Balfour Beatty has posted a total loss of £150 million as the result of historic UK problem contracts, according to its latest results for the half year ended 26th June published this morning.

The group’s order book remains stable at £11.3 billion (FY 2014: £11.4 billion), with underlying revenue stable at £4,085 million (2014: £4,072 million).

The first half included a £152 million shortfall, in line with indicated range of July trading update, reflecting historic issues in construction - 90% of historic UK problem contracts are expected to be at practical or financial completion by end of 2016.

Leo Quinn, Group Chief Executive commented:

“Six months in, our Build to Last transformation programme is gaining traction throughout the business. We have a new senior leadership team and an organisation re-aligned with key customer sectors. We are on course to meet our 24-month targets for £200 million cash in and £100 million cost out.In rising core markets, the Group is continuing to win business on better terms across our operations. “

“Inevitably the headline numbers set out the consequences of the historic issues that are now being tackled. However the continuing confidence of our customers in Balfour Beatty’s expertise, the positive response of our people to change, demonstrated by our excellent net cash performance, and the underlying strength of our balance sheet, supported by the Investments portfolio, all reinforce my conviction that over the medium term we can provide our customers, employees and shareholders with superior returns.”

Underlying revenue from continuing operations including joint ventures and associates of £4,085 million was broadly in line with the first half of 2014 (2014: £4,072 million), down 4% at constant exchange rates (CER). The underlying order book has remained stable since the start of the year at £11.3 billion (FY 2014: £11.4 billion), and flat at CER. The underlying loss from continuing operations was £120 million (2014: £29 million profit).

Detailed contract reviews as part of the half-year results process revealed additional losses and write-downs across a number of historic contracts. In line with the increased level of prudence set out in March, this led in turn to a further assessment of the risk-based provisions across the entire construction contract portfolio.

In a trading update on 9 July 2015, it was indicated that the ongoing review of Group businesses had continued to identify historic issues in the UK,
US and Middle East. This was expected to result in an additional shortfall to full-year 2015 underlying pre-tax profit of £120 million to £150 million.

In UK construction: as a result of schedule slippages and operational deterioration on a number of historic contracts, provisions were taken to maintain an adequate and cautious level of cover against expected end contract positions. Consistent with the approach adopted at the 2014 year end, based on current performance of the business and current market conditions, further risk-based provisions across the entire UK portfolio were also included. The net impact on the first half results was approximately £100 million.

The group has also been impacted by problems in its US construction work and also in the Middle East, where a review of the Middle East historic contracts has resulted in an increase in project-specific provisions, predominately in the mechanical and electrical engineering business, for additional cost overruns and claim recovery shortfalls.

Underlying loss per share for continuing operations was 19.4 pence (2014: earnings 3.2 pence).

The Group’s Build to Last transformation programme launched in February to drive continuous measurable improvement is described as a complex transformation which will be delivered over the medium term. The first 24-month self-help phase will restore Balfour Beatty to industry-standard performance and profitable growth. Many initiatives and changes are underway and already beginning to have an impact on the operations of the business, the results say.

The group said a new focus on procurement across the Group ensures that Balfour Beatty is positioned to negotiate the best arrangements with suppliers. Disciplined use of preferred suppliers would lead to a stronger supply chain with improved competitiveness, margin and cash flow.

Leadership of Balfour Beatty has been a major focus since the start of 2015. The Board has been strengthened with a new Chairman, Group CEO and CFO all taking up their positions. Two-thirds of the executive leadership team – direct reports to the Group CEO – are new to Balfour Beatty or newly promoted to their post. The organisational structure for the UK strategic business units has also been simplified.

Notable contract wins in the UK water sector include the Support Services division five-year joint venture contract with Skanska and MWH Treatment for Thames Water to provide water asset solutions which will generate revenue of £265 million for Balfour Beatty UK.

The UK order book declined by 13%, mainly as the Regional and Major Projects order books fell. The Major Projects order book declined as the business continued to execute on long-term contracts, however the order book is expected to increase in the second half as contracts at preferred bidder stage enter the order book. The Major Projects business successes include preferred bidder position on the main works on a sectionmof the new Thames Tideway Tunnel, as part of a 3-way joint venture with BAM and Morgan Sindall.