Reproduced for educational purposes only. Fair Use relied upon. QinetiQ Group plc Annual Report and Accounts 2014 Accounts Report and plc Annual Group QinetiQ A STRONGER, MORE FOCUSED GROUP QinetiQ Group plc Annual Report and Accounts 2014 QinetiQ People Who Know How Through their technical expertise, know-how and rigorous independent thinking, our engineers and scientists are uniquely placed to help customers meet challenges that define the modern world. Our prized possession is trust. We inspire confidence by working in partnership with our customers to ensure that they meet their goals, first time, every time. The innovation developed in partnership with Stay up to date You can view this Annual Report and Accounts and all our customers provides QinetiQ with a dynamic other results materials at www.QinetiQ.com. In addition, the QinetiQ Investor Relations iPad App gives you the platform of domain knowledge from which to latest investor and financial media information. The App generate new business offerings. The Group allows you to get the latest share price information and prioritises sectors and markets where it can corporate news, as well as view financial reports. Additional information is also available online on the case become a leading provider of technology studies and QinetiQ employees featured in this report. solutions in order to optimise its portfolio, Front cover: generate sustainable growth in earnings and Name: Samantha Prichard provide fulfilling careers for its people. Role: Aircraft Technician Read more online www.QinetiQ.com Group overview Markets – Defence, aerospace and Capabilities – High-end technical People security, but with a growing position expertise and advice underpinned ^ in select adjacent markets by world-class knowledge, 6,233 research and innovation. Customers – Predominantly Specifically research, innovation, people worldwide government organisations, advice, assurance, test and including defence departments, Geographies – Based in the UK with evaluation, engineering solutions as well as international customers an established US footprint and and training in other targeted sectors growing positions in targeted Divisions^ – The Group operates international markets two divisions: EMEA Services ^ Excluding US Services – sale agreed post year end and Global Products (see note 33) Cautionary statement: All statements other than statements of historical fact included in this Annual Report, including, without limitation, those regarding the financial condition, results, operations and businesses of QinetiQ and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements, which reflect management’s assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of QinetiQ or the markets and economies in which QinetiQ operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Nothing in this Annual Report should be regarded as a profit forecast. This Annual Report is intended to provide information to shareholders and is not designed to be relied upon by any other party. The Company and its Directors accept no liability to any other person other than under English law. Strategic report: overview Directors’ report Financial statements Additional information Financial highlights STRONG FINANCIAL POSITION Revenue Underlying operating profit* Underlying EPS* £1,191.4m £132.7m 16.0p 1,600 1,469.6 200 20 18.9 168.7 1,400 1,327.8 175 159.6 1,191.4 16.0 1,200 150 132.7 15 13.6 1,000 125 800 100 10 600 75 400 50 5 200 25 0 0 0 2012 2013 2014 2012 2013 2014 2012 2013 2014 Net cash/(debt) Total dividend (Loss)/profit after tax £170.5m 4.60p (£12.7m) 200 5 400 170.5 4.60 4 3.80 300 246.3 100 74.0 200 3 2.90 100 0 2 0 (100) (12.7) 1 (100) (122.2) (133.2) (200) 0 (200) 2012 2013 2014 2012 2013 2014 2012 2013 2014 Note: Year references (2014, 2013, and 2012) relate to the year ended 31 March. * Definitions of underlying measures of performance can be found in the glossary on page 150. Strategic report Directors’ report Additional information 149 Five-year record Overview Governance 150 Glossary 02 Chairman’s statement 48 Chairman’s introduction to governance 151 Shareholder information Strategy 50 Corporate Governance Statement 152 Additional information 04 Chief Executive’s strategic review 54 Board of Directors 06 Our business model and strategy Directors’ remuneration report Read information 08 How we create value 69 Annual Statement In the book 10 Understanding the new Group 73 Remuneration Policy 12 Understanding our markets Online 84 Annual Report on Remuneration 14 People Who Know How 18 Relationships Directors’ report 19 Key performance indicators 93 Directors’ report 22 Risks and uncertainties 96 Statement of Directors’ responsibilities Performance 28 EMEA Services Financial statements 32 US Services 97 Independent auditor’s report 33 Global Products 101 Consolidated income statement 36 Corporate responsibility and sustainability review 102 Consolidated statement of comprehensive income 42 Chief Financial Officer’s review 102 Consolidated statement of changes in equity 103 Consolidated balance sheet 104 Consolidated cash flow statement 104 Reconciliation of movement in net cash 105 Notes to the financial statements 146 Company balance sheet 147 Notes to the Company financial statements 1 QinetiQ Group plc Annual Report and Accounts 2014 Chairman’s statement STRENGTH THROUGH CHANGE QinetiQ is a company clearly focused on the future, with skills and technologies that will help shape and secure that future. However, in a year that sees many nations marking the 100th anniversary of the First World War, it is appropriate to recognise the ongoing contribution that science and technology make to our security, and to note that QinetiQ is the custodian of a rich heritage. With this heritage comes distinctive knowledge and unique facilities that are utilised for the benefit of our customers. The results The results for the year were in line with the Board’s expectations. In the year to 31 March 2014, Group revenue was £1,191.4m (2013: £1,327.8m), and underlying operating profit* was £132.7m (2013: £168.7m) due to the impact of US military drawdown on product sales. Full year underlying earnings per share* were 16.0p (2013: 18.9p), in line with the lower underlying operating profit partially offset by the reduced net finance costs and lower underlying effective tax rate*. Underlying operating cash conversion* remained strong at 103% (2013: 104%) with net cash increasing to £170.5m (31 March 2013: £74.0m). Strategy We believe that driving an increase in sustainable earnings represents the best route to delivering shareholder value and I am encouraged that our Organic-Plus strategy has recorded notable milestones this year. During the year the Group initiated a strategic review of US Services, because the division was not delivering its role Key highlights in the portfolio which, as a small player in a large market, was to grow profitably by building market share. The division • Organic-Plus strategy has recorded some notable milestones this year was too small to benefit from significant economies of scale, • Sale of US Services provides route to maximum value from this division but too large to benefit from US Government small-business set-aside initiatives. • The Board intends to return £150m to shareholders by way of a share buyback Following a market testing exercise, the Board concluded that a sale of US Services provided the route to maximum • The full year dividend represents an increase of 21% value and that the price agreed after the year end with • The Board’s policy is that the dividend will be progressive from The SI Organization, Inc. fully recognised its market position this new base and future prospects. Following the disposal the Board considers the continuing • Ensuring effective stewardship of QinetiQ is a priority for the Group to be highly differentiated and well positioned to Board along with succession planning and strategic growth deliver an increase in sustainable earnings. Capital return Given the strength of the balance sheet, I was pleased to be able to announce that we intend to return £150m to shareholders by way of a share buyback. The Board believes that the scale of the return reflects the strong cash generative characteristics of the Group, as well as its confidence in the Organic-Plus strategy, while taking into account the continuing uncertainty in QinetiQ’s end markets, its pension obligations and the strength of its working capital position. We remain committed to maintaining an efficient balance sheet. Dividend The Board proposes a final dividend of 3.20p per share for the year ended 31 March 2014 (2013: 2.70p) making the full year 2 QinetiQ Group plc Annual Report and Accounts 2014 Strategic report: overview Directors’ report Financial statements Additional information dividend 4.60p (2013: 3.80p). Subject to approval at the Outlook Annual General Meeting (AGM) the final dividend will be paid on 5 September 2014 to shareholders on the register Notwithstanding the strong performance in EMEA Services last year, the MOD at 8 August 2014. The full year dividend represents an transformation programme is likely to create some short-term uncertainty in increase of 21% reflecting the Board’s confidence that the UK defence market, and the division’s performance as a whole is expected the Group’s Organic-Plus strategy will deliver value to to remain steady this year. shareholders over the medium term. The Board’s policy is that the dividend will be progressive from this new level At the same time there is a wide range of possible outcomes for the performance which is consistent with the strength of the retained Group.