EADS’ (stock exchange symbol: EAD) first quarter 2009 results demonstrate a continuing solid underlying performance. The strong order book allows active management of deliveries at the expected level although the slowdown of the commercial business is reflected in the weak order intake. Based on under-proportional quarterly deliveries than in the same period of the previous year and less other favourable phasing effects, revenues stood at € 8.5 billion, EBIT* before one-off at € 0.4 billion. First-quarter EBIT* was mainly burdened by foreign exchange effects and an A400M accounting charge. The Net Cash Position remains solid at € 8.7 billion and provides a stable basis for the years to come. EADS is well positioned to face the crisis, although there is limited visibility towards the end of the year and beyond.
Louis Gallois, CEO of EADS said: “Despite the economic challenges, EADS remains robust. We continue to proactively monitor our order book and deliveries and we are improving our efficiency. With regard to the A400M programme, which is a big concern for us, we need to find common solutions on the technical and the commercial frame of the contract to achieve a balanced sharing of the risks with our customers. Nevertheless, even in these tough times, we remain fully committed to investing in our business with a view to the long term. Our successful integration efforts are generating real synergy benefits that go beyond cost savings. The range of skills available across the Group places us in a unique position to offer outstanding solutions for our customers’ future needs.”
EADS has adjusted its divisional structure. The former Military Transport Aircraft Division is being fully integrated into Airbus and has become – under the name of Airbus Military – the military pole of Airbus. This will strengthen programme management and improve resource allocation. The new organisation is effective as of 2009.
Revenues of the Group amounted to € 8.5 billion (Q1 2008: € 9.9 billion) reflecting under-proportional Airbus deliveries (116 aircraft compared to 123 in Q1 2008), less other favourable phasing effects, negative foreign exchange impacts and lower revenue recognition in the A400M programme. However, revenues improved at Astrium (up 20 percent) and Eurocopter (up 4 percent).
EADS' EBIT* for the first quarter of 2009 amounted to € 232 million compared to € 769 million in the previous year. This decrease came mainly from negative foreign exchange impacts and an A400M accounting charge. Before these one-offs, EADS’ EBIT* contracted to € 0.4 billion (Q1 2008: € 0.7 billion), mainly impacted by price deterioration on Airbus deliveries, less volume and an unfavourable product mix.
EADS achieved a Net Income of € 170 million (Q1 2008: € 285 million), or earnings per share of € 0.21 (earnings per share Q1 2008: € 0.35). Self-financed R&D expenses slightly increased to € 562 million (Q1 2008: € 534 million). This reflects Airbus’ and Eurocopter’s continuing aircraft development programmes.
Free Cash Flow before customer financing stood at € -600 million (Q1 2008: € 1,022 million). The change compared to the same period of the previous year, in which the Free Cash Flow benefited from a strongly favourable seasonal effect, reflects the decrease of gross cash flow from operations representing the lower earnings of the quarter and the deterioration of the working capital. This deterioration is mirroring a build-up of inventories at Airbus due to the mismatch between the current production rates and the under-proportional phasing of deliveries versus the full-year forecast. Despite the currently unfavourable market environment, EADS did not face any real need to support customers in the first quarter on a net basis. Therefore, Free Cash Flow including customer financing amounts to € -585 million (Q1 2008: € 1,079 million). The Group’s Net Cash position remained high at € 8.7 billion (year-end 2008: € 9.2 billion) giving EADS a robust liquidity base in unpredictable economic times.
The seasonality of EADS' defence and institutional businesses implies that revenue, earnings and cash performance tend to be back-loaded.
Order intake amounted to € 9.3 billion (Q1 2008: € 39.3 billion), clearly reflecting lower commercial aircraft orders at Airbus and Eurocopter but supported by the order for 35 Ariane 5 worth more than € 4 billion and France’s order for 22 NH90 helicopters booked in Q1 2009. At the end of March 2009, EADS' order book remained at a record high, at € 412.6 billion (year-end 2008: € 400.2 billion), benefiting from a € 13 billion favourable US dollar impact. Orders within the commercial aircraft business are based on list prices. Robust order intake in the defence business led to a stable defence order book of € 54.9 billion (year-end 2008: € 54.9 billion). At the end of March 2009, EADS had 117,198 employees (year-end 2008: 118,349).
As for the A400M, the first aircraft is progressing towards first flight. It is now undergoing systems testing, while the second aircraft is complete and about to start systems testing. For the engine, tests are progressing satisfactorily on the flying test bed with eight flights so far, totalling more than 21 flight hours. Static test was completed for the landing gear, while the aircraft’s fatigue test is in progress.
The customer OCCAR recently announced that the seven launch nations have agreed to a three-month moratorium period lasting until the end of June 2009. This provides an opportunity for all partners of the programme to agree on the way ahead for a certain number of unresolved issues. Furthermore, it gives room to realign and rebase the contract with conditions acceptable to all parties. During this period, EADS will continue to work with its suppliers and partners to establish a robust timetable including a date for the first flight.
Furthermore, this period opens the negotiation process during which different sets of assumptions will be exchanged. EADS intends to reduce any further potential loss, but all financial consequences of the delays will only be known once the negotiations are finalised. Any estimate in the meantime is inaccurate or incomplete.
From an accounting standpoint, substantial negative income statement impacts may still have to be booked in future periods when costs become estimable or triggering events lead to a return to the estimate-at-completion method of accounting. Potential benefits from current discussions with customers might reduce such impacts, but would only be taken into account once agreed upon by OCCAR and the launch nations.
Due to the continuing high level of uncertainty on the programme, EADS retained the early stage accounting treatment of this programme.** The EBIT* impact of € -120 million for the first quarter in Airbus does not reflect a complete new estimate of the cost-at-completion. Once EADS has more reliable estimates of over-costs, it will revert to the cost-at-completion method.
The first quarter of 2009 confirms the trends described at the beginning of the year. The Group's bottom-up analysis of the order book still shows overbooking for the coming years. Nevertheless, this order book and the overbooking are challenged by the deterioration of the macroeconomic and traffic indicators. Therefore, EADS is continuously monitoring the market, its customer base and its suppliers and continues to apply a rolling plan concept. Besides the commercial order book, the Group's solid defence and institutional order book provides a certain level of protection and stability.
EADS expects Airbus to capture up to 300 new gross orders in 2009, even if it is becoming more challenging in the current market environment. Based on a stable delivery assumption and a US dollar rate of € 1 = US$ 1.39, EADS revenues should be roughly in line with the 2008 level.
Under these assumptions, EBIT* before one-off should be down in 2009 but significantly positive supported by robust underlying performance. Compared to 2008, EBIT* will be negatively impacted by increased Research & Development (R&D) expenses, by significant hedging deterioration, price deterioration, increasing customer financing and support activity costs, partly offset by further Power8 cost savings. Concerning one-off impacts, revised industrial plans to complete the A400M programme could lead to a substantial charge in the first half of 2009, weighing on EBIT*. If and when EADS has an accurate view of the costs in H1, the Group will revert to the cost-at-completion methodology. Any potential positive outcome coming from the negotiation with customers and suppliers will need to be substantiated before being taken into account.
Free Cash Flow for 2009 will reflect some negative impacts from lower customer advance payments at Airbus and some build-up of inventory in the fourth quarter of 2009, reflecting the reduction of the single-aisle production rate. The recently announced cut in A380 deliveries will equally challenge the Free Cash Flow through a build- up of inventory which will be mitigated by production optimization and supply chain management. EADS expects to support its customers in financing their deliveries on a discretionary basis in 2009. The cash consumption of provisions taken over recent years will also weigh on the cash flow. At this stage, with the current level of visibility, EADS is not expecting to consume more than around € 1.5 billion of Free Cash Flow after customer financing in 2009, excluding any potential negative impact of the A400M programme.
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 cost-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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