WRITE DOWNS AT BAE SYSTEMS–TIMING IS OF THE ESSENCE
By Julian Nettlefold
14 Oct 09. BAE Systems plc today issued its Interim Management Statement for the period from 1 July 2009 to 13 October 2009 in accordance with the requirements of the UK Listing Authority’s Disclosure and Transparency Rules.
Trading for the period has been consistent with management’s expectations at the time of the half-year results announcement on 30 July 2009.
As previously indicated, the Group continues to anticipate a year of good growth for 2009 as a whole despite a lower volume of land vehicle sales than in 2008. A significant proportion of the Group’s sales and profit is derived in US dollars, and translated into sterling at the average exchange rate for the period. When compared with 2008, the Group’s trading results are expected to benefit from any continued weakness of sterling against the US dollar. The underlying interest charge is expected to increase in 2009 as a result of the cash cost of business acquisitions made in 2008 and the lower level of interest received on cash held.
The Group continues to anticipate a stronger operating cash inflow in the second half year than in the first.
Electronics, Intelligence & Support (EI&S)
The Group continues to see good demand for the high technology capabilities of its EI&S operating group. In September, BAE Systems was one of two companies selected to participate in an indefinite-delivery/indefinite-quantity contract with a maximum value of $1.9bn (£1.2bn) for the Driver’s Vision Enhancer Family of Systems, a system of infrared sensors that provides 24-hour all-weather visibility to operators of ground vehicles. An initial order for 338 systems, valued at $10.7m (£6.7m), was received during the period.
Land & Armaments
At the end of August, the Group was notified by the US Department of Defense (DoD) that it had lost a build-to-print competition for follow-on production of vehicles under the Family of Medium Tactical Vehicles (FMTV) programme. On 4 September, BAE Systems informed the DoD that it was protesting this decision. The implications for the Group cannot be fully assessed until the outcome of this protest has been determined.
The FMTV programme was part of the Armor Holdings, Inc. (Armor) business acquired in 2007. As at 30 June 2009, the goodwill and other intangible assets carried in the Group’s balance sheet relating to the Armor acquisition amounted to $3.8bn (£2.4bn). Should the Group’s protest at the loss of the contract be unsuccessful, significant impairments would result. The cash costs of a cessation of FMTV activity would not be expected to be material.
Production of FMTV vehicles continues through to the fourth quarter of 2010 under BAE Systems’ existing contracts. The Group’s financial planning assumptions anticipate FMTV sales in each of 2009 and 2010 of approximately $2bn (£1.3bn). It is not anticipated that this activity will be impacted by the DoD’s
decision regarding the follow-on contract. The Group had planned for FMTV sales to reduce to less than $1bn (£0.6bn) per annum over the period from 2011 to 2014 assuming that the Group had been awarded the follow-on contract.
Programmes & Support
Following the significant UK Ministry of Defence (MoD) support contracts awarded earlier this year, further contracts were awarded in the period. In August, a £370m ten-year contract was awarded to support Spearfish and Sting Ray torpedoes in service with the Royal Air Force and Royal Navy. In September, the Group was awarded its first major UK naval support contract with the Type 45 anti-air warfare destroyer In-Service Support contract valued at £309m over seven years.
In July, contracts were agreed by the four European partner nations for 112 Tranche 3 Typhoon aircraft with a contract value to the Group of approximately £2bn, extending visibility of production for the next five years.