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Thales Surges on Forecast of Earnings Gain After Charges on Plane Programs

Thales SA, Europe’s largest defense- electronics producer, rose in Paris trading after predicting that a “swift upturn” in operating profit will follow a 2010 loss caused by charges on aircraft programs and other contracts.

“We see the light at the end of the tunnel on these difficult contracts that were inherited from the past,” Chief Executive Officer Luc Vigneron told journalists today. He forecast operating margins of 5 percent this year and 6 percent in 2012.

The stock gained as much as 6.3 percent, the most since Dec. 11, 2009, and was up 5.4 percent at 27.76 euros at 3:58 p.m. in Paris. That pared the French company’s decline in the last 12 months to 14 percent.

Thales said it will book charges of more than 700 million euros ($943 million) against 2010 earnings on risky contracts signed before 2009, when Vigneron became CEO. That will cause an operating loss of about 100 million euros, the first deficit in almost 30 years, according to the company, based in Neuilly sur Seine, near Paris.

“The group unveiled a significant cleanup of its balance sheet,” Yan Derocles, an analyst at Oddo Securities, told investors today in a note. “This announcement may be the catalyst that we were waiting for,” he said, as “the balance sheet is now cleaned and 2011 should not be impacted by further provisions.”

The charges relate to contracts including those for components for Airbus SAS’s A400M military transport, said Vigneron, who was put in charge of Thales by its biggest shareholders, Dassault Aviation SA, with 25.9 percent, and the French state, with 27 percent. The costs follow an audit.

Airbus Pricing

Thales, which last year cut its dividend for the first time in more than a decade, is seeking to renegotiate prices on a contract with Airbus Military, a division of European Aeronautic, Defence & Space Co., to supply systems for the A400M. Thales has already booked 162 million euros in charges on that project over the last two years.

Provisions will also be charged in 2010 for a Danish ticketing-equipment order and for maritime patrol aircraft in Turkey, Thales said.

Revenue probably increased 2 percent last year to 13.1 billion euros, with positive net cash flow of about 270 million euros driven by “strict control” on costs and working capital, Thales said today. Vigneron forecast a book-to-bill ratio of 1 in 2011 and 2012, meaning the company expects orders to match sales.

Restructuring

Vigneron said the “swift upturn” in profitability will lead to the margin increase, after restructuring charges and before purchase price allocations, accounting for fair value of assets and liabilities in acquisitions. Restructuring charges will be about 1.5 percent of sales in 2011 and 1 percent of revenue in 2012, Thales said.

Thales had an operating margin, or income from operations as a proportion of sales, of 1.3 percent in 2009, after having margins of more than 7 percent in 2005 and 2006, according to Bloomberg data. Operating income totaled 168 million euros in 2009.

Vigneron also told journalists he’s confident he has retained board and shareholder support, following reports in French newspaper La Tribune that the government was seeking to oust him.

To contact the reporters on this story: Francois De Beaupuy at fdebeaupuy@bloomberg.net; Andrea Rothman in London at aerothman@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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