In the wake of its $4 billion acquisition of American armored vehicle and defense manufacturer United Defense LP, BAE Systems has reported a 35% rise in pre-tax profit during the first six months of the year (to GBP 426 million, or $726 million), and a rise in net profit of over 300% (GBP 318 million from 69 million). Much of the coverage appears to revolve around net numbers, or Chairman Dick Olver’s denial that BAE has any plans to sell its 20% stake in Airbus.
DID looked at the 2005 interim results in detail, and saw why not. While BAE Systems is best known for its involvement in big-ticket items like the M2/M3 Bradley, Eurofighter, Britain’s CVF future aircraft carrier, et. al., that is not where the firm’s profits come from in this interim report. Indeed, the sectors that manage these big-ticket items are relatively weak performers at the moment.
On measures of EBITDA and Operating Business Cash Flow (OBCF), the big contributors among BAE’s divisions are very clear over the past six months.
Number one is Customer Solutions & Support, whose primary activities involve long term partnerships with the UK MoD’s Defence Logistics Organisation, together with the company’s extensive Al Yamamah military support activities in the Kingdom of Saudi Arabia. Its sales were GBP 1.28 Billion, EBITDA GBP 185 million, OBCF contribution GBP 429 million.
Number two was Commercial Aerospace, whose sales were GBP 1.66 billion, EDITDA GBP 154 million, and OBCF contribution GBP 294 million.
Number three was Electronics, Intelligence & Support, which undertakes projects like aircraft avionics, network-centric weapons systems and communications, geopositioning software, IT contracts for the FBI, and defenses against shoulder-fired missiles for both military and civilian aircraft. Its sales were GBP 1.71 Billion, EBITDA GBP 151 million, OBCF contribution GBP 173 million.
By comparison, BAE’s Programmes category, which includes items like the Eurofighter Typhoon, Hawk trainers, F-35 Joint Strike Fighter, Astute Class SSN submarines, CVF future aircraft carrier, and Type 45 Air Defense Destroyers, had sales of GBP $1.2 Billion but EBITDA of only GBP 88 million, and a negative OBCF contribution of GBP -88 million.
Land and Armaments (Bradley IFV family, Future Combat Systems, M777 lightweight Howitzer, DD (X) AGS gun system, et. al.) and Integrated Systems & Partnerships (incl. the MEADS air/missile defense system, Gripen fighter, and its 37.5% stake in euro-missile manufacturer MBDA) were also negative OBCF contributors with very small EBITDA. All of these groups did have much more substantial order book:sales ratios, however, with only “Commercial Aircraft” approaching their levels.
The full interim report [PDF] gives all figures; meanwhile, the company continues to position itself in other respects.
The company’s US businesses are predicted to earn the defence giant about $8.5 billion in underlying sales during 2005. Through a combination of organic growth and a series of strategic acquisitions, the company will have grown the sales of its US business at a compound annual rate of 27% between 2000 and the end of 2005. CEO Mike Turner crisply enunciates the significance of that position from BAE’s point of view: “We are the only defence company that can grow at the very highest level of capability in the US whilst also deriving value from our strong capabilities and market position in Europe.”
One caution for observers, however, is BAE discussion of its pension situation. Unfunded pension liabilities are becoming a serious issue in many established companies, and BAE’s Interim 2005 Report notes that “Pension funding is an issue for the company and employees alike. Together we have already taken a number of important steps to close the funding deficit and I believe that with the constructive approach taken by all parties we will agree a plan to fully address this issue in the near future.”