Babcock International PLC (LSE:BAB) has cut its profit guidance for the year after taking a £90 million loss on the deterioration of the Type 31 warship contract, but said cashflow was much stronger than expected.
Based on draft preliminary accounts, the defence contractor said it now expects to report an underlying operating profit of roughly £238 million for the year to end-March 2024, up 34% on the prior year.
This includes a £90 million loss on the Type 31 contract and a £17 million profit on disposal of a property.
The FTSE 250-listed company said the Type 31 five-ship contract, signed in 2019, is "the last material legacy onerous contract the group is managing", with a dispute resolution process settled with the customer during the year, which has enabled the restructuring of the programme.
Overall estimated costs increased due to the changes to the design and increases in expected labour costs above inflation which resulted in the contract outturn deteriorating by £90 million, which has been fully recognised in the 2024 financial year, while the cash impact of the loss is expected to be realised over the remaining five years of the programme.
Overall group revenue was up 11% to £4.4 billion, while the contract backlog rose 9% to £10.3 billion.
Babcock said underlying free cash flow of £160 million was significantly ahead of expectations, despite making a £35 million accelerated pension deficit payment. The cash impact of the Type 31 loss will be recognised over the life of the contract
Net debt fell £129 million to just over £435 million.
For the current financial year, guidance was unchanged, with management expecting "a further year of progress".