Annual Report 2015
QinetiQ Group plc
Through their technical expertise, domain 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.
We work across four key markets:
Defence, security and aerospace are our key markets but we have a growing position in select
commercial markets. Our customers are predominantly government organisations, including
defence departments, as well as international customers in other targeted sectors.
Defence
Security
Aerospace
Commercial
Find out more about our key markets on page 6.
Contents
Strategic
report
Governance
Financial
statements
Overview
Highlights
Our business model
Market overview
Chairman’s statement
Chief Executive Officer’s statement
Our Organic-Plus strategy
Our strategic priorities
Our strategy in action
Key performance indicators
Responsible business
Risk management
Principal risks and uncertainties
Performance
Operating review
EMEA Services
Global Products
Chief Financial Officer’s review
Corporate governance statement
Relations with shareholders
Leadership
Board of Directors
Effectiveness
Accountability
Directors’ remuneration report
Directors’ report
Independent auditor’s report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated balance sheet
Consolidated cash flow statement
Reconciliation of movement in net cash
Notes to the financial statements
Company balance sheet
Notes to the Company financial statements
Five-year record
Additional
information
Glossary
Shareholder information
Additional information
01
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08
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140
141
142
143
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Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
02
Highlights
Strong financial
performance
Financial
Revenue
Underlying operating profit*
Underlying EPS*
£763.8m
2014: £782.6m^
£111.3m
2014: £113.7m^
15.2p
2014: 13.8p^
864.0^
782.6^
763.8
145.0^
113.7^
111.3
16.6^
13.8^
15.2
2013
2014
2015
2013
2014
2015
2013
2014
2015
Net cash
£195.5m
2014: £170.5m
Total dividend
5.4p
2014: 4.6p
Profit/(loss) after tax
£104.7m
2014: (£12.7m)
170.5
195.5
3.8
4.6
5.4
104.7
(133.2)
(12.7)
74.0
2013
2014
2015
2013
2014
2015
2013
2014
2015
Note: year end references (2015, 2014 and 2013) relate to the years ending 31 March.
* Definitions of underlying measures of performance can be found in the glossary on page 141.
^ Restated to reflect continuing/discontinued operations (see note 1 to the financial statements on page 97).
QinetiQ Group plc Annual Report and Accounts 2015 03
Meeting changing
customer needs
Operational
Organic-Plus strategy delivered
increased earnings
Strong performance in EMEA Services
with core Air, Weapons and Maritime
businesses all delivering good results
P12 Our Organic-Plus strategy
P38 EMEA Services
New President appointed to lead
repositioning of US Global Products
5% Club membership reaches over
70 companies that are committed to
creating opportunities for young people
P42 Global Products
P24 Responsible business
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 04
Our business model
Understanding
what QinetiQ does
The technical expertise and domain know-how of our people
differentiate our customer offerings from our peers.
QinetiQ is trusted, impartial and independent – we are not a
manufacturer. We rarely compete directly with aerospace and
defence companies, but instead work in partnership with them.
We also work in partnership with customers, leveraging our assets,
facilities and capabilities to deliver rigorous independent thinking
that ensures they meet their goals.
QinetiQ’s level of customer intimacy has been developed over many
years. Our specialist know-how about customer domains is nurtured
by working in partnership to understand their problems, shape their
needs and deliver solutions that help meet their challenges now and
for the future.
Our principal revenue streams are research, technology, advice, test
and evaluation, technology solutions and the royalties from licensing.
What makes QinetiQ different
How we generate value
How we deliver
Divisions
Business units
Principal markets
Defence
Security
Aerospace
Commercial
Technical
expertise
Rigorous
independent
thinking
Domain
know-how
Unique
facilities
Research
Advice
Test & Evaluation
Technology Solutions
Licensing
Global
Products
Enhances skills, specialist domain understanding
and reputation. Generates IP.
EMEA
Services
Procurement Advisory Services
Working in
partnership
to shape
needs and
deliver
solutions
Air
Weapons
Maritime
Australia
Training
C4ISR
Cyber Security
Cyveillance®
EMEA products
US products
OptaSense®
Space Products
QinetiQ Group plc Annual Report and Accounts 2015
05
Our business model is robust and sustainable because our
knowledge base is constantly refreshed. As well as enhancing
the domain know-how and reputation of our people, our work
provides a dynamic source of new intellectual property and
future technology-based offerings.
As a business whose reputation and achievements are centred
around our people, QinetiQ has low capital and resource
requirements. Our future success is primarily dependent on
our ability to recruit, develop and retain exceptional employees,
subject matter experts and world renowned specialists.
What makes QinetiQ different
How we generate value
How we deliver
Divisions
Business units
Principal markets
Defence
Security
Aerospace
Commercial
Technical
expertise
EMEA
Services
Procurement Advisory Services
Air
Weapons
Maritime
Australia
Working in
partnership
to shape
needs and
deliver
solutions
Training
C4ISR
Cyber Security
Cyveillance®
EMEA products
US products
OptaSense®
Space Products
Global
Products
Rigorous
independent
thinking
Domain
know-how
Unique
facilities
Research
Advice
Test & Evaluation
Technology Solutions
Licensing
Enhances skills, specialist domain understanding
and reputation. Generates IP.
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
06 Market overview
Understanding
our markets
Market drivers
UK Ministry of Defence budget (£m)
39,035
37,980
35,874
36,181
36,436
The world is an increasingly uncertain and less
secure place. Technology proliferation has lowered
the bar for terrorism, organised crime and conflict,
meaning that threats to security are increasing
in number and diversity.
At the same time, technology proliferation
enables governments to ‘spin-in’ technologies
from the commercial sector with the help of
organisations like QinetiQ which are independent
from the supply chain and experts in the
application of technology.
In the US, the Federal Government continues to
pursue technological superiority in response to the
deteriorating security situation and as its principal
source of military advantage. President Obama
recently requested an 8% increase to the US defence
budget for 2016, forcing the Republican majority to
weigh up competing concerns about defence and
tackling the ongoing fiscal deficit.
Elsewhere, governments and commercial organisations
continue to build capability and balance budgetary
constraints with security concerns.
FY11
FY12
FY13
FY14
FY15
Outturn
Plans
Source: HM Treasury – Public expenditure statistical analysis
QinetiQ’s ability to innovate and apply technology
to mitigate security threats, enables us to ‘work
smarter’ and to leverage available resources to help
customers deliver when budgets are under pressure.
These fiscal pressures, both in the UK and worldwide,
are no longer new. Despite reduction in the UK defence
budget over the last parliamentary term, QinetiQ
was able to improve its financial performance.
The UK Government continues to face a significant
budget deficit, and a further period of fiscal austerity
looks likely following the 2015 election result.
Defence expenditure is not protected by Government
ring-fencing, unlike spending on healthcare, schools
and international aid, but the UK Ministry of Defence
(MOD) has made significant progress over the last
five years in balancing its budget.
To date, the UK Government has aimed to spend
2% of GDP on defence and 1.2% of the budget on
science and technology, although these commitments
are likely to be considered as part of the Strategic
Defence and Security Review (SDSR) expected in
2015. As in 2010, we expect the SDSR to include
consultation with industry to help the Government
meet the challenges facing UK defence, and look
forward to contributing to topics including test and
evaluation, and research and technology. QinetiQ
has maintained the capability to carry out work not
required to be undertaken within Government and
the rationalisation of defence budgets and structures
could provide further opportunities in this area.
Defence transformation has been a priority since 2010,
incorporating a number of significant programmes.
For example, the MOD’s procurement agency Defence
Equipment and Support (DE&S) is transforming its
operating model and has been given access to private
sector expertise to help improve its performance.
The Front Line Commands (Navy, Army, Air and
Joint Forces) are exercising their newly delegated
powers to shape future capabilities and our
business units are aligned closely to these
Commands and are well placed to help them
with their growing procurement responsibilities.
Joint Forces Command has been created to bring
‘improved focus to technological enablers’ and
‘give intellectual energy’ to how warfare should be
conducted ‘in the information age’. With its own
procurement arm and multi-billion pound budget,
Joint Forces Command provides a more focused
channel for our Cyber Security, C4ISR, and Training
businesses which were aligned during the year.
Revised single source regulations and pricing terms
for single source contracts are now in place under
the new ‘Orange Book’. They cover new contracts
worth £5m or more, requiring additional reporting
and tightening definitions of allowable costs. Our
combination of capabilities is unique in the UK and,
consequently, 33% of EMEA Services revenue is
derived from single source contracts, excluding the
non-tasking element of the Long Term Partnering
Agreement (LTPA). Greater transparency and an
independent regulator – the Single Source Regulations
Office (SSRO) – will help demonstrate the value for
money the Government derives from single source
contracts. The SSRO has confirmed the Government
profit formula for 2016 is broadly consistent
with 2015 but has stated it will be reviewing the
methodology for this formula for future periods.
P4 Our business model
UK defence market
QinetiQ business units are aligned closely
to the Front Line Commands
Front Line
Command
QinetiQ
business
Joint
Forces
Navy
Army
Air
Training
C4ISR
Cyber Security
Maritime
Weapons
Air
P38 EMEA Services
QinetiQ Group plc Annual Report and Accounts 2015 07
Global markets
Breakdown of revenue by customer
2015
UK MOD
US Department
of Defence (DoD)
Government agencies
Commercial defence
Commercial
%
67
6
11
6
10
In May 2014, we completed the sale of the US
Services division and are no longer active in the
US federal services market. Our Global Products
division has a significant US footprint, providing a
route to the world’s largest defence market.
The US Government is continuing to drawdown the
number of troops deployed on Overseas Contingency
Operations (OCO) and reduce the accompanying
OCO procurement budget. Although there are ‘reset’
opportunities, this continues to depress demand for
conflict-related products.
US military customers are assessing their post-war
requirements and formulating new Programs of
Record which will determine the ‘peacetime’ demand
for products, such as unmanned systems. Our US
products business is responding to these opportunities
with a greater focus on these Programs of Record,
contract-funded research and development, and
non-defence markets. The disposal of US Services
has helped to facilitate this renewed focus by removing
any customer concerns about Organisational Conflict
of Interest.
Although our traditional markets are the UK
and US, many of our unique capabilities are
transferable to other geographies. For example,
as the Canadian and Australian Governments pursue
similar defence transformation programmes to the
UK, they value our independent advice, test and
evaluation in support of better procurement.
Governments in Europe, the Middle East and Asia
are building their defence capabilities in response to
the increasing volume and diversity of the threats to
security, increasing the demand for C4ISR, cyber and
training expertise.
Amongst the prime contractors, competition is
becoming fiercer. They are liaising with the supply
chain to find new sources of competitive advantage.
Much of QinetiQ’s innovation is created from solving
a specific set of customer problems, and at the same
time generating technology and expertise with the
potential to be transferred into new sectors offering
higher growth potential.
P42 Global Products
Impact on our business
Breakdown of revenues by key domains
2015
Air
Weapons
Maritime
Cyber, C4ISR
and Training
Other EMEA Services
Global Products – US
We rarely compete directly with aerospace
and defence companies but instead provide
client-side support through the domain know-how
and technical expertise of our people. In general,
we are not significantly impacted by changes in
individual procurement projects. Instead we provide
research, technical advice, and test and evaluation
across all military domains and the majority of
equipment programmes through the LTPA and
other key contracts.
%
25
26
10
15
6
8
Global Products – EMEA 10
Our position, independent from the supply
chain, means we bring unique, impartial skills that
help our customers meet the dual challenges of
declining budgets and increasing security threats.
Although the MOD transformation programme,
the election of a new Government and SDSR may
slow decision-making this year and create some
short-term uncertainty in the UK, they also provide
opportunities for us to build on our strong record
of a smarter way of working and efficient and
effective outcomes. This track record underpins
our ability to increase the scope of existing contracts,
win new outsourcing opportunities and take our
capabilities to new international markets.
P20 Key performance indicators
2016 Outlook
Defence transformation, and the forthcoming
Comprehensive Spending Review and SDSR are
expected to have an impact on the UK defence
market this year. This will provide future opportunities
for EMEA Services to build on its strong record of
delivering ‘more for less’, whilst recognising that in
FY16 there will be uncertainty and the potential for
interruptions to order flow. The portion of revenue
under contract at the start of FY16 was similar to a
year ago and the balance is supported by a pipeline
of opportunities but order flow and contract cover
will be watched closely over the coming months.
Overall, given the opening backlog position,
expectations for the performance of EMEA Services
in the current financial year are unchanged.
In Global Products, newer products are recording
notable milestones and the amount of revenue
under contract at the start of FY16 is up slightly on
a year ago, but the drawdown of American overseas
military forces is continuing to depress demand for
conflict-related products. As the division has a lumpy
revenue profile which is dependent on the timing
and shipment of key orders, there is a range of
possible outcomes for the performance of Global
Products in the current year.
In balancing the market uncertainties with the
strength of the Group’s operations, the Board is
maintaining its expectations for Group performance
in the current financial year.
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
08
Chairman’s statement
Another year of progress
Mark Elliott
Non-executive Chairman
Key highlights
• Strong demand for QinetiQ’s highly differentiated capabilities
•
Steve Wadey appointed as CEO – an outstanding leader
with a track record of driving growth
• £150m share buyback well advanced
• 17% increase in full year dividend reflecting upgrade at
the half year and the Group’s progressive dividend policy
• Maintaining expectations for Group performance in the
current financial year
Results
In today’s world, where threats to our security are many and varied,
demand for QinetiQ’s highly differentiated capabilities is strong and
we are pleased to be able to report another year of progress.
In the year to 31 March 2015, Group revenue was £763.8m (2014: 782.6m^),
and underlying operating profit* was £111.3m (2014: £113.7m^). Full year
underlying earnings per share* were 15.2p (2014: 13.8p^). Total Group
profit after tax was £104.7m (2014: loss of £12.7m). Underlying operating
cash conversion remained strong at 103% (2014: 93%^) with net cash
increasing to £195.5m (31 March 2014: £170.5m).
The Board is maintaining its expectations for Group performance in the
year to 31 March 2016.
Employees, customers and shareholders
The expertise and domain know-how of our people is our key competitive
advantage. We prioritise the safety and development of highly skilled
employees because they underpin the relationships with our customers
that build mutual trust and deliver unique benefits. We are pleased
to report further progress with employee engagement and customer
satisfaction scores this year and that we remain committed to
customer service excellence.
At QinetiQ, our most prized possession is trust. Our leaders are
responsible for ensuring that ethical and responsible business
practices are embedded in our culture. We would like to thank the
leadership team for continuing to drive a more open and empowered
culture across the Group.
QinetiQ has many sites distributed across the UK. We recognise and
support the important role our employees play in local communities
and their environmental stewardship of those sites.
Along with customers and employees, shareholders are key stakeholders
as the owners of the company. QinetiQ operates across many platforms
and contracts, so we set ourselves the target of providing information
to shareholders that is timely, clear and concise. We would like to thank
our shareholders for their continued support and the time that they
commit to a constructive dialogue with our Board and executive team.
Strategy
We are encouraged that the Group’s strategy has delivered further
progress this year, with increased demand for the capabilities provided
by our core businesses and further development of our pipeline of new
opportunities, all underpinned by continued financial discipline.
The sale of US Services, completed in May, was a key step in transforming
QinetiQ into a Group that is differentiated by the expertise of its
people and by its innovation, which provides a dynamic source of
potential future revenue streams. We now have a new leadership
team and Proxy Board in North America which is starting to reshape
our US products business.
The Group is cash generative and disciplined about capital allocation.
This supports ongoing investment in growth opportunities, a progressive
dividend policy and the maintenance of the balance sheet strength
necessary in an uncertain trading environment.
QinetiQ Group plc Annual Report and Accounts 2015
Dividend and shareholder returns
The Board proposes a final dividend of 3.6p per share for the year
ended 31 March 2015 (2014: 3.2p), making the full year dividend
5.4p (2014: 4.6p). Subject to approval at the Annual General Meeting,
the final dividend will be paid on 4 September 2015 to shareholders
on the register at 7 August 2015. The full year dividend represents an
increase of 17%, reflecting the Group’s progressive dividend policy
and upgrade at the half year.
In May 2014, we were pleased to be able to initiate a £150m capital
return to shareholders by way of a share buyback. We believe the
scale of the return reflects the strong cash generative characteristics
of the Group, as well as its confidence in its strategy, while taking
into account the continuing uncertainty in QinetiQ’s end markets,
its pension obligations and the strength of its working capital
position. By 15 May 2015, the Group had bought back 63 million
shares at a cost of £128m. The Board remains committed to
maintaining an efficient balance sheet.
The Board
The priorities that I have set for the Board are strategic growth
balanced with capital discipline, succession planning and to ensure
the effective stewardship of QinetiQ through appropriate governance
processes and systems of control. Good governance is pivotal in the
relationship of trust between QinetiQ, its customers, its employees
and other key stakeholders.
In June 2014, we announced the appointment of Ian Mason as
Non-executive Director and the retirement of Noreen Doyle after
nearly nine years on the Board.
On 15 October 2014, Leo Quinn tendered his resignation as CEO of
QinetiQ to take up a new role as CEO of Balfour Beatty. Leo arrived
at QinetiQ in 2009 at a difficult point in the Company’s history with
a downturn in defence spending on the horizon. Under his leadership,
QinetiQ has been transformed into the strong, competitive company
it is today, and on behalf of the Board, we wish him every success in
his new role.
Following Leo’s departure, Chief Financial Officer David Mellors
took over as interim CEO in addition to his existing responsibilities.
We would also like to place on record the Board’s appreciation for
David’s outstanding leadership during this period.
In January 2015, we were pleased to announce the appointment
of Steve Wadey as our new CEO, with effect from 27 April 2015.
We were looking for an outstanding leader with a track record of
driving growth, a deep understanding of the defence industry and
the technological know-how to lead QinetiQ in the next stage of our
Organic-Plus strategy. Steve fits all these criteria and is respected
across the MOD and European defence sector; we look forward
to working with him on the next stage of our strategic journey.
Mark Elliott
Non-executive Chairman
21 May 2015
09
Current Board Committee members
Audit Committee
Paul Murray, Committee Chairman
Admiral Sir James Burnell-Nugent
Michael Harper
Ian Mason
Susan Searle
Nominations Committee
Mark Elliott, Committee Chairman
Admiral Sir James Burnell-Nugent
Michael Harper
Ian Mason
Paul Murray
Susan Searle
Steve Wadey
Remuneration Committee
Michael Harper, Committee Chairman
Admiral Sir James Burnell-Nugent
Mark Elliott
Ian Mason
Paul Murray
Susan Searle
Risk & CSR Committee
Admiral Sir James Burnell-Nugent, Committee Chairman
Mark Elliott
Michael Harper
Ian Mason
David Mellors
Paul Murray
Susan Searle
Steve Wadey
Security Committee
Admiral Sir James Burnell-Nugent, Committee Chairman
Michael Harper
Ian Mason
David Mellors
Paul Murray
Susan Searle
Steve Wadey
Key governance highlights
•
Continuity in governance structures put in
place at the end of 2013, with the Operating
Committee overseeing operational
management and the Governance Committee
overseeing risk management
• Continued focus on succession planning,
with changes at Executive and Non-executive
Director level during the year
• Good working relationship established with
the new Proxy Board in the USA following the
US restructuring in 2014
• Continued focus on strategy and greater
measurement of progress against targets
* Definitions of underlying measures of performance can be found in the glossary on page 141.
^ Restated to reflect continuing/discontinued operations (see note 1 to the financial statements
on page 97).
P48 Governance
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 10
Chief Executive Officer’s statement
Customer-focused
Steve Wadey
Chief Executive Officer
Future priorities
•
Operational excellence and capital discipline
•
Innovation and investment in organic capabilities
• Customer focus
QinetiQ is a company that is focused firmly on its customers.
I am delighted to be leading QinetiQ – a company that is built on the
expertise of its people focused on providing effective solutions for
our customers.
There’s no denying that global markets are challenging, but they also
present opportunities. Throughout the world, the proliferation and
pace of technology means that threats to our security are increasing
in number and diversity. The ability to harness information, knowledge
and technology is critical to meeting these global challenges.
In the UK, Government customers need to deliver more with less and
so are seeking greater value. They are looking for suppliers that not
only have a track record of delivering efficiencies but can also help
them meet new challenges through innovation.
In the US, the Federal Government continues to pursue technological
superiority as its principal source of military advantage and has posed
the question – ‘what next?’ Disruptive innovation will be at the heart
of any answer, and this will have an impact on military customers and
markets worldwide.
Amongst prime contractors, competition is becoming more fierce.
They are engaging with the supply chain to find new sources of
competitive advantage.
Although changes in market dynamics can cause uncertainty, they
also create chances to do things differently, particularly for companies
like QinetiQ with the right foundations and inherent capabilities.
Competitive and financially robust, QinetiQ is a company that is ready
for a new phase of its journey. Our people already have a sense of
where we are going in the future but the changes in global markets
demand that we are more externally facing.
Success will be built on operational excellence – doing what we say
we are going to do, and underpinned by continued capital discipline.
It will be driven by investing in our organic capabilities and responding
proactively to the changes in our global markets through agility and
innovation that deliver effective solutions for our customers.
I look forward to leading QinetiQ during the next phase in its journey
and to the exciting future that we have ahead of us, focused firmly on
continuing to meet our customers’ needs.
Steve Wadey
Chief Executive Officer
21 May 2015
P14 Our strategic priorities
QinetiQ Group plc Annual Report and Accounts 2015 11
QinetiQ investment case
1. Uniqueandresilient
competitive position
• Unique technical expertise
and domain know-how
•
Trusted advisor – independent
position in supply chain
• Excellent customer relationships
•
•
•
Underpinned by a portfolio
of large long-term contracts
Sustainable core businesses well
positioned to win market share
Opportunity to expand
existing capabilities into
new international markets
2. Deliveringearningsgrowthand
•
shareholder returns
Strategy for growing sustainable
earnings through effective management
of the Group’s portfolio
• Competitive cost base
• High cash generation
• Strong balance sheet
•
Disciplined investment management
for core and ‘Explore’ portfolios,
with ‘Test for Value’ largely
customer funded
• Progressive shareholder returns
3. Significantoptionvalue
•
Potential for profitable growth from
emerging ‘Explore’ businesses with
demonstrable markets
• Development of new options from
customer-funded R&D in rigorously
managed ‘Test for Value’ portfolio
2015 Year in review – David Mellors, CFO
• Strong performance in EMEA Services with increased orders,
revenue and operating profit
• Core Air, Weapons and Maritime businesses all performed well
• New President appointed to lead repositioning of US Global Products
in response to a challenging market
• Continued high cash conversion
• £150m share buyback well advanced; £128m complete at 15 May 2015
• 17% increase in full year dividend reflecting upgrade at the half year
and progressive dividend policy
• 77% revenue under contract at start of 2016 consistent with prior year;
balance supported by pipeline of opportunities
• Maintaining expectations for Group performance in the current
financial year
Orders grew 3% to £613.6m (2014: £596.9m^), and Group Book-to-Bill ratio
was 1.1x. At the beginning of the new financial year, 77% of the Group’s
FY16 revenue was already under contract, a similar level to a year ago.
Revenue was £763.8m (2014: £782.6m^). EMEA Services delivered a strong
performance, with a 3% increase in revenue and the core Air, Weapons and
Maritime businesses all delivering improved results. The performance of
Global Products continued to be impacted by the ongoing reduction of US
military forces deployed to Afghanistan, which depressed demand for
conflict-related products.
Underlying operating profit* was £111.3m (2014: £113.7m^) with growth
in EMEA Services offset by Global Products, which was impacted by the
reduction in revenue and by approximately $5m of additional one-off costs
associated with separating from US Services infrastructure.
Underlying profit before tax* increased 7% to £107.8m (2014: £101.2m^)
with underlying net finance costs* falling to £3.5m (2014: £12.5m^) as a
result of the early repayment of the private placement debt in June 2014.
Underlying earnings per share* for the continuing Group were up 10% at 15.2p
(2014: 13.8p^), benefiting from the higher underlying profit before tax* and
reduced number of shares following the repurchase of £107m of the £150m
share buyback programme as at 31 March 2015. Basic earnings per share for
the total Group (including US Services) were 16.6p (2014: 1.9p loss per share).
Underlying operating cash conversion* remained strong at 103% (2014: 93%^),
delivering an underlying cash flow from continuing operations* of £114.9m
(2014: £106.2m^). At 31 March 2015, the Group had £195.5m net cash,
compared to £170.5m net cash at 31 March 2014 and £205.7m at 30
September 2014.
* Definitions of underlying measures of performance can be found in the glossary on page 141.
^ Restated to reflect continuing/discontinued operations (see note 1 to the financial statements
on page 97).
P44 Chief Financial Officer’s review
P4 Our business model
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 12
Our Organic-Plus strategy
Our value pipeline
Organic-Plus strategy
• The objective of our Organic-Plus strategy is to
deliver growing sustainable earnings by optimising
our portfolio.
• We aim to win market share in core markets and
nurture ‘Explore’ opportunities to deliver growth
particularly beyond defence, all underpinned by
continued financial discipline.
• The Group is sufficiently cash generative and
disciplined about capital allocation to support
ongoing investment in growth opportunities,
a progressive dividend policy and the maintenance
of a strong balance sheet.
Value pipeline
• Our Organic-Plus strategy prioritises active
portfolio management. All of our business
operations are graded within a value pipeline
which gives us full visibility and direction over
our assets and capabilities.
• Whether they are well-established business models
or new capabilities with as yet unclear commercial
potential, we manage and invest in them according
to three criteria:
– Maturity: how ready is our offering
and is there an attractive market?
– Potential scale: can it one day earn
significant profits?
– Investment: how much will it cost
to achieve success?
The Group’s principal role is to optimise business
returns by allocating resources appropriately.
Core
Increased market share
85%
Revenue
Explore
Growth in new markets
10%
Revenue
Test for Value
Commercial traction
5%
Revenue
Operated under strict rigour
Sustainable and defensible businesses, focused on growing market share.
This is the ‘engine’ on which our reputation and customer relationships
are built, the driver for continual renewal of our expertise and technology,
and the source of the majority of our profit and cash flow.
Our core businesses are focused on relatively resilient sectors in which
the technical expertise and domain know-how of our people is used
to provide trusted independent advice and solutions for our customers’
critical operations.
These are our sustainable and defensible core capabilities, mostly
comprising EMEA Services, and operating largely in the defence, security
and aerospace 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 that can be invested for future growth. Our core businesses also provide
a dynamic source of new intellectual property that is initially collected and
categorised in ‘Test for Value’ and managed through the value pipeline.
Representing around 85% of our revenue, the performance of the core is
the main driver of the future value of the Group and the majority of capital
investment is focused on these businesses. We are investing selectively
in key capabilities to win market share in existing markets
and to deploy these capabilities in new sectors and
international territories.
Employees
Customers
Growth Orientation
IP as an additional benefit
Strategic
Priorities
QinetiQ Group plc Annual Report and Accounts 2015
13
Core
Increased market share
85%
Revenue
Explore
Growth in new markets
10%
Revenue
Test for Value
Commercial traction
5%
Revenue
Operated under strict rigour
Our ‘Explore’ businesses are high potential, emerging
businesses, typically with a proven competitive offering in
growth markets, often beyond defence. They represent
the best opportunities for future growth, to at least
$100 million revenue a year, from both our services
and products divisions.
These are established, commercially viable businesses that
have proven technology and customers. In many cases, they
have been separated out as ‘Explore’ business units in their
own right, with appropriate support from the corporate team.
The challenge they face is to evolve a business model that can
achieve significant scale in order to become the sustainable,
value-accretive core businesses of the future. By meeting
this challenge we will deliver a broader base of significant
businesses, thereby increasing the diversification of the Group.
We are selectively investing in these businesses to determine
their ability to deliver growth both in the UK and overseas.
Investments can include new leadership and skills, accelerated
business development, strategic acquisitions, alliances and
partnership as appropriate to build momentum.
‘ Test for Value’ offerings are early-stage options that
are typically based around innovative technology
or know-how.
These technologies are often developed 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 customers
who provide the majority of early-stage funding.
Investment is required to achieve full commercialisation
and so we rigorously assess the viability of these options
and their markets to determine how best to realise their
potential. Technologies are often licensed out to reduce
implementation and sales risks, or taken to market with
partners. They can also be integrated to ‘Explore’ and
receive investment, divested or closed.
Employees
Customers
Growth Orientation
IP as an additional benefit
Strategic
Priorities
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
14
Our strategic priorities
StrategicPriorities
Employees
To deliver
Capability through our People Who Know How
What we are striving for
How we are getting there
Key:
2015 progress
2016 priorities
Empowered, engaged and highly skilled employees who are
passionate about customer service excellence, innovation and
responsible business practice.
Creating the right environment
Building a collaborative, empowered culture that recognises
the contribution of all employees
Enhanced engagement with the EEG, our independent
consultative forum
EST community established for our Engineers,
Scientists and Technicians
Facilitate greater collaboration by building understanding
of cross-functional working
Develop training, guidance and support networks to ensure
inclusivity of all employees
Attracting talent
Sourcing People Who Know How today and developing the
pipeline for tomorrow
Focused Centre of Excellence created for Early Careers
5% Club target achieved
Developing our people’s potential
Investing in our people to enhance their knowledge and skills
Learning and development Centre of Excellence established
Launched eLearning tools for technical skills, management
and leadership
Launch QinetiQ Academy to develop our people to their
full potential
Develop structured Early Careers Programmes to improve
the development of young employees
Retaining talent
Creating opportunities for our people to flourish and grow
Build transparency of the employee proposition by
developing Total Reward Statements
KPIs
The KPIs used as a measure of executive
performance are marked in bold.
Risks
The way we work
Risk sensitive
• Emerging and reputational risk
• Significant breach of relevant laws, regulations,
IT and security
• Defined benefit pension obligations and tax legislation
• Health and safety
• Voluntary employee turnover
• Employee engagement
• % Apprentices and graduates
• Recruitment and retention
Measuring progress
• Underlying operating profit
• Total Group profit after tax
• Underlying EPS
• Underlying operating cash flow
P30 Risk management
P20 Key performance indicators
QinetiQ Group plc Annual Report and Accounts 2015 15
Customers
Increased market share
Customer relationships which build mutual trust so we can
help our customers shape and achieve their current and
future challenges.
Helping shape the requirement
Listening to and helping to shape the needs of our customers
Structure aligned with MOD Front Line Commands
Board-to-Board meetings established with key customers
Develop new propositions for the MOD
Extend customer base
Delivering solutions
Working in partnership with them to understand and solve
their problems
Working with the MOD to support its transformation
Invest in Long Term Partnering Agreement
Support Front Line Commands with their new accountabilities
Excellence in delivery
Doing what we say we are going to do and ensuring good
contract governance
‘Safe for Life’ programme supported by 70 safety champions
Launched an academy for development of over 400
project managers
Customer feedback gathered every year by independent
third party
Launch accredited training for commercial managers
‘Working smarter’
Fully leveraging available resources
Hackathons held regularly, offering innovation
for customers
GrowthOrientation
UK and international growth
Growth both in and beyond the UK, using our domain
know-how and the reputation of our people, plus a pipeline
of future technology-based offerings to remain ahead of
global technology proliferation.
Developing our existing business
Actively managing our portfolio
US Services sale completed
‘Explore’ opportunities established as independent
business units
Increase frequency of engagement with senior customers
Looking for new opportunities
Developing new partnerships and alliances and rigorously
evaluating opportunities for risk.
International Business Development Director appointed
Canadian market potential developing with the opening
of our Ottawa office
Develop international strategy, model and propositions
Target countries and regions through independent
market research
Developing new ideas
Generating new intellectual property
Chief Technology Officer appointed focused on innovation
Reposition My Contribution programme to focus on
innovation and growth
• Customer satisfaction
• Orders
• Organic revenue growth
• Defence and security spending
• Trading in a global market
• Complex market characteristics and contract profile
High performance culture
• Protecting and enhancing our reputation by being a responsible and sustainable business
• Working smarter through operational excellence and continuously improving our productivity
• Environmental stewardship and community investment
P24 Responsible business
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 Defence
16
Our strategy in action
Transportable ranges
protect vessels and
save money
Employees
An expert stealth team
Growth Orientation
World-class capabilities to protect vessels
Customers
Making an 8,500 tonne destroyer look like a much smaller vessel
Often delivered in difficult conditions and
under severe time pressures, our Maritime
Stealth Information and Range Services
team provides the UK Royal Navy with
world-class stealth management capabilities,
helping to make vessels combat ready.
Rather than sailing mine-hunters out and
back for six-month tours in the Middle East,
our in-theatre expertise saves the customer
more than 85,000 nautical miles, allowing
four vessels to be based in the region for
years. We place magnetic and acoustic
sensors in the water, sail a vessel over
them, and then calibrate onboard systems
to avoid detection by aggressors.
Mechanical Engineering Officer, HMS
Shoreham – “Ranging highlighted issues
we were unaware of... identifying defects
that may otherwise be missed.”
Weapons Engineering Officer,
HMS Shoreham – “I consider the level
of support received from QinetiQ
during the magnetic ranging to be of
the highest level; very proactive.”
QinetiQ Group plc Annual Report and Accounts 2015
Independent of manufacturers and proven in the field – we are already the ‘go to’ solutions provider for a leading navy – these services are available to other navies, subject to MOD approval. Potential customers recognise our ranges are among the world’s most sensitive and, coupled with our high performance modelling software, far superior to other offerings. Neil Allan, QinetiQ project manager – “We minimise a ship’s signature both magnetically and acoustically, making an 8,500-tonne Type 45 Destroyer virtually unrecognisable by a mine.”Rob Wild, MOD Operational Signature Services – “The service includes managing all the associated and wide ranging logistics in getting equipment into theatre, managing subcontractors such as divers and providing the specialist, knowledgeable and highly experienced QinetiQ staff.”QinetiQ Group plc Annual Report and Accounts 2015 Protecting the public
in ‘soft target’ mass
transit locations
Security
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Employees
Innovative technology from
expert engineers
Customers
Detecting threats for the US Transportation Security Administration (TSA)
The TSA has awarded QinetiQ a $3m
two-year contract for an innovative threat
detection system that uses our passive
millimetre wave technology: SPO-NX™.
With the TSA concerned about terrorist
threats to targets like railway stations, ferry
and bus terminals, it wanted leading-edge
technology to help secure these venues.
Working at a range of up to 15 metres, our
SPO™ technology scans a crowd and detects
if a person is hiding something under
clothing – perhaps an explosive device –
without people needing to stop. Travellers
are not inconvenienced, the system doesn’t
emit harmful radiation, and no privacy laws
are contravened.
With earlier versions deployed in
locations including New Jersey, Washington
and Los Angeles, QinetiQ also provides
maintenance, support and end user
training. Crucially, the TSA itself is actively
involved in developing the system.
Growth Orientation
Addressing terrorist threats in new
ways and more locations
QinetiQ Group plc Annual Report and Accounts 2015
We aligned our experience, know-how and innovation with this customer’s active participation and investment to develop next-generation threat detection. With SPO-NX™ intended for a mass market, we plan to expand its reach and deliver larger quantities to customers in the US and organisations in Europe and the Middle East that face security challenges. We’ve been developing passive millimetre wave technology for many years, initially to see through dense foggy environments, and earlier versions of SPO™ were used in operational trials, informing the next generation. Colin Cameron, QinetiQ Technical Lead: “Through constant contact with the customer and exploring how the product can be used successfully, we’ve directly helped the TSA plug a real capability gap.”Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
18
Our strategy in action continued
Innovation in aerial
targets: delivering
accuracy worldwide
Employees
Customers
Defence
Delivering customer-focused
target solutions
Combined Aerial Target Service (CATS) builds on unparalleled weapons know-how
Under a 20-year contract, we provide
aerial targets worldwide for the UK Army,
Royal Navy, RAF and project teams working
on new weapons. Previously, the MOD
had several contracts with different
providers, including ageing and soon-to-be
obsolete systems. With reduced military
spending and increased emphasis on
affordability, it decided to bring all aerial
target needs under a single contract with
one provider: QinetiQ. We have also
completed successful aerial target projects
for the US Air Force, Swiss MOD, Danish
Navy and BAE Systems.
Steve Attrill, MOD – “The CATS contract
has been a success for the MOD, and
QinetiQ is delivering a high level of service.
QinetiQ makes available an extremely
flexible and responsive service, often
reacting at short notice to Armed Forces
requirements”. During this contract, both
customer satisfaction and reliability have
consistently increased.
Growth Orientation
Continuing innovation in the air
QinetiQ Group plc Annual Report and Accounts 2015
Demand for our services is rising: a recent contract for Sweden involved working with a US target manufacturer to deliver launchers and operators, and we are now exploring opportunities to bring other suppliers’ targets into CATS to offer even better performance and value for money to customers.In this heavily regulated environment, our experience in aviation, engineering and operations management means we can organise the complex logistics required for the most accurate aerial target engagements for our customers worldwide while continuously improving safety and compliance. Mark Sydenham, QinetiQ Target Services Manager: “Our 40-strong team works around the world, is highly mobile and deploys fast, often at short notice.”QinetiQ Group plc Annual Report and Accounts 2015 Aerospace
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Leading-edge satellite
technology breaks
new ground in space
Employees
Pushing the boundaries of the possible
Customers
Compact, highly complex avionics power
a remarkable spaceflight
Growth Orientation
A future in space
QinetiQ Group plc Annual Report and Accounts 2015
This mission will demonstrate the importance of formation flying for scientific research, with QinetiQ expertise contributing to the success of future missions. Our Space business is currently running four additional ESA satellite studies, expected to feed into future missions, with each project won competitively.The European Space Agency awarded QinetiQ Space a €16m three-year contract to develop the computer and avionics for its Proba-3 mission: two satellites making a virtually ‘fixed’ structure in space by precise formation flying only 150 metres apart. Proba-3 will study the Sun’s corona using an eclipsing mechanism, with a camera fixed on one satellite and an occulting disk on the other – and flying at the optimal distance apart to shield the camera from the Sun and create conditions usually only observable during a solar eclipse. Our Belgium-based team is creating highly compact avionics able to process millions of instructions per second while also operating effectively in the punishing high-radiation environment of space. Affordability was a critical element in this technically challenging project.Frank Preud’homme, QinetiQ Space – “We’ve established an enviable track record through our work on previous missions such as Proba-2, which captured the famous image of March’s solar eclipse. ESA chose QinetiQ because Proba-3 requires a small and agile platform at an affordable price, and we can deliver cutting-edge technology in shorter time scales and at lower cost.” Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
20
Key performance indicators
Measuring our progress
Key performance indicators (KPIs)
The objective of our Organic-Plus strategy
is to deliver growing sustainable earnings
by optimising our portfolio. Progress is
measured through a range of financial and
non-financial key performance indicators.
Measurements of health and safety,
customer satisfaction and employee
engagement underpin sustainability.
Measures such as order intake, organic
revenue growth, profitability and cash
flow track financial performance.
Similar indicators are used to review
performance in each of the Group’s
businesses.
P24 Responsible business
Continuing operations
All KPIs have been restated to reflect
the continuing operations only.
Non-financial KPIs
Customer satisfaction
(%)
77
85
Health and safety
LTIR
6.3
5.8
5.6
2013
2014
2015
2013
2014
2015
2015 performance
85%
2015 performance
5.6
Of our customers recognise
us as a top three supplier
Calculated on the lost time
incident rate (LTIR)
Description
QinetiQ’s customer satisfaction survey was
introduced in 2014, following suspension
of the MOD survey, to ask all UK customers
with contracts over £200,000 about QinetiQ’s
delivery, engagement and relationship. In
the US, customer satisfaction metrics are
reviewed on a contract-by-contract basis.
Rationale
Using an independent third party we annually
survey around 100 of our largest projects
to help us understand our performance and
what we need to be doing to continuously
improve. We also gather qualitative feedback
through structured interviews.
Description
The LTIR 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.
Rationale
Health and safety performance is monitored
to drive continual improvement in minimising
risks to employees and reducing harm.
Performance this year
Of those surveyed, 85% told us that QinetiQ
is performing as a ‘top three’ supplier, up
from 77% last year. We are moving in the
right direction.
Performance this year
The LTIR has decreased slightly from previous
year. The absolute number of lost time incidents,
resulting in at least one day off work, is broadly
similar to last year.
Link to strategy
Developing relationships with our customers
that are built on mutual trust is a key
strategic priority.
Link to strategy
The safety, health and wellbeing of our people
are intrinsically linked to our strategic success.
P72 Directors’ remuneration report
P24 Responsible business
QinetiQ Group plc Annual Report and Accounts 2015
21
Employee engagement
(Score out of 1,000)
575
593
613
Apprentices and graduates
(%)
4.8
5.9
Voluntary employee turnover
(%)
9.4
9.1
8.9
3.3
2013
2014
2015
2013
2014
2015
2013
2014
2015
2015 performance
613
Scale of 0–1,000 based on Best
Companies Employee Survey
2015 performance
5.9%
Total percentage
of our UK workforce
2015 performance
8.9%
Employees leaving not
at QinetiQ’s instigation
Description
A measure of employee engagement
(in the UK) on a scale of 0–1,000, based
on the Best Companies Employee Survey.
Through this survey, employees share
their views about working at QinetiQ under
the headings of management, leadership,
company, personal growth, my team, giving
something back, fair deal and wellbeing.
Rationale
The annual survey enables comparison
between QinetiQ and other UK companies.
Description
The number shown is the total number of
apprentices and graduates as a percentage
of our UK workforce.
Description
This is a measure of the number of
employees leaving the Company not
at QinetiQ’s instigation.
Rationale
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.
Rationale
Provides a measure of the Group’s ability
to retain employees.
Performance this year
We have again seen an improvement in our
overall engagement score, taking us into the
Best Companies ‘ones to watch’ category.
Performance this year
We have increased the percentage of our
UK workforce who are on apprenticeships
or graduate programmes to 5.9%, meeting
the target we set last year.
Performance this year
The trend of a reduction in voluntary
employee turnover has continued this year,
falling to 8.9%.
Link to strategy
QinetiQ seeks to develop, engage and
empower highly skilled employees who
are passionate about customer service
excellence, innovation and responsible
business practice.
Link to strategy
To deliver outstanding value for our stakeholders
we need to source People Who Know How
today and develop the pipeline for tomorrow.
QinetiQ is seeking to inspire a new generation
of engineers and scientists.
Link to strategy
Our employees 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 create opportunities for
our people to flourish and grow.
P72 Directors’ remuneration report
P24 Responsible business
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
22
Key performance indicators continued
Financial KPIs – continuing operations unless stated
Orders
(£m)
626.1
Organic revenue growth/decline
(%)
Underlying operating profit*
(£m)
596.9
613.6
(9)
(4)
(2)
145.0
113.7
111.3
2013
2014
2015
2013
2014
2015
2013
2014
2015
2015 performance
£613.6m
Value of orders booked in the year
2015 performance
(2)%
Organic decline in revenue
Description
The level of new orders (and amendments
to existing orders) booked in the year.
Rationale
This provides a measure of the Group’s ability
to replace completed contracts/business
with new contracts/business.
Performance this year
This year reflects a return to growth in orders
for the continuing business.
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 acquisitions and disposals.
Rationale
Organic revenue growth demonstrates
the Group’s capability to expand its
operations within its chosen markets
before the effect of acquisitions,
disposals and currency translation.
Performance this year
Continuing operations in total recorded a
2% decline in revenue at constant currency.
At a divisional level a 21% decline in
Global Products masked a 3% growth
in EMEA Services.
2015 performance
£111.3m
Description
The earnings before interest and tax,
excluding all specific adjusting items*.
Rationale
Underlying operating profit is used by the
Group for performance analysis as a measure
of operating profitability that is tracked over
time. Specific adjusting items are excluded
because their size and nature mask the true
underlying performance year on year.
Performance this year
Underlying operating profit declined by 2% in
the year. At a divisional level a 32% reduction
in Global Products offset a 7% increase in
EMEA Services.
Link to strategy
The level of orders reflects the Group’s
ability to listen to, and help shape the needs
of, our customers.
Link to strategy
Organic revenue growth reflects the
Group’s ability to work in partnership
with our customers to understand and
help meet their challenges.
Link to strategy
This measure is a reflection of the
productivity of the Group’s activities and
is used for executive remuneration.
* Definitions of underlying measures of performance and specific adjusting items can be found in the glossary on page 141.
P72 Directors’ remuneration report
QinetiQ Group plc Annual Report and Accounts 2015
23
Underlying earnings per share (EPS)*
(p)
Total Group profit after tax
(£m)
Underlying operating cash flow*
(£m)
16.6
13.8
15.2
(133.2)
(12.7)
104.7
129.8
106.2
114.9
2013
2014
2015
2013
2014
2015
2013
2014
2015
2015 performance
15.2p
Per share
2015 performance
2015 performance
£104.7m
£114.9m
Description
The underlying earnings, net of interest and
tax, expressed in pence per share.
Description
This is the total Group profit/(loss),
net of interest and tax, including all
specific adjusting items and including
discontinued items*.
Description
This represents net cash flow from
operations before cash flows of specific
adjusting items, less net cash outflows
on the purchase/sale of intangible assets
and property, plant and equipment.
Rationale
Underlying EPS provides a measure of the
earnings generated by the Group after
deducting tax and interest. Specific adjusting
items are excluded because their size and
nature mask the true underlying
performance year on year.
Rationale
This shows the overall financial performance
of the Group reflecting both underlying and
specific adjusting items of income and
expenditure. A key financial measure used
to reflect overall financial performance for
the year.
Rationale
This provides a measure of the Group’s ability
to generate cash from its operations and
gives an indication of its ability to service its
debt, make discretionary investments and
pay dividends to shareholders.
Performance this year
Underlying EPS grew by 10%. A marginal
decline in underlying operating profit was
more than offset by a reduction in net
finance expense (following repayment
of private placement debt), a marginal
reduction in the tax rate and a lower
number of shares in issue.
Link to strategy
This is used for executive remuneration,
determining the level of pay-out for certain
of the Group’s long-term incentive plans.
Performance this year
The significant step up in the total Group
profit after tax primarily results from the
absence of impairment charges in the year
as the prior years both contained significant
impairments of goodwill.
Performance this year
Underlying operating cash flow increased
from the prior year and represents a cash
conversion of more than 100%.
Link to strategy
This is a key financial measure of overall
financial performance for the year.
Link to strategy
This is a measure of the cash-generative
characteristics of the Group and is a measure
used for executive remuneration.
* Definitions of underlying measures of performance and specific adjusting items can be found in the glossary on page 141.
P72 Directors’ remuneration report
P105 Note 4 – Specific adjusting items
P72 Directors’ remuneration report
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
24
Responsible business
Making a positive impact
Engaging with our stakeholders
Our Corporate Responsibility strategy reflects the material issues for our business
– defined by our overall business strategy and taking into account 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 our employee engagement programmes. We have introduced
a corporate responsibility network with representatives from across the business
to raise awareness of programmes and plans. We are actively engaged with
industry through the Defence Growth Partnership and trade body working groups
on topics such as skills, environment and ethics.
Managing our approach to responsible business
Governance
Successful delivery of responsible business practice is driven by strong leadership
and governance and we have Board and executive level commitment to corporate
responsibility through the Group Risk & CSR Committee.
P70 – Report of the Risk & CSR Committee
The Committee receives reports and briefings on all material corporate
responsibility issues including business ethics, health and safety, environment,
reputational risk and human rights for its regular meetings. In QNA the Proxy
Board oversees these activities, obtaining independent assurance on the adequacy
of its compliance programmes on an ongoing basis. QinetiQ’s commercial success
is influenced by 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.
Employees are provided with annual training on export controls.
Certification
The Group’s policies and management systems underpin our corporate responsibility
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.
Supplier management
While QinetiQ prides itself on having ‘The People Who Know How’, we also draw upon
the goods and services provided by our approved suppliers. Our suppliers range from
other industry primes to Small and Medium sized Enterprises (SMEs), meaning that
QinetiQ contracts and collaborates with a wide variety of industry partners, and
ensuring that our customers receive the best available solutions in the marketplace.
Our robust procurement and supplier risk management processes ensure that we
work openly and ethically, in the best interest of our customers.
Key highlights
• CBI Award for The 5% Club
• Green Apple Award for Energy
Matters programme
• Successful pilot of the Safe for
Life programme
•
Improved Employee Engagement
Survey score
QinetiQ’s corporate
responsibility priorities
Our priorities can be summarised across
four themes, which we believe ensures that
we meet our stakeholders’ expectations
and contribute to our future success.
Business ethics
To be a responsible and
sustainable business
P25
Responsibility to our people
To attract, engage and
develop the best people
P26
Community investment
To make a positive contribution
to the community
P28
Environmental stewardship
To be an excellent
environmental steward
P29
QinetiQ Group plc Annual Report and Accounts 2015
QinetiQ Group plc Annual Report and Accounts 2015 25
Business ethics
In December 2014 we updated the QinetiQ
Group Code of Conduct, including a new
section on ethical decision-making. The Code
lays out our ethical standards, providing
employees with clear direction and guidance
on how we do business across the Group.
Employees are encouraged to talk to a
manager if they have a concern and are
provided with contact details for our ethics
email advice services and our independently
run, 24/7 confidential reporting line.
Employees are supported in understanding
and using the Code of Conduct through our
annual business ethics training, which is a
mandatory requirement for all employees.
It is also undertaken by our Board and is
available for our contractors and customers
as well. In addition to explaining the Code
of Conduct, the training provides a number
of challenging scenarios to help employees
know what to do if they were to come across
issues such as bribery, fraud, discrimination
and conflict of interest. We have also
communicated with managers to remind
them of the need to act if employees come
to them with issues. We have provided help
and advice in response to all queries received
via our ethics email advice services and all
communication through the whistleblowing
line is appropriately investigated.
Anti-bribery and corruption
We have a zero-tolerance approach to
bribery and corruption and have put in
place a range of governance measures.
Anti-bribery risk management is embedded
in our business processes; we have a process
for undertaking due diligence, monitoring
and auditing of our use of commercial
intermediaries, and we use expert third-
party providers of due diligence where
appropriate. We provide more in-depth
anti-bribery training for those in higher
risk roles, for example those who carry
out overseas business. Our anti-bribery
programmes are overseen by our Chief
Ethics Officers, who are senior executives.
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
responsible business conduct. QinetiQ has
policies in place, among others, to support
adherence to export controls, health and
safety, non-discrimination, anti-bribery and
environmental laws and guidance. This is
further supported by our procedures on
product safety, sustainable procurement,
due diligence and risk management. We
monitor the application of these policies and
procedures through our business assurance
processes. We believe that this embedded
approach is effective. We have recently
implemented a more structured approach
to understanding human rights risk within
our international business risk management
process. We have also been working to
improve our approach to human rights
risk in the supply chain.
Corporate responsibility in action
STEM Outreach: Inspiring
the next generation
Our Malvern site welcomed more than
90 children from four schools to a special
STEM (Science, Technology, Engineering and
Maths) event. With competitive activities
such as creating autonomous Lego robots,
programming airlocks, behavioural modelling
and building Android apps alongside live
demonstrations of QinetiQ technology,
our objective is to continue inspiring the
next generation of scientists and engineers.
The event organiser, QinetiQ systems
engineer and STEM ambassador Tara Francis,
has been an outstanding volunteer in
outreach initiatives, and was nominated
in 2014 for a national STEMNET “Most
Dedicated STEM Ambassador” Award.
The 5% Club: Investing
in a generation
In September 2014, The 5% Club won the
CBI Special Award for ‘Outstanding Business
Led Campaign’. The award was presented
to The 5% Club Campaign Director, QinetiQ’s
Dr Sam Healy, who said:
“Aiming to tackle the dual issues of youth
unemployment and skills shortages, the
campaign encourages members to provide
great ‘earn and learn’ opportunities for young
people with the aim of having 5% of their
workforce on apprenticeships or graduate
programmes. It’s been a rewarding experience
to work on this campaign. I’m delighted by the
response from industry – we now have over 70
members and I’m looking forward to working
with even more organisations in the future.”
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 26
Responsible business continued
Responsibility to our people
2015 Highlights
•
The 5% Club received the CBI Award for
Outstanding Business Led Campaign
•
Increased employee engagement
• Successful pilot of Safe for Life
2016 Priorities
•
Introduce a UK Safety Culture Climate
Survey score
•
Continuing reduction in Lost Time
Incident Rate
•
Increase employee engagement
•
Continued commitment to The 5% Club
Safety, health and wellbeing
QinetiQ puts the safety, health and wellbeing
of its people at the heart of operations and
safety, health and wellbeing underpin our
strategic goals. We continue to focus on
reducing accidents and work-related ill health
as part of our continuous improvement activity.
Last year we decided to move away from a
focus on the UK RIDDOR (Reporting of Injuries,
Diseases and Dangerous Occurrences Regulations
2013) to overall Lost Time Incident (LTI) Rate,
which provides a more internationally relevant
lagging indicator for the Group. LTI Rate
is highly dependent on the number of
employees (calculated as the number of lost
time incidents, where the employee is away
from work for one or more days, times 1,000
divided by the total number of employees).
The headcount in the North American
business reduced significantly with the
divestment of US Services. Therefore the
LTI Rate of prior years has been restated to
exclude the US Services business. On this
restated basis the LTI Rate has reduced
slightly from 5.8 to 5.6.
Lost Time Incident Rate
QinetiQ Group
(Excluding US Global
Products)
2015
2014
2013
5.0
5.0
5.3
US Global Products
17.8 17.8
17.6
Total
5.6
5.8
6.3
Adjusted in prior years to exclude US Services business.
Last year we recognised a weakness in lagging
indicators and, coupled with the desire to
improve safety, we introduced ‘Safe for Life’
into our UK Weapons business. ‘Safe for Life’
focuses on behavioural safety including safety
leadership, human factors, error management
and everyday behaviours of our people.
The programme is underpinned by a Safety
Culture Climate Survey and is supported by
local champions. The pilot programme will
complete with another Safety Culture Climate
Survey in the first half of 2016. Whilst it is too
early to identify changes in the safety climate,
safety theory would suggest that where safety
culture is working well there will be ongoing
reduction in significant incidents accompanied
by an increase in the reporting of safety related
behaviours and hazards. Encouragingly the
significant incident rate has halved from 2.7
to 1.3 (per 1,000 employees) and the reporting
of safety related behaviours and hazards has
significantly increased.
There were no prosecutions, prohibition
notices or improvement notices issued by
regulators in the UK in 2015.
We continue to develop our health and
wellbeing programmes. 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) continue to be
popular. A new area of focus in the coming year
will be improving the inclusion of employees
who have underlying health conditions by
providing an expert support network.
Safety of products
Our most prized possession is trust;
delivering products and services safely
is essential to our commitment to
customers. We have created distinct lines
of responsibility for both ensuring and
assuring product safety and compliance,
with competent individuals holding formally
delegated responsibilities. In the UK,
technical assurance and independent
design review have been fully integrated into
our product and engineering lifecycles.
We continue to invest in attracting and
developing engineers and scientists with
specialist safety expertise and competence.
Improvements continue to be driven by our
Engineering, Science and Technical leadership
team, supported by independent review and
audit. We actively support collaborative
working with the MOD and other industry
organisations, including professional
institutions, in order to develop and
implement best practice safety standards.
Employee engagement
We regularly communicate with employees
to ensure they understand QinetiQ strategy and
business priorities. Company performance
is shared to ensure our employees are aware
of what the results mean to our business,
how we have made progress against our
strategic direction and the market challenges
we face. We do this through a wide range of
communications channels, e.g. the intranet,
roadshows and townhalls.
Our UK Employee Engagement Group (EEG)
is an independent consultative forum which
covers almost 85% of the Group workforce.
Representatives, elected by employees, share
views with leadership teams at local, divisional
and executive level; so everyone gets to have
their say. The EEG listens, gathers feedback and
represents employees through times of change;
whether it’s a local or Company-wide issue.
The representatives are the employee voice to
constructively challenge policy decisions and
actions that have an effect on employees’
working lives or wellbeing.
The annual independent Employee Engagement
Survey is one of the key tools used to gain
feedback from our employees. Following the
divestment of US Services, the survey now
covers over 90% of employees (it excludes US
Global Products). The response rate in 2015
was 73%, which is high in comparison to
industry norms, and we scored 613, up from
593, which places us in Best Companies
‘Ones to watch’ category. The leadership
teams develop specific action plans to
address areas identified for improvement,
e.g. collaboration between teams.
Learning and development
Our people are critical to the delivery of
excellent service to our customers and
we have a highly qualified, experienced
QinetiQ Group plc Annual Report and Accounts 2015 Responsibility to our people
27
Given QinetiQ’s commitment to the
development of the next generation, we
have reviewed our UK Graduate Scheme
and will be improving the overall experience.
Graduates will be given opportunities outside
their main specialism, with the ability to grow
their career with us across a much wider career
remit. We are refreshing ‘Cortex’, which provides
a practical and friendly support network for
those at the start of their careers. Recognising
the difference in the attraction and support
needed to continue to achieve our objectives
with The 5% Club, we have separated out the
Early Careers Team into a specialist Centre of
Excellence within HR. This team continues to
look at new and innovative ways to engage
with schools, colleges, universities and other
establishments to attract talented people.
Diversity and inclusion
Inclusion of all employees is a key objective.
The US Global Products business has a
number of alliance partners that assist in
all aspects of inclusion. In the UK, we are
working with the Employers Network for
Equality and Inclusion and, using tools they
have developed, we have undertaken a gap
analysis to evaluate areas for improvement
in our approach to diversity and inclusion.
This will form the baseline to measure
improvement. With the Global Working
Centre of Excellence being set up to look
at issues related to the increased activity
across the global market, they will also give
consideration to diversity and inclusion
issues across the territories and regions
in which we work.
The breakdown of the number of employees
by gender at the end of March 2015 is shown
in the table below.
Level
Board Directors
Senior managers
All employees
Female
1
33
Male
8
279
1,236
5,014
A team of QinetiQ apprentices reached
the final of the Brathay Apprentice
Challenge 2014, a six-month competition
that saw them come in second place and
raise £2,300 for charity. Supported by the
National Apprenticeship Service, the
Challenge tests non-technical work skills
and the personal attributes of competing
apprentices. The eight finalist teams were
selected from over 110 teams and 1,000
apprentices who entered the competition.
The QinetiQ Brathay challenge team, 2014.
and stable workforce. We have a continued
focus on attracting, developing, supporting
and retaining our people, which creates the
foundation for our future growth. We have
established an Engineering, Science and
Technical community to create a supportive
and collaborative environment for our
technical people and we have appointed
six new Fellows, who are recognised by
QinetiQ customers and peers for their
expertise and excellence in their field.
In 2016 we will be launching the QinetiQ
Academy, which will underpin our continued
focus on delivering excellent training and
development. It will support our people in
the competencies they need to deliver their
roles today, but also ensure they have the
skills and succession opportunities for the
future. By developing leadership programmes
to enhance the skills and knowledge of our
current senior team, and growing our next
leaders through our talent pool, QinetiQ is
well placed to respond to change and look
to new horizons.
The 5% Club – Investing in a Generation
The 5% Club, spearheaded by QinetiQ,
has gone from strength to strength, with
membership at 72 (at 31 March 2015) and
including large and small companies from
a range of sectors and recently the MOD.
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. By encouraging employers to offer
great ‘earn and learn’ opportunities for
young people, we see this as a key step
in developing the future skills, knowledge
and experience needed across the UK.
The 5% Club
Number of apprentices
Number on
graduate programmes
Number of
sponsored students
2015
208
2014
121
102
106
8
17
Percentage of UK workforce
5.9% 4.8%
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 28
Responsible business continued
Community investment
2015 Highlights
• Several successful flagship STEM
outreach events including Schools
Powerboat Challenge
• Second year of awarding the Volunteer
of the Year award
• Employee Engagement Survey score
‘giving something back’ increased
2016 Priorities
•
Continue to increase employee
volunteering participation and reaching
more girls as part of the Your Life
campaign pledge
QinetiQ is committed to being a good
neighbour in the communities in which
we operate. We believe it’s the right thing
to do and it is valued by our employees.
The ‘giving something back’ section in
our employee survey allows employees
to express their opinions on our
community programmes.
One way in which employees contribute to
being a good neighbour is by volunteering
their time and professional skills. Our UK
Employee Volunteering Scheme has been
running since 2011 and provides employees
with time and access to a bursary. A similar
programme has been launched this year
in Australia, called ‘Operation Give Back’,
where employees volunteer as individuals
or in teams for one day a year.
professional skills in the communities where
we operate through programmes such as
Young Enterprise and they offer mentoring
through the Social Mobility Foundation.
Our flagship initiative is our STEM (Science,
Technology, Engineering & Maths) outreach
programme with the aim of inspiring the
next generation of scientists and engineers.
We value our relationships with organisations
such as STEMNET, the Arkwright Scholarship
Trust and the SmallPeice Trust in the UK and
various robotics education programmes in
the US. Our UK STEM Ambassadors have
organised STEM outreach events for school
children such as the annual Powerboat
Challenge and have hosted the UK Cyber
Security Challenge. QinetiQ Australia has
provided its Paramarine Ship and Submersible
Design Software to students of Australian
schools participating in the Future Submarine
Technology Challenge (SUBS in Schools) in
association with the Re-Engineering Australia
Foundation Ltd. QinetiQ’s Space business
in Belgium participates in STEM outreach
programmes such as Technoteens.
QinetiQ is a signatory of the ‘Your Life’ campaign,
and our priorities are to encourage employees
to take part in STEM outreach programmes,
and ensure that we are reaching more girls.
Our non-STEM employees also use their
Last year we created a new Volunteer
of the Year award, which recognised the
achievement of an employee who has made
an outstanding contribution by volunteering
in the community. Last year’s award was won
by Dr Ruth Tunnell for her mentoring through
the Social Mobility Foundation.
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. A sponsorship
and donations committee reviews charity
requests and a small number of additional
donations to local charities are made on a
case by case basis where there is an alignment
to our strategy. Employees can also choose
to give to their chosen charity pre-tax through
payroll giving. In the US, employees focus
on supporting wounded military and their
families by contributions to a range of
specialist organisations. In Belgium they
continue to support a community investment
project at a school in Baladharshan, India.
QinetiQ employees climbed Helvellyn mountain via Striding Edge
for Cancer Research UK. Together they raised over £3,000.
QinetiQ Group plc Annual Report and Accounts 2015
29
Environmental stewardship
2015 Highlights
• Green Apple Award for Energy
Matters programme
• Good progress against energy
reduction target
2016 Priorities
•
Improve asset re-use and waste recycling
• Reduce greenhouse gas emissions due
to UK energy use by 17% by 2020 from
the 2013 baseline
Environmental stewardship
QinetiQ’s environmental management system
(EMS) is geared to the unique challenges of
delivering a compliant, sustainable and ever
improving workplace against the background
of MOD and technology based trials, often
within environmentally sensitive areas. Our
UK EMS, certified to ISO 14001, is supported
through the collaboration of the business,
site and functional teams, with specialist
support from our regional Environmental
Advisors. The use of sustainability appraisals,
in trial and project planning, enables early
identification of potential hazards/impacts
and determination of suitable and sufficient
mitigation measures. In addition, our
monitoring processes have been further
strengthened, during 2015, via structured
Evaluation of Compliance formats and
processes, feeding a site status EMS matrix.
Director of facilities management and Energy manager,
receiving the Green Apple Award for the Energy
Matters Initiative.
UK waste management
Total waste levels in FY15 were lower than in
the previous year with 5,001 tonnes (including
313 tonnes of hazardous waste) compared
to 5,514 tonnes (including 112 tonnes of
hazardous waste) in FY14. However we
missed our challenging objective to have less
than 10% waste go to landfill. We achieved
13%, principally due to the need to review
and re-balance segregation and collection
arrangements following footprint and waste
service changes. There was, however, a slight
increase in recycling, reaching 76% (up from
74% in FY14). Enhanced re-use of assets and
segregation/recycling of waste will continue
to be our focus during FY16.
Greenhouse gas emissions and
energy management
We are making good progress on UK energy
reduction via our Energy Matters programme.
Energy Matters brings together a focused
campaign element, promoting involvement
and the contribution that can be made at
all levels within the organisation, with a
structured network of Energy Champions
and Energy Engineers to identify and manage
significant consumption reduction projects
and maintenance. During 2015, we received
a Green Apple Award for the Energy Matters
initiative. Our UK electricity usage was 7%
lower than last year and oil use reduced
by 5%, however there was a 2% increase
in our use of gas.
We continue to submit voluntarily to the
CDP Climate Change Programme and are
registered for the Carbon Reduction
Commitment (CRC) scheme. During 2016,
we will be seeking accreditation to the
ISO 50001 Energy Management standard,
as part of our ongoing commitment to driving
and demonstrating improvement across the
footprint and to meet the requirements
of ESOS (the Energy Savings Opportunity
Scheme). We continue 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 2014 to 31 March 2015, 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 2014 and
Defra reporting guidance (October 2013).
The figures below reflect a number of
changes in our business, including the
divestment of US Services, some acquisitions,
and some improvements in data capture.
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
ended
31 March
2015
Year
ended
31 March
2014
26,534 27,590
39,668 38,371
66,202 65,960
87
55
Conservation
Our partnership with Marwell Wildlife,
for the management of the Eelmoor Marsh
Site of Special Scientific Interest (SSSI),
at our Head Office in Farnborough, goes
from strength to strength, ensuring ongoing
‘favourable condition’ status. During FY15,
we enhanced communications to our
employees and introduced some guided
tours of the area, with significant positive
feedback; an initiative we are keen to repeat
during FY16. Many of our sites and those
we manage on behalf of the MOD contain
designated conservation areas and our
sustainability appraisal process plays an
important part in addressing any potential
issues as we deliver our test, evaluation and
training support services.
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
30
Risk management
Understanding and
managing our risks
Admiral Sir James Burnell-Nugent
Risk & CSR Committee Chairman
The Board recognises that QinetiQ operates in varied business
environments and that risk management must reflect both the need
to take risk and to avoid harm. Board level oversight is discharged
through two committees, the Audit Committee, which focuses on
risks where the primary impact is financial, and the Risk & CSR
Committee, which focuses on risks where the primary impact is
non-financial; both committees retain visibility of both the financial
and non-financial risks.
The Board agrees and reviews its tolerance of risk through
establishing a clear risk appetite and setting appropriate delegations
of authority to the executive and senior leaders. The Board’s risk
appetite is set to provide boundaries and guidance to support
executives and senior leaders in their decision-making and allow
operational flexibility. Local decision-making is supported within
defined delegation of authority and the Board requires all employees
to abide by relevant legal requirements as a minimum.
Managing risk
n
o
i
t
a
t
l
u
s
n
o
c
d
n
a
n
o
i
t
a
c
i
n
u
m
m
o
C
Establishing the context
Risk assessment
Risk identification
Risk analysis
Risk evaluation
Risk treatment
w
e
i
v
e
r
d
n
a
r
o
t
i
n
o
M
QinetiQ Group plc Annual Report and Accounts 2015
31
Our areas of risk
1
Risks relating
to strategy:
(cid:127) Defence and security spending
(cid:127) Complex market characteristics
and contract profile
(cid:127) Trading in a global market
(cid:127) Emerging and reputational risk
(cid:127) US foreign ownership
regulations
2
3
Risks relating
to people:
(cid:127) Recruitment and retention
(cid:127) Breaches of security and IT systems failure
(cid:127) Significant breach of relevant
laws and regulations
Risks relating to financial
management and markets:
(cid:127) Defined benefit pension obligations
(cid:127) Tax legislation
(cid:127) Exchange rates
(cid:127) Inflation, credit and interest rates
Risk appetite within QinetiQ focuses on those critical risk areas
necessary to achieve our strategic goals. 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
The Board agrees and reviews its tolerance of risk through appropriate
delegations of authority to the executive and senior leaders.
The management of risk is key to ensuring QinetiQ is successful
in delivering its objectives, whilst protecting the interests of its
stakeholders. QinetiQ’s risk management methods and processes
provide a framework which allows:
• Balanced: Preference for delivery options that have a low or
• Risk identification: identification of risks and opportunities
moderate degree of residual risk and where successful delivery
also provides an acceptable level of reward and value for money
relevant to the Group’s objectives
• Risk analysis: assessment of risks in terms of likelihood
• Cautious: Avoidance of risk and uncertainty is the key objective,
and impact
a greater level of control and mitigation may be required.
Significantly greater returns expected for commercial
opportunities to offset risk
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, 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 UK
• Risk evaluation: determine and prioritise which risks
need treatment
• Risk treatment: appropriate management strategies put in place
• Monitor and review: monitoring and oversight of risk management
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.
Our reputation is a highly valuable asset and reputational impact
is considered as a factor in assessing overall risk impact. 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.
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 32
Principal risks and uncertainties
Understanding and
managing our risks
Key risk
Defence
and security
spending
Associated
strategic
priority
Customers
Customers
Complex
market
characteristics
and contract
profile
Associated
KPIs
Responsibility
Risk
appetite
• Customer
satisfaction
• Business
Hungry
Development
• The Group services the UK defence domains of Air, Land, Maritime and Joint Forces
as well as adjacent sectors. This provides a degree of portfolio diversification.
The Group will continue to monitor expenditure changes in its traditional markets
and will adjust business activities where appropriate.
• The MOD has made considerable progress in balancing its equipment budget.
In defence research, where QinetiQ is the private sector market leader, spending
was stabilising at about £400m p.a. due to the 1.2% floor on R&T spend (pre SDSR).
• QinetiQ monitors and responds to potential opportunities arising from the MOD’s
actions to deliver improved value for money by making proactive proposals that
deliver the desired outcome.
• QinetiQ expects that the SDSR process will enable consultation between Government
and industry to ensure UK defence priorities are properly considered.
• Further investment in the pursuit of international opportunities assists in the
diversification away from the dependency on UK and US Government spending.
• US products (such as unmanned systems) are targeted to be funded through Programs
of Record (i.e. in the US Base budget) in approx 2017.
provide a strong proposition and a significant advantage in competitive bidding.
• QinetiQ and defence industry partners have been fully engaged with the MOD in
the development of the new ‘Orange Book’ framework and its practical application.
QinetiQ and defence industry partners have been consulted by the SSRO on the
draft Statutory Guidance, due to be published early in 2015.
• The contracts and orders pipeline is regularly reviewed by senior operational management.
• The nature of many of the services provided under 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.
Director
• Strategic
Business
Director
– Defence
Director
• Strategic
Business
Director
– Defence
Description and impact
Likelihood/Impact
Mitigation
• The Group’s revenue is predominantly derived from government customers in
Medium/High
Medium/High
• QinetiQ seeks to focus on areas within these markets in which its deep customer
understanding, domain knowledge, technical expertise and platform independence
• Customer
satisfaction
• Business
Balanced
Development
the defence and security sector. 70% of the Group’s revenue comes directly from
contracts with the UK Government and 7% comes directly from contracts with
the US Government.
• Any reduction in government defence and security spending in either the UK
or the US could have an adverse impact on the Group’s financial performance.
• 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 the Comprehensive Spending Review (CSR) as well as
the next Strategic Defence and Security Review (SDSR) expected to follow the 2015
General Election. The SDSR is expected to take place in the next 12 months. The total
amount, and subdivision of, UK defence spending post SDSR may be different to the
current budget. The Group’s main contracts are exposed to spend on Test & Evaluation
and Research & Technology, both of which are expected to be studied in the SDSR.
• The Group’s US products business (approximately £60m annual revenue) has been
largely funded through overseas contingency budgets which are expected to decline
as the US withdraws from Afghanistan.
• 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.
• Following the Currie Review, the Defence Reform Act and the Single Source
Regulations are now in place. The Single Source Regulations Office (SSRO) is
established with a Chairman and Board appointed. The ‘Yellow Book’, a legally
binding framework, has been replaced by the ‘Orange Book’ 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 ‘Baseline Profit Rate’ for single sourced work has been set at 10.6% for 2016
(2015: 10.7%) This percentage is reviewed annually. The new regulations apply
to new single source contracts over £5m in value from April 2015. Approximately
33% of EMEA Services revenue is derived from single sourced work, excluding the
non-tasking element of the LTPA contract.
• The ongoing ‘transformation’ of the UK MOD’s Defence Equipment and Support
(DE&S) organisation has now adopted a model of ‘bespoke trading entity’ rather
than Government-Owned Contractor-Operated, which was the intended model.
DE&S has hired ‘Managed Service Providers’ (MSPs), companies to help drive the
transformation programme to improve programme delivery and implement new
systems and processes as it looks to reduce costs.
• Some of the Group’s revenue is derived from contracts that have a fixed price.
There is a risk that the costs required for the delivery of a contract could be
higher than those agreed in the contract as a result of the performance of new
or developed products, operational over-runs or external factors. 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.
• Many 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,
often without cause.
• The timing of orders receipts could have a material impact on the Group’s
performance in a given reporting period as the amounts payable under some
government contracts can be significant.
QinetiQ Group plc Annual Report and Accounts 2015 33
Associated
KPIs
• Customer
satisfaction
Risk
appetite
Hungry
Responsibility
• Business
Development
Director
• Strategic
Business
Director
– Defence
• Customer
satisfaction
Balanced
• Business
Development
Director
• Strategic
Business
Director
– Defence
Key risk
Description and impact
Likelihood/Impact
Mitigation
• The Group services the UK defence domains of Air, Land, Maritime and Joint Forces
as well as adjacent sectors. This provides a degree of portfolio diversification.
The Group will continue to monitor expenditure changes in its traditional markets
and will adjust business activities where appropriate.
• The MOD has made considerable progress in balancing its equipment budget.
In defence research, where QinetiQ is the private sector market leader, spending
was stabilising at about £400m p.a. due to the 1.2% floor on R&T spend (pre SDSR).
• QinetiQ monitors and responds to potential opportunities arising from the MOD’s
actions to deliver improved value for money by making proactive proposals that
deliver the desired outcome.
• QinetiQ expects that the SDSR process will enable consultation between Government
and industry to ensure UK defence priorities are properly considered.
• Further investment in the pursuit of international opportunities assists in the
diversification away from the dependency on UK and US Government spending.
• US products (such as unmanned systems) are targeted to be funded through Programs
of Record (i.e. in the US Base budget) in approx 2017.
• QinetiQ seeks to focus on areas within these markets in which its deep customer
understanding, domain knowledge, technical expertise and platform independence
provide a strong proposition and a significant advantage in competitive bidding.
• QinetiQ and defence industry partners have been fully engaged with the MOD in
the development of the new ‘Orange Book’ framework and its practical application.
QinetiQ and defence industry partners have been consulted by the SSRO on the
draft Statutory Guidance, due to be published early in 2015.
• The contracts and orders pipeline is regularly reviewed by senior operational management.
• The nature of many of the services provided under 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.
Associated
strategic
priority
Customers
Defence
and security
spending
• The Group’s revenue is predominantly derived from government customers in
Medium/High
the defence and security sector. 70% of the Group’s revenue comes directly from
contracts with the UK Government and 7% comes directly from contracts with
Customers
• The aerospace, defence and security markets are highly competitive. The Group’s
Medium/High
performance may be adversely affected should it not be able to compete in the
Complex
market
characteristics
and contract
profile
the US Government.
• Any reduction in government defence and security spending in either the UK
or the US could have an adverse impact on the Group’s financial performance.
• 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 the Comprehensive Spending Review (CSR) as well as
the next Strategic Defence and Security Review (SDSR) expected to follow the 2015
General Election. The SDSR is expected to take place in the next 12 months. The total
amount, and subdivision of, UK defence spending post SDSR may be different to the
current budget. The Group’s main contracts are exposed to spend on Test & Evaluation
and Research & Technology, both of which are expected to be studied in the SDSR.
• The Group’s US products business (approximately £60m annual revenue) has been
largely funded through overseas contingency budgets which are expected to decline
as the US withdraws from Afghanistan.
markets in which it aims to operate.
• Following the Currie Review, the Defence Reform Act and the Single Source
Regulations are now in place. The Single Source Regulations Office (SSRO) is
established with a Chairman and Board appointed. The ‘Yellow Book’, a legally
binding framework, has been replaced by the ‘Orange Book’ 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 ‘Baseline Profit Rate’ for single sourced work has been set at 10.6% for 2016
(2015: 10.7%) This percentage is reviewed annually. The new regulations apply
to new single source contracts over £5m in value from April 2015. Approximately
33% of EMEA Services revenue is derived from single sourced work, excluding the
non-tasking element of the LTPA contract.
• The ongoing ‘transformation’ of the UK MOD’s Defence Equipment and Support
(DE&S) organisation has now adopted a model of ‘bespoke trading entity’ rather
than Government-Owned Contractor-Operated, which was the intended model.
DE&S has hired ‘Managed Service Providers’ (MSPs), companies to help drive the
transformation programme to improve programme delivery and implement new
systems and processes as it looks to reduce costs.
• Some of the Group’s revenue is derived from contracts that have a fixed price.
There is a risk that the costs required for the delivery of a contract could be
higher than those agreed in the contract as a result of the performance of new
or developed products, operational over-runs or external factors. 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.
• Many 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,
often without cause.
• The timing of orders receipts could have a material impact on the Group’s
performance in a given reporting period as the amounts payable under some
government contracts can be significant.
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 34
Principal risks and uncertainties continued
Associated
strategic
priority
Customers
Key risk
Complex
market
characteristics
and contract
profile
(continued)
Customers
Description and impact
Likelihood/Impact
Mitigation
• Organisational Conflicts of Interest (OCI) may occur where the Group provides
Medium/High
services to both a defence end-user customer as well as those within the defence
supply chain.
• QinetiQ takes proactive steps to manage any potential OCI and maintain its
ability to provide independent advice. QinetiQ operates under the MOD’s generic
• Customer
satisfaction
formal compliance regime and applies a rigorous compliance process.
• Where QinetiQ wishes to operate on both the advice and supply chain side
of an opportunity we do so only after receiving approval from the MOD.
• Strategic
Business
Director
– Defence
Associated
KPIs
Responsibility
Risk
appetite
Balanced
• The Group is reliant on a limited number of major customers. A material element
of the Group’s revenue is derived from one contract. The Long Term Partnering
Agreement (LTPA) is a 25-year contract to provide 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.
• In 2015 the LTPA directly contributed 26% of the Group’s revenue and supported
a further 17% through tasking services using LTPA managed facilities.
Medium/High
• In February 2013 the Group signed the LTPA for a third five-year period with the
• LTPA Director
Hungry
• Customer
satisfaction
MOD. The next scheduled ‘re-pricing’ 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 2014.
• The Group has achieved significant cost savings for the MOD on delivered services,
and is on track to exceed the £700m of savings originally projected to be delivered
over the life of the contract.
• The Group expects to engage with the MOD regarding the study of future plans for
test and evaluation services within the SDSR.
Recruitment
and retention
Employees
• The Group operates in many specialised engineering, technical and scientific domains.
• The lack of graduates in the science, technology, engineering and mathematics
Low/High
(STEM) domains leads to future skills shortage.
• 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 technicians.
• The Group conducts regular activities to identify key roles and personnel. Succession
• Health and
• Business Unit
Balanced
plans are in place looking internally at candidates ready now or in need of development
Safety
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
Managing
Directors
• STEM outreach from primary school age through to work experience and
• QinetiQ is leading industry in The 5% Club, a campaign to increase the recruitment
• % of graduates
Breaches
of security
and IT systems
failure
The way
we work
• 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 adverse 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.
High/High
• Data security is assured through a multi-layered approach that provides a
• Underlying
• Business Unit
Cautious
hardened environment, including robust physical security arrangements and data
• Comprehensive internal and external testing of potential vulnerabilities is conducted
• Underlying EPS
• Functional
satisfaction survey.
graduate opportunities.
of graduates and apprentices.
resilience strategies.
along with 24/7 monitoring.
improvement plans.
• 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
• 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.
• Voluntary
employee
turnover
• Employee
satisfaction
and apprentices
operating profit
• Profit after tax
Managing
Directors
• Underlying
operating
cash flow
Directors
Trading in a
global market
Growth
Orientation
• QinetiQ operates internationally. Risks include: regulation and administration
Low/Medium
• While the Group has a growing geographical footprint, its traditional activities are
• Orders
• Business Unit
Cautious
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.
confined to the UK and the US.
• Organic revenue
• Relationships or contracts in new markets are assessed for their inherent risks, using
growth
our International Business Risk Assessment process, before being formally agreed.
This allows opportunities to be reviewed at different levels of management according
to their inherent risk.
Managing
Directors
• International
Business
Development
Director
QinetiQ Group plc Annual Report and Accounts 2015 Complex
market
characteristics
and contract
profile
(continued)
Associated
strategic
priority
Customers
Customers
Key risk
Description and impact
Likelihood/Impact
Mitigation
• Organisational Conflicts of Interest (OCI) may occur where the Group provides
Medium/High
services to both a defence end-user customer as well as those within the defence
supply chain.
• QinetiQ takes proactive steps to manage any potential OCI and maintain its
ability to provide independent advice. QinetiQ operates under the MOD’s generic
formal compliance regime and applies a rigorous compliance process.
• Where QinetiQ wishes to operate on both the advice and supply chain side
of an opportunity we do so only after receiving approval from the MOD.
• The Group is reliant on a limited number of major customers. A material element
Medium/High
• In February 2013 the Group signed the LTPA for a third five-year period with the
of the Group’s revenue is derived from one contract. The Long Term Partnering
Agreement (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.
• In 2015 the LTPA directly contributed 26% of the Group’s revenue and supported
a further 17% through tasking services using LTPA managed facilities.
MOD. The next scheduled ‘re-pricing’ 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 2014.
• The Group has achieved significant cost savings for the MOD on delivered services,
and is on track to exceed the £700m of savings originally projected to be delivered
over the life of the contract.
• The Group expects to engage with the MOD regarding the study of future plans for
test and evaluation services within the SDSR.
35
Risk
appetite
Balanced
Associated
KPIs
• Customer
satisfaction
Responsibility
• Strategic
Business
Director
– Defence
• Customer
satisfaction
• LTPA Director
Hungry
Recruitment
and retention
Employees
• The lack of graduates in the science, technology, engineering and mathematics
(STEM) domains leads to future skills shortage.
• 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 technicians.
Breaches
of security
and IT systems
failure
The way
we work
• 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.
High/High
• A breach of data security or IT systems failure could have an adverse 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.
• The Group operates in many specialised engineering, technical and scientific domains.
Low/High
• The Group conducts regular activities to identify key roles and personnel. Succession
• Health and
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.
• STEM outreach from primary school age through to work experience and
graduate opportunities.
• QinetiQ is leading industry in The 5% Club, a campaign to increase the recruitment
of graduates and apprentices.
• 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.
• 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.
Safety
• Voluntary
employee
turnover
• Employee
satisfaction
• % of graduates
and apprentices
• Underlying
operating profit
• Profit after tax
• Underlying EPS
• Underlying
operating
cash flow
• Business Unit
Managing
Directors
Balanced
Cautious
• Business Unit
Managing
Directors
• Functional
Directors
Trading in a
global market
Growth
Orientation
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.
• QinetiQ operates internationally. Risks include: regulation and administration
Low/Medium
• While the Group has a growing geographical footprint, 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.
This allows opportunities to be reviewed at different levels of management according
to their inherent risk.
• Orders
• Organic revenue
growth
Cautious
• Business Unit
Managing
Directors
• International
Business
Development
Director
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 36
Principal risks and uncertainties continued
Associated
strategic
priority
The way
we work
Key risk
Significant
breach of
relevant
laws and
regulations
Defined
benefit
pension
obligations
The way
we work
Description and impact
Likelihood/Impact
Mitigation
Associated
KPIs
Responsibility
Risk
appetite
Low/High
• The Group has robust policy, procedures and training in place to ensure that it meets
• Underlying
• Business Unit
Cautious
• The Group operates in highly regulated environments and 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:
– Safety liability of products, services and advice.
– Workplace and occupational health, safety and environmental matters.
– Bribery and ethics.
– International trade controls.
• The Group operates a defined benefit (DB) pension scheme which is closed
Medium/High
• Scheme performance is reviewed regularly by Group management in conjunction
to future accrual.
• At the year end the DB pension scheme was a liability of £39.4m under an
IAS 19 basis.
• 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.
• Any change to 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.
Tax legislation
The way
we work
• QinetiQ is liable to pay tax in the countries in which it operates, principally the UK
High/High
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 expects to claim the super deduction while the treatment of RDEC
for MOD single source contracts remains under discussion between industry and
the Government.
all current regulations; for example role-specific safety training and business ethics
training which is mandatory for Board members and all employees across the Group.
• The QinetiQ Code of Conduct defines clear expectation for the Group and its
employees; for example it states that the Group does not tolerate bribery and
corruption and will comply with relevant international trade regulations.
• The Group manages the effective identification, measurement and control
of regulatory risk.
Managing
Directors
• Functional
Directors
operating profit
• Profit after tax
• Underlying EPS
• Underlying
operating
cash flow
• Health and
• Local management continuously monitor local laws. Professional advice is sought
Safety
when engaging in new territories to ensure that the Group complies with local
and international regulations.
• Accreditation to external standards; for example safety and environmental systems
continue to be accredited to international standards; external authorisation for
regulated design and maintenance services in the aviation sector.
• Group
Treasurer
Balanced
• Profit after tax
• Underlying EPS
• Underlying
operating
cash flow
with the scheme’s independent Trustee.
• External actuarial and investment advice is regularly taken to ensure the best
interests of both the Group and the scheme members.
• The Group works in collaboration with the Trustees to agree an investment strategy
that progressively de-risks the scheme as the funding level improves.
• The Company continues to pay the deficit recovery payments outstanding from
the 2011 valuation. Company contributions to the scheme are expected to continue
at £13m per annum until 2018.
• The scheme was closed to future accrual on 31 October 2013.
• At the year end 45% of the inflation risk is hedged and 20% of interest rate risk
hedged, measured on a gilts basis. A 5% inflation cap protects £264m of pensioner
liabilities for ten years to 2025.
• The Group is currently actively engaging with industry, MOD and industry bodies
• The Group has £291.6m of UK tax losses carried forward as at 31 March 2015
manage potential changes.
regarding the treatment of RDEC.
(2014: £213.9m).
• External advice and consultation are sought on potential changes in tax legislation
in the UK, the US and elsewhere as necessary enabling the Group to plan for and
• Profit after tax
• Underlying EPS
• Group Tax
Manager
Balanced
QinetiQ Group plc Annual Report and Accounts 2015 Key risk
Description and impact
Likelihood/Impact
Mitigation
• The Group has robust policy, procedures and training in place to ensure that it meets
all current regulations; for example role-specific safety training and business ethics
training which is mandatory for Board members and all employees across the Group.
• The QinetiQ Code of Conduct defines clear expectation for the Group and its
employees; for example it states that the Group does not tolerate bribery and
corruption and will comply with relevant international trade 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.
• Accreditation to external standards; for example safety and environmental systems
continue to be accredited to international standards; external authorisation for
regulated design and maintenance services in the aviation sector.
• The Group operates a defined benefit (DB) pension scheme which is closed
Medium/High
• Scheme performance is reviewed regularly by Group management in conjunction
with the scheme’s independent Trustee.
• External actuarial and investment advice is regularly taken to ensure the best
interests of both the Group and the scheme members.
• The Group works in collaboration with the Trustees to agree an investment strategy
that progressively de-risks the scheme as the funding level improves.
• The Company continues to pay the deficit recovery payments outstanding from
the 2011 valuation. Company contributions to the scheme are expected to continue
at £13m per annum until 2018.
• The scheme was closed to future accrual on 31 October 2013.
• At the year end 45% of the inflation risk is hedged and 20% of interest rate risk
hedged, measured on a gilts basis. A 5% inflation cap protects £264m of pensioner
liabilities for ten years to 2025.
• External advice and consultation are sought on potential changes in tax legislation
in the UK, the US and elsewhere as necessary enabling the Group to plan for and
manage potential changes.
• The Group is currently actively engaging with industry, MOD and industry bodies
regarding the treatment of RDEC.
• The Group has £291.6m of UK tax losses carried forward as at 31 March 2015
(2014: £213.9m).
Associated
strategic
priority
The way
we work
Significant
breach of
relevant
laws and
regulations
• The Group operates in highly regulated environments and recognises that its
Low/High
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:
– Safety liability of products, services and advice.
– Workplace and occupational health, safety and environmental matters.
– Bribery and ethics.
– International trade controls.
Defined
benefit
pension
obligations
The way
we work
to future accrual.
IAS 19 basis.
• At the year end the DB pension scheme was a liability of £39.4m under an
• 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.
• Any change to 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.
Tax legislation
The way
we work
and the US.
• QinetiQ is liable to pay tax in the countries in which it operates, principally the UK
High/High
• 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 expects to claim the super deduction while the treatment of RDEC
for MOD single source contracts remains under discussion between industry and
the Government.
37
Risk
appetite
Cautious
Associated
KPIs
Responsibility
• Business Unit
Managing
Directors
• Functional
Directors
• Underlying
operating profit
• Profit after tax
• Underlying EPS
• Underlying
operating
cash flow
• Health and
Safety
• Group
Treasurer
Balanced
• Profit after tax
• Underlying EPS
• Underlying
operating
cash flow
• Profit after tax
• Underlying EPS
• Group Tax
Manager
Balanced
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 38
Operating review
EMEA Services
EMEA Services combines world-leading expertise with unique facilities to provide technical assurance, test and evaluation and training
services, underpinned by long-term contracts. The most significant of these contracts is the Long Term Partnering Agreement (LTPA) for
test, evaluation and training services which has delivered an improved service and significant savings for the MOD over the last 12 years.
Capital expenditure is likely to increase in the future as we continue to invest in the LTPA contract. EMEA Services is also a market leader
in research and advice in specialist areas such as C4ISR, procurement advisory services and cyber security.
Financial performance
EMEA Services delivered a strong performance in 2015. Each of the
core Air, Weapons and Maritime businesses performed well despite
the uncertainty in the UK defence market resulting from the MOD
transformation programme and forthcoming Strategic Defence and
Security Review.
Orders, excluding the £998m third term of the LTPA contract, grew
3% to £461.6m (2014: £447.8m) demonstrating the unique strengths
of the division and its highly differentiated position in its markets.
Revenue grew 3% on an organic basis at constant currency, building
on the 3% increase last year. At the beginning of the new financial
year, 80% of the division’s FY16 revenue was already under contract,
a similar level to a year ago.
Underlying operating profit* increased 7% to £93.0m (2014: £86.7m)
assisted by an insurance recovery and the completion of a final
milestone on an international project.
P93 Financial statements
Markets and outlook
• The Front Line Commands (Navy, Army, Air and Joint Forces)
are exercising their newly delegated powers to shape future
capabilities. QinetiQ’s business units are aligned closely to
these Commands and so are well placed to help them with
their growing procurement responsibilities.
• During the year our Cyber, C4ISR and Training businesses
were aligned to meet the requirements of the recently created
Joint Forces Command, such as the need for information
superiority, as well as demand from other government and
commercial customers.
Defence transformation, the forthcoming comprehensive spending
review and SDSR are expected to have an impact on the UK defence
market this year. This will provide future opportunities for EMEA
Services to build on its strong record of delivering ‘more for less’,
whilst recognising that in FY16 there will be uncertainty and the
potential for interruptions to order flow. The portion of revenue
under contract at the start of FY16 was similar to a year ago and
the balance is supported by a pipeline of opportunities but order
flow and contract cover will be watched closely over the coming
months. Overall, given the opening backlog position, expectations
for the performance of EMEA Services in the current financial year
are unchanged.
Orders(1)
Revenue
Underlying operating profit*
Underlying operating margin*
Book to bill ratio(1)
Funded backlog(1)
2015
£m
2014
£m
461.6 447.8
625.6 607.0
86.7
93.0
14.9% 14.3%
1.1x
1.1x
678.6 661.0
(1) Excludes the £998m third term of the LTPA contract. B2B ratio is orders won
divided by revenue recognised, excluding the LTPA contract.
* Definitions of underlying measures of performance can be found in the glossary
on page 141.
Our value pipeline
Our Organic-Plus strategy prioritises active portfolio management.
All of our business operations are graded within a value pipeline which
gives us full visibility and direction over our assets and capabilities.
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
P6 Market overview
P12 Our Organic-Plus strategy
QinetiQ Group plc Annual Report and Accounts 2015 39
Year in review
Core
QinetiQ’s Air business de-risks complex aviation programmes. It works
with supply chain partners and signed new long-term agreements with
key suppliers to deliver additional flexibility for customers. During the
year it secured a £16m extension to its largest MOD test and evaluation
contract, and a four-year £5m contract for research into aircrew
performance. The business also continued to grow its engineering
services offering and now provides maintenance, repair and overhaul
services for fixed and rotary wing aircraft across three main contracts,
with opportunities to take this capability into new international markets.
QinetiQ’s Weapons business supplies independent research, evaluation
and training services for integrated weapons systems. The business
delivers the MOD’s conventional weapons research programme
through the Weapons Science and Technology Centre, which secured
£17m of orders during the year. In response to the growing complexity
of weapons systems trials work, major infrastructure improvements
took place at a number of the ranges that the business runs under the
LTPA contract including new communications infrastructure in the
Hebrides and a new range control centre at Aberporth in Wales.
QinetiQ’s expertise continues to attract international customers with
work undertaken for the South Korean government as well as European
customers. The Weapons business has a long track record of delivering
complex managed services in high risk environments and is pursuing a
number of outsourcing opportunities.
The Maritime business delivers operational advantage to naval
clients worldwide through the provision of independent technical
advice and support, particularly in the areas of platform performance,
stealth, command information systems and systems integration.
The business won a £5m contract from a competitor to deliver the
MOD’s mobile underwater targets service at the BUTEC range it
operates off North West Scotland, which also benefited from over
£20m of investment to modernise its acoustic measurement system,
enhancing QinetiQ’s ability to deliver stealth-related services. During
the year the business supported the integration of a new radar on
Type 23 frigates and a new Command System for the helicopter
carrier HMS Ocean. This expertise underpins a new mission systems
integration service to meet demand from international customers,
particularly in the Asia Pacific region. The business was also awarded
a contract to deliver technical support for ship procurement for
the Canadian government. QinetiQ’s Portsdown site was selected
to host the Defence Growth Partnership’s Centre for Maritime
Intelligent Systems which will help UK industry meet customer
interest in emerging technologies such as autonomous systems.
QinetiQ Australia provides impartial advice and services predominantly
to government customers. The business is underpinned by two long-term
contracts with the Commonwealth Government of Australia’s Department
of Defence – the Defence Science and Technology Organisation
(DSTO) contract which is focused on provision of engineering services
workshops and the Aircraft Structural Integrity contract which supports
the airworthiness of military aircraft. QinetiQ Australia delivered a
steady performance against a background of fiscal pressures and
defence reform, securing a two-year extension to the services
it delivers at DSTO Fishermans bend in Melbourne. Greg Barsby,
a former KBR executive, took up the role of Managing Director in
December 2014. His remit is to target long-term contracts through
improved commercial and business development capabilities as well
as to reinforce partnerships with government and industry.
QinetiQ’s C4ISR business provides research, advice and bespoke
solutions for secure communications, command and control,
surveillance sensors and information management. It is the MOD’s
leading supplier of C4ISR research, which underpins the advice
capability of the business as well as future opportunities to support
customers’ transformation and innovation needs. In the UK, recent
funding rounds and announcements have protected or enhanced
budgets for C4ISR. The UK’s Joint Forces Command provides a focus
for multi-billion pound procurements of ‘enabling’ capabilities that
have not existed before and C4ISR is now aligned with the Cyber and
Training businesses to meet these requirements. In addition, ongoing
instability in the Middle East is increasing opportunities from
governments in the region.
Explore
In the ‘Explore’ category, QinetiQ’s Training business uses
Commercial-Off-The-Shelf (COTS) technology to connect people
and assets for mission rehearsal and tactic development. The business
secured its largest ever contract for the continued provision in the
UK of Distributed Synthetic Air Land Training valued at £33m over
five years. It also beat a number of competitors to win the next
stage of a core research programme worth £3m over four years.
As a result, the business is well positioned for future opportunities
as the MOD moves towards its vision of a network of simulators
across the UK to augment live training. Having established an office
in Orlando, Florida, the heart of the US training and simulation market,
the business has secured a position on three IDIQ contracts working
in partnership with established prime contractors such as Alion
and developing a promising pipeline of opportunities in the US.
Cyber Security is an ‘Explore’ business with opportunities in critical
national infrastructure, as well as defence and security. It won a new
£3m contract to deliver secure monitoring and hosting services for
a major financial institution. In recognition that compliant systems
alone do not necessarily reduce business risk, the business is
integrating QinetiQ’s human science expertise into its consultancy
offering and is investing in its cyber intelligence capabilities. Closer
alignment with the Training business will ensure that QinetiQ is
better able to meet the demand for cyber training. QinetiQ’s cyber
intelligence business, Cyveillance®, launched a cloud-based cyber
threat centre that monitors the internet, provides alerts and delivers
data on domain names, IP addresses, phishing and malware attacks.
This provides direct access for customers to its monitoring and
investigative tools and complements its existing consultancy-based
services. QinetiQ’s suite of cyber security offerings is completed by
its wholly-owned subsidiary Boldon James, which provides data
classification and secure messaging solutions and is reported as
part of the Global Products division.
Procurement Advisory Services was established as a stand-alone
‘Explore’ business in 2014. It provides tender assessment, cost and
analytical services principally to support complex procurement
programmes in highly regulated markets. During the year, the business
provided horizon scanning for the UK Cabinet Office, cost forecasting
services to the MOD, and won a £2m MOD contract for business case
support to help address frontline challenges such as the supply of water,
fuel and power. Procurement Advisory Services is spear-heading QinetiQ’s
presence in Canada, where an office was opened during the year.
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 40
Operating review continued
Within the Air business, QinetiQ delivers turnkey services for customers
using Unmanned Aerial Systems (UAS) to meet growing demand
particularly from international organisations such as the United
Nations. The business has developed commercial relationships with
the three largest manufacturers of unmanned aircraft outside the
US and in September opened the UK’s first airfield capable of
operating large UAS at Llanbedr in Wales. During the year, it was
awarded a competitively-won contract to provide manpower for
a short duration service for an international institution.
Test for value
EMEA Services is ‘testing for value’ a number of early stage offerings.
These include the provision of technical services in support of Directed
Energy Weapons (DEW) and the delivery of secured navigation systems
such as the secure signal processing already being provided for the
Galileo constellation of satellites – the European Union version of GPS.
Understanding our business
What we do
Approximate annual
revenue
Approximate total
employees
Key sites
(UK unless stated)
Key contracts
De-risk complex aviation
programmes by testing
military aircraft and
equipment, evaluating the
risks and assuring safety.
Supplies independent
research, evaluation
and training services
for integrated
weapons systems.
Delivering operational
advantage to naval
clients worldwide
through the provision
of independent technical
advice and support.
c.£190m c.1,600 • Boscombe
• Farnborough
Down
c.£200m c.1,200 • Shoeburyness
• Fort Halstead
• Farnborough
• Hebrides
• Aberporth
• Pendine
• West Freugh
c.£75m c.700
Air
Core
Weapons
Core
Maritime
Core
Australia
Core
C4ISR
Core
Training
Explore
Cyber Security
Explore
Delivers impartial advice
and services predominantly
to government customers.
under
£25m
c.200
A leading supplier of
research and advice on
sensors, communications
and intelligence.
Uses technology to reduce
the cost of training, drawing
on training capability from
across QinetiQ.
Protects critical national
infrastructure through the
provision of consultancy,
managed security services,
secure information
exchange, and threat and
risk assessments.
c.450
c.£120m c.100
c.100
Procurement
Advisory Services
Provides decision support,
cost, analytical and tender
assessment services.
under
£25m
Explore
Cyveillance®
Explore
Provides open source threat
intelligence and remediation
to customers across the
world including many of the
Fortune 500.
under
£25m
c.150
c.100
• Long Term Partnering
Agreement (LTPA)
• LTPA
• Combined Aerial
Targets Service (CATS)
• Weapons, Science and
Technology Centre
• LTPA
• Maritime Strategic
Capabilities Agreement
(MSCA)
• Naval Combat System
Integration Support
Services (NCSISS)
• DSTO – munitions
• ASI – airworthiness
• DSTL research
• Portsdown
Technology Park
(PTP)
• Haslar
• Melbourne,
Australia
• Canberra,
Australia
• New South
Wales, Australia
• Malvern
• Farnborough
• Farnborough
• Malvern
• Distributed Synthetic
Air Land Training 2
• Malvern
• Farnborough
• Bristol,
• Farnborough
• Boscombe
Down
• Malvern
• Reston,
Virginia US
• Operational Support
Programme Customer
Friend
QinetiQ Group plc Annual Report and Accounts 2015
More flexible and
realistic training drives
mission success
Employees
World-leading simulation and synthetic training from
domain experts
41
Defence
S
t
r
a
t
e
g
i
c
r
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
A
d
d
i
t
i
o
n
a
l
i
n
f
o
r
m
a
t
i
o
n
Growth Orientation
A flexible resource for
tomorrow’s needs
Customers
Meeting and exceeding customer needs
Under a five-year contract that runs from
2014, QinetiQ is delivering the Distributed
Synthetic Air Land Training 2 capability for
UK MOD, building on successful delivery
of a previous five-year contract. Operating
from the Air Battlespace Training Centre
in Lincoln, the £33m DSALT2 training
programme provides the UK Army and
Royal Air Force with extremely realistic
and flexible representations of operating
environments. Our bid was supported
by a pan-QinetiQ team and includes
sub-contractors Boeing and Plexsys.
Russ Cole, Flight Simulation and Synthetic
Trainers Team Leader at MOD’s Defence
Equipment and Support – “Simulation
and synthetic training is an extremely
important part of training…the ability to
practise and train in highly realistic but safe
environments is a vital, life-saving capability
essential to effective mission preparation.”
QinetiQ Group plc Annual Report and Accounts 2015
Adaptability is fundamental to DSALT: reconfiguration means training can evolve to meet changing operational needs. The move into ‘contingent operations’ required an even more proactive approach, working with the customer to deploy training to best effect while future proofing the capability for later programmes. This capability is also fully transferable to address a range of commercial requirements.Fraser Bruce, DSALT Programme Technical Manager – “With UK Armed Forces no longer in Afghanistan, requirements shifted from specific predeployment training to training for ‘contingent operations’. We adapted and configured systems and services, listening to the customer and using virtualisation technologies to address obsolescence and deliver savings.” Dawn Harrison, QinetiQ Training, sums it up – “This is testament to our ability to seamlessly pull together subject matter experts and sub-contractors: the customer comes to QinetiQ because they trust our team. We deliver.”Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
42
Operating review continued
Global Products
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.
Financial performance
The performance of Global Products continued to be impacted by the
ongoing reduction of US military forces deployed to Afghanistan and
reduced funding for US military operations which depressed demand
for conflict-related products.
Revenue was £138.2m (2014: £175.6m) primarily due to reduced sales
of conflict-related products.
Orders grew by 2% to £152.0m (2014: £149.1m) as demand for EMEA
products offset the slow order intake in the US products business.
The Global Products division had more than half of its FY16 revenue
already under contract at the beginning of the new financial year,
slightly better than at the same time last year.
Underlying operating profit* was £18.3m (2014: £27.0m),
impacted by the reduction in revenue and by approximately
$5m of additional one-off costs associated with separating from
US Services infrastructure.
Markets and outlook
•
In January 2015, Jeff Yorsz took up his appointment as President of
QinetiQ’s US products business, joining from Northrop Grumman.
Jeff is leading the realignment of the business in response to structural
changes in its core markets. This will result in a greater focus on
contract-funded research and development and US DoD Programs
of Record, as well as on commercial and international markets.
In Global Products, newer products are recording notable milestones
and the amount of revenue under contract at the start of FY16 is up
slightly on a year ago, but the drawdown of American overseas military
forces is continuing to depress demand for conflict-related products.
As the division has a lumpy revenue profile which is dependent on
the timing and shipment of key orders, there is a range of possible
outcomes for the performance of Global Products in the current year.
Despite the continued prevalence of Lowest-Price-Technically-Acceptable
acquisitions in the US, careful cost control and a reduction of headcount
provided some protection to profitability, with the division delivering
an underlying operating profit margin* of 13.2% (2014: 15.4%).
Orders
Revenue
Underlying operating profit*
Underlying operating margin*
Book to bill ratio
Funded backlog
2015
£m
2014
£m
152.0 149.1
138.2 175.6
27.0
18.3
13.2% 15.4%
0.8x
97.1
1.1x
116.7
* Definitions of underlying measures of performance can be found in the glossary on
page 141.
P93 Financial statements
Our value pipeline
Our Organic-Plus strategy prioritises active portfolio management.
All of our business operations are graded within a value pipeline which
gives us full visibility and direction over our assets and capabilities.
Core
Explore
Test for value
TALON® robots
Survivability
products
Contract-funded
R&D
OptaSense®
Space Products
Robotic appliqué kits
– DriveRobotics™
Commerce
Decisions – AWARD®
ASX™
SPO™
MEWS™
Linewatch™
High density
generator
P6 Market overview
P12 Our Organic-Plus strategy
Understanding our business
What we do
Approximate
annual revenues
Approximate total
employees
Key sites
(UK unless stated)
US products
Core
OptaSense®
Explore
Space Products
Explore
EMEA products
Test for value
Contract-funded research and development
and innovative products that protect people
and assets, such as military robots.
A bespoke fibre sensing business that delivers
Decision Ready Data to multiple vertical markets.
Provides satellites, payload instruments,
sub-systems and ground station services.
Provides research services and bespoke solutions
developed from IP spun out from the core.
c.£60m c.250 • Waltham,
£25m
c.150
under
Massachusetts,
US
• Farnborough, Winfrith
and Portishead, UK
• Houston, US
• Calgary, Canada
• Dubai, UAE
under
£25m
c.£40m N/A
c.150 • Antwerp, Belgium
• Farnborough
• N/A
QinetiQ Group plc Annual Report and Accounts 2015
43
national infrastructure also increased demand. At the end of the year,
OptaSense® signed a framework supply agreement to protect
critical national infrastructure including pipelines, airports and
other facilities for a customer in the Middle East. When complete,
the two-year project could involve 200 units and encompass up
to 8,000km of assets.
QinetiQ’s Space Products business provides satellites, payload
instruments, sub-systems and ground station services. At the end
of the year, it was awarded a contract worth €16m over three years
to develop the computer and avionics for the European Space
Agency’s (ESA’s) Proba-3 satellites that will fly in formation and use
an eclipsing mechanism to study the Sun. The business is also playing
a vital role in ESA’s IXV mission launched in February 2015, as its
technology will be responsible for guiding the ‘space taxi’, a smaller
version of the US space shuttle, safely back to Earth.
Subsidiaries Boldon James and Commerce Decisions are reported
in Global Products. Commerce Decisions delivered record revenue
and profit in 2015, securing an enterprise-wide contract for the third
year from the MOD for its AWARD® procurement software, as well
as delivering growth in the UK health and transport markets. The
business also secured its first order in Canada shortly after year end.
Test for value
In the ‘Test for Value’ category, field evaluations are underway for
the LinewatchTM power line sensor system, which precisely measures
voltage and currents on power grids. The product is designed to meet
emerging Smart Grid requirements for the detection of faults and power
theft, condition-based maintenance, and distributed power generation.
In addition, the US products business is developing a High Power
Density Generator which can provide the modular ‘roll-on/roll-off’
power required for emerging defence and civil applications.
QinetiQ’s UK business has world-leading capabilities in electronic
signals intelligence and during the year it launched ASXTM, a small
sensor that delivers airborne surveillance capability. The MOD
selected QinetiQ’s Modular Electronic Warfare System (MEWSTM)
ahead of more established products to form the basis of its
Medium Weight Electronic Surveillance Capability for expeditionary
operations. Further milestone orders won during the year included
a $3m contract with the US Transportation Security Administration
to develop the next generation of QinetiQ’s SPOTM stand-off
Millimetre Wave threat detection system.
Year in review
Core
US Global Products continues to meet the US Department for Defence
(DoD) requirements for maintenance, repair and overhaul for military
robots, demonstrating the customer’s commitment to keeping
unmanned systems as a principal part of Explosive Ordnance
Disposal missions. The business won $24m of orders to reset TALON®
robots, modernising them for future operations. These ‘reset’ awards
position the business well for future US DoD Programs of Record,
although to date these have been slow to emerge. The fifth
generation of TALON® was launched during the year, incorporating
the ability to use third-party commercial components to capitalise on
the continued convergence of military and civil robotic technologies.
In addition, $14m of orders for unmanned systems were won from
international customers. In response to the growing use of robotics in
the construction and demolition industries, the US products business
launched DriveRoboticsTM, an appliqué kit that transforms existing
and new Bobcat vehicles into unmanned vehicles. Demand for
survivability products continues to be impacted by the drawdown
of US military operations, although new orders were received for
armour for the C-130 aircraft.
The sale of QinetiQ’s US Services division, completed in May
2014, removed organisational conflict of interest (OCI) barriers
that prohibited the US Global Products business from pursuing
strategically important DoD research and development contracts.
The business is now building on its base of contract-funded R&D
projects both as an alternative revenue stream and as a source
of future intellectual property; it saw a modest increase in these
activities during the year. For example, it was one of two suppliers
to receive a contract from the Defense Advanced Research Projects
Agency (DARPA) for the first phase development of the Hydra
programme to develop a distributed undersea network of modular
unmanned platforms and payloads. This positions the business well
for follow-on phases of the programme and other projects with the
US Office of Naval Research.
Explore
OptaSense® is a Distributed Acoustic Sensing (DAS) business which
is organised around market-facing business development units and
a single technical Centre of Excellence now incorporating the laser
manufacturer Redfern Integrated Optics (RIO) acquired this year.
The business made progress implementing its strategy of developing
partnerships with leading industry players to exploit its key markets.
In rail, OptaSense® continues to work with German rail operator
Deutsche Bahn and also won a $5m initial award from the
Saudi Rail Organisation to provide security monitoring for over
1,000km of rail line. In oil and gas, the product development
agreement with Shell continues to deliver significant technical
progress. This year, the fall in the oil price, and consequent capex
reductions by Oil Majors, slowed the adoption of DAS for well
completion but improved the economics of its use for flow
monitoring and seismic profiling. Immediately after year end
the business entered into a non-exclusive strategic alliance
with Weatherford to deliver solutions to optimise well planning,
construction and production. In infrastructure security, the delivery
of some key projects was interrupted by a worsening security situation
particularly in the Middle East, however the increased threat to
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015
44
Chief Financial Officer’s review
“ Another strong year
of operational cash flow
and the completion of the
US Services disposal has
enabled us to clear debt
and return £150m to
shareholders, whilst
retaining a strong
balance sheet”
David Mellors
Chief Financial Officer
Financial highlights
•
•
•
Strong performance from EMEA Services with 3% growth
in both orders and revenue
Further strengthening of the balance sheet with net cash
of £195.5m at 31 March 2015 (2014: £170.5m)
Re-basing of the dividend, with full year dividend of
5.4p, 17% growth on prior year
• Completed sale of the US Services division for net
cash inflow in the year of £78.6m. This was associated
with pay-down of private placement debt and a £6m
contribution to the pension scheme
• Revolving credit facility refinanced during the year, with a
new five-year, multi-currency facility of £166m and $100m
• Completed £107m of the planned £150m share
buyback programme
Strengthening of the balance sheet (£m)
Working capital
Retirement benefit obligation (before tax)
Net (debt/cash)
200
0
(200)
(400)
(600)
2010
2011
2012
2013
2014
2015
QinetiQ Group plc Annual Report and Accounts 2015 Group summary – continuing operations
Revenue (£m)
Organic change at constant currency (%)
Underlying operating profit* (£m)
Underlying operating margin* (%)
Total operating profit (£m)
Underlying profit before tax* (£m)
Total profit before tax (£m)
Underlying net finance expense* (£m)
Underlying effective tax rate* (%)
Underlying earnings per share* (pence)
Basic earnings per share (pence)
Dividend per share (pence)
Underlying net cash from operations (post-capex)* (£m)
Underlying operating cash conversion (%)
Net cash (£m)
45
2014^
782.6
(4%)
113.7
14.5%
97.1
101.2
84.0
(12.5)
11.3%
13.8p
10.4p
4.6p
106.2
93%
170.5
2015
763.8
(2%)
111.3
14.6%
109.5
107.8
105.4
(3.5)
10.9%
15.2p
18.6p
5.4p
114.9
103%
195.5
Headline results
Group revenue was £763.8m (2014: £782.6m), down 2% on an organic
basis at constant currency, excluding a £3.7m decrease due to foreign
exchange movements (primarily a weakening of the Australian dollar
and the Euro). EMEA Services performed well during the year returning
3% growth in both orders and revenue. Revenue was £625.6m (2014:
£607.0m). Global Products revenue was £138.2m (2014: £175.6m),
a 21% decrease at constant currency. Performance was again impacted
by the reduction in demand for US conflict-related products.
Specific adjusting items
Specific adjusting items, shown in the ‘middle column’, include a
profit of £15.9m recognised on the disposal of US Services, a one-off
accelerated interest cost of £28.8m associated with the early
repayment of the private placement debt and £25.2m in respect of
the capitalisation of a proportion of the Group’s unused tax losses.
The prior year statutory operating profit included a one-off net
benefit of £27.1m following the closure of the Group’s defined benefit
pension scheme to future accrual. Details of all specific adjusting
items and a reconciliation of underlying profit to total profit is shown
in the table below.
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 – continuing operations
– discontinued operations
Underlying profit for the year attributable to equity shareholders – total
Impairment of goodwill
US Services transaction costs
Amortisation of intangible assets arising from acquisitions
Release/(charge) 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 in respect of property
(Loss)/gain on business divestments and disposals of investments
Tax impact of items above
Recognition of deferred tax asset in respect of UK trade losses
Profit/(loss) for the year attributable to equity shareholders of the parent company
* Definitions of specific adjusting items and underlying measures of performance can be found in the glossary on page 141.
^ Restated for the reclassification of US Services (excluding Cyveillance®) as a discontinued operation.
2015
£m
96.0
0.7
96.7
–
–
(3.6)
1.0
–
–
(0.6)
–
(12.9)
(1.1)
25.2
104.7
2014
£m
89.8
14.2
104.0
(125.9)
(6.0)
(11.0)
(0.3)
31.1
(4.0)
(1.7)
1.4
1.1
(1.4)
–
(12.7)
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 46
Chief Financial Officer’s review continued
Finance costs
Net finance costs were £4.1m (2014: £14.2m^). The underlying net
finance costs* were £3.5m (2014: £12.5m^), with an additional
£0.6m (2014: £1.7m) in respect of the pension net finance expense
reported within specific adjusting items. The reduction in underlying
net finance costs* reflects pay down of the private placement debt
during 2015.
Taxation
The effective tax rate for the continuing Group was 10.9%
(2014: 11.3%^).
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. 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, the geographic mix of profits and the assumption
that the benefit of R&D relief continues to be reported in the tax
line. The 2013 Finance Act allows the continued super-deduction
approach for R&D expenditure until April 2016, when mandatory
R&D Expenditure Credit (RDEC) treatment is introduced.
At 31 March 2015 the Group had unused tax losses of £291.6m
(31 March 2014: £213.9m) available to offset against future profits.
These comprise UK and overseas trade and non-trade losses.
A deferred tax asset of £25.2m in respect of an element of these
losses was capitalised on the balance sheet in the year due to the
probability of them being used in the foreseeable future. The income
statement credit associated with this capitalisation went through the
‘middle column’ rather than underlying earnings. No deferred tax
asset has been recognised in respect of other tax losses due to
uncertainty over timing and extent of their utilisation.
Earnings per share
Underlying basic earnings per share* for the continuing Group
were 15.2p (2014: 13.8p^) benefiting from the higher profit before
tax and the reduced number of shares in issue following £107m
of the £150m share buyback programme as at 31 March 2015.
Basic earnings per share for the total Group (including US Services)
were 16.6p (2014: 1.9p loss per share). The average number of
shares in issue during the year, as used in the basic earnings per
share calculations, was 630.9m (2014: 651.7m), and there were
608.6m shares in issue at the year end.
Dividend
The Board proposes a final dividend of 3.6p per share for the year
ended 31 March 2015 (2014: 3.2p). Subject to approval at the AGM,
the final dividend will be paid on 4 September 2015 to shareholders
on the register at 7 August 2015.
Cash flow
The Group’s cash flow from operations before cash flows in
respect of specific adjusting items but after capital expenditure
was £114.9m (2014: £106.2m^). Underlying operating cash
conversion* remained strong at 103% (2014: 93%^).
The net cash outflow in the year on restructuring was £0.6m
(2014: £10.3m).
At 31 March 2015 net cash was £195.5m (2014: £170.5m), reflecting
continued strong operating cash performance.
Total committed facilities available to the Group at year end amounted
to £233.3m (2014: £416.8m). This is made up of a revolving credit
facility of £233.3m (2014: £267.9m), which is currently undrawn.
2014 included private placement debt of £148.9m.
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.
Pensions
The net pension deficit under IAS 19 (revised), before deducting
deferred tax, was £39.4m (2014: £22.2m). The increase in net pension
deficit is primarily driven by macro-economic factors. An actuarial
loss arises from the resultant changes to financial assumptions which
is partially offset by re-measurement gains on scheme assets.
The key assumptions used in the IAS 19 valuation of the scheme were:
Assumption
Discount rate
Inflation – CPI
Life expectancy – male (currently aged 40)
Life expectancy – female (currently aged 40)
2015
3.2%
2.1%
91
93
2014
4.2%
2.6%
90
92
* Definitions of specific adjusting items and underlying measures
of performance can be found in the glossary on page 141.
^ Restated for the reclassification of US Services (excluding Cyveillance®)
as a discontinued operation.
QinetiQ Group plc Annual Report and Accounts 2015 47
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 below. The market value of the
assets at 31 March 2015 was £1,454.6m (2014: £1,304.6m) and the
present value of scheme liabilities was £1,494.0m (2014: £1,326.8m).
Assumption
Discount rate
Inflation
Life expectancy
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 £28m
Increase/decrease
by £28m
Increase by £37m
The latest triennial valuation of the scheme is being completed
as at 30 June 2014. It is expected that the recovery plan will
require £13m contributions per annum until 31 March 2018,
the same annual funding level as previously.
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.
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
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.
Foreign exchange risk management
The principal exchange rates affecting the Group were the sterling
to US dollar exchange rate and the sterling to Australian dollar
exchange rate.
David Mellors
Chief Financial Officer
21 May 2015
Assumption
£/US$ – opening rate
£/US$ – average rate
£/US$ – closing rate
£/A$ – opening rate
£/A$ – average rate
£/A$ – closing rate
2015
1.67
1.63
1.49
1.80
1.85
1.95
2014
1.52
1.59
1.67
1.46
1.69
1.80
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.
Strategic reportGovernanceFinancial statementsAdditional informationQinetiQ Group plc Annual Report and Accounts 2015 48
Corporate governance statement
Focus on governance
Mark Elliott
Non-executive Chairman
In this section:
• Compliance
• Relations with shareholders
• Leadership
– Roles and responsibilities
– Board objectives
– Composition of the Board
– Board meetings and attendance
– Committees
• Directors’ biographies
• Effectiveness
– Director training and development
– Independence of Non-executive Directors
– Performance of the Board
• Report of the Nominations Committee
• Accountability
– Identification and review of risks
– Internal control
– Management and control of US subsidiaries
• Report of the Audit Committee
• Report of the Risk & CSR Committee
• Report of the Security Committee
• Directors’ remuneration report
– Report of the Remuneration Committee
– Remuneration Policy Summary
– Annual Report on Remuneration
• Directors’ report
• Directors’ responsibility statement
•
Independent auditor’s report
Good governance is pivotal to the relationship of trust between the
Company, its customers, its employees and other key stakeholders.
Effective stewardship and risk management are key to the markets
in which QinetiQ operates and provide the stability necessary to
enable the Group to grow its business and create future success.
Succession planning continued to be a key priority for the Board.
Following the departure of Colin Balmer and the appointment
of Susan Searle during the 2014 financial year, further changes
took place with the appointment of Ian Mason as an additional
Non-executive Director in June 2014 and the retirement of Noreen
Doyle as a Non-executive Director in July 2014, having completed
nearly nine years on the Board. Leo Quinn resigned as Chief Executive
Officer with effect from December 2014 and Steve Wadey was
appointed as the new Chief Executive Officer with effect from
April 2015. This process of change and renewal is critical as the
Group moves from the period of transformation under Leo Quinn
to a greater focus on growth. I am delighted to be working with
Steve Wadey as we begin this new phase in QinetiQ’s development.
At the executive level, the Operating Committee continued to be
responsible for the day to day management of the Group’s activities
(other than for the part of the US business that is subject to a
Proxy agreement) and the Governance Committee continued to
be responsible for overseeing risk management. Both committees
report to the Board via the Chief Executive Officer. At the annual
Board strategy meeting in October, members of the Board had an
opportunity to meet with and challenge business leaders on their
business plans and strategy.
Following completion of the sale of the US Services business in May
2014 and the appointment of the new Proxy Board to manage that
element of the retained US business that is required to be insulated
from foreign ownership, control or influence (as detailed on page 65),
work began in evaluating the retained US business. An excellent
working relationship has been established with the new Proxy Board
and the Proxy Board Chairman, Len Moodispaw, has joined the UK
Board on occasion. The internal audit function continues to work
closely with US management to gain assurance that an effective
control environment is in place.
During the year ended 31 March 2015 the Board oversaw significant
change within the Group, both in terms of personnel and in terms
of its structure. The governance arrangements ensured ‘business
as usual’ throughout this period and continue to provide a stable
environment for the new Chief Executive Officer.
Mark Elliott
Non-executive Chairman
21 May 2015
49
52
54
54
54
55
55
55
58
60
60
60
60
62
63
63
64
65
66
70
71
72
72
76
78
86
89
90
QinetiQ Group plc Annual Report and Accounts 2015 Compliance statement
QinetiQ is subject to the Financial Reporting Council’s UK Corporate
Governance Code (the Code) as currently in effect. The Code
and associated guidance are publicly available on the Corporate
Governance page of the Financial Reporting Council’s website,
www.frc.org.uk.
With the exception of the external evaluation of the Board, as
detailed below, the Board considers that QinetiQ has complied
with all relevant Provisions of the Code throughout the last financial
year. This statement provides details of the way in which the
Main Principles of the Code have been applied during that year.
External evaluation of the Board – Code Provision B.6.2.
Code Provision B.6.2. states that evaluation of the board of FTSE 350
companies should be externally facilitated at least every three years.
An external evaluation of the Board would have taken place during
the year under review, however, pending the appointment of the
new Chief Executive Officer, the Board decided to defer the external
evaluation process by one year, and to proceed with an externally
provided online questionnaire-based review tool in 2015, to allow
time for the new Chief Executive Officer to take up his role. Further
details of the review can be found in the ‘Effectiveness’ section on
page 60.
An overview of the Group’s corporate governance arrangements
can be found on the QinetiQ website at:
www.QinetiQ.com/about-us/corporate-governance.
49
Effective governance
An effective Board sets the tone, influencing culture and behaviours
through its decisions and leadership. To be effective, a Board should
comprise experienced individuals with a range of background and
experience, who are independent in character and judgment.
Number of Directors
6
Board skills
8
7
6
5
4
3
2
1
0
2015
Defence
Engineering
Financial
Science
Board independence
2015
Non-independent
Independent
Board composition
2015
Non-executive Chairman
Non-executive Directors
Executive Directors
3
8
4
%
37.5
62.5
%
12.5
62.5
25
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 50
Corporate governance statement continued
Overview of the application of
the Main Principles of the Code
A. Leadership (pages 54 to 59)
B. Effectiveness (pages 60 to 63)
A1 The Role of the Board
The Board met seven times during the year. There is a schedule
of matters reserved to the Board and the Board has a set of
objectives and responsibilities. Details of the Board membership
and their attendance at Board and Committee meetings are
included in this Annual Report on page 55.
A2 Division of Responsibilities
The roles of Chairman and Chief Executive are not exercised by the
same individual and their separate responsibilities are established.
A3 The Chairman
The Chairman, working with the Company Secretary, sets the
agenda for Board meetings and encourages an open and
constructive debate.
A4 Non-executive Directors
The Non-executive Directors provide constructive challenge to
management. The Board has appointed a Senior Independent
Non-executive Director. Regular meetings are held with the Chairman
and Non-executive Directors without the executives present.
B1 The Composition of the Board
At least half the Board (excluding the Chairman) comprises
independent Non-executive Directors. The Board considers the
overall size and composition to be appropriate, having regard
to the experience and skills the Directors bring to their duties.
B2 Appointments to the Board
The Nominations Committee oversees appointments to the
Board, its balance of skills and experience and the succession
planning process. The report of the Nominations Committee
can be found on page 62.
B3 Time Commitment
The anticipated time commitment required in respect of
the non-executive role is communicated in the appointment
process. The Board is notified of changes to other significant
commitments and the Chairman consulted where appropriate.
B4 Director Training and Development
All Directors receive a tailored induction on joining the Board.
Site visits and training are made available to enable Directors
to develop and update their knowledge and capabilities.
B5 Information and Support for Directors
The Chairman, working in conjunction with the Company
Secretary, ensures that the Board receives accurate,
timely and clear information.
B6 Performance evaluation
An evaluation of the performance of the Board, its Committees
and individual Directors is carried out annually.
B7 Re-election of Directors
The Company requires each serving member of the Board
to be put forward for election or re-election on an annual
basis at each Annual General Meeting.
QinetiQ Group plc Annual Report and Accounts 2015 51
C. Accountability (pages 63 to 71)
D. Remuneration (pages 72 to 85)
C1 Financial and Business Reporting
The Board presents its results at the full year and the half year
and provides quarterly updates to the market. The Annual Report
and Accounts contains a Strategic report which provides an
explanation of the business model and the strategy for delivering
the objectives of the Company. A going concern statement is
included on page 88, responsibility statements can be found
on pages 88 to 89, and details of the process for ensuring that
the Annual Report is fair, balanced and understandable can be
found on page 89. There is also a statement in the auditor’s
report on page 92 about their reporting responsibilities.
C2 Risk Management and Internal Control
The risk management process and the system of internal control
necessary to manage risks are overseen by the Audit Committee
(financial risks) and the Risk & CSR Committee (non-financial risks).
A report on specific risk review activity undertaken during the
year by those committees, together with the current risk registers,
was presented by the CEO to the Board at its March meeting.
The Strategic report contains on pages 30 to 37 details of risk
management and the Company’s principal risks and uncertainties,
their impact and how they are managed. Details of risk management
and internal control processes can be found on pages 63 to 65.
C3 Audit Committee and Auditors
The Board has established an Audit Committee comprising at
least three independent Non-executive Directors, with formal
terms of reference. It oversees the financial risk management
and internal controls process, the effectiveness of internal audit
activities, the external auditor’s independence and objectivity
and makes recommendations to the Board in respect of the
reappointment of the external auditor and their remuneration.
The report of the Audit Committee can be found on pages 66 to 69.
D1 Level and Components of Remuneration
The Board has established a Remuneration Committee with
formal terms of reference. It is responsible for ensuring that levels
of remuneration are sufficient to attract, retain and motivate
Directors of sufficient quality and that any performance related
elements are relevant, stretching and designed to promote the
long-term success of the Company.
D2 Developing Remuneration Policy and Packages
The report of the Remuneration Committee can be found on
pages 72 to 74 and provides details of, or links to, the procedure for
setting policy on Executive Director remuneration. The Committee
also recommends and monitors the level and structure of
remuneration for senior management.
E. Relations with shareholders (pages 52 to 53)
E1 Dialogue with Shareholders
The Chairman ensures that all Directors are made aware of major
shareholder issues and concerns, by way of reports from the
Executive Directors at Board meetings, attendance at key financial
calendar events and by making themselves available to meet
shareholders as required.
E2 Constructive Use of the Annual General Meeting
All shareholders are invited to attend the Annual General Meeting
and to ask questions. The Chairs of the Audit, Nominations,
Remuneration, Risk & CSR and Security Committees attend the
meeting and are available to answer any questions on the work
of the committees.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 52
Corporate governance statement continued
Relations with shareholders
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. 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.
An investor perception audit was conducted during the financial
year by an independent third party comprising interviews with a
dozen leading institutional shareholders in July and August 2014
controlling some 45% of the issued equity. The results of this
audit were considered by the Board as part of its review of Group
strategy in October, and when setting the criteria for the new CEO
recruitment process.
According to the audit, the QinetiQ investor relations team had
met with over 100 institutional contacts in the preceding 12 months,
accounting for more than three-quarters of QinetiQ’s institutional
shareholding base. More than 70 of these meetings were hosted
by the Executive Directors, who met with eight out of ten top
shareholders and 21 out of the top 30.
The Chairman proactively offers to attend meetings with key
shareholders, and their corporate governance teams, on a regular
basis. The Chairman, the Senior Independent Director and
Non-executive Directors routinely attend key financial calendar
events such as presentations of interim and preliminary results
and make themselves available to meet shareholders as required.
Following the announcement of the resignation of the Chief Executive
Officer, the Chairman and Investor Relations Director engaged with
top shareholders, subsequently meeting with a number of them
face-to-face. All top shareholders were also proactively contacted
following the announcement of the appointment of Steve Wadey
as the Group’s new CEO.
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 a section in the Executive Directors’
report which is included in the Board papers as a standing item.
The following information is included in these reports:
• 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.
Other investor activity during the last financial year included:
• telephone briefings for analysts and investors, at least six times
per year in conjunction with key financial announcements and
financial period ends;
• face-to-face presentations of full year and half-year results,
in May and November respectively, where the Chairman and
Directors were available for discussions with investors;
•
•
live and post-event webcasts of key presentations such as the
full year and half-year results;
investor ‘road shows’ held in London, Edinburgh, and the east
and west coasts of the United States in May, June, November
and December;
• visits, sales team briefings, group lunches, conference
presentations and ad hoc meetings on request;
• web-based investor centre optimised for mobile devices and
iPad app updated regularly and incorporating best practice; and
• the Annual General Meeting held on 22 July 2014.
QinetiQ Group plc Annual Report and Accounts 2015 53
Annual General Meeting
The Code notes that the Board should use the Annual General
Meeting (AGM) to communicate with investors and encourage their
participation. The Board invites holders of ordinary shares 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.
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 2014 AGM was held at Pennyhill Park Hotel, Bagshot, Surrey on
22 July 2014 and, with the exception of Noreen Doyle, who had a
prior engagement, each member of the Board attended the meeting
and was available to take questions.
The 2015 AGM is scheduled to be held at the same venue, Pennyhill
Park Hotel, Bagshot, Surrey, on 22 July 2015. 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.
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 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’s Disclosure Rules and Transparency Rules, and the
Directors’ powers in relation to issuing and buying back shares
can be found on pages 88 and 86 respectively in the Directors’
report section of this Annual Report.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 54
Corporate governance statement continued
Leadership
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
Board objectives
The overarching remit of the Board is to demonstrate the highest
standards of corporate governance in accordance with the Code:
• to ensure the continuing evolution and implementation of
the Group’s strategy to deliver value to all stakeholders:
customers, employees and shareholders;
• to develop challenging objectives for the business and monitor
management performance against those goals;
•
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.
• to provide a framework of effective controls to assess and
manage risks, with clear expectations of conduct to the
highest standards of ethics;
• to provide support and constructive challenges to the CEO
to promote the Group’s success;
• to demonstrate leadership in management systems around
health, safety and environment; and
• to manage succession planning for the Board and the Group’s
executive management.
The Board
The Board represents the interests of both QinetiQ and its shareholders.
It comprises a range of experience and expertise required to meet the challenges
facing the Group. The Non-executive Directors bring independent judgment on
key issues affecting the Group and its business operations, including strategy,
performance, resources (including key appointments) and standards of conduct.
Directors receive ongoing training about the Company and their duties.
Operation
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.
P55 See Operation of the Board for more information
Matters reserved to the Board
The Board has a clearly articulated set of matters which are
specifically reserved to it for consideration.
These include:
• reviewing and approving 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.
QinetiQ Group plc Annual Report and Accounts 2015 55
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 report
addresses the key strategic initiatives which have had an impact on
the Group since the previous Board meeting, with particular focus
on the progress of each of the businesses. Other key areas of focus
include health, safety and environmental matters; employee and
organisational issues; corporate responsibility; the status of key
account management/customer relationship initiatives; the pipeline
of potential bids, acquisitions, disposals and investments; and the
post-acquisition performance of recently acquired businesses.
The Board also receives updates from key functional areas on an
‘as needed’ basis, on issues such as human resources, treasury, corporate
responsibility, real estate, security, trade controls and pensions.
Key issues considered by the Board in the past year include:
a) the impact of the disposal of the US Services division;
b) the strategy for the Group as a whole; and
c) succession planning.
Further details are set out on the next page.
Committees
QinetiQ operates by way of two key Executive Committees and five
principal Board Committees. Details can be found on page 57.
Composition of the Board
At the date of this report, the Board has eight members: the
Non-executive Chairman; five other Non-executive Directors;
and two Executive Directors – the CEO and the CFO. Their names
and biographical details can be found on pages 58 to 59.
The following changes in Board membership took place during the year:
•
Ian Mason was appointed as a Non-executive Director on
3 June 2014.
• Noreen Doyle retired as a Non-executive Director on 22 July
2014, having served on the Board for more than eight years.
• Leo Quinn resigned as an Executive Director and Chief Executive
Officer on 31 December 2014.
• David Mellors was appointed as interim Chief Executive Officer
from 1 January 2015 until 26 April 2015.
The following change took place after the year end:
• Steve Wadey was appointed as an Executive Director and Chief
Executive Officer on 27 April 2015.
Attendance at meetings of the Board and its Committees
– 1 April 2014 to 31 March 2015
Committee
Members
Mark Elliott
Admiral
Sir James
Burnell-Nugent
Noreen Doyle ~
Michael Harper
Ian Mason
David Mellors <
Paul Murray
Leo Quinn
Susan Searle
Board
Audit
Nominations
Remuneration
Risk
& CSR
7/7
–
7/7
1/2
7/7
6/6
7/7
7/7
5/5
7/7
5/5
2/2
5/5
3/3
–
5/5
–
5/5
4/4
4/4
1/1
4/4
3/3
2/2
4/4
1/2
4/4
6/6
4/4
6/6
1/2
6/6
5/5
–
6/6
–
6/6
4/4
1/2
4/4
3/3
4/4
4/4
2/3
4/4
Steve Wadey has not been included in the above table as he did not serve as a Director
during the year under review.
~ Noreen Doyle was unable to attend the July meetings due to a prior engagement.
< David Mellors was interim CEO during the period from 1 January 2015 to 26 April 2015
and attended meetings in that capacity where appropriate.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 56
Corporate governance statement continued
Key issues covered by the Board during the past year include:
a) Disposal of the US Services business
The US Services business disposal was completed in May 2014.
The retained US business was split into those areas where no
Proxy arrangement was necessary, and the US Global Products
business where a new Proxy arrangement was required (as
detailed on page 65). Since then the Board has received updates,
via the regular Executive Directors’ Report to the Board and by
presentations from the US Global Products executive team,
b) Group strategy
During the year, the Board received updates on progress against
strategy by way of regular presentations from the Group Strategy
Director. The presentations included a measurement of progress
against milestones/objectives and a linkage between strategy and
daily activity. In October, 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. In advance of the meeting, the Board had
given guidance to the Group Strategy Director on subject areas it
would like to see covered at the strategy meeting. As in the previous
year, the Managing Directors from each business and the leaders
of key corporate functions attended the two-day meeting and gave
presentations on the strategy for their respective business areas.
The Board was able to meet both formally and informally with
business leaders, to understand the key drivers and risks (including
their mitigation) for their business areas. Following the meeting,
the strategic business plans were updated and form the basis for
regular progress reports to the Board by the Group Strategy Director.
c) Succession planning
Succession planning, both at Executive and Non-executive level,
remains a key focus for the Board. In July 2014 the Board highlighted
succession planning as one of its top priorities for the year. The
Board stated its objective of reviewing comprehensive succession
plans for the top 12 to 15 executive positions with a focus on
improving the talent pipeline and diversity. In addition, the Board
stated that it will continue to focus on the succession plans for the
Non-executive Directors, including both training and refreshment,
to ensure they align Board skills with the needs of the strategy.
Membership of the Board was refreshed during the year, with the
appointment of Ian Mason as a Non-executive Director in June 2014
and the search and appointment of a new Chief Executive Officer
which was completed with the appointment of Steve Wadey, who
joined the Board in April 2015. Further details can be found in the
report of the Nominations Committee on pages 62 to 63.
of progress with the new Proxy arrangement, an evaluation of the
business and its strategy, and measurement against its objectives.
During the year, a new president was appointed to drive forward
the development of the business, which will remain an important
subject of the Board’s focus.
Alongside the process for the setting and review of Group strategy,
the Board also commissioned an external report to identify
shareholder perspectives and observations on the Company’s
stated strategy and investment proposition. The report was tabled
at a Board meeting and it was noted that, amongst other things,
shareholders’ general observations were that the Company had
been transformed into a more focused and manageable business
with net cash on its balance sheet, there was strong support for
management and a well understood strategy. The output from the
report in terms of growth has been used to inform the Company’s
strategic thinking in respect of value creation and growth.
As regards talent management within the wider Group, at the
September Board meeting, the Director of Capability updated the
Board on the activities being taken in respect of equality, diversity
and inclusion. The Board approved the policy and noted the means
of measuring progress by way of a scorecard approach. At the
October strategy meeting, the Director of Capability gave a
presentation on enhancing human capability within the Group,
including to protect and secure suitably qualified and experienced
personnel, in particular to support the business strategy and to
continue to develop the Company’s culture, with improved diversity,
an emphasis on unlocking the potential of the workforce and the
encouragement of innovation.
Further details on diversity can be found in the Responsible
business section on pages 24 to 29.
QinetiQ Group plc Annual Report and Accounts 2015 57
The Board and its Committees
Board
The Board of Directors is responsible for the governance of the Company and
for agreeing its strategy and monitoring its progress. Details of the Directors
at the date of this report can be found on page 55.
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.
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/about-us/corporate-governance.
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 Code, statutory or
Security Committee requirements.
A report in respect of each of these Committees is contained on pages 62
to 74. 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 72 to 85 which is incorporated
into this corporate governance statement by reference.
Board Committees
Audit
Committee
Nominations
Committee
Remuneration
Committee
Risk & CSR
Committee
Security
Committee
Executive Committees
OperatingCommittee
GovernanceCommittee
• Responsible for the day-to-day management of the Group’s activities,
with the exception of QinetiQ’s US Global Products business (which is
managed through the Proxy Board, as described in the section on page
65 headed ‘Management and control of US subsidiaries’). It reports via
the Chief Executive Officer to the Board.
•
Its specific focus during the year continued to be on the
achievement of the Group’s strategic goals in respect of
growth and operational excellence.
• During the year the Operating Committee met on a monthly basis,
and received weekly updates on key operational issues by way
of pre-scheduled conference calls.
• Responsible for oversight of the risk management process and its
implementation by the divisions. It reports via the Chief Executive
Officer to the Board and supports the Board Committees.
• Matters covered during the year included 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.
• During the year the Committee met on a quarterly basis.
MembershipoftheExecutiveCommitteesduringtheyear
• Chief Executive Officer
• Chief Financial Officer
• UK Divisional Managing Directors
• Business Development Director
• Capability Director
• Chief Technology Officer
• Company Secretary & Group General Counsel
• Group Strategy Director
•
Investor Relations and Communications Director
• Operations and Shared Services Director
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 58
Board of Directors
Mark Elliott
Non-executive Chairman
Steve Wadey
Chief Executive Officer
David Mellors
Chief Financial Officer
Michael Harper
Deputy Chairman and
Senior Independent
Non-executive Director
Ian Mason
Non-executive Director
Admiral Sir James
Burnell-Nugent
Non-executive Director
Paul Murray
Non-executive Director
Susan Searle
Non-executive Director
Jon Messent
Company Secretary and
Group General Counsel
Appointment
to the Board
Appointed Non-executive
Chairman in March 2010;
Non-executive Director between
June 2009 and February 2010.
Appointed Chief Executive
Officer in April 2015.
Appointed Chief Financial Officer
in August 2008. Interim Chief
Executive Officer from 1 January
2015 until 26 April 2015.
Appointed Non-executive
Director in November 2011.
Appointed Deputy Chairman
and Senior Independent
Non-executive Director
in February 2012.
Appointed Non-executive
Director in June 2014.
Appointed Non-executive
Director in April 2010.
Appointed Non-executive
Director in October 2010.
Appointed Non-executive
Director in March 2014.
Appointed Company Secretary
and Group General Counsel in
January 2011.
Independent
Skills and experience
External appointments
Past roles
Independent on appointment
Not applicable
Not applicable
Yes
Yes
Yes
Yes
Yes
Not applicable
• Extensive experience in the
technology services sector
having worked for IBM for over
30 years in a number of senior
management positions.
• Experience of a variety
of industry sectors from
membership of the boards
of FTSE listed companies.
• The Board considers that
Mark’s extensive experience,
including listed company
governance experience, is a
valuable asset to the Group
in terms of leadership and of
addressing the strategic issues
that affect the Group.
• Non-executive Director
of G4S plc, where he is the
Senior Independent Director
and Chairman of the
Remuneration Committee.
• Chairman of Kodak Alaris
Holdings Limited (appointed
during the year under review).
• In-depth experience
of the defence industry
and technology.
• Extensive operational
and corporate experience
and stewardship.
• Fellow of the Royal
Academy of Engineering.
• Fellow of the Institution
of Engineering and
Technology.
• Fellow of the Royal
Aeronautical Society.
• Extensive experience
of working in a listed
company environment.
• Knowledge of the
defence, technology
and services sectors.
• A member of the Institute
of Chartered Accountants
in England and Wales.
• A depth of operational and
corporate experience and
stewardship, including in
the engineering sector.
• The Board considers
that Michael’s wealth of
operational and corporate
experience, including
listed company governance
experience, enables him
to make a significant
contribution to the Board.
• A broad range of experience
• Extensive experience of the
• Extensive experience as
• Considerable experience
in strategy, business
• Significant experience
of the defence industry,
transformation, eCommerce
contracting with government
and international development.
and management.
• The Board considers
that Ian’s experience
in strategy, business
transformation and
international development
is of significant benefit
to the Board.
• The Board considers that
Sir James’ expertise in the
Government contracting
domain, particularly with the
UK MOD and HM Treasury,
of QinetiQ’s government-
sourced operations.
in finance and corporate
governance from a range
of industries.
• The Board considers
that Paul’s experience
in finance and corporate
governance from a
cross-section of industries,
technology, and including
listed company governance
experience, is of significant
benefit to the Board.
new technologies sector.
• A founder of Imperial
Innovations Group plc.
• 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.
is highly beneficial in the context
all of which leverage
a General Counsel and
Company Secretary in
other FTSE250 companies.
• Background in legal
private practice.
• None
• Co-chair of the Defence
Growth Partnership.
• Non-executive director
of the MOD Research
and Development Board.
• Non-executive Director
of the Aerospace
Technology Institute.
• Deputy Chief Financial
• Chairman of Ricardo plc
• Group Chief Executive
• 37-year career in the
• Director of Knowledge
• CEO of Imperial Innovations
• Joined QinetiQ from
• 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.
• Various roles with MBDA
from 2001 to 2014, most
recently as Managing
Director, MBDA UK and
Technical Director for
the MBDA Group.
• Worked for IBM for over
• Matra BAe Dynamics
30 years where he occupied
a number of senior management
positions, including General
Manager of IBM Europe,
Middle East and Africa.
• Member of IBM’s worldwide
Management Council.
– various roles in
engineering held
from 1996 to 2001.
• Various roles with British
Aerospace held from 1989
to 1996.
• Co-Chair of the National
Defence Industries Research
& Development Group.
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.
• Various roles with CMG
plc, Rio Tinto plc and
Price Waterhouse.
Committee membership
Nominations Committee
(Chairman)
Remuneration Committee
Risk & CSR Committee
Nominations Committee
Risk & CSR Committee
Security Committee
Risk & CSR Committee
Security Committee
from November 2009 until
November 2014, having
joined that Board in 2003.
• Chairman of BBA Aviation plc
from June 2007 until May
2014, having joined that
Board in 2005.
• Chairman of Vitec Group
plc from 2004 to 2012.
• Director of Williams plc
where, at the time of the
demerger in 2000, he
became CEO of Kidde plc.
Audit Committee
Nominations Committee
Remuneration Committee
(Chairman)
Risk & CSR Committee
Security Committee
• None
• High Sheriff of Devon.
• Non-executive Director
• Benchmark Holdings plc. (a)
• None
and Chair of the Audit & Risk
Committee at Royal Mail
Group plc.
• Director of Independent
Oil and Gas plc.
• Director of Ventive Ltd.
• Director of Naked Energy Ltd.
• Horizon Discovery
Group plc. (a)
• Chair of Woodford Patient
Capital Trust plc.
• Mercia Technologies plc. (b)
• Member of the international
advisory board of PTT.
• Trustee of Fight for Sight.
Group plc from 2002
to July 2013.
• Previously Susan has
served on a variety of
private company boards
in engineering, healthcare
and materials.
(a) Non-executive Director and Chair
of the Remuneration Committee.
(b) Deputy Chair and Chair of the
Audit Committee.
of Electrocomponents plc
from 2001 until 31 March
2015, having joined that
company in 1995.
• Non-executive Director
of the Sage Group plc
from 2007 to 2013.
Royal Navy that culminated
Peers plc.
in his appointment as
Commander-in-Chief Fleet.
• Commanded the aircraft
carrier HMS Invincible
and three other ships
and submarines.
• Between operational
duties, several positions
at the MOD and gained
cross-Whitehall experience
while on secondment to
HM Treasury.
• Senior Independent Director
of Taylor Nelson Sofres plc.
• Non-executive Director of
Thomson SA.
• Non-executive Director of
Tangent Communications plc.
• Group Finance Director of
Carlton Communications plc.
• Group Finance Director of
LASMO plc.
• Trustee of Pilotlight.
Chloride Group plc.
• General counsel and company
secretarial experience in
other FTSE250 companies.
Audit Committee
Nominations Committee
Remuneration Committee
Risk & CSR Committee
Security Committee
Audit Committee
Nominations Committee
Remuneration Committee
Nominations Committee
Remuneration Committee
Risk & CSR Committee (Chairman)
Risk & CSR Committee
Security Committee (Chairman)
Security Committee
Remuneration Committee
Risk & CSR Committee
Nominations Committee
Security Committee
Audit Committee (Chairman)
Audit Committee
QinetiQ Group plc Annual Report and Accounts 2015
Mark Elliott
Steve Wadey
Non-executive Chairman
Chief Executive Officer
David Mellors
Chief Financial Officer
Michael Harper
Deputy Chairman and
Senior Independent
Non-executive Director
Ian Mason
Non-executive Director
Admiral Sir James
Burnell-Nugent
Non-executive Director
Paul Murray
Non-executive Director
Susan Searle
Non-executive Director
Jon Messent
Company Secretary and
Group General Counsel
59
Appointment
to the Board
Appointed Non-executive
Chairman in March 2010;
Non-executive Director between
June 2009 and February 2010.
Officer in April 2015.
Appointed Chief Executive
Appointed Chief Financial Officer
Appointed Non-executive
in August 2008. Interim Chief
Director in November 2011.
Executive Officer from 1 January
Appointed Deputy Chairman
2015 until 26 April 2015.
and Senior Independent
Non-executive Director
in February 2012.
Independent
Skills and experience
Appointed Non-executive
Director in June 2014.
Appointed Non-executive
Director in April 2010.
Appointed Non-executive
Director in October 2010.
Appointed Non-executive
Director in March 2014.
Appointed Company Secretary
and Group General Counsel in
January 2011.
Independent on appointment
Not applicable
Not applicable
Yes
Yes
Yes
Yes
Yes
Not applicable
• Extensive experience
of working in a listed
company environment.
• Knowledge of the
defence, technology
and services sectors.
• A member of the Institute
of Chartered Accountants
in England and Wales.
• A depth of operational and
corporate experience and
stewardship, including in
the engineering sector.
• The Board considers
that Michael’s wealth of
operational and corporate
experience, including
listed company governance
experience, enables him
to make a significant
contribution to the Board.
• Considerable experience
in strategy, business
transformation, eCommerce
and international development.
• Significant experience
of the defence industry,
contracting with government
and management.
• A broad range of experience
in finance and corporate
governance from a range
of industries.
• The Board considers
that Ian’s experience
in strategy, business
transformation and
international development
is of significant benefit
to the Board.
• 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.
• The Board considers
that Paul’s experience
in finance and corporate
governance from a
cross-section of industries,
all of which leverage
technology, and including
listed company governance
experience, is of significant
benefit to the Board.
• Extensive experience of the
new technologies sector.
• A founder of Imperial
Innovations Group plc.
• 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.
• Extensive experience as
a General Counsel and
Company Secretary in
other FTSE250 companies.
• Background in legal
private practice.
External appointments
• Non-executive Director
• Co-chair of the Defence
• None
• None
• High Sheriff of Devon.
• Non-executive Director
• Benchmark Holdings plc. (a)
• None
and Chair of the Audit & Risk
Committee at Royal Mail
Group plc.
• Director of Independent
Oil and Gas plc.
• Director of Ventive Ltd.
• Director of Naked Energy Ltd.
• Horizon Discovery
Group plc. (a)
• Chair of Woodford Patient
Capital Trust plc.
• Mercia Technologies plc. (b)
• Member of the international
advisory board of PTT.
• Trustee of Fight for Sight.
Past roles
• Deputy Chief Financial
• Chairman of Ricardo plc
• Group Chief Executive
• 37-year career in the
• Director of Knowledge
• CEO of Imperial Innovations
of Electrocomponents plc
from 2001 until 31 March
2015, having joined that
company in 1995.
• Non-executive Director
of the Sage Group plc
from 2007 to 2013.
Royal Navy that culminated
in his appointment as
Commander-in-Chief Fleet.
• Commanded the aircraft
carrier HMS Invincible
and three other ships
and submarines.
• Between operational
duties, several positions
at the MOD and gained
cross-Whitehall experience
while on secondment to
HM Treasury.
Peers plc.
• Senior Independent Director
of Taylor Nelson Sofres plc.
• Non-executive Director of
Thomson SA.
• Non-executive Director of
Tangent Communications plc.
• Group Finance Director of
Carlton Communications plc.
• Group Finance Director of
LASMO plc.
• Trustee of Pilotlight.
Group plc from 2002
to July 2013.
• Previously Susan has
served on a variety of
private company boards
in engineering, healthcare
and materials.
(a) Non-executive Director and Chair
of the Remuneration Committee.
(b) Deputy Chair and Chair of the
Audit Committee.
Audit Committee
Nominations Committee
Remuneration Committee
Risk & CSR Committee
Security Committee
Audit Committee
Nominations Committee
Remuneration Committee
Risk & CSR Committee (Chairman)
Security Committee (Chairman)
Audit Committee (Chairman)
Nominations Committee
Remuneration Committee
Risk & CSR Committee
Security Committee
Audit Committee
Remuneration Committee
Risk & CSR Committee
Nominations Committee
Security Committee
• Joined QinetiQ from
Chloride Group plc.
• General counsel and company
secretarial experience in
other FTSE250 companies.
• Extensive experience in the
• In-depth experience
technology services sector
of the defence industry
having worked for IBM for over
and technology.
30 years in a number of senior
management positions.
• Experience of a variety
of industry sectors from
membership of the boards
of FTSE listed companies.
• The Board considers that
Mark’s extensive experience,
including listed company
governance experience, is a
valuable asset to the Group
in terms of leadership and of
addressing the strategic issues
that affect the Group.
• Extensive operational
and corporate experience
and stewardship.
• Fellow of the Royal
Academy of Engineering.
• Fellow of the Institution
of Engineering and
Technology.
• Fellow of the Royal
Aeronautical Society.
of G4S plc, where he is the
Senior Independent Director
and Chairman of the
Remuneration Committee.
• Chairman of Kodak Alaris
Holdings Limited (appointed
during the year under review).
Growth Partnership.
• Non-executive director
of the MOD Research
and Development Board.
• 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.
• Various roles with MBDA
from 2001 to 2014, most
recently as Managing
Director, MBDA UK and
Technical Director for
the MBDA Group.
• Worked for IBM for over
• Matra BAe Dynamics
30 years where he occupied
– various roles in
a number of senior management
engineering held
positions, including General
from 1996 to 2001.
Manager of IBM Europe,
Middle East and Africa.
• Various roles with British
Aerospace held from 1989
• Member of IBM’s worldwide
to 1996.
Management Council.
• Co-Chair of the National
Defence Industries Research
& Development Group.
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.
• Various roles with CMG
plc, Rio Tinto plc and
Price Waterhouse.
• Non-executive Director
of the Aerospace
Technology Institute.
from November 2009 until
November 2014, having
joined that Board in 2003.
• Chairman of BBA Aviation plc
from June 2007 until May
2014, having joined that
Board in 2005.
• Chairman of Vitec Group
plc from 2004 to 2012.
• Director of Williams plc
where, at the time of the
demerger in 2000, he
became CEO of Kidde plc.
Audit Committee
Nominations Committee
Remuneration Committee
(Chairman)
Risk & CSR Committee
Security Committee
Committee membership
Nominations Committee
(Chairman)
Remuneration Committee
Risk & CSR Committee
Nominations Committee
Risk & CSR Committee
Security Committee
Risk & CSR Committee
Security Committee
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
60
Corporate governance statement continued
Effectiveness
The Board considers that the skills and experience of its individual
members, particularly in the areas of UK defence and security,
the commercialisation of innovative technologies, corporate finance
and governance, mergers and acquisitions, and risk management,
have been fundamental in the pursuit of QinetiQ’s strategic initiatives
(as described on pages 10 to 19 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.
Director training and development
On appointment, Directors receive a tailored induction programme,
comprising site visits, meetings with management and training where
required. On an ongoing basis, Directors receive appropriate training
about the Company and their duties. The Company Secretariat organises
site visits and training to suit individual requirements. Recent training
has included regulatory updates presented at Board meetings by the
Company’s legal advisors and by the auditor.
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. The Board considers that more than half its members were
independent Non-executive Directors throughout the last financial year.
The Non-executive Directors bring independent judgment on key
issues affecting the Group and its business operations including
strategy, performance, resources (including key appointments)
and standards of conduct. Their independence of character and
integrity, together with the experience and skills that they bring to
their duties, prevent any individual or small group from dominating
the decision making of the Board as a whole.
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 and 2014, 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.
For the year ended 31 March 2015, the Company was due to carry
out an external evaluation of the performance of the Board, however,
owing to the change of Chief Executive Officer during the year, it was
considered appropriate to defer the external review by one year, to
allow time for the incoming Chief Executive Officer to take up his new
role. Accordingly, to ensure an external and independent perspective
on the self-assessment, the Company used an online questionnaire tool
provided by Independent Audit Limited which was completed by Board
members, coupled with individual performance reviews carried out by
the Chairman. Independent Audit Limited had no other connection with
the Company during the period, other than the provision of advice to
the Audit Committee on the continued independence of the external
auditor in connection with contractual arrangements.
In terms of the fulfilment of its governance responsibilities, the overall
conclusion of the 2014 review had been that the Board was satisfied
that it continued to be effective in executing its duties and that
progress had been made in a number of areas since the last review.
Following on from the 2014 review, the Board had undertaken during
2015 a programme of continuous improvement, as follows:
• strategy and succession remained key priorities for the Board.
With regard to strategy, the Board required improved reporting
of daily activity implementing the strategy, with the preparation
of a note of achievement against strategy by the use of milestones
and the preparation of key objectives against which plans are
measured. These details have since been included in the regular
updates on progress against strategic targets provided to the
Board by the Group Strategy Director;
• alignment of Board risk appetite as it related to the Company’s
growth strategy;
• the Company Secretariat facilitates site visits for the Non-executive
Directors at their request and there were visits to five sites by
Non-executive Directors during the year;
• Board training – continuation of the focus on individual training
requirements. Recent training included a group training session
on cyber risk management and a formal presentation to the
Board by the external auditor on the changes to the UK
Corporate Governance Code;
QinetiQ Group plc Annual Report and Accounts 2015 61
To build upon the continuous improvement programme which had
begun during the year, the 2015 effectiveness review had covered
the following main areas:
• The role of the Board and the skills mix;
• The effectiveness of decision-making processes and the quality
of supporting documentation;
• The level of risk appetite and oversight; and
• Engagement with stakeholders.
The general outcome was that the Board was operating effectively
and carrying out its duties appropriately. There had been improved
reporting in the papers for the Board, allowing for a greater
understanding and support. Following the recent changes in the
Board membership, and with the arrival of the new CEO, it was
agreed that steps would be taken to integrate all members of the
Board and also to facilitate further attendance at Board meetings
by members of the Operating Committee and senior management
to enhance the Board–business relationship.
• continue the practice of making key senior management
available to the Board during site visits and other Company
events, and the focus on inviting some of them to attend the
Board to report on progress on key Company programmes –
during the year under review, Board meetings were held at
the Company’s Aberporth and Farnborough sites;
• continued efficiencies in the provision of Board materials,
by the use of a standardised layout for Board and Committee
papers, including an executive summary and clear indication
of the action required or purpose of the materials; and
•
identification by the Board of a consolidated set of key objectives
and responsibilities for the Board – each Director had been asked
to provide to the Chairman their view on three main objectives
for the Board. The Chairman had collated these and worked with
the CEO and CFO to finalise a consolidated set of objectives
which included:
– Shareholder perspectives – to commission an external report
to capture shareholders’ views as to the Company’s strategy
and investment proposition and their attitudes on growth,
risk and resource allocation. The report was commissioned
and details of the results of this review considered at the
Board’s October strategy meeting;
– Strategy development – to review progress and future
development of the Company’s strategy in the context of the
new portfolio of assets, focusing on means to accelerate value
creation including through growth, balanced with shareholders’
and the Board’s appetite for risk;
– Board operations – to continue to focus on improving Board
operations, including disciplined use of time and making
papers ‘fit for purpose’, recognising that papers for issue
resolution or decisions might differ from those intended
to update or inform the Board; and
– Succession planning – to continue to improve on succession
planning with the review of comprehensive succession
plans for the Company’s top 12 to 15 executive positions
with a focus on improving the talent pipeline and diversity.
In addition, to continue to focus on the succession plans for
the NEDs to ensure the alignment of Board skills with the
needs of the Company’s strategy.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 62
Corporate governance statement continued
Report of the
Nominations Committee
Mark Elliott
Nominations Committee Chairman
I am pleased to report that the Nominations Committee addressed
succession planning as a priority during the year, with the appointment
of Ian Mason as a Non-executive Director and the search for a new
Chief Executive Officer and subsequent appointment of Steve Wadey
being completed during the year. Going forwards, we have identified
succession planning as one of the Board’s primary objectives and we
will continue to focus on this. Diversity is a fundamental element of
the succession planning process and remains an area of focus.
Membership and attendance during the year
Member
Mark Elliott (Committee Chair)
Admiral Sir James Burnell-Nugent
Noreen Doyle˜
Michael Harper
Ian Mason#
David Mellors<
Paul Murray
Susan Searle
Leo Quinn>
Steve Wadey*
Attendance
4/4
4/4
1/1
4/4
3/3
2/2
4/4
4/4
1/2
N/A
~ Noreen Doyle retired as a Director on 22 July 2014.
# Ian Mason was appointed as a Director on 3 June 2014.
< David Mellors was interim CEO during the period from 1 January 2015 to 26 April 2015
and attended meetings in that capacity.
> Leo Quinn ceased to be a Director on 31 December 2014.
* Steve Wadey became a member of the Committee in April 2015 and will attend
future meetings.
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 2015, the Committee met on four occasions.
Overview
Key areas of focus during the year were:
a) Succession planning at Non-executive Director level.
b) Succession planning at Executive Director level including the
review and preparation of a memorandum setting out the role
and capabilities required for a new CEO to lead the organisation
through the next phase in its development.
c) Succession planning at senior management level.
a) Appointment of Non-executive Directors
In 2014, to ensure the alignment of Board skills with the needs of the
Group’s strategy, the Committee had 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. This led to the
appointment of Susan Searle in March 2014. A further Non-executive
Director was sought, again with assistance from the Zygos Partnership,
and we were delighted to appoint Ian Mason as an additional
Non-executive Director in June 2014. Details of the background
and experience for both Susan and Ian can be found on page 59.
Susan brings wide experience of the new technologies sector and
Ian brings experience of business transformation, eCommerce and
international development.
b) Appointment of CEO
In October 2015, we announced the resignation of Leo Quinn as
CEO and began the search for a new CEO. As part of this process,
the Chairman and the Investor Relations Director engaged with and
met top shareholders. JCA Group was appointed to carry out the
recruitment. The firm is a signatory to the Voluntary Code of Conduct
for Executive Search Firms and it has no other connection with the
Company. The Chairman worked with investors, the Board, senior
management and JCA Group to identify the qualities which would
be required in a new CEO to take the Company forwards. The general
theme that emerged was that the Company required an accomplished
leader with the character, drive and skills to lead the business through
its growth agenda in challenging market conditions. The search resulted
in the appointment of Steve Wadey, which was announced in January
2015, and he joined the Company as CEO on 27 April 2015.
QinetiQ Group plc Annual Report and Accounts 2015
63
c) Senior management succession planning
The Committee continues to maintain oversight of the processes
for ensuring that succession plans are in place for the top layer of
management, with a focus on improving the talent pipeline and
diversity. This process includes ensuring that the Board as a whole
meets with senior management, that remuneration policy and
long-term incentives for senior management are reviewed by the
Remuneration Committee and that the Chairman works with the CEO
to review succession planning and to ensure the right mix of skills
and experience at OpCo level. At the executive level, the Capability
Director works with the Governance Committee to ensure that
succession plans for the top layer of management are in place
and this is reported to the Risk & CSR Committee by the CEO.
Board Diversity Policy
During 2013 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 www.QinetiQ.com/about-us/
corporate-governance) are as follows:
Statement:
The QinetiQ Board recognises the benefits of diversity. Diversity
of skills, background, knowledge, international and industry
experience, and gender, amongst many other factors, will be taken
into consideration when seeking to appoint a new Director to the
Board. Notwithstanding the foregoing, all Board appointments will
always be made on merit.
Objectives:
The Board should ensure an appropriate mix of skills and experience
to ensure an optimum Board and efficient stewardship.
The Board should ensure that it comprises Directors who are sufficiently
experienced and independent in character and judgment.
The Board aims to increase the proportion of women on the Board
to 25% by the end of 2015. Thereafter, subject always to ensuring
that all Board appointments are made on merit, the Board aspires
to maintain a minimum Board composition of 25% women, such
percentage to be reviewed annually.
Progress against the policy:
The appointment of Susan Searle in March 2014 brought the
proportion of women on the Board to 25%, which was in line with
our objective. In July 2014, Noreen Doyle retired from the Board
after over eight years in office, reducing the proportion of women
Directors to 12.5%. We will aim to ensure that gender diversity
will be taken into consideration for any future appointments,
with the proviso that 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 background
skills and experience.
We have issued a Company-wide diversity policy and details can
be found in the Responsible business section on pages 24 to 29.
Accountability
Board review of the effectiveness of risk management and
internal control processes
The Board confirms that it has conducted a review of the effectiveness
of the Company’s risk management and internal control systems in
operation during the year, as required by the Code. The details of the
review and its findings can be found on page 64.
Directors’ responsibilities
Statements explaining the Directors’ responsibilities for preparing
the Group’s Annual Report and financial statements and the auditor’s
responsibilities for reporting on those statements are on pages 88
and 89.
Going concern
A statement regarding the business as a going concern can be found
on page 88.
Board responsibility for 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, like any appropriate or proportionate
system of corporate internal control, cannot provide absolute
assurance against material misstatement or loss.
Identification and review of risks
QinetiQ managers are responsible for the identification and evaluation
of significant risks, both financial and non-financial, 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.
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 on page 64.
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 on the following page and is performed by the businesses,
oversight functions and Internal Audit, reporting to the Governance
Committee and the Board’s Audit Committee in respect of financial
risks, and Risk & CSR Committee in respect of non-financial risks.
Details of key risks can be found in the Principal risks and uncertainties
section of this Annual Report on pages 32 to 37.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 64
Corporate governance statement continued
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Establishing the context
Risk assessment
Risk identification
Risk analysis
Risk evaluation
Risk treatment
Risk assurance activity during 2015 covered the following areas:
• Quarterly updates in respect of general risk governance from
the Safety and Assurance Director.
• Quarterly reviews of divisional risk registers and moderation
to form the Group Risk Register.
• Quarterly reports from the Internal Audit function in respect
of the effective management of Group risks and the risk
management process.
• Challenge to risk identification by business divisions and
functions.
• Use of the Business Assurance Tool to manage effective internal
control against regulatory and operational risks.
• Regularly requiring risk owners to report their activity to the
Risk & CSR Committee (see page 70).
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, is in operation. 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.
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 and the Board’s risk appetite. The business is guided by
two key documents which are managed by our Safety and
Operational Assurance 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.
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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 the internal audit function is approved in advance
by the Audit Committee. It is prioritised according to risks identified
by the Group through its risk management processes. Additionally,
regular discussions are held between the internal audit function and
the external auditor regarding internal audit reports, risks, internal
audit plans and the wider control environment.
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).
The full Board attends these Committee meetings, either as a
Committee member or a guest so as to receive at first-hand the
findings of the Committee. Details of the Committee memberships
are set out on page 55. 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.
At its meeting in March 2015, the Board reviewed the effectiveness
of the system of internal control that was in operation during
the financial year ended 31 March 2015. Details of specific risk
review activity undertaken during the year by the Audit and Risk
& CSR Committees, together with the current risk registers, were
presented by the CEO. The Board confirmed its approval that the
risk review activities undertaken during the year under review, as
presented by the CEO, amounted to an effective system being in
place to ensure that all aspects of risk management and internal
control had been considered for the year under review.
QinetiQ Group plc Annual Report and Accounts 2015
65
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.
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 directly 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. Reports on whistleblowing activity and the outcome
of investigations are regularly reported to the Audit Committee.
The Audit Committee reviewed the effectiveness of the Group’s
whistleblowing process during the year.
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 review panel processes for
doing business in high risk countries.
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 Responsible business section on pages 24 to 29.
Management and control of US subsidiaries
Following the sale of the US Services division in May 2014, the US
operations retained by QinetiQ (comprising 9% of the turnover of
the QinetiQ Group as a whole) have been split, with the US Global
Products business, trading as QinetiQ North America and comprising
approximately 84% of the total US turnover at 31 March 2015,
placed under a new Proxy arrangement, as detailed below, and
with the remainder of the US business operating outside the Proxy
regime and therefore following the same reporting lines and
processes as the Group’s other, non-regulated businesses.
US Global Products business and the Proxy arrangement
The US Global Products business, trading as QinetiQ North America,
is managed via Foster-Miller, Inc. (FMI), a wholly-owned subsidiary
of QinetiQ in the US. It has been placed under a Proxy arrangement
as it is required by the US National Industrial Security Program to
maintain facility security clearances and to be insulated from foreign
ownership, control or influence. Under the new Proxy arrangement,
FMI and the US Department of Defense (DoD) are parties to a Proxy
agreement that regulates the management and operation of FMI.
Pursuant to this Proxy agreement, QinetiQ has appointed three US
citizens who hold the requisite US security clearances (Len Moodispaw,
David Carey and John Currier) as Proxy holders to exercise the
voting rights in FMI. The Proxy holders are also directors of FMI and,
in addition to their powers as directors, have power under the Proxy
arrangements to exercise all prerogatives of share ownership of FMI.
The Proxy holders have a fiduciary duty, and agree, to perform their
role in the best interests of QinetiQ as shareholder (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 Board of FMI. 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 (and always
only with the consent of the US Defense Security Service).
In terms of the power to govern, the Proxy agreement vests certain
powers solely with the Proxy holders and certain powers solely with
QinetiQ. For example, the Proxy holders cannot carry out any of the
below without QinetiQ’s express approval:
• sell or dispose of, in any manner, capital assets or the business
of FMI;
• pledge, mortgage or encumber assets of FMI for purposes other
than obtaining working capital or funds for capital
improvements;
• merge, consolidate, reorganise or dissolve FMI; 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 FMI.
The Company maintains its involvement in FMI’s activities through
normal business activity and liaison with the Chair of the Proxy Board.
FMI commercial and governance activity is included in the business
update provided in the regular executive report to the Board. This
activity is subject always to the confines of the Proxy regime to ensure
that it meets the requirement that FMI must conduct its business
affairs without external control or influence, and the requirements
necessary to protect the US national security interest.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 66
Corporate governance statement continued
Report of the
Audit Committee
Paul Murray
Audit Committee Chairman
The Committee focuses specifically on the effectiveness of the
management of financial risks and the integrity of financial reporting.
This report describes the work of the Committee in discharging its
responsibilities, including:
• the significant issues considered by the Committee in relation to
the preparation and reporting of the full and half-year financial
statements, and how these issues were addressed;
• assessing external audit effectiveness and the approach taken
for the reappointment of the external auditor;
• the review of the provision of non-audit services and
safeguarding auditor independence; and
• overseeing the work of the Internal Auditor.
In last year’s report, I stated that I aimed to encourage an open but
challenging dialogue between the Committee, management, and
internal and external auditors. This way of working continues, with
reports from the executive and internal and external auditors being
scrutinised and challenged where appropriate, and I intend to
continue with this robust approach.
With the disposal of the US Services business, the US Group has been
re-shaped and a new Proxy Board appointed to oversee the US Global
Products business. We have been working with the Proxy Board and
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.
Membership and attendance during the year
Member
Paul Murray (Committee Chair)
Admiral Sir James Burnell-Nugent
Noreen Doyle#
Michael Harper
Ian Mason*
Susan Searle
# Noreen Doyle retired as a Director on 22 July 2014.
* Ian Mason was appointed as a Director on 3 June 2014.
Attendance
5/5
5/5
2/2
5/5
3/3
5/5
The Audit Committee is chaired by Paul Murray. The Board considers him
to have recent and relevant financial experience. He was formerly Group
Finance Director of Carlton Communications plc and LASMO plc, and he
is currently 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 pages 58 and 59. 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 2015, 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 each of QinetiQ’s external auditor and the
Group Internal Audit Manager on two separate occasions, without
Executive Directors present, to discuss the audit process and assure
itself regarding resourcing, auditor independence and objectivity.
Overview
Key areas of focus during the year were:
a) the review of the audit process for the full year and half-year
results, a review of the accounting policies and an assessment
of the estimates and judgments made by management.
b) a review of the “fair, balanced and understandable”
assessment of the Annual Report;
c) a regular review of the effectiveness of internal controls
including working arrangements with the US Proxy regime;
d) a review of Group Tax policies and issues;
e) the effectiveness of external audit, non-audit services,
contractual arrangements with the external auditor and
the re-tender of the external audit; and
f) the effectiveness of governance arrangements.
QinetiQ Group plc Annual Report and Accounts 2015 67
Further details are set out below.
a) 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 periods ended 30 September 2014 and 31 March 2015:
•
IFRS 10 criteria in respect of the consolidation of the US Global
Products business (operating under a Proxy Board) into the
Group’s results;
• the basis for, and judgments made by management in determining,
the liabilities recorded for litigation, onerous contracts, potential
claims and other disputes;
• the provisions for income tax and deferred tax, specifically
the recognition of a deferred tax asset of £25.2m in respect
of UK tax losses;
• the carrying values of the Group’s cash generating units (CGUs),
specifically the £67.2m of goodwill associated with the US Global
Products CGU. The major assumptions impacting on the NPV
of future expected cash flows were also discussed. Certain
discount rate assumptions and market growth forecasts are
advised by external consultants;
• assumptions used to value the net pension liability of £39.4m
(as advised by the Company’s external actuaries); and
• the disclosures in the Preliminary Announcement and Annual
Report and Accounts, in particular those relating to risk, goodwill
and discontinued operations.
The review was carried out by way of papers presented by the CFO,
the external auditor and the internal auditor, and through discussions
with management. 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.
b) Assessment of the fair, balanced and understandable
requirement:
Regarding the provision of advice to the Board to meet with
the requirements of the 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, the CEO and members of management presented to
the Committee details of the processes followed by management
in preparing the accounts, and in particular the Committee 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 55.
• 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 Communications
functions, which adheres to a timetable of actions for the
production and review of the Annual Report.
• The Annual Report working group is aware of the fair, balanced
and understandable requirements and is tasked with ensuring
that the Annual Report takes account of those requirements.
• A checklist of considerations to ensure the requirements were
met was completed by the working group and presented to the
Committee in order to provide assurance to the Committee
(and to the Board).
c) Review of internal controls:
The Committee monitors 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.
At four meetings during the year, reports on the operation of internal
controls and risk management processes are also received from the
internal audit function, including whistleblowing arrangements as
detailed on page 65.
Particular attention is given to the timely and effective implementation of
remedial actions, either identified by the business directly, or by Internal
Audit. The Internal Audit risk based strategic and annual plan is presented
to, and scrutinised twice a year by, the Committee to provide assurance
that resources are adequate and directed towards key risk areas.
The annual plan is structured to ensure that all significant financial
and non-financial risks are reviewed within a rolling two-year strategic
plan. In the last 12 months, the results of 20 completed internal audits
were reported to the Committee, detailing all significant findings and
management action taken to address the issues identified. The audits
included the review of financial systems, programmes and projects, as
well as the management of specific risks identified through the Group’s
risk management processes. Internal audit activity in the year continued
to indicate that overall an effective control environment was in place with
an open culture of continuous improvement being demonstrated by
regular management requests for internal audits to be undertaken.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 68
Corporate governance statement continued
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 financial risk register is presented
by management to the Committee at four meetings each year,
noting (i) risks being actively managed through internal mitigation
activity, including the timeframe for current mitigation to improve
the risk position, (ii) risks managed at post-mitigation levels but
heavily influenced by external factors and/or that require ongoing
monitoring, and (iii) retired risks.
The process in respect of the US Global Products business is adjusted
to take into account the Proxy arrangements referred to on page 65.
The executive management function have regular contact with the
Chair of the Proxy Board and with US executive management, and the
Group’s internal controls have been applied as far as possible within the
requirements of the Proxy regime. The internal audit function continues
to work closely with US management to gain assurance that an effective
control environment is in place. A full external audit in respect of the
US Global Products business was undertaken during the year.
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.
d) Review of Group Tax priorities and issues:
The CEO presented a paper to update the Committee on the Group’s
tax priorities and issues. The Committee considered these in the light
of regulatory requirements and the Group’s profit mix. Among more
general matters, procurement rules, R&D tax relief, the use of tax
losses and the effective tax rate were discussed.
e) External audit: Its effectiveness, the provision of non-audit
services, QinetiQ provision of services to the external auditor,
auditor re-appointment and the re-tender of the external audit:
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 Code and FRC
guidance. At this meeting, it was agreed that an effectiveness
review would be undertaken by way of questionnaire and would
include collecting the views of management and employees
involved in supporting the external audit work, feedback from
the CFO and Group Financial Controller and an open Committee
discussion without external auditors being present.
The review covered a range of topics, including:
• the audit partner and the audit team;
• the audit approach – planning and execution;
• communication with the Audit Committee;
• supporting the work of the Audit Committee;
•
insights and adding value;
•
independence and objectivity; and
• formal reporting.
The outcome of the review was considered at the May 2015 Committee
meeting and the following were noted and reported to the Board:
• the independence and objectivity of the external auditor were
strongly reaffirmed;
• the external audit process was considered to be effective
and robust;
• communication with the Audit Committee was effective; and
• more regular technical and other relevant training would be
provided to the Board and its Committees.
External auditor independence: non-audit services
At its September meeting the Committee reviewed the Company’s
Code of Practice relating to the principles for regulating the award of
non-audit work to the external auditor and for the employment of the
external auditor’s staff, and considered that it remained appropriate.
Details of non-audit fees are tabled at three Committee meetings
each year.
In the last financial year, there have been non-audit services
conducted by KPMG that exceeded £50,000 in value. These fees
related predominantly to the investor perception audit referred to
on pages 52 and 56 carried out by KPMG Makinson Cowell and also to
the disposal of the US Services business. The Committee concluded,
prior to engaging KPMG for the provision of these services, that there
had not been any conflict of interest that might compromise the
independence of KPMG’s audit work.
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 embedded the Code of Practice which sets out the principles for
regulating the award of non-audit work to the external auditor within
its Operating Framework. 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.
In line with this 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.
QinetiQ Group plc Annual Report and Accounts 2015 69
The Committee also noted that the feedback from customer
satisfaction questionnaires (which were issued on completion
of each audit to the auditee) indicated that the service was well
received within the business.
As reported on page 60, due to the change of CEO during the year,
it was decided that it would not be appropriate to undertake an
external review of the effectiveness of the Board and its Committees
(including therefore the Audit Committee), but that an evaluation
would be carried out by way of an externally provided online
questionnaire tool which was circulated to Board and Committee
members for completion. The Committee Chairman had evaluated the
results and reported on them at the Committee’s March 2015 meeting.
The questionnaire had asked the Directors to give their views on
progress against the actions from the previous year’s effectiveness
review, the Committee’s prior year performance, Committee training,
an assessment of key challenges for the year ahead and the
identification of future ‘deep dives’.
It was noted that, following completion of the US restructuring,
oversight of the US governance arrangements had been re-established
with the Proxy Chair, and direct access gained into the US for the
internal audit function.
The following key actions were noted from the review:
• the Committee members would seek to undertake routine,
externally-sourced training to keep up to date with changes
in regulation and guidance;
• the Committee would review the annual calendar of activities
to ensure the most efficient and effective way to complete its
oversight activities; and
• the Committee would continue to support the Remuneration
Committee in assessing ‘quality of earnings’ decisions that drove
long-term incentive and bonus outcomes.
Auditor re-appointment
At its May meeting, the Committee reviewed the effectiveness
and the independence of the external auditor during the year,
as detailed on the previous page. 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 2016.
At its meeting in March, the Committee considered the timings
for the tender of the external audit.
The Company notes the provision in the UK Corporate Governance
Code that FTSE 350 companies should put the external audit out
to tender at least every ten years. 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.
The Company stated in the 2014 Annual Report and Accounts
that it was its 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.
Following the approval of the EU audit regulation which takes effect
in member states from June 2016, the Committee will continue to
monitor developments in the implementation of this regulation in the
UK and will adjust the timings for the external audit tender process
where necessary.
The Committee will continue, however, with the annual review
of the performance of the external auditor and act accordingly.
f) Governance reviews:
The Committee’s September meeting had considered the processes
to be followed for the various governance reviews.
The process for the external audit review is detailed on the previous
page. As regards the UK internal audit function, the Committee had
agreed that there would be a self-assessment on progress being made
against the internal audit continuous improvement programme which
had been updated to take account of the recommendations of the
Chartered Institute of Internal Auditors, following their effectiveness
review of Internal Audit during 2014, together with feedback from the
Company’s management on their experience of internal audit.
At the Committee’s March meeting, it was noted that progress had
been made through the year in implementing the suggested actions,
most notably the alignment of internal audit plans to strategy-related
and other risks. In addition, it was agreed that consideration would be
given to the secondment of talented individuals into the internal audit
function as part of their career development.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 70
Corporate governance statement continued
Report of the
Risk & CSR Committee
Admiral Sir James
Burnell-Nugent
Risk & CSR Committee Chairman
I am pleased to report that, during the year, the Committee
continued to carry out its core functions with the support of the
executive Governance Committee in respect of risk management and
oversight. The annual calendar of activity, together with the in-depth
review of red risks and ‘deep dives’ into key risk areas, has continued
to provide a firm basis on which the Committee is able to oversee the
operation of the non-financial risk management processes within the
Group. Regular updates from management responsible for specific
areas such as sustainability or international trade, coupled with
presentations from external specialists, serve to further the
Committee’s understanding of risks and how they are mitigated.
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 2015, the Committee
met on four occasions.
The Governance Committee continued to report to the Risk & CSR
Committee and covered areas such as the status of non-financial
risks identified on the Group risk register, assurance around
regulatory compliance and emerging risks.
Membership and attendance during the year
Member
Admiral Sir James Burnell-Nugent
(Committee Chair)
Noreen Doyle#
Mark Elliott
Michael Harper
Ian Mason*
David Mellors
Paul Murray
Leo Quinn>
Susan Searle
Steve Wadey˜
Attendance
4/4
1/2
4/4
4/4
3/3
4/4
4/4
2/3
4/4
N/A
# Noreen Doyle retired as a Director on 22 July 2014. She was unable to attend the
July meeting due to a prior engagement.
* Ian Mason was appointed as a Director on 3 June 2014.
> Leo Quinn ceased to be a Director on 31 December 2014 and was unable to attend
one meeting due to a prior engagement.
~ Steve Wadey became a member of the Committee in April 2015 and will attend
future meetings.
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 Responsible business
section on pages 24 to 29.
Key areas of focus during the year were:
a) a review of the Group’s risk management processes including
working arrangements with the US Proxy regime;
b) the operation of the generic MOD compliance system;
c) a review of the Group Risk Register in accordance with FRC
recommendations; and
d) the effectiveness of the Committee’s performance during the year.
Further details are set out below. Details of the principal risks and
uncertainties can be found on pages 32 to 37 of the Strategic report.
a) A review of the Group’s risk management processes:
The Committee receives a report at each meeting from the Safety and
Assurance Director with regard to key areas of risk management activity,
such as health and safety, international trade controls and Proxy regime
compliance. Typically a report includes a high level summary of changes
to non-financial risks, an overview of assurance and audit activity, and
any other items to bring to the Committee’s attention. Following the
disposal of the US Services business, work has progressed to establish,
where possible, a consistency of approach by the US Global Products
business, as far as it is able to do so having regard to the US Proxy regime,
in respect of areas such as risk appetite, the risk register and internal
control, and the internal audit function is able to visit and undertake
work at the business, both in respect of financial and non-financial risks.
In addition to the report from the Safety and Assurance Director,
QinetiQ Group plc Annual Report and Accounts 2015 71
a series of ‘deep dives’ are scheduled for the course of each 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 emerging reputational related risks considered
how these are detected and managed within the Company.
The review included a presentation from the senior manager
responsible, on latest thinking around reputational risk, impact
on other organisations and how emerging reputational risks are
currently detected and monitored.
• Continuing the focus on cyber risk, an external specialist on how
boards should address cyber issues gave a presentation to the
Committee on current threats and set out some of the questions
which boards are facing. As a result of the presentation, a series
of actions were agreed, including testing of the Company’s I.T.
resistance to cyber attack, metrics to measure improvement actions
and a segmentation of security risks for review by the Governance
Committee prior to agreeing a risk appetite for each segment.
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. The Board nominates two
senior executives to act as Compliance Implementation Director and
Compliance Audit Director. Oversight of the operation of the system
is provided by the Committee. The Committee receives a bi-annual
report on the compliance areas that it monitors from the internal
audit function. A typical report includes a summary of the scope
and an executive summary of the findings with an audit opinion.
The report includes specific findings with agreed associated
time-bound action plans.
Recent activity included the adjustment of the financial reporting
system to ensure that the sales lead is required to make a specific
notification of the ultimate customer and the setting up and closing
down of firewalls in response to changes in bid activity.
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.
c) 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 and strategy. Further details can be found in the
Risk management section on pages 30 to 31 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.
d) Effectiveness review:
As reported on page 60, due to the change of CEO during the year,
it was decided that it would not be appropriate to undertake an
external review of the effectiveness of the Committee itself, but
that an evaluation would be carried out by way of an externally
provided online questionnaire tool which was circulated to Committee
members and key executives for completion. The Committee Chairman
had reviewed the responses and reported on them at the Committee’s
May 2015 meeting.
The review noted that there was generally a good level of satisfaction
with the work and processes of the Committee. Areas noted for
improvement were:
•
improved clarity and brevity in reporting to allow the Committee
to focus on key issues;
•
increased liaison with the US business; and
• considering risk appetite in relation to risk areas, such
as cyber risk.
Admiral Sir James Burnell-Nugent
Security Committee Chairman
Report of the Security Committee
Membership and attendance during the year
The Security Committee is chaired by Admiral Sir James Burnell-Nugent and the other
Committee members during the year were Michael Harper, Ian Mason (from 3 June 2014),
David Mellors, Paul Murray, Leo Quinn (until 31 December 2014) and Susan Searle.
Steve Wadey became a member of the Committee on 27 April 2015.
There was no requirement for the Committee to meet during the year.
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.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 72
Directors’ remuneration report
Report of the
Remuneration Committee
Michael Harper
Remuneration Committee Chairman
On behalf of the Board, I am pleased to
present the Annual Report on Remuneration
for the year ended 31 March 2015 for which
we will be seeking approval at the AGM
on 22 July 2015.
Remuneration Committee membership and attendance during
the year ended 31 March 2015
Michael Harper became Chair of the Committee on 22 July 2014
following the retirement of Noreen Doyle.
Member
Michael Harper (Committee Chair)
Noreen Doyle (retired 22 July 2014)
Mark Elliott (Group Chairman)
Admiral Sir James Burnell-Nugent
Paul Murray
Susan Searle
Ian Mason (appointed 3 June 2014)
Attendance
6/6
1/2
6/6
6/6
6/6
6/6
5/5
Dear shareholder,
On the following pages you will find information on:
• the key activities and main decisions made by the Remuneration
Committee (the Committee) during the year;
• the link between the Company strategy and the Remuneration
Policy; and
• a summary of the Remuneration Policy.
The Annual Report on Remuneration is subject to an advisory
shareholder vote at the AGM of the Company on 22 July 2015.
Remuneration policy
Last year the Committee conducted an extensive review of the
Directors’ Remuneration Policy which was approved at the 2014
AGM (22 July 2014). The full Policy may be found in the Corporate
Governance section on the Company’s website.
As a Committee we work to ensure that the remuneration
structure supports the Company strategy and aligns with the
interests of shareholders so that we are able to attract, retain
and motivate high calibre executives by rewarding the creation
of long-term sustainable value. We are proposing no changes to
the Policy at this year’s AGM and so the Policy will normally next
be subject to shareholder approval at the 2017 AGM.
QinetiQ Group plc Annual Report and Accounts 2015 73
Activities
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.
The Committee engages with investors as appropriate to ensure
a meaningful dialogue and is grateful for all the support it has
received from investors and their representative bodies over the
course of the year.
The Committee meets as necessary. During the financial year ended
31 March 2015, it met on six occasions.
Month
May
July
October
November
January
March
Main agenda Items
• Annual Cash Bonus Plan results (y/e 31 March 2014)
• Operating Committee Reward structure
• Directors’ Remuneration Report
• Share plan allocations and nominations
• Share plan performance and vesting
• Bonus Banking Plan rules prior to shareholder approval
• Executive Directors’ salary review
• Directors’ Remuneration Report
• Committee programme for the year
• Executive Director remuneration
• Trends in Remuneration Policies
• Review of Executive shareholding
• Reward and retention – all employees
• Executive incentive arrangements
• Projected share plan vesting
• Target setting for Annual Bonus (y/e 31 March 2016)
• Directors’ Remuneration Report
• Chairman’s fee
• New CEO remuneration
• Review of Committee effectiveness
Link to Company strategy
Our objective is to grow the business through the Organic-Plus
Strategy. Progress is measured through a range of financial and
non-financial KPIs to monitor Group and divisional performance.
Financial KPIs include measures such as order intake, organic sales
growth, profitability and cash conversion performance; while
non-financial KPIs include health and safety, productivity, customer
satisfaction and employee engagement. More details are provided
in the Strategic report on pages 2 to 47.
Key decisions made during the year
Summarised below are the key decisions the Committee made during
the year.
Adjustment to Performance Conditions
Following the sale of the US Services business and resulting share buyback,
the Committee worked with the Audit Committee to review the EPS
performance conditions for the Performance Share Plan (PSP) and
Deferred Annual Bonus (DAB) to assess their continued appropriateness.
In respect of these two events the Remuneration Committee decided
to exercise its discretion to amend the EPS performance conditions
as follows:
•
in accordance with best practice guidance the number of shares
bought under the share buyback has been added back in calculating
the current year’s EPS for the incentive plans, which reduced the
current year’s as reported EPS from 15.2p to 14.7p;
• to use only earnings reflecting continuing operations, which
reduced 2012 EPS from 13.6p to 10.5p;
• to treat the accelerated interest charge for the Private Placement
loan redemptions in 2012 consistently with the similar charge in
2015 which increased 2012 EPS by 2.5p from 10.5p to 13.0p;
• as a result of these adjustments the impact for the Executive
Director was that, of the shares subject to the EPS performance
condition due to vest in 2015, 36.97% under the PSP will vest
compared with 32.84% before the adjustments, and that in either
case no Deferred Annual Bonus Matching Shares would vest.
CEO Remuneration
On Leo Quinn’s resignation all his unvested performance based share
awards lapsed, and David Mellors was appointed Interim CEO. We decided
to increase Mr Mellors’ salary to reflect his new duties. Furthermore,
to ensure that Mr Mellors’ remuneration was aligned to the priorities
of his new role, as agreed by the Board, his annual bonus targets
were amended.
Interim CEO
The details of the Interim CEO package for David Mellors is as follows:
Element
Salary
Value
£633,800
Annual
Bonus
225% salary
Benefits
Pension
PSP
Policy
20% salary
150% salary
Rationale
The salary was positioned to reflect David
Mellors’ wide range of responsibilities as
both Interim CEO and CFO.
No change to maximum quantum. However, the
performance targets were changed so that 50%
of the maximum bonus opportunity was based
on role specific targets with a proportionate
reduction to the financial performance
conditions.
No change from CFO package.
No change from CFO package.
No additional award on becoming Interim CEO.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 74
Directors’ remuneration report continued
Conclusion
We have provided an ‘At a glance’ summary immediately after
this letter which summarises the Policy, how it was implemented
in the year and how it is proposed to operate it for the year ending
31 March 2016.
I hope that we can rely on your vote in favour of the Annual Report
on Remuneration at the AGM on 22 July 2015.
Michael Harper
Remuneration Committee Chairman
21 May 2015
New CEO
On recruitment, the agreed policy on remuneration of new Executive
Directors is to pay competitively to attract the appropriate high
calibre candidate to the role, following the same principles as for
the current Executive Directors. The key elements of the package
for Steve Wadey are set out in the following table:
Element
Salary
Value
£560,000
Annual
Bonus
225% salary
PSP
150% salary
Pension
20% salary
Rationale
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 CEO will be eligible to receive benefits
in line with the Policy.
The CEO will be eligible to participate in the Bonus
Banking Plan to the declared maximum potential
as set out in the Policy.
The CEO will be eligible to participate in
the PSP to the declared maximum potential
(200% of salary) as set out in the Policy.
The CEO will be eligible to receive pension
benefits as set out in the Policy (maximum
25% of salary).
Effectiveness review
The Committee reviewed its terms of reference and evaluated
the effectiveness of its performance during the year by way of an
effectiveness questionnaire which was completed by Committee
members. The questionnaire covered areas including culture
and behaviour, oversight and key contributors.
It was noted that the Committee continued to be effective in carrying
out its duties and that good progress had been made against the
objectives arising from the prior year review. Key areas from the 2015
review where improvements could be made were noted as follows:
• the Committee would anticipate and consider more broadly
the issues likely to impact remuneration judgments. This would
involve the Committee, both its internal and external advisors,
and the Executives increasing their level of engagement;
• remuneration arrangements would be refined to ensure the
most advantageous use of reward as a means to drive the
Company’s Organic-Plus growth strategy; and
• the Committee would continue to work closely with the
Audit Committee on ‘quality of earnings’ evaluations when
deciding upon the outcomes of incentive plans.
QinetiQ Group plc Annual Report and Accounts 2015 At a glance
75
How have we performed against our corporate performance objectives?
In this section we highlight the performance and remuneration outcomes for the year ended 31 March 2015. More detail can be found in the
Annual Report on Remuneration.
Bonus Banking Plan
Underlying profit after tax(a)
Underlying operating profit(a)
Underlying operating cash flow(a)(b)
Interim CEO Personal Objectives:
• underlying operating profit in line with the
Board’s expectations;
• ‘Best Companies’ Employee Engagement
Survey outcome;
Target performance Stretch performance Actual performance
£96.0m
£111.3m
£134.0m
£86.9m
£105.0m
£72.40m
£104.3m
£126.0m
£86.9m
% of maximum
reward achieved
71.38%
58.00%
100.00%
Meet
Expectations
Exceed
Expectations
Exceeded
Expectations
600
610
613.5
100.00%
• Customer Satisfaction Survey – Top 3 ranking; and
• overall stability maintained within the Group during
the period up to the new CEO’s commencement date.
80%
Meet
Expectations
85%
Exceed
Expectations
85%
Exceeded
Expectations
(a) Definition of underlying measures and performance can be found in the glossary on page 141.
(b) Adjusted to exclude LTPA and MSCA capital expenditure. An explanation of the underlying cash flow performance is given under Bonus Banking Plan on page 79.
Long-Term Incentives
2012 Performance Share Plan (EPS)(b)
2012 Performance Share Plan (TSR)
2012 Deferred Annual Bonus Matching (EPS)(b)
Threshold
performance
14.2p
Median
15.9p
Stretch
performance(a)
17.3p
Upper Quartile
19.8p
Actual
performance
14.7p
Below Median
14.7p
% of maximum
reward achieved
36.97%
0.00%
0.00%
(a) Performance Share Plan and Deferred Annual Bonus Matching use different Compound Annual Growth Rates (CAGR). Details provided on page 80.
(b) Adjusted EPS. Details provided on page 73.
How have we performed against our corporate performance objectives?
The following tables set out:
• the single figure for 2015 calculated in accordance with the regulations showing how much the Executive Directors earned in respect of 2015; and
• the single figure for 2015 compared to the Policy remuneration scenarios for 2014.
What did our executives earn during the year?
All figures
in £
CEO(a)
CFO(b)
2015
Salary/Fee
469,776
501,227
2015
Benefits
87,290
27,447
2015 Bonus
Banking Plan
0
998,603
2015 Long-Term
Incentive
0
134,881
2015 Pension
116,913
97,522
2015 Total
673,979
1,759,680
2014 Total
£2,177,742
£1,236,601
(a) Resigned 31 December 2014. (b) Appointed Interim CEO 20 October 2014.
CEO (£’000)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
851
407
563
851
Minimum
Target
CFO/Interim CEO (£’000)
2,500
1,521
1,409
851
Stretch
674
Actual
2,000
1,500
1,000
500
0
503
Minimum
245
358
503
Target
912
896
503
Stretch
135
999
626
Actual
Fixed
Linked to Annual Performance
Linked to performance over more than 1 year
Fixed
Linked to Annual Performance
Linked to performance over more than 1 year
The following chart shows the shareholding for the CFO:
Shareholding as a percentage of CFO salary
Shareholding requirement
100%
Value of beneficially owned shares
& deferred shares
224%
Value of conditional shares subject
to performance conditions
637%
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
76
Directors’ remuneration report continued
Policy summary
Element
Y/E 31 March 2015
Y/E 31 March 2016
Notes
Salary
We 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 in the Executive Director’s role.
Leo Quinn (CEO) £615,325 per annum to
31 August 2014; £633,800 per annum thereafter
until leaving date 31 December 2014.
David Mellors (CFO) £391,400 per annum
to 31 August 2014; £403,150 per annum to
20 October 2014.
David Mellors (Interim CEO)
£633,800 per annum from 20 October 2014.
Stephen Wadey (New CEO)
Leo Quinn, the CEO at the beginning of the financial year, resigned on 31 December
£560,000 per annum appointed on 27 April 2015.
2014. David Mellors was Interim CEO from 1 January 2015 until 26 April 2015.
David Mellors (Interim CEO)
to 30 April 2015 £633,800 per annum.
David Mellors (CFO)
from 1 May 2015 £440,000 per annum.
However, to reflect the increasing assumption of responsibilities up until his formal
appointment as Interim CEO on 1 January 2015, his salary was increased from
20 October 2014.
On 27 April 2015 a new CEO, Steve Wadey, was appointed.
David Mellors returned to an enlarged role as CFO on 1 May 2015, taking on
the operational management of Group procurement and an increased remit
for Group strategy.
Benefits
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.
Pension
The Group’s policy is to offer all UK employees participation in the QinetiQ Defined Contribution
Group Personal Pension (GPP).
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.
Bonus Banking Plan
As well as determining the performance conditions, targets and relative weighting, the Committee
will also determine, within the approved range of 90%-135% of salary, 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 or
shares. 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.
The Committee has discretion to adjust targets in exceptional circumstances. 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.
Performance Share Plan
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.
Policy benefits provided during financial year.
No change.
Payment in lieu of pensions.
Leo Quinn (CEO) 25% of salary.
David Mellors (CFO & Interim CEO) 20% of salary.
Stephen Wadey (CEO) 20% of salary.
No change for year ending 31 March 2016.
David Mellors (CFO) 20% of salary.
Maximum Annual Opportunity 225% of salary.
Maximum Annual Opportunity 225% of salary.
Details of specific performance targets have not been provided as they are deemed
Target = 90% of salary.
Threshold = 0% of salary.
Details of the performance conditions and their
level of satisfaction are set out on page 79.
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.
See page 80 of the Annual Report on
Remuneration for the grants made in
the year reported on.
Target = 112.5% of salary.
Threshold = 0% of salary.
Performance conditions (weighting):
• Group underlying operating profit (30%).
• Group underlying operating cash flow (30%).
• Group underlying profit after tax (20%).
• Qualitative measures based on Company KPIs (20%).
CEO 150% of salary.
CFO 150% of salary.
Performance conditions:
50% of the PSP award is based on EPS growth:
• EPS growth of 3% p.a. 25% vesting.
• EPS growth of 10% p.a. 100% vesting.
50% of the PSP award is based on relative
TSR compared to the FTSE 250:
• 30% vesting for median.
• 100% vesting for upper quartile.
Straight line vesting between points.
commercially sensitive.
They will be disclosed retrospectively in next year’s Annual Report on Remuneration.
In line with best practice malus and clawback provisions are applicable.
No change in operation of the PSP for year ending 31 March 2016.
NED Fees
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 those of employees.
See page 81 of the Annual Report on
Remuneration for the fees and allowances
paid in the year reported on.
Basic Non-executive Director fee
From 1 July 2015 £46,000.
Last reviewed in 2013, increase is equivalent to 3% per annum in line with increases to
employees generally.
QinetiQ Group plc Annual Report and Accounts 2015 77
Element
Salary
Benefits
Pension
Y/E 31 March 2015
Y/E 31 March 2016
Notes
We aim to pay base salaries in line with the market median against defined comparator groups.
Leo Quinn (CEO) £615,325 per annum to
Typically, the base salaries of Executive Directors in post at the start of the policy period and who
31 August 2014; £633,800 per annum thereafter
remain in the same role throughout the policy period will be increased by a similar percentage
until leaving date 31 December 2014.
to the average annual percentage increase in salaries of all other employees in the Group.
The exceptions to this rule may be where:
proven competence in role; or
• an individual is below market level and a decision is taken to increase base pay to reflect
20 October 2014.
• there is a material increase in scope or responsibility in the Executive Director’s role.
David Mellors (Interim CEO)
David Mellors (CFO) £391,400 per annum
to 31 August 2014; £403,150 per annum to
£633,800 per annum from 20 October 2014.
Stephen Wadey (New CEO)
£560,000 per annum appointed on 27 April 2015.
David Mellors (Interim CEO)
to 30 April 2015 £633,800 per annum.
David Mellors (CFO)
from 1 May 2015 £440,000 per annum.
Leo Quinn, the CEO at the beginning of the financial year, resigned on 31 December
2014. David Mellors was Interim CEO from 1 January 2015 until 26 April 2015.
However, to reflect the increasing assumption of responsibilities up until his formal
appointment as Interim CEO on 1 January 2015, his salary was increased from
20 October 2014.
On 27 April 2015 a new CEO, Steve Wadey, was appointed.
David Mellors returned to an enlarged role as CFO on 1 May 2015, taking on
the operational management of Group procurement and an increased remit
for Group strategy.
Benefits include car allowance, health insurance, life assurance, income protection and
Policy benefits provided during financial year.
No change.
membership of the Group’s employee Share Incentive Plan which is open to all UK employees.
The Group’s policy is to offer all UK employees participation in the QinetiQ Defined Contribution
Payment in lieu of pensions.
Stephen Wadey (CEO) 20% of salary.
No change for year ending 31 March 2016.
Group Personal Pension (GPP).
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
David Mellors (CFO & Interim CEO) 20% of salary.
Leo Quinn (CEO) 25% of salary.
David Mellors (CFO) 20% of salary.
As well as determining the performance conditions, targets and relative weighting, the Committee
Maximum Annual Opportunity 225% of salary.
Maximum Annual Opportunity 225% of salary.
Target = 112.5% of salary.
Threshold = 0% of salary.
Performance conditions (weighting):
• Group underlying operating profit (30%).
• Group underlying operating cash flow (30%).
• Group underlying profit after tax (20%).
• Qualitative measures based on Company KPIs (20%).
Details of specific performance targets have not been provided as they are deemed
commercially sensitive.
They will be disclosed retrospectively in next year’s Annual Report on Remuneration.
In line with best practice malus and clawback provisions are applicable.
Awards are earned based on an equal weighting of absolute underlying EPS growth and relative
Normal grant level = 150% of salary.
TSR performance. The performance period runs for three years from the start of the financial year
Maximum grant level = 200% of salary.
CEO 150% of salary.
CFO 150% of salary.
No change in operation of the PSP for year ending 31 March 2016.
Performance conditions:
50% of the PSP award is based on EPS growth:
• EPS growth of 3% p.a. 25% vesting.
• EPS growth of 10% p.a. 100% vesting.
50% of the PSP award is based on relative
TSR compared to the FTSE 250:
• 30% vesting for median.
• 100% vesting for upper quartile.
Straight line vesting between points.
allowance in lieu of pension contributions. This supplement will be a non-consolidated
allowance and will not impact any incentive calculations.
Bonus Banking Plan
will also determine, within the approved range of 90%-135% of salary, the level of target bonus at
the beginning of the plan year.
Target = 90% of salary.
Upon assessment of performance by the Committee, a contribution will be made by the Company
Threshold = 0% of salary.
into the participant’s plan account and 50% of the cumulative balance will be paid in cash or
shares. Any remaining balance will be converted into shares.
Details of the performance conditions and their
level of satisfaction are set out on page 79.
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.
The Committee has discretion to adjust targets in exceptional circumstances. 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.
The Committee has discretion to vary the weighting of performance metrics over the life of this
threshold performance are 25% for EPS growth
Remuneration Policy to ensure alignment with business strategy. If events occur which cause the
and 30% for relative TSR rising on a linear basis
Committee to consider that the performance targets are no longer an appropriate measure of
to 100% vesting at stretch performance.
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
See page 80 of the Annual Report on
The percentages of the award which vest at
Remuneration for the grants made in
the year reported on.
Performance Share Plan
in which the award is granted.
originally set.
NED Fees
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 those of employees.
See page 81 of the Annual Report on
Remuneration for the fees and allowances
paid in the year reported on.
Basic Non-executive Director fee
From 1 July 2015 £46,000.
Last reviewed in 2013, increase is equivalent to 3% per annum in line with increases to
employees generally.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 78
Directors’ remuneration report continued
Annual Report on
Remuneration
Introduction
The following section of this report details how the Remuneration Policy has been implemented for the year ended 31 March 2015.
Performance measures and targets
The performance targets are determined annually. The Committee selected the performance conditions, as detailed on the next page,
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.
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 80, complement the performance conditions described
in the Bonus Banking Plan, supporting sustainable performance.
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 2015 and the preceding year. The CFO
figure for 2015 includes the period as Interim CEO.
Executive
Director
CEO(a)
Salary/fees(a)
Benefits(b)
Bonus Banking Plan(c)
Long-Term Incentive(d)
Pension(e)
Single figure
2015
2014
£469,776 £610,844
2015
£87,290
2014
£59,524
2015
£0
2014
£710,393
2015
£0
2014
£644,270
2015
£116,913
2014
£152,711
2015
2014
£673,979 £2,177,742
CFO(b)
£501,227 £388,550
£27,447
£23,188
£998,603
£451,871
£134,881
£295,282
£97,522
£77,710 £1,759,680 £1,236,601
(a) Base salary is presented prior to adjustments for salary sacrifice pensions. For further details please refer to Additional supporting information for each Executive Director below.
(b) Benefits comprise car allowance, private medical insurance, life assurance and income protection. For 2015 the CEO figure includes a payment of £36,565 in lieu of untaken holiday.
(c) The Bonus Banking Plan was introduced in 2015 replacing the previous Annual Bonus scheme and Deferred Bonus arrangements. The figure provided comprises the value of both
cash and deferred award. Performance measures are Group Underlying Profit After Tax, Group Underlying Operating Profit, Group Underlying Cash Flow and Personal Objectives
for year ended 31 March 2015. For the year ended 31 March 2014 the Annual Bonus scheme performance measures were Group Underlying Operating Profit, Group Underlying
Cash Flow, and Underlying EPS. For the performance year ended 31 March 2015 all measures exceeded target performance resulting in a payout of 88.55% of maximum bonus
opportunity. Additional supporting information for each Executive Director below provides a detailed breakdown of calculations. For the performance year ended 31 March 2014
all performance measures exceeded target resulting in a payout of 76.97%.
(d) Long-Term Incentive figures for the year ending 31 March 2015 comprise the 2012 PSP and the 2012 DAB Matching Plan. For the 2012 PSP the EPS exceeded threshold
performance and the TSR did not meet threshold performance resulting in a payout equivalent to 18.49% of maximum. For the 2012 DAB Matching Plan the EPS failed to
meet threshold performance resulting in nil payout. Long-Term Incentives for the year ending 31 March 2014 comprise the 2011 Value Sharing Plan 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 for each Executive Director below provides
a breakdown of calculations. Long-Term Incentive figures include dividend equivalent payments for both 2015 and 2014.
(e) CEO pension figure represents cash in lieu of pension equating to 25% of base salary for both performance years. For the year ending 31 March 2015 the CFO pension figure
represents cash in lieu of pension equating to 20% of base salary. For year ending 31 March 2014 the CFO pension figure represents £38,344 paid into GPP and £39,366
cash in lieu of pension equating to 20% of base salary.
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 the performance
year ended 31 March 2015.
Base salary
Executive Director
CEO
CFO/Interim CEO
From 20 October
2014(a)
–
633,800
From 1 September
2014(b)
633,800
403,150
From 1 July 2013
615,325
391,400
Pro-rated
single figure(c)
469,776
501,227
(a) The CEO’s and CFO’s salaries increased by 3% (£18,475 per annum and £11,750 per annum respectively) effective from 1 September 2014, in line with salary increases generally
awarded to UK employees at that date.
(b) The CFO’s salary was increased on 20 October 2014 on becoming Interim CEO.
(c) 2015 pro-ration calculated on a daily basis. 2014 pro-ration calculated on a monthly basis.
Total pension entitlements
No Directors participate in the QinetiQ Pension Scheme.
QinetiQ Group plc Annual Report and Accounts 2015
79
Bonus Banking Plan
The CFO/Interim CEO was measured against the targets as shown below:
The Annual Bonus potential for the CFO changed from year ending
31 March 2014 with the introduction of the Bonus Banking Plan.
Achievement of on-target performance provides a payment equal
to 90% of base salary, rising on a linear scale to 225% of base
salary for achievement of stretch performance. The scheme
begins to pay out once threshold performance measures have
been achieved.
Group underlying profit after tax
Group underlying operating profit
Group underlying operating cash flow
Personal objectives
12.50%
18.75%
18.75%
50.00%
The following table details how the Remuneration Policy has been implemented and collates the Bonus Banking Plan results for the year ended
31 March 2015.
Performance measure
Underlying profit after tax(a)
Underlying operating profit(a)
Underlying operating cash flow(a)(b)
Interim CEO Personal Objectives:
• underlying operating profit in line with
the Board’s expectations;
• 'Best Companies' Employee Engagement
Survey outcome;
• Customer Satisfaction Survey
– Top 3 ranking; and
• overall stability maintained within the Group
during the period up to the new CEO’s
commencement date.
Overall Results
50% paid in cash
50% banked(c)
Threshold
£78.2m
£94.5m
£65.2m
Target
£86.9m
£105.0m
£72.40m
Stretch
£104.3m
£126.0m
£86.9m
Actual
£96.0m
£111.3m
£134.0m
% of maximum
reward achieved
71.38%
58.00%
100.00%
CFO/Interim CEO
payment
£100,624
£122,644
£211,455
N/A
593.5
77%
N/A
Meet
Expectations
Exceed
Expectations
Exceeded
Expectations
600
80%
610
85%
613.5
85%
Meet
Expectations
Exceed
Expectations
Exceeded
Expectations
100.00%
£563,880
88.55%
44.28%
44.28%
£998,603
£499,302
£499,301
(a) Definition of underlying measurements of performance can be found in the glossary on page 141.
(b) Adjusted to exclude LTPA and MSCA capital expenditure. Operating cash flow was significantly higher than budgeted. This was partially a result of the higher operating profit but
was largely due to the predicted unwind of working capital not materialising as originally expected. The latter results from favourable contract milestones and customers paying
within terms ahead of the year end cut-off.
(c) Banked portion of Bonus Banking Plan held in share units.
For the year ended 31 March 2015, no discretion was applied to the calculated results; therefore, £998,603 has been reported in the single
figure calculation. For the year ended 31 March 2014, financial targets were exceeded providing a payment of 76.97% 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, subject to the rules, in June
2017). No discretion was applied to these payments.
Deferred Annual Bonus
As reported in the 2012 Annual Report, the CEO and CFO deferred 50% (£362,000) and 40% (£185,000) respectively of their annual cash bonus
into the DAB Plan, allocating 229,596 and 117,173 shares respectively. These shares were held in trust prior to transfer to the outgoing CEO
on 5 January 2015, and will be released to the CFO on 29 June 2015. These figures are not reported in the single figure as they have been
previously reported under the regulations.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
80
Directors’ remuneration report continued
Long-Term Incentive summary
The following table details how the Remuneration Policy has been implemented and collates the Long-Term Incentive Plan results for the
performance period ended 31 March 2015. Plan details are provided in the paragraphs immediately following this table. As a result of his
resignation the CEO forfeited all outstanding awards, totalling 2,140,929 shares.
Plan
CFO
2012 Performance Share Plan (C)
2012 Deferred Annual
Bonus Matching
Total
Conditional
shares maturing
356,250
117,173
Shares vesting
65,860
0
Percentage
shares vesting
18.49%
0.00%
Share value(a)
126,846
0
Accrued
dividends(b)
8,035
0
Reported single
figure value
134,881
0
473,423
65,860
13.91%
126,846
8,035
134,881
(a) Share price used in calculation equals £1.926. Three-month average 1 January 2015 – 31 March 2015.
(b) Cash equivalent dividends are earned during the performance period and any period when shares are held in trust.
(c) 50% of PSP shares granted are subject to the EPS performance measure, 50% are subject to the TSR performance measure.
Following the sale of the US Services business and the £150m share buyback programme the Committee reviewed the EPS performance
conditions to assess their continued appropriateness. In respect of these two events the Remuneration Committee decided to exercise its
discretion to amend the EPS performance conditions as follows:
•
in accordance with best practice guidance the number of shares bought under the share buyback have been added back in calculating
the current year’s EPS for the incentive plans, which reduced the current year’s as reported EPS from 15.2p to 14.7p;
• to use only earnings reflecting continuing operations, which reduced 2012 EPS from 13.6p to 10.5p; and
• to treat the accelerated interest charge for the Private Placement loan redemptions in 2012 consistently with the similar charge in 2015
which increased 2012 EPS by 2.5p from 10.5p to 13.0p.
As a result, 65,860 conditional shares will vest with a value of £126,846 using a share price of £1.926 (three-month average to 31 March 2015).
Long-Term Incentive Plan Results
Performance measure and level
EPS Growth:
Threshold Performance
Vesting at Threshold
Maximum Performance
Vesting at Maximum
EPS at Start of Performance Period (Adjusted)
EPS at Threshold Performance
EPS at Maximum Performance
Actual Performance (Adjusted)
Actual Vesting
TSR Performance:
Threshold Performance
Vesting at Threshold
Maximum Performance
Vesting at Maximum
Actual Performance
Actual Vesting
Total PSP Vesting
Performance Share Plan
DAB Matching
7% (CAGR)
25%
15% (CAGR)
100%
13.0p
15.9p
19.8p
14.7p
0.00%
3% (CAGR)
25%
10% (CAGR)
100%
13.0p
14.2p
17.3p
14.7p
36.97%
Median
30%
Upper Quartile
100%
Below Median
0.00%
18.49%
Value Sharing Plan
As reported in the 2014 Annual Report, the CEO and CFO single figure value relating to the VSP was £502,682 and £251,341 respectively.
The CEO forfeited all shares outstanding under this plan. For the CFO, as per scheme rules, 50% of the vested shares were deferred until
26 May 2015. These figures are not reported in the 2015 single figure as they were included in the single figure for 2014 in accordance with
the regulations.
QinetiQ Group plc Annual Report and Accounts 2015
81
Percentage of
award vesting
at threshold
25%
30%
25%
Scheme interests awarded during the financial year ended 31 March 2015
The auditors are required to report on the information in this table. The following awards were made to Executive Directors.
Award as
percentage
of salary
75.0%
Share price at
date of grant
200p
Performance
measure
EPS
No. of
shares
granted
146,775
Face value
of award
£293,550
Grant date
28 May 14
Plan name
PSP 2014
CFO
CFO
PSP 2014
CFO
DAB Matching
2014 (a)
TSR
EPS
28 May 14
75.0%
£293,550
200p
146,775
1 July 14
57.7%
£225,936
207.7p
108,779
(a) DAB Matching 2014 is 50% of the deferred annual bonus earned in respect of year ended 31 March 2014.
Payments to past Directors
No payments were made to past Directors.
Performance
period
from – to
1 Apr 14
to 31 Mar 17
1 Apr 14
to 31 Mar 17
1 Apr 14
to 31 Mar 17
Payments for loss of office
No payments were made for loss of office. Leo Quinn on his resignation from the Company was paid until his date of cessation on 31 December
2014. He received no bonus for the year ended 31 March 2015 and no payment in lieu of notice of salary or benefits other than £36,565 in lieu
of untaken holiday. All matching deferred shares and performance share awards lapsed in their entirety on his cessation of employment.
Single figure remuneration for each Non-executive Director
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 2015 and the preceding year.
Salary/fees
Benefits
Committee Chair fees
US attendance fee
Single figure
Non-executive Director
Mark Elliott
Michael Harper
Paul Murray
Admiral Sir James Burnell-Nugent
Susan Searle
Ian Mason
Noreen Doyle
Colin Balmer
2015
£236,250
£43,000
£43,000
£43,000
£44,985
£35,392
£13,320
–
2014
£228,750
£43,000
£43,000
£43,000
–
–
£43,000
£35,833
2015
£75,000
–
–
2014
£75,000
–
–
–
–
–
–
–
–
–
–
–
–
2015
–
£16,549
£9,000
£9,000
–
–
£2,880
–
2014
–
£10,000
£9,000
£1,500
–
–
£9,000
£7,500
2015
–
£2,500
£2,500
–
£2,500
–
–
–
2014
–
£5,000
£5,000
£5,000
–
–
£5,000
£2,500
2015
£311,250
£62,049
£54,500
£52,000
£47,485
£35,392
£16,200
–
2014
£303,750
£58,000
£57,000
£49,500
–
–
£57,000
£45,833
Mark Elliot receives an accommodation allowance of £75,000 as he is US resident.
Susan Searle received an additional fee in April 2014 – payment for service provided in the previous financial year.
Ian Mason appointed 4 June 2014.
Noreen Doyle retired 22 July 2014. Colin Balmer retired 31 January 2014.
Statement of Directors’ shareholding and share interests
Set out below are the Directors’ shareholdings as at 31 March 2015. As stated in the Remuneration Policy, the Company requires Executive
Directors to hold shares equivalent to 100% of base salary.
The CFO exceeds the minimum shareholding requirement with a current holding equivalent to 224% of base salary using a share price of
£1.926 (three-month average to 31 March 2015).
David Mellors
Mark Elliott
Michael Harper
Paul Murray
Admiral Sir James Burnell–Nugent
Susan Searle
Ian Mason
Shares
beneficially
Shares subject
to performance
owned(a)
33,035
125,000
30,000
56,077
11,419
10,000
10,000
conditions(b)
1,332,948
–
–
–
–
–
–
Shares not subject
to performance
conditions(c)
435,996
–
–
–
–
–
–
Total
shares held at
21 May 2015
1,801,979
125,000
30,000
56,077
11,419
10,000
10,000
(a) Shares beneficially owned comprise 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 awards made under the DAB (matching) for 2014, 2013 and 2012, and PSP for 2014, 2013 and 2012.
(c) Shares not subject to performance conditions comprise deferred shares under the DAB plan for 2014, 2013 and 2012, and VSP 2011.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 82
Directors’ remuneration report continued
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 ended 31 March 2015, are as follows.
David Mellors
Plan name
VSP 2010
VSP 2011
DAB Match 2011
DAB Match 2012
PSP 2012
PSP 2013
DAB Match 2013
PSP 2014
DAB Match 2014
Granted in
year
(maximum
potential
of awards)
–
–
–
–
–
–
–
293,550
108,779
Number
at 1 April
2014
154,551
765,900
70,379
117,173
356,250
300,000
157,196
–
–
Date of grant
29 Jul 10
26 May 11
01 Jul 11
29 Jun 12
09 Aug 12
28 Jun 13
28 Jun 13
28 May 14
1 Jul 14
Exercised/
vested
in year
154,551
52,847
18,627
–
–
–
–
–
–
Lapsed
in year
–
660,206
51,752
–
–
–
–
–
–
Number at
31 March
2015
–
52,847
–
117,173
356,250
300,000
157,196
293,550
108,779
Market price
on date of
grant
124.9
112.3
129.1
157.1
166.0
180.4
180.4
200.0
207.7
Earliest vest
date
29 Jul 13
26 May 14
01 Jul 14
29 Jun 15
09 Aug 15
28 Jun 16
28 Jun 16
28 May 17
28 May 17
Latest vest
date
29 Jul 13
26 May 14
01 Jul 14
29 Jun 15
09 Aug 15
28 Jun 16
28 Jun 16
28 May 17
28 May 17
1,921,449
402,329
226,025
711,958
1,385,795
The awards in the table above are subject to the performance conditions described on pages 76 to 77. The price of a QinetiQ share at 31 March 2015 was 190.9p. The highest and
lowest prices of a QinetiQ share during the year ended 31 March 2015 were 229.4p and 182.1p. There have been no changes to the interests shown above between 31 March 2015
and 21 May 2015.
Performance review
The graph shows the Company’s TSR over the period from 31 March 2009 to 31 March 2015 and 31 March 2012 to 31 March 2015 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.
Six-year Comparator Chart
Three-year Comparator Chart
350
300
250
200
150
100
50
170
160
150
140
130
120
110
100
90
31 Mar 09
31 Mar 10
31 Mar 11
31 Mar 12
31 Mar 13
31 Mar 14
31 Mar 15
31 Mar 12
31 Mar 13
31 Mar 14
31 Mar 15
QinetiQ
FTSE 250 (excluding investment trusts)
QinetiQ
FTSE 250 (excluding investment trusts)
QinetiQ Group plc Annual Report and Accounts 2015 83
Incentive plans
Performance table
The table below shows the CEO’s remuneration over the same performance period (1 April 2010 to 31 March 2015):
Year ended 31 March
2015(a)
2015(b)
2014
2013
2012
2011
2010(c)
2010(d)
Salary/fees
469,776
501,227
610,844
593,050
580,000
580,000
217,872
266,667
Single figure
673,979
1,725,960
2,177,742
3,992,001
1,495,284
1,327,156
886,564
1,246,320
Annual Bonus
(% of maximum)
0.00%
88.55%
76.97%
100.00%
100.00%
100.00%
0.00%
0.00%
Long-Term Incentives
(% of maximum vesting)
0.00%
13.91%
15.43%
40.27%
0.00%
0.00%
0.00%
0.00%
(a) Leo Quinn left the Company on 31 December 2014.
(b) David Mellors was Interim CEO from 20 October 2014.
(c) 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.
(d) Graham Love left the Company on 30 November 2009. His single figure comprises earnings up to and including his leaving date and incorporates compensation for loss of office
and accelerated share vestings.
Percentage change in CEO remuneration
The following table compares change in CEO remuneration with an employee comparator group (averaged per capita). For comparison
purposes, Leo Quinn’s figures to 31 December 2014 and David Mellor’s figures for three months to 31 March 2015 have been used.
Base salary
Benefits
Annual bonus
2015
627,792
57,587
998,603
2014
610,344
59,524
710,393
% change
2.9
-3.3
40.6
Comparison group(a)
2015
38,073
1,193
870
2014
36,684
1,036
838
% change
3.8
15.2
3.8
(a) The comparison group (4,000 employees) represents the UK principal businesses in service between 1 April 2014 and 31 March 2015.
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.
The Committee is advised of the general reward policy for other employees and of any significant changes proposed.
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:
533.9
350.3
Total employee
remuneration
(£m)
2015
2014
32.3
29.8
107.0
0.0
Share-based profit
distribution
(£m)
Other significant profit
distribution(a)
(£m)
(a) For 2015 this figure relates to the share buyback resulting from sale
of the US Services business.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 84
Directors’ remuneration report continued
Implementation of Policy for the year ending 31 March 2016
Salary/fees
Non-executive Director fees were last increased on 1 August 2013,
and the Chairman’s fees were increased on 1 December 2013.
Salaries and fees are reviewed in line with policy, although the
Chairman requested no review of his fees on this occasion.
The review of Non-executive Directors’ fees resulted in an increase
in base fees from £43,000 to £46,000 per annum, equivalent to an
increase of 3% per annum since the last review. In March 2014,
the Committee changed the Executive Directors’ salary review date
to 1 September in line with the rest of the employee population.
Steve Wadey, the new CEO, commenced his role on 27 April 2015.
The agreed package is:
Base Salary
Maximum Annual Bonus
PSP
Pension
Car Allowance
£560,000
225% of base salary
150%
20% allowance
£19,000
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 former CEO was a Non-executive Director of Betfair Group plc
and Chairman of their Remuneration Committee. Non-executive
Director fees, as reported in the Betfair Group plc Annual Report
dated 30 April 2014, were £50,000 per annum plus £10,000 per
annum for chairing a committee.
Incentives for Executives
Below shows the measures and relative weighting for the 2016 Bonus
Banking Plan for the CEO and CFO.
Bonus Banking Plan
(target performance
112.5% of base salary,
stretch performance
225% of base salary)
Performance
Measure
Group Underlying
Operating Profit
Group Underlying
Operating Cash Flow(a)
(pre-customer capex)
Group Underlying
Profit After Tax
Qualitative measures
based on Company
KPIs
Relative
Weighting (%)
30%
30%
20%
20%
(a) 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.
In 2015 PSP awards to Executive Directors are equal to 150%
of base salary. The graphs below show the targets against which
the performance will be measured and the vesting mechanics:
TSR performance vs FTSE 250 (excl. investment trusts) –
50% of award
Neither the new CEO nor the CFO hold non-executive directorships in
other companies.
100%
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 a Board meeting
held in US by UK resident Non-executive Director
* From 1 July 2015 £46,000, being an equivalent to an increase of 3% per annum.
Fees effective
as at 1 April 2015
£236,250
30%
£75,000
£43,000
£9,000
£10,000
£2,500
Median
Upper quartile
Percentile performance
EPS performance – 50% of award
100%
25%
3%
10%
CAGR EPS%
QinetiQ Group plc Annual Report and Accounts 2015 85
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 as he 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
Officer, the Director of Capability, Group Reward 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.
The full terms of reference of the Committee can be found on the QinetiQ website (www.QinetiQ.com).
The Committee has appointed PwC, an independent firm of remuneration consultants, to provide advice on market practice, corporate
governance and institutional stakeholder views. Fees paid during the year for these services were £108,500 which included advice relating
to the Bonus Banking Plan.
PwC provided the following additional services during the year:
•
implementation support for the Company on executive reward plans;
• consultancy and advice to Group Tax, including tax support for the strategic review of the US Services division; and
• consultancy 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, Director of Capability and Group Reward Director also provided information and advice to the Committee.
The Chair of the Committee and the Chairman of the Board consult, from time to time, with key shareholders on significant remuneration
matters. The shareholders’ views are shared with the Committee to aid the Committee’s decision making.
Service contracts
Copies of Directors’ service contracts and letters of appointment are available for inspection at the Company’s registered office and at the
AGM. Executive Directors’ service agreements are of indefinite duration, terminable at any time by either party giving 12 months’ prior notice.
Under each of the Executive Directors’ service agreements, QinetiQ has the right to make a payment in lieu of notice of termination, 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 plan 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-executives 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.
Statement of voting
Remuneration Policy
Remuneration Report from previous financial year
Date
of vote
22 Jul 2014
22 Jul 2014
For
422,740,088
498,994,031
%
84.66%
99.42%
Against
76,602,719
2,927,802
%
15.34%
0.58%
Abstained
4,877,598
2,298,572
%
of issued share
capital voted
76.68%
77.08%
The Remuneration Report detailed on pages 72 to 85 was approved by the Board on 21 May 2015 and signed on its behalf by:
Michael Harper
Remuneration Committee Chairman
21 May 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 86
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:
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.
Location in
Annual Report
page 48
page 55
page 81
page 26
page 120
Share capital
As at 31 March 2015, the Company had allotted and fully paid up
share capital of 608,610,004 ordinary shares of 1p each with an
aggregate nominal value of £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 28 on page 127.
Information
Corporate Governance Statement
Directors’ details
Directors’ interests in shares
Employees
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
Greenhouse gas emissions
Likely future developments in the business
of the Company or its subsidiaries
Results and dividends
page 29
pages 2 to 47
page 45
Management report
The Strategic report on pages 2 to 47 and the Directors’ report,
as detailed on pages 86 to 89, including information which has
been incorporated into those sections by reference, comprise the
management report specified by rules 4.1.5R (2) and 4.1.8R of the
FCA’s Disclosure Rules and Transparency Rules.
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 in respect of
specific research contracts placed by customers. R&D costs are
included within operating costs in the income statement and R&D
income is reflected within revenue. In the financial year, the Group
recorded £306.6m (2014: £314.6m) of total R&D-related expenditure,
of which £285.8m (2014: £288.7m) was customer-funded work and
£20.8m (2014: £25.9m) was internally funded (all comparative figures
exclude discontinued operations). Additionally, £0.4m (2014: £2.1m)
of late-stage development costs was capitalised and £0.6m (2014: £0.3m)
of capitalised development costs was amortised in the year.
Political donations
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 buyback
At the general meeting of the Company held on 13 May 2014 relating
to the sale of the US Services business, shareholder approval was
given for the Directors to purchase ordinary shares up to 14.99% of
the issued ordinary share capital. The Company resolved to use this
authority to effect a £150 million return of capital to shareholders
by way of an on-market share buyback, subject to prevailing equity
market conditions, as this was considered to be a flexible distribution
method which was simple to execute, easily understood by the market
and provided shareholders with a choice as to whether to participate.
During the financial year, the Company purchased 52,384,634 ordinary
shares in the capital of the Company (representing 8.6% of the issued
ordinary share capital as at 31 March 2015) at an average price of
203 pence per share. Since the year end, the buyback programme has
continued and, as at 15 May 2015, a further 10,483,111 ordinary shares
have been purchased (representing 1.72% of the issued share capital),
at an average price of 202 pence per share. All of these shares have
been cancelled. Subject to prevailing market conditions, it is intended
that the buyback will remain ongoing until the £150 million return of
capital has been achieved.
In the financial year, the impact of the share buyback has been to
increase basic underlying earnings per share from 14.7p to 15.2p,
for total shareholder return to remain unchanged and for net asset
value to reduce by £107.1 million. In accordance with the Investment
Association’s guidelines, the effect of the share buyback has been
neutralised in incentive schemes, such that for calculation purposes
the number of shares in issue is regarded as the same at the end
of the three-year performance period as at the beginning.
Accordingly, no benefit has accrued under the incentive schemes
as a consequence of the share buyback.
Rights of ordinary shareholders
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.
Rights of special shareholder
The Special Share is held by HM Government through the Secretary
of State for Defence (the Special Shareholder) and it may only be held
by and transferred to HM Government. It confers certain rights which
QinetiQ Group plc Annual Report and Accounts 2015 87
Major shareholdings
The Company has been notified of the following interests of 3%
or more in the issued ordinary share capital of the Company (being
voting rights over such share capital) pursuant to Rule 5.1 of the
Disclosure Rules and Transparency Rules:
Name of shareholder
Schroders
Ruane Cunniff & Goldfarb
At 31 March 2015
% of issued share
capital*
10.00%
9.71%
5.02%
5.01%
4.24%
At 15 May 2015#
% of issued share
capital*
11.08%
9.71%
5.02%
5.01%
3.93%
are set out in the Articles of Association to protect UK defence and
security interests. These include:
• the promotion and reinforcement of the MOD compliance
principles which require QinetiQ to be an impartial, ethical and
responsible contractor by avoiding conflicts of interest in its
dealings with the MOD;
• the protection of defined strategic assets of the Group, such
as certain testing facilities, by providing the Special Shareholder
with an option to purchase those assets in certain circumstances;
• 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; and
• nationality of directors provisions whereby at least the Chairman
Investec
Artisan Partners
Norges Bank
or Chief Executive must be a British citizen.
The Special Share carries no financial and economic value and the
Special Shareholder is not entitled to vote at a general meeting of the
Company. 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 at its nominal value before other
shareholders. Any variation of the rights attaching to the Special
Share requires the written approval of the MOD. Further details
can be found in note 28 on page 127.
Restrictions on the transfer of shares
As detailed above, 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.
Employee share schemes
The QinetiQ Group plc Employee Benefit Trust (the Trust) holds shares
in connection with QinetiQ’s employee share schemes, excluding the
Share Incentive Plan. As at 31 March 2015, the Trust held 5,139,557
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.
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). As at 31 March 2015, 304,324 ordinary
shares of 1p each were held in trust under the Plan. Equiniti Share
Plan Trustees Limited will vote on all resolutions proposed at general
meetings in accordance with voting instructions received from
participants in the Plan.
Corporate sponsored nominee
In circumstances where ordinary shares are held by the corporate
sponsored nominee service, Equiniti Corporate Nominees Limited will
vote on all resolutions proposed at general meetings in accordance
with voting instructions received from shareholders using such
corporate nominee service.
* as notified by the shareholder.
#
being the latest practicable date prior to the issue of this report.
Directors’ 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 Articles of Association of the Company entitle the Directors
of the Company, to the extent permitted by law, to be indemnified
out of the assets of the Company in the event that they suffer any
expenses in connection with certain proceedings relating to the
execution of their duties as Directors of the Company.
In addition, the Company purchases directors’ and officers’ liability
insurance. Where it is not possible for directors and officers to be
indemnified by the Company, such directors and officers of the
Company benefit from the directors’ and officers’ liability insurance
cover in respect of legal actions brought against them. This insurance
protection is also provided to the Company and its subsidiaries where
they have provided an indemnity.
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.
Articles of Association
Changes to the Articles must be submitted to shareholders for approval.
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.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
88
Directors’ report continued
Appointment and replacement of Directors
According to the Articles of Association, all Directors are subject to
election by shareholders at the first annual general meeting following
their appointment, and to re-election thereafter at intervals of no
more than three years. In line with best practice reflected in the
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 annual general meeting.
Powers of the Directors: allotment/purchase of own shares
As noted on page 86, 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 has used 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.
At the Company’s Annual General Meeting held in July 2014, the
shareholders passed resolutions which authorised the Directors to
allot relevant securities up to an aggregate nominal value of £4,403,174
(£2,197,537 pursuant only to a rights issue) and to disapply pre-emption
rights (up to 5% of the issued ordinary share capital).
Resolutions in respect of the allotment of relevant securities, the
disapplication of pre-exemption rights and the purchase of own
shares will be laid before the 2015 Annual General Meeting.
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.
During the year under review, the Company re-financed its multi-
currency revolving credit facility and entered into a new five-year
facility, with a US$100m tranche and a £166m tranche, provided
by a consortium of banks, that expires on 29 August 2019. Under
the terms of the facility, in the event of a change of control of the
Company, any lender may give notice to cancel its commitment
under the facility and require all outstanding amounts to be repaid.
The Directors’ contracts contain no provisions for compensation
for loss of office on a change of control of the Company.
Annual General Meeting
The Company’s Annual General Meeting will be held on Wednesday,
22 July 2015 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 Annual General Meeting,
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
Annual General Meeting.
Going concern
The Group’s activities, combined with the factors that are likely to
affect its future development and performance, are set out on pages
2 to 47. The Chief Financial Officer’s review on pages 44 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 26 on page 120 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.
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).
QinetiQ Group plc Annual Report and Accounts 2015 89
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and parent company and of their
profit or loss for that period. In preparing each of the Group and
parent company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make 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;
Responsibility statement of the Directors in respect of the
Annual Report
The Directors in office as at the date of this report confirm that
to the best of their knowledge:
• the financial statements, 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
• the Directors’ report includes a fair review of the development
• 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
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.
• 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.
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.
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 66 to 69 of the
Corporate Governance Statement.
By order of the Board
Jon Messent
Company Secretary
Cody Technology Park
Ively Road
Farnborough
Hampshire
GU14 0LX
21 May 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 90
Independent auditor’s report to the members
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 2015 which comprise the Consolidated Income
Statement, the Consolidated Statement of Comprehensive Income, the
Consolidated Statement of Changes in Equity, the Consolidated Statement
of Financial Position, the Consolidated Statement of Cash Flows, 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
2015 and of the Group’s profit 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 financial statements,
the risks of material misstatement that had the greatest effect on
our audit were as follows:
• Carrying value of US Global Products goodwill – £67.2 million
Refer to page 67 (Report of the Audit Committee), page 99
(accounting policy note) and page 112 (financial disclosures).
The risk: The carrying value of goodwill associated with the US Global
Products business was written down to its recoverable amount in the
year ended 31 March 2014 based on its discounted projected cash
flows. As a result, any deterioration in these projections or an increase
in the discount rate applied will result in a further write down being
required. The carrying value of the US Global Products goodwill has
been re-assessed in 2015 also based on the discounted projected cash
flows of this business, which are inherently uncertain due to its lumpy
revenue profile. In addition, there has been a reduction in demand
for certain of this business’ conflict related products and, whilst the
projections anticipate that this will be offset partially by new revenue
streams, the latter may not be realised in full or in the timeframe
envisaged. This continues therefore to be an area of audit focus.
Our response: Our audit procedures included, among others, testing
the principles and mathematical integrity of the Group’s discounted
cash flow model, comparing the Group’s assumptions to externally
derived data such as projected economic growth and discount
rates, involving our own specialists as we considered appropriate
and challenging the cash flow projections. 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
– £685.1 million
Refer to page 67 (Report of the Audit Committee), page 97
(accounting policy note) and page 103 (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 a sample of 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 divisional 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 2 and 32) in respect of the analysis of revenue and material
contingent liabilities properly reflected the evidence obtained.
• Provisions and contingent liabilities – £25.4 million
Refer to page 67 (Report of the Audit Committee), page 100
(accounting policy note) and pages 117 and 135 (financial disclosures).
The risk: The Group operates in regulated environments and a failure
to comply with particular regulations could result in fines and/or
penalties. There is judgment required in determining the significance
of any instances of potential non-compliance and, where appropriate,
the extent of any potential liability. The Group holds provisions in
respect of warranty claims and indemnities and environmental issues.
The financial statements also disclose contingent liabilities in respect
of legal claims and environmental issues which have not been
provided for on the basis that they are not considered to qualify for
recognition as provisions. This is one of our key areas of audit focus.
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 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.
QinetiQ Group plc Annual Report and Accounts 2015 91
We considered the adequacy of the Group’s disclosures in respect of
provisions and contingent liabilities.
• Tax liabilities – current tax payable £15.3 million, deferred tax
asset £12.9 million
Refer to page 67 (Report of the Audit Committee), page 98
(accounting policy note) and pages 109 and 115 (financial disclosures).
The risk: The Group is subject to income taxes in 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.
In addition, a deferred tax asset of £25 million in respect of brought
forward un-utilised losses has been recognised in 2015. The timing
of recognition of brought forward tax losses requires judgment in
determining whether there will be sufficient future taxable profits
against which they will be recoverable and there is a risk that the
anticipated taxable profit will not be realised.
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
and the recoverability of tax assets 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 18) are appropriate and in accordance with
relevant accounting standards.
• Consolidation of US subsidiaries
Refer to page 67 (Report of the Audit Committee) and page 97
(accounting policy note).
The risk: As detailed on page 65 concerning ‘Management and
control of US subsidiaries’, the Group’s holding of its US Global Products
business (FMI) assets is regulated by a Proxy agreement, whose
purpose is to insulate FMI from undue 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. Judgment is required in assessing
whether the Proxy agreement restricts the Group’s ability to control
FMI’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 assess the respective rights of the QinetiQ and the
Proxy Board’s practical ability to direct the relevant activities of FMI’s
financial and operating policies. We also assessed whether the
Group’s disclosures are appropriate and in accordance with relevant
accounting standards.
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 £5.3 million, determined with reference to a benchmark
of Group profit before taxation, normalised to exclude this year’s
specific adjusting items as disclosed in note 4, of £107.8 million,
of which it represents 4.9%.
We report to the Audit Committee any corrected and uncorrected
misstatements exceeding £0.3 million, in addition to other identified
misstatements that warranted reporting on qualitative grounds.
For Group reporting purposes, we have performed an audit of
QinetiQ Limited, the main UK trading company, and audits of
account balances in respect of the US Global Products business
including covering revenue, current assets and current liabilities.
The components within the scope of our work accounted for the
following percentages of the Group’s results: 87% of total Group
revenue; 93% of the total profits and losses that made up the Group’s
underlying profit before taxation; and 87% of total Group assets, of
which the coverage attributable to QinetiQ Limited was 81%, 92%
and 70% respectively. For the remaining components, we performed
analysis at an aggregate Group level to re-examine our assessment that
there were no significant risks of material misstatement within these.
The Group audit team instructed component auditors as to the
significant areas to be covered, including the relevant risks detailed
above and the information to be reported back. The Group audit
team approved the component materialities, which ranged from
£0.7 million to £4.3 million, having regard to the mix of size and risk
profile of the Group across the components. The work on the US
Global Products business was performed by component auditors
and the rest by the Group audit team.
The Group audit team visited the US Global Products business,
including to assess the audit risk and strategy. Telephone conference
meetings were also held with the component auditor at this location.
At this visit and in these meetings, the findings reported to the Group
audit team were discussed in more detail, and any further work
required by the Group audit team was then performed by the
component auditor.
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 92
Independent auditor’s report to the members
of QinetiQ Group plc only continued
Under the Listing Rules we are required to review:
• the Directors’ statement, set out on page 88, in relation to going
concern; and
• the part of the Corporate Governance Statement on pages
48 to 71 relating to the Company’s compliance with the ten
provisions of the 2012 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 pages 88 to 89, 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/auditscopeukco2014a, 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
21 May 2015
4. Our opinion on other matters prescribed by the Companies Act
2006 is unmodified
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.
QinetiQ Group plc Annual Report and Accounts 2015
Consolidated income statement
Consolidated income statement
for the year ended 31 March
for the year ended 31 March
93
93
Total
782.6
(626.1)
7.0
163.5
(20.4)
(41.9)
(4.1)
97.1
1.1
1.9
(16.1)
84.0
(16.0)
Note
2, 3
Underlying
763.8
2
3, 16
3, 15
3
7
8
8
4
9
(636.9)
7.6
134.5
(21.7)
–
(1.5)
111.3
–
1.3
(4.8)
107.8
(11.8)
2015
Specific
adjusting
items*
–
1.0
–
1.0
–
–
(2.8)
(1.8)
–
–
(0.6)
(2.4)
23.8
Total
763.8
Underlying
782.6
(635.9)
7.6
(653.4)
7.0
135.5
136.2
(21.7)
–
(4.3)
109.5
–
1.3
(5.4)
105.4
12.0
(21.8)
–
(0.7)
113.7
–
1.9
(14.4)
101.2
(11.4)
2014^
Specific
adjusting
items*
–
27.3
–
27.3
1.4
(41.9)
(3.4)
(16.6)
1.1
–
(1.7)
(17.2)
(4.6)
96.0
21.4
117.4
89.8
(21.8)
68.0
1.2
(0.5)
0.7
(13.7)
(12.5)
18.2
(98.1)
(79.9)
0.3
(0.2)
(4.0)
3.2
(0.8)
(13.4)
(12.7)
14.2
(94.9)
(80.7)
96.7
8.0
104.7
104.0
(116.7)
(12.7)
15.2p
15.3p
13
13
13
13
13.8p
16.0p
18.6p
16.6p
18.5p
16.5p
10.4p
(1.9)p
10.4p
(1.9)p
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
Operating profit/(loss)
Gain on business divestments
Finance income
Finance expense
Profit/(loss) before tax
Taxation (expense)/income
Profit/(loss) for the year from
continuing operations
Discontinued operations
Profit/(loss) before tax – discontinued
operations
Tax in respect of discontinued
operations
Profit/(loss) for the year from
discontinued operations
Profit/(loss) for the year attributable to
equity shareholders
Earnings per share
Basic – continuing operations
Basic – total Group
Diluted – continuing operations
Diluted – total Group
*For details of ‘specific adjusting items’ refer to note 4 to the financial statements.
^ Restated to reflect continuing/discontinued operations (see note 1).
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 94
94
94
Consolidated
statement
of
comprehensive
income
Consolidated statement of comprehensive income
Consolidated
statement
of
comprehensive
income
for
the
year
ended
31
March
for the year ended 31 March
for
the
year
ended
31
March
all
figures
in
£
million
all
figures
in
£
million
Profit/(loss)
for
the
year
Profit/(loss)
for
the
year
Items
that
will
not
be
reclassified
to
profit
or
loss:
Items
that
will
not
be
reclassified
to
profit
or
loss:
Actuarial
loss
recognised
in
defined
benefit
pension
schemes
Actuarial
loss
recognised
in
defined
benefit
pension
schemes
Tax
on
items
that
will
not
be
reclassified
to
profit
and
loss
Tax
on
items
that
will
not
be
reclassified
to
profit
and
loss
Total
items
that
will
not
be
reclassified
to
profit
or
loss
Total
items
that
will
not
be
reclassified
to
profit
or
loss
Items
that
may
be
reclassified
to
profit
or
loss:
Items
that
may
be
reclassified
to
profit
or
loss:
Foreign
currency
translation
differences
for
foreign
operations
Foreign
currency
translation
differences
for
foreign
operations
Recycling
of
currency
translation
differences
to
the
income
statement
on
disposal
of
foreign
Recycling
of
currency
translation
differences
to
the
income
statement
on
disposal
of
foreign
subsidiary
subsidiary
(Decrease)/increase
in
fair
value
of
hedging
derivatives
(Decrease)/increase
in
fair
value
of
hedging
derivatives
Reclassification
of
hedging
derivatives
to
the
income
statement
Reclassification
of
hedging
derivatives
to
the
income
statement
Fair
value
gains
on
available-‐for-‐sale
investments
Fair
value
gains
on
available-‐for-‐sale
investments
Tax
on
items
that
may
be
reclassified
to
profit
or
loss
Tax
on
items
that
may
be
reclassified
to
profit
or
loss
Total
items
that
may
be
reclassified
to
profit
or
loss
Total
items
that
may
be
reclassified
to
profit
or
loss
Other
comprehensive
expense
for
the
year,
net
of
tax
Other
comprehensive
expense
for
the
year,
net
of
tax
Total
comprehensive
income/(expense)
for
the
year
Total
comprehensive
income/(expense)
for
the
year
2015
2015
104.7
104.7
(24.5)
(24.5)
5.1
5.1
(19.4)
(19.4)
11.0
11.0
(40.9)
(40.9)
(0.1)
(0.1)
0.1
0.1
0.2
0.2
–
–
(29.7)
(29.7)
(49.1)
(49.1)
55.6
55.6
Consolidated
statement
of
changes
in
equity
Consolidated statement of changes in equity
Consolidated
statement
of
changes
in
equity
for the year ended 31 March
for
the
year
ended
31
March
for
the
year
ended
31
March
all
figures
in
£
million
all
figures
in
£
million
At
1
April
2014
At
1
April
2014
Profit
for
the
year
Profit
for
the
year
Other
comprehensive
expense
for
Other
comprehensive
expense
for
the
year,
net
of
tax
the
year,
net
of
tax
Purchase
of
own
shares
Purchase
of
own
shares
Purchase
and
cancellation
of
Purchase
and
cancellation
of
shares
shares
Share-‐based
payments
settlement
Share-‐based
payments
settlement
Share-‐based
payments
Share-‐based
payments
Dividends
Dividends
At
31
March
2015
At
31
March
2015
At
1
April
2013
At
1
April
2013
Loss
for
the
year
Loss
for
the
year
Other
comprehensive
income/
Other
comprehensive
income/
(expense)
for
the
year,
net
of
tax
(expense)
for
the
year,
net
of
tax
Purchase
of
own
shares
Purchase
of
own
shares
Share-‐based
payments
settlement
Share-‐based
payments
settlement
Share-‐based
payments
Share-‐based
payments
Dividends
Dividends
At
31
March
2014
At
31
March
2014
Issued
Issued
share
share
capital
capital
6.6
6.6
–
–
Capital
Capital
redemption
redemption
reserve
reserve
39.9
39.9
–
–
Share
Share
premium
premium
147.6
147.6
–
–
Hedge
Hedge
reserve
reserve
0.1
0.1
–
–
Translation
Translation
reserve
reserve
23.1
23.1
–
–
–
–
–
–
(0.5)
(0.5)
–
–
–
–
–
–
6.1
6.1
6.6
6.6
–
–
–
–
–
–
–
–
–
–
–
–
6.6
6.6
–
–
–
–
0.5
0.5
–
–
–
–
–
–
40.4
40.4
39.9
39.9
–
–
–
–
–
–
–
–
–
–
–
–
39.9
39.9
–
–
–
–
–
–
–
–
–
–
–
–
147.6
147.6
147.6
147.6
–
–
–
–
–
–
–
–
–
–
–
–
147.6
147.6
–
–
–
–
–
–
–
–
–
–
–
–
0.1
0.1
–
–
–
–
0.1
0.1
–
–
–
–
–
–
–
–
0.1
0.1
(29.9)
(29.9)
–
–
–
–
–
–
–
–
–
–
(6.8)
(6.8)
44.3
44.3
–
–
(21.2)
(21.2)
–
–
–
–
–
–
–
–
23.1
23.1
Retained
Retained
earnings
earnings
160.7
160.7
104.7
104.7
(19.2)
(19.2)
(0.6)
(0.6)
(107.1)
(107.1)
0.6
0.6
3.2
3.2
(31.7)
(31.7)
110.6
110.6
200.0
200.0
(12.7)
(12.7)
(3.4)
(3.4)
(0.5)
(0.5)
0.9
0.9
3.2
3.2
(26.8)
(26.8)
160.7
160.7
Non-‐
Non-‐
controlling
controlling
interest
interest
0.1
0.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
0.1
0.1
0.1
–
–
–
–
–
–
–
–
–
–
–
–
0.1
0.1
Total
Total
378.0
378.0
104.7
104.7
(49.1)
(49.1)
(0.6)
(0.6)
(107.1)
(107.1)
0.6
0.6
3.2
3.2
(31.7)
(31.7)
298.0
298.0
438.4
438.4
(12.7)
(12.7)
(24.5)
(24.5)
(0.5)
(0.5)
0.9
0.9
3.2
3.2
(26.8)
(26.8)
378.0
378.0
2014
2014
(12.7)
(12.7)
(5.6)
(5.6)
1.3
1.3
(4.3)
(4.3)
(21.2)
(21.2)
–
–
0.4
0.4
(0.2)
(0.2)
0.9
0.9
(0.1)
(0.1)
(20.2)
(20.2)
(24.5)
(24.5)
(37.2)
(37.2)
Total
Total
equity
equity
378.1
378.1
104.7
104.7
(49.1)
(49.1)
(0.6)
(0.6)
(107.1)
(107.1)
0.6
0.6
3.2
3.2
(31.7)
(31.7)
298.1
298.1
438.5
438.5
(12.7)
(12.7)
(24.5)
(24.5)
(0.5)
(0.5)
0.9
0.9
3.2
3.2
(26.8)
(26.8)
378.1
378.1
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
QinetiQ Group plc Annual Report and Accounts 2015
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
95
95
Note
2015
2014
14
15
16
24
17
18
19
24
21
20
24
22
23
24
30
18
23
24
22
28
107.2
15.3
229.6
0.9
0.4
12.9
366.3
18.5
12.3
159.2
2.3
184.3
376.6
742.9
(352.3)
(15.3)
(3.0)
(1.9)
(372.5)
(39.4)
-
(22.4)
(0.1)
(10.4)
(72.3)
(444.8)
298.1
6.1
40.4
147.6
(6.7)
110.6
298.0
0.1
298.1
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
The financial statements were approved by the Board of Directors and authorised for issue on 21 May 2015 and were signed
on its behalf by:
Mark Elliott
Chairman
Steve Wadey
Chief Executive Officer
David Mellors
Chief Financial Officer
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 96
96
96
Consolidated cash flow statement
Consolidated cash flow statement
Consolidated cash flow statement
for the year ended 31 March
for the year ended 31 March
for the year ended 31 March
all figures in £ million
all figures in £ million
Net cash inflow from continuing operations before cash flows in respect of specific
Net cash inflow from continuing operations before cash flows in respect of specific
adjusting items^
adjusting items^
Net cash outflow relating to restructuring
Net cash outflow relating to restructuring
Disposal-related pension contribution
Disposal-related pension contribution
Cash generated from discontinued operations
Cash generated from discontinued operations
Net cash outflow relating to pension scheme closure costs
Net cash outflow relating to pension scheme closure costs
Cash inflow from operations
Cash inflow from operations
Tax received
Tax received
Interest received
Interest received
Interest paid
Interest paid
Net cash inflow from operating activities
Net cash inflow from operating activities
Purchases of intangible assets
Purchases of intangible assets
Purchases of property, plant and equipment
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Proceeds from sale of property, plant and equipment
Acquisition of business
Acquisition of business
Sale of investment in subsidiary
Sale of investment in subsidiary
Net cash inflow/(outflow) from investing activities
Net cash inflow/(outflow) from investing activities
Repayment of bank borrowings
Repayment of bank borrowings
Investment in available for sale investments
Investment in available for sale investments
Payment of bank loan arrangement fee
Payment of bank loan arrangement fee
Purchase of own shares
Purchase of own shares
Dividends paid to shareholders
Dividends paid to shareholders
Capital element of finance lease rental payments
Capital element of finance lease rental payments
Capital element of finance lease rental receipts
Capital element of finance lease rental receipts
Net cash outflow from financing activities
Net cash outflow from financing activities
(Decrease)/increase in cash and cash equivalents
(Decrease)/increase in cash and cash equivalents
Effect of foreign exchange changes on 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 beginning of year
Cash and cash equivalents disposed
Cash and cash equivalents disposed
Cash and cash equivalents at end of year
Cash and cash equivalents at end of year
^ 2014 restated to reflect continuing/discontinued operations (see note 1)
^ 2014 restated to reflect continuing/discontinued operations (see note 1)
Reconciliation of movement in net cash
Reconciliation of movement in net cash
Reconciliation of movement in net cash
for the year ended 31 March
for the year ended 31 March
for the year ended 31 March
all figures in £ million
all figures in £ million
(Decrease)/increase in cash and cash equivalents in the year
(Decrease)/increase in cash and cash equivalents in the year
Add back net cash flows not impacting net cash
Add back net cash flows not impacting net cash
Change in net cash resulting from cash flows
Change in net cash resulting from cash flows
Cash and cash equivalents disposed
Cash and cash equivalents disposed
Other movements including foreign exchange
Other movements including foreign exchange
Movement in net cash in the year
Movement in net cash in the year
Net cash at beginning of year
Net cash at beginning of year
Net cash at end of year
Net cash at end of year
Note
Note
27
27
6
6
24
24
Note
Note
24
24
24
24
24
24
24
24
24
24
2015
2015
2014
2014
143.9
143.9
(0.6)
(0.6)
(6.0)
(6.0)
1.8
1.8
–
–
139.1
139.1
8.8
8.8
1.0
1.0
(36.4)
(36.4)
112.5
112.5
(4.2)
(4.2)
(24.8)
(24.8)
–
–
(3.7)
(3.7)
79.6
79.6
46.9
46.9
(147.1)
(147.1)
(10.0)
(10.0)
(1.3)
(1.3)
(106.8)
(106.8)
(31.7)
(31.7)
(2.8)
(2.8)
3.0
3.0
(296.7)
(296.7)
(137.3)
(137.3)
0.4
0.4
322.2
322.2
(1.0)
(1.0)
184.3
184.3
2015
2015
(137.3)
(137.3)
158.2
158.2
20.9
20.9
(1.0)
(1.0)
5.1
5.1
25.0
25.0
170.5
170.5
195.5
195.5
127.0
127.0
(10.3)
(10.3)
–
–
30.3
30.3
(4.0)
(4.0)
143.0
143.0
2.1
2.1
1.0
1.0
(12.3)
(12.3)
133.8
133.8
(2.6)
(2.6)
(24.2)
(24.2)
6.0
6.0
–
–
–
–
(20.8)
(20.8)
–
–
–
–
–
–
(0.5)
(0.5)
(26.8)
(26.8)
(2.8)
(2.8)
3.0
3.0
(27.1)
(27.1)
85.9
85.9
(4.1)
(4.1)
240.4
240.4
–
–
322.2
322.2
2014
2014
85.9
85.9
(0.2)
(0.2)
85.7
85.7
–
–
10.8
10.8
96.5
96.5
74.0
74.0
170.5
170.5
QinetiQ Group plc Annual Report and Accounts 2015
QinetiQ Group plc Annual Report and Accounts 2015
QinetiQ Group plc Annual Report and Accounts 2015
Net cash inflow from continuing operations before cash flows in respect of specific
Net cash inflow from continuing operations before cash flows in respect of specific
2015
2015
2014
2014
96
96
Consolidated cash flow statement
Consolidated cash flow statement
for the year ended 31 March
for the year ended 31 March
Net cash outflow relating to restructuring
Net cash outflow relating to restructuring
Disposal-related pension contribution
Disposal-related pension contribution
Cash generated from discontinued operations
Cash generated from discontinued operations
Net cash outflow relating to pension scheme closure costs
Net cash outflow relating to pension scheme closure costs
Cash inflow from operations
Cash inflow from operations
all figures in £ million
all figures in £ million
adjusting items^
adjusting items^
Tax received
Tax received
Interest received
Interest received
Interest paid
Interest paid
Net cash inflow from operating activities
Net cash inflow from operating activities
Purchases of intangible assets
Purchases of intangible assets
Purchases of property, plant and equipment
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Proceeds from sale of property, plant and equipment
Acquisition of business
Acquisition of business
Sale of investment in subsidiary
Sale of investment in subsidiary
Net cash inflow/(outflow) from investing activities
Net cash inflow/(outflow) from investing activities
Repayment of bank borrowings
Repayment of bank borrowings
Investment in available for sale investments
Investment in available for sale investments
Payment of bank loan arrangement fee
Payment of bank loan arrangement fee
Purchase of own shares
Purchase of own shares
Dividends paid to shareholders
Dividends paid to shareholders
Capital element of finance lease rental payments
Capital element of finance lease rental payments
Capital element of finance lease rental receipts
Capital element of finance lease rental receipts
Net cash outflow from financing activities
Net cash outflow from financing activities
(Decrease)/increase in cash and cash equivalents
(Decrease)/increase in cash and cash equivalents
Effect of foreign exchange changes on 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 beginning of year
Cash and cash equivalents disposed
Cash and cash equivalents disposed
Cash and cash equivalents at end of year
Cash and cash equivalents at end of year
^ 2014 restated to reflect continuing/discontinued operations (see note 1)
^ 2014 restated to reflect continuing/discontinued operations (see note 1)
Reconciliation of movement in net cash
Reconciliation of movement in net cash
for the year ended 31 March
for the year ended 31 March
all figures in £ million
all figures in £ million
(Decrease)/increase in cash and cash equivalents in the year
(Decrease)/increase in cash and cash equivalents in the year
Add back net cash flows not impacting net cash
Add back net cash flows not impacting net cash
Change in net cash resulting from cash flows
Change in net cash resulting from cash flows
Cash and cash equivalents disposed
Cash and cash equivalents disposed
Other movements including foreign exchange
Other movements including foreign exchange
Movement in net cash in the year
Movement in net cash in the year
Net cash at beginning of year
Net cash at beginning of year
Net cash at end of year
Net cash at end of year
QinetiQ Group plc Annual Report and Accounts 2015
QinetiQ Group plc Annual Report and Accounts 2015
Note
Note
27
27
6
6
24
24
Note
Note
24
24
24
24
24
24
24
24
24
24
143.9
143.9
(0.6)
(0.6)
(6.0)
(6.0)
1.8
1.8
–
–
139.1
139.1
8.8
8.8
1.0
1.0
(36.4)
(36.4)
112.5
112.5
(4.2)
(4.2)
(24.8)
(24.8)
–
–
(3.7)
(3.7)
79.6
79.6
46.9
46.9
(147.1)
(147.1)
(10.0)
(10.0)
(1.3)
(1.3)
(106.8)
(106.8)
(31.7)
(31.7)
(2.8)
(2.8)
3.0
3.0
(296.7)
(296.7)
(137.3)
(137.3)
0.4
0.4
322.2
322.2
(1.0)
(1.0)
184.3
184.3
2015
2015
(137.3)
(137.3)
158.2
158.2
20.9
20.9
(1.0)
(1.0)
5.1
5.1
25.0
25.0
170.5
170.5
195.5
195.5
127.0
127.0
(10.3)
(10.3)
–
–
30.3
30.3
(4.0)
(4.0)
143.0
143.0
2.1
2.1
1.0
1.0
(12.3)
(12.3)
133.8
133.8
(2.6)
(2.6)
(24.2)
(24.2)
6.0
6.0
(20.8)
(20.8)
–
–
–
–
–
–
–
–
–
–
(0.5)
(0.5)
(26.8)
(26.8)
(2.8)
(2.8)
3.0
3.0
(27.1)
(27.1)
85.9
85.9
(4.1)
(4.1)
240.4
240.4
–
–
322.2
322.2
2014
2014
85.9
85.9
(0.2)
(0.2)
85.7
85.7
–
–
10.8
10.8
96.5
96.5
74.0
74.0
170.5
170.5
Notes
to
the
financial
statements
Notes to the financial statements
97
97
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:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
amortisation
of
intangibles
arising
from
acquisitions;
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;
restructuring
costs;
impairment
of
property;
impairment
of
goodwill
and
other
intangible
assets;
tax
on
the
above
items;
and
tax
credits
on
one-‐off
recognition
of
deferred
tax
asset
in
respect
of
UK
trade
losses.
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
88
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
137.
The
financial
statements
have
been
prepared
under
the
historical
cost
convention,
as
modified
by
the
revaluation
of
available-‐for-‐sale
financial
assets
and
other
relevant
financial
assets
and
liabilities.
Non-‐current
assets
held
for
sale
are
held
at
the
lower
of
carrying
amount
and
fair
value
less
costs
to
sell.
The
Group’s
reporting
currency
is
sterling
and
unless
otherwise
stated
the
financial
statements
are
rounded
to
the
nearest
£100,000.
The
comparative
income
statement
for
the
year
ended
31
March
2014
has
been
re-‐presented
for
the
sale
of
the
US
Services
business,
excluding
Cyveillance®,
which
completed
in
May
2014.
This
disposal
qualifies
as
a
discontinued
operation
during
the
current
year.
Revenue
as
previously
reported
has
been
reduced
by
£408.8m
and
now
reflects
continuing
operations
only.
Profit
before
tax,
previously
reported
as
a
single
figure
of
£4.1m,
has
been
split
into
its
component
parts
for
continuing
operations
and
discontinued
operations.
Further
details
of
discontinued
operations
are
presented
within
note
5.
Basis
of
consolidation
The
consolidated
financial
statements
comprise
the
financial
statements
of
the
Company
and
its
subsidiary
undertakings
to
31
March
2015.
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).
An
investor
controls
an
investee
when
it
is
exposed,
or
has
rights,
to
variable
returns
from
its
involvement
with
the
investee
and
has
the
ability
to
affect
those
returns
through
its
power
over
the
investee.
This
is
the
IFRS
10
definition
of
“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.
IFRS
10
is
the
accounting
standard
now
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
meets
the
requirements
of
IFRS
10
in
respect
of
control
over
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
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
98 Notes to the financial statements continued
98
Notes to the financial statements continued
1. Significant accounting policies continued
related to performance milestones yet to be achieved. When it is probable that total contract costs will exceed total contract revenue,
the expected loss is recognised immediately as an expense. The Group generally does not undertake construction contracts.
Goods sold
Sales of goods are recognised in the income statement on delivery of the product or when the significant risks and rewards of ownership
have been transferred to the customer and revenue and costs can be reliably measured.
Royalties and intellectual property
Royalty revenue is recognised over the period to which the royalty relates. Intellectual property revenue can be attributed either to
perpetual licences or to limited licences. Limited licences are granted for a specified period and revenue is recognised over the period of
the licence. Perpetual licences are granted for unlimited time frames and revenue is recognised when the risks and rewards of ownership
are transferred to the customer.
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 in respect of specific contracts placed by customers 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.
QinetiQ Group plc Annual Report and Accounts 2015
99
99
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.
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
100 Notes to the financial statements continued
100 Notes to the financial statements continued
1. Significant accounting policies continued
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.
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
QinetiQ Group plc Annual Report and Accounts 2015 101
101
plans,
the
excess
or
deficit
of
the
fair
value
of
plan
assets
less
the
present
value
of
the
defined
benefit
obligation
are
recognised
as
an
asset
or
a
liability
respectively.
For
defined
benefit
plans,
the
cost
charged
to
the
income
statement
consists
of
administrative
expenses
and
the
net
interest
cost.
There
is
no
service
cost
due
to
the
fact
the
plans
are
closed
to
future
accrual.
The
finance
element
of
the
pension
charge
is
shown
in
finance
expense
and
the
administration
cost
element
is
charged
as
a
component
of
operating
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
2015
The
following
EU-‐endorsed
accounting
standard
was
adopted
for
the
first
time
in
2015:
IFRS
10
‘Consolidated
Financial
Statements’
–
part
of
a
new
suite
of
standards
on
consolidation
and
related
areas,
replacing
the
existing
accounting
standards
for
subsidiaries
and
joint
ventures
(now
joint
arrangements)
and
making
limited
amendments
in
relation
to
associates.
Refer
to
the
‘Critical
accounting
estimates’
section
on
page
102.
Developments
adopted
by
the
Group
in
2015
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
2014
and
have
been
adopted
with
no
material
impact
on
the
Group’s
financial
statements:
IFRS
11
‘Joint
Arrangements’
–
part
of
the
same
suite
as
IFRS
10;
IFRS
12
‘Disclosure
of
Interests
in
Other
Entities’
–
as
above,
contains
the
disclosure
requirements
for
entities
that
have
interest
in
subsidiaries,
joint
arrangements,
associates
and/or
unconsolidated
structure
entities;
IAS
27
‘Separate
Financial
Statements’
–
amended
as
part
of
the
new
suite
of
IFRSs
as
above;
IAS
28
‘Investments
in
Associates’
–
reissued
as
IAS
28
‘Investments
in
Associates
and
Joint
Ventures’;
it
also
forms
part
of
the
new
suite
of
IFRSs
10-‐12;
IFRS
10,
11,
and
12
–
amendments
on
transition
guidance
and
on
consolidation
for
investment
entities;
IAS
32
‘Financial
Instruments’
–
amendment
relating
to
asset
and
liability
offsetting;
IAS
39
‘Financial
Instruments:
Recognition
and
measurement’
–
amendment
relating
to
the
novation
of
derivatives
and
hedge
accounting;
IFRIC
21
‘Levies’.
Developments
expected
in
future
periods
of
which
the
impact
is
being
assessed
Revenue
from
Contracts
with
Customers:
The
final
standard,
IFRS
15,
was
published
in
May
2014.
The
IASB
has
tentatively
decided
to
defer
the
effective
date
by
one
year
and
it
is
now
expected
that
the
standard
will
become
effective,
subject
to
EU
endorsement,
for
annual
reporting
periods
beginning
on
or
after
1
January
2018,
with
earlier
application
permitted.
The
new
standard
introduces
a
five-‐step
model
to
the
principle
of
revenue
recognition.
Briefly,
the
framework
includes
identifying
the
contract
with
the
customer,
identifying
the
performance
obligations
in
the
contract,
determining
the
transaction
price,
allocating
the
transaction
price
to
the
performance
obligations
in
the
contract
and
recognising
revenue
when
(or
as)
the
entity
satisfies
a
performance
obligation.
QinetiQ
is
currently
undertaking
an
assessment
of
the
impact
of
the
new
standard.
Typical
issues
to
be
analysed
on
a
contract-‐by-‐contract
basis
include
whether
the
current
methodology
for
recognising
revenue
over
time
remains
appropriate,
the
treatment
of
contract
modifications,
variable
consideration,
determination
and
distinction
of
performance
obligations,
collectability
and
licences
(list
not
exhaustive).
QinetiQ
is
also
undertaking
an
analysis
of
the
transitional
guidance
which
allows
for
two
different
approaches,
the
retrospective
method
(with
optional
practical
expedients)
or
the
cumulative
effect
method.
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
will
adopt
the
UK
GAAP
option
with
effect
from
1
April
2015.
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 102 Notes to the financial statements continued
102 Notes to the financial statements continued
1. Significant accounting policies continued
Leases: A revised exposure draft was issued in May 2013 and following subsequent deliberations the IASB has decided upon the tentative
adoption of a single right-of-use (“ROU”) model. This approach eliminates off balance sheet accounting for lessees who will instead account
for most leases on balance sheet as financing the purchase of an ROU asset. The ROU asset is a non-financial asset which would be
accounted for consistently with other non-financial assets i.e. amortised. A corresponding liability would be recognised separately and
accounted for at amortised cost, yielding an overall front-loaded expense profile, similar to existing finance leases. The IASB has tentatively
agreed that no significant changes are needed to the current lessor model. The standard is expected to be published in 2015; the effective
date is not yet known.
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’;
Amendments to new standards IFRS 10, 11, 12 and 27; and
Amendments to IAS 36 and 39.
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.
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 and related goodwill
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 14.
Consolidation of US subsidiaries
As described on page 65, 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. IFRS 10 is the accounting standard now applicable in respect of
consolidation of entities. This does not specifically deal with proxy situations but the key principle of this new standard, effective for the
year ended 31 March 2015, 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. Having considered the terms of the Proxy agreement, the Directors consider that the Group meets the requirements of
IFRS 10 in respect of control over such affected entities and, therefore, consolidates the subsidiaries in the consolidated accounts.
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. A key judgment made in the year to 31 March 2015 is that the
utilisation of certain UK trade losses is now sufficiently probable in the foreseeable future that a deferred tax asset should be recognised in
respect of those losses. As such, a deferred tax asset of £25.2m has been recognised at 31 March 2015.
Post-retirement benefits
The Group’s defined benefit pension obligations and net income statement costs are based on key assumptions, including discount rates,
mortality and inflation. 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 30.
QinetiQ Group plc Annual Report and Accounts 2015 2. Revenue and other income
Revenue and other income is analysed as follows:
Revenue by category – continuing operations
For the year ended 31 March
all figures in £ million
Sales of goods
Services
Royalties and licences
Revenue
Share of joint ventures’ and associates’ (loss)/profit after tax
Other income
Total other income
103
103
2015
71.8
685.1
6.9
763.8
(0.1)
7.7
7.6
2014^
110.4
665.8
6.4
782.6
0.1
6.9
7.0
Revenue and loss after tax of joint ventures and associates was £7.7m and £0.1m respectively (2014: revenue of £6.5m and profit before
tax of £0.3m). The figures in the table above represent the Group share of this loss/profit after tax.
Other income is in respect of property rentals and the recovery of other related property costs.
Revenue by customer geographic location – continuing operations
For the year ended 31 March
all figures in £ million
United Kingdom
US
Other
Total
Revenue by major customer type – continuing operations
For the year ended 31 March
all figures in £ million
UK Government
US Government
Other
Total
2015
610.7
69.4
83.7
763.8
2015
537.6
51.2
175.0
763.8
2014^
578.4
98.4
105.8
782.6
2014^
503.9
72.9
205.8
782.6
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 Global Products operating segment.
^ Restated for the reclassification of the US Services segment as a discontinued operation.
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 104 Notes to the financial statements continued
104 Notes to the financial statements continued
3. Segmental analysis
Operating segments
For the year ended 31 March
all figures in £ million
EMEA Services
Global Products
Total operating segments
Operating profit before specific adjusting items1 –
underlying operating profit
Specific adjusting items:
Restructuring
Pension scheme closure costs
Property impairment reversal
Impairment of goodwill
Amortisation of intangible assets arising from acquisitions
Operating profit
Gain on business divestments
Net finance expense
Profit before tax
Taxation income/(expense)
Profit for the year from continuing operations
Discontinued operations
Loss from discontinued operations, net of tax
Profit/(loss) for the period attributable to equity
shareholders
Note
2015
2014^
Revenue
625.6
138.2
763.8
Operating
profit
93.0
18.3
111.3
Revenue
607.0
175.6
782.6
Operating
profit
86.7
27.0
113.7
111.3
1.0
–
–
–
(2.8)
109.5
–
(4.1)
105.4
12.0
117.4
(12.7)
104.7
113.7
0.2
27.1
1.4
(41.9)
(3.4)
97.1
1.1
(14.2)
84.0
(16.0)
68.0
(80.7)
(12.7)
7
8
9
5
1 The measure of profit presented to the chief operating decision maker is underlying operating profit (as defined in glossary on page 141).
No measure of segmental assets and liabilities has been disclosed as this information is not regularly provided to the chief operating decision maker.
^ Restated for the reclassification of the US Services segment as a discontinued operation.
Depreciation and amortisation by business segment – excluding specific adjusting items
For the year ended 31 March 2015
all figures in £ million
Depreciation and impairment of property, plant and
equipment
Amortisation of purchased or internally developed
intangible assets
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
EMEA Services
Global
Products
Total continuing
operations
19.7
0.8
20.5
2.0
0.7
2.7
21.7
1.5
23.2
EMEA Services
19.7
Global Products
2.1
Total continuing
operations
21.8
0.6
20.3
0.1
2.2
0.7
22.5
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 2015
Year ended 31 March 2014
UK
262.0
Rest of World
91.4
UK
258.4
Rest of World
162.9
Total
353.4
Total
421.3
QinetiQ Group plc Annual Report and Accounts 2015
4. Profit/loss before tax
The following auditor’s remuneration has 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
105
105
2015
2014
0.4
0.2
0.1
–
–
0.1
0.8
0.6
0.5
0.1
0.2
1.3
–
2.7
The fees payable to auditors were significantly lower in 2015 than 2014 due to the fact that in the prior year KPMG were engaged to
perform work in connection with the strategic review and preparation for the proposed sale of the US Services division.
The following items have also been charged in arriving at profit/loss before tax for continuing operations:
all figures in £ million
Depreciation and impairment of property, plant and equipment:
Owned assets: depreciation
Owned assets: impairment (charge)/reversal
Foreign exchange loss
Research and development expenditure – customer funded contracts
Research and development expenditure – Group funded
2015
2014^
(20.7)
(1.0)
(0.3)
(285.8)
(20.8)
(21.8)
1.4
(1.1)
(288.7)
(25.9)
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. The following specific adjusting items have been (charged)/credited in arriving at profit/loss before tax:
all figures in £ million
Reversal of unutilised restructuring provisions
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
Amortisation of intangible assets arising from acquisition
Specific adjusting items operating loss
Gain on business divestments
Defined benefit pension scheme net finance expense
Specific adjusting items loss before tax – continuing operations
Profit on disposal of subsidiary – before accelerated interest expense
Loss on disposal of subsidiary – accelerated interest expense
Loss on disposal of subsidiary
US Services pre-sale transaction costs
Impairment of goodwill
Amortisation of intangible assets arising from acquisition
Restructuring costs
Specific adjusting items loss before tax – discontinued operations
Note
16
15
7
5
5
5
2015
1.0
–
–
1.0
–
–
(2.8)
(1.8)
–
(0.6)
(2.4)
15.9
(28.8)
(12.9)
–
–
(0.8)
–
(13.7)
2014^
0.2
31.1
(4.0)
27.3
(41.9)
1.4
(3.4)
(16.6)
1.1
(1.7)
(17.2)
–
–
–
(6.0)
(84.0)
(7.6)
(0.5)
(98.1)
Total specific adjusting items loss before tax
(16.1)
(115.3)
^ Restated for the reclassification of the US Services segment as a discontinued operation.
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 106 Notes to the financial statements continued
106 Notes to the financial statements continued
5. Discontinued operations
On 23 May 2014 the Group completed its sale of the US Services division, comprising QinetiQ North America Inc. and its subsidiaries. The
Circular seeking shareholder approval for the sale of the US Services division specified that the proceeds would be applied in settling the
remaining private placement (‘PP’) debt of $248m which was put in place to finance the acquisitions of the US Services
business. Accordingly, the penalty of £28.8m incurred on the early redemption of the PP is considered to be inextricably linked to the sale
of that business and has, therefore, been disclosed as an adjustment to the loss on its sale rather than as a finance expense.
The initial cash consideration was $165m prior to the standard working capital adjustments at completion. The mid-month completion of
the deal resulted in the May month end payroll and creditor payments falling outside QinetiQ’s period of ownership. This caused the
closing balance sheet to have higher cash (to be retained by QinetiQ) and lower working capital than would have been the case at the
month end. The working capital mechanism was designed to make such timing issues neutral. Hence working capital adjustments (and
closing net-debt adjustments) of $10.6m were required. Additional deferred consideration remains receivable. The earn-out is scheduled
to be payable in the first half of the Group’s next financial year on a sliding scale between zero and $50m based on gross profit generated
by the disposed business in the financial year to 31 March 2015. Actual gross profit delivered by the disposed business (still subject to
audit) indicates that the deferred consideration receivable will be approximately $9m in cash. The full impact of the disposal is given below:
a) Results of discontinued operations
all figures in £ million
Revenue
Operating costs excluding depreciation, amortisation and impairment
EBITDA (earnings before interest, tax, depreciation and amortisation)
Depreciation, amortisation and impairment of assets
Underlying operating profit
Impairment of goodwill
Amortisation of intangible assets arising from acquisitions
Other specific adjusting items
Operating profit/(loss)
Finance expense
Profit/(loss) before tax
Taxation expense
Results from operating activities, net of tax
Profit on sale of discontinued operations – before accelerated interest costs
Loss on sale of discontinued operations – accelerated interest costs
Loss for the period
Basic loss per share
Diluted loss per share
Underlying basic earnings per share
b) Cash flows from discontinued operations
all figures in £ million
Net cash from operating activities
Net cash from investing activities
Net cash inflow for the year
c) Effect of disposal on the financial position of the Group
all figures in £ million
Goodwill
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Deferred tax asset
Trade and other payables
Net assets and liabilities
Consideration received (net of transaction costs), satisfied in cash
Cash and cash equivalents disposed
Net cash inflow in the year to 31 March 2015
Note
4
2014
408.8
(387.3)
21.5
(2.5)
19.0
(84.0)
(7.6)
(6.5)
(79.1)
(0.8)
(79.9)
(0.8)
(80.7)
–
–
(80.7)
(12.4)p
(12.4)p
2.2p
2014
30.3
–
30.3
2015
55.7
(54.2)
1.5
(0.3)
1.2
–
(0.8)
–
0.4
–
0.4
(0.2)
0.2
15.9
(28.8)
(12.7)
(2.0)p
(2.0)p
0.1p
2015
1.8
–
1.8
2015
41.2
32.6
5.9
0.8
71.7
1.0
9.6
(54.7)
108.1
79.6
(1.0)
78.6
QinetiQ Group plc Annual Report and Accounts 2015
107
107
6. Business
combinations
The
Group
made
two
acquisitions
in
the
year
to
31
March
2015.
On
7
August
2014
the
Group
acquired
the
trade
and
assets
of
Redfern
Integrated
Optics
Inc.
from
its
founder
management
team
and
on
19
November
2014
the
Group
acquired
the
trade
and
assets
of
SR2020.
Further
information
on
each
acquisition
is
given
below.
Redfern
Integrated
Optics
Inc.
(“RIO”)
RIO
is
a
US-‐based
business
that
designs
and
manufactures
highly
coherent
semiconductor
lasers.
QinetiQ’s
OptaSense®
business
uses
the
lasers
within
its
core
product
range
in
the
Distributed
Acoustic
Sensing
market.
RIO
is
the
sole
source
supplier
for
this
type
of
product
and
the
acquisition
was
made
to
protect
the
supply
to
OptaSense®
of
the
RIO
laser
product.
If
the
acquisition
had
been
completed
on
the
first
day
of
the
financial
year,
Group
revenue
for
the
period
ended
31
March
2015
would
have
been
£764.7m
and
the
Group
profit
before
tax
would
have
been
£105.4m.
Acquisition
Trade
and
assets
of
Redfern
Integrated
Optics
Inc.
Acquisition
date
Expected
cash
consideration
£million
Contribution
post-‐acquisition
Revenue
£million
Operating
profit
£million
7
August
2014
3.8
1.8
–
Set
out
below
are
the
allocations
of
purchase
consideration,
assets
and
liabilities
of
the
acquisition
made
in
the
year
and
the
adjustments
required
to
the
book
values
of
the
assets
and
liabilities
in
order
to
present
the
net
assets
of
this
business
at
fair
value
and
in
accordance
with
the
Group
accounting
policies.
all
figures
in
£
million
Net
assets
acquired
Goodwill
and
intangibles
Consideration
satisfied
by:
Cash
Deferred
consideration
payable
Total
consideration
Book
value
1.8
–
1.8
Fair
value
adjustment
(0.9)
2.9
2.0
Fair
value
at
acquisition
0.9
2.9
3.8
3.3
0.5
3.8
SR2020
Inc.
SR2020
Inc.
is
a
US-‐based
leading
provider
of
borehole
seismic
services
who
develop
and
use
purpose
written,
proprietary
software
for
borehole
seismic
imaging,
micro-‐seismic
monitoring
and
passive
seismic
monitoring.
The
business
has
extensive
oil
and
gas
industry
experience
and
its
expertise
in
processing
and
interpretation
services
will
further
enhance
the
Group’s
Optasense®
product
and
services
portfolio.
If
the
acquisition
had
been
completed
on
the
first
day
of
the
financial
year,
Group
revenue
for
the
period
ended
31
March
2015
would
have
been
£763.9m
and
the
Group
profit
before
tax
would
have
been
£104.6m.
Acquisition
Trade
and
assets
of
SR2020
Inc.
Acquisition
date
Expected
cash
consideration
£million
Contribution
post-‐acquisition
Revenue
£million
Operating
profit
£million
19
November
2014
0.4
0.1
(0.4)
Set
out
below
are
the
allocations
of
purchase
consideration,
assets
and
liabilities
of
the
acquisition
made
in
the
year
and
the
adjustments
required
to
the
book
values
of
the
assets
and
liabilities
in
order
to
present
the
net
assets
of
this
business
at
fair
value
and
in
accordance
with
the
Group
accounting
policies.
all
figures
in
£
million
Net
assets
acquired
Goodwill
and
intangibles
Consideration
satisfied
by:
Cash
Deferred
consideration
payable
Total
consideration
Book
value
0.3
–
0.3
Fair
value
adjustment
(0.3)
0.4
0.1
Fair
value
at
acquisition
–
0.4
0.4
0.4
–
0.4
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 108 Notes to the financial statements continued
108 Notes to the financial statements continued
7. Gain on business divestments – continuing operations
For the year ended 31 March
all figures in £ million
Gain on business divestments
2015
–
2014
1.1
The gain on business divestments relates to deferred consideration received in respect of the disposal of the Calibration business in 2009.
8. Finance income and expense – continuing operations
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
Net finance expense
2015
1.1
0.2
1.3
(0.7)
(0.9)
(2.6)
(0.2)
(0.4)
(4.8)
(0.6)
(5.4)
(4.1)
2014^
1.4
0.5
1.9
(0.6)
(1.4)
(11.3)
(0.4)
(0.7)
(14.4)
(1.7)
(16.1)
(14.2)
^ Restated for the reclassification of the US Services segment as a discontinued operation.
The Circular seeking shareholder approval for the sale of the US Services division specified that the proceeds would be applied in settling
the remaining private placement (‘PP’) debt of $248m which was put in place to finance the acquisitions of the US Services business.
Accordingly, the penalty of £28.8m incurred on the early redemption of the PP is considered to be inextricably linked to the sale of that
business and has, therefore, been disclosed as an adjustment to the loss on its sale rather than as a finance expense. See note 5.
QinetiQ Group plc Annual Report and Accounts 2015
9. Taxation – continuing operations
all figures in £ million
Analysis of charge
Current UK tax expense/(income)
Overseas corporation tax
Current year
Adjustment for prior year
Current tax expense/(income)
Deferred tax expense/(income)
Deferred tax impact of change in rates
Deferred tax in respect of prior years
Deferred tax expense/(income)
Taxation expense/(income) – continuing
operations
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 21%
(2014: 23%)
Effect of:
Expenses not deductible for tax purposes,
research and development relief and
non-taxable items
Recognition of deferred tax asset in respect of
UK trading losses
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) – continuing
operations
Effective tax rate
*Details of specific adjusting items can be found in note 4.
2015
Before specific
adjusting items*
Specific adjusting
items*
2014^
Before specific
adjusting items*
Specific adjusting
items*
Total
0.5
0.9
(0.4)
1.0
(11.6)
(0.4)
(1.0)
(13.0)
–
(0.5)
0.6
0.1
(22.9)
–
(1.0)
(23.9)
(4.2)
(10.3)
–
(14.5)
25.0
0.9
–
25.9
(23.8)
(12.0)
11.4
0.5
1.4
(1.0)
0.9
11.3
(0.4)
–
10.9
11.8
(0.9)
(1.1)
–
(2.0)
7.8
–
(1.2)
6.6
4.6
107.8
22.6
(2.4)
(0.5)
105.4
101.2
(23.2)
22.1
23.3
(5.3)
(18.6)
1.7
(16.9)
(9.9)
10.4
–
(25.2)
(25.2)
6.9
(0.4)
0.9
0.4
–
–
–
0.2
6.9
(0.4)
0.9
0.6
–
(1.0)
0.9
0.2
(2.1)
11.8
10.9%
(23.8)
(12.0)
(11.4%)
11.4
11.3%
–
–
–
–
(0.5)
4.6
109
109
Total
(5.1)
(11.4)
–
(16.5)
32.8
0.9
(1.2)
32.5
16.0
78.0
18.0
0.5
–
(1.0)
0.9
0.2
(2.6)
16.0
20.5%
^Restated for the reclassification of the US Services segment as a discontinued operation.
Tax expense on continuing operations excludes the tax expense of the discontinued operation of £0.2m. This is included in ‘profit/(loss)
from discontinued operation, net of tax’ (see note 5).
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
tax 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 and the assumption that the benefit of R&D tax relief remains in the tax line.
The Finance Act 2013 allows the continued treatment of R&D tax relief as a super deduction until 1 April 2016, when R&D Expenditure
Credit treatment becomes mandatory.
Deferred tax has been calculated at 20% being the enacted future statutory tax rate.
At 31 March 2015 the Group had unused tax losses of £291.6m (2014: £213.9m) which are available for offset against future profits. An
asset of £25.2m has been recognised in respect of an element of these unused tax losses, relating to certain UK trading losses which are
expected to be utilised in the foreseeable future. No deferred tax asset is recognised in respect of the other losses due to uncertainty over
the timing and extent of their utilisation.
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 110 Notes to the financial statements continued
110 Notes to the financial statements continued
10. Dividends
An analysis of the dividends paid and proposed in respect of the years ended 31 March 2015 and 2014 is provided below:
Interim 2015
Final 2015 (proposed)
Total for the year ended 31 March 2015
Interim 2014
Final 2014
Total for the year ended 31 March 2014
Pence
per share
1.8
3.6
5.4
1.4
3.2
4.6
Date paid/
payable
Feb 2015
Sept 2015
Feb 2014
Sept 2014
£m
11.1
21.2
32.3
9.2
20.6
29.8
The Directors propose a final dividend of 3.6p (2014: 3.2p) per share. The dividend, which is subject to shareholder approval, will be paid
on 4 September 2015. The ex-dividend date is 6 August 2015 and the record date is 7 August 2015.
11. 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:
As at 31 March
Monthly average
EMEA Services
Global Products
Continuing operations
US Services
Total
The aggregate payroll costs of these persons were as follows:
all figures in £ million
Wages and salaries
Social security costs
Pension costs
Share-based payments costs
Employee costs before UK pension closure mitigation costs
UK pension scheme closure mitigation costs
Total employee costs
2015
Number
5,576
674
6,250
-
6,250
2014
Number
5,399
834
6,233
2,704
8,937
Note
29
2015
Number
5,521
706
6,227
227
6,454
2015
284.0
27.6
35.1
3.6
350.3
–
350.3
2014
Number
5,292
828
6,120
3,014
9,134
2014
450.3
38.3
40.8
4.5
533.9
4.0
537.9
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 prior
year.
12. Directors and other senior management personnel
The Directors and other senior management personnel of the Group during the year to 31 March 2015 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
2015
6.1
0.1
1.4
0.1
7.7
2014
6.7
0.2
1.9
0.8
9.6
Short-term employee remuneration and benefits include salary, bonus and benefits. Post-employment benefits relate to pension amounts.
QinetiQ Group plc Annual Report and Accounts 2015
111
111
13. 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
28).
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
Underlying
basic
EPS
–
continuing
operations
Profit
attributable
to
equity
shareholders
Remove
(profit)/loss
after
tax
in
respect
of
specific
adjusting
items*
Underlying
profit
after
taxation
Weighted
average
number
of
shares
Underlying
basic
EPS
–
continuing
operations
Underlying
basic
EPS
–
total
Group
Profit/(loss)
attributable
to
equity
shareholders
Remove(profit)/loss
after
tax
in
respect
of
specific
adjusting
items*
Underlying
profit
after
taxation
Weighted
average
number
of
shares
Underlying
basic
EPS
–
total
Group
For
the
year
ended
31
March
Basic
EPS
–
continuing
operations
Profit
attributable
to
equity
shareholders
Weighted
average
number
of
shares
Basic
EPS
–
continuing
operations
Diluted
EPS
–
continuing
operations
Profit
attributable
to
equity
shareholders
Weighted
average
number
of
shares
Effect
of
dilutive
securities
Diluted
number
of
shares
Diluted
EPS
–
continuing
operations
For
the
year
ended
31
March
Basic
EPS
–
total
Group
Profit/(loss)
attributable
to
equity
shareholders
Weighted
average
number
of
shares
Basic
EPS
–
total
Group
Diluted
EPS
–
total
Group
Profit/(loss)
attributable
to
equity
shareholders
Weighted
average
number
of
shares
Effect
of
dilutive
securities1
Diluted
number
of
shares
Diluted
EPS
–
total
Group
£
million
£
million
£
million
Million
Pence
£
million
£
million
£
million
Million
Pence
£
million
Million
Pence
£
million
Million
Million
Million
Pence
£
million
Million
Pence
£
million
Million
Million
Million
Pence
2015
117.4
(21.4)
96.0
630.9
15.2
104.7
(8.0)
96.7
630.9
15.3
2014
68.0
21.8
89.8
651.7
13.8
(12.7)
116.7
104.0
651.7
16.0
2015
2014
117.4
630.9
18.6
117.4
630.9
3.7
634.6
18.5
68.0
651.7
10.4
68.0
651.7
5.1
656.8
10.4
2015
2014
104.7
630.9
16.6
104.7
630.9
3.7
634.6
16.5
(12.7)
651.7
(1.9)
(12.7)
651.7
–
651.7
(1.9)
1
The
loss
attributable
to
equity
shareholders
results
in
the
effect
of
dilutive
securities
on
the
weighted
average
number
of
shares
being
nil
in
the
prior
year.
*Details
of
specific
adjusting
items
can
be
found
in
note
4.
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 112 Notes to the financial statements continued
112 Notes to the financial statements continued
14. Goodwill
all figures in £ million
Cost
At 1 April
Acquisitions
Disposals
Foreign exchange
At 31 March
Impairment
At 1 April
Disposals
Impairment
Foreign exchange
At 31 March
2015
2014
541.4
0.1
(370.1)
11.9
183.3
(400.1)
328.9
–
(4.9)
(76.1)
593.0
–
–
(51.6)
541.4
(302.6)
–
(125.9)
28.4
(400.1)
Net book value at 31 March
107.2
141.3
Goodwill as at 31 March 2015 was allocated across various cash generating units (CGUs) in the following segments: EMEA Services (three)
and Global Products (two). Goodwill previously allocated to the US Services CGU was written off in the year on disposal of that CGU.
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
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.
Key assumptions
Cash flows
The value-in-use calculations generally use discounted future cash flows based on financial plans approved by the Board covering a 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% (2014: 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 10.6%, 13.2% and 17.0% and for the Global
Products CGUs 10.0% and 10.5%.
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.
Significant CGUs
The carrying value of the net operating assets of the US Global Products CGU was written down in the prior year. This brought the carrying
value in line with the calculated value in use as at 31 March 2014. The carrying value of the goodwill for this CGU as at 31 March 2015 was
£67.2m (2014: £60.0m). The value in use of this CGU as at 31 March 2015, calculated using the assumptions noted above, is marginally
higher than the carrying value of net operating assets (of £78.0m) and no further impairment is required in the year to 31 March 2015. The
key sensitivity impacting on the value in use calculations is the terminal year cash flows. These cash flows include certain assumptions
about revenue and profit in respect of new product lines still to be launched. Applying a sensitivity to remove the new product contribution
from the terminal year results in an impairment of £9.9m. An additional sensitivity to remove all expected growth in the terminal year (i.e.
growth in existing products as well as new products) results in an impairment of £34.8m. Sensitivity analysis also shows that an increase of
1% in the discount rate assumption would result in an impairment of £9.5m. Sensitivity analysis also shows that a decrease of 1% in the
terminal growth rate would result in an impairment of £8.2m.
The UK Global Products CGU and the three 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 2015 was £5.2m (2014: £5.5m). The carrying values of goodwill
for the three EMEA Services CGUs as at 31 March 2015 were £27.5m, £5.2m and £2.1m (2014: £27.5m, £4.6m and £2.3m). The Directors
have not identified any other likely changes in other significant assumptions between 31 March 2015 and the signing of the financial
statements that would cause the carrying value of the recognised goodwill to exceed its recoverable amount.
QinetiQ Group plc Annual Report and Accounts 2015
15. Intangible assets
Year ended 31 March 2015
all figures in £ million
Cost
At 1 April 2014
Additions – internally developed
Additions – purchased
Additions – recognised on acquisition
Divestments
Transfers
Foreign exchange
At 31 March 2015
Amortisation and impairment
At 1 April 2014
Amortisation charge for year
Divestments
Transfers
Foreign exchange
At 31 March 2015
Net book value at 31 March 2015
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
113
113
Total
256.9
1.7
2.5
3.3
(118.9)
0.6
15.2
161.3
212.7
5.1
(86.3)
(0.2)
14.7
146.0
–
Acquired intangible assets
Customer
relationships
Intellectual
property
Brand
names
Development
costs
Other intangible
assets
141.4
–
–
–
(108.9)
–
6.5
39.0
105.5
1.4
(79.0)
–
5.1
33.0
6.0
53.5
–
–
3.3
(2.0)
–
4.1
58.9
49.9
2.1
(1.0)
–
6.8
57.8
1.1
9.2
–
–
–
(6.0)
–
0.9
4.1
8.1
0.1
(5.9)
–
0.3
2.6
1.5
17.0
0.4
–
–
(0.3)
(0.1)
–
17.0
14.5
0.6
(0.1)
–
–
15.0
2.0
Acquired intangible assets
Customer
relationships
Intellectual
property
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
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
1.1
44.2
35.8
1.3
2.5
–
(1.7)
0.7
3.7
42.3
34.7
0.9
(0.3)
(0.2)
2.5
37.6
36.5
–
0.5
(1.0)
0.2
(0.4)
35.8
35.3
0.7
(0.9)
(0.4)
34.7
The amortisation charge for the year of £5.1m includes £0.8m in respect of discontinued operations. Divestments are in respect of the
disposal of the US Services division (see note 5).
4.7
15.3
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 114 Notes to the financial statements continued
114 Notes to the financial statements continued
16. Property, plant and equipment
Year ended 31 March 2015
all figures in £ million
Cost
At 1 April 2014
Additions – purchased
Additions – acquisition
Disposals
Divestments
Transfers
Foreign exchange
At 31 March 2015
Depreciation
At 1 April 2014
Charge for year
Impairment
Disposals
Divestments
Transfers
Foreign exchange
At 31 March 2015
Land and
buildings
Plant, machinery
and vehicles
Computers
and office
equipment
Assets under
construction
317.6
0.3
–
(0.8)
(3.4)
(1.9)
0.8
312.6
145.9
9.7
–
(0.8)
(1.9)
(1.1)
0.5
152.3
164.5
1.2
0.3
(0.5)
(1.4)
8.9
1.3
174.3
137.5
8.5
0.5
(0.5)
(1.0)
1.1
0.9
147.0
50.0
1.0
0.1
(0.2)
(11.5)
1.3
0.8
41.5
39.8
2.8
0.1
(0.1)
(7.5)
0.2
0.9
36.2
24.9
22.3
–
(1.2)
–
(8.9)
–
37.1
–
–
0.4
–
–
–
–
0.4
Total
557.0
24.8
0.4
(2.7)
(16.3)
(0.6)
2.9
565.5
323.2
21.0
1.0
(1.4)
(10.4)
0.2
2.3
335.9
Net book value at 31 March 2015
160.3
27.3
5.3
36.7
229.6
Impairment of £1.0m (2014: reversal of £1.4m) expensed in the consolidated income statement relates to equipment which is no longer
being utilised. The depreciation charge for the year of £21.0m includes £0.3m in respect of discontinued operations. Divestments are in
respect of the disposal of the US Services division (see note 5).
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
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
53.1
1.1
(4.9)
2.9
(2.2)
50.0
41.3
4.4
–
(4.5)
(1.4)
39.8
10.2
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
17.8
21.6
(6.4)
(8.1)
–
24.9
–
–
–
–
–
–
Net book value at 31 March 2014
171.7
27.0
24.9
233.8
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 31.
QinetiQ Group plc Annual Report and Accounts 2015
17. 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
115
115
2015
2014
Joint
venture
and
associates
financial
results
0.3
8.0
8.3
(7.6)
–
(7.6)
0.7
0.7
Group
net
share
of
joint
ventures
and
associates
0.1
3.9
4.0
(3.7)
–
(3.7)
0.3
0.1
0.4
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
During
the
year
ended
31
March
2015
there
were
sales
to
associates
of
£3.0m
(2014:
£3.3m).
At
the
year
end
there
were
outstanding
receivables
from
associates
of
£0.3m
(2014:
£0.1m).
18. 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
2015
Deferred
tax
asset
all
figures
in
£
million
At
1
April
2014
(Charged)/credited
to
income
statement
Credited
to
other
comprehensive
income
Foreign
exchange
Eliminated
on
disposal
Gross
deferred
tax
asset
at
31
March
2015
Less:
liability
available
for
offset
Net
deferred
tax
asset
at
31
March
2015
Deferred
tax
liability
all
figures
in
£
million
At
1
April
2014
(Charged)/credited
to
income
statement
Eliminated
on
disposal
Foreign
exchange
Deferred
tax
impact
of
change
in
rates
Gross
deferred
tax
liability
at
31
March
2015
Less:
asset
available
for
offset
Net
deferred
tax
liability
at
31
March
2015
Pension
liability
1.3
(4.8)
5.1
–
–
1.6
Trading
losses
–
25.2
–
–
–
25.2
Short-‐term
timing
differences
27.5
(7.4)
–
1.9
(14.4)
7.6
Accelerated
capital
allowances
(17.5)
(1.3)
0.7
–
0.4
(17.7)
Amortisation
(8.2)
0.9
4.1
(0.6)
–
(3.8)
Total
28.8
13.0
5.1
1.9
(14.4)
34.4
(21.5)
12.9
Total
(25.7)
(0.4)
4.8
(0.6)
0.4
(21.5)
21.5
–
At
the
balance
sheet
date
the
Group
had
unused
tax
losses
of
£291.6m
(2014:
£213.9m)
potentially
available
for
offset
against
future
profits.
An
asset
of
£25.2m
has
been
recognised
in
respect
of
an
element
of
these
unused
losses,
relating
to
certain
UK
trading
losses
which
are
expected
to
be
utilised
in
the
foreseeable
future.
No
deferred
tax
asset
is
recognised
in
respect
of
the
other
losses
due
to
uncertainty
over
the
timing
of
their
utilisation.
These
losses
can
be
carried
forward
indefinitely.
Balances
eliminated
on
disposal
are
in
respect
of
the
disposal
of
the
US
Services
division
(see
note
5).
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 116 Notes to the financial statements continued
116 Notes to the financial statements continued
18. Deferred tax continued
Year ended 31 March 2014
Deferred tax asset
all figures in £ million
At 1 April 2013
(Charged)/credited to income statement
(Charged)/credited to other comprehensive income
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
(Charged)/credited to 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
19. Inventories
As at 31 March
all figures in £ million
Raw materials
Work in progress
Finished goods
20. Current asset investments
As at 31 March
all figures in £ million
Available-for-sale investment
Pension
liability
13.7
(13.0)
1.2
0.1
–
–
(0.7)
1.3
Short-term timing
differences
29.9
(4.7)
(0.1)
1.4
(2.8)
3.8
–
27.5
Accelerated
capital allowances
0.6
(17.7)
(0.3)
0.1
(0.2)
(17.5)
Amortisation
(11.8)
2.6
–
1.0
–
(8.2)
2015
9.6
3.3
5.6
18.5
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)
2014
11.4
4.8
3.6
19.8
2015
2.3
2014
2.1
At 31 March 2015 the Group held a 4.9% shareholding in pSivida Limited (31 March 2014: 4.9%), a company listed on NASDAQ and the
Australian and Frankfurt Stock Exchanges. The investment is held at fair value of £2.3m (2014: £2.1m) using the closing share price at
31 March 2015 of AUS$5.08 per share (31 March 2014: AUS$4.32 per share).
21. Trade and other receivables
As at 31 March
all figures in £ million
Trade receivables
Amounts recoverable under contracts
Other receivables
Prepayments
2015
82.0
51.6
15.8
9.8
159.2
2014
136.3
90.0
12.5
11.7
250.5
In determining the recoverability of trade receivables, the Group considers any change 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
government agencies. Accordingly, the Directors believe that no credit provision in excess of the allowance for doubtful debts is required.
As at 31 March 2015 the Group carried a provision for doubtful debts of £3.3m (2014: £2.9m).
QinetiQ Group plc Annual Report and Accounts 2015
117
117
Ageing of past due but not impaired receivables
all figures in £ million
Up to three months
Over three months
2015
13.0
0.7
13.7
Movements in the doubtful debt provision
all figures in £ million
At 1 April
Created
Released
Divestments
Utilised
At 31 March
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. Divestments are in respect of the disposal of the US Services division (see note 5).
2015
2.9
1.8
(0.5)
(0.3)
(0.6)
3.3
2014
43.7
3.7
47.4
2014
1.9
1.9
(0.9)
–
–
2.9
22. 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
23. Provisions
Year ended 31 March 2015
all figures in £ million
At 1 April 2014
Created in year
Released in year
Unwind of discount
Utilised in year
Divestments
Foreign exchange
At 31 March 2015
Current liability
Non-current liability
At 31 March 2015
2015
29.5
31.9
5.6
285.3
352.3
9.6
0.8
10.4
362.7
Restructuring
5.0
–
(1.4)
–
(0.6)
(3.0)
–
–
–
–
–
Property
12.6
2.9
(0.3)
0.4
(2.1)
–
–
13.5
2.3
11.2
13.5
Warranty and
indemnities
–
5.9
–
–
–
–
0.5
6.4
–
6.4
6.4
Other
6.5
0.9
(1.5)
–
(0.4)
–
–
5.5
0.7
4.8
5.5
2014
42.6
30.1
11.8
341.1
425.6
8.3
2.9
11.2
436.8
Total
24.1
9.7
(3.2)
0.4
(3.1)
(3.0)
0.5
25.4
3.0
22.4
25.4
Restructuring provisions related to historic cost reduction initiatives in the US and included redundancy and vacant property provisions.
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 11 years.
Other provisions relate to environmental and other liabilities, the magnitude and timing of utilisation of which are determined by a variety
of factors.
Divestments are in respect of the disposal of the US Services division (see note 5).
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 118
Notes
to
the
financial
statements
continued
118 Notes to the financial statements continued
24. Net
cash
As
at
31
March
all
figures
in
£
million
Current
financial
assets/(liabilities)
Deferred
financing
costs
Borrowings
Available-‐for-‐sale
investment
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
0.3
0.3
10.0
0.5
1.5
12.3
–
–
–
0.8
0.8
0.1
–
0.9
41.6
142.7
184.3
2015
Liabilities
Net
Assets
–
–
–
(0.5)
(1.4)
(1.9)
–
–
–
–
–
(0.1)
–
(0.1)
–
–
–
0.3
0.3
10.0
–
0.1
10.4
–
–
–
0.8
0.8
–
–
0.8
41.6
142.7
184.3
195.5
–
–
–
0.3
2.8
3.1
–
–
–
–
–
0.1
1.4
1.5
53.7
268.5
322.2
2014
Liabilities
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
At
31
March
2015
£1.3m
(2014:
£2.2m)
of
cash
was
held
by
the
Group’s
captive
insurance
subsidiary,
including
£0.1m
(2014:
£0.1m)
that
was
restricted
in
its
use.
All
US$
private
placement
notes
were
repaid
in
the
year.
The
Circular
seeking
shareholder
approval
for
the
sale
of
the
US
Services
division
specified
that
the
proceeds
would
be
applied
in
settling
the
remaining
private
placement
debt
of
$248m
which
was
put
in
place
to
finance
the
acquisitions
of
the
US
Services
business.
Reconciliation
of
net
cash
flow
to
movement
in
net
cash
all
figures
in
£
million
(Decrease)/increase
in
cash
and
cash
equivalents
in
the
year
Repayment
of
US$
private
placement
notes
Outflow
in
respect
of
available
for
sale
investment
Payment
of
bank
loan
arrangement
fee
Capital
element
of
finance
lease
payments
Capital
element
of
finance
lease
receipts
Change
in
net
cash
resulting
from
cash
flows
Cash
and
cash
equivalents
disposed
Amortisation
of
deferred
financing
costs
Finance
lease
receivables
Finance
lease
payables
Foreign
exchange
and
other
non-‐cash
movements
Movement
in
net
cash
in
year
Net
cash
at
beginning
of
year
Net
cash
at
31
March
2015
(137.3)
147.1
10.0
1.3
2.8
(3.0)
20.9
(1.0)
(0.7)
0.3
(0.2)
5.7
25.0
170.5
195.5
2014
85.9
–
–
–
2.8
(3.0)
85.7
–
(0.6)
0.4
(0.4)
11.4
96.5
74.0
170.5
QinetiQ Group plc Annual Report and Accounts 2015 119
119
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
2015
2014
Present value of minimum
lease payments
2015
2014
1.5
–
1.5
–
1.5
3.0
1.5
4.5
(0.3)
4.2
1.5
–
1.5
–
1.5
2.8
1.4
4.2
–
4.2
The Group leases out certain buildings under finance leases that expire in the year to 31 March 2016.
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
Present value of minimum
lease payments
2015
2014
2015
2014
1.4
–
1.4
–
1.4
2.8
1.4
4.2
(0.2)
4.0
1.4
–
1.4
–
1.4
1.4
–
1.4
2.6
1.4
4.0
–
4.0
2.6
1.4
4.0
The Group utilises certain buildings under finance leases that expire in the year to 31 March 2016.
25. 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
2015
7.3
19.1
10.9
37.3
2015
6.1
2015
5.0
6.8
1.2
13.0
2014
8.3
22.0
6.6
36.9
2014
18.9
2014
17.8
44.1
18.2
80.1
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. The majority of the Group’s operating lease expense in 2014 was in respect of leases held
by the US Services division. This division was divested in the year resulting in a significant reduction in operating lease expense in the
continuing operations.
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 120 Notes to the financial statements continued
120 Notes to the financial statements continued
26. Financial risk management
The Group’s international operations 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 as at 31 March 2015:
all figures in £ million
Assets
Available for sale investments
Current other investments
Current derivative financial instruments
Non-current other investments
Non-current derivative financial instruments
Liabilities
Current derivative financial instruments
Non-current derivative financial instruments
Total
Note
Level 1
Level 2
Level 3
24
20
24
24
24
24
10.0
2.3
–
–
–
–
–
12.3
–
–
0.5
–
0.1
(0.5)
(0.1)
–
–
–
–
0.1
–
–
–
0.1
The following table presents the Group’s assets and liabilities that are measured at fair value as 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
Non-current derivative financial instruments
Total
Note
Level 1
Level 2
Level 3
20
24
24
2.1
–
–
–
–
2.1
–
0.3
–
0.1
(0.1)
0.3
–
–
0.1
–
–
0.1
Total
10.0
2.3
0.5
0.1
0.1
(0.5)
(0.1)
12.4
Total
2.1
0.3
0.1
0.1
(0.1)
2.5
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.
QinetiQ Group plc Annual Report and Accounts 2015
All financial assets and liabilities have a fair value that is identical to book value at 31 March 2015 and 31 March 2014 except where
noted below:
121
121
As at 31 March 2015
all figures in £ million
Financial assets
Non-current
Derivative financial instruments
Other investments
Current
Finance leases
Trade and other receivables
Derivative financial instruments
Current asset investments
Available for sale investment
Cash and cash equivalents
Total financial assets
Financial liabilities
Non-current
Trade and other payables
Deferred financing costs
Derivative financial instruments
Current
Trade and other payables
Derivative financial instruments
Finance leases
Deferred financing costs
Total financial liabilities
Total
As at 31 March 2014
all figures in £ million
Financial assets
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
Available for
sale
Note
Loans and
receivables
Financial
liabilities at
amortised cost
Derivatives
used as hedges
Total
carrying
value
Total
fair
value
24
17
24
21
24
20
24
22
24
24
22
24
24
24
–
0.1
–
–
–
2.3
10.0
–
12.4
–
–
–
–
–
–
–
–
–
–
1.5
159.2
–
–
–
184.3
345.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(10.4)
0.8
–
(352.3)
–
(1.4)
0.3
(363.0)
0.1
–
–
–
0.5
–
–
–
0.6
0.1
0.1
1.5
159.2
0.5
2.3
10.0
184.3
358.0
–
–
(0.1)
–
(0.5)
–
–
(0.6)
(10.4)
0.8
(0.1)
(352.3)
(0.5)
(1.4)
0.3
(363.6)
0.1
0.1
1.5
159.2
0.5
2.3
10.0
184.3
358.0
(10.4)
0.8
(0.1)
(352.3)
(0.5)
(1.4)
0.3
(363.6)
12.4
345.0
(363.0)
–
(5.6)
(5.6)
Available for
sale
Note
Loans and
receivables
Financial
liabilities at
amortised
cost
Derivatives used
as hedges
24
24
17
24
21
24
20
24
22
24
24
22
24
24
24
–
–
0.1
–
–
–
2.1
–
2.2
–
–
–
–
–
–
–
–
1.4
–
–
2.8
250.5
–
–
322.2
576.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(11.2)
(152.7)
(1.4)
(425.6)
–
(2.6)
0.5
(593.0)
–
0.1
–
–
–
0.3
–
–
0.4
–
–
–
–
(0.1)
–
–
(0.1)
Total
carrying
value
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)
(0.1)
(2.6)
0.5
(593.1)
Total
fair
value
1.5
0.1
0.1
2.9
250.5
0.3
2.1
322.2
579.7
(11.2)
(175.5)
(1.4)
(425.6)
(0.1)
(2.8)
0.5
(616.1)
Total
2.2
576.9
(593.0)
0.3
(13.6)
(36.4)
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 122
Notes
to
the
financial
statements
continued
122 Notes to the financial statements continued
26. Financial
risk
management
continued
As
at
31
March
2015
there
are
no
financial
assets
or
liabilities
that
have
a
fair
value
that
is
different
from
the
carrying
value.
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
as
at
31
March
2014:
all
figures
in
£
million
Assets
Finance
leases
Liabilities
Finance
leases
Non-‐current
bank
and
other
borrowings
Total
Level
1
Level
2
Level
3
–
–
–
–
4.4
(4.2)
(175.5)
(175.3)
–
–
–
–
Total
4.4
(4.2)
(175.5)
(175.3)
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
2015
100%
(2014:
100%)
of
the
Group’s
borrowings
were
at
fixed
rates
with
no
adjustment
for
interest
rate
swaps.
Financial
assets/(liabilities)
As
at
31
March
2015
all
figures
in
£
million
Sterling
US
dollar
Euro
Australian
dollar
Other
As
at
31
March
2014
all
figures
in
£
million
Sterling
US
dollar
Euro
Australian
dollar
Other
Fixed
or
capped
1.5
–
–
–
–
1.5
Fixed
or
capped
4.2
–
–
–
–
4.2
Financial
asset
Financial
liability
Floating
163.9
14.7
1.9
3.0
0.8
184.3
Non-‐interest
bearing
10.6
0.1
–
2.3
–
13.0
Fixed
or
capped
(1.4)
–
–
–
–
(1.4)
Floating
–
–
–
–
–
–
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
(0.6)
–
–
–
–
(0.6)
Non-‐interest
bearing
(0.1)
–
–
–
–
(0.1)
Floating-‐rate
financial
assets
attract
interest
based
on
the
relevant
national
LIBID
equivalent.
Floating-‐rate
financial
liabilities
bear
interest
at
the
relevant
national
LIBOR
equivalent.
Trade
and
other
receivables/payables
and
deferred
finance
costs
are
excluded
from
this
analysis.
For
the
fixed
or
capped-‐rate
financial
assets
and
liabilities,
the
average
interest
rates
(including
the
relevant
marginal
cost
of
borrowing)
and
the
average
period
for
which
the
rates
are
fixed
are:
Financial
assets:
Sterling
Financial
liabilities:
Sterling
US
dollar
Total
financial
liabilities
2015
Weighted
average
interest
rate
%
Fixed
or
capped
£m
Weighted
average
years
to
maturity
2014
Weighted
average
interest
rate
%
Fixed
or
capped
£m
Weighted
average
years
to
maturity
1.5
(1.4)
–
(1.4)
13.4
12.1
–
12.1
0.5
0.5
–
0.5
4.2
(4.0)
(152.7)
(156.7)
13.4
12.1
7.1
7.3
1.5
1.5
3.9
3.8
Sterling
assets
and
liabilities
consist
primarily
of
finance
leases
with
the
weighted
average
interest
rate
reflecting
the
internal
rate
of
return
of
those
leases.
QinetiQ Group plc Annual Report and Accounts 2015 123
123
Interest rate risk management
The Group private placement borrowings were repaid during the year and were fixed-rate, while the revolving credit facility is floating-rate
and undrawn as at 31 March 2015.
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 2015 – sterling
31 March 2014 – sterling
Net foreign currency monetary assets/(liabilities)
US$
(5.9)
(18.1)
Euro
2.0
(2.2)
AUS$
(0.1)
2.1
Other
0.8
0.6
Total
(3.2)
(17.6)
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 2015 against sterling are net US dollars sold £24.3m (US$36.0m) and net euros sold £1.1m (€1.5m).
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 does not hedge against translational currency exposure to
overseas net assets.
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 £198.8m (2014: £329.0m). The Group held cash and cash equivalents of £184.3m at 31 March 2015
(2014: £322.2m), 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 £142.7m (2014: £218.5m) 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.
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 124 Notes to the financial statements continued
124 Notes to the financial statements continued
26. Financial risk management continued
E) Liquidity risk
Borrowing facilities
As at 31 March 2015 the Group had a revolving credit facility (RCF) of US$100m and £166m (2014: US$250m and £118m).
The RCF is contracted until 2019 and is un-utilised as shown in the table below:
Committed facilities 31 March 2015
Freely available cash and cash equivalents
Available funds 31 March 2015
Committed facilities 31 March 2014
Freely available cash and cash equivalents
Available funds 31 March 2014
Interest rate:
LIBOR plus
0.65%
Total
£m
233.3
Drawn
£m
–
1.20%
267.9
–
Undrawn
£m
233.3
184.2
417.5
267.9
322.1
590.0
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 2015
all figures in £ million
Non-derivative financial liabilities
Trade and other payables
Recapitalisation fee
Finance leases
Derivative financial liabilities
Forward foreign currency contracts –
cash flow hedges
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
Book value
Contractual cash
flows
1 year or less
1–2 years
2–5 years
More than
5 years
(362.7)
1.1
(1.4)
(362.7)
–
(1.4)
(352.3)
–
(1.4)
(0.6)
(363.6)
(0.6)
(364.7)
(0.5)
(354.2)
(10.4)
–
–
(0.1)
(10.5)
–
–
–
–
–
–
–
–
–
–
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)
–
–
–
–
–
–
QinetiQ Group plc Annual Report and Accounts 2015
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
More
than
two
years
Derivative
assets/(liabilities)
at
the
end
of
the
year
Asset
gains
2015
Liability
losses
Net
Asset
gains
2014
Liability
losses
0.6
0.6
(0.6)
(0.6)
–
–
0.4
0.4
(0.1)
(0.1)
Asset
gains
2015
Liability
losses
Net
Asset
gains
2014
Liability
losses
0.5
–
0.1
0.6
(0.5)
(0.1)
–
(0.6)
–
(0.1)
0.1
–
0.3
0.1
–
0.4
(0.1)
–
–
(0.1)
G) Maturity
of
financial
liabilities
As
at
31
March
2015
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
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
Trade
and
other
payables
352.3
10.4
–
–
362.7
Trade
and
other
payables
425.6
11.2
–
–
436.8
Bank
borrowings
and
loan
notes
(0.3)
(0.3)
(0.5)
–
(1.1)
Bank
borrowings
and
loan
notes
(0.5)
26.6
126.1
–
152.2
Finance
leases
and
derivative
financial
instruments
1.9
0.1
–
–
2.0
Finance
leases
and
derivative
financial
instruments
2.7
1.4
–
–
4.1
125
125
Net
0.3
0.3
Net
0.2
0.1
–
0.3
Total
353.9
10.2
(0.5)
–
363.6
Total
427.8
39.2
126.1
–
593.1
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
2015
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’s
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
2015,
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
2015,
with
all
other
variables
remaining
constant.
Such
analysis
is
for
illustrative
purposes
only
–
in
practice
market
rates
rarely
change
in
isolation.
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
£0.4m
decrease
in
profit
before
tax.
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 126 Notes to the financial statements continued
126 Notes to the financial statements continued
26. Financial risk management continued
As at 31 March 2015
all figures in £ million
Sterling
US dollar
Other
all figures in £ million
Sterling
US dollar
Other
As at 31 March 2014
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
(1.6)
(0.1)
(0.1)
Equity
–
1.6
0.9
Profit
before tax
–
–
–
1% increase in interest rates
10% strengthening in sterling
Equity1
–
–
–
Profit
before tax
1.6
0.1
0.1
Equity
–
(1.3)
(0.7)
Profit
before tax
–
–
–
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 This relates to the impact on items charged directly to equity and excludes the impact on profit/loss for the year flowing into equity.
27. Cash flows from operations
For the year ended 31 March
all figures in £ million
Profit/(loss) after tax for the year
Adjustments for:
Taxation (income)/expense
Net finance costs
Loss on business divestments and disposal of investments
Reversal of unutilised restructuring provisions
Amortisation of purchased or internally developed intangible assets
Amortisation of intangible assets arising from acquisitions
Impairment of goodwill
Depreciation and impairment of property, plant and equipment
Loss on disposal of property, plant and equipment
Share of post-tax (loss)/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 relating to restructuring
Add back: disposal-related pension contribution
Less: cash generated from discontinued operations
Add back: cash outflow relating to pension scheme closure costs
Net cash flow from operations before restructuring costs
2015
104.7
(11.8)
4.1
12.9
(1.0)
1.5
3.6
–
22.0
1.2
0.1
3.6
(7.9)
–
(1.6)
131.4
2.6
27.3
(22.2)
7.7
139.1
0.6
6.0
(1.8)
–
143.9
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
–
(30.3)
4.0
127.0
QinetiQ Group plc Annual Report and Accounts 2015
127
127
28. Share capital and other reserves
Shares allotted, called up and fully paid:
At 1 April 2013
Issued in the year
At 31 March 2014
Issued in the year
Cancelled in the year
At 31 March 2015
£
6,604,764
–
Ordinary shares of 1p each (equity)
Number
660,476,373
–
6,604,764 660,476,373
–
–
(518,664)
(51,866,369)
6,086,100 608,610,004
Special Share of £1 (non-equity)
Number
1
–
1
–
–
1
£
1
–
1
–
–
1
£
6,604,765
–
Total
Number
660,476,374
–
6,604,765 660,476,374
–
–
(518,664)
(51,866,369)
6,086,101 608,610,005
Except as noted below all shares in issue at 31 March 2015 rank pari-passu in all respects.
In May 2014 the Company initiated a £150m capital return to shareholders by way of a share buyback. At 31 March 2015 £107m of this
programme was complete.
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;
to refer matters to the Board for its consideration in relation to the application of the Compliance Principles;
b)
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)
e)
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
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 31 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 2015 are 5,443,881 shares (2014: 7,811,861 shares).
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 128
Notes
to
the
financial
statements
continued
128 Notes to the financial statements continued
29.
Share-‐based
payments
The
Group
operates
a
number
of
share-‐based
payment
plans
for
employees.
The
total
share-‐based
payment
expense
in
the
year
was
£3.6m,
of
which
£3.4m
related
to
equity-‐settled
schemes
and
£0.2m
related
to
cash-‐settled
schemes
(year
to
31
March
2014:
£4.5m,
of
which
£3.4m
related
to
equity-‐settled
schemes
and
£1.1m
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
2015
2014
Number
–
–
–
–
Weighted
average
exercise
price
–
–
–
–
Number
352,314
(335,294)
(17,020)
–
Weighted
average
exercise
price
2.3p
2.3p
2.3p
–
The
2003
ESOS
are
equity-‐settled
awards.
In
respect
of
the
share
options
exercised
during
the
prior
year,
the
average
share
price
on
the
date
of
exercise
was
189.7p.
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
of
the
Remuneration
Committee.
Outstanding
at
start
of
year
Granted
during
year
Exercised
during
the
year
Forfeited/lapsed
during
year
Outstanding
at
end
of
year
2015
Number
of
shares
8,090,260
4,310,206
(461,196)
(2,481,862)
9,457,408
2014
Number
of
shares
7,351,207
3,489,504
(907,312)
(1,843,139)
8,090,260
PSP
awards
are
equity-‐settled
awards
and
those
outstanding
at
31
March
2015
had
an
average
remaining
life
of
1.3
years
(2014:
1.5
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
24%
(2014:
28%)
for
the
average
share
price
volatility
of
the
FTSE
comparator
group
and
51%
(2014:
52%)
for
the
average
correlation
to
the
comparator
group.
The
weighted
average
fair
value
of
grants
made
during
the
year
was
£1.57
(2014:
£1.88).
The
weighted
average
share
price
at
date
of
exercise
was
£1.97
(2014:
£1.84).
Of
the
options
outstanding
at
the
end
of
the
year
nil
were
exercisable
(2014:
nil).
Restricted
Stock
Units
(RSU)
In
prior
years
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
2015
Number
of
shares
3,819,001
–
(196,154)
(3,447,660)
175,187
2014
Number
of
shares
5,249,861
2,500,000
(354,362)
(3,576,498)
3,819,001
RSUs
are
equity-‐settled
awards;
those
outstanding
at
31
March
2015
had
an
average
remaining
life
of
1.1
years
(2014:
1.1
years).
There
is
no
exercise
price
for
these
RSU
awards.
The
weighted
average
share
price
at
date
of
exercise
was
£2.09
(2014:
£1.91).
The
weighted
average
fair
value
of
grants
made
during
the
prior
year
was
£1.88.
Of
the
awards
outstanding
at
the
end
of
the
year
none
were
exercisable
(2014:
nil).
QinetiQ Group plc Annual Report and Accounts 2015
129
129
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.
Outstanding
at
start
of
year
Exercised
during
year
Forfeited/lapsed
during
year
Outstanding
at
end
of
year
2015
Number
of
shares
5,018,288
(1,210,650)
(3,653,790)
153,848
2014
Number
of
shares
10,850,040
(979,853)
(4,851,899)
5,018,288
VSP
awards
are
equity-‐settled
awards;
those
outstanding
at
31
March
2015
had
an
average
remaining
life
of
0.2
years
(2014:
0.6
years).
There
is
no
exercise
price
for
these
VSP
awards.
The
weighted
average
share
price
at
date
of
exercise
was
£2.04
(2014:
£1.92).
Of
the
awards
outstanding
at
the
end
of
the
year
nil
were
exercisable
(2014:
nil).
Group
Share
Incentive
Plan
(SIP)
Under
the
QinetiQ
SIP
the
Group
offers
UK
employees
the
opportunity
of
purchasing
up
to
£150
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
2015
Number
of
matching
shares
725,904
280,267
(309,350)
(49,000)
647,821
2014
Number
of
matching
shares
1,009,663
228,066
(467,228)
(44,597)
725,904
SIP
matching
shares
are
equity-‐settled
awards;
those
outstanding
at
31
March
2015
had
an
average
remaining
life
of
1.5
years
(2014:
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
(2014:
nil).
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
of
the
Remuneration
Committee.
Outstanding
at
start
of
year
Granted
during
year
Exercised
during
the
year
Forfeited
during
year
Outstanding
at
end
of
year
2015
Number
of
matching
shares
1,162,896
303,639
(85,126)
(917,294)
464,115
2014
Number
of
matching
shares
914,621
502,060
–
(253,785)
1,162,896
DAB
matching
shares
are
equity-‐settled
awards;
those
outstanding
at
31
March
2015
had
an
average
remaining
life
of
1.2
years
(2014:
1.4
years).
The
weighted
average
fair
value
of
grants
made
during
the
year
was
£2.08
(2014:
£1.80).
The
weighted
average
share
price
at
date
of
exercise
was
£2.08
(2014:
n/a).
There
is
no
exercise
price
for
these
DAB
awards.
Of
the
shares
outstanding
at
the
end
of
the
year
nil
were
exercisable
(2014:
nil).
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
130 Notes to the financial statements continued
130 Notes to the financial statements continued
29. Share-based payments continued
Cash Alternative Units (CAUs)
During the year, the Group granted CAU awards to certain employees in the UK and US.
Outstanding at start of year
Awarded during year
Exercised during the year
Forfeited during year
Outstanding at end of year
2015
Number of
awards
1,229,541
94,894
(364,362)
(670,051)
290,022
2014
Number of
awards
2,246,979
–
(274,188)
(743,250)
1,229,541
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 2015 had an average remaining life of 0.8 years (2014: 1.8 years). There is no exercise price for these awards. The fair value of
the grants at 31 March 2015 was £1.91 (2014: £2.26) being the Group’s closing share price on that day. The weighted average share price
on the date of exercise was £2.08 (2014: £1.90). The carrying amount of the liability of the grants at the balance sheet date was £0.3m
(2014: £1.1m). Of the awards outstanding at the end of the year nil were exercisable.
Bonus Banking Plan (BBP)
During the year, the Group granted BBP awards to certain senior executives in the UK.
Outstanding at start of year
Awarded during year
Outstanding at end of year
2015
Number of
awards
–
330,725
330,725
The BBP is a remuneration scheme that runs for four years with effect from 1 April 2014. Refer to the Directors’ Remuneration Report for
further details. Under the BBP a contribution will be made by the Company into the participant’s plan account at the start of each plan
year. 50% of the plan account balance for Executive Directors and 75% for all other participants will be paid in cash or shares (at the
Company’s discretion) at the end of each plan year. 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
Audit Committee.
At 31 March 2015, the awards had an average remaining life of 1.7 years. There is no exercise price for these awards. The fair value of the
awards at 31 March 2015 was £1.91 being the Group’s closing share price on that day. 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.
QinetiQ Group plc Annual Report and Accounts 2015
131
131
30. Post-retirement benefits
Defined contribution plans
In the UK the Group operates two defined contribution plans for the majority of its UK employees: a Group Personal Pension Plan (GPP)
and a defined contribution section of the QinetiQ Pension Scheme. These are both 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. 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 final pensionable earnings at closure to future accrual. 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.
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.
The expected employer cash contribution to the Scheme for the year ending 31 March 2016 is £13.0m. The Group has no further payment
obligations once the contributions have been paid. Following the closure to future accrual, the income statement no longer includes an
expense in respect of defined benefit pension service costs.
Triennial funding valuation
The most recent completed full actuarial valuation of the Scheme was undertaken as at 30 June 2011 and resulted in an actuarially
assessed deficit of £74.7m.
The latest triennial valuation of the Scheme is being completed as at 30 June 2014. It is expected that the agreed recovery plan will require
£13m contributions per annum until 31 March 2018, the same annual funding level as previously. This includes £2.5m p.a. distributions to
the Scheme, indexed by reference to CPI, from the Group’s Pension Funding Partnership (see page 132).
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 132 Notes to the financial statements continued
132 Notes to the financial statements continued
30. 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 2012 QinetiQ established the QinetiQ PFP Limited Partnership (the ‘Partnership’) with the
Scheme. Under this arrangement, properties to the capitalised value of £32.3m were transferred to the Partnership. The transfers were
affected through a 20-year sale and leaseback agreement. The Scheme’s interest in the Partnership entitles it to an annual distribution
of approximately £2.5m for 20 years, indexed with reference to CPI. These contributions 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 2015 amounted to £nil (2014: £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 after deferred tax
2015
517.2
323.4
311.4
176.3
–
113.4
12.9
1,454.6
(1,494.0)
(39.4)
1.6
(37.8)
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)
* The Scheme has assets invested in a Liability Driven Investment portfolio. As at 31 March 2015 this hedges against approximately 20% of the interest rate and 45% of the
inflation rate risk, as measured on the Trustees’ gilt-funding basis.
** Includes allocations to high-yield bonds, secured loans and emerging market debt.
QinetiQ Group plc Annual Report and Accounts 2015
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
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
Actuarial
(loss)/gain
on
Scheme
liabilities
based
on:
Change
in
financial
assumptions
Experience
gains
Change
in
demographic
assumptions
Curtailment
gain
Net
benefits
paid
out
and
transfers
Closing
defined
benefit
obligation
Changes
to
the
net
pension
liability
all
figures
in
£
million
Opening
net
pension
liability
Current
service
cost
Net
finance
cost
Administrative
expenses
Curtailment
gain
Net
actuarial
loss
Contributions
by
the
employer
Closing
net
pension
liability
Total
income/expense
recognised
in
the
income
statement
all
figures
in
£
million
Current
service
cost
Past
service
gain
(including
curtailments)
Net
interest
on
the
net
defined
benefit
liability
Administrative
expenses
Total
expense/(income)
recognised
in
the
income
statement
(gross
of
deferred
tax)
133
133
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)
2014
(54.1)
(11.3)
(1.7)
(1.2)
31.1
(5.6)
20.6
(22.2)
2014
11.3
(31.1)
1.7
1.2
(16.9)
2015
1,304.6
53.9
116.3
9.2
(28.1)
(1.3)
1,454.6
2015
(1,326.8)
–
(54.5)
(128.3)
7.8
(20.3)
–
28.1
(1,494.0)
2015
(22.2)
–
(0.6)
(1.3)
–
(24.5)
9.2
(39.4)
2015
–
–
0.6
1.3
1.9
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
134 Notes to the financial statements continued
134 Notes to the financial statements continued
30. Post-retirement benefits continued
Assumptions
The major assumptions used in the IAS 19 valuation of the Scheme 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)
2015
3.2%
2.1%
88
91
91
93
2014
4.2%
2.6%
88
90
90
92
The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, because of
the timescale covered, may not necessarily be borne out in practice. It is important to note that these assumptions are long term and,
in the case of the discount rate and the inflation rate, are measured by external market indicators. The mortality assumptions as at
31 March 2015 were 90% of S2PMA for males and 90% of S2PFA for females, based on year of birth making allowance for improvements in
mortality in line with CMI_2013 Core Projections and a long-term rate of improvement of 1.5% per annum. These assumptions adopted at
the previous year end were 90% of S1PMA for males and 90% 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.
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 (and other assets) 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
Indicative impact on Scheme liabilities
(before deferred tax)
Increase/decrease by 0.1%
Decrease/increase by £28m
Increase/decrease by 0.1%
Increase/decrease by £28m
Increase by one year
Increase by £37m
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 plan, the Group is exposed to a number of risks, the most significant of which are detailed below:
Volatility in market
conditions
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 finance expense in the
Group’s income statement.
Choice of accounting
assumptions
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.
Inflation rate risk
The majority of the Scheme’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.
QinetiQ Group plc Annual Report and Accounts 2015
135
135
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.
31. Transactions
with
the
MOD
The
MOD
continues
to
own
its
Special
Share
in
QinetiQ
which
conveys
certain
rights
as
set
out
in
note
28.
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.
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.
MOD’s
generic
compliance
regime
Adherence
to
the
generic
compliance
system
is
monitored
by
the
Risk
&
CSR
Committee.
Refer
to
the
Committee’s
report
within
the
Corporate
governance
statement
on
page
71.
Strategic
assets
Under
the
Principal
Agreement
with
the
MOD,
the
QinetiQ
controlled
Group
is
not
permitted
without
the
written
consent
of
the
MOD,
to:
dispose
of
or
destroy
all
or
any
part
of
a
strategic
asset;
or
i)
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
2015
was
£7.5m
(2014:
£1.3m).
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.
32. Contingent
liabilities
and
assets
Subsidiary
undertakings
within
the
Group
have
given
unsecured
guarantees
of
£36.2m
at
31
March
2015
(2014:
£40.3m)
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.
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 136 Notes to the financial statements continued
136 Notes to the financial statements continued
33. Capital commitments
The Group had the following capital commitments for which no provision has been made:
all figures in £ million
Contracted
2015
30.8
2014
38.7
Capital commitments at 31 March 2015 include £30.5m (2014: £37.8m) in relation to property, plant and equipment that will be wholly
funded by a third-party customer under long-term contract arrangements.
34. Subsidiaries
The companies listed below are those which were part of the Group at 31 March 2015 and which, in the opinion of the Directors,
significantly affected the Group’s results and net assets during the year. The Directors consider that those companies not listed are not
significant in relation to the Group as a whole. A comprehensive list of all subsidiaries will be disclosed as an appendix to the Group’s
annual return.
Name of company
Subsidiaries1,2
QinetiQ Group Holdings Limited
QinetiQ Holdings Limited
QinetiQ Limited
QinetiQ Overseas Holdings Limited
QinetiQ US Holdings, Inc.
Foster-Miller, Inc.
Principal area of operation
Country of incorporation
UK
UK
UK
UK
US
US
England & Wales
England & Wales
England & Wales
England & Wales
US
US
1 Accounting reference date is 31 March. All principal subsidiary undertakings listed above have financial year ends of 31 March and 100% of the ordinary shares are owned by the
Group.
2 QinetiQ Group Holdings Limited is a direct subsidiary of QinetiQ Group plc. All other subsidiaries are held indirectly by other subsidiaries of QinetiQ Group plc.
QinetiQ Group plc Annual Report and Accounts 2015
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 (liabilities)/assets
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.
137
137
Note
2015
2014
2
3
4
6
6
6
6
458.2
458.2
81.6
81.6
(205.5)
(123.9)
334.3
454.8
454.8
79.5
79.5
(64.6)
14.9
469.7
334.3
469.7
6.6
39.9
147.6
140.2
334.3
6.6
39.9
147.6
275.6
469.7
The financial statements of QinetiQ Group plc (company number 4586941) were approved by the Board of Directors and authorised
for issue on 21 May 2015 and were signed on its behalf by:
Mark Elliott
Chairman
Steve Wadey
Chief Executive Officer
David Mellors
Chief Financial Officer
QinetiQ Group plc Annual Report and Accounts 2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 138 Notes to the Company financial statements
138 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 29 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 Group Holdings Limited
Capital contributions arising from share-based payments to employees of subsidiaries
2015
424.3
33.9
458.2
A list of all principal subsidiary undertakings of QinetiQ Group plc is disclosed in note 34 to the Group financial statements.
2014
424.3
30.5
454.8
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 28 to the Group financial statements.
2015
81.6
2014
79.5
2015
205.5
2014
64.6
QinetiQ Group plc Annual Report and Accounts 2015
6.
Reserves
all
figures
in
£
million
At
1
April
2014
Profit
for
the
year
Purchase
of
own
shares
Purchase
and
cancellation
of
shares
Share-‐based
payments
–
settlement
Dividend
paid
Share-‐based
payments
At
31
March
2015
At
1
April
2013
Profit
for
the
year
Purchase
of
own
shares
Share-‐based
payments
–
settlement
Dividend
paid
Share-‐based
payments
At
31
March
2014
Issued
share
capital
6.6
–
–
(0.5)
–
–
–
6.1
6.6
–
–
–
–
–
6.6
Capital
redemption
reserve
39.9
–
–
0.5
–
–
–
40.4
39.9
–
–
–
–
–
39.9
Share
premium
147.6
–
–
–
–
–
–
147.6
147.6
–
–
–
–
–
147.6
Profit
and
loss
275.6
0.2
(0.6)
(107.1)
0.6
(31.7)
3.2
140.2
194.9
103.7
(0.5)
0.9
(26.8)
3.4
275.6
139
139
Total
equity
469.7
0.2
(0.6)
(107.1)
0.6
(31.7)
3.2
334.3
389.0
103.7
(0.5)
0.9
(26.8)
3.4
469.7
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
29
to
the
Group
financial
statements.
8.
Other
information
Directors’
emoluments,
excluding
Company
pension
contributions,
were
£2.9m
(2014:
£3.1m).
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
2015
was
£178,000
(2014:
£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.
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information
140
Five-‐year
record
for
the
years
ended
31
March
(unaudited)
140 Five-year record
for the years ended 31 March (unaudited)
EMEA
Services
(formerly
UK
Services)
Global
Products
Revenue
–
continuing
operations
Discontinued
operations
(US
Services)
Revenue
–
total
Group
EMEA
Services
(formerly
UK
Services)
Global
Products
Underlying
operating
profit1
–
continuing
operations
Discontinued
operations
(US
Services)
Underlying
operating
profit1
–
total
Group
Profit/(loss)
before
tax
Profit/(loss)
attributable
to
equity
shareholders
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
Continuing
operations:
Orders
Underlying
operating
margin1
Underlying
profit
before
tax1
Profit/(loss)
before
tax
Profit/(loss)
after
tax
Underlying
basic
EPS1
Basic
EPS
Underlying
net
cash
from
operations
(post
capex)1
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Pence
Pence
Pence
Pence
£m
£m
£m
%
£m
£m
£m
Pence
Pence
£m
2015
625.6
138.2
763.8
55.7
819.5
93.0
18.3
111.3
1.2
112.5
105.4
104.7
15.3
16.6
16.5
5.4
116.7
195.5
6,454
613.6
14.6
107.8
105.4
117.4
15.2
18.6
114.9
2014
607.0
175.6
782.6
408.8
1,191.4
86.7
27.0
113.7
19.0
132.7
4.1
(12.7)
16.0
(1.9)
(1.9)
4.6
136.5
170.5
9,134
596.9
14.5
101.2
84.0
68.0
13.8
10.4
106.2
20134
594.6
269.4
864.0
463.8
1,327.8
84.8
60.2
145.0
23.7
168.7
(137.0)
(133.2)
18.9
(20.5)
(20.5)
3.8
175.9
74.0
9,772
626.1
16.8
128.4
103.7
89.9
16.6
13.9
137.7
20123
620.9
325.0
945.9
523.7
1,469.6
20112,3
663.7
442.6
1,106.3
596.3
1,702.6
56.3
66.2
127.5
37.1
159.6
316.3
246.3
13.6
37.9
37.6
2.9
45.8
52.1
97.9
45.8
143.7
7.9
(8.8)
13.0
(1.3)
(1.3)
1.6
235.4
(122.2)
10,637
265.8
(260.9)
12,033
706.8
13.0
73.1
288.3
233.9
10.5
36.0
1,417.2
8.8
58.0
(29.9)
(29.6)
7.9
(4.5)
217.3
214.5
1
Underlying
measures
are
stated
before
specific
adjusting
items.
Definitions
of
underlying
measures
of
performance
are
in
the
glossary
on
page
141.
Underlying
financial
measures
are
presented
because
the
Board
believes
these
provide
a
better
representation
of
the
Group’s
long-‐term
performance
trend.
For
details
of
specific
adjusting
items
refer
to
Note
4
of
the
financial
statements.
2
The
2011
figures
have
been
restated
to
reflect
the
transfer
of
businesses
from
Global
Products
to
UK
Services
and
US
Services
at
the
beginning
of
the
2012
financial
year.
3
IAS
19
(revised)
‘Employee
Benefits’
was
adopted
for
2013
and
the
2012
and
2011
comparatives
have
been
restated
accordingly.
4
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.
2012
and
2011
have
also
been
restated
to
reflect
the
reclassification
of
Cyveillance®
from
US
Services
to
EMEA
Services.
QinetiQ
Group
plc
Annual
Report
and
Accounts
2015
QinetiQ Group plc Annual Report and Accounts 2015 Glossary
AGM
CAGR
C4ISR
CPI
CR
CSR
DAB
DE&S
DHS
DoD
EBITDA
EMEA
EPS
FMI
Funded backlog
Gearing ratio
IAS
IFRS
KPI
LIBID
LIBOR
LTPA
MOD
MSCA
OHSAS
Orange book
Organic growth
Annual General Meeting
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
Foster-Miller, Inc. – the legal entity through
which the US Products division operates
The expected future value of revenue from
contractually committed and funded customer
orders (excluding the £998m third-term re-pricing
of the LTPA contract)
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
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
Occupational Health and Safety Advisory Services
Single-source pricing regulations used by UK
Government from 1 April 2015. Replaces the
Yellow Book regulations
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
141
PBT
PSP
QNA
QSOS
R&D
RSU
Specific
adjusting items
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; 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; tax on the
preceding items; and tax credits on one-off recognition
of deferred tax asset in respect of UK trade losses
SDSR
SSRO
TSR
Strategic Defence and Security Review
Single Source Regulations Office
Total shareholder return
UK Corporate
Governance Code
Guidelines of the Financial Reporting
Council to address the principal aspects
of corporate governance
UK GAAP
UK Generally Accepted Accounting Practice
Underlying basic
earnings per share
Basic earnings per share as adjusted to exclude
‘specific adjusting items’
Underlying
effective tax rate
The tax charge for the year excluding the tax impact
of ‘specific adjusting items’ expressed as a
percentage of underlying profit before tax
Underlying
net cash from
operations
(post capex)
Underlying net
finance costs
Underlying
operating cash
conversion
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 margin
Underlying operating profit expressed
as a percentage of revenue
Underlying
operating profit
Operating profit as adjusted to exclude
‘specific adjusting items’
Underlying profit
before tax
Profit before tax as adjusted to exclude
‘specific adjusting items’
VSP
Yellow Book
Value Sharing Plan
Single-source pricing regulations used by MOD
up to 2015. Now replaced by the Orange Book
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 142 Shareholder information
Shareholding enquiries
The Company’s registrar is Equiniti. Enquiries regarding your
shareholding, including the following administrative matters,
should be addressed to Equiniti:
• Change of personal details such as change of name or address.
• Lost share certificates.
• Dividend payment enquiries.
• Direct dividend payments. You can have your dividends paid
directly into a UK bank or building society account by completing
a dividend mandate form. 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.
• Tax voucher enquiries. Tax vouchers are sent to a shareholder’s
registered address. 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.
Shareholders who prefer to continue receiving a tax voucher
with each dividend payment, rather than a consolidated tax
voucher, can contact Equiniti to request this.
Contact details for registrar
By post:
Equiniti Limited, Aspect House, Spencer Road, Lancing,
West Sussex BN99 6DA
By telephone:
0871 384 2021* for UK calls
+44 (0)121 415 7576 for calls from outside the UK
* 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.
By email:
You can send an email enquiry securely from Equiniti’s website,
at https://help.shareview.co.uk.
Online:
Equiniti’s website at https://help.shareview.co.uk (Shareview)
includes answers to frequently asked questions and provides key
forms for download. Shareview also offers online access to your
shareholding where you can manage your account, register for
electronic communications, see details of balance movements and
complete certain amendments online, such as changes to dividend
mandate instructions. You can register at www.shareview.co.uk,
click on ‘Register’ and follow the steps.
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 2015 Annual General Meeting
online quickly and easily using the Sharevote service by visiting
www.sharevote.co.uk.
Donating shares to charity – ShareGift
Small parcels of shares, which may be uneconomic to sell on their
own, can be donated to ShareGift, the share donation charity
(registered charity no. 1052686). ShareGift transfers these holdings
into their name, aggregates them, and uses the proceeds to support
a wide range of UK charities based on donor suggestion. If you would
like further details about ShareGift, please visit www.sharegift.org,
email help@sharegift.org or telephone them on 020 7930 3737.
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 2015:
240
220
200
180
160
140
120
31 Mar 14
30 May 14
31 Jul 14
30 Sep 14
30 Nov 14
31 Jan 15
31 Mar 15
The share prices used in the graph above are the mid-market prices
as derived from the London Stock Exchange Daily Official List.
Analysis of Share Register at 31 March 2015
By type
of holder
Individuals
Institutions and others 868
Number
of holdings
5,923
% of total
holdings
87.22%
12.78%
Shares
held
6,171,964
602,438,040
% of share
capital
1.01%
98.99%
Total
By size of holding
1–500
501–1,000
1,001–5,000
5,001–10,000
10,001–100,000
Over 100,000
Total
6,791
100.00%
608,610,004
100.00%
4,385
617
1,135
195
239
220
6,791
64.57%
9.09%
16.71%
2.87%
3.52%
3.24%
890,912
498,216
2,783,820
1,455,210
8,159,016
594,822,830
0.15%
0.08%
0.46%
0.24%
1.34%
97.73%
100.00%
608,610,004
100.00%
QinetiQ Group plc Annual Report and Accounts 2015 Additional information
143
Beware of share fraud
Fraudsters use persuasive and high-pressure tactics to lure investors
into scams. They may offer to sell shares that turn out to be worthless
or non-existent, or to buy shares at an inflated price in return for an
upfront payment. While high profits are promised, if you buy or sell
shares in this way you will probably lose your money.
How to avoid share fraud
1. Keep in mind that firms authorised by the FCA are unlikely to
contact you out of the blue with an offer to buy or sell shares.
2. Do not get into a conversation, note the name of the person
and firm contacting you and then end the call.
3. Check the Financial Services Register from www.fca.org.uk
to see if the person and firm contacting you is authorised
by the FCA.
4. Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details.
5. Use the firm’s contact details listed on the Register if you want
to call it back.
7.
6. Call the FCA on 0800 111 6768 if the firm does not have contact
details on the Register or you are told they are out of date.
Search the list of unauthorised firms to avoid at www.fca.org.uk/scams.
8. Consider that if you buy or sell shares from an unauthorised firm
you will not have access to the Financial Ombudsman Service
or Financial Services Compensation Scheme.
9.
Think about getting independent financial and professional
advice before you hand over any money.
10. Remember: if it sounds too good to be true, it probably is!
Report a scam
•
If you are approached by fraudsters please tell the FCA using the
share fraud reporting form at www.fca.org.uk/scams, where you
can find out more about investment scams.
You can also call the FCA Consumer Helpline on 0800 111 6768.
If you have already paid money to share fraudsters you should
contact Action Fraud on 0300 123 2040.
•
•
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.
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
Advisors
Corporate brokers
J.P.Morgan
25 Bank Street
London
E14 5JP
Bank of America Merrill Lynch
2 King Edward Street
London
EC1A 1HQ
Principal legal advisor
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Key dates
22 July 2015
22 July 2015
6 August 2015
7 August 2015
4 September 2015
30 September 2015
19 November 2015
February 2016
31 March 2016
May 2016
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Interim management statement
Annual General Meeting
Ordinary shares marked ex-dividend
Final 2015 dividend record date
Final 2015 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)
Strategic reportQinetiQ Group plc Annual Report and Accounts 2015GovernanceFinancial statementsAdditional information 144 Notes
QinetiQ Group plc Annual Report and Accounts 2015 This report is printed on Claro Silk paper. Manufactured at a mill that is FSC® accredited.
Certified to both ISO 14001 Environmental Standard and to the European Eco-Management and Audit Scheme.
Printed by Principal Colour.
Principal Colour are ISO 14001 certified, Alcohol Free and FSC® Chain of Custody certified.
Designed and produced by SampsonMay
Telephone: 020 7403 4099 www.sampsonmay.com
Registered office
Cody Technology Park
Ively Road, Farnborough
Hampshire GU14 0LX
United Kingdom
Tel: +44 (0) 1252 392000
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