Problem contracts hurt GEC results

RUSSELL HOTTEN

Problems with two important contracts forced GEC to make substantial provisions and caused a sharp fall in profits at its defence division.

The company said its GEC-Marconi business, where annual operating profits tumbled from pounds 252m to pounds 205m, had a difficult year but promised the provisions were a one-off and the operation would bounce back.

GEC as a whole saw pre-tax profits in the year to March rise from pounds 866m to pounds 891m, coming in below analysts' forecasts of between pounds 895m and pounds 934m.

David Newlands, finance director, would not disclose the size of the provisions. Concern about the state of GEC's defence businesses triggered an initial 7p fall in the shares, which recovered to close 4p down at 305p.

Cost over-runs on radar work on the Eurofighter 2000 project and the Phoenix sonar contract for the Royal Navy are thought to be the cause of the problems, though lower profits in Italy and Canada contributed to the shortfall.

Mr Newlands said: "Although profits were better than last year in several GEC-Marconi units, the overall results were adversely affected by substantial provisions taken on important contracts which are moving towards completion."

He said further restructuring of the defence businesses, which now include the VSEL Trident submarine maker, was unlikely and exceptional charges for last week's 1,000 Marconi job cuts would have little material affect on finances.

Headline sales in the GEC Alsthom joint venture, co-owned 50 per cent with France's Alcatel Alsthom, rose 18 per cent but GEC's share of the profit was flat at pounds 157m. Mr Newlands said that, adjusted for interest income, the venture's earnings rose by 6 per cent. Interest income was a natural and reliable profit source, he said.

The best performance came from the telecoms division where, after taking account of net interest and investment income, profits rose 6 per cent on sales up 18 per cent. Increased sales for the GPT telecoms unit helped raise operating profit from pounds 120m to pounds 148m. Telecoms exports rose 60 per cent and now represent more than a quarter of the group's total export sales.

GEC's order book and share of joint ventures stood at pounds 12.7bn, up from pounds 12.3bn, but one analyst said: "The make-up of the figures is not hugely inspiring."

GEC's cash pile grew another pounds 150m to pounds 2.95bn, though this was due to an increase in the company's share of net cash in joint ventures, which now stands at pounds 1.6bn.

Mr Newlands would not discuss speculation that GEC may eventually use some of that cash to bid for British Aerospace. A standstill agreement under which it would not bid for BAe expired last month, but no approach is expected until GEC has digested VSEL.

A final dividend of 8.42p (8.01p) makes 11.37p (10.82p) for the year.

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