IN FOCUS: Finmeccanica continues on bumpy road to recovery

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In Italy's furthest-east corner at the top of the Adriatic Sea lies Trieste, just a few miles from Slovenia and part of the Austro-Hungarian empire until its collapse at the end of the First World War. Even by Italian standards, the food is good, the wines sublime and the weather delightful. It also does a rather good line in unmanned aerial systems.

Finmeccanica's Selex Galileo division has a crack UAS unit in the village of Ronchi dei Legionari, developing systems ranging from the 2kg (4.4lb) Spyball - backpackable by an infantry unit for over-the-hill intelligence - to Falco and Falco Evo, with 18h endurance at 20,000ft (6,100m) and multiple observation payloads, including several advanced packages developed and built by Selex Galileo itself.

While stressing the unit's focus on providing its customers with information rather than just data-gathering systems, UAS and simulators vice-president Furio Bozzola is keen to emphasise the Selex mission: "Help them see, keep them safe." Indeed, he says, Selex people should not ask about sensors and computers and aircraft; they should ask what users need to have a useful system.

With 2011 revenue of nearly €1.8 billion ($2.3 billion), Selex Galileo accounts for about one-tenth of the Finmeccanica group and a short third of Finmeccanica's defence electronics business, itself the mainstay of group sales at some 34% - a figure that will grow significantly as troubled energy and transportation segments are hived off. The group is also poised for a management restructuring, possibly in the next couple of months, which, among other changes outlined below, will see the Selex companies - Galileo, Elsag (automation and communications) and Integrated Systems (security) - all amalgamated, along with US acquisition DRS (security and mission systems), to form an integrated defence electronics division.

alenia factory 

 Alenia Aermacchi builds horizontal stabilisers for the 787 at Foggia            Finmeccanica

The success of that division - which will trade as DRS in North America and as Selex elsewhere - could be key to the success of efforts to pull Finmeccanica clear of a disastrous 2011 in which it lost a staggering €2.4 billion before tax on revenue of €17.3 billion after taking a third-quarter charge of €753 million against its involvement in the Boeing 787 programme. The aeronautics part of the trouble stemmed from Boeing discovering wrinkles in the skins of some fuselage barrels produced by Finmeccanica's Alenia Aeronautica division at a massive, purpose-built factory in Grottaglie, deep in the heel of the Italian boot, and from alignment problems with horizontal stabilisers, also supplied by Alenia.

Some of that third-quarter charge was against estimates of penalties likely to be paid to Boeing, but a big chunk was set against the rising cost of meeting the "major technological, process and structural challenges" of the 787 contract.

The travails of 2011 followed a 2010 in which Finmeccanica - traditionally used by the Italian government, which owns 30.2% of the company, as a catch-all holding for industrial assets deemed economically or politically important in Italy - made a paltry net profit of €557 million on sales of €18.7 billion. That profit included €443 million netted from the partial sale of the troubled Ansaldo Energia power generation business.

Clearly, something had to give. When presenting the 2011 figures, chief executive Giuseppe Orsi promised never again to detail such dire numbers, and 2012 has been characterised by some, albeit slow, recovery and expectations of concrete steps to reorganise the group. The plan is to focus on four strategic sectors: aeronautics, helicopters, defence electronics and security. Finmeccanica will aim its solo efforts at areas where it can be a world leader focused on cutting-edge technology; other areas will either be pursued with solid partners or abandoned. Energy and transportation, principally rail equipment, are expected to be sold off.

Of those four key sectors, helicopters - the AgustaWestland business - stands alone as solid. Revenue has been rising steadily for three years, to €3.9 billion in 2011, with operating profit (EBITA) also gaining steadily, to €417 million.

Defence electronics and security look less steady, despite the huge hope placed on those sectors with the 2008 acquisition of DRS for what, from today's post-crisis vantage point, looks like a wildly optimistic price of $5.8 billion. The 2011 revenue of €6.04 billion was down by more than a billion on 2010, and more than €700 million below 2009's total. EBITA also plunged, to just €303 million in 2011, compared with €735 million in 2010.

In aeronautics - where Alenia Aermacchi and Alenia Aeronautica will be merged - the story is not very happy so far. Sales dipped in 2011 to €2.67 billion, a fraction above 2009, and the sector lost €903 million after losing ground between 2009 (€241 million) and 2010 (€205 million).

For the first half of 2012, financial performance has been good, given the weight of the global economic slowdown, defence spending cuts and the impact of the eurozone crisis on the confidence of any Italian business. Group revenue fell 5% to a little over €8 billion and operating profit (EBIT) gained 17% to €375 million. The net bottom line just held in the black, at €70 million.

alenia factory 2 

 Fuselage barrels are made at Grottaglie                                                        Finmeccanica

How much headway has been made in restructuring the group is not clear, but Orsi faces two huge challenges. One is the general economic climate, especially in European defence markets. Selex Galileo, for example, is exposed to Eurofighter Typhoon, which is not racking up new sales.

The other challenge may prove truly daunting, however. When he outlined the new group strategy a year ago, to restructure around four strategic segments, Orsi, who headed up AgustaWestland before taking over Finmeccanica in 2011, stressed that a key to success was for management to execute effectively, especially by taking real responsibility for the performance, particularly the financial performance, of their units.

Unfortunately, management morale has not been helped by the fact that Finmeccanica has been embroiled in a series of bribery scandals involving overseas defence equipment sales which have seen a number of top executives brought under judicial scrutiny. It must be at least surmised that progress toward restructuring Finmeccanica has, at times, taken a back seat to dealing with a scandal the Italian press is referring to, with some glee, as "tangentopoli", a term coined during political corruption scandals in the 1920s.

Whatever does or does not come of the investigation into Finmeccanica, it is evident from the string of statements issued over the past year in response to news reports that most parts of the business are under probe, that the group is wary, weary and exasperated. On 23 October, it said: "With reference to the precautionary measure issued today by the judge for the preliminary investigations at the court of Naples towards Mr Paolo Pozzessere, and to the alleged payment of bribes by the Finmeccanica group to obtain three contracts with a total value of €180 million, signed in 2010 by Selex Sistemi Integrati, Telespazio Argentina and AgustaWestland with the government of Panama, the Finmeccanica group clarifies that Finmeccanica and its companies have not paid any form of compensation for mediation connected with the abovementioned contracts."

A statement on 5 September quoted Orsi as saying: "I have never assigned consultancy operations to Prof Grilli's wife. Neither since I have been CEO of Finmeccanica, nor in the past when I was CEO of AgustaWestland."

A 16 May statement read: "It is hereby specified that AgustaWestland did not make use of intermediaries for the supply of 12 AW101 helicopters to the Indian ministry of defence. After stipulation of the above contract, the company drew up a post-sales service contract. As a result of said contract, payments amounting to €6.05 million were matured (from March 2010 for approximately two years). Furthermore, in order to improve its competitive position on the Indian market, which is of significant strategic importance for the company, AgustaWestland UK repurchased, from a company specifically assigned to that task, 14 used helicopters that had been decommissioned following two serious accidents, with a total value of approximately €18 million, sold in the past (1987) to an Indian government company."

And on 27 February it said: "With reference to articles published today, Finmeccanica declares that AgustaWestland is not involved in any irregularity concerning the supply of helicopters in India."

The affair may seem to bear some resemblance to the UK judiciary's investigation during the mid-2000s of BAE Systems' alleged involvement in bribery related to Saudi Arabian arms sales. But the critical difference, so far at least, is that BAE ultimately enjoyed the benefit of a champion as powerful as then-prime minister Tony Blair, who was able to bring the investigation to a close on national security grounds.

If Finmeccanica has such support in Rome, its champion has yet to emerge - possibly, of course, because its champions believe the courts will eventually conclude there is no case to answer. But in the meantime, Orsi and his executive team must be wishing they could give their full attention to the group's financial condition, which needs all the champions it can find.