BAE set for fallout from contract loss

Defence contractor also remains unsure over cost of SFO investigation

BAE Systems admitted it faces "significant impairments" yesterday after losing a US government contract, and that it was still unsure about the financial impact of the long-running investigation into alleged corruption.

The UK defence contractor said in an interim management statement that it expects "good growth" for 2009, despite selling fewer land vehicles than the previous year. The group also expects to benefit from foreign exchange effects and the weakness of sterling given that much of its profits are in dollars.

The news was not all positive. In August, BAE lost a contract to produce armoured battlefield vehicles for the US Department of Defence (DoD) to rival Oshkosh. BAE has protested the decision and said the implications of losing the family of medium tactical vehicles (FMTV) contract could not be assessed until the DoD's final decision but, should the protest fail, "significant impairments would result". A decision is expected by mid-December.

The contract is still expected to bring in $4bn by the time it expires at the end of next year. The extended contract was expected to bring in less than $1bn a year until 2014.

The loss marked a setback to its expansion in the US. The group bought Armor Holdings in May 2007 for £2.3bn, which brought the FMTV contract with it and helped BAE become the fourth largest contractor in the US.

The other cloud hanging over the company is the investigation it faces for offences relating to overseas corruption, launched by the Serious Fraud Office (SFO). The SFO sought the Attorney General's consent to prosecute earlier this month. BAE denies the charges.

BAE said yesterday that it "continues to expend considerable effort seeking to resolve [the matter], at the earliest opportunity".

"If the director of the SFO obtains the consent that he seeks from the Attorney General and proceedings are commenced, the group will deal with any issues raised in those proceedings at the appropriate time and, if necessary, in court," it said yesterday. "At this stage, it is not possible to determine the possible future financial effects that might result from this matter."

The group did win a series of high-profile contracts in the first half. Its electronics, intelligence and support business secured a deal with the US Army and Marine Corps to equip its ground vehicles with sensors providing all-weather visibility, and could be worth as much as $1.9bn.

The programmes and support division won several contracts from the Ministry of Defence in the UK earlier in the year, and more followed between July and October. This included a 10-year deal to support the Royal Air Force's Spearfish and Sting Ray torpedoes worth £370m. It also landed a support contract with the Royal Navy.

The company said it was preparing to close the UK site responsible for making the Nimrod, the controversial spy plane, by the end of 2012 when the contract ends, costing 1,100 jobs.

Last month, BAE sealed a deal to buy the 45 per cent stake held by VT Group in their BVT joint venture in a deal worth £346m, and is expected to complete in the fourth quarter.

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