UK Edition
Faulty Royal Navy patrol ship lands BAE Systems a £15m bill
An array of faults with a new patrol vehicle for the Royal Navy helped cast a cloud over BAE Systems in the first half of the year, as it reported a fall in sales and profits.
The defence giant will take a £15m charge due to "ongoing quality issues" with the HMS Forth, the first of five offshore patrol vessels (OPVs) for the Royal Navy.
There have been reports the ship was delivered with more than 100 defects, including broken bolt heads fixed with glue and issues with life rafts not deploying.
Chief executive Charles Woodburn has made improving execution of contracts a priority.
"The OPV charge is not on just the first ship, but across the programme of all five vessels," the chief executive said, calling the charge "prudent", with the company pointing out that the £15m is spread across a £600m programme.
"I'd love to say we will not have any further issues but we are quickly learning the lessons from OPV as we start building the Type 26 frigates and making our maritime business 'match fit'," he added.
In addition to the eight Type 26 ships, which will become the workhorse of the Navy from the 2020s, BAE is also leading the replacement Trident submarine programme - a £41bn project that the Government has warned cannot be late for risk of weakening UK national security.
Quality problems with the patrol vessels could raise fears about BAE’s ability to deliver on these other maritime contracts, though BAE has appointed a heavy-hitter to get the business into shape.
The company also booked a £33m charge on its shipyard in Alabama, which it had previously announced it was closing.
The FTSE 100 company, which was also hit by impact of an earlier decision to slow down the rate at which it builds its Typhoon jets, posted an 8.5pc drop in overall sales to £8.2bn in the six months to June 30, while operating profit was 10.5pc lower at £792m.
BAE’s combat aircraft division, which is responsible for about a third of total revenue, reported sales of £2.8bn, a 16.8pc fall on the previous year, while operating profit dropped 5pc to £438m.
The company is ramping up work on the F-35 joint strike fighter and is working on securing further sales for the Typhoon, having landed an order in March that is set to keep the production line running into the next decade.
Applied Intelligence, BAE’s cyber division, continued to underperform, with sales £100m down to £815m but profit almost doubling to £41m.
Previous management invested heavily in the business in the expectation it would be a big growth area. However it has failed to meet expectations and in its last annual results BAE took a £384m charge on Applied Intelligence and began restructuring the unit.
Jefferies analyst Sandy Morris said BAE’s results were “rescued by a surprisingly strong profit in air, but as that wasn’t matched by cash flow. We know it probably isn’t anything to do with current trading and likely more to do with conservative profit-taking in the past”.
BAE recently secured some high-profile contract wins - such as a deal to supply new frigates to the Australian navy, Typhoon and Hawk jets to Qatar and a new armoured vehicle to the US military - but payments for these will come after the first-half accounting period.
At the Farnborough air show the company also revealed a mock-up of the Tempest fighter it hopes to build with other defence companies as part of the UK’s combat air strategy, a programme which has £2bn of government funding to develop a British stealth jet.
Mr Woodburn said BAE and other industry partners would be putting money into Tempest but would not be drawn on how much.
At Tempest's launch Defence Secretary Gavin Williamson effectively invited other countries to join the programme, which is considered too large for Britain to complete on its own.
Mr Woodburn said BAE had had contact with a "number of companies and countries... from beyond the normal partner nations" - such as Europe and the US - but would not give names. He added he was "open-minded" about a potential tie-up with a rival Franco-German project, a move that could eliminate duplication of expensive R&D.
BAE orders in the first half of the year totalled £9.7bn, down almost £1bn on the same point a year ago. This takes BAE’s backlog of work up to £39.7bn.
Mr Woodburn described the company as having made "good progress" in the first half, "strengthening the outlook through significant wins on the Australian SEA 5000 and US Amphibious Combat Vehicle programmes". "These, combined with UK combat air strategy, provide good momentum into the second half and beyond," he said.
Despite these large contracts, Mr Woodburn defended the decision not to upgrade the outlook. "These are long-term contracts which will take time to flow through and nothing we have announced this morning was not known [on contracts]."
Finance director Peter Lynas added: "No investors were expecting upgrades to this year's earnings and I think the recent contract announcements are priced in."
Despite BAE’s description of the year as “transitional”, Jefferies' Mr Morris was unconvinced. “This financial year was never going to be a good year,” he said. “The question is whether it creates a springboard into 2019 - I don’t think so.”
BAE's interim dividend was raised by 2pc to 9p.
Shares in the company fell 3pc in afternoon trade to 633p.