BAE profits sink after faults on Navy vessel

Defence giant confirms £15m charges over new patrol boat’s flaws, as sales drop 8.5pc in 2018 so far

AN ARRAY of faults with a new patrol vessel 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 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 life rafts not deploying properly.

Charles Woodburn, the chief executive, 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,” he said, calling the charge “prudent”, with the company pointing out 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.

Quality problems with the patrol vessels could raise fears about BAE’S ability to deliver on the replacement Trident submarines for the Navy and other maritime contracts, though BAE has appointed a heavy-hitter to get the business into shape.

The FTSE 100 company, which was also hit by an earlier decision to slow the rate at which it built 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, responsible for about a third of total revenue, reported sales of £2.8bn, a 16.8pc fall on the previous year, while operating profit fell 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 from Qatar in March that is set to keep production 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.

Jefferies analyst Sandy Morris said BAE’S results were “rescued by a surprisingly strong profit in air but…that wasn’t matched by cash flow”.

BAE recently secured some highprofile contract wins – such as new frigates to the Australian navy, Typhoon and Hawk jets to Qatar and an armoured vehicle to the US – but payments for these will come after the first-half accounting period.

At the Farnborough Airshow, the company also revealed a mock-up of the Tempest fighter which it hopes to build as part of the UK’S combat air strategy, a programme that has £2bn of government funding to develop a British stealth jet. At Tempest’s launch, Gavin Williamson, the Defence Secretary, invited other countries to join the programme, which is seen as too big for Britain to manage alone.

Mr Woodburn said there had been contact with a “number of companies and countries…from beyond the normal partner nations” about this, but would not give names. He said he was “open-minded” about a potential tieup with a rival Franco-german project.

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.

Despite winning 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].”