Two years ago, Thales' results made unhappy reading. The electronic systems group turned in a 2010 operating loss of €100 million ($130 million) after taking a remarkable €700 million charge against troubled contracts with the Airbus Military A400M, the Turkish Meltem maritime patrol aircraft, and a Danish ticketing project.
The episode led, appropriately enough for a company named after a man whom Aristotle regarded as the father of philosophy, to serious introspection. But measures to avoid further contract disasters appear to be working, in particular a strict regime that allies engineering and sales closely in contract negotiations to ensure delivery is manageable.
Following that 2010 performance, then-chief executive Luc Vigneron also promised a new era of profitability for Thales, which he admitted had spent a decade lagging its European peers. The group has exceeded his forecasts of earnings before interest and taxes of 5% of revenue in 2011 and 6% in 2012 - in fact, Thales achieved 5.7% in 2011 and 6.4% last year. At that time he also said further improvement should, in 2014, bring Thales's EBIT margins into line with its peers', a level taken to be in the 9-10% range.
RAF pilots will taste the A400M on a Thales simulator
For 2012, the aerospace and transport division - which includes everything from avionics, cabin and air traffic management systems to rail ticketing, operating margin stood at 6.5% (see chart
), up from 5% in 2011 after a €221 million loss in 2010. Division operating profit surged 37% to €392 million on sales up 5% to €5.95 billion. Much of the rise came with ramping up of deliveries of heavy goods vehicle tracking devices for a French carbon tax system, but avionics sales are growing with production rates at Airbus, ATR, Sukhoi
(SSJ100) and Sikorsky (S76D).
For the group in 2013, sales are expected to hold level, with civil growth offset by "a less favourable situation in defence". However, marking continued recovery from 2010, Thales forecasts further improvement in profitability, with earnings before interest and taxes growing 5-8%. And, 2013 is showing momentum with, for example, the 4 March award of a £226 million contract with the UK MoD to support the RAF's A400M airlifters, through a joint venture between Airbus Military and Thales Training and Simulation.
This year's results will, in any case, bring some overdue transparency, with the business to be reorganised around four units: aerospace (including avionics and space), transport (road and rail systems), defence and security (including mission and surveillance systems), and DCNS naval shipbuilding, which Thales isolates in its reporting.
Thales' own assessment of its business as well-balanced is reasonable. Without separating out transport, the civil-defence/security sales balance is 45-55, and 30% of sales come from emerging markets. Thales is strong in the growth field of cabin electronics - its in-flight entertainment technology unit is a world-leader - and on the defence side its products are reasonably austerity resistant, with a strong tilt towards intelligence, surveillance and communications. In the related field of unmanned air systems, Thales is a European leader - it is the prime contractor on the UK's Watchkeeper system - and, through 26% shareholder Dassault Aviation, is well placed to benefit from growth generated by the strategic alliance linking the UK and French armed forces, and defence industries.
Dassault, along with the French state, which holds 27%, raised the prospect of some internal turmoil by forcing the resignation of Vigneron in December. However, his replacement, former Matra executive Jean-Bernard Lévy, who had been chief executive of French telecoms, music and video games group Vivendi, "came over well" when presenting the 2012 results, according to analysts at Société Générale.
Describing Thales as "under new management but still on course", Société Générale's Zafar Khan sees "a slow burn story" with "upside potential".