Serving the
national security
interests of our
customers
QinetiQ Group plc
Annual Report & Accounts 2023
QinetiQ Group plc
Annual Report & Accounts 2023
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
01
Our purpose
QinetiQ is dedicated to
protecting lives and securing
the vital interests of our customers
Who we are
We are a leading science and engineering company operating in the
defence and security markets. We are an information, knowledge and
technology-based company with the breadth and depth of over 8,000
highly dedicated employees.
What we do
We apply our unique technical expertise across the product lifecycle, helping
our customers to create, test and use defence and security capabilities.
Read more on page 10
Contents
Strategic report
Corporate governance
Financial statements
04 Group Chair’s statement
06 Group CEO review
08 Five-year plan
10 What we do
12
Investment case
14 Our business model
17 Our strategy
18 Strategic progress
22 Stakeholder focus
28 Trading environment
34 Operating review
42 Group CFO review
48 Key performance indicators
52
75 Risk management
83 Longer-term viability assessment
85 Going concern statement
86 Section 172 (1) statement
88
Non-financial information statement
Environmental, Social and Governance
92 Governance framework
93
95
An introduction from the Group Chair
Board leadership and
Company purpose
109 Division of responsibilities
110 Composition, succession
and evaluation
120 Audit Committee report
126 Risk & Security Committee report
130 Directors’ remuneration report
132 Remuneration at a glance
146 Annual report on remuneration
159 Directors’ report
163 Independent auditors’ report
172 Consolidated income statement
173 Consolidated comprehensive
income statement
173 Consolidated statement of
changes in equity
174 Consolidated balance sheet
175 Consolidated cash flow statement
175 Reconciliation of movements
in net cash
176 Notes to the financial statements
226 Company balance sheet
227 Company statement of changes
in equity
228 Notes to the Company
financial statements
Other information
230 Five-year financial summary
231 Additional financial information
232 Glossary
234 Shareholder information
Serving the national security
interests of our customers
Strategic report
Group CEO review
We delivered excellent operational performance throughout the year,
reflecting continued disciplined execution of our strategy. We have
increased our global ambition for the company, targeting high single-
digit organic revenue growth at stable margins, supplemented by
strategically aligned acquisitions to build a business with revenues of
£3bn by FY27, approximately doubling the size of the current business.
Read more on page 06
Governance
Group Chair’s introduction
I am extremely proud of the critical role that QinetiQ plays in defence
and security around the world, particularly in our three home countries
of the UK, the US and Australia, helping NATO and our allies to protect
lives and secure the vital interests of our customers.
Read more on page 04
What we do
We have unique capabilities around the world critical to maintaining
national defence and security. Our capabilities are aligned with
customer priorities, well positioned to capitalise on our £30bn
addressable market opportunity.
Board leadership and decision making
Key decisions made by the Board include strategic decisions on
potential acquisition opportunities, US leadership and our Net-Zero plan,
and key operational oversight on the cost of living crisis, TCFD and our
safety improvement programme.
Read more on page 10
Read more on page 95
Our strategy
Creating a global leader in mission-led innovation. Our strategy delivers
on this through three complementary and mutually reinforcing pillars:
global leverage, distinctive offerings and disruptive innovation.
Read more on page 17
Risk and Audit Committee report
Key areas for the Audit Committee have included internal control
and risk management, treatment of accounting judgements on key
programmes, ESG target-setting, assurance and reporting, including
Climate-Related Financial Disclosures (TCFD).
Read more on pages 120 and 126
Environmental, Social and Governance
QinetiQ has taken an active leadership role in ESG in the defence sector
for a number of years. This year we have invested significantly to
improve reward and benefits for our people and have been included in
the Sustainalytics 2023 Top-Rated ESG Companies list.
Remuneration Committee report
During FY23 the Remuneration Committee has continued to implement
the Directors’ Remuneration Policy in the interests of our stakeholders.
Following shareholder feedback the new Remuneration Policy has
been developed, presented here for approval at the 2023 AGM.
Read more on page 52
Read more on page 130
02
QinetiQ Group plc
Annual Report & Accounts 2023
How we have performed
Financial
highlights
Strong growth and underlying
performance across all metrics.
Orders
Revenue
£1,724.1m
(FY22: £1,226.6m)
£1,580.7m
(FY22: £1,320.4m)
FY23
FY22
FY21
£1,226.6m
£1,149.4m
£1,724.1m
FY23
FY22
FY21
£1,580.7m
£1,320.4m
£1,278.2m
Underlying* operating profit
Statutory operating profit^
£178.9m
(FY22: £137.4m)
£172.8m
(FY22: £123.7m)
FY23
FY22
FY21
£178.9m
£137.4m
£151.8m
FY23
FY22
FY21
£172.8m^
£123.7m^
£108.7m
Underlying earnings per share
Statutory earnings per share
26.5p
(FY22: 20.6p)
26.8p
(FY22: 15.7p)
FY23
FY22
FY21
26.5p
20.6p
22.1p
FY23
FY22
FY21
26.8p
15.7p
21.4p
^
*
Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 to
the financial statements for details.
Definitions for the Group’s ‘Alternative Performance Measures’ can be found in the glossary. Underlying operating profit refers to operating profit from
segments. See note 2 for details.
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
03
Operational highlights
Excellent operational performance across the company globally.
test &
evaluation
training
and mission
rehearsal
partnering to deliver experimentation, test and
evaluation for the Royal navy’s fleet
QinetiQ has renewed its Maritime Strategic Capability Agreement
(MSCA) with the Submarine Delivery Agency. The 10-year, £260m
contract, will deliver critical capabilities in Hydromechanics, Stealth and
Signatures, Structures and Maritime Life Support that assure the UK’s
ability to design, build and safely operate the Royal Navy’s surface and
subsurface fleet, including the UK’s Continuous at Sea Deterrent. This
significant 10-year commitment from the MOD, which includes an option
for an additional five years, is a testament to the value that QinetiQ has
delivered since 2008 when the original 15-year contract was secured.
transforming mission data for the UK mOD
The UK MOD has signed an £80m industry partnership with QinetiQ-
led Team Pegasus, enhancing the UK’s ability to provide its military
platforms and systems with the data needed to keep them safe and
effective. Team Pegasus will work in partnership with the MOD for a
10-year period on the transformation project – SOCIETAS – providing
a specialist mission data and electronic warfare skills solution alongside
training and IT support.
Cyber and
information
advantage
Engineering
services and
support
Avantus extending into intel customer
In the US, we strengthened our cyber and information advantage
offering through the acquisition of Avantus Federal LLC. Avantus is
a leading provider of mission-focused cyber, data analytics and software
development solutions. The business continues to deliver high-value
operational outcomes for our customers, including the selection for
a new $80m multi-year contract by a national intelligence customer.
Delivering digital night vision technology for the US Army
We have been awarded a $93m single award four-year contract to
support the US Army with the analysis, development, demonstration,
testing, acquisition, integration, initial deployment, sustainment and
training of Digital Night Vision Technology to support military operations.
DNVT will substantially enhance the warfighter’s situational awareness
and decision-making abilities by fielding digital night vision capabilities
coupled with component technology enhancements in support
of warfighters.
Robotics and
autonomous
systems
Experimentation
and technology
Air Affairs expanding threat representation
In December 2022 we completed the acquisition of Air Affairs (Australia)
Pty Ltd for A$53m. Air Affairs provides targets and training services,
and electronic warfare capabilities to the Australian Defence Force, as
well as aerial surveillance and reconnaissance in support of government
firefighting efforts. The business guarantees QinetiQ is positioned as
a market leader in air threat representation and aerial target services
and further extends the scope of capabilities in the Sector.
Developing new laser technology with Australian
Armed Forces
QinetiQ has partnered with the Australian Department of Defence to
develop and manufacture a high-energy defensive laser weapon system
prototype. The contract involves leveraging QinetiQ’s high-power laser
technology from the UK and test and evaluation expertise in collaboration
with Department for Science and Technology’s scientific innovation, to
deliver enhanced sovereign capability to the Australian Defence Force.
04
QinetiQ Group plc
Annual Report & Accounts 2023
Group Chair’s statement
A critical role in global defence
and security
This past year has seen continued unrest and growing conflict across
many regions of the world. Whether you look to Eastern Europe, the
Middle East, the Indo-Pacific or most recently Sudan, it is clear to see
the important role that the defence sector plays to protect societies
and national interests. While it is saddening to see these global conflicts
develop and evolve, I am extremely proud of the critical role that QinetiQ
plays in defence and security around the world, particularly in our three
home countries of the UK, the US and Australia, helping NATO and our
allies to protect lives and secure the vital interests of our customers.
Delivering for our customers, employees and shareholders
Our financial results demonstrate the continued high demand for
our services and solutions, with another strong year of consistent
financial and operational performance from the QinetiQ Group. We have
continued to deliver safely for our customers with reduced Lost Time
Incident rates and improved customer relationship scores. We continue
to deliver on our promises with high-value services and solutions, solving
our customers’ complex problems, delivering on time, quality and cost.
Our customers partner with QinetiQ because of the breadth and depth
of technical knowledge, experience and commitment of our people, so
we recognise the importance of an engaged and aligned workforce.
With elevated inflation, this year we have taken decisive steps to support
our people through the cost-of-living crisis around the world – we have
implemented one-off pay rises for the lower paid, introduced a hardship
fund to support those in financial difficulty and rolled out an adaptive
working policy to enable our teams to work more flexibly to balance
work and home needs more effectively. We retain our capital allocation
policy and have increased our full year dividend by 5% to 7.7p per share.
Consistent with our strategy to develop a multi-domestic mid-tier
defence and security company, aligned to the AUKUS partnership we
completed two significant acquisitions in the year, with the acquisition
of Avantus in the US and Air Affairs in Australia. The acquisition of
Avantus is our largest acquisition ever completed and positions us as a
disruptive defence and intelligence business in the US. We recognise the
challenges and some of the difficulties faced previously acquiring in the
US, so this has been a considered and well thought-through acquisition,
across the three lenses of strategy, economics and integration. Whilst
we took on debt for the first time in a decade, the cash generative nature
of QinetiQ has resulted in leverage reducing to under 1x Net Debt - EBITDA
after only four months, a year ahead of original expectations, giving
confidence in our ability to manage and operate in a leveraged position.
ESG remains high on the agenda for the Board, the Leadership Team
and for our employees. We are seeing excellent progress in the delivery
of our Net-Zero plan with a 12% reduction in our emissions in the financial
year and we have been recognised as a “top rated ESG company” by
Sustainalytics and have retained our AA rating from MSCI. The UK
Ministry of Defence Sanctuary Awards also recently recognised us for our
conservation and sustainability activities on St Kilda, a double UNESCO
World Heritage Site, where we undertake advanced test, trials, training
and evaluation – a great example of where we complete
I am proud to be Group Chair
of a company of talented and
world-leading experts that
are committed to delivering
for our customers, making a
real difference to defence and
security across the world.”
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
05
Capital allocation policy
Priority 1
Invest in our
organic capabilities,
complemented by
acquisitions where
there is a strong
strategic fit.
Priority 2
Maintain balance
sheet strength.
Priority 3
Provide a progressive
dividend to
shareholders.
Priority 4
Return excess cash
to shareholders.
technologically advanced services whilst looking after the world around us.
We also have a unique opportunity to help our partners and customers
decarbonise through technology, whether that be our stealth material
expertise that enables wider deployment of windfarms reducing the
interference with radar, our battery experts developing high power batteries
for military and commercial use, our large-scale low-speed wind tunnel
being used to support advancements in aircraft efficiency or many other
technology-driven solutions to improve sustainability for our stakeholders.
Read more about net-Zero on page 58
Board changes
As announced previously, Michael Harper, who has been a Non-executive
Director, Deputy Chair and Senior Independent Director is to retire from
the Board with effect from the conclusion of the 2023 Annual General
Meeting. I would like to thank Michael for his consistently invaluable
contribution to both the Board and the QinetiQ Group.
Steve Mogford joined the Board in August 2022 as a Non-Executive
Director and following Michael’s retirement will step up to become
Senior Independent Director. Steve brings a wealth of experience in
both executive and non-executive roles from a breadth of sectors. In
particular his long and comprehensive international defence and security
sector experience equip him ideally to further develop the skill sets of our
Board while supporting our global growth ambitions.
Historical dividend payments
Key
Final
Interim
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2022 2023
Read more on page 45
Overall I am confident we have the right mix of skills and experience on
the Board to provide effective challenge and support to the business
as it continues its global growth.
While not Executive-level appointments, following the retirement of
Andy Thorp I am also pleased to see the QinetiQ Leadership Team
develop further, with the appointment of Gary Stewart, from Rheinmetall
Defence Australia, as Chief Executive of our Australian Sector, which
includes the responsibility of QinetiQ Target Systems and our mission
rehearsal business in Germany.
I would also like to take this opportunity to personally thank Steve
Wadey, our Group CEO, for his leadership and drive over this past
year. His strategic and operational leadership and that of the QinetiQ
Leadership Team has been exemplary and an excellent demonstration
of our values: Integrity, Collaboration and Performance. All of our people
and teams have pulled together to deliver for our customers, my thanks
go to all of them.
Read more about Our Board on page 96
Looking ahead
The successful delivery of strategic, operational and financial outcomes
in the financial year has been pleasing to see, delivering for customers,
employees and shareholders. This year has been one of investment,
across our people, our capabilities and our geographic portfolio, which
positions us well and gives me great confidence in the long-term future
of the Group. As a result, we have raised our FY27 ambition to become
a £3bn revenue business at stable margins delivering strong returns to
shareholders. We have strong foundations to deliver on these promises:
fantastic people, a cohesive strategy, a strong balance sheet and the
right leadership.
I am proud to be Group Chair of a company of talented and world-
leading experts that are committed to delivering for our customers,
making a real difference to defence and security across the world.
Neil Johnson
Non-executive Group Chair
25 May 2023
06
QinetiQ Group plc
Annual Report & Accounts 2023
Group CEO review
Excellent operational
performance
We delivered excellent operational performance throughout the year,
reflecting continued disciplined execution of our strategy. We grew
orders by 41% at a record-high of more than £1.7bn, demonstrating the
continued high demand for our distinctive offerings. We achieved 20%
revenue growth, 11% on an organic constant currency basis excluding
the impact of the write-down in the prior year, with underlying operating
profit margin at 11.3%. In addition to the robust orders, revenue and
profit performance, cash flow management continues to remain
strong with 106% underlying cash conversion. We have successfully
reduced leverage to 0.8x net debt to EBITDA, a year ahead of our
original guidance.
EMEA Services continues to perform well, delivering 10% organic
revenue growth and margins of 11.6%, with ongoing investment in our
people supporting long-term growth. Global Products performance
has been strong with revenue growth of 20% organically and profit
margin of 10.4%. In particular our US business has performed well,
with high order intake of $280m and impressive revenue growth of
25%, prior to the benefit of the Avantus acquisition. We have won a
number of key contracts in the US that will support the delivery of our
ambitious growth targets. The performance throughout the year in the
US demonstrates greater stability and resilience, providing a strong
platform for continued growth.
We completed three M&A transactions in late-2022, the disposal of
QinetiQ Space NV in Belgium, the acquisition of Air Affairs in Australia,
and of most strategic significance the acquisition of Avantus in the
US. These transactions demonstrate the disciplined execution of our
strategy and focused deployment of capital to drive long-term growth,
building one integrated global defence and security company operating
in our three home countries with six distinctive offerings.
Today we are announcing an increase in our global ambition for the
company. We are targeting high single digit organic revenue growth
at stable 11-12% margins, supplemented by strategically aligned
acquisitions to build a business with revenues of c.£3bn by FY27.
As we pursue our strategy the geographic mix of the company will
change. Whilst the UK will scale by 50%, we will more than double
the scale of our businesses in Australia and the US. This evolving mix
across our home countries will result in delivering higher revenue growth
at 11-12% margins, representing upper quartile performance. The result
of this upgrade in our long-term guidance will deliver an increase of
approximately 20% profit by FY27, compared to our previous guidance.
The growing market opportunity
The global security situation continues to worsen and tensions
remain high. In Europe, Russia’s invasion of Ukraine is reshaping their
relationship with the West, and the threat from China remains uncertain.
These dynamics are driving defence and security policies, prioritisation
of budgets and modernisation of capabilities. Our major focus is on our
three home countries who have a shared defence and security mission
under the trilateral partnership known as AUKUS.
The heightened threat
environment is increasing demand
for our distinctive offerings, which
are closely aligned to our customers’
priorities. We have accelerated our
global ambitions, now targeting
revenues of £3bn by FY27.”
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
07
High single-digit
Targeted organic growth
£3bn
FY27 revenue ambition
The US has requested the largest ever Research & Development
and Test & Evaluation, budget at $145bn, increasing 40% since 2020.
The UK has refreshed its Integrated Review and is investing £6.6bn in
R&D and experimentation over 4 years. And the Australian government
has completed its Defence Strategic Review and is increasing defence
spending by 7% to $53bn. Beyond the new nuclear submarine
programme, all three countries are committed to working together
on a range of advanced capabilities and technologies, critical to future
warfare, such as advanced cyber and directed energy. These align well
with our strengths and provide attractive opportunities over the long-
term. In response to this geo-political context, we see greater opportunity
from the widening threat spectrum and our enhanced offerings. As a
result, we have increased our addressable market from £20bn to more
than £30bn per year. This increase is driven by RDT&E markets growing
in each of our home countries, adding intelligence and security markets
for the first time, and our offerings are increasingly aligned with high-
priority customer needs, enabling us to grow market share.
Building a £3bn defence and security company
QinetiQ is a purpose-driven company: protecting lives and securing
the vital interests of our customers. Our purpose drives our strategy:
to build an integrated global defence and security company, operating
in attractive markets with distinctive offerings, to deliver sustainable
growth for our shareholders. We have a clear business plan, guiding
our strategic focus and investment choices, to enhance our global
platform for growth.
The integration of Avantus is ahead of plan and will complete before the
end of the year. The business continues to perform well, delivering high
quality operational outcomes for our customers, and winning $100m
of customer business including 100% of re-competes. The leadership
team is now fully integrated and working together to pursue a number
of revenue synergies by leveraging and cross-selling our offerings to
existing and new customers, for example our sensor solutions for the
US Army into the US Intelligence community. We’ve had a strong start
to the year and we remain excited about the opportunity we’ve created,
to build a disruptive mid-tier defence and intelligence company, in the
largest defence and security market in the world.
Following the acquisitions of Avantus and Air Affairs, we will now
achieve our previous FY27 growth ambition and guidance organically.
Given our significant growth potential, we have chosen to increase
building on our strong momentum, and with the heightened threat
context reinforcing the long-term needs of our customers, we have
chosen to increase the scale of our ambition. We are upgrading our
revenue target to deliver high single digit organic growth, supplemented
by further strategic acquisitions, to build the company to approximately
£3bn revenue by FY27. As we pursue our strategy the geographic mix
of the company will change. Whilst the UK will scale by 50%, we will
more than double the scale of our businesses in Australia and the US.
This evolving mix across our home countries will result in delivering
higher revenue growth at 11-12% margins, representing upper quartile
performance. The result of this upgrade in our long-term guidance will
deliver an increase of approximately 20% profit by FY27, compared to
our previous guidance. We remain disciplined in the execution of our
strategy and have a robust plan to achieve this increased ambition,
which will accelerate sustainable profitable growth.
Creating an environment for our people to thrive is critical to our
performance and growth. We have increased employee engagement
to a new high and invested in our response to ongoing cost of living
pressures to retain, attract and reward the best talent across the whole
company. We have also continued to strengthen our leadership with
over 35% of our Top 100 leaders being American and or Australian.
We have a leadership team with the diversity, skills and/or experience
to deliver the scale of our AUKUS growth ambition.
In response to today’s threat environment, our people are delivering
for our customers with increasing agility and pace. They are focused
on co-creating innovative solutions that are directly aligned with the
priorities of the AUKUS customers in advanced technologies, such as
sensing, autonomy and directed energy. To maintain our relevance at
the forefront of innovation, we continue to invest in our ongoing Internal
Research and Development programme of c.£20m per year.
Our people are also passionate about protecting the environment and
delivering sustainable solutions for our customers. This year we have
continued to make progress on our Net-Zero plan and reduced our
Scope 1 & 2 emissions by a further 12%. To accelerate progress, our top
1,000 managers have 17.5% of their incentives aligned to delivery of our
ESG commitments. This is just one example of why we have been rated
as a top ESG company in our industry by Sustainalytics.
Outlook: FY24 expectations unchanged
We enter FY24 with confidence, a healthy order-book and positive
momentum with 61% revenue under contract. Consistent with our
upgraded long-term guidance, we expect to deliver high single-digit
revenue growth compared to the FY23 pro-forma revenue (full year
effect of FY23 M&A activity); this equates to high teens total revenue
growth versus the FY23 reported revenue. Operating profit margin will
be at the lower end of the 11-12% range. Capital expenditure is expected
to remain within the £90m to £120m range.
Outlook: Longer-term upgraded guidance
We are targeting high single-digit organic revenue growth, supplemented
by strategically aligned acquisitions to build a circa £3bn company by
FY27. This increased level of growth will be delivered at stable margins
of 11-12%, reflecting the evolving geographic mix of the global company.
Cash conversion will remain strong at over 90%, supporting our ability
to deploy capital effectively to achieve our long-term growth ambition
and deliver a return on capital employed at the upper end of the
15-20% range.
Steve Wadey
Group Chief Executive Officer
25 May 2023
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
09
08
QinetiQ Group plc
Annual Report & Accounts 2023
Five-year plan
Increasing our ambition
Building on strong track record to accelerate next phase of global growth.
• In April 2022 we set out an ambitious
• We are at an exciting stage in the
plan to grow the Company to more than
£2.3bn revenue by FY27+. We are now
upgrading this plan and increasing our
ambition for the Company.
• Strong operational performance over
the last 8 years. Over the last 4 years
we have grown revenue by 15% CAGR
(compound annual growth rate) and
profit by 9% CAGR.
development of the Company, with
world events reinforcing the short and
long-term needs of our customers for
our distinctive offerings; and as a result
we increase our ambition to grow to
£3bn revenue by FY27.
• We intend to grow our UK business by
50% and more than double the size of
our business in Australia and the US.
• By focusing on our customers’ needs,
• By making disciplined investment
we are driving profitable organic growth
and building strong momentum with
increased forward visibility; our order
book increased to £3.1bn and our
forward orders pipeline has grown by
5 times since FY16, to £10bn.
choices, in both organic opportunities
and strategic acquisitions, we
are creating a unique and
differentiated Company.
• This increased level of growth will
be delivered at stable margins of
11-12%, reflecting a normalised level
of investment and the geographic
mix of the group.
• Delivering mission advantage for our
customers globally and compelling
returns for our shareholders, as we
drive further profitable growth.
Excellent operational performance
Expanding revenue visibility
Increased ambition to approximately double the size of the business in the next four years
Revenue (£bn)
Revenue under contract for next 3 years (£bn)3
15% CAGR1
2.0
1.5
1.0
0.5
0.0
10% CAGR
2.5
2.0
1.5
1.0
0.5
0.0
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
8%
7%
12%
FY22
£1.3bn
20% growth
at 11.3% margin
7%
8%
19%
FY23
£1.6bn
66%
73%
2nd step change
15-20% CAGR1
at 11-12% margin
FY27
£3bn5
Operating profit* (£m2)
Orders pipeline for next five years (£bn)4
£179m profit*
c.£350m profit
9% CAGR
200
150
100
50
10
8
6
4
2
0
19% CAGR
Robust plan to accelerate sustainable profitable growth
1 Compound Annual Growth Rate.
2 FY22 shows add back for complex project write-down.
3 Revenue under contract for next three years at end of FY.
4 Orders pipeline for next five years at end of FY, FY16 estimated.
5
*
Illustrative geographic distribution.
Definitions for the Group’s ‘Alternative Performance Measures’ can be found in
the glossary. Underlying operating profit refers to operating profit from segments.
See note 2 for details.
0
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
Strong track record of organic and inorganic growth
10
QinetiQ Group plc
Annual Report & Accounts 2023
What we do
Our distinctive
offerings
Customer focused growth strategy aligned
with AUKUS shared mission.
We apply our unique technical expertise across the product lifecycle, helping our
customers to create, test and use defence and security capabilities. Not only do we
develop cutting-edge technology and turn it into a capability, we also tell customers
if that capability will work when it is critically needed and ensure they are trained and
operationally ready to use it when it matters. Anticipating the current, emerging and
future threat environment and proactively understanding our customers’ needs to
provide mission-led innovation are critical to our success.
Read more about our Markets on page 28
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Experimentation and technology
QinetiQ collaborates with customers and
partners to explore innovative technology
solutions that solve our customers’ complex
problems. We bring together a wide range
of experts to deliver new, fully assured
capabilities that provide mission advantage.
Robotics and autonomous systems
QinetiQ develops, tests, evaluates and supplies
trusted robotic and autonomous systems
across land, sea and air domains.
Case study: E-X Drive on Bradley
We have successfully completed trials of
our electric drive technology on the Bradley
fighting vehicle, leveraging our capability from
the UK, and positioning us for a key role within
the US Army’s Optionally Manned Fighting
Vehicle (OMFV) program of record. The
OMFV program’s focus on advanced system
infrastructure aligns with QinetiQ’s forward-
looking technology strategy.
Case study: Robot Command vehicle – light
The RCV Surrogate Prototype (RCV-SP) is a
purpose-built unmanned hybrid electric vehicle
developed to enable autonomous operation
at speed across terrain. QinetiQ has delivered
eight RCV platforms to the US Army for
experimentation and is contracted to support
ongoing user testing through the provision of
spares, field support, and ongoing technology
insertions and upgrades.
Engineering services and support
Working alongside a large network of supplier
providers, QinetiQ uses its innovative approach
and deep understanding of customer
requirements and existing systems to
provide our customers with reliable technical
advice and support, through all phases of
procurement and systems engineering.
Case study: Critical Engineering Services
We have been awarded a £32m three-year
contract through the Engineering Delivery
Partner (EDP) framework to provide
programme and technical support to the
new Catalyst Delivery Team, responsible for
introducing new capability to the MOD air
domain for various front line commands.
test and evaluation
QinetiQ leverages unique skills, data and
facilities to test and evaluate the performance
of military systems. This provides assurance
for our customers that their equipment and
platforms will work effectively when needed
in demanding environments and threat
scenarios, helping to reduce operational
risk and through-life cost.
Case study: Uncrewed teaming
QinetiQ has delivered a UK and European first
for the live airborne exchange and control
of an Uncrewed Air System (UAS) between
operators in separate crewed aircraft. This
physical demonstration was successfully
evaluated in parallel with a synthetic modelling
trial to support the development of our digital
test and evaluation capability.
Cyber and information advantage
QinetiQ innovates with a broad range
of partners across leading-edge sensor
technologies, data processing, advanced
analytics, cyber and artificial intelligence
to use data and information in a more
effective way.
Case study: Automating and Embedding
Secure Operations
Naimuri has delivered an innovative analysis
system that uses the National ANPR system
to determine whether County Lines trends and
behaviours can be identified, analysed and
included in the existing investigatory process.
training and mission rehearsal
QinetiQ combines engineering expertise,
operational know-how and leading-edge
technologies to deliver physical and virtual
training exercises to support operational
readiness and mission rehearsal.
Case study: platform Enabled training
Capability (pEtC)
Phase 1 of PETC demonstrated the ability of
the operational crew of a Royal Navy platform
to train in its own operations room, simulating
a realistic warfighting situation in an immersive
environment. Phase 2 of PETC will allow the
Royal Navy to undertake combined simulated
warfare training while geographically dispersed.
12
QinetiQ Group plc
Annual Report & Accounts 2023
investment case
Our investment case is
underpinned by four key attributes
By focusing on our customers’ needs and evaluating all investment
opportunities with the same rigour, we aim to deliver sustainable
and attractive returns to our shareholders.
StRAtEGiC REpORt
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13
Operate in
attractive markets
Unique capabilities
and relevant offerings
Strong financials and
shareholder return
Delivering responsibly
and taking a lead on ESG
Our business operates in the defence and security markets, both of
which are seeing significant spending increases. Furthermore, our
capabilities are well aligned with areas that are growing faster than
overall defence budgets:
We have unique capabilities around the world critical to maintaining
national defence and security. In addition, many of our capabilities
are well aligned with customer priorities:
Our business has attractive financial characteristics supported by a
strong balance sheet which enables us to invest and realise our long-
term growth ambitions:
QinetiQ has taken a proactive lead in ESG for many years and is
uniquely placed to help our partners and customers to achieve
Net-Zero through effective use of technology:
– Global defence remains high on the geo-political agenda
– We are a key partner to nations with shared defence and security
interests: (e.g. the UK, Australia and the US, known collectively
as AUKUS)
– Unique position in defence, providing early-stage research and
development, complex test and evaluation capabilities and select
niche defence and security products
– Key partner to sovereign nations providing leading technical
– The total addressable market is worth more than £30bn,
expertise and state-of-the-art facilities
with a focus on the UK, the US and Australia
– We are seeing growing demand for our differentiated capabilities
– There is significant opportunity for global leverage of our
– Relevant offerings for emerging and future threats
– Strong track record and significant opportunity for global leverage
of capabilities across the Group
capabilities across our business
– Ambition to build an integrated global defence and security company
– Strong revenue visibility from long-term contracts
– Attractive margins at the upper end of defence contracting,
demonstrating technical expertise
– Asset-light and cash-generative business model supports
organic investment to drive future growth: organic investment
funded from operating cash flow
– An important role in the defence sector, leading a number
of sector and industry sustainability fora
– Early adopter and communicator
– Invested significantly to improve reward and benefits,
increasing salaries (particularly addressing the lower
paid employees) as well as setting up a hardship fund
– Strong balance sheet and good operational rigour to support
– 30.5% reduction of our Scope 1 and Scope 2 GHG emissions
leverage for future acquisitions
– Clear capital allocation policy
– Progressive dividend policy
against our FY20 baseline
– Included in Sustainalytics 2023 Top-Rated ESG Companies list
– Unique position to help our customers meet their
sustainability goals
>£30bn
addressable
market
£3bn
revenue ambition
by FY27
Six
distinctive
offerings
>8,000
highly skilled
employees
~£1.1bn
of FY24 revenue
under contract
23%
return on capital
employed in FY23
Top-Rated
ESG Company
by Sustainalytics in 2023
AA
rated
by MSCI
14
QinetiQ Group plc
Annual Report & Accounts 2023
Business model
StRAtEGiC REpORt
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15
Our strengths
Our customer value proposition
01
02
Customer focus
Our employees are inherently customer-focused
and adopt innovative and leading approaches to
exceed our customers’ expectations. This approach
is underpinned by a high-performance culture where
employees are engaged and empowered, supporting
strong customer relationships and enabling us to act
as a “trusted partner” in the delivery of critical services.
Read more about our customer focus on page 22
Distinctive offerings
We operate some of the most advanced Research,
Development, Test and Evaluation facilities around
the world. These facilities are often unique assets
that are of strategic importance to national defence
capabilities. By combining these facilities with the
unique expertise of our people, we are able to support
our customers in countering current, emerging and
future threats.
Read more about our distinctive offerings
on page 10
03
04
Technical expertise
Many of our employees are highly skilled scientists
and engineers with deep domain knowledge and
know-how. Their technical expertise is critical to
delivering mission-led innovation for our customers,
and our success is dependent on our ability to recruit,
retain and engage high-calibre people.
Collaborative approach
The modern threat environment often requires
collaboration across industry and academia to
procure the most effective solution. By forming
complementary partnerships and by managing
large networks of small and medium-size enterprises,
our collaborative approach ensures we deliver the
most effective solutions for our customers.
We apply our unique technical expertise across the product lifecycle, helping
our customers to create, test and use defence and security capabilities.
Create It
Developing cutting-edge
technology and rapidly
turning it into capability
Utilising our research and experimentation capabilities, our test
and evaluation expertise and extensive domain knowledge,
we develop and apply cutting-edge technology to help our
customers create a true capability. We evaluate, integrate
and secure the platforms, systems, information and assets
on which missions depend.
Test It
Assuring a capability
will work when it is
critically needed
We offer customers agile and realistic testing experiences so
they can be sure that their capability works when it is critically
needed. We operate some of the most advanced land, sea
and air ranges in the world and combine the ability to manage
live-fire exercises and rehearsals with our digitally enabled
infrastructure to provide customers with realistic and
cost-effective testing solutions.
Use It
Ensuring our customers
are trained and
operationally ready
By combining real and simulated training experiences, we
can ensure our customers are operationally ready to use their
capabilities when it matters. Blending testing, mission rehearsal and
training, and analysis, we give customers tangible evidence about
how their capabilities perform within highly authentic environments
and provide advice on how to prepare them for operational use.
Exploiting emerging
technologies and
maintaining technological
advantage requires extensive
research and experimentation.
It requires dynamic approaches to innovation and
partnerships to exploit the most advanced technology.
It requires industry to deliver more for less, driving
efficiencies with innovative delivery models.
Delivering for
our stakeholders
A large proportion of our work is delivered
under long-term contracts and we typically
start the year with a significant proportion of
revenue under contract, providing a high level
of revenue visibility. In addition, our business
is cash-generative by nature, meaning we are
able to organically invest in our capabilities
and sustain our business model.
Our people are critical to our success and we
are continually investing to support their career
development, wellbeing and engagement. We
are also investing in our facilities and digital
infrastructure tools, ensuring we can continue
to support our customers in facing future
threats and challenges.
106%
~£1.1bn
Underlying cash conversion in FY23
of FY24 revenue under contract
Read more about how we deliver for our stakeholders on page 26
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QinetiQ Group plc
Annual Report & Accounts 2023
purpose, values, behaviours
QinetiQ is dedicated
to protecting lives and
securing the vital interests
of our customers
Protecting
lives
QinetiQ provides technology and solutions in
order to keep our armed forces and society safe
Securing vital interests
of our customers
QinetiQ is focused on producing mission-critical
solutions and innovating for our customers’ advantage
Creating a safe and secure environment for us all to thrive
A high-performance and inclusive work environment where employees are engaged,
empowered and clear about how they can contribute to our vision.
Our values
Our behaviours
Integrity
Listen
We take pride in our decisions, and work to create a sustainable and
responsible business. We take personal responsibility to do the right
thing, both as an organisation and as individuals.
We listen to what our customers say, ask questions to help us
understand and challenge, and offer ideas and solutions.
Collaboration
Focus
Delivering value through partnership and teamwork, we actively collaborate
with our colleagues, customers and industry partners. We know that
working together is the best way to meet our customers’ needs.
We hear what our customers want, are clear about our priorities
and know what needs to be delivered and why.
Performance
Keep my promises
Our performance is measured by how we deliver for our customers,
meeting their needs through flawless execution and delivery of
the mission-critical solutions on which they depend.
We do what we say we will, are trusted to do the right thing,
and are responsible and accountable for our own actions.
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Strategic framework
Our strategy is increasingly relevant
to respond to market dynamics
Our purpose
Protecting lives and securing the vital interests of our customers
Our vision
The chosen partner around the world for mission-critical solutions,
innovating for our customers’ advantage
Mission-led innovation
Create it
test it
Use it
Creating a safe and secure environment for us all to thrive
Our values
Our behaviours
Integrity
Collaboration
Performance
Listen
Focus
Keep my promises
Customer-focused growth strategy
Global leverage
Distinctive offerings
Disruptive innovation
Build an integrated global defence and security
company to leverage our capability through
single routes to market in the UK, the US,
Australia, Canada and Germany.
Co-create high-value differentiated solutions
for our customers in experimentation,
test, training, information, engineering
and autonomous systems.
Invest in and apply disruptive business
models, digitisation and advanced
technologies to enable our customers’
operational mission at pace.
Read more on page 19
Read more on page 20
Read more on page 21
We deliver safely, responsibly and sustainably
for the benefit of all our stakeholders
18
QinetiQ Group plc
Annual Report & Accounts 2023
Strategic progress FY23
Creating a
global leader in
mission-led innovation
We are investing in the breadth and depth of our
six distinctive offerings across three home markets.
Experimentation and technology
Robotics and autonomous systems
Engineering services and support
Test and evaluation
Cyber and information advantage
Training and mission rehearsal
StRAtEGiC REpORt
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19
StRAtEGiC pillAR #01: GlOBAl lEvERAGE
Build an integrated global
defence and security company
Leverage our capability through single routes to market in our home countries.
FY23 highlights
– During the last year QinetiQ Target Systems
Limited (QTS) has continued to make
excellent progress developing its presence in
the US market. This has included progress
with the introduction of the MQM-185B /
Jet 80+ target for the US Army (TSMO)
which should enter service early in the new
financial year and the adaptation of Rattler
for use in High Energy Laser Measurement
applications. Significant further growth is
expected on the back of these contracts.
– QTS also provided targets for the Mjolner
exercise at the Andoya Range in Norway.
This is a multinational navy exercise and a
large number of Jet80+ and Whirlwind and
Sprite 2 targets were provided with complex
profiles. The safe and effective execution of
the exercise required significant planning,
working with the customer.
– Under the AUKUS Pillar 1 framework, QinetiQ
staff in Australia collaborated with experts
in the UK to conduct studies in support of
the Nuclear Powered Submarine Task Force.
We leveraged deep technical expertise in
Platform Design and Life Support from the
team at Haslar to support the multi-agency
task force in examining the requirements
that underpin nuclear stewardship.
Experimentation
and technology
CASE StUDY
E-X Drive on Bradley
Fighting Vehicle
We have successfully completed trials of our electric drive
technology on the Bradley fighting vehicle, leveraging our
capability from the UK, and positioning us for a key role within
the US Army’s Optionally Manned Fighting Vehicle (OMFV)
program of record.
With the renewed focus on peer level competition and large-scale
combat operations, the US Army’s imperative to modernise
their armoured combat vehicle fleet is at a critical juncture. The
Optionally Manned Fighting Vehicle (OMFV) program is the core
thrust of the Next Generation Combat Vehicle (NGCV) Cross
Functional Team and the fourth initiative targeting to replace
the 40-year-old Bradley Fighting Vehicle.
The OMFV program’s focus on advanced system infrastructure
to enable ongoing platform upgrades, aligns with QinetiQ’s
forward-looking technology strategy. As a market leader in
modular open architecture Robotics and Autonomous Systems
(RAS), Command, Control, Computers, Communications,
Cyber, Intelligence, Surveillance and Reconnaissance
(C5ISR), Platform Electrification and Hybrid Electric Systems,
and system integration, QinetiQ is well positioned to be
a critical capability provider to the OMFV program.
Breadth of offering
Existing
Avantus
Air Affairs
Two strategically significant acquisitions in FY23 have increased our capability in the US and Australia
Avantus Federal
c.$300m revenue and 1,150 people
– Market-leading cyber, data analytics and
software development solutions
– Extends customer base in the US and builds
capability in defence and intelligence markets
Air Affairs
c.A$45m revenue and 180 people
– Market leader in air threat representation and
aerial target services
– Broadened the capability in Australia into Training
and Mission Rehearsal and Test and Evaluation
We see this project as
the start of a much wider
opportunity for the US Army
to experiment with the hybrid
electric drive across its fleet.”
Mike Sewart
Chief Technology Officer
20
QinetiQ Group plc
Annual Report & Accounts 2023
Strategic progress FY23 continued
StRAtEGiC REpORt
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21
StRAtEGiC pillAR #02: DiStinCtivE OFFERinGS
StRAtEGiC pillAR #03: DiSRUptivE innOvAtiOn
Co-create high-value solutions
Co-create distinctive products and services to offer exceptional value for
our customers in engineering, experimentation, test, training, information
and autonomous systems.
Innovation to support delivery of
our customers’ mission at pace
Invest in and apply disruptive business models, digitisation and advanced
technologies to enable our customers’ operational missions at pace.
FY23 highlights
– We have commenced full-rate production
in the US of over 1,200 small advanced
robots with a multi-year delivery schedule
for the US Army. The Common Robotic
System Individual contract is the largest US
Government Program of Record in robotics,
giving us a strong platform for growth.
– The maximum altitude of the Jet80+
unmanned aerial target has been increased
to 10,000m. This provides a unique
capability for a target in this performance /
price range and provides excellent value for
money for customers wishing to conduct
higher altitude missile firings. In addition,
a new high-manoeuvrability capability
has been released to production offering
increased manoeuvres over 4g.
– The UK MOD has signed an £80m, 10-year
industry partnership, with QinetiQ-led Team
Pegasus enhancing the UK’s ability to
provide its military platforms and systems
with the data needed to keep them safe
and effective. This partnership will create
70 new jobs in the UK and upskill over 200
of our personnel in the latest technology
and data analysis techniques. Not only
does this further enhance our future
capabilities and resilience, but it allows us
to continue providing our military platforms
and systems with the data needed to keep
them safe and effective.
– In the US we have won a $75m three-
year Systems Engineering and Technical
Assistance (SETA) contract to support the
Space Development Agency with Capability
Acquisition of Low Earth Orbit (LEO) satellite
launch and constellation management to
demonstrate Beyond Line of Sight (BLOS)
targeting and advanced missile detection
and tracking.
FY23 highlights
– QinetiQ has won a £6m, four-year contract
to support the Royal Navy’s future high-
performance Unmanned Aerial Systems
(UAS) operations. The Company will
provide its experimentation expertise and
its Banshee Jet80+ targets to help Royal
Navy Aircraft Carriers train for real-world
scenarios. The Vampire Phase 1 contract
will enable the Royal Navy to test and
evaluate the capability of small fixed wing,
jet-powered uncrewed systems to support
Carrier Aviation.
– Our large long-term contracts and
frameworks in the UK are supporting
significant and continued revenue growth
for EMEA Services. The Engineering Delivery
partner (EDP) framework continues to deliver
for our customer, alongside our partners
Atkins and BMT, with full year orders of circa
£400m and c.£325m revenue, respectively.
The Serapis framework is driving good growth
in our UK Intelligence Sector, for research
and development of command and control
systems, communications and networks, and
training and simulation projects. The Long
Term Partnering Agreement (LTPA) remains
our largest contract delivering world-leading
test, trials, training and evaluation (T3E) for
the UK MOD.
– In support of Federal law enforcement
analysts’ need to flag potential threats
against the US court system, QinetiQ’s
data science and application development
team created and deployed an AI-
powered web application called BADACT,
which automates web scraping, text
processing, video transcription, and
language translation. Most importantly,
the tool performs language translation
and semantic analysis to identify threats
against protected individuals.
Experimentation
and technology
CASE StUDY
Engineering
services &
support
Successful test of new
laser defence capability
The MOD’s Defence Science and Technology Laboratory (Dstl) has
hosted the UK’s first high-powered, long-range laser-directed energy
weapon (LDEW) trial on its ranges at Porton Down.
The trials involved firing the UK DragonFire demonstrator at targets
over a number of ranges, demanding pinpoint accuracy from the beam
director. Our technology offers a scalable, highly controllable construct
for UK High Energy Laser Weapon development that can complement
and supplement conventional defensive weapon capabilities. These
LDEW technologies are applicable to maritime, land and air domains.
QinetiQ’s First Generation LDEW technology has been tested over
many hundreds of high-power firings, including against targets at
range, demonstrating the performance advantages the technology
offers. In early autumn 2022, as part of the DragonFire consortium,
QinetiQ demonstrated a Laser Directed Energy Weapon Capability
Demonstrator in a series of complex live firing trials at Porton
Down. Working closely with Dstl and MOD WECA, our expertise in
trials conduct and safety as well as the technology itself assisted
the MOD in generating important evidence as it considered and
endorsed the next stage of LDEW capability development.
This trial is the culmination
of design development and
demonstration activity over
a number of years.”
Ben Maddison
Dstl Technical Partner
The Aurora Engineering
Delivery Partnership with the
UK MOD and DE&S continues to go
from strength to strength, providing
technical support to the most complex
acquisition programmes.”
Nic Anderson - Chief Executive UK Defence
CASE StUDY
Support to UK MOD
for the Future Combat
Air System (FCAS)
programme
QinetiQ has been awarded a £32m three-year contract through
the Engineering Delivery Partner (EDP) framework to provide
programme and technical support to the new Catalyst Delivery
Team, responsible for introducing new capability to the MOD
air domain for various front line commands. This demonstrates
our Engineering Services and Support offering in practice, in the
introduction of new technologies and delivery approaches for
the next generation of aircraft test and evaluation.
QinetiQ will provide a range of support to Catalyst, using
its digital engineering capabilities and vast experience in
requirements management. This will include engineering
support initially focusing on Human Performance, Safety
and Systems Engineering disciplines through to August 2025.
As the Catalyst programme grows, EDP provides a strong
platform to support emerging requirements for years to come.
22
QinetiQ Group plc
Annual Report & Accounts 2023
Stakeholder focus
Customers
Achieving operational advantage over an adversary requires timely and reliable
intelligence, alongside the strategic application of capability and resources,
to mitigate threats and project power at range to deter malicious actors.
Our six distinctive offerings are focused on addressing
contemporary customer challenges such as:
improving Situational Awareness
Tactical and strategic operational advantage relies on gaining
superior situational awareness. This requires achieving increasingly
fast and reliable decision making by establishing rapid sensing, data
and information processing, secure communications across land,
maritime, air, space and cyber domains and between allies.
Generating Affordable Combat mass
Achieving operational advantage through increasing combat mass
requires affordable low-cost technologies to be integrated and assured.
This requires exploiting the capabilities of low-cost military and dual-
use technologies, through research, development, experimentation,
integration and assurance.
Countering Existing, new and Emerging threats
Operational advantage depends on preventing adversaries from
disrupting, disabling, denying, deceiving and/or destroying platforms,
systems and infrastructure. This requires an understanding of how
new technologies impact the threat landscape, an evaluation of how
platforms, systems and infrastructure perform against physically and/
or digitally represented threats and the development of survivability
and lethality solutions to counter them.
tackling the impact of Climate Change
Climate change needs to be urgently mitigated through reducing
emissions, and defence forces have to adapt to respond to threats
climate change is posing to current and future operations, capabilities
and equipment. This requires an understanding of how the environment
will affect operations and warfighting, and needs new solutions to deliver
both environmental sustainability and operational advantage.
improving mission planning and preparation
Rehearsing in realistic scenarios and environments enables forces to
prepare and respond quickly and decisively to emerging threats. This
requires an innovative approach to improving individual and collective
training by adopting new technologies and approaches to increase
mission effectiveness.
Faced with these challenges our customers seek:
innovation – to experiment with and exploit new technologies
for operational advantage
Assurance – of safe and secure platforms and systems
for operational resilience
Risk and cost reduction – in the development and operation
of platforms and systems
To deliver operational advantage for our customers, we must remain at
the cutting edge of technology and create innovative solutions at pace.
Our focus is on delivering mission-led innovation where we co-create
with customers and partners to deliver cost-effective solutions through
our six distinctive offerings.
Our employees’ deep domain knowledge and expertise enable us to
understand and represent threats across all domains. We apply our
unique technical expertise across the product lifecycle, helping our
customers to create, test and use defence and security capabilities.
Delivering for our customers
Create It
Developing cutting-edge
technology and rapidly
turning it into capability
Test It
Assuring a capability
will work when it is
critically needed
Use It
Ensuring our customers
are trained and
operationally ready
StRAtEGiC REpORt
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23
CASE StUDY
Sharpshooter
Training Exercise
Sharpshooter is a UK Royal Navy exercise
designed to train, test and evaluate the
effectiveness of a warship’s medium and
close-range weapon systems and teams.
QinetiQ and Inzpire teams, working closely
with the Royal Navy, support the design and
delivery of fully immersive training to exercise
in increasingly complex tactical situations to
enable them to train as they would fight.
The customer recognises the value of
these training, test and evaluation events to
provide assurance and improve operational
decision making.
My team have come away
from this exercise with
their heads held high
and hugely enthused
about their ability.”
Commander Tom Johnson
Royal Navy
24
QinetiQ Group plc
Annual Report & Accounts 2023
Stakeholder focus continued
Our people
Our people are at the heart of delivering our strategy
and are passionate about our customers.
Our people are critical to our success so it’s important they feel valued
for their contribution, working in an environment in which they can
thrive. We have made a conscious choice to take a step change in our
approach, rebalancing our focus on our people. This is helping us to
make decisions and choices from an employee perspective, responding
in a way that is appropriate and sustainable for the long term.
Listening to feedback, over the last year we have invested in our
employee offering, specifically in the areas of Learning & Development
and Reward & Recognition.
We have been thoughtful in our decisions, directing this investment to
where it is needed most. Our efforts have been focused on supporting
our colleagues on lower salaries by ensuring that pay increases
are weighted more towards lower grades, and investing in benefits
that make the most difference. We have also put support in place
should anyone need urgent help through the QinetiQ Hardship Fund.
In the areas where we need to be more competitive, we have made
improvements, for instance, by expanding the Leadership Incentive
Scheme, introducing the ability to earn an additional 2% of base salary
on the All Employee Incentive Scheme, and we have introduced a
Personal Development Fund in support of career development. From
a wellbeing perspective, we are driving healthy habits and activities,
for example, introducing the YuLife app in the UK.
We continue to invest in the next generation, by encouraging our people
to take part in volunteering activities that promote careers in Science,
Technology, Engineering and Maths (STEM) subjects and by expanding
in our Early Careers Programmes. This year we have significantly
increased the number of apprentices and graduates being recruited
into our formal programmes in Australia and the UK ensuring that,
once they join us, they have access to meaningful placements that
help them learn and grow.
Our employee engagement has improved by 4.3% in FY23, with
significant improvement shown in the Reward and Growth drivers. We
continue to focus on our culture and employee offering recognising our
People strategy needs to remain agile and relevant in all our markets,
ensuring we are demonstrating the care for our people, and aiding
retention and attraction of the very best leaders and employees.
See page 67 for more details on our support for our people.
Our Employee Offering Framework
Reward & recognition
Offering a range of rewards
and benefits that recognise
collective performance and
personal contribution
Safety & wellbeing
Our priority is to protect our people;
looking after their safety, health
and wellbeing
Our Employee
Offering
Framework
Responsibility &
sustainability
Being a responsible and
sustainable business is at
the heart of our identity
Learning & development
Enabling career growth and
development through meaningful
learning experiences
Diversity & inclusion
Creating a company where
our differences are not only
embraced but make us stronger
Adaptability & flexibility
Facilitating an adaptable and
flexible working environment
to support work-life balance
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25
A number of confidential
requests made to the Hardship
Fund are challenging to read,
but the feedback from those
who have received help makes
you realise the impact this
initiative is having.”
William Bowers UK Chair
Global Employee Voice.
We have been thoughtful
in our decisions, directing
the investment to where
it is needed most.”
Amanda Nelson
Chief People Officer
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Stakeholder focus continued
Our stakeholders
Our approach to engagement
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O u r stakeholders
ulators
g
e
R
eople
P
S
u
p
p
l
i
e
r
s
C
u
s
t
Our
Stakeholders
o
m
e
r
s
In order to deliver responsibly and for the benefit of all stakeholders
we must understand what matters to our stakeholders. To do this we
engage in a variety of ways in an open and transparent manner, trying
to identify common goals. In some cases the Board will engage directly
with certain stakeholders, however in others the relevant delivery teams
will manage this engagement. This is dependent on the stakeholder
and issues considered, with engagement led by those best placed to
effect any necessary change. We expect that our approach and how
we engage with our stakeholders will continue evolving as we pursue
further growth and geographic expansion for the benefit of all of
our stakeholders.
For more information on our Section 172 Statement see page 86.
Sharehol d e r
s
Communi t i e s
Our stakehol d e r s
Primary stakeholders
Other stakeholders
Primary stakeholders
How we engage
impact of engagement
How we create value
Customers
Our customers are at the centre of our vision and the foundation
of our success. We strive to apply our strengths to their advantage
to deliver mission-led innovation, and invest time in understanding
and responding to their needs.
Every QinetiQ customer has a delivery team continually engaging
with them and adapting our approach to ensure their objectives are
achieved. In addition, we regularly take the time to step back and
listen and act upon our customers’ views on our performance and
relationships through our formal customer research systems.
People
We are a people business and our employees are critical to our
success. Their health, safety and wellbeing is vital and we are
committed to providing fulfilling careers where our employees
can perform meaningful and intellectually stimulating work.
Shareholders
Our shareholders’ ongoing support enables us to invest in our
business and execute our growth strategy for the benefit of all
stakeholders. In return we aim to deliver long-term sustainable
growth and attractive returns.
Other stakeholders
Our methods of engagement include: quarterly Peakon surveys,
Q-talks, global roadshows led by our CEO and local roadshows led
by members of our QinetiQ Leadership Team, our Global Employee
Voice Group (GEV) and other engagement forums (e.g. works
councils), as well as indirectly through feedback on platforms
such as Glassdoor.
We engaged with our shareholders during the year through both
physical and virtual roadshows, results presentations and the AGM.
In addition, our Chair proactively engaged with shareholders to
seek their views on the business, strategy, and management team.
Additionally, our Remuneration committee chair engaged with our
largest shareholders on remuneration policy. We seek to keep an
open dialogue with our shareholders.
Suppliers
We occupy a unique position in defence, working in partnership
with various suppliers to deliver the best solutions for our customers.
We strive to adopt a collaborative approach and ensure we treat our
suppliers with integrity, taking a fair and sustainable approach.
We actively engage with our supply chain and hold strategic
relationships at appropriate levels across organisations. We engage
with our suppliers through a variety of means including our QinetiQ
Collaborate events. We actively seek engagement across the supply
base with the aim of bringing down barriers for both those suppliers
already in the defence sector and those in adjacent or emerging sectors.
Our delivery teams continually adapt our approach to
ensure customers’ needs are met. The formal feedback
we receive is reviewed at all levels of our organisation to
ensure we continuously improve and evolve our business
processes and delivery solutions.
Our engagement has helped us to identify priority focus
areas to improve the employee experience. By listening to
our people through our Peakon surveys we have directed
our efforts to enhance those areas highlighted, including
ways of working, safety, digital improvements and
concerns about the cost of living.
We have sought to keep the financial markets and our
shareholders up-to-date with progress on the issues
throughout the year; shareholder feedback and comments
on operational direction, returns and acquisitions has
helped shape our strategic thinking and decision-making.
We deliver mission-critical solutions to our customers helping them to
address their most pressing challenges. They benefit from a responsive
and agile approach, the ability to innovate at pace and value for money.
Our employees work in an environment where the work they do makes
a genuine difference to our customers and their safety. They have
rewarding careers in highly skilled areas and are able to satisfy
their intellectual curiosities.
Our business model, supported by our strategy, aims to deliver
sustainable long-term growth and returns to our shareholders.
This engagement continues to ensure we are partnering
effectively to support our customers. It gives us insight into
industry developments and ensures effective collaboration
between QinetiQ, its partners and suppliers.
Working with our suppliers we bring together complementary industry-
leading thinking in a truly collaborative environment to the benefit of
the customers, QinetiQ and our suppliers.
Communities
We strive to be a good neighbour, to have a positive impact on our
local communities and wider society; from our outreach programme,
inspiring the next generation of scientists and engineers, to providing
services that ensure the safety and security of members of society,
and our Net-Zero Greenhouse Gas emissions plan.
Regulators
Various aspects of our business involve oversight from regulators.
We engage with regulators to understand changing regulations,
ensuring we can meet these requirements.
We engage via a variety of community investment activities
such as outreach, volunteering, supporting local charities
and community liaison.
Our community investment activity is viewed positively.
Through our community liaison, our regular updates have
ensured local people are aware of our activity. Our outreach
activity has provided benefit to young people.
We engage with regulators via meetings, audits and reports.
Through engagement we are able to ensure we continue
to meet the high standards expected by regulators.
We aim to benefit the wider socio-economic wellbeing of the
communities where we operate. We offer time for volunteering, and
one of the main ways we support our local communities is through
STEM (science, technology, engineering and maths) outreach with
young people, raising aspirations and providing signposting to
rewarding careers.
We take an active role in the defence industry, with our customers,
peers and partners alike. For example, our Chief Executive has been
recently reappointed as Industry Co-Chair of the Defence Growth
Partnership (DGP).
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trading environment
Our >£30bn addressable market
The UK, the US and Australia are our home countries and collectively
represent 93% of our revenue.
Revenue by customer location
Revenue by division
7%
8%
66%
25%
75%
UK
US
Australia
Rest of world
£1,045.7m
£301.0m
£124.1m
£109.9m
EMEA Services
£1,179.3m
Global Products
£401.4m
19%
UK
QinetiQ’s heritage stems from formerly being part of the
UK MOD, who we now work with closely as our largest
customer. Our capabilities are centred around customer
advice and service provision across research and
development, engineering advice, test and evaluation,
training and mission rehearsal, cyber security and data.
5,672
employees
32
sites
Trading environment
The 2023 Integrated Review Refresh (IRR) recognised the urgent
and immediate pressures brought about by the deteriorating security
situation. In the Spring 2023 budget statement, the government
announced that the UK defence budget would be increased by £11bn
over the next five years in response to these growing threats. The
IRR emphasised that strategic advantage in science and technology
is a core national priority. As announced in 2021, the UK MOD is also
investing over £6.6bn in research and development to develop next-
generation and emerging technologies in areas such as cyber, space,
directed-energy weapons, and advanced high-speed missiles.
As the UK seeks to develop and deploy next-generation capabilities
faster than their adversaries, we are well-positioned to support them in
applying mission-led innovation to achieve this. Our unrivalled expertise
in Research & Development and Test & Evaluation combined with our
recent investment to modernise UK test ranges will help our customers
generate and assure new and emerging technologies at pace. Delivering
value for money remains critical to our customers and we will continue
to utilise innovative delivery models to support our customers in
achieving this.
>£15bn
>£5bn
Market Opportunity1
Market opportunity1
£153m
£1,046m
FY22 revenue
FY23 revenue
1
Janes Defence Market Budget Forecast March 2023,
UK MOD and US DOD spending data, Australian
Defence Publications and QinetiQ estimates.
US
QinetiQ’s capabilities in the US originate from a close and
strong relationship with the US Department of Defense, as
the most significant provider of small robots, combined
with our acquired capabilities on autonomy and sensing.
This capability has been significantly enhanced with the
acquisition of Avantus Federal, a market-leading cyber,
data analytics and software development solutions
business, adding over 1,000 people.
1,574
employees
14
sites
Trading environment
The 2022 National Defense Strategy and National Security Strategy
recognised an intensifying competitive landscape and the urgent
need to sustain and strengthen deterrence, with China as its pacing
challenge. The 2024 Department of Defense Budget Request builds on
the principles of National Security Strategy and has grown by nearly
$100bn (13%) to $842bn since 2022. As part of this, the FY24 research
development test and evaluation budget request is the largest ever at
$145bn. This represents an increase of $26bn (22%) since FY22.
Investment in critical technology areas aimed at strengthening
technological advantage include: directed energy, hypersonics
and integrated sensing and cyber.
In the US, we are a market leader in robotics, autonomy and advanced
sensing solutions, an area of budget growth, delivering value to our
customers through the rapid development and deployment of disruptive
solutions. With the acquisition of Avantus we are also a leading cyber,
data analytics and software development provider. There is a growing
need to provide actionable intelligence into war-fighters’ hands quicker,
and a push to develop and integrate multiple autonomous and semi-
autonomous systems as the US seeks to invest in next-generation
technologies to maintain a technological advantage.
>£23bn
Market opportunity1
£301m
FY23 revenue
30
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trading environment continued
Australia
QinetiQ has had a strong relationship with the Australian
Department of Defence for many years, providing advice,
engineering and design solutions, as well as expanding
into test and evaluation services, robotics and autonomous
systems. The acquisition of Air Affairs, a market leader
in air threat representation and aerial target services,
has broadened our capability and added over 150 people.
823
employees
9
sites
Trading environment
The 2023 Defence Strategic Review addresses the prospect of major
conflict in the Indo-Pacific that directly threatens Australia’s national
interest. It frames the priority of investment in Defence capability and
posture to meet Australia’s security challenges through to 2032-33. In
the 2023 Budget, Defence spending will increase by 7% to AUD$52.6 bn
in 2023-24.
The Australian government reinforced its commitment to delivering on
the recommendations of the Defence Strategic Review, with plans to
commence the work to deliver Australia’s nuclear-powered submarine
program. Defence spending as a proportion of GDP will lift above its
current trajectory to be 0.2 per cent higher by 2032-33. As part of this,
the Government announced it would invest more than AUD$19bn
to implement the immediate priorities identified in response to the
Defence Strategic Review, namely:
•
AUD$9bn for the nuclear-powered submarine programme
through AUKUS;
• AUD$4.1bn for long-range strike capabilities;
• AUD$3.8bn for northern base infrastructure and;
•
AUD$900m on defence innovation, to establish the Advanced
Strategic Capabilities Accelerator and through AUKUS Pillar 2.
We see many opportunities to support the Australian forces in
modernising sovereign defence capabilities, leveraging expertise
from across QinetiQ.
>£1.5bn
Market opportunity1
£124m
FY23 revenue
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Rest of the world
Germany
In Germany, we are a trusted provider of airborne special
mission operations, technical solutions and airborne
training to defence and security customers.
121
employees
3
sites
Trading environment
The strategic landscape has undergone a seismic shift following
Russia’s invasion of Ukraine in February 2022. This has provoked
NATO to increase its defence capabilities and readiness to respond,
adding to the pressure for the NATO member countries to increase their
defence spending of at least 2% of GDP. Following the announcement
of Germany to increase defence spending by €100bn over the next five
years, many other NATO and European countries are also increasing
their defence and security investment.
While priority and investment focus will be attached to the prosecution
of our three home country strategies (UK, US and Australia), we will
continue to conduct business in the support of allies in 5-Eyes, NATO
and Continental Europe.
Canada
Canada is home to a branch of QinetiQ Target
Systems – a world-leading provider of unmanned
air, land and surface targets for live-fire training
and weapon system test and evaluation.
71
employees
2
sites
>£1bn
Market opportunity1
£110m
FY23 revenue
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Themes driving market growth
The long-term themes reshaping defence markets around the world.
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We are operating in an environment where there is an increasing
threat of wider global conflict. This follows Russia’s full-scale
invasion of Ukraine; the threat posed by China’s growing military
power coupled with its push to change global norms and potentially
threaten its neighbours; the rise of extremism in Africa; and ongoing
tensions and conflict in the Middle East.
In parallel, rapidly emerging and evolving technologies continue
to disrupt traditional business and society with both positive
and negative outcomes as well as creating unprecedented
vulnerabilities.
To meet these increasing challenges, the UK, US and Australia
have reviewed their strategic defence and security capabilities
and investment priorities as well as their allied activities.
How are defence and security markets changing?
How are we evolving to these new market dynamics?
Rising global tensions and increasingly complex threats
The threat environment continues to become increasingly complex,
fuelled by rapid advances in technology and heightened geo-political
tensions. From hypersonic missiles and advanced fighter jets to low cost
consumer drones adapted to cause harm, technological advances have
enhanced the lethality of threats at both ends of the spectrum, giving
both state and non-state actors access to capabilities which undermine
western superiority. In parallel to traditional threats, digital-based threats
continue to grow in sophistication, and are often deployed in conjunction
with more conventional threat forms.
The proliferation of grey-zone warfare
Grey-zone activity has increased significantly in recent years as the
supremacy of western forces has driven adversaries to adopt new
tactics. Grey-zone tactics often include acts, which would not typically
provoke a conventional military response, but nevertheless undermine
defence and security, as well as economic and political stability. Typical
threats in this space include cyber-attacks aimed at compromising
critical national infrastructure, disinformation campaigns and political
meddling. Key challenges for our customers include improving cyber
resilience, improving threat detection and adapting at pace.
Need for advanced capabilities, information advantage
and better inter-operability
Maintaining technological superiority is critical in this increasingly complex
threat environment. Our customers are investing heavily in R&D to develop
next-generation capabilities and ensure informational advantage. Areas
such as robotics, autonomy, advanced data analytics, artificial intelligence
and novel weapons are all of particular interest to our customers. These
new and emerging technologies must be integrated with traditional defence
capabilities, and across our markets there is a need for greater inter-
operability between platforms and systems to create true capabilities. This
extends to the need for greater co-operation between different forces and
nations to ensure a concerted effort in countering these modern threats.
Resilience of supply chains
In light of the growing tension and competition between global powers,
nations are increasingly focused on developing resilient domestic
supply chains. These supply chains must demonstrate the agility and
breadth and depth of capability to respond to the changing and complex
customer requirements. This is a critical part of maintaining capability
that can function without undue reliance on international trade and
expertise or raw materials from potentially hostile states.
Delivering disruptive science, engineering and technology
required to modernise defence and security capabilities
QinetiQ was founded on innovation with research, development,
test and evaluation at the core of what we do. As a predominantly
service-based business we are uniquely placed to operate across the
breadth of platforms, systems and lifecycles, unlike a more traditional
vertical platform manufacturer. We experiment, innovate and develop
new capabilities, drawing on a broad range of existing, emerging and
disruptive technologies. We emulate advanced threats and test and
evaluate the resilience and inter-operability of the systems and platforms
used to respond to these threats, to provide assurance. We have invested
heavily in contracts such as the LTPA to ensure we are able to generate
and assure future capabilities and will continue to apply disruptive
innovation to create relevant capabilities and offerings.
Delivering value for money through innovative delivery models
Governments around the world face significant fiscal pressure, with high
budget deficits and growing debt levels exacerbated by the impact of
higher inflation. Against this backdrop nations have a growing number of
threats to defend against and must wrestle with modernising traditional
defence capabilities, while also developing future digitally enabled
technologies. This means defence budgets must deliver value for money.
We act as a strategic partner to our customers, understanding their
challenges and applying our technical expertise to provide innovative
solutions. We believe by focusing on our customers’ needs and helping
them realise cost efficiencies we can create opportunities for growth.
Partnering for innovation
The capabilities our customers require can often be so complex that no
one company can deliver them alone. In addition, cutting-edge technology
is more often found in the commercial sector and academia. The defence
industry can benefit from leveraging this technology, but it needs new
and more effective partnerships to rapidly convert emerging technologies
into assured deployable capability. We collaborate across the supply
chain, but also form novel partnerships with organisations outside of
defence to provide the agility and expertise required to innovate at pace.
Our ability to work across platforms and technologies and form powerful
partnerships helps deliver mission-led innovation to our customers.
A multi-domestic strategy
Our strategy is a multi-domestic strategy aimed at developing sovereign
defence capabilities within the countries in which we operate. The
focus for growth is in our three home countries, the UK, the US and
Australia, where we are pursuing similar opportunities to support their
shared defence and security mission. The formation of the AUKUS
alliance between these nations reinforces our multi-domestic strategy
and makes us increasingly relevant. We are well-positioned to deliver
strong growth in the UK and more than double our Australian and
US businesses in the next five years.
Our customers seek to
rapidly modernise their
defence and security
capabilities so they can
better address current
and future threats.”
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Operating review
How we are structured
QinetiQ has simplified its organisational structure, reducing
the number of divisions, and created a new Australian Sector.
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The creation of the new Australia Sector, which replaces
what was previously the International Sector, is a further
demonstration of QinetiQ’s commitment and investment in
the region and is evidence of our ambition to build an integrated
global defence and security company focused around our six
distinctive offerings and three home countries of the UK, the US
and Australia. The Australia Sector becomes QinetiQ’s global hub
for threat representation, including recently acquired Air Affairs,
Target Systems (in the UK and Canada) and also includes our
German air threat representation and training business. QinetiQ’s
four Sectors are now Australia, UK Defence, UK Intelligence and
the US and together the Company is well-placed to support the
goals of AUKUS.
Australia
UK Defence
UK Intelligence
United States
EMEA Services
Combines world-leading expertise with unique facilities to generate
and assure capability. We do this through capability integration, threat
representation and operational readiness, underpinned by long-term
contracts that provide good revenue visibility and cash generation.
Global Products
Delivers innovative solutions and products to meet customer
requirements. We undertake contract-funded research and
development, evolving intellectual property in partnership with
key customers and through internal funding, with potential for
new revenue streams.
£1,179m
Revenue
Included here is our Australian, Canadian
and German operations that were
previously included under International.
In Australia we provide advice, products,
test and evaluation in the core Australia
business, and airborne training and mission
rehearsal services in the newly acquired
QinetiQ Air Affairs. In Germany we provide
airborne training and mission operations.
£132m
FY23 revenue
Delivers operational advantage to
customers by providing independent
research, evaluation and training services.
De-risks complex aerospace programmes
by testing systems and equipment,
evaluating the risks and assuring safety.
£688m
FY23 revenue
Helps customers respond to evolving
threats based on our expertise in cyber
security, secure communication networks
and devices, intelligence gathering
and training.
£359m
FY23 revenue
£401m
Revenue
Provides research services and
bespoke technological solutions
developed from intellectual property
spun off from EMEA Services. The
products and intellectual property
are typically specialist defence and
security solutions, including secure-
communication devices, cyber products
and electrification upgrades to military
equipment. Included in EMEA Products
is QinetiQ Target Systems − a world-
leading provider of unmanned air,
land and surface targets for live-fire
training and weapon system test
and evaluation.
£103m
FY23 revenue
Develops and manufactures
innovative defence products
specialising in robotics, autonomy
and sensing solutions. Avantus
Federal offers market-leading
cyber, data analytics and software
development solutions.
£298m
FY23 revenue
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EMEA Services
Overview
EMEA (Europe, Middle East and Australasia) Services combines world-
leading expertise with unique facilities to provide capability generation
and assurance, underpinned by long-term contracts that provide good
visibility of revenue and cash flows.
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Global Products
Overview
Global Products delivers innovative solutions to meet customer
requirements. The division is technology-based and has shorter order
cycles than EMEA Services. 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
Financial performance
Orders
Revenue
Underlying operating profit
Underlying operating margin
Book to bill ratio1
FY23
£m
1,372.2
1,179.3
137.1
11.6%
1.4x
FY22
£m
918.9
1,059.2
135.6
12.8%
1.1x
Total funded order backlog
2,768.8
2,541.6
1
B2B ratio is orders won divided by revenue recognised, excluding the LTPA non-tasking
services revenue of £225m (FY22 £222m).
Financial performance
Orders for the year increased by 49% to £1,372.2m (FY22: £918.9m),
driven by a £260m MSCA contract in the UK, for the delivery of critical
sovereign capabilities to the UK and continued growth in orders through
the EDP framework, totalling £404m orders in year.
Revenue increased by 11% to £1,179.3m (FY22: £1,059.2m), and
grew by 10% on an organic basis, as a result of new work under the
EDP framework and under the Major Service Provider (MSP) contract
in Australia.
At the beginning of FY24, we had £0.8bn of EMEA Services’ FY24
revenue under contract, compared to £0.7bn (of the FY23 revenue)
at the same point last year. This increase is driven by the 49% orders
growth in the year.
Underlying operating profit grew by 1% to £137.1m (FY22: £135.6m).
Operating margin decreased to 11.6% reflecting the investment in our
people in response to the cost of living crisis.
Approximately 64% of EMEA Services revenue is derived from single
source contracts, including the LTPA (FY22: approximately 67%). By
investing in our core contracts and extending their duration the high
proportion of single source revenue contracted on a long-term basis
provides visibility and reduces our exposure to future changes in the
baseline profit rate set annually by the Single Source Regulations Office.
Orders
Revenue
Underlying operating profit
Underlying operating margin
Book to bill ratio1
Total funded order backlog
1
B2B ratio is orders won divided by revenue recognised.
FY23
£m
351.9
401.4
41.8
10.4%
0.9x
301.5
FY22
£m
307.7
261.2
1.8
0.7%
1.2x
287.2
Financial performance
Orders increased by 14% to £351.9m (FY22: £307.7m). This was driven
by a good order intake in the US and the effect of the complex project
write-down in the prior year.
Revenue was up 54% on a reported basis at £401.4m (FY22: £261.2m),
due to strong US growth following prior year supply-chain challenges
on the initial production ramp-up of CRS-I robots. Furthermore there
was an increase in revenue from the acquisition of Avantus of £83.0m
offset partially by the disposal of Space NV. Excluding the impact of this
acquisition and foreign exchange, revenue was up 20% (£48.9m) on an
organic basis.
At the beginning of FY24, we had £0.3bn of Global Products’ FY24
revenue under contract, compared to £0.2bn (of the FY23 revenue) at
the same point last year. This increase is driven by the significant orders
growth in year plus the contribution from the Avantus acquisition.
Underlying operating profit increased to £41.8m (FY22: £1.8m), with
an underlying operating profit margin of 10.4% (FY22: 0.7%). This was
driven by strong performance in both the US and within QinetiQ Target
Systems, and the acquisition of Avantus. FY22 operating profit included
the £14.5m write-down on the complex project.
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Australia
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UK Defence
The creation of the new Australia Sector is a further demonstration
of QinetiQ’s commitment and investment in Australia.
The UK Defence Sector is focused on protecting lives and securing the vital
interests of our Air, Maritime & Land customers.
QinetiQ Target Systems (QTS)
QTS continues to make positive progress with customers resuming
trials and exercises. In response to increased customer demand for
live environment target simulations, QTS has successfully delivered
a significant improvement in production throughput which has been
positively received by our UK MOD customer and has delivered
positive growth.
QTS has responded with agility to customer requirements including
the delivery of a Dutch and German training exercise led by the Royal
Netherlands Army where QTS provided products and services to
support a bi-national Tactical Firing event with Germany at the NATO
Missile Firing Installation on Crete. QTS has also made good progress
in the United States with the integration of the Army Ground Aerial
Target Control System and our QTS targets. This represents a major
milestone, more than six years in the making, in US market penetration.
Following the successful demonstration of Banshee Jet80+ from
the deck of the Royal Navy’s HMS Prince of Wales aircraft carrier late
last year, QTS has recently won a contract that enables the test and
evaluation of the capability of small fixed wing, jet-powered uncrewed
systems to support Carrier Aviation.
We continue to experience strong demand for QTS products and services
arising from an increased demand from many of our global customers
which has resulted in March 2023 being the biggest production month
to date with over 100 aerial and surface targets delivered.
QinetiQ Germany GmbH
In Germany, we have continued to invest in the business with a strategic
uplift in fleet composition with a number of aircraft added to the fleet.
The fleet has seen further improvement with modifications to target
towing and cameras resulting in increased capability and capacity. In
the year, the business delivered more flying hours than in any previous
contract year. These successes continue to mature our flexibility and
credibility in our Air Services growth plans. In response to the ongoing
and increased customer demand for live environment target simulations,
the German business has proactively responded with precision and
professionalism to an increased tempo, by delivering an increase of 50%
in aerial target service tasks in the last two years. The Government’s
commitment to increased defence spending supports a positive view
of business growth into the future.
Gary Stewart
Chief Executive Australia
Overview
Our Australia Sector provides advisory services, engineering services
and training and mission rehearsal in the Australian, German and
Canadian markets.
QinetiQ Australia
The Australian business has continued to deliver impressive growth
in the year with a significant improvement in revenue coming from
the Advisory Services business. Notably, the business has responded
successfully to an increase in delivering to operations and exercises as
the customer uplifts activity in response to geo-political challenges. An
increase in deployments and training events has seen a positive impact
on the engineering, technical and advisory services contracts.
In December 2022 we completed the acquisition of Air Affairs (Australia)
Pty Ltd for A$53m. Air Affairs is an Australian defence services company
– a leader in air threat representation, Test and Evaluation (T&E),
unmanned targets and mission rehearsal. Air Affairs provides targets
and training services, and electronic warfare capabilities to the Australian
Defence Force, as well as aerial surveillance and reconnaissance in
support of government firefighting efforts. It owns and operates a fleet
of special mission aircraft and maintains an advanced manufacturing
and engineering facility providing design, manufacture and certification
operations. Air Affairs employs c.180 people, headquartered in Nowra,
New South Wales.
Integration of Air Affairs is progressing to plan and the business is
performing well, including securing the next phase of airborne training
services for the Australian Defence Force. As demand for threat
representation increases across all our home countries, we are focused
on leveraging our airborne training and target capabilities across QTS,
GmbH and Air Affairs to pursue new customer opportunities. A recent
example is the successful sale of our Banshee target into the US Army’s
Threat Systems Management Office.
The engineering services facility in South Melbourne (named “QTech”)
is now open and will be a cornerstone facility for further growth through
the Robotics and Autonomous Systems and the Test and Evaluation
Campaigns. Additionally, the inaugural Test and Evaluation Sovereign
Skills Programme has commenced with the 2023 cohort in the United
Kingdom undertaking T&E training already.
Nic Anderson
Chief Executive UK Defence
Overview
The UK Defence Sector delivers mission critical solutions, innovating
for our Air, Maritime and Land customers’ advantage. This Sector
represents the previously reported Air and Space, and Maritime and Land
business units. Its formation provides a sharper focus on our strategy
of maximising growth through our framework contracts, building new
core offerings through our global campaigns and exploring new growth
opportunities. The new Sector improves coherence of our distinctive
offerings across our customer base, with the embedding of enabling
functions bringing greater cohesion to operational strategy execution
for business performance excellence.
Maritime
We have secured a £260m contract with the Submarine Delivery Agency
for a further ten years of the Maritime Strategic Capability Arrangement
(MSCA), which also includes an option for an additional five years.
The MSCA delivers critical sovereign capabilities that contribute to
the assurance of the UK’s ability to design, build and safely operate
the Royal Navy’s surface and subsurface fleet, including the UK’s
continuous at sea deterrent.
LTPA
We have also seen a high level of usage of LTPA capabilities over
the last 12 months supporting operational training needs and urgent
capability requirements:
– We have completed our Air Range Modernisation investment
programme, securing recognition by the Ministry of Defence
(MOD) Sanctuary Awards for achievements in conservation and
sustainability in relation to the renovation programme on St Kilda
in the Outer Hebrides;
– Usage of LTPA capabilities by allies continues to increase and
included the Atlantic Thunder 22 live-fire exercise. This involved the
US Naval Forces Europe, US Air Forces Europe, the UK Royal Navy
and UK Royal Air Force developing combined proficiency in tactics,
targeting and live-firing against a surface target at sea;
– We continue to work in partnership with our customer to develop
new approaches to test and evaluation increasing the adoption of
modelling, synthetics and artificial intelligence (AI) techniques;
– Investment to pilot the transition to Net-Zero site operations
has been secured and is underway.
EDP
The Engineering Delivery Partner (EDP) programme has now
delivered over £1.3bn of orders since inception in October 2018, and
our partnership continues to evolve in support of our customers’ need
to transform their approach to capability acquisition. Key achievements
this year include:
– Securing the £32m contract to provide technical support to the
UK MOD’s Future Combat Air System (FCAS) Enterprise and the
Defence Equipment & Support (DE&S) Catalyst delivery team, which
is responsible for delivering the latest combat air capabilities to UK
frontline commands;
– Increasing the EDP supplier network by c.25% and the volume of
work delivered through them;
– Continuing to deliver over 97% of outputs on time and right first time;
– Embedding new services supporting the adoption of digital
design technologies;
– Starting to provide Net-Zero engineering services (see page 62).
Science and Technology
Science and technology is a priority area where we continue to
make progress primarily through contracting with Defence Science and
Technology Laboratory (Dstl), but also through increasing international
collaboration across the Group which provides a great platform to
support the priorities of AUKUS:
– Delivering the UK’s first high-powered, long-range laser-directed
energy weapon (LDEW) trial at Dstl Porton Down in partnership
with Leonardo and MBDA, demonstrating the capabilities of our
phase-combined laser technology;
– Leading the Weapons Sector Research Framework with a focus on
novel and hypersonic weapons, including an annual conference with
over 300 representatives from across the MOD and industry;
– Developing our E-X Drive technology through our US Sector for the
BAE Systems solution to the US Army’s Optionally Manned Fighting
Vehicle (OMFV) program;
– Supporting our Australian Sector to secure and deliver a higher energy
laser development programme to their Australian Defence Science
and Technology (DST) customer.
Mission Rehearsal
We continue to develop our mission rehearsal offerings through:
– Securing the second demonstration phase in partnership with
BAE Systems for the Platform Enabled Training Capability (PETC)
programme delivering multi-platform innovative synthetic training
capability to the Royal Navy in support of the wider Defence
Operational Training Capability (Maritime) (DOTC(M)) programme;
– Fielding a new threat representation training capability with the
Royal Navy through securing the four-year Vampire Phase 1
contract to support the Royal Navy’s future high-performance
Unmanned Aerial Systems (UAS) operations;
– Delivering enhanced mission support through the Royal Navy
Sharpshooter training exercise providing operationally realistic
scenarios to train as they would fight with close-in weapon systems.
40
QinetiQ Group plc
Annual Report & Accounts 2023
Operating review continued
UK Intelligence
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
41
United States
The UK Intelligence Sector is a key industry partner to the UK Ministry of Defence
(MOD), and continues to be well-placed to deliver critical digital change programmes.
The combination of capabilities across QinetiQ and Avantus has
created a disruptive defence and intelligence business in the US.
James Willis
Chief Executive UK
Intelligence
Overview
The UK Intelligence Sector 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. Contained
within UK Intelligence are three acquired businesses: QinetiQ Training
and Simulation Limited (QTSL, formerly NSC), Inzpire and Naimuri.
This Sector represents the previously reported Cyber and Information
business unit.
Order highlights
We won an £80m transformation programme focused on accelerating
the production of mission data, enabling the UK’s military platforms and
personnel to be better protected in a rapidly changing threat landscape.
We formed and led a winning industrial partnership team that included
Inzpire, SRC, CGI and an ecosystem of other expert SMEs. The team will
contribute to the UK’s export agenda by providing our allies with access
to world-class mission data. In demonstrating our commitment to the
Social Value Act, this programme includes a significant investment to
create at least 70 highly skilled data science jobs in the Lincolnshire
Area, and upskill customer personnel in advanced data analysis
techniques and technology.
Through the SERAPIS framework contract, we have won a £5m 18
month research contract focused on helping the UK MOD solve one
of its most enduring and significant capability challenges: pervasive,
full spectrum, multi-domain ISR (intelligence, surveillance and
reconnaissance). The aim is to use coherent real-time multi-modal
sensing to find and identify difficult land targets on a complex battlefield.
The partnership with Defence Intelligence in the UK has continued to grow
strongly with orders exceeding £100m in year. Using the EDP framework,
combined with the rapid innovation it enables, we have pulled through
expertise from across industry and led delivery of a wide portfolio which
is helping Defence Intelligence to drive its transformation strategy.
Innovation
We won the Vivace contract with the Home Office in 2017 to deliver our
Accelerated Capability Environment (ACE). ACE leverages a wide and
diverse ecosystem of suppliers to drive innovation into the delivery of
mission critical capability, it operates at high tempo greatly accelerating
delivery of deployable capability. In the past year Vivace has extended its
core team and under open competition was awarded the next phase in
development of ACE through the Private Sector Partner contract.
We continue to deliver well on the Battlefield Tactical Communication
and Information Systems (BATCIS) contract, winning the fifth year
option contract award worth £35m. This is the public sector support
programme for Defence Digital, delivering procurement and engineering
expertise for this transformational digital backbone programme. With
our partners ATOS, BMT and Roke we deliver specialist expertise
across this complex set of projects (Trinity, Niobe, Morpheus, DSA etc.)
covering a wide array of disciplines; developing concepts, engineering
solutions, managing obsolescence issues, supporting critical
operational requirements and enabling procurement competitions.
We have established the Training and Simulation Centre of Excellence
at our Farnborough site combining expertise from the NSC acquisition
with its extant training business unit (NSC now rebranded as QinetiQ
Training and Simulation Limited: QTSL). This business area is growing
strongly with recent key wins in the Land (Army Virtual Proving Ground),
Maritime (T23 and T45 training simulation systems), and secure Cyber
domains coupled with a significant increase in simulation research
and war-gaming demand as the UK Armed Forces consider future
operating requirements.
We continue to demonstrate our ability to take acquisitions and
position them for future success. This year has seen Inzpire reach a
major milestone in the delivery of the GECO Mission planning system
to the UK’s Military Flying Training System. GECO is now used on
the RAF’s Prefect, Phenom and Texan Fixed Wing aircraft and also
Juno and Jupiter Rotary Wing platforms as well as integration into
the simulators. In total, more than 100 systems will be rolled out.
Similarly, Naimuri’s portfolio has significantly diversified beyond National
Security into Homeland Security, and UK MOD. Naimuri continues to be
cited as an example of a high-performing SME working on the highest
priority government systems and highly engaged in supporting social
values growth as part of the North West Powerhouse.
We remain committed to providing operational support to the UK
Government including 24/7 support to operations and deployment
throughout this difficult period in Eastern Europe, which has enabled
UK platforms to support burden sharing with Allies, assisting with
military aid provision, and delivering our mission to protect lives
and secure the vital interests of our customers.
Global Products
We continue to invest in and see demand for our sensors and
communication product portfolio. This past year saw record demand
for its Position Navigation and Timing (PNT) product (Q20) across
a number of customers. This gives a high degree of confidence that
the market potential remains strong ahead of launching the next
generation product (Q40) in the near future.
Shawn Purvis
President & CEO US
Overview
Our US Sector provides technical advice, design and manufacture
of innovative defence products specialising in robotics, autonomy
and sensing solutions, and with the acquisition of Avantus is an
expert in cyber, data analytics and software development. We
have invested to support the long-term growth of our US Sector,
in leadership, integration, systems and tools; the business is now
a fully integrated single US Sector.
The US Sector has had a strong year, with high order intake of $280m
and impressive revenue growth of 25%, prior to the benefit of Avantus.
We have won a number of key contracts in the US that will support
the delivery of our ambitious growth targets.
Order highlights
We have won a $93m single award Indefinite Delivery Indefinite Quantity
(IDIQ) by the US Army for a Digital Night Vision Technology (DNVT)
contract to support the continued evolution of DNVT capabilities through
development, integration, experimentation and laboratory and platform
test and evaluation including using digital imaging, display, processing
and network architecture technologies. DNVT will substantially
enhance the user’s situational awareness and decision-making
abilities by developing digital night vision capabilities coupled with
component technology enhancements including fused imagers, display
enhancements, and image processing hardware and algorithms.
We secured a contract to provide technical services to the US Army.
The five year contract, worth up to $45m, will provide services for the
Development Command (DEVCOM) Command, Control, Computers,
Communications, Cyber, Intelligence, Surveillance and Reconnaissance
(C5ISR) at the Fort Belvoir Prototyping Integration Facility (PIF). The
contract, a one-year base period followed by four one-year option
periods, will provide technical services for system development,
fabrication, sensor and system integration, prototyping of multi-function
sensor suites, and technology assessment efforts aimed at supporting
current and future DEVCOM C5ISR PIF Belvoir customers. This contract
is an important competitive win for the business and reinforces our
continued value to our customers.
We also won a multi-year research, development and technology
integration contract, worth up to $49m, with the US Army C5ISR Center,
Research & Technology Integration Directorate’s Image Processing
Division for Image Processing and advanced Optics Technologies.
Operational highlights
We completed the RCV-L Surrogate Prototype base program activities
through the successful completion of US Army Performance Testing.
We delivered four (of eight) option vehicles (awarded in FY22) and
received c.$20m in orders to support ongoing experimentation
through the provision of spare parts, platform integration and updates,
technology insertions, and support and maintenance activities.
Following successful completion of the Low Rate Production (LRIP)
phase we made significant progress on the Common Robotic System-
Individual (CRS-I) programme, entering into Full Rate Production in
September 2022. In the year over 600 units were delivered bringing
the total delivery to over 900, with over 500 systems fielded to Combat
Engineering and Explosive Ordnance Disposal (EOD) units. Production
remains on track with full production continuing through FY24.
We completed Optionally Manned Fighting Vehicle (OMFV) Phase 2,
supporting prime contractor Oshkosh Defense. This phase delivered a
successful concept design to the US Army with QinetiQ US supporting
the development of the modular open architecture next generation
infantry fighting vehicle to replace the US Army Bradley fighting vehicle.
At the end of November 2022 we completed the acquisition of Avantus
for $590m. Avantus is a leading provider of mission-focused cyber, data
analytics and software development solutions to the US Department
of Defense, Intelligence Community, Department of Homeland Security
and other Federal civilian agencies. Avantus has a strong track record
of achieving speed-to-mission impact. Over the last three years, Avantus
has demonstrated a strong track record of consistent double-digit
revenue growth on a proforma organic basis, at attractive margins.
Since completion, Avantus has continued to perform well, including
two successful re-competes and selection for a new $80m multi-year
contract with a national intelligence customer. In the first four months
of our ownership, while new business awards were lower than assumed,
we achieved good performance across our contracts delivering $100m
revenue at our expected margin of 10.8%. Integration is progressing
ahead of plan and we are actively pursuing revenue synergies by
leveraging and cross selling our offerings to our existing and new
customer base. The combination of capabilities across QinetiQ and
Avantus has created a disruptive defence and intelligence business in
the US and we remain on track to deliver on the strategic and financial
returns outlined previously.
42
QinetiQ Group plc
Annual Report & Accounts 2023
Group CFO review
Overview of full year results
We have delivered strong growth and underlying performance.
Financial performance
(£m)
Revenue
Operating profit2
Profit after tax
(p)
Earnings per share
Full year dividend per share
Funded order backlog
Orders
Statutory results
Underlying* results
FY23
FY22
FY23
FY22
1,580.7 1,320.4 1,580.7 1,320.4
172.8
154.4
123.71
90.0
178.9
152.9
137.4
118.1
26.8
7.7
15.7
7.3
26.5
7.7
20.6
7.3
3,070.2 2,828.8
1,724.1 1,226.6
Net cash inflow from operations
240.6
215.11
270.1
220.71
Net (debt)/cash
(206.9)
225.1
(206.9)
225.1
* Definitions of the Group’s ‘Alternative Performance Measures’ can be found in the glossary
Prior year comparatives have been restated due to a change in accounting policy for
1
Research and Development Expenditure Credits (RDEC). See note 38 to the financial
statements for details.
2 Underlying operating profit refers to operating profit from segments.
See note 3 for details.
the Group has delivered excellent growth and underlying performance
across all metrics, reflecting continued disciplined execution of our
strategy. We have deployed our balance sheet to acquire Avantus
and Air Affairs in the year, expanding our capabilities in the US and
Australia. Strong cash generation, driven by disciplined working capital
management, with underlying cash conversion of 106% (FY22 restated:
113%), has successfully reduced leverage to 0.8x net debt to EBITDA,
well ahead of our original guidance. The acquisitions are performing
as expected with integration on-track. The Global Products segment
has performed particularly well during FY23, driven by strong US
performance. The full year dividend is up 5% at 7.7p per share.
Record orders in the year, totalling £1,724.1m (FY22: £1,226.6m), a year-
on-year 41% increase, 37% on an organic basis excluding the impact
of the write-down in prior year; this demonstrates the continued high
demand for our six distinctive offerings. This has been driven by multi-
year framework contracts including a £260m, 10-year extension of the
Maritime Strategic Capability Arrangement (MSCA) contract to deliver
critical sovereign capabilities to the UK MOD, £404m of Engineering
Delivery Partner (EDP) framework orders and £80m for SOCIETAS
within EMEA Services and in Global Products a $93m award for
the Digital Night Vision Technology (DNVT) over 4-years.
Strong underlying performance
and exceptional cash generation
provides strong momentum to
deliver our strategic ambition.”
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
43
We continue to see positive trends in our order book progression:
– Backlog: The Long-term Partnering Agreement (LTPA) is a large multi-
year contract that was booked in prior years – as we deliver non-tasking
revenue (of c.£225m per annum) this will naturally reduce the LTPA
order backlog. Outside of the LTPA, with our high orders in FY23 and
the addition of Avantus, our backlog has seen significant growth: total
order backlog as at 31 March 2023 was £3.1bn (FY22: £2.8bn).
– Opportunity size: As part of our previously stated strategy, we are
also seeing success in winning and delivering on larger longer-term
contracts, with 47% of our FY23 orders from contracts over £5m
in size, up from 28% three years ago.
At the beginning of FY24 approximately £1.1bn of the Group’s FY24
revenue was under contract, compared to £900m (of the FY23 revenue)
at the same point last year. This notable increase reflects the strong
performance on our key framework contracts in EMEA Services and
the good FY23 order intake in the US.
We delivered strong revenue growth of 20% to £1,580.7m (FY22:
£1,320.4m), 11% on an organic basis excluding the impact of the write-
down in prior year, with operating profit margins within our guidance
range at 11.3%, demonstrating increasing demand for our six distinctive
offerings. We saw a 10% organic revenue increase in EMEA Services
primarily due to a 37% year-on-year growth in EDP delivery and work
delivered under the Major Service Provider (MSP) contract in Australia.
Global Products revenue increased 15% organically excluding the write-
down in the prior year, due to the strong performance in the US business
with the full rate CRS-I production contract now underway following
delays due to COVID-related delivery and supply chain issues during
the previous year. Our Targets business also delivered good growth.
Operating profit from segments of £178.9m (FY22: £137.4m) was up
30%, this represents 11.3% operating margin (FY22: 10.4%), consistent
with our guidance range of 11-12% demonstrating sustainable revenue
growth at stable margins. Global Products was the largest contributor
to year-on-year growth, with this segment at double-digit margins, 10.4%
(FY22: 0.7%). The increase has been driven by strong performance
across the US business and the prior year being impacted by the
write-down. EMEA Services saw a modest decrease in operating
margin to 11.6% (FY22: 12.8%), driven by our investment in our
people, capabilities and tools.
Following a routine Financial Reporting Council (FRC) review of the
consolidated financial statements for the year ended 31 March 2022, the
Group engaged with the FRC which resulted in the decision to change
its accounting policy for Research and Development Expenditure Credits
(RDEC). We welcomed the FRC’s review and have set out the impact
of the change in accounting policy in note 20. As a result we are now
reporting RDEC under IAS 20 within underlying operating profit.
To ensure consistency and clarity on our headline profit figures, our
headline profit figure remains as Operating profit from segments and we
have determined that any benefit arising from the RDEC change should
not be attributed to segmental performance. Statutory operating profit,
as set out below, was £172.8m (FY22 restated: £123.7m), including the
impact of specific adjusting items and RDEC income.
Orders bridge (£ million)
41% total growth
37% organic growth
445.9
5.5
34.0
(10.4)
1,724.1
1,249.1
1,226.6
FY22
EmEA
Services
Global
products
Foreign
exchange
Acquisitions
& disposals
FY23
Revenue bridge (£ million)
20% total growth
11% organic growth
106.1
38.2
31.9
73.4
1,580.7
1.331.1
1.320.4
FY22
EmEA
Services
Global
products
Foreign
exchange
Acquisitions
& disposals
FY23
Underlying operating profit from segments (£ million)
30% total growth
12% organic growth
17.0
1.3
8.0
178.9
0.7
151.9
137.4
FY22
EmEA
Services
Global
products
Foreign
exchange
Acquisitions
& disposals
FY23
Impact of prior year write-down for comparison purposes
44
QinetiQ Group plc
Annual Report & Accounts 2023
Group CFO review continued
Underlying profit before tax increased 33% to £189.7m (FY22 restated:
£142.2m) in line with the increase in underlying operating profit, with
underlying net finance expense at £6.6m (FY22: £1.4m). Underlying net
finance expense increased due to the interest payable on the term loan
drawn down to fund the Avantus acquisition.
The acquisitions of Avantus and Air Affairs have together contributed
£91.1m revenue and £9.4m underlying operating profit in the year.
Since completion of the acquisitions, the businesses have continued
to perform as expected and integration is progressing on-track.
Specific adjusting items
In line with our previously approved policy, the total impact of specific
adjusting items (which are excluded from underlying performance due
to their distorting nature) on operating profit was a £23.5m cost (FY22:
cost of £19.9m). M&A activity during the year has contributed to the
overall level of specific adjusting items.
Acquisition, integration and disposal costs
Digital investment
Restructuring costs
Pension past service cost
Fair value in respect of contingent consideration
Release of RDEC MOD appropriation liability
Gain on sale of property
Impairment of property
Amortisation of intangibles assets arising from
acquisitions
Gain/(loss) on disposal of business
Pension net finance income
Total specific adjusting items gain/(loss) before tax
FY23
£m
(18.7)
(5.8)
(5.0)
–
–
19.6
2.0
–
FY22
£m
(5.0)
(1.9)
–
(2.4)
0.6
–
0.7
(1.2)
(15.6)
(10.7)
15.9
9.9
2.3
(0.9)
4.5
(16.3)
In line with our previously approved policy, the total impact of specific
adjusting items (which are excluded from underlying performance due
to their distorting nature) on operating profit was a £23.5m cost (FY22:
cost of £19.9m). M&A activity during the year has contributed to the
overall level of specific adjusting items.
Acquisition and integration costs of £18.7m (FY22: £5.0m) comprise
costs associated with the Avantus and Air Affairs acquisitions which
completed in FY23.
Restructuring costs of £5.0m have been incurred as part of significant
Group-wide organisation redesign completed in FY23 to better align the
organisation structure with future growth ambitions of the Company.
These restructuring costs have been completed in year to enable our
next step-change in growth.
We continue to deliver on our digital investment programme to modernise
the IT infrastructure to support our future growth ambitions. The non-
recurring costs will be reported as specific adjusting items in the P&L, with
ongoing recurring operating costs (such as licence costs and overheads)
remaining within underlying operating costs. In FY23 the non-recurring
cost of the digital investment programme is £5.8m (FY22: £1.9m).
In FY23 specific adjusting items includes a £19.6m credit in respect of
UK MOD appropriation for RDEC. Following a determination by the Single
Source Regulations Office (SSRO) on the interpretation of the Statutory
Guidance for Allowable Costs regulations (SGAC), the accounting
judgement is that RDEC on single source contracts from 1 April 2019
onwards will no longer be paid on to the UK MOD, which is a change
from the accounting judgement at FY22 year end. Therefore the release
of the liability is reported as a specific adjusting item through operating
profit.
Also included within specific adjusting items are a gain of disposal of the
Space NV business in Belgium of £15.9m, a gain on the sale of property
of £2.0m (FY22: £0.7m), financing income from pensions of £9.9m
(FY22: £4.5m) and amortisation of acquisition intangibles of £15.6m
(FY22: £10.7m), the last of which has increased due to the amortisation
of new intangible assets recognised on the FY23 acquisitions (primarily
the Customer Relationships asset associated with Avantus).
Tax
The total tax charge was £37.6m (FY22: £35.9m restated). The underlying
tax charge was £36.8m (FY22: £24.1m restated), on a higher underlying
profit before tax, with an underlying effective tax rate (ETR) of 19.4% for
the year ended 31 March 2023 (FY22: 16.9% restated). The underlying
effective tax rate is above the UK statutory rate primarily as a result of
higher tax rates in overseas jurisdictions.
In the Spring Budget 2021, the UK Government announced that from
1 April 2023 the corporation tax rate will increase from 19% to 25%. The
25% rate has been substantively enacted at the balance sheet date. An
adjustment was made in FY22 and a further £4.6m adjustment has been
made in FY23 to reflect that the revised UK deferred tax balances that are
expected to unwind at the new rate of 25%.
The effective tax rate is expected to remain above the UK statutory rate,
subject to the impact of any tax legislation changes and the geographic
mix of profits. The OECD has released model rules for Pillar II of the
Base Erosion and Profit Shifting regulations covering application of a
Global Minimum Tax. The Group is monitoring progress of these rules
and will engage with advisers to assess any potential future impact on
the tax charge.
RDEC was previously included as a tax benefit and included in the tax
line, reducing the ETR. Due to the change in treatment of RDEC, this has
moved it out of the tax line and into underlying operating profit, therefore
the headline tax rate has increased compared to prior year reporting
periods. As explained above, to be consistent with prior reporting the
RDEC benefit is not included in our headline reported operating profit
from segments, but is included in reported underlying operating profit.
For comparison and modelling purposes, if using operating profit from
segments the equivalent tax rate is 11.3% (not the headline 19.4% ETR).
With the increase in UK statutory rate, this 11.3% baseline ETR is expected
to increase to c.19% in FY24.
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
45
Cash flow bridge (£ million)
Strong cash generation
178.9
17.2
59.0
255.3
106% Cash conversion
11.9
2.9
270.1
(109.0)
161.1
Underlying
operating profit
from segments
RDEC
Depreciation &
amortisation
Underlying
EBitDA
Working
capital
movement
Other1
Underlying net
cash inflow
from operations
Capex
Underlying net
cash inflow
from operations
(post capex)
1 Other movements driven by share-based payments and pensions impacts.
Committed facilities
The acquisition of Avantus was financed using a combination of cash
and debt from a multi-currency floating rate Term Loan placed with our
relationship banks, acquisition financing totalled £340m. The Loan is
split into two Tranches: GBP Term Loan £273m (Tranche A); and, USD
Term Loan £67m (Tranche B), and has a 3-year term with two 1-year
extension options. Participating banks have lent on a 2-tier basis –
3-banks at £67m and 4-banks at £35m. In line with Group policy, £270m
(c.80%) of the floating rate debt has been fixed using SONIA interest
rate swaps split over a 3-year and 5-year tenure at a weighted average
rate of 3.29%. Including all fees and charges, the weighted average cost
of debt is 5.21%.
The Group has a £275m bank revolving credit facility with an additional
‘accordion’ facility to increase the limit up to £400m. The facility which
will mature on 27 September 2025 was undrawn at 31 March 2023
and provides the Group with significant scope to execute its strategic
growth plans.
We highlight that the Group adopts a strict policy on managing
counterparty risk through a combination of diversification of
investments and regular reviews of counterparty limits using credit
rating assessments. We are proud that our debt sits with our key
relationship banks who have strong credit ratings and diverse portfolios
demonstrating their resilience to the bank turmoil. The banks have
been selected for their capabilities in our home countries to support
our business.
Capital Allocation Policy
Working capital management and overall cash performance has
remained consistently strong. Underlying net cash flow from operations
was £270.1m (FY22 restated: £220.7m). Our cash conversion definition
reflects our pre-capital expenditure cash flows as a proportion of EBITDA
in order to demonstrate how we convert our profit (excluding interest, tax,
depreciation and amortisation) into cash flow – under this definition we
achieved underlying cash conversion of 106%, (FY22 restated: 113%).
As at 31 March 2023 the Group had £206.9m net debt (FY22:
£225.1m net cash), a transition into debt and a more efficient balance
sheet position, due to the strategic acquisitions completed in the
year and higher capital expenditure to support the Group strategic
growth ambitions. We have successfully reduced leverage to 0.8x,
within 4 months of the completion of the Avantus and Air Affairs
acquisitions, ahead of our original guidance by 12 months.
Through FY23 we have demonstrated our capital allocation policy
in action:
1. Organic and inorganic investment – increased capital expenditure
to £109.0m (FY22: £84.3m), focused on contractual commitments
(£44m into the LTPA), sustainment of the portfolio and investment
to support future growth. Inorganic investment to acquire Avantus
and Air Affairs.
2. The maintenance of balance sheet strength – continued discipline
and cash generative nature of the business model, further reinforced
by the strategic disposal of Space NV.
3. A progressive dividend policy with a proposed 5% year-on-year
increase.
4. Return of excess cash to shareholders – we continue to review this
element of the capital allocation policy in the best interests of all our
stakeholders to support long-term sustainable growth.
The Group is not subject to any externally imposed capital requirements.
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Annual Report & Accounts 2023
Group CFO review continued
Return on Capital Employed (ROCE)
In order to help understand the overall return profile of the Group, we
continue to report our Return on Capital Employed, using the calculation
of: profit from segments less amortisation / (average capital employed
less net pension asset), where average capital employed is defined as
shareholders’ equity plus net debt (or minus net cash).
For FY23 Group ROCE was 23% (FY22: 26%), modestly lower due to the
increased capital employed with the acquisitions completed in year. As
we continue to invest in our business to support sustainable long-term
growth our ROCE is forecast to remain attractive, at the upper end of
the 15-20% range.
Earnings per share
Underlying basic earnings per share increased by 29% to 26.5p (FY22:
20.6p) driven by the higher underlying profit after tax. Basic earnings per
share for the total Group (including specific adjusting items) increased
71% to 26.8p (FY22: 15.7p).
The average number of shares in issue during the year, as used in the
basic earnings per share calculations, was 575.9m (FY22: 573.2m)
and there were 578.8m shares in issue at 31 March 2023 (all net of
Treasury shares).
Dividend
The Board proposes a final FY23 dividend per share of 5.3p (FY22: 5.0p)
making the full year dividend 7.7p (FY22: 7.3p). 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 FY23
dividend will be paid on 24 August 2023 to shareholders on the
register at 28 July 2023.
Pensions
The key driver for the decrease in the net pension asset since 31 March
2022 was the turmoil in financial markets following the Government’s
‘mini-budget’ in September 2022, particularly a sharp increase in gilt
yields (and reduced gilt prices) which significantly reduced the value
of the Scheme’s Liability Driven Investments (LDIs) and related asset-
backed securities. Together with falls in other assets the reduction
across the whole investment portfolio was in excess of the reduction in
Scheme liabilities (which have also fallen substantially, due to an increase
in the discount rate). As with previous years, Aon have undertaken the
IAS19 valuation.
During the current financial year, due to the increased volatility in gilt
yields and reflecting increased liquidity requirements for Schemes
running LDI portfolios, the hedges have been amended to cover
approximately 65% of the interest rate risk and 80% of the inflation
rate risk as at 31 March 2023, as measured on the Trustees’
gilt-funded basis.
The key assumptions used in the IAS 19 valuation of the
scheme are set out in note 28.
Net finance costs
Net finance income was £3.3m (FY22: £3.1m). The underlying net
finance expense was £6.6m (FY22: £1.4m), increased due to the interest
payable on the Avantus funding borrowings, with additional income
of £9.9m (FY22: £4.5m) in respect of the defined benefit pension net
surplus reported within specific adjusting items. The pension net finance
income is calculated as a percentage of the opening net asset. In FY23
the opening net asset (£362.2m) was larger than the net asset at the
start of FY22 (£214.3m) generating an increase in the level of net finance
income. Similarly, the decrease in the net surplus within FY23 (closing at
£119.8m) will lead to a decrease in the pension net finance income in FY24.
Foreign exchange
The Group’s income and expenditure is largely settled in the functional
currency of the relevant Group entity, mainly Sterling, US Dollar
or Australian Dollar. The Group has a policy to hedge all material
transaction exposure at the point of commitment to the underlying
transaction. Uncommitted future transactions are not routinely hedged.
The Group does not hedge its exposure to translation of the income
statement.
Foreign exchange translation has provided a modest tailwind to
revenue and operating profit in the year. Most significantly, the US
Dollar has strengthened with the average exchange rate to Sterling
decreasing from 1.36 to 1.21. In FY23, 19% of our total Group revenue
was generated in the US. As a result of the strengthening US Dollar
and other FX movements in year, revenue increased by £31.9m and
operating profit increased by £1.3m. Looking ahead we expect US
revenues to represent 25-30% of Group revenues in FY24, so for every
1% move in the FX rate this would impact Group revenue by c.£5m and
Group profit by c.£0.5m.
Carol Borg
Group Chief Financial Officer
25 May 2023
Details of the Group’s tax strategy, treasury policy and approach to
managing currency risk and liquidity risk can be found in the Additional
Information section on page 230.
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Key performance indicators
Financial KPIs
The overall objective of our strategy is to deliver
sustainable growth, creating long-term value
for our stakeholders.
Our progress is measured by a range of financial and
non-financial key performance indicators (KPIs).
Measures such as orders, organic revenue growth, profitability
and cash flow track our financial performance. Similar indicators
are used to review performance in each of the Group’s business
units and, where relevant, are accompanied by indicators
specific to those business units.
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Orders (£m)
Backlog (£m)
1,724.1 (FY22: 1,226.6)
3,070.2 (FY22: 2,828.8)
Organic revenue growth (%)
12% (FY22: 5%)
FY23
FY22
FY21
£1,724.1m
£1,226.6m
£1,149.4m
FY23
FY22
FY21
£3,070.2m
£2,828.8m
£2,944.1m
FY23
FY22
FY21
5%
12%
10%
Description
This is the level of new orders and amendments to existing orders
booked in the year. This provides a measure of the Group’s ability to
sustain and grow QinetiQ. While some orders are booked and delivered
in-year, the level of orders booked in the year is one indicator of future
financial performance.
Performance this year
Orders in the year were £1,724.1m, up by 41%, or 39% on an organic
basis. EMEA Services grew by 49% on an organic basis driven by the
10-year MSCA extension. Global Products grew 10% on an organic
basis, driven by a $92m night vision technology order in the US.
Link to strategy
Order intake enables us to assess the effectiveness and execution of
our strategy which is designed to grow the Group. Order intake is used
as a metric for the Bonus Banking Plan, but for executive remuneration
purposes it is adjusted to exclude businesses acquired during the year.
Description
This represents the total future revenue currently on contract.
Increasing backlog demonstrates higher levels of confidence
on the ability to deliver on the stated future revenue targets.
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.
See glossary for definition.
Performance this year
Backlog increased to £3.1bn in the year. As the LTPA backlog naturally
decreases over the course of the contract, the level of backlog relating
to other contracts has increased showing a decreasing reliance on
the LTPA for Group revenue.
Link to strategy
Backlog allows us to assess the effectiveness and execution of
the Group strategy to move towards larger longer-term contracts,
increasing confidence in our long-term revenue guidance.
Performance this year
Revenue grew by 12% on an organic basis, driven by a strong
performance in EMEA Services where organic growth was 10%,
driven by ongoing EDP growth and new work under the MSP contract
in Australia. Strong recovery to growth in the Global Products business
saw revenue grow by 20%, organically driven by the full rate CRSI
production contract.
Link to strategy
Organic revenue growth demonstrates the Group’s ability to grow
market share and sources of revenue within its chosen markets before
the effect of acquisitions, disposals and currency translation. Delivering
long-term sustainable growth is critical to our success. Our organic
growth rate reflects the successful execution of a relevant and
consistent strategy.
Underlying operating profit (£m)*
178.9 (FY22: 137.4)
Underlying earnings per share (p)
26.5 (FY22: 20.6)
Underlying net cash flow from operations (£m)
270.1 (FY22: 220.7)
FY23
FY22
FY21
£178.9m
£137.4m
£151.8m
FY23
FY22
FY21
£26.5p
£20.6p
£22.1p
FY23
FY22
FY21
£270.1m
£220.7m
£199.0m
Description
The earnings before interest and tax, excluding all specific adjusting
items. See glossary for definition.
Description
The underlying earnings, net of interest and tax, excluding
all specific adjusting items, expressed in pence per share.
See glossary for definition.
Description
This represents net cash flow from operations before cash flows of
specific adjusting items and capital expenditure. See glossary for
definition.
Performance this year
Underlying profit increased by 30%, driven by the recovery in the US
with Global Products seeing a return to a 10.4% margin (FY22: 0.7%)
following the £14.5m complex project write-down in the prior year.
Performance this year
Underlying EPS increased by 29% (5.9p) to 26.5p due to the
strong revenue growth and improved profit margins.
Performance this year
Underlying net cash flow from operations was strong, growing 22%.
This reflects higher underlying operating profit and positive movements
in working capital.
Link to strategy
Underlying operating profit is used by the Group for performance
analysis as a measure of operating profitability. Specific adjusting items
are excluded because their size and nature mask the true underlying
performance year-on-year.
*
Definitions for the Group’s ‘Alternative Performance Measures’ can be found in the glossary.
Underlying operating profit refers to operating profit from segments. See note 3 for details.
Link to strategy
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.
Link to strategy
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.
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Key performance indicators continued
Non-financial
KPIs
We are committed to delivering responsibly and
sustainably for the benefit of all of our stakeholders.
Understanding measurements that give us insight into customer
satisfaction, health and safety, greenhouse gas emissions and
employee engagement help us enhance our performance
and are vital in ensuring our progress is sustainable.
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Customer satisfaction (Net Promoter Score)
Health and safety (LTI)
44 (FY22: 31)
1.20 (FY22: 2.05)
Early careers talent (%)
3.6 (FY22: 3.3)
FY23
FY22
FY21
31
44
49
FY23
FY22
FY21
1.20
2.05
2.67
FY23
FY22
FY21
3.6
3.3
3.3
Description
The Net Promoter Score is an internationally recognised metric
for customer satisfaction. The NPS 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.
Performance this year
Our score remains in the category of good, supported by our
continuous improvement approach to actioning customer feedback.
Link to strategy
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. This supports our ambition of becoming our
customers’ chosen partner in both our home countries and overseas,
which requires a relentless focus on meeting their needs. 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.
Description
The total percentage of our early careers community (apprentices,
graduates and sponsored students) of our global workforce. We have
been measuring this globally for two years, improving on a UK-only
KPI in FY21).
Performance this year
Our LTI decreased to 1.20 in FY23 from 2.05 in FY22. This ongoing
decrease is supported by our EHS Strategy and Safety Improvement
Programme.
See page 67 for more details.
Link to strategy
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. The safety, health and wellbeing of
our people are therefore intrinsically linked to our strategic success.
Performance this year
We continue to see investment in our early careers community
and programmes, with an increase in the early careers population
(3.6% in FY23 compared with 3.3% in FY22).
See page 71 for more details, including awards for our early careers
programme in Australia.
Link to strategy
As a knowledge-based business it is critical to our long-term
viability that we develop the next generation of employees.
Employee engagement (score out of 10)
Greenhouse gas emissions Scope 1 & 2 (tonnes CO2e)
7.4 (FY22: 7.1)
24,718 (FY22: 27,936)
FY23
FY22
FY21
7.4
7.1
7.3
FY23
FY22
FY21
24,718
27,936
29,444
Description
We use WorkDay Peakon, an employee engagement measurement tool,
which provides regular insights into how our people feel about working
at QinetiQ, enabling us to identify what we are doing well, but also
where we can improve and take action.
Performance this year
This year we continued to have good participation rates 69% and have seen
an increase in the overall score, 7.4 in FY23 compared with 7.1 in FY22.
See page 69 for more details.
Link to strategy
Employee engagement is a key part of sustaining our strategy. Having
an engaged workforce delivers increased productivity and retention.
Improving employee engagement is essential to creating a positive
culture within QinetiQ and aligns with our behaviour of “listen”.
Description
In 2022 we published our Net-Zero plan including new targets,
which includes a near-term target of 50% reduction in Scope 1 and 2
emissions by 2030 from a base year of FY20 (the full near-term
and long-term targets are shown on page 55).
Performance this year
We saw a decrease in our Scope 1 and Scope 2 emissions in FY23
compared with FY22, equating to a 30.5% reduction against our
FY20 base year.
See page 54 for more details.
Link to strategy
Setting a target and measuring and reporting our greenhouse
gas emissions is a key way to demonstrate our commitment to
addressing climate change and a critical part of our ESG strategy.
The KPI underpins our wider business performance.
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Sustainability
Environmental,
Social & Governance
Being part of QinetiQ means being central to the safety
and security of the world around us; because everything
we do is about protecting what matters most. In a year,
when we have seen conflict, unprecedented temperatures,
devastating floods, and a soaring cost of living, it is clear
that environmental, social and governance (ESG) aspects
matter to QinetiQ and to our stakeholders more than ever.
Highlights in FY23
– We have invested significantly to improve our employee
offering, increasing salaries, particularly addressing the lower
paid employees as well as setting up a hardship fund.
– Introduction of a new personal development fund for employees.
– Inclusion in the Sustainalytics 2023 Top-Rated ESG
Companies List.
– Validation of our greenhouse gas (GHG) emissions targets
by the Science Based Targets initiative (SBTi).
– 30.5% reduction of our Scope 1 and Scope 2 GHG emissions
against our FY20 baseline.
– Creation of a dedicated “ideation” channel for collaboration
and innovation to support our Climate Change programmes.
– Recognised as “Highly Commended” by the MOD Sanctuary
Awards, for achievements in conservation and sustainability
in relation to the renovation programme on St Kilda.
– Winner of Graduate Programme of the Year in the Australian
Defence Industry Awards for a second consecutive year.
– Received an Excellence Award for Best Graduate Development
Programme at the 2022 Australian HR Awards.
– Additional leadership support and governance for ESG
through the new ESG Steering Committee and the
new Environment Council.
Over the following pages, we report progress on
those areas of ESG we consider most important.
Signposting
Through this report we have also indicated where ESG is an
enabler for our business:
– Investment case (page 13) and strategy (page 17)
– Stakeholder focus (pages 22-27)
– Non-financial KPI (pages 50 and 51)
– Risk management (page 76)
– Non-financial information statement (page 88)
– Corporate Governance including ESG (page 92)
– ESG in leadership remuneration (page 138)
Additional information is provided on our website:
www.qinetiq.com/en/our-company/sustainability
ESG materiality
Sustainability and ESG encompass a broad range of aspects but
not all apply or are material to our Company, sector or communities,
so it is important that we are focused on what matters most to
support our business and meet the expectations and needs of our
stakeholders. Delivering our ESG strategy, based on key material
aspects ensures we are addressing risks and creating value for
our shareholders and customers, a great place to work for our
people and future workforce, protecting the environment and
having a positive impact in our communities.
The external landscape continues to move rapidly, with new reporting
requirements ahead and some additional focus areas. Climate change
continues to be a priority issue (both Net-Zero and climate resilience).
We have always had biodiversity as part of our ESG approach, and
have seen the external focus on this increasing, through the 2022 UN
Biodiversity Conference in Montreal (COP15), new government action
and interest from shareholders. A significant addition this year has been
to recognise the increased cost of living and the impact this has on our
people and communities, and we have sought to rapidly address this.
To ensure we understand future requirements, we actively horizon scan
providing monthly updates to the ESG Steering Committee, chaired
by our Group CEO, and updates as part of ESG reports to our Board.
Regular engagement with stakeholders is vital. Throughout the year, we
talk with shareholders, customers and employees about ESG so we are
able to listen, understand, and identify what matters most to them.
We also monitor and contribute to best practice through our active
role in industry sustainability working groups and networks. We strive
to be proactive, chairing the Sustainability Working Group with our
trade body (ADS), and co-chairing the UK MOD-Industry Sustainable
Procurement Working Group and the UK Defence Suppliers Forum
(DSF). We actively collaborate with customers and peers on topics
such as climate change, ethics, diversity and inclusion and skills.
We recognise the importance of supporting national and international
sustainability programmes and frameworks. We have our Net-Zero
targets validated by the Science Based Targets initiative (SBTi) (see
page 55), we support Race to Zero and also the UN Sustainable
Development Goals (SDGs) and remain committed to driving progress
on specific goals that are aligned to our sustainability agenda.
We believe that the core themes that we are focusing on are the
most material, and our approach is to embed ESG into our business.
Our approach to ESG governance is described on page 73. Our core
non-financial KPIs are on pages 50 and 51 and our principal risks on
page 76. In FY24 we will be spending time reviewing all of the new
reporting requirements e.g. the International Sustainability Standards
Board (ISSB) and associated frameworks such as the Sustainability
Accounting Standards Board (SASB) to ensure that we are able to clearly
explain how we manage sustainability, how we understand our material
aspects and how these are embedded as part of our business strategy.
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Our ESG
framework
Our purpose
Protecting lives and securing
the vital interests of our customers
Our ESG framework
We have a clear framework and focus to deliver change in the three areas of ESG
Environmental
Social
Governance
Material aspects
Material aspects
Material aspects
– Climate change – Net-Zero
– Climate change resilience
– Sustainable solutions for customers
– Environmental management
– Waste and resources
– Conservation and biodiversity
– Health, safety & wellbeing
– Employee engagement
– Diversity and inclusion
– Learning and development
– Reward and recognition
– Human rights/modern slavery
– Community impact
– Business ethics and Code of Conduct
– Anti-bribery and corruption
– Ethical trading policy
– Sustainable procurement
– Leadership ESG remuneration
Creating a safe and secure environment for us all to thrive
Our values demonstrate our purpose and ESG framework in action
Our values
Integrity
Collaboration
Performance
ESG fully supported by the QinetiQ
Leadership Team and Board.
Industry engagement and leadership.
Multidisciplinary internal collaboration.
MSCI AA rating and included in Sustainalytics
2023 Top-Rated ESG Companies List.
We deliver safely, responsibly and sustainably
for the benefit of all our stakeholders
54
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Annual Report & Accounts 2023
Sustainability continued
Environmental
In FY23 the world saw devastating floods and
the UK experienced the hottest temperatures on
record. In addition to the threat of climate change,
the UN Biodiversity Conference (COP15) amplified
growing concerns about the significant loss of
biodiversity. Within this context, environmental
stewardship has never been more important. We
actively play our part, reducing our greenhouse
gas emissions, through our conservation activities
and by the solutions we provide for our customers
to meet their sustainability ambitions, while
maintaining defence capability.
Climate change
During FY23 we formalised our Climate Change Programme, directly
engaging with all areas of the QinetiQ Group to embed the Net-Zero plan
that we developed in FY22, and to instigate the necessary operational
changes that will support future reductions in our GHG emissions. In this
section, we outline some of the activities and projects that have already
been delivered, as well as those that we will be embarking on in FY24
and beyond.
In addition, we provide our disclosures in line with the Taskforce on
Climate-Related Financial Disclosures (TCFD) recommendations.
Scope 1 and 2 of our GHG emissions form one of our non-financial KPIs
(see page 51).
Transition to Net-Zero
Our GHG emissions reduction targets, (shown in the table on the right),
will be achieved through the four initiatives that underpin our Net-Zero
plan, and we have shared details of activities completed this year in the
table on pages 58-59, along with examples of planned activities for FY24
and beyond. These represent not only work streams and projects that will
deliver direct reductions in emissions within Scope 1, 2 and 3, but also the
fundamental shift required in our governance, operations and culture to
enable us to adopt a Net-Zero approach that becomes business as usual.
Validation of our Net-Zero targets
In FY22 we revised our previous approach to setting GHG emissions
reduction targets, incorporating sources of emissions from across our
value-chain (Scope 1, 2 and 3 emissions) and we published our Net-Zero
plan. These targets, and our supporting methodologies, were reviewed
by the Science Based Targets initiative (SBTi), and subsequently fully
validated in early FY23. This can be found on the SBTi website:
https://sciencebasedtargets.org/companies-taking-action
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SBTi confirmed that our targets are ambitious, and that we were one
of the first companies to have set near-term, long-term and Net-Zero
targets (one of the first companies headquartered in the UK, and the
first Aerospace & Defence company).
FY23 represented the foundation year of our Net-Zero plan, to develop
and drive the initiatives that will deliver reductions in our GHG emissions.
Scope 3 emissions
We have been capturing, measuring and reporting Scope 1
and Scope 2 GHG emissions data for many years. But like many
organisations, we have only recently started capturing Scope 3 data.
For the first time we have published our full breakdown of GHG
emissions across all 15 Categories of Scope 3, on our website.
www.qinetiq.com/en/our-company/sustainability/climate-change/
net-zero
We use the Greenhouse Gas Protocol, a widely accepted methodology.
Because of the range of different category emissions, Scope 3 data
capture is challenging. We are using a spend-based methodology
for categories where we do not currently have access to accurate
emissions data and as a result our Scope 3 emissions are dominated
by our purchased goods and services. We recognise the importance
of working with our supply chain and further improving and developing
our data analysis to move away from a spend-based approach. We
also need to better align the timing of Scope 3 data capture (currently
several months after Scopes 1 and 2, due to the expertise and resource
required, creating a lag in reporting). Our Scope 3 emissions recorded
for FY22 were 269 kt CO2e, an increase compared with the previous year
(229 kt CO2e), primarily due to increased spend with suppliers, driven
by corporate growth. Since our first data capture, we have reviewed and
revised our process of GHG emissions data collection, allowing us to
build greater confidence in the scale and source of our current footprint,
through more detailed collaboration and information gathering from all
parts of QinetiQ Group. This will be a significant and ongoing process
and we aim to be transparent in our approach where improvements are
made, particularly where a change in the emissions reported is due to
the calculation methodology and not due to a real reduction/increase.
Scopes 1&2
Scope 3
Total
Base year
-50% absolute reduction
Net-Zero
Base year
-30% absolute reduction
Net-Zero
Base year
-33% absolute reduction
Net-Zero
Net-Zero targets
Timeframe
FY20
FY30
FY50 or sooner
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Annual Report & Accounts 2023
Sustainability continued
Scope 1 and Scope 2 emissions
Total Scope 1 emissions (tCO2e)
Total Scope 2 emissions (tCO2e)
Total Scope 1 and 2 emissions (tCO2e)
Intensity ratio (tCO2e per £m of revenue)
Energy consumption (kWh) resulting in the above reported emissions
Proportion of energy consumption arising from UK operations (%)
Proportion of emissions arising from UK operations (%)
FY23
13,360
11,358
24,718
16
FY22
15,727
12,236
27,936
21
FY21
15,872
13,572
29,444
23
FY20
19,289
16,298
35,587
33
114,809,565
125,261,565
122,808,625
139,780,656
96%
95%
98%
98%
99%
99%
98%
98%
In line with previous years, GHG from acquisitions are not included in our figures until we have a full year of data, but will be reported in future submissions when we have completed the necessary
data capture, analysis and assurance.
In line with reporting requirements, in the table above we have
published our Scope 1 and Scope 2 emissions and intensity metric.
We have adopted a financial control approach, used the GHG Protocol
Corporate standard and UK Government emission conversion factors.
PricewaterhouseCoopers LLP (PwC) carried out a limited assurance
engagement on selected GHG emissions data for the year ended 31
March 2023 in accordance with International Standard on Assurance
Engagements 3000 (revised) and 3410, issued by the International
Auditing and Assurance Standards Board. The figures covered by this
assurance process are indicated in the table by the following symbol ( ).
A copy of PwC’s report and our methodology is on our website:
www.qinetiq.com/en/our-company/sustainability/climate-change
Scope 1 and Scope 2 GHG emissions form one of our non-financial KPIs
(page 51). We are pleased to report a further reduction in our Scope 1
and Scope 2 emissions in FY23, equating to a 30.5% reduction from our
FY20 baseline, against our target of 50% by FY30. During FY23 we made
two acquisitions (Avantus and Air Affairs) and resulting emissions will
be included in our FY24 report when we have a full year of data.
To meet the Streamlined Energy and Carbon Reporting (SECR)
requirements, we also present our energy performance in the table
above (identifying the proportion that is for the UK) and the following
are examples of energy reduction projects in FY23:
– Installation of electrical sub-meters at key UK sites, to enable
the gathering of more accurate energy usage data to assist in the
identification and reduction of energy consumption. A number of
installations have taken place (at our Malvern and Haslar sites
and at MOD West Freugh) and further sites have been surveyed.
– LED lighting has been installed in our Haslar, Malvern and Portsdown
Technology Park sites and planning is underway for further sites.
– Reviewing our data has allowed us to identify and address anomalies.
For example at the MOD Loch Goil site an unexpected increase in
consumption was attributed to an incorrectly controlled heating unit.
– Preparation for installation of new Photovoltaic (PV) power solutions
across UK sites, to enable greater self-generation of renewable energy.
– Installation of Telematics systems in UK corporate fleet vehicles, to
identify usage patterns and opportunities to rationalise our corporate
fleet, supporting a transition to low-emission vehicles.
– Changes to air-traffic control procedures, with the introduction of
performance-based navigation approaches and revised continuation
training for pilots to reduce requirements for flying time and so reduce
consumption of jet fuel.
– Procurement of new electric aircraft tugs to replace diesel units, and
procurement of lower-emission diesel ground power units and a new
low-emission diesel runway sweeper vehicle.
A more comprehensive list of the activities that have been delivered in
FY23, and planned activities for FY24 and beyond, can be found in the
table on pages 58 and 59. These directly support our Net-Zero plan.
Stakeholder engagement on climate change and sustainability
We have seen an increasing interest and focus on climate change from
all stakeholders. We have been actively participating, sharing knowledge
and best practice, in a number of cases leading and driving engagement
across our industry and business community, for example as Industry
Co-Chair of the Defence Suppliers Forum (DSF) (see page 52). We have
also been engaging with our supply chain, via our industry working groups.
We continue to see an increase in climate change being included
within customer requirements (for example we now annually publish
a Carbon Reduction Plan on our website to meet UK PPN 06/21), and
through social value requirements. As well as mandatory reporting we
participate in voluntary climate change reporting, for example CDP (the
Carbon Disclosure Project) and recognise there will be more reporting
obligations in all of the geographies in which we operate. We will
continue to monitor and review these evolving requirements, engage
with shareholders and work closely with our customers and suppliers
to ensure that we meet our obligations and stakeholder expectations.
Our employees show significant interest in climate change and regularly
pose questions to leaders as part of our Global Employee Roadshow. We
included a question on climate change in our Peakon employee survey
in July 2022: “I would like to do more to help QinetiQ reduce its impact
on climate change”. The question scored 7.7 out of 10 (higher than the
average score) and there were over 1,100 comments and suggestions.
The survey has been valuable in informing our programme and also
how we communicate.
We have launched a new Net-Zero channel as part of our “IdeaXchange”
to make sure employees are able to create and collaborate on ideas
and we are able to capture any suitable ideas into our plan. We have
launched a new sustainability lunch and learn series, offering employees
the opportunity to learn from internal and external speakers on a range
of topics. We also use World Environment Day as an opportunity to
engage with our teams through various virtual events. We ran our
third “December Climate Change Challenge” campaign to promote
how we can all contribute to tackling climate change.
For our leaders, we launched an engagement process to discuss their
role in delivering the Net-Zero plan. This included an in-depth interview
programme, led by our Human Factors team who are experts on culture
change. We also introduced Net-Zero as part of the leadership incentives
(see page 73) and have refined this for FY24 (page 138).
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CASE StUDY
Vision 2050
sustainability
competition for
our early careers
community
We launched our first sustainability competition
for our global Early Careers community, asking
them “how do you see QinetiQ in 2050?”
Supported by a series of sustainability and
innovation workshops and mentors from our
QinetiQ Fellows community, the teams developed
a range of solutions considering biodiversity,
renewable energy and culture.
8 teams, 66 ideas
Read more about our Net-Zero
programme pages 58 and 59
It is exciting to see the range
of great ideas from our people
through the ideaXchange and
the Vision 2050 competition,
providing platforms to
showcase our diversity.”
Carol Borg, Group CFO
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Sustainability continued
Net-Zero pathway initiatives
QinetiQ’s Net-Zero GHG Emissions reduction programme: activities delivered to date and future plans
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Achieving Net-Zero
Contributing to Global Net-Zero
net-Zero Operations
(Scope 1 and 2 GHG emissions)
initiative
01
net-Zero upstream
and downstream focus
(Scope 3 GHG emissions)
initiative
02
Deliver critical internal and
industry-wide enabling activities
initiative
03
Co-create with customers,
invest in research and development
and care for the environment
initiative
04
Completed in FY23
Completed in FY23
Completed in FY23
Completed in FY23
– Elimination of Sulphur Hexafluoride (SF6) from Flash X-ray equipment.
– Internal stakeholder mapping, to identify and engage with Scope 3 data
– Inclusion of Net-Zero into the non-financial component of all senior
– Secured contracts with key customers for delivery of Net-Zero planning
– Preparation for installation of new Photovoltaic (PV) power solutions
owners from all areas of the business.
leaders’ incentive scheme.
and strategy development.
across UK sites.
– Installation of new electrical sub-meters at key UK sites.
– First phase of installation of new Electric Vehicle (EV) charging units
across UK sites.
– Installation of Telematics systems in UK corporate fleet vehicles.
– Changes to air-traffic control procedures with the introduction of
performance-based navigation approaches, and revised continuation
training for pilots.
– Efficiency improvements to our aircraft, for example through a weight-
reduction programme.
– Procurement of new electric aircraft tugs, lower-emission diesel ground
power units and lower-emission diesel runway sweeper vehicle.
– A range of energy efficiency improvements across our operations,
for example through digital transformation projects.
– Analysis of supply chain data, providing greater understanding of our
emissions associated with purchased goods and services.
– Significant employee engagement and raised awareness through
– Secured agreement for additional funded Net-Zero research and concept
briefings, blogs, webinars, and Peakon Survey.
development through our LTPA contract.
– Improved inclusion of environmental considerations within investment
– Creation of a dedicated idea generation channel for collaboration and
– Recognised by the UK MOD Sanctuary Awards for achievements in
decisions, including mergers and acquisitions.
innovation around climate change.
– Review of existing Business Travel policy and provider, and identification
– Early Careers Sustainability competition, to drive engagement and
of areas for improvement to reduce emissions.
gather insight.
conservation and sustainability in relation to the renovation programme
on St Kilda. The programme was Highly Commended in the Sustainable
Procurement and Construction category.
– Engagement with Business Development teams and internal product
owners, to identify and calculate emissions data associated with
sold products.
– Developed a Carbon Calculator Tool, to visualise the carbon footprint of
activities, projects, and investment opportunities.
– Continued to play an important role on stakeholder steering committees
and action groups, for example the Defence Suppliers Forum (DSF),
ADS and TechUK.
Planned for FY24 and beyond
Planned for FY24 and beyond
Planned for FY24 and beyond
Planned for FY24 and beyond
– Comprehensive plan for the removal of fossil fuels from our operations.
– Development of a hybrid approach to reporting Scope 3 emissions,
– Improved training for all employees and leaders, providing greater focus
– Launch new IRAD (Internal Research and Development) approach for
– Installation of new renewable power generation solutions across
moving away from current spend-based methodology for key categories.
on environmental issues.
sustainable solutions.
UK sites.
– Greater engagement across our supply chain, targeting emissions from
– Development of an improved emissions reporting toolset, to enable
– Continue to work closely with all customers to support their
– Installation of additional electrical sub-meters, to provide
greater granularity on our energy consumption.
– Trial of high-capacity energy storage solution, to capture
energy generated by on-site, renewable power systems.
– Installation of additional EV charging units across UK sites.
– Sustainable Aviation Fuel (SAF) pilot project, to help guide
a future adoption of SAF across our aviation activities.
– Phased rationalisation of our UK corporate vehicle fleet,
with a transition to low-emission vehicles.
purchased goods and services.
enhanced forecasting capabilities.
Net-Zero journey, for example as part of the LTPA.
– Design of a new travel strategy, reviewing and reducing emissions
associated with business travel and commuting.
– Greater engagement with corporate estate management teams
outside of the UK, to review options for reducing emissions
associated with leased assets.
– Embedding of environmental impact criteria into investment approvals,
– Undertake a review of our portfolio of solutions and explore
technical assurance processes, and project reporting metrics.
new opportunities.
– Development of a revised waste strategy.
– Development of a detailed Climate Transition Plan, in compliance with
the Transition Plan Taskforce (TPT) guidance, building on our existing
Net-Zero plan to further outline our strategy to contribute to and
prepare for a global transition towards a low-carbon economy.
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Sustainability continued
Sustainable solutions for customers
QinetiQ are supporting DE&S to deliver their Net-Zero strategy,
starting with a Discovery Phase regarding plans to purchase more
resilient and lower emission military capability. Working with Front
Line Commands, DE&S and supplier groups, we have reviewed
existing Acquisition and Support mechanisms, delivered a high-
level overview of the data requirements for a new approach to
carbon management and developed a comprehensive stakeholder
engagement plan. These, combined with our advice on culture,
behaviour, data, process and business change provide a strong
foundation for meeting the MOD Net-Zero strategy. This work is
being delivered through the Aurora Engineering Partnership.
Environmental management
We seek to deliver responsibly and sustainably for our customers,
protecting the environment, enhancing biodiversity and minimising
our GHG emissions. Our approach is underpinned by ISO 14001
certification in the UK and Canada. We have launched a new
Environment Council, where Functional and Sector leaders come
together to communicate, review and agree on issues, actions and
standards of best practices that are enterprise-wide and/or have
operational significance. Environmental matters are also reported
to and reviewed regularly by the Board. (Also see page 88).
We have refreshed the environmental content of our mandatory
training for employees and engaged and communicated with our
people, to promote environmental stewardship (see page 56).
Waste management
Our waste target is to increase the annual proportion of UK waste
that is re-used and recycled from our underlying waste production.
The sites that produce significant waste (approximately 95% of the
total) have waste management action plans. We met the FY23 waste
target, with 87.1% of underlying waste re-used or recycled (compared
with 82.7% in FY22). Waste contributes to our Scope 3 emissions
and so forms part of our Net-Zero plan and we will continue to look
at how we can drive improvements.
Conservation and biodiversity
During FY23 there has been a global focus on biodiversity following
COP15. Climate change is having an impact on habitats and we
know that responsible stewardship of the sites we manage can
contribute to biodiversity. We continue to support operational
delivery while protecting flora and fauna, for example:
– The rare, protected fen orchid has been rediscovered in the dunes
at MOD Pendine after 20 years. This species needs open, scrub-free
conditions and recent conservation work at the site has promoted this.
– Assessment and mitigation of underwater noise impacts on marine
mammals have enabled complex activities to take place such as
Exercise Atlantic Thunder at MOD Hebrides.
– Approvals have been obtained for seabed infrastructure
reinstatement within a Marine Protected Area at MOD Loch Fyne.
– An area has been identified for turtle dove conservation activity
at MOD Shoeburyness. Turtle doves are the fastest declining bird
population in the UK.
– Protection and monitoring of the great crested newt, a European
protected species, during ongoing restoration of a previously
contaminated site at MOD Eskmeals.
We were delighted to have been recognised by the MOD Sanctuary
Awards for achievements in conservation and sustainability in relation
to the renovation programme on St Kilda in the Outer Hebrides. The
project was Highly Commended in the Sustainable Procurement and
Construction award category.
In FY24 we will continue to focus on environmental stewardship
programmes, building greater connection with our Net-Zero
plan. We will be reviewing policy and further improving training,
awareness and environmental volunteering to engage our people.
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Taskforce on Climate-related
Financial Disclosures
We are committed to reducing our greenhouse gas emissions and
ensuring that our business is resilient in a future climate-changed world.
Our transition to Net-Zero requires us to proactively evolve and change
as the world around us decarbonises, and experiences the physical
impacts of climate change. We published our Net-Zero plan where we
have committed to near-term and long-term targets to reach Net-Zero
across our value chain by 2050 from a FY20 base year. Our targets
have been validated by the Science Based Targets initiative. FY23
formed our foundation year and we have made good progress.
The Financial Stability Board’s Taskforce on Climate-related Financial
Disclosures (TCFD) recommends a reporting framework across four
overarching themes (governance, strategy, risk management and
metrics and targets). In line with the Financial Conduct Authority (FCA)
Listing Rule 9.8.6(R)(8), we provide our disclosures here, consistent
with this framework, plus links to where further detail is provided in this
document and on our website. We are committed to implementing this
approach to provide investors and other stakeholders with information
on climate-related risks that are relevant and material to our business.
As best practice and guidance advances, we will actively seek to
refine our reporting over time.
Compliance statement
We believe our approach is consistent with 10 of the 11 TCFD
recommendations. In FY24 we will be focusing on further developing
the quantitative aspects of our financial modelling. We will be reviewing
our scenario modelling and seeking to refine our targets as our climate
resilience approach progresses and evolves.
Governance
Disclose the organisation’s governance around climate related-risks
and opportunities
TCFD recommended disclosures:
Additional information
a) Describe the board’s oversight
of climate-related risks and
opportunities
Page 97: Board Directors
Page 138: Remuneration
Committee
b) Describe management’s role
in assessing and managing
climate-related risks and
opportunities
Page 128: Audit Committee
Page 80: Risk Management
Page 73: ESG Governance
Page 138 Leadership incentives
Page 56: Leadership engagement
Page 88: Non-financial information
statement
The QinetiQ Board has overall responsibility for our ESG approach and
climate change forms a core part of this agenda. It has oversight of
the risks and opportunities resulting from climate change, and this is
considered as part of our strategy. Our Group CFO Carol Borg is the
Board Sponsor for the wider ESG programme, including climate change.
She has extensive ESG experience (see page 97). Both the Group CFO,
and our Group Director of ESG provide regular reports and briefings on
ESG and climate change to the Board and key Board Committees.
Board meetings:
•
In October 2022, climate change formed part of the Board’s
strategy day with a session led by the Group CFO to provide an
update on progress and to discuss plans, including a focus on data
in FY24.
In July 2022 and in January 2023 we provided updates on progress
and plans of the climate change programme.
•
Audit Committee
•
In March 2023 an update on non-financial reporting including TCFD
was presented.
Remuneration Committee
•
Overseen by the Remuneration Committee, in FY23 we launched
a new climate change goal as part of the non-financial collective
goals for our leadership community. During FY23 the focus on
climate change has evolved and strengthened as part of the
FY24 Annual Bonus Plan for leaders (page 138).
In 2022 we created a new ESG Steering Committee, Chaired by the
Group CEO, to provide oversight, leadership and scrutiny of our ESG
commitments and initiatives across the Group including performance
against our Net-Zero Plan. The Committee meets monthly and includes
the Group CFO, Group Director of ESG and members of the QLT.
Leadership and delivery of the climate change programme are
the responsibility of the Group Director of ESG, who reports to the
Group CFO. The Climate Change Steering Group includes leaders
and subject matter experts from across the business in key roles,
ensuring we take the necessary multidisciplinary approach. The
regular programme reviews and meetings create a senior forum for
developing and implementing strategy and plans and for reviewing
risks and performance. The Group CFO has oversight of the
programme and reviews progress and plans.
In FY23 we created a number of new Functional Councils to support
good governance across our business, where Functional leaders
come together to communicate, review and agree on issues, actions
and standards of best practice that are enterprise-wide and/or have
operational significance. Relevant to our climate change programme
are the Environment Council and the Risk and Assurance Council; the
former is chaired by the Group Director of ESG and she is a member of
the latter. As the councils mature, they will help to ensure that climate
change is embedded in our risk and governance approach. Also that our
governance structure, and oversight of policy and strategy for climate
change is consistent (eg aligned with our Finance Council). In FY24
we will be strengthening inclusion of climate change in sector and
functional performance reviews with the Group CEO and Group CFO.
As part of the introduction in FY23 of climate change into our leadership
incentive scheme, we undertook a widespread engagement approach
to working with senior leaders across the business to identify their
role in tackling the risks and opportunities associated with climate
change (page 56). This ongoing engagement and involvement by
leaders strengthens our commitment and underpins our leadership
engagement, oversight and governance.
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Sustainability continued
Taskforce on Climate-related Financial Disclosures
continued
Strategy
Disclose the actual and potential impacts of climate-related risks and
opportunities on the organisation’s businesses strategy, and financial
planning where such information is material
TCFD disclosures:
Additional information
a) Describe the climate-related
risks and opportunities
identified over the short,
medium and long term
Page 80: Climate Change risk
Page 17: Strategic framework
Page 53: ESG framework
b) Describe the impact of climate-
related risks and opportunities
on QinetiQ’s business, strategy
and financial planning
c) Describe the resilience of
QinetiQ’s strategy, taking into
consideration different climate-
related scenarios, including a
2°C or lower scenario
Pages 50-51: Non-financial KPIs
Pages 54-59: Net Zero plan
Page 59: New IRAD funding
Pages 52 and 56: Industry
partnerships
Page 84: Viability statement
Climate change is a significant global issue and considerations for
businesses include physical risks (with factors such as flooding
and extreme weather events), and transition risks, which are related
to the transition to a lower-carbon economy, such as policy or
regulation change and changing markets. During FY23 we have seen
unprecedented temperatures in the UK, devastating floods in Pakistan,
a significant increase in energy prices due to the conflict in Ukraine,
emerging reporting requirements on business and an increase in focus
by our customers. It is important that we understand where these types
of issues are material to our business.
In FY22 we undertook a Group-wide qualitative climate change risk
review of our operations, our supply chain and our work for customers
and considered how this could impact cost, revenue and asset value.
We have considered the medium (2030) and longer term (2050).
We considered risks site by site, to consider geographical and regional
variation, reflecting different locations and also different business
operations (for example delivering trials, managing our estate, our supply
chain). We identified that our business is exposed to both physical and
transitional risks (before mitigation activities) and opportunities which
are listed in the table on page 63.
Other issues were considered (for example, the impact on reputation)
but were less material. We will continue to review our risks and
opportunities as the external landscape and our business evolves
over time and we will also refine our approach and look to create
a quantitative approach and will report further information as
this develops.
impact on strategy and planning
These aspects are included in our principal risks on page 80 and a
description of our risk management approach is on page 75. As part
of our regular risk review, we do not believe these risks have materially
changed. We recognise this is not a one-off exercise and have been
focusing this year on how we ensure that we build the “business
as usual” mechanisms, to ensure that we understand the risks,
understand the impacts and can ensure we are resilient.
Our commitment to ESG and sustainability is part of our strategic
framework (see page 17) and GHG emissions are one of our core non-
financial KPIs (see page 51). ESG and climate change are embedded
in our Integrated Strategic Business Plan (ISBP) process. In FY22 we
developed and published our Net-Zero plan (see our full Net-Zero plan:
www.qinetiq.com/en/our-company/sustainability/climate-change/
net-zero) and FY23 has formed our foundation year of this
programme (a detailed review is provided on pages 54-59).
In FY23, as part of the preparation of the ISBP, we strengthened
our articulation of climate change to ensure we understand how
accountability lies across the whole of the Group. This included
a dedicated session on climate change as part of the Board’s
strategy day. We have revisited how we manage opportunity
and risk management as part of the strategy.
We are driving our Net-Zero plan and will continue our investment in
our initiatives detailed on page 58-59 as well as addressing the need
for greater horizon scanning and reporting and we have set up a new
IRAD (Internal Research and Development) fund for FY24 to support
sustainable and Net-Zero innovation ideas. We continue work to refine
how to quantify the financial risks of climate change and will continue
to develop this as part of our climate resilience programme, focusing
on risks and mitigations. We have been developing an approach to
introduce an internal cost of carbon that will be used in business
cases and acquisitions. We will be further focusing on quantifying
the growth potential of customer solutions, currently a relatively
small part of our capability portfolio, but with recognised potential.
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type of risk
Physical
Physical
Transition risk
Increasing number
or increasing severity
of extreme weather
events causing
disruption to
supply chain.
Emergence of
new regulation.
Opportunities
New products
and services.
Cause
Risk effect (unmitigated)
Scenario and timescale
mitigation
Increasing number
or increasing severity
of extreme weather
events or flooding
affecting sites.
May result in damage to
infrastructure, which could
disrupt operations on our estate
and those sites we manage on
behalf of our customers.
The likelihood and severity of
these events is likely to increase
in the medium and long term,
particularly under the rising
emissions scenario.
Risk assessments for our sites
to identify any vulnerability to
extreme weather or flooding
events. Building climate resilience
into business continuity planning.
Depending on the scenario, the
likelihood and severity of these
events is likely to increase in
the medium and long term,
particularly under the rising
emissions scenario.
This will be potentially more
likely for scenarios where global
decarbonisation is more rapid.
Short to medium term, may
increase in all scenarios.
May impact the ability of
our supply chain to meet
requirements, thereby causing
disruption to operations or
customer delivery.
Across all of the territories in
which we operate, we may be
subject to greater regulatory
requirements (for example
increases in reporting) or carbon
(GHG) pricing, which may result
in additional costs, the need for
additional resources or the failure
to meet requirements.
The global transition to a low-
carbon economy may create
opportunities for us to innovate
for our customers, and increase
revenue from current or future
low-carbon solutions (products
or services).
Risk assessment of supplier
categories. Building climate
resilience into business
continuity planning.
Monitoring of emerging
policy and regulation to
inform business planning (e.g.
recognition of future reporting
requirements is included in
our long-term strategic plan).
Reduction in emissions reduces
our exposure to carbon pricing.
Maintaining customer
intimacy to understand
future requirements. Regular
engagement through industry
working groups to understand
and share best practice.
Development of “sustainable
solutions” portfolio and
introduction of new IRAD fund.
Climate scenarios
While it is unequivocal that the climate is changing, the precise trajectory
is dependent on the influence of activities in the past, the global action
taken now and in the coming years and the rate at which that action is
taken. To guide our strategy and planning, it has been helpful to consider
different scenarios which reflect that the transition to a decarbonised
world may take different pathways, with different outcomes.
• low (<2°C) strongly declining emissions: Intensification of
decarbonisation action resulting in increasing and rapid transition,
with more limited physical impacts.
• middle (2-4°C): stabilising/slowly declining emissions: Physical
risks continue and transition risks continue to increase.
• High (>4°C): Rising emissions: Failure to address climate change
results in high physical risks with more limited transition issues.
In FY22, we undertook our first scenario-analysis to assess the
potential impact of climate change on our business and consider
different possible futures. We used the scenarios above, based on the
Representative Concentration Pathways (RCPs), which are used by the
Intergovernmental Panel on Climate Change (IPCC). We considered
two time horizons (2030 and 2050) so we were aligned with our Net-
Zero targets and used a variety of data sources. We plan to review this
approach regularly.
Climate change implications were considered through the FY23
ISBP process. A climate change event (a significant flood at a critical
site) was selected as one scenario for financial modelling as part of
the broader scenario impact assessment of our ISBP. The findings
were presented at the March 2023 Audit Committee to inform the
consideration of the recommended longer-term viability statement and
going concern statement disclosures (see page 84). Through the ISBP
process we have also identified potential business growth opportunity
due to the climate change imperative that we share with our customers.
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Sustainability continued
Taskforce on Climate-related Financial Disclosures
continued
Risk management
Disclose how the organisation identifies, assesses and manages
climate-related risks
TCFD disclosures:
Additional information
Page 80: Strategic risk
management
Pages 58-59: Net-Zero plan
Page 60: Environment Council
a) Describe the organisation’s
processes for identifying and
assessing climate-related risks
b) Describe QinetiQ’s processes
for managing climate-
related risks
c) Describe how processes for
identifying, assessing and
managing climate-related
risks are integrated into
the organisation’s overall
risk management
identifying risk
In line with TCFD recommendations, our risk assessment approach
addresses both physical risks and transition risks. In FY22, to identify
key risks and opportunities, we undertook a review of best practice and
guidance and ran briefing sessions and workshops with key internal
stakeholders, to explore what would be relevant to QinetiQ operations.
In FY23 we have been reviewing and refining our risks to ensure that
our assessments are current and that we are embedding these as
business as usual. For physical risks we considered these primarily by
site, and also considered issues such as our supply chain and business
delivery. A range of potential risks have been identified (for example
where there may be increased flood risk) and captured. We recognise
that this needs to be a continuous process as there may be change
either due to new emerging information or changes to our business
(e.g. use of site, supplier, etc). As part of our day to day management
of our site operations, we are familiar with the physical risks posed and
have a good understanding of suitable mitigations. In FY23 we surveyed
our site teams to explore if they were observing new issues or had
experienced significant events; no material issues were identified.
To assess transition risks we undertake horizon scanning to identify
any relevant changes. We have used a variety of sources of information.
In FY23 we have been exploring how we can strengthen our horizon
scanning and will be setting up some additional programmes in FY24.
The scenario analysis described above builds on our previous
programmes of undertaking climate change risk assessment at key
sites and horizon scanning for changes to the external landscape (e.g.
regulatory and market). The output has informed our understanding
of how climate-related risks (both physical and transitional) could
impact our business. We will review and evolve this scenario analysis
and integrate the findings into our risk management approach, in
order to ensure that mitigations are identified and in place to address
our business resilience to climate change. Our approach to scenario
modelling has been qualitative and we have started to develop a
quantitative approach which will evolve.
management of risk
Ownership and management of individual risks are assigned to
members of the QinetiQ Leadership Team (QLT) who are responsible
for ensuring the operational effectiveness of internal control systems
and for implementing key risk mitigation plans. The Board undertakes an
annual assessment of the principal risks and climate change is included
(see page 80 in the risk section). The QLT is supported by our Chief
Risk Officer and our risk managers, who are able to have more tactical
and operational oversight. Risks are assigned owners. In our Net-Zero
plan we have aligned our strategy with a transition to Net-Zero. Our four
initiatives outline our plans for reducing our Scope 1, 2 and 3 emissions,
addressing our operations, working with our supply chain and customers
(see pages 58-59 for progress and plans for FY24 onwards).
We will continue to regularly review physical risks across our sites
recognising potential for different impacts across different geographies,
as part of our risk management process. Managing transition risks
requires us to consider a range of factors which could impact our
business in the future. So we routinely undertake horizon scanning for
aspects such as emerging regulation and evolving markets (e.g. via our
close engagement with customers on Net-Zero). Any new changes (e.g.
new legislation) will be addressed in line with our standard processes.
Key to supporting the management of risks is raising awareness and
engagement with internal stakeholders. We have developed a climate
resilience “resource hub” for key internal stakeholders and have been
adding content and providing regular updates in the community group
and will use new stakeholder groups such as our Environment Council.
During FY23 we have acquired new businesses: Avantus with offices
in the US and Air Affairs, with locations in Australia. Our focus in FY24
will be to undertake climate resilience reviews of these new parts of
the QinetiQ Group. We will also be exploring how we can further include
aspects of Net-Zero and climate resilience as part of our mergers and
acquisitions (M&A) approach.
integrating/embedding into risk management
Our risk management and control framework enables us to effectively
identify, assess and manage risks, and climate change is featured within
our principal risk register. We have based our approach to climate risks
on our existing risk management methodology, to ensure that we are
embedding it into our existing processes (see page 75).
We recognise the importance of continuous improvements and based
on feedback, in FY24 we are running a climate change workshop for our
procurement community to explore emissions reduction and climate
resilience associated with our supply chain. We are also co-creating a
sector programme on climate resilience, through our role in the Defence
Suppliers Forum. We will also be looking at how we can share learning
and guidance across site teams in FY24. As part of our regular review
cycle of our policy and procedures, in FY24 the new Environment Council
will be reviewing our Group policy to ensure that we have established
and maintained adequate procedures, systems and controls to ensure
the Group is able to manage risk and comply with its obligations.
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metrics and targets
Disclose the metrics and targets used to assess and manage relevant
climate-related risks and opportunities where such information
is material
TCFD disclosures:
Additional information
a) Disclose metrics used by the
Page 55: Net-Zero targets
Disclosure of Scope 1, 2 and 3 emissions
• We have disclosed our Scope 1 and Scope 2 GHG emissions
in the annual report and accounts for a number of years.
• FY23 Total Scope 1 emissions of 13,360 tCO2e and Total Scope
2 emissions of 11,358 tCO2e have been subject to independent
limited assurance procedures (see page 56 for details).
• We publish our intensity ratio by revenue of 16 (page 56).
• We also disclose our energy consumption (page 56) in line
Page 55: Validation of targets
with SECR requirements.
organisation to assess climate-
related risks and opportunities
in line with its strategy and
risk management process
b) Disclose Scope 1, 2, and
if appropriate, Scope 3
GHG emissions and
the related risks
Page 138: Leadership incentives
Page 51: Non-financial KPIs
Page 56: Scope 1 and Scope 2
GHG emissions
Page 56: Intensity ratio
Page 55: Scope 3 GHG emissions
Page 56: Energy consumption
c) Describe the targets used by
the organisation to manage
climate-related risks and
opportunities and performance
against targets
Page 80: Risk management
Page 60: Waste target
Page 54-59: Net-Zero plan
metrics and targets
A key part of addressing the risks of climate change is to transition
our business to Net-Zero and so key metrics are associated with
our GHG emissions.
• Over the years we have set a number of reduction targets and
reported progress in the annual report.
• In FY21 we introduced Scope 1 and Scope 2 GHG emissions as
one of our five non-financial KPIs (see page 51).
• As part of our Net-Zero plan, published in March 2022, we introduced
new targets and have committed to near-term and long-term targets
across our value chain (see page 55).
• We submitted our full set of Scope 1, 2 and 3 GHG emissions targets
(near-term and long-term) to SBTi in January 2022, and received
confirmation of validation by SBTi in June 2022; we were one of
the first companies to achieve this (see pages 54 and 55).
• We have a waste reduction target (page 60) and plan to
further develop this in FY24.
• In FY22 we published our total Scope 3 emissions for the first time
in the Annual Report and Accounts. We have published our latest
Scope 3 emissions on page 55 (269 kt CO2e for FY22).
• Annually we publish a Carbon Reduction Plan on our website, in
line with UK Government Public Procurement Notice (PPN) 06/21,
which includes Scope 1, Scope 2 and aspects of Scope 3.
www.qinetiq.com/en/our-company/sustainability/climate-change
Our Net-Zero plan identified how we will address the reduction emissions
through four initiatives and we describe the progress against these plans
on pages 58 and 59. As part of our risk management approach we are
managing the risks associated with the delivery of this plan and these
are described on page 80. We also describe on page 55 the challenge
of Scope 3 data and the approach we are taking to address this.
We have been exploring the requirements and guidance of the Transition
Plan Taskforce, and will be engaging with key stakeholders to develop a
transition plan which builds on our published Net-Zero plan.
targets used and performance
We use our Net-Zero targets to drive our Net-Zero plan, managing
the risks to delivery and maximising opportunities. Progress against
the plan is detailed on pages 54-59.
On page 56 we have reported a 30.5% reduction in our Scope 1 and
Scope 2 emissions against our FY20 base year towards our target
of 50% reduction by 2030.
In FY23 we introduced Net-Zero into our leadership incentive scheme
and for FY24 this will be aligned with reduction in Scope 1, Scope 2
and aspects of Scope 3 emissions (page 138).
We currently have a waste target where we have been tracking the
improvements to recycling and diversion from landfill (page 60).
We will be reviewing this target in FY24.
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Sustainability continued
Social
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67
Our people play a critical role in what makes
our Company a great place to work. So we want
working at QinetiQ to feel inspiring, for our people
to realise their full potential and feel recognised
for their contribution. It is also important to
us that we have a positive social impact in
the communities in which we operate.
Our people and communities
S a f e t y & wellbeing
rd & recognitio n
a
w
e
R
L
e
a
r
n
i
n
g
&
d
e
v
e
l
o
p
m
e
nt
Our Employee
Offering
Framework
&
R
e
s
s
u
p
s
o
t
n
a
i
s
i
n
b
a
i
l
b
i
i
t
l
i
y
t
y
n
o
si
clu
Diversity & in
Adaptability & f l e x i b i l i
t
y
Our employee offering framework features six areas of focus: Safety
& Wellbeing; Responsibility & Sustainability; Diversity & Inclusion;
Adaptability & Flexibility; Learning & Development; Reward &
Recognition – with our purpose, values and behaviours at the heart.
This year we have focused on embedding our employee offering by
investing in and promoting the many advantages of working at QinetiQ,
and actively demonstrating what our people can expect in return for
the contribution they make towards our success.
As well as ensuring our people are familiar with our employee offering,
we have refreshed how we communicate externally to promote QinetiQ
as an employer of choice on our Career Site and via social media.
Safety and wellbeing
Safety
We are creating a safe and secure environment for us all to thrive,
sharing expertise and knowledge across our whole Company and
strengthening the positive impact we have on health and safety.
Across the Group, we have seen a steady decrease of our Lost
Time Incident (LTI) rate1 from 2.05 in FY22 to 1.20 in FY23.
Lost Time Incident (LTI) Rate1
FY23
FY22
FY21
1.20
2.05
2.67
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.
The LTI rate is one of our five non-financial KPIs (see page 51).
In FY22, driven by a desire to continuously improve our safety culture,
we launched our Group-wide Safety Improvement Programme (SIP)and
in FY23 appointed a Group Director Safety Excellence and Assurance.
The SIP is based on feedback from employees across all our global
sites and focuses on six core safety areas: culture; organisation;
competencies; governance; processes; and technology. Working in
partnership with dss+ (previously Du Pont Sustainable Solutions),
the programme continues to deliver and we have:
– Enhanced our environment, health and safety incident management
process to enable greater insights into safety performance data for
the purpose of corrective and preventative action.
– Designed a new suite of global safety key performance indicators for
improved safety performance measurement across the organisation.
– Launched a training and coaching programme to upskill our leaders
in the areas of visible, tangible safety leadership and effective safety
role modelling.
– Introduced a safety maturity assessment for our operating sectors
to use throughout the year to measure the maturity of their
safety culture.
As we make further improvements we are continuing to engage with our
employees and dss+ and will undertake a follow-on global safety culture
survey across all our sites. Underpinning our safety commitment and
drive for effective safety role modelling, our leaders continue to have a
common goal for safety as part of their leadership incentive scheme
(see page 138).
In FY23 we received a safety prohibition notice from the Health and
Safety Executive (HSE) as a result of the removal of explosive items
from packaging in explosive magazines at the MOD Boscombe Down
site. An investigation and appropriate actions are now completed.
As an early adopter of YuLife,
I’ve been using the app for
a couple of months and
I am really enjoying it.
It is easy just to spend all day
in the office or at home, sat
at my desk, so it’s a helpful
prompt to remind me to
get out and take a break.
The need to complete quests
appeals to my competitive
side and is encouraging me
to do a bit more exercise!”
QinetiQ Employee
Wellbeing
Our wellbeing strategy focuses on the five pillars of physical health,
mental health, personal growth, working environment and financial
wellbeing. The wellbeing team partner with our colleagues in the SIP
to support our safety culture and have established a jointly chaired
Wellbeing Steering Group. We have been gaining insights from employee
focus Group events in the UK, the US and Australia which will allow us
to develop meaningful and impactful learning interventions for leaders,
managers and our people in respect of psychological safety. Last year
we continued to develop our global wellbeing offering by:
– Launching the YuLife service and mobile app for our UK employees,
which encourages healthy habits and activities to support wellbeing.
– Hosting multiple financial wellbeing webinars.
– Introducing the QinetiQ Hardship Fund.
– Running regular wellness webinar events in the US.
– Utilising the Personal Development Fund as an enabler for
employees to understand the benefit of development linked to
their personal wellbeing.
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69
QinetiQ Leadership Team
All employees (including leaders)
– Financial wellbeing: Continue to provide support for financial
64%
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Annual Report & Accounts 2023
Sustainability continued
Our focus in FY24 will be to address three priority themes that were
identified through engaging with our people:
– leadership of wellbeing: Provide managers with the tools and skills
to proactively identify poor mental health and how to have supportive
conversations with their teams.
– Workload and stress: Support all of our people through new
resources on psychological safety (including identifying poor mental
health), how to build personal wellbeing strategies which support
sustainable ways of working and our mental health and how to
seek support where it is needed.
wellbeing via educational campaigns and awareness of our QinetiQ
Hardship Fund and undertaking a review of both our global Employee
Assistance Programme and benefit offerings.
Diversity and inclusion
Advancing Diversity & Inclusion (D&I) is both a business and a social
imperative. Our commitment centres on the success of our people and
our ability to attract and retain the best talent in order to deliver for our
customers. We aim to build a workplace that is inclusive, where our
differences are not only embraced but make us stronger. Our focus in
FY23 has been across three key themes: awareness of the importance
of inclusion and diversity, inclusive leadership, and employee inclusion
and belonging. Some of the key achievements we have accomplished
this year include:
– Holding a number of global awareness campaigns including: dyslexia;
mental health; Women in Defence; psychological safety; Black History
Month; International Men’s and Women’s days; hormonal imbalance;
Pride Month; disability; and domestic violence.
– Continuing to build D&I training and resources for all employees.
– Holding neurodiversity awareness sessions across the UK with more
than 1,000 people attending.
– Maintaining D&I as part of our global leadership incentive scheme,
with leaders delivering 918 interventions across the Company.
– Participation in the KPMG Cross Company Allyship Programme,
supporting mentees from Black Heritage and Ethnic Minority
backgrounds.
– Ensuring employees are aware of the channels through which
they can raise concerns including: Speak Up confidential reporting
(see page 73), Global Employee Voice (GEV) and Workday Peakon
engagement survey.
– Winning a number of awards, including one of our female employees
receiving the Women in Defence Award 2022, in the category of
Resolute Spirit, recognising steadfast spirit to persevere while
overcoming real adversity.
– Increasing indigenous representation in Australia’s Early Careers
programme.
– Running a fifth cohort of our global reverse mentoring programme,
inspiring partnerships between junior and senior employees.
– Recipient of the 2022 HR Australia Excellence awards for Best
Flexibility Program and Best Graduate Development Program, this
program also won the 2022 Australian Defence Industry Award
for Best Training & Mentoring Program.
– Participation in FTSE Women Leaders Review, reporting improved
female representation in our Executive Committee plus direct
reports, from 27.2% in FY22 to 27.8% in FY23.
This has all been supported through our seven employee-led networks
and our D&I champions, a number of which are sponsored by members
of the QinetiQ Leadership Team. These groups provide visible leadership
and direct engagement to ensure employees feel that their differences
are valued and represented.
36%
25%
75%
Women
Men
Women
Men
In FY23 we have expanded the range of our gender pay gap from just
QinetiQ Limited, and our latest report now includes key UK subsidiaries.
QinetiQ Limited reported a reduction in its gender pay gap from 12.6%
in 2021 to 11.3% in 2022 and Inzpire Limited had a gender pay gap
of 28.6% for 2022, so the overall UK gender pay gap has increased
to 12.9% for 2022.
Gender balance data
FY23
FY22
FY21
Female
Male Female
Male Female
Male
3
(33%)
57
(19%)
1976
(25%)
6
(67%)
244
(81%)
5989
(75%)
4
(44%)
59
(20%)
1478
(22%)
5
(56%)
240
(80%)
5136
(78%)
3
(37%)
57
(19%)
1,447
(22%)
5
(63%)
239
(81%)
5,145
(78%)
Board Directors1
Senior managers2
Other employees3
1 For more information on Board diversity see page 116.
2
Senior managers are defined as employees who have responsibility for planning,
directing or controlling the activities of the Group, or a strategically significant part of
it. This includes directors of subsidiary companies. It includes our QinetiQ Leadership
Team (QLT) but excludes our CEO and CFO who are captured under Board Directors.
3 Excluding senior managers, the CEO and the CFO.
We remain focused on progressing our D&I agenda, appointing a
new Group Culture, Diversity & Inclusion Lead to our Global Employee
Experience Team as part of our wider focus on improving employee
experience and engagement. In addition, in the US, we have appointed
a Director of Diversity, Equity, Inclusion & Belonging. In FY22 we set
a global target of 30% women by 2030. In preparation for our next
strategic phase, recognising that gender diversity is just one area of
focus, we have revised and broadened our D&I ambitions to include
progress towards greater ethnic diversity at all levels of the organisation
and increasing representation of women and ethnicity in leadership roles
and Early Careers programmes. This ensures our efforts are focused
on developing a broader pipeline of talent both in leadership and those
starting their career. We recognise in the US, 36% of our employees have
self declared as black heritage or ethnic minority. This gives us a place
to build on across the Group.
To support these ambitions an updated three-year (2023-2026)
global strategy and delivery plan has been developed and in FY24
our primary focus will be on:
– Improving our diversity data to help us better understand our
workforce and identify areas requiring more focus.
– Continuing our progress towards achieving greater diversity overall
and specifically across leadership and Early Careers roles.
– Further developing leadership capability with a focus on inclusive
leadership and engaging with our people to ensure all employee
voices are heard and action is taken to respond to build an
inclusive environment in which our people can thrive.
Employee engagement
This year we made a conscious choice to take a step change in our
engagement approach, rebalancing our focus on our people through
purposeful investments in our employee offering alongside greater
emphasis on what is impacting our colleagues around the world, for
example the cost of living, Adaptive Working, and skills development.
Critical to all of our people is feeling valued and engaged, ensuring
that the employee voice is considered. Views are represented by
the Global Employee Voice (GEV), a group of employees who work
alongside leaders to help shape ideas and initiatives that make QinetiQ
a great place to work. The GEV representatives meet regularly with
the Group CEO and Chief People Officer and have also met with the
Chairman and Board members during the year (see page 106). In
FY23 the GEV demonstrated that feedback has been listened to and is
helping to shape our actions through supporting a number of changes,
including the significant investment into our employee offering, support
for cost of living, the introduction of financial wellbeing webinars,
and the implementation of the QinetiQ Hardship Fund.
Our Adaptive Working approach and our global operating model means
that we need to communicate with a geographically and temporally
dispersed workforce. Two-way communication channels, including our
Global Portal intranet, monthly live events through Q-Talk, and virtual
communities, encourage our people to share their thoughts, feedback
and experience. To further our commitment of listening to employees
we have a global Site Champion network, who focus on creating a sense
of community, and our Speak Up programme (see page 73) provides
our people with a number of ways to seek advice or raise any concerns
they may have. In addition, we hold Global Employee Roadshows
twice a year, providing an opportunity for our people to hear from the
QinetiQ Leadership Team about our growth strategy and important
topics from across the global business, and to enable them to ask
questions of leaders.
It is an incredibly rewarding
position. I’m lucky to be able
to interact with so many
amazing people from across
the entire Company. I have
the support of an incredibly
enthusiastic group of
volunteers and together we
help shape change for the
better across the Company.”
Paul Dorsett,
Global Chair of the GEV
Employee engagement is one of our five non-financial KPIs, reflecting
its importance to our business strategy (see page 50). We adopt a
continuous listening approach, using the Workday Peakon employee
engagement platform, which means we benefit from regular insights
that enable us to make informed decisions and direct focus where it is
most needed. This helps us understand what is important to our people,
so that we can take action at a global, business and team level.
We measure engagement quarterly and continue to see a good level
of participation (69%), similar to FY22 (71%). This year we have seen
an increase in the overall engagement score from 7.1 (out of 10) in
FY22 to 7.4 in FY23; the highest we have achieved as a Group since
implementing this engagement approach. Employees highlighted that
areas of strength are: communication of strategy; workload; flexibility;
learning; and having the opportunity to develop their career.
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Sustainability continued
Employee engagement continued
Our people also tell us that they value our Adaptive Working approach
and the ability to balance work and personal commitments. In FY23 we
demonstrated that feedback through the GEV and Peakon has been
listened to and is helping shape our actions. This included the significant
investment into our employee offering, with support for the cost of living,
more opportunity for learning and development, and improving our ways
of working. Our voluntary attrition was 14.3% in FY23 compared with
13.8% in FY22, (noting that our number may be affected by our two
major acquisitions) with some hotspots in the US and Australia.
The focus in FY24 will be on evolving our employee offering, creating
choice and meeting the diverse needs of our people with emphasis
on reward, equipment provision, and ensuring a good match between
organisation and individual values. We will focus on listening to
feedback, taking action to respond and continuing to explore how
we can make the best of our investment, enabling us to attract
and retain talented people who are proud of what they do.
Our QinetiQ Leadership Community (QLC) was created this year to
connect our senior leaders globally, strengthening collaboration through
shared purpose, knowledge, experience and learning. The inaugural
QLC conference was held in Washington DC, US in July 2022, providing
the opportunity for leaders to develop our approach to delivering our
strategy and goals. Regular virtual events have been held throughout
the year providing opportunity for strategic and financial updates,
spotlights on specific topics and dialogue about our priorities. This focus
will continue in FY24 to ensure we build on this collaborative approach,
working across teams and geographies, to create value for our
customers, people and shareholders.
Adaptability and flexibility
Over the last few years we have learnt a great deal about how to adapt
to different working environments and situations. Our Adaptive Working
approach, in place for just under two years, is an important part of our
employee offering and is a key differentiator in the market. It empowers
us to make decisions about where, when and how we work, so that
we can achieve the most effective outcomes for our customers, while
retaining the benefits of work/life balance, greater flexibility and more
focus on safety and wellbeing. In FY23, we looked to maximise the
value of this approach in our overall employee offering. For example, we
implemented a global Site Improvement Fund for investing in creating an
engaging on-site workplace for our people. We are introducing options
for different working patterns such as a 4.5-day week or 9-day fortnight
in the UK in FY24. This follows the successful launch of similar flexible
working approaches in our Australian and US Sectors.
Learning and development
We are a people business and our skilled scientists and engineers
are at the heart of our customer offering, so we actively promote and
support skill development for our people. Our philosophy is to enable
development through a combination of live and virtual training, self-led
learning, on-the-job experience and by providing access to resources and
toolkits. This year we continued to grow our digital learning capability
to help more people access learning faster, improving productivity
and reducing the costs associated with face-to-face, external training
courses. We have been building digital capability and on-boarded a new
digital learning experience platform (Q Skills), which is currently being
utilised for the Test & Evaluation Sovereign Skills Programme (TESSP).
This allows us to host bespoke QinetiQ-created content and develop
learning paths for specific communities. It also enables self-directed
learning and participants can explore a wide range of skills-based
content relevant to their needs. Our learning portfolio continues to
develop and in FY23 we have focused on improving access to training
through our managed learner service, and internally developing new
content for our UK Team Essentials and Leadership programmes.
With personal development, people can realise their capabilities and
their potential, thrive at work and achieve goals associated with their
role. As part of our investment in our employee offering, we prioritised
this as an area for improvement, providing all of our employees across
the globe with access to a Personal Development Fund. This fund has
provided every employee with the choice on how to drive their ongoing
professional growth and skills development to enrich their careers.
It has proven to be a success with over 5,000 individual bookings
across a wide range of development opportunities.
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With a focus on our technical community, we have:
– Welcomed five new Fellows, three new Senior Fellows, and promoted
one Fellow to Senior Fellow. Our Fellow programme recognises the
expertise, achievements and impact of our global technical, scientific,
engineering and business experts and leaders.
– Launched Fellows and Futures aimed at connecting our global
Technical Community with colleagues in their early or mid-career
providing mentoring and collaboration and driving innovation
through diversity of thought, experience and perspective.
– Continued encouraging learning and professional development of
our Technical Community, through quarterly engagement sessions
and an annual face-to-face event, enabling them to contribute to
innovation, shape our strategy, build links with academic institutions
and partner companies, and develop and mentor the next generation
of scientists and engineers.
Additionally, this year we looked to leverage our skills and expertise
globally through the TESSP. QinetiQ has developed an innovative
knowledge transfer and development programme, capturing and
codifying existing UK knowledge and expertise in order to build a
blended and engaging learning programme that upskills individuals
and creates capability in Australia. The programme provides participants
with the opportunity to upskill and work alongside and be mentored by
our global Test & Evaluation experts at the UK MOD‘s world-class air,
land and maritime environments. This approach equips participants with
the technical, behavioural and leadership competencies to be leaders in
the Test & Evaluation field, investing in both our people and long-term
business growth. The first participants arrived in the UK mid-February
2023 for a three-month experiential learning period at MOD Aberporth,
MOD Shoeburyness and Winfrith.
In FY24 we are focused on:
– Developing and delivering Leadership Development interventions as
part of the wider transformation programme in creating the culture
for our next phase of growth.
– Developing a plan to embed the Group Strategic Resourcing and
Strategic Workforce Planning framework and market implementation.
– Collaborating with our Sectors to understand how they approach
learning and development and create consistency in areas such
as coaching, mentoring, induction, management and development.
– Focusing on career growth and skills development through continued
investment in the Personal Development Fund and our talent
management approach.
Early Careers
Our Early Careers approach across the Group provides a rich and
rewarding learning experience for individuals as they start their career
with us. Demonstrating our commitment to Early Careers is one of
our non-financial KPIs (see page 51).
In the UK we focus on graduates and apprentices, as well as Year
in Industry students and summer placements. Investing in the next
generation ensures we are developing the skills and capabilities
needed for the future, as well as creating a near-term talent pipeline.
We continue to focus on ensuring our Early Careers community are
involved in meaningful work, with access and opportunity to develop
their business knowledge, personal skills and understand how their
work contributes to meeting our customers’ requirements. We have
seen an increase in the number of apprentices being recruited.
In addition, more graduates are being recruited and we have a stable
level of Year in Industry students working with us during their degree
programmes. As a patron and a founding member of The 5% Club,
we remain committed to achieving 5% of our workforce being within
our Early Careers population. We continue to make progress towards
this and commit to publishing a breakdown of our UK Early Careers
community (see table below) including the percentage they comprise
of the UK workforce.
UK
FY23
FY22
FY21
FY20
Apprentices
Graduate Programme
Sponsored Students1
% UK Workforce2
1
2 UK workforce is 5,672.
85
128
26
4.2
53
105
24
3.3
72
98
24
3.6
67
50
2
2.3
includes 8 week paid work experience and Year in Industry placements.
We do not include reskilling numbers in this table; the number of
experienced employees using apprenticeships to reskill was 39 and
covers a number of different disciplines (e.g. Human Resources,
engineering etc.).
In Australia, we had 26 graduates on our 18 month graduate
programme (this includes two cohorts). And we have a further 35
people participating in Early Careers programmes, including within our
new aquistion Air Affairs. As we continue progressing our Indigenous
Reconciliation Action plan, in the last 12 months we have increased the
number of dedicated traineeships and apprenticeships for Indigenous
Australians. We were proud to win “Graduate Program of the Year” in the
Australian Defence Industry Awards for a second consecutive year and
be awarded and an Excellence Award for “Best Graduate Development
Programme” at the 2022 Australian HR Awards.
Reward and recognition
Reward & Recognition is key to our people strategy and an important
part of our global employee offering. Our approach is designed to
enhance our employees’ wellbeing and incentivise both collective
performance and individual contribution; enabling us to make choices
about what works best for ourselves and for our families. Through our
Rewarding for Performance framework, our people have been able to
collectively share in our success:
– Our All Employee Incentive Scheme (AEIS) for contribution in FY23
paid £1,250 to each employee.
– We continue to invest in Pay & Progression, addressing market
anomalies and managing in-year role and grade progression, with
an investment of £1.8m in FY23.
– Through Thank Q, our global recognition scheme, we celebrated
3,386 individual people and 1,140 teams, with 5,152 awards.
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Sustainability continued
Reward and recognition continued
Recognising the cost of living challenge, in October 2022 we made
a significant investment in a range of improvements to reward and
benefits. This extensive package included increases to salaries,
commitment to deliver above the real living wage, and creation of the
QinetiQ Hardship Fund. We also made market improvements for our
Global Grade 13 and 14 population (mid-level managers), by extending
our Leadership Incentive Scheme. In June 2022 we once again
celebrated the contribution of our people at our Global Recognition Gala.
Bringing together colleagues at live events in Australia, the UK, and the
US, as well as virtually from Germany and Canada, we recognised 145
people, via 47 awards in eight categories. In addition, the Project Vampire
team were recognised with the Outstanding Achievement award for their
work in facilitating the launch of a Banshee Jet 80+ from the deck of the
Royal Navy’s HMS Prince of Wales aircraft carrier for the first time, off
UK waters.
Looking forward to FY24, we plan to continue our investment in our
employee offering. We will be focused on ensuring we continue to
embed our Employee Offering enhancements and evolve in response
to the market and employee feedback as well as in support of enacting
our long-term strategy driving sustainable performance. Our leaders
will continue to be incentivised for their collective contribution to
non-financial KPIs, specifically around the areas of safety, employee
engagement and Net-Zero (see page 138).
Responsibility and sustainability: community impact
volunteering
At QinetiQ we focus our volunteering efforts in three key areas: skills-
based; environmental; and STEM (Science, Technology, Engineering
and Maths) outreach, through which our employees provide real-world
experiences to inspire the next generation of scientists and engineers.
We have a network of STEM outreach leads in the UK and Australia
who support our volunteers. Across our UK sites we’ve engaged with
approximately 8,000 children, supporting approximately 60 schools and
youth groups. We value the expertise of partners; for instance, in the UK
we are working with the Jon Egging Trust in continuing to understand
the needs of young people, and we co-created an interactive workshop
on the value of apprenticeships. During FY23 we launched our first
virtual work experience and ran a series of STEM outreach events,
including our annual Powerboat Challenge at our site in Haslar. Our
annual support for International Women in Engineering Day resulted
in a global awareness campaign and a large event for five schools
with 60 young women and 10 teachers participating.
Environmental volunteering has provided opportunities for teams
to make a difference and contribute to conservation initiatives while
building their understanding of conservation, biodiversity and climate
change. We also recognise the significant wellbeing benefits that this
brings with the opportunity for connection, fresh air and for learning.
Charities
In addition to volunteering, we continue to support a number of charities.
During FY23 in the UK we completed our three-year partnership with
UK Defence charity SSAFA and continued our relationship with the Jon
Egging Trust. In Australia, we partnered with Legacy, a charity focussed
on supporting the families of Defence Veterans and raised A$15,000.
In Canada, we’ve donated to Ottawa Food Bank and Root Cellar. In the
US we supported Our Military Kids, whose mission is to recognise the
children’s service and sacrifice, by providing grants for extracurricular
activities.. Please see our website for more information:
https://www.qinetiq.com/en/our-company/sustainability/community-
investment
In FY24 we intend to continue to grow our volunteering, focusing on
creating positive impact in our communities.
Our defence partnerships
We have always been passionate about supporting our Armed Forces
community, including veterans, as we believe that having Service
Leavers and Reservists within our Company greatly enhances how we
connect with our key customers. In 2016 we were awarded Gold Award
status by the UK Ministry of Defence (MOD) in their Defence Employer
Recognition Scheme. This recognises UK employers who demonstrate
a commitment to Defence by proactively supporting the Armed Forces
community and inspiring others to do the same. We were revalidated in
2022 and were delighted to receive our Gold Award from Major General
Swift in March 2023. We signed the UK Armed Forces Covenant in 2013
and continue to create covenant-related initiatives, such as our global
QinetiQ Veterans and Reserves Network (QVRN), which helps to connect,
support and value colleagues who serve or have served in their nations’
Armed Forces. A new covenant with enhanced support of forces and
reservists’ spouses and families will be published later in 2023.
In the US, we have an Outreach programme for Veterans through Circa
and Military Offices Association of America and participate in military
hiring events through Recruit Military and Corporate Grey. We contribute
to the Virginia Veteran Values (V3) Program and have been participating
in “Hiring our Heroes” events. In Australia we are pledge partners
with Soldier On and attend their network events which has resulted
in attracting talent into the business. We are also signatory to the
Prime Minister’s Veteran Employment programme.
QinetiQ receiving the UK MOD Defence Employer Recognition
Scheme Gold award from Major General Swift.
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Governance
Governance is a critical pillar, supporting us in how
we deliver business responsibly and sustainably.
It is linked to our corporate governance section.
Governance and leadership of ESG
Our approach to ESG is sponsored by our Group CFO and actively
supported by our Board. Our Group Director of ESG leads our strategy
and programmes, working with leaders across the business, and
provides regular papers and briefings to the Board. These cover all
material ESG issues, including ESG strategy, climate change, stakeholder
engagement and reporting, ethics, Speak Up, D&I and community (see
page 102). This provides oversight of our approach, including progress
against programmes and plans.
In FY23 we introduced a new ESG Steering Committee, chaired by our
Group CEO, meeting monthly. We have also launched new Functional
Councils to support aspects of our business, providing additional focus
on safety, people, and environment as well as risk and assurance, and
governance. pages 88 and 89 detail our policy and assurance approach.
The ESG strategy forms part of our ISBP (the five-year plan) and
includes longer-term plans e.g. our Net-Zero plan with targets to 2030
and 2050. We continue our goal to embed ESG into our strategy and our
day-to-day business. ESG factors are linked to the non-financial element
of our leadership incentive scheme, and this continues to evolve; the
FY22 focus on engagement, D&I, safety and security was expanded
in FY23 to include climate change.
In FY24 we will mature the role of the Functional Councils and further
drive change through the leadership incentive scheme, which will be
more strongly aligned with our Net-Zero target.
Business ethics, doing business the right way
Our Code of Conduct defines our ethical standards, providing clear
direction and guidance on how we do business. It contains information
on ethical decision-making and also how to seek help and advice.
We review the Code annually to reflect the evolving needs of our
business, the regulatory environment and best practice. In FY23 we
worked with the Institute of Business Ethics to gain an independent,
expert perspective on our Code of Conduct. Their feedback was very
encouraging and we have used their advice and updated and published
the 2023 version of the Code, which is available on our website.
www.qinetiq.com/en/our-company/sustainability/business-ethics
Annual business ethics training is mandatory and supports our
people in understanding and using the Code of Conduct. The training
is undertaken by our Board and is available to 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.
Speak up
We strive to create an environment where our people feel confident to
speak up and we provide a number of different ways for them to seek
help or raise concerns. Employees can talk to a manager, use our ethics
email advice services, our global network of Ethics Champions and
our independently run, 24/7, confidential reporting line. These are also
available to third parties via our Code of Conduct and Supplier Code
of Conduct, both published on our website (see above).
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Sustainability continued
Business ethics, doing business the right way continued
Throughout the year, we have promoted the importance of speaking
up and the various different contact routes, via awareness campaigns,
in the Code of Conduct and in our mandatory ethics training. We have
improved how employees can find and access Speak Up contact
details, launching a new highly visible button on the homepage of
the Global Portal (our Group Intranet). We promoted our Speak Up
Guide for Managers, supporting them in creating an open and inclusive
environment, where our people feel confident to raise concerns, and
managers know how to listen to and support anyone who may come to
them with an issue. For third parties, we have promoted our Speak up
contacts via our website and in our supplier Code of Conduct. We have
responded to all queries received via our ethics email advice services
and confidential reporting line. Our Audit Committee oversees our
approach to confidential reporting (see page 108).
Our Business Ethics Committee, chaired by our Chief Ethics Officer (the
Company Secretary), oversees our ethics programme. We are members
of our trade association, ADS, Business Ethics Network where members
can share best practice on ethics, human rights and anti-bribery.
Our focus in FY24 will be to continue to promote and raise awareness
on Speak Up.
Anti-bribery and corruption
Our anti-bribery and corruption (ABC) programme is designed to support
our people and business partners to demonstrate the highest standards
of ethical conduct within all jurisdictions in which we operate. Our zero-
tolerance approach to bribery and corruption in any form is explicitly
stated in our Code of Conduct, which provides a decision tool to support
ethical decision making, helping us to operate our business responsibly
and maintain the trust of our stakeholders. This is supported by the
provision of practical guidance through our ABC training, which includes
challenging scenarios to help our people know what to do if they were
to come across issues such as bribery and fraud.
Our Group-wide ABC procedures include measures and guidance for our
people to assess risks, understand relevant laws and speak up about
concerns. We identify and assess any exposure to bribery and corruption
risk when engaging third parties, and these risks are subject to on-going
monitoring and periodic updating. We have enhanced ABC procedures
for the appointment of Commercial Intermediaries, including the use of
external third-party due diligence, with all appointments and renewals
subject to Group CEO approval, with increased reporting requirements
for all payments made to Commercial Intermediaries overseen by the
Board. We take a continuous improvement approach to enhancing our
ABC programme, acting upon findings from our internal assurance
programmes, engaging with industry peers and seeking feedback
from our people.
Human rights and modern slavery
As part of our ongoing programme to address modern slavery, we
operate and manage an action plan across the Group. We continue
to provide in-depth training to those in key roles (we have moved from
e-learning to live training), and develop new supporting resources for
all employees and suppliers, including industry engagement events
such as our Collaborate programme. We regularly review our policies
and our approach to risk in the supply chain. Our updated supplier
Code of Conduct helps to ensure our suppliers have clarity of their
responsibilities on human rights, modern slavery and speaking up.
Our annual modern slavery and human trafficking statement is
published on the homepage of our website. 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, our ethical trading
policy, international business risk management process, grievance
mechanisms, due diligence and export controls process. Our third-party
confidential reporting mechanism provides routes for third parties
to raise concerns. We monitor the application of these policies and
procedures through our business and supplier assurance processes
and regular self-assessment, with oversight by our Business Ethics
Committee (see page 89). We believe that this integrated approach
is effective in ensuring our business acts responsibly and respects
all human rights. More information, including all our annual modern
slavery statements, can be found on our website: www.qinetiq.com/en/
our-company/sustainability/business-ethics.
In FY24 we will continue to make progress against our modern slavery
action plan and we will be reviewing and updating policy to support
our approach to human rights.
Working with our supply chain
Our supply chain is an extension of our own Company. We ensure that
our suppliers are committed to the same standards of safety, security,
sustainability and governance as we are.
Working in collaboration with wider industry, we foster and develop
ecosystems which draw together supplier, academia and third sector
communities to answer complex science, social, engineering and
technology challenges, supporting our customer offering. Through
this approach we enable access to opportunities for diverse suppliers,
including Small to Medium Sized Enterprises (SMEs) and non-traditional
defence suppliers, removing barriers to entry and promoting inclusive
procurement.
Our QinetiQ Collaborate series aims to ensure good practices are shared
throughout our supply chain and wider external stakeholders. We provide
a consistent platform for learning through panels of subject matter
experts from across the defence and security industry.
In FY23 we ran events on modern slavery and on SME engagement. We
also continue our work with the Aerospace and Defence Procurement
Group (ADPG) and JOSCAR (an industry collaboration).
We have a Sustainable Procurement Guide for our suppliers and have
updated our supplier Code of Conduct. Both documents are available
on our website:
www.qinetiq.com/en/our-company/suppliers-and-smes
Recognising the cost of living crisis, we understand the importance of
cash flow for our suppliers. As signatories to the UK Prompt Payment
Code, we report our payment performance as required by UK legislation.
We have brought down and standardised our UK payment terms to net
30 days. We are also seeking accreditation from the Real Living Wage
Foundation which applies not only to our workforce but also to our
supply chain.
In FY24 we will continue to develop our approach to sustainable
procurement and run further Collaborate events.
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Risk management
Our approach to identifying
and managing risks
How we protect our business
Effective management of current and emerging risks is critical
to achieving our strategic goals. Our Chief Risk Officer (CRO)
holds responsibility for risk management across the organisation,
ensuring the provision of risk expertise and support to the Sectors and
Functions. The CRO is also responsible for reporting risk information
to the QinetiQ Leadership Team, the Board and its Audit and Risk &
Security Committees.
Risk processes cannot operate in isolation and, like safety and security,
must engender a supportive and robust culture to enable effective
risk-based decision making. Our Group-wide global risk management
framework supports and develops a positive risk culture that spans
strategic to operational levels, exploiting both a top-down and bottom-
up approach. Our culture and embedded risk management processes,
combined, result in a stronger and more resilient organisation in the
face of challenges. Managing threats and optimising opportunities
to support the long-term success of our business is an established
part of the way we conduct business. Continual cycles of review and
improvement of our risk maturity keep pace with a growing business
in a complex industry; to ensure we are best placed to deliver results,
while simultaneously innovating for our customers’ advantage.
Principal risks
The Group Risk Register consists of material risks relating to both
the effective delivery of our strategy and those risks which may have
a material effect on our stakeholders, partners and environment. The
Board and QinetiQ Leadership Team assess these principal risks from
a number of different perspectives, both individually and collectively. The
Board recognises that some risks may be affected by factors outside
the control of the Company and that despite the robustness of the risk
management processes they cannot provide absolute assurance and
unknown risks may manifest without warning. We have well-established
processes in place to rapidly deploy appropriate management in these
situations, and utilise lessons learned across the organisation as part
of our ongoing drive for continuous improvement.
The Organisational Design process necessitated a refresh of the
mechanisms and approaches to risk management and presented an
excellent opportunity to perform a complete refresh of our Principal
Risks. The key change to Group Risk Management has been to reflect
the maturity of our US and Australia Sectors. As established Operating
Sectors, they both manage and report risks in the same way as our UK
Operating Sectors, removing the legacy risks associated with the US and
International businesses; which were reported as Principal Risks in FY22.
The invasion of Ukraine, current geopolitical landscape and enduring
impacts of Electrical and Electronic Equipment (EEE) component
shortages have affected a number of our principal risks. Our UK Strategy
risk has been retired as a Principal Risk from our Group Risk Register
following our growth in other territories and the re-focus on the need
for the UK to meet a dynamic range of defence threats that QinetiQ
is able to support.
Innovation is ubiquitous across QinetiQ. It is fundamental to everything
that we do. As such, it is not something that could fail across the Group.
We chose to retire our Innovation Principal Risk in favour of making it
a key consideration for all of our other risks; to make sure that we have
considered the effect that innovation has on our risks, and how our
risks could affect the way we innovate across the Group.
Our final tailoring measures were to increase focus on the integration
of our acquisitions, emphasise the digital and data elements of the
digital transformation and the splitting of our People Principal Risk
into Strategic Workforce Planning and Culture risks, to enable us
to target each more effectively.
Emerging risks
We define emerging risks as newly developing or changing risks, where
the extent and implications are not yet fully understood. These risks are
identified and managed using the same established risk management
framework as our Principal Risks and are included as part of our strategic
planning process to ensure we capitalise on the opportunity and minimise
the downsides they present. Where appropriate we establish ‘Working
Groups’ to monitor and scrutinise the potential impacts of the emerging
risks and ensure relevant mitigation actions are undertaken at pace. We
also consider the wider impact of emerging external risk, for example
where a risk creates challenges for our customers it may create an
opportunity where we have well-aligned capability to further support them.
As part of our Strategic Review, we undertook an extensive survey
of industry insight, competitor analysis and best-practice advice
to challenge our Principal Risks from an external perspective.
Our ongoing programme of Safety Improvement has given us a clear
picture of our exposures and the work streams we will undertake in
order to continually mature Safety for our employees, supply chain and
customers. This enables us to clearly articulate and target Health and
Safety as a Principal Risk; giving it appropriate priority. QinetiQ has a
holistic approach to Security risk, based on four interlocking pillars of
physical, people, information and cyber. During our refresh process,
it was felt necessary to separate out cyber as a Principal Risk due to
its prevalence in the work that we do and the context we operate in.
Supply chain pressures from component availability, global financial
volatility and acquisition investment that QinetiQ has made this year
means that it is prudent to manage Macroeconomic Volatility as a
Principal Risk. The volatility in the current macro-economic environment
has allowed us to reconsider this as a principal risk. In addition to
keeping abreast of trends and changes by leveraging of our internal
capabilities and external reserves and advisor network. The cost of living
crisis has been pro-actively managed by the People and Rewards team
with financial reward adjustments to protect our employees, so is not
a Principal Risk at present.
The legacy of COVID-19 is evident in our supply chain and the more
flexible way we approach on-site working. It is not a Principal Risk in
itself, but we have grown our Group Business Continuity Management
capability in order to enhance our resilience against the risk of future
material disruptions.
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Risk management continued
Risk management and assurance activity
three lines model
Our risk management and assurance activity follows the established Three Lines Model with the first and second line reporting to the QinetiQ
Leadership Team and Board, and the third line dual-reporting to the relevant Board Committees. The first line is performed by operational
management, who own and manage compliance in accordance with the QinetiQ Operating Model; the second line is performed by independent,
assurance and risk functions; and the third line is performed by the Internal Audit team and external assurance providers.
Audit Committee and Risk & Security Committee
Receive reports from the
assurance functions
Monitor and review
the principal and
emerging risks
Undertake risk
deep dives
Monitor the
effectiveness
of internal controls
Board
Responsible for effective
risk management and
internal control across
the QinetiQ Group,
sets risk appetite and
assesses principal
and emerging risks
QinetiQ leadership team
Identify and monitor the principal and emerging risks, as well as material risks
(including operational) reported from the operating Sectors
First Line
Second Line
Third Line
management
independent Assurance
– Identify and evaluate risks
– Design and operate internal controls
– Perform Risk Management and other
oversight functions with independence
and other mitigation measures
– Apply risk appetite, delegated
authorities, policies, procedures and
codes of practice
– Report risks through relevant reporting
and escalation processes
– Manage the day-to-day
operational risks
– Design and facilitate the risk
management processes across
the Group
– Provide risk expertise and support
– Responsible for continually improving
the risk management process across
the Group
– Report to the Board and the QinetiQ
Leadership Team
– Internal Audit and other external
independent assurance providers
– Review and evaluate risk management
activity and provide assurance
over the effectiveness of the
control environment
– Manage the confidential
reporting process
– Report to the Board and the QinetiQ
Leadership Team
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Cautious
Balanced
Eager
QinetiQ risk appetite
The Board identifies and reviews its
tolerance to 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 delivery options
with 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
Strategic risks
UK large contract renewals
Risk
impact
mitigation
These large
contracts and
framework
positions
contribute
a material
proportion of
the Group’s
revenue and
earnings.
A material element of the
Group’s revenue is derived from
large UK Government contracts
which are set to expire over
the next five years to 2028.
These include the 25-year Long
Term Partnering Agreement
(LTPA), the 10-year Engineering
Delivery Partnership (EDP),
and the 5-year Weapon Sector
Research Framework.
QinetiQ could be unsuccessful
in its efforts to renew these
contracts or secure a leading
position in future versions
of them.
Performance excellence against current contract deliverables, and a
deep appreciation of why and how we have to evolve our offerings
to deliver resonating customer value now and into the future. This
is certainly the case across our two largest UK contracts, the LTPA
and EDP.
We are investing significantly into the LTPA capabilities to ensure
they remain relevant and modern. The investment portfolio is
agile to changing customer needs and technological advances to
ensure we remain at the cutting edge of Test, Trials, Training, and
Evaluation (T3E).
Since transitioning to fully output-based delivery on the LTPA in
2019, we have demonstrated excellent financial performance on
the contract. Maintaining this strong Cost Performance Index
(CPI), through optimising efficient delivery in new and agile ways
significantly reduces customer affordability challenges.
EDP continues to evolve, and following a successful 2* review of
our performance at the year 4 anniversary, we have re-baselined
the contract KPIs to better reflect the changing demands of our
Customers, and our ever-closer working relationship. We continue
to focus our efforts on long-term, output-based contracting,
maximising efficiencies, and increasing the potential for more
innovative engineering delivery. Our relationship with the Aurora
Partners remains strong, providing a stable foundation to support
DE&S, Strategic Command and the Front Lines.
Metrics
All financial KPIs
Customer Satisfaction
Responsibility
Chief Executive UK
Defence
Chief Executive UK
Intelligence
Risk appetite
Balanced
Likelihood/Impact
Medium/High
Proximity/Velocity
2–5 yrs/Low
Strategy
Distinctive Offerings
Disruptive Innovation
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Risk management continued
Strategic risks continued
Acquisition integration
Risk
impact
mitigation
Adverse impact
on the Group’s
financial
performance.
M&A activity remains a key
element of our strategic
growth planning, to expand our
customer offerings within our
home markets of the US, the
UK and Australia, as well as in
our priority growth markets.
There is a risk that integration
may not realise the maximum
potential benefits of these new
business combinations.
Robust governance is underpinned by the M&A and Integration
Committee, which reports to the Board, and the relevant Integration
Steering Committees for each newly acquired company.
Metrics
Inorganic Growth
Revenue & Profit
All acquisitions are thoroughly assessed for strong strategic
alignment, for value creation potential and for integration risk
and deliverability. Comprehensive due diligence involving internal
experts and a broad range of external advisory companies
underpins risk management through the transaction and is the
basis for integration planning. Integration itself typically involves
external advisory support, and governance reviews of integration
are now conducted for three years following completion.
Portfolio rationalisation is ongoing where appropriate, including
for example, the recent disposal of the Space NV business.
Responsibility
Chief Strategy Officer
Sector Chief Executives
Risk appetite
Balanced
Likelihood/Impact
High/High
Proximity/Velocity
1–2yrs/Low
Strategy
Global Leverage
Distinctive Offerings
The digital and data programme
Risk
impact
mitigation
Technical,
Operational
and Cultural
debt which
prevent proper
zero trust
technologies.
QinetiQ Leadership Team work-stream sponsorship and Group-
wide stakeholder engagement ensure robust requirement
identification and focussed investment. This is supported
by a CEO-led steering group and a Global Digital & Data
Programme Board.
Metrics
Customer Satisfaction
Employee
Engagement
All financial KPIs
Budget and scope are managed through a robust governance
model reporting to the QinetiQ Leadership Team and Board that
gives sufficient flexibility to respond to changing customer needs
but with the guide rails in place to identify and control potential
cost overruns.
Benefits realisation is managed through a strong focus on
change management to drive adoption and the required changes
to behaviours. The Digital & Data Programme acts as an enabler
for the overall transformation by providing the tools and ways
of working to more rapidly address the cultural and behavioural
changes required to make the programme a success.
Responsibility
Chief Enterprise
Services Officer
Risk appetite
Balanced
Likelihood/Impact
High/High
Proximity/Velocity
0–1yr/Medium
Strategy
Global Leverage
Distinctive Offerings
Disruptive Innovation
The Digital and Data Programme
aims to position QinetiQ for
further growth by globalising
consistently around the
customer to deliver excellence.
In order to achieve this we
must invest in our processes
and systems to embed a
robust QinetiQ Operating
Model, supported by a Global
Interoperable Infrastructure
to enhance our collaboration,
and a Digital Workspace that
enables us to leverage our skills
globally. This requires significant
alignment and effort across the
Group as well as cultural and
behavioural changes.
There is a risk that the
investment required to
achieve the intended outcomes
is greater than budgeted, that
the programme benefits are
not fully realised and our Group
ambitions are constrained.
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Operational risks
Significant breach of relevant laws and regulations
Risk
impact
mitigation
We operate in highly regulated
environments across many
jurisdictions, at a time when
there is a rising regulatory
landscape for businesses to
comply with.
Non-compliance presents a
risk to people, property and the
environment, as well as having
the potential to compromise our
ability to conduct business.
Non-
compliance
can result
in penalties,
as severe as
temporarily
shutting down
the business
down, plus the
reputational
damage, and
for a public
company,
impact to the
share price.
Not adhering
to laws and
regulations
could also
lead to serious
accidents.
QinetiQ has a mature enterprise risk management programme, with
a focus on maintaining and strengthening safety and regulatory
compliance across the Group.
The QinetiQ Operating Model defines responsibility through the
organisation, and there is a cultural programme led by the QinetiQ
Code of Conduct that helps drive attitudes and behaviours. In
addition, there are policies and procedures, and a mandatory
training programme applicable to all employees.
QinetiQ has adopted the Three Lines Model, structuring a
compliance and assurance framework that enables a risk-focused
approach to compliance, alongside an assurance programme
that includes reporting regularly to the Board and internal
senior management.
Continuous improvement is driven using a range of approaches
such as audit and evaluation, focused training, strategic
improvement programmes, and business objectives. The
effectiveness of our internal control environment continues to
be assessed at Board level, helping identify any potential gaps in
assurance over key risks.
Security
Risk
QinetiQ operates in a dynamic
global threat environment
with high-value assets,
people and data, which
could be desirable targets
for criminals, competitors,
pressure groups and state
actors. A breach of physical,
personnel or Information
Security could lead to the loss
of information or harm for our
employees, customers and
broader stakeholders.
impact
mitigation
Significant
reputational
damage,
erosion of
business
advantage,
direct penalties
and possible
exclusion from
some types of
government
contracts.
As a key supplier in National Security supply chains and
international Operational capabilities, we must ensure that
organisational security meets government and other relevant
requirements worldwide. We employ a holistic security threat
approach through four interlocking pillars: Physical, Information,
Cyber and Personnel Security. Our changing and increasingly
sophisticated threat environment is continuously reviewed, using
appropriate tools and techniques, as part of our over-arching
Security Strategy such that new and emerging threats are removed
or mitigated, ensuring our strategy appropriately balances the
security, cost and flexibility required for any given solution.
Our programme of continuous security improvement is
underpinned by annual strategic security reviews and aligned
to key work streams for Transformation, Culture Development,
Global Information Interoperability and then Digital Programme.
Metrics
Health, Safety &
Environment
Mandatory training
compliance
ABC (including
commercial
intermediary)
monitoring
Responsibility
Chief Risk Officer
Group Director Legal/
Company Secretary
Risk appetite
Cautious
Likelihood/Impact
Medium/High
Proximity/Velocity
0–1yr/High
Strategy
Global Leverage
Distinctive Offerings
Metrics
Security Dashboard
Group Functional
Councils
Responsibility
Chief Enterprise
Services Officer
Risk appetite
Cautious
Likelihood/Impact
Medium/High
Proximity/Velocity
0–1yr/High
Strategy
Global Leverage
Distinctive Offerings
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Risk management continued
Operational risks continued
Project, Programme and Portfolio Management (P3M) capability
Risk
impact
mitigation
Adverse
impact on
Group financial
performance,
competitiveness
and future
growth.
The Group Performance Excellence (GPE) function is responsible
for the continuous improvement of our robust P3M framework in
order to provide a scalable and consistent approach to delivering
benefits on time, cost and quality. Work is ongoing to update
and roll out the Global P3M Competency Framework and the
P3M Delegations process, ensuring Project Manager skills and
experience are matched to the project complexity.
Project Management Offices (PMOs) have been embedded in
each business unit, and are actively implementing GPE outputs;
including the Global Competency Framework and the P3M
Delegations process.
QinetiQ operates in a
competitive and complex
delivery environment. Scalable,
adaptable and agile leadership
of work is the norm. There
is a risk that our Portfolio,
Programme and Project
Management (P3M) maturity
fails to keep pace with our
growth plans and evolving
requirements. We must
continually innovate and develop
our competency frameworks,
professionalism, processes,
tools and training in order to
ensure consistent excellence in
winning business and delivering
for our customers.
Climate change resilience and Net-Zero
Risk
impact
mitigation
QinetiQ Group must reduce
GHG emissions and ensure the
risks and opportunities resulting
from the changing climate and
decarbonising economy are
understood. Failure to embed
climate change into our strategy
and processes will result in
the Group not being resilient
to supply chain challenges or
legislative requirements and will
leave our operations exposed.
We may also not be able to
meet customer requirements
or optimise our position in a
decarbonised future.
Negative
impact on
the Group’s
market position,
competitiveness,
and future
growth.
We have a strong track record of environmental stewardship and
have published our Net-Zero plan but recognise that there is more
we can do.
We have developed a Net-Zero plan and are committed to science
based targets (approved by SBTi) to drive our emissions to Net-
Zero by 2050 or sooner. We have in place initiatives across the
Group to ensure that we are embedding our Net-Zero transition
plan:
1. Investment in energy efficiency projects to deliver Net-Zero
operations to reduce our Scope 1 and Scope 2 emissions.
2. Development of programmes to deliver reductions in Scope
3 emissions.
3. Delivery of critical internal and industry-wide enabling activities
(e.g. cost of carbon, and remuneration incentives).
4. Working with our customers to develop sustainable solutions
and protecting biodiversity.
We have undertaken a comprehensive review of the risk of climate
change to our business.
This includes embedding climate change into business as usual,
integrating opportunities into our strategy and ensuring efficacy
through leadership oversight with supporting tracking metrics.
We continue to improve this approach.
See ESG section on page 54
Metrics
All financial KPIs
Customer Satisfaction
Revenue and Profit
Responsibility
Group Director
Performance
Excellence
Risk appetite
Cautious/Balanced
Likelihood/Impact
Medium/Medium
Proximity/Velocity
1–2yrs/Medium
Strategy
Global Leverage
Distinctive Offerings
Disruptive Innovation
Metrics
Reduction of GHG
emissions
Stakeholder
satisfaction
Customer
satisfaction;
Employee
engagement
TCFD outputs
Responsibility
Group Chief Financial
Officer
Risk appetite
Balanced
Likelihood/Impact
Low/Medium
Proximity/Velocity
3–5yrs/Low
Strategy
Global Leverage
Distinctive Offerings
Disruptive Innovation
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Cyber
Risk
There is a greater than normal
risk of cyber-attack due to
QinetiQ’s relative priority as a
target for state offensive cyber
actors and ongoing global
geopolitical issues. An attack
could impact QinetiQ, our
customers and/or our suppliers
globally, regardless of the
immediate or intended location
of the target.
The highest threat and impact
of an attack is to the UK Sector
activities but an attack could
be targeted anywhere in our
Group, via our customers or
our supply chain.
impact
mitigation
As a key supplier in the multiple country National Security supply
chains, we must ensure that the organisation’s security meets
governments’ and other relevant requirements worldwide.
Metrics
Cyber Dashboard
Operational Reporting
– The implementation a Group Cyber Security Standard
– Targeted cyber security training for key IT staff, and mandatory
awareness training for all staff and contractors
– Deployment and continual upgrade of cyber security detection
and protective technologies
– Operational assurance exercising
This activity is supported by a wider digital investment programme
implementing a mixture of culture and technological improvements
across the Group. This activity will provide more consistency across
the Group globally, along with a modern Enterprise Architecture.
Responsibility
Chief Information
Security Officer
Risk appetite
Cautious
Likelihood/Impact
High/High
Proximity/Velocity
0–1yr/High
Strategy
Global Leverage
Distinctive Offerings
Potential for
significant
reputational
damage, as well
as interruptions
to delivery
and service
provision.
There is also
the possibility
of the
withdrawal of
our accredited
status (our
‘licence to
operate’)
resulting in
exclusion from
some types of
government
contracts, cyber
domain work
and subsequent
impact on
orders, revenue
and profit.
Health and safety
Risk
impact
mitigation
Due to the variety, complexity
and hazards associated with
QinetiQ’s operations, there is
a risk of an unplanned and
uncontrolled event occurring on
a QinetiQ site, resulting in serious
injury or fatality to employees,
contractors, visitors and
members of the public or other
third parties.
Failure in the
moral duty to
our employees.
Regulatory
enforcement
action, criminal
prosecution of
the Company
and/or
individuals,
reputational
damage and
financial
compensation
claims.
A global safety improvement programme will enable QinetiQ to
increase its safety culture maturity and deliver sustainable safety
improvements, including:
– Improving the effectiveness of global safety processes to achieve
overall risk reduction
– An aligned and globally integrated three lines of safety
assurance approach
– Enhanced safety performance measurements providing insights
on incidents and other metrics
– Enhancing competence and upskilling employees to become
better safety leaders and role models
– Reviewing technology as an enabler for safety
We are working to embed the new QinetiQ Operating Model
(QOM) into the safety organisation, management system
and our Operating Sectors.
Use Global Roadshows and Q-Talks to clarify upcoming safety
improvements and how these will both impact our people and
enable our organisation to improve its safety culture maturity.
See Health and Safety on page 67
Metrics
Safety culture
maturity score
Employee
engagement
Responsibility
Group Director
Safety Excellence &
Assurance
Risk appetite
Low
Likelihood/Impact
Medium/High
Proximity/Velocity
0–1yr/High
Strategy
Global Leverage
Distinctive Offerings
Disruptive Innovation
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Annual Report & Accounts 2023
Risk management continued
Operational risks continued
Strategic workforce planning
StRAtEGiC REpORt
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83
Financial risks
Macroeconomic volatility
Risk
impact
mitigation
Risk
impact
mitigation
There is a risk that we fail to
grow and adapt our planning,
development and employee
value proposition for the right
capability to deliver excellence
from our customers in the
longer term.
Negative
impact on
the Group’s
market position,
competitiveness,
and future
growth.
Our people are a core consideration in all of our strategic and
operational planning.
We are enhancing our Strategic Workforce Planning (SWP), the
Early Careers Programme, Diversity and Inclusion (D&I) Plans, and
career management approach through the release of the Personal
Development Fund and Talent Management Systems. The People
function is developing a global methodology for harnessing future
capability requirements, assimilating better understanding of the
skills gaps and identifying strategic solutions to mitigate the these.
A high-performance culture is central to our People strategy,
supported by engagement, talent review and reward strategies.
This is further enabled through our Adaptive Working principles
which have capitalised on the diverse ways that our people work.
Culture
Risk
Developing an inclusive, high-
performing culture where our
people can thrive will maximise
our potential. We operate in a
rapidly changing and disruptive
landscape and there is a risk that
we do not develop global, agile
and integrated ways of working
to ensure successful delivery for
our customers and achievement
of our strategic goals.
impact
mitigation
Negative
impact on
the Group’s
market position,
competitiveness,
and future
growth.
We have implemented our QinetiQ operating model and we are
investing in developing our culture to ensure our people can thrive
and be at their best. We are focusing on leading and engaging
our people through strong leadership, embedding our approach
to inclusion, diversity and belonging, people management and
development supported by aligned rewards, systems, tools and
processes that enable performance and help us embed our new
ways of working.
Metrics
Reward
Growth
Career Progression
Skills Development
Responsibility
Chief People Officer
Risk appetite
Balanced
Likelihood/Impact
Medium/Medium
Proximity/Velocity
1–2yrs/Medium
Strategy
Global Leverage
Distinctive Offerings
Disruptive Innovation
Metrics
Business
performance
Leadership
Employee
engagement
Responsibility
Chief People Officer
Risk appetite
Balanced
Likelihood/Impact
High/High
Proximity/Velocity
1–2yrs/Medium
Strategy
Global Leverage
Disruptive Innovation
Failure to anticipate and plan
for a volatile macroeconomic
environment.
Specifically failure to understand
the impact on the QinetiQ
Group of:
– Inflation changes
– Interest rate movements
– Foreign currency
Adverse impact
on the Group’s
financial
performance,
and future
growth
strategy.
We seek to manage the risk in various ways:
– Existing contract understanding of inflation impacts
– Analysis of target customer base in the event of
macroeconomic shocks
– New terms and conditions appropriate for uncertainty
around inflation
– Deployment of our Treasury policy that avoids speculation
on foreign exchange and interest rate risks (i.e. hedging,
% of fixed v floating rates)
As part of the strategic planning process, we model the resilience of
our financial position against different macro-economic scenarios.
Metrics
All financial KPIs
Growth
Responsibility
Chief Financial Officer
Risk appetite
Balanced
Likelihood/Impact
Medium/High
Proximity/Velocity
3–5 years/Low
Strategy
Global Leverage
Distinctive Offerings
Disruptive Innovation
viability statement
Assessing the prospects of the Group
This viability statement should be read in conjunction with the Group’s
Growth strategy on pages 17 and 18.
The Group’s corporate planning processes involve the following
individual processes covering differing time frames:
1.
2.
3.
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 of that order intake as well as contracted order backlog, and
the cost base required to support this enables generation of low-
case, base-case and high-case profit forecasts. Capital expenditure
and working capital requirements are also collected, reviewed,
approved and an operating cash flow produced for the Plan period.
This is then overlaid with inorganic growth assumptions as well as
detailed tax, interest, funding and other non-operating assumptions
to produce a five year net debt/cash forecast including relevant
covenant and funding metrics;
An annual budget process that covers the first year of the five-year
planning horizon in detail;
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 sensitivity analysis undertaken by
management explores the resilience of the Group to the potential
impact of each of the principal risks set out on pages 77 to 83, and
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 (as described on pages 77 to 83) 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 99, 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
QinetiQ Leadership Team 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 2028. This period is deemed appropriate as
the Group has significant contract cover out to 2028 driven by long-term
contracts. New debt committed in FY23 also aligns to the time period
with expiry in FY27. This is also 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 while still providing an appropriate longer-term outlook.
Assessing the viability of the Group
The scenarios applied consider the key risks facing the Group,
as summarised in the Risks Management section on page 75.
These include:
– The loss of a major contract
– A major environmental event
– Sensitivities on growth metrics in the plan such as margin
achievement and revenue growth
– Sensitivities based on our cash position including interest rate rises,
increased dividend payments and increased working capital burden
– Sensitivities linked to the economic environment including inflation
and FX risk.
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Annual Report & Accounts 2023
viability statement continued
The impact of each scenario is assessed in terms of revenue,
operating profit, net cash/(debt) and loan covenants (leverage and
interest cover ratio). They are considered individually and aggregated
through two combined stress-tests, covering financial downturn and
poor trading conditions.
The Group has significant forecast growth resulting in a return to
positive net cash from FY26. The sensitivities assume that the Group
continues to have access to Revolving Credit facilities of £275m
(expiring September 2025) and that the term loan of £270m can
be extended (expiring September 2027). This level of liquidity is
deemed sufficient for all of the viability scenarios analysed.
The financial impacts are inherently subjective and highly variable,
but have provided an indicative assessment to the Board. None of the
risks, applied individually, have a material impact on long-term viability
(in terms of breaching our available facility headroom or associated
covenants). Despite being unlikely, the Directors have considered
mitigations that could be put in place to offset the risks. The Group
Scenarios modelled
Scenario 1 – loss of major contract renewal
Loss of a major contract within the period.
Assumptions:
Revenue and margin removed from the end of the current contract in FY27.
has a number of cost control levers that could immediately be drawn on
to control cash outflows. In addition it continues to explore its portfolio
of assets to ensure they remain relevant to the strategic ambition (through
disposal of non-core assets). The revolving debt facility has the option
to increase further by an additional £125m, prior to considering the
reduction of dividends. All of these options can be drawn on to ensure
the Group remains a going concern and does not breach covenants.
Confirmation of longer-term viability
As noted on page 129, 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 2028.
Links to principle risks
UK large contract renewals
Scenario 2 – major environmental event
For the purposes of this scenario we have assumed a failure at the exposed area that would result in significant
flooding. This flooding would, despite mitigation measures, damage the equipment and infrastructure resulting
in significant remediation work to safely restore capability.
Assumptions:
There would be an immediate impact to our ability to deliver. The impact has been modelled through lost backlog,
pipeline revenue and reputational damage, together with lost recoveries from staff impacted.
Scenario 3 – profit margin downgrade
Profit margin is downgraded as a result of a major project write-down through poor project management,
a health and safety fine and/or overspend on our cost base.
P3M Capability
Health and Safety
Assumptions:
A 1% reduction in profit margin, no impact on revenue.
Scenario 4 – Reduction in revenue growth
Revenue grows at a slower rate through the planning period driven by a slow-down in customer spending,
failure to integrate acquisitions, a cyber incident or failure to plan the future resource and skillset needed.
Assumptions:
Revenue restricted to 5% organic growth per annum.
Acquisition integration
Cyber
Scenario 5 – increased working capital burden
Economic environment causes delays in customer payments or high inventory levels driven by supplier shortages
to manage demand.
Operational risk
Assumptions:
Cash conversion restricted to 85%.
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85
Scenarios modelled
Scenario 6 – pressure to increase dividend payments
Shareholders increase pressure on the Company due to strong performance and peer pressure to increase
dividend payments.
Links to principle risks
Operational risk
Assumptions:
10% increase in dividend payments through cycle.
Scenario 7 – pressure on interest rates
Global interest rates continue to rise due to macro-economic factors, global events and government interventions,
rather than flattening out as expected in the short/medium term.
Macroeconomic
Assumptions:
Doubling of interest rates over the five-year planning horizon.
Scenario 8 – Higher FX rates
Macro-economic trends, global events and government interventions may cause foreign exchange rates to move
in unfavourable directions (mainly an increase in the USD:GBP and AUD:GBP rates) such that the returns of the
US and Australia businesses are worth less in GBP terms.
Macroeconomic
Assumptions:
25% increase in FX (USD) rates
Combined stress tests modelled
Likelihood moderate given macroeconomic environment.
b) Poor trading performance (profitability).
c) Combination of all profitability related scenarios.
Going concern
The Group’s activities, combined with the factors that are likely to affect
its future development and performance, are set out on pages 1 to 41.
The Group meets its day-to-day working capital requirements through its
available cash funds and its bank facilities. The Chief Financial Officer’s
review on pages 42 to 46 sets out details of the financial position of
the Group, the cash flows, drawn and committed borrowing facilities
(including associated covenants), liquidity, and the Group’s policies
and processes for managing its capital and financial risks.
This past year has seen continued unrest and growing conflict across
many regions of the world. The defence and security context continues
to elevate the market needs for our six distinctive offerings. Both our
addressable market and our confidence in capitalising on that market
opportunity continues to grow. The Group enters the new year with a
healthy balance sheet and leverage position, and strong order backlog
and pipeline. After making enquiries, the Directors believe that the Group
is well positioned to manage its overall business risks successfully and
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.
Scenarios used
5, 6, 7
1, 2, 3, 4, 8
1-8
The Group is exposed to various risks and uncertainties, the principal
ones being summarised in the Risk Management section on pages 75
to 83. In reaching its conclusion on the going concern assessment, the
Board also considered the findings of the work performed to support the
statement on the long-term viability of the Company and the Group. As
noted above, this included assessing forecasts of severe but plausible
downside scenarios and further downside stress testing related to the
Company’s principal risks. Crystallisation of such risks, to the extent not
fully mitigated, would lead to a negative impact on the Group’s financial
results but none are deemed sufficiently material to prevent the Group
from continuing as a going concern for the next 12 months from
25 May 2023.
Climate change and Net-Zero
a) Financial downturn (liquidity) – if interest rates increase, shareholders will require greater ROI so dividends
may need to increase. Increased interest rates may further cause cash flow problems for customers, leading
to slower payments and reduced cash conversion.
86
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Annual Report & Accounts 2023
Section 172 (1) statement
We are committed to our responsibilities to promote the
success of the Company under section 172 of the 2006
Companies Act.
The Board of Directors confirms that it has acted to promote the long-term success of the Company for the benefit
of the shareholders, having due regard to matters set out in section 172(1)(a) to (f) of the Companies Act 2006:
s. 172(1) matter
Relevant disclosures
(a) the likely consequences of any decision in the long term
(b) the interests of the Company’s employees
(c) the need to foster the Company’s business relationships
with suppliers, customers and others
(d) the impact of the Company’s operations on the community
and the environment
(e) the desirability of the Company maintaining a reputation
for high standards of business conduct
Company purpose – page 16
Business model – pages 14 to 15
Strategy – page 17
Dividend policy – page 46
Longer-term viability statement – page 83
Improving the safety, health and wellbeing of our people – page 67
Engaging with our people – page 69
Developing our people – page 70
Rewarding and recognising our people – page 71
Non-financial information statement – page 88
Board employee engagement – page 106
Diversity and inclusion – page 68
Business ethics – doing business the right way – page 74
Anti-bribery and corruption – page 74
Human rights – page 74
Modern slavery – page 74
Supply chains – page 74
Supplier stakeholder management – page 26
Sanctions, embargos and compliance – page 74
Responding to climate change – pages 54 to 65
Greenhouse gas emissions and energy management – page 56
Investing in our community – page 26
TCFD disclosures – page 61
Stakeholder propositions – pages 26 to 27
Our sustainable business model – pages 12 to 13
Our values – page 16
Our culture – page 16
Our approach to responsible and sustainable business – page 60
Internal controls – page 129
(f) the need to act fairly between members of the Company
Investor engagement – page 107
The Annual General Meeting – page 94
StRAtEGiC REpORt
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87
Our Group Chair, with the assistance of the Company Secretary, sets
the agenda for each Board meeting to ensure that the requirements
of section 172 are always met and considered through a combination
of the following:
– Board papers which ensure that stakeholder factors are addressed
where judged relevant.
– Standing agenda matters presented at each Board meeting: for
example, the CEO presents updates on the financial overview,
strategic progress, investor relations, business development, and
operational progress. The Company Secretary also presents at
each Board meeting detailing relevant corporate governance and
compliance matters.
– A rolling agenda of matters to be considered by the Board throughout
the year, including a two-day strategy review, which considers the
purpose and strategy for the Group, supported by a budget for the
following year and a medium-term (five-year) financial plan. Agenda
items for the following year are set, based on the discussions held
and decisions taken by the Board throughout the year.
– A consistent approach to minute-taking with details as to when
section 172 factors are being considered.
Board activity and principal decisions in FY23
The principal decisions taken by the Board in FY23 are detailed on
pages 101 to 102. These decisions cover a variety of topics, including
our ESG strategy; Group portfolio optimisation decisions and investment
decisions. Due to the nature of these decisions, a variety of stakeholders
are considered as part of the Board’s discussions.
Typically in large and complex companies such as QinetiQ, the Directors
fulfil their duties partly through a governance framework that delegates
day-to-day decision making to the employees of the Company. The
Board recognises that such delegation needs to be part of a robust
governance structure, which covers our values, how we engage with
our stakeholders, and how the Board assures itself that the governance
structure and systems of controls continue to be robust. The main
methods used by the Directors to perform their duties include:
– An annual strategy meeting which assesses the long-term sustainable
success of the Group and our impact on our investors, customers,
employees, and local communities.
– Board risk management procedures that identify the potential
consequences of decisions in the short, medium and long term,
so that mitigation plans can be put in place to prevent, reduce or
eliminate risks to our business and wider stakeholders (see pages
75 to 83).
– The Board setting the Group’s purpose, values and strategy, ensuring
it is aligned with our culture (see page 104).
– Direct and indirect stakeholder engagement (see pages 56 and 105).
– External assurance, received through audits, stakeholder surveys and
reports from brokers and other advisers.
– Specific training for our Directors and senior managers (see page 119).
– Regularly scheduled Board presentations and reports, for example:
customer engagement, risk register reports, health and safety reports,
confidential reporting, defence process review, dividend policy, people
and culture strategy, and operational business updates.
– Corporate responsibility oversight, including business ethics, anti-
bribery and corruption, human rights, modern slavery, environmental
stewardship and use of resources, sustainable solutions, greenhouse
gas emissions and energy management, investing in our local
communities and our commitment to the armed forces.
– Formal consideration of any these factors which are relevant to any
major decisions taken by the Board throughout the year.
– Many of these topics are regularly reviewed through the Board risk
management process and the Audit Committee, Risk and Security
Committee and Remuneration Committee.
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Annual Report & Accounts 2023
non-financial information statement
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
89
Certain of the non-financial information required pursuant to the Companies Act
2006 is provided by reference to the following locations:
Community and society
Policy statement
Description
Non-financial information
Section
Business model
policies
Risk management
principal risks
Key performance indicators
ESG
Board Diversity policy
Business model
Non-financial information statement
Risk management
Risk management
Key performance indicators
Environmental Social Governance
Corporate Governance
Pages
14
88
75
77
48
52
116
The non-financial reporting requirements
contained in sections 414CA and 414CB
of the Companies Act 2006 are addressed
within this section by means of cross
reference, in order to indicate where they
are located within the strategic narrative
and to avoid duplication here.
We have a range of policy and guidance,
some of which is published on our
website: www.QinetiQ.com.
Our people
Policy statement
Description
Code of Conduct
Speak Up
Health and safety
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 (page 73). There is guidance on our standards, on ethical decision making and also how
to seek help and raise concerns. The Code is structured to include a range of advice for our people, our customers and
partners, our Company and shareholders and our communities and the public. We review our Code of Conduct annually to
reflect the needs of our business, regulations and best practice and in FY23 it was reviewed by external experts (page 74).
Guidance for our employees and third parties on how to ‘speak up’ is provided within our Code of Conduct and our supplier
Code of Conduct (see page 74), both are available on our website. Speak up and the Code of Conduct form part of the
Business Ethics Committee and ESG SteerCo agenda and updates are part of ESG papers for the Board. Confidential
reporting is overseen by the Audit Committee; the process is described on page 105.
Our Health and Safety policy outlines our commitment to continuously improving standards of safety management and
compliance. This is supported by our EHS Strategy. The effectiveness of the policy is governed through our assurance
process and our six-monthly self-certification. Safety issues are part of a regular governance timetable, monthly through
Safety Council meetings, through QinetiQ Leadership Team (QLT) meetings and regularly as part of the Board Risk and
Security Committee (see page 126). We track Lost Time Incidents (LTI) as a key non-financial KPI (page 50), and have
shown an improvement compared with FY22. Safety programmes are described on page 66 and listed in our operational
risks (page 81).
Diversity and inclusion Our Equality, Diversity and Inclusion (ED&I) policy details our approach to promoting ED&I in our workplace. The
effectiveness is governed via our assurance processes and KPIs with monthly oversight by our QLT as well as regular
oversight by the Board. Our Inclusion 2025 programme, including an improvement in gender diversity, is described on
pages 68 and 69. Data and progress against the Board’s Diversity and Inclusion Policy is described on page 116.
The environment
Policy statement
Description
Environmental
management
Energy management
and climate change
Waste management
We are committed to embedding an environmentally sustainable approach to business because we understand its
importance to our business and our stakeholders (see page 60). The effectiveness of our policy is governed through our
assurance process and our six-monthly self-certification. Environmental issues are part of a regular governance timetable,
with oversight by the ESG SteerCo, the new Environment Council (page 60) and the Board Risk and Security Committee.
We are certified to ISO 14001 in the UK and Canada and so are subject to external audit.
Underpinning our ISO 50001 certified energy management system is our Energy and Carbon Management policy, which
creates the framework for energy management in the UK. On page 56 we show the positive improvement against our
target and Scope 1 and Scope 2 GHG emissions, which form one of our non-financial KPIs (page 50). Our policy is
part of regular governance review and self-certification, as well as external audit, to ensure we are meeting certification
requirements. Our Net-Zero plan (pages 54-59) has oversight by the Environment Council, ESG SteerCo and the Board.
Risks associated with climate change are on page 80 and our TCFD disclosures on pages 61-65.
We recognise that reducing waste meets our sustainability goals and improves efficiency. On page 60 we outline the
progress against our target. The effectiveness is governed via our assurance processes and KPIs with oversight by
our QLT as well as regular oversight by the Risk and Security Committee.
Sustainability appraisal Sustainability appraisals are required under the LTPA. They involve an assessment of an activity across 16 sustainability
themes. The effectiveness is governed via our assurance processes as well as regular review and oversight by the UK MOD.
volunteering policy
Safeguarding children
and vulnerable adults
tax
Sponsorship
and donations
Human rights
Our policy provides guidance for employees to use Company time to use their skills, which enable us to make a positive
difference in the community (page 72). The effectiveness is monitored by the ESG team, with oversight by the ESG
SteerCo and via our assurance process.
Our policy explains the importance of safeguarding as part of our community investment programme and outlines
requirements for risk assessment and the right behaviours. The policy is managed both by the ESG team and locally
by safeguarding experts in our Early Careers Team and is managed via our assurance process.
Our tax strategy (available on our website) outlines our commitment to being compliant with tax legislation, wherever we
do business. We recognise our responsibility to pay the right amount of tax, at the right time and in the right jurisdiction.
Oversight of this commitment comes through external challenge, such as business risk reviews and audit questions from
tax authorities and external auditors and internal reviews such as quarterly tax updates with executive level reviews of
process and procedure. The tax strategy also has oversight by the Audit Committee (page 123).
Our policy is designed to ensure that all donations are made to appropriate organisations. We ensure that there is
screening and due diligence and we also undertake selection with oversight by the ESG team. This is managed by
our assurance process.
Policy statement
Description
Human rights
modern slavery
Data protection
Supply chain code
of conduct
international trade
compliance
We seek to anticipate and prevent potential negative human rights impacts through our policy and processes and address
salient human rights issues through our Code of Conduct, ethical trading policy, international business risk management
process and export controls process. Our policies ensure we meet all statutory requirements. We monitor the application
of these policies through our business assurance processes and regular self assessment and with leadership oversight
(ESG SteerCo, Business Ethics Committee and Board). We believe that this integrated approach is effective in ensuring
our business acts responsibly and respects human rights. (See page 74).
We recognise our responsibility to comply with all relevant legislation, including The UK Modern Slavery Act 2015. Our
policy focuses on management of the supply chain and the requirements for due diligence. In addition we include modern
slavery in our resourcing policy. Our Modern Slavery and Human Trafficking statement is updated annually, signed by
our Board and published on our website. The effectiveness is monitored via our assurance programme and leadership
oversight (QLT and Board). See page 74 for details of the programme.
Our Data Protection policy details how we manage the privacy and security of personal information. The effectiveness
is monitoring via our assurance programme and leadership oversight (QLT and Board).
Our Supplier Code of Conduct helps ensure our suppliers have clarity on our expectations on human rights issues.
See page 74 and our website for more details.
As an international business, it is vital that we operate fully within the requirements of international export requirements
and this is addressed by our policies. The effectiveness is monitored via our assurance programme and leadership
oversight (QLT and Board). See our website for more details.
Anti-bribery and anti-corruption
Policy statement
Description
Code of Conduct
Anti-bribery
and corruption
Commercial
intermediaries
Sanction screening
Gifts and hospitality
Our Code of Conduct lays out our ethical standards, and contains advice on anti-bribery and corruption (see page 73).
Our Anti-Bribery and Corruption policy sets out our responsibilities in observing and upholding our zero-tolerance approach
to all forms of bribery and corruption. This important policy, which ensures we meet applicable statutory requirements, has
significant senior oversight at QLT and Board level, is managed via our assurance processes and self-certification and there
are regular internal audits. Details of our ABC programme are provided on page 74.
Managing commercial intermediaries is one of a suite of key policies which supports our zero tolerance approach to ABC.
It provides clear guidance on approach. This policy has Executive and Board oversight, is subject to our assurance process
and self-certification.
It is key that we comply with any sanctions requirements and so undertake various screenings. This is captured in our
policy, which is designed to ensure we comply, has QLT and Board oversight, and is subject to our assurance process and
self-certification.
Our Gifts and Hospitality policy is one of a suite of policies which supports our zero-tolerance approach to ABC. It provides
clear guidance on what is appropriate and how to record. This policy has QLT and Board oversight, and is subject to our
assurance process and self-certification.
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Board of Directors
An experienced and strategically
focused Board who continue to
be paramount to the Company’s
long-term sustainable success.
Read more on page 96
purpose, values and culture
Our purpose communicates the
Group’s strategic direction and
intentions to our stakeholders.
Read more on page 104
Board decision making: ESG
The Board agreed the importance
of continuing to identify and
invest in ESG matters as a
whole and specifically for the
Net-Zero programme supporting
on programmes such as ESG
data improvement.
Read more on page 102
Board decision making:
acquisitions
The acquisitions of Avantus and
Air Affairs in the US and Australia
provide positive momentum for us
to deliver sustainable performance
in the years ahead.
Read more on page 101
Corporate
Governance
93 An introduction from our Group Chair
95 Governance framework
96 Board of Directors
99 Board activity
101 Board decision making
104 Purpose, values and culture
105 Stakeholder engagement
109 Division of responsibilities
110 Composition, succession and evaluation
112 Nominations Committee report
117 Director effectiveness
120 Audit Committee report
126 Risk & Security Committee report
130 Directors’ remuneration report
132 Remuneration at a glance
136 Directors’ remuneration policy
146 Annual report on remuneration
159 Directors’ report
163 Independent auditors’ report
1.
Board
leadership
and Company
purpose
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Corporate Governance
Governance framework
The Board is accountable to shareholders for its standards of governance and as a UK-listed Company our governance is
based on applying the principles and provisions of the UK Corporate Governance Code. See page 93 for further information.
The UK Corporate Governance Code is publicly available at www.frc.org.uk.
1. Board leadership and Company purpose
3. Composition, succession and evaluation
provides an overview of the activities undertaken by the Board
in the year, how the Board has considered its section 172(1)
responsibilities and its governance framework
Code principle A
–Section 172(1) statement – pages 86 to 87 and 101 to 102
–Board of Directors – pages 96 to 98
Code principle B
–Our strategy – page 17
–Section 172(1) statement – pages 86 to 87 and 101 to 102
–Company purpose – page 104
–Culture – pages 104 to 105
Code principle C
–Strategic report – pages 1 to 89
–Audit Committee report – pages 120 to 125
–Risk & Security Committee report – pages 126 to 129
Code principle D
–Social – pages 66 to 72
–Stakeholder engagement – pages 105 to 108
–Section 172(1) statement – pages 86 to 87 and 101 to 102
Code principle E
–Social – pages 66 to 72
–Employee engagement – page 106
2. Division of responsibilities
Explains the roles of the Board and its Directors
Code principle F
–Governance framework – page 95
–Division of responsibilities – page 109
Code principle G
–Governance framework – page 95
–Board of Directors – pages 96 to 98
–Division of responsibilities – pages 109 to 111
Code principle H
–Section 172(1) statement – pages 86 to 87 and 101 to 102
–Time commitment – page 110
Code principle i
–Board and Committee processes – page 110
Sets out key processes, which ensure that the Board and its
Committees can operate effectively
Code principle J
–Nominations Committee report – pages 112 to 119
Code principle K
–Board of Directors – pages 96 to 98
–Nominations Committee report – pages 112 to 119
Code principle l
–Director effectiveness – pages 117 to 118
4. Audit, risk and internal control
Explains the role of the Board, the Audit Committee and the Risk
& Security Committee in ensuring the integrity of the financial
statements and maintaining effective systems of internal controls
Code principle m
–Audit Committee report – pages 120 to 125
Code principle n
–Fair, balanced and understandable – page 121
Code principle O
–Risk management – page 129
–Audit Committee report – pages 120 to 125
–Risk & Security Committee report – pages 126 to 129
5. Remuneration
Describes the Company’s remuneration arrangements in respect
of its Directors, how these have been implemented in FY23, and
details of our remuneration policy
Code principle p
–Directors’ remuneration report – pages 130 to 158
Code principle Q
–Directors’ remuneration report – pages 130 to 158
Code principle R
–Directors’ remuneration report – pages 130 to 158
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Group Chair introduction
Introduction to Governance
Fast-evolving geopolitical and regulatory environment
More than ever this year, we have seen increasing pace in the change of
geopolitical events around us, and none more so than in the defence and
security arena. This has been particularly characterised by the conflict in
Ukraine, and the rising cost of living that has directly affected so many of
the countries that our people and customers operate in. As a result, the
Company’s purpose of protecting lives and securing the vital interests of
our customers, feels even more relevant today and looking towards the
future, than ever before. This has also come at a time when the pace of
regulatory change relevant to our industry has brought more rigorous
and demanding governance requirements for our business to meet.
In response, the Company’s executive and leadership teams, supported
by the experience and stewardship of the Board, have acted swiftly to
implement key changes to its strategy, structure, processes, and employee
offerings, to put it in the best possible position to meet these challenges.
I have highlighted a number of these below, and you can read more
about this in the following corporate governance statement.
Board activities
FY23 saw the Company deliver a strong underlying operating
performance at Group level, and I have been particularly pleased to
see the improved performance of our US business, with its newly
established leadership team.
The Board has also overseen the Group’s largest US acquisition and a
further strategically important acquisition in Australia, representing a major
step towards achieving our strategic growth ambition in the US, the world’s
largest defence and security market; and further establishing the Group as
a long-term, strategic partner to the Australian Defence Force. Underpinning
its strategic position as a market leader in threat representation, training,
and test and evaluation services.
The Board has also played a vital role in guiding and steering a substantial
structural reorganisation of the Group’s business. Designed to better
empower Sector leadership teams, embed functional expertise directly
in our Sectors, and enable efficient Group-level functional leadership. All
of which will better enable effective delivery to our customers, drive the
Company’s strategy and, ultimately, enhance returns for our investors.
In dealing with the renewal of our Directors’ remuneration policy at this
year’s AGM, the Remuneration Committee has considered at some length
how best to incentivise our leaders and employees to achieve both the
organic and inorganic growth ambitions of the Company, actively engaging
with our investor community to secure the valuable benefit of their views
and insights.
Additionally, the Audit Committee has been actively monitoring, and
planning for, the significant changes we expect to the audit, risk and internal
control provisions in the UK Corporate Governance Code, and the proposed
changes in the non-financial reporting and audit environment, to ensure we
are well placed to implement these when necessary.
A fuller summary of the Board’s activity during the year can be
found on pages 101 to 102, further information about the Group’s stakeholder
engagement can be found on page 56, and pages 105 to 107.
Dear Shareholder,
I am pleased to present this year’s
corporate governance statement. This report
provides an overview of the system of governance
adopted by the Company and will enable our
shareholders to evaluate the manner in which the
UK Corporate Governance Code’s Principles and
Provisions have been applied by the Company.”
For the year ended
31 March 2023, the Board
considers that the Company fully
applied the principles and complied
with the provisions of the Code, with
the exception of provisions 38 and 41.
For more details on these exceptions, see page 94
While being a British company, we operate internationally and our
governance structure respects the special arrangements in place to
protect the national security interests of our government customers
globally. Over the year, the Board has worked closely with the
Company’s executive and senior leadership teams on the reset of the
Group’s global growth strategy, evolving it to more closely align with
the recently announced AUKUS strategic alliance, and playing a key role
in challenging, shaping and developing the Company’s latest five-year
Integrated Strategic Business Plan.
1.
Board
leadership
and company
purpose
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Group Chair introduction continued
Environmental, Social and Governance (ESG)
QinetiQ is committed to responsible and sustainable business practice
and is proud to be acting as a catalyst, by driving and leading these
important issues within our sector. During the year, the Board and I have
had many discussions on how to best keep evolving our approach to ESG
matters. As part of our regular business review, we are able to oversee and
monitor management of ESG aspects, which are being delivered through
our ESG function. We are proud of the significant progress made to date
on our ESG strategy and programmes, and we continue to support the
business in its ambition to embed this further into corporate strategy
and decision making.
Health, safety and wellbeing
At QinetiQ, health, safety and wellbeing remain our number one priority.
Our commitment to look after our people, customers and visitors while
ensuring the public is never harmed by the work we do is at the heart
of our culture.
Further information on this can be found on pages 66 to 72,
and 104 to 105.
Culture
Promoting a culture of openness and debate in the boardroom is one
of my key responsibilities as Group Chair, and as a Board we play an
important leadership role in promoting the desired culture throughout
the organisation. By spending time with the business and its people,
the Board and I have seen that the culture and values of QinetiQ
(integrity, collaboration and high performance), are clearly embedded
and genuinely lived. In QinetiQ, I have found a culture that is grounded,
responsible and humble, where people have confidence in their capabilities
and our strategy, with a strong desire to learn and develop. The Company
continues to spend considerable time on engagement with our people to
embed and harness the benefits of our Company values.
Board and management succession
In August 2022 we welcomed Steve Mogford to the Board. Steve brings
a wealth of international defence and security sector experience from both
executive and non-executive roles, and this experience further enhances
the skill sets of our Board while supporting our global development
ambitions. Steve will become the Senior Independent Director
upon the retirement of Michael Harper at the 2023 AGM.
At the end of 2022, Lynn Brubaker stepped down as Non-executive
Director. We recognise that this has impacted the gender balance on the
Board which stands at 33% women, and we do not therefore currently
meet the target of 40%. This coming year will see continued focus on
evolving the composition of the Board to best align with, and support,
the Company’s global growth strategy, while continuing our efforts
to meet gender and ethnicity targets.
A new QinetiQ Leadership Team (QLT) was announced this year, which
included both promotion of internal talent and new appointments, bringing
the leadership skills and expertise needed to drive the Company’s global
growth ambitions. Ensuring a diverse culture on the QLT is crucial to
improving effectiveness, encouraging constructive debate, delivering
superior performance and enhancing the success of the Company.
We currently have a QLT comprising 36% women. We continue to be
committed to our gender and ethnic minority diversity targets for the QLT.
Evaluating the Board’s performance
Central to setting the correct tone is the review of the Board’s own
performance. Following on from the external assessment carried
out in FY22 by Tom Bonham-Carter of The Effective Board LLP, a
further external review was conducted in FY23 to assess how we
are progressing against last year’s recommendations.
Please see pages 114 to 119 for further information.
Remuneration
This year was the third and final year of the Directors’ Remuneration
Policy that was approved by shareholders at the AGM in 2020 (the Policy).
During this year, the Board’s Remuneration Committee has focused on
ensuring that the Policy is continuing to operate as intended to reward,
retain and incentivise appropriately the Executive Directors who are driving
the Company’s success. It has done so by seeking to ensure that the
Company’s remuneration schemes and their outcomes for Executive
Directors continue to be transparent, aligned with the Company’s strategy
and with the interests of, and returns delivered to, shareholders.
The Remuneration Committee, led by its Chair, Susan Searle, has
been working with advisors and consulting with investors to develop
the Company’s new Remuneration Policy, which will be presented for
approval by shareholders at the 2023 AGM.
The Company has also introduced new, enhanced reward schemes for
its employees, aimed at supporting its people with the rising cost of living
in a number of its home countries, including additional support through
a hardship fund available to those who have been most affected.
Exceptions to UK Corporate Governance Code Compliance
provision 38
During FY23, the Remuneration Committee agreed that the Chief
Executive’s pension contributions should be reduced such that, with
effect from 1 January 2023, it would be aligned with the maximum level
available to all UK employees (currently 10.5%). That change has been
implemented and, consequently, the Company is now compliant with
the UK Corporate Governance Code Provision 38.
provision 41
The Company has not formally consulted with employees in forming the
new Remuneration Policy, and is therefore not compliant with Provision
41 of the UK Corporate Governance Code which requires details of
engagement with the workforce to explain how executive remuneration
aligns with the wider Company pay policy. However, the Company has
engaged with its Global Employee Voice during this process. Further
details on employee engagement can be found on page 24.
Annual General Meeting
We are delighted this year to again welcome shareholders to our AGM.
The AGM will be held at 11:00 on Thursday 20 July 2023 at the office
of Ashurst LLP, London Fruit and Wool Exchange, Duval Square, London
E1 6PW. Further details will be provided in the Notice of AGM and on
www.QinetiQ.com.
Conclusion
As ever, I would like to take this opportunity to express my gratitude
to all employees of QinetiQ, the CEO and his executive team, and
my fellow Directors for all their hard work during the year.
neil Johnson
Non-executive Group Chair
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95
Board leadership and Company purpose
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 underpin 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.
Shareholders
Group Chair
Responsible for the leadership of the Board and for ensuring that it operates effectively through dynamic discussions and challenge.
Board of Directors
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, while cultivating a balanced approach to risk
within a framework of effective controls and taking into account the interests of a diverse range of stakeholders.
Audit Committee
Reviews and monitors
the Group’s financial
accounting and
reporting processes and
the integrity of published
financial statements.
Reviews the Group’s
system of internal
control, including the
effectiveness of its
internal audit function
and the independence
and effectiveness of
its external auditors.
See pages 120 to
125 for Committee
report
Committees
Remuneration
Committee
Determines and
recommends to the
Board the framework
for the remuneration of
the Group Chair, CEO,
CFO and QLT. Oversees
workforce remuneration
and workforce policy.
Risk & Security
Committee
Provides scrutiny
and assurance to the
Board, that the required
standards of risk
management, security,
health, safety and
environment within the
UK, and internationally,
are achieved.
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.
See pages 112 to
119 for Committee
report
See pages 130 to
158 for Committee
report
See pages 126 to
129 for Committee
report
Disclosure
Committee
Considers and acts
on the need for
disclosures to be made
to the market under
the requirements of
the Market Abuse
Regulations. The
Committee comprises
all Board members
except for when called
on short notice when
it comprises the Group
Chair, the CEO, the CFO
and any one of the
Committee Chairs.
Responsible for the day-to-day running of the Group’s business and performance, and the development and implementation of the Group strategy.
Group Chief Executive Officer
QinetiQ leadership team (Qlt)
The interaction between the Board and the QLT 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 directly to senior management.
The QLT meets twice a month. It is responsible for the day-to-day management of the Group’s activity. The focus of the QLT includes
managing the operational performance of the business, delivering the strategy, managing risk, managing regulatory compliance,
establishing financial and operational targets and monitoring performance against those targets.
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Board leadership and Company purpose continued
An experienced and
strategically focused Board
The Group Chair considers all of the Directors to contribute valuably, and to
continue to be paramount to the Company’s long-term sustainable success.
Committee membership key
A Audit
n Nominations
R Remuneration
RS Risk & Security
Committee Chair
Neil Johnson
Group Chair
nationality: British
Appointed: April 2019
Steve Wadey
Group Chief Executive
Officer
nationality: British
Appointed: April 2015
n
R
RS
RS
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97
Carol Borg
Group Chief Financial
Officer
nationality: Australian
Appointed: October 2021
Michael Harper
Deputy Chair and
Senior Independent
Non-executive Director
nationality: British
Appointed: November
2011
RS
A
n
R
RS
Skills, competence and experience:
Carol has a wealth of global financial expertise and ESG leadership to bring to
the role. Leading key interventions in working capital management, new market
entry and establishment, risk management, insurance and business continuity,
finance process maturation and shared service centre implementation, she
has a deep international knowledge of operational execution, performance
management, financial reporting, risk management, strategy and governance; all
of which makes her a true strategic finance and commercial business partner.
Carol has held various senior roles in international businesses, most recently in
a founder-led renewable business as the Chief Financial Officer of Lightsource
BP, a global solar developer. Prior to that she held various positions at Vestas,
a global wind turbine manufacturer, the most recent being the Regional Chief
Financial Officer of Vestas’ Southern Europe, Middle East and North Africa
(MENA) and Latin America operations (spanning manufacturing, sales,
construction and after-sales service).
Skills, competence and experience:
Michael has deep operational and corporate experience from a lengthy career
as a business leader and Board member within, among 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.
Michael has served as Chair of Ricardo plc, Vitec Group plc, and BBA Aviation
plc, having previously been its CEO. His previous appointments include Senior
Independent Director of Catlin Group Limited, Non-executive Director of
Williams plc and the Aerospace Technology Institute, and CEO of Kidde plc.
Other appointments:
N/A
Skills, competence and experience:
Neil’s former CEO experience and current roles as a plc Group Chair and
Non-executive Director bring to the Board relevant knowledge, challenge
and leadership.
Skills, competence and experience:
Steve’s proven track record of driving growth and his in-depth experience of
defence and technology industries are of essential importance and benefit
to the Board.
Other appointments:
N/A
Starting his career at Sandhurst and the Army, Neil 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, and former
Director General of the EEF and a Home Office appointed Independent Member
of the Metropolitan Police Authority. He was previously Chair of Motability
Operations and Centaur Media plc and Hostmore Group plc.
Steve is a Fellow of the Institution of Engineering and Technology, the Royal
Aeronautical Society, and the Royal Academy of Engineering. He was previously
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.
He has held various roles with MBDA, including as Managing Director, MBDA
UK. Previously he held various roles with Matra BAe Dynamics and British
Aerospace. He was also Chair of the Defence Industry Liaison Board of the
UK Department for International Trade, Defence and Security Exports.
Other appointments:
Chair of Unbound Group plc, and Deputy Chair and Senior Independent
Non-executive Director of the Business Growth Fund.
Other appointments:
Co-Chair of UK Defence Growth Partnership and Climate Change
and Sustainability steering group with UK MOD.
Board Gender Diversity
independent Directors
Female
33%
Executive
22%
male 67%
Male
Female
non-executive 78%
Non-executive
Executive
Steve Mogford
Independent
Non-executive Director
nationality: British
Appointed: August 2022
Shonaid Jemmett-Page
Independent
Non-executive Director
nationality: British
Appointed: May 2020
A
n
R
RS
A
n
R
RS
Skills, competence and experience:
Steve has vast experience in both executive and non-executive roles across
a range of sectors. In particular, his long and comprehensive international
defence and security sector experience equip him to further develop the
skill sets of our Board while supporting our global development ambitions.
Steve has a first-class honours degree in astrophysics, maths and physics
from London University.
Formerly the Chief Executive Officer of United Utilities Group PLC, Steve
started his career at British Aerospace at its North West based military aircraft
business. During his long career with the Company he held a number of senior
positions before being appointed Chief Operating Officer and a member of the
BAE Systems plc Board. He then joined Finmeccanica, Italy’s principal defence
and security company as Chief Executive of SELEX Galileo. He also served
on the Board of G4S plc as Senior Independent Director up to its acquisition
in 2021.
Other appointments:
N/A
Skills, competence and experience:
Shonaid has widespread experience as an executive and non-executive director
spanning a variety of sectors, including industrial and technology-based
businesses with international operations. This, combined with her extensive
financial experience, are invaluable in her role as Chair of the Audit Committee.
Shonaid is a Fellow of the ICAEW.
Previously she was the Chief Operating Officer of CDC Group plc, the UK
Government’s development finance institution, having joined from Unilever,
where she was Senior Vice-President Finance and Information, Home and
Personal Care, originally in Asia and later for the Group as a whole. Her early
career was spent at KPMG, latterly as a partner. Her Board level experience
includes Non-executive Chair of Greencoat Wind plc, MSAmlin plc, and
Non-executive Director at GKN plc.
Other appointments:
Non-executive Chair of Cordiant Digital Infrastructure Limited, Senior
Independent Director of ClearBank Limited and Non-executive Director
of Aviva plc.
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Board leadership and Company purpose continued
General Sir
Gordon Messenger
Independent
Non-executive Director
nationality: British
Appointed: October 2020
Lawrence
(Larry) Prior III
Independent
Non-executive Director
nationality: American
Appointed: August 2021
A
n
R
RS
A
n
R
RS
Skills, competence and experience:
Gordon brings considerable experience from the armed forces having served
for 37 years as a Royal Marine. Throughout his military career he served in key
appointments in various UK and NATO Headquarters, overseeing the planning
and execution of UK and coalition military and humanitarian relief operations
worldwide. He most recently served as Vice Chief of the Defence Staff,
a position he held for three years until his retirement in 2019.
Gordon’s unique experience enables him to provide invaluable insight
in his role as the Chair of the Risk & Security Committee.
Other appointments:
UK Member of the International Defence Reform Advisory Board for Ukraine,
Board member of the UK Health Security Agency, a member of the Advisory
Board of C3.ai Inc. and His Majesty’s Constable of the Tower of London.
Skills, competence and experience:
Larry is an experienced executive and non-executive from sectors including
aerospace, defence and government services, IT, and cyber and security. This,
combined with his global and US focus, make him ideal to support QinetiQ’s
progress in becoming an integrated global defence and security company.
Larry is currently an Operating Executive for the Carlyle Group. His most recent
executive experience was as President and Chief Executive Officer of CSRA,
which was acquired by General Dynamics in 2018. Previously, he was Executive
Vice President and General Manager of CSC’s North American Public Sector
(NPS) business, providing next-generation technology solutions and mission
services to the US Department of Defense, Intelligence Community and FedCiv
sectors. Larry started his career as an Intelligence Officer in the U.S. Marine Corp.
Other appointments:
Operating Executive for the Carlyle Group and Non-executive Director and Chair
of KLDiscovery Inc and Two Six Technologies; Non-executive Director of CNSI;
and independent Director of Shift5.
Susan Searle
Independent
Non-executive Director
nationality: British
Appointed: March 2014
A
n
R
RS
James Field
Company Secretary
and Group Director Legal
nationality: British
Appointed: July 2022
Skills, competence and experience:
Susan brings to the Board essential experience of investing in growing
technology businesses, acquisitions and exploitation of new technologies.
Her extensive experience as a plc Remuneration Committee Chair enables
her to efficiently and valuably chair the QinetiQ Remuneration Committee.
Susan was a founder of Touchstone Innovations plc, and formerly its CEO. She
has served on a variety of private company boards in engineering, healthcare
and advanced materials, and held a variety of commercial and business
development roles with Shell Chemicals, the Bank of Nova Scotia, Montech
(Australia), and Signet Group plc. Previously she was the Senior Independent
Director and Remuneration Committee Chair of Horizon Discovery Group plc, and
Chair of Mercia Asset Management plc and Schroder UK Public Private Trust plc.
Skills, competence and experience:
James was appointed Company Secretary in July 2022.
James joined QinetiQ as an in-house lawyer in 2004, progressing through
various roles to Head of the Group Legal and Intellectual Property team, before
becoming Group Director Legal and Company Secretary. Prior to QinetiQ,
James worked as in-house Legal Counsel at Transport for London, and
has a background in London-based private legal practice.
Other appointments:
N/A.
Other appointments:
Senior Independent Non-executive Director and Chair of the Remuneration
Committee of Benchmark Holdings plc, Non-executive Director of Gooch &
Housego PLC and Chair of Greenback Recycling Technologies Ltd.
Committee membership key
A Audit
R Remuneration
n Nominations
RS Risk & Security
Committee Chair
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Board activity
The key business and activities of the Board during the year were as follows:
topic
Key activities
Strategy and
operations
• Reviewed and considered the Company’s purpose, values and
strategy. See more on pages 16 to 17 and page 104
• Approved the FY23 component of the Group’s five-year Integrated
• Received updates from each of the Group’s Sectors and
Functions on their performance vs strategy and budget,
and their priorities and initiatives
Strategic Business Plan (ISBP). See more on page 83
• Received reports and discussed the Group’s Digital and
• Undertook in-depth reviews of business strategy and performance
• Undertook in-depth reviews of M&A pipeline and specific opportunities
• Reviewed and approved material bid, contract and M&A proposals,
divestments and assessed performance against these
Transformation strategy and investments
• Monitored the economic, environmental, legislative and
geopolitical landscape, particularly as regards the political
climate in Ukraine and global economic pressures
Financial
performance
• Approved the Company’s annual budget, business plan and KPIs,
and monitored performance against them. See more on pages
48 to 51
• Reviewed and confirmed the Group’s viability statement
and going concern status
• Reviewed the Group’s capital, debt and other liquidity
• Reviewed and approved the Group’s full and half-year results
arrangements
and interim trading updates
• Approved the full-year and half-year dividends
• Approved the Group’s tax strategy and treasury policy
• Considered and approved material bids, acquisitions,
• Approved the Company’s Annual Report, including its fair,
contracts, expenditure and guarantees
balanced and understandable nature
internal
control
and risk
management
• Reviewed and approved the Group’s risk appetite and reviewed the
Group’s principal and emerging risks, the processes for identifying
them, and actions to mitigate these
• Reviewed and validated the effectiveness of the
Group’s system of internal control
• Approved amendments to the Group’s delegated
• Received reports from the Chair of the Risk & Security Committee
authorities framework
on its activities
• Received reports from the Chair of the Audit Committee on its
activities and assessments
• Reviewed and approved confidential reporting policies
• Reviewed the reports on confidential reporting (the
process of which is described further on page 108)
leadership,
people and
culture
• Received recommendations from the Nominations Committee
on the appointment of new Directors, the re-election of Directors
and other advice regarding the structure, size and composition
of the Board
• Reviewed and actioned succession plans for the Board and senior
management, having regard to skills, experience and diversity
• Received reports from the Chair of the Remuneration
Committee on its activities, recommendations regarding
remuneration strategy and decisions regarding the Group
Chair’s, Executive Directors’ and senior management pay,
and reviewed and approved Non-executive Director fees
• Reviewed human capital reports, including updates
on talent development programmes and diversity
and inclusion programmes
Engagement,
environment
and
community
Governance
and legal
• Undertook an annual review of the Group’s stakeholders –
• Reviewed regular reports on our approach to ESG issues -
who they are, methods of engagement, outcomes and feedback. See
more on pages 2 to 27, and 105 to 108
• Reviewed feedback from investors and analysts and the output
of engagement with major shareholders and other stakeholders
• Reviewed workforce engagement activities and outcomes, including
the results of the Peakon surveys and received reports on the
Group Chair’s workforce engagement activities
see more on page 102
• Reviewed the activities of, and approved a financial
commitment to, the Company’s environmental
programmes, Net-Zero plan and charitable
and community initiatives
• Approved the Group’s section 172(1) statement. See more on
• Reviewed the results of the internal Board and Committee
pages 86 to 87 and 101 to 102
• Approved the Notice of the AGM
• Undertook an annual compliance review of the UK Corporate
Governance Code and DTR7
effectiveness evaluations
• Reviewed and approved matters reserved for the
Board and its Committees’ terms of reference
• Reviewed and approved the Group’s annual Modern
Slavery and Human Trafficking statement, published
on www.QinetiQ.com
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Board decision making
In making decisions, the Board of Directors is cognisant of undertaking its legal duties, including its duty under section 172(1), in the way that
is most likely to promote the success of the Company for the benefit of its members as a whole, and the need to have regard to the factors set
out therein; see pages 86 to 87 for more information. Examples of some of the most important decisions taken by the Board during the year of
reporting, and an explanation of which factors the Board had regard to when reaching such decisions, are set out below.
1. m&A – Acquisitions of Avantus Federal & Air Affairs Australia
Background – In the third quarter of the financial year, the Company made two strategically important acquisitions. Firstly, its largest ever
acquisition, Avantus Federal LLC in the US, a leading provider of cyber, data analytics and software development solutions to the US Department
of Defense, Intelligence Community, Department of Homeland Security and other Federal civilian agencies. Secondly, the strategically important
addition of Air Affairs in Australia, further establishing the Group as a long-term, strategic partner to the Australian Defence Force and underpinning
its strategic position as a market leader in threat representation, training, and test and evaluation services.
Board discussion – During the year the Board was kept up to date on the progress of these acquisitions via updates from the CEO and CFO
at each Board meeting, and through dedicated briefing sessions from the Chief Strategy Officer. The Board was able to provide guidance and
challenge on the strategic fit, investment returns and integration considerations associated with the acquisitions, and also test that lessons
learned from previous acquisitions had been considered and applied by the management team, before ultimately granting final approval for the
transaction to complete. The Board was also able to consider and help guide the funding strategy adopted by the Group for the acquisitions,
including consideration of the terms of its borrowing plans and how these would be repaid.
Board stakeholder considerations and impact – During its briefings, the Board had the opportunity to understand, consider and challenge
each transaction’s impact on investors, customers, and employees, particularly focusing on the following issues:
• Employees – the integration, incentivisation, development and succession planning for senior management and staff of the acquired
companies; and opportunities that would be created for the Group’s existing employees.
• Customers – the business development opportunities that would be created with existing and new customers; and synergies that could
be realised between existing skills and technology of the Group, and new skills and technology that would be acquired, that could be
combined to provide more valuable offerings for our customers.
• Investors – the implications for the Group’s forward funding, capital structure and forecast investor returns.
Outcome and next steps – As a result, both acquisitions were able to successfully proceed to completion, underpinned by robust integration
plans to ensure that customer and employee benefits, and investor returns, can be achieved as effectively as possible. The acquisitions represent
a further major step towards achieving the Company’s strategic growth ambitions in two of the world’s key defence and security markets. Through
ongoing updates to the Board on the progress of integration, at regular Board meetings, the Directors are able to continue to help steer and
challenge the effectiveness of the integration of both Avantus and Air Affairs in terms of the Company meeting its delivery commitments
to its customers and its returns commitments to its investors.
2. US – Development of leadership team
Background – Following various performance challenges in the prior FY22 financial year, the Nominations Committee oversaw the process of
making changes to the senior leadership team of the US Sector. Alongside the organisational restructure of the Group, various changes were
made to the US leadership team; to enhance its strategic, operational and performance delivery capability, ensuring it was appropriately skilled
and resourced to deliver on the US elements of the Group’s reset strategy, organically grow the business, and also effectively integrate planned
US acquisitions within its existing business.
Board discussion – Through a combination of feedback from the CEO, CFO and Chief People Officer on the evolution and development of the
US leadership team, and a site visit to various parts of the US business as part of the Company’s annual Strategy Board meeting, the Board has
kept itself appraised of the performance and effectiveness of the newly recruited team, and provided the benefits of individual Directors’ collective
experience and skills in both creating and leading high-performing senior leadership teams.
Board stakeholder considerations and impact – In continuing to have oversight of the performance of the US Sector, the Board appraised
the ability of its leadership team to deliver on the business strategy, and lead the recovery of the Sector from the effects of the performance
challenges of the prior financial year. This included considering the skills required to achieve both the organic and inorganic growth required to
meet investor expectations on the level of shareholder returns the Group would achieve; providing guidance on the type and level of incentivisation
offered to employees in the US business; and inputting into assessments of the skills and expertise required to both respond to the changing
needs of the Company’s US customers and develop the business to be able to deliver against the evolving mission of those customers.
Outcome and next steps – The improvements made in the US leadership team have led to sustained improvements across all metrics used to
measure the performance of the US Sector, particularly in terms of new contracts won; the quality of delivery to customers, particularly within its
robotics manufacturing business; its supply chain management capability; its financial performance results; and its levels of employee engagement.
CASE StUDY
Board Engagement
In March 2023 Shonaid Jemmett-Page, General Sir Gordon
Messenger and Steve Mogford visited MOD Boscombe
Down, a key hub for our aviation operations, to gain a
deeper understanding of the complexities of the site,
to review risk and assurance processes and talk to our
delivery teams across a range of activities.
Following an overview of the site, and its regulatory and
compliance landscape, the Directors visited the Civil Flying
Organisation, including the world’s first and premier test
pilot school, ETPS; the Aviation Engineering Centre, which
delivers aircraft design, manufacturing and flight test
activities under both civil and military approvals; and the
Hypobaric Facility during an emergency response exercise,
which provided an opportunity to discuss the intricacies
of operating a high-hazard facility.
The visit allowed engagement with a significant number
of employees, all of whom have a role to play in delivering
a safe and compliant environment for our people and
facilities. The Directors were able to engage with and
constructively challenge developments across UK sites
which have seen a focus on understanding and tracking
key compliance drivers, alongside the latest progress of
our Safety Improvement Programme.
A Board that is committed
to understanding how the
Company operates
at its frontline.”
Neil Johnson
Group Chair
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Board leadership and Company purpose continued
3. Environment, Social and Governance – particular focus on climate change and net-Zero plan
Background – During FY23 the Board regularly engaged on ESG aspects to provide oversight and support.
Board discussion – A key aspect of our evolved strategy is a strong and increasing focus on ESG factors. The Board seeks to grow the Company
in a responsible and sustainable way for the benefit of all stakeholders. Our ESG strategy is designed to meet stakeholder expectations across
ESG themes, aligned with our business strategy. FY23 has been the foundation year of our Net-Zero plan with a number of programmes
implemented across the four work streams. The Board included a focused session on climate change as part of the October strategy
day and a dedicated session on non-financial reporting for the Audit Committee in March.
Board stakeholder considerations and impact – The Board was kept up to date on investors’, customers’, and employees’ views. The transition
to Net-Zero is of material interest to society and the Board supported a new Net-Zero plan and received regular updates on progress in the
foundation year.
• Customers – The UK MOD has indicated the growing importance of climate change, and so our CEO Steve Wadey has actively engaged, as
Industry Co-Chair of the Climate DSF Change and Sustainability Steering Group, to understand how we can support their wider objectives
through leading and mobilising across the sector.
• Employees – We have introduced a number of new engagements on Net-Zero with employees, to ensure their views are heard (e.g. Peakon,
Global Employee Roadshow) and they can contribute their ideas (eg IdeaXchange).
• Shareholders and debt providers – The Board has regularly spoken with shareholders on ESG aspects including Net-Zero.
Outcome and next steps – As part of the October 2022 strategy review, the Board agreed the importance of continuing to identify and invest
in ESG matters as a whole and specifically for the Net-Zero programme, supporting on programmes such as ESG data improvement.
4. Group reorganisation and new operating model
Background – At the outset of the financial year, the Company embarked on the most significant restructure of its organisation in the last five
years. Creating four operating Sectors; ‘UK Defence’, ‘UK Intelligence’, ‘US’ and latterly ‘Australia’, supported by six Group functions. The rationale
for the reorganisation was to better empower Sector leadership teams, embed functional expertise directly in our Sectors, and enable efficient
Group-level functional leadership. Alongside this, a new QinetiQ Operating Model was introduced as the principal architecture of what we do and
how we do it, providing clarity on the roles and responsibilities within our organisation, and guiding our high-performing inclusive culture. The
purpose of this process was to support the rest of the Group’s strategy, focused around and aligned to the AUKUS alliance, and provide clarity
on our delivery to the Company’s customers.
Board discussion – Both prior to and during the design and implementation of the restructuring process, the Board received regular briefings
from, and had the opportunity to interact with, the CEO and Chief People Officer, as part of the regular schedule of Board meetings. These allowed
the Board to contribute to shaping the new structure of the organisation, and provide the benefits of their experience and insights from similar
types of restructurings they have been involved in, to help steer how the process would be implemented in a way that would achieve the key
objectives of the Executive team.
Board stakeholder considerations and impact – The Board’s discussions included consideration of the purpose of the restructure; how it aligned
to and supported the Group strategy, including enhancing returns for investors; its impact on and benefits to employees; and how it would ensure
ongoing compliance by the Company with its legal and regulatory obligations and responsibilities wherever it operates in the world. In particular,
the Chairs of the Audit and Risk & Security Committees provided direct input, to help ensure that the restructure of the Company’s ‘three lines
model’ (first and second line assurance, and third line audit process) would better support its effective and efficient delivery to customers and
rigorous compliance with laws and regulations relevant to its evolving business.
Outcome and next steps – The successful delivery of an effective organisational restructure by the second trading quarter of the financial year,
through an efficient process which mitigated any adverse impacts of change on the employees of the Company as far as possible, and ensured
the Company could continue to perform to a high level in delivering to its customers. Throughout the year, the CEO and Chief People Officer have
provided ongoing updates to the Board on the outcome of the restructuring process, which have enabled the ability to identify any opportunities
for further improvements in the operations of the Company. Additionally, the Chairs of the Audit and Risk & Security Committees have undertaken
a number of planned interventions with operational and functional teams in the business to assess and help improve the effectiveness of the
Company’s three lines model’.
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Management and control of US subsidiaries
QinetiQ’s US Sector is comprised of QinetiQ Inc and its subsidiary operating companies, including Foster Miller Inc and the newly acquired Avantus
Federal group. These companies operate under a Special Security Agreement (SSA) between QinetiQ and the US Defense Counterintelligence &
Security Agency (DCSA), which governs how the rest of the QinetiQ Group interfaces, collaborates and works with the companies in the US Sector.
The controls established by the SSA are required by the US National Industry Security Program for main facility security clearances, to appropriately
mitigate foreign ownership, control or influence to the extent that it could adversely affect the interests of US national security. QinetiQ Group plc,
QinetiQ Inc and the US Department of Defense (DoD), represented by the DCSA, are parties to the SSA, which establishes procedures that regulate
the management and operation of our US Sector, to achieve that mitigation. Under the SSA, the Board of Directors of QinetiQ Inc is comprised of
three types of Directors, all nominated by QinetiQ Group plc, as the foreign owner of QinetiQ Inc., and approved by the DCSA. The three types of
Director appointments are Outside Directors, Inside Directors and Officer Directors of QinetiQ Inc.
The Inside Directors are the means by which QinetiQ maintains appropriate visibility of the management and operations of the companies in the US
Sector. These positions are held by the Group CEO and Group CFO of QinetiQ Group plc. The Inside Directors serve as a minority representative of
QinetiQ Group plc as the foreign owner, to ensure there is no undue control or influence on the actions of the US Sector. Inside Directors do not need
to be US citizens, and are excluded from access to US classified and export-controlled information in possession of QinetiQ Inc and its subsidiaries.
The Officer Directors are responsible for the day-to-day operations of the US Sector, and serve as a liaison with the wider QinetiQ Group. These
positions are held by Shawn Purvis, President and CEO of the US Sector and Andy Manner, who is a consultant to Shawn. The Officer Directors must
ensure that the procedures and requirements of the SSA are effectively implemented, and have an obligation to maintain the security of classified
and export-controlled information entrusted to QinetiQ Inc and its subsidiaries, as well its ability to perform on classified contracts and participate
in classified programs. They must be resident US citizens who either have, or are eligible to possess, personal US security clearance.
Outside Directors must be resident US citizens who are objective individuals, who have no prior relationship with QinetiQ, and possess personal
US security clearance. Our appointed Outside Directors are John Hillen, Chair of the QinetiQ Inc Board, Pamela Drew and Tom Mills. The number of
Outside Directors must outnumber the number of Inside Directors. The Outside Directors also form the Government Security Committee, which is
in place to ensure US national security interests are upheld.
Supplementary information
The Board has seven meetings, each scheduled over two days, for Board and Committee business throughout the year. Additional Board
sub-Committee meetings and conference calls are held between the scheduled meetings as required. The table below sets out the
Board and Committee membership and attendance by members at meetings held in FY23.
Board and Committee attendance – 1 April 2022 to 31 March 2023:
Members
Lynn Brubaker1
Carol Borg5
Michael Harper4
Shonaid Jemmett-Page
Neil Johnson5
General Sir Gordon Messenger3
Steve Mogford2
Larry Prior
Susan Searle
Steve Wadey5
Board
Audit
Committee
Nominations
Committee
Remuneration
Committee
Risk & Security
Committee
5/7
7/7
7/7
7/7
7/7
7/7
5/7
7/7
7/7
7/7
3/4
–
3/4
4/4
–
3/4
3/4
4/4
4/4
–
2/3
–
2/3
3/3
3/3
3/3
2/3
3/3
3/3
–
3/4
–
3/4
4/4
4/4
4/4
2/4
4/4
4/4
–
3/4
4/4
4/4
4/4
4/4
4/4
2/4
4/4
4/4
4/4
1 Lynn Brubaker resigned from the Board on 31 December 2022.
2 Steve Mogford was appointed to the Board on 1 August 2022.
3 General Sir Gordon Messenger was unable to attend the Audit Committee meeting on 13 May 2022 due to a conflict with a prior commitment.
4 Michael Harper was unable to attend the Audit Committee, Remuneration Committee and Nominations Committee meetings on 23 March 2023 due to a conflict with a prior commitment.
5
Committees, and Neil Johnson is not a member of the Audit Committee.
In compliance with the UK Corporate Governance Code, and the Committee Terms of Reference, Steve Wadey and Carol Borg are not members of the Audit, Nominations and Remuneration
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The significance of our purpose, values and culture
Our values
Integrity
Collaboration
Performance
Trusted to do the right thing at all
times, we take pride in our decisions,
and work to create a sustainable and
responsible business. We are responsible
and accountable for all our actions.
We take personal responsibility to do
the right thing, demonstrating this
individually and as an organisation in
our decisions, behaviour and day-to-
day actions. We actively support each
other to meet the highest ethical and
professional standards.
The chosen partner for customers and
industry colleagues, we are a diverse and
inclusive community with a common
purpose; every contribution is valued.
Delivering value through partnership and
teamwork, we actively collaborate with
our colleagues, customers and industry
partners to bring together the best
thinking, the smartest talent, breadth
and depth in capability to our work,
driving ambition. We know that working
together is the best way to meet our
stakeholders’ needs.
Customer-focused and highly responsive,
providing operational excellence and
assuring safe and secure delivery. Our
performance is measured by how we
deliver for our customers; meeting their
needs through flawless execution and
delivery of the mission-critical solutions
on which they depend. This includes
being accountable for getting things right
the first time, safely, securely and in a
cost-effective way. Taking an innovative
and responsive approach to create an
outstanding customer experience, we try
to go the extra mile and act with courage.
Our purpose
Protecting lives and securing the vital interests of our customers
The chosen partner around the world for mission-critical solutions, innovating for our customers’ advantage
Our vision
Driven by mission-led innovation
Applying our unique technical expertise across the product lifecycle, helping our customers to create,
test and use defence and security capabilities as needed to meet their mission requirements
Creating a safe and secure environment for us all to thrive
Through our core values of Integrity, Collaboration and a High-Performance Culture,
and our Company behaviours of Listening, Focusing and Keeping Our Promises
Delivered through a customer-focused growth strategy
Global leverage – Building an integrated global defence and security company to leverage our unique technical capabilities
Distinctive offerings – Co-creating high-value differentiated solutions for our customers in experimentation,
test, training, information, engineering and autonomous systems
We deliver safely, responsibly and sustainably for the benefit of all our stakeholders
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The Board has supported the review and further refinement of the
Company’s purpose, to ensure it continues to capture the Board’s view
of the Company, its evolving global strategy and its role in society. Our
purpose communicates the Group’s strategic direction and intentions
to customers, employees, partners, investors, the local communities we
work in, and its wider stakeholders. It is reconfirmed on an annual basis,
to ensure it continues to reflect our strategy, values and desired culture.
Our values make clear our priorities and form the foundations of the
Company’s culture.
While the Recognition Gala and Thank Q programmes raise awareness
of and recognise and reward the behaviours that demonstrate our
values, there are many other actions which contribute to the creation
of a healthy corporate culture. These include:
– Our corporate policies, reviewed and approved by the Board, which set
a clear expectation, and mandate, for every member of the workforce
to perform the Company’s business with integrity and in accordance
with applicable laws, including anti-bribery and corruption, anti-slavery
and human trafficking, data protection and confidential reporting
policies and procedures
– Fair and transparent employee policies and practices which ensure
that employees’ rights are respected in accordance with applicable
laws and employment contracts, together with a number of
programmes and initiatives which support the health and wellbeing
of our employees, develop talent and promote diversity
– Supplier protocols and procedures which seek to ensure that our key
suppliers operate their businesses and respect their employees’ rights
in the same way that we do
– The application and monthly assessment by business and
functional executive teams and the QinetiQ Leadership Team of
safety and operational KPIs to enable management to monitor and
drive continuous improvements in safety, reliability and efficiency
of our services
– The work of Group support functions to prepare and advise upon the
Group’s policies, procedures and standards at every level and location
of the business around the world, including dedicated safety and
operational excellence teams, finance, legal and governance teams,
procurement, HR function, and the Group internal audit function
In addition, we as a Board use a number of other methods to understand
and monitor the Company’s culture and assess whether our employees
reflect our values. These include:
– Reviews, in the boardroom, of the outcomes of the Peakon surveys,
customer satisfaction scores and updates on confidential reporting.
These give us insights into what the Company does well and what
could be improved, as well as any particular areas of concern
– The employee interaction with the Global Employee Voice (GEV),
discussing the issues which matter most to our employees
– Directors’ attendance at various Company events, such as:
– Quarterly virtual Global Employee Roadshows
– Monthly virtual Global Engagement Network (GEN)
events, delivered by the QinetiQ Leadership Team
– The Annual Recognition Gala
Through feedback from all of these monitoring activities, the Board is
satisfied that the Company’s culture is aligned with our values. Where
the Peakon surveys, workforce engagement events or other interactions
between Directors and employees or other stakeholders have revealed
matters that can be improved upon or have flagged concerns, the Board
has discussed these and is content that management is putting action
plans in place that are designed to drive improvements or address
those concerns.
Safety culture
QinetiQ’s Environment, Health and Safety (EHS) strategy sets the
direction for how we look after ourselves, each other and the world
around us. Our culture journey, including safety culture, is constantly
progressing and adapting. During the year the Board established a QLT-
led Safety Improvement Programme (SIP) to drive a step-change in our
safety culture.
Stakeholder engagement
Engagement and collaboration through our value chain are essential.
Partnering with our stakeholders, understanding their challenges and
managing risks, we can find solutions for our shared success, sustain
our business and benefit all our stakeholders. We have aligned our
strategic priorities with the requirements and needs of our stakeholders
to enable delivery of profitable, sustainable value. The Board recognises
that it has a duty to act in the best interests of the Company for the
benefit of its shareholders, as well as considering other stakeholder
interests. In its decision-making, the Board considers all relevant factors,
including:
– How the decision would align with the Group’s over-reaching purpose
– The likely short-, medium- and long-term consequences of
the decision
– The value created for our investors
– The enhancement of our performance created by the decision
– The potential impacts on our people, local communities and
environment of making the decision
– The need to create strong, mutually-beneficial customer and supplier
relationships
– The Group’s commitment to business ethics
The section 172(1) statement on pages 86 to 87 explains how the
Directors have had regard to the matters set out in section 172(1)(a)
to (f) of the Companies Act 2006, when performing their duty under
section 172. The Board aims to promote the success of the Company
for the benefit of its shareholders as a whole, taking into account the
long-term consequences of its decisions while giving due consideration
to the interests of the Company’s stakeholders (including employees,
customers, suppliers, shareholders, as well as the environment and
local communities which are impacted by our operations), while also
considering the importance of maintaining our reputation for high
standards of business conduct. Examples of what that has looked like in
practice over the past year can be found as follows:
pages 26, 107, 108
pages 26, 106
Shareholders
Employees
Customers/suppliers page 26
Environment
Social
pages 52 to 65
pages 66 to 72
Further information about how the Directors have accounted for
stakeholders in their decision making is set out on pages 101 to 102.
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Employee engagement
We have experienced, diverse and dedicated employees who are recognised as key assets of our business and who drive our success.
The Group has a long-standing commitment to the importance and value of employee engagement. See more on pages 26, 66 to 72, and 106.
Shareholder engagement
Timeline
The Board recognises the value of engaging directly with employees to ensure an understanding of their views and inform its decision-making in
considering employee interests. Under normal circumstances the Board holds a number of its meetings at different Company sites, both in the UK
and globally, to take the opportunity to meet with employees in person.
The process set out below describes how the Board continued to be able to effectively gain the views of employees throughout the year.
How we engage with our employees
Dedicated non-Executive Director
Neil Johnson is the dedicated Non-executive
Director for gathering the views of employees
• Two meetings with the Global Employee
Voice (GEV)
• Attends the Global Recognition Gala
and also Global Employee Roadshows
• Reports back to the Board
Regular virtual QinetiQ leadership
Community (QlC) events – delivered by the
QinetiQ leadership team (Qlt)
Providing updates to the direct reports of the
QLT on latest operational, financial, strategic,
and key stakeholder issues
• The members of the QLC feedback to their
teams by way of Q-Talks, team meetings
and one-to-one meetings
Global Employee voice (GEv)
The GEV is a global forum that acts as the
collective voice of all QinetiQ employees.
Elected employees from across QinetiQ sites
in all home countries represent the employees
to the leaders of the Company
• Regular contact with Neil Johnson
• Two meetings with Susan Searle, the Chair
of the Remuneration Committee
• Regular meetings with the Chief People
Officer, who reports to the Board on
culture, employee and people strategy,
and employee engagement
Global Employee Roadshows
Delivered quarterly by the QinetiQ Leadership
Team, the Global Employee Roadshows give
an update on the progress we are making
against our vision and strategy, and provide
an understanding of our key priorities for
the future
• Employees have the opportunity to ask
questions, either in writing or live
• Reported back to the Board by the CEO
monthly virtual Q-talks
Delivered by members of the QLC, with the
purpose of keeping employees up-to-date with
what is currently important across QinetiQ
peakon Employee Engagement surveys
Quarterly surveys enabling the Board and
the Leadership team to immediately assess
employees’ engagement throughout the Group
• A mechanism accessible for employees
to get a thorough understanding of what
is happening in the Company and also to
provide individual feedback
Global portal – our intranet
A platform where all employees can access
our polices and be kept fully informed of the
latest Group news
• Enables employees to ask questions
Confidential Reporting
Our confidential reporting includes an
anonymous reporting line for employees to
raise any concerns with escalations to the
Board as necessary
and discuss topics internally
• Reported to the Board at each
Board meeting
See more on pages 69 to 70
• After each survey, the Group Director
Employee Experience has a meeting with
the CEO where they discuss the results,
trends, and any matters for concern
• The CEO feeds back to his fellow Board
members at each Board meeting
How does it work?
• By using a number of different employee
engagement mechanisms ensuring flexibility
• By having a direct link to the Board via the
purposefully designated Non-executive
Director
• By way of a dedicated forum to relay the
voice of the employees
• By regularly reporting to the Board on culture,
people strategy, and employee engagement
• By drawing on each individual Board
member’s unique experience as
business leaders
2022
May
– Full year results
announcement
– Analyst briefings
– Full year results investor
roadshow
July
– Governance meetings
ahead of AGM
– Trading update and
analyst briefings
– AGM
– US Investor Roadshow
– Farnborough International
Air Show
October
– Q2 post-close trading
update
December
– Completion of Air
Affairs acquisition and
shareholder engagement
June
– Annual Report published
August
September
– Announcement of Avantus
Federal acquisition and
shareholder and analyst
engagement
– Group Chair meetings
with shareholders
November
– Interim results announcement
– Analyst briefings
– Interim results investor
roadshow
– ‘Best of British’ Investor
Roadshow
– Completion of Avantus
Federal acquisition and
shareholder and analyst
engagement
2023
February
March
January
– Q3 Trading update and
analyst briefings
April
– Q4 trading update and
analyst briefings
Approach
The Board is committed to communicating in an open and transparent
manner with all shareholders, and places a clear importance on
shareholder engagement. The Investor Relations programme is
managed by the Investor Relations team, who provide day-to-day
contact with investors. This is complemented by engagement with the
CEO and CFO, who regularly attend meetings with institutional investors.
In addition, the Group Chair and other Non-executive Directors make
themselves available to discuss matters such as governance, ESG
factors, remuneration and other relevant topics. The Board is also kept
up to date on shareholders’ views and concerns through regular Board
papers, presentations and feedback from the Investor Relations team.
The AGM provides an opportunity for shareholders to engage directly
with the Board and receive an update on business performance. The
Company’s results presentations and other investor events are also
webcast live, and made readily available on the Company’s website,
enabling a wider audience to access them.
Activities during the year
During FY23 the CEO, CFO and Investor Relations team collectively met
with over 40% of the share register and hosted a number of meetings
with non-shareholders. This contact was conducted during routine
roadshows after results announcements, ad-hoc roadshows and at
various conferences. The Group’s Chair, Neil Johnson, engaged with a
number of shareholders on governance-related matters and the Chair of
the Remuneration Committee, Susan Searle, engaged with shareholders
ahead of the AGM on remuneration matters.
This year has seen increasing engagement, particularly with investors in
the US. The Investor Relations team and the CFO held a short Investor
Roadshow in July, overall 22% of the contacts made during the year
were with investors based in North America. As at 31 March 2023,
North American institutional investors accounted for 22% of the share
register, compared to 14% at the same time last year. We continue to
be proactive in investor engagement.
Constructive use of the Annual General meeting (AGm)
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 via
www.QinetiQ.com. This year’s AGM will be held at 11am on Thursday
20 July 2023 at the offices of Ashurst LLP, London Fruit and Wool
Exchange, 1 Duval Square, London E1 6PW.
Any updates to the arrangements for the conduct of the meeting will
be communicated via www.QinetiQ.com.
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Board leadership and Company purpose continued
Division of responsibilities
Investors met: By type
38.3%
Shareholders
Non-shareholders
61.7%
Investors met: By investor location
22.1%
2.3%
UK
Europe
North America
75.6%
Confidential reporting process
QinetiQ has in place a confidential reporting process, which is detailed
on the Company’s intranet and in its Code of Conduct. 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 properly investigated. Reports on confidential reporting
activity and outcome of investigations are reported to the Board at
each of its meetings. The Board reviewed the effectiveness of the
Group’s confidential reporting process, provided challenge and advice
on the issues raised, and was satisfied that the process in place is fit
for purpose.
Role of the Board
Underpinned by good corporate governance, the Board is focused
on delivering an effective and entrepreneurial Board which:
– Provides challenge, advice and support to management
– Drives informed, collaborative and accountable decision-making
– Creates long-term sustainable success and value for our
shareholders, having regard to all interests of all our stakeholders
Roles and responsibilities
The Board has agreed a clear division of responsibilities between the
Group Chair and the CEO. Other Directors and the Company Secretary’s
roles are also clearly defined to assist in enhancing the effectiveness of
the Board. A summary is set out below:
Group Chair
Neil Johnson
• Provides overall leadership and ensures effectiveness
of the Board
• Sets the agenda, character and tone of the Board
meetings and discussions
• Maintains an effective working relationship with the CEO
• Leads the annual performance evaluation of the Board, its
Committees and ensures that each Non-executive Director
makes an effective contribution
Deputy Chair
Michael Harper
Group CEO
Steve Wadey
• Maintains a close dialogue with the Group Chair and CEO • Supports and deputises for the Group Chair as required
• Develops the Group’s strategy for consideration and
approval by the Board and provides effective leadership
of the QinetiQ Leadership Team in its delivery of strategy
• Develops the Group’s business model and manages the
Group’s operations
• Overseas the development and implementation by
the QinetiQ Leadership Team’s corporate, safety and
environmental policies and standards
• Establishes and services relationships with key stakeholders
• Reinforces the Group’s values and sets expected employee
behaviours
• Communicates (with the CFO) the Group’s financial
performance and strategic progress to investors and analysts
• Ensures the Board is kept fully appraised of the Group’s
operational and safety performance, risks and opportunities
that may affect or contribute to the delivery of the strategy
Group CFO
Carol Borg
• Responsible for the financial stewardship of the Group’s
resources through appropriate accounting, financial
and other internal controls
• Communicates (with the CEO) the Group’s financial
performance and strategic progress to investors
and analysts
• Directs and manages the Group’s finance, tax, treasury,
risk management, legal and governance, insurance
and internal audit functions, and climate-change initiatives
Senior independent
non-executive
Director
Michael Harper
• Acts as sounding board for the Group Chair and a trusted
intermediary for the other Directors
• Available to shareholders to discuss any concerns that
cannot be resolved through the normal Group Chair
or CEO channels
• Leads the Board in the annual performance evaluation of
the Group Chair and in developing the long-term plans for
the Group Chair’s succession
• Meets with the Non-executive Directors without the Group
Chair present at least annually, and as required, to discuss
Board matters
• Monitor and scrutinise the Group’s performance against
• Monitor and assess the Group’s culture, use appropriate
its strategic goals and financial plans
• Provide an objective perspective on the Board’s
deliberations and decision-making, drawing on their
own broad collective experience and individual expertise
and insights
and effective means to engage with employees and acquire
an understanding of other stakeholders’ views
• Assess the effectiveness, support and constructively
challenge the Executive Directors
• Play a lead role in the functioning of the
Board’s Committees
independent
non-executive
Directors
Michael Harper
Shonaid
Jemmett-Page
General Sir
Gordon Messenger
Steve Mogford
Larry Prior
Susan Searle
Company Secretary
James Field
(appointed
22 July 2022)
• Provides advice and support to the Board, its Committees,
the Group Chair and other Directors individually as
required, primarily in relation to corporate governance
matters, and Non-executive Directors’ training and
development needs
communication between the Board and its Committees,
and between the Directors and senior management
as required
• Ensures that Board and Committee procedures are
complied with
• Responsible with the Group and Committee Chairs for
setting the agenda for Board and Committee meetings
and for high-quality and timely information and
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Composition, succession and evaluation
Composition of the Board
The Board considers that its composition reflects 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 the QinetiQ Leadership Team during the year.
Independence
A majority of the Board is comprised of independent Non-executive
Directors. The independence of the Non-executive Directors is
considered annually by the Nominations Committee, using the
independence criteria set out in Provision 10 of the UK Corporate
Governance Code. The Group Chair was independent upon
his appointment in April 2019 and continues to use objective
judgement in his leadership of the Board.
As part of this process, the Board keeps under review the length of
tenure of all Directors, as this is a factor when assessing independence.
The independence of Michael Harper and Susan Searle, who both have
served on the Board for more than nine years, was subject to a rigorous
review by the Nominations Committee in March 2023. When making this
assessment for Michael (who has served on the Board since November
2011) and Susan (who has served on the Board since March 2014), the
Nominations Committee based its decision on the fact that all continue
to demonstrate integrity and independence in their advice and challenge.
Neither Michael nor Susan were in attendance during the review and
the Nominations Committee remains satisfied that the length of their
tenures has not impacted on their respective levels of independence or
their respective contributions. Further to this review, it was announced
on 23 March 2023 that Michael Harper is to retire from the Board at
the conclusion of the 2023 AGM.
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Conflict of interest
The Board operates a policy to identify and manage situations declared
by the Directors (in accordance with their legal duty to do so) in which
they or their connected persons have, or may have, an actual or potential
conflict of interest with the Company. In accordance with the Companies
Act 2006, and the Articles of Association, the Board has the authority
to authorise conflicts of interest. This ensures that the influence of third
parties does not compromise the independent judgement of the Board.
Directors are required to declare any potential or actual conflicts of
interest that could interfere with their ability to act in the best interest
of the Group.
The Company Secretary maintains a conflicts register, which is a record
of actual and potential conflicts, together with any Board authorisation
of the conflict. The authorisations are for an indefinite period and
are reviewed annually by the Nominations Committee, which also
considers the effectiveness of the process for authorising Directors’
conflicts of interest. The Board reserves the right to vary or terminate
these authorisations at any time. No Director conflict of interest
currently exists.
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 their
responsibilities effectively. As part of the appointment process,
consideration is given to assess Non-executive Directors’ ability to
devote time to an additional directorship. Prior to undertaking an
additional external role or appointment, the Non-executive Directors are
asked to confirm that they will continue to have sufficient time to fulfil
their commitments to the Company. This means not only attending and
preparing for formal Board and Committee meetings, but also making
time to understand the business of the Company. The Non-executive
Directors’ commitment is reviewed as part of the Board and Director
evaluation.
The Group Chair 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. 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.
Shonaid Jemmett-Page holds appointments in three other companies,
Aviva plc, Cordiant Digital Infrastructure Limited and ClearBank Limited.
She is the Chair of Cordiant Digital Infrastructure Limited, which is an
investment trust listed on the Special Funds Segment of the FTSE,
rather than a full operating company. Therefore by their nature, the time
requirements for these roles are not as significant as at a FTSE 250
operating company such as QinetiQ. The Group Chair has reviewed her
current commitments and contribution to the QinetiQ Board, and he
confirms that during the year Shonaid has provided significant input
and advice at QinetiQ’s Board and Committee meetings, in particular
in her role as the Audit Committee Chair. He is therefore confident and
satisfied that Shonaid has the time and availability to commit fully to
her role on the QinetiQ Board.
Board and Committee processes
The Board has a formal schedule of matters reserved for its approval,
which includes (but is not limited to): strategy; risk appetite and review
of Group-wide principal and emerging risks; major M&A, contracts and
bids; share capital, debt financing and other liquidity matters; financial
results and budgets; key policies; Board and Committee membership;
and governance. Other matters, responsibilities and authorities have
been delegated by the Board to its standing Committees, comprising
Nominations, Audit, Risk & Security, Remuneration and Disclosure.
Any matters outside of the schedule and the responsibility of the
Committees fall within the authority of the CEO and/or CFO. The
schedule of matters reserved for the Board and the terms of reference
of each Committee, which are regularly reviewed and approved by the
Board, can be found on the Company’s website at www.QinetiQ.com.
The Group Chair and the Company Secretary are responsible, in
consultation with the CEO and the Chairs of the Committees, for
maintaining a scheduled 12-month programme of business for the
Board and its Committees, with flexibility for additional business to
be discussed as required. The programme ensures that all necessary
matters are covered and appropriate time is given for discussion and,
if thought fit, approval of relevant business. At each scheduled Board
meeting, the Board rigorously reviews updates from the Executive
Directors on Group and divisional safety, operating and financial
performance, investor relations, and from the Group Director Legal &
Company Secretary on legal compliance and corporate governance.
Other regular Board agenda items include strategic proposals (including
those relating to M&A, major contract bids and capital allocation),
transformation and digital programme, risk management (including
reviews of risk appetite and Group-level risks), tax and treasury updates,
pension updates, human capital updates (including on employee
relations, talent development and diversity promotion), and stakeholder
engagement. Senior management and external advisers regularly attend
both Board and Committee meetings, where detailed discussions on
specific matters on which their input or advice is needed. The Board
also seeks to hear external viewpoints inside and outside the boardroom,
including from customers, suppliers and experts in areas relevant to the
Company’s strategy.
In advance of each Board and Committee meeting, Directors receive
via a secure web portal high-quality briefings, prepared by the Executive
Directors, senior management, the Company Secretary and/or external
advisers where appropriate, on the agenda items to be discussed. The
secure web portal also gives Directors immediate access to a range of
other resources, including previous meeting papers, minutes, financial
reports, business presentations, investor reports, Company policies and
governance guidelines, and details of Board and Committee procedures.
If a Director is unable to attend a meeting due to illness or exceptional
circumstances, they will still receive all supporting papers in advance of
the meeting and are directed to discuss with, and provide input, opinion
and voting instructions to, the Group Chair or relevant Committee Chair
on the business to be considered at that meeting.
The Board has access to the Company Secretary for support and advice
as required, and the Company operates a policy which allows Directors
to obtain, at the Company’s expense, independent professional advice
where required to enable them to fulfil their duties effectively. In addition
to Board and Committee meetings, the Non-executive Directors hold
private meetings without the Executive Directors present, including to
discuss Executive Director performance. There are also opportunities
during the year for Directors to have informal discussions outside the
boardroom, either between themselves or with senior management
or external advisers.
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Composition, succession and evaluation continued
Nominations Committee report
This has been a year of planned change and consolidation for the
Committee, as we continue to embed succession plans designed to
maintain the effectiveness of the Board and its Committees, in-step
with the Company’s strategic priorities.
You can read more, later in this report, about the development of our
Directors and our talented senior management team. I would particularly
like to highlight the following considerations of the Committee during the
last year:
Lynn Brubaker has served on the Board since January 2016, and made
the decision to retire in December 2022, having brought the benefit of
her extensive aerospace and international experience, and provided
strong and insightful support to QinetiQ’s pursuit of its global growth
strategy. On behalf of all Board members and the Company, I thank
Lynn for her excellent support, and wish her the very best for the future.
During the year, we completed the new appointment of Steve Mogford
to the Board, bringing a wealth of experience in both executive and non-
executive roles across a breadth of sectors, including defence, security
and aerospace. He is ideally equipped to develop further the skill sets
of our Board, while supporting our global growth ambitions.
Michael Harper has served on the Board since November 2011.
During his tenure, he has been instrumental to the Board in his roles as
Deputy Chair and Senior Independent Director, providing strong
support, guidance and advice to the Board and the Company’s senior
leadership, and acting as a valued sounding board to his fellow Board
members. On 23 March 2023 we announced Michael’s intention to
retire from the Board with effect from the conclusion of the 2023 AGM.
He will be much missed, and we all wish him well in a richly deserved
retirement. However, we were pleased to be able to announce that,
upon Michael’s retirement, Steve Mogford will step into the role of
Senior Independent Director.
Susan Searle, who has served on the Board since March 2014, has
this year, in her role as Chair of the Remuneration Committee, led
the development and refinement of the Company’s latest three-year
Directors’ Remuneration Policy which is to be approved by shareholders
at the 2023 AGM.
The Nominations Committee undertook its usual assessment of
Directors’ continued independence for the year in review, and further
information on the Committee’s effectiveness can be found on pages
117 to 118.
I hope you find the information in this report about the Committee’s
work helpful and I will be pleased to answer any questions you
have at this year’s AGM.
neil Johnson
Nominations Committee Chair
QinetiQ aims to have the best
people leading our business
and delivering to our customers
today, and a diverse and talented
pipeline ready to lead the
business tomorrow.”
Dear shareholder
I am pleased to present the Nominations Committee
report. The Committee’s ambition is to ensure we have the
best people leading and governing our business today, and a
competitive, diverse and talented pipeline of people, ready to join and
lead the business tomorrow. The right high-performing people will have
the necessary experience, skills and creativity of thinking to shape and
drive the Company’s strategy in a fast-evolving geopolitical environment.
The Committee remains very focused on bringing diverse perspectives
into the Company, to help shape our strategic decisions in a way that
complements and reflects the knowledge and skills of the Company’s
growing business.
Key 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 ensuring the continued
ability of the organisation to compete effectively in the marketplace
– In accordance with the Board Diversity Policy, identifying and
nominating, for the approval of the Board, appropriately diverse
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
– Review the independence of the Non-executive Directors and any
potential conflict of interest for all Directors
FY23 activity highlights:
– Reviewed the structure, size and composition of the Board and its
Committees, including the skills, experience, independence and
diversity of its members, in anticipation of Non-executive Director
changes to the Board and its Committees
– Led the process to recruit a new Non-executive Director
– Reviewed the Board and senior management succession plans,
including via a review of potential internal successors and other high
potential talent for executive and senior management positions
– Reviewed the Board’s Diversity and Inclusion Policy and the
Company’s inclusion initiatives
Skills and experience
The chart below demonstrates the skills and experience of the Board members:
R&D/technology
Cyber security
m&A
transformation
Remuneration
Strategy
Finance and financial reporting
eCommerce
Emerging markets
international business
Defence
Aerospace and aviation
Government services
Board members – Age
Board members – Gender balance
Board members – Nationality
11%
22%
33%
78%
11%
22%
41–50
51–60
61–70
71–80
44%
Women
Men
11%
British
American
Australian
QinetiQ Leadership Team –
Gender balance
Direct reports to the QLT – Gender
balance
36%
28%
67%
Women
Men
64%
Women
Men
72%
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Composition, succession and evaluation continued
Succession planning
Board and Committees
The Committee annually reviews the composition of the Board and its Committees and the Nominations Committee expects to continue to
implement its succession plans for the Board and its Committees in 2023, 2024 and beyond. To ensure that we continue to recruit only the
candidates of the highest standard, that we continue to make progress towards our diversity and inclusion targets, and that we have the right mix
of an experienced Board, yet with a fresh perspective, we use the process outlined below. Following this year’s review the Committee is satisfied
that we have an appropriate mix of skills, knowledge and experience to operate effectively.
process step
Action
Outcome/impact
Identifying current
and future needs and
skills gaps
The Committee maintains and regularly reviews a matrix
of the Directors’ experience and skills to ensure that the
Board and its Committees are composed of individuals
who have the right experience and skills to enable them to
shape (and, in the case of the Executive Directors, deliver)
the Company’s strategy and to monitor and assess the
effectiveness of the Company’s control environment and
management of risk.
The matrix considers the following:
• Diversity, including age, gender and ethnicity
(see more on page 113)
• Background, professional skills and experience
(see more on pages 96 to 98 and 113)
• The number and balance of Executive and
Non-executive Directors
• Length of tenure (see more on page 115)
• Independence (see more on page 110)
• The appointment of Steve Mogford as Non-Executive
Director
• At the conclusion of the 2023 Annual General Meeting,
Michael Harper will step down as a Director of the
Company, and Steve Mogford will assume the role of
Senior Independent Director thereafter
• An additional appointment is planned in the current
financial year, to bring further skills which support
the Group’s alignment of its strategy to the AUKUS
strategic alliance
Ensuring that we get
access to the best
candidates
• Regularly reviewing the recruitment agencies that we use
and to ensure that they are best placed to find QinetiQ
the right mix of candidates capturing the clear benefits
of greater diversity. In addition, we pick the best suited
agency for the specific role currently recruited for
• Russel Reynolds Associates (who has no other
connection to the Group or to any individual Directors)
was used for the recruitment of Steve Mogford
Ensuring
accountability and
success of the
Board’s performance
• Annual Board effectiveness and performance evaluation,
using an external provider every three years. See more on
pages 117 to 118
• The FY23 Board effectiveness review concluded that the
Board has been effective, engaged with and helpful to
the organisation
• Annual review of the Group Chair’s performance led by
the Senior Independent Director. See more on page 118
• A summary of the Board’s decision making, considering
section 172(1) can be found on 86 to 87
• Annual independence review of the Non-executive
Directors. See more on page 110
• Continued assessment of the Non-executive Directors’
time commitment. See more on page 110
• Policy on Board members’ appointments to other Boards
• Annual performance review of the CEO and CFO,
supplemented by the Group Chair’s and Non-executive
Directors’ continual assessment of their performance.
See more on page 118
• A thorough induction programme for new Directors.
See more on page 119
• Annual training for the Board as a whole and on
an individual basis. See more on page 119
The effectiveness of the Committee’s succession plans is demonstrated by the appointment in FY23 of Steve Mogford, who has enhanced the
Board’s experience in the international defence and security sectors and brought valuable executive and non-executive director experience.
The process that the Committee has established, together with the particular considerations it takes into account, in identifying and nominating
Director candidates, is set out below.
A sub-Committee of the nominations Committee is appointed to oversee the recruitment and appointment process
A tender process identifies the most suitable recruitment agency to conduct the search and prepare candidate specifications
the sub-Committee reviews the list of candidates and narrows down to a short-list of those
who best meet the Company’s requirements, considering the following:
Background, skills
and experience
independence and
other commitments
Diversity
Other individual attributes
to widen the Board’s
overall knowledge,
providing challenge and
further support
the sub-Committee conducts initial interviews with the candidates on the short-list and identifies preferred candidates
Other Board members, including the Group CEO and Group CFO, interview the preferred candidates
nominations Committee recommends to the Board which of the preferred candidates best fulfils the Board’s and its Committees’ needs
non-executive Directors’ length of service
Name
Michael Harper
Susan Searle
Neil Johnson
Shonaid Jemmett-Page
General Sir Gordon Messenger
Steve Mogford
Larry Prior
% of Directors
Appointment date
6-year date
9-year date
22 Nov 2011
14 Mar 2014
2 April 2019
19 May 2020
12 Oct 2020
1 Aug 2022
2 Aug 2021
0–3 years: 14.3%
22 Nov 2017
14 Mar 2020
2 April 2025
19 May 2026
12 Oct 2026
1 Aug 2028
2 Aug 2027
4–6 years: 57.1%
22 Nov 2020
14 Mar 2023
2 April 2028
19 May 2029
12 Oct 2029
1 Aug 2031
2 Aug 2030
7–9+ years: 28.6%
Senior management succession planning programme
The Committee has undertaken its usual programme of senior management succession planning. Senior management for this purpose includes the
members of the QLT, as well as those talented individuals who have demonstrated the potential for promotion to higher or broader positions in the
Group’s senior management structure.
The programme includes an annual review of such senior managers’ experience and skills and their progress and notable achievements to
ascertain their potential for further career progression. The Committee also keeps the performance of potential successors to Executive Director
roles under regular review throughout the year during Board interactions and visits to the Company’s operations. This gives Committee members
the opportunity to observe senior managers’ working practices and relationships with their stakeholders first-hand. These reviews complement
the Executive Directors’ assessment of these individuals’ performance through a formal process of annual reviews, and continual feedback and
support. This programme enables the Committee to identify any gaps in the senior management succession pipeline and any requirements for
senior managers’ further development.
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Composition, succession and evaluation continued
In FY23, the Group was restructured into four new operating sectors,
supported by six Group functions. With effect from 1 July 2022, a
new QinetiQ Leadership Team (QLT) was appointed, and this will be
fundamental to deliver the next phase of sustainable growth and to
create a safe and secure environment for employees to thrive in. As part
of the implementation of the new QLT, the Committee was delighted
to oversee the internal promotion of Amanda Nelson to Chief People
Officer and Mike Sewart to Chief Technology and Operating Officer. The
appointment of Gary Stewart as Chief Executive for the Australia Sector,
following the retirement of Andy Thorp at the end of April 2023, is further
demonstration of these plans being put into action. Gary brings more
than 20 years of experience within the international defence industry.
Board and Company commitment to diversity
The Board is committed to ensuring diversity in all aspects (including
as regards to gender, ethnic and social background), at Board and senior
management level, and throughout the Company’s employees. This is
because we believe diversity can:
– Improve decision-making at all levels of the business by ensuring
diverse perspectives
– Attract and retain the best talent with a culture of inclusion where all
individuals are respected and supported to reach their full potential
– Better serve our customers, other stakeholders and the communities
in which we operate by ensuring that the diversity of our workforce
demographic is representative of the diversity of such stakeholders
This commitment is aligned with our values (see more on page 104),
which in turn support our strategy of growth by retaining and winning
business through having the best talent delivering the best service for
our customers. Our commitment is confirmed in the Board’s Diversity
Policy, which applies to the Board, and all of its Committees - the main
objectives of which are:
– To achieve and maintain targets on Gender and Ethnic Diversity
on the Board and its Committees
– To ensure that the membership of the Board and its Committees
reflects the diversity of the geographies and customers that the
Group serves
– To respect the differences of its members, and value and encourage
the diversity of thought that such differences can bring in each
case within the context of Board members having, between them,
the experience and skills required to support the development,
oversight and delivery of the Company’s strategy
We are pleased to have seen the positive benefits to these initiatives,
which have resulted in improvements in both gender and ethnic
diversity at a number of levels of the business, including:
– A female CFO
– The Audit and Remuneration Committee Chairs are female
– Female representation on the QLT has increased from 33.3%
in 2022 to 36.4% in 2023
– Female representations of the direct reports to the QLT has
increased from 27% to 27.8%, and remains a key area of focus
– One member of the QLT comes from an ethnic minority background
In respect of FY23 the Board has not yet met the targets in Listing
Rule 9.8.6(9) that at least 40% of the Board should be female, and that
there should be a Director from a minority ethnic background. We do
however meet the target that our CFO is a woman. The Board continues
to be dedicated to accomplishing these targets and will continue to
keep this under review to ensure progress against the targets, as set
out in the Board Diversity Policy. We believe that our established and
effective process, as outlined above, will help us achieve and maintain
these important targets in the near future. 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
ethnic backgrounds, while we remain focused on recruiting the best
candidate for any role based on merit.
Voluntary disclosures required under Listing Rule 9.8.6 as at 31 March 2023
(a) Table for reporting on gender identity or sex
Men
Women
Not specified/prefer not to say
Number of board members
6
3
N/A
(b) Table for reporting on ethnic background
Number of senior
positions on the
board (CEO, CFO, SID
and Chair)
Percentage
of the board
Number in executive
management
Percentage of
executive
management
67%
33%
N/A
3
1
N/A
1
1
N/A
50%
50%
N/A
Number of board members
Number of senior
positions on the
board (CEO, CFO, SID
and Chair)
Percentage
of the board
Number in executive
management
Percentage of
executive
management
9
N/A
N/A
N/A
N/A
100%
N/A
N/A
N/A
N/A
4
N/A
N/A
N/A
N/A
2
N/A
N/A
N/A
N/A
22%
N/A
N/A
N/A
N/A
White British or other White
(including minority-white groups)
Mixed/Multiple Ethnic Groups
Asian/Asian British
Black/African/Caribbean/Black British
Other ethnic group, including Arab
Not specified/ prefer not to say
the employee Diversity & inclusion (D&i) policy
pages 68 to 69 describes the progress of our Diversity and Inclusion
Programme in relation to employees and other diversity policies and
procedures of the Company.
The principal sources of data used to assess the effectiveness of the
Board and its Committees were questionnaires completed by each
Board member, the Company Secretary and a selection of members
of the senior management team.
QinetiQ’s D&I policy can be found on www.QinetiQ.com and outlines our
approach to promoting D&I in the workplace. The effectiveness of the
policy is governed via our assurance processes and with oversight by
our Executive team, and is underpinned by our Inclusion 2025 Strategy.
To help us reach our goals we have various tools in place, including
global employee mandatory training on inclusion, a collective leadership
objective on inclusion, and a D&I champion and network forum.
During the year we continued to see a significant increase in employee
activity and engagement around D&I. We are confident that this will
continue in 2024 and beyond, and have an overall positive effect
on our D&I landscape.
Director effectiveness
A performance evaluation of the Board, its Committees and the
individual Directors is conducted annually, with an externally facilitated
review required at least every three years. As illustrated by the chart
below, FY22 was the first in the three-year cycle when an external
evaluation was undertaken by Tom Bonham-Carter of The Effective
Board LLP. In FY23 a follow-up independent review was undertaken
through The Effective Board LLP. Neither Tom Bonham-Carter, nor
The Effective Board LLP has any other connection to the Group.
Year 1
FY22 – External
evaluation by selected independent consultants
(specific basis and approach agreed)
The questions were designed to understand whether the Directors
have thoroughly discussed and agreed the use and investment of
the shareholders’ funds to ensure the Company is successful while
managing the risks inherent in its strategy, operational plans and
operating environment. This was augmented by an assessment of how
effective the Board is in ensuring that the Executive team implements
the strategy and plans and manages all the other activities of the
Company including engaging across the spectrum of its stakeholders.
For the individual Directors, there were questions on each Director’s
contribution, the manner in which he or she contributes and any
suggestions for improvements. Finally, there were questions on
the effectiveness of the Board’s four Committees which included
asking if each Committee fulfilled its terms of reference and how
each Committee could improve.
Directors’ views were also sought on how well the Board and its
Committees had addressed the areas for development identified
in the previous year’s external evaluation.
The Company Secretary, in consultation with the Group Chair
and Committee Chairs, analysed the results of the evaluation by
reference to the scores given, the specific observations made, and any
recommendations given or improvements suggested. Following which,
those results were presented to and discussed by the Board and its
Committees.
The overall outcomes of the evaluations were positive, evidencing
that improvements had been made, acting on the prior year’s
recommendations, and demonstrating that the Board and each of
its Committees continue to function effectively with a high level
of probity, integrity and independence, through the mediums of
both open and challenging debate in meetings, and appropriate
engagements outside of meetings.
Year 2
FY23 – External
evaluation to focus on reviewing core effectiveness
and areas identified for development from the
Year 1 external evaluation
Year 3
FY24 – External
evaluation to focus on reviewing the effectiveness
of new initiatives and progress on areas identified
for development from the Year 2 external evaluation
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Composition, succession and evaluation continued
Director effectiveness continued
The key strengths and material areas for further attention identified by the FY23 Board and Committee evaluation are shown below:
Key strengths
Areas for further attention
The effectiveness of the Board’s support to the further development
and implementation of the Company’s strategy, aligned to its
purpose and vision.
Review monitoring and information received on the integration
planning and benefits realisation elements of the Company’s
acquisitions process.
The Board continues to work well as a unit, with Board discussions
being constructive and the Executive Directors being transparent with
the Board and open to advice.
Good progress is being made with the ESG agenda. The Company’s
Net-Zero plan has been published; the whole ESG Programme is
incorporated within the Integrated Strategic Business Plan process;
and there are ESG targets in all senior leaders’ performance plans,
which are cascaded down through the organisation. The Company is
also making efforts to help customers and suppliers with their own
emission management, and is therefore able to report these under
Scope 3 of TCFD. See more information on ESG on page 53.
Review need for improvements to the Group-wide control and
assurance framework, including clarity between the roles and
responsibilities of the first and second lines of assurance within
the Company’s ‘three lines model’.
Increased assessment of emerging risks which have impacted the
Company and lessons learned as a result. A specific example being
assessment of the effectiveness of business continuity plans and
procedures.
When comparing the outcome of the FY23 evaluation against principal areas for improvement identified through the FY22 review process, the
following progress has been seen:
Areas for further attention
Progress during the year
To review the Board’s programme of monitoring each business unit.
In light of section 172, to review the Company’s suppliers and how
the Company engages with them.
To continue to monitor, oversee and challenge the Company’s
safety culture.
The schedule of strategic focus items that the Board reviews as part
of its annual cycle of meetings now includes specific agenda items for
each operating Sector, including updates on the financial and operational
performance of the business units comprised in each Sector.
This has been reflected in three principal improvements: (i) increased
ESG monitoring and reporting on efforts to reduce the carbon footprint
of our supply chain; (ii) data on supply chain performance as part of
regular operating Sector updates to the Board; and (iii) consideration
of supply chain risk, as part of the Chief Risk Officer’s standing report
to the Risk & Security Committee.
As well as the continuing health and safety update provided by the
CEO at each Board meeting, a dedicated Safety Update report will be
provided to the Board, twice a year, by the Chief Technology & Operating
Officer. This will ensure the Board has access to up-to-date data, and
appropriate opportunity to constructively challenge the Company’s
progress and improvements in this area.
the Group Chair’s individual performance
As part of our annual evaluation process, Michael Harper, as Senior
Independent Director, led a review of the Group Chair’s performance.
At a private meeting, the Non-executive Directors, with input from the
Executive Directors, assessed the Group Chair’s ability to fulfil his role
as such. It was concluded that the he showed effective leadership of
the Board and his actions continued to influence the Board and the
wider organisation positively.
the Directors’ individual performances
The Group Chair, Neil Johnson, 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, Neil Johnson confirmed to the Nominations Committee
that, during the year, all Directors have demonstrated a clear commitment
to their roles.
Director induction
On joining the Board, whether in an Executive or Non-executive role, each Director undertakes an induction programme covering subject areas
relevant to the requirements of their role. This programme is designed to fast-track a new Director’s understanding of the Group’s purpose, values,
strategy and operations, thereby equipping them to perform their role.
Details of the induction programme, organised by the Company Secretary in conjunction with the Group Chair, for new Non-executive Directors,
is illustrated by the diagram below:
Background reading material, including previous Board and Committee books, investor and strategy presentations,
relevant Company procedures and Board policies
meetings with the Group Chair, Executive Directors and members of senior management
Guidance on corporate governance arrangements, including the Board and Committee agendas and procedures,
Board succession planning and Board evaluation – provided by the Company Secretary
visits to Company sites, meeting with senior local management
meetings with the Chair of the Committees, external auditors and external remuneration advisers
Ongoing Director training
The Directors have the opportunity to participate in an ongoing training
programme organised by the Company Secretary. This includes the
Company Secretary keeping the Board briefed on relevant regulatory
changes, and arranging external training, as required.
During the year PwC briefed the Board on forthcoming changes to
the external audit and governance environment, and Ashurst provided
training on legal and regulatory updates.
meetings and Director site visits
As global coronavirus restrictions have eased, we have been able to
resume a programme of physical Board meetings and Director visits
at our sites both in the UK and internationally. Locations for meetings
and site visits are agreed annually and are arranged by the Company
Secretary with assistance from the QLT as appropriate.
During the year the Board held physical meetings in Farnborough
and London in the UK, and Virginia in the US, as well as some Board
meetings that continue to be held virtually.
In March 2023, the Group Chair paid a visit to our QTS business
headquarters in Ashford, where he received a tour of their manufacturing
facility to see first-hand what was being built for customers. He was
able to engage in discussion with employees regarding the expansion
of production capabilities and plans for further developing QTS’s
technology offerings in relation to mission rehearsal needs.
Also in March 2023, Steve Mogford visited MOD Boscombe Down
as part of his induction. Shonaid Jemmett-Page, General Sir Gordon
Messenger and James Field were also in attendance. The experience
provided Shonaid, Steve and Gordon with an opportunity to better
understand the day-to-day work of the business and to gain a real
insight into the Company’s culture and values in an operational
setting, outside of the boardroom.
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Audit Committee report
The main tasks of the Committee continue to be the oversight of
a robust system of internal controls and risk management across
the business, encompassing both financial and increasingly non-
financial risks and ensuring the integrity of all reporting, including the
Annual Report and Accounts. The particular areas for focus, which
are addressed by the internal audit plan, the approach of the external
auditors and ‘deep dive’ reviews, are determined by the needs of
the business and the risks it faces. The full terms of reference of
the Committee can be found at www.QinetiQ.com.
We foster an ethos of continuous improvement and I am proud of the
progress we have made this year in enhancing the internal control
environment, including preparedness of our control frameworks in
advance of UK corporate governance requirement changes, expansion
of the internal audit programme to cover the approach to acquisitions,
and focus on safety improvement and high-risk project management
in internal audits.
During the year, we have acquired two companies, Air Affairs (Australia)
and Avantus (United States of America), in addition to disposing of the
Space NV (Belgium) business. The Committee reviewed the disclosures
and accounting to ensure they were appropriate. The year-end impact
is discussed in detail in the Significant Judgements section on pages
121 to 123.
The US continues to be an area of focus for the business and
therefore for the Committee, and this year has seen investment in
the US leadership team to ensure they are positioned for growth pay
dividends as they delivered strong year-on-year growth. Further the US
leadership team has been actively integrating the recently acquired
Avantus business. As the business grows, we need to ensure that there
remains a robust system of internal control and risk management
which is commensurate with our growth ambitions. To this end,
the Committee maintains a regular relationship with the US Special
Security Arrangement (SSA) Audit Committee, sharing best practice
and ensuring alignment of scope and coverage.
We received feedback from the FRC in January primarily related to our
accounting for Research and Development Expenditure Credits (RDEC).
Following an in-depth review including with both the Audit Committee
and our external auditors, we have concluded to change our accounting
policy and align our reporting with peers effective from the year ending
31 March 2023.
Finally the Committee has embraced the relevant aspects of the quickly
evolving sustainability agenda, including target setting, assurance and
reporting. The Task Force on Climate-related Financial Disclosures
(TCFD) reporting, on pages 52 to 74, was reviewed and endorsed
by the Committee.
I hope you find the information in this report about the Committee’s
work helpful and I will be pleased to answer any questions you have
about it at this year’s AGM.
Shonaid Jemmett-Page
Audit Committee Chair
We foster an ethos of
continuous improvement and
I am proud of the progress we
have made this year.”
Dear Shareholder,
I am pleased to present the report of the Audit Committee
for the work carried out by the Committee during FY23.
These pages outline how the Committee discharged the
responsibilities delegated to it by the Board over the course
of the year, and the key topics it considered in doing so.
Activities during the year
Financial reporting
The Group has complex long-term contract accounting and every year
the Committee spends much of its time reviewing the accounting
policies and judgements implicit in the Group’s financial results. In FY23,
we have also reviewed the accounting judgements associated with the
disposal of Space NV and the acquisitions of Avantus and Air Affairs.
The Committee reviewed the quality of income generated during the
year. This entailed assessing the sustainability of income or whether
it was generated from one-off items such as provision releases. The
assessment informs the Committee’s work on whether the accounts
are fair, balanced and understandable, and whether any adjustments
should be considered in remuneration calculations.
Fair, balanced and understandable
In accordance with the Code, the Board has established processes
to ensure that all reports and information it is required to present in
accordance with regulatory requirements, represent a fair, balanced
and understandable assessment of the Company’s performance,
position and prospects.
As such, the Audit Committee was requested to provide advice to the
Board on whether the FY23 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 established
process, the Committee reflected on the information it had received and
its discussions throughout the year. The review is a well-established
Key issues and judgements impacting FY23 accounts
and documented process involving senior management and the core
reporting team. 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.
The Board considers that the FY23 Annual Report and Accounts,
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.
Response to regulator engagement
During the year we engaged with the FRC on our accounting policy
for RDEC and several other items. As summarised in the issues and
judgements table, we updated our accounting policy for RDEC to
account for it within operating profit. As a result of additional feedback
received, we have enhanced the disclosures in the annual report
on several topics including goodwill impairment reviews, pensions,
SSA and TCFD.
The Company recognises that the FRC’s review was based on the
Annual Report and Accounts for the year ended 31 March 2022 and did
not benefit from detailed knowledge of the Company’s business or an
understanding of the underlying transactions entered into. The FRC’s
review provides no assurance that the Company’s Annual Report and
Accounts are correct in all material respects; the FRC’s role is not to
verify the information provided but to consider compliance with reporting
requirements. The FRC’s letters are written on the basis that it (and its
officers, employees and agents) accepts no liability for reliance on them
by the Company or any third party, including but not limited to investors
and shareholders.
Issue
Key uncertainties and judgements
Review and challenge by the Committee
Conclusion
impairment of
goodwill and acquired
intangibles
Germany impairment
assessment
The Group holds goodwill on its
balance sheet in respect of various
Cash Generating Units (CGUs).
An impairment review has been
undertaken confirming that sufficient
headroom (the gap between the
assessed net present value of future
cash flows and the carrying value of
net operating assets) exists in respect
of these CGUs and no impairment
is required.
There is a low level of headroom in
respect of the QinetiQ Germany CGU
and applying a reasonable level of
sensitivity to the assumptions would
lead to an impairment.
The Committee reviewed the outputs
of management’s annual impairment
testing exercise, noting the use of
external advisers to prepare the
technical assumptions (discount rates,
long-term inflation) which have also
been verified as appropriate by the
external auditors.
The Committee held detailed
discussions with management and
the external audit team, specifically
challenging revenue, profit and
technical assumptions.
The Committee acknowledged that
there was a wide range of outcomes to
the impairment test, which is sensitive
to outer-year cash flows. These cash
flows include certain assumptions
around utilisation of aircraft, renewal
of existing contracts and successful
winning of new business opportunities.
On challenging management, the
Committee concluded that no
impairments need to be recorded
in the year.
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Issue
Key uncertainties and judgements
Review and challenge by the Committee
Conclusion
Issue
Key uncertainties and judgements
Review and challenge by the Committee
Conclusion
The Committee concluded that
management’s best estimates
were reasonable.
pensions
Net pension asset
valuation
The Group’s net pension asset
decreased significantly during the
year due to the economic turmoil and
increase in gilt yields, reducing the value
of the LDIs and related asset backed
securities. This more than offset the
reduction in liabilities which were
impacted by higher discount rates.
The committee reviewed the results
on the valuation exercise, and key
assumptions used, noting the use
of external advisers to prepare
the calculations.
The Committee concluded that the
assumptions and outputs made by
management and the external advisers
were reasonable.
The Committee concluded that
management’s best estimates
were reasonable.
long-term contract
accounting
Risk assessment on
key contracts
The Group has a large number of
contracts which span multiple periods
and are accounted for on a percentage
of completion basis in accordance
with IFRS 15.
Long-term contract accounting
requires a number of judgements and
management estimates to be made,
particularly in calculating the forecast
costs to complete the contract, and
resultant contract profitability.
provisions and
contingent liabilities
Pendine and other
provisions
The Group holds provisions in respect
of legal, regulatory and environmental
issues. Judgement is required in
determining whether provisions
are required.
The Committee received commentary
from both management and the
external auditors in respect of the most
significant contracts being delivered
by the Group and discussed the main
financial assumptions (including level
of risk reserves and the use of Monte-
Carlo modelling).
The key judgements considered by
the Committee were: (i) QinetiQ will be
prosecuted, found guilty and be subject
to financial penalties; (ii) the quantum
of the liability in respect of such
penalties; (iii) that insurance will cover
the cost of any civil damages (with a
provision of c.£15.0m being recorded
together with an equally offsetting
Other Receivable).
Specifically, a provision is held in
respect of a serious incident at the
MOD range at Pendine in a previous
financial year.
The Group reports underlying
performance which excludes the
impact of specific adjusting items.
Following the change in accounting
policy relating to the capitalisation of
intangible assets for software as a
service in the prior year, the current
one-off period of digital investment is
included as a specific adjusting item.
Specific adjusting
items
Digital investment
Accounting for
Research and
Development
Expenditure Credits
(‘RDEC’)
Change in accounting
policy
Acquisition accounting
Customer relationship
intangibles
The Committee receives an update
on the nature and quantum of
specific adjusting items, as well
as management assessment
as to their appropriate use.
The Committee agreed with
management’s assessment that the
current Digital investment and other
such items are distorting in nature and
it is therefore helpful to the reader to
separate their impact.
The Group receives Research and
Development Expenditure Credits in
the UK in relation to its direct and
indirect R&D activities.
The Committee reviewed both of the
accounting policy options, as well
as a benchmarking of commonly
adopted market practice.
During the year the Group completed
two strategic acquisitions. Intangible
assets relating to customer
relationships, existing technology and
trade names were recognised as fair
value adjustments to the opening
balance sheets. The most material of
these is the customer relationships
intangible within Avantus.
The Committee reviewed the findings
and assumptions used, noting the
use of external advisers to prepare
the technical calculations. In
particular the Committee challenged
the forecast growth rates assumed
in the calculations and the useful
economic lives applied to the
resultant intangible assets.
The Committee acknowledged that
both IAS 12 and IAS 20 are acceptable
policy choices, but that given the
more common adoption of IAS 20
it is appropriate for the Group to
change its accounting policy.
The Committee concluded that the
assumptions and outputs made by
management were reasonable.
taxation
Key judgments
including recoverability
of losses
The key accounting assumptions
relating to tax include tax provisioning,
acquisition related tax balances, the
recoverability of deferred tax balances
relating to historical losses and the
impact of statutory rate changes.
The committee reviewed the key
judgments taken by management,
particularly relating to the future
recoverability of deferred tax relating to
losses, which will depend on the future
financial results of the relevant entities.
The committee concluded that the
judgments made by management
were reasonable.
Going concern and viability statements
The acquisitions of Avantus and Air Affairs during FY23 took the Group
into a net debt position, this meant that we have paid particular attention
to these assessments, specifically considering if covenants may be
breached. With consideration to the available information, following
review and challenge, the Committee concluded that the Group will be
able to continue in operation and meet its liabilities as they become due
through to 31 March 2028. The Committee considered it appropriate
that the statement covers a five-year period. In reaching its conclusion,
the Committee reviewed the five-year forecast, the stress tests applied
to it and the mitigating actions available to the Company. The viability
statement and the going concern statement can be found in full on
page 83, including the detail on how the process was conducted.
internal control environment
internal Audit
The Group Internal Audit function operates independently within the
business, as part of the third line under QinetiQ’s adoption of the Three
Lines Model (see page 76 for further details). The function works closely
with the business, providing an independent input to help develop a
robust system of risk management and internal control, and also to
ensure there remains a collaborative approach to assurance across
the business.
Group Internal Audit reports to the Committee, formally reporting four
times during the year. The Committee approves the annual audit plan,
reviews findings, and assesses the overall effectiveness of the audit
process. The plan aims to ensure that all significant financial and
non-financial risks are reviewed within a rolling three-year period.
The audit plan for the year was built around a number of priorities
including an assessment of high-risk project and programme
management processes, a focus on the progress of the internal safety
improvement programme, and reviews of the UK subsidiary businesses
that have been acquired by QinetiQ in recent years.
The overall assessment following the audit and assurance activity in the
period is that the control environment is considered to be effective, with
an open culture focused on growing the business in a sustainable way
for the future.
The effectiveness of the Group Internal Audit function was assessed by
the Committee in the period, using a survey and questionnaire that was
completed by members of the Committee, the external auditors, and a
number of senior managers from across the organisation. The outcome
was that the function remains effective in its activities, while noting the
need to strengthen the team and consider using external expertise for
more technical or specialist areas.
Moving forward into the next financial year there are a number
of priorities for the function including, but not limited to, helping
address the new UK corporate governance requirements, working
with the business to mature further the internal assurance model,
as well as focusing efforts to deliver assurance on the integration
of more recent acquisitions in the US and Australia.
Risk management
The Group Risk Management function operates independently within
the business, as part of the second line under QinetiQ’s adoption of
the Three Lines Model (see page 76 for further details). The function
works closely with the business, providing an independent input to help
develop a robust system of risk management and internal control, and
also to ensure there remains a collaborative approach to assurance
across the business. The Committee notes improvements in identifying
and mitigating emerging risks, such as macroeconomic and supply
chain risks, and also notes early signs of improvements in embedding
the three lines of assurance model, since the recruitment of a Chief
Risk Officer in January 2023.
prevention and detection of fraud
The Committee reviews the effectiveness of the control environment
annually, which includes considering the Group policies, processes
and controls for the detection and prevention of fraud. In addition,
the Committee discusses with the internal and external auditors any
findings on the quality of the organisation’s anti-fraud systems and
controls. At each Committee meeting during the year, the Committee
members individually confirmed that they were not aware of any case
of fraud within the Group at that point in time.
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treasury strategy and compliance
The Group Treasury policies and procedures provide a robust framework
of internal controls for the management of treasury risks faced in a net
debt environment. These include monitoring of leverage and availability
of liquidity through Group cash forecasting, meeting our covenant
compliance and legal requirements for our banking partners and
managing our financial exposures to foreign exchange and interest rate
fluctuations. We seek to continually challenge and review this framework
to ensure that it is fit for purpose and robust to meet the changing nature
of financial risks as faced with the collapse of Silicon Valley Bank, the
new higher interest rate environment and the banking sector’s policy on
investing in the defence sector, which impact the availability of liquidity.
External Audit
pwC audit scope
Reflecting the changing composition of the Group, the FY23 audit scope
has been expanded to include key financial statement line items and
the acquisition accounting relating to the acquisitions made during the
year. Consistent with last year, QinetiQ Australia, QinetiQ Inc. (C5ISR)
and QinetiQ Limited are full scope. The scope for Foster Miller Inc.
(Technology Solutions) also remains consistent with the prior year
with audit procedures being performed over Inventory, Revenue and
associated balances only. The Committee viewed it appropriate for
the audit scope to be updated to provide sufficient audit coverage
over the consolidated financial statements.
tax strategy and compliance
Group tax policies and procedures were tested with the identification of
a significant VAT error in the year. There were internal control failings in
both systems and processes which gave rise to a material adjustment
and payment to HMRC relating to the underpayment of prior year
obligations. There was early engagement with the tax authority, in line
with our open and transparent approach to tax risk management. The
control environment was tested and reviewed and further procedures
were adopted immediately to close out the risk and check whether there
were other instances of similar errors. We continue to engage with the
tax authority to demonstrate the operation of these controls. The tax
authority has suspended its penalty subject to compliance with these
controls and meeting compliance obligations over a six month period
of review.
task Force on Climate-related Financial Disclosures (tCFD)
and future non-financial reporting
In FY22 we were one of the first companies required to report, in
line with Listing Rule 9.8.6(R)(8) which addresses the four TCFD
recommendation pillars (Governance, Strategy, Risk and Metrics)
and 11 disclosures. We are committed to continuous improvement
as guidance and methodologies mature. For the FY23 reporting
(see page 61) aligned with the TCFD recommendations, we are able
demonstrate a number of refinements, for example in our approach to
Governance (e.g. the establishment of a new Environmental, Social and
Governance (ESG) Steering Committee providing a monthly oversight).
The Committee reviewed the proposed disclosures and endorsed
assumptions and judgements applied by management.
With the growing body of non-financial reporting requirements ahead,
the Committee requested a deep dive review and a standing agenda
item to continue to be briefed on this evolving area of interest. An
overview of the various new requirements across relevant geographies
was discussed, (including the new International Sustainability Standards
Board (ISSB) sustainability-related financial reporting standards;
and reporting in both the US and Australia) and the next steps and
investment needed to ensure that we remain a leader among our peers.
non-audit work and auditors independence
The Committee is responsible for the Group’s policy, the Code of
Practice on non-audit services and the approval of non-audit services.
The Code of Practice is applicable to all employees and sets out
the principles for regulating the award of non-audit work to the
external auditors.
In order to safeguard the auditor’s independence and objectivity, and
in accordance with the 2019 FRC’s ethical standard, the Group does
not engage PwC for any non-audit services except where it is work
that they must, or are clearly best suited to perform. Accordingly,
the Group’s policy for the engagement of the auditors to undertake
non-audit services broadly limit these to audit-related services such as
reporting to lenders and grant providers, where there is a requirement
by law or regulation to perform the work. All other non-audit services are
considered on a case-by-case basis in light of the requirements of the
ethical standards and in compliance with the Group’s own policy.
The Committee approves the terms of all audit services as well as
permitted audit-related and non-audit services in advance. Pursuant to
the Code of Practice, any non-audit services conducted by the external
auditors require the prior consent of the Group Chief Financial Officer or
the Chair of the Audit Committee, and any services exceeding £50,000
in value require the prior consent of the Committee as a whole. For work
that is permissible by type, the Committee will take into consideration
the size of the contract in proportion to the Group’s revenue and profit,
and also the total size when aggregated with other contracts with
PwC, noting that some non-auditing services are subject to an annual
regulatory 70% spending cap of the average of the audit fees billed over
the last three year period.
It is also the Group’s policy that no former PwC employee may be
appointed to a senior position within the Group without the prior
approval of the Group Chief Financial Officer.
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Review of non-audit work during the year
The Committee reviews the cost and nature of non-audit work
undertaken by the external auditors 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 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. Fees paid to PwC are set out in note 8 to
the Consolidated Financial Statements on page 181 and include one off
fees relating to the opening balance sheet and acquisition accounting for
Avantus and Air Affairs.
Non-audit related fees paid to the auditor during the year were £0.15m
(FY22: £0.66m), representing 8% (FY22: 59%) of the audit fee. This
included £0.11m (FY22: £0.09m) relating to the review of the half-
year results. FY22 included approved fees relating to an incomplete
acquisition. Our annual review of the external auditors takes into
account the nature and level of all services provided.
Review of the effectiveness and the independence of the
external auditors
At its September meeting the Committee discussed the effectiveness
of the external audit for FY22. It concluded that there had been several
challenges and there were learnings to be taken for both PwC and the
Group. As a result an additional week was incorporated into the reporting
timetable. It was confirmed that PwC continues to perform its audit
work to a high standard, in particular as a result of its comprehension
of the company’s business, control processes and the matters on which
significant accounting judgements or estimates are required and its
appropriate validation or challenge of management’s views.
Audit appointment and partner succession
PwC was appointed as auditor of the Group at the 2017 Annual General
Meeting (AGM) following a tender process. PwC are now in their sixth
year as auditors with a new external audit engagement partner, John
Ellis, who took the lead for FY23 audit cycle and will manage the external
audit team going forward. The external audit contract will be put out
to tender at least every 10 years, and the Committee considers that it
would be appropriate to conduct an external audit tender during FY27
to ensure that new auditors are appointed for the FY28 audit cycle.
The Committee and the Board will be recommending PwC’s re-
appointment at the 2023 AGM.
Audit Committee structure
The Audit Committee is comprised entirely of independent Non-
executive Directors and is chaired by Shonaid Jemmett-Page, who
is considered by the Board to fulfil the Code requirement of recent
and relevant experience from the financial sector.
The Board considers the members of the Audit Committee to be
independent and, in accordance with the Code, the Board concludes
that the Committee as a whole possesses competence relevant to the
Group’s sector, having a range of financial and commercial experience
in the industry and the commercial environment in which the Group
operates. The Group Chair, Group Chief Executive Officer, Group Chief
Financial Officer, Group Financial Controller, Group Director Internal Audit,
Chief Risk Officer and representatives of the external auditors attended
all Committee meetings by invitation during the year. Twice a year
we also welcome the Chair of the US SSA Audit Committee to update
us specifically on the internal controls and risk management across
the business.
The Committee met with PwC and the Group Director Internal Audit
on two separate occasions, without Executive Directors present, to
discuss the audit process and assure itself regarding resourcing,
auditor independence and objectivity.
Audit Committee effectiveness review
In 2023 the effectiveness review of the Committee was conducted
by The Effective Board LLP. This process is described further on
pages 117 to 118. The outcome of the evaluation confirmed that the
Committee continues to operate highly effectively and determined
that Committee members have good oversight of, and are able to
raise appropriate challenges in respect of, important financial matters,
such as management’s significant accounting judgements and the
implementation of new accounting standards.
looking ahead
We await the outcome of the Financial Reporting Council’s consultation
on Audit Committee minimum standards and the implementation of
regulatory standards to address the response in respect of the corporate
governance and audit reforms. The Committee will review its processes
and implement changes to its operations, as may be required. We will
also monitor the Group’s implementation of any required changes
resulting from the reforms.
Statutory audit services compliance
The company confirms that during the year under review it applied
and was in compliance with 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.
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Audit, risk and internal control continued
Risk & Security Committee report
The Risk & Security Committee risk management
responsibilities
The Risk and Security Committee has a close relationship with the Audit
Committee which enhances the efficiency and effectiveness of Board
oversight. The Committee provides further scrutiny and assurance
to the Board that the required UK and international standards in risk
management, security, health and safety, are achieved. This includes
ensuring that the organisation fulfils its statutory requirements and duty
of care. This assists the Board in reviewing and assessing the Group’s
risk management systems.
Risk profile of the Group
During the year, the Committee has focused on reducing the Group’s
risk profile. The review of the Group Risk Register, which is described
further on pages 75 to 83, continues to be fundamental for the
Committee to undertake its duties. The Risk Register contains details
of the Company’s principal risks and uncertainties, their impact on
the Company and how they are managed.
Security profile of the Group
One of our core responsibilities is to oversee the Group’s physical and
non-physical security systems. Our future success will be reliant on our
ability to exploit and operate technology at pace while still retaining the
exacting levels of security required by our customers and partners.
The Committee members and I have, together with the Chief Enterprise
Services Officer, Group Director Security, Business Services Director
and Chief Risk Officer, developed a schedule of security-related
agenda items, ensuring that the Committee will be able to oversee this
important subject, as well as the risks facing the Group. As a defence
and engineering Company, we must remain alert about our risks and
strengthen our processes to address increasing geopolitical instability.
Key highlights FY23
– Tapped key talent for our CIO and CISO roles and on-boarded our
Chief Risk Officer
– Matured our governance structure and our global view on risk
– Stood up the Security & Information and Risk & Assurance Councils
as key new bodies to reinforce Group-wide awareness of risk
and assurance
– Delineated and interlinked security risks into four pillars
– Embedded a sense of modernity into our risk and assurance approach
FY24 priorities
– Ensuring effective first line compliance and second line
assurance activities
– Monitoring progress on the Global Interoperable Infrastructure Project
– Improving the consistency of risk reporting across the Group
– Continuing to ensure that we are recruiting, building and retaining the
right workforce skills and talent to drive our physical and non-physical
security focus
I hope you find the information in this report about the Committee’s
work helpful and I will be pleased to answer any questions you have
about it at this year’s AGM.
General Sir Gordon Messenger
Risk & Security Committee Chair
We have strengthened our
processes to match growing
threats and ensure we are secure
and effective in the modern age.”
Dear Shareholder,
I am pleased to present our Risk & Security Committee report
for FY23, which describes our activities and areas of focus
during the year.
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Key responsibilities
The Committee’s primary functions are:
– To oversee the sound operation of the Group’s risk management
systems
– The ongoing review of the Group’s principal and emerging risks
(see pages 75 to 83)
– To oversee the Group’s physical and non-physical security systems,
including monitoring security exposures and security culture, and
considering emerging security issues
– To ensure that health and safety risks are being effectively managed
across the Group
– To oversee the Group’s second line assurance activity over the first
line compliance activity taking place across the Group’s functions
and businesses
– To monitor adherence to the generic MOD compliance system
– To review the Group’s policies, processes and controls for the
detection and prevention of bribery and modern slavery and
compliance with applicable laws, regulations and codes
of conduct
Risk management
The Board assumes ultimate responsibility for the effective
management of risk across the Group, determining its risk appetite
and ensuring that each business area implements appropriate internal
controls. The Group’s risk management systems are designed to
manage, rather than eliminate, the risk of failure to achieve business
objectives, and can only provide reasonable and not absolute assurance
against material misstatement or loss. These systems are also designed
to be sufficiently agile to respond to changes in circumstances, such as
geopolitical instability and supply chain disruptions.
Risk & Security Committee structure
All members of the Board are members of the Risk & Security
Committee, which is chaired by General Sir Gordon Messenger. The
Chief Enterprise Services Officer, the Group Director Security, the Chief
Information Officer, the Chief Information Security Officer, the Chief
Risk Officer and the Group Director – Internal Audit attend Committee
meetings by invitation.
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’s 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 QinetiQ Leadership Team and monthly performance reviews
feed into the Group strategy at the Executive and Board level. The risk
management and risk monitoring processes are divided as following:
Risk management
• Review risk management structures
and reporting lines (i.e. effectiveness
of control environment)
• Evaluate effectiveness of risk reporting
processes
• Review effectiveness of risk identification
processes
• Consideration of any security issues relating
to the appointment of external auditors
Risk monitoring
exposures
• Review of risk register and key exposures
• Monitor Health, Safety and Environmental
performance
• Scrutinise Internal Audit reports with
respect to risk and security issues
• Oversee international business governance
• Oversee application of apply anti-bribery
and corruption measures
Security management
The Committee is assured by the progress made by the Group in the
year, although, with the ever-increasing incidence and sophistication
of cyber attacks and the consequent need for the Group to remain
vigilant, the Committee expects security to remain one of its key areas
of focus. A Security Culture Survey, conducted by the Group Security
team covering the whole Group and aimed at understanding the
security maturity levels across four areas: information, physical, cyber
and personnel security, proved invaluable in identifying areas for focus,
both domestically and internationally.
Cyber security
Our cyber security procedures have been strengthened considerably
in recent years in response to the increasing threat this poses
to businesses, and it remains an area that we keep under
continuous review.
We continue to develop our cyber capability leveraging deep technical
expertise and knowledge to support all our business areas. The threat in
this area continues to evolve with the introduction of advanced Artificial
Intelligence tools (such as ChatGPT) making identification of phishing
emails, malware and false social media profiles increasingly difficult to
identify. This will form a key part of our security training and education
programme in FY24.
The Committee continues to receive regular reports from the CIO and
CISO on the maintenance of adequate cyber security systems, work
undertaken to improve cyber security capabilities and lessons to be
learnt from high-profile data breaches.
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internal financial controls
Internal financial controls are the systems that the Group employs to
support the Board in discharging its responsibilities for financial matters
and the financial reporting process.
The main elements include:
– Assessment by Internal Audit of the effectiveness of
operational controls
– Clear terms of reference setting out the duties of the Board and
its Committees, with delegation to management in all locations
– Group Finance and Group Treasury manuals outlining accounting
policies, processes and controls
– Weekly, monthly and annual reporting cycles, including targets
approved by the Board and regular forecast updates
– Leadership teams reviewing results against forecast and agreed
performance metrics and targets with overall performance
reviewed at region and Group levels
– Specific reporting systems covering treasury operations, major
investment projects and legal and insurance activities, which are
reviewed by the Board and its Committees on a regular basis
– Confidential reporting procedures allowing individuals to report
fraud or financial irregularities and other matters of concern
– Data protection policies to detect breaches and other issues
Enterprise risk management
Our Enterprise Risk Management (ERM) is designed to consistently
identify, measure, manage, monitor and report the principal risks to
the achievement of the Group’s business objectives and is embedded
throughout the Group. It is codified through risk policies and business
standards which set out the risk strategy, appetite, framework and
minimum requirements and controls for the Group’s worldwide
operations. Group reporting manuals in relation to International Financial
Reporting Standards (IFRS) reporting requirements and a Financial
Reporting Control Framework (FRCF) are in place across the Group.
The ERM relates to the preparation of reliable financial reporting,
covering both IFRS, and local statutory reporting activity. The ERM
process follows a risk-based approach, with management identification,
assessment (documentation and testing), remediation (as required),
reporting and certification over key financial reporting related controls.
Board oversight of risk management
The Board’s delegated responsibilities regarding oversight of risk
management and the approach to internal controls are set out on
pages 75 to 83. There are good working relationships between the
Board Committees, and they provide regular reports to the Board on
their activities and escalate significant matters where appropriate.
The responsibilities and activities of each Board Committee are set
out in the Committee reports.
Self-assessment and certification model
Each business unit Managing and Functional Director is required to
make a declaration that their business unit’s governance and system of
internal controls are effective and are fit for purpose for their business
and that they are kept under review throughout the year. Any material
risks not previously identified, control weaknesses or non-compliance
with the Group’s risk policies or local delegations of authority must be
highlighted as part of this process. The effectiveness assessment draws
on the regular cycle of assurance activity carried out during the year, as
well as the results of the annual assessment process. The details of key
failings or weaknesses are reported to the Risk and Security Committee
and the Board on a regular basis and are summarised annually to enable
them to carry out an effectiveness assessment.
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All employees have to complete mandatory cyber, information, physical
and personnel security training each year, which focuses on our policies,
procedures, culture and behaviour aligned to known threats. Our Group
intranet also includes a comprehensive Security Knowledge Library
which is used both individually and by leaders for regular security
engagements at team level. This approach substantially improved
security culture and behaviour during FY23.
Governance
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. 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 and half-year, is reported to
the Committee by the Group Director Risk & 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 managers to act as Compliance Implementation Director (CID)
and Compliance Audit Director (CAD).
Anti-bribery and corruption
The Committee oversees a zero-tolerance approach to bribery and
corruption, as confirmed by the Company’s anti-bribery and corruption
policy and the supporting local policies that apply to members of its
Group. The Group also has in place a range of procedures, including
regular training targeted at potentially risk-exposed roles of the
employees, Group and local gifts and hospitality policies, and Group
and divisional procurement, contracting and partnering practices,
which are designed to prevent bribery. See more on page 74.
Data privacy
The Company respects the personal data privacy of its customers,
employees and other individuals in respect of whom it and members
of its Group process personal information. The Group therefore has
in place policies which mandate the lawful processing and protection
of such personal information in accordance with applicable laws and
procedures which are designed to achieve the same. A report on GDPR
compliance is presented to the Committee at each Committee meeting.
Effectiveness review
In 2023 the effectiveness review of the Committee was conducted by
The Effective Board LLP. This process is described further on pages 117
and 118. The performance of the Committee was rated highly overall,
and the Committee agreed it would continue to focus on cyber risk
and security in FY24.
Frameworks for risk management and internal control
The Board is responsible for promoting the long-term success of the
Company for the benefit of shareholders, as well as taking account of
other stakeholders including employees and customers. This includes
ensuring that an appropriate and proportionate system of internal
control is in place throughout the Group. To discharge this responsibility,
the Board has established frameworks for risk management and internal
control using a Three Lines Model, see page 76, and reserves for itself
the setting of the Group’s risk appetite. In-depth monitoring of the
establishment and operation of prudent and effective controls in order
to assess and manage risks associated with the Group’s operations
is delegated to the Audit Committee, complemented by the work of
the Risk & Security Committee. However, the Board retains ultimate
responsibility for the Group’s systems of internal control and risk
management and has reviewed their effectiveness during the year.
The frameworks for risk management and internal control play a key
role in the management of risks that may impact the fulfilment of the
Board’s objectives. They are designed to identify and manage, rather
than eliminate, the risk of the Group failing to achieve its business
objectives and can only provide reasonable and not absolute assurance
against material misstatement or losses. The frameworks are regularly
reviewed and were in place for the financial year under review and up
to the date of this report. They help ensure the Group complies with the
Financial Reporting Council’s (FRC) guidance on Risk Management,
Internal Controls and related financial and business reporting.
After discussions with the Audit Committee and the Risk & Security
Committee, the Board conducts a robust six-monthly assessment of
the Group’s emerging and principal risks. The assessments in the year
included those emerging risks that could impact the Group’s business
model and future performance and therefore require management
prioritisation and action. Specifically the Board considered the principal
risks facing the Company when approving the Group business plan.
During the year, the Risk & Security Committee received updates on
a number of emerging risks and associated mitigating actions by
management. Emerging risks were also taken into account in the
design of scenarios which are intended to stress test the Group’s five-
year strategic business plan, recovery plan, climate change impacts,
decisions on the return of capital to shareholders and operational
resilience. The Company’s approach to risk and risk management
together with the principal risks that face the Group are explained
within the risk section of the Strategic report.
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Directors’ remuneration report
Directors’ remuneration report
It is against the backdrop of strong FY23 performance that I am pleased
to propose our new Directors’ Remuneration Policy to further incentivise
our ambitious growth agenda.
Reward decisions for FY23
The Remuneration Committee awarded base salary increases of 3.6%
for both the CEO and CFO effective 1 July 2022. Both salary reviews are
aligned with the Rewarding for Performance guidance used for all UK
employees and below the 4.0% budget for the July 2022 salary review.
The annual contribution to the Bonus Banking Plan (BBP) for FY23
for the CEO and the CFO is 98.2% and 96.8% of the maximum
respectively, recognising their personal performance during a year
when the Company delivered exceptional performance led by our
Executive Directors.
The FY23 contingent share award under the Deferred Share Plan (DSP)
will be made at 100% of the maximum reflecting stretch revenue growth
in-year, an excellent result. This DSP award will not vest in full unless the
performance underpin is met in FY26 that the level of operating profit for
FY23 is at least maintained.
The FY23 CEO single figure on page 146 is lower than FY22, despite the
higher FY23 annual incentive payment, largely due to no DSP contingent
shares vesting as no award was made based on FY20 performance.
The Committee considered the FY23 incentive out-turns in detail from
the perspective of our key stakeholders (shareholders, customers
and employees) and agreed that it was appropriate not to exercise
the discretion available to amend the outcome; that is, no adjustment
was made to incentive targets or outcomes.
New Directors’ Remuneration Policy
During FY23 the Committee has spent a significant amount of time
considering the new Directors’ Remuneration Policy for approval at the
July 2023 AGM to ensure that it is aligned with our strategy and growth
ambitions. We have consulted widely with our shareholders as our
proposal evolved and we are grateful for the input we received which
has greatly assisted the Committee in finalising our proposals.
The Committee’s desired outcomes from the review of our Policy, are to:
– Simplify the approach to incentives.
– Align more to market in terms of incentive structure.
– Be more aligned to the global and private equity markets
where we are increasingly competing for talent.
– Drive sustainable annual performance supporting our
ambitious growth strategy and long-term value creation.
– Provide clearer separation between the annual and
long-term incentives.
– Ensure alignment between the Executive Directors,
QinetiQ Leadership Team and other senior leaders.
The Committee believes that the new Policy and, in particular,
the proposed new annual and long-term incentives, achieve
the desired outcomes.
QinetiQ’s Gender Pay Gap data can be found on our website at
www.QinetiQ.com
It is against the backdrop of
strong FY23 performance that
I am pleased to propose our
new Directors’ Remuneration
Policy to further incentivise
our ambitious growth agenda.”
Dear Shareholder,
As the Group Chair notes in his statement on page 4,
FY23 was a year of excellent performance. This was
reflected in the incentive out-turns where stretch financial
targets were exceeded on orders, profit, cash and revenue;
a truly exceptional performance.
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The Bonus Banking Plan (BBP) will be replaced by an Annual Bonus Plan
(ABP), with the current 200% of salary maximum remaining unchanged.
The ABP is a more market-standard structure, with 70% of any outcome
payable in cash at year end and 30% deferred into shares which vest
after two years. This provides the same level of cash opportunity
each year as the BBP.
The Committee is also proposing the introduction of a new Long-term
Performance Award (LPA) to replace the Deferred Share Plan (DSP).
The DSP has supported incremental annual growth but is no longer
appropriate to motivate and reward our increased ambition. The LPA
will be targeted on achieving stretching levels of performance, aligned
with market guidance and the new FY27 ambition, beyond those of
the current incentives with an increased reward opportunity. For the
Executive Directors, the LPA will have a maximum award of shares to
the value of 250% of salary for exceptional levels of performance over
a three-year period, followed by a two-year holding period post-vesting.
The LPA is a similar construct to a Performance Share Plan whereas
the DSP is restricted shares with a one-year pre-grant performance
condition. The higher LPA maximum opportunity reflects the different
nature of the award and the higher level of performance required with
commensurately more stretching targets.
Implementation for FY24
Subject to shareholder approval at the AGM, the Committee intends to
operate new incentive plans for FY24 as described in the Policy section
on page 136 and above.
The ABP for FY24 is based on the same financial metrics as in prior
years (orders, profit and cash) with stretch targets set against the
delivery of the Integrated Strategic Business Plan (ISBP). Financial
metrics have a 70% weighting and non-financial targets have a 30%
weighting based on the achievement of personal and common goals,
with the focus of the latter on ESG metrics.
The FY24 LPA will be made immediately after shareholder approval at
the AGM, with a 3-year performance period commencing 1 April 2023.
The performance metrics for the FY24 LPA will be cumulative underlying
operating profit, Return on Capital Employed (ROCE) and total revenue
growth to drive consistent profit performance, robust investment
selection and value creation for our customers through collaboration.
Employee engagement and reward
Recent discussions provided a clear indication that our shareholders
want to understand the measures we have taken to ensure that our
employees are supported in these difficult times. The Company’s
leadership has made a number of interventions in FY23 to the long-
term benefit of our employees including: in the UK, a minimum salary
review of £1,500 in July 2022 and a further £1,500 in December
2022 to the benefit of our lower paid employees; in the US, greater
support for employees with the increased cost of medical provision;
in Australia, greater investment in scarce skills to negate the impact
of market attrition; and globally, establishing a hardship fund to
provide immediate financial support to those in the most need.
QinetiQ’s employees are key to the delivery of our ambitious growth
strategy. Our employees have been outstanding this year, demonstrating
extraordinary focus, collaboration and drive to continue to deliver to
our customers.
The CEO and the Chief People Officer have held regular discussions
with our Global Employee Voice on reward matters. The social
section on page 52 details our employee engagement activity.
I met with the Chair and other representatives of the Global Employee
Voice during the year and I found the discussions very helpful in terms
of understanding employee views. I understand that they have also
found the meetings helpful and it is our intention to continue to meet
at appropriate intervals.
In FY19 the Company introduced an All Employee Incentive Scheme
(AEIS) whereby every eligible employee can earn a payment if the
Company achieves a level of operating profit within a predetermined
range from target to stretch. For FY23 the stretch profit target was
achieved resulting in a maximum payment for the Company element
of the AEIS of £1,250. In addition, high-performing employees can earn
up to an additional 5% of salary based on personal performance.
The AEIS is a key element of the Company’s Rewarding for Performance
framework and aligns employees and shareholder interests by
incentivising and rewarding profitable growth. The Company will operate
the AEIS again for FY24. Looking forward, the Company will continue to
invest in our enhanced global reward strategy and employee offering.
Conclusion
Supporting leadership to drive Company performance and developing
the new Directors’ Remuneration Policy were the primary areas of focus
of the Remuneration Committee in FY23. The Committee believes
that we have a talented QLT and, as the Company continues to grow
and expand internationally, we are mindful of our global competitive
environment and the increasing levels of responsibility.
The Company performed exceptionally well in FY23. As we now enter
the next phase of growth we need simple stretching incentives which
offer enhanced opportunities for leadership aligned to the ambitious 5
year strategy. For FY24 the Committee looks forward to implementing
the new Policy to support the Company in delivering its growth targets.
I am very grateful for the time shareholders have given us this year
and I hope that we can rely on your vote in support of the Directors’
Remuneration Policy and FY23 Report at the AGM on 20 July 2023.
I would welcome comments and questions from shareholders in relation
to this Directors’ Remuneration Report and I can be contacted through
companysecretariat@qinetiq.com.
Susan Searle
Remuneration Committee Chair
25 May 2023
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Directors’ remuneration report continued
Remuneration at a glance
Components, alignment, application and changes (subject to the approval of the new Directors’ Remuneration policy at the 2023 AGm)
Annual fixed pay
Application in FY24
Link to strategy
Salary
Executive Directors’ base salaries are set on appointment
and reviewed annually, or when there is a change in
position or responsibility. Typically, base salaries will be
increased by a similar percentage to the average pay
increase for all employees of the Group.
Fixed pay is set at a level that enables us to attract
and retain high-quality Executive Directors, who are
capable of successfully leading and executing our
strategy and delivering long-term sustainable growth.
Our Policy aims to ensure that fixed pay remains
attractive and competitive.
Benefits
Benefits include a car allowance, health insurance, life
assurance, income protection and taxable expenses.
pension
Executive Directors currently receive 10.5% of base
salary allowance as cash in lieu of pension which is
equivalent to the UK workforce pension available to
all employees.
Annual variable pay
Link to strategy
The new Annual Bonus Plan (ABP) introduced for FY24
onwards will be as follows:
• 70% of any outcome will be payable in cash at year
end and 30% will be deferred into shares, which vest
after two years.
• The maximum incentive for Executive Directors
will be 200% of salary.
• The performance measures used for the ABP will be
the same as those used in prior years. For FY24 these
are orders, operating profit, cash flow, common goals
(which include ESG metrics) and personal goals. As
in FY23 a weighting of 70% financial and 30% non-
financial metrics will be used for FY24.
The ABP rewards strong sustainable financial
performance through a 70% weighting on core financial
metrics, driven by the implementation of our strategy.
The ABP also rewards non-financial performance through
the delivery of key Common Goals related to environment
(Net Zero roadmap), employee engagement & inclusion,
and safety and the achievement of personal goals.
The partial deferral of any ABP payment into shares
drives a long-term and sustainable focus aligned to
the interests of shareholders.
Long-term variable pay
Link to strategy
The new Long-term Performance Award (LPA)
introduced for FY24 onwards will be as follows:
The LPA has a clear link to strategy and incentivising
growth:
• Three-year performance test with any shares vesting
• Cumulative Earnings: To deliver consistent operational
subject to a further two-year holding period.
• The maximum LPA award for Executive Directors will
be 250% of salary for the delivery of truly stretching
financial targets.
performance over the longer term. Understood,
relevant and actionable for QinetiQ senior leaders.
• Returns: To drive robust investment selection
and delivery.
• The performance measures used for the LPA for FY24
• Total revenue growth: To drive value creation through
will be earnings, ROCE and total revenue growth.
collaboration and market leverage.
• No more than 20% of each element of the award
will vest at threshold levels of performance.
The payment of any LPA in shares which must be held
for a further two years drives a long-term and sustainable
focus aligned to the interests of shareholders.
No change to
current Policy.
No change to
current Policy.
No change to
current Policy.
Application in FY24
For FY24 the Remuneration
Committee revised the
annual incentive weightings
by reducing the orders
metric to 20% (previously
25%) and increasing
the profit metric to 30%
(previously 25%) to support
the drive for profitable
growth. Cash will remain
at a 20% weighting.
Application in FY24
Each LPA will be based
on key financial metrics
aligned to Company
strategy with weightings
set to provide an
appropriate balance
between the metrics.
For the FY24 LPA the
metrics are earnings
(underlying operating profit
on a 3-year cumulative
basis, 35% weighting),
ROCE (average EBITA
over three years divided by
average capital employed,
35% weighting) and
total revenue growth
(30% weighting).
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Timing
To create strong alignment between executive remuneration and the long-term interests of our shareholders, the ABP is paid in part in deferred shares
vesting two years after the award was earned. The LPA has a three-year performance 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
Fixed pay
ABp
lpA
Pay at risk subject to performance conditions
Shares held, not subject to performance conditions
Single Figure FY23
(£’000)
Illustration of FY24 potential
(£’000)
Chief Executive Officer
Chief Financial Officer
Chief Executive Officer
Chief Financial Officer
tOtAl
£2,477
tOtAl
£2,162
tOtAl
£514*
tOtAl
£1,393
tOtAl
£841
tOtAl
£2,391
tOtAl
£3,942
tOtAl
£4,803
tOtAl
£537
tOtAl
£1,545
tOtAl
£2,553
tOtAl
£3,113
£733
£912
£1,304
£832
£858
£835
£558
£274
£240
£2,584
£1,723
£861
£689
£1,378
£1,378
£1,680
£1,120
£560
£448
£896
£896
£841
£841
£841
£841
£537
£537
£537
£537
FY22
FY23
FY22
FY23
min
target
Stretch
+50%
min
target
Stretch
+50%
Key
Fixed pay
Annual variable pay
Long-term variable pay
* FY22 excludes £100,000 ‘Other’.
Minimum – Fixed pay (FY24 base salary, plus
taxable benefits and pension allowance)
Target – Fixed pay plus ABP at Target (100% of base
salary) and LPA at Target (125% of base salary)
Stretch – Fixed pay plus ABP at Maximum
(200% of base salary) and LPA at Maximum
(250% of base salary)
+ 50% Share price appreciation – Stretch plus
50% share price appreciation (on 100% of LPA)
Key
Fixed pay
Annual variable pay
Long-term variable pay
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2023 Directors’ remuneration policy Q&A
Q
Q
How does the Annual Bonus Plan (ABP) work?
– The ABP is an annual incentive plan with a one-year
performance measurement period, with any award paid
partly in deferred shares;
– A maximum award of 200% of salary is available each year;
– At the end of the first year 70% of the award is paid as a
cash bonus;
– The remaining 30% is deferred and held in shares,
which are subject to share price exposure;
– The deferred shares are held for two years;
– The financial metrics proposed for the ABP in FY24 are
orders (20% weighting), operating profit (30% weighting)
and operating cash flow (20% weighting);
– The non-financial metrics carry a collective weighting of
30% and include priorities such as implementing new safety
programmes, roadmap to net zero, transforming the culture
and engagement levels within the business. This supports
long-term sustainable growth.
How does the Long-term Performance Award
(LPA) work?
– Vesting of the LPA award will be determined by performance
against a scorecard of long-term performance measures
(which will not duplicate those for the ABP) to track the
step-change value enhancement and enable a rounded
assessment of performance;
– For the initial FY24 award, this will include earnings, financial
returns (e.g. ROCE with a mechanism to incentivise value
creative acquisitive growth), as well as a total revenue
measure to increase global collaboration and create value
across our Company;
– The performance target range for the LPA will be highly
stretching to reflect its intention to drive strong business
growth at an appropriate return on capital, delivering good
returns for our shareholders;
– No more than 20% of each element of the award may
vest at threshold levels of performance.
In alignment with our growth ambition, the FY24 LPA targets
will drive towards c.£3bn of revenue by FY27, at 11 - 12%
margin, with ROCE in a 15 - 20% range.
Q
Q
What are the principles of QinetiQ’s Directors’
Remuneration Policy?
The principles of the new Policy are:
– A simplified approach with greater alignment to market
practice and separation between annual and long-term
incentives;
– To drive sustainable annual performance, supporting our
ambitious growth strategy and long-term value creation;
– Balance between supporting organic and inorganic growth;
– Drive collaboration across our teams; and
– Retain, attract and incentivise top talent.
How does the Policy align executive pay with the
interests of shareholders?
QinetiQ’s annual incentive scheme and long-term share plan
deliver shares which must be retained after any award is paid
or vests. In our ABP, 30% of the award is deferred and held as
shares and is therefore subject to share price exposure. In our
LPA there is a three-year vesting period for any shares and
then a further two-year holding period.
In addition, the Executive Directors are required to build and
hold a significant shareholding in the Company of 300% of
salary for the CEO and 200% for other Executive Directors.
Q
How does your Policy reward the
implementation of Company strategy?
Our strategy, as detailed in our five-year Integrated Strategic
Business Plan (ISBP), aims to deliver sustainable and
long-term growth in our business and to increase value
to our shareholders.
The Policy focuses on the achievement of stretching but
sustainable annual and three-year financial performance
targets aligned to the ISBP, balanced with Common Goals
and personal objectives, to provide strategic alignment and
support the growth ambition of the Company.
Q
How does the Policy drive corporate culture?
Our annual bonus scheme includes a 30% weighting towards
non-financial metrics including common goals (which include
ESG metrics) and personal objectives.
Common goals are based on ESG targets for employee
engagement & inclusion, progress towards the Net Zero
target and the overall safety maturity of the Company.
The personal objectives measure the ‘what’ and the ‘how’
to ensure that key personal deliverables are achieved
through collegiate and collaborative behaviours.
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Q
Why aren’t you proposing ESG and/or TSR
as core performance metrics?
The Committee considered carefully both ESG measures
and TSR as core metrics for the LPA:
Q
ESG – measures such as route to Net-Zero, employee
engagement and D&I interventions have a 17.5% weighting
in the current annual incentive plan, which we anticipate will
continue for the ABP in FY24 and thereafter. At this current
point in the Company’s journey towards Net-Zero and other
core ESG milestones, the Committee considers it better to focus
on annual incremental performance to deliver long-term goals.
TSR – The Committee’s view is that comparative TSR is a
measure which is based as much on market sentiment as
Company performance; the Committee therefore prefers
performance measures, such as those proposed for the
FY24 award, which are in the direct control of senior leaders
and strongly align with the delivery of QinetiQ’s strategy and
long-term sustainable value creation for shareholders. The
Committee is also mindful of the challenge of identifying
appropriate comparators for a Company such as QinetiQ that
has few direct UK peers. However, the Committee will retain
the flexibility to select the most appropriate measures aligned
to business strategy each year, and will keep the use of TSR
as a measure under review.
How do you focus on employee engagement?
Our employees share in the Company’s success following the
introduction of the AEIS in FY19 which pays up to £1,250 to
all eligible employees on the basis of the Company’s annual
operating profit performance. The AEIS is important as a
performance driver, to support collaboration and to share the
success we create for shareholders.
Our Global Employee Voice (GEV), representing our global
employees, is deeply engaged across the Company. We listen
to the views and level of engagement of our employees through
a quarterly survey using a market-leading dynamic tool (Peakon).
Q
How do you avoid rewarding for failure?
In line with best practice, Executive Directors’ contractual
notice periods are 12 months with termination payments
normally limited to salary, benefits and pension with a duty
to mitigate loss if they are terminated by the Company.
Incentives have stretching performance targets to ensure that
any payments are justified with the Remuneration Committee
having discretion to adjust the formulaic outturn to ensure that
rewards are appropriate. In addition, bonus deferral, holding
periods and shareholding requirements ensure a focus on
sustainable share price performance.
Q
Why are you replacing the DSP with the LPA?
The LPA is designed to foster a greater focus on long-term
sustained performance and to drive outstanding levels of
organic and inorganic growth.
Q
What other changes to Policy is the Committee
proposing for 2023?
Apart from the introduction of the new annual and long-term
incentives, there are no substantive changes proposed for
the 2023 Policy.
LPA performance targets are measured over three financial
years, instead of an initial one-year target under the DSP,
and will be calibrated to be more stretching. This will help
to accelerate QinetiQ’s growth and, if achieved, participants
will earn higher payments than under the DSP.
Q
How have you supported employees in the cost of
living crisis?
We have made a number of interventions in FY23 including:
in the UK, a minimum salary review of £1,500 in July 2022 and
a further £1,500 in December 2022 to the benefit of our lower
paid employees; in the US, greater support for employees with
the spiralling cost of medical provision; in Australia, greater
investment in scarce skills to negate the impact of market
attrition; and globally, establishing a hardship fund to provide
immediate financial support to those in the most need.
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Directors’ remuneration policy
Introduction
Over the course of 2022 and 2023 the Remuneration Committee has
reviewed the current Policy considering the views of internal and external
stakeholders to ensure it is capable of supporting QinetiQ’s ambitions
for growth. The feedback received from our stakeholders identified
several themes as summarised below:
Scope of Policy
The Policy applies to Executive Directors, the Group Chair and
Non-executive Directors. Reference may also be made to the
QinetiQ Leadership Team who, while not Directors, fall within the
Remuneration Committee’s remit, although the Policy is not binding
for these individuals.
– The former Policy supported business performance and strategy
delivery across the last six years but, as the strategy evolves, so does
the need for a flexible and globally competitive Policy.
– The former Policy supported incremental organic growth, but was not
geared to motivate and reward for step-change value enhancement.
– The increased global nature of the business means we are competing
for talent against a variety of companies, not just from UK-listed
aerospace and defence peers. Private equity-backed companies
increasingly present an attractive proposition for senior executives
given their less restrictive pay policies and more leveraged
incentive arrangements.
– Our Policy was more complicated than market norms and, while well
understood internally, was difficult to explain to potential new recruits,
particularly those outside of the UK.
– Consistency and fairness in approach are seen as being supportive
of the QinetiQ culture.
Against this backdrop the Committee is proposing to make some
changes to the future Policy. The desired outcome is, in response
to shareholder feedback, to simplify the approach with incentive
arrangements which:
– Are more aligned to market.
– Drive sustainable annual performance supporting longer-term
value creation.
– Provide clearer separation between the annual and long-
term incentives.
– Ensure alignment between the Executive Directors, QinetiQ
Leadership Team and other senior leaders.
The review process
The Committee led the review process throughout, taking account
of market practice, particularly given the increased international
profile of the Company, the views of Committee members, executives
and external advisers as appropriate to help shape our thinking. No
individual is involved in the decision making on their own remuneration.
We then engaged with our largest shareholders representing some
49% of the register and revised the initial proposals to reflect the input
received. In particular, the Committee reduced the overall quantum of the
proposed Long-term Performance Award and revised the metrics. The
Remuneration Committee strongly believes that the proposed Directors’
Remuneration Policy will support the ambitious growth strategy.
We have also made every effort to engage with major shareholders
to explain the Policy and the positive impact it will have on Company
performance and culture. The Remuneration Committee therefore
seeks approval for the Policy at the AGM on 20 July 2023.
Changes to the Policy
As the annual incentive plan, the Committee is replacing the Bonus
Banking Plan (BBP) with the Annual Bonus Plan (ABP), and the
former Deferred Share Plan (DSP) will be replaced by the Long-term
Performance Award (LPA). The terms of the new incentive plans and
the rationale for their introduction is detailed in this report.
Apart from the introduction of the new annual and long-term incentives,
there are no changes proposed for the future Policy.
Discretion
The Committee has discretions in several areas of Policy as set out in
this report. The Committee commits to communicating to shareholders
when discretion is used.
UK Corporate Governance Code
When considering the review of the Policy, the Committee was mindful
of UK Corporate Governance Code provisions which state that the
Committee should address issues of clarity, simplicity, risk, predictability,
proportionality and alignment with culture.
– Clarity is achieved by the simplification of the incentives and the
better separation between the annual and long-term plans.
– Simplicity is delivered by a much simpler approach to incentives,
particularly the ABP.
– Risk continues to be managed through the operation of a broad
suite of performance measures and targets, the use of deferral,
holding periods and malus and clawback provisions, and the
close interaction with the Audit and Risk & Security Committees.
– Predictability is achieved by setting clear performance targets and
outcomes for threshold, target and stretch levels of performance,
with a close link to Company strategy.
– Proportionality is delivered through performance conditions, both
financial and non-financial, with the clear link to strategy. The
Committee has the discretion to override formulaic outturns to
ensure that they are appropriate and reflect overall performance.
– Alignment to culture is supported by performance measures which
are consistent with the Company’s purpose, values and strategy.
Executive Directors’ Remuneration Policy
The Policy will be put forward for approval at the AGM on 20 July 2023.
This Policy covers the three year period commencing 1 April 2023 and
complies with the Large and Medium-sized Companies and Groups
(Accounting and Reports) (Amendment) Regulations 2013.
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Element
purpose and link to strategy
Operation and performance measures
maximum opportunity
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 Committee ensures that maximum
salary levels are positioned in line with
companies of a similar size to QinetiQ
and validated against other companies in
the industry, so that they are competitive
against the market.
The Committee intends to review the
comparators periodically and may add or
remove companies from the group as it
considers appropriate.
The maximum policy pension allowance
is aligned with the Company pension
contribution paid to the majority of UK
pension scheme members (which is
currently 10.5% of salary).
The maximum is the cost of providing
the relevant benefits.
Base salary
To attract and retain the
talent needed to lead
our business.
An Executive Director’s base salary is set on
appointment and reviewed annually or when there
is a change in position or responsibility.
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; and
• pay levels for similar roles among appropriate
comparators.
Individuals who are recruited or promoted to the
Board may, on occasion, have their salaries set
below the targeted policy level until they become
established in their role. In such cases subsequent
increases in salary may be higher than the general
rises for employees until the target positioning
is achieved.
The Company provides a pension contribution
allowance in line with practice relative to its
comparators to enable the Company to recruit
and retain Executive Directors with the experience
and expertise to deliver the Group’s strategy. The
allowance is non-consolidated and does not impact
any incentive calculations.
Benefits include car allowance, health insurance, life
assurance, income protection, expenses incurred
which HMRC may deem taxable and membership
of the Group’s employee Share Incentive Plan
which is open to all UK employees (the Executive
Directors will also be eligible to participate in any
other all-employee plan operated by the Company
from time to time).
The Committee recognises the need to maintain
suitable flexibility in the benefits provided to
ensure it is able to support the objective of
attracting and retaining personnel in order to
deliver the Group strategy. Additional benefits may
therefore be offered such as relocation allowances
on recruitment or where new benefits are
introduced for the wider employee population.
pension allowance To ensure that Executive
Directors’ total
remuneration remains
attractive and competitive.
Benefits
To ensure that Executive
Directors’ total
remuneration remains
attractive and competitive.
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Annual incentive
purpose and link to strategy
Operation and performance measures
maximum opportunity
long-term incentive
purpose and link to strategy
Operation and performance measures
maximum opportunity
Annual Bonus
plan (ABp)
The ABP provides an
incentive for the Executive
Directors to achieve targets
that are entirely aligned to
the Company’s strategy.
The ABP rewards strong
sustainable financial
performance through
a 70% (for FY24)
weighting on core
financial metrics, driven
by the implementation of
our strategy.
The ABP also rewards
non-financial performance
through the delivery of key
common goals related to
our Net Zero roadmap,
employee engagement
& inclusion, safety and
the achievement of
personal goals.
The partial deferral of
any ABP payment into
shares drives a long-term
and sustainable focus
aligned to the interests
of shareholders.
• The ABP is an annual incentive plan with a one
year performance measurement period, with any
award paid partly in deferred shares;
Maximum = 200% of salary.
Target = 100% of salary.
Threshold = 0% of salary.
long-term
performance
Award (lpA)
• A maximum award of 200% of salary is available
each year;
• At the end of the first year 70% of the award is
paid as a cash bonus;
• The remaining 30% is deferred as an award of
deferred shares that must be held for two years,
and are subject to malus and clawback for up to
three years from the payment date;
• Dividend equivalents will be paid on the deferred
shares;
• The financial metrics will normally not be less
than 60% of the overall weighting.
In exceptional circumstances the Committee
retains the discretion to:
• Change the performance measures and targets
and the weighting attached to the performance
measures and targets part way through a
performance year if there is a significant and
material event which causes the Committee
to believe the original measures, weightings
and targets are no longer appropriate; for
example adjustments for: acquisitions and
disposals; restructuring costs; business structure
changes; restated corporate allocations; foreign
currency exchange rates; and Board-approved
budget adjustments.
• Make downward or upward adjustments
to the amount of incentive earned resulting
from the application of the performance
measures, if the Committee believes that the
incentive outcomes are not a fair and accurate
reflection of business performance.
Maximum = 250% of salary.
Target = 125% of salary.
Threshold = 50% of salary.
No more than 20% of each element of
the LPA may vest at threshold levels
of performance.
The LPA provides an
incentive for the Executive
Directors to achieve long-
term financial targets that
are entirely aligned to the
Company’s strategy and
the creation of shareholder
value.
With regard to the FY24
targets–
• Cumulative earnings
(35% weighting): To
deliver consistent
operational performance
over the longer term.
Understood, relevant
and actionable for
QinetiQ senior leaders
• Returns (35%
weighting): To drive
robust investment
selection and delivery
• Total revenue growth
(30% weighting): To
drive value creation
through collaboration
and market leverage
• The delivery of any LPA
in shares which must be
held for a further two-
years drives a long-term
and sustainable focus
aligned to the interests
of shareholders
Vesting of the LPA award will be determined by
performance against a scorecard of three-year
performance measures, the majority of which
will be financial (which will not duplicate those
for the ABP). Any vested shares must be held
for a further two years.
Malus and clawback provisions apply to the LPA.
The Committee will normally provide dividend
equivalents on vested shares under the LPA.
In exceptional circumstances the Committee
retains the discretion to:
• Change the performance measures and targets
and the weighting attached to the performance
measures and targets part way through a
performance year if there is a significant and
material event which causes the Committee
to believe the original measures, weightings
and targets are no longer appropriate; for
example adjustments for: acquisitions and
disposals; restructuring costs; business structure
changes; restated corporate allocations; foreign
currency exchange rates; and Board-approved
budget adjustments.
• Make downward or upward adjustments to
the amount of incentive earned resulting from
the application of the performance measures,
if the Committee believes that the incentive
outcomes are not a fair and accurate reflection
of business performance.
• Scale back incentive awards at grant if there
were to be a substantial Company share
price fall.
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Element
purpose and link to strategy
Requirement
Operation
minimum
shareholding
requirements –
during and after
employment
To align Executive
Directors’ interests with
those of shareholders
through the build-up and
retention of a personal
holding in QinetiQ shares.
Executives have five years to accumulate the
required shareholding.
300% of base salary for the CEO.
200% of base salary for other Executive Directors.
Executive Directors will have a post-employment
shareholding requirement of 100% of salary for
the first year post cessation, then 50% of salary
for the second year post cessation of employment.
The Committee has adopted formal
shareholding requirements to encourage
the Executive Directors to build up over
a five-year period and then subsequently
hold a shareholding equivalent to a
percentage of base salary. Adherence to
these guidelines is a condition of continued
participation in the equity incentive
arrangements. This policy ensures that the
interests of Executive Directors and those
of shareholders are closely aligned.
Executive Directors are required to retain
at least 50% of the post-tax amount of
vested shares from the Company incentive
plans until the minimum shareholding
requirement is met and maintained.
Vested awards under the LPA must be
retained by the participant for two years
post-vesting to further support the post-
employment shareholding requirement
where an Executive Director leaves
the Company.
The Committee retains the discretion to
increase the shareholding requirements.
Notes to the policy table
performance measures and targets
The performance measures and targets, financial and non-financial, are determined annually based on the Company’s strategy. Targets are set
taking into account a variety of inputs including but not limited to the strategic plan, the annual plan and brokers’ forecasts. The measures and,
where possible, the targets will be disclosed after the end of the relevant financial year in that year’s remuneration report.
Remuneration policy for all employees
All employees of QinetiQ are eligible to base salary, benefits and pension.
The link between performance and reward cascades down from the Executive incentive plans with the Leadership and Business Development
Communities typically invited to participate in the Company’s formal annual incentive arrangements. All other employees may receive a discretionary
bonus based on Company and individual performance. Participation in long-term incentive plans is available to Executive Directors, QinetiQ Leadership
Team members, Leadership Community and selected other employees. Share ownership is further encouraged via the QinetiQ Share Incentive Plan.
The Remuneration Committee is made aware of pay, incentives and benefits by grade across the Company and the relevant costs. This is actioned
by an annual report to the Committee which also includes details of any changes in remuneration policy for all employees during the year.
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141
Recruitment policy
The Company’s principle is that the remuneration of any new recruit will be assessed in line with the current Executive Directors. The Committee is
mindful that it wishes to avoid paying more than it considers necessary to secure a preferred candidate with the appropriate calibre and experience
needed for the role. In setting the remuneration for new recruits, the Committee will have regard to guidelines and shareholder sentiment regarding
one-off or enhanced short-term or long-term incentive payments as well as giving consideration for the appropriateness of any award. The Company’s
detailed policy when setting remuneration for the appointment of new Directors is summarised in the table below.
Remuneration element
Recruitment policy
Salary, benefits and pension
These will be set in line with the policy for existing Executive Directors.
incentive plans
Maximum annual participation will be set in line with the Company’s policy for existing Executive Directors and
will not exceed 450% of salary in aggregate.
maximum variable
remuneration
Relocation policies
Depending on the timing of the appointment, the performance measures and targets used for the first award may
differ to those of the existing Executive Directors. If different, they will be explained in detail in the following relevant
Directors’ Remuneration Report.
The maximum variable remuneration which may be granted is 450% of salary (excluding any buy-outs).
In instances where the new Executive Director is required to relocate or spend significant time away from their
normal residence, the Company may provide one-off compensation to reflect the cost of relocation for the
Executive Director. The level of the relocation package will be assessed on a case-by-case basis but will take
into consideration any cost of living differences/housing allowance and schooling.
Buy-out awards
Where the Committee determines that it is necessary to buy-out previous entitlements forfeited on cessation of
an Executive Director’s previous employment, the value of such a buy-out award will be calculated taking into
account the following:
• The proportion of the vesting period completed on the date of cessation of employment;
• The performance conditions attached to the vesting of the entitlements and the probability of them being
satisfied; and
• Any other terms and conditions having a material effect on their value.
The Committee may then agree to compensate for the value forfeited using, where possible, existing incentive
plans. To the extent that it is not possible or practical to provide the buy-out within the terms of existing incentive
plans, a bespoke arrangement would be used, using any flexibility provided under the Listing Rules.
Where an existing employee is promoted to the Board, the policy set out above would apply from the date of promotion but there would be no
retrospective application of the policy in relation to subsisting incentive awards or remuneration arrangements.
Service contracts
Current Executive Directors have open-ended service contracts terminable by the Company immediately without notice upon breach by the individual
or by the Company giving to the individual 12 months’ written notice or, at its discretion, payment in lieu of salary, pension and benefits only during
that notice. The payment in lieu of notice may be made in staged payments and may either reduce or cease completely where the departing
Executive Director gains new employment. The Executive Director may terminate their contract by giving the Company 12 months’ written notice.
Contracts for new Executive Directors will be limited to 12 months’ notice by both parties (or payment in lieu of notice in respect of the Company).
Copies of the service contracts are available for inspection at the Company’s registered address.
The Group Chair and the Non-executive Directors have letters of appointment and are appointed for initial fixed terms of three years, subject to
re-election at each Annual General Meeting. The Group Chair and the Non-executive Directors are not entitled to any payment in lieu of notice
or any compensation for loss of office.
The dates of the service contracts, letters of appointment and unexpired term periods are set out in the Annual Report on Remuneration (page 136).
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Remuneration element
Approach
Application of Committee discretion
long-term performance Award
(on cessation of employment)
Good leavers: Performance conditions will be measured
at the normal measurement date and vest on their
original vesting dates and remain subject to the sale
restrictions. The LPA will normally be pro-rated for the
part of the three-year performance period worked.
Vested LPA awards will remain subject to the holding
restrictions.
Other leavers: LPA awards lapse immediately on
cessation and no award for the year of cessation or if
serving notice at the time of the award.
The Committee may decide to accelerate the vesting
of LPA awards and measure performance up to the
date of cessation in circumstances where there is an
appropriate business case.
The Committee may also waive or shorten the holding
restrictions applicable to an award on compassionate
grounds (e.g. due to death or ill-health retirement).
long-term performance Award
(on change of control)
Performance conditions will be measured at the date
of the change of control and the award will normally be
pro-rated to the date of the change of control.
The Committee may waive pro-rating in circumstances
where it feels it is in the interests of shareholders
to do so.
Other contractual obligations
(on change of control)
There are no other contractual provisions other than
those set out above that could impact quantum of
the payment.
None.
Awards under the Deferred Share Plan, as detailed on page 152 (which includes the FY23 award), will vest on their original terms and will be treated
in-line with the Policy approved by shareholders at the 2020 AGM.
‘Good leaver’ is a person whose cessation of employment is for one of the following reasons:
– Death; ill-health; injury or disability; redundancy; retirement; employing Company ceasing to be a Group Company; transfer of employment
to a Company which is not a Group Company; and where the person is designated a good leaver at the discretion of the Committee
(as described above).
A person who ceases employment in circumstances other than those set out above is designated as an ‘other leaver’.
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Loss of office and change of control policy
When determining any loss of office payment for a departing Executive Director the Committee will always seek to minimise the cost to the Company
while complying with the contractual terms and seeking to reflect the circumstances in place at the time. The Committee reserves the right to make
additional payments where such payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of
such an obligation); or by way of settlement or compromise of any claim arising in connection with the termination of an Executive Director’s office
or employment.
The Committee has a number of discretions, including in relation to the determination of a good leaver. Any exercise of the Committee’s discretions
will be disclosed in full to shareholders.
Remuneration element
Approach
Application of Committee discretion
Salary, benefits
(on cessation of employment)
In the event of termination by the Company, there will be
no compensation for loss of office due to misconduct or
normal resignation.
The Company has discretion to make a payment in
lieu of notice, either as a lump sum or as a series of
phased payments.
In other circumstances, Executive Directors may be
entitled to receive compensation for loss of office which
will be a maximum of 12 months’ salary and benefits.
Such payments will be equivalent to the monthly salary
and benefits that the Executive Director would have
received if still in employment with the Company. These
will be paid over the notice period. Executive Directors
will be expected to mitigate their loss.
pension
(on cessation of employment)
Pension contributions or payments in lieu of pension
contribution will be made during the notice period.
The Company has discretion to make a lump sum
payment in lieu or a series of phased payments.
Remuneration element
Approach
Application of Committee discretion
Annual Bonus plan
(on cessation of employment)
For the year of cessation
Good leavers: Performance conditions will be measured
at the normal measurement date. The Company
incentive payment will be pro-rated for the period
worked during the financial year of cessation.
For the year of cessation
Any payment will normally be made as a mix of cash
and shares. However, the Committee has the discretion
(e.g. in the event of death or ill-heath retirement of a
participant) to pay the entire amount in cash.
Unvested deferred shares will vest in-line with the
normal vesting cycle of the award.
Other leavers: No Company incentive cash payment or
deferred shares awarded for the year of cessation. Any
unvested deferred shares awarded in prior years will
lapse on cessation.
Deferred shares
The Committee may decide to accelerate the vesting
(e.g. in the event of death or ill-heath retirement
of a participant) so that these vest at cessation
of employment.
Annual Bonus plan
(on change of control)
For the year of the change of control performance
conditions will be measured to the date of the change
of control. The Company incentive payment will be
pro-rated to the date of the change of control.
Unvested deferred shares will vest immediately
on the change of control.
The Committee has discretion to make a payment
entirely in cash.
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Malus and clawback
Malus provisions apply to both the ABP and the LPA. Malus is the adjustment of ABP or LPA outturns or awards which have not vested or been paid
due to the occurrence of one or more circumstances. The adjustment may result in the value being reduced to nil.
Policy for the Chairman and the Non-executive Directors
Fees for the appointment of a new Group Chair or Non-executive Directors will be aligned with the Policy for existing incumbents.
Chairman and non-executive Directors
Clawback is the recovery of payments made or vested shares as a result of the occurrence of one or more circumstances. Clawback may apply to all
or part of a participant’s payment or share award under the ABP or LPA and may be effected, among other means, by requiring the transfer of shares,
payment of cash or reduction of awards or bonuses.
Element
Fees
The circumstances in which malus and clawback could apply are as follows:
– Discovery of a material misstatement resulting in an adjustment in the audited accounts of the Group or any Group Company;
– The assessment that any performance condition or condition in respect of a payment or award under the ABP or LPA was based on error,
or inaccurate or misleading information;
– The discovery that any information used to determine the ABP or LPA award was based on error, or inaccurate or misleading information;
– Action or conduct of a participant which amounts to fraud or gross misconduct; or
– Events or the behaviour of a participant have led to the censure of a Group Company by a regulatory authority or have had a significant detrimental
impact on the reputation of any Group Company provided that the Board is satisfied that the relevant participant was responsible for the censure
or reputational damage and that the censure or reputational damage is attributable to the participant.
The following table sets out the periods during which malus and clawback may be effected.
Annual Bonus Plan
Long-term Performance Award
Malus
Clawback
Up to the date of a payment/ award
Three years post the date of any payment/ award
Any time prior to vesting
Three years from the date of vesting
Pay and performance scenario analysis
The proposed Directors’ Remuneration Policy is illustrated in the following charts showing what each Director could expect to receive in FY24 under
different performance scenarios, based on the following definitions:
Scenario
50% share price appreciation
Stretch
Target
Minimum
CEO Steve Wadey (£’000)
+50%
Stretch
target
minimum
17%
21%
35%
100%
841
CFO Carol Borg (£’000)
+50%
Stretch
target
17%
21%
35%
minimum
100%
537
Linked to performance
Stretch plus 50% share price growth (on 100% of LPA)
100% of ABP opportunity (200% of salary)
100% of LPA opportunity (250% of salary)
50% of ABP opportunity (100% of salary)
50% of LPA opportunity (125% of salary)
No variable pay
29%
29%
35%
29%
35%
36%
2,391
54%
4,803
44%
3,942
54%
3,113
44%
2,553
29%
36%
1,545
Fixed
Annual Variable Pay
Long-term Variable Pay
purpose and link to strategy
Operation and performance measures
maximum opportunity
The fees for Non-executive Directors
and the Group Chair are broadly set
at a competitive level against the
comparator group.
In general the level of fee increase for the
Non-executive Directors and the Group
Chair will be set taking account of any
change in responsibility and the general
rise in salaries across employees.
The Company will pay reasonable
expenses incurred by the Non-executive
Directors and Group Chair and may settle
any tax incurred in relation to these.
To attract and retain Non-
executive Directors of the
calibre required to assist
the Company in setting
and delivering its strategy.
The Executive Directors and the Group Chair are
responsible for setting the remuneration of the Non-
executive Directors.
The Board, minus the Chair, is responsible for
setting the Chair’s fees.
Non-executive Directors are paid an annual fee and
additional fees for chairmanship of Committees
and any other additional duties, and the Company
retains the flexibility to pay fees for the membership
of Committees. The Chair does not receive any
additional fees for membership of Committees.
Fees are reviewed annually based on equivalent
roles in the comparator group used to review
salaries paid to the Executive Directors.
An additional fee is payable to those Non-executive
Directors attending meetings outside of their
country of residence.
Non-executive Directors and the Group Chair do not
participate in any variable remuneration or benefits
arrangements.
Fee levels may be increased on a temporary basis
for a significant increase in time commitments
(e.g. assuming an executive position for an
interim period).
Consideration of shareholder and employee views
The Chair of the Committee and the Group Chair consult with key shareholders on remuneration matters from time to time, and particularly in seeking
views on the Directors’ Remuneration Policy in preparation for the triennial vote at the AGM. Any concerns expressed by shareholders are reported to
the Committee and these are taken into account as the Committee develops and implements its Policy. Any comments received from shareholders
outside these consultation exercises are also reported to the Committee, and the Committee takes account of general views on remuneration
expressed by shareholders and their representative bodies.
The Remuneration Committee is grateful for shareholders’ comments and engagement during the Directors’ Remuneration Policy consultation
process. At the end of this process, the Remuneration Committee was pleased that the majority of the shareholders consulted expressed support
for the new Policy.
The Committee has not formally consulted with employees in developing this Policy. However, our Global Employee Voice (GEV) is deeply engaged
across the Company to provide an employee voice at the table on all relevant issues, including remuneration (regular interactions are held with the
Group Chair, Remuneration Committee Chair, CEO and the Chief People Officer). The Company takes the views of employees very seriously and
we monitor this through a quarterly survey using a market-leading dynamic tool (Peakon).
The Committee is cognisant of employment conditions when determining Executive Director pay. In particular, the annual salary increase available
to the rest of the workforce is an important factor in determining any salary increase for the Executive Directors. The Committee reviews the CEO
pay ratio and considers it in the broader context of pay trends within the business.
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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 2023.
Audited information
Executive Directors’ single total figure of remuneration:
Executive Director
Steve Wadey (CEO)
Carol Borg (CFO)
(Appointed 11 October 2021)
Year
2023
2022
2023
2022
Salary
£’000
Benefits
£’000
Pension
£’000
664
639
431
199
79
65
82
20
115
128
45
21
Total
fixed pay
£’000
858
832
558
240
Bonus
Banking
Plan
£’000
1,304
912
835
274
Deferred
Share Plan
£’000
–
733
–
–
Total
variable
pay
£’000
1,304
1,645
835
374
Total
remuneration
£’000
2,162
2,477
1,393
614
Other
£’000
–
–
–
100
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.
The ‘Other’ payment to the CFO in FY22 is a payment in part compensation for performance-based annual bonus lost on resigning from her former employer as detailed in the FY22 DRR.
Salary
Salaries are reviewed effective 1 July, which is the same timing as for the rest of the UK
employee population.
Benefits
Benefits comprise a car allowance, travel allowance, private medical expenses
insurance, life assurance, income protection, and taxable expenses.
pensions
The Executive Directors did not participate in the QinetiQ pension scheme for FY23.
The pension figure is cash in lieu of pension equating to 20% of base salary for the
CEO until 31 December 2022 (not compliant with Provision 38 of the Code), when
it was reduced to 10.5%, and 10.5% of base salary for the CFO from appointment.
CEO
CFO
CEO
CFO
CEO
CFO
Salary as
at 1 April
2022
£’000
647
420
Increase in
the year
3.6%
3.6%
Salary as
at 1 July
2022
£’000
670
435
FY23 salary
actually
paid
£’000
664
431
Taxable
expenses
£’000
Travel & car
allowance
£’000
Insurance
benefit
£’000
Total
benefits
£’000
39
14
19
62
21
6
79
82
Cash in lieu
of pension
£’000
Total in lieu
of pension
£’000
115
45
115
45
Bonus Banking plan
The Bonus Banking Plan operates on a three-year performance cycle mirroring the
financial year, with a four-year payment cycle, i.e. running from 1 April to 31 March.
FY23 represents the third year of Cycle 3 as detailed on page 149.
Each year any incentive award earned is added to the total plan balance, with 50% of the
total plan balance being paid in cash in June after the FY. The remaining 50% is held in
the plan in notional shares. In year four, the total remaining plan balance is paid in shares.
CEO
CFO
BBP Cycle
3 balance
brought
forward
£’000
739
137
Dividend
equivalent
payment
£’000
18
3
BBP
award
in year
£’000
1,304
835
June 2023
payment
in cash
(50% value)
£’000
BBP cycle
3 balance
carried
forward
£’000
1,065
494
1,065
494
Deferred Share plan
No contingent shares were awarded under the DSP in FY20 as the performance
test was not achieved, so there is no DSP award available to vest in FY23.
FY20
Shares
Awarded
Vesting
%
Shares
Vesting
Estimated
value
£’000
CEO
0
–
0
0
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Bonus Banking Plan
FY23 performance measures and operation
For the year ended 31 March 2023 achievement of on-target
performance provides a payment equal to 100% of base salary,
rising on a linear scale to 200% of base salary for achievement
of stretch performance.
The scheme begins to pay out once threshold performance measures
have been achieved. For the year ended 31 March 2023, the CEO and
CFO were measured against the targets as shown in the chart to the
right. The target payment was 50% of maximum for financial and
non-financial objectives.
When 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
profit risk. Financial performance measures exclude the contribution
from businesses acquired in the year.
Audited information
FY23 performance outcomes
% of base salary
12.5%
17.5%
25%
20%
25%
Orders
Underlying operating profit
Underlying net cash flow from operations
Common goals
Personal goals
Threshold
Target
Stretch
Actual
% of
maximum
reward
achieved
CEO
contribution
CFO
contribution
25% £1,130.6m £1,230.6m £1,330.6m £1,701.0m
25% £148.0m £158.0m £168.0m £169.5m
20% £153.0m £173.0m £193.0m £270.2m
100.0% £332,108 £215,630
100.0% £332,108 £215,630
100.0% £265,686 £172,504
17.5%
40%
50%
100%
92.4%
92.4% £159,412
£139,495
12.5%
40%
50%
100%
96.0%
96.0% £214,847
CEO/CFO financial performance measures:
Orders1
Underlying operating profit1, 2
Underlying net cash flow from operations1, 2
CEO/CFO common goals
(as detailed on page 148):
• Performance against key stretching objectives
CEO personal goals
• Performance against stretching objectives
CFO personal goals
• Performance against stretching goals relating
to growth and leadership
12.5%
40%
50%
100%
85.0%
CEO overall result
CFO overall result
85.0%
98.2% £1,304,161
96.8%
£91,643
£834,902
1 Performance measures have been adjusted for the disposal of Space NV in FY23 and an unbudgeted VAT payment. The impact of the Space NV disposal to the original baseline targets was
orders -19.4m, profit -£2.0m and cash -£13.0m. The VAT payment was a cash -£14.0m adjustment.
2 Definition of underlying measures and performance can be found in the glossary on page 178.
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Audited information
Operation during FY23
Cycle 3
Notional shares
on account at
start of
Plan Year 3
(1 April 2022)
30-day average
share price to
31 March 2023
(p)
Share
value as at
measurement
date
(£)
Bonus plan
contribution
for Plan Year 3
(£)
Dividend
equivalent
payment
(£)
Bonus pool
total value as at
measurement
date
(£)
Gross payment
in cash for
Plan Year 3
(£)
Bonus pool
total value
after cash
payment
(£)
Notional shares
on account at
end of
Plan Year 3
(31 March 2023)
CEO
CFO
244,692
45,450
330.2
330.2
807,973
150,076
1,304,161
834,902
18,107
3,363
2,130,241
988,342
1,065,120
494,170
1,065,121
494,171
322,568
149,658
Forfeiture
For BBP Cycle 3 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 the level determined by the Remuneration Committee at the start of the year of £130.0m
for FY23. FY23 Group underlying operating profit was £169.5m (excluding contribution from acquisitions) therefore no notional shares were forfeited.
Discretion
For BBP Cycle 3, for the year ended 31 March 2023, targets were largely achieved providing a contribution of 98.2% of the maximum award for the
CEO and 96.8% for the CFO. CEO £1,304,161 and CFO £834,902 has been reported in the single figure table which represents the contributions to the
Plan related to FY23 performance. No discretion was applied to these contributions as the Committee considers them appropriate reflecting Group
performance. In reviewing the BBP out-turn the Remuneration Committee was mindful of the wider stakeholder experience across the financial year.
Termination of the BBP
Subject to shareholder approval of the new Directors’ Remuneration Policy at the 2023 AGM, the BBP will be terminated and no investment will be
made in FY24. For FY24 the BBP is in Cycle 3 Year 4 when no investment would normally be made. The notional shares on account as at the end
of Plan Year 3 (as identified above) will be revalued using the share price over the 30-day period to 31 March 2024 and then delivered to the CEO
and CFO as actual shares with a dividend equivalent payment.
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Common goals (17.5% weighting)
Measures
Net Zero
Engagement
Inclusion
Safety
Security
total
personal goals (12.5% weighting)
Measures
CEO
total
CFO
total
FY23 Performance
Undertake environmental engagements with demonstrable progress on Net Zero roadmap
Achieve Group Peakon (third-party employee engagement survey) improvement target
Undertake interventions to address organisational biases and drive D&I culture
Drive safety performance-based on lagging and leading metrics
Evidence demonstrable progress
FY23 Performance
Embed safety, security and Three Lines assurance model
Enable growth through customer focus and investment in new capabilities
Develop organisational capability and culture consistent with five-year ambition
Enable Company performance to demonstrate return to growth in FY23
Complete Company restructuring and benefits realisation, inc. overhead recovery model
Deliver year 1 of ESG plan
Establish an effective Finance & Governance Function aligned to new operating model
Refinance (debt/equity) in support of M&A ambition
Outcome
(% maximum)
92.4%
Outcome
(% maximum)
96.0%
85.0%
How the plan operates
– The Plan operates on a fixed three-year performance cycle with
a four-year vesting cycle. FY23 represents year three of Cycle 3.
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
based on the achievement of a profit underpin target.
– At the end of each of the first three Plan years, 50% of the
account balance will be paid in cash 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 and a cash dividend
equivalent is paid.
BBP payout mechanism
YEAR 1
YEAR 2
YEAR 3
YEAR 4
Cycle 3
FY21
FY22
FY23
FY24
Measurement date at the end of each Plan Year
Contribution* or forfeiture
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.
150
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Directors’ remuneration report continued
Annual Report on remuneration continued
Deferred Share Plan (DSP)
Scheme interests awarded during the financial year ended 31 march 2023
The Deferred Share Plan was first approved by shareholders at the 2017 AGM and further approved as a key element of the Directors’ Remuneration
Policy at the 2020 AGM. A maximum award of 125% of salary may be made to Executive Directors 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. FY22 DSP contingent shares granted in the year
are detailed on page 152. The FY22 award was 60.2% of the maximum available.
termination of the DSp
Subject to shareholder approval of the new Directors’ Remuneration Policy at the 2023 AGM, the DSP will be terminated and no award will be made
in relation to FY24 performance. Subsisting DSP awards as identified on page 152 will continue to be available to vest on the basis of the relevant
performance underpin.
Audited information
FY23 performance outcome
The FY23 Deferred Share Plan award was measured against Group organic revenue with the following calibration which was adjusted for the disposal
of Space NV.
Measure
Group Revenue1
CEO
CFO
Weighting
Threshold
Target
Stretch
Actual
% Max award
achieved
% Salary
awarded
Total
£’000
100%
£1,248.6m £1,348.6m £1,448.6m £1,489.6m
100.0%
125.0%
£830,269
£539,075
1 The performance measure has been adjusted for the disposal of Space NV in FY23, with an impact to the original baseline targets of -£26.4m.
The FY23 DSP award was also subject to a pre-grant performance underpin that FY23 profit margins are higher than 10%, which was achieved.
Group revenue achieved at £1,489.6m was above the Stretch level of performance resulting in a FY23 DSP contingent award of shares at
125% of the maximum available.
The FY23 DSP award will be subject to a further performance underpin before vesting:
– Group underlying profit out-turn for FY23 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 FY23 DSP award, this will be the actual underlying operating profit of £169.5m
for FY23 which must be achieved in FY26.
The FY23 DSP award which vests based on the achievement of the FY26 performance underpin must be held as shares for a further two years.
No FY20 DSP award of contingent shares was made as the pre-grant performance tests were not achieved and, therefore, there was no DSP
award available to vest based on FY23 performance and no amount has been reported in the single figure table.
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151
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 from the adoption of the guideline to achieve the required level through,
at a minimum, retaining 50% of the after-tax shares vesting from Company incentive plans.
The CEO has achieved his shareholding requirement and currently holds actual shares equivalent to 485% of base salary using a share price of
339.6p (three-month average to 31 March 2023).
The CFO was appointed during 2021 and does not currently meet the minimum shareholding requirement, with a current holding of actual shares
equivalent to 151% of base salary.
The Remuneration Committee continues to monitor progress towards the shareholding requirement.
Steve Wadey
Carol Borg
Michael Harper
Susan Searle
Neil Johnson
Shonaid Jemmett-Page
Lynn Brubaker (Resigned 31 December 2022)
Steve Mogford (Appointed 01 August 2022)
General Sir Gordon Messenger
Lawrence Prior III
Shares
beneficially
owned
Shares subject
to performance
conditions
Shares not
subject to
performance
conditions
955,909
–
45,000
48,300
100,000
7,000
25,000
–
–
–
391,944
49,299
–
–
–
–
–
–
–
–
564
193,199
–
–
–
–
–
–
–
–
Total shares
held at
31 Mar 2023
1,348,417
242,498
45,000
48,300
100,000
7,000
25,000
–
–
–
Shares beneficially owned comprise shares purchased under the Share Incentive Plan (SIP) and shares owned by the Director and any
connected persons. SIP matching shares are identified as shares not subject to performance conditions.
On 11 April 2023 Steve Wadey purchased 57 shares, then on 9 May 2023 he purchased 55 shares, through his participation in the SIP.
There have been no other changes to the shares shown above between 31 March 2023 and 25 May 2023.
Shares subject to performance conditions comprise awards made under the Deferred Share Plan which remain contingent subject to the
performance underpin as detailed on page 152. The Compensation Share Plan award to Carol Borg (193,199 shares above awarded on
5 January 2022) is only subject to continued employment.
Notional shares held by the CEO and CFO in the BBP Cycle 3 do not appear in the table above as they are not actual shares at 24 May 2023.
However, in reviewing compliance with the shareholding requirement, the net of tax value of notional shares (i.e. 51.75% in the UK) of the
50% of the BBP balance which is not subject to forfeiture is included within the calculation.
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Directors’ remuneration report continued
Annual Report on remuneration continued
Audited information
Total scheme interests summary
Total scheme interests, including those awarded during the financial year ended 31 March 2023, are as follows.
Plan name
Date of grant
Steve Wadey
DSP 2019
DSP 2021
DSP 20221
28 Jun 19
25 Jun 21
14 Jun 22
David Smith
(former CFO)
DSP 2019
DSP 2021
DSP 2022
28 Jun 19
25 Jun 21
14 Jun 22
Carol Borg
Compensation
Share Plan
DSP 20221
5 Jan 22
14 Jun 22
Granted in year
(maximum
potential of
awards)
Number
1 April 2022
Vested in year
Lapsed in year
Number
31 March 2023
Share price on
date of grant
Vest date
243,650
232,746
–
476,396
169,118
73,443
–
242,561
193,199
–
193,199
–
–
159,198
159,198
243,650
–
–
243,650
–
–
19,761
19,761
–
49,299
49,299
169,118
–
–
169,118
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
232,746
159,198
391,944
–
73,443
19,761
93,204
193,199
49,299
242,498
304.0
321.9
302.1
28 Jun 22
25 Jun 24
14 Jun 25
304.0
321.9
302.1
28Jun 22
25 Jun 24
14 Jun 25
258.8
302.1
5 Jan 25
14 Jun 25
1. The FY22 DSP contingent share award granted on 14 June 2022 at a share price of 302.1p (30-day average to 31 March 2022) is calculated on awards of 60.2% of the maximum (75.3% of
salary) with a face value of £480,939 and £148,933 for the CEO and CFO respectively, the award to the CFO being a pro-rata calculation to reflect the portion of FY22 served. If the FY22
Group underlying organic profit (£137.4m) is not achieved in FY25, a minimum of 50% of the award will lapse.
The contingent share award for the FY23 DSP will be granted in June 2023. The Committee estimates that 251,444 contingent shares will be
awarded to Steve Wadey and 163,256 to Carol Borg. This is calculated based on awards of 125% of salary and a share price of 330.2p (30-day
average to 31 March 2023).
As detailed in the FY22 Report, as part of the package approved by the Remuneration Committee for Carol Borg at recruitment, it was agreed that she
would receive a share award in part compensation for share awards which were forfeited on resigning from her former employer. On 5 January 2022
Carol was granted an award over 193,199 shares which will vest in three years. The QinetiQ share price used was the average closing price over the
30 days prior to the award with a value at grant of £500,000.
There have been no other changes to the interests shown above between 31 March 2023 and 25 May 2023.
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.
CFO succession
David Smith retired from the role of CFO effective 30 November 2021. The Remuneration Committee determined that Good Leaver status be
provided to David as regards BBP and DSP participation as detailed in the FY22 Report. David is required to maintain a shareholding in line with
the Directors’ Remuneration Policy.
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153
Performance review
The ten-year and three-year charts show the Company’s Total Shareholder Return over the period from 31 March 2013 to 31 March 2023 and
31 March 2019 to 31 March 2023 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.
Ten-year comparator chart
Three-year comparator chart1
t
n
e
m
t
s
e
v
n
i
0
0
1
£
a
f
o
e
u
a
V
–
R
S
T
l
3
1
0
2
h
c
r
a
M
1
3
n
o
e
d
a
m
300
250
200
150
100
50
0
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
0
2
0
2
1
2
0
2
2
2
0
2
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t
n
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t
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e
v
n
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0
0
1
£
a
f
o
e
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a
V
–
R
S
T
l
0
2
0
2
h
c
r
a
M
1
3
n
o
e
d
a
m
160
150
140
130
120
110
100
90
80
70
60
0
2
0
2
1
2
0
2
2
2
0
2
3
2
0
2
At 31 March
At 31 March
QinetiQ
FTSE 250 (excluding investment trusts)
QinetiQ
FTSE 250 (excluding investment trusts)
Source: Datastream (Thomson Reuters)
Source: Datastream (Thomson Reuters)
1 This period is from the beginning of COVID-19 which had a more distorting
effect at its outset on the TSR of FTSE 250 companies than on QinetiQ.
CEO remuneration
The table below shows the CEO’s remuneration over the same performance period as the Total Shareholder Return chart (31 March 2013 to 31
March 2023):
Year ended 31 March
CEO
Salary/fees
Single figure
Annual bonus
(% of maximum)
Long-term incentives
(% of maximum
vesting)
2023
2022
2021
2020
2019
2018
2017 (restated)
2016
2016
2015
2015
2014
Steve Wadey
Steve Wadey
Steve Wadey
Steve Wadey
Steve Wadey
Steve Wadey
Steve Wadey
Steve Wadey
David Mellors
David Mellors
Leo Quinn
Leo Quinn
689,125
639,121
511,550
610,357
596,422
582,167
568,166
520,219
455,885
501,227
469,776
610,844
2,161,990
2,477,069
2,695,414
1,978,247
2,339,474
1,522,460
1,829,470
1,654,546
1,423,382
1,725,960
673,979
2,177,742
98.2%
71.4%
95.7%
87.5%
94.4%
66.7%
86.4%
85.4%
82.9%
88.6%
–
77.0%
–
100.0%
100.0%
38.4%
31.7%
–
–
–
–
13.9%
–
15.4%
154
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Directors’ remuneration report continued
Annual Report on remuneration continued
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CEO pay ratio
The calculation below is based on the FY23 single figure for the CEO of £2,161,990 and similar calculations for the UK workforce (i.e. ‘Option A’
as defined by the Companies (Miscellaneous Reporting) Regulations 2018). The Remuneration Committee chose Option A as it is the approach
generally favoured by investors and GC100. The calculations for the UK workforce were performed as at 31 March 2023.
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 2023 and the preceding year.
total remuneration
Ratio of the CEO’s pay to UK employees
Year
FY23
FY22
FY21
FY20
25th percentile
Median
75th percentile
53 : 1
67 : 1
70 : 1
56 : 1
40 : 1
49 : 1
52 : 1
41 : 1
31 : 1
37 : 1
39 : 1
31 : 1
The CEO pay ratios have reduced between FY22 and FY23. The primary reason for this is the lower CEO single figure for FY23 due to no DSP award
vesting in the year. The Company believes that the median pay ratio for FY23 is consistent with the pay, reward and progression policies for the UK
employees as the approach for all QinetiQ employees is monitored and reported to the Remuneration Committee on an annual basis.
Year-on-year movements in the CEO pay ratio are likely to be volatile due to the wide range of incentive outcomes for the CEO single figure,
but the Remuneration Committee does note the ratio and will monitor long-term trends.
Total pay of UK employees
£
Total pay and benefits
Salary component1
25th percentile
Median
75th percentile
£40,608
£37,169
£54,216
£35,660
£70,569
£57,385
1 The base salary data is impacted by the fact that the employee identified at the Median on a total pay basis had a significant overtime payment.
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 which paid at the stretch level of
£1,250 to all eligible employees for the level of profit performance delivered in FY23.
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 leaders and selected employees throughout the organisation.
In FY19 the Company introduced an All Employee Incentive Scheme (AEIS) whereby every eligible employee has the opportunity to earn a cash
bonus based on Company and personal performance. For FY23 the Company element of the AEIS was paid at a stretch level of £1,250 as the profit
target was exceeded. The AEIS will be operated again in FY24 and thereafter.
The Committee reviews (but does not decide) the general reward policy for all employees and any significant changes proposed. Alignment with
the workforce is delivered through the Rewarding for Performance framework, including a transparent and consistent approach to the annual
salary review, the AEIS to drive Company and personal performance, recognition schemes and market competitive benefits in our countries.
For FY23 the Company has agreed significant investment in the employee offering across the Group.
Salary/fees
£’000
Benefits
£’000
Committee Chair fees
£’000
US/UK attendance fee
£’000
Single figure
£’000
Non-executive Director
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
Lynn Brubaker (Resigned 31 December 2022)
Michael Harper
Shonaid Jemmett-Page
Neil Johnson
Ian Mason (Resigned 26 April 2021)
General Sir Gordon Messenger
Steve Mogford (Appointed 01 August 2022)
Lawrence Prior III
(Appointed 2 August 2021)
Susan Searle
41
55
55
259
–
55
37
55
55
54
54
54
250
4
54
–
36
54
6
1
1
4
–
1
1
3
1
5
1
1
3
–
–
–
2
1
–
10
12
–
–
12
–
10
12
–
10
12
–
–
14
–
7
12
13
3
3
3
–
3
3
13
3
6
–
–
–
–
–
–
3
–
60
69
71
266
–
71
41
81
71
65
65
67
253
4
69
–
48
67
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.
The Committee Chair fee paid to General Sir Gordon Messenger in FY22 includes a true-up of £2,000 of unpaid Committee Chair fees for FY21
due to an administrative error by the Company. Lynn Brubaker (resigned 31 December 2022) and Larry Prior are US residents and are 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 is a payment of £10,000 as Senior Independent Director, and that for Larry Prior is a payment
of £10,000 as the senior US Non-executive director.
Percentage change in Directors’ remuneration
The following table compares the percentage change in the Director’s salary/fees, bonus and benefits to the average percentage change in salary,
bonus and benefits for a comparison group (4,000 employees) in the UK business in service between 1 April 2022 and 31 March 2023. The analysis
only includes Directors who served for the whole of FY23 and FY22 and is impacted by the temporary salary/fee sacrifice in FY21.
% change between FY23 and FY22
% change between FY22 and FY21
% change between FY21 and FY20
Steve Wadey
Carol Borg
Neil Johnson
Michael Harper
Susan Searle
General Sir Gordon Messenger
Lawrence Prior III
Shonaid Jemmett-Page
Steve Mogford
Average UK employee
Salary/fees
Benefits
3.9%
–
3.6%
1.6%
1.5%
–
–
1.5%
–
4.4%
21.5%
–
33.3%
0%
0%
–
–
0%
–
5.7%
Annual
bonus
43.0%
–
–
–
–
–
–
–
–
96.2%
Salary/fees
Benefits
24.9%
–
14.3%
18.4%
21.2%
–
–
–
–
2.9%
-4.3%
–
100%
100%
100%
–
–
–
–
10.9%
Annual
bonus
-22.7%
–
–
–
–
–
–
–
–
-38.2%
Salary/fees
Benefits
-16.2%
–
17.1%
-15.9%
-6.8%
–
–
–
–
1.2%
35.9%
–
-100%
–
-100%
–
–
–
–
-1.2%
Annual
bonus
10.3%
–
–
–
–
–
–
–
–
62.2%
1 UK employees were chosen in order to avoid the impact of exchange rate movements over the year. QinetiQ Group plc has no employees so QinetiQ Group Ltd employees were used.
The reduction in salary and fees which the Board implemented as a waiver for six months in FY21 impacted the analysis above, as did the reduced
travel and physical meeting attendance. The benefits paid to Non-executive Directors are largely travel and subsistence expenses incurred in relation
to the execution of their duties with the Company that are considered by HMRC to be taxable.
156
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Directors’ remuneration report continued
Annual Report on remuneration continued
Relative importance of spend on pay
The graph below shows actual spend on all employee remuneration, shareholder dividends and buy-backs and any other significant use of profit and
cash within the previous two financial years.
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157
Implementation of Policy for the year ended 31 March 2023
Fees
Non-executive Directors’ fees were last reviewed effective 1 July 2021 and are as follows:
– Basic fee £55,000
– Committee Chair fee £12,000
– Senior Independent Director fee £10,000
Total employee remuneration
2023
2022
£464.8m
£567.3.m
+22%
DiFFEREnCE
The Non-executive Group Chair receives a fee of £262,500 per annum which was increased by 5.0% effective 1 July 2022, the first adjustment
since appointment. 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 and CFO do not hold any Non-executive Directorships in other companies.
Share-based profit distribution
Other significant profit distribution
Dividend cash payment plus purchase of own shares
(see CFO Review page 42).
There were no other significant profit distributions in
2022 or 2023.
2023
2022
£43.4m
£41.0m
+5.9%
DiFFEREnCE
Gender related pay
QinetiQ is subject to gender pay reporting for UK employees and a copy of our latest report is available on the Company’s website.
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 112).
Date appointed
Arrangement
Notice period
Director
Michael Harper
22 November 2011
Shonaid Jemmett-Page
19 May 2020
Neil Johnson
02 April 2019
General Sir Gordon Messenger 12 October 2020
Lawrence Prior III
02 August 2021
Steve Mogford
01 August 2022
Susan Searle
14 March 2014
Carol Borg
Steve Wadey
11 October 2021
27 April 2015
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, 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, 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, subject to annual
reappointment at the AGM.
Service contract
Service contract
–
–
–
–
–
–
–
12 months
12 months
Group Chairman
Basic fee for UK Non-executive Director
Additional fee for chairing a Committee
Additional fee to Deputy Chair/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
1 July 2022
£
262,500
55,000
12,000
10,000
2,500
$4,000
Implementation of Policy for the year ending 31 March 2024
At the 16 May 2023 meeting of the Remuneration Committee, base salary increases of 3.8% (to £695,500p.a.) and 3.9% (to £452,000p.a.) were
approved for the CEO and CFO respectively, effective 1 July 2023. Both salary reviews are aligned with the Rewarding for Performance guidance
used for all UK employees which included a 4.0% budget for the July 2023 salary review plus 0.5% for in-year salary progression.
incentives for Executives
The table below shows the measures and relative weighting for the Annual Bonus Plan (subject to July 2023 AGM approval) for the CEO and CFO:
Performance measure (excluding FY23 acquisitions)
Relative weighting(%)
Annual Bonus Plan
Target performance 100% of base salary
Stretch performance 200% of base salary
Orders
Underlying operating profit
Underlying net cash flow from operations
Common, ESG and Personal Goals
20.0%
30.0%
20.0%
30.0%
For FY24 the Remuneration Committee agreed to adjust the annual incentive weightings by reducing the orders metric to 20% (previously 25%) and
increasing the profit metric to 30% (previously 25%) to support the drive for profitable growth. The increased focus on ESG goals as part of the non-
financial metrics continues for FY24 with a 30% weighting.
For FY24, the Remuneration Committee set the target level of performance at 50% of stretch for the financial measures, common and personal goals.
Details of specific performance targets for the Annual Bonus Plan have not been provided as they are deemed commercially sensitive. The targets will
be disclosed retrospectively in next year’s Annual Report on Remuneration.
For FY24 the Committee has set performance measures and targets for the Long-term Performance Award with a clear link to Company strategy
and incentivising growth:
– Earnings: organic underlying operating profit on a three year cumulative basis (35% weighting)
– Designed to deliver consistent operational performance over the longer term
– Understood, relevant and actionable for QinetiQ senior leaders
– Returns: ROCE (35% weighting)
– Average EBITA for the three year period divided by average capital employed
– Designed to drive robust investment selection and delivery
– Value creation through collaboration: total revenue growth (30% weighting)
– Designed to drive value creation through collaboration and market leverage
For the FY24 LPA the Committee agreed the following targets aligned with our growth ambition (20% of each element vests at Threshold) -
Cumulative earnings targets are deemed commercially sensitive at this time but are consistent with our growth ambition at 11-12% margin.
ROCE
FY26 Total revenue
Threshold 15.0%
Threshold £1.9bn
Stretch 20.0%.
Stretch £2.7bn
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Annual Report & Accounts 2023
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Directors’ remuneration report continued
Directors’ report
Annual Report on remuneration continued
Remuneration Committee meetings, activities and decisions FY23
The following table provides a summary of all the key activities during the year. The attendance at each meeting is detailed on page 103.
The membership of the Remuneration Committee in FY23 was Susan Searle (Chair), Michael Harper, Neil Johnson, Lynn Brubaker (resigned
31 December 2022), General Sir Gordon Messenger, Shonaid Jemmett-Page, Lawrence Prior III and Steve Mogford (joined 01 August 2022).
Base salary
May 2022
July 2022
Incentives
Share awards
Governance
Review of FY22 Company
performance and final results
for BBP and DSP
Approval of FY19 DSP
Performance underpin
and vesting
FY22 DSP awards
Salaries and resourcing
QLT base salary reviews
November 2022
FY23 half-year forecast
March 2023
FY23 provisional results
FY24 target setting
2023 Directors’ Remuneration Policy
Approve FY22 Directors’
Remuneration Report.
AGM preparation
2023 Directors’ Remuneration Policy
Review of QLT shareholdings
Review of Company reward
practices
2023 Directors’ Remuneration Policy
Review of all-employee
remuneration to ensure, inter alia,
alignment of incentives and reward
with culture
2023 Directors’ Remuneration Policy
Remuneration Committee effectiveness review
A performance evaluation of the Committee is conducted annually. This process is described further on page 117.
Remuneration consultants
In FY23 the Committee appointed Mercer to replace FIT Remuneration Consultants LLP as independent adviser to the Committee to provide advice
on market practice, corporate governance and investors’ views. Mercer were selected by the Committee after providing ad-hoc advice in support of
the design of the new Directors’ Remuneration Policy and based on members’ prior experience of working with them.
Fees paid during the year for services provided were £57,826 and £48,375 to FIT and Mercer respectively calculated on a time-spent basis at pre-
agreed rates. FIT did not provide additional services to the Company during the year. Mercer provides the Company with consulting advice on UK
pensions and pay and conditions for employees in the US. The Committee will review the nature of the advice received from Mercer on an annual
basis in order to satisfy itself that the advice it receives is independent and objective.
Statement of voting
Annual Report on Remuneration – 2022
Votes for
Votes against
Total votes cast
Abstained
471,556,509 (96.2%)
18,752,069 (3.8%)
490,308,578 (84.7% of share capital)
47,844
Directors’ Remuneration Policy – 2020
Votes for
Votes against
Total votes cast
Abstained
393,525,108 (87.0%)
59,006,721 (13.0%)
452,531,829 (79.7% of share capital)
19,408,696
Details on the voting on all resolutions at the 2023 AGM will be announced
via the RNS and posted on the QinetiQ website after the AGM.
Susan Searle
Remuneration Committee Chair
25 May 2023
Directors’ Remuneration
Report 2022 % of votes
(%)
Directors’ Remuneration
Policy 2020 % of votes
(%)
96.2%
87.0%
Votes for
Votes against
Directors’ report
The Directors present their report together with the audited consolidated
financial statements for the year ended 31 March 2023.
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 deemed to be incorporated into this report by reference:
Information
Corporate governance statement
Directors’ details
Directors’ conflicts of interest
Directors’ interests in shares
Dividends
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
Disclosure specifically required pursuant to the Companies
(Miscellaneous Reporting) Regulations 2018 can be found
on the following pages:
Stakeholder engagement statement
Statement in the Directors’ Report summarising how
Directors have engaged with employees and taken
account of their interests
Page
92
96
111
151
46
66 - 72
176
54 - 55
1 - 89
42 - 47
105
160
Statement in the Directors’ Report about the corporate
governance arrangements applied by the Company
92 - 94
Publication of the ratio of the CEO’s remuneration to the
median, 25th and 75th quartile pay remuneration of their
UK employees in the Directors’ Remuneration report
Illustration of the effect of future share price
increases on executive pay outcomes in
the Directors’ Remuneration report
154
133
Management report
The Strategic report on pages 1 to 89 and the Directors’ report,
as detailed on pages 159 to 162, 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 distinct business capabilities is the provision of
funded research and development (R&D) to customers. The Group
also invests in the commercialisation of promising technologies
across all areas of business.
In the financial year, the Group recorded £328.0m (FY22: £302.1m)
of total R&D-related expenditure, of which £313.8m (FY22: £287.5m)
was customer-funded work and £14.6m (FY22: £14.6m) was internally
funded. Additionally, £2.7m (FY22: £3.4m) of late-stage development
costs were capitalised and £3.5m (FY22: £2.1m) of capitalised
development costs were amortised in the year.
Political donations
QinetiQ does not make political donations to parties as that term would
be commonly recognised. 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 2023, the Company had an allotted and fully paid
up share capital of 578,757,121 ordinary shares of 1p each with
an aggregate nominal value of £5.8m and one Special Share with
a nominal value of £1. The ordinary share total includes 2,341,325
shares held by employee share trusts.
Details of the shares in issue during the financial year are shown
in note 29 on page 208.
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.
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Directors’ report continued
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 provision 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 29
on page 208.
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 2023, the Trust held 2,341,325
ordinary shares of 1p each (the Trust Shares). The Trustees of the Trust
have agreed to waive their entitlement to dividends payable on the Trust
Shares. The Trust holds further ordinary shares in respect of deferred
shares held on behalf of participants in the Company’s Deferred Annual
Bonus Plan. Dividends received by the Trust in respect of the deferred
shares are paid direct to the Plan participants on receipt and are not
retained in the Trust.
Equiniti Share Plan Trustees Limited acts as Trustee in respect of all
ordinary shares held by employees under the QinetiQ Group plc Share
Incentive Plan (the Plan). Equiniti Share Plan Trustees Limited will vote
on all resolutions proposed at general meetings in accordance with
voting instructions received from participants in the Plan.
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
Klear Kite LLC
Schroders
BlackRock. Inc.
At 31 March 2023
% of issued
share capital*
At 26 May 2023
% of issued
share capital*
10.01%
9.98%
7.92%
10.01%
9.98%
7.92%
*
As notified by the shareholder and based on the issued ordinary share capital at the time
of the notification.
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 practical.
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. The qualifying third party indemnity
was in force during the financial year and also at the date of approval
of the financial statements. 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.
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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 Maritime Strategic Capabilities Agreement Future Arrangement
contract is a 10 year contract awarded by the MOD which came
into effect on 1st April 2023. The contract terms include a provision
requiring that any change of control of QinetiQ Limited requires prior
approval from HM Government (with control being defined as the
ability to control the Company’s affairs by reason of the holding of
shares or means of voting or other powers). If such approval is not
obtained, the MOD reserves the right to terminate the agreement.
– The Group is party to funding agreements, provided by a consortium
of banks: a £275m multi-currency revolving credit facility which will
mature on 27 September 2025; a multi-currency floating rate term
loan of £340m which has an initial term of 3 years maturing on
27 September 2025, with two one-year options to extend the final
maturity to 27 September 2027; and interest rate derivative contracts
over 3 and 5 years to fix the floating rate bank borrowings in line with
Treasury policy. Under the terms of the agreements, in the event
of a change of control of the Company, any lender may give notice
to cancel its commitment 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 132.
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 must stand for re-election at intervals of no more than three years
thereafter. In line with best practice reflected in the UK Corporate
Governance Code, however, the Company requires each serving
member of the Board to stand for election or re-election on an
annual basis at each AGM.
Powers of the Directors: allotment/purchase of own shares
At the Company’s AGM held in July 2022, the shareholders passed
resolutions which authorised the Directors to allot relevant securities up
to an aggregate nominal value of £3,857,994 (£1,928,997 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 2023 AGM.
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 2023 AGM.
Annual General Meeting
The Company’s AGM will be held on Thursday 20 July 2023 at 11:00am
at the office of Ashurst LLP, London Fruit and Wool Exchange, Duval
Square, London E1 6PW.
Independent auditors
PwC has expressed its willingness to continue in office as independent
auditors and a resolution to re-appoint them will be proposed at
the AGM.
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Directors’ report continued
Statement of Directors’ responsibilities in respect
of the financial statements
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with applicable law and regulation.
Directors’ confirmations
Each of the Directors, whose names and functions are listed on
pages 96 to 98 confirm that, to the best of their knowledge:
– The Group financial statements, which have been prepared in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and international
financial reporting standards adopted pursuant to UK-adopted
International Accounting Standards, give a true and fair view of the
assets, liabilities, financial position and profit of the Group
– The Company Financial Statements, which have been prepared in
accordance with United Kingdom Accounting Standards, comprising
FRS 101, give a true and fair view of the assets, liabilities, financial
position and profit of the Company
– The Going concern statement on page 85 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.
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 2023.
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.
James Field
Company Secretary
25 May 2023
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 Accounting
Standards in conformity with the requirements of the Companies Act
2006 and the 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). Additionally, the Financial Conduct
Authority’s Disclosure Guidance and Transparency Rules require the
Directors to prepare the Group Financial Statements in accordance
with UK-adopted International Accounting Standards.
Under company law, 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 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 international accounting standards in
conformity with the requirements of the Companies Act 2006 and
UK-adopted International Accounting Standards 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
– 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’s and Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and Company and enable them to ensure
that the financial statements and the Directors’ Remuneration Report
comply with the Companies Act 2006.
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.
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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
2023 and of the group’s profit and the group’s cash flows for the year
then ended;
– the group financial statements have been properly prepared in
accordance with UK-adopted international accounting standards as
applied in accordance with the provisions of the Companies Act 2006;
– the company financial statements have been properly prepared in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, including 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.
We have audited the financial statements, included within the Annual
Report & Accounts (the “Annual Report”), which comprise: the
Consolidated and Company balance sheets as at 31 March 2023; the
Consolidated income statement, the 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.
Other than those disclosed in Note 8, we have provided no non-audit
services to the company or its controlled undertakings in the period
under audit.
Our audit approach
Overview
Audit scope
– We conducted full scope audit work in the UK over QinetiQ Limited, in
the US over QinetiQ Inc. (C5ISR) and in Australia over QinetiQ Pty Ltd
based on their size or risk. This provides significant coverage over all
financial statement balances, except inventory.
– We performed a full scope financial statement line item audit over
inventory balances at Foster-Miller Inc. (Technology Solutions) and
QinetiQ Target Systems Limited to provide sufficient overall Group
coverage.
– Additionally in Technology Solutions, we performed full scope financial
statement line item audits over revenue and associated balances.
– As a result of the Avantus Federal acquisition during the year, we
performed full scope financial statement line item audits over the
acquired balance sheet and revenue and associated balances.
– We performed procedures over goodwill, intangible assets, share-
based payments, pensions, IFRS 16 lease accounting, taxation,
borrowings, derivative financial instruments and testing of the
consolidation at a Group level.
Key audit matters
– Long-term contract accounting (group)
– Impairment of goodwill and acquired intangibles (group)
– Acquisition accounting (Avantus Federal) (group)
– Impairment of investments in subsidiary undertakings (parent)
Materiality
– Overall group materiality: £7,950,000 (2022: £6,650,000)
based on approximately 4.2% of underlying profit before tax.
– Overall company materiality: £5,000,000 (2022: £5,000,000)
based on 1% of total assets.
– Performance materiality: £6,000,000 (2022: £5,000,000) (group)
and £3,750,000 (2022: £3,750,000) (company).
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.
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.
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independent auditors’ report continued
to the members of QinetiQ Group plc
Acquisition accounting (Avantus Federal) is a new key audit matter this year. Accounting for tax research and development expenditure credits
(“RDEC”), which was a key audit matter last year, is no longer included because of management having updated their accounting policy in respect
of RDEC, from IAS 12 to IAS 20, and we concur with this treatment. Otherwise, the key audit matters below are consistent with last year.
Key audit matter
How our audit addressed the key audit matter
long-term contract accounting (Group)
Refer to page 120 (Audit Committee report) and page
215 (note 36, Significant accounting policies - Revenue
from contracts with customers) and page 176 (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 in accordance
with IFRS 15.
Long term contract accounting requires a number
of judgements and management estimates to be
made, particularly in calculating the forecast costs to
complete the contract. These judgements drive 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 certain key controls
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
audits. These detailed contract audits involved meeting with key financial and non-
financial personnel throughout the year and at year end 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 applicable 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 revenue, costs and associated balance
sheet positions to the underlying general ledger. We obtained evidence to corroborate
management estimates and judgements, particularly around forecast costs to complete
and risk contingencies. We validated costs incurred allocated to contracts during the
year to supporting documentation.
For the remaining untested contracts, we selected a sample and performed testing over
revenue and costs, agreeing to supporting documentation including customer contracts
and validating a sample of customer invoices to cash receipts. We agreed contract loss
provisions recorded based on the overall outcome anticipated on the contract through
a combination of the procedures above and consideration of recoverability of amounts
recoverable on contract.
Additional testing was performed, where not sufficiently covered by the above,
over the contract asset and liability balance sheet positions to gain assurance over
the accuracy of these balances. These have been sample tested and agreed to
supporting documentation.
No material exceptions were found.
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Key audit matter
How our audit addressed the key audit matter
We assessed the design and implementation of the goodwill impairment processes
and related controls; however, we concluded that we would not rely on the controls over
financial reporting and therefore we performed only substantive procedures in this area.
We have tested the principles and mathematical integrity of the Group’s discounted cash
flow model used to assess goodwill and indefinite-lived intangible assets for potential
impairment. With the assistance of our valuation specialists, we assessed the long-term
growth rates and discount rates used in the impairment calculation, by comparing the
Group’s assumptions to external data. We concluded that the Group’s assumptions
were materially appropriate.
We confirmed that cash flows for the next 5 years, consistent with internal budgeting
and strategic planning processes and the long term viability assessment, have been
input to the model and that the underlying budgets and strategic plans have been
approved by the Board.
In respect of US Technology Solutions and Germany, we challenged the cash flow
projections used within the model by reference to current cash flows, analysis
of management’s historic forecasting accuracy, understanding future contract
opportunities and through obtaining third party evidence where possible. We held
discussions with financial and non-financial personnel, corroborating explanations
to supporting evidence.
We tested the sensitivity of the impairment calculations, changes in the underlying
assumptions and concluded that no impairments are required, and that the sensitivity
to key assumptions is sufficiently disclosed. We did not identify any indication of
management bias and did not identify any impairment triggers which would require
an updated impairment assessment in the intervening period to year end.
We have obtained and reviewed the purchase agreement to ensure that all terms
have been considered and accounted for appropriately. We have performed audit
procedures over both the identification of assets acquired (including any potential
intangible assets) and the valuation of assets acquired and liabilities assumed. We
have agreed the consideration paid to bank statements and reconciled to the sale and
purchase agreements.
We involved our specialists in our audit of the valuation of assets acquired and liabilities
assumed. Our work included assessment of the appropriateness of the valuation models
used, assessment of the discount rate used in the models, and evaluation of future
cash flow forecasts. In particular we focused on the valuation of acquired customer
relationships and the assumption relating to attrition. We found that the valuation
models used, and the judgements and estimates made surrounding the valuation
of assets and liabilities acquired to be reasonable.
We assessed the completeness of disclosures made in respect of acquisitions against
the requirements of the relevant accounting standards and found that there were no
omissions of disclosures.
impairment of goodwill and acquired
intangibles (Group)
Refer to page 120 (Audit Committee report), page 218
(note 36, Significant accounting policies - Impairment
of goodwill and tangible, intangible and held for sale
assets), page 186 (note 14, Goodwill) and page 188
(note 15, Intangible assets).
The Group has a material amount of goodwill and
acquired intangible assets (£409.0m and £282.0m
respectively at 31 March 2023). There is a risk of
impairment where the performance of the cash
generating unit is behind expectation and does not
support the value held on the balance sheet.
Management performed a discounted cash flow analysis
based on the Board-approved five-year strategic plan
to assess whether the goodwill and acquired intangible
assets are supported by future cash flow projections.
This annual impairment review was performed as at 31
January 2023. No triggering events have been identified
in the period to 31 March 2023 and therefore no
additional impairment reviews have been performed. No
impairment charge has been recognised during the year.
Our audit focused on the risk that the carrying
value of goodwill and acquired intangible assets
could be overstated. A greater level of testing was
performed over the US Technology Solutions and
Germany cash-generating units (CGUs), being the
CGUs with comparatively lower levels of headroom
than the other CGUs.
Acquisition accounting (Avantus Federal) (group)
Refer to page 120 (Audit Committee report) and
page 183 (note 12, Business combinations).
The Group has completed two acquisitions in the
year, the most significant being Avantus Federal in the
US. Accounting for acquisitions can be complex, with
judgement required in both the identification of assets
acquired (including any intangible assets), and the
valuation of those assets and the liabilities assumed, in
accordance with IFRS 3 ‘Business Combinations’.
The calculation of fair value is subjective due to the
inherent uncertainty involved in the valuation of assets
and liabilities, and this requires the application of
judgement by management and technical expertise.
In particular the method of valuation, future forecasts
(including cash-flow forecasts) and underlying
assumptions that may all have a material impact
on the valuation of assets and liabilities, notably
the valuation of intangible assets (£209.2m), which
represent the most significant assets acquired.
The Avantus Federal acquisition has resulted in
£264.6m of goodwill recognised, creating a risk
that this may be impaired if it is unsupported by
the forecast performance of the business acquired.
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Annual Report & Accounts 2023
independent auditors’ report continued
to the members of QinetiQ Group plc
Key audit matter
How our audit addressed the key audit matter
We have evaluated management’s consideration of impairment triggers through
performing our own independent assessment, which has included;
• Considering the market capitalisation of the group at year end and comparing this
to the carrying value of the investment.
• Assessing the overall financial performance of the group to identify any indicators
of impairment as a result of poor financial performance.
• Considering other information gathered during the course of our audits of components
and assessing whether there are any other indicators of impairment.
• Comparing the carrying value of the investment to the carrying value of the underlying
net assets.
We found that management’s conclusion that there are no impairment triggers in the
investments in subsidiaries carrying value was reasonable.
impairment of investments in subsidiary
undertakings (parent)
Refer to page 228 (Accounting policies - Investments
and note 2, Investments in subsidiary undertakings).
The Company has investments of £521.2 million in
its subsidiary undertakings. Annually, the Directors
consider whether any events or circumstances have
occurred that could indicate that the carrying amount of
the investment in subsidiaries may not be recoverable.
If such circumstances are identified, an impairment
review is undertaken to establish whether the carrying
amount of the investments exceeds its recoverable
amount, being the higher of fair value less costs to
sell or value in use.
Impairment assessments of this nature require
significant judgement and there is a risk that a
potential impairment trigger may not be identified
by management and in the event that there is an
impairment trigger identified, there is a risk that the
calculation of the recoverable amount of the investment
is incorrect and therefore the value of the investment
may be misstated.
No such indicators of impairment have been identified.
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.
We conducted full scope audit work over QinetiQ Limited, C5ISR
and QinetiQ Pty Ltd, with QinetiQ Limited being the only component
considered financially significant to the Group. The audit of QinetiQ
Limited is performed in the UK and the audit of C5ISR and QinetiQ Pty
Ltd are performed by our local PwC component teams based in the
US and Australia, respectively. This provides sufficient coverage over
all financial statement balances, except inventory and central balances
audited by the Group team.
We performed additional procedures over inventory balances at
two further entities to ensure sufficient coverage over that financial
statement line item. QinetiQ Target Systems Limited is located within
the UK and work was performed by the Group audit team. Technology
Solutions is located in the US and work was performed by our local
PwC component audit team.
We performed additional procedures over revenue and associated
financial statement balances at Technology Solutions, located in the US,
which was performed by our local PwC component team. Additionally,
as a result of the Avantus Federal acquisition during the year, we
performed full scope financial statement line item audits over the
acquired balance sheet and revenue and associated balances.
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 financial information of
full scope components, QinetiQ Limited, C5ISR and QinetiQ Pty
Ltd, accounted for 82% of consolidated Group revenue and 80% of
underlying profit before taxation (on an absolute basis, excluding
holding companies and consolidation entities).
The full scope audits plus the additional audit procedures over inventory
in two other locations and revenue and associated balance sheet
accounts within Technology Solutions and Avantus Federal, resulted
in coverage of 93% of consolidated Group revenue and 85% of total
Group assets.
The combination of the work referred to above, together with additional
procedures performed at a Group level, including testing of significant
journals posted within the consolidation, significant adjustments made
to the financial statements, goodwill, intangible assets, share-based
payments, pensions, IFRS 16 lease accounting, taxation, borrowings
and derivative financial instruments gave us the evidence required
for our opinion on the financial statements as a whole.
The Group engagement leader discussed and agreed the audit plan
with our component audit teams, in addition to agreeing the format
and content of communications. We determined that the level of
involvement we were able to have in the audit work at our reporting
entities was sufficient, and appropriate audit evidence had been
obtained, to enable us to form our opinion on the financial statements
as a whole. The Group engagement leader visited our local PwC
component team and the local management team in the US as part of
our planning procedures. We maintained regular dialogue throughout the
audit process with our component audit teams through the use of video
conferencing. We also supervised the work performed by all component
teams through the review of component team working papers and
we are comfortable that sufficient and appropriate procedures have
been performed.
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167
The Company audit was performed by the Group audit team. The parent company is principally a holding company and there are no branches or
other locations to be considered when scoping the audit. There are no financial statement line items in scope for the group audit. The company is
audited on a stand-alone basis, and hence, testing has been performed on all material financial statement line items.
the impact of climate risk on our audit
As part of our audit we made enquiries of management to understand the extent of the potential impact of climate risk on the group’s and company’s
financial statements, and we remained alert when performing our audit procedures for any indicators of the impact of climate risk. In particular, when
carrying out our work over long term contracts we challenged management over the impact of climate change (e.g. flooding at exposed areas) on the
forecasted costs to complete as well as any potential risks arising from physical and environmental issues. Our procedures did not identify any material
impact as a result of climate risk on the group’s and company’s financial statements.
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:
Financial statements − Group
Overall materiality.
£7,950,000 (2022: £6,650,000).
Financial statements − Company
£5,000,000 (2022: £5,000,000).
How we determined it. approximately 4.2% of underlying profit before tax
1% of total assets.
Rationale for
benchmark applied.
We initially set our materiality at the planning stage of the audit using 5% applied
to an estimate of underlying profit before tax and before the RDEC credit was
included within other income. At the time of planning our audit, underlying profit
before tax was 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 on note 4 of the financial statements.
We determined it appropriate to maintain our overall materiality at £7,950,000
calculated in our audit plan, which equates to approximately 4.2% of underlying
profit before tax.
We believe that total assets is the
primary measure used by shareholders
in assessing the performance of this
entity, and is a generally accepted
auditing benchmark for a holding
company. This materiality relates to
the audit of the Parent Company only,
as the Parent Company was not in
scope for the Group audit.
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 £5,000,000 and £7,500,000. Certain components were audited to a local statutory audit materiality that
was also less than our overall group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and
extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance
materiality was 75% (2022: 75%) of overall materiality, amounting to £6,000,000 (2022: £5,000,000) for the group financial statements and
£3,750,000 (2022: £3,750,000) for the company financial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk
and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £400,000 (group audit) (2022:
£332,500) and £250,000 (company audit) (2022: £250,000) as well as misstatements below those amounts that, in our view, warranted reporting for
qualitative reasons.
168
QinetiQ Group plc
Annual Report & Accounts 2023
independent auditors’ report continued
to the members of QinetiQ Group plc
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the group’s and the
company’s ability to continue to adopt the going concern basis of
accounting included:
– Obtaining management’s Board-approved strategic plan for the five year
period ended 31 March 2028. We held discussions with management
to understand the budgeting process and the key assumptions made
in the forecasting processes, particularly in the first 12 months;
– Performing a comparison of the cash flow forecasts used in the
going concern assessment to those in the strategic plan and, where
applicable, compared these forecasts for consistency to those
used elsewhere in the business, including for long-term contract
accounting and impairment assessments;
– Assessing whether the stress testing performed by management
appropriately considered the principal risks facing the business,
and were adequate;
– Using our own knowledge from the audit and assessment of
previous forecasting accuracy we calculated sensitivities to apply
to management’s cash flow forecasts, These procedures confirmed
significant headroom in management’s forecasts when performing
severe but plausible sensitivities;
– Evaluating the feasibility of management’s mitigating actions in
response to the severe stress testing scenarios; and
– We assessed the adequacy of disclosures in the Going Concern
statement on page 85, the Audit Committee report on page 120 and
statements in Note 36 of the Financial Statements and found these
appropriately reflect our understanding of the process undertaken
and the conclusion reached.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that, individually
or collectively, may cast significant doubt on the group’s and the
company’s ability to continue as a going concern for a period of
at least twelve months from when the financial statements are
authorised for issue.
In auditing the financial statements, we have concluded that the
directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
However, because not all future events or conditions can be predicted,
this conclusion is not a guarantee as to the group’s and the company’s
ability to continue as a going concern.
In relation to the directors’ reporting on how they have applied the
UK Corporate Governance Code, we have nothing material to add or
draw attention to in relation to the directors’ statement in the financial
statements about whether the directors considered it appropriate to
adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect
to going concern are described in the relevant sections of this 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, which
includes reporting based on the Task Force on Climate-related Financial
Disclosures (TCFD) recommendations. 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 our work undertaken in the course of the audit, the Companies
Act 2006 requires us also to report certain opinions and matters as
described below.
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 2023 is consistent with the financial statements
and has been prepared in accordance with applicable legal requirements.
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.
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.
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169
Corporate governance statement
The Listing Rules require us to review the directors’ statements in
relation to going concern, longer-term viability and that part of the
corporate governance statement relating to the company’s compliance
with the provisions of the UK Corporate Governance Code specified for
our review. Our additional responsibilities with respect to the corporate
governance statement as other information are described in the
Reporting on other information section of this report.
Based on the work undertaken as part of our audit, we have concluded
that each of the following elements of the corporate governance
statement is materially consistent with the financial statements
and our knowledge obtained during the audit, and we have nothing
material to add or draw attention to in relation to:
– The directors’ confirmation that they have carried out a robust
assessment of the emerging and principal risks;
– The disclosures in the Annual Report that describe those principal
risks, what procedures are in place to identify emerging risks and
an explanation of how these are being managed or mitigated;
– The directors’ statement in the financial statements about whether
they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any material
uncertainties to the group’s and company’s ability to continue to do
so over a period of at least twelve months from the date of approval
of the financial statements;
– The directors’ explanation as to their assessment of the group’s and
company’s prospects, the period this assessment covers and why
the period is appropriate; and
– The directors’ statement as to whether they have a reasonable
expectation that the company will be able to continue in operation and
meet its liabilities as they fall due over the period of its assessment,
including any related disclosures drawing attention to any necessary
qualifications or assumptions.
Our review of the directors’ statement regarding the longer-term viability
of the group and company was substantially less in scope than an audit
and only consisted of making inquiries and considering the directors’
process supporting their statement; checking that the statement is in
alignment with the relevant provisions of the UK Corporate Governance
Code; and considering whether the statement is consistent with the
financial statements and our knowledge and understanding of the group
and company and their environment obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we
have concluded that each of the following elements of the corporate
governance statement is materially consistent with the financial
statements and our knowledge obtained during the audit:
– The directors’ statement that they consider the Annual Report, taken
as a whole, is fair, balanced and understandable, and provides the
information necessary for the members to assess the group’s and
company’s position, performance, business model and strategy;
– The section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems; and
– The section of the Annual Report describing the work of the
Audit Committee.
We have nothing to report in respect of our responsibility to report when
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.
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,
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 (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.
Irregularities, including fraud, are instances of non-compliance with laws
and regulations. We design procedures in line with our responsibilities,
outlined above, to detect material misstatements in respect of
irregularities, including fraud. The extent to which our procedures are
capable of detecting irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we identified that
the principal risks of non-compliance with laws and regulations related to
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 financial statements such as the Companies Act
2006 and relevant tax legislation. 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 payroll expense as well as considering
management bias in accounting estimates. The group engagement team
shared this risk assessment with the component auditors so that they
could include appropriate audit procedures in response to such risks in
their work.
170
QinetiQ Group plc
Annual Report & Accounts 2023
independent auditors’ report continued
to the members of QinetiQ Group plc
Auditors’ responsibilities for the audit of the financial statements
continued
Audit procedures performed by the group engagement team and/or
component auditors included:
– Discussions with management at multiple levels across the business,
internal audit and the Group’s legal counsel throughout the year, as
well as at year end. These discussions have included consideration
of known or suspected instances of non-compliance with laws and
regulations and fraud;
– Evaluation of management’s controls designed to prevent and detect
irregularities, in particular their anti-bribery controls;
– Assessment of matters reported on the Group’s whistleblowing
helpline and the results of management’s investigation of
such matters;
– Reviewing correspondence with and reporting to relevant regulatory
authorities;
– Challenging assumptions and judgements made by management in
their significant accounting estimates and judgements, particularly
in relation to the key audit matters above.
– Designing risk filters to search for journal entries, such as those
posted with unusual account combinations or posted by members
of senior management with a financial reporting oversight role,
and testing those journals highlighted (if any); and
– Incorporating elements of unpredictability into the audit
procedures performed.
There are inherent limitations in the audit procedures described above.
We are less likely to become aware of instances of non-compliance
with laws and regulations that are not closely related to events and
transactions reflected in the financial statements. 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.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited number
of items for testing, rather than testing complete populations. We
will often seek to target particular items for testing based on their
size or risk characteristics. In other cases, we will use audit sampling
to enable us to draw a conclusion about the population from which
the sample is selected.
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 obtained 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
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
6 years, covering the years ended 31 March 2018 to 31 March 2023.
Other matter
As required by the Financial Conduct Authority Disclosure Guidance
and Transparency Rule 4.1.14R, these financial statements form part of
the ESEF-prepared annual financial report filed on the National Storage
Mechanism of the Financial Conduct Authority in accordance with the
ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report
provides no assurance over whether the annual financial report has been
prepared using the single electronic format specified in the ESEF RTS.
John Ellis (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Southampton
25 May 2023
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171
Financial
Statements
172 Consolidated income statement
173 Consolidated comprehensive income statement
173 Consolidated statement of changes in equity
174 Consolidated balance sheet
175 Consolidated cash flow statement
175 Reconciliation of movements in net cash
176 Notes to the financial statements
226 Company balance sheet
227 Company statement of changes in equity
228 Notes to the Company financial statements
QinetiQ Group plc
Annual Report & Accounts 2023
172
Consolidated income statement
Consolidated income statement
For the year ended 31 March
For the year ended 31 March
All figures in £ million
Revenue
Operating costs excluding depreciation 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/(loss) on business divestments
Finance income
Finance expense
Profit/(loss) before tax
Taxation charge
Profit/(loss) for the year
Profit/(loss) is attributable to
Owners of the parent company
Non-controlling interests
Profit/(loss) for the year
Earnings per share for profit attributable to
the owners of the parent company
All figures in pence
Basic
Diluted
FY23
Specific
adjusting
Items*
FY22^
Specific
adjusting
Items*
Total
Underlying*
-
(29.5)
21.6
1,580.7
(1,382.9)
49.6
1,320.4
(1,140.7)
16.0
(7.9)
-
(15.6)
(23.5)
15.9
9.9
-
2.3
(0.8)
1.5
1.5
-
1.5
247.4
(51.5)
(23.1)
172.8
15.9
16.7
(13.4)
192.0
(37.6)
154.4
154.4
-
154.4
195.7
(46.7)
(5.4)
143.6
-
0.5
(1.9)
142.2
(24.1)
118.1
118.1
-
118.1
-
(8.7)
0.7
(8.0)
(1.2)
(10.7)
(19.9)
(0.9)
4.5
-
(16.3)
(11.8)
(28.1)
(28.1)
-
(28.1)
Note
Underlying*
2, 3
2
1,580.7
(1,353.4)
28.0
3, 16
3, 4, 15
3
4, 13
7
7
8
9
255.3
(51.5)
(7.5)
196.3
-
6.8
(13.4)
189.7
(36.8)
152.9
152.9
-
152.9
FY23
FY22
Note
10
10
Underlying
26.5
26.3
Total
26.8
26.5
Underlying
20.6
20.4
Total
1,320.4
(1,149.4)
16.7
187.7
(47.9)
(16.1)
123.7
(0.9)
5.0
(1.9)
125.9
(35.9)
90.0
90.0
-
90.0
Total
15.7
15.5
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
* 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 on page 233. Also refer to notes 4 and 36 for details of ‘specific adjusting items’.
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FinAnCiAl StAtEmEntS
Financial Statements
Financial Statements
Consolidated comprehensive income statement
Consolidated comprehensive income statement
Consolidated comprehensive income statement
For the year ended 31 March
For the year ended 31 March
For the year ended 31 March
173
All figures in £ million
Profit for the year
All figures in £ million
Items that will not be reclassified to profit or loss:
Profit for the year
Actuarial (loss)/gain recognised in defined benefit pension schemes
Items that will not be reclassified to profit or loss:
Tax on items that will not be reclassified to profit and loss
Actuarial (loss)/gain recognised in defined benefit pension schemes
Total items that will not be reclassified to profit or loss
Tax on items that will not be reclassified to profit and loss
Items that may be reclassified to profit or loss:
Total items that will not be reclassified to profit or loss
Foreign currency translation (losses)/gains on foreign operations
Items that may be reclassified to profit or loss:
Movement in deferred tax on foreign currency translation
Foreign currency translation (losses)/gains on foreign operations
Increase in the fair value of hedging derivatives
Movement in deferred tax on foreign currency translation
Movement in deferred tax on hedging derivatives
Increase in the fair value of hedging derivatives
Total items that may be reclassified to profit or loss
Movement in deferred tax on hedging derivatives
Other comprehensive (expense)/income for the year, net of tax
Total items that may be reclassified to profit or loss
Other comprehensive (expense)/income for the year, net of tax
Total comprehensive (expense)/income for the year
Total comprehensive (expense)/income for the year
Total comprehensive (expense)/income is attributable to:
Owners of the parent company
Total comprehensive (expense)/income is attributable to:
Non-controlling interests
Owners of the parent company
Total comprehensive (expense)/income for the year
Non-controlling interests
Total comprehensive (expense)/income for the year
Note
Note
28
28
FY23
154.4
FY23
154.4
(253.9)
63.5
(253.9)
(190.4)
63.5
(190.4)
(6.5)
(0.5)
(6.5)
7.8
(0.5)
(1.6)
7.8
(0.8)
(1.6)
(191.2)
(0.8)
(191.2)
(36.8)
FY22
90.0
FY22
90.0
144.0
(47.6)
144.0
96.4
(47.6)
96.4
5.6
(0.8)
5.6
0.6
(0.8)
(0.1)
0.6
5.3
(0.1)
101.7
5.3
101.7
191.7
(36.8)
191.7
(36.8)
-
(36.8)
(36.8)
-
(36.8)
191.5
0.2
191.5
191.7
0.2
191.7
Consolidated statement of changes in equity
Consolidated statement of changes in equity
Consolidated statement of changes in equity
For the year ended 31 March
For the year ended 31 March
For the year ended 31 March
All figures in £ million
Note
All figures in £ million
At 31 March 2022 – previously reported
Note
Change in accounting policy^ (note 38)
At 31 March 2022 – previously reported
At 1 April 2022 - restated^
Change in accounting policy^ (note 38)
Profit for the year
At 1 April 2022 - restated^
Other comprehensive income/
Profit for the year
(expense) for the year, net of tax
Other comprehensive income/
Purchase of own shares
(expense) for the year, net of tax
Share-based payment
Purchase of own shares
Tax on share-based payments (note 9)
Share-based payment
Movements on business divestment
Tax on share-based payments (note 9)
Dividends
Movements on business divestment
At 31 March 2023
Dividends
At 31 March 2023
Share
capital
Share
29
capital
5.8
29
-
5.8
5.8
-
-
5.8
-
-
-
-
-
-
-
-
-
-
-
-
5.8
-
5.8
Capital
redemption
Capital
reserve
redemption
reserve
40.8
-
40.8
40.8
-
-
40.8
-
-
-
-
-
-
-
-
-
-
-
-
40.8
-
40.8
Share
premium
Share
premium
147.6
-
147.6
147.6
-
-
147.6
-
-
-
-
-
-
-
-
-
-
-
-
147.6
-
147.6
Hedge
reserve
Hedge
reserve
0.1
-
0.1
0.1
-
-
0.1
-
6.2
-
6.2
-
-
-
-
-
-
-
-
6.3
-
6.3
Translation
reserve
Translation
reserve
1.9
-
1.9
1.9
-
-
1.9
-
(7.0)
-
(7.0)
-
-
-
-
0.9
-
-
0.9
(4.2)
-
(4.2)
Retained
earnings
Retained
earnings
847.0
(2.0)
847.0
845.0
(2.0)
154.4
845.0
154.4
(190.4)
(0.8)
(190.4)
5.7
(0.8)
0.7
5.7
-
0.7
(42.6)
-
772.0
(42.6)
772.0
Non-
controlling
Non-
interest
controlling
interest
0.2
-
0.2
0.2
-
-
0.2
-
-
-
-
-
-
-
-
(0.2)
-
-
(0.2)
-
-
-
Total
Total
1,043.2
(2.0)
1,043.2
1,041.2
(2.0)
154.4
1,041.2
154.4
(191.2)
(0.8)
(191.2)
5.7
(0.8)
0.7
5.7
0.9
0.7
(42.6)
0.9
968.3
(42.6)
968.3
Total
equity
Total
equity
1,043.4
(2.0)
1,043.4
1,041.4
(2.0)
154.4
1,041.4
154.4
(191.2)
(0.8)
(191.2)
5.7
(0.8)
0.7
5.7
0.7
0.7
(42.6)
0.7
968.3
(42.6)
968.3
At 31 March 2021 – previously reported
147.6
Change in accounting policy^(note 38)
-
At 31 March 2021 – previously reported
147.6
At 1 April 2021 - restated^
147.6
Change in accounting policy^(note 38)
-
-
Profit for the year
At 1 April 2021 - restated^
147.6
Other comprehensive income for the
-
Profit for the year
-
year, net of tax
Other comprehensive income for the
-
Purchase of own shares
-
year, net of tax
-
Issues of new shares
-
Purchase of own shares
-
Share-based payments
-
Issues of new shares
-
Tax on share-based payments (note 9)
-
Share-based payments
Fair value adjustment in respect of
-
Tax on share-based payments (note 9)
-
equity-based contingent consideration
Fair value adjustment in respect of
-
Dividends
-
equity-based contingent consideration
At 31 March 2022
147.6
-
Dividends
At 31 March 2022
147.6
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
884.6
(2.0)
884.6
882.6
(2.0)
90.0
882.6
90.0
101.7
(0.8)
101.7
0.1
(0.8)
7.4
0.1
(0.3)
7.4
(0.3)
0.7
(40.2)
0.7
1,041.2
(40.2)
1,041.2
693.8
(2.0)
693.8
691.8
(2.0)
90.0
691.8
90.0
96.4
(0.8)
96.4
-
(0.8)
7.4
-
(0.3)
7.4
(0.3)
0.7
(40.2)
0.7
845.0
(40.2)
845.0
(0.4)
-
(0.4)
(0.4)
-
-
(0.4)
-
0.5
-
0.5
-
-
-
-
-
-
-
-
-
-
0.1
-
0.1
0.3
-
0.3
0.3
-
-
0.3
-
-
-
-
-
-
-
-
-
-
-
-
(0.1)
-
0.2
(0.1)
0.2
(2.9)
-
(2.9)
(2.9)
-
-
(2.9)
-
4.8
-
4.8
-
-
-
-
-
-
-
-
-
-
1.9
-
1.9
40.8
-
40.8
40.8
-
-
40.8
-
-
-
-
-
-
-
-
-
-
-
-
-
-
40.8
-
40.8
884.9
(2.0)
884.9
882.9
(2.0)
90.0
882.9
90.0
101.7
(0.8)
101.7
0.1
(0.8)
7.4
0.1
(0.3)
7.4
(0.3)
0.7
(40.3)
0.7
1,041.4
(40.3)
1,041.4
5.7
-
5.7
5.7
-
-
5.7
-
-
-
-
0.1
-
-
0.1
-
-
-
-
-
-
5.8
-
5.8
172
QinetiQ Group plc
Annual Report and Accounts 2023
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
QinetiQ Group plc
Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
173
173
174
QinetiQ Group plc
Annual Report & Accounts 2023
Consolidated balance sheet
Consolidated balance sheet
As at 31 March
As at 31 March
All figures in £ million
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Other financial assets
Financial assets at fair value through profit and loss
Equity accounted investments
Net pension asset
Deferred tax asset
Current assets
Inventories
Other financial assets
Trade and other receivables
Current tax asset
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
Borrowings and other financial liabilities
Other payables
Total liabilities
Net assets
Equity
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 equity
Note
31 March
2023
31 March
2022^
31 March
2021^
14
15
16
24
17
28
18
20
24
21
19
24
22
19
23
24
18
23
24
22
29
409.0
343.0
477.8
6.2
-
1.4
119.8
32.6
1,389.8
68.8
5.7
452.6
4.0
151.2
682.3
2,072.1
(575.2)
(4.6)
(19.7)
(8.2)
(607.7)
(112.0)
(7.1)
(361.8)
(15.2)
(496.1)
(1,103.8)
968.3
5.8
40.8
147.6
6.3
(4.2)
772.0
968.3
-
968.3
149.4
140.3
414.5
0.5
-
2.6
362.2
21.0
1,090.5
54.9
0.6
373.2
1.4
248.1
678.2
1,768.7
(474.7)
(5.9)
(21.1)
(6.9)
(508.6)
(156.7)
(6.0)
(17.2)
(38.8)
(218.7)
(727.3)
1,041.4
5.8
40.8
147.6
0.1
1.9
845.0
1,041.2
0.2
1,041.4
145.5
133.1
397.2
0.8
0.9
4.2
214.3
11.7
907.7
54.4
0.9
338.5
0.7
190.1
584.6
1,492.3
(424.3)
(3.7)
(4.2)
(7.0)
(439.2)
(89.7)
(7.8)
(20.7)
(52.0)
(170.2)
(609.4)
882.9
5.7
40.8
147.6
(0.4)
(2.9)
691.8
882.6
0.3
882.9
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
The financial statements on pages 172 to 229 were approved by the Board of Directors and authorised for issue on 25 May 2023 and were
signed on its behalf by:
Steve Wadey
Group Chief Executive Officer
Carol Borg
Group Chief Financial Officer
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Consolidated cash flow statement
Consolidated cash flow statement
For the year ended 31 March
For the year ended 31 March
Financial Statements
175
All figures in £ million
Underlying net cash inflow from operations
Less 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 sale of property
Proceeds from disposal of business
Dividends from joint ventures and associates
Acquisition of businesses
Net cash outflow from investing activities
Purchase of own shares
Dividends paid to shareholders
Payment of bank facility arrangement fee
Capital element of lease payments
Drawdown of new borrowings
Repayment of borrowings
Repayment of acquired borrowings
Cash flow relating to intercompany loan hedges
Transaction with non-controlling interests
Net cash inflow/(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 (debt)/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 (debt)/cash
Movement in net (debt)/cash resulting from cash flows
Lease liabilities derecognised on disposal
Lease liabilities recognised on acquisition
Net increase in lease obligations
Net movement in derivative financial instruments
Other movements including foreign exchange
Movement in net (debt)/cash as defined by the Group
Net cash as defined by Group at the beginning of the year
Net (debt)/cash as defined by the Group at the end of the year
Less: total net financial liabilities
Total cash and cash equivalents
Note
25
25
25
15
16
12
11
24
FY23
FY22^*
270.1
(29.5)
240.6
(30.2)
5.5
(9.9)
206.0
(13.8)
(95.2)
2.4
28.1
-
(385.9)
(464.4)
(0.8)
(42.6)
(2.7)
(7.4)
481.1
(140.0)
(117.9)
(10.0)
-
159.7
(98.7)
1.8
248.1
151.2
220.7
(5.6)
215.1
(25.4)
0.5
(1.5)
188.7
(21.4)
(62.9)
1.5
-
2.0
(0.8)
(81.6)
(0.8)
(40.2)
-
(6.2)
-
-
-
(3.1)
(0.1)
(50.4)
56.7
1.3
190.1
248.1
Note
FY23
FY22^*
(98.7)
(331.0)
(429.7)
1.4
(15.1)
(1.6)
9.8
3.2
(432.0)
225.1
(206.9)
358.1
151.2
56.7
6.2
62.9
-
-
(1.3)
(1.3)
0.7
61.0
164.1
225.1
23.0
248.1
24
24
24
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
* To be consistent with FY23, the prior year has been re-presented in respect of the cash flow impact of intercompany loan hedging. See note 38 for details.
174
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Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
175
QinetiQ Group plc
Annual Report & Accounts 2023
176
Notes to the Consolidated Financial Statements
notes to the Consolidated Financial Statements
For the year ended 31 March
For the year ended 31 March
1. Significant changes in the current reporting period
The financial position and performance of the Group was particularly affected by the following events and transactions during the reporting
period:
1. The acquisitions of Avantus and Air Affairs (note 12) and the associated debt financing (note 27);
2. The divestment of the Space NV business (note 13);
3. A decrease in the value of the Group’s defined benefit pension scheme (note 28)
4. The change in accounting policy for Research and Development Expenditure Credits (RDEC) (note 38), together with the release of the
liability for MoD appropriation of RDEC following the determination made by the SSRO during the year (note 4)
For a detailed discussion of the Group’s performance and financial position refer to the Strategic Report on pages 1 to 89.
2. Revenue from contracts with customers and other income
Revenue and other income is analysed as follows:
Revenue by category
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: adjust current year for acquired businesses^
Less: adjust prior year for disposed businesses^
Adjust to constant prior year exchange rates
Total revenue on an organic, constant currency basis*
Organic revenue growth at constant currency*
FY23
1,481.4
96.1
3.2
1,580.7
(91.1)
-
(31.9)
1,457.7
12%
FY22
1,234.4
82.9
3.1
1,320.4
-
(17.7)
-
1,302.7
5%
^ For the period of which there was no contribution in the equivalent period in the comparator year which was pre-ownership (for acquisitions) or post-ownership (for
disposals) by the Group
* Alternative performance measures are used to supplement the statutory figures. See page 233.
Other income
All figures in £ million
Share of associates’ and joint ventures’ profit after tax
Research and development expenditure credits (RDEC)
Other income
Underlying other income
Specific adjusting item: gain on sale of property (note 4)
Specific adjusting item: release of RDEC MoD appropriation liability (note 4)
Total other income
FY23
0.8
17.4
9.8
28.0
2.0
19.6
49.6
FY22^
0.3
6.2
9.5
16.0
0.7
-
16.7
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
177
Notes to the Consolidated Financial Statements
Revenue by major customer type
All figures in £ million
UK government
US government
Other
Total revenue
FY23
969.4
230.8
380.5
1,580.7
FY22
881.7
104.7
334.0
1,320.4
‘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:
All figures in £ million
Total forecast revenue allocated to unsatisfied performance obligations
FY24
1,124.6
FY25
601.3
FY26
467.9
FY27+
876.5
Total
3,070.3
Management expects that 37% (£1,124.6m) of revenue allocated to un-satisfied contracts as of 31 March 2023 will be recognised as revenue
during the next reporting period.
The following table shows the aggregate amount of revenue allocated to performance obligations that were unsatisfied (or partially
satisfied) as at the end of the prior reporting period:
All figures in £ million
Total forecast revenue allocated to unsatisfied performance obligations
FY23
897.8
FY24
564.7
FY25
426.0
FY26+
Total
940.3
2,828.8
Revenue of £157.2m was recognised during the year that was previously unrecognised as at the previous year end and reported as a
contract liability.
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: UK Defence, UK Intelligence and
the Australia sector.
Global Products combines all other business units not aggregated within EMEA Services, including the QinetiQ US sector and EMEA Products
(which includes QinetiQ Target Systems). Generally these business units (which are not considered reportable segments as defined by IFRS
8) 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.
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
Operating segments
Revenue and profit after tax of associates and joint ventures was £11.3m and £1.0m respectively (FY22: revenue of £12.2m and profit after
tax of £0.4m). 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
All figures in £ million
United Kingdom (UK)
United States of America (US)
Australia
Home countries
Europe
Rest of world
Total revenue
Home countries revenue %
International (non-UK) revenue %
FY23
1,045.7
301.0
124.1
1,470.8
69.4
40.5
1,580.7
FY22
961.9
153.0
98.2
1,213.1
76.9
30.4
1,320.4
93%
34%
92%
27%
All figures in £ million
EMEA Services
Global Products
Operating profit from segments1,2
Research and development expenditure credits (RDEC)
Underlying operating profit2
Operating profit margin from segments 2
Revenue
from
external
customers
1,179.3
401.4
1,580.7
FY23
FY22^
Revenue
from
external
customers
1,059.2
261.2
1,320.4
Underlying
operating
profit1,2
137.1
41.8
178.9
17.4
196.3
11.3%
Underlying
operating
profit1,2
135.6
1.8
137.4
6.2
143.6
10.4%
1 The measure of profit presented to the Chief Operating Decision Maker is Operating profit from segments, stated before specific adjusting items and research and
development expenditure credits. The specific adjusting items are detailed in note 4.
2 Definitions of the Group’s ‘Alternative performance measures’ can be found on page 233.
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
176
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Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
177
QinetiQ Group plc
Annual Report & Accounts 2023
178
Notes to the Consolidated Financial Statements
For the year ended 31 March
3. Segmental analysis (continued)
No measure of segmental assets and liabilities is reported as this information is not regularly provided to the Chief Operating Decision
Maker. Transactions between segments are included within the operating profit and revenue of each segment as appropriate.
Reconciliation of segmental results to total profit
All figures in £ million
Operating profit from segments1,2
Research and development expenditure credits (RDEC)
UUnnddeerrllyyiinngg ooppeerraattiinngg pprrooffiitt2
Specific adjusting items operating loss
Operating profit
Gain/(loss) on business divestments
Net finance income
Profit before tax
Taxation expense
Profit for the year
Note
4
13
7
9
FY23
178.9
17.4
196.3
(23.5)
172.8
15.9
3.3
192.0
(37.6)
154.4
FY22^
137.4
6.2
143.6
(19.9)
123.7
(0.9)
3.1
125.9
(35.9)
90.0
1 The measure of profit presented to the Chief Operating Decision Maker is Operating profit from segments, stated before specific adjusting items and research and
development expenditure credits. The specific adjusting items are detailed in note 4.
2 Definitions of the Group’s ‘Alternative performance measures’ can be found on page 233.
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
Non-current assets* by geographic location
All figures in £ million
Year ended 31 March 2023
Year ended 31 March 2022
* Excluding deferred tax, financial instruments and net pension asset.
UK
519.3
491.7
US Australia
Germany
Rest of
world
Total
598.8
129.8
45.4
10.4
52.8
47.8
13.5 1,229.8
704.2
24.5
Depreciation, impairment and amortisation by business segment – excluding specific adjusting items
For the year ended 31 March 2023
All figures in £ million
Depreciation of property, plant and equipment
Amortisation of purchased or internally developed intangible assets
For the year ended 31 March 2022
All figures in £ million
Depreciation and impairment of property, plant and equipment
Amortisation of purchased or internally developed intangible assets
EMEA
Services
44.7
5.2
49.9
EMEA
Services
39.9
3.4
43.3
Global
Products
6.8
2.3
9.1
Global
Products
6.8
2.0
8.8
Total
51.5
7.5
59.0
Total
46.7
5.4
52.1
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
179
Notes to the Consolidated Financial Statements
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 36 (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
Acquisition and disposal costs
Acquisition related remuneration costs*
Acquisition integration costs
Pension past service cost
Digital investment
Restructuring costs
Release of RDEC MOD appropriation liability
Fair value adjustment in respect of contingent consideration
Gain on sale of property
Specific adjusting items loss before interest, tax, depreciation and amortisation
Impairment of property
Amortisation of intangible assets arising from acquisitions
Specific adjusting items operating loss
Gain/(loss) on disposal of businesses
Defined benefit pension scheme net finance income
Specific adjusting items gain/(loss) before tax
Specific adjusting items – tax
Deferred tax impact of change in future UK corporation tax rate
Total specific adjusting items gain/(loss) 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 gain/(loss) after tax
Total profit for the year
Note
13
28
9
9
FY23
(16.4)
(0.3)
(2.0)
-
(5.8)
(5.0)
19.6
-
2.0
(7.9)
-
(15.6)
(23.5)
15.9
9.9
2.3
3.8
(4.6)
1.5
FY23
152.9
1.5
154.4
FY22
(3.7)
(1.3)
-
(2.4)
(1.9)
-
-
0.6
0.7
(8.0)
(1.2)
(10.7)
(19.9)
(0.9)
4.5
(16.3)
4.1
(15.9)
(28.1)
FY22
118.1
(28.1)
90.0
*
In FY22 bonuses awarded post acquisition to key employees within the Avantus business acquired in November 2022. In FY22, bonuses awarded on to key employees
within the US MTEQ business (now the C5ISR business) acquired in December 2019.
In line with our previously approved policy, the total impact of specific adjusting items (which are excluded from underlying performance due
to their distorting nature) on operating profit was a £23.5m cost (FY22: cost of £19.9m). M&A activity during the year has contributed to the
overall level of specific adjusting items.
Acquisition and integration costs of £18.7m (FY22: £5.0m) comprise costs associated with the Avantus and Air Affairs acquisitions which
completed in FY23. The acquisition costs in FY22 related to an unsuccessful acquisition.
Restructuring costs of £5.0m have been incurred as part of significant Group-wide organisation redesign completed in FY23 to better align
the organisation structure with future growth ambitions of the Company. These restructuring costs have been completed in year to enable
our next step-change in growth.
We continue to deliver on our digital investment programme to modernise the IT infrastructure to support our future growth ambitions. The
non-recurring costs will be reported as specific adjusting items in the P&L, with ongoing recurring operating costs (such as licence costs and
overheads) remaining within underlying operating costs. In FY23 the non-recurring cost of the digital investment programme is £5.8m (FY22:
£1.9m).
In FY23 specific adjusting items includes a £19.6m credit in respect of UK MOD appropriation for RDEC. Following a determination by the
Single Source Regulations Office (SSRO) on the interpretation of the Statutory Guidance for Allowable Costs regulations (SGAC), the
accounting judgement is that RDEC on single source contracts from 1 April 2019 onwards will no longer be paid on to the UK MoD, which is
a change from the accounting judgement at FY22 year end. Therefore the release of the liability is reported as a specific adjusting item through
operating profit.
Also included within specific adjusting items are a gain of disposal of the Space NV business in Belgium of £15.9m, a gain on the sale of
property of £2.0m (FY22: £0.7m), financing income from pensions of £9.9m (FY22: £4.5m) and amortisation of acquisition intangibles of
£15.6m (FY22: £10.7m), the last of which has increased due to the amortisation of new intangible assets recognised on the FY23 acquisitions
(primarily the Customer Relationships asset associated with Avantus).
178
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QinetiQ Group plc
Annual Report and Accounts 2023
179
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
180
Notes to the Consolidated Financial Statements
For the year ended 31 March
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
181
Notes to the Consolidated Financial Statements
5. 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:
8. Profit before tax
The following auditors’ remuneration has been charged in arriving at profit before tax:
EMEA Services
Global Products
Total employees
The aggregate payroll costs of these persons were as follows:
All figures in £ million
Wages and salaries
Social security costs
Other pension costs
Share-based payments costs
Total employee costs
As at 31 March
Monthly average
2023
Number
6,437
1,831
8,268
2022
Number
6,036
879
6,915
FY23
Number
6,158
1,275
7,433
FY22
Number
5,992
919
6,911
Note
30
FY23
456.9
47.3
55.2
7.9
567.3
FY22
369.7
37.9
49.4
7.8
464.8
6. Directors and other senior management personnel
The Directors and other senior management personnel of the Group during the year to 31 March 2023 comprise the Board of Directors and
the QinetiQ Leadership Team and their remuneration and benefits are summarised below:
All figures in £ million
Short-term employee remuneration including benefits
Post-employment benefits
Share-based payments costs
Total
FY23
9.5
0.1
1.9
11.5
FY22
9.2
0.1
1.7
11.0
Short-term employee remuneration and benefits include salary, bonus and benefits. Post-employment benefits relate to pension amounts.
The highest paid director is the Group Chief Executive Officer, details of whose remuneration is provided on page 133 of the Directors’
Remuneration Report.
7. Finance income and expense
All figures in £ million
Receivable on bank deposits
Finance income before specific adjusting items
Amortisation of deferred financing costs
Bank interest and commitment fees
Lease expense
Unwinding of discount on financial liabilities
Other interest
Finance expense
Underlying net finance expense
Plus: specific adjusting items – defined benefit pension scheme net finance income
Net finance income
FY23
6.8
6.8
(0.8)
(10.6)
(1.1)
(0.1)
(0.8)
(13.4)
(6.6)
9.9
3.3
FY22
0.5
0.5
(0.4)
(0.5)
(1.0)
-
-
(1.9)
(1.4)
4.5
3.1
All figures in £ million
Fees payable to the auditors and its associates:
Audit of the Group’s annual accounts
Audit of the accounts of subsidiaries of the Company
Total audit fees
Audit-related assurance services (Interim financial statements)
Other assurance services – M&A
Other assurance services – other
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 gain
Research and development expenditure – customer funded contracts
Research and development expenditure – Group funded
FY23
FY22
1.1
0.7
1.8
0.1
-
0.1
0.2
2.0
0.5
0.6
1.1
0.1
0.5
0.1
0.7
1.8
FY23
55.2
45.3
6.2
(0.6)
313.8
14.6
FY22
47.1
40.3
5.9
(0.7)
287.5
14.6
9. Taxation charge
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
In respect of prior years
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
Factors affecting tax expense in the year
Principal factors reducing the Group’s current year tax charge
below the UK statutory rate are explained below:
Profit/(loss) before tax
Tax on profit/(loss) before tax at 19% (FY22: 19%)
Effect of:
Expenses not deductible for tax purposes and non-taxable items
Tax in respect of prior years
Recognition of deferred tax asset
Deferred tax impact of change in rates
Different tax rates in overseas jurisdictions
Taxation expense
Effective tax rate
FY23
FY22^
Specific
adjusting
items
Underlying
23.8
0.4
(0.4)
-
2.6
0.1
26.9
12.3
-
-
-
(0.4)
(3.4)
4.6
(2.4) -
1.2
9.9
0.8
36.8
189.7
36.0
2.3
0.5
1.1
(1.9)
-
-
1.6
36.8
19.4%
(1.8)
-
-
4.6
(2.5)
0.8
Total
Underlying
Specific
adjusting
Items
23.4
0.4
2.6
0.1
26.5
8.9
4.6
(2.4)
11.1
37.6
192.0
36.5
(0.7)
(1.9)
-
4.6
(0.9)
37.6
19.6%
26.8
(4.0)
4.0
-
26.8
(4.0)
0.3
1.0
(2.7)
24.1
142.2
27.0
(1.3)
(3.0)
3.3
0.3
(2.2)
24.1
16.9%
(0.2)
-
(0.2)
-
(0.4)
(3.7)
15.9
-
12.2
11.8
(16.3)
(3.1)
-
-
-
15.9
(1.0)
11.8
Total
26.6
(4.0)
3.8
-
26.4
(7.7)
16.2
1.0
9.5
35.9
125.9
23.9
(1.3)
(3.0)
3.3
16.2
(3.2)
35.9
28.5%
^ Prior year comparatives (profit before tax, current UK tax expense, current tax expense, total taxation and the effective tax rate) have been restated due to a change in
accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details. RDEC is no longer a reconciling item in the tax proof and has been
removed accordingly.
180
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Annual Report and Accounts 2023
181
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
182
Notes to the Consolidated Financial Statements
For the year ended 31 March
9. Taxation charge (continued)
The total tax charge was £37.6m (FY22: £35.9m restated). The underlying tax charge was £36.8m (FY22 restated: £24.1m), on a higher
underlying profit before tax, with an underlying effective tax rate of 19.4% for the year ended 31 March 2023 (FY22 restated: 16.9%). The
underlying effective tax rate is above the UK statutory rate, primarily as a result of higher tax rates in overseas jurisdictions.
Tax on specific adjusting items
The total specific adjusting items tax charge was £0.8m (FY22 charge: £11.8m). The tax charge includes the UK statutory rate change to
25% from 1 April 2023 (£4.6m) and a taxable Research and Development Allowances clawback (£1.2m), offset by non-taxable profit on sale
of QinetiQ Space NV (£3.0m) and overseas rate differences (£2.5m).
Amounts recognised directly in equity
Current and deferred tax not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity were:
All figures in £ million
Current tax: share-based payments
Deferred tax : share-based payments
Total: share-based payments
FY23
(0.3)
(0.4)
(0.7)
FY22
(0.4)
0.7
0.3
Factors affecting future tax charges
The effective tax rate is expected to remain above the UK statutory rate, subject to the impact of any tax legislation changes and the
geographic mix of profits. The OECD has released model rules for Pillar II of the Base Erosion and Profit Shifting regulations covering
application of a Global Minimum Tax. The Group is monitoring progress of these rules and will engage with advisers to assess any potential
future impact on the tax charge.
Changes in tax rates
In the Spring Budget 2021, the UK Government announced that from 1 April 2023 the corporation tax rate will increase from 19% to 25%. The
25% rate has been substantively enacted at the balance sheet date. An adjustment was made in FY22 and a further adjustment has been
made in FY23, of £4.6m, to reflect that the revised UK deferred tax balances are expected to unwind at the new rate of 25%.
Tax risk management and tax cash
For details of the Group’s approach to tax risk management and discussion of tax cash paid in the year see ‘Additional Financial Information’.
10. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary
shares in issue during the year. The weighted average number of shares used excludes those shares bought by the Group and held as own
shares (see note 29). For diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all
potentially dilutive ordinary shares arising from unvested share-based awards including share options.
Weighted average and diluted number of shares
Weighted average number of shares
Effect of dilutive securities
Diluted number of shares
Million
Million
Million
FY23
575.9
6.4
582.3
FY22
573.2
6.4
579.6
Underlying basic earnings per share figures are presented below, in addition to the basic and diluted earnings per share, because the Directors
consider this gives a more relevant indication of underlying business performance and reflects the adjustments to basic earnings per share
for the impact of specific adjusting items (see note 4) and tax thereon.
Underlying EPS
Profit attributable to the owners of the Company
Remove (profit)/loss 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
182
QinetiQ Group plc
Annual Report and Accounts 2023
£ million
£ million
£ million
Million
Pence
Million
Pence
FY23
154.4
(1.5)
152.9
575.9
26.5
582.3
26.3
FY22
90.0
28.1
118.1
573.2
20.6
579.6
20.4
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
183
Notes to the Consolidated Financial Statements
Basic and diluted EPS
Profit attributable to the owners of the Company
Weighted average number of shares
Basic EPS – total Group
Diluted number of shares
Diluted EPS – total Group
£ million
Million
Pence
Million
Pence
FY23
154.4
575.9
26.8
582.3
26.5
FY22
90.0
573.2
15.7
579.6
15.5
11. Dividends
An analysis of the dividends paid and proposed in respect of the years ended 31 March 2023 and 31 March 2022 is provided below:
Interim 2023
Final 2023 (proposed)
Total for the year ended 31 March 2023
Interim 2022
Final 2022
Total for the year ended 31 March 2022
Pence
per share
2.4
5.3
7.7
£m
Date paid/
payable
13.8 Feb 2023*
30.6 Aug 2023
44.4
2.3
5.0
7.3
Feb 2022
13.2
28.8 Aug 2022*
42.0
* Total cash paid in the year to 31 March 2023 was £42.6m (FY22: £40.2m).
The proposed final dividend in respect of the year ending 31 March 2023 will be paid on 24 August 2023. The ex-dividend date is 27 July
2023 and the record date is 28 July 2023.
12. Business combinations
Acquisitions cash flow in the year to 31 March 2023
All figures in £ million
Avantus Federal LLC
Air Affairs Australia
Total
Less: deferred consideration
Less: cash acquired
Net cash outflow for the year
Date
acquired
23 November 2022
1 December 2022
Total consideration
392.2
12.6
404.8
(4.0)
(14.9)
385.9
Contribution post-acquisition
Fair value
of net assets
acquired
127.6
9.5
137.1
Goodwill
264.6
3.1
267.7
Revenue
82.9
8.2
91.1
Operating
profit
8.9
0.5
9.4
Total acquisition costs of £16.4m relating to the two acquisitions, as well as an aborted disposal, are included within operating profit as a
specific adjusting item (see note 4). A further £2.3m of integration costs and acquisition related remuneration costs, both relating to
Avantus, are also included within operating profit as a specific adjusting item (see note 4).
Avantus Federal LLC
On 23 November 2022, the Group acquired 100% of the issued share capital of Avantus for an enterprise value of $590m, on a cash-free,
debt-free valuation basis. Avantus is a leading provider of mission-focused cyber, data analytics and software development solutions to the
US Department of Defense, Intelligence Community, Department of Homeland Security and other Federal civilian agencies. The Avantus
acquisition will significantly enhance our US offering and provide a strong platform from which to further grow our US operations. Avantus
has a track record of high growth at attractive margins and is well-positioned across priority areas for key defence and intelligence
customers in the US.
Avantus forms part of QinetiQ’s US Sector and is reported within the Global Products segment. If the acquisition had occurred on the first
day of the financial year, Group revenue for the period would have been £1,740.6m and the Group profit before tax £209.7m. There would
also have been an additional amortisation of the acquisition intangibles of £8.5m if the acquisition had occurred on the first day of the
financial year.
QinetiQ Group plc
Annual Report and Accounts 2023
183
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
184
Notes to the Consolidated Financial Statements
For the year ended 31 March
12. Business combinations (continued)
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired and liabilities assumed at the date of acquisition, 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
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Lease liabilities
Borrowings
Deferred tax
Other assets and liabilities
Net assets acquired
Goodwill
Total consideration
Note
15
16
18
14
Fair value at
acquisition
209.2
8.3
39.0
14.5
(34.3)
(7.2)
(104.9)
6.0
(3.0)
127.6
264.6
392.2
The consideration of £392.2m was satisfied entirely in cash in the financial year, with no deferred consideration. The borrowings of £104.9m
were repaid as part of the acquisition, which is presented separately in the cash flow statement. The fair value adjustments include £171.9m
in relation to the step-up in value and recognition of acquired intangible assets. £163.1m relates to the step up in value of customer
relationship assets, £2.2m relates to the recognition of existing technology assets and £6.6m relates to recognition of the Avantus trading
name asset. These fair value adjustments will unwind as the assets themselves are amortised, over 16 years for the customer relationships
and five years for the existing technology and trade name.
There has been no adjustment to the fair value of acquired receivables given the low credit risk of the customers. The gross contractual and
net amounts of receivables acquired were the same and there was no allowance for credit loss recognised at acquisition. Customer
relationships have been valued based on an income approach using an excess earnings method. The key assumptions are the revenue and
profit projections, customer contract retention/attrition assumptions, discount rate and contributory asset charges. Existing technology has
been valued using a replacement cost approach and the trade name has been valued using a relief from royalty method.
The goodwill is attributable mainly to the skills, technical talent and security clearances of Avantus’ work force and the synergies expected
to be achieved from integrating the company into the existing US business. The goodwill recognised on acquisition is tax deductible over a
15 year period as the purchase is as an asset deal rather than a share purchase for tax purposes.
Air Affairs Australia pty
On 1 December 2022, the Group acquired 100% of the issued share capital of the Air Affairs Australia group of companies for an enterprise
value of A$53.0m, on a cash-free, debt-free valuation basis. Air Affairs is an Australian defence services company - a leader in air threat
representation, Test and Evaluation, unmanned targets and mission rehearsal. Air Affairs provides targets and training services, and
electronic warfare capabilities to the Australian Defence Force, as well as aerial surveillance and reconnaissance in support of government
firefighting efforts. It owns and operates a fleet of special mission aircraft and maintains an advanced manufacturing and engineering
facility providing design, manufacture and certification operations. Air Affairs employs c.180 people, headquartered in Nowra, New South
Wales.
The acquisition of Air Affairs further establishes QinetiQ as a long-term, strategic partner to the Australian Defence Force and underpins
QinetiQ's strategic position as market leader in test & evaluation and air threat representation, now with a significant presence across the
UK, Canada and Australia, and training and special operations in Germany.
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
185
Notes to the Consolidated Financial Statements
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired and liabilities assumed at the date of acquisition, 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
Lease liabilities
Borrowings
Current tax
Deferred tax
Net assets acquired
Goodwill
Total consideration
Note
15
16
18
14
Fair value at
acquisition
2.4
29.8
3.2
5.1
0.4
(8.8)
(7.9)
(13.0)
(0.1)
(1.6)
9.5
3.1
12.6
The consideration of £12.6m includes £8.6m which was satisfied by cash in the financial year, and £4.0m of deferred consideration which is
expected to be settled within one year. The borrowings of £13.0m were repaid as part of the acquisition, which is presented separately in the
cash flow statement. There has been no adjustment to the fair value of acquired receivables given the low credit risk of the customers. The
gross contractual and net amounts of receivables acquired were the same and there was no allowance for credit loss recognised at
acquisition.
The most significant asset on the opening balance sheet is the PPE (Property, Plant and Equipment). A fair value uplift of £5.5m has been
applied to the aircraft, increasing the book value of £13.2m to £18.7m. The aircraft were valued based on a desktop exercise performed by
professional specialists. The key assumption relates to the market value of the aircraft. The fair value adjustments to PPE also include a
step-down to the value of leasehold improvements.
The fair value adjustments also include £2.4m in relation to the step-up in value and recognition of acquired intangible assets. £2.3m relates
to the recognition of existing technology assets and £0.1m relates to recognition of the Air Affairs trading name asset. These fair value
adjustments will unwind as the assets themselves are amortised, over ten years for the existing technology and three years for the trade
name. Deferred tax of £0.7m was recognised on the intangibles.
Existing technology has been valued using a replacement cost approach and the trade name has been valued using a relief from royalty
method. The goodwill is attributable mainly to the skills and technical talent of Air Affairs’ work force and the synergies expected to be
achieved from integrating the company into the Australia sector and wider existing business. The goodwill recognised on acquisition is not
tax deductible.
Acquisitions in the year to 31 March 2022
There were no acquisitions in the year to 31 March 2022. Deferred consideration of £0.8m was paid in the year to 31 March 2022 in respect
of the acquisition of QinetiQ Training & Simulation Limited (formerly known as Newman & Spurr Consultancy Limited) in the year to 31
March 2021.
13. Gain/(loss) on business divestments
All figures in £ million
Space NV business (comprising QinetiQ Space NV, Redu Operational Services SA and associate Redu Space Services SA)
Commerce Decisions business (comprising Commerce Decisions Limited and Commerce Decisions Pty Ltd)
Gain/(loss) on business divestments
FY23
15.9
-
15.9
FY22
-
(0.9)
(0.9)
Air Affairs forms part of QinetiQ’s Australia business unit and is reported within the EMEA Services segment. If the acquisition had occurred
on the first day of the financial year, Group revenue for the period would have been £1,599.3m and the Group profit before tax would have
been £192.8m.
The gain on business divestments relates to the sale of the Space NV for disposal proceeds of £32.3m (€37.0m). The enterprise value was
€32.0m. Proceeds received in the period, net of transaction costs of £1.2m and £3.0m of cash divested with the businesses, were £28.1m. All
consideration is settled entirely in cash.
Deferred consideration of £1.5m was potentially receivable in respect of the Commerce Decisions business, contingent on performance of
the disposed business in the year to 31 March 2022. The fair value of which had been estimated at £0.9m as at 31 March 2021. The required
performance was not achieved, nil deferred consideration became due and the receivable has been written off to the income statement in the
prior year, classified as a specific adjusting item.
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Annual Report and Accounts 2023
185
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
186
Notes to the Consolidated Financial Statements
For the year ended 31 March
14. Goodwill
All figures in £ million
Cost
At 1 April
Acquisitions
Disposals
Foreign exchange
At 31 March
Accumulated impairment
At 1 April
Foreign exchange
At 31 March
Net book value at 31 March
31 March
2023
31 March
2022
296.1
267.7
(5.6)
4.5
562.7
287.6
-
-
8.5
296.1
(146.7)
(7.0)
(153.7)
(142.1)
(4.6)
(146.7)
409.0
149.4
Goodwill analysed by cash-generating unit (CGU)
Goodwill is allocated across six cash-generating units within the EMEA Services segment and four CGUs within the Global Products segment.
The full list of CGUs that have goodwill allocated to them is as follows:
All figures in £ million
US Technology Solutions
US C5ISR
Target Systems
Space Products
Avantus Federal LLC
QinetiQ Germany
Inzpire
QinetiQ Training & Simulation
Naimuri
Australia
Air Affairs 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
EMEA Services
EMEA Services
31 March
2023
44.1
36.8
24.5
-
257.8
2.7
11.7
7.8
14.8
5.8
3.0
409.0
31 March
2022
41.5
34.6
24.7
5.6
-
2.6
11.7
7.8
14.8
6.1
-
149.4
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. As a result
of impairment in prior years, QinetiQ Germany has limited headroom and a critical sensitivity is discussed further below. For all other CGUs,
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 five-year
period (aligned with the Group’s Integrated Strategic Business Plan process and the longer-term viability assessment period). These are
‘bottom-up’ forecasts based on detailed analysis by contract for the revenue under contract and by opportunity for the pipeline. Pipeline
opportunities are categorised as ‘base case’ and ‘high case’ by management and only ‘base case’ opportunities are included in the financial
plans used for the value-in-use calculations.
Cash flows beyond these periods are extrapolated based on the last year of the plans, with a terminal growth-rate assumption applied. Whilst
the Group will likely be impacted by climate change in the future to an extent, the impacts on future cash flows used in the value-in-use
calculations are not considered to be material.
Terminal growth rates and discount rates
The specific plans for each of the CGUs have been extrapolated using the terminal growth rates as detailed in the following table. 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. The discount rates used are calculated based on the weighted
average cost of capital of a portfolio of comparable companies, adjusted for risks specific to the market characteristics of each CGU, on a
pre-tax basis. This is considered an appropriate estimate of a market participant discount rate.
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
187
Notes to the Consolidated Financial Statements
All figures %
31 March 2023: (2022)
US
Technology
Solutions
Target
Systems
US
Avantus
US C5ISR
Inzpire
Australia
Air Affairs
Australia
QinetiQ
Germany
QinetiQ
Training &
Simulation
Naimuri
Terminal growth rate
2.2 (2.1)
Pre-tax discount rate 11.1 (10.8) 10.9 (11.6) 11.2 (n/a) 11.2 (10.8) 12.0 (12.2)
2.2 ( 2.1) 2.3 (n/a)
2.3 (2.3)
2.3 (2.3)
2.3 (2.3) 2.3 (n/a)
2.2 (1.6)
2.2 (2.1)
2.2 (2.1)
12.9 (9.4) 12.9 (n/a)
8.9 (9.1) 10.9 (11.5) 11.8 (12.2)
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 flows. Sensitivities are provided below for each of the CGUs.
Significant CGUs
US Technology Solutions
The carrying value of the goodwill for the US Technology Solutions CGU was £44.1m as at 31 March 2023 (2022: £41.5m). The recoverable
amount of this CGU as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher than the carrying
value of net operating assets (of £111.7m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows.
These cash flows include certain assumptions around growth of new product lines in development, with clear market opportunity, and winning
identified future government contracts. US organic revenue grew by 25% compared to prior year, following a year of decline in FY22 which
was impacted by the US defence budget being constrained by the extended Continuing Resolution.
Confidence remains in continued growth into FY24 having secured significant growth in order intake in H2 FY22 and FY23 which, coupled
with the new leadership team provides a strong foundation for delivery of our strategy in the US. An increase in the discount rate of 1%, a
decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of $2.0m, all of which are reasonably possible
changes, would not cause the net operating assets to exceed their recoverable amount.
US C5ISR
The carrying value of the goodwill for the US C5ISR CGU as at 31 March 2023 was £36.8m (2022: £34.6m). The recoverable amount of this
CGU as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net
operating assets (of £88.9m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in
the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of $2.0m, all of which are
reasonably possible changes, would not cause the net operating assets to exceed their recoverable amount.
Target Systems
The carrying value of the goodwill for the Target Systems CGU as at 31 March 2023 was £24.5m (2022: £24.7m). The recoverable amount
of this CGU as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher than the carrying value
of net operating assets (of £88.6m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase
in the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £2.0m, all of which
are reasonably possible changes, would not cause the net operating assets to exceed their recoverable amount.
Germany
The carrying value of the goodwill for the Germany CGU as at 31 March 2023 was £2.7m (2022: £2.6m). The current forecasts result in the
recoverable amount based on the value in use calculations being £6.4m higher than the carrying value of assets. Confidence remains in the
business prospects over the next five years, with a new leadership team on board and a healthy pipeline of opportunities.
The key sensitivity impacting on the value in use calculations is the terminal year cash flows. These cash flows include certain assumptions
around utilisation of aircraft, renewal of existing contracts and successful winning of new business opportunities. A reduction in the terminal
value year cash flows of €3m, which would be a reasonably possible change, would lead to an impairment of the £2.7m carrying value of
goodwill together with an impairment charge against the carrying value of intangible assets of approximately £12.8m. An increase in the
discount rate of 1% or a decrease in the terminal growth rate of 1%, both of which are also reasonably possible changes, would result in an
impairment of £4.1m and £2.1m respectively.
Inzpire
The carrying value of the goodwill for the Inzpire CGU as at 31 March 2023 was £11.7m (2022: £11.7m). The recoverable amount of this CGU
as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net
operating assets (of £23.3m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in
the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £1.0m, all of which are
reasonably possible changes, would not cause the net operating assets to exceed their recoverable amount.
Naimuri
The carrying value of the goodwill for the Naimuri CGU as at 31 March 2023 was £14.8m (2022: £14.8m). The recoverable amount of this
CGU as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net
operating assets (of £25.3m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in
the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £1.0m, all of which are
reasonably possible changes, would not cause the net operating assets to exceed their recoverable amount.
186
QinetiQ Group plc
Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
187
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
188
Notes to the Consolidated Financial Statements
For the year ended 31 March
14. Goodwill (continued)
Australia
The carrying value of the goodwill for the Australia CGU, as at 31 March 2023 was £5.8m (2022: £6.1m). The recoverable amount of this CGU
as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net
operating assets (of £10.8m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in
the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of A$2.0m, all of which are
reasonably possible changes, would not cause the net operating assets to exceed their recoverable amount.
Avantus
The carrying value of the goodwill for the Avantus CGU, which was acquired during the year, as at 31 March 2023 was £257.8m. The
recoverable amount of this CGU as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher
than the carrying value of net operating assets (of £431.1m). The key sensitivity impacting on the value in use calculations is the terminal
year cash flows. An increase in the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash
flows of $2.0m, all of which are reasonably possible changes, would not cause the net operating assets to exceed their recoverable amount.
Air Affairs Australia
The carrying value of the goodwill for the Air Affairs Australia CGU, which was acquired during the year, as at 31 March 2023 was £3.0m. The
recoverable amount of this CGU as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher
than the carrying value of net operating assets (of £35.9m). The key sensitivity impacting on the value in use calculations is the terminal year
cash flows. An increase in the discount rate of 1% or a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash
flows of A$1.0m, all of which are reasonably possible changes, would not cause the net operating assets to exceed their recoverable amount.
QinetiQ Training & Simulation
The carrying value of the goodwill for the QinetiQ Training and Simulation CGU as at 31 March 2023 was £7.8m (2022: £7.8m). The recoverable
amount of this CGU as at 31 March 2023, based on value in use and calculated using the assumptions noted above, is higher than the carrying
value of net operating assets (of £14.1m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An
increase in the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £1.0m, all of
which are reasonably possible changes, would not cause the net operating assets to exceed their recoverable amount.
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
189
Notes to the Consolidated Financial Statements
The acquisition of Air Affairs resulted in the recognition of a £2.3m intangible asset relating to existing technology. Other significant individual
assets from past acquisitions include: customer relationships associated with US C5ISR, Germany and QinetiQ Training & Simulation Limited
(NBV: £14.3m; £21.5m; £2.9m respectively) with remaining amortisation periods of approximately 7 years, 9 years and 9 years respectively,
and acquired technology associated with US C5ISR, Germany, and QinetiQ Training & Simulation Limited (£12.3m; £3.7m; £1.8m respectively)
all with remaining amortisation periods of approximately 7 years.
For the year ended 31 March 2022
All figures in £ million
Cost
At 1 April 2021
Reclassifications from PPE
Additions – internally developed*
Additions – purchased*
Disposal
Foreign exchange
At 31 March 2022
Accumulated amortisation and impairment
At 1 April 2021
Amortisation charge for year
Disposal
Foreign exchange
At 31 March 2022
Acquired intangibles
Customer
relationships
Other
acquired
Development
costs
Other
internally
generated
112.5
-
-
-
-
2.0
114.5
(40.1)
(8.0)
-
(1.0)
(49.1)
82.8
-
-
-
(4.0)
2.7
81.5
(54.4)
(2.7)
4.0
(2.3)
(55.4)
28.2
(0.1)
3.4
-
-
0.1
31.6
(16.8)
(2.1)
-
-
(18.9)
Total
278.4
5.9
9.2
6.4
(5.7)
5.4
299.6
54.9
6.0
5.8
6.4
(1.7)
0.6
72.0
(34.0)
(3.3)
1.7
(0.3)
(35.9)
(145.3)
(16.1)
5.7
(3.6)
(159.3)
Net book value at 31 March 2022
65.4
26.1
12.7
36.1
140.3
* Additions per the table above are different to 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.
15. Intangible assets
For the year ended 31 March 2023
All figures in £ million
Cost
At 1 April 2022
Reclassifications from PPE
Reclassifications between categories
Additions – internally developed
Additions – purchased
Disposals
Amounts recognised on business acquisitions
Amounts derecognised on business disposal
Foreign exchange
At 31 March 2023
Accumulated amortisation and impairment
At 1 April 2022
Amortisation charge for year
Disposals
Amounts derecognised on business disposal
Foreign exchange
At 31 March 2023
Acquired intangibles
Customer
relationships
Other
acquired
Development
costs
Other
internally
generated^
114.5
-
-
-
-
-
197.5
(2.5)
(1.0)
308.5
(49.1)
(11.0)
-
2.5
(1.8)
(59.4)
81.5
-
-
-
-
-
11.1
-
3.4
96.0
(55.4)
(4.6)
-
-
(3.1)
(63.1)
31.6
5.0
0.2
1.6
1.1
(0.2)
0.9
(2.8)
(0.1)
37.3
(18.9)
(3.5)
0.2
-
(0.1)
(22.3)
Total
299.6
5.5
-
10.3
3.5
(2.1)
211.6
(7.3)
3.2
524.3
72.0
0.5
(0.2)
8.7
2.4
(1.9)
2.1
(2.0)
0.9
82.5
(35.9)
(4.0)
1.8
1.9
(0.3)
(36.5)
(159.3)
(23.1)
2.0
4.4
(5.3)
(181.3)
16. Property, plant and equipment
For the year ended 31 March 2023
All figures in £ million
Cost
At 1 April 2022
Reclassifications to intangibles
Reclassifications/transfers
Additions – purchased*
Additions – recognised on acquisitions
Disposals
Business divestments
Foreign exchange
At 31 March 2023
Accumulated depreciation and impairment
At 1 April 2022
Charge
Disposals
Business divestments
Foreign exchange
At 31 March 2023
Owned assets
Right of use assets
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets under
construction
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
350.6
-
13.8
4.6
0.5
(0.7)
(3.5)
0.4
365.7
(204.5)
(12.0)
0.4
1.0
(0.5)
(215.6)
274.5
-
7.4
12.4
20.8
(4.5)
(2.3)
1.0
309.3
(164.8)
(17.9)
4.3
1.9
(1.2)
(177.7)
102.8
-
16.2
5.4
2.1
(2.2)
-
-
124.3
(56.7)
(15.4)
1.9
-
(0.6)
(70.8)
94.5
(5.5)
(37.4)
63.1
0.7
(0.2)
-
0.3
115.5
(0.4)
-
0.4
-
-
-
56.5
-
-
1.5
14.0
(3.9)
(1.8)
2.4
68.7
(39.1)
(5.9)
3.9
0.9
(1.7)
(41.9)
17.4
26.8
16.6
-
-
-
-
(7.7)
(2.5)
0.1
6.5
(15.5)
(0.3)
7.6
2.0
-
(6.2)
1.1
0.3
0.4
-
-
-
-
-
-
-
0.4
(0.4)
-
-
-
-
(0.4)
-
-
Total
895.9
(5.5)
-
87.0
38.1
(19.2)
(10.1)
4.2
990.4
(481.4)
(51.5)
18.5
5.8
(4.0)
(512.6)
414.5
477.8
Net book value at 31 March 2023
249.1
32.9
15.0
46.0
343.0
^
Includes Assets In Course Of Construction of closing net book value of £20.9m as at 31 March 2023 (2022: £14.0m).
'Other’ consists primarily of intellectual property and existing technology arising on acquisition of businesses. The acquisition of Avantus
resulted in the recognition of £197.5m of customer relationship intangible assets and £8.8m of other intangible assets (£2.2m of existing
technology and £6.6m relating to the trade name).
188
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Annual Report and Accounts 2023
Opening net book value
146.1
109.7
46.1
94.1
Closing Net Book value
150.1
131.6
53.5
115.5
* Additions per the table above are different to 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.
QinetiQ Group plc
Annual Report and Accounts 2023
189
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
190
Notes to the Consolidated Financial Statements
For the year ended 31 March
16. Property, plant and equipment (continued)
During the year a £2.0m gain was recognised on the sale of property which had a carrying value of nil. This gain is included within other
income as a specific adjusting item (see note 4). Whilst the Group will likely be impacted by climate change in the future to an extent, the
impact on the carrying value of property, plant and equipment is not considered to be material.
For the year ended 31 March 2022
All figures in £ million
Cost
At 1 April 2021
Reclassifications to intangibles
Reclassifications/transfers
Additions – purchased*
Disposals
Foreign exchange
At 31 March 2022
Accumulated depreciation and impairment
At 1 April 2021
Charge
Reclassifications/transfers
Disposals
Impairment
Foreign exchange
At 31 March 2022
Owned assets
Right of use assets
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
Assets under
construction
Land and
buildings
Plant,
machinery
and vehicles
Computers
and office
equipment
353.8
(4.6)
1.0
0.5
(0.6)
0.5
350.6
(193.8)
(10.5)
-
0.2
-
(0.4)
(204.5)
248.9
-
4.3
23.0
(2.5)
0.8
274.5
(150.8)
(16.7)
1.4
2.1
-
(0.8)
(164.8)
81.9
(1.2)
20.2
2.5
(1.0)
0.4
102.8
(44.0)
(13.1)
-
0.9
(0.1)
(0.4)
(56.7)
76.9
(0.1)
(26.9)
47.3
(2.9)
0.2
94.5
-
-
-
-
(0.4)
-
(0.4)
54.8
-
-
1.3
(1.5)
1.9
56.5
(33.0)
(4.7)
-
1.2
(1.2)
(1.4)
(39.1)
16.9
-
-
0.5
(0.7)
(0.1)
16.6
(14.4)
(1.2)
-
-
-
0.1
(15.5)
0.4
-
-
-
-
-
0.4
(0.4)
-
-
-
-
-
(0.4)
Total
833.6
(5.9)
(1.4)
75.1
(9.2)
3.7
895.9
(436.4)
(46.2)
1.4
4.4
(1.7)
(2.9)
(481.4)
Net book value at 31 March 2022
146.1
109.7
46.1
94.1
17.4
1.1
--
414.5
* Additions per the table above are different to 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.
17. Equity accounted investments
As at 31 March
All figures in £ million
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets of joint ventures and associates
Net assets of joint ventures
Net assets of associate
Net assets of joint ventures and associates
31 March 2023
31 March 2022
JV’s and
associates
financial
results
1.4
5.8
7.2
(4.7)
(1.2)
(5.9)
1.3
Group net
share of
JV’s and
associates
0.7
3.6
4.3
(2.3)
(0.6)
(2.9)
1.4
1.4
-
1.4
JV’s and
associates
financial
results
0.6
9.1
9.7
(4.3)
(1.4)
(5.7)
4.0
Group net
share of
JV’s and
associates
0.3
5.1
5.4
(2.1)
(0.7)
(2.8)
2.6
0.9
1.7
2.6
The profit from the Group’s share of joint ventures and associate for the year ended 31 March 2023 was £0.8m (FY22: £0.3m).
190
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Annual Report and Accounts 2023
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
191
Notes to the Consolidated Financial Statements
18. Deferred tax
For the year ended 31 March 2023
Deferred tax asset
All figures in £ million
At 1 April 2022
(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 2023
Less: liability available for offset
Net deferred tax asset at 31 March 2023
Deferred tax liability
All figures in £ million
At 1 April 2022
Charged to income statement
Credited to other comprehensive income
Acquired in business combination
Foreign exchange
Gross deferred tax liability at 31 March 2023
Less: asset available for offset
Net deferred tax liability at 31 March 2023
Short-term
timing
differences
14.7
(1.2)
(2.1)
0.4
5.1
0.6
17.5
Carried
forward
interest
expense
-
-
-
-
-
-
-
Lease
liabilities
4.0
3.1
-
-
-
Tax
losses
21.7
8.2
-
-
-
0.3 0.7
30.6
7.4
Total
40.4
10.1
(2.1)
0.4
5.1
1.6
55.5
(22.9)
32.6
Owned
property,
plant &
equipment
(54.3)
(11.5)
-
-
0.1
(65.7)
Pension
surplus
(96.4)
(2.5)
63.5
-
-
(35.4)
Right of use
assets
(3.4)
(6.3)
-
-
-
(9.7)
Acquisition
intangibles
(22.0)
(0.9)
-
(0.7)
(0.5)
(24.1)
Total
(176.1)
(21.2)
63.5
(0.7)
(0.4)
(134.9)
22.9
(112.0)
Deferred tax has been calculated at the rate at which the timing difference is expected to reverse using enacted future statutory rates. Deferred
tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred
tax balances relate to the same taxation authority.
At 31 March 2023 the Group had unused tax losses and US carried forward interest expense of £175.6m (31 March 2022: £128.1m) which
are available for offset against future taxable profits. Deferred tax assets are recognised on the balance sheet of £22.7m in respect of £88.0m
of US net operating losses, £5.4m in respect of £21.5m of Canadian net operating losses and £2.5m in respect of £8.3m of German trade
losses. No deferred tax asset is recognised in respect of the £57.8m of US interest deductions due to uncertainty over the timing and extent
of their utilisation. Full recognition of the US carried forward interest expense would increase the deferred tax asset by £15.6m.
The Group has £32.4m of time-limited US net operating losses of which £22.9m will expire in 2035 and £9.5m in 2036. The Group made
overseas losses in the period ended 31 March 2023 and recognition of deferred tax assets is dependent on future forecast taxable profits.
The Group has reviewed the latest forecasts for these businesses which incorporate the unsystematic risks of operating in the defence
business. In the period beyond the 5 year forecast we have reviewed the terminal period profits and based on these and our expectations for
these businesses it is probable the losses, with the exception of the interest deductions, will be fully utilised. Based on the current forecasts
the losses will be fully utilised over the next 4-7 years. A 10% change in the forecast profits would alter the utilisation period by 1 year.
There are no material temporary differences associated with investments in subsidiaries or interests in joint ventures for which deferred tax
liabilities have not been recognised.
For the year ended 31 March 2022
Deferred tax asset
All figures in £ million
At 1 April 2021
Credited/(charged) to income statement
Charged to other comprehensive income
Charged to equity
Transferred to current tax
Foreign exchange
Gross deferred tax asset at 31 March 2022
Less: liability available for offset
Net deferred tax asset at 31 March 2022
Short-term
timing
differences
12.7
3.1
(0.9)
(0.7)
(0.2)
0.7
14.7
Carried
forward
interest
expense
1.4
(1.4)
-
-
-
-
-
Lease
liabilities
5.1
(1.2)
-
-
-
0.1
4.0
Tax
losses
8.5
12.5
-
-
-
0.7
21.7
QinetiQ Group plc
Annual Report and Accounts 2023
Total
27.7
13.0
(0.9)
(0.7)
(0.2)
1.5
40.4
(19.4)
21.0
191
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
192
Notes to the Consolidated Financial Statements
For the year ended 31 March
18. Deferred tax (continued)
Deferred tax liability
All figures in £ million
At 1 April 2021
(Charged)/credited to income statement
Charged to other comprehensive income
Foreign exchange
Gross deferred tax liability at 31 March 2022
Less: asset available for offset
Net deferred tax liability at 31 March 2022
19. Current tax
As at 31 March
All figures in £ million
Current tax receivable
Current tax payable
Net current tax payable
Owned
property,
plant &
equipment
(33.5)
(20.7)
-
(0.1)
(54.3)
Pension
surplus
(45.5)
(3.3)
(47.6)
-
(96.4)
Right of use
assets
(4.7)
1.4
-
(0.1)
(3.4)
Acquisition
intangibles
(22.0)
0.1
-
(0.1)
(22.0)
Total
(105.7)
(22.5)
(47.6)
(0.3)
(176.1)
19.4
(156.7)
31 March
2023
4.0
(4.6)
(0.6)
31 March
2022^
1.4
(5.9)
(4.5)
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
20. Inventories
As at 31 March
All figures in £ million
Raw materials
Work in progress
Finished goods
Total inventory
21. Trade and other receivables
As at 31 March
All figures in £ million
Trade receivables
Contract assets
Other receivables
Prepayments
Total trade and other receivables
31 March
2023
36.2
9.1
23.5
68.8
31 March
2022
32.5
6.2
16.2
54.9
31 March
2023
215.0
158.0
43.3
36.3
452.6
31 March
2022^
154.4
145.8
38.8
34.2
373.2
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
Trade and other receivables includes assets that are realised as part of the business’s normal operating cycle, including amounts of £4.0m
(2022: £2.3m) that are not expected to be realised within 12 months of the year end. 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 2023 the Group carried a loss allowance in respect of expected credit risk of £1.6m (2022:
£2.7m).
Contract assets increased in year due to acquisition of Avantus. Contract assets represents unbilled amounts recoverable under customer
contracts (refer to accounting policies note 36).
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
193
Notes to the Consolidated Financial Statements
Ageing of receivables and associated loss allowance for expected credit risk
As at 31 March 2023
Gross carrying amount - trade receivables (£m)
Gross carrying amount - contract assets (£m)
Expected loss rate (%)
Loss allowance (£m)
As at 31 March 2022
Gross carrying amount - trade receivables (£m)
Gross carrying amount - contract assets (£m)
Expected loss rate (%)
Loss allowance (£m)
Movements in the provision for expected credit loss
All figures in £ million
At 1 April
Increase in loss allowance recognised in income statement
Unutilised amount reversed through income statement
Utilised (receivables written off)
At 31 March
Current
174.5
158.0
0.1%
0.2
Up to 30 days
past due
28.1
-
-
-
30-120 days
past due
8.5
-
1.2%
0.1
>120 days
past due
5.5
-
23.6%
1.3
Current
136.7
145.8
-
-
Up to 30 days
past due
7.9
-
-
-
30-120 days
past due
6.8
-
-
-
>120 days
past due
5.7
-
47.4%
2.7
Total
216.6
158.0
0.4%
1.6
Total
157.1
145.8
0.9%
2.7
Trade
receivables
2.7
0.5
(0.7)
(0.9)
1.6
FY23
Contract
assets
-
-
-
-
-
Trade
receivables
1.8
1.8
(0.9)
-
2.7
FY22
Contract
assets
1.8
-
(1.8)
-
-
The maximum exposure to credit risk in relation to trade and other receivables at the reporting date is the fair value of trade and other
receivables. The Group does not hold any collateral as security.
22. 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
31 March
2023
135.9
55.7
216.9
166.7
575.2
14.0
1.2
15.2
590.4
31 March
2022^
76.1
64.6
182.5
151.5
474.7
15.2
23.6
38.8
513.5
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
Current other payables includes nil (2022 restated: £19.6m) of Research and Development Expenditure Credits (RDEC) payable to MOD. This
was subject to a determination from the SSRO which established that RDEC is retained by the Company, as such the liability has been reversed
to the income statement through specific adjusting items. Contract liabilities increased during the year due to the timing of revenue recognition
and invoicing on contracts, as well as a small balance acquired with Avantus.
192
QinetiQ Group plc
Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
193
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
194
Notes to the Consolidated Financial Statements
For the year ended 31 March
23. Provisions
For the year ended 31 March 2023
All figures in £ million
At 1 April 2022
Acquisitions
Created in year
Released in year
Unwinding of discount
Utilised in year
At 31 March 2023
Current liability
Non-current liability
At 31 March 2023
Property
7.3
Other
19.8
-
0.5
(0.1)
0.1
(1.2)
6.6
3.2
3.4
6.6
2.4
0.6
-
-
(2.6)
20.2
16.5
3.7
20.2
Total
27.1
2.4
1.1
(0.1)
0.1
(3.8)
26.8
19.7
7.1
26.8
Property provisions relate to dilapidations and under-utilised properties. The under-utilised property 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 5
years. Other provisions includes £14.2m (2022: £16.0m) in respect of a civil liability for the Pendine incident. This is offset in Other Receivables
for an insurance recoverable. There is uncertainty around the timing of the utilisation of this balance although this will not impact cash or the
P&L. The remaining balance relates to environmental and other liabilities, the magnitude and timing of utilisation of which are determined by
a variety of factors.
For the year ended 31 March 2022
All figures in £ million
At 1 April 2021
Created in year
Released in year
Utilised in year
At 31 March 2022
Current liability
Non-current liability
At 31 March 2022
24. Net (debt)/cash
As at 31 March
All figures in £ million
Current financial assets/(liabilities)
Deferred financing costs
Lease liabilities
Derivative financial instruments
Total current financial assets/(liabilities)
Non-current assets/(liabilities)
Deferred financing costs
Borrowings – Term loan
Lease liabilities
Derivative financial instruments
Total non-current financial assets/(liabilities)
Total financial assets/(liabilities)
Cash
Cash equivalents
Total cash and cash equivalents
Total net (debt)/cash as defined by the Group
Property
8.0
1.0
(0.5)
(1.2)
7.3
2.8
4.5
7.3
Other
4.0
16.5
(0.5)
(0.2)
19.8
18.3
1.5
19.8
Total
12.0
17.5
(1.0)
(1.4)
27.1
21.1
6.0
27.1
31 March 2023
31 March 2022
Assets
Liabilities
Net
Assets
Liabilities
Net
1.3
-
4.4
5.7
1.5
-
-
4.7
6.2
11.9
89.1
62.1
151.2
-
(7.6)
(0.6)
(8.2)
-
(337.6)
(23.7)
(0.5)
(361.8)
(370.0)
-
-
-
1.3
(7.6)
3.8
(2.5)
1.5
(337.6)
(23.7)
4.2
(355.6)
(358.1)
89.1
62.1
151.2
(206.9)
0.4
-
0.2
0.6
0.5
-
-
-
0.5
1.1
65.7
182.4
248.1
-
(5.5)
(1.4)
(6.9)
-
-
(16.6)
(0.6)
(17.2)
(24.1)
-
-
-
0.4
(5.5)
(1.2)
(6.3)
0.5
-
(16.6)
(0.6)
(16.7)
(23.0)
65.7
182.4
248.1
225.1
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
195
Notes to the Consolidated Financial Statements
At 31 March 2023 the Group held £0.4m (2022: £0.2m) of cash which is restricted in its use. The term loan was issued at floating rates as
Tranche A GBP 273.3m and Tranche B USD 79.6m. A proportion of Tranche A has been converted to fixed rate using interest rate swaps.
Further analysis of the terms and maturity dates for financial liabilities are set out in note 27.
25. Cash flows from operations
All figures in £ million
Profit after tax for the year
Adjustments for:
Taxation expense
Net finance income
(Gain)/loss on disposal of businesses
Gain on sale of property
Loss on disposal of plant and equipment
Impairment of plant and equipment
Impairment of property
Amortisation of purchased or internally developed intangible assets
Amortisation of intangible assets arising from acquisitions
Depreciation of property, 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
Pension past service cost
Fair value adjustment in respect of contingent consideration
Net movement in provisions
(Increase)/Decrease in inventories
Increase in receivables
Increase in payables
Changes in working capital
Net cash flow from operations
FY23
154.4
37.6
(3.3)
(15.9)
(2.0)
0.2
-
-
7.5
15.6
51.5
(0.8)
6.1
(1.6)
-
-
(1.0)
248.3
(9.6)
(56.7)
58.6
((77..77))
FY22^
90.0
35.9
(3.1)
0.9
(0.7)
-
0.5
1.2
5.4
10.7
46.2
(0.3)
7.4
(1.8)
2.4
(0.6)
(1.0)
193.1
1.4
(13.0)
33.6
2222..00
240.6
215.1
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
The working capital movements in the cash flow statement do not agree directly to the balance sheet due to impact of business acquisitions
and disposals, foreign exchange movements, deferred consideration, accrued interest and the timing of capex payments.
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: digital investment
Add back specific adjusting item: restructuring costs
Add back specific adjusting item: acquisition integration and remuneration costs
Add back specific adjusting item: acquisition transaction costs
Underlying net cash flow from operations
Less: tax and net interest payments
Less: purchases of intangible assets and property, plant and equipment
Free cash flow
Underlying cash conversion ratio
Underlying EBITDA – £ million
Underlying net cash flow from operations – £ million
Underlying cash conversion ratio – %
FY23
240.6
5.8
5.0
2.3
16.4
270.1
(34.6)
(109.0)
126.5
FY22^
215.1
1.9
-
-
3.7
220.7
(26.4)
(84.3)
110.0
FY23
255.3
270.1
106%
FY22^
195.7
220.7
113%
^ Prior year comparatives have been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
194
QinetiQ Group plc
Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
195
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
196
Notes to the Consolidated Financial Statements
For the year ended 31 March
26. 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
Total future minimum lease payments
Group as a lessee
Amounts recognised in the balance sheet
The balance sheet shows the following amounts relating to leases:
Right-of-use assets (included within Property, Plant & Equipment – see note 16)
All figures in £ million
Land and buildings
Plant, machinery and vehicles
Computers and office equipment
Total right of use assets net book value
Lease liabilities (included within Net cash – see note 24)
All figures in £ million
Current
Non-current
Total lease liabilities
31 March
2023
5.7
7.7
1.8
15.2
31 March
2022
5.7
9.3
0.5
15.5
31 March
2023
26.8
0.3
-
27.1
31 March
2022
17.4
1.1
-
18.5
31 March
2023
7.6
23.7
31.3
31 March
2022
5.5
16.6
22.1
Additions to the right-of-use assets during FY23 were £15.5m, including £14.0m due to acquisitions. The total cash outflow for leases in FY23
was £8.5m. The Group had no expense relating to variable lease payments not included in the measurement of lease liabilities.
Amounts recognised in the consolidated income statement
The consolidated income statement includes the following amounts relating to leases:
All figures in £ million
Depreciation charge
Land and buildings
Plant, machinery and vehicles
Total depreciation charge
Interest expense (included in finance cost - see note 7)
Expense relating to short-term leases (included in operating costs)
Expense relating to low value leases (included in operating costs)
Total lease and sub-lease expense charged to profit before tax
Minimum lease payment commitments
The Group has the following total future minimum lease payment commitments:
All figures in £ million
Within one year
In the second to fifth years inclusive
Greater than five years
Total future minimum lease payment commitments
FY23
FY22
5.9
0.3
6.2
1.1
1.6
0.1
9.0
4.7
1.2
5.9
1.0
1.3
0.2
8.4
31 March
2023
7.6
19.6
4.1
31.3
31 March
2022
5.5
13.4
3.2
22.1
Lease payments represent capital and interest payable by the Group on certain property, plant and equipment. Principal leases are negotiated
for a term of approximately 10 years.
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
Notes to the Consolidated Financial Statements
197
27. Financial risk management
The Group’s international operations expose it to financial risks that include the effects of changes in foreign exchange rates, interest rates,
credit risks and liquidity risks.
Treasury and risk management policies, which are set by the Board, specify guidelines on financial risks and the use of financial instruments
to manage risk. The instruments and techniques used to manage exposures include foreign currency and interest rate swap 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. For details of the Group’s Treasury policy and management of financial
instruments see ‘Additional Financial Information’ on page 231.
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to
stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, cash and cash
equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in
the consolidated statement of changes in equity. The Group has a revolving credit facility and floating rate term loan with its relationship
banks with a requirement for the half yearly testing period that the ratio of Net Debt to EBITDA will not exceed 3.5:1 and the ratio of EBITDA
to net finance charges will not be less than 4:1. The Group complied with both covenants during the year. As at 31 March 2023, the ratio of
Net Debt to EBITDA was 0.8:1 and the ratio of EBITDA to net finance charges was 46.2:1. The revolving credit facility is undrawn at the year
end and matures in 2025. The floating rate term loan is repayable in 2025 but has 2 one year extension options.
A) Fair values of financial instruments
The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
Level 1 – measured using quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – measured using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices). Level 2 derivatives comprise forward foreign exchange contracts which have been fair
valued using forward exchange rates that are quoted in an active market; and interest rate swaps which have been fair valued using interest
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 2023:
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
24
24
24
24
-
-
-
-
-
4.4
4.7
(0.6)
(0.5)
8.0
-
-
-
-
-
4.4
4.7
(0.6)
(0.5)
8.0
The following table presents the Group’s assets and liabilities that are measured at fair value as at 31 March 2022:
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
24
24
24
24
-
-
-
-
-
0.2
-
.(1.4)
(0.6)
(1.8)
-
-
-
-
-
0.2
-
(1.4)
(0.6)
(1.8)
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 2023 and 31 March 2022. Detailed analysis is
provided in the following tables:
196
QinetiQ Group plc
Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
197
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
198
Notes to the Consolidated Financial Statements
For the year ended 31 March
27. Financial risk management (continued)
As at 31 March 2023
All figures in £ million
Financial assets
Non-current
Derivative financial instruments
Deferred financing costs
Current
Trade receivables and similar items
Derivative financial instruments
Deferred financing costs
Cash and cash equivalents
Total financial assets
Financial liabilities
Non-current
Bank borrowings
Derivative financial instruments
Lease liabilities
Current
Trade payables and similar items
Derivative financial instruments
Lease liabilities
Total financial liabilities
Total
As at 31 March 2022
All figures in £ million
Financial assets
Non-current
Deferred financing costs
Current
Trade receivables and similar items
Derivative financial instruments
Deferred financing costs
Cash and cash equivalents
Total financial assets
Financial liabilities
Non-current
Bank borrowings
Derivative financial instruments
Lease liabilities
Current
Trade payables and similar items
Derivative financial instruments
Lease liabilities
Total financial liabilities
Financial
assets at fair
value profit
and loss
Financial
assets at
amortised
cost
Financial
liabilities at
amortised
cost
Derivatives
used as
hedges
Note
Total
carrying
value and
fair value
Other
24
24
24
24
24
24
24
24
-
-
-
-
-
151.2
151.2
-
1.5
229.2
-
1.3
-
232.0
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(337.6)
-
-
(281.8)
-
-
(619.4)
4.7
-
-
4.4
-
-
9.1
-
(0.5)
-
-
(0.6)
-
(1.1)
-
-
-
-
-
-
-
4.7
1.5
229.2
4.4
1.3
151.2
392.3
-
-
(23.7)
-
-
(7.6)
(31.3)
(337.6)
(0.5)
(23.7)
(281.8)
(0.6)
(7.6)
(651.8)
151.2
232.0
(619.4)
8.0
(31.3)
(259.5)
Financial
assets at fair
value profit
and loss
Financial
assets at
amortised
cost
Financial
liabilities at
amortised
cost
Derivatives
used as
hedges
Note
Total
carrying
value and
fair value
Other
24
24
24
24
24
24
24
-
0.5
-
-
-
248.1
248.1
170.3
-
0.4
-
171.2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
--
-
-
-
(205.3)
-
-
(205.3)
-
-
0.2
-
-
0.2
-
(0.6)
-
-
(1.4)
-
(2.0)
-
-
-
-
-
-
0.5
170.3
0.2
0.4
248.1
419.5
-
-
(16.6)
-
-
(5.5)
(22.1)
-
(0.6)
(16.6)
(205.3)
(1.4)
(5.5)
(229.4)
Total
248.1
171.2
(205.3)
(1.8)
(22.1)
190.1
B) Interest rate risk
The Group’s objective is to manage its exposure to interest rate fluctuations on borrowings through varying the proportion of fixed rate debt
relative to floating rate debt with debt-related derivative financial instruments, including interest rate and cross-currency swaps.
StRAtEGiC REpORt
GOvERnAnCE
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Financial Statements
199
Notes to the Consolidated Financial Statements
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 or debt-
related derivative financial instruments. Where there are significant changes in the level and/or structure of debt, the policy permits borrowings
to be 100% fixed, with regular Board reviews of the appropriateness of this fixed percentage.
At 31 March 2023, the Group had 80% (2022: N/A) of fixed rate debt and 20% (2022: N/A) of floating rate debt based on gross debt of
£337.6m (2022: nil) after including the impact of debt-related derivative financial assets (interest rate swaps).
Financial assets/(liabilities)
As at 31 March 2023
All figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other
Total
As at 31 March 2022
All figures in £ million
Sterling
US dollar
Euro
Australian dollar
Other
Total
Fixed or
capped
8.1
-
-
-
-
8.1
Fixed or
capped
-
-
-
-
-
--
Financial assets
Floating
116.7
24.0
0.1
6.7
3.7
151.2
Non-interest
bearing
1.0
-
-
-
-
1.0
Financial assets
Floating
214.8
11.6
14.5
4.9
2.3
248.1
Non-interest
bearing
0.2
-
-
-
-
0.2
Fixed or
capped
(4.8)
(17.5)
-
(9.0)
(0.2)
(31.5)
Fixed or
capped
(5.7)
(13.1)
(1.6)
(1.6)
(0.1)
(22.1)
Financial liabilities
Floating
(273.3)
(64.3)
-
-
-
(337.6)
Non-interest
bearing
(0.9)
-
-
-
-
(0.9)
Financial liabilities
Floating Non-interest
bearing
(2.0)
-
-
-
-
(2.0)
-
-
-
-
-
--
Floating rate financial assets attract interest based on the relevant reference rate. Floating rate financial liabilities bear interest at the
relevant reference rate. Trade and other receivables/payables and deferred finance costs are excluded from this analysis.
For the fixed or capped rate financial assets and liabilities, the average interest rates (including the relevant marginal cost of borrowing) and
the average period for which the rates are fixed are:
FFiinnaanncciiaall aasssseettss::
Sterling
FFiinnaanncciiaall lliiaabbiilliittiieess::
Sterling
US dollar
Euro
Australian dollar
Other
Total financial liabilities
31 March 2023
31 March 2022
Fixed or
capped
£m
Weighted
average
interest rate
%
Weighted
average years
to maturity
Fixed or
capped
£m
Weighted
average
interest rate
%
Weighted
average
years to
maturity
8.1
(4.8)
(17.5)
-
(9.0)
(0.2)
(31.5)
3.1
4.3
4.5
-
4.5
3.7
4.4
3.2
4.5
5.5
-
5.0
4.4
5.2
-
(5.7)
(13.1)
(1.6)
(1.6)
(0.1)
(22.1)
-
4.3
4.5
2.2
3.9
3.1
4.2
-
5.1
4.9
4.8
2.8
1.2
4.7
Sterling assets consist of debt-related derivative financial instruments. Sterling liabilities consist primarily of finance leases with the
weighted average interest rate reflecting the internal rate of return of those leases.
Interest rate risk management
The revolving credit facility (note 27E) is floating-rate and undrawn as at 31 March 2023.
As at 31 March 2023, the majority of the Group’s floating rate bank borrowings were fixed through interest rate swaps which swap the
Sterling floating rate interest payable into fixed rate Sterling. The notional principal amount of the outstanding interest rate swap contracts
as at 31 March 2023 is £270m (31 March 2022: £nil). The swaps have the economic effect of converting floating rate borrowings into fixed
rate borrowings and are accounted for as cash flow hedges.
198
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Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
199
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
200
Notes to the Consolidated Financial Statements
For the year ended 31 March
27. Financial risk management (continued)
C) Currency risk
Transactional currency exposure
The Group is exposed to foreign currency risks arising from sales or purchases by businesses in currencies other than their functional currency.
It is Group policy that when such a sale or purchase is certain, the net foreign exchange exposure is hedged using forward foreign exchange
contracts. Hedge accounting documentation and effectiveness testing are undertaken for all the Group’s transactional hedge contracts.
The table below shows the Group’s currency exposures (based on functional currency of the operating company), 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.
All figures in £ millions
31 March 2023 – Sterling
31 March 2022– Sterling
Net foreign currency monetary assets/(liabilities)
US$
17.7
3.2
Euro
3.3
2.4
A$
0.9
0.6
Other
4.1
3.8
Total
26.0
10.0
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
2023 against Sterling are net US dollars sold of £65.4m (USD 79.6m), net Euros sold £35.5m (EUR 41.3m), net Canadian dollars sold £14.7m
(CAD 25.6m), net United Arab Emirate dirhams sold £1.3m (AED 5.7m), net Swiss Francs bought of £0.4m (CHF 0.5m), net Swedish Krona
sold of £3.4m (SEK 43.1m), and net Australian dollars sold £21.5m (AUD 39.6m).
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 £160.3m (31 March 2022 restated*: £248.3m). This balance includes cash and cash equivalents and derivative
financial assets. The cash and cash equivalents of £151.2m at 31 March 2023 (2022: £248.1m) 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. Cash equivalents
comprise £62.1m (31 March 2022: £182.4m) invested in AAA-rated money market funds.
* This balance has been restated to exclude lease liabilities which had been included as at 31 March 2022.
E) Liquidity risk
Borrowing facilities
As at 31 March 2023 the Group had a revolving credit facility (RCF) of £275.0m (2022: £275.0m) and floating rate term loans of £337.6m
(2022: nil). The RCF, which is unutilised, has an initial term of five years and will mature on 27 September 2025. The term loan has an initial
term of 3 years and will mature on 27 September 2025. Total available funds, comprising the RCF, term loan and the Group’s freely available
cash and cash equivalents, are shown in the table below:
As at 31 March 2023
Committed facilities - RCF
Committed facilities – term loan
Freely available cash and cash equivalents
Available funds 31 March 2023
As at 31 March 2022
Committed facilities - RCF
Committed facilities – term loan
Freely available cash and cash equivalents
Available funds 31 March 2022
* Reference rate refers to SONIA for GBP and SOFR for USD.
200
QinetiQ Group plc
Annual Report and Accounts 2023
Interest rate:
Reference
rate* plus
Total
£m
Drawn
£m
Undrawn
£m
0.53%
1.10%
275.0
337.6
-
337.6
-
0.53%
275.0
-
-
-
275.0
-
149.6
424.6
275.0
-
246.7
521.7
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
201
Notes to the Consolidated Financial Statements
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.
The £337.6m term loan is repayable on 27 September 2025, with two one-year extension options available, with interest periods set to three
months. The loan bears interest at a variable margin over the relevant reference rate of between 1.00% and 2.50% dependent on the ratio of
Net Debt to EBITDA.
As at 31 March 2023
All figures in £ million
Non-derivative financial liabilities
Term loan
Revolving credit facility
Trade payables and similar items
Leases
Derivative financial liabilities
Forward foreign currency contracts – cash flow hedges
Interest rate swaps
Total
As at 31 March 2022
All figures in £ million
Non-derivative financial liabilities
Revolving credit facility
Trade payables and similar items
Leases
Derivative financial liabilities
Forward foreign currency contracts – cash flow hedges
Total
Book value
Contractual
cash flows
1 year
or less
1–2 years
2–5 years
More than
5 years
(337.6)
-
(281.8)
(31.3)
(0.9)
(0.2)
(651.8)
(375.8)
-
(281.8)
(32.0)
(0.9)
(0.2)
(690.7)
(16.0)
-
(281.8)
(7.6)
(0.6)
-
(306.0)
(16.4)
-
-
(6.5)
(0.3)
-
(23.2)
(343.4)
-
-
(13.1)
-
(0.2)
(356.7)
-
-
-
(4.8)
-
-
(4.8)
Book value
Contractual
cash flows
1 year
or less
1–2 years
2–5 years
More than
5 years
-
(205.3)
(22.1)
-
(205.3)
(24.1)
-
(205.3)
(6.3)
(2.0)
(229.4)
(2.0)
(231.4)
(1.4)
(213.0)
-
-
(5.3)
(0.6)
(5.9)
-
-
(9.5)
-
(9.5)
-
-
(3.0)
-
(3.0)
F) Derivative financial instruments
The Group has the following derivative financial instruments on the balance sheet, reported within the ‘Other financial assets’ line items.
All figures in £ million
Forward foreign currency contracts – cash flow hedges
Interest rate swaps
Derivative assets/(liabilities) at the end of the year
The maturity of these derivative financial instruments is as follows:
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
31 March 2023
31 March 2022
Asset
gains
1.0
8.1
9.1
Liability
losses
(0.9)
(0.2)
(1.1)
Net
0.1
7.9
8.0
Asset
gains
0.2
-
0.2
Liability
losses
(2.0)
-
(2.0)
Net
(1.8)
-
(1.8)
31 March 2023
31 March 2022
Asset
gains
Liability
losses
4.4
2.5
2.2
9.1
(0.6)
(0.3)
(0.2)
(1.1)
Net
3.8
2.2
2.0
8.0
Asset
gains
Liability
losses
0.2
-
-
0.2
(1.4)
(0.6)
-
(2.0)
Net
(1.2)
(0.6)
-
(1.8)
QinetiQ Group plc
Annual Report and Accounts 2023
201
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
202
Notes to the Consolidated Financial Statements
For the year ended 31 March
27. Financial risk management (continued)
The effects of these derivatives on the Group’s financial position and performance are as follows:
31 March 2023
31 March 2022
All figures in £ million
Notional amount (gross)
Carrying value (current and non-current assets and (liabilities))
Maturity date
Hedge ratio
Change in fair value of outstanding hedging instruments in the year
Change in value of hedged item used to determine hedge effectiveness
Weighted average hedged rate for the year*
Total
597.7
8.0
Cash flow
hedges
327.7
0.1
Interest rate
swaps
270.0
7.9
Cash flow
hedges
228.6
(1.8)
2023-2027 2025-2027 2023-2027 2022-2024
1:1
(1.3)
(1.3)
1.32
1:1
7.9
7.9
3.1%
1:1
1.9
1.9
1.23
1:1
9.8
9.8
Interest rate
Total
swaps
228.6
-
-
(1.8)
- 2022-2024
1:1
-
(1.3)
-
-
(1.3)
-
* The weighted average hedged rate for the year for cash flow hedges is based on GBP:USD, being the most significant currency pair. The Group also has cash flow hedges
relating to a number of other currency pairs aligned to its global operations.
G) Maturity of financial liabilities
The contractual maturity of the Group’s financial liabilities is shown below:
As at 31 March 2023
All figures in £ million
Due in one year or less
Due in more than one year but not more than two years
Due in more than two years but not more than five years
Due in five years or more
Total
As at 31 March 2022
All figures in £ million
Due in one year or less
Due in more than one year but not more than two years
Due in more than two years but not more than five years
Due in five years or more
Total
Trade
payables and
similar items
payables
281.8
-
-
-
281.8
Bank
borrowings
and loan
notes
-
-
337.6
-
337.6
Derivative
financial
instruments
0.6
0.3
0.2
-
1.1
Lease
liabilities
7.6
6.5
13.1
4.1
31.3
Trade
payables and
similar items
payables
205.3
-
-
-
205.3
Bank
borrowings
and loan
notes
-
-
-
-
--
Derivative
financial
instruments
1.4
0.6
-
-
2.0
Lease
liabilities
5.5
4.7
8.7
3.2
22.1
Total
290.0
6.8
350.9
4.1
651.8
Total^
212.2
5.3
8.7
3.2
229.4
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 2023 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.
As at 31 March 2023
All figures in £ million
Sterling
US dollar
Other
1% decrease in
interest rates
10% weakening
in Sterling
Profit before
tax
1.6
0.4
(0.1)
Equity1
(0.1)
-
-
Profit before
tax
-
0.1
-
Equity
-
0.1
0.5
StRAtEGiC REpORt
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FinAnCiAl StAtEmEntS
Financial Statements
203
Notes to the Consolidated Financial Statements
All figures in £ million
Sterling
US dollar
Other
1% increase in
interest rates
10% strengthening
in Sterling
Profit before
tax
(1.6)
(0.4)
0.1
Equity*
0.1
-
-
Profit before
tax
-
(0.1)
-
Equity
-
(0.3)
(0.4)
* 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 2022
All figures in £ million
Sterling
US dollar
Other
All figures in £ million
Sterling
US dollar
Other
1% decrease in
interest rates
Profit before
tax
(2.1)
(0.1)
(0.2)
Equity*
-
-
-
10% weakening
in Sterling
Profit before
tax
-
-
-
Equity
-
2.6
2.4
1% increase in
interest rates
10% strengthening
in Sterling
Profit before
tax
2.1
0.1
0.2
Equity*
-
-
-
Profit before
tax
-
-
-
Equity
-
(2.2)
(1.9)
* 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 2023, 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 2023, 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.
28. Post-retirement benefits
Defined contribution plans
The Group operates a number of defined contribution pension arrangements, the largest of which is in the UK and provided by the Mercer
Master Trust. 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. The expense incurred during the year was £55.2m (FY22: £49.4m). Prepaid contributions are recognised
as an asset to the extent that a cash refund or a reduction in the future payments is available.
Defined benefit pension plan
In the UK the Group operates the QinetiQ Pension Scheme (‘the Scheme’) for approximately one fifth of its UK employees. The Scheme closed
to future accrual on 31 October 2013 and there is no on-going service cost. 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 with the
Board of Trustees with consultation with the Company as needed. The Board of Trustees must be composed of representatives of the
Company and plan participants in accordance with the Scheme’s rules.
202
QinetiQ Group plc
Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
203
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
204
Notes to the Consolidated Financial Statements
For the year ended 31 March
28. Post-retirement benefits (continued)
The asset recognised in the balance sheet in respect of the defined benefit pension plan 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. Future cash flows of the Scheme which are subject to inflation are calculated using a CPI
inflation assumption for the majority of the cash flows, with a small proportion of cash flows linked to RPI. IAS 19 requires the inflation
assumptions to be market-based assumptions, as opposed to being based on economic forecasts.
The present value of the defined benefit obligation is determined by discounting the estimated, inflated future cash outflows using interest
rates of high quality corporate bonds and that have terms to maturity approximating to the terms of the related pension obligation.
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 2024 is £3.4m.
Triennial funding valuation
The most recent completed full actuarial valuation of the Scheme was undertaken as at 30 June 2020 and resulted in an actuarially assessed
surplus of £176.5m (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
2023. The agreed recovery plan requires £2.8m per annum (at 2021 prices) distributions to the Scheme until 31 March 2032, indexed by
reference to CPI. Such distributions are from the Group’s Pension Funding Limited Partnership, see below.
QinetiQ’s Pension Funding Partnership (PFP) structure
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 effected 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 (‘PPS’). The
PPS scheme is always fully funded and has a very small surplus at year end. QinetiQ also offers employees access to a Group Self Invested
Personal Pension Plan, but no Company contributions are paid to this arrangement.
Defined benefit pension plan (‘Scheme’) net pension asset
The Scheme is in a net asset position with the market value of assets in excess of the present value of Scheme liabilities. These have the
values set out below as at 31 March of each year end.
All figures in £ million
Total market value of assets – see table below for analysis by category of asset
Present value of Scheme liabilities
Net pension asset before deferred tax
Deferred tax liability
Net pension asset after deferred tax
31 March
2023
1,355.2
(1,235.4)
119.8
(35.4)
84.4
31 March
2022
2,065.7
(1,703.5)
362.2
(96.4)
265.8
The balance sheet net pension asset is a snapshot view which can be significantly influenced by short-term market factors. The calculation
of the net asset depends on factors which are beyond the control of the Group – principally the value of the various categories of assets in
which the Scheme has invested and long-term interest rates and inflation rates used to value the Scheme’s liabilities. This is particularly
pertinent at current times whilst markets are highly volatile. Sensitivities and risks are described on page 207.
The key driver for the decrease in the net pension asset since the March 2022 year end was the turmoil in financial markets following the
Government’s ‘mini-budget’ in September 2022, particularly a sharp increase in gilt yields (and reduced gilt prices). Prior to the ‘mini-budget’
the Scheme was 100% hedged on both interest rate and inflation risk, and significant levels of collateral were required to maintain such
hedging levels. The spike in gilt yields in October 2022 eroded the collateral required to be held in the LDI portfolio to such an extent that the
hedges needed to be reduced to a lower level, covering approximately 65% of the interest rate risk and 80% of the inflation rate risk. Subsequent
falls in gilt yields meant that, as interest rate risk was then 35% unhedged, the Scheme suffered a loss in value.
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
205
Notes to the Consolidated Financial Statements
This reduced level of hedging was maintained through to 31 March 2023, as measured on the Trustees’ gilt-funded basis. Over the course of
the year, the fall in value of assets across the whole investment portfolio (primarily LDI-related collateral) was in excess of the reduction in
Scheme liabilities (which also fell substantially, primarily due to an increase in the discount rate).
Total expense recognised in the income statement
All figures in £ million
Net finance income
Past service cost
Administrative expenses
Total net income recognised in the income statement (gross of deferred tax)
Movement in the net pension asset
The movement in the net pension asset (before deferred tax) is set out below:
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
FY23
9.9
-
(1.4)
8.5
FY22
4.5
(2.4)
(1.1)
1.0
FY23
362.2
9.9
(253.9)
(1.4)
-
3.0
119.8
FY22
214.3
4.5
144.0
(1.1)
(2.4)
2.9
362.2
Fair value of Scheme assets by type of asset
The fair value of the Scheme’s assets, which are not intended to be realised in the short term and may be subject to significant changes
before they are realised, were:
All figures in £ million
Equities
Liability Driven Investment
Asset backed security investments1
Alternative bonds2
Corporate bonds3
Property funds
Cash and cash equivalents
Derivatives
Insurance buy-in policies
Total market value of assets
31 March 2023
31 March 2022
Not quoted in
an active
market
32.9
-
-
256.4
117.6
-
17.2
6.7
515.5
946.3
Quoted
177.4
227.2
4.3
-
-
-
-
-
-
408.9
Total
210.3
227.2
4.3
256.4
117.6
-
17.2
6.7
515.5
1,355.2
Not quoted in
an active
market
44.7
-
-
208.6
97.4
29.5
78.5
(8.5)
645.9
1,096.1
Quoted
176.1
291.8
501.7
-
-
-
-
-
-
969.6
Total
220.8
291.8
501.7
208.6
97.4
29.5
78.5
(8.5)
645.9
2,065.7
1 Asset backed securities are used as collateral for the LDI. As gilt yields spiked during the year, the LDI drew down on significant levels of security, causing the year on
year drop shown above.
2 Primarily private market debt investments.
3 Unlisted corporate bonds with commercial property held as security.
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.
The insurance policies obtained by the pension scheme can only be used to pay or fund employee benefits under the Company’s defined
benefit plan. They are not available to the Company’s own creditors and cannot be paid to another entity. These are the requirements of IAS
19 paragraph 7 and hence our determination is that the insurance policies are qualifying insurance policies and require classification as a plan
asset. The policies were issued by insurers that are not a related party.
Per the Scheme rules the Company has an unconditional right to a refund of any surplus, assuming gradual settlement of all liabilities over
time. Such surplus 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.
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205
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
206
Notes to the Consolidated Financial Statements
For the year ended 31 March
28. Post-retirement benefits (continued)
Changes to the fair value of Scheme assets
All figures in £ million
Opening fair value of Scheme assets
Interest income on Scheme assets
Re-measurement loss on Scheme assets
Contributions by the employer
Net benefits paid out and transfers
Administrative expenses
Closing fair value of Scheme assets
FY23
2,065.7
55.8
(716.3)
3.0
(51.6)
(1.4)
1,355.2
FY22
2,071.8
43.0
(5.9)
2.9
(45.0)
(1.1)
2,065.7
Changes to the present value of Scheme liabilities
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
Opening present value of Scheme liabilities
Interest cost
Actuarial gain/(loss) on Scheme liabilities based on:
Change in demographic assumptions
Change in financial assumptions
Experience (losses)/gains
Past service cost
Net benefits paid out and transfers
Closing present value of Scheme liabilities
FY23
FY22
(1,703.5)
(45.9)
(1,857.5)
(38.5)
45.8
588.0
(171.4)
-
51.6
(1,235.4)
5.9
107.5
36.5
(2.4)
45.0
(1,703.5)
The net actuarial gains are primarily due to a decrease in value of the financial assumption for the discount rate (see Assumptions section
below).
Assumptions
The major assumptions used in the IAS 19 valuation of the Scheme’s liabilities were:
All figures in £ million
Discount rate applied to Scheme liabilities
CPI inflation assumption
Net rate (discount rate less inflation)
Assumed life expectancies in years:
At 60 for males currently aged 40
At 60 for females currently aged 40
At 60 for males currently aged 60
At 60 for females currently aged 60
At 65 for males currently aged 65
At 65 for females currently aged 65
31 March 2023
31 March 2022
Insured
members
4.80%
2.55%
2.25%
Uninsured
members
4.65%
2.70%
1.95%
Insured
members
2.80%
3.00%
(0.20%)
Uninsured
members
2.70%
2.90%
(0.20%)
n/a
n/a
n/a
n/a
21.6
23.3
27.9
30.3
26.2
28.2
n/a
n/a
n/a
n/a
n/a
n/a
22.0
23.7
28.4
30.7
26.7
28.6
n/a
n/a
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 reference to external market indicators. The discount rate is based on observable
yields on corporate bonds but there is no direct, observable market rate for CPI. A ‘market approach’ to deriving CPI involves adjusting a
market-based RPI rate downward by an ‘inflation risk premium’ and an RPI-CPI adjustment factor (determined from relevant market yield
curves). This market-based approach is required by IAS 19 and results in a CPI inflation rate significantly in excess of the Bank of England
long term target and also in excess of a consensus view of CPI (based on surveys of economists). However, adopting an economic consensus
approach to setting CPI inflation is not acceptable under accounting standards.
The mortality assumptions for both the current and prior year were based on the S3 Normal Lives base tables, with various scaling factors
based on sex and status. For the 31 March 2023 assumptions each of the various scaling factors were 8ppts higher than as at 31 March
2022, reflecting the negative impact of COVID-19 on future life expectancy. Allowance, in both years, was made for improvements in mortality
in line with CMI_2021 Core Projections and a long-term rate of improvement of 1.25% per annum.
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Notes to the Consolidated Financial Statements
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.
The sensitivity of the Scheme liabilities to each of the key assumptions is shown in the following table.
Sensitivity analysis of the principal assumptions
Assumption
Indicative impact on Scheme assets
Indicative impact on Scheme liabilities
Indicative impact on net pension asset
Increase discount rate by 0.1%
Increase rate of inflation by 0.1%
Increase life expectancy by one year
Decrease by £7.0m
Increase by £5.5m
Increase by £14.3m
Decrease by £21.7m
Increase by £20.6m
Increase by £34.0m
Decrease by £14.7m
Increase by £15.1m
Decrease by £19.7m
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 2022 this portfolio hedged against approximately 95% of the interest
rate risk and also 95% of the inflation rate risk, as measured on the Trustees’ gilt-funded basis. During the current financial year, due to the
increased volatility in gilt yields and reflecting increased liquidity requirements for Schemes running LDI portfolios, the hedges have been
amended to cover approximately 65% of the interest rate risk and 80% of the inflation rate risk as at 31 March 2023, 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.
In addition to the sensitivity of the liability side of the net pension asset (which will impact the value of the net pension asset) the net pension
asset is also exposed to significant variation due to changes in the fair value of Scheme assets. A specific sensitivity on assets has not been
included in the above table but any change in valuation of assets flows straight through to the value of the net pension asset e.g. if equities
fall by £10m then the net pension asset falls by £10m. The values of unquoted assets assume that an available buyer is willing to purchase
those assets at that value. For the Group’s portfolio of assets, the unquoted alternative bonds of £256.4m; the unquoted corporate bonds of
£117.6m and the unquoted equities of £32.9m are the assets with most uncertainty as to valuation as at 31 March 2023.
The accounting assumptions noted 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.
Risks
Through its defined benefit pension plan, the Group is exposed to a number of risks, the most significant of which are detailed below:
Volatility in market conditions Results under IAS 19 can change dramatically depending on market conditions. The present value of Scheme liabilities
is linked to yields on corporate bonds, while many of the assets of the Scheme are invested in various forms of assets
subject to fluctuating valuations. 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 present value of Scheme liabilities 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 calculation of the liabilities.
Choice of accounting
assumptions
206
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207
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
208
Notes to the Consolidated Financial Statements
For the year ended 31 March
29. Share capital and other reserves
Shares allotted, called up and fully paid:
As at 1 April 2022
Issue of new shares
At 31 March 2023
As at 1 April 2021
Issue of new shares
At 31 March 2022
Ordinary shares
of 1p each (equity)
Special Share
of £1 (non-equity)
£
Number
5,787,571 578,757,121
-
5,787,571 578,757,121
-
£
1
-
1
Number
£
1 5,787,572
-
-
1 5,787,572
Ordinary shares
of 1p each (equity)
Special Share
of £1 (non-equity)
£
Number
5,742,571 574,257,121
4,500,000
5,787,571 578,757,121
45,000
£
1
-
1
Number
£
1 5,742,572
45,000
-
1 5,787,572
Total
Number
578,757,122
-
578,757,122
Total
Number
574,257,122
4,500,000
578,757,122
Except as noted below all shares in issue at 31 March 2023 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 31 for further details).
The Special Share may only be issued to, held by and transferred to HM Government (or as it directs). At any time the Special Shareholder
may require QinetiQ to redeem the Special Share at par. If QinetiQ is wound up the Special Shareholder will be entitled to be repaid the capital
paid up on the Special Share before other shareholders receive any payment. The Special Shareholder has no other right to share in the capital
or profits of QinetiQ and 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 hedging 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.
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Notes to the Consolidated Financial Statements
30. Share-based payments
The Group operates a number of share-based payment plans for employees. The total share-based payment expense in the year was £7.9m,
all relating to equity-settled schemes (FY22: £7.8m, all relating to equity-settled schemes). The share-based payment charged to equity is
£5.7m consisting of the £7.9m charge to the income statement offset by a £0.4m charge to equity in respect of dividends accruing on
unvested awards and £1.8m of cash payments relating to the Bonus Banking Plan.
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
FY23
Number of
matching
shares
761,828
267,877
(220,369)
(63,350)
745,986
FY22
Number of
matching
shares
734,402
313,509
(247,433)
(38,650)
761,828
SIP matching shares are equity-settled awards; those outstanding at 31 March 2023 had an average remaining life of 1.5 years (2022: 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 (2022: nil).
Bonus Banking Plan (BBP)
During the year the Group granted BBP awards to certain senior executives in the UK and US.
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
FY23
FY22
Number of
Number of
awards
awards
1,942,855
1,122,439
529,683
602,408
(687,079) (1,227,020)
(145,352)
(123,079)
892,416 1,122,439
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.
At 31 March 2023 the awards had an average remaining life of 1.7 years (2022: 1.6 years). There is no exercise price for these awards.
The fair value of the awards at 31 March 2023 was £3.34 (2022: £3.02) being the Group’s 30 day average on 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
Exercised during the year
Provisionally awarded during the year
Outstanding at end of the year
FY23
Number of
awards
6,876,423
26,046
(599,763)
FY22
Number of
awards
6,761,362
126,565
(334,922)
(2,368,264) (1,460,253)
3,034,279
1,783,671
6,968,721 6,876,423
1,783,671
3,034,279
3,934,442
5,092,752
6,968,721 6,876,423
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 2023 are 4,208,899 shares (2022: 6,816,291 shares).
Provisional awards outstanding
Awards outstanding
Outstanding at end of the year
208
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209
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
210
Notes to the Consolidated Financial Statements
For the year ended 31 March
30. Share-based payments (continued)
The number of awards is dependent on the Group’s performance during the year (specifically with respect to the Group 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 2023 the awards had an average remaining life of 2.4 years (2022: 1.8 years). There is no exercise price for these awards. The
fair value of the DSP’s provisionally awarded at 31 March 2023 was £3.34 being the Group’s 30 day average. The weighted average share
price at date of exercise was £3.64 (2022: £3.50). Of the awards outstanding at the end of the year nil were exercisable.
Restricted share plan (RSP)
During the year the Group granted RSP awards to certain senior executives in the UK and US.
Outstanding at start of the year
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at end of the year
FY23
Number of
awards
560,002
608,158
(221,998)
(4,814)
941,348
FY22
Number of
awards
148,857
495,685
(68,217)
(16,323)
560,002
At 31 March 2023 the awards had an average remaining life of 1.4 years (2022: 1.9 years). There is no exercise price for these awards. The
weighted average fair value of grants made during the year was £3.41 (2022: £2.75). The weighted average share price at date of exercise
was £3.17 (2022: £3.06). Of the options outstanding at the end of the year nil were exercisable (2022: nil).
Value Creation Plan (VCP)
The Group has granted awards under a Value Creation Plan to certain senior executives in the US.
Outstanding at start of the year
Forfeited during the year
Outstanding at end of the year
FY23
Number of
awards
206,675
(31,576)
175,099
FY22
Number of
awards
335,848
(129,173)
206,675
At 31 March 2023 the awards had an average remaining life of 0.2 years (2022: 1.2 years). There is no exercise price for these awards. The
weighted average fair value of grants made during the year was £nil (2022: nil). Of the options outstanding at the end of the year nil were
exercisable.
High Performance Share Award (HPSA)
In a prior year, as one of eight initial measures in response to the COVID-19 pandemic, the senior leaders agreed to, on average, a temporary
base salary reduction of 15%. To both recognise the senior leaders for their sacrifice and to incentivise them to lead the Group through the
crisis as quickly and effectively as possible, the Group adopted a new award called High Performance Share Award (HPSA). The HPSA was
awarded in November 2020 as a ‘Thank Q’ to senior leaders for their sacrifice and enormous efforts to lead their teams out of unprecedented
crisis. The fair value of QinetiQ shares on grant date was £2.70 and the awards vest in June 2023. At 31 March 2023 the awards had an
average remaining life of 0.3 years (2022: 1.3 years). Of the awards outstanding at the end of the year nil were exercisable.
Outstanding at start of the year
Lapsed during the year
Outstanding at end of the year
FY23
Number of
awards
1,336,372
(13,041)
FY22
Number of
awards
1,336,372
-
1,323,331 1,336,372
Valuation of share-based awards
Share-based awards that vest based on non-market performance conditions have been valued at the share price at grant date and are
equity-settled.
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211
Notes to the Consolidated Financial Statements
31. 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 29. Transactions between the Group
and the MOD are disclosed as follows:
Freehold land and buildings and surplus properties
Under the terms of the Group’s acquisition of part of the business and certain assets of DERA from the MOD on 1 July 2001, the MOD
retained certain rights in respect of the freehold land and buildings transferred.
Restrictions on transfer of title
The title deeds of those properties with strategic assets (see below) include a clause that prevents their transfer without the approval of the
MOD. The MOD also has the right to purchase any strategic assets in certain circumstances.
MOD’s generic compliance regime
Adherence to the generic compliance system is monitored by the Risk & Security Committee. Refer to the Committee’s report within the
Corporate Governance Statement on page 129.
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 2023 was £3.0m (2022: £3.9m).
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% (FY22: 62%) of the Group’s revenue comes
directly from contracts with the MOD.
32. Contingent liabilities and assets
Subsidiary undertakings within the Group have given unsecured guarantees of £33.6m at 31 March 2023 (2022: £37.2m) 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.
33. Capital commitments
The Group had the following capital commitments for which no provision has been made:
All figures in £ million
Total contracted
31 March
2023
31 March
2022
43.4
34.7
Capital commitments at 31 March 2023 include £21.2m (2022: £24.5m) 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.
34. Related parties
During the year ended 31 March 2023 there were sales to associates and joint ventures of £0.4m (FY22: £5.2m). At the year-end there were
outstanding receivables from associates and joint ventures of £0.5m (FY22: £1.0m).
QinetiQ Group plc
Annual Report and Accounts 2023
211
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
212
Notes to the Consolidated Financial Statements
For the year ended 31 March
35. 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 2023 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.
Country of incorporation
Registered office
Name of company
Subsidiaries1,6
Aerospace Training Services Pty Ltd.
Air Affairs (Australia) Pty Ltd
Air Affairs Aviation Pty Ltd.
Air Target Services Pty Ltd.
Astra Aerospace Pty Ltd.
Avantus Federal LLC
Avantus Federal Services LLC
Avantus National Security Solutions LLC
BJ Trustee Limited
cueSim Limited
Data Works LLC
E3 Federal Solutions PR Inc.
Erial LLC
Far Ridgeline Engagements LLC
Foster-Miller Canada Limited
Foster-Miller Inc2
Graphics Research Corporation Limited
Gyldan 11 Limited
Inzpire Group Limited
Inzpire Holdings Limited
Inzpire Limited
Hirose Holdings Pty Ltd.
Leading Technology Limited
Lucid Perspectives LLC
MTEQ Precision Machining LLC
Metrix UK Limited
Naimuri Limited
Occam’s Razor Technologies LLC
Operational Intelligence LLC
Precis (2187) Limited
Precis (2188) Limited
Qinetic Limited
QinetiQ Aerostructures Pty Ltd
QinetiQ Australia Pty Ltd
QinetiQ Consulting Pty Ltd
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 Limited
QinetiQ Overseas Trading Limited
QinetiQ Pension Scheme Trustee Limited
QinetiQ PFP Limited Partnership4
QinetiQ Philippines Company, Inc
Australia
Australia
Australia
Australia
Australia
USA
USA
USA
England & Wales
England & Wales
USA
USA
USA
USA
Canada
USA
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Australia
England & Wales
USA
USA
England & Wales
England & Wales
USA
USA
England & Wales
England & Wales
England & Wales
Australia
Australia
Australia
England & Wales
Germany
Scotland
Canada
England & Wales
England & Wales
USA
Guernsey
England & Wales
Australia
England & Wales
England & Wales
England & Wales
Scotland
Philippines
QinetiQ Pty Ltd
QinetiQ Services Holdings Pty Ltd
Australia
Australia
212
QinetiQ Group plc
Annual Report and Accounts 2023
Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia
Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia
Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia
Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia
Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
Farnborough3
Farnborough3
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
318 Roxton Drive, Waterloo, Ontario, N2T 1R6, Canada
350 2nd Avenue, Waltham, Massachusetts, MA 02451, USA
Farnborough3
Farnborough3
Farnborough3
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
Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia
Farnborough3
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
10440 Furnace Road, Suite 204, Lorton, VA 22079,, USA
Farnborough3
Farnborough3
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
Farnborough3
Farnborough3
Farnborough3
Level 3, 210 Kings Way, South Melbourne, VIC 3205, Australia
Level 3, 210 Kings Way, South Melbourne, VIC 3205, Australia
Level 3, 12 Brindabella Court, Brindabella Business Park, Majura ACT
2609, Australia.
Farnborough3
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
Farnborough3
Farnborough3
10440 Furnace Road, Suite 204, Lorton, VA 22079,, USA
Mill Court, La Charroterie, St Peter Port, GY1 4ET Guernsey
Farnborough3
Petrie House, level 6, 80 Petrie Terrace, Brisbane QLD 400, Australia
Farnborough3
Farnborough3
Farnborough3
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
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213
Notes to the Consolidated Financial Statements
Name of company
QinetiQ Solutions Sdn. Bhd.
Country of incorporation
Malaysia
QinetiQ Special Projects Inc
QinetiQ Sweden AB
QinetiQ Target Services Limited
QinetiQ Target Systems Limited
QinetiQ Training and Simulation Limited
QinetiQ US Holdings, Inc.
RubiKon Group Pty Limited
Sensoptics Limited
Sentinel OpCo LLC
TSG International LLC
USA
Sweden
England & Wales
England & Wales
England & Wales
USA
Australia
England & Wales
USA
USA
Registered office
Suite 6.01, 6th Floor, Plaza See Hoy Chan, Jalan Raja Chulan 50200,
Kuala Lumpur, W.P. Kuala Lumpur, Malaysia
5885 Trinity Parkway, Suite 130, Centreville, Virginia 20120-1969, USA
Box 1541, 581 15, Linkoping, Stockholm, Sweden
Farnborough3
Farnborough3
Farnborough3
5885 Trinity Parkway, Suite 130, Centreville, Virginia 20120-1969, USA
Level 33, 101 Collins Street, Melbourne, Victoria 3000, Australia
Farnborough3
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
350 2nd Avenue, Waltham, Massachusetts 02451, USA
Joint ventures6
Houbara Defence & Security LLC5,6
United Arab Emirates
QinetiQ Dar Massader QDM Limited5,6
Saudi Arabia
Avantus CTA, LLC
Federal Mission Solutions, LLC
Hive Fed Solutions LLC
USA
USA
USA
Unit 3, Zone 4, Tawazun Industrial Park, Abu Dhabi, United Arab
Emirates, PO Box 128220
Al Nakhla Tower, 3026-Prince Saud Bin Mohamed Bin Muqin Road, PO
Box 2985, Riyadh 13321, Kingdom of Saudi Arabia
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
8281 Greensboro Drive, Ste 400, McLean, VA 22102, USA
1 As at 31 March 2023 the Group owned 100% of the ordinary shares of all subsidiary undertakings.
2 The class of shares is ‘common share’.
3 Cody Technology Park, Ively Road, Farnborough, Hampshire, GU14 OLX.
4 Limited partnership. The partners are all wholly-owned Group companies.
5 As at 31 March 2023 the Group owned 49% of Houbara Defence & Security LLC and 49% of QinetiQ Dar Massader QDM Limited.
6 The financial year end of each undertaking is 31 March other than Houbara Defence & Security LLC (31 December) and QinetiQ Dar Massader QDM Limited
(31 December).
36. Basis of preparation and 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 England, 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
Specific adjusting items include the following:
Item
Amortisation of intangible assets arising from acquisitions
Pension net finance income
Gains/losses on disposal of property and investments
Transaction & integration costs in respect of business acquisitions and disposals
Impairment of property and goodwill
Digital investment
Costs of group-wide restructuring programmes
The tax impact of the above
Other significant non-recurring tax and RDEC 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
P
P
P
P
P
The financial impact of each item is reported in note 4 to these financial statements.
These ‘specific adjusting items’ are of a ‘non-operational’ nature and do not include all significant, irregular items that are of an operational
nature, for example contract risk provisions and gains/losses on disposal of plant and equipment.
QinetiQ Group plc
Annual Report and Accounts 2023
213
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
214
Notes to the Consolidated Financial Statements
For the year ended 31 March
36. Basis of preparation and significant accounting policies (continued)
Basis of preparation
The Group’s financial statements, approved by the Directors, have been prepared on a going concern basis as discussed in the Strategic
Report on page 85 in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006
as applicable to companies reporting under those standards. The Company has elected to prepare its parent company financial statements
in accordance with UK GAAP (FRS 101); these are presented on page 226. The financial statements have been prepared under the historical
cost convention, as modified by the revaluation of 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 2023.
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 within the terms of a Special Security Arrangement (‘SSA’). Details of the SSA and
QinetiQ’s management of US subsidiaries are set out in the Corporate Governance section of this Annual Report (on page 103). IFRS 10 is
the accounting standard applicable in respect of consolidation of entities. This does not specifically deal with SSA’s. However, having
considered the terms of the SSA, 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. The impact of this specific judgement is full
consolidation as opposed to treatment as a 100% associated undertaking.
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.
Consideration of climate change
In preparing the financial statements, the Board have considered the impact to the organisation and its activities of climate change, particularly
those risks highlighted on page 80 in line with the recommendations by the Task Force for Climate-related Disclosures (TCFD). The Board
recognises its responsibilities for oversight of climate-related risks and opportunities. The QinetiQ Leadership Team support the Board through
the implementation of a strategic led approach to monitor, assess and address climate transition risks and opportunities.
Specific aspects of the financial statements that could potentially be impacted by climate change are the carrying value and useful economic
lives of tangible assets and goodwill, future capability development and the financial performance of customer contracts. Whilst the Group
will likely be impacted by climate change in the future, the impacts on the financial statements as at 31 March 2023 are not considered to be
material.
Recent accounting developments
Developments adopted by the Group for the year ended 31 March 2023 with no material impact on the Group’s financial statements
The following standards, interpretations and amendments to existing standards became effective on 1 January 2022 and have not had
a material impact on the Group:
• Amendments to IFRS 3 Business Combinations, effective from 1 January 2022;
• Amendments to IAS 16 Property, Plant and Equipment – Proceeds before Intended Use effective from 1 January 2022;
• Amendments to IAS 37 Onerous Contracts – Cost of Fulfilling a Contract effective from 1 January 2022; and
• Annual Improvements to IFRS Accounting Standards 2018–2020 Cycle effective from 1 January 2022.
Developments expected in future periods of which are not expected to have a material impact on the Group’s financial statements
The following other standards, interpretations and amendments to existing standards have been issued but were not mandatory for
accounting periods beginning on 1 April 2022. These either have been, or are expected to be endorsed by the UK Endorsement Board and
are not expected to have a material impact on the Group:
IFRS 17 Insurance Contracts, effective from 1 January 2023;
•
• Amendments to IAS 1: Presentation of Financial Statements, effective from 1 January 2023;
• Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting Policies, effective from 1 January 2023;
• Amendments to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, effective from 1 January 2023;
• Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture; and
• Amendments to IAS 12: Income Taxes, effective from 1 January 2023
214
QinetiQ Group plc
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GOvERnAnCE
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Financial Statements
215
Notes to the Consolidated Financial Statements
Significant accounting policies
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 are 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. Historical evidence
and experience shows that even where a reduction has been required, that reduction has been immaterial to the Group.
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 and the price
of the contract increases by an amount of consideration that reflects the entity's stand-alone selling prices for the additional promised goods
or services, 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.
Long-term service contracts also sometimes allow for extensions to the original order. A contract extension is determined to include either
additional goods or services or no additional goods or service. If a contract extension with additional goods or services is determined to be
distinct and the price of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling prices for the
additional promised goods or services, the Group accounts for this as a separate performance obligation.
If a contract extension with additional goods or services 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 extension has on the transaction
price and the Group’s measure of progress towards complete satisfaction of the performance obligation.
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.
QinetiQ Group plc
Annual Report and Accounts 2023
215
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
216
Notes to the Consolidated Financial Statements
For the year ended 31 March
36. Basis of preparation and significant accounting policies (continued)
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
does not offer any right of return or refunds which could impact transaction price at 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.
Contract assets
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
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.
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.
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 Research and Development Expenditure Credits (RDEC) and 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.
StRAtEGiC REpORt
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Financial Statements
217
Notes to the Consolidated Financial Statements
Research and development expenditure
Research and development (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.
Borrowings and financing
The Group has a term loan and access to a revolving credit facility with its relationship banks. Borrowings are initially recognised at fair value.
Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption
amount is recognised in profit or loss over the period of the borrowings using the effective interest method.
Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The
difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration
paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs.
Borrowings are classified as non-current liabilities where the group has an unconditional right to defer settlement of the liability for at least 12
months after the reporting period.
Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or
all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. The Group pays in advance finance costs in
relation to the multi-currency facility which are recognised as a deferred finance cost asset and amortised over the period of the facility, where
it is probable that some or all of the facility will be drawn down. Costs of letters of credit are also charged to finance expense.
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.
Taxation
The income tax expense or credit for the period is the tax payable on the current period’s taxable income, based on the applicable income tax
rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax
losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting
period in the countries where the company and its subsidiaries and associates operate and generate taxable income.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to
interpretation and considers whether it is probable that a taxation authority will accept an uncertain tax treatment. The Group measures its
tax balances either based on the most likely amount or the expected value, depending on which method provides a better prediction of the
resolution of the uncertainty.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise
from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability
in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit or loss.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting
period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences
and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of
investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is
probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset where there is a legally
enforceable right to offset current tax assets and liabilities and where the deferred tax balances relate to the same taxation authority. Current
tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or
to realise the asset and settle the liability simultaneously.
Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive
income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.
Research and Development Expenditure Credits (RDEC) are now recognised within other operating income following a change in accounting
policy, see note 38.
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Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
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218
Notes to the Consolidated Financial Statements
For the year ended 31 March
36. Basis of preparation and significant accounting policies (continued)
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.
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 1 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
1–5 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
Motor vehicles
Aircraft
Computers
Office equipment
20–25 years
Shorter of useful economic life and the period of the lease
3–15 years
3–5 years
10–20 years
3–5 years
5–10 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.
Leases
Leases – as a lessor
Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term (note
26). Initial direct costs incurred in obtaining an operating leases are added to the carrying amount of the underlying asset and recognised as
expense over the lease term on the same basis as lease income. The respective leased assets are included in the balance sheet based on
their nature.
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Notes to the Consolidated Financial Statements
Leases – as a lessee
The Group leases various offices, aircraft, equipment and vehicles. Rental contracts are typically made for fixed periods of 6 months to 25
years, but may have extension options as described below.
Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-
lease components based on their relative stand-alone process. Lease terms are negotiated on an individual basis and contain a wide range
of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leases assets
that are held by the lessor. Leased assets may not be used as security for borrowing purposes.
Leases are recognised as a right-of-use asset and corresponding liability at the date at which the leased asset is available for use by the
Group.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the
following lease payments:
fixed payments (including in-substance fixed payments), less any lease incentives receivable;
•
• variable lease payments based on an index or a rate, initially measured using the index or rate as at the commencement date;
• amounts expected to be payable by the Group under residual value guarantees;
•
the exercise price of a purchase option if the Group is reasonably certain to exercise that option, and
• payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.
Lease payments to be made under reasonably certain options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If the rate cannot be readily determined, which is generally the
case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate the individual lessee would have to pay to borrow
the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security
and conditions. To determine the incremental borrowing rate, the Group:
• where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in
financing conditions since third party financing was received;
• uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by QinetiQ Plc, which does not
have recent third party financing, and
• makes adjustments specific to the lease, for example to term, country, currency and security.
The Group is not exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the
lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed
and adjusted against the right-of-use asset. Lease payments are allocated between principal and finance cost. The finance cost is charged to
profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets are measured at cost comprising the following:
the amount of the initial measurement of lease liability;
•
• any lease payments made at or before the commencement date less any lease incentives received;
• any initial direct costs, and
•
restoration costs.
Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and lease term on a straight-line basis. If the Group is
reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. The Group does
not revalue its land and buildings that are presented within property, plant and equipment and has chosen to do the same for right-of-use
buildings by the Group. Payments associated with short-term leases of offices, equipment and vehicles and all leases of low-value assets are
recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-
value assets comprise lease assets under £5,000.
Lease extension and termination options
Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise
operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held
are exercisable only by the Group and not by the respective lessor.
Judgements in determining the lease term
In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension
option or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the
lease is reasonably certain to be extended (or not terminated).
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Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
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220
Notes to the Consolidated Financial Statements
For the year ended 31 March
36. Basis of preparation and significant accounting policies (continued)
For leases of offices and equipment, the following factors are normally the most relevant:
•
•
if there are significant penalties to terminate (or extend), the group is typically reasonably certain to end (or not to terminate);
if any leasehold improvements are expected to have a significant remaining value, the Group is typically reasonably certain to extend (or
not terminate);
• Otherwise, the Group considers other factors including historical lease durations and the costs and business disruptions required to
replace the leased asset.
Most extension options in office and vehicles leases have not been included in the lease liability, because the Group could replace the assets
without significant cost or business disruption.
As at 31 March 2023 no (undiscounted) potential future cash outflows have been included in the lease liability for extension or termination.
The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise)
it. The assessment of reasonable certainty is only revised if a significant event of significant change in circumstance occurs, which affects
this assessment, and that is within the control of the lessee. During the current financial year, the financial effect of revising lease terms to
reflect the effect of exercising extension or termination options was nil (FY22: nil) in recognised lease liabilities and right-of-use assets.
Investments in debt and equity securities
Investments held by the Group are classified as either a current asset or as a non-current asset. These are investments in debt and equity
instruments that are classified as at fair value through other comprehensive income. When these investments are derecognised, the
cumulative gain or loss previously recognised directly in equity is recognised in the income statement.
The fair value of quoted financial instruments is their bid price at the balance sheet date. The fair value of unquoted equity investments is
based on the price of the most recent investment by the Group or a third party, if available, or derived from the present value of forecast future
cash flows.
Inventories
Inventory and work-in-progress are stated at the lower of cost and net realisable value. Work-in-progress and manufactured finished goods
are valued at production cost. Production cost includes direct production costs and an appropriate proportion of production overheads. A
provision is established when the net realisable value of any inventory item is lower than its cost. 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 measured at amortised cost less any impairment losses. 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.
Impairment of trade and other receivables
The Group applies the simplified approach when using the expected credit loss (ECL) impairment model for trade and other 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 and other 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.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and short-term, highly liquid investments that are readily convertible into a known amount
of cash and which are subject to an insignificant risk of changes in value. The Group holds various short-maturity money market funds (see
note 24) across numerous financial institutions which meet the IAS 7 criteria to be classified as cash equivalents. In the cash flow statement
overdraft balances are included in cash and equivalents. Cash and cash equivalents includes an element that is restricted in use (note 24).
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.
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Notes to the Consolidated Financial Statements
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. Where an exposure is highly likely to be covered by insurance an offsetting receivable is recorded.
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 at the trade date. 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 and liabilities
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 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.
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
The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group
uses foreign exchange contracts and interest rate swap contracts to hedge these exposures. The use of financial derivatives is governed by
the Group’s Treasury Policies as approved by the Board of Directors, which provides written principles on the use of derivatives. The Group
does not use derivative instruments for speculative purposes.
Certain derivative instruments do not qualify for hedge accounting. These are categorised as “fair value through profit or loss” and are stated
at fair value, with any resultant gain or loss recognised in the income statement.
The Group designates certain hedging instruments in respect of foreign currency risk as cash flow hedges. At the inception of the hedge
relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management
objectives and strategy for undertaking various hedging transactions. The Group also documents, both at hedge inception and on an ongoing
basis, whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash
flows of the hedged item.
For the Group’s cash flow hedges of highly probable forecast transactions in foreign currencies, the hedge ratio is 100%, subject to a £100k
de Minimis threshold. If the underlying exposure changes over time, either due to commercial factors or timing differences, the hedging
instruments will be rebalanced to ensure that the hedge ratio of 100% is maintained.
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.
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Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
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222
Notes to the Consolidated Financial Statements
For the year ended 31 March
36. Basis of preparation and significant accounting policies (continued)
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 charges for
equity 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.
Non-controlling interests
The Group recognises non-controlling interest in an acquired entity either at fair value or at the non-controlling interest’s proportionate share
of the acquired entity’s net identifiable assets. This decision is made on an acquisition-by-acquisition basis. For non-controlling interests that
the Group holds, the Group elected to recognise the non-controlling interests at its proportionate share of the acquired net identifiable assets.
37. Critical accounting estimates and judgments in applying accounting policies
Critical accounting estimates
The following commentary is intended to highlight key sources of estimation uncertainty that have a significant risk of resulting in a material
adjustment to the financial statements in the next financial year.
Estimated goodwill impairment
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 14.
Estimation of the Group’s defined benefit pension net surplus
The Group’s defined benefit pension obligations (and hence the net surplus) 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 28.
In addition to the sensitivity of the liability side of the net pension surplus (which will impact the value of the net pension surplus) the net
pension surplus is also exposed to significant variation due to changes in the fair value of Scheme assets. A specific sensitivity on assets has
not been included in note 28 but any change in valuation of assets flows straight through to the value of the net pension surplus e.g. if equities
fall by £10m then the net pension surplus falls by £10m. The values of unquoted assets assume that an available buyer is willing to purchase
those assets at that value. For the Group’s portfolio of assets, the unquoted alternative bonds of £256.4m; the unquoted corporate bonds of
£117.6m and the unquoted equities of £32.9m are the assets with most uncertainty as to valuation as at 31 March 2023.
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Notes to the Consolidated Financial Statements
Estimated value of tax assets
The Group has significant levels of unused US tax losses and US carried forward interest expenses as set out in note 18 giving rise to potential
deferred tax assets. When estimating the appropriate amount that should be recognised, management consider sources of taxable profits
including the reversal of deferred tax liabilities and forecast future profits. This estimate is sensitive to similar factors as goodwill, as set out
in note 14 and further described in note 18. Scenarios are modelled to consider sensitivity to these factors (including annual profit levels and
growth expectations). Based on these scenarios, it is possible that revisions of these forecasts over the next 12 months could result in £4.1m
to £8.6m of the recognised US deferred tax assets not being recoverable.
Estimates of costs to complete on long-term contracts
The Group has a large number of contracts which span multiple years and are accounted for on a percentage of completion basis in
accordance with IFRS 15. Long-term contract accounting requires a number of estimates to be made, particularly in calculating the forecast
costs to complete the contract. These forecast costs will be impacted by numerous risks that could crystallise in the future (with a range of
cost outcomes), particularly on contracts of a developmental nature. Across the Group’s portfolio of long-term contracts there is a risk that
the actual out-turn of these contracts could be materially different than assumed in the year end contract forecasts.
For fixed price contracts the impact of inflation would reduce the contract profitability. As an example, an increase in cost inflation of 1% in
one of the Group’s most significant contracts, would increase costs and reduce profit by approximately £1m per annum. However in many
cases the contracts include inflation uplift clauses, such that inflation of costs would create additional contract value and revenue, thus
resulting in increased profit.
Estimated values of acquired intangibles on acquisitions
During the year the Group completed two strategic acquisitions. Intangible assets relating to customer relationships, existing technology and
trade names were recognised as fair value adjustments to the opening balance sheets. The most material of these is the customer
relationships intangible within Avantus which was recognised at £197.5m, per note 15.
Customer relationships have been valued based on an income approach using an excess earnings method. The key assumptions are the
revenue and profit projections, customer contract retention/attrition assumptions, discount rates and contributory asset charges. Applying
different assumptions could result in a materially different customer relationship intangible and a corresponding increase or decrease in the
value of Goodwill recognised.
Critical accounting judgements
Specific, material judgements made by the Directors in applying the Group’s accounting policies are set out below:
Basis of consolidation
The Group comprises certain entities that are operated within the terms of a Special Security Arrangement (‘SSA’). Details of the SSA and
QinetiQ’s management of US subsidiaries are set out in the Corporate Governance section of this Annual Report. IFRS 10 is the accounting
standard applicable in respect of consolidation of entities.
This does not specifically deal with SSA’s. However, having considered the terms of the SSA, 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. The impact of this specific judgement is full consolidation as opposed to treatment as a 100% associated undertaking. Treatment
as a 100% associated undertaking would reduce Group revenue by a material amount (~£300m per annum) but would have no impact on
reported profit, which would include an equivalent amount of profit reported within Other Income as ‘Share of profits of joint ventures and
associates’.
38. Changes in accounting policies
This note explains the impact of a change in accounting policy that is effective for the first time in the Group’s financial statements for the
year ended 31 March 2023:
Accounting for Research and Development Expenditure Credits (‘RDEC’)
Following a routine Financial Reporting Council (“FRC”) review of the consolidated financial statements for the year ended 31 March 2022,
the Group has changed its accounting policy relating to RDEC. The Group’s accounting policy has historically been to account for RDEC under
IAS12 Income Tax, as a credit within the tax charge. Following engagement with the FRC, and a review of common market practice, the Group
has now decided to account for RDEC as other operating income under IAS20 Government Grants.
The impact of this change is to move £6.2m of RDEC income for the year ending 31 March 2022 from the tax charge into other income. The
impact on the balance sheet and related notes is to reclassify a £12.0m receivable from current tax payable to other receivables as at 31
March 2022 (£11.8m as at 31 March 2021) as well as £12.0m (£12.6m as at 31 March 2021) from current tax to accrued expenses and
other payables. There is an impact on net assets of £2.0m as at both 31 March 2022 and 31 March 2021 due to the deferred income impact
of the updated income recognition under IAS20. There is nil impact on profit after tax for FY22. The following tables show the adjustments
recognised for each individual line item as at 31 March 2023, 31 March 2022 and 1 April 2021.
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Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
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224
Notes to the Consolidated Financial Statements
For the year ended 31 March
38. Changes in accounting policies (continued)
Impact on the balance sheet (extract) as at 31 March 2023 and 31 March 2022
All figures in £ million
Assets/(liabilities)
Other receivables (within Trade and other receivables)
Accrued expenses and other payables (within Trade and other payables)
Current tax payable
Deferred tax liability
Other net assets
Net assets
Impact on the balance sheet (extract) as at 1 April 2021
All figures in £ million
Assets/(liabilities)
Other receivables (within Trade and other receivables)
Accrued expenses and other payables (within Trade and other payables)
Current tax payable
Deferred tax liability
Other net assets
Net assets
31 March
2023
31 March
2022
Change in
policy As presented
As originally
presented
Impact of
restatement
Restated
15.4
(12.9)
(8.3)
0.6
-
(5.2)
43.3
(166.7)
(4.6)
(112.0)
1,208.3
968.3
26.8
(139.5)
(3.9)
(156.7)
1,316.7
1,043.4
12.0
(12.0)
(2.0)
-
-
(2.0)
38.8
(151.5)
(5.9)
(156.7)
1,316.7
1,041.4
Previous
policy
27.9
(153.8)
3.7
(112.6)
1,208.3
973.5
1 April 2021
As originally
presented
Impact of
restatement
1 April
2021
Restated
7.8
(133.4)
(2.5)
(89.7)
1,102.7
884.9
11.8
(12.6)
(1.2)
-
-
(2.0)
19.6
(146.0)
(3.7)
(89.7)
1,102.7
882.9
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Notes to the Consolidated Financial Statements
Statement of cash flows (extract)
The impact on the Group’s statement of cash flows of applying the restatement is set out below:
All figures in £ million
Profit after tax
Taxation expense
Others
(Increase)/decrease in inventories
Increase in receivables
Increase in payables
Changes in working capital
Net cash inflow from operations
Specific adjusting items
Underlying net cash inflow from operations
Net cash inflow from operations
Tax paid
Interest received
Interest paid
Net cash inflow from operating activities
Net cash outflow from investing activities
Net cash inflow /(outflow) from financing activities
Increase/(decrease) in cash and cash equivalents
Effect of foreign exchange changes
FY23
Previous
policy
157.6
(2.6)
56.3
211.3
Change in
policy
(3.2)
40.2
-
37.0
As
presented
154.4
37.6
56.3
248.3
As
originally
presented
90.0
29.7
67.2
186.9
Impact of
restatement Hedging*
-
-
-
-
-
6.2
-
6.2
(9.6)
(56.4)
80.0
14.0
225.3
29.5
254.8
225.3
(14.9)
5.5
(9.9)
206.0
(464.4)
159.7
(98.7)
1.8
-
(0.3)
(21.4)
(21.7)
15.3
-
15.3
15.3
(15.3)
-
-
-
-
-
-
-
(9.6)
(56.7)
58.6
(7.7)
240.6
29.5
270.1
240.6
(30.2)
5.5
(9.9)
206.0
(464.4)
159.7
(98.7)
1.8
1.4
(12.8)
34.2
22.8
209.7
5.6
215.3
209.7
(20.0)
0.5
(1.5)
188.7
(81.6)
(47.3)
59.8
(1.8)
-
(0.2)
(0.6)
(0.8)
5.4
-
5.4
5.4
(5.4)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3.1)
(3.1)
3.1
FY22
Restated
90.0
35.9
67.2
193.1
1.4
(13.0)
33.6
22.0
215.1
5.6
220.7
215.1
(25.4)
0.5
(1.5)
188.7
(81.6)
(50.4)
56.7
1.3
Impact on the income statement (extract)
The impact on the Group’s consolidated income statement of applying the restatement is set out below:
Free cash flow (as defined by the Group – see glossary)
126.5
-
126.5
110.0
-
-
110.0
* To be consistent with FY23, the prior year has been re-presented in respect of the cash flow impact of intercompany loan hedging.
All figures in £ million
Revenue
Operating costs excluding depreciation and amortisation
Other income
EBITDA (earnings before interest, tax, depreciation and amortisation)
Depreciation and amortisation
Operating profit
Gain/(loss) on business divestments
Finance income
Finance costs
Profit/(loss) before tax
Taxation expense
Profit/(loss) for the year attributable to equity shareholders
Impact on underlying measures of performance
Operating profit from segments
Underlying operating profit
Underlying tax charge
Impact on specific adjusting items
MoD appropriation release – operating profit
MoD appropriation release – tax
FY23
Change in
policy As presented
As originally
presented
Impact of
restatement
-
-
37.0
37.0
-
37.0
-
-
-
37.0
(40.2)
(3.2)
-
17.4
(18.4)
19.6
(21.8)
1,580.7
(1,382.9)
49.6
247.4
(74.6)
172.8
15.9
16.7
(13.4)
192.0
(37.6)
154.4
1,320.4
(1,149.4)
10.5
181.5
(64.0)
117.5
(0.9)
5.0
(1.9)
119.7
(29.7)
90.0
178.9
196.3
(36.8)
19.6
(3.7)
137.4
137.4
(17.9)
-
-
-
-
6.2
6.2
-
6.2
-
-
-
6.2
(6.2)
-
-
6.2
(6.2)
-
-
FY22
Restated
1,320.4
(1,149.4)
16.7
187.7
(64.0)
123.7
(0.9)
5.0
(1.9)
125.9
(35.9)
90.0
137.4
143.6
(24.1)
-
-
Previous
policy
1,580.7
(1,382.9)
12.6
210.4
(74.6)
135.8
15.9
16.7
(13.4)
155.0
2.6
157.6
178.9
178.9
(18.4)
-
18.1
224
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Annual Report and Accounts 2023
QinetiQ Group plc
Annual Report and Accounts 2023
225
Notes to the Consolidated Financial Statements continuedFor the year ended 31 March
QinetiQ Group plc
Annual Report & Accounts 2023
226
Company balance sheet
Company balance sheet
As at 31 March
For the year ended 31 March
All figures in £ million
Non-current assets
Investments in subsidiary undertakings
Current liabilities
Creditors: amounts falling due within one year
Net current liabilities
Total assets less current liabilities
Net assets
Equity
Share capital
Capital redemption reserve
Share premium
Retained earnings
Total equity
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Financial Statements
227
Company statement of changes in equity
Company statement of changes in equity
For the year ended 31 March
For the year ended 31 March
Note
31 March
2023
31 March
2022
2
3
4
521.2
521.2
(78.0)
(78.0)
443.2
515.2
515.2
(75.4)
(75.4)
439.8
443.2
439.8
5.8
40.8
147.6
249.0
443.2
5.8
40.8
147.6
245.6
439.8
All figures in £ million
At 1 April 2022
Profit for the year
Purchase of own shares
Business divestment
Dividend paid
Share-based payments
At 31 March 2023
At 1 April 2021
Profit for the year
Purchase of own shares
Issue of new shares
Dividend paid
Share-based payments
At 31 March 2022
Share
capital
Capital
redemption
reserve
Share
premium
Retained
earnings
5.8
-
-
-
-
-
5.8
5.7
-
-
0.1
-
-
5.8
40.8
-
-
-
-
-
40.8
40.8
-
-
-
-
-
40.8
147.6
-
-
-
-
-
147.6
147.6
-
-
-
-
-
147.6
245.6
41.3
(0.8)
(0.2)
(42.6)
5.7
249.0
240.4
38.8
(0.8)
-
(40.2)
7.4
245.6
Total
equity
439.8
41.3
(0.8)
(0.2)
(42.6)
5.7
443.2
434.5
38.8
(0.8)
0.1
(40.2)
7.4
439.8
The profit for the year ended 31 March 2023 was £41.3m (FY22: profit of £38.8m).
The financial statements of QinetiQ Group plc (company number 4586941) on pages 226 to 229 were approved by the Board of Directors
and authorised for issue on 25 May 2023 and signed on its behalf by:
Steve Wadey
Group Chief Executive Officer
Carol Borg
Group Chief Financial Officer
The capital redemption reserve is not distributable and was created following redemption of preference share capital.
226
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QinetiQ Group plc
Annual Report and Accounts 2023
227
QinetiQ Group plc
Annual Report & Accounts 2023
228
Notes to the Company Financial Statements
notes to the Company Financial Statements
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
Notes to the Company Financial Statements
Financial Statements
229
1. Accounting policies
The Company is a public limited company and is incorporated and domiciled in Farnborough, United Kingdom.
4. Share capital
The Company’s share capital is disclosed in note 29 to the Group financial statements.
5. Share-based payments
The Company’s share-based payment arrangements are set out in note 30 to the Group financial statements.
6. Parent company guarantees
The Company has provided guarantees to various customers of subsidiaries to the value of £21.0m as at 31 March 2023 (2022: £21.0m) in
the ordinary course of business. The company has also provided a guarantee of £337.6m as at 31 March 2023 (2022: £nil) in respect of the
term loan.
7. Other information
Directors’ emoluments, excluding Company pension contributions for the year to 31 March 2023 were £4.9m (FY22: £5.8m). 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 on
page 137 in the Directors’ Remuneration Report.
The remuneration of the Company’s auditors for the year to 31 March 2023 was £0.4m (FY22: £0.4m), which was for audit of the Group
financial statements and Company financial statements and audit related assurance services. No other services were provided by the auditors
to the Company.
The monthly average number of employees for the year to 31 March 2023 was nil (FY22: nil).
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 on a going concern basis 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 is in accordance with International Accounting Standards in conformity with the requirements of
the Companies Act 2006 and the International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies
in the EU 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
•
•
• Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7.
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
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 as a capital contribution. 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 30 to the Group financial statements.
2. Investments in subsidiary undertakings
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
Capital contributions arising from share-settled liabilities
Total investment in subsidiary undertakings
31 March
2023
424.3
83.3
13.6
521.2
31 March
2022
424.3
77.2
13.7
515.2
The increase in investments in subsidiary undertakings in FY23 mainly 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 35 to the Group financial statements.
3. Creditors: amounts falling due within one year
All figures in £ million
Amounts owed to Group undertakings
Amounts owed to Group undertakings are unsecured, repayable on demand and bear no interest.
31 March
2023
31 March
2022
78.0
75.4
228
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Annual Report and Accounts 2023
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Annual Report and Accounts 2023
229
230
QinetiQ Group plc
Annual Report & Accounts 2023
Five Year Financial Summary
Five year record
For the years ended 31 March (unaudited)
EMEA Services
Global Products
Revenue
EMEA Services
Global Products
Operating profit from segments1
Operating profit margin from segments1
Statutory operating profit
Underlying operating profit1
Underlying profit before tax1
Profit before tax
Profit attributable to owners of the Company
Underlying basic EPS1
Basic EPS
Diluted EPS
Dividend per share
Underlying net cash flow from operations 1
Net (debt)/cash as defined by the Group
Average number of employees
Orders excluding LTPA amendments
£m
£m
£m
£m
£m
£m
%
£m
£m
£m
£m
£m
Pence
Pence
Pence
Pence
£m
£m
£m
FY23
1,179.3
401.4
1,580.7
137.1
41.8
178.9
11.3
172.8
196.3
189.7
192.0
154.4
26.5
26.8
26.5
7.7
270.1
(206.9)
7,443
1,724.1
FY222
1,059.2
261.2
1,320.4
135.6
1.8
137.4
10.4
123.7
143.6
142.2
125.9
90.0
20.6
15.7
15.5
7.3
220.7
225.1
6,911
1,226.6
FY213
939.9
338.3
1,278.2
118.6
33.2
151.8
11.9
108.7
151.8
149.9
142.6
121.9
22.1
21.4
21.1
6.9
199.0
164.1
6,874
1,149.4
FY20
797.4
275.5
1,072.9
100.6
32.6
133.2
12.4
117.6
133.2
132.2
123.1
106.3
20.0
18.7
18.6
6.6
177.8
84.7
6,267
961.7
FY194
687.7
223.4
911.1
96.8
28.1
124.9
13.7
114.8
124.9
124.0
123.2
113.9
19.7
20.1
20.0
6.6
135.3
160.5
5,994
774.6
1 Underlying measures are stated before specific adjusting items. Definitions of underlying measures of performance are provided on page 233. Underlying financial
measures are presented because the Board believes these provide a better representation of the Group’s long-term performance trend. For details of specific adjusting
items refer to note 4 and note 36 of the financial statements.
2 FY22 has been restated due to a change in accounting policy for Research and Development Expenditure Credits (RDEC). See note 38 for details.
3 FY21 was restated in FY22 due to a change in accounting policy in respect of software implementation costs.
4 FY19 was restated in FY21 due to the retrospective adoption of the new accounting standard, IFRS 16, in respect of finance leases.
230
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Annual Report and Accounts 2023
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
231
Additional financial information
Foreign exchange
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 2023
12 months to
31 March 2022
1.31
1.21
1.24
1.75
1.76
1.85
1.38
1.36
1.31
1.81
1.85
1.75
Treasury policy
The Treasury policy is approved by the Audit Committee. There is a
structured approach to financial risk management, mitigating exposures
to currency, liquidity, counterparty and credit risks as outlined in note 27.
The policy allows the use of financial instruments to manage and hedge
business operational risks that arise on movements in financial, credit or
money markets. There is strict control on the use of financial instruments.
Speculative trading in financial instruments is not permitted.
– Currency risk – The Group’s income and expenditure is largely settled
in the functional currency of the relevant entity. Where cash flows are
denominated in currencies other than the functional currency of the
relevant trading entity, the policy is to hedge all material transaction
exposure at the point of commitment to the underlying transaction.
Uncommitted future transactions are not routinely hedged. Where
the timing of cash flows differ from the original expectation, currency
swaps will be used to realign the hedge maturity. The maximum
permitted hedge period is five years. Translation exposures arising
from the consolidation of overseas subsidiaries in foreign currencies
are not hedged.
– Interest rate risk – The Group’s funding is largely in floating rate debt
and subject to the adverse effects of changes in interest rates. The
Group has a policy to fix no less than 30% and no more than 80% of
the debt and spread the risk of fluctuations in interest rates. Options
and similar open-ended instruments are not permitted to manage
interest rate exposures.
– Financial credit and liquidity risk – Liquidity risk is managed to
ensure funds are available to meet business needs and maximise
return subject to counterparty and credit risks. Investments are
permitted with institutions on an Approved Counterparty list and
must not exceed the counterparty credit limit. Investments must be
held in the currency of the reporting entity except currency deposits
or borrowings specifically placed to hedge assets or liabilities with
related hedge documentation. Group funding is established to meet
the Group’s medium and long-term financing requirements. Facilities
are agreed with a number of financial institutions such that no single
institution exerts undue influence on the Group. At the year end
the Group had an undrawn revolving credit facility of £275m and
term loan of £338m both of which mature on 27 September 2025.
The term loan has two one-year extension options.
The policies manage and control treasury risk in alignment with the
Group strategy.
Tax risk management
QinetiQ’s tax strategy, as published on its corporate website, is to
ensure compliance with all relevant tax legislation, wherever we do
business, while 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 with
a zero-tolerance of tax evasion. 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 – QinetiQ does not have a significant level of
cross-border activity but this will increase as it pursues its policy
of expanding around the globe. Where there is cross-border
activity, 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. QinetiQ submits its ‘Country by Country’ report to the UK
tax authorities in line with the OECD rules providing insight for tax
authorities into its global tax affairs.
– 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 its home countries. Changes in tax legislation in these countries
would impact 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 where the majority of the Group’s business is undertaken and
employees are based. Total corporation tax payments in the year to
31 March 2023 were £30.2m (2022: £25.4m restated).
The differential between the taxation expense and the tax paid in the year
relates primarily to the impact of deferred tax movements, whereby the
income statement bears tax charges and credits (e.g. on fixed assets or
losses) but for which there is no corporation tax paid or recovered in the
year. Together, these result in the cash paid being £7.4m less than the
total expense charged to the income statement.
232
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Annual Report & Accounts 2023
Glossary
AGm
BBp
CAGR
C5iSR
CGU
Cmi
Cpi
CR
Annual General Meeting
Bonus Banking Plan
Compound Annual Growth Rate
Command, Control, Computers, Communications,
Cyber, Intelligence, Surveillance and Reconnaissance
Cash Generating Unit
Continuous Mortality Investigation
Consumer Price Index
Corporate Responsibility
DE&S
MOD’s Defence, Equipment and Support organisation
DSp
DoD
Deferred Share Plan
US Department of Defense
EBitDA
Earnings before interest, tax, depreciation and amortisation
ECl
ED&i
EDp
Expected credit loss
Equality, diversity and inclusion
Engineering Delivery Partner
EmEA
Europe, Middle East and Australasia
EpS
ESG
ESt
FAR
FCA
FRC
FY
GEv
GHG
Earnings per share
Environmental, Social, Governance
Engineering, Science and Technical
Federal Acquisition Regulations
Financial Conduct Authority
Financial Reporting Council
Financial year (ending 31 March)
Global Employee Voice
Greenhouse gas
HpSA
High Performance Share Award
lti
ltpA
m&A
mOD
Lost time incident
Long Term Partnering Agreement – 25-year contract
established in 2003 to manage the MOD’s Test and
Evaluation ranges
Mergers and acquisitions
UK Ministry of Defence
mSCA
Maritime Strategic Capability Agreement
pBt
ppE
ppS
Qlt
QtS
R&D
Rpi
RSp
RDEC
Sip
Profit before tax
Property, plant and equipment
Prudential Platinum Scheme
QinetiQ Leadership Team
QinetiQ Target Systems
Research and development
Retail price Index
Restricted Share Plan
Research and development expenditure credit
Share Incentive Plan
SOniA
Single Source Regulations Office
SOFR
SSA
SSRO
SSSi
StEm
t&E
tSR
vCp
UAv
Secured Overnight Financing Rate
Special Security Arrangement
Single Source Regulations Office
Site of Special Scientific Interest
Science, Technology, Engineering and Maths
Test and Evaluation
Total shareholder return
Value Creation Plan
Unmanned aerial vehicle
iAS
iFRiC
iFRS
iRAD
Kpi
International Accounting Standards
International Financial Reporting Interpretations Committee
International Financial Reporting Standards
Internal research and development
Key Performance Indicator
Guidelines of the Financial Reporting Council to address
the principal aspects of corporate governance in the UK
UK
Corporate
Governance
Code
UK GAAp UK Generally Accepted Accounting Practice
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
233
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
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
Underlying operating profit
Operating profit as adjusted to exclude ‘specific adjusting items’
Underlying operating margin
Underlying operating profit expressed as a percentage of revenue
Underlying operating profit
from operating segments
Underlying operating margin
from operating segments
Underlying net finance
income/expense
Total operating profit from operating segments which excludes ‘specific adjusting items’
and research and development expenditure credits (‘RDEC’)
Underlying operating profit from segments expressed as a percentage of revenue
Net finance income/expense as adjusted to exclude ‘specific adjusting items’
Underlying profit before/ after tax
Profit before/after tax as adjusted to exclude ‘specific adjusting items’
Underlying effective tax rate
The tax charge for the year excluding the tax impact of ‘specific adjusting items’
expressed as a percentage of underlying profit before tax
Note
Note 2
Note 3
Note 3
Note 3
Note 3
Note 7
Note 4
Note 9
Underlying basic and diluted EPS
Basic and diluted earnings per share as adjusted to exclude ‘specific adjusting items’
Note 10
Orders
The level of new orders (and amendments to existing orders) booked in the year.
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/(debt)
Return on capital employed
Specific adjusting items
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 new ratio, introduced in FY22, is the ratio of underlying net cash from operations
to underlying EBITDA. In previous years this was the ratio of underlying net cash from
operations to 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 (debt)/cash as defined by the Group combines cash and cash equivalents
with borrowings and other financial assets and liabilities, primarily available for
sale investments, derivative financial instruments and finance lease liabilities.
Calculated as: Underlying EBITA / (average capital employed less net pension asset),
where average capital employed is defined as shareholders equity plus net debt
(or minus net cash).
Amortisation of intangible assets arising from acquisitions; impairment of property; gains/
losses on disposal of property and investments; net pension finance income; transaction
and integration costs in respect of business acquisitions; one-off period of Digital investment;
tax impact of the preceding items and significant non-recurring tax and RDEC movements.
N/A
N/A
N/A
Note 25
Note 25
Note 25
Note 24
CFO
Review
Note 4
234
QinetiQ Group plc
Annual Report & Accounts 2023
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 2023
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
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 will now only make documentation and communication
available electronically via the Company’s website, unless direct requests
have been made otherwise. In addition, communications electronically,
via 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 2023 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
Percentage
of holders
Total number
of shares
Percentage
issued capital
5,235
589
5,824
3,871
467
542
302
157
214
271
5,824
89.89%
10.11%
100%
4,807,580
573,949,541
578,757,121
730,941
66.47%
374,219
8.02%
943,715
9.31%
1,082,916
5.19%
1,135,548
2.70%
3.67%
7,928,874
4.64% 566,560,908
578,757,121
100%
0.83%
99.17%
100%
0.13%
0.06%
0.16%
0.19%
0.20%
1.37%
97.89%
100%
StRAtEGiC REpORt
GOvERnAnCE
FinAnCiAl StAtEmEntS
235
Key dates
20 July 2023
20 July 2023
Trading update
Annual General Meeting
30 September 2023
Half-year financial period end
November 2023
January 2024
31 March 2024
May 2024
Half-year results announcement
Trading update
Financial year end
Preliminary results announcement
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.
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.
Do not get into a conversation, note the name of the person and
firm contacting you and then end the call.
Check the Financial Services Register from www.fca.org.uk to see
if the person and firm contacting you is authorised by the FCA.
Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details.
Use the firm’s contact details listed on the Register if you
want to call it back.
Call the FCA on 0800 111 6768 if the firm does not have contact
details on the Register or you are told they are out of date.
Search the list of unauthorised firms to avoid at
www.fca.org.uk/scams.
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.
Think about getting independent financial and professional
advice before you hand over any money.
2.
3.
4.
5.
6.
7.
8.
9.
10. Remember: if it sounds too good to be true, it probably is!
Report a scam
If you are approached by fraudsters please tell the FCA using the share
fraud reporting form at www.fca.org.uk/scams, where you can find out
more about investment scams. You can also call the FCA Consumer
Helpline on 0800 111 6768.
If you have already paid money to share fraudsters you should contact
Action Fraud on 0300 123 2040.
236
QinetiQ Group plc
Annual Report & Accounts 2023
Company information and advisers
Corporate brokers
Barclays, 1 Churchill Place,
London, EC14 5HP
Numis, 45 Gresham St
London, EC2V 7BF
Principal legal adviser
Ashurst LLP, London Fruit and
Wool Exchange, 1 Duval Square,
London, E1 6PW
Registered office
Cody Technology Park
Ively Road, Farnborough,
Hampshire, GU14 0LX, England
Tel: +44 (0) 1252 392000
Company Registration
Number: 4586941
Independent auditors
PricewaterhouseCoopers LLP,
Savannah House,
3 Ocean Way, Ocean Village,
Southampton, SO14 3TJ
Registrar
Equiniti, Aspect House,
Spencer Road, Lancing,
West Sussex, BN99 6DA
QinetiQ Group plc
Cody Technology Park
Ively Road
Farnborough
Hampshire
GU14 0LX
Tel: +44 (0) 1252 392000
Company Registration Number: 4586941