Annual Financial Report

RNS Number : 8278P
QinetiQ Group plc
12 June 2020
 

 

QINETIQ GROUP PLC

 

12 June 2020

 

Availability of Annual Report and Accounts 2020 and Notice of 2020 Annual General Meeting

 

QinetiQ Group plc (the 'Company') has today published the following documents:

 

· QinetiQ 2020 Annual Report and Accounts;

· Notice of 2020 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 2020 Annual General Meeting, have been submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

 

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

 

The 2020 Annual General Meeting will be held at 11.00 am on Tuesday 14 July 2020 at the offices of the Company, Cody Technology Park, Ively Road, Farnborough, Hampshire GU14 0LX .

 

In compliance with paragraph 6.3.5 of the Disclosure Guidance and Transparency Rules, the information in respect of Principal Risks, 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 2020 (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 2020 Annual Report and Accounts.

 

Enquiries:

 

Jon Messent - Company Secretary

+44 (0) 1252 392000

John Haworth - Group Head of Investor Relations

+44 (0) 447920545841

Press Office

+44 (0) 1252 393500



 

 

APPENDIX

 

PRINCIPAL RISKS

How we protect our business

Successful management of current and emerging risks is critical to achieving our company goals. Our Group Head of Enterprise Risk Management is responsible for designing and facilitating the risk management processes across the organisation, provides risk expertise and support to the businesses and reports risk information across the Group including to the Global Leadership Team, Audit and Risk & CSR Committees and the Board.

 

We utilise the Group-wide risk management framework to inform our decision-making at both the strategic and operational levels, adopting a top-down/bottom-up process. This enables us to fully leverage its benefits and subsequently support the long-term

success of our business. Our application of risk management continues to evolve with our customers' approach to risk, the rapidly changing external environment in which we operate and internal changes, thus ensuring we are best placed to pursue opportunities and deliver results, whilst simultaneously innovating for our customers' advantage. Over the past 12 months, risk and opportunity management has been extensively supported by the roll-out of a new risk management tool.

 

Risk management and assurance activity

Three lines of defence model

Our risk management and assurance activity is formed of three lines of defence, each reporting to the Global Leadership Team and to the relevant Board Committees. The first line of defence is performed by our businesses and functions, through managing activities in accordance with established operating principles; the second line is performed by the assurance functions, including the enterprise risk management and safety and governance teams; and the third line is performed by the internal audit team and external providers.

 

Board
Responsible for effective risk management across the QinetiQ Group. Sets risk appetite and assesses principal and emerging risks

Audit Committee and Risk & CSR Committee

· Receive reports from the assurance functions

· Monitor and review the principal and emerging risks

· Risk deep dives

· Monitor the effectiveness of internal controls

Global Leadership Team

Identifies and monitors the principal and emerging risks, as well as the material risks (including operational) reported from the businesses and Group functions

Risk owners

-  Managers identify and evaluate risks

-  Design and operate internal controls and other mitigation measures

-  Application of delegated authorities, policies, procedures and codes of practice

-  Report risks through relevant reporting and escalation processes

 

1st line of defence

Enterprise risk management

-  Risk Management and other assurance functions with limited independence

-  Design and facilitate the risk management processes across the Group, provide risk expertise and support to the businesses and functions

-  Responsible for continually improving the risk management process across the Group as a whole

-  Report to the Board and  the Global Leadership Team

2nd line of defence

 

Independent

risk assurance

-  Internal Audit and independent assurance providers

-  Review and evaluate risk management activity and provide assurance of the effectiveness of the control environment to manage risks

-  Manage the external confidential reporting process

-  Report to the Board and the Global Leadership Team


3rd line of defence

 

Emerging risk

The Group Risk Register consists of material risks relating to effective delivery of our strategy. The Board and Global Leadership Team look to assess these principal risks from a number of different perspectives, including both individually and collectively. We also actively consider emerging risks as part of the risk assessment process. The Board recognises that some risks may be affected by factors outside the control of the Company and also recognises that despite the robustness of the risk management processes they cannot provide absolute assurance and unknown risks may manifest without warning. We have proven processes in place to rapidly deploy appropriate management to such risks and utilise lessons learned across the organisation as part of our ongoing drive for continuous improvement.

 

Over the past 12 months our Group risk profile has changed owing to changes in our external environment, the ongoing development of our strategy and robust, focused mitigation. In light of this both the Single Source Regulations impacts on our revenue and the risk around recruitment and retention have been mitigated to a level such that they are no longer considered to pose principal risks to the organisation. However owing to the increased volume of M&A activity across our portfolio a new risk has been included. In addition, as the impact of COVID-19 has escalated we have included a risk that our operations are further disrupted by the pandemic.

 

QinetiQ risk appetite

The Board identifies and reviews its tolerance of risk by establishing a clear risk appetite and setting appropriate delegations of authority to the executive and senior leaders. We focus on those critical risk areas necessary to achieve our strategic goals. Risk appetite is articulated by defining three categories which balance scrutiny and mitigation activity against likely benefit:

Cautious

Avoidance of uncertainty - with negligible or low residual risk. Applying innovation prudently where the risks are fully understood.

Balanced

Preference for delivery options that have a low or moderate degree of residual risk. Applying innovation only where successful delivery is likely.

Eager

Willing to consider all delivery options despite greater inherent risk and eager to be innovative.

 

Commercial

Opportunities relating to increased market share where we have proven delivery into existing markets

Eager

Opportunities that translate proven delivery into new markets

Balanced to Eager

Opportunities that translate new capability or delivery into existing customers.

Balanced

Opportunities that involve new capability or delivery into new markets.

Cautious to Balanced

Operational

Operational delivery

Cautious to Balanced

Compliance with legal and regulatory requirements

Cautious

 

 

Strategic Risks

UK Defence Test and Evaluation strategy

International strategy

Innovation strategy

Risk

UK Government budget constraints lead to reduced spending in the core markets in which we operate. This, and modernising ways of evaluating capability, results in a risk that our approaches/offerings may not remain relevant. There remains the

potential for this risk to be exacerbated by the impact of COVID-19 on Government spending and the EU exit should the UK experience a loss of market confidence and further reduction in collaborative EU funding.

 

Risk

Plans to grow our international business may be impacted by external influences outside of our control, such as geo-political risks, or specific risks arising from working in new markets and globalised operations.

 

Risk

Failure to create a culture of innovation, develop relevant technology and business models or to attract and retain the right talent, to enable the realisation of new ideas for our customers and our organisation.Failure to create a culture of innovation or to invest

adequately in, or create value from, our innovation

investment. As well as the risks arising from the

introduction of disruptive technologies/alternative

business models

Impact

A reduction in revenue and associated profitability from the Group's Government and Defence contracts.

 

Impact

Unable to realise expected growth in the planned timeframes.

Impact

Negative impact on the Group's market position,

competitiveness, and future growth. and failure to

deliver a return on investment in our Internal

Research and Development (IRAD) fund.

 

Mitigation

Our strategy is focused on leading and modernising UK Test & Evaluation in support of our customers' objectives. This includes ongoing proactive engagement with our major customers to enable us to support their objectives.

Our focused investment into contracts enhances our offerings that support our customers with their efficiency challenges as well as ensuring that we provide the right services as the threat environment continues to evolve. We continue to deliver new types of evaluation and are increasingly moving towards modelling and synthetics as well as embracing the next generation digital transformation.

We are expanding our global Test & Evaluation business and post Brexit will maintain relationships with the UK Government to support bilateral relationships within Europe; there is increased recognition that T&E is an enabler to military capability and prosperity.

 

Mitigation

Our international strategy is focused on the markets we feel we have the best routes to access with the most appropriate products or services.

Adopting a focused approach ensures we can closely monitor our progress, adapting and responding as necessary.

We undertake extensive due diligence, taking the appropriate professional advice to ensure structural, regulatory, legal and political risks are understood and minimised.

We partner with or acquire, where appropriate, quality local businesses to leverage their infrastructure and de-risk local market access.

 

Mitigation

Our overall strategy helps us to ensure that we focus our innovation on areas with clear commercial opportunities.

 

We continue to mature our innovation approach, including clear articulation across the organisation, to ensure the importance of

innovation to both our organisation and our

customers is clearly understood and initiatives

are supported.

 

Specific innovation activities in FY21 will strengthen and improve our innovation approach across the organisation.We have evolved our approach to investment to

place a greater focus on routes to market in order

to drive a profitable return. We have also further evolved our partner eco-system to support indirect

routes to market.

Our operating model, based on matrix working, helps to ensure that any internal barriers to collaboration and knowledge sharing are removed.

Metrics

-  Customer satisfaction

-  All financial KPIs

Metrics

-  All financial KPIs

-  International revenue as a % of total revenue

Metrics

- Customer satisfaction

- Employee engagement

 

Responsibility

Group Director Business Development

Responsibility

Group MD International

Responsibility

Group Function Director Strategy and Planning

Group Function Director Business Development

Group Function Director Technical

Risk appetite

Eager

Risk appetite

Balanced to Eager

Risk Appetite

Balanced

Likelihood/Impact

Medium/Medium

Likelihood/Impact

High/High

Likelihood/Impact

High/High

Proximity/Velocity

1-2 years / Medium

Proximity/Velocity

0 -1 year / Medium

Proximity/Velocity

1 - 2 years / Low

 

A material element of the Group's revenue is derived from large contracts

Mergers and Acquisitions

(M&A)

 

Transformation

Risk

The Long Term Partnering Agreement (LTPA) is a 25-year partnering contract with the MOD to provide test, evaluation, and training

services. UK Government budget constraints could lead to a material change to the

contract.

 

Risk

M&A activity forms a key element of our strategic growth plans in order to expand our customer offerings. New acquisition selection and integration is key to realising the maximum potential benefits.

Risk

The transformation programme does not

realise the expected benefits.

Impact

The LTPA directly contributes a material proportion of the Group's revenue and earnings

Impact

Adverse impact on the Group's financial

performance.

Impact

The introduction of new ways of working disrupts business delivery.

Mitigation

Our aim is to provide our customer with the capabilities they need to test and train against current and future threats in a cost effective manner, leading and modernising UK Test & Evaluation. Our increased customer focus is evidenced in both the LTPA and EDP programmes.

Ensuring frameworks such as the LTPA enable agility and pace to the Front Line in a rapidly changing threat environment strengthens the rationale for their use.

Our investment into key contracts continues to ensure they meet the our customers' expectations and remain cost effective and relevant in an evolving threat environment.

 

Mitigation

We have robust governance in place regarding this risk including the M&A Committee and relevant Integration Steering Committees.

 

All planned acquisitions are carefully considered to ensure good strategic alignment, extensive due diligence is undertaken and integrations are run as individual projects,

ensuring they receive the focus and support

necessary to facilitate a smooth transition.

Mitigation

The programme is designed around three

transformational themes (Performance culture,

Global & Digital) to support the delivery of

our global strategy, improve customer focus,

competitiveness, and global collaboration

across the Company.

 

Significant engagement with leaders across

the organisation to catalyse the change

in behaviours necessary to allow the transformation work to deliver benefit.

 

Assessment of "capacity to change" and

phased approach to transformation in each

part of the business to maximise effectiveness.

Metrics

- All financial KPIs except orders

- Customer satisfaction

Metrics

Inorganic growth

Revenue & profit

Metrics

Customer satisfaction

Employee engagement

All financial KPIs

Responsibility

Group MD Maritime & Land

Group MD Air & Space

Responsibility

Group Function Director Strategy & Planning

Group Managing Directors

Responsibility

Group Function Director Business Transformation & Services

Risk Appetite

Balanced

Risk Appetite

Balanced

Risk Appetite

Eager

Likelihood/Impact

Medium/High

Likelihood/Impact

High/High

Likelihood/Impact

Medium/Medium

Proximity/Velocity

0 - 1 year / Low

Proximity/Velocity

1 - 2 years / Low

Proximity/Velocity

0 - 1 year / Medium

 

Operational Risks

Significant breach of relevant

laws and regulations

Security and IT systems

COVID-19 pandemic

Risk

We operate in highly regulated environments and non-compliance has the potential to compromise our ability to conduct business in certain jurisdictions, potentially having an impact on a variety of stakeholders

Risk

A breach of physical or data security, cyber attacks or IT systems' failure could have an adverse impact on our customers' operations.

 

Risk

The COVID-19 pandemic disrupts QinetiQ operations.

Impact

Failure to comply with particular regulations could result in a combination of fines, penalties, civil or criminal action, suspension or debarment from government contracts, as well as reputational damage to our brand.

 

Impact

Significant reputational damage, as well as the

possibility of exclusion from some types of government contracts resulting in reduced orders, revenue and profit.

 

Impact

The disease and public health management

strategies require QinetiQ, our customers and suppliers to stop or delay some activities.

Mitigation

Instilling the right behaviours and culture across the Group is a key part in minimising the risks.

In addition to our robust policy, procedures and mandatory training, the QinetiQ Code of Conduct defines clear expectations for the Group and its employees.

Key areas of focus include the following:

- Safety of product and services

- Health, Safety &

Environment, international trade controls, bribery and ethics; where the Company adopts a zero tolerance approach to bribery and corruption.

 

Mitigation

Data security is assured through a multi-layered

approach that provides a hardened environment,

including robust physical security arrangements

and data resilience strategies.

Information systems are designed with consideration to single points of failure and

comply with relevant accreditation standards.

Mandatory security awareness training for all employees.

Continuously reviewing the threats and adapting our security strategy and mitigations accordingly.

 

Mitigation

QinetiQ's crisis management process is well embedded, flexible and exercised. It operates at strategic, tactical and operational levels across the Group allowing the Company

to respond rapidly to the pandemic and governmental requirements in all the countries in which it operates. The process has been held under regular review and modification enacted where required to ensure an effective response to the pandemic. The Company has engaged with all relevant stakeholders including government, customers, suppliers and employees as the pandemic has

progressed. Ways of working have been

adapted to facilitate remote working from

home where possible and to meet public health

requirements where not.

Metrics

- Health, Safety and Environment

- Mandatory training compliance

- Commercial intermediary monitoring

Metrics

- Cyber dashboard

- Security dashboard

Metrics

- Customer satisfaction

- Employee Engagement

- All financial KPIs

Responsibility

Company Secretary/Group General Counsel

Responsibility

Group Function Director Business

Transformation & Services

Responsibility

CEO

Risk Appetite

Cautious

Risk Appetite

Cautious

Risk Appetite

Cautious

Likelihood/Impact

Medium/High

Likelihood/Impact

Medium/High

Likelihood/Impact

High/Medium

Proximity/Velocity

0 - 1 year / High

Proximity/Velocity

0 - 1 year / High

Proximity/Velocity

0 - 1 year / High

 

 

 

LONGER-TERM VIABILITY ASSESSMENT

Assessing the prospects of the Group

The Group's corporate planning processes involve the following individual processes  covering differing time frames:

 

1. An annual Integrated Strategic Business Plan (ISBP) process that looks at the financial outlook for the following five years. This process commences with an assessment of the orders pipeline producing an order intake scenario. A review of the phased delivery profile and the cost base required to support this enables generation of base-case, high-case and low-case profit forecasts. Capex and working capital requirements are also collected, reviewed, approved and a cash flow produced for the plan period;

2. An annual budget process that covers the first year of the five-year planning horizon in detail;

3. A bi-annual forecast process to update the view of the first budget year (the year which would be in progress);

4. A rolling monthly 'latest best estimate' process to assess significant changes to the budget/forecast for the year in progress; and

 

5. The financial impact of principal risks (individually and cumulative), together with mitigating actions.

The corporate planning process is underpinned by assessing scenarios and risks that encompass a wide spectrum of potential outcomes, both favourable and adverse. The downside risk scenarios are designed to explore the resilience of the Group to the potential impact of all the significant risks set out on pages 34 to 36, or a combination of those risks.

The scenarios are designed to be severe but plausible, and take full account of the availability and likely effectiveness of the mitigating actions that could be taken to avoid or reduce the impact or occurrence of the underlying risks, and that realistically would be open to them in the circumstances. In considering the likely effectiveness of such actions, the conclusions of the Board's regular monitoring and review of risk and internal control systems, as discussed on page 73, 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 Global Leadership Team to the potential crystallisation of a key risk.

Subsequent to the standard planning activities noted above and in response to the COVID-19 crisis that started to escalate just prior to the Group's current year end, specific scenarios have been run to model a variety of potential impacts of COVID-19 on the Group. This has been informed by a further month of trading post year end whilst employees are working during social distancing restrictions and by revised financial forecasts for the 2021 fiscal year prepared by each business unit within the Group.

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 2025. This is the period covered by our strategic planning process and is subject to stress-testing and scenario planning around potential risks. It has been selected because it presents the Board and readers of the Annual Report with a reasonable degree of confidence whilst still providing an appropriate longer-term outlook.

Confirmation of longer-term viability

As noted on page 113, 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 2025.

 

RELATED PARTY TRANSACTIONS

During the year ended 31 March 2020 there were sales to associates and joint ventures of £5.7m (2019: £10.1m). At the year-end there were outstanding receivables from associates and joint ventures of £2.1m (2019: £1.4m).

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

 

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. In preparing the financial statements, the Directors are required to:

 

-   select suitable accounting policies and then apply them consistently;

-  state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements;

make judgements and accounting estimates that are reasonable and prudent; and

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

 

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

DIRECTORS' CONFIRMATIONS

The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company's position and performance, business model and strategy.

 

Each of the Directors, whose names and functions are listed on pages 60 and 61 confirm that, to the best of their knowledge:

 

-  the Company's financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company;

-  the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

-  the Directors' report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces.

In the case of each Director in office at the date the Directors' report is approved:

 

-  so far as the Director is aware, there is no relevant audit information of which the Group and Company's auditors are unaware; and

-  they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group and Company's auditors are aware of that information.

 

SCOPE OF THE REPORTING IN THIS ANNUAL REPORT

The Board has prepared a Strategic report which provides an overview of the development and performance of the Group's business in the year ended 31 March 2020. 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.

 

 


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