20 Feb 03. BAE SYSTEMS Plc posted weaker full year earnings Thursday, with its bottom line hit by provisions related to cost overruns on two key U.K. defense projects.
Net losses widened to £686m from £134m in 2001, while sales fell to £12.145bn from £13.138bn. The 2002 net loss includes a £750m loss provision to cover BAE’s exposure to the Nimrod aircraft and Astute attack submarine programs. An agreement with the Ministry of Defence to revise the contract terms for these programs due to cost overruns and delays was announced Wednesday. (See BAE SYSTEMS AGREES NEW NIMROD AND ASTUTE CONTRACTS WITH UK MoD).
The closely-watched pretax profit before goodwill amortization and impairment and exceptional items fell 27% to £796m. The result was within the range of analysts’ expectations.
BAE Systems said its underlying performance for the company’s key defense business in 2003 is expected to remain broadly in line with that for 2002 before taking into account the exceptional charges for Nimrod and Astute. BAE’s group finance director George Rose said the company is likely to post a small net profit in 2003.
BAE shares lost ground today from yesterday’s 136p to 123p.
“The numbers were pretty much in line with expectations and a lot of fund managers had been waiting for news on the contracts in the U.K.,” said an analyst with a major European bank. “I think there is a perception that the risks have been reduced in BAE Systems.”
Analysts added that the outlook for 2003 was a touch disappointing although the company made progress in cutting its debt during the second half. Net debt was £1.298bn at the end of 2002 compared to £1.551bn at end June.
Chief Executive Mike Turner said the company is now on a better footing going forward following the agreement with the MoD. “The actions taken to address the challenges in the U.K. Programmes business and strength elsewhere in the company provide a strong foundation for future growth,” he said.
BAE Systems said its North America and Customer Solutions and Support businesses contributed strongly during 2002 while Avionics delivered improved results in the second half. Customer Solutions and Support, which provides support services for defense projects, increased sales to £2.3bn from GBP2.0bn.
The Commercial Aerospace unit, which comprises the group’s 20% interest in Airbus, saw sales fall to £bn from £3.1bn amid a tough commercial airline market. “What we and Airbus need to see is a recovery in the world airline market,” said Turner.
Turner said the company will look to make further acquisitions in the U.S. ” We’ve made no secret of our trans-Atlantic ambitions…and we will pursue that in due course.” he said. BAE Systems confirmed that its chairman, Richard Evans, will retire at next year’s annual general meeting. Sir Charles Masefield will retire from the board later this month after 33 years with the company.
BAE Systems is proposing paying a dividend of 9.2 pence per share for 2002 compared to 9.0 pence in 2001.
Comment: Where was the ‘European strategy’ championed by John Weston? Europe was not mentioned once yesterday apart from a reply ot the editor’s question regarding EUROSYSTEMS. As we have said before BAE is chasing the money in the USA and is quietly making acquisitions to broaden its base there.
The Nimrod and Astute decisions have effectively killed Fixed Price defence contracting in the UK and as BAE told BATTLESPACE, this happened 15 years ago in the US where there is now a sound market for making profits. Europe’s defence procurement structure is still in its infancy and BAE may be avoiding it for that reason and specially until the French decide to open the its market to international competition.
The US business contributed £2.2627bn in sales and an order book of £2.3bn with a number of key contract wins announced this year.
A full report of this story will appear in our Feb/March web is