BAE Systems orders slip as some divisions disappoint

BAE Systems reported an order backlog of £39.7bn at the end of its first half, with £9.7bn of orders in the first half - down from £10.65bn year-on-year.

The FTSE 100 company said the backlog did not yet include the initial contract on the SEA 5000 programme, or the contract for the supply of Typhoon and Hawk aircraft to Qatar, both of which were expected in the second half of the year.

Sales stood at £8.8bn for the period - down 3% on a constant currency basis, which the board said was a result of reduced Typhoon production activity.

Underlying EBITA was £874m, down 6% on a constant currency basis, but marginally better than the consensus forecast of £845m despite around £60m of charges.

Underlying earnings per share were off 2% to 19.8p, or up 2% on a constant currency basis. BAE said it expects 2018 underlying EPS to be in line with 2017's 42.1p assuming a sterling-dollar rate of $1.35.

The group said its effective tax rate for the first half of the year was 16.5%, compared to a rate of 23% in the same period last year.

On an IFRS basis, BAE said revenue decreased 5% at constant currency to £8.2bn, while operating profit dropped 11% to £792m, or 7% on a constant currency basis.

Basic earnings per share were off 17% to 14.8p.

The group said its share of the pre-tax accounting net pension deficit reduced to £3.0bn, from £3.9bn at the end of December.

BAE’s board declared an interim dividend of 9.0p per share - up 2% year-on-year.

On the operational front, BAE noted that in March, the UK government signed a memorandum of intent with the Kingdom of Saudi Arabia in a bid to finalise discussions for the purchase of 48 Typhoon aircraft.

In March, contracts worth AUD 1.0bn (£0.6bn) were agreed for the upgrade and sustainment of the Jindalee Operational Radar Network upgrade programme in Australia.

Following that, in June the Commonwealth of Australia selected BAE Systems as the preferred tenderer for the design and build of nine ships for the ‘Future Frigate’ programme for the Royal Australian Navy.

In July, the UK government announced its Combat Air Strategy, under which the UK government and industry would jointly invest in next-generation combat air systems.

BAE Systems said it and the Government of the State of Qatar signed a contract in December for the supply of 24 Typhoon aircraft to the Qatar Emiri Air Force, along with a bespoke support and training package, which was extended to include nine Hawk aircraft, along with an initial support package.

That contract was subject to financing conditions and receipt by the company of first payment.

“Discussions have progressed and a number of milestones achieved, including the issuing of a Royal Decree relating to Qatar's financing of the contract,” the BAE board said on Wednesday.

“Financing discussions are in progress and, when successfully concluded, it is anticipated first payment would be received in the third quarter of 2018.”

In the maritime division, BAE said Andrew Wolstenholme had been appointed to lead the business with a focus on programme schedule and cost performance.

The group secured the full £1.5bn contract in March for delivery of the seventh Astute Class submarine, and a further £0.9bn of funding on the Dreadnought programme from the Ministry of Defence.

It said the first of the five Offshore Patrol Vessels (OPV), HMS Forth, completed sea trials in December.

BAE did note that “short-term performance issues” on the programme were being addressed, which were expected to result in cost growth, with a loss provision of £15m being recognised in the first half.

Maritime performance was also impacted by more conservative margin trading on the aircraft carrier programme.

In electronic systems, BAE said it secured further awards for APKWS laser-guided rockets, worth $399m.

Demand for its products in the electronic systems business was said to be growing, with the portfolio “well aligned” with the new US National Defense Strategy published earlier this year and its customer requirements.

The business had a record order backlog at 30 June of $7.1bn (£5.3bn).

For platforms and services, BAE said that in June a contract worth $198m was secured for the US Marine Corps Amphibious Combat Vehicle programme, with options for a total of 204 vehicles worth up to $1.2bn.

The US Ship Repair business received orders totalling $607m in the first half of 2018.

A further charge had been taken in the first half of the year on the final commercial ship, the board noted.

“The group has taken the decision not to pursue new contracts for the Mobile, Alabama, shipyard, resulting in non-recurring impairment and other charges of $45m in the first half of the year.”

Challenges with a subcontractor on the Radford facilities programme also required a charge to be taken in the first half of the year.

Other than for that item and the commercial shipbuilding charges, return on sales performance for the platforms and services US business would have been in line with the 2017 half year for the segment, the board claimed.

Finally, in its applied intelligence business, BAE said the restructuring actions taken to return the business to profitability were “taking hold”, and the business achieved a “much improved” first half performance.

“We have made good progress in the first half strengthening the outlook through significant wins on the Australian SEA 5000 and US Amphibious Combat Vehicle programmes,” said chief executive Charles Woodburn.

“These, combined with the launch of the UK Combat Air Strategy, provide good momentum into the second half and beyond.”

Woodburn said that operationally, there had been some “notably strong” performances in BAE’s electronic systems and air sectors, but also some disappointments on certain long-standing programmes in maritime and platforms and services, where the firm had now taken steps to strengthen management and improve programme execution.

“In this transition earnings year, our group earnings guidance is maintained and, with a large order book and a positive outlook for defence budgets in a number of key markets, we have a strong foundation to deliver growth and sustainable cash flow.”