Shares in Rolls-Royce tumbled 15p to 175.5p yesterday as Britain's only large aero-engine maker revealed it was writing off over 90 per cent of the pounds 353m cost of Allison, an important US manufacturer acquired in March, and unveiled disappointing half-time profits. Leading analysts immediately downgraded expectations.
A problem with a large contract, understood to be a deal to supply AE2100 engines for the new Saab 2000 aircraft, has led Rolls to take a $175m write-down against Allison's net assets. Along with a $50m charge against plant and equipment, the "fair value" adjustment has reduced Allison's net assets from $250m to just $29m, leading to a pounds 324m goodwill write- off, taken against reserves.
Sir Ralph Robins, chairman, said: "We looked at this contract and decided we should provide against it. We decided to be conservative and prudent." Although Rolls believed it would not make as much money as originally envisaged, it would lead to other contracts which would, he stressed.
The charge came alongside interim profits up from pounds 40m to pounds 70m in the six months to June, boosted by pounds 23m of gains from the sale of a military bridge business and a pump manufacturer. Underlying profits of around pounds 38m came in well below market expectations of pounds 55m-pounds 65m and were greeted with dismay by analysts, who pointed the finger at a collapse in trading profits from pounds 37m to pounds 7m in the industrial power division.
Sir Ralph suggested that the market had over-reacted a little. "What has happened is that a major contributor to margins - the marine and gas turbine business - has had a cyclic downturn and that has had an impact on margins."
He said there had been a fall-off in large orders and spare parts deliveries to the oil and gas industry. "We have seen the same thing happen in the aero-engines business, but in the end they have got to keep the engines running, pumping gas, so in the end they must come back and buy spare parts."
Rolls, which has shed over 20,000 jobs in the past five years, warned that "further refinement of the company's operations can be expected", but said it had no plans for compulsory redundancies.
In the aerospace division, a pounds 30m cut in development spending on the new Trent engine and a pounds 9m first-time contribution from Allison pushed trading profits from pounds 3m to pounds 46m. Sir Ralph said he was encouraged by recovering airline profitability. Rolls was well- placed to exploit the market. He denied reports the company had been in merger talks with Pratt & Whitney, a US rival.
He also dismissed disquiet over a pounds 159m cash outflow, leaving net cash balances of pounds 126m in June, saying this reflected the normal working capital increase at this time of year.
Investment Column, page 23