Annual General Meeting 2010 and Interim Management Statement

29 Jul 2010

QinetiQ Group plc ('QinetiQ') today issues its Interim Management Statement which covers the period since 27 May 2010, prior to holding its Annual General Meeting today at 2.00pm in London.

Trading Environment

Defence markets in both the UK and the US remain challenging as Governments in both countries seek to reduce costs and focus on direct operational requirements. As a result, delays continue to be seen in orders from government customers in the UK and, to a lesser extent, from some sectors in the US. Additionally in the UK, the Strategic Defence and Security Review makes it difficult at this point to predict the areas likely to be targeted for cutbacks in defence spending and the levels of any such reductions.

UK Services
Political and economic factors affecting the letting of orders are not expected to change in the short term. The business is focused on shaping itself to meet customer needs while taking steps to lower its structural cost base significantly in order to increase competitiveness.

US Services
Revenues are similar to prior year following the insourcing of certain Government work toward the end of last year. A reorganisation of business development around key segments has taken place, overheads are being carefully controlled and the businesses continue to perform steadily.

Global Products
The product business in the US has experienced strong order demand for its new Q-NETS, a vehicle survivability product, following DoD approval. This has been offset by the impact of the weaker market environment on the UK business, where a review of the product and technology portfolio is underway. Update on actions following the Operational Review

Management is rolling out its action plan to refocus the businesses, create a more commercial and performance-oriented culture and strengthen the balance sheet.

Work is ongoing to align the structure around UK Services, US Services and Global Products. All businesses are now using a consistent financial reporting process.

Following a ballot in which 75% of union members in the UK workforce voted in favour of changes to employee terms and conditions, the trades unions formally accepted the Group's offer. The agreed changes, including the pay increases offered within the new package and revised redundancy arrangements, came into effect on 1 July and will contribute to greater competitiveness and standardisation of employment terms.

The Group is committed to resetting its cost base, including a redesign of key processes to increase productivity and to rationalise corporate headquarters. Consultation has commenced with UK trades unions regarding a potential reduction of up to 391 employees, primarily at its sites in Farnborough, Hampshire and Malvern, Worcestershire. Subject to successful completion of the consultation process, it is expected that the non-recurring charge for this restructuring, in the region of £20m, will be taken largely in the first half of the current year, but with the cash impact falling during the second half. As management continues to reshape the Group, it will announce consultation during the summer regarding further rationalisation of a similar number of positions.

In the US, the Global Products workforce has been reduced by 90 to raise productivity within the business.

Financial position

Net debt at 30th June 2010 was £417m (31 March 2010: £457m). This improvement resulted mainly from tight control of working capital and some deferral of capital expenditure. The Group remains well within its banking covenants and is focused on achieving its stated target of reducing its ratio of net debt to EBITDA to below 2 times by the end of 2011/2012.

Outlook

The Board believes that in the current financial year, the performance of QinetiQ’s service businesses is likely to remain steady overall in comparison to last year. The Global Products business, whose performance is by its nature more lumpy, is likely to benefit from a strong result in the US. This is expected to be offset by delays and curtailments in the UK products business caused by uncertainty in the defence sector.

Overall, the Board believes that it will meet its expectations for the current year, while continuing to implement its plans to reposition the business for a return to profitable growth over the medium term.

QinetiQ People Who Know How
Annual General Meeting 2010 and Interim Management Statement