7th Jun 2006 07:02
QinetiQ Group plc07 June 2006 News release 7 June 2006 QinetiQ Group plc audited preliminary results for the year ended 31 March 2006 Financial summary 2006 2005Turnover £1,051.7m £855.9mUnderlying operating profit £90.7m £82.3mUnderlying operating profit (excluding profit on £90.7m £65.2mdisposal 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 £58.2mUnderlying earnings per share 10.2p 8.8pBasic earnings per share 10.0p 12.0pNet debt £233.0m £176.6mFree cash flow £141.3m £55.7mBacklog £608.4m £572.0mUnderlying 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 thisstatement 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, whichdemonstrate real delivery against our growth strategy. In the UK we have grownour Technology Supply business to mitigate the impact of increased competitionfor MOD research funding, seen good organic growth and further acquisitions inthe US, and significant progression in the commercialisation of defencetechnology during the year. The UK government's Defence Industrial Strategy and the US government'sQuadrennial Defense Review will shape our markets to a considerable degree intothe medium term future. It is positive for QinetiQ that both documents emphasisethe imperative for agility in military procurement and the key role for advancedtechnology in delivering that agility. Budgets will remain constricted on eachside of the Atlantic and QinetiQ will have to maintain its pace oftransformation through investment, rationalisation and productisation in orderto realise the significant potential of its markets. The successes of the yearwe have just completed have laid a solid foundation for delivering on theseopportunities." Performance This year's results demonstrate QinetiQ's continued delivery in three strategicareas: the repositioning into growth markets within the Ministry of Defence(MOD) programmes, the expansion of the Group's US presence and thecommercialisation of our defence technologies. The continued repositioning of the UK defence business saw growth of 28.2% inTechnology Supply revenue to £124.2m (2005: £96.9m), as the business continuesto transition its business mix, invest in productisation and rationalise itsoperations to offset the expected ongoing reduction in revenue from the MOD'sresearch programme. QinetiQ also consolidated its position as a provider ofadvisory and managed services to the MOD. A particularly notable event this yearincluded selection as preferred bidder for the 20-year managed service contractfor the Combined Aerial Targets Service (CATS). In the US, turnover increased to £248.4m (2005: £70.1m), with a second halfannualised run-rate in excess of £310.0m. US expansion was accelerated withthree further notable acquisitions in specific growth markets: ApogenTechnologies, an IT services company working mainly for the Departments ofDefense (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 ofQinetiQ's UK electric drive technology for the US Future Combat Systems (FCS)tracked vehicle demonstrator programme and a research contract into opticaltagging from the US Defense Advanced Research Projects Agency (DARPA). more/... Other notable successes included the delivery of desert kits to equip the USArmy'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) andthe 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 apositive contribution from the new European space business, Verhaert, which morethan offsets declines in UK government funding for space research. Key eventsincluded 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 thedesign and implementation of an optical foot measuring system for shoe retailerClarks. Outlook The coming year will see QinetiQ continuing to execute its repositioningstrategy. In the UK defence business, this means continuing requirements torapidly insert technology into new and existing systems and equipment which areurgently required by the UK armed forces. In the commercialisation business,this means building particularly on a strong security positioning, continuing todevelop the space business through key bidding opportunities and selectedacquisitions, and further investment to develop the ventures portfolio businessplans. In North America, new business opportunities are anticipated as the UScompanies work more closely together and with the UK, and the disciplinedapproach to acquisitions continues to be pursued. - ends - There will be a webcast of the presentation of Preliminary Results to analystsat 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 392809Citigate 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 669.6 664.9Security & Dual Use 133.7 120.9QinetiQ 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 theGroup continued to execute its strategy to expand into the key North Americandefence and security markets. The growth reflects the inclusion of a full year'sresults from the acquisitions of Westar (acquired October 2004) and FosterMiller (acquired November 2004) together with a first time contribution from theacquisitions of Apogen (acquired September 2005) and Planning Systems (acquiredSeptember 2005). UK based sector turnover grew by 2.2% with the impact of £14mof non-recurring LTPA revenue in 2005 partly offset by the first timecontribution 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 420.7 472.6Security & Dual Use 168.1 127.8QinetiQ North America 227.9 67.9 ---------- ---------Total 816.7 668.3 ---------- --------- ---------- ---------Backlog 2006 2005-------- £m £m ---------- ---------Defence & Technology 366.6 410.0Security & Dual Use 112.6 93.4QinetiQ 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 includea value for the revenues from the £5.6bn core service contract for the LTPAincluded in the Defence & Technology sector each year as this contract wasawarded for a 25 year period at inception. Growth in orders was driven by theQNA acquisitions in 2005 and 2006 and strong organic growth in S&DU. At a Grouplevel this was offset by Defence & Technology where the previous year includedseveral awards of significant multi-year research and procurement & capabilitycontracts that, as expected, were not repeated in 2006. Backlog is also stated excluding the £5.0bn value of the remaining 22 years ofthe LTPA contract. The growth in backlog is generally driven by the same factorsunderlying the growth in orders. Compared to the UK, backlog in the USbusinesses is generally lower as the nature of the contract awards is morecentred around larger multi year 'enabling' contracts that become funded andthen 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-Millerhold which in total indicates an intention to buy $257m worth of equipment overa number of years with the specific funding for each year being decided as partof each US Government annual budget cycle. Operating Profit Underlying Operating Profit (excluding profit on disposal of interest inpSiMedica Limited) has grown by 39.1% from £65.2m to £90.7m, with marginimproving from 7.6% to 8.6%. Underlying Operating Profit growth from the two UKbased sectors was 15.7% reflecting continued margin enhancement and focus ondelivery from core trading activities together with the contribution from theacquisitions of HVR Consulting in August 2004 and Verhaert Design & DevelopmentNV in September 2005. This profit growth in the UK based sectors is complimentedby profit growth in QNA largely arising from acquisitions made in the year andthe consolidation of prior year acquisitions for a full year. Within the Group, S&DU crystallises value from intellectual property through avariety of different methods such as royalties, licence fees, equityrealisations, sale of IP joint ventures and technology transfer basedtransactions, which can lead to volatility in the year to year trend. In 2006license 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 2005Underlying Operating Profit included a £17.1m gain on disposal of the investmentin pSiMedica Limited. Underlying Operating Profit inclusive of the gain ondisposal 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 ofdemand for its services from customers and, where possible, actively seeks toredeploy people from declining areas of the business to areas of growth. Due tothe particular specialised capabilities within the business, redeployment is notalways possible and, due to the ever increasing rate of technological change andshift in market demands, the Group recognises that a degree of ongoingrestructuring and repositioning is an integral part of the progression of thebusiness. The current year costs of such repositioning are borne within theunderlying operating profits of the Group. In the year to 31 March 2006 anamount 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 areanticipated 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'sUnderlying Operating Profit was delivered in the second half of the year. Inlight of the strong LCD royalties in the first half of 2006 and therestructuring costs already committed in 2007, it is anticipated that a greaterproportion of profits will be generated in the second half of the coming yearthan 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 UKsectors were the drivers of this performance contributing strong operating cashflow conversion due to diligent working capital management and a consequentreduction in MOD related working capital at the year end. The benefit in the UKsectors was mitigated in part by an absorption of working capital in QNA due tothe timing of contract funding awards from the DoD and DHS around the year endfollowing the delayed finalisation of the US Government budget in February 2006. During 2006 the Group completed the UK restructuring programme announced in 2005resulting in an associated cash outflow during 2006 of £22.8m. Excluding theimpact of these cash payments the Underlying Operating Cash Conversion ratioimproved 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 yearto 31 March 2006. Underlying turnover growth was 2.4% after excludingnon-recurring rationalisation income of £14.0m in 2005 under the LTPA withinManaged Services and allowing for the contribution from the HVR Consultingacquisition in August 2004. Since the formation of QinetiQ in 2001, the MOD has introduced competition intoits research programme and is progressively phasing down the amount of such workthat is assured to QinetiQ such that by 2008 those elements of the MOD researchprogramme available to industry will be fully opened to competition. QinetiQ hasmaintained market leadership in this domain, through success in winning competedcontracts or as a subcontractor where QinetiQ is equipped to provide therequisite solution. During the year QinetiQ continued to win more than 50% ofthe 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 theresearch budget are opened to competition and the volume of assured work forQinetiQ reduces. QinetiQ has been able offset the impact of competition in theresearch programme by increasing its penetration of the defence technologysupply chain as a partner or subcontractor to other primes, leading to 28.2%growth in the Technology Supply stream offsetting the reduction in MOD researchrevenue within the D&T sector. Procurement and Capability Support turnover grew by 8.2% largely due toparticularly high levels of demand for Tasking Services within the LTPA in year.Within Managed Services the core provision of test and evaluation services underthe LTPA remained broadly consistent excluding the reduction year on year due tonon recurring rationalisation revenues in 2005 of approximately £14.0m. Underlying Operating Profit has risen £5.2m primarily due to core operationalperformance and improved margins driven from a continued focus on cost control,strong project delivery across the sector in year and ongoing rationalisation ofsector overhead functions. The sector incurred £4.4m in restructuring costs inyear as part of the continual process of aligning technical capabilities andback office infrastructure to evolving market needs. As discussed above the profile of work won on the "supply side" of D&T'sbusiness is transitioning to higher levels of Technology Supply work away from ahistoric dependence on MOD Research. The orders profile indicates that thistrend will continue where the book to bill ratio for Technology Supply was 1.1:1in the year. The overall decrease in D&T orders is due largely to thenon-recurrence of a number of multi-year contract awards that were won in 2005in the Research and Procurement & Capability Support streams. In March 2006 the Group was named preferred bidder, after a long and detailedcompetitive tender process, to provide a Combined Aerial Target Service (CATS)for air defence training and test and evaluation for the UK's armed forces overthe next 20 years. This selection demonstrates the Group's credentials to winand operate long term managed services contracts in a highly competitiveenvironment. The largest element of this opportunity is work already undertakenby QinetiQ under the LTPA to deliver the aerial target service. In additionQinetiQ will provide a service for ground-based air defence training, aerialtarget services for the Royal Navy, and an air-to-air service for the RAF. Theservice will be capable of operating from any suitable range worldwide. Looking forward, QinetiQ is a 50 per cent co-sponsor of Metrix, a planned jointventure with Land Securities Trillium, currently bidding for two large 25 yearcontracts to provide training to the UK armed forces as part of the MOD'sDefence Training Rationalisation (DTR) Programme. The joint venture is biddingagainst one other entity for each of the contracts and MOD has stated that itwill 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 organicgrowth of 2.1% reflects a strong performance in the Security stream withcontinued penetration of both government and commercial markets, including acontract to deliver the replacement information portal system for the UK policeforces and a rise in IT security managed services turnover allowing investmentto be initiated in a second secure operating centre. These increases were partlyoffset by a reduction in turnover from Technology Development & Exploitation (TD&E) as the Optronics and Materials businesses continued their transition awayfrom a traditional MOD funded research base towards US defence and commercialrevenues from contracts such as the optical foot measuring system being designedand implemented for Clarks, the shoe retailer. TD&E includes £13.0m (2005:£14.7m) of royalty revenue from enforcement actions on LCD patents which expiredin 2004. The Space stream saw an underlying decline in its UK business due tolower levels of UK Government funding directed to Space research in year morethan offset by a strong initial contribution from the acquisition of Verhaertwhich delivered £10.3m of revenue, well ahead of expectations due to anunusually high level of pass-through work on ESA projects. Underlying Operating Profit increased 64.4% (excluding the £17.1m gain on thesale of the Group's interest in pSiMedica in 2005) due to strong operationalfocus within the core business and a first time contribution of £0.6m fromVerhaert. The sector incurred £5.0m of restructuring costs in the year as itcontinues to align the business to market opportunities beyond the defencesector 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 streamwhich secured a four and a half year contract to provide and manage areplacement for the UK National Police Portal System, received funding from theDTI to form, manage and facilitate the UK's Cyber Security and BiometricsKnowledge Transfer Network and secured the first commercial order for theTarsier runway debris detection radar system for Vancouver Airport. ManagedServices secured a two year contract to continue to provide support to theDefence Diversification Agency (DDA) and also negotiated specific consultancycontracts to provide planning support, site remediation and integrationservices, and property consultancy services while TD&E saw some important winsin its Optronics business, including further research contracts from the DoD. QinetiQ North America ------------------------ ------- ------- ------- ------- 2006 2005 2006 2005 £m £m $m $m------------------------ ------- ------- ------- -------TurnoverTechnology 82.9 26.6 146.8 50.6Systems Engineering & Technical Assistance 105.3 43.5 187.5 82.4IT 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%------------------------ ------- ------- OrdersTechnology 73.2 25.3 129.6 48.2Systems Engineering & Technical Assistance 97.4 42.6 172.6 80.8IT 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 hasmade a number of acquisitions over the past two years to establish a platform toaccess this important market. The majority of growth in 2006 has been due to theacquisitions of Planning Systems and Apogen and the consolidation of a full yearof results for Westar and Foster-Miller which were acquired in 2005. Within theoperating units the Technology stream led by Foster-Miller was adverselyimpacted during the year by a number of factors, noticeably the lack ofshipments of Talon robots from September to November 2005 due to componentissues, an accelerated decline in Last(R)Armor sales and the cancellation of allexternal contractor work by Pfizer as it reshaped its own business. Shipments ofthe Talon product resumed in full in December 2005. Foster-Miller is completingthe testing of SWORDS, a new armed variant of the Talon platform, which it ishoped will commence sales in late 2006 and continues to pursue new opportunitiesto use the Talon robotic platform in other innovative applications. PlanningSystems has traded in line with expectations since its acquisition and hasrecovered well from the impact of Hurricane Katrina which caused the temporaryclosure of its four offices in the New Orleans area. The SETA stream driven by Westar performed strongly in the year with organicgrowth of 10.9% in the second half of 2006 when compared with the same period in2005. In particular the high demand for desert kits from its Air FiltrationSystems business, as the US Army in Iraq equipped their Blackhawk helicopterfleet, created a strong level of demand for these products in the first half ofthe year, although this is unlikely to be repeated as the product matures.Westar are now targeting their Air Filters business development towardscommercial helicopter applications and are actively pursuing a wide range ofcommercial models through civil aviation approval processes in order to bringthese products to market. Its engineering services divisions continued toperform strongly during the year. Westar's performance has exceeded expectationsat the time of acquisition and the contingent consideration has accordingly beensettled in full. Within IT Services Apogen has performed broadly in line with expectations sincejoining the Group in September 2005, although overall performance was adverselyimpacted by two external factors. In September, Hurricane Katrina resulted inover 150 staff and 100 contractors being displaced from a key customer site forseveral weeks due to the disruption caused by the hurricane. In the subsequentweeks after the hurricane struck, Apogen was praised by its customers for itsspeed and resilience in getting staff back to work on key tasks for customersand has won additional work later in the year to re-instate customers' systemsand networks disrupted as a result of the hurricane. Additionally across thesecond half of the year Apogen has suffered delays in generating revenue fromrecently won contracts with the DHS due to the lengthy process in obtainingsecurity clearances for new staff as the DHS expands its own staff andcontractor base. Underlying Operating Profit increased by 206.3% to £24.5m primarily due to theacquisitions in the year and full consolidation of prior year acquisitions. TheUnderlying Operating Margin decrease is due to the changing mix of products andservices as a result of the acquisitions in the year and the delayed Talonshipments 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 DevelopmentNV, the leading Belgian space systems integrator, for an initial cashconsideration, 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, beforeacquisition 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 technologyservices 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 datavisualisation 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 andintegration 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 assetsand assets held for sale. The principal gains in the year were £13.8 million onthe sale and partial leaseback of a long leasehold interest in the Fort Halsteadsite which was disposed of for gross proceeds of £40.0m in September 2005; £3.4mof contingent consideration received in respect of the 2003 sale of the Aquilasite; and £7.5m of contingent consideration received following the disposal ofthe Chertsey site in 2003. These gains were partially offset by £2.7m of losseson sundry other asset disposals and, in March 2006, two surplus properties atthe Group's Farnborough site were sold for gross proceeds of £24.7m generating aloss on disposal of £13.1m. The property disposals completed during the year mark the conclusion of thecurrent programme to dispose of the larger surplus properties in the estatesportfolio. The strategy going forward is to continue to pursue opportunities torelease capital through the disposal of smaller surplus sites. IPO On 15 February 2006 the Company successfully completed an initial publicoffering (IPO) and a listing on the London Stock Exchange raising net proceedsfor the Company of £132.7m. Costs associated with the IPO have been charged to the share premium account orthe income statement as appropriate. IPO costs totalling £8.9m are disclosedseparately in the Income Statement as they represent significant one-offexpenses relating to the transaction. The cost includes £5.8m arising on thegift of £500 worth (including associated tax costs) of ordinary shares to eachemployee at the date of IPO. Pensions The Group provides both defined contribution and defined benefit pensionarrangements. The principal defined benefit scheme is the QinetiQ PensionScheme. At 31 March 2006 the QinetiQ Pension Scheme had gross assets of £716.0m andgross liabilities of £884.4m resulting in a gross deficit of £168.4m. Afterdeducting the deferred tax asset-associated with the scheme the net pensiondeficit at the year end stood at £118.0m compared to £76.2m at the start of theyear (net of MOD indemnity). Of the increase in the gross deficit in the year £40m relates to the applicationof the latest mortality rates, which resulted in a weighted average increase ofone year in the life expectancy of scheme members, and £112m to a 0.5 percentagepoint reduction in 15 year AA bond yields increasing the present value of theliabilties. 15 year AA Bond yields declined significantly during the year from5.4% at 1 April 2005 to 4.9% at 31 March 2006. The impact of the changes in bondyields has been to disproportionately increase the present value of the futureliabilities in the scheme compared to the present value of the scheme assetsresulting in a net increase in the scheme deficit before additional fundingcontributions. The current investment policy of the QinetiQ Pension Scheme is weighted towardsequity investments. The trustees believe this to be appropriate at the currenttime due to the relative youth of the scheme, which is expected to be cashflowpositive 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 anda £45.0m prepayment of agreed future contributions out of the IPO proceeds. TheGroup has no further indemnities from the Government in respect of the scheme. The principal sensitivities regarding the key assumptions in the IAS19 valuationare: 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 standardUK rate, mainly due to the availability of research and development relief fromHM Revenue and Customs and the utilisation of tax losses not previouslyrecognised. The increase in the effective rate is primarily due to theincreasing contribution to Group profits from QNA operations, as the effectiverate for those businesses broadly tracks the US statutory rate together with alower level of utilisation of unprovided tax losses. The effective tax rate isexpected to continue to rise with the evolving geographical mix of the Group'sbusiness. From a cash tax perspective, the impact of the research and development reliefavailable, the utilisation of tax losses and the benefit of the additionalpension contributions is expected to result in the UK business not being in atax payable position for at least the next two years. The taxable profits fromQNA operations are expected to result in cash tax payments on these businessesbroadly following the US statutory rate. Cash flow and net debt Cash flow from operations has increased to £107.6m (2005: £36.9m) primarily dueto the growth in operating profit and the prior year cash flow being adverselyaffected by a £40.0m build up in short term MOD related working capital at theprevious year end. Improved working capital management in the UK sectors hascontributed to strong operational cash flows in the UK in 2006, partly offset byan increase in working capital in QNA as a result of the late funding ofcontracts following the delayed agreement of the DoD budget. Net interest paid increased to £9.4m from £1.6m as the Group increased itsborrowings to fund acquisitions this year. The Group's policy has been to fundsignificant US acquisitions with US dollar denominated debt to provide a hedgeagainst the investment in the subsidiary operations. Additional material cash flows include proceeds from the sale of the FortHalstead, 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 ofMOD indemnity receipt). As part of the preparation for the Group's IPO QinetiQ redeemed the £37.5m ofoutstanding cumulative preference shares for £48.0m inclusive of accruedpreference dividends. The Group received net cash proceeds of £136.2m from itsIPO in February 2006, of which £45.0m was used to reduce the deficit in thedefined benefit section of the QinetiQ Pension Scheme, with the balance of theIPO proceeds utilised to reduce net debt. A further £3.5m of IPO costs will besettled 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 additionalpension contributions, partly offset by IPO proceeds and strong operating cashflows. Net debt at 31 March 2006 comprised net US dollar denominated debt of £281.0mand Euro denominated debt of £4.9m offset by sterling denominated net financialassets of £52.9m which were principally represented by cash balances. The USdollar:sterling exchange rate prevailing at the year end was $1.73:£1. During the year the Group's primary borrowing facility was renegotiated, and nowcomprises a £500m multi-currency revolving facility of which £291.4m has beendrawn. 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 contractuallycommitted amounts recoverable through annual charges under managed servicescontracts (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 alsocustomer funded. Research and Development A large proportion of the Group's activity is focused on research anddevelopment, the majority of which is fully funded by customers as part of theGroup's core business. In most cases the Group retains the rights to anyintellectual property created in the course of research and development forcustomers. In addition to customer funded research and development the Groupalso undertakes limited research and development at its own expense, primarilyfocused on the later stage development of commercial products out of the fundedresearch base. In the year to 31 March 2006 research and development coststotalled £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, principallyTarsier, ZephIR and GPS. Profit for the period The underlying performance of the Group, after allowing for non-recurring eventsand amortisation of acquired intangible assets, is shown below; ---------- --------- 2006 2005 £m £m ---------- ---------Profit for the year 60.4 72.3Minority interests (2.3) 1.6Profit for the year attributable to equity shareholders ofthe parent company 58.1 73.9 ---------- ---------Preference share dividend - (5.2)IPO related items 4.2 -Restructuring costs - 25.9Profit on disposal of non current assets and impairment ofassets held for sale (8.9) (29.1)Profit on disposal of interest in pSiMedica Limited - (17.1)Amortisation of intangible assets and impairment ofgoodwill and current asset investments arising from acquisitions 12.3 5.7Tax impact of above items (0.7) 1.0Brought forward tax losses utilised (5.4) (4.7) ---------- ---------Underlying profit for the year attributable to equityshareholders of the parent 59.6 50.4 ---------- --------- In arriving at the underlying profit for the year, the Group has adjusted for anumber of items which are considered non-recurring including the costsassociated with the Group's IPO, profit on disposal of surplus property and thecost of restructuring the UK business into two market facing sectors. The Grouphas also restated the 2005 preference share dividend as if it had been treatedas interest expense, to align with the 2006 presentation following adoption ofIFRS. During the year the Group restructured the funding arrangements with itsco-investors in Quintel Technolgy and QS4 Limited of which part of thisagreement removed any funding obligations from its venture partner in QuintelTechnology Limited. This resulted in a credit to minority interests of £4.1mrepresenting the reversal of the cumulative losses previously attributable tominority interests. Prior to the restructuring the loss attributable to minorityinterest in the year was £1.8m (2005: £1.6m) resulting in a net overall creditto 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 sharein respect of the year ending 31 March 2006. The Group anticipates that itsfinal dividend will normally represent approximately two thirds of the fullannual dividend. No interim dividend was paid this year. The Group's dividendpolicy 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 ofcumulative preference shares. Under IFRS the dividend charge for the year isshown as a component of finance expense rather than as a distribution of profitsas in previous years. Consolidated Income StatementFor 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 - 858.9Less equitymethodaccountedjoint venturesand 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 operatingcostsexcludingdepreciationandamortisation (217.5) (2.1) (219.6) (207.8) - (207.8)Share of post tax loss ofequityaccountedjoint venturesand associates (0.4) - (0.4) (2.5) - (2.5)Profit on disposal ofinterest inequityaccountedassociate - - - 17.1 - 17.1Other income 13.5 - 13.5 13.5 - 13.5----------------- ------ -------- -------- ------- -------- -------- ------EBITDA(Earningsbeforeinterest, tax,depreciationandamortisation) 124.5 (8.9) 115.6 121.4 (25.9) 95.5 Depreciationof property,plant andequipment (32.7) - (32.7) (38.9) - (38.9)Amortisationof intangibleassets andimpairment ofgoodwill andcurrent assetinvestments (1.1) (12.3) (13.4) (0.2) (5.7) (5.9)----------------- ------ -------- -------- ------- -------- -------- ------Groupoperatingprofit 2 90.7 (21.2) 69.5 82.3 (31.6) 50.7 Profit ondisposal ofnon-currentassets 8.9 - 8.9 29.1 - 29.1Finance income 3 8.4 4.7 13.1 8.1 - 8.1Financeexpense 3 (19.0) - (19.0) (9.9) - (9.9)----------------- ------ -------- -------- ------- -------- -------- ------Profit beforetax 89.0 (16.5) 72.5 109.6 (31.6) 78.0 Taxationexpense 4 (16.6) 4.5 (12.1) (4.7) (1.0) (5.7)----------------- ------ -------- -------- ------- -------- -------- ------Profit for theyear 72.4 (12.0) 60.4 104.9 (32.6) 72.3----------------- ------ -------- -------- ------- -------- -------- ------ Profitattributable to: Equityshareholdersof the parentcompany 70.1 (12.0) 58.1 106.5 (32.6) 73.9Minorityinterest 2.3 - 2.3 (1.6) - (1.6)----------------- ------ -------- -------- ------- -------- -------- ------ 72.4 (12.0) 60.4 104.9 (32.6) 72.3----------------- ------ -------- -------- ------- -------- -------- ------ Earnings pershareBasic 6 10.0p 12.0pDiluted 6 9.8p 11.7pUnderlying 6 10.2p 8.8p Consolidated Balance SheetAs at 31 March 2006 2005 Notes £m £mNon-current assetsGoodwill 315.0 131.5Intangible assets 56.4 37.3Property, plant and equipment 340.3 367.9Investment property 5.8 6.6Financial assets 22.1 15.6Investments 1.3 0.5Investments accounted for using the equity method 0.6 -Deferred tax asset 12.4 15.1----------------------------------- ------ -------- --------- 753.9 574.5Current assetsInventories 25.4 17.8Financial assets 3.0 3.0Trade and other receivables 332.6 371.6Cash and cash equivalents 58.9 12.3Investments 11.2 12.8Non-current assets classified as held for sale 3.6 ------------------------------------ ------ -------- --------- 434.7 417.5----------------------------------- ------ -------- ---------Total assets 1,188.6 992.0----------------------------------- ------ -------- --------- Current liabilitiesTrade and other payables (302.7) (309.3)Provisions (17.3) (33.5)Financial liabilities (6.6) (54.5)----------------------------------- ------ -------- --------- (326.6) (397.3)Non-current liabilitiesRetirement 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 reservesOrdinary shares 6.5 1.6Preference shares - 37.5Capital redemption reserve 39.9 1.9Share premium account 147.5 11.4Hedging and translation reserve 4.9 -Retained earnings 164.7 244.5------------------------- ------------ ------ -------- ---------Capital and reserves attributable to shareholders ofthe parent company 363.5 296.9Minority interest (0.6) (2.8)----------------------------------- ------ -------- --------- 362.9 294.1----------------------------------- ------ -------- ---------Capital and reserves analysed as:Equity shareholders' funds 362.9 256.6Non-equity shareholders' funds - 37.5----------------------------------- ------ -------- ---------Total shareholders' funds 362.9 294.1----------------------------------- ------ -------- --------- Consolidated Cash Flow StatementFor the year ended 31 March Notes 2006 2005 £m £m Profit for the year 60.4 72.3Taxation expense 12.1 5.7Net finance costs 5.9 1.8IPO costs 8.9 -Profit on disposal of non-current assets and impairment ofasset held for sale (8.9) (29.1)Profit on disposal of interest in equity accountedassociate - (17.1)Depreciation of property, plant and equipment 32.7 38.9Amortisation of intangible assets and impairment ofgoodwill and current asset investments 13.4 5.9Share of post tax loss of equity accounted joint venturesand associates 0.4 2.5Increase 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 36.9Tax paid (4.4) (2.8)Interest received 3.4 3.8Interest 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 50.6Investments 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 198.9 151.7Preference 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 12.3Overdrafts 8 (0.3) (7.3)----------------------------------- ------ -------- ---------Cash and cash equivalents at end of year 58.6 5.0----------------------------------- ------ -------- --------- Consolidated statement of recognised income and expenseFor 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 andassociates - 0.6Actuarial loss recognised in the defined benefit pensionschemes (105.4) (9.9)Deferred tax asset on pension deficit 8.7 15.9----------------------------------- -------- ---------Net income recognised directly in equity (96.9) 6.2Prior period restatement on adoption of IAS 32 & 39 1.3 ------------------------------------ -------- --------- (95.6) 6.2Profit 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) 80.1Minority 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 beenprepared using accounting policies consistent with International FinancialReporting Standards (IFRSs) as endorsed by the European Union. The accountingpolicies followed are the same as those published on 25 January 2006 by theGroup 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 hasbeen prepared in accordance with International Financial Reporting Standards(IFRS) as endorsed by the European Union, this announcement does not itselfcontain sufficient information to comply with the all the disclosurerequirements of IFRS and does not constitute statutory accounts of the Companywithin the meaning of section 240 of the Companies Act 1985. The auditors havereported 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 section237(2) or (3) of the Companies Act 1985. Statutory accounts for the year ended31 March 2005 will be delivered to the Registrar of Companies following theCompany'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 £mTurnoverExternal sales 669.6 133.7 248.4 - 1051.7Internal sales (1) 9.8 11.3 - (21.1) ---------------------- -------- ------- ------- -------- --------- 679.4 145.0 248.4 (21.1) 1051.7--------------------- -------- ------- ------- -------- ---------Other informationEBITDA beforeIPO costs andshare ofequityaccountedjoint venturesand associatesand profit ondisposal ofequityaccountedassociate 79.0 18.8 27.1 124.9Share of lossof equityaccountedjoint venturesand associates - (0.4) - (0.4)--------------------- -------- ------- ------- -------- ---------EBITDA beforeIPO costs 79.0 18.4 27.1 124.5Depreciationof property,plant andequipment -own equipment (13.2) (8.2) (2.5) (23.9)Depreciationof property,plant andequipment-LTPA funded (8.8) - - (8.8)Amortisationfrom purchasedor internallydevelopedintangibleassets (0.5) (0.5) (0.1) (1.1)--------------------- -------- ------- ------- -------- ---------Groupoperatingprofit beforeIPO costs andamortisation (2) 56.5 9.7 24.5 90.7Amortisationof intangibleassets arisingfromacquisitions (2.0) (0.7) (9.6) (12.3)--------------------- -------- ------- ------- -------- ---------Groupoperatingprofit beforeIPO costs 54.5 9.0 14.9 78.4IPO costs (8.9)--------------------- -------- ------- ------- -------- ---------Groupoperatingprofit 69.5Profit ondisposal ofnon-currentassets andasset held forsale 8.9Net financeexpense (5.9)--------------------- -------- ------- ------- -------- ---------Profit beforetax 72.5Taxationexpense (12.1)---------------- ------- -------- ------- ------- -------- ---------Profit for theyear 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 £mTurnoverExternal sales 664.9 120.9 70.1 - 855.9Internal sales (1) 9.9 12.4 - (22.3) --------------------- -------- -------- ------- -------- --------- 674.8 133.3 70.1 (22.3) 855.9-------------------- -------- -------- ------- -------- --------- Other informationEBITDA beforerestructuringcosts andshare ofequityaccountedjoint venturesand associatesand profit ondisposal ofequityaccountedassociate 78.0 19.9 8.9 106.8Share of lossof equityaccountedjoint venturesand associates - (2.5) - (2.5)Profit ondisposal ofequityaccountedassociate - 17.1 - 17.1-------------------- -------- -------- ------- -------- ---------EBITDA beforerestructuringcosts 78.0 34.5 8.9 121.4Depreciationof property,plant andequipment -own equipment (13.5) (11.3) (0.9) (25.7)Depreciationof property,plant andequipment-LTPA funded (13.2) - - (13.2)Amortisationfrom purchasedintangibleassets - (0.2) - (0.2)-------------------- -------- -------- ------- -------- ---------Groupoperatingprofit beforerestructuringcosts andamortisation (2) 51.3 23.0 8.0 82.3Amortisationof intangibleassets arisingfromacquisitionsand impairmentof goodwilland currentassetinvestments (1.8) (1.4) (2.5) (5.7)-------------------- -------- -------- ------- -------- ---------Groupoperatingprofit beforerestructuringcosts 49.5 21.6 5.5 76.6Restructuringcosts (25.9)-------------------- -------- -------- ------- -------- ---------Groupoperatingprofit 50.7Profit ondisposal ofnon-currentassets andimpairment ofasset held forsale 29.1Net financeexpense (1.8)-------------------- -------- -------- ------- -------- ---------Profit beforetax 78.0Taxationexpense (5.7)---------------- ------ -------- -------- ------- -------- ---------Profit for theyear 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 TurnoverTurnover by destination 2006 2005 £m £m United Kingdom 733.9 732.5North America 268.7 86.9Other 49.1 36.5--------------------------------------- -------- ---------Total 1,051.7 855.9--------------------------------------- -------- --------- 3. Finance income and expense 2006 2005 £m £m £m £mReceivable on bank deposits 3.8 3.6Finance lease income 2.4 2.6Release 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 MODpension indemnity 4.7 -triggered by IPO -------------------------- -------- -------- -------- ---------Net finance expense (5.9) (1.8)-------------------------- -------- -------- -------- --------- 4. Taxation expense 2006 2005 £m £mAnalysis of chargeUK corporation tax at 30% - -Overseas corporation tax 7.4 1.0Overseas corporation tax in respect of previous periods - (0.1)--------------------------------------- -------- ---------Total corporation tax 7.4 0.9Overseas withholding tax 2.4 1.3Deferred tax 7.7 3.5Deferred 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 equitydividends (year to 31 March 2005: £nil). On 7 June 2006 the Directors proposed adividend of 2.25 pence per share payable on 23 August 2006. The accounting treatment under IAS 32 Financial Instruments: Disclosure andPresentation requires the preferences shares dividends to be classified as afinance expense. The Group has adopted this standard with effect from 1 April2005 and accordingly only the preference share dividend for the current year isreflected in Note 3 - Finance income and expense. Preference share dividends accrued and paid are as follows: 2006 2005 £m £mAt 1 April 7.4 11.1Preference dividend accrued in year 3.1 5.2Preference 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 toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year on an adjusted basis to reflect the sharerestructuring that took place at IPO. For diluted earnings per share theweighted average number of shares in issue is adjusted to assume conversion ofall dilutive potential ordinary shares arising from share options granted.Underlying earnings per share figures presented below reflect adjustments forthe 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 9.98Effect ofdilutivesecurities -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 9.98IPO relateditems (seenote 10) 4.2Amortisationof intangibleassets arisingfromacquisitions 12.3Profit ondisposal onnon-currentassets andimpairment ofasset held forsale (8.9)Tax impact ofitems above (0.7)Broughtforwardunprovided taxlossesutilised inyear (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 theperiod 73.9 573.0Net profitattributableto preferenceshareholders (5.2)------------------------- ---------- ------- -------- ---------Basic 68.7 573.0 11.99Effect ofdilutivesecurities -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 11.99Restructuringcosts 25.9Profit ondisposal onnon-currentassets andinterest inequityaccountedassociate andimpairment ofasset held forsale (46.2)Amortisationof intangibleassets arisingfromacquisitionsand impairmentof goodwilland currentassetinvestments 5.7Tax impact ofitems above 1.0Broughtforwardunprovided taxlossesutilised inyear (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 loanrepayments 72.2 116.6Loan noterepayments 45.9 -Repayment ofother borrowings 3.2 -Preference shareand associatedinterestrepayment 48.0 - --------- -------- -------- --------- (29.6) (35.1)Capital elementof finance leasepayments 2.2 0.7Capital elementof finance leasereceipts (3.0) (3.0)----------------------- ------ --------- -------- -------- ---------Change in netdebt resultingfrom cash flows 23.2 (187.0)Addition ofdeferredfinancing costs 0.7 1.7Amortisation ofdeferredfinancing costs (1.6) (4.5)Foreign exchangemovements (21.5) -Preference shareredemption andassociatedinterest (48.0) -Finance leasereceivables 2.4 2.6Finance leasepayables (18.2) (4.8)Adoption of IAS32and IAS39 1.8 -Movement onderivatives 4.8 -Net debt at thestart of the year (176.6) 15.4----------------------- ------ --------- -------- -------- ---------Net debt at theend 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 2006Due within one year £m £m £m £mBank and cash 12.3 46.6 - 58.9Bank overdraft (7.3) 7.0 - (0.3)Recapitalisation fee 0.3 - (0.2) 0.1Aquila/Chertsey Loan Note (45.9) 45.9 - -Other loannotes - (0.6) (0.9) (1.5)Finance leasecreditor (1.6) - (3.3) (4.9)Finance leasedebtor 3.0 - - 3.0PreferenceShares - 48.0 (48.0) --------------------------- --------- -------- -------- --------- (39.2) 146.9 (52.4) 55.3-------------------------- --------- -------- -------- ---------Due after one yearBank Loan (150.8) (119.1) (21.5) (291.4)Recapitalisation fee 1.2 - (0.7) 0.5Finance leasecreditor (2.5) 2.2 (14.9) (15.2)Finance leasedebtor 15.6 (3.0) 2.4 15.0Loan notes (0.9) (3.8) 0.9 (3.8)Derivativefinancialassets - - 7.1 7.1Derivativefinancialliabilities - - (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 toIFRS and foreign exchange. 9. Post-retirement benefits The QinetiQ Pension SchemeIn the UK the Group operates the QinetiQ Pension Scheme for the majority of itsUK employees, a mixed benefit scheme with both Defined Benefit (DB) and DefinedContribution sections. The most recent full actuarial valuation of the DB section was undertaken as at31 March 2005 and resulted in an actuarially assessed deficit of £106.5m. On thebasis of the 31 March 2005 full valuation the Trustees and the Company agreedthat the 17.5% employer contribution rate would continue and in addition afurther £10.0 million per annum cash payment would be paid monthly for 6 yearsfrom 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 ofthe IPO proceeds would be used to prepay the balance of the first five years ofthe additional funding and a £45m payment was made into the Scheme on 30 March2006. The Company also made a further £45.3m payment into the Scheme on the samedate following the receipt of the payment from MOD of the same value that wasreceived in March 2006 in accordance with the indemnity given by MOD to theCompany as part of the agreement dated 3 December 2002, whereby QinetiQ Groupplc acquired QinetiQ Holdings Limited. Other UK schemesIn the UK the Group operates a further three small defined benefit schemes,QinetiQ Prudential Platinum Scheme and schemes for the subsidiary companies ASAPCalibration Limited and Aurix Limited. The net pension deficits of these schemesat 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 pensionschemes' liabilities. The fair value of the schemes' assets, which are notintended to be realised in the short term and may be subject to significantchange before they are realised, and the present value of the scheme'sliabilities, which are derived from cash flow projections over long periods, andthus inherently uncertain, were: 2006 2005 £m £mEquities 551.1 361.6Corporate bonds 85.2 44.4Government bonds 74.8 45.7Cash 4.9 2.4-------------------------- -------- ---------Total market value of assets 716.0 454.1Present 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)-------------------------- -------- --------- AssumptionsThe 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 tothe application of the latest mortality rates which resulted from a weightedaverage increase of 1 year in the life expectancy of pre-retirement definedbenefit scheme members, as summarised below: 2006 2005Mortality assumption in yearsFuture male pensioners 86 85Future female pensioners 89 88 Scheme assetsExpected long term rates of return on scheme assets (weighted to reflectindividual 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 £mChanges to the fair value of scheme assets:Opening fair value of scheme assets 454.1 379.4New schemes acquired in the year - 1.3Expected return on assets 34.1 27.7Actuarial gains on scheme assets 85.8 12.0Contributions by the employer 149.2 37.8Contributions by plan participants 4.6 3.0Net benefits paid out (11.8) (7.1)-------------------------- -------- ---------Closing fair value of scheme assets 716.0 454.1-------------------------- -------- --------- 2006 2005 £m £mChanges to the present value of the defined benefitobligation:Opening defined benefit obligation 617.2 525.3New schemes acquired in the year - 1.7Current service cost 40.1 41.7Interest cost 34.4 30.0Contributions by plan participants 4.6 3.0Actuarial losses on scheme liabilities 193.5 21.9Net benefits paid out (11.8) (7.2)Curtailments 6.4 0.8------------------------------ -------- ---------Closing defined benefit obligation 884.4 617.2------------------------------ -------- --------- 2006 2005 £m £mPension costs charged to the income statement:Current service cost 40.1 41.7Interest cost 34.4 30.0Expected return on plan assets (34.1) (27.7)Curtailment cost - 0.8------------------------------------ -------- ---------Total expense recognised in the income statement (gross ofdeferred tax) 40.4 44.8------------------------------------ -------- --------- 2006 2005 £m £mHistory 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. Thetransactions relating to the Group's IPO are analysed below; 2006 £mProceeds received on IPO:Gross proceeds 150.0Costs paid in year (13.8)-------------------------- ---------Net proceeds received in year 136.2Accrued costs (3.5)-------------------------- ---------Net proceeds 132.7-------------------------- --------- In addition to the cash costs noted above the Company gifted £500 worth of freeshares to all employees at the date of the IPO. The value of these shares at theadmission 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, havebeen charged to the income statement or the share premium account as follows: 2006 £mIncome 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 plcacquired QinetiQ Holdings Limited, the MOD gave an indemnity to the Company topay to the Company on the earlier of a flotation, sale or winding up and 28February 2008, an amount up to £45m dependent on the size of the deficit on theQinetiQ Pension Scheme. At 31 March 2005 the amount included in the balancesheet of £38.1m represented the discounted amount payable based on the longestdate to maturity being 28 February 2008. The IPO represented a trigger event forthe payment of the indemnity which resulted in the remaining balance of thediscount on the carrying value of the indemnity at the date of the IPO of £4.7mbeing 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 asfollows: £mContribution to defined benefit pension scheme (see note 9) 45.0Reduction in net debt 91.2---------------------------- ---------Net proceeds 136.2---------------------------- --------- GLOSSARY AGM - Annual General MeetingBacklog - The expected future value of turnover from contractually-committed customer ordersBps - Basis pointsBook to bill - Ratio of orders in year to turnover in yearratioCATS - Combined Aerial Target ServiceD&T - QinetiQ's Defence & Technology SectorDARPA - US Defence Advanced Research Project AgencyDDA - Defence Diversification AgencyDHS - US Department of Homeland SecurityDoD - US Department of DefenseDRA - Defence Research Agency, a QinetiQ predecessor organisationDTI - Department of Trade and IndustryDTR - MOD's Defence Training Rationalisation ProgrammeESA - European Space AgencyEU - European UnionFCS - Future Combat SystemFree 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 equipmentFRES - Future Rapid Effect SystemGPS - Global Positioning SystemIAS - International Accounting StandardIFRS - International Financial Reporting StandardIP - Intellectual PropertyIPO - Initial Public OfferingLCD - Liquid Crystal DisplayLSE - London Stock ExchangeLTPA - Long Term Partnering Agreement - 25 year contract established in 2003 to manage the MOD's test and evaluation rangesm - MillionMOD - Ministry of DefenceNon-recurring - IPO costs, restructuring costs, disposals of property,items and plant and equipment, amortisation of intangible arisingacquisition from acquisitions and impairment of goodwill and currentamortisation assets (2005 only)OSEC - Ocean Systems Engineering CorporationQNA - QinetiQ North AmericaR&D - Research and developmentS&DU - QinetiQ's Security & Dual Use SectorSETA - Systems Engineering and Technology AssistanceUK GAAP - UK Generally Accepted Accounting PrinciplesUnderlying - Underlying Operating Profit expressed as a percentage ofoperating TurnovermarginUnderlying - Earnings before interest, tax and sale of investment inOperating 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 cashoperating cash spend on restructuring items), less cash outflows on theconversion purchase of intangible assets and property, plant and equipment to underlying operating profit, and before additional pension contributionsUnderlying - Profit before tax excluding IPO costs, restructuring costs,profit before property, plant and equipment disposals, sale of interesttax in equity accounted associate, amortisation of intangible assets arising from acquisitions and impairment of goodwill and current asset investments and including 2005 preference share dividendUnderlying - The tax charge for the year excluding the tax impact ofeffective tax non-recurring items expressed as a percentage of underlyingrate profit before tax This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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