Are profits at BAE Systems (LSE: BA.) distorted by unusual items?
Right now I'm trawling through the FTSE 100 (UKX) and double-checking for blue chips that may be flattering their profits.
You see, many companies these days report 'underlying' earnings, which are calculated by excluding costs the firm deems to be 'exceptional'. Trouble is, some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.
Today I'm looking at BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) to see if its reported earnings have been distorted significantly by exceptional, one-off or unusual items. I've extracted the following statistics courtesy of S&P Capital IQ:
| Year to 31 December | 2007 | 2008 | 2009 | 2010 | 2011 |
|---|
| Profit before unusual items (£m) | 1,373 | 2,398 | 1,345 | 1,803 | 1,574 |
| Restructuring charges (£m) | (37) | (87) | (151) | (153) | 6 |
| Impairment of goodwill (£m) | (148) | (175) | (725) | (84) | (94) |
| | | | | | |
| Gains on sales of assets and investments | 102 | 277 | 85 | 29 | 47 |
| Asset writedowns (£m) | (55) | (42) | (271) | (170) | 23 |
| Other items (£m) | - | - | (17) | (16) | (90) |
While annual figures can provide some insight into how a business has performed, I reckon looking back over several years provides a better view of possible problems in relation to one-off costs.
So between 2007 and 2011, my stats tell me BAE Systems reported cumulative profits before exceptional items and tax of £8.5bn. However, aggregate exceptional costs came to £1.7bn -- equivalent to a notable 20% of cumulative 'underlying' profits.
Although BAE's total exceptional items are a lower proportion of profits than some of the companies we've looked at in this series, their sheer number and frequency might concern many investors.
BAE's gains on sales of assets and asset writedowns more or less net off over the last five years, but it has still suffered significant charges relating to goodwill impairment and restructuring costs. The largest hit came in 2009, when it wrote down the cost of the $4bn acquisition of Armor Holdings, which was bought just two years previously. Lower demand for its military truck products were the primary culprit here.
BAE's earnings are likely to be under the microscope like never before, following its aborted mergers with EADS. With lower demand expected across the defence industry, particularly from the US, it wouldn't be a surprise to see its track record of one-off items continuing.
Somebody who always studies earnings numbers in detail is Neil Woodford, the UK's leading equity income fund manager. Mr Woodford's portfolios thrashed the FTSE 100 during the 15 years to 2011 and this exclusive Motley Fool report -- which can be downloaded free today -- reviews his favourite blue-chip shares for 2013 and beyond.
> Stuart does not own any share mentioned in this article.
