31st May 2007 07:03
QinetiQ Group plc31 May 2007 QinetiQ Group plc audited preliminary results for the year ended 31 March 2007 Financial summary 2007 2006Revenue £1,149.5m £1,051.7mUnderlying operating profit £106.0m £90.7mUnderlying operating margin 9.2% 8.6%Underlying profit before tax £94.0m £80.1mStatutory profit before tax £89.3m £72.5mUnderlying earnings per share 11.3p 10.2pBasic earnings per share 10.5p 10.0pNet debt £300.8m £233.0mCash flow from operations £107.0m £107.6mOrders £1,214.0m £816.7mBacklog (excluding LTPA) £850.9m £608.4mUnderlying effective tax rate 21.2% 22.7%Dividend per ordinary share 3.65p 2.25p See Glossary section for definitions of Non GAAP terms used throughout thisstatement Operational summary • Strong orders growth of 48.6% (organic orders growth of 41.6%) • Book to bill ratio of 1.2:1 (2006: 0.9:1) • Revenue increased by 9.3% (QinetiQ North America organic revenue growth of 14.2%) • Continued improvement in underlying operating margin to 9.2% (2006: 8.6%) • Underlying profit before tax up by 17.4% • Underlying earnings per share up by 10.4% to 11.3p • Final dividend increased by 8.9% to 2.45 pence per share (2006: 2.25 pence per share) QinetiQ CEO Graham Love commented: "I am delighted to report that QinetiQ performed strongly in the year, provingthat our strategy remains effective, our business model robust and that wecontinue to execute well against both. Our selection as preferred bidder forthe Defence Training Rationalisation programme shows that we have successfullyrepositioned ourselves in the UK defence market, with a track record ofdelivering technology-rich support services and supplying technology into majorprogrammes. In North America we have seen strong organic growth, supplementedby our continued acquisition of good companies which gives us the critical massto bid into the bigger defence programmes. "Looking forward, our principal markets in the United Kingdom and North Americacontinue to provide good opportunities for growth, and we believe we are wellpositioned as an innovative, technology-based company to perform strongly infuture years." OutlookGoing forward QinetiQ's strategy remains consistent with previous plans, and thefocus is on execution. In the UK defence market the Group believes that the rapidly changing needs ofdefence and security forces can only be met by the kind of agile and innovativetechnological services in which QinetiQ specialises. In the short to medium termthe effect on revenues of the introduction of competition into the MOD Researchfunding will broadly be countered by continued growth in Technology Supply.Demand for QinetiQ's consultancy and advisory services to the MOD remainsrobust, and the Group continues to develop important new business in systemsengineering and integration. The Group looks forward to entering the second fiveyear period of the 25 year LTPA with confidence. Significant incremental growthin the UK defence managed service business will be driven from the expectedfinancial close of both packages of DTR in late 2008/early 2009. In North America QinetiQ's positioning as a technology rich provider across awide and deep customer base provides it with the platform to continue to grow atrates above the forecast overall increases predicted in US DoD budgets in themedium term. Additionally the high end nature of QinetiQ's service offeringswill provide it with a significant degree of insulation from the impact offuture US government budget pressures. Commercial markets for services and products for QinetiQ's Ventures businessespresent a tremendous opportunity for the Group. QinetiQ aims to grow thesebusinesses into profitable contributors to the Group and to seek externalpartners and funders to support their development as appropriate. QinetiQ looks forward to the coming year with confidence that its robustbusiness model, the quality and commitment of its people and the strength anddepth of its customer relationships provide it with a platform for continuedgrowth in core defence and security markets, together with increasing success intaking its technology into other markets of global significance. There will be a webcast of the presentation of the preliminary results toanalysts at 09:30 am 31 May 2007. If you wish to watch this broadcast you willneed to register in advance at http://www.axisto.com/webcasting/investis/qinetiq/full-year-results-2006/. The event will be broadcast at the same address. There will also be an audiocast of the event which can be heard using thefollowing numbers: UK participants: 0800 634 5205Other participants: +44 208 817 9301 The presentation will be available at our investor relations page http://www.qinetiq.com/home/investor_centre.html on the morning of our results and the video conference will be uploaded to the site following the event. Notes for Editors: • QinetiQ (pronounced ki net ik as in 'kinetic energy') is a leading international defence and security technology business that was formed in July 2001 from the UK Government's Defence Evaluation & Research Agency (DERA). QinetiQ has approximately 13,500 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. For further information please contact:QinetiQ: Nicky Louth-Davies , Media relations +44 (0)7795 290593 Adrian Colman, Investor relations +44 (0)7740 432699Citigate Dewe Rogerson: Andrew Hey +44 (0)20 7216 4729 DisclaimerAll statements other than statements of historical fact included in thisdocument, including, without limitation, those regarding the financialcondition, results, operations and businesses of QinetiQ and its strategy, plansand objectives and the markets and economies in which it operates, areforward-looking statements. Such forward-looking statements, which reflectmanagement's assumptions made on the basis of information available to it atthis time, involve known and unknown risks, uncertainties and other importantfactors which could cause the actual results, performance or achievements ofQinetiQ or the markets and economies in which QinetiQ operates to be materiallydifferent from future results, performance or achievements expressed or impliedby such forward-looking statements. Nothing in this document should be regardedas a profit forecast. Group Trading PerformanceGroup summary 2007 2006 2005 £m £m £m Orders 1,214.0 816.7 668.3Revenue 1,149.5 1,051.7 855.9 Underlying EBITDA(1) 140.5 124.5 104.3Underlying operating profit (3) 106.0 90.7 65.2Underlying operating margin 9.2% 8.6% 7.6%----------------------------------------------- ------- ------- -------Business divestments and investment impairment 4.6 - 17.1----------------------------------------------- ------- ------- -------Underlying profit before tax (4) 94.0 80.1 58.2Net debt 300.8 233.0 176.6Backlog(2) 850.9 608.4 572.0Underlying effective tax rate 21.2% 22.7% 16.2%----------------------------------------------- ------- ------- -------Underlying earnings per share 11.3p 10.2p 8.8p----------------------------------------------- ------- ------- -------Dividend per share 3.65p 2.25p Nil----------------------------------------------- ------- ------- ------- (1) Underlying EBITDA excluding IPO related items(2006)(2) Excluding remaining £4.8bn (2006: £5.0bn 2005: £5.2bn) in respect of LTPAcontract(3) Underlying operating profit is operating profit before acquisitionamortisation and IPO related items and restructuring (2005)(4) Excluding business divestments and investment impairment and disposal ofnon-current assets and restructuring (2005) In February 2007 QinetiQ announced that it planned to create, from 1 April 2007,an EMEA (Europe, Middle East and Australasia) region to develop the Group'sprovision of its existing UK services globally. The EMEA region comprises all ofthe Group's operations with the exception of QinetiQ North America and Venturesactivities. In order to identify the results covered by the EMEA region and toprovide greater clarity on the development of commercial businesses from thedefence technology base, the operating results of Ventures have been split outfrom within Security & Dual Use in the analysis below. Revenue 2007 2006 2005 £m £m £m----------------------------- --------- ------- -------RevenueDefence & Technology 657.9 669.6 664.9Security & Dual Use 121.4 127.6 115.9----------------------------- --------- ------- -------EMEA 779.3 797.2 780.8QinetiQ North America 358.2 248.4 70.1Ventures 12.0 6.1 5.0----------------------------- --------- ------- -------Total 1,149.5 1,051.7 855.9----------------------------- --------- ------- ------- Group revenue increased 9.3% to £1,149.5m due primarily to acquisitions andorganic growth in QNA. The overall level of organic growth in revenue inconstant currency terms was 2.3% (2006: 2.3%). The acquisitions of OSEC (May2006) and Analex (March 2007) and the first time full year contributions fromApogen (September 2005) and PSI (September 2005) were complemented by organicgrowth in particular from Technology Supply (7.6%) within D&T and 14% from QNAat constant rates of exchange. These increases in revenue more than offset thelower than anticipated reductions in MOD Research (8.4%), the non recurrence ofLCD patent royalty income in S&DU (£13m) and the effect of the weakening USdollar on the translation of the results of QNA (£28.9m compared to the levelthat would have been reported on a constant currency basis). Orders and backlog 2007 2006 2005 £m £m £m----------------------------- --------- ------- -------OrdersDefence & Technology 650.8 420.7 472.6Security & Dual Use 132.9 158.3 124.7----------------------------- --------- ------- -------EMEA 783.7 579.0 597.3QinetiQ North America 416.0 227.9 67.9Ventures 14.3 9.8 3.1----------------------------- --------- ------- -------Total 1,214.0 816.7 668.3----------------------------- --------- ------- ------- BacklogDefence & Technology (1) 520.0 366.6 410.0Security & Dual Use 112.6 108.1 93.4----------------------------- --------- ------- -------EMEA 632.6 474.7 503.4QinetiQ North America 210.7 129.2 68.6Ventures 7.6 4.5 ------------------------------ --------- ------- -------Total (1) 850.9 608.4 572.0----------------------------- --------- ------- ------- (1) Excludes remaining £4.8bn (2006: £5.0bn) in respect of LTPA contract Orders have increased by 49% to £1,214.0m with strong performance from allsectors of the Group. A 55% increase in orders was delivered within D&T, withthe finalisation of the 20 year CATS contract (£104m) and the Typhoon supportthree year contract extension (£53m) particularly notable. The continued highlevels of funding for TALON(R) robots and robust funding for SETA work, togetherwith the benefit of acquisitions in the prior and current year, has increasedorder levels in QNA by 97% in constant currency terms. The Group's strong orders performance has resulted in a book to bill ratio(excluding the LTPA) of 1.2:1(2006:0.9:1). Backlog increased by 40% from £608.4m to close at £850.9m. LTPA backlog at 31March 2007 stood at £4.8bn (2006: £5.0bn). The increase was primarily in D&Twhere the CATS contract added £104m to backlog and in North America wherebacklog has risen in all operating units. There has also been an additional£44.6m of backlog added from the acquisitions of Analex and OSEC. Operating profit 2007 2006 2005 £m £m £m----------------------------- --------- ------- -------Defence & Technology 59.1 56.5 51.3Security & Dual Use 13.9 17.2 15.9----------------------------- --------- ------- -------EMEA 73.0 73.7 67.2QinetiQ North America 39.9 24.5 8.0Ventures (6.9) (7.5) (10.0)----------------------------- --------- ------- -------Total 106.0 90.7 65.2----------------------------- --------- ------- ------- ----------------------------- --------- ------- -------Underlying operating profit margin 9.2% 8.6% 7.6%----------------------------- --------- ------- ------- Underlying operating profit has increased by 17% to £106.0m due to the benefitof the acquisitions noted above, organic growth in QNA and margin improvementswithin underlying operations, despite the impact of the weakening US dollar onthe translation of QNA operating profits. On a constant currency basis, usingthe average rate for the prior year, QNA would have contributed an additional£2.9m of operating profit. Underlying operating profit includes charges for UKrationalisation of £8.0m (2006: £9.4m). Underlying operating margin has improved in the year by 60 basis points to 9.2%(2006: 8.6%), driven by further improvements in existing business performanceand benefiting from the increased contribution from QNA, whose operations aretypically higher margin than the EMEA businesses. Cash flowCash inflow from operations before investing activities was £107.0m (2006:£107.6m). The UK business experienced delays in the award of contracts from theMOD during the year leading to a build in working capital at the year end ofapproximately £20m. This position has reversed in the new financial year. Thiscontributed to an operating cash conversion of 56% compared to 84% in 2006 andthe Group's long term 80% target. Investment in acquisitions in the year amounted to £134.3m (2006: £202.5m)comprising £96.4m on Analex, £28.6m on OSEC and £9.3m of deferred considerationrelating to prior year acquisitions, principally Westar, following thesatisfaction of post acquisition performance criteria. Other investmentstotalled £9.4m (2006: £1.2m), the most significant of which were further fundingof £4.4m for ZBD, £2.1m for Metalysis and £1.5m for Nomad. £17.9m of proceedswere received from business realisations (primarily the AFS sale) and £8.6m fromfixed asset disposals. The Group paid £3.3m of tax in the year, all in the US. The payment was belowthe US statutory rate due to the utilisation of tax losses and higher thanrequired payments on account in the prior year. In the UK no cash tax was paiddue to the availability of deductions for research and development relief andpension contributions made in the year to 31 March 2006. The Group expects that future tax payments in the US will broadly follow the USstatutory rate. In the UK the business is not expected to be in a tax payingposition in the short to medium term as the Group continues to benefit fromdeductions for research and development relief and past pension contributions. Dividend payments of £22.7m were made in the year comprising the final dividendof £14.8m for the year ended 31 March 2006 (paid in August 2006) and an interimdividend of £7.9m (paid in February 2007). OutlookThe Group has maintained the strategy it outlined at IPO and performed in linewith the Board's expectations. The UK defence business is expected to showimproved levels of growth in the coming year. The Group will actively continueits strategy to commercialise appropriate elements of its intellectual propertybase and look to structures and resource allocations that will accelerate andenhance value creation from the portfolio. Growth in QNA is anticipated bothorganically and from the recently completed acquisitions of Analex and ITS. TheGroup continues to target selective acquisitions in its key markets tocomplement and expand its capabilities as a technology rich defence and securityservices provider. EMEA - Defence & Technology 2007 2006 2005 £m £m £m------------- ------ ------ ------RevenueMOD Research 150.5 164.3 188.8Technology Supply 133.7 124.2 96.9Procurement & Capability Support 182.6 197.3 182.3Managed Services 191.1 183.8 196.9------------- ------ ------ ------Total 657.9 669.6 664.9------------- ------ ------ ------ Underlying operating profit 59.1 56.5 51.3Underlying operating margin 9.0% 8.4% 7.7% OrdersMOD Research 164.5 99.8 202.5Technology Supply 153.0 137.3 98.3Procurement & Capability Support 214.0 177.1 171.8Managed Services 119.3 6.5 -------------- ------ ------ ------Total 650.8 420.7 472.6------------- ------ ------ ------ Book to bill ratio 1.3:1 0.8:1 1.0:1Backlog 520.0 366.6 410.0------------- ------ ------ ------ Operations - Preferred bidder on DTR Package 1 and provisional preferred bidder onDTR Package 2 awarded to Metrix, a QinetiQ joint venture with Land SecuritiesTrillium. - Combined Aerial Target Service (CATS) contract signed. Worth up to£308m over 20 years. - Typhoon programme contract extension signed to provide £50m of definedtechnical support, advice and safety clearance activity, together with £2.5mallocated to sub-contracts and future emergent work over three years. - World's first flight demonstration of a system capable of controllingand autonomously organising multiple unmanned aircraft. The successful flighttrial consisted of a package of self-organising unmanned air vehicles under thecontrol of an operator flying in a fast jet. - Contract from Northrop Grumman's Remotec UK subsidiary to design andmanufacture the command and control systems for the MOD CUTLASS roboticsprogramme. CUTLASS will provide the next generation of explosive ordinancedisposal (EOD) unmanned ground vehicle. - £9.5m MOD research contract to deliver the Vehicle TechnologyIntegration Demonstrator programme. Three-year programme will investigate andimplement a layered protection approach to survivability for armoured vehiclesto reduce their vulnerability to attack. - 2000th X-Net vehicle arresting device sold in year. X-Nets havegenerated revenue in excess of £3.5m - £10.5m weapons systems upgrade programme on the Philippine Navy's threeJacinto Class Patrol Vessels completed on time and to budget. - QinetiQ Rail sold resulting in a £2.8m profit. Financials - Revenue increased by 7.6% in Technology Supply broadly offsetting thecontinued impact of MOD Research opening to competition. - Restructuring costs of £8.0m (2006: £4.4m) to align D&T capabilitieswith market requirements. - Underlying operating profit margin improvement of 60 basis points to9.0%. - Strong orders performance in year resulting in book to bill ratio of1.3:1 (2006: 0.8:1). - Backlog including remainder of LTPA £5.3bn (2006: £5.4bn). MOD ResearchThe MOD Research stream consists of customer-funded defence research revenues.QinetiQ has retained its position as the leading independent provider ofresearch services to the MOD and continued to win in excess of half of thecompeted MOD research bids in which it participated, resulting in a lower thanexpected 8.4% (2006: 13.0%) decline in stream revenue to £150.5m. Order flowinto MOD Research has been stronger than expected at £164.5m including a numberof awards for multi-year programmes. The strong win rate has given rise to abook to bill ratio of 1.1:1. The MOD continues to increase competition in itsresearch programme and by the end of 2008 new contracts available to industrywill be fully open to competition. Group revenue from MOD Research is thereforeexpected to continue to decline in the coming years. The Group also conducts elements of MOD Research through the divisions in theSecurity & Dual Use sector. The total value of MOD research undertaken acrossthe Group declined by 10.7% to £172.4m (2006: £193.1m). Technology SupplyThe Technology Supply business stream focuses on using intellectual propertyfrom customer-funded defence research to provide technology-based solutions todefence Original Equipment Manufacturers (OEMs), defence prime contractors, MODand other UK Government agencies, US DoD and a number of technology-driven civilindustries. QinetiQ has been successful in continuing to gain positions on newand existing major MOD programmes, although delays by the MOD in placing majorprocurement contracts resulted in revenue growth lower than expected at 7.6% inyear to £133.7m (2006: £124.2m). Order intake of £153.0m resulted in a book tobill ratio of 1.1:1 providing good visibility for continued future growth. On 5th March 2007 QinetiQ Rail Limited, a subsidiary specialising in wirelessbroadband for the rail industry, was sold for consideration of £4.5m in sharesin the acquiring company, Nomad Holdings Limited (Nomad), representing an 8.6%shareholding in Nomad. The transaction resulted in a net gain of £2.8m. Procurement & Capability SupportProcurement & Capability Support provides advice to the MOD in relation to theacquisition, effective sustainment and use of defence equipment together withsystems engineering, integration and other support services and tasking servicesunder the LTPA. Revenue in year declined by 7.5% to £182.6m principally due todelays in commissioning work by MOD and lower levels of Urgent OperationalRequests (UORs). This was partly offset by the high level of tasking workundertaken in the year which rose by 23% from £63.3m in 2006 to £77.6m in 2007.The order flow from the MOD was stronger in the final quarter of the yearproviding good order cover into the next year. Managed ServicesManaged Services provides long-term technology rich managed services to the MOD.Currently this is principally through the LTPA whereby QinetiQ provides the UK'stest and evaluation capabilities to the MOD. The LTPA is QinetiQ's singlelargest current contract and is expected to provide revenues of up to £5.6bn(for the non-tasking services only) over the 25 years from its commencement in2003. The LTPA operates under five year periods with specific programmes,targets and performance measures set for each period. As QinetiQ enters thefifth year of the contract it has again increased its performance score underthe contract from 92% in 2006 to 94% in 2007. During the coming year QinetiQ andthe MOD will finalise the nature of any refinements to the scope, specificchanges to targets and agree relevant performance metrics and pricing for thenext five year period which is due to commence in April 2008. During the year the Group reached financial close on the CATS contract which isworth up to £308m over the next 20 years. This contract enhances the servicealready provided under the LTPA and is expected to provide £104m of incrementalrevenue to the Group over the duration of the contract. Defence Training Rationalisation ProgrammeIn January 2007, the MOD announced that Metrix, QinetiQ's joint venture withLand Securities Trillium, had been selected as the preferred bidder for Package1 and provisional preferred bidder for Package 2 of the 25 year DTR managedservices contract to provide the UK armed forces with elements of theirtechnical training programme. Package 1 primarily comprises technical training,including aeronautical engineering and communications and information systems.Package 2 incorporates logistics, joint personnel administration, security,languages, intelligence and photography as well as supply training. Negotiationsare ongoing with the MOD to refine the scope of the packages to address customeraffordability. The target remains to agree the final scope by Autumn 2007, withfinancial close expected 12 to 18 months thereafter. Since attaining preferred bidder and provisional preferred bidder status bidcosts have been capitalised. Up to £25m of costs are expected to be capitalisedduring the next 12 months. EMEA - Security & Dual Use 2007 2006 2005 £m £m £m--------------------------------------- ------ ------ -----RevenueSecurity 26.8 27.2 22.1Space 20.7 25.5 17.9Technology Development & Exploitation 46.3 49.1 53.5Managed Services 27.6 25.8 22.4--------------------------------------- ------ ------ -----Total 121.4 127.6 115.9--------------------------------------- ------ ------ ----- Underlying operating profit 13.9 17.2 15.9Underlying operating margin 11.4% 13.5% 13.7% OrdersSecurity 29.6 32.8 25.2Space 20.1 18.7 12.5Technology Development & Exploitation 51.6 66.4 55.9Managed Services 31.6 40.4 31.1--------------------------------------- ------ ------ -----Total 132.9 158.3 124.7--------------------------------------- ------ ------ ----- Book to bill ratio 1.1:1 1.2:1 1.1:1Backlog 112.6 108.1 93.4--------------------------------------- ------ ------ ----- Operations - Secured a two-year $5m research contract from the DARPA in supportof its Large Area Coverage Optical Search While Track and Engage (LACOSTE)programme. The concept is to develop a suite of sensors that can be operated athigh altitude, possibly on an airship or long endurance UAV, that detect andsimultaneously track large numbers of moving vehicles in dense urban areas witha high degree of accuracy, 24 hours a day. - Won a £1.6m, three year secure hosting contract for Aegate to keepsensitive information, generated as part of a drug authentication process,secure and confidential. - Awarded a two year contract extension worth £7m to continue theprovision of technical support to the MOD's Defence Fuels Group (DFG) for fuelsand lubricants. - Announced as preferred bidder on a 10 year contract to operate anESA tracking station. - Partnered with Advantage West Midlands in a £20m advanced sensorsproject which will assist SMEs in the development and integration of advancedsensors. Financials - S&DU revenue declined slightly, following the completion of LCDpatent royalty income in the prior year (£13m). Underlying growth excluding theLCD royalties was 5.9%. - £2.8m of revenue was generated through a number of smallertransactions to licence or dispose of surplus intellectual property in theGroup's portfolio. - Underlying operating profit margin declined from 14% to 11%reflecting the cessation of LCD royalties, partially mitigated by the revenuegenerated from the smaller licence transactions, and a £2.5m reduction in rentalincome following the sales of surplus property in recent years. - The absolute margin continued to benefit from strong performance bythe Estates division within Managed Services. - The sector orders were strong at £132.9m and continued to supportfuture growth with a book to bill ratio of 1.1:1. - Orders won typically had an average value of around £0.1mcomplemented by approximately 30 contracts in excess of £1m each. SecurityThe Group's Security stream offers world-class capabilities in informationsecurity and assurance, physical security, people screening, 24-hour monitoringof complex networks, forensic work in law enforcement and specialised ITsecurity and security technology. Revenue in the year was broadly consistentwith the prior year. We have made certain management changes to drive a returnto growth. SpaceQinetiQ's Space stream is a leading European player in the development of ionengines, small low-cost, fast-to-launch satellites, and mission design andgeospatial information systems. The nature of the industry is one of largeindividual projects which in turn can result in an irregular sales profile whichwas evidenced in 2007 with a £4.8m reduction in revenue despite the inclusion ofa full year contribution from Verhaert. The business is working an expandedpipeline of opportunities with customer decisions expected in the coming year. Technology Development & ExploitationThe Technology Development & Exploitation stream delivers research anddevelopment offerings from its leading Optronics, Materials and Energy technicalcapabilities. In addition, it facilitates the transition of intellectual capitalgenerated from QinetiQ's funded technology research and development work into aviable range of products and solutions for the commercial marketplace.Applications include optical devices and portable power units. Revenue declinedby only £2.8m despite the loss of the LCD royalty revenue, as a result of stronggrowth in Optronics and further sales of IP not selected for internalexploitation generating £2.8m of licence revenue. Managed ServicesManaged Services offers a portfolio of services in areas such as fuel andlubricant testing and analysis, instrument calibration and supporting technicalservices together with real estate, facilities and equipment managementservices. The Estates division continues to be a very strong profit generatorfor the sector from the rental income on surplus property. The property disposalprogramme is leading to a reduction in rental and other property income, withthe disposals over the past two years resulting in a £2.5m reduction in rentalincome in year. Actions are also underway to seek alternative tenants for partthe Group's Farnborough site as dstl, a significant sub-tenant has indicatedthat it intends to consolidate its operations elsewhere, although no formaltermination notice has been received. QinetiQ North America 2007 2006 2007 2006 £m £m $m $m Organic Growth at constant currency (1) %-------------------- ----- ----- ------- ------ -------------RevenueTechnology 126.9 82.9 242.5 146.9 42%SETA 98.5 105.3 188.3 187.5 (1.6)%IT Services 128.5 60.2 246.1 105.3 0.4%Mission Solutions 4.3 - 8.4 --------------------- ----- ----- ------- ------ -------------Total 358.2 248.4 685.3 439.7 14%-------------------- ----- ----- ------- ------ ------------- Underlying operatingprofit (1) 39.9 24.5 75.8 43.4Underlying operatingmargin 11.1% 9.9% 11.1% 9.9% OrdersTechnology 147.4 73.2 279.6 129.6SETA 128.0 97.4 244.5 172.6IT Services 140.6 57.3 269.6 100.2-------------------- ----- ----- ------- ------ -------------Total 416.0 227.9 793.7 402.4-------------------- ----- ----- ------- ------ ------------- Book to bill ratio 1.2 0.9 1.2 0.9Backlog 210.7 129.2 413.0 223.5 (1) Organic growth reflects the growth in businesses that were part of the Groupat the start of the financial year Operations - The MOD placed a $10m order to supply LAST(R) Armor for 85 MastiffProtected Patrol Vehicles. - New $63.9m indefinite delivery/indefinite quantity (IDIQ) contractfrom NAVAIR for TALON(R) robots and spares of which $54m was funded in year. Anextra $77m of funding released against the six-year, $257m IDIQ contract fromNAVSEA announced in September 2005 - IT Services was awarded the Field Operations Authoring Supportcontract by the US Department of Commerce in support of the Census Bureau. The$6.8m contract is to provide programming tools used in development ofcomputer-assisted interviewing systems that enable the Census Bureau to conductresearch for multiple federal agencies. - IT Services was awarded three contracts worth $11.3m with the MarineCorps System Command Acquisition Center for Support Services unit to provideengineering, technical, acquisition and logistics support services. - Systems Engineering & Technology Assistance (SETA) won a contract toprovide test support services to the US Army Aviation Technical Test Centerunder a five-year contract valued at more than $21m for planning, conducting,analysing and reporting on the development and airworthiness qualifications ofaircraft, aviation systems, and associated equipment throughout theirlife-cycles. - In June 2006 Duane Andrews was appointed CEO of QNA. Duane waspreviously the COO of SAIC and has also worked extensively for the US DoD. - Three acquisitions were announced in year: Ocean Systems EngineeringCorporation (OSEC) ($53.7m - completed May 2006); Analex ($193.6m - March 2007)and ITS Corporation (ITS) ($80m - April 2007) - With the addition of Analex a fourth revenue stream of MissionSolutions has been established. - Year end headcount has risen to 4,258 (2006: 2,640) including 1,440from the acquisitions of OSEC and Analex. ITS added a further 700 staff in April2007. Financials - Revenue increased 44% to £358.2m or 56% in constant currency to $685.3m. 2007included first time contributions from OSEC and Analex and full yearcontributions from Apogen and PSI. - Revenue growth from acquisitions was complemented by organic growthof 14% on a constant currency basis. - SETA stream without the contributions of Aerospace FiltrationSystems (AFS) delivered organic revenue growth of 10%. - Underlying operating margin, excluding business realisations, hasimproved 120 basis points to 11% primarily driven by the strong TALON(R) productsales in Technology. - All QNA streams won orders significantly higher than the previousyear and the sector book to bill ratio was 1.2:1. Acquisitions and disposalsOn 15 May 2006 the Group acquired San Diego based OSEC for cash consideration,before acquisition costs and assumed net cash, of £28.2m ($53.7m). OSEC is aleading provider of research, design, development and integration of advancedinformation technology systems to key defence agencies in the US, with some 340staff. OSEC has performed in line with expectations, and delivered £25.0m($48.1m) of revenue and £2.1m ($4.1m) of operating profit since acquisition. On 14 March 2007 the Group acquired Analex for a cash consideration, beforeacquisition costs and assumed net cash, of £98.8m ($193.6m). Analex's 1,100employees provide high technology professional services mainly to US Governmentagencies. Analex has delivered £4.3m ($8.4m) of revenue and £0.6m ($1.1m) ofoperating profit since acquisition. Subsequent to the year end, on 16 April 2007 the Group acquired ITS for aninitial cash consideration of £40.8m ($80.0m). ITS specialises in IT systems,business process management and operational support to federal governmentcustomers including the US Army, Navy and Department of Homeland Security. The Group disposed of its high performance engine inlet barrier AFS business on28 February 2007 for £19.9m ($39.0m) to Donaldson, Inc. The disposal allowed theGroup to realise the value from the AFS technology and business at anappropriate stage in its development. A profit of £9.9m ($19.4m) has beenrecognised on disposal. TechnologyThe Technology stream provides high technology research services and defence andsecurity related products to the US DoD, other government agencies andcommercial customers in North America. Specialisms in this stream include advanced materials, biomedical technology, robotics, electromagnetics, sensors,thermal systems, human performance, embedded software, non-destructiveinspection & evaluation and diagnostics & prognostics. Revenue grew organically by 42% as the strong demand for TALON(R) robotscontinued and additional LAST armor orders were won. During the year the Grouprecorded $111.6m TALON(R) revenue and shipped 546 TALON(R) robots including thefirst to non-US customers. A book to bill ratio of 1.2:1 supports a positiveoutlook for the coming year, albeit that the rate of growth is expected tomoderate. Systems Engineering & Technical AssistanceThe Systems Engineering & Technical Assistance (SETA) stream providesindependent support for the procurement, development, modification, fielding andsustainment of major army and missile defence equipment in North America. Revenue was flat on prior year due to the $19.2m fall in revenue from AFS to$11.8m (2006: $31.0m). The continuing business grew 10.1% primarily due tologistics services and the delivery of a number of aircraft flight simulationsolution installations. IT ServicesThe IT Services stream offers high value-added capabilities including enterprisearchitecture, software development and systems integration, network engineeringand operations, energy and environmental engineering and program management toUS Government agencies, particularly to the US DoD and DHS. Revenue growth occurred through the acquisition of OSEC and the full yearcontribution of Apogen. Growth in Apogen, in common with others operating in themarket, was held back by delays in new staff receiving security clearance towork at the DHS, which has continued to delay the commencement of revenuegeneration from new contracted positions won in the year. When combined with theexpected loss of contracts previously awarded under US small business set asiderules, this resulted in Apogen's revenue being flat year on year. The streamdelivered a good order intake, resulting in a book to bill of 1.1:1. Mission SolutionsFollowing the acquisition of Analex in March 2007 a new business stream, MissionSolutions, has been created comprising Analex and from 1 April 2007, elements ofOSEC. The business has capabilities principally in information technology,mission assurance and operations, system design, engineering and integration,system and program security, intelligence and counter-intelligence support,enterprise systems engineering and integration and other consulting servicesrequiring specialised customer or mission knowledge. Mission Solutions is focused on high margin/high growth markets such asintelligence and security with customers largely drawn from the US government,particularly NASA and the DHS, directly or through commercial subcontracts. In the year to 31 December 2006 Analex reported revenue of £78m and operatingprofit of £5.4m. Ventures 2007 2006 2005 £m £m £m--------------- ------ ------ ------Revenue 12.0 6.1 5.0 Operating loss (6.9) (7.5) (10.0) Orders 14.3 9.8 3.1 Backlog 7.6 4.5 - Operations - Tarsier(R) runway foreign object detection system: • first installation at Vancouver International airport now operationally live • second installation at Dubai International delayed pending completion of groundworks but expected to be complete in the second quarter of the coming year • extended evaluations being installed at London Heathrow and with the FAA at Providence, Rhode Island airport • winner of Top Award for defence to civil technology transfer at Defence Technology Exchange Awards - Licensed the ZephIR(TM) laser anemometer technology for wind speeddetection to Natural Power for £2.5m, a leading consultant to the internationalrenewable energy industry. - Sale of 12% stake in Aurix to strategic licensing partner valuesAurix at £9m - Successful fund raising round for ZBD Displays in March 2007 intowhich QintetiQ invested an additional £3.5m as part of the total £10.5m fundinground. QinetiQ increased its stake in the company by 1.2% to hold 32% followingits total £4.4m investment in the year and saw the value of its investmentincrease by £6.1m. - Extensive trials continuing with UK and European retailers Tesco,Dixons, Metro and PC World for ZBD displays - Omni-ID signed agreement with Crown Packaging to develop low costRFID packaging solution - Initial export orders for Quintel mobile telephone antenna sharingequipment - Invested in development of new US focussed product in Quintel Financials - Ventures revenue has doubled as a number of the businesses andtechnologies progressed into initial revenue generating phases, including astrategic licensing agreement for ZephIR(TM) and the initial Tarsier(R) revenue in respect of Vancouver. - Stream losses temporarily decreased due to the ZephIR(TM) licensingrevenue offsetting increased marketing costs to push products to greater levelsof customer awareness (principally Tarsier(R)) and further product development,particularly a new US focused product in Quintel. - Investment in Ventures is expected to increase by up to £5m in thecoming year to support accelerated development of promising opportunities suchas Aurix and Omni-ID. QinetiQ continues to explore a variety of routes to accelerate value creationfrom the ventures, with a drive to inject more management and financialresource, and to find valuable partners to help take products to market. This will allow greater management and investment focus on accelerating thegrowth of individual ventures while allowing the Group to focus on bringingforward new venture opportunities.Other financials Net debt and liquidityAt 31 March 2007 net debt was £300.8m representing an increase of £67.8m in theyear. Net debt was principally denominated in US dollars and consequently the12% weakening of the US dollar : sterling exchange rate in the year from $1.73at the start of the year to $1.96 at 31 March 2007 resulted in a £30.2m exchangegain on the translation of net debt in the year. In August 2006 the Group extended its five year, £500m revolving credit facility(RCF) by a further year to August 2011. On 6 December 2006 the Group completed aprivate debt placement with US financial institutions to refinance $260m ofexisting debt. This was secured at favourable interest rates and provides alonger debt maturity profile of 7 years for $135m and 10 years for $125m. TheGroup had £319.9m of further borrowing capacity at 31 March 2007 on the basis ofthe unutilised element of the RCF. The Group operated comfortably within itsbanking covenants during the year. Capital expenditure and fixed asset disposalsProperty, plant and equipment expenditure totalled £34.8m (2006:£45.0m), ofwhich £16.9m (2006: £23.5m) related to assets which are funded as part of theLTPA contract. The Group has future capital commitments of £13.2m (2006:£26.2m)largely in relation to planned capital expenditure under the LTPA. Capitalexpenditure in the year ending 31 March 2008 is expected to be some £15-20mhigher than in 2007 due to higher LTPA spend and new systems investment in theUK. PensionsThe Group provides both defined contribution and defined benefit pensionarrangements. The principal defined benefit scheme is the QinetiQ PensionScheme. The majority of new entrants to QinetiQ in EMEA join the Defined ContributionSection of the QinetiQ Pension Scheme. Pension benefits in QNA are provided on adefined contribution basis through 401k plans. A consolidated summary of the position of the defined benefit schemes is shownbelow: 2007 2006 £m £mSchemes' assets 794.1 716.0Schemes' liabilities (884.9) (884.4) ------- -----Schemes' deficit before deferred tax (90.8) (168.4)Deferred tax asset 27.1 50.4 ------- ------Net pension liability (63.7) (118.0) ------- ------ In the year the value of assets increased by 7.4%, close to the expected rate ofreturn for the year of 7.7%, with the 46% reduction in net pension liabilitybeing principally driven by a reduction in the discount rate, partly offset byan increase in the inflation rate assumptions, used to value the schemeliabilities. The current investment policy of the QinetiQ Pension scheme, as determined bythe trustees in consultation with QinetiQ, is weighted towards equityinvestments. The trustees believe this is appropriate at the current time due tothe relative youth of the scheme, which is expected to be cash flow positive forapproximately the next nine years. The funding of the defined benefit schemes is decided by the Group inconjunction with the trustees of the schemes and the advice of externalactuaries. The next full actuarial valuation is due as of 31 March 2008 and willbe the first valuation under the new regulations for funding defined benefits. During the year the net pension cost charged to the income statement, beforecurtailments, for the defined benefit scheme, represented 23% of pensionable payand this compared to 21% in the year to 31 March 2006. The key assumptions used in the IAS19 valuation are: Assumption 31 March 07 assumption 31 March 06 assumption---------- -------- --------Discount rate 5.4% 4.9%Inflation 3.1% 2.9%Salary increase 4.6% 4.4%Mortality male 86 86Mortality female 89 89 The increase in the discount rate follows the movement in the 15 year AA bondyield at the year end dates. Each assumption is selected by management in consultation with the companyactuary and taking account of the industry practice amongst comparator listedcompanies. The sensitivity of each of these key assumptions is shown in thetable below and this illustrates how a small change in each assumption can havea material effect on the magnitude of the IAS19 calculated deficit. Assumption Change in Indicative effect on scheme--------- assumption liabilities --------- -----------Discount rate Increase/ Decrease /increase by 2.6% decrease 0.1%Inflation and salary Increase/ Increase/decrease by 2.5%increase decrease 0.1%Life expectancy Increase 1 year Increase by 2.5% Based on the assumptions prevailing at the year end the expected pension chargefor the year to March 2008 will be lower than the current year, principally dueto the impact of the higher bond rate at the year end. Research and developmentResearch and development (R&D) represents a significant focus for the Group withthe majority of R&D related expenditure incurred on behalf of customers as partof specific funded research contracts from customers. The costs and relatedincome for this R&D is included in the relevant income statement cost categoryand revenue respectively. In the year to 31 March 2007 the Group recorded£511.1m of customer funded R&D related expenditure up 1.3% on the prior yearamount of £504.7m. £9.0m (2006: £5.6m) of internally funded R&D was charged to the income statementin the year and £3.2m (2006: £6.3m) of late stage development costs werecapitalised, relating to development work on Tarsier(R) and Aurix. £1.5 m (2006:£0.5m) of capitalised development costs were amortised in the year. Finance costsNet finance costs increased by £4.5m to £12.0m (2006: £7.5m before IPO relatedMOD indemnity income and preference share interest) due to the increase inacquisition related debt partly offset by the proceeds from the IPO in February2006 and the prior year redemption of high cost preference shares. The interestcover ratio, measured as underlying EBITDA: net finance costs was 11.7 times(2006: 11.7 times before IPO related MOD indemnity income). Profit before taxProfit before tax, non recurring items, disposals and acquisition amortisationincreased by 17% from £80.1m to £94.0m. The growth included the benefit of theacquisitions in the year of OSEC and Analex and a full year of trading resultsfor Apogen, PSI and Verhaert. The acquisitions made in the current yearcontributed £1.6m of profit before tax and the full year effect of acquisitionsmade in the prior year contributed an incremental £4.5m of profit before tax tothe current year. TaxThe effective tax rate was 23% (2006: 17%). The underlying effective tax ratefor the year is 21% compared to 23% in the prior year. The Group's effectiverate continues to be below the statutory rates in the UK primarily due to thebenefit of research and development relief. The effective rate is expected torise as an increasing proportion of taxable profits arise in the US. The USeffective rate is a little above the US statutory rate due to the US State taxmix. This more than offsets the benefits from the March 2007 UK Budget whichfurther enhanced research and development relief and reduced the UK corporationtax rate to 28% from April 2008. Profit for the yearThe underlying performance of the Group, after allowing for non-recurring eventsand amortisation of acquired intangible assets, is shown below: 2007 2006 £m £mProfit for the year 69.0 60.4Minority interest - (2.3)------------------- ------ ------Profit for the year attributable to equity shareholders of theparent company 69.0 58.1IPO related items - 4.2Profit on business divestments and unrealised impairment ofinvestment (4.6) -Profit on disposal of non current assets (3.3) (8.9)Amortisation of intangible assets arising from acquisitions 12.6 12.3Tax impact of items above 0.4 (0.7)Brought forward tax losses utilised - (5.4)------------------- ------ ------Underlying profit for the year attributable to equityshareholders of the parent company 74.1 59.6------------------- ------ ------ Non-recurring items that have been excluded from underlying profit relate toprofit on business divestments and investment impairment, costs associated withthe IPO in the previous year and profit on disposal of non current assets,principally surplus property. Earnings per shareUnderlying earnings per share increased by 10% to 11.3p compared to 10.2p in theprior year. Basic earnings per share increased 5.3% from 10.0p to 10.5p. DividendThe Board is recommending a final dividend of 2.45p per share bringing the totaldividend for the year to 3.65p per share, with the final dividend increasing8.9% from the 2.25p maiden final dividend paid in respect of the year ended 31March 2006. The full year dividend per share is 3.1 times covered by underlyingearnings per share. Consolidated income statement for the year ended 31 March all figures in£ million notes 2007 2007 2007 2006 2006 2006 Before Acquisition Total Before IPO IPO Total acquisition amortisation related items related items amortisation and acquisition and acquisition amortisation amortisation------------------ ----- -------- -------- -------- -------- -------- -------- Revenue 2 1,149.5 - 1,149.5 1,051.7 - 1,051.7------------------ ----- -------- -------- -------- -------- -------- -------- Employee costs (513.4) - (513.4) (492.0) (6.8) (498.8)Third partyproject costs (258.7) - (258.7) (230.8) - (230.8)Other operatingcosts excludingdepreciation andamortisation (246.7) - (246.7) (217.5) (2.1) (219.6)Share of post tax loss of equityaccountedjoint venturesand associates (1.2) - (1.2) (0.4) - (0.4)Other income 11.0 - 11.0 13.5 - 13.5------------------ ----- -------- -------- -------- -------- -------- --------EBITDA (earningsbefore interest, tax, depreciationand amortisation) 140.5 - 140.5 124.5 (8.9) 115.6------------------ ----- -------- -------- -------- -------- -------- --------Depreciationof property,plant andequipment (31.7) - (31.7) (32.7) - (32.7)Amortisationof intangibleassets (2.8) (12.6) (15.4) (1.1) (12.3) (13.4)------------------ ----- -------- -------- -------- -------- -------- --------Group operatingprofit 2 106.0 (12.6) 93.4 90.7 (21.2) 69.5------------------ ----- -------- -------- -------- -------- -------- --------Gain on businessdivestmentsand unrealisedimpairment ofinvestment 3a 4.6 - 4.6 - - -Profit ondisposal ofnon-currentassets 3b 3.3 - 3.3 8.9 - 8.9Finance income 4.2 - 4.2 8.4 4.7 13.1Finance expense (16.2) - (16.2) (19.0) - (19.0)------------------ ----- -------- -------- -------- -------- -------- --------Profit before tax 101.9 (12.6) 89.3 89.0 (16.5) 72.5------------------ ----- -------- -------- -------- -------- -------- -------- Taxation expense (25.0) 4.7 (20.3) (16.6) 4.5 (12.1)------------------ ----- -------- -------- -------- -------- -------- --------Profit for theyear 76.9 (7.9) 69.0 72.4 (12.0) 60.4------------------ ----- -------- -------- -------- -------- -------- -------- Profitattributable to:Equity shareholdersof the parentcompany 76.9 (7.9) 69.0 70.1 (12.0) 58.1Minority interest - - - 2.3 - 2.3------------------ ----- -------- -------- -------- -------- -------- -------- 76.9 (7.9) 69.0 72.4 (12.0) 60.4------------------ ----- -------- -------- -------- -------- -------- -------- Earnings per shareBasic 4 10.5p 10.0pDiluted 4 10.3p 9.8pUnderlying 4 11.3p 10.2p------------------ ----- -------- -------- -------- -------- -------- -------- Consolidated balance sheet as at 31 Marchall figures in £ million 2007 2006 Restated--------------------------------------------------------- --------- ---------Non-current assetsGoodwill 373.1 314.9Intangible assets 65.0 57.1Property, plant and equipment 341.5 340.3Investment property - 5.8Financial assets 18.8 22.1Investments 28.5 1.3Investments accounted for using the equity method 0.3 0.6Deferred tax asset 11.0 11.8--------------------------------------------------------- --------- --------- 838.2 753.9--------------------------------------------------------- --------- ---------Current assetsInventories 39.5 25.4Financial assets 4.0 3.0Trade and other receivables 401.2 332.6Cash and cash equivalents 20.0 58.9Investments 4.0 11.2Non-current assets classified as held for sale 1.8 3.6--------------------------------------------------------- --------- --------- 470.5 434.7--------------------------------------------------------- --------- ---------Total assets 1,308.7 1,188.6--------------------------------------------------------- --------- ---------Current liabilitiesTrade and other payables (339.4) (300.1)Current tax (6.9) (2.6)Provisions (1.1) (17.3)Financial liabilities (15.9) (6.6)--------------------------------------------------------- --------- --------- (363.3) (326.6)--------------------------------------------------------- --------- ---------Non-current liabilitiesRetirement benefit obligation (gross of deferred tax) (90.8) (168.4)Deferred tax liability (30.9) (8.2)Provisions (13.1) (9.2)Financial liabilities (327.7) (310.4)Other payables (5.5) (2.9)--------------------------------------------------------- --------- --------- (468.0) (499.1)--------------------------------------------------------- --------- ---------Total liabilities (831.3) (825.7)--------------------------------------------------------- --------- ---------Net assets 477.4 362.9--------------------------------------------------------- --------- ---------Capital and reservesOrdinary shares 6.6 6.5Capital redemption reserve 39.9 39.9Share premium account 147.6 147.5Own shares (0.1) -Hedging and translation reserve (13.1) 4.9Retained earnings 296.4 164.7--------------------------------------------------------- --------- ---------Capital and reserves attributable to shareholders ofthe parent company 477.3 363.5--------------------------------------------------------- --------- ---------Minority interest 0.1 (0.6)--------------------------------------------------------- --------- ---------Total shareholders' funds 477.4 362.9--------------------------------------------------------- --------- --------- Consolidated cash flow statement for the year ended 31 Marchall figures in £ million 2007 2006--------------------------------------------------------- --------- --------Profit for the year 69.0 60.4Taxation expense 20.3 12.1Net finance costs 12.0 5.9IPO costs - 8.9Gain on business divestment and unrealised impairmentof investment (4.6) -Profit on disposal of non-current assets (3.3) (8.9)Depreciation of property, plant and equipment 31.7 32.7Amortisation of intangible assets 15.4 13.4Share of post tax loss of equity accounted jointventures and 1.2 0.4associatesIncrease in inventories (15.5) (9.9)(Increase)/decrease in receivables (33.9) 42.2Increase/(decrease) in payables 27.0 (31.8)Decrease in provisions (12.3) (17.8)--------------------------------------------------------- --------- --------Cash inflow from operations 107.0 107.6Tax paid (3.3) (4.4)Interest received 4.2 3.4Interest paid (13.8) (12.8)Preference share interest paid - (10.5)--------------------------------------------------------- --------- --------Net cash inflow from operating activities 94.1 83.3--------------------------------------------------------- --------- -------- Purchase of intangible assets (12.1) (8.5)Purchase of property, plant and equipment (34.8) (45.0)Sale of property, plant and equipment 8.6 111.5Investments in associate undertaking and other (9.4) (1.2)investmentsPurchase of subsidiary undertakings (134.3) (202.5)Sale of interest in subsidiary undertakings 17.9 ---------------------------------------------------------- --------- --------Net cash outflow from investing activities (164.1) (145.7)--------------------------------------------------------- --------- --------Net (costs)/proceeds from IPO (2.0) 136.2Cash outflow from repayment of loans (79.2) (75.4)Cash outflow from repayment of loan note (1.4) (45.9)Cash inflow from loans received 131.3 198.9Cash inflow from loans notes 1.3 -Payment of deferred finance costs (0.4) -Preference share repayment - (37.5)Equity dividends paid (22.7) -Receipt of MOD indemnity - 45.3Additional pension contributions - (106.4)Capital element of finance lease rental payments (5.9) (2.2)Capital element of finance lease rental 3.5 3.0receipts --------------------------------------------------------- --------- --------Net cash inflow from financing activities 24.5 116.0--------------------------------------------------------- --------- --------(Decrease)/increase in cash and cash equivalents (45.5) 53.6Effect of foreign exchange changes on cash and cashequivalents (0.5) -Cash and cash equivalents at beginning of year 58.6 5.0--------------------------------------------------------- --------- --------Cash and cash equivalents at end of year 12.6 58.6--------------------------------------------------------- --------- --------Cash and cash equivalents 20.0 58.9Overdrafts (7.4) (0.3)--------------------------------------------------------- --------- --------Cash and cash equivalents at end of year 12.6 58.6--------------------------------------------------------- --------- -------- Consolidated statement of recognised income and expensefor the year ended 31 March all figures in £ million 2007 2006---------------------------------- -------- --------- Net loss on hedge of net investment in foreign subsidiary (14.4) (2.0)(Decrease)/increase in fair value of hedging derivatives (5.6) 4.9Movement in deferred tax on hedging derivatives 2.0 (1.5)Gain/(loss) on available for sale financial assets 10.0 (1.6)Actuarial gains/(losses) recognised in the defined benefitpension schemes 85.8 (105.4)(Decrease)/increase in deferred tax asset due to movement inpension deficit (17.9) 8.7---------------------------------- -------- ---------Net income recognised directly in equity 59.9 (96.9)Profit for the year 69.0 60.4---------------------------------- -------- ---------Total recognised income and expense for the year 128.9 (36.5)---------------------------------- -------- --------- Attributable to:Equity shareholders of the parent company 128.9 (38.8)Minority interest - 2.3---------------------------------- -------- --------- 128.9 (36.5)---------------------------------- -------- --------- Notes to the preliminary results announcement 1. Basis of preparationAccounting policyThe 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 by the Group within its AnnualReport for the year ended 31 March 2006 which is available on the Group'swebsite, www.QinetiQ.com. Certain comparatives have been restated following thefinalisation during the year of the fair values of acquisitions completed in theprior year. Further details as the restatements are provided in note 6. Statutory informationThe Board of Directors approved the preliminary announcement on 31 May 2007.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 2007 and 31 March 2006.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 2007 will be delivered to the Registrar of Companies following theCompany's Annual General Meeting on 26 July 2007. Details of the resolutions tobe proposed at that meeting will be included in the notice of Annual GeneralMeeting that will be sent to shareholders. 2. Segmental analysisBusiness segments Year ended 31 March 2007all figures in £ million Defence & Security & Ventures QinetiQ North Eliminations Consolidated Technology Dual America Use --------------------------- ------- ------- ------- ------- ------- -------RevenueExternal sales 657.9 121.4 12.0 358.2 - 1,149.5Internal sales(1) 5.3 10.8 - 0.6 (16.7) ---------------------------- ------- ------- ------- ------- ------- ------- 663.2 132.2 12.0 358.8 (16.7) 1,149.5--------------------------- ------- ------- ------- ------- ------- -------Other informationEBITDA before share ofequity accounted associates 81.0 21.2 (3.6) 43.1 - 141.7Share of equity accountedassociates - - (1.3) 0.1 - (1.2)--------------------------- ------- ------- ------- ------- ------- -------EBITDA 81.0 21.2 (4.9) 43.2 - 140.5Depreciation of property,plant and equipment -own equipment (13.9) (6.9) (0.7) (3.2) - (24.7)Depreciation of property,plant and equipment -LTPA funded (7.0) - - - - (7.0)Amortisation of purchasedor internally developedintangible assets (1.0) (0.4) (1.3) (0.1) - (2.8)--------------------------- ------- ------- ------- ------- ------- -------Group operating profit/(loss)before amortisation of intangible assets arisingfrom acquisitions 59.1 13.9 (6.9) 39.9 - 106.0Amortisation of intangibleassets arising fromacquisitions (0.8) (1.1) - (10.7) - (12.6)--------------------------- ------- ------- ------- ------- ------- -------Group operating profit/(loss) 58.3 12.8 (6.9) 29.2 - 93.4Gain on businessdivestments and unrealisedimpairment of investment 4.6Profit on disposal ofnon-current assets 3.3Net finance expense (12.0)--------------------------- ------- ------- ------- ------- ------- -------Profit before tax 89.3Taxation expense (20.3)--------------------------- ------- ------- ------- ------- ------- -------Profit for theyear 69.0--------------------------- ------- ------- ------- ------- ------- ------- (1) Inter segment sales are priced at fair value and treated as an arm's lengthtransaction. 2. Segmental analysis continuedYear ended 31 March 2006 all figures in £ million Defence & Security & Ventures QinetiQ North Eliminations Consolidated Technology Dual Use America------------------------- -------- -------- -------- ------------- ------------ ------------RevenueExternal sales 669.6 127.6 6.1 248.4 - 1,051.7Internal sales (1) 9.8 11.3 - - (21.1) -------------------------- -------- -------- -------- ------------- ------------ ------------ 679.4 138.9 6.1 248.4 (21.1) 1,051.7------------------------- -------- -------- -------- ------------- ------------ ------------Other informationEBITDA beforeIPO costs andshare of equityaccountedjoint venturesand associates 79.0 25.0 (6.2) 27.1 124.9Share of equityaccountedjoint venturesand associates - - (0.4) - (0.4)------------------------- -------- -------- -------- ------------- ------------ ------------EBITDA beforeIPO costs 79.0 25.0 (6.6) 27.1 124.5Depreciationof property,plant andequipment -own equipment (13.2) (7.3) (0.9) (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/(loss)before IPOcosts andamortisationof intangibleassets arisingfromacquisitions 56.5 17.2 (7.5) 24.5 90.7Amortisationof intangibleassets arisingfromacquisitions (2.0) (0.7) - (9.6) (12.3)------------------------- -------- -------- -------- ------------- ------------ ------------Groupoperatingprofit/(loss)before IPOcosts 54.5 16.5 (7.5) 14.9 78.4IPO costs (8.9)------------------------- -------- -------- -------- ------------- ------------ ------------Groupoperatingprofit 69.5Profit ondisposal ofnon-currentassets 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 lengthtransaction The segmental analysis has been modified from the prior year to align with theoperational change in the year in which the ventures are now separately reportedfrom the rest of the Security & Dual Use sector. 3a. Gains on Business Divestments and Impairment of Investment all figures in £ million 2007 2006-------------------------------------- --------- ---------Profit on disposal of interests in subsidiaries 13.4 -Unrealised impairment of investment (8.8) --------------------------------------- --------- --------- 4.6 --------------------------------------- --------- --------- On 28 February 2007 Aerospace Filtration Systems, Inc. was sold to Donaldson,Inc. for £19.9m ($39.0m) resulting in a profit on disposal of £9.9m ($19.4m).Included in the proceeds was £3.1m ($6.0m) of cash held in escrow for a periodof two years from the transaction date and recorded as a financial asset. On 5 March 2007 QinetiQ Rail Limited was sold to Nomad Holdings Limited (Nomad)in exchange for an 8.6% shareholding in Nomad valued at £4.5m, resulting in aprofit on disposal of £2.8m. At the transaction date QinetiQ also purchased£1.5m of initially zero coupon preference shares in Nomad and these have beenrecorded at their fair value at 31 March 2007 of £1.2m. On 3 August 2006 a 12% stake in Aurix Limited was sold to a strategic licensingpartner for cash consideration of £1.1m resulting in a profit on disposal of£0.7m. The unrealised impairment of investment relates to an £8.8m charge to the incomestatement in respect of the impairment in the carrying value of the quotedpSivida investment. 3b. Profit on Disposal of Non-Current Assets all figures in £ million 2007 2006-------------------------------------- --------- ---------Profit on disposal of non-current assets 3.3 8.9-------------------------------------- --------- --------- Current year disposalsOn 29 March 2007 the Group unconditionally exchanged on the contract to disposeof its Bedford site resulting in the recognition of £2.5m of profit on disposal,net of costs. Initial proceeds of £1.8m were received on exchange of contracts.The sale completed on 13 April 2007 and a further £15.7m was received at thatdate. The disposal was to Carlyle Shilton, a company which was at the date ofthe transaction 50% owned by the Carlyle group of companies. From the start ofthe year through to 14 February 2007, when they disposed of their entireshareholding, Carlyle was a related party of the Group by virtue of its 10.2%interest in the ordinary share capital of QinetiQ Group plc. The transaction wascompleted on an arms length basis as part of a competitive bidding process. Other disposals in the year generated a net profit of £0.8m, of which £0.7m camefrom property disposals. Prior year disposalsIn the year to 31 March 2006 the Group disposed of fixed assets for proceeds of£121.6m, with £6.0m of these proceeds due in the following financial year. Therewas a net profit of £8.9m recognised on these disposals. 4. Earnings per shareBasic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year. For the year ended 31 March 2006 this is presentedon 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 isadjusted to assume conversion of all dilutive potential ordinary shares arisingfrom share options granted. Underlying earnings per share figures are presentedbelow, as the Directors believe this to be a good measure of recurring businessperformance. Underlying earnings per share reflect adjustments for the impact ofnon-recurring and other items on basic earnings per share. Year ended 31 March 2007-------------------------------- --------- --------- --------- Earnings Weighted Per share £m average number amount pence of shares mllion-------------------------------- --------- --------- ---------Basic 69.0 656.6 10.51Effect of dilutive securities -options 11.0 (0.17)-------------------------------- --------- --------- ---------Diluted 69.0 667.6 10.34-------------------------------- --------- --------- --------- -------------------------------- --------- --------- ---------Underlying earnings per share Earnings Weighted Per share £m average number amount pence of shares million-------------------------------- --------- --------- ---------Basic 69.0 656.6 10.51Amortisation of intangibleassets arising from acquisitions 12.6 1.92Gain on business realisationsand impairment of investment (4.6) (0.70)Profit on disposal of non-currentassets (3.3) (0.50)Tax impact of items above 0.4 0.06-------------------------------- --------- --------- ---------Underlying 74.1 656.6 11.29-------------------------------- --------- --------- --------- Year ended 31 March 2006-------------------------------- --------- --------- --------- Earnings Weighted Per share £m average number amount pence of shares million-------------------------------- --------- --------- ---------Basic 58.1 582.4 9.98Effect of dilutive securities -options 12.4 (0.21)-------------------------------- --------- --------- ---------Diluted 58.1 594.8 9.77-------------------------------- --------- --------- --------- Underlying earnings per share-------------------------------- --------- --------- --------- Earnings £m Weighted Per share average number amount pence of shares million-------------------------------- --------- --------- ---------Basic 58.1 582.4 9.98IPO related items 4.2 0.72Amortisation of intangibleassets arising from acquisitions 12.3 2.11Profit on disposal of non-curentassets (8.9) (1.53)Tax impact of items above (0.7) (0.12)Brought forward unprovided taxlosses utilised in year (5.4) (0.93)-------------------------------- --------- --------- ---------Underlying 59.6 582.4 10.23-------------------------------- --------- --------- --------- 5. Business combinations In the year to 31 March 2007 the Group made two principal acquisitions, both inNorth America, Ocean Systems Engineering Corp (OSEC) and Analex Corporation(Analex). If these acquisitions had been completed at 1 April 2006 Group revenuefor the year ended 31 March 2007 would have been £1,228.1m and Group profitbefore tax would have been £92.3m. US acquisitionsOn 15 May 2006 the Group acquired the whole of the trade and assets of OSEC forcash consideration, before acquisition costs, of £28.2m ($53.7m). On 14 March2007 the Group acquired the whole of the share capital of Analex forconsideration, before acquisition costs, of £98.8m ($193.6m). Summary profit and loss accounts for the two acquisitions in the year, OSEC andAnalex, prior to acquisition are shown below. These results are extracted fromthe audited financial statements for the relevant periods, which were preparedunder US GAAP. The results have been converted into Sterling at the exchangerates ruling at that time and have not been adjusted to IFRS. OSEC------------------------------- --------- --------- ---------all figures in £ million Period from Year from Period 1 January 2006 1 January 2005 1 January 2004 to to to 14 May 31 December 31 December 2006 2005 2004------------------------------- --------- --------- --------- Income statementRevenue 5.1 24.6 16.5------------------------------- --------- --------- ---------Operating income 0.5 2.3 1.9------------------------------- --------- --------- ---------Profit before taxation 0.5 2.3 1.9Taxation expense (0.2) (0.9) (0.8)------------------------------- --------- --------- ---------Profit after tax 0.3 1.4 1.1------------------------------- --------- --------- --------- Analex------------------------------- --------- --------- ---------all figures in £ million Period from Year from Year from 1 January 2007 1 January 2006 1 January 2005 to to to 13 March 31 December 31 December 2007 2006 2005------------------------------- --------- --------- --------- Income statementRevenue 16.3 78.4 72.0------------------------------- --------- --------- ---------Operating income 1.1 5.4 4.6------------------------------- --------- --------- ---------Profit before taxation 0.6 3.0 2.6Taxation expense (0.3) (1.4) (1.6)------------------------------- --------- --------- ---------Profit after tax 0.3 1.6 1.0------------------------------- --------- --------- --------- Set out below are the allocations of purchase consideration, assets andliabilities of the North America acquisitions made in the period and theadjustments required to the book values of the assets and liabilities of thebusinesses acquired in order to present the net assets of these businesses atfair values and in accordance with Group accounting policies. In the case ofAnalex allocations and adjustments are provisional. --------------------- ------- ------- ------- ------- ------- -------all figures in Book value OSEC Fair value at Book value Analex Fair value at£ million Fair value acquisition Fair Value acquisition adjustment adjustment --------------------- ------- ------- ------- ------- ------- -------Intangible assets - 4.1 4.1 - 12.8 12.8Property, plant and equipment 0.6 - 0.6 1.4 - 1.4Trade and other receivables 6.4 - 6.4 20.3 - 20.3Trade and other payables (4.1) - (4.1) (9.4) - (9.4)Cash and cash equivalents 0.1 - 0.1 2.8 - 2.8Deferred taxation - - - (1.0) (5.1) (6.1)--------------------- ------- ------- ------- ------- ------- -------Net assets acquired 3.0 4.1 7.1 14.1 7.7 21.8Goodwill 21.6 77.4--------------------- ------- ------- ------- ------- ------- ------- 28.7 99.2--------------------- ------- ------- ------- ------- ------- ------- Consideration satisfied by:Cash 28.2 98.8--------------------- ------- ------- ------- ------- ------- -------Total consideration 28.2 98.8Related costs of acquisition 0.5 0.4--------------------- ------- ------- ------- ------- ------- ------- 28.7 99.2--------------------- ------- ------- ------- ------- ------- ------- The OSEC fair value adjustment of £4.1m relates to the recognition of acquiredintangible assets. From the date of acquisition to 31 March 2007 OSEC hascontributed revenue of £25.0m and operating profit of £2.1m. The Analex fair value adjustment of £7.7m relates to the recognition of £12.8mof acquired intangible assets less the recognition of a deferred tax liabilityof £5.1m in relation to these intangible assets. From the date of acquisition to31 March 2007 Analex has contributed revenue of £4.3m and an operating profit of£0.6m. Other acquisitions and disposals in year to 31 March 2007On 3 May 2006 the Group purchased the remaining 19.9% minority interest in AurixLimited for nil consideration resulting in goodwill on acquisition of £2.0m. On 28 March 2007 the Group acquired the remaining 10% minority interest share inVerhaert Design and Development NV for £0.6m (€0.95m), resulting in additionalgoodwill on acquisition of £0.6m. There was a net increase of £0.6m in goodwill in relation to the adjustment ofdeferred tax on the following acquisitions: Planning Systems, Inc. reduction of£0.3m ($0.5m), Apogen Technologies, Inc. an increase of £0.5m ($1.0m) andSimAuthor, Inc. an increase of £0.4m ($0.8m). These adjustments followed thefinalisation of the estimated deferred tax made at the time of the acquisitions. On 28 February 2007 Aerospace Filtration Systems, Inc., was sold to Donaldson,Inc for £19.9m ($39.0m) resulting in a profit on disposal of £9.9m ($19.4m).This transaction resulted in the disposal of £7.1m ($14.0m) of goodwill. On 5 March 2007 QinetiQ Rail Limited was sold to Nomad Holdings Limited (Nomad)in exchange for an 8.6% shareholding in Nomad valued at £4.5m, resulting in aprofit on disposal of £2.8m. There was no goodwill associated with thisdisposal. On 3 August 2006 a 12% stake in Aurix Limited was sold to a strategic licensingpartner for cash consideration of £1.1m resulting in a profit on disposal of£0.7m. There was no change in goodwill associated with this disposal. Update in respect of acquisitions made in the year ended 31 March 2006At the date of acquisition of Planning Systems Inc provision was made foradditional consideration payable on the achievement of certain performancecriteria in the 12 months ended 31 December 2005 of £0.9m and £0.8m for theperformance criteria in the 12 months to 31 December 2006. The performancecriteria for the 12 months to December 2005 was paid in full, however thecriteria for the 12 months to 31 December 2006 were not met and consequently theaccrual was released resulting in a reduction in goodwill of £0.8m in the yearto 31 March 2007. In the year to 31 March 2007 additional goodwill of £1.0m ($1.9m) was recognisedin relation to the acquisition of Apogen as additional contingent considerationwas paid as specific post acquisition criteria were met. During the year the Group paid deferred consideration amounting to £4.8m, £1.4mand £0.6m in respect of the acquisitions of Westar, Verhaert and GraphicsResearch Corporation respectively. The previously estimated fair value of assets and liabilities on theacquisitions of Apogen Inc, Planning Systems Inc and SimAuthor Inc werefinalised during the year. The goodwill on the SimAuthor acquisition was reducedby £0.7m ($1.3m) as the previously estimated fair value of intangibles wasfinalised following receipt of an external valuation report partially offset bya £0.4m ($0.7m) increase in deferred tax liabilities. The Group recognised £0.5m($1.0m) of additional goodwill on the acquisition of Apogen on finalisation ofdeferred tax liabilities. Goodwill on the acquisition of Planning Systems Incwas reduced by £0.3m ($0.6m) on finalisation of deferred tax liabilities. 6. Restatement of prior year comparatives IFRS 3 Business Combinations requires the Group to finalise the fair value ofassets and liabilities acquired from business combinations within one year ofthe acquisitions date except certain deferred tax balances. During the year theGroup was required to adjust goodwill, intangible assets and deferred taxbalances upon finalisation of the fair value of assets and liabilities on theacquisitions of Apogen Inc., Planning Systems Inc. and SimAuthor Inc. thesebalances have been restated in the prior year comparatives as follows: ------------------------ ------ ------- ---------all figures in £ million 2006 2006 2006 As reported Adjustment Restated------------------------ ------ ------- ---------Goodwill 315.0 (0.1) 314.9Intangible assets 56.4 0.7 57.1Deferred tax asset 12.4 (0.6) 11.8Other net liabilities not restated (20.9) - (20.9)------------------------ ------ ------- ---------Net assets 362.9 - 362.9------------------------ ------ ------- --------- 7. Post balance sheet events On 16 April 2007 the Group acquired ITS Corporation (ITS) for an initial cashconsideration of £40.8m ($80.0m). The agreement to purchase ITS includes anadditional deferred payment of £5.1m ($10.0m) based on the achievement ofcertain short-term performance milestones. ITS had revenues of £39.5m ($77.5m)for the 12 months ended 31 December 2006, EBITDA of £3.3m ($6.4m), and reportedoperating profit of £3.1m ($6.0m), after charging £0.6m ($1.2m) of non-recurringcosts related to acquisitions completed in late 2005. On 23 April 2007 the Group announced that it had agreed to purchase all theshares of Applied Perception Inc. (API) and Automatika Inc. (Automatika), bothproviders of robotics technologies, for up to £4.7m ($9.2m) each. Thetransactions will close upon receipt of appropriate US government regulatoryapprovals. The acquisition of each company will be settled for an initial cashconsideration of £3.1m ($6.0m), with an additional deferred consideration of upto £1.6m ($3.2m) two years after closing. Due to the recent announcement of the above acquisitions it is not practicableto provide information about the assets and liabilities as at the date ofacquisition. Glossary AFS - Aerospace Filtration Systems, Inc. AGM - Annual General Meeting Backlog - the expected future value of revenue from contractually-committed and funded customer orders (excluding £4.8bn value of remaining 21 years of LTPA contract) Bn - billion Book to - ratio of orders received in the year to revenue for the bill ratio year, adjusted to exclude revenue from the 25 year LTPA contract BPS - Basis points Carlyle - Former major investor and co-owner of QinetiQ. Carlyle sold its remaining share holding in QinetiQ on 14 February 2007. CATS - Combined Aerial Target Service CR - Corporate Responsibility D&T - QinetiQ's Defence & Technology Sector DARPA - US Defense Advanced Research Projects Agency dstl - Defence Science & Technology Laboratory DHS - US Department of Homeland Security DoD - US Department of Defence DTR - MOD's Defence Training Rationalisation programme EBITDA - earnings before interest, tax, depreciation, amortisation, gain on business divestments, unrealised impairment of investment and gain on disposal of non-current assets ESA - European Space Agency EU - European Union Free cash - net cash flow from operating activities less the net flow cash from the purchase and sale of intangible assets and the purchase and sale of plant, property and equipment GPS - Global Positioning System IAS - International Accounting Standard IFRS - International Financial Reporting Standard IP - Intellectual property IPO - Initial Public Offering KPI - Key Performance Indicator 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- - IPO costs, major restructuring costs, disposals of recurring property, plant and equipment, amortisation of items intangible assets arising from acquisitions andand impairment of goodwill and current assets (2005 only)acquisitionamortisation OEM - Original Equipment Manufacturer Operating - the ratio of cash flow from operations, less cash cash outflows on the purchase of intangible assetsconversion and property, plant and equipment and before additional pension contributions to operating profit excluding share of post-tax loss of equity accounted joint ventures and associates Organic - The level of year-on-year growth, expressed as a growth percentage, based on the businesses that were part of the Group at the start of the initial period. OSEC - Ocean Systems Engineering Corporation QNA - QinetiQ's North America Sector R&D - Research and development RFID - Radio frequency identification S&DU - QinetiQ's Security & Dual Use Sector SAIC - Science Applications International Corporation SETA - Systems Engineering and Technology Assistance SME - Small and medium sized enterprises UK GAAP - UK Generally Accepted Accounting Practices Underlying - the tax charge for the year excluding the tax impact ofeffective non-recurring items and acquisition amortisation tax rate expressed as a percentage of underlying profit before tax Underlying - the ratio of cash flow from operations (excluding cash operating spend on major restructuring items in 2006), cash less cash outflows on the purchase of intangible assets conversion and property, plant and equipment before additional pension contributions to underlying operating profit excluding share and of post-tax loss of equity accounted join ventures and associates Underlying - underlying operating profit expressed as a percentage operating of revenuemargin Underlying - earnings before interest, tax, IPO related items (2006 operating only) gains on business divestments and impairment profit of investment (2007 only), profit on disposal on non-current realisations assets and amortisation of intangible assets arising on acquisitions Underlying - profit before tax excluding IPO related items (2006 profit only) gains on business divestments and impairment of before tax investment (2007 only), profit on disposal on non-current assets and amortisation of intangible assets arising from acquisitions VOIP - Voice over Internet Protocol This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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