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A STRONGER,
MORE FOCUSED GROUP
QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ
People Who Know How
Through their technical expertise, know-how and
rigorous independent thinking, our engineers and
scientists are uniquely placed to help customers
meet challenges that define the modern world.
Our prized possession is trust. We inspire
confidence by working in partnership with our
customers to ensure that they meet their goals,
first time, every time.
The innovation developed in partnership with
our customers provides QinetiQ with a dynamic
platform of domain knowledge from which to
generate new business offerings. The Group
prioritises sectors and markets where it can
become a leading provider of technology
solutions in order to optimise its portfolio,
generate sustainable growth in earnings and
provide fulfilling careers for its people.
Stay up to date
You can view this Annual Report and Accounts and all
other results materials at www.QinetiQ.com. In addition,
the QinetiQ Investor Relations iPad App gives you the
latest investor and financial media information. The App
allows you to get the latest share price information and
corporate news, as well as view financial reports.
Additional information is also available online on the case
studies and QinetiQ employees featured in this report.
Front cover:
Name: Samantha Prichard
Role: Aircraft Technician
Read more online www.QinetiQ.com
Group overview
Markets – Defence, aerospace and
security, but with a growing position
in select adjacent markets
Customers – Predominantly
government organisations,
including defence departments,
as well as international customers
in other targeted sectors
Capabilities – High-end technical
expertise and advice underpinned
by world-class knowledge,
research and innovation.
Specifically research, innovation,
advice, assurance, test and
evaluation, engineering solutions
and training
Divisions^ – The Group operates
two divisions: EMEA Services
and Global Products
People
6,233^
people worldwide
Geographies – Based in the UK with
an established US footprint and
growing positions in targeted
international markets
^ Excluding US Services – sale agreed post year end
(see note 33)
Cautionary statement:
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.
Financial highlights
STRONG FINANCIAL POSITION
Revenue
£1,191.4m
Underlying operating profit*
£132.7m
Underlying EPS*
16.0p
20
15
10
5
0
18.9
16.0
13.6
2012
2013
2014
(Loss)/profit after tax
(£12.7m)
400
300
200
100
0
(100)
(200)
246.3
(133.2)
2013
2012
(12.7)
2014
Additional information
149 Five-year record
150 Glossary
151 Shareholder information
152 Additional information
Read information
In the book
Online
1,600
1,400
1,200
1,000
800
600
400
200
0
1,469.6
1,327.8
1,191.4
2012
2013
2014
200
175
150
125
100
75
50
25
0
159.6
168.7
132.7
2012
2013
2014
Net cash/(debt)
£170.5m
Total dividend
4.60p
200
100
0
(100)
(200)
170.5
74.0
(122.2)
2012
2013
2014
5
4
3
2
1
0
4.60
3.80
2.90
2012
2013
2014
Note: Year references (2014, 2013, and 2012) relate to the year ended 31 March.
* Definitions of underlying measures of performance can be found in the glossary on page 150.
Strategic report
Overview
02 Chairman’s statement
Strategy
04 Chief Executive’s strategic review
06 Our business model and strategy
08 How we create value
10 Understanding the new Group
12 Understanding our markets
14 People Who Know How
18 Relationships
19 Key performance indicators
22 Risks and uncertainties
Performance
28 EMEA Services
32 US Services
33 Global Products
36
42 Chief Financial Officer’s review
Corporate responsibility and sustainability review
Directors’ report
Governance
48 Chairman’s introduction to governance
50 Corporate Governance Statement
54 Board of Directors
Directors’ remuneration report
69 Annual Statement
73 Remuneration Policy
84 Annual Report on Remuneration
Directors’ report
93 Directors’ report
96 Statement of Directors’ responsibilities
Financial statements
97
Independent auditor’s report
101 Consolidated income statement
102 Consolidated statement of comprehensive income
102 Consolidated statement of changes in equity
103 Consolidated balance sheet
104 Consolidated cash flow statement
104 Reconciliation of movement in net cash
105 Notes to the financial statements
146 Company balance sheet
147 Notes to the Company financial statements
1
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: overview Directors’ report Financial statements Additional information Chairman’s statement
STRENGTH THROUGH CHANGE
QinetiQ is a company clearly focused on the future, with
skills and technologies that will help shape and secure that
future. However, in a year that sees many nations marking
the 100th anniversary of the First World War, it is appropriate
to recognise the ongoing contribution that science and
technology make to our security, and to note that QinetiQ
is the custodian of a rich heritage. With this heritage comes
distinctive knowledge and unique facilities that are utilised
for the benefit of our customers.
The results
The results for the year were in line with the Board’s
expectations. In the year to 31 March 2014, Group revenue
was £1,191.4m (2013: £1,327.8m), and underlying operating
profit* was £132.7m (2013: £168.7m) due to the impact of
US military drawdown on product sales. Full year underlying
earnings per share* were 16.0p (2013: 18.9p), in line with
the lower underlying operating profit partially offset by
the reduced net finance costs and lower underlying effective
tax rate*. Underlying operating cash conversion* remained
strong at 103% (2013: 104%) with net cash increasing to
£170.5m (31 March 2013: £74.0m).
Strategy
We believe that driving an increase in sustainable earnings
represents the best route to delivering shareholder value
and I am encouraged that our Organic-Plus strategy has
recorded notable milestones this year.
During the year the Group initiated a strategic review of
US Services, because the division was not delivering its role
in the portfolio which, as a small player in a large market,
was to grow profitably by building market share. The division
was too small to benefit from significant economies of scale,
but too large to benefit from US Government small-business
set-aside initiatives.
Following a market testing exercise, the Board concluded
that a sale of US Services provided the route to maximum
value and that the price agreed after the year end with
The SI Organization, Inc. fully recognised its market position
and future prospects.
Following the disposal the Board considers the continuing
Group to be highly differentiated and well positioned to
deliver an increase in sustainable earnings.
Capital return
Given the strength of the balance sheet, I was pleased
to be able to announce that we intend to return £150m
to shareholders by way of a share buyback. The Board
believes that the scale of the return reflects the strong
cash generative characteristics of the Group, as well as its
confidence in the Organic-Plus strategy, while taking into
account the continuing uncertainty in QinetiQ’s end markets,
its pension obligations and the strength of its working capital
position. We remain committed to maintaining an efficient
balance sheet.
Dividend
The Board proposes a final dividend of 3.20p per share for the
year ended 31 March 2014 (2013: 2.70p) making the full year
Key highlights
• Organic-Plus strategy has recorded some notable milestones this year
• Sale of US Services provides route to maximum value from this division
• The Board intends to return £150m to shareholders by way of
a share buyback
• The full year dividend represents an increase of 21%
• The Board’s policy is that the dividend will be progressive from
this new base
• Ensuring effective stewardship of QinetiQ is a priority for the
Board along with succession planning and strategic growth
2
QinetiQ Group plc Annual Report and Accounts 2014
Outlook
Notwithstanding the strong performance in EMEA Services last year, the MOD
transformation programme is likely to create some short-term uncertainty in
the UK defence market, and the division’s performance as a whole is expected
to remain steady this year.
At the same time there is a wide range of possible outcomes for the performance
of Global Products as the division has a lumpy revenue profile which is dependent
on the timing and shipment of key orders. Although newer products are recording
notable milestones, the drawdown of American overseas military forces is
expected to continue to depress demand for conflict-related products, and
the division is unlikely to see significant benefits from the repositioning of its
US operations until later in the year.
The Board is maintaining its expectations for overall Group performance in the
current financial year.
Key governance highlights
Good corporate governance is fundamental to the successful running of a
business and remains a Board priority. Key areas of focus during the year were:
• The oversight of strategy and leadership, particularly in light of the
establishment of a new Operating Committee and the strategic review
of US Services
• Succession planning, with changes in the Board taking place during
the year
• The review of risk management and assurance processes, with the setting
up of the Governance Committee occurring during the year
• The review of financial reporting systems and processes, to ensure robust
financial oversight and reporting
Read more on page 48.
dividend 4.60p (2013: 3.80p). Subject to approval at the
Annual General Meeting (AGM) the final dividend will be
paid on 5 September 2014 to shareholders on the register
at 8 August 2014. The full year dividend represents an
increase of 21% reflecting the Board’s confidence that
the Group’s Organic-Plus strategy will deliver value to
shareholders over the medium term. The Board’s policy
is that the dividend will be progressive from this new level
which is consistent with the strength of the retained Group.
The Board
The priorities that I have set for the Board are strategic
growth, succession planning and to ensure the effective
stewardship of QinetiQ through appropriate governance
processes and systems of control. Strong corporate
governance is essential in ensuring that the Group’s
transformation and growth are sustainable and create
long-term value.
Earlier this year we announced the retirement of Colin Balmer
effective at the end of January 2014. He participated in the
formative years as QinetiQ became a commercial entity
and provided important insight to the current Board and
Executive team as we have continued the transformational
journey. I thank him on behalf of the Board and the
shareholders. I would also like to welcome Susan Searle who
joined as a Non-executive Director in March. I am confident
that her experience in the commercialisation of technology
will reinforce the Board’s contribution and oversight of the
Group’s implementation of its Organic-Plus strategy.
Our people
QinetiQ is a people business and I am proud of the expertise
of our people, and the drive that they exhibit in the day-to-
day service of our customers. On behalf of the Board, I would
like to thank all of our employees for the commitment that
they have demonstrated again this year.
We encourage diversity and believe that a diverse workforce
can make the biggest contribution to helping our customers
meet their challenges. We also prioritise the development of
our employees, particularly in commercial skills and technical
knowledge that contribute to our customers’ future success.
The safety of our people is an absolute requirement across
all of our sites, as well as proper recognition of the role that
we play in local community and in the environmental
stewardship of these sites.
Our leaders play a crucial role in the ongoing transformation
of QinetiQ. We encourage candour, transparency and
empowerment amongst our leadership team. This underpins
our prized possession of trust driving ethical and responsible
business practice throughout the organisation. I would like
to thank all our leaders for continuing to drive a more open
and commercial culture across the Group.
Mark Elliott
Chairman
22 May 2014
* Definitions of underlying measures of performance can be found in the glossary on page 150.
3
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: overview Directors’ report Financial statements Additional information Chief Executive’s strategic review
A STRONGER GROUP
Four years ago, QinetiQ faced significant challenges.
Our response has been to build a stronger Group from
the ground up: leaner, debt-free and focused on those
capabilities most needed by our customers following
the recent reset in defence budgets. Critically this was
achieved by engaging the capacity of the organisation
and only one year’s dividend suspension, following our
decision not to seek further equity. The sale of US
Services is a key milestone in the Group’s transformation.
From this foundation, our people are working
hard across QinetiQ to deliver our growth strategy.
In continuing uncertain markets, our EMEA Services
division has achieved its first sales uplift in five years
with all the core services businesses playing their part.
A new Proxy Board and Chairman were appointed just
after the year end to assist management in repositioning
US Global Products and addressing its performance.
Among our newer operations, OptaSense® is executing
on landmark contracts in its three vertical markets and
received Queen’s Awards for its Export and Innovation.
Our developing cyber offerings and Procurement
Advisory Services, have been established as strategic
business units to realise their full potential.
We now have a Group strongly differentiated by
its expertise, innovation and financial discipline.
Our portfolio combines high-quality earnings with
growth opportunities in new sectors and geographies,
importantly underpinned by the right values and
commercial culture.
Leo Quinn
Chief Executive Officer
22 May 2014
“Four years ago, QinetiQ faced significant
challenges. Our response has been to build
a stronger Group from the ground up: leaner,
debt-free and focused on exactly those
capabilities most needed by our customers
following the recent reset in defence budgets.
Critically this was achieved by engaging the
capacity of the organisation and only one
year’s dividend suspension, following our
decision not to seek further equity. The sale
of US Services is a key milestone in the
Group’s transformation.”
4
QinetiQ Group plc Annual Report and Accounts 2014
Key highlights
• With a refocused portfolio, the Group is well
positioned for the next phase of its strategy
• The knowledge and capabilities of employees,
coupled with physical assets, means we are
uniquely placed to provide independent advice
• Our engineers and scientists, in partnership
with our customers, develop intellectual
property (IP) which underpins current and
future revenue streams
• The cash generative nature of our business
provides a good return through the progressive
dividend and allows us to self-fund investments
in growth opportunities
Q Why do you say the Group is stronger?
A The Group is well positioned today for the next phase
of its strategy. Initially we had three challenges, of
which the most urgent was that of strengthening our
balance sheet after the diversification that had taken
place in the past. We’ve also moved significantly
forward in terms of our agenda around cultural
transformation, including upgrading our leadership,
and leaning out the organisation which is an ongoing
process, engaging our employees in a practical way to
be part of the solution through our ‘My Contribution’
initiative. But our single most important achievement
is to have refocused the portfolio – knowing where
we make money, where we were losing money and
which business models we have in the Group that
are scalable.
Q Does QinetiQ have truly sustainable capabilities?
A Our ‘People Who Know How’ strapline actually
sums it up very nicely: QinetiQ’s core strength is
that it is a group of people with unique knowledge
and capabilities. This, coupled with our physical assets,
means that we are in fact uniquely placed – and
trusted to give our customers independent advice.
This in turn fosters another key competitive advantage:
QinetiQ’s level of customer intimacy, which has
been built over a long time and is maintained by the
fact that we are constantly working with them to
understand their challenges, where they play and
what result they require.
If I look at the defence space, QinetiQ doesn’t
compete directly with any of the major players but
it does form the ‘light blue lubricant’ that keeps the
industry moving forward. In many areas, whether it
be airworthiness or range capabilities – in terms of
submarines, ships or weapons – it’s our partnership
with industry and customers that is key.
or commercial markets?
Q So where is QinetiQ’s future? In defence
A As a Group we would never abandon our roots in
defence for two reasons. First and foremost, what
we do has a very noble purpose – it helps strengthen
the defence capability of the UK and its allies, which
is important to our people. That work in turn drives
a business model where the IP and knowledge
we generate then feeds the Group’s current
and future growth.
Q Is QinetiQ going to be a UK-only player?
A If you look around the world today you see many
governments under fiscal pressures looking to spend
their available money better. QinetiQ has developed
capabilities to support and advise by virtue of our
history and built-up knowledge base which helps ensure
that customers obtain the right outcomes. So, if we look
at countries like Canada and Australia they want to
understand how to get better value from their defence
expenditure. If you’ve got less money you’ve got to
spend it more wisely, therefore you need to partner
with companies that can ensure that your capabilities
are developed right, first time, and within budget.
Q So why did you not sell all your US interests?
A Not only does the US Products business give QinetiQ
a foothold in the world’s largest defence market,
it also – unlike US Services – lends itself to global
synergies. That, combined with new management
and governance, means that we believe there is
more value to be captured for shareholders.
Q Why sell the US Services division?
A Our US Services division, which was acquired
between 2004 and 2009, was primarily a portfolio
diversification. By virtue of the way that defence
assets have to be held in the US there are no synergies
between that division and our core EMEA Services
business. Nor is it the same business model of
generating sellable IP. QinetiQ, as a UK-listed company,
also faced additional administrative obligations and
costs associated with US national security, to which
the purchaser, as a US company, will not be subject.
We are not the right owner of this business because
we are disadvantaged in terms of costs.
Q Why did you decide to return capital to
shareholders rather than invest in the business?
A Cash is an asset to be deployed where we think the
returns can be maximised. If that’s returning it to
shareholders we’re very happy to do that. If we can
see a more value-accretive way within the Group of
using it we’ll use it in that way as well.
5
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statements Additional information Chief Executive’s strategic review continued
OUR BUSINESS MODEL
AND STRATEGY
Q In a nutshell what is the QinetiQ business model?
A We attract and retain highly skilled, highly
knowledgeable engineers and scientists who,
in partnership with our customers, develop IP
and knowledge which underpins current and
future revenue streams.
Q And what is the investment case?
A We have a strong core business, with high barriers
to entry and strong competitive advantage which
generates good cash returns that underpin the
progressive dividend. The business conducts
about £100m of funded research each year, in
partnership with both defence customers and
industry. That gives rise to a portfolio of IP which
in QinetiQ’s case is quite unique because it is
effectively a zero cost option. In a drug company
they pay for their drug pipeline. In QinetiQ our
customers commission our pipeline. And from
that we carefully select about a dozen areas that
we look to exploit at any one time for break-out
growth. And therefore you have a core that
provides strong cash, progressive returns and
also the option on a portfolio of potential
growth businesses.
part of the investment case?
Q Is the balance sheet strength still an important
A Yes, the strong cash generative nature of the core
business means as an investor you get a good
return through the dividend but then, through
our capacity to self-fund prudent investments,
you get additional optionality opportunities from
our ‘Explore’ portfolio.
for this business in 2015?
Q As a management team what are your priorities
A Our priorities for 2015 are focused on building
momentum in our Organic-Plus strategy – that is,
to continue to build our market share in defence
and to take further ground in the areas of our
‘Explore’ portfolio, particularly in new sectors.
Q What’s the timescale on breakout growth?
A I have to say that the timing of the success of
a business is always the biggest conundrum,
but the one thing I am more confident of is it’s
not a question of ‘if’, it’s a question of ‘when’.
Our business model
QinetiQ creates value by making the
expertise and know-how of its people
available to customers, both through
contracts to provide services and
by the creation of IP. The resulting
knowledge base, which has been built
up over decades, is continually updated
by innovations generated during the
advisory, test and evaluation stages,
and research work undertaken by the
Group in partnership with its customers.
All QinetiQ’s business operations are
graded within a ‘Value Pipeline’. Whether
well-established business models or new
capabilities with unclear commercial
potential, each is managed and invested
according to three criteria:
• Maturity: how ready is our offering
and is there a ready market?
• Possible size: can it one day earn
significant profits?
• Investment: how much will it cost
to become a success?
Each individual business is responsible
for its own research and development
(R&D), customer relations, sales and
delivery within the Group’s obligatory
processes and controls. The business
units develop their own ‘growth options’,
reported to and reviewed regularly by
the Group, in line with the size of
investment. A growth option
with up to $100m sales potential may
be separated out as a new ‘Explore’ unit
in its own right, with support from the
corporate team. The units designated
as ‘Test for Value’ are generally funded
by customers as R&D programmes, with
subsequent decisions as to their future
in the Group made at the corporate level.
The Group itself manages the QinetiQ
brand, defines the operating and
governance framework, provides
expertise in specific areas centrally
where this increases efficiency, and is
responsible for all decisions on any
additional investment into a business
– financial, technological or otherwise.
Investments are rigorously evaluated,
reviewed and approved or rejected in
line with defined processes and controls
on a regular basis.
This ‘Value Pipeline’ approach gives
the Group full visibility of, and direction
over, its assets and capabilities, which
combine to set it apart from competitors
in helping to meet its customers’
biggest challenges.
Role of the Group
• Strategic direction and
implementation
• Leadership and people development
• Portfolio management
• Budgeting and planning
• Investment appraisal and review
Role of the business units
• Business unit strategy
• Development of investment options
• Customer engagement and sales
• Safe and ethical delivery
• Human resource management
• Adherence to Group policy and
• Resource allocation and monitoring
regulatory frameworks
• Process design and functional support
• Governance and risk management
• Brand stewardship
6
QinetiQ Group plc Annual Report and Accounts 2014
Strategic drivers
Our Organic-Plus Strategy
1 Customers
2 People
3 Innovation
4 Productivity
Value Pipeline
Explore
Scale
c10%
revenue
Test for Value
Maintain the rigour
c5%
revenue
QinetiQ’s ‘Explore’ businesses are high potential,
emerging businesses, typically with a proven
competitive offering in a growth market. They
represent the best opportunities for future growth,
to at least $100 million of revenue per annum, from
both the Group’s services and products divisions.
These are established, commercially viable
businesses that have proven technology and
customers, but have yet to prove that they can
achieve significant scale.
The Group is ‘nurturing’ a select number of these
opportunities to determine their ability to deliver
both UK and international growth.
The challenge they face is to demonstrate a
compelling business model that is scalable to a
significant and sustainable size, in order to become
value-accretive core businesses which increase the
diversification of the Group.
The Group is selectively investing in these
businesses to create a broader base of significant
and, therefore, core businesses for the future.
Priorities for 2015:
• Invest in opportunities for growth
• Develop requisite business models
• Drive profitable growth
• Partner appropriately
QinetiQ’s ‘Test for Value’ offerings are early-stage
options that are typically based around innovative
technology or know-how that have yet to
demonstrate commercial viability.
These technologies are often proven
under customer-funded programmes, so
the portfolio can be likened to a drug pipeline
for a pharmaceutical company, except that
development takes place in partnership with
a customer who provides the majority of
‘early-stage’ funding.
The Group evaluates emerging technologies
to determine their potential for value.
Investment is required to achieve full
commercialisation, so the IP is often licensed
out to reduce implementation and sales
risks, or taken to market with partners.
Over the medium term, these early-stage
technologies are managed rigorously to
resolution. They can be moved to ‘Explore’
and receive investment, or divested, closed
or traded through until project completion.
Priorities for 2015:
• Sustain the rigour in the evaluation of emerging
offerings
• Continue to assess viability of technology
and markets
• Develop partnerships to commercialise options
• Monetise IP through licensing
Read more on page 18 about how we work in
partnership to develop IP and take technologies
to market.
Core
Maximise
c85%
revenue
QinetiQ’s core businesses are focused on
relatively resilient sectors in which the deep
domain expertise of our people is used to provide
trusted independent advice and solutions for
customers’ critical operations.
These are the Group’s sustainable and defensible
core capabilities, mostly comprising EMEA Services,
and operating largely in the aerospace, defence and
security markets.
Much of the revenue is derived from longer-term
contracts, with known dates for renewal and
re-tender. These contracts exhibit relatively low-risk
characteristics with low capital requirements and
strong, predictable cash flows.
QinetiQ’s core businesses retain and win market
share by applying the technical expertise of their
people, as well as their detailed understanding
of customer domains, to provide support for
customers’ ongoing and developing needs. Core
businesses 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
EMEA Services or Global Products capability.
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.
These businesses generate cash that can be invested
in the Group for future growth, and a strong portfolio
of IP that is initially collected and categorised in ‘Test
for Value’ and managed through a ‘Value Pipeline’
which includes a range of new capabilities at various
stages of maturity.
Priorities for 2015:
• Invest in key capabilities
• Drive market share growth in existing markets
• Deploy capabilities into new sectors and/or
geographical territories
Objective:
An increase to sustainable earnings
7
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statements Additional information Chief Executive’s strategic review continued
HOW WE CREATE VALUE
Q What dashboard do you use to run the Group?
A One of the fundamental principles about the way
QinetiQ is run is that we have a portfolio which
combines both mature and growth businesses; but
we have the same dashboard with a single central
database generating all financial data. So it is a
little like driving a car. You get in the car and you
know where to find the speedo, oil gauge and
petrol gauge and you know you can trust the
readings. The importance of the dashboard
is that, just as when you give someone the keys
to the car, after a period of time they begin to
understand the measurements that drive success.
The other thing that is really important to us is
that we have a regular drum beat in the Group
and that really creates a dialogue around the
business strategy, but not necessarily just
around the business numbers.
Q Why is The 5% Club so important to you?
A As a business we are faced with the issue of
ensuring that we have the best technical and
engineering competency available, to serve our
customers in the future. It is quite clear that in
order to do that, it is not enough to rely on the
education system: people do need practical
on-the-job training. We actually have to invest
ourselves and The 5% Club was a way of
galvanising not only what we, QinetiQ, do, but
what industry does in order to ensure that there
is a pipeline of skills and talented people available
to the UK in the future. And at the same time,
whereas that is a business imperative, it actually
solves what is probably the biggest social problem
of our time in this country: youth unemployment,
with about 900,000 under-25s without jobs. The
5% Club is about making a public declaration and
commitment that 5% of our employees will be
made up of apprentices or graduates on a formal
training scheme. We look to achieve that by 2015.
That measurement element is key – I believe
what gets measured gets done. Nothing is
more important than the sustainability of
the enterprise and this should always be
a Board level responsibility.
8
QinetiQ Group plc Annual Report and Accounts 2014
Strategic driver
1 Customers
2 People
3 Innovation
4 Productivity
Deliver outstanding
value for all stakeholders
through the expertise of
our people in chosen
technology-based sectors
Ensure relationships which build mutual
trust and deliver unique benefits
Customers around the world rely on the
ideas, innovations and drive of our people
to help them meet their goals – often in
environments where their mission has no
second chance for success.
So in QinetiQ listening to the customer is
the starting point for everyone – working
together to ensure that our know-how helps
our customers meet their challenges today
and in the future.
We aim to help customers do more with less,
enabling them to build something once and
derive the benefits many times.
Our objective is to be a partner of choice
for the long term, because having satisfied
customers underpins market share growth.
We know that a customer who extols our
virtues quickly becomes our best source of
future business.
We consistently strive to serve our
customers better, asking them about our
performance, so we can learn from what
we do well and what we could improve.
Develop and empower highly skilled
Grow using the deep domain knowledge
Maintain our focus on high performance and
employees wholly committed to customer
developed in our core to drive a continuous
self-help to ensure that we always provide
service excellence
pipeline of new opportunities, complemented
more from less
QinetiQ employs highly qualified and
experienced engineers, scientists and
by alliances and partnerships
The Group has addressed its immediate financial
QinetiQ continues to reshape the Group,
situation, restoring the balance sheet to strength
technicians who are dedicated to making
actively managing the portfolio to optimise
and providing the capacity for carefully targeted
a difference to their customers.
business returns.
investment choices.
Through their knowledge, insight, integrity and
This includes positioning the portfolio around
We continue the robust financial disciplines
commitment, our teams work in partnership
growth in the core to deliver repeatable earnings,
established during the prior self-help phase, to
with our customers to help them meet
both in traditional markets and new geographies.
maintain and grow margins and ensure strong
their challenges.
In our strategy of turning technologies into
cash management.
Our people are our principal source of
commercial businesses, we rigorously evaluate
The long-term cultural transformation of the
competitive advantage, directly impacting
investment opportunities to prioritise resources,
Group continues, building QinetiQ into a more
our ability to win and retain business. As such,
with the primary objective of identifying those
competitive and commercial company which
QinetiQ’s future success lies in its ability to
capable of break-out success.
embraces new values and operating principles.
We also engage selectively in partnerships,
We are building competitiveness across the
alliances and acquisitions to accelerate compelling
Group, de-layering the organisation to make
business development strategies and sustainable
us more agile, more accountable and more
earnings growth.
responsive to our customers.
In addition we look to exploit our knowledge and
As a business that prides itself on innovation,
IP via increased use of licensing approaches.
QinetiQ provides a fertile foundation for new
ideas to flourish. My Contribution is the channel
through which employees’ insights are captured
to propose improved ways of working, ways
to drive out unnecessary cost and to deliver
continuous productivity improvements for
the benefit of the Group and our customers.
recruit, retain and develop our employees.
Since satisfied employees deliver satisfied
customers, our goal is to make QinetiQ
a great place to work.
The new leaders running our businesses are
building an open, empowered culture and
are committed to investing in our people
particularly to develop commercial, customer
engagement, and people leadership and
development skills.
We are increasing our own intake of graduates
and apprentices and, in recognition of the
business and social imperative of inspiring
a new generation of engineers and scientists,
have also launched The 5% Club, a campaign
calling on industry to adopt a new 5% target
for graduates, apprentices and sponsored
students in their organisations.
Related KPIs
Profit after tax
Underlying EPS
Total Shareholder Return
Related risks
Customer satisfaction
Defence market
Contract profile
US foreign ownership regulations
Breaches of security and IT systems
Health and safety
Employee engagement
Apprentices and graduates
Voluntary employee turnover
Orders
Backlog
Organic revenue growth
My Contribution
Operating profit/margin
Cash conversion
Net cash
Recruitment and retention
Defence market
Contract profile
Working in a global marketplace
Risks relating to financial management
Emerging and reputational risk
Significant breach of relevant laws and regulations
Foundation: Brand, reputation and integrity
Corporate governance – read more on page 48.
Corporate Responsibility and Sustainability Review – read more on page 36.
Strategic driver
1 Customers
2 People
3 Innovation
4 Productivity
Deliver outstanding
Ensure relationships which build mutual
value for all stakeholders
trust and deliver unique benefits
through the expertise of
our people in chosen
technology-based sectors
Customers around the world rely on the
ideas, innovations and drive of our people
to help them meet their goals – often in
environments where their mission has no
second chance for success.
So in QinetiQ listening to the customer is
the starting point for everyone – working
together to ensure that our know-how helps
our customers meet their challenges today
and in the future.
We aim to help customers do more with less,
enabling them to build something once and
derive the benefits many times.
Our objective is to be a partner of choice
for the long term, because having satisfied
customers underpins market share growth.
We know that a customer who extols our
virtues quickly becomes our best source of
future business.
We consistently strive to serve our
customers better, asking them about our
performance, so we can learn from what
we do well and what we could improve.
Customer satisfaction
Related KPIs
Profit after tax
Underlying EPS
Related risks
Total Shareholder Return
Defence market
Contract profile
US foreign ownership regulations
Breaches of security and IT systems
Develop and empower highly skilled
employees wholly committed to customer
service excellence
QinetiQ employs highly qualified and
experienced engineers, scientists and
technicians who are dedicated to making
a difference to their customers.
Through their knowledge, insight, integrity and
commitment, our teams work in partnership
with our customers to help them meet
their challenges.
Our people are our principal source of
competitive advantage, directly impacting
our ability to win and retain business. As such,
QinetiQ’s future success lies in its ability to
recruit, retain and develop our employees.
Since satisfied employees deliver satisfied
customers, our goal is to make QinetiQ
a great place to work.
The new leaders running our businesses are
building an open, empowered culture and
are committed to investing in our people
particularly to develop commercial, customer
engagement, and people leadership and
development skills.
We are increasing our own intake of graduates
and apprentices and, in recognition of the
business and social imperative of inspiring
a new generation of engineers and scientists,
have also launched The 5% Club, a campaign
calling on industry to adopt a new 5% target
for graduates, apprentices and sponsored
students in their organisations.
Health and safety
Employee engagement
Apprentices and graduates
Voluntary employee turnover
Recruitment and retention
Grow using the deep domain knowledge
developed in our core to drive a continuous
pipeline of new opportunities, complemented
by alliances and partnerships
QinetiQ continues to reshape the Group,
actively managing the portfolio to optimise
business returns.
Maintain our focus on high performance and
self-help to ensure that we always provide
more from less
The Group has addressed its immediate financial
situation, restoring the balance sheet to strength
and providing the capacity for carefully targeted
investment choices.
This includes positioning the portfolio around
growth in the core to deliver repeatable earnings,
both in traditional markets and new geographies.
In our strategy of turning technologies into
commercial businesses, we rigorously evaluate
investment opportunities to prioritise resources,
with the primary objective of identifying those
capable of break-out success.
We continue the robust financial disciplines
established during the prior self-help phase, to
maintain and grow margins and ensure strong
cash management.
The long-term cultural transformation of the
Group continues, building QinetiQ into a more
competitive and commercial company which
embraces new values and operating principles.
We also engage selectively in partnerships,
alliances and acquisitions to accelerate compelling
business development strategies and sustainable
earnings growth.
We are building competitiveness across the
Group, de-layering the organisation to make
us more agile, more accountable and more
responsive to our customers.
In addition we look to exploit our knowledge and
IP via increased use of licensing approaches.
As a business that prides itself on innovation,
QinetiQ provides a fertile foundation for new
ideas to flourish. My Contribution is the channel
through which employees’ insights are captured
to propose improved ways of working, ways
to drive out unnecessary cost and to deliver
continuous productivity improvements for
the benefit of the Group and our customers.
Orders
Backlog
Organic revenue growth
My Contribution
Operating profit/margin
Cash conversion
Net cash
Defence market
Working in a global marketplace
Contract profile
Risks relating to financial management
Emerging and reputational risk
Significant breach of relevant laws and regulations
Foundation: Brand, reputation and integrity
Corporate governance – read more on page 48.
Corporate Responsibility and Sustainability Review – read more on page 36.
9
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statements Additional information
Chief Executive’s strategic review continued
UNDERSTANDING
THE NEW GROUP
QinetiQ Group plc is a global business, listed on the London Stock Exchange. Based in the UK,
it has an established US footprint and growing positions in targeted international markets.
As a people-based business, our service offerings account for the majority of sales. In addition
our products division provides technology-based solutions on a global basis.
Divisions
EMEA Services
Global Products
EMEA Services combines world-leading expertise with unique facilities
to provide technical assurance, test and evaluation, and training
services. The division is also a market leader in research and advice in
specialist areas such as C4ISR, acquisition services and cyber security.
Read more on page 28.
Defence
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Markets
Businesses
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 one-off testing
and evaluation projects.
Advanced technology solutions
Low-volume, 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.
10
QinetiQ Group plc Annual Report and Accounts 2014
EMEA Services
Markets
Businesses
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 one-off testing
Advanced technology solutions
Low-volume, 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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Global Products
Global Products provides technology-based solutions
to meet customer requirements and contract-funded
research and development.
Read more on page 33.
Security
Defence
Other
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Revenue by division
3
1
3
2
1
1
2
2014
1. EMEA Services
2. US Services
3. Global Products
Total
Underlying operating profit* by division
1
3
3
2
1
1
2
2014
1. EMEA Services
2. US Services
3. Global Products
Total
Revenue by major customer type
3
1
3
2
1
1
2
2014
1. UK Government
2. US Government
3. Other
Total
Revenue by geography
3
1
3
2
2014
1. UK
2. US
3. Other
Total
1
1
2
£m
607.0
408.8
175.6
1,191.4
£m
86.7
19.0
27.0
132.7
£m
503.9
472.1
215.4
1,191.4
£m
578.8
503.9
108.7
1,191.4
* Definitions of underlying measures of performance
can be found in the glossary on page 150.
11
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statements Additional information
Chief Executive’s strategic review continued
UNDERSTANDING
OUR MARKETS
Key highlights
• The Group accesses budgets for research,
technical advice and test and evaluation in the UK
• EMEA Services aligned with Front Line Commands
• DE&S transformation is creating some uncertainty
in the UK defence market
• International order momentum leverages
core strengths
• Sale of US Services removes exposure
to US federal services market
• Global Products has a significant US footprint
which provides a route to the world’s largest
defence market
UK
Service offerings to government customers account
for the majority of UK sales, principally to the Ministry
of Defence (MOD). This position, providing client-side
support independent from the defence supply chain,
sets QinetiQ apart from the majority of the larger UK
defence suppliers with whom the Group often works
in partnership.
This position in the supply chain also defines which
elements of the MOD’s budget account for the majority
of revenue. In general, QinetiQ is not impacted by
changes in single procurement projects and their
budgets. Instead the Group accesses a broad range
of budgets for research, technical advice, and test and
evaluation across all military domains and the majority
of equipment programmes.
Front Line Commands
The UK Government’s priorities for defence (beyond
success in current operations) are financial stability
coupled with essential transformation. The MOD has
made considerable progress in the last three years
balancing its budget. In addition, although the MOD did
not adopt a Government Owned Contractor Operated
model for its procurement agency, DE&S, the agency
is for the first time operating at arm’s length from
government with greater responsibility for managing its
business, outputs and workforce. This is creating some
uncertainty in the UK defence market as DE&S shapes
its policies and procedures. A new set of regulations and
pricing terms for single source contracts, known as the
‘Yellow Book’, is also progressing through Parliament
as part of this transformation programme. Because
QinetiQ’s combination of facilities and capabilities is
unique in the UK, EMEA Services often contracts under
single source rules so the Group is following closely the
implementation of the new regime.
The EMEA Services division is well placed to capitalise
on opportunities created by the defence transformation
programme having aligned its structure to the Front
Line Commands (Navy, Army, Air) that have taken on
responsibility for managing military capability and
budget. In addition, the creation of a Joint Forces
Command provides a new channel into which the C4ISR
and Cyber businesses can deliver their capabilities. As
the private sector leader in defence research, QinetiQ’s
EMEA Services division has also benefited from improved
visibility of defence research spending, which has been
stabilised at around £400m per annum until 2015.
Navy
Army
Air
Joint Forces
Maritime
Weapons
Air
C4ISR
Cyber Security
QinetiQ businesses
12
QinetiQ Group plc Annual Report and Accounts 2014
Certain Scandinavian countries
• Test and evaluation
Canada
• Procurement advice
• Support to naval
programmes
Certain Middle Eastern countries
• Strategic and
procurement advice
South Korea
• Weapons test and
evaluation
• Support to naval
programmes
Australia
• Opportunities post federal
elections
• Support to naval
programmes
US
QinetiQ’s disposal of its US Services division removes
the Group’s exposure to the US federal services market.
US Services was not delivering on its role in the portfolio
which was to grow profitably by building market share,
because it was too small to generate significant economies
of scale, but too large to benefit from US Government
small business set-aside initiatives. QinetiQ, as a
UK-listed company, also faced additional administrative
obligations and costs associated with US national
security to which the purchaser, as a US company,
will not be subject.
The Global Products division continues to have a
significant US footprint which provides a route to the
world’s largest defence market. While demand for
conflict-related products is being impacted by the
drawdown of US military forces from Afghanistan, US
military customers are currently assessing their post-war
requirements and formulating new programs of record.
To reduce the volatility of the division’s revenue over
time, QinetiQ is seeking both to widen its products
portfolio, and to find new sectors and applications
for existing technology offerings.
International
QinetiQ’s traditional geographic markets are the
UK and the US, but the Group is now pursuing a pipeline
of international opportunities to build on the order
momentum achieved in the 2014 financial year. Many
of these opportunities leverage the reputation of EMEA
Services for a unique range of capabilities and facilities.
For example, as the Canadian and Australian Governments
pursue similar defence transformation programmes
to the UK, they value the independent advice, test
and evaluation provided by QinetiQ to support better
procurement. Governments in Europe, the Middle East
and Asia are also building their defence and security
capabilities, increasing the demand for such expertise
as offered by QinetiQ businesses such as C4ISR and
Unmanned Systems, both of which increased their
international sales in the year.
New market sectors
Much of QinetiQ’s innovation arises from working closely
with defence customers to address their requirements,
generating technology and expertise with potential to
be transferred into new sectors offering higher growth
potential. The Group’s Organic-Plus strategy is designed
to manage, test and triage these options appropriately
to develop the portfolio beyond defence into commercial
lines of revenue. The Group then invests in and monitors
the resulting businesses to develop significant sales
and scale.
13
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statements Additional information
Name: Brendon Purnell
Role: Senior Fibre Optics Engineer
Our OptaSense® bespoke fibre sensing business
continues to reach new markets and customers with
its remarkable acoustic sensing solutions. The first year
of trading outside an exclusivity contract with Shell saw
OptaSense® move from a single downhole oil and gas
client to contracts with seven international
oil companies. Two contracts are notable strategic
milestones in creating a truly robust and scalable
business geared for continued growth. Our relationship
with Shell has continued, with a new contract to
waterproof OptaSense® for sub-sea operations: this
industry vote of confidence underlines the fact that
our technology is now proven onshore. In another
world-first we agreed the industry’s first contract
for multi-well 4D distributed vertical seismic profiling
with Petroleum Development Oman, covering up to
12 wells simultaneously and helping improve safety,
reduce costs and increase yields. This five-year deal
means assured revenues for the business.
People Who Know How
STRENGTH THROUGH
OUR PEOPLE
14
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy
Directors’ report
Financial statements
Additional information
15
QinetiQ Group plc Annual Report and Accounts 2014
Name: Daniel Yong
Role: Ordnance Engineer
‘We’re on our way’ is how QinetiQ Australia employees
feel right now. ‘A business on the move’ is how our
customers and industry partners have described the
business, which has continued its turnaround in a
challenging market with a second year of sustainable
growth: the product of customer confidence and
employee optimism. Importantly, the business has
broken the mould of defence contracting for advisory
services with two three-year multimillion-dollar
partnership contracts for Airworthiness and Munitions
advice, plus new military maritime contracts. Plans to
further accelerate growth include moving into adjacent
markets such as exploring Asia Pacific opportunities.
Alan Woolford, CEO QinetiQ Australia: “I’m proud
of our remarkable team, in particular how we’ve
strengthened the QinetiQ brand at the heart of
Australian government and defence while becoming
an employer of choice. There’s a real buzz around
the business.”
Name: Alex Slater
Role: Weapons Apprentice
We want to attract and retain the best talent: our
‘unfair share‘ of great people. But QinetiQ’s approach
runs deeper. Our goal is to inspire a generation and
initiatives like The 5% Club are designed to give young
people fresh opportunities, challenge the status quo
and drive innovation. Our attitude – building greater
pride in who we are and what we do – makes sense
for our current and future employees, customers and
local communities. We want people to be here for a
career, not just a job. In practical terms, this means
investing in people and looking to the long term:
networking with other employers, recognising
technical excellence, launching an Employee Referral
Scheme, and creating new Career Development
Frameworks so people can go further, faster. And
the minute people join us, a new Induction and
Onboarding programme is setting the tone and giving
joiners confidence that they made the right decision.
16
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy
Directors’ report
Financial statements
Additional information
Name: Ross Sproule and
Sheena MacDonald
Role: Mechanical Technicians
As testament to our increasing ability to bid
competitively in open markets, QinetiQ’s Maritime
business recently won a £5.3m, five-year contract
to deploy and maintain the Royal Navy’s underwater
mobile acoustic targets. These targets support
submarine crew certification and platform readiness
at the British Underwater Test & Evaluation Centre
(BUTEC), Kyle of Lochalsh – a Maritime range QinetiQ
operates on behalf of the MOD through the Long-
Term Partnering Agreement (LTPA). Up against one
of the country’s major providers as the incumbent,
the competition was tough; however, our value-for-
money approach – allowing the customer to do
more for less money – alongside the knowledge
and expertise of our people, won through for us.
Already providing a large proportion of services
at BUTEC, for which we recently scored feedback
scores of 10/10, this new contract sees us providing
a one-stop-shop service. One of our core beliefs –
that delighted customers underpin market share
growth – has again borne fruit.
17
QinetiQ Group plc Annual Report and Accounts 2014
Relationships
STRENGTH THROUGH
PARTNERSHIP
Working in partnership with our peers
New technology offerings can be taken to market with our peers.
This includes licensing our IP to reduce implementation and sales
risk, with revenue dependent on third-party sales channels, and
working with manufacturers to take technology to market
in partnership.
Working in partnership with our suppliers
QinetiQ is uniquely placed to help customers meet their
challenges due to the know-how and independence of its people,
but we recognise that working in partnership with our suppliers,
rather than working alone, is often the best way to meet these
challenges. These partnerships also benefit other organisations
in the supply chain, allowing small businesses and academic
institutions the opportunity to access customers with whom
QinetiQ has well-established relationships.
Read more about how QinetiQ works in partnership through
the Weapons Science and Technology Centre on page 29.
Working in partnership with our customers
Much of QinetiQ’s innovation arises from working closely
with customers to address their requirements and is proven in
partnership with them. These customer-funded research and
development programmes are mutually beneficial, in both our
traditional and newer markets. For example, many OptaSense®
applications for the downhole oil and gas market were developed
in partnership with Shell.
Name: Phil Cork
Role: Persistent Surveillance Business Manager
The Modular Electronic Warfare System (MEWS) is a brilliant illustration
of how QinetiQ’s know-how and IP can be combined with fresh thinking
to achieve sales success. Few companies share our rich heritage in
electronic warfare, including our ability to rapidly take prototypes
through to operational theatre. However, one stumbling block has been
being able to replicate and scale those successes, typically being able to
manufacture in volume and enter new markets confidently. When it came
to taking our land electronic warfare capabilities to market, a decision
was taken to partner with a proven hardware provider, namely L-3 TRL
Technology. Combining our electronic warfare processing and software
expertise with L-3 TRL’s 20 years’ defence manufacturing and their access
to new overseas markets effectively ‘de-risked’ launching this remarkable
product for both companies in 2012/13, with global sales ahead of plan.
Working in partnership to inspire a new generation
QinetiQ’s future success relies on its ability to recruit and retain
employees with the skills required to meet customer needs. Our
commitment to inspiring and attracting the next generation of
scientists and engineers is reflected in our outreach programme
which focuses on providing support in science, technology,
engineering and maths (STEM) subjects. This is primarily targeted
at students aged 11 and older, and is delivered in partnership with
schools and recognised national organisations such as STEMNET
and Cyber Security Challenge UK.
Read more about Cyber Security Challenge UK on page 39.
Name: Sandeep ‘Sid’ Gill
Role: Technical Engineering and Product Lead
Reflecting 70 years of radar expertise, a team of scientists, designers and
engineers achieved the near-impossible: creating a unique weapons
detection system that predicts the impact of low trajectory rocket attacks,
better protecting personnel by giving them time to take evasive action.
Alarm™ was an R&D triumph: initial research funded by external sources
transformed concept into prototype in eight months, delivering an
unprecedented 100% success rate in tests. Amazingly, it was only 18
months from blank page to delivering a qualified automated system that
people can assemble in three hours. With its market-leading capabilities
being software-based rather than hardware-restricted, the product’s
inherent flexibility enables rapid adaptation for a raft of military and civilian
applications: from software tweaks to detect slower moving unmanned
aerial vehicles, to revised hardware set-up for easy deployment at
government sites, oil installations and other locations.
18
QinetiQ Group plc Annual Report and Accounts 2014
Key performance indicators
MEASURING OUR PROGRESS
Non-financial KPIs
Customer satisfaction
3rd
3rd
8th
77% of our
customers
recognise
us as a top 3
supplier
17th
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
Employee engagement
Description
QinetiQ’s customer satisfaction survey was
introduced in 2014 following the suspension
of the MOD’s survey to ask all MOD customers
with contracts over £200,000 about QinetiQ’s
delivery, engagement and relationship.
77% of our customers stated that QinetiQ was
performing as a ‘top 3’ supplier, consistent with
the results of the MOD survey in 2011 and 2012.
In the US, customer satisfaction metrics are
reviewed on a contract-by-contract basis.
Comment
The survey will be conducted annually to improve
the number of projects performing well and the
percentage of our customers who rate QinetiQ
as a top 3 supplier.
Strategic driver
1 Customers
Health and safety
5
4
3
2
1
0
3.55
3.70
3.39
2012 2013 2014
Description
The Lost Time Incident Rate is calculated
using the total number of accidents resulting
in at least one day taken off work, multiplied
by 1,000 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 reducing harm.
Strategic driver
2 People
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
The annual survey enables comparison between
QinetiQ and other UK companies. A separate
engagement survey is undertaken for the
US business.
700
600
500
400
569.3 575.0
593.0
2012 2013 2014
Strategic driver
2 People
Description
This is a measure of the number of
employees leaving the organisation
not at QinetiQ’s instigation.
Comment
Provides a measure of the Group’s ability
to retain employees.
Strategic driver
2 People
Voluntary employee
turnover (%)
15
10
5
0
11.5 11.7
10.5
2012 2013 2014
Apprentices
and graduates
5
4
3
2
1
0
4.8%
2013
2014
My Contribution
1,697
1,431
797
2,000
1,600
1,200
800
400
0
Description
The number shown is the total number
of apprentices and graduates as a percentage
of our UK workforce.
Comment
Provides a measure of QinetiQ’s ability to
attract and develop new employees. It is also
a measure of our commitment to The 5% Club,
an industry-led initiative to grow the number
of young people on apprenticeships and
graduate programmes.
Strategic driver
2 People
Description
My Contribution is the channel through
which employees’ insights are captured and
activated to improve ways of working, drive
out unnecessary costs and drive productivity
improvements. The graph shows the total
number of projects. The financial returns
and benefits are also measured through
the My Contribution tracker.
Comment
My Contribution improves the work
environment for employees and how
the business delivers for customers.
Strategic driver
4 Productivity
2012 2013 2014
19
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statements Additional information
Key performance indicators continued
Financial KPIs
Orders (£m)
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.
972.4
Strategic driver
3 Innovation
1,226.3
1,076.8
2012 2013 2014
Organic revenue
growth (%)
2012 2013 2014
Description
The Group’s organic revenue growth is
calculated by taking the increase in revenue
over prior year pro forma revenue, at constant
exchange rates. Prior year pro forma revenue
excludes the impact of acquisition and disposal.
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.
(10)
(10)
(11)
Strategic driver
3 Innovation
1,500
1,200
900
600
300
0
0
(3)
(6)
(9)
(12)
(15)
Backlog (£m)
1,200
1,000
800
600
400
200
0
1,000.5 969.6
914.2
2012 2013 2014
Description
This is a measure of the value of work that
the Group has on contract but is yet to deliver.
It excludes the remaining value of the 25-year
LTPA contract.
Comment
The closing backlog at year end underpins the
revenue that will be delivered in the following
year. Growing backlog represents growth in
the overall business.
Strategic driver
3 Innovation
Underlying operating
profit* (£m)
Description
The underlying earnings before interest
and tax.
200
160
120
80
40
0
168.7
159.6
132.7
Comment
Underlying operating profit* is used by the
Group for internal performance analysis as
a measure of operating profitability that is
tracked over time.
Strategic driver
4 Productivity
2012 2013 2014
Underlying operating
margin* (%)
20
16
12
8
4
0
12.7
11.1
10.9
2012 2013 2014
Description
Underlying operating profit margin is calculated
by taking the underlying earnings before tax and
interest as a percentage of revenue.
Comment
Underlying operating profit 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.
Strategic driver
4 Productivity
Underlying EPS* (p)
20
16
12
8
4
0
18.9
16.0
13.6
2012 2013 2014
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
also determines the level of payout for certain
of the Group’s long-term incentive plans.
20
QinetiQ Group plc Annual Report and Accounts 2014
Financial KPIs
Group operating
profit/(loss) (£m)
Description
This measures the earnings before interest
and tax including all specific adjusting items
that are excluded in the underlying operating
profit measure.
Comment
To obtain a proper understanding of financial
performance, the Group focuses on ‘underlying’
measures of performance excluding specific
adjusting items*. The overall performance of
the Group, however, does include all adjusting
items and the total Group operating profit/loss
is the key financial measure used to reflect
overall operating performance for the year.
361.3
24.0
400
300
200
100
0
(100)
(200)
(121.4)
Strategic driver
2012 2013 2014
4 Productivity
Total Shareholder Return (TSR)
250
200
150
100
50
0
Profit/(loss) after tax
(£m)
Description
This is the total Group profit/(loss) including
all specific adjusting items.
Qine(cid:15)Q
FTSE 250 (excluding investment trusts)
31 M arch 11
30 M arch 12
28 M arch 13
31 M arch 14
Comment
To obtain a proper understanding of financial
performance the Group focuses on ‘underlying’
measures of performance excluding specific
adjusting items*. The overall performance of
the Group, however, does include all adjusting
items and the total profit/(loss) is a key financial
measure used to reflect overall financial
performance for the year.
Description
TSR represents the value returned to shareholders through a combination of share
price appreciation and cash dividends.
Comment
This measure provides an indication of the success of the Group in the view of
the investor. It is impacted by macro-economic factors and for management
remuneration purposes relative TSR is the performance indicator that determines
vesting of certain share-based payments.
300
200
100
0
(100)
(200)
(300)
246.3
(12.7)
(133.2)
2012 2013 2014
Underlying operating
cash conversion* (%)
150
125
100
75
50
25
0
148
104
103
2012 2013 2014
Description
The ratio of our net cash flow from operations
(before restructuring), 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 make discretionary investments.
Strategic driver
4 Productivity
Net cash/(debt) (£m)
200
150
100
50
0
(50)
(100)
(150)
170.5
74.0
(122.2)
2012 2013 2014
Description
The Group’s measure of liquidity and
borrowings. Includes finance lease debtors/
creditors and assets/liabilities in respect of
derivative financial instruments.
Comment
The level of net cash/(debt) provides a measure
of the Group’s financial strength.
Strategic driver
4 Productivity
* Definitions of underlying measures of performance can be found in the
glossary on page 150.
21
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statements Additional information Risks and uncertainties
UNDERSTANDING AND
MANAGING OUR RISKS
All QinetiQ business operations are graded within a
Value Pipeline. Within the context of the ‘Core’, ‘Explore’
and ‘Test for Value’ strategy the Board’s commercial
appetite is:
• Hungry for opportunities relating to increased market
share where we have proven delivery to existing and
potential new customers
• Balanced for opportunities that translate proven
delivery into new markets or new capability/delivery
into existing customers or that commit QinetiQ to
unlimited or excessive liabilities
• Cautious for opportunities that involve new capability
or delivery into new markets and any opportunity into
a new country outside the US and the UK
The Board agrees and reviews its tolerance of risk
through appropriate delegations of authority to the
Executive and senior leaders.
The Board recognises that QinetiQ operates in complex
geographical and regulatory environments and supports
local decision making within defined delegation of
authority. The Board requires all employees to abide
by relevant legal requirements as a minimum.
The Group Risk Register
The Group Risk Register consists of material risks relating
to effective delivery of our strategy. These risks may
emerge as standalone risks or be present through the
aggregation or interlinking of risks. The register considers:
• The authority, resources and coordination of those
involved in the identification, assessment and
management of the significant risks faced by
the Group
• The response to the significant risks which have been
identified by management and others
• The monitoring of reports from Group management
• 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. In addition, the risk owners present an update
of current status and mitigating actions by rotation
throughout the year.
Risk management
Risk management includes the methods and processes
used by QinetiQ to manage risks and seize opportunities
related to the achievement of our strategic objectives.
It provides a framework for identifying particular events
or circumstances relevant to the Group’s objectives (risks
and opportunities), assessing them in terms of likelihood
and magnitude of impact, determining a response
strategy and monitoring progress. By identifying and
proactively addressing risks and opportunities, we are
better able to protect and create value for our stakeholders.
Progress continues to be made to fully embed these
processes and to improve their effectiveness. The Risk
& CSR Committee has run for a full year focusing on risks
where the primary impact is non-financial, with the Audit
Committee retaining a focus on what might be termed
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.
Risk appetite
The QinetiQ Board recognises that risk management
is a complex process and should reflect both the need
to take risk and avoid harm. It also recognises that in
today’s operational environment closed statements do
not help the organisation, as inevitably issues are rarely
black and white and ultimately success or failure will be
determined by shareholders and regulators as well as
public opinion.
The QinetiQ risk appetite focuses on critical risk areas
necessary to achieve our strategic goals. It aims to
provide clear boundaries, operational flexibility and
guidance to support the thinking of executives and senior
leaders so that they can make and provide evidence for
decisions that reflect the need to protect our prized
possession, trust. Three categories of appetite are
defined as follows:
• Hungry: Willing to consider all delivery options and
eager to be innovative and to choose options offering
potentially higher business rewards, with a mature
understanding of inherent risk
• Balanced: Preference for delivery options that have
a low or moderate degree of residual risk and where
successful delivery also provides an acceptable level
of reward and value for money
• Cautious: Avoidance of risk and uncertainty is the key
objective, a greater level of control and mitigation may
be required. Significantly greater returns expected for
commercial opportunities to offset risk
22
QinetiQ Group plc Annual Report and Accounts 2014
Associated
strategic
driver
1
3
Risks relating to strategy
Potential impact
Mitigation
Defence market
• Any reduction in government defence and security spending
• Our focus on a range of markets in aerospace, defence and
in either the UK or the US could have an adverse impact on the
Group’s financial performance.
• The financial burden on both UK and US Government budgets
from the current economic downturn may lead to reduced
spending in the markets in which the Group operates.
This could be exacerbated by:
͵ Structural changes in UK MOD Defence Equipment and Support
͵ UK General Election in May 2015 and the next Strategic Defence
and Security Review (SDSR)
security as well as adjacent sectors provides a degree of portfolio
diversification. The Group will continue to review trends in its
traditional markets expenditure in order to align the business
with those trends.
• 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 £400m p.a.
until 2015.
• The sale of US Services removes the Group’s exposure to the US
͵ Current plans of both US and UK Governments are to drawdown
federal services market.
troops from Afghanistan by the end of 2014.
• Following the Currie Review, a Bill and regulations to introduce
the Single Source Procurement Reform are now subject to the
Parliamentary process and scheduled to be approved mid-2014.
• The impact will be to replace the Yellow Book in 2015 with a
legally binding framework for how single sourced work must
be contracted to ensure that a fair and reasonable price is paid
for goods and services procured in the absence of competition.
This could have an adverse impact on the Group’s financial
performance.
• The Reform Bill as currently drafted only affects new single
sourced contracts from the beginning of 2015.
• Organisational Conflicts of Interest (OCI) may occur where the
Group provides services to both a defence end-user customer
as well as those within the defence supply chain.
• The Group is managing the impact of drawdown from Afghanistan
by maintaining a market focus and competitive positioning in
adjacent markets, which are not directly conflict-related.
• QinetiQ and other defence industry partners have been fully
engaged with the MOD in the development of the new framework
and its practical application.
• The MOD has requested that industry test and provide feedback
on the proposed new reporting as it is developed prior to
implementation, so that the transition is effective for all parties.
• QinetiQ takes proactive steps to manage any potential OCI and
maintain its ability to provide independent advice. Since March
2012, QinetiQ has operated under the generic formal compliance
regime, replacing a QinetiQ-specific one. This change has not
affected the rigour of the compliance process.
• The aerospace, defence and security markets are highly
competitive. The Group’s performance may be adversely affected
should it not be able to compete in the markets in which it aims
to operate.
• 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.
Key to strategic drivers
1 Customers
2 People
3 Innovation
4 Productivity
A All
23
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statementsAdditional information Risks and uncertainties continued
Associated
strategic
driver
1
4
Risks relating to strategy continued
Potential impact
Mitigation
Contract profile
• A material element of the Group’s revenue is derived from
one contract. The LTPA is a 25-year contract to provide test,
evaluation, 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.
• The LTPA directly contributed 16% of the Group’s revenue and
supported a further 10% through tasking services using LTPA
managed facilities.
• In February 2013 the Group signed the LTPA for a third five-year
period with the MOD. The next break point is in 2018.
• The Group continues to achieve strong customer performance
and satisfaction levels, and significantly exceeded the agreed
minimum performance rating of 80% in 2013.
• The Group has achieved significant cost savings for the MOD
on delivered services, and is on track to deliver £180m of savings
over the life of the contract.
• The amounts payable under some government contracts can
• The contracts and orders pipeline is regularly reviewed by senior
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.
operational management.
• Some of the Group’s revenue is derived from contracts that have
• The nature of many of the services provided under such
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. 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.
• Some of the Group’s contracts have terms, not unusual in defence,
that provide for unlimited liabilities for the Group, or termination
rights for the customer.
Working in a global marketplace
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 or excessive delivery risk.
• QinetiQ operates internationally. Risks include: regulation
• While the Group has a growing geographical footprint,
and administration changes, taxation policy, political instability,
civil unrest, and differences in culture.
• Negative events could disrupt some of the Group’s operations
and have a material impact on its future financial performance.
its traditional activities are confined to the UK and the US.
• Relationships or contracts in new markets are assessed for their
inherent risks, using our International Business Risk Assessment
process, before being formally agreed.
Emerging and reputational risk
• Our reputation is a highly valuable asset and as an innovative
company we can operate at the cutting edge of current scientific
and regulatory thinking.
• An internal project has been launched to identify potential
emerging reputational risks and evaluate their materiality
on an ongoing basis.
• Failure to identify, measure and manage emerging, political,
public, regulatory and reputational trends could materially impact
Group performance and shareholder value.
3
A
24
QinetiQ Group plc Annual Report and Accounts 2014
Risks relating to strategy continued
Potential impact
Mitigation
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 conducted
under foreign ownership regulations, which require operation
under a Proxy agreement.
• The regulations are designed to insulate these activities from
undue foreign influence as a result of foreign ownership.
• Failure to comply with the regulations could result in sanctions,
suspension or debarment from government contracts, as well
as reputational damage to our brand.
• The Proxy agreement itself may present operational/management
challenges impacting performance.
Risks relating to people
Recruitment and retention
• The Group maintains procedures to ensure that extant
arrangements remain effective and to respond to any changes that
might occur in US attitudes to foreign ownership of such activities.
• Successful migration of Cyveillance® to a legal entity not governed
by these regulations, the creation of a revised proxy regime for
Global Products and the agreed divestment of the US Services
division have reduced the burden of these regulations.
The section entitled ‘Management and control of US subsidiaries’
on page 61 of this report provides details of the Proxy agreement.
• The Group operates in many specialised engineering, technical
• The Group conducts regular activities to identify key roles
and scientific domains.
• Key capabilities and competencies may be lost through failure
to recruit and retain employees due to internal factors, as well
as macro factors across the sector affecting the desirability,
intake and training of engineers, scientists and technologists.
Breaches of security and IT systems failure
• The Group operates in a highly regulated IT environment.
• The data held by QinetiQ is confidential and needs to be secure,
against a background of increasing cyber threat.
• A breach of data security or IT systems failure could have an
impact on our customers’ operations, resulting in significant
reputational damage, as well as the possibility of exclusion
from some types of government contracts.
• The Group’s financial systems are required to be adequate
to support US and UK Government contracting regulations.
and personnel. Succession plans are in place looking internally
at candidates ready now or in need of development to fill
particular roles and externally to identify people QinetiQ
may wish to attract.
• QinetiQ has made improvements in employee engagement and
conducts an annual satisfaction survey.
• QinetiQ is leading industry in The 5% Club, a campaign to increase
the recruitment of graduates and apprentices.
See also KPIs on page 19.
See also case study on page 16.
• Information systems are designed with consideration to single
points of failure and the removal of risk of minor and major
system failures.
• The Group maintains business continuity plans that cover
geographical assets as well as the technical capability of
employees. These plans cover a range of scenarios (including
loss of access to IT) and are regularly tested.
• Data security is assured through a multi-layered approach that
provides a hardened environment, including robust physical
security arrangements and data resilience strategies.
• Comprehensive internal and external testing of potential
vulnerabilities is conducted along with 24/7 monitoring.
• The Group engages with US and UK Government contracting audit
agencies, to enable them to test relevant financial systems and
data, and implements any recommended improvement plans.
Associated
strategic
driver
1
2
1
25
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statementsAdditional information Risks and uncertainties continued
Risks relating to people continued
Potential impact
Mitigation
Significant breach of relevant laws and regulations
• The Group operates in highly regulated environments and
• The Group has robust policy, procedures and training in place
recognises that its operations have the potential to have an
impact on a variety of stakeholders.
• Failure to comply with particular regulations could result in
a combination of fines, penalties, civil or criminal action.
• In addition, failure may also lead to suspension or debarment
from government contracts, as well as reputational damage
to the QinetiQ brand.
Key areas of focus for the Group include the following:
to ensure that it meets all current regulations.
• The Group manages the effective identification, measurement
and control of regulatory risk.
• Local management continuously monitor local laws. Professional
advice is sought when engaging in new territories to ensure that
the Group complies with local and international regulations.
• Safety liability of products, services and advice.
• QinetiQ continues to be externally authorised for regulated design
and maintenance services in the aviation sector.
• A Director of Engineering and Technology has been appointed and
is leading programmes focused on engineering and technical
competency and independent technical assurance.
• Workplace and occupational health, safety and
• Safety and environmental systems continue to be accredited
environmental matters.
to international standards.
Associated
strategic
driver
A
• QinetiQ is building on existing programmes to focus on human
factors and behavioural safety training to embed its safety culture.
See page 37
• The QinetiQ Code of Conduct states that the Group does not
tolerate bribery and corruption.
• Annual business ethics training is mandatory for all employees
across the Group and the Board.
• Systems exist for managing international business, agents,
gifts and hospitality.
• Performance is reviewed externally and benchmarked against
others in this sector.
See page 36
• Continual compliance has been supported by a programme
to improve QinetiQ’s handling of legacy materials as well as
to further 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 managing
existing requirements.
• Bribery and ethics.
• International trade controls.
26
QinetiQ Group plc Annual Report and Accounts 2014
Risks relating to financial management and markets
Potential impact
Mitigation
Defined benefit pension obligations
• The Group operates a defined benefit pension scheme.
• 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 of members.
• 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.
• At the last triennial funding valuation on 30 June 2011, the deficit was
£74.7m; the likely cost of a ‘buyout’ would be significantly higher.
• Scheme performance is reviewed regularly by Group management
in conjunction with the scheme’s independent Trustees.
• External actuarial and investment advice is regularly taken
to ensure the best interests of both the Group and the
scheme members.
• The Group and Trustees reduced future liabilities in March 2012
by switching from RPI to CPI for indexation purposes and agreeing
recovery payments of £10.5m per annum over six years.
• The scheme was closed to future accrual on 31 October 2013.
• A hedge of 20% of liabilities and an inflation cap for liabilities was
agreed in 2013.
Tax legislation
• QinetiQ is liable to pay tax in the countries in which it operates,
principally the UK and the US.
• Changes in tax legislation in these countries could have an adverse
impact on the level of tax paid on profits generated by the Group.
• In the UK, R&D Expenditure Credits (RDEC) were introduced from
1 April 2013 and will be mandatory from 1 April 2016, replacing
the R&D super deduction. Until that date, QinetiQ will continue
to claim the super deduction while the treatment of RDEC for
MOD single source contracts remains under discussion between
industry and the Government.
• External advice and consultation are sought on potential changes
in tax legislation in the UK and the US enabling the Group to plan
for and mitigate potential changes.
• The Group is currently actively engaging with industry, MOD and
industry bodies regarding R&D tax credits.
• Opportunities continue to be explored to manage both effective
tax rate (ETR) and cash tax impacts in line with the Board endorsed
Tax Strategy.
• The Group has £191.4m of UK tax losses carried forward as at
31 March 2014 (2013: £202.7m).
Exchange rates
• 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 50% is contracted in
sterling, 40% in US dollars and 3% in euros.
• 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 sheet 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.
Inflation, credit and interest rates
• The Group relies on the proper functioning of the credit markets
• The Group maintains a prudent level of committed funding
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 that
facilities: a five-year multi-currency facility totalling £268m was
provided by its relationship banks and signed in 2011. This is
currently undrawn.
borrowings are issued at floating interest rates.
• The Group also uses fixed-rate debt instruments issued to US
private placement investors with maturity dates up to 2019.
• The Group is exposed to inflation spikes above the
• The Group manages inflation risks through appropriate
long-term average.
contractual terms.
Associated
strategic
driver
4
4
4
4
4
27
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: strategy Directors’ report Financial statementsAdditional information
EMEA Services
RETURN TO ORGANIC GROWTH
Key highlights
Revenue
£607.0m
2013: £594.6m^
Underlying operating margin*
14.3%
2013: 14.3%^
Underlying operating profit*
£86.7m
2013: £84.8m
No. employees
5,399
2013: 5,352^
• EMEA Services performed well
• Orders grew 11%, demonstrating
throughout the year
• The C4ISR business performed
particularly strongly and the
other core Air, Weapons and
Maritime businesses all
produced good results
the unique strengths of
the division
• The division delivered organic
growth for the first time in
five years
* Definitions of underlying measures of performance can be found in the glossary on page 150.
^ Restated to reflect the reclassification of product sales from EMEA Services to Global Products
and the reclassification of the Cyveillance® business from US Services to EMEA Services.
Value pipeline
Core
Air
Weapons
Maritime
C4ISR
Australia
Explore
Test for value
Training
Cyber Security
Cyveillance®
Procurement Advisory
Services
International ranges
UAS Services
International
procurement advice
Smart metering
assurance
Directed Energy
Weapons
Secured navigation
systems (Galileo)
Market and operational review
EMEA Services (formerly UK Services) performed well
throughout the year in an environment where the
UK Government remains focused on financial stability
and defence transformation. The division delivered
organic growth for the first time in five years, increasing
revenue by 3% on an organic basis at constant currency.
The C4ISR business performed particularly strongly and
the other core Air, Weapons and Maritime businesses all
produced good results.
Orders grew 11% to £447.8m (2013: £402.2m^),
demonstrating the unique strengths of the division
and its highly differentiated position in the UK market.
International order intake was also encouraging, and the
division was renamed EMEA Services during the year to
reflect its current and potential geographic end markets.
Underlying operating profit* increased to £86.7m
(2013: £84.8m^) as a result of continued productivity
improvements and better project execution embedded
during the self-help phase, enhanced by the contribution
of certain international projects.
Organic-Plus update
EMEA Services combines world-leading expertise with
unique facilities to provide technical assurance, test and
evaluation, and training services, mainly under long-term
contracts. The division is also a market leader in research
and advice in specialist areas such as C4ISR, acquisition
services and cyber security. Its structure is closely aligned
to the Front Line Commands (Navy, Army and Air) that
have taken on responsibility for managing military
capability, and the creation of a Joint Forces Command
provides a new sales channel for its C4ISR and Cyber
businesses. The EMEA Services division is also leveraging
its core strengths and intellectual property to pursue
a pipeline of opportunities in new sectors and
international markets.
QinetiQ’s Air business combines unique facilities,
capabilities and world-class experts to de-risk complex
aviation programmes by testing military aircraft and
equipment, evaluating the risks and assuring safety. Its
core business delivers test and evaluation for the MOD
as well as aircraft manufacturers. During the year it was
awarded a £16m contract to support the conversion of
Merlin helicopters for maritime use, and renewed a
multi-year contract with Boeing for the wind tunnel
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QinetiQ Group plc Annual Report and Accounts 2014
testing of future aircraft designs. The business is building
market share beyond test and evaluation and won its
first major engineering services contract to extend the
life of an RAF aircraft type. The year also saw the first
flight of the Watchkeeper Unmanned Air System (UAS)
from Boscombe Down, which QinetiQ operates and
manages for the MOD. The business is looking to
leverage its UAS expertise through an agreement to
develop the Llanbedr Airfield in Wales as a test range
for UAS development, and through the provision of
turn-key remotely piloted aircraft services to military
and commercial customers.
The Weapons business provides independent research,
evaluation and training services for integrated weapons
systems. Its core business operates ranges, managing
upgrades and enhancements for these strategically
important facilities. It also provides research and advice,
principally through a four-year contract to manage the
Weapons Science and Technology Centre which was
awarded at the start of the year. The Weapons business
is working with its customers and supply chain partners
to combat the growing threat from Fast In-Shore
Attack Craft and is supporting the MOD’s ‘soft market
testing’ phase of a new, more efficient approach to the
management of the UK’s £6bn munitions inventory.
The business delivered test and evaluation services to
international governments in Europe and South Korea
during the year. It is also responding to increased
demand for advice on range design, management
and operations from international customers looking
to enhance their in-country capabilities.
QinetiQ’s Maritime business provides independent
research, design, integration, test and evaluation to
naval clients worldwide, with significant revenue
underpinned by three long-term contracts. The core
UK Maritime business delivered strong order intake
throughout the year driven by demand for expertise
to support vital submarine capability. As well as test
and evaluation, the business is establishing a new
hydrodynamic development facility and designing
Name: Dr Jonathan Collier
Role: Research Delivery Lead , Weapons Science and Technology Centre
QinetiQ continues to manage the Weapons Science and Technology Centre
(WSTC) on behalf of the MOD in a highly successful four-year contract,
with options for a further three years. This covers the strategy, planning,
management and delivery of research valued at circa £10m annually
to support complex weapons, general munitions and energetic materials.
What is genuinely ground-breaking about QinetiQ’s WSTC model is its
scalability, flexibility and how it brings industry and MOD together in an open
and collaborative way: gathering requirements from all parties, including
Front Line Commands, then using deep technical specialists drawn from the
58 partner organisations to plan and prioritise potential technology solutions
to form a coherent programme. Delivery is by a ‘best of breed’ basis and
includes taking concepts through R&D through to practical demonstration.
However, it is the planning which is truly innovative and informs all research
activities by capturing and translating MOD and industry requirements and
capabilities into a programme that delivers best value for money.
signature measurement facilities for the ‘Successor’
(future nuclear deterrent) and Maritime Underwater
Future Capability programmes. In addition, the Maritime
business opened a Communications Development
and Integration Facility during the year to de-risk the
procurement of future communications systems, and
won a £5m contract from a competitor shortly after
year end to deploy and maintain the MOD’s mobile
underwater targets. It is also leveraging core strengths
to win new international work, securing a contract from
Daewoo Shipbuilding to support the development of
the Republic of Korea’s new KSS-III attack submarine.
Understanding our business
Air
Core
Weapons
Core
What we do
De-risks complex aviation programmes
by testing military aircraft and equipment,
evaluating the risks and assuring safety.
What we do
Provides independent research,
evaluation and training services
for integrated weapons systems.
Maritime
Core
What we do
Provides independent research, design,
integration, test and evaluation to naval
clients worldwide – underpinned by
three long-term contracts.
QinetiQ Group plc Annual Report and Accounts 2014
29
Strategic report: performance Directors’ report Financial statements Additional information EMEA Services continued
QinetiQ’s C4ISR business is a leading supplier of research
and advice on sensors, communications and intelligence.
The business manages significant enabling contracts,
working with partners to deliver C4ISR research for the
MOD. During the year it was awarded two new research
enabling contracts, unseating the incumbent supplier to
win an enabling contract for defence logistics research,
and winning the next stage of the contract under which
it leads research into secure information infrastructure.
The independent technical expertise of its scientists and
engineers is in demand in the UK to provide advice on
the transition required following the Afghanistan conflict
and in support of the new Joint Forces Command.
There is also encouraging demand from international
customers, and during the year the business advised
governments in Europe, the Middle East and South East
Asia on the procurement of complex C4ISR technology.
QinetiQ Australia is a multi-disciplinary engineering and
consultancy business, within the defence, maritime and
rail markets. Despite short-term uncertainty following
September’s federal election, the core defence business
has continued to grow, underpinned by partnership
contracts with the Department of Defence to support
the airworthiness of military aircraft and develop
sovereign munitions manufacturing facilities. During
the year the business won positions on new government
framework contracts known as ‘panels’ and grew its
footprint in the maritime market by supporting the
Hydrographic Systems, Frigates and Helicopter Dock
Program Offices. Future opportunities exist as a result
of the Coalition Government’s commitment to restore
defence expenditure to 2% of GDP within ten years,
as well as in adjacent markets such as rail.
In the ‘Explore’ category of its portfolio, QinetiQ is
nurturing certain products and services to determine
their ability to scale. While some of these solutions
remain embedded within the appropriate core business,
significant progress has been made establishing the more
mature growth opportunities as distinct, agile business
units better placed to realise their potential.
QinetiQ’s Cyber 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. During the year the
business transferred responsibility for certain core
capabilities to the C4ISR business, and is now focused on
growth in the UK public sector and smart infrastructure
markets. The ability to monitor and identify incidents
on IT systems is a key customer concern and the Cyber
business was awarded a multi-year contract by the
Ministry of Justice to provide protective monitoring of
its networks. It was also awarded an £8m contract to
provide data security services to the UK Government’s
smart meter programme. Opportunities also exist for
international growth, with training and capability
development providing important routes to market
outside the UK, and to leverage the cyber intelligence
capabilities provided by Cyveillance®.
Cyveillance®, which provides cyber intelligence and was
formerly managed and reported under the US Services
division, did not form part of the strategic review of
that division but was instead extracted from the proxy
governance into a standalone commercial entity. It
complements QinetiQ’s UK-based cyber activities and
has been established as an ‘Explore’ business that is now
reported as part of EMEA Services. A new leadership
team has successfully commercialised Cyveillance®,
with a renewed focus on the delivery of higher margin,
repeatable security services to commercial markets.
During the year, the business increased its revenue from
US Fortune 500 customers as companies, particularly
in regulated markets such as finance, energy and
healthcare, established threat intelligence centres
to predict and combat cyber risks. Cyveillance® is
also extending its offering to small and medium-sized
Understanding our business
Australia
Core
What we do
A multi-disciplinary engineering and
consultancy business within the defence,
maritime and rail markets.
C4ISR
Core
What we do
A leading supplier of research and
advice on sensors, communications
and intelligence.
Procurement Advisory Services
Explore
What we do
Delivers government procurement
advice including tender assessment,
cost and risk advisory services.
30
QinetiQ Group plc Annual Report and Accounts 2014
enterprises, investing in cloud-based platforms and in
integrated support services that assist customers in
collecting and prioritising threat intelligence.
The Group has also established a new Procurement
Advisory Services business to deliver government
procurement advice including tender assessment, cost
and risk advisory services. The business, which employs
a software and services model, is targeting complex
procurement programmes in the highly regulated
government, transport, energy and minerals markets.
QinetiQ’s safety capabilities, previously delivered
by this business and focused primarily on defence
customers, have been transferred to the Air business,
where they complement existing release-into-service
work. Procurement Advisory Services incorporates
Commerce Decisions, a QinetiQ subsidiary, and its
AWARD® procurement evaluation software used on
projects totalling $140bn worldwide. The refocused
business unit also provides a route of entry into
international markets, as well as a bridgehead for
capabilities offered across EMEA Services. Building
on early successes in the Australian market, it won
a position on the framework contract through which
the Canadian Government procures technical and
acquisition support in the second half of the year.
The Training and Simulation Services business has been
renamed QinetiQ Training. While the business remains
differentiated by its use of technology to reduce the cost
of training, it will draw on training capability from across
QinetiQ, allowing it to address larger opportunities.
The Training business consolidated its position in the
UK market during the year, increasing revenue on its
flagship Distributed Synthetic Air Land Training (DSALT)
programme at RAF Waddington and securing a two-year
extension for the Defence Simulation Centre it has
established for Joint Forces Command. It also won the
re-compete of a £4m underpinning contract with the
UK’s Defence Science and Technology Laboratory (Dstl)
Name: Wendy Wates
Role: Managing Director, QinetiQ Commerce Decisions Limited
QinetiQ Commerce Decisions enables more intelligent procurement through
its expert people, best practice insights and powerful AWARD® software
used on projects worldwide totalling $140 billion. The company’s ongoing
transformation is already bringing considerable success: orders and revenue
increased last year. “This is sustainable growth, founded on a culture of
success and commitment shared by our people and our customers,” says
Wendy Wates, MD. “Existing customers know how important they are to us,
new customers recognise our credibility and commitment, the market
understands how we can help and our own people know they’re valued.
Our strategy includes retaining and growing our core, continued UK growth –
particularly in commercial sectors – and pushing even harder internationally.
We’re already achieving success in Australia, winning a contract for a
maritime programme, and have qualified opportunities in Canada.
This is a great place to be right now.”
for demonstrating the applicability of commercial
off-the-shelf technologies, such as gaming technologies,
to defence and security applications. The business has
yet to realise the potential offered by the US market, but
QinetiQ opened an office during the year in Orlando at
the heart of the US simulation community.
Understanding our business
Training
Explore
What we do
Uses technology to reduce the cost of
training, drawing on training capability
from across QinetiQ.
Cyber Security
Explore
What we do
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.
Cyveillance®
Explore
What we do
Provides open source threat intelligence
and remediation to customers across
the world including many of the
Fortune 500.
QinetiQ Group plc Annual Report and Accounts 2014
31
Strategic report: performance Directors’ report Financial statements Additional information US Services
MAXIMISING VALUE
Key highlights
Revenue
£408.8m
2013: £463.8m^
Underlying operating
margin*
4.6%
2013: 5.1%^
Underlying operating
profit*
£19.0m
2013: £23.7m^
No. employees
2,704
2013: 3,219^
^ Restated to reflect the reclassification of the Cyveillance® business
from US Services to EMEA Services.
* Definitions of underlying measures of performance can be found
in the glossary on page 150.
Post year end QinetiQ agreed to sell the US Services
division to The SI Organization, Inc.
Market and operational review
The performance of US Services was impacted by
continued uncertainties in the US federal services market,
despite a deal on the US defence budget being signed into
law in December 2013, providing a more gradual path to
lower defence spending than was previously mandated.
In this slower contracting environment, orders fell 17%
from £450.7m^ in 2013 to £375.5m as a result of budget
reductions and delays to customer decision making on
both new and incremental orders. This was exacerbated
by the routine lodging of protests by unsuccessful bidders.
Revenue declined 12% on an organic basis at constant
currency, impacted by funding reductions on certain
contracts, some work ending in period, and the switching
of some work to small-business set-aside contracts.
Underlying operating profit* was £19.0m (2013: £23.7m^)
with the widespread adoption of lowest-price-technically-
acceptable evaluations driving highly competitive market
conditions. However, the reduced performance of US
Services was somewhat mitigated by actions implemented
last year to place the US cost base on a more competitive
footing which included reducing management and property
costs, as well as the ongoing control of overheads
to maintain competitive rates.
Organic-Plus update
US Services is a leading provider of technical services and
solutions to the US federal government. The division has a
broad client base with key customers including NASA, the
Department of Homeland Security, the US Government’s
General Services Administration (GSA) and the Intelligence
Community as well as the US military.
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QinetiQ Group plc Annual Report and Accounts 2014
At the beginning of the year, the division’s two defence-
focused businesses – Lifecycle Solutions and Software &
Systems Engineering – were integrated to create Defense
Solutions, which provides systems engineering, fleet
management and software development services to
defence agencies, as well as modelling and simulation
for training. The business has a long record of providing
aviation engineering services, and during the year it was
awarded task orders totalling more than $30m on its two
major framework contracts with the US Army Air Corps.
The US Government’s ‘pacific pivot’ represents a resource
shift to naval markets, and during the period the Defense
Solutions business built on its strong base of contracts
in the maritime domain by winning a $19m contract to
provide Technical Authority Support to the Chief Engineer at
the Space and Naval Warfare System Command (SPAWAR)
and a $16m contract with the Office of Naval Research.
Aerospace Operations and Systems is one of the largest
contractors to NASA and the largest contractor at the
Kennedy Space Center, providing spaceflight and launch
support, mission analytics, satellite integration, scientific
data analysis and independent launch verification. The
business is building on its reputation for the successful
delivery of major engineering contracts to grow revenue
on its major contracts with NASA, including the Engineering
Services Contract at the Kennedy Space Center and the
Environmental Test and Integration Services contract at
the Goddard Space Flight Center. Key projects included
re-manufacturing the Crawler Transporter at Kennedy
and testing of the James Webb Space Telescope, NASA’s
replacement for the Hubble Space Telescope due for launch
in 2018. The business is also leveraging its R&D credentials
with NASA and the US Air Force to meet the need for
scientific and intelligence data analysis in support of
military intelligence organisations.
Mission Solutions provides enterprise IT, systems design
and integrated software solutions to defence, security,
intelligence agencies and other customers in the federal
and civil markets. The business has reduced its overhead
costs significantly over the last two years in response to
headwinds from reduced spending on non-differentiated
IT professional services and lowest-price-technically-
acceptable acquisitions. The specialist expertise of its
employees remains attractive to a range of customers
and during the year Mission Solutions increased revenue
from the General Services Administration, winning a
new $14m contract from the Public Buildings Service
for enterprise data management. It was also awarded a
$15m follow-on contract for software development by
the Maryland Procurement Office. Although revenue fell
from the Department of Homeland Security, the business
was awarded a position on the Department’s EAGLE II
contract that will serve as its platform for acquiring
IT services over the next seven years.
Global Products
DRIVING A CHANGE IN FOCUS
Key highlights
Revenue
£175.6m
2013: £269.4m^
Underlying operating margin*
15.4%
2013: 22.3%^
Underlying operating profit*
£27.0m
2013: £60.2m^
No. employees
834
2013: 927^
• Reduction in US conflict-related
product sales and profits against
strong prior year
• Reduction partially offset by
the contribution from UK Global
Products and TALON® orders from
Iraq and Pakistan
• New Proxy Board and Chairman
appointed just after year end
• 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
^ Restated to reflect the reclassification of product sales from EMEA Services to Global Products.
* Definitions of underlying measures of performance can be found in the glossary on page 150.
Value pipeline
Core
TALON®
Q-Net®
LAST® Armor
SWATS™
Explore
Test for value
OptaSense®
Alarm™
Robotic applique kits
Robotic controllers
Integrated Warrior
System™
Space Products
MEWS™
Power Line Sensors
(Linewatch™)
E-X-Drive®
Market and operational review
The performance of Global Products was impacted by
the drawdown of overseas US military forces that had
an increased negative effect on demand for US conflict-
related products, against a strong prior year. This was
partially offset by the contribution from UK Global
Products which benefited from deliveries of the Alarm™
radar system and the Modular Electronic Warfare System
(MEWS™). A new Proxy Board and Chairman for US
Products were appointed just after the year end to
assist in repositioning the business and addressing
its performance.
Orders were £149.1m (2013: £223.9m^) due to the
reduced demand for US military products and spares.
The division has shorter order cycles than the services
divisions and was impacted by budget reductions and
slippages in order flow as a result of the drawdown,
partially offset by TALON® orders from Iraq and
Pakistan with a combined value of $28m.
Revenue was £175.6m (2013: £269.4m^), underlining
the division’s dependency on the timing of delivery
schedules for key orders. Q-Net® revenue during the
year was $20m (2013: $120m) with minimal spares sales
as a result of the reduced operational tempo as US forces
leave Afghanistan.
As anticipated, this decline in Q-Net® deliveries, including
spares, reduced underlying operating profit* to £27.0m
(2013: £60.2m^), partially offset by an increased profit
contribution from the UK products business and a £6m
benefit from a favourable legal ruling on an historic
onerous contract.
Organic-Plus update
Global Products combines cutting-edge technologies
with an intimate understanding of customer problems
and strong productisation skills to deliver innovative
solutions to meet customer requirements. The division
also undertakes contract-funded research and
development, developing intellectual property in
partnership with key customers, with potential for
new revenue streams. 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 Unmanned Systems business is a world-leading
provider of military robots. With the US military
assessing their post-war requirements for robotics
and formulating new programs of record, demand from
customers in the US fell during the year but international
sales more than doubled with $20m of TALON® robots
delivered to Iraq, $8m to Pakistan and $3m of Dragon
Runner™ sales to the Netherlands. The Unmanned
QinetiQ Group plc Annual Report and Accounts 2014
33
Strategic report: performance Directors’ report Financial statements Additional information Global Products continued
Name: Tom Debraekeleer and Bart De Wilde
Role: Small satellite assurance and safety
QinetiQ’s Space Products business continues to grow in reach and reputation.
Europe’s leading manufacturer of small satellites, the last year saw us further
commercialise the expertise and IP developed with the European Space
Agency (ESA), launching into new international territories. Part of a Belgian
consortium, we are creating an observation satellite for the Vietnamese
Government designed for resource, environment and disaster monitoring.
This small satellite is similar to the ESA’s Proba-V, which we successfully
launched and tested in 2013. Proba-V exemplifies innovation in action,
requiring us to miniaturise technologies to fit the payload of this highly
compact satellite. Incidentally, our Proba-1 that launched in 2001 was
only designed for two years: it’s already celebrated its 12th anniversary
in space. We are currently prepping a remarkable follow-up mission for
ESA: formation flying two satellites only 200 metres apart in a controlled way.
Watch this space.
Systems business is also increasing its portfolio of
products, often partnering with universities such as the
University of Texas at Arlington, Virginia with whom it
works to develop advanced robotic control systems.
New offerings include low-cost, lightweight robots
controlled by mobile devices that are designed for
non-military applications.
The survivability business provides innovative products
that protect people and assets, thereby saving lives.
During the year the business delivered its Q-Net® vehicle
survivability product to Oshkosh to fit to M-ATV vehicles
under an $18m contract. It is also finding new markets
outside the US as European governments rebuild military
capabilities and governments in the Middle East and Asia
increase their expenditure on security and defence.
International product sales during the year included
delivery of the Precision Air Drop System (PADS®) to
a Middle Eastern customer and the Shoulder-Worn
Acoustic Targeting System (SWATS™) to Germany. In the
‘Test for Value’ category, the business has developed an
Integrated Warrior System™ that enables a soldier to
plug-and-play multiple sensors through a lightweight
vest and access data via a tablet or smartphone. The
system has a wide range of applications including
training, mission rehearsal and operations.
The division continues to diversify its product portfolio,
especially beyond defence. In the ‘Explore’ category
some products, such as newer robotic technologies,
remain embedded within the appropriate core business,
but other more mature growth opportunities, such as
OptaSense® and QinetiQ’s Space Products business,
have been established as distinct business units.
Early-stage emerging technologies are classified
in the ‘Test for Value’ category, with the relevant
core business responsible for their development.
Understanding our business
Survivability
Core
What we do
Provides innovative products
that protect people and assets
thereby saving lives.
Unmanned Systems
Core
What we do
A world leading provider
of military robots.
OptaSense®
Explore
What we do
A bespoke fibre sensing
business that delivers
Decision Ready Data to
multiple vertical markets.
Space Products
Explore
What we do
Provides satellites, payload
instruments, sub-systems
and ground station services.
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QinetiQ Group plc Annual Report and Accounts 2014
The OptaSense® bespoke fibre sensing business is
the most mature of the ‘Explore’ opportunities in
QinetiQ’s portfolio, recently winning Queen’s Awards
for Export and Innovation. The development of the
business has been accelerated by the acquisition of
Redfern Integrated Optics (RIO), a market leading
supplier of low noise semi-conductor lasers, with a
turnover of $5m in 2013. The acquisition provides
OptaSense® with access to current and future
generations of highly coherent semi-conductor lasers
that are ideally suited to distributed fibre sensing
particularly in the harsh environment of oil and gas.
OptaSense® technology has applications in multiple
vertical markets in which the business normally looks to
partner to achieve the necessary access and scale. The
largest of these markets is down-hole oil and gas, and
discussions are already underway with oilfield services
companies to establish the optimum model to address
this market. Following the end of the exclusivity period
with Shell in 2013, the business has signed enabling
agreements to supply its products and services to seven
oil and gas companies including BP and Conoco Philips.
OptaSense® continues to work with Shell under a
three-year product development contract that was
extended during the year to include the marinisation
of its technology for the subsea and deep water market.
The business also won the oil and gas industry’s first
multi-year 4D distributed acoustic sensing contract
for the vertical seismic profiling of up to 12 oil wells
simultaneously in Oman. In the rail market OptaSense®
is partnering with Deutsche Bahn under an 18-month
contract to develop applications and validate their
ability to replace current rail sensors. The business also
delivered trials for Austrian Rail on its infrastructure near
Vienna and on the M5 and M4 motorways in the UK.
In the infrastructure security market, OptaSense® won
three key orders to protect over 1,600km of pipeline in
the Middle East. This brought the total of new contracts
from customers in the Middle East to $24m for the year
and follows the decision to invest in the region two years
ago. The business is also engaged in four pilot
programmes for border security.
QinetiQ’s Space Products business provides satellites,
payload instruments, sub-systems and ground station
services. The business is a partner in the European
Space Agency (ESA) ground station at Redu, Belgium
and recently signed an agreement that ensured the
long-term development of this facility as a strategic
focus for European space activities. Proba-V, the latest
of the Space Products business’ family of small satellites,
was launched in May and is being used by ESA to study
vegetation following its successful commissioning in
December. The business is also a member of a Belgian
consortium that won a contract to design and build an
Name: Jeff Travis and Jim Godfrey
Role: Electrical engineers
Our Linewatch™ product is uniquely placed to capitalise on the next wave of
smart grid technologies to monitor, manage and automate power distribution
networks in real-time; we are already piloting innovative low-voltage and
medium-voltage power line sensors for major North American power
companies. With increasing energy generated from distributed sources
outside the main utilities and sold back into the grid – notably by wind, solar
and other ‘green’ suppliers – managing the grid is increasingly challenging.
How can you manage peaks in demand and dips in supply, ensure quality of
service for customers, monitor assets, cope with severe weather events,
locate interruptions fast, reduce outages, and protect against losses due
to theft? Linewatch™ sensors tick the boxes in all these critical areas. Fitted
to power lines quickly and safely, a range of valuable data is communicated
to the utility operations centre for analysis and actionable response.
agriculture monitoring satellite for the Vietnam Academy
of Science and Technology, an important first step in
growing its international satellite business.
In the ‘Test for Value’ category, early-stage offerings are
evaluated as they emerge to determine the best route
to maximise value. During the year, there were further
sales of the Alarm™ radar system to provide warning
of ultra-low-level rocket attacks in support of UK military
operations in Afghanistan. While some emerging military
technologies will be impacted by the drawdown, others
have potential beyond operations in Afghanistan. One
example is the Modular Electronic Warfare System
(MEWS™) which is being taken to market with L-3 TRL
and received a £4m order from the government of a
NATO country.
Other ‘Test for Value’ technologies are focused on
non-defence markets, such as the secured navigation
systems currently being proven on ESA’s Galileo
programme and stealth wind turbine technology,
which achieved its first licence sale during the year.
In addition a pilot of the Linewatch™ power line sensor
system, that precisely measures voltage and current on
power grids, is currently under way with a major North
American hydro-electric company to support its smart
metering programme.
QinetiQ Group plc Annual Report and Accounts 2014
35
Strategic report: performance Directors’ report Financial statements Additional information Corporate responsibility and sustainability review
COMMITTED TO EMBEDDING
A SUSTAINABLE APPROACH
“We recognise that our prized possession is trust and welcome the
value our customers, employees and shareholders place on QinetiQ
being a responsible business.”
Leo Quinn, Chief Executive Officer
Key highlights
• Launch of The 5% Club
• Introduction of a diversity policy
• Reporting Group greenhouse gas emissions
• MOD conservation award
Managing corporate responsibility
Strong governance underpins responsible business
practice and the Group has Board and executive level
Commitment to corporate responsibility through the
Group Risk & CSR Committee (page 66 of this report).
The Committee meets regularly and receives reports and
briefings on all material CR issues including business ethics,
environment, health and safety, diversity and human
rights. In the US, the Proxy Board oversees these activities,
obtaining independent assurance on the adequacy of its
compliance programmes on an ongoing basis.
The Group’s policies and management systems underpin
our CR programmes. In the UK, the business assurance
tool provides internal assurance and we have the
external certification ISO 14001 for our environmental
management system, ISO 9001 for our quality
management system and OHSAS 18001 for our health
and safety management system. In the UK we have a
Sustainable Procurement Code and we take a number of
steps to ensure that we buy responsibly and sustainably.
Similarly in the US, the business has policies and
programmes in place to ensure compliance with US
federal labour, health and safety, environmental and
other laws and regulations. Our US business is ISO
9001:2008 and ISO 9001:AS9100 certified at three
key sites. QinetiQ’s commercial success depends on
our ability to conduct business in overseas territories,
transacting with foreign governments and commercial
organisations in a legally compliant manner, controlling
the international movement of certain strategic items.
Our CR strategy reflects the material issues for our
business – defined by our stakeholder priorities. We
ensure that we understand these priorities through
regular dialogue such as investor meetings, involvement
in the MOD-industry Sustainable Procurement Working
Group and employee engagement programmes.
36
QinetiQ Group plc Annual Report and Accounts 2014
Best practice in CR is evolving and to ensure that as
we continuously improve, we regularly introduce
new programmes and initiatives.
Business ethics
The Group Code of Conduct (updated July 2013)
underpins how we do business. Its purpose is to clearly
articulate our ethical standards and provide employees
with a guide to what is expected of them in their
behaviour and business activities. It provides information
on how they can get help and also guidance on their
responsibility to report if they identify a problem.
Employees are advised to talk to their manager first
but we also provide ethics email advice services and
a whistleblowing line. The whistleblowing line is
independently run and provides a confidential 24/7
service. We respond to a number of queries through the
ethics advice services each year and all communication
through the whistleblowing line is investigated. Annual
business ethics training is mandatory for all employees
across the Group and for the Board. It covers a range
of issues including anti-bribery. We also provide more
in-depth anti-bribery training for those in higher risk
roles, for example those who carry out overseas business.
Anti-bribery risk management is embedded in our
business processes; we have a robust process for
undertaking due diligence, monitoring and audit of our
use of commercial intermediaries, and we use expert
third-party providers of due diligence, where appropriate.
Our anti-bribery programmes are overseen by our Chief
Ethics Officers who are senior executives. We adopt a
zero tolerance approach to bribery and corruption.
Human rights
QinetiQ recognises that the UN Guiding Principles on
Business and Human Rights set a standard of conduct
expected of companies. We seek to anticipate, prevent
and mitigate potential negative human rights impacts
through our policy and process, and through our Code
of Conduct and business ethics training for employees,
all of which underpin our commitment to ethical business
conduct. QinetiQ has policies in place to support meeting
internationally recognised human rights principles, including
adherence to export controls, health and safety, non-
discrimination, anti-bribery and environmental issues.
This is further supported by our procedures on product
safety, sustainable procurement, due diligence and risk
management (which are described in more detail
elsewhere in this Corporate responsibility and sustainability
Review). We monitor the application of these policies and
procedures through our business assurance processes.
We are presently reviewing the benefits of this embedded
approach, as compared with the implementation of a
specific human rights policy. We will also be looking at best
practice in tracking how human rights issues are addressed
within our business.
Employees
2014 highlights and 2015 priorities
2014 highlights
• Launch of The 5% Club
• Introduction of a diversity policy
• Launch of Safe for Life in the UK
2015 priorities
• Continue to improve our diversity programme
• Introduce a UK Safety Culture Climate
Survey score
• Continuing reduction in Lost Time Incident Rate
• 5% of UK workforce to be on apprenticeship
or graduate programmes by March 2015
Our employees
Safety, health and wellbeing
QinetiQ recognises that the safety, health and wellbeing
of our people are intrinsically linked to our strategic
success. We continue to focus on reducing accidents
and work-related ill health as part of our continuous
improvement activity.
The UK RIDDOR (Reporting of Injuries, Diseases and
Dangerous Occurrences Regulations 2013) rate rose
from 1.90 in 2014 to 2.74, missing our 2013 objective
of reducing reportable UK incidents. However, this
remains well below the Health and Safety Executive’s
‘all industries’ average of 3.11 per 1,000 employees.
Within these reportable accidents, severity of injuries
has reduced and our RIDDOR rate is down overall in the
last four years, from 5.35 to 2.74. Given the relatively
low number of reportable incidents, a small change in
absolute numbers can significantly impact annual rates.
Taking this and our increasing international presence into
consideration, QinetiQ has decided to change focus from
UK RIDDOR rate to an overall Lost Time Incident Rate
(see non-financial KPIs on page 19) which provides
a relevant lagging indicator for the Group. We also
recognise the need to incorporate leading indicators
into our annual reporting. As part of our new UK Safe
for Life programme we will be using a Safety Culture
Climate Survey score as a safety performance
indicator from 2015.
There were no prosecutions or prohibition notices issued
by regulators in the UK in 2014. A single improvement
notice was issued to the Company following the UK
Health and Safety Executive’s investigation of an incident
at one of the sites we manage on behalf of the MOD.
Although the incident was relatively minor in nature
and did not result in any injuries, several improvement
actions were identified relating to the risk assessment
process and training of employees. These actions have
all been completed, the Improvement Notice formally
closed and lessons shared across the organisation.
Safe for Life represents a logical progression of our
safety strategy, incorporating existing activity focused
on safety leadership, human factors, error management
and behavioural safety. It provides a single framework to
deploy flexible resources, systems and tools at a business
and operational site level to address local safety culture,
and is underpinned by an objective safety assurance
review and Safety Culture Climate Survey. This programme
is currently being piloted in our Weapons business with
plans for wider roll-out across the UK.
In our US business, focus continues to be on empowering
employees to operate safely through provision of further
specialist training.
Lost Time Incident Rate
QinetiQ Group excluding US
US business
Total
2012
5.53
1.12
3.55
2013
5.36
1.45
3.70
2014
4.29
1.37
3.39
Our health and wellbeing programmes in both the
UK and US continue to develop. The UK Wellbeing
programme and QinetiQ Benefits+ scheme in the
UK are offering more services, with increasing uptake
by employees. Free flu jabs and health assessments
(measuring BMI, blood pressure and cholesterol) are
proving particularly popular. The Vitality Wellness
Program has been running in our US business for over
three years, as part of the existing Health in Motion
initiative. It supports employees and their spouses, and
benefits include reduced health insurance premiums,
prizes for attaining point levels and discounts on health
clubs and equipment.
Safety of products
Delivering products and services safely fundamentally
underpins our offering to customers. We invest in
attracting and developing our engineers 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
37
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: performance Directors’ report Financial statements Additional information Corporate responsibility continued
our Engineering, Science and Technical Leadership
Team, supported by independent assurance activity.
In addition to maintaining and developing its design
and maintenance accreditations for safety-critical work,
QinetiQ actively supports collaborative working with the
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.
Employee engagement
We seek to utilise a range of communication channels
to engage with employees in respect of factors affecting
the performance of the Group. An independent annual
employee engagement survey for EMEA employees had
a response rate of 73% and recorded a 3% increase in
Employee Engagement compared with 2013 (see page
19). Action planning is taking place at a business unit
level to build on successes and address priority areas
for improvement. The UK Employee Engagement
Group (EEG) comprises 42 representatives elected
by employees covering both local and national level
to improve engagement and act as a consultative
body on developments within the Company. The EEG
is entering its third year and continues to play an active
role in monitoring and providing feedback on employees’
views on topics such as pensions, employee wellbeing
and engagement. In our US business we engage with
employees through a range of channels such as town
halls and employee focus groups. We also use various
channels, including the intranet, management briefings
and widespread training programmes to involve
employees in the running of the business.
Diversity and inclusion
In the US, we have a Diversity Recruiting Strategy
which was introduced during 2013 to focus on the
recruitment of under-represented groups. A Group-wide
equality, diversity and inclusion policy was introduced
during 2014. We have become core members of the
Employers Network for Equality and Inclusion (ENEI)
which promotes diversity and inclusion in employment.
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 – a commitment to
employing disabled people.
The breakdown of the number of employees by gender
at the end of March 2014 is shown in the table below:
Level
Board Directors
Senior managers
All employees
Female
2
38
1,998
Male
6
231
6,939
Learning and development
We deliver business-focused learning and development,
to enhance individual and team performance to deliver
results and achieve our strategic goals.
In the UK, professional development begins during
an employee’s ‘First 100 Days’ programme, including
induction, workshops, online learning and knowledge
acquisition. Tailored learning (personal and role specific)
continues for all employees, including mandatory
training such as health and safety, and business ethics.
Career development can be technical or managerial, with
some employees combining both. Our UK engineering,
science and technical communities now have a clear
Career Development Framework reflecting an ever-
changing marketplace. Development packages have
been enhanced in 2014 for line managers and business
leaders, including the launch of the QinetiQ Manager
Programme. Our graduate programme has been
maturing through 2014 and will result in an all-new
offering in 2015. We also continue to grow the number
of apprenticeships we offer. In 2015, the UK Performance
Management process will be updated and we will
provide a Career Development Framework for each
employee community.
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 programmes.
38
QinetiQ Group plc Annual Report and Accounts 2014
The 5% Club – Investing in a generation
The 5% Club was launched in October 2013. Spearheaded
by QinetiQ and supported by five founding members, this
industry-led campaign aims to transform the fortunes of
young people in the UK. This initiative already has the
support of 32 companies, large and small, from a range
of sectors, including engineering, construction, defence,
retail, law and IT. Developing our young people is both
a business and a social imperative. It is good for the
economy, as skills enhancement leads to innovation,
innovation leads to growth, and growth leads to prosperity.
We believe ‘what gets measured gets done’, so The 5%
Club involves formalising what an organisation does in
terms of apprentice and graduate programmes and making
the public commitment that these will comprise 5% of the
UK workforce within the next five years. At QinetiQ we
have set this UK goal by March 2015 (our current figure is
shown below). A People Network has been set up to ensure
that the achievement of this target is sustainable and the
first meeting was held in March 2014.
The 5% Club
Number of apprentices
Number of graduates
Number of sponsored students
Percentage of UK workforce
Number
121
106
17
4.78%
Our communities
QinetiQ is committed to being a good neighbour in the
communities in which we operate. One way in which
employees contribute to this is by volunteering their
time and professional skills, such as via the UK Employee
Volunteering Scheme. Our flagship initiative is our STEM
outreach programme with the aim of inspiring the next
generation of scientists and engineers. QinetiQ STEM
Ambassadors have organised STEM events for school
children such as the annual powerboat and robo-
olympics challenges, and have hosted Cyber Security
Challenge UK. We are delighted that one of our STEM
Ambassadors, Lauren Hill, won the accolade of Most
Inspirational Apprentice at STEMNET’s national Annual
Awards. Our non-STEM employees also use their skills
through programmes such as Young Enterprise. The
‘giving something back’ score in our 2014 employee
survey rose by 3% compared with 2013, indicating that
employees recognise and value the continued focus on
community programmes.
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.
Name: Chris Clinton [far right]
Role: Cyber Security Consultant
A graduate in electronic engineering and computer sciences who joined
QinetiQ in 2011, cyber security consultant Chris Clinton is passionate about
his job – and his extra workload as a Technical Lead for Cyber Security
Challenge UK. With the threat landscape growing and only one-fifth of
attacks reported, the not-for-profit challenge seeks to address the serious
shortfall in cyber defence professionals:
“There’s a huge shortage of expertise, and of young people coming into
the industry, yet the threat is massive and growing,” Chris says. “That’s
why initiatives like The 5% Club and the Challenge are vital, to promote
science and engineering, and energise people to get involved. We can
help government, military and businesses globally to understand that cyber
security isn’t an overhead – it’s actually a business enabler. We have an
amazing capability at QinetiQ, with cyber security’s leading minds ready
and able to help people counter attacks.”
39
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: performance Directors’ report Financial statements Additional information Corporate responsibility continued
This year we created a new UK Volunteer of the Year
award, presented at our leadership conference, which
recognised the achievement of an employee who has
made an outstanding contribution in the community
through the Employee Volunteering Scheme.
QinetiQ in the UK continues to support three corporate
charities voted for by employees (Cancer Research UK,
Help for Heroes and RNLI) by providing matched funding
for any employee fundraising activities. Employees can
also choose to give to their chosen charity pre-tax
through payroll giving.
Environment
2014 highlights and 2015 priorities
2014 highlights
• Launched Energy Matters in the UK
• MOD Silver Otter conservation award
2015 priorities
• Reduce greenhouse gas emissions due to UK
energy use by 17% by 2020 from a baseline
of 2013
• Consolidate the proportion of UK waste going
to landfill at less than 10%
• Set a number of UK site-specific targets to
reduce current waste-to-landfill levels
• Promote prevention of UK waste via enhanced
re-use of assets
Our environmental impact
Environmental stewardship
QinetiQ is committed to strong, effective and innovative
environmental management. The UK Environmental
Management System is certified to ISO 14001 and
applies to our own estate and the sites we manage
on behalf of the MOD. We are also reinforcing our
management review arrangements. We recruited a
dedicated Energy Manager to strengthen our specialist
team with responsibility to develop strategy, provide
clear direction and drive improvement programmes.
We have delivered further reductions in the proportion
of waste-to-landfill and established partnerships with
key service providers, from utilities to waste.
We have also delivered initiatives to deal with the
specific, complex challenges associated with our work
and footprint. These have included: the development
of our Sustainability Appraisal processes and training;
holding a Climate Change Workshop, with MOD, enabling
the identification of potential impacts and priorities; and
enhanced conservation and sustainability programmes
on many sites.
Many of the MOD sites contain designated conservation
areas of national and international importance, such
as Cardigan Bay, a Special Area of Conservation,
situated next to the MOD Aberporth site. As a result,
Sustainability Appraisals are regularly carried out to
identify and mitigate any impact to the flora and fauna
before we undertake our delivery of test, evaluation and
training support services. In 2014 we won the MOD’s
Silver Otter conservation award for our work at MOD
Aberporth (see case study on page 41). We also manage
Eelmore Marsh, a Site of Special Scientific Interest at our
Head Office in Farnborough. Through our partnership
with Marwell Wildlife and the long-term commitment
to restoration of this lowland heath system, Natural
England has now classed all three of the habitat units
at Eelmore Marsh as ‘favourable’ condition status.
Greenhouse gas emissions
We have continued our focus on reducing our carbon
footprint; we again submitted voluntarily to the CDP
Climate Change Programme (scoring 73 and Band C)
and we are registered for the Carbon Reduction
Commitment (CRC) scheme. As part of our annual UK
Environment Week, we launched a major new campaign
called Energy Matters. The aim is to encourage everyone
to get involved in reducing our energy usage. A network
of Energy Champions supports the business in identifying
areas where energy consumption could be reduced.
40
QinetiQ Group plc Annual Report and Accounts 2014
Name: Martin Pope
Role: Weapons Engineer
Paul Rowley, QinetiQ Trials Safety Manager at the MOD Aberporth coastal
range in Wales, instigated and championed an award-winning conservation
project to protect bottlenose dolphins from sea trials. Passive Acoustic
Monitoring (PAM) provides the tools to give additional protection for marine
mammals. “I conducted a study and recognised certain activities posed a
greater risk, requiring a focused solution. This was an opportunity to not
only protect wildlife but also expand our business, conducting test and
evaluation activities that were previously thought too risky to marine life.”
Paul persuaded senior managers to support the project, eventually gaining
support from a customer project. Engineer Martin Pope made PAM a reality:
“I’ve always been considered a good ‘ideas person’, and my formal training
in electronics, oceanography, biology and sustainability helped. I believe in
minimising risk to the marine environment, and PAM shows QinetiQ takes
environmental issues seriously.” PAM received the MOD’s Sanctuary
Environmental Award and prestigious Silver Otter conservation award.
Energy Matters has resulted in a reinvigorated
programme with improvements in data quality and
our ability to prioritise, so we have decided to re-set
our target to focus on carbon emissions from energy use
(gas, oil and electricity) associated with buildings and our
operations in the UK. Our new target is to reduce these
emissions by 17% by 2020 from a baseline of 2013, where
our emissions were 51,976 tonnes of carbon dioxide
equivalent (tCO2e). Our emissions due to energy use
in 2014 were 49,368 tCO2e – a reduction of 5%.
We have put in place the process to capture and report
our greenhouse gas (GHG) emissions across the Group
to reflect the requirements of the Companies Act 2006
(Strategic Report and Directors’ Report) Regulations
2013. The GHG emissions statement below provides
a summary of the Group’s emissions from 1 April 2013
to 31 March 2014, giving a summary of Scope 1 (fuel
combustion and operation of facilities) and Scope 2
(purchased electricity) emissions and an intensity
ratio (per £m of revenue). We have adopted a financial
control approach and have used the UK Government’s
Conversion Factors for Company Reporting 2013 and
Defra reporting guidance (October 2013).
Group GHG emissions
Total Scope 1 emissions (tCO2e)
Total Scope 2 emissions (tCO2e)
Total Scope 1 and 2 emissions (tCO2e)
Intensity ratio (tCO2e per £m of revenue)
Year end
31 March
2014
26,042
37,613
63,655
53.4
UK waste management
Robust capture and effective reporting of data is an
ongoing priority, enabling our improvement programmes
to be targeted. Our aim in 2014 was to encourage
reduction in waste, increase re-use of assets, and
enhance segregation of waste streams. Overall waste
levels increased compared with last year (5,626 tonnes,
including 112 tonnes of hazardous waste, compared with
4,904 tonnes in 2013) due to significant site clearance,
and development work, but the proportion of UK waste
going directly to landfill ran at less than 10%, reflecting
our focus to promote effective segregation and recycling.
Our aim for 2015 is to consolidate the proportion going
to landfill at less than 10% and to set a number of
site-specific targets to reduce current waste-to-landfill
levels. We also plan to promote prevention of waste
by improving the re-use of assets.
41
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: performance Directors’ report Financial statements Additional information Chief Financial Officer’s review
BALANCE SHEET STRENGTH
ACHIEVED
Key highlights
• Strong performance from EMEA Services
with 11% increase in orders and 3% organic
revenue growth
• Further strengthening of the balance sheet with net
cash of £170.5m at 31 March 2014 (2013: £74.0m)
• Re-basing of the dividend, with full year dividend
of 4.6p, 21% growth on prior year
• Agreed sale of the US Services division,
announced post year end on 22 April 2014, for an
initial gross cash consideration of $165m plus a
potential earnout of up to $50m in cash; together
with a proposed pay-down of private placement
debt; £6m contribution to the pension scheme;
and £150m share buyback
Group revenue was £1,191.4m (2013: £1,327.8m),
down 10% on an organic basis at constant currency,
excluding a £3.7m decrease due to the strengthening
of the Australian dollar and US dollar. The performance
of US Services was impacted by continued uncertainty
in the US federal services market. In Global Products,
there was a decrease in US conflict-related sales against
the very strong prior year levels of Q-Net® deliveries.
EMEA Services (formerly UK Services) performed well
throughout the year in an environment where the
UK Government remains focused on financial stability
and defence transformation. Revenue was £607.0m
(2013: 594.6m^), an increase of 3% on an organic basis
at constant currency, excluding a £2.9m decrease due
to the strengthening of the Australian dollar.
US Services revenue was £408.8m (2013: £463.8m^),
a 12% decrease on an organic basis at constant currency,
impacted by continued uncertainties in the US federal
services market, despite a deal on the US defence budget
being signed into law in December 2013, providing
a more gradual path to lower defence spending than
was previously mandated. Revenue was also impacted
by some long-term contracts ending in the period
and the switching of some work to small-business
set-aside contracts.
[continued on page 44]
Strengthening of the balance sheet (£m)
200
0
-200
-400
Working capital
Re(cid:31)rement benefit
obliga(cid:31)on (before tax)
Net (debt)/cash
-600
2009
2010
2011
2012
2013
2014
42
QinetiQ Group plc Annual Report and Accounts 2014
Revenue by customer 2014: £1,191.4m
Revenue by customer 2013: £1,327.8m
6
1
41%
1. MOD
18%
2. DoD
1%
3. DHS
14%
4. NASA
5. Commercial Defence
5%
6. Civil/Other government agencies 21%
3
5
4
3
1
1
2
2
35%
1. MOD
26%
2. DoD
2%
3. DHS
10%
4. NASA
5. Commercial Defence
6%
6. Civil/Other government agencies 21%
3
5
4
6
1
3
2
1
2
1
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*
Total Group operating profit/(loss) (£m)
Total Group profit/(loss) before tax (£m)
Total Group net finance expense (£m)
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 (£m)
Average US$/£ exchange rate
Closing US$/£ exchange rate
Underlying operating profit*
EMEA Services
US Services
Global Products
Total
Underlying operating margin*
2014
1,191.4
(10)%
132.7
11.1%
119.4
(13.3)
12.9%
24.0
4.1
(15.0)
(1.9)p
16.0p
4.6p
136.5
103%
170.5
1.59
1.67
2014
£m
86.7
19.0
27.0
132.7
11.1%
2013^
1,327.8
(10)%
168.7
12.7%
152.1
(16.6)
19.2%
(121.4)
(137.0)
(17.9)
(20.5)p
18.9p
3.8p
175.9
104%
74.0
1.58
1.52
2013^
£m
84.8
23.7
60.2
168.7
12.7%
^ Restated to reflect the reclassification of product sales from EMEA Services to Global Products and the reclassification of the Cyveillance® business from US Services to
EMEA Services.
* Definitions of underlying performance measures can be found in the glossary on page 150.
43
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: performance Directors’ report Financial statements Additional information
Chief Financial Officer’s review continued
The US services division was sold to The SI Organization, Inc.
post year end. The Cyveillance® business, which provides
cyber intelligence, did not form part of the strategic review
and is not part of the disposal transaction. This business
was previously reported under the US Services division but
in the second half of 2014 was established as a standalone
commercial entity reported as part of the EMEA Services
division. The divisional comparatives have been restated
accordingly.
Global Products revenue was £175.6m (2013: £269.4m^),
a 35% decrease on an organic basis at constant currency.
The performance of Global Products was impacted by
the reduction in demand for US conflict-related products
against a very strong prior year that included $120m of
Q-Net® systems and spares revenues ($20m this year).
EMEA Services delivered a positive performance with
underlying operating profit* increasing by 2% to £86.7m
(2013: £84.8m^). The resulting underlying margin*
remained flat at 14.3% (2013: 14.3%^) reflecting
continued productivity improvements and better
project execution embedded during the self-help
phase, enhanced by the contribution of certain
international projects.
Global Products underlying operating profit* fell by 55%
to £27.0m (2013: £60.2m^), with the underlying margin
declining to 15.4% (2013: 22.3%^). This performance was
primarily the result of a significant decline in demand for
conflict-related products (e.g. Q-Nets®), partially offset
by a £6m benefit from a favourable legal ruling on
an historic contract.
US Services underlying operating profit* was £19.0m
(2013: £23.7m^) and the underlying margin* fell from
5.1%^ to 4.6%.
Excluding US Services, revenue for 2014 was £782.6m
(2013: £864.0m^), down 4% on an organic basis at
constant currency.
The overall Group underlying operating margin*
decreased from 12.7% to 11.1%.
Specific adjusting items*
Initial gross cash consideration from the US Services
disposal will be $165m plus a potential earnout of up
to $50m in cash, based on the gross profit performance
of the US Services division in the year to 31 March 2015.
The net cash proceeds, are expected to be circa $175m
(£105m at year end rate) including an estimate of the
contingent, deferred consideration based on the 2015
budget assumptions. Following completion of the disposal
the Group will make a one-off cash payment of £6m into
the UK defined benefit pension scheme and will make
repayment of its remaining private placement debt. The
full impact of the disposal, including remaining transaction
costs, estimated warranty/indemnity liabilities, change in
control payments and deferred foreign exchange gains/
losses recycled from reserves will be shown in the year
ending 31 March 2015.
Goodwill in respect of the US Services division has been
impaired, with a change in valuation from a ‘value in
use’ basis to a ‘fair value’ basis crystalising an £84.0m
impairment loss (2013 impairment of US Services division
of £255.8m).
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 – US Services
Impairment of goodwill – US Global Products
US Services transaction costs
Amortisation of intangible assets arising from acquisitions
Charges in respect of the 2013 US restructuring
Reduction in pension liabilities on closure to future accrual
Pension closure mitigation costs
Pension net finance expense
Impairment reversal/(charge) in respect of property
Gain on business divestments and disposals of investments
Impairment of investments
Tax impact of items above
Loss for the year attributable to equity shareholders of the parent company
44
QinetiQ Group plc Annual Report and Accounts 2014
2014
£m
104.0
(84.0)
(41.9)
(6.0)
(11.0)
(0.3)
31.1
(4.0)
(1.7)
1.4
1.1
–
(1.4)
(12.7)
2013
£m
122.9
(255.8)
–
–
(14.0)
(16.3)
–
–
(1.3)
(4.0)
2.9
(0.6)
33.0
(133.2)
There was an impairment of the acquired goodwill in
the Global Products division of £41.9m reflecting the
drawdown from Afghanistan, and its impact on the
delivery of conflict-related products.
There was a reduction in pension liabilities on closure to
future accrual of £31.1m and an associated £4.0m cash
cost in respect of compensation to affected employees.
An impairment reversal of £1.4m (2013: £4.0m charge)
relates to obtaining new tenants for vacant, previously
impaired, properties.
The gain on business divestment of £1.1m is in respect
of the receipt of deferred consideration from the 2009
disposal of the Calibration business.
Finance costs
Net finance costs were £15.0m (2013: £17.9m).
The underlying net finance costs* were £13.3m (2013:
£16.6m), with an additional £1.7m (2013: £1.3m) in
respect of the pension net finance expense reported
within specific adjusting items. The reduction in
underlying net finance costs* reflects the lower
level of private placement debt in place during 2014.
Taxation
The Group’s underlying effective tax rate* was 12.9%
(2013: 19.2%). The rate is primarily dependent on the
geographic split of profits between the UK and US
businesses and the availability of R&D relief.
The effective tax rate continues to be below the
statutory rate in the UK, primarily as a result of the
benefit of R&D relief in the UK. The effective tax rate is
expected to remain below the UK statutory rate in the
medium term, subject to the impact of any tax legislation
changes and the geographic mix of profits. The Finance
Act 2013 allows the continued super-deduction approach
for R&D expenditure until April 2016, when mandatory
R&D Expenditure Credit (‘RDEC’) 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.
At 31 March 2014 the Group has unused tax losses of
£191.4m (2013: £202.7m) that are potentially available
to offset against future profits.
The resulting statutory loss after tax was £12.7m
(2013: £133.2m loss).
Earnings per share
Underlying earnings per share* was 16.0p compared
with 18.9p for the year ended 31 March 2013. The decline
is primarily the result of the operating performance of
the US businesses outlined above, partially offset by a
decrease in net finance costs. Basic earnings per share
was a loss of 1.9p (2013: 20.5p loss).
Dividend
The Board proposes a final dividend of 3.20p per share
for the year ended 31 March 2014 (2013: 2.70p). Subject
to approval at the AGM, the final dividend will be paid
on 5 September 2014 to shareholders on the register
at 8 August 2014.
Other financials
Cash flow
The Group’s cash flow from operations before net
restructuring recoveries/costs but after capital expenditure
was £136.5m (2013: £175.9m). Underlying operating cash
conversion* remained strong at 103% (2013: 104%).
The net cash outflow in the year on restructuring
was £10.3m (£63.1m cash inflow). This relates to
the restructuring costs recorded in 2013 in the
Group’s US businesses.
At 31 March 2014 net cash was £170.5m (2013: £74.0m),
reflecting continued strong operating cash performance.
Total committed facilities available to the Group
at year end amounted to £416.8m (2013: £446.3m);
this is made up of US private placement debt of
£148.9m (2013: £163.5m) and a revolving credit facility
of £267.9m (2013: £282.8m), which is currently undrawn
– the movement as a result of foreign exchange.
Following completion of the disposal of US Services,
the Group will make repayment of its remaining private
placement debt of $248m (£148.9m at year end rate),
with associated accelerated interest costs of approximately
£28.5m, subject to market rates on date of payment.
The Group will retain its revolving credit facilities.
^ Restated to reflect the reclassification of product sales from EMEA Services to Global Products and the reclassification of the Cyveillance® business from US Services
to EMEA Services.
* Definitions of underlying performance measures can be found in the glossary on page 150.
45
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: performance Directors’ report Financial statements Additional information Chief Financial Officer’s review continued
Change in assumption
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 £25m
Increase by £31m
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 2014 the Group’s total
equity was £378.1m (2013: £438.5m). Net cash as defined
by the Group was £170.5m (2013: net cash £74.0m).
The Group’s target is to maintain a strong balance sheet,
keeping 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.
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
2014
1.59
1.67
1.52
2013
1.58
1.52
1.60
Sensitivity of key pension assumptions
Assumption
Discount rate
Inflation
Life expectancy
Pensions
The net pension deficit under IAS 19 (revised), after
deducting deferred tax, was £20.9m (2013: £40.4m). The
decrease in net pension deficit is primarily a result of the
closure of the scheme to future accrual. This generated
a reduction in scheme liabilities of £31.1m. Additional
movement is driven by macro-economic factors.
The key assumptions used in the IAS 19 valuation of the
scheme are:
Assumption
Discount rate
Inflation
Life expectancy – male
(currently aged 40)
Life expectancy – female
(currently aged 40)
2014
4.2%
2.6%
90
92
2013
4.4%
2.7%
90
92
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 2014 was
£1,304.6m (2013: £1,256.5m) and the present value
of scheme liabilities was £1,326.8m (2013: £1,310.6m).
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. The next scheduled triennial
valuation will be performed as at 30 June 2014. The funding
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 period end.
46
QinetiQ Group plc Annual Report and Accounts 2014
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 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.
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 6%
to 8,937 at 31 March 2014 (2013: 9,498). The decline
primarily reflects headcount reductions in the US to
maintain competitiveness in the challenging market.
The headcount of the US Services division, which
the Group agreed to sell post year end, was 2,704
at 31 March 2014.
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 judgments
in applying accounting policies
A description and consideration of the critical
accounting estimates and judgments made in
preparing these financial statements is set out
in note 1 to the financial statements.
By order of the Board
David Mellors
Chief Financial Officer
22 May 2014
Employees by sector 2014: 8,937
Employees by sector 2013: 9,498^
3
1
3
2
1
1
2
1. EMEA Services
2. US Services
3. Global Products
3
1
61%
30%
9%
3
2
1
1
2
1. EMEA Services
2. US Services
3. Global Products
56%
34%
10%
^ Restated to reflect the reclassification of product sales from EMEA Services to Global Products and the reclassification of the Cyveillance® business from US Services
to EMEA Services.
47
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report: performance Directors’ report Financial statements Additional information Chairman’s introduction to governance
COMMITTED TO GOOD
GOVERNANCE
strategy, structures and processes in place to ensure
good governance and stewardship, and to facilitate
future growth.
The Group’s risk management processes were further
strengthened during the year with the establishment
of the Governance Committee. This is an executive
committee responsible for oversight of all risks,
and of the risk management process, including the
identification, monitoring and mitigation of risk, which
reports, via the Chief Executive Officer, to the Risk & CSR
Committee. Further details can be found on page 66.
Progress has been made with succession planning as
detailed in the report of the Nominations Committee
on page 58. At the end of January 2014, Colin Balmer
stepped down as a Director after over ten years on
the Board of QinetiQ. Colin’s in-depth experience of
government and knowledge of the Company’s business
was an invaluable resource during a period of great
transition for QinetiQ. In March 2014, Susan Searle was
appointed as an additional Non-executive Director and
her experience of commercialising new technologies will
provide a fresh perspective on the Company’s strategy
and stewardship.
During the year, changes in regulation have led to
considerable work by the Board and the Remuneration
and Audit Committees. The work of the Remuneration
Committee in relation to changes in remuneration
regulation has been detailed by the Chair of that
Committee in the Directors’ remuneration report on
page 69. The Board has considered the new reporting
requirement of ‘fair, balanced and understandable’ and
asked the Audit Committee to give assurance that the
relevant systems and processes are in place to support
that requirement. Details can be found in the Audit
Committee report on pages 62 to 65.
During this period of change, the Board continues to
maintain a dialogue with key investors and to make itself
available to shareholders at the Annual General Meeting.
The governance process will continue to evolve as the
Group takes shape, and to take account of future
changes in regulation and best practice.
Mark Elliott
Chairman
22 May 2014
In this section:
Risk management and internal control
Directors’ biographies
Effectiveness
Relations with shareholders
Leadership
Board objectives
Roles and responsibilities
Committees
Report of the Nominations Committee
Accountability
Composition of the Board
Board meetings and attendance
Performance of the Board
50
51
51
51
53
55
56
56
56
57
58
59
59
Management and control of US subsidiaries 61
62
Report of the Audit Committee
66
Report of the Risk & CSR Committee
68
Report of the Security Committee
69
Directors’ remuneration report
69
69
73
84
93
96
97
Annual statement
Report of the Remuneration Committee
Remuneration Policy
Annual Report on Remuneration
Directors’ report
Directors’ responsibility statements
Independent auditor’s report
The Board continues to consider good governance to be
a key element in its stewardship of the Group, providing
a foundation from which to build value and promote the
long-term success of the Company within a framework
of prudent and effective systems of internal control.
The Board’s role in the oversight of strategy and
leadership was pivotal during the year. At the end of
2013, the executive leadership team was refreshed
with the formation of the Operating Committee, which
includes the leaders from the UK and EMEA businesses.
The presentations by Operating Committee members at
the Board strategy meeting in October 2013 provided
a valuable opportunity for Board members to review
and discuss the objectives and goals of those businesses
directly with the business leaders. In addition, the
strategic review of the US Services division has been
a key focus of the Board, both in terms of agreeing the
strategic aims of the Group and its general direction of
travel, in overseeing the progress of the review and the
changes which will take place as a result; and in ensuring
that the re-configured Group will have the appropriate
48
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report
Directors’ report: Governance
Financial statements
Additional information
Compliance
QinetiQ is subject to the provisions of the 2010 and
2012 versions of the Financial Reporting Council’s UK
Corporate Governance Code (the ‘UK Code’). 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.
An overview of the Group’s corporate governance
arrangements can be found on the QinetiQ website at
www.QinetiQ.com\about-us\corporate-governance.
The Board considers that QinetiQ has complied
with the provisions of both versions of the UK Code
throughout the last financial year. This statement
provides details of the way the principles of the
UK Code have been applied during the year.
49
QinetiQ Group plc Annual Report and Accounts 2014
Corporate Governance Statement
Relations with shareholders
Responsibility for maintaining regular communications with
shareholders rests with the Chief Executive Officer (CEO) and the
Chief Financial Officer (CFO), assisted by the Investor Relations Director.
The Board as a whole is informed on a regular basis about the views
of key shareholders, including their concerns. The Investor Relations
Director reports to the CEO, and provides regular updates to the
Chairman and Non-executive Directors by way of face-to-face
briefings, email updates and the Executive Directors’ report
which is included in the Board papers as a standing item.
The following information is included in these reports:
“There should be a dialogue
with shareholders based on
the mutual understanding of
objectives. The board as a whole
has responsibility for ensuring
that a satisfactory dialogue with
shareholders takes place.”
• financial calendar and draft material;
• share price performance;
• the composition of the shareholder register;
• feedback from investor meetings, including key questions;
• covering sell-side analysts, their recommendations and
expectations; and
• peer group news.
The Company attaches significant importance to the effectiveness
of its communications with shareholders and sets itself the target
of providing information that is timely, clear and concise. Investor
activity during the last financial year included:
• telephone briefings for analysts and investors in conjunction
with key financial announcements;
• face-to-face presentations of full-year and half-year results
where the Chairman and Directors were available for discussions
with investors;
• live and post-event webcasts of key presentations;
• investor ‘road shows’ held in the UK and the US at least twice
during the year;
• investor days, briefings and ad hoc meetings on request,
where calendar and regulatory requirements allow;
• re-launched web-based investor centre incorporating best
practice and optimised for mobile devices; and
• the Annual General Meeting.
During the year, new executive incentive arrangements were
proposed and a consultation was undertaken with the Group’s
largest 20 investors, holding approximately 70% of the issued
share capital. Further details can be found in the Directors’
Remuneration Report on pages 69 to 92.
The Chairman proactively offers to attend meetings with key
shareholders on a regular basis and 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.
50
QinetiQ Group plc Annual Report and Accounts 2014
UK Corporate Governance Code
Annual General Meeting
The UK Code notes that the Board should use the Annual General
Meeting (AGM) to communicate with investors and encourage their
participation. Holders of ordinary shares are invited to attend the
Company’s AGM each year 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. During the year under review, the
AGM was held in July 2013 and each member of the Board attended
and was available to take questions.
In respect of the 2014 AGM, 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 of the resolutions in the Notice of Meeting.
The results of the votes on the resolutions will be published on the
Company’s website, www.QinetiQ.com, in the ‘Investors’ section.
Website information
All shareholders and potential shareholders can gain access to the
Annual Report, presentations to investors, AGM documentation, key
financial information, regulatory news, financial calendar, share and
dividend data and other significant information about QinetiQ in the
‘Investors’ section of the Company’s website, www.QinetiQ.com.
The site also provides contact details for any investor-related
queries, by telephone and by email.
The Company continues to look at ways of improving 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 Financial Conduct
Authority (FCA’s) Disclosure and Transparency Rules, and the
Directors’ powers in relation to issuing and buying back shares
can be found on pages 93 and 95 in the Directors’ report section
of this Annual Report.
Leadership
The Board of Directors has identified key objectives and responsibilities
in respect of its stewardship of the Group as a whole.
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 CEO to
promote the Group’s success;
• demonstrate leadership in management systems around health,
safety and environment; and
“Every company should
be headed by an effective
board which is collectively
responsible for the long-term
success of the company…
There should be a clear
division of responsibilities
at the head of the company
between the running of the
board and the executive
responsibility for the running
of the company’s business.”
• manage succession planning for the Board and the Group’s
UK Corporate Governance Code
Key issues considered by the Board in the past year include:
a) the strategic review of the US Services division;
b) strategy for the Group as a whole;
c) succession planning; and
d) the closure of the Company’s UK defined benefit pension scheme.
Further details are set out below.
a) US Services strategic review
The US Services strategic review has been one of the main items
of Board consideration during the course of the year, from the
announcement of the review in May 2013 to the announcement
of the outcome in April 2014, and will continue to be an area of focus
for the Board. Details of the activity in respect of the strategic review
and the outcomes from it can be found in the strategic report on
pages 2 to 47. The Board oversaw this process by way of regular
updates from the Group Strategy Director, the CFO and key external
advisors and also by way of a Board sub-committee which met
regularly to oversee the developments and drive the progress
of the review.
executive management.
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.
Operation of the Board
For each meeting, 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 HR, treasury, corporate
responsibility, real estate, security, trade controls and pensions.
51
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information Corporate Governance Statement continued
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. This includes
the level of delegated authorities (both financial and non-financial)
available to Executive Directors and other layers of management in
the business, 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 HR policies (including pension arrangements);
• reviewing material litigation; and
• monitoring the overall system of internal control,
including risk management.
b) Group strategy
The Board views strategic growth as a key priority. During the
year, the Board held its annual two-day strategy meeting at an
off-site location where the strategy for the Group as a whole was
reviewed. The Managing Directors from each business attended
the two-day meeting and gave presentations on their respective
business areas. The Board was able to meet both formally and
informally with business leaders, to assess potential future
leaders and to understand the key drivers and risks (including
their mitigation) for their business areas. Further details can
be found in the strategic report on pages 2 to 47.
During the course of the year, reporting on the progress of the
business units with their strategies is detailed in the Executive
Directors’ report contained in each Board pack. In addition, the
Group Strategy Director attends Board meetings to provide an
update on progress against Group strategy, including an interim
report to the Board on each business unit’s performance against
its material strategic goals.
c) Succession planning
Succession planning, both at Executive and Non-executive level,
remains a key focus for the Board. The Group HR Director gave
presentations to the Board during the year on succession planning,
including the tabling of succession planning charts for key senior
executive roles, on the development of the Group’s diversity policy
and to agree the methodology for establishing metrics for measuring
diversity across the Group. The policy has been approved and the
metrics will be established in 2015 for measuring progress against
the policy. Further details on diversity can be found in the corporate
responsibility and sustainability review on pages 36 to 41.
At a Non-executive level, the Board agreed details of the key
competencies required to enhance the composition of the Board
and those competencies have been used in the search for new
Non-executive Directors.
d) Pension scheme changes
During the year, the Board was kept informed of developments in the
review of the pension scheme arrangements which ultimately led to
the closure of the defined benefit scheme, by way of presentations
from the Group HR Director and the CFO. Further details can be
found in note 28 on page 139 in the notes to the accounts.
52
QinetiQ Group plc Annual Report and Accounts 2014
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. The full terms of reference can be found in the Governance
section of the QinetiQ website at www.qinetiq.com/responsibility/
corporate-governance/Pages/default.aspx. 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.
Given the size of the Board, and in the interests of full Board
participation and transparency, the Board maintains a policy
of all-Director membership of Committees, other than where
prohibited by the UK Code, statutory or Security Committee
requirements. A report in respect of each of these Committees
is contained in pages 58 to 68. The details of each Committee
member’s attendance at Committee meetings are set out in the
table contained within each Committee report. Details of the
Group’s reward and remuneration policies and payments, together
with the report of the Remuneration Committee, can be found
in the Directors’ remuneration report on pages 69 to 92 which
is incorporated into this governance statement by reference.
Committees
QinetiQ operates by way of two key Executive Committees and five
principal Board Committees.
Board
Audit Committee
Nominations Committee
Remuneration Committee
Security Committee
Board Committee
Executive Committee
Risk & CSR Committee
Governance Committee
Operating Committee
Executive Committees
During the year, the Operating Committee was responsible for the
day-to-day management of the Group’s activities, with the exception
of QinetiQ’s US operations (which were managed through the Proxy
Board, as described in the section on page 61 headed ‘Management
and control of US subsidiaries’). The Operating Committee had
a specific focus on the achievement of the Group’s strategic goals
in respect of growth and operational excellence. The Committee
membership comprised the Group CEO, Group CFO, UK Divisional
MDs, HR, Business Development and Operations Directors. From
December 2013, the Group Strategy Director and the Group General
Counsel were added as members of the Committee. The Committee
met on a monthly basis, and received weekly updates on key
operational issues by way of pre-scheduled conference calls.
The Governance Committee was responsible for oversight of the risk
management process and its implementation by the divisions and
covers matters such as non-financial corporate objectives, targets
and key performance indicators, approval of Operating Framework
policy documents and the review of business risk registers and the
Group Risk Register. It reported via the CEO to the Risk & CSR
Committee. The Committee membership comprised the Group CEO,
four UK Divisional MDs, the HR, Safety, Assurance, and Sustainability
Engineering and Technical Directors and the Group General Counsel.
The Committee is scheduled to meet on a quarterly basis.
53
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information
Board of Directors
THE RIGHT MIX OF SKILLS
AND EXPERIENCE
1
4
7
2
5
8
3
6
9
Committee membership
Name
1. Mark Elliott
2. Leo Quinn
3. David Mellors
4. Michael Harper
5. Noreen Doyle
6. Admiral Sir James Burnell-Nugent
7. Paul Murray
8. Susan Searle
9. Jon Messent
▲ Chairman
● Member
Audit
Committee
Nominations
Committee
▲
Remuneration
Committee
●
Risk & CSR
Committee
●
Security
Committee
●
●
●
●
●
●
●
●
●
▲
●
●
●
●
●
▲
●
●
●
●
●
▲
●
●
●
▲
●
●
●
Board statistics
Board experience
100%
Finance
87.5%
87.5%
87.5%
Operational
International
Other plc
2 female, 6 male
2 female, 5 male
2 female, 5 male
2 female, 5 male
Board composition
25%
Executive
2 male
Non-executive
2 female, 4 male
75%
75%
25%
Male
Female
Board tenure
12.5%
0–2 years
25%
50%
2–4 years
4–6 years
12.5%
6–9 years
6 male
2 female
1 female
2 male
4 male
1 female
54
QinetiQ Group plc Annual Report and Accounts 2014
1 Mark Elliott
Non-executive Chairman
Appointment to the Board
Appointed Non-executive Chairman
in March 2010; Non-executive Director
between June 2009 and February 2010.
Skills and experience
Mark is a Non-executive Director of G4S plc
and Chairman of Kodak Alaris Holdings Limited.
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.
2 Leo Quinn
Chief Executive Officer
Appointment to the Board
Appointed Chief Executive Officer in
November 2009.
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 US, Europe, the
Middle East and Africa. He is a Non-executive
Director of Betfair Group plc and was formerly
a Non-executive Director of Tomkins plc.
3 David Mellors
Chief Financial Officer
Appointment to the Board
Appointed Chief Financial Officer in August 2008.
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 and Wales.
4 Michael Harper
Deputy Chairman and Senior Independent
Non-executive Director
Appointment to the Board
Appointed Non-executive Director in
November 2011. Appointed Deputy Chairman
and Senior Independent Non-executive
Director in February 2012.
Skills and experience
Michael is Chairman of Ricardo plc and has
announced his intention to retire from that
company’s Board with effect from the end
of the AGM in November 2014. He was Chairman
of BBA Aviation plc from June 2007 until May
2014, having joined the Board in 2005, and also
Chairman of Vitec Group plc from 2004 to 2012.
He was previously a Director of Williams plc
where, at the time of the demerger in 2000,
he became CEO 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.
5 Noreen Doyle
Non-executive Director
Appointment to the Board
Appointed Non-executive Director
in October 2005.
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.
6 Admiral Sir James Burnell-Nugent
Non-executive Director
Appointment to the Board
Appointed Non-executive Director in April 2010.
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.
7 Paul Murray
Non-executive Director
Appointment to the Board
Appointed Non-executive Director
in October 2010.
Skills and experience
Paul is currently a Non-executive Director
and Chair of the Audit & Risk Committee at
Royal Mail Group plc. He is also a Director
of Independent Oil and Gas plc, Ventive
limited and Naked Energy Ltd and a Trustee
of Pilotlight. He was previously a Director
of Knowledge Peers plc, 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.
8 Susan Searle
Non-executive Director
Appointment
Appointed Non-executive Director in March 2014.
Skills and experience
Susan is a Non-executive Director
and Chair of the Remuneration Committee
of Benchmark Holdings plc. She is also
a member of the international advisory board
of PTT, an advisor to the Technology Strategy
Board and a Trustee of Fight for Sight.
Susan was a founder of Imperial Innovations
Group, leading it as CEO from 2002 to July 2013,
and has served on a variety of private company
boards in engineering, healthcare and materials.
The Board considers Susan’s strong experience
of commercialising new technologies and
intellectual property of particular relevance to
QinetiQ as it pursues its Organic-Plus strategy.
9 Jon Messent
Company Secretary and Group
General Counsel
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.
55
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information Corporate Governance Statement continued
Effectiveness
Composition of the Board
The Board currently has eight members: the Non-executive
Chairman; five other Non-executive Directors; and two Executive
Directors – the CEO and the CFO. During the year, Colin Balmer
resigned as a Non-executive Director, having served on the Board
for more than ten years, and Susan Searle was appointed.
1
A
C
3
2
1
B
A. Non-executive Chairman
B. Non-executive Directors
C. Executive Directors
1
5
2
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 CEO’s strategic review
on pages 4 to 13 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.
“The board and its committees
should have the appropriate
balance of skills, experience,
independence and knowledge of
the company to enable them to
discharge their respective duties
and responsibilities effectively.”
UK Corporate Governance Code
Board meetings and attendance
The Board has regular scheduled meetings. Seven scheduled Board
meetings and one further Board meeting (in respect of the strategic
review of the US Services division) 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 without Executive Directors present after each Board meeting.
The table below details the number of meetings of the Board and
its principal Committees held during the last financial year and
attendance by the Directors.
Board and Committee meeting attendance
Members
Mark Elliott
Colin Balmer#
Admiral Sir James Burnell-Nugent
Noreen Doyle~
Michael Harper~
David Mellors
Paul Murray
Leo Quinn
Susan Searle*
Board
8/8
7/7
8/8
7/8
8/8
8/8
8/8
8/8
1/1
Audit
–
4/4
5/5
4/5
5/5
–
5/5
–
1/1
Committee
Nominations
2/2
2/2
2/2
2/2
2/2
–
2/2
2/2
–
Remuneration
6/6
5/5
6/6
5/6
5/6
–
6/6
–
1/1
Risk & CSR
4/4
4/4
4/4
4/4
4/4
4/4
4/4
4/4
–
# Colin Balmer retired at the end of January 2014 and therefore had left the Board prior to the meetings in March 2014.
~ Noreen Doyle and Michael Harper were each unable to attend a meeting due to long-standing prior commitments.
* Susan Searle joined the Board in March 2014 and therefore was only able to attend the March Board and Committee meetings.
56
QinetiQ Group plc Annual Report and Accounts 2014
In the year under review, a process similar to that followed in 2013
was followed, which included individual performance evaluations
assessed by the Chairman, coupled with a Board effectiveness
questionnaire which was circulated to the members of the Board
for completion and the results evaluated by the Chairman.
The questionnaire covered the following areas:
• the role of the Board and its skills mix;
• clarity of decision-making processes and of information provided
to the Board;
• risk appetite and the overview of Group risks; and
• engagement with management and other stakeholders.
The principal actions agreed in respect of the outcome of the review
included the following:
• further improvement in the quality of supporting documentation
presented to the Board;
• provision of more opportunities for engagement with
management; and
• more reporting from management in respect of key outcomes
and targets that flow directly from the Group strategy.
The overall conclusion of the review was that the Board continues
to be effective in its fulfilment of its governance responsibilities.
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 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.
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
judgment. Prior to his departure, and notwithstanding that Colin
Balmer had served on the Board for more than ten years, the Board
considered that he had remained independent in character and
judgment and the Board found no information or circumstances
to lead it to conclude otherwise. The Board considers that more
than half its members were independent Non-executive Directors
throughout the last financial year.
“The board should undertake
a formal and rigorous annual
evaluation of its own performance
and that of its committees and
individual directors.”
UK Corporate Governance Code
Performance of the Board
QinetiQ continues each year to evaluate the performance of the
Board and its Committees.
The most recent external evaluation of the Board’s effectiveness
was carried out by Independent Audit Limited in 2012 and reported
in that year’s Annual Report and Accounts. In 2013, the Board’s
effectiveness was assessed internally by way of a questionnaire
completed by Board members and individual performance reviews
carried out by the Chairman and the Senior Independent Director.
The actions arising from those reviews have largely been completed
and resulted in the following:
• the setting up of the Risk & CSR Committee to provide greater
oversight of non-financial risk management and risk strategy;
• improvements in the way that information was provided to
members of the Board;
• the provision of a schedule of training and development options
for Non-executive Directors; and
• the facilitation of site visits and access to senior management by
way of the provision of a schedule of QinetiQ sites from which
Non-executive Directors are able to select site visits which are
then arranged by the Company Secretariat.
57
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information Corporate Governance Statement continued
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 2014, the Committee met on two 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 preparation of a memorandum setting out the role
and capabilities required to refresh the Board membership; and
• the review of succession planning processes at Executive Director,
Non-executive Director and senior management levels.
Succession planning
The Committee continued with the succession planning process which
had begun in 2013 and was detailed in the report of the Committee
contained in the 2013 Annual Report. Pending the outcome of the US
Services division strategic review, it was agreed to focus on the search
in the UK for potential Non-executive Director candidates, which was
being undertaken by the Zygos Partnership. The firm is a signatory
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 it has no other connections with the Company. We are
delighted with the appointment of Susan Searle to the Board in March
and look forward to her contribution to the work of the Board and
its Committees.
Board Diversity Policy
During 2013 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.
Report of the Nominations Committee
Diversity remained a key theme in the work of
the Nominations Committee during the year under
review and was a key element in both the search
for candidates to refresh the Non-executive element
of the Board and the progression of the objectives
under the Board Diversity Policy which was adopted
in 2013. Good progress has been made, culminating
in the appointment of an additional Non-executive
Director in 2014.
Mark Elliott
Chair
Membership and attendance during the year
Member
Mark Elliott (Committee Chair)
Colin Balmer
Admiral Sir James Burnell-Nugent
Noreen Doyle
Michael Harper
Paul Murray
Leo Quinn
Susan Searle*
Attendance
2/2
2/2
2/2
2/2
2/2
2/2
2/2
N/A
* Susan Searle became a member of the Committee in March 2014 and will attend
future meetings.
58
QinetiQ Group plc Annual Report and Accounts 2014
“The board should present a
fair, balanced and understandable
assessment of the company’s
position and prospects… The board
is responsible for determining the
nature and extent of the significant
risks it is willing to take in achieving
its strategic objectives.”
UK Corporate Governance Code
Risk management and internal control
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.
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 judgment.
• 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.
Progress against the policy:
QinetiQ continues to make progress against this policy. A Company-
wide diversity policy has been issued and details can be found in the
Corporate Responsibility and Sustainability Review on pages 36 to
41. In terms of Board diversity, the appointment of Susan Searle
brings the current proportion of women on the Board to 25%, which
is in line with our objective. Any future appointments will always be
made on merit and will continue to take into account diversity, not
only in terms of gender, but also in terms of the appropriate mix of
skills and experience.
Accountability
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 page 96.
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 strategic review on pages 4 to 13. The CFO’s review on pages
42 to 47 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 24 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 the 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.
59
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information Corporate Governance Statement continued
QinetiQ’s risk management processes are defined in the Group’s
Operating Framework and mirror the Institute of Risk Management’s
guidance as detailed in the figure below.
n
o
ti
a
t
l
u
s
n
o
c
d
n
a
n
o
ti
a
c
i
n
u
m
m
o
C
Establishing the context
Risk assessment
Risk identification
Risk analysis
Risk evaluation
Risk treatment
Risk reporting is embedded in the management of the business
through the Operating Committee and Quarterly Business Reviews
and feeds into Group strategy at the executive and Board level.
Risk assurance activity conforms to the three lines of defence model
detailed below and is performed by the businesses, oversight functions
and Internal Audit, reporting to the Governance Committee and the
Board’s Risk & CSR Committee.
Details of key risks can be found in the risks and uncertainties section
of this Annual Report on page 22 to 27.
Risk assurance activity during 2014 has covered the following areas:
• Agreement, and continued implementation of, the Group
Risk Appetite.
• Creation of the Governance Committee as the executive review
body for risk governance.
• Quarterly updates in respect of the divisional risk register and
moderation to form the Group Risk Register, such that the Group
Risk Register now lives as a dynamic document with regular risk
ratings changes, additions and retirement of risks.
• Challenge to risk identification by business divisions and functions.
• Embedding use of the Operating Framework and Business
Assurance Tool to ensure effective internal control against
regulatory and operational risks.
• Regularly requiring risk owners to report their activity to the
Risk & CSR Committee (see page 66).
60
QinetiQ Group plc Annual Report and Accounts 2014
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 Group policy.
It provides for successive assurances to be given at increasingly
higher levels of management and, finally, to the Board.
w
e
i
v
e
r
d
n
a
r
o
t
i
n
o
M
Internal control
Our businesses are responsible for ensuring that a robust risk
and control environment is in place as part of their day-to-day
operations. Business assurance managers oversee this process and
a clear set of delegated authorities is in place, covering financial and
non-financial activities, and is consistent with effective operational
control and risk management. The business is guided by two key
documents which are managed by our Safety, Assurance and
Sustainability team:
• ‘The Way We Work’ is applicable to all staff and covers three key
pillars of the way we operate: Organisation, Risk Management and
Assurance, and Key Business Processes. It is underpinned by key
business policies, the Operating Framework (referred to below)
and our culture, values and brand; and
• The Operating Framework (Business Management System), which
contains the policies, procedures and codes of practice which are
expected to be complied with across the business.
The internal audit function, which is independent of the business
and has a direct reporting line to the Audit Committee, provides
assurance to the Board and its Committees over the effectiveness
of the internal control environment. The programme of work
undertaken by Internal Audit is approved in advance by the Audit
Committee and is prioritised according to risks identified by the
Group through its risk management processes.
A similar process is undertaken within the Group’s QinetiQ North
America 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 2014.
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 2010, and other international
regulations and best practice relating to the prevention of
corruption, which are applicable to its business.
International Business Risk Assessment
The International Business Risk Assessment Procedure and the
Commercial Intermediaries Procedure both contain comprehensive
processes to support the Group’s commercial and legal objectives
when undertaking business in overseas jurisdictions.
Compliance is managed through a risk-based approach. As part
of this process, a country risk table has been developed which
segregates countries using a traffic-light code:
• Green for countries with whom we are willing to trade (subject
always to trade control and security clearances;
• Amber for countries with some risk, and which require careful
consideration; and
• Red for countries with high risks which require independent
review by the Red Review Panel – a group of experts who assist
with the assessment of the risk of activities associated with
‘red’ countries.
The risk table is compiled on the basis of information received in
respect of specified areas such as security advice, trade controls,
insurance and measures in respect of bribery and corruption, using
a combination of internal expertise and external, internationally
recognised organisations, such as TRACE, international law firms and
other expert service providers, who also conduct anti-corruption due
diligence reviews of all third-party commercial intermediaries used
by QinetiQ’s divisions.
During the year, a process of quarterly reporting to the Board was
instigated in respect of payments to agents, and signed overseas
contracts, in excess of £10m, in a standard form report. In addition,
the Board’s approval is required for certain types of contract
proposals in ‘amber’ and ‘red’ jurisdictions.
Whistleblowing
The Company has in place a whistleblowing process which is detailed
on the Company’s intranet. If an individual does not feel that they
can resolve any concerns with the Company directly, either through
discussions with their line manager, or with the Company Secretary
or Group Internal Audit Manager, they can use the whistleblowing
hotline – an externally provided confidential internet and telephone
reporting system. All concerns are passed by the external third party
to the Group Internal Audit Manager who will ensure that they are
held in strict confidence and are properly investigated.
Ethics
The Company provides employees with guidance to assist them in
making informed ethical decisions on a day-to-day basis, including
the Company’s Code of Conduct, annual ethics training for all
employees and links to the country risk table and Red Review
Panel processes detailed above.
Further details regarding activity in respect of corporate
responsibility, including in respect of business ethics and anti-bribery
risk management, can be found in the Corporate Responsibility and
Sustainability Review on pages 36 to 41.
Management and control of US subsidiaries
QinetiQ’s principal US subsidiaries are required by the US National
Industrial Security Program to maintain facility security clearances
and to be insulated from foreign ownership, control or influence.
This is achieved by way of proxy arrangement, as detailed below.
Following the announcement of the sale of the US Services division,
the main operating companies within the retained US business have
been placed under a new proxy arrangement, and a new Proxy Board
comprising US individuals has been appointed to manage that business.
The Board will review the robustness of the new governance
arrangements once the current restructuring has been completed.
Pending completion of the sale of the US Services division, to comply
with the proxy requirements, QNA, a wholly-owned subsidiary of
QinetiQ in the US and the holding company for the substantive part
of QinetiQ’s US operations (until completion of the US Services
disposal), and the US Department of Defense (DoD) are parties to
a proxy agreement that regulates the management and operation
of these companies. Pursuant to this Proxy agreement, QinetiQ
appointed four US citizens who hold the requisite US security
clearances (Peter Marino, Riley Mixson, John Currier and Vince Vitto)
as proxy holders to exercise the voting rights in QNA. The proxy
holders are also 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. 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).
61
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information Corporate Governance Statement continued
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.
In the interests of transparency and good governance, during the year
the Company sought to maintain its involvement in QNA’s activities
through the conduct of business meetings and communications at the
CEO, CFO, HR and Legal levels. QNA senior management presented on
key commercial and governance activities in respect of the US business
to the Company’s Board and its Committees twice during the year,
at six-monthly intervals, and QNA activities were reported on during
the intervening meetings by way of executive reports and updates
via teleconference.
This activity is subject always to the confines of the proxy regime
to ensure that it meets the requirement that QNA must conduct
its business affairs without external control or influence, and the
requirements necessary to protect the US national security interest.
The challenges that this creates for the Board are dealt with in the
Audit Committee report on page 63.
Report of the Audit Committee
The principal responsibility of the Committee remains
the review of controls around the preparation of
the full and half-year financial statements including
significant judgments taken in their preparation
and reporting.
2014 is the first full year in which the Committee has
operated separately from the Risk & CSR Committee
and therefore been able to focus specifically on the
effectiveness of the management of financial risks.
In both of these areas, I aim to encourage an open
but challenging dialogue between the Committee,
management, and internal and external auditors.
In addition, the Committee has worked with US
colleagues to achieve, where possible, consistency
between the US and the UK in respect of the
assessment and reporting of internal controls,
risks and governance arrangements generally. This
activity is challenging, remains ongoing and, with the
adjustment of the US Group following the outcome
of the US Services strategic review, further work will
be undertaken by the Committee to improve the
consistency of approach across the re-shaped Group.
Paul Murray
Chair
62
QinetiQ Group plc Annual Report and Accounts 2014
Membership and attendance during the year
Member
Paul Murray (Committee Chair)
Colin Balmer#
Admiral Sir James Burnell-Nugent
Noreen Doyle>
Michael Harper
Susan Searle*
Attendance
5/5
4/4
5/5
4/5
5/5
1/1
# Colin Balmer retired at the end of January 2014 and therefore had left the Board
prior to the Committee’s meeting in March 2014.
> Noreen Doyle was unable to attend one Committee meeting due to a long-standing
prior commitment.
* Susan Searle joined the Board in March 2014 and therefore was only able to attend
the March Committee meeting.
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 & Risk
Committee Chairman at Royal Mail Group plc.
The Board considers the members of the Committee to be independent.
They bring extensive experience of corporate management in senior
executive positions to the Company. Details of their background and
experience can be found on page 55.
The CEO, CFO, Group Financial Controller, Group 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
2014, 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 two 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:
a) QNA risks, issues and mitigating actions;
b) the effectiveness of internal controls;
c) the effectiveness of governance arrangements;
d) the effectiveness of external audit;
e) the review of the audit process for the full-year and half-year
results; and
f)
the review of the ‘fair, balanced and understandable’
requirement in respect of future Annual Reports.
Further details are set out below.
a) QNA risks, issues and mitigating actions
As detailed on page 61 concerning ‘Management and control of
US subsidiaries’, during the year the Company’s holding of its QNA
assets was 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. As a result, the Audit Committee places significant
reliance on the effectiveness of the QNA Audit Committee and
independent assurance from QNA’s external auditor.
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. Minutes of the QNA Audit Committee meetings were
reviewed by the Committee, along with QNA Internal Audit reports.
During the year under review, the Committee held two of its meetings
in the US (jointly with the Risk & CSR Committee). The meetings were
attended by the QNA Internal Audit Manager, QNA proxy holders
and a QNA Director, thereby facilitating a more detailed review
of matters affecting QNA, covering areas such as the QNA internal
control environment, its risk register and business risk appetite.
b) 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.
The process in respect of QNA is adjusted to take into account the
proxy arrangements referred to in (a) above, and 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 control framework. In addition, the Committee,
on behalf of the Board, undertakes an annual assessment of the
control environment and the QNA Audit Committee reports to the
Group Audit Committee regarding QNA controls effectiveness.
63
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information Corporate Governance Statement continued
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.
c) Governance reviews
The Committee’s September meeting had considered the processes
to be followed for the various governance reviews.
An external review of the effectiveness of the UK internal audit
function was undertaken during the second half of the year by the
Chartered Institute of Internal Auditors. The results of the review
were reported to the March Audit Committee. The independence
and effectiveness of the function were noted as well as an updated
continuous improvement programme incorporating the review
findings. This programme will be monitored at regular intervals
by the Audit Committee.
In terms of the effectiveness of the Committee itself, an evaluation
was carried out by way of a questionnaire which was circulated
to Committee members and key executives for completion. The
Committee Chairman had evaluated the results and reported on
them at the Committee’s May 2014 meeting.
The role of the Committee, its skills mix and oversight of financial
risk management, reporting and audit was considered to remain
effective. The following actions were noted:
• it was necessary to remain focused on the management of risk
oversight by either the Audit or Risk & CSR Committees, to ensure
that all matters are covered; and
• further progress would be necessary in respect of oversight of the
US governance arrangements following completion of the US
corporate restructuring.
d) External audit effectiveness review
The Committee’s September meeting had considered the approach
for monitoring the effectiveness and independence of the external
audit process in the light of the requirements of the UK Code and
FRC guidance.
At this meeting, it was agreed that an effectiveness review would
be undertaken by the internal audit function. The views of the Audit
Committee and key finance stakeholders were sought regarding the
effectiveness of the external audit process using a questionnaire
compiled using available best practice guidance.
The review covered a range of topics, including:
• the audit partner and the audit team;
• the audit approach – planning and execution;
• the role of management;
• communication with the Audit Committee;
• supporting the work of the Audit Committee;
• insights and adding value;
• independence and objectivity; and
• formal reporting.
64
QinetiQ Group plc Annual Report and Accounts 2014
The outcome of the review was considered at the March Committee
meeting and the following were noted and reported to the Board:
• the external auditor’s independence and objectivity were
strongly affirmed;
• the external auditor was in a strong position to challenge
management on its approach to key judgments;
• appropriate discussions were held with the Audit Committee
during the audit planning process; and
• within the business there is a general perception of high quality
execution and service.
e) Financial statements
The Committee reviews whether suitable accounting policies have
been adopted, whether management has made appropriate estimates
and judgments, and also seeks support from the external auditors to
assess them. The Committee reviewed the following main issues for
the year ended 31 March 2014:
• The basis of and key assumptions relating to management’s
assessment of the carrying value of the goodwill associated
with the US Services and US Global Products divisions.
• The basis for and judgments made by management in determining
the liabilities recorded for litigation, potential claims and
other disputes.
• The accounting for long-term contracts.
• The key assumptions and their sources used in accounting for the
Group’s defined benefit retirement obligations.
• Provisions for ITAR compliance.
• The provisions for Income tax and deferred tax.
• 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.
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 Group’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.
f) Review of the ‘fair, balanced and understandable’
requirement in respect of Annual Reports
The Audit Committee considered during the year how to adapt, if
necessary, the Group’s procedures to provide advice to the Board to
meet with the requirements of the UK Code on whether the Annual
Report and Accounts, taken as a whole, provide a fair, balanced
and understandable assessment of the Company’s financial position
and future prospects and provide all information necessary to a
shareholder to assess the Group’s performance, business model
and strategy.
As part of the review process, the Committee took guidance from the
external auditor and from the Group accounting and internal audit
functions. The following were noted:
• The Group has a clear strategy, which is presented to the Board for
review each year by business leaders, with interim updates during
the year.
• Quarterly business reviews are undertaken by senior management
which include monitoring business progress against budget.
• Business performance is monitored by the Board as detailed on
page 51.
• Key individuals from appropriate business divisions and functions
contribute to, or are involved in the verification of, the content of
the Annual Report.
• The Company has an Annual Report working group, comprising
individuals from the Finance, Investor Relations, Assurance,
HR, Group Strategy, Company Secretariat and Marketing/
Communications functions, which adheres to a timetable of
actions for the production and review of the Annual Report.
• The Annual Report working group was made aware of the fair,
balanced and understandable requirements early in the process
and tasked with ensuring that the Annual Report would take
account of those requirements.
• A checklist of considerations to ensure the requirements were
met was produced and completed by the working group in order
to provide assurance to the Committee (and to the Board).
• More time was allocated to the Annual Report process to allow for
additional checks for consistency of reporting across the narrative
and financial sections in respect of the strategy and performance
of the business as a whole.
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.
A rotation of KPMG’s lead audit partner was last undertaken during
2012, at which time the second audit partner was appointed since
the Company’s flotation in 2006.
Given the work undertaken during the year under review in respect
of the US Services division, and the resulting ongoing changes within
the Group, the Committee considers that a continuity of approach
with the external auditor is valuable and, having reviewed the
effectiveness and the independence of the external auditor during
the year, as detailed on page 64, the Committee does not consider
it appropriate to conduct a tender process for the appointment
of its auditor at the present time.
It is the Company’s current intention to align the process for putting
the external audit contract out to tender with the conclusion in 2017
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.
The members of the Committee have declared themselves satisfied
with the performance of KPMG as the Company’s auditor in the last
financial year and therefore the Committee has recommended to
the Board that KPMG be reappointed for the financial year ending
31 March 2015.
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.
The Committee reviewed the Code of Practice relating to the
principles for regulating the award of non-audit work to the external
auditor during the year and considered that it remained appropriate.
In the last financial year, there have been non-audit services conducted
by KPMG that exceeded £50,000 in value. The Committee concluded,
prior to engaging KPMG for the provision of these services (in
relation to the strategic review of the US Services business), that
there had not been any conflict of interest that might compromise
the independence of KPMG’s audit work.
65
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information Corporate Governance Statement continued
Membership and attendance during the year
Member
Admiral Sir James Burnell-Nugent (Committee Chair)
Colin Balmer#
Noreen Doyle >
Mark Elliott
Michael Harper
David Mellors
Paul Murray
Leo Quinn
Susan Searle*
Attendance
4/4
4/4
3/4
4/4
4/4
4/4
4/4
4/4
N/A
# Colin Balmer ceased to be Chairman of the Committee when he retired at the end
of January 2014.
> Noreen Doyle was unable to attend one Committee meeting due to a long-standing
prior commitment.
* Susan Searle became a member of the Committee in March 2014 and will attend
future meetings.
Main responsibilities
The Committee has three primary functions:
• to oversee the sound operation of the Company’s 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 2014, the Committee met on four
occasions, excluding the two joint meetings held with the Audit
Committee in the US, as noted on page 63.
As detailed in the section on Executive Committees on page 53, during
the year, a Governance Committee was established to monitor
non-financial strategies and their implementation by the businesses.
The Governance Committee comprises senior executives and reports
to the Risk & CSR Committee, with the Director of Safety, Assurance
and Sustainability playing a pivotal role in this respect. During the year,
matters which have been dealt with by the Governance Committee
and reported to the Risk & CSR Committee have covered areas such
as the inclusion or retirement of risks from the Risk Register which
were then presented to the Committee and the Audit Committee.
Report of the Risk & CSR Committee
I am delighted to have been appointed Chair of the
Risk & CSR Committee following the retirement of
Colin Balmer at the end of January and would like to
thank Colin for his hard work and diligence during his
tenure as Chair of this Committee, including overseeing
its evolution from the Compliance Committee to its
current status as the Risk & CSR Committee.
During the year, the Committee continued to carry
out its core functions and the development of the
executive Governance Committee will enhance the
process of risk management and oversight within the
Group. The annual calendar of activity, together with
the in-depth review of red risks and ‘deep dives’ into
key risk areas, has provided a firm basis on which the
Committee is able to oversee the operation of the
non-financial risk management processes within
the Group.
The work of the Committee continues to evolve,
both in the light of the corporate restructuring of
the QinetiQ Group and also in respect of changes
in governance regulation and guidance.
Admiral Sir James Burnell-Nugent
Chair
66
QinetiQ Group plc Annual Report and Accounts 2014
Overview
During the 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, corporate responsibility, 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 36 to 41.
Key areas of focus during the year were:
a) risk management within the operation of the QNA proxy regime;
b) the operation of the generic MOD compliance system;
c) a review of the Group’s risk management processes;
d) a review of the Group Risk Register in accordance with FRC
recommendations; and
e) a review of the Group’s risk appetite and providing clarity to
executive management on acceptable levels of risk.
Further details are set out below. Details of the principal risks and
uncertainties can be found in the ‘risks and uncertainties’ section on
pages 22 to 27 of the strategic report.
Effectiveness review
The Committee evaluated the effectiveness of its performance
during the year under review by way of a questionnaire which had
been circulated to Committee members and key executives. The
Chairman had reviewed the responses. It had been noted that there
was a good level of satisfaction with the process of reviewing the
management of financial risks and non-financial risks through the
Audit Committee and the Risk & CSR Committee respectively. A key
action arising from the review was to establish with the US Audit
Committee an annual reporting timetable on items where reporting
up to Board level was necessary to gain a greater understanding of
non-financial risk management.
a) Risk management within the operation of the
QNA proxy regime
As detailed on page 61 concerning ‘Management and control of US
subsidiaries’, during the year the Company’s holding of its QNA assets
was regulated by a Proxy agreement. In conjunction with the Board
and the Audit Committee, the Committee has worked with senior
executives from QNA to establish, where possible, a consistency of
approach with regard to areas such as risk appetite, the risk register
and internal control. Work has taken place to produce an annual
reporting timetable in respect of the US items where reporting is
necessary to gain a greater understanding of non-financial risk
management. In terms of crisis management, a revised and more
complete crisis response process and committee is being set up
across the Group.
The processes with regard to the US will continue to evolve as a
result of the disposal of the US Services division and consequent
corporate restructuring.
b) 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 Group 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 Group will continue
with rigorous management of potential conflicts of interest while
ensuring that proportionate governance is maintained by the Board.
c) A review of the Group’s risk management processes
The Committee receives a report at each meeting from the Safety,
Assurance and Sustainability Director with regard to key areas of
risk management activity, such as health and safety, international
trade controls and proxy regime compliance. In addition, a series
of ‘deep dives’ are scheduled for the course of the year, to facilitate
an in-depth review and discussion of key risks. The following are
examples of deep dive reviews carried out during the year:
• The review of ITAR-related risks, and the steps taken to deal
with them, the continued growth of awareness across the business
and the ‘tone from the top’ in respect of such risks. Aspects of the
review included a presentation from the executive responsible
for that function, a report by the internal audit function and
subsequent updates on progress with actions taken to ensure
delivery of a sound system.
• The review of cyber risk and the Company’s resilience to cyber
threats. The review included a presentation from the executive
responsible for that area of risk management. It was noted that
the Group’s resilience to cyber threats was considered to be good,
according to government agencies. The presentation gave details
of actions which had been put in place for driving improvement
and it was agreed that a quarterly report on the mitigation of
cyber risks would be presented at each Committee meeting.
67
QinetiQ Group plc Annual Report and Accounts 2014
Strategic report Directors’ report: GovernanceFinancial statements Additional information Corporate Governance Statement continued
d) A review of the risk register in accordance with
FRC recommendations
The review of the Risk Register is a standing item on the
Committee’s agenda, with amendments being made to reflect
changes in the Group’s business. Further details can be found on in
the ‘understanding and managing our risks’ section pages 22 to 27
of the strategic report. ‘Red’ risks are made the subject of a report
to the Committee or become the subject of a ‘deep dive’ review as
part of the Company’s risk management processes. As an example,
the Engineering and Technical Director updated the Committee on
the work being undertaken to improve the Company’s exposure to
engineering and technical risk, focusing on the key risks and how
they were being mitigated. The areas covered included technical
assurance, facility safety assurance reviews, the QinetiQ Flying
Organisation and the technical and engineering strategy.
e) A review of the Group’s risk appetite and providing clarity
to executive management on acceptable levels of risk
During the year the Committee reviewed the amount of investment
and control necessary to mitigate the level of risk that the Board
was willing to seek or accept in the pursuit of its key strategic goals,
whilst also providing, by way of delegations, clear boundaries,
operational flexibility and guidance for executive and business
leaders to safeguard the Group’s fundamental principle of trust.
The review was carried out by way of the discussion of a presentation
by the Safety, Assurance and Sustainability Director, which subsequently
led to the issuing of guidance to senior management.
The Security Committee
Membership and attendance during the year
Member
Admiral Sir James Burnell-Nugent (Committee Chair)
Colin Balmer#
Michael Harper
David Mellors
Paul Murray
Leo Quinn
Susan Searle*
Attendance
N/A
N/A
N/A
N/A
N/A
N/A
N/A
# Colin Balmer ceased to be Chairman of the Committee when he retired at the end
of January 2014.
* Susan Searle became a member of the Committee in March 2014 and will attend
future meetings.
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.
68
QinetiQ Group plc Annual Report and Accounts 2014
Directors’ Remuneration report
Report from the Remuneration Committee
On behalf of the Board, I am pleased to present the
Remuneration Committee’s report of the Directors’
Remuneration for the year ended 31 March 2014
for which we will be seeking approval at the
AGM on 22 July 2014.
Noreen Doyle
Chair
Remuneration Committee membership and attendance during
year ended 31 March 2014
Member
Noreen Doyle (Committee Chair)
Mark Elliott (Group Chairman)
Colin Balmer (resigned 31 January 2014)
Admiral Sir James Burnell-Nugent
Michael Harper
Paul Murray
Susan Searle (appointed 14 March 2014)
Attendance
5/6
6/6
5/5
6/6
5/6
6/6
1/1
Dear shareholder
On behalf of the Board, I am pleased to present the Remuneration
Committee’s report of the Directors’ Remuneration for the year
ended 31 March 2014 for which we will be seeking approval at
the Annual General Meeting (AGM) on 22 July 2014.
I have set out in my statement the following information:
• The overall Remuneration Policy principles for the Company;
• The link between the Company strategy and the Company
Remuneration Policy;
• The main decisions made by the Remuneration Committee
(the ‘Committee’) during the year;
• Key activities of the Committee during the year; and
• A forward look at the main focus for the Committee in the
upcoming year.
As required by the Large and Medium-sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013, the rest of
this Remuneration Report is divided into two parts:
• The Directors’ Remuneration Policy sets out the Company’s
proposed policy on Director remuneration and the key factors that
were taken into account in setting the policy. We will be applying
the revised policy from 1 April 2014 subject to an affirmative
shareholder vote at this AGM and after that at least every
third year.
• The Annual Report on Remuneration sets out payments and
awards made to the Directors and details the link between
Company performance and remuneration for the 2014 financial
year. The Annual Report on Remuneration is subject to an advisory
shareholder vote at the AGM of the Company on 22 July 2014.
Remuneration Policy objectives
The primary objectives of our Remuneration Policy are to:
• Attract and retain top talent;
• Incentivise key executives and managers;
• Ensure an approach which values the diversity of our workforce;
• Drive superior performance in both the short and long term; and
• Align with the interests of shareholders.
The key purpose of the Committee is to ensure that the remuneration
structure supports the Company strategy and that we are able to
attract, retain and motivate high calibre executives by rewarding
the creation of long-term sustainable value.
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2014 Group strategy and KPIs
Our strategy is to grow the business through the Organic-Plus programme. Progress is measured through a range of financial and
non-financial KPIs to monitor Group and divisional performance. Financial measures such as order intake, organic sales growth, profitability
and cash conversion track performance. Measurements of health and safety, productivity, customer satisfaction and employee engagement
contribute to sustainability.
The Group’s strategy is underpinned by focusing on a number of KPIs. These include a range of financial and non-financial indicators
to monitor Group and divisional performance.
Link to Remuneration Strategy
Annual Bonus
Annual Bonus is determined by Group performance against targets for:
• Underlying operating profit;
• Underlying operating cash flow*; and
• Underlying earnings per share (EPS).
It is the Committee’s opinion that these three headline KPIs encompass the performance of the Group and therefore encourage the
Executive Directors to focus on the effective delivery of the Group’s strategy on an annual basis.
Deferral of bonus in shares (DAB)
The deferral of bonus in shares has provided an ongoing exposure to the performance of the Group to ensure the annual performance
delivered is viewed as sustainable by shareholders.
Performance Share Plan (PSP)
PSP awards are contingent on meeting pre-determined performance criteria based on measures that are both absolute and compare
us to our peers. Awards are earned based on an equal weighting of absolute underlying EPS growth and relative Total Shareholder Return
(TSR) performance against our peers.
It is the Committee’s view that long-term EPS growth is the key financial measure in evaluating the sustainable performance of the Group
and, therefore, is a crucial measure to include in the long-term remuneration of the Executive Directors.
The Committee views comparative TSR as an appropriate external measure of whether the implementation of the Group’s strategy has led
to above average levels of return for investors. Relative TSR measures the success of management in delivering on Group KPIs consistently
over the longer term.
The Committee may not directly include qualitative non-financial KPIs in the performance conditions for Annual Bonus or PSP awards.
However, the Committee views these KPIs as underlying and supporting the financial KPIs and may make compensation adjustments
where the Committee believes that financial performance may have been delivered at the expense of meeting these non-financial KPIs.
Note: See definitions and more detail in the Strategy Report on pages 2-47.
Note: Definitions of underlying performance can be found in the glossary on page 150.
*Adjusted to exclude LTPA capital expenditure.
The Committee is grateful for all the support it has received from investors and their representative bodies over the course of the year while
consulting on the proposed changes to the Remuneration Policy. The Notice of AGM sets out the details of the main change which is the
proposed short-term incentive arrangement – the QinetiQ Group plc 2014 Bonus Banking Plan which, if approved by shareholders, will
replace the Group’s current Annual Bonus Plan, Deferred Bonus Plan and matching share arrangements.
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Activities
The Committee meets as necessary, although normally at least four
times a year. During the financial year ended 31 March 2014, it met
on six occasions.
Month
May
July
October
Main agenda Items
• 2013 Annual Cash Bonus Plan results
• Revised PSP rules prior to shareholder approval
• Share plan allocations and nominations
• Share plan performance and vesting
• Executive Director recruitment policy
• Executive Director payment for loss of office policy
• Annual bonus and long-term incentive policy
November
• Government reforms
• Committee programme for the year
• Review of Executive shareholding
• Reward and retention – all employees
January
March
• 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
The Committee sets remuneration and incentives for Executive
Directors and approves and monitors remuneration and incentives
for senior executives of the Group. No Executive Director or
employee of QinetiQ is permitted to be present or participate
in the Committee’s discussions about their own remuneration.
Effectiveness review
The Committee evaluated the effectiveness of its performance
during the year under review by way of a questionnaire which
had been circulated to Committee members and key executives.
There was a good level of satisfaction with the independence and
qualification of Committee members and of their willingness to
challenge processes and reports where appropriate. It was noted
that there was a formal and transparent procedure for developing
policy on executive remuneration and for setting the remuneration
packages of individual directors.
Principal areas where there was a good, but lower, level of satisfaction
and therefore where improvement is possible, were noted as:
• a requirement for greater oversight of the remuneration processes
for senior US Executives;
• a greater level of executive involvement in remuneration strategy;
• further continuous improvement in the provision of
Committee materials;
• greater account to be taken of risk issues when considering the
alignment of remuneration policies and practices with corporate
objectives and business strategy; and
• the provision of greater development opportunities for
Committee members to enable them to keep abreast of
changes in remuneration policy and practice.
These areas for improvement are being addressed.
Looking forward for 2015
The Committee conducted an extensive review during the year
of the Directors’ Remuneration Policy, taking into account the
following factors:
• the future suitability of the current incentive arrangements
for the Company;
• the revision of strategy for the business and the requirement
for any incentive to be aligned to the new strategy;
• the new BIS Regulations which require the Company to seek
shareholder approval of the Remuneration Policy through
a binding vote at the 2014 AGM; and
• the increasing strength of shareholder views against the operation
of both a leveraged matching share plan and PSP, both of which
measured performance against underlying EPS.
The key objectives of the new policy are:
• simplicity;
• retention of Executives;
• appropriate levels of fixed remuneration;
• an incentive programme which provides:
͵ assurance that earned incentives materially contribute to the
build-up of long-term equity holdings by the Management Team;
͵ flexibility to allow the Committee to set relevant targets
each year against a background of continual change and
transformation of the business and sector over the next period;
͵ material value if the incentive is earned; and
͵ an element of annual bonus deferred into shares.
Conclusion
We have provided an ‘At a glance’ summary of 2014 remuneration
immediately after this letter. The Annual Report on Remuneration
provides further details and the Directors’ Remuneration Policy
sets out how we are building the strategy for the future.
I hope that we can rely on your vote in favour of the Annual Report
on Remuneration and our Directors’ Remuneration Policy for
future years.
Noreen Doyle
Chair of the Remuneration Committee
May 2014
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At a glance
In this section we highlight the performance and remuneration outcomes for year ended 31 March 2014. More detail can be found in the
Annual Report on Remuneration.
Performance against 2014 key incentive targets:
Bonus KPIs
Underlying operating profit1
Underlying operating
cash flow1,2
Underlying EPS1
LTIP vesting
2011 Value Sharing Plan
(VSP) – profit before
tax (PBT)
2011 Value Sharing Plan
(VSP) – TSR
2011 Deferred Annual
Bonus (DAB) – EPS
Target performance
£125.0m
£116.0m
Stretch performance
£145.0m
£135.0m
Actual performance
£132.7m
£144.9m
% of maximum
reward achieved
69.25%
100.00%
14.7p
17.1p
16.0p
77.08%
Threshold performance
£1,087m
Stretch performance
£1,938m
Actual performance
£1,026.2m
£851m
15.9p
£1,702m
19.8p
£1,085.9m
16.0p
% of maximum
reward achieved
0.00%
27.60%
26.47%
Single total figure of remuneration for Executive Directors for 2013 and 2014:
CEO
CFO
2014
Salary/Fee
£610,844
£388,550
2014 taxable
benefits
£59,524
£23,188
2014 Annual
Bonus
£710,393
£451,871
2014 Long Term
Incentive
£644,270
£295,282
2014 pension
£152,711
£77,710
2014 total
£2,177,742
£1,236,601
2013 total
£3,992,001
£1,643,687
Proposed changes to Remuneration Policy:
Policy element
Base salary
Benefits
Annual Bonus
Performance Share Plan (PSP)
Pension
No change
Operation of element
No change
No change
Bonus Banking Plan replacing
the Annual Bonus, Deferred
and Matching Share Plans
No change
Maximum potential value
Performance metrics used
N/A
N/A
Details are contained in the Notice
of AGM (maximum 225% of salary)
No change (maximum 200%
of salary)
No change
N/A
1 Definition of underlying measures and performance can be found in the glossary on page 150.
2 Adjusted to exclude LTPA capital expenditure.
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Remuneration Policy
Introduction
This section of the Remuneration Report contains the general
principles operated by the Group in respect of the Group’s
Directors’ Remuneration Policy which will underpin the Group’s
future remuneration payments. The Committee aims to maintain a
Remuneration Policy, consistent with the Group business strategy
and objectives, which:
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;
• congruence with pay and employment conditions elsewhere
in the Group;
• attracts, retains and motivates individuals of high calibre;
• incremental compensation is achieved for attaining stretch
• is responsive to both Group and personal performance; and
performance targets;
• is competitive within relevant employment markets.
This Remuneration Policy covers the three-year period commencing
1 April 2014. The policy set out below complies with the Large and
Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 (‘the Regulations’).
• objectives are measured on metrics designed to be consistent
with sustainable long-term business performance;
• promotion of long-term alignment with shareholders through
satisfaction of incentives in shares and required employee
shareholding; and
• all decisions are made taking into account the diversity of
our people.
The total remuneration levels of the Executive Directors are
reviewed annually by the Committee, with due consideration for:
• composition of the reward package;
• 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.
The Executive Directors’ remuneration package is made up of the
following components:
Base salary
+
Bonus Banking Plan
+
Performance Share
Plan
+
Benefits and
pensions
=
Remuneration
package
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These main elements of remuneration, how they are linked to, and support, the Group business strategy are summarised
in the following policy table:
Policy for Executive Directors
Component
Purpose and link to strategy
Base salary
To attract and retain the talent needed to lead our business.
Reviewed annually, with any change effective from 1 September.
Bonus Banking Plan – NEW
Enabling the successful implementation of Group strategy through setting relevant targets to
measure Executive Director performance. 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 in shares rather than cash.
Annual performance conditions and targets are set at the beginning of the plan year.
Maximum = 225% of salary
Target = 90%–135% of salary
Threshold = 0% of salary
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Maximum payment and payment at threshold
Aim to pay base salaries in line with the market
median against defined comparator groups.
Typically, the base salaries of Executive Directors in
post at the start of the policy period and who remain
in the same role throughout the policy period will
be increased by a similar percentage to the average
annual percentage increase in salaries of all other
employees in the Group. The exceptions to this rule
may be where:
• an individual is below market level and a decision
is taken to increase base pay to reflect proven
competence in role; or
• there is a material increase in scope or
responsibility to the Executive Director’s role.
Operation and performance measures
Reference is made to the market data provided by the advisors to the Committee
which covers all aspects of reward.
Each year, the packages are benchmarked independently by our advisors, currently
PwC, using two comparator groups: one group is based on company size, measured
by market capitalisation, 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 benchmarked
against these to ensure that they remain competitive at the mid-market level. Other
factors taken into account when considering whether or not to award a base salary
increase include:
• the business environment for the year ahead;
• the salary increase budget for all employees for the coming year;
• all other aspects of remuneration (the reward mix);
• the critical nature of the appointment with respect to delivering business results;
• the performance of the Executive over the previous 12 months;
• the Executive’s position in terms of career development, potential and
experience; and
• retention risk.
As well as determining the performance conditions, targets and relative weighting,
the Committee will also determine, within the approved range, the level of target
bonus at the beginning of the plan year. Upon assessment of performance by the
Committee, a contribution will be made by the Company into the participant’s plan
account and 50% of the cumulative balance will be paid in cash. Any remaining
balance will be converted into shares.
100% of the balance in year 4 will be paid in shares to the participant. During the
four-year plan period, 50% of the retained balance is at risk of forfeiture based on
a minimum level of performance determined annually by the Committee.
Discretion by the Committee to adjust targets may be made in exceptional
circumstances, for example:
• acquisitions and disposals;
• restructuring costs;
• business structure changes;
• restated corporate allocations;
• Board approved budget adjustments;
• final IAS 19 pensions finance cost.
However, where such targets are altered, the Committee will adjust the
performance targets so that the revised target is not materially less challenging
than the target as originally set.
These main elements of remuneration, how they are linked to, and support, the Group business strategy are summarised
in the following policy table:
Policy for Executive Directors
Component
Base salary
Purpose and link to strategy
Operation and performance measures
To attract and retain the talent needed to lead our business.
Reviewed annually, with any change effective from 1 September.
Bonus Banking Plan – NEW
Enabling the successful implementation of Group strategy through setting relevant targets to
measure Executive Director performance. 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 in shares rather than cash.
Reference is made to the market data provided by the advisors to the Committee
which covers all aspects of reward.
Each year, the packages are benchmarked independently by our advisors, currently
PwC, using two comparator groups: one group is based on company size, measured
by market capitalisation, 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 benchmarked
against these to ensure that they remain competitive at the mid-market level. Other
factors taken into account when considering whether or not to award a base salary
increase include:
• the business environment for the year ahead;
• the salary increase budget for all employees for the coming year;
• all other aspects of remuneration (the reward mix);
• the critical nature of the appointment with respect to delivering business results;
• the performance of the Executive over the previous 12 months;
• the Executive’s position in terms of career development, potential and
experience; and
• retention risk.
Annual performance conditions and targets are set at the beginning of the plan year.
As well as determining the performance conditions, targets and relative weighting,
the Committee will also determine, within the approved range, the level of target
bonus at the beginning of the plan year. Upon assessment of performance by the
Committee, a contribution will be made by the Company into the participant’s plan
account and 50% of the cumulative balance will be paid in cash. Any remaining
balance will be converted into shares.
100% of the balance in year 4 will be paid in shares to the participant. During the
four-year plan period, 50% of the retained balance is at risk of forfeiture based on
a minimum level of performance determined annually by the Committee.
Discretion by the Committee to adjust targets may be made in exceptional
circumstances, for example:
• acquisitions and disposals;
• restructuring costs;
• business structure changes;
• restated corporate allocations;
• Board approved budget adjustments;
• final IAS 19 pensions finance cost.
However, where such targets are altered, the Committee will adjust the
performance targets so that the revised target is not materially less challenging
than the target as originally set.
Maximum payment and payment at threshold
Aim to pay base salaries in line with the market
median against defined comparator groups.
Typically, the base salaries of Executive Directors in
post at the start of the policy period and who remain
in the same role throughout the policy period will
be increased by a similar percentage to the average
annual percentage increase in salaries of all other
employees in the Group. The exceptions to this rule
may be where:
• an individual is below market level and a decision
is taken to increase base pay to reflect proven
competence in role; or
• there is a material increase in scope or
responsibility to the Executive Director’s role.
Maximum = 225% of salary
Target = 90%–135% of salary
Threshold = 0% of salary
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Component
Purpose and link to strategy
Operation and performance measures
Maximum payment and payment at threshold
Performance Share Plan (PSP)
awards made from 31 March
2012 onwards
To align Executive Directors’ reward with returns to shareholders by a focus on increasing
shareholder value over the medium to long term and ensuring long-term commitment
to strategic objectives.
The PSP focuses Executives on key measures which determine the sustainable performance
of the Company and also ensures that the implementation of the Company’s strategy is leading
to above market levels of return for investors.
Pension
To ensure that Executive Directors’ total remuneration remains attractive and competitive.
Other benefits
To ensure that Executive Directors’ total remuneration remains attractive and competitive.
Personal Shareholding Policy
To align Executive Directors’ interests with those of shareholders through the build-up
and retention of a personal holding in QinetiQ shares.
Provisions of previous policy that will
continue to apply – Deferred Annual
Bonus matching (DAB), Value Share
Plan (VSP)
To align Executive Directors’ interests with those of shareholders. No further awards are made
under these plans.
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Awards are earned based on an equal weighting of absolute underlying EPS growth
Individual participants’ award levels are determined
and relative TSR performance. The performance period runs for three years from
by the Committee annually.
the start of the financial year in which the award is granted.
The Committee has discretion to vary the weighting of performance metrics over
the life of this Remuneration Policy to ensure alignment with business strategy.
If events occur which cause the Committee to consider that the performance targets
are no longer an appropriate measure of Group performance, the Committee may
alter the terms of performance targets as it considers appropriate, but so that the
revised target is not materially less challenging than the target as originally set.
To guard against misconduct, a claw back facility will apply under which part, or all,
of the award can be recovered for the following reasons (but not limited to these):
• a material misstatement of the Group’s financial results has occurred;
• the Board has found that the participant has engaged in misconduct (as
determined by the Board) in the period between the date of grant and vesting.
For the Executive Directors:
Normal grant level = 150% of salary
Maximum grant level = 200% of salary
The percentages of the award which vest at
threshold performance are 25% for EPS growth
and 30% for relative TSR rising on a linear basis
to 100% vesting at stretch performance.
The Group’s policy is to offer all UK employees membership in the QinetiQ Group
Maximum pension contribution or salary
Personal Pension (GPP) plan which is a defined contribution scheme. Executives
supplement = 25% of base salary for CEO,
whose benefits are likely to exceed the Lifetime Allowance may opt out of the GPP.
20% of base salary for CFO.
In such cases, or if the annual allowance would be exceeded, the individual will
be paid an allowance in lieu of pension contributions. This supplement will be
a non-consolidated allowance and will not impact any incentive calculations.
Benefits include car allowance, health insurance, life assurance, income protection
Benefit values vary year on year depending on
and membership of the Group’s employee Share Incentive Plan which is open to all
premiums and the maximum potential value is the
UK employees.
Executives have five years to accumulate the required shareholding.
Deferred shares held as part of the DAB will count towards this total
(excluding unvested matching shares).
Unvested awards do not count towards the required shareholding.
Once the required level of shareholding has been achieved to satisfy the policy,
the Director/Executive will be expected to maintain that level of shareholding
irrespective of whether the share price increases or decreases. Accordingly,
they will be considered to have satisfied the test in future years even if the share
price decreases.
cost of the provision of these benefits.
The CEO and CFO are required to hold QinetiQ shares
with a value equivalent to 100% of their base salary.
Other defined members of the senior leadership
team are required to hold shares with a value
equivalent to 50% of base salary.
The outstanding awards under the previous DAB and VSP will continue to form part
DAB – maximum 100% of deferred bonus.
of the Remuneration Policy until vesting. Details on how these plans operate can be
found in the Directors’ Remuneration Report for the year of grant.
VSP – pre-defined number of shares for each £1m
of additional shareholder value created based
These plans vest on terms set out in the plan rules which have previously been
on PBT and TSR.
approved by shareholders.
The Annual Report on Remuneration will disclose
achievements under these plans in the year
performance is completed.
Performance Share Plan (PSP)
awards made from 31 March
To align Executive Directors’ reward with returns to shareholders by a focus on increasing
shareholder value over the medium to long term and ensuring long-term commitment
2012 onwards
to strategic objectives.
The PSP focuses Executives on key measures which determine the sustainable performance
of the Company and also ensures that the implementation of the Company’s strategy is leading
to above market levels of return for investors.
Pension
To ensure that Executive Directors’ total remuneration remains attractive and competitive.
Other benefits
To ensure that Executive Directors’ total remuneration remains attractive and competitive.
and retention of a personal holding in QinetiQ shares.
Provisions of previous policy that will
To align Executive Directors’ interests with those of shareholders. No further awards are made
continue to apply – Deferred Annual
under these plans.
Bonus matching (DAB), Value Share
Plan (VSP)
Component
Purpose and link to strategy
Operation and performance measures
Maximum payment and payment at threshold
Awards are earned based on an equal weighting of absolute underlying EPS growth
and relative TSR performance. The performance period runs for three years from
the start of the financial year in which the award is granted.
The Committee has discretion to vary the weighting of performance metrics over
the life of this Remuneration Policy to ensure alignment with business strategy.
If events occur which cause the Committee to consider that the performance targets
are no longer an appropriate measure of Group performance, the Committee may
alter the terms of performance targets as it considers appropriate, but so that the
revised target is not materially less challenging than the target as originally set.
To guard against misconduct, a claw back facility will apply under which part, or all,
of the award can be recovered for the following reasons (but not limited to these):
• a material misstatement of the Group’s financial results has occurred;
• the Board has found that the participant has engaged in misconduct (as
determined by the Board) in the period between the date of grant and vesting.
The Group’s policy is to offer all UK employees membership in the QinetiQ Group
Personal Pension (GPP) plan which is a defined contribution scheme. Executives
whose benefits are likely to exceed the Lifetime Allowance may opt out of the GPP.
In such cases, or if the annual allowance would be exceeded, the individual will
be paid an allowance in lieu of pension contributions. This supplement will be
a non-consolidated allowance and will not impact any incentive calculations.
Individual participants’ award levels are determined
by the Committee annually.
For the Executive Directors:
Normal grant level = 150% of salary
Maximum grant level = 200% of salary
The percentages of the award which vest at
threshold performance are 25% for EPS growth
and 30% for relative TSR rising on a linear basis
to 100% vesting at stretch performance.
Maximum pension contribution or salary
supplement = 25% of base salary for CEO,
20% of base salary for CFO.
Benefits include car allowance, health insurance, life assurance, income protection
and membership of the Group’s employee Share Incentive Plan which is open to all
UK employees.
Benefit values vary year on year depending on
premiums and the maximum potential value is the
cost of the provision of these benefits.
Personal Shareholding Policy
To align Executive Directors’ interests with those of shareholders through the build-up
Executives have five years to accumulate the required shareholding.
Deferred shares held as part of the DAB will count towards this total
(excluding unvested matching shares).
Unvested awards do not count towards the required shareholding.
Once the required level of shareholding has been achieved to satisfy the policy,
the Director/Executive will be expected to maintain that level of shareholding
irrespective of whether the share price increases or decreases. Accordingly,
they will be considered to have satisfied the test in future years even if the share
price decreases.
The outstanding awards under the previous DAB and VSP will continue to form part
of the Remuneration Policy until vesting. Details on how these plans operate can be
found in the Directors’ Remuneration Report for the year of grant.
These plans vest on terms set out in the plan rules which have previously been
approved by shareholders.
The CEO and CFO are required to hold QinetiQ shares
with a value equivalent to 100% of their base salary.
Other defined members of the senior leadership
team are required to hold shares with a value
equivalent to 50% of base salary.
DAB – maximum 100% of deferred bonus.
VSP – pre-defined number of shares for each £1m
of additional shareholder value created based
on PBT and TSR.
The Annual Report on Remuneration will disclose
achievements under these plans in the year
performance is completed.
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Notes to the policy tables
Performance measures and targets in 2015
The performance targets are determined annually. The Committee
selected the performance conditions, as detailed on page 95, for the
Bonus Banking Plan because these are central to the Group’s overall
strategy and are the key metrics used by the Executive Directors to
oversee the operation of the business. Further details are included
in the Notice of AGM.
The Committee is of the opinion that the specific performance
targets for the Bonus Banking Plan are commercially sensitive in
respect of the Company and that it would be detrimental to the
interests of the Company to disclose them. The targets will be
disclosed after the end of the relevant financial year in that year’s
Remuneration Report.
The Performance Share Plan performance conditions, as defined on
page 95, complement the performance conditions described in the
Bonus Banking Plan, supporting sustainable performance.
Illustrations of application of Remuneration Policy
The tables below are for illustrative purposes and represent the
minimum, target and maximum remuneration opportunity for both
the CEO and CFO based on the following assumptions:
Fixed Pay: Estimated base salary for the year ending 31 March 2015
plus car allowance plus pension contribution.
Remuneration linked to annual performance: 40% of maximum
opportunity will pay out at target performance and 100% at
stretch performance.
Remuneration linked to long-term performance: 27.5% of maximum
opportunity will pay out at target performance and 100% at
stretch performance.
The table below sets out the potential remuneration for the CEO
at minimum, target and stretch performance levels:
Stretch
25%
45%
30%
£3,159,119
Changes to remuneration policy from that operating in 2014
The Committee conducted an extensive review of the Remuneration
Policy taking into account the following factors:
• the current suitability of the incentive arrangements for the Group;
s
o
i
r
a
n
e
c
S
Target
49%
35%
16%
£1,625,519
• the change in strategy for the business and the requirement
to be aligned to the revised strategy;
• the new BIS Regulations which require the Company to seek
shareholder approval of the Remuneration Policy through
a binding vote at the 2014 AGM;
• the increasing strength of shareholder views against the operation
of a leveraged matching share plan and PSP, both of which
measured performance against underlying EPS.
This has resulted in the Committee proposing to introduce the
Bonus Banking Plan which if approved by shareholders will replace
the Company’s current Annual Bonus plan, DAB Plan and matching
share arrangements.
Remuneration Policy for all employees
All employees of QinetiQ are entitled to base salary, benefits
and pension. UK and Australia based employees are entitled to
participate in the QinetiQ Share Incentive Plan. The maximum
opportunity available is based on the seniority and responsibility of
the role. Participation in the PSP is available to Executive Directors;
senior managers and selected employees throughout the
organisation are also invited to participate.
Minimum
100%
£493,247
0
20
40
60
80
100
Fixed
Linked to annual performance
Linked to perfomance over
more than 1 year
The table below sets out the potential remuneration for the CFO
at minimum, target and stretch performance levels:
Stretch
25%
45%
30%
£2,005,030
s
o
i
r
a
n
e
c
S
Target
48%
36%
16%
£1,022,371
Minimum
100%
£493,247
0
20
40
60
80
100
Fixed
Linked to annual performance
Linked to perfomance over
more than 1 year
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Approach to recruitment remuneration
When recruiting Executive Directors, the Committee applies the following recruitment philosophy:
Components
General
Base salary and
benefits
Pension
Policy
The Committee’s approach to recruitment remuneration is to pay competitively to attract the appropriate high
calibre candidate to the role. We expect that the pay of any new recruit would be assessed following the same
principles as for the Executive Directors.
The base salary will be set taking into account the responsibilities of the individual and the salaries paid to similar
roles in comparable companies as per our base salary policy. The Executive Director will be eligible to receive
benefits in line with QinetiQ’s benefits policy as set out in the policy table.
The Executive Director will be eligible to receive pension benefits in line with QinetiQ’s Pension Policy as set out
in the policy table.
Bonus Banking Plan The Executive Director will be eligible to participate in the Bonus Banking Plan to the declared maximum potential
as set out in the policy table.
Long Term Incentives The Executive Director will be eligible to participate in the LTIPs to the declared maximum potential as set out in the
policy table.
Share buy-outs/
replacement awards
Awards may be granted to replace those forfeited by the Executive Director on taking up the appointment where
considered by the Committee to be appropriate. The Committee will seek to structure any replacement awards such
that overall they are no more generous in terms of quantum or vesting period than the awards due to be forfeited.
In determining quantum and structure of these commitments, the Committee will seek to replicate the fair value
and, as far as practicable, the timing and performance requirements of remuneration foregone.
Sign-on payments/
recruitment awards
The Committee’s policy is not to provide sign-on compensation. However, in exceptional circumstances where the
Committee decides to provide this type of compensation it will endeavour to provide the compensation in equity,
subject to a holding period during which cessation of employment will generally result in forfeiture and subject to
the satisfaction of performance targets. In addition, where practical the Committee will endeavour to consult with
its key shareholders prior to entering into any commitment. The maximum value of this one-off compensation will
be proportionate to the overall remuneration offered by the Company and in all circumstances is limited to 150%
of salary which will only be provided in exceptional circumstances.
Relocation policies
In instances where the new Executive Director is required to relocate or spend significant time away from their
normal residence, the Company may provide one-off compensation to reflect the cost of relocation for the Executive
Director. The level of the relocation package will be assessed on a case by case basis but will take into consideration
any cost of living differences/housing allowance and schooling.
Where an existing employee is promoted to the Board, the policy set out above would apply from the date of promotion but there would be
no retrospective application of the policy in relation to subsisting incentive awards or remuneration arrangements. Accordingly, prevailing
elements of the remuneration package for an existing employee would be honoured and form part of the ongoing remuneration of the
person concerned. These would be disclosed to shareholders in the Annual Remuneration Report for the relevant financial year.
Service contracts
Copies of Directors’ service contracts and letters of appointment are available for inspection at the Company’s registered office, and
available at the AGM.
Executive Directors’ service agreements are of indefinite duration, terminable at any time by either party giving 12 month prior notice.
It is the Company’s policy not to provide notice periods greater than 12 months.
Under each of the Executive Directors’ service agreements, QinetiQ has the right to make a payment in lieu of notice of termination, the
amount of that payment being base salary and benefits that would have accrued to the Executive Director during the contractual notice
period. In addition, the Committee reserves the right to allow continued participation in the annual bonus during the notice period provided
that the individual is being required to work their notice period. It should be noted that the Company expects Executive Directors to mitigate.
Non-executive Directors’ letters of appointment are renewed on a rolling 12-month basis subject to reappointment at the AGM.
There are no provisions for compensation on early termination.
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Strategic reportDirectors’ report: remunerationFinancial statements Additional information Directors’ Remuneration report continued
Policy on payment for loss of office
When considering compensation for loss of office, the Committee will always seek to minimise the cost to the Company whilst applying the
following philosophy:
Components
General
Base salary
and benefits
Pension
Policy
The Committee will honour Executive Directors’ contractual entitlements. Service contracts do not contain
liquidated damages clauses. If a contract is to be terminated, the Committee will determine such mitigation as it
considers fair and reasonable in each case. There are no contractual arrangements that would guarantee a pension
with limited or no abatement on severance or early retirement. There is no agreement between the Company and
its Directors or employees, providing for compensation for loss of office or employment that occurs because of a
takeover bid. The Committee reserves the right to make additional payments where such payments are made in
good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation); or by
way of settlement or compromise of any claim arising in connection with the termination of an Executive Director’s
office or employment.
In the event of termination instigated by either the Company or Executive Director, the Executive Director may be
entitled to receive compensation equivalent to salary and benefits they would have received if still in employment
for their 12-month notice period.
In the event of termination instigated by either the Company or Executive Director, the Executive Director may be
entitled to receive compensation equivalent to their Company pension contributions, or cash allowance, they would
have received if still in employment for their 12-month notice period.
Bonus Banking
In the event of termination instigated by either the Company or Executive Director, the Executive Director may
be considered a good leaver and accrue service under the Bonus Banking Plan until the date they cease to hold
employment if their reason for ceasing to hold employment is for the following reasons:
• death;
• injury, ill-health or disability;
• redundancy;
• retirement with the Board’s agreement;
• the employing Company ceasing to be a member of the Group;
• the business or part of the business to which the Participant’s employment relates is transferred to a person
who is not a member of the Group; or
• any other reason (other than for dishonesty, fraud, misconduct, or any other circumstances justifying summary
dismissal) as the Committee in its absolute discretion so permits in any particular case. The Committee will only
use its general discretion to determine that an Executive Director is a good leaver in exceptional circumstances
and will provide a full explanation to shareholders, if possible in advance, of the basis for its determination.
In addition, all balances in the participants’ plan account will be paid.
In normal good leaver circumstances, the bonus will be based on the normal performance period and paid on the
normal payment date. However, the Board has discretion to accelerate the payment of bonus to an earlier date,
subject to satisfaction of the performance conditions at that time.
In the event that an Executive director is not a good leaver they will have no entitlement to a payment under the
plan for the year of their cessation of employment and all balances in their plans will be forfeited.
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Components
Long Term Incentives
(including matching
awards under
the DAB)
Policy
An award which has not vested will lapse on the date the participant ceases to hold employment unless the reason
for ceasing to hold employment is for one of the following reasons:
• death;
• injury, ill-health or disability;
• redundancy;
• retirement with the agreement of the employing Company; It is the Committees Policy time;
• the employing Company ceasing to be a member of the Group;
• the business or part of the business to which the Participant’s employment relates is transferred to a person who
is not a member of the Group; or
• any other reason (other than for dishonesty, fraud, misconduct, or any other circumstances justifying summary
dismissal) as the Remuneration Committee in its absolute discretion so permits in any particular case.
The Committee will only use its general discretion to determine that an Executive Director is a good leaver in
exceptional circumstances and provide a full explanation to shareholders, if possible in advance, of the basis
for determination.
Awards vest on the normal vesting date, subject to the performance conditions being satisfied. However, the
Committee has discretion to accelerate the vesting of awards to an earlier date, subject to satisfaction of the
performance conditions at that time. In either case, unless the Committee decides otherwise, awards are
pro-rated to reflect the period in which the participant was not employed during the performance period.
The Committee reserves the right to pay cash in lieu of shares if deemed appropriate.
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Policy for Non-executive Directors
The Remuneration Policy for Non-executive Directors is summarised in the table below:
Component
Fees
Purpose & link to strategy
To attract and retain Non-executive Directors of the calibre required to assist the
Company in setting and delivering its strategy.
Operation
Maximum
The Group Chairman reviews annually the fees of the Non-executive Directors,
Non-executive Director fee policy aims to pay at
other than the Group Chairman’s, and makes recommendations to the Board.
median level, when considering the same comparator
group used for Executive Directors, and increases will
generally be in line with that of employees.
The Senior Independent Non-executive Director reviews the Group Chairman’s
fees and makes recommendations to the Board.
Non-executive Directors are paid a basic fee plus additional fees for chairing
committees to take account of the additional responsibilities of the role.
Fees are neither performance-related nor pensionable. Non-executive Directors
are not eligible to participate in bonus, profit sharing or employee share schemes.
Excluding the Group Chairman, an additional fee is payable to those Non-executive
Directors attending meetings outside of their country of residence.
All Non-executive Directors are reimbursed for any travel and other business
expenses incurred.
An annual accommodation allowance may be payable to the Group Chairman
and as deemed appropriate for individuals who are not UK resident.
Other Remuneration Committee discretions
Under the various reward plans, the Committee may apply its
discretion in the event of the following:
• variation of the share capital of the Company;
• demerger or disposal of a substantial part of the Group’s business;
• significant acquisition or disposal;
• change of control of the Company.
Bonus Banking Plan
The Participant will receive an award in cash immediately prior to
the date of the change of control (and conditional on the change of
control actually occurring) based on the level of satisfaction of the
performance conditions at this date pro-rated to the amount of
the Plan Year completed on the change of control subject to the
Committee’s discretion to waive or partially waive pro-rating.
It is the Committee’s policy in normal circumstances to pro-rate
to time; however, in exceptional circumstances where the nature
of the transaction produces exceptional value for shareholders
and provided the performance targets are met, the Committee will
consider whether pro-rating is equitable. All balances in Participants’
Plan Accounts will vest in full on a change of control.
Performance Share Plan
In the event of a change of control of the Company it is the Committee’s
normal expectation that any outstanding awards will vest subject to the
satisfaction of the Performance Targets and pro-rated to time. However,
in exceptional circumstances, the Committee will consider whether
pro-rating is equitable particularly where the nature of the transaction
produces exceptional value for shareholders and, provided the
Performance Targets are met, may waive some or the entire
pro-rating requirement.
Alternatively in the event of a change of control of the Company any
outstanding allocations shall, with the Remuneration Committee’s
consent, continue to subsist, but subject to such adjustments to the
performance target as the Remuneration Committee shall determine.
The Committee may make adjustments to awards as it may
determine to be appropriate under the DAB plan, Bonus Banking Plan
and PSP, in accordance with the plan rules.
The Committee has discretion in several areas of policy as set out
in this report. The Committee may also exercise operational and
administrative discretions under relevant plan rules approved by
shareholders as set out in those rules. In addition, the Committee has
the discretion to amend policy with regard to minor or administrative
matters where it would be, in the opinion of the Committee,
disproportionate to seek or await shareholder approval. It is the
Committee’s intention that commitments made in line with its
policies prior to the date of the 2014 AGM will be honoured, even
if satisfaction of such commitments is made post the AGM and
may be inconsistent with the remuneration policies.
Consideration of employment conditions elsewhere
in the Group
The Committee gains an overview of the reward and retention of the
whole employee population annually when the Human Resources
Director is invited to present on the proposals for salary increase
for the employee population generally, and on any other changes
to Remuneration Policy within the Group. The information presented
is taken into consideration when setting the pay levels
of the Executive population.
The Committee also oversees arrangements for share-based reward
in respect of managers and the wider workforce.
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Policy for Non-executive Directors
The Remuneration Policy for Non-executive Directors is summarised in the table below:
Component
Fees
Purpose & link to strategy
To attract and retain Non-executive Directors of the calibre required to assist the
Company in setting and delivering its strategy.
Maximum
Non-executive Director fee policy aims to pay at
median level, when considering the same comparator
group used for Executive Directors, and increases will
generally be in line with that of employees.
Operation
The Group Chairman reviews annually the fees of the Non-executive Directors,
other than the Group Chairman’s, and makes recommendations to the Board.
The Senior Independent Non-executive Director reviews the Group Chairman’s
fees and makes recommendations to the Board.
Non-executive Directors are paid a basic fee plus additional fees for chairing
committees to take account of the additional responsibilities of the role.
Fees are neither performance-related nor pensionable. Non-executive Directors
are not eligible to participate in bonus, profit sharing or employee share schemes.
Excluding the Group Chairman, an additional fee is payable to those Non-executive
Directors attending meetings outside of their country of residence.
All Non-executive Directors are reimbursed for any travel and other business
expenses incurred.
An annual accommodation allowance may be payable to the Group Chairman
and as deemed appropriate for individuals who are not UK resident.
Consideration of shareholder views
The Chair of the Committee and the Chair of the Company consult
with key shareholders on remuneration matters from time to time,
and particularly where changes to share arrangements are under
consideration. The Chair reports any concerns expressed by
shareholders to the Committee and these are taken into account as
the Committee develops and implements its policy. Any comments
received from shareholders outside these consultation exercises are
also reported to the Committee, and the Committee takes account
of general views on remuneration expressed by shareholders or
representative bodies such as the ABI.
The Committee consulted with its principal shareholders in relation
to the proposal to introduce the 2014 Bonus Banking Plan and took
into account views expressed during the consultation when agreeing
the final design. The Remuneration Committee is grateful for
shareholders’ comments and engagement during the consultation
process. At the end of this process, the Remuneration Committee
was pleased that the majority of the shareholders consulted
expressed support for the Bonus Banking Plan.
Remuneration of employees in QinetiQ North America (QNA) is
governed, according to the Proxy agreement, by their Compensation
Committee. The chairs of the QNA Compensation and QinetiQ Group
plc Remuneration Committee meet on a regular basis to exchange
information. In addition the Remuneration Committee receive
quarterly reporting on the QNA senior leaders’ remuneration
and any material changes.
Employee plans
The Share Incentive Plan is operated in the UK and Australia in the
form of a share purchase award with a matching Company contribution
to encourage employee ownership and engagement in the business.
Executive plans
In addition to the VSP and PSP, the Group operates the following
executive share plans:
• QinetiQ Share Option Scheme (QSOS) – This plan expired in 2013
• Stock Award Plan – Restricted Stock Units (RSU) – RSU awards are
allocated in QNA to retain and motivate senior managers. The RSU
awards vest in four equal tranches over a four-year period. Grants
are subject to a vesting schedule which is 50% time-based and
50% based on the achievement of profit growth targets.
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.
The Company does not invite employees to comment on the
Directors’ Remuneration Policy. The Company does not use
remuneration comparison measurements.
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Strategic reportDirectors’ report: remunerationFinancial statements Additional information Directors’ Remuneration report continued
Annual Report on Remuneration
Introduction
The following section of this report details how the Remuneration Policies have been implemented for the year ended 31 March 2014 and
provides an overview on planned policy implementation for the year ending 31 March 2015.
Executive Director single figure remuneration
The auditors are required to report on the information in this table. Executive Director remuneration is shown as a single figure to provide an
annual comparison between the actual remuneration for the performance year ended 31 March 2014 and the preceding year.
Executive
Director
CEO
CFO
Salary/Fees1
2014
£610,844
£388,550
2013
£593,050
£377,500
Taxable benefits2
Annual Bonus3
Long Term Incentive4
2014
£59,524
£23,188
2013
2014
£52,106 £710,393
£21,183 £451,871
2013
£896,100
£570,000
2014
2013
£644,270 £2,302,483
£295,282
£599,504
Pensions5
2014
£152,711
£77,710
2014
2013
2013
£148,262 £2,177,742 £3,992,001
£75,500 £1,236,601 £1,643,687
Single figure
1 Base salary is presented prior to adjustments for salary sacrifice pensions. For further details see Additional supporting information below.
2 Taxable benefits comprise of car allowance, private medical insurance, life assurance and income protection.
3 Annual Bonus figure comprises of the value of both cash and shares (excluding DAB matching) awarded under the DAB plan. Performance measures are Group Underlying
Operating Profit, Group Underlying Cash Flow and Underlying EPS for both performance years. For the performance year ended 31 March 2014 all measures exceeded target
performance resulting in a payout of 76.97% of maximum bonus opportunity. Additional supporting information below provides a detailed breakdown of calculations. For the
performance year ended 31 March 2013 all performance measures exceeded the stretch performance thresholds and the scheme therefore paid out at maximum.
4 Long Term Incentive figures for FY14 comprise of the 2011 VSP and the 2011 DAB matching plan. For the 2011 VSP only TSR exceeded target performance resulting in an
overall payout equivalent to 13.80% of maximum. The EPS performance measure in the 2011 DAB matching plan exceeded threshold resulting in a payout equivalent to
26.47% of maximum. Additional supporting information below provides a breakdown of calculations. Long Term Incentive figures for 2013 comprise of the performance
for the 2010 VSP for both the CEO and the CFO. In addition the 2013 Long Term Incentive Plan figure for the CEO also comprises of the performance of the 2009 Mirror
PSP and 2009 Matching PSP. Long Term Incentive figures include dividend payments for both 2014 and 2013.
5 CEO pension figure represents cash in lieu of pension equating to 25% of base salary for both performance years. CFO pension figure represents £38,344 into GPP and
£39,366 cash in lieu of pension equating to 20% of base salary for year ended 31 March 2014 and £38,675 into GPP and £36,825 cash in lieu of pension equating to 20%
of base salary for year ended 31 March 2013.
Additional supporting information for each Executive Director
To support the single figure, this section documents each element of remuneration and how the figure was calculated for performance year
ended 31 March 2014.
Base salary
Executive
Director
CEO
CFO
From 1 July
2013 (a)
£615,325
£391,400
From 1 July
2012
£597,400
£380,000
Prorated
single figure
£610,844
£388,550
a) Following market review, the CEO’s and CFO’s salaries increased by 3% (£17,925 per annum and £11,400 per annum respectively) effective from 1 July 2013, based on
performance and their compensation levels.
Annual Bonus
The Annual Bonus potential for both CEO and CFO remained
unchanged from year ending 31 March 2013 with achievement of
on-target performance providing a payment equal to 75% of base
salary, rising on a linear scale to 150% of base salary for achievement
of stretch performance. The scheme begins to pay out once
threshold performance measures have been achieved.
Both the CEO and CFO were measured against Group targets
as shown below:
3
1
3
2
1
1
2
1. Group underlying operating profit 60%
2. Group underlying operating
cash flow
3. Underlying EPS
20%
20%
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QinetiQ Group plc Annual Report and Accounts 2014
Achievements against these Annual Bonus metrics and the amounts payable are as follows:
Performance
measure
Underlying1
operating profit
Underlying
operating
cash flow1,2
Underlying EPS1
Threshold (0%
payable)
£120m
Target (50%
payable)
£125m
Stretch (100%
payable)
£145m
% of maximum
performance
achieved
69.25%
Actual
£132.7m
CEO payment
£383,501
CFO payment
£243,940
£111m
£116m
£135m
£144.9m
100.00%
£184,598
£117,420
14.1p
14.7p
Overall results
50% paid in cash
50% paid in shares
17.1p
16.0p
77.08%
76.97%
38.48%
38.49%
£142,294
£710,393
£355,196
£355,197
£90,511
£451,871
£225,935
£225,936
1 Definition of underlying measurements of performance can be found in the glossary on page 150.
2 Adjusted to exclude LTPA capital expenditure.
For the year ended 31 March 2014, no discretion was applied to the calculated results; therefore, £710,393 and £451,871 have been reported
in the single figure calculation.
For the year ended 31 March 2013, stretch financial targets were exceeded providing a payment of 150% of base salary for both the CEO and
CFO as detailed in the single figure table (50% of which was deferred into shares which will vest in June 2016). No discretion was applied to
these payments.
Long Term Incentive summary
The auditors are required to report on the information in this table. The following table collates all Long Term Incentives (2011 VSP and 2011
DAB matching plan) results for the performance period ended 31 March 2014. Plan details are provided in the paragraphs immediately
following this table.
CEO
CFO
Plan
2011 Value
Sharing Plan
2011 Deferred
Annual Bonus
Matching
Total
2011 Value
Sharing Plan
2011 Deferred
Annual Bonus
Matching
Total
Shares granted
1,531,800
Shares vesting
211,388
Percentage shares
vesting
13.80% (b)
Shares value (a)
£478,161
Accrued dividends
(c)
£24,521
Reported single
value figure
£502,682
226,777
60,021
26.47%
£135,766
£5,822
£141,588
1,758,577
765,900
271,409
105,694
15.43%
13.80% (b)
£613,927
£239,080
£30,343
£12,261
£644,270
£251,341
70,379
18,627
26.47%
£42,134
£1,807
£43,941
836,279
124,321
14.87%
£281,214
£14,068
£295,282
a) Share price used in calculation equals £2.262; three month average 1 January 2014 – 31 March 2014.
b) Vesting is based on value created via TSR and PBT. TSR performance is based on a QinetiQ result of 84.5% compared with the comparator group TSR of 56.9%. PBT is based
on a QinetiQ result of £119.4m at the end of the performance period compared to £105.5m at the beginning of the performance period. Detailed calculations can be found
on pages 86 and 87.
c) Cash equivalent dividends are earned during the performance period and any period when shares are held in trust.
For the year ended 31 March 2014, no discretion was applied to the calculated results; therefore, £644,270 and £295,282 have been
reported in the single figure calculation.
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Strategic reportDirectors’ report: remunerationFinancial statements Additional information Directors’ Remuneration report continued
Deferred Annual Bonus matching
In 2011, the CEO deferred 50% (£290,000) and the CFO deferred 30% (£90,000) of their annual cash bonus into the DAB Plan, allocating
them 226,777 and 70,379 shares respectively. These shares were subject to a three-year vesting period (vesting due 1 July 2014) and were
matched up to 100% based on EPS performance detailed below:
Underlying EPS Compound annual growth rate (CAGR) over three years
<7%
7%
Between 7% and 15%
>15%
Percentage of shares vesting
0%
25%
Between 25% and 100% (linear)
100%
Actual performance and vesting levels are presented below:
EPS at start of performance
period (1 April 2011) (p)
13.0
EPS at threshold
performance level (p)
15.9
EPS at maximum
performance level (p)
19.8
Actual EPS
at end of performance period
(31 March 2014) (p)
16.0
Vesting
level (% of maximum)
26.47
The resulting outcomes for the performance year ended 31 March 2014 are CEO: £141,588; and CFO: £43,941. These values are used for
single figure reporting. Deferred shares have been transferred to the CEO and CFO.
For the year ended 31 March 2014, no discretion was applied to the calculated results.
Value Sharing Plan
On 26 May 2011, the CEO, CFO and a small number of senior executives were awarded shares under the VSP based on a defined number
of shares for every £1m of value created using PBT and TSR, over and above three-year performance hurdles ending
31 March 2014.
Both performance measures were equally weighted with the CEO awarded 1,800 shares per £1m of calculated Additional Shareholder
Value (ASV) and the CFO was awarded 900 shares per £1m of ASV. 2011 VSP performance has been assessed as follows:
2011 VSP – TSR
50% 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).
The CEO was awarded 900 shares per £1m TSR ASV.
The CFO was awarded 450 shares per £1m TSR ASV.
QinetiQ’s TSR over the period was 84.5% and the TSR for the FTSE 250 Index was 56.9%, therefore QinetiQ outperformed the market
by 27.6%.
The additional shareholder value was £234.9m being 27.6% of £851m (the average market capitalisation over the three months to
31 March 2011).
Consequently the CEO was eligible for 211,388 (900*234.9) shares.
The CFO was eligible for 105,694 (450*234.9) shares.
50% of the awarded shares vested in May 2014 and the remaining 50% will vest in May 2015 (provided the Executive Director remains
in service).
For the year ended 31 March 2014, no discretion was applied to the calculated results.
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2011 VSP – PBT
50% 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% per annum. 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).
The CEO was awarded 900 shares per £1m PBT ASV.
The CFO was awarded 450 shares per £1m PBT ASV.
QinetiQ’s average market cap over the three months to 31 March 2011 was £851m.
Group adjusted PBT for the financial year ended 31 March 2011 was £105.5m.
Market cap as a (fixed) multiple of PBT for 2011 VSP awards is therefore 8.07 ( = £851 / £105.5m), Group adjusted PBT for the financial
year ending 31 March 2014 is £119.4m, and dividends to shareholders over the three-year period amount to £63.1m.
Additional shareholder value is £977.8m being:
• £914.7m (PBT in FY 2014 of £119.4m multiplied by the fixed multiple of 8.07) plus £63.1m (paid dividends).
• which is less than hurdle rate of £1,087m (= £851m x (1+8.5%)3).
Consequently the CEO and CFO were both eligible for 0 shares.
For the year ending 31 March 2014, no discretion was applied to the calculated results.
The resulting outcomes for the performance year ended 31 March 2014 are:
Performance measure
Profit Before Tax (PBT)
Grant date
26 May 11
Total Shareholder Return (TSR)
26 May 11
Vested shares
CEO: 0
CFO: 0
CEO: 211,388
CFO: 105,694
Value for single figure reporting(a)
CEO: £0
CFO: £0
CEO: £502,682
CFO: £251,341
a) Figures exclude dividend payments and are calculated using share price of £2.262 (three month average from 1 January 2014 – 31 March 2014).
Total pension entitlements
No Directors participate in the QinetiQ Pension Scheme.
Scheme interests awarded during the financial year ended 31 March 2014
The auditors are required to report on the information in this table. The following awards were made to Executive Directors.
Plan name
CEO PSP 2013
Performance
measure
EPS
Award as
percentage of
salary
71.2(a)
Grant date
28 Jun 13
Face value of
award
£425,412
Share price at
date of grant
£1.804
No. of shares
granted
235,816
TSR
EPS
EPS
TSR
EPS
DAB match
2013 (c)
CFO PSP 2013
DAB match
2013 (c)
28 Jun 13
71.2(a)
£425,412
£1.804
235,815
28 Jun 13
74.6(b)
£448,050
£1.813
247,129
28 Jun 13
71.2(a)
£270,600
£1.804
150,000
28 Jun 13
71.2(a)
£270,600
£1.804
150,000
28 Jun 13
74.6(b)
£285,000
£1.813
157,196
Performance
period
from – to
1 Apr 13 to
31 Mar 2016
1 Apr 13 to
31 Mar 2016
1 Apr 13 to
31 Mar 2016
1 Apr 13 to
31 Mar 2016
1 Apr 13 to
31 Mar 2016
1 Apr 13 to
31 Mar 2016
Percentage of
award vesting
at threshold
25
30
25
25
30
25
a) The Committee signed off an award equivalent to 150% of salary for the PSP (75% for each performance measure). Between date of sign-off and grant date the share price
decreased resulting in a revised face value equivalent to 142.4% of salary (71.2% for each performance measure).
b) Figure represents award following deduction of stamp duty payable on the deferred shares (equivalent to 0.4% of award).
c) DAB match 2013 is 50% of bonus earned in respect of year ended 31 March 2013.
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Strategic reportDirectors’ report: remunerationFinancial statements Additional information Directors’ Remuneration report continued
Payments to past Directors
The auditors are required to report on this information. No payments were made to past directors.
Payments for loss of office
The auditors are required to report on this information. No payments were made for loss of office.
Single figure remuneration for each Non-executive Director
The auditors are required to report on the information in this table. Non-executive Director remuneration is shown as a single figure to
provide an annual comparison between the actual remuneration awarded during the performance year ended 31 March 2014 and the
preceding year.
Non-
executive
Director
Mark
Elliott
Colin
Balmer#
Noreen
Doyle
Admiral
Sir James
Burnell-
Nugent
Paul
Murray
Michael
Harper
Salary/Fees
Taxable benefits
Committee Chair fees
US attendance fee
Single figure
2014
2013
£228,750 £225,000
2014
2013
£75,000 (a) £75,000 (a)
2014
–
2013
–
2014
–
2013
–
2014
£303,750
2013
£300,000
£35,833
£42,000
£43,000
£42,000
£43,000
£42,000
£43,000
£42,000
£43,000
£42,000
–
–
–
–
–
–
–
–
–
–
£7,500
£8,333
£2,500
£5,000
£45,833
£55,333
£9,000
£8,333
£5,000
£5,000
£57,000
£55,333
£1,500
–
£5,000
£5,000
£49,500
£47,000
£9,000
£8,333
£5,000
£5,000
£57,000
£55,333
£10,000
£10,000
£5,000
£5,000
£58,000
£57,000
# Colin Balmer retired 31 January 2014.
a) Accommodation allowance of £75,000 as Mark Elliott is a US resident.
Statement of Directors’ shareholding and share interests
The auditors are required to report on the information in this table. Below sets out the Directors’ shareholdings as at 31 March 2014.
As detailed on page 77, the Company requires Executive Directors to hold shares equivalent to 100% of base salary.
The CEO has a current holding equivalent to 611% of base salary using a share price of £2.262 (three month average to 31 March 2014).
The CFO has a current holding equivalent to 217% of base salary using a share price of £2.262 (three month average to 31 March 2014).
Both Executive Directors have therefore met the minimum shareholding requirement.
Leo Quinn
David Mellors
Mark Elliott
Noreen Doyle
Admiral Sir James
Burnell-Nugent
Paul Murray
Michael Harper
Susan Searle
Shares beneficially owned(a)
958,403
31,268
125,000
24,662
11,419
Shares subject to
performance conditions
3,576,099
1,921,449
–
–
–
Shares not subject to
performance conditions
703,502
344,748
–
–
–
56,077
20,000
5,000
–
–
–
–
–
–
Total shares held
at 22 May 2014
5,238,004
2,297,465
125,000
24,662
11,419
56,077
20,000
5,000
a) Shares beneficially owned comprise of awards exercised under the VSP 2010 and PSP 2009, Shares held under the Share Incentive Plan (Including matched shares) and
shares owned by the Executive Director and any connected persons.
b) Shares subject to performance conditions comprise of awards made under the DAB (matching) for 2013, 2012 and 2011, PSP for 2013 and 2012, VSP for 2011 and 2010.
c) Shares not subject to performance conditions comprise of deferred shares under the DAB plan for 2013, 2012 and 2011.
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QinetiQ Group plc Annual Report and Accounts 2014
Total scheme interests summary
The auditors are required to report on the information in this table. Total scheme interests, including those awarded during the financial year
ending 31 March 2014, are as follows.
Leo
Quinn
Plan name
PSP Mirror 2009(b)
Matching 2009(b)
VSP 2010
VSP 2011
DAB Match 2011
DAB Match 2012
PSP 2012
PSP 2013
DAB Match 2013
Number at
1 April
Date of
2013
grant
420,900
16 Dec 09
16 Dec 09
725,689
29 Jul 10 1,812,000
26 May 11 1,531,800
226,777
229,596
560,064
–
–
5,506,826
01 Jul 11
29 Jun 12
09 Aug 12
28 Jun 13
28 Jun 13
David
Mellors
Plan name
VSP 2010
VSP 2011
DAB Match 2011
DAB Match 2012
PSP 2012
PSP 2013
DAB Match 2013
Date of grant
29 Jul 10
26 May 11
01 Jul 11
29 Jun 12
09 Aug 12
28 Jun 13
28 Jun 13
Number at
1 April
2013
906,000
765,900
70,379
117,173
356,250
–
–
2,215,702
Granted
in year
(maximum
potential of
awards)
–
–
–
–
–
–
–
471,631
247,129
718,760
Granted
in year
(maximum
potential of
awards)
–
–
–
–
–
300,000
157,196
457,196
Exercised/
Lapsed in
vested in
year
year
210,450
210,450
362,844
362,845
309,102 1,193,796
–
–
–
–
–
–
Number at
31 March
2014
–
–
309,102
1,531,800
226,777
229,596
560,064
471,631
247,129
882,396 1,767,091 3,576,099
–
–
–
–
–
–
Exercised/
vested in
year
154,551
–
–
–
–
–
–
154,551
Lapsed in
year
596,898
–
–
–
–
–
–
Number at
31 March
2014
154,551
765,900
70,379
117,173
356,250
300,000
157,196
596,898 1,921,449
Market
price
on date
of grant
165.0(a)
165.0(a)
124.9
112.3
129.1
157.1
166.0
180.4
180.4
Market
price
on date
of grant
124.9
112.3
129.1
157.1
166.0
180.4
180.4
Earliest vest
date
01 Jun 13
01 Jun 13
29 Jul 13
26 May 14
01 Jul 14
29 Jun 15
09 Aug 15
28 Jun 16
28 Jun 16
Latest vest
date
01 Jun 13
01 Jun 13
29 Jul 13
26 May 14
01 Jul 14
29 Jun 15
09 Aug 15
28 Jun 16
28 Jun 16
Earliest vest
date
29 Jul 13
26 May 14
01 Jul 14
29 Jun 15
09 Aug 15
28 Jun 16
28 Jun 16
Latest vest
date
29 Jul 13
26 May 14
01 Jul 14
29 Jun 15
09 Aug 15
28 Jun 16
28 Jun 16
a) Shares awarded to CEO in 2009 were based on an average market price of 138.0 representing the average price taken 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 exercise price was 189.25p.
The awards in the table above are subject to the performance conditions described on pages 76-77. The price of a QinetiQ share at 31 March 2014 was 225.9p. The highest and
lowest prices of a QinetiQ share during the year ended 31 March 2014 were 236.7p and 179.5p.
There have been no changes to the interests shown above between 31 March 2014 and 22 May 2014.
The exercise price for the VSP 2010 award was 186.15p.
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Strategic reportDirectors’ report: remunerationFinancial statements Additional information Directors’ Remuneration report continued
Performance review
The graph shows the Company’s TSR over the period from 31 March 2009 to 31 March 2014 and 31 March 2011 to 31 March 2014 compared
with the FTSE 250 (excluding investment trusts) over the same period based on spot values. The Committee has chosen to demonstrate the
Company’s performance against this index as it is an appropriate sector comparison within the index in which the Company is listed. This
comparator group is also used to measure TSR performance in the PSP.
350
300
250
200
150
100
50
31 Mar 09
31 Mar 10
31 Mar 11
31 Mar 12
31 Mar 13
31 Mar 14
250
200
150
100
50
0
31 March 11
30 March 12
28 March 13
31 March 14
QinetiQ
FTSE 250 (excluding investment trusts)
QinetiQ
FTSE 250 (excluding investment trusts)
Incentive plans
Performance table
The table below shows the CEO remuneration over the same performance period (31 March 2009 to 31 March 2014):
Year
2014
2013
2012
2011
2010 (a)
2010 (b)
Salary/Fees
£610,844
£593,050
£580,000
£580,000
£217,872
£266,667
Single figure
£2,177,742
£3,992,001
£1,495,284
£1,327,156
£886,564
£1,246,320
Annual Bonus
(% of maximum)
76.97
100.00
100.00
100.00
0.00
0.00
Long Term
Incentives (% of
maximum vesting)
15.43
40.27
0.00
0.00
0.00
38.70
a) Leo Quinn joined the Company on 16 November 2009. He was awarded £600,000 in lieu of compensation for monies earned from a third party.
b) Graham Love left the Company on 30 November 2009. His single figure comprises of earnings up to and including his leaving date and incorporates compensation for loss
of office and accelerated share vests.
Percentage change in CEO remuneration
The following table compares change in CEO remuneration with an employee comparator group (averaged per capita):
Base salary
Taxable benefits
Annual Bonus
2013
£593,050
£52,106
£896,100
2014
£610,844
£59,524
£710,393
% change
3.0%
14.2%
-20.7%
2013
£34,906
£707
£921
2014
£36,434
£1,031
£721
% change
4.4%
45.8%
-21.7%
a) The comparison group (4,000 employees) represents the UK principal businesses in service between 1 April 2012 and 31 March 2014.
Comparison group (a)
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QinetiQ Group plc Annual Report and Accounts 2014
Relative importance of spend on pay
The graph below shows actual spend on all employee remuneration,
shareholder dividends and buybacks and any other significant use
of profit and cash within the previous two financial years:
600
500
400
300
200
100
0
581.3
533.4
29.9
24.7
Share-based profit
distribution1
(£m)
Total employee
remuneration
(£m)
2014
2013
Chief Executive Officer
Chief Financial Officer
Non-executive Chairman
Accommodation allowance for
Group Chairman
Basic fee for UK Non-executive Director
Additional fee for chairing a Committee
Additional fee to Deputy Chairman/Senior
Independent Non-executive Director
Additional fee for attendance at Board meeting
held in US by UK resident Non-executive Director
Salary/Fees
effective as at
1 April 2014
£615,325
£391,400
£236,250
£75,000
£43,000
£9,000
£10,000
£2,500
Other significant profit
distribution
(£m)
Incentives for Executives
Below shows the measures and relative weighting for the 2015 Bonus
Banking Plan:
1 Includes final 2014 dividend due to be paid September 2014.
Implementation of Policy for the year ending 31 March 2015
Salary/Fees
Executive Director salaries and Non-executive Director fees were
last reviewed on 1 July 2013. The Chairman’s fees were increased
in December 2013. Salaries and fees will be reviewed in line with
policy with the exception of the Chairman where no review is
planned. In March 2014, the Committee changed the Executive
Directors’ salary review date to 1 September in line with the
rest of the employee population.
Executive Directors are permitted to accept one external Non-
executive Director position with the Board’s approval. Any fees
received in respect of these appointments may be retained by the
Executive Director. The CEO was appointed a Non-executive Director
for Betfair Group plc on 5 March 2014 and subsequently appointed
Chairman of the Remuneration Committee on 31 March 2014.
Non-executive Director fees, as reported in the Betfair Group plc
Annual Report dated 30 April 2013, were £50,000 per annum plus
£10,000 per annum for chairing a committee.
Bonus Banking Plan
(target performance
90% base salary, stretch
performance 225% of
base salary)
Performance
measure
Group underlying
operating profit
Group underlying
operating
cash flow1
Group underlying
profit after tax
Qualitative
measures based
on Company KPIs
Relative weighting
(%)
30
30
20
20
1 Adjusted to exclude LTPA and MSCA capital expenditure.
Details of specific performance targets for the Bonus Banking Plan
have not been provided as they are deemed commercially sensitive.
They will be disclosed retrospectively in next year’s Annual Report
on Remuneration.
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Directors’ Remuneration report continued
The full terms of reference of the Committee can be found on the
QinetiQ website (www.QinetiQ.com).
Up to and including 30 September 2013 the Committee received
advice from Towers Watson, an independent firm of remuneration
consultants, appointed by the Committee after consultation with the
Board. Towers Watson 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. Total fees
paid during this period were £26,232.
On 1 October 2013, following a tender exercise and consultation with
the Board, the Committee appointed PwC, an independent firm of
remuneration consultants, to provide advice on market practice,
corporate governance and institutional stakeholder views. Total fees
paid during the period were £143,000 which included advice relating
to the Bonus Banking Plan and advice relating to the new legislation
on Directors’ remuneration.
PwC provided the following additional services during the year:
• consultancy and advice to Group Tax, including tax support for the
strategic review of the US Services division; and
• consultancy and advice to Group Reward for the review of global
mobility services and advice in relation to Group pensions.
The Committee is satisfied the scale and nature of this work does not
impact on the objectivity and independence of the advice it receives
from PwC.
The Group Chief Executive, Group HR Director and Group Reward
Director also provided information and advice to the Committee.
Statement of voting
Date of
vote
25 July
2013
Remuneration
Report for
previous
financial year
Remuneration
Policy for year
ahead (a)
For
% Abstained
451,287,128 89.78 51,390,043 10.22 7,421,072
Against
%
Not voted on in 2013
a) To be voted for first time at 2014 AGM.
The Remuneration Report detailed on pages 69 to 93 was approved
by the Board on 22 May 2014 and signed on its behalf by:
Noreen Doyle
Chair of the Remuneration Committee
May 2014
In 2015 PSP awards to Executive Directors are equal to 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 (excl. investment trusts) –
50% of award
Award vesting
100%
30%
Median
Upper quartile
Percentile performance
EPS performance – 50% of award
% award vesting
100%
25%
3%
10%
CAGR EPS%
Consideration by the Directors of matters relating
to Directors’ remuneration
Members of the Committee are appointed by the Board. The
Committee comprises at least three members (not counting 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 Human Resources Director and external advisors 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.
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QinetiQ Group plc Annual Report and Accounts 2014
Directors’ report
Statutory information contained elsewhere
in the Annual Report
Information required to be part of this Directors’ report can be found
elsewhere in the Annual Report as indicated in the table below and is
incorporated into this report by reference:
Information
Greenhouse gas emissions
Employees
Results and dividends
Post balance sheet events
Likely future developments in the business of
the Company or its subsidiaries
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
Corporate Governance Statement
Directors’ details
Location in
Annual Report
Page 41
Page 37
Page 2
Page 144
Pages 2 to 35
Note 24 on
page 126
Pages 48 to 68
Pages 54 to 55
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 £315.7m
(2013: £335.6m) of total R&D-related expenditure, of which £288.9m
(2013: £311.0m) was customer-funded work and £26.8m (2013:
£24.6m) was internally funded. Additionally, £2.1m (2013: £0.3m)
of late-stage development costs was capitalised and £0.3m (2013:
£0.9m) of capitalised development costs was amortised in the year.
Political 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.
Share capital
As at 31 March 2014, 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 26 on page 135.
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 26 on page 135.
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.
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Strategic reportDirectors’ reportFinancial statements Additional information Directors’ report continued
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 2014
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,
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 2014 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.
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.
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’ 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 (the
Scheme), benefit from an indemnity contained in the rules of the
Scheme. The indemnity would be provided out of the Scheme 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.
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QinetiQ Group plc Annual Report and Accounts 2014
Restrictions on the transfer of shares
As outlined in note 26 on page 135, 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 the rights attaching to the Special Share, the Company
has not adopted any special rules relating to the appointment and
replacement of Directors or 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 Tuesday, 22 July 2014 at
11.00am, at Pennyhill Park Hotel, London Road, Bagshot, Surrey,
GU19 5EU. Details of the business to be proposed and voted on
at the meeting are contained in the Notice of AGM, which is sent
to all shareholders and is also published on the Company’s website,
www.QinetiQ.com in the ‘Investors’ section.
Auditor
KPMG LLP has expressed its willingness to continue in office as
auditor and a resolution to re-appoint them will be proposed
at the AGM.
Major shareholders
At 31 March 2014, the Group had been notified of the following
shareholdings under Chapter 5 of the Disclosure Rules
and Transparency Rules:
Shareholder
Ruane, Cunniff & Goldfarb, Inc.
Artisan Partners
Schroders
Investec
Norges Bank
Number of
ordinary shares
64,117,000
36,320,010
35,429,785
33,160,928
26,310,597
% of issued
share capital
9.71
5.50
5.36
5.02
3.98
At 20 May 2014, being the latest practable date prior to the issue of
this report, the Company had recieved a notification from Artisan
Partners that their shareholding had fallen below 5% and that
therefore they ceased to have a notifiable interest in the Company’s
shares. 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 AGM held in July 2013, 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).
At the general meeting of the Company held on 13 May 2014,
shareholder approval was given for the Directors to purchase
ordinary shares up to 14.99% of the issued ordinary share capital.
The Company intends to use this authority to effect a £150m return
of capital to shareholders by way of an on-market share buyback,
subject to prevailing equity market conditions.
Equivalent resolutions in respect of the allotment of relevant
securities and the disapplication of pre-exemption rights will
be laid before the 2014 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 26 on page 135. As at
31 March 2014, the Trust held 7,811,861 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.
95
QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statements Additional information Directors’ report continued
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).
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:
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:
• the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company, and the undertakings included in the consolidation
taken as a whole; and
• select suitable accounting policies and then apply them consistently;
• the Directors’ report includes a fair review of the development
• make judgments 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;
• 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 Strategic report, 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.
and performance of the business, and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
In addition, all Directors consider that the Annual Report, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s
performance, business model and strategy. In this context, the
coordination and review of the Group-wide input into the Annual
Report is a vital part of the control process upon which the Directors
rely and is an exercise which spans a period wider than the timetable
for compiling the Annual Report itself. Critically these processes
include the controls the business operates throughout the year to
identify key financial and operational issues. Further details can be
found in the report of the Audit Committee on pages 64 to 65 of
the Corporate Governance Statement.
By order of the Board
Jon Messent
Company Secretary
Cody Technology Park
Ively Road
Farnborough
Hampshire GU14 0LX
22 May 2014
96
QinetiQ Group plc Annual Report and Accounts 2014
Independent auditor’s report to the members
Independent auditor’s report to the members
of QinetiQ Group plc only
of QinetiQ Group plc only
Opinions and conclusions arising from our audit
1 Our opinion on the financial statements is unmodified
We have audited the financial statements of QinetiQ Group plc for the year ended 31 March 2014 which comprise the Consolidated
Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity, the
Consolidated Balance Sheet, the Consolidated Cash Flow statement, the parent company Balance Sheet and the related notes.
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 2014
and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU);
the parent company financial statements have been properly prepared in accordance with UK Accounting Standards; 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.
2 Our assessment of risks of material misstatement
In arriving at our audit opinion above on the Group financial statements, the risks of material misstatement that had the greatest effect
on our Group audit were as follows:
• Carrying value of goodwill - £ 141.3 million
Refer to page 64 (Audit Committee report), page 110 (accounting policy note) and page 117 (financial disclosures)
The risk: The carrying value of goodwill is assessed for impairment at least annually and whenever there is an indication that the asset may
be impaired. In the period an impairment has been recognised to the goodwill associated with:
a) the US SSG Cash-Generating Unit, and
b) the US TSG Cash-Generating Unit.
The impairment calculations are based on an estimate of the fair value less costs to sell of the US SSG business and the discounted
projected cash flows of the US TSG business. The fair value less costs to sell of the US SSG business reflects the expected sale proceeds
which include an element of contingent consideration based on its future performance, which therefore requires estimation. There is
also inherent uncertainty involved in forecasting and discounting the future cash flows used for the purposes of the US TSG impairment
calculations due to the lumpy revenue profile of this business which declined in 2014 due to a significant reduction in demand for conflict
related products.
Our response: Our audit procedures included in respect of the US SSG Cash-generating unit included, among others, testing the principles
and mathematical integrity of the Group’s estimated contingent consideration calculation. In respect of the US TSG Cash-generating unit,
our audit procedures included, among others, testing the principles and mathematical integrity of the Group’s discounted cash flow model
and comparing the Group’s assumptions to externally derived data and key inputs such as projected economic growth and discount rates.
We tested the sensitivity of the impairment calculation to changes in the judgments and assumptions used by the directors. We also
assessed whether the Group’s disclosures about the sensitivity of the outcome of the impairment assessment to changes in key
assumptions properly reflected the risks inherent in the valuation of goodwill.
• Recognition of revenues and profits on long-term contracts – £1,069.3 million
Refer to page 64 (Audit Committee report), page 110 (accounting policy note) and page 111 (financial disclosures)
The risk: A significant proportion of the Group’s revenues and profits are derived from long-term contracts. These contracts can include
complex technological and commercial risks and often specify performance milestones to be achieved throughout the contract period. This
results in estimates and assumptions having to be made to forecast the margin on each contract after making appropriate allowances for
these technical and commercial risks related to performance milestones yet to be achieved. The risk of misstatement is that the accounting
for the Group’s significant contracts does not accurately reflect the status and the associated cost to complete of the relevant contract.
Our response: Our audit procedures included, amongst others, testing the design and operating effectiveness of controls in place to
manage the commercial, technical and financial aspects of the Group’s long-term contracts, For all significant contracts, determined
on the basis of technical and commercial complexity and profitability of the contract, we also obtained an understanding of the status
of the contract through discussions with contract project teams and Directors at a Group and division level, attendance at project teams’
contract review meetings, and examining externally available evidence, such as customer correspondence. We examined the assumptions
behind estimated costs to complete, challenging the reasonableness of these in light of supporting evidence including past experience of
the contracts and the extent of technical or commercial risk identified. We also assessed whether the Group’s disclosures (see notes 3
and 30) around segmental information and material contingent liabilities properly reflected the evidence obtained.
97
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statementsAdditional information
Independent auditor’s report to the members
Independent auditor’s report to the members
of QinetiQ Group plc only continued
of QinetiQ Group plc only continued
• Provisions and contingent liabilities – £24.1 million
Refer to page 64 (Audit Committee report), page 110 (accounting policy note) and pages 123 and 143 (financial disclosures)
The risk: Provisions are held in respect of restructuring costs, environmental issues and other matters. The financial statements also
disclose contingent liabilities in respect of legal claims which have not been provided for on the basis that they are not considered to
qualify for recognition as provisions. The application of accounting standards to determine whether a provision should be recorded and,
if so, the amount, is inherently subjective as it relates to uncertain future events.
Our response: Our audit procedures included, among others, a critical assessment of the extent to which the Directors’ estimates take into
account a balanced assessment of the latest available information and the accuracy and reliability of the sources of that information. We
corroborated the appropriateness of the assumptions including by reference to third-party confirmations and legal advice, where available,
and considered whether our understanding of the business gained throughout the audit process corroborated the provisions recorded,
or indicated that further challenge was warranted. We considered the adequacy of the Group’s disclosures in respect of provisions and
contingent liabilities. We also assessed whether the Group’s disclosures about provisions and the treatment of movements on provisions
in the income statement for the year were appropriate.
• Tax liabilities – current tax payable £4.6 million, deferred tax liability £15.0 million, deferred tax asset £18.1 million
Refer to page 64 (Audit Committee report), page 110 (accounting policy note) and pages 115 and 121 (financial disclosures)
The risk: The Group is subject to income taxes in the UK, USA and a number of other overseas jurisdictions. The level of current tax and
deferred tax recognised requires judgments as to the likely outcome of decisions to be made by the tax authorities, including those related
to specific tax allowances such as the UK Research and Development tax credit. There is a risk that the judgments on which the provisions
are based do not take into account or do not properly reflect the latest available, reliable information or an appropriate application of
relevant tax legislation, and are either under or overstated as a result.
Our response: Our audit procedures included, among others, challenging the appropriateness of the Directors’ assumptions and estimates
in relation to tax assets and liabilities, by critically assessing the range of possible amounts that may be assessed under tax laws, likely
settlements based on the latest correspondence with the relevant tax authorities and the complexity of the relevant tax legislation. We
involved our tax specialist in analysing and challenging the assumptions used to determine tax provisions based on our knowledge and
experience of the application of the legislation by the relevant authorities and courts. We also assessed whether the Group’s tax
disclosures (see note 16) are appropriate and in accordance with relevant accounting standards.
• The effect of the proposed disposal of the US Services Solutions Group (SSG) division
Refer to page 64 (Audit Committee report), page 110 (accounting policy note) and page 117 and 144 (financial disclosures)
The risk: The Group has not classified the US SSG business as held for sale and consequently has not classified it as a discontinued
operation as at 31 March 2014. The classification as held for sale involves judgment as it requires consideration of whether specific
criteria set out in accounting standards are present at the year end, in particular, whether the transaction was highly probable at the
balance sheet date with reference to the facts and circumstances at the time.
Our response: Our audit procedures in this area included, among others: assessing the available documentation relating to the proposed
disposal and making a critical assessment as to the appropriateness of not classifying the US SSG business as held for sale applying the facts
and circumstances present at the year end to the criteria set out in accounting standards and assessing the carrying value of the US SSG
business based on a fair value less cost to sales equivalent to the likely sale price. We also considered the adequacy of the disclosures in
the financial statements.
• Consolidation of US subsidiaries
Refer to page 63 (Audit Committee report) and page 110 (accounting policy note)
The risk: As detailed on page 61 concerning ‘Management and control of US subsidiaries’, the Group’s holding of its QNA assets is regulated
by a Proxy agreement whose purpose is to insulate QNA from foreign ownership control or influence, the effects of which have to be
considered when assessing whether it should be consolidated in accordance with the requirements of the relevant accounting standard
(IAS 27). Judgment is required in assessing whether the Proxy agreement restricts the Group’s ability to control QNA’s operating and
financial policies to an extent that it would be inappropriate to consolidate it and, if so, what the alternative accounting treatment
should be.
Our response: Our audit procedures included, among others, challenging the appropriateness of the directors’ judgment, by critically
assessing the available evidence as to the operation of the Proxy agreement in the context of the relevant accounting standard. We
reviewed the relevant documentation including the Proxy agreement to assessed the respective rights of the QinetiQ and the proxy board
over QNA’s financial and operating policies. We also assessed whether the Group’s disclosures are appropriate and in accordance with
relevant accounting standards.
98
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
3 Our application of materiality and an overview of the scope of our audit
The materiality for the Group financial statements as a whole was set at £5.4 million. This has been determined with reference to
a benchmark of Group underlying profit before taxation (of which it represents 4.5%), which we consider to be one of the principal
considerations for members of the Company in assessing the financial performance of the Group.
We agreed with the Audit Committee to report to it all corrected and uncorrected misstatements we identified through our audit with
a value in excess of £0.3 million, in addition to other audit misstatements below that threshold that we believe warranted reporting on
qualitative grounds.
Audits for group reporting purposes were performed by component auditors at the key reporting components in the USA and by the
group audit team in the UK. These group procedures covered 93% of total group revenue; 102% of group underlying profit before tax,
as reporting units with a total net loss before tax of £1.8 million were outside the scope of group reporting activities; 89% of group
specific adjusting items; and 92% of total Group assets. The disclosures in note 2 set out the individual significance of a specific country.
The audits undertaken for group reporting purposes at the key reporting components of the group were all performed to materiality
levels set by, or agreed with, the group audit team. These materiality levels were set individually for each component and ranged
from £3.8 million to £4.5 million.
Detailed audit instructions were sent to the component auditors. These instructions covered the significant audit areas that should
be covered by these audits (which included the relevant risks of material misstatement detailed above) and set out the information
required to be reported back to the Group audit team. The Group audit team visited the US. Telephone meetings were also held
with the auditors at these locations and other locations that were not physically visited.
4 Our 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 Strategic Report and Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
5 We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified
other information in the Annual Report that contains a material inconsistency with either that knowledge or the financial statements,
a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired during our audit and the Directors’ statement that
they consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group’s performance, business model and strategy; or
•
the Audit Committee Report does not appropriately address matters communicated by us to the Audit Committee.
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.
99
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statementsAdditional information
Independent auditor’s report to the members
Independent auditor’s report to the members
of QinetiQ Group plc only continued
of QinetiQ Group plc only continued
Under the Listing Rules we are required to review:
•
•
the Directors’ statement, set out on page 59, in relation to going concern; and
the part of the Corporate Governance Statement on pages 48 – 68 relating to the Company’s compliance with the nine provisions of
the 2010 UK Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope of report and responsibilities
As explained more fully in the Directors’ Responsibilities Statement set out on page 96, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of accounts is
provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the Company’s
members as a body and subject to important explanations and disclaimers regarding our responsibilities, published on our website at
www.kpmg.com/uk/auditscopeukco2013a, which are incorporated into this report as if set out in full and should be read to provide
an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions
Anthony Sykes (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London, E14 5GL
22 May 2014
100
100
QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
Consolidated income statement
Consolidated income statement
for the year ended 31 March
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 profit/(loss)
Net (loss)/gain on disposal/impairment
of businesses and investments
Finance income
Finance expense
Profit/(loss) before tax
Taxation (expense)/income
Profit/(loss) for the year attributable to
equity shareholders
Earnings per share
Basic
Diluted
Note
2, 3
Underlying
1,191.4
2014
Specific
adjusting
items*
–
Total
1,191.4
Underlying
1,327.8
2013
Specific
adjusting
items*
–
Total
1,327.8
(1,040.7)
7.0
2
26.8
–
(1,013.9)
7.0
(1,132.9)
5.8
(16.3)
–
(1,149.2)
5.8
157.7
26.8
184.5
200.7
(16.3)
184.4
(24.0)
–
(1.0)
132.7
–
1.9
(15.2)
119.4
(15.4)
1.4
(125.9)
(11.0)
(108.7)
(4.9)
–
(1.7)
(115.3)
(1.4)
(22.6)
(125.9)
(12.0)
24.0
(4.9)
1.9
(16.9)
4.1
(16.8)
(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
104.0
(116.7)
(12.7)
122.9
(256.1)
(133.2)
16.0p
15.8p
(1.9)p
(1.9)p
18.9p
18.7p
(20.5)p
(20.5)p
3, 14
12
3, 13
3
5
6
6
4
7
11
11
*For details of ‘specific adjusting items’ refer to note 4 to the financial statements.
101
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statementsAdditional information
Consolidated statement of comprehensive income
Consolidated statement of comprehensive income
for the year ended 31 March
for the year ended 31 March
all figures in £ million
Loss 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
Increase/(decrease) in fair value of hedging derivatives
Reclassification of hedging derivatives to the income statement
Impairment loss on revalued investments
Fair value gains 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
2014
(12.7)
(5.6)
1.3
(4.3)
(21.2)
0.4
(0.2)
–
0.9
(0.1)
(20.2)
(24.5)
2013
(133.2)
(42.1)
10.1
(32.0)
24.6
(0.1)
–
(4.1)
0.3
–
20.7
(11.3)
Total comprehensive expense for the year
(37.2)
(144.5)
Consolidated statement of changes in equity
for the year ended 31 March
all figures in £ million
At 1 April 2013
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 2014
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
Issued
share
capital
6.6
–
Capital
redemption
reserve
39.9
–
Share
premium
147.6
–
Hedge
reserve
–
–
Translation
reserve
44.3
–
Retained
earnings
200.0
(12.7)
–
–
–
–
–
6.6
6.6
–
–
–
–
–
–
6.6
–
–
–
–
–
39.9
39.9
–
–
–
–
–
–
39.9
–
–
–
–
–
147.6
147.6
–
–
–
–
–
–
147.6
0.1
–
–
–
–
0.1
0.1
–
(0.1)
–
–
–
–
–
(21.2)
–
–
–
–
23.1
19.7
–
24.6
–
–
–
–
44.3
Total
438.4
(12.7)
(24.5)
(0.5)
0.9
3.2
(26.8)
378.0
(3.4)
(0.5)
0.9
3.2
(26.8)
160.7
385.4
(133.2)
599.3
(133.2)
(35.8)
(0.4)
0.7
3.4
(20.1)
200.0
(11.3)
(0.4)
0.7
3.4
(20.1)
438.4
Non-
controlling
interest
0.1
–
–
–
–
–
–
0.1
0.1
–
–
–
–
–
–
0.1
Total
equity
438.5
(12.7)
(24.5)
(0.5)
0.9
3.2
(26.8)
378.1
599.4
(133.2)
(11.3)
(0.4)
0.7
3.4
(20.1)
438.5
102
102
QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
Consolidated balance sheet
Consolidated balance sheet
as at 31 March
as at 31 March
all figures in £ million
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Other financial assets
Investments
Deferred tax
Current assets
Inventories
Other financial assets
Trade and other receivables
Investments
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Current tax
Provisions
Other financial liabilities
Non-current liabilities
Retirement benefit obligation
Deferred tax
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
2014
2013
12
13
14
22
15
16
17
22
19
18
22
20
21
22
28
16
21
22
20
26
141.3
44.2
233.8
1.5
0.5
18.1
439.4
19.8
3.1
250.5
2.1
322.2
597.7
1,037.1
(425.6)
(4.6)
(4.8)
(2.2)
(437.2)
(22.2)
(15.0)
(19.3)
(154.1)
(11.2)
(221.8)
(659.0)
378.1
6.6
39.9
147.6
23.2
160.7
378.0
0.1
378.1
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
The financial statements were approved by the Board of Directors and authorised for issue on 22 May 2014 and were signed
on its behalf by:
Mark Elliott
Chairman
Leo Quinn
Chief Executive Officer
David Mellors
Chief Financial Officer
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Consolidated cash flow statement
Consolidated cash flow statement
for the year ended 31 March
for the year ended 31 March
all figures in £ million
Net cash inflow from operations before restructuring costs
Net cash (outflow)/inflow relating to restructuring
Net cash outflow relating to pension scheme closure costs
Cash inflow from operations
Tax received/(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
Proceeds from sale of investments
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
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 cash resulting from cash flows
Other movements including foreign exchange
Movement in net cash in the year
Net cash/(debt) at beginning of year
Net cash at end of year
Note
25
22
Note
22
22
22
22
22
2014
157.3
(10.3)
(4.0)
143.0
2.1
1.0
(12.3)
133.8
(2.6)
(24.2)
6.0
–
(20.8)
–
–
(0.5)
(26.8)
(2.8)
3.0
(27.1)
85.9
(4.1)
240.4
322.2
2014
85.9
(0.2)
85.7
10.8
96.5
74.0
170.5
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
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Notes to the financial statements
Notes to the financial statements
1. Significant accounting policies
Accounting policies
The following accounting policies have been applied consistently to all periods presented in dealing with items 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 judgment of the Directors, for the reader to obtain a proper understanding of the financial information, specific adjusting items need
to be disclosed separately because of their size and nature.
Specific adjusting items include:
• amortisation of intangibles arising from acquisitions;
• pension curtailment gains/losses;
• pension gain on closure to future accrual and associated Scheme-closure mitigation costs;
• pension net finance expense;
• gains/losses on business divestments and disposal of investments;
•
• gains/losses on disposal of property;
•
•
•
impairment of property;
impairment of goodwill and other intangible assets; and
tax on the above items.
restructuring costs;
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 59 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 page 147. 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.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary undertakings to 31 March 2014.
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.
The Group comprises certain entities that are operated under the management of a Proxy Board. Details of the Proxy Board arrangements
and the powers of the proxy holders and QinetiQ management are set out in the Corporate Governance section of this Annual Report.
IAS 27 is the accounting standard currently applicable in respect of consolidation of entities. This does not specifically deal with proxy
situations. However, having considered the terms of the Proxy agreement, the Directors consider that the Group has control over the
operating and financial policies of such affected entities and, therefore, consolidates these entities in the consolidated accounts.
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.
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Strategic reportDirectors’ reportFinancial statementsAdditional information Notes to the financial statements continued
Notes to the financial statements continued
1. Significant accounting policies continued
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.
Segmental information
Segmental information is presented according to the Group’s internal management reporting 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
R&D 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 R&D 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.
Discontinued operation
A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished
from the rest of the Group and which:
•
•
•
represents a separate major line of business or geographical area of operations;
is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or
is a subsidiary acquired exclusively with a view to re-sale.
Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified
as held for sale. When an operation is classified as a discontinued operation, the comparative statement of profit and loss and other
comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year.
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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.
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.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
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.
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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.
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.
Recent accounting developments
Developments adopted by the Group in 2014 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 2013 and have been adopted with no material impact on the Group’s financial statements. Note that QinetiQ
adopted IAS19 (revised) in the prior year:
IFRS 13 ‘Fair Value Measurement’ – new standard replacing existing guidance on fair value measurement in different IFRSs with a single
definition of fair value.
IAS 1 ‘Presentation of Financial Statements’ – amendments revising the way both other comprehensive income and comparative
information are presented.
IFRS 1 ‘First Time Adoption of IFRS’ – amendments relating to government grants, hyperinflation and fixed dates.
IFRS 7 ‘Financial Instruments’ – amendments relating to asset and liability offsetting.
Annual improvements 2011 – annual improvements cycle including amendments to IAS 16, IAS 32 and IAS 34.
Developments expected in future periods of which the impact is being assessed
FRS 100, 101 and 102: FRS 100, 101 and 102 all fall under the new UK GAAP regime. FRS 100 sets out the application of financial
reporting requirements in the UK and Republic of Ireland and FRS 101, known as ‘IFRS with reduced disclosures’, outlines the reduced
disclosure framework available for use by qualifying entities choosing to follow the principles of IFRS but under the umbrella of UK GAAP.
FRS 102 is applicable in the UK and Republic of Ireland and is known as the ‘new UK GAAP’. FRS 102 follows more closely the principles
of existing UK GAAP with some exceptions. The mandatory effective date for the new framework of reporting is for accounting periods
beginning on or after 1 January 2015. The Group can choose to apply either full IFRS, or a choice of either FRS 101 or FRS 102 to the
Company and to its subsidiary entities. The two latter options both fall under UK GAAP and either may therefore be applied to Group
companies on an entity by entity basis. If full IFRS is selected, this must be applied to all Group companies consistently. The Group is
likely to choose the UK GAAP option and is currently undertaking a full analysis on an individual company basis as to whether FRS 101
or FRS 102 is appropriate.
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 imminently. 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 at the earliest and will therefore be applied for
the first time to the Group accounts in 2018; the IASB has 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: During 2014 the IASB and FASB discussed fundamental aspects of their lease accounting proposals published in 2013, covering both
lessee and lessor accounting, and potential simplifications to the accounting models. Although both accounting bodies remain committed
to on-balance sheet recognition of leases by lessees, the IASB and FASB could not agree on key aspects of the proposals.
IFRS 10 ‘Consolidated Financial Statements’: Refer to the ‘Critical accounting estimates’ section on page 110.
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 11 ‘Joint Arrangements’; IFRS 12 ‘Disclosure of Interests in Other Entities’; IFRS 14 ‘Regulatory Deferral Accounts’;
IAS 27 ‘Separate Financial Statements’; IAS 28 ‘Investments in Associates’; and
•
•
• Amendments to new standards IFRS 10, 11, 12 and 27; Amendments to IAS 36 and 39.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
1. Significant accounting policies continued
Critical accounting estimates and judgments 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
judgment required in their application, their complexity and their potential impact on the results and financial position reported for
the Group. The level of management judgment 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.
Assets/businesses held for sale
Post year end, on 22 April 2014, the Group entered into an agreement, subject to shareholder approval and normal closing conditions,
to sell the US Services business. Whether or not to classify this business as held for sale as at 31 March 2014 is a matter of judgment and
has a significant impact on the presentation of the financial statements. The Directors are of the opinion that completion of the disposal
transaction was not ‘highly probable’ as at 31 March 2014 and the criteria of IFRS 5 ‘Non-current Assets Held for Sale and Discontinued
Activities’ had not been met. Accordingly, the US Services business has not been reported as an asset held for sale. Additional financial
information in respect of this business is disclosed in note 33 ‘Post balance sheet events’.
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 61, the Group and the US Department of Defense (DoD) have entered into a Proxy agreement that regulates the
ownership, management and operation of certain Group subsidiaries. Having considered the terms of the Proxy agreement, the Directors
consider that the Group has control over the operating and financial policies of such entities and, therefore, consolidates the subsidiaries
in the consolidated accounts. The key principle of the new standard IFRS10, effective in future periods, is that control exists, and
consolidation is required, only if the investor (i) possesses power over the investee, (ii) has exposure to variable returns from its
involvement with the investee and (iii) has the ability to use its power over the investee to affect its returns. The impact of this new
standard on future reporting periods is being assessed.
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.
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 judgment, 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 28.
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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
Sales of goods
Services
Royalties and licences
Revenue
Share of joint ventures’ and associates’ profit after tax
Other income
Total other income
2014
115.7
1,069.3
6.4
1,191.4
0.1
6.9
7.0
2013
201.7
1,118.7
7.4
1,327.8
0.1
5.7
5.8
Revenue and profit after tax of joint ventures and associates was £6.5m and £0.3m respectively (2013: £17.0m and £0.3m 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
United Kingdom
US
Other
Total
Revenue by major customer type
For the year ended 31 March
all figures in £ million
UK Government
US Government
Other
Total
2014
578.8
503.9
108.7
1,191.4
2014
503.9
472.1
215.4
1,191.4
2013
560.4
672.7
94.7
1,327.8
2013
480.3
620.8
226.7
1,327.8
Revenue from the UK Government was generated by the EMEA Services and Global Products operating segments. Revenue from the
US Government was generated by the US Services and Global Products operating segments.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
3. Segmental analysis
Operating segments
For the year ended 31 March
all figures in £ million
EMEA Services
US Services
Global Products
Total operating segments
Note
2014
2013
Revenue
607.0
408.8
175.6
1,191.4
Operating
profit
86.7
19.0
27.0
132.7
Revenue^
594.6
463.8
269.4
1,327.8
Operating
profit^
84.8
23.7
60.2
168.7
Operating profit before specific adjusting items1 –
underlying operating profit
Specific adjusting items before amortisation, depreciation
and impairment
Property impairment reversal/(charge)
Impairment of goodwill
Amortisation of intangible assets arising from acquisitions
Operating profit/(loss)
(Loss)/gain on business divestments
and disposal and impairment of investments
Net finance expense
Profit/(loss) before tax
Taxation (expense)/income
Loss for the year
4
12
5
6
7
132.7
26.8
1.4
(125.9)
(11.0)
24.0
(4.9)
(15.0)
4.1
(16.8)
(12.7)
168.7
(16.3)
(4.0)
(255.8)
(14.0)
(121.4)
2.3
(17.9)
(137.0)
3.8
(133.2)
1 The measure of profit presented to the chief operating decision maker is underlying operating profit (as defined in glossary on page 150).
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 – excluding specific adjusting items
For the year ended 31 March 2014
all figures in £ million
Depreciation of property, plant and equipment
Amortisation of purchased or internally developed
intangible assets
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
EMEA Services
19.7
US Services
2.2
0.6
20.3
0.3
2.5
EMEA
Services^
22.0
3.6
25.6
US Services^
2.2
0.2
2.4
Global
Products
2.1
0.1
2.2
Global
Products
3.8
0.2
4.0
Total
24.0
1.0
25.0
Total
28.0
4.0
32.0
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 2014
Year ended 31 March 2013
UK
258.4
Rest of World
162.9
UK
262.6
Rest of World
331.7
Total
421.3
Total
594.3
^ Restated to reflect the reclassification of products businesses from EMEA Services to Global Products and the reclassification of Cyveillance® from
US Services to EMEA Services.
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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 and its associates:
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
Other assurance services
Corporate finance services – due diligence support
All other non-audit services
Total auditor’s remuneration
2014
2013
0.6
0.5
0.1
0.2
1.3
–
2.7
0.6
0.2
0.1
–
–
–
0.9
* Included within this amount is £0.3 million in respect of the audit of prior year US Services division financial statements.
The fees payable to auditors were significantly greater in 2014 than 2013 due to the fact that KPMG were engaged to perform work in
connection with the strategic review and preparation for the proposed sale of the US Services division. This included audit of prior year
US Services division financial statements and acting as reporting accountant for the Class 1 circular.
all figures in £ million
Depreciation of property, plant and equipment:
Owned assets: before impairment
Owned assets: Property impairment reversal/(charge)
Foreign exchange (loss)/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
Restructuring costs in respect of 2013 US restructuring
Reduction in pension liabilities on closure to future accrual
Pension scheme closure mitigation costs
Specific adjusting items before amortisation, depreciation and impairment
Impairment of goodwill
Property impairment reversal/(charge)
Intangible impairment and acquisition amortisation
Specific adjusting items operating loss
Gain on business divestments and disposal of investments
US Services transaction costs
Unrealised impairment of investments
(Loss)/gain on business divestments and disposal/impairment of investments
Defined benefit pension scheme net finance expense
Total specific adjusting items loss before tax
Note
12
14
13
5
5
5
5
2014
2013
(24.0)
1.4
(1.1)
(288.9)
(26.8)
2014
(0.3)
31.1
(4.0)
26.8
(125.9)
1.4
(11.0)
(108.7)
1.1
(6.0)
–
(4.9)
(1.7)
(115.3)
(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)
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
5. Net gain/loss on disposal/impairment of businesses and investments
For the year ended 31 March
all figures in £ million
Gain on business divestments
US Services transaction costs
Gain on disposal of investments
Unrealised impairment of investments
Net (loss)/gain on disposal/impairment of businesses and investments
2014
1.1
(6.0)
–
–
(4.9)
2013
–
–
2.9
(0.6)
2.3
The gain on business divestments relates to deferred consideration received in respect of the disposal of the Calibration business in 2009.
The US Services transaction costs relate to costs incurred in the current year in relation to the planned disposal of the US Services business.
The disposal itself is a non-adjusting post balance sheet event (see note 33).
The prior year gain on disposal of investments relates to the disposal of QinetiQ’s investment in InfoSciTex Inc.
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 debt
Finance lease expense
Unwinding of discount on financial liabilities
Finance expense before specific adjusting items
Specific adjusting items:
Defined benefit pension scheme net finance expense
Total finance expense
2014
1.4
0.5
1.9
(0.6)
(2.1)
(11.3)
(0.4)
(0.8)
(15.2)
(1.7)
(16.9)
2013
1.0
0.7
1.7
(0.6)
(1.4)
(14.2)
(0.6)
(1.5)
(18.3)
(1.3)
(19.6)
Net finance expense
(15.0)
(17.9)
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7. Taxation
all figures in £ million
Analysis of charge
Current UK tax (income)/expense
Overseas corporation tax
Current year
Adjustment for prior year
Current tax (income)/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/(credit) 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 23%
(2013: 24%)
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*
2014
Specific
adjusting
items*
(4.2)
(6.3)
–
(10.5)
25.0
0.9
–
15.4
(0.9)
(4.3)
–
(5.2)
7.8
–
(1.2)
1.4
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)
Total
(5.1)
(10.6)
–
(15.7)
32.8
0.9
(1.2)
16.8
Total
0.6
1.3
0.4
2.3
(6.4)
(0.3)
0.6
(3.8)
119.4
(115.3)
27.5
(26.5)
4.1
1.0
152.1
(289.1)
(137.0)
36.5
(69.4)
(32.9)
(9.9)
(1.0)
0.9
0.2
(2.3)
15.4
12.9%
29.7
19.8
(12.4)
49.0
36.6
–
–
–
(1.8)
1.4
(1.0)
0.9
0.2
(4.1)
16.8
>100%
(2.2)
0.7
0.1
6.5
29.2
19.2%
–
(0.1)
–
(12.5)
(33.0)
(2.2)
0.6
0.1
(6.0)
(3.8)
2.8%
*Definitions of underlying measures of performance and specific adjusting items can be found in the glossary on page 150.
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 the impact of any
tax legislation changes and the geographic mix of profits. The Finance Act 2013 allows the continued recognition of R&D tax credits as a
super deduction in the tax line until April 2016, when R&D Expenditure Credit treatment becomes mandatory, which could increase the
Group’s effective tax rate over time to a blend of the US and UK corporation tax rates.
Previously, the UK Government announced reductions to the UK corporation tax rate to 21% on 1 April 2014 and to 20% on 1 April 2015
and these were substantively enacted on 2 July 2013. Deferred tax has been calculated at 21% being the tax rate effective for the financial
year to 31 March 2015. The subsequent change to 20% will reduce the Group’s future tax charge accordingly. It has not yet been possible
to quantify the full anticipated effect of the announced rate reduction to 20% in 2015, although this will further reduce the Group’s future
tax charge and reduce the Group’s deferred tax accordingly.
At 31 March 2014 the Group had unused tax losses of £191.4m (2013: £202.7m) potentially available for offset against future profits.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
8. Dividends
An analysis of the dividends paid and proposed in respect of the years ended 31 March 2014 and 2013 is provided below:
Interim 2014
Final 2014 (proposed)
Total for the year ended 31 March 2014
Interim 2013
Final 2013
Total for the year ended 31 March 2013
Pence
per share
1.40
3.20
4.60
1.10
2.70
3.80
Date paid/
payable
Feb 2014
Sept 2014
Feb 2013
Sept 2013
£m
9.2
20.8
30.0
7.1
17.6
24.7
The Directors propose a final dividend of 3.20p (2013: 2.70p) per share. The dividend, which is subject to shareholder approval, will be paid
on 5 September 2014. The ex-dividend date is 6 August 2014 and the record date is 8 August 2014.
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 executive Directors, analysed by business segment, were:
EMEA Services
US Services
Global Products
Total
As at 31 March
2014
Number
5,399
2,704
834
8,937
2013
Number^
5,352
3,219
927
9,498
Monthly average
2014
Number
5,292
3,014
828
9,134
2013
Number^
5,146
3,602
1,024
9,772
^ Restated to reflect the reclassification of products businesses from EMEA Services to Global Products and the reclassification of Cyveillance® from
US Services to EMEA Services.
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 and UK pension closure mitigation costs
US restructuring costs
UK pension scheme closure mitigation costs
Total employee costs
Note
27
2014
450.3
38.3
40.8
4.5
533.9
–
4.0
537.9
2013
496.0
38.8
41.0
5.5
581.3
7.3
–
588.6
On closure of the UK defined benefit pension scheme to future accrual, affected employees were transferred to a defined contribution
pension scheme. Additional one-off employer contribution payments were made by the Company into the new schemes during the year.
10. Directors and other senior management personnel
The Directors and other senior management personnel of the Group during the year to 31 March 2014 comprise the Board of
Directors and the Operations Committee. The remuneration and benefits provided to Directors and the Operations Committee
are summarised below:
all figures in £ million
Short-term employee remuneration including benefits
Post-employment benefits
Share-based payments costs
Termination benefits
Total
2014
6.7
0.2
1.9
0.8
9.6
2013
6.7
0.2
2.3
0.9
10.1
Short-term employee remuneration and benefits include salary, bonus, and benefits. Post-employment benefits relate to pension amounts.
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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 26). 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 (see note 4) and tax thereon.
For the year ended 31 March
Basic EPS
Loss attributable to equity shareholders
Weighted average number of shares
Basic EPS
Diluted EPS
Loss attributable to equity shareholders
Weighted average number of shares
Effect of dilutive securities1
Diluted number of shares
Diluted EPS
Underlying basic EPS
Loss attributable to equity shareholders
Loss after tax in respect of specific adjusting items
Underlying profit after taxation
Weighted average number of shares
Underlying basic EPS
Underlying diluted EPS
Loss attributable to equity shareholders
Loss 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
Million
Pence
£ million
Million
Million
Million
Pence
£ million
£ million
£ million
Million
Pence
£ million
£ million
£ million
Million
Million
Million
Pence
2014
(12.7)
651.7
(1.9)
(12.7)
651.7
–
651.7
(1.9)
(12.7)
116.7
104.0
651.7
16.0
(12.7)
116.7
104.0
651.7
5.1
656.8
15.8
2013
(133.2)
648.7
(20.5)
(133.2)
648.7
–
648.7
(20.5)
(133.2)
256.1
122.9
648.7
18.9
(133.2)
256.1
122.9
648.7
7.1
655.8
18.7
1 The loss attributable to equity shareholders results in the effect of dilutive securities on the weighted average number of shares being nil.
12. Goodwill
all figures in £ million
Cost
At 1 April
Foreign exchange
At 31 March
Impairment
At 1 April
Impairment
Foreign exchange
At 31 March
Net book value at 31 March
2014
2013
593.0
(51.6)
541.4
564.2
28.8
593.0
(302.6)
(125.9)
28.4
(400.1)
(44.9)
(255.8)
(1.9)
(302.6)
141.3
290.4
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
12. Goodwill continued
Goodwill as at 31 March 2014 was allocated across various CGUs in the following segments: EMEA Services (three), 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 each CGU for impairment annually, or
more frequently if there are indications that goodwill might be impaired.
Impairment testing is dependent on management’s estimates and judgments, particularly as they relate to the forecasting of future cash
flows, the discount rates selected and expected long-term growth rates. Significant headroom exists in all CGUs with the exception of
US Services and US Global Products, 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 CGUs.
US Services CGU
A strategic review was announced in May 2013 to determine the route to maximise the performance and value of US Services. This
concluded with the decision to dispose of the CGU and a sale was agreed post year end (see note 33). As at 31 March 2014 the Group
intended to realise value from US Services via sale rather than use. An impairment loss has been recognised at year end based on a
comparison of the US Services goodwill with its recoverable amount, being fair value less costs to sell. Fair value has been determined by
taking the initial cash consideration for the disposal of $165m together with a potential earn out of up to $50m in cash. The earn out is
scheduled to be payable no earlier than 1 April 2015 on a sliding scale between zero and $50m based on gross profit generated by the
US Services division between $100m and $132m in the financial year ending 31 March 2015. Management estimates have been used to
determine the value of the likely earn out. The re-measurement to fair value less costs to sell resulted in an impairment loss of £84.0m.
The carrying value of goodwill for this CGU as at 31 March 2014, after impairment, was £41.4m and its net operating assets excluding
goodwill were £55.6m.
The Cyveillance® business, which previously formed part of US Services, was excluded from the strategic review and was separated out
from US Services during 2014. Goodwill of £4.6m was allocated to this new CGU and it has significant headroom as at 31 March 2014.
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 CGU sits within EMEA Services.
Key assumptions for other CGUs
Cash flows
The value-in-use calculations generally use discounted future cash flows based on financial plans approved by the Board covering a two-
year period. Discounted cash flows for the US Global Products CGU were based on a Board-approved three-year plan, reflecting increases
in revenue from new product lines. Cash flows for periods beyond these periods are extrapolated based on the last year of the plans, with
a terminal growth-rate assumption applied.
Terminal growth rates
The specific plans for each of the CGUs have been extrapolated using a terminal growth rate of 2.0% – 3.0% (2013: 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 three EMEA Services CGUs were 11.5%, 15.6% and 18.3% and for the Global
Products CGUs 10.1% and 11.4%.
Sensitivity analysis shows that the value of the terminal year cash flow, the discount rate and the terminal growth rates have a significant
impact on the value of the discounted cash flow.
The performance of Global Products was impacted by the drawdown of overseas US military forces. The value in use of the US Global
Products 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 £41.9m. Sensitivity analysis shows that a 33% decrease in the terminal year cash flow would result
in an increase in the impairment charge of £24.4m. Sensitivity analysis also shows that a decrease or increase of 1% in the discount rate
assumption would result in an impairment of £25.6m or £53.3m respectively. Sensitivity analysis also shows that a decrease or increase
of 1% in the terminal growth rate would result in an impairment of £52.5m or £27.9m. The carrying value of goodwill for this CGU as at
31 March 2014, after impairment, was £60.0m and its net operating assets excluding goodwill were £12.8m.
The UK Global Products CGU and the individual CGUs within EMEA 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 UK Global Products CGU as at 31 March was £5.5m. The carrying values of goodwill for the three EMEA Services
CGUs as at 31 March were £27.5m, £2.3m and £4.6m. The Directors have not identified any other likely changes in other significant
assumptions between 31 March 2014 and the signing of the financial statements that would cause the carrying value of the recognised
goodwill to exceed its recoverable amount.
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13. Intangible assets
Year ended 31 March 2014
all figures in £ million
Cost
At 1 April 2013
Additions – internally developed
Additions – purchased
Disposals
Transfers
Foreign exchange
At 31 March 2014
Amortisation and impairment
At 1 April 2013
Amortisation charge for year
Disposals
Foreign exchange
At 31 March 2014
Net book value at 31 March 2014
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
Acquired intangible assets
Customer
relationships
Intellectual
property
Brand
names
Development
costs
Other
intangible
assets
1.1
44.2
Acquired intangible assets
Intellectual
property
Customer
relationships
Brand
names
Development
costs
Other
intangible
assets
155.2
–
–
–
–
(13.8)
141.4
107.8
7.5
–
(9.8)
105.5
35.9
57.3
–
–
–
–
(3.8)
53.5
51.0
2.4
–
(3.5)
49.9
3.6
10.1
–
–
–
–
(0.9)
9.2
7.8
1.1
–
(0.8)
8.1
1.1
14.8
2.1
–
–
0.1
–
17.0
14.2
0.3
–
–
14.5
2.5
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
Total
273.9
2.1
0.5
(1.0)
0.3
(18.9)
256.9
216.1
12.0
(0.9)
(14.5)
212.7
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
36.5
–
0.5
(1.0)
0.2
(0.4)
35.8
35.3
0.7
(0.9)
(0.4)
34.7
36.6
–
0.3
(1.2)
0.5
0.3
36.5
33.1
3.1
(1.2)
0.3
35.3
1.2
57.8
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Notes to the financial statements continued
Notes to the financial statements continued
14. Property, plant and equipment
Year ended 31 March 2014
all figures in £ million
Cost
At 1 April 2013
Additions
Disposals
Transfers
Foreign exchange
At 31 March 2014
Depreciation
At 1 April 2013
Charge for year
Impairment reversal
Disposals
Foreign exchange
At 31 March 2014
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
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets under
construction
320.0
0.1
(2.7)
1.5
(1.3)
317.6
140.5
9.8
(1.4)
(2.2)
(0.8)
145.9
163.1
1.4
(1.8)
3.5
(1.7)
164.5
130.8
9.8
–
(1.7)
(1.4)
137.5
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
153.6
1.5
(3.1)
10.2
–
0.9
163.1
121.3
11.8
–
(2.9)
–
–
0.6
130.8
Total
554.0
24.2
(15.8)
(0.2)
(5.2)
557.0
312.6
24.0
(1.4)
(8.4)
(3.6)
323.2
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
17.8
21.6
(6.4)
(8.1)
–
24.9
–
–
–
–
–
–
18.4
24.7
(4.9)
(20.5)
–
0.1
17.8
–
–
–
–
–
–
–
–
53.1
1.1
(4.9)
2.9
(2.2)
50.0
41.3
4.4
–
(4.5)
(1.4)
39.8
10.2
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
Net book value at 31 March 2014
171.7
27.0
24.9
233.8
The prior year impairment charge of £4.0m has been reversed by £1.4m in the current year reflecting the fact that new tenancies have
been signed for previously vacant owned properties.
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets under
construction
Net book value at 31 March 2013
179.5
32.3
17.8
241.4
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 29.
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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
2014
2013
Joint venture
and associates
financial results
0.3
4.2
4.5
(3.4)
(0.3)
(3.7)
0.8
–
0.8
Group net
share of joint
ventures and
associates
0.1
2.0
2.1
(1.6)
(0.1)
(1.7)
0.4
0.1
0.5
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
During the year ended 31 March 2014, there were sales to associates of £3.3m (2013: £nil). At the year end there were outstanding
receivables from associates of £0.1m (2013: £nil).
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 2014
Deferred tax asset
all figures in £ million
At 1 April 2013
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 2014
Less: liability available for offset
Net deferred tax asset at 31 March 2014
Deferred tax liability
all figures in £ million
At 1 April 2013
(Released)/created through the income statement
Prior year adjustment
Foreign exchange
Deferred tax impact of change in rates
Gross deferred tax liability at 31 March 2014
Less: asset available for offset
Net deferred tax liability at 31 March 2014
Pension
liability
13.7
(13.0)
1.2
0.1
–
–
(0.7)
1.3
Short-term
timing
differences
29.9
(4.7)
–
1.4
(2.8)
3.8
–
27.6
Hedging
–
–
(0.1)
–
–
–
–
(0.1)
Accelerated
capital
allowances
0.6
(17.7)
(0.3)
0.1
(0.2)
(17.5)
Amortisation
(11.8)
2.6
–
1.0
–
(8.2)
Total
43.6
(17.7)
1.1
1.5
(2.8)
3.8
(0.7)
28.8
(10.7)
18.1
Total
(11.2)
(15.1)
(0.3)
1.1
(0.2)
(25.7)
10.7
(15.0)
At the balance sheet date the Group had unused tax losses of £191.4m (2013: £202.7m) 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.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
16. Deferred tax continued
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
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
13.3
(9.2)
10.1
–
–
–
(0.5)
13.7
Accelerated
capital
allowances
3.1
(2.3)
–
(0.1)
–
–
(0.1)
0.6
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)
2014
11.4
4.8
3.6
19.8
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
–
2013
16.5
4.7
4.3
25.5
2014
2.1
2013
1.4
At 31 March 2014 the Group held a 4.9% shareholding in pSivida Limited (31 March 2013: 4.9%), a company listed on NASDAQ and the
Australian and Frankfurt Stock Exchanges. The investment is held at fair value of £2.1m (2013: £1.4m) using the closing share price at
31 March 2014 of AUS$4.32 per share (31 March 2013: AUS$2.22 per share).
19. Trade and other receivables
As at 31 March
all figures in £ million
Trade receivables
Amounts recoverable under contracts
Other receivables
Prepayments
2014
136.3
90.0
12.5
11.7
250.5
2013
143.4
112.2
15.2
13.4
284.2
In determining the recoverability of trade receivables, the Group considers any changes in the credit quality of the trade receivable from
the date credit was granted 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 2014 the Group carried a provision for doubtful debts of £2.9m (2013: £1.9m).
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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
2014
43.7
3.7
47.4
2014
1.9
1.9
(0.9)
–
2.9
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. 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
21. Provisions
Year ended 31 March 2014
all figures in £ million
At 1 April 2013
Created in year
Released in year
Unwind of discount
Utilised in year
Foreign exchange
At 31 March 2014
Current liability
Non-current liability
At 31 March 2014
2014
42.6
30.1
11.8
341.1
425.6
8.3
2.9
11.2
436.8
Other
6.2
1.9
(1.4)
–
(0.2)
–
6.5
0.2
6.3
6.5
Restructuring
15.3
0.9
–
–
(10.3)
(0.9)
5.0
1.6
3.4
5.0
Property
13.6
1.5
(1.2)
0.4
(1.7)
–
12.6
3.0
9.6
12.6
2013
37.1
3.4
40.5
2013
4.0
0.7
(1.9)
(0.9)
1.9
2013
43.7
25.9
16.9
371.5
458.0
7.0
0.6
7.6
465.6
Total
35.1
4.3
(2.6)
0.4
(12.2)
(0.9)
24.1
4.8
19.3
24.1
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 12 years.
Other provisions relate to environmental and other liabilities, the magnitude and timing of utilisation of which are determined by a variety
of factors.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
22. Net cash/debt
As at 31 March
all figures in £ million
Current financial assets/(liabilities)
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 as defined by the Group
Assets
2014
Liabilities
–
–
0.3
2.8
3.1
–
–
–
–
–
0.1
1.4
1.5
53.7
268.5
322.2
0.5
0.5
(0.1)
(2.6)
(2.2)
(26.6)
(29.2)
(96.9)
–
(152.7)
–
(1.4)
(154.1)
–
–
–
Net
0.5
0.5
0.2
0.2
0.9
(26.6)
(29.2)
(96.9)
–
(152.7)
0.1
–
(152.6)
53.7
268.5
322.2
170.5
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
At 31 March 2014 £2.2m (2013: £2.7m) of cash was held by the Group’s captive insurance subsidiary, including £0.1m (2013: £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 24.
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 cash/(debt) at beginning of year
Net cash at 31 March
2014
85.9
–
–
2.8
(3.0)
85.7
(0.6)
0.4
(0.4)
11.4
96.5
74.0
170.5
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
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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
2014
2013
Present value of minimum
lease payments
2014
2013
3.0
1.5
4.5
(0.3)
4.2
3.0
4.5
7.5
(0.7)
6.8
2.8
1.4
4.2
–
4.2
2.5
4.3
6.8
–
6.8
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
2014
2013
Present value of minimum
lease payments
2014
2013
2.8
1.4
4.2
(0.2)
4.0
2.8
4.2
7.0
(0.6)
6.4
2.6
1.4
4.0
–
4.0
2.6
1.4
4.0
2.4
4.0
6.4
–
6.4
2.4
4.0
6.4
The Group utilises certain buildings under finance leases. Average lease terms are typically between two and ten years (31 March 2013:
between two and ten years).
23. Operating leases
Group as a lessor
The Group receives rental income on certain properties. Primarily these are properties partially occupied by Group companies, with vacant
space sub-let to third-party tenants. 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
2014
8.3
22.0
6.6
36.9
2014
18.9
2014
17.8
44.1
18.2
80.1
2013
7.8
23.8
3.4
35.0
2013
23.1
2013
21.4
58.1
20.5
100.0
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.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
24. 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. There have been no changes in any
risk management policies since the year end.
A) Fair values of financial instruments
The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
Level 1 – measured using quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – measured using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 2 derivatives comprise forward foreign exchange contracts which
have been fair valued using forward exchange rates that are quoted in an active market; and
Level 3 – measured using inputs for the assets or liability that are not based on observable market data (i.e. unobservable inputs).
The following table presents the Group’s assets and liabilities that are measured at fair value at 31 March 2014:
all figures in £ million
Assets
Current other investments
Current derivative financial instruments
Non-current other investments
Non-current derivative financial instruments
Liabilities
Current derivative financial instruments
Total
Note
Level 1
Level 2
Level 3
Total
18
22
22
22
2.1
–
–
–
–
2.1
–
0.3
–
0.1
(0.1)
0.3
–
–
0.1
–
–
0.1
2.1
0.3
0.1
0.1
(0.1)
2.5
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
22
22
22
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. There have been no transfers between levels.
The following table presents the fair value of the Group’s assets and liabilities that have a fair value that is different from the carrying value
at 31 March 2014:
all figures in £ million
Assets
Finance leases
Liabilities
Finance leases
Non-current bank and other borrowings
Total
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QinetiQ Group plc Annual Report and Accounts 2014
Level 1
Level 2
Level 3
–
–
–
–
4.4
(4.2)
(175.5)
(175.3)
–
–
–
–
Total
4.4
(4.2)
(175.5)
(175.3)
The following table presents the fair value of the Group’s assets and liabilities that have a fair value that is different from the carrying value
at 31 March 2013:
all figures in £ million
Assets
Finance leases
Liabilities
Finance leases
Non-current bank and other borrowings
Total
Level 1
Level 2
Level 3
–
–
–
–
7.4
(7.0)
(197.7)
(197.3)
–
–
–
–
Total
7.4
(7.0)
(197.7)
(197.3)
All financial assets and liabilities have a fair value that is identical to book value at 31 March 2014 and 31 March 2013 except where
noted below:
As at 31 March 2014
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
Deferred financing costs
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
1.5
0.1
0.1
2.9
250.5
0.3
2.1
322.2
579.7
–
–
–
–
–
–
–
–
–
–
0.1
–
–
–
0.3
–
–
0.4
1.4
0.1
0.1
2.8
250.5
0.3
2.1
322.2
579.5
(11.2)
(152.7)
(1.4)
(425.6)
(2.6)
0.5
(593.0)
–
–
–
(11.2)
(152.7)
(1.4)
–
(0.1)
–
–
(0.1)
(425.6)
(0.1)
(2.6)
0.5
(593.1)
(11.2)
(175.5)
(1.4)
(425.6)
(0.1)
(2.8)
0.5
(616.1)
22
22
15
22
19
22
18
22
20
22
22
20
22
22
22
–
–
0.1
–
–
–
2.1
–
2.2
–
–
–
–
–
–
–
–
1.4
–
–
2.8
250.5
–
–
322.2
576.9
–
–
–
–
–
–
–
–
Total
2.2
576.9
(593.0)
0.3
(13.6)
(36.4)
127
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
24. Financial risk management continued
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
Deferred financing costs
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
22
15
22
19
22
18
22
20
22
22
22
20
22
22
22
–
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)
–
–
–
–
0.1
–
–
0.1
–
–
–
(0.1)
–
(0.2)
–
–
(0.3)
4.3
0.1
2.5
284.2
0.1
1.4
240.4
533.0
(7.6)
(167.2)
(4.0)
(0.1)
(458.0)
(0.2)
(2.4)
0.6
(638.9)
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)
0.6
(670.0)
Total
1.5
531.4
(638.6)
(0.2)
(105.9)
(136.4)
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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. 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 2014 100% (2013: 100%) of the Group’s
borrowings were at fixed rates with no adjustment for interest rate swaps.
Financial assets/(liabilities)
As at 31 March 2014
all figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other
As at 31 March 2013
all figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other
Fixed or
capped
4.2
–
–
–
–
4.2
Fixed or
capped
6.8
–
–
–
–
6.8
Financial asset
Financial liability
Floating
280.1
30.5
2.3
8.4
0.9
322.2
Non-interest
bearing
0.4
0.1
–
2.1
–
2.6
Fixed or
capped
(4.0)
(152.7)
–
–
–
(156.7)
Floating
–
–
–
–
–
–
Non-interest
bearing
(0.1)
–
–
–
–
(0.1)
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)
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
2014
Weighted
average
interest rate
%
Weighted
average years
to maturity
13.4
12.1
7.1
7.3
1.5
1.5
3.9
3.8
Fixed or
capped
£m
4.2
(4.0)
(152.7)
(156.7)
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)
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 2014.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
24. Financial risk management continued
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 2014 – sterling
31 March 2013 – sterling
US$
(18.1)
0.9
Net foreign currency monetary assets/(liabilities)
Other
0.6
1.9
Euro
(2.2)
(2.5)
AUS$
2.1
1.5
Total
(17.6)
1.8
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 2014 against sterling are net US dollars sold £17.0m (US$28.3m) and net euros sold £8.3m (€10.1m).
Translational currency exposure
The Group has significant investments in overseas operations, particularly in the US. 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 £329.0m (2013: £248.8m). The Group held cash and cash equivalents of £322.2m at 31 March 2014
(2013: £240.4m), 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 £218.5m (2013: £207.8m) was invested in AAA-rated money funds at
the year end and £50m was invested in deposits collateralised by security, where the security was gilts.
E) Liquidity risk
Borrowing facilities
As at 31 March 2014 the Group had a revolving credit facility (RCF) of US$250m and £118m (2013: US$250m and £118m).
The RCF is contracted until 2016 and is un-utilised as shown in the table below:
Committed facilities 31 March 2014
Freely available cash and cash equivalents
Available funds 31 March 2014
Committed facilities 31 March 2013
Freely available cash and cash equivalents
Available funds 31 March 2013
Interest rate:
LIBOR plus
1.20%
Total
£m
267.9
Drawn
£m
–
1.20%
282.8
–
Undrawn
£m
267.9
322.1
590.0
282.8
240.2
523.0
130
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QinetiQ Group plc Annual Report and Accounts 2014
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 2014
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 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
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
Derivative assets/(liabilities) at the end
of the year
Book value
Contractual
cash flows
1 year or less
1–2 years
2–5 years
More than
5 years
(436.8)
(152.7)
0.5
(4.0)
(436.8)
(195.8)
–
(4.2)
(425.6)
(10.6)
–
(2.8)
(11.2)
(37.0)
–
(1.4)
–
(148.2)
–
–
(0.1)
(593.1)
(0.1)
(636.9)
(0.1)
(439.1)
–
(49.6)
–
(148.2)
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)
–
(113.8)
–
–
–
–
–
–
More than
5 years
–
(113.8)
–
–
Asset gains
2014
Liability losses
Net
Asset gains
2013
Liability losses
0.4
0.4
(0.1)
(0.1)
0.3
0.3
0.1
0.1
(0.3)
(0.3)
Asset gains
2014
Liability losses
Net
Asset gains
2013
Liability losses
0.3
0.1
0.4
(0.1)
–
(0.1)
0.2
0.1
0.3
0.1
–
0.1
(0.2)
(0.1)
(0.3)
Net
(0.2)
(0.2)
Net
(0.1)
(0.1)
(0.2)
131
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
24. Financial risk management continued
G) Maturity of financial liabilities
As at 31 March 2014
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 2013
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
425.6
11.2
–
–
436.8
Bank
borrowings
and loan notes
(0.5)
26.6
126.1
–
152.2
Finance leases
and derivative
financial
instruments
2.7
1.4
–
–
4.1
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
Total
427.8
39.2
126.1
–
593.1
Total
460.0
9.9
62.6
106.4
638.9
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 2014 is set
out in the following table. 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 following table, 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 2014, 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 2014, with all other variables remaining
constant. Such analysis is for illustrative purposes only – in practice market rates rarely change in isolation. The figures shown in the
table 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.
132
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QinetiQ Group plc Annual Report and Accounts 2014
As at 31 March 2014
all figures in £ million
Sterling
US dollar
Other
all figures in £ million
Sterling
US dollar
Other
As at 31 March 2013
all figures in £ million
Sterling
US dollar
Other
all figures in £ million
Sterling
US dollar
Other
1% decrease in interest rates
10% weakening in sterling
Equity1
–
–
–
Profit
before tax
(2.8)
(0.3)
(0.1)
Equity
–
(13.6)
1.5
Profit
before tax
–
(1.2)
–
1% increase in interest rates
10% strengthening in sterling
Equity1
–
–
–
Profit
before tax
2.8
0.3
0.1
Equity
–
11.1
(1.3)
Profit
before tax
–
1.0
–
1% decrease in interest rates
10% weakening in sterling
Equity1
–
–
–
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
Equity1
–
–
–
Profit
before tax
2.2
0.1
0.1
Equity
–
14.4
(1.2)
Profit
before tax
–
1.1
–
1 This relates to the impact on items charged directly to equity and excludes the impact on profit/loss for the year flowing into equity.
133
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
25. Cash flows from operations
For the year ended 31 March
all figures in £ million
Loss after tax for the year
Adjustments for:
Taxation expense/(income)
Net finance costs
Loss/(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 on disposal of property, plant and equipment
Share of post-tax profit of equity accounted entities
Share-based payments charge
Changes in retirement benefit obligations
Pension curtailment gain
Net movement in provisions
Decrease in inventories
Decrease in receivables
Decrease in payables
Changes in working capital
Cash generated from operations
Add back: cash outflow/(inflow) relating to restructuring
Add back: cash outflow relating to pension scheme closure costs
Net cash flow from operations before restructuring costs
2014
(12.7)
16.8
15.0
4.9
–
1.0
11.0
125.9
22.6
1.4
(0.1)
4.5
(8.1)
(31.1)
(10.5)
140.6
4.4
21.7
(23.7)
2.4
143.0
10.3
4.0
157.3
2013
(133.2)
(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
134
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
26. Share capital and other reserves
Shares allotted, called up and fully paid:
At 1 April 2012
Issued in the year
At 31 March 2013
Issued in the year
At 31 March 2014
£
Ordinary shares of 1p each (equity) Special Share of £1 (non-equity)
Number
1
–
1
–
1
Number
6,604,764 660,476,373
–
6,604,764 660,476,373
–
6,604,764 660,476,373
£
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 2014 rank pari passu in all respects.
Rights attaching to the Special Share
QinetiQ carries out activities which are important to UK defence and security interests. To protect these interests in the context of the
ongoing commercial relationship between the MOD and QinetiQ, and to promote and reinforce the Compliance Principles, the MOD
holds a Special Share in QinetiQ. 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 29 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 2014 are 7,811,861 shares (2013: 11,238,669 shares).
135
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
27. Share-based payments
The Group operates a number of share-based payment plans for employees. The total share-based payment expense in the year was
£4.5m, of which £3.4m related to equity-settled schemes and £1.1m related to cash settled schemes (year to 31 March 2013: £5.5m,
of which £3.8m related to equity-settled schemes and £1.7m 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
2014
2013
Weighted
average
exercise price
2.3p
2.3p
2.3p
2.3p
Number
352,314
(335,294)
(17,020)
–
Weighted
average
exercise price
2.3p
2.3p
2.3p
2.3p
Number
461,242
(68,080)
(40,848)
352,314
The 2003 ESOS are equity-settled awards; those outstanding at 31 March 2014 had an average remaining life of nil years (2013: 0.3 years).
In respect of the share options exercised during the year, the average share price on the date of exercise was 189.7p (2013: 178.2p). The
exercise price of the outstanding options was 2.3p. Of the outstanding awards at the year end none were exercisable (2013: 352,314).
Performance Share Plan (PSP)
In the year, the Group made awards of conditional shares to certain UK senior employees under the PSP. The awards vest after
three years with 50% of the awards subject to TSR conditions and 50% subject to EPS conditions as detailed in the Report from
the Remuneration Committee.
Outstanding at start of year
Granted during year
Exercised during the year
Forfeited/lapsed during year
Outstanding at end of year
2014
Number
of shares
7,351,207
3,489,504
(907,312)
(1,843,139)
8,090,260
2013
Number
of shares
3,684,486
4,857,004
–
(1,190,283)
7,351,207
PSP awards are equity-settled awards and those outstanding at 31 March 2014 had an average remaining life of 1.5 years (2013: 1.8 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 26% (2013: 29%) for the average share price volatility of the FTSE comparator group and 52%
(2013: 47%) for the average correlation to the comparator group. The weighted average fair value of grants made during the year was
£1.88 (2013: £1.35). The weighted average share price at date of exercise was £1.84. Of the options outstanding at the end of the year
nil were exercisable (2013: nil).
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 2014 awards, and 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
2014
Number of
shares
5,249,861
2,500,000
(354,362)
(3,576,498)
3,819,001
2013
Number of
shares
5,458,526
2,379,877
(694,197)
(1,894,345)
5,249,861
RSUs are equity-settled awards; those outstanding at 31 March 2014 had an average remaining life of 1.1 years (2013: 1.4 years). There
is no exercise price for these RSU awards. The weighted average share price at date of exercise was £1.91 (2013: £1.47). The weighted
average fair value of grants made during the year was £1.88 (2013: £1.73). Of the awards outstanding at the end of the year none were
exercisable (2013: 24,031).
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Value Sharing Plan (VSP)
In 2012 and 2011, the Group granted VSP awards to certain senior UK employees under the VSP. The awards vest over a three-year
performance period: 50% of the 2012 awards and 70% of the 2011 awards (which vested in 2014) are/were 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/were dependent on 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 Report
from the Remuneration Committee on pages 86 and 87.
Outstanding at start of year
Granted during year
Exercised during year
Forfeited/lapsed during year
Outstanding at end of year
2014
Number of
shares
10,850,040
–
(979,853)
(4,851,899)
5,018,288
2013
Number of
shares
11,105,340
–
–
(255,300)
10,850,040
VSP awards are equity-settled awards; those outstanding at 31 March 2014 had an average remaining life of 0.6 years (2013: 0.7 years).
There is no exercise price for these VSP awards. The weighted average share price at date of exercise was £1.92. Of the awards outstanding
at the end of the year nil were exercisable (2013: nil).
Group Share Incentive Plan (SIP)
Under the QinetiQ SIP 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
2014
Number of
matching
shares
1,009,663
228,066
(467,228)
(44,597)
725,904
2013
Number of
matching
shares
1,319,468
217,899
(450,015)
(77,689)
1,009,663
SIP matching shares are equity-settled awards; those outstanding at 31 March 2014 had an average remaining life of 1.5 years
(2013: 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
(2013: nil).
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
27. Share-based payments continued
Group Deferred Annual Bonus Plan (DAB)
Under the QinetiQ DAB 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 Report from the Remuneration Committee.
Outstanding at start of year
Granted during year
Forfeited during year
Outstanding at end of year
2014
Number of
matching
shares
914,621
502,060
(253,785)
1,162,896
2013
Number of
matching
shares
448,682
470,119
(4,180)
914,621
DAB matching shares are equity-settled awards; those outstanding at 31 March 2014 had an average remaining life of 1.4 years (2013:
1.8 years). There is no exercise price for these DAB awards. Of the shares outstanding at the end of the year nil were exercisable (2013: nil).
Cash Alternative Units (CAUs)
In prior years, 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
2014
Number of
shares
2,246,979
–
(274,188)
(743,250)
1,229,541
2013
Number of
shares
1,309,000
1,407,729
(298,500)
(171,250)
2,246,979
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 2014 had an average remaining life of 1.8 years (2013: 1.7 years). There is no exercise price for these awards. The fair value of
the grants at 31 March 2014 was £2.26 (2013: £2.07) being the Group’s closing share price on that day. The weighted average share price
on the date of exercise was £1.90 (2013: £1.67). The carrying amount of the liability of the grants at the balance sheet date was £1.7m
(2013: £1.8m). 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 DAB awards, have been
valued at the share price at grant, less attrition. For the 2003 ESOS, 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.
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28. Post-retirement benefits
Defined contribution plans
In the UK the Group operates two Group Personal Pension Plans (GPPs) for the majority of its UK employees. These are defined
contribution schemes 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
In the UK the Group operates the QinetiQ Pension Scheme (the ‘Scheme’) for a significant proportion of its UK employees. The Scheme
closed to future accrual on 31 October 2013. After this date, defined benefit members transferred to a defined contribution scheme.
On closure, the Group realised a reduction in scheme liabilities of £31.1m and a one-off cost of £4.0m arising from associated contributions
to affected members’ defined contribution plans following the closure of the scheme. The Scheme is a final salary plan, which provides
benefits to members in the form of a guaranteed level of pension payable for life. The 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 (CPI). 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.
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.
The expected employer cash contribution to the Scheme for the year ending 31 March 2015 is £17.1m (2014: £20.6m), including a £6.0m
one-off contribution following the disposal of US Services. The Group has no further payment obligations once the contributions have been
paid. Following the closure to future accrual, future reporting periods will no longer include an expense in respect of defined benefit
pension service costs.
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 2013 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 CPI, for 20 years secured on certain properties owned by the Group.
The next scheduled triennial valuation will be performed as at 30 June 2014. The funding 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 it
had been performed at the year end.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
28. Post-retirement benefits continued
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 2013 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 replaced 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 2014 amounted to £nil (2013: £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
2014
434.4
273.6
279.9
183.0
–
94.0
39.7
1,304.6
(1,326.8)
(22.2)
1.3
(20.9)
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)
* The Scheme has assets invested in a Liability Driven Investment portfolio. As at 31 March 2014 this hedges against approximately 22% of the interest rate
and 20% 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.
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QinetiQ Group plc Annual Report and Accounts 2014
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
Experience losses/(gains)
Curtailment 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 (income)/expense recognised in the income statement (gross of deferred tax)
2014
1,256.5
54.9
2.6
20.6
–
(28.8)
(1.2)
1,304.6
2014
1,310.6
11.3
56.6
–
39.2
(31.0)
(31.1)
(28.8)
1,326.8
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
2014
2013
11.3
(31.1)
1.7
1.2
(16.9)
18.7
(0.7)
1.3
2.0
21.3
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
28. Post-retirement benefits continued
Assumptions
The major assumptions (weighted to reflect individual Scheme differences) were:
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)
2014
4.2%
2.6%
88
90
90
92
2013
4.4%
2.7%
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 2014 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 20 years.
Sensitivity analysis of the principal assumptions used to measure Scheme liabilities
Assumption
Discount rate
Rate of inflation
Rate of mortality
Change in assumption
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 £25m
Increase by £31m
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. 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 it had been performed at the year end.
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29. Transactions with the MOD
The MOD continues to own its Special Share in QinetiQ which conveys certain rights as set out in note 26. Transactions between the Group
and the MOD are disclosed as follows:
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
During the 12 years from 1 July 2001, following a ‘trigger event’, the MOD was 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. This agreement expired in the year to
31 March 2014.
MOD’s generic compliance regime
Adherence to the generic compliance system is monitored by the Risk & CSR Committee. Refer to the Corporate Governance Report on
page 67.
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 2014 was £1.3m (2013: £1.4m).
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.
30. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of £40.3m at 31 March 2014 (2013: £54.3m)
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 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.
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Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the financial statements continued
Notes to the financial statements continued
31. Capital commitments
The Group had the following capital commitments for which no provision has been made:
all figures in £ million
Contracted
2014
38.7
2013
18.0
Capital commitments at 31 March 2014 include £37.8m (2013: £15.8m) in relation to property, plant and equipment that will be wholly
funded by a third-party customer under long-term contract arrangements.
32. Subsidiaries
The companies listed below are those which were part of the Group at 31 March 2014 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.
Country of incorporation
Principal area of operation
Name of company
Subsidiaries1,2
QinetiQ Group Holdings Limited3
QinetiQ Holdings Limited
QinetiQ Limited
QinetiQ Overseas Holdings Limited
QinetiQ North America, Inc.4
QinetiQ US Holdings, Inc.
Analex Corporation4
Apogen Technologies, Inc.4
Foster-Miller, Inc.
Westar Aerospace & Defence Group, Inc.4
1 Accounting reference date is 31 March. All principal subsidiary undertakings listed above have financial year ends of 31 March and 100% of the
England & Wales
England & Wales
England & Wales
England & Wales
US
US
US
US
US
US
UK
UK
UK
UK
US
US
US
US
US
US
ordinary shares are owned by the Group.
2 QinetiQ Group Holdings Limited is a direct subsidiary of QinetiQ Group plc. All other subsidiaries are held indirectly by other subsidiaries
of QinetiQ Group plc.
3 QinetiQ Group Holdings Limited changed its name from QinetiQ Middle East Limited on 3 December 2013.
4 Sale agreed post year end. See note 33.
33. Post balance sheet events
On 22 April 2014, the Group agreed to sell the US Services division, comprising QinetiQ North America Inc. and its subsidiaries, for an
initial cash consideration of $165m plus potential deferred consideration of up to $50m. As at 31 March 2014 negotiations to conclude
the transaction were still ongoing, with significant terms still unresolved. As such the Directors are of the opinion that the successful
conclusion to the transaction was not ‘highly probable’ as at 31 March 2014. The financial reporting implications of which are that the
US Services division cannot be presented as an ‘asset held for sale’ as at the balance sheet date, and the results of US Services are not
reported as a ‘discontinued operation’ within the income statement.
At 31 March 2014, the Group had the intention to realise value from US Services via sale rather than use and an impairment loss
(to goodwill) has been recognised in 2014 following valuation at ‘fair value less costs to sell’. The full impact of the disposal, including
the remaining transaction costs, estimated warranty/indemnity liabilities, completion bonuses/change of control payments, and
deferred foreign exchange gains/losses recycled from reserves, will be shown in the accounts for the year ending 31 March 2015,
subject to transaction completion.
144
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
The income statement of the US Services division is as follows:
all figures in £ million
Revenue
Operating costs excluding depreciation, amortisation and impairment
EBITDA (earnings before interest, tax, depreciation and amortisation)
Depreciation and impairment
of property, plant and equipment
Amortisation of intangible assets
Underlying operating profit
Impairment of goodwill
Other specific adjusting items
Operating loss before tax
Finance expense
Loss before tax
Taxation (expense)/income
Loss for the year
Net assets of the disposed business as at 31 March 2014 are set out below.
Assets
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Deferred tax asset
Current assets
Inventory
Trade and other receivables
Total assets
Liabilities
Current liabilities
Trade and other payables
Provisions
Current tax liabilities
Non-current liabilities
Other payables
Provisions for other liabilities and charges
Total liabilities
Net assets
2014
408.8
(387.3)
21.5
(2.3)
(0.2)
19.0
(84.0)
(8.1)
(73.1)
(0.8)
(73.9)
(3.0)
(76.9)
2013
463.8
(438.4)
25.4
(1.6)
(0.1)
23.7
(246.7)
(17.7)
(240.7)
–
(240.7)
17.6
(223.1)
2014
41.4
33.6
6.1
7.3
88.4
0.7
75.8
76.5
164.9
(52.5)
(1.4)
(1.7)
(55.6)
(3.0)
(2.0)
(5.0)
(60.6)
104.3
145
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statementsAdditional information
Company balance sheet
Company balance sheet
as at 31 March
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/(liabilities)
Total assets less current liabilities
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
2014
2013
2
3
4
6
6
6
6
454.8
454.8
79.5
79.5
(64.6)
14.9
469.7
451.4
451.4
77.7
77.7
(140.1)
(62.4)
389.0
469.7
389.0
6.6
39.9
147.6
275.6
469.7
6.6
39.9
147.6
194.9
389.0
The financial statements of QinetiQ Group plc (company number 4586941) were approved by the Board of Directors and authorised
for issue on 22 May 2014 and were signed on its behalf by:
Mark Elliott
Chairman
Leo Quinn
Chief Executive Officer
David Mellors
Chief Financial Officer
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QinetiQ Group plc Annual Report and Accounts 2014
146
QinetiQ Group plc Annual Report and Accounts 2014
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 27 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
Subsidiary undertaking – 100% of ordinary share capital of QinetiQ Group Holdings Limited
Capital contributions arising from share-based payments to employees of subsidiaries
2014
–
424.3
30.5
454.8
2013
424.3
–
27.1
451.4
During the year the company transferred its investment in QinetiQ Holdings Limited to QinetiQ Group Holdings Limited in return for 100%
of the share capital of the company.
A list of all principal subsidiary undertakings of QinetiQ Group plc is disclosed in note 32 to the Group financial statements.
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 26 to the Group financial statements.
2014
79.5
2013
77.7
2014
64.6
2013
140.1
147
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QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statementsAdditional information
Notes to the Company financial statements continued
Notes to the Company financial statements
6. Reserves
all figures in £ million
At 1 April 2013
Profit
Purchase of own shares
Share-based payments – settlement
Dividend paid
Share-based payments
At 31 March 2014
At 1 April 2012
Profit
Purchase of own shares
Share-based payments – settlement
Dividend paid
Share-based payments
At 31 March 2013
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
194.9
103.7
(0.5)
0.9
(26.8)
3.4
275.6
135.2
75.7
(0.4)
0.7
(20.1)
3.8
194.9
Total
equity
389.0
103.7
(0.5)
0.9
(26.8)
3.4
469.7
329.3
75.7
(0.4)
0.7
(20.1)
3.8
389.0
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 27 to the Group financial statements.
8. Other information
Directors’ emoluments, excluding Company pension contributions, were £3.1m (2013: £3.3m). 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 auditor for the year to 31 March 2014 was £146,000 (2013: £146,000), which was for audit
of the Group’s annual accounts and audit related assurance services. No other services were provided by the auditor to the Company.
148
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QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
Five-year record for the years ended 31 March (unaudited)
Five-year record for the years ended 31 March (unaudited)
all figures in £ million
EMEA Services (formerly UK Services)
US Services
Global Products
Revenue
EMEA Services (formerly 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
(Loss)/profit after tax
Underlying basic EPS1
Basic EPS
Diluted EPS
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
2014
607.0
408.8
175.6
1,191.4
86.7
19.0
27.0
132.7
20135
594.6
463.8
269.4
1,327.8
84.8
23.7
60.2
168.7
20124
610.1
534.5
325.0
1,469.6
61.3
32.1
66.2
159.6
20113,4
652.7
607.3
442.6
1,702.6
45.7
45.9
52.1
143.7
11.1
119.4
4.1
(12.7)
16.0
(1.9)
(1.9)
4.60
136.5
170.5
9,134
972.4
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
20102
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
169.2
(457.4)
13,604
1,400.9
1 Underlying measures are stated before specific adjusting items. Definitions of underlying measures of performance are in the glossary on page 150.
Underlying financial measures are presented because the Board believes these provide a better representation of the Group’s long-term
performance trend.
2 The Group’s management structure changed with effect from 1 April 2010. Segmental data for 2010 has been retained on the old structure as reported
in previous financial statements.
3 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
2013 financial year.
4 IAS 19 (revised) ‘Employee Benefits’ was adopted for 2013 and the 2012 and 2011 comparatives have been restated accordingly.
5 The 2013 figures have been restated to reflect the reclassification of product sales from UK Services to Global Products and the reclassification
of Cyveillance® from US Services to EMEA Services.
149
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QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statementsAdditional information
Association of British Insurers
Annual General Meeting
OHSAS
Organic growth
Glossary
Glossary
ABI
AGM
BIS
CAGR
C4ISR
CPI
CR
CSR
DAB
DE&S
DHS
DoD
EBITDA
EMEA
EPS
Gearing ratio
IAS
IFRS
IP
IPO
KPI
LIBID
LIBOR
LTPA
MOD
MSCA
NASA
Department for Business, Innovation and Skills
Compound Annual Growth Rate
Command, control, communications, computers,
intelligence, surveillance and reconnaissance
Consumer Price Index
Corporate Responsibility
Corporate Social Responsibility
Deferred Annual Bonus
MOD’s Defence, Equipment and Support
organisation
US Department of Homeland Security
US Department of Defense
Earnings before interest, tax, depreciation
and amortisation
Europe, Middle East and Australasia
Earnings per share
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
International Accounting Standards
International Financial Reporting Standards
Intellectual property
Initial Public Offering
Key Performance Indicator
London inter-bank bid rate
London inter-bank offered rate
Long-Term Partnering Agreement – 25-year contract
established in 2003 to manage the MOD’s test and
evaluation ranges
UK Ministry of Defence
Maritime Strategic Capability Agreement
National Aeronautics and Space Administration (US)
PBT
PSP
QNA
QSOS
R&D
RSU
Specific adjusting
items
Occupational Health and Safety Advisory Services
The level of year-on-year growth, expressed as
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
Profit before tax
Performance Share Plan
QinetiQ North America
QinetiQ Share Option Scheme
Research and development
Restricted Stock Unit
Amortisation of intangible assets arising from
acquisitions; net restructuring charges/recoveries;
net pension finance expense; pension curtailment
gains; pension past service gains; net pension
gain on closure to future accrual; impairment of
property; impairment of goodwill and 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
UK GAAP
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
Guidelines of the Financial Reporting Council to
address the principal aspects of corporate governance
UK Generally Accepted Accounting Practice
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 cash flows
of specific adjusting items, less net cash outflow
on purchase/sale of intangible assets and property,
plant and equipment
Net finance costs excluding net pension
finance costs
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’
VSP
Yellow Book
Value Sharing Plan
Single-source pricing regulations used by MOD
150
150
QinetiQ Group plc Annual Report and Accounts 2014
QinetiQ Group plc Annual Report and Accounts 2014
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 2014
AGM online quickly and easily using the Sharevote service by
visiting www.sharevote.co.uk.
Donating shares to charity
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 fraudsters who use
persuasive and high-pressure tactics to lure investors into scams.
They may offer to sell shareholders shares that turn out to be
worthless or non-existent, or to buy shares at an inflated price
in return for an upfront payment. If you receive any unsolicited
investment advice, check that the firm is properly authorised by
the Financial Conduct Authority (FCA) 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 graph below
shows the share price trend during the year ended 31 March 2014:
260
240
220
200
180
160
140
120
M ar 13
Apr 13
M ay 13
Jun 13
Jul 13
Aug 13
Sep 13
Oct 13
N ov 13
Dec 13
Jan 14
Feb 14
M ar 14
The share prices used in the graph above are the mid-market closing prices as derived
from the London Stock Exchange Daily Official List.
Analysis of Share Register at 31 March 2014
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
6,109
908
7,017
4,456
662
1,208
218
247
226
7,017
% of total holdings
87.06%
12.94%
100.00%
63.50%
9.43%
17.22%
3.11%
3.52%
3.22%
100.00%
Shares held
6,709,352
653,767,021
660,476,373
910,914
533,981
2,984,926
1,639,803
8,231,325
646,175,424
660,476,373
% of share capital
1.02%
98.98%
100.00%
0.14%
0.08%
0.45%
0.25%
1.25%
97.83%
100.00%
151
QinetiQ Group plc Annual Report and Accounts 2014
Strategic reportDirectors’ reportFinancial statementsAdditional information Interim management statement
Annual General Meeting
Ordinary shares marked ex-dividend
Final 2014 dividend record date
Final 2014 dividend payment date
Half-year financial period end
Half-year results announcement
Interim management statement (provisional date)
Financial year end
Preliminary results announcement (provisional date)
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
Additional information
Key dates
22 July 2014
22 July 2014
6 August 2014
8 August 2014
5 September 2014
30 September 2014
20 November 2014
February 2015
31 March 2015
May 2015
Company information
Registered office
Cody Technology Park
Ively Road
Farnborough
Hampshire
GU14 0LX
Tel: +44 (0) 1252 392000
Company Registration Number 4586941
Auditor
KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
152
QinetiQ Group plc Annual Report and Accounts 2014
Additional information GO ONLINE TO FIND OUT MORE...
This report is complemented by a range of online
information and resources: www.QinetiQ.com/investors
The QinetiQ Annual Report 2014 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.
What you find in each section:
Overview
• Latest and historic share prices
• Financial calendar
• Regulatory (RNS) news
• Corporate governance
Shareholder services
• Register online via Shareview
• Common questions
• Dividend history
Financial reports
• Financial results and trading updates
• Company results
• Company presentations
Contacts
• Investor contacts
Corporate responsibility
• Further details of our corporate
responsibility policy can be found
at www.QinetiQ.com/cr
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Registered office
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Hampshire GU14 0LX
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Tel: +44 (0) 1252 392000
www.QinetiQ.com
Company Registration Number
4586941
©QinetiQ Group plc
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