30th Nov 2006 07:03
QinetiQ Group plc30 November 2006 News release 30 November 2006 QinetiQ Group plc Interim Results Announcement Six month period ended 30 September 2006 Results highlights Results in line with expectations, supporting the full year outlook. • Turnover increased by 13.9% to £539.2m (2005: £473.5m) • Orders won in period grew 38.1% to £524.6m (2005: £379.9m) • Contracted and funded backlog increased by 14.7% to £697.6m (31 March 2006: £608.4m). Backlog is £5.6bn including LTPA contract. • North America turnover increased to £165.8m (2005: £91.5m), with organic growth of 9.2% and a strong book to bill ratio of 1.3:1 • Underlying operating profit before restructuring costs* up 18.3% to £43.9m and underlying operating margin before restructuring costs* increased 30 basis points to 8.1% • Underlying profit before tax and restructuring costs* increased by 18.8% to £38.6m (2005: £32.5m) • Underlying earnings per share of 3.7p (4.7p per share excluding the impact of restructuring costs*; 2005: 4.2p per share) • Interim dividend of 1.2p per share declared See Glossary section on page 12 for definitions of Non GAAP terms usedthroughout this statement * £9.0m of restructuring costs in H1 2006 (H1 2005: £nil) Commenting on the results, Graham Love, Chief Executive Officer, said:"We are continuing to perform to expectations, and remain focused on deliveringthe growth strategy we set out at the time of the IPO. Our increased turnoverand strong order performance is underpinned by the growth of our North Americanbusiness, where we see the greatest opportunity for expansion. In the UK, wehave continued to grow our Technology Supply business as planned in order tocounteract the expected decline in research revenue. We saw further growth inour commercialisation business offsetting the reduction in our LCD royaltyrevenue which finished last year. "Looking forward, our three strategic thrusts remain the repositioning intogrowth areas within the UK defence market, the expansion of our US presence withorganic growth supplemented by further acquisitions, and the commercialisationof our defence technologies. We are confident that we remain on track to deliverperformance in the remainder of the year in line with expectations." There will be a webcast of the presentation of the Interim Results at 9:30am on30th November 2006. For details log on to the QinetiQ Investor Centre at:http://www.qinetiq.com/home/investor_centre.html -ends- Register now for our electronic news alert service by visiting the newsroom at www.QinetiQ.com Notes for Editors: • QinetiQ (pronounced ki net ik as in 'kinetic energy') is a leading international defence and security technology business that was formed in July 2001 from the UK Government's Defence Evaluation & Research Agency (DERA). QinetiQ has over 11,400 employees, who deliver technology-based services and exploit QinetiQ's strengths in technology research by selling systems solutions, products and licences to government and commercial customers in a spectrum of defence, security and related commercial markets. • QinetiQ is organised into three operating sectors: o Defence & Technology (D&T) - D&T represents the core of QinetiQ's UK based defence business, delivering research based technology solutions, advice and managed services that support the UK's armed forces and those of its allies. o Security & Dual Use (S&DU) - S&DU draws from QinetiQ's broad inventory of defence related intellectual property and leading scientists to develop commercially viable products and services in selected adjacent commercial markets. o QinetiQ North America (QNA) - QNA delivers technology services, systems engineering & technical assistance and IT services into the North American marketplace from its US based operations. For further information please contact:QinetiQ: Nicky Louth-Davies +44 (0)1252 392809Citigate Dewe Rogerson: Chris Barrie +44 (0)20 7282 2943 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. Operational review QinetiQ continued to trade in line with expectations in the first half of 2006,with turnover increasing by 13.9% to £539.2m (2005: £473.5m) and strong ordergrowth. This progress has been built on a robust growth strategy. The Group'sstrong order performance of £524.6m (2005: £379.9m), driven particularly fromthe US and UK defence businesses, demonstrates the success of its broadly basedbusiness model, which ensures QinetiQ is not dependent on individual orders todeliver growth. Continued repositioning of QinetiQ's UK defence business saw a 15.8% increase inthe provision of technology into the supply chain and an ongoing book to billratio of 1.1:1 in this area, largely offsetting the expected reduction inrevenue from the MOD research programme. Technology Supply wins includecontracts to provide key elements such as electronic armour to the Future RapidEffects System (FRES) programme, and under water effects programmes for DEC(UWE). Notable wins by the UK defence advisory business included a three-yearextension to support the Typhoon project worth up to £52.5m, while recent winsinclude the award of a five-year call-off contract from the US military for thevehicle-arresting device X-Net, the first orders from which totalled $9.2m, andan eight year contract worth over £10m to provide flight test and evaluationservices to the Merlin helicopter programme. In Managed Services the Groupcontinues perform well under the Long Term Partnering Agreement (LTPA) to manageMoD's test and evaluation ranges, with QinetiQ achieving increases in theperformance scores reported under the Performance Regime in the contract. TheGroup is close to finalising negotiations as preferred bidder on the CombinedAerial Targets Service (CATS) and is currently awaiting the UK Government'sdecision on the selection of preferred bidders for the two packages of the DTRprogramme for which it has submitted bids. QinetiQ's commercial business, Security & Dual Use (S&DU), also saw continuedgrowth with a 6.5% increase in turnover driven by growth in the Securitybusiness, which recorded a book to bill ratio of 1.3:1 in the half year, and afull year's contribution from the European space business, Verhaert. Recent winsinclude a contract with US DARPA for a novel lenseless camera and further ITsecurity managed services contracts, including a £1.6m contract withpharmaceutical authentication company Aegate. QinetiQ anticipates a continuedincrease in demand for security technology as a result of sustained threatlevels around the world. QinetiQ has expanded its portfolio of ventures businesses this half year,including the launch of a development programme with the US company CrownHoldings to adapt QinetiQ's Omni-ID PakTM Radio Frequency Identification (RFID)technology for use in metal packaging. The technology will allow brand owners tointegrate ultra high frequency (UHF) RFID tags into metal packaging or onwater-based products for the first time, and will also reduce manufacturingcosts thanks to its innovative antenna design. The Group is also conductinginitial trials with US shoe retailer Stride Rite of the optical foot gaugealready successfully delivered to UK retailer Clarks. Steady progress was made in developing a balanced portfolio of businesses fromearly stage ideas to mature revenue and profit generators, with the mostadvanced ventures such as GPS chip sets and Tarsier moving through the firststages of revenue generation with early adopter customers. The Tarsier runwaydebris detector is now operationally live at Vancouver and the Dubaiinstallation is scheduled for the first quarter of 2007. A new agreement withBritish Airports Authority (BAA) will also see Tarsier installed at Heathrow'ssouth runway in the first quarter of 2007 for an extended evaluation, followingearlier short trials at Heathrow and Southampton airports. In addition, aninstallation at Providence, Rhode Island airport will allow further operationalevaluation of Tarsier. QinetiQ continues to seek ways of optimising the valueobtained from its ventures portfolio particularly with regard to targetedinvestments and realisations. QinetiQ North America (QNA) turnover grew by 87.8% in constant currency,reflecting 9.2% organic growth and the inclusion of results from acquiredbusinesses Apogen, Planning Systems (PSI) and Ocean Systems Engineering Corps(OSEC). Order performance was strong with a book to bill ratio of 1.3:1 over theperiod, driven particularly by over $85m of orders for the Talon robot platform.Good progress has also been made in other product areas with LAST Armor sales toMOD for use in the Mastiff PPV and further funding gained for the PrecisionAirdrop System (PADS). Further orders are expected for Maverick, the ImprovisedExplosive Device (IED) detection system, and Secures, the gunshot detectionsystem. Services contract wins in Westar continue to grow, with strong demandfor software engineering and technical support services in particular from theUS Army offsetting the decline in Air Filters sales from its peak last year.Apogen continues to win business from its strong customer base, notably withfurther contract awards from the Department of Homeland Security and US CensusBureau. Synergies between the US companies are being developed actively,delivering new wins such as $11.3m of orders from the Marine Corps for supportservices from Apogen/OSEC in October 2006. In addition several cross Groupmarket facing businesses have been created, including one to counter improvisedexplosive devices. The OSEC acquisition was completed in May 2006, and QinetiQ continues to pursueits pipeline of other acquisition opportunities, primarily in North America. Market conditions The MOD's Defence Technology Strategy (DTS), the companion to its DefenceIndustrial Strategy White Paper (DIS), has confirmed the continued opportunitiesopen to QinetiQ in the UK defence market. It recognises the need for nationalcapability in science and technology, identifying a number of key technologies,many of which QinetiQ is currently leading on MOD programmes. QinetiQ regardsthe publication of the DTS as particularly significant for its business in thatit argues for a stabilisation of the MOD's research programme. Implementation ofthe DIS continues, with one of the first tangible outputs being the formation ofTeam CW (Complex Weapons) of which QinetiQ is a member. In the Security market,Home Secretary John Reid's recent call for an 'innovation partnership' betweenthe security industry and government validates QinetiQ's positioning strategyand is expected to produce future opportunities for QinetiQ's securitytechnologies. The US 2007 federal budget, announced in period, delivered an overall increaseof 6% in the defence budget, including a record $76.8bn for defence R&D plus a$70bn supplementary budget to support operations in Iraq. This points tocontinued growth opportunities for QinetiQ, which numbers the DoD as its secondbiggest customer and works increasingly closely with DoD, DARPA and otherresearch agencies. The results of the November US mid term elections are notexpected to change overall defence and security spending significantly frompre-election expectations. While spending for specific platforms may be reducedand RDT&E priorities may change, the Group remains confident about prospects forQNA on the basis that technology insertion remains a key priority. Appointments The QinetiQ management team has been strengthened further, with the appointmentof Duane Andrews as CEO of QinetiQ North America. Former CIA director GeorgeTenet has been appointed as a non-executive director. Both bring outstandingknowledge and experience of the US defence and security markets. Additionally,Sir Alan West, recently retired as head of the Royal Navy, has become chairmanof the QinetiQ Defence Advisory Board. As described both in the IPO prospectus and the 2006 Annual Report and Accounts,QinetiQ's Chairman, Sir John Chisholm, relinquished his executiveresponsibilities and became non-executive Chairman with effect from 1 October2006. Outlook During the first half of the year, the Group has continued to deliver on thestrategy set out at the time of the IPO in February 2006. The Board expects theGroup to continue to trade in line with expectations for the remainder of theyear. The D&T and S&DU sectors are expected to follow the historical trends forthese businesses with a significantly greater proportion of UK profit beingearned in the second half of the year. In QNA the 2007 DoD budget was finalisedin October and the robust order flow in QNA has continued, supporting theBoard's expectation that QNA will continue to deliver good underlying organicgrowth which the Group aims to continue to enhance with further acquisitions,subject to the availability of suitable opportunities at acceptable prices. Group trading performance Summary 6 months 6 months 12 months to 30 Sep to 30 Sep to 31 Mar 2006 2005 2006 Group turnover £539.2m £473.5m £1,051.7mOrders £524.6m £379.9m £816.7m Underlying operating margin before restructuringcosts 8.1% 7.8% Underlying operating profit before restructuringcosts £43.9m £37.1m Restructuring costs £(9.0)m - -------- --------Underlying operating profit £34.9m £37.1m £90.7m -------- --------Underlying operating profit margin 6.5% 7.8% 8.6% Underlying profit before tax before restructuringcosts £38.6m £32.5m £80.1mUnderlying earnings per share 3.7p 4.2p 10.2pNet debt £255.1m £332.7m £233.0mNet cashflow from operating activitiesbefore restructuring costs* £35.3m £71.5m £106.1mBacklog (excluding LTPA) £697.6m £648.0m £608.4mHeadcount 11,473 11,394 11,446 *Excluding £9.0m of current period restructuring costs and the cash outflow ofprior year restructuring programmes of £7.8m (30 September 2005 and 31 March2006: cash outflow of prior year restructuring programmes of £22.8m).Restructuring costs incurred in the 6 months ended 30 September 2006 areconsidered to be part of the Group's normal cost base. They have beenhighlighted to aid understanding of the results as similar costs were incurredin the second half in prior years and accordingly in-year phasing comparisonsare distorted. Turnover 6 months 6 months 12 months to 30 Sept to 30 Sept to 31 March 2006 2005 2006 £m £m £m Defence & Technology (D&T) 311.5 323.9 669.6Security & Dual Use (S&DU) 61.9 58.1 133.7QinetiQ North America (QNA) 165.8 91.5 248.4 -------- -------- --------Group turnover 539.2 473.5 1,051.7 -------- -------- -------- Turnover in the six months to 30 September 2006 grew by 13.9% over 2005, withthe acquisition of OSEC (acquired May 2006) contributing £10.8m. QNA deliveredorganic growth in turnover of 9.2% in constant currency terms with good growthfrom the Technology stream driven by strong Talon shipment levels. UK basedsector turnover was broadly flat with the underlying growth in the Security &Dual Use Sector and a full contribution from Verhaert (acquired September 2005)mitigating the expected loss of LCD royalty income (£9.4m in 2005) and, withinthe Defence & Technology Sector, timing issues on the direction and signing ofcontracts. Orders and backlog 6 months 6 months 12 months to 30 Sept to 30 Sept to 31 March 2006 2005 2006 £m £m £mOrdersDefence & Technology 258.2 225.4 420.7 Security & Dual Use 49.4 72.2 168.1QinetiQ North America 217.0 82.3 227.9 -------- -------- --------Total 524.6 379.9 816.7 -------- -------- -------- Backlog (ex LTPA)Defence & Technology 418.5 412.0 366.6Security & Dual Use 108.4 103.0 112.6QinetiQ North America 170.7 133.0 129.2 -------- -------- --------Total 697.6 648.0 608.4 -------- -------- -------- Orders won in the first half increased by 38.1% to £524.6m (20.5% organicgrowth). Growth in orders was driven by £45.5m further funding for Talon robotsin QNA and the award of a three year contract extension worth up to £52.5m forthe Typhoon programme in the UK, while the QNA acquisitions in 2005 and 2006made a contribution of £68.1m in the first half. At a Group level this goodperformance was partly offset by S&DU which, in the previous year, includedseveral multi-year managed services consultancy contracts and £9.4m of LCDroyalties that, as expected, were not repeated in 2006. The overall book to billratio (excluding the LTPA) was strong at 1.2:1. Backlog (ex LTPA) grew by 14.7% in the period to £697.6m, reflecting the strongorder performance and book to bill ratio together with the acquisition of OSEC.The LTPA backlog stood at £4.9bn at period end. Underlying operating profit 6 months to 30 Sept 6 months to 30 Sept 2006 2005 Operating Operating Operating Operating profit margin profit margin £m % £m % Defence & Technology (D&T) 14.0 4.5 22.2 6.9D&T restructuring costs 9.0 - ------ ------ ------ ------Underlying D&T operating profit before restructuring costs 23.0 7.4 22.2 6.9Security & Dual Use (S&DU) 3.2 5.2 4.5 7.7QinetiQ North America (QNA) 17.7 10.7 10.4 11.4 ------ ------ ------ ------Underlying operating profit beforerestructuring costs 43.9 8.1 37.1 7.8 ------ ------ ------ ------ Underlying growth in operating profit in each of the sectors is masked by anumber of factors when making a half on half comparison. The impact of UKrestructuring programmes amounting to £9.0m in the first half of the year ratherthan the second half, as was the case last year, is shown in the table above.Additionally the profit impact of the £9.4m non-recurring licence revenue fromthe LCD patents in the first half of the prior year and the weakening of the USdollar:Sterling exchange rate during the period have also impacted on thecomparability of profits. On a constant currency basis (using the same averageexchange rates as the prior period) the operating profit of QNA would have been3.9% (£0.7m) higher than reported at £18.4m. It is expected that the impact ofthe specific UK sector related items, together with the customary second halfbias in the UK business, will result in an even greater proportion of profitsgenerated in the second half of this year than normal. Profit before tax and earnings per shareProfit before tax, excluding the impact of restructuring costs, has increased by18.8% to £38.6m compared to £32.5m in 2005. After restructuring charges profitbefore tax for the period was £29.6m. Underlying earnings per share, excludingthe impact of restructuring charges for the period is 4.7 pence per share.Underlying earnings per share of 3.7 pence per share is below the figure for thecomparative period of 4.2 pence per share largely as a function of thecomparative period being based on the number of shares in issue at the date ofthe IPO in February 2006 (573m). The impact of the primary issue at the time ofthe IPO and subsequent exercises of historic share options has lifted theaverage number of shares in issue by 14% to 654m in the current period whichaccounts for virtually all of the reduction in EPS. Sector analysis Defence and Technology 6 months 6 months 12 months to to 30 Sept to 30 Sept 31 March 2006 2005 2006 Growth £m £m * £m % ------- ------- -------- --------TurnoverMOD Research 67.1 83.2 164.3 (19.4)%Technology Supply 62.4 53.9 124.2 15.8%Procurement & Capability Support 84.0 93.5 197.3 (10.2)%Managed Services 98.0 93.3 183.8 5.0% ------- ------- -------- -------- 311.5 323.9 669.6 (3.8)% ------- ------- -------- -------- Underlying operating margin beforerestructuring costs 7.4% 6.9% Underlying operating profit beforerestructuring costs 23.0 22.2 Restructuring costs (9.0) - ------- -------Underlying operating profit 14.0 22.2 56.5 ------- -------Underlying operating margin 4.5% 6.9% 8.4% Orders MOD Research 52.2 41.1 99.8Technology Supply 70.0 63.7 137.3Procurement & Capability Support 133.0 118.5 177.1Managed Services 3.0 2.1 6.5 ------- ------- -------- 258.2 225.4 420.7 ------- ------- -------- Headcount at period end 6,532 6,795 6,791 ------- ------- -------- *£3.6m of revenue has been reclassified in the period to 30 Sept 2005 fromProcurement & Capability Support to Managed Services from the classification inthe IPO Prospectus to align the presentation with that used at 31 March 2006 and30 Sept 2006 Defence and Technology (D&T) turnover decreased by 3.8% to £311.5m in the firsthalf of the year compared to the previous year. The decrease in turnover largelyreflects timing issues on the direction and signing of MOD funding towardsspecific programmes in the first half of the year. The Group believes this is inpart due to the short term effects of the efforts within MOD directed towardsthe completion of the Defence Technology Strategy paper, subsequently publishedby MOD in October 2006 and the impact of the announcement by MOD that the DPOand DLA will merge, both of which are considered to be beneficial to QinetiQ inthe medium term. The overall level of MOD research undertaken by the Group has continued to fallin line with expectations from £95.6m (D&T £83.2m) in the first half of 2006 to£77.2m (D&T £67.1m) in the current period as further areas of the researchbudget are opened to competition and the volume of assured work for QinetiQdeclines. QinetiQ has continued to win more than half of the competed researchprogrammes that it bids for and has largely offset the impact of competition inthe research programme by increasing its penetration of the defence technologysupply chain, as a partner or subcontractor to prime contractors. Growth of15.8% in revenues in the Technology Supply stream to £62.4m has largely offsetthe 19.4% reduction in MOD research revenue within the D&T sector. The positivetrend for Technology Supply continues in the orders won in the first half wherethe book to bill ratio was 1.1:1. Technology Supply wins include contracts toprovide key elements such as electronic armour to the Future Rapid EffectsSystem (FRES) programme and under water effects programmes for DEC (UWE).Progress continues in non defence markets, an example being the sale ofCerberus, a swimmer and diver detection system, to several commercial clientsincluding the intended deployment to protect a large private yacht while atanchor or alongside in harbour. Procurement and Capability Support turnover fell by 10.2% in the first sixmonths largely due to particularly high levels of demand for Tasking Serviceswithin the LTPA in the prior period and the timing of tasking work undertaken inthe current period. The £14.5m increase in Procurement & Capability Supportorders is in part due to the three year extension to the Typhoon supportcontract, worth up to £52.5m, offset by the very strong order levels experiencedfor tasking services in the first half of the prior period. Within ManagedServices the core provision of test and evaluation services under the LTPAremained broadly consistent, with the increase in revenue being largelyattributable to price indexation. Underlying operating profit (excluding restructuring costs of £9.0m (2005:£nil)) increased to £23.0m with underlying operating margins, on the same basis,improving from 6.9% to 7.4%. The restructuring costs were incurred in the periodas D&T continues to align its technical capabilities to market needs. In theprior year restructuring costs of £4.4m were incurred in D&T in the second halfof the year. Work continued throughout the period in Metrix, our joint venture with LandSecurities Trillium, on our response to the major Defence TrainingRationalisation Programme opportunity. The customer is currently indicating thatthe preferred bidder announcement will be made in December. Security & Dual Use 6 months 6 months 12 months to to 30 Sept to 30 Sept 31 March 2006 2005 2006 Growth £m £m £m % ------- ------- -------- --------TurnoverSecurity 15.6 11.8 32.1 32.2%Space 10.1 8.7 25.5 16.1%Technology Development & Exploitation (TD&E) 21.7 26.4 50.3 (17.8)%Managed Services 14.5 11.2 25.8 29.5% -------- -------- --------- -------- 61.9 58.1 133.7 6.5% -------- -------- --------- --------Underlying operating profit 3.2 4.5 9.7 -------- -------- --------- Underlying operating margin 5.2% 7.7% 7.3% -------- -------- --------- OrdersSecurity 17.4 25.1 48.3Space 6.4 9.8 18.7Technology Development & Exploitation (TD&E) 22.5 28.2 63.1Managed Services 3.1 9.1 38.0 -------- -------- --------- 49.4 72.2 168.1 -------- -------- --------- Headcount at period end 1,540 1,701 1,643 -------- -------- --------- Security & Dual Use (S&DU) turnover increased by 6.5% in the period. The growthin revenue in the Security stream continued with the first delivery of theTarsier runway debris monitoring system into Vancouver International Airport andfurther growth in IT security managed services turnover as new contracts cameon-stream. TD&E revenues grew by 27.6% excluding the non-recurrence of £9.4m ofroyalty revenue in the first six months of 2005 from enforcement actions on LCDpatents which expired in 2004. In particular turnover in S&DU was delivered bystrong performance in the Optronics division which converted its robust orderpipeline from the second half of last year into revenue, supplemented by thereceipt of £2m from the sale of non core intellectual property and initialincome receipts from new licensing arrangements. The growth in the Space streamrevenues reflects a full contribution from the Verhaert business (acquired inAugust 2005) and the growth in Managed Services is largely due to multi-yearconsultancy agreements which commenced in the second half of last year. The operating profit margin of 5.2% compared to 7.7% in the prior periodreflects the mix change across the two periods with the benefit of the highmargin LCD royalty receipts in the prior period replaced by service and productrevenue, generating more normal margin levels. S&DU orders fell by 31.6% to £49.4m at the half year point, following a numberof significant wins in the comparative period in 2005. The Security businesscontinued to make good progress with a book to bill ratio of 1.3:1 whichincluded further contract wins in IT security managed services, including a£1.6m three year secure hosting contract for Aegate's new drug authenticationsystem, and the second Tarsier sale to Dubai International Airport. Interest inthe Tarsier system solution remains strong and further demonstration trialsystems have been provided at other airports around the globe. Orders in theSpace stream are typically related to larger overall programmes and the timingof these contract decisions by customers has impacted order flow in the half.Headline TD&E orders declined due to the non-recurrence of the £9.4m of LCDpatent royalties in the prior period but were up 19.7% if the LCD royalty ordersare excluded. QinetiQ North America 6 months 6 months 12 months 6 months 6 months 12 months to 30 to 30 to 31 to 30 to 30 to 31 Sept Sept Mar Sept Sept Mar 2006 2005 2006 2006 2005 2006 £m £m £m $m $m $m ------- ------- ------- ------- ------- -------Average USD:GBP exchange rate 1.87 1.80 1.77TurnoverTechnology 53.3 33.3 82.9 99.5 60.0 146.8Systems Engineering &Technical Assistance (SETA) 50.4 53.1 105.3 94.2 96.1 187.5IT Services 62.1 5.1 60.2 116.1 8.9 105.5 ------- ------- ------- ------- ------- ------- 165.8 91.5 248.4 309.8 165.0 439.8 ------- ------- ------- ------- ------- -------Underlying operatingprofit 17.7 10.4 24.5 33.1 18.8 43.4 ------- ------- ------- Underlying operating margin 10.7% 11.4% 9.9% ------- ------- ------- OrdersTechnology 95.1 38.0 73.2 177.8 68.5 129.6Systems Engineering &Technical Assistance (SETA) 69.1 44.3 97.4 129.2 79.9 172.6IT Services 52.8 - 57.3 98.7 - 100.3 ------- ------- ------- ------- ------- ------- 217.0 82.3 227.9 405.7 148.4 402.5 ------- ------- ------- ------- ------- -------Headcount at period end 3,051 2,537 2,640 ------- ------- ------- QinetiQ North America (QNA) turnover increased by 87.8% on a constant currencybasis, reflecting organic growth of 9.2% from FMI and Westar and contributionsfrom acquired businesses, namely Apogen and Planning Systems Inc (PSI) (acquiredSeptember 2005) and Ocean Systems Engineering Corp (acquired May 2006). TheTechnology Stream has grown through the contribution of PSI for a full sixmonths in the half year period compared to one month in the prior period and28.5% growth in Foster Miller (FMI), driven by continued strong demand for Talonrobots, including the first European order from the Royal Netherlands Army.Activity levels in the SETA stream, driven by Westar, saw 9.0% growth in thecore systems engineering business underpinned by the strong contracts with theUS Army, in particular with US Army Aviation for helicopter airworthinessqualification, the helicopter reset programme and database development forcondition based maintenance programmes largely offsetting lower revenues fromthe Air Filtration Systems business, which benefited last year from significantrevenues as the US Army in Iraq equipped their Blackhawk helicopter fleet. TheIT Services stream, comprising Apogen and OSEC, made steady progress with Apogenreporting revenues consistent with those from the second half of last year, withthe ongoing delays experienced in clearing new staff impacting revenue growth inthe period, and with OSEC contributing revenues of $20.2m since its acquisitionin May 2006. Operating profits have grown both organically, in the Technology stream, andfrom acquisitions in both the Technology and IT services streams. The underlyingoperating margin has risen from 9.9% in the year to 31 March 2006 to 10.7% inthe first half. The underlying operating margin of 11.4% in the first half oflast year benefited from the stronger contribution from the high margin filtersbusiness. QNA orders were strong in the first half, with an overall book to bill ratio of1.3:1. In excess of $85m of Talon orders were booked in the first half alongwith generally robust order intake in the technology and SETA streams. ITServices orders were also strong at the end of the half and this has continuedinto October with strong order flow from the DHS. The Group does not have any significant transactional foreign exchange exposurearising from its underlying business. However, the translation of QNA's resultsinto sterling has been adversely impacted by the weakening of the dollar from$1.80:£1 in the prior period to $1.87:£1 in the current period. On a constantcurrency basis reported turnover and operating profit would have been 3.9%higher by some £6.5m and £0.7m respectively. The Group notes the continuedweakening of the US dollar:sterling exchange rate which will continue to impactthe translation of the operating results of QNA. Other Group activities and performance Acquisitions and disposals On 15 May 2006 the Group completed the acquisition of Ocean Systems EngineeringCorp (OSEC) for a cash consideration of £29.0m. OSEC is a leading provider ofresearch, design, development and integration of advanced information technologysystems to key defence agencies. The integration of OSEC into Apogen is welladvanced and OSEC has delivered to expectations since acquisition. Further payments totalling £6.7m of contingent and deferred consideration havebeen made in relation to prior year acquisitions, principally Westar, followingthe satisfaction of post acquisition performance criteria. £1.1m was received from the disposal of a 12 per cent stake in a Groupsubsidiary, Aurix Limited, to a licensing partner. Pensions The Group continues to provide both defined contribution and defined benefitpension arrangements. The principal defined benefit scheme is the QinetiQPension Scheme. At 30 September 2006 the QinetiQ Pension Scheme had gross assets of £732.9m (31March 2006: £716.0m) and gross liabilities of £898.8m (31 March 2006: £884.4m)resulting in a gross deficit of £165.9m (31 March 2006: £168.4m). Afterdeducting the deferred tax asset associated with the scheme the net pensiondeficit at the end of the period stood at £116.4m compared to £118.0m at 31March 2006. The two major drivers of the movement in the gross deficit in the period are a0.1 percentage point increase in 15 year AA bond yields from 4.9% at 31 March2006 to 5.0% at 30 September 2006, reducing the present value of the liabilitiesby approximately £22m, largely offset by the lower than expected return onassets as the equity markets were broadly unchanged between the start and end ofthe period. Tax The underlying effective tax rate for the year is expected to be 22.6% (year to31 March 2006: 22.7%). The effective rate continues to be below the standard UKrate, mainly due to the availability of research and development relief. The UK business is not expected to be in a cash tax paying position in thecurrent or next financial year whereas taxable profits from QNA operations areexpected to result in cash tax payments on these businesses broadly followingthe US statutory rate. In the first half, the Group's cash flow benefited fromthe impact of higher than required payments on account in the US in the prioryear. Cash flow and net debt Net cash flow from operating activities of £27.5m (2005: £48.7m) reflects strongoperational cash generation from QNA in the half offset by cash out flows of£7.8m (2005: £22.8m) from the restructuring programme announced at the end oflast year. Excluding the impact of restructuring costs the operating cashconversion ratio for the period was 61.4% (2005: 148.7%) The prior period cashconversion benefited from the reversal of a £40m build up in short term MODrelated working capital arising in the year to 31 March 2005. Capital expenditure on plant property and equipment totalled £17.8m (2005:£16.7m). Of this amount £9.4m (2005: £8.6m) was in respect of contractuallycommitted amounts recoverable through annual charges under managed servicescontracts (principally the LTPA). Other capex in the period largely related tooffice and computer equipment and minor estates works. Purchases of otherintangible assets of £3.4m (2005: £0.6m) relate primarily to upfront paymentsfor software licences. The Group capitalised £2.2m (2005: £nil) of developmentcosts related to the Tarsier runway debris monitoring system in the period asthe product continues to be developed in response to initial customer feedback. The Group's net debt increased by £22.1m to £255.1m in the six months to 30September 2006 and was principally denominated in US dollars. The US dollar:sterling exchange rate prevailing at the period end was $1.87:£1 (31 March 2006:$1.73:£1). In August 2006 the Group extended its five year, £500m revolving currencyfacility (RCF) by a further year to August 2011. During November 2006 the Grouphas successfully negotiated a private debt placement with US financialinstitutions to refinance $260m of existing debt at favourable fixed interestrates providing the Group with a longer debt maturity profile over 7 and 10years which better reflects the long term nature of the core debt financing usedfor the North American acquisitions. The Group intends to retain its borrowingfacilities under the existing RCF at their current level once the private debtplacement completes in early December. Dividends On 23 August 2006 the Group paid a maiden final ordinary dividend of 2.25p pershare in respect of the year ended 31 March 2006. The Company intends to pay aninterim dividend of 1.20p per ordinary share on 23 February 2007 in respect ofthe year ending 31 March 2007. The record date will be 26 January 2007. TheGroup anticipates that the interim dividend will normally representapproximately one third of the full annual dividend. No interim dividend waspaid in the previous year. GlossaryBacklog - The expected future value of turnover from contractually-committed customer orders (excluding £4.9bn value of remaining 22 years of LTPA contract)Book to bill - Ratio of orders in year to turnover in yearratioDARPA - US Defence Advanced Research Projects AgencyDEC (UWE) - Directorate Equipment Capability (Underwater Effects)DHS - US Department of Homeland SecurityDoD - US Department of DefenseDTR - Defence Training RationalisationLTPA - Long Term Partnership AgreementMOD - UK Ministry of DefenceRDT&E - Research Development Test and EvaluationSETA - Systems Engineering and Technical AssistanceUnderlying - Earnings per share as adjusted for non-recurring and otherearnings per items as set out in note 6 to the interim resultsshareUnderlying - The tax charge for the year excluding the tax impact ofeffective 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 profit, and before additional pension contributionsUnderlying - Earnings before interest, tax (excluding IPO costs, property,operating plant and equipment disposals and amortisation of intangiblesmargin arising on acquisitions) as a percentage of turnoverUnderlying - Earnings before interest, tax (excluding IPO costs, property,operating plant and equipment disposals and amortisation of intangiblesprofit arising on acquisitions)Underlying - Profit before tax excluding IPO costs (including release ofprofit before MoD indemnity), property, plant and equipment disposals, saletax of interest in equity accounted associate, amortisation of intangible assets arising from acquisitions Consolidated Income Statement 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) Notes £m £m £m Group turnover 539.7 474.1 1,053.1Less equity methodaccounted joint venturesand associates (0.5) (0.6) (1.4)-------------------------- ------ -------- -------- --------Turnover 2 539.2 473.5 1,051.7 Employee costs (273.1) (229.1) (492.0)Third partyproject costs (112.2) (91.7) (230.8)Other operating costsexcluding depreciation andamortisation (111.1) (103.4) (217.5)Share of post tax loss ofequity accounted joint ventures and associates (0.4) (0.7) (0.4)Profit on disposal ofinterest in subsidiary 0.7 - -Other income 7.9 7.4 13.5-------------------------- ------ -------- -------- --------EBITDA (Earnings beforeinterest, tax,depreciationand amortisation)before IPO costs 51.0 56.0 124.5 Depreciation of property,plant and equipment (15.4) (18.7) (32.7)Amortisation of purchasedor internally developedintangible assets (0.7) (0.2) (1.1)-------------------------- ------ -------- -------- --------Group operating profit before IPO costs andacquisition amortisation 34.9 37.1 90.7Amortisation of intangibleassets arising fromacquisitions (6.0) (3.5) (12.3)-------------------------- ------ -------- -------- --------Group operating profit before IPO costs 28.9 33.6 78.4 IPO costs - - (8.9)-------------------------- ------ -------- -------- --------Group operating profit 28.9 33.6 69.5 Profit on disposal ofnon-current assets 0.1 13.9 8.9Finance income 3 2.4 3.5 13.1Finance expense 3 (7.7) (8.1) (19.0)-------------------------- ------ -------- -------- --------Profit before tax 23.7 42.9 72.5 Taxation expense 4 (4.3) (7.8) (12.1)-------------------------- ------ -------- -------- --------Profit for the period 19.4 35.1 60.4-------------------------- ------ -------- -------- --------Profit attributable to:Equity shareholdersof the parent company 20.3 35.9 58.1Minority interest (0.9) (0.8) 2.3-------------------------- ------ -------- -------- -------- 19.4 35.1 60.4-------------------------- ------ -------- -------- --------Earnings per shareBasic 6 3.1p 6.3p 10.0pDiluted 6 3.0p 6.1p 9.8pUnderlying 6 3.7p 4.2p 10.2p Consolidated Balance Sheet 30 September 30 September 31 March 2006 2005 2006 (unaudited) Notes £m £m £mNon-current assetsGoodwill 316.5 299.2 315.0Intangible assets 56.1 84.8 56.4Property, plant and equipment 344.2 340.7 340.3Investment property - 5.8 5.8Financial assets 19.5 18.2 22.1Investments 2.0 - 1.3Investments accounted for using the equity method 0.2 - 0.6Deferred tax asset 5.4 33.7 12.4----------------------------- ------ --------- --------- -------- 743.9 782.4 753.9Current assetsInventories 31.0 21.1 25.4Financial assets 3.0 3.0 3.0Trade and other receivables 306.0 288.5 332.6Cash and cash equivalents 17.9 78.5 58.9Investments 4.3 13.2 11.2Non-current assetsclassified as held for sale 7.6 16.7 3.6----------------------------- ------ --------- --------- -------- 369.8 421.0 434.7----------------------------- ------ --------- --------- --------Total assets 1,113.7 1,203.4 1,188.6----------------------------- ------ --------- --------- --------Current liabilitiesTrade and other payables (276.8) (276.9) (302.7)Provisions (5.9) (10.5) (17.3)Financial liabilities (4.1) (58.7) (6.6)----------------------------- ------ --------- --------- -------- (286.8) (346.1) (326.6)Non-current liabilitiesRetirement benefit obligation(gross of deferred tax) 11 (165.9) (206.3) (168.4)Deferred tax liability (0.8) (27.3) (8.2)Provisions (8.0) (13.9) (9.2)Provision for losses inequity accountedinvestments - (0.9) -Financial liabilities (291.4) (373.7) (310.4)Other payables (4.5) (4.8) (2.9)----------------------------- ------ --------- --------- -------- (470.6) (626.9) (499.1)----------------------------- ------ --------- --------- --------Total liabilities (757.4) (973.0) (825.7)----------------------------- ------ --------- --------- --------Net assets 356.3 230.4 362.9----------------------------- ------ --------- --------- --------Capital and reservesOrdinary shares 6.6 1.6 6.5Share premium account 147.6 11.4 147.5Capital redemption reserve 39.9 1.9 39.9Hedging and translationreserve 4.0 2.3 4.9Retained earnings 159.4 216.9 164.7----------------------------- ------ --------- --------- --------Capital and reservesattributable toshareholders of the parentcompany 357.5 234.1 363.5Minority interest (1.2) (3.7) (0.6)----------------------------- ------ --------- --------- -------- 10 356.3 230.4 362.9----------------------------- ------ --------- --------- -------- Consolidated Cash Flow Statement 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) £m £m £m Profit for the period 19.4 35.1 60.4Taxation expense 4.3 7.8 12.1Net finance costs 5.3 4.6 5.9IPO costs - - 8.9Profit on disposal of non-current assets (0.1) (13.9) (8.9)Profit on disposal of interest in subsidiary (0.7) - -Depreciation of property, plant and equipment 15.4 18.7 32.7Amortisation of intangible assets 6.7 3.7 13.4Share of post tax loss of equity accounted joint venturesand associates 0.4 0.7 0.4Cost of equity settled employee share schemes 0.9 - -IAS19 charge in excess of/(lower than) pension contributions 4.6 (2.7) (2.4)Increase in inventories (5.6) (5.6) (9.9)Decrease in receivables 32.0 69.3 42.2Decrease in payables (36.9) (47.1) (29.4)Decrease in provisions (12.6) (19.9) (17.8)--------------------------------------------------------- --------- -------- --------Cashflow from operations 33.1 50.7 107.6Tax (paid)/received (0.3) 1.7 (4.4)Interest received 1.2 1.2 3.4Interest paid (6.5) (4.9) (12.8)Preference share interest paid - - (10.5)--------------------------------------------------------- --------- -------- --------Net cash flow from operating activities 27.5 48.7 83.3--------------------------------------------------------- --------- -------- -------- Capitalised development costs (2.2) - (6.3)Purchase of other intangible assets (3.4) (0.6) (2.2)Purchase of property, plant and equipment (17.8) (16.7) (45.0)Sale of property, plant and equipment 4.0 87.6 111.5Investments in associate undertaking and investments (0.6) (0.3) (1.2)Purchase of subsidiary undertakings (35.7) (196.5) (202.5)Sale of interest in subsidiary undertaking 1.1 - ---------------------------------------------------------- --------- -------- --------Net cash flow from investing activities (54.6) (126.5) (145.7)--------------------------------------------------------- --------- -------- -------- Net (costs)/proceeds from initial public offering (1.4) - 136.2Cash outflow from repayment of loans - (199.4) (75.4)Cash outflow from repayment of loan note (1.3) - (45.9)Cash inflow from loans received 4.8 360.9 198.9Preference share repayment - - (37.5)Receipt of MOD indemnity - - 45.3Equity dividends (14.8) - -Additional pension contributions - (11.0) (106.4)Capital element of finance lease rental payments (2.4) (0.8) (2.2)Capital element of finance lease rental receipts 1.5 1.6 3.0--------------------------------------------------------- --------- -------- --------Net cash flow from financing activities (13.6) 151.3 116.0--------------------------------------------------------- --------- -------- -------- (Decrease)/increase in cash and cash equivalents (40.7) 73.5 53.6Cash and cash equivalents at beginning of period 58.6 5.0 5.0--------------------------------------------------------- --------- -------- --------Cash and cash equivalents at end of period 17.9 78.5 58.6--------------------------------------------------------- --------- -------- -------- Cash and cash equivalents 17.9 78.5 58.9Overdrafts - - (0.3)--------------------------------------------------------- --------- -------- --------Cash and cash equivalents at end of period 17.9 78.5 58.6--------------------------------------------------------- --------- -------- -------- Consolidated statement of recognised income and expense 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) £m £m £m Net (loss)/gain on hedge of net investment in foreign subsidiary (10.4) 0.6 (2.0)(Decrease)/increase in fair value of hedging derivatives (1.4) 0.6 4.9Movement in deferred tax on hedging derivatives - (0.2) (1.5)(Loss)/gain on available for sale assets (6.9) 0.4 (1.6)Actuarial gain/(loss) recognised in the defined benefit pensionschemes 7.1 (89.3) (105.4)Movement on deferred tax asset on pension deficit (0.9) 24.8 8.7--------------------------------------------------------------------- --------- -------- --------Net expense recognised directly in equity (12.5) (63.1) (96.9)Prior period restatement on adoption of IAS 32 & 39 - 1.3 1.3--------------------------------------------------------------------- --------- -------- -------- (12.5) (61.8) (95.6)Profit for the period 19.4 35.1 60.4--------------------------------------------------------------------- --------- -------- --------Total recognised income and expense for the period 6.9 (26.7) (35.2)--------------------------------------------------------------------- --------- -------- -------- Attributable to:Equity shareholders of the parent company 7.8 (25.9) (37.5)Minority interest (0.9) (0.8) 2.3--------------------------------------------------------------------- --------- -------- -------- 6.9 (26.7) (35.2)--------------------------------------------------------------------- --------- -------- -------- Significant accounting policies 1. Basis of preparationThe interim financial statements have been prepared applying accounting policiesconsistent with those followed in the preparation of the Group's annualfinancial statements for the year ended 31 March 2006, except that the followingamendments have been implemented in 2006 with no material effect on either thecurrent or prior periods; IAS 21 The effects of changes in foreign exchange rates, IAS 39 Financial Instruments: Recognition and Measurement and, IFRIC 4 Determining whether an arrangement contains a lease The interim financial statements have been prepared in accordance with theListing Rules of the Financial Services Authority. The interim financialinformation is unaudited but has been reviewed by the auditors and their reviewopinion is included in this interim report. The interim financial information inthis statement does not constitute statutory accounts, as defined in section 240of the Companies Act 1985. The auditors' report on the statutory accounts forthe year to 31 March 2006 and the 6 month period ended 30 September 2005 wereunqualified and did not contain a statement under section 237 of the CompaniesAct 1985. Statutory accounts for the year to 31 March 2006 have been deliveredto the Registrar of Companies. The interim financial statements were approved bythe Board of Directors on 29 November 2006. The preparation of the interimfinancial statements requires management to make assumptions and estimates aboutfuture events which are uncertain, the actual outcome of which may result in amaterially different outcome from that anticipated. 2. Business segments 6 months ended 30 September 2006 (unaudited) Defence & Security & QinetiQ North Consolidated Technology Dual Use America £m £m £m £m Turnover 311.5 61.9 165.8 539.2----------------------------------------------- -------- -------- -------- -------- Other informationEBITDA before share of equity accounted joint ventures and associates 24.1 8.0 19.3 51.4Share of loss of equity accounted joint ventures and associates - (0.4) - (0.4)----------------------------------------------- -------- -------- -------- --------EBITDA 24.1 7.6 19.3 51.0Depreciation of property, plant and equipment - own equipment (6.3) (4.0) (1.6) (11.9)Depreciation of property, plant and equipment -LTPA funded (3.5) - - (3.5)Amortisation of purchased or internally developedintangible assets (0.3) (0.4) - (0.7)----------------------------------------------- -------- -------- -------- --------Group operating profit before acquisitionamortisation 14.0 3.2 17.7 34.9Amortisation of intangible assets arising fromacquisitions (0.7) (0.5) (4.8) (6.0)----------------------------------------------- -------- -------- -------- --------Group operating profit 13.3 2.7 12.9 28.9Profit on disposal of non-current assets 0.1Net finance expense (5.3)----------------------------------------------- -------- -------- -------- --------Profit before tax 23.7Taxation expense (4.3)----------------------------------------------- -------- -------- -------- --------Profit for the period 19.4----------------------------------------------- -------- -------- -------- -------- 2. Business segments (continued) 6 months ended 30 September 2005 Defence & Security & QinetiQ North Consolidated Technology Dual Use America £m £m £m £m Turnover 323.9 58.1 91.5 473.5-------------------------------------------- -------- -------- -------- -------- Other informationEBITDA before share of equity accounted joint ventures and associates 35.5 9.7 11.5 56.7Share of loss of equity accounted joint ventures and associates - (0.7) - (0.7)-------------------------------------------- -------- -------- -------- --------EBITDA 35.5 9.0 11.5 56.0Depreciation of property, plant and equipment - own equipment (8.6) (4.4) (1.1) (14.1)Depreciation of property, plant and equipment - LTPA funded (4.6) - - (4.6)Amortisation of purchased or internallydeveloped intangible assets (0.1) (0.1) - (0.2)-------------------------------------------- -------- -------- -------- --------Group operating profit before acquisitionamortisation 22.2 4.5 10.4 37.1Amortisation of intangible assets arising fromacquisitions (0.9) (0.1) (2.5) (3.5)-------------------------------------------- -------- -------- -------- --------Group operating profit 21.3 4.4 7.9 33.6Profit on disposal of non-current assets 13.9Net finance expense (4.6)-------------------------------------------- -------- -------- -------- --------Profit before tax 42.9Taxation expense (7.8)-------------------------------------------- -------- -------- -------- --------Profit for the period 35.1-------------------------------------------- -------- -------- -------- -------- Year ended 31 March 2006 Defence & Security & QinetiQ North Consolidated Technology Dual Use America £m £m £m £m Turnover 669.6 133.7 248.4 1,051.7-------------------------------------------- -------- -------- -------- -------- Other informationEBITDA before IPO costs and share of equityaccounted joint ventures and associates 79.0 18.8 27.1 124.9Share of loss of equity accounted jointventures and associates - (0.4) - (0.4)-------------------------------------------- -------- -------- -------- --------EBITDA before IPO costs 79.0 18.4 27.1 124.5Depreciation of property, plant and equipment - own equipment (13.2) (8.2) (2.5) (23.9)Depreciation of property, plant and equipment - LTPA funded (8.8) - - (8.8)Amortisation of purchased or internallydeveloped intangible assets (0.5) (0.5) (0.1) (1.1)-------------------------------------------- -------- -------- -------- --------Group operating profit before IPO costs and acquisition amortisation 56.5 9.7 24.5 90.7Amortisation of intangible assets arising fromacquisitions (2.0) (0.7) (9.6) (12.3)-------------------------------------------- -------- -------- -------- --------Group operating profit before IPO costs 54.5 9.0 14.9 78.4IPO costs (8.9)-------------------------------------------- -------- -------- -------- --------Group operating profit 69.5Profit on disposal of non-current assets 8.9Net finance expense (5.9)-------------------------------------------- -------- -------- -------- --------Profit before tax 72.5Taxation expense (12.1)-------------------------------------------- -------- -------- -------- --------Profit for the year 60.4-------------------------------------------- -------- -------- -------- -------- 3. Finance income and expense 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) £m £m £m £m £m £mReceivable on bank deposits 1.3 1.2 3.8Finance lease income 1.1 1.2 2.4Release of discount on MOD indemnity - 1.1 2.2------------------------------------------------ ------ ------ ------ ------ ------ ------Finance income 2.4 3.5 8.4------------------------------------------------ ------ ------ ------ ------ ------ ------ Amortisation of recapitalisation fee (0.1) (1.5) (1.6)Payable on bank loans and overdrafts (6.6) (4.4) (13.3)Finance lease expense (1.0) - (1.0)Other loan interest - (0.1) -Preference share interest - (2.1) (3.1) ------ ------ ------Interest payable (7.6) (6.6) (17.4)------------------------------------------------ ------ ------ ------ ------ ------ ------Finance expense (7.7) (8.1) (19.0)------------------------------------------------ ------ ------ ------ ------ ------ ------------------------------------------------------ ------ ------ ------ ------ ------ ------Net finance costs before IPO related items (5.3) (4.6) (10.6)Release of remaining discount on MOD indemnity - - 4.7------------------------------------------------ ------ ------ ------ ------ ------ ------Net finance expense (5.3) (4.6) (5.9)------------------------------------------------ ------ ------ ------ ------ ------ ------ 4. Taxation expense The tax charge has been based on the expected tax rate for the year on theGroup's profit before tax, acquisition intangible amortisation and profit ondisposal of non current assets. 5. Dividends On 23 August 2006 the Group paid a final dividend of 2.25 pence per ordinaryshare totalling £14.8m in respect of the year ended 31 March 2006. On 29November 2006 the Directors declared an interim dividend of 1.20 pence perordinary share payable on 23 February 2007. No dividends were proposed or paidin the period to 30 September 2005. 6. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the period on an adjusted basis to reflect the sharerestructuring that took place at IPO. For diluted earnings per share theweighted average number of shares in issue is adjusted to assume conversion ofall dilutive potential ordinary shares arising from share options granted.Underlying earnings per share are presented in addition to basic and dilutedearnings per share as the directors consider this gives a more relevantindication of underlying performance and reflect the adjustments for the impactof non-recurring and other items on basic earnings per share. 6 months ended 30 September 2006 (unaudited) Earnings Weighted Per share average number amount pence of shares £m million Basic 20.3 654.5 3.10Effect of dilutive securities -options 12.3-------------------- ------- ---- ------- ----------- ----------Diluted 20.3 666.8 3.04------------------------- ---- ------- ----------- ---------- 6. Earnings per share (continued) Underlying earnings per share Earnings Weighted Per share average number amount pence of shares £m Million Basic 20.3 654.5 3.10Profit on disposal of non-currentassets (0.1)Amortisation of intangible assets arising from acquisitions 6.0Tax impact of items above (2.3)---------------------------- -------- --------- ---------Underlying 23.9 654.5 3.65---------------------------- -------- --------- --------- 6 months ended 30 September 2005 Earnings Weighted Per share average number amount pence of shares £m Million(1) Basic 35.9 573.0 6.27Effect of dilutive securities -options 12.4-------------------- ------- ----- -------- --------- ---------Diluted 35.9 585.4 6.13------------------------- ----- -------- --------- --------- Underlying earnings per share Earnings Weighted Per share average number amount pence of shares £m Million Basic 35.9 573.0 6.27Profit on disposal of non-currentassets and impairment of asset held for sale (13.9)Amortisation of intangible assets arising from acquisitions 3.5Tax impact of items above (1.3)---------------------------- -------- --------- ---------Underlying 24.2 573.0 4.22---------------------------- -------- --------- --------- Year ended 31 March 2006 Earnings £m Weighted Per share average number amount pence of shares million Basic 58.1 582.4 9.98Effect of dilutive securities -options 12.4---------------------------- -------- --------- ---------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 4.2Amortisation of intangible assets arising from acquisitions 12.3Profit on disposal of non-currentassets (8.9)Tax impact of items above (0.7)Brought forward unprovided taxlosses utilised in year (5.4)---------------------------- -------- --------- ---------Underlying 59.6 582.4 10.23---------------------------- -------- --------- --------- (1) The weighted average shares in the 6 months ended 30 September 2005 tablerepresents the shares in issue at the time of the Initial Public Offer on 15February 2006. 7. Business combinations On 4 April 2006 Apogen Technologies, one of QinetiQ's principal US subsidiaries,signed an agreement to acquire, subject to US Government approval, SanDiego-based Ocean Systems Engineering Corp (OSEC). The approvals weresubsequently received and the acquisition completed on 15 May 2006 for a cashconsideration, before acquisition costs, of £28.5m ($53.3m). The provisionalfair value of net assets, including an estimate of the identifiable intangiblefixed assets, was £7.7m ($14.3m) which together with acquisition costs of £0.5m($0.9m) resulted in goodwill of £21.3m ($39.9m). OSEC reported revenues of$48.2m, EBITDA of $4.8m and earnings of $2.7m in the year to 31 December 2005. 8. Analysis of net debt 30 September 30 September Year ended 31 2006 2005 March 2006 (unaudited) £m £m £mDue within one yearBank and cash 17.9 78.5 58.9Bank overdraft - - (0.3)Recapitalisation fee 0.2 0.1 0.1Loan notes (0.2) (7.1) (1.5)Finance lease creditor (4.1) (4.8) (4.9)Finance lease debtor 3.0 3.0 3.0Preference shares - (46.9) ------------------------ ---- ----------- --------- --------- 16.8 22.8 55.3 ----------------------- ---- ----------- --------- ---------Due after one yearBank Loan (273.4) (354.1) (291.4)Recapitalisation fee 0.7 0.6 0.5Finance lease creditor (14.5) (16.8) (15.2)Finance lease debtor 14.5 15.3 15.0Loan notes (3.8) (2.9) (3.8)Derivative financialassets 5.0 2.9 7.1Derivative financialliabilities (0.4) (0.5) (0.5)----------------------- ---- ----------- --------- --------- (271.9) (355.5) (288.3) ----------------------- ---- ----------- --------- --------- ----------------------- ---- ----------- --------- ---------Total net debt (255.1) (332.7) (233.0)----------------------- ---- ----------- --------- --------- 9. Reconciliation of net cash flow to movement in net debt 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) £m £m £m (Decrease)/increase in cashin the period (40.7) 73.5 53.6New loans (4.8) (354.1) (191.3)New loan notes - (6.8) (7.6)Bank loan repayments - 163.1 72.2Loan note repayments 1.3 43.6 45.9Repayments of otherborrowings - (7.3) 3.2Preference Share andassociated interestrepayment - - 48.0Capital element offinance lease payments 2.4 0.8 2.2Capital element offinance lease receipts (1.5) (1.6) (3.0)Addition of deferredfinancing costs 0.4 0.7 0.7------------------------------ -------- -------- ---------Change in net debt resultingfrom cash flows (42.9) (88.1) 23.9 Amortisation of deferred financing costs (0.1) (1.5) (1.6)Foreign exchange movements 22.8 (5.0) (21.5)Preference Share andassociated interestrepayment - (46.9) (48.0)Finance lease payables (0.9) (18.3) (18.2)Finance lease receivables 1.0 1.3 2.4Adoption of IAS 32 & 39 - 1.8 1.8Movement on derivatives (2.0) 0.6 4.8Net debt at the start ofthe period (233.0) (176.6) (176.6)------------------------------ -------- -------- ---------Net debt at the end of theperiod (255.1) (332.7) (233.0)------------------------------ -------- -------- --------- 10. Changes in equity 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) £m £m £m Shareholders' funds at thestart of the period 362.9 294.1 294.1---------------------------- --------- -------- -------- Adoption of IAS 32 & IAS39 (net of deferred tax) - (36.2) (36.2)---------------------------- --------- -------- --------Shareholders' funds at thestart of the period 362.9 257.9 257.9Exchange (loss)/gain (10.4) 1.2 (2.0)Profit for the period 19.4 35.1 60.4Ordinary share dividend (14.8) - -Bonus issue - - (4.1)Shares issued 0.2 - 159.2IPO costs - - (13.6)Purchase of own shares (0.1) - -Share based payments 1.0 - 0.1Net (loss)/gain onavailable for sale financial assets (6.9) 0.4 (1.6)(Decrease)/increase in fairvalue of hedging derivatives (1.4) 0.6 4.9Deferred tax on hedgingderivatives - (0.2) (1.5)Minority interest arising onacquisition and disposal 0.2 (0.1) (0.1)Actuarial gain/(loss) recognised in the definedbenefit pension schemes 7.1 (89.3) (105.4)Deferred tax asset onpension deficit (0.9) 24.8 8.7---------------------------- --------- -------- --------Shareholders' funds at theend of the period 356.3 230.4 362.9---------------------------- --------- -------- -------- In the six months to 30 September 2006 the Group granted to certain employees5.5m options under the Group Share Option Scheme at an exercise price of £1.95. The total number of ordinary shares in issue at 30 September 2006 was 659.1m (31March 2006: 650.6m) 11. 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 the scheme calculated asat the balance sheet date. It is a snapshot view which can be significantlyinfluenced by short-term market factors. The calculation of the surplus ordeficit is, therefore, dependent on factors which are beyond the control of theGroup - principally the value at the balance sheet date of equity shares inwhich the scheme has invested and long term interest rates which are used todiscount future liabilities. The funding of the scheme is based on long termtrends and assumptions relating to market growth, as advised by qualifiedactuaries. There were no outstanding or prepaid contributions at the balance sheet date(September 2005: £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 thescheme's liabilities, which are derived from cash flow projections over longperiods, and thus inherently uncertain, were: 30 September 30 September 31 March 2006 2006 2005 (unaudited) £m £m £mEquities 562.8 438.3 551.1Corporate bonds 86.6 50.5 85.2Government bonds 79.0 49.7 74.8Cash 4.5 11.7 4.9----------------------- -------- -------- ---------Total market value ofassets 732.9 550.2 716.0Present value of schemeliabilities (898.8) (795.7) (884.4)----------------------- -------- -------- ---------Retirement benefitobligation (165.9) (245.5) (168.4)MOD pensionindemnity - 39.2 ------------------------ -------- -------- ---------Net pension liabilitybefore deferred tax (165.9) (206.3) (168.4)Deferred tax asset 49.5 73.6 50.4----------------------- -------- -------- ---------Net pension liability (116.4) (132.7) (118.0)----------------------- -------- -------- --------- 11 Post-retirement benefits (continued) Assumptions The major assumptions (weighted to reflect individual scheme differences) were: 30 September 30 September 31 March 2006 2006 2005 (unaudited) Rate of increase in salaries 4.40% 4.30% 4.40%Rate of increase in pensions in payment 2.90% 2.90% 2.90%Rate of increase in pensions in deferment 2.90% 2.80% 2.90%Discount rate applied to scheme liabilities 5.00% 5.00% 4.90%Inflation assumption 2.90% 2.80% 2.90%Mortality assumption in yearsFuture male pensioners 86 85 86Future female pensioners 89 88 89 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 assumption Indicative effect on the scheme's gross liabilities Discount rate Increase/decrease by 0.1% Decrease/increase by 2.5% Rate of inflation Increase/decrease by 0.1% Increase/decrease by 2.5% Real rate of increase Increase/decrease by 0.1% Increase/decrease by 0.6% in salaries Mortality Increase by 1 year Increase by 4.5% 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) £m £m £mChanges to the fair value of scheme assets:Opening fair value of scheme assets 716.0 454.1 454.1Expected return on assets 24.7 16.4 34.1Actuarial (loss)/gain on scheme assets (19.5) 49.7 85.8Contributions by the employer 19.8 34.4 149.2Contributions by plan participants 2.8 2.2 4.6Net benefits paid out (10.9) (6.6) (11.8)------------------------------- -------- -------- ---------Closing fair value of scheme assets 732.9 550.2 716.0------------------------------- -------- -------- --------- 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) £m £m £mChanges to the present value of thedefined benefit obligation:Opening defined benefit obligation 884.4 617.2 617.2Current service cost 24.3 20.2 40.1Interest cost 21.8 16.9 34.4Contributions by plan participants 2.8 2.2 4.6Actuarial (gain)/loss on scheme liabilities (26.6) 139.0 193.5Net benefits paid out (10.9) (6.6) (11.8)Curtailments 3.0 6.8 6.4------------------------------------- -------- -------- ---------Closing defined benefit obligation 898.8 795.7 884.4------------------------------------- -------- -------- --------- 11 Post-retirement benefits (continued) 6 months ended 6 months ended Year ended 31 30 September 30 September March 2006 2006 2005 (unaudited) £m £m £mPension costs charged to the income statement:Current service cost 24.3 20.2 40.1Interest cost 21.8 16.9 34.4Expected return on plan assets (24.7) (16.4) (34.1)Curtailment cost (1) 3.0 - -------------------------------------- -------- -------- ---------Total expense recognised in the incomestatement (gross of deferred tax) 24.4 20.7 40.4------------------------------------- -------- -------- --------- (1) Curtailment costs for the year to 31 March 2006 were provided for in theyear to 31 March 2005 as part of the Group's restructuring costs. Independent review report to QinetiQ Group plc IntroductionWe have been instructed by the Group to review the financial information for thesix months ended 30 September 2006 which comprise the Income Statement, BalanceSheet, Cash Flow, Statement of Recognised Income and Expenses and the relatednotes. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted bylaw, we do not accept or assume responsibility to anyone other than the companyfor our review work, for this report, or for the conclusions we have reached. Directors' responsibilitiesThe interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performedWe conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the UK. A review consists principally of making enquiries ofmanagement and applying analytical procedures to the financial information andunderlying financial data and, based thereon, assessing whether the accountingpolicies and presentation have been consistently applied unless otherwisedisclosed. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit performed in accordance with International Standards onAuditing (UK and Ireland) and therefore provides a lower level of assurance thanan audit. Accordingly, we do not express an audit opinion on the financialinformation. Review conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 September 2006. KPMG Audit PlcChartered AccountantsLondon30 November 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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