QinetiQ Group plc audited preliminary results for the year ended 31 March 2006

Operational summary

• Results in line with expectations
  
• Turnover increased by 22.9%
  
• Underlying profit before tax up by 37.6%
  
• Underlying earnings per share up by 16.3% to 10.2p
  
• Continued improvement in underlying operating margin to 8.6% (2005: 7.6%)
  
• Statutory profit before tax of £72.5m (2005: £78.0m including £17.1m profit on disposal of pSiMedica Limited)
  
• Backlog increased by 6.4% to £608.4m (2005: £572.0m)
  
• North American turnover increased to £248.4m (2005: £70.1m)
  
• Net debt grew by £56.4m after investment of £202.5m in acquisitions and net cash of £136.2m received from IPO
  
• Free cash flow up by 153.7%, driven by underlying operating cash conversion of 84.4%

2006 preliminary results statement

Commenting on the results, Sir John Chisholm, executive Chairman, said:

"I am delighted with the performance underpinning these results, which demonstrate real delivery against our growth strategy. In the UK we have grown our Technology Supply business to mitigate the impact of increased competition for MOD research funding, seen good organic growth and further acquisitions in the US, and significant progression in the commercialisation of defence technology during the year.

The UK government's Defence Industrial Strategy and the US government's Quadrennial Defense Review will shape our markets to a considerable degree into the medium term future. It is positive for QinetiQ that both documents emphasise the imperative for agility in military procurement and the key role for advanced technology in delivering that agility. Budgets will remain constricted on each side of the Atlantic and QinetiQ will have to maintain its pace of transformation through investment, rationalisation and productisation in order to realise the significant potential of its markets. The successes of the year we have just completed have laid a solid foundation for delivering on these opportunities."

Performance

This year's results demonstrate QinetiQ's continued delivery in three strategic areas: the repositioning into growth markets within the Ministry of Defence (MOD) programmes, the expansion of the Group’s US presence and the commercialisation of our defence technologies.

The continued repositioning of the UK defence business saw growth of 28.2% in Technology Supply revenue to £124.2m (2005: £96.9m), as the business continues to transition its business mix, invest in productisation and rationalise its operations to offset the expected ongoing reduction in revenue from the MOD's research programme. QinetiQ also consolidated its position as a provider of advisory and managed services to the MOD. A particularly notable event this year included selection as preferred bidder for the 20-year managed service contract for the Combined Aerial Targets Service (CATS).

In the US, turnover increased to £248.4m (2005: £70.1m), with a second half annualised run-rate in excess of £310.0m. US expansion was accelerated with three further notable acquisitions in specific growth markets: Apogen Technologies, an IT services company working mainly for the Departments of Defense (DoD) and Homeland Security (DHS), technology firm Planning Systems and, subsequent to the year-end, IT services specialist Ocean Systems Engineering. Particular achievements made in the US market included the selection of QinetiQ's UK electric drive technology for the US Future Combat Systems (FCS) tracked vehicle demonstrator programme and a research contract into optical tagging from the US Defense Advanced Research Projects Agency (DARPA).

Other notable successes included the delivery of desert kits to equip the US Army's Blackhawk helicopter fleet and the 500th Talon robot into active service.

Security & Dual Use turnover increased by 10.6% to £133.7m (2005: £120.9m) and the sector also passed important milestones in developing commercial ventures. Turnover growth was driven by a strong performance from the security business, which continued to penetrate both government and commercial markets, and a positive contribution from the new European space business, Verhaert, which more than offsets declines in UK government funding for space research. Key events included a contract to replace the UK police forces' information portal system, the first sale for the Tarsier venture, sales of 113,000 GPS chips and the design and implementation of an optical foot measuring system for shoe retailer Clarks.

Outlook

The coming year will see QinetiQ continuing to execute its repositioning strategy. In the UK defence business, this means continuing requirements to rapidly insert technology into new and existing systems and equipment which are urgently required by the UK armed forces. In the commercialisation business, this means building particularly on a strong security positioning, continuing to develop the space business through key bidding opportunities and selected acquisitions, and further investment to develop the ventures portfolio business plans. In North America, new business opportunities are anticipated as the US companies work more closely together and with the UK, and the disciplined approach to acquisitions continues to be pursued.