Last Quarter Not Good For QinetiQ

QinetiQ the British defense contractor formed originally by privatizing a chunk of the British Ministry of Defence’s testing commands and facilities has had some good years recently. Much of this was driven by their penetration of the United States market while maintaining British work as well as winning a large training support contract. Unfortunately recent events have not been so kind to the company.

Last month their CEO, Graham Love, was replaced. This was due to a combination of issues related to the company’s performance relative to the crash of a Nimrod intelligence aircraft, some ways the move to a public company was handled by Love and recent labor strife in England. Love and some other senior managers had personally made a great deal of money when the original stock was issued. British workers felt neglected due to the focus on America and there had been a strike over pay and benefits.

QinetiQ had made a profit of over $1 billion in 2008. Now they are reporting a decline in profit for the first half of 2009. This is due to delays in contract awards. The company also warned that it might not meet its predicted performance this year due to concerns with the defense budgets in England and America. If real budgets due start declining that will have a great affect on the contracts available to QinetiQ. They also provide support for U.K. operations in Afghanistan and if these eventually wind down that revenue stream will decline.

Some analysts have expressed concern with the company’s large amount of debt. QinetiQ has made several acquisitions in the U.S. as well as selling off pieces of its original English operations. This debt may make it harder in the future to acquire other companies and expand or shift its business base. This may be one way it can alleviate the problems it is facing with its current contracts and operations.

If the British and U.S. do make major reductions to their defense budgets it will lead to a time similar to the Nineties where the total number of defense contractors will decline. Their just won’t be enough programs and work to support all of the companies. Many will merge or acquire each other as they absorb the available business opportunities. QinetiQ may be a sign of that trend starting, or they may be able to sort things out and continue their restructuring and keep their market position. The 2011 defense budget will be the first major clue of how the next few years will go.