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A400M, other charges push Thales into red

Thales is to report a 2010 operating loss of €100 million ($135 million) after taking a remarkable €700 million charge against its troubled supply contracts for the Airbus Military A400M, Turkish Meltem maritime patrol aircraft and a Danish ticketing project.

In a preliminary results announcement, it says its full-year figures, to be released on 24 February, will show revenue up 2% to €13.1 billion at the aerospace, defence and transport electronics and systems group. However, the rise is mostly driven by favourable exchange rate movements - revenue would actually have fallen by 1% at constant scope and exchange rates.

Zafar Khan at Société Générale says analysts were surprised by the size of the charge, with €700 million being "much, much bigger than any expectation". However, given its scale, Khan is reasonably convinced that Thales has finally drawn a line under its difficulties with these contracts, against which the company has, to date, charged nearly €1.5 billion.

Airbus Military A400M cold weather testing, Airbus Military
 © Airbus Military

Chief executive Luc Vigneron told analysts there is now sufficient clarity to estimate the contracts' cost to completion, and Thales may turn out to have been overly generous with its provisions for excess costs.

Khan is also pleasantly surprised by Thales's cash generation, which appears sustainable, he says. Its cash position has been steadily improving: it ended 2008 with a cash position of -€456 million, improving to a figure of -€91 million at the end of 2009, and 2010 closed with €191 million in the bank. This year is forecast to be positive cash-wise, too.

The company has also taken positive steps to avoid more contract disasters. Now, according to Vigneron, there is a strict regime in place that sees engineering and sales closely allied in all contract negotiations. Deals of a certain size have to be signed off centrally. Gone, then, are the days when sales did a deal only for engineering to realise Thales did not yet have the technology to deliver.

Although order intake last year fell by 6% to €13.1 billion, the expected pressure on European defence budgets was partly offset by the upturn in commercial aeronautics and what Vigneron calls an "exceptional" intake level in space spending. The orderbook closed the year at €25.4 billion, up 3%.

Vigneron is also promising a new era of profitability for Thales, which he admits has spent a decade lagging its European peers. He forecasts 2011 earnings before interest and taxes at 5% of revenue after restructuring charges of about 1.5%, rising to 6% in 2012 after charges of about 1%. By 2014, he told analysts, EBIT margins should match Thales's peer group, a level taken to be in the 9-10% range.

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