Qinetiq Sales Fall on U.S. Defense Slowdown, U.K. Uncertainty

Qinetiq Group Plc, the tester of aircraft for the U.K. military, said first-half sales fell 7.3 percent even as it increased operating margin on restructuring measures put in place in the past two years.

Sales declined to 685.5 million pounds ($1.09 billion) in the six months ended Sept. 30 from 739.6 million pounds a year earlier, the London-based company said today in a statement. A spree of contracts typically awarded by the Pentagon in September did not take place this year, Chief Executive Officer Leo Quinn said in an interview.

Qinetiq and other defense contractors are contending with uncertainty about U.S. defense plans that have slowed activity at the Pentagon at the same time that military spending in the U.K. is pared. Qinetiq has undergone rounds of cost cutting in both countries to counteract the budgetary restraint.

“Visibility remains much lower than usual, particularly in the U.S.,” Quinn said, while predicting full-year performance will be in line with expectations. Strong competition is causing “aggressive bids” and protests on contract awards that are slowing business, the company said.

Qinetiq declined 0.6 percent to 194.5 pence at 8:50 a.m. in London, valuing the business at 1.28 billion pounds. The company has risen 46 percent this year.

The slowdown in sales was partly offset by earlier booking of contracts for Qinetiq’s Q-Net, a netting system to protect military vehicles against the threat of rocket-propelled grenades, the company said. Revenue declined for the fourth consecutive six-month period.

Cash Positive

Qinetiq’s underlying operating margin rose to 13.9 percent from 11.1 percent, led by gains in the U.K. division.

There is uncertainty in the U.K. over the outcome of a government review into how it prices single-source contracts and the establishment of a government-owned, contractor-operated system for the Defence Equipment & Support procurement agency, Qinetiq said. While the company has ruled out a lone bid to run the system, a partnership agreement could be considered, Quinn said.

Qinetiq reported net cash of 21.5 million pounds after the completion of a three-year debt reduction plan, which included the suspension of dividend payments. The positive cash balance allows the company to consider investments, Quinn said, with a focus on training, simulation and OptaSense fiber-optic activities. Small bolt-on acquisitions are also possible, he said.

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