Becoming the chosen partner QinetiQ Group plc Annual Report and Accounts 2016 QinetiQ is a leading science and engineering company operating primarily in the defence, security and aerospace markets. We work in partnership with our customers to solve real world problems through innovative solutions, delivering operational and competitive advantage. The world around us is changing. We are responding decisively by establishing a vision and strategy for QinetiQ to ensure we continue to meet customer needs. Our vision is: “to be the chosen partner around the world for mission-critical solutions, innovating for our customers’ advantage.” We have reorganised the Group, introducing a new way of working which aligns the organisation with our strategy, and launched a transformation programme to deliver the changes we need to make as a company. The model below sets out our plan to adapt and deliver in a changing world. Further detail can be found on the following pages. Steve Wadey Chief Executive Officer VISION CREATING THE AND CONDITIONS FOR STRATEGY GROWTH page 10 Page 06 WAY OF WORKING page 12 TRANSFORMATION PROGRAMME MARKET OVERVIEW page 14 Page 08 Through their technical expertise, domain STRATEGIC REPORT know-how and innovative thinking, our Overview engineers and scientists are uniquely Key highlights 02 Our business model 03 placed to help customers meet challenges Chairman’s statement 04 that define the modern world. Chief Executive Officer’s statement 06 Market overview 08 We inspire confidence by working in partnership Our vision and strategy 10 with our customers to ensure that they meet Our way of working 12 their goals, first time, every time. Our transformation programme 14 Strategy in action 16 Key performance indicators 22 Markets: defence, security and aerospace, with a growing Corporate responsibility 26 position in select adjacent markets. Customers: predominantly government organisations, Performance including defence departments, as well as international Operating review 34 customers in other targeted sectors. – EMEA Services 34 – Global Products 35 Home markets: UK, US and Australia, with projects Chief Financial Officer’s review 38 delivered in more than 10 other countries. Principal risks and uncertainties 42 Divisions: EMEA Services and Global Products. People: GOVERNANCE Corporate governance statement 50 – Leadership 54 worldwide 6,207 – Board of Directors 58 – Effectiveness 60 – Accountability 64 – Relations with shareholders 78 Directors’ remuneration report 80 Directors’ report 96 Independent auditor’s report 100 FINANCIAL STATEMENTS Consolidated income statement 103 Consolidated comprehensive income statement 104 Consolidated statement of changes in equity 104 Consolidated balance sheet 105 Consolidated cash flow statement 106 Reconciliation of movement in net cash 106 Notes to the financial statements 107 Company balance sheet 145 Company statement of changes in equity 146 Notes to the company financial statements 146 Five-year record 148 ADDITIONAL INFORMATION Glossary 149 Shareholder information 150 Additional information 152 QinetiQ app for tablets and smartphones ar2016.QinetiQ.com You can view this Annual Report and Accounts, and all other results materials at www.QinetiQ.com. In addition, the QinetiQ investor relations app for tablets and smartphones gives you the latest investor and financial media information. The app allows you to get the latest share price information and corporate news, as well as view our financial reports. QinetiQ Group plc Annual Report and Accounts 2016 01 Key highlights A solid operational performance in challenging markets Financial highlights Operational highlights Revenue Underlying operating profit* Aircraft engineering services contract £755.7m £108.9m delivers more 2015: £763.8m 2015: £111.3m for less 782.6 113.7 763.8 755.7 111.3 108.9 Awarded five-year renewal which represents a new way of doing business with the Ministry of Defence (MOD) where QinetiQ is measured and paid on results and outputs, not inputs. Contract value 2014 2015 2016 2014 2015 2016 £153m Underlying EPS* Net cash The first ever UK launch, and subsequent 16.3p £274.5m engagement 2015: 15.2p 2015: £195.5m of a ballistic missile in space 16.3 274.5 15.2 Coordinated three weeks of allied at-sea 13.8 195.5 operations and live weapons firing, at 170.5 Europe’s largest range: the QinetiQ-operated Hebrides range. 2014 2015 2016 2014 2015 2016 Multiple world firsts Dividend per share Profit/(loss) after tax Supporting delivery of launch systems and arresting gear 5.7p £106.1m on the US Navy’s 2015: 5.4p 2015: £104.7m next-generation aircraft carrier 5.7 104.7 106.1 5.4 Won a multi-year production contract to update, 4.6 procure, assemble and test launch and arresting control hardware and software for the CVN-79 John F. Kennedy. (12.7) Contract value 2014 2015 2016 2014 2015 2016 $16m Year end references (2016, 2015, 2014) relate to the years ending 31 March. * Definitions of specific adjusting items and underlying measures of performance can be found in the glossary on page 149. 02 QinetiQ Group plc Annual Report and Accounts 2016 Strategic report Governance Financial statements Additional information Our business model How we create customer value QinetiQ is a company of scientists and Our principal revenue streams are advice, Our business model is robust and sustainable engineers essential to sovereign capability. services (particularly test and evaluation) because our knowledge base is constantly The technical expertise and domain and technology-based products. refreshed as we learn from experience, know-how of our people are our principal understand emerging customer needs and sources of competitive advantage and are We work across the equipment lifecycle invest in our future. This enables us to both well matched to the emerging themes in from initial concept through to final sustain existing capabilities and create new our markets. By leveraging our distinctive disposal. At the start of the lifecycle, our ones to ensure we respond to customer facilities and integrating our core focus is on research and experimentation. needs and stay ahead of the competition. capabilities, we play a critical role in We then test and evaluate next generation helping customers meet current and equipment to help customers to control As a business whose reputation and future challenges. risks and determine the best options. achievements are centred on our people, Once a new capability has been adopted, QinetiQ has relatively low capital and QinetiQ’s customer relationships and we train users and facilitate the rehearsal resource requirements. Our future success know-how about customer domains of how equipment will be used most is primarily dependent on our ability have been developed over many years effectively in an operational environment. to recruit, develop, engage and retain of working in partnership. We also work exceptional employees, including collaboratively with prime contractors and By providing mission-critical solutions, subject matter experts and specialists a broad-based supply chain that includes we deliver operational and competitive of international standing. small and medium-sized companies, advantage to our customers, ensuring as well as academic institutions. they meet their goals faster, more cost effectively and with greater confidence. Generation Next Current LIFECYCLE After Next Generation Generation Experimentation Test Training & Research & Evaluation & Rehearsal DELIVERING OUR ROLE Advice CUSTOMER ADVANTAGE Services Products Understanding Science & Engineering Capability OUR CORE Future Needs QinetiQ Group plc Annual Report and Accounts 2016 03 Chairman’s statement The next chapter for QinetiQ Key highlights FY16* Performance • Solid operating performance in challenging markets Board appointments • Steve Wadey appointed as CEO • Lynn Brubaker appointed as Non-executive Director Defining QinetiQ’s future direction • Set out a vision and strategy • Capital allocation policy published Shareholder returns • 6% increase in full year dividend • £150m capital return completed • £50m buyback announced in November 2015, £47m remains to be completed * FY = Financial year to 31 March. Results FY17 outlook Employees and leadership In a year that marked the tenth anniversary The UK Government’s Strategic Defence and On 27 April 2015, the Board was delighted of QinetiQ’s listing on the London Stock Security Review has brought clarity to key to appoint Steve Wadey as CEO. We were Exchange, it was appropriate that we defence programmes but will require further looking for an outstanding leader with a track embarked on the next chapter as a publicly- savings to be delivered from ongoing defence record of driving growth, a deep understanding listed company. During the year, we transformation. This will provide future of the defence sector and the technological appointed Steve Wadey as our new Chief opportunities for EMEA Services to build know-how to lead our people; Steve met all Executive Officer (CEO), set out a vision and on its strong record of delivering more for these criteria. strategy for QinetiQ and delivered a solid less, whilst recognising that in the short term operating performance in challenging markets. there will continue to be uncertainty and the Steve was attracted to the role by the potential for interruptions to order flow. expertise of our employees who are held In the year to 31 March 2016, orders grew Although revenue under contract for FY17 in high regard across industry. In an 8% to £659.8m (2015: £613.6m), Group is slightly below that of a year ago, the environment where we are witnessing revenue was £755.7m (2015: £763.8m), and division’s performance as a whole is increasing security threats, many of which underlying operating profit* was £108.9m expected to remain steady this year. can only be met through innovative thinking, (2015: £111.3m). Full year underlying there is strong demand for this expertise; we earnings per share* were 16.3p (2015: 15.2p). The Group’s Global Products division has would like to thank employees across QinetiQ Total Group profit after tax was £106.1m shorter order cycles than EMEA Services. for their hard work and dedication this year.