### QinetiQ Group plc ## Focused on ## sustainable ## global growth Annual Report & Accounts 2022 ## QinetiQ Group plc ### Annual Report & Accounts 2022 ## Introduction ## We are building an ## integrated global defence ## and security company ## Our purpose ## QinetiQ is dedicated to protecting ## lives and securing the vital interests ## of our customers. ## Who we are ### We are a leading science and engineering company operating ### primarily in the defence and security markets. We are an ### information, knowledge and technology-based company ### with the breadth and depth of approximately 7,000 highly ### dedicated employees. ## What we do ### We apply our unique technical expertise across the product ### lifecycle, helping our customers to create, test and use defence ### and security capabilities. Not only do we develop cutting-edge ### technology and turn it into a capability, we also tell customers if ### that capability will work when it is critically needed and ensure ### they are trained and operationally ready to use it when it matters. Front cover depicts a Banshee Jet80+ target launching from HMS Prince of Wales. Photo by Ben Corbett; UK ### Anticipating the current, emerging and future threat environment Ministry of Defence © Crown copyright 2022. ### Throughout this report FY22/2022 refers to QinetiQ’s and proactively understanding our customers’ needs to provide Financial year ended 31 March 2022. ### mission-led innovation is critical to our success. The report also refers to “Underlying” measures of performance. Definitions can be found on page 207. ## How we have performed ### Financial highlights ### Good progress with strong second-half momentum. ORDERS REVENUE UNDERLYING OPERATING PROFIT ## £1,226.6m £1,320.4m £137.4m | (FY21: £1,149.4m*) | | | (FY21: £1,278.2m) | | | (FY21: £151.8m) | | | --- | --- | --- | --- | --- | --- | --- | --- | | FY22 | | £1,226.6m | FY22 | | £1,320.4m | FY22 | £137.4m | | FY21 | | £1,149.4m* | FY21 | | £1,278.2m | FY21 | £151.8m | | FY20 | £961.7m* | | FY20 | £1,072.9m | | FY20 | £133.2m | STATUTORY OPERATING PROFIT UNDERLYING EARNINGS PER SHARE STATUTORY EARNINGS PER SHARE ## £117.5m 20.6p 15.7p | (FY21: £108.7m^) | | (FY21: 22.1p) | | (FY21: 21.4p^) | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | FY22 | £117.5m | FY22 | 20.6p | FY22 | 15.7p | | | | FY21 | £108.7m^ | FY21 | 22.1p | FY21 | | | 21.4p^ | | FY20 | £117.6m | FY20 | 20.0p | FY20 | | 18.7p | | ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. * Restated to exclude Joint Ventures. ### Operational highlights ### Positioning ourselves for long-term sustainable global growth. • Leading role in securing the interests of our NATO allies – we (RCV-L) prototypes for testing. With a c.20% growth in orders coupled supported Formidable Shield, the largest live-fire integrated air and with our new leadership team, headed by Shawn Purvis, this provides missile defence exercise in 2021 led by the US Sixth Fleet and conducted a strong foundation for the delivery of our strategy in the US, through by Naval Striking and Support Forces NATO. This is a good example of both strong organic growth and strategy-led acquisitions. the benefits arising from our investment in the Long Term Partnering • Trusted partner in Australia – Our Australian business continues to Agreement (LTPA) contract, driving enhanced operational outcomes for deliver strong growth. Our Major Service Provider (MSP) contract has our customers, increasing the demand for our ranges and positioning delivered orders totalling A$97m including an A$27m order to assist QinetiQ at the leading edge of safe delivery of complex events to ensure the Australian Department of Defence in delivering its largest and our NATO allies can defend against future threats. most complex Land projects. This contract positions us for future • Our large contracts continue to support significant growth in the growth as a trusted partner able to provide sovereign Australian UK – we have won orders totalling £115m on the Weapons Sector industry capability, while leveraging our global capabilities. Research Framework contract, including work on the development • QinetiQ Target Systems (QTS) recovery – In FY22 we have seen and deployment of directed-energy weapons for the UK’s Ministry of significant positive progress across the QTS business with customers Defence (UK MOD), an important capability particularly focused on resuming trials and exercises previously cancelled or postponed counter-hypersonics. The Engineering Delivery Partner (EDP) contract due to COVID-19 and winning significant orders, with growth in both continues to evolve to meet the ever-changing needs of our customers, existing countries and new business wins in the US, India and Japan. and has now delivered over £920m of orders since its inception in FY22 revenue was back to pre-pandemic levels and we remain October 2018. positive on the trajectory of the business. • Strategic partner to Strategic Command – we have won more than • Net-Zero plan – Over the last decade, we have set a series of £160m worth of orders with Defence Digital and Defence Intelligence increasingly ambitious greenhouse gas (GHG) emission reduction These include a £33m contract to transform the aeronautical data- targets. In FY19, we developed a new target in line with the Science management and aeronautical information production capability Based Targets initiative (SBTi) to reduce our Scope 1 and Scope 2 for UK MOD; and a £20m contract to support defence intelligence GHG emissions and we are pleased that over the last 3 years we transformation across electronic warfare, mission-data, intelligence have reduced our emissions by 32%. In March 2022 we published training, capability assessments and Urgent Operational Requirements our Net-Zero plan which outlines a credible route to achieve Net-Zero implementation, adding automation and providing enhanced resilience. across Scope 1, 2 and 3. • Building a disruptive mid-tier company in the US – we have won a number of notable and strategically significant contracts in the US, including a $12m advanced sensor prototype contract, a $62m full-rate production contract for our Squad Pack Utility Robot (SPUR) and a $12m contract to deliver additional Robotic Combat Vehicle Light | | QinetiQ Group plc Annual Report & Accounts 2022 | 01 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Contents ## Focused on sustainable ## global growth ### Our vision To be the chosen partner around the world ## 01 for mission-critical solutions, innovating for our customers’ advantage. Our strategy delivers on this through three ## Strategic complementary and mutually reinforcing ## report pillars; global leverage, distinctive offerings and disruptive innovation. ### What we do See Page 18 We are a leading science and engineering company operating primarily in the defence and security markets. We apply our unique technical expertise across the product lifecycle, helping our customers to create, test and use defence and security capabilities. See Page 20 ## Recent world events ## have reinforced the ## long-term needs of our ## customers, including ## capabilities utilising ## differentiated technology ## and test and training ## solutions which are ## directly aligned with ### ESG ## our strategy.” QinetiQ has taken an active leadership role in ESG Steve Wadey in the defence sector for many years. This year we have published our Chief Executive Officer Net-Zero plan which outlines a credible route for us to decarbonise while also ### CEO working with our partners and ### review customers to help them on their journey to Net-Zero. We have delivered good underlying operating See Page 44 performance at Group level. We have continued to make good strategic progress this year, with our major achievements being £1.23bn of orders secured across the Group, and excellent performance in EMEA Services, with 26% revenue growth in Australia and 12% revenue growth in the UK. See Page 14 ### 02 02 QinetiQ Group plc Annual Report & Accounts 2022 ### Strategic report 04 About QinetiQ 06 What we do 08 How we are structured 10 Investor proposition 12 Group Chair’s statement 14 CEO review 16 Our business model 18 Our strategy 19 Strategic progress 22 Market themes 24 Trading environment 26 Our stakeholders 28 Stakeholder questions and answers ### Risk and audit 30 Operating review 36 CFO review ### summaries 40 Key performance indicators ## 02 | | Key areas for the Audit Committee | 44 Environmental, Social and | | | --- | --- | --- | --- | | | have included internal control and risk | | Governance | | Corporate | | 60 Risk management | | management, treatment of accounting judgements on key programmes, ESG 69 Longer-term viability assessment ## governance target-setting, assurance and reporting, 69 Going concern statement including Climate Related Financial 70 Section 172 (1) statement ### Group Chair’s introduction Disclosures (TCFD). 72 Non-financial information statement FY22 saw QinetiQ delivering a good underlying operating performance at See Page 108 ### Corporate governance Group level. However, our result was 76 Governance framework impacted by two short-term issues: 79 An introduction from the Group Chair complex project write-down and US 81 Board leadership and company revenue performance. The Board took purpose swift actions to mitigate these, including 96 Division of responsibilities a robust plan to ensure the best possible 98 Composition, succession outcome on the large complex project. and evaluation See Page 79 108 Audit, risk and internal control 110 Audit Committee report 116 Risk and Security Committee report 117 Directors’ remuneration report 119 Remuneration at a glance 123 Annual report on remuneration 137 Directors’ report 141 Independent auditors’ report ### Financial statements 150 Consolidated income statement 151 Consolidated comprehensive income statement 151 Consolidated statement of changes in equity ### Remuneration 152 Consolidated balance sheet ### summary 153 Consolidated cash flow statement 153 Reconciliation of movements Implementing the Directors’ in net cash Remuneration Policy in the interests of 154 Notes to the financial statements shareholders as been the primary focus 200 Company balance sheet of the Remuneration Committee this year. ### Board 201 Company statement of changes For FY23 we include more ESG metrics in equity into the leaders’ collective objectives and ### leadership 202 Notes to the company we are developing the new Remuneration financial statements policy, taking on shareholder feedback. ### decision making Key decisions made by the Board include ### See Page 117 Other information strategic decisions on potential acquisition 204 Five-year financial summary opportunities, US leadership and our 205 Additional financial information Net-Zero plan, and key operational 206 Glossary oversight on the complex project, TCFD 208 Shareholder information and our safety improvement programme. See Page 81 | | QinetiQ Group plc Annual Report & Accounts 2022 | 03 03 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## About ## QinetiQ ## Our purpose ### QinetiQ is dedicated to protecting lives and securing the vital interests of our customers. ## Protecting Securing ## lives vital interests ## of our ## customers QinetiQ provides technology and QinetiQ is focused on producing solutions in order to keep our mission critical solutions and armed forces and society safe. innovating for our customers’ advantage. In action: In action: QinetiQ, in partnership with With our defence-grade security MedEng, has designed and technologies, rigorous threat developed the Next-Generation checks and system-wide managed Advanced Bomb Suit (NGABS) for cyber-security service, we help the army. The NGABS increases customers build digital resilience. soldier readiness to respond to evolving threats by providing situational awareness, 360-degree ballistic protection and reducing weight-burdens via its modular scalable design. See Page 34 See Page 32 ### 04 QinetiQ Group plc Annual Report & Accounts 2022 ## Where we operate ### Many of our facilities around the world are unique assets that are critical to maintaining national defence ### capabilities, and are often the only place where certain trials can take place. ### Three home countries: ## UK US Australia QinetiQ’s heritage stems from formerly QinetiQ’s capabilities in the US originate QinetiQ has had a strong relationship being a part of the UK MOD, who we now from a close and strong relationship with with the Australian Department of work with closely as our largest customer. the US Department of Defense, as the Defence for many years, providing advice, Our capabilities are centred around most significant provider of small robots, engineering and design solutions, as well customer advice and service provision combined with our acquired capabilities as expanding into test and evaluation across research and development, on autonomy and sensing. Our operations services, robotics and autonomous engineering advice, test and evaluation, include manufacture of robots and systems. training and mission rehearsal, cyber prototype platforms for our customer. security and data. ### Employees: 487 Employees: 626 ### Employees: ### Sites: 6 Sites: 5 ### 5,432 ### Sites: 31 | Three priority countries: | Revenue by customer location | | | | | --- | --- | --- | --- | --- | | | | | 8% | 73% | | Belgium | | 7% | | | QinetiQ’s space business designs and develops small satellites and space technology for military, security and civil use. UK £962m 12% US £153m Employees: 166 Sites: 1 Australia £98m Rest of world £107m ## Germany QinetiQ has developed its capability through acquisition. We are a trusted provider of airborne special mission operations, technical solutions and airborne training to defence and ### Revenue by division security customers. 80% 20% Employees: 123 Sites: 3 ## Canada EMEA Services £1,059m QinetiQ Canada provides many services, including test and Global Products £261m evaluation advice, electronic surveillance systems, software tools for designing and developing vessels, and helping with cost estimation. Employees: 74 Sites: 2 | | QinetiQ Group plc Annual Report & Accounts 2022 | 05 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## What we do ### We apply our unique technical expertise across the product lifecycle, helping our customers to create, ### test and use defence and security capabilities. Not only do we develop cutting-edge technology and ### turn it into a capability, we also tell customers if that capability will work when it is critically needed ### and ensure they are trained and operationally ready to use it when it matters. Anticipating the current, ### emerging and future threat environment and proactively understanding our customers’ needs to ### provide mission-led innovation is critical to our success. ### Our capabilities are grouped in to six distinctive offerings: ## Experimentation Cyber and information ## and technology advantage QinetiQ collaborates with customers and partners to explore QinetiQ innovates with a broad range of partners across innovative technology solutions that solve our customers’ leading-edge sensor technologies, data processing, complex problems. We bring together a wide range of experts advanced analytics, cyber and artificial intelligence to deliver new, fully-assured capabilities that provide mission to use data and information in a more effective way. advantage. Case study: Awarded a $24m US Army contract to build Case study: Awarded a multi-million pound UK research three additional SPECTRE next-generation, full spectrum, and development contract that forms part of a broad range hyperspectral prototype sensors for a US Army Program of activities in the hypersonics field ,and secured active R&D of Record. projects for Directed Energy technologies. ## Training and mission rehearsal ## Test and evaluation QinetiQ combines engineering expertise, operational know- QinetiQ leverages unique skills, data and facilities to test and how and leading-edge technologies to deliver physical and evaluate the performance of military systems. This provides virtual training exercises to support operational readiness and assurance for our customers that their equipment and mission rehearsal. platforms will work effectively when needed in demanding environments and threat scenarios, helping to reduce Case Study: We supported Formidable Shield, the largest operational risk and through-life cost. live-fire integrated air and missile defence exercise in 2021, providing the safe environment, logistics and range control Case study: QinetiQ specialists helped the UK Royal Navy to to facilitate this trial, across the maritime and air domains. overcome an extremely challenging timescale and delivered A range of targets were used to test defences, including both an airborne surveillance capability and guided weapon subsonic, supersonic and ballistic targets. capability in time for the first operational deployment of the UK’s Carrier Strike Group (CSG). ### 06 QinetiQ Group plc Annual Report & Accounts 2022 ## Engineering services and ## support ## Single routes to market Working alongside a large network of supplier providers, QinetiQ uses its deep understanding of customer requirements, We focus on partnering with our customers, existing systems and innovative approach to provide our to deliver mission-led innovation through our customers with reliable technical advice and support, through six distinctive offerings. all phases of procurement and systems engineering. Case Study: New Futures Lab service introduced We optimise our capabilities internally, to maximise the innovation and exploitation of new through leveraging our technology and technologies and capabilities, putting EDP at the engineering solutions globally; in order to forefront of some of the MOD’s most important maximise external growth opportunities via and innovative programmes. single routes to market, in six “home” and “priority” countries. ## Robotics and autonomous ## systems QinetiQ develops, tests, evaluates and supplies trusted robotic and autonomous systems across land, sea and air domains. Case study: Awarded a $62m contract for full-rate production of our SPUR – the winner of the Common Robotic System – Individual (CRS(I)) programme by the US Army. Read more about Our Markets on Page 22 | | QinetiQ Group plc Annual Report & Accounts 2022 | 07 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## How we are ## structured ## EMEA Services ### Revenue: £1,059m ### Combines world-leading expertise with unique facilities to generate ### and assure capability. It does this through capability integration, threat ### representation and operational readiness, underpinned by long-term ### contracts that provide good revenue visibility and cash generation. ### Air and Space De-risks complex aerospace programmes by testing systems and equipment, evaluating the risks and assuring safety. Approximate revenue FY22 £230m. ### Maritime and Land Delivers operational advantage to customers by providing independent research, evaluation and training services. Approximate revenue FY22 £415m. ### Cyber and Information Helps customers respond to evolving threats based on our expertise in cyber security, secure communication networks and devices, intelligence gathering and training. Approximate revenue FY22 £310m. ### International Included here is our Australian and German operations. In Australia we provide advice, products and test and evaluation services, and in Germany we provide airborne training and mission operations. Approximate revenue FY22 £105m. ### United States ### 08 QinetiQ Group plc Annual Report & Accounts 2022 ## Global Products ### Revenue: £261m ### Delivers innovative solutions and products to meet customer ### requirements. It undertakes contract-funded research and development, ### developing intellectual property in partnership with key customers and ### through internal funding, with potential for new revenue streams. Space Products: Develops small satellites, payload instruments, subsystems and ground station services. Approximate revenue FY22 £40m. EMEA Products: Provides research services and bespoke technological solutions developed from intellectual property spun off from EMEA Services. The products and intellectual property are typically specialist defence and security solutions, including secure-communication devices, cyber products and electrification upgrades to military equipment. Included in EMEA Products is QinetiQ Target Systems − a world-leading provider of unmanned air, land and surface targets for live-fire training and weapon system test and evaluation. Approximate revenue FY22 £70m. United States: Develops and manufactures innovative defence products specialising in robotics, autonomy and sensing solutions. Approximate revenue FY22 £150m. | | QinetiQ Group plc Annual Report & Accounts 2022 | 09 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Investor ## proposition ### Our investment case is underpinned by four key attributes: By focusing on our customers’ needs and evaluating all investment opportunities with the same rigour, we aim to deliver sustainable and attractive returns to our shareholders. ## Operate in attractive Unique capabilities and ## markets relevant offerings Our business operates in the defence and security We have unique capabilities around the world critical markets which both are seeing significant spending to maintaining national defence and security. In increases; furthermore our capabilities are well addition, many of our capabilities are well aligned aligned with those areas that are growing faster with customer priorities: than the overall defence budgets: • Unique position in defence, providing early-stage • Global defence and security are climbing up the research and development, complex test and geo-political agenda evaluation capabilities and select niche defence and security products • We are a key partner to nations with shared defence and security interests: (eg the UK, Australia and the • Key partner to sovereign nations providing leading US, known collectively as AUKUS) technical expertise and state-of-the-art facilities • The total addressable market is worth more than • Relevant offerings for emerging and future threats £20bn, with a key focus on the UK, US and Australia • Strong track record and significant opportunity • We are seeing growing demand for our for global leverage of capabilities across the Group differentiated capabilities • Ambition to build an integrated global defence • There is significant opportunity for global leverage and security company of our capabilities across our global business ## >£20bn Six addressable market distinctive offerings ## £2.3bn+ ~7,000 revenue ambition by FY27+ highly skilled employees ### 10 QinetiQ Group plc Annual Report & Accounts 2022 ## Strong financials and Delivering responsibly and ## shareholder return taking a lead on ESG Our business has attractive financial characteristics QinetiQ has taken a proactive lead in ESG for many supported by a strong balance sheet which enables us years and is uniquely placed to help our partners and to invest and realise our long-term growth ambitions: customers to achieve Net-Zero through effective use of technology: • Strong revenue visibility from long-term contracts • An important role in the defence sector, protecting • Attractive margins at the upper end of defence lives and society contracting, demonstrating technical expertise • Early adopter and communicator: • Asset-light and cash-generative business model supports organic investment to drive future growth: • Held investor seminar in March 2021 on ESG organic investment funded from operating cash flow • Active sustainability leadership role in industry • Strong balance sheet and good operational rigour fora such as Defence Suppliers Forum and ADS. to support leverage for future acquisitions • Rated strongly by MSCI and Sustainalytics • Clear capital allocation policy • Recognised as implementing best practice in • Progressive dividend policy our ethical policy for autonomous systems • Unique position to help our customers meet their ESG targets − technology and offerings ## ~£900m AA rated of FY23 revenue under contract by MSCI ## 26% Net-Zero plan return on capital employed in FY22 published Mar-22 | | QinetiQ Group plc Annual Report & Accounts 2022 | 11 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Group Chair’s ## statement ### Introduction: This last year has seen both challenge and conflict – it started with much of the world still in the grip of the COVID-19 pandemic and finished with perhaps the most significantly unsettling conflict of a generation. While the wonders of science and medicine are successfully containing the COVID-19 pandemic, it is saddening to see the conflict and resulting humanitarian crisis arise in Ukraine. This conflict will impact lives, economies and geo-politics for many years to come. It also demonstrates the vital importance of defence companies to society. At QinetiQ we are proud of our unique and important role in the defence ecosystem, central to protecting lives and making the world a safer place. For QinetiQ, it has been a year of mixed As a Board we recognise the importance fortunes with our own share of challenges, of delivering results in the right way. We alongside good operating performance. have a strong and resilient Governance I have been immensely proud of the framework and take an active role in determination and commitment that industry bodies to share and learn our people have shown throughout the from best practice. ongoing COVID-19 pandemic, and the | resilience of teams in pulling together to | In March 2022 we published our Net-Zero | | --- | --- | | resolve the short-term issues and build | plan which outlines a credible route to | | positive momentum towards our | achieve Net-Zero by 2050 or sooner. | | ambitious goals. | We have a clear plan to decarbonise | our own Scope 1 and 2 emissions, through Delivering safely, responsibly the use of renewable energy sources, and sustainably for the benefit reduced aviation emissions and other of all our stakeholders global projects. But more significantly, with 89% of our total emissions coming Delivering safely in all of our day- from Scope 3, we intend to work closely to-day operations remains a critical with our partners and customers to help cornerstone of the business. This year them on their journey to Net-Zero. We have we have implemented a programme of a unique opportunity to help our partners review, understanding and continuous ## This has been a and customers decarbonise through improvement for safety across the Group, technology; whether that be through our ## challenging year to further reinforce and enhance our expertise on stealth materials that enables safety culture. wider use of windfarms as they are less ## for QinetiQ, but likely to interfere with radar; our battery Our customers partner with QinetiQ ## robust actions and experts developing high power batteries because of the breadth and depth of our for military and commercial use; our technical knowledge, experience and the ## decisive leadership large-scale, low-speed wind tunnel enthusiasm of our people, so we recognise being used to support advancements ## see us emerge the importance of an engaged and in aircraft efficiency, or many other aligned workforce. To enable this high- ## with strengthened technology-driven solutions to improve performance inclusive culture we have sustainability for our stakeholders. implemented an adaptive working policy ## foundations to which enables our teams to operate most Board changes ## support our future effectively as we all learn to live alongside There were a number of changes to the COVID-19. We have continued to focus on membership of the Board during the year. ## growth.” proactive engagement with our employees Lawrence (Larry) Prior III joined the Board through quarterly all-employee virtual as senior US independent Non-executive roadshows led by the Global Leadership Director, bringing a wealth of experience Team, quarterly employee engagement from various sectors including aerospace, surveys and the “Global Employee Voice” defence and government services, IT, and engagement network, to name but a few. cyber and security; Larry’s breadth of experience as both an executive and non-executive in the US is a strong addition to the Board to support our US and global strategies. Read more about Safety on Page 55 Read more about Net-Zero on Page 47 ### 12 QinetiQ Group plc Annual Report & Accounts 2022 ### Historical dividend payments Key 7.3p 6.9p Final 6.6p 6.6p 5.0p | | | | | 6.3p | | | 4.7p | | --- | --- | --- | --- | --- | --- | --- | --- | | Interim | | | 6.0p | | 4.5p | 4.4p | | | | | 5.7p | | 4.2p | | | | | | 5.4p | | 4.0p | | | | | 3.8p 4.6p 3.6p 3.2p 3.8p 2.7p 2.9p 2.0p ### Capital allocation policy | | | | | | 2.2p | 2.2p | 2.3p | | --- | --- | --- | --- | --- | --- | --- | --- | | | | 2.0p | 2.1p | 2.1p | | | | | 1.8p | 1.9p | | | | | | | 1.4p 1.1p 0.9p ### Priority 1 2012 2013 2014 2015 2016 2017 2018 2019 2020* 2021 2022 Invest in our organic capabilities, After four years as CFO, David Smith stepped appointment of Sam Lewis as Group Business complemented by acquisitions down from the Board and we were delighted Development Director from various roles in where there is a strong strategic fit. to appoint Carol Borg as his successor. large US defence businesses. Carol brings extensive experience of | leading global finance teams, and driving | I would also like to take this opportunity | | | --- | --- | --- | | operational execution and performance | to personally thank Steve Wadey, our CEO, | | | management in complex growing | for his focus, commitment and resilience | | | businesses. David made a very significant | over this past year. His leadership and | Priority 2 | | contribution to QinetiQ, providing robust | that of his Leadership Team has been | | Maintain balance sheet strength. financial direction and guidance. I wish exemplary and an excellent demonstration him the very best in his retirement. of our values: Integrity, Collaboration and Performance. In the face of adversity, all | I am also pleased to welcome Steve | of our people and teams have pulled | | | --- | --- | --- | | Mogford to the Board for FY23. Steve | together to deliver for our customers; | | | brings a wealth of experience, as Chief | my thanks to all of them. | | | Executive of United Utilities Group Plc, and | | Priority 3 | Looking ahead former senior roles in the defence sector at Provide a progressive dividend to SELEX Galileo (part of Finmeccanica), BAE While we faced some unique challenges shareholders. | Systems Plc and British Aerospace Plc. | this year, I am extremely positive and | | --- | --- | | Steve’s official appointment date will be | optimistic about the future for QinetiQ. | | August 2022. | We are closing out the two short-term | issues and have delivered strong Overall I am confident we have the underlying performance from the rest of right mix of skills and experience on the the Group, increasing momentum towards ### Priority 4 Board to provide effective challenge and our ambitious goals. We exit this period support to the business as it continues its into a new normal with strong foundations Return excess cash to global growth. – fantastic people, a cohesive strategy, shareholders. a strong balance sheet and the right I would like to thank all my Board leadership; ingredients that will support Read more on Page 29 colleagues, past and present, and us in achieving excellent results and particularly Committee Chairs for exceeding our stakeholders’ expectations their leadership, support and advice over the long-term. throughout the year. Neil Johnson While not Executive-level appointments, Non-executive Group Chair I am also pleased to see four further 20 May 2022 significant additions to the Global Leadership Team to further support and enable our global growth, with the appointment of Shawn Purvis as President and CEO of QinetiQ US from Northrop Grumman, internal promotion of Amanda Nelson to Group HR Director, internal promotion of our CTO, Mike Sewart, to the Global Leadership Team and the | | QinetiQ Group plc Annual Report & Accounts 2022 | 13 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## CEO ## review ### Introduction: 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 growth. Following a challenging first half, we The formation of the AUKUS alliance delivered a strong second half and between these nations reinforces our achieved good underlying operational multi-domestic strategy and makes performance at Group level. us increasingly relevant. We are well- positioned to deliver strong growth in the With a clear focus on disciplined execution UK and to more than double our Australian of our strategy we secured our largest and US businesses in the next five years. order intake at £1.23bn, 9% growth on an | organic basis, demonstrating high demand | Building on our track record of growing | | --- | --- | | for our distinctive offerings. We maintained | the company by 75% over the last six | | good programme execution and delivery | years, we have increased the scale of our | | across all our major contracts to deliver | ambition. We will grow by another 75% | | 5% revenue growth on an organic basis. | over the next five years to more than | | Underlying operating profit was £137.4m, | £2.3bn revenue. Within our latest strategic | | equivalent to 11.4% margin before a | business plan, we see 30% of our future | | £14.5m complex project write-down | growth coming from the UK and more | | consistent with our short-term guidance. | than 50% coming from Australia and the | | We continue to deliver very strong cash | US. This plan is supported by our strong | | performance with 114% underlying cash | balance sheet and continued investment in | | conversion, up from 98% last year, using | our global strategy, through both organic | | our new cash conversion definition. | opportunities and strategic acquisitions. | Focused strategy US revenue performance recovery was slower than expected, with the second Our strategy is increasingly relevant and ## Throughout the last half in line with the first half, largely due to provides focus for our business decisions ## year our people have the US defence budget being constrained and our investment choices. We are a by the extended Continuing Resolution. company with a clear purpose, vision ## continued to partner However, we secured c.20% year-on-year and customer value proposition called growth in order intake which, coupled “mission-led innovation”, co-creating cost- ## with our customers with our new leadership team, provides a effective solutions to meet our customers’ ## to deliver high-value strong foundation for the delivery of our needs at pace, as reinforced by the current US growth strategy. The complex project conflict in Ukraine. Our strategy is a multi- ## solutions critical to domestic strategy, with a clear focus on contract is now closed and the financial impact remains fully contained in our where we operate, what we do and how we ## current and future first half results. deliver value for our customers: ## national defence and Delivering our global ambition Global leverage – Build an integrated ## security challenges.” Recent world events have reinforced global defence and security company the long-term needs of our customers, to leverage our capability through single requiring capabilities utilising differentiated routes to market in the UK, US, Australia, technology, test and training solutions Canada, Germany and Belgium. which are directly aligned with our | strategy. This defence and security context | Distinctive offerings – Co-create high-value | | --- | --- | | is heightening the market needs for our | differentiated solutions for our customers, in | | six distinctive offerings. Our addressable | experimentation, test, training, information, | | market is worth more than £20bn per year, | engineering and autonomous systems. | and we see increased customer demand for our high-value solutions in high-priority Disruptive innovation – Invest in and apply growth segments. The major focus for disruptive business models, digitisation growth is in our three home countries, and advanced technologies to enable our the UK, US and Australia, where we are customers’ operational mission at pace. pursuing similar opportunities to support their shared defence and security mission. Read more about our strategy on Page 18 ### 14 QinetiQ Group plc Annual Report & Accounts 2022 Our first priority is to maintain focus on vibrant and meets the same standards driving organic growth in each country. of safety, security, sustainability and Environmental, Social | We remain disciplined in delivering our | | governance that we do. In May 2022 we | | --- | --- | --- | | commitments to our customers and | and Governance (ESG) | launched our sustainable procurement | | shareholders by continuously improving | We continue to take our ESG responsibility | guide to help our suppliers achieve this | | our bidding, programme execution and risk | seriously, ensuring our growth strategy is | objective. Driven by our company purpose, | | management capability. | sustainable. We have been seen as a leader | we take the ethics of defence seriously and | | | in the defence sector in ESG by many for | carefully consider who we do business with | | Looking forward, we have a clear strategic | years (validated by our strong MSCI and | and the projects we undertake, to protect | | business plan focused on creating a global | Sustainalytics ratings). | lives and secure the vital interests of our | | leader in mission-led innovation. With a | | customers. This year we are taking our | | strong balance sheet, we continue to invest | Our Environmental agenda is significant, | focus on ESG to a new level, with 17.5% | | in our multi-domestic growth strategy to | including responsibility for over 50 | of all leadership incentives focused on | | realise our ambition. We have clarity around | internationally recognised conservation | delivering our commitments. | | our six distinctive offerings and focus on | sites. In March we launched our Net- | | Read more about ESG on Page 44 | our home countries, to provide a guide for | Zero plan with validation by Science | | | --- | --- | --- | | our future investment decisions. Growth will | Based Targets initiative (SBTi) currently | | | be driven by investing in these distinctive | | Outlook – FY23 | underway, to achieve Net-Zero emissions | offerings and leveraging across countries. | | by 2050 or sooner, with a reduction of 33% | We enter FY23 with confidence, a healthy | | --- | --- | --- | --- | | | | by 2030. We are already well on the way | order-book, £900m revenue under contract | | We have continued to make good strategic | | towards this target with a 32% reduction | and positive momentum. We remain | | progress implementing our strategy to | | in our scope 1 & 2 emissions over the last | confident to deliver in line with our current | | become an integrated global defence and | | 3 years. We are also working closely with | expectations for FY23, with mid single-digit | | security company: | | our customers to co-create sustainable | organic revenue growth and operating | | | | solutions, such as modernisation of the | profit margin towards the middle of our | | • Providing a leading role in securing the | | operations on St Kilda, a World-Heritage site, | 11-12% expected range, lower than our | | | interests of our NATO allies through | in the middle of our world-class test range. | medium to long-term guidance, driven by | | | facilitating the Formidable Shield | | inflationary pressures and our continued | | | exercise | From a Social perspective, we are a | investment to support future growth. | | • Our large contracts in the UK continue | | people business and we want our people | Capital expenditure is expected to be at | | | to support significant growth, with 12% | to feel inspired and have the opportunity | the upper end of the £90m to £120m per | | | revenue growth in the UK | to realise their full potential. This year we | annum range, consistent with our previous | | | | are enhancing our focus on both physical | guidance and our strategy to invest to grow. | • We have won over £160m orders safety and wellbeing. With rising costs of with Defence Digital and Defence Outlook – Longer term living and growing competition for talent, Intelligence, becoming a strategic we have committed £10m additional Our ambition is to deliver c.75% growth partner to Strategic Command investment into our reward offering with in the next five years, as we have in • We are building a disruptive mid-tier the last six years, with revenue of more a particular emphasis on our lower paid company in the US with a number of than £2.3bn in FY27 and beyond. This staff. We continue to embrace many forms notable wins across our robotics and means we are targeting mid-single digit of difference to make us stronger, including sensing capabilities percentage compound organic revenue gender balance with a global target of | • We continue to deliver strong growth in | | 30% women by 2030. I have recently | growth over the next five years, with | | --- | --- | --- | --- | | | Australia, with 26% revenue growth | augmented the QinetiQ Leadership Team | strategic acquisitions further enhancing | | | | for the next phase of growth. The team is | this growth. We are targeting an operating | • QinetiQ Target Systems has recovered diverse in many ways, with the necessary profit margin of 12-13% in the mid to long- from COVID-19 and achieved its largest skills and experience in our key markets term. ROCE is forecast to remain strong at ever order intake with £42m orders and has seen an increase of women the upper end of the 15-20% range. • In March 2022 we published our Net- representations from 25% to 36% in FY23. Zero plan, targeting a 33% reduction in emissions by 2030 and Net-Zero by Steve Wadey Effective Governance is critical to 2050 or sooner Chief Executive Officer. our sustainability. We are focused on • You can read about these further in the 20 May 2022 strengthening our own skills and processes Operating Review and ensuring our supply chain is both | | QinetiQ Group plc Annual Report & Accounts 2022 | 15 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Our business ## model ## The challenge Our strengths Exploiting emerging technologies ## 01 02 and maintaining technological ### advantage requires extensive Customer focus Distinctive offerings research and experimentation. Our employees are inherently We operate some of the most customer focused and adopt advanced Research, Development, It requires dynamic approaches innovative and leading approaches Test and Evaluation facilities around to innovation and partnerships to exceed our customers’ the world. These facilities are often expectations. This approach is unique assets that are of strategic to exploit the most advanced underpinned by a high-performance importance to national defence technology. culture where employees are engaged capabilities. By combining these and empowered, supporting strong facilities with the unique expertise of It requires industry to deliver more customer relationships and enabling our people, we are able to support for less, driving efficiencies with | | us to act as a “trusted partner” in | | our customers in countering current, | | | --- | --- | --- | --- | --- | | innovative delivery models. | the delivery of critical services. | | future and emerging threats. | | | | | Read more about our | | Read more about our | | | Customer focus on | | Distinctive offerings on | | | | Page 26 | | Page 6 and 7 | | | 03 | 04 | | --- | --- | | Technical expertise | Collaborative approach | | Many of our employees are highly | The modern threat environment | | skilled scientists and engineers | often requires collaboration across | | with deep domain knowledge and | industry and academia to procure the | | know-how. Their technical expertise | most effective solution. By forming | | is critical to delivering mission-led | complementary partnerships and by | | innovation for our customers, and | managing large networks of small | | our success is dependent on our | and medium-size enterprises, our | | ability to recruit, retain and | collaborative approach ensures we | | engage high-calibre people. | deliver the most effective solutions | for our customers. ## Delivering for our stakeholders A large proportion of our work is delivered under long-term contracts and we typically start the year with a significant proportion of revenue under contact, providing a high level of revenue visibility. In addition our business is cash-generative by nature, meaning we are able to organically invest in our capabilities and sustain our business model. Our people are critical to our success and we are continually investing to support their career development, wellbeing and engagement. We are also investing in our facilities and digital infrastructure tools, ensuring we can continue to support our customers in facing future emerging threats and challenges. ### 16 16 QinetiQ Group plc Annual Report & Accounts 2022 QinetiQ Group plc Annual Report & Accounts 2022 ## Create it Developing cutting-edge ## Our customer technology and rapidly turning it into capability ## value proposition Utilising our research and experimentation capabilities, our test and evaluation expertise and extensive domain knowledge, we develop and apply cutting-edge technology to help our customers create a true capability. We evaluate, integrate and secure the platforms, systems, information and assets on which missions depend. ## Test it Assuring a capability will work when it is critically needed We offer customers agile and realistic testing experiences so they can be sure We apply our unique technical that their capability works when it is critically expertise across the product lifecycle, needed. We operate some of the most advanced land, sea and air ranges in the helping our customers to create, world and combine the ability to manage test and use defence and live-fire exercises and rehearsals with security capabilities. our digitally-enabled infrastructure to provide customers with realistic and cost-effective testing solutions. ## Use it Ensuring our customers are trained and operationally ready By combining real and simulated training experiences we can ensure our customers are operationally ready to use their capabilities when it matters. Blending testing, mission rehearsal and training, and analysis, we give customers tangible evidence about how their capabilities perform within highly authentic environments and provide advice on how to prepare them for operational use. ## 114% ~£900m Underlying cash conversion in FY22 of FY23 revenue under contract Read more about How we deliver for our stakeholders on Page 26 and 27 | | QinetiQ Group plc Annual Report & Accounts 2022 QinetiQ Group plc Annual Report & Accounts 2022 | 17 17 | | --- | --- | --- | | CORPORATE CORPORATE STRATEGIC FINANCIAL STRATEGIC FINANCIAL | | | | GOVERNANCE GOVERNANCE STATEMENTS STATEMENTS REPORT REPORT | | | ## Our strategy ## Our purpose ### Protecting lives and securing the vital interests of our customers. ## Our vision ### The chosen partner around the world for mission-critical solutions, ### innovating for our customers’ advantage. ## Our strategy ### Three complementary and mutually supporting strategic pillars support us in achieving our vision. Global leverage Distinctive offerings Disruptive innovation | Build an integrated global defence | | Co-create high-value solutions | | Invest in and apply disruptive | | | --- | --- | --- | --- | --- | --- | | and security company to leverage | | for our customers in engineering, | | business models, digitisation and | | | our capability through single routes | | experimentation, test, training, | | advanced technologies to enable | | | to market in UK, US, Australia, | | information and autonomous | | our customers’ operational mission | | | Canada, Germany and Belgium. | | systems. | | at pace. | | | | Read more on Page 19 | | Read more on Page 20 | | Read more on Page 21 | ## Creating a safe and secure environment for us all to thrive ### A high performance and inclusive work environment where employees are engaged, empowered and clear ### about how they can contribute to our vision. ## Our values Integrity Collaboration Performance We take pride in our decisions, and work Delivering value through partnership and Our performance is measured by how we to create a sustainable and responsible teamwork, we actively collaborate with deliver for our customers; meeting their business. We take personal responsibility our colleagues, customers and industry needs through flawless execution and to do the right thing, both as an partners. We know that working together is delivery of the mission-critical solutions organisation and as individuals. the best way to meet our customers’ needs. on which they depend. ## Our behaviours Listen Focus Keep my promises We listen to what our customers say, ask We hear what our customers want, are We do what we say we will, are trusted to questions to help us understand, and clear about our priorities and know do the right thing, and are responsible challenge and offer ideas and solutions. what needs to be delivered and why. and accountable for our own actions. Read more about Our Values on Page 91 ## We deliver safely, responsibly and sustainably for the benefit of all our stakeholders Read more about ESG framework and offerings on Page 45 ### 18 QinetiQ Group plc Annual Report & Accounts 2022 ## Strategic ## progress ## Build an integrated global ## defence and security company ## Global ## leverage ### Strategic pillar #01 ## We are successfully ### Leverage our capability through single ## leveraging our ### routes to market in the UK, US, Australia, ## capabilities into ### Canada, Germany and Belgium. ## the global Test and ## Evaluation market, ## with notable contract FY22 highlights ## wins and delivery • We have won a $10m contract with the US Army to ## internationally.” develop our supersonic target offering. The contract, known as Modernizing Instrumentation Solutions for Test and Evaluation (MISTE) for High Energy Laser Case study: T&E leverage Measurement (HELM), is a great example of our single into Australia routes to market in action, leveraging our Rattler target | | into the US for the testing of high-energy lasers on | We are leveraging our UK capabilities in | | | --- | --- | --- | --- | | | supersonic targets. | Test and Evaluation to support growth | | | • Through FY22 QinetiQ Target Systems has seen | | in our key home markets internationally; | | | | significant positive progress following the COVID-19 | three examples this year of our global | | | | disruption, with customers resuming trials and | leverage in Australia are: | | | | exercises and winning some significant orders. We | 1. Building on our success with the | | | | have achieved good growth in both existing countries | | development of the unmanned aerial | | | with new business wins in the US, India and Japan. | | systems (UAS) flight test range in | Queensland, we have signed our first • We have entered into a strategic collaboration commercial Queensland flight test agreement with automotive manufacturer AM General range user agreement. to accelerate the development of electrification 2. Launched a global skills transfer programme, aimed at technologies for military vehicles, demonstrating the expanding local Test and Evaluation expertise to support viability of electrifying military land vehicles to deliver increasingly complex projects in Australia. The bespoke enhanced performance, while decarbonising military career development program offers new and existing operations, initially on the HUMVEE vehicle. This is a QinetiQ employees in Australia the opportunity to work UK/US collaboration that will lay the foundation for alongside global experts to grow their technical and further research into electrification capabilities for operational expertise within sovereign test and evaluation. land vehicles. 3. We have won an A$27m order to assist the Australian Department of Defence in delivering its largest and most complex land projects. This contract positions us for future growth as a trusted partner, able to provide sovereign Australian industry capability, while leveraging our global capabilities. | | QinetiQ Group plc Annual Report & Accounts 2022 | 19 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Strategic ## progress ## Co-create high ## value solutions ## Distinctive ## offerings ## Our US business Strategic pillar #02 ## continues to develop Co-create distinctive products and ### services to offer exceptional value ## and manufacture ### for our customers in engineering, ## innovative defence ### experimentation, test, training, ## products specialising information and autonomous systems. ## in robotics, FY22 highlights ## autonomy and • We have secured a $62m full-rate production contract in ## sensing solutions.” the US for over 1,200 small advanced robots with a multi- year delivery schedule for the US Army. The Common Case study: US customer pivot Robotic System Individual contract is the largest US against the near-peer threats in Government Program of Record in robotics, giving us a the Indo-Pacific strong platform for growth. • In 2018 we won a significant competitive programme Our US business is continuing to to provide private sector client-side support to the successfully adapt to the changing Battlefield Tactical Communication and Information market dynamics and customer Systems Delivery Team for the UK MOD. The contract is behaviours. Two example projects that a critical enabler to deliver the next generation of Tactical are focused to combat the future threat Communication and Information Systems for UK armed environment are: forces. Following the strong delivery we have been awarded a one year extension. • We have won the DI Pillar £20m contract to support 1. We have won a $24m contract from the US Army to build defence intelligence transformation covering electronic three additional SPECTRE next generation full spectrum warfare, mission data, intelligence training, capability hyperspectral prototype sensors. SPECTRE is an ISR assessments to accelerating innovation, implementing (intelligence, surveillance and reconnaissance) sensor Urgent Operational Requirements, adding automation and system that enables multi-mission Uncrewed Aircraft providing enhanced resilience. Systems (UAS) and crewed aircraft to operate in parallel to other critical sensor payloads and weapons, with improved • Successful field testing of advanced bomb suit for US performance at a fraction of the size and weight Army – our Next-Generation Advanced Bomb Suit has of the sensors currently in use by the US Government. successfully completed field testing to enable full-rate 2. We have received a $12m contract for delivery of additional production in FY23 worth $70m over a 5 year period prototype vehicles under the Robotic Combat Vehicle • A$7.5m, five year extension to the Australian Mine Light (RCV-L) programme, for testing and experimentation Warfare Maintenance Facility contract, out to 2027. by the US Department of Defense. Furthermore, we have established a strategic partnership with Oshkosh for the Optionally Manned Fighting Vehicle (OMFV) competition, seeking to position ourselves to be the primary provider of autonomous controls and integration for the US military land platforms. ### 20 QinetiQ Group plc Annual Report & Accounts 2022 ## Innovation to support delivery of ## our customers’ mission at pace ## Disruptive ## Innovation ## Strategic pillar #03 We are successfully ## Invest in and apply disruptive business delivering on the ### models, digitisation and advanced ## most complex ### technologies to enable our customers’ ## programmes, ### operational missions at pace. ## delivering disruptive ## innovation for FY22 highlights ## our customers’ • Exploring directed-energy technology – In December ## advantage.” we were awarded a multi-million pound R&D contract that forms part of a broad range of activities in the Case study: Delivery on the hypersonics field. QinetiQ has now secured active Robust Global Navigation research and development projects that span near System (RGNS) contract term and future generations of directed-energy technologies, all of which are aligned with the | intentions set out in the UK Integrated Review and | We have completed the hardware design | | --- | --- | | Defence Command paper. This is a great example | and initial associated embedded software | | of our disruptive innovation and focus on creating | development and integration for the | | a global leader in high-value solutions to national | highly complex Robust Global Navigation | | defence and security challenges. | System (RGNS) £67m contract, won in | 2019 with the UK Ministry of Defence. • Completion of modernisation and sustainability Having passed this important technical investment on St Kilda – alongside the National Trust milestone, we now move into the initial for Scotland and UK MOD, as part of the LTPA Air stages of production and testing. This Range Modernisation programme, we have completed is an important programme for the UK a significant programme of upgrades on the UNESCO to develop next-generation satellite World Heritage Site of St Kilda. The investment navigation and timing receivers, that has developed world-class test and evaluation and will be robust and reliable in the most training capabilities, while improving the sustainability challenging and contested environments. of facilities, demonstrating the deployment of our This demonstrates our ability to work capital to support both our long-term growth as well collaboratively with our customers as progressing QinetiQ’s and our customers’ drive and partners to deliver the most towards Net-Zero. complex innovative solutions for sovereign capabilities. | | QinetiQ Group plc Annual Report & Accounts 2022 | 21 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Market ## themes ## The long-term themes reshaping defence ## markets around the world Geo-political tensions have risen to new heights following the Achieving operational advantage over an adversary requires Russian invasion of Ukraine. This has created more uncertainty timely and reliable intelligence, alongside the strategic application around the world than has existed at any time since 9/11 and of capability and resources, to mitigate threats and project power has risked moving Europe and NATO closer to a direct conflict at range to deter malicious actors. The level of modernisation with Russia. required to achieve these outcomes in today’s environment relies on successful innovation, through the effective application There is an expectation that NATO members need to fundamentally of science, engineering and technology to enhance existing increase the range and readiness of their military capabilities for the capabilities, create and assure new ones, and train users to foreseeable future. At the same time, China demonstrates a growing deploy them effectively in a wide range of scenarios. assertiveness in the Indo-Pacific, which is further driving US investment and action to bolster deterrence and security in the region. ### How are defence and security markets changing? ## 1 2 Need for advanced capabilities, informational Resilience of supply chains Rising global tensions and The proliferation of grey-zone warfare In light of the growing tension and competition between Grey-zone activity has increased significantly in recent years advantage and better interoperability increasingly complex threats global powers, nations are increasingly focused on as the supremacy of western forces has driven adversaries to Maintaining technological superiority is critical in this The threat environment continues to become increasingly developing resilient domestic supply chains. These supply adopt new tactics. Grey-zone tactics often include acts, which increasingly complex threat environment. Our customers are complex, fuelled by rapid advances in technology and chains must operate cohesively, as a single ecosystem, would not typically provoke a conventional military response, investing heavily in R&D to develop next-generation capabilities heightened geo-political tensions. From hypersonic missiles to respond to the changing and complex customer but nevertheless undermine defence and security, as well and ensure informational advantage. Areas such as robotics, and advanced fighter jets to low cost consumer drones requirement. This is a critical part of maintaining a as economic and political stability. Typical threats in this autonomy, advanced data analytics, artificial intelligence and adapted to cause harm, technological advances have sovereign defence capability that can function without space include cyber-attacks aimed at compromising critical novel weapons are all of particular interest to our customers. enhanced the lethality of threats at both ends of the spectrum, undue reliance on international trade and expertise or national infrastructure, disinformation campaigns and political These new and emerging technologies must be integrated giving both state and non-state actors access to capabilities raw materials from potentially hostile states. meddling. Key challenges for our customers include improving with traditional defence capabilities, and across our markets which undermine western superiority. In parallel to traditional cyber resilience, improving threat-detection and adapting there is a need for greater inter-operability between platforms threats, digital-based threats continue to grow in sophistication, at pace. and systems to create true capabilities. This extends to the and are often deployed in conjunction with more conventional need for greater co-operation between different forces and threat forms. nations to ensure a concerted effort in countering these modern threats. ## 3 4 ### 22 QinetiQ Group plc Annual Report & Accounts 2022 ## Our customers seek to rapidly ## modernise their defence and ## security capabilities so they ## can better address current and ## future threats.” ### How are we evolving to these new market dynamics? ## 1 2 A multi-domestic strategy Partnering for innovation Delivering value for money through Delivering disruptive science, engineering Our strategy is a multi-domestic strategy aimed at The capabilities our customers require can often be so innovative delivery models and technology required to modernise developing sovereign defence capabilities within the complex that no one company can deliver them alone. In ### Governments around the world face significant fiscal pressure, defence and security capabilities countries in which we operate. The major focus for growth addition, cutting-edge technology is more often found in with high budget deficits and growing debt levels exacerbated QinetiQ was founded on innovation with research, is in our three home countries, the UK, US and Australia, the commercial sector and academia. The defence industry by the impact of COVID-19 support programmes. Against development, test and evaluation at the core of what we do. where we are pursuing similar opportunities to support can benefit from leveraging this technology, but it needs this backdrop nations have a growing number of threats to As a predominantly service-based business we are uniquely their shared defence and security mission – targeting to be new and more effective partnerships to rapidly convert defend against and must wrestle with modernising traditional placed to operate across the breadth of platforms, systems seen as British in the UK, American in the US and Australian emerging technologies into assured deployable capability. defence capabilities, while also developing future digitally and lifecycles, unlike a more traditional vertical platform in Australia. The formation of the AUKUS alliance between We collaborate across the supply chain, but also form novel enabled technologies. This means defence budgets must manufacturer. We can experiment, innovate and develop new these nations reinforces our multi-domestic strategy and partnerships with organisations outside of defence to provide deliver value for money. We act as a strategic partner to our capabilities, drawing on a broad range of existing, emerging and makes us increasingly relevant. We are well-positioned to the agility and expertise required to innovate at pace. Our customers, understanding their challenges and applying our disruptive technologies. We emulate advanced threats and test deliver strong growth in the UK and more than double our ability to work across platforms and technologies and form technical expertise to provide innovative solutions. We believe and evaluate the resilience and inter-operability of the systems Australian and US businesses in the next five years. powerful partnerships helps deliver mission-led innovation to by focusing on our customers’ needs and helping them realise and platforms used to respond to these threats, to provide our customers. cost efficiencies we can create opportunities for growth. assurances. We have invested heavily in contracts such as Engineering Delivery Partner is an example of an innovative the LTPA to ensure we have the capabilities to generate ## 3 4 delivery model we have adopted for the provision of and assure future capabilities and will continue to engineering services to the UK MOD, which has apply disruptive innovation to create relevant ### delivered both savings to the customer and QinetiQ Group plc Annual Report & Accounts 2022 23 capabilities and offerings. growth in our business. CORPORATE STRATEGIC FINANCIAL GOVERNANCE STATEMENTS REPORT # Trading environment The UK, US and Australia are our home countries and collectively represent 92% of our revenue. ## 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 and Development and Test and Evaluation 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. ![img-0.jpeg](img-0.jpeg) Read more about our **UK business** on Page 30 ## 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 Defence Strategy and the focus of that strategy on the growing challenge presented by China. As well as supporting the preparation for future challenges, such as climate change, it preserves investment for the 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 research, development, test and evaluation (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. ![img-1.jpeg](img-1.jpeg) Read more about our **US business** on Page 33 1 Sources: Jane's Market Budget Forecast April 2021, UK MOD and US DOD forecasts for RDT&E, Australia Defence publications and QinetiQ estimates. 2 Research & Development and Test & Evaluation 24 QinetiQ Group plc Annual Report & Accounts 2022 ## Australia Other international markets Tensions in the Indo-Pacific region remain heightened The strategic landscape has undergone a seismic shift from competition between global powers. In light of this, following Russia’s invasion of Ukraine in February Australia published its Defence Strategic Update and 2022. This has provoked NATO to increase its defence Force Structure Plan in July 2020, placing increased capabilities and readiness to respond, adding to the emphasis on force readiness and capability modernisation. pressure for the NATO member countries to increase their In September 2021, a trilateral security partnership was defence spending of at least 2% of GDP. Following the announced between Australia, United Kingdom and United announcement of Germany to increase defence spending States (AUKUS) to further enhance security in the region. by EUR100bn over the next five years, many other NATO and European countries are also increasing their defence The total defence budget is estimated to increase by and security investment. 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 While priority and investment focus will be attached to the reflects funding required to continue delivery of the 2016 prosecution of our three home country strategies (UK, US Defence White Paper and new or adjusted capability and Australia), we will continue to conduct business in the investments outlined in the 2020 Force Structure Plan, support of allies in 5-Eyes, NATO and Continental Europe. 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 programmes 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, ## >£0.5bn >£1.5bn leveraging expertise from across QinetiQ. 1 1 Market Opportunity Market Opportunity ## £98m £107m FY22 revenue FY22 revenue Read more about our Australian business on Page 32 Read more about our International markets on Page 32 1 Sources: Jane’s Market Budget Forecast April 2021, UK MOD and US DOD forecasts for RDT&E, Australia Defence publications and QinetiQ estimates. 2 Research & Development and Test & Evaluation. | | QinetiQ Group plc Annual Report & Accounts 2022 | 25 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Our ## stakeholders Our approach to engagement In order to deliver responsibly and for the benefit of all and issues considered, with engagement led by those best placed stakeholders we must understand what matters to our to effect any necessary change. We expect that our approach and stakeholders. To do this we engage in a variety of ways in how we engage with our stakeholders will continue evolving as an open and transparent manner, trying to identify common we pursue further growth and geographic expansion benefit of goals. In some cases the Board will engage directly with certain the customer, QinetiQ and our suppliers. stakeholders, however in others the relevant delivery teams will manage this engagement. This is dependent on the stakeholder For more information on Section 172 Statement see page 72. How we engage Primary stakeholders Customers Every QinetiQ customer has a delivery team continually engaging with them and adapting our approach to ensure Our customers are at the centre of our vision and the foundation their objectives are achieved. In addition, we regularly take of our success. We strive to apply our strengths to their the time to step back and listen and act upon our customer’s advantage to deliver mission-led innovation, and invest time in views on our performance and relationships through our understanding and responding to their needs. formal customer research systems. Shareholders We engaged with our shareholders during the year through both physical and virtual roadshows, results presentations Our shareholders’ ongoing support enables us to invest in our and the AGM. In addition, our Chairman proactively engaged business and execute our growth strategy for the benefit of all with shareholders to seek their views on the business, stakeholders. In return we aim to deliver long-term sustainable strategy and management team. We seek to keep growth and attractive returns. an open dialogue with our shareholders, particularly around the short-term issues experienced in this year. Employees Our methods of engagement include: Quarterly Peakon surveys, Q-talks, Global roadshows led by our CEO and Global Leadership We are a people business and our employees are critical to our Team, our Global Employee Voice Group (GEV) and other success. Their health, safety and wellbeing is vital and we are engagement forums (e.g. works councils), as well as indirectly committed to providing fulfilling careers where our employees through feedback on platforms such as Glassdoor. can perform meaningful and intellectually stimulating work. Other stakeholders Suppliers In addition to day-to-day engagement through normal business activity, we actively engaged with key partners We occupy a unique position in defence, working in partnership through a series of “Board to Board” meetings. We with various suppliers to deliver the best solutions for our engage with our suppliers through our QinetiQ Collaborate customers. We strive to adopt a collaborative approach and programme; we seek new suppliers through our presence at ensure we treat our suppliers with integrity, taking a fair and external events and engagement with small to medium sized sustainable approach. enterprises through our participation at “Meet the Buyer” events. Communities We engage via a variety of community investment activities such as outreach, volunteering, supporting local charities and We strive to be a good neighbour, having a positive impact on community liaison. our local communities and wider society; from our outreach programme, inspiring the next-generation of scientists and engineers, to providing services that ensure the safety and security of members of society, and our Net-Zero emissions plan. Regulators We engage with regulators via meetings, audits and reports. Various aspects of our business involve oversight from regulators. We engage with regulators to understand changing regulations, ensuring we can meet these requirements. ### 26 QinetiQ Group plc Annual Report & Accounts 2022 r s t a k e h o l d O u e r s s S r u o p t p l a C s u l i u e s e g e t r y o s e o m R l p e r m Our s E Stakeholders S s h a r r e h o l d e C o s m m u n i t i e Primary stakeholders O u r s r s t a o l d e Other stakeholders k e h Impact of engagement How we create value Our delivery teams continually adapt our We deliver mission-critical solutions to our customers helping approach to ensure customers’ needs are met. them to address their most pressing challenges. They benefit from The formal feedback we receive is reviewed a responsive and agile approach, the ability to innovate at pace at all levels of our organisation to ensure we and value for money. continuously improve and evolve our business processes and delivery solutions. We have sought to keep the financial markets Our business model, supported by our strategy, aims to deliver and our shareholders up-to-date with progress sustainable long-term growth and returns to our shareholders. on the issues throughout this challenging year; shareholder feedback and comments on operational direction, returns and acquisitions has helped shape our strategic thinking and decision-making. Our engagement has helped us to identify Our employees work in an environment where the work they do priority focus areas to improve the employee makes a genuine difference to our customers and their safety. experience. By listening to our people through They have rewarding careers in highly skilled areas and are our Peakon surveys we have directed our efforts able to satisfy their intellectual curiosities. to enhance those areas highlighted, including ways of working, safety, digital improvements and concerns on cost of living. This engagement continues to ensure we are Working with our suppliers we bring together complementary partnering effectively to support our customers. industry-leading thinking in a truly collaborative environment to the It gives us insight into industry developments benefit of the customer, QinetiQ and our suppliers. and ensures effective collaboration between QinetiQ and its partners and suppliers. Our community investment activity is viewed We aim to benefit the wider socio-economic wellbeing of the positively. Through our community liaison, our communities where we operate. We offer time for volunteering, and regular updates have ensured local people are one of the main ways we support our local communities is through aware of our activity. Our outreach activity has STEM (science, technology, engineering and maths) outreach with provided benefit to young people. young people, raising aspirations and providing signposting to rewarding careers. Through engagement we are able to ensure we We take an active role in the defence industry, with our customers, continue to meet the high standards expected peers and partners alike. For example, our Chief Executive has been by regulators. recently re-appointed as Industry Co-Chair of the Defence Growth Partnership (DGP). | | QinetiQ Group plc Annual Report & Accounts 2022 | 27 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Stakeholder ## Q&A ## Answers to some ## of our stakeholders’ ## most frequently ### - ## asked questions What differentiates QinetiQ ## Q from competitors, particularly in regard to ESG? We are capability-focused rather than platform-focused, meaning ## A we operate across all customer platforms, developing strong partnerships with customers, defence peers and academia. We are proud of our unique and privileged position as a customer-friend and advisor. Our core capabilities such as test and evaluation, training and rehearsal, robotics and autonomy support our purpose of protecting lives, by ensuring platforms work safely and correctly, and removing the war-fighter from harm’s way. We are also proud to have published our Net-Zero GHG emissions plan and to manage over 50 conservation sites. What is driving the strong ## Q performance in EMEA Services? EMEA Services is a brilliant example of the results from ## A successful delivery of our long-term strategy, where we have been actively winning larger, longer-term contracts, which has driven strong growth in our backlog, supported by up-skilling our business development capability and our programme management capability to successful execute those contracts. This demonstrates the strength in the fundamentals of our strategy and the foundations of QinetiQ. ### 28 QinetiQ Group plc Annual Report & Accounts 2022 What is QinetiQ’s capital ## Q allocation policy? ## EMEA Services Firstly, we look to invest in our business to support the long-term growth of the Group. We do this through ## A ## demonstrates the two lenses, supporting organic growth and targeting acquisitions that are strategically aligned with our overall growth ## successful delivery of ### - ambition. Next, we look to retain a strong balance sheet and to ## our long-term strategy.” optimise our capital structure. At present we have a net cash position but in future we would consider taking on leverage to fund strategically aligned acquisitions consistent with our financial and operating policies. Our business would be comfortable in a sustainable leverage position of circa 2 times net debt to EBITDA, and for the right strategic acquisition potentially higher for a short duration, returning to below 2 times leverage within 24 months. We also have a disciplined approach to portfolio management as demonstrated by the three disposals completed last year that were no longer aligned with our strategic objectives. Then we look to retain a progressive dividend to shareholders – the full-year dividend for FY22 is 7.3p per share. Finally we commit to return excess cash to our shareholders. 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 What is QinetiQ’s US growth strategy and ability to prosecute our strategy. ## Q how does this differ from the past? What were the two discrete short-term issues Our US growth strategy is developing a disruptive that QinetiQ faced this year, why did they occur ## Q mid-tier operator in the world’s largest defence market, and how has QinetiQ’s approach evolved since? ## A targeting $600m annual revenue by FY26, through both organic and inorganic growth. Importantly, the structure and In our first-half results we reported two discrete short- approach of QinetiQ US today is very different from 2006-2010. term issues. Firstly, an unusual combination of emergent ## A In the first instance we have significantly strengthened our risks across system maturity, supplier capability and governance system with Special Security Agreement (SSA), contract delivery conditions on a large complex project caused enabling much greater collaboration with the wider QinetiQ Group a £14.5m write-down. The project has now been fully closed and management teams. Secondly we are focused on our core and the financial impact remains consistent and contained in capabilities in higher-skill, higher-margin operations that align our first half results. Neither the system nor the supplier exist with key US budget growth segments such as sensing, autonomy in our forward order-book and there is no read-across to other and robotics. Thirdly, we have put in place a strong management programmes. After careful review, we strengthened our risk- structure to drive performance, including the excellent hire this management practices to better consider and mitigate the effect year of Shawn Purvis as QinetiQ US CEO. of combined risks materialising on an individual project. Secondly, US organic revenue reduced by 24% compared to prior year with the second half revenue performance recovery slower than What is QinetiQ’s exposure expected. As we reported in November in our Interim results, ## Q to inflation? there were a number of compounding effects that impacted our first half results in the US including lower opening order backlog due to COVID-19, supply-chain and the US administration change, As a predominantly service orientated business, our and the customer priority pivot from Afghanistan to the Indo- primary inflation exposure is from wages. For single ## A Pacific. Whilst we took proactive steps to manage the revenue source work (approximately half of Group revenue) shortfall in the first half and position us for growth in the second wage inflation is recoverable as an allowable cost. In competitive half, our second half revenue recovery performance was slower processes any cost increase is considered in our pricing strategy. than targeted, with the second half in line with the first half largely Fixed price contracts contain “variation of price” clauses that due to the US defence budget being constrained by the extended allow for an adjustment based on an agreed escalation factor Continuing Resolution. The US defence budget was constrained or index, reducing or removing inflation risk to QinetiQ. Firm by the extended Continuing Resolution through the first quarter of price contracts include our assumptions on wage growth over calendar 2022 which had a material impact on contract funding the contract, therefore we hold the benefit and risk of wage held back, and therefore customer spending behaviour, impacting inflation being lower or higher than planned. We enter each our ability to deliver revenue in our fourth quarter; the impact of financial year with approximately 60-65% of that year’s the Continuing Resolution delay was particularly felt by those revenue already contracted, therefore with the mix of fixed, companies like ours with March year ends. firm and cost-plus contract we are exposed to approximately half of the cost increase as an impact to our bottom line with the other half passed directly on to customers. | | QinetiQ Group plc Annual Report & Accounts 2022 | 29 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Operating ## review FY22 FY21 Financial Performance £m £m 1 Orders 918.9 864.4 Revenue 1,059.2 939.9 Underlying operating profit 135.6 118.6 Underlying operating margin 12.8% 12.6% 2 Book to bill ratio 1.1x 1.2x Total funded order backlog 2,541.6 2,710.6 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, excluding the share of orders from JV orders, divided by revenue recognised, excluding the LTPA non-tasking services revenue of £222m (FY21 £226m). ## EMEA ## Services Financial performance Business unit commentary Overview Orders for the year increased by 6% to Maritime & Land (~39% of EMEA EMEA (Europe, Middle East and £918.9m (FY21: £864.4m), driven by Services revenue) Australasia) Services combines world- £115m under the WSRF contract in the leading expertise with unique facilities The Maritime and Land business delivers UK, mainly for the development of directed to provide capability generation and operational advantage to customers by energy systems in the UK; an increase in assurance, underpinned by long-term providing independent research, orders from Defence Digital and Defence contracts that provide good visibility of evaluation and training services. Intelligence; and an order worth A$27 revenue and cash flows. • We supported Formidable Shield, million for Land systems engineering the largest live-fire Integrated Air and support in Australia. Missile Defence exercise in FY22 led by US Sixth Fleet and conducted by Naval Revenue increased by 13% to £1,059.2m Striking and Support Forces NATO. (FY21: £939.9m), and grew by 13% In total, 16 ships, 31 aircraft, and on an organic basis, as a result of approximately 3,300 personnel from new work under the EDP and WSRF 10 NATO nations participated in the contracts, Defence Digital contracts live training event at the Hebrides (in Cyber & Information) and ongoing range. We provided the safe growth in Australia. environment, logistics and range control to facilitate this trial, across At the beginning of FY23, £726m of the maritime and air domains. A range the division’s FY23 revenue was under of targets were used to test defences, contract, compared to £684m (of the including subsonic, supersonic and FY22 revenue) at the same point last ballistic targets. This is an excellent year. This reflects the 6% increase in example of our investment in the LTPA orders won in the year. contract, driving enhanced operational outcomes for our customers and Underlying operating profit grew by 14% increasing the demand for our ranges, to £135.6m (FY21: £118.6m) and grew with QinetiQ being at the leading edge organically by 14% in line with revenue of safe delivery of complex events to growth. Operating margin increased ensure our NATO allies can defend to 12.8% reflecting the continuation of against future threats. disciplined cost control and risk management. • We supported the Royal Navy Carrier Strike Group Strike Warrior exercise at | Including the LTPA, approximately 67% | MOD Aberporth and Hebrides ranges, | | --- | --- | | of EMEA Services revenue is derived | with our operational training and | | from single source contracts (FY21: | missions system business Inzpire, | | approximately 68%). By investing in | supporting the overall training activity | | our core contracts and extending their | using its God’s Eye View (GEV) | | duration the high proportion of single | capability. Exercise Strike Warrior | | source revenue contracted on a long-term | involved more than 20 warships, three | | basis provides visibility and reduces our | submarines and 150 aircraft from 11 | | exposure to future changes in the baseline | nations and was the final test for the | | profit rate set annually by the Single | Carrier Strike Group before its first | | Source Regulations Office. | operational deployment. The GEV | system developed by QinetiQ enabled the Royal Navy and Royal Air Force to enhance the training value from the exercise with a near real-time picture of the overall exercise, tracking each asset across waters off north-west Scotland by connecting sensors across the Hebrides range and RAF bases through a digital backbone. ### 30 QinetiQ Group plc Annual Report & Accounts 2022 | • We have won orders totalling £115m | | Air & Space (~22% of EMEA | • We have made good progress on | | | --- | --- | --- | --- | --- | | | on the Weapons Sector Research | Services revenue) | | developing the tools, people, processes | | | Framework (WSRF) contract, | | | and procedures for Digital Test and | The Air and Space business de-risks including work on the development Evaluation. We are applying these to complex aerospace programmes by and deployment of directed energy the New Medium Helicopter acquisition evaluating systems and equipment, weapons for the UK MOD, an important programme for DE&S where we will assessing the risks and assuring safety. capability as identified in the Integrated pilot our digital innovation on this • The Engineering Delivery Partner (EDP) Review earlier in the year, particularly important procurement to help the programme continues to evolve to focused on counter-hypersonics. We MOD speed up its decision-making deliver the ever changing needs of our were appointed to lead the WSRF and reduce costs. customers, and has now delivered over in June 2020 by DSTL, alongside • Building on our pre-collaboration £920m of orders since inception of this industry partners MBDA and Thales. agreement on the UK’s next-generation 10-year framework contract in October The framework, which we expect to be fighter concept known as Tempest, 2018. Over 97% of engineering outputs worth £300m over five years, brings throughout the year we have signed have been delivered on time, right first together more than 100 industry and contracts with the four main key time. This year, we also achieved Full academic partners to research and industry partners to develop our role Operating Capability (FOC) as planned develop technologies for the benefit and position in the programme. We and we successfully passed through of the UK MOD. will provide capability assurance, the 4-year review point demonstrating • Working alongside a range of industry helping streamline the development DE&S’ continued confidence and and NATO partners, we successfully programme, while also exploring how commitment to the contract. Key delivered the Robotic Experimentation our advanced technologies could be wins this year include: and Prototyping augmented by used to enhance operational capability — A £25m, 3-year contract to integrate Maritime Unmanned Systems of the platform. We have also all Lightning II Technical Support (REPMUS) trials in Portugal. This continued to develop opportunities requirements to provide the was an important unmanned system on the FCAS Acquisition Programme. continuity and flexibility necessary development trial that combined multi- to support safe, effective and • We continue to deliver on a range national and multi-domain data to operationally focused aircraft of other critical programmes and generate a detailed mobile command capability development; capabilities in the Air domain, and control picture of the battle-space including Merlin CROWSNEST radar — A multi-year contract bringing used by an amphibious raiding party. trials and Future Anti Surface Guided together the Land Assurance • Under the LTPA Air Ranges Weapon trials in support of the MOD QinetiQ is providing into a single, Modernisation programme we have Carrier Strike Group (CSG) capability, agile contract, supporting the completed a significant upgrade to our acceleration of the Tribune program, achievement of FOC of the AJAX facilities on the island of St Kilda – the bringing the C130J capability across vehicle line by 2025; UK’s only dual UNESCO World Heritage to the A400M, support to the Battle — A series of contract amendments site, 40 miles off the west coast of of Britain Memorial Flight, and totalling £22m to supporting the the Outer Hebrides in Scotland. We continued provision tests for New Style of IT programme in have developed a new energy centre, Boeing in our five-metre wind its delivery of critical engineering accommodation, tracking radars tunnel at Farnborough. delivery commitments and and telemetry, completed on time timelines through maintaining and to budget. essential engineering expertise and • We have made an investment in continuity of technical knowledge. our autonomy capability in the UK, • Despite logistical challenges presented acquiring the Northstar autonomous by COVID-19, we have successfully navigation software intellectual delivered the full 2021 Test Aircrew property and related test and trials Training course. Aligned with our assets from TP Group Plc. As part global ambitions and broadening of the investment, the software international success, our training development team have also moved to courses are attracting significant QinetiQ. This investment demonstrates international demand. In FY22, we have our capital allocation policy in action, welcomed students from Australia, investing in important capabilities and Finland, Switzerland, Netherlands, IP to support future growth in the UK Sweden, German and Turkey. and internationally. | | QinetiQ Group plc Annual Report & Accounts 2022 | 31 31 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Operating ## review ## continued Cyber & Information (~29% of EMEA — A several million pounds 2-year International (~10% of EMEA Services revenue) contract extension to support Services revenue) UK MOD in the development The Cyber and Information business Our international business leverages and transition to live service helps government and commercial our expertise and the skills we have of a cutting edge, highly customers respond to fast-evolving threats developed in the UK and applies them to scalable and deployable using its expertise in training, secure opportunities in attractive markets globally. secure Communications communication networks and devices, • Our Australian business continues and Information System; intelligence gathering and surveillance to deliver strong growth. Our Major — The DI Pillar £20m contract to sensors, and cyber security. Service Provider (MSP) contract has support defence intelligence • We have won over £160m of orders delivered orders totalling A$97m transformation, covering aspects with Defence Digital and Defence including an A$27m order to assist the key to defence intelligence: from Intelligence. We have become Australian Department of Defence in electronic warfare; mission data; a strategic partner supporting delivering its largest and most complex intelligence training; capability Strategic Commands’ digital change Land projects. This contract positions assessments to accelerating programmes and are well-placed to us for future growth as a trusted innovation; implementing Urgent continue to leverage our position with partner able to provide sovereign Operational Requirements (UORs); these customers in the coming years. Australian industry capability, while adding automation; and providing Orders won include the following , many leveraging our global capabilities. enhanced resilience. This contract of which are contracted through EDP: • Building on our success with the is won and delivered through EDP — A £33m contract to transform the development of the unmanned aerial alongside our partners and aeronautical data management systems (UAS) flight test range in subject-matter experts. and aeronautical information Queensland, we have signed our first • Over the last year we have seen production capability for UK MOD. commercial Queensland UAS range strong delivery progress on the highly PICASSO Aeronautical Information user agreement. This demonstrates complex Robust Global Navigation Capability (P-AIC) will provide excellent progress in leveraging our System (RGNS) development contract, global access to reliable, timely, UK capabilities in Test and Evaluation won in 2019 with the MOD. We have accurate, and (where applicable) to support growth in our key home completed the hardware design and assured and legislatively markets internationally. initial associated embedded software aligned, worldwide Aeronautical • In Germany, following the re-baselining development and integration. This is Information that will support safe of the business plan in FY21, this an important programme for the UK to Defence aviation. The solution will past year has been better for the develop the next-generation satellite be a 24/7, cloud-hosted, system- business, winning both extensions navigation and timing receivers, of-systems, that will transform and new work. Furthermore the that will be robust and reliable in the way UK MOD manages German Government’s commitment the most challenging and contested aeronautical data; to increase defence spending environments. The contract is a great — In 2018, a significant competitive provides a supportive environment to example of QinetiQ delivering on programme to provide private business growth in our capabilities highly complex programmes at sector client side support to the of operational training and special the leading-edge of technology Battlefield Tactical Communication mission support. for sovereign capability. and Information Systems • Our recent acquisitions of NSC (BATCIS) Delivery Team within and Naimuri are performing well Defence Digital (within MOD). producing over 20% year-on-year The contract is a critical enabler revenue growth. In particular, in line to deliver the next generation with our acquisition strategy, we have of Tactical Communication and successfully leveraged the Naimuri Information Systems as part of a business (acquired in 2020) into the Single Information Environment National Security and Data Intelligence for UK armed forces. Following the UK market, now a key supplier on strong delivery in the first three intelligence frameworks. years of the programme by both QinetiQ and in collaboration with our partners (Roke, ATOS and BMT) and suppliers, we have been awarded a one-year extension; ### 32 QinetiQ Group plc Annual Report & Accounts 2022 FY22 FY21 Financial Performance £m £m Orders 307.7 285.0 Revenue 261.2 338.3 Underlying operating profit 1.8 33.2 Underlying operating margin 0.7% 9.8% 1 Book to bill ratio 1.2x 0.8x Total funded order backlog 287.2 233.5 1 B2B ratio is orders won divided by revenue recognised. ## Global ## Products Financial performance Business Unit commentary Overview | | Orders increased by 8% to £307.7m (FY21: | United States (~58% of Global | | --- | --- | --- | | Global Products delivers innovative | £285.0m) This was driven by a US$62m | Products revenue) | | solutions to meet customer requirements. | order for the full rate production contract | | Our US business develops and The division is technology-based and on the SPUR robots in the United States, manufactures innovative defence products has shorter order cycles than EMEA partly offset by a reduction in order value specialising in robotics, autonomy and Services. Our strategy is to expand of £22.5m associated with the complex sensing solutions. This business unit the product portfolio and win larger, project, and a change in customer comprises Technology Solutions longer-term programmes to improve funding priorities from counter-insurgency (formerly QNA) as well as C5ISR the consistency of the financial missions in Afghanistan to emerging Solutions (formerly MTEQ), which performance of this division. near-peer threats in the Indo-Pacific we acquired in December 2019. and the impact of the Continuing • US organic revenue reduced by 24% Resolution in early 2022. compared to prior year with the second half revenue performance At the beginning of FY23, £172m of recovery slower than expected. As we the division’s FY23 revenue was under reported in November in our interim contract, compared to £117m (of the FY22 results, there were a number of revenue) at the same point last year. This compounding effects that impacted increase reflects the growth in orders in our first half results in the US, year combined with lower revenue burn including lower opening order backlog following supply chain and technical due to COVID-19, supply-chain issues challenges in the United States in FY22. and the US administration change, and the customer priority pivot from Revenue was down 23% on a reported Afghanistan to the Indo-Pacific. basis at £261.2m (FY21: £338.3m), due | to slower recovery in the US including | • Whilst we took proactive steps to | | | --- | --- | --- | | COVID related delivery and supply-chain | | manage the revenue shortfall in the | | challenges on the initial production | | first half and position us for growth | | ramp-up of SPUR robots and the change | | in the second half, our second half | | in customer funding priorities mentioned | | revenue recovery performance | | above. Furthermore there was the loss | | was slower than targeted, with the | | of revenue contribution from the FY21 | | second half in line with the first half | | disposals (Optasense, Boldon James | | largely due to the US defence budget | | and Commerce Decisions) amounting to | | being constrained by the extended | | £16.8m. Excluding the impact of these | | Continuing Resolution. The US | | disposals and foreign exchange, | | defence budget was constrained by | | revenue was down 16% (£51.7m) | | the extended Continuing Resolution | | on an organic basis. | | through the first quarter of calendar | 2022 which had a material impact | Underlying operating profit fell to £1.8m | on contract funding held back, | | --- | --- | | (FY21: £33.2m), with an underlying | and therefore customer spending | | operating profit margin of 0.7% (FY21: | behaviour, impacting our ability | | 9.8%). This loss was driven by a £14.5m | to deliver revenue in our fourth | | write-down on the complex project and | quarter; the impact of the Continuing | | the revenue shortfall in the US business. | Resolution delay was particularly felt | | Excluding the impact of this write-down | by those companies like ours with | | operating profit was £16.3m | March year ends. Furthermore we | | (6.0% margin) in FY22. | have also seen some delays to other | contract wins due to overall customer sentiment during these times, which has had the effect of delaying some spending decisions. | | QinetiQ Group plc Annual Report & Accounts 2022 | 33 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Operating ## review ## continued Business unit commentary • We have also secured a $62m FRP • In January 2022 we announced the contract in the US for over 1,200 appointment of Shawn Purvis as the United States (~58% of Global SPUR robots under the Common new President and CEO of QinetiQ Products revenue) continued | | Robotic System–Individual (CRS-I) | US. Shawn has more than 25 years | | --- | --- | --- | | Despite these challenges, we have secured | contract with a multi-year delivery | of experience in the US defence and | | an impressive $253m of orders in FY22, | schedule for the US Army. The SPUR | intelligence industry with Northrop | | 19% growth on the prior year. | robot enables a heightened capability | Grumman and SAIC, with a track | | | for organic tactical reconnaissance, | record of transformational leadership, | • Building on the successful delivery and surveillance and target acquisition driving billion-dollar P&L performance trials of our Intelligence, Surveillance to enhance manoeuvres and of complex organisations and large- and Reconnaissance (ISR) prototype protection for dismounted forces. scale acquisition integration. Shawn is system on a Program of Record, we The small advanced robotic platform further building her US leadership team have won a $24m contract from the is lightweight and highly mobile to support the scale of our ambition of US Army to build three additional offering unprecedented capability in growth. In July 2021 we also appointed SPECTRE next generation full multi-domain environments including Lawrence (Larry) Prior III to the QinetiQ spectrum hyperspectral prototype special payloads, advanced sensors Plc Board; he brings a wealth of US sensors. SPECTRE is an ISR sensor and mission modules. CRS-I is the experience from aerospace, defence system that enables multi-mission largest US Government Program of and government services. With Uncrewed Air Systems (UAS) and Record in robotics, giving us a strong these executive and non-executive crewed aircraft to operate in parallel platform for growth. During the year appointments, we are building the right to other critical sensor payloads and we have completed necessary steps to foundations for growth to more than weapons, with improved performance transition the contract from low rate to double the size of the US business at a fraction of the size and weight of full rate production to meet customer over the next five years, through the sensors currently in use by the US delivery milestones in the years ahead. both organic growth and strategy-led Government. This is exciting progress acquisitions. For more context and • We received a $12m contract for for our US business, with opportunity information on our growth ambition delivery of additional prototype for greater exploitation in the future. and plan, please refer to the investor vehicles under the Robotic Combat • Our Next Generation Advanced seminar we presented on 27 April Vehicle Light (RCV-L) programme, for Bomb Suit (NGABS) for the US Army 2022: Delivering our global ambition; testing and experimentation by the US has successfully completed field a playback can be found on our DoD. Furthermore, we have established testing to enable full-rate production website here: https://www.qinetiq. a strategic partnership with Oshkosh to commence in FY23, worth an com/en/investors/investor-seminars/ for the Optionally Manned Fighting estimated $70m over a five-year delivering-global-growth. Vehicle (OMFV) competition, seeking period. Our solution brings together to position ourselves to be the primary • While the second half revenue in the a novel see-through Heads-Up provider of autonomous controls US has been lower than we expected, Display, combined with advanced and integration for the US military we remain confident of our growth integrated sensing capability, to bring land platforms. looking forward. We have secured 20% a differentiated capability for Explosive growth in order intake in FY22 which, • We are investing in tactical airborne Ordinance Disposal operators. As a coupled with our new leadership team, and strategic ISR capabilities and Program of Record, NGABS production headed by Shawn Purvis, provides a strategic teaming to exploit our will provide another significant strong foundation for delivery of our expertise on combat-vehicle platforms foundation for our growth in the US. strategy in the US. over the next few years to drive • We have won a $10m contract with future growth. We are confident we the US Army to develop our supersonic will deliver growth in the second half target offering. The contract, known as from existing contracted customer- Modernizing Instrumentation Solutions funded R&D work and new growth for Test and Evaluation (MISTE) for opportunities on airborne sensors High Energy Laser Measurement and ground-vehicle integration. (HELM), is a great example of our single routes to market in action, leveraging our Rattler target into the US for the testing of high energy lasers on supersonic targets. ### 34 QinetiQ Group plc Annual Report & Accounts 2022 Space Products (~15% of EMEA Products (~27% of • QinetiQ Target Systems, under Global Products revenue) Global Products revenue) the LTPA and CATS contracts, in September 2021 supported trials of QinetiQ’s Space Products business EMEA Products provides research services our Banshee Jet 80+ on the flight-deck provides satellites, payload instruments, and bespoke technological solutions of HMS Prince of Wales. The Banshee sub-systems and ground-station services. developed from intellectual property flights represent the first step for • We have won two significant new originating in EMEA Services. QinetiQ the UK Royal Navy in exploring how contracts in our Belgium Space Target Systems is also reported within crewless technology could be operated business: EMEA Products. from the Queen Elizabeth-class aircraft — - A €28m contract for satellite and • We have entered into a strategic carriers in the future. Commander Rob payload integration of Quantum Key collaboration agreement with Taylor, lead for Royal Navy air test and Distribution encryption technology. automotive manufacturer AM General evaluation group, commented: “There This is a significant commercial to accelerate the development of is a real need for a low-cost drone satellite win with our customer, electrification technologies for military such as the Banshee that can replicate ArQit, aiming to be the first provider vehicles. The partnership has begun a range of the threats in the skies and of quantum encryption services with the development of a hybrid provide a test bed for future payloads”. to the defence and commercial concept of the globally iconic HMMWV • Our sensors and communication sectors. This contract also provides (High-Mobility Multipurpose Wheeled products have seen strong global market opportunity for further Vehicle often referred to as ‘HUMVEE’) demand and growth, with orders of follow-on satellite sales over the – demonstrating the viability of £15m for our SIGINT, counter-drone next 10 years. electrifying military land vehicles to radar, secure communication and deliver enhanced performance while Building on the success of the PROBA secure navigation products to UK decarbonising military operations. The satellite platform, we have won a >€10m and international customers. HUMVEE vehicle concept is the first contract for the European Commission, step of a highly ambitious programme contracted via the European Space Agency in which QinetiQ and AM General (ESA) to deliver and operate an important are exploring how electrification can new satellite that will support technological transform competitive advantage in innovation, de-risking and concept testing the land domain. This collaboration will for public agencies and commercial lay the foundation for further research enterprises in Europe. The satellite into electrification capabilities for land will provide organisations with new vehicles, for example autonomous opportunities to capitalise on affordable systems, increased situational access to space demonstration and awareness through enhanced sensor validation, essential for driving advances capability and optical communications. in new space technologies and capabilities. • QinetiQ Target Systems (QTS) experienced disruption in FY21 due to COVID-19 with cancellations of trials and deployments due to travel restrictions around the world. Through FY22 we have seen significant positive progress across the QTS business with customers resuming trials and exercises and winning some significant orders, seeing growth in both their existing countries and new business wins in the US, India and Japan – the business has both recovered from COVID and achieved its largest order intake ever with £42m orders. | | QinetiQ Group plc Annual Report & Accounts 2022 | 35 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## CFO ## review Financial performance Statutory results Underlying results 2 (£m) FY22 FY21 FY22 FY21 Revenue 1,320.4 1,278.2 1,320.4 1,278.2 Operating profit 117.5 108.7 137.4 151.8 Profit after tax 90.0 121.9 118.1 126.1 (p) Earnings per share 15.7 21.4 20.6 22.1 Dividend per share 7.3 6.9 7.3 6.9 Total funded order backlog 2,828.8 2,94 4.1 Total orders 1,226.6 1,149.4 Net cash inflow from operations 209.7 194.4 215.3 199.0 1 Cash conversion ratio 114% 98% Free cash flow 110.0 106.7 Net cash 225.1 164.1 1 Cash conversion defined as operating casflow pre-capex/ EBITDA. 2 Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. Overview of full year results We are also seeing positive trends in our order-book progression: We have made good progress with a strong second half, partially offsetting • Backlog: The LTPA is a large multi- the challenging first half. year contract that was booked in prior years – as we deliver revenue this We delivered strong orders and revenue, will naturally reduce the LTPA order growing organically by 9% and 5% ## Exceptionally strong backlog. Order backlog excluding the respectively. Prior to the complex project LTPA continues to steadily increase, ## performance in write-down, we delivered good underlying with 7% CAGR increase, now trading performance with operating profit ## EMEA Services standing at £1.33bn. margins within our short-term target range at 11.4%. Strong cash performance has • Opportunity size: As part of our ## enabled us to continued in FY22 and we closed the year previously stated strategy, we are with net cash of £225.1m, which continues also seeing success in winning and ## partially mitigate | | to provide support for investment | delivering on larger longer-term | | --- | --- | --- | | a disappointing | opportunities. We have changed our | contracts, with 34% of our FY22 Orders | | | cash conversion definition to reflect our | from contracts over £5m in size, up | ## year from Global pre-capex cash flows as a proportion of from 28% two years ago. EBITDA – using this new definition we ## Products.” | achieved underlying cash conversion of | Revenue increased 3% to £1,320.4m | | --- | --- | | 114%. We enter FY22 in a strong position, | (FY21: £1,278.2m) up 5% on an organic | | with a large order backlog and a robust | basis, with a 13% organic increase in | | balance sheet. | EMEA Services primarily due to ongoing | EDP growth, new work under the WSRF | Orders in the year totalled £1,226.6m | contract and work delivered under the | | --- | --- | | (FY21: £1,149.4m), a 7% increase, 9% on | Major Service Provider (MSP) contract in | | an organic basis. This included £320m | Australia. Global Products revenue was | | of Engineering Delivery Partner (EDP) | down 16% organically due to the revenue | | framework orders, £115m under the WSRF | performance recovery in the US being | | contract and in excess of £160m from | slower than expected, with the second half | | Defence Digital and Defence Intelligence | in line with the first half, largely due to the | | in EMEA Services and in the United States | US defence budget being constrained by | | a $62m order for the full rate production | the extended Continuing Resolution. | contract on the SPUR robots in Global Products. 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. ### 36 QinetiQ Group plc Annual Report & Accounts 2022 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 Orders bridge the revenue and additional cost impact to resolve the project. The impact on our 7% total growth full year underlying results was an order 9% organic growth reduction of £22m, revenue reduction of 76.3 (22.5) (16.5) 48.6 (8.7) 1,226.6 £11m and operating profit reduction of 1,149.4 £14.5m. The project has now been fully closed and the financial impact remains consistent with and contained in our first half results. Underlying operating profit of £137.4m (FY21: £151.8m) was down 9%. Excluding £ million the impact of the write-down underlying FY21 Global Complex Foreign Acquisitions & FY22EMEA operating profit was flat at £151.9m, at Services Products project write- exchange disposals* down 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 Revenue bridge profit was down 12%. Operating profit in 3% total growth Global Products decreased by £31.4m 5% organic growth primarily due to the write-down and US 118.4 (41.0) (10.7) (10.3) (14.2) 1,320.4 reduced revenue. This was offset by 1,278.2 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 restated: | £108.7m). | £ million | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | FY21 | EMEA | Global | Complex | Foreign | Acquisitions | FY22 | | | | | Services | Products | project | exchange | & disposals* | | | Underlying profit before tax decreased 9% | | | | | write-down | | | | to £136.0m (2021: £149.9m) in line with the decrease in underlying operating profit, with underlying net finance expense at £1.4m (2021: £1.9m). Underlying operating profit bridge 9% total decline Specific adjusting items 12% organic decline Specific adjusting items, sometimes | referred to as the middle column, at the | | 16.4 | (20.8) | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | operating profit level amounted to a loss of | 151.8 | | | (14.5) | | | | | | | | | | 0.2 | 4.3 | 137.4 | £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 £ million FY21 EMEA Global Complex Foreign Acquisitions FY22 accounting policy in respect of software Services Products project exchange & disposals* implementation costs. The latter arises write-down from a decision by the International * Prior year acquisition of Naimuri and prior year disposal of Optasense, Boldon James Financial Reporting Interpretations and Commerce Decisions Committee (IFRIC) on how companies should be interpreting accounting standards when assessing how to account for configuration and customisation costs in cloud computing arrangements. | | QinetiQ Group plc Annual Report & Accounts 2022 | 37 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## CFO ## review ## continued | Many companies, including QinetiQ, are now | Similarly, the increase in the net surplus | The effective tax rate is expected to remain | | --- | --- | --- | | having to expense, rather than capitalise, | within FY22 (closing at £362.2m) will lead | below the UK statutory rate in the medium | | the costs of implementing new software | to an increase in the pension net finance | term, subject to any tax legislation changes, | | tools procured through “Software as a | income in FY23. | the geographic mix of profits, the recognition | | Service” arrangements. | | of deferred tax assets and while the benefit | Tax of net RDEC retained by the Group remains | Below operating profit, specific adjusting | The total tax charge was £29.7m (FY21 | in the tax line. | | --- | --- | --- | | items included income of £4.5m (FY21: | restated: £20.7m), with specific adjusting | | | £7.1m) in respect of the defined benefit | items driving the increase. The underlying | A £15.9m charge in respect of the impact | | pension net surplus and a tax expense of | tax charge was £17.9m (FY21: £23.8m), on | on UK deferred tax balances due to the | | £11.8m (FY21 restated: £3.1m income), | lower underlying profit before tax with an | UK corporation tax rate change from 19% | | discussed in more detail below. The | underlying effective tax rate of 13.2% for the | to 25% has been classified as a specific | | prior year also included a gain on sale of | year ending 31 March 2022 (FY21: 15.9%). | adjusting item. Together with a £4.1m | | businesses and investments of £28.7m and | The underlying effective tax rate continues | income (FY21 restated: income of £3.1m) | | a £25.4m goodwill impairment in relation | to be below the UK statutory rate, primarily | in respect of the pre-tax specific adjusting | | to the QinetiQ Germany business. Further | as a result of the benefit of research and | items (see note 4), the total specific | | analysis is set out in note 4. | development expenditure credits (‘RDEC’) | adjusting items tax expense was £11.8m | | | in the UK which are accounted for under IAS | (FY21 restated: income of £3.1m). | Net finance costs | | 12 within the tax line. An adjusted underlying | At 31 March 2022 the Group had unused | | --- | --- | --- | | Net finance income was £3.1m (FY21: | effective tax rate before the impact of RDEC | tax losses and US carried forward interest | | £5.2m). The underlying net finance expense | would be 17.3% (FY21: 19.4%). The impact | expense of £128.1m (FY21: £73.2m) which | | was £1.4m (FY21: £1.9m) with additional | of RDEC is shown net of £9.5m (FY21: | are available for offset against future taxable | | income of £4.5m (FY21: £7.1m) in respect | £10.6m) appropriated by the MOD. Within | profits. Deferred tax assets are recognised | | of the defined benefit pension net surplus | other creditors there are provisions for | on the balance sheet of £15.5m in respect of | | reported within specific adjusting items. The | payments of MOD appropriations awaiting | £59.7m of US net operating losses, £4.5m in | | pension net finance income is calculated as | the resolution of an SSRO decision with | respect of £19.0m of Canadian net operating | | a percentage of the opening net asset. In | regard to RDEC which may give rise to a | losses and £1.8m in respect of £5.5m of | | FY22 the opening net asset (£214.3m) was | reversal of the creditor and to an increased | German trade losses. | | substantially smaller than the net asset at | benefit from RDEC in the income statement | | | the start of FY21 (£309.7m) generating a | in the current and future periods. | | reduction in the level of net finance income. Cash flow bridge Strong cash generation 114% Cash conversion 4.3 215.3 (84.3) 21.5 52.1 189.5 137.4 131.0 (20.0) (1.0) 110.0 £ million Depreciation EBITDAUnderlying OtherWorking CapexForeign Net InterestTaxationNet cash Underlying operating and capital exchange inflow from Free cash profit amortisation movement operations flow (post capex) ### 38 QinetiQ Group plc Annual Report & Accounts 2022 Cash performance Through FY22 we have demonstrated Dividend our capital allocation policy in action: The Board proposes a final FY22 dividend Underlying net cash flow from operations excellent cash conversion and balance per share of 5.0p (FY21: 4.7p) making the was £215.3m (FY21: £199.0m). Listening sheet strength retained; £84m capital full year dividend 7.3p (FY21: 6.9p). The to stakeholder feedback we have changed investment in year; M&A targets pursued; full year dividend represents an increase our cash conversion definition to reflect and a progressive dividend payment of 6% in line with the Group’s progressive our pre-capital expenditure cash flows confirmed. Whilst we have had a material dividend policy. as a proportion of EBITDA in order to cash balance for a few years and with demonstrate how we convert our profit good operational and strategic rigour this Subject to approval at the Annual General (excluding interest, tax, depreciation and may continue to increase in the short-term, Meeting, the final FY22 dividend will be amortisation) into cash flow – under this we are comfortable with this as it gives paid on 25 August 2022 to shareholders new definition we achieved underlying us the flexibility and ability to prosecute on the register at 29 July 2022. cash conversion of 114%, an increase from our strategy. 98% last year applying the new definition; Pensions for reference using our prior year definition Committed facilities The net pension asset under IAS 19, before we delivered cash conversion (pre-capex The Group has a £275m bank revolving adjusting for deferred tax, was £362.2m cash flow vs operating profit) of 157% credit facility with an additional ‘accordion’ (31 March 2021: £214.3m). The key (FY21: 131%). This cash flow included facility to increase the limit up to £400m. driver for the increase in the net pension a £21.5m working capital inflow driven The facility, of which £65m will mature asset since March 2021 was gains due by the timing of contract receivables on 27 September 2024 and £210m will to changes in financial assumptions and payables. mature on 27 September 2025, was (primarily in respect of the discount undrawn at 31 March 2022 and provides rate), which decrease the present value of Capital expenditure increased to £84.3m the Group with significant scope to scheme liabilities, partially offset by a small (FY21 restated: £75.9m), driven by execute its strategic growth plans. decrease in the value of scheme assets. ongoing LTPA contract investment and digital transformation. After paying tax Return on Capital Employed The key assumptions used in the IAS 19 and net interest of £21.0m the Group (ROCE) valuation of the scheme are set out in generated free cash flow of £110.0m In order to help understand the overall note 28. (FY21: £106.7m). Looking forward, given return profile of the Group, last year we the nature of our business model, we Foreign exchange reported our Return on Capital Employed, expect to continue to fund our capex using the calculation of: Underlying EBITA / The Group’s income and expenditure is requirements from operational cash flow. (average capital employed less net pension largely settled in the functional currency asset), where average capital employed is of the relevant Group entity, mainly As at 31 March 2022 the Group had defined as shareholders’ equity plus net Sterling, US Dollar or Australian Dollar. The £225.1m net cash (FY21: £164.1m). debt (or minus net cash). Group has a policy to hedge all material The increase in net cash was primarily transaction exposure at the point of due to the £110.0m free cash flow, For FY22 Group ROCE was 26% (FY21: commitment to the underlying transaction. offset by dividend payments of 28%). Before the impact of the complex Uncommitted future transactions are not £40.2m (FY21: £37.7m). project write-down FY22 ROCE is 28%, in routinely hedged. The Group does not line with the prior year. As we continue hedge its exposure to translation of the We retain a strong balance sheet to to invest in our business to support income statement. The principal exchange support investment in our long-term sustainable long term growth our rates affecting the Group were the Sterling growth strategy and maintain a rigorous ROCE is forecast to remain attractive, to US Dollar and Sterling to Australian approach to the deployment of our at the upper end of the 15-20% range. Dollar exchange rates. capital, scrutinising organic and inorganic opportunities in the same manner, to Earnings per share For the avoidance of doubt, the strategic ensure returns to our shareholders are Underlying basic earnings per share report covering pages 1 to 75 has been appropriate for the risks taken. | | | decreased by 7% to 20.6p (FY21: 22.1p) | approved by the board and signed on | | | --- | --- | --- | --- | --- | | | | driven by the lower underlying profit after | their behalf by: | | | Our priorities for capital allocation, | | tax. Basic earnings per share for the | | | | following this rigorous methodology, are: | | total Group (including specific | | | | | | adjusting items) decreased 26% | Carol Borg | | | 1. Organic investment complemented | | to 15.7p (FY21 restated: 21.4p). | Chief Financial Officer | | | | by acquisitions where there is a | | 20 May 2022 | | | | strong strategic fit; | The average number of shares in issue | | | | 2. The maintenance of balance sheet | | during the year, as used in the basic | | | | | strength; | earnings per share calculations, was | | | | 3. A progressive dividend; and | | 573.2m (FY21: 569.7m) and there were | | | | 4. The return of excess cash to | | | | Details of the Group’s tax strategy, | 573.8m shares in issue at 31 March 2022 shareholders. (all net of Treasury shares). treasury policy and approach to managing currency risk and liquidity risk can be The Group is not subject to any externally found in the Additional Information section imposed capital requirements. on page 205 | | QinetiQ Group plc Annual Report & Accounts 2022 | 39 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Key performance ## indicators Orders (£m) International revenue (£m) ## Financial KPIs ## 1,226.6 358.5 (FY21: 1,149.4)^ (FY21: 420.4) The overall objective of our strategy is to deliver sustainable growth, creating long- term value for our stakeholders. FY22 1,226.6m FY22 £358.5m Our progress is measured by a range of FY21 1,149.4m^ FY21 £420.4m financial and non-financial key performance FY20 961.7m^ FY20 £333.4m indicators (KPIs). Measures such as orders, organic revenue growth, profitability and cash flow track our Description Description financial performance. Similar indicators are used to review performance in each of the This is the level of new orders and This represents revenue derived amendments to existing orders from non-UK customers, that Group’s business units and where relevant, booked in the year. This provides was recognised in the period. are accompanied by indicators specific to a measure of the Group’s ability International revenue demonstrates those business units. to sustain and grow QinetiQ. While the Group’s ability to win and some orders are booked and deliver work outside of the UK. Our non-financial KPI are shown on delivered in-year, the level of orders Building a global defence and page 42 and 43. booked in the year is one indicator security business and leveraging of future financial performance. Group-wide capabilities is a core pillar of our strategy. | Performance this year | Performance this year | | --- | --- | | Orders in the year were £1,226.6m, | Non-UK revenue was down 16% | | up by 7%, or 9% on an organic | organically due to the revenue | | basis. EMEA services grew by | performance recovery in the US | | 6% on an organic basis driven by | being slower than expected, with | | growth in WSRF orders. Global | the second half in line with the first | | Products grew 20% on an organic | half, largely due to the US defence | | basis, driven by a $62m order for | budget being constrained by the | | SPUR robots full rate production | extended Continuing Resolution. | contract in the US. Link to strategy Link to strategy Order intake enables us to Growing our international assess the effectiveness and revenues and leveraging Group- execution of our strategy which wide capabilities to support is designed to grow the Group. growth is a core pillar of our Order intake is used as a metric strategy, which aims to deliver for the Bonus Banking Plan, long-term sustainable growth but for executive remuneration for shareholders. International purposes is adjusted to exclude revenue was previously used businesses acquired during as a metric for remuneration the year. purposes in the Deferred Share Plan in FY20. It is no longer used for remuneration purposes but remains a KPI. ^ Restated to exclude Joint Ventures ### 40 QinetiQ Group plc Annual Report & Accounts 2022 Organic revenue Underlying operating Underlying earnings Underlying net cash flow growth (%) profit (£m) per share (p) from operations (£m) ## 5% 137.4 20.6 215.3 (FY21: 10%) (FY21: 151.8) (FY21: 22.1) (FY21: 199.0) | FY22 | 5% | | FY22 £137.4 m | | | FY22 20.6p | | | FY22 £215.3m | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | FY21 | | 10% | FY21 | | £151.8m | FY21 | | 22.1p | FY21 | | £199.0m | | FY20 | | 10% | FY20 | £133.2m | | FY20 | 20.0p | | FY20 | £17 7.8m | | Description Description Description Description The Group’s organic revenue The earnings before interest and The underlying earnings, net of This represents net cash flow from growth is calculated by taking tax, excluding all specific adjusting interest and tax, excluding all operations before cash flows of the increase in revenue over items. See glossary for definition. specific adjusting items, specific adjusting items and prior year pro-forma revenue, expressed in pence per share. capital expenditure. See at constant exchange rates. See glossary for definition. glossary for definition. It excludes the impact of acquisitions and disposals. See glossary for definition. | Performance this year | Performance this year | Performance this year | Performance this year | | --- | --- | --- | --- | | Revenue grew by 5% on an | Underlying profit decreased by | Underying EPS decreased by 7% | Underlying net cashflow from | | organic basis, driven by a strong | 9% (£14.4m) to £137.4m, driven | (1.5p) to 20.6p with the decline in | operations was strong, growing | | performance in EMEA Services | by the £14.5m complex project | underlying profit partially offset by | 8%. This reflects movements in | | where organic growth was 13%, | write-down. There were various | the lower effective tax rate. | working capital and no cash | | driven by ongoing EDP growth | other movements including | | impact from the complex | | and new work under the WSRF | US underperformance, offset | | project profit write-down. | | contract. This was partially offset | by stronger EMEA Services | | | | by a 15% organic decline in Global | performance. | | | Products driven by challenges in the US business. Link to strategy Link to strategy Link to strategy Link to strategy Organic revenue growth Underlying operating profit Underlying EPS provides This provides a measure of the demonstrates the Group’s is used by the Group for a measure of the earnings Group’s ability to generate cash ability to grow market share performance analysis as generated by the Group after from its operations, and gives and sources of revenue within a measure of operating deducting tax and interest. an indication of its ability to its chosen markets before the profitability. Specific adjusting Specific adjusting items are make discretionary investments effect of acquisitions, disposals items are excluded because excluded because their size and in facilities and capabilities and and currency translation. their size and nature mask the nature mask the true underlying pay dividends to shareholders. Delivering long- term true underlying performance performance year-on-year. sustainable growth is critical year-on-year. to our success. Our organic growth rate reflects the successful execution of a relevant and consistent strategy. | | QinetiQ Group plc Annual Report & Accounts 2022 | 41 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Key performance ## indicators ## continued Customer satisfaction (Net Health and safety (LTI) Promoter Score) ## Non-financial 31 ## 2.05 (FY21: 49) (FY21: 2.67) ## KPIs We are committed to delivering | responsibly and sustainably | FY22 31 | | | FY22 2.05 | | | --- | --- | --- | --- | --- | --- | | for the benefit of all of our | FY21 | 49 | | FY21 | 2.67 | | stakeholders. | FY20 | | 59 | FY20 | 2.74 | Understanding measurements that give us insight into customer Description Description satisfaction, health and safety The Net Promoter Score is an internationally The Lost Time Incident (LTI) rate is calculated and employee engagement help recognised metric for customer satisfaction. using the total number of accidents resulting us enhance our performance and The NPS is calculated by deducting the in at least one day taken off work, multiplied are vital in ensuring our progress percentage of customers who are detractors by 1,000, divided by the average number of is sustainable. from the percentage who are promoters, and employees in that year. can therefore range from -100 to +100. | | Performance this year | Performance this year | | --- | --- | --- | | Read more about our ESG | Our score remains in the category of good, | Our LTI decreased to 2.05 in FY22 from | | approach on Page 44 | supported by our continuous improvement | 2.67 in FY21. This ongoing decrease, is | | | approach to actioning customer feedback. | supported by our EHS strategy and | planned future programme. See page 55 for more details. Link to strategy Link to strategy Measuring customer satisfaction provides As a company, it is imperative we operate us with insight into our customers’ views. with the highest level of safety. Not only Complemented with qualitative surveys, is this the right thing to do for our people, this provides us with actionable insights but for our customers who entrust us with that enable us to improve our customer safety-critical work. The safety, health experience. This supports our ambition and wellbeing of our people is therefore of becoming our customers’ chosen intrinsically linked to our strategic success. partner in both our home countries and overseas, which requires a relentless focus on meeting their needs. Customer satisfaction is a metric used for the Bonus Banking Plan. ### 42 QinetiQ Group plc Annual Report & Accounts 2022 Early careers talent (%) Employee engagement Greenhouse gas emissions (score out of 10) Scope 1 & 2 (tonnes CO e) 2 ## 3.3% 7.1 27,936 (FY21: 3.3%) (FY21: 7.3) (FY21: 29,444) | FY22 3.3 | | | FY22 7.1 | | | FY22 27,936 | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | FY21 | | 3.3 | FY21 | | 7.3 | FY21 | 29,444 | | | FY20 | 2.3 (UK only) | | FY20 | 6.9 | | FY20 | | 35,587 | | Description | Description | Description | | --- | --- | --- | | The total percentage of our early careers | We use WorkDay Peakon, an employee | In FY19 we set a target to reduce our | | community (apprentices, graduates and | engagement measurement tool, which | Scope 1 and Scope 2 greenhouse gas | | sponsored students) of our global workforce. | provides regular insights into how our people | emissions, by 25% from the FY19 base year. | | We have been measuring this globally for two | feel about working at QinetiQ, enabling us to | During FY22 we set new targets; in FY23 | | years, improving on a UK-only KPI in FY20). | identify what we are doing well, but also where | we will be transitioning to a new target and | | | we can improve and take action. | will show performance in the Annual Report | for completeness. | Performance this year | Performance this year | Performance this year | | --- | --- | --- | | We continue to see investment in our early | This year we continue to have good | We saw a significant decrease in our Scope | | careers community and programmes, and | participation rates (71%) and have seen a | 1 and Scope 2 emissions in FY21 compared | | see a steady level in the number of our | slight decline in the overall score, 7.1 in | with FY20 and we continue to see this | | early careers population (again 3.3%) | FY22 from 7.3 in FY21, but with some | decrease in FY22, equating to a 32% reduction | | compared with FY21. | areas of improvement. | against our FY19 base year. | | See page 58 for more details. | See page 58 for more details. | See page 48 for more details. | Link to strategy Link to strategy Link to strategy As a knowledge-based business it is critical Employee engagement is a key part of Setting a target and measuring and to our long-term viability that we develop sustaining our strategy. Having an engaged reporting our greenhouse gas emissions is the next generation of employees. workforce delivers increased productivity a key way to demonstrate our commitment and retention. Improving employee to addressing climate change and a engagement is essential to creating a critical part of our sustainability strategy; it positive culture within QinetiQ and aligns underpins our wider business performance. with our behaviour of “listen”. We have published our Net-Zero plan and will transition to new targets in FY23. | | QinetiQ Group plc Annual Report & Accounts 2022 | 43 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Environmental, ## Social & ## Governance ### During FY22, we have had many conversations with our key ### stakeholders, where they have expressed the importance ### they place on sustainability and their expectation that we ### are considering environmental, social and governance (ESG) ### aspects. FY22 has seen a particular focus on climate change with ### the development and publication of our first Net-Zero greenhouse ### gas emissions plan, TCFD reporting and Carbon Reduction Plans. ### The board has oversight and governance of ESG and regularly ### discusses and reviews a range of topics such as climate change, ### diversity and inclusion and Speak Up. Steve Wadey Chief Executive Officer ### Highlights in FY22 • Publication of our Net-Zero • Received Gold Award in the Greenhouse Gas Emissions Plan. UK MOD Defence Employer Recognition Scheme. • 32% reduction of our Scope 1 and | | Scope 2 greenhouse gas emissions | • Achieved Employer of Choice for | | | --- | --- | --- | --- | | | (GHG) against our FY19 Base Year. | | Gender Equality citation in Australia. | | • Leadership in climate change | | • Recognised for Outstanding | | | | programmes in our sector. | | Diversity and Inclusion Strategy | at the Australian Aviation • Launched adaptive working Aerospace Awards. for employees. • Awarded Graduate Program • Won Engineering, Aerospace and of the Year in the Australian Defence Sector category in Britain’s Defence Industry Awards and Most Admired Companies 2021. an Excellence Award for Best • Received Team of the Year award Graduate Development Program from the Jon Egging Trust. at the Australian HR Awards. ESG Strategy We have also revisited our mapping against the Sustainable Development Over the following pages, we report Priorities, strategy, materiality Goals. Our Leaders have common goals to progress on those areas we consider most and stakeholder engagement focus on a number of aspects, including important. Additional information is provided safety, engagement, diversity and inclusion on the sustainably pages on our website The ESG landscape continues to evolve (D&I) and environment. Our approach to www.qinetiq.com/en/our-company/sustainability | rapidly so we regularly review our ESG | ESG governance is described on page | | --- | --- | | priorities by considering our business | 61. We strive to be proactive, chairing the | | strategy and purpose, the views of our | Sustainability Working Group with our | | stakeholders, the landscape and best | trade body (ADS), and Co-chairing the | Signposting practice. This approach ensures we are MOD-Industry Sustainable Procurement Through this report we have also indicated confident that ESG issues are integral to Working Group. In FY22 Steve Wadey where ESG is an enabler for our business: our business strategy and we are meeting became the Industry Co-chair of the new non-financial KPI (pages 42), risk management the expectations of our stakeholders. Climate Change and Sustainability Steering (page 62), engagement with stakeholders We have refreshed our ESG strategy, Group under the UK Defence Suppliers (page 26), TCFD report (page 50) non-financial enhancing our plans and introducing new Forum (DSF). We actively collaborate with information statement (page 74) and Board programmes e.g. our Net-Zero GHG plan, customers/peers on topics such as ethics, Governance including ESG (page 89) new sustainable procurement strategy D&I and skills. and Adaptive Working. ### 44 QinetiQ Group plc Annual Report & Accounts 2022 ## Our ESG ## framework ## Our purpose ### Protecting lives and securing the vital interests of our customers ## Our ESG framework ### We have a clear framework and focus to deliver change in the three areas of ESG Environmental Social Governance Material issues Material issues Material issues • Climate change; Net-Zero • Health, safety and wellbeing • Business ethics and resilience • Employee engagement • Code of Conduct • Sustainable solutions • Diversity and inclusion • Anti-bribery and corruption for customers • Learning and development • Ethical trading policy • Environmental management • Reward and recognition • Responsible and sustainable • Waste and resources procurement • Human rights and • Conservation and biodiversity modern slavery • Leadership ESG remuneration • Community and STEM outreach ## Creating a safe and secure environment for us all to thrive ### Our values demonstrate our purpose and ESG framework in action ## Our values | | Integrity | | Collaboration | | | Performance | | | --- | --- | --- | --- | --- | --- | --- | --- | | ESG fully supported by the Global | | Industry engagement and leadership; | | MSCI | AA and | Sustainalytics | : in the top | | Leadership Team and Board | | Multidisciplinary internal collaboration. | | 7% in our sector | | | | ## We deliver safely, responsibly and sustainably for the ## benefit of all our stakeholders | | QinetiQ Group plc Annual Report & Accounts 2022 | 45 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | Environmental ![img-2.jpeg](img-2.jpeg) Environmental stewardship has never been more important, with climate change and the impact on biodiversity ever-growing global concerns. We actively play our part, reducing greenhouse gas emissions, our conservation activities and by the solutions we provide for our customers to meet their sustainability ambitions while maintaining defence capability. ### Climate change Over the last decade, we have set a series of increasingly ambitious GHG emission reduction targets. In FY19, we developed a new target in line with the Science Based Targets initiative (SBTi) to reduce our Scope 1 and Scope 2 emissions by 25%, from a FY19 base year by FY25. We are pleased that from FY19 to FY22 we were able to make excellent progress against this target (see page 48). In FY22 we extended the coverage of our GHG reporting to incorporate Scope 3 emissions. This means we are now developing visibility of the GHG emissions of our whole value-chain, which is essential for playing our part in tackling climate change. We have collected data, set a new base year of FY20 and set a target of reaching Net-Zero by 2050 or sooner. In this section we outline our new Net-Zero plan, detail our Scope 1 and 2 data and energy projects, and provide our disclosures in line with the Taskforce on Climate Related Financial Disclosures (TCFD) (see page 50). ### Transition to Net-Zero During FY22 our Climate Change Steering Group, comprising a team of multi-disciplinary experts and leaders from across our business (including energy management, Group Property, CR&S, Strategy and Planning, Supply Chain, Legal, Operations, Aviation, Business Development, Investor Relations and Innovation) worked together to develop our Net-Zero plan. This plan replaces our previous targets; it includes our Scope 3 emissions, which we mapped for the first time and sets a new base year (due to improved data quality and availability, as it includes Scope 3 and improved representation of our operations, e.g. a full year of data from our business in Germany). A summary of the plan is shown on the next page and a full copy of the plan can be found on our website. We commit to achieve Net-Zero GHG emissions by 2050 or sooner for our operations and our whole value-chain (ie Scope 1, 2 and Scope 3). A breakdown of our new targets against the FY20 base year is presented in the table below. Our total footprint for FY20 across Scopes 1, 2 and 3 was 265k tonnes CO₂ equivalent (tCO₂e). Our FY21 current footprint is 258k tCO₂e and is presented in more detail in Figure 1 (see also our Net-Zero plan). We will now be reporting our Scope 3 emissions annually. | Timeframe | Scopes 1&2 | Scope 3 | Total | | --- | --- | --- | --- | | FY20 | Base year | Base year | Base year | | FY30 | -50% absolute reduction | -30% absolute reduction | -33% absolute reduction | | FY50 or sooner | Net-Zero | Net-Zero | Net-Zero | Figure 1: FY21 Scope 1, 2 and 3 emissions ![img-3.jpeg](img-3.jpeg) 46 QinetiQ Group plc Annual Report & Accounts 2022 QinetiQ’s Net-Zero GHG Emissions plan: one page summary QinetiQ will be a Net-Zero company by 2050 or sooner, with achievable and ambitious Our ambition near-term GHG emissions reduction targets. To deliver this, we will take a global whole value-chain approach. We will work proactively with our supplier ecosystem, continue to invest in relevant climate-positive research and development to help our customers achieve their Net-Zero ambitions, while improving the operational efficiency and biodiversity of our estates and those we manage on behalf of our customers. Our Net-Zero pathway initiatives Our targets Examples of how we will achieve our ambition | • Optimise our estate footprint | • Develop an advanced, data-driven | • Continue the QinetiQ Collaborate | • Net-Zero pilot site by 2025. | | --- | --- | --- | --- | | using metering, management | approach to further leverage our | programme to engage with | • Co-create with customers to | | and control. | Scope 3 data. | suppliers and customers. | develop innovative solutions, | | • Implement energy efficiency | • Focus on highest emitting | • Participate in relevant industry | building our portfolio of climate- | | improvements to deliver 5-20% | categories, including our | associations and events. | positive solutions which currently | | energy savings. | engineering services supplier | • Develop environmental | includes: enhanced synthetic test | | • Invest further in on-site | network, procurement of digital | awareness training for | and evaluation solutions, stealth | | renewables (we have, for | assets and travel and transport. | colleagues. | materials for wind turbines, | | example, generated renewable | • Reduce emissions from | | hybrid-electric technology for | • Evolve the employee relationship electricity on the roof at our international air travel by battlefield equipment, smart with incentives. | HQ site in Farnborough since | | 50% by 2030 and use | | power grids, and providing | | --- | --- | --- | --- | --- | | | Our full Net-Zero plan can be found on our website: www.qinetiq.com/en/our-company/sustainability/climate-change/net-zero | | • Maintain a detailed 5-year funding | | | February 2012) and procure | | transportation providers who | | deployable test and | horizon for Net-Zero activities 100% of the remainder of our are demonstrably improving their evaluation capabilities. through the Integrated Strategic electricity needs from renewable own emissions performance. • Invest in relevant research and Business Plan. | sources by 2030. | Stakeholder engagement and expectations on climate change | development to bring more | | --- | --- | --- | | • Reduce water consumption by | During FY22, we saw a significant increase in focus on climate change from key customers and have been actively responding and engaging. | climate-positive solutions | | introducing grey water/rainwater | | to market; an example area | Under the Defence Suppliers Forum (DSF) Climate Change Steering Group, QinetiQ have taken a leading role as Industry Co-chair, delivering harvesting where appropriate. of investment is high power the first phase of the programme, including producing a Code of Practice for the Defence Sector through joint industry-MOD working group. batteries and storage for • Transition our road fleet to zero We also published our first Carbon Reduction Plan, pursuant to a new requirement from UK Government customers and essential in order to military and commercial use. emission power sources by 2035. bid for contracts over £5 million pa (this can be found on our website). • Implementing nature-based • Monitor opportunities to | | | | | | | Create and foster the internal | Helping our customers achieve sequestration initiatives, with | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 50% | transition our aviation fleet to | | | 30% | | | | | | | | | | | | | foundation and productive industry | their Net-Zero ambitions without a specific focus on restoring | | | | | Sustainable Aviation Fuel (SAF). | | Initiative 1 Initiative 2 Initiative 3 Initiative 4 | | | | | | | | Reduction from | | | | Reduction from | | | natural ecosystems. | | | | | Net-Zero Operations (Scope Co-create with customers, | Deliver critical internal Net-Zero upstream | | | | engagement to deliver success | compromising their capability | | | | • Eliminate leakage of sulphur- | | | | | | | | QinetiQ Group plc Annual Report & Accounts 2022 | 47 | | 2020 to 2030 and | | | | 2020 to 2030 and | | | | | | | | 1 and 2 GHG emissions) and downstream focus | invest in research and Contributing to and industry-wide | | | Achieving | | • Exemplary management of | | | hexaflouride (SF6) from our | net-zero by 2050 | | | Net-Zero by 2050 | | our estates and habitats | | --- | --- | --- | --- | --- | --- | | | range equipment. (Scope 3 GHG emissions) development and care | enabling activities | | | | | | CORPORATE STRATEGIC FINANCIAL | | | | | | | | Global Net-Zero | | QinetiQ Net-Zero | around the globe. | | or sooner | | for our environments | or sooner | | | | | GOVERNANCE STATEMENTS | REPORT | | | | Environmental continued # Scope 1 and Scope 2 emissions | | FY22 | FY21 | FY20 | | --- | --- | --- | --- | | Total Scope 1 emissions (tCO_{2}e) | 15,727^{a} | 15,872 | 19,289 | | Total Scope 2 emissions (tCO_{2}e) | 12,236^{a} | 13,572 | 16,298 | | Total Scope 1 and 2 emissions (tCO_{2}e) | 27,936 | 29,444 | 35,587 | | Intensity ratio (tCO_{2}e per Km of revenue) | 21^{a} | 23 | 33 | | Energy consumption (kWh) resulting in the above reported emissions | 125,261,565 | 122,808,625 | 139,780,656 | | Proportion of energy consumption arising from UK operations (%) | 98% | 99% | 98% | | Proportion of emissions arising from UK operations (%) | 98% | 99% | 98% | In line with reporting requirements, in the table above we publish our Scope 1 and Scope 2 emissions and intensity metric. We have adopted a financial control approach, used the GHG Protocol Corporate standard and UK Government (BEIS) emission conversion factors. PricewaterhouseCoopers LLP (PwC) carried out a limited assurance engagement on selected GHG emissions data for the year ending 31 March 2022 in accordance with International Standard on Assurance Engagements 3000 (revised) and 3410, issued by the International Auditing and Assurance Standards Board. The figures that have been covered by this assurance process are indicated in the table by the following symbol (+). A copy of PwC's report and our methodology is on our website: www.qinetiq.com/en/our-company/sustainability/climate-change We are pleased to report a further reduction in our Scope 1 and Scope 2 emissions, equating to a 32% reduction from our base year, against our target of 25% by FY25. As described in the previous section, this target has now been superseded by more ambitious Net-Zero targets. To meet the Streamlined Energy and Carbon Reporting (SECR) requirements, we also present our energy performance in the table above (identifying the proportion that is for the UK) and the following are examples of energy and emissions reduction projects in FY22: - Replacement of the main drive control system in our 5m wind-tunnel, which should result in estimate a 1 MWh/annum saving. - Improvement of the ventilation systems in the concourse at Farnborough to reduce the need for compressors. - Installation of new air conditioning systems in the range control building at MOD Hebrides. - Review of options for electric vehicle infrastructure on our main sites – these will be implemented in FY23. - Review of photovoltaic (PV) solutions for our key sites, informing our plans for expanding our use of PV. - Significant employee engagement, including blogs and webinars. - Replacement of 139 street lights and bollards in parking and pedestrian areas across our Farnborough site. - SF6 is a GHG with a very high global warming potential and we have worked with the customer to change pressure systems to be able to use an alternative gas, while maintaining delivery. # Sustainable solutions for customers Sustainability is essential to next-generation defence. Climate change will trigger new instability due to natural disasters and lack of resources; military technologies that rely on outdated fuels may become inoperable without commercial infrastructure. Electrification opens up new ways of operating; there is a need for greater agility to respond to these changes and to increase resilience to future shocks. Innovation is vital to help our customers modernise and gain operational (or business) advantage, meeting Net-Zero goals without reducing capability, and wherever possible taking advantage of new technologies to deliver enhanced capabilities. Examples where Qinetiq can provide those vital solutions include virtual test and evaluation (T&E); unit-based virtual training (UBVT) gives the field army a virtual (desktop/laptop) style environment for training a wide variety of units (dismounted forces, logistics, and vehicle squadrons, to reservists). It is a very flexible, immersive and realistic training environment, which reduces risks for personnel, as well as equipment logistics and reduces the carbon footprint prior to live training. A wide variety of training events has been held this year, including AWE21 demonstration for Collective Training development. We manage a number of sites as part of the LTPA for the UK MOD, including at MOD West Freugh. Funded by the MOD, the West Freugh project was started as a technical demonstrator to show how a site could be taken to Net-Zero carbon emissions. A site audit identified key issues (such as a high proportional baseload) and an 'ideation' campaign helped us gather cross-company input and ideas, alongside expert evaluation. A suite of solutions has been developed, ranging from 'Fabric First' where insulation and lighting are improved, decarbonisation of space heating (removing oil and gas heating), local generation by solar and wind, sub-metering, smart grid and storage, to smooth out peaks and troughs, as well as electrification of vehicles and carbon sequestration. The solutions are replicable and so provide opportunities for other sites. # Environmental management We have refreshed our commitment to protect our environment, and simplified our approach as part of our EHS strategy. We seek to deliver responsibly and sustainably for our customers, protecting the environment, enhancing biodiversity and minimising our GHG emissions. Underpinned by ISO 14001 certification in the UK and Canada, environmental matters are reviewed regularly by the Risk and Security Committee. 48 Qinetiq Group plc Annual Report & Accounts 2022 We have engaged and communicated with our people on a range of environmental issues, explaining our approach to environmental stewardship and encouraging their participation and we used World Environment Day as an opportunity to engage with our teams through various virtual events. We ran a “December Climate Change Challenge” campaign to promote how we can all contribute to tackling climate change. Every day through December, different employees wrote blogs about their ideas and experiences. Waste management Our waste target is to increase the annual proportion (%) of UK waste that is re-used and recycled from our underlying waste production. The sites that produce significant waste (collectively 95% of the total) have waste management action plans. We met the FY22 waste target, with 82.7% of underlying waste re-used or recycled (compared with 81.5% in FY21). There had been some COVID-19 related impacts on waste-contractor availability to transport and deal with waste, which had effected recycling opportunities, but we are now seeing improvements. Waste contributes to our Scope 3 emissions and so forms part of our Net-Zero plan and we will continue to look at how we can drive reductions. Conservation and biodiversity Climate change is having an impact on habitats and we know that responsible stewardship of the sites we manage can contribute to biodiversity. We continue to support operational delivery while protecting flora and fauna, for example: • We have successfully undertaken remedial works of the MOD Pendine Long Test Track, alongside the protected colonies of the diminutive petalwort. • Our work as part of Sands For Life (a conservation project to revitalise sand dunes across Wales) has seen dune habitats rejuvenated at MOD Pendine through clearance of scrub and sea buckthorn and improving fencing to enable conservation grazing. • Our work to reinstate and landscape in the SSSI (Site of Special Scientific Interest) as part of the new accommodation project in the World Heritage Site of St Kilda has been well received by National Trust for Scotland and positively remarked upon by visitors. • Partnership is key and we work with Marwell Wildlife to support the SSSI at our site in Farnborough. • We have also resumed face to face meetings of the MOD Shoeburyness Conservation Group, where we bring together many of our stakeholders. In FY23 we will continue to focus on environmental stewardship programmes, building in greater connection with our Net-Zero plan. We will be further promoting environmental volunteering to engage our people, proving opportunities for awareness, learning and involvement. | | QinetiQ Group plc Annual Report & Accounts 2022 | 49 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Environmental ## continued Taskforce on Climate-related Financial Disclosures The recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) provide a framework for consistent reporting of climate-related information. Across four overarching themes (governance, strategy, risk management and metrics), there are 11 disclosures. We are committed to implementing this approach to provide investors and other stakeholders with information on climate-related risks relevant and material to our business. Pursuant to Listing Rule 9.8.6 R(8), we provide our disclosures here, consistent with this framework, plus links to where further detail is provided in this document. A number of aspects of TCFD were already part of our ESG and risk management approach, but we recognise the TCFD framework is still new, so we will seek to refine our reporting over time as best practice and guidance evolves and our approach develops. Governance Board oversight of The QinetiQ Board has overall responsibility for our ESG approach and climate change forms a core part of this agenda. Both climate-related risks the CFO (previously David Smith and now Carol Borg) and our Group Director of Corporate Responsibility and Sustainability and opportunities (CR&S) provide regular reports and briefings on ESG and climate change to the Board (see page 89). Our Remuneration Committee has also reviewed and approved non-financial collective goals for our leadership community for FY23 (See page 117) which will include climate change. Management’s role Carol Borg, our CFO, has extensive ESG experience (page 82) and is the Board member with overall responsibility for in assessing and climate change; she chairs the Climate Change Steering Group (CCSG) supported by our Group Director of CR&S. The CCSG managing climate- membership includes leaders and subject matter experts from across the business in key roles (see page 46 for details), related risks and ensuring we take the necessary multidisciplinary approach. It is the senior forum for developing and implementing strategy opportunities and plans and for reviewing risks and performance. The CCSG met monthly through FY22, to drive the development of the Net-Zero plan (see pages 46-47) and to oversee our TCFD approach as well as other programmes such as stakeholder engagement. There is a dedicated TCFD Working Group, reporting into the Steering Group. Strategy Climate-related risks Climate change is a significant global issue and considerations for businesses include both physical risks, including factors and opportunities such as flooding and extreme weather events, and transition risks which are related to the transition to a lower carbon identified over the economy, such as policy or regulation change and changing markets. short, medium and We have undertaken a qualitative review of our operations, our supply chain and our work for customers and considered the long term effect on cost, revenue and asset value. We have considered the medium (2030) and longer term (2050). We have identified that our business is exposed to both physical and transitional risks (before mitigation activities) and issues are listed below. This is included in our principal risks on page 70 and a description of our risk management approach is on page 52. Physical risk: • Increasing number or the increasing severity of extreme weather events or flooding (for a limited number of sites) may result in damage to infrastructure, which could disrupt operations on our estate and those sites we manage on behalf of our customers. Depending on the scenario, the likelihood and severity of these events is likely to increase in the medium and long term. • Increasing number or the increasing severity of extreme weather events may impact the ability of our supply chain to meet requirements, thereby causing disruption to operations or customer delivery. Depending on the scenario, the likelihood and severity of these events is likely to increase in the medium and long term. Transition risk: • Policy and Legal: Across all of the territories we operate, we may be subject to greater regulatory requirements or carbon (GHG) pricing which may result in additional costs, or the failure to meet requirements. This will be potentially more likely for scenarios where global decarbonisation is more rapid. Opportunities: • The global transition to a low-carbon economy may create opportunities for us to innovate for our customers, and increase revenue from current or future low-carbon solutions (products or services). Other issues were considered (for example, the impact on reputation) but were less material. We will continue to refine our approach and look to create a quantitative approach and will report further information as this develops. ### 50 QinetiQ Group plc Annual Report & Accounts 2022 The impact of Climate change risks and opportunities are reflected in our strategy and plans and we strive for continuous improvement to climate-related risks reflect our purpose, our growth strategy, the external landscape and stakeholder expectations. and opportunities on • During FY21 we more explicitly embedded our commitment to ESG and sustainability into our QinetiQ business strategy, QinetiQ’s business, revising our framework to include the need to “deliver responsibly, sustainably for the benefit of all our stakeholders” strategy and financial (further updated in FY22 to include safety (see page 18). ESG and climate change are embedded in our Integrated planning Strategic Business Plan (ISBP) process. • In FY21, we also included, for the first time, GHG emissions as a core non-financial KPI (see page 43) reflecting the increased importance of our GHG emissions. • During FY22, we more clearly brought together an overview of those products and services that meet the sustainability agenda of our customers. • In FY22 we developed and published our Net-Zero plan (see pages 46-47) which provides a framework for reducing our GHG emissions using four initiatives, which will contribute to both reducing risks, for example reducing our exposure to energy prices by reducing energy use, to creating opportunities, such as our strategy to innovate and collaborate across the value-chain to develop sustainable solutions for customers. • In FY22 we started work on quantifying the financial risks of climate change and will continue to develop this as part of our climate resilience programme, focusing on risks and mitigations. We have been developing an approach to introduce an internal cost of carbon that will be used in business cases and acquisitions (see our full Net-Zero plan: www.qinetiq. com/en/our-company/sustainability/climate-change/net-zero). The resilience In FY22, we undertook scenario-analysis to assess the potential impact of climate change on our business. Our analysis of QinetiQ’s considered three scenarios to explore rising, stabilising and declining emissions to ensure we considered different possible o strategy, taking futures (including 2 C or lower). We used scenarios that were based on the Representative Concentration Pathways (RCPs), into consideration which are used by the Intergovernmental Panel on Climate Change (IPCC) to reflect that the transition to a decarbonised different climate- world may take different pathways, with different outcomes. related scenarios, o o • Low (<2 C) strongly declining emissions: Intensification of decarbonisation action resulting in increasing and rapid including a 2 C or transition, with more limited physical risks. lower scenario o • Middle (2-4 C): stabilising/slowly declining emissions; physical risks continue and transition risks continue to increase. o • High (>4 C): rising emissions; Failure to address climate change results in high physical risks, with more limited transition issues. We considered two time horizons (2030 and 2050) so we were aligned with our Net-Zero targets and used a variety of data sources. In our Net-Zero plan we have aligned our strategy with a transition to Net-Zero. Our four initiatives outline our plans for reducing our Scope 1, 2 and 3 emissions, addressing our operations, working with our supply chain and customers (see page 47 for more detail). This scenario analysis builds on our previous programmes of undertaking climate-change risk assessment at key sites and horizon scanning for changes to the external landscape (e.g. regulatory and market). The output has informed our understanding of how climate-related risks (both physical and transitional) could impact our business. We will review and evolve this scenario analysis and integrate the findings into our risk management approach, in order to ensure that mitigations are identified and in place to address our business resilience to climate change. Our approach to scenario modelling has been qualitative and we have started to develop a quantitative approach which will evolve. | | QinetiQ Group plc Annual Report & Accounts 2022 | 51 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Environmental ## continued Risk management QinetiQ’s processes Our risk management and control framework enables us to effectively identify, assess and manage risks and where material for identifying and these are featured within our principal risk register. We have based our approach to climate risks on our existing risk assessing climate- management methodology (to ensure that we are embedding it into our existing processes). related risks In line with TCFD recommendations, our risk assessment approach covered both physical risks and transition risks. To identify key risks and opportunities, we undertook a review of best practice and guidance to explore what would be relevant to QinetiQ operations. In order to establish those that we believe are material, In order to identify material risks, we ran briefing sessions and workshops with key stakeholders (e.g. Head of Site, supply chain, operations, business development) who are our subject matter experts across the business in order to identify risks, and then these were reviewed to look at the key issues and identify those that were considered to be most material. As part of our day to day management of our site operations we are familiar with the physical risks posed and have a good understanding of suitable mitigations. Transition risks include a number of issues which we also manage – for example – routinely horizon scanning for emerging regulation and understanding of evolving markets (e.g. via our close engagement with customers on Net-Zero). QinetiQ’s processes Ownership and management of individual risks are assigned to members of the Global Leadership Team (GLT) who are for managing responsible for ensuring the operational effectiveness of internal control systems and for implementing key risk mitigation climate-related risks plans. The Board undertakes an annual assessment of the principal risks and Climate Change is included (see page 70 in the risk section). The GLT is supported by our Head of Enterprise Risk Management and our risk managers, who are able to have more tactical and operational oversight. Risks are assigned owners. This approach, which forms part of our risk culture, will ensure that climate change is fully integrated into our risk management approach (see page 62). How processes for For physical risks we have considered these primarily by site, and for issues such as our supply chain and business delivery. identifying, assessing Risks have been identified (for example where there may be increased flood risk) and will form part of the regular review and managing cycle. Risk will change either due to new emerging information or changes to our business (e.g. use of site, supplier, etc). climate-related risks Transition risks are more dynamic and we will be horizon scanning to identify any relevant changes. Any new changes are integrated in to (e.g. new legislation) will be addressed in line with our standard processes. We have used a variety of sources of QinetiQ’s overall Risk information to undertake the assessments. We have developed a TCFD “resource hub” for our risk community. management Climate change is identified as a principal risk and described in more detail in the risk section on page 70. Metrics and targets Metrics used to A key part of addressing the risks of climate change is to transition our business to Net-Zero and so key metrics are assess climate- associated with GHG emissions, one of our five non-financial KPI (see page 43) as well as targets as part of our related risks and Net-Zero plan (see pages 46-47). opportunities in-line with QinetiQ’s strategy and risk management process Scope 1, 2 and if We have disclosed our Scope 1 and Scope 2 GHG emission in the Annual Report and Accounts for a number of years. During appropriate 3 GHG FY22 we calculated our Scope 3 emissions for the first time and this is shown on page 46. We have also published our total emissions and the Scope 1, 2 and 3 GHG emission in our Net-Zero plan (the plan is published in full on our website: www.qinetiq.com/en/our- related risks company/sustainability/climate-change/net-zero). Our Net-Zero plan identified how we will address these emissions through four initiatives. This programme has clear oversight by the CCSG and will ensure we are able to manage the programmes, and identify and address risks. QinetiQ’s targets for We were the first aerospace and defence company globally to publicly commit on the Science Based Targets initiative (SBTi) o managing climate- website to developing science based-GHG targets aligned to a 1.5 C scenario. We submitted our full set of Scope 1,2, and 3 related risks and (near term and Net-Zero) emissions targets to SBTi in January 2022, with formal assessment and validation scheduled in opportunities and FY23. Our targets will, subject to validation, position us to pledge our commitment to Race to Zero, the United Nations global performance against campaign. The targets form part of our Net-Zero plan where we have in place a programme across our business to measure targets manage and reduce emissions from our supply chain operations and our products and services. These targets are detailed on page 46. Our leadership Incentive scheme will support these targets (see page 117). ### 52 QinetiQ Group plc Annual Report & Accounts 2022 Priorities for FY23 Governance Our Board will continue to review progress and in FY23 our new ESG Steering Committee, chaired by our CEO will provide an additional route for leadership support and monitoring of progress. Our leadership incentives are aligned with ESG and this will be enhanced in FY23 (see page 117), linked to our climate change programme and goals. Strategy We will review best practice and evolve our use of scenarios. We will develop tools to build a quantitative methodology and refine our approach. Risk Management We will be focusing on further embedding climate change risk into business as usual. To support this we will continue to refine our approach and review emerging trends as well as best practice. Metrics and targets We have published our new Net-Zero plan and so will be working towards these new targets. We will also consider whether any additional metrics are required to support our climate resilience reporting. | | QinetiQ Group plc Annual Report & Accounts 2022 | 53 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Social This year we have fully articulated our employee offering, bringing together all of the advantages of working at QinetiQ and what our people can expect in return for their contribution. This includes opportunities to grow their career, to get involved in meaningful and interesting projects, clear reward and recognition, and to have pride in our impact on the world around us. The employee offering framework features six areas of focus; safety and wellbeing, responsibility and sustainability, diversity and inclusion, adaptability and flexibility, learning and development, reward and recognition; with our purpose, values and behaviours at the heart. ## Our people and communities ## We want working at QinetiQ to feel inspiring, ## for our people to have the opportunity to ## realise their full potential, and feel recognised ### 54 QinetiQ Group plc Annual Report & Accounts 2022 ## for their contribution. Safety and wellbeing Wellbeing Safety Our wellbeing strategy focuses on the five pillars of physical health and mental health, personal growth, working environment Our Environment, Health and Safety (EHS) strategy encourages and financial wellbeing. We continue to develop our global us to look after ourselves, each other and the world around us. wellbeing offering: In support, we have; • Extended the UK and Australia Mental Health First Aider • Introduced a new EHS incident management tool, network into Canada. consolidating previous systems and tools, enabling improved data analytics and enhancing governance • Launched the Thrive mental wellbeing app in Belgium, across the whole of the Group. Canada and the US. • Developed a new risk assessment process, ensuring • Delivered online mental health awareness courses to support consistency across the Group and providing a suite managers and employees. of tools and resources. • Created a suite of seven wellbeing tool-kits to support • Initiated a new training programme on accident investigation, wellbeing conversations in the workplace. increasing competencies of leaders and investigators. • Delivered a wellbeing action plan guide and template to support employee wellbeing best practice. Underpinning our commitment, our leaders have a common goal for safety as part of their leadership incentive scheme COVID-19 (see page 125). Having established a range of guidance and controls early in the pandemic, we have continued to ensure that our people Our overall safety record is good, the Lost Time Incident (LTI) understand what they need to do to look after themselves and rate (1) for the whole of the Group has decreased from 2.67 in each other. Reflecting government guidance in each of the FY21 to 2.05 in FY22. It is one of our five non-financial KPIs countries where we operate, we empowered up to 80% of (see page 42). our people to work at home and protected those who needed to be on our sites. 1 Lost Time Incident (LTI) Rate To enable this we have: FY22 2.05 • Shared practical advice and developed our digital tools. FY21 2.67 • For colleagues who need to work on site, taken a risk-based FY20 2.74 approach with individual teams working through what they need to do, based on the work they are doing. 1 LTI rate is calculated as the number of lost time incidents where the employee is away from work for one or more days, times 1,000, divided by the total number of employees. • Encouraged regular testing, with test kits available on our sites. • Continued to offer extended special paid leave, providing In the last year we received two safety Improvement Notices from support to anyone who cannot work from home. the UK Health and Safety Executive (HSE). The first relates to the incident at the MOD Pendine site in the UK, which resulted in • Engaged and shared information with our people, encouraging life-long injuries to one of our team. This event occurred in March them to use the health and wellbeing resources available, 2021 and was reported last year. Action has been taken, resulting including our Mental Health First Aiders, Employee Assistance in confirmation from the HSE that the terms of the notice have Programme, Wellbeing Toolkits and Wellbeing Action Plan. been met. The second Improvement Notice refers to management • Published regular COVID-19 updates as well as answering any of gas networks at five UK sites and we are on track to meet the questions as they arise. All of the guidance and resources are requirements, by the due date of September 2022. consolidated on our COVID-19 Hub, accessed via our intranet. Feedback from WorkDay Peakon continues to show that this As a result, with a desire to continuously improve, we launched a support is valued. company-wide Safety Improvement Programme. We undertook two safety culture surveys, seeking feedback from all employees As we look forward to FY23, our overall safety and wellbeing on our safety culture across all our sites. The results have been focus will be on continuous improvement. For safety, we compared against previous data and will be used to identify will continue to deliver against the EHS strategy and Safety site-based culture improvement programmes. We are utilising Improvement Programme. For wellbeing, we will leverage insights DuPont Sustainable Solutions (DSS) for a further independent from our employee networks (e.g. Neurodiversity and Disability deep-dive into our safety culture and organisational safety and Carers), the Peakon Workday engagement survey and performance. See also page 92 and page 116. Safety Improvement Programme outputs. We will be improving our offerings in areas such as financial wellbeing and stress awareness and will be promoting and maximising the benefits from our Employee Assistance Programme. As we address COVID-19, we are putting the emphasis on enabling our people to manage the risk in a way that is right for each situation. It is important we are now trusting our own judgement to make considered and informed decisions about how we look after and protect each other. | | QinetiQ Group plc Annual Report & Accounts 2022 | 55 55 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Social ## continued Responsibility and sustainability: Community In addition to volunteering, we continue to support a number of charities. In the UK our charity partner is SSAFA. In Australia we Due to COVID-19, we have adapted our community outreach have donated to Legacy Australia and the Royal Flying Doctor activities, which have traditionally been in person, and recognised Service of Australia. evolving needs in our communities. Our key focus is through science, technology, engineering and maths (STEM) outreach with In FY23 we aim to increase our outreach, both through virtual young people, where our employees provide real-world experiences activities (such as virtual work experience) and increase to inspire the next generation of scientists and engineers. Support in-person outreach (such as our Schools Powerboat Challenge). from employers to schools and youth groups, continues to be important to help mitigate the long-term impacts of the pandemic. Our defence partnerships We have a network of STEM outreach leads in the UK, Australia We have been re-validated with the Gold Award status by the and Belgium, who support our volunteers. We have valued the UK MOD in their Defence Employer Recognition Scheme, which expertise of partners; in the UK we have worked with the Jon recognises UK employers who demonstrate a commitment to Egging Trust, STEM Learning and Primary Engineer, to continue defence by proactively supporting the Armed Forces community to understand young peoples’ current needs, and to design virtual and inspiring others to do the same (we were first awarded gold in and remote outreach activities, which can be delivered globally. 2016). We have always been passionate about supporting our Armed A highlight this year was receiving the Team of the Year award Forces community, including veterans, as we believe that having for our contribution to the Jon Egging Trust Blue Skies Outreach Service Leavers and Reservists within our company greatly enhances programmes in Wiltshire. how we connect with our key customers. We signed the UK Armed Forces Covenant in 2013 and continue to create covenant-related In Australia, we have partnered with Girls of Impact to sponsor initiatives, such as our global QinetiQ Veterans and Reserves Network a Future Female Innovators summit for Australian high school (QVRN), which helps to connect, support and value colleagues who students. In Belgium we participated in specialist Space Industry serve or have served in their nations’ Armed Forces. Careers fair to raise awareness with young people of rewarding careers. We engaged with an estimated 5,500+ young people In the US, we have a Veteran’s outreach programme through Circa through bespoke in-person or online outreach activities, and and Military Offices Association of America and participate in military through larger events or external organisers such as virtual hiring events through Recruit Military and Corporate Grey. We also careers fairs. partnered with Our Military Kids whose mission is to recognize the children’s service and sacrifice, by providing grants for extracurricular activities. We have enrolled in the Virginia Veteran Values (V3) Program, a Commonwealth of Virginia Department of Veterans Services Program, which educates and trains employers on the value of Virginia’s veterans, and helps them connect with these personnel to maximise the productivity of their workforce. Diversity and inclusion We’re creating a company where our differences are not only embraced but make us stronger. To achieve this our Inclusion 2025 strategy aims to build a workplace and culture where everyone can feel valued, be authentic and realise their full potential. Our focus in FY22 has been across three key themes: awareness of the importance of diversity and inclusion (D&I); leadership; and employees. This year, we have: • Held a number of global awareness campaigns on topics, including dyspraxia, mental health, women in STEM, menopause, psychological safety, Black History Month, LGBT History Month, disability, Speak Up and Domestic Violence awareness. • Increased availability of D&I training and resources. • Maintained D&I as part of our leadership incentive scheme, with leaders delivering 670+ interventions such as running team sessions, writing blogs and supporting reverse mentoring and our D&I networks. • Facilitated our D&I champions (see page 105) and the leads of our seven employee-led networks to meet regularly, sharing ideas and best practice. ### 56 QinetiQ Group plc Annual Report & Accounts 2022 • Run a fourth cohort of our reverse mentoring programme. • Recognised our D&I champions and network leads at the Global Recognition Gala. • Gained an Employer of Choice for Gender Equality citation in Australia and recognised for an Outstanding Diversity and Inclusion strategy at the Australian Aviation Aerospace Awards. • Participated in FTSE Women Leaders, reporting improved female representation in our Executive Committee plus direct reports, from 23.5% in FY21 to 27.2% in FY22. • Reported an improvement in our UK gender pay gap from 13.9% in 2020 to 12.6% in 2021. Our FY23 priorities will be to continue to deliver our Inclusion 2025 strategy; to raise awareness, work with our leaders and our employee networks. We will build on our progress on gender balance, setting a target of 30% for our Group workforce to be women by 2030 and we will also be focusing on improving ethnic diversity. GLT and direct reports All employees (including leaders) 27% 22% 73% 78% Women Women Men Men Gender balance data Employee engagement Critical to all of our people feeling valued and engaged is making FY22 FY21 FY20 sure that the employee voice is considered. Views are represented Female Male Female Male Female Male by the Global Employee Voice (GEV), a group of employees who work alongside leaders to help shape ideas and initiatives. The | | | | 4 | | 5 | | 3 | | 5 | | 2 | | 7 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 1 | | | | | | | | | | | | | representatives met regularly with the CEO and Group Director | | Board directors | | (44%) | | (56%) | | (37%) | | (63%) | | (22%) | | (78%) | | | of Human Resources and have also met with the Chairman and 59 240 57 239 54 267 Board members during the year (see page 93). The GEV Chair 2 Senior managers (20%) (80%) (19%) (81%) (17%) (83%) also actively participates at leadership engagement events. In 1478 5136 1,447 5,145 1,384 5,080 FY22 the GEV has supported a number of changes, including 3 Other employees (22%) (78%) (22%) (78%) (20%) (80%) the COVID-19 response, Employee Offering, our Adaptive Working approach, and supporting organisational change. 1 For more information on Board diversity see page 104. 2 Senior managers are defined as employees who have responsibility for planning, directing With our people working on site and remotely, communication or controlling the activities of the Group, or a strategically significant part of it. This includes has never been more important. Two-way communication directors of subsidiary companies. It includes our Global Leadership Team (GLT) but channels, including our Global Portal intranet, monthly live events excludes our CEO and CFO who are captured under Board directors. through Q-Talk, and virtual communities, encourage our people 3 Excluding senior managers, CEO and CFO. to share their thoughts, feedback and experience. In addition, we hold Global Employee Roadshows four times a year, providing an opportunity for our people to hear from the Global Leadership Team about our market strategy, and important topics from across the global business. | | QinetiQ Group plc Annual Report & Accounts 2022 | 57 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Social ## continued Employee engagement is one of our five non-financial KPIs, • Leadership Live, a new digital platform provides fresh, relevant reflecting its importance to our business strategy (page 43). To and on-demand personalised development, available to all of enable us to adopt a continuous listening approach, using regular our people, not just leaders. insight to shape how we create a great place to work, we use • New global suite of mandatory e-learning, translated and Workday Peakon. This helps us understand what is important to appropriate for each country. our people, so that we can take action globally and locally. We • Sustained focus on coaching and mentoring; focusing on measure engagement quarterly and continue to see a good level of leaders, increasing the number of mentors and growing our engagement, with participation rates at 71%, similar to FY21 (74%). reverse mentoring programme. This year we have seen a slight decline in the overall score from 7.3 • Established Management and Team Essentials programmes in FY21 to 7.1 in FY22. Employees shared that areas of strength aimed at providing leaders with fundamental knowledge and are adaptive working, flexibility and autonomy. Our people also tell skills to help build high-performing teams. us that there is a strong sense of team working, pride and purpose. We have made progress in the priority area of Career Growth (see • Welcomed five new Fellows and promoted two colleagues to below for more details on activities). Underpinning our commitment, Senior Fellow. our leaders have a common goal for engagement as part of their • More than 300 new starters attended the new interactive leadership incentive scheme. Where leadership focus is prioritised virtual corporate induction. and visible, engagement has improved, for instance in Australia and the US. Our voluntary turnover was 13.8% in FY22, compared with In FY23, we will: 8.7% in FY21 with some hotspots in the US and Australia. • Continue to grow our digital learning capability to help more people access learning faster in the moment of need and Focus in FY23 will be on evolving our employee offering, creating during their work to improve productivity and reduce the costs choice and meeting the diverse needs of our people. Responding associated with face to face external training courses. to business needs and listening to feedback, we are continuing to • Provide new, innovative ways to develop our global leaders. explore how we can make the best of our investment, enabling us • Leverage our skills and expertise globally through the Test to attract and retain talented people who are proud of what they do. and Evaluation Sovereign Skills Programme. Adaptability and flexibility • Provide a new personal development fund, enabling more The continuing impact of the global pandemic has meant that we choice for our people to drive their career development. have had to adopt different ways of working to ensure that we maintain the safety and wellbeing of our people and our partners Early careers while continuing to deliver effectively for our customers. Building Our Early Careers programme is designed for graduates and on what we have learnt, we launched our Adaptive Working apprentices, providing a rich and rewarding learning experience approach, encouraging us to consider where, when and how we for them as they start their career with us. We also welcome work together to deliver the best outcome for our customers, year in industry, and summer placements every year. Investing while retaining the benefits of work/life balance, greater flexibility in the next generation ensures we are developing the skills and and more focus on safety and wellbeing. capabilities needed for the future, as well as creating a near-term talent pipeline. Demonstrating our commitment to early careers Adaptive Working was launched in June 2021 and focuses on is one of our non-financial KPIs (page 43). In the UK programme, three principles; working flexibly, global collaboration/ knowledge- we have focused on developing personal, technical and leadership sharing, and business focus. To help our people understand skills, building business knowledge, and acquiring professional this approach, we have published Group-level principles and qualifications. Our placements ensure real-life experience, such local guidance, supported by discussion tools and information as working on trials, customer secondments, and alongside the resources. Adaptive Working empowers us to make a difference Global Leadership Team. We encourage coaching and to our customers and the teams in which we work, balancing mentoring, including opportunities to take part in our work and individual needs, and meeting our sustainability Reverse Mentoring programme. commitments to protect the world around us. Looking forward to FY23, we will be focused on maximising the value of this As a member of The 5% Club we commit to publishing a approach in our overall employee offering. breakdown of our UK early careers community (see table below) including the percentage they comprise of the UK workforce. Learning and development We promote and enable personal growth for employees and take a blended approach to learning, with a mix of on-the-job experience, virtual and live training, and access to a wide range of resources and toolkits. Our learning portfolio has increased and evolved this year to include: • Introducing SuccessFactors to 95% of our company, providing a platform for continuous development, through setting development plans, understanding the competencies FY22 FY21 FY20 FY19 needed to progress, and providing access to the associated Apprentices 53 72 67 101 learning resources. Graduate programme 105 98 50 90 Sponsored students 24 24 2 8 % UK workforce 3.3 3.6 2.3 4.0 ### 58 QinetiQ Group plc Annual Report & Accounts 2022 We are also actively supporting 38 colleagues at later stages of their careers to undertake apprenticeships because we believe the apprenticeship model is an excellent way to support skills development and career development. In Australia our 18 month graduate programme has seen two cohorts of 30 graduates run concurrently this financial year with a further 14 graduating from the 2020 programme. D&I remains a priority; we achieved 50% female representation in our 2022 graduate intake and realised a significant increase in the employment of Indigenous Australians through the creation of dedicated traineeships and apprenticeships as part of our Reconciliation Action Plan, and in support of the Australian Government’s Indigenous Participation Plan. We were proud to win Graduate Programme of the Year in the Australian Defence Industry Awards and an Excellence Award for Best Graduate Development Programme at the Australian HR Awards. Our Early Careers focus in FY23 will be on maximising the apprenticeship levy in the UK, supporting the ongoing development of our people through progression or reskilling, as part of talent development plans. Rewarding for Performance Reward and recognition are key elements of our people strategy and an important part of our employee offering. We offer a broad range of reward and recognition, designed to enhance our employees’ wellbeing and incentivise both collective performance and individual contribution; enabling us to make choices about what works best for ourselves and for our families. Through our Rewarding for Performance framework, our people have been able to collectively share in our success: • Our All Employee Incentive Scheme (AEIS) for contribution in FY22 paid £500 to each employee. • We continue to invest in Pay and Progression, addressing market anomalies and managing in-year role and grade progression, with an investment of £ 2.0m. • Through Thank Q, our global recognition scheme, we celebrated 2,540 individual people and 872 teams, with 3,412 awards. As we continue to build a truly integrated, global company, we are evolving the way we work together. Our Global Recognition Gala is no exception and in 2021 we adapted the event to bring together colleagues celebrating at live events from the UK, US and Australia, as well as virtually from Belgium, Germany and Canada; making this our most global gala yet. At the event we presented 51 awards, recognising 186 of our people. Looking forward to FY23, we plan to increase our current investment by a further £7.1m in our refreshed global reward strategy and wider employee offering. As part of this we will also review our current offering, with the intention of ensuring that our overall reward strategy meets the changing needs and diverse nature of our workforce. Our leaders will continue to be incentivised, aligned with key ESG factors to support our strategy and this will be enhanced in FY23 (see page 117). | | QinetiQ Group plc Annual Report & Accounts 2022 | 59 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Governance ## Governance is a critical pillar, supporting us in how ## we deliver business responsibly and sustainably. ## It is linked to our corporate governance section. Business ethics, doing business the right way Our Code of Conduct defines our ethical standards, providing clear direction and guidance on how we do business. It contains information on ethical decision-making and also how to seek help and advice. We review the Code annually to reflect the evolving needs of our business, the regulatory environment and best practice. Annual business ethics training is mandatory and supports our people in understanding and using the Code of Conduct. The training is undertaken by our Board and is available to our suppliers and customers. We provide a number of challenging scenarios to help our people know what to do if they were to come across issues such as bribery, fraud, harassment, conflict of interest and modern slavery. We strive to create an environment where our people feel Our focus in FY23 will be to continue to promote and raise confident to speak up and we provide a number of different ways awareness on Speak Up and we will be undertaking a best for them to seek help or raise concerns. Employees can talk to a practice review of the Code of Conduct. manager, use our ethics email advice services, our global network of Ethics Champions and our independently run, 24/7, confidential Anti-bribery and corruption (ABC) reporting line. These are also available to third parties (we publish our Code on Conduct on our website, which contains the details: We have a zero-tolerance approach to bribery and corruption. Our ABC programme is continuously reviewed to ensure that it www.qinetiq.com/en/our-company/sustainability/business-ethics adheres to regulatory requirements and addresses the bribery and corruption risks that we recognise face our company and Throughout the year, we have promoted the importance of that it meets best practice. The principles of our ABC procedure speaking up and the various different contact routes with our are embedded within key processes and instructions, covering employees, in awareness campaigns, in the Code of Conduct subjects such as the use of commercial intermediaries, gifts and in our mandatory ethics training. We have promoted and hospitality and facilitation payments. All third parties that psychological safety both via blogs and a team tool kit. We we engage with are subject to initial, and repeat, risk-based due promoted our guide for managers, supporting them in creating an diligence, along with ongoing monitoring to address bribery and open and inclusive environment, where our people feel confident corruption risks. In addition to our mandatory business ethics to raise concerns, and they know how to listen to and support training (which is for all employees), we provide specific training anyone who may come to them with an issue. For third parties, for our people in roles with a higher potential exposure to bribery we have promoted these via our website and in our supplier and corruption risks. This is repeated bi-annually. The programme Code of Conduct. is overseen by the Chief Ethics Officer and receives internal assurance and oversight to ensure that it remains effective. No We have responded to all queries received via our ethics material breaches of our procedures were identified during the year. email advice services and confidential reporting line. In FY23, we plan to review our fraud prevention procedures and Our Audit Committee oversees our approach to confidential deliver specific role-related commercial intermediary training. reporting (see page 95). Our Business Ethics Committee, chaired by our Chief Ethics Officer (the Company Secretary), oversees our ethics programme. We are members of our trade association, ADS, Business Ethics Network where members can share best practice on ethics, human rights and anti-bribery. ### 60 QinetiQ Group plc Annual Report & Accounts 2022 Human rights and modern slavery Governance of ESG As part of our ongoing programme to address modern slavery, Regular papers and briefings are provided to the Board by the we operate and manage an action plan across the Group. Group Director CR&S on all material ESG issues, including ESG We continue to provide in-depth training to those in key roles, strategy, stakeholder engagement and reporting, ethics, Speak and develop new supporting resources for all employees and Up, Climate change, D&I and community (See page 89). This suppliers, including industry engagement events such as our provides oversight of our approach, including progress against Collaborate programme. We regularly review our policies and our programmes and plans. In FY23 we will be introducing a new approach to risk in the supply chain. Our updated supplier Code ESG Steering Committee, chaired by our Chief Executive. The ESG of Conduct helps to ensure our suppliers have clarity of their strategy forms part of our ISBP (the five year plan) and includes responsibilities on human rights, modern slavery and speaking longer term plans e.g. our Net-Zero plan with targets to 2050. up. Our annual modern slavery and human trafficking We have linked key ESG factors to the non-financial element of statements are published on our website. our leadership incentive scheme, and this continues to evolve; the FY22 focus on engagement, D&I, safety and security will be We seek to anticipate, prevent and mitigate potential negative enhanced in FY23, (see page 117), aligned with key ESG priorities, human rights impacts through our policy and processes, which with the addition of a specific goal linked to climate change, underpin our commitment to responsible business practices. For to support our new Net-Zero plan. example, we address salient human rights issues through our Code of Conduct, our ethical trading policy, international business risk management process, grievance mechanisms, due diligence and export controls process. Our third-party confidential reporting mechanism, provides routes for third parties to raise concerns. We monitor the application of these policies and procedures through our business and supplier assurance processes and regular self-assessment, with oversight by our Business Ethics Committee. We believe that this integrated approach is effective in ensuring our business acts responsibly and respects all human rights. More information can be found on our website: www.qinetiq.com/en/our-company/sustainability/business-ethics In FY23 we will continue make progress against our modern slavery action plan. Working with our Supply Chain Our supply chain is an extension of our own company. We ensure that it is committed to the same standards of safety, security, sustainability and governance as we are. We have a supplier Code of Conduct and our supplier assurance process ensures that suppliers understand the issues important to us. We have developed a new Sustainable Procurement Strategy and created a Sustainable Procurement Guide for our suppliers. The Supplier code and the Guide are both available on our website: www.qinetiq.com/en/our-company/suppliers-and-smes/ working-with-us As signatories to the UK Prompt Payment Code, we report our payment performance as required by legislation and have continued to focus on paying small suppliers early throughout the COVID-19 pandemic. In FY22, we ran supplier Collaborate events to raise awareness of issues such as environment and emissions, abolishing slavery in our supply chains and fostering supplier diversity. Working in collaboration with wider industry, we foster and develop ecosystems which draw together supplier, academia and third sector communities to answer complex science, social, engineering and technology challenges, supporting our customer offering. Through this approach we enable access to opportunities for diverse suppliers, including Small to Medium Sized Enterprises and non-traditional defence suppliers, removing barriers of entry and promoting inclusive procurement. In FY23 we will continue to develop our approach to sustainable procurement and run further Collaborate events. | | QinetiQ Group plc Annual Report & Accounts 2022 | 61 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Risk ## management There has been a reduction in the likelihood of our innovation ### Our Approach to identifying and managing risks risk following a number of successful group-wide initiatives. How we protect our business Our UK growth risk has also decreased in likelihood as a result of robust mitigation; including increased collaboration across Effective management of current and emerging risks is critical the Group, paving the way for international opportunities, and to achieving our strategic goals. Our Group Director of Risk and the strong positioning of our abilities and offerings following Governance has oversight and responsibility for risk management the UK Government Spending Reviews. The large contracts risk across the organisation, providing risk expertise and support to the has decreased, in part, because the Engineering Delivery Partner businesses and reporting risk information to the Global Leadership (EDP) contract is now firmly established as the default route Team, the Board and its Audit and Risk and Security Committees. for contracted engineering services for Defence, Equipment and Support (DE&S). In addition, recent renegotiations of elements of Risk processes cannot operate in isolation and, like safety and the EDP programme has taken it to the next level and builds on security, must engender a supportive and robust culture to the success of the first three years. enable effective risk-based decision making. Our Group-wide risk management framework supports and develops a positive risk culture that spans the strategic to operational levels; exploiting Emerging risks both a top-down and bottom-up approach. Our culture and We define emerging risks as newly developing or changing embedded risk management processes, combined, result in a risks, where the extent and implications are not yet fully stronger and more resilient organisation in the face of challenges. understood. These risks are identified and managed using the Managing threats and optimising opportunities to support the same established risk management framework as our principal long-term success of our organisation is an established part of risks and are included as part of our strategic planning process the way we conduct business. Continual cycles of review and to ensure we capitalise on the opportunity and minimise the improvement of our risk maturity keeps pace with a growing downsides they present. Where appropriate, we establish business in a complex industry; to ensure we are best placed “Working Groups” to monitor and scrutinise the potential impacts to deliver results, while simultaneously innovating for our of the emerging risks and ensure relevant mitigation actions customers’ advantage. are undertaken at pace. We also consider the wider impact of emerging external risk; for example, where a risk creates Principal risks challenges for our customers it may create an opportunity where we have well-aligned capability to further support them. The Group Risk Register consists of material risks relating to both the effective delivery of our strategy and those risks which The enduring COVID-19 pandemic has continued to have limited may have a material effect on our stakeholders, partners and impact on our operations globally. Our sites and facilities have environment. The Board and Global Leadership Team assess remained open and the opportunity to maximise the potential of these principal risks from a number of different perspectives, new ways of working is being exploited through our transformation both individually and collectively. The Board recognises that programme in order to re-invent our workspaces to maximise some risks may be affected by factors outside the control performance and optimise spend whilst simultaneously providing of the company and that despite the robustness of the increased flexibility and productive ways of working for our risk management processes they cannot provide absolute employees. We remain cognisant that the pandemic challenges assurance and unknown risks may manifest without warning. have the potential to cause future disruption and, therefore, We have well established processes in place to rapidly deploy we continue to monitor the situation in readiness to respond appropriate management in these situations, and utilise lessons effectively to ensure that our people are safe and we continue learned across the organisation as part of our ongoing drive for to deliver excellence for our customers. continuous improvement. Refer to page 55 for more detailed information on Over the past 12 months, we have seen considerable movement our COVID-19 response in our principal risks, including the addition of three new risks, which have gained in materiality, and the decrease of ESG issues continue to be a focus for our investors and other three existing risks. The pandemic has been the catalyst for stakeholders, and so we are ensuring we provide visibility on fundamental changes in the way employees work, and the our programmes and plans, including how we are managing the subsequent “Great Resignation” phenomenon, driven by worker’s associated risks. We have a well-established ESG strategy in place, dissatisfaction with current working conditions and personal underpinned by robust sponsorship from our Board and the Global reassessments of career and lifestyle due to the changes and Leadership Team, to ensure we are identifying and managing the hardships of the pandemic, is likely here to stay. In light of ESG risks to our company, including compliance to legislative and this, we have escalated our people risk to the principal risks. In reporting requirements. The landscape continues to evolve and, addition, the step-change in the new requirements and evolving through 2021, we saw a number of topics emerge and develop. Key context of our climate risk was met with a significant amount areas included the focus and outcomes of COP26, the evolution of work throughout the year to assess and evaluate; resulting of the management of COVID-19, Social Value and Levelling Up in it being moved from the emerging risks to the principal risks, (in the UK), new reporting requirements and Defence Ethics. We Finally, given the significant growth ambitions of the QinetiQ carefully track the emerging ESG risks and, where necessary, build in Group, we must ensure that our delivery organisation can match additional work-streams under the ESG Programme to ensure robust the increasing size and complexity of programmes we undertake. mitigation is undertaken and opportunities are leveraged. To reflect Until our project and programme improvement initiative is the importance and necessary focus of ESG in QinetiQ, our CR&S completed, the risk of our project management failing to Director reports on the programme directly to the Board. keep pace with our growth will be held as a principal risk. ### 62 QinetiQ Group plc Annual Report & Accounts 2022 Risk management and assurance activity Three Lines Model Our risk management and assurance activity follows the established Three Lines Model with the first and second line reporting to Global Leadership Team and Board, and the third line reporting to the relevant Board Committees. The first line is performed by operational management, who own and manage the risks in accordance with the Group Operating Model; the second line is performed by the compliance, assurance and risk functions; and the third line is performed by the internal audit team and external assurance providers. ### Board Responsible for effective risk management and internal control across QinetiQ Group Sets risk appetite and assesses principal and emerging risks Audit Committee, and Risk and Security Committee Receive reports from second and Monitor and review the Risk deep-dives Monitor the effectiveness and third line assurance functions principal and emerging risks application of internal controls ### Global Leadership Team Identify and monitor the principal and emerging risks, as well as material risks(including operational) reported from the businesses and group functions Management Independent Assurance First Line Second Line Third Line Managers identify and evaluate risk, in Risk management and other oversight Internal Audit and other external conjunction with Second Line functions with limited independence independent assurance providers Design and operate internal controls and Provides complementary expertise, Review and evaluate risk management other mitigation measures, in conjunction support, monitoring, and challenge activity and provide assurance over the with Second Line related to the management of risk effectiveness of the control environment Application of risk appetite, delegated Design and facilitate the risk Manage the Confidential authorities, policies, procedures and management processes across Reporting process codes of practice the Group Report to the Board and Global Report risks through relevant reporting Provide risk expertise and support, Leadership Team and escalation processes including analysis and reports on the adequacy and effectiveness of Manage the day-to-day operational risks risk management Ensures compliance with legal, Responsible for continually improving regulatory, and ethical expectations the risk management process across the Group Monitor compliance with policies and standards Report to the Board and Global Leadership Team We have described our approach to ESG in more detail in the responsible business section of this report on Page 44 | | QinetiQ Group plc Annual Report & Accounts 2022 | 63 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Risk ## management ## continued QinetiQ risk appetite Cautious Balanced Eager The Board identifies and reviews its tolerance to risk by establishing a clear Commercial risk appetite and setting appropriate delegations of authority to the executive Opportunities relating to increased and senior leaders. We focus on those market share where we have proven critical risk areas necessary to achieve delivery into existing markets our strategic goals. Risk appetite is articulated by defining three categories Opportunities that translate proven which balance scrutiny and mitigation delivery into new markets activity against likely benefit: Cautious Opportunities that translate new capability or delivery into existing customers Avoidance of uncertainty – with negligible or low residual risk. Opportunities that involve new capability Applying innovation prudently or delivery into new markets where the risks are fully understood. Operational Balanced Preference for delivery options that Operational delivery have a low or moderate degree of residual risk. Applying innovation only Compliance with legal and where successful delivery is likely. regulatory requirements Eager Willing to consider delivery options with greater inherent risk and eager to be innovative. Strategic risks UK strategy Risk Impact Mitigation UK Government budget constraints A reduction in Our strategy is focused on leading and modernising UK test Metrics lead to reduced spending in core revenue and and evaluation in support of our UK and overseas customers’ Customer satisfaction markets in which we operate. associated objectives and developing our training and mission rehearsal All financial KPIs This, and the ever-increasing profitability from and data intelligence/cyber businesses. This includes ongoing Responsibility pace required to introduce new the Group’s proactive engagement with our major customers to enable us Group Function technology to respond to emerging UK Defence to support their objectives through mission-led innovation. Director: threats, results in a risk that our and Security Business Development Our focused investment into contracts enhances our offerings approaches/offerings for evaluating contracts. Managing Director: that support our customers with their pace and efficiency capability may not remain relevant. A&S, M&L and C&I. challenges as well as ensuring that we provide the right services as the threat environment continues to evolve. We continue to Risk appetite deliver new customer solutions, increasingly utilising modelling Eager and synthetics, embracing digital transformation. Likelihood/Impact We are expanding our global test and evaluation business, as Low/Medium evidenced through securing the contract to operate and maintain Proximity/Velocity the Queensland Flight Test Range and, post-Brexit, maintain 1-2 yrs/Medium relationships with the UK Government to support bilateral relationships within Europe; where there is increased recognition Strategy that T&E is an enabler to military capability and prosperity. Global leverage Distinctive offerings Read more at Page 19. Disruptive innovation ### 64 QinetiQ Group plc Annual Report & Accounts 2022 US business Risk Impact Mitigation There is a risk that the US Business Adverse impact Our US strategy is focused on developing our relationships Metrics will be unable to establish a on the Group’s with the DoD and major industry prime contractors through All financial KPIs robust and distinct position in financial mission-led innovation at pace in areas of technology such as US revenue as % of the marketplace and deliver the performance. robotics and autonomy, sensor solutions and systems, artificial total revenue significant growth ambition, intelligence and maritime systems where we feel we have resulting in impact to the strategic strong technology capability and the ability to deliver the most Responsibility direction of the Group and potential appropriate products or services. Group Function reputational damage. Director: We have created specific and ambitious growth strategies for the The ongoing impact of the Business Development US and are developing our capability to enact those strategies Continuing Resolution on the US under a new US CEO, and through driving the operational President and CEO: US DoD budgets within the Federal performance through two customer-focused businesses, C5ISR Government may exacerbate this Risk appetite Solutions and Technology Solutions. Additionally, we are leveraging risk through increased customer Balanced to Eager the broader QinetiQ group to sell our commercial systems disruptions and constraints. internationally to expand our market and mitigate reliance on the US Government procurement cycles. To encourage business winning, our single routes to market Likelihood/Impact approach enables our in-country team to leverage the full High/High QinetiQ brand and our Group-wide capabilities; maximising the opportunities to cross-sell and offer comprehensive solutions to the domestic challenges our US customers face. Initial focus is on augmenting US business relationships on the next generation Proximity/Velocity of combat vehicle programmes and making a greater selection of 0-1 yrs/Medium threat representation targets available to US DoD customers. We continue to mature our global end-to-end processes and business systems such that we can act with agility and pace in response to our US customer requirements. Further, the Strategy US business is fully embedded in our annual Group Audit and Global leverage Assurance planning process. Distinctive Offerings Disruptive Innovation Read more about our addressable market on page 25. International strategy Risk Impact Mitigation Our international business conducts Unable to realise Our international strategy is focused on growing capability in Metrics business in a number of regions, expected growth our home and priority markets, and leveraging aligned Group All financial KPIs including Australia, Canada and in the planned products and services to maximise growth. We have developed International revenue Germany. Plans to grow these timeframes. specific and ambitious growth strategies in our priority markets, as % of total revenue businesses to achieve our global including organic and inorganic growth options. Responsibility leverage may be impacted by We undertake extensive due diligence, taking the appropriate Group Finance Director external influences outside of professional advice to ensure structural, regulatory, legal and our control, such as geo-political Business Development political risks are understood and minimised. In addition, our risks, or specific risks arising Managing Director: international businesses are included in our Group Audit and from working in new markets International Assurance plans, and hold several internationally recognised and globalised operation. Political certifications and standards. uncertainties could also impact the Risk appetite availability and focus of customer The continued exploitation of single routes to market enables Balanced to Eager budgets. Elements of this risk exist our in-country teams to leverage the full QinetiQ brand and our within QinetiQ’s control, including Group-wide capabilities; maximising the opportunities to cross- Likelihood/Impact growing the maturity of our in- sell and offer more comprehensive solutions to the domestic High/High country capabilities to deliver our challenges our customers face. Proximity/Velocity growth ambitions. We are maturing our global and local processes and systems, 1-2 yrs/Medium as well as the approach to the global leverage of capabilities, such that we can deliver world-class solutions consistently Strategy across all of our home-market countries. Global leverage Read more about our addressable market on page 24. Distinctive offerings | | QinetiQ Group plc Annual Report & Accounts 2022 | 65 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Risk ## management ## continued Innovation strategy Risk Impact Mitigation Failure to innovate to enable the Negative impact Global initiatives to ensure innovation and the necessary Metrics realisation of new ideas for our on the Group’s underlying culture is embedded across the Group, including: Customer satisfaction customers and our organisation, market position, Employee engagement • Investment in tools to facilitate innovative approaches, such in the face of market and competitiveness, Responsibility as enhanced exploitation of digital platforms and virtual environmental changes such future growth Group Function Director environments to collaborate and demonstrate our products/ as rapidly evolving customer and profitability. Business Development services globally. needs, technological change and Group Function Director increased competition. • Diversity and Inclusion programme to drive and foster Strategy and Planning diverse thinking and embraces new ideas. Group Function Director Specifically failure to: • Commercial innovation, including agile approaches Technical • Create a culture of innovation to contracting. Group Function Director across the QinetiQ group. • Strategic workforce planning and global Success Factors, Human Resources • Develop relevant business utilisation to ensure we identify, attract and retain the right Risk appetite models, processes and people now and for the future. Balanced products/services. Ongoing Group-wide communications, including via the Global Likelihood/Impact • Attract, retain and nurture Roadshows and Q-Talks, and training to drive understanding Medium/High the right talent. and adoption of our Mission-Led Innovation philosophy across Proximity/Velocity QinetiQ Group, which is to deliver better operational outcomes 1-2yrs/Low for customers and end-users; working collaboratively to solve complex problems, at pace. Strategy Global leverage Read more about our approach to innovation on page 21. Distinctive offerings Disruptive innovation A material element of the Group’s revenue is derived from large contracts Risk Impact Mitigation | The Long Term Partnering | The LTPA and | We are investing significantly into the LTPA capabilities to | Metrics | | --- | --- | --- | --- | | Agreement (LTPA) is a 25-year | EDP directly | ensure they remain relevant and modern. The investment | All financial KPIs except | | partnering contract with the UK | contribute | portfolio is agile to changing customer needs and technological | orders | | MOD to provide test, evaluation, | a material | advances to ensure we remain at the cutting edge. We are now | Customer satisfaction | | and training services. | proportion of the | also working with the MOD on the T&E Futures programme | | Responsibility Group’s revenue through the delivery of a number of capability and technology Group Managing The Engineering Delivery and earnings. demonstrators. Director M&L Partnership (EDP) programme is a Group Managing 10 year agreement delivered by the We have achieved excellent customer satisfaction feedback Director A&S Aurora Engineering Partnership and along with very strong performance across all of our KPIs, LTPA Managing Director is established as the default route resulting in strong financial performance on the contract for contracted engineering services throughout FY22. Risk appetite for UK MOD Defence Equipment Balanced EDP is a collaborative programme with DE&S and our Aurora and Support (DE&S) and the wider partners, that provides customers with key capacity and Likelihood/Impact UK MOD. capability, focused on long term outcomes that maximise Medium/Medium efficiencies and operational performance. During FY22 we have UK Government budget constraints, Proximity/Velocity renegotiated some commercial elements of our agreement could lead to a material change in 0-1yrs/Low to build on the success of the first two years, ensuring that use of these large contracts. EDP remains competitive, relevant and continues to form a Strategy robust part of the solution to government spending challenges, Global leverage delivering the best equipment and support of the UK’s Armed Distinctive offerings Forces and Front Line Commands. Disruptive innovation ### 66 QinetiQ Group plc Annual Report & Accounts 2022 Mergers and acquisitions Risk Impact Mitigation M&A activity continues to form Adverse impact Robust governance is underpinned by the M&A Committee, Metrics a key element of our strategic on the Group’s which reports to the Board, and the relevant Integration Steering Inorganic growth growth plans in order to expand our financial Committees, for newly acquired companies. Revenue and Profit customer offerings within our home performance. Responsibility All acquisitions are thoroughly assessed for strong strategic markets of the UK, the US and Group Function Director alignment for value creation potential and for integration risk. Australia, as well as in our priority Strategy and Planning Extensive due diligence involves internal experts and a variety of growth markets. There is a risk Group Managing external advisory companies, and every integration is managed that our new acquisition selection Directors separately to ensure focus. Best practice, learned from successful and integrations do not realise the integrations, is rigorously applied to each new transaction. maximum potential benefits. Risk appetite Balanced Portfolio rationalisation is ongoing where appropriate. Likelihood/Impact High/High Proximity/Velocity 1-2yrs/Low Strategy Global leverage Distinctive offerings The Transformation and Digitisation Programme Risk Impact Mitigation The Transformation and Failure to realise Global Leadership Team work stream sponsorship and Group- Metrics Digitisation Programme aims to benefits will wide stakeholder engagement to ensure robust requirement Customer satisfaction position QinetiQ for further growth, challenge our identification and focussed investment. This is supported Employee Engagement by globalising consistently around ability to meet by a CEO-led steering group and a Global Digital and Data All financial KPIs the customer to deliver excellence. our strategic Programme Board. Responsibility In order to achieve this we must growth targets Group Function Budget and scope managed through a robust governance invest in our processes and and limit our Director Business model reporting to the Global Leadership Team and Board that systems to embed a robust Global capacity to scale Transformation and gives sufficient flexibility to respond to changing customer Operating Model, supported by a affordably. Services needs but with the guide-rails in place to identify and control Global Interoperable Infrastructure potential cost overruns. to enhance our collaboration, and a Risk appetite Digital Workspace that enables us Balanced Benefits realisation is managed through a strong focus on to leverage our skills globally. This change management, to drive adoption and the required changes Likelihood/Impact requires significant alignment and to behaviours. The Digital and Data Programme acts as an High/High effort across the Group as well as enabler for the overall transformation by providing the tools cultural and behavioural changes. Proximity/Velocity and ways of working to more rapidly address the cultural and 0-1yr/Medium behavioural changes required to make the programme a success. There is a risk that the investment Strategy required to achieve the intended Global leverage outcomes is greater than budgeted, Distinctive offerings that the programme benefits are Disruptive innovation not fully realised and our Group ambitions are constrained. | | QinetiQ Group plc Annual Report & Accounts 2022 | 67 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Risk ## management ## continued Operational risks Significant breach of relevant laws and regulations Risk Impact Mitigation We operate in highly regulated Failure to comply Maintaining and strengthening a proactive safety and regulatory Metrics environments across many with particular compliance culture across the Group is a key part in minimising Health, Safety and jurisdictions. Non-compliance to regulations could the risk of a failure. Environment existing and new requirements result in serious Mandatory training The Global Operating Model clearly defines lines of responsibility presents risks to people, property detriment to people, compliance through the organisation. In addition we have robust policy, and the environment as well as property and the Commercial procedures and mandatory training in place. The QinetiQ Code having the potential to compromise environment, and/ intermediary of Conduct sets out clear expectations for the Group and its our ability to conduct business in or a combination monitoring employees; and in areas such as bribery and corruption the certain markets, potentially having an of fines, penalties, Responsibility company adopts a zero-tolerance approach. impact on a variety of stakeholders. civil or criminal Director of Group action, suspension We drive continuous improvement using a range of approaches Safety Improvement or debarment such as audit and evaluation, focused training, strategic Programme from government improvement programmes, and business objectives. Company Secretary/ contracts, as well Group General as significant One example is the launch of our Group-wide Health and Safety Counsel reputational Improvement Programme; partnering with industry safety experts Group Function damage to QinetiQ. to further enhance our safety culture. Director Technical Group Managing The effectiveness of our internal control environment continues to Directors be assessed annually with the Board, and a board assurance map is increasingly used to identify any potential gaps in assurance Risk appetite over key risks. Cautious ESG risks are robustly managed under the ESG programmes. Likelihood/Impact Medium/High Proximity/Velocity 0-1yr/High Strategy Global leverage Distinctive offerings ### 68 QinetiQ Group plc Annual Report & Accounts 2022 Security and IT systems Risk Impact Mitigation A breach of physical or data Significant As a key supplier in the National Security supply chain, we must Metrics security, cyber-attacks or IT reputational ensure that the organisation’s security meets governments’ Cyber dashboard systems failure, leading to loss of damage, as and other relevant requirements worldwide. We employ a Security dashboard customer or company information well as service holistic security threat approach through four interlocking could have an adverse impact on interruptions and pillars: Physical, Information, Cyber and Personnel Security. Our our reputation, customer confidence the possibility of changing and increasingly sophisticated threat environment is Responsibility and operational delivery. withdrawal of our continuously reviewed, using appropriate tools and techniques, Group Director accredited status as part of our over-arching Security Strategy such that new Transformation and (our “licence to and emerging threats are removed or mitigated, ensuring our Business Services operate”) resulting strategy appropriately balances the security, cost and flexibility in exclusion from required for any given solution. Risk appetite some types of Cautious Our programme of continuous security improvement includes: government contracts and • A Group Cyber Security Standard. subsequent impact • Targeted Cyber Security Training for key IT staff, and Likelihood/Impact on orders, revenue mandatory awareness training for all staff and contractors. High/High and profit. • Deployment and continual upgrade of cyber security detection and protective technologies. • Annual strategic security reviews. Proximity/Velocity • Continuous employee communications and engagement, 0-1yr/High including an annual Security Culture survey. The introduction of a group-wide common IT infrastructure through the Digital and Data Transformation Programme will strengthen our Strategy overall cyber security capability through the adoption of common Global leverage security tooling. This will also facilitate greater global inter- Distinctive offerings operability through technology controlled information sharing while still protecting National and Sovereign data and information. Project and programme professionalism and processes Risk Impact Mitigation | QinetiQ operates in a competitive | Adverse impact | The Group Performance Excellence (GPE) function is | Metrics | | --- | --- | --- | --- | | and complex delivery environment. | on group financial | responsible for the continuous improvement or our robust | All Financial KPIs | | Scalable, adaptable and agile | performance, | P3M framework in order to provide a scalable and consistent | Customer | | leadership of work is the norm. | competitiveness | approach to delivering benefits to time, cost and quality. Work | Satisfaction | | There is a risk that our Portfolio, | and future growth. | is ongoing to consolidate toolsets, implement a pan-discipline, | Revenue and Profit | | Programme and Project | | Group-wide Lifecycle Framework, and enhance Project Manager | | Responsibility Management (P3M) maturity fails professional development. Group Director to keep pace with our growth plans Technical Project Management Offices (PMOs) have been embedded in each and successful delivery of larger, business unit, and are actively implementing GPE outputs; including longer-term contracts. We must Risk appetite the integration of professional Project Controls and Assurance. continually innovate and develop our Cautious/Balanced frameworks, processes, tools and Likelihood/Impact training in order to ensure consistent Medium/Medium excellence in winning business and delivering for our customers. Proximity/Velocity 0-1yrs/Medium Strategy Global leverage Distinctive offerings Disruptive innovation | | QinetiQ Group plc Annual Report & Accounts 2022 | 69 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Risk ## management ## continued Climate change Risk Impact Mitigation QinetiQ Group, like all organisations, Negative impact We have a strong track-record of environmental stewardship but Metrics must play its part in reducing on the Group’s recognise that there is more we can do. Reduction of GHG GHG emissions and ensuring market position, emissions We have developed a Net-Zero plan and are committed to target | that the risks and opportunities | competitiveness, | | | | --- | --- | --- | --- | | | | to achieve Net-Zero GHG emissions by 2050 or sooner. We have | Customer | | resulting from climate change | future growth. | | | | | | in place Global initiatives to ensure that we are embedding our | satisfaction | and the decarbonising economy Net-Zero plan; are understood, and effectively Employee managed as an intrinsic part of our 1. Net-Zero operations (Scope 1 and 2) engagement operations and strategy. 2. Net-Zero upstream and downstream focus (Scope 3) TCFD outputs Failure to manage the climate change risk as part of our strategy Responsibility 3. Delivery of critical internal and industry-wide enabling will leave operations on our estates Chief Finance Officer activities (e.g. cost of carbon, and remuneration incentives) and our supply chains, exposed. Risk appetite We may not meet legislative 4. Co-create with our customers, invest in research and Balanced or customer requirements, development and care for our environment Likelihood/Impact stakeholder expectations and we We have also undertaken a comprehensive review of the risk Low/Medium will not be correctly positioned in a of climate change to our business and have ensured that we decarbonised future. Proximity/Velocity embed climate change into our business-as-usual activities, 3-5yrs/Low For more details see our Net-Zero integrating opportunities into our strategy and ensuring efficacy plan on page 47 and the TCFD through leadership oversight with supporting tracking metrics. Strategy section on page 50. This is reported on page 50 aligned with the TCFD framework. Global leverage Distinctive offerings Disruptive innovation People Risk Impact Mitigation Identifying, attracting and retaining Negative impact Our people are a core consideration in all of our strategic and Metrics the right people now and in the on the Group’s operational planning. Reward future is essential to QinetiQ’s market position, Growth We are enhancing our Strategic Workforce Planning (SWP), the success. There has been a competitiveness, Career Path Early Careers Programme, D&I Plans, and career management significant change in expectation future growth. Responsibility tools. The HR function is developing a collaborative functional within the global workforce in terms Group Human model for harnessing future capability requirements, of location, flexibility and baseline Resources Director assimilating existing structure, understanding better the skills toolsets; this has been accelerated gaps and capable of leading SWP strategic thinking. by the pandemic, and there is a Risk appetite risk that we fail to grow and adapt Balanced A high performance culture is central to our people strategy, our ways of working in order to supported by engagement, talent review and reward strategies; Likelihood/Impact ensure that we attract, develop and this is further enabled through our Smart Adaptive Working Medium/Medium retain the right capability to deliver (SAW) guidance which has capitalised on the diverse ways that excellence for our customers. Proximity/Velocity our people have worked. 1-2yrs/Medium Each of our home countries has been able to adapt to trends an Strategy opportunities in their own localities; for example, a successful Global leverage pilot of a four-day week in Australia. Distinctive offerings Disruptive innovation Proximity – Risk proximity means how far away in time will the risk occur (if it materialises). Velocity – Velocity refers to the time that elapses between the occurrence of an event and the point at which the QinetiQ first feels its effects. ### 70 QinetiQ Group plc Annual Report & Accounts 2022 ## Longer- ## term viability ## assessment Assessing the prospects of The corporate planning process is The period over which we confirm underpinned by assessing scenarios and the Group longer-term viability risks that encompass a wide spectrum of | An overview of the Group’s growth | potential outcomes, both favourable and | The period over which the Directors | | --- | --- | --- | | strategy is provided on pages 18 to 21. | adverse. The sensitivity analysis undertaken | consider it possible to form a reasonable | | | by management explores the resilience of | expectation as to the Group’s longer-term | The Group’s corporate planning processes the Group to the potential impact of all the viability is the five-year period to 31 March involve the following individual processes significant risks set out on pages 64 to 70, 2027. This is the period covered by our covering differing time frames: or a combination of those risks. strategic planning process and is subject 1. An annual Integrated Strategic Business to stress-testing and scenario planning The scenarios are designed to be severe Plan (ISBP) process that looks at the around potential risks. It has been selected but plausible, and take full account of financial outlook for the following five because it presents the Board and readers the availability and likely effectiveness years. This process commences with of the Annual Report with a reasonable of the mitigating actions (as described an assessment of the orders pipeline degree of confidence while still providing an on pages 64-70) that could be taken producing an order intake scenario. appropriate longer-term outlook. to avoid or reduce the impact or A review of the phased delivery occurrence of the underlying risks, and profile and the cost base required to Confirmation of longer-term that realistically would be open to them support this enables generation of in the circumstances. In considering viability low-case, base-case and high-case the likely effectiveness of such actions, profit forecasts. Capex and working As noted on page 111, the Directors the conclusions of the Board’s regular capital requirements are also collected, confirm that their assessment of the monitoring and review of risk and internal reviewed, approved and a cash flow principal risks facing the Group was control systems, as discussed on page produced for the Plan period; robust. Based upon the robust assessment 108, is taken into account. of the principal risks facing the Group and 2. An annual budget process that covers Alongside the annual review of risk their stress-testing based assessment of the first year of the five-year planning scenarios applied to the strategic plan, the Group’s prospects, all of which are horizon in detail; performance is rigorously monitored to described in this statement, the Directors alert the Board and Global Leadership have a reasonable expectation that the 3. A bi-annual forecast process to update Team to the potential crystallisation of Group will be able to continue in operation the view of the first budget year (the a key risk. and meet its liabilities as they fall due over year which would be in progress). the period to 31 March 2027. | 4. A rolling monthly “latest best estimate” | | We consider that this stress-testing based | | --- | --- | --- | | | process to assess significant changes | assessment of the Group’s prospects is | | | to the budget/forecast for the year | reasonable in the circumstances of the | | | in progress. | inherent uncertainty involved. | ## Going concern ## statement The Group’s activities, combined with the The market conditions in which the Group The Group is exposed to various risks and factors that are likely to affect its future operates are expected to be challenging, uncertainties, the principal ones being development and performance, are set as spending from key customers comes summarised in the ‘Principal risks and out on pages 1 to 35. The Group meets its under pressure, however the Group enters uncertainties’ section on pages 64 to 70. day-to-day working capital requirements the new year with a very strong balance Crystallisation of such risks, to the extent through its available cash funds and its sheet and a healthy order-book. After not fully mitigated, would lead to a negative bank facilities. The Chief Financial Officer’s making enquiries, the Directors believe that impact on the Group’s financial results but review on pages 36 to 39 sets out details the Group is well-positioned to manage none are deemed sufficiently material to of the financial position of the Group, the its overall business risks successfully and prevent the Group from continuing as a cash flows, committed borrowing facilities, have a reasonable expectation that the going concern for the next 12 months. liquidity, and the Group’s policies and Group has adequate resources to continue processes for managing its capital and in operational existence for the foreseeable financial risks. future. The Group therefore continues to adopt the going-concern basis in preparing its financial statements. | | QinetiQ Group plc Annual Report & Accounts 2022 | 71 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Section 172 (1) ## statement ### We welcome our responsibilities to promote the success of the ### company in accordance with section 172 of the 2006 Companies Act. The Board of Directors confirm that during the year under review, it has acted to promote the long-term success of the company for the benefit of the shareholders, while having due regard to matters set out in section 172(1)(a) to (f) of the Companies Act 2006, being: s. 172(1) matter Relevant disclosures (a) The likely consequences of any decision in the long term Company purpose – page 4 Business model – pages 16 to 17 Strategy – page 18 Dividend policy – page 39 Longer-term viability statement – page 71 (b) The interests of the company’s employees Improving the safety, health and wellbeing of our people – page 55 Engaging with our people – page 57 Developing our people – page 58 Rewarding and recognising our people – page 59 Non-financial information statement – page 74 Board employee engagement – page 93 Diversity and inclusion – page 56 and 104 to 105 (c) The need to foster the company’s business relationships Business ethics – doing business the right way – page 60 with suppliers, customers and others Anti-bribery and corruption – page 61 Human rights – page 61 Modern slavery – page 61 Supply chains – page 61 Supplier stakeholder management – page 61 (d) The impact of the company’s operations on the community Responding to climate change – pages 46 to 53 and the environment Greenhouse gas emissions and energy management – page 47 Investing in our community – page 56 TCFD disclosures – page 50 (e) The desirability of the company maintaining a reputation for Stakeholder propositions – pages 10 to 11 high standards of business conduct Our sustainable business model – pages 10 to 11 Our values – page 18 Our culture – page 91 Our approach to responsible and sustainable business – page 48 Internal controls – page 108 (f) The need to act fairly between members of the company Investor engagement – page 94 The Annual General Meeting – page 95 ### 72 QinetiQ Group plc Annual Report & Accounts 2022 Typically in large and complex companies such as QinetiQ, the Our Chairman, with the assistance of the Company Secretary, Directors fulfil their duties partly through a governance framework sets the agenda for each Board meeting to ensure that the that delegates day-to-day decision making to the employees of requirements of section 172 are always met and considered the company. The Board recognises that such delegation needs through a combination of the following: to be part of a robust governance structure, which covers our Board papers ensure that stakeholder factors are • values, how we engage with our stakeholders, and how the Board addressed where judged relevant. assures itself that the governance structure and systems of Standing agenda points and papers presented at each • controls continue to be robust. The main methods used by Board meeting: for example, the CEO presents updates on the Directors to perform their duties include: the financial overview, strategic progress, investor relations, An annual strategy meeting which assesses the long-term • businesses development, and operational progress. The sustainable success of the Group and our impact on key Company Secretary also presents at each Board meeting Stakeholders. relevant corporate governance and compliance matters. The Board’s risk management procedures identify the • A rolling agenda of matters to be considered by the Board • potential consequences of decisions in the short, medium throughout the year, including a two-day strategy review, and long term so that mitigation plans can be put in place to which considers the purpose and strategy for the Group, prevent, reduce or eliminate risks to our business and wider supported by a budget for the following year and a medium- stakeholders (see pages 64 to 70). term (five-year) financial plan. Agenda items for the following The Board sets the Group’s purpose, values and strategy year are set, based on the discussions held and decisions • | | and ensures it is aligned with our culture (see page 90). | | taken by the Board throughout the year. | | --- | --- | --- | --- | | | Direct and indirect stakeholder engagement | | Consistent approach to minute-taking with details as | | • | | • | | | | (see pages 26 and 92 to 93). | | to when section 172 factors are being considered. | External assurance is received through audits, stakeholder • Board activity and principal decisions in FY22 surveys and reports from brokers and advisers. The principal decisions taken by the Board in FY22 are detailed Specific training for our Directors and senior managers • on pages 87 to 89. These decisions cover a variety of topics, (see page 107). including the Group’s response to COVID-19, our Environment, Regularly scheduled Board presentations and reports, by Health and Safety strategy and portfolio optimisation decisions. • way of example: customer engagement, risk register reports, Due to the nature of these decisions, a variety of stakeholders health and safety reports, whistle blowing reports (if relevant), had to be factored into the Board’s discussions. defence process review, dividend policy and people and culture strategy and developments. The discharge of Directors’ duties and oversight of • these duties, of which further details are included in the Governance section. Corporate responsibility, including business ethics, anti-bribery • and corruption, human rights, environmental stewardship and use of resources, sustainable solutions, greenhouse gas emissions and energy management, investing in our local communities and our commitment to the armed forces. Formal consideration of any these factors which are • relevant to any major decisions taken by the Board throughout the year. Review of many of these topics through the risk management • process and other standard Audit Committee, Risk and CSR Committee and Remuneration Committee agenda items. | | QinetiQ Group plc Annual Report & Accounts 2022 | 73 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Non-financial ## information ## statement ### The non-financial reporting Certain of the non-financial information required pursuant requirements contained in sections ### to the Companies Act is provided by reference to the 414CA and 414CB of the Companies Act 2006 are addressed within this ### following locations: section by means of cross reference, in order to indicate where they are Non-financial information Section Pages located within the strategic narrative Business model Business model 16 and to avoid duplication here. Policies Non-financial information statement 74–75 Risk Management Risk management 62–64 We have a range of policy and Principal risks Risk management 64–70 guidance, some of which is published Key Performance Indicators Key performance indicators 40–43 on our website: www.QinetiQ.com. ESG Environmental Social Governance 44–61 Board Diversity Policy Corporate Governance 104 Our people Policy statement Description Code of Conduct Our Code of Conduct lays out our ethical standards, providing our people with clear direction and guidance on how we do business across the company (Page 60). There are details on ethical decision making and also how to seek help and raise concerns. The Code is structured to include a range of advice for our people, our customers and partners, our company and shareholders and our communities and the public. We review our Code of Conduct annually to reflect the needs of our business, regulations and best practice. Speak Up Guidance for our employees and third parties on how to ‘speak up’ is provided within our Code of Conduct and our supplier Code of Conduct (both available on our website). Queries to our ethics email line are reported to the GLT monthly and an overview of the programme was presented to the Board. (See page 86). Confidential reporting is overseen by the Audit Committee, the process is described on page 95. Health and safety Our Health and Safety policy outlines our commitment to continuously improving standards of safety management and compliance. This is supported by our EHS Strategy (page 55). The effectiveness of the policy is governed through our assurance process and our six-monthly self certification. Safety issues are part of a regular governance timetable, monthly through MD meetings, quarterly through Global Leadership Team (GLT) meetings and the Board Risk and Security Committee (see page 115). We track Lost Time Incidents (LIT) as a key non-financial KPI (page 42), which demonstrates an improvement in the LTI). Diversity and inclusion Our Equality, Diversity and Inclusion (ED&I) policy details our approach to promoting ED&I in our workplace. The effectiveness is governed via our assurance processes and KPIs with monthly oversight by our GLT as well as regular oversight by the Board. Our Inclusion 2025 programme including an improvement in gender diversity, is described on pages 56 and 57 including relevant data and progress against the Board’s Diversity and Inclusion Policy is described on page 104. The environment Policy statement Description Environmental We are committed to embedding an environmentally sustainable approach to business because we understand its management importance to our business and our stakeholders (see pages 47 and 49). The effectiveness of our policy is governed through our assurance process and our six-monthly self certification. Environmental issues are part of a regular governance timetable, with oversight by the GLT and the Risk and Security Committee (page 115). We are certified to ISO 14001 in the UK and Canada and so are subject to external audit. Energy management and Underpinning our ISO 50001 certified energy management system is our energy and carbon management policy, which climate change creates the framework for energy management. On page 48 we show the positive improvement against our target. Our policy is part of regular governance review and self certification, as well as external audit, to ensure we are meeting certification requirements (see page 48). Our new Net-Zero plan has had oversight by the Board (page 89). Risks associated with climate change are on page 70. Waste management We recognise that reducing waste meets our sustainability goals, and improves efficiency. On page 49 we outline the progress against our target. The effectiveness is governed via our assurance processes and KPI with monthly oversight by our GLT as well as regular oversight by the Risk and Security Committee. Sustainability appraisal Sustainability appraisals are required under the LTPA. They involve an assessment of an activity across 16 sustainability themes. The effectiveness is governed via our assurance processes as well as regular review and oversight by the UK MOD customer. ### 74 QinetiQ Group plc Annual Report & Accounts 2022 Community and society Policy statement Description Volunteering policy Our policy provides guidance for employees to use company time to use their skills, which enable us to make a positive difference in the community (page 56). The effectiveness is monitored by the CR&S team and via our assurance process. Safeguarding children Our policy explains the importance of safeguarding as part of our community investment programme and outlines and vulnerable adults requirements for risk assessment and the right behaviours. The policy is managed both by the CR&S team and locally by safeguarding experts in our Early Careers Team and is managed via our assurance process. Tax Our Tax strategy (available on our website) outlines our commitment to being compliant with tax legislation, wherever we do business. We recognise our responsibility to pay the right amount of tax, at the right time and in the right jurisdiction. Oversight of this commitment comes through external challenge, such as business risk reviews and audit questions from tax authorities and external auditors and internal reviews such as quarterly tax updates with executive level reviews of process and procedure. The tax strategy also has oversight by the Audit Committee (page 112). Sponsorship Our policy is designed to ensure that all donations are made to appropriate organisations. We ensure that there is and donations screening and due diligence and we also undertake selection with oversight of the CR&S team and the Sponsorship and Donation Committee. This is managed by our assurance process. Human rights Policy statement Description Human rights We seek to anticipate and prevent potential negative human rights impacts through our policy and processes and address salient human rights issues through our Code of Conduct, trading policy, international business risk management process and export controls process. Our policies ensure we meet all statutory requirements. We monitor the application of these policies through our business assurance processes and regular self assessment and with leadership oversight (GLT and Board). We believe that this integrated approach is effective in ensuring our business acts responsibly and respects human rights. (See page 61). Modern slavery We recognise our responsibility to comply with all relevant legislation, including The Modern Slavery Act 2015. Our policy focuses on management of the supply chain and the requirements for due diligence. In addition we include modern slavery in our resourcing policy. Our Modern Slavery and Human Trafficking statement is published on our website. The effectiveness is monitoring via our assurance programme and leadership oversight (GLT and Board). See page 61 for details of the programme. Data Protection Our data protection policy details how we manage the privacy and security of personal information. The effectiveness is monitoring via our assurance programme and leadership oversight (GLT and Board). Supply chain code Our supplier code of conduct helps ensure our suppliers have clarity on our expectations on human rights issues. of conduct See page 61 and our website for more details. International trade As an international business, it is vital that we operate fully within the requirements of international export requirements compliance and this is address by our policies. The effectiveness is monitoring via our assurance programme and leadership oversight (GLT and Board). See our website for more details. Anti-bribery and anti-corruption Policy statement Description Code of Conduct Our Code of Conduct lays out our ethical standards, and contains advice on anti-bribery and corruption. Anti-bribery Our anti-bribery and corruption policy sets out our responsibilities in observing and upholding our zero-tolerance approach and corruption to all forms of bribery and corruption. This important policy, which ensures we meet applicable statutory requirements, has significant senior oversight at GLT and Board level, is managed via our assurance processes and self-certification and there are regular internal audits. Details of our ABC programme are provided on page 60. Commercial Managing commercial intermediaries is one of a suite of key polices which supports our zero tolerance approach to ABC. intermediaries It provides clear guidance on approach. This policy has Executive and Board oversight, is subject to our assurance process and self-certification. Sanction screening It is key that we comply with any sanctions requirements and so undertake various screenings. This is captured in our policy, which is designed to ensure we comply, which has GLT and Board oversight, is subject to our assurance process and self-certification. Gifts and hospitality Our gifts and hospitality policy is one of a suite of polices which supports our zero-tolerance approach to ABC. It provides clear guidance on what is appropriate and how to record. This policy has GLT and Board oversight, is subject to our assurance process and self certification. | | QinetiQ Group plc Annual Report & Accounts 2022 | 75 | | --- | --- | --- | | CORPORATE STRATEGIC FINANCIAL | | | | GOVERNANCE STATEMENTS REPORT | | | ## Corporate ## Governance 79 An introduction from our Chair 81 Governance framework 82 Board of Directors 86 Board activity 87 Board decision making 90 Purpose, values and culture 92 Stakeholder engagement 96 Division of responsibilities 98 Composition, succession and evaluation 100 Nominations Committee report 106 Director effectiveness 108 Audit, risk and internal control 109 Audit Committee report 115 Risk & Security Committee report 117 Directors’ remuneration report 119 Remuneration at a glance 123 Annual report on remuneration 137 Directors’ report 141 Independent auditors’ report ### 76 QinetiQ Group plc Annual Report & Accounts 2022 CORPORATE GOVERNANCE | | QinetiQ Group plc Annual Report & Accounts 2022 | 77 | | --- | --- | --- | | CORPORATE FINANCIAL FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS STATEMENTS REPORT | | | ## Governance ## framework ### Statement of compliance with the 2018 UK Corporate Governance Code (the Code) The Board is accountable to shareholders for its standards of governance and throughout the year the Board has applied and been compliant with the principles and provisions set out in the Code, with the exception of Provision 38 (alignment of Executive Directors’ pension with those available to the employees). See page 123 for further information. The Code is publicly available at www.frc.org.uk. Listed below are the Code principles, and details of where we have addressed them in this Annual Report. 1. Board Leadership and company purpose 3. Composition, succession and evaluation Provides an overview of the activities undertaken by the Board in the Sets out key processes, which ensure that the Board and its year, how the Board has considered its s. 172(1) responsibilities and Committees can operate effectively its governance framework Code principle J Code principle A • Nominations Committee report – pages 100 to 107 • Section 172(1) statement – pages 72 to 73 and 87 to 89 Code principle K • Board of Directors – pages 82 to 84 • Board of Directors – pages 82 to 84 Code principle B • Nominations Committee report – pages 100 to 107 • Our strategy – page 18 Code principle L • Section 172(1) statement – pages 72 to 73 and 87 to 89 • Director effectiveness – pages 106 to 107 • Company purpose – page 90 • Culture – pages 91 to 92 4. Audit, risk and internal control Code principle C Explains the role of the Board, the Audit Committee and the Risk • Strategic report – pages 1 to 75 & Security Committee in ensuring the integrity of the financial • Audit Committee report – pages 109 to 114 statements and maintaining effective systems of internal controls • Risk & Security Committee report – pages 115 to 116 Code principle M • Audit Committee report – pages 109 to 114 Code principle D • Social – pages 54 to 59 Code principle N • Stakeholder engagement – pages 92 to 95 • Fair, balanced and understandable – page 111 • Section 172(1) statement – pages 68 to 69 and 87 to 89 Code principle O | Code principle E | • Risk management – page 108 | | --- | --- | | • Social – pages 54 to 59 | • Audit Committee report – pages 109 to 114 | | • Employee engagement – page 93 | • Risk & Security Committee report – pages 115 to 116 | • Confidential reporting – page 95 5. Remuneration 2. Division of responsibilities Describes the company’s remuneration arrangements in respect of its Directors, how these have been implemented in FY22, and details of Explains the roles of the Board and its Directors our remuneration policy Code principle F Code principle P • Governance framework – page 81 • Directors’ remuneration report – pages 117 to 136 • Division of responsibilities – pages 96 to 97 Code principle Q Code principle G • Directors’ remuneration report – pages 117 to 136 • Governance framework – page 81 Code principle R • Board of Directors – pages 82 to 84 • Directors’ remuneration report – pages 117 to 136 • Division of responsibilities pages – 96 to 97 Code principle H • Section 172(1) statement – pages 72 to 73 and 87 to 89 • Time commitment – page 98 Code principle I • Board and Committee processes – page 98 ### 78 QinetiQ Group plc Annual Report & Accounts 2022 ## An introduction ## from the ## Group Chair ### Dear Shareholder, Stakeholder engagement – ### I am pleased to present this year’s more important than ever corporate governance statement. This During the year the Board had to make a report provides a summary of the system number of challenging decisions, which of governance adopted by the company affected all our stakeholders in different and will enable our shareholders to ways, and we have sought to balance evaluate the manner in which the Code’s the needs of our many stakeholders principles and provisions have been throughout the year, be they employees, applied by the company. customers, suppliers, shareholders or regulators, while taking steps to secure the Group’s longer term success. There ### Board activities has been a constant dialogue with all FY22 saw QinetiQ delivering a good of the main stakeholder groups, and on underlying operating performance at Group behalf of the Board, I would like to take level. In particular the EMEA Services this opportunity to thank them all for their division strongly delivered on its strategy, partnership during this challenging time. winning larger long-term contracts, A fuller summary of the Board’s activity managing complex programmes effectively during the year can be found on page 86, and delivering for its customers. However, further information about the Group’s our result was impacted by two short-term stakeholder engagement can be found issues; a write-down on a large complex on pages 87 to 89, and 92 to 95. project and a weaker performance in the US, negatively impacted our share price in ### late 2021. The Board took swift actions to Environmental, Social mitigate these issues, including a robust ### and Governance (ESG) plan to ensure the best possible outcome | on the large complex project, see page | QinetiQ is proud to be acting as a catalyst, | | --- | --- | | 87. The Nominations Committee was | by driving and leading these important | | also able to apply the established Senior | issues within our sector. During the | | Management Succession Programme to | year, the Board and I have had many | | assure that we appointed the best possible | discussions on how to best keep evolving | | candidate to lead our US business, and in | our approach to ESG matters. As part of | | January we announced the appointment | our regular business review, we are able | | of Shawn Purvis as President and CEO of | to oversee and monitor management of | | QinetiQ US, see more on page 88. | ESG issues, which are being delivered | through our Corporate Responsibility and To navigate through these issues, we Sustainability function. We are proud of the have called on the extensive skills and significant progress made to date on our experience of the entire Board. Our robust ESG strategy, and we continue to support governance framework, and how this is the business in its ambition to embed implemented, has been fundamental to this further into corporate strategy and our ability to do this successfully. decision making. | | QinetiQ Group plc Annual Report & Accounts 2022 | 79 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## An introduction ## from the ## Group Chair ## continued To ensure that the Board can provide ### Board and management Remuneration the appropriate oversight of ESG issues ### succession This year was the second year of the we have an established Climate Change Directors’ Remuneration Policy that Steering Committee, chaired by our There have been a number of changes to was approved by shareholders at the CFO. In addition, in FY23, our Global the Board since the last Annual Report. AGM in 2020 (the Policy). The Board’s Leadership Team will set up a dedicated David Smith stood down as Chief Financial Remuneration Committee has during the ESG Committee, which will be chaired by Officer in November 2021, and we year focused on ensuring that the Policy our CEO, with the aim to provide further welcomed Carol Borg as his successor. is continuing to operate as intended to support to the business in this vital area. Carol brings extensive financial and reward, retain and incentivise appropriately operational expertise in driving disciplined the Executive Directors who are driving strategy execution. In addition, Larry Prior ### Health and safety the company’s success. It has done so joined the Board as an Independent Non- by seeking to ensure that the company’s At QinetiQ, safety and wellbeing executive Director in November 2021. remuneration schemes and their outcomes remain our number one priority and our for Executive Directors continue to be commitment to look after our people, Succession planning for the Global transparent, aligned with the company’s customers and visitors is at the heart of Leadership Team (GLT) is on track, with strategy and aligned with the interests of, our culture. The Board has, during the the onboarding of Shawn Purvis as our and returns delivered to, shareholders. year, supported the management team in US President and CEO, and the internal launching the Group Safety Improvement promotions of Amanda Nelson as Programme, aimed at developing and Group Human Resources Director ### Annual General Meeting implementing a robust safety management and Mike Sewart as Chief Technology We are delighted this year to again system that incorporates key lessons and Operating Officer. welcome shareholders to our AGM. The identified and improves our safety culture. AGM will be held at 11:00 on Thursday Further information on this can be found Ensuring a diverse culture on the Board 21 July 2022 at the office of Ashurst LLP, on pages 54 to 59, and 91 to 92. and the GLT is crucial to improving London Fruit and Wool Exchange, Duval effectiveness, encouraging constructive Square, London E1 6PW. Further details debate, delivering superior performance ### Culture will be provided in the Notice of AGM and enhancing the success of the and on www.QinetiQ.com. | Promoting a culture of openness and | company. We currently have a Board | | --- | --- | | debate in the boardroom is one of my | comprising 44.4% women and 33.3% | | key responsibilities as Group Chair, | women on the GLT. We continue to be | ### Conclusion and as a Board we play an important committed to our gender and ethnic I would like to take this opportunity to leadership role in promoting the desired minority diversity targets for the Board, express my gratitude to all employees of culture throughout the organisation. By and the GLT. QinetiQ, the CEO and his executive team, spending time with the business and its and my fellow Directors for all their hard people, the Board and I have seen that the ### Evaluating the Board’s work during the year. culture and values of QinetiQ (integrity, ### collaboration and performance), are performance Neil Johnson clearly embedded and genuinely lived. Central to setting the correct tone is the Non-executive Group Chair In QinetiQ, I have found a culture that is review of the Board’s own performance. grounded, responsible and humble, where This year we carried out an external people have confidence in their capabilities assessment, which was conducted by Tom and our strategy, with a strong desire to Bonham-Carter of The Effective Board LLP. learn and develop. However, our people The positive outcomes of this were well have found this year challenging, with received, and in the spirit of continuous the continued impact of COVID-19 and improvement, we also identified areas to the financial performance shock which work on. Please see pages 105 to 107 for required a short-term recovery plan. The further information. company has spent considerable time over the last year supporting our people The suite of evaluation actions from the and getting the culture right, and we are previous year, alongside progress against continuing this journey. these are set out on page 106. ### 80 QinetiQ Group plc Annual Report & Accounts 2022 ## Board ## leadership and ## company ## purpose ### Board leadership and company purpose ### Governance framework This is the structure through which the company is managed. It has evolved over time, and continues to evolve to meet the needs of the business and the company’s stakeholders. Boards of large companies invariably delegate day-to-day management and decision- making to Executive Management. Directors should maintain oversight of a company’s performance and ensure that management is acting in accordance with the strategy and its delegated authorities. At QinetiQ, the culture, values and standards that underpin this delegation help to ensure that when decisions are made, their wider impact has been considered. The Board has reserved certain matters (posted at www.QinetiQ.com) for its own consideration so that it can exercise judgement directly when making major decisions, and in doing so, promoting the success of the company. Shareholders Group Chair Responsible for the leadership of the Board and for ensuring that it operates effectively through dynamic discussions and challenge. Board of Directors The Board is responsible for leading the Group, by setting strategic priorities and overseeing the delivery of the strategy in a way that promotes sustainable long-term growth, while cultivating a balanced approach to risk within a framework of effective controls and taking into account the interests of a diverse range of stakeholders. Committees Audit Committee Nominations Committee Remuneration Committee | | Reviews and monitors the Group’s | | | Considers the structure, size and | | | | Determines and recommends | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | financial accounting and reporting | | | composition of the Board and | | | to the Board the framework for the | | | | processes and the integrity of published | | | | Committees, and succession | | | remuneration of the Group Chair, | | | | | financial statements. Reviews the | | | planning. It identifies and proposes | | CEO, CFO and GLT. Oversees workforce | | | | | | Group’s system of internal control, | | individuals to be Directors and also for | | | | remuneration and workforce policy. | | | | including the effectiveness of its internal | | | Executive Management, and establishes | | | | | | | | audit function and the independence and | | | | | the criteria for any | | | | See pages 117 to 136 | | | effectiveness of its external auditor. | | | | new positions. | | | | `for Committee Report | | | | See pages 109 to 114 | | | See pages 100 to 107 | | | | | | | | for Committee Report | | | for Committee Report | | | | | Risk & Security Committee Disclosure Committee | To provide scrutiny and assurance to | | | Established in 2016 following the | | --- | --- | --- | --- | | the Board, that the required standards of | | | requirements of the Market Abuse | | risk management, security, health, safety | | Regulations (MAR). The Committee | | | and environment within the UK, and | | comprises all Board members except | | | | internationally, are achieved. | for when called on short notice when it | | comprises the Group Chair, the CEO, the See pages 115 to 116 for Committee CFO and any one of the Committee Chairs. The Chief Executive Officer Responsible for the day-to-day running of the Group’s business and performance, and the development and implementation of the Group strategy. The Global Leadership Team (GLT) The interaction between the Board and the GLT enables the Board to receive information first-hand about the company and its operations and to give guidance on strategy and oversight of the business direct to senior management. The GLT meets twice a month. It is responsible for the day-to-day management of the Group’s activity. The focus of the GLT includes managing the business, delivering the strategy, managing risk, establishing financial and operational targets and monitoring performance against those targets. | | QinetiQ Group plc Annual Report & Accounts 2022 | 81 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Board ## leadership and ## company ## purpose ### Board of Directors – an experienced and balanced Board ### The Group Chair considers all of the Directors to contribute valuably, and to continue to be paramount ### to the company’s long-term sustainable success. N R RS RS RS Neil Johnson Steve Wadey Carol Borg Group Chair Chief Executive Officer Chief Financial Officer Nationality: British Nationality: British Nationality: Australian Skills, competence and experience: Skills, competence and experience: Skills, competence and experience: Neil’s former CEO experience and current Steve’s proven track record of driving growth, Carol brings a wealth of global financial roles as a plc Chair and Non-executive Director and his in-depth experience of defence and expertise and Environmental, Social and brings to the Board relevant knowledge, technology industries is of essential Governance (ESG) leadership to the role. challenge and leadership. importance and benefit to the Board. Leading key interventions in working capital management, new market entry and | Starting his career at Sandhurst and the Army, | Steve is a Fellow of the Institution of | establishment, risk management, insurance and | | --- | --- | --- | | Neil spent much of his early career in the | Engineering and Technology, the Royal | business continuity, finance process maturation | | automotive and engineering industries. He | Aeronautical Society, and the Royal Academy | and shared service centre implementation, | | was worldwide Sales and Marketing Director | of Engineering. He was previously a member of | she has a deep international knowledge | | at Jaguar before being seconded to the UK | the Prime Minister’s Business Advisory Group, | of operational execution, performance | | Ministry of Defence to command 4th Battalion | Co-chair of the National Defence Industries | management, financial reporting, risk | | The Royal Green Jackets. He returned to | Council Research and Development Group, | management, strategy and governance; | | the industry with British Aerospace, initially | and a Non-executive Director of the UK MOD | all of which makes her a true strategic | | running Land Rover and then all of its European | Research and Development Board. Steve has | finance and commercial business partner. | | automotive operations. Neil was later CEO of | held various roles with MBDA, including as | | | the RAC, and former Director General of the | Managing Director, MBDA UK. Previously he | Carol has held various senior roles in | | EEF and a Home Office appointed Independent | held various roles with Matra BAe Dynamics | international businesses, most recently in a | | Member of the Metropolitan Police Authority. He | and British Aerospace. He was also Chair of | founder-led renewable business as the Chief | | was previously Chair of Motability Operations, | the Defence Industry Liaison Board of the UK | Financial Officer of Lightsource bp, a global | | Centaur Media plc and Hostmore Group plc. | Department for International Trade, Defence | solar developer. Prior to that she held various | | | and Security Exports. | positions at Vestas, a global wind turbine | | Other appointments: | | manufacturer, the most recent being the | | Chair of Unbound Group plc, and Deputy Chair | Other appointments: | position as Regional Chief Financial Officer of | | and Senior Independent Non-executive Director | Co-Chair of UK Defence Growth Partnership | Vestas’ Southern Europe, Middle East and North | | of the Business Growth Fund. | and Climate Change and Sustainability steering | Africa (MENA) and Latin America operations | | | group with UK MOD. | (spanning manufacturing, sales, construction | and after-sales service). Other appointments: N/A ### 82 QinetiQ Group plc Annual Report & Accounts 2022 A A N R A N R Committee membership key A N R RS Audit Nominations Remuneration Risk & Security Committee Chair A N R RS A N R RS A N R RS Michael Harper Lynn Brubaker Shonaid Jemmett-Page Deputy Chair and Senior Independent Non- Independent Non-executive Director Independent Non-executive Director executive Director Nationality: American Nationality: British Nationality: British Skills, competence and experience: Skills, competence and experience: Skills, competence and experience: Michael brings to the Board a wealth of Lynn’s experience from a number of senior Shonaid brings to the Board a wealth of operational and corporate experience from a Board positions at various US-based experience from previous roles as an executive lengthy career as a business leader and Board companies, in particular in the aerospace and Non-executive Director from a breadth of member within, among others, the engineering sector, makes her a valuable member of the sectors, including industrial and technology- and aviation industries. He continues to provide Board and enables her to provide insightful based businesses with international operations. highly valuable advice to the Board and its advice on matters such as strategy and This, combined with her extensive financial discussions, in particular in his capacity customer stakeholder management. experience, enables her to successfully as the Senior Independent Director. chair the Audit Committee. Lynn has held positions as Non-executive Michael has served as Chair of Ricardo plc, Director of Force Protection, Inc., Seabury Group, Previously Shonaid was the Chief Operating Vitec Group plc, and BBA Aviation plc, having Graham Partners, Cordiem, the Nordam Group, Officer of CDC Group plc, the UK Government’s previously been its CEO. Michael’s previous the Flight Safety Foundation (as Chair), the development finance institution, having joined appointments include Senior Independent Hexcel Corporation and as a member of the from Unilever, where she was Senior Vice- Director of Catlin Group Limited, Non-executive Management Advisory Council of the Federal President Finance and Information, Home and Director of Williams plc and the Aerospace Aviation Administration. Lynn was also the Vice Personal Care, originally in Asia and later for Technology Institute, and CEO of Kidde plc. President and General Manager of Commercial the Group as a whole. Her early career was Aerospace at Honeywell International. spent at KPMG, latterly as a partner. Her Board Other appointments: level experience includes Non-executive Chair N/A Other appointments: of Origo Partners plc and MSAmlin plc, and Non-executive Director of FARO Non-executive Director roles at GKN plc, Technologies Inc. Close Brothers Group plc and APR Energy plc. Other appointments: Non-executive Chair of Greencoat UK Wind plc and Cordiant Digital Infrastructure Limited, Senior Independent Director of ClearBank Ltd and Non-executive Director of Aviva plc. | | QinetiQ Group plc Annual Report & Accounts 2022 | 83 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Board ## leadership and ## company ## purpose A N R RS A N R RSA N R RS General Sir Gordon Messenger Lawrence (Larry) Prior III Susan Searle Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director Nationality: British Nationality: American Nationality: British | Skills, competence and experience: | Skills, competence and experience: | Skills, competence and experience: | | --- | --- | --- | | Gordon brings vast experience from the armed | Larry brings a wealth of experience as an | Susan brings to the Board essential experience | | forces having served for 37 years as a Royal | experienced executive and non-executive from a | of investing in growing technology businesses, | | Marine. Throughout his military career he | breadth of sectors including aerospace, defence | acquisitions and exploitation of new | | served in key appointments in various UK and | and government services, IT, and cyber and | technologies. Her extensive experience as | | NATO Headquarters, overseeing the planning | security. This, combined with his global and | a plc Remuneration Committee Chair enables | | and execution of UK and coalition military | US focus, make him ideal to support QinetiQ’s | her to efficiently and valuably chair the | | and humanitarian relief operations worldwide. | progress in becoming an integrated global | QinetiQ Remuneration Committee. | | He most recently served as Vice Chief of the | defence and security company. | | | Defence Staff, a position he held for three years | | Susan was a founder of Touchstone Innovations | | until his retirement in 2019. | Larry is currently an Operating Executive for the | plc, and formerly its CEO. She has served | | | Carlyle Group. His was previously the President | on a variety of private company boards in | | His unique experience enables him to provide | and Chief Executive Officer of CSRA, Inc. where | engineering, healthcare and advanced materials, | | invaluable insight in his role as the Chair of the | he led a spinout from CSC, a merger with SRA | and held a variety of commercial and business | | Risk & Security Committee. | and an IPO on the NYSE in 2015. The company | development roles with Shell Chemicals, the | | | was acquired by General Dynamics in 2018. | Bank of Nova Scotia, Montech (Australia), and | | Other appointments: | Before that he was Executive Vice President | Signet Group plc. Previously Susan was the | | UK Member of the international Defence Reform | and General Manager of CSC’s North American | Senior Independent Director and Remuneration | | Advisory Board for Ukraine, Board member | Public Sector (NPS) business, providing next- | Committee Chair of Horizon Discovery Group | | of the UK Health Security Agency, and Her | generation technology solutions and mission | plc, and Chair of Mercia Asset Management plc | | Majesty’s Constable of the Tower of London | services to the US Department of Defense, | and Schroder UK Public Private Trust plc. | | (designate). | Intelligence Community and FedCiv sectors. | | Other appointments: Other appointments: Senior Independent Non-executive Director Operating executive for the Carlyle Group, and Chair of the Remuneration Committee including Non-executive Director of CNSI, of Benchmark Holdings plc, and Chair of Non-executive Director and Chair of the Audit Greenback Recycling Technologies Ltd. Committee of KLDiscovery Inc, and Chair of Two Six Technologies; and independent Director of Shift5. ### 84 QinetiQ Group plc Annual Report & Accounts 2022 Jon Messent Company Secretary and Group General Counsel Nationality: British Skills, competence and experience: Jon joined QinetiQ from Chloride Group plc where he held a similar role. He has a background in legal private practice as well as General Counsel and Company Secretary. Other appointments: N/A Committee membership key A N R RS Audit Nominations Remuneration Risk & Security Committee Chair | | QinetiQ Group plc Annual Report & Accounts 2022 | 85 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE A N R RS STATEMENTS REPORT | | | ## Board ## leadership and ## company ## purpose ### Board activity – the key business and activities of the Board during the year ### were as follows: Topic Key activities Strategy and operations • Reviewed and considered the company’s purpose, values • Received updates from each of the Group’s Business and strategy. See more on pages 18 to 21 and page 90 and Function Units on their performance vs strategy and budget, and their priorities and initiatives • Approved the FY23 component of the Group’s five year Integrated Strategic Business Plan (ISBP). • Received reports and discussed the Group’s Digital See more on page 18 and Transformation strategy and investments • In-depth reviews of business strategy and performance • Monitored the economic, legislative and geo-political landscape, particularly as regards to the COVID-19 • In-depth reviews of M&A pipeline and specific opportunities pandemic and political climate in Ukraine • Reviewed and approved material bid, contract and M&A proposals, divestments and assessed performance against these Financial performance • Approved the company’s annual budget, business plan • Reviewed and confirmed the Group’s viability statement and KPIs, and monitored performance against them. and going concern status See more on pages 40 to 43 • Reviewed the Group’s capital, debt and other • Reviewed and approved the Group’s full and half-year liquidity arrangements results and interim trading updates • Approved the Group’s tax strategy and treasury policy • Approved the full year and half-year dividends • Considered and approved material bids, acquisitions, • Approved the company’s Annual Report, including its fair, contracts, expenditure and guarantees balanced and understandable nature Internal control and risk • Reviewed and approved the Group’s risk appetite and • Reviewed and validated the effectiveness of the Group’s management reviewed the Group’s principal and emerging risks, and the system of internal control processes for identifying, and actions to mitigate these • Approved amendments to the Group’s delegated • Received reports from the Chair of the Risk & Security authorities framework Committee on its activities • Reviewed and approved confidential reporting policies • Received reports from the Chair of the Audit Committee • Reviewed the reports on confidential reporting (of which on its activities and assessments the process is further described on page 95) Leadership, people and • Received recommendations from the Nominations • Received reports from the Chair of the Remuneration culture Committee on the appointment of new Directors, the Committee on its activities, recommendations regarding re-election of Directors and other advice regarding the remuneration strategy and decisions regarding the Group structure, size and composition of the Board Chair’s, executive Director’s and senior management pay, and reviewed and approved Non-executive Director fees • Reviewed and actioned succession plans for the Board and senior management, having regard to skills, • Reviewed human capital reports, including updates experience and diversity on talent development programmes and diversity and inclusion programmes Engagement, • Undertook an annual review of the Group’s stakeholders • Reviewed regular reports on our approach to ESG issues, environment and – who they are, methods of engagement, outcome and see more on page 89 community feedback. See more on pages 2 to 29, and 92 to 95 • Reviewed the activities of, and approved a financial • Reviewed feedback from investors and analysts and commitment to, the company’s charitable and the output of engagement with major shareholders community initiatives and other stakeholders • Reviewed and approved the Group Modern Slavery • Reviewed workforce engagement activities and outcomes, Statement, published on www.QinetiQ.com including the results of the Peakon surveys and received reports on the Group Chair’s workforce engagement activities Governance and legal • Approved the Group’s s. 172(1) statement. • Reviewed the results of the internal Board and See more on pages 72 to 73 and 87 to 89 Committee effectiveness evaluations • Approved the Notice of the AGM • Reviewed and approved matters reserved to the Board and its Committees’ terms of reference • Undertook an annual compliance review of the Code and DTR7 • Approved the Group’s annual Modern Slavery and Human Trafficking statement ### 86 QinetiQ Group plc Annual Report & Accounts 2022 ### Board decision making In making decisions, the Board of Directors are cognisant of all their legal duties, including their duty under s. 172(1), see pages 72 to 73, in the way that is most likely to promote the success of the company for the benefit of its members as a whole and to have regard (among other matters) to the factors set out therein. Examples of some of the most important decisions taken by the Board during the year of reporting, and an explanation of which factors the Board had regard to when reaching such decisions, are set out below. 1. Complex Project – write down Background – During the year this complex project faced increased risk exposure, as technical issues and a delay on system development arose. In October QinetiQ issued a trading update outlining the issues on the programme. Following this, for the first half-year results we included a write-down associated with this project, reducing orders by £22.5m, revenue by £8.0m and underlying operating profit by £14.5m. We also presented further information on the complex project and QinetiQ’s wider contract portfolio in order to provide investors with greater understanding of the discrete nature of this particular project. In January’s third quarter trading update, we updated the market that discussions with the customer now indicated contract closure as the most likely outcome, bringing certainty to our exposure, which remained consistent with the £14.5m profit write-down fully contained in our FY22 first half results. Following the trading update in October, the QinetiQ share price reduced by up to 26% (15 December 2021), primarily reflecting market concerns of potential write-down value increases or portfolio contagion. Since then our shares have largely recovered, supported by subsequent trading updates and our full year results which demonstrated closure of the project in-line with the initial £14.5m profit impact given. Board discussion – During the year the Board was kept up to date on the progress of this project via updates from the CEO at each Board meeting, and from the CFO at each Audit Committee and Risk and Security Committee meeting. By ensuring that QinetiQ’s corporate governance framework and governance procedures were adhered to (capturing: risk assessments; financial reviews; and discussions with the customer and suppliers), the Board was able to challenge the management team and provide advice where necessary, and also ensuring that the necessary lessons learned exercises were held and considered. Board stakeholder considerations and impact • Shareholders/investors – Trading updates sought to provide increasingly transparent and up-to-date information throughout the year, though full details of the project could not be disclosed due to commercial sensitives. In addition, the management and investor relation team kept an open and continuous dialogue with investors, helping to restore market confidence by providing clarity, supporting information, and ensuring investor understanding of the remedial steps being taken by the company. • Customer – The project team kept constant and open dialogue with the customer, ensuring the best possible outcome for both parties. Outcome and next steps – The contract has now been fully closed and we have mitigated all future risk exposure. The financial impact remains consistent with and contained within the £14.5m write down in our first half results. Our current global order book does not have us working with this supplier nor does this product exist elsewhere in our portfolio. The Board will ensure that lessons learnt from this event are implemented into operational and risk management going forward. 2. M&A – incomplete acquisition Background – Our M&A work maintains a focus on developing our US inorganic growth strategy, and during the year QinetiQ pursued an opportunity to acquire a sizeable company in the US. Unfortunately this attempt was unsuccessful. Board discussion – The Board held several phone calls and meetings throughout the process, providing guidance and challenge on the opportunity’s strategic fit, investment returns and integration considerations. A summary of the lessons learned from the outcome was also presented to the Board. Board stakeholder considerations and impact – The Board was regularly kept up to date of the potential transaction’s impact on investors, customers, and employees. • Employees – integration; incentivisation; development and succession issues for management and staff • Customers – business development opportunities with existing and new customers • Investors – implications for the Group’s forward funding, capital structure and forecast investor returns Outcome and next steps – Following this unsuccessful bid, we have further refined our strategy to accelerate our future growth. As a result, we have reinforced our M&A pipeline development activity to explore further opportunities to grow our US market position. As a business, we learned an extraordinary amount through this process and have demonstrated that we can credibly contemplate a deal of equivalent scale. | | QinetiQ Group plc Annual Report & Accounts 2022 | 87 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Board ## leadership and ## company ## purpose 3. Health and Safety Background – QinetiQ’s Environment, Health and Safety (EHS) strategy sets the direction for how we look after ourselves, each other and the world around us. One of the areas on which it focuses on is ensuring that we continuously improve; learning from experience and strengthening our approach to safety and wellbeing. In achieving this we place an emphasis on leadership. Our most senior people are required to lead the way and role model the behaviours we expect of ourselves and each other. However, the MOD Pendine incident (see more on page 55), has demonstrated that we need to do more. Board discussion – The Board, led by the Risk & Security Committee, gave the action to the Global Leadership Team to establish a Safety Improvement Programme (SIP) to drive a step-change in our safety culture. As such we developed a new risk assessment process and supporting material, which will improve the way safety risk assessments are carried out across the company. Board stakeholder considerations and impact – The Risk & Security Committee, led by its Chair Gordon Messenger, closely monitored and guided the management team throughout the process. Employees – The Committee gave the action to engage safety experts DuPont, to give an independent view of QinetiQ’s safety arrangements and culture, and to advise on best-practice improvements. The feedback will be used to define our refreshed approach to our safety culture where we will be involving all our people at every step of the process, and establishing an environment where it is safe to take a proactive approach, raising issues and concerns and owning the solution (psychological safety). Outcome and next steps – Changing a culture takes time and we are taking a systematic approach, doing it properly, learning as we go, drawing on external expertise and adapting our plan as needed. We are committed to making the necessary change “stick”. The SIP is the mechanism by which we are driving this improvement across the whole company. The two primary outcomes of the SIP will be a revised QinetiQ Safety Management System (SMS) and a programme of continuous safety culture improvements. In the short-term, we are focusing on areas where we can make an immediate impact: • Our risk assessment process. • Introducing a new global incident reporting tool. • Continued learning and improvement from our Safe for Life culture surveys. • Undertaking an in-depth review of our global systems, processes and culture. 4. US – leadership reorganisation operational performance challenges and customer focus shift Background – US foreign policy has shifted significantly in recent years, which has been amplified by recent events to counteract the near-peer adversaries of the West and NATO allies. The US administration is in the process of responding to challenges that remain and are growing regarding China and also from an increasingly assertive Russia. These changes follow what has been a challenging time within the US defence and security market. The challenging situation with the US defence budget through 2021 and 2022, coincident with the rapid draw-down from Afghanistan, created delays and uncertainty in funding, especially in the areas of research, development and prototyping, where QinetiQ US is particularly strong as an innovation partner to several US customers. As a consequence, these delays, compounded with residual supply-chain issues related to COVID-19, created operational performance challenges for the US business, and impacted its ability to contract and deliver products and services to the US armed forces. Board discussion – The CEO and CFO provided ongoing direct support to the US management team by way of regular visits to the US office throughout the year. The Nominations Committee oversaw the process of recruiting a new US management team, specifically selected to enhance organic and acquisition-based approach to growth. Board stakeholder considerations and impact: Employees – Due to the challenges the US business went through a necessary employee rationalisation programme was implemented. Outcome and next steps – With the recruitment of Shawn Purvis as US CEO and President, and a revised leadership team, the US business is well placed to solidify the current business through further corporate integration, expand business with current customers and partners, and dock in strategically aligned acquisitions. ### 88 QinetiQ Group plc Annual Report & Accounts 2022 5. Environment, Social and Governance – particular focus on climate change and Net Zero Plan Background – During FY22 the Board confirmed priorities to support the objectives of our Corporate Responsibility and Sustainability (CR&S) Strategy, addressing the key Environmental, Social and Governance (ESG) aspects. Board discussion – A key aspect of our evolved strategy is a strong and increasing focus on ESG factors. The Board seeks to grow the company in a responsible and sustainable way for the benefit of all stakeholders. Our CR&S strategy is designed to meet stakeholder expectations across ESG themes, aligned with our business strategy. There has been particular focus on climate change this year to meet new requirements, including: • Net-Zero Plan – Good progress during the year, with candidate targets developed. Underpinning this we mapped our Scope 3 emissions, developed a new carbon calculator and undertook significant employee engagement, including blogs, webinars and the “December Climate Change Challenge”, where employees from across the company shared their ideas in daily blogs, ranging from e-waste, travel and lighting to radiator reflectors. • TCFD (Taskforce on Climate-Related Financial Disclosures) – A risk assessment was performed during the year, aimed at working with key stakeholders to identify any material risks, and also to develop a sustainable methodology, so that this approach, to understand our resilience to climate change, becomes embedded in our standard risk processes. • Defence Suppliers Forum (DSF) Climate Change Steering Group – Under DSF QinetiQ have taken a leading role in delivering the first phase of the programme, including producing a Code of Practice for the Defence Sector and some research papers, through three joint industry MOD working groups. • Publication of our first Carbon Reduction Plan. • The strategy also addresses other key areas such as diversity and inclusion (Inclusion 2025 strategy, see more on page 56), ethics, and community investment. Board stakeholder considerations and impact – The Board was continuously kept up to date of investors’, customers’, and employees’ views. A summary of the key considerations which informed the Board’s decision making were: • Climate change and Net-Zero – The transition to Net-Zero is of material interest to society (with particular focus by investors, customers and employees). The Board supported a new Net-Zero strategy (see page ), which will be implemented in FY23, and see programmes to reduce our greenhouse gas emissions across our business and embedded in our strategy. • Customers – Our customers, including the UK MOD, has clearly indicated the importance of climate change, and so we have actively engaged directly, via the DSF programme, to understand how we can support their wider objectives by way of leading (Steve Wadey acting as the industry Chair) and mobilising across the sector. • Employees – Through COVID-19 we have changed the way we work and have engaged with employees to understand how we can best deliver for our customers. We have developed an adaptive working model, to support our performance and inclusive culture. • Shareholders and debt providers – QinetiQ’s ESG strategy has been transparently reported and subject to discussions and support in investor meetings. Outcome and next steps – As part of the 2021 strategy review, the Board agreed the importance of continuing to identify and invest in sustainable solutions for defence and commercial customers, and also in ESG matters as a whole for our employees and shareholders. A dedicated team has been established to ensure the delivery of our Net-Zero plan, and we will continue to engage with stakeholders to ensure they are informed and involved. | | QinetiQ Group plc Annual Report & Accounts 2022 | 89 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Board ## leadership and ## company ## purpose ### Supplementary information The Board has seven scheduled meetings, held over two days, for Board and Committee business throughout the year. Additional Board sub-Committee meetings and conference calls are held between the scheduled meetings as required. The table below sets out the Board and Committee membership and attendance by members at meetings held in FY22. Board and Committee attendance – 1 April 2021 to 31 March 2022 Nominations Remuneration Risk & Security Members Board Audit Committee Committee Committee Committee Lynn Brubaker 7/7 4/4 4/4 5/5 4/4 1 Carol Borg 4/7 – – – 2/4 2 Michael Harper 7/7 3/4 4/4 4/5 3/4 3 Shonaid Jemmett-Page 7/7 4/4 4/4 4/5 4/4 Neil Johnson 7/7 – 4/4 5/5 4/4 General Sir Gordon Messenger 7/7 4/4 4/4 5/5 4/4 4 Larry Prior 5/7 3/4 3/4 3/5 2/4 Susan Searle 7/ 7 4/4 4/4 5/5 4/4 5 David Smith 5/7 – – – 2/4 Steve Wadey 7/7 – – – 4/4 1 Carol Borg was appointed to the Board on 11 October 2021. 2 Michael Harper was unable to attend the Audit Committee, Remuneration Committee and Risk & Security Committee meetings on 8 November 2021 due to a conflict with a prior commitment. 3 Shonaid Jemmet-Page was unable to attend the Remuneration Committee meeting on 26 January 2022 due to a conflict with a prior commitment. 4 Larry Prior was appointed to the Board on 2 August 2021. 5 David Smith resigned from the Board on 30 November 2021. ### The significance of our purpose, values and culture The Board has reviewed and articulated the company’s purpose to ensure it captures the Board’s current view of the company and its role in society. Our purpose communicates the Group’s strategic direction and intentions to our employees, occupiers and wider stakeholders. Owing to its importance, it is reconfirmed on an annual basis to ensure it continues to reflect our strategy, values and desired culture. to be the chosen partner around the world for mission-critical solutions, innovating for our Our Vision customers’ advantage ## > to protect lives, defending sovereign capabilities and securing the vital interests of our QinetiQ’s ethos is defined within our purpose customers ## > through responsible and ethical leadership we strive to be a good employer and partner, This is demonstrated through our dedication while applying our unique technical expertise across the product lifecycle helping our and commitment to our mission ## > customer to create, test and use defence and security capabilities Underpinned by our values Integrity, collaboration and performance ## > A high performance and inclusive work environment where employees are engaged, Re-imagined through our culture empowered and clear about how they can contribute to Our Purpose ## > ### 90 QinetiQ Group plc Annual Report & Accounts 2022 ### Our culture Our values make clear our priorities and form the foundations of the company’s culture. Integrity Trusted to do the right thing at all times, we take pride in our decisions, and work to create a sustainable and responsible business. We are responsible and accountable for all our actions. We take personal responsibility to do the right thing, demonstrating this individually and as an organisation in our decisions, behaviour and day-to-day actions. We actively support each other to meet the highest ethical and professional standards Collaboration The chosen partner for customers and industry colleagues, we are a diverse and inclusive community with a common purpose; every contribution is valued. Delivering value through partnership and teamwork, we actively collaborate with our colleagues, customers and industry partners to bring together the best thinking, the smartest talent, breadth and depth in capability to our work. We know that working together is the best way to meet our customers’ needs Performance Customer focused and highly responsive, providing operational excellence and assuring safe and secure delivery. Our performance is measured by how we deliver for our customers; meeting their needs through flawless execution and delivery of the mission-critical solutions on which they depend. This includes being accountable for getting things right the first time, safely, securely and in a cost effective way. Taking an innovative and responsive approach to create an outstanding customer experience, we try to go the extra mile and act with courage The annual Recognition Gala and Thank Q Awards are strong evidence of how we live by our values: The Recognition Gala An annual event where people from across the global business have nominated their colleagues for demonstrating behaviours, which exemplify our values. The exceptional number and quality of nominations received each year is a testament to how our people live by our values. The nominations process, award event and publication of awards winners across the Group also serve to remind people of our values and what they mean in practice Saying Thank Q Thank Q recognises the efforts of our people that reflect our values, behaviours and capabilities for going above and beyond and making a difference. This can be done by: • Saying Thank Q via our Global Portal community group • A more personal touch through giving someone a Thank Q card • Nominate someone or a team for a Thank Q award to receive a voucher for going above and beyond | | QinetiQ Group plc Annual Report & Accounts 2022 | 91 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Board leadership and company purpose While the Recognition Gala and Thank Q programmes raise awareness of and recognise and reward the behaviours that demonstrate our values, there are many other input actions which contribute to the creation of a healthy corporate culture. These include: - Our corporate policies, reviewed and approved by the Board, which set a clear expectation, and mandate, for every member of the workforce to perform the company's business with integrity and in accordance with applicable laws, including anti-bribery and corruption, anti-slavery and human trafficking, data protection and confidential reporting policies and procedures - Fair and transparent employee policies and practices which ensure that employees' rights are respected in accordance with applicable laws and employment contracts, together with a number of programmes and initiatives which support the health and wellbeing of our employees, develop talent and promote diversity - Supplier protocols and procedures which seek to ensure that our key suppliers operate their businesses and respect their employees' rights in the same way that we do - The application and monthly assessment by business and functional executive teams and the Global Leadership Team of safety and operational KPIs to enable management to monitor and drive continuous improvements in safety, reliability and efficiency of our services - The work of Group support functions prepare and advise upon the Group's policies, procedures and standards at every level and location of the business around the world, including dedicated safety and operational excellence teams, finance, legal and governance team, procurement, HR function, and the Group internal audit function In addition, we as a Board, use a number of other methods to understand and monitor the company's culture and assess whether our employees reflect our values. These include: - Reviews, in the Boardroom, of the outcomes of the Peakon surveys, customer satisfaction scores and updates on confidential reporting. These gives us insights into what the company does well and what could be improved, as well as any particular areas of concern - The employee interaction with the Global Employee Voice (GEV), discussing the issues which matter most to our employees - Directors' attendance at various company events, such as: - Quarterly virtual Global Employee Roadshows - Monthly virtual Global Engagement Network (GEN) events, delivered by the Global Leadership Team - The Annual Recognition Gala Through feedback from all of these monitoring activities, the Board is satisfied that the company's culture is aligned with our values. Where the Peakon surveys, workforce engagement events or other interactions between Directors and employees or other stakeholders have revealed matters that can be improved upon or have flagged concerns, the Board has discussed these and is content that management is putting action plans in place that are designed to drive improvements or address those concerns. ## Safety culture QinetiQ's Environment, Health and Safety (EHS) strategy sets the direction for how we look after ourselves, each other and the world around us. Our culture journey, including safety culture, is constantly progressing and adapting. During the year the Board established a GLT-led Safety Improvement Programme (SIP) to drive a step-change in our safety culture. This is working in conjunction with the already established Safety For Life programme. ## Stakeholder engagement Engagement and collaboration through our value chain is essential. Partnering with our stakeholders, understanding their challenges and managing risks, we can find solutions for our shared success, sustain our business and benefit all our stakeholders. We have aligned our strategic priorities with the requirements and needs of our stakeholders to enable delivery of profitable, sustainable value. The Board recognises that it has a duty to act in the best interest of the company for the benefit of its shareholders, as well as considering other stakeholder interests. In its decision-making, the Board considers all relevant factors, including: - How the decision would align with the Group's over-reaching purpose - The likely short-, medium- and long-term consequences of the decision - The value created for our investors - The enhancement of our performance created by the decision - The potential impacts on our people, local communities and environment of making the decision - The need to create strong, mutually-beneficial customer and supplier relationships - The Group's commitment to business ethics This section 172(1) statement on pages 72 to 73 explains how the Directors have had regard to the matters set out in section 172(1)(a) to (f) Companies Act 2006, when performing their duty under section 172. The Board aims to promote the success of the company for the benefit of its shareholders as a whole, taking into account the long-term consequences of its decisions while giving due consideration to the interests of the company's stakeholders (including employees, customers, suppliers, shareholders, as well as the environment and local communities which are impacted by our operations), while also considering the importance of maintaining our reputation for high standards of business conduct. Examples of what that has looked like in practice over the past year can be found as follows: | Shareholders | Pages 26, 94, 95 | | --- | --- | | Employees | Pages 26, 93 | | Customers/suppliers | Pages 26 | | Environment | Pages 44 to 53 | | Social | Pages 54 to 59 | Further information about how the Directors have accounted for stakeholders in their decision making is set out on pages 87 to 89. ## Employee engagement We have experienced, diverse and dedicated employees which are recognised as a key asset of our business and who drive our success. The Group has a long-standing commitment to the importance and value of employee engagement. See more on pages 26, 54 to 59, and 93. 92 QinetiQ Group plc Annual Report & Accounts 2022 | The Board recognises the value of | of its meetings at different company sites, | pandemic. The process set out below | | --- | --- | --- | | engaging directly with employees to | both in the UK and globally, to take the | describes how the Board continued to be | | ensure an understanding of their views and | opportunity to meet with the employees | able to effectively gain the views of the | | inform its decision-making in considering | in person. However, this has not been | employees throughout the year. | | employee interests. Under normal | possible during the year due to the safety | | | circumstances the Board holds a number | measures associated with the COVID-19 | | How we engage with our employees Dedicated Non- Neil Johnson is the dedicated Non-executive Director for • Two meetings with the Global Employee Voice (GEV) Executive Director gathering the views of the employees • Attends the Global Recognition Gala and also Global Employee Roadshows • Reports back to the Board Global Employee Voice The GEV is a global forum that acts as the collective voice • Regular contact with Neil Johnson (GEV) of all QinetiQ employees. All businesses and functions • Two meetings with Susan Searl, the Chair of the each have a member of the GEV, acting as their own Remuneration Committee representative. Australia, Belgium, Canada, Germany and the • Regular meetings with the Group Function Director Human US also have their own GEVs, with a direct link to the UK Resources, who reports to the Board on culture, employee | | See more on pages 57 to 58 | | and people strategy, and employee engagement | | --- | --- | --- | --- | | Global Employee | Delivered quarterly by the Global Leadership Team, the Global | • Employees have the opportunity to ask questions, either in | | | Roadshows | Employee Roadshows give an update on the progress we | | writing or live | are making against our vision and strategy, and provide an • Reported back to the Board by the CEO understanding of our key priorities for the future Monthly virtual Global The GEN includes approximately 400 senior leaders from • The members of the GEN feedback to their teams by way Engagement Network across the Group, selected for their sphere of influence of Q–Talks, team meetings and one-to-one meetings (GEN) events – and critical role within our Company. The sessions provide delivered by the Global a monthly leader’s update and the opportunity to discuss Leadership Team employees’ wellbeing and topics critical to driving high performance and growth Monthly virtual Q– Delivered by Business or Function Global Engagement • A mechanism accessible for employees to get a thorough Talks Network leaders, with the purpose of keeping employees understanding of what is happening in the company and up-to-date with what is currently important across QinetiQ also to provide individual feedback Peakon Employee Quarterly surveys enabling the Board and the Leadership • After each survey, the Director of Organisation Engagement surveys team to immediately assess employees’ engagement Development has a meeting with the CEO where they throughout the Group discuss the results, trends, and any matters for concern • The CEO feeds back to his fellow Board members at each See more on pages 57 to 58 Board meeting Global Portal – our A platform where all employees can access our polices and • Enables employees to ask questions and discuss intranet be kept fully informed of the latest Group news topics internally Confidential Reporting Our confidential reporting includes an anonymous reporting • Reported to the Board at each Board meeting line for employees to raise any concerns with escalations to the Board as necessary How does it work? • By using a number of different employee engagement mechanism ensuring flexibility • By having a direct link to the Board via the purposefully designated Non-executive Director • By way of a dedicated forum to relay the voice of the employees • By regularly reporting to the Board on culture, people strategy, and employee engagement • By drawing on each individual Board member’s unique experience as business leaders | | QinetiQ Group plc Annual Report & Accounts 2022 | 93 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Board ## leadership and ## company ## purpose Approach ### Shareholder engagement The Board is committed to communicating Timeline in an open and transparent manner with all shareholders, and places a clear importance on shareholder engagement. ## 2021 The Investor Relations programme is managed by the Investor Relations May team, who provide day-to-day contact • Full year results announcement with investors. This is complemented by • Analyst briefings engagement with the CEO and CFO, who regularly attend meetings with institutional • Full year results investor roadshow investors. In addition, the Group Chair June and other Non-executive Directors make • Annual report published themselves available to discuss matters such as governance, ESG factors, July remuneration and other relevant topics. The Board is also kept up to date on • Governance meetings ahead of AGM shareholders’ views and concerns through • Trading update and analyst briefings regular Board papers, presentations and • Virtual AGM feedback from the Investor Relations team. • Announcement of CFO succession The AGM provides an opportunity for August shareholders to engage directly with the September Board and receive an update on business performance. The company’s results • Group Chair meetings with presentations and other investor events shareholders are also webcast live, and made readily • Announcement US CEO appointment available on the company’s website, enabling a wider audience to access them. October • Q2 post-close trading update Activities during the year During FY22 the CEO, CFO and Investor November Relations team collectively met with • Interim results announcement over 50% of the share register and • Analyst briefings hosted a number of meetings with non- • Interim results investor roadshow shareholders. This contact was conducted during routine roadshows after results December announcements, ad-hoc roadshows and at various conferences. The Group’s Chair, Neil Johnson, engaged with a number ## 2022 of shareholders on governance related matters and the Chair of the Remuneration Committee, Susan Searle, engaged with January shareholders ahead of the AGM • Q3 Trading update and on remuneration matters. analyst briefings This year has seen increased investor February engagement, with many seeing our share March price weakness in late-2021 and overall • Net Zero plan published market sentiment towards defence stock improving in early-2022 as a good April opportunity to invest. We continue to • Q4 trading update and be proactive in investor engagement, analyst briefings both with our existing shareholders • Investor Seminar and prospective new shareholders. ### 94 QinetiQ Group plc Annual Report & Accounts 2022 Constructive use of the Annual General ### Confidential reporting process Meeting (AGM) QinetiQ has in place a confidential | The Notice of AGM and related papers | reporting process, which is detailed on | | --- | --- | | will, unless otherwise noted, be sent | the company’s intranet and in its Code | | to shareholders at least 20 working | of Conduct. If an individual does not feel | | days before the meeting. For those | that they can resolve any concerns with | | shareholders who have elected to receive | the company directly through discussions | | communications electronically, notice is | with their functional manager, they can | | given of the availability of the documents | use an externally provided confidential | | via www.QinetiQ.com. This year’s AGM | internet and telephone reporting system. | | will be held at 11am on Thursday, 21 July | All concerns are passed by the external | | 2022 at the offices of Ashurst LLP, London | third party to the Group Head of Internal | | Fruit and Wool Exchange, 1 Duval Square, | Audit, who ensures that they are held in | | London E1 6PW. | strict confidence and properly investigated. | Reports on confidential reporting activity Any updates to the arrangements for and outcome of investigations are reported the conduct of the meeting will be to the Board at each of its meetings. The communicated via www.QinetiQ.com. Board reviewed the effectiveness of the Group’s confidential reporting process, provided challenge and advice on the matter, and was satisfied that the process in place is fit for purpose. ### Investors met: By type Investors met: ### By investor location 5.3% 46.2% 84.2% 10.5% 53.8% Shareholders UK Non-shareholders Europe North America | | QinetiQ Group plc Annual Report & Accounts 2022 | 95 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Division of ## responsibilities ### Role of the Board Underpinned by good corporate governance, the Board is focused on delivering an effective and entrepreneurial Board which: • Provides challenge, advice and support to management • Drives informed, collaborative and accountable decision-making • Creates long-term sustainable success and value for our shareholders, having regard to all interests of our stakeholders ### Roles and responsibilities The Board has agreed a clear division of responsibilities between the Group Chair and the CEO. Other Directors and the Company Secretary’s roles are also clearly defined to assist in enhancing the effectiveness of the Board. A summary is set out below: Group Chair • Provides overall leadership and ensures effectiveness of the Board Neil Johnson • Sets the agenda, character and tone of the Board meetings and discussions • Maintains an effective working relationship with the CEO • Leads the annual performance evaluation of the Board, its Committees and ensures that each Non-executive Director makes an effective contribution Deputy Chair • Maintains a close dialogue with the Group Chair and CEO Michael Harper • Supports and deputises for the Group Chair as required CEO • Develops the Group’s strategy for consideration and approval by the Board and provides effective leadership of the Global Steve Wadey Leadership Team in its delivery of strategy • Develops the Group’s business model and manages the Group’s operations • Overseas the development and implementation by the Global Leadership Team’s corporate, safety and environmental policies and standards • Establishes and services relationships with key stakeholders • Reinforces the Group’s values and sets expected employee behaviours • Communicates (with the CFO) the Group’s financial performance and strategic progress to investors and analysts • Ensure the Board is kept fully appraised of the Group’s operational and safety performance, risks and opportunities that may affect or contribute to the delivery of the strategy CFO • Responsible for the financial stewardship of the Group’s resources through appropriate accounting, financial and other Carol Borg internal controls • Directs and manages the Group’s finance, tax, treasury, risk management, legal and governance, insurance and internal audit functions, and climate-change initiatives • Communicates (with the CEO) the Group’s financial performance and strategic progress to investors and analysts ### 96 QinetiQ Group plc Annual Report & Accounts 2022 Senior Independent • Acts as sounding board for the Group Chair and a trusted intermediary for the other Directors Non-Executive • Available to shareholders to discuss any concerns that cannot be resolved through the normal Group Chair or CEO Director channels Michael Harper • Leads the Board in the annual performance evaluation of the Group Chair and in developing the long-term plans for the Group Chair’s succession • Meets with the Non-executive Directors without the Group Chair present at least annually, and as required, to discuss Board matters Independent Non- • Monitor and scrutinise the Group’s performance against its strategic goals and financial plans Executive Directors • Provide an objective perspective on the Board’s deliberations and decision-making, drawing on their own collective broad Lynn Brubaker, experience and individual expertise and insights Michael Harper, • Monitor and assesses the Group’s culture, use appropriate and effective means to engage with the employees and Shonaid Jemmett- acquire an understanding of other stakeholders’ views Page, Gordon • Asses the effectiveness, support and constructively challenge the Executive Directors Messenger, Larry Prior and Susan • Play a lead role in the functioning of the Board’s Committees Searle Company Secretary • Provides advice and support to the Board, its Committees, the Group Chair and other Directors individually as required, Jon Messent primarily in relation to corporate governance matters, and Non-executive Directors’ training and development needs • Responsible with the Group Chair for setting the agenda for Board and Committee meetings and for high quality and timely information and communication between the Board and its Committees, and between the Directors and senior management as required • Ensures that Board and Committee procedures are complied with | | QinetiQ Group plc Annual Report & Accounts 2022 | 97 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Composition, ## succession and ## evaluation ### Composition of the Board Time commitment The Board considers that its composition reflects the requisite Each Non-executive Director must be able to devote sufficient balance of skills, experience, challenge and judgement time to their role as a member of the Board in order to appropriate for the requirements of the business and full Board discharge their responsibilities effectively. Prior to undertaking effectiveness. The skills and experience of the Board’s individual an additional external role or appointment, the Directors are members, particularly in the areas of UK defence and security, asked to confirm that they will continue to have sufficient time the commercialisation of innovative technologies, corporate to fulfil their commitments to the company. This means not finance and governance, international markets and risk only attending and preparing for formal Board and Committee management, have brought both support and challenge to meetings, but also making time to understand the business the CEO, CFO and the Global Leadership team during the year. of the company. The Non-executive Directors’ commitment is reviewed as part of the Board and Director evaluation. ### Independence The Group Chair is conscious that some shareholders have A majority of the Board is comprised of independent Non- concerns regarding Directors taking on too many Non-executive Executive Directors. The independence of the Non-Executive roles. Consequently, he has assessed the ability to meet the Directors is considered annually by the Nominations Committee, commitments required by QinetiQ for those members of the using the independence criteria set out in Provision 10 of the Board who hold more than one other Board position, and he is Code. The Group Chair was independent upon his appointment satisfied that all Board members are able to meet the company’s in April 2019 and continues to use objective judgement in his time commitment. In addition to their work on the QinetiQ Board leadership of the Board. and its Committees, the members of the Board also regularly make themselves available for Board calls, sub-Committee As part of this process, the Board keeps under review the length meetings and Executive leadership events. of tenure of all Directors, as this is a factor when assessing independence. The independence of Michael Harper, Susan Shonaid Jemmett-Page holds appointments in four other Searle and Lynn Brubaker, who all have served on the Board companies, two of which she is the Chair, i.e. Greencoat UK Wind for more than six years, was subject to a rigorous review by plc and Cordiant Digital Infrastructure Limited, both of which the Nominations Committee in March 2022. When making this are investment trusts rather than full operating companies. assessment, in particular for Michael, who has served on the In addition, the latter and ClearBank Limited are non-listed Board since November 2011, the Nominations Committee based companies. Therefore by their nature, the time requirements for its decision on the fact that all continue to demonstrate integrity these roles are not as significant as at a FTSE 250 operating and independence in their advice and challenge. Michael, Susan company such as QinetiQ. In December 2021 Shonaid was and Lynn were not in attendance during the review and the appointed as a Non-executive Director of Aviva plc. Before her Nominations Committee remains satisfied that the length of appointment the Group Chair reviewed her current commitments their tenures has not impacted on their respective levels of and contribution to the QinetiQ Board, and he confirms that independence or their respective contributions. during the year Shonaid has provided significant input and advice at QinetiQ’s Board and Committee meetings, in particular in her role as the Audit Committee Chair. He is therefore confident and satisfied that Shonaid has the time and availability to commit fully to her role on the QinetiQ Board. ### Board and Committee processes The Board has a formal schedule of matters reserved for its approval, which includes (but is not limited to) : strategy; risk appetite and review of Group-wide principal and emerging risks; major M&A, contracts and bids; share capital, debt financing and other liquidity matters; financial results and budgets; key policies; Board and Committee membership; and governance. Other matters, responsibilities and authorities have been delegated by the Board to its standing Committees, comprising Nominations, Audit, Risk and Security, Remuneration and Disclosure. Any matters outside of the schedule and the responsibility of the Committees, fall within the authority of the CEO and/or CFO. The schedule of matters reserved to the Board and the terms of reference of each Committee, which are reviewed and approved by the Board annually, can be found on the company’s website at www.QinetiQ.com. ### 98 QinetiQ Group plc Annual Report & Accounts 2022 The Group Chair and the Company Secretary are responsible, ### Conflict of interest in consultation with the CEO and the Chairs of the Committees, The Board operates a policy to identify and manage situations for maintaining a scheduled 12-month programme of business declared by the Directors (in accordance with their legal duty to for the Board and its Committees, with flexibility for additional do so) in which they or their connected persons have, or may business to be discussed as required. The programme ensures have, an actual or potential conflict of interest with the company. that all necessary matters are covered and appropriate time In accordance with the Companies Act 2006, and the Articles of is given for discussion and, if thought fit, approval of relevant Association, the Board has the authority to authorise conflicts business. At each scheduled Board meeting, the Board rigorously of interest. This ensures that the influence of third parties does reviews updates from the Executive Directors on Group and not compromise the independent judgement of the Board. divisional safety, operating and financial performance, investor Directors are required to declare any potential or actual conflicts relations, and from the Group General Counsel and Company of interest that could interfere with their ability to act in the best Secretary on legal compliance and corporate governance. interest of the Group. Other regular Board agenda items include strategic proposals (including those relating to M&A, major contract bids and The Company Secretary maintains a conflicts register, which capital allocation), transformation and digital programme, risk is a record of actual and potential conflicts, together with any management (including reviews of risk appetite and Group-level Board authorisation of the conflict. The authorisations are for an risks), tax and treasury updates, pension updates, human capital indefinite period and are reviewed annually by the Nominations updates (including on employee relations, talent development Committee, which also considers the effectiveness of the and diversity promotion), and stakeholder engagement. Senior process for authorising Directors’ conflicts of interest. The Board management and external advisers regularly attend both Board reserves the right to vary or terminate these authorisations at and Committee meetings, where detailed discussions on specific any time. No Director conflict of interest currently exists. matters on which their input or advice is needed. The Board also seeks to hear external viewpoints inside and outside the Boardroom, including from customers, suppliers and experts in areas relevant to the company’s strategy. In advance of each Board and Committee meeting, Directors receive via a secure web portal high quality briefings, prepared by the Executive Directors, senior management, the Company Secretary and/or external advisers where appropriate, on the agenda items to be discussed. The secure web portal also gives Directors immediate access to a range of other resources, including previous meeting papers, minutes, financial reports, business presentations, investor reports, company policies and governance guidelines, and details of Board and Committee procedures. If a Director is unable to attend a meeting due to illness or exceptional circumstances, they will still receive all supporting papers in advance of the meeting and are directed to discuss with, and provide input, opinion and voting instructions to, the Group Chair or relevant Committee Chair on the business to be considered at that meeting. The Board has access to the Company Secretary for support and advice as required, and the company operates a policy which allows Directors to obtain, at the company’s expense, independent professional advice where required to enable them to fulfil their duties effectively. In addition to Board and Committee meetings, the Non-executive Directors hold private meetings without the Executive Directors present, including to discuss Executive Director performance. There are also opportunities during the year for Directors to have informal discussions outside the Boardroom, either between themselves or with senior management or external advisers. | | QinetiQ Group plc Annual Report & Accounts 2022 | 99 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Composition, ## succession and ## evaluation ## Nominations Committee report ### Dear fellow shareholder Key responsibilities: I am pleased to present the Nominations • Keep under review the structure, Committee Report. The Committee’s size and composition of the Board ambition is to ensure we have the best • Succession planning for Directors people governing our business today and and other senior Executives a competitive diverse talent in the pipeline • Keep under review the leadership able to govern the business tomorrow. needs of the organisation, both The best people will have the necessary Executive and Non-executive, with a experience and skills to shape and support view to ensure the continued ability of the company’s strategy, including bringing the organisation to compete effectively diverse perspectives on strategic decisions in the marketplace in a way that complements and reflects the knowledge and skills of the • Be responsible for identifying and company’s business. nominating, for the approval of the Board, candidates to fill Board This was a busy year for the Committee as vacancies, as and when they arise we continued implementing the succession • Review annually the time required plans we have previously developed to from Non-executive Directors – the maintain the effectiveness of the Board performance evaluation is used to and its Committees, having regard to assess whether the Non-executive the company’s strategic priorities. Directors are spending sufficient time to fulfil their duties You can read more further down in this • Review the independence of the Non- report about the appointment process of executive Directors and any potential the Directors appointed during the year conflict of interest for all Directors and also about the development of our talented senior management team. ## QinetiQ aims to FY22 activity highlights: Michael Harper has served on the Board • Reviewed the structure, size and since November 2011. During the year ## have the best composition of the Board and its he has been instrumental to the Board Committees, including the skills, in his roles as Deputy Chair and Senior ## people governing experience, independence and diversity Independent Director. Further information of its members, in anticipation of about Michael’s independence assessment ## our business today Non-executive Director changes review can be found on page 98. to the Board and its Committees ## and a competitive • Led the process to recruit a new CFO I hope you find the information in this and a new Non-executive Director report about the Committee’s work ## and diverse helpful and I will be pleased to answer • Reviewed the Board and senior any questions you have about it at this management succession plans, ## talent pipeline year’s AGM. including via a review of potential internal successors and other high ## able to govern potential talent for executive and Neil Johnson senior management positions ## the business Committee Chair • Reviewed the Board’s Diversity and Inclusion Policy and the company’s ## tomorrow.” inclusion initiatives ### 100 QinetiQ Group plc Annual Report & Accounts 2022 Skills and experience The below bar chart demonstrates the skills and experience of the Board members: R&D/Technology Cyber security M&A Transformation Remuneration Strategy Finance and financial reporting eCommerce Emerging markets International business Defence Aerospace and aviation Government services | Board members – Age | | | Board members – Gender balance | | Board members – Nationality | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | 11% | | | 44% | | | 67% | | | | 22% | | | | 11% | | 22% 45% 22% 56% | 41-50 | Women | British | | --- | --- | --- | | 51-60 | Men | American | | 61-70 | | Australian | 71-80 | Global Leadership Team – | | Direct reports to the GLT – | | | --- | --- | --- | --- | | Gender balance | | Gender balance | | | | 33.3% | | 27% | 73% 66.7% Women Women Men Men | | QinetiQ Group plc Annual Report & Accounts 2022 | 101 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Composition, ## succession and ## evaluation ### Succession planning Board and Committees The Committee annually reviews the composition of the Board and its Committees and the Nominations Committee expects to continue to implement its succession plans for the Board and its Committees in 2022, 2023 and beyond. To ensure that we continue to recruit only the candidates of the highest standard, that we continue to make progress towards our diversity and inclusion targets, and that we have the right mix of an experienced Board, yet with a fresh perspective, we use the process outlined below. Following this year’s review the Committee is satisfied that we have an appropriate mix of skills, knowledge and experience to operate effectively. Process step Action Outcome/impact Identifying current The Committee maintains and regularly reviews a matrix of • The appointment of Carol Borg as CFO. Carol’s and future needs the Directors’ experience and skills to ensure that the Board appointment to the Board brought vast experience of both and skills gaps and its Committees are composed of individuals who have operational and financial management, including extensive the right experience and skills to enable them to shape (and, experience as a strategic business partner in diverse and in the case of the Executive Directors, deliver) the company’s complex international organisations strategy and to monitor and assess the effectiveness of the • The appointment of Larry Prior to the Board’ increased company’s control environment and management of risk. the Board’s general maturity by way of Larry’s wealth of experience as an executive and non-executive from The matrix considers the following: a breadth of sectors including aerospace, defence and • Diversity, including age, gender and ethnicity government services, IT, and cyber and security. This, (see more on page 101) combined with his global and US focus, make him ideal to support QinetiQ’s progress in becoming an integrated • Background, professional skills and experience global defence and security company (see more on pages 82 to 85 and 101) • The number and balance of Executive and Non-executive Directors • Length of tenure (see more on page 103) • Independence (see more on page 98) Ensuring that we • Regularly reviewing the recruitment agencies that we • MWM Consulting Ltd (who has no other connection to get access to the use and ensure that they are best placed to find QinetiQ the Group) was appointed to assist with the recruitment best candidates the right mix of candidates capturing the clear benefits of Carol Borg, and Russel Reynolds Associates (who of greater diversity. In addition, we pick the best suited has no other connection to the Group) was used for the | | | agency for the specific role currently recruited for. | | recruitment of Larry Prior. | | --- | --- | --- | --- | --- | | Ensuring | • Annual Board effectiveness and performance evaluation, | | • The FY22 Board effectiveness review concluded that | | | accountability | | using an external provider every three years. See more on | | the Board has been effective, engaged with and helpful | | and success | | pages 105 to 107 | | to the organisation | of the Board’s • Annual review of the Group Chair’s performance led by the • A summary of the Board’s decision making, considering performance Senior Independent Director. See more on page 107 s. 172(1) can be found on 87 to 89 • Annual independence review of the Non-executive Directors. See more on page 107 • Continued assessment of the Non-executive Directors’ time commitment. See more on pages 98 • Policy on Board members’ appointments to other Boards • Annual performance review of the CEO and CFO, supplemented by the Group Chair’s and Non-executive Directors’ continual assessment of their performance. See more on page 106 to 107 • A thorough induction programme for new Directors. See more on page 107 • Annual training for the Board as a whole and on an individual basis. See more on page 107 • The effectiveness of the Committee’s succession plans is demonstrated by the new Director appointments in FY22, having enhanced the Board’s experience and skills, and increased the Board’s gender diversity from 37.5% to 44.4% The process that the Committee has established, together with the particular considerations it takes into account, in identifying and nominating Director candidates is set out below. ### 102 QinetiQ Group plc Annual Report & Accounts 2022 A sub-Committee of the Nominations Committee is appointed to oversee the recruitment and appointment process A tender process identifies the most suitable recruitment agency to conduct the search and prepare candidate specifications The sub-Committee reviews the list of candidates and narrows down to a short-list of those who best meet the company’s requirements, considering the following: Other individual attributes Background, skills and Independence and other Diversity to complement the to widen the Board’s overall experience commitments company’s own diversity knowledge, providing challenge and further support The sub-Committee conducts initial interviews with the candidates on the short-list and identifies preferred candidates Interviews between other Board members, including the CEO and CFO, and the preferred candidates Nominations Committee recommends to the Board which of the preferred candidates best fulfils the Board’s and its Committees’ needs Non-executive Directors’ length of service Name Appointment date 6-year date 9-year date Michael Harper 22 Nov 2011 22 Nov 2017 22 Nov 2020 Susan Searle 14 Mar 2014 14 Mar 2020 14 Mar 2023 Lynn Brubaker 27 Jan 2016 27 Jan 2022 27 Jan 2025 Neil Johnson 2 April 2019 2 April 2025 2 April 2028 Shonaid Jemmett–Page 19 May 2020 19 May 2026 19 May 2029 Gordon Messenger 12 Oct 2020 12 Oct 2026 12 Oct 2029 Larry Prior 2 Aug 2021 2 Aug 2027 2 Aug 2030 % of Directors 1 – 3 years: 43% 4 – 6 years: 14% 7 – 9 years: 43% | | QinetiQ Group plc Annual Report & Accounts 2022 | 103 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Composition, ## succession and ## evaluation | Senior management succession | In FY23, with effect from 1 July 2022, a | • To respect the differences of its | | | --- | --- | --- | --- | | planning programme | new smaller QinetiQ Leadership Team | | members, and value and encourage | | | (QLT) will be implemented, which will | | the diversity of thought that such | The Committee, has undertaken its be fundamental in QinetiQ delivering the differences can bring in each case usual programme of senior management next phase of sustainable growth and to within the context of Board members succession planning. Senior management create a safe and secure environment having, between them, the experience for this purpose includes the members for employees to thrive in. As part of and skills required to support the of the GLT, as well as those talented the implementation of the new QLT, the development, oversight and delivery individuals who have demonstrated Committee was delighted to oversee the of the company’s strategy the potential for promotion to higher or internal promotion of Mike Sewart to Chief broader positions in the Group’s senior Technology and Operating Officer. We are pleased to have seen the positive management structure. benefits to these initiatives, which have resulted in improvements in gender The programme includes an annual review ### Board and company diversity and representation of people from of such senior managers’ experience ethnic minorities at a number of levels of ### and skills and their progress and notable commitment to diversity the business, including: achievements to ascertain their potential The Board is committed to ensuring • Female representation on the Board for further career progression. The diversity, in all aspects (including as has increased from 37.5% in 2021 to Committee also keeps the performance of regards to gender, ethnic and social 44.4% in 2022 potential successors to Executive Director background), at Board and senior • Female CFO roles under regular review throughout management level, and throughout the year during Board interactions and • Two female Committee Chairs the company’s employees. This is when we visit the company’s operations. because we believe diversity can: • Female representation on the GLT This gives us the opportunity to observe • Improve decision-making at all has increased from 27% in 2021 to senior managers’ working practices and levels of the business by ensuring 33.3% in 2022 relationships with their stakeholders diverse perspectives • Female representations of the direct first-hand. Our review complements the • Attract and retain the best talent reports to the GLT has increased from Executive Directors’ assessment of these by developing a culture of inclusion 24% to 27%, and remains a key area individuals’ performance through a formal where all individuals are respected and of focus process of annual reviews, and continual supported to reach their full potential feedback and support. This programme • A member of the GLT comes from an • Better serve our customers, other ethnic minority background enables the Committee to identify stakeholders and the communities in any gaps in the senior management which we operate by ensuring that the Currently all members of the Board are succession pipeline and any requirements diversity of our workforce demographic from a white background , however the for senior managers’ further development. is representative of the diversity of Committee continues to be dedicated such stakeholders to accomplish the targets set by the The Board’s senior management succession plans were put into action Hampton Alexander Review, Parker Review This commitment is aligned with our and the new Listing Rules in relation through the promotion of Amanda values (see more on page 90), which in to gender and ethnic diversity at board Nelson to Group Functional Director of turn support our strategy of growth by and executive management level. The Human Resources, and Mike Sewart retaining and winning business through Committee will continue to keep this under as Chief Technology and Operating having the best talent delivering the review to ensure progress against the Officer. In January Shawn Purvis was best service for our customers. Our targets, as set out in the Board Diversity appointed President and CEO of QinetiQ commitment is confirmed in the Board’s Policy. We believe that our established US. She has vast experience in the US Diversity and Inclusion Policy, of which the and effective process, as outlined above, defence and intelligence industry, and key points are: will help us achieve and maintain these a long track record of transformational • To maintain at least 33% female important targets in the near future. The and inspirational leadership, driving representation on the Board company’s mandatory requirement for performance in complex organisations and delivering large scale acquisition a diverse candidate pool ensures that • To ensure that its membership reflects integration. we continue to have the opportunity to the diversity of the geographies and recruit candidates from all gender, cultural customers that the Group serves and ethnic backgrounds, while we remain focused on recruiting the best candidate for any role based on merit. ### 104 QinetiQ Group plc Annual Report & Accounts 2022 The employee Diversity & Inclusion (D&I) The role of the champions is to: ### Director effectiveness policy • To be a focal point and leader on D&I A performance evaluation of the Board, its for our businesses and functions Pages 56 to 57 describes the progress of Committees and the individual Directors • To actively lead the internal D&I our Diversity and Inclusion Programme in is conducted annually within a three- Steering Group in our functions | relation to employees and other diversity | | | year cycle, by an external evaluation in | | --- | --- | --- | --- | | policies and procedures of the company. | • To be a role model and to promote and | | the first year of the cycle, followed by | | | | raise awareness of the benefits of D&I | two successive internal evaluations. As | | QinetiQ’s D&I policy can be found on | | in our business or functions | illustrated by the chart below, FY22 was | | www.QinetiQ.com and outlines our | | | the first year of the cycle and an external | • To promote D&I as an integral approach to promoting D&I in the evaluation was undertaken by Tom element of business planning workplace. The effectiveness of the policy Bonham Carter of The Effective Board • To be the representative from the is governed via our assurance processes LLP. Neither has any other connection business or function on the Group and KPIs with monthly oversight by our to the Group. D&I Council executive, and is underpinned by our | Inclusion Strategy to be delivered by 2025. | • To engage regularly with the CR&S | | | --- | --- | --- | | To help us reach our goals we have put | | Director (the Group lead on D&I) to | | various tools in place, including; global | | discuss progress and agree plans | Year 1 employee mandatory training on inclusion, • To support corporate initiatives, e.g. FY22 – External a collective leadership objective on – communicating notable dates, data evaluation by selected inclusion, and a D&I champion and network gathering and reporting independent consultants forum. The D&I champions and network • To promote the benefits of mandatory (specific basis and approach agreed) leads meet regularly and the aim of the and additional D&I training forum is: • To be the contact point for D&I ideas, • Promoting the core themes as well issues, concerns and to escalate as the wider aspect of diversity appropriately across QinetiQ • To identify and challenge any barriers • Encouraging education and awareness and resistance to embracing the D&I among our employees programme • Providing support for our colleagues • To facilitate sharing of best practice • Creating an environment where we both internally and externally can all be our true selves at work • To promote and celebrate good Year 2 • Contributing to and influence behaviours and ideas FY23 – Internal policy on D&I evaluation to focus on During the year we have already seen reviewing core effectiveness and significant increase in employee activity areas identified for development and engagement around D&I. We are from the Year 1 external evaluation confident that this will continue in 2023 and beyond, and have an overall positive effect on our D&I landscape. Year 3 FY24 Internal Evaluation to focus on reviewing the effectiveness of new initiatives and progress on areas identified for development from the Year 2 internal evaluation | | QinetiQ Group plc Annual Report & Accounts 2022 | 105 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Composition, ## succession and ## evaluation Committees which included asking if each ### Directors’ effectiveness Committee fulfilled its terms of reference The principal sources of data used to and how each Committee could improve. assess the effectiveness of the Board and its Committees were interviews conducted Directors’ views were also sought on how with each Board member, the Company well the Board and its Committees had Secretary and a selection of members addressed the areas for development of the senior management team. identified in the previous year’s internal evaluation. The questions were designed to understand whether the Directors have The Company Secretary, in consultation thoroughly discussed and agreed the with the Group Chair and Committee use of the shareholders’ funds (what, Chairs, analysed the results of the where, when, how and why) to ensure the evaluation by reference to the scores company is successful while managing given and the specific observations made, the risks inherent in the strategy, plans commendations given or improvements and the operating environment. This was suggested, following which such results then augmented by an assessment of were presented to and discussed by the how effective the Board is in ensuring Board and its Committees. that the executive team implements the strategy and plans and manages all the The overall outcomes of the evaluations other activities of the company including were positive, demonstrating that the engaging with all the stakeholders. Board and each of its Committees continue to function effectively with a For the individual Directors, there were high level of probity, integrity and questions on each directors contribution, independence, through the mediums the manner in which he or ‘she contributes of both open and challenging debate in and any suggestions for improvements. meetings, and appropriate engagement Finally, there were questions on the outside of meetings. effectiveness of the Board’s four The key strengths and areas for further attention identified by the FY22 Board and Committee evaluation are shown below: Key strengths Areas for further attention Effective implementation of the strategy To review its programme of monitoring each business unit Clarity of the company’s purpose, vision, and In light of section 172, to review the company’s mission as well as its strategy suppliers and how the company engages with them The Board works well as a unit, with Board To continue to monitor, oversee and challenge discussions being constructive and the the company’s safety culture Executive Directors being transparent to the Board and open to advice. When comparing the outcome of the FY22 evaluation against the principal areas identified for further attention in the FY21 evaluation, the following progress can be noted: Areas for further attention Progress during the year By way of using Board briefing meetings to The Board has successfully held a number of aid understanding and focus discussion, and discussions between Board meetings constructive challenge during scheduled Board meetings The ESG strategy The ESG strategy has evolved significantly during the year, see more on pages 44 to 61 Further support to management in its work on This has been and continues to be an area of the Digital and Data Transformation Programme focus for the Board. Major progress has been achieved, and the implementation process is continuing to plan ### 106 QinetiQ Group plc Annual Report & Accounts 2022 The Group Chair’s individual performance Director induction As part of our annual evaluation process, Michael Harper, as On joining the Board, whether in an Executive or Non-executive Senior Independent Director, led a review of the Group Chair’s role, each Director undertakes an induction programme performance. At a private meeting, the Non-executive Directors, covering subject areas relevant to the requirements of their with input from the Executive Directors, assessed the Group role. This programme is designed to fast-track a new Director’s Chair’s ability to fulfil his role as such. It was concluded that understanding of the Group’s purpose, values, strategy and the he showed effective leadership of the Board and his operations, thereby equipping them to perform their role. actions continued to influence the Board and the wider organisation positively. Details of the induction programme, organised by the Company Secretary in conjunction with the Group Chair, for the two new The Directors’ individual performances Non-executive Directors who joined the Board since the last publication of the last Annual Report, is illustrated by the The Group Chair, Neil Johnson, held performance meetings with diagram below: each Board member to discuss their individual contribution and performance over the year, and their future training and development needs. Following these meetings, Neil Johnson confirmed to the Nominations Committee that all Directors, have during the year demonstrated clear commitment to their roles. Background reading material, including previous Board and Committee books, investor and strategy presentations, relevant Company procedures and Board policies Meetings with the Group Chair, Executive Directors and members of senior management Guidance on corporate governance arrangements, including the Board and Committee agendas and procedures, Board succession planning and Board evaluation – provided by the Company Secretary When safe, visits to Company sites, meeting with senior local management Meetings with the Chair of the Committees, external auditors and external remuneration advisers Visiting MOD Butec Ongoing Director training During the year Shonaid Jemmett-Page and Gordon Messenger The Directors have the opportunity to participate in an ongoing visited MOD Butec as part of their induction. The experience training programme organised by the Company Secretary. This provided Shonaid and Gordon with an opportunity to understand include the Company Secretary keeping the Board briefed on the day-to-day work of the business and to gain a real insight relevant regulatory changes, and external training. During the into the company’s culture and values in an operational setting, year PwC briefed the Board twice on forthcoming changes outside of the Boardroom. to the external audit and governance environment. | | QinetiQ Group plc Annual Report & Accounts 2022 | 107 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Audit, risk and ## internal control activity. The ERM process follows a risk-based approach, with ### Frameworks for risk management management identification, assessment (documentation and ### and internal control testing), remediation (as required), reporting and certification The Board is responsible for promoting the long-term success over key financial reporting related controls. of the company for the benefit of shareholders, as well as taking account of other stakeholders including employees and Board oversight of risk management customers. This includes ensuring that an appropriate and The Board’s delegated responsibilities regarding oversight of risk proportionate system of internal control is in place throughout management and the approach to internal controls are set out on the Group. To discharge this responsibility, the Board has pages 63 to 70. There are good working relationships between established frameworks for risk management and internal control the Board committees, and they provide regular reports to the using a Three Lines Model, see page 63, and reserves for itself Board on their activities and escalate significant matters where the setting of the Group’s risk appetite. In-depth monitoring of appropriate. The responsibilities and activities of each Board the establishment and operation of prudent and effective controls committee are set out in the committee reports. in order to assess and manage risks associated with the Group’s operations is delegated to the Audit Committee, complemented Self assessment and certification model by the work by the Risk & Security Committee. However, the Board retains ultimate responsibility for the Group’s systems Each business unit Managing and Functional Director is required of internal control and risk management and has reviewed to make a declaration that their business unit’s governance, their effectiveness during the year. and system of internal controls are effective and are fit for purpose for their business and that they are kept under review The frameworks for risk management and internal control play throughout the year. Any material risks not previously identified, a key role in the management of risks that may impact the control weaknesses or non-compliance with the Group’s risk fulfilment of the Board’s objectives. They are designed to identify policies or local delegations of authority must be highlighted and manage, rather than eliminate, the risk of the Group failing to as part of this process. The effectiveness assessment draws achieve its business objectives and can only provide reasonable on the regular cycle of assurance activity carried out during the and not absolute assurance against material misstatement or year, as well as the results of the annual assessment process. losses. The frameworks are regularly reviewed and were in place The details of key failings or weaknesses are reported to the for the financial year under review and up to the date of this Risk and Security Committee and the Board on a regular basis report. They help ensure the Group complies with the Financial and are summarised annually to enable them to carry out an Reporting Council’s (FRC) guidance on Risk Management, effectiveness assessment. Internal Controls and related financial and business reporting. Internal financial controls After having been discussed by the Audit Committee and the Internal financial controls are the systems that the Group Risk & Security Committee, the Board, conducts a robust six- employs to support the Board in discharging its responsibilities monthly assessment of the Group’s emerging and principal for financial matters and the financial reporting process. risks. The assessments included those emerging risks that could impact the Group’s business model and future performance The main elements include: and therefore required management prioritisation and action. Specifically the Board considered the principal risks facing the − Assessment by Internal Audit of the effectiveness of company when approving the Group business plan. During operational controls the year, the Risk & Security Committee received updates on a number of emerging risks and associated mitigating actions by − Clear terms of reference setting out the duties of the Board and management. Emerging risks were also taken into account in the its Committees, with delegation to management in all locations design of scenarios which are intended to stress test the Group’s five-year strategic business plan, recovery plan, climate change − Group Finance and Group Treasury manuals outlining impacts, decisions on the return of capital to shareholders and accounting policies, processes and controls operational resilience. The company’s approach to risk and risk management together with the principal risks that face the Group − Weekly, monthly and annual reporting cycles, including targets are explained within the risk section of the Strategic report. approved by the Board and regular forecast updates Enterprise Risk Management − Leadership teams reviewing results against forecast and Our Enterprise Risk Management (ERM) is designed to agreed performance metrics and targets with overall consistently identify, measure, manage, monitor and report performance reviewed at region and Group levels the principal risks to the achievement of the Group’s business objectives and is embedded throughout the Group. It is codified − Specific reporting systems covering treasury operations, through risk policies and business standards which set out the major investment projects and legal and insurance activities, risk strategy, appetite, framework and minimum requirements which are reviewed by the Board and its Committees on a and controls for the Group’s worldwide operations. Group regular basis reporting manuals in relation to International Financial Reporting Standards (IFRS) reporting requirements and a Financial − Confidential reporting procedures allowing individuals to report Reporting Control Framework (FRCF) are in place across the fraud or financial irregularities and other matters of concern Group. The ERM relates to the preparation of reliable financial reporting, covering both IFRS, and local statutory reporting − Data protection policies to detect breaches and other issues ### 108 QinetiQ Group plc Annual Report & Accounts 2022 ## Audit Committee report The US is an area of focus for the business ### Dear Shareholder, and therefore for the Committee, and this I am pleased to present the report of the year has seen the appointment of two Audit Committee on the work carried strong leaders in the senior positions of out by the Committee during FY22. President and CEO of QinetiQ US, and also These pages outline how the Committee its CFO. We need to ensure that there is discharged the responsibilities delegated a robust system of internal control and to it by the Board over the course of the risk management which is commensurate year, and the key topics it considered in with our growth ambitions. To this end, the doing so. Group Audit Committee is working closely with the US Audit Committee, with the The main tasks of the Audit Committee Group Chair speaking regularly, and the continue to be the oversight of a robust internal audit plan includes a review of the system of internal controls and risk US control environment. management across the business, encompassing both financial and Finally the Committee has embraced the increasingly non-financial risks and relevant aspects of the quickly evolving ensuring the integrity of the Annual Report ESG agenda, including target setting, and Accounts and other reporting. The assurance and reporting. The TCFD particular areas for focus, which are reporting, on pages 50 to 53, was reviewed addressed by the internal audit plan, the and challenged by the Committee. approach of the external auditors and “deep dive” reviews are determined by I would like to thank David Smith, the the needs of the business and the risks former CFO, who gave great support to it faces. The full terms of reference of this Committee over many years, and the Audit Committee can be found at I welcome Carol Borg who is already www.QinetiQ.com. bringing fresh perspectives to the work of the Committee and more widely. We foster an ethos of continuous improvement and I am proud of the ## The main tasks I hope you find the information in this progress we have made this year in report about the Committee’s work building an integrated risk and control ## of the Audit helpful and I will be pleased to answer framework across the business, aligning any questions you have about it at this the activities under the Three Lines Model ## Committee year’s AGM. in response to major risks, see page 63 for further details. This has meant a close ## continue to be working relationship between the risk Shonaid Jemmett–Page management function and internal audit, Audit Committee Chair ## the oversight of the second and third lines. Matt Guy, our Head of Internal audit, explains how he ## a robust system reviewed the Three Lines Model in relation to fraud risk across the business in the ## of internal Internal Audit section below on page 112. ## controls and risk During the year, a large and complex project ran into difficulty and required ## management provisioning and disclosure. The Committee kept this matter under constant review to ensure provisioning ## across the and disclosure were appropriate. The year-end position is discussed in detail ## business.” in the Significant Judgements section on pages 110 to 111. In addition, we will ensure that lessons are learned from this event. | | QinetiQ Group plc Annual Report & Accounts 2022 | 109 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Audit, risk and ## internal control ## continued ### Activities during the year Financial reporting: Key uncertainties and judgements/estimates Specific issues addressed by the Committee for the year ended 31 March 2022 include the following items of significant judgement. Issue Key uncertainties and judgements Review and challenge by the Committee Conclusion Impairment of The Group holds goodwill on its The Committee reviewed the outputs of The Committee acknowledged goodwill and balance sheet in respect of various management’s annual impairment testing that there was a wide range of acquired intangibles Cash Generating Units (CGUs). exercise, noting the use of external advisors outcomes to the impairment test An impairment review has been to prepare the technical assumptions which is very sensitive to outer German and US undertaken confirming that sufficient (discount rates, long term-inflation) which year cash flows. On challenging Technology Solutions headroom (the gap between the have also been verified as appropriate by management, and a review of the goodwill impairment assessed net present value of future the external auditors. The Committee had challenge presented by the external assessment cash flows and the carrying value of lengthy discussions with management auditors, the Committee concluded net operating assets) exists in respect and the external audit team, specifically that no impairments need to be of these CGUs and no impairment is challenging revenue and profit estimated to recorded in year. The risk of future required. However, there is a low level be delivered through key opportunities not impairment in Germany should a of headroom in respect of the QinetiQ yet under contract. key contract not be successfully Germany and US Technology Solutions re-tendered when it comes up CGUs and applying a reasonable level for renewal should be (and of sensitivity to the assumptions would has been) disclosed in the lead to an impairment. financial statements. Contract accounting During the first half the Group The Committee received commentary The Committee concluded that experienced technical issues and from management on the recoverability management’s best estimates of Large complex contract | delay on system development for | of advance payments to suppliers and | the carrying value of contract assets | | --- | --- | --- | | a complex service contract. The | assessed the carrying value of assets at the | were appropriate and that the | | contract has now expired and | balance sheet date. | contract loss was likely to be limited | | judgements are required as to the | | to the £14.5m previously disclosed | | recoverable value of contract assets. | | externally, with no material | exposure. It was appropriate not to record an asset for additional amounts potentially recoverable from the customer and supplier. Long-term contract The Group has a large number The Committee received commentary from The Committee concluded that accounting of contracts which span multiple both management and the external auditors management’s best estimates periods and are accounted for on a in respect of the most significant contracts were reasonable. Risk assessment on key percentage of completion basis in being delivered by the Group and discussed contracts | accordance with IFRS 15. Long- | the main financial assumptions (including | | --- | --- | | term contract accounting requires | level of risk reserves and the use of Monte- | | a number of judgements and | Carlo modelling). | management estimates to be made, particularly in calculating the forecast costs to complete the contract. Provisions and The Group holds provisions in respect The key judgements considered by The Committee concluded that contingent liabilities of legal, regulatory and environmental the Committee were: (i) QinetiQ will be management’s best estimates issues. Judgement is required in prosecuted, found guilty and be subject were reasonable. Pendine provision determining whether provisions to financial penalties; (ii) the quantum of are required. the liability in respect of such penalties; (iii) that insurance will cover the cost of Specifically, a provision is held in any civil damages (with a provision of respect of a serious incident at the £16.0m being recorded together with MOD range at Pendine in the prior an Other Receivable). financial year. ### 110 QinetiQ Group plc Annual Report & Accounts 2022 Issue Key uncertainties and judgements Review and challenge by the Committee Conclusion Capitalisation of assets QinetiQ has made (and plans to The Committee noted the ‘Agenda decision’ The Committee concluded that: continue to make) significant issued by the IFRIC during the financial year Capitalisation of digital • The impact of the change in investment in digital tools. and agreed that the IFRIC’s interpretation cloud-computing accounting policy is sufficiently Capitalisation of intangible assets should now be matched by the Group’s investments material to require a prior year such as these is covered by the interpretation. restatement. accounting standard IAS 38 Management’s assessment of the new ‘Intangible Assets’ but there is no • It is appropriate to expense guidance and how this was reflected in specific standard in respect of ‘Cloud costs in respect of configuration the financial statements was discussed computing costs’. New guidance has, activity for software tools at length. however, been issued by the IASB’s provided through a Software as a International Financial Reporting Service arrangement. The change in accounting policy impacts Interpretations Committee (IFRIC) the financials reported in the prior year and • It is appropriate to classify such in respect of configuration and judgement is required as to whether the costs as a specific adjusting item customisation costs in a cloud- size of such adjustments are sufficiently (noting that over the course of computing arrangement. material to require a restatement of the the Group’s digital transformation prior year comparatives (as opposed to programme these would Judgement is required as to whether a cumulative catch-up adjustment in the otherwise cause significant the cost of such investments should current year). fluctuations in underlying profit be capitalised or expensed (or not representative of in-year potentially treated as a prepayment). performance − being irregular, long-term investments). Going concern and viability statements As such, the Audit Committee was requested to provide advice to the Board on whether the FY22 Annual Report and Accounts, Following review and challenge, the Committee concluded that taken as a whole, provide a fair, balanced and understandable the Group will be able to continue in operation and meet its assessment of the company’s financial position and future liabilities as they become due. The Committee also considered prospects and provide all information necessary to a shareholder it appropriate that the statement covers a five-year period. In to assess the Group’s performance, business model and strategy. reaching its conclusion, the Committee reviewed the five-year Following the established process, the Committee reflected on forecast, the stress tests applied to it and the mitigating actions the information it had received and its discussions throughout the available to the company. The viability statement and the going year. The review is a well-established and documented process concern statement can be found in full on page 71, including the involving senior management and the core reporting team. The process on how the process was conducted. assessment was assisted by an internal verification of the factual content by management, a review at different levels of the Group Fair, balanced and understandable to ensure consistency and overall balance, and a comprehensive In accordance with the Code, the Board has established review by the senior management team and the external auditors. processes to ensure that all reports and information it is required to present in accordance with regulatory requirements, The Board considers that the Annual Report and Accounts 2022, represent a fair, balanced and understandable assessment of the taken as whole, is fair, balanced and understandable and provides company’s performance, position and prospects. the information necessary for shareholders to assess the company’s position, and performance, business model and strategy. | | QinetiQ Group plc Annual Report & Accounts 2022 | 111 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Audit, risk and ## internal control ## continued The Audit Committee risk management responsibilities Treasury strategy and compliance The Group’s system of internal control has been in place for The Group maintains a treasury policy which sets the approved the year under review and is up to the date of approval of the level and nature of the Group’s debt and hedging facilities, and Annual Report. Over the year the Audit Committee has discharged the headroom to be maintained under them. The Committee its commitment to monitor the integrity of the of the Group’s regularly reviews the treasury policy, approved changes to it published financial information, providing the appropriate where appropriate and monitored the Group’s compliance with it. challenge to any significant judgements and estimates made by management. Furthermore, the Committee has evaluated Tax strategy and compliance the adequacy, robustness and effectiveness of the Group’s The Committee reviewed and approved the company’s tax internal financial and other controls. In addition, the Committee strategy to ensure that it remained appropriate. The Committee has provided support to the Board in evaluating the adequacy, also received updates from management about the Group’s robustness and effectiveness of the Group’s risk management tax affairs, including the status of any tax audits and tax systems, for identifying, managing and mitigating principal risk, and compliance matters. identifying and mitigating, where possible, emerging risks. Finally, the Committee has reviewed the Group’s policies, processes Quality of income and controls for the detection and prevention of fraud and for compliance with applicable laws, regulations and codes of conduct The Committee reviewed the quality of income generated during and has approved the activities, reviewed the findings and assessed the year. This entailed assessing the sustainability of income or the effectiveness of the Group’s internal audit function. whether it was generated from one-off items such as provision releases. The assessment informs the Committee’s work on Report from US on internal controls whether the accounts are fair, balanced and understandable, and whether any adjustments should be considered in During the year Internal Audit commissioned a review of the remuneration calculations. internal financial controls relating to several business cycles and an assessment of the control environment in QinetiQ’s US businesses. The review found that, as is common with many ### Internal audit growing business at this stage of maturity, additional formality in The Group Internal Audit function is independent of the business, respect of evidencing and documentation of controls is required. operating under the third line as part of QinetiQ’s adoption of Management has accepted the findings and Internal Audit will the Three Lines Model (see page 63 for further details). Internal monitor progress of implementing the remeditation actions. Audit work closely with other functions providing assurance to help develop a robust system of risk management and internal Task Force on Climate-related Financial Disclosures (TCFD) control, and also to ensure there remains a collaborative QinetiQ has committed to implement the recommendations of approach to assurance across the business and that plans are TCFD in full, and this is our first disclosure of these important complementary. issues. We are devoted to developing a business model that is consistent with the objectives of the Paris Agreement, and Internal Audit reports directly to the Audit Committee, formally therefore reduce our Scope 1 and 2 emissions by 2050. Further reporting four times during the year. The Audit Committee details can be found on page 48. The Committee reviewed approves the annual audit plan, monitor progress, and assess the proposed disclosures and challenged assumptions and the overall effectiveness of the audit process. The plan aims to judgements therein. ensure that all significant financial and non-financial risks are reviewed within a rolling three-year period. Prevention and detection of fraud The audit plan for the year was built around a number of priorities The Committee reviews the effectiveness of the control including the development of an internal controls framework, environment annually, which includes considering the risk of assessing the progress of key change programmes, and a focus fraud. In addition, the Committee discusses with the internal and on some specific elements of IT and security, including software external auditors any findings on the quality of the organisation’s licences. In addition, there has been a review of key operational anti-fraud systems and controls. At each Committee meeting and financial controls in the US businesses. during the year, the Committee members individually confirmed that they were not aware of any case of fraud within the Group at As commonly happens the audit plan was updated throughout that point in time. the year, including changes to reflect risks that were identified or concerns which were raised. This led to reviews over purchasing cards and staff expenses being added to the FY22 audit plan. ### 112 QinetiQ Group plc Annual Report & Accounts 2022 Based on the results of the audit and assurance activity in the In order to safeguard the auditor’s independence and objectivity, year the control environment is considered to be effective, with and in accordance with the 2019 FRC’s ethical standard, QinetiQ an open culture of continuous improvement demonstrated by does not engage PwC for any non-audit services except where the business. it is work that they must, or are clearly best suited to, perform. Accordingly, the company’s policy for the engagement of the Internal Audit will also continue to develop the assurance map auditor to undertake non-audit services broadly limit these to of the business, reporting twice a year to the Audit Committee audit-related services such as reporting to lenders and grant on specific risk areas in order to build the Group wide view of providers, where there is a requirement by law or regulation to assurance and the effectiveness of the assurance activities. perform the work. All other non-audit services are considered on During the year there was a deep dive on fraud risk across the a case-by-case basis in light of the requirements of the ethical Group, reviewing and assessing the assurance provided under standards and in compliance with the company’s own policy. the three lines. The Audit Committee approves the terms of all audit services The Audit Committee has assessed the effectiveness of the as well as permitted audit-related and non-audit services in Group Internal Audit function by way of an annual survey and advance. Pursuant to the Code of Practice, any non-audit services questionnaire completed by members of the Audit Committee, conducted by the external auditor require the prior consent of the external auditors, and a selection of management across the the CFO or the Chair of the Audit Committee, and any services business. The outcome was that the function remains effective, exceeding £50,000 in value require the prior consent of the Audit with a number of scores improving over the year. There were Committee as a whole. For work that is permissible by type, also opportunities identified to develop the team with specialist the Audit Committee will take into consideration the size of the knowledge needed for specific audit assignments. contract in proportion to QinetiQ’s revenue and profit, and also the total size when aggregated with other contracts with PwC, Looking forward to the forthcoming financial year there are noting that some non-auditing services are subject to an annual priorities for the audit plan that include delivering assurance over regulatory 70% spending cap of the average of the audit fees key improvement programmes in the areas of safety and IT, as billed over the last three year period. well as focusing efforts to ensure all businesses within QinetiQ have a common base level of effective internal financial controls. It is also QinetiQ’s policy that no former PwC employee may be appointed to a senior position within the QinetiQ group without the prior approval of the CFO. ### External audit PwC audit scope Consideration of breach of 70% rule on auditors’ fees Reflecting the changing composition of the Group, the FY22 Audit During the year PwC assisted on the Group work connected to the Scope also included QinetiQ Australia, contributing £94.3m to M&A incomplete acquisition, further details can be found on page the Group revenue in FY22. The scope also includes full scope 87, resulting in that PwC’s fees for non-audit services in FY22 reporting from QinetiQ Inc. (C5ISR) and QinetiQ Limited, which exceeded the permitted 70% fee cap. In advance of providing remains consistent with the historic audit scope. The scope for support on this M&A project, PwC had obtained a waiver from Foster Miller Inc. (Technology Solutions) also remains consistent the FRC along with approval from the Audit Committee Chair. with the prior year with audit procedures being performed over The Committee considered that PwC’s independent advice on Inventory, Revenue and associated balances only. The Committee the matter would support and enhance QinetiQ’s approach to viewed it appropriate for the audit scope to be updated to risk management and due diligence which would lead to the provide sufficient audit coverage over the consolidated creation of shareholder return and value. financial statements. Review of non-audit work during the year Non-audit work and auditor independence The Committee reviews the cost and nature of non-audit work The Audit Committee is responsible for QinetiQ’s policy, the Code undertaken by the external auditor at three meetings during of Practice, on non-audit services and the approval of non-audit the financial year as a standing item, with a fourth meeting services. The Code of Practice is applicable to all employees and considering the auditor’s fees as part of the year-end review. sets out the principles for regulating the award of non-audit work The Committee concluded, prior to engaging PwC for the to the external auditor. provision of these services, that there had not been any conflict of interest that might compromise the independence of PwC’s audit work. | | QinetiQ Group plc Annual Report & Accounts 2022 | 113 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Audit, risk and internal control continued The following auditors' remuneration has been charged in arriving at profit before tax: | | 2022 £'000 | 2022 £'m | % of audit fee | 2021 £'000 | 2021 £'m | % of audit fee | | --- | --- | --- | --- | --- | --- | --- | | **Audit fees** | **1,112** | **1.1** | | **1,087** | **1.1** | | | **Non-audit:** | | | | | | | | Audit-related assurance services | 91 | 0.1 | 8% | 84 | 0.1 | 8% | | Other assurance services | 570 | 0.6 | 51% | 40 | 0.0 | 3% | | **Total non-audit fees** | **660** | **0.7** | **59%** | **124** | **0.1** | **11%** | | % of three year average audit fees | 77% | | | | | | ## Review of the effectiveness and the independence of the external auditor At its September meeting the Committee reviewed the results of an effectiveness survey of the previous year's audit process, which allowed learnings to be fed into the current year's planning process. This took the form of questionnaires completed by members of the Group and divisional finance teams, and was supplemented by feedback from the Executive Directors and members of the Committee, together with consideration of the FRC's latest Audit Quality Inspection Report on PwC. The evaluation confirmed that PwC continues to perform its audit work to a high standard, in particular as a result of its comprehension of the company's business, control processes and the matters on which significant accounting judgements or estimates are required and its appropriate validation or challenge of management's views. ## Audit appointment and partner succession PwC was appointed as auditor of the Group at the 2018 AGM following a tender process. Since then the external audit engagement partner has been Julian Gray, Senior Statutory Auditor, who has now concluded his fifth year as the Group's audit lead partner. As the time line for the mandatory appointment of a new external audit lead partner is five years, John Ellis of PwC has been identified and appointed as the new PwC lead partner to manage the external audit team going forward. The external audit contract will be put out to tender at least every 10 years, and the Committee considers that it would be appropriate to conduct an external audit tender by no later than 2028. The Committee and the Board will be recommending PwC's re-appointment at the 2022 AGM. ## Audit Committee structure The Audit Committee is comprised entirely of independent Non-executive Directors and is chaired by Shonaid Jemmett-Page, who is considered by the Board to fulfil the Code requirement of recent and relevant experience from the financial sector. The Board considers the members of the Audit Committee to be independent and, in accordance with the Code, the Board concludes that the Committee as a whole possesses competence relevant to the Group's sector, having a range of financial and commercial experience in the industry and the commercial environment in which QinetiQ operates. The Group Chair, CEO, CFO, Group Financial Controller, Group Head of Internal Audit, Group Director Risk and Governance and representatives of the external auditor attended all Committee meetings by invitation during the year. The Audit Committee met with PwC and the Group Head of Internal Audit on two separate occasions, without Executive Directors present, to discuss the audit process and assure itself regarding resourcing, auditor independence and objectivity. ## Audit Committee effectiveness review The evaluation of the effectiveness of the Committee was conducted alongside the Board effectiveness review. See more on pages 105 to 107. The outcome of the evaluation confirmed that the Committee continues to operate highly effectively and determined that Committee members have good oversight of, and are able to raise appropriate challenges in respect of, important financial matters, such as management's significant accounting judgements and the implementation of new accounting standards. ## Looking ahead Looking ahead, the Committee is continuing to monitor the developments following the consultation published by the Government in March on proposals for significant reform of audit and corporate reporting. ## Statutory audit services compliance The company confirms that during the year under review it applied and was in compliance with the Competition and Market's Authority's Order on statutory audit and services, which relates to the frequency and governance of external audit tenders and the setting of a policy on the provision of non-audit services. 114 QinetiQ Group plc Annual Report & Accounts 2022 ## Risk & Security Committee report The Committee members and I have, ### Dear Shareholder, together with the Group Functional Director I am pleased to present our Risk & Business Transformation and Services, Security Committee report for FY22, Group Director Security, the Business which describes our activities and Services Director and Group Director Risk areas of focus during the year. and Governance, developed a schedule of security related agenda items, ensuring that the Committee will be able to oversee ### The Risk & Security this important subject, as well as the ### Committee risk management risks facing the Group. World events have ### responsibilities potentially heightened our risk, particularly in cyberspace, and we must be vigilant and The Risk & Security Committee provides innovative to ensure we remain ahead of further scrutiny, and assurance to the the ever-evolving threats. Board, that the required standards in risk management, security, health and safety, within the UK and internationally, ### FY23 action plan are achieved. This includes driving • Continue to monitor progress of the continuous improvement ensuring that company’s wider technology and cyber the organisation fulfils its statutory security transformation requirements and duty of care. This assists the Board in reviewing and assessing the • Continue to increase focus on risk Group’s risk management systems. reporting and accountability for risk throughout the Group, both for its UK businesses as well as its ### Risk profile of the Group global businesses During the year, the Committee has • Continue the implementation of a focused on reducing the Group’s risk Global Security Strategy to emphasise profile. The review of the Group Risk the importance of security and to Register, which is described further drive a culture of heightened security ## The safety and on pages 62 to 70, continues to be awareness across the Group fundamental for the Committee to • Continue to ensure that we are ## wellbeing of undertake its duties. The Risk Register recruiting, building and retaining the contains details of the company’s principal right workforce skills and talent to ## our employees, risks and uncertainties, their impact on the drive our physical and non-physical company and how they are managed. security focus ## customers and ### Security profile of the Group I hope you find the information in this ## partners, remains report about the Committee’s work One of our core responsibilities is to helpful and I will be pleased to answer oversee the Group’s physical and non- ## the company’s any questions you have about it at this physical security systems. Our future year’s AGM. success will be reliant on our ability to ## number one exploit and operate technology at pace while still retaining the exacting levels ## priority.” General Sir Gordon Messenger of security required by our customers Risk & Security Committee Chair and partners. Now more than ever, the Committee understands that emphasis has to be placed on the need for a robust, international security capability, which leverages our Group wide capability and experience. | | QinetiQ Group plc Annual Report & Accounts 2022 | 115 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Audit, risk and ## internal control ## continued To enable the Committee to get a comprehensive understanding ### Key highlights FY22 of how risk management processes have been implemented and • A key initiative during the year in our Integrated Strategic to ensure that these are fully embedded within the business’s Business Plan (ISBP) FY22 was to improve our cyber day-to-day work, deep-dives are presented to the Committee by incidence resilience employees who have first-hand knowledge of such matters, i.e. • Launch of the Safety Improvement Programme (SIP) to perform the work on a daily basis. drive a step-change in our safety culture; ensuring we have the right processes, tools and systems; the skills-set and Risk reporting is incorporated into the management of the mind-set needed (physical safety). Moreover, to establish an business through the Global Leadership Team and monthly environment where it is safe to take a proactive approach, performance reviews feed into the Group strategy at the raising issues and concerns and owning the solution Executive and Board level. The risk management and risk (psychological safety) monitoring processes are divided as following: • Focused on the risk management processes in the Group’s international businesses Risk management • Review risk management structures and reporting lines (i.e. effectiveness of control environment) ### Key responsibilities • Effectiveness of risk reporting processes The Committee primary functions are: | • To oversee the sound operation of the Group’s risk | | • Review effectiveness of risk identification | | | --- | --- | --- | --- | | | management systems | | processes | | • The ongoing review of the Group’s principal and emerging | | • Consideration of external auditor | | | | risks (see pages 62 to 70) | | recommendations relating to risk | management • To oversee the Group’s physical and non-physical security systems, including monitoring security exposures and Risk monitoring • Review of risk register and key exposures security culture, and considering emerging security issues • Health, Safety and Environmental • Continue to ensure that health and safety risks are being Performance effectively managed across the Group • Internal Audit reports • To oversee the Group’s second line assurance activity over • International business governance the first line compliance activity taking place across the • Anti-bribery and corruption Group’s functions and businesses • To monitor adherence to the generic MOD compliance system ### Security management • To review the Group’s policies, processes and controls for The Committee is assured by the progress made by the Group the detection and prevention of bribery and modern slavery in the year, although, with the ever-increasing incidence and and compliance with applicable laws, regulations and sophistication of cyber attacks and the consequent need for codes of conduct the Group to remain vigilant, the Committee expects security to ### Risk management remain one of its key areas of focus. A Security Culture Survey, conducted by the Group Security team covering the whole Group The Board assumes ultimate responsibility for the effective and aimed at understanding the security maturity levels across management of risk across the Group, determining its risk four areas; information, physical, cyber and personnel security, appetite and ensuring that each business area implements proved invaluable in identifying areas for focus, both domestically appropriate internal controls. The Group’s risk management and internationally. systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. These systems are also designed to be sufficiently agile to respond to changes in circumstances, such as the impact of COVID-19. ### Risk & Security Committee structure All members of the Board are members of the Risk & Security Committee, which is chaired by Gordon Messenger. The Group Functional Director Business Transformation and Services, the Group Director Security, the Group IT Services Director, the Group Director Risk and Governance and the Group Head of Internal Audit attended all Committee meetings by invitation. ### 116 QinetiQ Group plc Annual Report & Accounts 2022 ## Directors’ ## remuneration ## report | Dear Shareholder, | CFO succession | | --- | --- | | As the Group Chair outlined in his | FY22 saw the retirement of our CFO, David | | statement on page 12, FY22 was a | Smith. I would personally like to thank | | challenging year for the company; our | David for the support he provided to the | | good underlying performance was | work of the Remuneration Committee. | impacted by two discrete short-term profit | issues. The impact of these issues has | Carol Borg joined QinetiQ in October 2021 | | --- | --- | | been contained and I am confident that | taking over as CFO effective 1 December | | FY23 will see a return to sustainable | 2021. Carol brings a strong focus on | | profit growth. | Environmental, Social and Governance | (ESG) issues to QinetiQ which will The response of the Executive Directors, support the work of the Remuneration the Global Leadership Team (GLT) and all Committee as such issues are of of our employees to the profit challenges increasing importance to the company and in the second half of the year was key stakeholders; this is reflected in our outstanding. Orders and revenue both saw approach to incentives. strong growth over FY22 to create a sound platform for the future. The Remuneration Committee considered and approved the Good Leaver retirement ### Incentive out-turn for FY22 terms for David and the appointment terms | The annual contribution to the Bonus | for Carol as detailed on page 130. Also, | | --- | --- | | Banking Plan (BBP) for FY22 for the | following the approval of his remuneration | | CEO, the new CFO (Carol Borg) and the | terms in FY21, Sam Lewis joined the GLT in | | former CFO (David Smith) is 71.4%, 69.4% | April 2021 as Group Business Development | | and 69.4% of the maximum respectively, | Director. Two further critical roles were | | recognising their personal performance | appointed to the GLT in FY22 for which | | during a year when the company delivered | the Committee appoved the remuneration | | stretch orders and cash performance; | terms - Shawn Purvis as President and | | with the disappointing profit performance | CEO of our US business and Amanda | | recognised by a 0% outturn for this | Nelson as Group HR Director. At the end | | element (which had a 25% weighting). | of FY22, the Committee also approved the | remuneration terms for Mike Sewart as The FY22 contingent share award under Chief Technology and Operating Officer, ## The response the Deferred Share Plan (DSP) will be effective April 2022. made at 60.2% of the maximum reflecting ## of the Executive Implementation for FY23 above target revenue growth in-year. This DSP award will not vest in full unless the The Bonus Banking Plan for FY23 is based ## Directors, the performance hurdle is met in FY25. on the same financial metrics as in FY22 (orders, profit and cash) with stretch | GLT and all of our | The FY22 CEO single figure on page 123 is | targets set against the delivery of the | | --- | --- | --- | | | lower than FY21 largely due to the smaller | Integrated Strategic Business Plan (ISBP). | | | BBP contribution. The FY22 single figure | Financial metrics have a 70% weighting for | ## employees to the includes the second award under the FY23 (previously 75%) and non-financial DSP based on FY19 performance, which targets have a 30% weighting (previously ## profit challenges I am pleased to confirm has now ceased 25%) based on the achievement of to be contingent as the performance individual, common and collective goals. ## in the second half | | underpin has been met; that is, our FY22 | | Payment for target performance is 50% of | | --- | --- | --- | --- | | | profit performance of £137.4m exceeded | | the maximum. | | of the year was | | 1 | | | | that delivered in FY19 of £124.9m | . The | | | | FY19 DSP vests as shares which must be | | The changes for FY23 in terms of the | ## outstanding.” retained for a further two years. weightings for the financial and non- financial elements of the BBP provide for | The Committee considered the FY22 | an enhanced focus on ESG measures | | --- | --- | | BBP and DSP outturns in detail from | and a reduction in the cash metric (20% | | the perspective of our key stakeholders | weighting for FY23, was 25% previously). | (shareholders, customers and employees) and agreed that it was appropriate not to exercise the discretion available to amend QinetiQ’s Gender Pay Gap data the outcome; that is, no adjustment was can be found on our website at made to incentive targets or outcomes. www.QinetiQ.com 1. Restated in FY20 for a change in accounting policy. | | QinetiQ Group plc Annual Report & Accounts 2022 | 117 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Directors' remuneration report continued The Committee considered return on investment as an annual incentive metric and is monitoring it for potential future use. At this time it is not considered appropriate as it may not drive the right behaviours at this point in the company investment cycle. In support of the ISBP, the FY23 DSP strategic growth performance measure is revenue growth across the Group excluding in-year acquisitions, as per FY21 and FY22. Underpins ensure that FY23 profit margins are strong and Group operating profitability must be at least equal to FY23 performance in FY26 for full vesting. ## Employee engagement and reward QinetiQ's employees are key to the delivery of our ambitious growth strategy. Our employees have been outstanding this year, demonstrating extraordinary agility, focus, commitment and drive to continue to deliver to our customers. The CEO and the Group HR Director have held regular discussions with our Global Employee Voice on reward matters. The people section on page 54 details our employee engagement activity. I met with the Chair and other representatives of the Global Employee Voice during the year and I found the discussions very helpful in terms of understanding employee views. I understand that they have also found the meetings helpful and it is our intention to continue to meet at appropriate intervals. In FY19 the company introduced an All Employee Incentive Scheme (AEIS) whereby every eligible employee can earn a payment if the company achieves a level of operating profit within a predetermined range from target to stretch. For FY22 I am disappointed that the profit target for AEIS payment was not achieved; however I am pleased that the CEO and the GLT chose to pay a discretionary award of £500 to all employees to reflect the way our employees rose to the challenge of the profit issues and ensured that other key performance metrics were delivered. The AEIS is a key element of the company's Rewarding for Performance framework and aligns employees and shareholder interests by incentivising and rewarding profitable growth. The company will operate the AEIS again for FY23 and thereafter. Looking forward, the company will increase investment significantly in FY23 in our enhanced global reward strategy and wider employee offering. ## The Directors' Remuneration Policy and pensions The Directors' Remuneration Policy was presented for the triennial binding vote at the AGM in July 2020 and the Committee noted that we received a 87% vote in favour of the Policy and, at the July 2021 AGM, a 94% vote in favour of the Directors' Remuneration Report for FY21. The Policy approved at the 2020 AGM confirmed that incumbent Executive Directors' pension allowances would be reduced to the UK employee level (10.5% of salary) over the three-year life of the 2023 Policy. This reduction from 20% to 10.5% has been brought forward for the CEO to be effective from 1 January 2023, and the new CFO received a 10.5% pension allowance on her appointment. The Committee acknowledges that the incentive plans can appear complex as we have received this feedback from shareholders and new hires. Over the coming year the Committee will conduct a full review of the incentive approach in preparation for the Policy vote at the 2023 AGM, with the overall aim of simplification. ## Conclusion Supporting leadership to drive the response to the profit issues and implementing the Directors' Remuneration Policy in the interests of shareholders were the primary areas of focus of the Remuneration Committee in FY22. The Committee believes that we have a talented GLT that deal with issues with commitment and integrity. As the company continues to grow and expand internationally we need to be mindful of our global competitive environment and the increasing levels of responsibility. FY22 was a challenging year for QinetiQ, delivering growth in orders and revenue, but with a disappointing profit performance. The Remuneration Committee carefully scrutinises financial performance as it relates to incentive payments. The Committee considered a discretionary adjustment to the scheme outturns but this facility was not used. We are satisfied that payments are appropriate and fair, reflecting overall performance delivered in FY22 and in consideration of the profit challenges. The Committee was pleased to note the share price response (£3.42 close on 29 April 2022) to the 20 April 2022 trading update which confirmed that the profit write-downs were fully contained in our first half results. As we look to FY23, we anticipate that the company will return to the trajectory of sustainable organic profit growth which we delivered for six years prior to FY22. I am very grateful for the time shareholders and their representative bodies have given us throughout the year and I hope that we can rely on your vote in support of the Directors' Remuneration Report at the AGM on 21 July 2022. I would welcome comments and questions from shareholders in relation to this Directors' Remuneration Report and I can be contacted through companysecretariat@qinetiq.com. **Susan Searle** **Remuneration Committee Chair** 20 May 2022 118 QinetiQ Group plc Annual Report & Accounts 2022 ### Remuneration at a glance Components, alignment, application and changes | | Annual fixed pay | Link to strategy Application in FY23 | | | --- | --- | --- | --- | | Salary | | Fixed pay is set at a level that enables us to attract | No change to current | | | | and retain high-quality Executive Directors, who | Policy. | Executive Directors’ base salaries are set on appointment are capable of successfully leading and executing and reviewed annually, or when there is a change in position our strategy and delivering long-term sustainable or responsibility. Typically, base salaries will be increased growth. Our Policy aims to ensure that fixed pay by a similar percentage to the average pay increase for all remains attractive and competitive. employees of the Group. Benefits No change to current Policy. Benefits include a car allowance, health insurance, life assurance, income protection and taxable expenses. Pension New Executive Directors will receive 10.5%, as will Existing Executive Directors currently receive 20% of base existing ones effective salary allowance as cash in lieu of pension. January 2023, to align with the UK workforce. | | Medium-term variable pay (one to four Years) | Link to strategy Application in FY23 | | | --- | --- | --- | --- | | The Bonus Banking Plan (BBP) | | The BBP rewards strong financial performance | No change to current | | | | through a 70% weighting to financial metrics. Over | Policy; some reweighting | The BBP is a partially deferred annual bonus scheme where a the long-term this financial performance is driven by of metrics to provide a maximum award of 200% of salary is available. 70% weighted the successful implementation of our strategy. The greater focus on ESG. on financial metrics (for FY23 orders, operating profit and scheme also rewards non-financial performance in operating cash flow) and 30% weighted on non-financial areas such as implementing safety programmes and metrics (key strategic, operational and personal goals). transforming the culture. The BBP therefore supports In the first year of the BBP cycle, 50% of the annual award our ongoing transformation which is critical to our is paid as cash with the remainder deferred and held as long-term success. notional shares in a deferred pot. Each year the annual award The partial deferral of the bonus and exposure to is added to this notional pot, with 50% of the balance then share price drives a long-term and sustainable focus, paid as cash. At the end of the fourth year the entire residual aligning interests with shareholders. Furthermore, pot is paid as shares and a new three-year performance cycle 50% of the value of the deferred BBP pot is initiated. subject to forfeiture should minimum performance requirements-not be met. | | Long-term variable pay (one to six years) | Link to strategy Application in FY23 | | | --- | --- | --- | --- | | The Deferred Share Plan (DSP) | | The DSP enables us to reward Executive Directors | No change to current | | | | for delivering against key strategic priorities. We | operation. | The DSP is a long-term incentive scheme that provides a retain the flexibility to select an appropriate contingent share award up to a maximum of 125% of salary strategic growth metric on an annual basis ensuring for success against an annual metric aligned with QinetiQ’s that the DSP is agile and drives the long-term long-term strategic growth plan. strategic success of the Group. Initial entry into the DSP is based on an annual growth With a four-year period before DSP shares vest, and measure with a pre-grant margin underpin, to ensure that then a further two-year holding requirement, the Executive Directors are not incentivised to pursue low-margin DSP is inherently long-term in nature with various growth. underpins ensuring growth is both sustainable and The award is then held in contingent shares for a period of profitable over the long-term. three years. If at this point the level of profit in the year that gave rise to the award has been maintained, the contingent award is considered ‘vested’ and is included in the single figure. Shares are then subject to a further two-year holding period. | | QinetiQ Group plc Annual Report & Accounts 2022 | 119 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Directors’ ## remuneration ## report ## continued Timing To create strong alignment between executive remuneration and the long-term interests of our shareholders, the annual BBP awards remain, in part, subject to forfeiture based on performance for three years after the award was earned. Annual DSP awards also have a similar forfeiture period, after which any vested shares must be retained by the executive for a further two years. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Fixed pay Bonus Banking Plan Deferred Share Plan Pay at risk, shares held, subject to certain performance conditions Shares held, not subject to performance conditions | Single Figure FY22 | | | | | | Illustration of FY23 potential | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | (£’000) | | | | | | (£’000) | | | | | | | | | Chief Executive Officer Chief Financial Officer | | | | | | Chief Executive Officer Chief Financial Officer | | | | | | | | | | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | TOTAL | | | £2,696 | £2,477 | £2,033 | £614* | £1,355 | £853 | £1,942 | £3,031 | £3,784 | £523 | £1,230 | £1,937 | £2,427 | £814 £1,256 £733 £838 £619 £816 £1,179 £912 £419 £1,675 £544 £509 £1,340 £892 £670 £272 £1,088 £870 £439 £435 £832 £274 £703 £853 £853 £853 £853 £522 £407 £523 £523 £523£523 £240 FY21 | FY22FY21 | FY22 | FY22 | | Target TargetStretch Stretch+50% +50%Min Min | | --- | --- | --- | --- | --- | | | CFO | former | | | | | | CFO | Minimum – Fixed pay (FY23 base | | salary, plus taxable benefits and pension Key Key allowance) Fixed pay Fixed pay Target – Fixed pay plus BBP at Target Medium-term variable pay (100% of base salary) and DSP at Target Medium-term variable pay (62.5% of base salary) Long-term variable pay Long-term variable pay Stretch – Fixed pay plus BBP at Maximum (200% of base salary) and DSP at * Including the £100,000 ‘Other’ payment, see page 123 Maximum (125% of base salary) + 50% Share price appreciation – Stretch plus 50% share price appreciation (on 50% of BBP and 100% of DSP) Remuneration in context Our remuneration principles Flexible Stretching Aligned The Committee can select Targets are set by the Committee While our incentive targets are initially assessed on an measures and set tough to ensure executives are annual basis, the BBP has a deferred share-based element targets each year to ensure incentivised to outperform, while with the risk of forfeiture, and the DSP has a “meet or that executives are incentivised, delivering sustainable levels of exceed” performance underpin, whereby performance must aligned to the delivery of each performance. be met or exceeded pre-grant and in year three, after which stage of our strategy. any vested shares must be retained for a further two years. ### 120 QinetiQ Group plc Annual Report & Accounts 2022 Summary Directors’ Remuneration Policy The Directors’ Remuneration Policy was approved by shareholders at the AGM on 14 July 2020. The full Policy is provided in the Corporate Governance section on the company’s website, and it will remain in effect until the 2023 AGM. When developing the Policy, the Committee was mindful of the six factors as set out in the Code: clarity, simplicity, proportionality, predictability, alignment of culture and risk. A summary of the Policy is set out below: Element Policy summary description Maximum opportunity Base salary When determining an appropriate level of salary, the Typically, the base salaries of Executive Directors in post Committee considers: at the start of the Policy period and who remain in the same role throughout the Policy period will be increased • general salary rises to employees by a similar percentage to the average annual percentage • remuneration practices within the Group increase in salaries of all other employees in the Group. The exceptions to this rule may be where: • any change in scope, role and responsibilities • the general performance of the Group • an individual is below market level and a decision is • the experience of the relevant Director taken to increase base pay to reflect proven competence in the role; or • the economic environment • there is a material increase in scope or responsibility • when the Committee determines a benchmarking to the Executive Director’s role. exercise is appropriate, salaries within the ranges paid by the companies in the comparator groups used for remuneration benchmarking Pension The company provides a non-consolidated pension Any new Executive Directors will have a maximum contribution allowance in line with practice relative contribution of 10.5% which is the level available to to its comparators. UK employees. The allowance paid to the CEO will reduce to 10.5% effective 1 January 2023. Benefits Benefits include car allowance, health insurance, life Benefit values can vary year-on-year depending on assurance, income protection and membership of the premiums and the maximum is the cost of providing Group’s employee Share Incentive Plan which is open the relevant benefits. to all UK employees. Incentive Plan The Incentive Plan supports the company’s objectives by: Maximum 325% of salary (200% of salary under the Bonus Banking Plan and 125% of salary under the • allowing the setting of annual targets based on the Deferred Share Plan). strategic objectives at that time; and Bonus Banking Plan • providing substantial deferral in shares and ongoing adjustment by requiring a threshold level of performance Maximum = 200% of salary. to be achieved during the deferral period. Target = 80%–120% of salary. Threshold = 0% of salary. The Incentive Plan consists of two elements: Deferred Share Plan Bonus Banking Plan (BBP) Maximum = 125% of salary. Annual contributions are earned based on the satisfaction Target = 30%–75% of salary. of the performance conditions. Contributions are made for Threshold = 0% of salary three years with payments made over four years. Half the value of a participant’s bonus account is paid out annually for three years with 100% of the residual value paid out at the end of year four. Half of the unpaid balance of a participant’s bonus account is at risk of annual forfeiture. Deferred Share Plan (DSP) Deferred share-based element earned based on the satisfaction of pre-grant annual performance assessment, which is subject to a three-year vesting period and a further two-year holding period. A minimum 50% of the unvested award will lapse after three years if a performance underpin, set annually by the Committee, is not achieved. | | QinetiQ Group plc Annual Report & Accounts 2022 | 121 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Directors’ ## remuneration ## report ## continued Element Policy summary description Maximum opportunity Shareholding Executives have five years to accumulate the required n/a requirements shareholding by retaining at least 50% of the post-tax vested shares from company incentive plans. 300% of base salary for the CEO. 200% of base salary for the CFO. On cessation of employment, Executive Directors are required to maintain a shareholding of 100% of salary for one year post-cessation, then 50% of salary for a further one year. Chairman and Non-executive Directors Fees Fees are reviewed annually based on equivalent roles in The fees for Non-executive Directors and the Group the comparator group used to review salaries paid to the Chairman are broadly set at a competitive level against the Executive Directors. comparator group. ### 122 QinetiQ Group plc Annual Report & Accounts 2022 ### Annual Report on Remuneration The following section of this report details how the Directors’ Remuneration Policy has been implemented for the year ended 31 March 2022. Audited information Executive Directors’ single total figure of remuneration | | | | | | | | Bonus | Deferred | | Total | | Total | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Salary | Benefits | Pension | | Total | Banking Plan | | Share Plan | Other | variable | remuneration | | | Executive Director Year | £’000 | £’000 | £’000 | fixed pay | | | £’000 | £’000 | £’000 | pay | | £’000 | Steve Wadey (CEO) 2022 639 65 128 832 912 733 – 1,645 2,477 2021 512 68 123 703 1,179 814 – 1,993 2,696 Carol Borg (CFO) 2022 199 20 21 240 274 – 100 374 614 (Appointed 11 October 2021) 2021 – – – – – – – – – David Smith (Former CFO) 2022 315 29 63 407 439 509 – 948 1,355 (Retired 30 November 2021) 2021 392 37 93 522 892 619 – 1,511 2,033 Benefits can include travel and subsistence expenses incurred in relation to the execution of their duties with the company that are considered by HMRC to be taxable. The ‘Other’ payment to the CFO is a payment in part compensation for performance-based annual bonus lost on resigning from her former employer as detailed on page 130. Fixed pay | Salary | Salary as at | | | Salary as at | | FY22 salary | | | --- | --- | --- | --- | --- | --- | --- | --- | | Salaries are reviewed effective 1 July, which is the same timing for the rest of | 1 April 2021 | | Increase in | 1 July 2021 | | actually paid | | | | | £’000 | the year | | £’000 | | £’000 | the UK employee population. There was no base salary review in FY21 as part of the response to COVID-19 and both the CEO and former CFO entered into CEO 616 5.0% 647 639 a voluntary salary waiver for six months of the year of £104,450 and £74,450 CFO – – – 199 respectively. Carol Borg was appointed on a salary of £420,000. Former CFO 466 2.5% 478 315 Benefits | | Taxable | | Car | Insurance | | | Total | | --- | --- | --- | --- | --- | --- | --- | --- | | Benefits comprise a car allowance, travel allowance, private medical expenses | expenses | allowance | | | benefit | benefits | | | insurance, life assurance, income protection, and taxable expenses. | £’000 | | £’000 | | £’000 | | £’000 | CEO 28 19 18 65 CFO 11 6 3 20 Former CFO 8 9 12 29 Pensions Cash in lieu Total in lieu The Executive Directors did not participate in the QinetiQ pension scheme for of pension of pension FY22 and have not done so in prior years. The pension figure consists of cash £’000 £’000 in lieu of pension equating to 20% of base salary for the CEO and the former CEO 128 128 CFO and 10.5% of base salary for the CFO. CFO 21 21 Former CFO 63 63 Bonus Banking Plan BBP cycle June 2022 BBP cycle The Bonus Banking Plan operates on a three-year performance cycle mirroring | | 3 balance | | Dividend | | BBP | payment in | | 3 balance | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | the financial year, with a four-year payment cycle, i.e. running from 1 April to | | brought | equivalent | award in | | cash (50% | | | carried | | 31 March. FY22 represents the second year of cycle 3 as detailed on page | | forward | payment | | year | | value) | forward | | | | | £’000 | £’000 | | £’000 | | £’000 | | £’000 | 126. CEO 553 13 912 739 739 Each year any incentive award earned is added to the total plan balance, with 50% of the total plan balance being paid in cash in June after the FY. The CFO – – 274 137 137 remaining 50% is held in the plan in notional shares. In year four, the total Former CFO 419 10 439 868 - remaining plan balance is paid in shares. Deferred Share Plan The FY21 DSP figures represent the actual vesting of the of the FY18 award replacing the estimate provided last year. The share price at vesting was 348.9p and the FY21 figure includes £43,274 and £32,923 paid to the CEO and former CFO respectively as income in respect of a dividend equivalent payments. The FY19 Deferred Share Plan award achieved the performance underpin FY19 Shares Shares Estimated based on FY22 profit exceeding that in FY19 (£124.9m) and, therefore, the Awarded Vesting % Vesting value £’000 shares ceased to be contingent and are disclosed in the single figure for CEO 243,650 100% 243,650 733 FY22. The 100% vesting refers to the shares which have passed the underpin Former CFO (pro-rata) 184,401 100% 169,118 509 of those initially granted based on FY19 performance, which was 93.4% of the maximum available. The share value used is the 3-month average to 31 March 2022 (280.4p) and the estimated value includes CEO £49,461 and former CFO £34,331 as dividend equivalent payments. | | QinetiQ Group plc Annual Report & Accounts 2022 | 123 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Directors' remuneration report continued ## Bonus Banking Plan ### FY22 performance measures and operation For the year ended 31 March 2022 achievement of on-target performance provides a payment equal to 100% of base salary, rising on a linear scale to 200% of base salary for achievement of stretch performance. The scheme begins to pay out once threshold performance measures have been achieved. For the year ended 31 March 2022, the CEO, former CFO and CFO were measured against the targets as shown in the chart to the right. The target payment was 50% of maximum for financial and non-financial objectives. Setting performance targets – the Remuneration Committee takes into account the budget and the company's strategy set in relation to the ISBP shareholder expectations and the external environment. The aim is to set stretching targets which incentivise the Executive Directors to deliver annual results which will exceed the expectations of investors, but which are also sustainable and do not create undue risk. Financial performance measures exclude the contribution from businesses acquired in the year. ### % of base salary ![img-4.jpeg](img-4.jpeg) ## Audited information ### FY22 performance outcomes | | Weighting (%) | Threshold | Target | Stretch | Actual | % of maximum reward achieved | CEO contribution | CFO contribution | Former CFO | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | **CEO/CFO financial performance measures:** | | | | | | | | | | | Orders^{1} | 25% | £975.0m | £1,100.0m | £1,225.0m | £1,226.6m | 100% | £319,561 | £98,959 | £158,190 | | Underlying operating profit^{1, 2} | 25% | £137.5m | £150.0m | £162.5m | £137.4m | 0% | £0 | £0 | £0 | | Underlying net cash flow from operations^{1, 2} | 25% | £152.5m | £165.0m | £177.5m | £215.3m | 100% | £319,561 | £98,959 | £158,190 | | **CEO/CFO collective goals** (as detailed on page 125): | | | | | | | | | | | • Performance against key stretching objectives | 12.5% | 40% | 50% | 100% | 85% | 85% | £135,813 | £42,058 | £67,231 | | **CEO personal goals** | | | | | | | | | | | • Performance against stretching goals relating to growth and leadership | 12.5% | 40% | 50% | 100% | 86% | 86% | £137,411 | | | | **CFO personal goals** | | | | | | | | | | | • Performance against stretching goals - strategic, growth and operational | 12.5% | 40% | 50% | 100% | 70% | 70% | | £34,636 | | | **Former CFO personal goals** | | | | | | | | | | | • Performance against stretching goals - strategic, growth and operational | 12.5% | 40% | 50% | 100% | 70% | 70% | | | £55,367 | | CEO overall result | | | | | | 71.4% | £912,346 | | | | CFO overall result (pro-rated) | | | | | | 69.4% | | £274,612 | | | Former CFO overall result (pro-rated) | | | | | | 69.4% | | | £438,978 | 1 Performance measures exclude the contribution from businesses acquired during the year and have been adjusted for disposals during the year. 2 Definition of underlying measures and performance can be found in the glossary on page 207. 124 QinetiQ Group plc Annual Report & Accounts 2022 Collective and personal goals (25.0% weighting) Outcome Measures FY22 Performance (% maximum) Collective goals (12.5% weighting) Safety and security culture Stretch performance levels were met to improve safety and security through high visibility safety – 40% weighting and security tours and leading safety and security engagements. Employee engagement Employee engagement fell slightly in FY22 as measured by the independent Peakon tool. – 30% weighting Leaders delivered diversity and inclusion events and interventions with strong feedback. Productivity and efficiency Leaders achieved stretch performance levels to simplify processes, drive innovation, improve –30% weighting productivity of our facilities, implement collaborative actions and improve ESG across the Group. Total 85% Personal goals (12.5% weighting) Outcome Measures FY22 Performance (% maximum) CEO Growth Active management of the portfolio to drive higher margins and strengthen strategy implementation through acquisitions and global campaigns. Deliver US integration and return the US business to profitable growth. Leadership Establish a GLT for FY23 that reflects diversity and provides the capability required to fulfil global ambitions with succession plan implemented. Improve ESG focus including publishing Net Zero Plan and improving safety focus and culture. Total 86% CFO Strategic Deliver minimum result at company level. Growth Agree FY23 budget with improved process for UK recoveries. Operational Deliver new model for Group Assurance and Audit. Total 70% Former CFO Strategic Deliver on financial commitments. Growth Explore innovative ways to lead growth. Operational Adopt best practice operating model for Finance team. Total 70% | | QinetiQ Group plc Annual Report & Accounts 2022 | 125 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Directors’ ## remuneration ## report ## continued How the plan operates BBP payout mechanism • The Plan operates on a fixed three-year performance cycle with a four-year vesting cycle. FY22 represents year two of YEAR 1 YEAR 2 YEAR 3 YEAR 4 Cycle 3. Plan years commence on 1 April. • Performance targets are set at the beginning of each ### Plan year. Cycle 3 FY21 FY22 FY23 FY24 • At the end of each of the first three Plan years the performance against targets is assessed and the level Measurement date at the end of each Plan Year of the incentive earned is determined and paid into the Plan account. Contribution* or forfeiture • Each year 50% of the account balance is subject to forfeiture. Participant’s plan account • At the end of each of the first three Plan years, 50% of the account balance will be paid in cash and the balance retained and held in the Plan as notional shares. 100% of closing 50% of closing balance paid out at the balance in Plan • At the end of the fourth year, any remaining balance end of each Plan Year. Unpaid balance deferred account paid in in the Plan account is paid out in shares. in notional shares. shares. * Single figure BBP value for a Plan/financial year. Audited information Operation during FY22 Cycle 3 | Notional | | | | | | | | | | | | | | | | | | | | Notional | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | shares on | | 30-day | | | | | | | | | | | | Bonus | | | | | | shares on | | account at | | average | | | | Share | Bonus plan | | | | | | pool total | | | | Gross | Bonus pool | | account at | | start of | share price | | | | value as at | | contribution | | | Dividend | | | value as at | | | payment in | | total value | | end of | | Plan year 2 | to 31 March | | | measurement | | | | for Plan | | equivalent | | measurement | | | | cash for Plan | | after cash | | Plan year 2 | | (1 April | | 2022 | | | | date | | year 2 | | payment | | | | | date | | year 2 | payment | | (31March | | 2021) | | | (p) | | | (£) | | | (£) | | (£) | | | | (£) | | (£) | | (£) | 2022) | CEO 183,140 302.1 553,266 912,346 12,820 1,478,432 (739,216) 739,216 244,692 CFO – 302.1 – 274,612 – 274,612 (137,306) 137,306 45,450 Former CFO 138,54 4 302.1 418,541 438,978 9,698 867,217 (867, 217) – – Forfeiture For BBP Cycle 3 the CEO and former CFO retained notional shares in their Plan accounts of which 50% were subject to forfeiture. Forfeiture would have been enacted if Group underlying operating profit was less than the level determined by the Remuneration Committee at the start of the year of £124.9m for FY22. FY22 Group underlying operating profit was £137.4m (excluding contribution from acquisitions) therefore no notional shares were forfeited. The BBP Cycle 3 notional shares held by the former CFO as at 31 March 2022 will be paid as cash in June 2022 based on the notional share price over March 2022. The pro-rata FY22 BBP payment to the former CFO will be paid in cash in June 2022 with no deferred element. Discretion For BBP Cycle 3, for the year ended 31 March 2022, targets were largely achieved providing a contribution of 71.4% of the maximum award for the CEO and 69.4% for both the CFO and former CFO. CEO £912,346, CFO £274,612 and former CFO £438,978 has been reported in the single figure table which represents the contributions to the plan related to FY22 performance. No discretion was applied to these contributions as the Committee considers them appropriate reflecting Group performance. In reviewing the BBP out-turn the Remuneration Committee was mindful of the wider stakeholder experience across the financial year. ### 126 QinetiQ Group plc Annual Report & Accounts 2022 ### Deferred Share Plan (DSP) Scheme interests awarded during the financial year ended 31 March 2022 The Deferred Share Plan was first approved by shareholders at the 2017 AGM and further approved as a key element of the Directors’ Remuneration Policy at the 2020 AGM. A maximum award of 125% of salary may be made to Executive Directors with the amount contingent on meeting a stretching annual performance target based on QinetiQ’s strategic growth plan. Once the award has been made, it is deferred for three years and remains subject to a performance underpin; any vested shares are then subject to a further two-year holding period. FY21 DSP contingent shares granted in the year are detailed on page 129. The FY21 award was 97.3% of the maximum available. Setting performance targets FY22 The FY22 DSP performance measure was group revenue excluding in-year acquisitions. Calibration was set with a maximum of 125% of salary available for achieving stretch and 50% of the maximum payable at target performance. The performance targets were set by the Remuneration Committee so as to be stretching. Audited information FY22 performance outcome The FY22 Deferred Share Plan award was measured against Group revenue with the following calibration. % Max award % Salary Total Measure Weighting Threshold Target Stretch Actual achieved awarded £’000 Group Revenue CEO 100% £1,200m £1,300m £1,400m £1,320.4m 60.2% 75.3% £480,939 1 CFO £148,933 2 Former CFO £59,699 1 As an in-year joiner, pro-rated 172/365 days to reflect the portion of FY22 served. 2 As a good leaver, pro-rated 244/1,460 days to reflect the portion of the 4-year performance period served. The FY22 DSP award was also subject to a pre-grant performance underpin that FY22 profit margins are higher than 10%, which was achieved. Group revenue achieved at £1,320.4m was between the Target and Stretch levels of performance resulting in a FY22 DSP contingent award of shares at 60.2% of the maximum available. The FY22 DSP award will be subject to a further performance underpin before vesting: • Group underlying profit out-turn for FY22 must be maintained at the end of the three-year vesting period. If this is not maintained then, at a minimum, 50% of the award will lapse. For the purposes of the FY22 DSP award, this will be the actual underlying operating profit £137.4m for FY22 which must be achieved in FY25. The FY22 DSP award which vests based on the achievement of the FY25 performance underpin must be held as shares for a further two years. The FY19 DSP award achieved the performance underpin based on FY22 profit exceeding that in FY19 (£124.9m) and, therefore, the shares ceased to be contingent and will be released on 28 June 2022. Had the FY22 profit not been greater than FY19, 50% of the DSP award would have lapsed. The net shares vesting from the FY19 DSP must be retained for a further two years for continuing Executive Directors. The value of this award is shown in the single figure table, in line with the reporting regulations, calculated as CEO £683,195 and former CFO £474,207 based on the share amounts due to vest of 243,650 and 169,118 (pro-rata) respectively and a share price of 280.4p (3-month average to 31 March 2022). The cash in lieu of dividends payment on these awards at vesting included in the single figure table is estimated at CEO £49,461 and former CFO £34,331. Actual share values at vesting and the cash payment in lieu of dividends will be reported in a restated FY22 single figure in the FY23 DRR. | | QinetiQ Group plc Annual Report & Accounts 2022 | 127 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Directors’ ## remuneration ## report ## continued Audited information Statement of Directors’ shareholding and share interests In relation to the shareholding requirement adopted on 1 April 2017 the company requires Executive Directors to hold shares equivalent to 300% (CEO) and 200% (CFO) of base salary. Executive Directors have five years from the adoption of the guideline to achieve the required level through, at a minimum, retaining 50% of the after-tax shares vesting from company incentive plans. The CEO has achieved his shareholding requirement and currently holds actual shares equivalent to 359% of base salary using a share price of 280.4p (three-month average to 31 March 2022). The CFO was appointed during 2021 and does not currently meet the minimum shareholding requirement; with a current holding of actual shares equivalent to 0% of base salary. The Remuneration Committee continues to monitor progress towards the shareholding requirement. Shares not | | Shares | Shares subject | | subject to | Total shares | | | --- | --- | --- | --- | --- | --- | --- | | beneficially | | to performance | | performance | | held at | | | owned | | conditions | conditions | 31 Mar 2022 | | Steve Wadey 829,280 476,396 588 1,306,264 Carol Borg (Appointed 11 October 2022) – 193,199 – 193,199 David Smith (Resigned 30 November 2021) 426,428 242,561 533 669,522 Michael Harper 45,000 – – 45,000 Susan Searle 48,300 – – 48,300 Lynn Brubaker 25,000 – – 25,000 Neil Johnson 100,000 – – 100,000 Ian Mason (Resigned 26 April 2021) 10,000 – – 10,000 Shonaid Jemmett-Page 7,000 – – 7,000 General Sir Gordon Messenger – – – – Lawrence Prior III (Appointed 2 August 2021) – – – – Shares beneficially owned comprise shares purchased under the Share Incentive Plan (SIP) and shares owned by the Director and any connected persons. SIP matching shares are identified as shares not subject to performance conditions. On 11 April 2022 Steve Wadey purchased 61 shares, then on 9 May 2022 he purchased 55 shares, through his participation in the SIP. There have been no other changes to the shares shown above between 31 March 2022 and 20 May 2022. Shares subject to performance conditions comprise awards made under the Deferred Share Plan which remain contingent subject to the performance underpin as detailed on page 127. The Compensation Share Plan award to Carol Borg is only subject to continued employment. Notional shares held by the CEO and CFO in the BBP Cycle 3 do not appear in the table above as they are not actual shares at 20 May 2022. However, in reviewing compliance with the shareholding requirement, the net of tax value of notional shares (i.e. 51.75% in the UK) of the 50% of the BBP balance which is not subject to forfeiture is included within the calculation. ### 128 QinetiQ Group plc Annual Report & Accounts 2022 Audited information Total scheme interests summary Total scheme interests, including those awarded during the financial year ended 31 March 2022, are as follows. Granted in year (maximum Number 1 April potential of Number 31 Share price on Plan name Date of grant 2021 awards) Vested in year Lapsed in year March 2022 date of grant Vest date Steve Wadey DSP 2018 8 Jun 18 220,785 – 220,785 – – 206.0 8 Jun 21 DSP 2019 28 Jun 19 243,650 – – – 243,650 304.0 28 Jun 22 1 DSP 2021 25 Jun 21 – 232,746 – – 232,746 321.9 25 Jun 24 464,435 232,746 220,785 – 476,396 David Smith DSP 2018 8 Jun 18 167,975 – 167,975 – – 206.0 8 Jun 21 DSP 2019 28 Jun 19 184,401 – – 15,283 169,118 304.0 28Jun 22 1 DSP 2021 25 Jun 21 – 176,070 – 102,627 73,443 321.9 25 Jun 24 352,376 176,070 167,975 117,910 242,561 Carol Borg Compensation Share Plan 5 Jan 22 – 193,199 – – 193,199 258.8 5 Jan 25 – 193,199 – – 193,199 1. The FY21 DSP contingent share award granted on 25 June 2021 at a share price of 321.9p (30-day average to 31 March 2021) is calculated on awards of 97.3% of the maximum (121.6% of salary) with a face value of £749,210 and £566,773 for the CEO and former CFO respectively. If the FY21 Group underlying profit (£150.0m) is not achieved in FY24, a minimum of 50% of the award will lapse. The contingent share award for the FY22 DSP will be granted in June 2022. The Committee estimates that 159,198 contingent shares will be awarded to Steve Wadey, 49,299 to Carol Borg and 19,761 to David Smith (both the latter awards pro-rata for length of service). This is calculated based on awards of 75.3% of salary and a share price of 302.1p (30-day average to 31 March 2022). As part of the package approved by the Remuneration Committee for Carol Borg at recruitment, it was agreed that she would receive a share award in part compensation for share awards which were forfeited on resigning from her former employer. On 5 January 2022 Carol was granted an award over 193,199 shares which will vest in 3 years. The QinetiQ share price used was the average closing price over the 30 days prior to the award with a value at grant of £500,000. The award was structured as a conditional award granted under a one-off arrangement and will lapse in the event of Carol’s cessation of service ahead of the award’s vesting date, save for good leaver treatment. The award is limited to settlement with existing shares sourced from the company’s employee benefit trust (no new issue or treasury shares will be used in relation to the award). Exceptionally, the award may be cash settled but there is no intention to do so. The award includes a dividend equivalent entitlement by reference to the value of dividends with record dates arising during the vesting period. Market standard terms apply in respect of scope for the company to make appropriate adjustments to the award in the event of a variation of share capital or in the event of demerger, payment of special dividend or similar event materially affecting the price of shares. Best practice malus and clawback terms apply. The award is not pensionable. The award was granted under Listing Rule 9.4.2(2) to implement terms agreed to facilitate Carol’s recruitment as an Executive Director; the unusual nature of the awards forfeited meant that they could not be replicated by the QinetiQ DSP. No advantageous amendment to the terms of the award (except for minor administrative changes) will be made without prior shareholder approval in general meeting. The average 3-month market share price to 31 March 2022 of the FY19 DSP was 280.4p, leading to an estimated loss of £57,501 and £39,912 for the CEO and former CFO respectively based on share price depreciation of the shares due to vest on 28 June 2022. There have been no other changes to the interests shown above between 31 March 2022 and 20 May 2022. Payments to past Directors and payment for loss of office No payments were made to past Directors during the year and no payments were made for loss of office during the year. | | QinetiQ Group plc Annual Report & Accounts 2022 | 129 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Directors’ ## remuneration ## report ## continued Audited information continued CFO succession David Smith retired from the role of CFO effective 30 November 2021, succeeded by Carol Borg effective 1 December 2021 having joined the company as CFO Designate on 11 October 2021 to enable a smooth transition of responsibilities. Carol Borg was appointed on a base salary of £420,000. Her appointment terms also included a grant of restricted stock with a value of £500,000, deemed to be less than the value of long-term incentives forfeited on resigning, and a cash payment for annual bonus lost with her former employer for the 2021 financial year, capped at £100,000. David Smith received his normal remuneration until retirement with no payment for loss of office. On 1 December 2021 David entered into a Friend of QinetiQ agreement with the company which is a contract for occasional consultancy which the company provides to selected former employees to retain their expertise and skills on an ‘as needed’ basis. The agreement with David provides no guarantee of future work and has no impact on the treatment of his incentives. The Remuneration Committee determined that Good Leaver status be provided to David as regards BBP and DSP participation including - a) FY22 BBP paid on a pro-rata basis, subject to performance, in cash in June 2022 with no deferred element. b) FY22 Cycle 3 account balance released as cash in June 2022 based on the notional share price averaged over March 2022. c) FY19 and FY21 DSP awards will be preserved on a pro-rata basis and will remain available to vest subject to the achievement of the performance underpins. d) The FY22 DSP will be awarded on a pro-rata basis in June 2022, vesting on June 2025, subject to the achievement of the performance underpin. David will be required to maintain a shareholding in line with the Directors’ Remuneration Policy. ### Performance review The ten-year and three-year charts show the company’s Total Shareholder Return over the period from 31 March 2012 to 31 March 2022 and 31 March 2019 to 31 March 2022 compared with the FTSE 250 (excluding investment trusts) over the same period based on spot values. The Committee has chosen to demonstrate the company’s performance against this index as it is the index in which the company is listed. | Ten-year comparator chart | | | | | | | | | | | | | Three-year comparator chart | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | 300 | | | | | | | | | | | | | 120 | | | | | | | 250 | | | | | | | | | | | | | 110 | | | | | | | 200 | | | | | | | | | | | | | 100 | | | | | | | 150 | | | | | | | | | | | | | 90 | | | | | | | 100 | | | | | | | | | | | | | 80 | | | | | | made on 31 March 2010 | | | | | | | | | | | | | made on 31 March 2017 | | | | | | TSR – Value of a 100 unit investment | | 50 | | | | | | | | | | | TSR – Value of a 100 unit investment | | 70 | | | | | | | 0 | | | | | | | | | | | | | 60 | | | | | | | 31/03/2012 | 31/03/2013 | 31/03/2014 | 31/03/2015 | 31/03/2016 | 31/03/2017 | 31/03/2018 | 31/03/2019 | 31/03/2020 | 31/03/2021 | 31/03/2022 | | | 31/03/2019 | 31/03/2020 | 31/03/2021 | 31/03/2022 | | | QinetiQ | | QinetiQ | | --- | --- | --- | --- | | | FTSE 250 (excluding investment trusts) | | FTSE 250 (excluding investment trusts) | | Source: Datastream (Thomson Reuters) | | Source: Datastream (Thomson Reuters) | | ### 130 QinetiQ Group plc Annual Report & Accounts 2022 ### CEO remuneration The table below shows the CEO’s remuneration over the same performance period as the Total Shareholder Return chart (31 March 2012 to 31 March 2022): Long-term incentives Annual bonus (% of maximum Year ended 31 March CEO Salary/fees Single figure (% of maximum) vesting) 2022 Steve Wadey 639,121 2,477,069 71.4% 100.0% 2021 Steve Wadey 511,550 2,695,414 95.7% 100.0% 2020 Steve Wadey 610,357 1,978,247 87.5% 38.4% 2019 Steve Wadey 596,422 2,339,474 94.4% 31.7% 2018 Steve Wadey 582,167 1,522,460 66.7% – 2017 (restated) Steve Wadey 568,166 1,829,470 86.4% – 2016 Steve Wadey 520,219 1,654,546 85.4% – 2016 David Mellors 455,885 1,423,382 82.9% – 2015 David Mellors 501,227 1,725,960 88.6% 13.9% 2015 Leo Quinn 469,776 673,979 – – 2014 Leo Quinn 610,844 2,17 7,742 7 7.0% 15.4% 2013 Leo Quinn 593,050 3,992,001 100.0% 40.3% ### CEO pay ratio The calculation below is based on the FY22 single figure for the CEO of £2,477,069 and similar calculations for the UK workforce (i.e. ‘Option A’ as defined by the Companies (Miscellaneous Reporting) Regulations 2018). The Remuneration Committee chose Option A as it is the approach generally favoured by investors and GC100. The calculations for the UK workforce were performed as at 31 March 2022. Total remuneration Ratio of the CEO’s pay to UK employees Year 25th percentile Median 75th percentile FY22 67 : 1 49 : 1 37 : 1 FY21 70 : 1 52 : 1 39 : 1 FY20 56 : 1 41 : 1 31 : 1 The CEO pay ratios have reduced between FY21 and FY22. The primary reason for this is the lower CEO single figure for FY22 due to the lower BBP outturn. Year on year movements in the CEO pay ratio are likely to be volatile due to the wide range of incentive outcomes for the CEO single figure, but the Remuneration Committee does note the ratio and will monitor long-term trends. Total pay of UK employees £ 25th percentile Median 75th percentile Total pay and benefits £37,28 6 £50,831 £66,297 Salary component £34,196 £44,910 £61,740 The Remuneration Committee welcomes the opportunity to provide this information to shareholders. The company aims to reward all employees fairly for the success and growth they create, hence the inception of the All Employee Incentive Scheme in FY19 which paid a discretionary amount of £500 to all eligible employees for performance delivered in FY22 even though the profit target was not met. | | QinetiQ Group plc Annual Report & Accounts 2022 | 131 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Directors' remuneration report continued ## Remuneration policy for all employees All employees of QinetiQ are entitled to base salary, benefits and pension. UK and Australia-based employees are entitled to participate in the QinetiQ Share Incentive Plan. The maximum incentive opportunity available is based on the seniority and responsibility of the role. Participation in the DSP is available to Executive Directors, senior leaders and selected employees throughout the organisation. In FY19 the company introduced an All Employee Incentive Scheme (AEIS) whereby every employee has the opportunity to earn a cash bonus based on company and personal performance. For FY22 the company element of the AEIS was paid at a discretionary level of £500 as the profit target was not met. The AEIS will be operated again in FY23 and thereafter. The Committee reviews (but does not decide) the general reward policy for all employees and any significant changes proposed. Alignment with the workforce is delivered through the Rewarding for Performance framework, including a transparent and consistent approach to the annual salary review, the AEIS to drive company and personal performance, recognition schemes and market competitive benefits in our countries. For FY23 the company has agreed significant investment in the employee offering across the Group. ### Audited information #### Single figure total remuneration for the Chairman and each Non-executive Director Non-executive Directors' remuneration is shown as a single figure to provide an annual comparison between the remuneration awarded during the financial year ended 31 March 2022 and the preceding year. Amounts in brackets were waived in FY21. | Non-executive Director | Salary/fees £'000 | | Benefits £'000 | | Committee Chair fees £'000 | | US/UK attendance fee £'000 | | Single figure £'000 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | | Lynn Brubaker | 54 | 46 (7) | 5 | 2 | – | – | 6 | 3 | 65 | 51 | | Admiral Sir James Burnell-Nugent (Resigned 31 December 2020) | – | 33 (7) | – | – | – | 6 (1) | – | – | – | 39 | | Michael Harper | 54 | 46 (7) | 1 | – | 10 | 9 (1) | – | – | 65 | 55 | | Shonaid Jemmett-Page (Appointed 19 May 2020) | 54 | 41 (3) | 1 | – | 12 | 7 (1) | – | – | 67 | 48 | | Neil Johnson | 250 | 219 (31) | 3 | – | – | – | – | – | 253 | 219 | | Ian Mason (Resigned 26 April 2021) | 4 | 46 (7) | – | – | – | – | – | – | 4 | 46 | | General Sir Gordon Messenger (Appointed 12 October 2020) | 54 | 25 | 1 | – | 14 | – | – | – | 69 | 25 | | Paul Murray (Resigned 14 July 2020) | – | 17 (5) | – | – | – | 2 (1) | – | – | – | 19 | | Lawrence Prior III (Appointed 2 August 2021) | 36 | – | 2 | – | 7 | – | 3 | – | 48 | – | | Susan Searle | 54 | 46 (7) | 1 | – | 12 | 9 (1) | – | – | 67 | 55 | Benefits include travel and subsistence expenses incurred in relation to the execution of their duties with the company that are considered by HMRC to be taxable. The Committee Chair fee paid to General Sir Gordon Messenger in FY22 includes a true-up of £2,000 of unpaid Committee Chair fees for FY21 due to an administrative error by the company. Lynn Brubaker and Larry Prior are US residents and are entitled to receive a $4,000 fee for attending UK meetings. UK-based Non-executive Directors are entitled to receive a £2,500 fee for attending US meetings. The Committee Chair fees figure for Michael Harper is a payment of £10,000 as Senior Independent Director, and that for Larry Prior is a payment of £10,000 as the senior US Non-executive director. 132 QinetiQ Group plc Annual Report & Accounts 2022 ### Percentage change in Directors’ remuneration The following table compares the percentage change in each of the Director’s salary/fees, bonus and benefits to the average percentage change in salary, bonus and benefits for a comparison group (4,000 employees) in the UK business in service between 1 April 2021 and 31 March 2022. The analysis only includes Directors who served for the whole of FY22 and FY21 and is impacted by the temporary salary/fee sacrifice in FY21. % change between FY22 and FY21 % change between FY21 and FY20 Salary/fees Benefits Annual bonus Salary/fees Benefits Annual bonus Steve Wadey 24.9% -4.3% -22.7% -16.2% 35.9% 10.3% David Smith – – – -15.2% 0% 11.1% Carol Borg – – – – – – Neil Johnson 14.3% 100% – 17.1% -100% – Michael Harper 18.4% 100% – -15.9% 0% – Susan Searle 21.2% 100% – -6.8% -100% – Ian Mason – – – -9.8% -100% – General Sir Gordon Messenger – – – – – – Lawrence Prior III – – – – – – Shonaid Jemmett-Page – – – – – – Lynn Brubaker 33.0% 127.5% – -35.5% -7 7.8% – Average UK employee 2.9% 10.9% -38.2% 1.2% -1.2% 62.2% 1 UK employees were chosen in order to avoid the impact of exchange rate movements over the year. QinetiQ Group plc has no employees so QinetiQ Group Ltd employees were used. The reduction in salary and fees which the Board implemented as a waiver for six months in FY21 impacted the analysis above, as did the reduced travel and physical meeting attendance as the benefits paid to Non-executive Directors are largely travel and subsistence expenses incurred in relation to the execution of their duties with the company that are considered by HMRC to be taxable. ### Relative importance of spend on pay The graph below shows actual spend on all employee remuneration, shareholder dividends and buy-backs and any other significant use of profit and cash within the previous two financial years. ### Total employee remuneration 2022 £464.8.m ## -1.8% 2021 £473.5m DIFFERENCE | Share-based profit distribution | Other significant profit distribution | | --- | --- | | Dividend cash payment plus purchase of own shares | There were no other significant profit distributions in | | (see page 151). | 2021 or 2022. | 2022 £41.0m ## -12.2% 2021 £46.7m DIFFERENCE | | QinetiQ Group plc Annual Report & Accounts 2022 | 133 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Directors' remuneration report continued ## Gender related pay QinetiQ is subject to gender pay reporting for UK employees and a copy of our latest report is available on the company's website. ## Service contracts/letters of appointment The company's policy is that Executive Directors have rolling contracts which are terminable by either party giving 12 months' notice. The Group Chairman and the Non-executive Directors do not have service contracts but are appointed under letters of appointment. All service contracts and letters of appointment are available for viewing at the company's registered office and at the AGM. Non-executive Directors typically serve two three-year terms but may be invited by the Board to serve for an additional period (see table in the Nominations Committee report on page 100). | Director | Date appointed | Arrangement | Notice period | | --- | --- | --- | --- | | Lynn Brubaker | 27 January 2016 | Initial term of three years from date of appointment, subject to annual reappointment at the AGM. | – | | Michael Harper | 22 November 2011 | Initial term of three years from date of appointment, subject to annual reappointment at the AGM. | – | | Shonaid Jemmett-Page | 19 May 2020 | Initial term of three years from date of appointment, subject to annual reappointment at the AGM. | – | | Neil Johnson | 02 April 2019 | Initial term of three years from date of appointment, subject to annual reappointment at the AGM. | – | | General Sir Gordon Messenger | 12 October 2020 | Initial term of three years from date of appointment, subject to annual reappointment at the AGM. | – | | Lawrence Prior III | 2 August 2021 | Initial term of three years from date of appointment, subject to annual reappointment at the AGM. | – | | Susan Searle | 14 March 2014 | Initial term of three years from date of appointment, subject to annual reappointment at the AGM. | – | | Carol Borg | 11 October 2021 | Service contract | 12 months | | Steve Wadey | 27 April 2015 | Service contract | 12 months | ## Implementation of Policy for the year ended 31 March 2022 ### Fees Non-executive Directors' fees were reviewed effective 1 July 2021, the last increase being in July 2019, and are now as follows – - Basic fee £55,000 (previously £52,000) - Committee Chair fee £12,000 (previously £10,000) - Senior Independent Director fee £10,000 (no change) The Non-executive Group Chairman receives a fee of £250,000 per annum which has not been adjusted since appointment. Fees are reviewed in line with Policy. In FY21 a voluntary fee waiver was implemented for six months as detailed on page 132. Executive Directors are permitted to accept one external Non-executive Director position with the Board's approval. Any fees received in respect of these appointments may be retained by the Executive Director. The CEO and CFO do not hold any Non-executive Directorships in other companies. | | Fees effective 1 July 2021 £ | | --- | --- | | Group Chairman | 250,000 | | Basic fee for UK Non-executive Director | 55,000 | | Additional fee for chairing a Committee | 12,000 | | Additional fee to Deputy Chairman/Senior Independent Non-executive Director | 10,000 | | Additional fee for attendance at a Board meeting held in US by UK resident Non-executive Director | 2,500 | | Additional fee for attendance at a Board meeting held in UK by US resident Non-executive Director | $4,000 | 134 QinetiQ Group plc Annual Report & Accounts 2022 ### Implementation of Policy for the year ending 31 March 2023 At the 11 May 2022 meeting of the Remuneration Committee, base salary increases of 3.6% (to £670,000p.a.) and 3.6% (to £435,000p.a.) were approved for the CEO and CFO respectively, effective 1 July 2022. Both salary reviews are aligned with the Rewarding for Performance guidance used for all UK employees which included a 4.0% budget for the July 2022 salary review. Incentives for Executives The table below shows the measures and relative weighting for the Bonus Banking Plan for the CEO and CFO: Performance measure (excluding FY23 acquisitions) Relative weighting(%) Bonus Banking Plan Underlying operating profit 25.0% Target performance 100% of base salary Underlying net cash flow from operations 20.0% Stretch performance 200% of base salary Orders 25.0% Common, ESG and Personal goals 30.0% For FY23 the Remuneration Committee agreed to reduce the weighting of Bonus Banking Plan financial metrics to 70% (previously 75%) by reducing the cash metric to 20% (previously 25%). This enables an increased focus on ESG goals as part of the non-financial metrics with a 30% weighting (previously 25%). For FY23, the Remuneration Committee set the target level of performance at 50% of stretch for the financial measures, collective and personal goals. Details of specific performance targets for the Bonus Banking Plan have not been provided as they are deemed commercially sensitive. The targets will be disclosed retrospectively in next year’s Annual Report on Remuneration. The Deferred Share Plan will award a maximum of 125% of base salary for achieving stretch performance. For FY23 the strategic growth performance measure is revenue growth (excluding in-year acquisitions) across the Group to incentivise our senior leaders globally to collaborate across the Group to deliver sustainable profitable growth, as per FY22. There will be a pre-grant margin underpin to ensure that profit performance remains strong in FY23. Performance metrics have been set for FY23 based on the ISBP FY23. At the end of the year the Committee will look back at the impact on shareholders and the performance of comparators and, if appropriate, will apply discretion. It is important that the rewards overall to executives are balanced and fair in the context of the shareholder journey. The FY23 DSP award will be subject to a performance underpin before vesting: • Group underlying profit out-turn for FY23 must be maintained at the end of the three-year vesting period. If this is not maintained then, at a minimum, 50% of the award will lapse. For the purposes of the FY23 DSP award, this will be the actual underlying operating profit (£m) for FY23 which must be achieved in FY26. Awards of contingent shares will be made in June 2023 based on FY23 performance. Details of performance targets for the Deferred Share Plan have not been provided as they are deemed commercially sensitive. They will be disclosed retrospectively in next year’s Annual Report on Remuneration. | | QinetiQ Group plc Annual Report & Accounts 2022 | 135 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Directors' remuneration report continued ## Remuneration Committee meetings, activities and decisions FY22 The following table provides a summary of all the key activities during the year. The attendance at each meeting is detailed on page 90. The membership of the Remuneration Committee in FY22 was Susan Searle (Chair), Michael Harper, Neil Johnson, Lynn Brubaker, Ian Mason (resigned 26 April 2021), General Sir Gordon Messenger, Shonaid Jemmett-Page and Lawrence Prior III (joined 2 August 2021). | Base salary | Incentives | Share awards | Governance | Salaries and Resourcing | | --- | --- | --- | --- | --- | | May 2021 | Review of FY21 Company performance and final results for BBP and DSP | Approval of FY18 DSP Performance underpin and vesting FY21 DSP awards | Market update Approve Directors' Remuneration Report. | GLT base salary reviews | | July 2021 | | | AGM preparation | CFO succession | | November 2021 | FY22 half-year forecast | | Market update Review of GLT shareholdings Review of company reward practices Review of Terms of Reference | Terms of a GLT-level appointment | | January 2022 | 'Blue Sky' session in preparation for the 2023 AGM Directors' Remuneration Policy vote | | | | | March 2022 | FY22 provisional results FY23 target setting | FY19 DSP provisional vesting | 2023 Directors' Remuneration Policy vote | | ## Remuneration Committee effectiveness review In 2022 the effectiveness review was conducted by The Effective Board LLP. This process is described further on page 80. ### Remuneration consultants The Committee appointed FIT Remuneration Consultants LLP, an independent firm of remuneration consultants, to provide advice on market practice, corporate governance and investors' views. FIT were appointed by the Committee in 2017 after a competitive tendering exercise. Fees paid during the year for services provided were £55,000 determined on a fixed-fee annual retainer basis, with fees agreed in advance for out-of-scope work, if any. FIT provided no additional services to the company during the year and the Committee is satisfied that the advice received is independent and objective. #### Statement of voting ##### Annual Report on Remuneration – 2021 | Votes for | 436,288,423 (93.6%) | | --- | --- | | Votes against | 29,698,657 (6.4%) | | Total votes cast | 465,987,080 (80.5% of share capital) | | Abstained | 10,345,055 | ##### Directors' Remuneration Policy – 2020 | Votes for | 393,525,108 (87.0%) | | --- | --- | | Votes against | 59,006,721 (13.0%) | | Total votes cast | 452,570,726 (79.7% of share capital) | | Abstained | 19,408,696 | Details on the voting on all resolutions at the 2022 AGM will be announced via the RNS and posted on the QinetiQ website after the AGM. #### Susan Searle Remuneration Committee Chair 20 May 2022 ## Directors' Remuneration Report 2021 % of votes (%) ![img-5.jpeg](img-5.jpeg) ## Directors' Remuneration Policy 2020 % of votes (%) ![img-6.jpeg](img-6.jpeg) Votes for Votes against 136 QinetiQ Group plc Annual Report & Accounts 2022 ## Directors’ ## Report ### Statutory information contained Research and development ### elsewhere in the Annual Report One of the Group’s principal business streams is the provision of funded research and development (R&D) for customers. Information required to be part of this Directors’ report can be The Group also invests in the commercialisation of promising found elsewhere in the Annual Report as indicated in the table technologies across all areas of business. below, and is incorporated into this report by reference: In the financial year, the Group recorded £302.1m (FY21: Information Page £300.4m) of total R&D-related expenditure, of which £287.5m (FY21: £281.9m) was customer-funded work and £14.6m (FY21: Corporate governance statement 78 £18.5m) was internally funded. Additionally, £3.4m (FY21: £2.6m) Directors’ details 82 – 84 of late-stage development costs were capitalised and £2.1m Directors’ conflicts of interest 99 (FY21: £2.4m) of capitalised development costs were amortised Directors’ interests in shares 128 in the year. Employees 54 – 59 Stakeholder engagement statement 92 ### Political donations Financial instruments: Information on the Group’s 174 financial risk management objectives and policies, QinetiQ does not make political donations to parties as that term and its exposure to credit risk, liquidity risk, interest would be commonly recognised. These may include legitimate rate risk and foreign currency risk interactions in making MPs and others in the political world aware of key industry issues and matters that affect QinetiQ, Greenhouse gas emissions 46 – 49 and that make an important contribution to their understanding Likely future developments in the business 1 – 75 of QinetiQ, the markets in which it operates and the work of of the company or its subsidiaries their constituents. Results 36 – 39 ### Disclosure specifically required pursuant to the Companies Branches (Miscellaneous Reporting) Regulations 2018 can be found The company and its subsidiaries have established branches on the following pages: in a number of different countries; their results are, however, not material to the Group’s financial results. Statement in the Directors’ Report summarising how 138 Directors have engaged with employees and taken ### Share capital account of their interests As at 31 March 2022, the company had an allotted and fully paid Statement in the Directors’ Report about the corporate 138 up share capital of 578,757,121 ordinary shares of 1p each with governance arrangements applied by the company an aggregate nominal value of £5.8m and one Special Share with Publication of the ratio of the CEO’s remuneration to the 131 a nominal value of £1. The ordinary share total includes 4,912,585 median, 25th and 75th quartile pay remuneration of their shares held by employee share trusts. UK employees in the Directors’ Remuneration report Illustration of the effect of future share price 123 Details of the shares in issue during the financial year are shown increases on executive pay outcomes in the in note 29 on page 182. Directors’ Remuneration report ### Rights of ordinary shareholders ### Management report The holders of ordinary shares are entitled to receive the The Strategic report on pages 1 to 75 and the Directors’ report, company’s Reports and Accounts, to attend and speak at as detailed on pages 137 to 140, including information which has general meetings of the company, to exercise voting rights been incorporated into those sections by reference, comprise the in person or by appointing a proxy, and to receive a dividend management report specified by rules 4.1.5R (2) and 4.1.8R of where declared or paid out of profits available for that purpose. the FCA’s Disclosure Guidance and Transparency Rules (DTRs). | | QinetiQ Group plc Annual Report & Accounts 2022 | 137 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Directors' Report continued ## Rights of special shareholder The Special Share is held by HM Government through the Secretary of State for Defence (the Special Shareholder) and it may only be held by and transferred to HM Government. It confers certain rights to protect UK defence and security interests. These include: - The promotion and reinforcement of the MOD compliance principles which require QinetiQ to be an impartial, ethical and responsible contractor by avoiding conflicts of interest in its dealings with the MOD - The protection of defined strategic assets of the Group, such as certain testing facilities, by providing the Special Shareholder with an option to purchase those assets in certain circumstances - The right to require certain persons with a material interest in QinetiQ to dispose of some or all of their ordinary shares on the grounds of national security or conflict of interest - A provisions whereby at least the Non-executive Chairman or Chief Executive Officer must be a British citizen. The Special Share carries no financial and economic value and the Special Shareholder is not entitled to vote at a general meeting of the company. At any time the Special Shareholder may require QinetiQ to redeem the share at par and, if wound up, the Special Shareholder would be entitled to be repaid at its nominal value before other shareholders. Any variation of the rights attached to the Special Share requires the written approval of the MOD. Further details can be found in note 29 on page 182. ## Restrictions on the transfer of shares As detailed above, the special share requires certain persons with an interest in QinetiQ's shares that exceed certain prescribed thresholds to dispose of some or all of their ordinary shares on the grounds of national security or conflict of interest. ## Employee share schemes The QinetiQ Group plc Employee Benefit Trust (the Trust) holds shares in connection with QinetiQ's employee share schemes, excluding the Share Incentive Plan. As at 31 March 2022, the Trust held 4,912,585 ordinary shares of 1p each (the Trust Shares). The Trustees of the Trust have agreed to waive their entitlement to dividends payable on the Trust Shares. The Trust holds further ordinary shares in respect of deferred shares held on behalf of participants in the company's Deferred Annual Bonus Plan. Dividends received by the Trust in respect of the deferred shares are paid direct to the Plan participants on receipt and are not retained in the Trust. Equiniti Share Plan Trustees Limited acts as Trustee in respect of all ordinary shares held by employees under the QinetiQ Group plc Share Incentive Plan (the Plan). Equiniti Share Plan Trustees Limited will vote on all resolutions proposed at general meetings in accordance with voting instructions received from participants in the Plan. ## Corporate sponsored nominee In circumstances where ordinary shares are held by the corporate sponsored nominee service, Equiniti Corporate Nominees Limited will vote on all resolutions proposed at general meetings in accordance with voting instructions received from shareholders using such corporate nominee service. ## Major shareholdings In accordance with DTR 5, the company has been notified of the following from holders representing 3% or more of the issued ordinary share capital of the company. The below table has been adjusted to reflect notifications received under Section 793 of the 2006 Companies Act on 29 April 2022, that the following companies no longer meet the 3% threshold requirement under DTR5: Silchester International Investors LLP, Ninety One UK Ltd (formerly Investec), Ruane Cunniff & Goldfarb, abrdn plc (formerly Standard Life Aberdeen plc) and Norges Bank. | | At 31 March 2022 | At 12 May 2022 | | --- | --- | --- | | Name of shareholder | % w issued share capital* | % of issued share capital* | | Schroders | 9.82% | 9.98% | | BlackRock, Inc. | 7.73% | 7.66% | | GLG Partners LP | 5.66% | 5.79% | | Liontrust Asset Management PLC | 3.93% | 3.93% | * As notified by the shareholder and based on the issued ordinary share capital at the time of the notification. ## Employees The Group is committed to the fair treatment of people with disabilities in relation to applications, training, promotion and career development. If an existing employee becomes disabled, the company makes every effort to enable them to continue their employment and career development, and to arrange appropriate training, wherever practical. ## Directors' interests in contracts At the date of this report, there is no contract or arrangement with the company or any of its subsidiaries that is significant in relation to the business of the Group as a whole in which a Director of the company is materially interested. ## Indemnities The company has entered into indemnity deeds with all its current Directors containing qualifying indemnity provisions, as defined in Section 234 of the Companies Act 2006, under which the company has agreed to indemnify each Director in respect of certain liabilities, which may be attached to them as Directors or as former Directors of the company or any of its subsidiaries. The qualifying third party indemnity was in force during the financial year and also at the date of approval of the financial statements. The Directors of QinetiQ Pension Scheme Trustee Limited, a Group company and the Trustee of the QinetiQ Pension Scheme (the Scheme), benefit from an indemnity contained in the rules of the Scheme. The indemnity would be provided out of the Scheme assets. 138 QinetiQ Group plc Annual Report & Accounts 2022 ### Change of control – significant agreements Appointment and replacement of Directors The following significant agreements contain provisions entitling According to the Articles of Association, all Directors are subject the counterparties to require prior approval, exercise termination, to election by shareholders at the first AGM following their alteration or other similar rights in the event of a change of appointment, and to re-election thereafter at intervals of no more control of the company, or if the company ceases to be a than three years. In line with best practice reflected in the Code, UK company: however, the company requires each serving member of the Board to be put forward for election or re-election on an annual • The Combined Aerial Target Service contract is a 20-year basis at each AGM. contract awarded to QinetiQ by the MOD on 14 December 2006. The terms of this contract require QinetiQ Limited to ### Powers of the Directors: allotment/purchase remain a UK company which is incorporated under the laws ### of any part of the UK, or an overseas company registered of own shares in the UK, and that at least 50% of the Board of Directors At the company’s AGM held in July 2021, the shareholders are UK nationals. The terms also contain change of control passed resolutions which authorised the Directors to allot relevant conditions and restricted share transfer conditions which securities up to an aggregate nominal value of £3,857,994 require prior approval from HM Government if there is a (£1,928,997 pursuant only to a rights issue), to disapply pre- material change in the ownership of QinetiQ Limited’s share emption rights (up to 5% of the issued ordinary share capital) capital, unless the change relates to shares listed on a and to purchase ordinary shares (up to 10% of the issued regulated market; “material” is defined as being 10% or more ordinary share capital). The authorities will remain valid until the of the share capital. In addition, there are restrictions on 2022 AGM. transfers of shares to persons from countries appearing on the restricted list as issued by HM Government. Resolutions in respect of the allotment of relevant securities, • The Long Term Partnering Agreement (LTPA) is a 25-year the disapplication of pre-exemption rights and the purchase contract, which QinetiQ Limited signed on 28 February 2003, of own shares will be laid before the 2022 AGM. to provide test, evaluation and training services to the MOD. This contract contains conditions under which the prior ### Annual General Meeting approval of HM Government is required if the contractor, The company’s AGM will be held on Thursday 21 July 2022 at QinetiQ Limited, ceases to be a subsidiary of the QinetiQ 11:00am at the office of Ashurst LLP, London Fruit and Wool Group, except where such change in control is permitted Exchange, Duval Square, London E1 6PW. under the Shareholders Agreement to which the MOD is a party. ### • The company is party to a £275m multi-currency revolving Independent auditor credit facility, provided by a consortium of banks, of which PwC has expressed its willingness to continue in office as £65m will mature on 27 September 2024 and £210m will independent auditor and a resolution to re-appoint them will mature on 27 September 2025. Under the terms of the facility, be proposed at the AGM. in the event of a change of control of the company, any lender may give notice to cancel its commitment under the facility ### and require all outstanding amounts to be repaid. Statement of Directors’ responsibilities in ### respect of the financial statements The Directors’ contracts contain no provisions for compensation The Directors are responsible for preparing the Annual Report for loss of office on a change of control of the company. and the Financial Statements in accordance with applicable law and regulation. ### Disclosures in accordance with Listing Rule Company law requires the Directors to prepare financial ### 9.8.4 statements for each financial year. Under that law the Directors There are no matters requiring disclosure under the FCA’s Listing have prepared the Group financial statements in accordance Rule 9.8.4, other than details of long-term incentive schemes, with International Accounting Standards in conformity with the which are explained further on page 119. requirements of the Companies Act 2006 and the company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom ### Articles of Association Accounting Standards, comprising FRS 101 “Reduced Disclosure Changes to the Articles must be submitted to shareholders for Framework”, and applicable law). Additionally, the Financial approval. Save in respect of the rights attaching to the Special Conduct Authority’s Disclosure Guidance and Transparency Rules Share, the company has not adopted any special rules relating to require the Directors to prepare the Group Financial Statements in the appointment and replacement of Directors or the amendment accordance with UK-adopted International Accounting Standards. of the company’s Articles of Association, other than as provided under UK corporate law. | | QinetiQ Group plc Annual Report & Accounts 2022 | 139 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Directors’ ## Report continued Under company law, Directors must not approve the Financial ### Directors’ confirmations Statements unless they are satisfied that they give a true and Each of the Directors, whose names and functions are listed on fair view of the state of affairs of the Group and Company and pages 82 and 84 confirm that, to the best of their knowledge: of the profit or loss of the Group for that period. In preparing the financial statements, the Directors are required to: • The Group financial statements, which have been prepared in accordance with international accounting standards in • Select suitable accounting policies and then apply conformity with the requirements of the Companies Act them consistently 2006 and international financial reporting standards adopted • State whether applicable international accounting standards pursuant to UK-adopted International Accounting Standards, in conformity with the requirements of the Companies Act give a true and fair view of the assets, liabilities, financial 2006 and UK-adopted International Accounting Standards position and profit of the Group have been followed for the Group financial statements and • The Company Financial Statements, which have been United Kingdom Accounting Standards, comprising FRS 101 prepared in accordance with United Kingdom Accounting have been followed for the company financial statements, Standards, comprising FRS 101, give a true and fair view subject to any material departures disclosed and explained of the assets, liabilities, financial position and profit of in the financial statements the company • Make judgements and accounting estimates that are • The Going concern statement on page 71 includes a fair reasonable and prudent review of the development and performance of the business • Prepare the financial statements on the going concern and the position of the Group and company, together with basis unless it is inappropriate to presume that the a description of the principal risks and uncertainties that Group and company will continue in business it faces The Directors are also responsible for safeguarding the assets of In the case of each Director in office at the date the Directors’ the Group and company and hence for taking reasonable steps report is approved. for the prevention and detection of fraud and other irregularities. ### The Directors are responsible for keeping adequate accounting Scope of the reporting in this Annual Report records that are sufficient to show and explain the Group’s and The Board has prepared a Strategic report which provides an company’s transactions and disclose with reasonable accuracy overview of the development and performance of the Group’s at any time the financial position of the Group and company business in the year ended 31 March 2022. and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the For the purposes of DTR 4.1.5R(2) and DTR 4.1.8 the Directors’ Companies Act 2006. report, the Directors confirm that, so far as they are aware, there is no relevant audit information of which the company’s auditor The Directors are responsible for the maintenance and integrity is unaware, and that they have taken all steps that they ought of the company’s website. Legislation in the United Kingdom to have taken as Directors to make themselves aware of any governing the preparation and dissemination of financial relevant audit information and to establish that the company’s statements may differ from legislation in other jurisdictions. auditor is aware of that information. By order of the Board. Jon Messent Company Secretary and Group General Counsel 20 May 2022 ### 140 QinetiQ Group plc Annual Report & Accounts 2022 ## Auditors’ ## Report • We performed a full scope financial statement line item audit ### Opinion over inventory balances at Foster-Miller Inc. (Technology In our opinion: Solutions) and QinetiQ Target Systems Limited to provide sufficient overall Group coverage. • QinetiQ Group plc’s Group financial statements and Company financial statements (the “financial statements”) give a • Additionally in Technology Solutions, we performed full true and fair view of the state of the Group’s and of the scope financial statement line item audits over revenue and Company’s affairs as at 31 March 2022 and of the Group’s associated balances. profit and the Group’s cash flows for the year then ended; • We performed procedures over goodwill, intangible assets, • the Group financial statements have been properly share-based payments, pensions, IFRS 16 lease accounting, prepared in accordance with UK-adopted international taxation and testing of the consolidation at a Group level. accounting standards; Key audit matters • the Company financial statements have been properly prepared in accordance with United Kingdom Generally • Long-term contract accounting (Group). Accepted Accounting Practice (United Kingdom Accounting • Impairment of goodwill and acquired intangibles (Group). Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and • Accounting for tax research and development expenditure credits (Group). • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. • Impairment of investments in subsidiary undertakings (Parent). We have audited the financial statements, included within the Annual Report, which comprise: the Consolidated and Company balance Materiality sheet as at 31 March 2022; the Consolidated income statement, the • Overall Group materiality: £6,650,000 (2021: £6,400,000) Consolidated comprehensive income statement, the Consolidated based on approximately 5% of underlying profit before tax. cash flow statement, and the Consolidated and Company statement of changes in equity for the year then ended; and the notes to the • Overall Company materiality: £5,000,000 (2021: £5,000,000) financial statements, which include a description of the significant based on approximately 1% of total assets. accounting policies. • Performance materiality: £5,000,000 (2021: £4,800,000) (Group) and £3,750,000 (2021: £3,750,000) (Company). Our opinion is consistent with our reporting to the Audit Committee. The scope of our audit ### Basis for opinion As part of designing our audit, we determined materiality and We conducted our audit in accordance with International assessed the risks of material misstatement in the financial Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our statements. responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of Key audit matters our report. We believe that the audit evidence we have obtained is Key audit matters are those matters that, in the auditors’ sufficient and appropriate to provide a basis for our opinion. professional judgement, were of most significance in the audit of the financial statements of the current period and include Independence the most significant assessed risks of material misstatement We remained independent of the Group in accordance with the (whether or not due to fraud) identified by the auditors, including ethical requirements that are relevant to our audit of the financial those which had the greatest effect on: the overall audit strategy; statements in the UK, which includes the FRC’s Ethical Standard, as the allocation of resources in the audit; and directing the efforts applicable to listed public interest entities, and we have fulfilled our of the engagement team. These matters, and any comments we other ethical responsibilities in accordance with these requirements. make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, To the best of our knowledge and belief, we declare that non-audit and in forming our opinion thereon, and we do not provide a services prohibited by the FRC’s Ethical Standard were not provided. separate opinion on these matters. Other than those disclosed in note 8, we have provided no non-audit This is not a complete list of all risks identified by our audit. services to the Company or its controlled undertakings in the period under audit. Provisions and contingent liabilities (Group) and the impact of COVID-19 (Group and parent), which were key audit matters last year, are no longer included because of a reduction in the ### Our audit approach level of estimation involved in the accounting for provisions and Overview contingent liabilities and the limited impact from the pandemic on the operations and financial results of the Group and Company. Audit scope Otherwise, the key audit matters below are consistent with last year. • We conducted full scope audit work in the UK over QinetiQ Limited, in the US over QinetiQ Inc. (C5ISR), and in Australia over QinetiQ Pty Ltd based on their size or risk. This provides significant coverage over all financial statement balances, except inventory. | | QinetiQ Group plc Annual Report & Accounts 2022 | 141 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Auditors' Report continued | Key activities | How our audit addressed the key audit matter | | --- | --- | | **Long-term contract accounting (Group)** Refer to page 110 (Report of the Audit Committee) and page 189 (note 36, Significant accounting policies – Revenue from contracts with customers) and page 154 (note 2, Revenue from contracts with customers and other income). QinetiQ Group plc has a large number of contracts which span multiple periods and are accounted for on a percentage of completion (POC) basis in accordance with IFRS 15. Long term contract accounting requires a number of judgements and management estimates to be made, particularly in calculating the forecast costs to complete the contract. These judgements drive revenue and profit recognition, and together with cash paid by the customer, impact the balance sheet position at the year end. Onerous contract provisions are recorded where there is an expectation that a contract will be loss-making, and judgement is applied to determine the magnitude of any provision. Particular focus is given to contracts which are technologically challenging. | We evaluated the contract governance policies and controls in place within the business and tested the design and operating effectiveness of certain key controls over long-term contracts. We performed risk assessment procedures over the portfolio of contracts to identify higher-risk contracts. These higher risk contracts were selected for detailed contract audits. These detailed contract audits involved meeting with key financial and non-financial personnel throughout the year and at year end to discuss contract performance, as well as obtaining evidence to support contract financials. Specifically, our procedures included the following: - We assessed the basis of revenue recognition to ensure it is in line with applicable accounting standards. - We agreed overall anticipated revenue to the underlying contract and validated a sample of customer invoices through to cash receipt. - We calculated revenue recognised and agreed revenue, costs and associated balance sheet positions to the underlying general ledger. - We obtained evidence to corroborate management estimates and judgements, particularly around forecast costs to complete and risk contingencies. - We validated costs incurred allocated to contracts during the year to supporting documentation on a Group-wide basis. - We made enquiries as to the potential impact in delivery and forecast costs to complete arising from climate change risks. For remaining untested contracts, we selected a sample and performed testing over revenue and costs, agreeing to supporting documentation including customer contracts and validating a sample of customer invoices to cash receipts. We agreed contract loss provisions recorded based on the overall outcome anticipated on the contract through a combination of the procedures above and consideration of recoverability of amounts recoverable on contract. Additional testing was performed, where not sufficiently covered by the above, over the contract asset and liability balance sheet positions. These have been sample tested and agreed to supporting documentation. No material exceptions were found. | | **Impairment of goodwill and acquired intangibles (Group)** Refer to page 110 (Report of the Audit Committee), page 193 (note 36, Significant accounting policies – Impairment of goodwill and tangible, intangible and held for sale assets, page 162 (note 14, Goodwill) and page 164 (note 15, intangible assets). The Group has a material amount of goodwill and acquired intangible assets. There is a risk of impairment where the performance of the cash generating unit is behind expectation and does not support the value held on the balance sheet. Management performed a discounted cash flow analysis based on the Board-approved five-year strategic plan to assess whether the goodwill and acquired intangible assets are supported by future cash flow projections. This annual impairment review was performed as at 31 January 2022. No triggering events have been identified in the period to 31 March 2022 and therefore no additional impairment reviews have been performed. No impairment charge has been recognised during the year. Our audit focused on the risk that the carrying value of goodwill and acquired intangible assets could be overstated. | We have tested the principles and mathematical integrity of the Group's discounted cash flow model used to assess goodwill and indefinite-lived intangible assets for potential impairment. With the assistance of our valuation specialists, we assessed the long-term growth rates and discount rates used in the impairment calculation, by comparing the Group's long-term growth rates and discount rates assumptions to external data, along with the mathematical accuracy of the model. We concluded that the Group's assumptions were materially appropriate. We confirmed that cash flows for the next 5 years, consistent with internal budgeting and strategic planning processes and the long term viability assessment, have been input to the model and that the underlying budgets and strategic plans have been approved by the Board. We challenged the cash flow projections used within the model by reference to current cash flows, analysis of management's historic forecasting accuracy, understanding future contract opportunities and through obtaining third party evidence where possible. We held discussions with financial and non-financial personnel, corroborating explanations to supporting documentation and seeking contradictory evidence, if available. We tested the sensitivity of the impairment calculations, changes in the underlying assumptions and concluded that no impairments are required, and that the sensitivity to key assumptions is sufficiently disclosed. We did not identify any indication of management bias and did not identify any impairment triggers which would require an updated impairment assessment in the intervening period to year end. | 142 QinetiQ Group plc Annual Report & Accounts 2022 Key activities How our audit addressed the key audit matter Accounting for tax research and development expenditure We have reviewed management’s accounting policy for RDEC and disclosure of its credits (Group) impact on the Group’s underlying effective tax rate. Management has determined the RDEC should be accounted for under IAS 12, as opposed to IAS 20, and we consider Refer to page 191 (note 36, Significant accounting policies the disclosures made are sufficient to enable the user of the accounts to identify and – Taxation) and page 159 (note 9, Taxation). understand the impact of management’s accounting policy. The Group has determined that it is appropriate to account for the UK’s Research and Development Expenditure Credit (‘RDEC’) under IAS 12, rather than as a government grant within IAS 20. Impairment of investment in subsidiary company (parent) We have evaluated management’s consideration of impairment triggers through performing our own independent assessment which has included: Refer to page 202 (Accounting policies – Investments and note 2, Investments in subsidiary undertakings). • Assessing the overall financial performance of the Group to identify any indicators of impairment as a result of poor financial performance. The Company has investments of £515.2 million in its • Considering other information gathered during the course of our audits of subsidiary undertakings. Annually, the Directors consider components and assessing whether there are any other indicators of impairment, whether any events or circumstances have occurred as well as considering other factors that could indicate increased impairment risk that could indicate that the carrying amount of the such as regulatory change. investment in subsidiaries may not be recoverable. If such circumstances are identified, an impairment review is • Considering the market capitalisation of the Group at year end and comparing this undertaken to establish whether the carrying amount of to the carrying value of the investments. the investments exceeds its recoverable amount, being the We found that management’s conclusion that there are no impairment triggers in the higher of fair value less costs to sell or value in use. investments in subsidiaries carrying value was reasonable. Impairment assessments of this nature require significant judgement and there is a risk that a potential impairment trigger may not be identified by management and in the event that there is an impairment trigger identified, there is a risk that the calculation of the recoverable amount of the investment is incorrect and therefore the value of the investment may be misstated. No such indicators of impairment have been identified. How we tailored the audit scope In addition to the above, we performed analytical procedures on the remaining entities to understand key balances and We tailored the scope of our audit to ensure that we performed transactions in the year and performed additional procedures on enough work to be able to give an opinion on the financial any unusual balances identified. statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, The audit procedures performed over the financial information of and the industry in which they operate. full scope components, QinetiQ Limited, C5ISR and QinetiQ Pty Ltd, accounted for 88% of consolidated Group revenue and 72% of We conducted full scope audit work over QinetiQ Limited, underlying profit before taxation (on an absolute basis, excluding C5ISR and QinetiQ Pty Ltd, with QinetiQ Limited being the only holding companies and consolidation entities). component considered financially significant to the Group. The audit of QinetiQ Limited is performed in the UK and the The full scope audits plus the additional audit procedures over audit of C5ISR and QinetiQ Pty Ltd are performed by our inventory in two other locations and revenue and associated local PwC component teams based in the US and Australia, balance sheet accounts within Technology Solutions, resulted respectively. This provides sufficient coverage overall financial in coverage of 92% of consolidated Group revenue and 92% of statement balances, except inventory and central balances total Group assets. audited by the Group team. The combination of the work referred to above, together with We performed additional procedures over inventory balances additional procedures performed at a Group level, including at two further entities to ensure sufficient coverage over that testing of significant journals posted within the consolidation, financial statement line item. QinetiQ Target Systems Limited is significant adjustments made to the financial statements, located within the UK and work was performed by the Group audit goodwill, intangible assets, share based-payments, pensions, IFRS team. Technology Solutions is located in the US and work was 16 lease accounting and taxation, gave us the evidence required performed by our local PwC component audit team. for our opinion on the financial statements as a whole. We performed additional procedures over revenue and associated financial statement balances at Technology Solutions, located in the US, which was performed by our local PwC component team. | | QinetiQ Group plc Annual Report & Accounts 2022 | 143 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | # Auditors' Report continued The Group engagement leader discussed and agreed the audit plan with our component audit teams, in addition to agreeing the format and content of communications. We determined that the level of involvement we were able to have in the audit work at our reporting entities was sufficient, and appropriate audit evidence had been obtained, to enable us to form our opinion on the financial statements as a whole. We maintained regular dialogue throughout the audit process with our component audit teams through the use of video conferencing. We also supervised the work performed by all component teams through the review of component team working papers and we are comfortable that sufficient and appropriate procedures have been performed. The Company audit was performed by the Group audit team. The Company is principally a holding Company and there are no branches or other locations to be considered when scoping the audit. There are no financial statement line items in scope for the Group audit. The Company is audited on a stand-alone basis, and hence, testing has been performed on all material financial statement line items. ## Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: | | Financial statements – Group | Financial statements – Company | | --- | --- | --- | | Overall materiality | £6,650,000 (2021: £6,400,000). | £5,000,000 (2021: £5,000,000). | | How we determined it | Approximately 5% of underlying profit before tax. | Approximately 1% of total assets. | | Rationale for benchmark applied | Based on the benchmarks used in the Annual Report and Accounts, underlying profit before tax is one of the primary measures used by the shareholders in assessing the performance of the Group, and is a generally accepted auditing benchmark. It is considered appropriate to exclude specific adjusting items due to the nature of these balances as disclosed on note 4 of the financial statements. | We believe that total assets is the primary measure used by shareholders in assessing the performance of this entity, and is a generally accepted auditing benchmark for a holding Company. This materiality relates to the audit of the Company only, as the Company was not in scope for the Group audit. | For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £4,300,000 and £6,317,500. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality. We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2021: 75%) of overall materiality, amounting to approximately £5,000,000 (2021: £4,800,000) for the Group financial statements and £3,750,000 (2021: £3,750,000) for the Company financial statements. In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls – and concluded that an amount at the upper end of our normal range was appropriate. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £332,500 (Group audit) (2021: £320,000) and £250,000 (Company audit) (2021: £250,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. ## Conclusions relating to going concern Our evaluation of the directors' assessment of the Group's and the Company's ability to continue to adopt the going concern basis of accounting included: - Obtaining management's Board-approved strategic plan for the five year period ended 31 March 2027. We held discussions with management to understand the budgeting process and the key assumptions made in the forecasting processes; - Performed a comparison of the cash flow forecasts used in the going concern assessment to those in the strategic plan and, where applicable, compared these forecasts for consistency to those used elsewhere in the business, including for long-term contract accounting and impairment assessments; - Assessing whether the stress testing performed by management appropriately considered the principal risks facing the business, and were adequate; - Using our own knowledge from the audit and assessment of previous forecasting accuracy we calculated sensitivities to apply to management's cash flow forecasts. These procedures confirmed significant headroom in management's forecasts when performing severe but plausible sensitivities; - Evaluating the feasibility of management's mitigating actions in response to the severe stress testing scenarios; and 144 QinetiQ Group plc Annual Report & Accounts 2022 • We assessed the adequacy of disclosures in the Going Based on our work undertaken in the course of the audit, the Concern statement on page 71, the audit committee Companies Act 2006 requires us also to report certain opinions report on page 109 and statements in note 36 of the and matters as described below. Financial Statements and found these appropriately reflect our understanding of the process undertaken Strategic report and Directors’ report and the conclusion reached. In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ Based on the work we have performed, we have not identified Report for the year ended 31 March 2022 is consistent with the any material uncertainties relating to events or conditions that, financial statements and has been prepared in accordance with individually or collectively, may cast significant doubt on the applicable legal requirements. Group’s and the Company’s ability to continue as a going concern for a period of at least twelve months from when the financial In light of the knowledge and understanding of the Group and statements are authorised for issue. Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the In auditing the financial statements, we have concluded that the Strategic report and Directors’ Report. directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Directors’ Remuneration However, because not all future events or conditions can be In our opinion, the part of the Directors’ Remuneration Report to predicted, this conclusion is not a guarantee as to the Group’s be audited has been properly prepared in accordance with the and the Company’s ability to continue as a going concern. Companies Act 2006. In relation to the directors’ reporting on how they have applied the ### UK Corporate Governance Code, we have nothing material to add Corporate governance statement or draw attention to in relation to the directors’ statement in the The Listing Rules require us to review the directors’ statements financial statements about whether the directors considered in relation to going concern, longer-term viability and that part of it appropriate to adopt the going concern basis of accounting. the corporate governance statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Our responsibilities and the responsibilities of the directors with Code specified for our review. Our additional responsibilities respect to going concern are described in the relevant sections with respect to the corporate governance statement as other of this report. information are described in the Reporting on other information section of this report. ### Reporting on other information Based on the work undertaken as part of our audit, we have The other information comprises all of the information in the concluded that each of the following elements of the corporate Annual Report other than the financial statements and our governance statement is materially consistent with the financial auditors’ report thereon. The directors are responsible for statements and our knowledge obtained during the audit, and we the other information, which includes reporting based on the have nothing material to add or draw attention to in relation to: Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Our opinion on the financial statements • The directors’ confirmation that they have carried out a does not cover the other information and, accordingly, we do robust assessment of the emerging and principal risks; not express an audit opinion or, except to the extent otherwise • The disclosures in the Annual Report that describe those explicitly stated in this report, any form of assurance thereon. principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being In connection with our audit of the financial statements, our managed or mitigated; responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent • The directors’ statement in the financial statements about with the financial statements or our knowledge obtained in whether they considered it appropriate to adopt the going the audit, or otherwise appears to be materially misstated. concern basis of accounting in preparing them, and their If we identify an apparent material inconsistency or material identification of any material uncertainties to the Group’s and misstatement, we are required to perform procedures to conclude Company’s ability to continue to do so over a period of at whether there is a material misstatement of the financial least twelve months from the date of approval of the statements or a material misstatement of the other information. financial statements; If, based on the work we have performed, we conclude that there • The directors’ explanation as to their assessment of is a material misstatement of this other information, we are the Group’s and Company’s prospects, the period this required to report that fact. We have nothing to report based on assessment covers and why the period is appropriate; and these responsibilities. • The directors’ statement as to whether they have a reasonable expectation that the Company will be able to With respect to the Strategic report and Directors’ Report, we continue in operation and meet its liabilities as they fall due also considered whether the disclosures required by the UK over the period of its assessment, including any related Companies Act 2006 have been included. disclosures drawing attention to any necessary qualifications or assumptions. | | QinetiQ Group plc Annual Report & Accounts 2022 | 145 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Auditors’ ## Report continued Our review of the directors’ statement regarding the longer-term is a high level of assurance, but is not a guarantee that an audit viability of the Group was substantially less in scope than an conducted in accordance with ISAs (UK) will always detect a audit and only consisted of making inquiries and considering material misstatement when it exists. Misstatements can arise the directors’ process supporting their statement; checking that from fraud or error and are considered material if, individually or the statement is in alignment with the relevant provisions of the in the aggregate, they could reasonably be expected to influence UK Corporate Governance Code; and considering whether the the economic decisions of users taken on the basis of these statement is consistent with the financial statements and our financial statements. knowledge and understanding of the Group and Company and their environment obtained in the course of the audit. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our In addition, based on the work undertaken as part of our audit, responsibilities, outlined above, to detect material misstatements we have concluded that each of the following elements of the in respect of irregularities, including fraud. The extent to which corporate governance statement is materially consistent with the our procedures are capable of detecting irregularities, including financial statements and our knowledge obtained during the audit: fraud, is detailed below. • The directors’ statement that they consider the Annual Based on our understanding of the Group and industry, we Report, taken as a whole, is fair, balanced and understandable, identified that the principal risks of non-compliance with and provides the information necessary for the members to laws and regulations related to Single Source Contracting assess the Group’s and Company’s position, performance, Regulations, the Health and Safety Executive and anti-bribery business model and strategy; and corruption legislation, and we considered the extent to which non-compliance might have a material effect on the financial • The section of the Annual Report that describes the review statements. We also considered those laws and regulations that of effectiveness of risk management and internal control have a direct impact on the financial statements such as the systems; and Companies Act 2006 and relevant tax legislation. We evaluated • The section of the Annual Report describing the work management’s incentives and opportunities for fraudulent of the Audit Committee. manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks We have nothing to report in respect of our responsibility to were related to posting inappropriate journal entries to increase report when the directors’ statement relating to the Company’s revenue or reduce expenditure, and management bias in compliance with the Code does not properly disclose a departure accounting estimates. The Group engagement team shared this from a relevant provision of the Code specified under the Listing risk assessment with the component auditors so that they could Rules for review by the auditors. include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement ### Responsibilities for the financial statements team and/or component auditors included: ### and the audit • Discussions with management at multiple levels across Responsibilities of the directors for the financial statements the business, internal audit and the Group’s legal counsel throughout the year, as well as at year end. These discussions As explained more fully in the Statement of Directors’ have included consideration of known or suspected instances responsibilities, the directors are responsible for the preparation of non-compliance with laws and regulations and fraud; of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair • Evaluation of management’s controls designed to prevent and view. The directors are also responsible for such internal control detect irregularities, in particular their anti-bribery controls; as they determine is necessary to enable the preparation of • Assessment of matters reported on the Group’s whistleblowing financial statements that are free from material misstatement, helpline and the results of management’s investigation of whether due to fraud or error. such matters; • Reviewing correspondence with and reporting to relevant In preparing the financial statements, the directors are regulatory authorities; responsible for assessing the Group’s and the Company’s ability to continue as a going concern, disclosing, as applicable, matters • Challenging assumptions and judgements made by related to going concern and using the going concern basis of management in their significant accounting estimates accounting unless the directors either intend to liquidate the and judgements, particularly in relation to the key audit Group or the Company or to cease operations, or have no realistic matters above. alternative but to do so. • Designing risk filters to search for journal entries, such as those posted with unusual account combinations or posted Auditors’ responsibilities for the by members of senior management with a financial reporting audit of the financial statements oversight role, and testing those journals highlighted (if any); and Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material • Incorporating elements of unpredictability into the audit misstatement, whether due to fraud or error, and to issue an procedures performed. auditors’ report that includes our opinion. Reasonable assurance ### 146 QinetiQ Group plc Annual Report & Accounts 2022 There are inherent limitations in the audit procedures described Appointment above. We are less likely to become aware of instances of non- Following the recommendation of the Audit Committee, we were compliance with laws and regulations that are not closely related appointed by the members on 22 June 2017 to audit the financial to events and transactions reflected in the financial statements. statements for the year ended 31 March 2018 and subsequent Also, the risk of not detecting a material misstatement due to financial periods. The period of total uninterrupted engagement is 5 fraud is higher than the risk of not detecting one resulting years, covering the years ended 31 March 2018 to 31 March 2022. from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or ### through collusion. Other matters As required by the Financial Conduct Authority Disclosure Our audit testing might include testing complete populations Guidance and Transparency Rule 4.1.14R, these financial of certain transactions and balances, possibly using data statements form part of the ESEF-prepared annual financial auditing techniques. However, it typically involves selecting a report filed on the National Storage Mechanism of the Financial limited number of items for testing, rather than testing complete Conduct Authority in accordance with the ESEF Regulatory populations. We will often seek to target particular items for Technical Standard (‘ESEF RTS’). This auditors’ report provides testing based on their size or risk characteristics. In other cases, no assurance over whether the annual financial report has we will use audit sampling to enable us to draw a conclusion been prepared using the single electronic format specified about the population from which the sample is selected. in the ESEF RTS. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: Julian Gray (Senior Statutory Auditor) www.frc.org.uk/auditorsresponsibilities. This description forms for and on behalf of PricewaterhouseCoopers LLP part of our auditors’ report. Chartered Accountants and Statutory Auditors Southampton Use of this report This report, including the opinions, has been prepared for and 20 May 2022 only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. ### Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not obtained all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of directors’ remuneration specified by law are not made; or • the Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. | | QinetiQ Group plc Annual Report & Accounts 2022 | 147 | | --- | --- | --- | | CORPORATE FINANCIAL STRATEGIC | | | | GOVERNANCE STATEMENTS REPORT | | | ## Financial ## Statements 150 Consolidated income statement 151 Consolidated comprehensive income statement 151 Consolidated statement of changes in equity 152 Consolidated balance sheet 153 Consolidated cash flow statement 153 Reconciliation of movements in net cash 154 Notes to the financial statements 200 Company balance sheet 201 Company statement of changes in equity 202 Notes to the Company financial statements ### 148 QinetiQ Group plc Annual Report & Accounts 2022 QinetiQ Group plc Annual Report & Accounts 2022 FINANCIAL STATEMENTS | | QinetiQ Group plc Annual Report & Accounts 2022 QinetiQ Group plc Annual Report & Accounts 2022 | 149 | | --- | --- | --- | | CORPORATE STRATEGIC | | | | GOVERNANCE REPORT | | | ## Consolidated ## income ## statement For the year ended 31 March ## Consolidated income statement 2022 2021 restated^ For the year ended 31 March Specific Specific adjusting adjusting * * * All figures in £ million Note Underlying Items Total Underlying Items Total Revenue Other operating costs excluding depreciation and amortisation (1,140.7 (8.7 (1,149.4 (1,086.0) (6.4 (1,092.4 Other income 2 9.8 0.7 10.5 9.9 0.1 10.0 EBITDA (earnings before interest, tax, depreciation and amortisation) 189.5 (8.0) 181.5 202.1 (6.3) 195.8 Depreciation and impairment of property, plant and equipment 3, 4, 16 (45.6) (0.5) Operating profit/(loss) 3 137.4 (19.9) 117.5 151.8 (43.1) 108.7 Profit/(loss) for the year 118.1 (28.1 90.0 126. 1 (4.2 121.9 Profit is attributable to | Owners of the parent company 118.1 (28.1 | | | 90.0 125.9 (4.2 | | 121.7 | | --- | --- | --- | --- | --- | --- | | Non-controlling interests | | – – – 0.2 – 0.2 | | | | | Profit/(loss) for the year | 118.1 (28.1 | | 90.0 126.1 | (4.2 | 121.9 | Earnings per share for profit attributable to the owners of the parent company 2022 2021 restated^ * * Basic 10 20.6p 15.7p 22.1p 21.4p Diluted 10 20.4p 15. 5p 21.9p 21.1p ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. * 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 on page 207. Also refer to notes 4 and 36 for details of ‘specific adjusting items’. | | | | | 150 | QinetiQ Group plc Annual Report & Accounts 2022 | | --- | --- | --- | --- | --- | --- | | Profit/(loss) before tax | | (47.9) (46.1) (46.7) (0.9) (0.9) (1.2) | | ) ) * | | | Finance expense Taxation (charge)/income Finance income All figures in pence Gain on sale of investments Amortisation and impairment of intangible assets (Loss)/gain on business divestments Impairment of goodwill | 3, 4, 15 Underlying Underlying 4, 14 | Note 1,320.4 1,320.4 1,278.2 1,278.2 2, 3 136.0 (16.3) 119.7 142.6 (11.8) (29.7) (20.7) 149.9 (10.7) (16.1) (10.9) (15.6) 13 (25.4) (25.4) (17.9) (23.8) Total Total 7 9 7 8 (7.3) 28.4 28.4 (1.9) (2.2) (1.9) (2.2) (5.4) (4.7) | 3.1 4.5 5.0 7.1 7.4 0.3 0.3 0.5 0.3 – – – – – – – – – – – – – – | ) ) ) ) ) ) ) ) ) | | 150 QinetiQ Group plc Annual Report and Accounts 2022 ## Consolidated ## comprehensive ## income statement For the year ended 31 March ## Consolidated comprehensive income statement For the year ended 31 March 90.0 121.9 (47.6) 19.8 loss: gains/(losses) on foreign operations 5.6 (12.0 (0.8) 0.8 /(decrease) in the fair value of hedging derivatives 0.6 5.3 income/(expense) for the year, net of tax 101.7 191.5 25.4 -controlling interests 0.2 0.2 191.7 25.6 ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. ## Consolidated statement of changes in equity ## Consolidated statement of changes in equity Capital Non- Share redemption Share Hedge Translation Retained controlling Total For the year ended 31 March | Consolidated comprehensive income statement | counting policy – | | | | --- | --- | --- | --- | | For the year ended 31 March | - restated^ | | | | | | – – – – – | – | r comprehensive income for the – – – 0.5 4.8 96.4 – – – – – – (0.8) – ## Consolidated comprehensive income statement For the year ended 31 March -based contingent consideration – – – – – 0.7 – 2022 nting policy – - restated^ 5.7 40.8 147.6 0 .4 8.3 679.9 2.4 – – – – – r comprehensive expense for the – – – (0.8) (11.2) (84.3) – – – – – – 0.5 – – – – – – (1.6) (2.3) ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. 31 March 2021^ ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. | | Consolidated statement of changes in equity | | | | QinetiQ Group plc Annual Report & Accounts 2022 | 151 | | --- | --- | --- | --- | --- | --- | --- | | Othe Change in accou Change in ac Fair value adjustment in respect of Othe | | CORPORATE FINANCIAL STRATEGIC | | software software | | | | Financial Statements Financial Statements Financial Statements | For the year ended 31 March | | | | | | | At At 31 March Total items that may be reclassified to profit or loss Total items that may be reclassified to profit or loss Total items that may be reclassified to profit or loss Profit for the year Total comprehensive income for the year Profit for the year Total comprehensive income for the year Profit for the year Total comprehensive income for the year Total comprehensive income is attributable to: Total comprehensive income is attributable to: Total comprehensive income is attributable to: Non Purchase of own shares At 1 April 2020 Non-controlling interests year, net of tax Transactions with NCI Non-controlling interests Other comprehensive income/(expense) for the year, net of tax Other comprehensive Other comprehensive income/(expense) for the year, net of tax Items that will not be reclassified to profit or loss: Items that will not be reclassified to profit or loss: Items that will not be reclassified to profit or loss: Increase Increase/(decrease) in the fair value of hedging derivatives At 1 April 2021 equity Increase/(decrease) in the fair value of hedging derivatives year, net of tax Deferred tax on share options Owners of the parent company Owners of the parent company Owners of the parent company Profit for the year At 31 March 2020 – previously reported Total comprehensive income for the year Movement in deferred tax on foreign currency translation Total comprehensive income for the year Movement in deferred tax on foreign currency translation Movement in deferred tax on foreign currency translation Total comprehensive income for the year Share-based payments Deferred tax on share options At 31 March 2021 – previously reported Profit for the year Total items that will not be reclassified to profit or loss Total items that will not be reclassified to profit or loss implementation costs (note 38) Total items that will not be reclassified to profit or loss All figures in £ million All figures in £ million All figures in £ million Foreign currency translation gains/(losses) on foreign operations Foreign currency translation Foreign currency translation gains/(losses) on foreign operations Share-based payments Share-settled liabilities implementation costs (note 38) Tax on items that will not be reclassified to profit and loss Tax on items that will not be reclassified to profit and loss Tax on items that will not be reclassified to profit and loss Items that may be reclassified to profit or loss: Items that may be reclassified to profit or Items that may be reclassified to profit or loss: Issues of new shares Purchase of own shares Dividends Actuarial gain/(loss) recognised in defined benefit pension schemes Actuarial gain/(loss) recognised in defined benefit pension schemes Actuarial gain/(loss) recognised in defined benefit pension schemes All figures in £ million Movement in deferred tax on hedging derivatives Movement in deferred tax on hedging derivatives Dividends Movement in deferred tax on hedging derivatives | premium earnings 1,043.2 1,043.4 capital reserve reserve interest reserve (104.1) (104.1) (104.1) GOVERNANCE (96.3) (96.3) 147.6 693.8 884.6 884.9 101.7 101.7 147.6 847.0 882.7 885.1 121.7 121.9 884.6 884.9 884.7 887.1 889.4 889.7 (37.7) (37.7) equity (40.2) (40.3) STATEMENTS (0.4) (12.0) (12.0) (12.0) 121.7 121.9 191.7 121.9 191.7 147.6 693.8 101.7 (96.3) (96.3) 147.6 681.9 101.7 (96.3) 147.6 698.6 191.7 191.7 191.7 (84.3) (84.3) (40.2) (84.3) (2.9) 191.5 191.5 (2.0) 2021^ 2021^ 2021^ (12.0) (12.0) (37.7) 144.0 144.0 144.0 | (47.6) (47.6) Total (0.8) (1.6) 40.8 40.8 10.6 10.6 10.6 (0.3) 90.0 90.0 90.0 (2.0) 13.7 13.7 (4.8) (9.0) (0.8) (3.9) 5.7 25.4 25.4 5.8 90.0 25.6 90.0 25.6 40.8 (0.4) (0.3) (0.3) (2.0) 2022 2022 40.8 2022 13.7 (4.8) (4.8) 40.8 (0.4) 19.8 19.8 (9.0) (9.0) 25.6 25.6 25.6 96.4 96.4 96.4 (1.0) (1.0) (1.0) (0.8) (0.8) 5.7 (2.9) 5.7 5.7 (2.9) 0.1 (0.1) (0.1) (0.1) (0.1) 0.1 0.3 0.7 0.7 0.5 0.5 1.9 0.2 0.4 7.4 7.4 7.4 0.1 0.1 0.2 0.2 5.3 5.3 0.2 0.8 0.8 0.3 8.3 2.4 0.3 0.2 0.2 0.2 0.2 0.2 0.6 0.6 5.6 5.6 REPORT – – – – – – – – – | – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ) | | | | | | Capital | Non- | | | | | | Translation redemption controlling | Retained Share Hedge Share | Total | | | | | QinetiQ Groupplc Annual ReportandAccounts 2022 151 All figures in £ million premium earnings reserve reserve interest capital reserve equity Total ## Consolidated statement of changes in equity At 31 March 2021 – previously reported 889.4 889.7 147.6 698.6 40.8 (0.4) 5.7 (2.9) 0.3 Change in accounting policy – software For the year ended 31 March | implementation costs (note 38) | | (4.8) (4.8) (4.8) | – – – – – – | | --- | --- | --- | --- | | At 1 April 2021 - restated^ | | 884.6 884.9 147.6 693.8 40.8 (0.4) 5.7 (2.9) | 0.3 | | | Capital | Non- | | | Profit for the year | | 90.0 90.0 90.0 | – – – – – – | | Translation redemption | controlling Retained | Share Hedge Share Total | | Other comprehensive income for the | All figures in £ million | premium earnings reserve reserve interest capital reserve | equity Total | | | --- | --- | --- | --- | | year, net of tax | | 101.7 101.7 96.4 0.5 | 4.8 – – – – | | At 31 March 2021 – previously reported | | 889.4 889.7 147.6 698.6 40.8 (0.4) 5.7 (2.9) | 0.3 | | Purchase of own shares | | (0.8) (0.8) (0.8) | – – – – – – | Change in accounting policy – software | Issues of new shares | 0.1 0.1 0.1 – – – – – – | | --- | --- | | implementation costs (note 38) | (4.8) (4.8) (4.8) – – – – – – | | Share-based payments | 7.4 7.4 7.4 – – – – – – | | At 1 April 2021 - restated^ | 884.6 884.9 147.6 693.8 40.8 (0.4) 5.7 (2.9) 0.3 | | Deferred tax on share options | (0.3) (0.3) (0.3) – – – – – – | | Profit for the year | 90.0 90.0 90.0 – – – – – – | Fair value adjustment in respect of Other comprehensive income for the | equity-based contingent consideration | | 0.7 0.7 0.7 – – – – – – | | --- | --- | --- | | year, net of tax | 101.7 101.7 | 96.4 0.5 4.8 – – – – | | Dividends | (40.2) (40.3) (40.2) | (0.1) – – – – – | | Purchase of own shares | | (0.8) (0.8) (0.8) – – – – – – | | At 31 March 2022 | 1,043.2 1,043.4 147.6 847.0 | 40.8 5.8 0.1 1.9 0.2 | | Issues of new shares | | 0.1 0.1 0.1 – – – – – – | | Share-based payments | | 7.4 7.4 7.4 – – – – – – | | At 31 March 2020 – previously reported | 884.7 887.1 147.6 681.9 | 40.8 5.7 0.4 8.3 2.4 | | Deferred tax on share options | | (0.3) (0.3) (0.3) – – – – – – | Change in accounting policy – software Fair value adjustment in respect of | implementation costs (note 38) | (2.0) (2.0) (2.0) | – – – – – – | | --- | --- | --- | | equity-based contingent consideration | | 0.7 0.7 0.7 – – – – – – | | At 1 April 2020 - restated^ Dividends | 882.7 885.1 (40.2) (40.3) 147.6 679.9 (40.2) 40.8 5.7 (0.1) | 0.4 8.3 2.4 – – – – – | | Profit for the year At 31 March 2022 | 1,043.2 1,043.4 121.7 121.9 147.6 847.0 121.7 40.8 5.8 | 0.1 1.9 0.2 0.2 – – – – – | Other comprehensive expense for the | year, net of tax | (96.3) (96.3) (0.8) (11.2) (84.3) | – – – – | | --- | --- | --- | | At 31 March 2020 – previously reported | 884.7 887.1 147.6 681.9 40.8 | 5.7 0.4 8.3 2.4 | | Purchase of own shares | (9.0) (9.0) (9.0) | – – – – – – | Change in accounting policy – software | Share-settled liabilities | 13.7 13.7 13.7 | – – – – – – | | --- | --- | --- | | implementation costs (note 38) | (2.0) (2.0) (2.0) | – – – – – – | | Share-based payments | 10.6 10.6 10.6 | – – – – – – | | At 1 April 2020 - restated^ | 882.7 885.1 147.6 679.9 40.8 5.7 0.4 | 8.3 2.4 | | Deferred tax on share options | 0.5 0.5 0.5 | – – – – – – | | Profit for the year | 121.7 121.9 121.7 | 0.2 – – – – – | | Transactions with NCI | (1.6) (1.6) (3.9) (2.3) | – – – – – | Other comprehensive expense for the | Dividends year, net of tax | (37.7) (37.7) (96.3) (96.3) (37.7) (0.8) (11.2) (84.3) | – – – – – – – – – – | | --- | --- | --- | | At 31 March 2021^ Purchase of own shares | 147.6 693.8 884.6 884.9 (0.4) (2.9) 40.8 (9.0) 5.7 (9.0) (9.0) | 0.3 – – – – – – | | Share-settled liabilities | ^ 13.7 13.7 13.7 | – – – – – – | Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. | Share-based payments | 10.6 10.6 10.6 | – – – – – – | | --- | --- | --- | | Deferred tax on share options | 0.5 0.5 0.5 | – – – – – – | | Transactions with NCI | (1.6) (1.6) (3.9) (2.3) | – – – – – | QinetiQ Groupplc Annual ReportandAccounts 2022 151 Dividends (37.7) (37.7) (37.7) – – – – – – At 31 March 2021^ 147.6 693.8 884.6 884.9 (0.4) (2.9) 40.8 5.7 0.3 ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. QinetiQ Groupplc Annual ReportandAccounts 2022 151 # Consolidated balance sheet As at 31 March | All figures in £ million | Note | 2022 | 2021* | 2020* | | --- | --- | --- | --- | --- | | **Non-current assets** | | | | | | Goodwill | 14 | 149.4 | 145.5 | 180.8 | | Intangible assets | 15 | 140.3 | 133.1 | 136.4 | | Property, plant and equipment | 16 | 414.5 | 397.2 | 375.6 | | Other financial assets | 24 | 0.5 | 0.8 | 1.0 | | Financial assets at fair value through profit and loss | 13 | – | 0.9 | – | | Equity accounted investments | 17 | 2.6 | 4.2 | 3.6 | | Retirement benefit surplus | 28 | 362.2 | 214.3 | 309.7 | | Deferred tax asset | 18 | 21.0 | 11.7 | 13.3 | | | | **1,090.5** | **907.7** | **1,020.4** | | **Current assets** | | | | | | Inventories | 20 | 54.9 | 54.4 | 52.3 | | Other financial assets | 24 | 0.6 | 0.9 | 6.7 | | Trade and other receivables | 21 | 361.2 | 326.7 | 250.0 | | Current tax asset | 19 | 1.4 | 0.7 | 0.2 | | Cash and cash equivalents | 24 | 248.1 | 190.1 | 105.8 | | | | **666.2** | **572.8** | **415.0** | | **Total assets** | | **1,756.7** | **1,480.5** | **1,435.4** | | **Current liabilities** | | | | | | Trade and other payables | 22 | (462.7) | (411.7) | (379.8) | | Current tax payable | 19 | (3.9) | (2.5) | (3.6) | | Provisions | 23 | (21.1) | (4.2) | (1.8) | | Other financial liabilities | 24 | (6.9) | (7.0) | (8.9) | | | | **(494.6)** | **(425.4)** | **(394.1)** | | **Non-current liabilities** | | | | | | Deferred tax liability | 18 | (156.7) | (89.7) | (101.3) | | Provisions | 23 | (6.0) | (7.8) | (9.7) | | Other financial liabilities | 24 | (17.2) | (20.7) | (19.9) | | Other payables | 22 | (38.8) | (52.0) | (25.3) | | | | **(218.7)** | **(170.2)** | **(156.2)** | | **Total liabilities** | | **(713.3)** | **(595.6)** | **(550.3)** | | **Net assets** | | **1,043.4** | **884.9** | **885.1** | | **Equity** | | | | | | Ordinary shares | 29 | 5.8 | 5.7 | 5.7 | | Capital redemption reserve | | 40.8 | 40.8 | 40.8 | | Share premium account | | 147.6 | 147.6 | 147.6 | | Hedging reserve | | 0.1 | (0.4) | 0.4 | | Translation reserve | | 1.9 | (2.9) | 8.3 | | Retained earnings | | 847.0 | 693.8 | 679.9 | | **Capital and reserves attributable to shareholders of the parent company** | | **1,043.2** | **884.6** | **882.7** | | Non-controlling interest | | 0.2 | 0.3 | 2.4 | | **Total equity** | | **1,043.4** | **884.9** | **885.1** | * Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. The financial statements on pages 150 to 203 were approved by the Board of Directors and authorised for issue on 20 May 2022 and were signed on its behalf by: **Steve Wadey** Chief Executive Officer **Carol Borg** Chief Financial Officer 152 QinetiQ Group plc Annual Report & Accounts 2022 ## Consolidated ## cash flow ## statement For the year ended 31 March ## Consolidated cash flow statement For the year ended 31 March | | | 25 | 215.3 199.0 | | | --- | --- | --- | --- | --- | | specific adjusting items: change in accounting policy in respect of software implementation 25 (1.9) | | | | (3.6) | | | : acquisition transaction costs 25 (3.7) | | | (1.0) | 25 (20.0) 0.5 0.3 (1.5) 188.7 178.0 15 (21.4) (10.9 16 (62.9) – 54.4 – 0.3 2.0 – | 12 (0.8) | | | (28.5) | | --- | --- | --- | --- | | | | (81.6) | (49.6 | | (0.8) | | | (9.0) | | | 11 (40.2) | | (37.7) | bank facility arrangement fee - (0.4) (6.2) | | -controlling interests (0.1) | | | | – | | --- | --- | --- | --- | --- | --- | | in cash and cash equivalents | | | 59.8 72.8 | | | | | | (1.8) | | 11.5 | | year 190.1 105.8 24 248.1 190.1 ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. Reconciliation of movement in net cash for the year ended 31 March 59.8 72.8 – 1.9 – (1.3) in lease obligations (1.3) (3.7) 6.2 in net cash as defined by the Group 61.0 79.4 year 164.1 84.7 year 24 225.1 164.1 non-cash net financial liabilities 24 23.0 26.0 24 248.1 190.1 ### QinetiQ Group plc Annual Report & Accounts 2022 153 CORPORATE FINANCIAL STRATEGIC Financial Statements Cash and cash equivalents at end of the year Increase in cash and cash equivalents in the year Increase Underlying net cash inflow from operations Net cash as defined by Group at the end of the Total cash and cash equivalents Net cash outflow from investing activities Effect of foreign exchange changes on cash and cash equivalents Net cash as defined by Group at the beginning of the Payment of Net cash inflow from operating activities Less Less: Purchases of property, plant and equipment Acquisition of businesses All figures in £ million Other movements including foreign exchange Increase Interest paid Dividends paid to shareholders Purchases of intangible assets Dividends from joint ventures and associates Net increase Net cash inflow from operations Interest received Purchase of own shares Net cash outflow from financing activities All figures in £ million Proceeds from disposal of investment Leases and debt recognised on acquisition Tax paid Transaction with non Proceeds from disposal of businesses Lease liabilities derecognised on disposal of subsidiaries Cash and cash equivalents at beginning of the Capital element of lease payments Less specific adjusting items Proceeds from sale of property Add back net cash flows not impacting net cash Increase in net cash resulting from cash flows GOVERNANCE STATEMENTS 209.7 194.4 (47.3) (55.6) (65.0) 2021^ (15.0) 2021 Note 2022 Note 2022 66.0 81.7 (1.7) (9.1) (8.5) 0.1 8.9 1.5 6.2 REPORT ) ) QinetiQ Group plc Annual ReportandAccounts 2022 153 # Notes to the Consolidated Financial Statements For the year ended 31 March ## 1. Significant changes in the current reporting period The financial position and performance of the Group was particularly affected by the following events and transactions during the reporting period: 1) A down-turn in trading in the Global Products segment (note 3 to the financial statement) driven by a £14.5m write-down on a complex project due to technical and supplier issues and challenges impacting revenue in the US business; For a detailed discussion of the Group's performance and financial position refer to the Strategic Report on pages 1 to 75. ## 2. Revenue from contracts with customers and other income Revenue and other income is analysed as follows: ### Revenue by category For the year ended 31 March | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Services contracts with customers | 1,234.4 | 1,189.4 | | Sale of goods contracts with customers | 82.9 | 83.0 | | Royalties and licences | 3.1 | 5.8 | | **Total revenue** | **1,320.4** | **1,278.2** | | Less: adjust current year for acquired businesses^{1} | (2.6) | – | | Less: adjust prior year for disposed businesses^{1} | – | (16.8) | | Adjust to constant prior year exchange rates | 10.3 | – | | **Total revenue on an organic, constant currency basis^{2}** | **1,328.1** | **1,261.4** | | **Organic revenue growth at constant currency^{2}** | **5%** | **10%** | $^{1}$ 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 page 207. ### Other income | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Share of associates' and joint ventures' profit after tax | 0.3 | 0.7 | | Other income | 9.5 | 9.2 | | **Other income – underlying** | **9.8** | **9.9** | | Specific adjusting item: gain on sale of property (note 4) | 0.7 | 0.1 | | **Total other income** | **10.5** | **10.0** | Revenue and profit after tax of associates and joint ventures was £12.2m and £0.4m respectively (2021: revenue of £12.6m and profit after tax of £1.1m). The figures in the table above represent the Group share of this profit after tax. Other income is in respect of property rentals and the recovery of other related property costs. ### Revenue by customer geographic location For the year ended 31 March | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | US | 153.0 | 215.6 | | Australia | 98.2 | 77.9 | | Europe | 76.9 | 88.2 | | Rest of world | 30.4 | 38.7 | | **International** | **358.5** | **420.4** | | United Kingdom | 961.9 | 857.8 | | **Total revenue** | **1,320.4** | **1,278.2** | | **International revenue %** | **27%** | **33%** | | **Revenue from 'home countries' (UK, US and Australia)** | **1,213.1** | **1,151.3** | | **Home countries revenue %** | **92%** | **90%** | 154 QinetiQ Group plc Annual Report & Accounts 2022 STRATEGIC^{}[] REPORT CORPORATE^{}[] GOVERNANCE FINANCIAL^{}[] STATEMENTS # Revenue by major customer type For the year ended 31 March | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | UK government | 881.7 | 794.6 | | US government | 104.7 | 140.8 | | Other | 334.0 | 342.8 | | **Total revenue** | **1,320.4** | **1,278.2** | 'Other' does not contain any customers with revenue in excess of 10% of total Group revenue. The following table shows the aggregate amount of revenue allocated to performance obligations that are unsatisfied (or partially satisfied) as at the end of the reporting period: | All figures in £ million | 2023 | 2024 | 2025 | 2026+ | Total | | --- | --- | --- | --- | --- | --- | | **Total forecast revenue allocated to unsatisfied performance obligations** | **897.8** | **564.7** | **426.0** | **940.3** | **2,828.8** | Management expects that 32% (£897.8m) of revenue allocated to unsatisfied contracts as of 31 March 2022 will be recognised as revenue during the next reporting period. The following table shows the aggregate amount of revenue allocated to performance obligations that were unsatisfied (or partially satisfied) as at the end of the prior reporting period: | All figures in £ million | 2022 | 2023 | 2024 | 2025+ | Total | | --- | --- | --- | --- | --- | --- | | **Total forecast revenue allocated to unsatisfied performance obligations** | **800.5** | **523.9** | **395.9** | **1,223.8** | **2,944.1** | Revenue of £157.3m was recognised during the year that was previously unrecognised as at the previous year end and reported as a contract liability. ### 3. Segmental analysis The analysis by business segment is presented in accordance with IFRS 8 Operating Segments, on the basis of those reportable segments whose operating results are regularly reviewed by the Board (the Chief Operating Decision Maker as defined by IFRS 8) and are aligned with the Group's strategic direction, determined with reference to the products and services they provide, as follows: EMEA Services provides technical assurance, test and evaluation and training services, underpinned by long-term contracts. EMEA Services comprises the following business units which are not considered reportable segments as defined by IFRS 8: Maritime & Land; Air & Space, Cyber & Information and the International business. Global Products combines all other business units not aggregated within EMEA Services, including the QinetiQ US business, Space Products and EMEA Products (which includes QinetiQ Target Systems). Generally these business units (which are not considered reportable segments as defined by IFRS 8) deliver innovative solutions and products which includes contract-funded research and development and developing intellectual property in partnership with key customers and through internal funding with potential for new revenue streams. #### Operating segments | All figures in £ million | 2022 | | 2021 | | | --- | --- | --- | --- | --- | | | Revenue from external customers | Underlying operating profit^{1} | Revenue from external customers | Underlying operating profit^{1} | | EMEA Services | 1,059.2 | 135.6 | 939.9 | 118.6 | | Global Products | 261.2 | 1.8 | 338.3 | 33.2 | | **Total operating segments** | **1,320.4** | **137.4** | **1,278.2** | **151.8** | | **Underlying operating margin^{2}** | | **10.4%** | | **11.9%** | $^{1}$ The measure of profit presented to the Chief Operating Decision Maker is operating profit stated before specific adjusting items ('underlying operating profit'). The specific adjusting items are detailed in note 4. $^{2}$ Definitions of the Group's 'Alternative performance measures' can be found on page 207. No measure of segmental assets and liabilities is reported as this information is not regularly provided to the Chief Operating Decision Maker. QinetiQ Group plc Annual Report & Accounts 2022 155 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 3. Segmental analysis (continued) For the year ended 31 March Reconciliation of segmental results to total profit 137.4 151.8 loss 4 (19.9) (43.1) ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. Non-current assets* by geographic location UK USA Germany world Total *Excluding deferred tax, financial instruments and retirement benefit surplus. Depreciation, impairment and amortisation by business segment – excluding specific adjusting items For the year ended 31 March 2022 Services Products Total 3.4 2.0 5.4 For the year ended 31 March 2021 ll figures in £ million Services Products Total | | | | | 156 | QinetiQ Group plc Annual Report & Accounts 2022 | | --- | --- | --- | --- | --- | --- | | | Rest of | Global Global EMEA EMEA | | | | | Operating profit A All figures in £ million Underlying operating profit Profit for the year All figures in £ million All figures in £ million Profit before tax Taxation expense Amortisation of purchased or internally developed intangible assets Year ended 31 March 2022 Net finance income Depreciation and impairment of property, plant and equipment Gain on sale of investments Amortisation of purchased or internally developed intangible assets Year ended 31 March 2021 - restated Specific adjusting items operating (Loss)/gain on business divestments Depreciation and impairment of property, plant and equipment | 129.8 704.2 675.8 491.7 132.2 463.5 | 41.6 47.8 34.9 38.5 108.7 121.9 142.6 2021^ (20.7) Note 28.4 | 42.0 50.3 38.7 45.6 43.3 52.1 39.9 46.7 3.3 1.4 4.7 8.3 5.2 6.9 0.3 8.8 6.8 117.5 119.7 13 (29.7) 2022 9 90.0 7 | (0.9) 3.1 – | | 156 QinetiQ Groupplc Annual ReportandAccounts 2022 ## Notes to the Consolidated Financial Statements 4. Specific adjusting items In the income statement, the Group presents specific adjusting items separately. In the judgement of the Directors, for the reader to obtain a ## continued proper understanding of the financial information, specific adjusting items need to be disclosed separately because of their size and nature. Further explanation of this rationale is provided in note 36 (Accounting Policies). Underlying measures of performance exclude specific adjusting items. The following specific adjusting items have been (charged)/credited in the consolidated income statement: – | | (3.7) | | – | | --- | --- | --- | --- | | | | (1.3) | (1.8 | | (2.4) | | | – | 38 (1.9) 0.6 – (8.7) (6.4 property 0.7 0.1 loss before interest, tax, depreciation and amortisation (8.0) (6.3 (1.2) 14 – acquisitions (10.7) loss (19.9) (43.1 ain on disposal of businesses 13 (0.9) 28.4 17 – 0.3 income 28 4.5 7.1 loss before tax (16.3) (7.3 – tax 9 4.1 3.1 9 (15.9) – specific adjusting items loss after tax (28.1) (4.2 Reconciliation of underlying profit for the year to total profit for the year 118.1 126.1 specific adjusting items loss after tax (28.1 (4.2) 90.0 121.9 ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. * Bonuses awarded on acquisition (and subsequently paid) to key employees within the US MTEQ business (now the C5ISR business) acquired in December 2019. 5. Analysis of employee costs and numbers The largest component of operating expenses is employee costs. The year-end and average monthly number of persons employed by the Group, including Executive Directors, analysed by business segment, were: Number Number Number Number 6,036 5,867 5,992 5,673 879 1,023 919 1,201 employees 6,915 6,890 6,911 6,874 The aggregate payroll costs of these persons were as follows: 369.7 381.7 37.9 35.1 49.4 45.5 -based payments costs 30 7.8 11.2 employee costs 464.8 473.5 ### QinetiQ Group plc Annual Report & Accounts 2022 157 CORPORATE 2022 2021 2022 2021 FINANCIAL STRATEGIC Financial Statements Underlying profit after tax – total Group Total profit for the year Specific adjusting items Total Total Impairment of property All figures in £ million Change in accounting policy in respect of software implementation costs^ Specific adjusting items Operating costs excluding depreciation and amortisation Deferred tax impact of change in future UK corporation tax rate Share Total Pension past service cost All figures in £ million Defined benefit pension scheme net finance All figures in £ million Specific adjusting items Pension costs Specific adjusting items operating Global Products Acquisition related remuneration costs* Gain on disposal of investment Social security costs Amortisation of intangible assets arising from EMEA Services Unsuccessful acquisition costs (Loss)/g Wages and salaries Impairment of goodwill Total Acquisition transaction costs Fair value adjustment in respect of contingent consideration Gain on sale of GOVERNANCE STATEMENTS 2021^ (10.9) (25.4) 2021 2021^ Note 2022 Note 2022 (0.5) (3.6) 2022 (1.0) REPORT Monthly average As at 31 March ) ) ) ) ) ) ) QinetiQ Group plc AnnualReportandAccounts2022 157 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements For the year ended 31 March 6. Directors and other senior management personnel The Directors and other senior management personnel of the Group during the year to 31 March 2022 comprise the Board of Directors and the Global Leadership Team and their remuneration and benefits are summarised below: -term employee remuneration including benefits 9.2 9.4 -employment benefits 0.1 0.1 -based payments costs 1.7 2.1 11.0 11.6 Short-term employee remuneration and benefits include salary, bonus and benefits. Post-employment benefits relate to pension amounts. The highest paid director is the Chief Executive Officer, details of whose remuneration is provided on page 120 of the Directors’ Remuneration Report. 7. Finance income and expense For the year ended 31 March 0.5 0.3 0.5 0.3 | deferred financing costs (0.4) | | | | | (0.4) | | --- | --- | --- | --- | --- | --- | | | | | (0.5) | | (0.6) | | (1.0) | | | | | (1.0) | | | financial liabilities | | | – (0.2) | | | | | | (1.9) | | (2.2) | | | | (1.4) | | | (1.9) | – defined benefit pension scheme net finance income 4.5 7.1 3.1 5.2 8. Profit before tax The following auditors’ remuneration has been charged in arriving at profit before tax: 0.5 0.6 0.6 0.5 1.1 1.1 -related assurance services (Interim financial statements) 0.1 0.1 – M&A 0.5 – services – other 0.1 – non-audit fees 0.7 0.1 1.8 1.2 The following items have also been charged in arriving at profit before tax: ll figures in £ million 2022 2021 ^ 47.1 35.8 40.3 37.2 5.9 8.4 (gain)/loss (0.7) 0.5 – customer funded contracts 287.5 281.9 – Group funded 14.6 18.5 ^ The 2021 cost of inventories expensed was incorrectly reported as £10.2m in the 2021 financial statements and has been restated. ### 158 QinetiQ Group plc Annual Report & Accounts 2022 Total Finance expense before specific adjusting items Total Total auditors’ remuneration A Total audit fees Net finance income Fees payable to the auditor and its associates: Foreign exchange Share Audit of the accounts of subsidiaries of the Company Plus: specific adjusting items Lease expense Audit Finance income before specific adjusting items Leased assets: depreciation Post Audit of the Group’s annual accounts Underlying net finance expense Bank interest and commitment fees Receivable on bank deposits Owned assets: depreciation Short Amortisation of Cost of inventories expensed Research and development expenditure All figures in £ million All figures in £ million Other assurance Research and development expenditure All figures in £ million Unwinding of discount on Other assurance services 2021 2021 2022 2022 2022 2021 158 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements 9. Taxation ## continued adjusting adjusting ll figures in £ million items Total items Total expense/(income) 20.6 (0.2) 20.4 12.3 (0.4) 11.9 (4.0) – (1.6) – (1.6) 4.0 (0.2) 3.8 3.7 (0.4) 3.3 respect of prior years – – – (0.4) – (0.4) 20.6 (0.4) 20.2 14.0 (0.8) 13.2 /expense (4.0) (3.7) (7.7 8.7 (1.9) 6.8 0.3 15.9 16.2 – – – respect of prior years 1.0 – 1.0 1.1 (0.4) 0.7 /expense (2.7) 12.2 9.5 9.8 (2.3) 7.5 17.9 11.8 29.7 23.8 (3.1) 20.7 /(loss) before tax 136.0 (16.3) 119.7 149.9 (7.3) 142.6 /loss before tax at 19% (2021: 19%) | | | | -taxable items (1.2) – (1.2 | | 0.6 (0.5) 0.1 | | --- | --- | --- | --- | --- | --- | | ax in respect of prior years (3.0) – (3.0 | | | | | (0.9) (0.4) (1.3) | | | | (5.1) – | | | (5.1) – (5.1) | | | of deferred tax asset | | | 3.3 – 3.3 (1.1) – (1.1) | | 0.3 15.9 16.2 – – – ifferent tax rates in overseas jurisdictions (2.2) (1.0) 1.8 (0.8) 1.0 13.2% 24.8% 15.9% 14.5% ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. The total tax charge was £29.7m (2021 restated: £20.7m), with specific adjusting items driving the increase, see below. The underlying tax charge was £17.9m (2021: £23.8m), on lower underlying profit before tax, with an underlying effective tax rate of 13.2% for the year ending 31 March 2022 (2021: 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% (2021: 19.4%). The impact of RDEC is shown net of £9.5m (2021: £10.6m) appropriated by the MOD (see note 36 for details). 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 (see note 37). Tax on specific adjusting items 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 of income (2021 restated: income of £3.1m) in respect of the pre-tax specific adjusting items (see note 4), the total specific adjusting items tax expense was £11.8m (2021 restated: income of £3.1m). Factors affecting future tax charges The effective tax rate is expected to remain below the UK statutory rate, subject to the impact of any tax legislation changes, the geographic mix of profits and the assumption that RDEC retained by the Group remain in the tax line. Future recognition of unrecognised tax losses will also affect future tax charges. The OECD has released model rules for Pillar II of the Base Erosion and Profit Shifting regulations covering application of a Global Minimum Tax. The Group is monitoring progress of these rules and management’s initial view is that they are not expected to have a material effect on the tax charge. | | | QinetiQ Group plc Annual Report & Accounts 2022 | 159 | | --- | --- | --- | --- | | | Specific Specific | | | | Principal factors reducing the Group’s current year tax charge | CORPORATE FINANCIAL STRATEGIC | | | Financial Statements Taxation expense/(income) Effective tax rate Current tax expense/(income) Factors affecting tax expense/(income) in the year Overseas corporation tax Analysis of charge Research and development expenditure credits Current UK tax in respect of prior years Deferred tax (income) T Taxation expense/(income) Current UK tax Tax on profit Deferred tax in Expenses not deductible for tax purposes and non D Profit Deferred tax impact of change in rates Effect of: Deferred tax impact of change in rates In A below the UK statutory rate are explained below: Deferred tax (income) Recognition Current year GOVERNANCE STATEMENTS 2021^ 17.9 23.8 (3.1) 25.8 (3.1) 28.5 (1.4) 2022 11.8 29.7 20.7 22.7 27.1 (5.1) (4.0) (3.2) REPORT ) ) ) Underlying Underlying QinetiQ Group plc AnnualReportandAccounts2022 159 # Notes to the Consolidated Financial Statements continued For the year ended 31 March ## 9. Taxation (continued) ### Changes in tax rates In the Spring Budget 2021, the UK Government announced that from 1 April 2023 the corporation tax rate will increase from 19% to 25%. The 25% rate has been substantively enacted at the balance sheet date. An adjustment has been made to reflect that a portion of the UK deferred tax balances are expected to unwind at the new rate of 25%. The adjustment has been recorded as a specific adjusting item tax expense to the Consolidated income statement of £15.9m and an expense of £20.6m to the Consolidated comprehensive income statement, increasing the deferred tax liability by £36.5m. US deferred tax balances have not yet been adjusted for a potential increase in the US federal tax rate, as an increase has not yet been passed into law. ### Tax risk management and tax cash For details of the Group's approach to tax risk management and discussion of tax cash paid in the year see 'Additional Financial Information'. ## 10. Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year. The weighted average number of shares used excludes those shares bought by the Group and held as own shares (see note 29). For diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares arising from unvested share-based awards including share options. ### Weighted average and diluted number of shares For the year ended 31 March | | | 2022 | 2021 | | --- | --- | --- | --- | | Weighted average number of shares | Million | 573.2 | 569.7 | | Effect of dilutive securities | Million | 6.4 | 6.1 | | Diluted number of shares | Million | 579.6 | 575.8 | Underlying basic earnings per share figures are presented below, in addition to the basic and diluted earnings per share, because the Directors consider this gives a more relevant indication of underlying business performance and reflects the adjustments to basic earnings per share for the impact of specific adjusting items (see note 4) and tax thereon. ### Underlying EPS For the year ended 31 March | | | 2022 | 2021* | | --- | --- | --- | --- | | Profit attributable to the owners of the Company | £ million | 90.0 | 121.7 | | Remove loss after tax in respect of specific adjusting items | £ million | 28.1 | 4.2 | | Underlying profit after taxation | £ million | 118.1 | 125.9 | | Weighted average number of shares | Million | 573.2 | 569.7 | | Underlying basic EPS | Pence | 20.6 | 22.1 | | Diluted number of shares | Million | 579.6 | 575.8 | | Underlying diluted EPS | Pence | 20.4 | 21.9 | ### Basic and diluted EPS For the year ended 31 March | | | 2022 | 2021* | | --- | --- | --- | --- | | Profit attributable to the owners of the Company | £ million | 90.0 | 121.7 | | Weighted average number of shares | Million | 573.2 | 569.7 | | Basic EPS – total Group | Pence | 15.7 | 21.4 | | Diluted number of shares | Million | 579.6 | 575.8 | | Diluted EPS – total Group | Pence | 15.5 | 21.1 | * Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. 160 QinetiQ Group plc Annual Report & Accounts 2022 STRATEGIC^{}[] REPORT CORPORATE^{}[] GOVERNANCE FINANCIAL^{}[] STATEMENTS ## 11. Dividends An analysis of the dividends paid and proposed in respect of the years ended 31 March 2022 and 31 March 2021 is provided below: | | Pence per share | £m | Date paid/ payable | | --- | --- | --- | --- | | Interim 2022 | 2.3 | 13.2 | Feb 2022* | | Final 2022 (proposed) | 5.0 | 28.8 | Aug 2022 | | **Total for the year ended 31 March 2022** | **7.3** | **42.0** | | | Interim 2021 | 2.2 | 12.6 | Feb 2021 | | Final 2021 | 4.7 | 27.0 | Aug 2021* | | **Total for the year ended 31 March 2021** | **6.9** | **39.6** | | *Total cash paid in the year to 31 March 2022 was £40.2m (2021: £37.7m) The proposed final dividend in respect of the year ending 31 March 2022 will be paid on 25 August 2022. The ex-dividend date is 28 July 2022 and the record date is 29 July 2022. ## 12. Business combinations There were no acquisitions in the year to 31 March 2022. Deferred consideration of £0.8m has been paid in respect of the prior year acquisition of QinetiQ Training & Simulation Limited (formerly known as Newman & Spurr Consultancy Limited). ### Acquisitions in the year to 31 March | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Naimuri Limited | – | 28.4 | | Inzpire Group Limited | – | 3.9 | | Less: cash acquired within Naimuri Limited | – | (4.0) | | QinetiQ Training & Simulation Limited | 0.8 | 0.2 | | **Total acquisitions cash outflow** | **0.8** | **28.5** | ## 13. Loss/gain on business divestments | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Boldon James business (comprising Boldon James Limited) | – | 19.3 | | Commerce Decisions business (comprising Commerce Decisions Limited and Commerce Decisions Pty Ltd) | (0.9) | 1.6 | | OptaSense business (comprising OptaSense Holdings Limited and subsidiary companies) | – | 7.5 | | **(Loss)/gain on business divestments** | **(0.9)** | **28.4** | Deferred consideration of £1.5m was potentially receivable in respect of the Commerce Decisions business, contingent on performance of the disposed business in the year to 31 March 2022. The fair value of which had been estimated at £0.9m as at 31 March 2021. The required performance was not achieved, nil deferred consideration became due and the receivable has been written off to the income statement in the current year, classified as a specific adjusting item. QinetiQ Group plc Annual Report & Accounts 2022 161 # Notes to the Consolidated Financial Statements continued For the year ended 31 March ## 14. Goodwill | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | **Cost** | | | | At 1 April | 287.6 | 307.9 | | Acquisitions | – | 15.0 | | Disposals | – | (17.2) | | Foreign exchange | 8.5 | (18.1) | | **At 31 March** | **296.1** | **287.6** | | **Impairment** | | | | At 1 April | (142.1) | (127.1) | | Disposals | – | 0.2 | | Impairment in year | – | (25.4) | | Foreign exchange | (4.6) | 10.2 | | **At 31 March** | **(146.7)** | **(142.1)** | | **Net book value at 31 March** | **149.4** | **145.5** | ### Goodwill analysed by cash-generating unit (CGU) Goodwill is allocated across five cash-generating units (CGUs) within the EMEA Services segment and four CGUs within the Global Products segment. The full list of CGUs that have goodwill allocated to them is as follows: | All figures in £ million | Primary reporting segments | 2022 | 2021 | | --- | --- | --- | --- | | US Technology Solutions | Global Products | 41.5 | 39.6 | | MTEQ US C5ISR | Global Products | 34.6 | 33.0 | | Target Systems | Global Products | 24.7 | 24.3 | | Space Products | Global Products | 5.6 | 5.7 | | QinetiQ Germany | EMEA Services | 2.6 | 2.7 | | Inspire | EMEA Services | 11.7 | 11.7 | | QinetiQ Training & Simulation Limited | EMEA Services | 7.8 | 7.8 | | Naimuri Limited | EMEA Services | 14.8 | 14.8 | | Australia | EMEA Services | 6.1 | 5.9 | | **Net book value at 31 March** | | **149.4** | **145.5** | Goodwill is attributable to the excess of consideration over the fair value of net assets acquired and includes expected synergies, future growth prospects and employee knowledge, expertise and security clearances. The Group tests each CGU for impairment annually, or more frequently if there are indications that goodwill might be impaired. Impairment testing is dependent on management's estimates and judgements, particularly as they relate to the forecasting of future cash flows, the discount rates selected and expected long-term growth rates. As a result of impairment in prior years, QinetiQ Germany has limited headroom (26%) and a critical sensitivity is discussed further below. US Technology Solutions also displays limited headroom (23%) reflecting the balance of opportunity and risk of securing new government contracts as the business responds from its recent short-term challenges, discussed further below. However, alongside all other CGUs, management considers that there are no likely variations in the key assumptions which would lead to an impairment being recognised. ### Key assumptions #### Cash flows The value-in-use calculations generally use discounted future cash flows based on financial plans approved by the Board covering a five-year period (aligned with the Group's Integrated Strategic Business Plan process and the longer-term viability assessment period). These are 'bottom-up' forecasts based on detailed analysis by contract for the revenue under contract and by opportunity for the pipeline. Pipeline opportunities are categorised as 'base case' and 'high case' by management and only 'base case' opportunities are included in the financial plans used for the value-in-use calculations. Cash flows for periods beyond these periods are extrapolated based on the last year of the plans, with a terminal growth-rate assumption applied. Whilst the Group will likely be impacted by climate change in the future to an extent, the impacts on future cash flows used in the value-in-use calculations are not considered to be material. #### Terminal growth rates and discount rates The specific plans for each of the CGUs have been extrapolated using the terminal growth rates as detailed in the following table. Growth rates are based on management's estimates which take into consideration the long-term nature of the industry in which the CGUs operate and external forecasts as to the likely growth of the industry in the longer term. The Group's weighted average cost of capital was used as a basis in determining the discount rate to be applied, adjusted for risks specific to the market characteristics of CGUs, as appropriate on a pre-tax basis. This is considered an appropriate estimate of a market participant discount rate. 162 QinetiQ Group plc Annual Report & Accounts 2022 ## Notes to the Consolidated Financial Statements ## continued : (2021) Technology Systems Germany Training & Solutions Simulation 2.3 (2.1) 2.1 ( 1.7) 2.1 (1.7) 2.3 (2.1) 2.1 (1.7) 2.3 (2.3) 1.6 (1.5) 2.1 (1.7) 2.1 (1.7) -tax discount rate 10.8 (11.3) 11.6 (12.2) 11.5 (11.9) 10.8 (11.3) 12.2 (12.8) 9.4 (10.0) 9.1 (9.3) 11.5 (12.3) 12.2 (12.2) The value of the terminal year cash flow, the discount rate and the terminal growth rates have a significant impact on the value of the discounted cash flow. Sensitivities are provided below for each of the significant CGUs. Significant CGUs US Technology Solutions The carrying value of the goodwill for the US Technology Solutions CGU was £41.5m as at 31 March 2022 (2021: £39.6m). The recoverable amount of this CGU as at 31 March 2022, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net operating assets (of £98.5m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. These cash flows include certain assumptions around a turnaround in 2023 from a period of softened performance in 2022 which is then sustained through growth of new product lines in development, with clear market opportunity, and winning identified future government contracts. US organic revenue reduced by 21% compared to prior year with the second half revenue performance recovery slower than expected due to the US defence budget being constrained by the extended Continuing Resolution. Confidence remains in the turnaround in FY23 having secured significant growth in order intake in FY22 which, coupled with a new leadership team provides a strong foundation for delivery of our strategy in the US. An increase in the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £2.0m would not cause the net operating assets to exceed their recoverable amount. US C5ISR (previously MTEQ) The carrying value of the goodwill for the US C5ISR CGU as at 31 March 2022 was £34.6m (2021: £33.0m). The recoverable amount of this CGU as at 31 March 2022, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net operating assets (of £82.0m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £2.0m would not cause the net operating assets to exceed their recoverable amount. Target Systems The carrying value of the goodwill for the Target Systems CGU as at 31 March 2022 was £24.7m (2021: £24.3m). The recoverable amount of this CGU as at 31 March 2022, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net operating assets (of £85.0m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £2.0m would not cause the net operating assets to exceed their recoverable amount. Germany The carrying value of the goodwill for the Germany CGU as at 31 March 2022 was £2.6m (2021: £2.7m). Our German operations generally performed below expectations in the year, however its core contract is in the process of being extended to June 2023 and increased in scope, underpinning performance in future years. Whilst a further impairment is a risk (following a £25m impairment in 2021) if additional contracts are not won, or the core contract is not successfully re-tendered in June 2023, the current forecasts result in a small headroom when comparing discounted future cash flows to carrying value of assets. The key sensitivity impacting on the value in use calculations is the terminal year cash flows, with the core contract contributing approximately one third of the business’s revenue in the terminal year (2027). Should this key contract not be successfully won (on a long-term basis) in June 2023 then there would be a significant decrease in future cash flows and this would lead to full impairment of the residual £2.6m carrying value of goodwill together with an impairment charge of approximately £1.3m against the £26.8m carrying value of intangible assets. An increase in the discount rate of 1% or a decrease in the terminal growth rate of 1% would decrease the headroom by £7.0m and £5.3m respectively. Inzpire The carrying value of the goodwill for the Inzpire CGU as at 31 March 2022 was £11.7m (2021: £11.7m). The recoverable amount of this CGU as at 31 March 2022, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net operating assets (of £25.8m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £2.0m would not cause the net operating assets to exceed their recoverable amount. Naimuri The carrying value of the goodwill for the Naimuri CGU as at 31 March 2022 was £14.8m (2021: £14.8m). The recoverable amount of this CGU as at 31 March 2022, based on value in use and calculated using the assumptions noted above, is higher than the carrying value of net operating assets (of £25.8m). The key sensitivity impacting on the value in use calculations is the terminal year cash flows. An increase in the discount rate of 1%, a decrease in the terminal growth rate of 1% or a decrease in the terminal year cash flows of £2.0m would not cause the net operating assets to exceed their recoverable amount. | | | | | QinetiQ Group plc Annual Report & Accounts 2022 | 163 | | --- | --- | --- | --- | --- | --- | | All figures % | Space NV US C5ISR Australia | Naimuri QinetiQ QinetiQ Target Inzpire | US | | | | | | CORPORATE FINANCIAL STRATEGIC | | | | | 2022 Financial Statements | | | | | | | Terminal growth rate Pre | | GOVERNANCE STATEMENTS | REPORT | | | QinetiQ Group plc AnnualReportandAccounts2022 163 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 15. Intangible assets For the year ended 31 March For the year ended 31 March 2022 ll figures in £ million relationships Other costs intangibles^ Total 1 April 2021 restated 112.5 82.8 28.2 54.9 278.4 – – 6.0 5.9 * – internally developed – – 3.4 5.8 9.2 * – purchased – – – 6.4 6.4 – (4.0) – (1.7) (5 2.0 2.7 0.1 0.6 5.4 2022 114.5 81.5 31.6 72.0 299.6 mortisation and impairment 2021 (54.4) (34.0) – 4.0 – 1.7 5.7 (2.3) – (0.3) 2022 65.4 26.1 12.7 36.1 140.3 ^ Includes Assets In Course Of Construction of closing net book value of £14.0m (2021 restated: £7.1m). * Additions per the table above are different to the capital expenditure included in the cash flow statement due to the relative timing of cash payments compared to the recognition of balance sheet assets. ‘Other’ consists primarily of intellectual property and existing technology arising on acquisition of businesses. Significant individual assets include: customer relationships associated with US C5ISR (formerly known as MTEQ), Germany and QinetiQ Training & Simulation Limited (formerly known as Newman & Spurr Consultancy Limited) (£15.7m; £24.3m; £3.3m respectively) with remaining amortisation periods of approximately 8 years, 10 years and 10 years respectively, and acquired technology associated with US C5ISR, Germany, and QinetiQ Training & Simulation Limited (£13.5m; £3.3m; £2.1m respectively) all with remaining amortisation periods of approximately 8 years. For the year ended 31 March 2021 | ll figures in £ million | | relationships Other | | costs | intangibles^ Total | | | | --- | --- | --- | --- | --- | --- | --- | --- | | 31 March 2020 117.5 | | | 98.7 | 27.4 | | 68.2 | 311.8 | | | - software implementation costs – – – | | | | | | (2.5) | * 117.5 98.7 27.4 65.7 309.3 – – – 0.1 0.1 | | – (2.5) | | | 8.5 (6.0 | | – | | --- | --- | --- | --- | --- | --- | --- | | – internally developed* | | – – 2.5 1.7 4.2 | | | | | | – purchased | | – | – | 0.1 | 6.4 | 6.5 | – recognised on acquisition 9.3 1.9 – – 11.2 | | | (9.0) | (10.3) | | (40.3) | | --- | --- | --- | --- | --- | --- | | | | (6.3) | | – | (12.6) | | 2021 restated* | 112.5 82.8 28.2 54.9 278.4 | | | | | mortisation and impairment | 2020 | | (63.8) | (21.6) | | (172.9) | | --- | --- | --- | --- | --- | --- | | | | (3.2) | (2.4) | | (15.6) | | | – 0.7 (0.9) | | | 0.2 – | | 8.9 7.7 8.1 10.9 35.6 3.1 4.2 – 0.3 7.6 31 March 2021 2021 restated* 72.4 28.4 11.4 20.9 133.1 ^ Includes Assets In Course Of Construction with net book value at 31 March 2021 restated of £9.6m. * Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. | | | | | 164 | QinetiQ Group plc Annual Report & Accounts 2022 | | --- | --- | --- | --- | --- | --- | | Development Development | Customer Customer | Other Other | | | | | Cost Net book value at 31 March 2022 Cost Net book value at 31 March Reclassifications Additions At 31 March Reclassifications from PPE At 31 March Accumulated a Accumulated a At 1 April Amortisation charge for year A Reclassifications Foreign exchange At Foreign exchange At 31 March At 1 April At A Disposal Business divestments Reclassifications from PPE Foreign exchange Foreign exchange Change in accounting policy Additions At 1 April 2020 restated Additions Disposal At Business divestments Additions Additions Amortisation charge for year | (145.3) (159.3) | (145.3) Acquired intangibles (49.1) (18.9) (35.9) (40.1) (55.4) (16.1) (16.8) (34.0) (40.1) (16.8) (44.4) (43.1) (12.1) (54.4) Acquired intangibles (0.1) (1.0) (3.6) (8.0) (2.7) (2.1) (3.3) (7.7) (2.3) (5.4) (0.9) (8.9) (2.5) | .7) | ) | | 164 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements 16. Property, plant and equipment For the year ended 31 March 2022 ## continued Plant, Computers Land and machinery and office Assets under buildings machinery and office ll figures in £ million buildings and vehicles equipment construction and vehicles equipment Total 1 April 2021 353.8 248.9 81.9 76.9 54.8 16.9 0.4 833.6 – purchased* 0.5 23.0 2.5 47.3 1.3 0.5 – 75.1 | (0.6) | | | | (2.5) | (1.0) | (1.5) | – (9.2) | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | 0.5 0.8 0.4 0.2 1.9 | | | | | – 3.7 | | | | 2022 | | 350.6 274.5 102.8 94.5 | | | 56.5 16.6 0.4 | | 895.9 | epreciation and impairment 2021 (193.8) (150.8) (44.0) – (33.0) (0.4) (436.4) (10.5) (16.7) (13.1) – (4.7) – (46.2) – 1.4 – – – – – 1.4 (0.4) (0.8) (0.4) - (1.4) 0.1 – (2.9) et book value 160.0 98.1 37.9 76.9 21.8 2.5 – 397.2 – * Additions per the table above are different to the capital expenditure included in the cash flow statement due to the relative timing of cash payments compared to the recognition of balance sheet assets. For the year ended 31 March 2021 Plant, Computers Computers Land and machinery and office Assets under Land and machinery and office ll figures in £ million buildings and vehicles equipment construction buildings and vehicles equipment Total 19.8 10.0 13.9 – – – – – purchased* 11.0 8.9 5.8 36.7 11.1 – – 73.5 - recognised on acquisition 0.1 0.2 0.1 – 1.2 – – 1.6 (0.7) (0.3) (3.3) – (7.1) 2021 epreciation and impairment 1.7 26.2 4.9 – 4.1 0.2 – 37.1 0.3 4.7 2.9 – 3.1 – – 11.0 (0.5) – – – – – – (0.5) (193.8) (44.0) – (33.0) (436.4) – * Additions per the table above are different to the capital expenditure included in the cash flow statement due to the relative timing of cash payments compared to the recognition of balance sheet assets. | | | QinetiQ Group plc Annual Report & Accounts 2022 | 165 | | --- | --- | --- | --- | | Computers Land and | Plant, Plant, | | | | | CORPORATE FINANCIAL STRATEGIC | | | Financial Statements Cost Accumulated d At 31 March 2021 Opening n At 31 March Cost At Foreign exchange Reclassifications/transfers Impairment Additions Closing Net Book value Accumulated d Disposals Charge At 31 March 2022 Net book value at 31 March 2021 Additions At 31 March Business divestments A Additions At 1 April Foreign exchange A Reclassifications/transfers Foreign exchange Disposals Impairment Reclassifications/transfers Reclassifications to intangibles Business divestments Charge Disposals Reclassifications to intangibles At 1 April 2020 Foreign exchange At 1 April 2020 Disposals (204.5) (150.8) (164.8) (481.4) GOVERNANCE (167.8) STATEMENTS (183.9) (443.4) (14.4) 397.2 146.1 109.7 414.5 (56.7) 248.9 833.6 (39.1) (15.5) 160.0 353.8 264.2 819.0 (14.4) (43.7) (15.5) (12.4) 325.6 (26.7) (26.9) (13.8) (12.0) (45.6) (42.4) (36.6) (39.5) 98.1 76.9 16.9 46.1 94.1 20.2 76.9 17.4 (0.4) (0.4) 37.9 21.8 54.8 81.9 70.5 84.6 56.1 17.6 (0.4) (0.1) (2.9) (0.7) (1.2) (2.1) (0.3) (0.4) (0.1) (0.4) (1.7) (1.4) (0.1) (0.1) (0.3) (5.6) (2.7) (4.6) (1.2) (0.1) (5.9) (5.0) (0.3) (0.3) (1.2) (3.1) (4.8) (9.7) (5.6) (0.1) (0.3) (1.7) (5.5) REPORT 1.1 2.5 0.4 1.0 4.3 0.2 2.1 0.9 4.4 0.6 1.6 0.3 2.0 0.5 5.0 1.2 0.4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Right of use assets Right of use assets Owned assets Owned assets QinetiQ Group plc AnnualReportandAccounts2022 165 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements For the year ended 31 March 17. Equity accounted investments As at 31 March associates share of associates share of financial JV’s and financial JV’s and ll figures in £ million results associates results associates -current assets 0.6 0.3 0.7 0.3 9.1 5.1 12.9 6.5 9.7 5.4 13.6 6.8 -current liabilities (0.7) (1.3) (0.6) 4.0 2.6 8.2 4.2 s of joint ventures 0.9 1.0 2.6 4.2 In the prior year the Group sold a share of an investment in a middle-east joint venture for a gain of £0.3m. 18. Deferred tax For the year ended 31 March 2022 Deferred tax asset | | | | | Short-term | | forward | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | timing | interest | | | Lease | Tax | | ll figures in £ million | | | | differences | | expense | | liabilities | | losses Total | | redited/(charged) to income statement 3.1 (1.4) | | | | | | | | | (1.2) | 12.5 13.0 | | | to other comprehensive income (0.9) | | | | | | – – – | | | | | | to equity (0.7) | | | | | | – – – | | | | | | | (0.2) | | | | | – – – | | | | | | | | 2022 | | 14.7 – 4.0 21.7 40.4 | | | | | | (19.4 2022 21.0 Deferred tax liability property, | | | Pension | | plant & | | Right of use | | | Acquisition | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | ll figures in £ million | | surplus | equipment | | | | assets | | intangibles Total | | | | Charged)/credited to income statement (3.3) | | | | (20.7) | | | | 1.4 0.1 (22.5) | | | | | harged to other comprehensive income (47.6) | | | | | – – – (47.6) | | | | | | | | | – | | | | (0.1) | | | | | (0.1) | (0.3) | 2022 19.4 2022 Deferred tax has been calculated at the rate at which the timing difference is expected to reverse using the enacted future statutory rates. Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred tax balances relate to the same taxation authority. | | Owned | | 166 | QinetiQ Group plc Annual Report & Accounts 2022 | | --- | --- | --- | --- | --- | | Group net Group net JV’s and JV’s and | Carried | | | | | Net assets of joint ventures and associates Gross deferred tax asset at 31 March Net assets of joint ventures and associates Net deferred tax asset at 31 March Less: liability available for offset Net asset Transferred to current tax Current assets Gross deferred tax liability at 31 March A Net deferred tax liability at 31 March Non Charged Foreign exchange A Less: asset available for offset Charged C C Non ( A At 1 April 2021 Net assets of associate Foreign exchange At 1 April 2021 Current liabilities | (176.1) (156.7) (105.7) (96.4) (54.3) (22.0) (5.7) (2.8) (5.4) (2.6) (45.5) (33.5) (22.0) | (1.4) (4.3) (2.1) (4.1) (2.0) (3.4) (0.1) 12.7 27.7 (4.7) (0.2) (0.7) (0.9) 3.2 1.7 1.4 5.1 8.5 0.7 0.1 0.7 1.5 – | ) | 2022 2021 | | 166 | | | | QinetiQGroupplc AnnualReportandAccounts2022 | ## Notes to the Consolidated Financial Statements At 31 March 2022 the Group had unused tax losses and US carried forward interest expense of £128.1m (2021: £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. No ## continued deferred tax asset is recognised in respect of the £43.8m of US interest deductions due to uncertainty over the timing and extent of their utilisation. Full recognition of the US carried forward interest expense would increase the deferred tax asset by £11.8m. The Group has £30.5m of time-limited US net operating losses of which £21.5m will expire in 2035 and £9.0m in 2036. The Group made overseas losses in the period ended 31 March 2022 and recognition of deferred tax assets is dependent on future forecast taxable profits. The Group has reviewed the latest forecasts for these businesses which incorporate the unsystematic risks of operating in the defence business. In the period beyond the 5 year forecast we have reviewed the terminal period profits and based on these and our expectations for these businesses we believe it is probable the losses, with the exception of the interest deductions will be fully utilised. Based on the current forecasts the losses will be fully utilised over the next 6-8 years. A 10% change in the forecast profits would alter the utilisation period by 1 year. There are no material temporary differences associated with investments in subsidiaries or interests in joint ventures for which deferred tax liabilities have not been recognised. For the year ended 31 March 2021 Deferred tax asset Short-term forward Intellectual timing interest Lease Tax ll figures in £ million property differences expense liabilities losses Total 2020 0.3 15.6 – – 7.8 23.7 (1.2) – – 1.3 – – 0.5 – – – 0.5 – (0.3) – – – (0.3) – – – – (0.2) – (1.8) 1.4 5.1 – 4.7 2021 – 12.7 1.4 5.1 8.5 27.7 Deferred tax liability property, | | | Pension | | plant & | Right of use | | | Acquisition | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | ll figures in £ million | | surplus | equipment | | | assets | | intangibles Total | | | | 2020 | (63.8) | | (26.8) | | | – (21.1) | | (111.7) | | Charged)/credited to income statement (1.5) | | | | (6.8) | | | – 0.8 (7.5) | | | redited to other comprehensive income 19.8 – – – 19.8 – – – (2.1) (2.1) – 0.1 – 0.4 0.5 19. Current tax As at 31 March ll figures in £ million 2022 2021^ 1.4 0.7 (3.9 (2.5) current tax payable (2.5 (1.8) ^ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. ### Owned QinetiQ Group plc Annual Report & Accounts 2022 167 Carried CORPORATE FINANCIAL STRATEGIC Financial Statements Gross deferred tax asset at 31 March A Reclassification (Charged)/credited to income statement Acquired in business combination A Eliminated on disposal of businesses At 1 April C Current tax payable Net Transferred to current tax Gross deferred tax liability at 31 March 2021 ( A Net deferred tax liability at 31 March 2021 Current tax receivable Credited to equity Foreign exchange At 1 April Less: asset available for offset Net deferred tax asset at 31 March 2021 Foreign exchange Credited to other comprehensive income Reclassification Less: liability available for offset (105.7) GOVERNANCE STATEMENTS (45.5) (33.5) (22.0) (89.7) (16.0) 16.0 (4.7) 11.7 (0.1) (0.2) (0.6) (4.7) (1.1) (1.7) (4.7) REPORT 1.0 1.0 – – – – – – – – – – ) ) QinetiQ Group plc AnnualReportandAccounts2022 167 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements For the year ended 31 March 20. Inventories As at 31 March 32.5 36.0 21. Trade and other receivables As at 31 March 154.4 120.5 145.8 161.1 34.2 37.3 Trade and other receivables includes assets that are realised as part of the business’s normal operating cycle, including amounts of £2.3m (2021: £11.2m) that are not expected to be realised within 12 months of the year end. Contract assets reduced in year primarily due to the closure of a complex project (see Global Products operating review). Credit risk is limited as a result of the high percentage of revenue derived from UK and US government agencies. Accordingly, the Directors believe that no credit provision in excess of the allowance for doubtful debts is required. As at 31 March 2022 the Group carried a loss allowance in respect of expected credit risk of £2.7m (2021: £3.6m). Contract assets represents unbilled amounts recoverable under customer contracts (refer to accounting policies note 36). Ageing of receivables and associated loss allowance for expected credit risk As at 31 March 2022 past due past due past due - contract assets (£m) 145.8 – – – 145.8 (%) – – – 47.4% 0.9% – – – 2.7 2.7 As at 31 March 2021 past due past due past due - contract assets (£m) 161.1 – – – 161.1 (%) 0.7% – 0.8% 53.3% 1.3% 1.9 – 0.1 1.6 3.6 Movements in the provision for expected credit loss Trade Contract Trade Contract receivables assets receivables assets 1.8 1.8 3.1 – 1.8 – 1.4 1.8 amount reversed through income statement (1.8) – – – – – The maximum exposure to credit risk in relation to trade and other receivables at the reporting date is the fair value of trade and other receivables. The Group does not hold any collateral as security. | | | | 168 | QinetiQ Group plc Annual Report & Accounts 2022 | | --- | --- | --- | --- | --- | | Up to 30 days Up to 30 days 30-120 days 30-120 days | >120 days >120 days | Current Current Total Total | | | | Contract assets Raw materials Loss allowance (£m) Loss allowance (£m) Unutilised Trade receivables All figures in £ million Expected loss rate Expected loss rate All figures in £ million Increase in loss allowance recognised in income statement At 31 March All figures in £ million Gross carrying amount Gross carrying amount At 1 April Foreign exchange Prepayments Finished goods Total inventory Gross carrying amount - trade receivables (£m) Gross carrying amount - trade receivables (£m) Divestments Other receivables Work in progress Total trade and other receivables Utilised (receivables written off) | | 361.2 326.7 136.7 157.1 124.1 2022 2021 2022 2021 2022 2021 54.9 16.2 12.8 54.4 98.5 11.9 26.8 (2.3) (0.1) 10.7 (0.2) (0.1) (0.9) 2.7 1.8 1.8 6.8 3.0 7.8 6.2 5.6 7.9 5.7 | – – – – – – | | | 168 | | | | QinetiQGroupplc AnnualReportandAccounts2022 | ## Notes to the Consolidated Financial Statements ## continued 22. Trade and other payables As at 31 March 76.1 77.3 64.6 43.7 182.5 157.3 139.5 133.4 462.7 411.7 liabilities 15.2 36.3 23.6 15.7 -current trade and other payables 38.8 52.0 501.5 463.7 Current other payables includes £22m of RDEC payable to MOD. This is subject to a determination from the SSRO and it is possible that the outcome could be that RDEC is retained by the Company, in which case the liability would be reversed to the income statement. 23. Provisions For the year ended 31 March 2022 ll figures in £ million Property Other Total 2021 8.0 4.0 12.0 1.0 16.5 17.5 | | (0.5) | | (1.0) | | --- | --- | --- | --- | | | (1.2) | | (1.4) | | 2022 | | 7.3 19.8 27.1 | | 2.8 18.3 21.1 -current liability 4.5 1.5 6.0 2022 7.3 19.8 27.1 Property provisions relate to under-utilised properties. The extent of the provision is affected by the timing of when properties can be sub-let and the proportion of space that can be sub-let. Based on current assessment the provision will be utilised within 6 years. Other provisions includes £16m in respect of a civil liability for Pendine incident. This is offset in Other Receivables for an insurance recoverable. The balance relates to environmental and other liabilities, the magnitude and timing of utilisation of which are determined by a variety of factors. 24. Net cash As at 31 March 0.4 – 0.4 0.4 – 0.4 | – | | | (5.5) | – | (6.9) | | --- | --- | --- | --- | --- | --- | | | 0.2 | | (1.2) | 0.5 | 0.4 | | | | 0.6 | (6.3) | 0.9 | (6.1) | -current assets/(liabilities) financing costs 0.5 – 0.5 0.8 – 0.8 | | – | | | (16.6) | – | (19.8) | | --- | --- | --- | --- | --- | --- | --- | | | | – | | (0.6) | – | (0.9) | | | | | 0.5 | (16.7) | 0.8 | (19.9) | | financial assets/(liabilities) | | | 1.1 (24.1 | (23.0) | 1.7 | (26.0) | 65.7 – 65.7 57.0 – 57.0 182.4 – 182.4 133.1 – 133.1 248.1 248.1 190.1 – 190.1 Group 225.1 164.1 At 31 March 2022 the Group held £0.2m (2021: £5.6m) of cash which is restricted in its use. ### QinetiQ Group plc Annual Report & Accounts 2022 169 CORPORATE FINANCIAL STRATEGIC Financial Statements Total current trade and other payables Total cash and cash equivalents Total non-current financial assets/(liabilities) Total non All figures in £ million Other payables Total current financial assets/(liabilities) Contract liabilities At 31 March Non Total trade and other payables Cash At 31 March Lease liabilities Contract Created in year Derivative financial instruments Other tax and social security Total net cash as defined by the Total Deferred Current financial assets/(liabilities) Current liability Lease liabilities A Trade payables Deferred financing costs At 1 April All figures in £ million Released in year Utilised in year Accrued expenses and other payables Non Cash equivalents Derivative financial instruments Liabilities Liabilities GOVERNANCE STATEMENTS Assets Assets (20.7) (27.7) (17.2) (19.8) (16.6) 2021 2022 2021 (6.9) (7.0) 2022 (1.4) (0.1) (5.5) (6.9) (0.5) (0.2) (0.6) (0.9) REPORT Net Net ) QinetiQ Group plc AnnualReportandAccounts2022 169 # Notes to the Consolidated Financial Statements continued For the year ended 31 March ## 25. Cash flows from operations For the year ended 31 March | All figures in £ million | 2022 | 2021^{a} | | --- | --- | --- | | **Profit after tax for the year** | **90.0** | **121.9** | | Adjustments for | | | | Taxation expense | 29.7 | 20.7 | | Net finance income | (3.1) | (5.2) | | Loss/(gain) on disposal of businesses | 0.9 | (28.4) | | Gain on disposal of investment | – | (0.3) | | Gain on sale of property | (0.7) | (0.1) | | Impairment of plant and equipment | 0.5 | 0.5 | | Impairment of property | 1.2 | – | | Impairment of goodwill | – | 25.4 | | Acquisition related remuneration costs not paid as at year end | – | 1.8 | | Amortisation of purchased or internally developed intangible assets | 5.4 | 4.7 | | Amortisation of intangible assets arising from acquisitions | 10.7 | 10.9 | | Depreciation of property, plant and equipment | 46.2 | 45.6 | | Loss on disposal of plant and equipment | – | 1.0 | | Share of post-tax profit of equity accounted entities | (0.3) | (0.7) | | Share-based payments charge | 7.4 | 10.6 | | Retirement benefit contributions in excess of income statement expense | (1.8) | (1.6) | | Pension past service cost | 2.4 | – | | Fair value adjustment in respect of contingent consideration | (0.6) | – | | Net movement in provisions | (1.0) | 0.3 | | | **186.9** | **207.1** | | Decrease/(increase) in inventories | 1.4 | (4.6) | | Increase in receivables | (12.8) | (97.3) | | Increase in payables | 34.2 | 89.2 | | **Changes in working capital** | **22.8** | **(12.7)** | | **Net cash flow from operations** | **209.7** | **194.4** | $^{a}$ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details ### Reconciliation of net cash flow from operations to underlying net cash flow from operations to free cash flow | All figures in £ million | 2022 | 2021^{a} | | --- | --- | --- | | **Net cash flow from operations** | **209.7** | **194.4** | | Add back specific adjusting item: change in accounting policy in respect of software implementation | 1.9 | 3.6 | | Add back specific adjusting item: acquisition transaction costs | 3.7 | 1.0 | | **Underlying net cash flow from operations** | **215.3** | **199.0** | | Less: tax and net interest payments | (21.0) | (16.4) | | Less: purchases of intangible assets and property, plant and equipment | (84.3) | (75.9) | | **Free cash flow** | **110.0** | **106.7** | $^{a}$ Prior year comparatives have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details ### Underlying cash conversion ratio | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Underlying EBITDA – £ million | 189.5 | 202.1 | | Underlying net cash flow from operations – £ million | 215.3 | 199.0 | | **Underlying cash conversion ratio^{a} – %** | **114%** | **98%** | $^{a}$ Prior year restated to reflect new definition of underlying cash conversion. See page 207. 170 QinetiQ Group plc Annual Report & Accounts 2022 STRATEGIC^{}[] REPORT CORPORATE^{}[] GOVERNANCE FINANCIAL^{}[] STATEMENTS ## 26. Leases ### Group as a lessor The Group receives rental income on certain properties. Primarily these are properties partially occupied by Group companies, with vacant space sub-let to third-party tenants. The Group had contracted with tenants for the following future minimum lease payments: | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Within one year | 5.7 | 5.7 | | In the second to fifth years inclusive | 9.3 | 9.3 | | Greater than five years | 0.5 | 2.4 | | **Total future minimum lease payments** | **15.5** | **17.4** | ### Group as a lessee Amounts recognised in the balance sheet The balance sheet shows the following amounts relating to leases: Right-of-use assets (included within Property, Plant & Equipment – see note 16) | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Land and buildings | 17.4 | 21.8 | | Plant, machinery and vehicles | 1.1 | 2.5 | | Computers and office equipment | – | – | | **Total right of use assets net book value** | **18.5** | **24.3** | Lease liabilities (included within Net cash – see note 24) | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Current | 5.5 | 6.9 | | Non-current | 16.6 | 19.8 | | **Total lease liabilities** | **22.1** | **26.7** | Additions to the right-of-use assets during the 2022 financial year were £1.8m. The total cash outflow for leases in 2022 was £7.2m. The Group had no expense relating to variable lease payments not included in the measurement of lease liabilities. Amounts recognised in the consolidated income statement The consolidated income statement includes the following amounts relating to leases: | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | **Depreciation charge** | | | | Land and buildings | 4.7 | 5.6 | | Plant, machinery and vehicles | 1.2 | 2.7 | | Computers and office equipment | – | 0.1 | | **Total depreciation charge** | **5.9** | **8.4** | | Interest expense (included in finance cost) | 1.0 | 1.0 | | Expense relating to short-term leases (included in operating costs) | 1.3 | 1.1 | | Expense relating to low value leases (included in operating costs) | 0.2 | 0.2 | | **Total lease and sub-lease expense charged to profit before tax** | **8.4** | **10.7** | Minimum lease payment commitments The Group has the following total future minimum lease payment commitments: | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Within one year | 5.5 | 6.9 | | In the second to fifth years inclusive | 13.4 | 15.6 | | Greater than five years | 3.2 | 4.2 | | **Total future minimum lease payment commitments** | **22.1** | **26.7** | Lease payments represent capital and interest payable by the Group on certain property, plant and equipment. Principal leases are negotiated for a term of approximately 10 years. QinetiQ Group plc Annual Report & Accounts 2022 171 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 27. Financial risk management For the year ended 31 March The Group’s international operations expose it to financial risks that include the effects of changes in foreign exchange rates, interest rates, credit risks and liquidity risks. Treasury and risk management policies, which are set by the Board, specify guidelines on financial risks and the use of financial instruments to manage risk. The instruments and techniques used to manage exposures include foreign currency derivatives. Group treasury monitors financial risks and compliance with risk management policies during the year. There have been no changes in any risk management policies during the year or since the year end. For details of the Group’s Treasury policy and management of financial instruments see ‘Additional Financial Information’ on page 205. The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the consolidated statement of changes in equity. The Group has a revolving credit facility with its relationship banks with a requirement for the half yearly testing period that the ratio of Net Debt to EBITDA will not exceed 3:5:1 and the ratio of EBITDA to net finance charges will not be less than 4:1. At year end, the Group was undrawn on the facility. A) Fair values of financial instruments The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Level 1 – measured using quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 – measured using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 2 derivatives comprise forward foreign exchange contracts which have been fair valued using forward exchange rates that are quoted in an active market; Level 3 – measured using inputs for the assets or liability that are not based on observable market data (i.e. unobservable inputs). The following table presents the Group’s assets and liabilities that are measured at fair value as at 31 March 2022: financial instruments 24 – 0.2 – 0.2 13 – – – – | | 24 – | | – | | --- | --- | --- | --- | | -current derivative financial instruments 24 – (0.6 | | | – (0.6 | | | | – | – | The following table presents the Group’s assets and liabilities that are measured at fair value as at 31 March 2021: -current derivative financial instruments 24 – – – – 13 – – 0.9 0.9 For cash and cash equivalents, trade and other receivables and bank and current borrowings, the fair value of the financial instruments approximate to their carrying value as a result of the short maturity periods of these financial instruments. For trade and other receivables, allowances are made within the carrying value for credit risk. For other financial instruments, the fair value is based on market value, where available. Where market values are not available, the fair values have been calculated by discounting cash flows to net present value using prevailing market-based interest rates translated at the year-end rates, except for unlisted fixed asset investments where fair value equals carrying value. There have been no transfers between levels. ### 172 QinetiQ Group plc Annual Report & Accounts 2022 Liabilities Assets Total All figures in £ million Liabilities Current derivative Non All figures in £ million Current derivative financial instruments Financial instruments at fair value through profit or loss Assets Non Total Financial instruments at fair value through profit or loss Current derivative financial instruments Non-current derivative financial instruments Non-current derivative financial instruments Current derivative financial instruments Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Total Total Note Note (1.8) (1.8) (0.5) (1.4) (1.4) (0.9) (0.9) (0.1) (0.1) 0.9 0.4 0.5 0.5 24 24 24 24 – – – – – – – – – – – ) ) 172 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements All financial assets and liabilities had a fair value that is identical to book value at 31 March 2022 and 31 March 2021. Detailed analysis is provided in the following tables: ## continued As at 31 March 2022 Financial Financial Financial Total assets at fair assets at liabilities at Derivatives carrying value profit amortised amortised used as value and ll figures in £ million Note and loss cost cost hedges Other fair value 24 – 0.5 – – – 0.5 and similar items – 170.3 – – – 170.3 24 – – – 0.2 – 0.2 24 – 0.4 – – – 0.4 248.1 171.2 – 0.2 – 419.5 | and similar items – – (205.3) | | | – – (205.3) | | | | --- | --- | --- | --- | --- | --- | | – – – – | | | | | (5.5) | | | – – | | | (22.1) | | | | | 171.2 | | ( | | As at 31 March 2021 Financial Financial Financial Total assets at fair assets at liabilities at Derivatives carrying value profit amortised amortised used as value and ll figures in £ million Note and loss cost^ cost hedges Other^ fair value^ -current and similar items^ – 120.5 – – – 120.5 24 – – – 0.5 – 0.5 190.1 121.7 – 0.5 – 312.3 -current 24 – – – (0.9) – (0.9) 24 – – – (0.1) – (0.1) – – – (6.9) (6.9) ^ In the prior year notes to the financial statements the ‘Trade receivables and similar items’ line item was reported as ‘Trade and other receivables (excluding prepayments)’ and included contract assets and an RDEC debtor. The prior year comparatives have now been restated by £168.9m to exclude such assets which do not meet the definition of a financial instrument. The ‘Trade payables and similar items’ line item was reported as ‘Trade and other payables (excluding contract liabilities)’ and included tax and social security liabilities and RDEC liabilities. The prior year comparatives have now been restated by £68.8m to exclude such liabilities which do not meet the definition of a financial instrument. ### QinetiQ Group plc Annual Report & Accounts 2022 173 CORPORATE FINANCIAL STRATEGIC Financial Statements Total financial assets Total Total financial assets Non-current Financial liabilities Non Financial liabilities A Total financial liabilities Deferred financing costs Current Derivative financial instruments Current Derivative financial instruments Total financial liabilities Derivative financial instruments Lease liabilities Financial assets Non-current Trade receivables Current Lease liabilities Financial assets Derivative financial instruments Trade receivables Non Current Total Deferred financing costs A Deferred financing costs Derivative financial instruments Trade payables Cash and cash equivalents Lease liabilities Trade payables and similar items^ Cash and cash equivalents Lease liabilities Deferred financing costs Derivative financial instruments (229.0) (229.4) (201.3) (201.3) (201.3) (205.3) (205.3) 190.1 GOVERNANCE 190.1 121.7 (201.3) (19.8) STATEMENTS 248.1 (16.6) 190.1 248.1 190.1 83.3 (1.8) 24 (2.0) 24 24 24 248.1 24 24 (1.0) (0.5) (0.6) (1.4) (1.4) (26.7) (26.7) (0.6) (16.6) (19.8) 0.8 0.4 22.1) 0.8 0.4 (5.5) REPORT – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – QinetiQ Group plcAnnualReportandAccounts2022 173 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 27. Financial risk management (continued) For the year ended 31 March B) Interest rate risk The Group operates an interest rate policy designed to optimise interest costs and to reduce volatility in reported earnings. The Group’s current policy is to require rates to be fixed for 30%–80% of the level of borrowings, which is achieved primarily through fixed-rate borrowings. Where there are significant changes in the level and/or structure of debt, policy permits borrowings to be 100% fixed, with regular Board reviews of the appropriateness of this fixed percentage. At 31 March 2022 and 31 March 2021 the Group had no borrowings. Financial assets/(liabilities) As at 31 March 2022 Financial assets Financial liabilities | ll figures in £ million Floating | | | | | bearing | capped | bearing | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | 214.8 0.2 (5.7) | | | | | | (2.0) | | | | | 11.6 – (13.1) | | | | | | | – | | | 14.5 – (1.6) | | | | | | | | – | | | | | 4.9 – (1.6) | | | | | | – | | | 2.3 – (0.1) | | | | | | | | – | | | | | | 248.1 0.2 (22.1) | | | | (2.0) | | As at 31 March 2021 | ll figures in £ million Floating | | | | bearing | capped | bearing | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | 155.4 0.5 (7.8) | | | | | (1.0) | | | | 14.7 – (15.2) | | | | | – | | | 6.6 – (2.1) | | | | | | – | | | | | 9.3 – (1.3) | | | | – | | | 4.1 – (0.3) | | | | | | – | Floating-rate financial assets attract interest based on the relevant reference rate. Floating-rate financial liabilities bear interest at the relevant reference rate. Trade and other receivables/payables and deferred finance costs are excluded from this analysis. Interest rate risk management The revolving credit facility (note 27E) is floating-rate and undrawn as at 31 March 2022. C) Currency risk Transactional currency exposure The Group is exposed to foreign currency risks arising from sales or purchases by businesses in currencies other than their functional currency. It is Group policy that when such a sale or purchase is certain, the net foreign exchange exposure is hedged using forward foreign exchange contracts. Hedge accounting documentation and effectiveness testing are undertaken for all the Group’s transactional hedge contracts. The table below shows the Group’s currency exposures, being exposures on currency transactions that give rise to net currency gains and losses recognised in the income statement. Such exposures comprise the monetary assets and liabilities of the Group that are not denominated in the functional currency of the operating company involved. Functional currency of the operating company 2022 – Sterling 3.2 2.4 0.6 3.8 10.0 2021– Sterling 7.1 3.3 0.8 23.8 35.0 The amounts shown in the table take into account the effect of the forward contracts entered into to manage these currency exposures. The Group enters into forward foreign currency contracts to hedge the currency exposures that arise on sales and purchases denominated in foreign currencies, as the transaction occurs. The principal contract amounts of the outstanding forward currency contracts as at 31 March 2022 against Sterling are net US dollars sold of £80.9m (US$106.7m), net Euros bought £18.9m (€24.0m), net Canadian dollars sold £22.3m (C$36.8m), net United Arab Emirate dirhams sold £1.0m (AED 5.0m), net Swiss Francs bought of £0.9m (CHF 1.0m), net Swedish Krona bought of £3.0m (SEK 34.0m), and net Australian dollars bought £0.3m (A$ 0.5m). | | | | 174 | QinetiQ Group plc Annual Report & Accounts 2022 | | --- | --- | --- | --- | --- | | Non-interest Non-interest Non-interest Non-interest | Fixed or Fixed or | | | | | Total US dollar Other 31 March A Total Sterling Australian dollar 31 March Other Euro A US dollar Australian dollar All figures in £ millions Euro Sterling | | 190.1 (26.7) Other Total (1.0) Euro US$ Financial liabilities 0.5 A$ | Financial assets | Net foreign currency monetary assets/(liabilities) | 174 QinetiQGroupplcAnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements Translational currency exposure The Group has significant investments in overseas operations, particularly in the US. As a result, the Sterling value of the Group’s balance sheet can be affected by movement in exchange rates. The Group does not hedge against translational currency exposure to overseas net assets. ## continued D) Financial credit risk The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not currently expect any counterparties to fail to meet their obligations. Credit risk is mitigated by a Board-approved policy of only selecting counterparties with a strong investment grade long-term credit rating for cash deposits. In the normal course of business the Group operates notional cash pooling systems, where a legal right of set-off applies. The maximum credit-risk exposure in the event of other parties failing to perform their obligations under financial assets, excluding trade and other receivables, totals £226.2m (2021: £163.9m). The Group held cash and cash equivalents of £248.1m at 31 March 2022 (2021: £190.1m), which represents the maximum credit exposure on these assets. The cash and cash equivalents were held with different financial institutions which were rated single A or better. Cash equivalents comprise £182.4m (2021: £133.1m) invested in AAA-rated money market funds. E) Liquidity risk Borrowing facilities As at 31 March 2022 the Group had a revolving credit facility (RCF) of £275.0m (2021: £275.0m). This facility, which is unutilised, has an initial term of five years of which £65.0m will mature on 27 September 2024 and £210.0m will mature on 27 September 2025. Total available funds, comprising the RCF and the Group’s freely available cash and cash equivalents, are shown in the table below: Reference Total Drawn Undrawn rate plus £m £m £m 2 0.53% 275.0 – 275.0 247.9 2022 522.9 1 0.53% 275.0 – 275.0 184.5 1 459.5 Gross contractual cash flows for borrowings and other financial liabilities The following are the contractual maturities of financial liabilities, including interest payments. The cash flows associated with derivatives that are cash flow hedges are expected to have an impact on profit or loss in the periods shown. As at 31 March 2022 ll figures in £ million Book value cash flows or less 1–2 years 2–5 years 5 years -derivative financial liabilities | | | and similar items | | (205.3 | (205.3 | | (205.3 | | – | – – | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | eases | | | | | | | | (5.3) | | | (3.0) | | | | | – cash flow hedges (2.0 | | | (2.0 | | (0.6) | | | – | | | (229.4 | | | | (231.4 | | (213.0 | (5.9) | | | (3.0) | As at 31 March 2021 ll figures in £ million Book value cash flows or less 1–2 years 2–5 years 5 years -derivative financial liabilities and similar items^ (201.3 (201.3 (201.3 – – – contracts – cash flow hedges – ^The ‘Trade payables and similar items’ line item was reported as ‘Trade and other payables (excluding contract liabilities)’ in the prior year financial statements and included tax and social security liabilities and RDEC liabilities. The comparatives have now been restated by £68.8m to exclude such liabilities which do not meet the definition of a financial instrument. ### QinetiQ Group plc Annual Report & Accounts 2022 175 Interest rate: Contractual Contractual More than More than CORPORATE 1 year 1 year FINANCIAL STRATEGIC Financial Statements Non As at 31 March 202 As at 31 March 202 Available funds 31 March 202 Non Available funds 31 March Trade payables Derivative financial liabilities Freely available cash and cash equivalents A Freely available cash and cash equivalents Forward foreign currency contracts Committed facilities Total Derivative financial liabilities Committed facilities A L Forward foreign currency Trade payables Total^ Leases (229.0) (233.0) GOVERNANCE (209.3) STATEMENTS (12.1) (22.1) (5.2) (26.7) (30.7) (24.1) (11.5) (5.2) (9.5) (1.0) (6.4) (9.5) (1.0) (0.3) (6.1) (1.4) (6.3) (0.1) (0.6) (7.9) REPORT – ) ) ) ) ) ) ) ) ) ) ) QinetiQ Group plcAnnualReportandAccounts2022 175 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 27. Financial risk management (continued) For the year ended 31 March F) Derivative financial instruments The Group has the following derivative financial instruments on the balance sheet, reported within the ‘Other financial assets’ line items. As at 31 March ll figures in £ million gains losses Net gains losses Net – cash flow hedges 0.2 (2.0) (1.8) 0.5 (1.0) (0.5) The maturity of these derivative financial instruments is as follows: As at 31 March | ll figures in £ million | | | gains | losses Net | | gains | | losses Net | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 0.2 (1.4) | | | | (1.2) | | 0.5 (0.1) | | 0.4 | | | | – (0.6) | | | (0.6) | | – (0.3) | | (0.3) | | | – – – – (0.6) | | | | | | | | (0.6) | | | | | 0.2 (2.0) | | (1.8) | | 0.5 (1.0) | | (0.5) | G) Maturity of financial liabilities The contractual maturity of the Group’s financial liabilities is shown below: As at 31 March 2022 payables financial and similar instruments items and lease 1 ll figures in £ million payables liabilities Total 205.3 6.9 212.2 – 5.3 5.3 not more than five years – 8.7 8.7 five years or more – 3.2 3.2 205.3 24.1 229.4 As at 31 March 2021 payables financial and similar instruments items^ and lease ll figures in £ million payables liabilities Total^ 201.3 7.0 208.3 – 10.8 10.8 or more – 4.1 4.1 201.3 27.6 228.9 ^ Restated to exclude non-financial instruments. | Derivative Derivative | Trade Trade | | | | | | --- | --- | --- | --- | --- | --- | | | | | 176 | QinetiQ Group plc Annual Report & Accounts 2022 | | | | Liability Liability Liability Liability Asset Asset Asset Asset | | | | | | Derivative assets/(liabilities) at the end of the year A More than two years Due in one year or less Forward foreign currency contracts Between one and two years Due in Total A A In one year or less Due in more than two years but Derivative assets/(liabilities) at the end of the year Due in five years Total A Expected to be recognised: Due in more than one year but not more than two years Due in more than two years but not more than five years Due in one year or less Due in more than one year but not more than two years | (0.5) (2.0) (1.8) (1.0) | 0.2 0.5 5.7 5.7 – | | | 2022 2021 2022 2021 | 176 QinetiQGroupplcAnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements H) Sensitivity analysis The Group’s sensitivity to changes in foreign exchange rates and interest rates on financial assets and liabilities as at 31 March 2022 is set out in the following table. The impact of a weakening in Sterling on the Group’s financial assets and liabilities would be more than offset ## continued in equity and income by its impact on the Group’s overseas net assets and earnings respectively. Sensitivity on Group’s assets other than financial assets and liabilities is not included in this analysis. As at 31 March 2022 | 1% decrease in | | 10% weakening | | | --- | --- | --- | --- | | | interest rates | | in Sterling | | | Profit before | | Profit before | 1 ll figures in £ million Equity tax Equity tax 1% increase in 10% strengthening Profit before Profit before 1 1 This relates to the impact on items charged directly to equity and excludes the impact on profit/loss for the year flowing into equity. As at 31 March 2021 1 ll figures in £ million Equity tax Equity tax | 1% increase in | 10% strengthening | | | --- | --- | --- | | interest rates | | in Sterling | | Profit before | | Profit before | 1 1 This relates to the impact on items charged directly to equity and excludes the impact on profit/loss for the year flowing into equity. The amounts generated from the sensitivity analysis are forward-looking estimates of market risk assuming that certain market conditions occur. Actual results in the future may differ materially from those projected as a result of developments in global financial markets that may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the previous tables, which should not, therefore, be considered to be a projection of likely future events and losses. The estimated changes for interest rate movements are based on an instantaneous decrease or increase of 1% (100 basis points) in the specific rate of interest applicable to each class of financial instruments from the levels effective at 31 March 2022, with all other variables remaining constant. The estimated changes for foreign exchange rates are based on an instantaneous 10% weakening or strengthening in Sterling against all other currencies from the levels applicable at 31 March 2022, with all other variables remaining constant. Such analysis is for illustrative purposes only – in practice market rates rarely change in isolation. The impact of transactional risk on the Group’s monetary assets/liabilities that are not held in the functional currency of the entity holding those assets/liabilities is minimal. ### QinetiQ Group plc Annual Report & Accounts 2022 177 Profit before Profit before CORPORATE FINANCIAL STRATEGIC 10% weakening 1% decrease in Financial Statements A Sterling Other A All figures in £ million US dollar Other All figures in £ million Sterling Other US dollar Sterling US dollar Other Sterling US dollar GOVERNANCE STATEMENTS Equity Equity Equity Equity 10.2 (0.2) (0.1) (1.6) (0.2) (3.7) (0.1) (1.9) (2.1) (2.2) 2.1 0.2 0.1 1.6 0.2 0.1 tax tax 4.4 5.8 tax tax 2.4 2.6 REPORT – – – – – – – – – – – – – – – – – – – – – – – – – – – – interest rates interest rates in Sterling in Sterling QinetiQ Group plc AnnualReportandAccounts2022 177 # Notes to the Consolidated Financial Statements continued For the year ended 31 March ## 28. Post-retirement benefits ### Defined contribution plans In the UK the Group operates a defined contribution pension arrangement provided by the Mercer Master Trust. A defined contribution plan is a pension plan under which the Group and employees pay fixed contributions to a third-party financial provider. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The contributions are recognised as an employee benefit expense when they are due. The expense incurred during the year was £49.4m (2021: £45.5m). Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. ### Defined benefit pension plan In the UK the Group operates the QinetiQ Pension Scheme (the Scheme) for approximately one fifth of its UK employees. The Scheme closed to future accrual on 31 October 2013 and there is no on-going service cost. The Scheme is a final salary plan, which provides benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on the members' length of service and their final pensionable earnings at closure to future accrual. In the Scheme, pensions in payment are generally updated in line with the Consumer Price Index (CPI). The benefit payments are made from Trustee-administered funds. Plan assets held in trusts are governed by UK regulations as is the nature of the relationship between the Group and the Trustees and their composition. Responsibility for the governance of the Scheme – including investment decisions and contribution schedules – lies with the Board of Trustees but the Company is consulted. The Board of Trustees must be composed of representatives of the Company and plan participants in accordance with the Scheme's rules. The asset recognised in the balance sheet in respect of the defined benefit pension plan is the fair value of plan assets less the present value of the defined benefit obligation at the end of the reporting period. The defined benefit obligation is calculated bi-annually by independent actuaries using the projected unit credit method. Future cash flows of the Scheme which are subject to inflation are calculated using a CPI inflation assumption for the majority of the cash flows, with a small proportion of cash flows linked to RPI. IAS 19 requires the inflation assumptions to be market-based assumptions, as opposed to being based on economic forecasts. The present value of the defined benefit obligation is determined by discounting the estimated, inflated future cash outflows using interest rates of high quality corporate bonds and that have terms to maturity approximating to the terms of the related pension obligation. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. The Group has no further payment obligations once the agreed contributions have been paid. The expected employer cash contribution to the Scheme for the year ending 31 March 2023 is £2.9m. ### Triennial funding valuation The most recent completed full actuarial valuation of the Scheme was undertaken as at 30 June 2020 and resulted in an actuarially assessed surplus of £176.5m (relative to the technical provisions i.e. the level of assets agreed by the Trustee and the Company as being appropriate to meet member benefits, assuming the Scheme continues as a going concern). The next triennial valuation will be performed as at 30 June 2023. The agreed recovery plan requires £2.8m per annum (at 2021 prices) distributions to the Scheme until 31 March 2032, indexed by reference to CPI. Such distributions are from the Group's Pension Funding Limited Partnership. ### QinetiQ's Pension Funding Partnership (PFP) structure On 26 March 2012 QinetiQ established the QinetiQ PFP Limited Partnership (the 'Partnership') with the Scheme. Under this arrangement, properties to the capitalised value of £32.3m were transferred to the Partnership. The transfers were effected through a 20-year sale and leaseback agreement. The Scheme's interest in the Partnership entitles it to an annual distribution of approximately £2.5m (from 2012) for 20 years, indexed with reference to CPI. The Scheme's interest in the Partnership will revert back to QinetiQ Limited in 2032. The Partnership is controlled by QinetiQ and its results are consolidated by the Group. Under IAS 19, the interest held by the Scheme in the Partnership does not qualify as a plan asset for the purposes of the Group's consolidated financial statements and is, therefore, not included within the fair value of plan assets. As a result, the Group's consolidated financial statements are unchanged by the Partnership. In addition, the value of the property transferred to the Partnership and leased back to QinetiQ remains on the balance sheet. QinetiQ retains the operational flexibility to substitute properties of equivalent value within the Partnership and has the option to settle outstanding amounts due under the interest before 2032 if it so chooses. ### Other UK schemes In the UK the Group has a small number of employees for whom benefits are secured through the Prudential Platinum Scheme ('PPS'). The PPS scheme is always fully funded and has a very small surplus at year end. QinetiQ also offers employees access to a Group Self Invested Personal Pension Plan, but no Company contributions are paid to this arrangement. 178 QinetiQ Group plc Annual Report & Accounts 2022 STRATEGIC^{}[] REPORT CORPORATE^{}[] GOVERNANCE FINANCIAL^{}[] STATEMENTS # **Defined benefit pension plan ('Scheme') net pension asset** The Scheme is in a net asset position with the market value of assets in excess of the present value of Scheme liabilities. These have the values set out below as at 31 March of each year end. | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Total market value of assets – see table below for analysis by category of asset | 2,065.7 | 2,071.8 | | Present value of Scheme liabilities | (1,703.5) | (1,857.5) | | **Net pension asset before deferred tax** | **362.2** | **214.3** | | Deferred tax liability | (96.4) | (45.5) | | **Net pension asset after deferred tax** | **265.8** | **168.8** | The balance sheet net pension asset is a snapshot view which can be significantly influenced by short-term market factors. The calculation of the net asset depends on factors which are beyond the control of the Group – principally the value of the various categories of assets in which the Scheme has invested and long-term interest rates and inflation rates used to value the Scheme's liabilities. This is particularly pertinent at current times whilst markets are highly volatile. Sensitivities and risks are described on pages 181 and 182. # **Pension buy-in transaction** During the current year the Scheme completed a bulk annuity insurance buy-in at a cost of £132.3m. This transaction has removed longevity risk, interest rate risk, and inflation risk for approximately 8% of the Scheme and is in line with the Group's strategy of de-risking the pension liabilities. This buy-in follows the Scheme's first buy-in in 2019 which had already removed risk for approximately one-third of the Scheme. As a result of the transaction, the accounting pension surplus recorded on the Group's balance sheet reduced by an estimated £25m with no related cash impact. The impact on the surplus was more than offset by the favourable effect of changes to assumptions which reduced the present value of the Scheme liabilities. # **Total expense recognised in the income statement** | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Net finance income | 4.5 | 7.1 | | Administrative expenses | (1.1) | (1.3) | | **Total net income recognised in the income statement (gross of deferred tax)** | **3.4** | **5.8** | # **Movement in the net pension asset** The movement in the net pension asset (before deferred tax) is set out below: | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Opening net pension asset | 214.3 | 309.7 | | Net finance income | 4.5 | 7.1 | | Net actuarial gain/(loss) | 144.0 | (104.1) | | Administrative expenses | (1.1) | (1.3) | | Past service cost | (2.4) | – | | Contributions by the employer | 2.9 | 2.9 | | **Closing net pension asset** | **362.2** | **214.3** | QinetiQ Group plc Annual Report & Accounts 2022 179 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 28. Post-retirement benefits (continued) For the year ended 31 March Fair value of Scheme assets by type of asset The fair value of the QinetiQ Pension Scheme assets, which are not intended to be realised in the short term and may be subject to significant changes before they are realised, were: an active an active 291.8 – 291.8 362.3 – 362.3 501.7 – 501.7 455.6 – 455.6 1 2 – 97.4 97.4 – 98.0 98.0 3 s – 29.5 29.5 – 76.6 76.6 -in policies – 645.9 645.9 – 588.0 588.0 1 Primarily private market debt investments. Prior year split restated to show split of quoted and not quoted. 2 Unlisted corporate bonds with commercial property held as security. 3 Valued by comparing with equivalent properties that have recently been transacted in the market. The Scheme’s assets do not include any of the Group’s own transferable financial instruments, property occupied by, or other assets used by the Group. The insurance policies obtained by the pension scheme can only be used to pay or fund employee benefits under the Company’s defined benefit plan. They are not available to the Company’s own creditors and cannot be paid to another entity. These are the requirements of IAS 19 paragraph 7 and hence our determination is that the insurance policies are qualifying insurance policies and require classification as a plan asset. The policies were issued by insurers that are not a related party. Per the Scheme rules the Company has an unconditional right to a refund of any surplus, assuming gradual settlement of all liabilities over time. Such surplus may arise on cessation of the Scheme in the context of IFRIC 14 paragraphs 11(b) and 12 and therefore the full net pension asset can be recognised on the Group’s balance sheet and the Group’s minimum funding commitments to the Scheme do not give rise to an additional balance sheet liability. Changes to the fair value of Scheme assets Changes to the present value of Scheme liabilities The present value of the Scheme’s liabilities, which are derived from cash flow projections over long periods, and thus inherently uncertain, were: Change in demographic assumptions 5.9 30.0 Experience gains/(losses) 36.5 (2.4) – 45.0 44.4 osing present value of Scheme liabilities (1,703.5) The net actuarial gains are primarily due to a decrease in value of the financial assumption for the discount rate (see Assumptions section on the following page). | | | | | 180 | QinetiQ Group plc Annual Report & Accounts 2022 | | | --- | --- | --- | --- | --- | --- | --- | | Not quoted in Not quoted in | | | | | | | | LDI investment Insurance buy Corporate bonds Total market value of assets Asset backed security investments All figures in £ million Cl Property fund Alternative bonds Equities Derivatives All figures in £ million Past service cost Cash and cash equivalents All figures in £ million Net benefits paid out and transfers Interest income on Scheme assets Interest cost Contributions by the employer Actuarial gain/(loss) on Scheme liabilities based on: Opening present value of Scheme liabilities Administrative expenses Opening fair value of Scheme assets Closing fair value of Scheme assets Re-measurement gain/(loss) on Scheme assets Net benefits paid out and transfers | Change in financial assumptions (1,857.5) (1,857.5) (1,602.6) 2,065.7 2,071.8 | 2,071.8 1,912.3 2,065.7 1,076.8 2,071.8 1,096.1 (269.6) Quoted Quoted 107.5 158.8 market market (23.3) (36.4) (44.4) 969.6 (38.5) (45.0) 176.1 995.0 2021 208.6 208.6 118.7 136.1 254.8 220.8 140.2 187.6 2021 | 2022 2022 43.0 43.5 (1.1) (1.3) (5.9) Total Total 44.7 47.4 78.5 78.5 49.3 49.3 (8.5) (8.5) (0.4) (0.4) 2.9 2.9 – – – | – – | | 2022 2021 | 180 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements ## continued Assumptions The major assumptions used in the IAS 19 valuation of the Scheme’s liabilities were: Insured Uninsured All members* members* members 2.80% 2.70% 2.10% 3.00% 2.90% 2.60% rate (discount rate less inflation) (0.20%) n/a 28.4 28.4 | n/a | 30.7 30.7 | | | --- | --- | --- | | 22.0^ | 26.7 26.7 | | | 23.7^ | 28.6 | 28.6 | * As a result of two recent insurance buy-in transactions the Scheme has two distinct membership groups: insured members and un-insured members. Insured members are all pensioners and un-insured members are predominantly not yet drawing pensions. As such, the future cash outflows will be over differing timeframes and it is more accurate to use different key assumptions to each of the two groups when calculating the Scheme liabilities. These are now presented separately. ^ For pensioners currently aged 65. The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, because of the timescale covered, may not necessarily be borne out in practice. It is important to note that these assumptions are long term and, in the case of the discount rate and the inflation rate, are measured by reference to external market indicators. The discount rate is based on observable yields on corporate bonds but there is no direct, observable market rate for CPI. A ‘market approach’ to deriving CPI involves adjusting a market-based RPI rate downward by an ‘inflation risk premium’ and an RPI-CPI adjustment factor (determined from relevant market yield curves). This market-based approach is required by IAS 19 and results in a CPI inflation rate significantly in excess of the Bank of England long term target and also in excess of a consensus view of CPI (based on surveys of economists). However, adopting an economic consensus approach to setting CPI inflation is not acceptable under accounting standards. The mortality assumptions as at 31 March 2022 were based on the S3 Normal Lives base tables, with various scaling factors based on sex and status. Allowance was made for improvements in mortality in line with CMI_2021 Core Projections and a long-term rate of improvement of 1.25% per annum. These mortality assumptions were the same as at the prior year end with the exception of the allowance made for improvements in mortality which was previously in line with CMI_2020 Core Projections. The funding of the Scheme is based on long-term trends and assumptions relating to market growth, as advised by qualified actuaries and investment advisors. The weighted average duration of the defined benefit obligation is approximately 20 years. The sensitivity of the Scheme liabilities to higher or lower inflation rate assumptions, along with sensitivities to the discount rate and life expectancy assumptions is shown below. Sensitivity analysis of the principal assumptions | | Indicative impact on Scheme | Indicative impact on | | --- | --- | --- | | Assumption Change in assumption | liabilities (before deferred tax) | net pension asset | | Discount rate | Decrease/increase by £32m Decrease/increase by £9m | | Rate of inflation Increase/decrease by 0.1% Increase/decrease by £31m Increase/decrease by £3m Life expectancy Increase by 1 year Increase by £64m Decrease by £37m The impact of movements in Scheme liabilities will, to an extent, be offset by movements in the value of Scheme assets as the Scheme has assets invested in a Liability Driven Investment portfolio. As at 31 March 2022 this portfolio hedges against approximately 95% of the interest rate risk and also 95% of the inflation rate risk, as measured on the Trustees’ gilt-funded basis. The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (projected unit credit method) has been applied as when calculating the pension liability recognised within the statement of financial position. The methods and types of assumption did not change. In addition to the sensitivity of the liability side of the net pension asset (which will impact the value of the net pension asset) the net pension asset is also exposed to significant variation due to changes in the fair value of Scheme assets. A specific sensitivity on assets has not been included in the above table but any change in valuation of assets flows straight through to the value of the net pension asset e.g. if equities fall by £10m then the net pension asset falls by £10m. The values of unquoted assets assume that an available buyer is willing to purchase those assets at that value. For the Group’s portfolio of assets, the unquoted alternative bonds of £208.6m; the unquoted corporate bonds of £97.4m; the unquoted equities of £44.7m and the property funds of £29.5m are the assets with most uncertainty as to valuation as at 31 March 2022. | | | | | QinetiQ Group plc Annual Report & Accounts 2022 | 181 | | --- | --- | --- | --- | --- | --- | | All figures in £ million | CORPORATE 2021 FINANCIAL STRATEGIC | | 2022 | | | | Financial Statements | | Increase/decrease by 0.1% | | | | | Life expectancy at 60 for female currently aged 60 Life expectancy at 60 for male currently aged 60 Assumed life expectancies in years: Life expectancy at 60 for female currently aged 40 Net CPI inflation assumption Discount rate applied to Scheme liabilities Life expectancy at 60 for male currently aged 40 | (0.20%) (0.50%) GOVERNANCE STATEMENTS | REPORT | | | | QinetiQ Group plcAnnualReportandAccounts2022 181 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 28. Post-retirement benefits (continued) For the year ended 31 March Risks Through its defined benefit pension plan, the Group is exposed to a number of risks, the most significant of which are detailed below: epending on market conditions. The present value of Scheme liabilities yields on corporate bonds, while many of the assets of the Scheme are invested in various forms of assets . Changing markets in conjunction with discount rate volatility will lead to volatility in asset on the Group’s balance sheet and in other comprehensive income. To a lesser extent this will net finance income in the Group’s income statement. present value of Scheme liabilities involves projecting future cash flows from the Scheme many not be in line with the assumptions For example, members could live longer than foreseen or inflation could be higher or lower than allowed for in calculation of the liabilities. The accounting assumptions noted above are used to calculate the year end net pension asset in accordance with the relevant accounting standard, IAS 19 (revised) ‘Employee Benefits’. Changes in these assumptions have no impact on the Group’s cash payments into the Scheme. The payments into the Scheme are reassessed after every triennial valuation. The triennial valuations are calculated on a funding basis and use a different set of assumptions, as agreed with the pension Trustees. The key assumption that varies between the two methods of valuation is the discount rate. The funding basis valuation uses the risk-free rate from UK gilts as the base for calculating the discount rate, whilst the IAS 19 accounting basis valuation uses corporate bond yields as the base. 29. Share capital and other reserves Shares allotted, called up and fully paid: of 1p each (equity) of £1 (non-equity) Total 45,000 4,500,000 – – 45,000 4,500,000 31 March 2022 5,787,571 578,757,121 1 1 5,787,572 578,757,122 of 1p each (equity) of £1 (non-equity) Total 0 5,717,571 571,757,121 1 1 5,717,572 571,757,122 31 March 2021 Except as noted below all shares in issue at 31 March 2022 rank pari-passu in all respects. Rights attaching to the Special Share QinetiQ carries out activities which are important to UK defence and security interests. To protect these interests in the context of the ongoing commercial relationship between the MOD and QinetiQ, and to promote and reinforce the Compliance Principles, the MOD holds a Special Share in QinetiQ. QinetiQ obtained MOD consent to changes in its Special Shareholder rights, which were approved by shareholders at the 2012 AGM. The changes to the Special Share were disclosed in the 2012 Annual Report. Subsequent to the changes approved at the 2012 AGM the Special Share confers certain rights on the holder: a) to require the Group to implement and maintain the Compliance System (as defined in the Articles of Association) so as to make at all times effective its and each member of QinetiQ Controlled Group’s application of the Compliance Principles, in a manner acceptable to the Special Shareholder b) to refer matters to the Board for its consideration in relation to the application of the Compliance Principles c) to require the Board to obtain Special Shareholder’s consent: i) if at any time when the chairman is not a British citizen, it is proposed to appoint any person to the office of chief executive, who is not a British citizen ii) if at any time when the chief executive is not a British citizen, it is proposed to appoint any person to the office of chairman, who is not a British citizen d) to require the Board to take action to rectify any omission in the application of the Compliance Principles, if the Special Shareholder is of the opinion that such steps are necessary to protect the defence or security interests of the United Kingdom e) to demand a poll at any of QinetiQ’s meetings (even though it may have no voting rights except those specifically set out in the Articles). | Choice of accounting The calculation of the Results under IAS 19 can change dramatically d Volatility in market conditions | | | | | | --- | --- | --- | --- | --- | | is linked to assumptions years into the future. This means that the assumptions used can have a material impact on the balance sheet position | | | 182 | QinetiQ Group plc Annual Report & Accounts 2022 | | and profit and loss charge. In practice future experience within the Scheme may subject to fluctuating valuations | | | | | | adopted. the net pension | | Special Share Special Share | Ordinary shares Ordinary shares | | | At also lead to volatility in the IAS 19 pension As at 1 April 202 the At Issue of new shares As at 1 April 2021 Issue of new shares 5,742,572 5,742,572 | 574,257,121 574,257,121 574,257,122 574,257,122 5,742,571 Number Number 25,000 5,742,571 2,500,000 2,500,000 | Number Number 25,000 Number Number – £ £ 1 1 £ £ – 1 1 | £ £ | | 182 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements ## continued The Special Shareholder has an option to purchase defined Strategic Assets of the Group in certain circumstances. The Special Shareholder has, inter alia, the right to purchase any Strategic Assets which the Group wishes to sell. Strategic Assets are normally testing and research facilities (see note 31 for further details). The Special Share may only be issued to, held by and transferred to HM Government (or as it directs). At any time the Special Shareholder may require QinetiQ to redeem the Special Share at par. If QinetiQ is wound up the Special Shareholder will be entitled to be repaid the capital paid up on the Special Share before other shareholders receive any payment. The Special Shareholder has no other right to share in the capital or profits of QinetiQ and the Special Shareholder must give consent to a general meeting held on short notice. The Special Share entitles the Special Shareholder to require certain persons who hold (together with any person acting in concert with them) a material interest in QinetiQ to dispose of some or all of their ordinary shares in certain prescribed circumstances on the grounds of national security or conflict of interest. The Directors must register any transfer of the Special Share within seven days. Other reserves The translation reserve includes the cumulative foreign exchange difference arising on translation since the Group transitioned to IFRS. Movements on hedge instruments, where the hedge is effective, are recorded in the hedge reserve until the hedge ceases. The capital redemption reserve, which was created following the redemption of preference share capital and the bonus issue of shares, cannot be distributed. Own shares Own shares represent shares in the Company that are held by independent trusts and include treasury shares and shares held by the employee share ownership plan. Included in retained earnings at 31 March 2022 are 6,816,291 shares (2021: 5,020,832 shares). 30. Share-based payments The Group operates a number of share-based payment plans for employees. The total share-based payment expense in the year was £7.8m, of which £7.8m related to equity-settled schemes and nil related to cash-settled schemes (2021: £11.2m, of which £11.2m related to equity- settled schemes and nil to cash-settled schemes). The share-based payment charged to equity is £7.4m consisting of the £7.8m charge to the income statement offset by a £0.4m charge to equity in respect of dividends accruing on unvested awards. Performance Share Plan (PSP) During the year there were no further grants of PSP awards to employees as this scheme has been phased out. The awards vest after three years with 50% of the awards subject to TSR conditions and 50% subject to EPS conditions. PSP awards are equity-settled awards and have vested on 22 June 2020. There is no exercise price for these PSP awards. Group Share Incentive Plan (SIP) Under the QinetiQ SIP the Group offers UK employees the opportunity of purchasing up to £150 worth of shares a month at the prevailing market rate. The Group will make a matching share award of a third of the employee’s payment. The Group’s matching shares may be forfeited if the employee ceases to be employed by QinetiQ within three years of the award of the shares. There is no exercise price for these SIP awards. SIP matching shares are equity-settled awards; those outstanding at 31 March 2022 had an average remaining life of 1.5 years (2021: 1.5 years). There is no exercise price for these SIP awards. Of the shares outstanding at the end of the year nil were exercisable (2021: nil). | | | | QinetiQ Group plc Annual Report & Accounts 2022 | 183 | | --- | --- | --- | --- | --- | | | 2021 2022 | | | | | Number of Number of | 2021 2022 | | | | | matching matching | CORPORATE FINANCIAL STRATEGIC | | | | | Financial Statements Number | Number | | | | | Outstanding at end of the year Outstanding at end of the year Exercised during the year Exercised during the year Awarded during the year Outstanding at start of the year Outstanding at start of the year Forfeited during the year Forfeited/lapsed during the year (291,851) (247,433) of shares of shares 761,828 734,402 300,420 (40,347) 313,509 734,402 746,645 103,314 (20,812) (62,967) (38,650) | shares GOVERNANCE shares STATEMENTS | REPORT – – – – – | | | QinetiQ Group plc AnnualReportandAccounts2022 183 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements For the year ended 31 March 30. Share-based payments (continued) Bonus Banking Plan (BBP) During the year the Group granted BBP awards to certain senior executives in the UK and US. Number of Number of matching matching shares shares 1,942,855 1,811,792 529,683 764,822 (1,227,020) (595,978) /lapsed during the year (123,079) (37,781) 1,122,439 1,942,855 The BBP is a remuneration scheme that runs in three-year performance cycles, with each cycle vesting over a four-year period. Under the BBP a contribution will be made by the Company into the participant’s Plan account following the end of each Plan year. 50% of the value of a participant’s Plan account will be paid out annually for three years with 100% of the residual value paid out at the end of year four. 50% of the unpaid balance of a participant’s bonus account will be at risk of forfeiture. Refer to the Directors’ Remuneration Report for further details. At 31 March 2022 the awards had an average remaining life of 1.6 years (2021: 1.2 years). There is no exercise price for these awards. The fair value of the awards at 31 March 2022 was £3.02 (2021: £3.22) being the Group’s 30 day average on 31 March. Of the awards outstanding at the end of the year nil were exercisable. Deferred Share Plan (DSP) During the year the Group granted DSP awards to certain employees. | | 2022 | | 2021 | | --- | --- | --- | --- | | Number of | | Number of | | | | awards | | awards | 6,761,362 4,881,077 provisionally awarded in prior year 126,565 – during the year 1,783,671 2,701,401 5,092,752 4,059,961 The number of awards is dependent on the Group’s performance during the year (specifically with respect to the Group revenue growth). This is provisionally quantified at year end based on Group performance and also the number of eligible employees in employment as at 31 March. Actual awards are made in the following June and the final number awarded will be slightly different to the number provisionally calculated. Awards are then subject to a three-year vesting period and a further two-year holding period. Vesting of the awards is contingent upon Group operating profit in the year prior to vesting being maintained at the level reported during the year prior to award. Refer to the Directors’ Remuneration Report for further details. At 31 March 2022 the awards had an average remaining life of 1.8 years (2021: 1.8 years). There is no exercise price for these awards. The fair value of the DSP’s provisionally awarded at 31 March 2022 was £3.02 being the Group’s 30 day average on 31 March. The weighted average share price at date of exercise was £3.50 (2021: £3.09). Of the awards outstanding at the end of the year nil were exercisable. Restricted share plan (RSP) During the year the Group granted RSP awards to certain senior executives in the UK and US. Number of Number of awards awards 148,857 71,355 (68,217) (47,424) during the year (16,323) (20,331) | | | 2021 2022 | 184 | QinetiQ Group plc Annual Report & Accounts 2022 | | --- | --- | --- | --- | --- | | | | 2021 2022 | | | | Outstanding at end of the year Forfeited Outstanding at start of the year Difference between actual awards in year and amount Exercised during the year Outstanding at end of the year Outstanding at start of the year Outstanding at end of the year Granted during the year Outstanding at end of the year Lapsed Provisionally awarded Outstanding at start of the year Awards outstanding Exercised during the year Exercised during the year Provisional awards outstanding Granted during the year Lapsed during the year (1,460,253) | 6,876,423 6,876,423 6,761,362 1,783,671 6,761,362 2,701,401 (334,922) (545,582) (275,534) 560,002 148,857 495,685 145,257 | | | | 184 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements At 31 March 2022 the awards had an average remaining life of 1.9 years (2021: 1.4 years). There is no exercise price for these awards. The weighted average fair value of grants made during the year was £2.75 (2021: £2.60). The weighted average share price at date of exercise was £3.06 (2021: £2.90). Of the options outstanding at the end of the year nil were exercisable (2021: nil). ## continued Value Creation Plan (VCP) The Group has granted awards under a Value Creation Plan to certain senior executives in the US and UK. Number of Number of awards awards 335,848 – – 335,848 during the year (129,173) – 206,675 335,848 At 31 March 2022 the awards had an average remaining life of 1.2 years (2021: 2.2 years). There is no exercise price for these awards. The weighted average fair value of grants made during the year was £nil (2021: £2.99). Of the options outstanding at the end of the year nil were exercisable. High Performance Share Award (HPSA) In the prior year, as one of eight initial measures in response to the COVID-19 pandemic, the senior leaders agreed to, on average, a temporary base salary reduction of 15%. To both recognise the senior leaders for their sacrifice and to incentivise them to lead the Group through the crisis as quickly and effectively as possible, the Group adopted a new award called High Performance Share Award (HPSA). The HPSA was awarded in November 2020 as a ‘Thank Q’ to senior leaders for their sacrifice and enormous efforts to lead their teams out of unprecedented crisis. The fair value of QinetiQ shares on grant date was £2.70 and the awards vest in June 2023. At 31 March 2022 the awards had an average remaining life of 1.3 years (2021: 2.3 years). Of the awards outstanding at the end of the year nil were exercisable. Number of Number of awards awards 1,336,372 – – 1,336,372 1,336,372 1,336,372 Inzpire acquisition incentives During the year ended 31 March 2019, the Group granted 399,708 shares to 136 employees of Inzpire Limited as part of the acquisition deal. The Group issued share-based payment awards to all Inzpire employees on 30 November 2018 which is the grant date. The fair value of QinetiQ shares on grant date was £2.97 and the awards vested after two years on 30 November 2020 subject to continued employment at the date of vesting. Number of Number of awards awards – 343,265 – – – – Other performance incentives In the prior year, as part of the Group’s COVID-19 response measures, the Group elected to settle the outstanding bonuses via an award of shares rather than the previously anticipated cash settlement. The fair value of QinetiQ shares on grant date was £3.07 and the awards vested immediately on award. Number of Number of awards awards – – – 4,796,981 – – Valuation of share-based awards Share-based awards that vest based on non-market performance conditions have been valued at the share price at grant date and are equity-settled. | | QinetiQ Group plc Annual Report & Accounts 2022 | 185 | | --- | --- | --- | | 2021 2021 2021 2021 2022 2022 2022 2022 | | | | CORPORATE FINANCIAL STRATEGIC | | | Financial Statements Outstanding at end of the year Outstanding at end of the year Granted during the year Outstanding at end of the year Granted during the year Outstanding at end of the year Outstanding at start of the year Forfeited Outstanding at start of the year Exercised during the year Granted during the year Lapsed during the year Outstanding at start of the year Outstanding at start of the year Exercised during the year (4,796,981) (317,564) (25,701) GOVERNANCE STATEMENTS REPORT – QinetiQ Group plc AnnualReportandAccounts2022 185 # Notes to the Consolidated Financial Statements continued For the year ended 31 March ## 31. Transactions with the Ministry of Defence (MOD) The MOD continues to own its Special Share in QinetiQ which conveys certain rights as set out in note 29. Transactions between the Group and the MOD are disclosed as follows: ### Freehold land and buildings and surplus properties Under the terms of the Group's acquisition of part of the business and certain assets of DERA from the MOD on 1 July 2001, the MOD retained certain rights in respect of the freehold land and buildings transferred. ### Restrictions on transfer of title The title deeds of those properties with strategic assets (see below) include a clause that prevents their transfer without the approval of the MOD. The MOD also has the right to purchase any strategic assets in certain circumstances. ### MOD's generic compliance regime Adherence to the generic compliance system is monitored by the Risk & Security Committee. Refer to the Committee's report within the Corporate Governance Statement on pages 115 and 116. ### Strategic assets Under the Principal Agreement with the MOD, the QinetiQ controlled Group is not permitted without the written consent of the MOD, to: i) dispose of or destroy all or any part of a strategic asset; or ii) voluntarily undertake any closure of, or cease to provide a strategic capability by means of, all or any part of a strategic asset. The net book value of assets identified as being strategic assets as at 31 March 2022 was £3.9m (2021: £3.0m). ### Long Term Partnering Agreement On 27 February 2003 QinetiQ Limited entered into a Long Term Partnering Agreement (LTPA) to provide test and evaluation (T&E) facilities and training support services to the MOD. This is a 25-year contract with a total revenue value of up to £5.6bn, dependent on the level of usage by the MOD, under which QinetiQ Limited is committed to providing T&E services with increasing efficiencies through cost saving and innovative service delivery. Following an amendment to the LTPA contract on 5 April 2019 this contract is no longer subject to re-pricing every five years and is now contracted at a fixed price to 31 March 2028. ### Other contracts with MOD The LTPA is the most significant contract QinetiQ has with the MOD. In total approximately 62% (2021: 57%) of the Group's revenue comes directly from contracts with the MOD. ## 32. Contingent liabilities and assets Subsidiary undertakings within the Group have given unsecured guarantees of £37.2m at 31 March 2022 (2021: £31.6m) in the ordinary course of business, typically in respect of performance bonds and rental guarantees. The Company has on occasion been required to take legal action to protect its intellectual property rights, to enforce commercial contracts or otherwise and similarly to defend itself against proceedings brought by other parties, including in respect of environmental and regulatory issues. Provisions are made for the expected costs associated with such matters, based on past experience of similar items and other known factors, taking into account professional advice received, and represent management's best estimate of the likely outcome. The timing of utilisation of these provisions is uncertain pending the outcome of various court proceedings, ongoing investigations and negotiations. However, no provision is made for proceedings which have been or might be brought by other parties unless management, taking into account professional advice received, assesses that it is more likely than not that such proceedings may be successful. Contingent liabilities associated with such proceedings have been identified but the Directors are of the opinion that any associated claims that might be brought can be resisted successfully and therefore the possibility of any outflow in settlement is assessed as remote. ## 33. Capital commitments The Group had the following capital commitments for which no provision has been made: | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Total contracted | 34.7 | 33.0 | Capital commitments at 31 March 2022 include £24.5m (2021: £25.3m) in relation to property, plant and equipment that will be wholly funded by a third-party customer under long-term contract arrangements. These primarily relate to investments under the LTPA contract. ## 34. Related parties During the year ended 31 March 2022 there were sales to associates and joint ventures of £5.2m (2021: £6.0m). At the year-end there were outstanding receivables from associates and joint ventures of £1.0m (2021: £1.4m). 186 QinetiQ Group plc Annual Report & Accounts 2022 STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS ### 35. Subsidiaries and other related undertakings In accordance with section 409 of the Companies Act 2006, a full list of subsidiaries and other related undertakings as at 31 March 2022 is detailed below. Unless stated otherwise, the Group's holding comprises ordinary shares which are held indirectly by QinetiQ Group plc, with the exception of QinetiQ Group Holdings Limited which is held directly by QinetiQ Group plc. | Name of company | Country of incorporation | Registered office | | --- | --- | --- | | **Subsidiaries^{1}** | | | | BJ Trustee Limited | England & Wales | Farnborough^{4} | | cueSim Limited | England & Wales | Farnborough^{4} | | Foster-Miller Canada Limited | Canada | 318 Roxton Drive, Waterloo, Ontario, N2T 1R6, Canada | | Foster-Miller Inc^{1} | US | 350 2^{nd} Avenue, Waltham, Massachusetts, MA 02451, USA | | Graphics Research Corporation Limited | England & Wales | Farnborough^{4} | | Gyldan 11 Limited | England & Wales | Farnborough^{4} | | Inzpire Group Limited | England & Wales | Farnborough^{4} | | Inzpire Holdings Limited | England & Wales | Landmark House West, Unit 1b, Alpha Court, Kingsley Road, Lincoln, Lincolnshire, LN6 3TA | | Inzpire Limited | England & Wales | Landmark House West, Unit 1b, Alpha Court, Kingsley Road, Lincoln, Lincolnshire, LN6 3TA | | Leading Technology Limited | England & Wales | Farnborough^{4} | | Metrix UK Limited | England & Wales | Farnborough^{4} | | Naimuri Limited | England & Wales | Farnborough^{4} | | Precis (2187) Limited | England & Wales | Farnborough^{4} | | Precis (2188) Limited | England & Wales | Farnborough^{4} | | Qinetic Limited | England & Wales | Farnborough^{4} | | QinetiQ Aerostructures Pty Ltd | Australia | Level 3, 210 Kings Way, South Melbourne, VIC 3205, Australia | | QinetiQ Australia Pty Ltd | Australia | Level 3, 210 Kings Way, South Melbourne, VIC 3205, Australia | | QinetiQ Consulting Pty Ltd | Australia | Level 3, 12 Brindabella Court, Brindabella Business Park, Majura ACT 2609. | | QinetiQ Estates Limited | England & Wales | Farnborough^{4} | | QinetiQ GmbH | Germany | Flughafenstraße 65, 41066, Mönchengladbach, Germany | | QinetiQ GP Limited | Scotland | 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, Scotland | | QinetiQ Group Canada Inc.^{2} | Canada | 5300 Commerce Court West, 199 Bay Street, Toronto ON M5L 1A9, Canada | | QinetiQ Group Holdings Limited | England & Wales | Farnborough^{4} | | QinetiQ Holdings Limited | England & Wales | Farnborough^{4} | | QinetiQ Inc^{2} | US | 10440 Furnace Road, Suite 204, Lorton, VA 22079, USA | | QinetiQ Insurance PCC Limited | Guernsey | Mill Court, La Charroterie, St Peter Port, GY1 4ET Guernsey | | QinetiQ Limited | England & Wales | Farnborough^{4} | | QinetiQ Novare Pty Ltd | Australia | Petrie House, level 6, 80 Petrie Terrace, Brisbane QLD 400, Australia | | QinetiQ Overseas Holdings Limited | England & Wales | Farnborough^{4} | | QinetiQ Overseas Trading Limited | England & Wales | Farnborough^{4} | | QinetiQ Pension Scheme Trustee Limited | England & Wales | Farnborough^{4} | | QinetiQ PFP Limited Partnership^{3} | Scotland | 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, Scotland | | QinetiQ Philippines Company, Inc | Philippines | 22^{nd} Floor Corporate Centre, 139 Valero Street, Salcedo Village, Makati City, Philippines | | QinetiQ Pty Ltd | Australia | Level 33, 101 Collins Street, Melbourne, VIC 3000, Australia | | QinetiQ Services Holdings Pty Ltd | Australia | Level 33, 101 Collins Street, Melbourne, Victoria 3000, Australia | | QinetiQ Solutions Sdn. Bhd. | Malaysia | Suite 6.01, 6^{th} Floor, Plaza See Hoy Chan, Jalan Raja Chulan 50200, Kuala Lumpur, W.P. Kuala Lumpur, Malaysia | | QinetiQ Space N.V. | Belgium | Hogenakkerhoekstraat, 9, 9150 Kruibeke, Belgium | | QinetiQ Special Projects Inc | US | 5885 Trinity Parkway, Suite 130, Centreville, Virginia 20120-1969, USA | | QinetiQ Sweden AB | Sweden | Advokatfirman Delphi, Box 1432, Stockholm, Sweden | | QinetiQ Target Services Limited | England & Wales | Farnborough^{4} | | QinetiQ Target Systems Limited | England & Wales | Farnborough^{4} | | QinetiQ Training and Simulation Limited^{1} | England & Wales | Farnborough^{4} | | QinetiQ US Holdings, Inc. | US | 5885 Trinity Parkway, Suite 130, Centreville, Virginia 20120-1969, USA | | Redu Operational Services S.A.^{1} | Belgium | Rue Devant les Hetres, 2B, 6890 Transnine, Belgium | | RubiKon Group Pty Limited | Australia | Level 33, 101 Collins Street, Melbourne, Victoria 3000, Australia | | Sensoptics Limited | England & Wales | Farnborough^{4} | | TSG International LLC | US | 350 2^{nd} Avenue, Waltham, Massachusetts 02451, USA | | **Associates^{2}** | | | | Redu Space Services S.A | Belgium | Rue Devant les Hetres, 2B, 6890 Transnine, Belgium | QinetiQ Group plc Annual Report & Accounts 2022 187 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 35. Subsidiaries and other related undertakings (continued) For the year ended 31 March 6 s 6,7 Security LLC 6,7 Tower, 3026-Prince Saud Bin Mohamed Bin Muqin Road, PO 1 As at 31 March 2022 the Group owned 100% of the ordinary shares of these subsidiary undertakings except for Redu Operational Services S.A. (52%) 2 The class of shares is ‘common share’ 3 As at 31 March 2022 the Group owned 48% of Redu Space Services S.A. 4 Cody Technology Park, Ively Road, Farnborough, Hampshire, GU14 OLX 5 Limited partnership. The partners are all wholly-owned Group companies 6 As at 31 March 2022 the Group owned 49% of Houbara Defence & Security LLC and 49% of QinetiQ Dar Massader QDM Limited. 7 The financial year end of each undertaking is 31 March other than Houbara Defence & Security LLC (31 December) and QinetiQ Dar Massader QDM Limited (31 December) 8 Newman & Spurr Consultancy Limited has changed its company name to QinetiQ Training & Simulation Limited on 22 March 2022 36. Basis of preparation and significant accounting policies QinetiQ Group plc (‘the Company’) is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in England, United Kingdom. The consolidated financial statements of the Group comprise statements for the Company and its subsidiaries, together referred to as ‘the Group’. Accounting policies The following accounting policies have bee n applied consistently to all periods presented in dealing with items that are considered material in relation to the Group’s financial statements. 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 business performance, specific adjusting items need to be disclosed separately. Underlying measures of performance exclude specific adjusting items. Specific adjusting items Specific adjusting items include the following: irregular nature fluctuating nature operational performance year on year (size and sign) of continuing business mortisation of intangible assets arising from acquisitions P P P ains/losses on disposal of property and investments P P P ransaction & integration costs in respect of business acquisitions P P mpairment of property and goodwill P | | implementation costs previously capitalised under IAS 38 P | | P | P | | --- | --- | --- | --- | --- | | | | P | P | P | | ther significant non-recurring deferred tax movements P | | | P | P | The financial impact of each item is reported in note 4 to these financial statements. 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. Basis of preparation The Group’s financial statements, approved by the Directors, have been prepared on a going concern basis as discussed in the Strategic Report on page 69 in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006. The Company has elected to prepare its parent company financial statements in accordance with UK GAAP (FRS 101); these are presented on page 200. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of relevant financial assets and liabilities. The Group’s reporting currency is Sterling and unless otherwise stated the financial statements are rounded to the nearest £100,000. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiary undertakings to 31 March 2022. The purchase method of accounting has been adopted. Those subsidiary undertakings acquired or disposed of in the period are included in the consolidated income statement from the date control is obtained to the date that control is lost (usually on acquisition and disposal respectively). An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. This is the IFRS 10 definition of ‘control’. | | | 188 | QinetiQ Group plc Annual Report & Accounts 2022 | | --- | --- | --- | --- | | Distorting due to Does not reflect in-year | Distorting due to | | | | Houbara Defence & United Arab Emirates QinetiQ Dar Massader QDM Limited Saudi Arabia Unit 3, Zone 4, Tawazun Industrial Park, Abu Dhabi, United Arab Al Nakhla | | | | | Joint venture A Software as a Service I Item Name of company Country of incorporation T O G Pension net finance income The tax impact of the above Emirates, PO Box 128220 Registered office Box 2985, Riyadh 13321, Kingdom of Saudi Arabia | | | | 188 QinetiQGroupplcAnnualReportandAccounts2022 STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS The Group comprises certain entities that are operated within the terms of a Special Security Arrangement ('SSA'). Details of the SSA and QinetiQ's management of US subsidiaries are set out in the Corporate Governance section of this Annual Report. IFRS 10 is the accounting standard applicable in respect of consolidation of entities. This does not specifically deal with SSA's. However, having considered the terms of the SSA, the Directors consider that the Group meets the requirements of IFRS 10 in respect of control over such affected entities and, therefore, consolidates these entities in the consolidated accounts. The impact of this specific judgement is full consolidation as opposed to treatment as a 100% associated undertaking. An associate is an undertaking over which the Group exercises significant influence, usually from 20%–50% of the equity voting rights, in respect of financial and operating policy. A joint venture is an undertaking over which the Group exercises joint control. Associates and joint ventures are accounted for using the equity method from the date of acquisition to the date of disposal. The Group's investments in associates and joint ventures are held at cost including goodwill on acquisition and any post-acquisition changes in the Group's share of the net assets of the associate less any impairment to the recoverable amount. Where an associate or joint venture has net liabilities, full provision is made for the Group's share of liabilities where there is a constructive or legal obligation to provide additional funding to the associate or joint venture. The financial statements of subsidiaries, joint ventures and associates are adjusted where necessary to ensure compliance with Group accounting policies. # Consideration of climate change In preparing the financial statements the Directors have considered the impact of climate change on the Group. Specific aspects of the financial statements that could potentially be impacted by climate change are the carrying value of tangible assets and goodwill. Whilst the Group will likely be impacted by climate change in the future, the impacts on the financial statements as at 31 March 2022 are not considered to be material. # Recent accounting developments Developments adopted by the Group in 2022 with no material impact on the Group's financial statements The following IFRS and endorsed standards and amendments, improvements and interpretations of published standards are effective for accounting periods beginning on or after 1 June 2020 and have been adopted with no material impact on the Group's financial statements: - Amendment to IFRS 16 'Leases' COVID-19 related rent concessions: The amendment make it easier for lessees to account for COVID-19 related rent concessions such as rent holidays and temporary rent reductions. The Group has no such concessions in its lease agreements; - Amendments to IFRS 4, IFRS 7, IFRS 9, IFRS 16 and IAS 39 'Interest Rate Benchmark Reform Phase 2', all in respect of interest rate benchmark reform. Developments expected in future periods of which the impact on the Group's financial statements is still being assessed The Directors anticipate that the adoption of the following new, revised, amended and improved published standards and interpretations, which were in issue at the date of authorisation of these financial statements, will have no material impact on the financial statements of the Group when they become applicable in future periods: - Amendments to IFRS 3 'Business combinations', update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations. - Amendments to IAS 16, prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sale proceeds and related cost in profit or loss. - Amendments to IAS 37, specify which costs a company includes when assessing whether a contract will be loss-making. - Annual Improvements 2018 - 2020 # Significant accounting policies # Revenue from contracts with customers The Group recognises revenue primarily from the following major sources: - Through combining world-leading expertise with unique facilities to provide technical assurance, test and evaluation and training services underpinned by long-term contracts; - Through delivering innovative solutions and products to meet customer requirements by undertaking contract-funded research and development, developing intellectual property and by internal funding with potential for new revenue streams. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Group recognises revenue when it transfers control of a product or service to a customer. The Group's revenue contracts are accounted for under IFRS 15 'Revenue from Contracts with Customers' taking into account the requirement to distinguish between the various performance obligations within a contract and treating these separately. The Group's methodology applies IFRS 15 on a contract-by-contract basis which includes considerations for contract modifications, variable consideration, the determination of distinct performance obligations, determination of agency and principal relationships and licences. QinetiQ Group plc Annual Report & Accounts 2022 189 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements For the year ended 31 March 36. Basis of preparation and significant accounting policies (continued) Service contracts The Group’s long-term service contracts are generally ‘test and evaluation’ or advice-based contracts where control of the service is transferred over a period of time as the Group performs. At contract inception the Group undertakes an assessment to determine how many distinct performance obligations exists within a contract. As part of the assessment the Group obtains an understanding of the overall deliverable to the customer through discussions with business units and project leads. Each individual deliverable in the contract is then assessed to determine if it is an input into the overall deliverable, and therefore part of a single performance obligation, or if it is a stand-alone separable deliverable with its own transaction price and therefore a distinct performance obligation in its own right. Each distinct performance obligation identified within a contract is accounted for separately. Certain service contracts have a similar pattern of transfer of control to the customer where each year is effectively the same from a performance obligation perspective. The Group has applied the series guidance as permitted within the Standard to these contracts and accounts for these as a series of distinct service performance obligations satisfied annually over the contract term. The transaction price for a contract is determined at contract inception based on a fixed-margin applied to the total forecast costs to complete the deliverable. Some long-term contracts include an excess profit clause which is a variable consideration factor that could impact the transaction price. Excess profits are estimated at contract inception and at the end of each reporting period to ensure that the transaction price is not under or over stated. Any required adjustment will be made against the transaction price in the period in which it occurred. The Group does not offer any right of return or refunds which could impact transaction price at inception. Certain contracts attract bonuses and/or penalties which are variable and will have an impact on transaction price at contract inception. The Group assesses variable consideration in relation to bonuses and penalties at contract inception using the most-likely method and this forms part of the transaction price and recognised over time as costs are incurred. The Group only includes bonuses and penalties into the transaction price to the extent that it is highly probable that a significant reversal of revenue will not occur in future periods. Historical evidence and experience shows that even where a reduction has been required, that reduction has been immaterial to the Group. The transaction price is allocated between each distinct performance obligation identified in a contract based on the stand-alone selling price of each performance obligation. Each performance obligation will be costed and the transaction price will be cost plus margin. This amount would be the stand-alone selling price of each performance obligation if contracted with a customer separately. Long-term service contracts allow for modifications to the original order. If a contract modification is determined to be distinct and the price of the contract increases by an amount of consideration that reflects the entity's stand-alone selling prices for the additional promised goods or services, the Group accounts for this as a separate contract. If a contract modification is not distinct, the Group accounts for this as if it were part of the existing contract. A cumulative catch-up adjustment to revenue is then recognised to disclose the effect that the contract modification has on the transaction price and the Group’s measure of progress towards complete satisfaction of the performance obligation. Long-term service contracts also sometimes allow for extensions to the original order. A contract extension is determined to include either additional goods or services or no additional goods or service. If a contract extension with additional goods or services is determined to be distinct and the price of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling prices for the additional promised goods or services, the Group accounts for this as a separate performance obligation. If a contract extension with additional goods or services is not distinct, the Group accounts for this as if it were part of the existing contract. A cumulative catch-up adjustment to revenue is then recognised to disclose the effect that the contract extension has on the transaction price and the Group’s measure of progress towards complete satisfaction of the performance obligation. When the outcome of a distinct performance obligation in delivering services can be reliably estimated, revenue associated with the performance obligation is recognised over time using the input method. The input method recognises revenue over time on the basis of costs incurred to date to the satisfaction of a performance obligation relative to the total forecast costs to complete the performance obligation. The Group has determined the input method to be appropriate as it best depicts the Group’s performance in transferring control of the service to the customer as it incurs costs on a particular contract. No profit is recognised on contracts until the outcome of the contract can be reliably estimated. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense. Goods sold The Group recognises revenue on the sale of products at a point in time once control has been transferred to the customer. Control is generally transferred to customers on delivery of products or when the customer has the significant risks and rewards of ownership of the product. Payment is typically due within 30 days of invoice (within the UK) and customers typically do not have a right of return or refund. The transaction price for sale of products is agreed at contract inception. When the Group develops a bespoke product for a customer with no alternative use to the Group, revenue is recognised over time using the input method. ### 190 QinetiQ Group plc Annual Report & Accounts 2022 190 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements Licence revenue Licence revenue is attributed to either ‘right to use’ or ‘right to access’ licences. ‘Right to use’ licence revenue is recognised at a point in time when the Group sells a licence to a customer and does not undertake significant further activities or involvement in developing the licence ## continued after the sale. ‘Right to access’ licence revenue is recognised over time when the Group maintains a significant level of involvement in developing and enhancing the licence after the sale. The level of involvement goes beyond general support, bug-fixing and upgrades which generally only maintain the current operating level. The transaction price for intellectual property is agreed at contract inception. The Group does not offer any right of return or refunds which could impact transaction price at inception. The Group recognises licence revenue through the supply of a range of security, messaging and connectivity software products. A licence fee is paid for each computer that uses the software and the customer can also purchase a support service contract for a fixed period. The sale of these types of licences is recognised at a point in time as a distinct performance obligation because the Group does not undertake any further activities in developing the licence after the sale. The support service contract is recognised over time as a separate performance obligation as this is an optional extra and is not integral into the functionality of the licence. The support service contract offers general support and maintenance of the licence to the customer over a fixed period. Contract assets Contract assets is a term used in adopting IFRS 15 and effectively represents amounts recoverable under contracts as previously reported. Contract assets represent revenue recognised in excess of amounts invoiced. Revenue is recognised on service contracts by using a ‘percentage complete’ method, applying the proportion of contract costs incurred for work performed to date relative to the estimated total contract cost, after making suitable allowances for technical and other risks related to performance milestones yet to be achieved, and applying that proportion to total contract price. Payment for service contracts are not always due from the customer until certain milestones have been reached and, therefore, a contract asset is recognised over the period in which the services are performed representing the Group’s right to consideration for services performed to date, to the extent that the customer has not yet been invoiced for those services. Contract liabilities Contract liabilities is a term used in adopting IFRS 15 and effectively represents deferred income as previously reported. The Group, on occasion, bills customers in advance of performing certain types of work which results in the Group recognising contract liabilities. Once the work has been performed these amounts will be reduced and recognised as revenue. For sale of goods, revenue is recognised in the income statement when control of the goods has been transferred to the customer; being at the point when the goods are delivered. Any transaction price received by the Group prior to that point is recognised as a contract liability. Principal-agent arrangements The Group enters into certain arrangements which involve a consortium of service providers. The Group acts as a ‘Prime’ contractor in certain contracts with customers and utilises sub-contractors to undertake the work. Under these contracts the Group is considered to be primarily responsible for fulfilling the service to the customer. The Group performs a technical assessment of the work before it is delivered to the customer and is responsible for quality and performance of the sub-contractor. As such the Group is considered to be the principal to the arrangement with the customer and includes sub-contractor costs within revenue. However, where the Group is merely acting as an agent of a sub-contractor then no revenue is recognised in respect of sub-contractor costs. All consortium arrangements are assessed by the Group to determine if it is the principal or agent. Contract bidding costs The Group recognises the ‘incremental costs of obtaining a contract’ with a customer as an asset if the Group expects to recover those costs. The ‘incremental costs of obtaining a contract’ are those costs that the Group incurs to obtain a contract with a customer that it would not have incurred if the contract had not been won. Costs to obtain a contract that would have been incurred regardless of whether the contract was won or lost shall be recognised as an expense when incurred, unless those costs are explicitly chargeable to the customer. Segmental information Segmental information is presented according to the Group’s internal management reporting structure and the markets in which it operates. Segmental results represent the contribution of the different segments to the profit of the Group. Corporate expenses are allocated to the corresponding segments. Unallocated items mainly comprise specific adjusting items. Specific adjusting items are referred to in note 4. Segmental assets and liabilities information is not regularly provided to the Chief Operating Decision Maker. Research and development expenditure R&D costs incurred in respect of specific contracts placed by customers are recognised within operating costs and revenue is recognised in respect of the R&D services performed. Internally funded development expenditure is capitalised in the balance sheet where there is a clearly defined project, the expenditures are separately identifiable, the project is technically and commercially feasible, all costs are recoverable by future revenue and the resources are committed to complete the project. Such capitalised costs are amortised over the forecast period of sales resulting from the development. All other R&D costs are expensed to the income statement in the period in which they are incurred. If the research phase cannot be clearly distinguished from the development phase, the respective project-related costs are treated as if they were incurred in the research phase only and expensed. ### QinetiQ Group plc Annual Report & Accounts 2022 191 CORPORATE FINANCIAL STRATEGIC Financial Statements GOVERNANCE STATEMENTS REPORT QinetiQ Group plc AnnualReportandAccounts2022 191 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements For the year ended 31 March 36. Basis of preparation and significant accounting policies (continued) Financing The Group holds no external borrowings but does have access to a revolving credit facility, fees for which are reported within finance costs. Costs of letters of credit are also charged to finance expense. Income earned on funds invested is reported within finance income. Exchange differences on financial assets and liabilities and the income or expense from interest hedging instruments that are recognised in the income statement are included within finance income and finance expense. Financing also includes the net finance income or expense in respect of defined benefit pension schemes. The Group pays in advance finance costs in relation to the multi-currency facility which are recognised as a deferred finance cost asset. Taxation The income tax expense or credit for the period is the tax payable on the current period’s taxable income, based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the company and its subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and considers whether it is probable that a taxation authority will accept an uncertain tax treatment. The Group measures its tax balances either based on the most likely amount or the expected value, depending on which method provides a better prediction of the resolution of the uncertainty. The Group’s accounting policy is to include the impact of research and development expenditure credits (‘RDEC’) within the tax charge. An element of the Group’s RDEC claim relates to activities on MOD contracts. Commercial negotiations with the MOD do not take RDEC into consideration; instead both parties have agreed that the amount collected by QinetiQ on certain contracts will be passed through as a lump sum to the MOD, akin to QinetiQ collecting the RDEC on behalf of the MOD. As such, the MOD-appropriated element of the RDEC receivable from HMRC is netted off against the gross receivable within the tax line, as opposed to being recognised as a reduction to revenue or as an expense above the tax line. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Non-current assets held for sale Non-current assets are classified as held for sale if their carrying amount will be recovered primarily through a sales transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and expected to be completed within a year of the balance sheet date. The assets should be available for immediate sale in their present condition and actively marketed at a price that is reasonable in relation to their current fair value. Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Any write-down to fair value less costs to sell shall be recognised directly through profit and loss as an impairment loss. No further depreciation is charged in respect of assets classified as held for sale. Goodwill Goodwill on acquisitions of subsidiaries is included in non-current assets. Goodwill on acquisitions of joint ventures and associates is included in the carrying value of equity accounted investments. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill related to the entity sold. Intangible assets Intangible assets arising from business combinations are recognised at fair value and are amortised over their expected useful lives, typically between 1 and 16 years. Internally generated intangible assets are recorded at cost, including labour, directly attributable costs and any third- party expenses. ### 192 QinetiQ Group plc Annual Report & Accounts 2022 192 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements ## continued The ‘multi-period excess earnings’ method and the ‘relief-from-royalty’ method are both used for fair valuing intangible assets arising from acquisitions. The multi-period excess earnings method considers the present value of net cash flows expected to be generated by customer relationships, by excluding any cash flows related to contributory assets. The relief-from-royalty method considers the discounted estimated royalty payments that are expected to be avoided as a result of the patents or trademarks being owned. Purchased intangible assets are recognised at cost less amortisation. Intangible assets are amortised over their respective useful lives on a straight-line basis as follows: Intellectual property rights 2–10 years Customer relationships 1–16 years Development costs 1–4 years Other 1–14 years Property, plant and equipment Property, plant and equipment are stated at cost less depreciation. Freehold land is not depreciated. Other tangible non-current assets are depreciated on a straight-line basis over their useful economic lives to their estimated residual value as follows: Freehold buildings 20–25 years Leasehold land and buildings Shorter of useful economic life and the period of the lease Plant and machinery 3–15 years Fixtures and fittings / office equipment 5–10 years Computers 3–5 years Motor vehicles 3–5 years Assets under construction are included in property, plant and equipment on the basis of expenditure incurred at the balance sheet date. In the case of assets constructed by the Group, the value includes the cost of own work completed, including directly attributable costs and interest. The useful lives, depreciation methods and residual values applied to property, plant and equipment are reviewed annually and, if appropriate, adjusted accordingly. Impairment of goodwill and tangible, intangible and held for sale assets At each reporting date the Group assesses whether there is an indication that an asset may be impaired. If the carrying amount of any asset exceeds its recoverable amount an impairment loss is recognised immediately in the income statement. In addition, goodwill is tested for impairment annually irrespective of any indication of impairment. If the carrying amount exceeds the recoverable amount, the respective asset or the assets in the cash-generating unit (CGU) are written down to their recoverable amounts. The recoverable amount of an asset or CGU is the higher of its fair value less costs to sell and its value in use. The value in use is the present value of the future cash flows expected to be derived from an asset or CGU calculated using an appropriate pre-tax discount rate. Impairment losses are expensed to the income statement. Leases Leases – as a lessor Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term (note 26). Initial direct costs incurred in obtaining an operating leases are added to the carrying amount of the underlying asset and recognised as expense over the lease term on the same basis as lease income. The respective leased assets are included in the balance sheet based on their nature. The Group did not need to make any adjustments to the accounting for assets held as lessor as a result of adopting the new leasing standard. Leases – as a lessee The Group leases various offices, aircrafts, forklifts, equipment and vehicles. Rental contracts are typically made for fixed periods of 6 months to 25 years, but may have extension options as described below. Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non- lease components based on their relative stand-alone process. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leases assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes. Leases are recognised as a right-of-use asset and corresponding liability at the date at which the leases asset is available for use by the Group. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable; • variable lease payments based on an index or a rate, initially measured using the index or rate as at the commencement date; • amounts expected to be payable by the Group under residual value guarantees; • the exercise price of a purchase option if the Group is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option. ### QinetiQ Group plc Annual Report & Accounts 2022 193 CORPORATE FINANCIAL STRATEGIC Financial Statements GOVERNANCE STATEMENTS REPORT QinetiQ Group plc AnnualReportandAccounts2022 193 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements 36. Basis of preparation and significant accounting policies (continued) For the year ended 31 March Lease payments to be made under reasonably certain options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If the rate cannot be readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. To determine the incremental borrowing rate, the Group: • where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received; • uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by QinetiQ Plc, which does not have recent third party financing, and • makes adjustments specific to the lease, example, term country, currency and security. The Group is not exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset. Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability; • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs, and • restoration costs. Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. The Group does not revalue its land and buildings that are presented within property, plant and equipment and has chosen to do same for right-of-use buildings by the Group. Payments associated with short-term leases of offices, equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise lease assets under £5,000. Lease extension and termination options Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. Judgements in determining the lease term In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). For leases of offices and equipment, the following factors are normally the most relevant: • if there are significant penalties to terminate (or extend), the group is typically reasonably certain to end (or not to terminate); • if any leasehold improvements are expected to have a significant remaining value, the Group is typically reasonably certain to extend (or not terminate); • Otherwise, the Group considers other factors including historical lease durations and the costs and business disruptions required to replace the leased asset. Most extension options in office and vehicles leases have not been included in the lease liability, because the Group could replace the assets without significant cost or business disruption. As at 31 March 2022 no (undiscounted) potential future cash outflows have been included in the lease liability for extension or termination. The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event of significant change in circumstance occurs, which affects this assessment, and that is within the control of the lessee. During the current financial year, the financial effect of revising lease terms to reflect the effect of exercising extension or termination options was nil (2021: nil) in recognised lease liabilities and right-of-use assets. ### 194 QinetiQ Group plc Annual Report & Accounts 2022 194 QinetiQGroupplc AnnualReportandAccounts2022 ## Notes to the Consolidated Financial Statements ## continued Investments in debt and equity securities Investments held by the Group are classified as either a current asset or as a non-current asset. These are investments in debt and equity instruments that are classified as at fair value through other comprehensive income. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in the income statement. The fair value of quoted financial instruments is their bid price at the balance sheet date. The fair value of unquoted equity investments is based on the price of the most recent investment by the Group or a third party, if available, or derived from the present value of forecast future cash flows. Inventories Inventory and work-in-progress are stated at the lower of cost and net realisable value. Work-in-progress and manufactured finished goods are valued at production cost. Production cost includes direct production costs and an appropriate proportion of production overheads. A provision is established when the net realisable value of any inventory item is lower than its cost. A ‘market comparison’ technique is used to fair value inventories acquired through a business combination. The fair value is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. Trade and other receivables Trade and other receivables are measured at amortised cost less any impairment losses. Amounts recoverable on contracts are included in trade and other receivables and represent revenue recognised in excess of amounts invoiced. Other receivables will also include insurance recoveries where we are virtually certain of recovery. Impairment of trade and other receivables The Group applies the simplified approach when using the expected credit loss (ECL) impairment model for trade and other receivables. Under the simplified approach the Group always measures the loss allowance at an amount equal to the lifetime expected credit losses for trade receivables. The Group measures the expected credit losses of trade and other receivables in a way that reflects a probability-weighted amount that is determined by evaluating a range of possible outcomes, the time value of money and supportable information that is readily available at each reporting date about past events, current condition and forecasts of future economic conditions. The ECL’s are updated each reporting period to reflect changes in credit risk since initial recognition. Cash and cash equivalents Cash and cash equivalents comprise cash at bank and short-term, highly liquid investments that are readily convertible into a known amount of cash and which are subject to an insignificant risk of changes in value. The Group holds various short-maturity money market funds (see note 24) across numerous financial institutions which meet the IAS 7 criteria to be classified as cash equivalents. In the cash flow statement overdraft balances are included in cash and equivalents. Cash and cash equivalents includes an element that is restricted in use (note 24). Current and non-current liabilities Current liabilities include amounts due within the normal operating cycle of the Group. Deferred income, or ‘contract liabilities’, is included in trade and other payables and represents amounts invoiced in excess of revenue recognised. Interest-bearing current and non-current liabilities are initially recognised at fair value and then stated at amortised cost with any difference between the cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest rate basis. Costs associated with the arrangement of bank facilities or the issue of loans are held net of the associated liability presented in the balance sheet. Capitalised issue costs are released over the estimated life of the facility or instrument to which they relate using the effective interest rate method. If it becomes clear that the facility or instrument will be redeemed early, the amortisation of the issue costs will be accelerated. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event which can be reliably estimated, and it is probable that an outflow of economic benefits will be required to settle the obligation. Where appropriate, provisions are determined by discounting the expected cash flows at an appropriate discount rate reflecting the level of risk and the time value of money. Where an exposure is highly likely to be covered by insurance an offsetting receivable is recorded. Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument at the trade date. The de-recognition of a financial instrument takes place when the Group no longer controls the contractual right that comprise the financial instrument, when the instrument expires, or when the instrument is sold, terminated or exercised. Financial assets and liabilities Financial assets are classified on the Group’s balance sheet as subsequently measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss. This classification is made on the basis of both the Group’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. Financial liabilities are classified on the Group’s balance sheet as subsequently measured at amortised cost except for financial liabilities at fair value through profit and loss. The Group may at initial recognition irrevocably designate a financial liability as measured at fair value through profit or loss if a contract contains one or more embedded derivatives and the host is not an asset within the scope of IFRS 9, or when doing so results in more relevant information. ### QinetiQ Group plc Annual Report & Accounts 2022 195 CORPORATE FINANCIAL STRATEGIC Financial Statements GOVERNANCE STATEMENTS REPORT QinetiQ Group plc AnnualReportandAccounts2022 195 ## Notes to the ## Consolidated ## Financial Statements ## continued For the year ended 31 March ## Notes to the Consolidated Financial Statements For the year ended 31 March 36. Basis of preparation and significant accounting policies (continued) Derivative financial instruments Derivative financial instruments are initially recognised and thereafter held at fair value, being the market value for quoted instruments or valuation based on models and discounted cash flow calculations for unlisted instruments. Fair value hedging The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses foreign exchange contracts and, occasionally, interest rate swap contracts to hedge these exposures. The use of financial derivatives is governed by the Group’s Treasury Policies as approved by the Board of Directors, which provides written principles on the use of derivatives. The Group does not use derivative instruments for speculative purposes. Certain derivative instruments do not qualify for hedge accounting. These are categorised as “fair value through profit or loss” and are stated at fair value, with any resultant gain or loss recognised in the Income Statement. The Group designates certain hedging instruments in respect of foreign currency risk as cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents, both at hedge inception and on an ongoing basis, whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item. For the Group’s cash flow hedges of highly probable forecast transactions in foreign currencies, the hedge ratio is 100%, subject to a £100k de Minimis threshold. If the underlying exposure changes over time, either due to commercial factors or timing differences, the hedging instruments will be rebalanced to ensure that the hedge ratio of 100% is maintained. Cash flow hedging Changes in the fair value of derivatives designated as a cash flow hedge that are regarded as highly effective are recognised in equity. The ineffective portion is recognised immediately in the income statement. Where a hedged item results in an asset or a liability, gains and losses previously recognised in equity are included in the cost of the asset or liability. Gains and losses previously recognised in equity are removed and recognised in the income statement at the same time as the hedged transaction. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at period-end rates. Any resulting exchange differences are taken to the income statement. Gains and losses on designated forward foreign exchange hedging contracts are matched against the foreign exchange movements on the underlying transaction. The individual financial statements of each Group company are presented in its functional currency. On consolidation, assets and liabilities of overseas subsidiaries, associated undertakings and joint ventures, including any related goodwill, are translated to Sterling at the rate of exchange at the balance sheet date. The results and cash flows of overseas subsidiaries, associated undertakings and joint ventures are translated to Sterling using the average rates of exchange during the period. Exchange adjustments arising from the re-translation of the opening net investment and the results for the period to the period-end rate are taken directly to equity and reported in the statement of comprehensive income. Post-retirement benefits The Group provides both defined contribution and defined benefit pension arrangements. The liabilities of the Group arising from defined benefit obligations are determined using the projected unit credit method. Valuations for accounting purposes are carried out bi-annually. Actuarial advice is provided by external consultants. For the funded defined benefit plans, the excess or deficit of the fair value of plan assets less the present value of the defined benefit obligation are recognised as an asset or a liability respectively. Per the Scheme rules, the Company has an unconditional right to a refund of any surplus that may arise on cessation of the Scheme in the context of IFRIC 14 paragraphs 11(b) and 12 and therefore the full net pension asset can be recognised on the Group’s balance sheet and the Group’s minimum funding commitments to the Scheme do not give rise to an additional balance sheet liability. For defined benefit plans, the cost charged to the income statement consists of administrative expenses and the net interest income. There is no service cost due to the fact the plans are closed to future accrual. The net interest income is reported within finance income and the administration cost element is charged as a component of operating costs in the income statement. Actuarial gains and losses and re- measurement gains and losses are recognised immediately in full through the statement of comprehensive income. Contributions to defined contribution plans are charged to the income statement as incurred. Share-based payments The Group operates share-based payment arrangements with employees. The fair value of equity-settled awards for share-based payments is determined on grant and expensed straight line over the period from grant to the date of earliest unconditional exercise. The valuation methodology for TSR awards is based on Monte Carlo model to allow for the impact of market related performance criteria and taking into account all non-vesting conditions. The value is expensed straight line over the period from grant to the date of earliest unconditional exercise. The charges for equity settled share-based payments are updated annually for non-market-based vesting conditions. ### 196 QinetiQ Group plc Annual Report & Accounts 2022 196 QinetiQGroupplc AnnualReportandAccounts2022 STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS #### Share capital Ordinary share capital of the Company is recorded as the proceeds received, less issue costs. Company shares held by the employee benefit trusts are held at the consideration paid. They are classified as own shares within equity. Any gain or loss on the purchase, sale or issue of Company shares is recorded in equity. #### Non-controlling interests The Group recognises non-controlling interest in an acquired entity either at fair value or at the non-controlling interest's proportionate share of the acquired entity's net identifiable assets. This decision is made on an acquisition-by-acquisition basis. For non-controlling interests that the Group holds, the Group elected to recognise the non-controlling interests at its proportionate share of the acquired net identifiable assets. ### 37. Critical accounting estimates and judgements in applying accounting policies #### Critical accounting estimates The following commentary is intended to highlight key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the financial statements in the next financial year. #### Estimated goodwill impairment The Group tests annually whether goodwill has suffered any impairment. This process relies on the use of estimates of the future profitability and cash flows of its cash generating units which may differ from the actual results delivered. In addition, the Group reviews whether identified intangible assets have suffered any impairment. Further details on the sensitivity of the carrying value of goodwill to changes in the key assumptions are set out in note 14. #### Estimation of the Group's defined benefit pension net surplus The Group's defined benefit pension obligations (and hence the net surplus) are based on key assumptions, including discount rates, mortality and inflation. Management exercises its best judgement, in consultation with actuarial advisors, in selecting the values for these assumptions that are the most appropriate to the Group. Small changes in these assumptions at the balance sheet date, individually or collectively, may result in significant changes in the size of the net surplus/deficit. Further details of these assumptions and the sensitivity of the net pension surplus to changes in these assumptions are set out in note 28. In addition to the sensitivity of the liability side of the net pension surplus (which will impact the value of the net pension surplus) the net pension surplus is also exposed to significant variation due to changes in the fair value of Scheme assets. A specific sensitivity on assets has not been included in note 28 but any change in valuation of assets flows straight through to the value of the net pension surplus e.g. if equities fall by £10m then the net pension surplus falls by £10m. The values of unquoted assets assume that an available buyer is willing to purchase those assets at that value. For the Group's portfolio of assets, the unquoted alternative bonds of £208.6m; the unquoted corporate bonds of £97.4m; the unquoted equities of £44.7m and the property funds of £29.5m are the assets with most uncertainty as to valuation as at 31 March 2022 as a consequence of the economic uncertainty caused by the COVID-19 pandemic. #### Estimated value of tax assets and liabilities The Group has significant levels of unused tax losses and US carried forward interest expense as set out in note 18. When estimating the appropriate amount that should be recognised, management consider sources of taxable profits including the reversal of deferred tax liabilities and forecast future profits. This estimate is sensitive to similar factors as goodwill, as set out in note 14 and further described in note 18. Within the current tax payable of £3.9m as at 31 March 2022, management include an estimate of the impact of technical uncertainties associated with tax positions. To the extent that the outcome of a tax audit differs from the tax that has been provided, a material adjustment could arise in a future period. Considering reasonably possible changes in forecast taxable profits and developments with tax authorities, management consider the potential impact of changes in these tax estimates over the next 12 months could range between a £4m increase to a £8m decrease in net assets. If there is a further downturn in forecast taxable profits over the next 12 months then the lower tax estimate could lead to a further £12m decrease in net assets. #### Estimates of costs to complete on long-term contracts The Group has a large number of contracts which span multiple years and are accounted for on a percentage of completion basis in accordance with IFRS 15. Long-term contract accounting requires a number of estimates to be made, particularly in calculating the forecast costs to complete the contract. These forecast costs will be impacted by numerous risks that could crystallise in the future (with a range of cost outcomes), particularly on contracts of a developmental nature. Across the Group's portfolio of long-term contracts there is a risk that the actual out-turn of these contracts could be materially different than assumed in the year end contract forecasts. QinetiQ Group plc Annual Report & Accounts 2022 197 # Notes to the Consolidated Financial Statements continued For the year ended 31 March ## 37. Critical accounting estimates and judgements in applying accounting policies (continued) ### Critical accounting judgements Specific, material judgements made by the Directors in applying the Group's accounting policies are set out below: ### Basis of consolidation The Group comprises certain entities that are operated within the terms of a Special Security Arrangement ('SSA'). Details of the SSA and QinetiQ's management of US subsidiaries are set out in the Corporate Governance section of this Annual Report. IFRS 10 is the accounting standard applicable in respect of consolidation of entities. This does not specifically deal with SSA's. However, having considered the terms of the SSA, the Directors consider that the Group meets the requirements of IFRS 10 in respect of control over such affected entities and, therefore, consolidates these entities in the consolidated accounts. The impact of this specific judgement is full consolidation as opposed to treatment as a 100% associated undertaking. Treatment as a 100% associated undertaking would reduce Group revenue by a material amount (~£150m per annum) but would have no impact on reported profit, which would include an equivalent amount of profit reported within Other Income as 'Share of profits of joint ventures and associates'. ### Liability in respect of Research and Development Expenditure Credits (RDEC) Other Payables includes £22.4m of RDEC Expenditure Credits payable to MOD. This is subject to a determination from the SSRO and it is possible that the outcome could be that RDEC is retained by the Company, in which case the liability would be reversed to the income statement. A critical accounting judgement is that the liability will become due. ## 38. Changes in accounting policies The note explains the impact of a change in accounting policy that is effective for the first time in the Group's financial statements for the year ended 31 March 2022: ### 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 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. ### Balance sheet (extract) | All figures in £ million | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Pre-IFRIC agenda | Applying IFRIC agenda | As presented | As originally presented | Impact of restatement | Restated | | **Assets/liabilities** | | | | | | | | Intangible assets | 148.3 | (8.0) | 140.3 | 139.2 | (6.1) | 133.1 | | Current tax payable | (5.6) | 1.7 | (3.9) | (3.8) | 1.3 | (2.5) | | Other net assets | 907.0 | – | 907.0 | 754.3 | – | 754.3 | | **Net assets** | **1,049.7** | **(6.3)** | **1,043.4** | **889.7** | **(4.8)** | **884.9** | | **Equity** | | | | | | | | Retained earnings | 853.3 | (6.3) | 847.0 | 698.6 | (4.8) | 693.8 | | Share capital and other reserves | 196.2 | – | 196.2 | 190.8 | – | 190.8 | | Non-controlling interest | 0.2 | – | 0.2 | 0.3 | – | 0.3 | | **Total equity** | **1,049.7** | **(6.3)** | **1,043.4** | **889.7** | **(4.8)** | **884.9** | 198 QinetiQ Group plc Annual Report & Accounts 2022 ## Notes to the Consolidated Financial Statements Balance sheet (extract) The impact of the restatement on the Group’s opening consolidated balance sheet as at 1 April 2020 is set out below: ## continued 2020 As 1 April originally Impact of 2020 202.8 – 202.8 Statement of profit or loss (extract) The impact on the Group’s consolidated income statement of applying the restatement is set out below: Pre-IFRIC IFRIC As As originally Impact of (47.9) – (47.9) (46.1) – (46.1 5.0 – 5.0 7.4 – 7.4 Statement of cash flows (extract) The impact on the Group’s statement of cash flows of applying the restatement is set out below: Pre-IFRIC IFRIC As originally Impact of | 1 April | | QinetiQ Group plc Annual Report & Accounts 2022 | 199 | | --- | --- | --- | --- | | Applying Applying | As | | | | CORPORATE | FINANCIAL STRATEGIC | | | Financial Statements Depreciation and impairment of property, plant and equipment Share capital and other reserves Finance income Assets/liabilities EBITDA (earnings before interest, tax, depreciation and amortisation) Retained earnings Sale of investments All figures in £ million All figures in £ million Gain on sale of investment Equity Others Other net assets Free cash flow (as defined by the Group – see glossary) Net cash (outflow)/inflow from investing activities Net assets Impact on underlying measures of performance Amortisation of intangible assets Net cash inflow/(outflow) from operating activities Net cash (outflow)/inflow from financing activities Underlying operating profit/(loss) Operating profit Increase in cash and cash equivalents Taxation expense Purchase of intangible assets Current tax payable Profit/(loss) for the year attributable to equity shareholders Impairment of goodwill Non-controlling interest Finance costs All figures in £ million Total equity Profit/(loss) before tax Intangible assets restatement restatement restated presented restatement presented presented presented presented Restated Restated 885.1 885.1 679.9 752.3 136.4 agenda agenda agenda agenda 110.0 106.7 (53.2) 887.1 191.1 181.6 (55.6) 887.1 183.9 199.4 681.9 752.3 (84.0) (47.3) 124.7 119.4 112.3 124.7 121.6 146.2 138.9 GOVERNANCE (60.2) (38.7) (23.8) (14.5) (3.6) STATEMENTS (16.6) (15.6) (30.1) (21.5) (25.4) 181.5 110.0 106.7 188.7 178.0 117.5 72.8 119.7 195.8 (81.6) (49.6) (47.3) (55.6) 121.9 108.7 59.8 121.9 142.6 (2.4) 28.4 (60.2) (16.1) (2.4) (3.6) 91.5 (1.5) (1.9) (29.7) (10.9) 91.5 (1.5) 2.4 (1.9) 2022 2021 2022 (3.6) (38.7) (15.6) (2.8) (3.6) (20.7) (21.4) (4.1) (2.8) (25.4) (3.6) 2021 (0.9) 2.4 (1.9) (2.2) 2.4 90.0 59.8 72.8 90.0 0.3 (0.9) 28.4 3.6 0.5 0.4 3.6 2.4 (1.9) 0.8 (2.2) (2.0) (2.0) REPORT (2.0) 0.3 (2.5) – – – – – – – – – – – – – – – – – – - 0.5 – – – – ) QinetiQ Group plc AnnualReportandAccounts2022 199 # Company balance sheet As at 31 March | All figures in £ million | Note | 2022 | 2021 | | --- | --- | --- | --- | | **Fixed assets** | | | | | Investments in subsidiary undertakings | 2 | 515.2 | 507.4 | | | | **515.2** | **507.4** | | **Current liabilities** | | | | | Creditors: amounts falling due within one year | 3 | (75.4) | (72.9) | | **Net current liabilities** | | **(75.4)** | **(72.9)** | | **Total assets less current liabilities** | | **439.8** | **434.5** | | **Net assets** | | **439.8** | **434.5** | | **Equity** | | | | | Share capital | 4 | 5.8 | 5.7 | | Capital redemption reserve | | 40.8 | 40.8 | | Share premium | | 147.6 | 147.6 | | Retained earnings | | 245.6 | 240.4 | | **Total equity** | | **439.8** | **434.5** | The profit for the year ended 31 March 2022 was £38.8m (2021: profit of £45.0m). The financial statements of QinetiQ Group plc (company number 4586941) were approved by the Board of Directors and authorised for issue on 20 May 2022 and were signed on its behalf by: **Steve Wadey** Chief Executive Officer **Carol Borg** Chief Financial Officer 200 QinetiQ Group plc Annual Report & Accounts 2022 # Company statement of changes in equity For the year ended 31 March STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS | All figures in £ million | Share capital | Capital redemption reserve | Share premium | Retained earnings | Total equity | | --- | --- | --- | --- | --- | --- | | **At 1 April 2021** | 5.7 | 40.8 | 147.6 | 240.4 | 434.5 | | Profit for the year | – | – | – | 38.8 | 38.8 | | Purchase of own shares | – | – | – | (0.8) | (0.8) | | Issue of new shares | 0.1 | – | – | – | 0.1 | | Dividend paid | – | – | – | (40.2) | (40.2) | | Share-based payments | – | – | – | 7.4 | 7.4 | | **At 31 March 2022** | **5.8** | **40.8** | **147.6** | **245.6** | **439.8** | | **At 1 April 2020** | 5.7 | 40.8 | 147.6 | 217.8 | 411.9 | | Profit for the year | – | – | – | 45.0 | 45.0 | | Purchase of own shares | – | – | – | (9.0) | (9.0) | | Share-settled liabilities | – | – | – | 13.7 | 13.7 | | Dividend paid | – | – | – | (37.7) | (37.7) | | Share-based payments | – | – | – | 10.6 | 10.6 | | **At 31 March 2021** | **5.7** | **40.8** | **147.6** | **240.4** | **434.5** | The capital redemption reserve is not distributable and was created following redemption of preference share capital. QinetiQ Group plc Annual Report & Accounts 2022 201 # Notes to the Company Financial Statements For the year ended 31 March ## 1. Accounting policies The Company is a public limited company and is incorporated and domiciled in Farnborough, United Kingdom. The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company's financial statements. ### Basis of preparation The financial statements have been prepared on a going concern basis under the historical cost convention and in accordance with applicable UK Accounting Standards. As permitted by section 408(4) of the Companies Act 2006, a separate profit and loss account dealing with the results of the Company has not been presented. These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework. In preparing these financial statements, the Company is in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and the International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken. - A cash flow statement and related notes - Disclosures in respect of capital management - The effects of new but not yet effective IFRSs - Disclosures in respect of the compensation of key management personnel - IAS 24 in respect of related party transactions entered into between two or more members of a group - IFRS 2 Share Based Payments in respect of Group-settled share-based payments - Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7. ### Investments In the Company's financial statements, investments in subsidiary undertakings are stated at cost less any impairment in value. ### Share-based payments The cost of share-based payments in respect of employees of Group subsidiaries is charged to those subsidiary undertakings. In the Company financial statements the recoverable from subsidiaries is credited directly to equity as a capital contribution. The fair value of equity-settled awards for share-based payments is determined on grant and expensed in subsidiary undertakings (and credited to equity in the Company) on a straight line basis over the period from grant to the date of earliest unconditional exercise. The charges for equity-settled share-based payments are updated annually for non-market-based vesting conditions. Further details of the Group's share-based payment charge are disclosed in note 30 to the Group financial statements. ## 2. Investments in subsidiary undertakings As at 31 March | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Subsidiary undertaking – 100% of ordinary share capital of QinetiQ Group Holdings Limited | 424.3 | 424.3 | | Capital contributions arising from share-based payments to employees of subsidiaries | 77.2 | 69.4 | | Capital contributions arising from share-settled liabilities | 13.7 | 13.7 | | **Total investment in subsidiary undertakings** | **515.2** | **507.4** | The increase in investments in subsidiary undertakings in 2022 relates to £7.8m of equity-settled schemes during the year. A list of all subsidiary undertakings of QinetiQ Group plc is disclosed in note 35 to the Group financial statements. ## 3. Creditors: amounts falling due within one year As at 31 March | All figures in £ million | 2022 | 2021 | | --- | --- | --- | | Amounts owed to Group undertakings | 75.4 | 72.9 | Amounts owed to Group undertakings are unsecured, repayable on demand and bear no interest. 202 QinetiQ Group plc Annual Report & Accounts 2022 STRATEGIC^{}[] REPORT CORPORATE^{}[] GOVERNANCE FINANCIAL^{}[] STATEMENTS #### 4. Share capital The Company's share capital is disclosed in note 29 to the Group financial statements. #### 5. Share-based payments The Company's share-based payment arrangements are set out in note 30 to the Group financial statements. #### 6. Parent company guarantees The Company has provided guarantees to various customers of subsidiaries to the value of £21.0m (2021: £21.0m) in the ordinary course of business. #### 7. Other information Directors' emoluments, excluding Company pension contributions, were £5.8m (2021: £5.9m). These emoluments were all in relation to services provided on behalf of the QinetiQ Group with no amount specifically relating to their work for the Company. Details of the Directors' emoluments, share schemes and entitlements under money purchase pension schemes are disclosed on page 121 in the Directors' Remuneration Report. The remuneration of the Company's auditor for the year to 31 March 2022 was £0.4m (2021: £0.4m), which was for audit of the Group financial statements and Company financial statements and audit related assurance services. No other services were provided by the auditors to the Company. The monthly average number of employees for the year to 31 March 2022 was nil (2021: nil). QinetiQ Group plc Annual Report & Accounts 2022 203 # Five Year Financial Summary | For the years ended 31 March (unaudited) | | 2022 | 2021^{1} | 2020 | 2019^{2} | 2018 | | --- | --- | --- | --- | --- | --- | --- | | EMEA Services | £m | 1,059.2 | 939.9 | 797.4 | 687.7 | 651.4 | | Global Products | £m | 261.2 | 338.3 | 275.5 | 223.4 | 181.6 | | **Revenue** | **£m** | **1,320.4** | **1,278.2** | **1,072.9** | **911.1** | **833.0** | | EMEA Services | £m | 135.6 | 118.6 | 100.6 | 96.8 | 94.3 | | Global Products | £m | 1.8 | 33.2 | 32.6 | 28.1 | 28.2 | | **Underlying operating profit^{1}** | **£m** | **137.4** | **151.8** | **133.2** | **124.9** | **122.5** | | *Underlying operating margin^{1}* | % | 10.4 | 11.9 | 12.4 | 13.7 | 14.7 | | Operating profit | £m | 117.5 | 108.7 | 117.6 | 114.8 | 141.0 | | Underlying profit before tax^{1} | £m | 136.0 | 149.9 | 132.2 | 124.0 | 122.1 | | Profit before tax | £m | 119.7 | 142.6 | 123.1 | 123.2 | 144.8 | | Profit attributable to owners of the Company | £m | 90.0 | 121.9 | 106.3 | 113.9 | 138.1 | | Underlying basic EPS^{1} attributable to owners of the Company | Pence | 20.6 | 22.1 | 20.0 | 19.7 | 19.3 | | Basic EPS attributable to owners of the Company | Pence | 15.7 | 21.4 | 18.7 | 20.1 | 24.4 | | Diluted EPS attributable to owners of the Company | Pence | 15.5 | 21.1 | 18.6 | 20.0 | 24.3 | | Dividend per share | Pence | 7.3 | 6.9 | 6.6 | 6.6 | 6.3 | | Underlying net cash flow from operations^{1} | £m | 215.3 | 199.0 | 177.8 | 135.3 | 126.5 | | Net cash as defined by the Group | £m | 225.1 | 164.1 | 84.7 | 160.5 | 266.8 | | Average number of employees | | 6,911 | 6,874 | 6,267 | 5,994 | 6,143 | | Orders excluding LTPA amendments and JV orders | £m | 1,226.6 | 1,149.4 | 961.7 | 774.6 | 582.6 | $^{1}$ Underlying measures are stated before specific adjusting items. Definitions of underlying measures of performance are provided on page 207. Underlying financial measures are presented because the Board believes these provide a better representation of the Group's long-term performance trend. For details of specific adjusting items refer to note 4 and note 36 of the financial statements. $^{2}$ Prior year comparatives for 2021 have been restated due to a change in accounting policy in respect of software implementation costs. See note 38 for details. $^{3}$ 2019 restated in 2021 due to the retrospective adoption of the new accounting standard, IFRS 16, in respect of finance leases. 204 QinetiQ Group plc Annual Report & Accounts 2022 # Additional Financial Information ## Foreign exchange The principal exchange rates affecting the Group were the Sterling to US Dollar exchange rate and the Sterling to Australian Dollar rate. | | 12 months to 31 March 2022 | 12 months to 31 March 2021 | | --- | --- | --- | | £/US$ – opening | 1.38 | 1.24 | | £/US$ – average | 1.36 | 1.31 | | £/US$ – closing | 1.31 | 1.38 | | £/A$ – opening | 1.81 | 2.03 | | £/A$ – average | 1.85 | 1.84 | | £/A$ – closing | 1.75 | 1.81 | ## Treasury policy The Group treasury department works within a framework of policies and procedures approved by the Audit Committee. There is a structured approach to financial risk management, mitigating exposures to currency, liquidity, counterparty and credit risks as outlined in note 27. The policy supports the use of financial instruments to manage and hedge business operations risks that arise on movements in financial, credit or money markets. As part of these policies and procedures, there is strict control on the use of financial instruments. Speculative trading in financial instruments is not permitted. - Currency risk – The Group’s income and expenditure is largely settled in the functional currency of the relevant Group entity. However, where cash flows are denominated in currencies other than the functional currency of the relevant trading entity, the Group has a policy in place to hedge all material transaction exposure at the point of commitment to the underlying transaction. Uncommitted future transactions are not routinely hedged. Where the timing of cash flows differ from the original expectation, the Group will enter into currency swaps to realign the hedge maturity. The maximum permitted hedge period is 5 years. The Group does not hedge translation exposures arising from the consolidation of overseas subsidiaries in foreign currencies. - Financial credit and liquidity risk – The Group manages liquidity risk to ensure funds are available to meet business needs and maximise return while managing counterparty and credit risks. Investments are permitted with institutions on an Approved Counterparty list and not to exceed the counterparty credit limit. Investments must be held in the currency of the reporting entity except currency deposits or borrowings specifically placed to hedge assets or liabilities with related hedge documentation. Group funding is established to meet the Group’s medium and long-term financing requirements. Facilities are agreed with a number of financial institutions such that no single institution exerts undue influence on the Group. At the year end the Group had an undrawn revolving credit facility of £275m of which £65m matures on 27 September 2024 and £210m matures on 27 September 2025. The policies are established to manage and control risk in the treasury environment and to align the treasury goals, objectives and philosophy of the Group. ## Tax risk management QinetiQ’s tax strategy, as published on its corporate website, is to ensure compliance with all relevant tax legislation, wherever we do business, whilst managing our effective tax rates and tax cash flows. Tax is managed in alignment with our corporate responsibility strategy in that we strive to be responsible in all our business dealings with a zero tolerance of tax evasion. These principles are applied in a consistent and transparent manner in pursuing the tax strategy and in all dealings with tax authorities around the world. - Tax planning – QinetiQ manages both effective tax rate (ETR) and cash tax impacts in line with the Board-endorsed tax strategy. External advice and consultation are sought on potential changes in tax legislation in the UK, the US and elsewhere as necessary, enabling the Group to plan for and mitigate potential changes. QinetiQ does not make use of ‘off-shore’ entities or tax structures to focus taxable profits in jurisdictions that legislate for low tax rates. - Relationships with tax authorities – QinetiQ is committed to building constructive working relationships with tax authorities based on a policy of full disclosure in order to remove uncertainty in its business transactions and allow the authorities to review possible risks. In the UK, QinetiQ seeks to be open and transparent in its engagement with the tax authorities by sharing with HMRC the methodologies adopted in its tax returns. - Transfer pricing – QinetiQ does not have a significant level of cross-border activity but this will increase as it pursues its policy of expanding around the globe. Where there is cross-border activity, controls are in place to ensure pricing reflects ‘arm’s length’ principles in compliance with the OECD Transfer Pricing Guidelines and the laws of the relevant jurisdictions. The Group does not, therefore, have a significant exposure to transfer pricing legislation. QinetiQ submits its ‘Country by Country’ report to the UK tax authorities in line with the OECD rules providing insight for tax authorities into its global tax affairs. - Governance – The Board has approved this approach. The Audit Committee oversees the tax affairs and risks through periodic reviews. The governance framework is used to manage tax risks, establish controls and monitor their effectiveness. The Head of Tax is responsible for ensuring that appropriate policies, processes and systems are in place and that the tax team has the required skills and support to implement this approach. QinetiQ’s corporate tax contribution – QinetiQ is liable to pay tax in the countries in which it operates, principally the UK, the US, Australia, Canada, Germany and Belgium. Changes in tax legislation in these countries could have an adverse impact on the level of tax paid on profits generated by the Group. A significant majority of the Group’s profit before tax is generated in the UK. This reflects the fact that the majority of the Group’s business is undertaken, and employees are based, in the UK. Total corporation tax payments in the year to 31 March 2022 were £20.0m (2021: £15.0m). The differential between the taxation expense and the tax paid in the year relates primarily to the timing of the recovery of research and development expenditure credits for which the cash is recovered in the year following the year of account. There is also an impact of deferred tax movements, whereby the income statement bears charges and credits (e.g. in respect of property, plant and equipment) but for which there is no corporation tax paid in the year. Together, these result in the cash paid being £9.7m less than the total expense charged to the income statement. QinetiQ Group plc Annual Report & Accounts 2022 205 ## Glossary | AGM Annual General Meeting | KPI Key Performance Indicator | | --- | --- | | BBP Bonus Banking Plan | LDP Leadership development programme | | CAGR Compound Annual Growth Rate | LIBID London inter-bank bid rate | | C4ISR Command, control, communications, computers, | LIBOR London inter-bank offered rate | intelligence, surveillance and reconnaissance LTI Lost time incident COTS Commercial off the shelf LTPA Long Term Partnering Agreement – 25-year contract CPI Consumer Price Index established in 2003 to manage the MOD’s Test and Evaluation ranges CR Corporate Resposibility MDP Modernising Defence Programme CRC Carbon Reduction Commitment MOD UK Ministry of Defence CSR Corporate Social Responsibility MSCA Maritime Strategic Capability Agreement DE&S MOD’s Defence, Equipment and Support organisation NCSISS Naval Combat System Integration Support Services DHS US Department of Homeland Security OHSAS Occupational Health and Safety Advisory Services DSP Deferred Share Plan PDR Performance development review DoD US Department of Defense PBT Profit before tax EBITDA Earnings before interest, tax, depreciation and amortisation PSP Performance Share Plan ED&I Equality, diversity and inclusion QNA QinetiQ North America EDP Engineering Delivery Partner QSOS QinetiQ Share Option Scheme EMEA Europe, Middle East and Australasia QTS QinetiQ Target Systems EPS Earnings per share R&D Research and development ESA European Space Agency RDEC Research and development expenditure credit ESOS Energy Savings Opportunity Scheme EST SE Strategic Enterprise EST Engineering, Science and Technical SPA Special protection area FAR Federal Acquisition Regulations SSRO Single Source Regulations Office FCA Financial Conduct Authority SSSI Site of Special Scientific Interest FMI Foster-Miller, Inc. – the legal entity through which the STEM Science, Technology, Engineering and Maths QNA business operates T&E Test and Evaluation Funded The expected future value of revenue from order contractually committed and funded T&R Training and Rehearsal backlog customer orders TSR Total shareholder return GEV Global Employee Voice UAV Unmanned aerial vehicle GHG Greenhouse gas UK Guidelines of the Financial Reporting Council IAS International Accounting Standards Corporate to address the principal aspects of corporate Governance governance in the UK IBDM International Berthing and Docking Mechanism Code IFRS International Financial Reporting Standards UK GAAP UK Generally Accepted Accounting Practice IRAD Internal research and development ### 206 QinetiQ Group plc Annual Report & Accounts 2022 ## Alternative ## Performance ## Measures ## (APMs) The Group uses various non-statutory measures of performance, or APMs. Such APMs are used by management internally to monitor and manage the Group’s performance and also allow the reader to obtain a proper understanding of performance (in conjunction with statutory financial measures of performance). The APMs used by QinetiQ are set out below: Measure Explanation Note Organic growth The level of year-on-year growth, expressed as a percentage, calculated at constant prior Note 2 year foreign exchange rates, adjusting for business acquisitions and disposals to reflect equivalent composition of the Group Underlying operating profit Operating profit as adjusted to exclude ‘specific adjusting items’ Note 3 Underlying operating margin Underlying operating profit expressed as a percentage of revenue Note 3 Underlying net finance income/expense Net finance income/expense as adjusted to exclude ‘specific adjusting items’ Note 7 Underlying profit before/ after tax Profit before/after tax as adjusted to exclude ‘specific adjusting items’ Note 4 Underlying effective tax rate The tax charge for the year excluding the tax impact of ‘specific adjusting items’ Note 9 expressed as a percentage of underlying profit before tax Underlying basic and diluted EPS Basic and diluted earnings per share as adjusted to exclude ‘specific adjusting items’ Note 10 Orders The level of new orders (and amendments to existing orders) booked in the year. Includes N/A share of orders won by joint ventures. Backlog, funded backlog or order book The expected future value of revenue from contractually committed and funded N/A customer orders Book to bill ratio Ratio of funded orders received in the year to revenue for the year, adjusted to exclude N/A revenue from the 25-year LTPA contract due to significant size and timing differences of LTPA order and revenue recognition which may distort the ratio calculation Underlying net cash flow from Net cash flow from operations before cash flows of specific adjusting items. Note 25 operations Underlying operating cash conversion or The new ratio for 2022 is the ratio of underlying net cash from operations to underlying Note 25 cash conversion ratio EBITDA. In previous years this was the ratio of underlying net cash from operations to operating profit Free cash flow Underlying net cash flow from operations less net tax and interest payments less Note 25 purchases of intangible assets and property, plant and equipment. Plus proceeds from disposal of plant and equipment. Net cash Net cash as defined by the Group combines cash and cash equivalents with other Note 24 financial assets and liabilities, primarily available for sale investments, derivative financial instruments and finance lease assets/liabilities. Return on capital employed Calculated as: Underlying EBITA / (average capital employed less net pension asset), CFO where average capital employed is defined as shareholders equity plus net debt (or minus Review net cash). Specific adjusting items Amortisation of intangible assets arising from acquisitions; impairment of property; gains/ Note 4 losses on disposal of property and investments; net pension finance income; transaction and integration costs in respect of business acquisitions; change in accounting policy in respect of software implementation costs; tax impact of the preceding items and significant non-recurring deferred tax movements. ### QinetiQ Group plc Annual Report & Accounts 2022 207 # Shareholder Information ## Registrar: Equiniti Limited www.shareview.co.uk Tel: 0371 384 2021 ## Shareholding enquiries The Company's registrar is Equiniti. Enquiries regarding your shareholding, including the following administrative matters, should be addressed to Equiniti: - Change of personal details such as change of name or address - Lost share certificates - Dividend payment enquiries - Direct dividend payments. You can have your dividends paid directly into a UK bank or building society account by completing a dividend mandate form. The associated dividend confirmation will still be sent to your registered address. If you live outside the UK, Equiniti offers a global payments service which is available in certain countries and could enable you to receive your dividends direct into your bank account in your local currency ## Contact details for registrar By post: Equiniti Limited, Aspect House, Spencer Road Lancing, West Sussex BN99 6DA By telephone: 0371 384 2021* for UK calls, +44 (0)121 415 7576 for calls from outside the UK. * Lines are open 8.30am to 5.30pm (UK time), Monday to Friday (excluding public holidays in England and Wales). By email: You can send an email enquiry securely from Equiniti's website, at help.shareview.co.uk ## Analysis of share register at 31 March 2022 | By type of holder | Total number of holdings | Percentage of holders | Total number of shares | Percentage issued capital | | --- | --- | --- | --- | --- | | Individual | 5,276 | 88.27% | 4,880,873 | 0.84% | | Institutions and others | 701 | 11.73% | 573,876,248 | 99.16% | | Total | 5,977 | 100% | 578,757,121 | 100% | | By size of holding | | | | | | 1–500 | 3,925 | 65.67% | 755,542 | 0.13% | | 501–1,000 | 502 | 8.40% | 402,277 | 0.07% | | 1,001–2,500 | 598 | 10.01% | 1,046,517 | 0.18% | | 2,501–5,000 | 331 | 5.54% | 1,186,725 | 0.21% | | 5,001–10,000 | 168 | 2.81% | 1,206,775 | 0.21% | | 10,001–100,000 | 224 | 3.75% | 7,585,247 | 1.31% | | Over 100,000 | 229 | 3.83% | 566,574,038 | 97.89% | | Total | 5,977 | 100% | 578,757,121 | 100% | Online: Equiniti's website at help.shareview.co.uk (Shareview) includes answers to frequently asked questions and provides key forms for download. Shareview also offers online access to your shareholding where you can manage your account, register for electronic communications, see details of balance movements and complete certain amendments online, such as changes to dividend mandate instructions. You can register at www.shareview.co.uk, click on 'Register' and follow the steps. ## Electronic communications Following the latest guidance from the Department for Business, Energy & Industrial Strategy (BEIS) in assisting companies to meet their statutory obligations during the COVID-19 pandemic, the Company will this year only make documentation and communication available electronically via the Company's website. In addition, communications electronically, via the wider use of electronic communications enables fast receipt of documents, reduces the Company's printing, paper and postal costs and reduces the Company's environmental impact. Shareholders can register for electronic communications at www.shareview.co.uk and may also cast their vote for the 2022 Annual General Meeting online quickly and easily using the Sharevote service by visiting www.sharevote.co.uk ## Donating shares to charity – ShareGift Small parcels of shares, which may be uneconomic to sell on their own, can be donated to ShareGift, the share donation charity (registered charity no. 1052686). ShareGift transfers these holdings into their name, aggregates them, and uses the proceeds to support a wide range of UK charities based on donor suggestion. If you would like further details about ShareGift, please visit www.sharegift.org, email help@sharegift.org or telephone them on 020 7930 3737. ## Share price Details of current and historical share prices can be found on the Company's website at www.QinetiQ.com/investors 208 QinetiQ Group plc Annual Report & Accounts 2022 Share fraud reporting: www.fca.org.uk/scams FCA Consumer Helpline: 0800 111 6768 ## Beware of share fraud Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that turn out to be worthless or non-existent, or to buy shares at an inflated price in return for an upfront payment. While high profits are promised, if you buy or sell shares in this way you will probably lose your money. ## How to avoid share fraud 1. Keep in mind that firms authorised by the FCA are unlikely to contact you out of the blue with an offer to buy or sell shares. 2. Do not get into a conversation, note the name of the person and firm contacting you and then end the call. 3. Check the Financial Services Register from www.fca.org.uk to see if the person and firm contacting you is authorised by the FCA. 4. Beware of fraudsters claiming to be from an authorised firm, copying its website or giving you false contact details. 5. Use the firm's contact details listed on the Register if you want to call it back. 6. Call the FCA on 0800 111 6768 if the firm does not have contact details on the Register or you are told they are out of date. 7. Search the list of unauthorised firms to avoid at www.fca.org.uk/scams. 8. Consider that if you buy or sell shares from an unauthorised firm you will not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme. 9. Think about getting independent financial and professional advice before you hand over any money. 10. Remember: if it sounds too good to be true, it probably is! ## Report a scam If you are approached by fraudsters please tell the FCA using the share fraud reporting form at www.fca.org.uk/scams, where you can find out more about investment scams. You can also call the FCA Consumer Helpline on 0800 111 6768. If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040. ## Key dates | 21 July 2022 | Trading update | | --- | --- | | 21 July 2022 | Annual General Meeting | | 30 September 2022 | Half-year financial period end | | November 2022 | Half-year results announcement | | January 2023 | Trading update | | 31 March 2023 | Financial year end | | May 2023 | Preliminary results announcement | ## 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. QinetiQ Group plc Annual Report & Accounts 2022 209 ## Shareholder ## Information ## continued ## Company Information and ## Advisors Registered office Corporate brokers Cody Technology Park Barclays, 1 Churchill Place, Ively Road, Farnborough, London, EC14 5HP Hampshire, GU14 0LX Tel: +44 (0) 1252 392000 Numis, 45 Gresham St Company Registration London, EC2V 7BF Number: 4586941 Independent auditors Principal legal advisor PricewaterhouseCoopers LLP, Ashurst LLP, London Fruit and Savannah House, Wool Exchange, 1 Duval Square, 3 Ocean Way, London, E1 6PW Southampton, SO14 3TJ Registrar Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA ### 210 QinetiQ Group plc Annual Report & Accounts 2022 CBP00019082504183028 Annual Report & Accounts 2022 Cody Technology Park Ively Road Farnborough Hampshire GU14 0LX Tel: +44 (0) 1252 392000 Company Registration Number: 4586941