Audited preliminary results
QinetiQ Group plc
07 June 2006
News release
7 June 2006
QinetiQ Group plc audited preliminary results
for the year ended 31 March 2006
Financial summary
2006 2005
Turnover £1,051.7m £855.9m
Underlying operating profit £90.7m £82.3m
Underlying operating profit (excluding profit on £90.7m £65.2m
disposal of interest in pSiMedica Limited)
Underlying operating margin (excluding profit on 8.6% 7.6%
disposal of interest in pSiMedica Limited)
Underlying profit before tax £80.1m £58.2m
Underlying earnings per share 10.2p 8.8p
Basic earnings per share 10.0p 12.0p
Net debt £233.0m £176.6m
Free cash flow £141.3m £55.7m
Backlog £608.4m £572.0m
Underlying effective tax rate 22.7% 16.2%
Dividend per ordinary share 2.25p nil
See Glossary section for definitions of Non GAAP terms used throughout this
statement
Operational summary
• Results in line with expectations
• Turnover increased by 22.9%
• Underlying profit before tax up by 37.6%
• Underlying earnings per share up by 16.3% to 10.2p
• Continued improvement in underlying operating margin to 8.6% (2005: 7.6%)
• Statutory profit before tax of £72.5m (2005: £78.0m including £17.1m
profit on disposal of pSiMedica Limited)
• Backlog increased by 6.4% to £608.4m (2005: £572.0m)
• North American turnover increased to £248.4m (2005: £70.1m)
• Net debt grew by £56.4m after investment of £202.5m in acquisitions and
net cash of £136.2m received from IPO
• Free cash flow up by 153.7%, driven by underlying operating cash
conversion of 84.4%
more/...
2006 preliminary results statement
Commenting on the results, Sir John Chisholm, executive Chairman, said:
'I am delighted with the performance underpinning these results, which
demonstrate real delivery against our growth strategy. In the UK we have grown
our Technology Supply business to mitigate the impact of increased competition
for MOD research funding, seen good organic growth and further acquisitions in
the US, and significant progression in the commercialisation of defence
technology during the year.
The UK government's Defence Industrial Strategy and the US government's
Quadrennial Defense Review will shape our markets to a considerable degree into
the medium term future. It is positive for QinetiQ that both documents emphasise
the imperative for agility in military procurement and the key role for advanced
technology in delivering that agility. Budgets will remain constricted on each
side of the Atlantic and QinetiQ will have to maintain its pace of
transformation through investment, rationalisation and productisation in order
to realise the significant potential of its markets. The successes of the year
we have just completed have laid a solid foundation for delivering on these
opportunities.'
Performance
This year's results demonstrate QinetiQ's continued delivery in three strategic
areas: the repositioning into growth markets within the Ministry of Defence
(MOD) programmes, the expansion of the Group's US presence and the
commercialisation of our defence technologies.
The continued repositioning of the UK defence business saw growth of 28.2% in
Technology Supply revenue to £124.2m (2005: £96.9m), as the business continues
to transition its business mix, invest in productisation and rationalise its
operations to offset the expected ongoing reduction in revenue from the MOD's
research programme. QinetiQ also consolidated its position as a provider of
advisory and managed services to the MOD. A particularly notable event this year
included selection as preferred bidder for the 20-year managed service contract
for the Combined Aerial Targets Service (CATS).
In the US, turnover increased to £248.4m (2005: £70.1m), with a second half
annualised run-rate in excess of £310.0m. US expansion was accelerated with
three further notable acquisitions in specific growth markets: Apogen
Technologies, an IT services company working mainly for the Departments of
Defense (DoD) and Homeland Security (DHS), technology firm Planning Systems and,
subsequent to the year-end, IT services specialist Ocean Systems Engineering.
Particular achievements made in the US market included the selection of
QinetiQ's UK electric drive technology for the US Future Combat Systems (FCS)
tracked vehicle demonstrator programme and a research contract into optical
tagging from the US Defense Advanced Research Projects Agency (DARPA).
more/...
Other notable successes included the delivery of desert kits to equip the US
Army's Blackhawk helicopter fleet and the 500th Talon robot into active service.
Security & Dual Use turnover increased by 10.6% to £133.7m (2005: £120.9m) and
the sector also passed important milestones in developing commercial ventures.
Turnover growth was driven by a strong performance from the security business,
which continued to penetrate both government and commercial markets, and a
positive contribution from the new European space business, Verhaert, which more
than offsets declines in UK government funding for space research. Key events
included a contract to replace the UK police forces' information portal system,
the first sale for the Tarsier venture, sales of 113,000 GPS chips and the
design and implementation of an optical foot measuring system for shoe retailer
Clarks.
Outlook
The coming year will see QinetiQ continuing to execute its repositioning
strategy. In the UK defence business, this means continuing requirements to
rapidly insert technology into new and existing systems and equipment which are
urgently required by the UK armed forces. In the commercialisation business,
this means building particularly on a strong security positioning, continuing to
develop the space business through key bidding opportunities and selected
acquisitions, and further investment to develop the ventures portfolio business
plans. In North America, new business opportunities are anticipated as the US
companies work more closely together and with the UK, and the disciplined
approach to acquisitions continues to be pursued.
- ends -
There will be a webcast of the presentation of Preliminary Results to analysts
at 9:30am 7th June 2006. For details log on to the QinetiQ Investor Centre at:
http://www.qinetiq.com/home/investor_centre.html
Register now for our electronic news alert service
by visiting the newsroom at www.QinetiQ.com
Notes for Editors:
• QinetiQ (pronounced ki net ik as in 'kinetic energy') is a leading
international defence and security technology company that was formed in
July 2001 from the UK Government's Defence Evaluation & Research Agency
(DERA). QinetiQ has over 11,400 employees, who deliver technology-based
services and exploit QinetiQ's strengths in technology research by selling
systems solutions, products and licences to government and commercial
customers in a spectrum of defence, security and related commercial markets.
• QinetiQ is organised into three operating sectors:
o Defence & Technology (D&T) - D&T represents the core of QinetiQ's UK
based defence business, delivering research based technology solutions
and managed services that support the UK's armed forces and those of its
allies.
o Security & Dual Use (S&DU) - S&DU draws from QinetiQ's broad inventory
of defence related intellectual property and leading scientists to
develop commercially viable products and services in selected adjacent
commercial markets.
o QinetiQ North America (QNA) - QNA delivers technology services,
systems engineering & technical assistance and IT services into the North
American marketplace from its US based operations.
For further information please contact:
QinetiQ: Nicky Louth-Davies +44 (0)1252 392809
Citigate Dewe Rogerson: Chris Barrie +44 (0)20 7282 2943
Group trading performance 2006 2005 Increase %
--------- ---------- ---------
Summary
Group turnover £1,051.7m £855.9m 22.9%
Underlying Operating Profit £90.7m £82.3m
Profit on disposal of interest in
pSiMedica Limited - £17.1m
--------- ----------
Underlying Operating Profit
(excluding profit on disposal of
interest in pSiMedica Limited) £90.7m £65.2m 39.1%
--------- ----------
Underlying Operating Profit margin
(excluding profit on disposal of
interest in pSiMedica Limited) 8.6% 7.6% 100bps
Underlying profit before tax £80.1m £58.2m 37.6%
Underlying earnings per share 10.2p 8.8p 16.3%
Net debt £233.0m £176.6m 31.9%
Free cash flow £141.3m £55.7m 153.7%
Backlog £608.4m £572.0m 6.4%
Underlying effective tax rate 22.7% 16.2%
Dividend per ordinary share 2.25 pence Nil
QinetiQ is organised into three operating sectors:
• Defence & Technology (D&T) - D&T represents the core of QinetiQ's UK
based defence business, delivering research based technology solutions and
managed services that support the UK's armed forces and those of its allies.
• Security & Dual Use (S&DU) - S&DU draws from QinetiQ's
broad inventory of defence related intellectual property and leading
scientists to develop commercially viable products and services in selected
adjacent commercial markets.
• QinetiQ North America (QNA) - QNA delivers technology services, systems
engineering & technical assistance and IT services into the North American
marketplace from its US based operations.
------------------------------ ---------- ---------
Turnover 2006 2005
£m £m
------------------------------ ---------- ---------
Defence & Technology 669.6 664.9
Security & Dual Use 133.7 120.9
QinetiQ North America 248.4 70.1
------------------------------ ---------- ---------
Group turnover 1,051.7 855.9
------------------------------ ---------- ---------
Turnover in the year to 31 March 2006 has increased by 22.9% over 2005 as the
Group continued to execute its strategy to expand into the key North American
defence and security markets. The growth reflects the inclusion of a full year's
results from the acquisitions of Westar (acquired October 2004) and Foster
Miller (acquired November 2004) together with a first time contribution from the
acquisitions of Apogen (acquired September 2005) and Planning Systems (acquired
September 2005). UK based sector turnover grew by 2.2% with the impact of £14m
of non-recurring LTPA revenue in 2005 partly offset by the first time
contribution from Verhaert Design and Development NV (Verhaert) of Belgium
(acquired September 2005). Underlying organic growth in the UK sectors was 2.3%.
---------- ---------
Orders and backlog 2006 2005
£m £m
---------- ---------
Orders
--------
Defence & Technology 420.7 472.6
Security & Dual Use 168.1 127.8
QinetiQ North America 227.9 67.9
---------- ---------
Total 816.7 668.3
---------- ---------
---------- ---------
Backlog 2006 2005
-------- £m £m
---------- ---------
Defence & Technology 366.6 410.0
Security & Dual Use 112.6 93.4
QinetiQ North America 129.2 68.6
---------- ---------
Total 608.4 572.0
---------- ---------
Orders won in year increased by 22.2% to £816.7m in 2006. Orders do not include
a value for the revenues from the £5.6bn core service contract for the LTPA
included in the Defence & Technology sector each year as this contract was
awarded for a 25 year period at inception. Growth in orders was driven by the
QNA acquisitions in 2005 and 2006 and strong organic growth in S&DU. At a Group
level this was offset by Defence & Technology where the previous year included
several awards of significant multi-year research and procurement & capability
contracts that, as expected, were not repeated in 2006.
Backlog is also stated excluding the £5.0bn value of the remaining 22 years of
the LTPA contract. The growth in backlog is generally driven by the same factors
underlying the growth in orders. Compared to the UK, backlog in the US
businesses is generally lower as the nature of the contract awards is more
centred around larger multi year 'enabling' contracts that become funded and
then utilised in smaller segments during the course of each fiscal budget cycle.
An example of this is the enabling order for Talon robots that Foster-Miller
hold which in total indicates an intention to buy $257m worth of equipment over
a number of years with the specific funding for each year being decided as part
of each US Government annual budget cycle.
Operating Profit
Underlying Operating Profit (excluding profit on disposal of interest in
pSiMedica Limited) has grown by 39.1% from £65.2m to £90.7m, with margin
improving from 7.6% to 8.6%. Underlying Operating Profit growth from the two UK
based sectors was 15.7% reflecting continued margin enhancement and focus on
delivery from core trading activities together with the contribution from the
acquisitions of HVR Consulting in August 2004 and Verhaert Design & Development
NV in September 2005. This profit growth in the UK based sectors is complimented
by profit growth in QNA largely arising from acquisitions made in the year and
the consolidation of prior year acquisitions for a full year.
Within the Group, S&DU crystallises value from intellectual property through a
variety of different methods such as royalties, licence fees, equity
realisations, sale of IP joint ventures and technology transfer based
transactions, which can lead to volatility in the year to year trend. In 2006
license revenue from now expired LCD patents contributed £13.0m of turnover
(2005: £14.7m) of which £9.0m arose in the first half of the year. In the 2005
Underlying Operating Profit included a £17.1m gain on disposal of the investment
in pSiMedica Limited. Underlying Operating Profit inclusive of the gain on
disposal of the investment in pSiMedica, has grown 10.2% from £82.3m in 2005 to
£90.7m in 2006.
Within the UK the business continues to respond to changes in the profile of
demand for its services from customers and, where possible, actively seeks to
redeploy people from declining areas of the business to areas of growth. Due to
the particular specialised capabilities within the business, redeployment is not
always possible and, due to the ever increasing rate of technological change and
shift in market demands, the Group recognises that a degree of ongoing
restructuring and repositioning is an integral part of the progression of the
business. The current year costs of such repositioning are borne within the
underlying operating profits of the Group. In the year to 31 March 2006 an
amount of £9.4m has been charged to the income statement, within employee costs,
associated with such restructuring and further costs of at least £8.0m are
anticipated in the first half of the year ending 31 March 2007.
Consistent with the historical trends in our UK business, 58.9% of the Group's
Underlying Operating Profit was delivered in the second half of the year. In
light of the strong LCD royalties in the first half of 2006 and the
restructuring costs already committed in 2007, it is anticipated that a greater
proportion of profits will be generated in the second half of the coming year
than in 2006.
Net cashflow from operating activities
---------- ---------
2006 2005
£m £m
---------- ---------
83.3 23.6
---------- ---------
Net cashflow from operating activities improved by 253.0% to £83.3m. The UK
sectors were the drivers of this performance contributing strong operating cash
flow conversion due to diligent working capital management and a consequent
reduction in MOD related working capital at the year end. The benefit in the UK
sectors was mitigated in part by an absorption of working capital in QNA due to
the timing of contract funding awards from the DoD and DHS around the year end
following the delayed finalisation of the US Government budget in February 2006.
During 2006 the Group completed the UK restructuring programme announced in 2005
resulting in an associated cash outflow during 2006 of £22.8m. Excluding the
impact of these cash payments the Underlying Operating Cash Conversion ratio
improved from 27.2% to 84.4%.
Sector analysis
Defence and Technology
2006 2005 Growth Underlying
Growth (1)
£m £m % %
----- ------- -------- ----------
Turnover
MOD Research 164.3 188.8 (13.0)% -13.0%
Technology Supply 124.2 96.9 28.2% 28.2%
Procurement & Capability
Support 197.3 182.3 8.2% 6.5%
Managed Services 183.8 196.9 (6.7)% 0.5%
----- ------- -------- ----------
669.6 664.9 0.7% 2.4%
----- ------- -------- ----------
Underlying Operating Profit 56.5 51.3 10.1% 8.9%
----- ------- -------- ----------
Underlying Operating Margin 8.4% 7.7%
Orders
MOD Research 99.8 202.5
Technology Supply 137.3 98.3
Procurement & Capability
Support 177.1 171.8
Managed Services 6.5 -
----- -------
420.7 472.6
----- -------
1. Underlying growth in turnover excludes the impact of acquisitions and
£14.0m non recurring rationalisation revenues under the LTPA in 2005.
Defence and Technology (D&T) turnover increased by £4.7m to £669.6m in the year
to 31 March 2006. Underlying turnover growth was 2.4% after excluding
non-recurring rationalisation income of £14.0m in 2005 under the LTPA within
Managed Services and allowing for the contribution from the HVR Consulting
acquisition in August 2004.
Since the formation of QinetiQ in 2001, the MOD has introduced competition into
its research programme and is progressively phasing down the amount of such work
that is assured to QinetiQ such that by 2008 those elements of the MOD research
programme available to industry will be fully opened to competition. QinetiQ has
maintained market leadership in this domain, through success in winning competed
contracts or as a subcontractor where QinetiQ is equipped to provide the
requisite solution. During the year QinetiQ continued to win more than 50% of
the MOD research bids in which it competed.
The overall level of MOD research undertaken by the Group, in both D&T and S&DU,
has reduced in line with expectations from £227.1m in 2005 to £193.1m in 2006.
This trend is expected to continue in the coming year as further areas of the
research budget are opened to competition and the volume of assured work for
QinetiQ reduces. QinetiQ has been able offset the impact of competition in the
research programme by increasing its penetration of the defence technology
supply chain as a partner or subcontractor to other primes, leading to 28.2%
growth in the Technology Supply stream offsetting the reduction in MOD research
revenue within the D&T sector.
Procurement and Capability Support turnover grew by 8.2% largely due to
particularly high levels of demand for Tasking Services within the LTPA in year.
Within Managed Services the core provision of test and evaluation services under
the LTPA remained broadly consistent excluding the reduction year on year due to
non recurring rationalisation revenues in 2005 of approximately £14.0m.
Underlying Operating Profit has risen £5.2m primarily due to core operational
performance and improved margins driven from a continued focus on cost control,
strong project delivery across the sector in year and ongoing rationalisation of
sector overhead functions. The sector incurred £4.4m in restructuring costs in
year as part of the continual process of aligning technical capabilities and
back office infrastructure to evolving market needs.
As discussed above the profile of work won on the 'supply side' of D&T's
business is transitioning to higher levels of Technology Supply work away from a
historic dependence on MOD Research. The orders profile indicates that this
trend will continue where the book to bill ratio for Technology Supply was 1.1:1
in the year. The overall decrease in D&T orders is due largely to the
non-recurrence of a number of multi-year contract awards that were won in 2005
in the Research and Procurement & Capability Support streams.
In March 2006 the Group was named preferred bidder, after a long and detailed
competitive tender process, to provide a Combined Aerial Target Service (CATS)
for air defence training and test and evaluation for the UK's armed forces over
the next 20 years. This selection demonstrates the Group's credentials to win
and operate long term managed services contracts in a highly competitive
environment. The largest element of this opportunity is work already undertaken
by QinetiQ under the LTPA to deliver the aerial target service. In addition
QinetiQ will provide a service for ground-based air defence training, aerial
target services for the Royal Navy, and an air-to-air service for the RAF. The
service will be capable of operating from any suitable range worldwide.
Looking forward, QinetiQ is a 50 per cent co-sponsor of Metrix, a planned joint
venture with Land Securities Trillium, currently bidding for two large 25 year
contracts to provide training to the UK armed forces as part of the MOD's
Defence Training Rationalisation (DTR) Programme. The joint venture is bidding
against one other entity for each of the contracts and MOD has stated that it
will announce its preferred bidder in October 2006.
Security & Dual Use
2006 2005 Growth Underlying
£m £m % Growth (1)
%
----- ----- ------ ----------
Turnover
Security 32.1 24.6 30.5% 30.5%
Space 25.5 17.9 42.5% (15.1)%
Technology Development &
Exploitation 50.3 56.0 (10.2)% (10.2)%
Managed Services 25.8 22.4 15.2% 15.2%
----- ----- ------ ----------
133.7 120.9 10.6% 2.1%
----- ----- ------ ----------
Underlying Operating Profit
(excluding profit on disposal of
interest in pSiMedica Limited) 9.7 5.9 64.4% 54.2%
------ ----------
Profit on disposal of interest in
pSiMedica - 17.1
----- -----
Underlying Operating Profit 9.7 23.0
----- -----
Underlying Operating Margin
(excluding profit on disposal of
interest in pSiMedica Limited) 7.3% 4.9%
----- -----
Orders
Security 48.3 28.2
Space 18.7 12.5
Technology Development &
Exploitation 63.1 56.0
Managed Services 38.0 31.1
----- -----
168.1 127.8
----- -----
(1) Underlying growth in turnover excludes the impact of acquisitions in 2006.
Security & Dual Use (S&DU) turnover increased 10.6% in the year. The organic
growth of 2.1% reflects a strong performance in the Security stream with
continued penetration of both government and commercial markets, including a
contract to deliver the replacement information portal system for the UK police
forces and a rise in IT security managed services turnover allowing investment
to be initiated in a second secure operating centre. These increases were partly
offset by a reduction in turnover from Technology Development & Exploitation (TD
&E) as the Optronics and Materials businesses continued their transition away
from a traditional MOD funded research base towards US defence and commercial
revenues from contracts such as the optical foot measuring system being designed
and implemented for Clarks, the shoe retailer. TD&E includes £13.0m (2005:
£14.7m) of royalty revenue from enforcement actions on LCD patents which expired
in 2004. The Space stream saw an underlying decline in its UK business due to
lower levels of UK Government funding directed to Space research in year more
than offset by a strong initial contribution from the acquisition of Verhaert
which delivered £10.3m of revenue, well ahead of expectations due to an
unusually high level of pass-through work on ESA projects.
Underlying Operating Profit increased 64.4% (excluding the £17.1m gain on the
sale of the Group's interest in pSiMedica in 2005) due to strong operational
focus within the core business and a first time contribution of £0.6m from
Verhaert. The sector incurred £5.0m of restructuring costs in the year as it
continues to align the business to market opportunities beyond the defence
sector and to improve operational efficiency.
Security & Dual Use orders rose 31.5% resulting in a book to bill ratio of 1.26:
1 in the year. This was driven by strong performance in the Security stream
which secured a four and a half year contract to provide and manage a
replacement for the UK National Police Portal System, received funding from the
DTI to form, manage and facilitate the UK's Cyber Security and Biometrics
Knowledge Transfer Network and secured the first commercial order for the
Tarsier runway debris detection radar system for Vancouver Airport. Managed
Services secured a two year contract to continue to provide support to the
Defence Diversification Agency (DDA) and also negotiated specific consultancy
contracts to provide planning support, site remediation and integration
services, and property consultancy services while TD&E saw some important wins
in its Optronics business, including further research contracts from the DoD.
QinetiQ North America
------------------------ ------- ------- ------- -------
2006 2005 2006 2005
£m £m $m $m
------------------------ ------- ------- ------- -------
Turnover
Technology 82.9 26.6 146.8 50.6
Systems Engineering & Technical Assistance 105.3 43.5 187.5 82.4
IT Services 60.2 - 105.5 -
------------------------ ------- ------- ------- -------
248.4 70.1 439.8 133.0
------------------------ ------- ------- ------- -------
Underlying Operating Profit 24.5 8.0
------------------------ ------- -------
Underlying Operating Margin 9.9% 11.4%
------------------------ ------- -------
Orders
Technology 73.2 25.3 129.6 48.2
Systems Engineering & Technical Assistance 97.4 42.6 172.6 80.8
IT Services 57.3 - 100.3 -
------------------------ ------- ------- ------- -------
227.9 67.9 402.5 129.0
------------------------ ------- ------- ------- -------
QinetiQ North America turnover has increased by £178.3m in 2006 as the Group has
made a number of acquisitions over the past two years to establish a platform to
access this important market. The majority of growth in 2006 has been due to the
acquisitions of Planning Systems and Apogen and the consolidation of a full year
of results for Westar and Foster-Miller which were acquired in 2005. Within the
operating units the Technology stream led by Foster-Miller was adversely
impacted during the year by a number of factors, noticeably the lack of
shipments of Talon robots from September to November 2005 due to component
issues, an accelerated decline in Last(R)Armor sales and the cancellation of all
external contractor work by Pfizer as it reshaped its own business. Shipments of
the Talon product resumed in full in December 2005. Foster-Miller is completing
the testing of SWORDS, a new armed variant of the Talon platform, which it is
hoped will commence sales in late 2006 and continues to pursue new opportunities
to use the Talon robotic platform in other innovative applications. Planning
Systems has traded in line with expectations since its acquisition and has
recovered well from the impact of Hurricane Katrina which caused the temporary
closure of its four offices in the New Orleans area.
The SETA stream driven by Westar performed strongly in the year with organic
growth of 10.9% in the second half of 2006 when compared with the same period in
2005. In particular the high demand for desert kits from its Air Filtration
Systems business, as the US Army in Iraq equipped their Blackhawk helicopter
fleet, created a strong level of demand for these products in the first half of
the year, although this is unlikely to be repeated as the product matures.
Westar are now targeting their Air Filters business development towards
commercial helicopter applications and are actively pursuing a wide range of
commercial models through civil aviation approval processes in order to bring
these products to market. Its engineering services divisions continued to
perform strongly during the year. Westar's performance has exceeded expectations
at the time of acquisition and the contingent consideration has accordingly been
settled in full.
Within IT Services Apogen has performed broadly in line with expectations since
joining the Group in September 2005, although overall performance was adversely
impacted by two external factors. In September, Hurricane Katrina resulted in
over 150 staff and 100 contractors being displaced from a key customer site for
several weeks due to the disruption caused by the hurricane. In the subsequent
weeks after the hurricane struck, Apogen was praised by its customers for its
speed and resilience in getting staff back to work on key tasks for customers
and has won additional work later in the year to re-instate customers' systems
and networks disrupted as a result of the hurricane. Additionally across the
second half of the year Apogen has suffered delays in generating revenue from
recently won contracts with the DHS due to the lengthy process in obtaining
security clearances for new staff as the DHS expands its own staff and
contractor base.
Underlying Operating Profit increased by 206.3% to £24.5m primarily due to the
acquisitions in the year and full consolidation of prior year acquisitions. The
Underlying Operating Margin decrease is due to the changing mix of products and
services as a result of the acquisitions in the year and the delayed Talon
shipments and lower research and development revenue at Foster-Miller.
Other Group activities and performance
Acquisitions
Since 1 April 2005 the Group has made the following principal acquisitions:
On 1 September 2005, 90% of the share capital of Verhaert Design and Development
NV, the leading Belgian space systems integrator, for an initial cash
consideration, before acquisition costs, of £4.1m (Euro 5.9m), including £0.2m
(Euro 0.3m) for Verhaert's cash and surplus working capital.
On 2 September 2005, Planning Systems Inc., a technology development company,
for an initial cash consideration, before acquisition costs, of £24.3m ($44.4m),
including £1.6m ($2.8m) for Planning Systems' cash and surplus working capital.
On 9 September 2005, Apogen Technologies Inc. for a cash consideration, before
acquisition costs, of £130.3m ($238.5m) and assumed debt of £29.2m ($53.5m).
This included £1.7m ($3.2m) for Apogen's cash and surplus working capital.
Apogen is one of the United States' leading providers of information technology
services to the US federal government.
On 1 March 2006, SimAuthor Inc for cash consideration of £4.6m ($8.0m).
SimAuthor is a software and services company that specialises in flight data
visualisation and simulation technology.
On 22 May 2006 Ocean Systems Engineering Corp (OSEC) for a cash consideration of
£30.3m ($53m). OSEC is a leading provider of research, design, development and
integration of advanced information technology systems to key defence agencies.
Fixed asset disposals
The Group recognised a net £8.9 million profit on disposal of non-current assets
and assets held for sale. The principal gains in the year were £13.8 million on
the sale and partial leaseback of a long leasehold interest in the Fort Halstead
site which was disposed of for gross proceeds of £40.0m in September 2005; £3.4m
of contingent consideration received in respect of the 2003 sale of the Aquila
site; and £7.5m of contingent consideration received following the disposal of
the Chertsey site in 2003. These gains were partially offset by £2.7m of losses
on sundry other asset disposals and, in March 2006, two surplus properties at
the Group's Farnborough site were sold for gross proceeds of £24.7m generating a
loss on disposal of £13.1m.
The property disposals completed during the year mark the conclusion of the
current programme to dispose of the larger surplus properties in the estates
portfolio. The strategy going forward is to continue to pursue opportunities to
release capital through the disposal of smaller surplus sites.
IPO
On 15 February 2006 the Company successfully completed an initial public
offering (IPO) and a listing on the London Stock Exchange raising net proceeds
for the Company of £132.7m.
Costs associated with the IPO have been charged to the share premium account or
the income statement as appropriate. IPO costs totalling £8.9m are disclosed
separately in the Income Statement as they represent significant one-off
expenses relating to the transaction. The cost includes £5.8m arising on the
gift of £500 worth (including associated tax costs) of ordinary shares to each
employee at the date of IPO.
Pensions
The Group provides both defined contribution and defined benefit pension
arrangements. The principal defined benefit scheme is the QinetiQ Pension
Scheme.
At 31 March 2006 the QinetiQ Pension Scheme had gross assets of £716.0m and
gross liabilities of £884.4m resulting in a gross deficit of £168.4m. After
deducting the deferred tax asset-associated with the scheme the net pension
deficit at the year end stood at £118.0m compared to £76.2m at the start of the
year (net of MOD indemnity).
Of the increase in the gross deficit in the year £40m relates to the application
of the latest mortality rates, which resulted in a weighted average increase of
one year in the life expectancy of scheme members, and £112m to a 0.5 percentage
point reduction in 15 year AA bond yields increasing the present value of the
liabilties. 15 year AA Bond yields declined significantly during the year from
5.4% at 1 April 2005 to 4.9% at 31 March 2006. The impact of the changes in bond
yields has been to disproportionately increase the present value of the future
liabilities in the scheme compared to the present value of the scheme assets
resulting in a net increase in the scheme deficit before additional funding
contributions.
The current investment policy of the QinetiQ Pension Scheme is weighted towards
equity investments. The trustees believe this to be appropriate at the current
time due to the relative youth of the scheme, which is expected to be cashflow
positive for approximately the next ten years.
During the year, the Group made past service deficit contributions totalling
£106.4m, including £45.3m on receipt of a MOD indemnity triggered by the IPO and
a £45.0m prepayment of agreed future contributions out of the IPO proceeds. The
Group has no further indemnities from the Government in respect of the scheme.
The principal sensitivities regarding the key assumptions in the IAS19 valuation
are:
Assumption Change in assumption Indicative effect on the scheme's gross liabilities
Discount rate Increase/decrease by 0.1% Decrease/increase by 2.5%
Rate of inflation Increase/decrease by 0.1% Increase/decrease by 2.5%
Real rate of increase in salaries Increase/decrease by 0.1% Increase/decrease by 0.6%
Mortality Increase by 1 year Increase by 4.5%
Tax
The Group's statutory effective tax rate for the year was 16.7% compared to 7.3%
in the year to 31 March 2005 while the underlying effective tax rate was 22.7%
(2005: 16.2%). The effective rate of taxation continues to be below the standard
UK rate, mainly due to the availability of research and development relief from
HM Revenue and Customs and the utilisation of tax losses not previously
recognised. The increase in the effective rate is primarily due to the
increasing contribution to Group profits from QNA operations, as the effective
rate for those businesses broadly tracks the US statutory rate together with a
lower level of utilisation of unprovided tax losses. The effective tax rate is
expected to continue to rise with the evolving geographical mix of the Group's
business.
From a cash tax perspective, the impact of the research and development relief
available, the utilisation of tax losses and the benefit of the additional
pension contributions is expected to result in the UK business not being in a
tax payable position for at least the next two years. The taxable profits from
QNA operations are expected to result in cash tax payments on these businesses
broadly following the US statutory rate.
Cash flow and net debt
Cash flow from operations has increased to £107.6m (2005: £36.9m) primarily due
to the growth in operating profit and the prior year cash flow being adversely
affected by a £40.0m build up in short term MOD related working capital at the
previous year end. Improved working capital management in the UK sectors has
contributed to strong operational cash flows in the UK in 2006, partly offset by
an increase in working capital in QNA as a result of the late funding of
contracts following the delayed agreement of the DoD budget.
Net interest paid increased to £9.4m from £1.6m as the Group increased its
borrowings to fund acquisitions this year. The Group's policy has been to fund
significant US acquisitions with US dollar denominated debt to provide a hedge
against the investment in the subsidiary operations.
Additional material cash flows include proceeds from the sale of the Fort
Halstead, Chertsey and Pyestock South sites, which generated net cash inflows of
£111.5m, and additional payments to the QinetiQ Pension Scheme of £61.1m (net of
MOD indemnity receipt).
As part of the preparation for the Group's IPO QinetiQ redeemed the £37.5m of
outstanding cumulative preference shares for £48.0m inclusive of accrued
preference dividends. The Group received net cash proceeds of £136.2m from its
IPO in February 2006, of which £45.0m was used to reduce the deficit in the
defined benefit section of the QinetiQ Pension Scheme, with the balance of the
IPO proceeds utilised to reduce net debt. A further £3.5m of IPO costs will be
settled post year end.
The Group's net debt increased by £56.4m to £233.0m at 31 March 2006 (2005:
£176.6m) principally due to the acquisitions made in the year and additional
pension contributions, partly offset by IPO proceeds and strong operating cash
flows.
Net debt at 31 March 2006 comprised net US dollar denominated debt of £281.0m
and Euro denominated debt of £4.9m offset by sterling denominated net financial
assets of £52.9m which were principally represented by cash balances. The US
dollar:sterling exchange rate prevailing at the year end was $1.73:£1.
During the year the Group's primary borrowing facility was renegotiated, and now
comprises a £500m multi-currency revolving facility of which £291.4m has been
drawn.
Capital expenditure
Capital expenditure on property, plant and equipment totalled £45.0m (2005:
£16.0m). Of this amount £23.5m (2005: £5.9m) was in respect of contractually
committed amounts recoverable through annual charges under managed services
contracts (principally the LTPA). The Group has future capital commitments of
£26.2m, of which £24.7m is under the LTPA and as such these commitments are also
customer funded.
Research and Development
A large proportion of the Group's activity is focused on research and
development, the majority of which is fully funded by customers as part of the
Group's core business. In most cases the Group retains the rights to any
intellectual property created in the course of research and development for
customers. In addition to customer funded research and development the Group
also undertakes limited research and development at its own expense, primarily
focused on the later stage development of commercial products out of the funded
research base. In the year to 31 March 2006 research and development costs
totalled £504.7m (2005: £502.6m).
The Group capitalised £6.3m (2005: £1.8m) of development costs in the year.
These sums were incurred on late stage development of new products, principally
Tarsier, ZephIR and GPS.
Profit for the period
The underlying performance of the Group, after allowing for non-recurring events
and amortisation of acquired intangible assets, is shown below;
---------- ---------
2006 2005
£m £m
---------- ---------
Profit for the year 60.4 72.3
Minority interests (2.3) 1.6
Profit for the year attributable to equity shareholders of
the parent company 58.1 73.9
---------- ---------
Preference share dividend - (5.2)
IPO related items 4.2 -
Restructuring costs - 25.9
Profit on disposal of non current assets and impairment of
assets held for sale (8.9) (29.1)
Profit on disposal of interest in pSiMedica Limited - (17.1)
Amortisation of intangible assets and impairment of
goodwill and
current asset investments arising from acquisitions 12.3 5.7
Tax impact of above items (0.7) 1.0
Brought forward tax losses utilised (5.4) (4.7)
---------- ---------
Underlying profit for the year attributable to equity
shareholders of the parent 59.6 50.4
---------- ---------
In arriving at the underlying profit for the year, the Group has adjusted for a
number of items which are considered non-recurring including the costs
associated with the Group's IPO, profit on disposal of surplus property and the
cost of restructuring the UK business into two market facing sectors. The Group
has also restated the 2005 preference share dividend as if it had been treated
as interest expense, to align with the 2006 presentation following adoption of
IFRS.
During the year the Group restructured the funding arrangements with its
co-investors in Quintel Technolgy and QS4 Limited of which part of this
agreement removed any funding obligations from its venture partner in Quintel
Technology Limited. This resulted in a credit to minority interests of £4.1m
representing the reversal of the cumulative losses previously attributable to
minority interests. Prior to the restructuring the loss attributable to minority
interest in the year was £1.8m (2005: £1.6m) resulting in a net overall credit
to the minority interest position of £2.3m in the year.
Dividends
The Board recommends a final dividend for the year of 2.25p per ordinary share
in respect of the year ending 31 March 2006. The Group anticipates that its
final dividend will normally represent approximately two thirds of the full
annual dividend. No interim dividend was paid this year. The Group's dividend
policy allows for a progressive approach.
In January 2006 the Company paid a dividend of 28 pence per preference share
(including cumulative accrued dividends from prior periods) on the redemption of
cumulative preference shares. Under IFRS the dividend charge for the year is
shown as a component of finance expense rather than as a distribution of profits
as in previous years.
Consolidated Income Statement
For the year ended 31 March
2006 2006 2006 2005 2005 2005
Before Non-recurring Total Before Non-recurring Total
non-recurring items and non-recurring items and
items and acquisition items and acquisition
acquisition amortisation acquisition amortisation
amortisation amortisation
Notes £m £m £m £m £m £m
Group turnover 1,053.1 - 1,053.1 858.9 - 858.9
Less equity
method
accounted
joint ventures
and associates (1.4) - (1.4) (3.0) - (3.0)
----------------- ------ -------- -------- ------- -------- -------- ------
Turnover 2 1,051.7 - 1,051.7 855.9 - 855.9
Employee costs (492.0) (6.8) (498.8) (394.8) (25.9) (420.7)
Third party
project costs (230.8) - (230.8) (160.0) - (160.0)
Other
operating
costs
excluding
depreciation
and
amortisation (217.5) (2.1) (219.6) (207.8) - (207.8)
Share of post
tax loss of
equity
accounted
joint ventures
and associates (0.4) - (0.4) (2.5) - (2.5)
Profit on
disposal of
interest in
equity
accounted
associate - - - 17.1 - 17.1
Other income 13.5 - 13.5 13.5 - 13.5
----------------- ------ -------- -------- ------- -------- -------- ------
EBITDA
(Earnings
before
interest, tax,
depreciation
and
amortisation) 124.5 (8.9) 115.6 121.4 (25.9) 95.5
Depreciation
of property,
plant and
equipment (32.7) - (32.7) (38.9) - (38.9)
Amortisation
of intangible
assets and
impairment of
goodwill and
current asset
investments (1.1) (12.3) (13.4) (0.2) (5.7) (5.9)
----------------- ------ -------- -------- ------- -------- -------- ------
Group
operating
profit 2 90.7 (21.2) 69.5 82.3 (31.6) 50.7
Profit on
disposal of
non-current
assets 8.9 - 8.9 29.1 - 29.1
Finance income 3 8.4 4.7 13.1 8.1 - 8.1
Finance
expense 3 (19.0) - (19.0) (9.9) - (9.9)
----------------- ------ -------- -------- ------- -------- -------- ------
Profit before
tax 89.0 (16.5) 72.5 109.6 (31.6) 78.0
Taxation
expense 4 (16.6) 4.5 (12.1) (4.7) (1.0) (5.7)
----------------- ------ -------- -------- ------- -------- -------- ------
Profit for the
year 72.4 (12.0) 60.4 104.9 (32.6) 72.3
----------------- ------ -------- -------- ------- -------- -------- ------
Profit
attributable to:
Equity
shareholders
of the parent
company 70.1 (12.0) 58.1 106.5 (32.6) 73.9
Minority
interest 2.3 - 2.3 (1.6) - (1.6)
----------------- ------ -------- -------- ------- -------- -------- ------
72.4 (12.0) 60.4 104.9 (32.6) 72.3
----------------- ------ -------- -------- ------- -------- -------- ------
Earnings per
share
Basic 6 10.0p 12.0p
Diluted 6 9.8p 11.7p
Underlying 6 10.2p 8.8p
Consolidated Balance Sheet
As at 31 March
2006 2005
Notes £m £m
Non-current assets
Goodwill 315.0 131.5
Intangible assets 56.4 37.3
Property, plant and equipment 340.3 367.9
Investment property 5.8 6.6
Financial assets 22.1 15.6
Investments 1.3 0.5
Investments accounted for using the equity method 0.6 -
Deferred tax asset 12.4 15.1
----------------------------------- ------ -------- ---------
753.9 574.5
Current assets
Inventories 25.4 17.8
Financial assets 3.0 3.0
Trade and other receivables 332.6 371.6
Cash and cash equivalents 58.9 12.3
Investments 11.2 12.8
Non-current assets classified as held for sale 3.6 -
----------------------------------- ------ -------- ---------
434.7 417.5
----------------------------------- ------ -------- ---------
Total assets 1,188.6 992.0
----------------------------------- ------ -------- ---------
Current liabilities
Trade and other payables (302.7) (309.3)
Provisions (17.3) (33.5)
Financial liabilities (6.6) (54.5)
----------------------------------- ------ -------- ---------
(326.6) (397.3)
Non-current liabilities
Retirement benefit obligation (gross of deferred tax) 9 (168.4) (125.0)
Deferred tax liability (8.2) (10.1)
Provisions (9.2) (10.8)
Financial liabilities (310.4) (153.0)
Other payables (2.9) (1.7)
----------------------------------- ------ -------- ---------
(499.1) (300.6)
----------------------------------- ------ -------- ---------
Total liabilities (825.7) (697.9)
----------------------------------- ------ -------- ---------
----------------------------------- ------ -------- ---------
Net assets 362.9 294.1
----------------------------------- ------ -------- ---------
Capital and reserves
Ordinary shares 6.5 1.6
Preference shares - 37.5
Capital redemption reserve 39.9 1.9
Share premium account 147.5 11.4
Hedging and translation reserve 4.9 -
Retained earnings 164.7 244.5
------------------------- ------------ ------ -------- ---------
Capital and reserves attributable to shareholders of
the parent company 363.5 296.9
Minority interest (0.6) (2.8)
----------------------------------- ------ -------- ---------
362.9 294.1
----------------------------------- ------ -------- ---------
Capital and reserves analysed as:
Equity shareholders' funds 362.9 256.6
Non-equity shareholders' funds - 37.5
----------------------------------- ------ -------- ---------
Total shareholders' funds 362.9 294.1
----------------------------------- ------ -------- ---------
Consolidated Cash Flow Statement
For the year ended 31 March
Notes 2006 2005
£m £m
Profit for the year 60.4 72.3
Taxation expense 12.1 5.7
Net finance costs 5.9 1.8
IPO costs 8.9 -
Profit on disposal of non-current assets and impairment of
asset held for sale (8.9) (29.1)
Profit on disposal of interest in equity accounted
associate - (17.1)
Depreciation of property, plant and equipment 32.7 38.9
Amortisation of intangible assets and impairment of
goodwill and current asset investments 13.4 5.9
Share of post tax loss of equity accounted joint ventures
and associates 0.4 2.5
Increase in inventories (9.9) (16.7)
Decrease/(Increase) in receivables 42.2 (49.6)
Decrease in payables (31.8) (0.6)
(Decrease)/increase in provisions (17.8) 22.9
----------------------------------- ------ -------- ---------
Cash flow from operations 107.6 36.9
Tax paid (4.4) (2.8)
Interest received 3.4 3.8
Interest paid (12.8) (5.4)
Preference share interest paid (10.5) (8.9)
----------------------------------- ------ -------- ---------
Net cash flow from operating activities 83.3 23.6
----------------------------------- ------ -------- ---------
---------
Purchase of intangible assets (8.5) (2.5)
Purchase of property, plant and equipment (45.0) (16.0)
Sale of property, plant and equipment 111.5 50.6
Investments in associate undertaking (1.2) (2.5)
Purchase of subsidiary undertakings (202.5) (166.9)
Sale of interest in equity accounted associate - 1.7
----------------------------------- ------ -------- ---------
Net cash flow from investing activities (145.7) (135.6)
----------------------------------- ------ -------- ---------
Net proceeds from IPO 10 136.2 -
Cash outflow from repayment of loans (75.4) (116.6)
Cash outflow from repayment of loan note (45.9) -
Cash inflow from loans received 198.9 151.7
Preference share repayment (37.5) (75.0)
Receipt of MOD indemnity 45.3 -
Additional pension contributions (106.4) -
Capital element of finance lease rental payments (2.2) (0.7)
Capital element of finance lease rental
receipts 3.0 3.0
----------------------------------- ------ -------- ---------
Net cash flow from financing activities 116.0 (37.6)
----------------------------------- ------ -------- ---------
Increase/(decrease) in cash and cash equivalents 7 53.6 (149.6)
Cash and cash equivalents at beginning of year 5.0 154.6
----------------------------------- ------ -------- ---------
Cash and cash equivalents at end of year 58.6 5.0
----------------------------------- ------ -------- ---------
----------------------------------- ------ -------- ---------
Cash and cash equivalents 8 58.9 12.3
Overdrafts 8 (0.3) (7.3)
----------------------------------- ------ -------- ---------
Cash and cash equivalents at end of year 58.6 5.0
----------------------------------- ------ -------- ---------
Consolidated statement of recognised income and expense
For the year ended 31 March
2006 2005
£m £m
Net loss on hedge of net investment in foreign subsidiary (2.0) (0.4)
Increase in fair value of hedging derivatives 4.9 -
Movement in deferred tax on hedging derivatives (1.5) -
Loss on available for sale assets (1.6) -
Gain arising on the refinancing of joint ventures and
associates - 0.6
Actuarial loss recognised in the defined benefit pension
schemes (105.4) (9.9)
Deferred tax asset on pension deficit 8.7 15.9
----------------------------------- -------- ---------
Net income recognised directly in equity (96.9) 6.2
Prior period restatement on adoption of IAS 32 & 39 1.3 -
----------------------------------- -------- ---------
(95.6) 6.2
Profit for the year 60.4 72.3
----------------------------------- -------- ---------
Total recognised income and expense for the year (35.2) 78.5
----------------------------------- -------- ---------
Attributable to:
Equity shareholders of the parent company (37.5) 80.1
Minority interest 2.3 (1.6)
----------------------------------- -------- ---------
(35.2) 78.5
----------------------------------- -------- ---------
Notes to the preliminary results announcement
1 Basis of preparation and general information
The financial information included within the preliminary announcement has been
prepared using accounting policies consistent with International Financial
Reporting Standards (IFRSs) as endorsed by the European Union. The accounting
policies followed are the same as those published on 25 January 2006 by the
Group within its Price Range Prospectus prior to its Initial Public Offering
(IPO) which is available on the Group's website, www.QinetiQ.com.
The Board of Directors approved the preliminary announcement on 7 June 2006.
Whilst the financial information included in this preliminary announcement has
been prepared in accordance with International Financial Reporting Standards
(IFRS) as endorsed by the European Union, this announcement does not itself
contain sufficient information to comply with the all the disclosure
requirements of IFRS and does not constitute statutory accounts of the Company
within the meaning of section 240 of the Companies Act 1985. The auditors have
reported on the results for the years ended 31 March 2006 and 31 March 2005.
Their reports were not qualified and did not contain a statement under section
237(2) or (3) of the Companies Act 1985. Statutory accounts for the year ended
31 March 2005 will be delivered to the Registrar of Companies following the
Company's Annual General Meeting on 28 July 2006.
2. Segmental analysis
Business segments
Year ended 31 March 2006
Defence & Security & Dual QinetiQ North Eliminations Consolidated
Technology Use America
£m £m £m £m £m
Turnover
External sales 669.6 133.7 248.4 - 1051.7
Internal sales (1) 9.8 11.3 - (21.1) -
--------------------- -------- ------- ------- -------- ---------
679.4 145.0 248.4 (21.1) 1051.7
--------------------- -------- ------- ------- -------- ---------
Other information
EBITDA before
IPO costs and
share of
equity
accounted
joint ventures
and associates
and profit on
disposal of
equity
accounted
associate 79.0 18.8 27.1 124.9
Share of loss
of equity
accounted
joint ventures
and associates - (0.4) - (0.4)
--------------------- -------- ------- ------- -------- ---------
EBITDA before
IPO costs 79.0 18.4 27.1 124.5
Depreciation
of property,
plant and
equipment -
own equipment (13.2) (8.2) (2.5) (23.9)
Depreciation
of property,
plant and
equipment
-LTPA funded (8.8) - - (8.8)
Amortisation
from purchased
or internally
developed
intangible
assets (0.5) (0.5) (0.1) (1.1)
--------------------- -------- ------- ------- -------- ---------
Group
operating
profit before
IPO costs and
amortisation (2) 56.5 9.7 24.5 90.7
Amortisation
of intangible
assets arising
from
acquisitions (2.0) (0.7) (9.6) (12.3)
--------------------- -------- ------- ------- -------- ---------
Group
operating
profit before
IPO costs 54.5 9.0 14.9 78.4
IPO costs (8.9)
--------------------- -------- ------- ------- -------- ---------
Group
operating
profit 69.5
Profit on
disposal of
non-current
assets and
asset held for
sale 8.9
Net finance
expense (5.9)
--------------------- -------- ------- ------- -------- ---------
Profit before
tax 72.5
Taxation
expense (12.1)
---------------- ------- -------- ------- ------- -------- ---------
Profit for the
year 60.4
--------------------- -------- ------- ------- -------- ---------
(1) Inter segment sales are priced at fair value and treated as an arm's length
transaction
(2) Group operating profit before IPO costs and amortisation of intangible
assets arising from acquisitions and impairment of goodwill and current
asset investment
Year ended 31 March 2005
Defence & Security & Dual QinetiQ North Eliminations Consolidated
Technology Use America
£m £m £m £m £m
Turnover
External sales 664.9 120.9 70.1 - 855.9
Internal sales (1) 9.9 12.4 - (22.3) -
-------------------- -------- -------- ------- -------- ---------
674.8 133.3 70.1 (22.3) 855.9
-------------------- -------- -------- ------- -------- ---------
Other information
EBITDA before
restructuring
costs and
share of
equity
accounted
joint ventures
and associates
and profit on
disposal of
equity
accounted
associate 78.0 19.9 8.9 106.8
Share of loss
of equity
accounted
joint ventures
and associates - (2.5) - (2.5)
Profit on
disposal of
equity
accounted
associate - 17.1 - 17.1
-------------------- -------- -------- ------- -------- ---------
EBITDA before
restructuring
costs 78.0 34.5 8.9 121.4
Depreciation
of property,
plant and
equipment -
own equipment (13.5) (11.3) (0.9) (25.7)
Depreciation
of property,
plant and
equipment
-LTPA funded (13.2) - - (13.2)
Amortisation
from purchased
intangible
assets - (0.2) - (0.2)
-------------------- -------- -------- ------- -------- ---------
Group
operating
profit before
restructuring
costs and
amortisation (2) 51.3 23.0 8.0 82.3
Amortisation
of intangible
assets arising
from
acquisitions
and impairment
of goodwill
and current
asset
investments (1.8) (1.4) (2.5) (5.7)
-------------------- -------- -------- ------- -------- ---------
Group
operating
profit before
restructuring
costs 49.5 21.6 5.5 76.6
Restructuring
costs (25.9)
-------------------- -------- -------- ------- -------- ---------
Group
operating
profit 50.7
Profit on
disposal of
non-current
assets and
impairment of
asset held for
sale 29.1
Net finance
expense (1.8)
-------------------- -------- -------- ------- -------- ---------
Profit before
tax 78.0
Taxation
expense (5.7)
---------------- ------ -------- -------- ------- -------- ---------
Profit for the
year 72.3
-------------------- -------- -------- ------- -------- ---------
(1) Inter segment sales are priced at fair value and treated as an arm's length
transaction
(2) Group operating profit before restructuring costs and amortisation of
intangible assets arising from acquisitions and impairment of goodwill and
current asset investment
Geographical segments
Turnover
Turnover by destination 2006 2005
£m £m
United Kingdom 733.9 732.5
North America 268.7 86.9
Other 49.1 36.5
--------------------------------------- -------- ---------
Total 1,051.7 855.9
--------------------------------------- -------- ---------
3. Finance income and expense
2006 2005
£m £m £m £m
Receivable on bank deposits 3.8 3.6
Finance lease income 2.4 2.6
Release of discount on MOD indemnity 2.2 1.9
-------------------------- -------- -------- -------- ---------
Finance income 8.4 8.1
-------------------------- -------- -------- -------- ---------
Amortisation of recapitalisation fee (1.6) (4.5)
Payable on bank loans and overdrafts (13.3) (4.1)
Payable on Aquila / Chertsey Loan Note - (1.1)
Finance lease expense (1.0) -
Other loan interest - (0.2)
Preference share interest (3.1) -
-------- --------
Interest payable (17.4) (5.4)
-------------------------- -------- -------- -------- ---------
Finance expense (19.0) (9.9)
-------------------------- -------- -------- -------- ---------
-------------------------- -------- -------- -------- ---------
Net finance costs before IPO related items (10.6) (1.8)
Release of remaining discount on MOD
pension indemnity 4.7 -
triggered by IPO
-------------------------- -------- -------- -------- ---------
Net finance expense (5.9) (1.8)
-------------------------- -------- -------- -------- ---------
4. Taxation expense
2006 2005
£m £m
Analysis of charge
UK corporation tax at 30% - -
Overseas corporation tax 7.4 1.0
Overseas corporation tax in respect of previous periods - (0.1)
--------------------------------------- -------- ---------
Total corporation tax 7.4 0.9
Overseas withholding tax 2.4 1.3
Deferred tax 7.7 3.5
Deferred tax in respect of prior years (5.4) -
--------------------------------------- -------- ---------
Taxation expense 12.1 5.7
--------------------------------------- -------- ---------
5. Dividends
During the year to 31 March 2006 the Group has not declared or paid equity
dividends (year to 31 March 2005: £nil). On 7 June 2006 the Directors proposed a
dividend of 2.25 pence per share payable on 23 August 2006.
The accounting treatment under IAS 32 Financial Instruments: Disclosure and
Presentation requires the preferences shares dividends to be classified as a
finance expense. The Group has adopted this standard with effect from 1 April
2005 and accordingly only the preference share dividend for the current year is
reflected in Note 3 - Finance income and expense.
Preference share dividends accrued and paid are as follows:
2006 2005
£m £m
At 1 April 7.4 11.1
Preference dividend accrued in year 3.1 5.2
Preference dividend paid in year (10.5) (8.9)
-------- ---------
At 31 March - 7.4
-------- ---------
6. Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to
ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year on an adjusted basis to reflect the share
restructuring that took place at IPO. For diluted earnings per share the
weighted average number of shares in issue is adjusted to assume conversion of
all dilutive potential ordinary shares arising from share options granted.
Underlying earnings per share figures presented below reflect adjustments for
the impact of non-recurring and other items on basic earnings per share.
Year ended 31 March 2006
Earnings Weighted Per share
£m average number amount pence
of shares
million
Basic 58.1 582.4 9.98
Effect of
dilutive
securities -
options - 12.4
---------------------------------- ------- -------- ---------
Diluted 58.1 594.8 9.77
---------------------------------- ------- -------- ---------
Underlying earnings per share Earnings Weighted Per share
£m average number amount pence
of shares
million
Basic 58.1 582.4 9.98
IPO related
items (see
note 10) 4.2
Amortisation
of intangible
assets arising
from
acquisitions 12.3
Profit on
disposal on
non-current
assets and
impairment of
asset held for
sale (8.9)
Tax impact of
items above (0.7)
Brought
forward
unprovided tax
losses
utilised in
year (5.4)
---------------------------------- ------- -------- ---------
Underlying 59.6 582.4 10.23
---------------------------------- ------- -------- ---------
Year ended 31 March 2005
Earnings Weighted Per share
average number amount pence
of shares
£m million
Profit for the
period 73.9 573.0
Net profit
attributable
to preference
shareholders (5.2)
------------------------- ---------- ------- -------- ---------
Basic 68.7 573.0 11.99
Effect of
dilutive
securities -
options - 12.8
-------------------- ------- ---------- ------- -------- ---------
Diluted 68.7 585.8 11.73
------------------------- ---------- ------- -------- ---------
Underlying earnings per share Earnings Weighted Per share
average number amount pence
of shares
£m Million
Basic 68.7 573.0 11.99
Restructuring
costs 25.9
Profit on
disposal on
non-current
assets and
interest in
equity
accounted
associate and
impairment of
asset held for
sale (46.2)
Amortisation
of intangible
assets arising
from
acquisitions
and impairment
of goodwill
and current
asset
investments 5.7
Tax impact of
items above 1.0
Brought
forward
unprovided tax
losses
utilised in
year (4.7)
---------------------------------- ------- -------- ---------
Underlying 50.4 573.0 8.80
---------------------------------- ------- -------- ---------
7. Reconciliation of net cash flow to movement in net debt
Note Year ended 31 March 2006 Year ended 31 March 2005
£m £m £m £m
Increase/(decrease)
in cash in the year 53.6 (149.6)
New loans (191.3) (150.8)
New loan notes (7.6) (0.9)
Bank loan
repayments 72.2 116.6
Loan note
repayments 45.9 -
Repayment of
other borrowings 3.2 -
Preference share
and associated
interest
repayment 48.0 -
--------- -------- -------- ---------
(29.6) (35.1)
Capital element
of finance lease
payments 2.2 0.7
Capital element
of finance lease
receipts (3.0) (3.0)
----------------------- ------ --------- -------- -------- ---------
Change in net
debt resulting
from cash flows 23.2 (187.0)
Addition of
deferred
financing costs 0.7 1.7
Amortisation of
deferred
financing costs (1.6) (4.5)
Foreign exchange
movements (21.5) -
Preference share
redemption and
associated
interest (48.0) -
Finance lease
receivables 2.4 2.6
Finance lease
payables (18.2) (4.8)
Adoption of IAS32
and IAS39 1.8 -
Movement on
derivatives 4.8 -
Net debt at the
start of the year (176.6) 15.4
----------------------- ------ --------- -------- -------- ---------
Net debt at the
end of the year 8 (233.0) (176.6)
----------------------- ------ --------- -------- -------- ---------
8. Analysis of net debt
Year ended 31 Cash Flow Non cash Year ended 31
March 2005 movements March 2006
Due within one year £m £m £m £m
Bank and cash 12.3 46.6 - 58.9
Bank overdraft (7.3) 7.0 - (0.3)
Recapitalisation fee 0.3 - (0.2) 0.1
Aquila/Chertsey
Loan Note (45.9) 45.9 - -
Other loan
notes - (0.6) (0.9) (1.5)
Finance lease
creditor (1.6) - (3.3) (4.9)
Finance lease
debtor 3.0 - - 3.0
Preference
Shares - 48.0 (48.0) -
-------------------------- --------- -------- -------- ---------
(39.2) 146.9 (52.4) 55.3
-------------------------- --------- -------- -------- ---------
Due after one year
Bank Loan (150.8) (119.1) (21.5) (291.4)
Recapitalisation fee 1.2 - (0.7) 0.5
Finance lease
creditor (2.5) 2.2 (14.9) (15.2)
Finance lease
debtor 15.6 (3.0) 2.4 15.0
Loan notes (0.9) (3.8) 0.9 (3.8)
Derivative
financial
assets - - 7.1 7.1
Derivative
financial
liabilities - - (0.5) (0.5)
-------------------------- --------- -------- -------- ---------
(137.4) (123.7) (27.2) (288.3)
-------------------------- --------- -------- -------- ---------
-------------------------- --------- -------- -------- ---------
Total net debt (176.6) 23.2 (79.6) (233.0)
-------------------------- --------- -------- -------- ---------
Non cash movements principally consist of movements arising on transition to
IFRS and foreign exchange.
9. Post-retirement benefits
The QinetiQ Pension Scheme
In the UK the Group operates the QinetiQ Pension Scheme for the majority of its
UK employees, a mixed benefit scheme with both Defined Benefit (DB) and Defined
Contribution sections.
The most recent full actuarial valuation of the DB section was undertaken as at
31 March 2005 and resulted in an actuarially assessed deficit of £106.5m. On the
basis of the 31 March 2005 full valuation the Trustees and the Company agreed
that the 17.5% employer contribution rate would continue and in addition a
further £10.0 million per annum cash payment would be paid monthly for 6 years
from October 2005, subject to review at the next valuation, due in March 2008,
to cover the past service deficit. Subsequently the Company agreed that part of
the IPO proceeds would be used to prepay the balance of the first five years of
the additional funding and a £45m payment was made into the Scheme on 30 March
2006. The Company also made a further £45.3m payment into the Scheme on the same
date following the receipt of the payment from MOD of the same value that was
received in March 2006 in accordance with the indemnity given by MOD to the
Company as part of the agreement dated 3 December 2002, whereby QinetiQ Group
plc acquired QinetiQ Holdings Limited.
Other UK schemes
In the UK the Group operates a further three small defined benefit schemes,
QinetiQ Prudential Platinum Scheme and schemes for the subsidiary companies ASAP
Calibration Limited and Aurix Limited. The net pension deficits of these schemes
at 31 March 2006 amounted to £0.3m (31 March 2005 £0.4m).
Set out below is a summary of the overall IAS 19 defined benefit pension
schemes' liabilities. The fair value of the schemes' assets, which are not
intended to be realised in the short term and may be subject to significant
change before they are realised, and the present value of the scheme's
liabilities, which are derived from cash flow projections over long periods, and
thus inherently uncertain, were:
2006 2005
£m £m
Equities 551.1 361.6
Corporate bonds 85.2 44.4
Government bonds 74.8 45.7
Cash 4.9 2.4
-------------------------- -------- ---------
Total market value of assets 716.0 454.1
Present value of scheme liabilities (884.4) (617.2)
-------------------------- -------- ---------
Retirement benefit obligation (168.4) (163.1)
MOD pension indemnity - 38.1
-------------------------- -------- ---------
Net pension liability before deferred tax (168.4) (125.0)
Deferred tax asset 50.4 48.8
-------------------------- -------- ---------
Net pension liability (118.0) (76.2)
-------------------------- -------- ---------
Assumptions
The major assumptions (weighted to reflect individual scheme differences) were:
2006 2005
Rate of increase in salaries 4.40% 4.30%
Rate of increase in pensions in payment 2.90% 2.90%
Rate of increase in pensions in deferment 2.90% 2.80%
Discount rate applied to scheme liabilities 4.90% 5.40%
Inflation assumption 2.90% 2.80%
Of the pension liability increase in the year to 31 March 2006, £25m relates to
the application of the latest mortality rates which resulted from a weighted
average increase of 1 year in the life expectancy of pre-retirement defined
benefit scheme members, as summarised below:
2006 2005
Mortality assumption in years
Future male pensioners 86 85
Future female pensioners 89 88
Scheme assets
Expected long term rates of return on scheme assets (weighted to reflect
individual scheme differences) were:
2006 2005
Equities 7.70% 7.70%
Corporate bonds 4.70% 5.00%
Government bonds 4.10% 4.70%
Cash 4.50% 4.20%
------------ ---------------- --------- -------- -------- ---------
Weighted average 6.90% 7.00%
-------------------------- --------- -------- -------- ---------
2006 2005
£m £m
Changes to the fair value of scheme assets:
Opening fair value of scheme assets 454.1 379.4
New schemes acquired in the year - 1.3
Expected return on assets 34.1 27.7
Actuarial gains on scheme assets 85.8 12.0
Contributions by the employer 149.2 37.8
Contributions by plan participants 4.6 3.0
Net benefits paid out (11.8) (7.1)
-------------------------- -------- ---------
Closing fair value of scheme assets 716.0 454.1
-------------------------- -------- ---------
2006 2005
£m £m
Changes to the present value of the defined benefit
obligation:
Opening defined benefit obligation 617.2 525.3
New schemes acquired in the year - 1.7
Current service cost 40.1 41.7
Interest cost 34.4 30.0
Contributions by plan participants 4.6 3.0
Actuarial losses on scheme liabilities 193.5 21.9
Net benefits paid out (11.8) (7.2)
Curtailments 6.4 0.8
------------------------------ -------- ---------
Closing defined benefit obligation 884.4 617.2
------------------------------ -------- ---------
2006 2005
£m £m
Pension costs charged to the income statement:
Current service cost 40.1 41.7
Interest cost 34.4 30.0
Expected return on plan assets (34.1) (27.7)
Curtailment cost - 0.8
------------------------------------ -------- ---------
Total expense recognised in the income statement (gross of
deferred tax) 40.4 44.8
------------------------------------ -------- ---------
2006 2005
£m £m
History of scheme experience gains and losses
-------------------------- -------- ---------
Experience gains on scheme assets 85.8 12.0
-------------------------- -------- ---------
Experience losses on scheme liabilities (193.5) (21.9)
-------------------------- -------- ---------
10. Initial Public Offering
On 15 February 2006 the Group listed on the London Stock Exchange. The
transactions relating to the Group's IPO are analysed below;
2006
£m
Proceeds received on IPO:
Gross proceeds 150.0
Costs paid in year (13.8)
-------------------------- ---------
Net proceeds received in year 136.2
Accrued costs (3.5)
-------------------------- ---------
Net proceeds 132.7
-------------------------- ---------
In addition to the cash costs noted above the Company gifted £500 worth of free
shares to all employees at the date of the IPO. The value of these shares at the
admission price of £2.00 per share amounts to £5.2m.
The total costs of the IPO, inclusive of the value of the gift of shares, have
been charged to the income statement or the share premium account as follows:
2006
£m
Income statement (8.9)
Share premium account (13.6)
-------------------------- ---------
Total costs (22.5)
-------------------------- ---------
Income statement income/(costs) before corporation tax;
Employee shares (including associated tax costs) (6.8)
Other IPO costs (2.1)
-------------------------- ---------
IPO costs (8.9)
Release of remaining discount on MOD indemnity triggered by IPO 4.7
-------------------------- ---------
Net IPO related items (4.2)
-------------------------- ---------
As part of the agreement dated 3 December 2002 whereby QinetiQ Group plc
acquired QinetiQ Holdings Limited, the MOD gave an indemnity to the Company to
pay to the Company on the earlier of a flotation, sale or winding up and 28
February 2008, an amount up to £45m dependent on the size of the deficit on the
QinetiQ Pension Scheme. At 31 March 2005 the amount included in the balance
sheet of £38.1m represented the discounted amount payable based on the longest
date to maturity being 28 February 2008. The IPO represented a trigger event for
the payment of the indemnity which resulted in the remaining balance of the
discount on the carrying value of the indemnity at the date of the IPO of £4.7m
being released and classified as finance income in the year (see note 3).
The net proceeds received from the IPO as at 31 March 2006 have been applied as
follows:
£m
Contribution to defined benefit pension scheme (see note 9) 45.0
Reduction in net debt 91.2
---------------------------- ---------
Net proceeds 136.2
---------------------------- ---------
GLOSSARY
AGM - Annual General Meeting
Backlog - The expected future value of turnover from
contractually-committed customer orders
Bps - Basis points
Book to bill - Ratio of orders in year to turnover in year
ratio
CATS - Combined Aerial Target Service
D&T - QinetiQ's Defence & Technology Sector
DARPA - US Defence Advanced Research Project Agency
DDA - Defence Diversification Agency
DHS - US Department of Homeland Security
DoD - US Department of Defense
DRA - Defence Research Agency, a QinetiQ predecessor
organisation
DTI - Department of Trade and Industry
DTR - MOD's Defence Training Rationalisation Programme
ESA - European Space Agency
EU - European Union
FCS - Future Combat System
Free cashflow - Net cash flow from operating activities less the net cash
flow from the purchase of intangible assets and the
purchase and sale of plant property and equipment
FRES - Future Rapid Effect System
GPS - Global Positioning System
IAS - International Accounting Standard
IFRS - International Financial Reporting Standard
IP - Intellectual Property
IPO - Initial Public Offering
LCD - Liquid Crystal Display
LSE - London Stock Exchange
LTPA - Long Term Partnering Agreement - 25 year contract
established in 2003 to manage the MOD's test and evaluation
ranges
m - Million
MOD - Ministry of Defence
Non-recurring - IPO costs, restructuring costs, disposals of property,
items and plant and equipment, amortisation of intangible arising
acquisition from acquisitions and impairment of goodwill and current
amortisation assets (2005 only)
OSEC - Ocean Systems Engineering Corporation
QNA - QinetiQ North America
R&D - Research and development
S&DU - QinetiQ's Security & Dual Use Sector
SETA - Systems Engineering and Technology Assistance
UK GAAP - UK Generally Accepted Accounting Principles
Underlying - Underlying Operating Profit expressed as a percentage of
operating Turnover
margin
Underlying - Earnings before interest, tax and sale of investment in
Operating equity accounted associate in 2005 (excluding IPO costs,
Profit restructuring costs, property, plant and equipment
disposals and amortisation of intangibles arising on
acquisitions)
Underlying - The ratio of net cash flow from operations, (excluding cash
operating cash spend on restructuring items), less cash outflows on the
conversion purchase of intangible assets and property, plant and
equipment to underlying operating profit, and before
additional pension contributions
Underlying - Profit before tax excluding IPO costs, restructuring costs,
profit before property, plant and equipment disposals, sale of interest
tax in equity accounted associate, amortisation of intangible
assets arising from acquisitions and impairment of goodwill
and current asset investments and including 2005 preference
share dividend
Underlying - The tax charge for the year excluding the tax impact of
effective tax non-recurring items expressed as a percentage of underlying
rate profit before tax
This information is provided by RNS
The company news service from the London Stock Exchange
Latest directors dealings
- 3 minutes ago Banco Santander S.A.
- 4 minutes ago Merit Group
- 9 minutes ago 3i Group
- 51 minutes ago British American Tobacco
- 1 hour ago British American Tobacco