QinetiQ Group plc
Annual Report and Accounts 2019
Invest
Deliver
Grow
Contents
Strategic report
At a glance
2
Investment case
4
Business model
6
Chairman’s statement
14
Chief Executive Officer’s review
16
Q&A
18
Market themes
20
Trading environment
22
Strategic progress
24
Key performance indicators
28
Principal risks
32
Longer-term viability assessment
37
Our people
38
Corporate responsibility
41
Operating review
44
Chief Financial Officer’s review
48
Corporate governance
54 Corporate governance statement
56 Board of Directors
58 Governance framework
65 Compliance statement
68 Report of the Audit Committee
72 Report of the Nominations Committee
74 Report of the Risk & CSR Committee
76 Directors’ remuneration report
80 Summary Directors’ Remuneration Policy
81 Annual Report on Remuneration
93 Directors’ report
96
Independent auditor’s report
Financial statements
104 Consolidated income statement
105 Consolidated comprehensive income statement
105 Consolidated statement of changes in equity
106 Consolidated balance sheet
107 Consolidated cash flow statement
107 Reconciliation of movements in net cash
108 Notes to the Financial Statements
151 Company balance sheet
152 Company statement of changes in equity
153 Notes to the Company Financial Statements
155 Five-year record
Additional information
158 Additional Financial Information
159 Glossary
160 Shareholder Information
Who we are
QinetiQ is a leading science and engineering company operating
primarily in the defence, security and critical infrastructure markets.
We are an information, knowledge and technology based company
with the breadth and depth of more than 6,000 people, including
more than 3,000 scientists and engineers.
What we offer
We apply our strengths through three core offerings to
provide solutions to customers which are increasingly relevant
in today’s rapidly changing security and economic environment.
Technology
We specialise in the creation of technology that is disruptive
to give decisive advantage.
Services and products
Bringing together our own and others’ technology and know-how
to provide distinctive specialist services and products.
Unique capability generation and assurance
We are integrated across the life cycle, undertaking creative research
and development, enabling test and evaluation and delivering
operational readiness through training and rehearsal. We play a central
role in delivering capability generation and assurance for our customers.
What we deliver
Operational and competitive advantage
These three core offerings allow us to deliver operational
advantage in the military context, or competitive
advantage in the commercial context.
Cover photo
Emma Jones, a Trials Conduct Graduate
and colleagues conducting an air target
integration flight at the MOD Hebrides air
range, operated by QinetiQ.
Photograph taken by: Alex Holt, Naval
Architect Graduate, QinetiQ.
This page
Our new civil certified PC-21 aircraft at
the Empire Test Pilots’ School.
Our inherent strengths
– Deep domain knowledge and experience
– Close customer relationships
– Core science and engineering expertise
– Ability to develop and manage broad academic
and industrial partnerships
Key to our success
Is to proactively understand our customers’ current and future needs and to
create and enable solutions at greater pace to meet current threats, adjacent
threats and emergent threats.
In simple terms
Not only can we develop cutting-edge technology and turn it into capability,
we can also tell you if that capability will work when it is critically needed,
and ensure you are trained and operationally ready.
Visit the website at
www.QinetiQ.com
As a reminder
Throughout this report, year
references (FY19, FY18, 2019,
2018) refer to QinetiQ’s financial
year ending 31 March.
Strategic report | Who we are
1
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 At a glance
We offer our customers world-class
expertise through our services and
innovative technology-based products
We deploy our scientific and
technological knowledge, proven
research capabilities and unique,
purpose-built facilities to provide
both services and products that
meet the needs of a wide range
of global customers.
We operate primarily in the defence,
security and critical infrastructure
markets and our customers are
predominantly government
organisations, including defence
departments, as well as a growing
number of commercial customers.
The proportion of revenue from
outside the UK has increased
from 21% to 30% in three years.
Revenue by division (%)
FY19
Revenue by destination country (%)
FY19
7
5
%
7
0
%
25%
1
2
%
6%
2 %
1
EMEA Services – 75%
Global Products – 25%
UK – 70%
US – 12%
Australia – 6%
Rest of the World – 12%
EMEA Services
Air & Space
Maritime, Land
& Weapons
Combines world-leading
expertise with unique facilities
to generate and assure
capability. It does this through
capability integration, threat
representation and operational
readiness, underpinned by
long-term contracts that
provide good revenue
visibility and cash flows.
£687.7m
annual revenue
(FY18: £651.4m)
5,170
total employees
(FY18: 5,239)
Page 44
Operating review
2
What we do
De-risk complex aerospace programmes
by testing systems and equipment,
evaluating the risks and assuring safety.
What we do
Deliver operational advantage to customers
by providing independent research, evaluation
and training services.
Approximate revenue
£180m
Approximate revenue
£310m
Cyber, Information
& Training
What we do
Help government and commercial customers
respond to evolving threats based on our
expertise in training, secure communication
networks and devices, intelligence gathering
and surveillance sensors, and cyber security.
Our strategic investment in Inzpire is
reported through this business.
International
What we do
Our International business leverages our
expertise and skills developed in the UK and
applies them to opportunities in attractive
markets globally. QinetiQ Germany (EIS
acquisition) is reported as part of our
International business.
Approximate revenue
£120m
Approximate revenue
£80m
QinetiQ Group plc Annual Report and Accounts 2019 Financial highlights
Orders
We delivered our third year of
organic growth, turning around
five years of decline. In FY19
we delivered an organic increase
in operating profit.
£776.4m
(FY18: £587.2m)
Revenue
£911.1m
(FY18: £833.0m)
Statutory Operating Profit
Underlying Operating Profit
£113.8m
(FY18: £141.0m)
£123.9m
(FY18: £122.5m)
Statutory Earnings per Share
Underlying Earnings per Share
Page 48
Chief Financial Officer’s review
20.1p
(FY18: 24.4p)
19.7p
(FY18: 19.3p)
Global Products
QinetiQ North America
OptaSense
Delivers innovative solutions
and products to meet customer
requirements. Undertakes
contract-funded research and
development, developing
intellectual property in
partnership with key customers
and through internal funding
with potential for new
revenue streams.
£223.4m
annual revenue
(FY18: £181.6m)
891total employees
(FY18: 826)
Page 46
Operating review
What we do
Develop and manufacture innovative defence
products specialising in unmanned systems,
survivability and maritime systems, along
with products in related commercial markets.
What we do
Provide innovative fibre sensing solutions
to deliver decision-ready data in multiple
vertical markets.
Approximate revenue
£90m
Approximate revenue
£30m
Space Products
EMEA Products
What we do
Provide small satellites, payload instruments,
sub-systems and ground station services.
What we do
Provide research services and bespoke
technological solutions developed from
intellectual property spun out from EMEA
Services. QinetiQ Target Systems is
reported in EMEA Products.
Approximate revenue
£20m
Approximate revenue
£90m
Strategic report | At a glance
3
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Investment case
Creating enduring value for our
customers and shareholders
Unique capabilities critical
to national sovereignty
– Key partner to UK defence
– Leading expertise and facilities
– At the centre of creating, testing
and training defence capability
Over
3,000
scientists and engineers globally
34
sites across the UK
16
sites under the Long Term
Partnering Agreement
Increasing exposure
to attractive international
markets
– Significant presence in high-growth
home countries – the US and Australia,
as well as the UK
– Growing presence in the Middle East,
Europe and Canada
– Ambition to increase international
revenue to 50% of Group
– Addressable market of >£8bn
Group revenue (£m)
783.1
833.0
911.1
Key:
UK
International
FY17
FY18
FY19
30%
international revenue
(FY18: 27%)
4
acquisitions since the launch
of new strategy
41%
revenue increase for QinetiQ
Target Systems in FY19
Page 6
Business model
Page 20
Market themes
4
QinetiQ Group plc Annual Report and Accounts 2019 A clear growth
strategy
Strong financial profile
Increasing returns
to our shareholders
– Lead and modernise
UK test and evaluation
– Build an international company
– Innovating for our
customers’ advantage
– Long-term contracts
– Cash generative model
– Strong balance sheet
– Ability to self-fund organic
and inorganic investment
– Clear capital allocation policy
– Three years of revenue growth
following five years of decline
– Sustainable increase in key
financial metrics
– Progressive dividend policy
£3.1bn*
total order backlog
(FY18: £2.0bn)
£370m
investment into the Long Term
Partnering Agreement
3
years of revenue growth
* Includes LTPA amendment signed post
year end on 5 April 2019.
74%
revenue cover
(FY18: 69%)
102%
cash conversion
(FY18: 103%)
£188.5m
of net cash
(FY18: £266.8m)
9%
revenue growth
(FY18: 6%)
2%
underlying EPS growth
(FY18: 7%)
5%
increase in
full year dividend
(FY18: 5%)
Page 14
Chairman’s
statement
Page 48
Chief Financial
Officer’s review
Page 24
Strategic progress
Strategic report | Investment case
QinetiQ Group plc Annual Report and Accounts 2019
5
Strategic report Business model
A sustainable business model enhanced by our strategy
A sustainable
business model
People and domain know-how
> 3,000
scientists, engineers and technicians
> 95%
of our UK employees have
national security clearance
Technical expertise
> 1,200
granted patents
Distinctive facilities
1.1m km2
The unique air range in the Hebrides
operated by QinetiQ can provide safe
air and sea space twice the size of Spain
for test, evaluation and training
Our unique position in the market
We combine the dedication and creativity of
our people, our unique science and engineering
expertise, and our distinctive modernised facilities
to equip customers with solutions to their most
pressing challenges, and the assurance that they
will work when critically needed.
We are predominantly a services business,
valued for our independence.
Sustaining our business model
As a company 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. We are investing in our
people to support their career development,
wellbeing and engagement.
Our business model is robust and sustainable
because our knowledge base is constantly
refreshed as we learn from experience,
understand emerging customer requirements
and invest in our future.
This enables us to both sustain existing
capabilities and create new ones to ensure we
respond to customer requirements and stay
ahead of the competition.
We are investing in our facilities to ensure they
remain relevant to support our customers against
current and future threats, ensuring longevity and
sustainability in our business model.
How we generate revenue
Our customers are predominantly in defence,
security, and critical infrastructure in our home
countries of the UK, US and Australia, with a
growing international and commercial presence.
We operate two divisions:
– EMEA Services generates revenue through
the provision of advice and services, particularly
test and evaluation. The division is underpinned
by long-term contracts providing good visibility
of revenue and cash flows.
– Global Products delivers products and
solutions supported by research and
development which is often funded by
customers. The division is technology-based
and has shorter order cycles so can have
a more variable revenue profile.
How we deliver benefits to key stakeholders
Customers
– Deliver mission-critical solutions
– Responsive and agile with the ability
to innovate at pace
– Ensure value for money
Shareholders
Inherent strong cash generation allows us to invest
in our organic capabilities to deliver:
– Sustainable growth in revenue, operating
profit and high quality earnings
– A progressive dividend
Employees
– Rewarding careers in highly skilled areas
– Utilise expertise across QinetiQ
Within our two divisions, our business units are
aligned to customer domains and all deliver a
combination of services and products.
A clear strategy for growth
UK
International
Innovation
Lead and modernise the UK Defence
Test & Evaluation enterprise, by working
in partnership with Government and
prime contractors
Build an international company that delivers
additional value to our customers by
developing our home countries (UK, US
and Australia), creating new home countries
(i.e. where we have our own indigenous
industrial capabilities) and exporting
Invest in and apply our inherent strengths
for customer advantage in defence, security
and critical infrastructure markets
6
QinetiQ Group plc Annual Report and Accounts 2019 How we create value
We deliver and assure more advanced capabilities at lower cost, operating across the domains of air, land, maritime, cyber, and space.
We accelerate our customers’ ability to transition from concept to capability, and provide ongoing assurance throughout the lifecycle
of complex platforms, weapons and capabilities.
Our work helps our customers to achieve operational and competitive advantage, and by working closely with them to address their
existing needs, we are able to understand future requirements for the next generation of capability.
Delivering
operational
advantage to
defence, security
and critical
infrastructure
customers and
creating value for
our stakeholders
OUR UNIQUE INTEGRATED VALUE PROPOSITION:
Capability Generation & Assurance
We offer three services to assist our customers to generate and assure a capability:
1. Research & Experimentation
2. Test & Evaluation
3. Training & Rehearsal
We deliver to our clients:
Capability
integration
Systems | Systems of systems
Threat
representation
Live | Virtual | Cyber
Operational
readiness
Team | Group | Joint
Create it
Test it
Use it
OUR DISTINCTIVE OFFERINGS:
Services & Products
We offer a range of products to our customers and act as an independent ‘customer friend’
assisting clients with a range of engineering and advisory services.
e.g. advice, intelligence, information systems, protection, unmanned systems, space systems
OUR DISRUPTIVE EDGE:
Technology
We employ our distinctive technology to support our integrated offer, and it can also be purchased
by our customers as a standalone offering.
e.g. advanced materials, sensing, communications, cyber, analytics, autonomy, directed energy
OUR INHERENT STRENGTHS
Academic & industrial
partnerships
Domain knowledge &
experience
Science &
engineering expertise
Understanding
future needs
Strategic report | Business model
7
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Our business model in action
Integrated capability
generation & assurance
Formidable Shield,
testing integrated
defence capabilities
UK
Most complex exercise of its type
ever conducted in the UK
8
NATO countries
3,300
Personnel
12
Warships
The Formidable Shield series of military exercises, first delivered in 2017 and now taking
place every two years, demonstrate our integrated value proposition. They are also an
example of our strategy in action, enabled by investment in the UK and now attracting
international customers to our world-leading UK facilities.
Formidable Shield ‘17 brought together eight NATO countries led by the US in the Outer
Hebrides to test integrated air and missile defence capabilities through a series of live missile
firings and demonstrations. The exercise culminated with the launch and intercept of a Terrier
Oriole ballistic missile target to simulate a medium-range ballistic missile, marking the largest
and highest object launched into space from UK soil, reaching an altitude of 320km. To enable
this firing to be conducted safely, QinetiQ put in place an air exclusion zone of 1.1m sq km,
approximately twice the size of Spain. The exercise was enabled by our investment to
modernise the range, enhancing our data collection and interpretation abilities and air traffic
control systems. The investment means the range is capable of facilitating large-scale
exercises and rehearsals, and has secured this major event on a bi-annual basis until
the end of the next decade.
To watch the video, visit www.QinetiQ.com/FS17
A live firing taking place during Formidable Shield ‘17.
8
QinetiQ Group plc Annual Report and Accounts 2019 Strategic report
1.1m km2
exclusion
zone
An area twice the size of Spain
UK
International
Innovation
With the advancement in defence
capabilities and the sophistication of
the threats our customers face, our
modernisation ensures we continue to
provide relevant test, training and rehearsal.
Our investment into the Long Term
Partnering Agreement (LTPA) will ensure
we can support future UK programmes
such as the Dreadnought submarine.
Our investment into air ranges is making
them more attractive to international
customers. We are capable of testing the
most advanced defence systems, and our
expertise and facilities are of increasing
relevance to a wider range of nations.
Recent large scale exercises, such as
Formidable Shield, act as showcases to other
international customers of our capabilities.
Under the modernisation of the LTPA we
are investing in new technologies and ways
of working to deliver test and evaluation,
and training and rehearsal in more cost
effective and innovative ways. This involves
combining live, virtual and constructive
environments as well as facilitating
improved data generation and analysis.
Our business model in action
Capability
integration
Threat
representation
Operational
readiness
– Large scale rehearsals, such as
Formidable Shield, require the
integration of multiple systems
– This tests the interoperability of
multiple nations’ systems to
assure they work
– Our teams’ understanding of
these systems is critical in
providing this assurance
– New threats, such as hypersonic
weapons and the proliferation of
ballistic missiles, require new
ways of assuring capability
– Our facilities and expertise
– Large scale capabilities, such
as aircraft carrier task groups,
require more integrated and
complex ways to assure their
operational readiness
provide the ability to emulate
these threats and the right
environment to test
responsiveness
– Our unique ability to leverage our
multiple sites and facilities to
effectively test these types of
platforms and train their crews
means our customers can be sure
they work when critically needed
Strategic report | Integrated capability generation & assurance
9
QinetiQ Group plc Annual Report and Accounts 2019
Our business model in action
Working across the capability lifecycle
Generating and
assuring the
capability of UK
combat aircraft
1st
UK live firing of
F-35 weapons systems
> 1,500
Supported over 1,500 hours
of Typhoon Operational
Evaluation flying activity
1 of 4
ETPS, our test aircrew training
school at MOD Boscombe Down is
one of only four globally recognised
military test pilot schools
At any moment in time, QinetiQ is working
on multiple generations of critical
defence platforms
QinetiQ’s work is vital at every stage of the lifecycle of defence and security technologies. From
first concept and design, to production and in-service operation, our value comes from creating
and assuring customers’ critical capabilities by combining research and development, test and
evaluation, and training and rehearsal.
So not only do we develop new approaches and create new technologies, we combine them
into complex defence and security capabilities, test them to prove they will work, and make
sure the people who will use them are ready to do so.
An example of how this adds value is the essential role we play to continuously ensure
the effectiveness of the UK’s combat air fleet.
To watch the video, visit www.QinetiQ.com/combataircraft
Feedback from customers allows us to understand their future needs
PREVIOUS GENERATION
CURRENT GENERATION
NEXT GENERATION
GENERATION AFTER NEXT
Tornado
Over its life QinetiQ has
worked to maintain and
enhance Tornado’s
capabilities, making sure
it could evolve to respond
to the latest threats. We
worked to extend the life
of the Tornado prior to
its retirement, maximising
value for our customer.
Typhoon
With Tornado retiring, we
supported the RAF to
transfer and enhance
weapons capabilities across
to Typhoon. By combining
our understanding of these
systems with our unique
facilities we conducted a
series of tests that provided
our customer with assurance
that these critical capabilities
would work.
F-35
Our people understand the
complexity of the F-35 and
are making sure it can
integrate effectively with the
UK’s other systems. As part
of this, we have provided the
environment to test the
F-35’s weapons systems.
This culminated in the first
live-firing of the F-35’s
weapons on UK soil at
Aberporth, an MOD facility
operated by QinetiQ.
Tempest
The Future Combat Air
System, a stealth fighter
that will replace current
aircraft in 15-20 years, is
in development and we are
playing an essential role.
Our knowledge and expertise
supports our customer to
understand and define the
requirements for this cutting
edge future aircraft so it is fit
for purpose.
10
QinetiQ Group plc Annual Report and Accounts 2019 UK
International
Innovation
Our investment into the LTPA is supporting
our ability to provide critical research and
experimentation, test and evaluation and
training and rehearsal to our customers.
The investment ensures that our capabilities
remain relevant for current and future
generations of technologies.
The credibility and experience we have
developed in the UK through this work
directly supports our ability to grow
internationally.
The investment into the LTPA will accelerate
our ways of working and ensure we are at
the leading edge of technology. This will
create more valuable data for our
customers, and provide the vital analysis
needed to make critical decisions.
Our business model in action
Across the generation of these capabilities, we are helping to maintain,
upgrade or bring new capabilities into service
Capability
integration
Threat
representation
Operational
readiness
– Our people’s technical expertise
is essential to integrate various
systems to create real capabilities
for our customers
– Our independence from the supply
chain positions us as a trusted
partner to our customers and
other defence companies
– The threats these aircraft must
be effective against continually
change
– We put aircraft through their
– Our knowledge of the systems and
the threat environment means we
can create realistic training
– Our range of facilities enables
paces by effectively representing
the latest and most advanced
threats
realistic training and rehearsal to
provide assurance to our customers
that these capabilities are fit to fight
Strategic report | Working across the capability lifecycle
11
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Our business model in action
International growth
Applying our
business model
in new markets
>£8bn
addressable market
30%
of revenue now from international
customers
50%
ambition to grow international
revenue to 50%
Leveraging our Group-wide capabilities,
customer focus and acquisitions to
strengthen our presence in Canada
Canada is an example of where we are working with our customers to enhance their defence and
security capabilities. Canada is an attractive market with increasing defence spending. The doubling
of capital projects to C$8bn by 2021, and the need to modernise air, land and sea ranges for fifth
generation platforms are key priorities. QinetiQ’s state-of-the-art target systems facility in Medicine
Hat, Alberta and consulting presence in Ottawa, provide Canadian capabilities that allow us to offer
our complete value chain of products to support the Canadian Department of National Defence. In
FY19 we won a C$51m contract to provide unmanned aerial systems that will provide enhanced
situational awareness for the Royal Canadian Navy and Canadian Special Operations Forces. We
secured this work by drawing on the full breadth of expertise and capability across the QinetiQ Group.
As we build our presence and strengthen our relationships in Canada we will be able to move up our
value chain from discrete products and services to integrated capability generation and assurance.
To watch the video, visit www.QinetiQ.com/internationalgrowth
As we build our presence in Canada we are able to move up our value chain
1. PRODUCTS
2. ADVISORY SERVICES
3. TEST, EVALUATION &
REHEARSAL
4. INTEGRATED CAPABILITY
GENERATION & ASSURANCE
Seed presence overseas
through export sales
By exporting our products
and services, we build
relationships, brand
awareness, and our
reputation as a technology
innovator in new markets.
Build relationship as an
advisor, leveraging unique
UK experience
Once our capabilities are
better understood, and
customers understand how
we can support them, we
typically build a reputation
as an independent
engineering advisory
services provider, or
‘customer friend’.
Use customer insight to
offer further services
Our advisory services
activities allow us to
become intimate with our
customers’ concerns,
challenges and future
requirements. This allows
us to offer further value
added services, typically
leveraging our Group-wide
R&D and T&E capabilities.
Provide a fully
integrated offer
Co-investing with our
customer to create
enhanced in-country
capabilities positions
QinetiQ as a long-term,
fully integrated capability
generation and
assurance partner.
12
QinetiQ Group plc Annual Report and Accounts 2019 Strategic report
UK
International
Innovation
Our work in the UK has created a strong
reference point for our Canadian customer.
Being able to leverage this experience into
countries such as Canada is an intrinsic part
of our UK investment strategy.
We have accelerated our progress in Canada
through the 2016 acquisition of QinetiQ
Target Systems, which brought customer
relationships and an indigenous, state-of-the-
art product design, prototype, testing and
manufacturing facility into QinetiQ.
Our understanding of autonomous systems
and how to integrate sub-systems and
sensors onto them was a key component
of our offer. Our independence allowed us to
partner with leading technology companies
to meet our customers’ requirements.
Our business model in action
Capability
integration
Threat
representation
Operational
readiness
– Our ability to integrate various
systems and platforms was a key
reason for the award of our
largest contract to date in Canada
– Our advisory services business
understands the complexity of
defence systems and provides
advice for making long-term
procurement decisions
– QinetiQ Target Systems has an
advanced product manufacturing
facility in Medicine Hat, Alberta
– QTS is able to cost-effectively
represent key threats to test and
evaluate systems and provide
realistic training
– Understanding the systems
our customer uses, and an ability
to cost-effectively emulate the
threats they must respond to,
are key aspects of creating
operational readiness
Strategic report | International growth
13
QinetiQ Group plc Annual Report and Accounts 2019 Chairman’s statement
A year of significant milestones
5%
increase in full year dividend
(FY18: 5%)
Full year dividend (p)
2019
2018
2017
2016
2015
6.6
6.3
6.0
5.7
5.4
4.5p
Final dividend to be paid on
30 August 2019 (2018: 4.2p)
Progressive dividend policy
Since 2011, we have consistently
grown our dividend in line with our
progressive dividend policy.
Annual General Meeting 2019
11am on 24 July 2019, at the offices
of Ashurst LLP, Fruit and Wool
Exchange, 1 Duval Square, London
E1 6PW.
We have seen encouraging
signs of the necessary
cultural changes required to
deliver sustainable growth.”
14
Mark Elliott
Non-executive Chairman
Significant financial and strategic progress
This year marked a number of significant milestones, most notably agreeing a ground-breaking
amendment to reinvigorate the Long Term Partnering Agreement (LTPA). This secures £1.3bn
of revenue, increasing our order backlog to over £3.1bn*, and also supports our further growth
aspirations. Leading and modernising UK test and evaluation is a key component of our
strategy and one that also opens up international opportunities. Internationally, we have made
significant progress with major contract wins in the US for our robotics technology and in
Canada building on our experience in unmanned systems. Overall, we have delivered a third
year of organic revenue growth and an organic increase in operating profit.
We’ve continued to deploy our capital to support our growth. As a Board, we have been
focused on ensuring we do so wisely, evaluating opportunities to make sure they deliver the
right returns to our shareholders. During FY19, we invested nearly £100m into our Company,
much in modernising our core contracts such as the LTPA. We also successfully completed
two acquisitions that enhance our capabilities in training, both in the UK and internationally.
Delivering cultural change to sustain our strategy
Looking beyond the financial performance, as a Board we have seen encouraging signs of the
necessary cultural and behavioural changes required to deliver sustainable growth. Across
our organisation, initiatives are underway to embed real and positive change. We have defined
Company behaviours as “listen, focus and keep our promises”, attributes we think are critical
to our success. Talented people are our greatest asset. To ensure we attract and retain the
best talent we have a clear commitment to diversity. As an example, we have launched a new
LGBTQ+ (Lesbian, Gay, Bisexual, Transgender, Questioning) employee network as part of our
commitment to creating an inclusive workforce.
We’ve taken steps to ensure that all our employees share in the success of our performance.
The introduction of our All Employee Incentive Scheme, which I am pleased to say paid out
at the end of the period, helps to align interests and supports our ambition of having a high
performance culture within QinetiQ.
My fellow Board members and I have been fortunate to spend time with many of our
employees over the past year. We’ve enjoyed a number of site visits including to our facilities
in Farnborough and Malvern. I am struck by both our people’s abilities and their appetite for
positive change. We still have a lot to do, and our employee engagement figures are not where
we would like them to be. We recognise that our people are intrinsic to our long-term success
and, working closely with our Employee Engagement Group (EEG), we are listening carefully
to our employees to improve how it feels to work at QinetiQ.
* Includes LTPA amendment signed post year end on 5 April 2019.
QinetiQ Group plc Annual Report and Accounts 2019 QinetiQ has all of the
attributes to delight
its customers, provide
fulfilling jobs for our
people and to deliver
long-term profitable
growth for our owners.”
As a Board, we continue to invest time in ensuring we understand the evolving nature of the
markets in which we operate so we are better able to provide the right constructive challenge
to our management team. During the course of the year, we have undertaken a number of
‘deep dives’ into different aspects of the Company and its strategy. Each October, we spend
two days working with the executive team on the integrated strategic business plan. This
allows us to constantly evaluate our progress and refine aspects of the strategy. We have
also engaged with other stakeholders, including customers, providing us with the holistic view
needed to make better decisions. Overall, this supports our understanding of the strategic risks
we face and how better to mitigate and manage them, a key part of ensuring good governance.
Board succession
As announced on 21 March 2019, I will be retiring from QinetiQ at our AGM in July. I can’t help
but reflect on the past ten years as I prepare to step down. We began with an intense focus on
repairing our balance sheet and the cultural transformation from civil service to a competitive
commercial organisation. With a strong balance sheet we recruited Steve Wadey to lead our
Company in investing for long-term profitable growth. With an ambitious but clear strategy
to invest in our core markets and capabilities as well as the development of our international
business we are beginning to see that growth. It is encouraging to see the increasing
contribution that international revenue is making and to have delivered a third consecutive
year of growth.
It has been a real honour and privilege to work with many wonderful people in QinetiQ and to
have worked with a talented and dedicated Board of Directors. As we announced, we have
recruited Neil Johnson who joined the Board in April with the intention that he replaces me at
the AGM. Bringing a fresh perspective, and with significant experience of leading businesses
in both executive and non-executive roles, as a Board we are confident he will make a huge
contribution to the next stage of QinetiQ’s growth.
With our expert people, unique capabilities, a strong management team, coupled with financial
strength, and the support of our shareholders, QinetiQ has all of the attributes to delight its
customers, provide fulfilling jobs for our people and to deliver long-term profitable growth
for our owners.
Mark Elliott
Non-executive Chairman
23 May 2019
A clear and disciplined approach to capital allocation
1
3
2
4
Investing for growth
Organic investment
complemented by bolt-on
acquisitions where there
is a strong strategic fit
Balance sheet
Maintaining the necessary
level of balance sheet strength
Dividend
Maintaining our progressive
dividend in line with policy
Shareholder distributions
Returning excess cash
to shareholders
Strategic report | Chairman’s statement
15
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Chief Executive Officer’s review
Our strategy is delivering – third year of growth
This year marked a
number of significant
strategic achievements
that will underpin the
continued, profitable
growth of QinetiQ.”
16
Steve Wadey
Chief Executive Officer
We are pleased to report another year of organic revenue growth and record order backlog.
Three years since launching our vision-based strategy we have reversed five years of revenue
decline and delivered three years of growth. In addition, we drove performance across the
Group to successfully offset a ~£5-6m profit headwind from UK single source regulations
in FY19 and delivered organic growth in operating profit. For FY20, we are maintaining
expectations for Group performance, excluding non-recurring trading items, with revenue
growth at stable margins resulting in continued operating profit progression.
This year marked a number of significant strategic achievements that will underpin sustainable
profitable growth of QinetiQ in the years ahead.
Shortly after the period end we agreed a significant amendment to the Long Term Partnering
Agreement (LTPA) for test, evaluation and training services, our largest single contract and the
foundation for many of the capabilities we offer. This secures our market leading position in
this critical UK capability, facilitates investment to enhance this capability at appropriate returns
for our shareholders, and provides a platform for UK and international growth.
During the year we won five long-term, competitive programmes that mark a step change in our
ability to understand our customer requirements, draw on resources across the whole of QinetiQ
and identify key industry partners. In every case, these wins provide us with opportunities to
enhance our expertise and the value we can derive from these capabilities in the future.
In the UK, we were selected with our partners to become the Engineering Delivery Partner
(EDP) to the UK Ministry of Defence (MOD) procurement agency Defence Equipment &
Support (DE&S), establishing the default contracting route for all engineering services.
We also won the Battlefield Tactical Communication and Information Systems (BATCIS)
contract, our largest competitive UK win, awarded by an area of the UK MOD we had not
worked with regularly before. Winning these types of contract moves us up the value chain
and deepens our relationship with key customers creating further opportunities.
We are applying the same approach in markets outside of the UK to deliver our ambition
of 50% of revenues from international customers.
QinetiQ Group plc Annual Report and Accounts 2019 It has been an excellent
year for QinetiQ, with
strong operational
performance and further
evidence of our strategy
delivering results.”
In the US, we won two robotic programs of record: the Common Robotic System-Individual
(CRS-I) program for small robots worth up to $164m over seven years, and a $12m order as
part of the Route Clearance and Interrogation System (RCIS) program for route clearance
vehicles which is worth up to $44m. This positions us well for future growth in an attractive
and dynamic market. Our focus on strategic business winning will deliver greater stability in
the performance of our Global Products division, through expansion of the product portfolio
and larger, longer-term programmes.
In Canada, we were awarded a C$51m contract to provide Unmanned Aerial System (UAS)
services to the Royal Canadian Navy and Canadian Special Operations Forces Command.
We won this competition, our largest ever export order, by combining the strong relationship
with the Canadian customer, expertise in unmanned systems and manufacturing facilities
acquired through QinetiQ Target Systems, with broader defence capabilities from across
the QinetiQ Group.
We completed one further acquisition and one strategic investment during the year that
complement our capabilities and allow us to access attractive adjacent markets in UK and
international training. With a strong balance sheet, we have the ability to continue to acquire
attractive businesses that complement our strategy, enhance our capabilities and increase
our international reach.
QinetiQ is a company built on the expertise of its people who are critical to our success.
Our focus is on creating the right culture and ensuring everyone feels engaged in our strategy
and driving growth. This year we launched a new All Employee Incentive Scheme, the first
time QinetiQ has provided a Company-wide bonus. The scheme aligns our employees and
shareholders by incentivising and rewarding growth and I am delighted that in its first year
of introduction it will pay out £1,000 to every employee in the Company.
It has been an excellent year for QinetiQ, with strong operational performance and further
evidence of our strategy delivering results. I would like to take this opportunity to thank the
hard work of all our people who have been instrumental in delivering such significant change,
and who will be critical to sustaining our strategy and delivering continued profitable growth
in the years ahead.
Outlook – FY20
We enter FY20 with confidence having delivered a third successive year of organic revenue
growth and an organic increase to operating profit.
– As we build on our record order backlog and benefit from the full year contribution from
our recent acquisition of E.I.S. Aircraft Operations and strategic investment into Inzpire,
we anticipate delivering mid-single-digit revenue growth including further organic
revenue progression
– In EMEA Services, we expect divisional margins in FY20 to be consistent with FY19
– In Global Products, we also expect more stability in divisional margins due to the expansion
of our product portfolio combined with our success in winning longer-term programmes
– We will continue to invest to drive future growth, including capex of £80-100m, the majority
of which will be invested into the LTPA at an appropriate return. We expect working capital
outflows of £20-30m and continued strong cash conversion pre-capex
Overall we are maintaining expectations for Group performance in FY20, excluding non-
recurring trading items, with revenue growth at stable margins resulting in continued operating
profit progression.
Outlook – longer term
We will continue to grow by implementing our strategy and investing in our people, technology,
systems and infrastructure. By doing so, our objective is to deliver continued organic
revenue growth, further supported by acquisitions, resulting in sustainable profitable
growth at stable margins.
Steve Wadey
Chief Executive Officer
23 May 2019
Strategic report | Chief Executive Officer’s review
17
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Q&A
Answers to some of our investors’
most frequently asked questions
Q Where are the growth opportunities
within QinetiQ?
There are three main areas of growth opportunities for us. By leading
and modernising UK test and evaluation we can grow our market
share, win more work in adjacent sectors such as training, and attract
a broader array of international customers. Internationally, we see
strong growth opportunities for our services and products in attractive
markets such as Australia, North America and the Middle East. We are
well placed to help countries either develop their own indigenous
defence capabilities, or modernise the capability that they have.
Our focus on innovation and the products we have within our
overall portfolio also offer the potential for growth.
Page 24
Strategic progress
Q How is QinetiQ reacting to cost
pressures at the UK MOD?
A large proportion of QinetiQ’s revenue is generated under long-term
contracts, such as the LTPA, which gives us good visibility. Much of
the work we do is critical to maintaining the UK’s defence capability.
We are positioning ourselves as a long-term strategic partner to the
Ministry of Defence (MOD), committed to helping them realise
efficiencies. By constantly evaluating what we do, we can support the
MOD in achieving value for money. We believe this active and forward
thinking approach will create further opportunities to work with the
MOD in the future. For example in October we were selected as the
Engineering Delivery Partner to the MOD’s procurement agency,
DE&S. This is the contract through which DE&S will procure all its
engineering services.
Page 22
Trading environment
18
QinetiQ Group plc Annual Report and Accounts 2019 Q How do changes in the SSRO rate
impact QinetiQ?
The Single Source Regulations Office (SSRO) aims to derive fair
pricing for contracts, where there is only a single supplier. This is
intended to ensure that the UK Government receives value for money,
whilst the supplier receives a fair return. Given the specialised and
critical nature of the work we do, much of our work falls under SSRO
regulations. In line with our strategy, we have been mitigating our
exposure to changes in the SSRO rate by pursuing longer-term
contracts. This gives us long-term visibility of our contracted returns
and enables us to better plan our investment, ensuring our facilities
remain world class. With the steps we have taken, coupled with the
increase in the Baseline Profit Rate (BPR), we expect the headwind
to operating profit experienced in FY19 to abate in FY20 and beyond.
Page 44
Operating review
Q How do you effectively manage the risks
in your contracts?
We have been managing risk and delivering output based contracts
successfully for many years, and have also moved a number of our
‘cost plus’ contracts to deliver outputs in support of our growth
strategy. We believe this gives us greater flexibility to meet our
customers’ needs. It creates the opportunity for us to deliver higher
returns, but can increase the risk that we take on. Over the last three
years we have made significant investment in our Company, in
particular up-skilling our managers and hiring industry-leading
individuals. They bring with them significant commercial experience,
particularly at delivering large, output based defence contracts.
We spend extensive time understanding the risks associated with
contracts so we can be confident in our ability to mitigate them.
The recent amendment to the LTPA is such an example, where we
spent 18 months working with our customer to fully understand
requirements, the associated risks to delivery and how we effectively
mitigate them. We then monitor our progress on an on-going basis,
making adjustments as necessary.
Page 32
Principal risks
Q What is the culture
like at QinetiQ?
We recognise that the right culture is critical to delivering our strategy.
We are fortunate that our employees have world-leading technical
expertise. We are building on this foundation to create a performance
culture that has safety at its core and where we all listen, focus and
keep our promises, three behaviours that we think are critical to our
future success. During the year we have undertaken several initiatives
to drive higher employee engagement and further develop a positive
culture that builds on our strong technical heritage.
Page 38
Our people
Jennie Corne, a NATS Air Traffic
Control Officer in ‘Target Controller’
position during an ‘Air to Air’ trial
simulation at MOD Aberporth, UK.
Strategic report | Q&A
QinetiQ Group plc Annual Report and Accounts 2019
19
Strategic report Market themes
Three key themes in our markets
Across the markets and sectors we operate in there are three key themes. They are inherently long term in their
nature and impact our customers in different ways. Our strategy was developed with these themes in mind.
Key themes
Increasing complexity
Partnering for innovation
Value for money
– Threats are increasingly complex
– Systems used to counter these threats
are correspondingly complex
– Cyber risk threatening public
and private sectors
– Accelerating pace of innovation
– Customers have finite resources,
through partnerships
– Appetite to exploit ideas coming
from outside defence
– Rapidly integrate new technologies
into existing capabilities
but increasing requirements
– In some regions, defence
budgets are growing
– UK defence budgets under pressure
– Customers are looking to the private
sector to drive efficiencies
Increasing complexity
The threats our customers must be confident in defeating are constantly evolving. With
the advancements in technologies, the pace at which these threats evolve is accelerating.
From low-cost consumer drones adapted to cause harm, to hypersonic missiles, the
threat environment is growing more complex. In parallel to physical threats, cyber-based
ones continue to increase in sophistication and can be deployed in conjunction with
more conventional threat forms.
To defeat these threats, the capabilities our customers use are growing in complexity
and frequently combine a multitude of systems.
Against this backdrop, the geopolitical environment is also becoming more uncertain.
In addition to the proliferation of technology giving state and non-state actors capabilities
that can undermine the technological superiority of western governments, the competition
for resources, trade and investment is also raising tensions around the globe.
How we are responding
Our strategy and commitment to lead and modernise UK Defence Test & Evaluation (T&E)
allows us to support our customers in their preparations against a range of increasingly
complex threats. This is complemented by the investment we are making, such as into the
Long Term Partnering Agreement, ensuring we have the right capabilities to generate and
assure future systems. Our ability to emulate threats and test and evaluate the resilience of
systems and capabilities provides assurance to our customers that they can effectively respond.
Our expertise in cyber security, and our understanding of how to evaluate and deploy
innovative technologies, helps our customers to contend with imminent threats and
prepare for the future.
Our strategy and
commitment to lead and
modernise UK Defence
Test & Evaluation allows
us to support our
customers in their
preparations against
a range of increasingly
complex threats.”
20
QinetiQ Group plc Annual Report and Accounts 2019 A key market theme
is the need for effective
partnership to rapidly
convert emerging
technologies into
assured deployable
capability.”
Partnering for innovation
The leading edge of technological advancement is often found in academia and commercial
sectors. Our customers are keen to leverage this technology for defence and the protection of
critical national infrastructure. Robotics, autonomy, sensing technology and advances in data
processing, including machine learning, are all of significant value to our customers. A key
market theme is the need for effective partnership to rapidly convert emerging technologies
into assured deployable capability.
Partnerships with universities, small and medium size enterprises, and other defence
companies are critical in doing this.
How we are responding
QinetiQ is a company that was founded upon innovation; research and development, and
test and evaluation form the core of our business. The breadth and depth of our people’s
technology and domain expertise, and our investment in their continued development, enables
QinetiQ to deliver valuable advice, innovative solutions and services. Furthermore, as a
predominantly service-based business, we are not encumbered by large product portfolios,
supply chains or conflicts of interests. QinetiQ is ideally placed to act as an innovation
integrator, acting as a convening facilitator between government, academia and wider industry
to rapidly develop and deploy innovative solutions. Our strategy is to further develop our own
Research and Development (R&D) capabilities as well as creating valuable partnerships to
deliver innovation effectively to our customers.
Value for money
Many developed nations are wrestling with multiple calls on their resources. Ageing
populations, increasing social care costs and moderate economic growth put pressure on
overall budgets. Against this backdrop, our customers must continue to meet commitments
to defence spending and ensure they can protect their sovereign interests. In more developing
markets, defence expenditure is increasing but the requirement to deliver value for money is
common in both. Our customers are looking to the private sector to help them maintain or
advance their capabilities while also delivering cost efficiencies.
How we are responding
We are taking a forward-leaning approach to understanding our customers’ challenges and
thinking innovatively to solve them. We believe our proactive approach can create opportunities
for us to help enhance defence capabilities and deliver cost efficiencies. This approach can
also support long-term sustainable growth in our business. Our focus on modernising the
LTPA and creating innovative delivery models such as Engineering Delivery Partner, are
recent examples of us putting this approach into action.
Strategic report | Market themes
21
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Trading environment
Significant growth potential
Our addressable market
By focusing on our core offerings and
target markets, we have an addressable
market of over £8bn per annum.
Growth in QinetiQ comes from
increasing our share in existing
markets and leveraging our strengths
into attractive adjacent ones.
> £8bn
per annum
addressable market
Services and products
(Defence, security and critical infrastructure)
£££bn pa
Size
Growth +2-5% CAGR1
<1% (£325m)
Share
UK training
International training
£1bn pa
Size
Growth +1% CAGR
Share
~5% (£60m)
££bn pa
Size
Growth +1-3% CAGR
<1% (£30m)
Share
1 CAGR = Compound Annual Growth Rate.
2 RDT&E = Research & Development and
Test & Evaluation.
3 ~£320m pa via Long Term Partnering
Agreement (LTPA) with UK MOD.
4 Australia, Canada, New Zealand, France,
Germany, Sweden, Saudi Arabia, UAE, Qatar,
Turkey included. USA ($79bn pa) excluded.
UK RDT&E2
£1.5bn pa
Size
Growth +1% CAGR
Share
~30% (£455m)3
International RDT&E2
£6bn pa4
Size
Growth +4% CAGR
<1% (£40m)
Share
Source: Jane’s Market Forecast, FY19 market
sizing (USD/GBP exchange rate of 0.77), UK MOD.
QinetiQ market share based on FY19 revenue.
Key
Current market share
Future market potential
The UK, US and Australia are our home countries where we have our own
indigenous industrial capabilities.
UK
The UK’s total defence spending of £42bn in 2019 makes it the largest among European
nations. The Modernising Defence Programme (MDP) reported in December 2018 and
recognised the need for driving innovation and generating new technologies. It placed an
emphasis on the value of cutting edge technology in areas such as artificial intelligence,
cyberspace and space; all areas in which QinetiQ holds significant expertise.
The MOD is focused on driving efficiencies to generate savings while also maintaining and
enhancing its capability. As a result, QinetiQ remains a proactive strategic partner to the MOD,
providing capability generation and assurance. The UK is expected to spend approximately
£1.5bn on research & development and test & evaluation in 2019 and therefore remains a
key market for QinetiQ where we can continue to support the MOD. The signing of the LTPA
amendment will help to deliver efficiencies while also enhancing this critical capability.
While the UK’s exit from the European Union could create short-term fiscal pressure for the
Government, it is likely that the current geopolitical environment and the UK’s commitment
to NATO will offer support to overall defence spending.
By focusing on our core
offerings and target
markets, we have an
addressable market of
over £8bn per annum.”
22
QinetiQ Group plc Annual Report and Accounts 2019
Growth in QinetiQ comes
from increasing our share
in existing markets
and leveraging our
strengths into attractive
adjacent ones.”
US
With a military budget of US$725bn in 2019, the US defence budget continues to dwarf that
of other nations and is more than the next ten largest military budgets combined. In addition,
continued trade tension between the US and China, a more assertive Russia and a deteriorating
environment in the Middle East, supported by a strong US economy, could drive further growth
in US defence spending.
The 2019 budget was the first prepared since the publication of the National Defence Strategy
(NDS) which cited the need for investment and modernisation of US defence capability. The
NDS also highlighted the need to shift the focus from the global war on terror to state-on-state
conflict and recognised the value of collaboration with the private sector.
QinetiQ remains at the forefront in supporting the US Department of Defense (DoD) in
modernising its defence capability, evidenced by the award of two “programs of record”
for robotics. Our expertise in robotics and autonomous systems is well aligned with the
DoD’s ambition to make greater use of this technology.
Australia
Modernising and enhancing defence capability remains a key priority for the Australian military.
As a result, defence spending, which is expected to be US$31.6bn in 2019, is forecast to grow
at ~5% per annum to 2024. The core focus for Australian forces continues to be the Navy as
the trend of the ‘pivot to the Pacific’ continues following tension in the South China Sea.
The 2018 Defence Industrial Capability Plan outlines ten areas of focus key to enhancing
Australian sovereign industrial capability. These include advancing signal processing capability
in electronic warfare, cyber and information security and conducting test, evaluation, certification
and systems assurance. Australian research, development, test and evaluation spending is
expected to exceed US$1bn in 2019. We work closely with the Australian military providing test
and evaluation and we see opportunities to continue developing our offering and expertise.
Broader international markets
Supported by our strategy, our aim is to grow international revenue to 50% of Group revenue.
To achieve this we will need to grow revenue not just in our home countries, but also in broader
international markets. We aim to leverage the skills and expertise developed in our home
countries to support allies in high growth markets in developing their own indigenous capability.
In the Middle East, widespread unrest, including conflicts in Iraq, Syria and Yemen, as well as
growing concern over a resurgent Iran, has driven defence spending higher. The nations driving
this spending have predominantly focused procurement on new equipment and, as their
sophistication grows, are more aware of the benefits of integrating and assuring this equipment
to create military capabilities. Being independent from the supply chain, and leveraging our
experience in the UK, we are well placed to help these countries assure their defence capabilities.
We continue to see good opportunities in Canada to support the modernisation of their domestic
capability. Canadian defence spending is expected to be US$16.4bn in 2019, with the drive to
modernise their capability likely to result in continued growth in expenditure over the medium term.
Europe accounts for roughly 20% of global defence spending with many European forces
currently in the process of renewing their ageing capability. The work we have done in the
UK through the modernisation of the LTPA is an example of the value we can create for other
countries in how to update their own test and evaluation capabilities. Germany is an attractive
market for QinetiQ with defence spending expected to increase by 10% in 2019 and further
increases expected in 2020 and 2021. Our acquisition of E.I.S. Aircraft Operations, now known
as QinetiQ Germany, supports our future growth in training in Germany and other attractive
international markets.
Strategic report | Trading environment
23
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Strategic progress
The three pillars of our strategy are interlinked
and mutually reinforcing
Vision
The chosen partner around the world for mission-critical solutions, innovating for our customers’ advantage.
Strategy
UK
International
Innovation
Lead and modernise the UK Defence
Test & Evaluation enterprise, by working
in partnership with Government and
prime contractors.
Build an international company that delivers
additional value to our customers by
developing our home countries (UK, US
and Australia), creating new home countries
(i.e. where we have our own indigenous
industrial capabilities) and exporting.
Invest in and apply our inherent
strengths for customer advantage
in defence, security and critical
infrastructure markets.
Highlights in FY19
Modernising UK MOD capabilities
to meet future needs
– LTPA negotiations concluded in
April 2019, securing revenue and
investment until 2028
Highlights in FY19
Successfully accelerating
international growth
– Grown international revenue from
27% to 30% over last year
– Good progress in US, Australia,
– Delivered new aircraft and syllabus
and Middle East
for test aircrew training
– Exploiting synergies with strategic
bolt-on acquisitions, such as E.I.S.
Aircraft Operations (now QinetiQ
Germany) to expand our international
training offer
Highlights in FY19
Major competitive campaign wins
– Won two robotics “programs
of record” in the US
– Won Engineering Delivery Partner
for UK Defence Equipment & Support
– Won Battlefield & Tactical
Communication Information
Systems (BATCIS)
Transformation programme
To put in place the key changes we needed to deliver growth.
24
QinetiQ Group plc Annual Report and Accounts 2019
Strategy
Our strategy was developed in anticipation of the market conditions we see today and launched three years ago to deliver our vision
of becoming the chosen partner around the world for mission-critical solutions, innovating for our customers’ advantage.
We have been consistent in the application of our strategy over the past three years, and the improvements we are delivering in our financial
performance, our ability to win new business and our increasing international footprint are the direct result of its implementation.
In 2016 we also launched a transformation programme to put in place the key changes that we needed to deliver growth. The programme has
improved our customer focus and competitiveness by delivering key changes in leadership and organisation, operational excellence, and business
winning, and ensuring a disciplined approach to investment in our future. To enable our ambition of generating 50% of revenue from outside the
UK, the focus of the programme is now on the transformational change that is required for QinetiQ to become a high-performing, global, and
digitally-enabled company.
UK Defence Test & Evaluation
QinetiQ has a unique role in UK defence. Defining and supporting this set
of capabilities is the Long Term Partnering Agreement (LTPA), our largest
contract, underpinning UK defence test and evaluation (T&E) capability.
Our strategy is to invest in and modernise this unique capability,
enabling us to meet our customers’ growing demand for more
complex and integrated testing and training. This approach provides
us with a strong foundation, securing UK customers and growing
international users. Being a leader in UK T&E is also critical to
supporting our international ambitions. Our ability to win work
internationally is in part built upon our credibility within the UK.
Our work within UK T&E enables us to grow into near adjacent
markets such as cost-effective training.
In April 2019, we hosted a seminar explaining more about this
element of our strategy.
www.QinetQ.com/investors/investor-seminars
Highlights included:
– Agreeing, shortly after year end, a second amendment to the
LTPA which secures £1.3bn of revenue until 2028 and allows us
to invest £190m in modernising its capabilities. This transforms
QinetiQ’s ability to enable the delivery of the MOD’s future
programmes, such as the Queen Elizabeth Class aircraft carrier,
Dreadnought submarine and future combat aircraft. Securing
this amendment delivers significant benefits:
– For our customers, it future-proofs our ability to help create
and assure the next generation of defence capabilities, more
efficiently and cost effectively;
– For our people, it provides exciting career opportunities by
introducing new ways of working and ensuring we continue
to work on some of the most challenging issues our
customers face; and
– For our shareholders, it secures nine years of revenue and
delivers appropriate returns which we can enhance further
by delivering efficiencies, growing our UK market share,
increasing the work we do with large defence prime
contractors and attracting more international customers.
– Successfully delivering our new fleet of aircraft and syllabus for
test aircrew training. The enhanced facilities, which were part of
our investment under the December 2016 LTPA amendment, are
attracting international customers from Australia, the Netherlands,
Switzerland and Singapore as well as the first students for
the civil course.
– The modern fleet of aircraft is significantly more cost effective to
run and is civil-, rather than military-certified, broadening their
customer scope. With their modern “glass cockpits” that are
representative of aircraft in customers’ fleets, they provide highly
relevant training to students.
– Investment in our air ranges is driving growth by supporting
more complex and realistic exercises with increasing levels of
threats. The US Navy has committed to running its large NATO
ballistic missile training exercise, known as Formidable Shield, on
a bi-annual basis at the Hebrides range we operate for the MOD.
These exercises also demonstrate QinetiQ’s expertise to the
other nations participating, and have led to subsequent work
with the Canadian and Polish navies.
Focus for FY20
Our primary focus will be to implement the first year of amended
LTPA contract. This includes embedding new ways of working,
investing in facilities and securing new opportunities for growth.
Rattler, our new supersonic target ready for launch during live trials.
Strategic report | Strategic progress
25
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Strategic progress continued
International
We have made significant progress to becoming a truly international
company, increasing our international share of revenue from 21% to
30% over the last three years.
Our home countries are the UK, US and Australia and are defined
by our significant in-country presence. We complement these home
markets with export sales into selective international markets.
Innovation
We are a company which is founded on innovation. Our people, using
their extensive technical and scientific expertise, innovate to overcome
some of the most challenging problems our customers face. A core
part of our strategy to grow QinetiQ is to build on this technical
expertise with commercial innovation, and to apply this approach
across all our activities and geographies, as a major source of
competitive advantage.
In September 2018, we hosted a seminar explaining more about
this element of our strategy.
Highlights during the year included:
– We were appointed with our partners Atkins and BMT, to become
www.QinetQ.com/investors/investor-seminars
Highlights during the year included:
– We won our largest ever export sales order, a C$51m (c.£30m)
contract to deliver unmanned aircraft systems (UAS) that will
drive better situational awareness for the Canadian Armed Forces.
This contract is an example of how QinetiQ can utilise its UK
capabilities and acquisitions to grow internationally. The vertical
take-off and landing unmanned air systems that we will provide
under this contract will deliver enhanced Intelligence, Surveillance,
Target Acquisition and Reconnaissance (ISTAR) services to
Canadian military units at sea and on land, for both domestic
and international operations.
– QinetiQ Target Systems continues to perform well. During the
year we received our first order for Rattler, a supersonic target
developed with investment and technical support from across
the QinetiQ Group.
– We completed the acquisition of E.I.S. Aircraft Operations, now
known as QinetiQ Germany, a business specialising in aerial training
services. The acquisition delivers a number of strategic benefits to
QinetiQ, providing us with a permanent presence in Germany and
strengthening our capability integration, threat representation and
operational readiness offering to our German customer.
– QinetiQ North America delivered a strong performance in FY19 and
won two programs of record with the US Department of Defense:
– We were awarded a $12m order as part of the Route Clearance
and Interrogation Systems (RCIS) Type 1 robotics program
worth up to $44m
– We were also successful in the competition for the US Army’s
Common Robotic System-Individual (CRS(I)) program. This
seven-year Indefinite Delivery Indefinite Quantity (IDIQ)
contract, worth up to $164m, includes a Low Rate Initial
Production phase worth approximately $20m over the next
one-to-two years
– Our Australian business delivered record breaking orders of over
A$100m during FY19, further expanding its consulting and
customer advice side business.
– We have established three joint ventures in countries in the Middle
East, partnering with government and commercial companies, to
accelerate the delivery of our products and services in the region,
and opened an office in Kuala Lumpur, Malaysia.
Focus for FY20:
– Further expand our presence in the Canadian market, building on
the work that we are delivering to our customers in Ottawa and
the unmanned aircraft services that we are delivering from
Medicine Hat, Alberta.
– Grow our recently acquired business in Germany by expanding our
current aerial training and aircraft modification services.
– Mature our sales pipeline in the Middle East and Asia.
26
the Engineering Delivery Partner (EDP) for the UK MOD’s
procurement agency Defence Equipment & Support (DE&S). EDP
will help the MOD to reduce the cost of engineering services, while
ensuring the UK’s Armed Forces receive the best equipment and
support, using an innovative delivery model that QinetiQ first
pioneered through the Strategic Enterprise contract for air
engineering services. During the second half of FY19, we secured
£69m of orders through EDP, the total programme value of which
could be more than £1bn over the next ten years.
– We were awarded a three-year contract with options to extend
for a further two years to support the MOD in delivering next
generation Battlefield Tactical Communication and Information
Systems (BATCIS). The initial order was £41m under a programme
worth up to £95 million with an initial term of three years and
options to extend by a further two years. To win the award, we
combined our extensive technical capabilities with an innovative
approach to satisfying customer requirements demonstrating
our increasing customer focus and more strategic approach to
business winning.
– Our ground-breaking Solar Electric Propulsion System, developed
following significant investment and manufactured by an industrial
consortium led by QinetiQ, provided the engine power behind the
BepiColombo mission to Mercury which successfully launched
in October 2018.
Focus for FY20:
– Learning from the successes and losses in FY19, we are maturing
our approach to delivering commercial innovation through our
business winning activities in three areas:
– Foundation sales, which are shorter-term opportunities
that are normally won and delivered in year
– Strategic captures, which are medium-term opportunities
that are specific and competitive in nature
– Global campaigns, where we are evolving our campaign-
based approach to create and pursue longer-term
opportunities globally
Ruth Vaughan, a QinetiQ Systems Engineer is debriefed by users on the
effectiveness of a drone during the Army Warfighting Experiment 2018.
QinetiQ Group plc Annual Report and Accounts 2019 Strategy in action
8
1
0
2
t
h
g
i
r
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p
o
C
n
w
o
r
C
Engineering Delivery Partner (EDP)
An example of our commercial innovation was the signing in early October of the Engineering Delivery Partner Agreement covering
the provision of all engineering services to DE&S, the UK MOD’s procurement and support agency.
Known as the ‘Aurora Engineering Partnership’, the team led by QinetiQ, with our partners Atkins and BMT, will lead the provision of engineering
services with the aim of providing improved performance at reduced costs for the customer. The experience gained in delivering Strategic
Enterprise for air engineering services in the air domain gives us a platform to build on to ensure the successful delivery of EDP, a service
potentially worth up to £1bn over its ten year life.
Page 36
Risk management in action
Strategic report | Strategic progress
27
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019
Key performance indicators
Non-financial KPIs
Customer satisfaction
(Net Promoter Score)
Health and safety
(LTI)
Apprentices
and graduates
Employee
engagement
Voluntary
employee turnover
50(FY18: 63)*
2019
2018
2017
4.4
(FY18: 4.0)
50
63
45
2019
2018
2017
4.4
4.0
5.7
Description
The Net Promoter Score is an internationally
recognised metric for customer satisfaction.
The NPS score is calculated by deducting the
percentage of customers who are detractors
from the percentage who are promoters, and
can therefore range from -100 to +100.
Rationale
Measuring customer satisfaction provides
us with insight into our customers’ views.
Complemented with qualitative surveys, this
provides us with actionable insights that
enable us to improve our customer experience.
Performance this year
*The introduction of a new market-leading
customer engagement programme during
FY19 resulted in a smaller sample size. While
the new approach has improved customer
insight, the smaller sample has marginally
impacted this year’s NPS. We expect the
sample size to increase during FY20. Our
NPS score is in the category of “excellent”
with customer feedback remaining
overwhelmingly positive.
Link to strategy
Achieving our ambition of becoming our
customers’ chosen partner requires a
relentless focus on meeting their needs
in both our home countries and overseas.
Customer satisfaction is a metric used
for the Bonus Banking Plan.
Description
The Lost Time Incident (LTI) rate is calculated
using the total number of accidents resulting
in at least one day taken off work, multiplied
by 1,000 divided by the average number of
employees in that year.
Rationale
As a company it is imperative we operate with
the highest level of safety. Not only is this the
right thing to do for our people, but for our
customers who entrust us with safety
critical work.
Performance this year
Safety is a top priority and a number of
initiatives were run in FY19 as part of the ‘Safe
For Life’ programme. We have seen a small
increase in the LTI rate compared with FY18.
Link to strategy
The safety, health and wellbeing of our people
are intrinsically linked to our strategic success.
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.
Employee engagement is a metric used for the Bonus Banking Plan.
(%)
4.0%
(FY18: 4.8%)
2019
2018
2017
(Score out of 10)
(%)
6.3(FY18: n/a)
4.0
4.8
4.9
2019
2018
2017
11.5%
(FY18: 10.0%)
6.3
n/a
n/a
2019
2018
2017
11.5
10.0
9.0
Description
Description
Description
The total number of early careers, graduates
In FY19 we implemented Peakon, an employee
This is a measure of the number of employees
and sponsored students as a percentage of
engagement measurement tool. This new tool
leaving the Company not at QinetiQ’s
our UK workforce.
provides greater insights into what our
instigation.
employees are feeling, enabling us to identify
issues and take steps to address them. This is
done through regular employee surveys,
conducted throughout the year.
Rationale
Rationale
Rationale
As a knowledge-based business it is critical to
Employee engagement is a key part of
Provides a measure of the Group’s ability to
our long-term viability that we develop the next
sustaining our strategy. Having an engaged
retain employees.
generation of employees. It is also a measure of
workforce delivers a number of benefits to us,
our commitment to The 5% Club, an industry-
such as increased productivity and higher
led initiative of which we are a founding
member, to provide opportunities for young
people through our early careers schemes.
staff retention. Improving employee
engagement is aligned with our focus on
creating a positive culture within QinetiQ.
Performance this year
Performance this year
Performance this year
There was an anticipated decrease in our
Our employee engagement score is not where
Overall employee turnover increased
overall early careers population in line with our
we would like it to be and we are working on
marginally during the year. This was largely
long-term skills requirement, however we
several initiatives aimed at improving our
driven by higher turnover in the US and
continue to focus on early careers as a key
employees’ experiences. It is a key focus of
Australia, where growth in defence spending
driver of our talent programme.
our Board and management team and forms
has resulted in tightening labour markets.
part of formal leadership objectives and
business reviews. A subsequent survey
conducted in April 2019 showed a small
improvement with a score of 6.5.
In the UK our employee turnover was broadly
in line with last year, and overall our turnover
is still below industry averages.
Key performance indicators (KPIs)
The objective of our strategy is to grow
QinetiQ, delivering a sustainable increase
in quality earnings to our shareholders.
Progress is measured through a range
of financial and non-financial key
performance indicators.
Building on our review of key performance
indicators during FY18, we introduced new,
more dynamic approaches to measuring
customer satisfaction and employee
engagement in FY19.
Measurements of customer satisfaction,
health and safety and employee
engagement underpin sustainability.
Measures such as orders, organic revenue
growth, profitability and cash flow track
financial performance.
Similar indicators are used to review
performance in each of the Group’s
businesses.
Page 38
Our people
Page 41
Corporate responsibility
28
QinetiQ Group plc Annual Report and Accounts 2019 Customer satisfaction
Health and safety
(Net Promoter Score)
(LTI)
50(FY18: 63)*
2019
2018
2017
4.4
(FY18: 4.0)
50
63
45
2019
2018
2017
4.4
4.0
5.7
Description
Description
The Net Promoter Score is an internationally
The Lost Time Incident (LTI) rate is calculated
recognised metric for customer satisfaction.
using the total number of accidents resulting
in at least one day taken off work, multiplied
The NPS score is calculated by deducting the
by 1,000 divided by the average number of
percentage of customers who are detractors
employees in that year.
from the percentage who are promoters, and
can therefore range from -100 to +100.
Rationale
Measuring customer satisfaction provides
us with insight into our customers’ views.
Rationale
As a company it is imperative we operate with
the highest level of safety. Not only is this the
right thing to do for our people, but for our
Complemented with qualitative surveys, this
customers who entrust us with safety
provides us with actionable insights that
critical work.
enable us to improve our customer experience.
Performance this year
Performance this year
*The introduction of a new market-leading
customer engagement programme during
Safety is a top priority and a number of
initiatives were run in FY19 as part of the ‘Safe
FY19 resulted in a smaller sample size. While
For Life’ programme. We have seen a small
increase in the LTI rate compared with FY18.
the new approach has improved customer
insight, the smaller sample has marginally
impacted this year’s NPS. We expect the
sample size to increase during FY20. Our
NPS score is in the category of “excellent”
with customer feedback remaining
overwhelmingly positive.
Link to strategy
Achieving our ambition of becoming our
customers’ chosen partner requires a
relentless focus on meeting their needs
in both our home countries and overseas.
Customer satisfaction is a metric used
for the Bonus Banking Plan.
Apprentices
and graduates
(%)
Employee
engagement
(Score out of 10)
Voluntary
employee turnover
(%)
4.0%
(FY18: 4.8%)
2019
2018
2017
6.3(FY18: n/a)
4.0
4.8
4.9
2019
2018
2017
11.5%
(FY18: 10.0%)
6.3
n/a
n/a
2019
2018
2017
11.5
10.0
9.0
Description
The total number of early careers, graduates
and sponsored students as a percentage of
our UK workforce.
Description
In FY19 we implemented Peakon, an employee
engagement measurement tool. This new tool
provides greater insights into what our
employees are feeling, enabling us to identify
issues and take steps to address them. This is
done through regular employee surveys,
conducted throughout the year.
Description
This is a measure of the number of employees
leaving the Company not at QinetiQ’s
instigation.
Rationale
As a knowledge-based business it is critical to
our long-term viability that we develop the next
generation of 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 provide opportunities for young
people through our early careers schemes.
Rationale
Employee engagement is a key part of
sustaining our strategy. Having an engaged
workforce delivers a number of benefits to us,
such as increased productivity and higher
staff retention. Improving employee
engagement is aligned with our focus on
creating a positive culture within QinetiQ.
Rationale
Provides a measure of the Group’s ability to
retain employees.
Performance this year
There was an anticipated decrease in our
overall early careers population in line with our
long-term skills requirement, however we
continue to focus on early careers as a key
driver of our talent programme.
Performance this year
Our employee engagement score is not where
we would like it to be and we are working on
several initiatives aimed at improving our
employees’ experiences. It is a key focus of
our Board and management team and forms
part of formal leadership objectives and
business reviews. A subsequent survey
conducted in April 2019 showed a small
improvement with a score of 6.5.
Performance this year
Overall employee turnover increased
marginally during the year. This was largely
driven by higher turnover in the US and
Australia, where growth in defence spending
has resulted in tightening labour markets.
In the UK our employee turnover was broadly
in line with last year, and overall our turnover
is still below industry averages.
Link to strategy
The safety, health and wellbeing of our people
are intrinsically linked to our strategic success.
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.
Employee engagement is a metric used for the Bonus Banking Plan.
Strategic report | Key performance indicators
29
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Key performance indicators
Financial KPIs
Orders
(£m)
International revenue
(£m)
Organic revenue
growth
(%)
£776.4m
(FY18: £587.2m)
£273.7m
(FY18: £226.0m)
8%
(FY18: 3%)
Underlying operating
Underlying earnings
Underlying net cash
per share (EPS)*
flow from operations*
profit*
(£m)
£123.9m
(FY18: £122.5m)
(p)
19.7p
(FY18: 19.3p)
(£m)
£126.3m
(FY18: £126.5m)
2019
2018
2017
776.4
587.2
675.3
2019
2018
2017
273.7
226.0
175.7
2019
2018
2017
8
3
1
2019
2018
2017
123.9
122.5
116.3
2019
2018
2017
19.7
19.3
18.1
2019
2018
2017
126.3
126.5
111.9
Description
The level of new orders (and amendments
to existing orders) booked in the year.
Although new multi-year contracts can
impact the reported orders number, the level
of orders booked in the year is one indicator
of future financial performance.
Rationale
This provides a measure of the Group’s ability
to sustain and grow QinetiQ.
Performance this year
Orders in the year excluding LTPA
amendments totalled £776.4m (2018:
£587.2m) and grew 28% in the year on an
organic basis. This increase was driven by
a strong performance in EMEA Services,
following some notable multi-year contract
wins and securing the EDP contract.
Description
This represents revenue derived from
non-UK customers, recognised in the period.
Rationale
International revenue demonstrates the
Group’s capability to win and deliver work
outside of its traditional UK customer base
and thus reduce its dependence upon wider
UK economic conditions and Government
spending patterns.
Performance this year
Non-UK revenue grew by 21% (£47.7m)
compared to the prior year. Excluding the
£9.8m contribution from the businesses
acquired during the year, and including a
£1.9m contribution from joint ventures, the
organic growth was £39.8m.
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. It 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
Revenue grew by 8% on an organic basis,
with a 4% increase in EMEA Services and a
22% increase in Global Products driven by
strong performance in QinetiQ North America
and QinetiQ Target Systems.
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, and is used for the Bonus Banking
Plan. For executive remuneration it is adjusted
to exclude businesses acquired in the year.
Link to strategy
International revenue is an important measure
of progress of the implementation of our
strategy, a key element of which is accessing
higher growth, international markets. It will be
used again as a performance measure for the
FY20 Deferred Share Plan.
Link to strategy
Organic revenue growth is an important
measure of progress of the implementation
of our strategy, the objective of which is
to deliver sustainable growth.
Page 48
Chief Financial Officer’s review
Description
Description
Description
The earnings before interest and tax,
excluding all specific adjusting items.
The underlying earnings, net of interest and
This represents net cash flow from operations
tax, expressed in pence per share.
before cash flows of specific adjusting items
and capital expenditure.
Rationale
Rationale
Rationale
Underlying operating profit is used by the
Underlying EPS provides a measure of the
This provides a measure of the Group’s
Group for performance analysis as a measure
earnings generated by the Group after
ability to generate cash from its operations
of operating profitability that is tracked over
deducting tax and interest. Specific adjusting
and gives an indication of its ability to make
time. Specific adjusting items are excluded
items are excluded because their size and
discretionary investments in facilities
because their size and nature mask the true
nature mask the true underlying performance
and capabilities and pay dividends to
underlying performance year-on-year.
year-on-year.
shareholders.
Performance this year
Performance this year
Performance this year
Underlying operating profit grew by £1.4m
Underlying earnings per share grew by 0.4p
Underlying net cash from operations reduced
(1%). The contribution from businesses
(2%). This included a 0.2p contribution from
marginally to £126.3m from £126.5m in the
acquired during the year was £1.3m and the
businesses acquired during the year.
prior year. The contribution from the businesses
acquired during the year was £2.3m.
impact of movements in exchange rates
was an adverse £1.5m.
Link to strategy
Link to strategy
Link to strategy
This measure is a reflection of the productivity
This is a measure of growth in quality
of the Group’s activities and is used for both
earnings for our shareholders. It was used
the Bonus Banking Plan and the Deferred
Share Plan. For Executive remuneration it
for the Performance Share Plan incentive
scheme, adjusted to exclude the impact
This is a measure of the cash-generative
characteristics of the Group and is used for
executive remuneration (adjusted to exclude
businesses acquired in the year).
is adjusted to exclude businesses acquired
of acquisitions.
in the year.
Page 48
Chief Financial Officer’s review
30
QinetiQ Group plc Annual Report and Accounts 2019
Orders
(£m)
International revenue
Organic revenue
(£m)
Underlying operating
profit*
(£m)
Underlying earnings
per share (EPS)*
(p)
Underlying net cash
flow from operations*
(£m)
£776.4m
(FY18: £587.2m)
£273.7m
(FY18: £226.0m)
£123.9m
(FY18: £122.5m)
19.7p
(FY18: 19.3p)
£126.3m
(FY18: £126.5m)
growth
(%)
8%
(FY18: 3%)
2019
2018
2017
776.4
587.2
675.3
2019
2018
2017
273.7
226.0
175.7
2019
2018
2017
8
3
1
2019
2018
2017
123.9
122.5
116.3
2019
2018
2017
19.7
19.3
18.1
2019
2018
2017
126.3
126.5
111.9
Description
Description
Description
The level of new orders (and amendments
This represents revenue derived from
The Group’s organic revenue growth is
non-UK customers, recognised in the period.
calculated by taking the increase in revenue
Description
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 represents net cash flow from operations
before cash flows of specific adjusting items
and capital expenditure.
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.
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 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 in facilities
and capabilities and pay dividends to
shareholders.
Performance this year
Underlying operating profit grew by £1.4m
(1%). The contribution from businesses
acquired during the year was £1.3m and the
impact of movements in exchange rates
was an adverse £1.5m.
Performance this year
Underlying earnings per share grew by 0.4p
(2%). This included a 0.2p contribution from
businesses acquired during the year.
Performance this year
Underlying net cash from operations reduced
marginally to £126.3m from £126.5m in the
prior year. The contribution from the businesses
acquired during the year was £2.3m.
Link to strategy
This measure is a reflection of the productivity
of the Group’s activities and is used for both
the Bonus Banking Plan and the Deferred
Share Plan. For Executive remuneration it
is adjusted to exclude businesses acquired
in the year.
Link to strategy
This is a measure of growth in quality
earnings for our shareholders. It was used
for the Performance Share Plan incentive
scheme, adjusted to exclude the impact
of acquisitions.
Link to strategy
This is a measure of the cash-generative
characteristics of the Group and is used for
executive remuneration (adjusted to exclude
businesses acquired in the year).
Page 48
Chief Financial Officer’s review
* Definitions of the Group’s alternative performance measures can be found in the glossary on page 159.
Strategic report | Key performance indicators
31
to existing orders) booked in the year.
Although new multi-year contracts can
impact the reported orders number, the level
of orders booked in the year is one indicator
of future financial performance.
over prior year pro-forma revenue, at constant
exchange rates. It excludes the impact of
acquisitions and disposals.
Rationale
Rationale
Rationale
This provides a measure of the Group’s ability
International revenue demonstrates the
Organic revenue growth demonstrates the
to sustain and grow QinetiQ.
Group’s capability to win and deliver work
Group’s capability to grow market share and
outside of its traditional UK customer base
sources of revenue within its chosen markets
and thus reduce its dependence upon wider
before the effect of acquisitions, disposals
UK economic conditions and Government
and currency translation.
spending patterns.
Performance this year
Orders in the year excluding LTPA
amendments totalled £776.4m (2018:
£587.2m) and grew 28% in the year on an
organic basis. This increase was driven by
a strong performance in EMEA Services,
Performance this year
Non-UK revenue grew by 21% (£47.7m)
compared to the prior year. Excluding the
£9.8m contribution from the businesses
acquired during the year, and including a
Performance this year
Revenue grew by 8% on an organic basis,
with a 4% increase in EMEA Services and a
22% increase in Global Products driven by
strong performance in QinetiQ North America
£1.9m contribution from joint ventures, the
and QinetiQ Target Systems.
following some notable multi-year contract
organic growth was £39.8m.
wins and securing the EDP contract.
Link to strategy
Link to strategy
Link to strategy
Order intake is an important measure of
progress of the implementation of our
International revenue is an important measure
Organic revenue growth is an important
of progress of the implementation of our
measure of progress of the implementation
strategy, the objective of which is to grow the
strategy, a key element of which is accessing
of our strategy, the objective of which is
Group, and is used for the Bonus Banking
higher growth, international markets. It will be
to deliver sustainable growth.
Plan. For executive remuneration it is adjusted
used again as a performance measure for the
to exclude businesses acquired in the year.
FY20 Deferred Share Plan.
Page 48
Chief Financial Officer’s review
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019
Principal risks
How we protect our business
Effective risk management plays an integral role in everything we do: ensuring we utilise the Group-wide risk management framework to inform our decision-making,
supporting the successful delivery of our objectives and increasing our operational efficiency. Our Group Head of Enterprise Risk Management is responsible for
designing and facilitating the risk management processes across the organisation, provides risk expertise and support to the businesses and reports risk information
across the Group including to the Executive Committee, Audit and Risk & CSR Committees and the Board.
Our focus on commercial innovation and changes in our customers’ approach to risk are business drivers shaping our application of risk management. We develop
innovative business models and are taking more outputs-based approaches to contracts; taking on more risk to pursue opportunities and deliver results, whilst
simultaneously innovating for our customers’ advantage.
Risk management and assurance activity
Three lines of defence model
Our risk management and assurance activity is formed of three lines of defence, each reporting to the Executive Committee, to the Board’s Audit Committee
in respect of financial risks, and the Board’s Risk & CSR Committee in respect of non-financial risks. The first line of defence is performed by the businesses,
through managing activities in accordance with established operating principles; the second line is performed by the oversight functions, including the enterprise
risk management and safety and governance teams; and the third line is performed by the internal audit team and external providers.
Board
Responsible for effective risk management across the
QinetiQ Group. Sets risk appetite and assesses principal risks
Audit Committee/Risk & CSR Committee
– Receive reports from the assurance functions
– Risk deep dives
– The Audit Committee focuses primarily on risks with financial impacts
– The Risk & CSR Committee focuses primarily on risks with non-financial impacts
Executive Committee
Identifies and monitors the principal risks, as well as the material risks (including operational) reported from the businesses and Group functions
Risk owners
– Managers identify and evaluate risks
– Design and operation of internal controls
to mitigate risks
– Application of delegated authorities,
policies, procedures and codes of practice
Enterprise risk management
– Risk Management and other oversight
functions with limited independence
– Design and facilitate the risk management
processes across the Group, provide risk
expertise and support to the businesses
and functions
– Report to the Board and the
Executive Committee
Independent risk assurance
– Internal Audit and independent
assurance providers
– Review and evaluate risk management
activity and provide assurance of the
effectiveness of the control
environment to manage risks
– Manage the external confidential
reporting process
– Report to the Board and the
Executive Committee
1st line of defence
2nd line of defence
3rd line of defence
Cautious
Balanced
Eager
QinetiQ risk appetite
The Board identifies and reviews its tolerance
of risk by establishing a clear risk appetite and
setting appropriate delegations of authority to
the executive and senior leaders. We focus on
those critical risk areas necessary to achieve
our strategic goals. Risk appetite is articulated
by defining three categories which balance
scrutiny and mitigation activity against
likely benefit:
Cautious
Avoidance of uncertainty – with negligible or
low residual risk. Applying innovation prudently
where the risks are fully understood.
Balanced
Preference for delivery options that have a low
or moderate degree of residual risk. Applying
innovation only where successful delivery is likely.
Eager
Willing to consider all delivery options despite
greater inherent risk and eager to be innovative.
Commercial
Opportunities relating to increased
market share where we have proven
delivery into existing markets
Opportunities that translate proven
delivery into new markets
Opportunities that translate new
capability or delivery into existing
customers
Opportunities that involve new
capability or delivery into new markets
Operational
Operational delivery
Compliance with
legal and regulatory requirements
32
QinetiQ Group plc Annual Report and Accounts 2019 We deploy appropriate
management to risks
and utilise lessons
learned processes
across the organisation
to continuously strive
for improvement.”
Key
Proximity
0-1 years
1-2 years
2+ years
Velocity
Low
Medium
High
The Group Risk Register consists of material risks relating to effective delivery of our strategy. The Board
and Executive Committee look to assess these principal risks from a number of different perspectives,
including both individually and collectively. The Board recognises that some risks may be affected by
factors outside the control of the Company and also recognises that however robust 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 and utilise lessons
learned processes across the organisation such that we continuously strive for improvement.
Strategic risks
UK defence test and
evaluation strategy
International strategy
Risk
UK Government budget constraints lead to reduced
spending in the core markets in which we operate.
This, and modernising ways of evaluating
capability, results in a risk that our approaches/
offerings may not remain relevant. EU exit causes
a loss of market confidence and reduction in
collaborative EU funding.
Risk
Plans to grow our international business may
be impacted by external influences outside of
our control, such as geo-political risks, or specific
risks arising from working in new markets and
globalised operations.
Impact
A reduction in revenue and associated profitability
from the Group’s government and defence contracts.
Impact
Unable to realise expected growth in the planned
timeframes.
Mitigation
Our strategy is focused on leading and modernising
UK test and evaluation in support of our customers’
objectives.
Mitigation
Our international strategy is focused on the
markets we feel we have the best routes to access
with the most appropriate products or services.
Proactive engagement with our major customers
enables us to support their objectives.
Our investments into contracts enhance our
offerings that support our customers with their
efficiency challenges as well as ensuring that we
provide the right services as the threat environment
continues to evolve. We are delivering new types of
evaluation and increasingly moving towards
modelling and synthetics.
We continue to grow our access to international
growth from test and evaluation and post Brexit will
maintain relationships with the UK Government to
support bilateral relationships within Europe.
Adopting a focused approach ensures we can
closely monitor our progress, adapting and
responding as necessary.
We undertake extensive due diligence, taking
the appropriate professional advice to ensure
structural, regulatory, legal and political risks are
understood and minimised.
We partner with or acquire, where appropriate,
quality local businesses to leverage their
infrastructure and de-risk local market access.
Page 24
Strategic progress – International strategy
Page 24
Strategic progress – UK T&E
Metrics
– Customer satisfaction
– All financial KPIs
Metrics
– All financial KPIs
– International revenue as % of total revenue
Responsibility
Group Director Business Development
Responsibility
Managing Director International
Risk appetite
Eager
Likelihood/Impact
Medium/ High
Risk appetite
Balanced to Eager
Likelihood/Impact
Medium/ High
Proximity/Velocity
Proximity/Velocity
Strategic report | Principal risks
33
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Principal risks continued
Strategic risks
Innovation strategy
Risk
Failure to create a culture of innovation or to invest
adequately in, or create value from, our innovation
investment. As well as the risks arising from the
introduction of disruptive technologies/alternative
business models.
Impact
Negative impact on the Group’s market position,
competitiveness, future growth and failure to
deliver a return on investment in our Internal
Research and Development (IRAD) fund.
Mitigation
Our overall strategy helps us to ensure that we
focus our innovation on areas with clear
commercial opportunities.
We have evolved our approach to investment to
place a greater focus on routes to market in order
to drive a profitable return. We have also further
evolved our partner eco-system to support indirect
routes to market.
Our operating model, based on matrix working,
helps to ensure that any internal barriers to
collaboration and knowledge sharing are removed.
Page 24
Strategic progress – Innovation
A material element of the
Group’s revenue is dependent
on a number of UK
Government contracts
Risk
A significant part of the Group’s revenue is derived
from UK Government contracts, the Long Term
Partnering Agreement (LTPA) being an example of
this. Government budget constraints could impact
our ability to grow.
Single source contract
regulations
Recruitment and retention
Significant breach of relevant
Security and IT systems
laws and regulations
Operational risks
Risk
Group performance is affected by application of
the regulations from the Single Source Regulations
Office (SSRO).
Impact
Contracts we have with the UK Government
contribute a material proportion of the Group’s
revenue and earnings.
Impact
The regulations could have an impact on the
Group’s financial performance.
Mitigation
Our aim is to provide our customer with the
capabilities they need to test and train against
current and future threats in a cost effective
manner, leading and modernising UK test
and evaluation.
Mitigation
Our strategy to lead and modernise UK test and
evaluation and invest in our core contracts allows us
to put a greater volume of our work onto longer-
term contracts, reducing the proportion of our
revenues exposed to changes in the SSRO rate.
As part of this strategy, we are putting more of
our work onto longer-term contracts. This provides
higher visibility for us. For example, the recent
amendments we have made to the LTPA secure
nine years of revenue, and significantly increase
Group revenue visibility.
Our investment into key contracts and innovative
delivery approaches continues to ensure we meet
the UK Government customer’s expectations and
remain cost effective and relevant in an evolving
threat environment.
Our growing international business provides the
opportunity for us to win competitive work which
helps mitigate SSRO margin pressure within the UK.
We continue to support a joint industry position
in refining the SSRO framework and its
practical application.
Metrics
– Customer satisfaction
– Employee engagement
Metrics
– All financial KPIs except orders
– Customer satisfaction
Metrics
– Customer satisfaction
– All financial KPIs
Responsibility
Group Director Business Development
Group Director Strategy & Planning
Responsibility
Group Director Business Development
Managing Director Maritime, Land & Weapons
Responsibility
Chief Financial Officer
Risk appetite
Balanced
Likelihood/Impact
Medium/ High
Proximity/Velocity
Risk appetite
Balanced
Likelihood/Impact
Medium/ Low
Proximity/Velocity
Risk appetite
Cautious
Likelihood/Impact
High/Medium
Proximity/Velocity
34
Risk
Risk
Risk
We operate in many specialised engineering,
technical and scientific domains where key
We operate in highly regulated environments and
non-compliance has the potential to compromise
A breach of physical or data security, cyber attacks
or IT systems’ failure could have an adverse impact
capabilities and competencies may be lost through
failure to recruit, develop and retain our employees.
our ability to conduct business in certain
jurisdictions, potentially having an impact on a
on our customers’ operations.
variety of stakeholders.
Impact
Delivery of business strategies, plans and projects
would be adversely impacted.
Impact
Failure to comply with particular regulations could
result in a combination of fines, penalties, civil or
criminal action, suspension or debarment from
government contracts, as well as reputational
damage to our brand.
Impact
Significant reputational damage, as well as the
possibility of exclusion from some types of
government contracts resulting in reduced orders,
revenue and profit.
Mitigation
Mitigation
We have created a five-year skills forecast and built
it into our overall strategic workforce plan.
Instilling the right behaviours and culture across
the Group is a key part in minimising the risks.
Attraction through diverse and inclusive campaigns
to ensure we meet the changing needs of the
business but reflect the talent pools we hire from.
In addition to our robust policy, procedures and
mandatory training, the QinetiQ Code of Conduct
defines clear expectations for the Group and its
employees.
Ensuring we have access to talent now and in the
future such as STEM outreach and Early Careers
development.
Supporting our people to recognise, develop and
fulfil their potential via the QinetiQ Talent approach,
career frameworks, Academy & Training.
Key areas of focus include the following:
Safety of product and services, health, safety &
environment, international trade controls and
bribery and ethics, where the company adopts a
zero tolerance approach to bribery and corruption.
Mitigation
Data security is assured through a multi-layered
approach that provides a hardened environment,
including robust physical security arrangements
and data resilience strategies.
Information systems are designed with
consideration to single points of failure and
comply with relevant accreditation standards.
Mandatory security awareness training for
all employees.
Continuously reviewing the threats and adapting
our security strategy and mitigations accordingly.
Page 38
Our people
requirements
Risk appetite
Balanced
Likelihood/Impact
Low/Medium
Proximity/Velocity
Metrics
– Strategic workforce planning
Metrics
– Health & safety
– Apprentices, graduates and sponsored students
– Voluntary employee turnover against planned
– Mandatory training compliance
– Commercial intermediary monitoring
Metrics
– Cyber dashboard
– Security dashboard
Responsibility
Group Director Human Resources
Responsibility
Company Secretary/Group General Counsel
Responsibility
Chief Financial Officer
Risk appetite
Cautious
Likelihood/Impact
Medium/High
Proximity/Velocity
Risk appetite
Cautious
Likelihood/Impact
Medium/ High
Proximity/Velocity
QinetiQ Group plc Annual Report and Accounts 2019 Strategic risks
Innovation strategy
A material element of the
Single source contract
Group’s revenue is dependent
regulations
on a number of UK
Government contracts
Operational risks
Recruitment and retention
Significant breach of relevant
laws and regulations
Security and IT systems
Risk
Risk
Failure to create a culture of innovation or to invest
adequately in, or create value from, our innovation
investment. As well as the risks arising from the
introduction of disruptive technologies/alternative
A significant part of the Group’s revenue is derived
from UK Government contracts, the Long Term
Partnering Agreement (LTPA) being an example of
this. Government budget constraints could impact
Risk
Group performance is affected by application of
the regulations from the Single Source Regulations
Office (SSRO).
Risk
We operate in many specialised engineering,
technical and scientific domains where key
capabilities and competencies may be lost through
failure to recruit, develop and retain our employees.
Risk
We operate in highly regulated environments and
non-compliance has the potential to compromise
our ability to conduct business in certain
jurisdictions, potentially having an impact on a
variety of stakeholders.
Risk
A breach of physical or data security, cyber attacks
or IT systems’ failure could have an adverse impact
on our customers’ operations.
Contracts we have with the UK Government
contribute a material proportion of the Group’s
The regulations could have an impact on the
Group’s financial performance.
Impact
Impact
Delivery of business strategies, plans and projects
would be adversely impacted.
Impact
Failure to comply with particular regulations could
result in a combination of fines, penalties, civil or
criminal action, suspension or debarment from
government contracts, as well as reputational
damage to our brand.
Impact
Significant reputational damage, as well as the
possibility of exclusion from some types of
government contracts resulting in reduced orders,
revenue and profit.
business models.
Impact
Negative impact on the Group’s market position,
competitiveness, future growth and failure to
deliver a return on investment in our Internal
Research and Development (IRAD) fund.
our ability to grow.
Impact
revenue and earnings.
evolved our partner eco-system to support indirect
our work onto longer-term contracts. This provides
Mitigation
Our overall strategy helps us to ensure that we
focus our innovation on areas with clear
commercial opportunities.
We have evolved our approach to investment to
place a greater focus on routes to market in order
to drive a profitable return. We have also further
routes to market.
Our operating model, based on matrix working,
helps to ensure that any internal barriers to
collaboration and knowledge sharing are removed.
Page 24
Strategic progress – Innovation
Mitigation
Our aim is to provide our customer with the
capabilities they need to test and train against
current and future threats in a cost effective
manner, leading and modernising UK test
and evaluation.
Mitigation
Our strategy to lead and modernise UK test and
evaluation and invest in our core contracts allows us
to put a greater volume of our work onto longer-
term contracts, reducing the proportion of our
revenues exposed to changes in the SSRO rate.
As part of this strategy, we are putting more of
higher visibility for us. For example, the recent
amendments we have made to the LTPA secure
nine years of revenue, and significantly increase
Group revenue visibility.
Our investment into key contracts and innovative
delivery approaches continues to ensure we meet
the UK Government customer’s expectations and
remain cost effective and relevant in an evolving
threat environment.
Our growing international business provides the
opportunity for us to win competitive work which
helps mitigate SSRO margin pressure within the UK.
We continue to support a joint industry position
in refining the SSRO framework and its
practical application.
Metrics
– Customer satisfaction
– Employee engagement
Metrics
– All financial KPIs except orders
– Customer satisfaction
Metrics
– Customer satisfaction
– All financial KPIs
Responsibility
Group Director Business Development
Group Director Strategy & Planning
Responsibility
Group Director Business Development
Managing Director Maritime, Land & Weapons
Responsibility
Chief Financial Officer
Risk appetite
Balanced
Likelihood/Impact
Medium/ High
Proximity/Velocity
Risk appetite
Balanced
Likelihood/Impact
Medium/ Low
Proximity/Velocity
Risk appetite
Cautious
Likelihood/Impact
High/Medium
Proximity/Velocity
Mitigation
We have created a five-year skills forecast and built
it into our overall strategic workforce plan.
Mitigation
Instilling the right behaviours and culture across
the Group is a key part in minimising the risks.
Attraction through diverse and inclusive campaigns
to ensure we meet the changing needs of the
business but reflect the talent pools we hire from.
Ensuring we have access to talent now and in the
future such as STEM outreach and Early Careers
development.
Supporting our people to recognise, develop and
fulfil their potential via the QinetiQ Talent approach,
career frameworks, Academy & Training.
In addition to our robust policy, procedures and
mandatory training, the QinetiQ Code of Conduct
defines clear expectations for the Group and its
employees.
Key areas of focus include the following:
Safety of product and services, health, safety &
environment, international trade controls and
bribery and ethics, where the company adopts a
zero tolerance approach to bribery and corruption.
Mitigation
Data security is assured through a multi-layered
approach that provides a hardened environment,
including robust physical security arrangements
and data resilience strategies.
Information systems are designed with
consideration to single points of failure and
comply with relevant accreditation standards.
Mandatory security awareness training for
all employees.
Continuously reviewing the threats and adapting
our security strategy and mitigations accordingly.
Page 38
Our people
Metrics
– Strategic workforce planning
– Apprentices, graduates and sponsored students
– Voluntary employee turnover against planned
Metrics
– Health & safety
– Mandatory training compliance
– Commercial intermediary monitoring
Metrics
– Cyber dashboard
– Security dashboard
requirements
Responsibility
Group Director Human Resources
Responsibility
Company Secretary/Group General Counsel
Responsibility
Chief Financial Officer
Risk appetite
Balanced
Likelihood/Impact
Low/Medium
Proximity/Velocity
Risk appetite
Cautious
Likelihood/Impact
Medium/High
Proximity/Velocity
Risk appetite
Cautious
Likelihood/Impact
Medium/ High
Proximity/Velocity
Strategic report | Principal risks
35
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Principal risks continued
Risk management in action
8
1
0
2
t
h
g
i
r
y
p
o
C
n
w
o
r
C
A balanced risk approach to implementing output-based,
multi-year engineering services
Engineering services were historically procured by MOD Defence
Equipment & Support (DE&S) through a variety of contractual
approaches delivered by over 150 providers. This was inefficient for
the MOD, had the potential to delay programmes and created
considerable risk to managing within budget.
We have an eager commercial risk appetite for opportunities relating to
increased market share where we have proven delivery, therefore will
consider all delivery options, and are eager to be innovative despite
greater inherent risk. With this in mind, through our Strategic Enterprise
contract (SE) with DE&S in the air environment, we developed and
successfully implemented a balanced risk method for packaging
engineering outputs into multi-year programmes of work.
Focusing heavily on robust but proportionate project and programme
risk management, our approach ensures right first time requirements,
lean delivery using standardised outputs and a proprietary output
acceptance, performance and contract system. Building on this
success, this approach is now being implemented on the Engineering
Delivery Partner (EDP) programme to bring together previously
disparate tasks into a manageable delivery service. Our
implementation plan is building an effective partnership supported by
our joint risk management approach with the MOD, our top-tier
partners, Atkins and BMT, and our provider network of 122 engineering
specialist companies. This ensures the full breadth of capability and
capacity to deliver is available to MOD, minimising the supply chain risk
exposure, increasing delivery standards and achieving cost efficiencies.
Page 27
Engineering Delivery Partner case study
36
QinetiQ Group plc Annual Report and Accounts 2019
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 Integrated Strategic Business Plan (ISBP) process
that looks at the financial outlook for the following five years.
This process commences with an assessment of the orders
pipeline producing an order intake scenario. A review of the phased
delivery profile and the cost base required to support this enables
generation of base-case, high-case and low-case profit forecasts.
Capex and working capital requirements are also collected,
reviewed, approved and a cash flow produced for the plan period;
2. An annual budget process that covers the first year of the five-year
planning horizon in detail;
3. A bi-annual forecast process to update the view of the first
budget year (the year which would be 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 33 to 35, 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 64
to 65, 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
Executive 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.
The period over which we confirm longer-term viability
The period over which the Directors consider it possible to form a
reasonable expectation as to the Group’s longer-term viability is the
five-year period to 31 March 2024. This is the period covered by our
strategic planning process and is subject to stress-testing and
scenario planning around potential risks. It 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 page 95, 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 2024.
Going concern statement
The Group’s activities, combined with the factors that are likely to
affect its future development and performance, are set out on pages
28 to 37. The CFO’s review on pages 48 to 51 set out details of the
financial position of the Group, the cash flows, committed borrowing
facilities, liquidity, and the Group’s policies and processes for managing
its capital and financial risks. Note 25 on page 134 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 market in the UK 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’ section on pages 32 to
36. 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 to sufficiently material to prevent the Group from continuing
as a going concern for the next 12 months.
Strategic report | Longer-term viability assessment
37
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Our people
Engaged in high-performing teams
We are committed to a safe, inclusive, secure and ethical
working environment where all our people have the
opportunity to contribute to our success. Our approach,
focusing on development and behaviours, is enabling
talented teams to feel engaged and recognised in delivering
our mission across the world, for all of our customers.
Focused on safety, health and wellbeing for our people
Our safety focus this year has been our ‘Safe for Life’ programme.
We have undertaken safety culture surveys across our sites to listen
to how our people feel about and perceive safety. This feedback is
driving local plans, identifying a range of commitments to improve
safety and health. Leadership is integral to strengthening our safety
culture and one-day ‘Leaders Talk Safety’ events were held to support
our leaders to think about how they contribute towards our safety
culture (our leaders also have a collective safety objective each year).
We have created a ‘Learning Together’ framework for managers to use
with their teams to support employee engagement and safety
performance. The Company was served with an Improvement Notice
by the Health and Safety Executive during FY19 regarding risk
assessment deficiencies. Remedial action has been implemented
accordingly. The FY19 Lost Time Incident (LTI) rate for QinetiQ Group
was 4.4 compared with 4.0 in FY18.
Safety metrics
Lost time incident (LTI) rate1
FY19
4.4
FY18
4.0
FY17
5.7
1 LTI rate is 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.
We have introduced a new wellbeing framework as part of Safe for
Life, and our goal is to help all of our people reach their potential by
enabling them to have a healthy physical and mental balance at work.
Whilst we provide access to services, information and training, we
also ran campaigns on mental health and ‘wellbeing breakfasts’, to
signpost the importance of good mental and physical health and the
support available. We recently appointed 65 mental health first aiders
with the support of an expert provider and will be training our first
cohort in early FY20.
Creating our high performance culture
We are committed to developing the right environment where all our
people can perform at their best and feel motivated, recognised and
proud of what they do. Our performance culture enables all of our
people to do the right thing, deliver on commitments and be inspired
to deliver innovative solutions, contributing to overall Company
performance, with personal accountability. In FY19, using feedback
from our people and building on our values of integrity, collaboration
and performance, we developed new cultural behaviours: listen,
focus and keep my promises, to support customer focus and high
performing teams. The behaviours have been embedded via culture
workshops, in our leadership and management development
programmes, corporate on-boarding and in all communications activity.
Our values and cultural behaviours underpin who we are and how we
do things in QinetiQ.
Employee engagement: listening to our people
We regularly communicate with our people, through townhalls, our
intranet campaigns and bi-annual Employee Roadshows (delivered by
our Executive Committee), so we can ensure that our people across
the Group understand our strategic priorities, know how they can
contribute and are supported to deliver our goals. Feedback from the
Roadshows has shown that employees are significantly more positive
about the future and understand how they can personally contribute.
Feedback from Employee Roadshows
%
80
70
60
50
40
30
20
10
0
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-19
Key
I enjoyed the roadshow presentation
As a result of the roadshow I understand our future direction
I am confident about the future
I understand how I can contribute to our success
Employee engagement forms an integral part of our strategy and is
a key non-financial KPI. In FY19 we invested in Peakon, an innovative
new employee engagement platform, to enable us to build high
performance and a better understanding of how to ensure that QinetiQ
is a great place to work. The tool is designed to capture feedback
throughout the year, providing information directly to a dashboard for
each manager, so that they know what is working well and what can
be improved. All employees (excluding QinetiQ North America, who
use an alternative survey) have had the opportunity to provide
feedback and we have an organisation level ‘Engagement in Action’
plan to address Company-wide themes, with action also being taken
at a local level. We plan to roll out Peakon to QNA in FY20. It is early
days, but employees have already participated in two surveys,
resulting in scores of 6.3 and then 6.5 (out of 10) with a participation
rate in the second survey of 81%. There is more work to be done to
Wellbeing breakfasts
Between January and March 2019, wellbeing
breakfasts were held across the Company to
encourage our people to take an hour or two out
of their busy day to think about how to make
positive lifestyle choices for both physical and
mental wellbeing. There was an opportunity to
talk, build friendships and support networks,
and to find out about the support and tools
available through QinetiQ as well as local
services. 18 sites participated with 1,192
attendees and we had really positive feedback.
Where to find more information
Page 28
Non-financial KPIs
Page 35
Principal risks and uncertainties:
recruitment and retention
www.QinetiQ.com/about-us/corporate-
responsibility
38
QinetiQ Group plc Annual Report and Accounts 2019
Our unique learning environment – inspiring innovation and wellbeing
Our exciting learning environment, opened in FY19, creates new ways of collaborating, testing
preconceived perceptions. It showcases what different ‘spaces’ can provide to stimulate enhanced
learning, performance, innovation and wellbeing. We are working with areas of the business such as
test aircrew training, to connect resources and provide a place for fresh thinking to drive innovation,
deliver exceptional results for our customers and grow our business. Creative environments can also
inspire people to collaborate; traditional resources such as blackboards are blended with more creative
tools such as craft areas and puzzles, to support challenge based thinking. The facility also has areas
for quiet reflection, recognising different learning styles and supporting our drive for greater inclusion
and wellbeing. The facility uses virtual reality to provide enhanced learning experiences and enabling
collaboration internationally.
increase engagement and Peakon will give us feedback in real time to
target areas to improve. We also monitor voluntary employee turnover
and, in the 12 months to March 2019, this figure stood at 11.5 %
(compared with 10.0% in FY18).
The table below shows the gender split for different level of seniority
in our business. We have participated in the annual Hampton-Alexander
programme, and have published our second gender pay gap report
(which can be found on our website).
Gender diversity
Board Directors1
Senior managers2
All employees4
Female
2 (20%)
52 (17%3)
1,207 (21%)
Male
8 (80%)
248 (83%)
4,552 (79%)
1 For more information on Board diversity see page 73.
2 Excluding senior managers who are also Board Directors (CEO and CFO).
3 Up from 15% in FY18.
4 Excluding senior managers.
Developing our people: learning and talent management
We invest in our people, from our early careers programme to senior
managers looking to develop their skills and further their careers, and
we continue to focus on our performance management approach.
In FY19 we developed new overarching career frameworks which
comprise three elements: a competency framework, a career
framework and career pathways. A dedicated Talent team was formed
at the end of FY19 to increase our focus. We also collaborate with the
UK Defence Growth Partnership (DGP) and Defence Suppliers Forum,
developing apprenticeships and addressing attraction.
Our talent approach reviews and identifies talent across the company
and our Academy provides technical, business and leadership
development to ensure our people are able to develop throughout their
career. More generally all of our employees receive training on safety,
security, ethics, D&I and environment, including newly created digital
content. During FY19 we focused on succession planning for senior
leadership to ensure a robust internal talent pipeline.
A Head of Employee Relations has been appointed, who is working
in partnership with the Chair of the UK Employee Engagement Group
(EEG) to ensure that the voice of our people is heard and they are
involved in decisions that affect them. The EEG meets regularly with
the Board, CEO and members of the Executive Committee and EEG
representatives have been actively involved in our continuous
improvement projects. The EEG Chair and Deputy Chair have been
made members of our Leadership Community, ensuring they are
engaged in the key strategic aspects of QinetiQ.
Creating a diverse and inclusive environment for innovation
A diverse and inclusive culture supports our people to be their best
and is key enabler for innovation, core to our business strategy. In
FY19 we have made progress with our diversity and inclusion (D&I)
programme, and have now developed our “Inclusion 2025” strategy,
which will support and drive sustainable change. Highlights during
the year include:
– In Australia we were granted the Employer of Choice for Gender
Equality citation by the Workplace Gender Equality Agency.
– Launch of mandatory training for all our people, targeted training
for key roles (for example a D&I workshop for our marketing and
communications function) and a new library of resources on our
online learning zone.
– Company-wide awareness campaigns, e.g. mental health and
International Women in Engineering Day (INWED) and sponsorship
of the ‘Innovation’ category of the Women in Defence Awards. We
have also run awareness sessions for our Leadership teams, and
international ‘lunch and learn’ sessions.
– Launch of new networks for our people, including Neurodiversity
and a new LGBTQ+ (Lesbian, Gay, Bisexual, Trans and
Questioning) network launched during LGBT history month.
– Our first year participating in the Social Mobility Employer Index,
which has enabled us to understand where we could improve
inclusion from all social backgrounds.
– Developing a new ‘reverse mentoring’ programme which we plan
to launch in FY20.
Reviewing best practice, and our existing employee support networks
(e.g. the EEG), we have created ‘Ethics Champions’ (see page 41)
which include key aspects of the role of a ‘fair treatment advisor’,
which have a broader remit. We have benefitted from sharing best
practice via our global membership of The Employers Network for
Equality and Inclusion and engaging with like-minded businesses.
Strategic report | Our people
39
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Our people continued
Our new All Employee Incentive Scheme
rewards employee contribution and
enables everyone to share the benefit
of Company success”.
We continue to invest significantly in our leaders and managers,
through coaching and mentoring and development programmes.
In FY19 we also launched ‘Enabling Managers’, to provide 300 key
managers and leaders with the knowledge, tools, skills and confidence
to lead high performing teams through immersive, experiential and
virtual learning.
We also continue to develop our early careers pipeline. We are
a founding member of The 5% Club, and commit to publishing the
number of employees on apprenticeships, graduate programmes
and sponsored students (see table below and also page 29). As well
as providing apprenticeships for employees early in their career, we
are also actively supporting 23 colleagues at later stages of their
careers to undertake apprenticeships, including those on the new
(FY19) Defence Enterprise Export Programme, a Level 7 apprenticeship,
which was developed as part of the Defence Growth Partnership.
Apprentices1
Graduates
Sponsored students
% UK workforce
1 Early careers apprentices only.
FY19
101
90
8
4.0%
FY18
129
109
11
4.8%
FY17
146
106
10
4.9%
Rewarding and recognising our people
We hosted our second gala dinner to recognise and reward
outstanding performance in our business. This year’s 45 winners
showcased the breadth and depth of what we do across the whole
of the Company.
In FY19 we launched a new recognition platform ‘Thank Q’. Anyone
can nominate individuals or teams who make a difference, focusing
on those capabilities and behaviours that are vital to our future success.
Our new All Employee Incentive Scheme rewards employee
contribution and enables everyone to share the benefit of Company
success through a bonus based on Company performance and an
additional potential payment based on personal contribution. All
employees are eligible to receive a bonus of between £500 and £1,000
depending on Group operating profit for the year falling within a
pre-defined performance band. In the first year of operation, the
scheme will pay out £1,000 to every employee in QinetiQ. As part of
our employee engagement the Chair of the Remuneration Committee
met with the EEG to ensure that link with employees.
To meet UK legislation, companies with more than 250 UK employees
are required to publish their gender pay gap annually. In our second
report, published in FY19, our mean gender pay gap was 16.6% and
is due to the proportion of men who have senior roles. We recognise
it will take time to make change but we are committed to doing so.
In addition we now also report the CEO pay ratio (page 88).
I feel honoured to be part
of the Enabling Managers
programme, to hear the
key messages from the
CEO and all of us having
a clear plan on the way
forward, while being
supported along the way.”
40
QinetiQ Group plc Annual Report and Accounts 2019 Corporate responsibility
Trusted to deliver sustained success for all of our
stakeholders; our values are at the heart of how we deliver a
responsible and sustainable business. We know that we can
contribute to our future success and provide wider value to
society through focusing on the skills 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.
Strategy, materiality and governance
Our corporate responsibility and sustainability strategy reflects the
material issues for our business – defined by our overall business
strategy and taking into account stakeholder priorities and best practice.
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; for example, how the Sustainable Development Goals
can inform our priorities. The skills agenda, diversity reporting
requirements and emerging modern slavery legislation across the
world all need to be considered. Addressing them is integrated into our
programmes, ensuring our approach to responsible and sustainable
business does not stand still and fully supports the success of our
business. Key to our materiality assessment is understanding the
priorities of our stakeholders – primarily customers, investors and our
people. 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
38). We are actively engaged with industry and trade body working
groups on topics such as skills, environment and ethics.
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 (see page 74). Further Executive chaired committees
include the Business Ethics Committee and the Health, Safety and
Environment (HS&E) Committee. The Group’s policies and management
systems underpin our corporate responsibility programmes.
Business ethics – doing business the right way
Our Code of Conduct lays out our ethical standards, providing our
people with clear direction and guidance on how we do business
across the company. There are details on ethical decision-making
and also how to seek help. We review our Code of Conduct annually
to reflect the needs of our business, regulations and best practice.
managers on their role in creating an open and inclusive environment
where our people feel confident to raise concerns, and how to listen
to and support anyone who may come to them with an issue.
In FY19 we launched a new global network of Ethics Champions,
who are available for advice, provide guidance on our ethical decision-
making tools, and help escalate concerns as required. They
communicate about ethical issues, and provide feedback to
continuously improve our ethics programme.
Our ethics programme is overseen by our Business Ethics Committee,
chaired by our Chief Ethics Officer (the Company Secretary). We are
active participants in the ethics forum hosted by our trade association
ADS, where members can share best practice on ethics, human rights
and anti-bribery.
Anti-bribery and corruption
Bribery is a serious issue and we recognise its potential risk to our
business. We have a zero-tolerance approach to bribery and corruption,
with robust policy and procedures in place, overseen by our Chief
Ethics Officer. These are regularly reviewed against changing
regulations and industry guidance. These procedures are also
embedded into our international business risk management process
with specific focus on risks associated with partner relationships. This
includes commercial intermediaries, who are subject to comprehensive
risk-based due diligence, using both in-house expertise and recognised
specialist third party due diligence providers. Anti-bribery training
forms part of our mandatory business ethics training for all of our
people, and, additionally, we provide face-to-face training for our people
in roles with a higher potential exposure to bribery and corruption risks
with bi-annual refresher training.
Human rights
We seek to anticipate, prevent and mitigate potential negative human
rights impacts through our policy and processes, which underpin our
commitment to responsible business practices. For example, we
address salient human rights issues through our Code of Conduct,
trading policy, international business risk management process and
export controls process. We monitor the application of these policies
and procedures through our business assurance processes. We believe
that this integrated approach is effective in ensuring our business acts
responsibly and respects all human rights. As part of our ongoing
programme to address modern slavery, we continue to provide training
to our people, and to review our approach to risk in the supply chain.
Our Supplier Code of Conduct helps to ensure our suppliers have clarity
of their responsibilities on human rights. Our modern slavery and
human trafficking statement is published on our website.
Our annual business ethics training is mandatory and supports our
people in understanding and using the Code of Conduct. The training
is also undertaken by our Board and is available for our suppliers and
customers. We 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, harassment, conflict of interest and modern slavery.
Environmental stewardship and use of resources
As part of our HS&E Strategy, we are working to deliver for our
customers while protecting and sustaining our environment.
Underpinning our approach is our ISO 14001 certification in the UK.
Environmental issues are reviewed by the HS&E Committee and the
Risk & CSR Committee.
We strive to create an environment in which our people feel included
and confident to ‘speak up’ and so provide a number of routes for
them to seek help or raise concerns. They are encouraged to talk to a
manager, use our ethics email advice services and our independently
run, 24/7 confidential reporting line. 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 (page 71). We provide guidance for
As the costs of raw materials and waste disposal rise, adopting best
practice in waste management makes good business sense and
meets stakeholder expectations. A review of waste management
across QinetiQ Group was undertaken to inform a new environmental
corporate target which aligns with our strategy: to achieve a year
on year increase in the annual proportion (%) of waste re-used and
recycled from our underlying waste production from FY18-20. Due to
the variety of our operations, infrastructure, facilities and geographical
Strategic report | Corporate responsibility
41
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Corporate responsibility continued
locations, there is no single solution to meet this target. To address
this, we have implemented Waste Management Action Plans at our
significant waste producing sites which account for 95% of waste
produced. The new target was achieved with 81.6% of underlying
waste reused or recycled, a small increase (0.3%) compared to
the previous year.
During the year we have communicated regularly with our people on
environmental issues – promoting the work we do and encouraging
participation. A particular focus was World Environment Day, which
in 2019 had the theme of ‘Beating Plastic Pollution’. We have also
been piloting an approach to environmental volunteering which we
plan to launch in FY20.
The Task Force on Climate-related Financial Disclosures (TCFD) is a
global initiative which has created a framework for companies to
demonstrate climate change resilience to stakeholders. Unlike most
environmental reporting, TCFD isn’t about our impact on the
environment; it is about the environment’s impact on QinetiQ. Our
approach to all aspects of environment and risk are overseen by our
board (Risk & CSR Committee) and our HS&E Committee, with a high
level risk review undertaken quarterly as part of the enterprise risk
management process. Since 2011, we have undertaken climate
change risk assessments on priority sites which we manage on behalf
of the MOD, to understand what the key issues might be. In FY19 we
undertook a series of new assessments based on recent climate
projection data, working in partnership with the MOD. The key findings
of the assessments will ensure we understand any vulnerability to
climate change and can prioritise mitigations.
Sustainable solutions
Responsible and sustainable business practice is not just part of our
operations but embraces the full value chain. QinetiQ is the industry
chair of the MOD-industry sustainable procurement working group,
where members collaborate and share best practice on a range of
topics including risk, plastics and the Sustainable Development Goals.
Delivering products and services safely fundamentally underpins our
offering to customers. Using our knowledge of sustainability has enabled
us to increase our ability to support trials for our UK MOD customer. For
example, the RAF approached QinetiQ to conduct firing training at MOD
Aberporth, which until recently had been conducted in the Netherlands.
Bringing the training to the UK has significant cost and logistics benefits
for the customer. Environmental concerns relating to undertaking the
training were effectively managed by the QinetiQ team by undertaking a
sampling and monitoring programme of the marine environment.
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. We have a supplier code
of conduct and our on-boarding and vetting process ensures that
suppliers understand the issues which are important to us such as
safety, anti-bribery and modern slavery. In return, we are signatories to
the Prompt Payment Code, and report our payment details as required
by legislation. During FY19 we ran events with our suppliers where we
raised awareness of issues such as safety and modern slavery and
shared best practice.
Greenhouse gas emissions and energy management
There is clear scientific evidence linking rising greenhouse gas (GHG)
concentrations and climate change. We have developed a new Group
GHG (Scope 1 and Scope 2) reduction target of a 25% reduction on
our FY19 baseline emissions by the end of FY25. The new target
follows the retirement of the 2020 target to achieve 17% reduction
on a 2013 baseline, which was achieved earlier than expected. Our new
target aligns to a climate change trajectory of 1.5O C. In support of this
new target we have a new 2025 energy strategy that will support
sustainable business growth through responsible supply and use of
energy resources, while reducing our GHG emissions. The strategy
focuses on resource and cost efficiency, operational resilience and
positive environmental impact. Further details on our GHG reporting,
our new target and our energy strategy are on our website.
In FY19 we successfully achieved recertification of our Energy
Management System to ISO 50001 standard. The management
system includes a new tool (the Energy Management Action Plan)
to collect, track and quantify energy saving opportunities. We have
also developed new sustainable Property Standards to support the
sustainable development and maintenance of our estate. In FY19
we migrated to a new data assurance process for Scope 1 and 2
GHG emissions reporting. PricewaterhouseCooper LLP (PwC) carried
out a limited assurance engagement on selected GHG emissions data
for year ending 31 March 2019 in accordance with International
Standard on Assurance Engagements 3000 (revised) and 3410,
issued by the International Auditing and Assurance Standards Board.
A copy of PwC’s report and our methodology is on our website:
www.QinetiQ.com/about-us/corporate-responsibility
We report our Scope 1 and Scope 2 emissions on the basis of financial
control in line with the Companies Act 2006 (Strategic Report and
Directors’ Report) Regulations 2013. There are no material exclusions
from this data. The data has been prepared in accordance with the UK
Government’s Environmental Reporting Guidance (March 2019).
Beating Plastic Pollution
5 June is World Environment Day and activities were organised by
teams across our sites to support the theme of ‘beating plastic pollution’.
A number of beach cleans and litter picks were undertaken, with one team
filling a whole skip with the rubbish they collected.
We promoted the day using china cups, not take-away cups, and built a
‘coffee cup tower’ with (used) non-recyclable cups to illustrate and raise
awareness of the size of the issue. We also encouraged people to reduce
the use of disposable plastic cups at water fountains.
These activities all help raise awareness and support our waste target.
42
QinetiQ Group plc Annual Report and Accounts 2019 Greenhouse gas emissions
Total Scope 1 Emissions (tCO2e)
from fuel combustion and operation
of facilities
Total Scope 2 Emissions (tCO2e)
from purchased electricity
Total Scope 1 & 2 Emissions (tCO2e)
Intensity ratio (tCO2e per £m of
revenue)
FY191
FY18
(Restated)
FY18
(Previously
Reported)
20,096
19,776
24,651
20,977
41,073
22,666
42,441
25,678
50,329
45
51
60
1 FY19 data is subject to the new assurance process.
The continuous improvement in our Energy Management System,
combined with the increased scrutiny of the FY19 data as our new
baseline year for the 2025 Group target and the adoption of a new
and more robust assurance process, has identified some errors, with
historical over-reporting of our Scope 1 and 2 emissions. The original
FY18 data is presented alongside the restated data for FY18. The restated
FY18 figures have not been subject to external assurance but revisions
have been made to ensure consistency to the FY19 methodology.
Investing in our local communities
Our STEM (Science, Technology, Engineering and Maths) outreach
programme recognises the value of inspiring the next generation of
scientists and engineers and contributing to current and future skills
shortages in these disciplines. There is clear evidence that giving
young people the opportunity to engage with business has a positive
impact on their future employability. Our people use their professional
skills to make a positive difference, and our approach is to grow
sustainable long-term relationships with local schools and youth
groups such as cadets, near to our sites. In addition to STEM
volunteering, our non-technical people use their professional skills
to make a positive difference in our local communities.
2018 was the Year of Engineering, a Government-led national
campaign in the UK, and throughout the year we communicated
regularly both with our people and externally to raise the profile of the
wide variety of rewarding career pathways available in engineering.
While the Year of Engineering has come to a close, we will continue
to support our network of STEM Ambassadors to provide real-world
insights into engineering and inspire a diverse range of young people
to choose careers in STEM.
This year our STEM Ambassadors engaged with over 90 schools and
approximately 3,500 young people in the UK, through activities such
as inspirational projects with our STEM Ambassadors, visits to our
sites, mentoring, support with extra-curricular STEM and coding clubs,
and careers fairs. We have also engaged with approximately 18,000
young people at larger events such as the Royal International Air
Tattoo and Solent Festival of Engineering.
Outreach – Cadets
A visit to QinetiQ Haslar by a group of Sea Cadets from across the UK,
participating in an inaugural engineering summer camp at HMS Sultan,
Gosport, as part of the Year of Engineering. Our STEM outreach
activities include supporting youth groups such as cadets as well as
schools. Site visits and STEM outreach with cadets also form part of
our Armed Forces Covenant commitments.
We recognise that STEM subjects have traditionally been seen as
male dominated and so as part of our D&I strategy we continue
to focus on attracting girls into STEM careers. 30% of our STEM
Ambassador role models are female and we again supported
International Women in Engineering Day, engaging with 195 girls
from 20 different schools, and published blogs and videos featuring
our female engineers from across the world, telling their stories.
Across QinetiQ Group we have a number of charity partners chosen by
our people: Alzheimer’s Society and Alzheimer Scotland, British Heart
Foundation and Combat Stress in the UK, and a number of local charities
chosen at many of our UK sites, as well as other charity partners
internationally, such as Legacy in Australia. In addition to fundraising
for these chosen partner charities, there are clear links with and we
welcome their contributions to our wellbeing and D&I programmes.
Our commitment to the armed forces
As a signatory to the Armed Forces Covenant, we are proud of our
support to the armed forces. In FY19 our Group HR Director was
invited to speak at the AGM of SERFCA (South East Reserves Forces
and Cadets Association) and we are the first company working
with SERFCA to receive a Gold Award in the MOD Defence Employer
Recognition Scheme. We undertake a broad range of activities
including onward career support for the wounded injured sick
(WIS) service personnel at Tedworth House.
Strategic report | Corporate responsibility
43
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Operating review
EMEA Services
Orders excluding LTPA amendments1
Revenue
Underlying operating profit
Underlying operating margin
Book to bill ratio2
Funded order backlog
Total funded order backlog3
2019
£m
534.6
687.7
96.3
14.0%
1.2x
2018
£m
355.9
651.4
94.3
14.5%
0.8x
784.2
2,916.8
709.6
1,804.9
1 Includes share of orders from joint ventures.
2 B2B ratio is orders won divided by revenue recognised, excluding the LTPA.
contract and share of JV orders.
3 2019 includes LTPA amendment signed 5th April 2019.
Overview
EMEA (Europe, Middle East and Australasia) Services combines world-
leading expertise with unique facilities to provide integrated capability
generation and assurance. Our core value proposition is built upon our
expertise in capability integration, threat representation and
operational readiness underpinned by long-term contracts that
provide good visibility of revenues and cash flows. The division 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
Orders for the year were £534.6m (2018: £355.9m), including £23.3m
from the two companies acquired in the year, growing £157.1m (44%)
on an organic basis excluding acquisitions and foreign exchange.
The increase was driven by key orders won including £69m relating
to Engineering Delivery Partner (EDP) and £41m for Battlefield Tactical
Communications and Information Systems (BATCIS). Performance
was particularly strong on smaller value contracts which accounted
for £115m of the £157m growth.
Revenue increased by 6% to £687.7m (2018: £651.4m), including £15.1m
from acquisitions, and increased by 4% on an organic constant currency
basis, principally driven by our Cyber, Information & Training business.
At the beginning of the new financial year, 79% of EMEA Services’ FY20
revenue was under contract, compared with 75% at the beginning of the
prior year. The growth is a reflection of the increase in key multi-year
contracts and securing of the LTPA amendment in April 2019, which
is included in this figure.
50%
Increase in orders
4%
Organic revenue growth
Underlying operating profit was £96.3m (2018: £94.3m) assisted
by ~£9m (2018: ~£8m) non-recurring trading items. Excluding these
non-recurring trading items, the QinetiQ Germany acquisition and
strategic investment into Inzpire and the effect of foreign exchange,
underlying operating profit for EMEA Services increased by 2%.
This is despite an approximate £5-6m headwind during FY19 (~£10m
cumulatively over three years) due to the lower baseline profit rate for
single source contracts, which was in line with our expectations.
Including the LTPA, approximately 70% of EMEA Services revenue is
now derived from single source contracts (2018: approximately 75%),
reflecting a greater proportion of revenue derived from competitive
contracts. By investing in our core contracts and extending their
duration we have increased the proportion of revenue contracted on a
long-term basis, providing visibility and reducing our exposure to future
changes in the baseline profit rate set annually by the Single Source
Regulations Office.
Overall, we expect FY19 to have represented the peak in SSRO
headwind at ~£5-6m. Based on changes to the profit rate for
single source contracts and the actions we have taken, we expect
the headwind from the SSRO to abate in FY20 and beyond.
FY19 review
Air & Space (26% of EMEA Services revenue)
The Air & Space business de-risks complex aerospace
programmes by testing systems and equipment, evaluating
the risks and assuring safety.
– We continued to build on the investment made under the
December 2016 LTPA amendment to modernise our test
aircrew training, read more on page 25.
– BepiColombo, a joint mission between the European Space
Agency and Japanese Space Agency to explore Mercury, that
showcases QinetiQ’s significant investment in developing ion
engine technology, successfully launched in October 2018, read
more on page 26.
– Our ‘Aurora’ partnership was successful in being appointed
as the Engineering Delivery Partner for Defence Equipment &
Support (DE&S), read more on page 26.
– Whilst we were disappointed that the MOD has cancelled the
competitive process for ASDOT, we believe our synthetic and
live-virtual-constructive technologies are increasingly relevant
to the UK’s operational training needs.
79%
of FY20 revenue under contract
(FY18: 75%)
2%
Growth in underlying
operating profit
We expect the headwind from the SSRO
to abate in FY20 and beyond.”
David Smith, Chief Financial Officer
44
QinetiQ Group plc Annual Report and Accounts 2019 International (11% of EMEA Services revenue)
Our International business leverages our expertise and skills
developed in the UK, and applies them to opportunities in attractive
markets globally. Revenue derived from outside of the UK is reported
in many of our businesses, and are not exclusive to our
International business.
– We completed the acquisition of E.I.S. Aircraft Operations in
October 2018, read more on page 26.
– We expanded our consulting and customer advice side business
in Australia:
– A significant proportion of this work was awarded through
integrated work packages made possible by our new status as a
Major Support Provider, which was awarded to QinetiQ as part
of Team Nova at the end of FY18.
– As a result of these wins our Australian business achieved
record order intake, breaking through the A$100m mark for the
first time.
– Recognising opportunities in South East Asia, we opened an office
in Kuala Lumpur, Malaysia. We achieved two contract wins in the
region: one to provide maritime design and hydrodynamic modelling
services and the other to provide key engineering and test services
for an indigenous product development programme. We will look to
leverage our capabilities in Australia to support development in
South East Asia.
– In the Middle East we now operate three joint ventures, and are
seeing encouraging opportunities in the region. We anticipate that
in FY20 the investments in these joint ventures will start to deliver
increased contract wins, development of indigenous capability and
product sales, but recognise that geopolitical issues remain a risk.
Maritime, Land & Weapons (45% of EMEA Services revenue)
The Maritime, Land & Weapons business delivers operational
advantage to customers by providing independent research, test,
evaluation and training services.
– In April 2019 we signed an amendment to the LTPA securing
£1.3bn of revenue and saving taxpayers £85m, read more on
page 25.
– Several high value trials were delivered including ‘Information
Warrior’, a three-week exercise with the Royal Navy exploring
the adoption of emerging technologies to secure information
advantage at sea.
– We experienced strong demand from international customers.
For example, in Australia we deployed our autonomous systems
command, control and communication capabilities in support of
a significant military exercise.
– We continue to work closely with the Royal Navy to develop
their approach to Carrier Task Group operations. Supporting
the Royal Navy in developing this strategic capability should
deepen our relationship with a key customer and lead to further
potential opportunities.
Cyber, Information & Training (CIT) (18% of EMEA Services revenue)
The CIT business helps government and commercial customers
respond to fast-evolving threats based on its expertise in training,
secure communication networks and devices, intelligence gathering
and surveillance sensors, and cyber security.
– We are repositioning our CIT business to be a ‘Mission Assurance
Partner’ to key strategic clients in the defence and security markets.
This should result in a change in the revenue profile of the business
unit from short-term contracts to multi-year service and product
revenue streams, increasing visibility and supporting growth.
– In line with this approach, in July 2018 we won a contract to support
the UK Ministry of Defence in delivering next generation battlefield
tactical communications and information systems (BATCIS) worth
up to £95m, highlighting our progress in moving to multi-year service
contracts. This win reflects our extensive technical capabilities and
approach to delivering real innovation for customers.
– We were awarded a £10m contract to provide support to key
combat aircraft mission data systems in one of our target markets
in the Middle East.
– We completed our strategic investment into Inzpire, a leading
provider of operational training, in November 2018. Inzpire is
pursuing multiple opportunities in areas such as mission data
and aircrew training.
– We opened a new office in Lincoln to act as a hub for our CIT
business in support of the work we do with the UK’s Royal Air
Force in mission data and training. The hub will support our
further growth in this critical area and our strategic investment
into Inzpire.
Supporting our customers’ enduring need for
capability assurance
Our increasing customer focus enabled us to win the
competition for the Battlefield and Tactical Communications &
Information Systems (BATCIS) contract, worth up to £95m over
five years. BATCIS is strategically significant for us as it is our
largest UK competitive win to date. The contract was awarded
by the Joint Forces Command (JFC) Information Systems and
Services (ISS) organisation, an area of the UK MOD we have not
worked with regularly before. The award highlights our increased
customer focus, and ability to innovate and to form industry
partnerships to better meet our customers’ needs.
£95m
Largest UK competitive
contract win
Strategic report | Operating review
45
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Operating review continued
FY19 review
QinetiQ North America (39% of Global Products revenue)
QinetiQ North America (QNA) develops and produces innovative
defence products specialising in unmanned systems, survivability and
maritime systems along with products in related commercial markets.
– QNA delivered a strong performance in FY19, winning two programs
of record with the US Department of Defense (DoD) with initial
values of up to $44m and $164m. Read more on page 26.
– The business was also awarded a $90m Indefinite Delivery/
Indefinite Quantity (IDIQ) contract to support the sustainment
of the TALON family of robotic systems, providing on-going
maintenance, upgrades and servicing of the US Army’s existing,
fielded fleet of TALON robots. The contract wins within the robotics
market reflect our leading capability and create opportunities to
work with the DoD to deliver further innovative solutions.
– We were unsuccessful in winning the Man-Transportable Robotic
System (MTRS) Program of Record for the US Army. We
undertook an extensive exercise to identify why we were
unsuccessful and applied what we learnt to our subsequent
successful bids.
OptaSense (11% of Global Products revenue)
OptaSense provides innovative fibre sensing solutions to deliver
decision-ready data in multiple vertical markets.
– Our OptaSense business delivered strong order growth during the
year in key areas of infrastructure and oil field services, including
our first orders in the North Sea; the business enters FY20 with
its largest backlog to date.
– Overall revenues remained stable during the period with a greater
contribution from repeat customers as they increasingly recognise
the value OptaSense creates.
– OptaSense has developed a new, innovative service-based model
that has received positive traction in initial testing. If successful,
this should deliver larger value contracts over longer durations
increasing overall revenue visibility in the division.
– We continue to make good progress on the delivery of the
1,841km Trans Anatolian Natural Gas Pipeline (TANAP), our
largest system award to date.
Global Products
Orders
Revenue
Underlying operating profit
Underlying operating margin
Book to bill ratio
Funded backlog
2019
£m
241.8
223.4
27.6
12.4%
1.1x
216.8
2018
£m
231.3
181.6
28.2
15.5%
1.3x
200.5
Overview
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. The division is technology-based and has shorter order
cycles than EMEA Services so can have a more lumpy revenue
profile. Our strategy is to expand the product portfolio and win larger,
longer-term programmes to improve the consistency of the financial
performance of this division.
Financial performance
Orders increased to £241.8m (2018: £231.3m) including a contract to
deliver unmanned air system services to the Canadian armed forces
and underpinned by growth on smaller contracts particularly in QinetiQ
North America (QNA) and QinetiQ Target Systems (QTS).
The Global Products division had 60% of its FY20 revenue already
under contract at the beginning of the new financial year compared
with 51% at the same time last year, reflecting key multi-year contracts
secured over the last two years.
Revenue was up 23% on a reported basis at £223.4m (2018: £181.6m).
On an organic constant currency basis, revenue increased by 22%
driven by new research work delivered by QNA for Common Robotics
System Individual (CRS(I)) and Route Clearance Interrogation System
(RCIS) and new QTS Banshee sales to the Indian Airforce and Army.
Underlying operating profit was £27.6m (2018: £28.2m) impacted by
£1.7m of one-off charges in FY19 compared with £1.0m of one-off
gains in FY18. Adjusting for these non-recurring trading items and the
impact of foreign exchange, underlying operating profit increased by
7% at constant currency. This was driven by increased volume of
product shipments in QTS and QNA, partially offset by an unfavourable
change in product mix, with a lower volume of high-margin licence
income in FY19.
5%
Increase in orders
22%
Organic revenue growth
60%
of FY20 revenue under contract
(FY18: 51%)
2%
Decrease in operating profit
Our strategy is to expand the product
portfolio and win larger, longer-term
programmes.”
David Smith, Chief Financial Officer
46
QinetiQ Group plc Annual Report and Accounts 2019 Space Products (11% of Global Products revenue)
QinetiQ’s Space Products business provides satellites, payload
instruments, sub-systems and ground station services.
– We delivered a contract for the preliminary design activities of the
Altius Satellite. This European Space Agency (ESA) satellite will
study the distribution of ozone in the earth’s stratosphere and
chart climate change. In FY20, we have the potential to convert
this design contract into a further order for the Altius satellite.
– QTS continues to perform well. During the year we received our
first contract for the sale of Rattler, our supersonic ground and
air launched target that represents high dive, sea skimming missile
threats. This first contract with the Royal Navy will see Rattler
integrated and certified for use on UK ranges. This is the first new
product released by QTS since the acquisition of the business at
the end of 2016 and was developed with the technical support
of the broader QinetiQ Group.
– We invested in a new, higher grade clean room in facilities in
– Leveraging QTS expertise, we won our largest contract to date in
Belgium allowing us to produce up to four major products at any
one time. The Altius satellite and the International Berthing and
Docking Mechanism are likely to be the first products to benefit
from this investment.
EMEA Products (39% of Global Products revenue)
EMEA Products provides research services and bespoke technological
solutions developed from intellectual property spun out from EMEA
Services. It also includes various product-based acquired businesses
including QinetiQ Target Systems (QTS).
Canada with a C$51m contract to deliver unmanned aircraft systems
(UAS) to the Canadian armed forces, read more on page 26.
– With our partner, we secured a contract for the provision of aerial
target services to the UAE armed forces for weapons acceptance
and training activities. We will be building our Banshee aerial
targets in-country and opening a new product assembly and
service facility in Dubai.
– We successfully launched our Obsidian counter drone system and
won our first order from the Canadian Government. In addition, we
expect the UK Government to go live with the system in the
second half of FY20.
Small robot program of record
During the year we successfully won two US robotic programs of record, the largest of which was Common Robotic System-
Individual (CRS(I)) worth up to $164m.
CRS(I) is designed to be back-packable and is equipped with advanced sensors and mission modules for dismounted forces to
enhance mission capabilities. The award of this contract was strategically significant for us as it demonstrated both our leading
expertise in robotics and autonomy and our ability to create commercially compelling propositions.
Securing two programs of record increases our exposure to an attractive end market, and supports both our US and international
growth aspirations.
Strategic report | Operating review
47
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Chief Financial Officer’s review
A strong performance in FY19
Overview of full year results
We reported a strong performance in FY19, delivering growth across
orders, revenue and profitability and building on the strategic progress
we have made over the past three years. Our rigorous focus on
performance and ensuring we keep costs under control means
we were successfully able to offset the well flagged headwind
to profitability in the UK. We enter FY20 in a strong position, with
a record order backlog and a robust balance sheet. Strong cash
generation from the Company is expected to be sufficient to fund
our organic investment, while net cash of £188.5m provides support
for bolt-on acquisition opportunities.
Revenue was up 9% at £911.1m (2018: £833.0m), including a £15.1m
contribution from E.I.S. Aircraft Operations (now known as QinetiQ
Germany) and Inzpire Ltd, which completed during the second half
of FY19. Revenue grew by 8% on an organic basis, with a 4% increase
in EMEA Services and a 22% increase in Global Products driven by
strong performance in QinetiQ North America (QNA) and QinetiQ
Target Systems (QTS).
Orders in the year excluding LTPA amendments totalled £776.4m
(2018: £587.2m) a 28% increase on an organic basis. This was driven
by a strong performance in EMEA Services in both large, multi-year
contracts, such as Engineering Delivery Partner (EDP), and in smaller
value contracts. Key orders won in FY19 included £69m relating to
EDP, £41m for Battlefield Tactical Communications and Information
Systems (BATCIS) and C$51m for Canadian Armed Forces Unmanned
Air System work.
At the beginning of the new financial year, 74% of the Group’s FY19
revenue was under contract, compared to 69% at the same point
last year. This reflects increased multi-year contracts and securing
the LTPA amendment in April 2019, the work for which is included
in the calculation.
David Smith
Chief Financial Officer
Financial performance
(£m)
Revenue
Operating profit
Profit after tax
(p)
Earnings per share
Full year dividend
per share
Statutory results
Underlying* results
2019
911.1
113.8
113.9
20.1
6.6
2018
833.0
141.0
138.1
24.4
6.3
2019
911.1
123.9
111.5
19.7
6.6
2018
833.0
122.5
109.0
19.3
6.3
(£m)
Total funded order backlog1
Total orders1
Orders excluding LTPA amendments2
Net cash inflow from operations
Cash conversion ratio
Free cash flow
Net cash
Underlying* results
2019
3,133.6
2,031.7
776.4
126.3
102%
35.5
188.5
2018
2,005.4
687.4
587.2
126.5
103%
56.3
266.8
1 2019 includes the impact of the LTPA amendment signed post year end.
2 Includes share of joint ventures, excludes LTPA contract amendments.
Order bridge
587.2
157.1
10.0
(1.2)
753.1
23.3
776.4
28% organic growth
Organic increase in orders
28%
£3.1bn
Total backlog*
FY18: £2.0bn
2018
EMEA
Services
organic
Global
Products
organic
Foreign
exchange
2019 excl.
acquisitions
EIS & Inzpire
2019
* Includes LTPA amendment signed
post year end.
Definitions of the Group’s ‘alternative
performance measures’ can be found
in the glossary on page 159.
48
QinetiQ Group plc Annual Report and Accounts 2019 Underlying operating profit was up 1% at £123.9m (2018: £122.5m),
assisted by ~£7m (2018: ~£9m) non-recurring trading items including:
a £6.9m gain on sale of aircraft following investment in a new fleet of
aircraft for test aircrew training; a £5.4m benefit related to project risk
re-assessments following technical successes on a major contract in
the EMEA Services division; and a £5.0m charge relating to redundancy
costs. During the year we completed the full acquisition of QinetiQ
Germany and a strategic investment in Inzpire which together
contributed £1.3m of operating profit in the five months of our
ownership, as we increased investment to support future growth.
Excluding the non-recurring trading items, the QinetiQ Germany
acquisition and strategic investment into Inzpire, and the effect of
foreign exchange, underlying operating profit for the Group increased
by £3m (3%).
EMEA Services operating profit grew 2% (1% organic) offsetting an
approximate £5-6m headwind due to the lower baseline profit rate for
single source contracts, which was in line with our expectations. The
level of non-recurring items was similar in both years and had minimal
impact on EMEA Services growth. Global Products underlying
operating profit fell by 2% but was impacted adversely by ~£2m
of non-recurring trading items, and was up 7% on an organic basis
(excluding non-recurring trading items) driven by increased revenue
in QinetiQ North America and QinetiQ Target Systems.
Total operating profit was £113.8m (2018: £141.0m), including £3.9m
amortisation of acquired intangibles (2018: £2.6m), £3.7m impairment
of property (2018: £nil) and £2.0m acquisition costs (2018: £nil). FY18
profit was higher due to £14.6m profit recognised on the disposal of
property and a £5.9m gain on the sale of intellectual property.
Underlying profit before tax increased 2% to £124.0m (2018: £122.1m),
broadly in line with the increase in underlying operating profit, with
underlying net finance income at £0.1m (2018: cost £0.4m).
Total profit before tax fell to £123.2m (2018: £144.8m) due to higher
specific adjusting items in FY18.
Specific adjusting items
Specific adjusting items, shown in the ‘middle column’, at the profit
after tax level amounted to a total net profit of £2.4m (2018: £29.1m).
This included £3.9m (2018: £2.6m) amortisation of acquired intangible
assets, £3.7m impairment of property and £2.0m acquisition costs,
offset by £8.2m (2018: £4.2m) finance income related to the defined
benefit pension asset and £3.2m (2018: £6.4m) of tax movements
(see below). FY18 contained a significantly higher value of specific
adjusting items due to a profit of £14.6m (2019: £0.2m) recognised
on the disposal of property and a £5.9m gain (2019: £nil) on the sale
of intellectual property.
Net finance costs
Net finance income was £8.3m (2018: £3.8m). The underlying net
finance income was £0.1m (2018: cost £0.4m) with additional income
of £8.2m (2018: £4.2m) in respect of the defined benefit pension asset
reported within specific adjusting items.
Tax
The total tax charge was £9.3m (2018: £6.7m). The underlying tax
charge was £12.5m (2018: £13.1m) with an underlying effective tax rate
of 10.1% for the year ending 31 March 2019 (2018: 10.7%). 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
(‘RDEC’) in the UK which are accounted under IAS 12 within the tax
line. An adjusted effective tax rate before the impact of RDEC would be
15.0%. The effective tax rate is expected to remain below the UK
statutory rate in the medium term, subject to any tax legislation
changes, the geographic mix of profits, the recognition of unrecognised
tax losses and while the benefit of net RDEC retained by the Group
remains in the tax line.
A £2.8m credit in respect of initial recognition of corporate tax
deductions for certain equity-settled share-based payment schemes
has been classified as a specific adjusting item. Together with a
£0.4m tax effect of the pre-tax specific adjusting items, the total
specific adjusting items tax credit was £3.2m (2018: £6.4m).
At 31 March 2019 the Group had unused tax losses and surplus
interest costs of £114.9m which are available for offset against future
taxable profits.
Revenue bridge*
833.0
24.2
40.2
(1.4)
896.0
15.1
911.1
7.7% organic growth
Revenue growth
9%
£123.9m
Underlying operating profit
FY18: £122.5m
2018
EMEA
Services
organic
Global
Products
organic
Foreign
exchange
2019 excl.
acquisitions
EIS & Inzpire
2019
* Excludes contribution from joint ventures of £1.9m.
Strategic report | Chief Financial Officer’s review
49
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 Chief Financial Officer’s review continued
Cash flow, working capital, capex and net cash
Underlying net cash flow from operations was £126.3m (2018:
£126.5m) with an underlying operating cash conversion of 102%
(2018: 103%). This included a £27.5m working capital unwind.
Net cash flow associated with capex increased to £80.7m (2018:
£54.5m) following the settlement of £23.5m FY18 year end capex
creditors in FY19. After paying tax and net interest of £10.1m the
Group generated free cash flow of £35.5m (2018: £56.3m), before
property disposal proceeds of £5.3m (2018: £23.1m).
Overall capex between FY20-22 is expected to be in the range of
£70-100m per annum, of which the majority reflects our investment
into the LTPA. Given the nature of our business model, we expect to
be able to fund our capex requirements from operational cash flow.
As at 31 March 2019 the Group had £188.5m net cash (2018:
£266.8m). The reduction in net cash was primarily due to the £81.2m
of consideration and associated repayment of acquired debt for the
acquisition of QinetiQ Germany and the strategic investment into
Inzpire, and payment of £35.7m of dividends; these were partially
offset by £35.5m free cash flow and £5.3m of property disposals.
In September 2018 the Group completed the re-financing of its
revolving credit facilities, putting in place a new £275m facility with an
‘accordion’ facility to expand this up to a maximum of £400m. The
facility has an initial term of five years with two one-year options to
extend the final maturity to 27 September 2025. The larger facility size,
longer term and additional operational flexibility provide the maximum
scope to execute our strategic growth plans. QinetiQ has introduced
positive incentive language into the facility agreement to reinforce our
environmental, social and governance policies, and sustainability
agenda; this has the effect of providing a modest margin adjustment
of +/- 0.02% if we exceed greenhouse gas emission targets over the
life of the facility.
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.
Earnings per share
Underlying basic earnings per share increased by 2% to 19.7p (2018:
19.3p), benefitting from the higher underlying profit after tax. Basic
earnings per share for the total Group (including specific adjusting
items) decreased 18% to 20.1p (2018: 24.4p).
The average number of shares in issue during the year, as used in the
basic earnings per share calculations, was 566.0m (2018: 565.2m)
and there were 566.3m shares in issue at 31 March 2019 (all net of
Treasury shares).
Dividend
The Board proposes a final FY19 dividend per share of 4.5p (2018:
4.2p) making the full year dividend 6.6p (2018: 6.3p). The full year
dividend represents an increase of 5%, in line with the Group’s
progressive dividend policy.
Subject to approval at the Annual General Meeting, the final FY19
dividend will be paid on 30 August 2019 to shareholders on the
register at 2 August 2019.
Pensions
In the UK, the Group operates a defined benefit pension scheme. The
Scheme is closed to future accrual and there is no on-going service cost.
Prior to the year end the Scheme completed its first bulk annuity
insurance buy-in for approximately £700m. This transaction has
removed longevity risk, interest rate risk and inflation risk for
approximately one third of the Scheme and is in line with the Group’s
strategy of de-risking the pension liabilities. As a result of the transaction
the accounting pension surplus recorded on the Group’s balance sheet
reduced by an estimated £120m with no related cash impact.
Group operating profit bridge
Cash conversion (pre-capex)
122.5
2.4
(0.8)
(1.5)
122.6
1.3
123.9
2018
EMEA
Services
organic
Global
Products
organic
Foreign
exchange
2019 excl.
acquisitions
EIS & Inzpire
2019
50
102%
£126.3m
Operating cash flow
FY18: £126.5m
QinetiQ Group plc Annual Report and Accounts 2019 Implementation of IFRS 16 ‘Leases’
The new accounting standard IFRS 16 ‘Leases’ will be adopted for the
FY20 financial year. 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, i.e. lessors continue to classify leases as finance
and operating leases.
The standard will be effective for periods beginning on or after
1 January 2019, i.e. FY20 for QinetiQ, using either the full retrospective
approach or the modified retrospective approach. Early adoption is
permitted but QinetiQ plans to adopt the new standard on the required
effective date, 1 April 2019, using the full retrospective approach. The
main impact on QinetiQ’s financial statements in FY20 will be the
introduction of a right-of-use asset on day one of approximately
£23.8m, largely offset by an incremental lease liability of approximately
£26.6m, i.e. a reduction in net assets of ~£2.8m. There will also be an
immaterial impact on the income statement with <£1m of finance cost
being reclassified from operating costs. Detailed analysis is included
in note 1 to the financial statements in the Annual Report.
David Smith
Chief Financial Officer
23 May 2019
The Scheme is in a very healthy position with the most recently
completed actuarial valuation (prior to the buy-in) showing a surplus of
£139.7m (as at 30 June 2017) and the net asset position, post the buy-in
transaction, was £259.1m on an accounting basis under IAS 19 as at 31
March 2019 (2018: £316.2m). As at year end the Scheme was hedged
against approximately 93% of the interest rate risk and 100% of the
inflation rate risk, as measured on the Trustees’ gilt-funded basis.
Full details are set out in note 29.
During the reporting period the High Court ruled on a case involving
Lloyds Banking Group in respect of equalising (between men and
woman) Guaranteed Minimum Pensions (‘GMPs’). QinetiQ’s pension
scheme has not been significantly impacted by this court ruling but an
increase in liabilities of £0.7m has been recognised in the period, through
a past service charge to operating profit. This is reported as a ‘significant
adjusting item’ in the income statement in accordance with historical
Group policy.
Implementation of IFRS 15 ‘Revenue from contracts
with customers’
The adoption of accounting standard IFRS 15 for the Group’s FY19
financial year has not had a significant impact on QinetiQ’s reported
financial performance. This was as expected given the nature of our
contracts and QinetiQ’s historic method of accounting (using
‘percentage of completion’ accounting for service contracts as
opposed to milestone accounting). Additional disclosures (eg in
respect of backlog and contract assets and liabilities) are required,
and these will be provided in the financial statements.
Implementation of IFRS 9 ‘Financial instruments’
The adoption of accounting standard IFRS 9 for the Group’s FY19
financial year has not had a significant impact on QinetiQ’s reported
financial performance. The Group assessed that certain financial
assets would be reclassified from being measured at fair value
through other comprehensive income to fair value through profit
and loss. The changes to impairment and hedge accounting have not
has a material impact on the results of the Group and these
accounting policies have also been updated.
‘Recent accounting developments adopted by the Group’ within
note 1 provides further insight into the implementation of both
IFRS 15 and IFRS 9.
Strategic report | Chief Financial Officer’s review
51
Strategic reportQinetiQ Group plc Annual Report and Accounts 2019 52
QinetiQ Group plc Annual Report and Accounts 2019
Image CaptionLorem ipsum dolor sit amet, consectetur adipiscing elit. Ut sit amet volutpat diam. Vestibulum iaculis pulvinar lacus in luctus. Praesent tempor eros ac. Corporate
Governance
54 Corporate governance statement
56 Board of Directors
58 Governance framework
65 Compliance statement
68 Report of the Audit Committee
72 Report of the Nominations Committee
74 Report of the Risk & CSR Committee
76 Directors’ remuneration report
80 Summary Directors’ Remuneration Policy
81 Annual report on remuneration
93 Directors’ report
96
Independent auditor’s report
A live testing of our counter drone technology,
Obsidian, at our site in Malvern, UK. Obsidian
is specifically designed to detect, identify
and track small and micro drones.
53
QinetiQ Group plc Annual Report and Accounts 2019 Corporate governance statement
An introduction from our Chairman
My fellow Directors and I
have worked extensively…
to ensure that all voices
– those of shareholders,
employees, customers and
communities – find their
way to the board room.”
Mark Elliott
Non-Executive
Chairman
Dear Shareholder,
I am pleased to present this year’s corporate governance statement. As in previous years,
this report should be read in conjunction with the section on how we have complied with
the UK Corporate Governance Code on pages 65 to 67.
Supporting good governance
During my tenure as the Chairman of QinetiQ, my fellow Directors and I, have built a sound
and robust corporate governance structure. This has proved invaluable during the year in
progressing with the delivery of our strategy, and in testing and supporting our Executives’
decision making. Key issues considered by the Board during the year, are further described
on page 59.
Preparation for the 2018 UK Corporate Governance Code
The 2018 UK Corporate Governance Code was published in July 2018, emphasising the need
for boards to develop effective relationships with all stakeholders. In particular, boards are
encouraged to ensure they find ways to hear the voice of employees. My fellow Directors and
I have worked extensively on our approach to these important matters, to ensure that all voices
– those of shareholders, employees, customers and communities – find their way to the board
room. More information about how the Board considers stakeholders, including workforce
engagement, can be found on pages 62 to 63.
The Board has created a clear action plan to implement the new Code and reporting
requirements successfully, and we are confident that we will next year be able to report that
the Company is compliant with the Corporate Governance Code and best industry practice.
54
QinetiQ Group plc Annual Report and Accounts 2019 Culture has been one
of the most important
focuses of the Company
throughout the year, with
a number of cultural
workshops taking place
across the Group.”
Changes to the Board
I will be standing down as Chairman after the 2019 AGM. Michael Harper, as Senior Independent
Director, has led a comprehensive search during the year to find my successor. This process is
further outlined in the Report of the Nominations Committee on page 72. In April, my fellow
Directors and I were delighted to welcome Neil Johnson to the Board. He will be working
alongside me until the conclusion of the 2019 AGM. Neil’s extensive experience as a CEO
and Chairman will further strengthen the Board and enhance its knowledge and capabilities.
Diversity
The Board believes in the benefits of diversity and inclusion, and strongly supports the
initiatives within our business in relation to these. Further details can be found on pages 39
and 73. It is the responsibility of the Board to monitor the Company’s strategy on diversity
and inclusion, and the Nominations Committee continues to keep diversity of the Board
itself under close review.
Board evaluation
I will have served as Chairman for over nine years by the time I step down. The Board has
faced many challenges during that time. We have used the annual evaluations of the Board
and the Committees to ensure that we have been focusing on the right issues and adding
value. We have also found the evaluation process to be helpful in ensuring that an open
dialogue delivers good practice and establishes a culture of continuous improvement. The
evaluation this year was conducted externally by Duncan Reed of Condign Board Consulting
(further information can be found on page 64). I am pleased to report that the results of this
year’s anonymised evaluation shows that the Board continues to operate effectively. In
addition, I am satisfied that each Director makes a valuable contribution to the work of the
Board, and this is outlined in more detail in the biographies of the Directors on page 56 and 57.
Strategy meeting
The strategy of the business is at the core of the Board’s thinking during the year, and in
addition the Board dedicates one of its seven meetings to strategy only. Further details
of this meeting can be found on page 60.
Culture
The delivery of our strategy and the success of the Company depends on a strong
culture within the business, as well as benefitting the Company, our employees and
other stakeholders. Culture has been one of the most important focuses of the Company
throughout the year, with a number of cultural workshops taking place across the Group.
The Interim Group HR Director regularly updated the Board on the initiatives, work and
progress on the topic of cultural change within the business.
Conclusion
I would especially like to thank the CEO, his Executive team and my fellow Directors for their
work during the year. QinetiQ has an exciting future ahead and I believe that the right team
is in place to take the Company forward and transition into a global business.
Mark Elliott
Non-Executive Chairman
Strategic report | Corporate governance statement
55
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Board of Directors
The Chairman considers all of the Directors to contribute valuably, and to
continue to be, important to the Company’s long-term sustainable success
Committee membership key
Audit
Nominations
Remuneration
Risk & CSR
Security
Committee Chairman
Mark Elliott,
Non-Executive Chairman
Independent: Upon appointment
Steve Wadey,
Chief Executive Officer
Independent: No
David Smith,
Chief Financial Officer
Independent: No
Skills, competence and experience: Mark is
responsible for leading the Board and ensuring that
it operates effectively. Mark’s extensive business
knowledge, experience on FTSE listed company
boards, and his comprehensive international
business and management experience, have been
essential to his success in leading the QinetiQ Board
as its Chairman.
Mark was a Non-Executive Director of G4S plc, where
he also served as Senior Independent Director and
Chairman of the Remuneration Committee. He was a
Non-Executive Director of Reed Elsevier NV, and Reed
Elsevier Group plc, where he also became Chairman
of the Remuneration Committee. Mark worked for
IBM for over 30 years, occupying a number of senior
management positions, including General Manager of
IBM EMEA, and was a member of IBM’s worldwide
Management Council.
Other appointments: Chairman of Kodak Alaris
Holdings Limited.
Skills, competence and experience: Steve’s proven
track record of driving growth, and his in-depth
experience of defence and technology industries
is of essential importance and benefit to the Board
and the Company. In addition, his extensive
operational and corporate experience, is
fundamental to his success in leading the Group’s
Executive management team, and developing
and implementing the Group’s strategy.
Steve is a Fellow of the Institution of Engineering
and Technology, the Royal Aeronautical Society, and
the Royal Academy of Engineering. He was previously
Co-Chair of the UK Defence Growth Partnership, a
member of the Prime Minister’s Business Advisory
Group, Co-Chair of the National Defence Industries
Council Research and Development Group, and a
Non-Executive Director of the UK MOD Research
and Development Board. Steve has held various
roles with MBDA, most recently as Managing
Director, MBDA UK, and Technical Director for the
MBDA Group. Previously he held various roles with
Matra BAe Dynamics and British Aerospace.
Other appointments: Chair of the Defence Industry
Liaison Board of the UK Department for International
Trade, Defence & Security Organisation.
Skills, competence and experience: David provides
significant expertise to the Group from his broad
and comprehensive executive experience in blue-chip
companies and work in the aerospace and defence,
technology, and automotive sectors.
David is an Associate of the Chartered Institute of
Management Accountants and a member of its
Advisory Panel. He was previously the CFO of
Rolls-Royce Holdings plc, having joined as CFO of
its Aerospace Division. Prior to that, David was CFO
of Edwards Group and CEO of Jaguar Land Rover,
having previously been its CFO. He has also held
a variety of roles with the Ford Motor Company.
Other appointments: Non-Executive Director
of Motability Operations Group plc.
Michael Harper,
Deputy Chairman and Senior Independent
Non-Executive Director
Independent: Yes
Lynn Brubaker,
Non-Executive Director
Independent: Yes
Admiral Sir James Burnell-Nugent,
Non-Executive Director
Independent: Yes
Skills, competence and experience: Michael brings
to the Board a wealth of operational and corporate
experience from a lengthy career as a business leader
and Board member within, amongst others, the
engineering and aviation industries. He continues
to provide highly valuable advice to the Board and its
discussions, in particular in his capacity as the Senior
Independent Director and Chair of the Remuneration
Committee.
Michael has served as Chairman of Ricardo plc, Vitec
Group plc, and BBA Aviation plc, having previously
been its CEO. He was Senior Independent Director
of Catlin Group Limited. In addition, he was a Director
of Williams plc and, at the time of its demerger,
he became CEO of Kidde plc.
Other appointments: Non-Executive Director of
the Aerospace Technology Institute.
Skills, competence and experience: Lynn’s
experience from a number of senior Board positions
at various US-based companies, in particular in the
aerospace sector, makes her a valuable member of
the Board and enables her to provide insightful advice
on matters such as strategy, management of
customer relations, and sales and marketing.
Skills, competence and experience: Sir James brings
to the Board unique senior experience from the armed
forces and of contracting with government. In addition
to his Board contribution of deep customer
knowledge, the Company also benefits from his
experience in his roles as Chair of the Risk & CSR
Committee and of the Security Committee.
Lynn has held positions as Non-Executive Director
of Force Protection, Inc., Seabury Group, Graham
Partners, Cordiem, the Nordam Group, the Flight
Safety Foundation (as Chair), and as a member
of the Management Advisory Council of the Federal
Aviation Administration. Lynn was Vice President and
General Manager of Commercial Aerospace at
Honeywell International, and prior to that, she held
a variety of roles in the commercial aerospace sector
working for Allied Signal, the McDonnell Douglas
Corporation, Republic Airlines and ComAir Airlines.
Other appointments: Non-Executive Director
of FARO Technologies Inc. and Hexcel Corp.
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.
Other appointments: Non-Executive Chairman
of Witt Limited.
56
QinetiQ Group plc Annual Report and Accounts 2019
Ian Mason,
Non-Executive Director
Independent: Yes
Paul Murray,
Non-Executive Director
Independent: Yes
Susan Searle,
Non-Executive Director
Independent: Yes
Skills, competence and experience: Ian brings to
the Board extensive experience in strategy, business
transformation, eCommerce and international
business development. His current and previous
experience as a CEO and Non-Executive Director,
enables him to provide the Board with highly relevant
business and board experience. His advice has been,
and continues to be, particularly valuable for the Board
and the leadership team in the work of implementing
and enhancing the transformation and strategy of
the Company.
Previously Ian was Group Chief Executive of
Electrocomponents plc. He has also worked for
the Boston Consulting Group and served as a
Non-Executive Director of Sage Group plc.
Other appointments: Chief Executive Officer
of Domestic & General Group.
Skills, competence and experience: Paul’s broad
range of experience in finance and corporate
governance from many industries is of significant
value to the Board. As a result of his previous roles
as Group Finance Director of a number of plc
companies and a plc Audit Committee Chair, he
has gained a deep understanding of governance,
financial reporting, and regulatory issues, and he
therefore serves as the Chair of the Audit Committee.
Paul has held positions as Non-Executive Director
and Chair of the Audit & Risk Committee at Royal
Mail Group plc, Senior Independent Director of Taylor
Nelson Sofres plc, Non-Executive Director of
Thomson SA, Tangent Communications plc and
Independent Oil & Gas plc. He has also been Group
Finance Director of Carlton Communications plc
and LASMO plc, and Treasurer of Pilotlight.
Other appointments: Director of Ventive Ltd and
Naked Energy Ltd.
Appointed on 2nd April 2019
Company Secretary
Skills, competence and experience: Susan brings
to the Board essential experience of investing in
growing technology businesses, acquisitions and
exploitation of new technologies. She has worked
in the UK and Australia with academics and
entrepreneurs on the development and
commercialisation of new technologies. Susan’s
experience from a variety of commercial, business
development and operational roles, and from
serving on a variety of private company boards,
enables her to provide both challenge and beneficial
advice to Board discussions.
Susan was a founder of Touchstone Innovations plc,
and its CEO until 2013. She has served on a variety
of private company boards in engineering,
healthcare and advanced materials. Susan was a
Trustee of Fight for Sight, and a member of the
international advisory Board of PTT. Previously,
she held a variety of commercial and business
development roles with Shell Chemicals, the Bank
of Nova Scotia, Montech (Australia), and Signet
Group plc.
Other appointments: Senior Independent and
Non-Executive Director and Chair of the
Remuneration Committee of both Benchmark
Holdings plc and Horizon Discovery Group plc.
Chair of Woodford Patient Capital Trust plc and
Mercia Technologies plc (and Chair of its
Nominations Committee). Appointments
explanation on page 66.
Jon Messent,
Company Secretary and Group
General Counsel
Independent: N/A.
Skills, competence and experience:
Jon joined QinetiQ from Chloride Group
plc where he held a similar role. He has
a background in legal private practice
as well as General Counsel and
Company Secretarial experience
in other FTSE 250 companies.
Neil Johnson,
Non-Executive Director
Independent: Yes
Skills, competence and experience: Neil’s former
CEO experience and current roles as a plc Chairman
and Non-Executive Director from numerous international
businesses, including from the defence, automotive
and engineering, and aerospace industries, brings to
the Board relevant knowledge, challenge and leadership.
Starting his career at Sandhurst and the Army, Neil then
spent much of his early career in the automotive and
engineering industries. He was worldwide Sales and
Marketing Director at Jaguar before being seconded
to the UK Ministry of Defence to command 4th
Battalion The Royal Green Jackets. He returned to the
industry with British Aerospace, initially running Land
Rover and then all of its European automotive
operations. Neil was later CEO of the RAC, managing
the demutualisation and sale process. Since 2012 Neil
has been Senior Independent Director of the Business
Growth Fund. He is also a former Director General of
the EEF and was a Home Office appointed Independent
Member of the Metropolitan Police Authority. He was
Chairman of Motability Operations until March 2019.
Other appointments: Chairman of Synthomer Plc (and
Chair of its Nominations Committee), Centaur Media
plc and Electra Private Equity plc and the Senior
Independent Non-Executive Director of the Business
Growth Fund. Appointments explanation on page 66.
Strategic report | Board of Directors
57
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019
Corporate governance statement
Governance framework
This is the structure through which the Company is managed. It has evolved over time, and
continues to evolve to meet the needs of the business and the Company’s stakeholders.
Boards of large companies invariably delegate day-to-day management and decision-making to Executive Management. Directors should
maintain oversight of a company’s performance and ensure that management is acting in accordance with the strategy and its delegated
authorities. At QinetiQ, the culture, values and standards that underpins this delegation help to ensure that when decisions are made, their
wider impact has been considered. The Board has reserved certain matters (posted at www.QinetiQ.com) for its own consideration so that it
can exercise judgement directly when making major decisions, and in doing so, promoting the success of the Company whilst having regard to
all necessary matters. The Company’s success depends on the Board’s continual commitment to high standards of corporate governance and
a strong, positive culture across the business, whilst managing effectively the risks and uncertainties of the markets in which QinetiQ operates.
Shareholders
Chairman
Responsible for the leadership of the Board and for ensuring that it operates effectively through dynamic discussions
and challenge.
The Board is responsible for leading the Group, by setting strategic priorities and overseeing the delivery of the strategy in a
way that promotes sustainable long-term growth, whilst cultivating a balanced approach to risk within a framework of effective
controls and taking into account the interests of a diverse range of stakeholders.
Board of Directors
Audit
Committee
Monitors the Group‘s
integrity in financial
reporting and
reviews the
effectiveness of
financial risk and
managements
framework.
Remuneration
Committee
Determines and
recommends to the
Board the framework
for the remuneration
of the Company’s
Chairman, CEO and
CFO. Oversees
remuneration and
workforce policy.
Nominations
Committee
Considers the
structure, size and
composition of the
Board and
Committees and
succession planning.
It identifies and
proposes individuals
to be Directors and
also for Executive
Management, and
establishes the
criteria for any new
positions.
Risk & CSR
Committee
Oversees the sound
operation of the
Company’s risk
management
systems. Monitors
non-financial risk
exposures. Oversees
corporate
responsibility
strategy
programmes and
procedures. Monitors
adherence to the
generic MOD
compliance systems.
Security
Committee
Enables UK nationals
on the Board to
consider matters of
a UK national
security dimension
that have an impact
on QinetiQ’s UK
business.
Disclosure
Committee
Established in 2016
following the
requirements of the
Market Abuse
Regulations (MAR).
The Committee
comprises all Board
members except for
when called on short
notice when it
comprises the
Chairman, the CEO,
the CFO and any one
of the Committee
Chairs.
Page 68
Committee
report
Page 72
Committee
report
Page 76
Committee
report
Page 74
Committee
report
Page 75
Committee
report
Responsible for the day-to-day running of the Group’s business and performance, and the development and implementation
of the Group strategy.
The Chief Executive Officer
The Executive Committee
The interaction between the Board and the Executive Committee 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.
The full list of the members of the Committee can be found at www.QinetiQ.com.
The Committee meets on a two-weekly basis. It is responsible for the day-to-day management of the Group’s activity, with the
exception of QinetiQ North America which is managed through a Proxy Board of which further details can be found on page 60.
The focus of the Committee includes managing the business, delivering the strategy, managing risk, establishing financial and
operational targets and monitoring performance against those targets.
58
QinetiQ Group plc Annual Report and Accounts 2019
Board activity
An insight into the year – practicing good governance
Topic
Strategy
Operations and business
performance oversight
Internal control
and risk management
Leadership, people
and culture
Governance
and legal
Key activities
– Approved the FY20 component of the Group’s five-year Integrated Strategic Business Plan
– Approved the Group’s overall five-year Integrated Strategic Business Plan
– Approved an investment into Inzpire Group Limited
– Approved the acquisition of E.I.S. Aircraft Operations in Germany
– Approved the Royal Canadian Navy UAS ISTAR contract
– Received presentation from management in relation to business strategy and performance
– In-depth reviews of the M&A pipeline and specific M&A opportunities
Page 60
Annual Board strategy
– Approved the annual budget, business plan and KPIs (further details of the KPIs can be found on pages 28 to 31)
– Reviewed and approved the Group’s full year and half year results (including dividends), as well as its quarterly
trading updates
– Approved the Group’s Annual Report (including its fair, balanced and understandable status) and Notice of AGM
– Received regular updates in relation to the renewal of the LTPA contract
– Received updates of the Group’s operations in North America
– Reviewed the Group’s risk management framework and principal risks (further details can be found on pages 32 to 36)
– Reviewed and confirmed the Group’s Viability Statement and going concern status (further details can be found
on page 37)
– Reviewed and validated the effectiveness of the Group’s systems of internal control and risk management (further
details can be found on pages 66 to 67)
– Continued focus on the composition, balance and effectiveness of the Board
– Received regular updates from the Nominations Committee on the recruitment process of Neil Johnson, as
Non-Executive Director, Chairman designate
– Reviewed the key operational roles and identified gaps in experience needed to deliver the Group’s strategy
– Considered the outcomes and approved the actions arising from the external Board evaluation process (further
details of this process can be found on page 64)
– Reviewed the Group’s people strategy, culture, vision and values, including receiving reports on cultural change
throughout the business
– Approved the Board skills matrix
– Reviewed and approved the Non-Executive Directors’ fees
– Held separate Non-Executive Director sessions with the Chairman after each board meeting to discuss leadership
and other board matters
– Received and reviewed regular updates on the corporate governance developments and legal and regulatory issues,
including the 2018 Corporate Governance Code and the Companies (Miscellaneous Reporting) Regulations 2018,
and approved action plans to ensure smooth transition and compliance with these
– Approved the Group’s third annual Modern Slavery Statement for publication on the Group’s website
– Received reports on engagement with institutional shareholders, investor and other stakeholders throughout the
year. Further details of the Board’s engagement with stakeholders can be found on pages 62 to 63
– Approved the appointment of Barclays plc to replace Bank of America Merrill Lynch as the Company’s joint
corporate brokers
Brexit
– Received regular reports on the impact of Brexit on the Group’s strategy and in-year delivery, and approved action
plans where necessary in relation to Brexit
Strategic report | Corporate governance statement
59
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Corporate governance statement
continued
Management and control of US subsidiaries
The US Global Products division, trading as QinetiQ North America, which
contributed approximately £88m to the Group’s revenue in FY19, operates
under a Proxy agreement, 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 businesses.
In terms of the power to govern, the Proxy agreement vests certain
powers solely with the Proxy holders and certain powers solely
with QinetiQ. By way of 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
US Global Products business and the Proxy agreement
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 agreement as is required by the US National Industry Security
Program for main facility security clearances and to be insulated from
foreign ownership, control or influence. Under the Proxy, FMI and the
US Department of Defense (DoD) are parties to a Proxy agreement that
regulates the management and operation of FMI. Pursuant to the Proxy,
QinetiQ has appointed three US citizens who hold the requisite
clearances as Proxy holders to exercise the voting rights in FMI.
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 shareholders
(including the legitimate national security interests of the US). QinetiQ
Group plc does not have any representation on the Board of FMI, and
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 Defence Security Service).
Board strategy meeting
The annual Board strategy meeting was conducted over two days
in October 2018. The strategy meeting allows the Board to focus on
debating the future direction of the business. It is also an opportunity
to reflect on progress to date against the Group’s strategy and the
execution of the Integrated Strategic Business Plan (ISBP).
In preparation for the day, the Board received background
reading material, including:
– QinetiQ’s trading environment
– Strategic progress
– Transformation / Enabling projects
– Strategically relevant investment options
– Summary of the Group’s strategic context
– People strategy, including diversity and inclusion
– M&A pipeline
The meeting topics were mainly presented by senior members of the
management team and other members of staff working with strategy
matters. This led to insightful and productive discussions on reviewing
the business, the Company’s strategic goals and its approach going
forward. The discussions considered strategic initiatives and more
challenging potential business ideas over a five-year horizon.
obtaining working capital or funds for capital improvements
– Merge, consolidate, reorganise or dissolve FMI
– 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 interaction and liaison with the Chair of the Proxy Board.
QinetiQ’s CEO and/or CFO attended four meetings of the Proxy Board
during the year and from time to time the Proxy holders attend meetings
of the Board of Directors of the Company.
The President of FMI is a member of the Executive Committee. FMI
commercial and governance activity is included in the business update
provided in the regular executive report to the Board. This activity is
subject to the confines of the Proxy regime to ensure that it meets the
requirements that FMI must conduct its business affairs without external
control or influence, and the requirements necessary to protect the US
national security interest.
Following the strategy meeting, insights and ideas generated were
further discussed at the Board’s meetings in November, January and
March, and refined for incorporation into the latest edition of the ISBP.
The importance of the strategy meeting lies in the opportunity for the
Board to evaluate its strategic goals and to explore new themes and
ideas in a conducive environment with senior leaders from across the
business. A recent introduction of a ‘vignette’ approach to strategy
discussions has proven to be a successful way of ensuring that
sufficient focus is spent on the details while still keeping the bigger
picture in view.
The discussions considered strategic
initiatives and more challenging potential
business ideas over a five-year horizon.”
60
QinetiQ Group plc Annual Report and Accounts 2019 Visiting the business – Meeting our people
During FY19 the Board held three of its seven meetings at operational locations, enabling the Board to see first-hand how our operations
are run and, importantly, engage with local teams at all levels. These are invaluable opportunities for the Board to experience the day-to-
day work of the business and to gain a real insight into the Company’s culture and values of the business in an operational setting, outside
of the board room. All other board meetings were held at the London office.
Farnborough, UK – meeting with the Employment Engagement Group (EEG)
and getting first-hand insight into QinetiQ’s Internal Research &
Development (IRAD)
In January 2019 the Board conducted a two-day meeting at QinetiQ’s head
office and technical facilities in Farnborough. During its visit, the Board was
able to meet members of the Employee Engagement Group (EEG) informally
over lunch. Further information about the EEG can be found on page 39.
The Board also visited the Farnborough Academy Talent Centre. Finally, the
Board took part in a walking tour of the Research & Development facilities
(R&D), which was conducted and presented by the Group Director of
Research, Experimentation & Innovation. The tour and presentation provided
the Board with the opportunity to discuss and interact with the teams
responsible for IRAD and also gave the Directors key highlights and insights
into the risks and challenges they face.
“It is of fundamental importance for the Board that it gets
a full and comprehensive understanding of the Company’s
IRAD developments. The Board greatly benefitted from the
well prepared pre-reading materials, presentation and tour
of the IRAD facilities.“
Mark Elliott, Chairman
Visiting QinetiQ North America – Waltham, US
The Board and Committee meetings in March 2019 were held at QinetiQ
North America’s (QNA) head office in Waltham, Massachusetts in the
United States.
The Board had the opportunity to tour the site and receive presentations
from the local management on the key challenges facing the US business.
The Board also spent time with employees, gaining valuable feedback on
how QinetiQ’s culture and values are operating at a local level.
Visiting QinetiQ Target Systems in Ashford, Kent, UK
Based in Ashford, Kent, QinetiQ Target Systems (QTS), is a world-leading
provider of unmanned air, land and surface vehicle targets for live-fire
training and weapon system test and evaluation. In 2018, the Board held
its September meeting at the QTS site, giving the Board the opportunity
to visit the QTS site production facility. The visit, which was scheduled
over two days, included a walking tour of the site, an opportunity for the
Board to meet and liaise with the engineering and development teams,
and receive a presentation from the management team.
“I found the walking tour in particular an excellent
opportunity for the Board to gain an in-depth review of the
QNA business and an understanding of the wider context
on how QNA operates within the Group and the Group’s
strategy as a whole.”
Susan Searle, Non-Executive Director
“The visit to QTS brought alive how QinetiQ’s culture
and values are being integrated at local level.”
Admiral Sir James Burnell-Nugent, Non-Executive Director
Strategic report | Corporate governance statement
61
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Corporate governance statement
continued
Stakeholder engagement
QinetiQ seeks to deliver value for all our stakeholders and the Board is also aware that its actions impact all the stakeholders of the
Company and the communities which we operate in. Effective engagement strengthens the business and helps to deliver a positive result for
all stakeholder groups. The Board is committed to engaging closely with the Company’s diverse range of stakeholders and to take their views
into account. During the year, the Board undertook a rigorous review of the Company’s current stakeholder activities. The review considered:
– Who the Company’s key stakeholders are
– Our engagement activities with each key stakeholder and the appropriateness of this engagement
– The information the Board receives on our stakeholders, including details on the outcome of engagement activities
– Whether appropriate stakeholder feedback loops are in place
– Whether there was a need for greater engagement with any stakeholders at Board level
Topic
Key activities
Workforce
engagement
One of the focuses of the new Code is the Board’s engagement with the Company’s workforce, as
outlined in Provision 5 of the 2018 Corporate Governance Code. The Board recognises that achieving the
Company’s strategy depends on the people of our business. During the year the Board has sought to
find the most efficient and beneficial solution for QinetiQ, also supporting compliance with the Code.
Following discussions during the year, the Board’s has concluded on the following approach:
The Chairman will effectively act as a Non-Executive Director designated to workforce engagement.
As part of this role he will join at least two meetings a year with the Employee Engagement Group (EEG),
which is a consultative forum that acts as the collective voice of all UK-based QinetiQ employees. In
addition, the Senior Independent Director will join one EEG meeting a year to support appropriate
engagement on Executive Director remuneration, as required by the Code, and at least half of the
Non-Executive Directors will also meet the EEG each year on a rotational basis. Following these
meetings the members of the Board will report back to their fellow Directors on their discussions
with the EEG members.
During the year of reporting, the Board found visits to various Company sites (of which further
information can be found on page 61, both in the UK and in the US, and involvement with the Company’s
leadership community meetings (further information below), to be excellent opportunities to meet the
workforce and to gain an understanding on how the Company’s culture and values are embedded within
the business. The Board will continue these important visits as part of its engagement with the people of
QinetiQ. By way of example, the Board is planning to visit the Company’s facilities in Australia in FY20.
The Leadership Community meetings are meetings for senior managers across the business, which
are held four times a year. The members of the Board each attend two of these meetings annually. In
addition the members of the Board are invited to and attend the annual Employee Recognition Gala.
These are further opportunities for the Board to engage with employees.
The Board found visits
to various Company sites…
and involvement with the
Company’s leadership
community meetings… to
be excellent opportunities to
meet the workforce and to
gain an understanding on how
the Company’s culture and
values are embedded within
the business.”
62
QinetiQ Group plc Annual Report and Accounts 2019 Topic
Key activities
Investor
engagement
The Company places considerable importance on communications with shareholders, both institutional
investors and individual shareholders. This communication helps us to understand their views about the
Company and allows us to ensure that they are provided with timely and appropriate information on our
strategy, performance, objectives, financing and other developments.
QinetiQ has a comprehensive investor relations programme through which the CEO, the CFO and the
Group Director of Investor Relations & Communications regularly meet with the Company’s institutional
investors. The Board is informed on a regular basis about the views of key shareholders including noting
any concerns. In addition, the Chairman proactively offers to attend meetings with key shareholders and
he met with a number of the Company’s major shareholders during the year.
The Chairman and the Chairman of the Remuneration Committee also regularly engaged with major
shareholders throughout the year on the Company’s executive remuneration matters, including
executive performance measures. Further details of this can be found in the report of the Remuneration
Committee on pages 76 to 92.
The Company places
considerable importance
on communications with
shareholders…the Chairman
proactively offers to attend
meetings with key
shareholders.”
During the year, investor roadshows, which were attended by the CEO and CFO, were held in London
and Edinburgh in the UK, and Boston and New York in the US. In addition, the Board members make
themselves available to meet shareholders as required. Live webcasts of results presentations were
provided and telephone briefings for analysts and investors took place in conjunction with these.
Two investor seminars were also held to explain in more depth key aspects of QinetiQ’s strategy.
All shareholders and potential shareholders are invited and encouraged to visit the ‘Investors’ section
on our website, www.QinetiQ.com, where important information for shareholders can be found.
The site also provides contact details for any investor-related queries.
The information about major shareholders can be found on page 94 and the analysis of shares held
can be found on page 160.
Constructive use of the Annual General Meeting
The Board encourages all shareholders to participate in the Annual General Meeting (AGM) and to
ask questions. All Directors attend the AGM and are available to answer any questions on the work
of the Committees.
The 2019 AGM is scheduled to be held on 24 July at the offices of Ashurst LLP, London Fruit and
Wool Exchange, 1 Duval Square, London E1 6PW. The Notice of AGM and related papers will, unless
otherwise noted, be sent to shareholders at least 20 working days before the meeting. For those
shareholders who have elected to receive communications electronically, notice is given of the
availability of the documents in the ‘Investors’ section on the Group’s website.
One of the Group’s key priorities during the year has been to foster closer relationships with customers
at all levels. This helps QinetiQ provide value for money and high performance technical solutions to its
customers. Customer engagement is underpinned by related, intelligent and persistent communication
through a variety of means, building a position of mutual understanding and genuine trust between the
Company and the customer. QinetiQ prides itself on building such relationships, taking the time to
understand its customers’ strategic vision and needs in order to provide timely, effective and affordable
solutions that tie into their organisational goals. Given that effective engagement is as much about
attitude and behaviour as it is about delivering messages, QinetiQ’s customer engagement is affirmed by
the timely delivery of programmes, and acting as a genuine, flexible and helpful partner that demonstrates
the desire to address customer issues as soon as possible.
Managed by the Strategic Engagement Team, QinetiQ’s engagement matrix nominates an Executive
Committee-level sponsor and business relationship lead to each customer. The sponsor and business
lead engage with their nominated customer(s) as business dictates or, as a minimum, at the frequency
determined by the engagement matrix to gain a full understanding of any business opportunities or issues,
and to ensure consistency of the Company’s messaging. Progress and details of customer engagement
are distributed to the Executive Committee and thereafter informed by the CEO to the Board.
The Board invited a significant customer to one of its Board dinners during the year. This provided the
Board the opportunity to gain invaluable first hand insight into the experience of being a QinetiQ customer.
Customer
engagement
Community
investment
At QinetiQ we recognise that it is important that we interact positively with the wider community
and environment in which we operate. Our community investment initiatives are further described
on pages 38 to 43.
The Board invited a significant
customer to one of its Board
dinners during the year.
This provided the Board the
opportunity to gain invaluable
first hand insight into the
experience of being a
QinetiQ customer.”
Strategic report | Corporate governance statement
63
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Corporate governance statement
continued
Board performance evaluation
Every three years the Board carries out an external Board
effectiveness review of the Board itself and its Committees. Following
two internal reviews in 2017 and 2018, the Chairman, Mark Elliott, led
the process, with the assistance of the Company Secretary, in finding
the most appropriate independent external reviewer for the 2019
evaluation. The Chairman met with three such providers, resulting
in the engagement of Duncan Reed of Condign Board Consulting
(Condign). Neither has any other connection with the Group.
The evaluation process was as follows:
1 Approach
Meetings were held between the Chairman, the Company
Secretary and Condign to discuss and agree the
approach to the process.
2 Individual face-to-face meetings
Condign conducted face-to-face interviews with all Board
and Committee members. In addition, Condign also met
with the Group Director Strategy and Planning, the
interim Group Human Resources Director, FIT
Remuneration Consultants, the Group Financial
Controller, the Audit Partner at PwC and the
Group Director Safety and Governance.
3 Feedback meeting
The Chairman and the Company Secretary held
a feedback meeting with Condign to provide their
comments on the evaluation process.
4 Data analysis
Condign then collated the individual responses and
compiled a confidential and non-attributable report of its
findings. The report was initially issued to the Chairman
and the Company Secretary, before being submitted to
the members of the Board.
5 Board and Committee review of outcome
The Board and its Committees discussed the findings
of the report and agreed a number of actions for the
coming year, as set out in this report. The Board also
discussed its performance generally and agreed that
the Board had worked well together as a unit, discharged
its duties and responsibilities effectively, and worked
effectively with the Board Committees during the year.
Progress against prior year’s review
Key findings
Action taken
Succession planning
– focus on skills
necessary for
implementing the
strategy
The Nominations Committee has extensively
discussed this topic during the year. A detailed
report from the Nominations Committee, including
the latest changes to the Board and succession
plans for FY20 can be found on pages 72 to 73.
The annual strategy meeting is of particular benefit
to the Board. Further details of this meeting can
be found on page 60.
Focus on operational
effectiveness and
supporting
management’s
implementation
of strategy
64
Key findings
Action taken
Leverage the Board’s
collective experience
People and culture
– focus on
challenging,
supporting and
evolving this area.
The Board focused on using its distinctive strengths,
collaborative working style, diversity, experience
and maturity to support management in the most
effective way.
The Board considered the importance of the
leadership role it plays in influencing and monitoring
the Company’s culture, in setting the standards of
good behaviour that align with our values, and how to
reinforce these formally in the board room and how
to best support management to embed our values,
beliefs and behaviours throughout the organisation.
The Board was assisted in its discussions by the
Interim Group Human Resources Director.
Priorities for the coming year
– Enhanced focus on matters that will be transformative in relation
to results and performance and with applicability beyond individual
countries, projects, companies or sites
– Agree key issues and any new priorities for the Board mandate
for the upcoming year
– Cultural discussions – ensure a greater emphasis on experiences
and examples to support the Board’s debate
– Extend the programme of guests at the Board with the aim of
gaining further understanding of stakeholders and competitors
The Board effectiveness review concluded that it was clear the Board
was seen to be effective, engaging and helpful to the organisation.
It became apparent during the effectiveness review process that
the Chairman himself (further to his retirement at the July 2019 AGM)
will be missed for his insight, personal qualities and commitment.
The Chairman-elect will inherit an increasingly experienced top team,
and a stable Board, who between them are effectively deploying the
Company’s stated strategy.
The effectiveness review took in commentary from a broad population,
comprising Board members, senior Executives who have high exposure
to the Board and Committees, and some of its professional advisors.
This has provided the Board and the Chairman-elect with a
comprehensive picture of its strengths and opportunities as it
continues to develop, and to help drive forward the Company’s strategy.
The Chairman’s individual performance
As part of our annual evaluation process, Michael Harper, as Senior
Independent Director, led a review of the Chairman’s performance.
At a private meeting, the Non-Executive Directors, with input from the
Executive Directors, assessed his ability to fulfil his role as Chairman.
It was concluded that the Chairman showed effective leadership of the
Board and his actions continued to influence the Board and the wider
organisation positively.
The Directors’ individual performances
The Chairman held performance meetings with each Board member
to discuss their individual contribution and performance over the year,
and their future training and development needs. Following these
meetings, the Chairman confirmed to the Nominations Committee
that each Director demonstrated commitment to the role, that their
performance continued to be effective, and that they have sufficient
time available to perform their duties.
QinetiQ Group plc Annual Report and Accounts 2019
Compliance statement
Throughout the year QinetiQ has applied the principles
and been compliant with the provisions set out in the UK
Corporate Governance Code (the Code), published on
27 April 2016, which is available at www.frc.gov.uk
A. Leadership
A.1 The Role of the Board
The Board of Directors represents the interests of QinetiQ and its
shareholders. The Board has ensured that there is a framework of
prudent and effective controls which enable risk to be assessed and
managed, along with key policies and procedures, and for the business
to implement strategy and monitor operational performance through
the Board’s direction and advice.
The Board has a formal schedule of matters specifically reserved
for its decision which can be seen at www.QinetiQ.com. Following
the introduction of the 2018 Corporate Governance Code, the Board
has reviewed and updated the schedule of matters reserved and
limitations of authority to ensure they remain appropriate. The Board
has adopted procedures relating to the conduct of the business
including the timely provision of information, and the Company
Secretary is responsible for ensuring that these are observed.
The Board has seven scheduled meetings throughout the year, which
are held over two days. Details of the Directors’ attendance can be
found in the table below. Additional Board sub-Committee meetings
and conference calls are held between the scheduled meetings as
required. Non-Executive Directors are encouraged to communicate
directly with Executive Directors and senior management between
Board meetings via the Executive Directors and the Company Secretary.
The Chairman meets with the Non-Executive Directors, without
Executives present, after each Board meeting. The Non-Executive
Directors, led by the Senior Independent Director, meet with the
Directors at least once a year without the Chairman being present,
to evaluate the Chairman’s performance. Further details of this can
be found on page 64.
A.2 Division of responsibilities
The roles of the Chairman and CEO are separate, clearly established,
set out in writing, and agreed by the Board. The Chairman is
responsible for the operation of the Board and the CEO is responsible
for leading and managing the business within the authorities
delegated by the Board.
A.3 The Chairman
The Chairman, working with the Company Secretary, sets the agenda
for the board meetings and encourages an open and constructive
debate. On appointment as Chairman in March 2010, Mark Elliott
met the independence criteria as set out in the Code.
A.4 The Non-Executive Directors
Non-Executive Directors are appointed for an initial term of three
years, subject to annual re-election in accordance with the Code.
The Board undertakes an annual review of the independence of
the Non-Executive Directors.
The Non-Executive Directors bring independent judgement on key
issues affecting the Group and its business operations, including
strategy, performance, resources and standards of conduct. They
provide constructive challenge to management and help develop
proposals on strategy.
A.4.1 Senior Independent Director
Michael Harper is Senior Independent Director and Deputy Chairman.
In this role, Michael provides advice and additional support and
experience to the Chairman as required, and is available to act as an
intermediary for the other Directors if necessary. He is also available
to address shareholders’ concerns should it occur that these have
not been resolved through the normal channels of communication
with the Chairman, CEO or other Executive Directors.
B. Effectiveness
B.1 Composition of the Board
The Board considers that, throughout the year, at least half of the
Board, excluding the Chairman, comprised independent Non-Executive
Directors and that the composition of the Board had the requisite
balance of skills, experience, challenge and judgement appropriate
for the requirements of the business and full Board effectiveness.
The skills and experience of the Board’s 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 brought
both support and challenge to the CEO, CFO and management team
during the year. Full biographical details of all the Directors appear
on pages 56 to 57.
Board and Committee attendance – 1 April 2018 to 31 March 2019
Members
Lynn Brubaker
Admiral Sir James Burnell-Nugent
Mark Elliott
Michael Harper
Neil Johnson (appointed 2 April 2019)
Ian Mason
Paul Murray
Susan Searle
David Smith
Steve Wadey
Strategic report | Compliance statement
Board
Audit
Committee
Nominations
Committee
Remuneration
Committee
Risk & CSR
Committee
7/7
7/7
7/7
7/7
–
7/7
7/7
7/7
7/7
7/7
4/4
4/4
—
4/4
–
4/4
4/4
4/4
—
—
8/8
8/8
8/8
8/8
–
8/8
8/8
8/8
—
—
6/6
6/6
6/6
6/6
–
6/6
6/6
6/6
—
—
4/4
4/4
4/4
4/4
–
4/4
4/4
4/4
4/4
4/4
65
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Compliance statement
continued
B.2 Board Appointments
The Nominations Committee oversees appointments to the Board.
Further details of the role of the Nominations Committee and its
activities during the year, including the details of the process of
the appointment of Neil Johnson, can be found on page 72.
Disclosures on diversity can be found on pages 39 and 73.
All Directors are expected to commit and take responsibility for their
own development during their tenure. During the year of reporting,
individual Non-Executive Directors attended various seminars and
workshops covering matters such as cyber risks, diversity,
remuneration trends and strategy development. In addition, the
Directors are required to complete the annual business ethics training,
as noted on page 41.
New Directors receive a comprehensive induction on joining the Board,
which is tailored to their experience and background. David Smith, who
was appointed in March 2017, successfully completed his induction
during the year of reporting. Neil Johnson has recently commenced
his induction, compromising site visits, meeting staff at all levels
throughout the organisation, meeting with major shareholders and
having access to comprehensive relevant briefing material.
B.5 Information and support
The Chairman, working in conjunction with the Company Secretary,
ensures that the Board receives accurate, timely and clear information.
Board papers are made available electronically, allowing sufficient time
for review prior to each meeting.
All Directors have access to the advice of the Company Secretary.
Directors may take independent professional advice at the Company’s
expense where they judge it necessary to do so in order to discharge
their responsibilities as Directors.
The appointment and removal of the Company Secretary is a matter
requiring Board approval.
B.6 Evaluation
The details of this year’s Board evaluation, which was carried out
externally, and an update on the recommendations from the evaluation
in 2018 can be found on page 64.
B.7 Re-election
All Directors stand for re-election at each AGM and any term beyond
six years is subject to a rigorous review, taking into account the need
for progressive refreshment of the Board.
C. Accountability
C.1 Financial and business reporting
The Board has established processes to ensure that all reports
and information, which it is required to present in accordance with
regulatory requirements, represent a fair, balanced and understandable
assessment of the Company’s position and prospects. Details of the
process for ensuring that this is the case, is set out on page 68.
The Board considers that the Annual Report 2019, taken as 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.
The going concern statement and viability statement are included
on page 37, and a summary of the statements of Directors’
responsibilities in respect of the Annual Report and the financial
statements is set out on page 95.
B.3 Time commitment
Each Non-Executive Director must be able to devote sufficient time
to their role as a member of the Board in order to discharge his or her
responsibilities effectively. Prior to undertaking an additional external role
or appointment, the Directors are asked to confirm that they will continue
to have sufficient time to fulfil their commitments to the Company.
The Chairman is conscious that some shareholders have concerns
regarding Directors taking on too many non-executive roles.
Consequently, he has assessed the ability to meet the commitments
required by QinetiQ for those members of the Board who hold more
than one other Board position, and he is satisfied that all Board
members are able to meet the Company’s time commitment going
forward. In addition to their work on the QinetiQ Board and its
Committees, the members of the Board also regularly make
themselves available for Board calls, sub-Committee meetings
and Executive leadership events.
Susan Searle holds appointments in four other plc companies,
in addition to her work with QinetiQ. However, one of these companies
(Woodford Patient Capital Trust) is an investment trust and the other
three are AIM listed companies. By nature, the time requirements for
these roles are not as significant as at a FTSE 250 operating company
such as QinetiQ. Therefore, the Chairman is satisfied that Susan has
the time and availability to commit fully to her role as a Non-Executive
Director of the QinetiQ Board.
At the date of this report, Neil Johnson, who was appointed a
Non-Executive Director, Chairman designate, on 2 April 2019, holds
three other Chairmanships. Neil has made preparations to stand down
from his role as Chairman of Centaur plc on 30 June 2019. He is also
the Chairman of Electra Private Equity, a former private equity firm
which has returned over £2bn to shareholders in recent years and is
now running off its final few investments prior to closing the fund, at
which point he will also resign from this position. Neil will remain the
Chairman of Synthomer Plc. In considering his appointment, the Board
gave careful consideration to Neil’s other appointments, how they
would reduce prior to his proposed appointment as Chairman and
subsequently concluded that he would effectively be the Chairman of
two FTSE250 listed companies, and that accordingly he would be able
to give the Company the time and commitment necessary to act first
as a Non-Executive Director, and subsequently as its Chairman.
B.4 Director training and development
The Company Secretary organises site visits and training to suit
Directors’ individual requirements. This year Non-Executive Director
site visits included Ashford, Malvern (Susan Searle and Mark Elliott
only), and Farnborough in the UK; and Waltham, Massachusetts, in
the U.S. External training was conducted by PwC, and briefings were
made by the Company Secretary to the Board on corporate
governance matters and regulatory changes, in particular on the new
2018 Corporate Governance Code and the Companies (Miscellaneous
Reporting) Regulations 2018.
66
QinetiQ Group plc Annual Report and Accounts 2019 D. Remuneration
D.1 The level of components of remuneration
The principal responsibility of the Remuneration Committee is
to determine and agree with the Board the overall remuneration
principles and the framework for remuneration of the Executive
Directors, the Company Secretary, and the other members of the
Executive Committee. The report of the Remuneration Committee
appears on pages 76 to 92. The terms of reference can be found
on the corporate governance section of the Company’s website
at www.QinetiQ.com.
D.2 Procedure
When determining policy on Executive remuneration the Remuneration
Committee takes into account all factors which it deems necessary,
such as:
– Relevant legal and regulatory requirements and guidance
– The provisions of the Code
– The views of principal shareholders
Individual members of the Executive Committee are not present
when his or her own remuneration is being determined.
E. Relations with Shareholders
E.1 and E.2 Dialogue with Shareholders and
Annual General Meeting
The Company attaches significant importance to maintaining
effective engagement with shareholders to ensure a mutual
understanding of objectives and to deal with any issues of concern.
The Chairman and the Executives meet regularly with institutional
shareholders, and views are communicated to the Board as a whole.
Institutional shareholders are offered the opportunity to attend
meetings with the Senior Independent Director, or may request
such meetings themselves.
The responsibility for communications with shareholders rests
with the Executive Directors, assisted by the Group Director, Investor
Relations and Communications. The Company Secretary oversees
the communications with private individual shareholders. The Board
receives reports of meetings with institutional shareholders together
with regular market reports and brokers’ reports which enable the
Directors to understand the views of shareholders.
See page 63 for further details on the Board’s engagement with
shareholders. An analysis of the shareholder register, by type of
holder and by size of holding, can be found on page 160.
Further details about the AGM can be found on page 95.
C.2 Risk Management and Internal Control
The Board oversees the systems of risk management and internal
control through the Audit Committee (financial risk) and the Risk &
CSR Committee (non-financial risk) in conjunction with the risk
management and assurance processes detailed in this report. These
processes are underpinned by an appropriate mix of techniques used
to obtain the level of assurances required by the Board. All board
members attend these Committee meetings, either as a Committee
member or as a guest, so as to receive at first-hand the findings of
the Committees. Matters of particular concern are escalated for
presentation at board meetings.
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 internal audit function prioritises its work
according to risk, including those 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, internal audit plans and the wider
control environment.
The Board routinely challenges management to ensure that the
systems of internal control are constantly improving in order to
maintain their effectiveness. At its meeting in March 2019, the Board
reviewed the effectiveness of the systems of internal control that
were in operation during the year.
Further to this meeting, the Board confirms that it has carried out
a robust risk assessment of the principal risks facing the Company,
including those that would threaten its business model, future
performance, solvency and liquidity.
The report of the Audit Committee can be found on pages 68 to 71
and the report of the Risk & CSR Committee can be found on pages
74 to 75.
The Strategic report contains details of the Company’s principal risks
and uncertainties (see pages 33 to 35), their impact on the Company
and how they are managed, including the Company’s Three Lines
of Defence Model (see page 32).
C.3 Audit Committee and Auditors
The Audit Committee is comprised entirely of independent Non-
Executive Directors, and is chaired by Paul Murray, who continues to
have recent and relevant financial experience. The Board considers the
members of the Committee to be independent. In accordance with the
Code, the Board concludes that the Committee as a whole possesses
competence relevant to the Company’s sector, having a range of
financial and commercial experience in the industry and the
commercial environment in which QinetiQ operates.
The CEO, CFO, Group Financial Controller, Group Head of Internal Audit
Manager and representatives of PwC attended all Committee
meetings by invitation during the year.
The Committee met PwC and the Group Internal Audit Manager on
two separate occasions during the year, without Executive Directors
present, to discuss the audit process and assure itself regarding
resourcing, auditor independence and objectivity.
A full report of the Audit Committee is set out on pages 68 to 71.
The Committee’s formal terms of reference can be found at
www.QinetiQ.com.
Strategic report | Compliance statement
67
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Report of the Audit Committee
Dear Shareholder,
I am pleased to present the report of the Audit Committee on the work
carried out by the Committee during the last financial year. This report
should be read in conjunction with the section on how we have complied
with the UK Corporate Governance Code on pages 65 to 67. The
Committee continues to operate on the basis of an open but challenging
dialogue with management and with the internal and external auditors,
and the application of an appropriate level of scrutiny.
The main responsibilities of the Committee are set out in this report.
It details the activities, discussions and decisions which enabled the
Audit Committee to fulfil its objectives effectively during the year
of reporting.
Paul Murray
Audit Committee Chairman
Paul Murray
Audit Committee
Chairman
Main responsibilities
The Audit Committee monitors the Group’s integrity in financial
reporting and reviews the effectiveness of the financial risk
management framework.
Activities during the year
The Committee has an annual calendar of activities, and in addition, it identifies particular areas on which the Committee wishes to focus on.
The significant issues that the Committee considered during the year are set out in the table below:
Areas of focus
Action taken by the Committee
The Committee scrutinised and challenged the principle underpinning the statement for FY19, and concluded that the Group will
be able to continue in operation and meet its liabilities as they become due. The Committee therefore considers it appropriate that
the statement covers a five-year period. The statement can be found in full on page 37.
As a standing agenda item, the Committee focused on understanding the reasonableness of provisions and liabilities, both in terms of
consistency of policy application and key judgements made by management and professional advisors. Considering the nature of the
business and global market in which QinetiQ operates, comprehensive discussions were held by the Committee throughout the year where
the Committee reviewed whether suitable accounting policies had been adopted, and whether management had made the appropriate
estimates and judgements. In addition, support and assessment were sought from the external auditor. To facilitate this process, the
Committee received presentations from the CFO and the Group Financial Controller and also received a report from the external auditor
covering the key risk areas addressed during the audit, and the auditors’ view of the key judgements made by management.
Specific issues addressed by the Committee for the periods ended 30 September 2018 and 31 March 2019 include the following:
– The basis for, and judgements made by management in determining, the liabilities recorded for onerous contracts, potential claims
and other disputes. Specific items discussed include project risk re-assessments following technical successes on a major
contract in the EMEA Services division (generating a one-off benefit to operating profit of £5.4m); a £5.0m charge in the year
relating to redundancy costs; liabilities and accounting treatment of engine servicing obligations; liabilities and charges relating to
property issues (taking into consideration the views of external advisors) and a number of other contract-related releases/charges
– The carrying values of the Group’s cash-generating units (CGUs). The major assumptions impacting on the net present value 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 asset of £259.1m (as advised by the Company’s external actuaries)
– The basis for recognition of US tax losses and judgements in respect of the Group’s tax reserves, including R&D expenditure credits
– The disclosures in the interim statement, the preliminary announcement and Annual Report and Accounts, in particular those
relating to ‘specific adjusting items’, to ‘one-off’ trading items and risk. In addition, the disclosures and key accounting judgements
in respect of the acquisition of QinetiQ GmbH (formerly E.I.S. Holding GmbH) in Germany and the investment into Inzpire Group
Limited, were reviewed. The valuations of acquired intangible assets were undertaken by an external firm of specialists in that area
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.
Longer-term
viability statement
Financial reporting
68
QinetiQ Group plc Annual Report and Accounts 2019 Areas of focus
Action taken by the Committee
Fair, balanced and
understandable
The Committee was required to provide advice to the Board 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. Following the process established and
reported on in previous years, and in forming its opinion, the Committee reflected on the information it had received and its
discussions throughout the year. The assessment was assisted by an internal verification of the factual content by management,
a review at different levels of the Group to ensure consistency and overall balance, and a comprehensive review by the senior
management team and the external auditors. Following its review, the Committee was of the opinion that the FY19 Annual Report
and Accounts were representative of the year and present a fair, balanced and understandable overview, providing the necessary
information for shareholders to assess the Group’s position and performance, business model and strategy. The external auditor
confirmed their satisfaction with the standard achieved. The Board’s statement in this respect can be found on page 37.
Financial reporting process
The Committee 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 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 various financial reporting teams who
report to the CFO. The Group Finance team comprises qualified and
experienced accountants, and is responsible for the preparation of the
half-year and annual reports and for internal financial reporting to senior
management and the Board. To ensure 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 also liaises with the external auditor.
The internal control and risk management systems described on
page 60 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.
Internal controls
During the year under review, the Committee monitored the
effectiveness of the systems of internal control to gain assurance that
an effective control framework was maintained. Reports on the effective
operation of the control framework were received from management
and reviewed by the Committee along with key policies and processes.
As in previous years, particular attention was given to the timely and
effective implementation of remedial actions, either identified by the
business directly, or by the internal audit function, with updates on
improvement actions being scheduled for follow up at a later meeting
during the year.
The process in respect of QinetiQ North America is adjusted to take
into account the Proxy agreement referred to on page 60. 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. In addition, the Executive Directors
attended meetings of the US Board during the year. The internal audit
function continues to work closely with US management to gain
assurance that an effective control environment is in place.
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.
Internal audit
The Group Head of Internal Audit reported on four occasions to the
Committee on the operation of internal control and risk management
processes. The internal audit function’s risk-based annual plan was
presented, and formally reviewed twice during the year by the
Committee to provide assurance that resources were 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 period. The audits cover financial systems,
programmes and projects, as well as reviews of specific risks
identified through the Group’s risk management processes. During
the year the internal audit function audited the controls in place over
a range of key functions across the Group in line with the risk based
plan. Particular areas of focus were the Company’s joint ventures,
business continuity, and expenses.
In addition, a Board Assurance Map (‘BAM’) process was commenced
during the year. The BAM is based on the three lines of defence
framework (set out on page 32) and addresses the following:
– It identifies and documents relevant compliance and assurance
providers across the organisation
– It exposes potential gaps in compliance assurance coverage as
well as any duplication of effort and identifies whether improved
assurance coverage can be achieved by leveraging more of the
second defence activities currently being undertaken
– It enables an objective review through each line of defence
to support senior management and the Board to establish an
appropriate level of assurance of a system of internal controls
in the Group
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.
During the year a new Group Head of Internal Audit was appointed
following the retirement of the previous person in position. The Chair
of the Audit Committee and the Chair of the Risk & CSR Committee
were involved in determining the role specification for the position and
also in the interview process of the candidates. Commencing his role
in October 2019, the new Group Head of Internal Audit has been able
to provide fresh perspectives to the Audit Committee.
Strategic report | Report of the Audit Committee
69
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Report of the Audit Committee
continued
Audit Committee effectiveness review
The evaluation of the effectiveness of the Committee was conducted
alongside the Board effectiveness review and carried out by way of
face-to-face interviews with Condign Board Consulting. Further details
of this process can be found on page 64.
The Committee ensures that any 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 PwC 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 reviews the cost and nature of non-audit work
undertaken by the external auditor at three meetings during the
financial year as a standing item, with a fourth meeting considering
the auditor’s fees as part of the year-end review.
The Committee had concluded, prior to engaging PwC for the
provision of these services, that there had not been any conflict of
interest that might compromise the independence of PwC’s audit
work. Details of the external auditor’s remuneration can be found in
note 5 on page 121.
Audit fees
Non-audit:
Audit-related assurance
services
All other non-audit
services
Total non-audit fees
2019
% of
audit fee
12%
6%
18%
£m
0.7
0.1
0.0
0.1
2018
% of
audit fee
12%
1%
13%
£m
0.6
0.1
0.0
0.1
Fees related to non-audit work services amounted to £111k, including £74k for audit-
related services (2018: £75k including £72k for audit-related services).
The following actions had been noted from the 2018 effectiveness
review:
– Value gained from PwC’s first year as auditors
– Gaining an improved understanding of the control environment
at QNA
– Focus on ensuring that the internal audit function continues
to have the appropriate resources, processes and systems
These items were covered during the year under review.
The effectiveness of the Committee continued to be rated highly. It
was agreed that the Committee should focus on the following areas
over the coming year:
– Continued focus on the development of the internal audit function
by way of extended support from the Audit Committee and the
senior finance team
– Enhanced presentation time from the CFO to enable the Audit
Committee to further support the finance function
External audit
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 a Code of Practice applicable to all employees
which sets out the principles for regulating the award of non-audit
work to the external auditor. The Code of Practice 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.
Pursuant to the Code of Practice, any non-audit services conducted
by the external auditor require the prior consent of the CFO or the
Chairman of the Audit Committee, and any services exceeding
£50,000 in value require the prior consent of the Audit Committee
as a whole. In addition, the Group’s policy in respect of the award of
non-audit work to the Group’s auditors contains a detailed listing of
prohibited services, which follows the Financial Reporting Council’s
guidance. For work that is not prohibited by type, the Audit Committee
will take into consideration the size of the contract in proportion to
QinetiQ’s revenue and profit, and also the total size when aggregated
with other contracts with PwC.
70
QinetiQ Group plc Annual Report and Accounts 2019 Review of the effectiveness and the independence of the
external auditor
At its September meeting the Committee reviewed the results of
an effectiveness survey of the previous year’s audit process, which
allowed the learnings to be fed into the current year’s planning
process. At its May meeting, the Committee again 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 PwC as the Company’s auditor
in the last financial year.
Audit appointment
PricewaterhouseCoopers LLP, as the external auditor, is engaged to
conduct a statutory audit and express an opinion on the Company’s
financial statements. Its audit includes the review and testing of the
data which is to produce the information contained in the financial
statements. PwC was appointed as auditor of the Group at the 2018
AGM following a tender process undertaken in 2017.
The current external audit engagement partner is Julian Gray, Senior
Statutory Auditor, who has held his role since 2017. The time line for
the mandatory appointment of a new external audit lead partner
is five years. Under the EU audit reform legislation, companies are
required to have a mandatory rotation of auditors after ten years,
or 20 years if there is compulsory re-tender at ten years.
The Committee and the Board will be recommending PwC’s re-
appointment at the 2019 AGM.
Statutory audit services compliance
The Company confirms that, during the year under review, it has
complied with the provisions of the Competition and Market’s
Authority’s Order on statutory audit and services, which relates
to the frequency and governance of external audit tenders and
the setting of a policy on the provision of non-audit services.
Employee reporting and guidance: Confidential reporting processes
QinetiQ has in place a confidential reporting process which is detailed
on the Company’s intranet and its Code of Conduct Policy. If an
individual does not feel that they can resolve any concerns with the
Company directly through discussions with their functional manager,
they can use an externally provided confidential internet and telephone
reporting system. All concerns are passed by the external third party
to the Group Head of Internal Audit who ensures 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.
Strategic report | Report of the Audit Committee
71
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Report of the Nominations Committee
QinetiQ’s Gender Pay Gap data can be found on our website – www.QinetiQ.com.
Board succession planning
Appointment of Neil Johnson
Mark Elliott will be stepping down as Chairman at the conclusion
of the 2019 AGM after just over nine years in post. In October 2018,
a process was launched to identify and recruit a Non-Executive
Director, Chairman designate. The candidate specification for this role
was carefully prepared by the Committee as a whole, using the Board
Diversity Policy, and as such ensuring that it was specific to skills and
experience, appropriately neutral, and supportive of QinetiQ’s diversity
and inclusion strategy. The Committee specifically considered the
following qualities in its search for the new Chairman:
– A proven track record as a successful leader in international
and defence-related businesses
– Broad knowledge and demonstrable expertise of operating
in international businesses
– Credible relationships with relevant external stakeholders
– Strong experience of working with government and partners
– A strong track record of project delivery
– Leadership within a strong and value-based culture
A working group of the Nominations Committee, led by the Senior
Independent Director, conducted an extensive and rigorous search for
the new Chairman. The working group considered three potential
external executive search firms, all of international standing and fully
conversant with the benefits that diversity and inclusion brings. Russell
Reynolds were chosen to conduct the search, and they produced a
diverse list of candidates, including strong female candidates. Susan
Searle and Michael Harper initially met with the candidates and, upon
their recommendation, the Committee agreed on two preferred
candidates. The members of the Committee individually met with both
candidates. Based on merit, the Committee ultimately established Neil
Johnson to be the best candidate for the position and therefore
recommended him to the Board for the appointment of Non-Executive
Director, Chairman designate. This meeting of the Nominations
Committee was chaired by the Senior Independent Director.
Upcoming changes to the Board
Admiral Sir James Burnell-Nugent has this year served nine years as
Non-Executive Director and Chairman of the Risk & CSR Committee.
Once more, Russell Reynolds, has been engaged in assisting with
finding candidates with relevant Senior Crown Servant experience,
equivalent to that of Sir James. The guidance from the Advisory
Committee on Business Appointments (ACOBA) restricts
appointments of former Senior Servants to the Crown from working
in the UK defence market for two years from their last day in post.
In addition, work as a consultant or advisor in the defence sector,
can also not be undertaken under the same time limit. Owing to this
restriction, the Committee has thus far not identified a candidate
who would provide the requisite experience and be available in the
near term. In light of this, Sir James has agreed to continue his role
for a further year until suitable candidates have been found. In
accordance with Code Provision B.1.1. of the 2016 UK Corporate
Governance Code, the Board has undertaken a rigorous review, without
Sir James in attendance, to determine whether he is still independent
in character and judgement. Following this review, the Board was
satisfied that he continues to remain independent. The Committee
based its decision on its view that Sir James has been, and continues
to be, excellent in his role as Non-executive Director of the Board and
also in the effective way in which he chairs the Risk & CSR Committee,
all of which is evidenced by the annual Board evaluations.
Mark Elliott
Nominations
Committee Chairman
Main responsibilities
– Keep under review the structure, size and composition
of the Board
– Succession planning for Directors and other senior Executives
– Keep under review the leadership needs of the organisation,
both Executive and Non-Executive, with a view to ensure the
continued ability of the organisation to compete effectively
in the marketplace
– Be responsible for identifying and nominating, for the
approval of the Board, candidates to fill Board vacancies,
as and when they arise
– Review annually the time required from Non-Executive
Directors – the performance evaluation is used to assess
whether the Non-Executive Directors are spending sufficient
time to fulfil their duties
Dear Shareholder,
I am pleased to present the Nominations Committee report covering
the Committee’s key activities during the year of reporting. This report
should be read in conjunction with the separate report on compliance
with the UK Corporate Governance Code, which can be found on
pages 65 to 67.
It has been a busy year for the Nominations Committee, overseeing
the appointment process of Neil Johnson, who joined the Board in
early April of this year. The process of his appointment is described
further below in this report.
In FY20 the Committee will focus on implementation of the changes
to the corporate governance framework, Non-Executive Directors’
succession planning, Board diversity and findings of the Board and
Committee evaluation.
Mark Elliott
Nominations Committee Chairman
72
QinetiQ Group plc Annual Report and Accounts 2019 For FY20, the Committee will continue to focus on Board
succession planning.
Non-Executive Directors’ appointment and retirement dates
Name
Mark Elliott
Admiral Sir James
Burnell-Nugent
Paul Murray
Michael Harper
Susan Searle
Ian Mason
Lynn Brubaker
Neil Johnson
Appointment date
1 Mar 2010
(as Chair)
10 Apr 2010
6-year date
1 Mar 2016
9-year date
1 Mar 2019
10 Apr 2016
10 Apr 2019*
25 Oct 2010
22 Nov 2011
14 Mar 2014
3 June 2014
27 Jan 2016
2 Apr 2019
25 Oct 2016
22 Nov 2017
14 Mar 2020
3 June 2020
27 Jan 2022
2 Apr 2025
25 Oct 2019
22 Nov 2020
14 Mar 2023
3 June 2023
27 Jan 2025
2 Apr 2028
* Details of the succession plans for Admiral Sir James Burnell-Nugent are described
above in this report.
Board experience and balance
The Committee annually reviews the composition of the Board
and its Committees, taking the following into account:
– Diversity, including age, gender and ethnicity
– Background, professional skills and experience
– The number and balance of Executive and Non-Executive Directors
– Committee memberships
– Length of tenure
– Independence
The Committee considered how well the skills, knowledge and
experience of the Board continued to ensure that it remains supportive
to the business to deliver effectively against our strategy, both now
and in the future. The Committee also discussed emerging
requirements for skills and experience on the Board.
Following this review the Committee is satisfied that the Board
currently has an appropriate mix of skills, knowledge and experience
to operate effectively. The Directors, individually, bring a range of skills
gained in diverse business environments and have excellent track
records obtained from working in a number of sectors. Further details
about the particular skills, knowledge and experience each Director
brings to the Board can be found in the Directors’ biographies on
pages 56 to 57.
Executive succession planning
The Committee has spent substantial time discussing this important
area during the year, receiving regular updates from the Interim Group
HR Director on succession planning and career development for the
Executive Directors and the Executive Committee members. The
Committee reviewed the succession plans in place for each member of
the Executive Committee, which took into account the immediate,
emerging and longer-term succession plans for these roles. Particular
focus included hearing about how the Company is making best use of
the many highly talented individuals employed throughout the Group and
that the Company is ensuring that we use such individuals to create a
culture that supports a diverse and inclusive working environment. The
Committee was satisfied that the plans were sufficiently robust to fill
vacancies on a short to medium-term interim basis, as well as taking
into account individuals of sufficient calibre to fill vacancies on a
longer-term basis. The Committee also sought to ensure that the
succession plans provide sufficient support in developing a diverse
pipeline of candidates for Directors and senior management vacancies.
Diversity and inclusion
Board diversity policy
QinetiQ recognises the value of and welcomes the current discussions
around diversity in the board rooms of UK companies. The Board
Diversity Policy can be found on www.QinetiQ.com. The objective of
this policy affirms the Board’s belief in the benefits of diversity and
inclusion in its widest sense in the board room as well as throughout
the business. The policy applies to the Board, the Executive Committee
and direct reports to the Executive Committee. Additional policy is in
place to address diversity and inclusion for the whole workforce.
The Board continues to have regard to the Hampton-Alexander Review
recommendations to improve gender diversity among FTSE boards
and leadership teams, and the Parker Review on ethnic diversity on
UK boards. The Board aspires to meet the voluntary targets set out
in those reports.
Further details about the gender balance of the Executive Committee
and their direct reports can be found in ‘Our People’ section on page 39.
Objectives and progress
As at the date of this Annual Report the Board comprises 20% women,
which is a smaller number than the Board aspires towards. This
number will change to 22% when Mark Elliott steps down from the
Board at the conclusion of the 2019 AGM.
The Board is committed to progress against the targets, both in
relation to gender and ethnic diversity, as set out in the Board Diversity
Policy. The Company’s mandatory requirement for a diverse candidate
pool ensures that we continue to have the opportunity to recruit
candidates from all gender, cultural and ethnical backgrounds. When
drawing up selection criteria for a Board recruitment process the
Committee will have regard to diversity in its widest sense, but will
remained focused on recruiting the best candidate for any role based
on merit. The recruitment process for Neil Johnson, as described on
the previous page, is an example how the Board Diversity Policy was
applied in practice.
Page 39 describes the progress of our Diversity and Inclusion
Programme, including progress against the Board Diversity Policy
in connection to the Executive Committee and its direct reports.
Diversity and Inclusion in relation to the other employees of QinetiQ
are covered by other policies and procedures of the Company.
Succession plans are continually being reviewed in light of
opportunities to develop high calibre employees and improve diversity.
Effectiveness of the Committee
The effectiveness of the Committee is monitored and assessed
regularly by Mark Elliott, as the Chairman of the Committee and
Chairman of the Board, and as part of the board performance
evaluation. The overall outcome of the external FY19 review (further
details of this process can be found on page 64) of the Committee
was positive, and in particular it was noted that the Committee would
be increasingly busy and it would be beneficial for the Committee to
continue to use a sub-Committee for succession activities as had
been done during the most recent recruitment process to the Board.
Strategic report | Report of the Nominations Committee
73
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Report of the Risk & CSR Committee
Dear Shareholder,
I am pleased to report that, during the year, the Committee continued
to oversee the operation of non-financial risk management processes
within the Group effectively. Building on our work from last year, the
Committee continued to focus on in-depth reviews of ‘red’ risks, and
deep-dives into key risk areas. Examples of such deep-dives can be
found below in this report.
The review of the Group Risk Register, which is described further on
pages 33 to 35, continues to be fundamental for the Committee to
undertake its duties. This year the Committee spent further time, in
conjunction with the Executive Committee, on ensuring that the Group
Risk Register remains relevant and accurate. ‘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.
At QinetiQ we realise that our business has an impact on the
communities and environment in which we operate. The Committee
and the Board recognise the importance of leading a responsible and
sustainable company and was pleased to receive reports from the
Group Director Corporate Responsibility during the year, covering areas
such as environment, business ethics and code of conduct, emerging
reputational risk, diversity and inclusion, stakeholder engagement,
trading policy and Modern Slavery Act reporting. You can read more
about all of the above in the ‘Our people’ section on pages 38 to 43.
Details of risk management and internal control processes and the
Company’s principal risks and uncertainties can be found on pages 66
to 67 and 33 to 35, respectively. In addition, further details about internal
controls and financial risks, can be found in the Report of the Audit
Committee on pages 68 to 71.
This report should be read in conjunction with the section on
compliance with the UK Corporate Governance Code, which
can be found on pages 65 to 67.
Admiral Sir James Burnell-Nugent
Risk & CSR Committee Chairman
Admiral Sir James
Burnell-Nugent
Risk & CSR
Committee Chairman
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
– To monitor adherence to the generic MOD compliance system
The sampling approach of risk,
by way of deep-dives, relating
to certain sites and projects,
was successfully used by the
Committee as a way to ensure it
kept focus on details while keeping
the bigger picture still in view.”
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QinetiQ Group plc Annual Report and Accounts 2019 Good governance supporting the Group’s risk
management activities
During the year the Committee met on four occasions. All the
members of the Board attend the Committee meetings as a
Committee member. In addition, the Group Director, Safety and
Governance and the Group Head of Internal Audit are invited to attend
each meeting. Other senior staff members, such as the Group Head
of Enterprise Risk Management and the Group Head of International
Governance, are also invited to attend when required. The Group
Director, Safety and Governance presents to the Committee twice
each year. To enable the Committee to get a comprehensive
understanding of how risk management processes have been
implemented and to ensure that these are fully embedded within the
business’ day-to-day work, deep-dives are presented to the Committee
by employees who have first-hand knowledge of such matters, i.e.
perform the work on a daily basis.
Risk reporting is incorporated into the management of the business
through the Executive Committee and monthly performance reviews
feeds into the Group strategy at the Executive and Board level.
Key activities undertaken by the Committee during the year
Risk
management
Risk
monitoring
Corporate
responsibility
Deep-dives
– Review risk management structures and reporting lines
(i.e. effectiveness of control environment)
– Effectiveness of risk reporting processes
– Review effectiveness of risk identification processes
– Consideration of external auditor recommendations
relating to risk management
– Review of risk register and key exposures
– Health, Safety & Environmental Performance
– Internal Audit reports
– International business governance
– Anti-bribery and corruption
– Cyber & Security
– Modern Slavery Act
– Corporate Responsibility Programme and focus
– Ethics training
– People (culture, recruitment, retention and equality,
diversity & inclusion)
– Diving – QinetiQ Haslar Marine Technology Park
– Aerial targets at QinetiQ Hebrides and Aberporth Ranges
– Non-ionising radiation – QinetiQ Portsdown
Technology Park
– Group property high hazard maintenance – QinetiQ
Farnborough
Self-certification process
An annual process of hierarchical self-certification on the
effectiveness of internal controls has been established. This process
provides a documented and auditable trail of accountability for the
operation of the system of internal control in operation. It is informed
by a rigorous and structured self-assessment that addresses
compliance with Group policy, and provides for successive assurances
to be given at increasingly higher levels of management and, finally, to
the Board. The self-certification process, which is carried out at the full
year and the half year, and is reported to the Committee by the Group
Director, Safety and Governance.
The self-certification process continues to be a valuable tool in
assessing the effectiveness of internal controls in all functions
and business units across the Group.
Generic MOD compliance system
A key aspect of the Committee’s work is the oversight of the UK Ministry
of Defence’s (MOD) generic compliance system. This is integral to the
work of QinetiQ in its relationship with the UK Government.
The system is designed to give the MOD customer confidence that
QinetiQ is able to provide impartial advice during any competitive
evaluation of a procurement opportunity 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 commercialise research into the
supply chain and pursue its planned business activities, without
compromising the defence or security interests of the UK. The
Board nominates two senior executives to act as Compliance
Implementation Director ‘CID’ and Compliance Audit Director ‘CAD’.
During FY19 the CID role was held by the Group Director, Safety and
Governance. The CAD role was held by the Company Secretary.
In FY20, the CID role transferred to the Group Commercial Director.
Oversight of the operation of the compliance system is provided by
the Committee. During the year the Committee received an annual
report from the Group Director, Safety and Governance and the
internal audit function on the compliance areas that it monitored.
A typical report includes a summary of the scope and an Executive
summary of the findings with an audit opinion, with agreed
associated time-bound action plans.
Effectiveness review
The evaluation of the effectiveness of the Committee during
FY19 was conducted externally, by way of an interview processes
carried out by Condign Board Consulting (further details of the
review process can be found on page 64).
The performance of the Committee was rated highly overall.
The following action for the Committee was agreed for the
upcoming year:
– A focused session on the risk attached to strategy to
be planned for FY20
Report of the Security Committee
There was no requirement for the Committee to meet during the year.
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, Paul Murray, Susan Searle, David Smith
and Steve Wadey. Neil Johnson has also joined the Committee upon
his appointment as Non-Executive Director on 2 April 2019.
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.
Strategic report | Report of the Risk & CSR Committee
75
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Directors’ remuneration report
Chairman’s statement
Our Directors’ Remuneration Report is organised into the following sections:
Chairman’s statement
At a glance
Summary Remuneration Policy
Annual Report on Remuneration
76-77
78-79
80
81-92
This report complies with the Large and Medium- sized Companies and
Groups (Accounting and Reports) (Amendment) Regulations 2013 as well as
the Companies Act 2006.
Michael Harper
Remuneration
Committee
Chairman
During FY19 the Committee met six times with full attendance at each
meeting (detailed summary of attendance is provided on page 65).
The full terms of reference of the Remuneration Committee can be found
on the QinetiQ website (www.QinetiQ.com).
Dear Shareholder,
As the Group Chairman has outlined in his statement on page 14,
strong progress has been made by the CEO and the Executive
Committee during the third year of our ambitious strategy to modernise
and grow our business. This progress is evident in three successive
years of organic revenue growth and a 3% increase in FY19 organic
operating profit excluding non-recurring trading items. This business
performance has been reflected in the strong share price performance
and shareholder returns over the year, as shown on page 87.
The annual contribution to the Bonus Banking Plan (BBP) pool
for FY19 for the CEO and CFO is higher than for FY18 reflecting
the improved performance against plan.
The second award under the Deferred Share Plan (DSP) will be
granted at close to the maximum opportunity for Executive Directors
which reflects excellent performance against the non-UK revenue
growth target set at the start of the year. The DSP award provides
a contingent share award which vests in three years to our top 200
leaders, thereby aligning their reward to the shareholder experience
through the delivery of future profits and share price growth. The
FY19 DSP shares will only fully vest if the level of underlying operating
profit in FY19 (£122.6m – excluding the contribution from businesses
acquired in year) is at least maintained in FY22.
The FY19 CEO single figure on page 81 shows an increase of 54%
on FY18 which has been seriously considered by the Remuneration
Committee against the performance of the business, and we believe
it is a fair outcome which reflects our commitment to pay for
performance; over half of this increase is due to the legacy
Performance Share Plan vesting reflecting the share price growth
over the year.
The business context in FY19
Three years ago we launched a strategy to deliver sustainable,
profitable growth. The strategy focused on leading and modernising
UK test & evaluation, becoming a more international company and
effectively applying commercial and technological innovation. Since
implementing this strategy, we have turned around five years of
revenue decline and are now delivering sustainable growth. The
progress the business has made since this strategy was developed,
and particularly in FY19, is all the more satisfying given the significant
market headwind we have faced. In FY19, these headwinds peaked
and represented a ~£5m drag to operating profit, cumulatively ~£10m
over three years. The fact that our management team were able to
successfully lead a company through a period of significant
transformation and, in parallel, overcome such strong market
headwinds to grow profitability is a great achievement. The signing
of the amendment to the Long Term Partnering Agreement in April
further underpins the strength of the business and provides a strong
platform for future growth.
The Directors’ Remuneration Policy
Shareholders approved the Directors’ Remuneration Policy at the AGM
in 2017 and FY19 represents the second year of the implementation
of this policy.
In our FY18 Annual Report we enhanced disclosure and transparency
on directors’ remuneration to enable our shareholders to review
decisions taken during the year as we implement the Policy. This was
welcomed by shareholders and this year’s report continues in a similar
theme with additional disclosures and clear presentation. For example,
the Committee decided to publish the CEO pay ratio for FY19, a full
year before being required to do so by the new UK Corporate
Governance Code.
We trust that improving communications in these ways will ensure
both the successful implementation of the Policy and continued
shareholder support.
One of the key areas of focus for the Committee in FY20 will be
consideration of the Directors’ Remuneration Policy for shareholder
approval at the July 2020 AGM and we look forward to engaging with
our shareholders to seek their views and support.
Incentive outturn for FY19
The FY19 BBP outturn for the Executive Directors was 94.4% and 93.1%
of the maximum for the CEO and the CFO respectively. This outturn is
higher than that for the previous year (66.7% and 66.1% of maximum
for the CEO and the CFO respectively), which reflects the fact that
performance exceeded the stretch target set by the Committee on
all three core FY19 financial metrics of orders, profit and cash.
Of the FY19 BBP outturn noted above, 50% will be paid in cash and
50% deferred into the BBP, where it will remain at risk of forfeiture for a
further two years (see page 84 for the details). These deferred amounts
are already reported as remuneration in the year they were earned.
The second DSP award will be made in June 2019 at 99.4% of the
maximum available, reflecting performance against the non-UK
76
QinetiQ Group plc Annual Report and Accounts 2019 The Remuneration Committee
carefully scrutinises financial
performance as it relates to
incentive payments and is satisfied
that FY19 payments are
appropriate and fair, reflecting
performance in the year.”
Conclusion
The Directors’ Remuneration Policy was approved at the 2017 AGM
and is summarised on page 80. It is also available to view in full
on the Company’s website www.QinetiQ.com.
Implementing this Policy in FY19 in the interests of shareholders
has been the primary focus of the Remuneration Committee.
FY19 was an outstanding year for QinetiQ as we deliver against our
strategy. The Remuneration Committee carefully scrutinises financial
performance as it relates to incentive payments and is satisfied that
FY19 payments are appropriate and fair, reflecting performance
in the year.
I am very grateful for the time shareholders and their representative
bodies have given us throughout the year and I hope that we can rely
on your vote in favour of the Annual Report on Remuneration at the
AGM on 24 July 2019.
I would welcome comments and questions from shareholders in
relation to this Directors’ Remuneration Report and I can be contacted
through companysecretariat@qinetiq.com.
Michael Harper
Remuneration Committee Chairman
23 May 2019
revenue growth target, taking International from 27% to 30% of Group
revenue over the last year. However, this DSP award will not vest in full
unless the FY19 profit performance (£122.6m) underpin is achieved in
FY22. Even then the vested shares must be retained for a further two
years. The 2019 DSP award is, therefore, an initial contingent share
award in a six-year programme providing a clear link to sustainable
long-term performance and the shareholder experience.
Shares awarded under the legacy Performance Share Plan (PSP) in
2016 will vest in July 2019 to the CEO at 31.7% of the initial award
based on a partial achievement of the Total Shareholder Return target.
The Earnings Per Share target was not achieved and this part of the
2016 PSP award will lapse. This was the last full award under the PSP,
a legacy plan replaced by the DSP which has more agile growth-
focused targets.
Incentive targets for FY20
The Bonus Banking Plan for FY20 is based on the same financial
metrics as in FY19 (orders, profit and cash) with stretch targets set
against the delivery of the Integrated Strategic Business Plan (ISBP).
Financial metrics have a 75% weighting. For FY20 the payment for
target performance has been reset as 50% of the stretch level, having
previously been 60%. Non-financial targets have a 25% weighting
based on the achievement of collective and personal objectives
with a target payment of 50% of stretch, as per previous years.
In support of the ISBP, as per FY19, the FY20 DSP performance
measure is absolute growth in international revenue above that
delivered for FY19. We have also agreed strong underpins to ensure
that FY19 profit margins are maintained on non-UK revenue in FY20
and Group operating profitability must be at least equal to FY20
performance in FY23, as detailed on page 91. The Remuneration
Committee carefully considered the performance measure for this
award and agreed that this continues to be the appropriate metric
to drive growth at this stage of the development of the Company.
The targets have been set to be stretching by requiring accelerated
international revenue growth and achieving the target level of
performance results in an award of 35% of the maximum available.
Employee engagement and reward
All QinetiQ’s employees are key to the delivery of the strategy.
The CEO and the Group HR Director have held regular discussions with
our Employee Engagement Group on reward matters including
executive remuneration. The people section on page 38 details our
employee engagement activity including the introduction of a new
employee engagement tool in FY19.
I have met the Chair and the Deputy Chair of the Employee
Engagement Group during the year and I have found the discussions
very helpful in terms of understanding employee views. I understand
that they have also found the meetings helpful to build their awareness
of the Remuneration Committee’s approach to executive remuneration.
It is our intention to continue to meet at appropriate intervals.
In FY19 the Company introduced an All Employee Incentive Scheme
(AEIS) whereby every employee can earn a fixed amount if the
Company achieves a level of operating profit within a pre-determined
range from target to stretch. I am delighted to confirm that the AEIS
will pay out at the maximum level of £1,000 to all employees, a truly
excellent result, aligning employees and shareholder interests by
incentivising and rewarding profitable growth. The Company will
operate the AEIS again for FY20.
Strategic report | Directors’ remuneration report
77
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Directors’ remuneration report
At a glance
How to use this report
This ‘At a Glance’ section highlights the performance and remuneration outcomes for the year ended 31 March 2019 with greater detail
provided in the Annual Report on Remuneration.
Key
Fixed pay
Bonus Banking Plan (BBP)
Performance Share Plan (old policy, PSP)
Denotes a KPI (see page 28)
Performance in 2019
Deferred Share Plan (current policy, DSP)
Shareholding guidelines
Audited information
Content contained within a grey box, accompanied by this
‘Audited information’ icon, indicates that the information
has been audited.
The BBP measures annual performance against three financial KPIs (75% weighting) and other key strategic, operational and personal targets
(25% weighting). Annual financial performance was excellent and the Company achieved above stretch levels of performance on orders, profit
and cash. Against non-financial measures, recognising the exceptional personal contribution to Company performance of both Executive
Directors during the year, the CEO and the CFO received payments of 77.5% and 72.5% of the maximum respectively. The DSP award for FY19
reflects non-UK revenue growth at a level just below the maximum, however the operating profit performance for FY19 (£122.6m – excluding
the contribution from businesses acquired in year) must be maintained in FY22 for the shares to vest in full. The 2016 PSP partially vested
driven by share price appreciation in the year.
Measures and targets used for BBP and performance outturn
Financial (75% weighting)
Orders* £m (25% weighting)
Threshold
570
Target
650
Max
750
753.1
Underlying operating profit* £m (25% weighting)
Threshold
105
Target
112
Max
122
122.6
Underlying operating cash flow* £m (25% weighting)
Threshold
85
Target
95
Max
105
124.0
Measure and target for DSP and performance outturn
Non-UK revenue*, FY18 Result+ £m, absolute growth (100% weighting)
Threshold
0
Target
20
Max
40
39.8
FY19 DSP annual target level of performance was exceeded, but
performance was just below the maximum stretch level. The vesting
of the award is subject to a performance underpin that means the
Company must meet or exceed the £122.6m operating profit
performance for FY19 in FY22 for full vesting.
* Excluding contribution from businesses acquired in the year.
Strategic, operational, personal (25% weighting)
CEO and CFO 77.5% and 72.5% aggregate achievement respectively as detailed on page 83.
What we paid our executives this year
The charts below illustrate FY19 potential opportunity against FY18 and FY19 actual pay for both Executive Directors. Actual pay excludes
benefits. The actual pay for both Executive Directors reflects excellent Company and individual performance in FY19.
CEO: Steve Wadey (£’000)
3,000
2,947
CFO: David Smith (£’000)
3,000
2,500
2,000
1,500
1,000
500
0
1,443
1,382
1,116
FY19
Potential
FY19
Actual
FY18
Actual
2,500
2,000
1,500
1,000
500
0
2,297
1,474
FY19
Potential
FY19
Actual
FY18
Actual
Key
Minimum = fixed pay (excluding benefits)
Target = On-target award for the BBP and PSP performance
Maximum = Maximum award under the BBP and PSP
BBP award
PSP
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QinetiQ Group plc Annual Report and Accounts 2019
Shareholding requirement
In line with the Directors’ Remuneration Policy, the minimum shareholding requirement is 300% of salary for the CEO and 200% of salary for
the CFO. The current shareholding of the Executive Directors illustrated below reflects their relatively short length of service. The Committee
reviews progress made towards the guideline and is confident that the implementation of the Policy through the operation of the BBP and DSP
will increase the shareholdings given strong Company performance.
CEO
2018/19
CFO
2018/19
137
541
44
156
% salary
100
200
300
400
500
600
Key
Shareholding requirement
Shares beneficially owned and deferred
Shares subject to performance conditions
Components of remuneration – timing
To create strong alignment between executive remuneration and the long-term interests of our shareholders, the annual BBP awards remain,
in part, subject to forfeiture based on performance for three years after the award was earned. Annual DSP awards also have a similar
forfeiture period, after which any vested shares must be retained by the executive for a further two years.
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Performance
period
Fixed pay
Bonus Banking Plan
Deferred Share Plan
Key
Pay at risk, shares held, subject to certain performance conditions
Shares held, not subject to performance conditions
Our remuneration principles
Flexible
The Committee can select measures and
set tough targets each year to ensure that
executives are incentivised aligned to the
delivery of each stage of our strategy.
Stretching
Targets are set by the Committee to ensure
executives are incentivised to outperform,
whilst delivering sustainable levels of
performance.
Aligned
Whilst our incentive targets are initially
assessed on an annual basis, the BBP has
a deferred share-based element with the risk
of forfeiture, and the DSP has a ‘meet or
exceed’ performance underpin, whereby
performance must be met or exceeded in
year three, after which any vested shares
must be retained for a further two years.
Strategic report | Directors’ remuneration report
79
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019
Directors’ remuneration report
Summary Directors’ Remuneration Policy
The Directors’ Remuneration Policy was approved by shareholders at the AGM on 19 July 2017. The full Policy is provided in the Corporate
Governance section on the Company’s website, and it will remain in effect until the 2020 AGM. A summary of the Policy is set out below:
Element
Base salary
Pension
Benefits
Policy summary description
Maximum opportunity
When determining an appropriate level of salary, the Committee
considers:
– general salary rises to employees
– remuneration practices within the Group
– any change in scope, role and responsibilities
– the general performance of the Group
– the experience of the relevant Director
– the economic environment
– when the Committee determines a benchmarking exercise is
appropriate, salaries within the ranges paid by the companies
in the comparator groups used for remuneration
benchmarking
The Company provides a non-consolidated pension contribution
allowance in line with practice relative to its comparators.
Typically, the base salaries of Executive Directors in post at the
start of the Policy period and who remain in the same role
throughout the Policy period will be increased by a similar
percentage to the average annual percentage increase in salaries
of all other employees in the Group. The exceptions to this rule
may be where:
– an individual is below market level and a decision is taken to
increase base pay to reflect proven competence in the role; or
– there is a material increase in scope or responsibility to the
Executive Director’s role.
The maximum pension contribution allowance is 20% for
existing Executive Directors. Any new Executive Directors
will have a maximum contribution of 15%.
Benefits include car allowance, health insurance, life assurance,
income protection and membership of the Group’s employee
Share Incentive Plan which is open to all UK employees.
Benefit values can vary year-on-year depending on premiums
and the maximum is the cost of providing the relevant benefits.
Incentive Plan
The Incentive Plan supports the Company’s objectives by:
– allowing the setting of annual targets based on the strategic
Maximum 325% of salary (200% of salary under the Bonus
Banking Plan and 125% of salary under the Deferred Share Plan).
Bonus Banking Plan
Maximum = 200% of salary.
Target = 80%–120% of salary.
Threshold = 0% of salary.
Deferred Share Plan
Maximum = 125% of salary.
Target = 30%–75% of salary.
Threshold = 0% of salary.
objectives at that time; and
– providing substantial deferral in shares and ongoing
adjustment by requiring a threshold level of performance to
be achieved during the deferral period.
The Incentive Plan consists of two elements:
Bonus Banking Plan (BBP)
Annual contributions are earned based on the satisfaction of the
performance conditions. Contributions are made for three years
with payments made over four years. Half the value of a
participant’s bonus account is paid out annually for three years
with 100% of the residual value paid out at the end of year four.
Half of the unpaid balance of a participant’s bonus account is at
risk of annual forfeiture.
Deferred Share Plan (DSP)
Deferred share-based element earned based on the satisfaction
of pre-grant annual performance assessment, which is subject to
a three-year vesting period and a further two-year holding period.
A minimum 50% of the unvested award is at risk of forfeiture
after three years based on a performance underpin.
Shareholding
requirements
Executives have five years to accumulate the required
shareholding by retaining at least 50% of the post-tax vested
shares from Company incentive plans.
n/a
300% of base salary for the CEO. 200% of base salary for the CFO.
Chairman and Non-executive Directors
Fees
Fees are reviewed annually based on equivalent roles in the
comparator group used to review salaries paid to the
Executive Directors.
The fees for Non-executive Directors and the Group Chairman
are broadly set at a competitive level against the
comparator group.
Our full Remuneration Policy can be found on our website www.QinetiQ.com
80
QinetiQ Group plc Annual Report and Accounts 2019 Directors’ remuneration report
Annual Report on Remuneration
The following section of this report details how the Directors’ Remuneration Policy has been implemented for the year ended 31 March 2019.
Audited information
Executive Directors’ single total figure of remuneration
Executive Director
Steve Wadey (CEO)
David Smith (CFO)
Year
2019
2018
2019
2018
Salary
£’000
596
582
451
443
Benefits
£’000
48
48
34
37
Pension
£’000
119
116
90
88
Bonus
Banking Plan
£’000
1,126
776
841
585
Deferred
Share Plan
£’000
–
–
–
–
Performance
Share Plan
£’000
456
–
–
–
Total
remuneration
£’000
2,345
1,522
1,416
1,153
Benefits can include travel and subsistence expenses incurred in relation to the execution of their duties with the Company that are considered by HMRC to be taxable.
Fixed pay
Salary
Salaries are normally reviewed effective 1 September, which is
the same timing for the rest of the UK employee population.
The Committee takes a number of factors into consideration when
awarding salary increases including Company and individual
performance, affordability and general market movements.
Benefits
Benefits comprise a car allowance, travel allowance, private medical
insurance, life assurance, income protection, and taxable expenses.
Pensions
Neither of the Executive Directors participate in the QinetiQ pension
scheme. The pension figure consists of cash in lieu
of pension equating to 20% of base salary.
Salary as at
August
2018
£’000
Salary as at
September
2018
£’000
FY19
Pro-rated
salary
£’000
Increase in
the year
Steve Wadey
David Smith
588
445
2.5%
2.5%
603
456
596
451
Taxable
expenses
£’000
Car
allowance
£’000
Insured
benefits
£’000
Total
benefits
£’000
15
6
19
13
14
15
48
34
Cash in lieu
of pension
£’000
Total in lieu
of pension
£’000
119
90
119
90
Steve Wadey
David Smith
Steve Wadey
David Smith
Bonus Banking Plan
The Bonus Banking Plan was introduced in 2014 and operates
on a three-year performance cycle mirroring the financial year,
with a four-year vesting cycle, i.e. running from 1 April to 31 March.
FY19 represents the second year of the current cycle as detailed
on page 82.
BBP balance
brought
forward
£’000
Dividend
equivalent
payment
£’000
BBP award
in year
£’000
Cash
payment*
(50% value)
£’000
BBP balance
carried
forward
£’000
CEO
CFO
573
432
12
9
1,126
841
855
641
855
641
Each year any incentive award earned is added to the total plan
balance, with 50% of the total plan balance being paid in cash,
and the remaining 50% held in the plan in notional shares. In
year 4, the total remaining plan balance is paid in shares.
* To be paid June 2019.
Deferred Share Plan
The Deferred Share Plan contingent share award to be made in
June 2019 is not included in the single figure as vesting remains
subject to a stretching performance underpin in 2022. It will, to the
extent it vests, appear in the single total figure in 2022.
2016 Performance Share Plan (legacy plan)
The PSP award made to the CEO in 2016 achieved 31.7% vesting in
2019 based on TSR performance as detailed on page 85. The £3.02
share price is based on three months to 31 March 2019, the actual
value will be the share price at vesting on 1 July 2019.
Strategic report | Directors’ remuneration report
Steve Wadey
Shares
Awarded
476,190
Vesting %
31.7%
Shares
Vesting
150,952
Value at
£3.02 per
share
£’000
456
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Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019
Directors’ remuneration report
Annual Report on Remuneration continued
Bonus Banking Plan
FY19 performance measures and operation
For the year ended 31 March 2019 achievement of on-target performance
provides a payment equal to 115.0% of base salary, rising on a linear scale
to 200% of base salary for achievement of stretch performance.
% of base salary (%)
2
5
%
1
2.5
%
The scheme begins to pay out once threshold performance measures have been
achieved. For the year ended 31 March 2019, the CEO and CFO were measured
against the targets as shown in the chart to the right. The target payment was
60% of maximum for financial objectives and 50% for non-financial objectives.
Setting performance targets – the Remuneration Committee takes into account
the budget and the Company’s strategy set in relation to the ISBP, shareholder
expectations and the external environment. The aim is to set stretching targets
which incentivise the Executive Directors to deliver annual results which will
exceed the expectations of investors, but which are also sustainable and do not
create undue risk. Financial performance measures exclude the contribution
from businesses acquired in the year.
12.5%
25%
%
5
2
Key
Orders
Underlying operating profit
Underlying net cash flow from operations
Collective objectives
Personal objectives
Audited information
2019 performance outcomes
Weighting
(%)
Threshold
Target
Stretch
Actual
% of
maximum
reward
achieved
CEO
contribution
CFO
contribution
25
CEO/CFO financial performance measures:
Orders1
Underlying operating profit1, 2
Underlying net cash flow from
operations1, 2
CEO/CFO shared strategic and operational objectives
(as detailed on page 83):
Strategy:
– Performance against key stretching
12.5
25
25
objectives relating to the UK business,
international and innovation
Operational:
– Performance against stretching
objectives relating to transformation
and organisational development
CEO individual personal objective:
– Performance against stretching
objectives relating to growth and
leadership
CFO individual personal objectives:
– Performance against stretching
objectives relating to business support
and operational performance
CEO overall results
CFO overall results
£570m
£105m
£85m
£650m
£112m
£95m
£750m
£122m
£105m
£753.1m
£122.6m
£124.0m
100.0%
100.0%
100.0%
£298,211
£298,211
£298,211
£225,695
£225,695
£225,695
40%
50%
100%
65.0%
65.0%
£96,919
£73,351
40%
50%
100%
65.0%
12.5
40%
50%
100%
90.0%
90.0%
£134,195
12.5
40%
50%
100%
80.0%
80.0%
£90,278
94.38%
£1,125,747
93.13%
£840,714
1 Performance measures exclude the contribution from businesses acquired during the year.
2 Definition of underlying measures and performance can be found in the glossary on page 159.
82
QinetiQ Group plc Annual Report and Accounts 2019 Bonus Banking Plan (continued)
Audited information
Financial performance measures (75% award)
The three key measures of orders, underlying operating profit
and underlying net cash flow from operations are given an
equal 25% weighting.
Reconciliation of measures used in determining remuneration
to Group KPIs
The difference below is the contribution from businesses acquired
in the year.
£m
Per KPIs on page 30
Metric used for BBP
Difference
Orders
776.4m
753.1m
23.3m
Underlying
operating profit
123.9m
122.6m
1.3m
Underlying
cash flow
126.3m
124.0m
2.3m
The Company drove performance to successfully offset a ~£5m
headwind from UK single source regulations in FY19 and delivered
organic growth in operating profit. Underlying operating profit was
up 1% at £123.9m (2018: £122.5m), assisted by ~£7m (2018: ~£9m)
non-recurring trading items including: a £6.9m gain on sale of
aircraft following investment in a new fleet of aircraft for test crew
training; £5.4m benefit related to project risk re-assessments
following technical successes on a major contract in the EMEA
Services division; and a £5.0m charge relating to redundancy costs.
The decision to include these items took into account a number of
factors including a qualitative assessment of the nature of the items.
Shared strategic and operational measures (12.5% award)
Measures
Strategic
UK
International
Innovation
Operational
Transformation
Organisational
development
Total
2019 Performance
– Secured reinvigorated LTPA contract
– Secured significant contracts in export markets and with non-UK governments for the outsourcing
of test & evaluation capabilities
– Modernised test & evaluation by establishing a digital hub capability
– Secured Engineering Delivery Partner contract as industry lead
– Delivered robust and consistent operational performance through the Transformation programme
– Each member of the Leadership Community personally engaged in the implementation of the cultural
development action plan
– Embedded ‘Safe for Life’ across the Group, including supply chain
Personal objectives (12.5% award)
Objectives
CEO
Growth
Leadership
Total
CFO
Growth &
Transformation
Leadership
Delivery
Total
2019 Performance
– Secured reinvigorated LTPA contract amendment
– Acquisitions delivered
– International opportunities developed within selected markets to drive medium-term growth
– Delivered organisational and people development plans to two Board reviews
– Improved employee engagement through employee survey results and Board interactions with the
Employee Engagement Group
– Demonstrable progress of talent movement and external recruitment in support of business growth
and strategy
– Supported business winning activities across UK, International and Innovation
– Acquisitions delivered
– Ensured funding and allocation plans in place for inorganic growth
– Instilled performance management cadence and improved team employee engagement
– Implemented ‘Safe for Life’
– Restructured team, integrating IT, Security and Property to deliver enhanced functional performance
– Delivered improved operational performance through enhanced tracking, delivery plans and process
governance
– Created businesses services and revisions to organisational responsibilities
Strategic report | Directors’ remuneration report
Outcome
(% maximum)
65.0%
Outcome
(% maximum)
90.0%
80.0%
83
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Directors’ remuneration report
Annual Report on Remuneration continued
Bonus Banking Plan (continued)
How the plan operates
– The Plan operates on a fixed three-year performance cycle
with a four-year vesting cycle. FY19 represents year two of
Cycle 2. Plan years commence on 1 April.
– Performance targets 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.
– Each year 50% of the account balance is subject to forfeiture.
– 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 fourth year, any remaining balance in the
Plan account is paid out in shares.
BBP payout mechanism
Year 1
Year 2
Year 3
Year 4
Cycle 2
FY18
FY19
FY20
FY21
Measurement Date at the end of each Plan Year
Contribution or deduction*
Participant’s plan account
50% of closing balance paid out at
the end of each Plan Year. Unpaid
balance deferred in notional shares.
100% of closing
balance in Plan
account paid
in shares.
* Single figure BBP value for a Plan/financial year.
Audited information
Operation during 2019
Cycle 1 of the BBP ended on 31 March 2018 resulting in the transfer of 314,971 shares to the CEO on 21 June 2018 at a share price
of £2.68 per share. The CEO retained the after-tax proceeds as shares.
Cycle 2
Notional
shares on
account at
start of Plan
year 2 at £2.06
per share
(1 April
2018)
188,429
142,014
CEO
CFO
30-day
average share
price as at
measurement
date
(£)
Share value
as at
measurement
date
(£)
3.04
3.04
572,824
431,723
Bonus plan
contribution
for Plan
year 2
(£)
1,125,747
840,714
Bonus
pool total
value as at
measurement
date
(£)
Dividend
equivalent
payment
(£)
11,871
8,947
1,710,442
1,281,384
Gross cash
payment for
Plan year 2
(£)
855,221
640,692
Bonus pool
total value
following
cash payment
(£)
Notional
shares
on account at
end of Plan
year 2
(31 March
2019)
855,221
640,692
281,322
210,754
Forfeiture
For BBP Cycle 2 the CEO and CFO retained notional shares in their Plan accounts of which 50% were subject to forfeiture. Forfeiture
would have been enacted if Group underlying operating profit was less than £95.0m for FY19. FY19 Group underlying operating profit
was £122.6m (excluding contribution from acquisitions) therefore no notional shares were forfeited.
Discretion
For BBP Cycle 2, for the year ended 31 March 2019, financial targets were exceeded providing a contribution of 94.38% of base salary for the
CEO and 93.13% of base salary for the CFO. £1,125,747 and £840,714 has been reported in the single figure table which represents the cash
and deferred notional share elements. No discretion was applied to these contributions as the Committee considers them appropriate.
Deferred Share Plan (DSP)
Scheme interests awarded during the financial year ended 31 March 2018
The Deferred Share Plan was approved by shareholders at the 2017 AGM. A maximum award of 125% of salary may be made to the CEO
and CFO with the amount contingent on meeting a stretching annual performance target based on QinetiQ’s strategic growth plan. Once
the award has been made, it is deferred for three years and remains subject to a performance underpin; any vested shares are then
subject to a further two-year holding period.
Setting performance targets FY19
The FY19 DSP performance measure was non-UK revenue growth. Calibration was set with a maximum of 125% of salary available
for achieving stretch and 35% of the maximum payable at target performance. The performance targets were set by the Remuneration
Committee so as to be stretching.
84
QinetiQ Group plc Annual Report and Accounts 2019 Audited information
2019 performance outcome
The 2019 Deferred Share Plan award was measured against FY19 absolute growth in non-UK revenue with the following calibration.
Measure
Non-UK revenue (FY18+)
Weighting
100%
Threshold
£0.0m
Target
£20.0m
Stretch
£40.0m
Actual
£39.8m
% Max award
achieved
99.35%
% Salary
awarded
124.19%
CEO
CFO
Total
£’000
741
561
The FY19 DSP award was also subject to a pre-grant underpin that FY18 profit margins are maintained on non-UK revenue in FY19.
The Remuneration Committee is satisfied that this underpin was achieved.
Non-UK revenue growth achievement at £39.8m is therefore 99.35% of maximum resulting in an award of 124.19% of salary for the
CEO and CFO.
The FY19 DSP award is also subject to a further stretching performance underpin which must be achieved before shares vest to the
benefit of the participant. The profit outturn for 2019 (£122.6m, excluding the contribution from businesses acquired in the year) must
be maintained at the end of the year of vesting (2022) for the shares to vest in full. If this is not maintained then, at a minimum, 50% of
the award will lapse. Any vested shares must be retained for a further two-year period. The contingent nature of the DSP award means
it is not included in the FY19 single figure, but will appear in FY22 to the extent it vests.
The number of awards made is based on the 30-day average share price ending on 31 March 2019; this is £3.04. It is anticipated that
2019 Deferred Share Plan awards will be made on or around 1 June 2019. The actual number of contingent shares awarded will be
detailed in the 2020 Directors’ Remuneration Report, but is anticipated to be Steve Wadey 243,650 shares and David Smith 184,401 shares.
Legacy Performance Share Plan (PSP)
2016 PSP
The 2016 PSP award was measured 50% based on EPS growth of 3% to 10% per annum (25% vesting at threshold, 100% at maximum,
with linear vesting between these points), and 50% based on TSR performance against the FTSE 250 (30% vesting at median
performance, 100% at upper quartile performance, with linear vesting between these points).
The 2016 PSP award measurement period was to 31 March 2019 and the Committee reviewed performance against the EPS and TSR
performance measures at the May 2019 meeting.
Measures
Weighting
Performance conditions
EPS
TSR
50%
50%
Between 3% and 10% per annum
Between FTSE 250 median and upper quartile
Threshold
17.8p
22.3%
Stretch
21.7p
54.0%
Performance
Actual
16.9p
%
Max award
achieved
0%
37.4%
63.4%
Based on audited EPS performance and TSR performance analysis provided by the independent advisor to the Committee (FIT
Remuneration Consultants), it was determined that the EPS test was not met and that the TSR element (50% weighting) will vest at 63.4%
on the third anniversary of grant (1 July 2019), resulting in an aggregate vesting of 31.7% of the initial award to the CEO.
Performance condition adjustments during 2019
As in prior years, the Committee adjusted the
performance conditions for the Performance Share Plan
to reflect continuing operations and share buyback so
performance is measured on a like-for-like basis.
Reconciliation of measures used in determining
remuneration to Group KPIs
Per KPIs on page 30
Metric used for PSP
Difference
Which relates to:
– Constant number of shares
– Excluding profit after tax of acquired businesses
EPS
p
19.7
16.9
2.8
Strategic report | Directors’ remuneration report
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Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Directors’ remuneration report
Annual Report on Remuneration continued
Audited information
Statement of Directors’ shareholding and share interests
In relation to the shareholding requirement adopted on 1 April 2017 the Company requires Executive Directors to hold shares equivalent
to 300% (CEO) and 200% (CFO) of base salary. Executive Directors have five years to achieve the required level through, at a minimum,
retaining 50% of the after-tax shares vesting from Company incentive plans.
The CEO does not currently meet the minimum shareholding requirement; with a current holding equivalent to 137% of base salary using
a share price of £3.02 (three-month average to 31 March 2019). This reflects his appointment date as CEO and the limited opportunity for
share-based awards to vest.
The CFO does not currently meet the minimum shareholding requirement; with a current holding equivalent to 44% of base salary using a
share price of £3.02 (three-month average to 31 March 2019). This reflects his recent appointment as CFO and the lack of any opportunity
for share-based awards to vest.
Shares
beneficially owned
Shares subject to
performance conditions
Shares not subject to
performance conditions
Total shares held
at 31 Mar 2019
Steve Wadey
David Smith
Mark Elliott
Michael Harper
Admiral Sir James Burnell-Nugent
Paul Murray
Susan Searle
Ian Mason
Lynn Brubaker
Neil Johnson (appointed 2nd April 2019)
270,268
65,285
145,000
40,000
15,567
83,214
25,000
10,000
12,000
–
799,111
167,975
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,069,379
233,260
145,000
40,000
15,567
83,214
25,000
10,000
12,000
–
Shares beneficially owned comprise shares held under the Share Incentive Plan (SIP) (including matched shares) and shares owned by
the Director and any connected persons. On 9 April 2019 Steve Wadey and David Smith purchased 66 shares and 66 shares respectively,
then on 9 May 2019, Steve Wadey and David Smith purchased 66 shares and 65 shares respectively, through their participation in the SIP.
Shares subject to performance conditions comprise awards made under the Performance Share Plan and Deferred Share Plan as detailed
on page 87. Notional shares held by the CEO and CFO in the BBP Cycle 2 do not appear in the table above as they are not actual shares
at 23 May 2019.
86
QinetiQ Group plc Annual Report and Accounts 2019 Audited information
Total scheme interests summary
Total scheme interests, including those awarded during the financial year ended 31 March 2019, are as follows.
Steve Wadey
Plan name
PSP 2015
PSP 2016
PSP 2017
DSP 2018
David Smith
Plan name
DSP 2018
Date of grant
Number
1 April 2018
28 Jul 15
1 Jul 16
22 Jun 17
8 Jun 18
363,636
476,190
102,136
–
941,962
Number
1 April 2017
Date of grant
8 Jun 18
Granted in
year
(maximum
potential of
awards)
–
–
–
220,785
220,785
Granted in
year
(maximum
potential of
awards)
Exercised/
vested in
year
–
–
–
–
–
Lapsed in
year
363,636
–
–
–
363,636
Number
31 March
2019
Market price
on date of
grant
–
476,190
102,136
220,785
799,111
231.0
224.4
281.0
206.0
Vest date
28 Jul 18
1 Jul 19
22 Jun 20
8 Jun 21
Exercised/
vested in
year
Lapsed in
year
Number
31 March
2018
Market price
on date of
grant
Vest date
–
–
167,975
167,975
–
–
–
–
167,975
167,975
206.0
8 Jun 21
The contingent share award in relation to the 2019 DSP will be granted on or around 1 June 2019. The Committee estimates that 243,650
contingent shares will be granted to Steve Wadey and 184,401 to David Smith. This is calculated based on awards of 124.2% salary,
and a share price of £3.04 (based on 30 day average to 31 March 2019).
The highest and lowest prices of a QinetiQ share during the year ended 31 March 2019 were 311.4p and 204.1p. There have been no other
changes to the interests shown above between 31 March 2019 and 23 May 2019.
Payments to past Directors and payment for loss of office
No payments were made to past Directors during the year and no payments were made for loss of office during the year.
Performance review
The ten-year and three-year charts show the Company’s Total Shareholder Return over the period from 31 March 2009 to 31 March 2019
and 31 March 2016 to 31 March 2019 compared with the FTSE 250 (excluding investment trusts) over the same period based on spot values.
The Committee has chosen to demonstrate the Company’s performance against this index as it is the index in which the Company is listed.
This comparator group is also used to measure TSR performance in the PSP (under which no future awards will be made).
Ten-year comparator chart
Three-year comparator chart
400
350
300
250
200
150
100
50
150
140
130
120
110
100
90
80
Mar-09 Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17 Mar-18
Mar-19
Mar-16
Mar-17
Mar-18
Mar-19
Key
QinetiQ
FTSE 250 (excluding investment trusts)
Strategic report | Directors’ remuneration report
87
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Directors’ remuneration report
Annual Report on Remuneration continued
CEO remuneration
The table below shows the CEO’s remuneration over the same performance period as the Total Shareholder Return chart (31 March 2009
to 31 March 2019):
Year ended 31 March
CEO
Salary/fees
Single figure
Annual bonus
(% of maximum)
Long-term incentives
(% of maximum vesting)
2019
2018
2017 (restated)
2016
2016
2015
2015
2014
2013
2012
2011
2010
2010
Steve Wadey
Steve Wadey
Steve Wadey
Steve Wadey
David Mellors
David Mellors
Leo Quinn
Leo Quinn
Leo Quinn
Leo Quinn
Leo Quinn
Leo Quinn
Graham Love
596,422
582,167
568,166
520,219
455,885
501,227
469,776
610,844
593,050
580,000
580,000
217,872
266,667
2,345,200
1,522,460
1,829,470
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
94.4%
66.7%
86.4%
85.4%
82.9%
88.6%
–
77.0%
100.0%
100.0%
100.0%
–
–
31.7%
–
–
–
–
13.9%
–
15.4%
40.3%
–
–
–
–
CEO Pay Ratio
For transparency the Remuneration Committee has decided to publish the ratio of the CEO’s pay for FY19 to the earnings of QinetiQ’s
UK employees, one year in advance of the legal requirement to do so under the revised UK Corporate Governance Code.
The calculation below is based on the FY19 ‘single figure’ for the CEO of £2,345,200, and similar calculations for the UK workforce (i.e ‘Option
A’ as defined by the Companies (Miscellaneous Reporting) Regulations 2018).
Total remuneration
Ratio of the CEO’s pay to UK employees
Total pay of UK employees
Year
FY19
25th Percentile
70 : 1
Median
50 : 1
75th Percentile
38 : 1
25th Percentile
£33,730
Median
£46,562
75th Percentile
£61,895
The Remuneration Committee welcomes the opportunity to provide this information to shareholders. The Company aims to reward all employees
fairly for the success and growth they create, hence the inception of the All Employee Incentive Scheme in FY19.
Audited information
Single figure total remuneration for the Chairman and each Non-executive Director
Non-executive Directors’ remuneration is shown as a single figure to provide an annual comparison between the remuneration awarded
during the financial year ended 31 March 2019 and the preceding year.
Salary/fees
£’000
2018
48
48
242
48
–
48
48
48
2019
49
49
242
49
–
49
49
49
2019
11
2
75
2
–
1
1
1
Benefits
£’000
2018
Committee Chair fees
£’000
2018
2019
US/UK attendance fee
£’000
2018
2019
16
2
76
1
–
1
1
1
–
9
–
19
–
–
9
–
–
9
–
19
–
–
9
–
24
21
3
–
3
–
3
3
3
–
–
–
–
–
–
–
Single figure
£’000
2018
85
59
318
68
–
49
58
49
2019
84
63
317
73
–
53
62
53
Non-executive
Director
Lynn Brubaker
Admiral Sir
James Burnell-
Nugent
Mark Elliott
Michael Harper
Neil Johnson
Ian Mason
Paul Murray
Susan Searle
88
QinetiQ Group plc Annual Report and Accounts 2019 Benefits include travel and subsistence expenses incurred in relation to the execution of their duties with the Company that are considered
by HMRC to be taxable.
Mark Elliott, the Chairman, and Lynn Brubaker are US residents. Mark is entitled to an accommodation allowance of £75,000 and Lynn
is entitled to receive a $4,000 fee for attending UK meetings. UK-based Non-executive Directors are entitled to receive a £2,500 fee for
attending US meetings.
The Committee Chair fees figure for Michael Harper includes a payment of £10,000 as Senior Independent Director.
Percentage change in CEO remuneration
The following table compares change in CEO remuneration with an employee comparator group (averaged per capita). The comparison
group (4,000 employees) represents the employees in the UK principal businesses in service between 1 April 2018 and 31 March 2019.
Base salary
Benefits
Annual bonus
2019
2018
£596,422
£582,167
£47,874
£47,533
£1,125,747
£776,327
CEO
% change
2.4%
0.7%
45.0%
2019
Comparison group
% change
2018
£44,010
£41,283
£1,298
£3,446
£1,190
£1,436
6.6%
9.1%
140.0%
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 incentive opportunity available is based on the seniority and responsibility of the role.
Participation in the DSP is available to Executive Directors, senior managers and selected employees throughout the organisation.
In FY19 the Company introduced an All Employee Incentive Scheme (AEIS) whereby every employee has the opportunity to earn a cash
bonus based on Company and personal performance. For FY19 the Company element of the AEIS achieved a level above stretch resulting
in a payment of £1,000 to every employee, plus the opportunity to earn an additional payment based on personal performance.
The AEIS will be operated again in FY20.
The Committee reviews (but does not decide) the general reward policy for all employees and of any significant changes proposed.
Gender related pay
QinetiQ is subject to gender pay reporting for UK employees and a copy of our 2018 report is available on the Company’s website
Our Gender Pay Gap report can be found on our website www.QinetiQ.com
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.
Total Employee
remuneration
Share-based
profit distribution
Other significant
profit distribution
Key
FY19
FY18
Strategic report | Directors’ remuneration report
Total
£m
376.8
362.7
36.4
35.2
0.0
0.0
Difference
%
3.9
3.4
0
89
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Directors’ remuneration report
Annual Report on Remuneration continued
Service contracts/letters of appointment
The Company’s policy is that Executive Directors have rolling contracts which are terminable by either party giving 12 months’ notice. The Group
Chairman and the Non-executive Directors do not have service contracts but are appointed under letters of appointment. All service contracts
and letters of appointment are available for viewing at the Company’s registered office and at the AGM. Non-executive Directors typically serve
two three-year terms but may be invited by the Board to serve for an additional period (see table in the Nominations Committee report on page 73).
Director
Lynn Brubaker
Date appointed
27 January 2016
Admiral Sir
James Burnell-Nugent
10 April 2010
Mark Elliott
01 June 2009
Michael Harper
22 November 2011
Neil Johnson
2 April 2019
Ian Mason
04 June 2014
Paul Murray
25 October 2010
Susan Searle
14 March 2014
David Smith
Steve Wadey
01 March 2017
27 April 2015
Arrangement
Initial term of three years from date of appointment until the conclusion of
the Annual General Meeting approximately three years from that date,
subject to annual reappointment at the AGM.
Initial term of three years from date of appointment, subject to annual
reappointment at the AGM.
Initial term of three years from date of appointment, retiring from the role of
Group Chairman on 24 July 2019.
Initial term of three years from date of appointment, subject to annual
reappointment at the AGM.
Initial term of three years from date of appointment, subject to annual
reappointment at the AGM.
Initial term of three years from date of appointment until the conclusion of
the Annual General Meeting approximately three years from that date,
subject to annual reappointment at the AGM.
Initial term of three years from date of appointment, subject to annual
reappointment at the AGM.
Initial term of three years from date of appointment until the conclusion of
the Annual General Meeting approximately three years from that date,
subject to annual reappointment at the AGM.
Service contract
Service contract
Notice period
1 month
–
–
–
1 month
–
–
12 months
12 months
Implementation of Policy for the year ending 31 March 2019
Fees
Non-Executive Directors’ fees were not increased during FY19 and will next be reviewed in July 2019. The current fee is £49,000 per annum.
The current Non-Executive Group Chairman’s fee was last increased on 1 December 2016 and is £242,000 per annum. Subject to his election
at the Annual General Meeting, the new Non-Executive Group Chairman will receive a fee of £250,000 per annum.
Fees are reviewed in line with Policy.
Executive Directors are permitted to accept one external non-executive director position with the Board’s approval. Any fees received in respect
of these appointments may be retained by the Executive Director.
The CEO does not hold any Non-Executive directorships in other companies. David Smith was appointed Non-Executive director of Motability
Operations Group plc on 1 July 2010. Non-Executive director fees, as reported in the 2018 Motability Operations Group plc annual report, were
£50,000 per annum which are retained.
Group Chairman
Accommodation allowance for Group Chairman
Basic fee for UK Non-Executive Director
Additional fee for chairing a Committee
Additional fee to Deputy Chairman/Senior Independent Non-Executive Director
Additional fee for attendance at a Board meeting held in US by UK resident
Non-Executive Director
Additional fee for attendance at a Board meeting held in UK by US resident
Non-Executive Director
Fees effective as at 1 April 2018
£
242,000
75,000
49,000
9,000
10,000
2,500
$4,000
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QinetiQ Group plc Annual Report and Accounts 2019 Implementation of Policy for the year ending 31 March 2020
Incentives for Executives
The table below shows the measures and relative weighting for the Bonus Banking Plan for the CEO and CFO:
Bonus Banking Plan
Target performance 100% of base salary
Stretch performance 200% of base salary
Performance measure
(excluding 2020 acquisitions)
Underlying operating profit
Underlying net cash flow from operations
Orders
Collective objectives
Personal objectives
Relative weighting
(%)
25.0%
25.0%
25.0%
12.5%
12.5%
For FY20, the Remuneration Committee set the target level of performance at 50% of stretch for the financial measures, having been 60%
for FY19. Collective and personal objectives were previously set at a 50% payment for target performance and will be so for FY19. Details
of specific performance targets for the Bonus Banking Plan have not been provided as they are deemed commercially sensitive. The targets
will continue to be set at a challenging level and they will be disclosed retrospectively in next year’s Annual Report on Remuneration.
The Deferred Share Plan will award a maximum of 125% of base salary for achieving stretch performance with 35% of maximum payable at
target performance. As per FY19, the FY20 performance measure will be absolute growth in organic non-UK revenue as, in line with the ISBP,
the Board has agreed that a critical aim for the Company is to deliver growth in international revenue. This is at the heart of our strategy to drive
sustainable growth and follows significant success in FY19. The DSP awards will be subject to two performance underpins:
– To ensure that we deliver strong margins, the profit margin on non-UK revenue in FY20 must be the same or higher than the profit margin
on non-UK revenue in FY19
– Group underlying profit outturn for FY20 must be maintained at the end of the three-year vesting period. If this is not maintained then, at
a minimum, 50% of the award will lapse. For the purposes of the FY20 DSP award, this will be the actual underlying operating profit (£m)
for FY20 which must be achieved in FY23
Awards will be made in June 2020 based on FY20 performance. Details of performance targets for the Deferred Share Plan have not been
provided as they are deemed commercially sensitive. They will be disclosed retrospectively in next year’s Annual Report on Remuneration.
Salary and benefits
Salaries will be reviewed effective from 1 September 2019. No changes are envisaged to the implementation of benefits policy.
Remuneration Committee meetings, activities and decisions 2019
The following table provides a summary of all the key activities during the year. There was full attendance at each meeting.
May 2018
Base salary
Incentives
FY18 final results
Share awards
2015 PSP vesting
Executive Director and
Executive Committee
salary review
Trends in executive
remuneration
July 2018
September 2018
November 2018
January 2019
March 2019
Review of incentive
target setting process
FY19 half year forecast
FY20 incentive
measures
Review of Executive
Committee
shareholdings
FY19 provisional results
FY20 target setting
2016 PSP provisional
vesting
Governance
Approve Directors’
Remuneration Report.
Review of shareholder
engagement regarding
DSP performance
measure
AGM preparation
Review of remuneration-
related risk
Review of Company
reward practices
Revisions to the
UK Corporate
Governance Code
Resourcing
New Chairman fees
Effectiveness review
In 2019, the effectiveness review was undertaken by an independent third party, and the Committee was found to be functioning effectively.
Considerations for 2019 include explaining the incentive plans to shareholders as the Committee works towards the approval of the Directors’
Remuneration Policy in 2020, implementation of the new UK Corporate Governance Code and ensuring continuing close collaboration between
the Chairmen of the Audit and Remuneration Committees.
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Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Directors’ remuneration report
Annual Report on Remuneration continued
Remuneration consultants
The Committee has appointed FIT Remuneration Consultants LLP, an independent firm of remuneration consultants, to provide advice on market
practice, corporate governance and investors’ views. Fees paid during the year for these services were £50,000.
FIT provided the following additional services during the year:
– Implementation support for the Company on executive share plans; and
– TSR performance monitoring for Performance Share Plan awards.
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 FIT.
Statement of voting
Annual Report on Remuneration – 2018
Votes for
Votes against
Total votes cast
Abstained
407,739,447 (89.3%)
49,109,681 (10.7%)
456,849,128 (80.46% share capital)
4,284,969
.
8
9
3
%
1
0
.
7
%
Details on the voting on all resolutions at the 2019 AGM will be announced via the RNS and posted
on the QinetiQ website following the AGM.
Michael Harper
Remuneration Committee Chairman
23 May 2019
Votes for – 89.3%
Votes against – 10.7%
92
QinetiQ Group plc Annual Report and Accounts 2019 Directors’ report
Statutory information contained elsewhere
in the Annual Report
Information required to be part of this Directors’ report can be found
elsewhere in the Annual Report as indicated in the table below, and
is incorporated into this report by reference:
Information
Corporate governance statement
Directors’ details
Directors’ interests in shares
Employees
Financial instruments: Information on the Group’s financial
risk management objectives and policies, and its exposure
to credit risk, liquidity risk, interest rate risk and foreign
currency risk
Greenhouse gas emissions
Likely future developments in the business of the Company or
its subsidiaries
Results and dividends
Page
54
56
86
38
134 note 25
43
2-51
48-51
Management report
The Strategic report on pages 2 to 51 and the Directors’ report,
as detailed on pages 93 to 95, 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 Guidance and Transparency Rules (DTRs).
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.
In the financial year, the Group recorded £298.9m (2018: £310.1m)
of total R&D-related expenditure, of which £272.9m (2018: £284.3)
was customer-funded work and £26.0m (2018: £25.8m) was internally
funded. Additionally, £3.1m (2018: £1.8m) of late-stage development
costs was capitalised and £1.1m (2018: £1.5m) 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.
Branches
The Company and its subsidiaries have established branches in a
number of different countries; their results are, however, not material
to the Group’s financial results.
Share capital
As at 31 March 2019, the Company had an allotted and fully paid
up share capital of 571,757,121 ordinary shares of 1p each with
an aggregate nominal value of £5.7m and one Special Share with
a nominal value of £1. The ordinary share total includes 3,794,743
shares held exclusive of voting rights in treasury and 1,410,327
shares held by employee share trusts.
Details of the shares in issue during the financial year are shown
in note 27 on page 142.
Rights of ordinary shareholders
The holders of ordinary shares are entitled to receive the Company’s
Reports and Accounts, to attend and speak at general meetings of the
Company, to exercise voting rights in person or by appointing a proxy,
and to receive a dividend where declared or paid out of profits
available for that purpose.
Rights of special shareholder
The Special Share is held by HM Government through the Secretary
of State for Defence (the Special Shareholder) and it may only be held
by and transferred to HM Government. It confers certain rights to
protect UK defence and security interests. These include:
– The promotion and reinforcement of the MOD compliance
principles which require QinetiQ to be an impartial, ethical and
responsible contractor by avoiding conflicts of interest in its
dealings with the MOD
– The protection of defined strategic assets of the Group, such as
certain testing facilities, by providing the Special Shareholder with
an option to purchase those assets in certain circumstances
– The right to require certain persons with a material interest in
QinetiQ to dispose of some or all of their ordinary shares on
the grounds of national security or conflict of interest
– A 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 attached to the Special Share
requires the written approval of the MOD. Further details can be found
in note 27 on page 142.
Restrictions on the transfer of shares
As detailed above, the special share requires 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 2019, the Trust held 1,410,327
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.
Strategic report | Directors’ report
93
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Directors’ report continued
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.
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.
Major shareholdings
In accordance with DTR 5, the Company has been notified of the
following from holders representing 3% or more of the issued ordinary
share capital of the Company:
Name of shareholder
Schroders
BlackRock, Inc.
Silchester International
Investec
Standard Life
Aberdeen plc
Norges Bank
At 31 March 2019 % of
issued share capital*
9.62%
5.01%
4.96%
4.95%
At 15 May 2019# % of
issued share capital
9.62%
5.01%
4.96%
4.95%
4.81%
3.94%
4.81%
3.94%
* As notified by the shareholder and based on the issued ordinary share capital at the
time of the notification.
# Being a date not more than a month prior to the date of the Notice of AGM.
Employees
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, the Company makes every
effort to enable them to continue their employment and career
development, and to arrange appropriate training, wherever practicable.
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 Company has entered into indemnity deeds with all its current
Directors containing qualifying indemnity provisions, as defined in
Section 234 of the Companies Act 2006, under which the Company
has agreed to indemnify each Director in respect of certain liabilities,
which may be attached to them as Directors or as former Directors
of the Company or any of its subsidiaries. All such indemnity
provisions are in force as at the date of this Directors’ report.
The Directors of QinetiQ Pension Scheme Trustee Limited, a Group
company and the Trustee of the QinetiQ Pension Scheme (the
Scheme), benefit from an indemnity contained in the rules of the
Scheme. The indemnity would be provided out of the Scheme assets.
Change of control – significant agreements
The following significant agreements contain provisions entitling the
counterparties to require prior approval, exercise termination,
alteration or other similar rights in the event of a change of control
of the Company, or if the Company ceases to be a UK company:
– The Combined Aerial Target Service contract is a 20-year
contract awarded to QinetiQ by the MOD on 14 December 2006.
The terms of this contract require QinetiQ Limited to remain a
UK company which is incorporated under the laws of any part
of the UK, or an overseas company registered in the UK, and
that at least 50% of the Board of Directors are UK nationals. The
terms also contain change of control conditions and restricted
share transfer conditions which require prior approval from HM
Government if there is a material change in the ownership of
QinetiQ Limited’s share capital, unless the change relates to
shares listed on a regulated market; ‘material’ is defined as
being 10% or more of the share capital. In addition, there are
restrictions on transfers of shares to persons from countries
appearing on the restricted list as issued by HM Government
– The Long Term Partnering Agreement (LTPA) is a 25-year
contract, which QinetiQ Limited signed on 28 February 2003,
to provide test, evaluation and training services to the MOD.
This contract contains conditions under which the prior
approval of HM Government is required if the contractor, QinetiQ
Limited, ceases to be a subsidiary of the QinetiQ Group, except
where such change in control is permitted under the
Shareholders Agreement to which the MOD is a party
– The Company is party to a £275m multi-currency revolving
credit facility, provided by a consortium of banks, that expires
on 27 September 2023, with an option to extend to a final
maturity to 27 September 2025. 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.
Disclosures in accordance with Listing Rule 9.8.4
There are no matters requiring disclosure under the FCA’s Listing
Rule 9.8.4, other than details of long-term incentive schemes,
which are explained further on page 85.
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 AGM following their
appointment, and to re-election thereafter at intervals of no
more than three years. In line with best practice reflected in the
Code, however, the Company requires each serving member of
the Board to be put forward for election or re-election on an annual
basis at each AGM.
94
QinetiQ Group plc Annual Report and Accounts 2019
Powers of the Directors: allotment/purchase of own shares
At the Company’s AGM held in July 2018, the shareholders passed
resolutions which authorised the Directors to allot relevant securities
up to an aggregate nominal value of £3,910,816 (£1,955,408 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). The authorities will remain
valid until the 2019 AGM.
ensure that the financial statements and the Directors’ Remuneration
Report comply with the Companies Act 2006 and, as regards the
group financial statements, Article 4 of the IAS Regulation.
The directors are responsible for the maintenance and integrity of the
company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
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 2019 AGM.
Annual General Meeting
The Company’s AGM will be held on Wednesday, 24 July 2019 at
11.00am, at the offices of Ashurst LLP, Fruit and Wool Exchange,
1 Duval Square, London E1 6PW.
Independent auditor
PwC has expressed its’ willingness to continue in office as
independent auditor and a resolution to re-appoint them will be
proposed at the AGM.
Statement of Directors’ responsibilities
The directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulation.
Company law requires the directors to prepare financial statements
for each financial year. Under that law the directors have prepared the
group financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and
company financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 “Reduced Disclosure Framework”, and
applicable law). 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 company and of
the profit or loss of the group and company for that period. In
preparing the financial statements, the directors are required to:
– select suitable accounting policies and then apply them
consistently;
– state whether applicable IFRSs as adopted by the European Union
have been followed for the group financial statements and United
Kingdom Accounting Standards, comprising FRS 101, have been
followed for the company financial statements, subject to any
material departures disclosed and explained in the financial
statements;
– make judgements and accounting estimates that are reasonable
and prudent; and
– prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the group and company
will continue in business.
The directors are also responsible for safeguarding the assets of the
group and company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the group and company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the group and company and enable them to
Directors’ confirmations
The directors consider that the annual report and accounts, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the group and
company’s position and performance, business model and strategy.
Each of the directors, whose names and functions are listed in pages
56 and 57 confirm that, to the best of their knowledge:
– the company financial statements, which have been prepared in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS
101 “Reduced Disclosure Framework”, and applicable law), give a
true and fair view of the assets, liabilities, financial position and
profit of the company;
– the group financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give a
true and fair view of the assets, liabilities, financial position and
profit of the group; and
– the Directors’ Report includes a fair review of the development
and performance of the business and the position of the group
and company, together with a description of the principal risks
and uncertainties that it faces.
– In the case of each director in office at the date the Directors’
Report is approved:
– so far as the director is aware, there is no relevant audit
information of which the group and company’s auditors are
unaware; and
– they have taken all the steps that they ought to have taken as a
director in order to make themselves aware of any relevant audit
information and to establish that the group and company’s
auditors are aware of that information.
Scope of the reporting in this Annual Report
The Board has prepared a Strategic report which provides an overview
of the development and performance of the Group’s business in the
year ended 31 March 2019.
For the purposes of DTR 4.1.5R(2) and DTR 4.1.8 the Directors’ report,
the Directors confirm that, so far as they are aware, there is no relevant
audit information of which the Company’s auditor is unaware, and that
they have taken all steps that they ought to 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.
By order of the Board.
Jon Messent
Company Secretary and Group General Counsel
23 May 2019
Strategic report | Directors’ report
95
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Independent auditors’ report to the
members of QinetiQ Group plc
Report on the audit of the financial statements
Opinion
In our opinion:
– QinetiQ Group plc’s Group financial statements and Company financial statements (the “financial statements”) give a true and fair view
of the state of the Group’s and of the Company’s affairs as at 31 March 2019 and of the Group’s profit and cash flows for the year then
ended;
– the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
– the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); 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.
We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise: the
consolidated and Company balance sheets as at 31 March 2019; the consolidated income statement and consolidated comprehensive income
statement, the consolidated cash flow statement, and the consolidated and Company statements of changes in equity for the year then ended;
and the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements
in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided
to the Group or the Company.
Other than those disclosed in note 5 to the financial statements, we have provided no non-audit services to the Group or the Company
in the period from 1 April 2018 to 31 March 2019.
Our audit approach
Overview
Materiality
Materiality
Audit
Audit
scope
scope
Key audit
Key audit
matters
matters
– Overall Group materiality: £6.1 million (2018: £5.8 million), based on 5% of underlying profit before tax.
– Overall Company materiality: £4.8 million (2018: £4.8 million), based on 1% of total assets.
– We conducted full scope audit work in the UK over QinetiQ Limited, the main trading entity of the Group
which provided significant coverage over all financial statement balances, except inventory. We performed
the audit of specific inventory balances at two entities.
– In addition, we performed procedures over goodwill, intangible assets, taxation and testing of the
consolidation at a Group level.
– Long-term contract accounting.
– Provisions and contingent liabilities.
– Impairment of goodwill and acquired intangibles.
– Accounting for tax research and development expenditure credits and tax uncertainties.
– Acquisition accounting.
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations related
to relevant tax legislation, Single Source Contracting Regulations, the Health and Safety Executive and anti-bribery and corruption legislation, and
we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and
regulations that have a direct impact on the preparation of the financial statements such as the Companies Act 2006. We evaluated management’s
incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that
the principal risks were related to posting inappropriate journal entries to increase revenue or reduce expenditure, and management bias in
accounting estimates. The Group engagement team shared this risk assessment with the component auditors so that they could include
96
QinetiQ Group plc Annual Report and Accounts 2019 appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement team
and/or component auditors included:
– Discussions with management, internal audit and the Group’s legal counsel, including consideration of known or suspected instances
of non-compliance with laws and regulation and fraud;
– Assessment of matters reported on the Group’s whistleblowing helpline and the results of management’s investigation of such matters;
– Reviewing correspondence with and reports to relevant regulatory authorities;
– Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation
to long-term contract accounting and the impairment of intangible fixed assets (see related key audit matters below);
– Identifying and testing journal entries, in particular any journal entries posted with unusual account combinations or posted by
senior management; and
– Incorporating elements of unpredictability into the audit procedures performed.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations
is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not
detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were
addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters. This is not a complete list of all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Long-term contract accounting
Refer to page 68 (Report of the Audit Committee) and page 111 (note 1,
Significant accounting policies – Revenue from contracts with customers) and
page 118 (note 2, Revenue from contracts with customers and other income).
QinetiQ Group plc has a large number of contracts which span multiple periods
and are accounted for on a percentage of completion (POC) basis.
Long-term contracting accounting requires a number of judgements and
management estimates to be made, particularly calculating the forecast costs
to complete the contract. These judgements drive the revenue and profit
recognition, and together with cash paid by the customer, impact the balance
sheet position at the year end.
Onerous contract provisions are recorded where there is an expectation that
a contract will be loss-making, and judgement is applied to determine the
magnitude of any provision. Particular focus is given to contracts which are
technologically challenging.
We evaluated the contract governance policies and controls in place within
the business, and tested the design and operating effectiveness of key controls
in place over long-term contracts.
We performed risk assessment procedures over the portfolio of contracts
to identify higher-risk contracts. These higher-risk contracts were selected
for detailed contract reviews. These detailed reviews involved meeting with key
personnel to discuss contract performance, as well as obtaining evidence to
support contract financials. Specifically our procedures included the following:
– We assessed the basis of revenue recognition to ensure it is in line with
accounting standards
– We agreed overall anticipated revenue to the underlying contract and
validated a sample of customer invoices through to cash receipt
– We recalculated revenue recognised and agreed both revenue, costs and
associated balance sheet positions to the underlying general ledger
– We obtained evidence to corroborate management estimates and
judgements, particularly around costs to complete. Where necessary,
we obtained correspondence with the customer to evidence progress
made on the contract during the year and remaining obligations.
– We validated costs incurred and allocated to contracts during the year
to supporting documentation on a company wide basis.
For remaining untested low-risk contracts, we selected a sample and
performed testing over revenue, agreeing to supporting documentation
including customer contracts and validating a sample of customer invoices
to cash receipt.
We agreed contract loss provisions recorded based on the overall outcome
anticipated on the contract through a combination of the procedures above.
Additional testing was performed, where not sufficiently covered by the above,
over contract-related balance sheet positions. These have been sample tested
and agreed to supporting documentation.
No material exceptions were found.
Corporate governance | Independent auditors’ report
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Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Independent auditors’ report to the
members of QinetiQ Group plc continued
Key audit matter
How our audit addressed the key audit matter
Provisions and contingent liabilities
Refer to page 68 (Report of the Audit Committee) and page 117 (note 1,
Significant accounting policies – Other payables, provisions and contingent
liabilities), page 133 (note 22, Provisions) and page 149 (note 31, Contingent
liabilities and assets).
QinetiQ Group plc holds provisions in respect of legal, regulatory and
environmental issues. (Note: Project and contract related provisions are
covered within the ‘long-term contract accounting’ matter above).
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 should disclose any contingent liabilities in respect
of contractual, regulatory or legal issues which have not been provided for on
the basis that they are not considered to qualify for recognition as provisions.
Impairment of goodwill and acquired intangibles
Refer to page 68 (Report of the Audit Committee), page 117 (note 1, Significant
accounting policies – Business combinations and related goodwill), page 122
(note 13, Goodwill) and page 128 (note 14, Intangible assets).
The carrying value of goodwill associated with the US Global Products
business was written down to its recoverable amount in the year ended 31
March 2016. As a result, any deterioration in these projections or an increase
in the discount rate applied may result in a further write-down being required.
In addition, the business has a material amount of acquired intangible assets,
including for recent acquisitions. There is an increased risk of impairment
where the post-acquisition performance of businesses acquired is behind
expectations from the time of the original acquisition.
The current year acquisitions have been considered within the key audit
matter below.
Accounting for tax research and development expenditure credits and tax
uncertainties
Refer to page 68 (Report of the Audit Committee), page 117 (note 1, Significant
accounting policies – Taxation), page 124 (note 8, Taxation) and page 130 (note 17,
Deferred tax).
The Group has determined that it is appropriate to account for the UK’s Research
and Development Expenditure Credit (‘RDEC’) under IAS 12, rather than as a
government grant within IAS 20.
Measurement of current tax (including RDEC) and deferred tax requires
judgements as to the probable amount of tax payable after the preparation of tax
filings and potential challenge by relevant tax authorities.
There is a risk that the key 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.
We have assessed management’s processes and controls over legal and
regulatory claims and issues and made enquiries with in-house legal counsel.
We tested the appropriateness of management’s assumptions by reference
to third party evidence for key provisions recorded at the year end. In doing
this, we concluded on whether our understanding of the business gained
throughout the audit process corroborated the provisions recorded.
We challenged management’s estimates of the most likely outcomes by
critically evaluating the range of possible outcomes to determine if the
amounts provided are appropriate.
We assessed the adequacy of the Group’s financial statement disclosures
and adherence to accounting standards.
We found that the judgements formed by management were within an
acceptable range and disclosures made in the financial statements were
appropriate.
We have tested the principles and mathematical integrity of the Group’s
discounted cash flow model used to assess goodwill and intangible assets
for potential impairment. With the assistance of our valuation specialists, we
assessed the growth and discount rates used in this impairment calculation,
by comparing the Group’s assumptions to external data. We concluded that
the Group’s assumptions were appropriate.
We challenged the cash flow projections used within the model by reference to
current level of sales and analysis of management’s historic forecasting accuracy.
We tested the sensitivity of the impairment calculation to changes in the
underlying assumptions and concluded that there is sufficient headroom
within the model such that no impairment is required.
We assessed whether the Group’s disclosures regarding sensitivity of the
outcome of the impairment assessment to changes in key assumptions
properly reflected the risks inherent in the valuation of goodwill. We are
satisfied that the disclosures made in the financial statements are appropriate.
We have reviewed management’s accounting policy for RDEC and disclosure
(note 8, Taxation) of its impact on the Group’s underlying effective tax rate.
Management have made a judgement as to whether RDEC should be
accounted for under IAS 12 or IAS 20 and we consider the disclosures made
sufficient to enable a user of the accounts to identify and understand the
impact of management’s accounting policy.
We have used our tax specialists to challenge the appropriateness of
management’s assumptions and estimates in relation to tax positions,
including RDEC and recognition of deferred tax assets, by critically assessing
the range of possible outcomes. We obtained the latest correspondence
with the relevant tax authorities to corroborate management’s conclusions.
We found that judgements made by management were within an
acceptable range.
We reviewed the disclosures made in respect of tax, in particular around
estimates and uncertainties, and are satisfied that the disclosures made were
appropriate.
Acquisition accounting
Refer to page 68 (Report of the Audit Committee), page 117 (note 1, Significant
accounting policies – Business combinations and related goodwill), and page
122 (note 7, Business Combinations).
QinetiQ Group plc has completed two acquisitions in the year.
Business combinations are inherently of greater risk as they are one-off and
unique in nature. Management have applied key judgements, including assessing
the fair value of assets and liabilities acquired.
A material amount of goodwill has resulted from these transactions, creating a
risk that this may be impaired if it is unsupported by the forecast performance
of the businesses acquired.
We have obtained and reviewed the purchase agreements to ensure that
all terms have been considered and accounted for appropriately.
We used our internal valuation experts to assess the appropriateness of the
fair value of acquired intangibles, as calculated by management’s experts.
We agreed consideration to supporting documents and ensured that the
resulting goodwill is calculated accurately and supported by the expected
future performance of the acquired businesses.
We reviewed the disclosures made in respect of tax, in particular around
estimates and uncertainties, and are satisfied that the disclosures made
were appropriate.
We determined that there were no key audit matters applicable to the Company to communicate in our report.
98
QinetiQ Group plc Annual Report and Accounts 2019 How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
The only financially significant component within the Group is QinetiQ Limited. The audit of this entity’s complete financial information was
performed by the Group audit team in the UK. This provided sufficient coverage over all financial statement balances, except inventory. We
performed additional audit procedures over inventory balances at two further entities to ensure sufficient coverage over that financial statement
line item. One entity was located within the UK and work was performed by the Group audit team. The other entity was located in the US and work
was performed by our local PwC component audit team.
In addition to the above, we performed analytical procedures on the remaining entities to understand key balances and transactions in the year
and performed additional procedures on any unusual balances identified.
The audit procedures performed over the complete financial information of QinetiQ Limited, accounted for 72% of total Group revenue (2018
coverage: 75%) and 87% of underlying profit before taxation (2018 coverage: 87%). These audit procedures, in addition to the specific audit
procedures performed over inventory in two locations and goodwill and intangibles arising on acquisition, accounted for 88% of total Group assets
(2018 coverage: 91%).
The combination of the work referred to above, together with additional procedures performed at Group level, including testing of significant
journals posted within the consolidation and significant adjustments made to the financial statements, gave us the evidence we needed for our
opinion on the financial statements as a whole.
Only one component auditor, located in the US, was involved in the audit as all other audit procedures were performed by the Group audit team.
The US business operates under a Proxy Board which is required to carry on business with the US Department of Defense. This Proxy Board places
certain restrictions on access to, and communication of, information outside of the US borders. We planned our audit to ensure US personnel
completed the audit work within the US and obtained approvals for transfer of information in advance of undertaking the audit work. The Group
engagement leader met and agreed the audit plan with our US component audit team, in addition to agreeing the format and content of
communications. We determined the level of involvement we needed to have in the audit work at this reporting entity to be able to conclude
whether sufficient appropriate evidence had been obtained as a basis for our opinion on the financial statements as a whole. As the procedures
performed by this component were limited to inventory only, this included discussion with the component team and attending the audit close
meeting by conference call, at which the outcome of all audit findings was discussed.
The Company audit was performed by the Group audit team at QinetiQ Group plc’s head office in the UK. Audit procedures were performed over
the complete financial information and disclosures for statutory audit purposes only. Audit work over the Company was not required for the Group
audit, as all significant balances within the Company are eliminated on consolidation.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate, on the financial
statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
£6.1 million (2018: £5.8 million).
£4.8 million (2018: £4.8 million).
Group financial statements
Company financial statements
How we determined it
5% of underlying profit before tax.
1% of total assets.
Rationale for benchmark applied
Based on the benchmarks used in the Annual
Report, underlying profit before tax is one of the
primary measures used by the shareholders in
assessing the performance of the Group, and is a
generally accepted auditing benchmark. It is
considered appropriate to exclude specific adjusting
items due to the nature of these balances as
disclosed in note 4 of the financial statements.
We believe that total assets is the primary measure used by the
shareholders in assessing the performance of this entity, and is
a generally accepted auditing benchmark for non-trading entities.
This materiality relates to the audit for the statutory entity only,
as the Company was not in scope for the Group audit.
Corporate governance | Independent auditors’ report
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Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 Independent auditors’ report to the
members of QinetiQ Group plc continued
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range
of materiality allocated across components was between £3.0 million and £5.8 million. Certain components were audited to a local statutory
audit materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £300,000 (Group audit)
(2018: £290,000) and £240,000 (Company audit) (2018: £240,000) as well as misstatements below those amounts that, in our view, warranted
reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw attention
to in respect of the Directors’ statement in the financial statements about
whether the Directors considered it appropriate to adopt the going concern
basis of accounting in preparing the financial statements and the Directors’
identification of any material uncertainties to the Group’s and the Company’s
ability to continue as a going concern over a period of at least 12 months from
the date of approval of the financial statements.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be predicted, this
statement is not a guarantee as to the Group’s and Company’s ability to
continue as a going concern. For example, the terms on which the United
Kingdom may withdraw from the European Union are not clear, and it is
difficult to evaluate all of the potential implications on the group’s trade,
customers, suppliers and the wider economy.
We are required to report if the Directors’ statement relating to going concern
in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our
knowledge obtained in the audit.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon.
The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude
whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing
to report based on these responsibilities.
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act 2006
have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and
the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by
ISAs (UK) unless otherwise stated).
Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for
the year ended 31 March 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
(CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic report and Directors’ report. (CA06)
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the
group
We have nothing material to add or draw attention to regarding:
– The directors’ confirmation on page 67 of the Annual Report that they have carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model, future performance, solvency or liquidity.
– The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
– The directors’ explanation on page 37 of the Annual Report as to how they have assessed the prospects of the group, over what period they have
done so and why they consider that period to be appropriate, and their statement as to whether they 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 of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
100
QinetiQ Group plc Annual Report and Accounts 2019 We have nothing to report having performed a review of the Directors’
statement that they have carried out a robust assessment of the
principal risks facing the Group and statement in relation to the
longer-term viability of the Group. Our review was substantially less
in scope than an audit and only consisted of making inquiries and
considering the Directors’ process supporting their statements;
checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code (the “Code”); and
considering whether the statements are consistent with the knowledge
and understanding of the Group and Company and their environment
obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report
when:
– The statement given by the directors, on page 95, that they consider
the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the
members to assess the group’s and company’s position and
performance, business model and strategy is materially inconsistent
with our knowledge of the group and company obtained in the
course of performing our audit.
– The section of the Annual Report on page 68 describing the work
of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
– The directors’ statement relating to the company’s compliance with
the Code does not properly disclose a departure from a relevant
provision of the Code specified, under the Listing Rules, for review
by the auditors.
(UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken
on the basis of these financial statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for
the company’s members as a body in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do
not, in giving these opinions, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown or
into whose hands it may come save where expressly agreed by our
prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
– we have not received all the information and explanations we require
for our audit; or
– adequate accounting records have not been kept by the company,
or returns adequate for our audit have not been received from
branches not visited by us; or
– certain disclosures of directors’ remuneration specified by law are
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance with the Companies
Act 2006. (CA06)
not made; or
– the company financial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with
the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were
appointed by the members on 22 June 2017 to audit the financial
statements for the year ended 31 March 2018 and subsequent financial
periods. The period of total uninterrupted engagement is two years,
covering the years ended 31 March 2018 to 31 March 2019.
Julian Gray (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Southampton
23 May 2019
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ Responsibilities
set out on page 95, the directors are responsible for the preparation of
the financial statements in accordance with the applicable framework
and for being satisfied that they give a true and fair view. The directors
are also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the Group’s and the Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and
using the going concern basis of accounting unless the directors either
intend to liquidate the group or the company or to cease operations, or
have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that
includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs
Corporate governance | Independent auditors’ report
101
Corporate GovernanceQinetiQ Group plc Annual Report and Accounts 2019 102
QinetiQ Group plc Annual Report and Accounts 2019
Financial
Statements
104 Consolidated income statement
105 Consolidated comprehensive income statement
105 Consolidated statement of changes in equity
106 Consolidated balance sheet
107 Consolidated cash flow statement
107 Reconciliation of movements in net cash
108 Notes to the financial statements
151 Company balance sheet
152 Company statement of changes in equity
153 Notes to the Company financial statements
155 Five-year record
QinetiQ’s SPUR robot which won the competition
for the US Army’s Common Robotic System-
Individual (CRS(I)) program. The robot is designed
to be back-packable and is equipped with advanced
sensors and mission modules to enable dismounted
forces to detect, identify and counter hazards.
QinetiQ Group plc Annual Report and Accounts 2019
103
Consolidated income statement
For the year ended 31 March
All figures in £ million
Revenue1
Operating costs excluding depreciation and amortisation
Other income
EBITDA (earnings before interest, tax, depreciation
and amortisation)
Depreciation and impairment of property, plant and equipment
Amortisation of intangible assets
Operating profit/(loss)
Gain on sale of investments
Finance income
Finance expense
Profit/(loss) before tax
Taxation (expense)/income
Profit for the year attributable to equity shareholders
Earnings per share
Basic
Diluted
2019
Note Underlying*
2, 3
911.1
(762.5)
10.6
2
Specific
adjusting
items*
–
(2.7)
0.2
Total Underlying*
833.0
911.1
(690.9)
(765.2)
9.7
10.8
Specific
adjusting
items*
–
–
21.1
3, 15
3, 14
3
6
6
5
8
12
12
159.2
(32.1)
(3.2)
123.9
–
1.2
(1.1)
124.0
(12.5)
111.5
19.7p
19.6p
(2.5)
(3.7)
(3.9)
(10.1)
1.1
8.2
–
(0.8)
3.2
2.4
156.7
(35.8)
(7.1)
113.8
1.1
9.4
(1.1)
123.2
(9.3)
113.9
20.1p
20.0p
151.8
(25.6)
(3.7)
122.5
–
0.7
(1.1)
122.1
(13.1)
109.0
19.3p
19.2p
21.1
–
(2.6)
18.5
–
4.2
–
22.7
6.4
29.1
2018
Total
833.0
(690.9)
30.8
172.9
(25.6)
(6.3)
141.0
–
4.9
(1.1)
144.8
(6.7)
138.1
24.4p
24.3p
1 Revenue excludes the share of revenue of joint ventures £1.9m (2018: nil).
* Alternative performance measures are used to supplement the statutory figures. These are additional financial indicators used by management internally to assess the underlying
performance of the Group. Definitions can be found in the glossary on page 159. Also refer to note 1 and note 4 for details of ‘specific adjusting items’.
104
104
QinetiQ Group plc
Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
Consolidated comprehensive income statement
For the year ended 31 March
Financial Statements
All figures in £ million
Profit for the year
Items that will not be reclassified to profit or loss:
Actuarial (loss)/gain 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 gains/(losses) on foreign operations
Movement in deferred tax on foreign currency translation
Increase/(decrease) in fair value of hedging derivatives
Movement in deferred tax hedging derivatives
Recycling of gain on disposal of investment
Fair value gains/(losses) on available-for-sale investments
Total items that may be reclassified to profit or loss
Other comprehensive (expense)/income for the year, net of tax
2019
113.9
(66.4)
11.3
(55.1)
4.6
(0.4)
1.8
(0.2)
(1.1)
0.7
5.4
(49.7)
2018
138.1
143.6
(24.4)
119.2
(9.7)
(1.0)
(2.2)
0.4
–
(0.6)
(13.1)
106.1
Total comprehensive income for the year
64.2
244.2
Consolidated statement of changes in equity
For the year ended 31 March
All figures in £ million
At 1 April 2018
Profit for the year
Acquisition of partially owned subsidiary
Other comprehensive income/(expense)
for the year, net of tax
Purchase of own shares
Share-based payments
Deferred tax on share options
Dividends
At 31 March 2019
At 1 April 2017
Profit for the year
Other comprehensive income/(expense)
for the year, net of tax
Purchase of own shares
Share-based payments
Dividends
At 31 March 2018
Issued
share
capital
5.7
Capital
redemption
reserve
40.8
Share
premium
147.6
Hedge
reserve
(1.8)
Translation
reserve
(0.4)
Retained
earnings
552.2
–
–
–
–
–
–
–
5.7
5.7
–
–
–
–
–
5.7
–
–
–
–
–
–
–
40.8
40.8
–
–
–
–
–
40.8
–
–
–
–
–
–
–
147.6
147.6
–
–
–
–
–
147.6
–
–
1.6
–
–
–
–
(0.2)
–
–
(1.8)
–
–
–
(1.8)
–
–
4.2
–
–
–
–
3.8
10.3
–
(10.7)
–
–
–
(0.4)
113.9
–
(55.5)
(0.7)
5.9
1.0
(35.7)
581.1
328.0
138.1
118.6
(0.7)
2.7
(34.5)
552.2
Non-
controlling
interest
0.2
–
2.0
–
–
–
–
–
2.2
0.2
–
–
–
–
–
0.2
Total
744.1
113.9
–
(49.7)
(0.7)
5.9
1.0
(35.7)
778.8
532.4
138.1
106.1
(0.7)
2.7
(34.5)
744.1
Total
equity
744.3
113.9
2.0
(49.7)
(0.7)
5.9
1.0
(35.7)
781.0
532.6
138.1
106.1
(0.7)
2.7
(34.5)
744.3
Financial statements
QinetiQ Group plc
Annual Report and Accounts 2019
105
105
Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Consolidated balance sheet
As at 31 March
All figures in £ million
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Other financial assets
Equity accounted investments
Retirement benefit surplus
Deferred tax asset
Current assets
Inventories
Other financial assets
Trade and other receivables
Investments
Current tax receivable
Assets held for sale
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Current tax payable
Provisions
Other financial liabilities
Non-current liabilities
Deferred tax liability
Provisions
Other financial liabilities
Other payables
Total liabilities
Net assets
Capital and reserves
Ordinary shares
Capital redemption reserve
Share premium account
Hedging reserve
Translation reserve
Retained earnings
Capital and reserves attributable to shareholders of the parent company
Non-controlling interest
Total shareholders’ funds
Note
2019
2018
13
14
15
23
16
29
17
18
23
19
20
15
23
21
22
23
17
22
23
21
27
148.6
88.5
298.0
0.9
4.5
259.1
7.8
807.4
40.1
0.5
208.5
–
1.5
1.9
190.8
443.3
1,250.7
(346.6)
(8.5)
(6.2)
(1.8)
(363.1)
(73.1)
(10.7)
(1.9)
(20.9)
(106.6)
(469.7)
781.0
5.7
40.8
147.6
(0.2)
3.8
581.1
778.8
2.2
781.0
101.5
41.1
269.0
0.3
2.2
316.2
6.4
736.7
38.1
16.9
150.3
0.7
–
1.2
254.1
461.3
1,198.0
(334.9)
(8.9)
(6.0)
(2.6)
(352.4)
(66.4)
(14.3)
(1.9)
(18.7)
(101.3)
(453.7)
744.3
5.7
40.8
147.6
(1.8)
(0.4)
552.2
744.1
0.2
744.3
The financial statements were approved by the Board of Directors and authorised for issue on 23 May 2019 and were signed on its behalf by:
Mark Elliott
Chairman
Steve Wadey
Chief Executive Officer
David Smith
Chief Financial Officer
106
106
QinetiQ Group plc
Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
Consolidated cash flow statement
For the year ended 31 March
All figures in £ million
Underlying net cash inflow from operations
(Less)/add back specific adjusting items
Net cash inflow from operations
Tax paid
Interest received
Interest paid
Net cash inflow from operating activities
Purchases of intangible assets
Purchases of property, plant and equipment
Proceeds from disposals of plant and equipment
Proceeds from sale of property
Proceeds from sale of investments
Acquisition of businesses
Investment in joint venture
Proceeds from disposal of available-for-sale-investments
Investment in available-for-sale investments
Net cash outflow from investing activities
Purchase of own shares
Dividends paid to shareholders
Repayment of external bank loan
Payment of bank facility arrangement fee
Capital element of finance lease payments
Net cash outflow from financing activities
(Decrease)/increase in cash and cash equivalents
Effect of foreign exchange changes on cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Reconciliation of movement in net cash for the year ended 31 March
All figures in £ million
(Decrease)/increase in cash and cash equivalents in the year
Add back net cash flows not impacting net cash
Change in net cash resulting from cash flows
Finance leases and debt recognised on acquisition
Other movements including foreign exchange
(Decrease)/increase 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
Note
26
26
26
7
23
Note
23
23
23
2019
126.3
(0.7)
125.6
(10.7)
1.3
(0.7)
115.5
(10.6)
(77.0)
6.9
5.3
1.5
(61.2)
(1.6)
15.7
–
(121.0)
(0.7)
(35.7)
(20.0)
(1.5)
(0.4)
(58.3)
(63.8)
0.5
254.1
190.8
2019
(63.8)
6.2
(57.6)
(22.7)
2.0
(78.3)
266.8
188.5
2.3
190.8
2018
126.5
5.9
132.4
(15.7)
0.7
(0.7)
116.7
(8.5)
(46.0)
–
23.1
–
(1.1)
(0.5)
–
(5.0)
(38.0)
(0.7)
(34.5)
–
–
–
(35.2)
43.5
(1.2)
211.8
254.1
2018
43.5
5.0
48.5
–
(3.6)
44.9
221.9
266.8
(12.7)
254.1
Financial statements
QinetiQ Group plc
Annual Report and Accounts 2019
107
107
Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements
1. Significant accounting policies
QinetiQ Group plc (‘the Company’) is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in
United Kingdom. The consolidated financial statements of the Group comprise statements for the Company and its subsidiaries, together referred
to as ‘the Group’.
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 business performance, specific adjusting items need to be disclosed separately.
Underlying measures of performance exclude specific adjusting items.
Specific adjusting items include the following:
Item
Amortisation of intangible assets arising from acquisitions
Pension net finance income and pension past service cost
Gains/losses on disposal of property, investments and intellectual property
Transaction & integration costs in respect of business acquisitions
Impairment of property
The tax impact of the above
Other significant non-recurring deferred tax movements
Distorting due to
irregular nature
year on year
Distorting due to
fluctuating nature
(size and sign)
Does not reflect in-year
operational performance
of continuing business
P
P
P
P
P
P
P
P
P
P
P
P
P
P
P
The financial impact of each item is reported in note 4 to these financial statements.
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 95 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
(FRS 101); these are presented on page 151. 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. 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 2019.
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.
108
108
QinetiQ Group plc
Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
Recent accounting developments
Developments adopted by the Group in 2019 with no material impact on the financial statements
The following IFRS and EU-endorsed standards and amendments, improvements and interpretations of published standards are effective for
accounting periods beginning on or after 1 January 2018 and have been adopted with no material impact on the Group’s financial statements:
– Amendments to IFRS 2 ‘Share based payments’, on clarifying how to account for certain types of share-based payment transactions
– Amendments to IFRS 4 ‘Insurance contracts’ regarding the implementation of IFRS 9 ‘Financial instruments’
– Amendments to IAS 40 ‘Investment property’, relating to transfers of investment property
– IFRIC 22 ’Foreign currency transactions and advance consideration’
Annual improvement 2014-2016 cycle have been adopted with effect from 1 January 2018. No changes to the previously published accounting
policies or other adjustments were required on the adoption of these amendments.
IFRS 15 Revenue from Contracts with Customers
In the current year the Group has applied IFRS 15 Revenue from Contracts with Customers (as amended in April 2016). IFRS 15 establishes
a five-step model to account for revenue arising from contracts with customers. The model 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 the revenue when the entity satisfies a performance obligation.
The new revenue standard supersedes all previous revenue recognition requirements under IFRS and required either a full retrospective application
or a cumulative effect transitional method. The Group adopted the new standard using the cumulative effect transitional method without using
the practical expedients for modified contracts in IFRS 15.C5(c). This method requires, if the impact of adoption is material, an adjustment to the
opening balance of equity in the period of adoption without having to restate comparative amounts. The adoption of IFRS 15 has not had a
significant impact on QinetiQ’s reported financial performance. This was as expected given the nature of our contracts and QinetiQ’s historic
method of accounting (using ‘percentage of completion’ accounting for service contracts as opposed to milestone accounting).
QinetiQ performed a detailed assessment of the impact of implementing IFRS 15. All major long-term service contracts (LTPA, CATS, NCSISS,
MSCA and FAST), which accounted for approximately 39% of FY18 revenue, were assessed by the Group Finance team and the Company’s
auditors in detail and concluded on individually. Management within each business unit also assessed all other contracts greater than £1m and
which extended beyond FY18 into FY19. We have not identified any contracts in total, or part contracts (in the form of performance obligations),
where we would need to move from recognising revenue over time to recognising revenue at a point in time. The majority of QinetiQ’s contracts
are largely either long-term service contracts where the customer benefits from QinetiQ’s performance throughout the contract, or they are long-
term design, build and delivery contracts which are highly bespoke and have no alternative use to QinetiQ (and QinetiQ have a right to payment for
work performed to date). Therefore, it remains appropriate to recognise revenue over time using an input-based methodology (cost-to-cost). Where
IFRS 15 has required the disaggregation of contracts into distinct performance obligations, this does not materially alter the revenue recognised
compared to the long-term percentage completion methodology previously applied. Product shipment contracts with control clauses were
assessed to determine the point in time when revenue shall be recognised by considering the additional indicators highlighted in the new standard.
It was determined that there was no material impact on QinetiQ point in time revenue recognition. No adjustment to the opening balance of equity
has been required following implementation of IFRS15. More extensive disclosures are required, however. (See note 2)
IFRS 15 requires the recognition of an asset in respect of incremental costs of obtaining a contract with a customer where it is expected these
costs will be recovered. We have determined that this has minimal impact to the Group, as even though many of our contracts are single-sourced,
we do not typically incur qualifying incremental costs (including third party expenses) in securing those contracts that would be considered
recoverable.
IFRS 15 uses the terms ‘contract assets’ and ‘contract liabilities’ to describe what was known as ‘amounts recoverable under contracts’ and
‘deferred income’; however the Standard does not prohibit an entity from using alternative descriptions in the balance sheet. The Group has
adopted the new terminology used in IFRS 15 to describe such balances.
The Group’s accounting policies for its revenue streams are disclosed in detail on pages 111-112.
IFRS 9 financial instruments
IFRS 9 addresses the classification, measurement and recognition of financial assets and financial liabilities, introduces a new impairment model
for financial assets, as well as new rules for hedge accounting. The new standard has replaced IAS 39 in its entirety and is effective for annual
periods beginning on or after 1 January 2018. The Group adopted the new standard during the current reporting period, FY19, and has not restated
comparative periods. All components of the standard, including new rules for hedge accounting and impairment, are applied prospectively.
The impact of adopting the new standard in FY19 resulted in certain financial assets being reclassified from fair value through other
comprehensive income to fair value through profit and loss. This change has not had a material impact on profit in FY19 as these financial
assets were sold during the period without any significant increase in fair value. Gains previously held in other comprehensive income have
been released to equity.
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Notes to the Financial Statements continued
1. Significant accounting policies continued
Derivative financial instruments designated as cash flow hedges under IAS 39 in the prior period shall continue to be classified as such and
continue to qualify for hedge accounting under IFRS 9. Trade and other receivables previously classified as ‘loans and receivables’ and measured
at amortised cost under IAS 39 are now classified as ‘financial assets at fair value through profit and loss’ and measured at amortised costs under
IFRS 9. Loans and receivables no longer exist as a classification category under IFRS 9. Trade and other payables previously classified and
measured at amortised cost under IAS 39 shall continue to be classified and measured at amortised costs under IFRS 9.
The Group’s trade receivables are subject to the new expected credit loss impairment model under IFRS 9. In determining the recoverability of
trade receivables, the Group considers any change in the credit quality of each trade receivable from the date credit was granted to the reporting
date using forward looking information. The Group assessed credit risk to be limited as a result of the high percentage of revenue derived from
UK and US government agencies. For non-government customers the Group considers the expected credit loss to be immaterial to the
financial statements.
The changes to impairment and hedge accounting have not had a material impact on the Group financial statements
Developments expected in future periods for which the impact has been assessed
IFRS 16 leases
The new leases standard 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 – i.e. lessors continue to classify leases as finance
and operating leases.
The standard will be effective for periods beginning on or after 1 January 2019, i.e. FY20 for QinetiQ, using either the full retrospective approach
or the modified retrospective approach. Early adoption is permitted but QinetiQ plans to adopt the new standard on the required effective date,
1 April 2019, using the full retrospective approach. Under the full retrospective approach QinetiQ will be required to apply IFRS 16 to all periods
presented as if it had always been applied by restating comparative periods. A third balance sheet (1 April 2018) is required to be presented in
addition to FY19 restated in FY20. The income statement and cash flow statement will only have FY19 restated. A detailed change in accounting
policies note will show a reconciliation between previously reported figures and restated figures for all three statements. QinetiQ will apply IAS 17
when preparing FY19 financial statements and then also apply IFRS 16 to prepare comparative financial information to be included in FY20
financial statements. QinetiQ elected to apply the full retrospective approach. A benefit of the full retrospective approach is that financial
statements will be comparable in the first year of adoption.
When applying the full retrospective approach QinetiQ elected to use the short-term lease and low-value asset exemptions for leases less than 12
months and lease assets under £5,000. QinetiQ also elected to reassess all leases using new IFRS 16 lease definitions and have not elected to use
the practical expedient which exempts entities from doing so.
QinetiQ quantified the expected impact on the FY19 financial statements using all available lease information and expectations around extensions,
early terminations and payments as at 31 March 2019. Should there be changes to any lease terms during FY20 QinetiQ will consider these in
lease calculations for the FY20 financial statements.
The expected impact on financial statements under the full retrospective approach is set out below:
For the year ended 31 March
Balance sheet
Right-of-use assets
Lease liabilities
Income statement
Depreciation of right-of-use assets
Finance expense in respect of lease liabilities
Operating lease expense no longer incurred
2020
2019
16.7
(19.3)
7.6
0.9
(8.5)
23.8
(26.6)
7.9
1.1
(8.9)
IFRIC 23 ‘Uncertainty over income tax treatments’
This interpretation was published in June 2017 and is required to be applied in the determination of taxable profits / losses and tax attributes, when
there is uncertainty over their treatment under IAS 12.
The primary impact on QinetiQ arises in relation to the provision for potential overseas tax liabilities in territories where the group does not have a
registered taxable presence (i.e. territories to which the group exports goods or short term services). Currently, the group holds a provision under
IAS12 reflecting the potential risk of QinetiQ’s many activities across many jurisdictions. This provision is not expected to meet the more
prescriptive threshold for recognition under IFRIC 23, which explicitly requires consideration of each tax jurisdiction individually.
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Combined with an assessment of other tax reserves, the estimated impact of the adoption of IFRIC 23 in FY20 is a reduction in tax provisions
(within current tax payable) of approximately £2m.
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:
– Amendments to IFRS 3, and 9
– Amendments to IAS 1, 8, 19 and 28
Revenue from contracts with customers
The Group recognises revenue primarily from the following major sources:
– Through combining world-leading expertise with unique facilities to provide technical assurance, test and evaluation and training services
underpinned by long-term contracts.
– Through delivering innovative solutions and products to meet customer requirements by undertaking contract-funded research and
development, developing intellectual property and by internal funding with potential for new revenue streams.
Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third
parties. The Group recognises revenue when it transfers control of a product or service to a customer. The Group’s revenue contracts are
accounted for under IFRS 15 ‘Revenue from Contracts with Customers’ taking into account the requirement to distinguish between the various
performance obligations within a contract and treating these separately. The Group’s methodology applies IFRS 15 on a contract-by-contract basis
which includes considerations for contract modifications, variable consideration, the determination of distinct performance obligations,
determination of agency and principal relationships and licences.
Service contracts
The Group’s long-term service contracts are generally ‘test and evaluation’ or advice-based contracts where control of the service is transferred
over a period of time as the Group performs. At contract inception the Group undertakes an assessment to determine how many distinct
performance obligations exists within a contract. As part of the assessment the Group obtains an understanding of the overall deliverable to the
customer through discussions with business units and project leads. Each individual deliverable in the contract is then assessed to determine if it
is an input into the overall deliverable, and therefore part of a single performance obligation, or if it is a stand-alone separable deliverable with its
own transaction price and therefore a distinct performance obligation in its own right. Each distinct performance obligation identified within a
contract is accounted for separately.
Certain service contracts have a similar pattern of transfer of control to the customer where each year is effectively the same from a performance
obligation perspective. The Group has applied the series guidance as permitted within the Standard to these contracts and accounts for these as a
series of distinct service performance obligations satisfied annually over the contract term. The transaction price for a contract is determined at
contract inception based on a fixed-margin applied to the total forecast costs to complete the deliverable. Some long-term contracts include an
excess profit clause which is a variable consideration factor that could impact the transaction price. Excess profits are estimated at contract
inception and at the end of each reporting period to ensure that the transaction price is not under or over stated. Any required adjustment will be
made against the transaction price in the period in which it occurred. The Group does not offer any right of return or refunds which could impact
transaction price at inception. Certain contracts attract bonuses and/or penalties which are variable and will have an impact on transaction price at
contract inception. The Group assesses variable consideration in relation to bonuses and penalties at contract inception using the most-likely
method and this forms part of the transaction price and recognised over time as costs have been incurred. The Group only includes bonuses and
penalties into the transaction price to the extent that it is highly probable that a significant reversal of revenue will not occur in future periods.
The transaction price is allocated between each distinct performance obligation identified in a contract based on the stand-alone selling price of
each performance obligation. Each performance obligation will be costed and the transaction price will be cost plus margin. This amount would be
the stand-alone selling price of each performance obligation if contracted with a customer separately.
Long-term service contracts allow for modifications to the original order. If a contract modification is determined to be distinct, the Group accounts
for this as a separate contract. If a contract modification is not distinct, the Group accounts for this as if it were part of the existing contract. A
cumulative catch-up adjustment to revenue is then recognised to disclose the effect that the contract modification has on the transaction price
and the Group’s measure of progress towards complete satisfaction of the performance obligation.
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Notes to the Financial Statements continued
1. Significant accounting policies continued
When the outcome of a distinct performance obligation in delivering services can be reliably estimated, revenue associated with the performance
obligation is recognised over time using the input method. The input method recognises revenue over time on the basis of costs incurred to date to
the satisfaction of a performance obligation relative to the total forecast costs to complete the performance obligation. The Group has determined
the input method to be appropriate as it best depicts the Group’s performance in transferring control of the service to the customer as it incurs
costs on a particular contract.
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.
Goods sold
The Group recognises revenue on the sale of products at a point in time once control has been transferred to the customer. Control is generally
transferred to customers on delivery of products or when the customer has the significant risks and rewards of ownership of the product. Payment
is typically due within 30 days of invoice (within the UK) and customers typically do not have a right of return or refund. The transaction price for
sale of products is agreed at contract inception. When the Group develops a bespoke product for a customer with no alternative use to the Group,
revenue is recognised over time using the input method.
Licence revenue
Licence revenue is attributed to either ‘right to use’ or ‘right to access’ licences. ‘Right to use’ licence revenue is recognised at a point in time when
the Group sells a licence to a customer and does not undertake significant further activities or involvement in developing the licence after the sale.
‘Right to access’ licence revenue is recognised over time when the Group maintains a significant level of involvement in developing and enhancing
the licence after the sale. The level of involvement goes beyond general support, bug-fixing and upgrades which generally only maintain the current
operating level. The transaction price for intellectual property is agreed at contract inception.
The Group recognises licence revenue through the supply of a range of security, messaging and connectivity software products. A licence fee is
paid for each computer that uses the software and the customer can also purchase a support service contract for a fixed period. The sale of these
types of licences is recognised at a point in time as a distinct performance obligation because the Group does not undertake any further activities
in developing the licence after the sale. The support service contract is recognised over time as a separate performance obligation as this is an
optional extra and is not integral into the functionality of the licence. The support service contract offers general support and maintenance of the
licence to the customer over a fixed period.
The Group also offers a cloud-based service where customers pay a host fee, licence fee and support and maintenance fee to access the QinetiQ
hosted service for a fixed term. It was assessed that each of the three deliverables could not benefit the customer on a stand-alone basis as the
customer requires each to obtain the complete hosting service. One distinct service performance obligation is provided to the customer over the
term of the contract. The Group recognises revenue over time as the customer simultaneously receives and consumes the benefits of the hosting
service provided by the Group as the Group performs.
Contract assets
Contract assets is a new term used in adopting IFRS 15 and effectively represents amounts recoverable under contracts as previously reported.
Contract assets represent revenue recognised in excess of amounts invoiced. Revenue is recognised on service contracts by using a ‘percentage
complete’ method, applying the proportion of contract costs incurred for work performed to date relative to the estimated total contract cost, after
making suitable allowances for technical and other risks related to performance milestones yet to be achieved, and applying that proportion to total
contract price. Payment for service contracts are not always due from the customer until certain milestones have been reached and, therefore, a
contract asset is recognised over the period in which the services are performed representing the Group’s right to consideration for services
performed to date, to the extent that the customer has not yet been invoiced for those services.
Contract liabilities
Contract liabilities is a new term used in adopting IFRS 15 and effectively represents deferred income as previously reported. The Group, on
occasion, bills customers in advance of performing certain types of work which results in the Group recognising contract liabilities. Once the work
has been performed these amounts will be reduced and recognised as revenue. For sale of goods, revenue is recognised in the income statement
when control of the goods has been transferred to the customer; being at the point when the goods are delivered. Any transaction price received by
the Group prior to that point is recognised as a contract liability.
Principal-agent arrangements
The Group enters into certain arrangements which involve a consortium of service providers. The Group acts as a ‘Prime’ contractor in certain
contracts with customers and utilises sub-contractors to undertake the work. Under these contracts the Group is considered to be primarily
responsible for fulfilling the service to the customer. The Group performs a technical assessment of the work before it is delivered to the customer
and is responsible for quality and performance of the sub-contractor. As such the Group is considered to be the principal to the arrangement with
the customer and includes sub-contractor costs within revenue. However, where the Group is merely acting as an agent of a sub-contractor then
no revenue is recognised in respect of sub-contractor costs. All consortium arrangements are assessed by the Group to determine if it is the
principal or agent.
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Contract bidding costs
The Group recognises the ‘incremental costs of obtaining a contract’ with a customer as an asset if the Group expects to recover those costs.
The ‘incremental costs of obtaining a contract’ are those costs that the Group incurs to obtain a contract with a customer that it would not have
incurred if the contract had not been won. Costs to obtain a contract that would have been incurred regardless of whether the contract was won
or lost shall be recognised as an expense when incurred, unless those costs are explicitly chargeable to the customer. Under IAS 18 the Group
capitalised bidding costs on major bids once preferred bidder status was achieved. The capitalised costs were amortised over the life of the
contract. Under IFRS 15 bidding costs are not seen as incremental costs of obtaining a contract and the Group will expense bid costs as incurred.
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.
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
The Group holds no external borrowings but does have access to a revolving credit facility (undrawn during 2018 and 2019), fees for which are
reported within finance costs. Costs of letters of credit are also charged to finance expense. Income earned on funds invested is reported within
finance income. 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 income or
expense in respect of defined benefit pension schemes. The Group pays in advance finance costs in relation to the multi-currency facility which are
recognised as a deferred finance cost asset.
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.
The Group’s accounting policy is to include the impact of research and development expenditure credits (RDEC) within the tax charge. To provide
comparability to other companies that account for RDEC as a government grant the effective underlying tax rate is disclosed in the taxation note
both with and without the impact.
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.
Non-current assets held for sale
Non-current assets are classified as held for sale if their carrying amount will be recovered primarily through a sales transaction rather than
through continuing use. This condition is regarded as met only when the sale is highly probable and expected to be completed within a year of the
balance sheet date. The assets should be available for immediate sale in their present condition and actively marketed at a price that is reasonable
in relation to their current fair value.
Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Any write-down to fair
value less costs to sell shall be recognised directly through profit and loss as an impairment loss. No further depreciation is charged in respect of
assets classified as held for sale.
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Notes to the Financial Statements continued
1. Significant accounting policies continued
Goodwill
Goodwill on acquisitions of subsidiaries is included in non-current 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 16 years. Internally generated intangible assets are recorded at cost, including labour, directly attributable costs and any third-
party expenses.
The ‘multi-period excess earnings’ method and the ‘relief-from-royalty’ method are both used for fair valuing intangible assets arising from
acquisitions. The multi-period excess earnings method considers the present value of net cash flows expected to be generated by customer
relationships, by excluding any cash flows related to contributory assets. The relief-from-royalty method considers the discounted estimated royalty
payments that are expected to be avoided as a result of the patents or trademarks being owned.
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
Customer relationships
Development costs
Other
2–10 years
1–16 years
1–4 years
1–14 years
Property, plant and equipment
Property, plant and equipment are stated at cost less depreciation. Freehold land is not depreciated. Other tangible non-current assets are
depreciated on a straight-line basis over their useful economic lives to their estimated residual value as follows:
Freehold buildings
Leasehold land and buildings
Plant and machinery
Fixtures and fittings / office equipment
Computers
Motor vehicles
20–25 years
Shorter of useful economic life and the period of the lease
3–15 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.
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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. A ‘market comparison’ technique is used to fair value
inventories acquired through a business combination. The fair value is determined based on the estimated selling price in the ordinary course
of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell
the inventories.
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. 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 equivalents.
Current and non-current liabilities
Current liabilities include amounts due within the normal operating cycle of the Group. Deferred income, or ‘contract liabilities’, is included in trade
and other payables and represents amounts invoiced in excess of revenue recognised. Interest-bearing current and non-current liabilities are
initially recognised at fair value and then stated at amortised cost with any difference between the cost and redemption value being recognised in
the income statement over the period of the borrowings on an effective interest rate basis. Costs associated with the arrangement of bank facilities
or the issue of loans are held net of the associated liability presented in the balance sheet. Capitalised issue costs are released over the estimated
life of the facility or instrument to which they relate using the effective interest rate method. If it becomes clear that the facility or instrument will
be redeemed early, the amortisation of the issue costs will be accelerated.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event which can
be reliably estimated, and it is probable that an outflow of economic benefits will be required to settle the obligation. Where appropriate, provisions
are determined by discounting the expected cash flows at an appropriate discount rate reflecting the level of risk and the time value of money.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual
provisions of the instrument. The de-recognition of a financial instrument takes place when the Group no longer controls the contractual
right that comprise the financial instrument, when the instrument expires, or when the instrument is sold, terminated or exercised.
Financial assets
Financial assets are classified on the Group’s balance sheet as subsequently measured at amortised cost, fair value through other comprehensive
income or fair value through profit or loss. This classification is made on the basis of both the Group’s business model for managing the financial
assets and the contractual cash flow characteristics of the financial asset.
Financial liabilities
Financial liabilities are classified on the Group’s balance sheet as subsequently measured at amortised cost except for financial liabilities at fair
value through profit and loss. The Group may at initial recognition irrevocably designate a financial liability as measured at fair value through profit
or loss if a contract contains one or more embedded derivatives and the host is not an asset within the scope of IFRS 9, or when doing so results
in more relevant information.
Impairment of trade receivables
The Group applies the simplified approach when using the expected credit loss (ECL) impairment model for trade receivables. Under the
simplified approach the Group always measures the loss allowance at an amount equal to the lifetime expected credit losses for trade receivables.
The Group measures the expected credit losses of trade receivables in a way that reflects a probability-weighted amount that is determined by
evaluating a range of possible outcomes, the time value of money and supportable information that is readily available at each reporting date about
past events, current condition and forecasts of future economic conditions. The ECL’s are updated each reporting period to reflect changes in
credit risk since initial recognition.
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.
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Notes to the Financial Statements continued
1. Significant accounting policies continued
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.
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 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.
Per the Scheme rules, the Company has an unconditional right to a refund of any surplus that may arise on cessation of the Scheme in the context
of IFRIC 14 paragraphs 11(b) and 12 and therefore the full net pension asset can be recognised on the Group’s balance sheet and the Group’s
minimum funding commitments to the Scheme do not give rise to an additional balance sheet liability.
For defined benefit plans, the cost charged to the income statement consists of administrative expenses and the net interest income. There is no
service cost due to the fact the plans are closed to future accrual. The net interest income is reported within finance income and the administration
cost element is charged as a component of operating costs in the income statement. Actuarial gains and losses and re-measurement gains and
losses are recognised immediately in full through the statement of comprehensive income. Contributions to defined contribution plans are charged
to the income statement as incurred.
Share-based payments
The Group operates share-based payment arrangements with employees. The fair value of equity-settled awards for share-based payments is
determined on grant and expensed straight line over the period from grant to the date of earliest unconditional exercise. The fair value of cash-
settled awards for share-based payments is determined each period end until they are exercised or lapse. The value is expensed straight line over
the period from grant to the date of earliest unconditional exercise. The charges for both equity and cash-settled share-based payments are
updated annually for non-market-based vesting conditions.
Share capital
Ordinary share capital of the Company is recorded as the proceeds received, less issue costs. Company shares held by the employee benefit trusts
are held at the consideration paid. They are classified as own shares within equity. Any gain or loss on the purchase, sale or issue of Company
shares is recorded in equity.
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QinetiQ Group plc Annual Report and Accounts 2019
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 from contracts with customers
Performance obligations
Long-term services contracts require judgement and a detailed assessment of each deliverable within a contract to determine distinct performance
obligations. Point in time, sale of product, contracts are generally straightforward as usually only one performance obligation exists which is to
deliver a product.
Management, business unit leaders and project leads collaborate to determine the overall deliverable to customers and what they expect to receive
over the period of delivery. Each individual deliverable within the contract is then assessed to determine if the customer can benefit from a task on
a stand-alone basis (or with other readily available resources) and if a task is separately identifiable from other tasks in the contract. When
determining if a task is separately identifiable management assesses how tasks combine and integrate with each other to deliver the overall
performance obligation. If individual tasks are not highly interrelated, could be delivered by an independent third-party and the customer could
benefit from the task on a stand-alone basis management assess these to be distinct performance obligations. If multiple tasks are highly
interrelated and combine together to deliver one overall deliverable these are assessed to be one performance obligation as a customer would
not ordinarily contract with the Group for certain tasks only.
Variable consideration
The Group applies judgement when determining the amount of variable consideration to include in the transaction price at contract inception.
Variable bonus consideration is earned based on the Group meeting milestones and performance KPI’s on certain contracts. At contract inception
management uses the ‘most-likely method’ to determine the amount bonus to include the transaction price. This is based on management’s best
estimates on how the Group expects to perform against contract milestones and KPI’s. Where management is uncertain on a milestone’s or KPI’s
achievement it is assumed that it will not be met and the associated bonus is not included in the transaction price. Management applies the same
methodology for penalties where the transaction price will be reduced for penalties which management view will most-likely be incurred. Where
there is uncertainty on penalties management will reduce the transaction price at contract inception for these.
Forecast costs at completion (FCAC) and contract progress
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.
Business combinations and related goodwill
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 cash generating units 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 13.
Tax
The Group has significant levels of unused tax losses, as set out in note 8. Judgement is applied when assessing the recoverability of deferred tax
assets impacting on the value of losses recognised on the balance sheet as a deferred tax asset. Judgement is also required when assessing
technical uncertainties associated with tax positions. To the extent that the outcome of a tax audit differs from the tax that has been provided,
adjustments will be made to current 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 (see note 22). 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 net surplus/deficit. Further details of these assumptions and the sensitivity of the net pension surplus to
changes in these assumptions are set out in note 29.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
117
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Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
2. Revenue from contracts with customers and other income
Revenue and other income is analysed as follows:
Revenue by category and other income
For the year ended 31 March
All figures in £ million
Services contracts with customers
Sale of goods contracts with customers
Royalties and licences
Total revenue
Less: acquired businesses^
Adjust to constant prior year exchange rates
Total revenue on an organic, constant currency basis
Organic revenue growth at constant currency
^ For the period of which there was no contribution in the equivalent period in the prior year which was pre-ownership by the Group.
Other income
Share of associates’ and joint ventures’ profit after tax
Other income
Other income – underlying
Specific adjusting item: gain on sale of assets (note 4)
Total other income
2019
790.9
105.6
14.6
911.1
(15.1)
1.4
897.4
8%
2019
0.6
10.0
10.6
0.2
10.8
2018
733.4
85.8
13.8
833.0
–
–
833.0
3%
2018
0.3
9.4
9.7
21.1
30.8
Revenue and profit after tax of associates and joint ventures was £16.2m and £1.2m respectively (2018: revenue of £13.6m and profit after tax of
£0.6m). The figures in the table above represent the Group share of this profit after tax.
Other income is in respect of property rentals and the recovery of other related property costs.
Revenue by customer geographic location
For the year ended 31 March
All figures in £ million
US
Australia
Europe
Middle East
Rest of World
International
United Kingdom
Total revenue
Reconciliation of international revenue to organic international revenue including share of joint ventures
For the year ended 31 March
All figures in £ million
International revenue
Less: international revenue from businesses acquired in current financial year
Add: incremental share of revenue from joint ventures
Organic international revenue including share of joint ventures
2019
105.3
55.2
60.8
11.0
41.4
273.7
637.4
911.1
2019
273.7
(9.8)
1.9
265.8
2018
81.6
54.8
43.2
13.9
32.5
226.0
607.0
833.0
2018
226.0
–
–
226.0
The year on year organic growth in international revenue including share of joint ventures was £39.8m. This metric is used for management
remuneration purposes under the Deferred Share Scheme.
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QinetiQ Group plc Annual Report and Accounts 2019
Revenue by major customer type
For the year ended 31 March
All figures in £ million
UK Government
US Government
Other
Total revenue
2019
562.7
83.1
265.3
911.1
2018
544.2
65.5
223.3
833.0
‘Other’ does not contain any customers with revenue in excess of 10% of total Group revenue.
The following table shows the aggregate amount of revenue allocated to performance obligations that are unsatisfied (or partially satisfied) as at
the end of the reporting period (adjusted to include the LTPA amendment signed 5 April 2019):
All figures in £ million
Revenue from contracts with customers
Total revenue allocated to unsatisfied performance obligations
2020
706.4
706.4
2021
454.8
454.8
2022
348.8
348.8
2023+
1,623.6
Total
3,133.6
1,623.6
3,133.6
Management expects that 23% (£706.4m) of revenue allocated to unsatisfied contracts as of 31 March 2019 will be recognised as revenue during
the next reporting period.
3. Segmental analysis
The analysis by business segment is presented in accordance with IFRS 8 Operating Segments, on the basis of those reportable segments whose
operating results are regularly reviewed by the Board (the Chief Operating Decision Maker as defined by IFRS 8) and are aligned with the Group’s
strategic direction, determined with reference to the products and services they provide, as follows:
EMEA Services provides technical assurance, test and evaluation and training services, underpinned by long-term contracts. EMEA Services
comprises the following business units which are not considered reportable segments as defined by IFRS 8: Maritime, Land & Weapons; Air &
Space, Cyber, Information & Training, and International business. These are aggregated into the single EMEA Services segment due to their similar
characteristics including the nature of the services provided and customers.
Global Products combines all other business units not aggregated within EMEA Services. Generally these business units deliver innovative
solutions and products which includes contract-funded research and development and developing intellectual property in partnership with key
customers and through internal funding with potential for new revenue streams. Global Products comprises the following business units which
are not considered reportable segments as defined by IFRS 8: QinetiQ North America, Space Products, OptaSense and EMEA Products. No single
component represents 10% or more of the Group's revenue.
Operating segments
All figures in £ million
EMEA Services
Global Products
Total operating segments
Underlying operating margin*
Revenue
from
external
customers
687.7
223.4
911.1
2019
2018
Revenue
from
external
customers
651.4
181.6
833.0
Underlying
operating
profit1
96.3
27.6
123.9
13.6%
Underlying
operating
profit1
94.3
28.2
122.5
14.7%
1 The measure of profit presented to the Chief Operating Decision Maker is operating profit stated before specific adjusting items (‘underlying operating profit’). The specific adjusting
items are detailed in note 4.
* Definitions of the Group’s ‘Alternative performance measures’ can be found in the glossary on page 159.
No measure of segmental assets and liabilities is reported as this information is not regularly provided to the Chief Operating Decision Maker.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
119
119
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
3. Segmental analysis continued
Reconciliation of segmental results to total profit
All figures in £ million
Underlying operating profit
Specific adjusting items operating (loss)/profit
Operating profit
Gain on sale of investments
Net finance income
Profit before tax
Taxation expense
Profit for the year attributable to equity shareholders
Non-current assets* by geographic location
All figures in £ million
Year ended 31 March 2019
Year ended 31 March 2018
* Excluding deferred tax, financial instruments and retirement benefit surplus.
Depreciation, impairment and amortisation by business segment – excluding specific adjusting items
For the year ended 31 March 2019
All figures in £ million
Depreciation and impairment of property, plant and equipment*
Amortisation of purchased or internally developed intangible assets
* Excludes impairment of property £3.7m which is treated as a specific adjusting item (note 4).
For the year ended 31 March 2018
All figures in £ million
Depreciation of property, plant and equipment
Amortisation of purchased or internally developed intangible assets
Note
4
6
8
2019
123.9
(10.1)
113.8
1.1
8.3
123.2
(9.3)
113.9
2018
122.5
18.5
141.0
–
3.8
144.8
(6.7)
138.1
UK
382.1
340.5
Rest of
World
153.0
71.1
Total
535.1
411.6
EMEA
Services
29.9
2.3
32.2
Global
Products
2.2
0.9
3.1
EMEA
Services
23.6
2.3
25.9
Global
Products
2.0
1.4
3.4
Total
32.1
3.2
35.3
Total
25.6
3.7
29.3
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Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
4. 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.
Further explanation of this rationale is provided in note 1 (Accounting policies). Underlying measures of performance exclude specific adjusting
items. The following specific adjusting items have been (charged)/credited in the consolidated income statement:
All figures in £ million
Gain on sale of property
Gain on sale of investment
Gain on sale of intellectual property
Pension past service cost in respect of GMP equalisation
Acquisition transaction costs
Acquisition integration costs
Specific adjusting items (loss)/profit before interest, tax, depreciation and amortisation
Impairment of property
Amortisation of intangible assets arising from acquisitions
Specific adjusting items operating (loss)/profit
Gain on sale of investments
Defined benefit pension scheme net finance income
Specific adjusting items (loss)/profit before tax
Specific adjusting items – tax
Total specific adjusting items profit after tax
Reconciliation of underlying profit for the year to total profit for the year
All figures in £ million
Underlying profit after tax – total Group
Total specific adjusting items profit after tax
Total profit for the year attributable to equity shareholders
5. Profit before tax
The following auditors’ 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
Total audit fees
Audit-related assurance services
Total non-audit fees
Total auditors’ remuneration
The following items have also been charged in arriving at profit before tax:
All figures in £ million
Cost of inventories expensed
Owned assets: depreciation
Leased assets: depreciation
Foreign exchange loss
Research and development expenditure – customer funded contracts
Research and development expenditure – Group funded
Note
8
Note
2019
0.2
–
–
(0.7)
(1.3)
(0.7)
(2.5)
(3.7)
(3.9)
(10.1)
1.1
8.2
(0.8)
3.2
2.4
2019
111.5
2.4
113.9
2018
14.6
0.6
5.9
–
–
–
21.1
–
(2.6)
18.5
–
4.2
22.7
6.4
29.1
2018
109.0
29.1
138.1
2019
2018
0.5
0.2
0.7
0.1
0.1
0.8
2019
28.5
29.0
0.4
0.5
272.9
26.0
0.4
0.2
0.6
0.1
0.1
0.7
2018
25.4
25.6
–
–
284.3
25.8
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
121
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Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
6. Finance income and expense
For the year ended 31 March
All figures in £ million
Receivable on bank deposits
Finance income before specific adjusting items
Amortisation of deferred financing costs
Payable on commitment fees
Finance lease expense
Unwinding of discount on financial liabilities
Finance expense before specific adjusting items
Specific adjusting items:
Defined benefit pension scheme net finance income
Net finance income
2019
1.2
1.2
(0.3)
(0.6)
(0.1)
(0.1)
(1.1)
2018
0.7
0.7
(0.3)
(0.7)
–
(0.1)
(1.1)
8.2
8.3
4.2
3.8
7. Business combinations
Acquisitions in prior year
A payment of £0.1m deferred consideration has been paid in respect of the prior year acquisition of Rubikon Group Pty Limited. The remaining
£0.1m deferred consideration has not been paid as at year end.
Acquisitions in the year to 31 March 2019
All figures in £ million
Company acquired
E.I.S Aircraft Operations
Inzpire Group Limited
Total current year acquisitions
Payment of deferred consideration – prior year acquisitions1
Less: cash acquired
Plus: transaction costs2
Net cash outflow in the year
Date
acquired
Cash
consideration
Goodwill
Contribution post-acquisition
Fair value
of net assets
acquired
Revenue
Operating
profit
16 October 2018
19 November 2018
46.8
22.9
69.7
0.1
(9.9)
1.3
61.2
(33.3)
(11.7)
(45.0)
13.5
13.2
26.7
9.8
5.3
15.1
1.1
0.2
1.3
1 Deferred consideration has been paid in respect of the prior year acquisition of Rubikon Group Pty Limited.
2 Transaction costs have been included in ‘Operating costs excluding depreciation and amortisation’ as a specific adjusting item.
E.I.S Aircraft Operations (EIS), now QinetiQ Germany
QinetiQ acquired 100% of the share capital of EIS Holding GmbH, and thereby its Aircraft Operations business, in October 2018 for €52.6m
(£46.8m). EIS had €22.5m (£20.0m) of bank funding as at acquisition and this loan was paid off by the Group post acquisition. EIS is a leading
provider of airborne training services based in Germany, delivering threat-representation and operational readiness for military customer. EIS has
natural synergies with QinetiQ’s existing air engineering, test aircrew training and unmanned target service capabilities which we will exploit to
strengthen our position in defence operational training. EIS will continue to be led by its existing management team, forms part of QinetiQ’s
International business unit and, post-acquisition, is reported within QinetiQ’s EMEA Services division. If the acquisition had occurred on the first day
of the financial year, Group revenue for the year would have been £925.2m and the Group profit before tax would have been £125.9m.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired and liabilities assumed at the date of acquisition and the adjustments
required to the book values of the assets and liabilities in order to present the net assets of these businesses at fair value and in accordance with
Group accounting policies. The fair values remain provisional, but will be finalised within 12 months of acquisition.
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QinetiQ Group plc Annual Report and Accounts 2019
All figures in £ million
Intangible assets
Property, plant and equipment
Inventory
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Finance lease liabilities
Corporation tax
Bank loan
Deferred tax liability
Net assets acquired
Goodwill
Consideration
Note
14
15
17
13
Book
value
–
4.8
0.4
9.2
6.4
(6.7)
(2.7)
(2.5)
(20.0)
(0.8)
(11.9)
Fair value
adjustment
37.3
–
–
–
–
–
–
–
–
(11.9)
25.4
Fair value at
acquisition
37.3
4.8
0.4
9.2
6.4
(6.7)
(2.7)
(2.5)
(20.0)
(12.7)
13.5
33.3
46.8
The consideration of £46.8m was satisfied entirely in cash in the financial year, with no deferred consideration.
The fair value adjustments include £37.3m in relation to the recognition of acquired intangible assets of which £31.8m relates to customer
relationships and £5.5m relates to existing technology. The goodwill is attributable mainly to the skills and technical talent of the EIS work force
and the synergies expected to be achieved from integrating the company into the Group’s existing business.
Inzpire Group Limited (Inzpire)
In November 2018 QinetiQ acquired 85% of the shares of Inzpire Group Limited for a total consideration of £22.9m with an arrangement to acquire
the remaining 15% after two years. Inzpire is a highly regarded provider of training services to the Royal Air Force and British Army and this
strategic investment further enhances our capability in defence operational training. With a leading position within the UK, the investment allows us
to further leverage the capability in attractive markets internationally, complementing our acquisitions of QTS and EIS and supporting our strategic
objectives. If the acquisition had occurred on the first day of the financial year, Group revenue for the year would have been £921.4m and the Group
profit before tax would have been £124.8m.
Following completion, Inzpire continues to be led by its existing management team. It is aligned to QinetiQ’s CIT business unit and is reported
within QinetiQ’s EMEA Services division.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired and liabilities assumed at the date of acquisition and the adjustments
required to the book values of the assets and liabilities in order to present the net assets of the business at fair value and in accordance with Group
accounting policies. The fair values remain provisional, but will be finalised within 12 months of acquisition.
All figures in £ million
Intangible assets
Property, plant and equipment
Inventory
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred tax liability
Net assets acquired
Non-controlling interest
Goodwill
Consideration
Note
14
15
17
13
Book
value
–
0.4
0.1
3.3
3.5
(2.0)
–
5.3
Fair value
adjustment
9.6
–
–
–
–
–
(1.7)
7.9
Fair value at
acquisition
9.6
0.4
0.1
3.3
3.5
(2.0)
(1.7)
13.2
(2.0)
11.7
22.9
The consideration of £22.9m was satisfied entirely in cash in the financial year, with no deferred consideration.
The fair value adjustments include £9.6m in relation to the recognition of acquired intangible assets of which £4.6m relates to customer
relationships, £4.4m relates to existing technology and £0.6m relates to trade names. The goodwill is attributable mainly to the skills and technical
talent of Inzpire’s work force and the synergies expected to be achieved from integrating the company into the Group’s existing business.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
123
123
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
8. Taxation
All figures in £ million
Analysis of charge
Current UK tax expense/(income)
Current UK tax in respect of prior years
Overseas corporation tax
Current 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)
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 before tax
Tax on profit before tax at 19% (2018: 19%)
Effect of:
Expenses not deductible for tax purposes and non-taxable items
Current UK tax in respect of prior years
Research and development expenditure credits
Tax in respect of an FY09 US acquisition – payable to the tax authorities
Recognition of deferred tax asset
Deferred tax impact of change in rates
Deferred tax in respect of prior years
Other deferred tax movements
Different tax rates in overseas jurisdictions
Taxation expense/(income)
Effective tax rate
2019
Specific
adjusting
items
Underlying
Total Underlying
Specific
adjusting
items
8.2
(1.6)
1.8
8.4
3.5
(0.1)
0.7
4.1
12.5
124.0
23.6
(0.9)
(1.6)
(7.1)
–
(1.6)
(0.7)
0.7
–
0.1
12.5
10.1%
1.0
(4.1)
–
(3.1)
(1.2)
(0.1)
1.2
(0.1)
(3.2)
(0.8)
(0.2)
0.1
(4.1)
–
–
–
(0.1)
1.2
0.2
(0.3)
(3.2)
9.2
(5.7)
1.8
5.3
2.3
(0.2)
1.9
4.0
9.3
123.2
23.4
(0.8)
(5.7)
(7.1)
–
(1.6)
(0.8)
1.9
0.2
(0.2)
9.3
7.5%
(0.2)
(1.0)
4.7
3.5
7.9
2.4
(0.7)
9.6
13.1
122.1
23.2
(0.2)
(1.0)
(12.0)
1.0
–
1.5
(0.7)
(0.1)
1.4
13.1
10.7%
0.6
–
–
0.6
(7.2)
(1.2)
1.4
(7.0)
(6.4)
22.7
4.3
(3.3)
–
–
–
(7.6)
(1.2)
1.4
0.2
(0.2)
(6.4)
2018
Total
0.4
(1.0)
4.7
4.1
0.7
1.2
0.7
2.6
6.7
144.8
27.5
(3.5)
(1.0)
(12.0)
1.0
(7.6)
0.3
0.7
0.1
1.2
6.7
4.6%
The total tax charge was £9.3m (2018: £6.7m). The underlying tax charge was £12.5m (2018: £13.1m) with an underlying effective tax rate of
10.1% for the year ending 31 March 2019 (2018: 10.7%). 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 (‘RDEC’) in the UK which are accounted under IAS12 within the tax line. The
adjusted effective tax rate before the impact of RDEC would be 15.0%. The effective tax rate is expected to remain below the UK statutory rate
in the medium term, subject to any tax legislation changes, the geographic mix of profits, the recognition of unrecognised tax losses and while
the benefit of net RDEC retained by the Group remains in the tax line.
Tax losses and specific adjusting items
A £2.8m credit in respect of initial recognition of corporate tax deductions for certain equity-settled share based payment schemes has been
classified as a specific adjusting item. Together with a £0.4m tax effect of the pre-tax specific adjusting items, the total specific adjusting items
tax credit was £3.2m (2018: £6.4m).
At 31 March 2019 the Group had unused tax losses and surplus interest costs of £114.9m which are available for offset against future taxable
profits. A deferred tax asset of £4.9m is recognised in respect of £21.1m of US net operating losses. No deferred tax asset is recognised in respect
of the remaining £93.8m of losses/interest costs due to uncertainty over the timing and extent of their utilisation. The Group has £60.0m of time-
limited losses of which US capital losses of £28.2m will expire in 2020 and US net operating losses of £21.2m will expire in 2035, £9.1m in 2036
and £1.5m in 2038. Deferred tax has been calculated using the enacted future statutory tax rates.
Factors affecting future tax charges
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 expenditure credits retained by the Group remain in the tax line.
Future recognition of unrecognised tax losses will also affect future tax charges.
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QinetiQ Group plc Annual Report and Accounts 2019
9. Dividends
An analysis of the dividends paid and proposed in respect of the years ended 31 March 2019 and 31 March 2018 is provided below:
Interim 2019
Final 2019 (proposed)
Total for the year ended 31 March 2019
Interim 2018
Final 2018
Total for the year ended 31 March 2018
Pence
per share
2.1
4.5
6.6
2.1
4.2
6.3
Date paid/
payable
Feb 2019
Aug 2019
Feb 2018
Aug 2018
£m
11.9
25.5
37.4
11.9
23.8
35.7
The Directors propose a final dividend of 4.5p (2018: 4.2p) per share. The dividend, which is subject to shareholder approval, will be paid on
30 August 2019. The ex-dividend date is 1 August 2019 and the record date is 2 August 2019.
10. 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
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
2018
Number
5,239
826
6,065
2019
Number
5,170
891
6,061
Monthly average
2018
Number
5,340
803
6,143
2019
Number
5,134
860
5,994
Note
28
2019
303.1
27.4
40.2
6.1
376.8
2018
292.3
28.1
39.6
2.7
362.7
11. Directors and other senior management personnel
The Directors and other senior management personnel of the Group during the year to 31 March 2019 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
Total
2019
10.0
0.1
1.2
11.3
2018
8.1
0.1
0.7
8.9
Short-term employee remuneration and benefits include salary, bonus and benefits. Post-employment benefits relate to pension amounts.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
125
125
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
12. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares
in issue during the year. The weighted average number of shares used excludes those shares bought by the Group and held as own shares (see
note 27). For diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all potentially dilutive
ordinary shares arising from unvested share-based awards including share options.
For the year ended 31 March
Weighted average number of shares
Effect of dilutive securities
Diluted number of shares
Million
Million
Million
2019
566.0
4.0
570.0
2018
565.2
2.0
567.2
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.
Underlying EPS
For the year ended 31 March
Profit attributable to equity shareholders
Remove profit after tax in respect of specific adjusting items
Underlying profit after taxation
Weighted average number of shares
Underlying basic EPS
Diluted number of shares
Underlying diluted EPS
Basic and diluted EPS
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
13. Goodwill
All figures in £ million
Cost
At 1 April
Acquisitions
Foreign exchange
At 31 March
Impairment
At 1 April
Foreign exchange
At 31 March
Net book value at 31 March
£ million
£ million
£ million
Million
Pence
Million
Pence
£ million
Million
Pence
Million
Pence
2019
113.9
(2.4)
111.5
566.0
19.7
570.0
19.6
2019
113.9
566.0
20.1
570.0
20.0
2018
138.1
(29.1)
109.0
565.2
19.3
567.2
19.2
2018
138.1
565.2
24.4
567.2
24.3
2019
2018
203.0
45.0
9.4
257.4
220.4
–
(17.4)
203.0
(101.5)
(7.3)
(108.8)
(112.6)
11.1
(101.5)
148.6
101.5
The goodwill acquired of £45.0m arises from the acquisitions of E.I.S. Aircraft Operations (now QinetiQ GmbH) and Inzpire Group Limited in the
year, generating goodwill of £33.3m and £11.7m respectively. Foreign exchange movements in respect of the E.I.S. goodwill post acquisition result
in the E.I.S. closing goodwill as at 31 March 2019 decreasing to £32.2m (as per the following table).
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QinetiQ Group plc Annual Report and Accounts 2019
Goodwill analysed by cash-generating unit (CGU)
Goodwill is allocated across four cash-generating units (CGUs) within the EMEA Services segment and five CGUs within the Global Products
segment. The full list of CGUs that have goodwill allocated to them is as follows:
All figures in £ million
QinetiQ North America
Target Systems
Boldon James
Commerce Decisions
Space Products
QinetiQ Germany (acquired in year, see note 7)
Inzpire (acquired in year, see note 7)
Advisory Services
Australia
Net book value at 31 March
Primary reporting segments
Global Products
Global Products
Global Products
Global Products
Global Products
EMEA Services
EMEA Services
EMEA Services
EMEA Services
2019
41.9
24.3
10.7
6.4
5.7
32.2
11.7
9.8
5.9
148.6
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 and management considers that there are no likely variations in the key assumptions which would lead to an impairment
being recognised.
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 three-year
period. 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 1.0% – 2.4% (2018: 1.0% – 2.5%). The US terminal
growth rate was 1.9% (2018: 1.7%). 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 an appropriate estimate of a market participant discount rate.
The pre-tax discount rates applied to the cash flows of the QNA CGU and to the Target Systems CGU were 14.6% and 11.3% respectively. Discount
rates ranging from 11.2% to 12.0% were applied to the cash flows of the other, less significant, CGUs.
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
QinetiQ North America (QNA)
The carrying value of the goodwill for QNA CGU was £41.9m as at 31 March 2019 (2018: £38.8m). The recoverable amount of this CGU as at
31 March 2019, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net operating
assets (of £52.4m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. These cash flows include
certain assumptions about revenue and profit in respect of new product lines still to be launched and the success of winning certain government
contracts. An increase in the discount rate by 1%, a decrease in the terminal growth rate by 1% or a decrease in the terminal year cash flows
of £2.0m would not cause the net operating assets to exceed their recoverable amount.
Target Systems
The recoverable amount of this CGU as at 31 March 2019, based on value in use and calculated using the assumptions noted above, is higher
than the carrying value of net operating assets (of £29.4m). The key sensitivity impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate by 1%, a decrease in the terminal growth rate by 1% or a decrease in the terminal year cash flows
of £2.0m would not cause the net operating assets to exceed their recoverable amount.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
127
127
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
14. Intangible assets
Year ended 31 March 2019
All figures in £ million
Cost
At 1 April 2018
Additions – internally developed*
Additions – purchased*
Additions – recognised on acquisition
Foreign exchange
At 31 March 2019
Accumulated amortisation and impairment
At 1 April 2018
Amortisation charge for year
Foreign exchange
At 31 March 2019
Acquired intangible
assets
Customer
relationships
Development
costs
Other
AICC^ and
other
intangible
assets
52.7
–
–
36.4
1.1
90.2
33.8
2.7
1.9
38.4
62.6
–
–
10.5
2.9
76.0
55.4
1.2
2.9
59.5
22.3
0.3
2.8
–
0.4
25.8
19.3
1.1
0.2
20.6
47.0
3.2
1.9
–
0.2
52.3
35.0
2.1
0.2
37.3
Total
184.6
3.5
4.7
46.9
4.6
244.3
143.5
7.1
5.2
155.8
Net book value at 31 March 2019
51.8
16.5
5.2
15.0
88.5
^ AICC = Assets In Course Of Construction £7.4m (2018: £4.0m)
* Additions per the table above are lower than the capital expenditure included in the cash flow statement due to the relative timing of cash payments compared to the recognition of
balance sheet assets
‘Other’ consists primarily of intellectual property and existing technology arising on acquisition of businesses.
Year ended 31 March 2018
All figures in £ million
Cost
At 1 April 2017
Additions – internally developed
Additions – purchased
Reclassification from property, plant and equipment
Disposals
Transfers
Foreign exchange
At 31 March 2018
Accumulated amortisation and impairment
At 1 April 2017
Amortisation charge for year
Disposals
Foreign exchange
At 31 March 2018
Net book value at 31 March 2018
^ AICC = Assets In Course Of Construction £4.0m (2017: £2.1m)
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Annual Report and Accounts 2019
Acquired intangible
assets
Customer
relationships
Development
costs
Other
AICC^ and
other
intangible
assets
56.0
–
–
–
–
–
(3.3)
52.7
34.9
1.6
–
(2.7)
33.8
67.5
–
–
–
–
–
(4.9)
62.6
58.8
1.0
–
(4.4)
55.4
19.7
0.4
1.4
–
–
0.7
0.1
22.3
17.8
1.5
–
–
19.3
43.3
3.6
7.9
0.4
(7.1)
(0.7)
(0.4)
47.0
40.3
2.2
(7.1)
(0.4)
35.0
Total
186.5
4.0
9.3
0.4
(7.1)
–
(8.5)
184.6
151.8
6.3
(7.1)
(7.5)
143.5
18.9
7.2
3.0
12.0
41.1
QinetiQ Group plc Annual Report and Accounts 2019
15. Property, plant and equipment
Year ended 31 March 2019
All figures in £ million
Cost
At 1 April 2018
Additions – purchased*
Additions – recognised on acquisition
Land and buildings assets classified as held for sale
Disposals
Transfers
Foreign exchange
At 31 March 2019
Accumulated depreciation and impairment
At 1 April 2018
Charge for year
Impairment
Disposals
Foreign exchange
At 31 March 2019
Plant,
machinery
and
vehicles^
Computers
and office
equipment
Assets
under
construction
Land and
buildings
303.1
2.1
–
(0.7)
–
1.9
0.5
306.9
161.2
8.7
3.7
–
0.4
174.0
193.8
21.9
5.0
–
(1.2)
19.1
1.1
239.7
140.2
13.0
2.7
(1.2)
0.9
155.6
50.3
2.2
0.2
–
(0.3)
10.1
0.4
62.9
27.6
7.7
–
(0.3)
0.3
35.3
50.8
35.1
–
–
(1.4)
(31.1)
–
53.4
–
–
–
–
–
–
Total
598.0
61.3
5.2
(0.7)
(2.9)
–
2.0
662.9
329.0
29.4
6.4
(1.5)
1.6
364.9
Net book value at 31 March 2019
132.9
84.1
27.6
53.4
298.0
* Additions per the table above are lower than the capital expenditure included in the cash flow statement due to the relative timing of cash payments compared to the recognition of
balance sheet assets
^ Includes finance leased aircrafts acquired as part of EIS £2.5m
Disposals include aircraft sold for a gain of £6.9m following investment in new aircraft for test aircrew training under the LTPA contract.
Non-current assets classified as held for sale
Property, plant and equipment excludes property to the value of £1.9m (2018: £1.2m) which is reported separately as ‘Non-current assets
classified as held for sale’. £0.7m of property was transferred out of PP&E in the current year and £1.2m had been transferred out in the prior
year. This property is surplus to use in the Group and disposal transactions are expected to complete within the next 12 months.
Year ended 31 March 2018
All figures in £ million
Cost
At 1 April 2017
Additions – purchased
Additions – acquisitions
Land and buildings assets classified as held for sale
Disposals
Transfers
Foreign exchange
At 31 March 2018
Accumulated depreciation and impairment
At 1 April 2017
Charge for year
Disposals
Foreign exchange
At 31 March 2018
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets
under
construction
331.7
1.0
–
(1.2)
(29.2)
1.7
(0.9)
303.1
174.9
9.7
(22.6)
(0.8)
161.2
198.5
13.4
–
–
(32.6)
16.3
(1.8)
193.8
163.5
10.5
(32.2)
(1.6)
140.2
52.1
3.5
–
–
(16.6)
11.7
(0.4)
50.3
39.4
5.4
(16.6)
(0.6)
27.6
34.3
49.2
(0.4)
–
(2.4)
(29.7)
(0.2)
50.8
–
–
–
–
–
Total
616.6
67.1
(0.4)
(1.2)
(80.8)
–
(3.3)
598.0
377.8
25.6
(71.4)
(3.0)
329.0
Net book value at 31 March 2018
141.9
53.6
22.7
50.8
269.0
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
129
129
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
16. Equity accounted investments
As at 31 March
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets of joint ventures and associates
Net assets of joint ventures
Net assets of associate
Net assets of joint ventures and associates
Joint
ventures and
associates
financial
results
0.2
18.6
18.8
(1.9)
(9.0)
(10.9)
7.9
Joint
ventures and
associates
financial
results
0.2
11.4
11.6
–
(7.1)
(7.1)
4.5
2019
Group net
share of
joint
ventures
and
associates
0.1
9.4
9.5
(0.6)
(4.4)
(5.0)
4.5
2.1
2.4
4.5
2018
Group net
share of
joint
ventures
and
associates
0.1
5.6
5.7
–
(3.5)
(3.5)
2.2
0.5
1.7
2.2
17. 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 2019
Deferred tax asset
All figures in £ million
At 1 April 2018
(Charged)/credited to income statement
Charged to other comprehensive income
Credited to equity
Acquired in business combination
Foreign exchange
Gross deferred tax asset at 31 March 2019
Less: liability available for offset
Net deferred tax asset at 31 March 2019
Deferred tax liability
All figures in £ million
At 1 April 2018
(Charged)/credited to income statement
Credited to other comprehensive income
Acquired in business combination
Foreign exchange
Gross deferred tax liability at 31 March 2019
Less: asset available for offset
Net deferred tax liability at 31 March 2019
Deferred tax has been calculated using the enacted future statutory tax rates.
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Annual Report and Accounts 2019
Intellectual
property
3.2
(2.8)
–
–
–
–
0.4
Short-term
timing
differences
7.3
6.1
(0.6)
1.0
(0.8)
1.0
14.0
Losses
5.5
(0.8)
–
–
–
0.2
4.9
Pension
surplus
(58.5)
(1.4)
11.3
–
–
(48.6)
Accelerated
capital
allowances
(10.3)
(5.8)
–
–
–
(16.1)
Acquisition
intangibles
(7.2)
0.7
–
(13.6)
0.2
(19.9)
Total
16.0
2.5
(0.6)
1.0
(0.8)
1.2
19.3
(11.5)
7.8
Total
(76.0)
(6.5)
11.3
(13.6)
0.2
(84.6)
11.5
(73.1)
QinetiQ Group plc Annual Report and Accounts 2019
Deferred tax of £13.6m was created on the acquisitions of E.I.S. and Inzpire in the year (£11.9m and £1.7m respectively). E.I.S. also had a net
£0.8m of deferred tax liability on the balance sheet at acquisition, included as an asset in the table above due to a swing to a deferred tax asset
position at year end.
At 31 March 2019 the Group had unused tax losses and surplus interest costs of £114.9m which are available for offset against future profits.
A deferred tax asset of £4.9m is recognised in respect of £21.1m of US net operating losses. No deferred tax asset is recognised in respect of the
remaining £93.8m of losses/interest costs due to uncertainty over the timing and extent of their utilisation. The Group has £60.0m of time-limited
losses of which US capital losses of £28.2m will expire in 2020 and US net operating losses of £21.2m will expire in 2035, £9.1m in 2036 and
£1.5m in 2038. Deferred tax has been calculated using the enacted future statutory tax rates.
Year ended 31 March 2018
Deferred tax asset
All figures in £ million
At 1 April 2017
(Charged)/credited to income statement
Charged to other comprehensive income
Foreign exchange
Gross deferred tax asset at 31 March 2018
Less: liability available for offset
Net deferred tax asset at 31 March 2018
Deferred tax liability
All figures in £ million
At 1 April 2017
(Charged)/credited to income statement
Charged to other comprehensive income
Foreign exchange
Gross deferred tax liability at 31 March 2018
Less: asset available for offset
Net deferred tax liability at 31 March 2018
18. Inventories
As at 31 March
All figures in £ million
Raw materials
Work in progress
Finished goods
19. Trade and other receivables
As at 31 March
All figures in £ million
Trade receivables
Contract assets
Other receivables
Prepayments
Intellectual
property
–
3.2
–
–
3.2
Short-term
timing
differences
9.9
(1.2)
(0.6)
(0.8)
7.3
Losses
3.7
1.9
–
(0.1)
5.5
Pension
surplus
(31.4)
(2.7)
(24.4)
–
(58.5)
Accelerated
capital
allowances
(4.9)
(5.3)
–
(0.1)
(10.3)
Acquisition
intangibles
(8.9)
1.5
–
0.2
(7.2)
2019
24.1
6.4
9.6
40.1
2019
86.7
90.5
12.1
19.2
208.5
Total
13.6
3.9
(0.6)
(0.9)
16.0
(9.6)
6.4
Total
(45.2)
(6.5)
(24.4)
0.1
(76.0)
9.6
(66.4)
2018
18.3
9.2
10.6
38.1
2018
66.7
62.3
7.9
13.4
150.3
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
131
131
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
19. Trade and other receivables continued
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 2019
the Group carried a provision for doubtful debts of £1.2m (2018: £1.5m).
Contract assets is a new term used in adopting IFRS 15 and effectively represents amounts recoverable under contracts as previously reported
(refer to accounting policies note). The increase in contract assets in the year primarily reflects the phasing of payment milestones on
programmes in the Group’s Maritime, Land & Weapons business unit. This is expected to reduce in 2020.
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
Foreign exchange
At 31 March
2019
14.5
2.4
16.9
2019
1.5
1.9
(0.1)
(2.2)
0.1
1.2
2018
10.5
0.6
11.1
2018
2.0
0.5
(0.1)
(0.8)
(0.1)
1.5
The maximum exposure to credit risk in relation to trade receivables at the reporting date is the fair value of trade receivables. The Group does not
hold any collateral as security.
20. Current asset investments
As at 31 March
All figures in £ million
Current asset investments
2019
–
2018
0.7
The Group previously held a 2.6% investment in pSivida, a company listed on NASDAQ. The investment was sold in FY19 for proceeds of £1.5m,
recognising a gain on sale of £1.1m.
21. Trade and other payables
As at 31 March
All figures in £ million
Trade payables
Other tax and social security
Contract liabilities
Accrued expenses and other payables
Total current trade and other payables
Contract liabilities
Other payables
Total non-current trade and other payables
Total trade and other payables
2019
61.2
31.8
123.6
130.0
346.6
4.3
16.6
20.9
367.5
2018
83.0
26.3
88.0
137.6
334.9
6.1
12.6
18.7
353.6
Contract liabilities is a new term used in adopting IFRS 15 and effectively represents deferred income as previously reported (see accounting
policies note). The increase in contract liabilities in the year primarily reflects the relative phasing of project delivery versus payment milestones on
various programmes in the Group’s Maritime, Land & Weapons, Air & Space and CIT business units. This is expected to reduce in 2020. Revenue
recognised in the current period that was included in contract liabilities balance at the beginning of the period was £62.0m.
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QinetiQ Group plc Annual Report and Accounts 2019
22. Provisions
Year ended 31 March 2019
All figures in £ million
At 1 April 2018
Created in year
Released in year
Unwind of discount
Utilised in year
Reclassification
Foreign exchange
At 31 March 2019
Current liability
Non-current liability
At 31 March 2019
Property
Other
Total
11.1
1.6
(0.8)
0.1
(1.6)
2.7
–
13.1
5.4
7.7
13.1
9.2
2.6
(5.2)
–
(0.2)
(2.7)
0.1
3.8
0.8
3.0
3.8
20.3
4.2
(6.0)
0.1
(1.8)
–
0.1
16.9
6.2
10.7
16.9
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 10 years.
Other provisions relate to environmental and other liabilities, the magnitude and timing of utilisation of which are determined by a variety of factors.
23. Net cash
As at 31 March
All figures in £ million
Current financial assets/(liabilities)
Deferred financing costs
Available-for-sale investment
Finance lease
Derivative financial instruments
Total current financial assets/(liabilities)
Non-current assets/(liabilities)
Deferred financing costs
Finance lease
Derivative financial instruments
Total non-current financial assets/(liabilities)
Total financial assets/(liabilities)
Cash
Cash equivalents
Total cash and cash equivalents
Total net cash as defined by the Group
Assets
Liabilities
0.4
–
–
0.1
0.5
0.9
–
–
0.9
1.4
99.6
91.2
190.8
–
–
(0.7)
(1.1)
(1.8)
–
(1.6)
(0.3)
(1.9)
(3.7)
–
–
–
2019
Net
0.4
–
(0.7)
(1.0)
(1.3)
0.9
(1.6)
(0.3)
(1.0)
(2.3)
99.6
91.2
190.8
188.5
Assets
Liabilities
0.1
15.7
–
1.1
16.9
–
–
0.3
0.3
17.2
128.0
126.1
254.1
–
–
–
(2.6)
(2.6)
–
–
(1.9)
(1.9)
(4.5)
–
–
–
2018
Net
0.1
15.7
–
(1.5)
14.3
–
–
(1.6)
(1.6)
12.7
128.0
126.1
254.1
266.8
At 31 March 2019 the Group held £2.8m (2018: £2.2m) of cash which is restricted in its use. The available for sale investment is a ‘Libor-plus’
investment fund investing in a portfolio of AAA and AA-rated asset backed securities and corporate floating rate notes.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
133
133
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
24. Leases
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 expense for the year
The Group has the following total future minimum operating lease payment commitments:
All figures in £ million
Within one year
In the second to fifth years inclusive
Greater than five years
2019
5.9
13.1
3.7
22.7
2018
4.6
10.1
5.3
20.0
2019
8.9
2018
7.5
2019
8.5
17.5
3.3
29.3
2018
7.5
17.2
3.5
28.2
Operating lease payments represent rentals payable by the Group on certain property, plant and equipment. Principal operating leases are
negotiated for a term of approximately 10 years.
Finance leases
Group as a lessee
The Group has the following total future minimum finance lease payment commitments:
All figures in £ million
Within one year
In the second to fifth years inclusive
Greater than five years
2019
0.7
0.7
0.9
2.3
2018
–
–
–
–
The Group acquired three aircraft held under finance leases (expiring December 2021) as part of the EIS acquisition in the current year.
25. 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. Group treasury monitors financial
risks and compliance with risk management policies during the year. There have been no changes in any risk management policies during the year
or since the year end.
134
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QinetiQ Group plc Annual Report and Accounts 2019
A) Fair values of financial instruments
The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined
as follows:
Level 1 – measured using quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 – measured using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices). Level 2 derivatives comprise forward foreign exchange contracts which have been fair valued using
forward exchange rates that are quoted in an active market
Level 3 – measured using inputs for the assets or liability that are not based on observable market data (i.e. unobservable inputs).
The following table presents the Group’s assets and liabilities that are measured at fair value as at 31 March 2019:
All figures in £ million
Assets
Current derivative financial instruments
Non-current derivative financial instruments
Liabilities
Current derivative financial instruments
Non-current derivative financial instruments
Total
Note
Level 1
Level 2
Level 3
Total
23
23
23
23
–
–
–
–
–
0.1
–
(1.1)
(0.3)
(1.3)
–
–
–
–
–
0.1
–
(1.1)
(0.3)
(1.3)
The following table presents the Group’s assets and liabilities that are measured at fair value as at 31 March 2018:
All figures in £ million
Assets
Available for sale investments
Current other investments
Current derivative financial instruments
Non-current derivative financial instruments
Liabilities
Current derivative financial instruments
Non-current derivative financial instruments
Total
Note
Level 1
Level 2
Level 3
Total
23
20
23
23
23
23
15.7
0.7
–
–
–
–
16.4
–
–
1.1
0.3
(2.6)
(1.9)
(3.1)
–
–
–
–
–
–
–
15.7
0.7
1.1
0.3
(2.6)
(1.9)
13.3
For cash and cash equivalents, trade and other receivables and bank and current borrowings, the fair value of the financial instruments
approximate to their carrying value as a result of the short maturity periods of these financial instruments. For trade and other receivables,
allowances are made within the carrying value for credit risk. For other financial instruments, the fair value is based on market value, where
available. Where market values are not available, the fair values have been calculated by discounting cash flows to net present value using
prevailing market-based interest rates translated at the year-end rates, except for unlisted fixed asset investments where fair value equals
carrying value. There have been no transfers between levels.
All financial assets and liabilities had a fair value that is identical to book value at 31 March 2019 and 31 March 2018. Detailed analysis is provided
in the following tables:
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
135
135
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
25. Financial risk management continued
As at 31 March 2019
All figures in £ million
Financial assets
Non-current
Derivative financial instruments
Deferred financing costs
Current
Trade and other receivables (excluding prepayments)
Derivative financial instruments
Current asset investments
Available for sale investment
Deferred financing costs
Cash and cash equivalents
Total financial assets
Financial liabilities
Non-current
Trade and other payables (excluding contract liabilities)
Derivative financial instruments
Finance leases
Current
Trade and other payables (excluding contract liabilities)
Derivative financial instruments
Finance leases
Total financial liabilities
Total
As at 31 March 2018
All figures in £ million
Financial assets
Non-current
Derivative financial instruments
Current
Trade and other receivables (excluding prepayments)
Derivative financial instruments
Current asset investments
Available for sale investment
Deferred financing costs
Cash and cash equivalents
Total financial assets
Financial liabilities
Non-current
Trade and other payables (excluding contract liabilities)
Derivative financial instruments
Current
Trade and other payables (excluding contract liabilities)
Derivative financial instruments
Total financial liabilities
Financial
assets at
fair value
profit and
loss
Financial
liabilities at
amortised
cost
Note
Available
for sale
Derivatives
used as
hedges
Total
carrying
value
Total fair
value
23
23
19
23
20
23
23
23
21
23
21
23
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
189.3
–
–
–
–
190.8
380.1
–
–
–
–
–
–
–
–
0.9
–
–
–
–
0.4
–
1.3
(16.6)
–
(1.6)
(223.0)
–
(0.7)
(241.9)
–
–
–
0.1
–
–
–
–
0.1
–
(0.3)
–
–
(1.1)
–
(1.4)
–
0.9
189.3
0.1
–
–
0.4
190.8
381.5
(16.6)
(0.3)
(1.6)
(223.0)
(1.1)
(0.7)
(243.3)
–
0.9
189.3
0.1
–
–
0.4
190.8
381.5
(16.6)
(0.3)
(1.6)
(223.0)
(1.1)
(0.7)
(243.3)
380.1
(240.6)
(1.3)
138.2
138.2
Note
Available
for sale
Loans and
receivables
Financial
liabilities at
amortised
cost
Derivatives
used as
hedges
Total
carrying
value
Total fair
value
23
19
23
20
23
23
23
21
23
21
23
–
–
0.7
15.7
–
–
16.4
–
–
–
–
–
–
–
136.9
–
–
–
–
254.1
391.0
–
–
–
–
–
0.1
–
0.1
0.3
–
1.1
–
–
–
–
1.4
0.3
0.3
136.9
1.1
0.7
15.7
0.1
254.1
408.9
136.9
1.1
0.7
15.7
0.1
254.1
408.9
–
–
–
–
–
(12.6)
–
(246.9)
–
(259.5)
–
(1.9)
–
(2.6)
(4.5)
(12.6)
(1.9)
(12.6)
(1.9)
(246.9)
(2.6)
(264.0)
(246.9)
(2.6)
(264.0)
Total
16.4
391.0
(259.4)
(3.1)
144.9
144.9
136
136
QinetiQ Group plc
Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
B) Interest rate risk
The Group operates an interest rate policy designed to optimise interest costs and to reduce volatility in reported earnings. The Group’s current
policy is to require rates to be fixed for 30%–80% of the level of borrowings, which is achieved primarily through fixed-rate borrowings. Where there
are significant changes in the level and/or structure of debt, policy permits borrowings to be 100% fixed, with regular Board reviews of the
appropriateness of this fixed percentage. At 31 March 2019 and 31 March 2018 the Group had no borrowings.
Financial assets/(liabilities)
As at 31 March 2019
All figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other
As at 31 March 2018
All figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other
Financial assets
Non-interest
bearing
0.1
–
–
–
–
0.1
Floating
159.1
20.0
5.2
1.5
5.0
190.8
Financial liabilities
Non-interest
bearing
(1.4)
–
–
–
–
(1.4)
Fixed or
capped
–
–
(2.3)
–
–
(2.3)
Financial assets
Non-interest
bearing
17.1
–
–
0.7
–
17.8
Floating
224.3
20.5
7.3
0.7
1.3
254.1
Financial liabilities
Non-interest
bearing
(4.5)
–
–
–
–
(4.5)
Fixed or
capped
–
–
–
–
–
–
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.
Interest rate risk management
The revolving credit facility (note 25E) is floating-rate and undrawn as at 31 March 2019.
C) Currency risk
Transactional currency exposure
The Group is exposed to foreign currency risks arising from sales or purchases by businesses in currencies other than their functional currency. It
is Group policy that when such a sale or purchase is certain, the net foreign exchange exposure is hedged using forward foreign exchange
contracts. Hedge accounting documentation and effectiveness testing are undertaken for all the Group’s transactional hedge contracts.
The table below shows the Group’s currency exposures, being exposures on currency transactions that give rise to net currency gains and losses
recognised in the income statement. Such exposures comprise the monetary assets and liabilities of the Group that are not denominated in the
functional currency of the operating company involved.
Functional currency of the operating company
All figures in £ millions
31 March 2019 – Sterling
31 March 2018 – Sterling
US$
5.2
2.3
Net foreign currency monetary assets/(liabilities)
Total
11.5
6.9
Other
3.4
0.9
Euro
2.7
3.5
A$
0.2
0.2
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 2019
against Sterling are net US dollars bought of £4.9m (US$4.6m), net Euros sold of £5.9m (€7.3m), net Canadian dollars sold £7.7m (C$13.1m), net
United Arab Emirate dirhams sold £4.7m (AED 22.5m), net Swiss Francs bought of £3.2m (CHF 3.9m) and net Swedish Krona bought of £11.3m
(SEK 130.6m).
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
137
137
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
25. Financial risk management continued
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 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 £190.9m (2018: £271.9m). The Group held cash and cash equivalents of £190.8m at 31 March 2019 (2018: £254.1m), 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 £91.2m (2018: £126.1m) was invested in AAA-rated money funds at the year end.
E) Liquidity risk
Borrowing facilities
As at 31 March 2019 the Group had a revolving credit facility (RCF) of £275m (2018: US$100m and £166m). This facility has an initial term of five
years with two one-year options to extend the final maturity to 27 September 2025 and is un-utilised as shown in the table below:
Committed facilities 31 March 2019
Freely available cash and cash equivalents
Available funds 31 March 2019
Committed facilities 31 March 2018
Freely available cash and cash equivalents
Available funds 31 March 2018
Interest
rate:
LIBOR plus
0.55%
Total
£m
275.0
Drawn
£m
–
0.65%
237.3
–
Undrawn
£m
275.0
188.0
463.0
237.3
251.9
489.2
Gross contractual cash flows for borrowings and other financial liabilities
The following are the contractual maturities of financial liabilities, including interest payments. The cash flows associated with derivatives that are
cash flow hedges are expected to have an impact on profit or loss in the periods shown.
As at 31 March 2019
All figures in £ million
Non-derivative financial liabilities
Trade and other payables (excluding contract liabilities)
Finance leases
Derivative financial liabilities
Forward foreign currency contracts – cash flow hedges
As at 31 March 2018
All figures in £ million
Non-derivative financial liabilities
Trade and other payables (excluding contract liabilities)
Derivative financial liabilities
Forward foreign currency contracts – cash flow hedges
138
138
QinetiQ Group plc
Annual Report and Accounts 2019
Book value
Contractual
cash flows
1 year
or less
1–2 years
2–5 years
More than
5 years
(239.6)
(2.3)
(239.6)
(2.6)
(223.0)
(0.8)
(1.4)
(243.3)
(1.4)
(243.6)
(1.1)
(224.9)
(16.6)
(0.8)
(0.1)
(17.5)
–
(1.0)
(0.2)
(1.2)
–
–
–
–
Book value
Contractual
cash flows
1 year
or less
1–2 years
2–5 years
More than
5 years
(259.5)
(259.5)
(246.9)
(12.6)
–
(4.5)
(264.0)
(4.5)
(264.0)
(2.6)
(249.5)
(1.4)
(14.0)
(0.5)
(0.5)
–
–
–
QinetiQ Group plc Annual Report and Accounts 2019
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
G) Maturity of financial liabilities
As at 31 March 2019
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
1 Excluding contract liabilities
As at 31 March 2018
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
1 Excluding contract liabilities
Asset
gains
0.1
0.1
Liability
losses
(1.4)
(1.4)
Asset
gains
Liability
losses
0.1
–
–
0.1
(1.1)
(0.1)
(0.2)
(1.4)
2019
Net
(1.3)
(1.3)
2019
Net
(1.0)
(0.1)
(0.2)
(1.3)
Asset
gains
1.4
1.4
Liability
losses
(4.5)
(4.5)
Asset
gains
Liability
losses
1.1
0.2
0.1
1.4
(2.6)
(1.4)
(0.5)
(4.5)
Bank
borrowings
and loan
notes
(1.3)
–
–
(1.3)
Derivative
financial
instruments
and finance
leases
1.8
0.8
1.1
3.7
Trade and
other
payables1
223.0
16.6
–
239.6
Trade and
other
payables1
246.9
12.6
–
259.5
Bank
borrowings
and loan
notes
(0.1)
–
–
(0.1)
Derivative
financial
instruments
2.6
1.4
0.5
4.5
2018
Net
(3.1)
(3.1)
2018
Net
(1.5)
(1.2)
(0.4)
(3.1)
Total
223.5
17.4
1.1
242.0
Total
249.4
14.0
0.5
263.9
H) Sensitivity analysis
The Group’s sensitivity to changes in foreign exchange rates and interest rates on financial assets and liabilities as at 31 March 2019 is set out
in the following table. The impact of a weakening in Sterling on the Group’s financial assets and liabilities would be more than offset in equity and
income by its impact on the Group’s overseas net assets and earnings respectively. Sensitivity on Group’s assets other than financial assets and
liabilities is not included in this analysis.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
139
139
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
25. Financial risk management continued
As at 31 March 2019
All figures in £ million
Sterling
US dollar
Other
All figures in £ million
Sterling
US dollar
Other
1% decrease in
interest rates
Profit
before tax
(1.6)
(0.2)
(0.1)
Equity1
–
–
–
10% weakening
in Sterling
Profit
before tax
–
–
–
Equity
–
1.8
1.0
1% increase in
interest rates
Profit
before tax
1.6
0.2
0.1
Equity1
–
–
–
10% strengthening
in Sterling
Profit
before tax
–
–
–
Equity
–
(1.3)
(1.0)
1 This relates to the impact on items charged directly to equity and excludes the impact on profit/loss for the year flowing into equity.
As at 31 March 2018
All figures in £ million
Sterling
US dollar
Other
All figures in £ million
Sterling
US dollar
Other
1% decrease in
interest rates
Profit
before tax
(2.2)
(0.2)
(0.1)
Equity1
–
–
–
10% weakening
in Sterling
Profit
before tax
–
–
–
Equity
–
1.7
1.1
1% increase in
interest rates
Profit
before tax
2.2
0.2
0.1
Equity1
–
–
–
10% strengthening
in Sterling
Profit
before tax
–
–
–
Equity
–
(1.4)
(0.9)
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.
The amounts generated from the sensitivity analysis are forward-looking estimates of market risk assuming that certain market conditions occur.
Actual results in the future may differ materially from those projected as a result of developments in global financial markets that may cause
fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the previous tables, 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 2019, 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 2019, 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.
140
140
QinetiQ Group plc
Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
26. Cash flows from operations
For the year ended 31 March
All figures in £ million
Profit after tax for the year
Adjustments for:
Taxation expense
Net finance income
Gain on sale of investment
Gain on sale of property
Impairment of property, plant and equipment
Acquisition transaction costs
Pension past service cost
Amortisation of purchased or internally developed intangible assets
Amortisation of intangible assets arising from acquisitions
Depreciation of property, plant and equipment
(Profit)/loss on disposal of plant and equipment
Share of post-tax profit of equity accounted entities
Share-based payments charge
Retirement benefit contributions in excess of income statement expense
Net movement in provisions
Increase in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables
Changes in working capital
Net cash flow from operations
Reconciliation of net cash flow from operations to underlying net cash flow from operations to free cash flow
All figures in £ million
Net cash flow from operations
Add back specific adjusting item: acquisition integration costs
Less specific adjusting items: proceeds from sale of intellectual property
Underlying net cash flow from operations
Add: proceeds from disposal of plant and equipment
Less: tax and net interest payments
Less: purchases of intangible assets and property, plant and equipment
Free cash flow
Underlying cash conversion ratio
All figures in £ million
Underlying operating profit – £ million
Underlying net cash flow from operations – £ million
Underlying cash conversion ratio – %
2019
113.9
9.3
(8.3)
(1.1)
(0.2)
6.4
1.3
0.7
3.2
3.9
29.4
(5.5)
(0.6)
6.1
(1.8)
(3.6)
153.1
(0.5)
(48.7)
21.7
(27.5)
2018
138.1
6.7
(3.8)
(0.6)
(14.6)
–
–
–
3.7
2.6
25.6
2.9
(0.3)
2.4
(12.4)
(3.7)
146.6
(10.8)
19.0
(22.4)
(14.2)
125.6
132.4
2019
125.6
0.7
–
126.3
6.9
(10.1)
(87.6)
35.5
2019
123.9
126.3
102%
2018
132.4
–
(5.9)
126.5
–
(15.7)
(54.5)
56.3
2018
122.5
126.5
103%
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
141
141
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
27. Share capital and other reserves
Shares allotted, called up and fully paid:
At 1 April 2018 and 31 March 2019
Ordinary shares
of 1p each (equity)
Number
5,717,571 571,757,121
£
Special Share
of £1 (non-equity)
Number
1
£
1
Total
Number
5,717,572 571,757,122
£
Except as noted below all shares in issue at 31 March 2019 rank pari-passu in all respects.
Rights attaching to the Special Share
QinetiQ carries out activities which are important to UK defence and security interests. To protect these interests in the context of the ongoing
commercial relationship between the MOD and QinetiQ, and to promote and reinforce the Compliance Principles, the MOD holds a Special Share
in QinetiQ. QinetiQ obtained MOD consent to changes in its Special Shareholder rights, which were approved by shareholders at the 2012 AGM.
The changes to the Special Share were disclosed in the 2012 Annual Report. Subsequent to the changes approved at the 2012 AGM the Special
Share confers certain rights on the holder:
a)
b)
c)
to require the Group to implement and maintain the Compliance System (as defined in the Articles of Association) so as to make at all times
effective its and each member of QinetiQ Controlled Group’s application of the Compliance Principles, in a manner acceptable to the Special
Shareholder
to refer matters to the Board for its consideration in relation to the application of the Compliance Principles
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
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
ii)
d)
e)
to require the Board to take action to rectify any omission in the application of the Compliance Principles, if the Special Shareholder is of the
opinion that such steps are necessary to protect the defence or security interests of the United Kingdom
to demand a poll at any of QinetiQ’s meetings (even though it may have no voting rights except those specifically set out in the Articles).
The Special Shareholder has an option to purchase defined Strategic Assets of the Group in certain circumstances. The Special Shareholder has,
inter alia, the right to purchase any Strategic Assets which the Group wishes to sell. Strategic Assets are normally testing and research facilities
(see note 30 for further details).
The Special Share may only be issued to, held by and transferred to HM Government (or as it directs). At any time the Special Shareholder may
require QinetiQ to redeem the Special Share at par. If QinetiQ is wound up the Special Shareholder will be entitled to be repaid the capital paid up
on the Special Share before other shareholders receive any payment. The Special Shareholder has no other right to share in the capital or profits
of QinetiQ.
The Special Shareholder must give consent to a general meeting held on short notice.
The Special Share entitles the Special Shareholder to require certain persons who hold (together with any person acting in concert with them) a
material interest in QinetiQ to dispose of some or all of their ordinary shares in certain prescribed circumstances on the grounds of national
security or conflict of interest.
The Directors must register any transfer of the Special Share within seven days.
Other reserves
The translation reserve includes the cumulative foreign exchange difference arising on translation since the Group transitioned to IFRS.
Movements on hedge instruments, where the hedge is effective, are recorded in the hedge reserve until the hedge ceases.
The capital redemption reserve, which was created following the redemption of preference share capital and the bonus issue of shares, cannot be
distributed.
Own shares
Own shares represent shares in the Company that are held by independent trusts and include treasury shares and shares held by the employee
share ownership plan. Included in retained earnings at 31 March 2019 are 6,946,678 shares (2018: 7,934,634 shares).
142
142
QinetiQ Group plc
Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
28. 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 £6.1m,
of which £6.1m related to equity-settled schemes and nil related to cash-settled schemes (2018: £2.7m, of which £2.7m related to equity-settled
schemes and nil to cash-settled schemes). The share-based payment charged to equity is £5.9m consisting of the £6.1m charge to the income
statement offset by a £0.2m charge to equity in respect of dividends accruing on unvested awards.
Performance Share Plan (PSP)
During the year there were no further grants of PSP awards to employees as this scheme has been phased out. 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 the year
Granted during the year
Exercised during the year
Forfeited/lapsed during the year
Outstanding at end of the year
2019
Number
of shares
5,988,221
–
2018
Number
of shares
8,583,157
102,136
(63,801) (1,136,685)
(3,009,309) (1,560,387)
5,988,221
2,915,111
PSP awards are equity-settled awards and those outstanding at 31 March 2019 had an average remaining life of 0.3 years (2018: 0.8 years). There
is no exercise price for these PSP awards. Monte Carlo modelling was used to fair value the TSR element of the awards at grant date. The average
share price volatility of the FTSE comparator group during the year was nil (2018: 21%) and the average correlation to the comparator group was
nil (2018: 58%). The weighted average fair value of grants made during the year was £nil (2018: £2.02). The weighted average share price at date
of exercise was £2.14 (2018: £2.78). Of the options outstanding at the end of the year nil were exercisable (2018: nil).
Group Share Incentive Plan (SIP)
Under the QinetiQ SIP the Group offers UK employees the opportunity of purchasing up to £150 worth of shares a month at the prevailing market
rate. The Group will make a matching share award of a third of the employee’s payment. The Group’s matching shares may be forfeited if the
employee ceases to be employed by QinetiQ within three years of the award of the shares. There is no exercise price for these SIP awards.
Outstanding at start of the year
Awarded during the year
Exercised during the year
Forfeited during the year
Outstanding at end of the year
2019
Number of
matching
shares
853,512
289,748
(309,950)
(50,948)
782,362
2018
Number of
matching
shares
828,448
342,413
(277,839)
(39,510)
853,512
SIP matching shares are equity-settled awards; those outstanding at 31 March 2019 had an average remaining life of 1.5 years (2018: 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 (2018: nil).
Bonus Banking Plan (BBP)
During the year the Group granted BBP awards to certain senior executives in the UK.
Outstanding at start of the year
Granted during the year
Exercised during the year
Forfeited during the year
Outstanding at end of the year
2019
Number of
matching
shares
1,324,541
740,122
(632,991)
–
1,431,672
2018
Number of
matching
shares
786,195
709,755
(143,923)
(27,486)
1,324,541
The BBP is a remuneration scheme that runs in three-year performance cycles, with each cycle vesting over a four-year period. Under the BBP
a contribution will be made by the Company into the participant’s Plan account following the end of each Plan year. 50% of the value of a
participant’s Plan account will be paid out annually for three years with 100% of the residual value paid out at the end of year four. 50% of the
unpaid balance of a participant’s bonus account will be at risk of forfeiture. Refer to the Directors’ Remuneration Report for further details.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
143
143
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
28. Share-based payments continued
The first awards (under ‘Cycle 1’ of the Plan) were in respect of the three years from 1 April 2014 and all awards were fully exercised in the
current year.
At 31 March 2019 the awards had an average remaining life of 1.2 years (2018: 1.5 years). There is no exercise price for these awards. The fair
value of the awards at 31 March 2019 was £3.01 (2018: £2.06) being the Group’s closing share price as at 31 March. Of the awards outstanding
at the end of the year nil were exercisable.
Deferred Share Plan (DSP)
During the year the Group granted DSP awards to certain employees.
Outstanding at start of the year
Difference between actual awards in year and amount provisionally awarded in prior year
Lapsed during the year
Provisionally awarded during the year
Outstanding at end of the year
Provisional awards outstanding
Awards outstanding
Outstanding at end of the year
2019
Number of
awards
2,518,384
(219,315)
(95,577)
2,554,593
4,758,085
2,554,593
2,203,492
4,758,085
2018
Number of
awards
–
–
–
2,518,384
2,518,384
2,518,384
–
2,518,384
Early in the financial year QinetiQ’s top 200 leaders are provisionally awarded contingent shares in the Company. The number of awards is
dependent on the Group’s performance during the year (specifically with respect to the level of non-UK revenue growth). This is provisionally
quantified at year end based on Group performance and also the number of eligible employees in employment as at 31 March. Actual awards are
made in the following June and the final number awarded will be slightly different to the number provisionally calculated. Awards are then subject
to a three-year vesting period and a further two-year holding period. Vesting of the awards is contingent upon Group operating profit in the year
prior to vesting being maintained at the level reported during the year prior to award. Refer to the Directors’ Remuneration Report for further details.
At 31 March 2019 the awards had an average remaining life of 2.6 years (2018: 2.1 years). There is no exercise price for these awards. The fair
value of the DSP’s provisionally awarded at 31 March 2019 was £3.01 (2018: £2.06) being the Group’s closing share price on 31 March. The fair
value of DSP’s awarded during the year was £2.68 being the Group’s closing share price at the date of award (1 June 2018). Of the awards
outstanding at the end of the year nil were exercisable.
Other performance incentives
During the year the Group granted 399,708 shares to 136 employees of Inzpire Limited as part of the acquisition deal. The Group issued share-
based payment awards to all Inzpire employees on 30 November 2018 which is the grant date. The fair value of QinetiQ shares on grant date was
£2.97 and the awards will vest after two years on 30 November 2020 subject to meeting certain vesting conditions.
Outstanding at start of the year
Granted during the year
Outstanding at end of the year
2019
Number of
awards
–
399,708
399,708
2018
Number of
awards
–
–
–
Share-based awards - pricing
Share-based awards that vest based on non-market performance conditions have been valued at the share price at grant date.
29. 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 Scottish Widows. 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.
144
144
QinetiQ Group plc
Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
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 and there is no on-going service cost. 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 asset recognised in the balance sheet in respect of defined benefit pension plans is the fair value of plan assets less the present value of
the defined benefit obligation at the end of the reporting period. 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 Group has no further payment obligations once the agreed contributions have been paid. The expected employer cash contribution to the
Scheme for the year ending 31 March 2020 is £2.7m.
Pension buy-in transaction
Prior to the year end the Scheme completed its first bulk annuity insurance buy-in for approximately £700m. This transaction has removed
longevity risk, interest rate risk, and inflation risk for approximately one third of the Scheme and is in line with the Group's strategy of de-risking the
pension liabilities. As a result of the transaction, the accounting pension surplus recorded on the Group's balance sheet reduced by an estimated
£120m with no related cash impact.
Guaranteed minimum pensions
During the reporting period the High Court ruled on a case involving Lloyds Banking Group in respect of equalising (between men and woman)
Guaranteed Minimum Pensions (‘GMPs’). QinetiQ’s pension scheme has not been significantly impacted by this court ruling but an increase in
liabilities of £0.7m has been recognised in the period, through a past service charge to operating profit. This is reported as a ‘significant adjusting
item’ in the income statement in accordance with historical Group policy.
Triennial funding valuation
The most recent completed full actuarial valuation of the Scheme was undertaken as at 30 June 2017 and resulted in an actuarially assessed
surplus of £139.7m (relative to the technical provisions i.e. the level of assets agreed by the Trustee and the Company as being appropriate to
meet member benefits, assuming the Scheme continues as a going concern). The next triennial valuation will be performed as at 30 June 2020.
The agreed recovery plan requires £2.7m per annum (at 2019 prices) distributions to the Scheme until 31 March 2032, indexed by reference to CPI.
Such distributions are from the Group’s Pension Funding Partnership.
QinetiQ’s Pension Funding Partnership (PFP) structure
Following the 30 June 2011 valuation, a package of pension changes was 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 (from 2012)
for 20 years, indexed with reference to CPI. The Scheme’s interest in the Partnership will revert back to QinetiQ Limited in 2032.
The Partnership is controlled by QinetiQ and its results are consolidated by the Group. Under IAS 19, the interest held by the Scheme in the
Partnership does not qualify as a plan asset for the purposes of the Group’s consolidated financial statements and is, therefore, not included within
the fair value of plan assets. As a result, the Group’s consolidated financial statements are unchanged by the Partnership. In addition, the value of
the property transferred to the Partnership and leased back to QinetiQ remains on the balance sheet. QinetiQ retains the operational flexibility to
substitute properties of equivalent value within the Partnership and has the option to settle outstanding amounts due under the interest before
2032 if it so chooses.
Other UK schemes
In the UK the Group has a small number of employees for whom benefits are secured through the Prudential Platinum Scheme. The net pension
deficits of this scheme at 31 March 2019 amounted to £nil (2018: £nil). QinetiQ also offers employees access to a Group Self Invested Personal
Pension Plan, but no Company contributions are paid to this arrangement.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
145
145
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
29. Post-retirement benefits continued
QinetiQ Pension Scheme net pension asset
The fair value of the QinetiQ Pension Scheme assets, which are not intended to be realised in the short term and may be subject to significant
change before they are realised, and the present value of the Scheme’s liabilities, which are derived from cash flow projections over long periods,
and thus inherently uncertain, were:
All figures in £ million
Equities
LDI investment*
Corporate bonds
Alternative bonds**
Property fund
Cash and cash equivalents
Insurance buy-in policy
Outstanding payment due in respect of buy-in
Derivatives
Total market value of assets
Present value of Scheme liabilities
Net pension asset before deferred tax
Deferred tax liability
Net pension asset after deferred tax
Not quoted
in an active
market
51.8
–
–
–
–
–
–
–
–
51.8
Quoted
127.0
690.8
96.0
304.4
145.6
75.1
566.4
(96.0)
2.5
1,911.8
Not quoted
in an active
market
58.9
–
–
35.0
–
–
–
–
–
93.9
Quoted
115.8
1,050.9
311.3
197.9
138.7
80.2
–
–
1.8
1,896.6
2019
Total
178.8
690.8
96.0
304.4
145.6
75.1
566.4
(96.0)
2.5
1,963.6
(1,704.5)
259.1
(48.6)
210.5
2018
Total
174.7
1,050.9
311.3
232.9
138.7
80.2
–
–
1.8
1,990.5
(1,674.3)
316.2
(58.6)
257.6
* The Scheme has assets invested in a Liability Driven Investment portfolio. As at 31 March 2019 this hedges against 93% 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 Scheme’s assets do not include any of the Group’s own transferable financial instruments, property occupied by, or other assets used by
the Group.
Per the Scheme rules, the Company has an unconditional right to a refund of any surplus that may arise on cessation of the Scheme in the context
of IFRIC 14 paragraphs 11(b) and 12 and therefore the full net pension asset can be recognised on the Group’s balance sheet and the Group’s
minimum funding commitments to the Scheme do not give rise to an additional balance sheet liability.
Changes to the fair value of Scheme assets
All figures in £ million
Opening fair value of Scheme assets
Interest income on Scheme assets
Re-measurement (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 demographic assumptions
Change in financial assumptions
Experience gains
Net benefits paid out and transfers
Past service cost
Closing defined benefit obligation
146
146
QinetiQ Group plc
Annual Report and Accounts 2019
2019
1,990.5
51.2
(35.2)
2.7
(44.7)
(0.9)
1,963.6
2018
1,926.3
49.8
34.8
13.4
(32.8)
(1.0)
1,990.5
2019
2018
(1,674.3)
(43.0)
(1,770.3)
(45.6)
43.9
(69.9)
(5.2)
44.7
(0.7)
(1,704.5)
70.4
31.8
6.6
32.8
–
(1,674.3)
QinetiQ Group plc Annual Report and Accounts 2019
Changes to the net pension asset
All figures in £ million
Opening net pension asset
Net finance income
Net actuarial (loss)/gain
Administrative expenses
Past service cost
Contributions by the employer
Closing net pension asset
Total expense recognised in the income statement
All figures in £ million
Net finance income on the net pension asset
Past service cost
Administrative expenses
Total net income recognised in the income statement (gross of deferred tax)
Assumptions
The major assumptions used in the IAS 19 valuation of the Scheme were:
All figures in £ million
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)
2019
316.2
8.2
(66.4)
(0.9)
(0.7)
2.7
259.1
2019
8.2
(0.7)
(0.9)
6.6
2018
156.0
4.2
143.6
(1.0)
–
13.4
316.2
2018
4.2
–
(1.0)
3.2
2019
2.45%
2.35%
2018
2.60%
2.25%
87
89
89
91
88
90
90
92
The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, because of the
timescale covered, may not necessarily be borne out in practice. It is important to note that these assumptions are long term and, in the case of
the discount rate and the inflation rate, are measured by external market indicators. The mortality assumptions as at 31 March 2019 and 31 March
2018 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_2018 Core Projections (2018: CMI_2016 Core Projections) and a long-term rate of improvement of 1.5% per annum.
The balance sheet net pension asset is a snapshot view which can be significantly influenced by short-term market factors. The calculation of the
surplus or deficit depends, therefore, on factors which are beyond the control of the Group – principally the value at the balance sheet date of equity
shares (and other assets) in which the Scheme has invested and long-term interest rates which are used to discount future liabilities. The funding of
the Scheme is based on long-term trends and assumptions relating to market growth, as advised by qualified actuaries and investment advisors.
The weighted average duration of the defined benefit obligation is approximately 20 years.
Sensitivity analysis of the principal assumptions
Assumption
Discount rate
Rate of inflation
Life expectancy
Change in assumption
Increase by 0.1%
Increase by 0.1%
Increase by one year
Indicative impact on Scheme
liabilities (before deferred tax)
Decrease by £31m
Increase by £30m
Increase by £59m
Indicative impact on
net pension asset
Decrease by £15m
Increase by £13m
Decrease by £39m
The impact of movements in Scheme liabilities will, to an extent, be offset by movements in the value of Scheme assets as the Scheme has assets
invested in a Liability Driven Investment portfolio. As at 31 March 2019 this hedges against approximately 93% of the interest rate and 100% of the
inflation rate risk, as measured on the Trustees’ gilt-funded basis.
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.
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
147
147
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
29. Post-retirement benefits continued
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 IAS 19 can change dramatically depending on market conditions. The defined benefit obligation is linked to yields
on AA-rated corporate bonds, while many of the assets of the Scheme are invested in other assets. Changing markets in
conjunction with discount rate volatility will lead to volatility in the net pension asset on the Group’s balance sheet and in other
comprehensive income. To a lesser extent this will also lead to volatility in the IAS 19 pension net finance income 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 asset in accordance with the relevant accounting
standard, IAS 19 (revised) ‘Employee Benefits’. Changes in these assumptions have no impact on the Group’s cash payments into the Scheme.
The payments into the Scheme are reassessed after every triennial valuation.
The triennial valuations are calculated on a funding basis and use a different set of assumptions, as agreed with the pension Trustees. The key
assumption that varies between the two methods of valuation is the discount rate. The funding basis valuation uses the risk-free rate from UK
gilts as the base for calculating the discount rate, whilst the IAS 19 accounting basis valuation uses corporate bond yields as the base.
30. Transactions with the Ministry of Defence (MOD)
The MOD continues to own its Special Share in QinetiQ which conveys certain rights as set out in note 27. Transactions between the Group and the
MOD are disclosed as follows:
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 74.
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)
ii)
dispose of or destroy all or any part of a strategic asset; or
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 2019 was £4.6m (2018: £5.5m).
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. Following an amendment to the LTPA contract on 5 April 2019 this contract is no longer subject to re-pricing every five years and is now
contracted at a fixed price to 31 March 2028.
Other contracts with MOD
The LTPA is the most significant contract QinetiQ has with the MOD. In total approximately 57% (2018: 62%) of the Group’s revenue comes
directly from contracts with the MOD.
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QinetiQ Group plc Annual Report and Accounts 2019
31. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of £29.9m at 31 March 2019 (2018: £30.1m) in the ordinary course of
business, typically in respect of performance bonds and rental guarantees.
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, including in respect of environmental and regulatory issues.
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, ongoing investigations 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.
32. Capital commitments
The Group had the following capital commitments for which no provision has been made:
All figures in £ million
Contracted
2019
40.6
2018
76.2
Capital commitments at 31 March 2019 include £20.6m (2018: £74.3m) in relation to property, plant and equipment that will be wholly funded by a
third-party customer under long-term contract arrangements. These primarily relate to investments under the LTPA contract.
33. Subsidiaries and other related undertakings
In accordance with section 409 of the Companies Act 2006, a full list of subsidiaries and other related undertakings as at 31 March 2019 is
detailed below. Unless stated otherwise, the Group’s holding comprises ordinary shares which are held indirectly by QinetiQ Group plc, with the
exception of QinetiQ Group Holdings Limited which is held directly by QinetiQ Group plc.
Name of company
Subsidiaries1
BJ Trustee Limited
Boldon James Holdings Limited
Boldon James Limited
Commerce Decisions Limited
Commerce Decisions Pty Ltd
CueSim Limited
Foster-Miller Canada Limited
Foster-Miller Inc2
Graphics Research Corporation Limited
Gyldan 6 Limited
Gyldan 7 Limited
Gyldan 8 Limited
Inzpire Group Limited1, 7
Inzpire Holdings Limited1, 7
Inzpire Limited1, 7
Leading Technology Limited
Metrix UK Limited
Optasense Canada Limited2
Optasense Holdings Limited
Optasense Inc2
Optasense Limited
Precis (2187) Limited
Precis (2188) Limited
QinetiQ Aerostructures Pty Ltd
QinetiQ Australia Pty Ltd
Country of incorporation
Registered office
England & Wales
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
England & Wales
England & Wales
Canada
England & Wales
US
England & Wales
England & Wales
England & Wales
Australia
Australia
Farnborough4
Farnborough4
Farnborough4
Farnborough4
Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia
Farnborough4
318 Roxton Drive, Waterloo, Ontario, N2T 1R6, Canada
350 2nd Avenue, Waltham, Massachusetts, MA 02451 1104, USA
Farnborough4
Farnborough4
Farnborough4
Farnborough4
Farnborough4
Landmark House West, Unit 1b, Alpha Court, Kingsley Road, Lincoln,
Lincolnshire, LN6 3TA
Landmark House West, Unit 1b, Alpha Court, Kingsley Road, Lincoln,
Lincolnshire, LN6 3TA
Farnborough4
Farnborough4
4 Robert Speck Parkway, Suite 1600, Mississauga ON LAZ 1S1, Canada
Farnborough4
5885 Trinity Parkway, Suite 130, Centreville, Virginia 20120-1969, USA
Farnborough4
Farnborough4
Farnborough4
Level 3, 210 Kings Way, South Melbourne, VIC 3205, Australia
Level 3, 210 Kings Way, South Melbourne, VIC 3205, Australia
Financial statements | Notes to the Financial Statements
QinetiQ Group plc
Annual Report and Accounts 2019
149
149
Financial Statements | Notes to the Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Financial Statements continued
33. Subsidiaries and other related undertakings continued
Name of company
QinetiQ Consulting Pty Ltd
Country of incorporation
Australia
QinetiQ Estates Limited
QinetiQ GmbH
QinetiQ GP Limited
QinetiQ Group Canada Inc.2
QinetiQ Group Holdings Limited
QinetiQ Holdings Limited
QinetiQ Inc2
QinetiQ Insurance PCC Limited
QinetiQ Limited
QinetiQ Novare Pty Ltd
QinetiQ Overseas Holdings (2) Limited
QinetiQ Overseas Holdings Limited
QinetiQ Overseas Trading Limited
QinetiQ Pension Scheme Trustee Limited
QinetiQ PFP Limited Partnership5
QinetiQ Philippines Company, Inc
QinetiQ Pty Ltd
QinetiQ Services Holdings Pty Ltd
QinetiQ Solutions Sdn. Bhd.
QinetiQ Space N.V.
QinetiQ Sweden AB
QinetiQ Target Services Limited
QinetiQ Target Systems Limited
QinetiQ US Holdings, Inc.
Redu Operational Services S.A1
RubiKon Group Pty Limited
Sensoptics Limited
Tarsier Limited
Trusted Experts Limited
TSG International LLC
Associates3
Redu Space Services S.A7
Joint venture6
BQ Solutions QSTP-LLC7
England & Wales
Germany
Scotland
Canada
England & Wales
England & Wales
US
Guernsey
England & Wales
Australia
England & Wales
England & Wales
England & Wales
England & Wales
Scotland
Philippines
Australia
Australia
Malaysia
Belgium
Sweden
England & Wales
England & Wales
US
Belgium
Australia
England & Wales
England & Wales
England & Wales
US
Qatar
Registered office
Unit 5 (Level 1), 8 Brindabella Circuit, Brindabella Business Park, Majura
NSW 2609, Australia
Farnborough4
Flughafenstraße 65, 41066, Mönchengladbach, Germany
50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, Scotland
5300 Commerce Court West, 199 Bay Street, Toronto ON M5L 1A9, Canada
Farnborough4
Farnborough4
5885 Trinity Parkway, Suite 130, Centreville, Virginia 20120-1969, USA
Mill Court, La Charroterie, St Peter Port, GY1 4ET Guernsey
Farnborough4
Petrie House, level 6, 80 Petrie Terrace, Brisbane QLD 400, Australia
Farnborough4
Farnborough4
Farnborough4
Farnborough4
50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, Scotland
22nd Floor Corporate Centre, 139 Valero Street, Salcedo Village,
Makati City, Philippines
Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia
Level 33, 101 Collins Street, Melbourne, Victoria 3000, Australia
Suite 6.01, 6th Floor, Plaza See Hoy Chan, Jalan Raja Chulan 50200, Kuala
Lumpur, W.P. Kuala Lumpur, Malaysia
Hogenakkerhoekstraat, 9, 9150 Kruibeke, Belgium
Advokatfirman Delphi, Box 1432, Stockholm, Sweden
Farnborough4
Farnborough4
5885 Trinity Parkway, Suite 130, Centreville, Virginia 20120-1969, USA
Rue Devant les Hetres, 2B, 6890 Transinne, Belgium
Level 33, 101 Collins Street, Melbourne, Victoria 3000, Australia
Farnborough4
Farnborough4
Farnborough4
350 Second Avenue, Waltham, Massachusetts 02451, USA
Belgium
Rue Devant les Hetres, 2B, 6890 Transinne, Belgium
Houbara Defence & Security LLC7
QinetiQ Dar Massader QDM Limited7
United Arab Emirates
Saudi Arabia
Qatar Science & Technology Park, Innovation Centre Building, Office 307,
Doha, Qatar
503 Al Wahda Commercial Tower, Abu Dhabi, PO box 128220
Al Nakhla Tower, 3026-Prince Saud Bin Mohamed Bin Muqin Road, PO Box
2985, Riyadh 13321, Kingdom of Saudi Arabia
1 As at 31 March 2019 the Group owned 100% of the ordinary shares of these subsidiary undertakings except for Redu Operational Services S.A. (52%), Inzpire Group Limited (85%),
Inzpire Holdings Limited (85%) and Inzpire Limited (85%)
2 The class of shares is ‘common share’
3 As at 31 March 2019 the Group owned 48% of Redu Space Services S.A.
4 Cody Technology Park, Ively Road, Farnborough, Hampshire, GU14 OLX
5 Limited partnership. The partners are all wholly-owned Group companies
6 As at 31 March 2019 the Group owned 49% of BQ Solutions QSTP-LLC, 49% of Houbara Defence & Security LLC and 49% of QinetiQ Dar Massader QDM Limited.
7 The financial year end of each undertaking is 31 March other than BQ Solutions QSTP-LLC (31 December), Houbara Defence & Security LLC (31 December), QinetiQ Dar Massader QDM
Limited (31 December), Inzpire Group Limited (31 August), Inzpire Holdings Limited (31 August) and Inzpire Limited (31 August).
34. Related parties
During the year ended 31 March 2019 there were sales to associates and joint ventures of £10.1m (2018: £10.4m). At the year-end there were
outstanding receivables from associates and joint ventures of £1.4m (2018: £4.5m).
150
150
QinetiQ Group plc
Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
Company balance sheet
For the year ended 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
Called up equity share capital
Capital redemption reserve
Share premium account
Profit and loss account
Capital and reserves attributable to shareholders
Note
2019
2018
2
3
4
5
475.0
475.0
13.2
13.2
(91.8)
(78.6)
396.4
468.9
468.9
9.2
9.2
(73.0)
(63.8)
405.1
396.4
405.1
5.7
40.8
147.6
202.3
396.4
5.7
40.8
147.6
211.0
405.1
The profit for the year ended 31 March 2019 was £21.8m (2018: profit of £161.7m).
The financial statements of QinetiQ Group plc (company number 4586941) were approved by the Board of Directors and authorised for issue
on 23 May 2019 and were signed on its behalf by:
Mark Elliott
Chairman
Steve Wadey
Chief Executive Officer
David Smith
Chief Financial Officer
Financial statements
QinetiQ Group plc
Annual Report and Accounts 2019
151
151
Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Company statement of changes in equity
For the year ended 31 March
All figures in £ million
At 1 April 2018
Profit for the year
Purchase of own shares
Dividend paid
Share-based payments
At 31 March 2019
At 1 April 2017
Profit for the year
Purchase of own shares
Dividend paid
Share-based payments
At 31 March 2018
Issued
share
capital
5.7
–
–
–
–
5.7
Capital
redemption
reserve
40.8
–
–
–
–
40.8
Share
premium
147.6
–
–
–
–
147.6
Profit
and loss
211.0
21.8
(0.7)
(35.7)
5.9
202.3
5.7
–
–
–
–
5.7
40.8
–
–
–
–
40.8
147.6
–
–
–
–
147.6
81.8
161.7
(0.7)
(34.5)
2.7
211.0
Total
equity
405.1
21.8
(0.7)
(35.7)
5.9
396.4
275.9
161.7
(0.7)
(34.5)
2.7
405.1
The capital redemption reserve is not distributable and was created following redemption of preference share capital.
152
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QinetiQ Group plc Annual Report and Accounts 2019
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. 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 capital management
– The effects of new but not yet effective IFRSs
– Disclosures in respect of the compensation of key management personnel
– IAS 24 in respect of related party transactions entered into between two or more members of a group
– IFRS 2 Share Based Payments in respect of Group-settled share-based payments
– Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7.
Investments
In the Company’s financial statements, investments in subsidiary undertakings are stated at cost less any impairment in value.
Share-based payments
The cost of share-based payments in respect of employees of Group subsidiaries is charged to those subsidiary undertakings. In the Company
financial statements the recoverable from subsidiaries is credited directly to equity. The fair value of equity-settled awards for share-based
payments is determined on grant and expensed in subsidiary undertakings (and credited to equity in the Company) on a straight line basis over the
period from grant to the date of earliest unconditional exercise. The charges for equity-settled share-based payments are updated annually for non-
market-based vesting conditions. Further details of the Group’s share-based payment charge are disclosed in note 28 to the Group financial
statements.
2. Investment in subsidiary undertakings
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
The increase in investments in subsidiary undertakings in 2019 relates to £6.1m of equity-settled schemes during the year.
A list of all subsidiary undertakings of QinetiQ Group plc is disclosed in note 33 to the Group financial statements.
3. Debtors
As at 31 March
All figures in £ million
Amounts owed by Group undertakings
2019
424.3
50.7
475.0
2018
424.3
44.6
468.9
2019
13.2
2018
9.2
Financial statements
QinetiQ Group plc
Annual Report and Accounts 2019
153
153
Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
Notes to the Company Financial Statements
continued
4. Creditors: amounts falling due within one year
As at 31 March
All figures in £ million
Amounts owed to Group undertakings
Amounts owed to Group undertakings are unsecured, repayable on demand and bear no interest.
5. Share capital
The Company’s share capital is disclosed in note 27 to the Group financial statements.
6. Share-based payments
The Company’s share-based payment arrangements are set out in note 28 to the Group financial statements.
2019
91.8
2018
73.0
7 Other information
Directors’ emoluments, excluding Company pension contributions, were £4.5m (2018: £3.7m). 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 2019 was £0.1m (2018: £0.2m), 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.
154
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Annual Report and Accounts 2019
QinetiQ Group plc Annual Report and Accounts 2019
Five-year record
For the years ended 31 March (unaudited)
EMEA Services
Global Products
Revenue – continuing operations
Discontinued operations (US Services)
Revenue – total Group
EMEA Services
Global Products
Underlying operating profit1 – continuing operations
Discontinued operations (US Services)
Underlying operating profit1 – total Group
Profit before tax
Profit attributable to equity shareholders
Underlying basic EPS1
Basic EPS
Diluted EPS
Dividend per share
Underlying net cash flow from operations 1
Net cash
Average number of employees
Continuing operations2
Orders excluding LTPA amendment and including share of JVs
Underlying operating margin1
Underlying profit before tax1
Profit before tax
Profit after tax
Underlying basic EPS1
Basic EPS
Underlying net cash flow from operations1
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Pence
Pence
Pence
Pence
£m
£m
£m
%
£m
£m
£m
Pence
Pence
£m
2019
687.7
223.4
911.1
–
911.1
96.3
27.6
123.9
–
123.9
123.2
113.9
19.7
20.1
20.0
6.6
126.3
188.5
5,994
776.4
13.6
124.0
123.2
113.9
19.7
20.1
126.3
2018
651.4
181.6
833.0
–
833.0
94.3
28.2
122.5
–
122.5
144.8
138.1
19.3
24.4
24.3
6.3
126.5
266.8
6,143
587.2
14.7
122.1
144.8
138.1
19.3
24.4
126.5
2017
613.5
169.6
783.1
–
783.1
92.7
23.6
116.3
–
116.3
131.5
123.3
18.1
21.5
21.3
6.0
111.9
221.9
6,114
675.3
14.9
116.1
131.5
123.3
18.1
21.5
111.9
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
133.4
274.5
6,266
659.8
14.4
108.7
90.2
98.6
16.3
16.8
133.4
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
145.7
195.5
6,454
613.6
14.6
107.8
105.4
117.4
15.2
18.6
143.9
1 Underlying measures are stated before specific adjusting items. Definitions of underlying measures of performance are provided in the glossary on page 159. 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
1 and note 4 of the financial statements.
2 Continuing operations excludes the financial results of the US Services business disposed in 2015.
Financial statements
QinetiQ Group plc
Annual Report and Accounts 2019
155
155
Financial StatementsQinetiQ Group plc Annual Report and Accounts 2019Financial Statements
A UMS Skeldar V-200 coming in for
landing. QinetiQ is providing vertical
take-off Unmanned Air Systems, based
on the UMS Skeldar V-200, to the
Canadian Armed Forces to improve
Intelligence, Surveillance, Target
Acquisition and Reconnaissance.
156
Image CaptionLorem ipsum dolor sit amet, consectetur adipiscing elit. Ut sit amet volutpat diam. Vestibulum iaculis pulvinar lacus in luctus. Praesent tempor eros ac.QinetiQ Group plc Annual Report and Accounts 2019 Additional
information
158 Additional financial information
159 Glossary
160 Shareholder information
Obsidian
A live testing of our counter drone technology, Obsidian,
at our site in Malvern, UK. Obsidian is specifically designed
to detect, identify and track small and micro drones.
157
QinetiQ Group plc Annual Report and Accounts 2019 Additional financial information
Foreign exchange
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.
The principal exchange rates affecting the Group were the Sterling
to US Dollar exchange rate and the Sterling to Australian Dollar rate.
£/US$ – opening
£/US$ – average
£/US$ – closing
£/A$ – opening
£/A$ – average
£/A$ – closing
12 months to
31 March 2019
1.40
1.31
1.30
1.83
1.80
1.83
12 months to
31 March 2018
1.25
1.33
1.40
1.64
1.71
1.83
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.
Tax risk management
QinetiQ’s tax strategy is to ensure compliance with all relevant tax
legislation, wherever we do business, whilst managing our effective
tax rates and tax cash flows. 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 tax strategy and in all dealings
with tax authorities around the world.
– Tax planning – QinetiQ manages both effective tax rate (ETR) and
cash tax impacts in line with the Board-endorsed tax strategy.
External advice and consultation are sought on potential changes
in tax legislation in the UK, the US and elsewhere as necessary,
enabling the Group to plan for and mitigate potential changes.
QinetiQ does not make use of ‘off-shore’ entities or tax structures to
focus taxable profits in jurisdictions that legislate for low tax rates
– Relationships with tax authorities – QinetiQ is committed to
building constructive working relationships with tax authorities
based on a policy of full disclosure in order to remove uncertainty
in its business transactions and allow the authorities to review
possible risks. In the UK, QinetiQ seeks to be open and transparent
in its engagement with the tax authorities by sharing with HMRC
the methodologies adopted in its tax returns
– Transfer pricing – The Group does not currently have a significant
level of cross-border activity but this is likely to increase as the
Group pursues its policy of expanding around the globe, however,
As a UK-listed company,
the Group is required to
adopt EU endorsed IFRS
and comply with the
Companies Act 2006.”
where it does have such transactions, controls are in place to
ensure pricing reflects ‘arm’s length’ principles in compliance
with the OECD Transfer Pricing Guidelines and the laws of the
relevant jurisdictions. The Group does not, therefore, have a
significant exposure to transfer pricing legislation and submits
its “Country by Country” report in line with the tax authority
regulations and OECD guidelines
– Governance – The Board has approved this approach. The Audit
Committee oversees the tax affairs and risks through periodic
reviews. The governance framework is used to manage tax risks,
establish controls and monitor their effectiveness. The Head of
Tax is responsible for ensuring that appropriate policies, processes
and systems are in place and that the tax team has the required
skills and support to implement this approach
QinetiQ’s corporate tax contribution – QinetiQ is liable to pay tax in
the countries in which it operates, principally the UK, the US, Australia,
Canada, Belgium and now Germany. Changes in tax legislation in
these countries could have an adverse impact on the level of tax paid
on profits generated by the Group. A significant majority of the Group’s
profit before tax is generated in the UK. This reflects the fact that the
majority of the Group’s business is undertaken, and employees are
based, in the UK. Total corporation tax payments in the year to 31
March 2019 were £10.7m.
The differential between the taxation expense and the tax paid in the
year relates primarily to the timing of the recovery of research and
development expenditure credits for which the cash is recovered in
the year following the year of account. There is also an impact of
deferred tax movements, whereby the income statement bears
charges and credits (e.g. in respect of accelerated capital allowances)
but for which there is no corporation tax paid in the year. Together,
these result in the cash paid being £1.4m greater than the total
expense charged to the income statement.
Accounting standards
As a UK-listed company, the Group is required to adopt EU endorsed
IFRS 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.
158
QinetiQ Group plc Annual Report and Accounts 2019 Glossary
AGM
BBP
CAGR
C4ISR
COTS
CPI
CR
CRC
CSR
DE&S
DHS
DSP
DoD
EBITDA
ED&I
EDP
EEG
EMEA
EPS
ESA
ESOS
EST
FAR
Annual General Meeting
Bonus Banking Plan
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
MOD’s Defence, Equipment and
Support organisation
US Department of Homeland Security
Deferred Share Plan
US Department of Defense
Earnings before interest, tax,
depreciation and amortisation
Equality, diversity and inclusion
Engineering Delivery Partner
Employee Engagement Group
Europe, Middle East and Australasia
Earnings per share
European Space Agency
Energy Savings Opportunity Scheme
Engineering, Science and Technical
Federal Acquisition Regulations
FCA
FMI
Funded
order
backlog
GHG
IAS
IBDM
IFRS
IRAD
KPI
LDP
LIBID
LIBOR
LTI
LTPA
MDP
MOD
MSCA
NCSISS
Financial Conduct Authority
Foster-Miller, Inc. – the legal
entity through which the QNA
business operates
The expected future value of revenue
from contractually committed and
funded customer orders
Greenhouse gas
International Accounting Standards
International Berthing and
Docking Mechanism
International Financial Reporting
Standards
Internal research and development
Key Performance Indicator
Leadership development programme
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
Modernising Defence Programme
UK Ministry of Defence
Maritime Strategic Capability
Agreement
Naval Combat System Integration
Support Services
OHSAS
PDR
PBT
PSP
QNA
QSOS
QTS
R&D
RDEC
SE
SPA
SSRO
SSSI
STEM
T&E
T&R
TSR
UAV
UK
Corporate
Governance
Code
UK GAAP
Occupational Health and Safety
Advisory Services
Performance development review
Profit before tax
Performance Share Plan
QinetiQ North America
QinetiQ Share Option Scheme
QinetiQ Target Systems
Research and development
Research and development
expenditure credit
Strategic Enterprise
Special protection area
Single Source Regulations Office
Site of Special Scientific Interest
Science, Technology, Engineering
and Maths
Test and evaluation
Training and rehearsal
Total shareholder return
Unmanned aerial vehicle
Guidelines of the Financial Reporting
Council to address the principal
aspects of corporate governance
in the UK
UK Generally Accepted Accounting
Practice
Alternative performance measures (APMs)
The Group uses various non-statutory measures of performance, or APMs. Such APMs are used by management internally to monitor and
manage the Group’s performance and also allow the reader to obtain a proper understanding of performance (in conjunction with statutory
financial measures of performance). The APMs used by QinetiQ are set out below:
Measure
Organic growth
Underlying operating
profit
Underlying operating
margin
Underlying net finance
income/expense
Underlying profit before/
after tax
Underlying effective
tax rate
Underlying basic
and diluted EPS
Orders
Backlog, funded
backlog or order book
Book to bill ratio
Underlying net cash flow
from operations
Underlying operating
cash conversion or cash
conversion ratio
Free cash flow
Net cash
Explanation
The level of year-on-year growth, expressed as a percentage, calculated at constant prior year foreign exchange rates,
adjusting for business acquisitions and disposals to reflect equivalent composition of the Group
Operating profit as adjusted to exclude ‘specific adjusting items’
Underlying operating profit expressed as a percentage of revenue
Net finance income/expense as adjusted to exclude ‘specific adjusting items’
Profit before/after tax 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
Basic and diluted earnings per share as adjusted to exclude ‘specific adjusting items’
Note
Note 2
Note 3
Note 3
Note 6
Note 4
Note 8
Note 12
The level of new orders (and amendments to existing orders) booked in the year. Includes share of orders won by joint ventures. N/A
N/A
The expected future value of revenue from contractually committed and funded customer orders
Ratio of funded orders received in the year to revenue for the year, adjusted to exclude revenue from the 25-year LTPA contract
due to significant size and timing differences of LTPA order and revenue recognition which may distort the ratio calculation
Net cash flow from operations before cash flows of specific adjusting items.
The ratio of underlying net cash from operations to underlying operating profit
Underlying net cash flow from operations less net tax and interest payments less purchases of intangible assets and
property, plant and equipment. Plus proceeds from disposal of plant and equipment.
Net cash as defined by the Group combines cash and cash equivalents with other financial assets and liabilities, primarily
available for sale investments and derivative financial instruments.
Specific adjusting items Amortisation of intangible assets arising from acquisitions; impairment of property; gains/losses on disposal of property,
investments and intellectual property; net pension finance income; pension past service costs; acquisition costs; tax impact
of the preceding items and significant non-recurring deferred tax movements.
Additional information | Glossary
N/A
Note 26
Note 26
Note 26
Note 23
Note 4
159
QinetiQ Group plc Annual Report and Accounts 2019Additional information Shareholder Information
Registrar: Equiniti Limited
www.shareview.co.uk
Tel: 0371 384 2021
Shareholding enquiries
The Company’s registrar is Equiniti. Enquiries regarding your
shareholding, including the following administrative matters,
should be addressed to Equiniti:
– Change of personal details such as change of name or address
– Lost share certificates
– Dividend payment enquiries
– Direct dividend payments. You can have your dividends paid
directly into a UK bank or building society account by completing
a dividend mandate form. The associated 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 help.shareview.co.uk.
Analysis of share register at 31 March 2019
Online:
Equiniti’s website at 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 2019
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.
Total number of holdings
5,708
753
6,461
Percentage of holders
88.35%
11.65%
100%
Total number of shares
5,436,128
566,320,993
571,757,121
Percentage issued capital
0.95%
99.05%
100%
4,315
533
628
342
162
220
261
6,461
66.79%
8.25%
9.72%
5.29%
2.51%
3.41%
4.04%
100%
837,692
427,997
1,100,363
1,236,203
1,188,453
7,770,925
559,195,488
571,757,121
0.15%
0.07%
0.19%
0.22%
0.21%
1.36%
97.80%
100%
By type of holder
Individual
Institutions and others
Total
By size of holding
1-500
501-1,000
1,001-2,500
2,501-5,000
5,001-10,000
10,001-100,000
Over 100,000
Total
160
QinetiQ Group plc Annual Report and Accounts 2019 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
Advisors
Corporate brokers
J.P.Morgan
25 Bank Street
London
E14 5JP
Barclays
1 Churchill Place
London
EC14 5HP
Auditor
PriceWaterhouseCoopers LLP
Savannah House
3 Ocean Way
Southampton
SO14 3TJ
Principal legal advisor
Ashurst LLP
London Fruit and Wool Exchange
1 Duval Square
London
E1 6PW
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Share fraud reporting:
www.fca.org.uk/scams
FCA Consumer Helpline:
0800 111 6768
Beware of share fraud
Fraudsters use persuasive and high-pressure tactics to lure investors
into scams. They may offer to sell shares that turn out to be worthless
or non-existent, or to buy shares at an inflated price in return for an
upfront payment. While high profits are promised, if you buy or sell
shares in this way you will probably lose your money.
How to avoid share fraud
1. Keep in mind that firms authorised by the FCA are unlikely to
contact you out of the blue with an offer to buy or sell shares.
2. Do not get into a conversation, note the name of the person and
firm contacting you and then end the call.
3. Check the Financial Services Register from www.fca.org.uk to see
if the person and firm contacting you is authorised by the FCA.
4. Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details.
5. Use the firm’s contact details listed on the Register if you want to
call it back.
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
11. 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
24 July 2019
24 July 2019
1 August 2019
2 August 2019
30 August 2019
30 September 2019
14 November 2019
February 2020
31 March 2020
May 2020
Trading update
Annual General Meeting
Ordinary shares marked ex-dividend
Final 2019 dividend record date
Final 2019 dividend payment date
Half-year financial period end
Half-year results announcement
Trading update (provisional date)
Financial year end
Preliminary results announcement (provisional date)
Additional information | Shareholder Information
161
Additional informationQinetiQ Group plc Annual Report and Accounts 2019 QinetiQ Group plc
Registered office
Cody Technology Park
Ively Road, Farnborough
Hampshire GU14 0LX
United Kingdom
Tel: +44 (0) 1252 392000
www.QinetiQ.com
Company Registration
Number 4586941
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