Qinetiq Group Plc Annual Report 2016

FY2016 Annual Report · Qinetiq Group Plc

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Becoming
the chosen
partner

QinetiQ Group plc
Annual Report and Accounts 2016

QinetiQ is a leading science and
engineering company operating primarily
in the defence, security and aerospace
markets. We work in partnership with our
customers to solve real world problems
through innovative solutions, delivering
operational and competitive advantage.

The world around us is changing. We are responding
decisively by establishing a vision and strategy for QinetiQ
to ensure we continue to meet customer needs. Our vision is:
“to be the chosen partner around the world for mission-critical
solutions, innovating for our customers’ advantage.”

We have reorganised the Group, introducing a new way
of working which aligns the organisation with our strategy,
and launched a transformation programme to deliver the
changes we need to make as a company.

The model below sets out our plan to adapt and deliver
in a changing world. Further detail can be found on
the following pages.

Steve Wadey
Chief Executive Officer

CREATING THE
CONDITIONS FOR
GROW TH
Page 06

VISION
AND
STRATEGY
page 10

WAY OF WORKING

page 12

MARKET OVERVIEW

Page 08

TRANSFORMATION PROGRAMME

page 14

Through their technical expertise, domain
know-how and innovative thinking, our
engineers and scientists are uniquely
placed to help customers meet challenges
that define the modern world.

We inspire confidence by working in partnership
with our customers to ensure that they meet
their goals, first time, every time.

Markets: defence, security and aerospace, with a growing
position in select adjacent markets.

Customers: predominantly government organisations,
including defence departments, as well as international
customers in other targeted sectors.

Home markets: UK, US and Australia, with projects
delivered in more than 10 other countries.

Divisions: EMEA Services and Global Products.

People:

6,207 worldwide

STRATEGIC REPORT
Overview
Key highlights
Our business model
Chairman’s statement
Chief Executive Officer’s statement
Market overview
Our vision and strategy
Our way of working
Our transformation programme
Strategy in action
Key performance indicators
Corporate responsibility

Performance
Operating review
– EMEA Services
– Global Products
Chief Financial Officer’s review
Principal risks and uncertainties

GOVERNANCE
Corporate governance statement
– Leadership
– Board of Directors
– Effectiveness
– Accountability
– Relations with shareholders
Directors’ remuneration report
Directors’ report
Independent auditor’s report

FINANCIAL STATEMENTS
Consolidated income statement
Consolidated comprehensive income statement
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
Company statement of changes in equity
Notes to the company financial statements
Five-year record

ADDITIONAL INFORMATION
Glossary
Shareholder information
Additional information

QinetiQ app for tablets
and smartphones

ar2016.QinetiQ.com

You can view this Annual Report and Accounts, and all other results materials
at www.QinetiQ.com. In addition, the QinetiQ investor relations app for tablets
and smartphones gives you the latest investor and financial media information.
The app allows you to get the latest share price information and corporate news,
as well as view our financial reports.

02
03
04
06
08
10
12
14
16
22
26

34
34
35
38
42

50
54
58
60
64
78
80
96
100

103
104
104
105
106
106
107
145
146
146
148

149
150
152

QinetiQ Group plc Annual Report and Accounts 2016Key highlights

A solid operational performance
in challenging markets

Financial highlights

Operational highlights

Revenue

£755.7m

2015: £763.8m

Underlying operating profit*

£108.9m

2015: £111.3m

782.6

763.8

755.7

113.7

111.3

108.9

2014

2015

2016

2014

2015

2016

Underlying EPS*

16.3p

2015: 15.2p

16.3

15.2

13.8

Net cash

£274.5m

2015: £195.5m

274.5

195.5

170.5

2014

2015

2016

2014

2015

2016

Dividend per share

5.7p

2015: 5.4p

5.4

5.7

4.6

Profit/(loss) after tax

£106.1m

2015: £104.7m

104.7

106.1

(12.7)

2014

2015

2016

2014

2015

2016

Aircraft
engineering
services contract
delivers more
for less

Awarded five-year renewal which represents a
new way of doing business with the Ministry of
Defence (MOD) where QinetiQ is measured and
paid on results and outputs, not inputs.

Contract value

£153m

The first ever
UK launch, and
subsequent
engagement
of a ballistic
missile in space

Coordinated three weeks of allied at-sea
operations and live weapons firing, at
Europe’s largest range: the QinetiQ-operated
Hebrides range.

Multiple world firsts

Supporting delivery
of launch systems
and arresting gear
on the US Navy’s
next-generation
aircraft carrier

Won a multi-year production contract to update,
procure, assemble and test launch and arresting
control hardware and software for the CVN-79
John F. Kennedy.

Contract value

$16m

Year end references (2016, 2015, 2014) relate to the years ending 31 March.

* Definitions of specific adjusting items and underlying measures of performance can be found in the glossary on page 149.

QinetiQ Group plc Annual Report and Accounts 2016Our business model

How we create
customer value

QinetiQ is a company of scientists and
engineers essential to sovereign capability.
The technical expertise and domain
know-how of our people are our principal
sources of competitive advantage and are
well matched to the emerging themes in
our markets. By leveraging our distinctive
facilities and integrating our core
capabilities, we play a critical role in
helping customers meet current and
future challenges.

QinetiQ’s customer relationships and
know-how about customer domains
have been developed over many years
of working in partnership. We also work
collaboratively with prime contractors and
a broad-based supply chain that includes
small and medium-sized companies,
as well as academic institutions.

Our principal revenue streams are advice,
services (particularly test and evaluation)
and technology-based products.

We work across the equipment lifecycle
from initial concept through to final
disposal. At the start of the lifecycle, our
focus is on research and experimentation.
We then test and evaluate next generation
equipment to help customers to control
risks and determine the best options.
Once a new capability has been adopted,
we train users and facilitate the rehearsal
of how equipment will be used most
effectively in an operational environment.

By providing mission-critical solutions,
we deliver operational and competitive
advantage to our customers, ensuring
they meet their goals faster, more cost
effectively and with greater confidence.

Our business model is robust and sustainable
because our knowledge base is constantly
refreshed as we learn from experience,
understand emerging customer needs and
invest in our future. This enables us to both
sustain existing capabilities and create new
ones to ensure we respond to customer
needs and stay ahead of the competition.

As a business whose reputation and
achievements are centred on our people,
QinetiQ has relatively low capital and
resource requirements. Our future success
is primarily dependent on our ability
to recruit, develop, engage and retain
exceptional employees, including
subject matter experts and specialists
of international standing.

LIFECYCLE

Generation
After Next

Next
Generation

Current
Generation

Experimentation
& Research

Test
& Evaluation

Training
& Rehearsal

OUR ROLE

Advice

Services

Products

DELIVERING
CUSTOMER
ADVANTAGE

OUR CORE

Science & Engineering Capability

Understanding
Future Needs

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationChairman’s statement

The next chapter
for QinetiQ

Key highlights

FY16* Performance
• Solid operating performance
in challenging markets

Board appointments
•
•

Steve Wadey appointed as CEO
Lynn Brubaker appointed as
Non-executive Director

Defining QinetiQ’s future direction
•
Set out a vision and strategy
• Capital allocation policy published

6% increase in full year dividend
£150m capital return completed

Shareholder returns
•
•
• £50m buyback announced in November
2015, £47m remains to be completed

* FY = Financial year to 31 March.

Results
In a year that marked the tenth anniversary
of QinetiQ’s listing on the London Stock
Exchange, it was appropriate that we
embarked on the next chapter as a publicly-
listed company. During the year, we
appointed Steve Wadey as our new Chief
Executive Officer (CEO), set out a vision and
strategy for QinetiQ and delivered a solid
operating performance in challenging markets.

In the year to 31 March 2016, orders grew
8% to £659.8m (2015: £613.6m), Group
revenue was £755.7m (2015: £763.8m), and
underlying operating profit* was £108.9m
(2015: £111.3m). Full year underlying
earnings per share* were 16.3p (2015: 15.2p).
Total Group profit after tax was £106.1m
(2015: £104.7m). Underlying operating
cash conversion remained strong at 96%
(2015: 103%) with net cash increasing
to £274.5m (2015: £195.5m).

FY17 outlook
The UK Government’s Strategic Defence and
Security Review has brought clarity to key
defence programmes but will require further
savings to be delivered from ongoing defence
transformation. This will provide future
opportunities for EMEA Services to build
on its strong record of delivering more for
less, whilst recognising that in the short term
there will continue to be uncertainty and the
potential for interruptions to order flow.
Although revenue under contract for FY17
is slightly below that of a year ago, the
division’s performance as a whole is
expected to remain steady this year.

The Group’s Global Products division has
shorter order cycles than EMEA Services.
At the beginning of the financial year, FY17
revenue under contract was slightly above
that of a year ago, but the performance
of Global Products remains dependent on
the timing and shipment of key orders.

Overall, the Board’s expectations for Group
performance this financial year remain
unchanged.

Employees and leadership
On 27 April 2015, the Board was delighted
to appoint Steve Wadey as CEO. We were
looking for an outstanding leader with a track
record of driving growth, a deep understanding
of the defence sector and the technological
know-how to lead our people; Steve met all
these criteria.

Steve was attracted to the role by the
expertise of our employees who are held
in high regard across industry. In an
environment where we are witnessing
increasing security threats, many of which
can only be met through innovative thinking,
there is strong demand for this expertise; we
would like to thank employees across QinetiQ
for their hard work and dedication this year.

Steve’s first move as CEO was to establish
a Leadership Community QinetiQ, bringing
together the top 100 leaders every month for
the first time. I have seen first-hand how this
community is contributing to the future
direction of the company and would like
to put on record my appreciation for this
step-change in leadership.

QinetiQ Group plc Annual Report and Accounts 2016Not only are our leaders accountable for
driving business performance, they also
ensure that we are behaving responsibly to
the benefit of all our stakeholders – so that
we operate safely, uphold strong governance,
support environmental stewardship of the
sites which we operate, and invest in our
local communities.

A £150m share buyback, which
commenced on 28 May 2014, following the
disposal of US Services, was completed by
30 September 2015 with 72.5m shares
purchased in total. In November 2015,
we were pleased to be able to announce
a further £50m share repurchase, of which
£47m remains to be completed.

Customers
Over the last year, this new leadership team
has injected great energy and fresh thinking
to accelerate our transformation to a more
customer-focused company. Achieving our
ambition of becoming the chosen partner
will require a relentless focus on continuing
to meet our customers’ needs in both
defence and commercial markets. There is
much more to do, but QinetiQ’s customer
satisfaction scores remain strong, so we
have a good foundation to build on.

Shareholders
Along with customers and employees,
shareholders are key stakeholders in QinetiQ
as the owners of the company. We would
like to thank our investors for their continued
support this year and for their constructive
dialogue, particularly during the CEO transition.

We are clear that continued capital discipline
underpins growing, sustainable returns and
that unlocking QinetiQ’s unrealised potential
requires focused investment in growth.
In recognition of this, our priorities for
capital allocation are: organic investment
complemented by bolt-on acquisitions
where there is a strong strategic fit, the
maintenance of balance sheet strength,
a progressive dividend, and the return of
excess cash to shareholders.

The Board proposes a final dividend of 3.8p
per share for the year ended 31 March 2016
(2015: 3.6p), making the full year dividend
5.7p (2015: 5.4p). Subject to approval at the
Annual General Meeting, the final dividend
will be paid on 2 September 2016 to
shareholders on the register at 5 August
2016. The full year dividend represents an
increase of 6%, reflecting our commitment
to a progressive dividend.

* Definitions of underlying measures of performance

can be found in the glossary on page 149.

Strategy
Strategic growth, balanced with capital
discipline, is the top priority we have set as
a Board this year and the mandate we gave
to Steve on his appointment. The Board has
been actively engaged in the development
of a revised strategy for QinetiQ and fully
endorses the future direction. We are
encouraged by the progress that has been
made this year and will continue to support the
leadership team with the successful delivery
and implementation of strategic priorities.

The Board
The other priorities we have set as a Board
are succession planning and ensuring the
effective stewardship of QinetiQ through
appropriate governance processes and
systems of control. The Board recognises
that good governance is fundamental to
the successful delivery of our strategy as it
ensures the continued support of customers,
employees and other key stakeholders.
This year has seen an external evaluation of
the effectiveness of the Board and details
can be found on page 61.

In January 2016 we announced the
appointment of Lynn Brubaker as a Non-
executive Director. Lynn has spent her career
in the aerospace industry, culminating in
her appointment as Vice President and
General Manager of Commercial Aerospace
at Honeywell International. Her international
experience is particularly relevant to QinetiQ
and we were pleased to welcome her to
the Board.

I would like to thank Board members for
the support they have given me this year.

Mark Elliott
Non-executive Chairman
26 May 2016

Current Board
Committee members

Page 58

Audit Committee

Paul Murray, Committee Chairman
Lynn Brubaker
Admiral Sir James Burnell-Nugent
Michael Harper
Ian Mason
Susan Searle

Nominations Committee

Mark Elliott, Committee Chairman
Lynn Brubaker
Admiral Sir James Burnell-Nugent
Michael Harper
Ian Mason
Paul Murray
Susan Searle
Steve Wadey

Remuneration Committee

Michael Harper, Committee Chairman
Lynn Brubaker
Admiral Sir James Burnell-Nugent
Mark Elliott
Ian Mason
Paul Murray
Susan Searle

Risk & CSR Committee

Admiral Sir James Burnell-Nugent,
Committee Chairman
Lynn Brubaker
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

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationChief Executive Officer’s statement

Creating the conditions
for growth

As a leading science
and engineering company
operating primarily in
the defence, security and
aerospace markets, QinetiQ
analyses and anticipates
how global security threats
are evolving.

QinetiQ will innovate and
invest carefully to grow its
market share and sources
of revenue.

Responding decisively to a changing
market environment
The world around us is changing. Day by
day we witness increasing global security
threats both at home and abroad. We also
see government budgets continuing to be
under pressure. Customers are looking to
achieve more with less and demanding
better value for money. This requires greater
efficiency, innovation and collaboration both
domestically and with international partners.
We recognise that staying the same will
not be good enough in a changing world.

As a company we have a solid foundation
to build on, because our core competences
are well matched to emerging themes in our
markets. We have considerable breadth and
depth of knowledge and capability that we can
deliver for our customers, particularly in test
and evaluation, and science and technology.
Not only are our people critical to sovereign
capability, we are also experienced in delivering
more for less and responding to new
challenges through innovation in services,
products and business models. Last year our
customer satisfaction scores remained strong
at more than eight out of ten. Customers have
requirements we can meet if we remain
sufficiently agile and responsive to connect their
requirements with the strength and depth of our
core technical and engineering competences.

QinetiQ Group plc Annual Report and Accounts 2016

Our vision and strategy
We have established an ambitious vision
that defines where we want to be in five
to ten years’ time, building on our strengths.

Our vision is: “to be the chosen partner
around the world for mission-critical solutions,
innovating for our customers’ advantage”.

To realise our vision, we are implementing
strategic priorities designed to grow the company
by focusing on our primary UK customer, on
international customers and on innovation.

Transforming our way of working
We are embedding a new way of working to
align the organisation with our strategy and
ensure we are agile and responsive in meeting
customer needs. We have also launched
a transformation programme to deliver the
key changes that we need to put in place as
a company to achieve growth, in particular the
dynamic resourcing of people and assets from
across QinetiQ to deliver better value for money
and a more efficient service for our customers.

Improving customer focus and competitiveness
are our immediate priorities. The savings we
deliver through improved efficiencies and greater
agility will ensure we remain one step ahead of
the competition and also create the headroom so
that we can invest in our future. This will allow us
to invest carefully in research and development,
improve skills and processes, take and manage
risk more effectively on our customers’ behalf,
and pursue campaigns to grow the company.

Delivering benefits to our key stakeholders
Although market headwinds are strong, by
working together and encouraging our people’s
entrepreneurial spirit, we are creating
a customer-focused, collaborative and
competitive environment in order to deliver
growth. Our customers will benefit through
better products and services, increased
responsiveness and improved value for money.
Our employees will benefit through greater
opportunities to work in integrated teams,
utilising their expertise across multiple domains
throughout QinetiQ. Over the medium term
we expect our shareholders to benefit through
growth in quality earnings as we realise our
vision and deliver our full potential.

Steve Wadey
Chief Executive Officer
26 May 2016

The world around us is changing. We are responding decisively by establishing a vision
and strategy for QinetiQ to ensure we continue to meet customer needs. We have reorganised
the Group, introducing a way of working which aligns the organisation with our strategy,
and launched a transformation programme to deliver the changes we need to make as
a company. The model below sets out our plan to adapt and deliver in a changing world.

Increasing security threats

Common themes across our markets
•
• Government budgets under pressure
• Drive for greater efficiency

International partnerships

•
• Need for innovation

Page 08 – Market overview

VISION
AND
STRATEGY

Our vision defines
where we want to be
as a company. To realise our
vision we are implementing
strategic priorities designed
to create the conditions
for growth.

page 10

WAY OF WORKING

Our new way of working ensures we are responsive in
meeting customer needs. In particular, dynamic resourcing
of people and resources from across QinetiQ delivers
better value for money and a more efficient service
for our customers.

page 12

TRANSFORMATION PROGRAMME

page 14

Further detail around
each specific area
can be found on the
relevant pages.

OPERATIONAL EXCELLENCE
Our future success will be built
on operational excellence and
underpinned by continued
operational and financial discipline.

BUSINESS WINNING
We are improving our business
winning skills to evolve in an
increasingly competitive market.

INVESTING IN OUR FUTURE
The savings we deliver through improved
efficiencies and greater agility will create
the capacity we need to invest in key
campaigns to grow the company.

Delivering benefits to our customers and other key stakeholders

Employees
• Work in integrated teams
• Utilise experience across QinetiQ

Customers
• Better products and services
Increased responsiveness
•
Improved value for money
•

Shareholders
• Growth in quality earnings

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationMarket overview

Increasing security threats;
budget pressures

QinetiQ has a track record of delivering more for less
and meeting new challenges through innovation. We
are well positioned to help customers meet the dual
challenges of budget pressures and increasing global
security threats.

Alignment with UK defence customers
In the financial year to 31 March 2016, 67%
(2015: 67%) of QinetiQ Group revenue was
generated from the UK Ministry of Defence
(MOD) in addition to 3% (2015: 3%) from other
UK Government Departments. We are the
UK’s leading provider of test and evaluation
(T&E) services across all military domains and
the majority of equipment programmes. We
generate more than £300m per year from T&E,
underpinned by the Long Term Partnering
Agreement (LTPA), which has delivered an
improved service and significant savings for the
MOD over the last 13 years. We estimate the UK
T&E market is double this size and the addressable
market worldwide is much greater. Leading the
UK T&E enterprise by working in partnership with
Government and prime contractors is one of the
key pillars of QinetiQ’s strategy. In addition, we
remain a market leader in research and advice
in specialist areas such as C4ISR*, weapons and
energetics, cyber security and procurement
advisory services.

Within the MOD, the main customers for our
services are the MOD’s procurement function
DE&S (Defence Equipment and Support), the
Defence Science and Technology Laboratory
(Dstl) and the Front Line Commands (Navy,
Army, Air and Joint Forces), whose influence
on future capabilities has increased in recent
years. Our businesses are aligned closely to these
Commands and are well placed to help them
with their growing procurement responsibilities.
In particular, Joint Forces Command, with its
own procurement arm and multi-billion pound
budget, provides a focused channel for our
Cyber, Information & Training business.

The UK Government’s Strategic Defence and
Security Review (SDSR) was published on
23 November 2015. Its publication has helped
to clarify the UK’s capability priorities, but it will
take time before its impact on the associated
allocation of the UK defence budget is clear.

Delivering ‘more for less’
As part of the SDSR, the MOD has declared plans to
address important capability gaps such as maritime
surveillance (through the purchase of nine new
aircraft) and combat air numbers (by extending the
life of Typhoon aircraft that have been in service
for some time). These plans will require immediate
savings to be made elsewhere in the defence
enterprise to fund them, with the UK Government
looking to achieve a 30% reduction in MOD civilian
staff and in ‘built’ estate to deliver £11bn of savings
from defence and security budgets over the next
four years.

The introduction of new capabilities, and in
particular extending the life of existing capabilities,
provides QinetiQ with opportunities to deliver
engineering, test and evaluation services. The
savings programmes could also provide further
opportunities for outsourcing, along with increased
MOD presence on our sites. There is likely to
be increasing competition, but QinetiQ is well
positioned due to its strong record in delivering
improved services combined with significant
savings (ie more for less) for customers.

MOD spending on science and technology will
continue to be protected at 1.2% of the defence
budget with an increased emphasis on disruptive
technologies and innovation, and a move away
from some more traditional research programmes.
Space, cyber security and cryptography are
among the priorities, areas in which QinetiQ
has recognised expertise.

The Single Source Regulations Office (SSRO) is now
fully established as the independent regulator for
single source defence contracts, driving greater
transparency that will help demonstrate the value
for money the Government derives from Qualifying
Defence Contracts (QDCs). The SSRO has confirmed
the baseline profit rate for new single source
defence contracts is 8.95% for FY17 (10.6% in FY16)
and that over the course of FY17 it will consult
again and develop the methodology for calculating
the baseline profit rate in future years, potentially
introducing multiple profit rates. This baseline

UK Ministry of Defence budget (£bn)

34.3

35.1

36.1

37.0

39.6

38.1

FY16

FY17

FY18

FY19

FY20

FY21

Source: UK Government Comprehensive
Spending Review 2015.

rate acts as the starting point for agreeing the
profit rates of new and renewed contracts, and
suppliers can both under and over-perform the
contracted rate depending on, for example, risk,
capital servicing and project execution. Further
updates and clarifications are expected to be
published by the SSRO on other topics affecting
QDCs, eg allowable costs.

Our combination of capabilities is unique in
the UK and, consequently, approximately 70%
of total EMEA Services revenue is derived
from single source contracts, including the
non-tasking element of the Long Term Partnering
Agreement (LTPA). As we have said before, we
anticipate that the majority of our single source
revenue will fall under the regulations within
approximately three years.

* C4ISR is command, control, communications,
computers, intelligence, surveillance and
reconnaissance.

QinetiQ Group plc Annual Report and Accounts 2016Breakdown of revenue by customer

Breakdown of revenue by key domain

UK Ministry of Defence (MOD)
US Department of Defence (DoD)
Government agencies
Commercial defence
Commercial

67%
6%
10%
6%
11%

Air & Space
Maritime, Land & Weapons
Cyber Information & Training
International
Global Products – US
Global Products – EMEA

25%
36%
14%
6%
8%
11%

Supporting defence modernisation
in Australia
QinetiQ’s third home market is Australia. The
Australian Government is responding to the need
to modernise its defence equipment and now
plans to replace the majority of its platforms
over the next 15 years, supported by an increase
in defence expenditure to 2% of GDP. In line
with the recommendations of its First Principles
Review, in which our Australian business played
a role, the Government is also pursuing a defence
transformation programme similar to that which
has been underway in the UK since the beginning
of the decade.

Global investment in defence
Many of our unique capabilities are attractive
to customers beyond the UK, US and Australia,
and we have made it a strategic priority
to develop new home markets through
partnerships, and grow sales by exporting our
products and services. For example, as the
Canadian Government pursues similar defence
transformation programmes to the UK, it values
the advice, test and evaluation that we can
provide in support of better procurement.

In Sweden, where QinetiQ operates the Flight
Physiological Test Centre for the Swedish defence
department, the defence environment is similar,
with budget pressures evident against a background
of heightened security threats. Such pressures, on
Sweden and other Northern European nations, can
drive greater cooperation on specific programme
opportunities and greater interdependency
between allies in capability provision.

Further afield, in Turkey and the Middle East,
budgets remain more robust, offering increased
export opportunities for defence products and
services, albeit these and other nations are
determined to develop indigenous capability for
both economic and sovereignty motives. This can
provide seams of growth potential for QinetiQ’s
most distinctive capabilities but accessing these
markets will require thoughtful partnering
approaches and alignment with UK Government
export initiatives.

Emerging themes
in our markets

Increasing threats; budget pressures
Looking across our home and overseas markets
we see a number of key themes. Governments
are having to respond to increasing security
threats with reducing budgets. They need
to deliver more with less. So not only are
government customers seeking greater value
for money from their suppliers, they are also
looking for assistance in meeting their own
‘efficiency’ challenges. Companies like QinetiQ,
with a track record of delivering improved
productivity and innovation in products and
services, are strongly positioned to help.

Innovation in equipment, processes and
approach
Most governments recognise that being efficient
is not enough and they also need to innovate
to respond to these fast evolving threats. They
are seeking new approaches to innovation in
both equipment and processes so that they can
rapidly integrate new technologies into existing
capabilities. Investing and applying our core
competence for customer advantage in defence
and commercial markets is a strategic priority for
QinetiQ. Many customers are keen to capture
the innovation that comes from universities
and small and medium sized enterprises (SMEs),
and are looking for assistance from organisations
that can help them connect their supply
chains. Similarly, governments are promoting
multilateral approaches to developing new
capabilities, encouraging suppliers to cooperate
internationally.

QinetiQ already delivers an ‘innovation
integrator’ role, building networks of suppliers
to bring together Government, industry,
SMEs and academia in collaborating teams
and thereby facilitating innovation at every
stage of the procurement process. Our Cyber
Information & Training (CIT) business, for
example, is the MOD’s leading supplier of C4ISR
research, managing framework contracts for the
MOD that involve more than 100 UK SMEs.

Global markets

Our Global Products division has a significant US
footprint, providing a route to the world’s largest
defence market and, in the financial year to
31 March 2016, 6% (2015: 6%) of QinetiQ Group
revenue was generated from the US Department
of Defense (DoD).

US defence market: a greater focus on
innovation
In the US, the defence downturn is reaching the
bottom of the cycle, with the President requesting
continued increases to the defence budget and
the budget for overseas contingency operations.
A renewed commitment by US military customers
to unmanned systems products is reflected in
plans to award new competitive Programs of
Record over the next two years to enhance and
sustain the US unmanned systems capability
as a funded capability in the DoD budget.

The President has requested an increased
research and development (R&D) budget for
defence which includes the Defense Innovation
Initiative, also known as the Third Offset Strategy,
“an ambitious effort to identify and invest in
innovative ways to sustain and advance America’s
military dominance for the 21st Century”. This
initiative is expected to put new resources
behind innovation and, in particular, research
and development in technology to support and
optimise the interaction between humans and
machines. These initiatives align with a number of
areas in which QinetiQ has distinctive strengths
including sensor fusion, man-machine interfaces,
autonomy, and unmanned vehicles.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationOur vision and strategy

Becoming the
chosen partner

Vision
Our vision is our aspiration for the company that has been tested
with customers and has been communicated to employees across
the company. It sets out our future path and provides the catalyst
for change.

Each word has specific meaning:
• A company our customers want to work with –

chosen partner.

• A company operating beyond the UK – around the world.
• A company solving difficult problems – mission-critical

solutions.

• A company delivering state-of-the-art technology,

services, products and business solutions – innovating.

• A company focused outwardly – for our customers’

advantage.

Strategy
To realise our vision, we have developed a strategy designed
to grow the company:

UK – We will lead and modernise the UK defence test
and evaluation enterprise by working in partnership with
Government and prime contractors.

We intend to modernise the approach to test and evaluation in
the UK, focused on introducing a more agile capability. By working
in partnership with Government and other companies, we will
help our customers save money. As threats change, we need
to ensure that our test and evaluation capabilities continue to
enable next generation military equipment. For example, in
October 2016, we will host a world-first Royal Navy trial which
will demonstrate how autonomous systems can operate
together as part of a naval fleet.

International – We will build an international company that
delivers additional value to our customers by developing our
home markets, creating new home markets and exporting.

QinetiQ will become an international company, operating
around the world. We will maintain a focus on our home markets
(the US and Australia as well as the UK) where we already have a
presence and market share, develop new home markets through
partnerships, and grow sales by exporting our products and
services. For example, to win in an export market, rather than
compete independently, we have chosen to partner with
BAE Systems, with the backing of the UK Government, for
a competition in Chile to upgrade their Type 23 frigates.
A ‘Team UK’ approach.

Innovation – We will invest in and apply our core competences
for customer advantage in defence and commercial markets.

QinetiQ will continue to innovate, focusing on markets where
customers have a clear need for our skills, investing in and applying
our competences to meet their needs. For example, as part of our
new Internal Research and Development (IRAD) programme, we
are funding projects to develop next generation approaches to test
and evaluation services, robotics and OptaSense applications in the
rail industry.

Our vision is:
To be the chosen partner
around the world for
mission-critical solutions,
innovating for our
customers’ advantage.

By prioritising customer
focus and competitiveness
today, we will deliver
customer advantage
now and in the future
to become the chosen
partner for our
customers.

QinetiQ Group plc Annual Report and Accounts 2016Our strategic pillars

UK
We will lead and modernise the UK defence
test and evaluation enterprise by working
in partnership with Government and prime
contractors.

INTERNATIONAL
We will build an international company that
delivers additional value to our customers
by developing our home markets, creating
new home markets and exporting.

INNOVATION
We will invest in and apply our core
competences for customer advantage
in defence and commercial markets.

Page 16

Page 18

Page 20

Our
strategy

N
T

N
O
TI

IN NOVA

To become the chosen partner, we have
reorganised the company, establishing
a new way of working, and launched a
transformation programme
to improve our customer focus
and competitiveness.

Operational
excellence

Business
winning

Investing
in our future

sponsored students, this equals 5.7%

of our UK workforce.

Link to strategy

position in the Best Companies ‘ones to

market place.

watch’ category, which recognises companies

with good employee engagement that are

progressing towards best practice.

As a business whose reputation and achievements are centred on our people, our future success is primarily dependent on our ability

to recruit, develop, engage and retain exceptional employees.

Page 80 – Directors’
remuneration report

Page 28 – Corporate responsibility

QinetiQ Group plc Annual Report and Accounts 2016Description

Description

QinetiQ’s customer satisfaction survey

The Lost Time Incident (LTI) rate is calculated

asks all UK customers with contracts

using the total number of accidents resulting

over £200,000 about QinetiQ’s delivery,

in at least one day taken off work, multiplied

and engagement. This year, on the

by 1,000 divided by the average number

recommendation of our independent

of employees in that year.

supplier, we moved from last year’s “top

three supplier” score to a measure out of

10 which improves comparability. In the US,

customer satisfaction metrics are reviewed

on a contract-by-contract basis.

Rationale

Using an independent third party we annually

Health and safety performance is monitored

survey around 100 of our largest projects to

to drive continual improvement in minimising

help us understand our performance and

risks to employees and reducing harm.

what we need to be doing to continuously

improve. We also gather qualitative feedback

through structured interviews.

Performance this year

Of those surveyed, we received an average

The reduction in LTI rate has continued from

rating for our performance overall of 8.1 out

the previous year. The absolute number

of 10, consistent with 2015. Our top three

of lost time incidents resulting in at least

supplier score, used previously, was 77%

one day off work has also reduced slightly

in 2016 compared to 85% in 2015 and 77%

on last year.

in 2014.

Link to strategy

Achieving our ambition of becoming the

The safety, health and wellbeing of our

chosen partner will require a relentless focus

people are intrinsically linked to our

on continuing to meet our customers’ needs.

strategic success.

Link to strategy

Apprentices and graduates (%)

Employee engagement (Score out of 1,000)

Voluntary employee turnover (%)

5.7%

2015: 5.9%

623

2015: 613

9.2%

2015: 8.9%

5.9

5.7

593

613

623

9.1

8.9

9.2

4.8

2014

2015

2016

2014

2015

2016

2014

2015

2016

Description
The number shown is the total number
of apprentices, graduates and sponsored
students as a percentage of our UK
workforce.

Description
A measure of employee engagement
(in the UK) on a scale of 0–1,000, based
on the Best Companies Employee Survey.

Description
This is a measure of the number of
employees leaving the company not
at QinetiQ’s instigation.

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.

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, retaining our
position in the Best Companies ‘ones to
watch’ category, which recognises companies
with good employee engagement that are
progressing towards best practice.

Performance this year
Voluntary employee turnover has increased
slightly to 9.2% reflecting a more competitive
market place.

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 of which we
are a founding member, to grow the number
of young people on apprenticeships,
graduate programmes and student
sponsorships.

Performance this year
We continue to provide opportunities for
young people through our apprenticeship
and graduate programmes. Including
sponsored students, this equals 5.7%
of our UK workforce.

Link to strategy
As a business whose reputation and achievements are centred on our people, our future success is primarily dependent on our ability
to recruit, develop, engage and retain exceptional employees.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationKey performance indicators continued

Financial KPIs

Orders (£m)

£659.8m

2015: £613.6m

596.9

613.6

659.8

Organic revenue growth/decline (%)

Underlying operating profit* (£m)

(1)%

2015: (2)%

£108.9m

2015: £111.3m

(4)

(2)

(1)

113.7

111.3

108.9

2014

2015

2016

2014

2015

2016

2014

2015

2016

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.

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 grow market share and
sources of revenue within its chosen markets
before the effect of acquisitions, disposals
and currency translation.

Performance this year
Orders grew 8% due to the award of a £153m
five-year renewal from the UK MOD in an
otherwise challenging market.

Performance this year
Continuing operations recorded a 1% decline
in revenue, after adjusting for foreign
exchange and the divestment of the
non-core Cyveillance business.

Description
The earnings before interest and tax,
excluding all specific adjusting items*.

Description

The underlying earnings, net of interest

This is the total Group profit/(loss), net

This represents net cash flow from

and tax, expressed in pence per share.

of interest and tax, including all specific

operations before cash flows of specific

adjusting items and including discontinued

adjusting items, less net cash outflows on

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
Growth in EMEA Services was offset by a
reduction in Global Products. See Operating
review on page 34.

Link to strategy
Order intake is an important measure of
progress of the implementation of our
strategy, the objective of which is to
grow the Group.

Link to strategy
Organic revenue growth is an important
measure of progress of the implementation
of our strategy, the objective of which
is to grow the Group.

Link to strategy
This measure is a reflection of the
productivity of the Group’s activities and
is used for executive remuneration.

Page 80 – Directors’
remuneration report

items*.

Rationale

the purchase/sale of intangible assets and

property, plant and equipment.

Rationale

Underlying EPS provides a measure of the

This shows the overall financial performance

This provides a measure of the Group’s ability

earnings generated by the Group after

of the Group reflecting both underlying and

to generate cash from its operations and

deducting tax and interest. Specific adjusting

specific adjusting items of income and

gives an indication of its ability to make

items are excluded because their size and

expenditure. A key financial measure used

discretionary investments and pay dividends

nature mask the true underlying

performance year on year.

the year.

to reflect overall financial performance for

to shareholders.

Performance this year

Underlying EPS grew by 7%, benefiting from

The increase in the total Group profit after tax

Underlying operating cash flow decreased

a reduction in net finance expense (following

primarily results from business divestments

marginally from the prior year but remains

repayment of private placement debt in the

and a net tax credit following election into the

strong, representing a cash conversion

prior year) and a reduced share count as

RDEC regime, partially offset by an impairment

ratio of 96%.

a result of the Group buying back shares.

of goodwill in Global Products.

Link to strategy

This is a measure of growth in quality

This is a key financial measure of overall

This is a measure of the cash-generative

earnings for our shareholders and is used for

financial performance for the year.

characteristics of the Group and is used

for executive remuneration.

executive remuneration, determining the

level of pay-out for certain of the Group’s

long-term incentive plans.

QinetiQ Group plc Annual Report and Accounts 2016revenue over prior year pro-forma revenue,

at constant exchange rates. Prior year

pro-forma revenue excludes the impact

of acquisitions and disposals.

Rationale

This provides a measure of the Group’s ability

Organic revenue growth demonstrates the

Underlying operating profit is used by the

to replace completed contracts/business

Group’s capability to grow market share and

Group for performance analysis as a measure

with new contracts/business.

sources of revenue within its chosen markets

of operating profitability that is tracked over

before the effect of acquisitions, disposals

time. Specific adjusting items are excluded

and currency translation.

because their size and nature mask the true

underlying performance year on year.

Performance this year

Orders grew 8% due to the award of a £153m

Continuing operations recorded a 1% decline

Growth in EMEA Services was offset by a

five-year renewal from the UK MOD in an

in revenue, after adjusting for foreign

reduction in Global Products. See Operating

otherwise challenging market.

exchange and the divestment of the

review on page 34.

non-core Cyveillance business.

Link to strategy

Order intake is an important measure of

Organic revenue growth is an important

This measure is a reflection of the

progress of the implementation of our

measure of progress of the implementation

productivity of the Group’s activities and

strategy, the objective of which is to

of our strategy, the objective of which

is used for executive remuneration.

grow the Group.

is to grow the Group.

Underlying earnings per share (EPS)* (p)

Total Group profit after tax (£m)

Underlying operating cash flow* (£m)

16.3p

2015: 15.2p

£106.1m

2015: £104.7m

£103.6m

2015: £114.9m

15.2

16.3

13.8

104.7

106.1

106.2

114.9

103.6

2014

2015

2016

2014

2015

2016

2014

2015

2016

(12.7)

Description

The level of new orders (and amendments

The Group’s organic revenue growth is

to existing orders) booked in the year.

calculated by taking the increase in

The earnings before interest and tax,

excluding all specific adjusting items*.

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 make
discretionary investments and pay dividends
to shareholders.

Performance this year
Underlying EPS grew by 7%, benefiting from
a reduction in net finance expense (following
repayment of private placement debt in the
prior year) and a reduced share count as
a result of the Group buying back shares.

Performance this year
The increase in the total Group profit after tax
primarily results from business divestments
and a net tax credit following election into the
RDEC regime, partially offset by an impairment
of goodwill in Global Products.

Performance this year
Underlying operating cash flow decreased
marginally from the prior year but remains
strong, representing a cash conversion
ratio of 96%.

Link to strategy
This is a measure of growth in quality
earnings for our shareholders and is used for
executive remuneration, determining the
level of pay-out for certain of the Group’s
long-term incentive plans.

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 used
for executive remuneration.

Page 80 – Directors’
remuneration report

Page 115 – Note 4:
Specific adjusting items

Page 80 – Directors’
remuneration report

* Definitions of underlying measures of performance and specific adjusting items can be found in the glossary on page 149.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate responsibility

Committed to
our stakeholders

2016 highlights

Skills development
• Launch of the QinetiQ Academy

(page 27)

• The 5% Club grows to over 160

members (page 27)

Health and safety
•

‘Safe for Life’ rolling out
across the UK (page 28)

Environmental stewardship
•

ISO 50001 certification of our energy
management system (page 31)

2017 priorities

Skills development
• Developing our people to support

our growth agenda

Engagement of our people
•

Improving the way we engage with
our people

Health and safety
• Further roll out of ‘Safe for Life’

Environmental stewardship
• Continual improvement of our
energy management system

Trust is the foundation of how we do business and
manifests itself in everything we do; our relationships
with our customers and stakeholders, industry partners,
and shareholders. It also drives how our people work with
each other. We know that we can contribute to our future
success and provide wider value to society through focusing
on the skills and competences of our people and the next
generation, supporting our customers’ sustainability agendas,
our commitment to environmental stewardship and having
a positive impact in the communities where we work.

There are some elements which will always
be business priorities, such as the safety of
our people and our approach to governance.
However, we also recognise that we need to
anticipate and understand emerging issues
and trends.

The skills agenda, with an emphasis on
apprenticeships, new energy management
regulations and the introduction of the
Modern Slavery Act all have an impact on
our business. Addressing them is integrated
into our programmes, ensuring our approach
to corporate responsibility does not
stand still and fully supports the success
of our business.

Our framework

g i n

g C o r p o rate Responsibility P

Our People
Page 27

a n

Community
Investment
Page 32

Business
Ethics
Page 33

Sustainable
Solutions
Page 29

Environment
Page 30

QinetiQ Group plc Annual Report and Accounts 2016
Our people
By having the right people, ensuring they are engaged, creating a
positive working environment and supporting their development, we can
deliver to our customers. There is a recognised shortfall of engineering
skills so focusing on the skills of our people as well as the future
pipeline is vital (also see community investment section, page 32).

The 5% Club –
Investing in a Generation
The skills of the next generation are
the foundation of the future of QinetiQ.

The 5% Club, launched in 2013 and spearheaded by QinetiQ,
has gone from strength to strength, with membership at over
160 (at 31 March 2016) including large and small companies from
a range of sectors. Members that sign up to The 5% Club pledge
to have 5% of their UK workforce on apprenticeships, formal
graduate schemes or as student sponsorships. 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.

As part of QinetiQ’s commitment to the development of the
next generation, we reviewed our UK graduate scheme and the
People Faculty launched a new two-year corporate graduate
development framework, bringing graduates together where
previously separate schemes were run by each business.

Page 23 – Apprentices and graduates KPI

Assumption
Number of apprentices
Number of graduates on formal programmes
Number of sponsored students
Percentage of UK workforce

2016
150
135
26
5.7%

2015
208
102
8
5.9%

2014
121
106
17
4.8%

Learning and development
We have been focusing on how we provide opportunities
for developing skills.

The breadth and depth of knowledge and capability of our people
is key to delivering for our customers.

Page 03 – Our business model

The QinetiQ Academy was established in April 2015, addressing
the business need to drive effectiveness (quality, consistency
and standards) and in response to our people’s appetite to learn,
develop and give more to our company (articulated in our
Engagement Surveys). There are three faculties:

•

The People Faculty delivers management and leadership
development from early careers to executive level.

• The Engineering, Science and Technical (EST) Faculty delivers
training to sustain and develop the highly specialised skills
essential to meet our customers’ challenges.
The Business Faculty delivers skills and competences such as
marketing, business development, negotiation and sales through
to project management, assurance and health and safety.

•

Underpinning the Academy is the QinetiQ Learning Zone (QLZ) which
provides one-stop online access for our people’s learning needs. The
full functionality has been developed for QinetiQ UK and accessibility
to the QLZ will be increased across the Group. The EST Faculty has
facilitated our first cohort of ten delegates on the Systems
Engineering Masters Apprenticeship Programme (SEMAP). This is a
three to five-year programme of blended vocational and academic
learning at Masters level developed by the Defence Growth
Partnership to address an enterprise wide skills gap in systems
engineering.

Learning and development highlights in FY16 include:
•
• Accreditation obtained for a further three years from the

The course catalogue has grown from 70 to over 140 courses.

Association for Project Management.

• Launch of refreshed coaching and mentoring capabilities.
Innovation of course delivery through ‘gamification’.
•

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information

Diversity and inclusion
The inclusion, diversity and equality of
all our people is critical to our strategy.

In order to support our approach, we value
working with specialist networks in each of
our home markets. QNA is a member of the
Direct Employers Association which provides
recruiting solutions with a strong focus on
diversity and inclusion. QinetiQ Australia is
a member of the Diversity Council Australia
and has established a diversity and inclusion
strategy which has been endorsed by the
Australian Board and Australian Leadership
Team. The UK continues to be a core member
of, and work with, the Employers Network
of Equality and Inclusion, using their tools to
support our agenda. The Group is committed
to the fair treatment of people with
disabilities in relation to applications,
training, promotion and career development.
If an existing employee becomes disabled,
we make every effort to enable them to
continue their employment and career
development, and to arrange appropriate
training, wherever practicable. The
breakdown of the number of employees by
gender at the end of March 2016 is shown
in the table below.

Board Directors
Senior Managers(1)
All employees(2)

Female
2
28
1,190

Male
7
170
4,817

(1) Excluding Board Directors.
(2) Excluding Senior Managers and Board Directors.

Corporate responsibility continued

Engaging our people
Engaged employees are motivated to
reach their full potential. Improving
employee engagement forms an
important part of our strategy and
is one of our non-financial KPIs.

Page 23 – Employee engagement KPI

We regularly communicate with employees
to ensure they understand QinetiQ strategy,
performance and business priorities. In 2015
‘Q-Talk’ was introduced as a monthly briefing
and discussion session. Through Q-Talk
(and numerous other channels such as the
intranet, campaigns and roadshows) we can
ensure that our people across the Group
understand how what they do contributes
to our strategy and they are knowledgeable
about our business.

Our UK Employee Engagement Group
(EEG) is an independent consultative forum.
The EEG listens, gathers feedback and
represents our people on all key employee
related matters (local or company-wide)
and through times of change. The
representatives are the employee voice to
constructively challenge policy decisions
and actions that have an effect on
employees’ working lives or wellbeing.

We undertake an annual independent
survey for all employees across the Group,
excluding QinetiQ North America (QNA),
run by Best Companies. This survey allows
us to gain feedback and an accurate picture
of how our people feel about a number
of aspects of our business. The response
rate in FY16 was 68% and we scored 623
(compared to 613 in FY15), putting us in
the ‘ones to watch’ category. The survey
identifies specific areas where we can work
to improve performance and engagement
and leaders respond through action plans
on priority areas.

QNA use Workplace Dynamics to
administer the Top Work Places survey
and will be conducting it for the second
year in FY17.

Page 88 – Directors’
remuneration report

Safety, health and wellbeing
Health and wellbeing of our people sits
at the heart of operations and underpins
our strategic goals.

We continue to focus on reducing accidents
and work-related ill health as part of our
continuous improvement activity. We measure
overall Lost Time Incident (LTI) Rate as
a lagging indicator for the Group.

Page 22 – Health and safety KPI

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 LTIR has reduced from 5.6 to 5.0.

Lost Time Incident Rate
QinetiQ Group

2016
5.0

2015
5.6

2014
5.8

In 2014 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 supported by local champions.
The pilot programme has been completed
successfully and we are rolling ‘Safe for Life’
out into other UK business areas.

There were no safety prosecutions or
prohibition notices issued by regulators in the
UK in FY16. A single improvement notice was
issued to the company during the UK Health
and Safety Executive’s ongoing investigation
of an incident at one of the sites we manage on
behalf of the MOD. The improvement actions
identified required the review of schematics for
the high voltage electrical system on the site.
The required actions have been completed,
the Improvement Notice formally closed and
lessons shared across the organisation.

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 good
uptake by our people. Health assessments
(measuring BMI, blood pressure and cholesterol)
and flu vaccinations continue to be popular.

QinetiQ Group plc Annual Report and Accounts 2016

Sustainable solutions
Providing customers with solutions to reduce fuel
use can help with cost efficiencies but also meet
their sustainability agenda.

Customers recognise the importance of
sustainable products and services to enable
greater efficiency and resilience. While it
is not core business, we regularly provide
solutions for our customers, across a
breadth of technology areas including:

•

Training and simulation: allowing
troops and aircrew to train in
sophisticated simulated environments,
reducing the need for costly and energy
intensive activities.

• Unmanned Aerial Vehicles (UAVs):

QinetiQ, in partnership with the Welsh
Government and Snowdonia Aerospace
LLP, ran an event at the Snowdonia
Aerospace Centre in Llanbedr to
demonstrate how UAVs flown from the
airfield can help to tackle environmental
issues and other commercial challenges.

• Maritime: improved propulsion

efficiency resulting in reduced fuel
consumption and noise/vibration
pollution. QinetiQ has also completed
work to ensure ships comply with the
Energy Efficiency Design Index which
is unique to the maritime industry.
• Batteries: QinetiQ is part of a project
called ‘3CCAR’ targeting Integrated
Components for Complexity Control
in affordable electrified cars, focusing
particularly on smart battery cells,
which will help improve effectiveness
of electric cars.

• Engine efficiency: the hub drive

provides an entirely new approach.

Page 21 – next-generation
hub motors

• Modelling of wind turbine interactions
with radars which assists the planning
processes to support the renewable
energy industry.

Page 18 – Radar impact assessment

Product safety
Delivering products and services safely
fundamentally underpins our offering
to customers.

We invest in attracting and developing our
engineers and scientists with specialist safety
expertise. In the UK, technical assurance,
governance and Independent Design
Review have been fully integrated into
our day-to-day business delivery processes
and are underpinned by our Through-Life
Engineering principles. These principles are
applied to all our customer and internal
projects. High Integrity Systems are delivered
using our specifically developed principles
and independently assured throughout their
lifecycle. Continuous improvement is driven
by our Engineering, Science and Technical
Leadership Team, supported by independent
assurance and specialist safety expertise.

We have significantly enhanced our
approach to independent assurance and risk
assessment. QinetiQ actively supports
collaboration with the MOD and specialist
organisations to develop and implement
common safety standards and practices.

Our US business continues to use technical
excellence to improve and develop the safety
and usability of their products.

Supply chain management
and sustainable procurement
At QinetiQ, we believe that our supply
chain is an extension of our own
organisation, and so we take care
in ensuring that it is as committed
to the same standards of safety,
security and governance as we are.

The goods and services that we procure are
largely high-end technology or Commercial
Off the Shelf (COTS) products, or high end
consultancy and research services. Most of
our spend is within our home territories (UK,
US and Australia) where instances of bribery,
corruption and modern slavery practices
are lower than other parts of the world.
However, this does not mean that we
are complacent. In the UK, we have a very
robust approach to supply chain risk, which
is now being rolled out across the Group,
where appropriate. This includes:

• Supplier vetting for all suppliers
for infringement of UN Sanctions

• Robust prequalification of suppliers to

an industry set level through a third party

• Risk assessment and third party vetting
of high risk spend categories for modern
slavery (UK) and human trafficking under
US Federal Acquisition Regulations (FAR);
• Robust Terms and Conditions enabling us
to take corrective action against suppliers
not acting in an ethical manner.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information

Corporate responsibility continued

Environment
We integrate care of the environment into our business
operations and our delivery of test and evaluation.

Environmental stewardship
The challenges of protecting the
environment and wildlife, in locations used
in the conduct of defence and security
related test and evaluation trials, can
appear daunting. Our own QinetiQ estate
and MOD LTPA sites are located across
the UK, with significant marine and
land environmental considerations,
encompassing European and UK protected
areas. The use of structured planning
processes, in combination with innovative
solutions, robust technology and skilled
employees, has enabled the elimination or
minimisation of environmental risks from
diverse trial activities. The introduction
and application of sustainability appraisals
(SA) from early in the trial planning phase
continues to support prompt identification
of potential impacts and careful selection
of mitigation measures. Examples include:

• Aberporth: Use of remote visual and

acoustic marine monitoring systems for
protection of mammals. These measures,
together with acoustic deterrent devices
(ADD) and physical checks, have provided
protection for species including
bottlenose dolphins, harbour porpoise
and grey seals.

• West Freugh: Trials timed to avoid
disturbance of breeding birds and
to protect great crested newts.

• Hebrides RAF trial: SA process resulted in
agreement for missile airburst detonation
instead of at sea surface to reduce
any potential sea mammal impacts.

• Hebrides ASD15 trial (page 17): modified
existing concrete platform to shelter
rocket and launch infrastructure to
prevent the risk of damage to the Site of
Special Scientific Interest (SSSI) habitat.

The drive and enthusiasm with which
our people, guided by a team of skilled
environmental professionals, embrace sound
environmental practice have contributed
to our performance across the year:

• Our waste recycling arrangements and
levels have been further enhanced;
84% compared with 76% for FY15.

• Work has been conducted

to collect, understand and interrogate
water consumption and travel
information, with a view to identifying
additional improvement programmes.

• We have initiated transition to

the new ISO 14001 Environmental
Management standard.

• We have made considerable progress
in energy management (see page 31).

Celebrating our 20-year partnership with Marwell Wildlife
Protecting and restoring Eelmoor Marsh

QinetiQ’s head office site in Farnborough,
UK, includes Eelmoor Marsh which was
designated a national Site of Special
Scientific Interest in 1978 and is a hotspot
for biodiversity. Covering more than 79
hectares, Eelmoor Marsh supports more
than 400 species of conservation concern
across grassland, lowland heath, bog and
mire, including six species of insectivorous
plants, 11 species of orchid, the rare nail
fungus, over a third of Britain’s dragonfly
and damselfly species, around 60% of
Britain’s butterfly species, four out of six
native species of reptile, and bird species
including woodlark, nightjar and lapwing.
The site forms part of the Thames Basin
Heaths Special Protection Area (SPA),
notified in 2005 following the arrival of the
Dartford Warbler and provides excellent
undisturbed habitat for specialist heathland
birds. In partnership with British conservation
charity Marwell Wildlife we have managed
this ecologically sensitive location for over
20 years.

“Our relationship with Marwell Wildlife began
in 1995 with the need for conservation
grazing but over the 20 years has become
much broader and is vital to the success of
the project,” says Dr Sam Healy, Group
Corporate Responsibility Director, QinetiQ.
Highland cattle and endangered Przewalski’s
horses are employed to help control scrub
and grass encroachment and have become
an integral part of long-term restoration of
the lowland heath system. One-third of
Eelmoor Marsh has already been restored
from pine woodland, and 157 survey reports
and 17 student projects have been produced
creating a wealth of valuable information
about this special site. Natural England has
confirmed ‘favourable’ condition status
across all three units on site.

Employees can also access and enjoy this
special place during the week, and experts
from Marwell regularly provide guided tours
for employees. Employees have volunteered
their time to support the project.

QinetiQ Group plc Annual Report and Accounts 2016Greenhouse gas emissions
and energy management
Saving energy reduces our impact on
the environment and makes us more
efficient.

The highlight for FY16 was our certification
to ISO 50001 (BS EN ISO 50001:2011 Energy
Management System) which recognises
the systems and processes put in place by the
UK organisation to enable us to effectively
manage our energy consumption. We will
now use the framework established by the
introduction of ISO 50001 to continually
improve our approach to energy management
and strive to embed energy efficiency best
practice across the UK business.

As part of this continual improvement, we
will be reviewing our energy performance
indicators and targets to provide an
improvement in the way we measure the
success of our energy management activities
and projects.

In 2015 we continued our Energy Matters
programme, communicating with our people
(see below), growing our network of Energy
Champions and empowering our Energy
Engineers to identify and implement energy
saving projects. We continue to submit
voluntarily to the Carbon Disclosure Project
Climate Change Programme, and are
registered for the Carbon Reduction
Commitment (CRC) scheme. In 2015 we
met the requirements of ESOS (the Energy
Savings Opportunity Scheme) through a
combination of ISO 50001 Certification and
an energy audit report produced by our
appointed ESOS Lead Assessor.

Our Group greenhouse gas (GHG) emissions
are captured to meet the requirements of
the Companies Act 2006 (Strategic report
and Directors’ report) Regulations 2013.

Total Scope 1 emissions (tCO2e)
Total Scope 2 emissions (tCO2e)
Total Scope 1 and 2 emissions (tCO2e)
Intensity ratio (tCO2e per £m of revenue)

The table below provides a summary of the
Group’s GHG emissions from 1 April 2015 to
31 March 2016, 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 Defra 2015
emissions factors.

Our emissions have reduced overall due to
more efficient use of our estate. We are on
track to meet our target of reducing GHG
emissions due to UK energy use by 17% by
2020 from a 2013 baseline. Our GHG data
were independently reviewed and next year
will be independently verified.

2016
23,183
36,722
59,905
79

2015
26,534
39,668
66,202
87

2014
27,590
38,371
65,960
55

Example employee communication as part of Energy Matters

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate responsibility continued

Community investment
QinetiQ is committed to having a positive impact in the communities
where we operate. A particular focus is contributing our professional
skills through employee volunteering. We believe it’s the right thing
to do and is one way that we play our part in tackling issues such
as youth unemployment and skills shortages, particularly in the
area of STEM (Science, Technology, Engineering and Maths).

Across the Group we have various ways
that our people can volunteer and use their
skills to make a positive difference to their
communities. In the UK and within
OptaSense we provide our people with
time and access to a bursary. In Australia,
a programme called ‘Operation Give Back’
enables employees to volunteer as
individuals or in teams for one day a year,
and employees in Belgium also volunteer
during work time. Because the majority of
our people are technical professionals, our
focus is our STEM 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,
Primary Engineer and the Social Mobility
Foundation in the UK and various robotics
education programmes in the US.

of our sites for school groups on National
Women in Engineering Day, a space themed
day to celebrate the launch of Principia:
British ESA (European Space Agency)
astronaut Tim Peake’s six-month mission
to the International Space Station (see case
study below), and we have hosted the UK
Cyber Security Challenge. 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 our people to take part in STEM
outreach programmes, and to ensure that
we are reaching more girls. Our non-STEM
employees also use their professional skills
in the communities where we operate
through programmes such as Young
Enterprise and they offer mentoring
through the Social Mobility Foundation.

With a variety of STEM expertise amongst
our people, our UK STEM Ambassadors have
organised a wide range of outreach events
for school children; such as the annual
Powerboat Challenge, activities at a number

Being a good neighbour is an important part
of our approach to our communities. Where
necessary we have dedicated Community
Liaison Officers who engage with local
communities on issues such as noise and

public access. The officers have created a
number of information channels including
web and text services.

In the UK we continue to support our three
corporate charities (Cancer Research UK,
Help for Heroes and RNLI) by providing
matched funding for employee fundraising
activities. These charities were voted for by
employees and form a five-year partnership
with QinetiQ. In the US, employees focus on
supporting wounded military and their
families by contributions to a range of
specialist organisations such as Home Base,
a Red Sox (baseball) Foundation and
Massachusetts General Hospital program
dedicated to healing the invisible wounds
of war for Service Members. In Australia,
we have agreed a two-year partnership with
the Australian War Memorial in Canberra
to provide in-kind advisory services and
engineering support for aircraft installation
projects. Our people can also choose to give
to their chosen charity pre-tax through
payroll giving in the UK.

STEM Outreach
Inspiring the next generation

Engineers from our Farnborough site
welcomed more than 90 pupils from 12
Hampshire and Surrey schools for a special
STEM (Science, Technology, Engineering
and Maths) event to celebrate the launch
of Principia: British ESA (European Space
Agency) astronaut Tim Peake’s six month
mission to the ISS (International Space
Station). The pupils and their teachers were
invited to join some of our colleagues and
STEM Ambassadors to watch the live launch
of Tim Peake and his colleagues in the Soyuz
rocket to the ISS. With a team of QinetiQ
experts on hand to answer questions about
human spaceflight, the pupils learned about
the mission and about potential careers in
the space industry. The pupils then
completed their own challenge to design,
build and launch bottle rockets with
mentoring from QinetiQ STEM Ambassadors.
The teams were judged on their rocket
design, teamwork, highest flight and

engineering. Following this, the pupils
received a tour of QinetiQ’s space
testing facilities.

In addition to hosting this event, as a
technology partner with the Raspberry Pi
Foundation, our graduates have developed
hardware and software for AstroPi. AstroPi is
a Raspberry Pi mini-computer loaded with
experiments written by UK school children;

the experiments will be performed by Tim
Peake while he is on board the ISS and will
transmit live data back to Earth. By learning
about the real-world applications of STEM
subjects with our STEM Ambassadors at
outreach activities such as the Principia
launch party at Farnborough, and by
participating in projects such as AstroPi,
our aim is to inspire the next generation
of scientists and engineers.

QinetiQ Group plc Annual Report and Accounts 2016Business ethics
A critical element of winning business, in our home
markets and internationally, is that our customers
trust us to work in an ethical manner.

Managing
corporate
responsibility

Our Code of Conduct lays out our ethical
standards, providing employees with clear
direction and guidance on how we do
business across the Group. There are details
on ethical decision-making and also how to
get help. We regularly update the Code
of Conduct and we plan to review it in FY17.

QinetiQ.com/code-of-conduct

Our annual business ethics training is a
mandatory requirement for all of our people
and supports them in understanding and
using the Code of Conduct. The training is
also undertaken by our Board and is available
for our suppliers and customers. As well
as explaining the Code of Conduct, our
approach is to provide a number of
challenging scenarios to help our people
know what to do if they were to come across
issues such as bribery, fraud, discrimination,
conflict of interest and modern slavery.

Employees are provided with a number of
routes to seek help or raise concerns. They
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. 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 confidential
reporting line is appropriately investigated.

Anti-bribery and corruption
Bribery is a serious issue across the world
and we recognise this is a potential risk to our
business. 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. We embed the risk of
bribery into our international business risk
management process. This year we have
undertaken a review and update of our
procedures associated with commercial
intermediaries.

Page 42 – Principal risks and
uncertainties

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. We have set up
a working group to look at the particular issue
of modern slavery and have updated policies
and introduced new training and KPIs. Our
statement on modern slavery and human
trafficking is published on our website.

QinetiQ.com

Governance
We have Board and executive level
commitment to corporate responsibility
through the Group Risk & CSR Committee and
this ensures successful delivery of responsible
business practice, driven by strong leadership
and governance. The Committee receives
reports and briefings on all material corporate
responsibility issues including business ethics,
health and safety, environment, reputational
risk and human rights. In QNA, the Proxy
Board oversees these activities, obtaining
independent assurance on the adequacy of its
compliance programmes on an ongoing basis.
In FY17 we will be introducing a Business Ethics
Committee, chaired by the Chief Ethics Officer
and including members of the Executive and
the Group Corporate Responsibility Director.

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 50001
for energy management (see page 31), ISO 9001
for our quality management system and OHSAS
18001 for our health and safety management
system. Additionally, QNA’s Quality Management
System is certified to AS9100C and ISO
9001:2008.

Materiality and 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. In line with our new vision,
strategy and way of working, in FY17 we will be
reviewing our priorities. Part of our materiality
assessment is understanding the priorities of our
stakeholders – primarily customers, investors
and employees. This is achieved through regular
dialogue such as investor meetings, involvement
in the MOD-Industry Sustainable Procurement
Working Group and our employee engagement
programmes (see page 28). We are actively
engaged with industry and trade body working
groups on topics such as skills, environment and
ethics. We are a Patron Member of the Institute
of Corporate Responsibility and Sustainability
(ICRS) and have been actively involved in the
development of the Institute, in recognition of
the importance of supporting and developing
the CR profession.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information
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 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 13 years. EMEA Services is also a
market leader in research and advice in
specialist areas such as C4ISR, weapons
and energetics, cyber security and
procurement advisory services.

Financial performance
Each of the core Air & Space, Maritime,
Land & Weapons and Cyber, Information
& Training businesses delivered a solid
performance in 2016, despite the
uncertainty resulting principally from the
UK Strategic Defence and Security Review
(SDSR) published in November 2015 and
budgetary pressures.

Orders grew 7% to £495.4m (2015:
£461.6m) driven by the timing of multi-year
contract awards (including the £153m
five-year UK MOD renewal for aircraft
engineering services) with some continued
de-scoping and delay to other orders
in a challenging market environment.

Revenue was flat on an organic basis at a
constant exchange rate, after adjusting for
the divestment of Cyveillance Inc, which
was sold in December 2015 for net disposal
proceeds of £22m. Cyveillance, which had
revenues of $18m in FY15, is a former
business unit of the US Services division,
sold in May 2014, and more recently has
been reported in EMEA Services. At the
beginning of the new financial year, 77%
of EMEA Services’ FY17 revenue was under
contract, compared with 80% at the
beginning of the prior year.

Underlying operating profit* increased 1% to
£93.8m (2015: £93.0m) assisted by a credit
of approximately £3m due to the resolution
of a historical overseas exposure.

Assumption
Orders(1)
Revenue
Underlying operating profit*
Underlying operating margin*
Book to bill ratio(1)
Funded backlog(1)

2016
£m
495.4
616.4
93.8
15.2%
1.2x
719.1

2015
£m
461.6
625.6
93.0
14.9%
1.1x
678.6

* Definitions of underlying measures of performance can be found in the glossary on page 149.
(1) Excludes the £998m third term of the LTPA contract. B2B ratio is orders won divided by revenue recognised,

excluding the LTPA contract.

Year in review
Air & Space
With technology developments increasingly
blurring boundaries between air and space
systems, our Air & Space businesses were
combined on 1 April 2016 to increase
collaboration in our engineering capabilities
to de-risk complex aerospace programmes.

The business is working in partnership with
the MOD and the supply chain to implement
a new model to transform the provision of
aircraft test and evaluation. During the year,
it was awarded two single source contract
renewals under this new model, worth a
combined £153m over five years, to deliver
technical services to fast jets and heavy lift
aircraft. This represents a new way of
working under which we are measured
and paid on results and outputs, not inputs,
improving long-term planning, providing
better visibility, and delivering considerable
savings to the MOD. This award complements
a £13m contract to assist the MOD in bringing
the Delta Test variant of the A400M Atlas into
UK service, and a £5m contract to evaluate
flight control system upgrades to Boeing’s
Chinook helicopter.

In international markets, the Air & Space
business was awarded a five-year extension
to the contract under which it manages
and assists in the delivery of training at the
Swedish Flight Physiological Centre. It is also
developing the gridded ion engine electric
propulsion systems for the flight module
to be used on the European Space Agency’s
BepiColombo mission to Mercury. Significant
resources are being deployed by all parties
to ensure the mission meets the planned
launch date which has been deferred to 2018.
The business delivers turnkey services for
customers using Remotely Piloted Air Systems

(RPAS) to meet growing demand particularly
from international organisations such as the
United Nations.

Following the opening of the Snowdonia
Aerospace Centre at Llanbedr in Wales,
it successfully demonstrated the use of RPAS
in tackling environmental issues in a project
for the Welsh Government.

Maritime, Land & Weapons
The Maritime, Land & Weapons business
was created on 1 April 2016 combining
businesses with a strong focus on test and
evaluation at a time when customers are
increasingly undertaking more complex,
multi-domain trials. The new business will
deliver operational advantage to customers
by providing independent research,
evaluation and training services.

In the weapons domain, the business is
a leading provider of independent research
on weapons and energetics, coordinating
the MOD’s conventional weapons research
programme through its leadership of the
Weapons Science and Technology Centre.
During the year it was also awarded a
new research framework contract for trials,
testing and analysis in cyber and electronic
warfare, a five-year contract to provide
advice to the MOD on military batteries
and a four-year contract to provide advice
to NATO, contracts which all demonstrate
confidence in QinetiQ as a long-term partner.
In addition to research and advice, core
capabilities include test and evaluation,
delivered mainly under the LTPA, and targets
services. In October 2015, the business led
a team from across QinetiQ to deliver an
international at sea demonstration at the
Hebrides range, the largest in Europe.

QinetiQ Group plc Annual Report and Accounts 2016The exercise attracted nine ships from eight
nations, culminating in the first ever launch
of a ballistic rocket into space from the UK
and its subsequent engagement by an SM3
missile launched by a US guided missile
destroyer. As a result, the business is now
pursuing opportunities for further combat
scenario training and inter-operability testing
involving customers from many nations.
It also undertook testing of the latest
helicopter-borne Infra-Red Threat Warning
System in live rocket and gunfire scenarios.

Sustaining and growing its core technical
advice and design support services to the
UK Royal Navy is a strategic priority for the
Maritime, Land & Weapons business, and
during the year it was awarded a new
contract to deliver acceptance trials for the
four new MARS class tankers. The business
also resolved urgent operational issues
to enable ships to deploy and be effective
in theatre including improving the
hydrodynamic efficiency of Type 23 frigates
by optimising the design of the propeller
and hull, enabling the Royal Navy to realise
potential fuel savings across its fleet. It also
delivered a container-based combat system
for close-in defence against Fast Inshore
Attack Craft offering a new, flexible solution
for the self-protection of support ships.
The business is pursuing selected growth
campaigns with a focus on emerging
technologies such as autonomous systems.
During the year, it won a number of
autonomy-related contracts, including
support to the Royal Navy to deliver the
Unmanned Warrior exercise in October
2016 which will demonstrate the use of
autonomous systems in a wide range of
scenarios. QinetiQ’s role also includes the
delivery of a containerised command system
to control multiple unmanned systems.

Cyber, Information & Training
The CIT business helps government and
commercial customers respond to ever-
evolving threats based on its expertise in
training, secure communication networks
and devices, intelligence gathering and
surveillance sensors, and cyber security.

Although competition is fierce, the UK SDSR
and the focus on counter-terrorism are likely
to drive increases in budgets for C4ISR
and cyber security. The CIT business is the
MOD’s leading supplier of C4ISR research,
maintaining its research revenues during
the year and winning new work to improve
information systems for deployed
headquarters. The business manages
a network of more than 100 UK SMEs
through these research framework contracts,
fulfilling an ‘innovation integrator’ role that
is becoming more and more important in
defence and other sectors. Large framework
contracts are being used increasingly for the
delivery of technology services and during
the year the business was awarded a position
with Northrop Grumman on a seven-year
framework contract to deliver cyber security
support to the UK Government. It also won
a contract with Motorola Solutions to provide
monitoring, assessment and assurance
services in support of the delivery of the
UK Emergency Services Network.

Outside its traditional markets, CIT is
providing advice to regional and local
government customers on innovation
initiatives to support local business growth,
and is delivering training and simulation
services to customers in North America,
Europe and the Middle East. Finally, the
business is providing secure receiver
processing for the encrypted Public
Regulated Service (PRS) on the Galileo

constellation of satellites – the European
Union version of GPS which goes live in 2017.
During the year it launched a new receiver
that will utilise the PRS service for use by
governments, the military and emergency
services across Europe.

International
On 1 April 2016, a new International business
was established incorporating businesses
with a significant international footprint and
those with international potential, as well as
to manage other opportunities via our
international offices. The business includes
QinetiQ Australia as well as Advisory Services
(previously known as Procurement Advisory
Services).

The Australian business provides impartial
advice and services predominately to
government customers. This year, the
business successfully agreed with the
Australian Department of Defence, the
renewal for up to 15 years of the Aircraft
Structural Integrity (ASI) services contract for
a minimum value of A$21m, which supports
the airworthiness of military aircraft. This is
one of two underpinning contracts for the
Australian business, which position it well for
‘strategic partner’ style contracts that the
Australian Government is using increasingly
as it implements its recapitalisation and
defence acquisition reform programmes.

Advisory Services helps customers deliver
complex programmes by providing analytical
services and the evidence required to make
complex decisions. Building on its strong
record in the UK, the business won a major
contract to provide early stage advice and
business case support to a Middle Eastern
client for a complex engineering project.

Global Products
Global Products delivers innovative
solutions to meet customer requirements
and undertakes contract-funded research
and development, developing intellectual
property in partnership with key
customers and through internal funding
with potential for new revenue streams.

Financial performance
Orders grew 8% to £164.4m (2015: £152.0m)
as a result of a new pipeline contract for
OptaSense and due to improved order flow
in QinetiQ North America. As a result, the
Global Products division had 64% of its FY17
revenue already under contract at the
beginning of the new financial year compared
with 61% at the same time last year.

Revenue was up slightly to £139.3m
(2015: £138.2m) as a result of currency
movements but underlying operating
profit* fell to £15.1m (2015: £18.3m),
impacted by a reduction in income from
the oil and gas sector and the completion
of certain programmes in the prior year.
The underlying operating profit margin*
was 10.8% (2015: 13.2%).

Assumption
Orders
Revenue
Underlying operating profit*
Underlying operating margin*
Book to bill ratio
Funded backlog

* Definitions of underlying measures of performance can be found in the glossary on page 149.

2016
£m
164.4
139.3
15.1
10.8%
1.2x
139.1

2015
£m
152.0
138.2
18.3
13.2%
1.1x
116.7

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationOperating review continued

Year in review
QinetiQ North America
QinetiQ North America develops and
produces innovative military protection
products, specialising in unmanned systems,
survivability and maritime systems, along
with products in related commercial markets.
The performance of this business improved
in year as it continued to adapt to a defence
funding environment that has shifted
markedly from the overseas contingency
operations associated with Iraq and
Afghanistan. QinetiQ North America is the
world’s leading provider of military robots
with employees centred in Massachusetts,
Pennsylvania and Virginia. Activity in year
focused on the reset and recapitalisation
of robots previously used on operations and
the upgrade of systems with new capabilities
such as the detection of CBRNE (chemical,
biological, radiological, nuclear, and
explosives). At the same time, the business
is preparing for multi-year Programs of
Record which will be funded out of the
Department of Defense’s base budget.

During the year the business announced
a contract win valued at $16m from General
Atomics in San Diego, California to deliver
control hardware and software for the
Electromagnetic Aircraft Launch System
(EMALS) and the Advanced Arresting Gear
(AAG) to be installed on the Navy’s next
aircraft carrier, the future John F. Kennedy
(CVN 79). It was also awarded orders for
survivability products for both US and
international customers, with demand for
air and ground armour increasing in year.
In addition to product sales, QinetiQ North
America is building on its base of contract-
funded R&D projects to drive technology
development, explore new customer
problems and expand its competitive
offerings.

The project will pave the way for a second
mission, recently rescheduled to 2020, in
which a rover will spend six months analysing
Mars’s environment for signs of life. The business
is currently developing the computer and
avionics for ESA’s Proba 3 satellites, to be
launched in 2019 to study the Sun.

EMEA Products
EMEA Products provides research services
and bespoke technological solutions
developed from intellectual property spun
out from EMEA Services. QinetiQ makes
an important contribution to sovereign UK
capability in advanced materials technology,
and during the year it renewed a five-year,
£10m contract to provide materials research
and advice to the UK MOD. This capability
underpins ongoing commercial relationships
with EDF Energy for the development of
stealth wind turbines. QinetiQ also became
the first company accredited and authorised
by the French Government to assess
proposed wind farm impact on
meteorological radars, in order to speed
up planning applications. Other orders
received in year included a contract with
the US Defense Advanced Research Projects
Agency (DARPA) to develop an electric
hub-drive that will improve survivability and
mobility of future military ground vehicles.
The contract, worth $2m with an option for
a further $3m, is part of DARPA’s Ground
X-Vehicle Technologies (GXV-T) programme.

Subsidiaries Boldon James and Commerce
Decisions are reported in EMEA Products.
Boldon James, which provides data
classification solutions to large military
and commercial organisations, had a strong
year and should see further opportunities
following changes to European Union
regulations that introduce significant
penalties for data classification leaks.
Commerce Decisions renewed its agreement
with the MOD for the provision of tender
assessment and procurement support
software. It also won the first contract
through its Australian arm and was selected
to deliver bid evaluation criteria for the
Canadian Surface Combatant programme
which will be used to assess warship
designers and combat system integrators.

OptaSense
OptaSense is a Distributed Acoustic Sensing
(DAS) business operating in multiple vertical
markets. During the year, Jamie Pollard
was appointed to be its CEO after more
than 20 years running large global businesses
at oilfield services company Schlumberger.
An OptaSense advisory board has also been
established, comprising senior industry
specialists to provide domain expertise in
key target markets including Hansjorg Hess,
a former Executive Director of Deutsche
Bahn Netze. Although growth in the
upstream oil and gas market has been
constrained by the low oil price, the product
development agreement with Shell continues
to deliver significant technical progress and
a fourth generation OptaSense system was
launched in year. The business also signed
a strategic marketing agreement with
Weatherford, an oil and gas service company
with a presence in every major oil and gas
region of the world. The partnership will
deliver enhanced data acquisition and
monitoring of seismic activity, well
construction, completion and fracture
operations, and production flow.

OptaSense continues to make progress in
infrastructure security, winning a contract
with a partner to deliver the world’s largest
distributed fibre sensing project for the
Trans-Anatolian Natural Gas Pipeline (TANAP)
that runs from Azerbaijan, through Georgia
and Turkey, to Europe. The total contract
value is more than $30m, of which
approximately half has been contracted
with OptaSense, and will cover the protection
of over 1,850km of pipeline. The business
also won a contract to monitor a further
500km of gas pipeline in India. At the end
of September, OptaSense successfully
completed an 18-month development
project with Deutsche Bahn, which
concluded that DAS technology has the
potential to significantly reduce the cost
of sensing in the rail industry. It also won
a contract with a Class 1 US Railroad operator
to deliver a software platform in preparation
for a wider rollout of DAS technology.

Space Products
QinetiQ’s Space Products business, which
provides satellites, payload instruments,
sub-systems and ground station services,
delivered several innovative projects during
the year. In March, the European Space
Agency’s (ESA’s) ExoMars mission was
launched, containing QinetiQ’s UHF
transceiver which will transmit data from
the lander on the planet’s surface back
to Earth via a satellite orbiting Mars.

QinetiQ Group plc Annual Report and Accounts 2016Leading the way in
maritime autonomy

Unmanned Warrior
The UK Defence Science and Technology
Laboratory (Dstl) has awarded QinetiQ
a £4.2m contract to deliver a command
and control demonstration of coordinating
multiple unmanned vehicles. This will see
landmark new systems deployed during the
Royal Navy’s Unmanned Warrior showcase in
October 2016, with demonstrations including
a comparison of mine countermeasures by
manned and unmanned craft. This showcase
takes place alongside the Joint Warrior
exercise, with QinetiQ facilities and expertise
supporting a wide range of activities.

Leading the way in maritime autonomy
Anticipating the critical role of autonomy
in future maritime operations, QinetiQ
established its Maritime Autonomy Centre
two years ago to support customers in the
design, integration, test and evaluation of
these emerging systems. “We deliver the
innovation, expertise and facilities that
help our customers to lead the way in this
increasingly important sector,” says Bill Biggs,
Campaign Leader Maritime Management.
The centre won new business valued at more
than £6.5m in its first year of full operation.

Groundbreaking technology
Unmanned Warrior will involve more
than 60 unmanned vehicles from 40
organisations operating in the challenging
waters and airspace of northwest Scotland.
Leading a team that comprises BAE Systems,
Thales Group and SeeByte, our experts
are developing a solution to integrate
unmanned systems from multiple suppliers.
“The objective is to minimise the number
of screens and controls needed to conduct
missions, so improving efficiency and
mitigating the risk of human error by
reducing the burden on operators,” Biggs
adds. Using QinetiQ facilities near the Isle
of Skye and Hebrides, this groundbreaking
work will provide two systems for Defence
Equipment and Support (DE&S) and Dstl:
one in a surveillance role and the other
supporting underwater mine
countermeasures.

Commander Peter Pipkin, Royal Navy –
“This is an important part of showing the
true potential of unmanned systems. Being
able to demonstrate the end-to-end flow
of information to enable better decision-
making is key and an important enabler
for our demonstrations.”

QinetiQ Group plc Annual Report and Accounts 2016

Strategic reportGovernanceFinancial statementsAdditional informationChief Financial Officer’s review

A strong balance sheet and
a clear capital allocation policy

Financial highlights

• Stable performance from EMEA Services
in challenging markets, with flat revenue
on an organic basis

• EMEA Services orders growth driven by
the timing of multi-year contract awards
(including the £153m five-year UK MOD
renewal for aircraft engineering services
awarded in H2 FY16), with some continued
de-scoping and delay to other orders
• Global Products performance stabilising
despite the reduction in demand for
US conflict-related products

• Further strengthening of the balance sheet
with net cash of £274.5m at 31 March 2016
(2015: £195.5m) and continued strong
operating cash conversion performance

• Full year dividend of 5.7p, 6% growth

on prior year

• Completed the £150m share buyback

programme and announced a new £50m
programme in November 2015

• Disposal of non-core Cyveillance business

for net cash proceeds of £22m

• Published clear capital allocation policy

“Another strong year of operational cash
flow has enabled us to announce the
return of a further £50m to shareholders,
whilst retaining a strong balance sheet
in line with our capital allocation policy.”

Revenue

£755.7m

2015: £763.8m

Organic change in revenue

Underlying operating profit*

( 1%)

2015: (2%)

£108.9m

2015: £111.3m

Underlying operating margin*

Underlying earnings per share*

Dividend per share

14.4%

2015: 14.6%

16.3p

2015: 15.2p

5.7p

2015: 5.4p

* Definitions of specific adjusting items and underlying measures of performance can be found in the glossary on page 149.

QinetiQ Group plc Annual Report and Accounts 2016
Headline results
Orders grew 8% to £659.8m (2015: £613.6m), due to the award of
a £153m five-year renewal from the UK Ministry of Defence (MOD)
for aircraft engineering support, partially offset by some de-scoping
and delay to orders in a challenging market environment. At the
beginning of the new financial year, 74% of the Group’s FY17 revenue
was already under contract, compared with 77% a year ago.

Revenue was £755.7m (2015: £763.8m), 1% down on an organic basis,
after adjusting for foreign exchange movements and the divestment
of the non-core Cyveillance business in December 2015 for net
disposal proceeds of £22m.

Underlying operating profit* was £108.9m (2015: £111.3m). Growth
in EMEA Services, which benefited from a credit of approximately
£3m due to the resolution of a historical overseas exposure, was
offset by Global Products which was impacted by a reduction of
income in the oil and gas sector and the completion of certain
programmes in the prior year.

Underlying profit before tax* increased 1% to £108.7m (2015:
£107.8m) with underlying net finance costs* falling to £0.2m (2015:
£3.5m) as a result of the early repayment of the private placement
debt in the prior year. Underlying earnings per share* for the
continuing Group increased 7% to 16.3p (2015: 15.2p), benefiting
from the higher underlying profit before tax* and reduced share
count as a result of the Group buying back shares. Basic earnings
per share for the total Group (including approximately two months
of US Services in 2015) were 18.1p (2015: 16.6p per share).

Group summary – continuing operations

Orders (£m)
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)

2016
659.8
755.7
(1%)
108.9
14.4%
75.3
108.7
90.2
(0.2)

11.8%
16.3p
16.8p
5.7p
103.6
96%
274.5

2015
613.6
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

* Definitions of specific adjusting items and underlying measures of performance can be found in the glossary on page 149.

Specific adjusting items
In the income statement, the Group presents specific adjusting
items separately. In the judgement of the Directors, for the reader
to obtain a proper understanding of the financial information,
specific adjusting items need to be disclosed separately because
of their size and nature. Underlying measures of performance
exclude the specific adjusting items.

Specific adjusting items included a profit of £16.2m recognised
on the disposal of Cyveillance, a £7.5m gain in respect of the US
Services disposal following the closure of certain warranty issues
and a £31.9m impairment of US goodwill. There is also a net tax
credit of £21.2m following the election into the RDEC regime and
other deferred tax movements.

Page 118 – Note 9 to the financial statements

The prior year statutory operating profit included 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. Details of all specific adjusting items and a reconciliation
of underlying profit to total profit are shown in note 4 of the
financial statements.

Page 115 – Note 4 to the financial statements

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information

Chief Financial Officer’s review continued

Finance costs
Net finance costs were £1.3m (2015: £4.1m) following the pay down
of the US private placement debt in the prior year. The underlying net
finance costs* were £0.2m (2015: £3.5m), with an additional £1.1m
(2015: £0.6m) in respect of the pension net finance expense reported
within specific adjusting items.

Taxation
UK Group companies have now elected to obtain tax benefits in
respect of allowable R&D expenditure through the R&D Expenditure
Credit (‘RDEC’) process rather than through the previous treatment
as a super-deduction in the tax computations. This election was made
retrospectively back to 1 April 2013 and the incremental impact on
the tax expense for the years ending 31 March 2014 and 31 March
2015 has been reported in the current year as a specific adjusting
item. The change of regime results in the utilisation of previously
capitalised UK trading losses and the associated deferred tax asset
has been charged to the income statement.

Page 118 – Note 9 to the financial statements

Deferred tax has been calculated using the enacted future statutory
tax rates.

At 31 March 2016, the Group had unused tax losses of £154.8m
(2015: £291.6m) which are potentially available for offset against future
profits. £26.1m of these losses are time limited of which £6.3m will
expire in 2034 and £19.8m will expire in 2035. Certain UK tax losses
had been recognised on the balance sheet as at 31 March 2015 as a
deferred tax asset of £25.2m. As noted above, those tax losses have
now been utilised following the election into the RDEC regime. No
deferred tax asset is recognised in respect of the remaining tax losses
due to uncertainty over the timing and extent of their utilisation.

Factors affecting future tax charges
The effective tax rate continues to be below the UK statutory rate,
primarily as a result of the benefit of research and development
expenditure credits 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, the geographic mix
of profits and the assumption that the benefit of net R&D tax relief
retained by the Group remains in the tax line.

Earnings per share
Underlying basic earnings per share* for the continuing Group were
16.3p (2015: 15.2p), benefiting from the higher profit before tax and
the reduced share count, as a result of the Group buying back shares.
Basic earnings per share for the total Group were 18.1p (2015: 16.6p
per share). The average number of shares in issue during the year,
as used in the basic earnings per share calculations, net of treasury
shares, was 587.0m (2015: 630.9m), and there were 586.7m shares
in issue at the year end.

Cash flow
The Group’s cash flow from operations before cash flows in respect
of specific adjusting items but after capital expenditure was £103.6m
(2015: £114.9m). Underlying operating cash conversion* remained
strong at 96% (2015: 103%).

At 31 March 2016, net cash was £274.5m (2015: £195.5m), reflecting
continued strong operating cash performance, the £22m proceeds
from the disposal of Cyveillance and non-recurring net tax receipts
totalling £28m relating to the impact of the regime change to R&D
tax credits and the associated surrender of UK trading losses. Total
committed facilities available to the Group at year end amounted to
£235.6m (2015: £233.3m). This is made up of a revolving credit facility
of £235.6m (2015: £233.3m), which is currently undrawn.

Capital allocation
Priorities for capital allocation are:
1. Organic investment complemented by bolt-on acquisitions where

there is a strong strategic fit,

2. The maintenance of balance sheet strength,
3. A progressive dividend, and
4. The return of excess cash to shareholders.

Dividend
The Board proposes a final dividend of 3.8p (2015: 3.6p) making the
full year dividend 5.7p (2015: 5.4p). Subject to approval at the Annual
General Meeting, the final dividend will be paid on 2 September 2016
to shareholders on the register at 5 August 2016. The full year
dividend represents an increase of 6% reflecting the Group’s
progressive dividend policy.

* Definitions of specific adjusting items and underlying measures of performance can be found in the glossary on page 149.

QinetiQ Group plc Annual Report and Accounts 2016

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 IAS19 (revised), before deducting
deferred tax, was £37.7m (2015: £39.4m). The decrease in the net
pension deficit is primarily driven by cash contributions into the
scheme, partially offset by a net actuarial loss arising from changes
to financial assumptions.

The market value of the assets at 31 March 2016 was £1,410.4m
(2015: £1,454.6m) and the present value of scheme liabilities was
£1,448.1m (2015: £1,494.0m).

The key assumptions used in the IAS19 valuation of the scheme were:

Assumption
Discount rate
Inflation – CPI
Life expectancy – male (currently aged 40)
Life expectancy – female (currently aged 40)

2016
3.4%
2.1%
91
93

2015
3.2%
2.1%
91
93

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.

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 £27m
Increase/decrease
by £25m
Increase by £36m

The latest triennial valuation of the scheme was a net surplus of
£31.0m as at 30 June 2014. The triennial valuations are calculated on
a funding basis and use a different set of assumptions, as agreed with
the pension Trustees. Given the extremely low gilt yields, a funding
valuation of the scheme would probably have resulted in a bigger
net deficit than the IAS19 methodology if one had been performed
at the year end.

There has been no change to the cash contributions required under
the recovery plan, which continues to require £13m of company
contributions per annum until 31 March 2018.

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.

Assumption
£/US$ – opening rate
£/US$ – average rate
£/US$ – closing rate
£/A$ – opening rate
£/A$ – average rate
£/A$ – closing rate

2016
1.49
1.50
1.44
1.95
2.05
1.87

2015
1.67
1.63
1.49
1.80
1.85
1.95

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.

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 judgements
A description and consideration of the critical accounting estimates
and judgements made in preparing these financial statements is set
out in note 1 to the financial statements.

David Mellors
Chief Financial Officer
26 May 2016

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationPrincipal risks and uncertainties

Understanding and
managing our risks

Managing our risks

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Establishing the context

Risk assessment

Risk identification

Risk analysis

Risk evaluation

Risk treatment

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. The Board is
accountable for effective risk management
across the Group and 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 reports of the Audit Committee and Risk
& CSR Committee can be found on pages 70
to 77. Details of the Group’s system of risk
management and internal control can be
found in the Corporate governance
statement on pages 64 to 77.

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.

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QinetiQ Group plc Annual Report and Accounts 2016

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) Business transformation

2
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

3
Risks relating to financial
management and markets:

(cid:127) Defined benefit pension obligations
(cid:127) Changes in tax legislation
(cid:127) Defined benefit pension obligations

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:

• Risk identification: identification of risks

and opportunities relevant to the Group’s
objectives.

• Risk analysis: assessment of risks in terms

of likelihood and impact.

• 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 to them an update of
current status and mitigating actions by
rotation throughout the year. The Board
recognises that however good the risk
management processes are they cannot
provide absolute assurance and unknown risks
may manifest without warning; the company
has processes in place to deploy appropriate
management to such risks.

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. The Board
recognises that some risks may be affected
by factors outside the control of the company.

Risk appetite within QinetiQ focuses on those
critical risk areas necessary to achieve our
strategic goals. The risk appetite is articulated
by defining three categories of appetite which
describe the balance of scrutiny and mitigation
activity against likely benefit or reward.

The three categories are:

• Eager: 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, less
investment in mitigation and control
is accepted.

• Balanced: Preference for delivery options
that have a low or moderate degree
of residual risk and where successful
delivery also provides an acceptable
level of reward and value for money.

• Cautious: Avoidance of risk and

uncertainty is the key objective, a greater
level of control and mitigation may be
required. Significantly greater returns
expected for commercial opportunities
to offset risk.

These three categories are then used within
the context of the business strategy to define
the Board’s commercial appetite as:

• Eager 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.

• Cautious for opportunities that involve
new capability or delivery into new
markets and any opportunity into a
new country outside the US and UK.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationPrincipal risks and uncertainties continued

Key risk

Description, link to strategy and impact

Defence
spending

• 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. 70% of the Group’s revenue comes directly from contracts held with the UK Government and 7% directly from
contracts with the US Government.

• The financial burden on both UK and US Government budgets from economic downturn may lead to reduced spending in the markets

in which the Group operates.

• However, the 2015 Strategic Defence and Security Review confirmed that defence spending (which may include some spending from

Departments other than the MOD) would remain at least 2% of GDP, and that the MOD Budget would rise slightly in real terms over the
next ten years. The MOD has ambitious plans to plug capability gaps which require significant budget cuts elsewhere, including a reduction
in civilian posts of up to 30% and a reduction in MOD estate of 30%. These cuts could impact QinetiQ’s core support contracts. The Group’s
main contracts are exposed to spend on test and evaluation, and research and technology.

• QinetiQ North America (approximately £60m annual revenue) has been largely funded through overseas contingency budgets which have

declined in recent years.

• The aerospace, defence and security markets are highly competitive. The Group’s performance may be adversely affected should it not

• QinetiQ seeks to focus on areas within these markets in which its deep customer

• Underlying

• Group Director

Balanced Medium/

be able to compete in the markets in which it aims to operate.

• The Single Source Regulations Office (SSRO) has confirmed the baseline profit rate for new single source defence contracts is 8.95% for
FY17 (FY16: 10.6%) and that over the course of FY17 it will consult again and develop the methodology for calculating the baseline profit
rate in future years, potentially introducing multiple profit rates. This baseline rate acts as the starting point for agreeing the profit rates of
new and renewed contracts, and suppliers can both under and over-perform the contracted rate depending on, for example, risk, capital
servicing and project execution. Further updates and clarifications are expected to be published by the SSRO on other topics affecting
QDCs, eg allowable cost. Our combination of capabilities is unique in the UK and, consequently, approximately 70% of total EMEA Services
revenue is derived from single source contracts, including the non-tasking element of the Long Term Partnering Agreement (LTPA).
We anticipate that the majority of our single source revenue will fall under the regulations within approximately three years.

• The timing of the orders receipt 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.

• 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.

• Some of the Group’s contracts have terms, not unusual in defence, that provide for unlimited liabilities for the Group, or termination

rights for the customer.

• Organisational Conflicts of Interest (OCI) may occur where the Group provides services to both a defence end-user customer as well

as those within the defence supply chain.

• QinetiQ takes proactive steps to manage any potential OCI and maintain its ability to

provide independent advice. QinetiQ operates under the generic formal compliance

• Customer

satisfaction

• Group General

Balanced

Low/

Medium

• The Group is reliant on a limited number of major customers.

• In February 2013 the Group signed the LTPA for a third five-year period with the MOD.

• Underlying

• Group Director

Balanced Medium/

• A material element of the Group’s revenue is derived from one contract. The LTPA is a 25-year contract to provide test, evaluation,
and training services to the MOD. The original contract was signed in 2003. The LTPA operates under five-year periods with specific
programmes, targets and performance measures set for each period. The LTPA directly contributed 27% of the Group’s revenue
and supported a further 16% through tasking services using LTPA managed facilities.

Complex Market
Characteristics

• Our focus on a range of markets in aerospace, defence and security as well as adjacent

• Group Director

Eager

sectors provides a degree of portfolio diversification. The Group will continue to monitor

expenditure changes in its traditional markets and will adjust business activities where

Business

Development

Medium/

High

Associated

Responsibility

Risk

appetite

Likelihood/

impact

Mitigation

appropriate.

KPIs

• Customer

satisfaction

• Underlying

operating

• Underlying

operating

cash flow

• The MOD has made considerable progress in balancing its budget. In defence research,

profit

where QinetiQ is the private sector market leader, spending appears to have stabilised

at 1.2% of the UK defence budget.

• 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.

• 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 though Programs

of Record (ie in the US Base budget) over the next two years.

• QinetiQ and defence industry partners have been fully engaged with the MOD in the

• Underlying

development of the new framework and its practical application. QinetiQ and defence

industry partners expect to be consulted by the SSRO on the Statutory Guidance.

• QinetiQ is supporting an industry review of the profit rate methodology prior to the

consultation on the changes for 2017. The baseline profit rate is the starting point

for profitability on single source contracts – other factors include capital servicing,

operating

cash flow

• Customer

satisfaction

risk and project execution.

• 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.

understanding, domain knowledge, technical expertise and platform independence

provide a strong proposition and a significant advantage in competitive bidding.

operating

profit

Business

Development

High

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.

Counsel &

Company

Secretary

• Compliance

Implementation

Director

The next scheduled ‘re-pricing’ point is March 2018.

• The Group continues to achieve strong customer performance and satisfaction levels,

and significantly exceeded the agreed minimum performance rating of 80% in 2016.

• Underlying

Test & Evaluation

operating

profit

Business Group

• Group Director

High

• The Group has achieved significant cost savings for the MOD on delivered services,

and is on track to deliver £700m of additional savings originally projected over the life

of the contract.

• The Group is proactively engaging with the MOD regarding future plans for test

and evaluation services as a result of SDSR.

operating

cash flow

• Customer

satisfaction

QinetiQ Group plc Annual Report and Accounts 2016Key risk

Description, link to strategy and impact

Mitigation

• Our focus on a range of markets in aerospace, defence and security as well as adjacent

sectors 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 budget. In defence research,
where QinetiQ is the private sector market leader, spending appears to have stabilised
at 1.2% of the UK defence budget.

• 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.

• 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 though Programs

of Record (ie in the US Base budget) over the next two years.

• 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 framework and its practical application. QinetiQ and defence
industry partners expect to be consulted by the SSRO on the Statutory Guidance.

• QinetiQ is supporting an industry review of the profit rate methodology prior to the
consultation on the changes for 2017. The baseline profit rate is the starting point
for profitability on single source contracts – other factors include capital servicing,
risk and project execution.

• 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.

Responsibility

Risk
appetite

Likelihood/
impact

• Group Director

Eager

Business
Development

Medium/
High

• Group Director

Balanced Medium/

Business
Development

High

Associated
KPIs

• Customer
satisfaction

• Underlying
operating
profit

• Underlying
operating
cash flow

• Underlying
operating
profit

• Underlying
operating
cash flow

• Customer
satisfaction

Defence

spending

• 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. 70% of the Group’s revenue comes directly from contracts held with the UK Government and 7% directly from

contracts with the US Government.

in which the Group operates.

• The financial burden on both UK and US Government budgets from economic downturn may lead to reduced spending in the markets

• However, the 2015 Strategic Defence and Security Review confirmed that defence spending (which may include some spending from

Departments other than the MOD) would remain at least 2% of GDP, and that the MOD Budget would rise slightly in real terms over the

next ten years. The MOD has ambitious plans to plug capability gaps which require significant budget cuts elsewhere, including a reduction

in civilian posts of up to 30% and a reduction in MOD estate of 30%. These cuts could impact QinetiQ’s core support contracts. The Group’s

main contracts are exposed to spend on test and evaluation, and research and technology.

• QinetiQ North America (approximately £60m annual revenue) has been largely funded through overseas contingency budgets which have

declined in recent years.

Complex Market

Characteristics

be able to compete in the markets in which it aims to operate.

• The aerospace, defence and security markets are highly competitive. The Group’s performance may be adversely affected should it not

• The Single Source Regulations Office (SSRO) has confirmed the baseline profit rate for new single source defence contracts is 8.95% for

FY17 (FY16: 10.6%) and that over the course of FY17 it will consult again and develop the methodology for calculating the baseline profit

rate in future years, potentially introducing multiple profit rates. This baseline rate acts as the starting point for agreeing the profit rates of

new and renewed contracts, and suppliers can both under and over-perform the contracted rate depending on, for example, risk, capital

servicing and project execution. Further updates and clarifications are expected to be published by the SSRO on other topics affecting

QDCs, eg allowable cost. Our combination of capabilities is unique in the UK and, consequently, approximately 70% of total EMEA Services

revenue is derived from single source contracts, including the non-tasking element of the Long Term Partnering Agreement (LTPA).

We anticipate that the majority of our single source revenue will fall under the regulations within approximately three years.

• The timing of the orders receipt 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.

• 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.

• Some of the Group’s contracts have terms, not unusual in defence, that provide for unlimited liabilities for the Group, or termination

rights for the customer.

as those within the defence supply chain.

• Organisational Conflicts of Interest (OCI) may occur where the Group provides services to both a defence end-user customer as well

• 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 LTPA is a 25-year contract to provide test, evaluation,

and training services to the MOD. The original contract was signed in 2003. The LTPA operates under five-year periods with specific

programmes, targets and performance measures set for each period. The LTPA directly contributed 27% of the Group’s revenue

and supported a further 16% through tasking services using LTPA managed facilities.

• QinetiQ takes proactive steps to manage any potential OCI and maintain its ability to
provide independent advice. QinetiQ operates under the generic formal compliance
regime and applies a rigorous compliance process.

• Customer
satisfaction

• 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.

• In February 2013 the Group signed the LTPA for a third five-year period with the MOD.

The next scheduled ‘re-pricing’ point is March 2018.

• The Group continues to achieve strong customer performance and satisfaction levels,
and significantly exceeded the agreed minimum performance rating of 80% in 2016.

• The Group has achieved significant cost savings for the MOD on delivered services,

and is on track to deliver £700m of additional savings originally projected over the life
of the contract.

• The Group is proactively engaging with the MOD regarding future plans for test

and evaluation services as a result of SDSR.

• Underlying
operating
profit

• Underlying
operating
cash flow

• Customer
satisfaction

Counsel &
Company
Secretary

• Compliance

Implementation
Director

• Group Director
Business Group

• Group Director

Test & Evaluation

• Group General

Balanced

Low/
Medium

Balanced Medium/

High

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationPrincipal risks and uncertainties continued

Key risk

Description, link to strategy and impact

Mitigation

Recruitment
and retention

• The Group operates in many specialised engineering, technical and scientific domains.

• The lack of graduates in the science, technology, engineering and mathematics (STEM) domains leads to future skills shortage.

• Key capabilities and competences may be lost through failure to recruit and retain employees due to internal factors, as well as macro

factors across the sector affecting the desirability, intake and training of engineers, scientists and technologists.

• The regulatory framework in some countries where the Group operates reduces the candidate pool for recruitment and deployment.

• The UK workforce has a skewed age distribution which creates risk on future skills shortage.

Breaches of
security and IT
systems failure

• The Group operates in a highly regulated IT environment.

• The data held by QinetiQ is confidential and needs to be secure, against a background of increasing cyber threat.

• A breach of data security or IT systems failure could have an 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 conducts regular activities to identify key roles and personnel. Some succession

• Employee

• Group Director

Balanced Medium/

planning is undertaken looking internally at candidates ready now or in need of development

engagement

Human Resources

High

Associated

Responsibility

KPIs

Risk

appetite

Likelihood/

impact

• Data security is assured through a multi-layered approach that provides a hardened

• Underlying

• Executive

Cautious

High/High

environment, including robust physical security arrangements and data resilience strategies.

operating

Committee

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.

opportunities.

• STEM outreach from primary school age through to work experience and graduate

• QinetiQ is leading industry in The 5% Club, a campaign to increase the recruitment

of graduates and apprentices.

• 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

• Underlying

them to test relevant financial systems and data, and implements any recommended

EPS

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.

Business
transformation

• A strategic priority is to innovate for value, focusing on markets where customers have a clear need for our skills.

• Innovation will be driven through cultural change, investment in, and application of, our

• Customer

• Group Director

Eager

• Failure to create a culture of innovation or invest adequately in, or create value from, our innovation investment will impact negatively

on the Group’s market position.

core competences for our customers’ advantage in defence and commercial markets.

satisfaction

• The Internal R&D investment process is in place.

Medium/

High

Engineering &

Operations

• Employee

engagement

• Group Director

Human Resources

• Resources have historically been deployed within divisional teams. This encourages an internal culture which makes it difficult to use

• Our way of working has been designed to support the delivery of our strategy, increase

• Group Director

Eager

High/High

resource flexibly across the company to meet customer demands.

customer focus, improve our competitiveness and deliver collaboration across the company.

Human Resources

Trading in
a global market

• A strategic priority is to build an International business that delivers additional value to our customers.

• The Group’s Integrated Strategic Business Planning process is used to clearly articulate

• Orders

• CEO

Cautious

Medium/

• Failure to execute this strategy soundly would negatively impact future growth.

• QinetiQ operates internationally. Risks include: regulation and administration changes, taxation policy, political instability, civil unrest

• While the Group has a growing geographical footprint, its traditional activities are confined

• Orders

• CEO

Cautious

Medium/

and differences in culture.

• Negative events could disrupt some of the Group’s operations and have a material impact on its future financial performance.

• The UK EU referendum scheduled for 23 June may create uncertainty.

strategy, appropriate objectives and metrics.

• The Group has established and is investing in a new International business.

• The Group has been reorganised to enhance customer focus and collaboration,

aligning it with the strategy.

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.

• Regular review within the Group’s Integrated Strategic Business Planning process.

High

• % of

apprentices

and graduates

• Voluntary

employee

turnover

profit

• Profit after tax

• Underlying

operating

cash flow

• Customer

satisfaction

• Employee

engagement

• Organic

revenue

growth

• Organic

revenue

growth

QinetiQ Group plc Annual Report and Accounts 2016Recruitment

and retention

• The lack of graduates in the science, technology, engineering and mathematics (STEM) domains leads to future skills shortage.

• Key capabilities and competences may be lost through failure to recruit and retain employees due to internal factors, as well as macro

factors across the sector affecting the desirability, intake and training of engineers, scientists and technologists.

• The regulatory framework in some countries where the Group operates reduces the candidate pool for recruitment and deployment.

• The UK workforce has a skewed age distribution which creates risk on future skills shortage.

Breaches of

security and IT

systems failure

• The Group operates in a highly regulated IT environment.

• The data held by QinetiQ is confidential and needs to be secure, against a background of increasing cyber threat.

• A breach of data security or IT systems failure could have an 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.

Business

transformation

• A strategic priority is to innovate for value, focusing on markets where customers have a clear need for our skills.

• Failure to create a culture of innovation or invest adequately in, or create value from, our innovation investment will impact negatively

on the Group’s market position.

Key risk

Description, link to strategy and impact

Mitigation

Associated
KPIs

Responsibility

Risk
appetite

Likelihood/
impact

• The Group operates in many specialised engineering, technical and scientific domains.

• The Group conducts regular activities to identify key roles and personnel. Some succession

• Employee

• Group Director

Balanced Medium/

planning is undertaken 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.

• Innovation will be driven through cultural change, investment in, and application of, our
core competences for our customers’ advantage in defence and commercial markets.

• The Internal R&D investment process is in place.

• Resources have historically been deployed within divisional teams. This encourages an internal culture which makes it difficult to use

resource flexibly across the company to meet customer demands.

• Our way of working has been designed to support the delivery of our strategy, increase

customer focus, improve our competitiveness and deliver collaboration across the company.

engagement

Human Resources

High

• % of

apprentices
and graduates

• Voluntary
employee
turnover

• Underlying
operating
profit

• Profit after tax

• Underlying

EPS

• Underlying
operating
cash flow

• Executive
Committee

Cautious

High/High

• Customer
satisfaction

• Employee

• Group Director
Engineering &
Operations

engagement

• Group Director

Human Resources

Eager

Medium/
High

• Group Director

Eager

High/High

Human Resources

• Customer
satisfaction

• Employee

engagement

Trading in

a global market

• Failure to execute this strategy soundly would negatively impact future growth.

• A strategic priority is to build an International business that delivers additional value to our customers.

• The Group’s Integrated Strategic Business Planning process is used to clearly articulate

• Orders

• CEO

Cautious

strategy, appropriate objectives and metrics.

• The Group has established and is investing in a new International business.

• The Group has been reorganised to enhance customer focus and collaboration,

aligning it with the strategy.

• Organic
revenue
growth

• QinetiQ operates internationally. Risks include: regulation and administration changes, taxation policy, political instability, civil unrest

• While the Group has a growing geographical footprint, its traditional activities are confined

• Orders

• CEO

Cautious

and differences in culture.

• Negative events could disrupt some of the Group’s operations and have a material impact on its future financial performance.

• The UK EU referendum scheduled for 23 June may create uncertainty.

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.

• Regular review within the Group’s Integrated Strategic Business Planning process.

• Organic
revenue
growth

Medium/
High

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationPrincipal risks and uncertainties continued

Key risk

Description, link to strategy and impact

Mitigation

Associated

Responsibility

KPIs

Risk

appetite

Likelihood/

impact

Significant breach
of relevant laws
and regulations

• The Group operates in highly regulated environments and recognises that its operations have the potential to have an impact

• The Group has robust policy, procedures and training in place to ensure that it meets

• Underlying

• Executive

Cautious

Medium/

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.

Changes in tax
legislation

• QinetiQ is liable to pay tax in the countries in which it operates, principally the UK, the US, Australia and Belgium. Changes in tax legislation
in these countries could have an adverse impact on the level of tax paid on profits generated by the Group. The majority of the trading
losses in the UK were utilised during the year to 31 March 2016 on transition to the RDEC scheme and are no longer available to offset
future taxable profits.

• In the UK, QinetiQ claims significant levels of tax relief in respect of its R&D activities. This is claimed via the Government’s R&D

Expenditure Credits (RDEC) scheme, which currently provides a rebate of 11% of allowable R&D expenditure. Hence, in addition to the
risk of changes to the headline level of corporation tax, the Group is exposed to changes to the level of this R&D rebate percentage and
the level of R&D expenditure deemed to be allowable for tax purposes. The SSRO has stated that any tax reliefs or credits claimed by
a contractor in respect of single-source qualifying defence contracts should be reimbursed to the MOD. As new customer contracts are
entered into and as the mix of single-source, non-competed MOD contracts to other contracts changes, the value of the R&D tax benefit
passed back to the customer will also change.

Defined benefit
pension
obligations

• The Group operates a defined benefit pension scheme closed to future accrual.

• At the year end the DB pension scheme was in deficit under an IAS19 basis. The deficit was £37.7m

• The size of the deficit may be materially affected by a number of factors, including investment returns, changes in interest rates

and inflation 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.

• At the last triennial valuation as at 30 June 2014 the scheme funding (on a technical provisions basis) was a surplus of £31.0m.

all current regulations; for example, annual business ethics training is mandatory for

all employees across the Group and the Board; role specific safety training.

operating

profit

Committee

High

• The QinetiQ Code of Conduct defines clear expectations for the Group and its employees;

• Profit after tax

for example, it states that the Group does not tolerate bribery and corruption and will

comply with relevant international trade regulations.

• Underlying

EPS

• Underlying

operating

cash flow

• Underlying

EPS

• 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.

potential changes.

• The Group does not have a significant level of cross-border activity but where it does have

such transactions controls are in place to ensure pricing reflects ‘arm’s length’ principles.

The Group does not, therefore, have a significant exposure to transfer-pricing legislation.

• The Group does not make use of ‘off-shore’ entities or tax structures to focus taxable

profits in jurisdictions that legislate for low tax rates.

• Opportunities continue to be explored to manage both effective tax rate (ETR) and cash

tax impacts in line with the Board endorsed tax strategy.

• QinetiQ seeks to be open and transparent in its engagement with the UK tax authorities

by sharing with HMRC the methodologies adopted in its tax returns.

• The Group has £154.8m of tax losses carried forward as at 31 March 2016 (2015: £291.6m).

• External advice and consultation are sought on potential changes in tax legislation in the

• Profit after tax

• Chief Finance

Cautious

Medium/

UK, the US and elsewhere as necessary enabling the Group to plan for and mitigate

Officer

High

• Scheme performance is reviewed regularly by the Trustee in conjunction with

• Profit after tax

• Chief Finance

Balanced

High/High

Group management.

• External actuarial and investment advice is regularly taken to ensure the best interests

EPS

• Group Treasurer

• Underlying

Officer

• Underlying

operating

cash flow

of both the Group and the scheme members.

• The Group works in collaboration with the Trustee 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. This will require £10.5m pa until 2018.

• The Group and Trustee reduced future liabilities by switching from RPI to CPI for indexation

and revaluation purposes as part of the 2012 Strategy Agreement.

• The scheme was closed to future accrual on 31 October 2013.

• At the year end 100% of the inflation risk (CPI basis) is hedged and 44% of interest rate risk

hedged, measured on a gilts basis.

• A contingent asset in the form of an asset backed funding structure provides the Scheme

with an additional £2.5m per annum (indexed by CPI) for 20 years to 2032.

QinetiQ Group plc Annual Report and Accounts 2016Significant breach

of relevant laws

and regulations

on a variety of stakeholders.

• The Group operates in highly regulated environments and recognises that its operations have the potential to have an impact

• 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.

Changes in tax

legislation

in these countries could have an adverse impact on the level of tax paid on profits generated by the Group. The majority of the trading

losses in the UK were utilised during the year to 31 March 2016 on transition to the RDEC scheme and are no longer available to offset

future taxable profits.

• In the UK, QinetiQ claims significant levels of tax relief in respect of its R&D activities. This is claimed via the Government’s R&D

Expenditure Credits (RDEC) scheme, which currently provides a rebate of 11% of allowable R&D expenditure. Hence, in addition to the

risk of changes to the headline level of corporation tax, the Group is exposed to changes to the level of this R&D rebate percentage and

the level of R&D expenditure deemed to be allowable for tax purposes. The SSRO has stated that any tax reliefs or credits claimed by

a contractor in respect of single-source qualifying defence contracts should be reimbursed to the MOD. As new customer contracts are

entered into and as the mix of single-source, non-competed MOD contracts to other contracts changes, the value of the R&D tax benefit

passed back to the customer will also change.

Defined benefit

• The Group operates a defined benefit pension scheme closed to future accrual.

• At the year end the DB pension scheme was in deficit under an IAS19 basis. The deficit was £37.7m

pension

obligations

• The size of the deficit may be materially affected by a number of factors, including investment returns, changes in interest rates

and inflation 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.

• At the last triennial valuation as at 30 June 2014 the scheme funding (on a technical provisions basis) was a surplus of £31.0m.

Key risk

Description, link to strategy and impact

Mitigation

• The Group has robust policy, procedures and training in place to ensure that it meets
all current regulations; for example, annual business ethics training is mandatory for
all employees across the Group and the Board; role specific safety training.

• The QinetiQ Code of Conduct defines clear expectations 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.

Responsibility

• Executive
Committee

Risk
appetite

Cautious

Likelihood/
impact

Medium/
High

Associated
KPIs

• Underlying
operating
profit

• Profit after tax

• Underlying

EPS

• Underlying
operating
cash flow

• QinetiQ is liable to pay tax in the countries in which it operates, principally the UK, the US, Australia and Belgium. Changes in tax legislation

• External advice and consultation are sought on potential changes in tax legislation in the

• Profit after tax

• Chief Finance

Cautious

UK, the US and elsewhere as necessary enabling the Group to plan for and mitigate
potential changes.

• Underlying

EPS

Officer

• The Group does not have a significant level of cross-border activity but where it does have
such transactions controls are in place to ensure pricing reflects ‘arm’s length’ principles.
The Group does not, therefore, have a significant exposure to transfer-pricing legislation.

• The Group does not make use of ‘off-shore’ entities or tax structures to focus taxable

profits in jurisdictions that legislate for low tax rates.

• Opportunities continue to be explored to manage both effective tax rate (ETR) and cash

tax impacts in line with the Board endorsed tax strategy.

• QinetiQ seeks to be open and transparent in its engagement with the UK tax authorities

by sharing with HMRC the methodologies adopted in its tax returns.

• The Group has £154.8m of tax losses carried forward as at 31 March 2016 (2015: £291.6m).

Medium/
High

• Scheme performance is reviewed regularly by the Trustee in conjunction with

• Profit after tax

• Chief Finance

Balanced

High/High

Group management.

• Underlying

Officer

• External actuarial and investment advice is regularly taken to ensure the best interests

EPS

• Group Treasurer

• Underlying
operating
cash flow

of both the Group and the scheme members.

• The Group works in collaboration with the Trustee 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. This will require £10.5m pa until 2018.

• The Group and Trustee reduced future liabilities by switching from RPI to CPI for indexation

and revaluation purposes as part of the 2012 Strategy Agreement.

• The scheme was closed to future accrual on 31 October 2013.

• At the year end 100% of the inflation risk (CPI basis) is hedged and 44% of interest rate risk

hedged, measured on a gilts basis.

• A contingent asset in the form of an asset backed funding structure provides the Scheme

with an additional £2.5m per annum (indexed by CPI) for 20 years to 2032.

This Strategic report was approved by the Board of Directors
on 26 May 2016 and signed on its behalf by:

David Mellors
Chief Financial Officer
26 May 2016

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement

An introduction
from our Chairman

Effective governance
Corporate governance is about what the Board of a company
does and how it sets the values of the company. The purpose of
corporate governance is to facilitate effective, entrepreneurial and
prudent management that can deliver the long-term success of
the company. The Board of Directors therefore should comprise
experienced individuals with a variety of backgrounds and
experience, who are independent in character and judgement.

Board skills

2016

Defence
Engineering
Financial
Science

Number of Directors
6
4
9
5

Dear shareholder,
We believe that it is imperative that a company operates a sound
system of corporate governance and internal control as it seeks to
evolve and grow its business. As QinetiQ develops its vision and
strategy for the coming years, good governance is critical for effective
stewardship and risk management.

The Board has overseen a year of intense activity as the new Group
Chief Executive Officer, Steve Wadey, carried out his familiarisation
with and evaluation of QinetiQ, and then developed and rolled out his
strategy to take the Group forwards.

Succession planning has remained an area of focus for the Board.
Lynn Brubaker was appointed as an additional Non-executive Director
in January 2016. Lynn enjoyed a long career in the US commercial
aviation sector and I am delighted that she has joined the Board.

In the US, Tom Mills and Scott Webster were appointed as Proxy
holders of Foster-Miller, Inc. in 2015. I was saddened by the death of
Len Moodispaw in 2015. Len was an excellent Proxy Board Chairman,
having been appointed to that role in 2014 following the disposal of
the US Services business, and he was instrumental in setting out the
processes for the new Proxy Board and its relationship with the UK
Board of Directors. Dave Carey has replaced Len as Proxy Board
Chairman and the Executive Directors have met with and joined the
new Proxy Board at a number of its meetings. Details of the role of
the Proxy Board can be found on page 66.

There have been a number of changes in the company’s senior
executive management team and its structure, to enhance and
complement the existing range of skills. Details of the new
governance structure can be found on page 56.

This year has seen an external evaluation of the effectiveness of the
Board and details can be found on page 61.

Director’s length of tenure

2016

Up to 3 years
4-6 years
7-9 years

%
44.5
44.5
11.0

As QinetiQ begins the new financial year with a new vision and
strategy, and a new Executive Committee to lead the way, the Board,
through its decisions and leadership, will maintain a guiding hand on
the work of the CEO and his team to ensure a balanced and measured
way forwards.

Mark Elliott
Non-executive Chairman
26 May 2016

Board composition

2016

Chairman
Non-executive
Non-independent

%
11.0
67.0
22.0

QinetiQ Group plc Annual Report and Accounts 2016Compliance 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.

The Board considers that QinetiQ has complied with
all relevant Provisions of the Code throughout the last
financial year. With regard to the Code requirements
on audit tendering, as set out on page 74, the
company intends to tender the audit during 2016,
with the selected auditor being proposed for
appointment at the Annual General Meeting in 2017.

This statement provides details of the way in which
the Main Principles of the Code have been applied
during that year.

An overview of the Group’s corporate governance
arrangements can be found on the QinetiQ website at
www.QinetiQ.com/about-us/corporate-governance.

“ Corporate governance is
about what the Board of
a company does and how
it sets the values of the
company. The purpose
of corporate governance
is to facilitate effective,
entrepreneurial and prudent
management that can
deliver the long-term
success of the company.”

In this section:

• Compliance
• Overview of the application of the main principles of the Code

Leadership
• Composition of the Board
• Roles and responsibilities
• Board objectives
• Board operation
• Board meetings and attendance
• Committees

• Directors’ biographies

Effectiveness
• Director training and development
•
• Performance of the Board

Independence of Non-executive Directors

• Report of the Nominations Committee

Accountability
•
•
• Management and control of US subsidiaries

Identification and review of risks
Internal control

Board statements relating to risk management
• Directors’ statement of ‘fair, balanced and understandable’ assessment
• Board assessment of principal risks
• Board review of effectiveness of risk management and internal controls
• Going concern statement
• Directors’ confirmation of longer-term viability

• Report of the Audit Committee

• Report of the Risk & CSR Committee

• Report of the Security Committee

Relations with shareholders

Remuneration
• Annual statement on remuneration
• Remuneration Policy Summary
• Annual Report on Remuneration

• Directors’ report

• Directors’ responsibility statement

• Independent auditor’s report

51
52

54
54
54
54
54
56
56

60
60
60
61

64
64
65
66

68
68
68
68
68
69

80
80
82
86

100

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

Overview of the application of
the Main Principles of the Code

Code Principle A
Leadership
(pages 54 to 59)

Code Principle 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. This report contains a statement
of how the Board operates, including which types of decisions
are taken by the Board and which are delegated to management.
Details of the Board and Committee membership and Directors’
attendance at Board and Committee meetings are included in this
Annual Report on page 56.

A2
Division of Responsibilities
The roles of Chairman and Chief Executive are not exercised by the
same individual and their separate responsibilities are established,
set out in writing and approved by the Board.

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 and help develop proposals on strategy. 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. Details can be
found on page 61.

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 2016Code Principle C
Accountability
(pages 64 to 77)

Code Principle D
Remuneration
(pages 80 to 95)

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 how the company generates or preserves value
over the longer term (the business model) and the strategy for
delivering the objectives of the company. A going concern
statement and longer-term viability statement are included on
pages 68 and 69 respectively, responsibility statements can be
found on page 99, and details of the process for ensuring that the
Annual Report is fair, balanced and understandable can be found
on page 68. There is also a statement in the auditor’s report on
page 102 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 assessed and monitored 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, is presented by the CEO to the Board
annually. The Strategic report contains on pages 42 to 49 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 64 to 67.

An explanation of how the Directors have assessed the prospects
of the company and a statement in respect of the Board’s
assessment of the company’s longer-term viability are set out
on page 69.

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 70 to 74.

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 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 in the
Directors’ remuneration report on pages 80 to 81. It provides details
of, or links to, the Group’s reward and remuneration policies and
payments, and also the procedure for setting policy on Executive
Director remuneration.

The Committee also recommends and monitors the level and
structure of remuneration for senior management. The Directors’
remuneration report is incorporated into this corporate governance
statement by reference.

Code Principle E
Relations with Shareholders
(pages 78 to 79)

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. As noted on page 78, meetings with
investors during the year were led by the Executive Directors.
The Chairman and Senior Independent Director were available
to attend meetings with investors as appropriate and on request.

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.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

A
Leadership

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 judgement on key issues affecting the
Group and its business operations, including strategy, performance,
resources (including key appointments) and standards of conduct.

Composition of the Board
At the date of this report, the Board has nine members: the
Non-executive Chairman; six other Non-executive Directors; and
two Executive Directors – the Chief Executive Officer (CEO) and the
Chief Financial Officer (CFO). Their names and skills and experience
are set out on pages 58 to 59.

The following changes in Board membership took place during the year:
• Steve Wadey was appointed as an Executive Director and CEO

on 27 April 2015.

• Lynn Brubaker was appointed as a Non-executive Director

on 27 January 2016.

Roles and responsibilities
The Board of Directors is responsible for overseeing the Group’s strategy
and ensuring the implementation of operational activity which supports
that strategy. It has mandated the organisation’s standards of behaviour
and its risk appetite, along with key policies and processes, and enables
the business to implement strategy and monitor operational
performance through its direction and advice. The Directors are
responsible for overseeing the performance of the Group, and their
powers are subject to the Articles of Association and any applicable
legislation. The Board has delegated the day-to-day operational
management of the company to the Executive Directors and members
of the senior management team, but certain matters are reserved
to it for its decision, as detailed on this page. The Board monitors the
performance of the senior management team and organises its business
to have regular interaction with key members of senior management.

Individual Board members bring significant skills and experience to bear
on their contribution to the Board. They are able to operate at a high
level independently of each other but also work together as a team.

Board objectives
The overarching remit of the Board is to demonstrate the highest
standards of corporate governance in accordance with the Code
and to carry out the Directors’ fiduciary duties:
• to demonstrate strategic leadership and oversight;
• to agree the strategy and 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;

• 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.

Matters reserved to the Board
The Board has a clearly articulated set of matters which are
specifically reserved to it for consideration, in addition to those
specified in the company’s Articles of Association.

These include (but are not limited to):
• 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.

Operation
The Board has an annual calendar of meetings and 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. Details of
the Board’s review of strategy during the year can be found on the
next page.

For each meeting, as standing items, the Board receives a written
report from the CEO and CFO 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, and also contains a report on investor relations which is
prepared in consultation with QinetiQ’s brokers. 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.

Following the changes in the Board membership in 2015, and with the
arrival of the new CEO, it had been agreed as part of the Board
effectiveness review in 2015 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 senior management team
to enhance the Board–business relationship.

QinetiQ Group plc Annual Report and Accounts 2016During the year under review, members of the senior management
team presented to the Board and its Committees on specific areas,
including reputational risk, corporate responsibility, cyber risk,
pensions and strategy. Going forwards, arrangements have been
made for Non-executive Directors to attend each of the quarterly
extended leadership meetings run by the Executive Committee
and which are attended by approximately 100 senior leaders
within the Group.

Board and Committee meetings are generally spread over a two-day
period, to allow sufficient time for the Board to deal with the various
items of business. The Chairman meets with the Non-executive
Directors, without executives present, after each Board meeting.

The Board also meets informally, to facilitate Board integration and
working together as a team, and to allow time for the Directors to
consider other matters outside of the formal agenda.

Key issues considered by the Board in the past year include:

Development of Group Strategy
The Board has had full oversight of the development of the Group
strategy and transformation programme during the year.

At its May and July meetings, the Board received updates from the CEO
in respect of his progress with his Group familiarisation programme and
how that was beginning to crystallise the focus for the Group strategy.
Strategy planning was a separate agenda item at both the July and
September meetings, when the Group Strategy Director presented on
progress against milestones in respect of the current strategy, together
with updates on progress with the development of the new integrated
strategic business plan which would be presented at the two day Board
strategy meeting in early November.

The November Board Strategy meeting was a two-day meeting held
at an off-site location where the strategy for the Group as a whole
was reviewed by the Board, with presentations by key members
of the senior management team. The pre-reading materials had
detailed the broad structure of discussions on the strategic
environment, a vision-led strategy that responded to that
environment and a transformation programme that would drive
growth. A review of each business was presented and the market

factors which drove the case for change were considered. The
second day looked at the proposed vision, success criteria and
strategy, and the critical enablers of integration, excellence,
investment, international growth and innovation were considered.
The transformation programme, leadership and organisational
structures and performance trajectory were also considered. It was
noted that further research, analysis and iteration were required to
refine the strategy and establish the detail of the new structures,
and would take place over the ensuing three to four months.

Following the November strategy meeting, the Group strategy
was further refined and established, and reported on by the Group
Strategy Director at the January Board meeting. The new vision and
strategy and related transformation programme were rolled out
to the company in early March, with a further update on progress
from the Group Strategy Director at the Board’s March meeting.

The progress of the integrated strategic business plan and
transformation programme will continue to be on the Board agenda
for consideration and measurement over the coming year. Details of
the Group strategy can be found in the Strategic report on pages
10 to 15.

Monitoring developments in the MOD spending review
The UK Government’s Strategic Defence and Security Review
(SDSR) was published in November 2015, in respect of the UK’s
capability priorities and UK defence budget, and the revised
baseline profit rates for single source contracts as set by the Single
Source Regulations Office were announced in 2016. These were
key matters for the company and it was important for the Board to
be kept informed of developments and mitigating actions.

Consequently, as part of the Executive Report tabled at each
Board meeting, the CEO and CFO kept the Board up to date on
developments with the consultations in respect of both matters,
and of the actions being taken within the company to mitigate
the potential impact of the reviews and to address the related
opportunities and threats.

Efficiency and innovation were identified early on in the process
as key themes. The company set up a Test and Evaluation working
group and engaged directly with MOD personnel to identify
how the company could work with the MOD to strengthen the
company’s offering from the Long Term Partnering Agreement
in order to achieve the efficiencies that were needed to meet the
government’s requirements.

By keeping the Board informed of developments as the reviews
progressed, the Board was able to provide the executive with
guidance and oversight throughout the review periods.

Financial Reporting
Financial oversight is a key responsibility of the Directors and the
Board routinely reviews, with input from the Audit Committee,
the results at the half year and the full year in November and May
respectively.

At the May Board meeting, the draft annual report and financial
results announcement were considered. The Board received a
report from the CFO and considered the recommendation from
the Audit Committee in respect of the work undertaken to satisfy
the ‘fair, balanced and understandable’ requirement. The Board
received a summary of the principal controls put in place by the
executive to ensure the integrity of the audit process, including
the provision of information to the auditor, the self-certification
process and internal management representations, a going
concern review and a paper to discuss any dividend
considerations. The company’s brokers attended relevant parts
of the meeting.

At the November Board meeting, the half year announcement and
draft results presentation were presented by the CEO and CFO to
the Board for their consideration, together with a paper to discuss
any dividend considerations. The company’s auditor and brokers
attended relevant parts of the meeting.

At the intervening Board meetings, financial updates were
presented by the CFO as part of the routine Executive Report.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

Attendance at meetings of the Board and its Committees:
1 April 2015 to 31 March 2016

Members
Mark Elliott
Lynn Brubaker(1)
Admiral Sir James
Burnell-Nugent
Michael Harper
Ian Mason
David Mellors(2)
Paul Murray
Susan Searle
Steve Wadey(3)

Board
7/7
2/2
7/7

Audit
Committee
–
1/1
5/5

Nominations
Committee
4/4
–
4/4

Remuneration
Committee
5/5
1/1
5/5

Risk & CSR
Committee
4/4
–
4/4

7/7
7/7
7/7
7/7
7/7
7/7

5/5
5/5
–
5/5
5/5
–

4/4
4/4
–
4/4
4/4
4/4

5/5
5/5
–
5/5
5/5
–

4/4
4/4
4/4
4/4
4/4
4/4

(1) Lynn Brubaker joined the Board on 27 January 2016.
(2) David Mellors was interim CEO during the period from 1 January 2015 to 26 April 2015.
(3) Steve Wadey joined the Board on 27 April 2015.
There was no requirement for the Security Committee to meet during the year.

Committees
During the year, QinetiQ operated by way of two key executive
committees, the Operating Committee and the Executive Committee,
and five principal Board committees. Further details are set out
on the next page.

Since the end of the period under review, the Operating Committee
has been replaced by a new Executive Committee and the Group’s
businesses have been re-aligned to reflect the new vision and
strategy, as detailed on pages 10 to 15. The Executive Committee
comprises the CEO, CFO, the MDs of the new business groups and
functional heads.

As part of this change, the work of the Governance Committee has
been included in the business of the Executive Committee with
specific agenda items for governance matters. Going forwards,
a number of sub-committees have been set up to drive integration,
alignment and monitoring of policies. Each sub-committee is led by
a member of the Executive Committee and comprises representatives
from relevant businesses and functions.

Communication between the Board and the Executive
Committee
The Executive Directors and Company Secretary are members of the
Executive Committee and are involved in the day-to-day management
of the Group’s business, operations and underlying committees.
Other Executive Committee members and members of the senior
management team present to the Board and the Board Committees
on key matters. This interaction enables the Board to receive
information first-hand about the company and its operations and
to give guidance on strategy and oversight of the business direct
to senior management.

Board and Committee structure

Board

Audit
Committee

Nominations
Committee

Remuneration
Committee

Risk & CSR
Committee

Security
Committee

Executive
Committee

QinetiQ Group plc Annual Report and Accounts 2016Board Committees
The Board has established five principal Committees: the Audit
Committee, the Nominations Committee, the Remuneration
Committee, the Risk & CSR Committee and the Security Committee.
Each operates within written terms of reference approved by the
Board. The full terms of reference can be found in the Governance
section of the QinetiQ website at www.QinetiQ.com/about-us/
corporate-governance.

Executive Committees
During the year, the company operated via two executive
committees, the Operating Committee and the Governance
Committee. Membership of the two committees comprised the CEO
and CFO, business MDs and functional heads. With effect from 1 April
2016, following the company’s strategic review, the Operating and
Governance Committees were replaced by an Executive Committee,
as detailed on the previous page.

Given the size of the Board, and in the interests of full Board
participation and transparency, the Board maintains a policy of all
of the Directors being members of all of the Committees, other than
where prohibited by the Code, statutory or Security Committee
requirements. As a result, both the Executive and Non-executive
Directors are members of the Risk & CSR Committee, which facilitates
full consideration of the oversight of internal controls and non-
financial risk management, with the Non-executive Directors being
members of the Audit Committee and focusing on financial controls
and financial risk management.

During the year under review, the Operating Committee was
responsible for the day-to-day management of the Group’s activities,
with the exception of QinetiQ North America (which is managed
through the Proxy Board, as described on page 66 in the section
headed ‘Management and control of US subsidiaries’). It met on a
monthly basis, and received weekly updates on key operational issues
by way of pre-scheduled conference calls. It reported via the Chief
Executive Officer to the Board. Its specific focus continued to be on
the achievement of the Group’s strategic goals in respect of growth
and operational excellence.

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.

A report in respect of each of these Committees is set out in this
report on the pages noted in the index on page 51. The details of
attendance at Committee meetings are set out in the table on the
previous page and also in separate tables contained within each
Committee report.

During the year under review, the Governance Committee was
responsible for the oversight of the risk management process and
its implementation by the divisions. It met on a quarterly basis and
reported via the Chief Executive Officer to the Risk & CSR Committee.

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.

The relevant Code disclosures in respect of the Remuneration
Committee are set out in the Directors’ Remuneration Report on
pages 80 to 95 and are incorporated into this Corporate governance
statement by reference.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationBoard of Directors

Mark Elliott
Non-executive Chairman

Steve Wadey
Chief Executive Officer

David Mellors
Chief Financial Officer

Appointment
to the Board

Appointed Non-executive
Chairman in March 2010.
Appointed Non-executive
Director between June 2009
and February 2010.

Appointed Chief Executive
Officer in April 2015.

Appointed Chief Financial
Officer in August 2008.
Appointed Interim Chief
Executive Officer from
1 January 2015 until
26 April 2015.

Michael Harper
Deputy Chairman and Senior
Independent Non-executive
Director

Appointed Non-executive
Director in November 2011.
Appointed Deputy Chairman
and Senior Independent
Non-executive Director
in February 2012.

Lynn Brubaker
Non-executive Director

Admiral Sir James

Burnell-Nugent

Non-executive Director

Ian Mason

Paul Murray

Susan Searle

Non-executive Director

Appointed Non-executive
Director in January 2016

Appointed Non-executive

Director in April 2010.

Director in June 2014.

Appointed Non-executive

Director in October 2010.

Appointed Non-executive

Director in March 2014.

Jon Messent

Company Secretary and

Group General Counsel

Appointed as Company

Secretary and Group General

Counsel in January 2011.

Independence

Independent on appointment

Not applicable

Independent

Not applicable

Committee
memberships

Nominations Committee
(Chairman)
Remuneration Committee
Risk & CSR Committee

Nominations Committee
Risk & CSR Committee
Security Committee

Risk & CSR Committee
Security Committee

Audit Committee
Nominations Committee
Remuneration Committee
(Chairman)
Risk & CSR Committee
Security Committee

Audit Committee
Nominations Committee
Remuneration Committee
Risk & CSR Committee

Audit Committee

Nominations Committee

Remuneration Committee

Risk & CSR Committee

Security Committee

Audit Committee (Chairman)

Audit Committee

Nominations Committee

Remuneration Committee

Risk & CSR Committee

Security Committee

Remuneration Committee

Risk & CSR Committee

Nominations Committee

Security Committee

• Steve has in-depth

• David has extensive

• Michael has a wealth of

• Lynn has considerable

• Sir James has significant

• Ian has considerable

• Paul has a broad range of

• Susan has extensive

experience of working
in a listed company
environment and of the
defence, technology and
services sectors. He is a
member of the Institute
of Chartered Accountants
in England and Wales.

• David was previously

Deputy Chief Financial
Officer of Logica plc,
Chief Financial Officer
of Logica’s international
division, covering
operations in North
America, Australia,
the Middle East and Asia
and, before that, he was
the Group Financial
Controller. Earlier
experience included
various roles with
CMG plc, Rio Tinto plc
and Price Waterhouse.

operational and corporate
experience and
stewardship, including in
the engineering sector.

• He is a Non-executive

Director of the Aerospace
Technology Institute.
Michael was Chairman of
Ricardo plc 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
and Chairman of Vitec
Group plc from 2004 to
2012. He was Senior
Independent Director of
Catlin Group Limited from
2005 to 2011. Michael was
previously a Director of
Williams plc where, at the
time of the demerger in
2000, he became CEO
of Kidde plc.

experience in the
international aerospace
industry, including
responsibility for business
development, strategy,
operational and
manufacturing issues.
She has a strong track
record of running
international operations,
as well as experience
of businesses in which
technology and intellectual
property are important.

• She is a Non-executive

Director of FARO
Technologies Inc., Hexcel
Corp. and The Nordam
Group. Previously, Lynn was
a Non-executive Director
of Force Protection, Inc.,
Seabury Group, Graham
Partners, Cordiem,
Chairman of the Flight
Safety Foundation, and
a member of the
Management Advisory
Council of the Federal
Aviation Administration.
Lynn retired from
Honeywell International in
2005, where she was Vice
President and General
Manager of Commercial
Aerospace. Prior to that,
she held a variety of roles in
the commercial aerospace
sector working for Allied
Signal (which acquired
Honeywell in 1999),
the McDonnell Douglas
Corporation, Republic
Airlines and ComAir Airlines.

experience of the defence
industry and technology
and extensive operational
and corporate experience
and stewardship. He is
a Fellow of the Royal
Academy of Engineering,
a Fellow of the Institution of
Engineering and Technology
and a Fellow of the Royal
Aeronautical Society.

• During the year under

review, Steve ceased to be
Co-Chair of the Defence
Growth Partnership (DGP)
but retained his
involvement in the DGP by
taking up the role as Chair
of the Industry Liaison
Board of the UK Trade &
Investment Defence &
Security Organisation.
Steve was also appointed
as a member of the Prime
Minister’s Business Advisory
Group. Also during the year
under review, Steve ceased
to be a Non-executive
director of the UK MOD
Research and Development
Board. Previously, Steve
held various roles with
MBDA from 2001 to 2014,
most recently as Managing
Director, MBDA UK and
Technical Director for the
MBDA Group. Before that,
he held various roles in
engineering with Matra BAe
Dynamics from 1996 to
2001, and various roles
with British Aerospace
held from 1989 to 1996.
He was also Co-Chair of
the National Defence
Industries Research &
Development Group.

Skills and
experience

• Mark has experience of a
variety of industry sectors
from membership of the
boards of FTSE listed
companies.

• Mark is a Non-executive

Director of G4S plc,
where he is the Senior
Independent Director
and Chairman of the
Remuneration Committee,
and Chairman of Kodak
Alaris Holdings Limited.

• He was a Non-executive
Director of Reed Elsevier
Group plc (and also
Chairman of its
Remuneration Committee)
and Reed Elsevier NV from
April 2003 until April 2013.
He worked for IBM for over
30 years where he occupied
a number of senior
management positions,
including General Manager
of IBM Europe, Middle East
and Africa and was a
member of IBM’s worldwide
Management Council.

Audit Committee

Nominations Committee

Remuneration Committee

Risk & CSR Committee

(Chairman)

Security Committee

(Chairman)

experience of the defence

industry, contracting with

government and

management. He is

Non-executive Chairman of

Witt Limited and was High

Sheriff of Devon during

2015. During a 37-year

career in the Royal Navy,

which culminated in his

appointment as

Commander-in-Chief Fleet,

he commanded the aircraft

carrier HMS Invincible and

three other ships and

submarines. Between

operational duties, Sir

James held several positions

at the MOD and gained

cross-Whitehall experience

while on secondment

to HM Treasury.

experience in strategy,

business transformation,

eCommerce and

international development.

• He was Group Chief

Executive of

Electrocomponents plc

from 2001 until 31 March

2015, having joined

that company in 1995.

Previously he worked for

The Boston Consulting

Group and was a

Non-executive Director

of the Sage Group plc

from 2007 to 2013.

• Jon Joined QinetiQ from

Chloride Group plc where

he held a similar role.

He has a background

in legal private practice

as well as general

counsel and company

secretarial experience in

other FTSE250 companies.

experience in finance and

corporate governance

from a cross-section of

industries, all of which

leverage technology.

• He is a Non-executive

Director and Chair of the

Audit & Risk Committee at

Royal Mail Group plc.

Paul is also a Director of

Independent Oil and Gas

plc, Ventive Ltd and Naked

Energy Ltd. Previously,

Paul was a Director of

experience of investing

in growing technology

businesses, acquisitions,

intellectual property

and exploitation of

new technologies.

• Susan is a Non-executive

Director and Chair of the

Remuneration Committee

of both Benchmark Holdings

plc and Horizon Discovery

Group plc. She is Chair of

Woodford Patient Capital

Trust plc and Chair of

Knowledge Peers plc, Senior

Mercia Technologies plc

Independent Director of

Taylor Nelson Sofres plc,

a Non-executive Director

of Thomson SA and Tangent

Communications plc,

and has also been Group

(and Chair of its

Nominations Committee),

having been previously

Deputy Chair and Chair

of the Audit Committee.

She is also a member of

Finance Director of Carlton

the international advisory

Communications plc,

Group Finance Director

of LASMO plc and a

Trustee of Pilotlight.

board of PTT.

• She was a founder of

Imperial Innovations Group

plc, leading it as CEO from

2002 to July 2013, and

previously has served on a

variety of private company

boards in engineering,

healthcare and materials.

Susan was a Trustee of

Fight for Sight from 2013

to 2016.

QinetiQ Group plc Annual Report and Accounts 2016Appointment

to the Board

Appointed Non-executive

Chairman in March 2010.

Appointed Non-executive

Director between June 2009

and February 2010.

Independent Non-executive

Director

Officer in August 2008.

Appointed Interim Chief

Executive Officer from

1 January 2015 until

26 April 2015.

Appointed Deputy Chairman

and Senior Independent

Non-executive Director

in February 2012.

Committee

memberships

Nominations Committee

(Chairman)

Remuneration Committee

Risk & CSR Committee

Security Committee

Risk & CSR Committee

Security Committee

Skills and

experience

variety of industry sectors

from membership of the

boards of FTSE listed

companies.

• Mark is a Non-executive

Director of G4S plc,

where he is the Senior

Independent Director

and Chairman of the

Remuneration Committee,

and Chairman of Kodak

Alaris Holdings Limited.

• He was a Non-executive

Director of Reed Elsevier

Group plc (and also

Chairman of its

Remuneration Committee)

and Reed Elsevier NV from

April 2003 until April 2013.

He worked for IBM for over

30 years where he occupied

a number of senior

management positions,

including General Manager

of IBM Europe, Middle East

and Africa and was a

member of IBM’s worldwide

Management Council.

experience of the defence

industry and technology

and extensive operational

and corporate experience

and stewardship. He is

a Fellow of the Royal

Academy of Engineering,

a Fellow of the Institution of

Engineering and Technology

and a Fellow of the Royal

Aeronautical Society.

• During the year under

review, Steve ceased to be

Co-Chair of the Defence

Growth Partnership (DGP)

but retained his

experience of working

in a listed company

environment and of the

defence, technology and

services sectors. He is a

member of the Institute

of Chartered Accountants

in England and Wales.

• David was previously

Deputy Chief Financial

Officer of Logica plc,

Chief Financial Officer

of Logica’s international

division, covering

operations in North

America, Australia,

involvement in the DGP by

taking up the role as Chair

the Middle East and Asia

and, before that, he was

the Group Financial

Controller. Earlier

experience included

various roles with

CMG plc, Rio Tinto plc

and Price Waterhouse.

experience and

stewardship, including in

the engineering sector.

• He is a Non-executive

Director of the Aerospace

Technology Institute.

Michael was Chairman of

Ricardo plc from November

2009 until November 2014,

having joined that Board in

2003, Chairman of BBA

Aviation plc from June 2007

until May 2014, having

and Chairman of Vitec

Group plc from 2004 to

2012. He was Senior

Independent Director of

Catlin Group Limited from

2005 to 2011. Michael was

previously a 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

Audit Committee

Nominations Committee

Remuneration Committee

Risk & CSR Committee

operational and corporate

experience in the

joined that Board in 2005

• She is a Non-executive

international aerospace

industry, including

responsibility for business

development, strategy,

operational and

manufacturing issues.

She has a strong track

record of running

international operations,

as well as experience

of businesses in which

technology and intellectual

property are important.

Director of FARO

Technologies Inc., Hexcel

Corp. and The Nordam

Group. Previously, Lynn was

a Non-executive Director

of Force Protection, Inc.,

Seabury Group, Graham

Partners, Cordiem,

Chairman of the Flight

Safety Foundation, and

a member of the

Management Advisory

Council of the Federal

Aviation Administration.

Lynn retired from

Honeywell International in

2005, where she was Vice

President and General

Manager of Commercial

Aerospace. Prior to that,

she held a variety of roles in

the commercial aerospace

sector working for Allied

Signal (which acquired

Honeywell in 1999),

the McDonnell Douglas

Corporation, Republic

Airlines and ComAir Airlines.

of the Industry Liaison

Board of the UK Trade &

Investment Defence &

Security Organisation.

Steve was also appointed

as a member of the Prime

Minister’s Business Advisory

Group. Also during the year

under review, Steve ceased

to be a Non-executive

director of the UK MOD

Research and Development

Board. Previously, Steve

held various roles with

MBDA from 2001 to 2014,

most recently as Managing

Director, MBDA UK and

Technical Director for the

MBDA Group. Before that,

he held various roles in

engineering with Matra BAe

Dynamics from 1996 to

2001, and various roles

with British Aerospace

held from 1989 to 1996.

He was also Co-Chair of

the National Defence

Industries Research &

Development Group.

Mark Elliott

Steve Wadey

Non-executive Chairman

Chief Executive Officer

David Mellors

Chief Financial Officer

Michael Harper

Lynn Brubaker

Deputy Chairman and Senior

Non-executive Director

Admiral Sir James
Burnell-Nugent
Non-executive Director

Ian Mason
Non-executive Director

Paul Murray
Non-executive Director

Susan Searle
Non-executive Director

Appointed Chief Executive

Appointed Chief Financial

Appointed Non-executive

Officer in April 2015.

Director in November 2011.

Director in January 2016

Appointed Non-executive
Director in April 2010.

Appointed Non-executive
Director in June 2014.

Appointed Non-executive
Director in October 2010.

Appointed Non-executive
Director in March 2014.

Jon Messent
Company Secretary and
Group General Counsel

Appointed as Company
Secretary and Group General
Counsel in January 2011.

Independence

Independent on appointment

Not applicable

Independent

Not applicable

Audit Committee
Nominations Committee
Remuneration Committee
Risk & CSR Committee
(Chairman)
Security Committee
(Chairman)

Audit Committee
Nominations Committee
Remuneration Committee
Risk & CSR Committee
Security Committee

Audit Committee (Chairman)
Nominations Committee
Remuneration Committee
Risk & CSR Committee
Security Committee

Audit Committee
Remuneration Committee
Risk & CSR Committee
Nominations Committee
Security Committee

• Mark has experience of a

• Steve has in-depth

• David has extensive

• Michael has a wealth of

• Lynn has considerable

• Sir James has significant

• Ian has considerable

experience in strategy,
business transformation,
eCommerce and
international development.

• He was Group Chief

Executive of
Electrocomponents plc
from 2001 until 31 March
2015, having joined
that company in 1995.
Previously he worked for
The Boston Consulting
Group and was a
Non-executive Director
of the Sage Group plc
from 2007 to 2013.

experience of the defence
industry, contracting with
government and
management. He is
Non-executive Chairman of
Witt Limited and was High
Sheriff of Devon during
2015. During a 37-year
career in the Royal Navy,
which culminated in his
appointment as
Commander-in-Chief Fleet,
he commanded the aircraft
carrier HMS Invincible and
three other ships and
submarines. Between
operational duties, Sir
James held several positions
at the MOD and gained
cross-Whitehall experience
while on secondment
to HM Treasury.

• Paul has a broad range of
experience in finance and
corporate governance
from a cross-section of
industries, all of which
leverage technology.

• He is a Non-executive

Director and Chair of the
Audit & Risk Committee at
Royal Mail Group plc.
Paul is also a Director of
Independent Oil and Gas
plc, Ventive Ltd and Naked
Energy Ltd. Previously,
Paul was a Director of
Knowledge Peers plc, Senior
Independent Director of
Taylor Nelson Sofres plc,
a Non-executive Director
of Thomson SA and Tangent
Communications plc,
and has also been Group
Finance Director of Carlton
Communications plc,
Group Finance Director
of LASMO plc and a
Trustee of Pilotlight.

• Susan has extensive

• Jon Joined QinetiQ from

Chloride Group plc where
he held a similar role.
He has a background
in legal private practice
as well as general
counsel and company
secretarial experience in
other FTSE250 companies.

experience of investing
in growing technology
businesses, acquisitions,
intellectual property
and exploitation of
new technologies.

• Susan is a Non-executive
Director and Chair of the
Remuneration Committee
of both Benchmark Holdings
plc and Horizon Discovery
Group plc. She is Chair of
Woodford Patient Capital
Trust plc and Chair of
Mercia Technologies plc
(and Chair of its
Nominations Committee),
having been previously
Deputy Chair and Chair
of the Audit Committee.
She is also a member of
the international advisory
board of PTT.

• She was a founder of

Imperial Innovations Group
plc, leading it as CEO from
2002 to July 2013, and
previously has served on a
variety of private company
boards in engineering,
healthcare and materials.
Susan was a Trustee of
Fight for Sight from 2013
to 2016.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

Independence of Non-executive Directors
Of the current Directors of the company, the Board considers all the
Non-executive Directors to be independent of QinetiQ’s executive
management and free from any business or other relationships that
could materially interfere with the exercise of their independent
judgement. 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 judgement 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.

The Nominations Committee’s role is to ensure that the composition
of the Board and its Committees provides the optimum balance of
skills, knowledge and experience, and to oversee succession planning
for the Board and senior management. The report of the Nominations
Committee can be found on page 62.

B
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, international markets and risk management, have
provided both support and challenge to the CEO, CFO and the
executive management team during the year, in terms of both the
formulation of the new strategy and transformation programme
and also in respect of ‘business as usual’ items which require Board
oversight, such as financial and trading matters and significant
commercial projects.

Director training and development
On appointment, Directors receive a tailored induction programme,
comprising site visits, meetings with management, and training where
required. Lynn Brubaker, who joined the Board in January 2016, has
visited facilities at QinetiQ’s Farnborough site where she met with
senior management and has received a technical briefing in respect
of Directors’ responsibilities and listed company obligations from the
company’s legal advisor, Ashurst LLP. Further site visits are being
arranged.

On an ongoing basis, Directors receive appropriate training about
the company and their duties. The Directors are also required to
complete the annual business ethics training, as noted on page 65.
The Company Secretariat organises site visits and training to suit
individual requirements. During the year, individual Non-executive
Directors visited the Boscombe Down and Fort Halstead sites as a
result of specific requests and the Board received collective training
in the form of technical briefings from KPMG on accounting changes
and from Ashurst on the Model Code and changes being brought
in by the Market Abuse Regulation. Non-executive Directors also
personally arrange and attend external updates and training courses.

Succession planning
The Nominations Committee oversees succession planning for the
Board and senior management to ensure the optimum balance
of skills and experience and to ensure that the requirements for
updating Board membership are met on a timely basis. The report
of the Nominations Committee can be found on page 62.

QinetiQ Group plc Annual Report and Accounts 2016Performance of the Board
QinetiQ continues each year to evaluate the performance of the
Board and its Committees. During the year, an external evaluation of
the effectiveness of the Board and its Committees was carried out.
The previous external evaluation had taken place in 2012 and the
current evaluation had been deferred from 2015 owing to the change
of Chief Executive Officer during the year. In the intervening years,
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.

Timing and appointment of external reviewer
During the year, the Board agreed the timings and process for the
external evaluation. A shortlist of potential external reviewers was
drawn up by the Company Secretary and the Chairman. Following
a selection process, Lintstock were appointed to carry out the
effectiveness reviews. Lintstock had no other connection with the
company. The review took place in the final quarter of the year so
that it could be fully focused on outside the financial reporting cycle
and strategy meetings.

Review process
The review consisted of a series of questionnaires in respect of each
of the Board and its Committees and the Chairman, which were
completed by each director and the Company Secretary, and then the
feedback from these questionnaires was used to facilitate one-to-one
interviews. In order to obtain a complete overview of the workings
of the Board and its Committees, the Committee questionnaires
covered time management and composition, process and support,
and the work of the Committee; and the Board questionnaire covered
composition, expertise, dynamics, time management, support, Board
Committees, strategic oversight, risk management and internal
control, succession planning and HR management, and priorities
for change. The questionnaire in respect of the Chairman covered
relationships and communications with members of the Board,
availability, management of Board meetings and areas for
improvement.

Key findings
The results of the review were presented by the Chairman at the
Board’s March meeting. In terms of the fulfilment of its governance
responsibilities, the overall conclusion of the 2016 review was that
the Board was satisfied that it continued to be effective in executing
its duties. The following were noted:

The composition of the Board was rated highly. It was noted that
a greater understanding of wider, international markets would be
required as the company’s strategic priorities develop. The Board’s
understanding of the views of shareholders and customers was
considered to be appropriate, and it was considered that the
Committees supported the Board effectively.

Relationships between individual Board members and with senior
management, including the US Proxy Board, were highly rated, and
it was noted that it was intended to further develop the relationship
with the Proxy Board, subject to the requirements of the Proxy
regime.

Going forwards, to maintain the Board’s understanding and oversight
of group strategy and the areas in which the company operates, the
Board’s agenda would specify items covering strategic topics and
deep dives into key challenges, businesses, issues or geographies.
These items would include presentations by the leadership involved,
and would serve to facilitate the Board’s focus on the development
and composition of the executive management team.

Priorities for the coming year
Priorities for the coming year were identified as: i) a review of
the Board’s annual agenda, to focus on issues of strategy while
maintaining the reporting rigour on operational and governance
activity, and fulfilling the company’s governance responsibilities;
ii) oversight of HR policy and the development of a more in-depth
understanding of the management of employee engagement,
performance management, diversity and succession planning;
iii) reviewing Executive Committee succession planning; iv) reviewing
the Board’s composition and skills; v) reviewing risk management
and reporting processes; and vi) ensuring further interaction with
the leadership community and senior executives during the year.

An Audit Committee effectiveness review, which was undertaken
independently of the Board effectiveness review, was also
undertaken by Lintstock and followed the same process.
Details can be found in the Audit Committee report on page 73.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

Report of the
Nominations Committee

Main responsibilities
The role of the Committee is to ensure that the composition of the
Board and Committees comprises 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’s full terms
of reference can be found in the Governance section of the QinetiQ
website at www.QinetiQ.com/about-us/corporate-governance.

The Committee meets as necessary and when called by its Chair.
During the financial year ended 31 March 2016, the Committee
met on four occasions.

Overview
Key areas of focus during the year were:

(a) Succession planning at Non-executive Director level; and

(b) Succession planning at senior management level.

The work of the Committee during the year built on: (i) the
considerable work that had been carried out in the previous year
to identify the requirements for updating the Board membership,
and this was followed through; and (ii) overseeing the work being
undertaken at the executive level to align executive succession
planning with the overall business transformation and strategy, which
was then presented to the Board as part of the overall strategy plan.

(a) Succession planning at Non-executive Director level
Since 2014, to ensure the alignment of Board skills with the needs of
the Group’s strategy, the Committee has been focusing on the search
for potential Non-executive Director candidates. The Zygos Partnership
has undertaken this search on the company’s behalf. 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. Following
a short-list review, potential candidates meet with the Chairman and
Directors on an individual basis prior to selection. This search led to
the appointment of Susan Searle in March 2014 and Ian Mason as an
additional Non-executive Director in June 2014. In continuation of this
process, Lynn Brubaker was appointed as an additional Non-executive
Director in January 2016. Details of all three Directors’ background
and experience can be found on pages 58 to 59. Lynn brings a US
perspective to the Board and has in-depth experience of management
in large corporations, the commercial aviation industry and
international commerce.

As noted on page 61, an action arising from the Board’s annual
effectiveness review is to review the Board’s composition and skills
to ensure the right balance of skills and experience as the company
evolves in pursuit of its strategic objectives. The Chairman and the
CEO will begin this process with the formulation of a skills matrix
for consideration by the Board.

Dear shareholder,
During the year under review, the Nominations Committee
continued the work which had begun in 2015 in respect of Board
refreshment and diversity. This process began in 2015 with the
appointments of Ian Mason as a Non-executive Director and
Steve Wadey as the new CEO. It continued during the year with
the appointment of Lynn Brubaker as an additional Non-executive
Director and a number of senior appointments within the
executive management team.

Going forwards, succession planning and a review of the balance
of skills and experience will be key priorities.

Mark Elliott
Nominations Committee Chairman

Membership and attendance during the year

Member
Mark Elliott (Committee Chair)
Lynn Brubaker*
Admiral Sir James Burnell-Nugent
Ian Mason
Michael Harper
Paul Murray
Susan Searle
Steve Wadey

* Lynn Brubaker joined the Board on 27 January 2016.

Nominations Committee allocation of time

Attendance
4/4
–
4/4
4/4
4/4
4/4
4/4
4/4

2016

Governance
NED succession, skills and development
ED succession, skills and development
Senior Executive succession, skills
and development

%
10.0
50.0
25.0

15.0

QinetiQ Group plc Annual Report and Accounts 2016(b) Succession planning at senior management level
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 the executive level. As part of the review of strategy
during the year, the Capability Director and the CEO presented to the
Board on succession plans for the top layer of management. New
appointments have been made, including a new Human Resources
Director and a new Sales and Business Development Director, and
adjustments made to the executive leadership team, to have in place
the appropriate level of management to take QinetiQ forwards with
its new vision and strategy.

Board Diversity Policy
The Board Diversity Policy was approved by the Board in 2013. The key
statement and objectives of that policy (the full text of which is available on
the QinetiQ 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 judgement.

The Board aimed to increase the proportion of women on the Board to
25% by 2015. Thereafter, the Board aimed to maintain a minimum Board
composition of 25% women, such percentage to be reviewed annually.

Progress against the policy: Having previously met the 2015 target of 25% of
the Board comprising women, changes since then led to a reduction in this
proportion. Following the appointment of Lynn Brubaker in January 2016,
the proportion of women members of the Board increased to 22%, which
is working towards our original objective of 25%. The Committee notes the
recommendation in the five-year review of the Davies report published in
late 2015 to achieve a minimum representation of 33% by 2020.

Gender diversity will be taken into consideration in the review of Board
composition and skills which is planned for the coming year. Any future
appointments will be made on merit, however, and will continue to take
into account diversity, not only in terms of gender, but also in terms of the
appropriate mix of skills and experience.

Details of company-wide diversity and inclusion activity can be found
in the Corporate responsibility section on page 28.

Our areas of focus

1
Succession Planning
Board

(cid:127) Building on prior year activity
(cid:127) Appointment of new directors
(cid:127) Ensuring balance of skills and experience
(cid:127) Review of skills to meet needs
of new strategy

2
Succession Planning
Senior Management

(cid:127) Oversight of processes for ensuring
succession plans in place
(cid:127) Focus on improving talent
pipeline and diversity
(cid:127) Meetings with senior management
(cid:127) New executive appointments
during year

3
Diversity
Board/Company-wide

(cid:127) Board diversity policy
(cid:127) Women represent 22% of Board
(cid:127) Diversity includes gender,
skills and experience
(cid:127) Company-wide diversity activity

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

C
Accountability

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.

How we manage risk

• Risk management – page 64 – managers identify and evaluate
risks; design and operation of internal controls to mitigate risks.

• Risk assurance – page 64 – oversight by operations and
assurance managers, oversight functions and the Board
and its Committees.

• Self-certification process – page 64 – annual process of

hierarchical self-certification.

•

Internal control – page 65 – delegated authorities; policies,
procedures and codes of practice.

Internal audit function – page 67 – provides assurance
of the effectiveness of the control environment.

Risk reporting is embedded in the management of the business
through the Governance Committee (which was merged into the
Executive Committee on 1 April 2016) and Quarterly Business
Reviews (which changed to monthly Business Performance Reviews
on 1 April 2016) and feeds into Group strategy at the executive and
Board level.

Risk assurance
Risk assurance activity conforms to the three lines of defence model
and is performed by (1) the businesses, through operations and
assurance managers, (2) oversight functions, including the Safety and
Operational Assurance team, and (3) Internal Audit, reporting to the
Governance Committee (whose activities were merged into the
Executive Committee from 1 April 2016) and the Board’s Audit
Committee in respect of financial risks, and the Board’s Risk & CSR
Committee in respect of non-financial risks. Further details can be
found on page 65 in the ‘Internal control’ section.

The reports of the Audit Committee and of the Risk & CSR Committee
can be found on pages 70 and 75 respectively.

Details of key risks can be found in the ‘Principal risks and
uncertainties’ section of this Annual Report on pages 42 to 49.

Risk assurance activity was ongoing during the year under review.
The following areas were covered bi-monthly by the Governance
Committee and then key issues reported four times a year to the
Risk & CSR Committee:

• Committee oversight of risk management – page 67

• Updates in respect of general risk governance from the Group

• Board oversight of risk management – page 67

• Board statements relating to risk management – page 68

Risk management
QinetiQ’s 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 business management systems and mirror the Institute
of Risk Management’s guidance as detailed in the figure on page 42.

Director: Safety and Governance.

• 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 (further details can be found on page 43).

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.

QinetiQ Group plc Annual Report and Accounts 2016Internal control
QinetiQ’s 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 and operations 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. During the
year under review, the business was guided by two key resources
managed by the Safety and Operational Assurance team:

•

‘The Way We Work’ was applicable to all staff and covered three
key pillars of the way the company operates: Organisation, Risk
Management and Assurance, and Key Business Processes. It was
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, either as
specifically set out in the ‘Operating Framework’ or by adopting
similar policies and processes to fit with local structures and
requirements.

With effect from 1 April 2016, ‘The Way We Work’ was replaced
by a new framework of ‘Operating Principles’ and associated
‘Organisational Notes’ to support the new operating model and
organisation. The new framework applies to every employee within
the QinetiQ Group, including all subsidiaries, with the exception
of Foster-Miller, Inc., due to the proxy arrangement as detailed on
page 66. Foster-Miller, Inc. is, however, an active and supportive
participant in this overall framework and their President is a member
of the new Executive Committee.

Confidential reporting process
The company has in place a confidential reporting 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
an externally provided confidential internet and telephone reporting
system, further details can be found in the Corporate responsibility
section on page 33. 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 confidential reporting activity and the outcome of investigations
are regularly reported to the Audit Committee. The Audit Committee
reviewed the effectiveness of the Group’s confidential reporting
process during the year, as detailed on page 72.

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.

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, mandatory annual ethics training for all employees and
the company’s Directors, 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 Corporate responsibility
section on pages 26 to 33.

Risk management and internal control: financial reporting
process
The following elements provide assurance in respect of the financial
reporting process and preparation of consolidated accounts:

• the financial management and control framework;

• the company’s finance function;

• the internal control and risk management systems;

• the internal audit function;

• the external audit function; and

• oversight by the Audit Committee and the Board.

The company operates a financial management and control framework,
comprising a system of targets, reporting (external and internal) and
controls, that is embedded throughout the businesses and on which
progress is reported to the Audit Committee and to the Board. The
finance function consists of different financial reporting teams who
report to the CFO. The Group Finance team comprises suitably qualified
and experienced professionals, including accountants. It is responsible
for the preparation of the interim and annual reports and for internal
financial reporting to senior management and the Board. To ensure a
consistency of approach and accuracy in financial reporting, the team
provides advice on accounting and financial reporting issues to
QinetiQ’s businesses and sets the Group’s accounting policies which are
contained in the Finance Accounting Manual. The team liaises with the
external auditor.

The internal control and risk management systems described on
pages 64 and 77 apply to the company’s process of financial reporting
and the preparation of consolidated accounts. The internal audit and
external audit functions, and the reviews by the Audit Committee and
the Board, provide a structured approach to the review and challenge
of financial information and financial reporting. The report of the
Audit Committee can be found on page 70 and the work of the Board
in respect of financial oversight can be found on pages 55 and 67.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

Management and control of US subsidiaries
The US Global Products division, trading as QinetiQ North America
and comprising approximately 92% of the total US revenue (excluding
Cyveillance, Inc.) in 2016, operates under a Proxy arrangement,
as detailed below, 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 division and the Proxy arrangement
The US Global Products division, 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
(put in place in 2014, following the sale of the US Services business),
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
four US citizens who hold the requisite US security clearances
as Proxy holders to exercise the voting rights in FMI.

During the year there was a change in Proxy holders following the
death of Len Moodispaw. Len made a significant contribution to the
Group and will be sadly missed. The current Proxy holders comprise
David Carey, John Currier, Tom Mills and Scott Webster. The Proxy
holders are also Directors of FMI, with David Carey as Chairman. In
addition to their powers as Directors, the Proxy holders 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.
QinetiQ’s CEO and CFO attended two meetings of the Proxy Board
during the year under review. The President of FMI is a member of the
new Executive Committee (as detailed on page 56). FMI commercial
and governance activity is included in the business update provided
in the regular executive report to the Board. As detailed in the Audit
Committee report on page 70, a local accountancy firm was engaged
during 2015 to undertake an internal audit of FMI key processes and
further internal audit work is planned for 2016. 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.

QinetiQ Group plc Annual Report and Accounts 2016Internal audit function
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.

Board oversight of risk management
The Board oversees the system of risk management and internal
control by means of the Audit Committee and the Risk & CSR
Committee in conjunction with the risk management and assurance
processes details in this section. Any matters of particular concern
are escalated for presentation at a Board meeting by the relevant
personnel. Examples of such escalation are consideration of cyber risk
and strategic risk. The Board routinely challenges management to
ensure that the systems of internal control are constantly improving
to maintain their effectiveness. Once a year, the CEO presents to the
Board on the system of internal control in operation during the year.

Committee oversight of risk management
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 as a guest so as to receive at first-hand the
findings of the Committee. Details of the Committee memberships
are set out on page 5. 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. The reports
of both Committees can be found on pages 70 and 75 respectively.

At its meeting in March 2016, the Board reviewed the effectiveness
of the system of internal control that was in operation during the
financial year ended 31 March 2016. 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.

In the light of the new strategic priorities and organisational
structure, the Board has requested the Risk & CSR Committee to
undertake a review of risk management and its reporting for the
coming year.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

Board statements relating
to risk management

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 49. The Chief Financial Officer’s review on pages 38 to 41 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 27 on page
129 to the financial statements also provides details of the Group’s
hedging activities, financial instruments, and its exposure to liquidity
and credit risk.

The Group meets its day-to-day working capital requirements through
its available cash funds and its bank facilities. The market conditions
in which the Group operates have been, and are expected to continue
to be, challenging as spending from the Group’s key customers in its
primary markets in the UK and US remains under pressure. Despite
these challenges, the Directors believe that the Group is well positioned
to manage its overall business risks successfully. After making enquiries,
the Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future. The Group therefore continues to adopt the
going-concern basis in preparing its financial statements.

The Group is exposed to various risks and uncertainties, the principal
ones being summarised in the ‘Principal risks and uncertainties’ section
on pages 42 to 49. Crystallisation of such risks, to the extent not fully
mitigated, would lead to a negative impact on the Group’s financial
results but none are deemed sufficiently material to prevent the Group
from continuing as a going concern for the next 12 months.

Directors’ statement in respect of ‘fair, balanced
and understandable’ assessment
All of the 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 position and
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 page 70.

Board assessment of principal risks
The Board confirms that it has carried out a robust assessment of
the principal risks facing the company, including those that would
threaten its business model, future performance, solvency or
liquidity. The way in which the Board understands and manages
risk is set out on pages 64 to 77 and details of key risks and their
management and mitigation can be found on pages 42 to 49.
Board level oversight is carried out by the Audit Committee and the
Risk & CSR Committee. As noted in the previous paragraph, at its
meeting in March, the CEO presented details of the risk review
activities that had taken place during the year.

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 Board considers that the risk review activities undertaken during
the year under review, as presented by the CEO at the Board’s March
meeting, 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. Details of the company’s
principal risks and uncertainties and how they are managed and
mitigated can be found on pages 42 to 49. Details of the company’s
risk management and internal control systems are set out in this
Corporate governance statement on pages 64 to 77, and the reports
of the Audit Committee and Risk & CSR Committee in respect of the
oversight of risk management can be found on pages 70 and 75
respectively.

QinetiQ Group plc Annual Report and Accounts 2016The period over which we confirm longer-term viability
Whilst the Directors have no reason to believe the Group will not
be viable over a longer period than three years, given the inherent
uncertainty involved, the period over which the Directors consider
it possible to form a reasonable expectation as to the Group’s
longer-term viability is the three-year period to 31 March 2019.
This period, essentially the period used for our mid-term business
plans that are subject to stress-testing and scenario planning,
has been selected because it presents the Board and readers of
the annual report with a reasonable degree of confidence whilst
still providing an appropriate longer-term outlook.

Confirmation of longer-term viability
As noted on the previous page, the Directors confirm that their
assessment of the principal risks facing the Group was robust. Based
upon the robust assessment of the principal risks facing the Group
and their stress-testing based assessment of the Group’s prospects,
all of which are described in this statement, the Directors have a
reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period to 31
March 2019.

Viability statement
Longer-term viability assessment: assessing the prospects
of the Group
The Group’s corporate planning processes involve the following
individual processes covering differing time frames:

1. An annual Strategic Plan (or Strategic Plan update) process that looks
at the detailed financials for the subsequent three years, together
with an overview of one additional year, to 31 March 2020.

2. An annual budget process that covers the subsequent two years.

3. A bi-annual detailed forecast process to update the view of the

first budget year (the year now in progress).

4. A rolling monthly ‘latest best estimate’ process to assess significant

changes to the budget/forecast for the year in progress.

The corporate planning process is underpinned by assessing scenarios
and risks that encompass a wide spectrum of potential outcomes,
both favourable and adverse. The downside risk scenarios are
designed to explore the resilience of the Group to the potential
impact of all the significant risks set out on pages 44 to 49,
or a combination of those risks.

The scenarios are designed to be severe but plausible, and take full
account of the availability and likely effectiveness of the mitigating
actions that could be taken to avoid or reduce the impact or
occurrence of the underlying risks, and that realistically would
be open to them in the circumstances. In considering the likely
effectiveness of such actions, the conclusions of the Board’s
regular monitoring and review of risk and internal control systems,
as discussed on page 67, is taken into account.

Alongside the annual review of risk scenarios applied to the strategic
plan, performance is rigorously monitored to alert the Board and
Operating Committee to the potential crystallisation of a key risk.

We consider that this stress-testing based assessment of the Group’s
prospects is reasonable in the circumstances of the inherent
uncertainty involved.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

Report of the
Audit Committee

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.

Dear shareholder,
I am pleased to present the report of the Audit Committee on the work
carried out during the last financial year. I continue to foster 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, in line
with the requirements of the UK Corporate Governance Code.

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 Committee’s full terms of reference can be found
in the Governance section of the QinetiQ website at www.QinetiQ.
com/about-us/corporate-governance.

The main responsibilities of the Committee are set out in this report.
In addition to reviewing the Group’s financial reporting processes and
external audit effectiveness, other matters that we considered during
the year were the process for the forthcoming external audit tender and
a review of the process and requirements for the longer-term viability
statement. Further details are set out in this report.

As noted on page 61, an external review of the effectiveness of the Board
and its Committees was carried out during the year. The outcome of the
review in respect of the Audit Committee is set out on page 73 and I look
forward to working with the Chair of the Risk & CSR Committee in the
coming months to review the processes for risk management and reporting.

Paul Murray
Audit Committee Chairman

Membership and attendance during the year

The Audit Committee meets as necessary and at least four times a
year. During the financial year ended 31 March 2016, 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
This report describes the work of the Committee in discharging
its responsibilities, including:

Member
Paul Murray (Committee Chair)
Lynn Brubaker*
Admiral Sir James Burnell-Nugent
Michael Harper
Ian Mason
Susan Searle

Attendance
5/5
1/1
5/5
5/5
5/5
5/5

a) 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;

b) assessment of the ‘fair, balanced and understandable’

requirement;

c) the review of internal controls;

* Lynn Brubaker joined the Board on 27 January 2016.

d) the review of various individual matters during the year;

Audit Committee allocation of time

2016

Governance
Financial Reporting
Audit
Risk management and internal controls

%
13.0
47.0
25.0
15.0

e) annual effectiveness reviews; and

f) external audit: the provision of non-audit services, auditor
re-appointment and the re-tender of the external audit.

The Committee received presentations, reports and analyses from
the CFO, the Group Financial Controller, the Group Internal Audit
Manager and the external auditor during the course of its meetings.

QinetiQ Group plc Annual Report and Accounts 2016a) 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:
The Committee reviewed whether suitable accounting policies had been
adopted, whether management had made the appropriate estimates and
judgements, and sought support from the external auditor to assess
them. To facilitate this process, the Committee received presentations
from the CFO and the Group Financial Controller in respect of goodwill,
accounting provisions for key contracts, litigation, trade controls and the
treatment for taxation. It also received a report from the external auditor
on the outcome of the audit.

b) Assessment of the ‘fair, balanced and understandable’
requirement:
The Committee was required to provide 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. To enable it to do so, the CFO and members of management
presented to the Committee details of the processes followed by
management in preparing the accounts. In particular, the Committee
noted:

The Committee reviewed the following main issues for the periods
ended 30 September 2015 and 31 March 2016:

• the basis for, and judgements 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, and the

disclosures associated with the election into the research and
development expenditure credit (RDEC) regime, specifically the
treatment of both the £36.8m RDEC receipt and the write-off of
the previously capitalised £25.2m deferred tax asset as ‘specific
adjusting items’;

• the carrying values of the Group’s cash generating units (CGUs),
specifically the impairment 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 £37.7m

(as advised by the company’s external actuaries);

• the disclosures in the preliminary announcement and annual

report and accounts, in particular those relating to risk, goodwill
and tax; and

• the process for making the longer-term viability statement and
the assessment of different scenarios that could arise, to enable
the Committee to make a recommendation to the Board at its
May meeting. Further details can be found on page 69.

The reviews were carried out by way of papers presented by the CFO,
the Group Financial Controller, 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 auditor, the Committee was satisfied that the accounting
disclosures and assumptions were reasonable and appropriate for a
business of the Group’s size and complexity, that the external auditor
had fulfilled its responsibilities in scrutinising the financial statements
for any material misstatements and that the disclosures were
satisfactory.

• the Group has developed a clear strategy, which has been

presented to the Board for review during the year by business
leaders, with updates on progress at each Board meeting;

• 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 54;

• 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; and

• 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). The checklist includes areas such as ensuring what must
be included to satisfy regulatory requirements, consulting with
relevant experienced people to contribute and review each section,
avoiding where possible the use of boiler-plate language and jargon,
ensuring that all matters are discussed and all issues reported at
an appropriate level of aggregation, with tables of reconciliations
supported by and consistent with the accompanying narrative.
There is an opportunity for contributors to provide comments on
areas where there were difficulties or details of specific issues that
have been considered.

The external auditor confirmed their satisfaction with the standard
achieved. The Board’s statement in this respect can be found on page 68.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

The internal audit function continues to work closely with US
management to gain assurance that an effective control environment
is in place. An internal audit of key control processes was undertaken
during the year utilising a US-based accountancy firm, and their report
summarising findings and recommendations was provided to the
Committee. In addition, the Executive Directors attended meetings
of the US Board during the year and further such meetings are planned.

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 various individual matters during the year:
The Committee has an annual calendar of matters which it considers.
The following matters are examples of such items which the
Committee considers as part of its annual cycle:

Group Tax policies and issues: The CFO 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.

Annual review of the Committee’s Terms of Reference and Annual
Schedule of Activities: The views of the Committee were sought on
the Committee’s Terms of Reference and annual schedule of activities.
As a result of the review, changes were made to the Terms of Reference
to include a reference to the Committee’s obligation to run audit
tenders and to procure the production of the longer-term viability
statement. The annual schedule of activities was updated to include
a ‘quality of earnings’ report for the May meeting.

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 the confidential reporting process.

Particular attention is given to the timely and effective implementation
of remedial actions, either identified by the business directly, or by the
internal audit function. The internal audit function’s 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 three-year strategic plan. The audits include 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.

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 QinetiQ North America is adjusted to take
into account the Proxy arrangements referred to on page 66. The
executive management function has 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.

QinetiQ Group plc Annual Report and Accounts 2016e) Annual effectiveness reviews:
The Committee’s September meeting considered the processes
to be followed for the various governance reviews.

It agreed that the review of the effectiveness of the Committee itself
and of the internal audit function would be taken alongside the Board
effectiveness review to be carried out externally. The approach for
the review of the external audit would follow the same, questionnaire-
based process as for the previous year.

Audit Committee effectiveness review
As reported on page 61, the external effectiveness evaluation of the
Board and its Committees had been deferred from 2015 owing to the
change of Chief Executive Officer during the year. An evaluation had
been carried out instead by way of an externally provided online
questionnaire tool.

The following key actions had been noted from the 2015 Audit
Committee effectiveness 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.

All three items had been covered in the following year. Externally
sourced training is made available to all Directors, either as a Board in
the form of a technical briefing, or individually on request; there is a
standing item for the review of the annual calendar of activities during
the year; and an additional action has been added to the annual
calendar in respect of the ‘quality of earnings’ review.

As detailed on page 61, the 2016 external review was carried out by
Lintstock by way of an initial questionnaire which was then supported
by individual interviews. The Audit Committee questionnaire covered
the following areas: time management and composition, processes
and support, the work of the Committee and priorities for change.

The outcome of the review was considered at the Committee’s March
meeting. The effectiveness of the Committee was rated highly. As
noted in the Board’s priorities for the coming year on page 61, one
of the priorities is to review risk management and reporting processes,
with the review being led by the Chairs of the Audit Committee and the
Risk & CSR Committee.

Other recommendations to improve the performance of the Audit
Committee over the coming year included receiving an update on the
processes for the risk management and controls of the US business and
to continue with Committee training to keep appraised of legislative
evolution and best practice.

Review of the effectiveness of the external audit process
The Committee’s September meeting considered the approach for
monitoring the effectiveness and independence of the external audit
process in the light of the requirements of the Code and Financial
Reporting Council (FRC) guidance. At this meeting, it was agreed that
an effectiveness review would follow the same format as used in the
previous year and be undertaken by way of questionnaire and would
include collecting the views of management and employees who are
specifically involved in supporting the external audit work, feedback
from the CFO and Group Financial Controller and an open Committee
discussion without external auditor being present.

The review covered a range of topics, some of which are set out below,
with a summary of their outcomes:

• Audit scope: The audit scope adequately addresses the key

financial risks of the Group and is discussed with management
in a timely manner.

• Audit quality and approach: The audit approach demonstrates
a good understanding of the business and provides adequate
engagement with, and challenge to, management.

• Communication: The interaction between the auditor and
management is effective, timely and allows for accounting
treatment to be agreed and issues highlighted and resolved
promptly.

• Governance and independence: There are appropriate structures
in place to ensure the independence of the auditor and to provide
adequate challenge to management.

The auditor was provided with details of the review and its results, and
provided their comments on each of the topics covered. In particular,
the auditor noted that there was scope to improve further the advance
planning process, that the use of data analytics would be beneficial in
respect of certain parts of the audit, and that they perceived a strong
working relationship between management and the finance function.

The outcome of the review was considered at the May 2016
Committee meeting. The Committee noted the following matters
which were reported to the Board:
• There had been an improvement in all areas when comparing the
results to those for FY15, and the initiatives taken by the auditor
following the previous review had had a positive impact.

• These initiatives had included ensuring that audit plans and data
requests were sent as early as possible prior to, and during, the
audit, dealing with any issues with businesses as they arise and
ensuring that the audit team are fully briefed on key issues before
the start of the audit.

• The auditor had confirmed that meetings between executive

management and the auditor outside of the ongoing interaction
with finance led to a better understanding of the business issues,
performance and key challenges going forward.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

Auditor re-appointment and re-tender process
At its May meeting, the Committee reviewed the effectiveness and the
independence of the external auditor during the year. 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 2017.

At its meeting in March, the Committee considered the timings for
the tender of the external audit. The Committee notes the provision
in the UK Corporate Governance Code that FTSE 350 companies should
put the external audit out to tender at least every 10 years and the
requirements of the new EU audit regulation which takes effect
in member states from June 2016.

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 previous 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. The Committee maintains this view and it
has recommended to the Board that a tender of the audit be carried
out during 2016, with the selected auditor being proposed for
appointment at the 2017 Annual General Meeting in respect of the
financial year ending on 31 March 2018. There is no restriction on
the choice of auditor. The process will include the appointment of a
sub-committee to carry out preliminary discussions, face-to-face
meetings, followed by the submission of proposals, presentations from
short-listed firms and, following consideration by the Audit Committee,
a recommendation from the Audit Committee to the Board for its
consideration, in readiness for a 2017/2018 accounting year start date.

f) External audit: the provision of non-audit services, auditor
re-appointment and the re-tender of the external audit

External auditor independence: non-audit services:

Policy on the regulation of non-audit work and safeguarding
auditor independence
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 following
process is operated by the company:

The company has embedded a 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 approvals that are necessary prior to the
provision of non-audit work. Any non-audit services conducted by the
auditor require the consent of the CFO or the Chairman of the Audit
Committee before being initiated; any services exceeding £50,000 in
value require the consent of the Audit Committee as a whole.

In 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 Code of Practice enables the Committee to take corrective action
if it believes that there is a risk of the external 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.

Review of non-audit work during the year
The Committee regularly reviews the cost and nature of non-audit
work undertaken by the external auditor during the financial year.
It is included at regular intervals in the Committee’s annual schedule
as a standing item. An update on non-audit fees was tabled at three
Committee meetings during the year.

In the last financial year, the fees relating to non-audit services
amounted to £199,000 (2015: £99,000), being approximately 33% of
the audit fee and 25% of the total fees. The fees related predominantly
to the review of US Services business closing working capital, following
the sale of that business in May 2014. The Committee had 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. Details of the external auditor’s
remuneration can be found in note 4 on page 115.

QinetiQ Group plc Annual Report and Accounts 2016Report of the
Risk & CSR Committee

Dear shareholder,
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 non-financial 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. At each meeting an introductory
note of the key issues for that particular meeting ensured that all relevant
matters were considered and dealt with appropriately. In addition, a separate
section of the Committee papers contained supplementary materials to
ensure that there was sufficient detail for those Committee members who
wished to have more in-depth information on a particular matter. Regular
updates from management responsible for specific areas such as corporate
responsibility or international trade served to further the Committee’s
understanding of risks and how they are mitigated.

Admiral Sir James Burnell-Nugent
Risk & CSR Committee Chairman

Membership and attendance during the year

Member
Admiral Sir James Burnell-Nugent
(Committee Chair)
Lynn Brubaker*
Mark Elliott
Michael Harper
Ian Mason
David Mellors
Paul Murray
Susan Searle
Steve Wadey

* Lynn Brubaker joined the Board on 27 January 2016.

Risk & CSR Committee allocation of time

Attendance
4/4

–
4/4
4/4
4/4
4/4
4/4
4/4
4/4

%
14.0
19.0
21.0
13.0
33.0

2016

Governance
Safety and Governance Director’s updates
Corporate Social Responsibility
Internal Audit
Specific risk reviews/deep dives

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 responsibility and health, safety and
environment; and

• to monitor adherence to the generic MOD compliance system.

The Committee’s full terms of reference can be found in
the Governance section of the QinetiQ website at www.QinetiQ.com/
about-us/corporate-governance.

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 2016, the Committee met on four
occasions.

The Governance Committee continued to report, via the CEO, 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.

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. Details of key activities in respect of health, safety
and environment and business ethics are set out in the Corporate
responsibility section on pages 26 to 33.

Key areas of focus of the Committee during the year were:

a) a review of the Group’s risk management processes

b) generic MOD compliance system;

c) a review of the risk register in accordance with FRC

recommendations; and

d) effectiveness review.

Further details are set out overleaf. Details of the principal risks and
uncertainties can be found on pages 42 to 49 of the Strategic report.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCorporate governance statement continued

a) A review of the Group’s risk management processes:
Each Committee meeting during the year was structured so that
it received the following regular reports: a report from the Group
Director-Safety and Governance, a report from the Group Director-
Corporate Responsibility and an update from the Group Head of
Internal Audit. The report from the Group Director – Safety and
Governance covered key areas of risk management activity, including
health and safety, international trade controls and Proxy regime
compliance. It included a high level summary of changes to non-
financial risks, an overview of assurance activity, and any other items
to bring to the Committee’s attention. The report from the Group
Director-Corporate Responsibility covered areas such as business
ethics training, emerging reputational risks, anti-bribery and
corruption, trading policy and Modern Slavery Act reporting. The
report from the Group Head of Internal Audit provided an update on
internal audit activity since the last meeting, details of progress with
audit recommendations and details of any overdue recommended
actions from internal audits.

In addition to the standing reports detailed above, 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 by the Committee during
the year:

• Cyber Security – Protecting Data

• Engineering and Product Safety

• Business Strategy

•

International Business Governance

The presentation had detailed an action plan which covered areas
such as a security improvement programme, a risk chart, how to
manage the insider threat and the expected outputs from that
process, which would include a code of practice developed in
conjunction with the HR, Legal and Security functions, and
implementation of higher level controls for the I.T. networks which
would be measured against a widely recognised industry standard.
The Committee had endorsed the plan and requested that the
Governance Committee review the Risk Map categories relating to
loss of data and that it receive an update on progress at its May 2016
meeting. Further to the presentation, the Group Communications
and Investor Relations Director presented to the Committee’s January
meeting on the communications response to a security breach.

b) Generic MOD compliance system:
A key aspect of the Committee’s work is the oversight of the MOD’s
generic compliance system. This is integral to the work of QinetiQ
in its relationship with the UK Government.

The generic compliance system 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.

For each deep dive, the relevant senior manager for the business area
presented to the Committee and Committee members were able to
challenge the details provided and receive further details or give
guidance as necessary.

During the year the Committee approved the appointment
of the Group Director-Safety and Governance as Compliance
Implementation Director in place of the Strategic Business Director
– Defence, following a review of the oversight process and approval
by the CEO.

The Business Strategy deep dive was considered at the Committee’s
September meeting. The Group Strategy Director presented to the
Committee in respect of a paper circulated prior to the meeting.
He was able to give further details on the approach to the strategy
planning process and what the strategy output would look like, in
terms of an integrated strategic business plan that would articulate
the Group’s vision and strategy, and tactical inputs. The Group
Strategy Director reported on how the Group Risk Register would
be reviewed as part of the strategy planning process to ensure
it remained aligned to the Group strategy. It was noted that a
re-evaluation of the Group’s risk appetite in the context of the new
business plan would be considered at the Board strategy meeting
in November. The approach was endorsed by the Committee.

The Cyber Security deep dive was considered at the Committee’s
November meeting. The Director of Capability and the Capability
Programme Director had presented to the Committee in respect
of a paper which had been circulated previously.

Oversight of the operation of the compliance system is provided
by the Committee. During the year under review, the Committee
received a bi-annual report from the Group Director-Safety and
Governance and the internal audit function on the compliance areas
that it monitored. The report was tabled at the July and January
meetings. 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. It was agreed at the January meeting that in future the
Committee would receive annual reports.

Recent activity included consideration of improvements in action
tracking following firewall reviews and seeking clarification in respect
of MOD policy in dealing with conflict of interest mitigations in the
process for bid submissions.

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.

QinetiQ Group plc Annual Report and Accounts 2016c) 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
Principal risks and uncertainties section on pages 42 to 49 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.

The following actions were also agreed for the coming year:
• To continue to focus on the big risk areas.
• To continue with the practice of having a more focused discussion

on fewer items, aided by executive summaries.

• To work closely with the Executive Committee and management

in respect of risk management activity.

• To continue the practice of deep dives into subject risk areas
• To review the Committee’s focus on Corporate Responsibility

in the light of best practice.

d) Effectiveness review:
As reported on page 61, the external effectiveness evaluation of the
Board and its Committees had been deferred from 2015 owing to the
change of Chief Executive Officer during the year. An evaluation had
been carried out instead by way of an externally provided online
questionnaire tool.

The following areas had been noted for improvement from the 2015
Committee effectiveness review:

•

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.

All three items had been dealt with during the year under review. The
format and content of Committee papers have been adjusted, as noted
on page 75; there has been regular contact with the US Proxy Board
and US executive management, and an internal audit of key control
processes undertaken by a US-based accountancy firm (as noted
on page 72); and the approach to assessing risk appetite in respect
of risk areas has been improved by way of the deep dive process.

As detailed on page 61, the 2016 external review was carried out by
Lintstock by way of an initial questionnaire supported by individual
interviews. The Risk & CSR Committee questionnaire covered the
following areas: time management and composition, processes
and support, the work of the Committee and priorities for change.

The outcome of the review was considered at the Committee’s May
meeting and was as follows:

The Risk & CSR Committee was rated highly and the continued
separation of financial and non-financial risk into the Audit
Committee and Risk & CSR Committee respectively was considered to
be working well and created appropriate time to focus on key issues.

As noted on page 61, one of the Board’s priorities for the coming
year is to review risk management and reporting processes, with
such review being led by the Chairs of the Audit Committee and
the Risk & CSR Committee.

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 , David Mellors, Paul Murray, Susan
Searle and Steve Wadey (from 27 April 2015).

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.
The Committee’s full terms of reference can be found in the
Governance section of the QinetiQ website at www.QinetiQ.com/
about-us/corporate-governance.

There was no requirement for the Committee to meet during
the year.

Admiral Sir James Burnell-Nugent
Security Committee Chairman

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information
Corporate governance statement continued

E
Relations with shareholders

The company attaches significant importance to maintaining an
effective engagement with shareholders to ensure a mutual
understanding of objectives and to deal with issues of concern.
Responsibility for communications with shareholders rests with the
Executive Directors, assisted by the Communications and Investor
Relations Director. The Company Secretary oversees communications
with private individual shareholders.

An analysis of the shareholder register, by type of holder and by size
of holding, can be found on page 150.

Understanding the views of shareholders
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.

The Board as a whole is informed on a regular basis about the views of
key shareholders, including their concerns. The Communications and
Investor Relations Director 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;
• a report from the company’s brokers detailing activity
on the shareholder register since the previous meeting;
• feedback from investor meetings, including key questions;
• with regard to sell-side analysts, their recommendations and

expectations; and
• peer group news.

Investor relations activity during the year under review
The company elected to continue to update the market six times a year,
in conjunction with key financial announcements and financial period
ends, due to the short order cycle in its Global Products division.
Telephone briefings for analysts and investors took place in conjunction
with these dates.

The Chairman and the Senior Independent Director engaged
proactively with shareholders during the transition of the Chief
Executive Officer prior to Steve Wadey’s appointment on 27 April 2015.
The Chairman also engaged with shareholders at their request
throughout the year.

Meetings with investors during the year were led by the Executive
Directors. The Chairman and Senior Independent Director were
available to attend meetings with individual investors on request.

A new QinetiQ investor relations app was launched during the year
to make investor information available for mobile devices.

Other investor activity included:
• 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 in respect
of the full year and half-year results;
investor ‘road shows’ in May, June, November and December;

•
• visits, sales team briefings, group lunches, conference presentations

•

and ad hoc meetings on request; and

• the Annual General Meeting held on 22 July 2015.

Providing information to shareholders
The company sets itself the target of providing information that
is timely, clear and concise.

Key means of communication used by the company are:

• the Annual Report, which sets out the business model and strategy,

corporate governance arrangements and financial results;

• announcements made via the company’s website or a regulatory

information service;

• responding to environment, social and governance questionnaires;
• results presentations and webcasts; and
• the company’s website, www.QinetiQ.com, and an app for smart
phones and tablets. All shareholders and potential shareholders
can gain access to the Annual Report, presentations to investors,
Annual General Meeting 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.

QinetiQ Group plc Annual Report and Accounts 2016Annual General Meeting
The Annual General Meeting (AGM) provides all shareholders with the
opportunity to communicate directly with the Board of Directors 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. All shareholders are
entitled to vote on the resolutions put to the AGM. To ensure that all
shareholders, whether attending in person, by proxy, or unable to attend,
are able to vote in proportion to their shareholding, a poll is taken on all
of the resolutions in the Notice of Meeting. The results of the votes on
the resolutions are announced through a Regulatory Information Service
and published on the company’s website, www.QinetiQ.com, in the
‘Investors’ section, by the end of the next business day.

The 2015 AGM was held at Pennyhill Park Hotel, Bagshot, Surrey on
22 July 2015 and each member of the Board attended the meeting
and was available to take questions.

The 2016 AGM is scheduled to be held at Ashurst LLP, Broadwalk
House, 5 Appold Street, London EC2A 2HA, on 20 July 2016. 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.

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 96 and 98 in the Directors’ report section of this Annual Report.

Further information for shareholders can be found on pages 150 to 151
of this Annual Report.

Communicating with shareholders

1
Understanding
shareholders’ views

(cid:127) Meetings with key shareholders
(cid:127) Proactive Investor Relations team
(cid:127) Board briefings from IR Director
(cid:127) Updates from brokers

2
Investor
relations activity

(cid:127) Results presentations and webcasts
(cid:127) Market updates and key
financial announcements
(cid:127) Briefings for analysts and investors
(cid:127) Annual General Meeting

3
Information
for shareholders

(cid:127) Investor relations app
(cid:127) Annual report and accounts
(cid:127) Website at www.QinetiQ.com
(cid:127) Announcements – via website or
regulatory information service

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationDirectors’ remuneration report

Annual statement

Remuneration Committee membership and attendance
during the year ended 31 March 2016
During the financial year ended 31 March 2016, the Committee
met on five occasions.

Member
Mike Harper (Committee Chair)
Lynn Brubaker*
Admiral Sir James Burnell-Nugent
Mark Elliott
Ian Mason
Paul Murray
Susan Searle

Attendance
5/5
1/1
5/5
5/5
5/5
5/5
5/5

* Lynn Brubaker joined the Board on 27 January 2016.

This report has been prepared in compliance with Schedule
8 of The Large and Medium-sized Companies and Group
(Accounts and Reports) Regulations 2013, as well as the
Companies Act 2006

Remuneration Committee allocation of time

2016

Executive Director Reward Policy
and Remuneration
Senior Executive Remuneration
Long-Term Incentive Plan arrangements
Governance

19.0
36.0
22.0
23.0

D
Remuneration

Dear shareholder,
Executive pay continues to be high on the agendas of shareholders
and other stakeholders alike. A key focus of our work is to ensure
that the executive team’s remuneration remains aligned to the
performance of the business. In presenting this year’s report for the
year ending 31 March 2016, we continue to strive to be transparent,
whilst aiming for a report that is easy to read. We will be seeking
approval of this report at the AGM on 20 July 2016.

Business context to the Remuneration Committee’s decisions
FY16 was an important year for QinetiQ with the new leadership
team, led by Steve Wadey, establishing and commencing
implementation of a refreshed vision and strategy.

The Committee have fully supported Steve in ensuring that the
implementation of our reward strategy aligns with, and takes account
of, our two year transformation programme, whilst maintaining our high
performance culture and our principles of reward for performance.

The balance between long-term sustainable performance and short
term transformation has been consistently and carefully balanced in
the Committee’s key decision-making during the year. Shareholding
requirements have been strengthened to further align with
shareholder interests, and annual performance measures have
been developed to focus on ‘how we do things’ as well as results.

Steve has led the creation, by promotion and recruitment, of a senior
leadership team and the application of an appropriate reward structure
and implementation is underway.

Key activities and decisions made during the year
Summarised below are the key areas the Committee focused
on during the year.

1. Oversight and support of the review for the Executive Committee
reward structure
To support the Executive Directors in delivering the refreshed
strategy and transformation programme, an Executive Committee
has been formed to replace the current Operating Committee,
to enable group-wide collaboration that focuses on the customer.
From the outset the CEO has worked closely with the Remuneration
Committee to review and establish the reward framework for the
Executive Committee.

2. Performance Share Plan (PSP) award for CEO
The Committee has agreed, in line with the approved remuneration
policy, to increase the PSP opportunity for the CEO from 150% to
200% of salary for awards made in 2016 and 2017 only. This increase
acknowledges the forfeiture of previous long-term incentive
opportunities on joining, and aims to incentivise the delivery of the
revised company strategy and ensure the CEO has strong alignment

QinetiQ Group plc Annual Report and Accounts 2016with shareholder interests, and that the transformation programme
leads to long-term sustainable company performance.

3. Review of Executive Director and Executive Committee
shareholding requirement
To align with the interests of shareholders, and following a review
of the market practice, the Committee implemented an increase
in minimum shareholding requirements to 200% of base salary
for the CEO and 150% of base salary for the CFO respectively.

The Committee also reviewed the qualifying share criteria in
determining the satisfaction of the requirement and will adopt,
from 1 April 2016, the Policy to include only:

Effectiveness review
As detailed on page 61, the 2016 external review of Board
and Committee effectiveness was carried out by Lintstock.
The Committee questionnaire covered the following areas: time
management and composition, processes and support, the work
of the Committee and priorities for change.

The outcome of the review was considered at the March Board
meeting. The effectiveness of the Committee was rated highly
overall. Recommendations to improve the performance of the
Committee over the coming year included working closely with
the recently appointed Group Director Human Resources and
reviewing the level of support provided by the external advisors.

• Shares owned outright with no further conditions attached;
• Vested shares that remain subject to a holding period or

clawback only; and

The following are the remuneration priorities which the Committee
is going to focus on over the coming year:
• Reviewing the effectiveness of the long-term incentive plans

• Deferred shares that are not forfeitable under any circumstances.

in driving the delivery of the company’s strategy;

4. Adjustment to performance conditions
In March 2015 the Committee agreed a set of adjustment principles
to enable consistent and fair review in the event of an accounting
decision impacting on incentives.

Following the sale of the US Services division and the share buyback
exercise, the Committee followed these principles and exercised
its discretion to amend performance conditions as follows:

• To provide consistency, only earnings reflecting continuing
operations have been used in calculating the FY13 EPS,
reducing the 2013 reported EPS from 18.9p to 16.6p;
In accordance with best practice guidance the number of shares
repurchased under the share buyback has been added back
in calculating the FY16 EPS, reducing the as reported EPS from
16.3p to 14.7p

•

Underlying operating profit in 2016 included a credit of $3.9m due
to the resolution of a historical overseas exposure. The Committee
viewed this as neutral for the purposes of the remuneration as the
original charge reduced profit in FY13.

Following these adjustments the threshold targets for the 2013 PSP
and 2013 Deferred Annual Bonus (DAB) Matching were not met and
therefore none of the awards granted to the CFO will vest. The CEO
was not a participant in these awards, only joining the company
on 27 April 2015.

5. Agreement of Executive Directors’ performance conditions
The refreshed strategy and new organisational structure creates
the foundation and capability to grow the company. To reflect this,
Executive Directors’ performance measures focus on financial KPIs,
and key collective and personal non-financial KPIs. The performance
conditions strike a balance between maintaining strong traditional
financial performance and building a collective and group-orientated
organisation. Implementation of the policy for the year ending
31 March 2017 on page 94 highlights the key elements of the
Executive Director remuneration for the year.

• Supporting the CEO to establish and incentivise a new top team; and
• Developing a solution for the remuneration of senior executives

that rewards long-term value creation.

The results of this work will be reflected in the Policy put to
shareholders at the 2017 AGM.

Conclusion
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. The Committee is proposing no changes to the Policy at this
year’s AGM. The Policy will next be subject to shareholder approval
at the 2017 AGM. The Directors’ Remuneration Policy is available
to view in full on the company’s website www.QinetiQ.com.

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 for the year ending 31 March 2017.

I hope that we can rely on your vote in favour of the Annual Report
on Remuneration at the AGM on 20 July 2016. On behalf of the
Committee I am committed to engaging with investors as appropriate
to ensure a meaningful dialogue and am grateful for all the support
we have received from them and their representative bodies over
the course of the year. If you would like to discuss any aspect of our
remuneration policy and this report, I would be happy to hear from
you. You may contact me through Jon Messent, Company Secretary
and Group General Counsel.

Michael Harper
Remuneration Committee Chairman
26 May 2016

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information
Directors’ remuneration report continued

At a glance

Key principles of the Executive Director Remuneration policy

Remuneration
packages are
structured to support
business strategy and
conform to current
best practice

Appropriate rewards
are given for meeting
specific targets set
at the beginning of
each year

Congruence with pay
and employment
conditions elsewhere
in the Group and
taking into account the
diversity of our people

Incremental
compensation is
achieved for attaining
stretch performance
targets

Objectives are
measured on metrics
designed to be
consistent with
sustainable long-term
business performance

Promotion of long-
term alignment with
shareholders through
satisfaction of
incentives in shares
and required
employee
shareholding

Summary of Directors’ Remuneration Policy
The Directors’ Remuneration Policy was approved at the AGM 22 July 2014. The full Policy may be found in the Corporate Governance section
on the company’s website. A summary of the Policy is set out below:

Element

Policy summary description

Maximum opportunity

Executive Directors

Base salary We aim to pay base salaries in line with the market median against

defined comparator groups.

Typically, 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.

Pension

Benefits

Bonus
Banking
Plan
(BBP)

Either a contribution to the QinetiQ Defined Contribution Group
Personal Pension (GPP); or if the annual allowance would be exceeded,
an allowance in lieu of pension contributions will be paid.

Maximum pension contribution or salary supplement is 25% of salary.
Actual pension contribution or salary supplement for CEO and CFO
is 20% of salary.

Benefit values vary year on year depending on premiums and the
maximum potential value is the cost of the provision of these benefits.

Maximum = 225% of salary.

Target = 90% – 135% of salary.

Threshold = 0% of salary.

Benefits include car allowance, health insurance, life assurance,
income protection and membership of the all employee Share
Incentive Plan.

Annual performance conditions and targets are set at the
beginning of the plan year. For years 1-3, upon assessment of
performance by the Committee, a contribution will be made into
the participant’s plan account and 50% of the cumulative balance
will be paid in cash. Any remaining balance will be converted into
notional 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.
Malus and clawback arrangements are in place.

Performance
Share Plan
(PSP)

Awards are earned based on an equal weighting of absolute
underlying EPS growth and relative Total Shareholder Return
performance. The performance period runs for three years from
the start of the financial year in which the award is granted.

Malus and clawback arrangements are in place.

Normal grant level = 150% of salary

Maximum grant level = 200% of salary

Shareholding
requirement

Executives have five years to accumulate the required shareholding.

n/a

200% of base salary for the CEO. 150% of base salary for the CFO.

Non-Executive Directors

Fees

Non-executive Director fee policy aims to pay at median level, when
considering the same comparator group used for Executive Directors.

Increases will generally be in line with those of employees.

QinetiQ Group plc Annual Report and Accounts 2016How have we performed against our corporate performance
objectives?
The company is operating in challenging conditions reflected by the
Strategic Defence Security Review, highlighting the need to deliver
‘more for less’. The Single Source Regulations Office is also now fully
established, driving greater transparency to help demonstrate the
value for money the Government derives from qualifying defence
contracts. Across our markets we are seeing requirements increasing
but within the context of significant budget restraint.

Against this background the achievement of results broadly level with
2015, with continuing strong cash flow, together with the development and
communication of a revised strategy, plus commencement of the
transformation programme is regarded by the committee as a good result.
In order to encourage management to ensure that the revised
strategy and transformation programme leads to strong long-term
sustainable performance; the Performance Share Plan continues
to use the key financial measures of EPS and TSR.

The Committee believes that the use of both individual and collective
qualitative measures in the bonus plan is a key element in ensuring
that on a holistic basis management are rewarded for the business
outputs during the year.

Steve Wadey and David Mellors have collaborated well on the joint
qualitative measures and are therefore rated as Exceed Expectations
for each measure.

In relation to the CEO’s personal objective, Steve Wadey has successfully
developed good relationships with our suppliers, key customers and
stakeholders and is therefore rated as Exceed Expectations.

In relation to the CFO’s personal objective, David Mellors has defined
an operating model to support Group Strategy and is therefore rated
as Meet Expectations.

The following table highlights the performance and remuneration
outcomes for the year ended 31 March 2016 with more detail
provided in the Annual Report on Remuneration.

Annual Incentive (BBP)
Group Underlying Profit After Tax(a)
Group Underlying Operating Profit(a)
Group Underlying Operating Cash Flow(a)(b)
CEO/CFO Shared Personal Objectives:
Strategy:
• Develop the Group strategy to drive sustainable
growth across UK and international markets,
building on the core strengths of the business.

Employees:
• Maintain or improve relations with our customers,

key suppliers and stakeholders.

Organisation:
• Develop plan to augment and build the skills,

processes and structure of the senior leadership
team to execute the Group strategy.

CEO Individual Personal Objective:
Customers:
Maintain or improve reputation of the business
with our customers.
CFO Individual Personal Objective:
Operating Model:
Develop a refined operating model that enables the
implementation of the Group strategy, to maximise
cross-cutting synergies and investment in growth,
whilst continuing to deliver capital discipline and
cash generation.

Weighting (%)
20
30
30

Target performance
£89.5m
£104.6m
£80.1m

Stretch performance
£98.4m
£115.0m
£96.1m

Actual performance
£95.9m
£108.9m
£126.5m

% of maximum
reward achieved
85.68%
70.74%
100.00%

Meet
Expectations

Exceed
Expectations

Meet
Expectations

Exceed
Expectations

Meet
Expectations

Exceed
Expectations

Meet
Expectations

Exceed
Expectations

Meet
Expectations

Exceed
Expectations

Meet
Expectations

CEO 85.00%

CFO 72.50%

(a) Definitions of underlying measures of performance can be found in the glossary on page 149.
(b) Adjusted to exclude LTPA and MSCA capital expenditure.

Long-Term Incentives
2013 Performance Share Plan (EPS)(a)
2013 Performance Share Plan (TSR)
2013 Deferred Annual Bonus Matching (EPS)(a)

(a) An explanation of the adjustments can be found on page 90.

Threshold performance
18.1p
Median
18.1p

Stretch performance
22.1p
Upper Quartile
22.1p

Adjusted performance
14.7p
Below Median
14.7p

% of maximum
reward achieved
0.00%
0.00%
0.00%

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationDirectors’ remuneration report continued

What did our executives earn during the year to 31 March 2016?
Results for 2016 represent a strong achievement against the financial and personal objectives under the Annual Incentive. Zero vesting
under the Long Term Incentives reflects the difficult defence market conditions over the last three years that has restricted the growth
of the business. To provide transparency in a challenging year of transition, the following tables provide the single figure for 2016, showing
how much the Executive Directors earned in respect of 2016. This figure is then considered in relation to:
the proportion of the single figure that is paid and the proportion that is earned in respect of 2016;
(i)
(ii) the single figure for 2016 compared to the Policy remuneration scenarios;
(iii) the single figure trend in comparison to EPS;
(iv) the shareholding of Executive Directors.

(i) 2016 Single Figure of Remuneration for Executive Directors
The auditor is required to report on the information in this table. A detailed breakdown of the figures can be found on pages 86 to 95 however,
for clarity, the Bonus Banking Plan number reported is the calculated annual bonus figure before any banking has occurred.

All figures
in £
CEO(a)
CFO(b)

2016
Salary/Fee
520,219
455,885

2016
Benefits
31,166
26,403

2016 Bonus
Banking Plan
999,117
849,917

2016 Long-Term
Incentive
–
–

2016 Pension
104,044
91,177

2016 Total
1,654,546
1,423,382

2015 Total
–
1,759,680

(a) Appointed 27 April 2015.
(b) Interim CEO until 26 April 2015 returning to enlarged CFO role on 1 May 2015.

(ii) Single Figure Paid in 2016
Executive Director remuneration includes elements both paid (base
salary, benefits, Bonus), and earned (Bonus Banking Pool) in 2016.
To provide a clearer understanding of balance between short and
long-term remuneration the following chart highlights that 30% of
Executive Director earnings for 2016 are deferred and at risk of future
forfeiture if minimum performance levels are not maintained.

FY16 Single figure remuneration type

CEO

CFO

1,154,987

499,559

998,424

424,958

Paid

Earned

637%

(iii) 2016 Single Figure versus Remuneration Policy
Comparing against our Remuneration Policy, Executive Director remuneration is broadly comparable to on target performance, and in line with
our financial results achieved in challenging operating conditions.

CEO (£‘000)

CFO (£‘000)

3,000

2,500

2,000

1,500

1,000

500

703

Minimum

1,569
236
630

703

Target

2,822

859

1,260

703

Stretch

3,000

2,500

2,000

1,500

1,000

500

1,654

999

655

Actual

554

Minimum

1,325
278
493

554

Target

2,590

1,046

990

554

Stretch

1,423

850

573

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

(iv) 2016 Single Figure versus EPS
The following chart highlights that trends in Executive Director remuneration are aligned to business results.
CEO single figure versus profit

20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0

)
e
c
n
e
p
(
S
P
E

2013

2014

2015

2016

Salary

Taxable Benefits

Bonus

LTIP

Pension

EPS

‘

)
0
0
0
£
(
n
o
i
t
a
r
e
n
u
m
e
R

5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0

QinetiQ Group plc Annual Report and Accounts 2016

Shareholdings of Executive Directors
To align with the change in Executive Director shareholding requirements the following charts indicate current holdings against the new requirements.

CEO shareholding as a percentage of salary

CFO shareholding as a percentage of salary

Shareholding requirement

200

Shareholding requirement

150

Value of beneficially owned shares
& deferred shares

161

Value of conditional shares subject
to performance conditions

153

Value of conditional shares subject
to performance conditions

615

Implementation of Policy in 2016 and 2017

Pension

Benefits

Bonus
Banking
Plan

Implementation for Y/E 31 March 2016

Element
Executive Directors
Base salary

Stephen Wadey from 27 April 2015 £560,000 per annum.
David Mellors (CFO) from 1 May 2015 £440,000 per annum.(a)
Stephen Wadey (CEO) 20% of salary.
David Mellors (CFO) 20% of salary.

Policy benefits provided during financial year.

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%).

50% of the retained balance is at risk of forfeiture based
on a Group Operating Profit Threshold Target.

Performance
Share Plan

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.

Implementation for Y/E 31 March 2017

Salaries to be reviewed in September in line with the rest of the
employee population.

No change.

Maximum Annual Opportunity 225% of salary.
Target = 112.5% of salary.
Threshold = 0% of salary.

Performance conditions (weighting):
• Group Order Intake (25%).
• Group Operating Profit (25%).
• Group Operating Cash Flow (25%).
• Collective measures based on company KPIs (12.5%).
• Personal measures based on company KPIs (12.5%).

50% of the retained balance is at risk of forfeiture based on a Group
Operating Profit Threshold Target.

CEO 200% of salary. The Committee considered whether with the
increased award level that the performance conditions should be
changed for the CEO. However, the Committee reached the conclusion
that given current and predicted market conditions facing the
company the EPS and TSR performance conditions were in practice
likely to be more stretching than in the past and therefore there was
no requirement to change them for the higher award level.

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.

Shareholding
requirement

100% of base salary for the CEO and CFO to be built up over a period
of five years.

200% of base salary for the CEO and 150% of base salary for the CFO
to be built up over a period of five years from date of policy adoption
(1 April 2016).

Non-Executive Directors
Fees

See page 91 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.
Fee for Chairing a Committee – From 1 July 2015 £9,000.

(a)

Following the resignation of Leo Quinn in October 2014, David Mellors served as Interim CEO until 26 April 2015 when he returned to an enlarged CFO role, taking on more
operational management responsibilities.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationDirectors’ 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 2016.

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 90, complement the performance conditions described in the Bonus
Banking Plan, supporting sustainable performance.

Executive Director single figure remuneration
The auditor is 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 2016 and the preceding year. The CFO figure
for 2016 includes the period as Interim CEO.

Executive
Director
CEO
CFO

Salary/fees(a)

Benefits(b)

Bonus Banking Plan(c)

Long-Term Incentive(d)

Pension(e)

Single figure

2016
£520,219
£455,885

2015
£-
£501,227

2016
£31,166
£26,403

2015
£-
£27,447

2016
£999,117
£849,917

2015
£-
£998,603

2016
£0
£0

2015
£-
£134,881

2016
£104,044
£91,177

2015
£-
£97,522

2016
£1,654,546
£1,423,382

2015
£-
£1,759,680

(a) For further details please refer to additional supporting information for each Executive Director opposite.
(b) Benefits comprise of car allowance, private medical insurance, life assurance and income protection.
(c) The Bonus Banking Plan was introduced in 2014 replacing the previous Annual Bonus scheme and Deferred Bonus arrangements. The figure reported equates to the FY16

calculated outturn. For further details, including how this figure is used to derive the deferred element please refer to Additional supporting information for each Executive
Director on page 88.

(d) Long-Term Incentive figures for the year ended 31 March 2016 comprise the 2013 PSP and the 2013 DAB Matching Plan. For further details please refer to the following

additional supporting information.

(e) CEO and CFO pension figure represents cash in lieu of pension equating to 20% of base salary for both years.

QinetiQ Group plc Annual Report and Accounts 2016Additional 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 2016.

Salary/fees

Executive Director
CEO
CFO

From 1 May

From 27 April

2015(a)
–
440,000

2015(b)

560,000
–

From 20 October
2014(c)
–
633,800

From 1 September
2014(d)
–
403,150

Pro-rated
single figure(e)
520,219
455,885

(a) The CFO’s salary was restated on 1 May 2015 to reflect the enlarged CFO role including greater operational responsibility.
(b) The CEO salary on joining the company.
(c) The CFO’s salary was increased on 20 October 2014 as part of the transition to becoming interim CEO.
(d) The CFO’s salary increased by 3% (£11,750 per annum) effective from 1 September 2014, in line with salary increases generally awarded to UK employees at that date.
(e) Pro-ration calculated on a daily basis.

The CEO/CFO were measured against the targets as shown below:

% of Base Salary

2016

Group underlying operating profit
Group underlying operating
cash flow
Group underlying profit after tax
Qualitative measures

%
67.5

67.5
45.0
45.0

Total pension entitlements
No Directors participate in the QinetiQ Pension Scheme.

Annual Incentive
For the year ended 31 March 2016 achievement of on-target
performance provides a payment equal to 112.5% of base salary,
rising on a linear scale to 225% of base salary for achievement
of stretch performance.

For the year ended 31 March 2015 the equivalent achievement
of on-target performance provided a payment equal to 90%
of base salary, rising on a linear scale to 225% of base salary
for achievement of stretch performance.

For both performance periods the scheme begins to pay out once
threshold performance measures have been achieved.

For the year ended 31 March 2016 financial performance measures
make up 80% of the annual bonus potential and with personal
objectives accounting for the remaining 20%.

For the year ended 31 March 2015 financial performance
measures and personal objectives were equally weighted at 50%
of the annual bonus potential to reflect the role of the Interim
CEO during this period.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationDirectors’ remuneration report continued

The auditor is required to report on the information in this table which summarises the key steps in the calculation of the Annual Incentive.

CEO/CFO Shared Financial
Performance Measures
Group Underlying Profit After Tax(a)
Group Underlying Operating Profit(a)
Group Underlying Operating Cash Flow(a)(b)
CEO/CFO Shared Personal Objectives:
Strategy:
• Develop the Group strategy to drive
sustainable growth across UK and
international markets, building on the
core strengths of the business.

Employees:
• Maintain or improve employee

engagement in delivery of customer
satisfaction and business strategy.

Organisation:
• Develop plan to augment and build the
skills, processes and structure of the
senior leadership team to execute the
Group strategy.

CEO Individual Personal Objective:
Customers:
• Maintain or improve reputation of the

business with our customers.

CFO Individual Personal Objectives:
Operating Model:
• Develop a refined operating model
that enables the implementation of
the Group strategy, to maximise
cross-cutting synergies and
investment in growth, whilst
continuing to deliver capital discipline
and cash generation.

CEO Overall Results
CFO Overall Results

Weighting
(%)
20
30
30

Threshold
£80.5m
£94.1m
£72.1m

Target
£89.5m
£104.6m
£80.1m

Stretch
£98.4m
£115.0m
£96.1m

% of
maximum
reward achieved
85.68%
70.74%
100.00%

Actual
£95.9m
£108.9m
£126.5m

CEO
contribution
£200,575
£248,411
£351,148

CFO
contribution
£175,771
£217,691
£307,723

n/a

Meet
Expectations

Exceed
Expectations

n/a

Meet
Expectations

Exceed
Expectations

80.00%

£140,458

£123,089

n/a

Meet
Expectations

Exceed
Expectations

n/a

Meet
Expectations

Exceed
Expectations

100.00%

£58,525

n/a

Meet
Expectations

Exceed
Expectations

Meet
Expectations

50.00%

£25,643

85.36%
82.86%

£999,117

£849,917

(a) Definition of underlying measures and performance can be found in the glossary on page 149.
(b) Adjusted to exclude LTPA and MSCA capital expenditure.

The Bonus Banking Plan operates as follows:
• The Plan operates on a fixed 4 year cycle. Year 1 of the Plan commenced on 1 April 2014, year 2 commenced 1 April 2015,

year 3 commenced 1 April 2016, and year 4 will commence on 1 April 2017.

• Performance conditions are set at the beginning of each Plan year.
• At the end of each of the first three Plan years the performance against targets is assessed and the level of the incentive earned

is determined and paid into the Plan account.

• At the end of each of the first three Plan years, 50% of the account balance will be paid and the balance retained and held in the Plan

as notional shares.

• At the end of the 4th year, any remaining balance in the Plan account is paid out in shares.

QinetiQ Group plc Annual Report and Accounts 2016The auditor is required to report on the information in this table. The Bonus Plan contribution for FY16 is as reported in the single figure.
Through the operation of the plan the CEO and CFO receive a cash payment of £499,559 and £728,721 respectively. The CEO and CFO retain
213,304 and 311,153 notional shares in their Plan accounts as detailed below:

Notional shares
on account at
beginning of
plan year 2
(31 March 2015)
–
253,452

Share price as at
31 March 2016
measurement
date
(£)
2.342
2.342

Share value
as at
measurement
date
(£)
–
593,584

Bonus plan
contribution
for plan year 2
(£)
999,117
849,917

Dividend
equivalent
payment
(£) (total
dividend 5.5p)
–
13,940

Bonus pool
total value as at
measurement
date
(£)
999,117
1,457,441

Gross cash
payment for
plan year 2
(£)
499,559
728,721

Bonus pool
total value
following
cash payment
(£)
499,558
728,720

Notional shares
on account at
beginning of

plan year 3(a)
213,304
311,153

CEO
CFO

(a) Share price used in calculation equals £2.342. Thirty day average 2 March 2016 – 31 March 2016.

Forfeiture
The CFO retained 253,452 notional shares in his Plan account of which 50% were subject to forfeiture. Forfeiture would have been enacted if
Group Underlying Operating Profit was less than £85.0m for FY16. FY16 Group Underlying Operating Profit was £108.9m therefore no notional
shares were forfeited.

Discretion
For the year ended 31 March 2016, no discretion was applied to the calculated results; therefore, £999,117 and £849,917 have been reported
in the single figure calculation.

For the year ended 31 March 2015, financial targets were exceeded providing a contribution of 76.97% of base salary for the CFO as detailed
in the single figure table (£998,603). No discretion was applied to these contributions.

Long-Term Incentive
Deferred Annual Bonus
As reported in the 2013 Annual Report, the CFO deferred 50% (£285,000) of his annual cash bonus into the DAB Plan, and was awarded
157,196 shares to be held in trust and will be released to the CFO on 28 June 2016. These shares were then subject to a matching award under
the Deferred Annual Bonus Matching Plan. Details of this matching award are set out in the section headed Long-Term Incentive Summary.
These figures are not reported in the single figure as they have been previously reported under the regulations.

Long-Term Incentive Summary
The following table sets out the Long-Term Incentive Plan results for the performance period ended 31 March 2016. Plan details are provided
in the paragraphs immediately following this table. The CEO started on 27 April 2015 therefore does not have any awards capable of vesting.

CFO

Plan name
2013 Performance Share Plan(a)
2013 Deferred Annual Bonus Matching
Total

Conditional
shares capable
of vesting
300,000
157,196
457,196

Shares vesting
–
–
–

Percentage
shares vesting
–
–
–

Share value
–
–
–

Accrued
dividends
–
–
–

Reported
single figure
value
–
–
–

(a) 50% of PSP shares granted are subject to the EPS performance measure, 50% are subject to the TSR performance measure.

The following table summarises the key steps in the vesting calculation for both the performance Share Plan and DAB Matching.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationDirectors’ remuneration report continued

Long-Term Incentive Plan Results
The following table summarises the key vesting calculation for both the PSP and DAB Matching.

Performance measures 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

3% (CAGR)
25%
10% (CAGR)
100%
16.6p
18.1p
22.1p
14.7p
–

Median
30%
Upper Quartile
100%
Below Median
–

–

3% (CAGR)
25%
10% (CAGR)
100%
16.6p
18.1p
22.1p
14.7p
–

–
–
–
–
–
–

–

Following the sale of the US Services business and the share buyback exercise the Committee has exercised its discretion to amend EPS
performance conditions as follows:
• To provide consistency, only earnings reflecting continuing operations have been used in calculating the FY13 EPS, reducing the 2013

•

reported EPS from 18.9p to 16.6p;
In accordance with best practice guidance the number of shares bought under the share buyback has been added back in calculating
the FY16 EPS, reducing the as reported EPS from 16.3p to 14.7p.

Scheme interests awarded during the financial year ended 31 March 2016
The auditor is required to report on the information in this table. The following awards were made to Executive Directors.

Plan name
PSP 2015
PSP 2015
PSP 2015
PSP 2015

CEO
CEO
CFO
CFO

Performance
measure
EPS
TSR
EPS
TSR

Award as
percentage
of salary
75.0%
75.0%
75.0%
75.0%

Grant date
28 Jul 15
28 Jul 15
28 Jul 15
28 Jul 15

Face value
of award
£420,000
£420,000
£330,000
£330,000

Share price
at date
of grant
231p
231p
231p
231p

No. of
shares
granted
181,818
181,818
142,857
142,857

Performance period
from – to
1 Apr 15 to 31 Mar 18
1 Apr 15 to 31 Mar 18
1 Apr 15 to 31 Mar 18
1 Apr 15 to 31 Mar 18

Percentage of
award vesting
at threshold
25%
30%
25%
30%

The auditor is required to report on the information shown here over payments to past Directors.

Payments to past Directors
No payments were made to past Directors.

Payments for loss of office
No payments were made for loss of office.

QinetiQ Group plc Annual Report and Accounts 2016Single figure remuneration for each Non-executive Director
The auditor is required to report on the information in this table. Non-executive Director remuneration is shown as a single figure to provide
an annual comparison between the actual remuneration awarded during the performance year ended 31 March 2016 and the preceding year.

Non-executive Director
Lynn Brubaker
Admiral Sir James
Burnell-Nugent
Noreen Doyle
Mark Elliott
Michael Harper
Ian Mason
Paul Murray
Susan Searle

Salary/fees

Benefits

Committee Chair fees

US attendance fee

2016
£8,197
£45,250

2015
–
£43,000

2016
–
–

2015
–
–

2016
–
£9,000

2015
–
£9,000

2016
£2,823
–

–
£236,250
£45,250
£45,250
£45,250
£45,250

£13,320
£236,250
£43,000
£35,392
£43,000
£44,985

–
£75,000
–
–
–
–

–
–
£19,000
–
£9,000
–

£2,880
–
£16,549
–
£9,000
–

–
–
–
–
–
–

2015
–
–

–
–
£2,500
–
£2,500
£2,500

Single figure

2016
£11,020
£54,250

2015
–
£52,000

–
£311,250
£64,250
£45,250
£54,250
£45,250

£16,200
£311,250
£62,049
£35,392
£54,500
£47,485

Mark Elliot receives an accommodation allowance of £75,000 as he is US resident.

Noreen Doyle resigned on 22 July 2014.

Lynn Brubaker was appointed on 27 January 2016. Lynn is a US resident and receives a $4,000 fee for attending UK meetings.

Statement of Directors’ shareholding and share interests
The auditor is required to report on the information in this table. Set out below are the Directors’ shareholdings as at 31 March 2016.
In relation to the revised Executive Shareholding Policy adopted on 1 April 2016 the company requires Executive Directors to hold shares
equivalent to 200% (CEO) and 150% (CFO) of base salary.

The CEO does not currently meet the minimum shareholding requirement; with a current holding equivalent to 9% of base salary using a
share price of £2.362 (three-month average to 31 March 2016). This reflects his recent appointment as CEO and the lack of any opportunity
for share based awards to vest.

The CFO exceeds the minimum shareholding requirement; with a current holding equivalent to 161% of base salary using a share price
of £2.362 (three-month average to 31 March 2016).

Steve Wadey
David Mellors
Mark Elliott
Michael Harper
Admiral Sir James Burnell-Nugent
Paul Murray
Susan Searle
Ian Mason
Lynn Brubaker

Shares
beneficially

Shares subject
to performance

owned(a)
20,944
34,693
125,000
30,000
11,419
56,077
17,500
10,000
–

conditions(b)
363,636
1,145,239
–
–
–
–
–
–
–

Shares not subject
to performance

conditions(c)

–
265,975
–
–
–
–
–
–
–

Total
shares held at
20 May 2016
384,580
1,445,907
125,000
30,000
11,419
56,077
17,500
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 and 2013, PSP for 2015, 2014 and 2013.
(c) Shares not subject to performance conditions comprise deferred shares under the DAB plan for 2014, and 2013.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information
Directors’ remuneration report continued

Total scheme interests summary
The auditor is required to report on the information in this table. Total scheme interests, including those awarded during the financial year
ended 31 March 2016, are as follows.

Steve Wadey

Plan name
PSP 2015

Date of grant
28 Jul 15

Number at
1 April 2015
–

Granted in year
(maximum potential
of awards)
363,636

Exercised/
vested in year
–

Lapsed
in year
–

Number at
31 March 2016
363,636

Market price on
date of grant
231.0

Earliest
vest date
28 Jul 18

Latest
vest date
28 Jul 18

–

363,636

–

363,636

David Mellors

Plan name
PSP 2012
DAB Match
2012
PSP 2013
DAB Match
2013
PSP 2014
DAB Match
2014
PSP 2015

Date of grant
09 Aug 12
29 Jun 12

28 Jun 13
28 Jun 13

28 May 14
1 Jul 14

Number at
1 April 2015
356,250
117,173

Granted in year
(maximum potential
of awards)
–
–

Exercised/
vested in year
65,860
–

Lapsed
in year
290,390
117,173

Number at
31 March 2016
0
0

Market price on
date of grant
166.0
157.1

Earliest
vest date
09 Aug 15
29 Jun 15

Latest
vest date
09 Aug 15
29 Jun 15

300,000
157,196

293,550
108,779

–
–

28 Jul 15

–

1,332,948

285,714

–
–

–

–
–

–

300,000
157,196

293,550
108,779

180.4
180.4

28 Jun 16
28 Jun 16

200.0
207.7

28 May 17
1 Jul 14

28 May 17
1 Jul 17

285,714

231.0

28 Jul 18

65,860 407,563

1,145,239

The awards in the table above are subject to the performance conditions described on page 85. The price of a QinetiQ share at 31 March 2016
was 228.0p. The highest and lowest prices of a QinetiQ share during the year ended 31 March 2016 were 274.4p and 185.5p. There have been
no changes to the interests shown above between 31 March 2016 and 26 May 2016.

Performance review
The 7 year and 3 year charts show the company’s TSR over the period from 31 March 2009 to 31 March 2016 and 31 March 2013 to
31 March 2016 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 these indices 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.

Seven-year comparator chart

Three-year comparator chart

350

300

250

200

150

100

140

130

120

110

100

Mar 09

Mar 10

Mar 11

Mar 12

Mar 13

Mar 14

Mar 15

Mar 16

Mar 13

Mar 14

Mar 15

Mar 16

QinetiQ

FTSE 250 (excluding investment trusts)

QinetiQ

FTSE 250 (excluding investment trusts)

QinetiQ Group plc Annual Report and Accounts 2016CEO Remuneration
The table below shows the CEO’s remuneration over the same performance period (31 March 2009 to 31 March 2016):

Year ended 31 March
2016(a)
2016(b)
2015(c)
2015(d)
2014
2013
2012
2011
2010(e)
2010(f)

Salary/fees
520,219
455,885
501,227
469,776
610,844
593,050
580,000
580,000
217,872
266,667

Single figure
1,654,546
1,423,382
1,725,960
673,979
2,177,742
3,992,001
1,495,284
1,327,156
886,564
1,246,320

Annual Bonus
(% of maximum)
85.36%
82.86%
88.55%
–
76.97%
100.00%
100.00%
100.00%
–
–

Long-Term Incentives
(% of maximum vesting)
–
–
13.91%
–
15.43%
40.27%
–
–
–
–

(a) Steve Wadey joined the company 27 April 2015.
(b) David Mellors was Interim CEO to 26 April 2015.
(c) Steve Wadey joined the company 27 April 2015. David Mellors was Interim CEO from 1 Jan 2015.
(d) Leo Quinn left the company on 31 December 2014.
(e) Leo Quinn joined on 16 November 2009.
(f) Graham Love on 30 November 2009.

Percentage change in CEO remuneration
The following table compares change in CEO remuneration with an employee comparator group (averaged per capita). For comparison
purposes, Steve Wadey’s full year equivalent figures have been used (Steve joined on 27 April 2015).

Base salary
Benefits

Annual bonus

2016
£560,000
£34,939

£975,707

CEO

2015
£627,792
£57,857

£998,603

% change
-10.8%
-39.3%

-2.3%

Comparison group(a)

2016
£38,992
£1,200

£921

2015
£37,574
£1,168

£924

% change
3.6%
2.7%

-0.3%

(a) The comparison group (4,000 employees) represents the UK principal businesses in service between 1 April 2015 and 31 March 2016.

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.

332.6

350.3

33.0

32.3

Share-based profit
distribution

107.1

46.9

Other significant
profit distribution(a)

Total employee
remuneration

(£m) 2016

(£m) 2015

(a) For both 2016 and 2015 the figure relates to the share buyback resulting from the sale of the
US Services business.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information
Directors’ remuneration report continued

Implementation of Policy for the year ending 31 March 2017
Salary/fees
Non-executive Director fees were last increased on 1 July 2015,
and the Non-executive Chairman’s fees were last increased on
1 December 2013. Salaries and fees are reviewed in line with Policy.
The review of Non-executive Directors’ fees resulted in an increase
in base fees from £43,000 to £46,000 per annum.

• An increase (20% to 25%) in the weighting of the element of bonus
on collective and personal objectives. This amendment has been
introduced to support the refreshed strategy and the transformation
of the business and is designed with the financial KPIs to encourage
a holistic approach to company performance over this period
of change. Again these types of measures are cascaded through
the Executive Committee.

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.

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.

Neither the CEO nor the CFO hold non-executive directorships
in other companies.

Non-executive Chairman
Accommodation allowance for Non-executive 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
Additional fee for attendance at a Board meeting held
in UK by US resident Non-executive Director

Fees effective
as at 1 April 2016
£236,250
£75,000
£46,000
£9,000

30%

£10,000

£2,500

$4,000

In 2016 PSP awards to Executive Directors are equal to 200% of base
salary for the CEO and 150% of base salary for the CFO. 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
100%

Incentives for Executives
Below shows the measures and relative weighting for the 2017 Bonus
Banking Plan for the CEO and CFO:

Median

Upper quartile

Percentile performance

Bonus Banking Plan
(target performance
112.5% of base salary,
stretch performance
225% of base salary)

Performance
Measure
QinetiQ Operating
Profit
QinetiQ Operating
Cash Flow(a)
QinetiQ Order Intake
Collective Objectives
Personal Objectives

Relative
Weighting (%)

EPS performance – 50% of award
100%

25%

25.0%

25.0%
25.0%
12.5%
12.5%

(a) Adjusted to exclude LTPA and MSCA capital expenditure.

The Remuneration Committee has made the following main changes
to the performance conditions for the 2017 Bonus Banking Plan:
•

Introduction of Order Intake as a new performance condition.
In accordance with the refreshed strategy top line growth is one
of the key objectives. Order Intake measures revenue generation
and therefore the introduction of this measure ensures that it
is core focus of both the CEO and CFO. In addition, this type
of measure is reflected in the bonus performance conditions
for the new Executive Committee and therefore provides a
common focus to the senior management of the company.

10%

CAGR EPS%

The Committee considered whether with the increased award level
that the performance conditions should be changed for the CEO.
However, the Committee reached the conclusion that given current
and predicted market conditions facing the company the EPS and TSR
performance conditions were in practice likely to be more stretching
than in the past and therefore there was no requirement to change
them for the higher award level.

QinetiQ Group plc Annual Report and Accounts 2016Consideration 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 Non-executive Chairman of the Board), all of whom are
independent Non-executive Directors. The Non-executive 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 Non-executive Chairman is not permitted to be Non-executive
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 £58,500 which included
advice relating to the Executive Shareholding requirements.

PwC provided the following additional services during the year:
•
implementation support for the company on executive
reward plans;

• consultancy and advice to Group Tax; 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 Chief Executive Officer, Director of Capability and Group Reward
Director also provided information and advice to the Committee.

The Chair of the Committee and the Non-executive Chairman 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 any payments on
termination.

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

For
22 Jul 14 422,740,088
22 Jul 15 445,373,206

%
84.66%
99.45%

Against
76,602,719
2,470,126

%
15.34%
0.55%

Abstained
4,877,598
9,840,663

%
of issued share
capital voted
76.68%
75.06%

The high level of support from shareholders on the Annual Report on Remuneration satisfies the Committee that shareholders are
comfortable with the current operation of the Policy. The Remuneration Report detailed on pages 80 to 95 was approved by the Board
on 26 May 2016 and signed on its behalf by:

Michael Harper
Remuneration Committee Chairman
26 May 2016

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationDirectors’ 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.

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

Location in
Annual Report
page 50
page 58
page 91
page 27
page 129

page 31
pages 2 to 49

page 38

Management report
The Strategic report on pages 02 to 49 and the Directors’ report,
as detailed on pages 96 to 99, 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 £300.8m (2015: £306.6m) of total R&D-related expenditure,
of which £277.6m (2015: £285.8m) was customer-funded work and
£23.2m (2015: £20.8m) was internally funded (all comparative figures
exclude discontinued operations). Additionally, £0.4m (2015: £0.4m)
of late-stage development costs was capitalised and £1.2m (2015:
£0.6m) 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 capital
As at 31 March 2016, the company had allotted and fully paid up
share capital of 586,681,200 ordinary shares of 1p each with an
aggregate nominal value of £5.9m (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 29 on page 136.

Share buyback activity
Following the sale of the US Services business in 2014, 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 under review,
the company completed this buyback. The company announced at
the half year in November 2015 that it intended to carry out a further
return of capital to shareholders of up to £50 million over 12 months,
consistent with the company’s capital allocation policy, by way of an
on-market buyback, subject to prevailing equity market conditions.
This buyback has begun and will continue during the year ending
31 March 2017, subject to market conditions.

As a result of the share buyback activity detailed above, during the
year under review, 21,928,804 ordinary shares in the capital of the
company (representing 3.74% of the issued ordinary share capital
as at 31 March 2016) were purchased at an average price of
217 pence per share. All of these shares have been cancelled.
In the financial year, the impact of the share buyback has been to increase
basic underlying earnings per share from 15.2p to 16.3p, for total
shareholder return to remain unchanged and for net asset value to
reduce by £46.9 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 Articles of Association can be found on the
company’s website at www.QinetiQ.com in the Corporate
Governance section. 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.

QinetiQ Group plc Annual Report and Accounts 2016Rights 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
are set out in the Articles of Association to protect UK defence and
security interests. These include:

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.

• 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 Non-
executive Chairman or Chief Executive Officer 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 29 on page 136.

Restrictions on the transfer of shares
As detailed above, the Special Share confers 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 2016, the Trust held 3,007,587 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). 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.

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
Artisan Partners
BlackRock, Inc.
Investec
Norges Bank

At 31 March 2016
% of issued share
capital*

9.984%
5.01%
5.01%
4.95%
3.93%

At 20 May 2016#

% of issued share
9.984%
5.01%
8.63%
4.95%
3.93%

* as notified by the shareholder.
# being a date not more than a month prior to the date of the notice of AGM.

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.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationDirectors’ report continued

Change of control – significant agreements
The following significant agreements contain provisions entitling
the counterparties to require prior approval, exercise termination,
alteration or other similar rights in the event of a change of control
of the company, or if the company ceases to be a UK company:

• The Combined Aerial Target Service contract is a 20-year contract
awarded to QinetiQ by the MOD on 14 December 2006. The terms
of this contract require QinetiQ Limited to remain a UK company
which is incorporated under the laws of any part of the UK, or an
overseas company registered in the UK, and that at least 50% of
the Board of Directors are UK nationals. The terms also contain
change of control conditions and restricted share transfer
conditions which require prior approval from HM Government if
there is a material change in the ownership of QinetiQ Limited’s
share capital, unless the change relates to shares listed on a
regulated market – ‘material’ is defined as being 10% or more of
the share capital. In addition, there are restrictions on transfers
of shares to persons from countries appearing on the restricted
list as issued by HM Government.

• The Long Term Partnering Agreement (LTPA) is a 25-year contract,
which QinetiQ Limited signed on 28 February 2003, to provide
test, evaluation and training services to the MOD. This contract
contains conditions under which the prior approval of HM
Government is required if the contractor, QinetiQ Limited, ceases
to be a subsidiary of the QinetiQ Group, except where such change
in control is permitted under the shareholders Agreement to
which the MOD is a party.

• The company is party to a multi-currency revolving credit facility
with a US$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.

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.

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
At the Company’s Annual General Meeting held in July 2015, the
shareholders passed resolutions which authorised the Directors to allot
relevant securities up to an aggregate nominal value of £3,981,256
(£1,990,329 pursuant only to a rights issue), to disapply pre-emption
rights (up to 5% of the issued ordinary share capital) and to purchase
ordinary shares (up to 10% 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 2016 Annual General Meeting.

Annual General Meeting
The Company’s Annual General Meeting will be held on Wednesday,
20 July 2016 at 11.00am, at the offices of Ashurst LLP, Broadwalk House,
5 Appold Street, London EC2A 2HA. 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.

QinetiQ Group plc Annual Report and Accounts 2016Statement of disclosure of information to the auditor
The Directors who held office at the date of approval of this
Directors’ report have confirmed that, so far as the Directors are
aware, there is no relevant audit information of which the company’s
auditor is unaware, and the Directors have taken all the steps they
reasonably should have taken as Directors to make themselves aware
of any relevant audit information and to establish that the company’s
auditor is aware of that information.

Responsibility statement of the Directors in respect of the
Annual Report
The Directors in office as at the date of this report confirm that to the
best of their knowledge:

• the financial statements, 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

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.

By order of the Board:

Jon Messent
Company Secretary and Group General Counsel
26 May 2016

Directors’ responsibilities in respect of the Annual Report
and financial statements
The Directors are responsible for preparing the Annual Report and
the Group and parent company financial statements in accordance
with applicable law and regulations.

Company law requires the Directors to prepare Group and parent
company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements in
accordance with IFRSs as adopted by the EU and applicable law and
have elected to prepare the parent company financial statements
in accordance with UK Accounting Standards and applicable law
(UK Generally Accepted Accounting Practice).

Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and parent company and of their
profit or loss for that period. In preparing each of the Group and
parent company financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• for the Group financial statements, state whether they have been

prepared in accordance with IFRSs as adopted by the EU;
• for the parent company financial statements, state whether

applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the parent
company financial statements; and

• prepare the financial statements on the going concern basis unless

it is inappropriate to presume that the Group and the parent
company will continue in business.

The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the parent company and enable them to ensure
that its financial statements comply with the Companies Act 2006.
They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Group
and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic report, Directors’ report,
Directors’ remuneration report and Corporate Governance
Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company’s website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationIndependent 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 2016 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 2016 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, including
FRS 101 Reduced Disclosure Framework; 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, in decreasing order of audit significance, were as follows:

Recurring risks
• Recognition of revenues and profits on long-term contracts

£679.0m (2015: £685.1m)

Refer to page 71 (Report of the Audit Committee), page 107
(accounting policy note) and page 113 (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,
financial significance and profitability, 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, where relevant. On a sample basis 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 in
respect of the analysis of revenue and material contingent liabilities
properly reflected the evidence obtained.

• Carrying value of US Global Products goodwill – £37.9m

(2015: £67.2m)

Refer to page 71 (Report of the Audit Committee), page 108
(accounting policy note) and page 121 (financial disclosures).

The risk: The carrying value of goodwill is assessed for impairment at
least annually and whenever there is an indication that the asset may
be impaired. In the period an impairment has been recognised to the
goodwill associated with the US Global Products Cash-Generating
Unit. There is inherent uncertainty involved in forecasting the future
cash flows due to the variability of future sales and product mix.
Judgement is required in the selection of an appropriate discount
rate used for the purposes of the impairment calculations. Whilst the
projections anticipate future growth based on 2016 performance,
there remains uncertainty around the impact of new revenue streams
and demand for the current portfolio of products.

Our response: Our audit procedures included testing the principles
and mathematical integrity of the Group’s discounted cash flow
model, comparing the Group’s assumptions to external market
evidence such as projected economic growth and discount rates,
involving our corporate finance specialists as we considered
appropriate and challenging the cash flow projections by reviewing
the timing of new revenue streams and product mix against market
conditions and the current level of sales. We tested the sensitivity
of the impairment calculation to changes in the judgements 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.

100

QinetiQ Group plc Annual Report and Accounts 2016• Other payables, provisions and contingent liabilities included
within other payables of £163.3m (2015: £169.7m), provisions
of £19.1m (2015: £25.4m) and contingent liabilities of £Nil
(2015: £Nil)

Refer to page 71 (Report of the Audit Committee), page 109
(accounting policy note) and pages 126 and 143 (financial disclosures).

The risk: The Group holds provisions in respect of warranty claims
and indemnities and regulatory issues. The Group operates in
regulated environments and a failure to comply with particular
regulations could result in fines and/or penalties. There is judgement
required in determining the significance of any instances of potential
non-compliance and potential liability based on management’s
assessment of the most likely outcome. The financial statements also
disclose contingent liabilities in respect of legal claims and regulatory
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 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 Directors’ 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. We challenged the Directors’ estimates of the most likely
outcomes based on the range of possible outcomes to determine if
the amounts provided are appropriate.

We considered the adequacy of the Group’s disclosures in respect
of other payables, provisions and contingent liabilities.

• Tax liabilities – current tax payable £39.9m (2015: £15.3m),

deferred tax asset £4.1m (2015: £12.9m).

Refer to page 71 (Report of the Audit Committee), page 108
(accounting policy note) and pages 124 and 126 (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 judgements as to the likely outcome
of decisions to be made by the tax authorities. This includes those
related to specific tax allowances, such as the UK Research and
Development tax credit. There is a risk that the judgements on which
the provisions are based do not take into account or do not properly
reflect the latest available, reliable information or an appropriate
application of relevant tax legislation, and are either under or
overstated as a result.

Our response: Our audit procedures included 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 own tax specialists in analysing and challenging
the assumptions used to determine tax provisions based on our
knowledge and experience of the application of the legislation by
the relevant authorities and courts. We also assessed whether the
Group’s tax disclosures are appropriate and in accordance with
relevant accounting standards.

Removal of risk in respect of Consolidation of US subsidiaries
We continue to perform procedures over the consolidation of US
subsidiaries. However, there has been no change in our conclusion that
the Proxy agreement does not restrict the Group’s ability to control
FMI’s operating and financial policies. This is not one of the risks that
had the greatest impact on our audit for the year ended 31 March 2016
and therefore it is not separately identified in our report.

3. Our application of materiality and an overview of the scope
of our audit
Materiality for the Group financial statements as a whole was set at
£5.2m (2015: £5.3m), 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 £108.7m (2015:
£107.8m), of which it represents 4.8% (2015: 4.9%). The Group
audit team performed procedures on those items excluded from
normalised Group profit before taxation.

We reported to the Audit Committee any corrected or uncorrected
misstatements exceeding £0.3 million (2015: £0.3 million), in addition
to other identified misstatements that warranted reporting on
qualitative grounds.

The audit of QinetiQ Limited, the main UK trading company, and
goodwill arising on consolidation accounted for the following
percentages of the Group’s results: 81% (2015: 81%) of total Group
revenue; 90% (2015: 92%) of the total profits and losses that made
up the Group’s underlying profit before taxation; and 69% (2015:
70%) of total Group assets. 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.

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.

101

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationIndependent auditor’s report to the
members of QinetiQ Group plc only continued

5. We have nothing to report on the disclosures of
principal risks
Based on the knowledge we acquired during our audit, we have
nothing material to add or draw attention to in relation to:

• the Directors’ confirmation of longer-term viability on page 69,

concerning the principal risks, their management, and, based on
that, the Directors’ assessment and expectations of the Group’s
continuing in operation over the 3 years to 31 March 2019; or
• the disclosures in note 1 of the financial statements concerning

the use of the going concern basis of accounting.

6. 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 position and performance, business model and
strategy; or

• the Audit Committee Report does not appropriately address

matters communicated by us to the Audit Committee.

Under the Listing Rules we are required to review:

• the Directors’ statement, set out on pages 68 to 69, in relation

to going concern and longer-term viability; and

• the part of the Corporate Governance Statement on pages 51
to 77 relating to the company’s compliance with the eleven
provisions of the 2014 UK Corporate Governance Code specified
for our review.

We have nothing to report in respect of the above responsibilities.

Scope of report and responsibilities
As explained more fully in the Directors’ Responsibilities Statement
set out on page 99, 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

Under the Companies Act 2006 we are required to report to you if,
in our opinion:

26 May 2016

• 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.

102

QinetiQ Group plc Annual Report and Accounts 2016Consolidated income statement
for the year ended 31 March

all figures in £ million

Revenue
Operating costs excluding depreciation,
amortisation and impairment
Other income

EBITDA (earnings before interest, tax,
depreciation and amortisation)
Depreciation and impairment of property,
plant and equipment
Impairment of goodwill
Amortisation and impairment of intangible assets

Operating profit/(loss)
Gain on business divestments
Finance income
Finance expense

Profit/(loss) before tax
Taxation (expense)/income

Profit 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

Note

2, 3

Underlying
755.7

(630.5)
9.5

3, 16

3, 15

134.7

(23.0)
–
(2.8)

108.9
–
1.0
(1.2)

108.7
(12.8)

95.9

–
–

–

2016

Specific
adjusting
items*
–

Total
755.7

Underlying
763.8

2015

Specific
adjusting
items*
–

(630.2)
9.5

(636.9)
7.6

1.0
–

Total
763.8

(635.9)
7.6

0.3
–

0.3

–
(31.9)
(2.0)

(33.6)
16.2
–
(1.1)

(18.5)
21.2

2.7

7.5
–

7.5

135.0

134.5

1.0

135.5

(23.0)
(31.9)
(4.8)

75.3
16.2
1.0
(2.3)

90.2
8.4

98.6

7.5
–

7.5

(21.7)
–
(1.5)

111.3
–
1.3
(4.8)

107.8
(11.8)

96.0

1.2
(0.5)

0.7

–
–
(2.8)

(1.8)
–
–
(0.6)

(2.4)
23.8

21.4

(13.7)
0.3

(13.4)

(21.7)
–
(4.3)

109.5
–
1.3
(5.4)

105.4
12.0

117.4

(12.5)
(0.2)

(12.7)

Profit for the year attributable to equity shareholders

95.9

10.2

106.1

96.7

8.0

104.7

Earnings per share
Basic – continuing operations
Basic – total Group
Diluted – continuing operations
Diluted – total Group

16.3p
16.3p
16.2p
16.2p

16.8p
18.1p
16.7p
18.0p

15.2p
15.3p
15.1p
15.2p

18.6p
16.6p
18.5p
16.5p

* For details of ‘specific adjusting items’ refer to note 4 to the financial statements.

103

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationConsolidated comprehensive income statement
for the year ended 31 March

all figures in £ million

Profit for the year
Items that will not be reclassified to profit or loss:
Actuarial loss recognised in defined benefit pension schemes
Tax on items that will not be reclassified to profit and loss

Total items that will not be reclassified to profit or loss
Items that may be reclassified to profit or loss:
Foreign currency translation differences for foreign operations
Recycling of currency translation differences to the income statement on disposal of foreign subsidiaries
Decrease in fair value of hedging derivatives
Reclassification of hedging derivatives to the income statement
Fair value (losses)/gains on available-for-sale investments

Total items that may be reclassified to profit or loss

Other comprehensive expense for the year, net of tax

2016
106.1

(10.6)
2.1

(8.5)

3.2
1.7
(0.1)
–
(0.6)

4.2

(4.3)

2015
104.7

(24.5)
5.1

(19.4)

11.0
(40.9)
(0.1)
0.1
0.2

(29.7)

(49.1)

Total comprehensive income for the year

101.8

55.6

Consolidated statement of changes in equity
for the year ended 31 March

all figures in £ million
At 1 April 2015
Profit for the year
Other comprehensive income/
(expense) for the year, net of tax
Purchase of own shares
Purchase and cancellation of shares
Share-based payments
Dividends

At 31 March 2016

At 1 April 2014
Profit for the year
Other comprehensive expense
for the year, net of tax
Purchase of own shares
Purchase and cancellation of shares
Share-based payments settlement
Share-based payments
Dividends

At 31 March 2015

Issued
share
capital
6.1
–

Capital
redemption
reserve
40.4
–

Share
premium
147.6
–

Hedge
reserve
0.1
–

Translation
reserve
(6.8)
–

Retained
earnings
110.6
106.1

–
–
(0.2)
–
–

5.9

6.6
–

–
–
(0.5)
–
–
–

6.1

–
–
0.2
–
–

–
–
–
–
–

40.6

147.6

39.9
–

–
–
0.5
–
–
–

147.6
–

–
–
–
–
–
–

(0.1)
–
–
–
–

–

0.1
–

–
–
–
–
–
–

40.4

147.6

0.1

4.9
–
–
–
–

(9.1)
(0.7)
(46.9)
4.7
(32.3)

(1.9)

132.4

23.1
–

(29.9)
–
–
–
–
–

(6.8)

160.7
104.7

(19.2)
(0.6)
(107.1)
0.6
3.2
(31.7)

110.6

Non-
controlling
interest
0.1
0.1

–
–
–
–
–

0.2

0.1
–

–
–
–
–
–
–

0.1

Total

298.0
106.1

(4.3)
(0.7)
(46.9)
4.7
(32.3)

324.6

378.0
104.7

(49.1)
(0.6)
(107.1)
0.6
3.2
(31.7)

298.0

Total
equity

298.1
106.2

(4.3)
(0.7)
(46.9)
4.7
(32.3)

324.8

378.1
104.7

(49.1)
(0.6)
(107.1)
0.6
3.2
(31.7)

298.1

104

QinetiQ Group plc Annual Report and Accounts 2016Consolidated balance sheet
as at 31 March

all figures in £ million

Non-current assets
Goodwill
Intangible assets

Property, plant and equipment
Other financial assets
Investments
Deferred tax

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
Provisions
Other financial liabilities
Other payables

Total liabilities

Net assets

Capital and reserves
Ordinary shares
Capital redemption reserve
Share premium account
Hedging and translation reserve
Retained earnings

Capital and reserves attributable to shareholders of the parent company
Non-controlling interest

Total shareholders’ funds

Note

2016

2015

73.1
8.3

233.4
0.6
0.9
4.1

320.4

19.0
10.8
156.2
1.7
263.5

451.2

771.6

(338.7)
(39.9)
(5.3)
(0.2)

(384.1)

(37.7)
(13.8)
(0.2)
(11.0)

(62.7)

(446.8)

324.8

5.9
40.6
147.6
(1.9)
132.4

324.6
0.2

324.8

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

The financial statements were approved by the Board of Directors and authorised for issue on 26 May 2016 and were signed on its behalf by:

Mark Elliott
Chairman

Steve Wadey
Chief Executive Officer

David Mellors
Chief Financial Officer

105

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information

Consolidated cash flow statement
for the year ended 31 March

all figures in £ million

Net cash inflow from continuing operations before cash flows in respect of specific adjusting items
Net cash outflow relating to restructuring
Disposal-related pension contribution

Cash generated from discontinued operations

Cash inflow from operations
Tax received
Interest received
Interest paid

Net cash inflow from operating activities
Purchases of intangible assets
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Investment in available for sale investments
Acquisition of businesses
Sale of investment in subsidiaries

Net cash (outflow)/inflow from investing activities
Repayment of bank borrowings
Payment of bank loan arrangement fee
Purchase of own shares
Dividends paid to shareholders
Capital element of finance lease rental payments
Capital element of finance lease rental receipts

Net cash outflow from financing activities

Increase/(decrease) in cash and cash equivalents
Effect of foreign exchange changes on cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents disposed

Cash and cash equivalents at end of year

Reconciliation of movement in net cash
for the year ended 31 March

all figures in £ million

Increase/(decrease) in cash and cash equivalents in the year
Add back net cash flows not impacting net cash – repayment of bank loans and fees
Add back net cash flows not impacting net cash – investments
Add back net cash flows not impacting net cash – other

Change in net cash resulting from cash flows
Cash and cash equivalents disposed
Other movements including foreign exchange

Movement in net cash in the year
Net cash at beginning of year

Net cash at end of year

Note

2016

133.4
–
–

–

133.4
27.9
0.9
(0.6)

161.6
(1.6)
(28.6)
0.4
–
(0.6)
28.0

(2.4)
–
–
(48.6)
(32.3)
(1.4)
1.5

(80.8)

78.4
0.8
184.3
–

263.5

2016

78.4
–
–
(0.1)

78.3
–
0.7

79.0
195.5

274.5

2015

143.9
(0.6)
(6.0)

1.8

139.1
8.8
1.0
(36.4)

112.5
(4.2)
(24.8)
–
(10.0)
(3.7)
79.6

36.9
(147.1)
(1.3)
(106.8)
(31.7)
(2.8)
3.0

(286.7)

(137.3)
0.4
322.2
(1.0)

184.3

2015

(137.3)
148.4
10.0
(0.2)

20.9
(1.0)
5.1

25.0
170.5

195.5

106

QinetiQ Group plc Annual Report and Accounts 2016Notes to the financial statements

1. Significant accounting policies
Accounting policies
The following accounting policies have been applied consistently to all periods presented in dealing with items that are considered material in
relation to the Group’s financial statements. In the income statement, the Group presents specific adjusting items separately. In the judgement
of the Directors, for the reader to obtain a proper understanding of the financial information, specific adjusting items need to be disclosed
separately because of their size and nature. Underlying measures of performance exclude specific adjusting items.

Specific adjusting items include:

• amortisation of intangible assets arising from acquisitions;
• pension net finance expense;
• gains/losses on business divestments and disposal of property and investments;
•
• one-off recovery of research and development tax credits and associated write-off of deferred tax asset in respect of tax losses; and
• other significant non-recurring deferred tax movements.

impairment of goodwill and other intangible assets;

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 68 and in accordance with International Financial Reporting Standards as adopted by the EU (‘IFRS’) and the Companies Act
2006 applicable to companies reporting under IFRS. The company has elected to prepare its parent company financial statements in
accordance with UK GAAP; these are presented on pages 145 to 146. The financial statements have been prepared under the historical cost
convention, as modified by the revaluation of available-for-sale financial assets and other relevant financial assets and liabilities. Non-current
assets held for sale are held at the lower of carrying amount and fair value less costs to sell. The Group’s reporting currency is sterling and
unless otherwise stated the financial statements are rounded to the nearest £100,000.

Basis of consolidation
The consolidated financial statements comprise the financial statements of the company and its subsidiary undertakings to 31 March 2016.
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 IAS18 ‘Revenue’. When the outcome of a contract involving the rendering
of services can be reliably estimated, revenue associated with the transaction is recognised by reference to the stage of completion of the
contract activity at the end of the reporting period. This is normally measured by the proportion of contract costs incurred for work performed
to date compared with the estimated total contract costs after making suitable allowances for technical and other risks related to performance
milestones yet to be achieved. No profit is recognised on contracts until the outcome of the contract can be reliably estimated. 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

107

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

1. Significant accounting policies continued
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.

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

108

QinetiQ Group plc Annual Report and Accounts 2016Property, 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 goodwill and tangible, 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 are expensed in the
income statement immediately, when it becomes likely that financial close will not be achieved.

Trade and other receivables
Trade and other receivables are stated net of provisions for doubtful debts. Amounts recoverable on contracts are included in trade and other
receivables and represent revenue recognised in excess of amounts invoiced. Payments received on account are included in trade and other
payables and represent amounts invoiced in excess of revenue recognised. Other receivables will also include insurance recoveries where
we are virtually certain of recovery.

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 cash 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.

109

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

1. Significant accounting policies continued
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event which
can be reliably estimated, and it is probable that an outflow of economic benefits will be required to settle the obligation. Where appropriate,
provisions are determined by discounting the expected cash flows at an appropriate discount rate reflecting the level of risk and the time value
of money.

Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual
provisions of the instrument. The de-recognition of a financial instrument takes place when the Group no longer controls the contractual rights
that comprise the financial instrument, when the instrument expires, or when the instrument is sold, terminated or exercised.

Derivative financial instruments
Derivative financial instruments are initially recognised and thereafter held at fair value, being the market value for quoted instruments
or valuation based on models and discounted cash flow calculations for unlisted instruments.

Fair value hedging
Changes in the fair value of derivatives designated as fair value hedges of currency risk or interest rate risk are recognised in the income
statement. The hedged item is held at fair value with respect to the hedged risk with any gain or loss recognised in the income statement.

Cash flow hedging
Changes in the fair value of derivatives designated as a cash flow hedge that are regarded as highly effective are recognised in equity. The
ineffective portion is recognised immediately in the income statement. Where a hedged item results in an asset or a liability, gains and losses
previously recognised in equity are included in the cost of the asset or liability. Gains and losses previously recognised in equity are removed
and recognised in the income statement at the same time as the hedged transaction.

Leased assets
Leases are classified as finance leases when substantially all the risks and rewards of ownership are held by the lessee. Assets held under
finance leases are capitalised and included in property, plant and equipment at the lower of the present value of minimum lease payments
and fair value at the inception of the lease. Assets are then depreciated over the shorter of their useful economic lives or the lease term.
Obligations relating to finance leases, net of finance charges arising in future periods, are included under financial liabilities.

Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the lease.

Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities
in foreign currencies are translated at period-end rates. Any resulting exchange differences are taken to the income statement. Gains and
losses on designated forward foreign exchange hedging contracts are matched against the foreign exchange movements on the underlying
transaction.

The individual financial statements of each Group company are presented in its functional currency. On consolidation, assets and liabilities
of overseas subsidiaries, associated undertakings and joint ventures, including any related goodwill, are translated to sterling at the rate of
exchange at the balance sheet date. The results and cash flows of overseas subsidiaries, associated undertakings and joint ventures are
translated to sterling using the average rates of exchange during the period. Exchange adjustments arising from the re-translation of the
opening net investment and the results for the period to the period-end rate are taken directly to equity and reported in the statement of
comprehensive income.

Post-retirement benefits
The Group provides both defined contribution and defined benefit pension arrangements. The liabilities of the Group arising from defined
benefit obligations, and the related current service cost, are determined using the projected unit credit method. Valuations for accounting
purposes are carried out bi-annually. Actuarial advice is provided by external consultants. For the funded defined benefit plans, the excess
or deficit of the fair value of plan assets less the present value of the defined benefit obligation are recognised as an asset or a liability
respectively.

For defined benefit plans, the cost charged to the income statement consists of 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.

110

QinetiQ Group plc Annual Report and Accounts 2016Share 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 2016 with no material impact on the financial statements
The following UK GAAP and EU-endorsed Standards and amendments, improvements and interpretations of published Standards are effective
for accounting periods beginning on or after 1 January 2015 and have been adopted with no material impact on the Group’s financial
statements:

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. QinetiQ
had the choice between applying either full IFRS, or a choice of either FRS 101, or FRS 102 to its subsidiary entities. The two latter options both
fall under UK GAAP and either may therefore be applied to subsidiary entities on an entity by entity basis. The Group has adopted the UK GAAP
option as of 1 April 2015.

IAS19 Employee Benefits – amendment to clarify requirement that relates to how contributions from employees or third parties that are
linked to service should be attributed to periods of service.

Annual improvement 2010-2012 cycle:

•

•
•

•

IFRS 2 Share-based Payment – amends definitions of ‘vesting condition’ and ‘market condition’ and adds definitions for ‘performance
condition’ and ‘service condition’.
IFRS 3 Business Combinations – amendment to clarify that contingent consideration that is classified as an asset or liability shall be
measured at fair value at each reporting date.
IFRS 8 Operating Segments – two amendments relating to disclosure requirements on application of aggregation criteria and reconciliation
of assets.
IFRS 13 Fair Value Measurement – amendment relating to short-term receivables and payables with no stated interest rate.
IAS16 Property, Plant and Equipment and IAS38 Intangible Assets – amendment clarifying that under the revaluation method, accumulated
depreciation should be restated on a proportionate basis.
IFRS 24 Related Party Disclosures – clarification that an entity providing key management personnel services to the reporting entity
or to the parent of the reporting entity is a related party of the reporting entity.

Annual improvement 2011-2013 cycle:

•
•

•

IFRS 1 First-time Adoption of IFRS – amendment relating to first-time application of IFRS.
IFRS 3 Business Combinations – amendment clarifying that IFRS 3 excludes from its scope the accounting for the formation of a joint
arrangement in the financial statements of the joint arrangement itself.
IAS40 Investment Property – amendment clarifying the interrelationship of IFRS 3 and IAS40 when classifying property as investment
property or owner-occupied property.

Developments expected in future periods of which the impact is being assessed
IFRS 15 Revenue from Contracts with Customers: the final Standard was published in May 2014 and the IASB has taken the decision to defer
the effective date of IFRS 15 to 1 January 2018 ie FY19 for QinetiQ. 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 the performance obligations. 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. Under the
retrospective method, QinetiQ would need to restate prior year comparatives and recognise the cumulative effect of applying the new
Standard in equity at the start of the earliest presented comparative period. Under the cumulative effect method, QinetiQ would apply the
new Standard as of the date of initial application, with no restatement of comparative period amounts. It would record the cumulative effect
of initially applying the new Standard – which would affect revenue and costs – as an adjustment to the opening balance of equity at the date
of initial application. Under the cumulative effect method, the provisions of the new Standard apply only to contracts that are open (ie not
complete) under previous GAAP at the date of initial application.

111

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

1. Significant accounting policies continued
Leases: The final Standard IFRS 16 ‘Leases’ was published in January 2016. Under the new Standard, companies will recognise new assets
and liabilities, bringing added transparency to the balance sheet. IFRS 16 eliminates the current dual accounting model for lessees, which
distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet
accounting model that is similar to current finance lease accounting. Lessor accounting remains similar to current practice – ie lessors continue
to classify leases as finance and operating leases. The Standard will be effective from 1 January 2019 ie FY20 for QinetiQ subject to EU
endorsement.

IFRS 9 Financial Instruments – This new Standard on accounting for financial instruments will replace IAS39 Financial Instruments: Recognition
and Measurement. This Standard has not yet been endorsed by the EU. It is expected to come into effect for accounting periods beginning
on or after 1 January 2018.

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 14 ‘Regulatory Deferral Accounts’;
• Amendments to IFRS 9, 10 and 11; and
• Amendments to IAS1, 7, 9, 12, 15, 27, 36 and 38.

Critical accounting estimates and judgements in applying accounting policies
The following commentary is intended to highlight those policies that are critical to the business based on the level of management judgement
required in their application, their complexity and their potential impact on the results and financial position reported for the Group. The level
of management judgement required includes assumptions and estimates about future events that are uncertain and the actual outcome
of which may result in a materially different outcome from that anticipated.

Revenue and profit recognition
The estimation process required to evaluate the potential outcome of contracts and projects requires skill, knowledge and experience from
a variety of sources within the business to assess the status of the contract, costs to complete, internal and external labour resources required
and other factors. This process is carried out continuously throughout the business to ensure that project and contract assessments reflect the
latest status of such work. No profit is recognised on a contract until the outcome can be reliably estimated.

Business combinations 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.

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.

Other payables, provisions and contingent liabilities
The Group holds liabilities in respect of environmental and regulatory issues. The Group operates in regulated environments and a failure
to comply with particular regulations could result in fines and/or penalties. There is judgement required in determining the significance of
any instances of potential non-compliance and potential liability based on management’s assessment of the most likely outcome. The financial
statements also disclose contingent liabilities in respect of legal claims and regulatory issues which have not been provided for on the basis
that they are not considered to qualify for recognition as provisions. Judgement is required in these assessments.

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 judgement, in consultation with actuarial advisors, in selecting the values for these
assumptions that are the most appropriate to the Group. Small changes in these assumptions at the balance sheet date, individually or
collectively, may result in significant changes in the size of the deficit or the net income statement costs. Any change in these assumptions
would have an impact on the retirement benefit obligation recognised. Further details of these assumptions are set out in note 31.

112

QinetiQ Group plc Annual Report and Accounts 20162. 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 associates’ profit/(loss) after tax
Other income

Total other income

2016
66.0
679.0
10.7

755.7

0.5
9.0

9.5

2015
76.9
688.9
8.0

763.8

(0.1)
7.7

7.6

Revenue and profit after tax of associates was £7.3m and £1.0m respectively (2015: revenue of £7.7m and loss before tax of £0.1m). The figures
in the table above represent the Group share of this profit/loss 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

2016
597.8
69.4
88.5

755.7

2016
531.0
53.0
171.7

755.7

2015
610.7
69.4
83.7

763.8

2015
537.6
51.2
175.0

763.8

Revenue from the UK Government was generated by the EMEA Services and Global Products operating segments. Revenue from the US
Government was generated by the Global Products operating segment.

113

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information 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

Reconciliation of operating segment profit to total profit:
Operating profit before specific adjusting items1 –
underlying operating profit
Specific adjusting items:

Restructuring
Profit on disposal of property
Impairment of goodwill
Amortisation of intangible assets arising from acquisitions

Operating profit
Gain on business divestments
Net finance expense

Profit before tax
Taxation income

Profit for the year from continuing operations

Discontinued operations
Profit/(loss) from discontinued operations, net of tax

Profit for the period attributable to equity shareholders

Note

2016

2015

Revenue
616.4
139.3

755.7

Operating
profit
93.8
15.1

108.9

Revenue
625.6
138.2

763.8

Operating
profit
93.0
18.3

111.3

108.9

–
0.3
(31.9)
(2.0)

75.3
16.2
(1.3)

90.2
8.4

98.6

7.5

106.1

111.3

1.0
–
–
(2.8)

109.5
–
(4.1)

105.4
12.0

117.4

(12.7)

104.7

1 The measure of profit presented to the chief operating decision maker is underlying operating profit (as defined in the glossary on page 149).

No measure of segmental assets and liabilities has been disclosed as this information is not regularly provided to the chief operating decision maker.

Depreciation and amortisation by business segment – excluding specific adjusting items (note 4)
For the year ended 31 March 2016

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 2015

all figures in £ million
Depreciation and impairment of property, plant and equipment
Amortisation of purchased or internally developed intangible assets

EMEA
Services
21.1
1.3

22.4

EMEA
Services
19.7
0.8

20.5

Global
Products
1.9
1.5

3.4

Total
continuing
operations

23.0
2.8

25.8

Global
Products
2.0
0.7

2.7

Total
continuing
operations

21.7
1.5

23.2

Excludes specific adjusting items not included within the measure of operating profit reported to the chief operating decision maker.

Non-current assets* by geographic location
all figures in £ million
Year ended 31 March 2016

Year ended 31 March 2015

* excluding deferred tax and financial instruments.

UK Rest of World

264.3

50.5

UK Rest of World

262.0

91.4

Total

314.8

Total

353.4

114

QinetiQ Group plc Annual Report and Accounts 20164. Profit before tax
The following auditor’s remuneration has been charged in arriving at profit 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

Total audit fees
Other assurance services
Corporate finance services – due diligence support
All other non-audit services

Total non-audit fees

Total auditor’s remuneration

The following items have also been charged in arriving at profit before tax for continuing operations:

all figures in £ million

Depreciation and impairment of property, plant and equipment:
Owned assets: depreciation
Owned assets: impairment reversal/(charge)

Foreign exchange gain/(loss)
Research and development expenditure – customer funded contracts
Research and development expenditure – Group funded

2016

2015

0.4
0.1
0.1

0.6
–
–
0.2

0.2

0.8

0.4
0.2
0.1

0.7
–
–
0.1

0.1

0.8

2016

2015

(23.4)
0.4

0.2
(277.6)
(23.2)

(20.7)
(1.0)

(0.3)
(285.8)
(20.8)

‘Specific adjusting items’
In the income statement, the Group presents specific adjusting items separately. In the judgement of the Directors, for the reader to obtain
a proper understanding of the financial information, specific adjusting items need to be disclosed separately because of their size and nature.
Underlying measures of performance exclude specific adjusting items. The following specific adjusting items have been (charged)/credited
in arriving at profit before tax:

all figures in £ million
Profit on disposal of property
Reversal of unutilised restructuring provisions

Specific adjusting items before amortisation, depreciation and impairment
Impairment of goodwill
Amortisation of intangible assets arising from acquisitions

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

Profit/(loss) on disposal of subsidiary
Amortisation of intangible assets arising from acquisition

Specific adjusting items loss before tax – discontinued operations

Note

2016
0.3
–

0.3
(31.9)
(2.0)

(33.6)

16.2
(1.1)

(18.5)

7.5
–
7.5
–

7.5

2015
–
1.0

1.0
–
(2.8)

(1.8)

–
(0.6)

(2.4)

15.9
(28.8)
(12.9)
(0.8)

(13.7)

Total specific adjusting items loss before tax

(11.0)

(16.1)

Specific adjusting items – tax (continuing operations)
Specific adjusting items – tax (discontinued operations)

Total specific adjusting items profit after tax

Reconciliation of underlying profit for the year to total profit for the year

Underlying profit after tax – total Group
Total specific adjusting items profit after tax

21.2
–

10.2

2016

95.9
10.2

23.8
0.3

8.0

2015

96.7
8.0

Total profit for the year attributable to equity shareholders

106.1

104.7

115

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

5. Discontinued operations
In the prior year, 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 debt was considered to be inextricably linked to the sale of that
business and was, therefore, disclosed as an adjustment to the loss on its sale rather than as a finance expense.

Net cash inflow in respect of this transaction was £78.6m in the year to 31 March 2015, with a further £28.8m outflow in respect of the
associated PP early redemption expense. Additional deferred consideration, the earn-out, was payable 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 resulted in deferred consideration of £6.2m (in line with expectations and matching the prior year book value of deferred
consideration receivable) becoming due, which was paid in full in the year to 31 March 2016.

In the current year, an income statement impact of this transaction occurred from the release of opening warranty and indemnity liabilities
following expiry of the contractual warranty clauses and an assessed remote possibility of claims under the extant indemnity clauses of the
sale agreement.

2016
–
–

–
–

–
–
–
–

–
–

–
7.5
–

7.5
1.3p
1.3p

2016
–

–
–

–

2016
6.2
–

6.2

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

2015
1.8

1.8
(28.8)

(27.0)

2015
79.6
(1.0)

78.6

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
Amortisation of intangible assets arising from acquisitions

Operating profit
Finance expense

Profit 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

Gain/(loss) for the period
Basic gain/(loss) per share
Diluted gain/(loss) per share

b) Cash flows from discontinued operations
all figures in £ million
Net cash from operating activities

Net cash inflow for the year from the disposed entity
Cash outflow in respect of accelerated interest expense – included within ‘Interest paid’

Net cash outflow related to discontinued operations

c) Effect of disposal on the financial position of the Group
all figures in £ million
Consideration received (net of transaction costs), satisfied in cash
Cash and cash equivalents disposed

Net cash inflow in the year

116

QinetiQ Group plc Annual Report and Accounts 20166. Business combinations
The Group made two acquisitions in the prior year to 31 March 2015: SR2020 and Redfern Integrated Optics Inc. Consideration (of £0.4m) for
the acquisition of SR2020 was paid in full in the prior year and no further payments, or adjustments to the assets acquired, were made in the
year to 31 March 2016. The total consideration for the acquisition of Redfern Integrated Optics Inc. was £3.9m, of which £3.3m was paid in the
prior year. The remaining consideration of £0.6m was paid in the current year.

7. Gain on business divestments – continuing operations
For the year ended 31 March

all figures in £ million

Gain on business divestments

2016
16.2

2015

–

The gain on business divestments relates to the sale of the Cyveillance business on 11 December 2015 for consideration before costs
of $34.1m and a gain on disposal of £16.2m. There is no deferred consideration receivable.

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

2016
1.0
–

1.0

(0.3)
(0.6)
–
–
(0.3)

(1.2)

(1.1)

(2.3)

2015
1.1
0.2

1.3

(0.7)
(0.9)
(2.6)
(0.2)
(0.4)

(4.8)

(0.6)

(5.4)

(1.3)

(4.1)

117

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

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 20% (2015: 21%)
Effect of:
Expenses not deductible for tax purposes and non-taxable items
Research and development credits/reliefs
Tax in respect of an FY09 US acquisition – payable to the tax authorities
Tax in respect of an FY09 US acquisition – recoverable from insurers
Utilisation/(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
Other deferred tax movements
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.

Before
specific
adjusting
items*

2016

Specific
adjusting
items*

Before
specific
adjusting
items*

Total

2015

Specific
adjusting
items*

2.2

(35.6)

(33.4)

0.5

–

2.4
–

4.6
7.7
(0.2)
0.7

8.2

12.8

108.7

21.7

3.7
(13.7)
16.2
(16.2)

–
–
(0.2)
0.7
–
0.6

12.8

11.8%

–
–

(35.6)
20.0
–
(5.6)

14.4

(21.2)

(18.5)

(3.7)

4.5
(36.8)
–
–

25.2
–
–
(5.6)
(4.8)
–

(21.2)

2.4
–

(31.0)
27.7
(0.2)
(4.9)

22.6

(8.4)

90.2

18.0

8.2
(50.5)
16.2
(16.2)

25.2
–
(0.2)
(4.9)
(4.8)
0.6

(8.4)

(9.3%)

1.4
(1.0)

0.9
11.3
(0.4)
–

10.9

11.8

107.8

22.6

(7.9)
(10.7)
–
–

–
6.9
(0.4)
0.9
–
0.4

11.8

10.9%

(0.5)
0.6

0.1
(22.9)
–
(1.0)

(23.9)

(23.8)

(2.4)

(0.5)

1.7
–
–
–

(25.2)
–
–
–
–
0.2

(23.8)

Total

0.5

0.9
(0.4)

1.0
(11.6)
(0.4)
(1.0)

(13.0)

(12.0)

105.4

22.1

(6.2)
(10.7)
–
–

(25.2)
6.9
(0.4)
0.9
–
0.6

(12.0)

(11.4%)

UK Group companies have now elected to obtain tax benefits in respect of allowable R&D expenditure through the R&D Expenditure Credit
(‘RDEC’) process rather than through the previous treatment as a super-deduction in the tax computations. This election was made
retrospectively back to 1 April 2013 and the incremental impact on the tax expense for the years ending 31 March 2014 and 31 March 2015
has been reported in the current year as a specific adjusting item. The change of regime results in the utilisation of previously capitalised
UK trading losses and the associated deferred tax asset has been written off in the current year, also reported as a specific adjusting item.
Other deferred tax movements includes the effect of changes in estimates in respect of the apportionment of book values between qualifying
and non-qualifying property, plant and equipment.

Deferred tax has been calculated using the enacted future statutory tax rates.

At 31 March 2016 the Group had unused tax losses of £154.8m (2015: £291.6m) which are available for offset against future profits. £26.1m
of these losses are time limited of which £6.3m will expire in 2034 and £19.8m will expire in 2035. Certain UK tax losses had been recognised
on the balance sheet as at 31 March 2015 as a deferred tax asset of £25.2m. As noted above those tax losses have now been utilised following
the election into the RDEC regime. No deferred tax asset is recognised in respect of the remaining tax losses due to uncertainty over the timing
and extent of their utilisation.

118

QinetiQ Group plc Annual Report and Accounts 2016
Factors affecting future tax charges
The effective tax rate continues to be below the UK statutory rate, primarily as a result of the benefit of research and development
expenditure credits 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, the geographic mix of profits and the assumption that the benefits of net R&D tax relief retained
by the Group remain in the tax line. Future recognition of unrecognised tax losses will also affect future tax charges.

10. Dividends
An analysis of the dividends paid and proposed in respect of the years ended 31 March 2016 and 2015 is provided below:

Interim 2016
Final 2016 (proposed)

Total for the year ended 31 March 2016

Interim 2015
Final 2015

Total for the year ended 31 March 2015

Pence per
share
1.9
3.8

5.7

1.8
3.6

5.4

Date paid/
payable
Feb 2016
Sept 2016

Feb 2015
Sept 2015

£m
11.1
21.6

32.7

11.1
21.2

32.3

The Directors propose a final dividend of 3.8p (2015: 3.6p) per share. The dividend, which is subject to shareholder approval, will be paid
on 2 September 2016. The ex-dividend date is 4 August 2016 and the record date is 5 August 2016.

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:

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

Total employee costs

As at 31 March

Monthly average

2016
Number
5,514
693

6,207
–

6,207

2015
Number
5,576
674

6,250
–

6,250

Note

2016
Number
5,595
671

6,266
–

6,266

2016
263.7
27.2
37.0
4.7

332.6

2015
Number
5,521
706

6,227
227

6,454

2015
284.0
27.6
35.1
3.6

350.3

The reduction in costs reflects the disposal of the US Services business in 2015.

12. Directors and other senior management personnel
The Directors and other senior management personnel of the Group during the year to 31 March 2016 comprise the Board of Directors
and the Executive Committee. The remuneration and benefits provided to Directors and the Executive Committee are summarised below:

all figures in £ million
Short-term employee remuneration including benefits
Post-employment benefits
Share-based payments costs
Termination benefits

Total

2016
6.9
0.1
1.2
–

8.2

2015
6.1
0.1
1.4
0.1

7.7

Short-term employee remuneration and benefits include salary, bonus and benefits. Post-employment benefits relate to pension amounts.

119

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

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 29). 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.

For the year ended 31 March
Weighted average number of shares
Effect of dilutive securities

Diluted number of shares

Million

2016
587.0
3.7

590.7

2015
630.9
3.7

634.6

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.

£ million

Million

Pence

Million

Pence

£ million

Million

Pence

Million

Pence

£ million

Million

Pence

Million

Pence

£ million

Million

Pence

Million

Pence

2016
98.6
(2.7)

95.9
587.0

16.3
590.7

16.2

2016
106.1
(10.2)

95.9
587.0

16.3
590.7

16.2

2016
98.6
587.0

16.8
590.7

16.7

2016
106.1
587.0

18.1
590.7

18.0

2015
117.4
(21.4)

96.0
630.9

15.2
634.6

15.1

2015
104.7
(8.0)

96.7
630.9

15.3
634.6

15.2

2015
117.4
630.9

18.6
634.6

18.5

2015
104.7
630.9

16.6
634.6

16.5

Underlying EPS – continuing operations

For the year ended 31 March
Profit attributable to equity shareholders
Remove loss after tax in respect of specific adjusting items

Underlying profit after taxation
Weighted average number of shares

Underlying basic EPS – continuing operations
Diluted number of shares

Underlying diluted EPS – continuing operations

Underlying EPS – total Group

For the year ended 31 March
Profit attributable to equity shareholders
Remove loss after tax in respect of specific adjusting items

Underlying profit after taxation
Weighted average number of shares

Underlying basic EPS – total Group
Diluted number of shares

Underlying diluted EPS – total Group

Basic and diluted EPS – continuing operations

For the year ended 31 March
Profit attributable to equity shareholders
Weighted average number of shares

Basic EPS – continuing operations
Diluted number of shares

Diluted EPS – continuing operations

Basic and diluted EPS – total Group

For the year ended 31 March
Profit attributable to equity shareholders
Weighted average number of shares

Basic EPS – total Group
Diluted number of shares

Diluted EPS – total Group

120

QinetiQ Group plc Annual Report and Accounts 201614. 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

2016

2015

183.3
–
(16.2)
4.4

171.5

(76.1)
11.0
(31.9)
(1.4)

(98.4)

541.4
0.1
(370.1)
11.9

183.3

(400.1)
328.9
–
(4.9)

(76.1)

Net book value at 31 March

73.1

107.2

Goodwill as at 31 March 2016 was allocated across various cash-generating units (CGUs) in the following segments: EMEA Services (two) and
Global Products (two). Goodwill previously allocated to an EMEA Services CGU (the Cyveillance business) of £5.2m 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 judgements, particularly as they relate to the forecasting of future cash
flows, the discount rates selected and expected long-term growth rates. Significant headroom exists in all 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% – 2.4% (2015: 2.0% – 3.0%). The US
terminal growth rate was 2.4% (2015: 3.0%). Growth rates are based on management’s estimates which take into consideration the long-term
nature of the industry in which the CGUs operate and external forecasts as to the likely growth of the industry in the longer term.

Discount rates
The Group’s weighted average cost of capital was used as a basis in determining the discount rate to be applied, adjusted for risks specific
to the market characteristics of CGUs, as appropriate on a pre-tax basis. This is considered to appropriately estimate a market participant
discount rate. The pre-tax discount rates applied for the two EMEA Services CGUs were 11.7% and 14.7%, for the UK Global Products CGU
was 11.7% and for the US Global Products CGU was 11.3%.

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
US Global Products
The carrying value of the goodwill for the US Global Products CGU as at 31 March 2016 was £37.9m (2015: £67.2m). The decrease results from
an impairment of £31.9m in the year following a reduction in the value in use, calculated using the assumptions noted above. The impairment
is primarily due to the combined impact of changes to the discount rate and terminal growth rate. Sensitivity analysis has then been undertaken
to assess the impact of changes to the key assumptions. Applying a sensitivity to remove new product growth would increase the impairment
by £4.5m. Alternatively, increasing the discount rate by another 1% would increase the impairment by £6.0m and reducing the terminal growth
rate by 1% would increase the impairment by £5.3m. The carrying value of net operating assets as at 31 March 2016 was £82.8m.

Other CGUs
The UK Global Products CGU and the two 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 2016 was £5.5m (2015: £5.2m). The carrying values of goodwill for the two
EMEA Services CGUs as at 31 March 2016 were £27.5m and £2.2m (2015: £27.5m and £2.1m). The Directors have not identified any other likely
changes in other significant assumptions between 31 March 2016 and the signing of the financial statements that would cause the carrying
value of the recognised goodwill to exceed its recoverable amount.

121

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

15. Intangible assets
Year ended 31 March 2016

all figures in £ million

Cost
At 1 April 2015
Additions – internally developed
Additions – purchased
Disposals
Divestments
Transfers
Foreign exchange

At 31 March 2016

Amortisation and impairment
At 1 April 2015
Amortisation charge for year
Impairments
Disposals
Divestments
Foreign exchange

At 31 March 2016

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

Acquired intangible assets

Customer
relationships

Intellectual
property

Brand
names

Development
costs

Other
intangible
assets

39.0
–
–
–
(7.7)
–
0.6

31.9

33.0
0.3
–
–
(2.9)
0.8

31.2

58.9
–
–
–
(7.3)
–
1.1

52.7

57.8
1.6
–
–
(9.3)
1.0

51.1

4.1
–
–
–
(2.2)
–
0.2

2.1

2.6
0.1
–
–
(1.3)
0.1

1.5

0.6

17.0
0.4
0.1
–
–
1.0
–

18.5

15.0
1.2
0.3
–
–
–

16.5

2.0

42.3
0.5
0.6
(0.5)
–
(0.9)
0.2

42.2

37.6
1.3
–
(0.2)
–
0.1

38.8

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

53.5
–
–
3.3
(2.0)
–
4.1

58.9

49.9
2.1
(1.0)
–
6.8

57.8

17.0
0.4
–
–
(0.3)
(0.1)
–

17.0

14.5
0.6
(0.1)
–
–

15.0

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

9.2
–
–
–
(6.0)
–
0.9

4.1

8.1
0.1
(5.9)
–
0.3

2.6

1.5

2.0

4.7

15.3

Total

161.3
0.9
0.7
(0.5)
(17.2)
0.1
2.1

147.4

146.0
4.5
0.3
(0.2)
(13.5)
2.0

139.1

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

Net book value at 31 March 2016

0.7

1.6

Divestments are in respect of the disposal of the Cyveillance business (see note 7).

Year ended 31 March 2015

3.4

8.3

Net book value at 31 March 2015

6.0

1.1

122

QinetiQ Group plc Annual Report and Accounts 201616. Property, plant and equipment
Year ended 31 March 2016

all figures in £ million

Cost
At 1 April 2015
Additions – purchased
Additions – acquisition
Disposals
Divestments
Transfers
Foreign exchange

At 31 March 2016

Depreciation
At 1 April 2015
Charge for year
Impairment charge / (reversal)
Disposals
Divestments
Foreign exchange

At 31 March 2016

Land and
buildings

Plant,
machinery
and vehicles

Computers
and office
equipment

Assets under
construction

312.6
2.2
–
(0.2)
(0.2)
3.8
0.2

318.4

152.3
10.2
–
(0.1)
(0.1)
0.1

162.4

174.3
2.9
–
(1.0)
–
14.0
0.5

190.7

147.0
9.7
–
(0.7)
–
0.4

156.4

41.5
1.9
–
(2.2)
(1.8)
7.8
0.2

49.2

36.2
3.5
–
(0.3)
(1.6)
0.1

37.9

37.1
21.6
–
(1.2)
–
(25.7)
–

31.8

0.4
–
(0.4)
–
–
–

–

Total

565.5
28.6
–
(2.8)
(2.0)
(0.1)
0.9

590.1

335.9
23.4
(0.4)
(1.1)
(1.7)
0.6

356.7

Net book value at 31 March 2016

156.0

34.3

11.3

31.8

233.4

Divestments are in respect of the disposal of the Cyveillance business (see note 7).

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

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 32.

123

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

17. Non-current investments
As at 31 March

all figures in £ million

Non-current assets
Current assets

Current liabilities

Net assets of joint ventures and associates
Other non-current investments

Total

2016

2015

Joint
venture and
associates
financial
results
0.2
12.8

Group net
share of joint
ventures and
associates
0.1
6.1

Joint
venture and
associates
financial
results
0.3
8.0

Group net
share of joint
ventures and
associates
0.1
3.9

13.0
(11.2)

1.8

6.2
(5.4)

0.8
0.1

0.9

8.3
(7.6)

0.7

4.0
(3.7)

0.3
0.1

0.4

During the year ended 31 March 2016 there were sales to associates of £3.2m (2015: £3.0m). At the year end there were outstanding
receivables from associates of £0.4m (2015: £0.3m).

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 2016
Deferred tax asset

all figures in £ million
At 1 April 2015
(Charged)/credited to income statement
Credited/(charged) to other comprehensive income
Foreign exchange
Eliminated on disposal

Gross deferred tax asset at 31 March 2016
Less: liability available for offset

Net deferred tax asset at 31 March 2016

Deferred tax liability

all figures in £ million
At 1 April 2015
Credited to income statement
Eliminated on disposal
Foreign exchange
Transferred to current tax

Gross deferred tax liability at 31 March 2016
Less: asset available for offset

Net deferred tax liability at 31 March 2016

Pension
liability
1.6
(2.3)
2.2
–
–

1.5

Short-term
timing
differences
7.6
0.6
(0.1)
0.1
(0.2)

8.0

Trading
losses
25.2
(25.2)
–
–
–

–

Accelerated
capital

allowances Amortisation
(3.8)
0.1
1.5
(0.1)
–

(17.7)
4.2
(0.1)
0.1
10.4

(3.1)

(2.3)

Total
34.4
(26.9)
2.1
0.1
(0.2)

9.5
(5.4)

4.1

Total
(21.5)
4.3
1.4
–
10.4

(5.4)
5.4

–

UK Group companies have now elected to obtain tax benefits in respect of allowable R&D expenditure through the R&D Expenditure
Credit (‘RDEC’) process rather than through the previous treatment as a super-deduction in the tax computations. This election was made
retrospectively back to 1 April 2013 and the incremental impact on the tax expense for years ending 31 March 2014 and 31 March 2015 has
been reported in the current year as a specific adjusting item. The change of regime results in the utilisation of previously capitalised UK
trading losses and the associated deferred tax asset has been charged to the income statement (see note 9).

Deferred tax has been calculated using the enacted future statutory tax rates.

At 31 March 2016 the Group had unused tax losses of £154.8m (2015: £291.6m) which are available for offset against future profits. £26.1m of
these losses are time limited of which £6.3m will expire in 2034 and £19.8m will expire in 2035. Certain UK tax losses had been recognised on
the balance sheet as at 31 March 2015 as a deferred tax asset of £25.2m. As noted above those tax losses have now been utilised following the
election into the RDEC regime. No deferred tax asset is recognised in respect of the remaining tax losses due to uncertainty over the timing
and extent of their utilisation.

Deferred tax eliminated on disposal relates to the disposal of the Cyveillance business (see note 7).

124

QinetiQ Group plc Annual Report and Accounts 2016Year 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
Prior year adjustment
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

19. Inventories
As at 31 March

all figures in £ million
Raw materials
Work in progress
Finished goods

20. Trade and other receivables
As at 31 March

all figures in £ million
Trade receivables
Amounts recoverable under contracts
Other receivables
Prepayments

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 Amortisation
(8.2)
0.9
4.1
(0.6)
–

(17.5)
(1.3)
0.7
–
0.4

(17.7)

(3.8)

2016
10.0
4.0
5.0

19.0

2016
64.8
54.0
26.3
11.1

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

–

2015
9.6
3.3
5.6

18.5

2015
82.0
51.6
15.8
9.8

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 2016
the Group carried a provision for doubtful debts of £4.1m (2015: £3.3m).

156.2

159.2

Ageing of past due but not impaired receivables

all figures in £ million
Up to three months
Over three months

Movements in the doubtful debt provision

all figures in £ million
At 1 April
Created
Released
Utilised
Divestments

At 31 March

2016
8.0
1.4

9.4

2016
3.3
2.1
(0.2)
(1.1)
–

4.1

2015
13.0
0.7

13.7

2015
2.9
1.8
(0.5)
(0.3)
(0.6)

3.3

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 were in respect of the disposal of the US Services division (see note 5).

125

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

21. Current asset investments
As at 31 March

all figures in £ million

Current asset investments

2016
1.7

2015

2.3

At 31 March 2016 the Group held a 4.9% shareholding in pSivida Limited (31 March 2015: 4.9%), a company listed on NASDAQ and the
Australian and Frankfurt Stock Exchanges. The investment is held at fair value using the closing share price at 31 March 2016 of AUS$3.56
per share (31 March 2015: AUS$5.08 per share).

22. Trade and other payables
As at 31 March

all figures in £ million
Trade payables
Other tax and social security
Deferred income
Accrued expenses and other payables

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. Current tax
As at 31 March

all figures in £ million

Current tax liability

2016
32.9
32.3
111.3
162.2

338.7
9.9
1.1

11.0

349.7

2015
29.5
31.9
122.0
168.9

352.3
9.6
0.8

10.4

362.7

2016

39.9

2015

15.3

The increase in the current tax liability is primarily due to a tax liability crystallising in the US following a court decision in respect of taxes
payable in respect of the Group’s acquisition of Dominion Technology Resources, Inc. in 2008. An insurance policy was taken out by the
Group at the point of acquisition and if, subject to an appeal, the court’s decision is final then the funds required to settle this dispute will
be provided by the insurers and an escrow account funded by the vendors. Hence, an offsetting receivable is reported on the balance sheet
as at 31 March 2016 (included within trade and other receivables).

24. Provisions
Year ended 31 March 2016

all figures in £ million
At 1 April 2015
Created in year
Released in year
Unwind of discount
Utilised in year
Foreign exchange

At 31 March 2016

Current liability
Non-current liability

At 31 March 2016

Warranty
and
indemnities
6.4
–
(6.7)
–
–
0.3

–

–
–

–

Property
13.5
1.8
(0.5)
0.3
(1.7)
–

13.4

3.2
10.2

13.4

Other
5.5
1.3
(0.6)
–
(0.5)
–

5.7

2.1
3.6

5.7

Total
25.4
3.1
(7.8)
0.3
(2.2)
0.3

19.1

5.3
13.8

19.1

Property provisions 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 ten years.

Other provisions relate to environmental and other liabilities, the magnitude and timing of utilisation of which are determined by a variety
of factors.

126

QinetiQ Group plc Annual Report and Accounts 201625. 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)
Deferred financing costs

Borrowings
Derivative financial instruments

Total non-current financial assets/(liabilities)
Cash
Cash equivalents

Total cash and cash equivalents

Total net cash as defined by the Group

2016

Assets

Liabilities

0.3

0.3
9.9
0.6
–

10.8

0.5

0.5
0.1

0.6
68.4
195.1

263.5

–

–
–
(0.2)
–

(0.2)

–

–
(0.2)

(0.2)
–
–

–

Net

0.3

0.3
9.9
0.4
–

10.6

0.5

0.5
(0.1)

0.4
68.4
195.1

263.5

274.5

2015

Assets

Liabilities

Net

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

–

–
–
(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

At 31 March 2016 £1.6m (2015: £1.3m) of cash was held by the Group’s captive insurance subsidiary, including £0.1m (2015: £0.1m) that was
restricted in its use.

Reconciliation of net cash flow to movement in net cash
all figures in £ million
Increase/(decrease) in cash and cash equivalents in the year
Repayment of US$ private placement notes
Outflow in respect of the purchase of available for sale investments
Payment of bank loan arrangement fee
Capital element of finance lease payments
Capital element of finance lease receipts

Change in net cash as defined by the Group 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

In-year movement in net cash as defined by the Group
Net cash as defined by Group at the beginning of the year

Net cash as defined by Group at the end of the year
Less: other financial assets and liabilities

Total cash and cash equivalents

2016
78.4
–
–
–
1.4
(1.5)

78.3
–
(0.3)
–
–
1.0

79.0
195.5

274.5
(11.0)

263.5

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
(11.2)

184.3

127

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

25. Net cash continued
Finance leases
Group as a lessor
The minimum lease receivables under finance leases fall due as follows:

all figures in £ million

Amounts receivable under finance leases
Within one year

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

Classified as follows:
Financial liability – current

Minimum lease payments

Present value of minimum
lease payments

2016

2015

2016

2015

–

1.5

–

1.5

Minimum lease payments

Present value of minimum
lease payments

2016

2015

2016

2015

–

1.4

–

1.4

26. 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 for the year

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

2016
6.5
13.6
7.2

27.3

2016
5.3

2016
9.4
8.1
1.5

19.0

2015
7.3
19.1
10.9

37.3

2015

6.1

2015
5.0
6.8
1.2

13.0

Operating lease payments represent rentals payable by the Group on certain property, plant and equipment. Principal operating leases
are negotiated for a term of approximately ten years.

128

QinetiQ Group plc Annual Report and Accounts 2016
27. 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
(ie as prices) or indirectly (ie 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 asset or liability that are not based on observable market data (ie unobservable inputs).

The following table presents the Group’s assets and liabilities that are measured at fair value as at 31 March 2016:

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

Total

9.9
1.7
–
–
–

–
–

11.6

–
–
0.6
–
0.1

(0.2)
(0.2)

0.3

–
–
–
0.1
–

–
–

0.1

9.9
1.7
0.6
0.1
0.1

(0.2)
(0.2)

12.0

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

Total

10.0
2.3
–
–
–

–
–

12.3

–
–
0.5
–
0.1

(0.5)
(0.1)

–

–
–
–
0.1
–

–
–

0.1

10.0
2.3
0.5
0.1
0.1

(0.5)
(0.1)

12.4

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.

129

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

27. Financial risk management continued
All financial assets and liabilities had a fair value that is identical to book value at 31 March 2016 and 31 March 2015. Detailed analysis
is provided in the tables below:

As at 31 March 2016

all figures in £ million

Financial assets
Non-current
Derivative financial instruments
Other investments

Current
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
Deferred financing costs

Total financial liabilities

Total

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
Bank and other borrowings
Finance leases

Current
Trade and other payables
Derivative financial instruments
Finance leases
Deferred financing costs

Total financial liabilities

Total

130

Note

Available
for sale

Loans and
receivables

Financial
liabilities at
amortised
cost

Derivatives
used as
hedges

Total
carrying
value

Total fair
value

–
0.1

–
–
1.7
9.9
–

11.7

–
–
–

–

–
–

156.2
–
–
–
263.5

419.7

–
–
–

–

–
–

–
–
–
–
–

–

(11.0)
0.5
–

(338.7)
–
0.3

(348.9)

0.1
–

–
0.6
–
–
–

0.7

–
–
(0.2)

–
(0.2)
–

(0.4)

0.1
0.1

156.2
0.6
1.7
9.9
263.5

432.1

(11.0)
0.5
(0.2)

(338.7)
(0.2)
0.3

(349.3)

0.1
0.1

156.2
0.6
1.7
9.9
263.5

432.1

(11.0)
0.5
(0.2)

(338.7)
(0.2)
0.3

(349.3)

11.7

419.7

(348.9)

0.3

82.8

Note

Available
for sale

Loans and
receivables

Financial
liabilities at
amortised
cost

Derivatives
used as
hedges

Total
carrying value

Total fair
value

–
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)

–
(0.5)
–
–

(0.6)

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)

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)

QinetiQ Group plc Annual Report and Accounts 2016B) 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 2016 none (2015: 100%) of the Group’s borrowings were at fixed rates
with no adjustment for interest rate swaps.

Financial assets/(liabilities)
As at 31 March 2016

all figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other

As at 31 March 2015

all figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other

Financial asset

Financial liability

Floating
246.6
8.9
2.1
3.6
2.3

263.5

Non-interest
bearing
10.6
0.1
–
1.7
–

12.4

Fixed or
capped
–
–
–
–
–

–

Floating
–
–
–
–
–

Non-interest
bearing
(0.4)
–
–
–
–

–

(0.4)

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
–
–
–
–
–

Non-interest
bearing
(0.6)
–
–
–
–

–

(0.6)

Fixed or
capped
–
–
–
–
–

–

Fixed or
capped
1.5
–
–
–
–

1.5

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

Total financial assets
Financial liabilities:
Sterling

Total financial liabilities

2016

Weighted
average
interest rate
%

Fixed or
capped
£m

Weighted
average
years to
maturity

2015

Weighted
average
interest rate
%

Fixed or
capped
£m

Weighted
average years
to maturity

–

1.5

(1.4)

13.4

12.1

0.5

Sterling assets and liabilities consist primarily of finance leases with the weighted average interest rate reflecting the internal rate of return
of those leases.

131

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

27. Financial risk management continued
Interest rate risk management
The Group private placement borrowings were repaid during the prior year and were fixed-rate, while the revolving credit facility is floating-
rate and undrawn as at 31 March 2016.

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 £ million

31 March 2016 – sterling
31 March 2015 – sterling

Net foreign currency monetary assets/(liabilities)

US$

5.8
(5.9)

Euro

1.7
2.0

AUS$

0.2
(0.1)

Other

0.6
0.8

Total

8.3
(3.2)

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 2016 against sterling are net US dollars sold £13.5m (US$19.3m) and net euros sold £3.4m (€4.3m).

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 £275.9m (2015: £198.8m). The Group held cash and cash equivalents of £263.5m at 31 March 2016 (2015: £184.3m),
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 £145.1m (2015: £142.7m) was invested in AAA-rated money funds at the year end and £40m
(2015: £50m) was invested in deposits collateralised by security, where the security was gilts.

E) Liquidity risk
Borrowing facilities
As at 31 March 2016 the Group had a revolving credit facility (RCF) of US$100m and £166m (2015: US$100m and £166m).

The RCF is contracted until 2019 and is unutilised as shown in the table below:

Interest rate:
LIBOR plus
0.65%

Total
£m
235.6

Drawn
£m
–

0.65%

233.3

–

Undrawn
£m
235.6
263.4

499.0

233.3
184.2

417.5

Committed facilities 31 March 2016
Freely available cash and cash equivalents

Available funds 31 March 2016

Committed facilities 31 March 2015
Freely available cash and cash equivalents

Available funds 31 March 2015

132

QinetiQ Group plc Annual Report and Accounts 2016Gross 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 2016

all figures in £ million

Non-derivative financial liabilities
Trade and other payables
Recapitalisation fee

Derivative financial liabilities
Forward foreign currency contracts – cash flow hedges

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

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

Book
value

(349.7)
0.8

Contractual

cash flows 1 year or less

1–2 years

2–5 years

More than
5 years

(349.7)
–

(338.7)
–

(0.4)

(0.2)

(349.3)

(350.1)

(338.9)

(11.0)
–

(0.1)

(11.1)

–
–

(0.1)

–
–

–

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)

(0.5)

(363.6)

(364.7)

(354.2)

Asset
gains
0.7

0.7

Asset
gains

0.6
0.1
–

0.7

2016

Liability
losses
(0.4)

(0.4)

2016

Liability
losses

(0.2)
(0.1)
(0.1)

(0.4)

Net
0.3

0.3

Net

0.4
–
(0.1)

0.3

(10.4)
–
–

(0.1)

(10.5)

Asset
gains
0.6

0.6

Asset
gains

0.5
–
0.1

0.6

–
–
–

–

2015

Liability
losses
(0.6)

(0.6)

2015

Liability
losses

(0.5)
(0.1)
–

(0.6)

–
–
–

–

Net
–

–

Net

–
(0.1)
0.1

–

133

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

27. Financial risk management continued
G) Maturity of financial liabilities
As at 31 March 2016

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 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

Bank
borrowings
and loan
notes
(0.3)
(0.3)
(0.2)
–

Finance
leases and
derivative
financial
instruments
0.2
0.1
0.1
–

(0.8)

0.4

Trade and
other
payables
338.7
11.0
–
–

349.7

Bank
borrowings
and loan
notes
(0.3)
(0.3)
(0.5)
–

Finance
leases and
derivative
financial
instruments
1.9
0.1
–
–

(1.1)

2.0

Trade and
other
payables
352.3
10.4
–
–

362.7

Total
338.6
10.8
(0.1)
–

349.3

Total
353.9
10.2
(0.5)
–

363.6

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 2016 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 the Group’s assets other than financial assets
and liabilities is not included in this analysis.

As at 31 March 2016

all figures in £ million
Sterling
US dollar
Other

As at 31 March 2015

all figures in £ million
Sterling
US dollar
Other

1% decrease in interest rates

10% weakening in sterling

Equity1
–
–
–

Profit
before tax
(2.5)
(0.1)
(0.1)

Equity
–
1.0
1.1

Profit
before tax
–
–
–

1% increase in interest rates 10% strengthening in sterling

Equity1
–
–
–

Profit
before tax
2.5
0.1
0.1

Equity
–
(0.8)
(0.9)

Profit
before tax
–
–
–

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 This relates to the impact on items charged directly to equity and excludes the impact on profit/loss for the year flowing into equity.

134

QinetiQ Group plc Annual Report and Accounts 2016The 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 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 2016, 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 2016, 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 also result in a minimal decrease in profit before tax.

28. Cash flows from operations
For the year ended 31 March

all figures in £ million

Profit after tax for the year
Adjustments for:
Taxation income
Net finance costs
(Profit)/loss on business divestments and disposal of investments
Reversal of unutilised restructuring provisions
Amortisation and impairment 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 (profit)/loss of equity accounted entities
Share-based payments charge
Changes in retirement benefit obligations
Net movement in provisions

(Increase)/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

Net cash flow from operations before specific adjusting items

2016

106.1

(8.4)
1.3
(23.7)
–
2.8
2.0
31.9
23.0
1.2
(0.5)
4.7
(13.4)
(0.3)

126.7

(0.2)
13.8
(6.9)

6.7

133.4
–
–
–

133.4

Reconciliation of net cash flow from operations before specific adjusting items to underlying operating cash flow

all figures in £ million
Net cash flow from operations before specific adjusting items
Purchases of intangible assets
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment

Underlying operating cash flow

2016
133.4
(1.6)
(28.6)
0.4

103.6

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

2015
143.9
(4.2)
(24.8)
–

114.9

135

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

29. Share capital and other reserves
Shares allotted, called up and fully paid:

Ordinary shares of 1p each (equity)

Special Share of £1 (non-equity)

At 1 April 2014
Cancelled in the year

At 31 March 2015
Issued in the year
Cancelled in the year

At 31 March 2016

Number

6,604,764
(518,664)

6,086,100
–
(219,288)

660,476,373
(51,866,369)

608,610,004
–
(21,928,804)

5,866,812

586,681,200

1
–

1
–
–

Number

Total

Number

1
–

1
–
–

6,604,765
(518,664)

6,086,101
–
(219,288)

660,476,374
(51,866,369)

608,610,005
–
(21,928,804)

5,866,813

586,681,201

Except as noted below all shares in issue at 31 March 2016 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 2016 this programme
was complete. A new £50m share buyback was announced in November 2015 and by 31 March 2016 the Group had completed £3m of the
programme.

Rights attaching to the Special Share
QinetiQ carries out activities which are important to UK defence and security interests. To protect these interests in the context of the ongoing
commercial relationship between the MOD and QinetiQ, and to promote and reinforce the Compliance Principles, the MOD holds a Special
Share in QinetiQ. QinetiQ obtained MOD consent to changes in its Special Shareholder rights, which were approved by shareholders at the
2012 AGM. The changes to the Special Share were disclosed in the 2012 Annual Report. Subsequent to the changes approved at the 2012 AGM
the Special Share confers certain rights on the holder:

a) to require the Group to implement and maintain the Compliance System (as defined in the Articles of Association) so as to make at all times

effective its and each member of QinetiQ Controlled Group’s application of the Compliance Principles, in a manner acceptable to the
Special Shareholder;

b) to refer matters to the Board for its consideration in relation to the application of the Compliance Principles;

c) to require the Board to obtain Special Shareholder’s consent:

i) 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

ii) if at any time when the chief executive is not a British Citizen, it is proposed to appoint any person to the office of chairman, who is not

a British Citizen;

d) to require the Board to take action to rectify any omission in the application of the Compliance Principles, if the Special Shareholder

is of the opinion that such steps are necessary to protect the defence or security interests of the United Kingdom; and

e) to demand a poll at any of QinetiQ’s meetings (even though it may have no voting rights except those specifically set out in the Articles).

The Special Shareholder has an option to purchase defined Strategic Assets of the Group in certain circumstances. The Special Shareholder
has, inter alia, the right to purchase any Strategic Assets which the Group wishes to sell. Strategic Assets are normally testing and research
facilities (see note 32 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 2016 are 4,862,182 shares (2015: 5,443,881 shares).

136

QinetiQ Group plc Annual Report and Accounts 2016

30. Share-based payments
The Group operates a number of share-based payment plans for employees. The total share-based payment expense in the year was £4.7m,
of which £4.7m related to equity-settled schemes and nil related to cash-settled schemes (year to 31 March 2015: £3.6m, of which £3.4m
related to equity-settled schemes and £0.2m to cash-settled schemes).

Performance Share Plan (PSP)
In the year, the Group made awards of conditional shares to certain UK senior employees under the PSP. The awards vest after three years with
50% of the awards subject to TSR conditions and 50% subject to EPS conditions as detailed in the Report from the Remuneration Committee.

Outstanding at start of year
Granted during year
Exercised during the year
Forfeited/lapsed during year

Outstanding at end of year

2016
Number
of shares
9,457,408
3,842,409
(2,304,189)
(2,081,068)

2015
Number
of shares
8,090,260
4,310,206
(461,196)
(2,481,862)

8,914,560

9,457,408

PSP awards are equity-settled awards and those outstanding at 31 March 2016 had an average remaining life of 1.4 years (2015: 1.3 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 22% (2015: 24%) for the average share price volatility of the FTSE comparator group and 53% (2015:
51%) for the average correlation to the comparator group. The weighted average fair value of grants made during the year was £1.79 (2015:
£1.57). The weighted average share price at date of exercise was £2.51 (2015: £1.97). Of the options outstanding at the end of the year nil were
exercisable (2015: 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
Exercised during year
Forfeited/lapsed during year

Outstanding at end of year

2016
Number
of shares
175,187
(9,375)
(141,437)

2015
Number
of shares
3,819,001
(196,154)
(3,447,660)

24,375

175,187

RSUs are equity-settled awards; those outstanding at 31 March 2016 had an average remaining life of 0.4 years (2015: 1.1 years). There is no
exercise price for these RSU awards. The weighted average share price at date of exercise was £2.35 (2015: £2.09). Of the awards outstanding
at the end of the year nil were exercisable (2015: nil).

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

2016
Number
of shares
153,848
(153,848)
–

2015
Number
of shares
5,018,288
(1,210,650)
(3,653,790)

–

153,848

VSP awards are equity-settled awards; those outstanding at 31 March 2016 had an average remaining life of nil years (2015: 0.2 years).
There is no exercise price for these VSP awards. The weighted average share price at date of exercise was £2.37 (2015: £2.04). Of the awards
outstanding at the end of the year nil were exercisable (2015: nil).

137

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

30. Share-based payments continued
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

2016
Number of
matching
shares
647,821
322,597
(123,202)
(41,431)

2015
Number of
matching
shares
725,904
280,267
(309,350)
(49,000)

805,785

647,821

SIP matching shares are equity-settled awards; those outstanding at 31 March 2016 had an average remaining life of 1.5 years (2015: 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 (2015: 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 from the Remuneration Committee.

Outstanding at start of year
Granted during year
Exercised during the year
Forfeited during year

Outstanding at end of year

2016
Number of
matching
shares
464,115
–
–
(152,615)

2015
Number of
matching
shares
1,162,896
303,639
(85,126)
(917,294)

311,500

464,115

DAB matching shares are equity-settled awards; those outstanding at 31 March 2016 had an average remaining life of 0.7 years (2015: 1.2
years). The weighted average fair value of grants made during the prior year was £2.08. The weighted average share price at date of exercise
during the prior year was £2.08. There is no exercise price for these DAB awards. Of the shares outstanding at the end of the year nil were
exercisable (2015: nil).

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

2016
Number of
awards
290,022
20,000
(135,352)
(139,670)

2015
Number of
awards
1,229,541
94,894
(364,362)
(670,051)

35,000

290,022

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 2016
had an average remaining life of 0.5 years (2015: 0.8 years). There is no exercise price for these awards. The fair value of the grants at
31 March 2016 was £2.28 (2015: £1.91) being the Group’s closing share price on that day. The weighted average share price on the date
of exercise was £2.34 (2015: £2.08). The carrying amount of the liability of the grants at the balance sheet date was nil (2015: £0.3m).
Of the awards outstanding at the end of the year nil were exercisable.

138

QinetiQ Group plc Annual Report and Accounts 2016Bonus Banking Plan (BBP)
During the year, the Group granted BBP awards to certain senior executives in the UK.

Outstanding at start of year
Granted during the year
Exercised during the year
Forfeited during year

Outstanding at end of year

2016
Number of
awards
330,725
493,505
(5,711)
(3,741)

2015
Number of
awards
–
330,725
–
–

814,778

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 four 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 2016, the awards had an average remaining life of 2.3 years (2015: 1.7 years). There is no exercise price for these awards.
The fair value of the awards at 31 March 2016 was £2.34 (2015: £1.91) being the Group’s 30 day average share price in the period running
up to 31 March. 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.

31. 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.

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 2017 is £13.0m. The Group has no further payment
obligations once the contributions have been paid.

Triennial funding valuation
The most recent completed full actuarial valuation of the Scheme was undertaken as at 30 June 2014 and resulted in an actuarially assessed
surplus of £31.0m.

The agreed recovery plan requires £13.0m contributions per annum until 31 March 2018, the same annual funding level as previously in place.
This includes £2.5m p.a. distributions to the Scheme, indexed by reference to CPI, from the Group’s Pension Funding Partnership.

139

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

31. 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 IAS19, 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 2016 amounted to £nil (2015: £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 – quoted
Equities – unquoted
LDI investment*
Corporate bonds
Alternative bonds**
Property
Cash and 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

2016
347.9
66.1
362.8
314.2
176.6
126.6
16.2

2015
447.2
70.0
323.4
311.4
176.3
113.4
12.9

1,410.4
(1,448.1)

1,454.6
(1,494.0)

(37.7)
1.5

(36.2)

(39.4)
1.6

(37.8)

* The Scheme has assets invested in a Liability Driven Investment portfolio. As at 31 March 2016 this hedges against 40% of the interest rate and 100% 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.

The company has an unconditional right to a refund of any surplus that may arise on cessation of the Scheme.

140

QinetiQ Group plc Annual Report and Accounts 2016Changes to the fair value of Scheme assets
all figures in £ million
Opening fair value of Scheme assets
Interest income on Scheme assets
Re-measurement (loss)/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
Interest cost

Actuarial gain/(loss) on Scheme liabilities based on:
Change in financial assumptions
Experience gains
Change in demographic assumptions
Net benefits paid out and transfers

Closing defined benefit obligation

Changes to the net pension liability
all figures in £ million
Opening net pension liability
Net finance cost
Administrative expenses
Net actuarial loss
Contributions by the employer

Closing net pension liability

Total expense recognised in the income statement
all figures in £ million
Net interest on the net defined benefit liability
Administrative expenses

Total expense recognised in the income statement (gross of deferred tax)

Assumptions
The major assumptions used in the IAS19 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)

2016
1,454.6
46.3
(75.8)
14.6
(28.1)
(1.2)

2015
1,304.6
53.9
116.3
9.2
(28.1)
(1.3)

1,410.4

1,454.6

2016
(1,494.0)
(47.4)

2015
(1,326.8)
(54.5)

40.4
24.8
–
28.1

(128.3)
7.8
(20.3)
28.1

(1,448.1)

(1,494.0)

2016
(39.4)
(1.1)
(1.2)
(10.6)
14.6

(37.7)

2016
1.1
1.2

2.3

2016
3.4%
2.1%

89
91
91
93

2015
(22.2)
(0.6)
(1.3)
(24.5)
9.2

(39.4)

2015
0.6
1.3

1.9

2015
3.2%
2.1%

88
91
91
93

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 2016 and
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.

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.

141

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

31. Post-retirement benefits continued
Sensitivity analysis of the principal assumptions used to measure Scheme liabilities

Assumption

Discount rate

Rate of inflation

Rate of mortality

Change in assumption

Increase/decrease by 0.1%

Increase by one year

Indicative impact on Scheme liabilities
(before deferred tax)

Decrease/increase by £27m

Increase/decrease by £25m

Increase by £36m

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

Choice of accounting assumptions

Results under IAS19 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
IAS19 pension finance expense in the Group’s income statement.

The calculation of the defined benefit obligation (DBO) involves projecting future cash flows from the Scheme
many years into the future. This means that the assumptions used can have a material impact on the balance sheet
position and profit and loss charge. In practice future experience within the Scheme may not be in line with the
assumptions adopted. For example, members could live longer than foreseen or inflation could be higher or lower
than allowed for in the DBO calculation.

The accounting assumptions noted above are used to calculate the year end net pension liability in accordance with the relevant accounting
standard, IAS19 (revised) ‘Employee benefits’. Changes in these assumptions have no impact on the Group’s cash payments into the Scheme.
The payments into the Scheme are reassessed after every triennial valuation.

The triennial valuations are calculated on a funding basis and use a different set of assumptions, as agreed with the pension Trustees.
Given the current extremely low gilt yields, a funding valuation of the Scheme would probably have resulted in a bigger deficit than the
IAS19 methodology if one had been performed at the year end.

142

QinetiQ Group plc Annual Report and Accounts 2016

32. Transactions with the MOD
The MOD continues to own its Special Share in QinetiQ which conveys certain rights as set out in note 29. 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 75.

Strategic assets
Under the Principal Agreement with the MOD, the QinetiQ controlled Group is not permitted without the written consent of the MOD, to:

i) dispose of or destroy all or any part of a strategic asset; or

ii) voluntarily undertake any closure of, or cease to provide a strategic capability by means of, all or any part of a strategic asset.

The net book value of assets identified as being strategic assets as at 31 March 2016 was £7.2m (2015: £7.5m).

Long Term Partnering Agreement
On 27 February 2003 QinetiQ Limited entered into a Long Term Partnering Agreement (LTPA) 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.

Other contracts with MOD
The LTPA is the most significant contract QinetiQ has with the MOD. In total approximately 70% of the Group’s revenue comes directly from
contracts with the MOD.

33. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of £32.8m at 31 March 2016 (2015: £36.2m) 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
remote.

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.

34. Capital commitments
The Group had the following capital commitments for which no provision has been made:

all figures in £ million

Contracted

2016
35.5

2015

30.8

Capital commitments at 31 March 2016 include £30.8m (2015: £30.5m) in relation to property, plant and equipment that will be wholly funded
by a third-party customer under long-term contract arrangements.

143

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional information Notes to the financial statements continued

35. Subsidiaries
The full list of companies which were part of the Group as at 31 March 2016 is detailed below:

Name of company

Subsidiaries1,2,3
BJ Trustee Limited
Boldon James Holdings Limited
Boldon James Inc
Boldon James Limited
Cody US Limited
Commerce Decisions Limited
Commerce Decisions Pty Ltd
CueSim Limited
Foster-Miller Canada Limited
Foster-Miller Inc
Graphic Research Corporation
Limited
Gyldan 1 Limited
Gyldan 2
Gyldan 3 Limited

Gyldan 4 Limited
Leading Technology Limited
Metrix UK Limited
Optasense Canada Limited
Optasense Holdings Limited
Optasense Inc
Optasense Limited
Precis (2187) Limited
Precis (2188) Limited
Q Shelf Limited
QinetiQ Aerostructures Pty Ltd
QinetiQ Australia Pty Ltd
QinetiQ Canada Operations Limited
QinetiQ Consulting Pty Ltd
QinetiQ Corporate Finance Limited
QinetiQ Defence Training Limited

Country of incorporation

Name of company

Country of incorporation

England & Wales
England & Wales
US
England & Wales
England & Wales
England & Wales
Australia
England & Wales
Canada
US

England & Wales
England & Wales
England & Wales
England & Wales

England & Wales
England & Wales
England & Wales
Canada
England & Wales
US
England & Wales
England & Wales
England & Wales
England & Wales
Australia
Australia
Canada
Australia
England & Wales
England & Wales

Subsidiaries1,2,3
QinetiQ Target Services Limited
QinetiQ Estates Limited
QinetiQ GP Limited
QinetiQ Group Holdings Limited
QinetiQ Holdings Limited
QinetiQ Inc
QinetiQ Insurance PCC Limited
QinetiQ Investments Limited
QinetiQ Limited
QinetiQ Novare Pty Ltd

QinetiQ Overseas Holdings (2) Limited
QinetiQ Overseas Holdings Limited
QinetiQ Overseas Trading Limited
QinetiQ Partnership Finance Limited
QinetiQ Pension Scheme Trustee
Limited
QinetiQ PFP LP
QinetiQ Philippines Company, Inc
QinetiQ Pty Ltd
QinetiQ Services Holdings Pty Ltd
QinetiQ Space N.V.
QinetiQ Sweden AB
QinetiQ US Holdings, Inc.
Redu Operational Services S.A.
Sensoptics Limited
Tarsier Limited
Trusted Experts Limited
TSG International LLC

Associates4
Redu Space Services S.A.
Trillium International – I, L.P.

England & Wales
Scotland
Scotland
England & Wales
England & Wales
US
Guernsey
England & Wales
England & Wales
Australia

England & Wales
England & Wales
England & Wales
England & Wales

England & Wales
Scotland
Philippines
Australia
Australia
Belgium
Sweden
US
Belgium
England & Wales
England & Wales
England & Wales
US

Belgium
Cayman Islands

1 Accounting reference date is 31 March. All subsidiary undertakings listed above have financial year ends of 31 March.
2 The Group owned 100% of the ordinary shares of the subsidiary undertakings except for Redu Operational Services S.A. (52%).
3 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.
4 The Group owned 48% of Redu Space Services S.A. and 25% of Trillium International – I, L.P.

144

QinetiQ Group plc Annual Report and Accounts 2016Company balance sheet
as at 31 March

all figures in £ million

Fixed assets
Investments in subsidiary undertaking

Current assets
Debtors

Current liabilities
Creditors – amounts falling due within one year

Net current liabilities

Total assets less current liabilities

Net assets

Capital and reserves
Equity share capital
Capital redemption reserve
Share premium account
Profit and loss account

Capital and reserves attributable to shareholders

There are no other recognised gains and losses.

Note

2016

2015

462.9

185.0

(291.0)

(106.0)

356.9

458.2

81.6

(205.5)

(123.9)

334.3

356.9

334.3

5.9
40.6
147.6
162.8

356.9

6.1
40.4
147.6
140.2

334.3

The financial statements of QinetiQ Group plc (company number 4586941) were approved by the Board of Directors and authorised for issue
on 26 May 2016 and were signed on its behalf by:

Mark Elliott
Chairman

Steve Wadey
Chief Executive Officer

David Mellors
Chief Financial Officer

145

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationCompany statement of changes in equity
for the year ended 31 March

all figures in £ million
At 1 April 2015
Profit for the year
Purchase of own shares
Purchase and cancellation of shares
Dividend paid
Share-based payments

At 31 March 2016

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

Issued share
capital
6.1
–
–
(0.2)
–
–

Capital
redemption
reserve
40.4
–
–
0.2
–
–

5.9

6.6
–
–
(0.5)
–
–
–

6.1

40.6

39.9
–
–
0.5
–
–
–

40.4

Share
premium
147.6
–
–
–
–
–

147.6

147.6
–
–
–
–
–
–

147.6

Profit
and loss
140.2
97.8
(0.7)
(46.9)
(32.3)
4.7

162.8

275.6
0.2
(0.6)
(107.1)
0.6
(31.7)
3.2

140.2

Total
equity
334.3
97.8
(0.7)
(46.9)
(32.3)
4.7

356.9

469.7
0.2
(0.6)
(107.1)
0.6
(31.7)
3.2

334.3

The capital redemption reserve is not distributable and was created following redemption of preference share capital.

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.

These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (“FRS 101”).
In preparing these financial statements, the company applies the recognition, measurement and disclosure requirements of International
Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”), but makes amendments where necessary in order to comply with
Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken.

• A Cash Flow Statement and related notes;
• Disclosures in respect of transactions with wholly owned subsidiaries;
• Disclosures in respect of capital management;
• The effects of new but not yet effective IFRSs;
• Disclosures in respect of the compensation of Key Management Personnel;
• Disclosures of transactions with a management entity that provides key management personnel services to the company;
•
• Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7.

IFRS 2 Share Based Payments in respect of Group settled share based payments; and

In the transition to FRS 101, the company has applied IFRS 1 whilst ensuring that its assets and liabilities are measured in compliance with FRS
101. No adjustments were required as part of that transition.

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 30 to the Group financial statements. The cost of share-based
payments is charged to subsidiary undertakings.

146

QinetiQ Group plc Annual Report and Accounts 20162. 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

A list of all principal subsidiary undertakings of QinetiQ Group plc is disclosed in note 35 to the Group financial statements.

3. Debtors
As at 31 March

all figures in £ million

Amounts owed by Group undertakings

Amounts owed by Group undertakings includes a dividend from its subsidiary of £100m (2015: nil) received during the year.

4. Creditors
As at 31 March

all figures in £ million

Amounts owed to Group undertakings

2016
424.3
38.6

462.9

2015
424.3
33.9

458.2

2016

185.0

2015

81.6

2016

291.0

2015

205.5

5. Share capital
The company’s share capital is disclosed in note 29 to the Group financial statements.

6. Share-based payments
The company’s share-based payment arrangements are set out in note 30 to the Group financial statements.

7. Other information
Directors’ emoluments, excluding company pension contributions, were £3.6m (2015: £2.9m). 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 2016 was £170,000 (2015: £178,000), 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.

147

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationFive-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 operations4:
Orders
Underlying operating margin1
Underlying profit before tax1
Profit before tax
Profit after tax
Underlying basic EPS1
Basic EPS
Underlying net cash from operations (post capex)1

£m

Pence

£m

Pence

£m

2016
616.4
139.3

755.7

–

755.7

93.8
15.1

108.9
–

108.9

97.7
106.1
16.3
18.1
18.0
5.7
103.6
274.5
6,266

659.8
14.4
108.7
90.2
98.6
16.3
16.8
103.6

2015
625.6
138.2

763.8

55.7

819.5

93.0
18.3

111.3
1.2

112.5

92.9
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

20133
594.6
269.4

864.0

463.8

20122,3
620.9
325.0

945.9

523.7

1,191.4

1,327.8

1,469.6

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

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

56.3
66.2

122.5
37.1

159.6

316.3
246.3
13.6
37.9
37.6
2.9
235.4
(122.2)
10,637

706.8
13.0
73.1
288.3
233.9
10.5
36.0
217.3

1 Underlying measures are stated before specific adjusting items. Definitions of underlying measures of performance are in the glossary on page 149. 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 IAS19 (revised) ‘Employee Benefits’ was adopted for 2013 and the 2012 comparatives have been restated accordingly.
3 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 has also been restated to reflect the reclassification of Cyveillance® from US Services to EMEA Services.

4 Continuing operations excludes the financial results of the US Services business disposed in 2015.

148

QinetiQ Group plc Annual Report and Accounts 2016Glossary

AGM

ASD15

CAGR

C4ISR

COTS

CPI

CRC

CSR

DAB

defra

DE&S

DHS

DoD

EBITDA

EMEA

EPS

ESA

ESOS

EST

FAR

FMI

Funded
backlog

GHG

IAS

IFRS

IRAD

ISS

KPI

LIBID

LIBOR

LTI

LTPA

MOD

MSCA

OHSAS

Orange book

Organic growth

Annual General Meeting

At-Sea-Demonstration 2015

Compound Annual Growth Rate

Command, control, communications, computers,
intelligence, surveillance and reconnaissance

Commercial off the shelf

Consumer Price Index

Corporate Responsibility

Carbon Reduction Commitment

Corporate Social Responsibility

Deferred Annual Bonus

Department for Environment, Food and Rural Affairs

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

European Space Agency

Energy Savings Opportunity Scheme

Engineering, Science and Technical

Federal Acquisition Regulations

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)

Greenhouse gas

International Accounting Standards

International Financial Reporting Standards

Internal research and development

International Space Station

Key Performance Indicator

London inter-bank bid rate

London inter-bank offered rate

Lost time incident

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

PBT

PSP

QLZ

QNA

QSOS

R&D

RSU

SEMAP

Specific
adjusting
items

SDSR

SPA

SSRO

SSSI

STEM

TSR

UAV

Profit before tax

Performance Share Plan

QinetiQ Learning Zone

QinetiQ North America

QinetiQ Share Option Scheme

Research and development

Restricted Stock Unit

Systems Engineering Master Apprenticeship
Programme

Amortisation of intangible assets arising from
acquisitions; impairment of goodwill and intangible
assets; gains/losses on business divestments and
disposal of property and investments; net pension
finance expense; net restructuring charges/
recoveries; tax on the preceding items; one-off
recovery of research and development tax credits and
associated write-off of tax losses; and other significant
non-recurring deferred tax movements

Strategic Defence and Security Review

Special protection area

Single Source Regulations Office

Site of Special Scientific Interest

Science, Technology, Engineering and Maths

Total shareholder return

Unmanned aerial vehicle

UK Corporate
Governance Code

Guidelines of the Financial Reporting
Council to address the principal aspects
of corporate governance

UK GAAP

UK Generally Accepted Accounting Practice

Underlying
basic earnings
per share

Underlying
effective
tax rate

Underlying
net cash from
operations
(post capex)

Underlying net
finance costs

Underlying
operating cash
conversion

Basic earnings per share as adjusted to exclude
‘specific adjusting items’

The tax charge for the year excluding the tax impact of
‘specific adjusting items’ expressed as a percentage of
underlying profit before tax

Net cash inflow from operations before cash flows of
specific adjusting items, less net cash outflow on
purchase/sale of intangible assets and property, plant
and equipment

Net finance costs excluding net pension
finance costs

The ratio of underlying net cash from operations (post
capex) to underlying operating profit excluding share
of post-tax result of equity-accounted joint ventures
and associates

Underlying
operating 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

Value Sharing Plan

149

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationShareholder 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

Dividend Tax Changes
From 6 April 2016, the dividend tax credit has been replaced by an
annual tax-free dividend allowance of £5,000. UK residents will pay
tax on dividends received over that amount at specified rates.
Dividends paid on shares held within pensions and Individual Savings
Accounts will continue to be tax-free. Further information is available
from HMRC at www.gov.uk/government/publications/dividend-
allowance-factsheet.

directly into a UK bank or building society account by completing a
dividend mandate form. The associated dividend confirmation 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.

Contact details for registrar
By post:
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA

By telephone:
0371 384 2021* for UK calls
+44 (0)121 415 7576 for calls from outside the UK.

* Lines are open 8.30am to 5.30pm (UK time), Monday to Friday (excluding public

holidays in England and Wales).

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 2016
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 2016:

280

260

240

220

200

180

160

140

31 Mar 15

31 May 15

31 Jul 15

30 Sep 15

30 Nov 15

31 Jan 16

31 Mar 16

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 2016

By type of holder
Individuals
Institutions and others

Number of
holdings
5,739
870

% of total
holdings
86.84%
13.16%

Shares
held
5,833,438
580,847,762

% of share
capital
0.99%
99.01%

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

6,609

100.00%

586,681,200

100.00%

4,258
580
1,103
191
234
243

64.43%
8.78%
16.69%
2.89%
3.54%
3.67%

855,323
469,469
2,700,065
1,412,499
7,230,020
574,013,824

0.15%
0.08%
0.46%
0.24%
1.23%
97.84%

6,609

100.00%

586,681,200

100.00%

150

QinetiQ Group plc Annual Report and Accounts 2016Beware 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.

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.

7. 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.

Key dates

20 July 2016

4 August 2016

5 August 2016

2 September 2016

30 September 2016

17 November 2016

February 2017

31 March 2017

May 2017

Trading update

Annual General Meeting

Ordinary shares marked ex-dividend

Final 2016 dividend record date

Final 2016 dividend payment date

Half-year financial period end

Half-year results announcement

Trading update (provisional date)

Financial year end

Preliminary results announcement (provisional date)

151

QinetiQ Group plc Annual Report and Accounts 2016Strategic reportGovernanceFinancial statementsAdditional informationAdditional information

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

Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA

152

QinetiQ Group plc Annual Report and Accounts 2016This 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 Westerham (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
www.QinetiQ.com