Balfour Beatty takes £60m hit to UK construction profit

Announcing its results for the year to 31 December 2013 this morning, Balfour Beatty said that following a £50m profit warning last April, the performance of its UK construction business had deteriorated in the second half of the year, and its profit for the full year had fallen £60m short of expectations.

Balfour Beatty reported global construction revenue of £6.6bn, marginally up on £6.5bn last year, but underlying operating profit, after the removal of restructuring and other finance costs, fell to £21m, down 82% from £119m the previous year.

When accounting for the finance and restructuring costs, the global construction business posted a £34m operating loss, compared to an operating profit of £58m in 2012.

The firm said the decline was “mostly due to the performance of the UK business”.

It said that after making a £50m profit warning last April, the profit shortfall in its construction business had risen to £60m after a “deterioration at the end of the year”.

It said: “Whilst there was an expectation of reduced profitability at the start of the year, in light of a declining market, we announced a shortfall of approximately £50m in April, resulting from further deterioration in the external environment combined with the impact of an ongoing internal reorganisation.

“Whilst the UK business broadly performed in line with these reduced expectations, a further deterioration at the end of the year resulted in an actual profit shortfall of £60m.”

Within the UK construction business, the firm said the performance of its regional business had improved, but the major projects and M&E businesses underperformed.

It said: “Whilst we have seen a better than anticipated turnaround in the regional business, there was weaker financial performance on selected major projects in the building sector.

“In our mechanical and electrical engineering business, where we predominantly act as a subcontractor, financial performance in the final quarter was adversely impacted by increasingly difficult market conditions.”

It added that the performance of its UK rail business had been hit by “operational issues on a small number of projects”.

The firm added: “The UK construction market has been a challenging environment in which to win and execute work, allowing clients to impose increasingly stringent conditions onto contractors, and as a result, placing subcontractors under significant financial pressure.”

Overall, Balfour Beatty posted group revenue, including share of joint ventures, of £10.1bn, up 2% on 2012, with £155m in costs dragging down the group’s pre-tax profit to £32m - a fall of 78% from £147m the previous year.

The £155m in costs included £52m in restructuring costs, with £20m related to the firm’s Australian business; £26m related to its UK businesses - including a further £14m related to the UK construction business on top of the £34m it incurred in 2012; as well as a further £6m related to other non-UK businesses.

The firm also incurred £52m in pension curtailment charges; £17m in costs for implementing shared services centres in the UK and the US; and was also hit by a £38m goodwill impairment on its European rail business.

After stripping out the £155m in costs underlying pre-tax profit across the group stood at £187m, down 32% from £277m last year.

The firm said: “Continued difficult market conditions and operational issues in the UK construction business and a significant downturn in the Australian mining and resources sector resulted in a disappointing financial performance in 2013.”