28th Nov 2007 07:01
QinetiQ Group plc28 November 2007 28 November 2007 QinetiQ Group plc Interim Results Announcement Six months ended 30 September 2007 Financial highlights • Revenue increased 18.5% to £638.8m (2006: £539.2m), with organic growth of 8.4% • Underlying operating profit up 34.5% to £46.0m (£2006: £34.2m), with organic growth of 21.6% • Underlying operating cash conversion of 159% (2006: 51%) • Profit before tax up 9.3% to £25.9m (2006: £23.7m) • Underlying earnings per share increased 29.3% to 4.6p (2006: 3.6p per share) • Basic earnings per share increased 8.4% to 3.4p (2006:3.1p per share) • Interim dividend increased 10.8% to 1.33p (2006:1.2p) Operating highlights • Orders won in period grew 12.9% to £592.2m (2006: £524.6m) • Contracted and funded backlog (excluding LTPA) increased 8.4% to £922.5m (31 March 2007: £850.9m). Backlog is £5.6bn including LTPA contract (31 March 2007: £5.7bn). • QinetiQ North America revenue increased 54.8% to £256.6m (2006: £165.8m), with organic growth of 24% and a strong book to bill ratio of 1.2:1 • Strategic review of EMEA has identified opportunities to drive efficiencies - at least £10m per annum operating profit improvement. Cost of £30m to £35m in the second half of the year • Group operating margin target increased to 11% • Confirmation of progress on DTR Package 1 opportunity. Package 2 remains under evaluation See Glossary section on page 25 for definitions of Non GAAP terms usedthroughout this statement Commenting on the results, Graham Love, Chief Executive Officer, said:"The Group produced a strong performance in the six months to 30 September 2007confirming continued delivery against our strategy. The North American defenceand security market continues to provide the greatest opportunity for expansionwithin the Group and in the period this sector has driven strong order andturnover growth. With the establishment of the EMEA sector this year we areplanning to continue to focus on growth opportunities in the UK, supplemented byreplicating selected service offerings from our core UK market into appropriateother defence markets globally. As a result of the strong trading performance and forward order visibility inQNA, together with a lower tax cost, the Board anticipates that underlyingperformance for the Group for the year as a whole will be at the upper end ofprevious expectations." 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. Chief Executive Statement Progress in the periodThe Group has performed strongly in the period and continued to deliver againstits strategy. A key element of this strategy is developing the Group's footprintin the North American market. QinetiQ has been able to pinpoint particulartechnology focused growth markets within the North American defence and securitysector to acquire and develop strong individual companies into a successful,integrated and fast growing business with annualised revenues now in excess of$1bn. During the six month period the QNA business continued to demonstrate strongorganic growth across all business streams. This was supplemented by the firsttime contribution from four further acquisitions made in the period and a fullcontribution from Analex which was acquired in March 2007. The Technologybusiness stream performed exceptionally well. Strong demand across its productportfolio, most notably for the TALON(R) robots, which generated in excess of$175m of new orders in the period and reported strong revenues from shipments ofnew units and exceptionally high revenues from spares in the period, resulted inorganic growth of 50%. On 1 April 2007 QinetiQ combined the previous UK based Defence & Technology andSecurity & Dual Use sectors under a new Europe, Middle East and Australasia(EMEA) sector highlighting the Group's ambition to replicate its UK defencetechnology platform in relevant defence markets globally. In the core EMEA business, Managed Services has performed strongly in the periodand the Group continued to deliver good win rates in MOD Research resulting in alower than expected decline from the continuing introduction of competition intothis stream. These healthy performances were partly offset by lower thanexpected growth rates in other EMEA business streams, largely due to delays inthe letting of supply contracts from the MOD as it assesses the implications ofthe Comprehensive Spending Review. Whilst the Comprehensive Spending Review hasresulted in some delays to Technology Supply contracts, we are confident thatour strategy here remains sound, and that budgetary pressures will lead to fewernew platforms and more technology insertion favouring our market position. In October, positive confirmation that progress has been made on the largestincremental opportunity for the UK business, the Defence TrainingRationalisation programme (DTR), was received in a Ministerial Statement. TheMOD confirmed that Package 1 of DTR would progress with the aim for a commitmentto the final development phase by Spring 2008 with financial close expectedwithin a year from that date. We continue to work with the MOD on affordableoptions for Package 2 although this is on a slower and less certain timetable. Coincident with the launch of the EMEA sector the Ventures businesses were splitout to promote greater management focus. In August, the Group completed atransaction to establish a technology venture fund with Coller Capitalconsisting of seven of QinetiQ's ventures. The creation of the fund enablesthese ventures to be managed by an independent team focused on acceleratedgrowth with access to Coller Capital's expertise and a further combined capitalcommitment totalling £40m from QinetiQ and Coller Capital. Further progress hasbeen made with the Tarsier business, including a sale to Doha and successfultrials of the camera solution. Recognising the Group's strong performance, the Board is pleased to increase theinterim dividend by 10.8% to 1.33p. OutlookGrowth in QNA is anticipated to continue organically from the recently completedacquisitions. QNA's positioning as a provider of critical services for defence,security, intelligence and homeland security customers, and its access toimportant contracts, is expected to deliver organic revenue growth rates of atleast 10% into the medium term. Demand for TALON(R) within the QNA Technologystream is expected to remain strong with good visibility to funding for newunits well into 2008, although the exceptional growth in spares demand seen inthe current period may not be repeated at the same level going forward. The medium term outlook for EMEA in its core UK market is more mixed, withstrong prospects in areas such as Managed Services offsetting pressures causedby continuing strains on the UK defence budget which were reinforced by therecent Comprehensive Spending Review. To respond to these challenges, the EMEAbusiness will position itself to compete more effectively in those areas of theUK defence market offering sustainable long term growth opportunities. Themedium term growth opportunities for Technology Supply remain positive astechnology insertion underpins the MOD strategy and the national defencecovenant. Additionally EMEA will address adjacent markets including Security andEnergy & Environment. As previously announced, more focus will also be directedtowards expanding the geographical footprint into other international defencemarkets in addition to the UK and North America, with initial focus being inAustralia and selected Middle and Far East markets. As a result of these changes, a portfolio review of the EMEA business is inprogress to ensure that the capabilities and resources are aligned with thestrategic direction and market demand. The EMEA business will be reorganisedfrom April 2008 into four larger business units focused on Managed Services,Technology Solutions, Consulting and Products which positions us to betteraddress growth markets and at the same time will provide the opportunity toeliminate duplicate overheads. It is anticipated that the reorganisation willresult in an exceptional restructuring charge in the second half of the year of£30m to £35m. The restructuring is expected to be completed by Summer 2008 andimprove EMEA operating profit by at least £10m per annum from the second half ofthe year ending 31 March 2009. As a result the Group operating profit margintarget is raised from 10% to 11%. The Group will actively continue its strategy to commercialise appropriateelements of its intellectual property base and believes that the use ofinnovative structures, such as the newly established venture fund, willaccelerate and enhance value creation going forward. The Group continues to see a strong pipeline of acquisition opportunities andwill continue to supplement organic growth in both QNA and EMEA by selectedacquisitions where they can be secured at sensible prices. The Group's results for the six months to 30 September 2007 reflect thehistorical seasonality in the UK business with a stronger performance expectedin the second half of the year. As a result of the strong trading performanceand forward order visibility in QNA, together with a lower tax cost, the Boardanticipates that underlying performance for the Group for the year as a wholewill be at the upper end of previous expectations. Graham LoveChief Executive Group Trading PerformanceGroup summary ----------- ------- ------ ------- 6 months 6 months 12 months to 30 Sept 2007 to 30 Sept 2006 to 31 March 2007 £m £m £m----------- ------- ------ ------- Orders 592.2 524.6 1,214.0Revenue 638.8 539.2 1,149.5 Underlying EBITDA(3) 64.1 50.3 140.5Underlying operatingprofit (2) 46.0 34.2 106.0Underlying operatingmargin 7.2% 6.3% 9.2%----------- ------- ------ -------(Loss)/gain on businessdivestments andunrealised impairment (4.2) 0.7 4.6----------- ------- ------ -------Underlying profitbefore tax (3) 37.6 28.9 94.0----------- ------- ------ -------Underlying effectivetax rate 19% 22% 21%----------- ------- ------ -------Underlying cashconversion ratio 159% 51% 56%Net debt 325.5 255.1 300.8Backlog(1) 922.5 697.6 850.9Headcount 13,414 11,359 12,781Profit before tax 25.9 23.7 89.3Basic earnings pershare 3.4p 3.1p 10.5pUnderlying earnings pershare 4.6p 3.6p 11.3pDividend per share 1.33p 1.20p 3.65p----------- ------- ------ -------(1) Excluding remaining £4.7bn (30 Sept 2006: £4.9bn, 31 March 2007: £4.8bn) inrespect of LTPA contract(2) Underlying operating profit is operating profit before amortisation ofintangible assets arising from acquisitions(3) Excluding business divestments and investment impairment and disposal ofnon-current assets The Group continued to maintain a book to bill ratio at its target level of 1.1:1 (excluding the impact of the LTPA) with orders up £67.6m on the prior period.Revenue increased £99.6m with organic revenue growth of 8.4%. Underlyingoperating profit increased by 34.5% to £46.0m, including organic growthexcluding ventures of 21.6%. Consistent with prior years the Group's resultsreflect the historical seasonality in the UK business with a strongerperformance expected in the second half of the year. QinetiQ continues to generate strong levels of operating cash flow and thisallows the Group to fund acquisitions, ventures investment and organicopportunities, such as DTR, to drive growth. Revenue----------- ------ ------ ------- 6 months 6 months 12 months to 30 Sept 2007 to 30 Sept 2006 to 31 March 2007 £m £m £m----------- ------ ------ -------RevenueEMEA 377.2 369.9 779.3QinetiQ North America 256.6 165.8 358.2Ventures 5.0 3.5 12.0----------- ------ ------ -------Total 638.8 539.2 1,149.5----------- ------ ------ ------- Group revenue increased 18.5% to £638.8m through very strong organic growth inQNA supplemented by the contributions from recent acquisitions and modestorganic growth in EMEA. QNA revenue grew £90.8m with organic growth of 24.0% contributing £38.3m of thisincrease. The weakening of the US Dollar to Sterling exchange rate impacted thetranslation of QNA revenue by £18.9m compared to a constant currency basis. EMEA revenue increased by £7.3m as organic growth in Managed Services (4.5%) andProcurement & Capability Supply (5.0%) more than offset a smaller than expectedfall in MOD Research. Orders and backlog ----------- ------ ------- ------- 6 months to 30 6 months 12 months Sept 2007 to 30 Sept 2006 to 31 March 2007 £m £m £m----------- ------ ------- -------OrdersEMEA 269.8 299.4 783.7QinetiQ North America 315.4 217.0 416.0Ventures 7.0 8.2 14.3----------- ------ ------- -------Total 592.2 524.6 1,214.0----------- ------ ------- ------- BacklogEMEA (1) 610.6 507.5 632.6QinetiQ North America 297.9 170.7 210.7Ventures 14.0 19.4 7.6----------- ------ ------- -------Total (1) 922.5 697.6 850.9----------- ------ ------- -------(1) Excludes remaining £4.7bn (30 September 2006: £4.9bn, 31 March 2007: £4.8bn)in respect of LTPA contract Group orders have increased by 12.9% to £592.2m compared to the six months to 30September 2006. The QNA book to bill ratio of 1.2:1 was above the Group longterm target of 1.1:1. EMEA book to bill was 0.9:1 (excluding the impact of theLTPA) principally due to delays in the letting of supply contracts from the MOD. Operating profit----------- ------ ------ ------- 6 months 6 months 12 months to 30 Sept 2007 to 30 Sept 2006 to 31 March 2007 £m £m £m----------- ------ ------ -------Underlying operating profitEMEA 22.1 21.4 73.0QinetiQ North America 30.7 17.7 39.9Ventures (6.8) (4.9) (6.9)----------- ------ ------ -------Total 46.0 34.2 106.0----------- ------ ------ ------- Underlying operatingprofit margin 7.2% 6.3% 9.2%----------- ------ ------ ------- Underlying operating profit has increased by 34.5% to £46.0m due to organicgrowth of 21.6%, supplemented by the contribution from new acquisitions. Thiswas partially offset by the translation impact of the weakening US dollar and ahigher level of investment in ventures. On a constant currency basis, using theaverage rate for the six month period to 30 September 2006, QNA would havecontributed an additional £2.3m of operating profit. TaxThe Group's underlying effective tax rate was 18.9% (2006: 22.1%). During theinterim period the Group made progress with certain UK tax arrangements relatingto prior years which are expected to result in a lower effective tax rate forthe UK business going forward. Additionally the UK business will benefit fromthe impact of the change in corporation tax rates from 30% to 28% as announcedin the 2007 Government Budget, which has resulted in a £1.0m benefit in thecurrent year on restatement of deferred tax balances. The underlying effectivetax rate is expected to rise from the 31 March 2008 level by 100 - 200 basispoints over the next two years as the proportion of Group profit generated inNorth America increases. Profit for the periodThe Group's underlying performance, after allowing for non-recurring events andamortisation of acquired intangible assets, is shown below: ----------- ------- ------- ------- 6 months to 30 6 months 12 months to 31 Sept 2007 to 30 Sept 2006 March 2007 £m £m £m----------- ------- ------- -------Profit for theperiod 22.1 19.4 69.0Minorityinterest - (0.9) ------------ ------- ------- -------Profit for theperiodattributableto equityshareholdersof the parentcompany 22.1 20.3 69.0Loss/(gain) onbusinessdivestmentsand unrealisedimpairment ofinvestment 4.2 (0.7) (4.6)Loss/(profit)on disposal ofnon currentassets 0.1 (0.1) (3.3)Amortisationof intangibleassets arisingfromacquisitions 7.4 6.0 12.6Tax impact ofitems above (2.3) (2.1) 0.4Change in UKtax rate (1.0) - ------------ ------- ------- -------Underlyingprofit for theperiodattributableto equityshareholdersof the parentcompany 30.5 23.4 74.1----------- ------- ------- ------- Non-recurring items have been excluded from underlying profit as the Boardbelieves that the underlying profit provides a better representation of theGroup's long term performance. Earnings per shareUnderlying earnings per share increased by 29.3% to 4.6p compared to 3.6p forthe six months to 30 September 2006. Basic earnings per share increased 8.4%from 3.1p to 3.4p over the same period. DividendThe Company will pay an interim dividend of 1.33 pence per share (2006: 1.20pence per share) on 22 February 2008. The record date will be 25 January 2008.The Board anticipates that QinetiQ will follow past practice with the interimdividend representing approximately one third of the full annual dividend. EMEA------------ ------- ------ ------- 6 months 6 months 12 months to 30 Sept 2007 to 30 Sept 2006 to 31 March 2007 £m £m £m------------ ------- ------ -------RevenueMOD Research 65.4 67.1 150.5Technology Supply 63.1 62.4 133.7Procurement &Capability Support 88.2 84.0 182.6Managed Services 102.4 98.0 191.1Security & Dual Use 58.1 58.4 121.4------------ ------- ------ -------Total 377.2 369.9 779.3------------ ------- ------ ------- Underlying operatingprofit 22.1 21.4 73.0Underlying operatingmargin 5.9% 5.8% 9.4% OrdersMOD Research 53.1 52.2 164.5Technology Supply 53.2 70.0 153.0Procurement &Capability Support 110.0 133.0 214.0Managed Services 2.1 3.0 119.3Security & Dual Use 51.4 41.2 132.9------------ ------- ------ -------Total 269.8 299.4 783.7------------ ------- ------ ------- Book to bill ratio 0.9:1 1.1:1 1.3:1Backlog (1) 610.6 507.5 632.6------------ ------- ------ -------(1) Excludes remaining £4.7bn (30 September 2006: £4.9bn, 31 March 2007: £4.8bn)in respect of LTPA contract PerformanceOverall, the EMEA business has traded in line with the comparative period in theprevious year, with good progress being made on repositioning the business atthe sub-sector level with a similar level of restructuring charge taken againstoperating profit as in the prior period. Revenue in the six months to 30 September 2007 increased by £7.3m to £377.2m.The increase has been primarily driven by organic growth in Procurement &Capability Support (5.0% increase) and Managed Services (4.5% increase) slightlyoffset by a lower than anticipated fall in MOD Research income reflecting thesuccess in maintaining strong win rates in this area despite the continuingintroduction of competition into the MOD Research programme. Growth in Technology Supply was held back by customer budget pressures and theimpact on MOD resources of the completion of the Comprehensive Spending Reviewcontributing to delays in new contract awards and restricting growth in revenueto 1.0%. The book to bill ratio for Procurement & Capability Support of 1.2:1 wasparticularly strong given that the current period did not benefit from anysignificant multi year awards as was the case in the six months to 30 September2006, which included the 3 year £52.5m Typhoon support order. Excluding thisorder the sector delivered an increase in orders of 9.3% over the comparativeperiod with strong performance in all streams except Technology Supply. Underlying operating profit has risen £0.7m resulting in an increase inunderlying operating margin of 0.1% to 5.9%. The benefit of lower pension costsas a result of higher bond yields at the beginning of the year was offset by asmall number of project over-runs in the Technology Supply stream. Consistentwith prior years the EMEA results reflect the historical seasonality in the UKbusiness with a stronger performance expected in the second half of the year. HighlightsEMEA secured a five-year £9.3m programme from the MOD's Research AcquisitionOrganisation to focus on de-risking future procurement and raise technologyreadiness levels for the development and exploitation of advanced ElectronicSurveillance technology. Zephyr, QinetiQ's High Altitude Long Endurance Unmanned Aerial Vehicle, exceededthe official world record time for the longest duration unmanned flight with a54 hour flight achieved during trials funded through a MOD research programme. QinetiQ demonstrated network enabling operational extensions at CWID (CoalitionWarrior Interoperability Demonstration). The capability enables all platforms toaccess the common operational picture and command and control systems using HighFrequency radios already fitted on ships. QinetiQ secured a £5.5m contract from the MOD to use the Tornado F3 as thealternative test platform to the Typhoon to support trials for the Beyond VisualRange Air-Air Missile (Meteor). QinetiQ secured a 10-year service agreement with the European Space Agency tomaintain and operate the REDU satellite ground station in Belgium, inpartnership with SES ASTRA, an SES company. In October, QinetiQ completed the acquisition of Boldon James Holdings Limitedfor an initial consideration of £12.9m and assumed net debt of £2.3m oncompletion. A further amount of £4.3m is payable dependent on the achievement of specific performance criteria. Boldon James is a UK-based provider of softwaresolutions for high end secure messaging, primarily for military, government andsecurity customers worldwide. This acquisition will enhance QinetiQ's portfolio of security based software products, providing additional routes to market in the USA, Europe and the Asia Pacific regions and broadening its customer base. QinetiQ North America--------- ------- ------ ------ ------ 6 months 6 months to 30 6 months 6 months to 30 to 30 Sept Sept 2006(1) to 30 Sept Sept 2006 (1) 2007(2) 2007(2) £m £m $m $m--------- ------- ------ ------ ------RevenueTechnology 80.5 56.9 161.6 106.2SETA 51.9 50.4 104.2 94.2IT Services 77.4 58.5 155.4 109.4MissionSolutions 46.8 - 93.9 ---------- ------- ------ ------ ------Total 256.6 165.8 515.1 309.8--------- ------- ------ ------ ------ Underlyingoperatingprofit 30.7 17.7 61.6 33.1Underlyingoperatingmargin 12.0% 10.7% OrdersTechnology 139.9 98.0 281.4 183.3SETA 64.5 69.1 129.6 129.2IT Services 68.3 49.9 136.7 93.2MissionSolutions 42.7 - 85.7 ---------- ------- ------ ------ ------Total 315.4 217.0 633.4 405.7--------- ------- ------ ------ ------ Book to bill ratio 1.2:1 1.3:1Backlog 297.9 170.7 589.1 319.1--------- ------- ------ ------ ------ (1) Prior year Technology and IT Services results have been restated to reflectthe transfer of part of the IT Services business to the Technology business. Thebusiness unit transferred reported turnover of £3.6m ($6.7m) in the prior periodand orders of £2.9m ($5.5m).Total QinetiQ North America results are unchanged. (2) The Mission Solutions Group was formed on the acquisition of Analex in March2007. From 1 April 2007 an element of the OSEC business previously part of theIT Services business was transferred to Mission Solutions. In the comparativeperiod this business unit reported revenues of £5.8m ($10.9m) and orders of£2.2m ($4.2m) within the IT Services stream. PerformanceQinetiQ North America (QNA) revenue increased 54.8% to £256.6m or 66.2% inconstant currency to $515.1m compared to the six months to 30 September 2006.The increase reflects strong organic growth of 24.0% and the benefit ofacquisitions. Even when compared with the stronger second half results from theprior year, organic growth on an annualised basis exceeded 10%. Revenue in theperiod benefited from the acquisitions of Analex (March 2007), ITS Corporation(April 2007), Automatika (June 2007) Applied Perception (June 2007) and 3HTechnology (June 2007) and a full six month contribution from OSEC (May 2006).These acquisitions contributed incremental revenue of $125.4m. The Technology stream has experienced a continuation of the strong demand forTALON(R) robots (revenue up 19.0%) and exceptionally strong demand for TALON(R)spares, which along with other technology offerings resulted in a 50.3% organicincrease in Technology revenue. Talon revenue was $80.2m in the six months to 30September 2007 (30 Sept 2006: $44.5m) of which new product shipments contributed$33.9m (30 Sept 2006: $28.6m). SETA revenue grew organically by 21.2%, compared to the first half of last yearafter excluding £4.4m ($8.2m) of revenue from the Group's Air Filtration Systemsbusiness which was disposed in February 2007. Revenue growth has been drivenlargely by increased demand for both logistics work and software engineeringservices by SETA's US Army customers IT Services revenue has increased organically by5.3% (excluding the part of OSEC that has now moved to Mission Solutions),reflecting the strong position of this business, in particular with the DHS, atthe differentiated high value-add end of the market. The Missions Solutions stream was formed within QNA following the acquisition ofAnalex. This stream operates primarily in markets associated with NASA and USIntelligence agencies, both defence and non-defence and is principally focusedon providing solutions in the C4ISR area to help customers meet their missioncritical needs. Mission Solutions has made a strong start and Analex hasperformed at the upper end of the Group's expectations at the time ofacquisition. Underlying operating profit, excluding business realisations, has increased73.4%, with 43.3% organic growth and contributions from acquired businesses morethan offsetting the impact on translation of the results of the weaker USdollar. QNA orders were significantly higher than the previous period with particularsuccess in Technology and important new contracts and re-competes won across allbusiness streams. The sector book to bill ratio was 1.2:1.The Mission Solutions book to bill ratio was lower than anticipated at 0.9:1 asthe funded element of a $35.8m five-year contract award for the Army Research &Technology Protection Center was awarded later than expected in early October2007. In addition, Mission Solutions was awarded a $96.0m contract duringSeptember 2007 to provide IV&V (independent verification and validation)services to one of the US intelligence agencies. This five-year contract awardis also funded by the customer on an incremental basis and consequently only asmall portion of this award has been counted in orders at 30 September 2007. AcquisitionsDuring the period the Group acquired ITS Corporation for consideration of up to£47.3m ($94.2m) in April 2007, 3H Technology LLC for consideration of up to£25.6m ($51.2m) in June 2007, Applied Perception Inc. for consideration of up to£5.0m ($10.0m) and Automatika Inc for up to £4.7m ($9.4m). Initial trading fromthese businesses has been positive. Integration of the North American acquisitions is progressing well, withincreasing recognition of the QinetiQ brand, tangible evidence of biddingsynergies emerging and integration cost savings being ploughed back intobusiness development initiatives. The Group continues to see a healthy pipelineof further acquisition opportunities in North America, although vendor pricingexpectations remain high. HighlightsIT Services has won the right to participate in the US's largest government-wideacquisition contract (GWAC). The General Service Administration's Alliantcontract is a 10-year indefinite delivery indefinite quantity contract with aceiling of $50bn. It will enable US government agencies and military services topurchase innovative IT solutions. ITS is one of around 30 contractors acceptedunder the Alliant contract vehicle. The first task orders under this GWAC areexpected to be let in 2008. IT Services was awarded a $34m contract to provide IT operations centre supportto the US Department of Homeland Security's Immigration and Customs Enforcementagency. The Technology business has received over $175m of further funding for TALON(R)robots and spares in the six month period. The Technology business won a $10m contract from the US Army's Natick SoldierCenter for PSI's Precision Airdrop System (PADSTM) equipment and support. The Army Material Systems Analysis Activity awarded the SETA business afive-year, $100m re-compete contract for continued support to its Sample DataCollection program. The U.S. Army Aviation Technical Test Center awarded the SETA business afive-year $22 million re-compete contract for engineering and aviation testingservices. Ventures--------- ------ ------ ------- 6 months 6 months 12 months to 30 Sept 2007 to 30 Sept 2006 to 31 March 2007 £m £m £m--------- ------ ------ -------Revenue 5.0 3.5 12.0 Operating loss (6.8) (4.9) (6.9) Orders 7.0 8.2 14.3 Backlog 14.0 19.4 7.6--------- ------ ------ ------- In August 2007 QinetiQ completed the transaction to create a new technologyventure fund to accelerate the development and realisation of seven of itsventure investments. The Group has retained its core venture businesses,including QinetiQ Airport Technologies (with its Tarsier runway debris detectionsystem) and the high-sensitivity GPS business. These activities will remainwithin QinetiQ's internal venture structure. In-house VenturesOn 1 April 2007 QinetiQ transferred the cueSim business from the EMEA sector tothe Ventures portfolio. CueSim provides a range of high quality advanced flightsimulation products and services which, using its Real Time All VehicleSimulator software, allows tailored solutions to be implemented rapidly and at areduced cost compared with traditional full motion simulators. In addition toits successful aerospace applications, cueSim has won contracts with the RedBull Racing Formula 1 team to develop a simulator to evaluate vehicle dynamicsand performance characteristics. The development of the day and night vision camera to supplement the existingTarsier system is progressing well with successful prototype demonstrations atLondon Heathrow in October. In early November, a contract was signed to supply 3Tarsier units to cover the main runway at Doha airport. Tarsier trials are alsotaking place at Providence, Rhode Island and we expect the Dubai installation tobe completed shortly. In September 2007 Sciemus completed an external funding round in which the Groupparticipated, allowing an increase in fair value of £3.2m to be recognisedthrough equity. Technology venture fundAt inception in August, QinetiQ contributed seven of its venture investmentswith an ascribed value of £40m into the fund, with QinetiQ and its partner,Coller Capital, each committed to contribute up to £20m of follow on funding toaccelerate development of the fund's portfolio companies. Depending on theperformance of the fund, QinetiQ will own up to 75 per cent of future economicvalue. The fund has been established to drive faster growth from its venture portfolioby creating an independent team with exclusive management focus and long termcapital commitment. The fund is treated as a joint venture and as such the Groupno longer fully consolidates the results of Aurix, Omni-ID, Nanomaterials andQuintel after their transfer to the fund. One of the fund's investments, Metalysis, a leading technology business for theglobal specialty metals industry, completed a £13m funding round in July 2007 tosupport it in taking three product lines to commercial production using itspatented technologies. PerformanceVentures revenue has increased to £5.0m largely due to the first time inclusionof the results of cueSim from 1 April 2007. During the period operating lossesincreased to £6.8m (2006: £4.9m loss). As previously indicated, for the fullyear, the level of QinetiQ revenue investment in the ventures is expected to beat a higher level than in the prior year. Other Financials Cash flow, net debt and liquidityGroup cash inflow from operations before investing activities increased 175% to£90.9m compared to £33.1m for the interim period to 30 September 2006. Theincrease in cash inflow was driven by a strong operating performance and areversal of £20m of excess working capital at 31 March 2007 in EMEA, which arosedue to delays in the award of contracts from the MOD at the end of the prioryear. The Group's operating cash conversion was 159% compared to 51% in the sixmonths to 30 September 2006 (excluding the cash flow from prior periodrestructuring in 2006) and 56% in the year to 31 March 2007. Excluding thereversal of 31 March 2007 excess working capital, the operating cash conversionin the six months to 30 September 2007 was approximately 116%, well above theGroup's long term 80% target. During the period the Group's investment in acquisitions totalled £75.0mincluding £42.0m for ITS and £24.6m for 3H Technology. QinetiQ received £15.2m of net proceeds from the disposal of surplus property atBedford which completed at the end of March 2007.During the period the company has provided £12.4m of funding to the trustees ofits employee share schemes to allow them to purchase shares in the company tohedge outstanding share options and other share based awards that have been madesince IPO. The trust acquired 7m shares at an average price of 177p. Net finance costs increased by £3.1m to £8.4m principally due to the increase inacquisition related debt. The net benefit of the weakening US dollar:sterlingexchange rate on the translation of US dollar interest charges was broadlyoffset by an increase in the effective annual interest rate on US borrowings. At 30 September 2007 net debt was £325.5m compared to £300.8m at 31 March 2007.Net debt was principally denominated in US dollars. The rise in net debt isprimarily due to acquisition investment partially offset by strong operatingcashflow and a 3% weakening of the period-end US dollar: sterling exchange rate. The Group had £304.9m of further borrowing capacity at 30 September 2007 on thebasis of the unutilised element of its principal revolving credit facility. InAugust 2007 the Group exercised its second and final option to extend the termof this facility by a further year to August 2012 and also negotiated a numberof beneficial changes to its terms, including a lower margin on amounts drawnunder the facility. Foreign exchange--------- -------- ------- -------- 6 months 6 months 12 months to 31 to 30 Sept to 30 Sept 2006 March 2007 2007--------- -------- ------- --------£/US$ - average 2.01 1.87 1.92£/US$ - closing 2.02 1.87 1.96--------- -------- ------- -------- The impact on translation of a one cent movement in the average rate in the sixmonth period on revenue and operating profit was approximately £1.4m and £0.16mrespectively. PensionsThe Group provides both defined contribution and defined benefit pensionarrangements. The principal defined benefit scheme is the QinetiQ PensionScheme. A consolidated summary of the position of the defined benefit schemes isshown below: ----------- ------ ------ ------- 30 Sept 2007 30 Sept 2006 31 March £m £m 2007 £m----------- ------ ------ -------Schemes' assets 837.6 732.9 794.1Schemes' liabilities (874.1) (898.8) (884.9)----------- ------ ------ -------Schemes' deficit before deferredtax (36.5) (165.9) (90.8)Deferred tax asset 10.2 49.5 27.1----------- ------ ------ -------Net pension liability (26.3) (116.4) (63.7)----------- ------ ------ ------- The £37.4m reduction in net pension liability in the first half is principallydriven by an increase in the discount rate, partly offset by an increase in theinflation rate and mortality assumptions, used to value the scheme liabilities.For the mortality assumptions applied in valuing the scheme the Group has nowmoved from using the short cohort effect tables to medium cohort effect tables.As previously indicated the prevailing higher discount rate at the start of theyear has had a positive impact on the pension service cost for the period. In the period the Group announced plans to change the terms of the definedbenefit section of the pension scheme from June 2008, on which the Group iscurrently consulting with employees. Core changes include raising the normalpension age from 60 to 65 supplemented by a range of options that allow theemployee to maintain future benefit accrual at rates similar to their currentlevels, based on a higher rate of employee contribution, or to retain currentemployee contribution levels by accepting a reduction in the rate of futurebenefit accrual. The changes do not affect past service obligations or the pastservice deficit and the Group is not making any additional cash fundingcommitments to the scheme as part of these arrangements. Future cost increaseswill be dealt with through a risk sharing agreement between the company andemployees. Principal risks and uncertaintiesThe principal risks and uncertainties to which the group is exposed remainunchanged from those as detailed in the Annual Report for the year to 31 March2007. Consolidated Income Statement(A) (A) 6 months ended 6 months ended Year ended 31 30 September 30 September March 2007 2006 2007 (unaudited) (unaudited) (audited) Notes £m £m £m Revenue 2 638.8 539.2 1,149.5 Employee costs (301.4) (273.1) (513.4)Third-partyproject costs (151.2) (112.2) (258.7)Otheroperatingcostsexcludingdepreciationandamortisation (128.3) (111.1) (246.7)Share of posttax loss ofequityaccountedjoint venturesand associates (0.8) (0.4) (1.2)Other income 7.0 7.9 11.0------------------------- ------------ ------------ ---------EBITDA(earningsbeforeinterest, tax,depreciationandamortisation) 64.1 50.3 140.5 Depreciationof property,plant andequipment (16.8) (15.4) (31.7)Amortisationof purchasedor internallydevelopedintangibleassets (1.3) (0.7) (2.8)------------------------- ------------ ------------ ---------Groupoperatingprofit beforeacquisitionamortisation 46.0 34.2 106.0Amortisation of intangibleassets arisingfromacquisitions (7.4) (6.0) (12.6)------------------------- ------------ ------------ ---------Groupoperatingprofit 38.6 28.2 93.4 (Loss)/gain onbusinessdivestmentsand unrealisedimpairment ofinvestment 3 (4.2) 0.7 4.6(Loss)/profiton disposal ofnon-currentassets (0.1) 0.1 3.3Finance income 4 1.9 2.4 4.2Financeexpense 4 (10.3) (7.7) (16.2)------------------------- ------------ ------------ ---------Profit beforetax 25.9 23.7 89.3 Taxationexpense 5 (3.8) (4.3) (20.3)------------------------- ------------ ------------ ---------Profit for theperiod 22.1 19.4 69.0------------------------- ------------ ------------ --------- Profit attributableto:Equityshareholdersof the parentcompany 22.1 20.3 69.0Minorityinterest - (0.9) ------------------------- ------------ ------------ --------- 22.1 19.4 69.0------------------------- ------------ ------------ --------- Earnings per shareBasic 7 3.4p 3.1p 10.5pDiluted 7 3.3p 3.0p 10.3pUnderlying (30September 2006Restated) 7 4.6p 3.6p 11.3p Consolidated Balance Sheet 30 September 30 September 31 March 2007 2006 2007 (unaudited) (unaudited) (audited) Notes £m £m £mNon-current assetsGoodwill 418.3 316.5 373.1Intangibleassets 74.7 56.1 65.0Property,plant andequipment 334.7 344.2 341.5Financialassets 17.5 19.5 18.8Investments 16.3 2.0 28.5Investmentsaccounted forusing theequity method 9.2 0.2 0.3Deferred taxasset - 5.4 11.0------------------------ ------ --------- --------- -------- 870.7 743.9 838.2Current assetsInventories 46.2 31.0 39.5Financialassets 3.6 3.0 4.0Trade andotherreceivables 365.2 306.0 401.2Cash and cashequivalents 21.5 17.9 20.0Investments 1.7 4.3 4.0Non-currentassetsclassified asheld for sale 1.8 7.6 1.8------------------------ ------ --------- --------- -------- 440.0 369.8 470.5------------------------ ------ --------- --------- --------Total assets 1,310.7 1,113.7 1,308.7------------------------ ------ --------- --------- -------- Current liabilitiesTrade andother payables (347.6) (276.8) (339.4)Current tax (4.3) - (6.9)Provisions (10.6) (5.9) (1.1)Financialliabilities (5.7) (4.1) (15.9)------------------------ ------ --------- --------- -------- (368.2) (286.8) (363.3)Non-current liabilitiesRetirementbenefitobligation(gross ofdeferred tax) 12 (36.5) (165.9) (90.8)Deferred taxliability (23.8) (0.8) (30.9)Provisions (4.1) (8.0) (13.1)Financialliabilities (362.4) (291.4) (327.7)Other payables (9.4) (4.5) (5.5)------------------------ ------ --------- --------- -------- (436.2) (470.6) (468.0)------------------------ ------ --------- --------- --------Totalliabilities (804.4) (757.4) (831.3)------------------------ ------ --------- --------- -------------------------------- ------ --------- --------- --------Net assets 506.3 356.3 477.4------------------------ ------ --------- --------- -------- Capital and reservesOrdinaryshares 6.6 6.6 6.6Capitalredemptionreserve 39.9 39.9 39.9Share premiumaccount 147.6 147.6 147.6Own shares (12.5) - (0.1)Hedging andtranslationreserve (20.7) 4.0 (13.1)Retainedearnings 345.3 159.4 296.4--------------------------- --- --- --------- --------- --------Capital andreservesattributabletoshareholdersof the parentcompany 506.2 357.5 477.3Minorityinterest 0.1 (1.2) 0.1------------------------ ------ --------- --------- --------Totalshareholders'funds 11 506.3 356.3 477.4------------------------ ------ --------- --------- -------- Consolidated Cash Flow Statement 6 months ended 6 months ended Year ended 31 30 September 30 September March 2007 2006 2007 (unaudited) (unaudited) (audited) £m £m £m Profit for theperiod 22.1 19.4 69.0Taxationexpense 3.8 4.3 20.3Net financecosts 8.4 5.3 12.0Loss/(gain) onbusinessdivestmentsand unrealisedimpairment ofinvestment 4.2 (0.7) (4.6)Loss/(profit)on disposal ofnon-currentassets 0.1 (0.1) (3.3)Depreciationof property,plant andequipment 16.8 15.4 31.7Amortisationof intangibleassets 8.7 6.7 15.4Share of posttax loss ofequityaccountedentities 0.8 0.4 1.2Increase ininventories (6.7) (5.6) (15.5)Decrease/(increase) inreceivables 32.1 32.0 (33.9)Increase/(decrease) inpayables 0.2 (31.4) 27.0Increase/(decrease) inprovisions 0.4 (12.6) (12.3)----------------------------- --------- -------- --------Cashflow fromoperations 90.9 33.1 107.0Tax paid (10.8) (0.3) (3.3)Interestreceived 0.5 1.2 4.2Interest paid (10.0) (6.5) (13.8)----------------------------- --------- -------- --------Net cash flowfrom operatingactivities 70.6 27.5 94.1----------------------------- --------- -------- -------- Capitaliseddevelopmentcosts - (2.2) (3.2)Purchase andcapitalisationof otherintangibleassets (5.5) (3.4) (8.9)Purchase ofproperty,plant andequipment (11.2) (17.8) (34.8)Sale ofproperty,plant andequipment 15.2 4.0 8.6Investments inassociateundertakingandinvestments (3.8) (0.6) (9.4)Purchase ofsubsidiaryundertakings (75.0) (35.7) (134.3)Sale ofinterest insubsidiaryundertakings - 1.1 17.9----------------------------- --------- -------- --------Net cash flowfrom investingactivities (80.3) (54.6) (164.1)----------------------------- --------- -------- -------- Net costs frominitial publicoffering - (1.4) (2.0)Cash outflowfrom repaymentof loans - - (79.2)Cash outflowfrom repaymentof loan notes - (1.3) (1.4)Cash inflowfrom loansreceived 44.5 4.8 131.3Cash inflowfrom loannotes - - 1.3Payment ofdeferredfinance costs - - (0.4)Sharespurchased byemployeetrusts (12.4) - -Equitydividends paid (16.2) (14.8) (22.7)Capitalelement offinance leaserentalpayments (1.7) (2.4) (5.9)Capitalelement offinance leaserentalreceipts 1.7 1.5 3.5----------------------------- --------- -------- --------Net cash flowfrom financingactivities 15.9 (13.6) 24.5----------------------------- --------- -------- -------- Increase/(decrease) in cashand cashequivalents 6.2 (40.7) (45.5)Effect offoreignexchangechanges oncash and cashequivalents - - (0.5)Cash and cashequivalents atbeginning ofperiod 12.6 58.6 58.6----------------------------- --------- -------- --------Cash and cashequivalents atend of period 18.8 17.9 12.6----------------------------- --------- -------- -------- Cash and cashequivalents 21.5 17.9 20.0Overdrafts (2.7) - (7.4)----------------------------- --------- -------- --------Cash and cashequivalents atend of period 18.8 17.9 12.6----------------------------- --------- -------- -------- Consolidated statement of recognised income and expense 6 months ended 6 months ended Year ended 31 30 September 30 September March 2007 2006 2007 (unaudited) (unaudited) (audited) £m £m Net loss onhedge of netinvestment inforeignsubsidiary (6.7) (10.4) (14.4)Decrease infair value ofhedgingderivatives (1.2) (1.4) (5.6)Movement indeferred taxon hedgingderivatives 0.3 - 2.0Gain/(loss) onavailable forsale financialassets 0.3 (6.9) 10.0Gain onavailable forsale financialassetsrecycled ondisposal (3.6) - -Actuarial gainrecognised inthe definedbenefitpensionschemes 53.5 7.1 85.8Decrease indeferred taxdue onmovement inpensiondeficit (8.2) (0.9) (17.9)------------------------------ -------- -------- --------Netincome/(expense) recogniseddirectly inequity 34.4 (12.5) 59.9Profit for theperiod 22.1 19.4 69.0------------------------------ -------- -------- --------Totalrecognisedincome andexpense forthe period 56.5 6.9 128.9------------------------------ -------- -------- -------- Attributable to:Equityshareholdersof the parentcompany 56.5 7.8 128.9Minorityinterest - (0.9) ------------------------------- -------- -------- -------- 56.5 6.9 128.9------------------------------ -------- -------- -------- 1. Significant accounting policies Basis of preparation QinetiQ Group plc is a company domiciled in the United Kingdom. The condensedinterim financial statements of the Group for the six months ended 30 September2007 comprise the Group and its subsidiaries (together referred to as the"Group"). The Group financial statements for the year ended 31 March 2007 are availableupon request from the Company's registered office at 85 Buckingham Gate, London,SW1E 6PD. These condensed Group interim financial statements have been prepared inaccordance with "IAS 34 Interim Financial Reporting" as adopted by the EU andthe requirements of the Disclosures and Transparency Rules. They do not includeall of the information required for full annual financial statements and shouldbe read in conjunction with the Group financial statements for the year ended 31March 2007. These condensed interim financial statements were approved by theBoard of Directors on 28 November 2007. The comparative figures for the year ended 31 March 2007 have been extractedfrom the Company's statutory accounts for that financial year. Those accountshave been reported on by the Company's auditors and delivered to the registrarof companies. The report to the auditors was (i) unqualified; (ii) did notinclude a reference to matters to which the auditors drew attention by wayemphasis without qualifying their report; and (iii) did not contain a statementunder section 237(2) or (3) of the Companies Act 1985. The accounting policies applied by the Group in these condensed Group interimfinancial statements are the same as those applied by the Group in its Groupfinancial statements for the year ended 31 March 2007 except that "IFRS 7Financial Instruments: Disclosures" has been adopted in the current year. IFRS 7has not had any impact on the disclosures presented in these condensed Groupinterim financial statements. 2. Business segments Six months ended 30 September 2007 (unaudited) EMEA QinetiQ North Ventures Consolidated America £m £m £m £m Revenue 377.2 256.6 5.0 638.8------------------------- --- ------- ------- ------- --------- Other informationEBITDA beforeshare of equityaccountedentities 37.3 32.9 (5.3) 64.9Share of lossof equityaccountedentities - - (0.8) (0.8)------------------------- --- ------- ------- ------- ---------EBITDA 37.3 32.9 (6.1) 64.1Depreciation ofproperty, plantand equipment (14.2) (2.2) (0.4) (16.8)Amortisation ofpurchased orinternallydevelopedintangibleassets (1.0) - (0.3) (1.3)------------------------- --- ------- ------- ------- ---------Group operatingprofit/(loss)beforeacquisitionamortisation 22.1 30.7 (6.8) 46.0Amortisation ofintangibleassets arisingfromacquisitions (0.4) (7.0) - (7.4)------------------------- --- ------- ------- ------- ---------Group operatingprofit/(loss) 21.7 23.7 (6.8) 38.6------------------------- --- ------- ------- ------- --------- 2. Business segments (continued) 6 months ended 30 September 2006 (unaudited) Restated* EMEA QinetiQ North Ventures Consolidated America £m £m £m £m Revenue 369.9 165.8 3.5 539.2------------------------- ----- ------ ------- ------- --------- Other informationEBITDA beforeshare of equityaccountedentities 35.4 19.3 (4.0) 50.7Share of lossof equityaccountedentities - - (0.4) (0.4)------------------------- ----- ------ ------- ------- ---------EBITDA 35.4 19.3 (4.4) 50.3Depreciation ofproperty, plantand equipment (13.5) (1.6) (0.3) (15.4)Amortisation ofpurchased orinternallydevelopedintangibleassets (0.5) - (0.2) (0.7)------------------------- ----- ------ ------- ------- ---------Group operatingprofit/(loss)beforeacquisitionamortisation 21.4 17.7 (4.9) 34.2Amortisation ofintangibleassets arisingfromacquisitions (1.2) (4.8) - (6.0)------------------------- ----- ------ ------- ------- ---------Group operatingprofit/(loss) 20.2 12.9 (4.9) 28.2------------------------- ----- ------ ------- ------- --------- * The segmental results for the 6 months ended 30 September 2006 have beenrestated to align with the sector structure used in the year ended 31 March 2007and the 6 months ended 30 September 2007. This has involved the restatement ofthe former Defence & Technology and Security & Dual Use sectors into the EMEAand Ventures sectors. Year ended 31 March 2007 EMEA QinetiQ North Ventures Consolidated America £m £m £m £m Revenue 779.3 358.2 12.0 1,149.5------------------------- ---- ------- ------ ------- --------- Other informationEBITDA beforeshare of equityaccountedentities 102.2 43.1 (3.6) 141.7Share of lossof equityaccountedentities - 0.1 (1.3) (1.2)------------------------- ---- ------- ------ ------- ---------EBITDA 102.2 43.2 (4.9) 140.5Depreciation ofproperty, plantand equipment (27.8) (3.2) (0.7) (31.7)Amortisation ofpurchased orinternallydevelopedintangibleassets (1.4) (0.1) (1.3) (2.8)------------------------- ---- ------- ------ ------- ---------Group operatingprofit/(loss)beforeacquisitionamortisation 73.0 39.9 (6.9) 106.0Amortisation ofintangibleassets arisingfromacquisitions (1.9) (10.7) - (12.6)------------------------- ---- ------- ------ ------- ---------Group operatingprofit/(loss) 71.1 29.2 (6.9) 93.4------------------------- ---- ------- ------ ------- --------- 3. (Loss)/gain on business divestments and unrealised impairment of investment 6 months ended 6 months ended Year ended 30 September 30 September 31 March 2007 2006 2007 (unaudited) (unaudited) (audited) £m £m(Loss)/gain on businessdivestments (1.9) 0.7 13.4Unrealised impairment ofinvestment (2.3) - (8.8)------------------------ ---------- ------------ --------- (4.2) 0.7 4.6 ------------------------ ---------- ------------ --------- The loss on business divestment of £1.9m in the 6 months to 30 September 2007represents the net book loss arising on the establishment of the QinetiQ VentureFund with Coller Capital and the deconsolidation of certain previouslyconsolidated subsidiaries that were transferred into the fund at inception. The unrealised impairment of investment in the 6 months to 30 September 2007relates to the impairment of the pSivida investment reflecting the decrease inthe share price of pSivida from A$0.27 per share at 31 March 2007 to A$0.11 at30 September 2007. 4. Finance income and expense 6 months ended 6 months ended Year ended 30 September 30 September 31 March 2007 2006 2007 (unaudited) (unaudited) (audited) £m £m £mReceivable onbank deposits 0.9 1.3 2.1Finance leaseincome 0.8 1.1 2.1Amortisationof discount onfinancialasset 0.2 - -------------------------- ------ ------ ------ ------- ----- ------Finance income 1.9 2.4 4.2------------------------- ------ ------ ------ ------- ----- ------ Amortisationofrecapitalisation fee (0.1) (0.1) (0.2)Payable onbank loans andoverdrafts (5.6) (6.6) (12.3)Payable on US$privateplacement debt (3.6) - (1.6)Finance leaseexpense (0.6) (1.0) (1.9)Amortisationof discount onfinancialliability (0.4) - (0.2)------------------------- ------ ------ ------ ------- ----- ------Financeexpense (10.3) (7.7) (16.2)------------------------- ------ ------ ------ ------- ----- ------------------------------- ------ ------ ------ ------- ----- ------Net financeexpense (8.4) (5.3) (12.0)------------------------- ------ ------ ------ ------- ----- ------ 5. Taxation expense The tax charge has been based on the expected tax rate for the year ending 31March 2008 on the Group's profit before tax, acquisition intangibleamortisation, and loss on disposal of non current assets and unrealisedimpairment of investment. 6. Dividends On 27 November 2007 the Directors declared an interim dividend of 1.33p (6months ended 30 September 2006: 1.20p) pence per ordinary share payable on 22February 2008. The record date for the dividend will be 25 January 2008. TheQinetiQ Group plc Employee Benefit Trust has waived its entitlement to dividendsin the amount of £0.1m (2006: nil). On 31 August 2007 the Group paid a finaldividend of 2.45 pence per ordinary share totalling £16.2m in respect of theyear ended 31 March 2007. 7. 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 period (less those non-vested shares held by employeeownership trusts). For diluted earnings per share the weighted average number ofshares in issue is adjusted to assume conversion of all dilutive potentialordinary shares arising from share options granted. Underlying earnings pershare are presented in addition to basic and diluted earnings per share as thedirectors consider this gives a more relevant indication of underlyingperformance and reflect the adjustments for the impact of non-recurring andother unrepresentative items on basic earnings per share. 6 months ended 30 September 2007 (unaudited) Earnings Weighted Per share average number amount of shares pence £m million Basic 22.1 658.6 3.36Effect ofdilutivesecurities -options 2.9 (0.02)-------------------- ------- ------ -------- ----------- -------Diluted 22.1 661.5 3.34------------------------- ------ -------- ----------- ------- Underlying earnings per share Earnings Weighted Per share average number amount of shares pence £m Million Basic 22.1 658.6 3.36Loss onbusinessdivestmentsand unrealisedimpairment ofinvestment 4.2 0.63Loss ondisposal ofnon-currentassets 0.1 0.02Amortisationof intangibleassets arisingfromacquisitions 7.4 1.12Tax ratechange (1.0) (0.15)Tax impact ofitems above (2.3) (0.35)------------------------------ ------- ----------- -------Underlying 30.5 658.6 4.63------------------------------ ------- ----------- ------- 6 months ended 30 September 2006 (unaudited) Earnings Weighted Per share average number amount of shares pence £m million Basic 20.3 654.5 3.10Effect ofdilutivesecurities -options 12.3 (0.06)---------------------- ------- ---- -------- ----------- -------Diluted 20.3 666.8 3.04--------------------------- ---- -------- ----------- ------- Underlying earnings per share (restated) Earnings Weighted Per share average number amount of shares pence £m Million Basic 20.3 654.5 3.10Profit onbusinessdivestments (0.7) (0.11)Profit ondisposal ofnon-currentassets (0.1) (0.01)Amortisationof intangibleassets arisingfromacquisitions 6.0 0.92Tax impact ofitems above (2.1) (0.32)------------------------------ ------- ----------- -------Underlying 23.4 654.5 3.58------------------------------ ------- ----------- ------- Underlying earnings per share has been restated to exclude from underlyingearnings the profit on business divestments in order to be consistent with thecurrent interim period and prior year end analysis. The tax impact of earningshas also been adjusted to reflect this change. 7. Earnings per share (continued)Year ended 31 March 2007 Earnings £m Weighted Per share average number amount pence of shares million Basic 69.0 656.6 10.51Effect ofdilutivesecurities -options 11.0 (0.17)------------------------------ -------- ----------- -------Diluted 69.0 667.6 10.34------------------------------ -------- ----------- ------- Underlying earnings per share Earnings £m Weighted Per share average number amount pence of shares million Basic 69.0 656.6 10.51Gain onbusinessdivestmentsand unrealisedimpairment ofinvestment (4.6) (0.70)Profit ondisposal ofnon-currentassets (3.3) (0.50)Amortisationof intangibleassets arisingfromacquisitions 12.6 1.92Tax impact ofitems above 0.4 0.06------------------------------ ------- ----------- -------Underlying 74.1 656.6 11.29------------------------------ ------- ----------- ------- 8. Business combinations On 16 April 2007 the Group completed the acquisition of ITS Corporation forinitial net consideration of £41.5m ($82.6m), a further £5.0m ($10.0m) to bepaid following the satisfaction of certain performance criteria, additionaldeferred consideration of £0.3m ($0.6m) payable two years after completion andacquisition costs of £0.5m ($1.0m). The provisional fair value of net assetsacquired was £17.1m ($34.0m) resulting in goodwill of £30.2m ($60.2m). On 5 June 2007 the Group completed the acquisition of Automatika, Inc. forinitial consideration of £4.0m ($8.0m), an additional deferred consideration of£0.6m ($1.2m) payable two years after completion and acquisition costs of £0.1m($0.2m). The provisional fair value of net assets acquired was £0.2m ($0.4m)resulting in goodwill of £4.5m ($9.0m). On 5 June 2007 the Group completed the acquisition of Applied Perception, Inc.for initial consideration of £4.3m ($8.6m), an additional deferred considerationof £0.6m ($1.2m) payable two years after completion and acquisition costs of£0.1m ($0.2m). The provisional fair value of net assets acquired was £0.4m($0.8m) resulting in goodwill of £4.6m ($9.2m). On 26 June 2007 the Group completed the acquisition of 3H Technologies LLC forinitial net consideration of £24.5m ($49.0m), an additional contingentconsideration of up to £1.0m ($2.0m) payable 18 months after completion andacquisition costs of £0.1m ($0.2m). The provisional fair value of net assetsacquired was £7.8m ($15.6m) resulting in goodwill of £17.8m ($35.6m). 9. Analysis of net debt 30 September 30 September 31 March 2007 2006 2007 (unaudited) (unaudited) (audited) £m £m £mDue within one yearBank and cash 21.5 17.9 20.0Bank overdraft (2.7) - (7.4)Recapitalisation fee 0.2 0.2 0.2Loan notes (0.1) (0.2) (5.2)Finance leasedebtor 3.0 3.0 3.0Finance leasecreditor (2.9) (4.1) (3.2)Derivativefinancialassets 0.6 - 1.0Derivativefinancialliabilities (0.2) - (0.3)----------------------------- ---- --------- ---------- --------- 19.4 16.8 8.1----------------------------- ---- --------- ---------- ---------Due after one yearBank Loan (219.3) (273.4) (180.1)Recapitalisation fee 0.6 0.7 0.6US$ 260m loanrepayable 2013& 2016 (130.3) - (134.3)Loan notes - (3.8) -Finance leasedebtor 13.5 14.5 14.1Finance leasecreditor (13.3) (14.5) (13.9)Escrow cash 3.0 - 3.1Derivativefinancialassets 1.0 5.0 1.6Derivativefinancialliabilities (0.1) (0.4) ------------------------------ ---- --------- ---------- --------- (344.9) (271.9) (308.9)----------------------------- ---- --------- ---------- -------------------------------------- ---- --------- ---------- ---------Total net debt (325.5) (255.1) (300.8)----------------------------- ---- --------- ---------- --------- 10. Reconciliation of net cash flow to movement in net debt 6 months ended 6 months ended Year ended 31 30 September 30 September March 2007 2006 2007 (unaudited) (unaudited) (audited) £m £m £m Increase/(decrease) in cash in theperiod 6.2 (40.7) (45.5)New loans (44.5) (4.8) (131.3)New loan notes - - (1.3)Bank loanrepayments - - 79.2Loan noterepayments - 1.3 1.4Payment ofdeferredfinancing costs - 0.4 0.4Capital elementof finance leasepayments 1.7 2.4 5.9Capital elementof finance leasereceipts (1.7) (1.5) (3.5)------------------------------ ---------- --------- ---------Change in netdebt resultingfrom cash flows (38.3) (42.9) (94.7) Amortisation ofdeferredfinancing costs (0.2) (0.1) (0.2)Foreign exchangemovements 9.4 22.8 30.2Accrued US$ 260mloan interest - - (1.6)Loan notedisposed withbusinessdivestment 5.1 - -Finance leasereceivables 1.1 1.0 2.6Finance leasepayables (0.8) (0.9) (2.9)Movement onescrow cash - - 3.1Movement onderivatives (1.0) (2.0) (4.3)Net debt at thestart of theperiod (300.8) (233.0) (233.0)------------------------------ ---------- --------- ---------Net debt at theend of the period (325.5) (255.1) (300.8)------------------------------ ---------- --------- --------- 11. Changes in equity 6 months ended 6 months ended Year ended 31 30 September 30 September March 2007 2006 2007 (unaudited) (unaudited) (audited) £m £m £m Shareholders'funds at thestart of theperiod 477.4 362.9 362.9Exchange loss (6.7) (10.4) (14.4)Profit for theperiod 22.1 19.4 69.0Dividends paid (16.2) (14.8) (22.7)Issue of newshares - 0.2 0.2Purchase ofown shares (12.4) (0.1) (0.1)Share basedpayments 1.0 1.0 1.1Deferred taxon exercise ofshare options - - 4.8Impairment ofavailable forsale financialassets - - 1.6Netgain/(loss) onavailable forsale financialassets 0.3 (6.9) 10.0Gain onavailable forsale financialassetsrecycled ondisposal (3.6) - -Decrease infair value ofhedgingderivatives (1.2) (1.4) (5.6)Deferred taxon hedgingderivatives 0.3 - 2.0Minorityinterestarising onacquisitionand disposal - 0.2 0.7Actuarial gainrecognised inthe definedbenefitpensionschemes 53.5 7.1 85.8Reduction indeferred taxasset onpensiondeficit (8.2) (0.9) (17.9)--------------------------- ---------- ---------- --------Shareholders'funds at theend of theperiod 506.3 356.3 477.4--------------------------- ---------- ---------- -------- In the six months to 30 September 2007 the Group granted 7.5 million of newshare options to certain employees under the Group Share Option Scheme.The total number of ordinary shares in issue at 30 September 2007 was 660.5m (31March 2007: 660.1m) 12. Post-retirement benefits Introduction and background to IAS 19International Accounting Standard 19 (Employee Benefits) requires the Group toinclude in the balance sheet the surplus or deficit on its defined benefitpension schemes calculated as at the balance sheet date. It is a snapshot viewwhich can be significantly influenced by short-term market factors. Thecalculation of the surplus or deficit is, therefore, dependent on factors whichare beyond the control of the Group - principally the value at the balance sheetdate of equity shares in which the scheme has invested and long term interestrates which are used to discount future liabilities. The funding of the schemesis based on long term trends and assumptions relating to market growth, asadvised by qualified actuaries. There were no outstanding or prepaid contributions at the balance sheet date(September 2006: £nil). Set out below is a summary of the overall IAS 19 definedbenefit pension schemes' liabilities. The fair value of the schemes assets,which are not intended to be realised in the short term and may be subject tosignificant change before they are realised, and the present value of theschemes liabilities, which are derived from cash flow projections over longperiods, and thus inherently uncertain, were: 30 September 30 September 31 March 2007 2006 2007 (unaudited) (unaudited) (audited) £m £m £m Equities 675.8 562.8 641.5Corporatebonds 75.1 86.6 74.5Governmentbonds 77.5 79.0 74.7Cash 9.2 4.5 3.4----------------------------- ---------- ---------- ---------Total marketvalue ofassets 837.6 732.9 794.1Present valueof schemeliabilities (874.1) (898.8) (884.9)----------------------------- ---------- ---------- ---------Net pensionliabilitybeforedeferred tax (36.5) (165.9) (90.8)Deferred taxasset 10.2 49.5 27.1----------------------------- ---------- ---------- ---------Net pensionliability (26.3) (116.4) (63.7)----------------------------- ---------- ---------- --------- AssumptionsThe major assumptions (weighted to reflect individual scheme differences) were: 30 September 30 September 31 March 2007 2006 2007 (unaudited) (unaudited) (audited) Rate ofincrease insalaries 4.8% 4.4% 4.6%Rate ofincrease inpensions inpayment 3.3% 2.9% 3.1%Rate ofincrease inpensions indeferment 3.3% 2.9% 3.1%Discount rateapplied toschemeliabilities 5.9% 5.0% 5.4%Inflation rate 3.3% 2.9% 3.1% ----------Average lifeexpectancybeyond 60 forscheme membersnot currentlyretired(years) 27 26 26Male ----------Female 30 29 29 ---------- The assumptions used by the actuary are the best estimates chosen from a rangeof possible actuarial assumptions which, due to the timescale covered, may notnecessarily be borne out in practice. It is important to note that theseassumptions are long term, and in the case of the discount rate and theinflation rate are measured by external market indicators. The principalsensitivities regarding the key assumptions in the IAS19 valuation are: Assumption Change in Indicative assumption effect on the scheme liabilities Discount rate Increase/decrease Decrease/increase by 0.1% by £22m Inflation and Increase/decrease Increase/decrease salary increase by 0.1% by £21m Life Increase by 1 Increase by expectations year £21m 6 months ended 6 months ended Year ended 30 September 30 September 31 March 2006 2006 2007 (unaudited) (unaudited) (audited) £m £m £mChanges to the fair value ofscheme assets:Opening fairvalue ofscheme assets 794.1 716.0 716.0Actual returnon assets 35.8 5.2 51.9Contributionsby theemployer 16.3 16.8 33.3Contributionsby planparticipants 3.3 2.8 5.6Net benefitspaid out (10.4) (10.9) (18.8)Businessdisposal inthe period (1.5) - -Curtailments - 3.0 6.1-------------------------- ---------- ----------- ---------Closing fairvalue ofscheme assets 837.6 732.9 794.1-------------------------- ---------- ----------- --------- 6 months ended 6 months ended Year ended 31 30 September 30 September March 2007 2007 2006 (unaudited) (unaudited) (audited) £m £m £mChanges to the present value of thedefined benefit obligation:Opening definedbenefitobligation 884.9 884.4 884.4Current servicecost 19.7 24.3 47.7Interest cost 23.7 21.8 44.3Contributions byplanparticipants 3.3 2.8 5.6Actuarial gainon schemeliabilities (45.5) (26.6) (84.3)Net benefitspaid out (10.4) (10.9) (18.9)Curtailments - 3.0 6.1Businessdisposal in theperiod (1.6) - ------------------------------ ---------- ----------- ---------Closing definedbenefitobligation 874.1 898.8 884.9----------------------------- ---------- ----------- --------- 13. Transactions with MOD The MOD is an 18.9% (2006: 19.2%) shareholder in the Group. Transactions betweenthe Group and the MOD are disclosed as follows: TradingThe MOD is a major customer of the Group. An analysis of trading with the MOD ispresented below 6 months ended 6 months ended Year ended 31 30 September 30 September March 2007 2007 2006 (unaudited) (unaudited) (audited) £m £m £mSale to theMOD excludingpropertyrental income 276.6 267.8 584.5Propertyrental income 3.4 3.3 6.8--------------------------- ---------- ---------- ---------Total incomefrom the MOD 280.0 271.1 591.3--------------------------- ---------- ---------- --------- Purchasedservices fromthe MOD 5.1 7.5 12.4 Trade debtors 53.8 34.1 81.3Tradecreditors 0.0 0.2 0.1 14. Related party transactionsTransactions between the Company and its subsidiaries, which are relatedparties, have been eliminated on consolidation and are not disclosed in thisnote. During the period to 30 September 2007 there were sales to associates, ReduSpace Services SA, of £0.4m (30 September 2006: £nil, 31 March 2007: £nil) andInfoscitex, Inc., of £nil (30 September 2006: £0.1m, 31 March 2007: £0.2m).There were no other related party transactions between the Group and its jointventures and associates during the period. 15. Post balance sheet events On 24 October 2007 the Group completed the acquisition of Boldon James HoldingsLimited for an initial consideration of £12.9m and assumed net debt of £2.3m oncompletion. A further amount of £4.3m is payable dependent on the achievement ofspecific performance criteria. Boldon James Holdings Limited is a UK-basedprovider of software solutions for high end secure messaging, primarily formilitary, government and security customers worldwide. Responsibility statements of the directors in respect of the interim financialreport We, the directors of the Company, confirm that to the best of our knowledge: a. The condensed set of financial statements has been prepared inaccordance with IAS 34 Interim Financial Reporting as adopted by the EU: b. The interim management report includes a fair review of theinformation requited by DTR 4.2.7R, being an indication of important events thathave occurred during the interim period and their impact on the condensed set offinancial statements and a description of the principal risks and uncertaintiesfor the remainder of the financial year; and c. The interim management report includes a fair review of theinformation required by DTR 4.2.8R, being disclosure of related partytransactions and changes therein since the last annual report. By order of the Board G Love D WebbChief Executive Officer Chief Financial Officer Independent review report to QinetiQ Group plc IntroductionWe have been engaged by the group to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30September 2007 which comprise the Income Statement, Balance Sheet, Cash Flow,Statement of Recognised Income and Expenses and the related explanatory notes.We have read the other information contained in the half-yearly financial reportand considered whether it contains any apparent misstatements or materialinconsistencies with the condensed set of financial statements. This report is made solely to the group in accordance with the terms of ourengagement to assist the company in meeting the requirements of the Disclosureand Transparency Rules (The DTR") of the UK's Financial Services Authority (theUK FSA"). Our review has been undertaken so that we might state to the companythose matters we are required to state to it in this report and for no otherpurpose. To the fullest extent permitted by law, we do not accept or assumeresponsibility to anyone other than the group for our review work, for thisreport, or for the conclusions we have reached. Directors' responsibilitiesThe half-yearly financial report is the responsibility of, and has been approvedby, the directors. The directors are responsible for preparing the half-yearlyfinancial report in accordance with the DTR of the UK FSA. As disclosed in note 1, the annual financial statements of the group areprepared in accordance with IFRSs as adopted by the EU. The condensed set offinancial statements included in this half-yearly financial report has beenprepared in accordance with IAS 34 Interim Financial Reporting as adopted by theEU. Our responsibilityOur responsibility is to express to the group a conclusion on the condensed setof financial statements in the half-yearly financial report based on our review. Scope of reviewWe conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity issued by the AuditingPractices Board for use in the UK. A review of interim financial informationconsists of making enquiries, primarily of persons responsible for financial andaccounting matters, and applying analytical and other review procedures. Areview is substantially less in scope than an audit conducted in accordance withInternational Standards on Auditing (UK and Ireland) and consequently does notenable us to obtain assurance that we would become aware of all significantmatters that might be identified in an audit. Accordingly, we do not express anaudit opinion on the financial information. Review conclusionBased on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the half-yearly financialreport for the six months ended 30 September 2007 is not prepared, in allmaterial respects, in accordance with IAS 34 as adopted by the EU and the DTR ofthe UK FSA. KPMG Audit PlcChartered AccountantsLondon28 November 2007 GLOSSARY Backlog - The expected future value of turnover from contractually-committed customer orders (excluding £4.7bn value of remaining 21 years of LTPA contract)Book to bill - Ratio of orders in year to turnover in year, excludingratio LTPAC4ISR - Command, Control, Communications Computers, Intelligence, Surveillance and ReconasissanceDoD - US Department of DefenseDTR - Defence Training Rationalisation programmeEMEA - QinetiQ's Europe, Middle East and Australasia sectorGPS - Global Positioning SystemIV&V - Independent Verification and ValidationMOD - UK Ministry of DefenceNASA - National Aeronautics and Space AdministrationOrganic Growth - The level of year-on-year growth on a constant currency basis, expressed as a percentage, based on the businesses that have been part of the Group for at least 12 monthsQNA - QinetiQ's North American sectorSETA - Systems Engineering and Technical AssistanceUnderlying - Earnings per share as adjusted for non-recurring and otherearnings per items as set out in note 7 to the interim resultsshareUnderlying - The tax charge for the year excluding the tax impact oneffective tax non-recurring items expressed as a percentage of underlyingrate profit before taxUnderlying - The ratio of net cash flow from operations, less cashoperating cash outflows on the purchase of intangible assets and property,conversion plant and equipment to underlying operating profitUnderlying - Earnings before interest and tax (excluding property, plantoperating and equipment disposals and amortisation of intangiblesmargin arising on acquisitions) as a percentage of turnoverUnderlying - Earnings before interest and tax (excluding property, plantoperating and equipment disposals and amortisation of intangiblesprofit arising on acquisitions)Underlying - Profit before tax excluding, property, plant and equipmentprofit before disposals, sale of interest in equity accounted associatetax and amortisation of intangible assets arising from acquisitions This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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