Defense companies announce financial measures to stave off impact of coronavirus

The positioning of Honeywell and QinetiQ as defense prime contractors inherently exposes them to potential budgetary cuts from US and UK Governments. By announcing financial measures in anticipation of a contraction of the global defense market as a result of the coronavirus (COVID-19), the two companies have chosen to pre-empt likely budget cuts and lessen the impact, says GlobalData, a leading data and analytics company.

Honeywell declared on March 31 that it was entering a US$6bn two-year delayed draw term loan agreement in spite of excellent performances in 2019 (+5% organic sales and US$6.1 bn net incomes).

Nicolas Jouan, Defense Analyst at GlobalData, explains: “Honeywell is primarily exposed to the struggling commercial aviation market, a significant source of income with US$8.7bn of sales in 2019. Nonetheless, defense and space was by far the fastest growing business of the company with 14% year-on-year increase last year, showing a reliance on governmental sales to sustain growth through its involvement in programs such as the CH-47 Chinook or the MQ-9 Reaper.”

QinetiQ is one of the major prime contractors and sub-contractors to the UK Ministry of Defence. Sales in the UK represent the main source of income for the company standing at 70% in 2019. QinetiQ announced March 31 that it was postponing the decision to pay full-year 2019 dividends to its shareholders, suggesting that the company feels particularly exposed to the potential impact of COVID-19 on governmental sales.

Jouan adds: “The US and the UK growth domestic products (GDPs) are expected to decrease respectively by 2.4% and 3.4% in 2020, according to GlobalData. This will impact tax revenues and could potentially decrease defense spending on the short to medium terms. The US Department of Defense represented US$3.5bn of sales for Honeywell in 2019. QinetiQ’s revenues, on the other hand, mostly originate from UK Governmental sales. The company has exposure to the US defense market via its North American subsidiary, focusing on unmanned systems, which generates 10% of total revenues.

“Honeywell and QinetiQ are both exposed to potential budget cuts and as the COVID-19 crisis is still in its early stage and 2020 budgets are already enacted, the authorities have yet to communicate on longer-term decisions. The two companies have therefore chosen to pre-empt likely budget-cuts.”

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