Qinetiq Regulatory News (QQ.)

Preliminary Results

19 May 2022

Focused on sustainable global growth

Unaudited Results for the year ended 31 March 2022

Steve Wadey, Group Chief Executive Officer said:

"Throughout the last year our people have continued to partner with our customers to deliver high-value solutions critical to current and future national defence and security challenges. Following a challenging first half we delivered a strong second half and achieved good underlying operational performance, ahead of market expectations. Recent world events have reinforced the long-term needs of our customers, including capabilities utilising differentiated technology, test and training solutions which are directly aligned with our strategy. With a clear focus on disciplined execution of our strategy, increasing demand for our solutions and good revenue coverage, we have positive momentum and are on-track to deliver sustainable global growth."

* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary

1 Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs (see note 1 to the financial statements).

2 To be consistent with revenue reporting, prior year orders has been restated to exclude £1.7m of contribution from Joint Ventures 

3 New cash conversion definition: Operating cash flow pre-capex divided by EBITDA

4 Excluding LTPA amendments, booked in FY16 and FY20

Preliminary results presentation:

Management will host a presentation at 09:30 hours BST on 19 May 2022 at Numis' auditorium, 45 Gresham Street, London EC2V 7BF. The presentation will also be shared as a live webcast. To register to join this event, please see details on our website here:

https://www.qinetiq.com/en/investors/results-reports-and-presentations/full-year-results-webcast-2022

You are warmly invited to join, either in person or virtually.

About QinetiQ:

QinetiQ (QQ.L) is a leading science and engineering company operating primarily in the defence and security markets. We work in partnership with our customers to solve real world problems through innovative solutions delivering operational and competitive advantage. Visit our website www.QinetiQ.com. Follow us on LinkedIn and Twitter @QinetiQ. Visit our blog www.QinetiQ-blogs.com.

For further information please contact:

Basis of preparation:

This preliminary announcement does not constitute the Group's full financial statements for the year ended 31 March 2022. The Group's full financial statements will be approved by the Board of Directors and reported on by the auditors no later than 23 May 2022. Accordingly, the financial information for FY22 is presented unaudited in the preliminary announcement.

Throughout this document, certain measures are used to describe the Group's financial performance which are not recognised under IFRS or other generally accepted accounting principles (GAAP). The Group's Directors and management assess financial performance based on underlying measures of performance, which are adjusted to exclude certain 'specific adjusting items'. In the judgment of the Directors, the use of alternative performance measures (APMs) such as underlying operating profit and underlying earnings per share are more representative of ongoing trading, facilitate meaningful year-to-year comparison and, therefore, allow the reader to obtain a fuller understanding of the financial information. The adjusted measures used by QinetiQ may differ from adjusted measures used by other companies. Details of QinetiQ's APMs are set out in the glossary to the document.

Year references (FY22, FY21, FY20, 2022, 2021, 2020) refer to the year ended 31 March.

Disclaimer

This document contains certain forward-looking statements relating to the business, strategy, financial performance and results of the Company and/or the industry in which it operates. Actual results, levels of activity, performance, achievements and events are most likely to vary materially from those implied by the forward-looking statements. The forward-looking statements concern future circumstances and results and other statements that are not historical facts, sometimes identified by the words 'believes',' expects', 'predicts', 'intends', 'projects', 'plans', 'estimates', 'aims', 'foresees', 'anticipates', 'targets', 'goals', 'due', 'could', 'may', 'should', 'potential', 'likely' and similar expressions, although these words are not the exclusive means of doing so. These forward-looking statements include, without limitation, statements regarding the Company's future financial position, income growth, impairment charges, business strategy, projected levels of growth in the relevant markets, projected costs, estimates of capital expenditures, and plans and objectives for future operations. Forward-looking statements contained in this announcement regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Nothing in this document should be regarded as a profit forecast.

The forward-looking statements, including assumptions, opinions and views of the Company or cited from third party sources, contained in this announcement are solely opinions and forecasts which are uncertain and subject to risks. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Actual results may differ materially from those expressed or implied by these forward-looking statements. A number of factors could cause actual events to differ significantly and these are set out in the principal risks and uncertainties section of this document. Most of these factors are difficult to predict accurately and are generally beyond the control of the Company. Any forward-looking statements made by, or on behalf of, the Company speak only as of the date they are made. Save as required by law, the Company will not publicly release the results of any revisions to any forward-looking statements in this document that may occur due to any change in the Directors' expectations or to reflect events or circumstances after the date of this document.

Chief Executive Officer's Review

Following a challenging first half, we delivered a strong second half and achieved good underlying operational performance at Group level. With a clear focus on disciplined execution of our strategy we secured our largest order intake at £1.23bn, 9% growth on an organic basis, demonstrating high demand for our distinctive offerings. We maintained good programme execution and delivery across all our major contracts to deliver 5% revenue growth on an organic basis. Underlying operating profit was £137.4m, equivalent to 11.4% margin before a £14.5m complex project write-down consistent with our short-term guidance. We continue to deliver very strong cash performance with 114% underlying cash conversion, up from 98% last year, using our new cash conversion definition.

US revenue performance recovery was slower than expected, with the second half in line with the first half, largely due to the US defence budget being constrained by the extended Continuing Resolution. However, we secured c.20% year-on-year growth in order intake which, coupled with our new leadership team, provides a strong foundation for the delivery of our US growth strategy. The complex project contract is now closed and the financial impact remains fully contained in our first half results.

Delivering our global ambition

Recent world events have reinforced the long-term needs of our customers, requiring capabilities utilising differentiated technology, test and training solutions which are directly aligned with our strategy. This defence and security context is heightening the market needs for our six distinctive offerings. Our addressable market is worth more than £20bn per year and we see increased customer demand for our high value solutions in their priority growth segments. The major focus for growth is in our three home countries, the UK, US and Australia, where we are pursuing similar opportunities to support their shared defence and security mission. The formation of the AUKUS alliance, between these nations, reinforces our multi-domestic strategy and makes us increasingly relevant. We are well positioned to deliver strong growth in the UK and more than double our Australian and US businesses in the next five years.

Building on our track record of growing the company by 75% over the last six years, we have increased the scale of our ambition. We will grow by another 75% over the next five years to more than £2.3bn revenue. Within our latest strategic business plan, we see 30% of our future growth coming from the UK and more than 50% coming from Australia and the US. This plan is supported by our strong balance sheet and continued investment in our global strategy, through both organic opportunities and strategic acquisitions.

Our strategy is increasingly relevant and provides focus for our business decisions and our investment choices. We are a company with a clear purpose, vision and customer value proposition called "mission-led innovation", co-creating cost-effective solutions to meet our customers' needs at pace, as reinforced by the current conflict in Ukraine. Our strategy is a multi-domestic strategy, with a clear focus on where we operate, what we do and how we deliver value for our customers:

Our first priority is to maintain focus on driving organic growth in each country. We remain disciplined in delivering our commitments to our customers and shareholders by continuously improving our bidding, programme execution and risk management capability.

Looking forward, we have a clear strategic business plan focused on creating a global leader in mission-led innovation. With a strong balance sheet, we continue to invest in our multi-domestic growth strategy to realise our ambition. We have clarity around our six distinctive offerings and focus on our home countries, to provide a guide for our future investment decisions. Growth will be driven by investing in these distinctive offerings and leveraging across countries.

Environmental, Social and Governance (ESG)

We continue to take our ESG responsibility seriously, ensuring our growth strategy is sustainable. We have been seen as a leader in the defence sector in ESG by many for years (validated by our strong MSCI and Sustainalytics ratings).

Our Environmental agenda is significant, including responsibility for over 50 internationally recognised conservation sites. In March we launched our Net-Zero plan with validation by Science Based Targets initiative (SBTi) currently underway, to achieve Net-Zero emissions by 2050 or sooner, with a reduction of 33% by 2030. We are already well on the way towards this target with a 32% reduction in our scope 1 & 2 emissions over the last 3 years. We are also working closely with our customers to co-create sustainable solutions, such as modernisation of the operations on St Kilda, a World-Heritage site, in the middle of our world-class test range.

From a Social perspective, we are a people business and we want our people to feel inspired and have the opportunity to realise their full potential. This year we are enhancing our focus on both physical safety and wellbeing. With rising costs of living and growing competition for talent, we have committed £10m additional investment into our reward offering with a particular emphasis on our lower paid staff. We continue to embrace many forms of difference to make us stronger, including gender balance with a global target of 30% women by 2030. I have recently augmented the QinetiQ Leadership Team for the next phase of growth. The team is diverse in many ways, with the necessary skills and experience in our key markets and has seen an increase of women representation from 25% to 36% in FY23.

Effective Governance is critical to our sustainability. We are focused on strengthening our own skills and processes, as well as those of our supply chain. We are focused on strengthening our own skills and processes and ensuring our supply chain is both vibrant and meets the same standards of safety, security, sustainability and governance that we do. In May 2022 we launched our sustainable procurement guide to help our suppliers achieve this objective. Driven by our company purpose, we take the ethics of defence seriously and carefully consider who we do business with and the projects we undertake, to protect lives and secure the vital interests of our customers.

This year we are taking our focus on ESG to a new level, with 17.5% of all leadership incentives focused on delivering our commitments.

Strategic achievements

We have continued to make good strategic progress implementing our strategy to become an integrated global defence and security company. A few selected examples are:

Outlook - FY23

We enter FY23 with confidence, a healthy order-book, £900m revenue under contract and positive momentum. We remain confident to deliver in line with our current expectations for FY23, with mid-single digit organic revenue growth and operating profit margin towards the middle of our 11-12% expected range, lower than our medium to long-term guidance driven by inflationary pressures and our continued investment to support future growth. Capital expenditure is expected to be at the upper end of the £90m to £120m per annum range, consistent with our previous guidance and our strategy to invest to grow.

Outlook - Longer term

Our ambition is to deliver c.75% growth in the next five years, as we have in the last six years, with revenue of more than £2.3bn in FY27 and beyond. This means we are targeting mid-single digit percentage compound organic revenue growth over the next five years, with strategic acquisitions further enhancing this growth. We are targeting an operating profit margin of 12-13% in the mid to long-term. ROCE is forecast to remain strong at the upper end of the 15-20% range.

Trading Environment

Geopolitical tensions have risen to new heights following the Russian invasion of Ukraine. This has created more uncertainty around the world than has existed at any time since 9/11 and has risked moving Europe and NATO closer to a direct conflict with Russia. Alongside this, there has been a proliferation of grey-zone warfare, a need for advanced capabilities, informational advantage and better interoperability, as well as a focus on the resilience of domestic supply chains.

As a predominantly service-based business we are uniquely placed to operate across the breadth of platforms, systems and lifecycles unlike a more traditional vertical platform manufacturer. We can experiment, innovate and develop new capabilities, drawing on a broad range of existing, emerging and disruptive technologies across all our geographies.

UK

The 2021 Integrated Review outlined the UK's current defence and security policy. This, alongside the Defence Command Paper and the Defence and Security Industrial Strategy, has seen the allocation of an additional £24.1bn in funding over a four-year period from November 2020 to 2024. The Integrated Review placed science and technology at the heart of the UK's defence policy with innovation cited as critical to UK success. The UK is investing over £6.6bn in research and development to develop next generation and emerging technologies in areas such as cyber, space, directed energy weapons, and advanced high-speed missiles. The Russian invasion of Ukraine has further cemented wider support for defence investment.

As the UK seeks to develop and deploy next generation capabilities faster than their adversaries, we are well positioned to support them in applying mission-led innovation to achieve this. Our unrivalled expertise in Research & Development and Test & Evaluation (RDT&E) combined with our recent investment to modernise UK test ranges will help our customers generate and assure new and emerging technologies at pace. Delivering value for money remains critical to our customers and we will continue to utilise innovative delivery models to support our customers in achieving this.

US

The US maintains the largest defence budget worldwide, with the FY22 Department of Defense budget of $743bn, more than the next ten largest countries combined. The FY23 budget request is $30bn higher at $773bn. The budget reflects the National Defense Strategy and the focus of that strategy on the pacing challenge of China. As well as supporting the preparation for future challenges, such as climate change, it preserves investment for readiness and deterrence against current threats including the acute threat of an aggressive Russia and the constantly emerging threats posed by North Korea, Iran, and violent extremist organisations. The budget request includes more than $130.1bn for RDT&E (an all-time high and a 9.5% increase on FY22) to address the need to sharpen readiness in advanced technology, cyber, space and artificial intelligence.

In the US, we are a market leader in robotics, autonomy and advanced sensing solutions, an area of budget growth, delivering value to our customers through the rapid development and deployment of disruptive solutions. We have ambitious growth plans in the US. This is underpinned by a relevant offering with a growing need to provide actionable intelligence into war fighters' hands quicker and a push to develop and integrate multiple autonomous and semi-autonomous systems as the US seeks to invest in next generation technologies to maintain a technological advantage.

Australia

Tensions in the Indo-Pacific region remain heightened from competition between global powers. In light of this, Australia published its Defence Strategic Update and Force Structure Plan in July 2020, placing increased emphasis on force readiness and capability modernisation. In September 2021, a trilateral security partnership was announced between Australia, United Kingdom and United States (AUKUS) to further enhance security in the region.

The total defence budget is estimated to increase by 3.1% in real terms from 2021-22 to 2022-23, and by 7.1% in real terms over the period 2022-23 to 2025-26. This reflects funding required to continue delivery of the 2016 Defence White Paper and new or adjusted capability investments outlined in the 2020 Force Structure Plan, as well as increased investment in the capabilities of the Australian Signals Directorate through the 2022-23 Budget measure REDSPICE (Resilience, Effects, Defence, Space, Intelligence, Cyber, and Enablers). During 2022-23, AUKUS partners will progress trilaterally agreed programs of work and priority initiatives under: cyber capabilities, artificial intelligence, quantum technologies, and additional undersea capabilities. We see many opportunities to support the Australian forces in modernising sovereign defence capabilities, leveraging expertise from across QinetiQ.

Broader international markets

The strategic landscape has undergone a seismic shift following Russia's invasion of Ukraine in February 2022. This has provoked NATO to increase its defence capabilities and readiness to respond, adding to the pressure for the NATO member countries to increase their defence spending of at least 2% GDP. Following the announcement of Germany to increase defence spending by EUR100bn over the next 5 years, many other NATO and European countries are also increasing their defence and security investment.

Whilst priority and investment focus will be attached to the prosecution of our three home country strategies (UK, US and Australia), we will continue to conduct business in the support of allies in 5-Eyes, NATO and Continental Europe.Chief Financial Officer's Review

Overview of full year results

We have made good progress with a strong second half, partially offsetting the challenging first half. We delivered strong orders and revenue, growing organically by 9% and 5% respectively. Prior to the complex project write-down, we delivered good underlying trading performance with operating profit margins within our short-term target range at 11.4%. Strong cash performance has continued in FY22 and we closed the year with net cash of £225.1m, which continues to provide support for investment opportunities. We have changed our cash conversion definition to reflect our pre-capex cash flows as a proportion of EBITDA - using this new definition we achieved underlying cash conversion of 114% (FY21: 98%). We enter FY22 in a strong position, with a large order backlog and a robust balance sheet.

Orders in the year totalled £1,226.6m (FY21: £1,149.4m), a 7% increase, 9% on an organic basis. This included £320m of Engineering Delivery Partner (EDP) framework orders, £115m under the WSRF contract and in excess of £160m from Defence Digital and Defence Intelligence in EMEA Services and in the United States a $62m order for the full rate production contract on the SPUR robots in Global Products.

We are also seeing positive trends in our order-book progression:

At the beginning of FY23 approximately £900m of the Group's FY23 revenue was under contract, compared to £800m (of the FY22 revenue) at the same point last year. This notable increase reflects the strong performance on our key framework contracts in EMEA services and the ongoing recovery in Global Products.

Revenue increased 3% to £1,320.4m (FY21: £1,278.2m) up 5% on an organic basis, with a 13% organic increase in EMEA Services primarily due to ongoing EDP growth, new work under the WSRF contract and work delivered under the Major Service Provider (MSP) contract in Australia. Global Products revenue was down 16% organically due to the revenue performance recovery in the US being slower than expected, with the second half in line with the first half, largely due to the US defence budget being constrained by the extended Continuing Resolution.

As explained in our Interim Results, in the first half we reported a write-down on a large complex project due to technical issues and supplier delay on system development for a service contract. The write-down was due to a unique combination of emergent risks across system maturity, supplier capability and contract delivery conditions. Our first half results included a prudent judgement of the revenue and additional cost impact to resolve the project. The project has now been fully closed and the financial impact remains consistent with and contained in our first half results.

The below table demonstrates our full year underlying results before and after the effect of the complex project write-down:

Underlying operating profit of £137.4m (FY21: £151.8m) was down 9%. Excluding the impact of the write-down underlying operating profit was flat at £151.9m, at 11.4% margin, consistent with our short-term target range of 11-12%. On an organic basis (after adjusting for the impact of acquisitions, disposals and the effect of foreign exchange) underlying operating profit was down 12%. Operating profit in Global Products decreased by £31.4m primarily due to the write-down and US reduced revenue. This was offset by EMEA Services which saw a 14% increase in profit following a similar increase in revenue in this area of the business. 

Statutory operating profit, including the impact of specific adjusting items, as set out below, was £117.5m (FY21: £108.7m).

Underlying profit before tax decreased 9% to £136.0m (FY21: £149.9m) in line with the decrease in underlying operating profit, with underlying net finance expense at £1.4m (FY21: £1.9m).

Specific adjusting items

Specific adjusting items (sometimes known as 'middle column'), at the operating profit level amounted to a loss of £19.9m (FY21 restated: loss of £43.1m). This included £10.7m amortisation of acquired intangibles (FY21: £10.9m); £3.7m associated with unsuccessful acquisition activity (FY21: £1.0m acquisition costs); a £2.4m past service cost in respect of the defined benefit pension scheme and a £1.9m charge in respect of a change in accounting policy in respect of software implementation costs. The latter arises from a decision by the International Financial Reporting Interpretations Committee (IFRIC) on how companies should be interpreting accounting standards when assessing how to account for configuration and customisation costs in cloud computing arrangements. Many companies, including QinetiQ, are now having to expense, rather than capitalise, the costs of implementing new software tools procured through 'Software as a Service' arrangements.

Below operating profit, specific adjusting items included income of £4.5m (FY21: £7.1m) in respect of the defined benefit pension net surplus and a tax expense of £11.8m (FY21 restated: £3.1m income), discussed in more detail below. The prior year also included a gain on sale of businesses and investments of £28.7m and a £25.4m goodwill impairment in relation to the QinetiQ Germany business.

Further analysis is set out in note 3.

Net finance costs

Net finance income was £3.1m (FY21: £5.2m). The underlying net finance expense was £1.4m (FY21: £1.9m) with additional income of £4.5m (FY21: £7.1m) in respect of the defined benefit pension net surplus reported within specific adjusting items. The pension net finance income is calculated as a percentage of the opening net asset. In FY22 the opening net asset (£214.3m) was substantially smaller than the net asset at the start of FY21 (£309.7m) generating a reduction in the level of net finance income. Similarly, the increase in the net surplus within FY22 (closing at £362.2m) will lead to an increase in the pension net finance income in FY23.

Tax

The total tax charge was £29.7m (FY21 restated: £20.7m), with specific adjusting items driving the increase. The underlying tax charge was £17.9m (FY21: £23.8m), on lower underlying profit before tax with an underlying effective tax rate of 13.2% for the year ending 31 March 2022 (FY21: 15.9%). The underlying effective tax rate continues to be below the UK statutory rate, primarily as a result of the benefit of research and development expenditure credits ('RDEC') in the UK which are accounted for under IAS 12 within the tax line. An adjusted underlying effective tax rate before the impact of RDEC would be 17.3% (FY21: 19.4%). The impact of RDEC is shown net of £9.5m (FY21: £10.6m) appropriated by the MOD. Within other creditors there are provisions for payments of MOD appropriations awaiting the resolution of an SSRO decision with regard to RDEC which may give rise to a reversal of the creditor and to an increased benefit from RDEC in the income statement in the current and future periods. The effective tax rate is expected to remain below the UK statutory rate in the medium term, subject to any tax legislation changes, the geographic mix of profits, the recognition of deferred tax assets and while the benefit of net RDEC retained by the Group remains in the tax line.

A £15.9m charge in respect of the impact on UK deferred tax balances due to the UK corporation tax rate change from 19% to 25% has been classified as a specific adjusting item. Together with a £4.1m income (FY21 restated: income of £3.1m) in respect of the pre-tax specific adjusting items (see note 3), the total specific adjusting items tax expense was £11.8m (FY21 restated: income of £3.1m).  

At 31 March 2022 the Group had unused tax losses and US carried forward interest expense of £128.1m (FY21: £73.2m) which are available for offset against future taxable profits. Deferred tax assets are recognised on the balance sheet of £15.5m in respect of £59.7m of US net operating losses, £4.5m in respect of £19.0m of Canadian net operating losses and £1.8m in respect of £5.5m of German trade losses.

Cash Performance

Underlying net cash flow from operations was £215.3m (FY21: £199.0m). Listening to stakeholder feedback we have changed our cash conversion definition to reflect our pre-capital expenditure cash flows as a proportion of EBITDA in order to demonstrate how we convert our profit (excluding interest, tax, depreciation and amortisation) into cash flow - under this new definition we achieved underlying cash conversion of 114%, an increase from 98% last year applying the new definition; for reference using our prior year definition we delivered cash conversion (pre-capex cash flow vs operating profit) of 157% (FY21: 131%). This cash flow included a £21.5m working capital inflow driven by the timing of contract receivables and payables.

Capital expenditure increased to £84.3m (FY21 restated: £75.9m), driven by ongoing LTPA contract investment and digital transformation. After paying tax and net interest of £21.0m the Group generated free cash flow of £110.0m (FY21: £106.7m). Looking forward, given the nature of our business model, we expect to continue to fund our capex requirements from operational cash flow.

As at 31 March 2022 the Group had £225.1m net cash (FY21: £164.1m). The increase in net cash was primarily due to the £110.0m free cash flow, offset by dividend payments of £40.2m (FY21: £37.7m).

We retain a strong balance sheet to support investment in our long-term growth strategy and maintain a rigorous approach to the deployment of our capital, scrutinising organic and inorganic opportunities in the same manner to ensure returns to our shareholders are appropriate for the risks taken.  

Our priorities for capital allocation, following this rigorous methodology, are:

The Group is not subject to any externally imposed capital requirements.

Through FY22 we have demonstrated our capital allocation policy in action: excellent cash conversion and balance sheet strength retained; £84m capital investment in year; M&A targets pursued; and a progressive dividend payment confirmed. Whilst we have had a material cash balance for a few years and with good operational and strategic rigour this may continue to increase in the short-term, we are comfortable with this as it gives us the flexibility and ability to prosecute our strategy.

Committed facilities

The Group has a £275m bank revolving credit facility with an additional 'accordion' facility to increase the limit up to £400m. The facility, of which £65m will mature on 27 September 2024 and £210m will mature on 27 September 2025, was undrawn at 31 March 2022 and provides the Group with significant scope to execute its strategic growth plans.

Return on Capital Employed (ROCE)

In order to help understand the overall return profile of the Group, last year we reported our Return on Capital Employed, using the calculation of: Underlying EBITA / (average capital employed less net pension asset), where average capital employed is defined as shareholders equity plus net debt (or minus net cash).

For FY22 Group ROCE was 26% (FY21: 28%). Before the impact of the complex project write-down FY22 ROCE is 28%, in line with the prior year. As we continue to invest in our business to support sustainable long term growth our ROCE is forecast to remain attractive, at the upper end of the 15-20% range.

Earnings per share

Underlying basic earnings per share decreased by 7% to 20.6p (FY21: 22.1p) driven by the lower underlying profit after tax. Basic earnings per share for the total Group (including specific adjusting items) decreased 26% to 15.7p (FY21 restated: 21.4p).

The average number of shares in issue during the year, as used in the basic earnings per share calculations, was 573.2m (FY21: 569.7m) and there were 573.8m shares in issue at 31 March 2022 (all net of Treasury shares).

Dividend

The Board proposes a final FY22 dividend per share of 5.0p (FY21: 4.7p) making the full year dividend 7.3p (FY21: 6.9p). The full year dividend represents an increase of 6% in line with the Group's progressive dividend policy.

Subject to approval at the Annual General Meeting, the final FY22 dividend will be paid on 25 August 2022 to shareholders on the register at 29 July 2022.

Pensions

The net pension asset under IAS 19, before adjusting for deferred tax, was £362.2m (31 March 2021: £214.3m). The key driver for the increase in the net pension asset since March 2021 was gains due to changes in financial assumptions (primarily in respect of the discount rate), which decrease the present value of scheme liabilities, partially offset by a small decrease in value of scheme assets.

The key assumptions used in the IAS 19 valuation of the scheme are set out in note 15.

Foreign exchange

The Group's income and expenditure is largely settled in the functional currency of the relevant Group entity, mainly Sterling, US Dollar or Australian Dollar. The Group has a policy to hedge all material transaction exposure at the point of commitment to the underlying transaction. Uncommitted future transactions are not routinely hedged. The Group does not hedge its exposure to translation of the income statement.

The principal exchange rates affecting the Group were the Sterling to US Dollar and Sterling to Australian Dollar exchange rates.

Operating Review

EMEA Services

(1) To be consistent with revenue reporting prior year orders has been restated to exclude £1.7m of contribution from Joint Ventures 

(2) B2B ratio is orders won divided by revenue recognised, excluding the LTPA non-tasking services revenue of £222m (FY21: £226m) 

Overview

EMEA (Europe, Middle East and Australasia) Services combines world-leading expertise with unique facilities to provide capability generation and assurance, underpinned by long-term contracts that provide good visibility of revenue and cash flows.

Financial performance

Orders for the year increased by 6% to £918.9m (FY21: £864.4m), driven by £115m under the WSRF contract in the UK, mainly for the development of directed energy systems in the UK; an increase in orders from Defence Digital and Defence Intelligence; and an order worth A$27 million for Land systems engineering support in Australia.

Revenue increased by 13% to £1,059.2m (FY21: £939.9m), and grew by 13% on an organic basis, as a result of new work under the EDP and WSRF contracts, Defence Digital contracts (in Cyber & Information) and ongoing growth in Australia.

At the beginning of FY23, £726m of the division's FY23 revenue was under contract, compared to £684m (of the FY22 revenue) at the same point last year. This reflects the 6% increase in orders won in the year.

Underlying operating profit grew by 14% to £135.6m (FY21: £118.6m) and grew organically by 14% in line with revenue growth. Operating margin increased to 12.8% reflecting the continuation of disciplined cost control and risk management.

Including the LTPA, approximately 67% of EMEA Services revenue is derived from single source contracts (FY21: approximately 68%). By investing in our core contracts and extending their duration the high proportion of single source revenue contracted on a long-term basis provides visibility and reduces our exposure to future changes in the baseline profit rate set annually by the Single Source Regulations Office.

Business Unit commentary

Maritime & Land (~39% of EMEA Services revenue)

The Maritime & Land business delivers operational advantage to customers by providing independent research, evaluation and training services.

Air & Space (~22% of EMEA Services revenue)

The Air & Space business de-risks complex aerospace programmes by evaluating systems and equipment, assessing the risks and assuring safety.

Cyber & Information (~29% of EMEA Services revenue)

The Cyber & Information business helps government and commercial customers respond to fast-evolving threats based on its expertise in training, secure communication networks and devices, intelligence gathering and surveillance sensors, and cyber security.

International (~10% of EMEA Services revenue)

Our International business leverages our expertise and the skills we have developed in the UK and applies them to opportunities in attractive markets globally.

Global Products

1. B2B ratio is orders won divided by revenue recognised

Overview

Global Products delivers innovative solutions to meet customer requirements. The division is technology-based and has shorter order cycles than EMEA Services. Our strategy is to expand the product portfolio and win larger, longer-term programmes to improve the consistency of the financial performance of this division.

Financial performance

Orders increased by 8% to £307.7m (FY21: £285.0m) This was driven by a $62m order for the full rate production contract on the SPUR robots in the United States, partly offset by a reduction in order value of £22.5m associated with the complex project, and a change in customer funding priorities from counter-insurgency missions in Afghanistan to emerging near-peer threats in the Indo-Pacific and the impact of the Continuing Resolution in early 2022.

At the beginning of FY23, £172m of the division's FY23 revenue was under contract, compared to £117m (of the FY22 revenue) at the same point last year. This increase reflects the growth in orders in year combined with lower revenue burn following supply chain and technical challenges in the United States in FY22.

Revenue was down 23% on a reported basis at £261.2m (FY21: £338.3m), due to slower recovery in the US including COVID related delivery and supply-chain challenges on the initial production ramp-up of SPUR robots and the change in customer funding priorities mentioned above. Furthermore there was the loss of revenue contribution from the FY21 disposals (Optasense, Boldon James and Commerce Decisions) amounting to £16.8m. Excluding the impact of these disposals and foreign exchange, revenue was down 16% (£51.7m) on an organic basis.

Underlying operating profit fell to £1.8m (FY21: £33.2m), with an underlying operating profit margin of 0.7% (FY21: 9.8%). This loss was driven by a £14.5m write-down on the complex project and the revenue shortfall in the US business. Excluding the impact of this write-down operating profit was £16.3m (6.0% margin) in FY22.

Business Unit commentary

United States (~58% of Global Products revenue)

Our US business develops and manufactures innovative defence products specialising in robotics, autonomy and sensing solutions. This business unit comprises Technology Solutions (formerly QNA) as well as C5ISR Solutions (formerly MTEQ), which we acquired in December 2019.

Space Products (~15% of Global Products revenue)

QinetiQ's Space Products business provides satellites, payload instruments, sub-systems and ground station services. 

EMEA Products (~27% of Global Products revenue)

EMEA Products provides research services and bespoke technological solutions developed from intellectual property spun out from EMEA Services. QinetiQ Target Systems is also reported within EMEA Products.

Principal risks and uncertainties

The Group continues to be exposed to a number of risks and uncertainties which management continue to identify, assess and mitigate to minimise their potential impact on the reported performance of the Group. An explanation of risks and their mitigations, together with details of our risk management framework can be found in the annual report which will be available for download at:

https://www.qinetiq.com/investors.

A summary of the significant risks and uncertainties is set out below:

Consolidated income statement

for the year ended 31 March

^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 1.

* Alternative performance measures are used to supplement the statutory figures. These are additional financial indicators used by management internally to assess the underlying performance of the Group. Definitions can be found in the glossary. Also refer to notes 1 and 3 for details of 'specific adjusting items'.

Consolidated comprehensive income statement

for the year ended 31 March

^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 1.

Consolidated statement of changes in equity

for the year ended 31 March

^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 1.

Consolidated balance sheet as at 31 March

^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 1.

Consolidated cash flow statement for year ended 31 March

^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 1.

Reconciliation of movement in net cash for the year ended 31 March

Notes to the financial statements (unaudited)

1. Significant accounting policies

Basis of preparation

QinetiQ Group plc is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in the United Kingdom.

The summary financial information set out above does not constitute the Group's statutory Consolidated Financial Statements for the years ended 31 March 2022 or 2021. QinetiQ has completed its preparation of the Group's 2022 Annual Report and Accounts. The Group has, however, been advised by its auditor, PwC, that their audit procedures are not yet fully complete and that they are therefore not yet in a position to sign their audit report on the annual financial statements. PwC has confirmed to QinetiQ that at the present time PwC are not aware of any matters that may give rise to a modification to their audit report. Based on the latest guidance from PwC, the Group expects the 2022 full Financial Statements to be signed by the Directors no later than 23 May 2022.

Statutory Consolidated Financial Statements for the Group for the year ended 31 March 2021, prepared in accordance with adopted IFRS, have been delivered to the Registrar of Companies. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of any emphasis without qualifying their opinion and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. This preliminary announcement does not constitute the Group's full financial statements for 2022. This report is based on accounts which are in the process of being audited and will be approved by the Board and subsequently filed with the Registrar of Companies in the United Kingdom. Accordingly, the financial information for 2022 is unaudited and does not constitute statutory accounts within the meaning of Section 434 of the United Kingdom Companies Act 2006.

The financial information included within the preliminary announcement has been prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006. The accounting policies followed are the same, subject to the changes noted below under 'recent accounting developments', as those published by the Group within its Annual Report for the year ended 31 March 2021 which is available on the Group's website, www.QinetiQ.com.

The preliminary announcement was approved by the Board of Directors on 19 May 2022. The financial information in this preliminary announcement does not constitute the statutory accounts of QinetiQ Group plc ('the Company') within the meaning of section 435 of the Act.

In the income statement, the Group presents specific adjusting items separately. In the judgement of the Directors, for the reader to obtain a proper understanding of the financial information, specific adjusting items need to be disclosed separately because of their size and nature. Underlying measures of performance exclude specific adjusting items. Specific adjusting items include:

All items treated as a specific adjusting item in the current and prior year are detailed in note 3. These 'specific adjusting items' are of a 'non-operational' nature and do not include all significant, irregular items that are of an operational nature, for example contract risk provisions, cost of redundancy exercises and gains/losses on disposal of plant and equipment. Such 'non-recurring trading items' are referred to in the business performance narrative to aid readers from a 'quality of earnings perspective'. They are considered by the Directors to be irregular but still part of our businesses' normal 'operating' performance and are included within the KPIs used to measure those business units (and total Group performance for remuneration purposes).

Recent accounting developments adopted by the Group

IFRIC Agenda Decision 'Configuration and customisation costs in a cloud computing arrangement'

The Group has changed its accounting policy related to the capitalisation of configuration and customisation costs in a cloud computing (Software as a Service, 'SaaS') arrangement. This change is as a result of the IFRS Interpretations Committee's agenda decision published in April 2021.

The Group's accounting policy has historically been to capitalise costs directly attributable to the configuration and customisation of cloud computing arrangements as intangible assets in the Balance sheet, whether or not the services were performed by the SaaS provider or SaaS subcontractors or a third party. Following the publication of the above IFRIC agenda decision, current cloud computing arrangements were identified and assessed to determine if the Group has control of the software. For those arrangements where it was determined that we do not have control of the developed software, to the extent that the services were performed by third parties, the Group derecognised the intangible asset previously capitalised. Amounts paid to the SaaS provider in advance of the commencement of the service period, including for configuration or customisation, if identified as not distinct, are treated as a prepayment.

The change in accounting policy led to adjustments amounting to a £8.0m, £6.1m and £2.5m reduction in the intangible assets recognised in the 31 March 2022, 31 March 2021 and 1 April 2020 balance sheets respectively, and to a £2.4m, £3.6m and £2.5m increase in operating costs, in those respective years.

Accordingly, the prior period balance sheets at 31 March 2021 and 1 April 2020 have been restated in accordance with IAS 8, together, together with related notes. The following tables show the adjustments recognised for each individual line item as at 31 March 2022, 31 March 2021 and 1 April 2020.

Impact on the condensed consolidated balance sheet at 31 March 2022 and 31 March 2021

Impact on the condensed consolidated balance sheet at 1 April 2020

Impact on the condensed consolidated income statement

The impact on the Group's consolidated income statement of applying the restatement is set below:

The impact is classified as a specific adjusting item and there is no impact on underlying measures of performance.

Going concern basis

The Group meets its day-to-day working capital requirements through its available cash funds and its bank facilities. The market conditions in which the Group operates are expected to be challenging as spending from key customers comes under pressure, however the Group enters the year with a very strong balance sheet and a healthy order book.

After making enquiries, the Directors have a reasonable expectation that the Group is well-positioned to manage its overall business risks successfully and has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going-concern basis in preparing its financial statements.

The Group is exposed to various risks and uncertainties, the principal ones being summarised in the 'Principal risks and uncertainties' section. Crystallisation of such risks, to the extent not fully mitigated, would lead to a negative impact on the Group's financial results but none are deemed sufficiently material to prevent the Group from continuing as a going concern for at least the next 12 months.

2. Disaggregation of revenue and segmental analysis

Revenue by category

for the year ended 31 March

1 For the period of which there was no contribution in the equivalent period in the comparator year which was pre-ownership (for acquisitions) or post-ownership (for disposals) by the Group.

2 Alternative performance measures are used to supplement the statutory figures. See Glossary.

Other income

for the year ended 31 March

Revenue by customer geographical location 

for the year ended 31 March

Revenue by major customer type 

for the year ended 31 March

* 'Other' does not contain any customers with revenue in excess of 10% of total Group revenue.

Operating segments

for the year ended 31 March

* Definitions of the Group's 'Alternative Performance Measures' can be found in the glossary.

Reconciliation of segmental results to total profit

for the year ended 31 March