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12 Sep 02. BAE Systems PLC (London:BA.L – News) said first-half profit fell 26% because of losses at shipbuilding and satellite operations and warned that it may fail to meet its 2003 profit target.

The closely watched profit before goodwill amortization and exceptional items fell 26% to £359m ($557.5m) in the six-month period ended June 30 (2001: 482m). That was well below analysts’ forecast of £455m .

The company swung to a net loss of £63m (2001: net profit of £23m). while revenue fell 9.4% to £5.70bn pounds (200: £6.29bn).

BAE Systems Chief Executive Mike Turner struck a cautious note on the company’s profitability target by saying possible changes in the timing of key defense programs might disrupt an expected resumption of profit growth in 2003.

BAE Systems continues to plan on an increase in profit next year but a shift in the British ministry of defence’s priorities could prevent the company from achieving that goal, Mr. Turner said.

Mr. Turner said the ministry of defence might decide to delay orders for some equipment, such as Typhoon fighters, to put more emphasis on new-generation communications and surveillance programs. “But we don’t see us loosing any major contract,” Mr. Turner said. “We remain on track to resume profit growth in the future.”

In February, BAE Systems had warned investors that the downturn in civil aerospace would prevent it from posting an increase in profit in 2002 from 2001.BAE Systems blamed the net loss in the first half of this year on a provision of £90m booked against unexpected losses from a residual shipbuilding program in the U.K.

The company also booked a charge of £30m against first-half earnings to complete the closure of its regional jet business. Profit from international partnerships shrank to £2m from £51m, chiefly because of losses at Astrium, a satellite-making joint venture in which BAE Systems owns 25%, Mr. Turner said. He said BAE Systems hopes to complete the sale of this stake EADS for €165m ($161m) by the end of the year.

The company’s commercial aerospace division, which includes BAE Systems’ 20% stake in European aircraft maker Airbus, faired well despite the sharp downturn in the industry with a 11% rise in profit before goodwill amortization and exceptional items to 122 million pounds.

Mr. Turner said BAE Systems was disappointed not to have been successful in its bid for the defense assets of U.S. engineering company TRW Inc.. However, he said BAE Systems continues to look for potential acquisitions in the U.S. with the aim to boost the weighing of its U.S. revenue to 50% of overall defense sales within five years, from 28% in 2001.

Comment: Stage management has never been one of BAE fortes! After the bluff sabre rattling by Mike Turner suggesting that his company should receive all MoD contracts, he produces these results. Perhaps he needs all MoD contracts to make the business work! The City responded immediately by marking the shares down by 25%.

With a little better stage management he could have easily pacified the doubters by discussing not the Carlyle/Qinetiq deal, which had no relevance to the current figures, but the exciting future projects in the UK and the US which his company has won including Falcon and FIST with a strong possibility of Watchkeeper. It has always been noticed that BAE majors on aircraft projects given its heritage and he pointed out that the possibility of Typhoon delays was a real possibility which would hurt the Warton operation hard. He also put faith in A400M and Meteor succeeding in the long term, BATTLESPACE has expressed doubts on the latter and we hope for his sake that the City gets an inkling of possible cancellation before BAE makes the announcement. In addition the announcement that the French intend building a second carrier put Thales in a strong position to win the CVF project (See INCREASE IN FRENCH GOVERNMENT DEFENSE SPENDING – NEW

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