BAE Systems, Europe's largest defence company, has surprised investors by announcing an unexpectedly strong cash flow last year, enabling it to wipe out the ?870m in debt it held at the start of 2004.
George Rose, finance director, said the company held ?1.7bn in operating cash after taxes and interest, more than triple its 2003 performance, which allowed the company to finance all of last year's acquisitions internally, pay down its debt, issue dividends, and still emerge with ?5m net cash at the end of the year.
The much improved cash performance puts the company in a strong position as it continues to hunt for large-scale acquisitions in the US. Mike Turner, BAE's chief executive, said yesterday that he was continuing to push his expanding North American operation to find suitable targets.
BAE shares rose 3p, closing at 253p on Thursday.
The surprising cash position, which was announced along with annual revenues increase of 7 per cent to ?13.5bn, was tempered by a ?1bn increase in the company's US and UK pension fund deficit, which stood at ?3bn at the end of December.
The company posted a pre-tax loss of ?232m against a profit of ?233m last time, but most of the loss resulted from a ?1bn goodwill write-down that the markets largely ignored because it was a non-cash item that investors had been warned about.
The results led to a pre-write down earnings per share of 18p. The basic loss per share was 16p against a loss of 0.5p last time. The strong cash flow enabled the company to raise its dividend from 9.2p to 9.5p.
At the earnings announcement, Mr Turner dampened speculation that BAE was looking to sell its 20 per cent stake in Airbus, saying that the company had yet to see returns on its large investment in Airbus's new superjumbo, the A380, which is not expected to go into service until June 2006.
"Until you can see a better use of funds, why would you consider doing that?" Mr Turner asked. "We're getting a very good return."
Mr Turner also said if the US objected, BAE would not move to sell weapons technology to China if the European Union lifts its arms embargo as expected this summer. BAE is the largest foreign supplier to the Pentagon.
"We will do nothing that will jeopardise our position in the US. They are a very, very important customer," said Mr Turner.