EADS (stock exchange symbol: EAD) delivered encouraging results for the first nine months of 2008, but is facing challenges in critical programmes. The Group continued to show robust underlying performance and benefited from strong market demand. EADS recorded a remarkable order intake across its product portfolio, receiving 737 new aircraft orders at Airbus as well as orders for 605 new helicopters at Eurocopter. Capitalising on continued restructuring efforts in previous years, Astrium displayed both strong top and bottom line growth. The Defence & Security Division achieved an EBIT* growth of 74 percent. The Group is carefully monitoring the development in the financial markets and has started preparing itself to limit negative impact through a variety of measures.
“EADS faces the impacts of the financial crisis in a position of strength. Our large and well diversified order book covers deliveries for several years. A strong Net Cash position ensures stability while giving us flexibility to adapt to a changing economic environment,” said EADS CEO Louis Gallois. “The pressure on the A400M programme remains and we are conducting ambitious efforts to tackle both the industrial and commercial challenges in discussion with our customers and suppliers. EADS is more determined than ever to get this complex programme under control.”
In the A400M programme, the unavailability of a committed and reliable schedule for the propulsion system, which compounds unresolved issues with certain equipment supplies as well as equipment and systems integration, will lead to further delays. Due to the unavailability of a reliable schedule update in the A400M programme EADS must shift temporarily to the early stage contract accounting methodology and suspend the milestone accounting for this programme.** EADS has started to discuss with its main customers to define next steps. Once a schedule update is achieved, EADS will resume the milestone accounting and further update the A400M charge, for which € 341 million have been recorded in the third quarter of 2008 and have burdened EBIT* accordingly.
Revenues increased by 7 percent to € 29.4 billion (9m 2007: € 27.6 billion) reflecting growth from operations across all five Divisions. The increase includes € 803 million resulting from the move to the early stage accounting methodology in the A400M programme applied in Q3 2008.
EADS’ EBIT* (pre goodwill and exceptionals) for the first nine months of 2008 improved to € 2,018 million compared to € -353 million in the same period of the previous year, when Airbus’ EBIT* in particular was burdened by higher exceptional charges (Power8, A400M, A350). The EBIT* growth resulted from improvements across all Divisions. At Airbus, strong operational performance in series programmes, achievement of Power8 cost savings and lower exceptional charges than in the previous year contributed positively to the improvement. In the first nine months of 2008 deterioration of maturing hedge rates was nearly compensated by a positive US dollar spot rate impact of around € 265 million resulting from the revaluation of loss making contracts at closing spot rate.
In line with the Group's EBIT* development, EADS improved its Net Income to € 1,082 million (9m 2007: € -705 million), or earnings per share of € 1.34 (earnings per share 9m 2007: € -0.88).
Self-financed R&D expenses decreased slightly to € 1,792 million (9m 2007: € 1,903 million), but are expected to grow more strongly in the fourth quarter mainly in the context of Airbus’ A350 programme.
Free Cash Flow before customer financing was significantly higher at € 1,959 million (9m 2007: € 168 million) driven by an improvement in working capital caused by lower additions to inventories and higher advance payments received. Including a low customer financing contribution of € 8 million, Free Cash Flow improved to € 1,967 million (9m 2007: € 111 million). Despite a cash-out for acquisitions and for option hedges, the Net Cash position reached a record € 9.0 billion (year-end 2007: € 7.0 billion). This gives EADS a robust liquidity base for the years to come.
In the first nine months of 2008, EADS’ order intake reached a remarkable level of € 88.7 billion compared to € 82.4 billion in the same period of the previous year. The order intake was strongly supported by the high order flow at this year’s Farnborough air show and the UK tanker order. Up to the end of September 2008, the Group’s order book reached a record level of € 400.7 billion (year-end 2007: € 339.5 billion). The growth in order book benefited from a favourable US dollar spot rate at the end of September compared to year-end 2007. Orders within the commercial aircraft business are based on list prices. Strong order intake in the defence businesses pushed the Group’s defence order book to a record level of € 57.0 billion (year-end 2007: € 54.5 billion). At the end of September, EADS had 118,487 employees (year-end 2007: 116,493).
Due to the financial crisis, EADS – especially through the commercial businesses at Airbus, Eurocopter and Astrium – is currently operating in an uncertain market environment. The slowdown in economic growth and the resulting strong decrease in air traffic have overshadowed the recovery of the US dollar versus the euro and the reduction in oil price since the summer period. Thanks to its strong and geographically diversified order book and the record Net Cash position, EADS remains robust against the backdrop of the global financial crisis. Even if EADS has no short-term refinancing needs the Group’s credit facility of € 3 billion is fully committed and undrawn. So far, the Group’s institutional and government businesses are resilient and growing, benefiting from the highest order book ever.
With weaker anticipated air traffic and more difficult refinancing the commercial aircraft market is expected to slow down with risk of deferrals and even cancellations, but visibility on this is limited. Taking this into account and despite a record order book covering several years’ deliveries, Airbus has suspended the production ramp-up of the A320 Family at a level of 36 aircraft per month. Aircraft financing sources have tightened up. So far, there have been limited requests to support customers in closing funding gaps. With the lowest customer financing exposure of the past 20 years and a record Net Cash position EADS is well able to support customers if feasible on a restrictive and discretionary basis as in previous downturns. In any case, Airbus and Eurocopter stay vigilant, ready to adapt themselves to the evolution of the market.
Group-wide efficiency measures are on track. The Power8 restructuring programme is progressing well and the divestment strategy is delivering: The sale of the site in Laupheim (Germany) to Diehl/Thales is completed and the negotiations with GKN regarding the divestment in Filton (UK) are concluded, but control has not yet passed. Just recently, EADS and DAHER agreed on the latter acquiring a 70 percent majority stake in EADS Socata. Establishing links between DAHER and EADS Socata will lead to the creation of a major player in the field of aerostructures, business aviation and services. The agreement is subject to approval by the respective authorities. The new French and German aerostructures companies – Aerolia and Premium Aerotec – are progressing. These changes will allow EADS and Airbus to concentrate on core business, whilst creating strong aircraft component suppliers.
Power8 Plus has been launched as a Group-wide initiative to deliver a further annual EBIT* benefit of € 1 billion from across the Group in 2011 to 2012. The full amount will comprise a € 650 million contribution from Airbus and € 350 million contributed by the Eurocopter, Astrium, Defence & Security and Military Transport Aircraft Divisions as well as by EADS Headquarters.
In addition, EADS is currently working on a further integration and cost savings plan called “Future EADS” at a minimum level of € 200 million in 2011-2012. It aims at further integration, improvement of decision making process and cost savings through the Headquarters, the Divisions and the interaction between Headquarters and the Divisions.
The EADS guidance is based on a closing spot rate at year-end 2008 of € 1 = US$ 1.45.
EADS expects Airbus to capture orders for more than 850 new aircraft in 2008.
Forecasted EADS revenues growth to more than € 40 billion in 2008 is unchanged, with over 470 aircraft deliveries for the full year.
With an EBIT* of € 2.0 billion in the first nine months of 2008, EADS should exceed its full-year EBIT* guidance of € 1.8 billion (at € 1 = US$ 1.45) based on the strong underlying performance. This excludes any additional impact for the A400M, due to the uncertainties of the programme.
The variation of the closing €/US$ spot rate at year-end relative to that of end of September 2008 could have negative or positive impacts on earnings linked to the revaluation at the closing US dollar rate of some Airbus balance sheet items, including loss-making contract provisions.
Before the impact of customer financing, EADS expects 2008 Free Cash Flow at above € 2 billion while bearing in mind that this is the most volatile item to predict.
EADS uses EBIT pre goodwill impairment and exceptionals as a key indicator of its economic performance. The term “exceptionals” refers to such items as depreciation expenses of fair value adjustments relating to the EADS merger, the Airbus Combination and the formation of MBDA, as well as impairment charges thereon.
As the outcome of the A400M construction contract cannot be estimated reliably, EADS can currently not comply with all requirements to account for the contract under the estimate-at-completion accounting methodology. Consequently and in accordance with IAS 11 (Construction Contracts), EADS has suspended the application of estimate at completion methodology accounting (“milestone accounting”) and has then recognised contract costs incurred to date as an expense directly in the income statement as well as corresponding revenues as far as such contract costs incurred are expected to be recoverable under the “early stage“ method of accounting. The loss-at-completion provision was then updated only to cover additional losses under the contract which EADS was able to estimate reliably.
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