Interim Results

14 November 2024

Good Group performance and increased returns

Results for six months to 30 September 2024 ('H1 FY25')

Steve Wadey, Group Chief Executive Officer, said: "We have delivered a good operational and financial performance across the Group, set against a backdrop of political change and an evolving threat environment. Our talented people do critical work, highly relevant to our customers' mission and this is driving increasing demand for our capabilities.

"As a result of our continued focus on disciplined capital allocation, we have extended our £100m share buyback programme by £50m to deliver increased shareholder returns. Guidance for FY25 is unchanged and we remain on track to deliver our FY27 outlook of c.£2.4 billion organic revenue at c.12% margin. We are well positioned for long-term sustainable growth with compelling value creation for shareholders."

Financial highlights

Good overall Group financial performance

High relevance to our customers' mission driving increasing demand

FY25 guidance unchanged and on-track to deliver FY27 outlook

Interim results presentation:

We will be hosting an in-person results presentation at 09:30 GMT at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. Registration to join in-person or via the live webcast will be available via our website at https://www.qinetiq.com/en/ or at https://brrmedia.news/QQ_Q2_24

About QinetiQ:

QinetiQ is an integrated global defence and security company focused on mission-led innovation. QinetiQ employs c.8,500 highly-skilled people, committed to creating new ways of protecting what matters most; testing technologies, systems, and processes to make sure they meet operational needs; and enabling customers to deploy new and enhanced capabilities with the assurance they will deliver the performance required.

For further information please contact:

Stephen Lamacraft, Interim Group Investor Relations Director:                   +44 (0) 7471 885817

Lindsay Walls, Group Communications Director (Media enquiries)              +44 (0) 7793 427582

Basis of preparation:

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

Year references (FY25, FY24, 2025, 2024) refer to the year ended 31 March.

Disclaimer

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

The forward-looking statements, including assumptions, opinions and views of the Company or cited from third party sources, contained in this announcement are solely opinions and forecasts which are uncertain and subject to risks. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Actual results may differ materially from those expressed or implied by these forward-looking statements. A number of factors could cause actual events to differ significantly and these are set out in the principal risks and uncertainties section of this document.

Most of these factors are difficult to predict accurately and are generally beyond the control of the Company. Any forward-looking statements made by, or on behalf of, the Company speak only as of the date they are made. Save as required by applicable law, the Company will not publicly release the results of any revisions to any forward-looking statements in this document that may occur due to any change in the Directors' expectations or to reflect events or circumstances after the date of this document.  All subsequent written and oral forward-looking statements attributable to either QinetiQ Group plc or to persons acting on its behalf are expressly qualified in their entirety by the cautionary statements referred to in this disclaimer and contained elsewhere in this document.

QinetiQ Group plc and its directors accept no liability to third parties in respect of this document save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Schedule 10A of the Financial Services and Markets Act 2000. It should be noted that Schedule 10A and Section 463 of the Companies Act 2006 contain limits on the liability of the directors of QinetiQ Group plc so that their liability is solely to QinetiQ Group plc.

Chief Executive Officer's Review

Overview

In the first half we delivered good, consistent operational and financial performance across the Group. We secured a record first half order intake of £1,035m, with a book-to-bill ratio of 1.3x, demonstrating our high relevance to our customers' mission.  We achieved 8% organic revenue growth[6], with stable underlying operating profit margin stable at 11.3%. Cash conversion in the first half was 84%, and full year cash conversion is expected to be in-line with guidance of 90%+. Leverage remains comfortably within our target range at 0.6x. Completion of the sale and leaseback of Cody Technology Park in the second half, further strengthens our balance sheet and provides increased optionality for value accretive capital deployment.

We are increasing shareholder returns with the extension of our £100m share buyback programme by a further £50m and sustaining our dividend growth at 7%.

EMEA Services continues to maintain the order and revenue momentum from FY24, delivering 10% organic revenue growth, and strong margins of 11.5%. Orders increased by 16% delivering a robust book-to-bill of 1.2x.

Global Solutions performance is in line with our expectations, with good order intake of £304m, revenue stable at £229m and a margin of 10.3%. There is good visibility with a total funded order backlog of £376m and a book-to-bill of 1.3x, supporting our confidence for growth in the coming years.

Operational highlights

We have continued to make good progress over the first half in implementing our strategy. Major strategic achievements delivered in the first half include:

High relevance to our customers' mission driving increased demand

We operate in a rapidly changing and highly uncertain geopolitical environment, with ongoing conflicts in Ukraine, the Middle East and growing tensions in the Indo-Pacific. This is accelerating the pace and expanding the breadth of the threat, further stretching allied capability across the globe. We are also experiencing political change with new governments taking office in the UK and US and an election in Australia next year. The importance of international cooperation, through alliances such as NATO and AUKUS will continue as governments look to respond to the increasing threat whilst balancing fiscal pressures and budget prioritisation.

Our strategy and unique value proposition are well matched to respond to these market dynamics as the need for strong national defence and security endures, focused on greater resilience and rapid modernisation. This is driving our customers' capability and investment priorities to enable them to maintain technological superiority, acceleration of capabilities and operational advantage. In turn, this is increasing demand for our differentiated capabilities in Research & Development, Engineering Services, Test & Training and Cyber & Intelligence. These remain highly relevant and critical to national defence and security priorities underpinning our sustainable growth and is why we have delivered organic revenue at broadly double the growth rate of national defence budgets over the last five years.

Clear purpose driven strategy delivering for our customers

Our purpose of protecting lives and serving the national security interests of our customers has never been more relevant. It guides our strategy which has three inter-related components:

By focusing on our customers' needs, partnering with industry and investing in our capabilities, we have won larger longer-term programmes enabling us to deliver consistent organic growth and attractive returns. We have a healthy order backlog of £3.5bn and a pipeline aligned to major programme opportunities that is worth more than £11bn over the next five years. This gives us significant revenue visibility and underpins our long-term sustainable growth for many years.

We continue to invest in our people, technology and capabilities to drive organic growth. The delivery of our strategy and focused execution of our order book is dependent on the highly-skilled people we employ. We continue to make progress creating an environment where they can all thrive and have achieved our highest ever level of employee engagement. We invest c.£20m per year in R&D aligned to our customers' priorities and to create more value for our customers and support future growth opportunities. We're also investing in our digital platform to improve the exchange of technology and information as well as collaborative working. Investing in our business and organic growth is core to our strategy to build a differentiated company so that we can continue to deliver long-term value for our customers and shareholders.

Leadership changes

We have our strengthened leadership team, through the arrival of Martin Cooper (Group Chief Financial Officer) and Iain Stevenson (Chief Operating Officer), both providing increased oversight of our growing and increasingly global company.

Outlook: FY25 expectations unchanged and on track to deliver FY27 guidance

Our FY25 guidance remains unchanged. We expect to deliver high single-digit organic[8] revenue growth, compared to FY24, at a stable operating profit margin. We are on-track to achieve c.£2.4bn organic revenue at c.12% margin by FY27. This will deliver an attractive return on capital employed at or above the upper end of the 15-20%+ range.

Cash conversion will remain high at 90%+ with capital expenditure within the £90m to £120m range. Our strengthened balance sheet provides optionality, through disciplined deployment of capital, for bolt-on acquisitions to compound growth at 11-12% margin and further shareholder returns.

Following the completion of the sale and leaseback of the Cody Technology Park year-end Net Debt will be improved by c.£50m reflecting the net position after the in-year impact of the extended buy-back programme.

Summary

I am pleased with the continued progress we have made in the first half. Building on our strong track record we have delivered good consistent operational and financial performance across the Group. We remain on-track to deliver £2.4bn organic revenue at c.12% margin by FY27 and our visibility to achieve this goal is increasing. Faced with continued rising global instability, I'm incredibly proud of the outstanding skills and capabilities of our people, fulfilling our purpose by serving the national security interests of our customers. In summary, we are well positioned and have a clear strategy to deliver long-term sustainable growth and compelling value creation for shareholders.

Trading environment

Global context

We are operating in an environment of escalating regional conflicts and geopolitical tension, with outcomes remaining uncertain in the Middle East and Ukraine as well as the threat posed by China's growing military power coupled with its push to change global norms and potentially threaten its neighbours.

Strategic response

To meet these increasing challenges, our three home countries of Australia, the UK, the US as well as their allies continue to review their evolving defence and security capabilities and are focusing on high-priority areas aligned with our strategy.

UK

The new Labour government launched a Strategic Defence Review (SDR) in July 2024 and is due to report in the first half of 2025. This will inform the decisions of a multi-year Spending Review, due to be published in Spring 2025. Although a timetable has yet to be set, Labour has committed to an increase in Defence spending to 2.5% GDP from its current 2.32% GDP[9].

We remain well positioned to enable the UK to remain at the forefront of current and next-generation capabilities through the application of mission-led innovation.

US

The 2025 Department of Defense Budget request of $895bn in discretionary funding for national defense, including approximately $850bn for the Department of Defense (DOD), continues to deliver on the 2022 National Security Strategy[10]. A Continuing Resolution is now in place until December 20th 2024 and new agreed funding levels will follow the inauguration of Donald Trump as the next US president on January 20 2025.

We serve our US customers' mission in the areas of Intelligence, Surveillance and Reconnaissance (ISR), mission operations, advanced cyber, information advantage, multi-domain autonomous solutions and systems and engineering and innovation.

Australia

2024 Integrated Investment Program (IIP) detailing a generational investment in the Australian Defence Force's posture, capability and structure. The commensurate increase in annual funding will see the Defence budget grow to more than AUD$100bn by 2033-34[11].

We continue to support the Australian forces in modernising sovereign defence capabilities, leveraging expertise across the global business.

Broader international markets

Global defence spending continues to rise. The 2025 forecast for global defence spending stands at USD$2.5tn[12]. Total NATO spending increased by 11% in 2024, compared to 3% in 2023. Growth was even stronger among NATO's European members, who increased their combined military spending by 19% in real terms in 2024[13].

While priority and investment focus will be attached to the prosecution of our three home country strategies (Australia, UK and US), we continue to conduct business in the support of allied nations whether through the use of our LTPA sites in the UK with the Spanish and German Air Forces, or through the Next Generation Aerial Training Services contract recently signed in Germany.

Chief Financial Officer's Review

Operating performance

We delivered good orders performance in the period with orders of £1,034.8m (H1 FY24: £952.7m), up 9% on a reported basis. On a consistent currency basis, orders grew 10% year on year. Orders won include €284m for the continuation of the threat representation training contract that underpins our German business on a long term ten year plus basis. In the US the next year of funding was received for contracts won last year, together with new business and on contract growth on the Space Development Agency and Strategic Capabilities Office programmes. Due to the multi-year phasing and funding approach to contract awards in the US we continue to only book awards in-line with our prudent order recognition policy.

Revenue visibility remains good and the Group's total funded order backlog at 30 September 2024 stood at £2.9bn in line with year end 2024 when taking into account our foreign exchange headwind. As we deliver revenue on our large long-term contracts (with orders booked in prior years, most significantly with the Long Term Partnering Agreement) backlog will naturally reduce, it is therefore pleasing to see backlog maintained by a strong book to bill of 1.3x in the period. At the start of H2 FY25, the Group had approximately £854m of H2 FY25 revenue under contract. This compares with approximately £840m of H2 FY24 revenue at the same time last year.

Revenue was £946.8m (H1 FY24: 883.1m), up 7% on a reported basis. On a consistent currency basis, revenue grew 8% compared to the same period last year. Organic growth was driven by strong performance in our engineering delivery contracts in the UK and Australia, together with increased volumes in aerial targets across the world.

Operating profit was £106.6m (H1 FY24: £100.1m), up 7% on a constant currency basis. The Group's operating margin was 11.3% for H1 FY25, consistent with H1 FY24 and the FY24 outturn.

Operating profit from segments excludes income from Research and Development Expenditure Credits (RDEC). RDEC income was £12.6m (H1 F24: £11.9m).

Specific adjusting items

The total impact of specific adjusting items on operating profit (which are excluded from underlying performance) was an expense of £24.9m (H1 FY24: £20.7m).

Acquisition and disposal costs of £0.8m (H1 FY24: £0.6m) include costs relating to the disposal (sale and leaseback) of Cody Technology Park. Acquisition related remuneration of £0.4m relates to specific post-acquisition retention arrangements for Avantus employees which were anticipated at the time of the transaction. Acquisition integration costs of £1.7m relate to the one-off costs of integrating both Avantus and Air Affairs with the existing Group operations.

We continue to deliver on our discrete investment project to build our digital platform to enable our global growth strategy and our AUKUS customers' needs. The majority of the costs in the first half are reported as specific adjusting items in the P&L given their one-off nature, with ongoing recurring operating costs (such as licence costs and overheads) remaining within underlying operating costs. In H1 FY25 the exceptional cost element of the digital investment programme within specific adjusting items totals £9.9m (FY24: £5.1m).

Amortisation of acquisition intangibles was £12.1m (H1 FY24: £12.7m), with the variance due to foreign exchange.

Also included within specific adjusting items in H1 FY24 were a gain on the sale of property in the UK of £2.1m and impairment of right of use lease assets in the US following space relocation of £0.7m.

Net finance costs

Underlying net finance expense on the group's net debt position was £8.2m (H1 FY24: £7.7m). In H1 FY24 interest payable and receivable on the interest rate swap derivatives were presented gross. For H1 FY25, consistent with the FY24 year end, these items are presented on a net basis in the income statement. The pension net finance income, which is a specific adjusting item of £0.4m (H1 FY24: £2.2m) reduced due to a lower opening net pension surplus. Net finance expense was £7.8m (H1 FY24: £5.5m).

Tax

The total tax charge is £23.5m (H1 FY24: £22.1m). The underlying tax charge of £30.1m (H1 FY24: £27.0m) is calculated by applying the expected underlying effective tax rate at a jurisdictional level for the year ending 31 March 2025 to the underlying profit before tax for the six months to 30 September 2024.

The Group's full year expected underlying effective tax rate is 27.2% in line with the half year underlying effective tax rate of 27.1% (H1 FY24: 25.9%). The increase on last year is due to the jurisdictional mix of profits.

In future we expect the effective rate to be above the UK statutory rate subject to the jurisdictional mix of profits and the recognition of deferred tax in respect of overseas tax losses and excess interest deductions.

Tax on specific adjusting items includes a £3.5m credit for tax on the amortisation of acquisition intangibles and a £3.1m credit in respect of other pre-tax specific adjusting items. The total specific adjusting items tax credit was £6.6m (H1 FY24: £4.9m).

Return on Capital Employed (ROCE)

ROCE is calculated as underlying operating profit less amortisation for the previous 12 months / (average capital employed less net pension asset), where average capital employed is defined as shareholders' equity plus net debt (or minus net cash).

For H1 FY25 Group ROCE was 20.1% (H1 FY24: 25.5%). This reduced due to the full year impact of capital employed with the acquisitions completed in H2 FY23. ROCE is expected to increase modestly following the completion of the sale and leaseback of Cody Technology Park at the end of October.

Earnings per share

Underlying basic earnings per share for the Group was 14.2p up 6% on the prior year first half (H1 FY24: 13.4p), with the increase primarily due to the increase in profits. Statutory basic earnings per share (including specific adjusting items) were marginally up at 11.1p (H1 FY24: 11.0p), with the increase in underlying operating profit offset by specific adjusting items.

Dividend

An interim dividend of 2.8p (H1 FY24: 2.6p) will be paid on 7 February 2025 to shareholders on the register on 9 January 2025. The interim dividend represents one third of the prior year total dividend reflecting our previously communicated methodology. The full year proposed dividend will be announced with our full year preliminary results in May 2025.

Cash performance

Underlying net cash flows from operations was £130.9m (H1 FY24: £71.7m), resulting in an improved cash conversion before capital expenditure of 84% (H1 FY24: 50%). H1 FY24 operating cash flow was adversely impacted by the timing of customer billing milestones and receipts. There are some seasonal impacts between the first and the second half which impact H1 cash conversion, such as the timing of receiving RDEC income (with the prior year income received in cash in H2). We are on- track to deliver full year underlying operating cash conversion of approximately 90%, in-line with our previous guidance.

Capex for the period was £48.6m (H1 FY24: £46.9m). We continue to invest in core contracts including the LTPA following the contract amendment announced in April 2019. Full year total capex is expected to be in-line with previous guidance of £90-120m.

At 30 September 2024 the Group had £190.9m net debt, compared to £151.2m at 31 March 2024. The increase is due to £47.2m free cash flow being more than offset with shareholder distributions comprising dividend payment of £32.2m and £46.2m of share repurchases due to the ongoing share buyback programme.

The reported H2 FY24 and H1 FY25 EBITDA and 30 September 2024 net debt position result in a leverage ratio of 0.6x (31 March 2024: 0.5x).

The net debt balance as at 30 September 2024 includes £3.1m of net financial derivative assets, predominantly the interest rate swaps which have been taken out to hedge future interest rate exposure on the term loan, £2.9m of capitalised bank fees and £53.8m of lease liabilities.

We maintain a rigorous approach to the deployment of our capital, scrutinising organic and inorganic opportunities to ensure returns to our shareholders are appropriate. Our capital allocation policy as follows:

Committed facilities

The Group has a £333m Term Loan split into two Tranches: GBP Term Loan £273m (Tranche A); and, USD Term Loan £60m (Tranche B), and has a 3-year term with two 1-year extension options.  Participating banks have lent on a 2-tier basis, 3-banks at £67m and 4-banks at £35m. In-line with Group policy, £270m (c.80%) of the floating rate debt has been fixed using SONIA interest rate swaps split over a 3-year and 5-year tenure at a weighted average rate of 3.29%. Including all fees and charges, the weighted average cost of debt is 5.21%.

The Group has a £290m bank revolving credit facility with an additional 'accordion' facility to increase the limit up to £400m. The facility which will mature on 22 April 2027 was undrawn at 30 September 2024 and provides the Group with significant scope to execute its strategic growth plans.

We adopt a strict policy on managing counterparty risk through a combination of diversification of investments and regular reviews of counterparty limits using credit rating assessments. We are proud that our debt sits with our key relationship banks who have strong credit ratings and diverse portfolios demonstrating their resilience to the bank turmoil. The banks have been selected for their capabilities in our home countries to support our business. 

Foreign exchange

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

Foreign exchange translation has provided a modest headwind to revenue and operating profit compared to the previous half year. Most significantly, the US Dollar has strengthened with the average exchange rate to Sterling increasing from 1.25 to 1.29. In H1 FY25, c.20% of our total Group revenue was generated in the US. As a result of the strengthening US Dollar and other FX movements in year, revenue decreased by £4.7m and operating profit decreased by £0.3m. Every 5c movement in the USD rate would impact Group revenue by c.£15m.

Pensions

The net pension asset under IAS 19, before adjusting for deferred tax, was £31.1m (31 March 2024: £18.4m). The key driver for the increase in the net pension asset since the March 2024 year end was the net actuarial gain on scheme net assets.

The key assumptions used in the IAS 19 valuation of the scheme are set out in note 13.

Post balance sheet events

On 30 September 2024 the Group announced an agreement for the sale and leaseback of our site at Cody Technology Park, Farnborough, UK, to Tristan Capital Partners. The assets, comprising the land, buildings, plant and machinery relating to the site have been reclassified from Property, Plant and Equipment to Assets held for sale.

On 31 October 2024, subsequent to the period end, the transaction was completed. A cash receipt of £112m was received and a new 15 year lease was entered into. The sale and leaseback accounting under IFRS16, which will be completed in H2 FY25, is expected to result in a one-off, non-cash, accounting loss of approximately £30m, which will be calculated based on the varying values of assets being sold and those being leased back

Operating review

EMEA Services

Overview

EMEA (Europe, Middle East and Australasia) Services combines world-leading expertise with unique facilities to generate and assure capability. We do this through capability integration, threat representation and operational readiness, underpinned by long-term contracts that provide good revenue visibility and cash generation.

Financial performance

Orders were up 16% to £730.4m (H1 FY24: £631.1m), underpinned by a €284m order for the continuation of threat representation and training services for the German Armed Forces, delivering a strong book to bill ratio of 1.2x. The funded order backlog was £2.6bn, in line with 31 March 2024, increasing by 5% excluding LTPA.

Revenue increased 10% on an organic basis on the back of strong orders won last year and strong programme execution on that backlog.

Underlying operating profit increased by 7% on an organic basis to £82.9m (H1 FY24: £77.4m). This has been achieved at a margin of 11.5% in line with expectations (H1 FY24: 11.8%).

Including the LTPA, approximately 66% of EMEA Services revenue is derived from single source contracts (H1 FY24: approximately 67%) demonstrating our critical and unique capabilities for our customers.

Sector commentary

UK Defence (59% of EMEA Services revenue)

The UK Defence sector delivers mission critical solutions, innovating for our Air, Maritime and Land customers' advantage. The sector maximises growth through our framework contracts, building new core offerings through our global campaigns and exploring new growth opportunities; it improves coherence of our distinctive offerings across our customer base, with the embedding of enabling functions bringing greater cohesion to operational strategy execution for business performance excellence. The sector manages a number of large long-term contracts, including the LTPA for test, trials, training and evaluation and the Engineering Delivery Partner (EDP).

UK Intelligence (29% of EMEA Services revenue)

The UK Intelligence sector utilises its unique domain knowledge across C5ISTAR (Command, Control, Communications, Computers, Cyber, Intelligence, Surveillance and Reconnaissance), allied to its research, innovation and applied engineering pedigree, to support UK Government in the development, assurance, integration and deployment of mission critical capabilities at pace. We are a key industry partner to the MOD, and continue to be well placed to deliver critical digital change programmes over the coming years to Defence Digital, Defence Intelligence and Defence Science and Technology Laboratory (Dstl). During the first half, highlights include:

Australia (12% of EMEA Services revenue)

Our Australia sector comprises our specialist advisory and engineering business in Australia and also includes our threat representation business operating in Australia, the UK, Germany and Canada.

Global Solutions

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

Global Solutions combines our world-leading technology-based products and services. Our strategy is to expand the portfolio of solutions to win larger, longer-term programmes providing good visibility of revenue and cash flows.

Financial performance

Orders decreased by 3% on an organic (constant currency) basis to £304.4m (H1 FY24: £321.6m), following a strong prior year performance in the US. Book to bill was 1.3x as we saw good order flow from US funding on 2024 contract awards and on contract growth, together with high demand for aerial targets. Funded order backlog is up 17% from the full year at £0.4bn and together with strong US unfunded orders of £0.6bn there is good visibility, our confidence for growth in the coming years.

Revenue was flat at £229.0m (H1 FY24: £228.3m) in line with expectations. US revenue decreased due to the completion of the CRSi robot programme, partially offset by growth in the legacy Avantus business driven by the SDA, SCO and TARS contracts. We also benefited from higher levels of revenue from our targets and other product lines.

Underlying operating profit increased to £23.7m (H1 FY24: £22.7m), with an underlying operating profit margin of 10.3% (H1 FY24: 9.9%) reflecting the high level of product sales.

Sector commentary

United States (74% of Global Solutions revenue)

Our US sector provides design, development, rapid prototyping, systems engineering, and integration and manufacture of speciality defence mission products and solutions related to robotics, autonomy, maritime and sensors. We provide a complementary suite of services related to mission support, modernisation, enablement and operations, technical advisory, cyber, information advantage for US Defense, Federal, Homeland and National Security customers.

Other Products and Solutions (26% of Global Solutions revenue)

The portfolio of our Global Solutions products provide research services and bespoke technological solutions derived from EMEA Services, and includes QinetiQ Target Systems (QTS). As a key component of our Threat Representation offering, QTS provides products and product related services to global defence customers in support of their training, test and evaluation requirements.  Our portfolio includes multi-role fixed-wing aerial targets and maritime surface vessels which are remotely-operated and deliver comprehensive threat simulation scenarios, as well as customised uncrewed special mission vehicles, command and control systems, and teams, scoring systems, and launchers.

Principal risks and uncertainties

There are a number of risks and uncertainties which management continue to identify, assess and mitigate to minimise their potential impact on performance. An explanation of risks and their mitigations, together with details of our risk management framework can be found in the 2024 Annual Report and Accounts (on pages 56 to 61) which is available for download at: https://www.qinetiq.com/investors.

Having considered recent geopolitical and macroeconomic events, the Group believes the principal risks and uncertainties for the remainder of FY25 are included in, and are therefore unchanged from, those reported in the 2024 Annual Report and Accounts. The Group's principal risks and uncertainties at 31 March 2024 related to the following areas: competitive landscape, disruptive technologies, acquisition integration, climate change, organisational culture, cyber security, management of change, health, safety & wellbeing, information security, IT infrastructure, licence to operate, P3M capability and strategic capability planning.

Condensed consolidated income statement

* Alternative performance measures are used to supplement the statutory figures. These are additional financial indicators used by management internally to assess the underlying performance of the Group. Definitions can be found in the glossary.

Condensed consolidated statement of comprehensive income

Condensed consolidated statement of changes in equity

Condensed consolidated balance sheet

Condensed consolidated cash flow statement

Reconciliation of movement in net debt

Notes to the condensed interim financial statements

Revenue by category and reconciliation to revenue on an organic, constant currency basis

Other income

Revenue by customer geographical location 

Revenue by major customer type 

For the six months ended 30 September

Operating segments

Reconciliation of segmental results to total profit

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

In the income statement, the Group presents specific adjusting items separately. In the judgement of the Directors, for the reader to obtain a proper understanding of the financial information, specific adjusting items need to be disclosed separately because of their size and nature. Underlying measures of performance exclude specific adjusting items. The following specific adjusting items have been (charged)/credited in the consolidated income statement:

Reconciliation of underlying profit for the period to total profit for the period

The total impact of specific adjusting items on operating profit (which are excluded from underlying performance) was an expense of £24.9m (H1 FY24: £20.7m).

Acquisition and disposal costs of £0.8m (H1 FY24: £0.6m) include costs relating to the disposal (sale and leaseback) of Cody Technology Park. Acquisition related remuneration of £0.4m relates to specific post-acquisition retention arrangements for Avantus employees which were anticipated at the time of the transaction. Acquisition integration costs of £1.7m relate to the one-off costs of integrating both Avantus and Air Affairs with the existing Group operations.

Our digital investment programme continues to deliver improvements to the infrastructure, digital tools and operating systems of the company - the majority of the costs in the first half are reported as specific adjusting items in the P&L given their one-off nature, with ongoing recurring operating costs (such as licence costs and overheads) remaining within underlying operating costs. In H1 FY25 the exceptional cost element of the digital investment programme within specific adjusting items totals £9.9m (FY24: £5.1m).

Amortisation of acquisition intangibles was £12.1m (H1 FY24: £12.7m), with the variance due to foreign exchange.

Also included within specific adjusting items in H1 FY24 were a gain on the sale of property in the UK of £2.1m and impairment of right of use lease assets in the US following space relocation of £0.7m.

There were no acquisitions in H1 FY25 or H1 FY24. The cash flow statement for H1 FY24 included £3.8m of deferred consideration which was settled in respect of the Air Affairs acquisition. A further £1.1m of deferred consideration was settled in H1 FY24 in respect of legacy acquisitions made by the Avantus business before its acquisition by QinetiQ.

The total tax charge is £23.5m (H1 FY24: £22.1m). The underlying tax charge of £30.1m (H1 FY24: £27.0m) is calculated by applying the expected underlying effective tax rate at a jurisdictional level for the year ending 31 March 2025 to the underlying profit before tax for the six months to 30 September 2024.

The Group's full year expected underlying effective tax rate is 27.2% which is higher than the half year underlying effective tax rate of 27.1% (H1 FY24: 25.9%) due to the jurisdictional mix of profits in H1 FY25.

In future we expect the effective rate to be above the UK statutory rate subject to the jurisdictional mix of profits and the recognition of deferred tax in respect of overseas tax losses and excess interest deductions.

Tax losses and specific adjusting items

At 30 September 2024 the Group had unused tax losses and surplus interest costs of £221.2m (31 March 2024: £212.3m) which are available for offset against future profits.

Within deferred tax assets recognised on the balance sheet is £24.7m in respect of £117.8m of US net operating losses, £4.1m in respect of £17.6m of Canadian net operating losses and £3.3m in respect of £10.2m of German trade losses and excess interest.

No deferred tax asset is recognised in respect of the £75.5m of US interest deductions due to uncertainty over the timing and extent of their utilisation. Full recognition of the US interest deductions would increase the deferred tax asset by £20.4m. The Group has recognised £29.9m of time-limited US net operating losses of which £21.1m will expire in 2035 and £8.8m in 2036. Deferred tax has been calculated using the enacted future statutory tax rates.

Tax on specific adjusting items includes a £3.5m credit for tax on the amortisation of acquisition intangibles and a £3.1m credit in respect of other pre-tax specific adjusting items. The total specific adjusting items tax credit was £6.6m (H1 FY24: charge of £4.9m).

Basic earnings per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of ordinary shares in issue during the period. The weighted average number of shares used excludes those shares bought by the Group and held as own shares. For diluted earnings per share the weighted average number of shares in issue is adjusted to assume conversion of potentially dilutive ordinary shares arising from unvested share-based awards including share options.

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 3) and tax thereon.

Reconciliation of net cash flow from operations to underlying net cash inflow from operations to free cash flow

Underlying cash conversion ratio

The interim financial statements do not include all financial risk management information and disclosures required in annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 31 March 2024. There have been no changes in any risk management policies since the year end. 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; and

Level 3 - measured using inputs for the assets or liability that are not based on observable market data (i.e. unobservable inputs).

The Group's assets and liabilities that are measured at fair value, as at 30 September 2024, are as follows:

The following table presents the Group's assets and liabilities that are measured at fair value as at 31 March 2024:

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.

An analysis of the dividends paid and proposed in respect of the period ended 30 September 2024 and comparative periods is provided below: