Bae SystemsThis was one of the first companies we invested in as we wanted a solid, blue-chip company for the foundation of our portfolio. When it was beginning to look a bit shaky (February 2001?) the club was divided as to whether to sell (and invest in Marconi!). We decided to hold for another month to see what happened. Then the price fell dramatically immediately after the meeting and there was some question over whether we would have cut our losses in time anyway. However, since September 11, the price has been climing again.
Note: The above was written January 2002
COMPANY NEWS
1000 jobs to go at BAE
by our business staff, Timesonline 18 March 2003
BAE Systems is to cut 1005 aircraft-related jobs at four UK sites, the defence and aerospace giant announced today.
Reduced workloads will result in 492 job losses at Woodford, Cheshire, while the remainder of the cuts will be split between sites at Chadderton, near Manchester; Prestwick, in Ayrshire; and Warton, Lancashire.
The overhaul reflects changes made recently to BAE's Nimrod patrol aircraft programme, which was the subject of cost overruns earlier this year.
Indian Hawk deal lands £1bn for BAE
Times September 04
BAE Systems concluded what must be the longest sales pitch in history yesterday, when India finally decided to buy 66 Hawk training jets, worth about £1 billion, from the company. Almost 18 years after Delhi first showed interest in Hawk, BAE signed a deal to supply 24 aircraft, with the remainder to be built in India as part of a joint venture with Hindustan Aeronautics.
Britain's Ministry of Defence hailed the deal as vindication of its battle this summer with the Treasury over whether the Royal Air Force should buy Hawks. Geoff Hoon, the Defence Secretary, had argued that India would never be persuaded to buy Hawks until the MoD had first endorsed its own product. The MoD is now buying up to 44 of the jets. Mike Turner, BAE's chief executive, welcomed the India deal as good news for the 2,000-strong Hawk workforce at Brough, Yorkshire, whose jobs had been under threat.Rolls-Royce, the aero-engine company, has also welcomed India's decision to select the Adour-powered Hawk. The company said that its joint venture with France's Turbomeca would supply a variant of its Adour engines, which will be assembled at a Rolls plant in Bristol and at Hindustan Aeronautics. However, BAE and the British Government are likely to come in for criticism for selling the jets to India at a time of increasing tensions with Pakistan.The Indian Air Force has an appalling safety record and desperately needs the training aircraft to help to stem the accident death toll of its pilots. The Hawk has long been the front-runner for the deal, since the Indian Air Force formally proposed a trainer aircraft in 1985. But changes of government, corruption scandals and bureaucracy all conspired to delay a deal.Zafar Khan, a defence analyst at SG Securities, said: "In terms of BAE, it should be good for sentiment and it means the Hawk production facility can keep going for a while."The Hawk is the mainstay trainer for the US Navy as well as Britain's RAF. Australia, Bahrain and South Africa are also recent Hawk customers.BAE made fixed-price U-turn to win Hawk deal
Sunday Telegraph 07 September
BAE systems caved in over its refusal to accept fixed-price contracts with the Ministry of Defence as part of its effort to secure the controversial £800m Hawk jet trainer aircraft deal, which it narrowly won in July. Over the past year BAE has insisted that fixed-price defence contracts, which it views as far too risky, are a thing of the past. The debate over how much of any downside taxpayers should bear if costs overrun has soured relations between the company and the MoD and Treasury. However, The Telegraph has learned that despite the rhetoric the Hawk deal is a fixed-price contract.
Mark Parkinson, who heads the Hawk business at Brough in Yorkshire, said: "We have said we will not take fixed-price development contracts."But this is a fixed-price development and production deal - because of our experience on the Hawk we understand the risks. And that is a plus point for the MoD."Earlier this year BAE was forced to take a £750m provision on controversial fixed-price programmes including the Nimrod maritime patrol aircraft and the Astute submarine. The hit could have been much greater had the Government not agreed to cap the liabilities after months of bitter wrangling with the company. The U-turn over the Hawk contract will perturb City analysts who fear further damaging cost overruns.
"It makes you feel sick just to think about it - after all, they said they understood Nimrod," one analyst said. "The new UK Hawk is more than a plane, it's a flying classroom with a remarkable degree of development on the avionics side, and no one really has done one of these before," he added.However, a spokesman for BAE said: "There are not any unknown costs in Hawk. We have always said that when we have taken all the risk out of a programme we are perfectly willing to go for fixed-price contracts." The Hawk deal has already proved one of the most controversial in BAE's history and led to a series of clashes between members of the Government. The company was desperate to win the UK deal and threatened that hundreds of jobs would be lost if it failed. On the back of the MoD deal, BAE has won a further order from India for 66 Hawks.
This week BAE is expected to announce interim pre-tax profits of between £370m and £400m before goodwill and exceptional items. The company, which in February announced a loss for 2002 of £616m, will attempt to draw a line under the problems of the past 18 months.Analysts will be looking for signs as to BAE's future direction. The company has made it clear that while it regards Europe as a crucial market, it sees its future within a major US alliance. BAE is known to have talked to potential suitors including Boeing, Lockheed Martin and General Dynamics.BAE cashes in on half year strength
11 Sept 2003
More good news from BAE Systems; on the back of recent large contracts wins the company has reported far better than expected cash flows in today's interim results. But as ever with defence firms, controversy is never far away. The Guardian newspaper this morning reported on its front page that the Serious Fraud Office had sent the Ministry of Defence a letter voicing concern about an alleged £20 million slush fund operated by BAE.
Chief executive Mike Turner brushed aside the report telling Citywire: 'We operate in line with the law in the UK and in all the countries that we operate in.'The City has warmed to BAE after large orders for Hawk warplanes from the Royal Air Force and India propped up confidence in the company's prospects. Today's interims to June vindicated the City's faith in BAE. The group reported earnings per share of 7.2p which were towards the top end of forecasts. 'Clearly we're making progress with this solid set of results,' Turner said. What really shone through was a cash performance that was far better than anyone had expected.There had been talk of a possible £400 million increase in net debt during the year - instead the measure dropped £44 million to £1.25 billion. BAE put the strong cash performance in part down to the timing of payments but also said a strong operating performance across its operations and especially by Airbus meant the first half performance would flow through to the full year.Analysts had previously forecast year-end debt in the region of £1.9 billion but this now looks likely to be revised downwards. Turnover of £5.7 billion for the half-year was marginally lower than the same period in 2002. Profits before tax and exceptional items were down 26% at £59 million and operating profits before goodwill charges were up a sliver at £465 million. The interim dividend was maintained at 3.7p.
Order books stood at a record £46.4 billion at the end of the six months.Airbus, in which BAE has a 20% stake, put in a resilient performance given the current tough market conditions. BAE's US operations also performed particularly strongly.The group's FRS17 pension deficit - a snapshot view of a company's pension fund - was up £300 million at £2.5 billion at the end of June, but management said it had since dropped below £2 billion. A 40% increase in employees' contributions has now been negotiated with BAE's staff.Citywire Verdict
These are certainly a good set of results and the better than expected cash performance should add to the momentum behind the shares in recent months. BAE said it is sticking with earnings guidance for the full year, which should add to the market's growing confidence. With recent worries about contract wins behind it and a solid set of results now under its belt, the shares, up 3p at 177p, look capable of making up more of the ground on more highly-rated peers.
BAE clinches key accord on Joint Strike Fighter with US
BAE Systems, Britain's biggest defence contractor, has secured a crucial technology agreement with America that will allow it to play a full part in the $400 billion (£230 billion) Joint Strike Fighter (JSF) programme.
The deal ends months of uncertainty over BAE's level of participation. It is under contract to provide several key systems and components to the high-tech combat aircraft, but this had been thrown into doubt by continuing hold-ups and rows over the transfer of American defence secrets, in particular stealth technology.Earlier this year Sir Richard Evans, BAE's chairman, warned that Britain could lose control over the ability to upgrade and maintain its own fleet of JSF aircraft because of American unwillingness to transfer technology, including the complex software codes that control the aircraft systems.
But The Sunday Times has learned that a crucial hurdle was passed on November 17, when BAE signed an agreement under the controversial Amendment 8 rule, which requires case-by-case approvals for the export of sensitive military technology.The JSF is the largest military aircraft programme currently under consideration. It will replace several types of combat aircraft, and about 4,000 are expected to be built.Even though Britain has contributed $2 billion to the JSF programme, is the Pentagon's only "level one" partner, and will buy 150 planes, it has still run into problems with technology transfer.
The number of partners involved - JSF partner nations include Italy, Australia, Israel, Singapore, Turkey and Holland - has led to a backlog of applications for clearances.BAE has also had to contend with approvals having to be dealt with on a government-to-government basis. A spokesman said: "These issues are being worked through steadily and we are confident that we will receive approvals as we require them."The JSF programme is still set to be a big earner for the British aerospace industry. A report by First Equity, an American firm of consultants, found Britain could expect to earn about $40 billion, a 2,000% return on its initial investment.BAE Systems had a dreadful profit's warning in January, due to massive cost overruns with its UK submarine contract, as well as on both the Nimrod and Astute programmes. Thankfully newsflow has definitely improved, topped by a new contract with the Indian Airforce for Hawk Trainers - something the company has been negotiating for the last 16 years! Overall this is an extremely complex company, with which we have reservations, especially as analysts never see the contracts between the company and clients (normally Governments). These are highly complicated, often very old and invariably have a mass of penalty clauses for inefficiencies. The latter seems to have become commonplace. The company is actively seeking an American partner and the shares should go north of £2.