Balfour Beatty reports £304M pretax loss; £59M total loss

Parsons Brinckerhoff sale nets £234M gain to help reduce total losses to £59M; total loss in Construction Services is £391M.

Balfour Beatty has posted a pre tax loss of £304M for the 2014 financial year. UK construction losses include a further £118M write-down on top of the £70M initially identified in the KPMG review of contracts, following an assessment of the existing risk provisions by the board.

Loss on the Construction Services operation totalled £391M.

Total loss for the year was £59M in part due to profit of £242M from sales of “discontinued operations” which included a £234M net gain from the Parsons Brinckerhoff  deal with WSP.

The business turned over £8.75bn in total. The company has cancelled its final dividend. In 2013 the contractor reported a pretax loss of £49M on turnover of £8.85bn. 

New chief executive Leo Quinn is currently engaged in his “Build to Last” transformation to get the company back on track but following the results announcement today said there would be “major short-term challenges ahead” but stuck by the business model and his staff.

He said: "Balfour Beatty is a global name built on the exceptional engineering skills of its people. This strength is evidenced by the continuing flow of landmark contracts across the group. The business model also balances Construction Services and Support Services with a successful Investments business which will continue to create significant value.

"Over the next two years we should work through the severe legacy of "problem" construction projects.

“However, in tackling the cultural change required to ensure these issues are behind us, we face major short-term challenges.

“The key is that we are determined to address this through self-help. Our transformation programme, Build to Last, is gaining rapid traction and we are driving initial improvements of £200M cash in, £100M cost out over 24 months. In addition, our investments portfolio will provide the financial flexibility of both reliable income and the sale of maturing assets into a strong market.

"To maintain balance sheet strength throughout this period, we have already cancelled the share buyback and re-phased our pension fund payments with the support of the trustee. We have also decided not to recommend a final dividend this year, but expect to reinstate the dividend at an appropriate level by March 2016.

"I remain convinced that all our operations can achieve industry-standard performance as markets improve. The real prize is a sustainable return to profitable growth, built on the group's unique capabilities, underpinned by leaner, stronger processes and flawless execution. 

“Longer term we believe that as a leader in its core markets Balfour Beatty should be able to deliver superior returns to the benefit of its customers, employees and shareholders."

Quinn said in his chief executive’s report that Balfour Beatty’s underlying performance has been declining since 2010, “with the sharpest and most noticeable decline occurring over the last 12 months”.

“This has been caused not only by the significant operational issues impacting Construction Services UK over the last two years, but also because the cost base of the group is too high (1% of revenue above industry benchmarks) and there have been significant working capital outflows since 2009."

In detail:

Construction Services

  • Underlying revenue flat at £6.6 billion.
  • Underlying loss for the year of £209 million (2013: profit £18 million) reflecting a very poor performance from the UK construction business. Total loss  for the year of £391 million (2013: £103 million).
  • UK construction revenues fell by 6% to £2.35 billion. Growth in Major Projects was more than offset by reductions elsewhere. The business remains focused on implementing the recommendations of the KPMG review, to return to profitability and peer group margins.
  • Senior leadership within the UK Regional and Engineering Services businesses will be strengthened by the introduction of a new chief operating officer.
  • US revenues remained flat in the year at £3.0 billion (up 5% at constant exchange rates). Order book at CER maintained flat as a result of good order intake. In 2014, the business was the third-largest building market contractor in the US by revenue.
  • Revenues from the international business1,2 grew by 24% at CER to £1.0 billion, predominantly due to Gammon, the Hong Kong based joint venture.
  • Middle East construction underlying losses of £15 million largely due to two specific contract positions within the mechanical and electrical engineering joint venture.

Support Services

  • Revenue for the year was up 1% at £1,273 million, with a 35% increase in transportation revenues being largely offset by expected revenue decline in the power sector.
  • Underlying profi from operations was down 9% at £50 million (2013: £55 million), with an underlying operating margin of 3.9% (2013: 4.3%). Good performances in the water sector, including the settlement of multi-year commercial issues, and the transportation sector, were offset by lower volumes in power.

Infrastructure Investments

  • Infrastructure Investments achieved record financial results, with future value underpinned by Investments portfolio.
  • Directors’ valuation increased to £1,300 million (2013: £766 million) despite realising £159 million of disposal proceeds and £92 million of other distributions.
  • Underlying pre-tax profits3 increased to £162 million (2013: £132 million), driven by increases in profits on disposal, pre-disposals operating profits and net interest income.
  • Number of investments within the portfolio increased to 66 (2013: 61) as the portfolio continued to expand into new sectors and geographies.
  • Group has a strong pipeline of new investment opportunities and expects to invest over £300 million over the next five years. Directors estimate the value of the future pipeline at an additional 10%-15% of the Directors’ valuation of the Investments portfolio.
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