Annual Financial Report

RNS Number : 9262P

QinetiQ Group plc

12 June 2015

 



12 June 2015

QINETIQ GROUP PLC

Availability of Annual Report and Accounts 2015 and Notice of 2015 Annual General Meeting

QinetiQ Group plc has today published the following documents:

·      QinetiQ 2015 Annual Report and Accounts;

·      Notice of 2015 Annual General Meeting; and

·      Chairman's Letter to Shareholders.

The documents are available to view or download from the Company's website at www.qinetiq.com/investors.

In compliance with Listing Rule 9.6.1, copies of the above documents, together with a copy of the Form of Proxy for the 2015 Annual General Meeting, have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

These documents are today being posted or otherwise made available to shareholders.

The 2015 Annual General Meeting will be held at 11.00 am on Wednesday, 22 July 2015 at Pennyhill Park Hotel, London Road, Bagshot, Surrey GU19 5EU.

In compliance with paragraph 6.3.5 of the Disclosure and Transparency Rules, the information in respect of Principal Risks and Uncertainties, Related Party Transactions and the Directors' Responsibility Statement, contained in the Appendix, is extracted from the Annual Report and Accounts and should be read in conjunction with the Group's preliminary results announcement of 21 May 2015 (the 'Preliminary Results') which can be viewed on the Company's website at www.qinetiq.com/investors.  The information in the Appendix and the Preliminary Results together constitute the material required by DTR 6.3.5 to be communicated in unedited full text through a Regulatory Information Service.  This is not a substitute for reading the full Annual Report and Accounts.  Page and note references in the Appendix refer to page numbers and notes in the 2015 Annual Report and Accounts.

Enquiries:

Jon Messent - Company Secretary, QinetiQ Group plc

Telephone [phone]

Press Office, QinetiQ Group plc

Telephone [phone]

David Bishop - Investor Relations, QinetiQ Group plc

Telephone [phone]

APPENDIX

PRINCIPAL RISKS AND UNCERTAINTIES

UNDERSTANDING AND MANAGING OUR RISKS

TheBoard recognises that QinetiQ operates in variedbusiness environments and that risk management must reflectboth the need to take risk and to avoid harm. Boardlevel oversight is discharged throughtwo committees, the Audit Committee, which focuseson risks wherethe primary impactis financial, and the Risk & CSR Committee, which focuseson risks where the primaryimpact is non-financial; both committees retain visibility of both the financial and non-financial risks.

TheBoard agrees and reviews its toleranceof risk through establishing a clear risk appetiteand setting appropriate delegations ofauthority to the executive and senior leaders.  The Board'srisk appetite is set to provideboundaries and guidance to supportexecutives and senior leaders in their decision-making and allow operational flexibility.  Local decision-making is supportedwithin defined delegationof authority and the Board requires all employees to abide by relevant legal requirements as a minimum.

Our Areas of risk:

1 - Risks relating to strategy:

·      Defence and security spending

·      Complex market characteristics and contract profile

·      Trading in a global market

·      Emerging and reputational risk

·      US Foreign ownership regulations

2 - Risks relating to people:

·      Recruitment and retention

·      Breaches of security and IT systems failure

·      Significant breach of relevant laws and regulations

3 - Risks relating to financial management and markets:

·      Defined benefit pension obligations

·      Tax legislation

·      Exchange rates

·      Inflation, credit and interest rates

Risk appetitewithin QinetiQfocuses onthose criticalrisk areasnecessary to achieve our strategic goals.  Three categories of appetite are defined as follows:

·      Hungry:Willing to consider all delivery options and eager to be innovative and to choose options offering potentially higher business rewards, with a mature understanding of inherent risk

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

·      Cautious: Avoidance of risk and uncertainty is the key objective, a greaterlevel of controland mitigation may be required.Significantly greaterreturns expectedfor commercial opportunities to offset risk

Within thecontext ofthe core,'Explore' and'Test forValue' strategy,the Board'scommercial appetiteis:

·      Hungry for opportunities relating to increased market   share where we have provendelivery, existing and potential new customers

·      Balanced for opportunities that translate proven deliveryinto new markets or new capability/delivery into existingcustomers or that commit QinetiQ to unlimitedor excessive liabilities

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

The Boardagrees andreviews itstolerance of risk through appropriate delegations of authority to the executive and senior leaders.

The management of risk is key to ensuring QinetiQ is successful indelivering its objectives, whilst protecting the interests of its stakeholders.  QinetiQ's risk management methods and processes provide a frameworkwhich allows:

·      Risk identification: identification of risks and opportunities relevantto the Group'sobjectives

·      Risk analysis: assessment of risks in terms of likelihood and impact

·      Risk evaluation: determine and prioritisewhich risks need treatment

·      Risk treatment: appropriate management strategies put in place

·      Monitor and review: monitoring and oversight ofrisk management

TheGroup Risk Register consists of material risks relating to effective delivery of our strategy.  These risks may emerge as risksor be presentthrough the aggregation or interlinking of risks.  Our reputation is a highly valuable asset and reputational impact is considered as a factorin assessing overall risk impact.  The Group Risk Registeris reviewed by the executive and the Board.  In addition the risk owners present an update of current status and mitigating actions by rotation throughout the year.

Key risk	Associated strategic priority	Description and impact	Likelihood/Impact	Mitigation	Associated KPIs	Responsibility	Risk appetite
Defence and security spending	Customers	• The Group's revenue is predominantly derived from government customers in the defence and security sector. 70% of the Group's revenue comes directly from contracts with the UK Government and 7% comes directly from contracts with the US Government. • Any reduction in government defence and security spending in either the UK or the US could have an adverse impact on the Group's financial performance. • The financial burden on both UK and US Government budgets from the current economic downturn may lead to reduced spending in the markets in which the Group operates. • This could be exacerbated by the Comprehensive Spending Review (CSR) as well as the next Strategic Defence and Security Review (SDSR) expected to follow the 2015 General Election. The SDSR is expected to take place in the next 12 months. The total amount, and subdivision of, UK defence spending post SDSR may be different to the current budget. The Group's main contracts are exposed to spend on Test & Evaluation and Research & Technology, both of which are expected to be studied in the SDSR. • The Group's US products business (approximately £60m annual revenue) has been largely funded through overseas contingency budgets which are expected to decline as the US withdraws from Afghanistan.	Medium/High	• The Group services the UK defence domains of Air, Land, Maritime and Joint Forces as well as adjacent sectors. This provides a degree of portfolio diversification. The Group will continue to monitor expenditure changes in its traditional markets and will adjust business activities where appropriate. • The MOD has made considerable progress in balancing its equipment budget. In defence research, where QinetiQ is the private sector market leader, spending was stabilising at about £400m p.a. due to the 1.2% floor on R&T spend (pre SDSR). • QinetiQ monitors and responds to potential opportunities arising from the MOD's actions to deliver improved value for money by making proactive proposals that deliver the desired outcome. • QinetiQ expects that the SDSR process will enable consultation between Government and industry to ensure UK defence priorities are properly considered. • Further investment in the pursuit of international opportunities assists in the diversification away from the dependency on UK and US Government spending. • US products (such as unmanned systems) are targeted to be funded through Programs of Record (i.e. in the US Base budget) in approx 2017.	• Customer satisfaction	• Business Development Director • Strategic Business Director - Defence	Hungry
Complex market characteris-tics and contract profile	Customers	• The aerospace, defence and security markets are highly competitive. The Group's performance may be adversely affected should it not be able to compete in the markets in which it aims to operate. • Following the Currie Review, the Defence Reform Act and the Single Source Regulations are now in place. The Single Source Regulations Office (SSRO) is established with a Chairman and Board appointed. The 'Yellow Book', a legally binding framework, has been replaced by the 'Orange Book' for how single sourced work must be contracted to ensure that a fair and reasonable price is paid for goods and services procured in the absence of competition. • This could have an adverse impact on the Group's financial performance. The 'Baseline Profit Rate' for single sourced work has been set at 10.6% for 2016 (2015: 10.7%) This percentage is reviewed annually. The new regulations apply to new single source contracts over £5m in value from April 2015. Approximately 33% of EMEA Services revenue is derived from single sourced work, excluding the non-tasking element of the LTPA contract. • The ongoing 'transformation' of the UK MOD's Defence Equipment and Support (DE&S) organisation has now adopted a model of 'bespoke trading entity' rather than Government-Owned Contractor-Operated, which was the intended model. DE&S has hired 'Managed Service Providers' (MSPs), companies to help drive the transformation programme to improve programme delivery and implement new systems and processes as it looks to reduce costs. • Some of the Group's revenue is derived from contracts that have a fixed price. There is a risk that the costs required for the delivery of a contract could be higher than those agreed in the contract as a result of the performance of new or developed products, operational over-runs or external factors. Any significant increase in costs which cannot be passed on to a customer may reduce the profitability of a contract or even result in a contract becoming loss making. • Many of the Group's contracts have terms, not unusual in defence, that provide for unlimited liabilities for the Group, or termination rights for the customer, often without cause. • The timing of orders receipts could have a material impact on the Group's performance in a given reporting period as the amounts payable under some government contracts can be significant.	Medium/High	• QinetiQ seeks to focus on areas within these markets in which its deep customer understanding, domain knowledge, technical expertise and platform independence provide a strong proposition and a significant advantage in competitive bidding. • QinetiQ and defence industry partners have been fully engaged with the MOD in the development of the new 'Orange Book' framework and its practical application. QinetiQ and defence industry partners have been consulted by the SSRO on the draft Statutory Guidance, due to be published early in 2015. • The contracts and orders pipeline is regularly reviewed by senior operational management. • The nature of many of the services provided under fixed-price arrangements is often for a defined amount of effort or resource rather than firm deliverables and, as a result, mitigates the risk of costs escalating. The Group ensures that its fixed-price bids and projects are reviewed for early detection and management of issues which may result in cost over-run or excessive delivery risk.	• Customer satisfaction	• Business Development Director • Strategic Business Director - Defence	Balanced
Complex market characteris-tics and contract profile (continued)	Customers	• Organisational Conflicts of Interest (OCI) may occur where the Group provides services to both a defence end-user customer as well as those within the defence supply chain.	Medium/High	• QinetiQ takes proactive steps to manage any potential OCI and maintain its ability to provide independent advice. QinetiQ operates under the MOD's generic formal compliance regime and applies a rigorous compliance process. • Where QinetiQ wishes to operate on both the advice and supply chain side of an opportunity we do so only after receiving approval from the MOD.	• Customer satisfaction	• Strategic Business Director - Defence	Balanced
Complex market characteris-tics and contract profile (continued)	Customers	• The Group is reliant on a limited number of major customers. A material element of the Group's revenue is derived from one contract. The Long Term Partnering Agreement (LTPA) is a 25-year contract to provide test, evaluation, and training services to the MOD. The original contract was signed in 2003. The LTPA operates under five-year periods with specific programmes, targets and performance measures set for each period. • In 2015 the LTPA directly contributed 26% of the Group's revenue and supported a further 17% through tasking services using LTPA managed facilities.	Medium/High	• In February 2013 the Group signed the LTPA for a third five-year period with the MOD. The next scheduled 're-pricing' break point is in 2018. • The Group continues to achieve strong customer performance and satisfaction levels, and significantly exceeded the agreed minimum performance rating of 80% in 2014. • The Group has achieved significant cost savings for the MOD on delivered services, and is on track to exceed the £700m of savings originally projected to be delivered over the life of the contract. • The Group expects to engage with the MOD regarding the study of future plans for test and evaluation services within the SDSR.	• Customer satisfaction	• LTPA Director	Hungry
Recruit-ment and retention	Employees	• The Group operates in many specialised engineering, technical and scientific domains. • The lack of graduates in the science, technology, engineering and mathematics (STEM) domains leads to future skills shortage. • Key capabilities and competencies may be lost through failure to recruit and retain employees due to internal factors, as well as macro factors across the sector affecting the desirability, intake and training of engineers, scientists and technicians.	Low/High	• The Group conducts regular activities to identify key roles and personnel. Succession plans are in place looking internally at candidates ready now or in need of development to fill particular roles and externally to identify people QinetiQ may wish to attract. • QinetiQ has made improvements in employee engagement and conducts an annual satisfaction survey. • STEM outreach from primary school age through to work experience and graduate opportunities. • QinetiQ is leading industry in The 5% Club, a campaign to increase the recruitment of graduates and apprentices.	• Health and Safety • Voluntary employee turnover • Employee satisfaction • % of graduates and apprentices	• Business Unit Managing Directors	Balanced
Breaches of security and IT systems failure	The way we work	• The Group operates in a highly regulated IT environment. • The data held by QinetiQ is confidential and needs to be secure, against a background of increasing cyber threat. • A breach of data security or IT systems failure could have an adverse impact on our customers' operations, resulting in significant reputational damage, as well as the possibility of exclusion from some types of government contracts. • The Group's financial systems are required to be adequate to support US and UK Government contracting regulations.	High/High	• Data security is assured through a multi-layered approach that provides a hardened environment, including robust physical security arrangements and data resilience strategies. • Comprehensive internal and external testing of potential vulnerabilities is conducted along with 24/7 monitoring. • The Group engages with US and UK Government contracting audit agencies, to enable them to test relevant financial systems and data, and implements any recommended improvement plans. • Information systems are designed with consideration to single points of failure and the removal of risk of minor and major system failures. • The Group maintains business continuity plans that cover geographical assets as well as the technical capability of employees. These plans cover a range of scenarios (including loss of access to IT) and are regularly tested.	• Underlying operating profit • Profit after tax • Underlying EPS • Underlying operating cash flow	• Business Unit Managing Directors • Functional Directors	Cautious
Trading in a global market	Growth orientation	• QinetiQ operates internationally. Risks include: regulation and administration changes, taxation policy, political instability, civil unrest, and differences in culture. • Negative events could disrupt some of the Group's operations and have a material impact on its future financial performance.	Low/Medium	• While the Group has a growing geographical footprint, its traditional activities are confined to the UK and the US. • Relationships or contracts in new markets are assessed for their inherent risks, using our International Business Risk Assessment process, before being formally agreed. This allows opportunities to be reviewed at different levels of management according to their inherent risk.	• Orders • Organic revenue growth	• Business Unit Managing Directors • International Business Development Director	Cautious
Significant breach of relevant laws and regulations	The way we work	• The Group operates in highly regulated environments and recognises that its operations have the potential to have an impact on a variety of stakeholders. • Failure to comply with particular regulations could result in a combination of fines, penalties, civil or criminal action. • In addition, failure may also lead to suspension or debarment from government contracts, as well as reputational damage to the QinetiQ brand. • Key areas of focus for the Group include the following: -- Safety liability of products, services and advice. -- Workplace and occupational health, safety and environmental matters. -- Bribery and ethics. -- International trade controls.	Low/High	• The Group has robust policy, procedures and training in place to ensure that it meets all current regulations; for example role-specific safety training and business ethics training which is mandatory for Board members and all employees across the Group. • The QinetiQ Code of Conduct defines clear expectation for the Group and its employees; for example it states that the Group does not tolerate bribery and corruption and will comply with relevant international trade regulations. • The Group manages the effective identification, measurement and control of regulatory risk. • Local management continuously monitor local laws. Professional advice is sought when engaging in new territories to ensure that the Group complies with local and international regulations. • Accreditation to external standards; for example safety and environmental systems continue to be accredited to international standards; external authorisation for regulated design and maintenance services in the aviation sector.	• Underlying operating profit • Profit after tax • Underlying EPS • Underlying operating cash flow • Health and Safety	• Business Unit Managing Directors • Functional Directors	Cautious
Defined benefit pension obligations	The way we work	• The Group operates a defined benefit (DB) pension scheme which is closed to future accrual. • At the year end the DB pension scheme was a liability of £39.4m under an IAS 19 basis. • The size of the deficit may be materially affected by a number of factors, including inflation, investment returns, changes in interest rates and improvements in life expectancy of members. • Any change to the deficit may require the Group to increase the cash contributions to the scheme, which would reduce the Group's cash available for other purposes.	Medium/High	• Scheme performance is reviewed regularly by Group management in conjunction with the scheme's independent Trustee. • External actuarial and investment advice is regularly taken to ensure the best interests of both the Group and the scheme members. • The Group works in collaboration with the Trustees to agree an investment strategy that progressively de-risks the scheme as the funding level improves. • The Company continues to pay the deficit recovery payments outstanding from the 2011 valuation. Company contributions to the scheme are expected to continue at £13m per annum until 2018. • The scheme was closed to future accrual on 31 October 2013. • At the year end 45% of the inflation risk is hedged and 20% of interest rate risk hedged, measured on a gilts basis. A 5% inflation cap protects £264m of pensioner liabilities for ten years to 2025.	• Profit after tax • Underlying EPS • Underlying operating cash flow	• Group Treasurer	Balanced
Tax legislation	The way we work	• QinetiQ is liable to pay tax in the countries in which it operates, principally the UK and the US. • Changes in tax legislation in these countries could have an adverse impact on the level of tax paid on profits generated by the Group. • In the UK, R&D Expenditure Credits (RDEC) were introduced from 1 April 2013 and will be mandatory from 1 April 2016, replacing the R&D super deduction. Until that date, QinetiQ expects to claim the super deduction while the treatment of RDEC for MOD single source contracts remains under discussion between industry and the Government.	High/High	• External advice and consultation are sought on potential changes in tax legislation in the UK, the US and elsewhere as necessary enabling the Group to plan for and manage potential changes. • The Group is currently actively engaging with industry, MOD and industry bodies regarding the treatment of RDEC. • The Group has £291.6m of UK tax losses carried forward as at 31 March 2015 (2014: £213.9m).	• Profit after tax • Underlying EPS	• Group Tax Manager	Balanced

RELATED PARTY TRANSACTIONS

This statement is extracted from note 17 in respect of non-current investments which can be found on page 115 of the Annual Report and Accounts. 

During the year ended 31 March 2015 there were sales to associates of £3.0m (2014: £3.3m).  At the year end there were outstanding receivables from associates of £0.3m (2014: £0.1m).

DIRECTORS' RESPONSIBILITY STATEMENT

This statement is in compliance with DTR 4.1.12 and relates to and is extracted from page 89 of the Annual Report and Accounts and is signed by order of the Board by Jon Messent, Company Secretary.  Details of the Board of Directors of QinetiQ Group plc can be found on pages 58 and 59 of the Annual Report and Accounts.  Responsibility is for the full Annual Report and Accounts and not the extracted information presented in this announcement or in the Preliminary Results.

Responsibility statement of the Directors in respect of the Annual Report
The Directors in office as at the date of this report confirm that to the best of their knowledge:

·       the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company, and the undertakings included in the consolidation taken as a whole; and

·       the Directors' report includes a fair review of the development and performance of the business, and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

END

 

 

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