Final Results - Year Ended 31 December 1999
British Aerospace PLC
3 March 2000
Preliminary Announcement 1999
BAE SYSTEMS
Highlights
Profit before interest increased 19.6%*
Diluted earnings per share increased 6.3%*
Dividend per share increased 23.1%
Net debt at 31 December £(825)m
Order book £36.6bn
*excluding goodwill amortisation and exceptional items
1999 Preliminary results statement
This has been an important year in the development of the Company, with the
merger on 29 November 1999 of the former British Aerospace (BAe) and Marconi
Electronic Systems (MES) businesses resulting in the creation of BAE SYSTEMS,
now the world's second largest defence company.
Profit before interest, excluding goodwill amortisation and exceptional items,
increased to £763m (1998 £638m) on sales of £8,929m. Before taking into
account the contribution from MES, this represents a 15.2% increase on 1998.
MES contributed a £28m profit before interest, excluding goodwill amortisation
and exceptional items, and £455m sales, which represented a single month's
trading.
Profit before tax, excluding goodwill amortisation and exceptional items,
advanced 11.6% to £790m. The lower level of MES contribution for the short,
December, trading month was the principal reason for holding back the
corresponding increase in diluted earnings per share to 6.3%.
Cash performance in the former BAe businesses was strong with net trading cash
balances excluding the impact of the MES merger increasing to £373m before
taking into account £686m relating to the cash raised following the issue of
the Orange Exchangeable Bond. The total net cash flows associated with the
merger with MES, including the cash generated for the one month of ownership,
were (£1,884)m. These, together with the above cash flows of the former BAe
businesses, resulted in net indebtedness of the Group at the year end of
£825m. The significant majority of this indebtedness would have been offset
by cash payments on defence contracts had they been received prior to the year
end rather than, as was the case, in the early months of this year.
BAE SYSTEMS ended the year with a strong order book of £36.6bn (1998 £28.1bn)
with MES contributing £8.5bn to this.
Performance in the Defence businesses was again good. Productivity further
improved with a higher profit recognition as key programmes mature. Operating
margin increased to 13.0% (10.0% in 1998) on lower sales. Defence sales
benefited from higher activity in defence systems and key military aircraft
programmes including Eurofighter Typhoon. These increases were offset by
lower sales as the established Al Yamamah programme in the Kingdom of Saudi
Arabia moves from hardware and construction phases towards a stable base of
underlying customer support activity. The reduced sales for the year have
also been affected by the renegotiated programme for Nimrod, where delays in
the programme have occurred following a reassessment of the engineering
resource and technical requirements. The 1999 results reflect the cost
implications of this reassessment.
A £10m loss before interest for Commercial aerospace reflects the higher
launch aid repayments and the adverse effect of the delivery of aircraft
against orders taken in a period of poor pricing. This was offset by profit
improvements in the regional aircraft business together with continued good
trading on Airbus wing sets. Launch aid repayments increased as a consequence
of the dual incidence of a full year of repayments on both the A330/340 and
the A320 programmes. Repayment on the A320 programme was completed at the end
of 1999.
An important step in addressing value creation through industrial
consolidation was the merger with the MES businesses. The merger brings
together two dynamic businesses with a depth of capability to rival any
competitor and establishes BAE SYSTEMS as the future partner of choice.
The merger was announced on 19 January 1999. At that time it was estimated
that significant synergy benefits would result in annual cost savings
totalling in excess of £275m within three full financial years of completion
of the merger. Subsequent verification work has confirmed these savings and
identified further opportunities.
Integration of the two businesses has made an excellent start. A radical
reorganisation has been undertaken drawing on, and integrating fully, the
combined strengths of the two constituent management teams. The resulting
lean organisation will have a major focus on programme management.
Based on the confidence that the Directors have in the Company's outlook
following the merger the dividend per share for the year has been increased to
8.0p (1998 6.5p), representing an increase of 23.1% which is covered 3.6 times
on a diluted basis. This increase reflects the Company's intention to base
its dividend policy on 3.25 times cover (before goodwill amortisation and
exceptional items) on a full year basis.
Commenting on these results Sir Richard Evans, Chairman said:-
'Following the merger BAE SYSTEMS is now a leader in the global aerospace and
defence market. The business is financially strong with a large order book
and the management team has an excellent track record of delivering value'.
John Weston, Chief Executive, added:-
'The transformation to BAE SYSTEMS melds two strong businesses into a single
performance and customer focused organisation. It represents a major step in
the strategy for systems led growth and creates a business with the technology
and capability to compete in the global market'.
Summarised profit and loss account
For the year ended 31 December
1999 1998
£m £m
Sales 8,929 8,611
=================================================== =========== ============
Operating profit* 769 666
Share of operating loss of joint ventures* (6) (28)
Net interest* 27 70
--------------------------------------------------- ----------- ------------
Profit before tax, goodwill amortisation and 790 708
exceptional items
Profit before tax 459 973
Tax (131) (280)
Minority interests (4) (1)
--------------------------------------------------- ----------- ------------
Profit for the year 324 692
=================================================== =========== ============
Basic earnings per share* 30.8p 29.4p
Diluted earnings per share* 28.8p 27.1p
Dividend per share 8.0p 6.5p
* excluding goodwill amortisation and/or exceptional items as appropriate
Segmental analysis
For the year ended 31 December Sales Profit/(loss)
-------------------- --------------------
1999 1998 1999 1998
£m £m £m £m
Defence 5,837 6,353 760 638
Commercial aerospace 2,970 2,523 (10) 12
MES businesses 455 - 28 -
Other businesses and head office 35 47 (15) (12)
---------------------------------- --------- --------- --------- ---------
9,297 8,923 763 638
Less: intra-group (368) (312) - -
Net interest excluding exceptional 27 70
items
---------------------------------- --------- --------- --------- ---------
790 708
Goodwill amortisation, including (63) (23)
joint ventures
Exceptional items (note 2) (268) 288
---------------------------------- --------- --------- --------- ---------
8,929 8,611 459 973
================================== ========= ========= ========= =========
Review of operations
Defence
Defence profit before interest and tax excluding goodwill amortisation and
exceptional items advanced 19.1% on 1998 to £760m (1998 £638m) on sales of
£5,837m (1998 £6,353m).
Order intake in the year of £5bn resulted in a defence order book at the end
of the year of £15.3bn (1998 £16.1bn).
Development of Eurofighter Typhoon is progressing well to meet the
requirements of the four European nations' partnership, with major assemblies
for the first production aircraft of the initial batch of 148 aircraft nearing
completion by the end of 1999. The first delivery of production aircraft is
scheduled for the end of 2001.
Nimrod MRA 4, a programme to replace maritime patrol aircraft for the UK Royal
Air Force, involves the integration of a new, complex suite of sensors and
systems into existing Nimrod airframes, with a total contract value of £2.2bn.
This is a challenging programme, and the original plan for engineering
resources underestimated the requirement for the extensive new structure and
airframe systems. This has led to an early reassessment of the in-service
date and consequent contract renegotiation with the customer, the UK MoD.
The Hawk advanced jet trainer and light combat aircraft customer base
continues to expand. Current production activity centres on aircraft for
Australia and the NATO flying training programme in Canada. A recent notable
success was the selection by South Africa of Hawk as part of a larger defence
package including Gripen aircraft in partnership with Saab. Contracts leading
to 24 Hawk and 28 Gripen aircraft are expected to become effective during the
current year.
In addition to the established aircraft activities the Company also
participates in two programmes which are near the start of the maturity cycle
in the Future Offensive Air System (FOAS) and the US-led Joint Strike Fighter
(JSF). FOAS comprises a series of UK studies to define concepts for a system
to replace Tornado strike aircraft from 2018. JSF is at the concept
demonstration phase with proposals to replace a range of current fighter
aircraft. The likely requirement identifies some 3,000 aircraft replacements.
BAE SYSTEMS has been selected as prime contractor for the Type 45 Destroyer
programme, a £2.5bn programme to replace the Royal Navy's Type 42 vessels.
Rapid progress to move Type 45 to contract by the third quarter 2000 is now
anticipated, leading to service entry for the first of up to 12 ship systems
in 2007.
The Type 45 main weapons system, Principal Anti Air Missile System (PAAMS) has
been selected with contracts awarded to Matra BAe Dynamics last year. PAAMS
will integrate with the highly advanced new Sampson multi-mode electronic
scanning radar developed by BAE SYSTEMS.
The Saab joint venture is in the process of acquiring another Swedish
aerospace business, Celsius. This acquisition will significantly enhance
Saab's strategic presence and has the endorsement of BAE SYSTEMS. Completion
of the acquisition is planned for March 2000.
As a result of the ongoing drive for operational improvements, coupled with
reducing workload on the Harrier programme, in June the Company announced a
Defence sector rationalisation. The programme encompasses the closure of the
Dunsfold site together with a voluntary redundancy programme across a number
of other sites across the sector. Pre-tax costs of the programme are
estimated at £250m over a two year period, with £198m charged in 1999.
Commercial aerospace
The Commercial aerospace activities produced sales of £2,970m (1998 £2,523m)
primarily through increased Airbus activity, which saw current deliveries rise
to 294 aircraft in 1999 (1998 229). The Commercial aerospace order book at
the year end stood at £13.1bn compared to £12.0bn at the end of 1998, a result
of continued strong Airbus order intake.
Airlines placed net orders for 430 new Airbus airliners during 1999. Net of
cancellations, the order book for Airbus airliners stood at 1,445 aircraft
valued at $100.1bn at the year end (1998 $92.7bn).
The Commercial aerospace sector results for the year included our share of the
result attributable to Airbus Industrie (AI) being a loss after interest of
£42m (1998 loss: £25m).
The regional jet business delivered 23 RJ aircraft during 1999, with orders
outstanding at year end for 11 aircraft.
Launch aid repayments charged to the profit and loss account during 1999
amounted to £176m (1998 £141m) of which £74m were on single aisle programmes.
Airbus continues to expand its family of airliners. Development of smaller
and larger extensions to the range are currently underway. The 105 seat A318
will enter service in 2003 and, above 375 seats, the A340-500 and 600
airliners will enter service from 2002.
Development of an A3XX family of airliners seating 480 - 650 passengers
continues. Discussions are underway to establish possible sources of launch
finance including the UK Government. Launch of this programme will be
determined by a number of criteria including the extent of market interest
from airlines.
Work is still ongoing in planning for the conversion of the Airbus partnership
into a new Airbus Integrated Company (AIC) which has been facilitated by the
announcement in the second half of 1999 of the merger of DASA and Aerospatiale
to form the European Aeronautic Defence and Space Company (EADS).
MES
Included in these results is £28m profit before interest excluding goodwill
amortisation and exceptional items and £455m sales representing a single
month's contribution from MES. At 31 December 1999 the MES order book stood
at £9.3bn, including intra group orders of £0.8bn.
The addition of MES' depth of capability in avionics and defence electronics
alongside BAe's established capability in airframe and system integration
significantly enhances the Company's capability in airborne systems. The
merger also establishes BAE SYSTEMS with a comparable breadth and depth of
capability in naval systems from combat management to surface ship, and
submarine, design and build.
The Company is expanding the scope of the guided weapons joint venture Matra
BAe Dynamics with the addition of activities from the Alenia Marconi Systems
(AMS) joint venture. At the same time the addition of former BAe activities
will enhance the Anglo-Italian AMS joint venture in the field of radars and
command systems.
The merger has established BAE SYSTEMS as a major participant in the US
industry with some 18,500 people in North America. In 1999 combined sales of
BAe and MES were greater in the US than the UK market. The North American
activities have a strong position in airborne systems and BAE SYSTEMS is a
major supplier of support services to the US Navy.
Future reporting
The sectors against which the Company has in the past reported its results are
not appropriate to BAE SYSTEMS going forward. The Company will in future give
greater visibility of the constituents of its business performance by
reporting seven sectors:
North America
Avionics
Operations
Commercial aerospace
Major programmes
Customer support
International partnerships
These revised sectors reflect the new Company organisation, which separates
the management of large programmes from management of the operational
facilities. It places a focus on customer support as a separate business
stream and gives greater emphasis to the way joint ventures are managed.
Importantly also it enables commercial separation of both the Avionics and
North American businesses from other activities, facilitating compliance with
regulatory undertakings in the UK and US.
Consolidated profit and loss account
For the year ended 31 Notes Ongoing Acquisitions Total Total
December
1999 1999 1999 1998
£m £m £m £m
Sales 8,474 455 8,929 8,611
Less: adjustment for share of
joint venture sales (1,761) (125) (1,886) (1,569)
----------------------------- ----- ------- ------------ ------- --------
Turnover 6,713 330 7,043 7,042
Operating costs
Excluding goodwill
amortisation and exceptional
items (5,950) (324) (6,274) (6,376)
Goodwill amortisation (17) (26) (43) (12)
Exceptional items 2 (210) - (210) (51)
------- ------------ ------- --------
(6,177) (350) (6,527) (6,439)
----------------------------- ----- ------- ------------ ------- --------
Operating profit/(loss) 536 (20) 516 603
Share of operating
(loss)/profit of joint
ventures
Share of operating
(loss)/profit before goodwill
amortisation (28) 22 (6) (28)
Goodwill amortisation (18) (2) (20) (11)
(46) 20 (26) (39)
----------------------------- ----- ------- ------------ ------- --------
Non-operating exceptional 2
items
Loss on sale and closure of
operations - - - (22)
Profit on disposal of fixed
asset investments - - - 401
------- ------------ ------- --------
- - - 379
----------------------------- ----- ------- ------------ ------- --------
Profit before interest
Excluding goodwill
Amortisation and exceptional
items 735 28 763 638
Goodwill amortisation and
exceptional items (245) (28) (273) 305
------- ------------ ------- --------
490 - 490 943
----------------------------- ----- ------- ------------ ------- --------
Interest
Net interest arising on
activities excluding
exceptional items 15 (12) 3 45
Share of net interest of
joint ventures 23 1 24 25
Exceptional interest charges 2 (58) - (58) (40)
------- ------------ ------- --------
(20) (11) (31) 30
----------------------------- ----- ------- ------------ ------- --------
Profit/(loss) before tax on
ordinary activities
Excluding goodwill
amortisation and exceptional
items 773 17 790 708
Goodwill amortisation and
exceptional items (303) (28) (331) 265
470 (11) 459 973
Tax
Tax on profit excluding
exceptional items (188) (172)
Tax on exceptional items 57 (108)
------- --------
(131) (280)
----------------------------- ----- ------- ------------ ------- --------
Profit after tax on ordinary
activities 328 693
Equity minority interests (4) (1)
----------------------------- ----- ------- ------------ ------- --------
Profit for the financial year 324 692
Dividends 4
Equity: ordinary shares (202) (114)
Non-equity: preference shares (21) (21)
------- --------
(223) (135)
----------------------------- ----- ------- ------------ ------- --------
Retained profit 101 557
----------------------------- ----- ------- ------------ ------- --------
Basic earnings per share
Including goodwill
amortisation and exceptional
items 16.2p 38.4p
============================= ===== ======= ============ ======= ========
Excluding goodwill
amortisation and exceptional
items 30.8p 29.4p
============================= ===== ======= ============ ======= ========
Diluted earnings per share
Including goodwill
amortisation and exceptional
items 15.6p 35.1p
============================= ===== ======= ============ ======= ========
Excluding goodwill
amortisation and exceptional
items 28.8p 27.1p
============================= ===== ======= ============ ======= ========
All results arise from continuing operations
Consolidated balance sheet
as at 31 December
Group
--------------------------
1999 1998
Note £m £m
Fixed assets
Intangible assets 1 6,365 322
Tangible assets 2,167 1,604
Investments 1
Share of gross assets of
joint ventures 5,208 3,384
Share of gross liabilities of
joint ventures (4,573) (2,927)
------------ ------------
Share of joint ventures 635 457
Others 25 139
------------ ------------
660 596
----------------------------- ------------------- ------------ ------------
9,192 2,522
----------------------------- ------------------- ------------ ------------
Current assets
Stocks 1,559 1,442
Debtors due within one year 3,647 3,201
Debtors due after one year 512 511
Investments 1,713 1,066
Cash at bank and in hand 811 308
----------------------------- ------------------- ------------ ------------
8,242 6,528
Current liabilities
Loans and overdrafts (2,025) (264)
Creditors (4,871) (4,069)
----------------------------- ------------------- ------------ ------------
(6,896) (4,333)
Net current assets 1,346 2,195
----------------------------- ------------------- ------------ ------------
Total assets less current
liabilities 10,538 4,717
----------------------------- ------------------- ------------ ------------
Liabilities falling due after
one year
Loans (1,155) (898)
Creditors (542) (701)
Provisions for liabilities
and charges (1,396) (1,092)
----------------------------- ------------------- ------------ ------------
7,445 2,026
----------------------------- ------------------- ------------ ------------
Capital and reserves
Called up share capital 140 111
Shares to be issued 255 -
Share premium account 212 110
Statutory reserve 202 202
Other reserves 5,212 324
Profit and loss account 1,339 1,273
----------------------------- ------------------- ------------ ------------
Shareholders' funds
Equity: ordinary shares 7,091 1,750
Non-equity: preference shares 269 270
------------ ------------
7,360 2,020
Equity minority interests 85 6
----------------------------- ------------------- ------------ ------------
7,445 2,026
Consolidated cash flow
For the year ended 31 December 1999 1998
£m £m
Net cash inflow/(outflow) from operating
activities
Operating profit 516 603
Depreciation, amortisation and impairment 254 150
Profit on disposal of fixed assets (4) (19)
Movement in provisions for liabilities and charges
excluding deferred tax (116) (93)
Decrease/(increase) in working capital:
Stocks 100 62
Debtors 122 (1,647)
Creditors (409) 469
Customer stage payments (44) (31)
-------------------------------------------------- ------------ ------------
419 (506)
================================================== ============ ============
Cash flow statement
Net cash inflow/(outflow) from operating
activities 419 (506)
Dividends from joint ventures 30 5
Returns on investments and servicing of finance (62) 94
Taxation (81) (136)
Capital expenditure and financial investment (132) 419
Acquisitions and disposals
Acquisitions - MES (1,357) -
Other (18) (612)
Disposal of subsidiary undertakings and joint
ventures 42 201
Equity dividends paid (100) (60)
-------------------------------------------------- ------------ ------------
Net cash outflow before financing and management
of liquid resources (1,259) (595)
Management of liquid resources 234 785
Financing (1,686) (127)
-------------------------------------------------- ------------ ------------
Net increase in cash available on demand 661 63
================================================== ============ ============
Reconciliation of net cash flow to net movement in
net funds
Net increase in cash available on demand 661 63
Net decrease in liquid resources (234) (785)
(Increase)/decrease in other loans included within
net funds (957) 145
-------------------------------------------------- ------------ ------------
Change in net funds from cash flows (530) (577)
Investments, loans and finance leases assumed on
acquisition of MES (435) -
Other non cash movements 27 1
-------------------------------------------------- ------------ ------------
Net (decrease) in net funds (938) (576)
Net funds at 1 January 212 788
-------------------------------------------------- ------------ ------------
Net (debt)/funds at 31 December (726) 212
================================================== ============ ============
Reconciliation to movement in net cash/debt as
defined by the Group
Net (decrease) in net funds (938) (576)
(Increase)/decrease in cash on customers' account (83) 11
-------------------------------------------------- ------------ ------------
Net decrease for the year (1,021) (565)
================================================== ============ ============
Statement of total recognised gains and losses
For the year ended 31 December 1999 1998
£m £m
Profit for the financial year 324 692
Currency translation on foreign currency net
investments, including joint ventures (9) (7)
Revaluation of current asset investment 563 -
Revaluation of land and buildings (10) -
Deferred tax on revalued assets - (37)
------------ ------------
Other recognised gains and losses relating to the
year (net) 544 (44)
-------------------------------------------------- ------------ ------------
Total recognised gains and losses relating to the
year 868 648
Prior year adjustment - (284)
-------------------------------------------------- ------------ ------------
Total recognised gains and losses 868 364
================================================== ============ ============
Reconciliation of movements in shareholders' funds
For the year ended 31 December 1999 1998
£m £m
Profit for the financial year 324 692
Dividends (223) (135)
-------------------------------------------------- ------------ ------------
101 557
Other recognised gains and losses relating to the
year (net) 544 (44)
New share capital subscribed 29 -
Merger reserve arising on the issuance of shares
relating to the MES acquisition 4,336 -
Shares to be issued in relation to the MES
acquisition 255 -
Issuance of shares to QUEST 7 -
Exercise of share options, warrants and dividend
scrip issue 68 51
Write back of goodwill on disposal of the
Arlington Securities business - 4
-------------------------------------------------- ------------ ------------
Net increase in shareholders' funds 5,340 568
Opening shareholders' funds 2,020 1,452
-------------------------------------------------- ------------ ------------
Closing shareholders' funds 7,360 2,020
================================================== ============ ============
Notes to the preliminary results
1 Acquisitions
On 29 November 1999 the Group acquired the Marconi Electronic Systems (MES)
businesses of The General Electric Company, p.l.c. (now Marconi p.l.c) for a
total consideration of £6,534 million. This principally represents the issue
of 1.17 billion ordinary shares of 2.5p, Capital Amortising Loan Stock of £369
million together with assumed debt of £1.4 billion. After fair value
adjustments (£244 million) together with accounting policy realignments (£43
million), goodwill arising on consolidation amounted to £6,554 million, and is
being amortised over its expected useful life of 20 years. The goodwill
arising on consolidation has been allocated £6,076 million to MES subsidiary
undertakings and £478 million to MES joint ventures.
2 Exceptional items
Year to Year to
31 31
December December
1999 1998
£m £m
Exceptional loss included within operating profit
Defence sector rationalisation (198) -
MES integration costs (12) -
Financial Risk Insurance Programme costs - (51)
-------- --------
(210) (51)
-------- --------
Exceptional profit/(loss) not included within operating
profit
Partial sale of investment in Orange plc - 368
Sale of investment in Orion Network Services Inc - 33
-------- --------
- 401
-------- --------
Sale of the Arlington Securities business - (22)
-------- --------
- 379
-------- --------
Exceptional (loss)/profit included within profit before
interest (210) 328
-------- --------
Exceptional interest
Finance charges relating to the MES acquisition (22) -
Adjustment to net present value provisions (36) (40)
-------- --------
(58) (40)
-------- --------
Net exceptional (loss)/profit included
Within profit before tax (268) 288
======== ========
Defence sector rationalisation
On 24 June 1999 the Group announced a rationalisation of defence sector
activities including the closure of the Dunsfold site together with redundancy
programmes across a number of business units.
The total cost of this rationalisation is estimated at £250 million before a
tax credit of £60 million, of which £198 million before a tax credit of £43
million has been charged at 31 December 1999. The balance is expected to be
charged in 2000. A net cash outflow of £53 million arose in 1999 in respect
of these costs.
MES integration and finance costs
The Group is now in the process of integrating the former BAe and MES
businesses. Costs of £12 million before a tax credit of £2 million have been
charged at 31 December 1999. Integration costs are expected to continue in
the next three financial years. A net cash outflow of £5 million arose in
1999 in respect of these costs.
Finance charges arising as a result of the acquisition relate to certain loan
and overdraft facilities that were required to be renegotiated as a direct
consequence. The cost and cash outflows in the year resulting from these
renegotiations amounted to £22 million before a tax credit of £1 million.
Adjustment to net present value provisions
Adjustments have been included to maintain the net present value of certain
Commercial aerospace sector recourse provisions which were established as
exceptional items on a net present value basis in prior years. The taxation
effect of these adjustments is £11 million (1998 £nil). These adjustments
have no cash flow effect.
3 Commercial aircraft financing
Commercial aircraft are frequently sold for cash with the manufacturer
retaining some financial exposure. Aircraft financing commitments of the Group
can be categorised as either direct or indirect. Direct commitments arise
where the Group has sold the aircraft to a third party lessor and then leased
it back under an operating lease (or occasionally a finance lease) prior to an
onward lease to an operator. Indirect commitments (contingent liabilities) may
arise where the Group has sold aircraft to third parties who either operate
the aircraft themselves or lease the aircraft on to operators. In these cases
the Group may give guarantees in respect of the residual values of the related
aircraft or certain head lease and finance payments to be made by either the
third parties or the operators. The Group's exposure to these commitments is
offset by future lease rentals and the residual value of the related aircraft.
During 1998, an external review was commissioned of the likely income to be
generated from the portfolio of aircraft to which the Group has either direct
or indirect financing exposures. This review identified a most likely level of
income of some £2.4 billion. Following this analysis, in September 1998, the
Group entered into arrangements which reduced its exposure from commercial
aircraft financing by obtaining insurance cover from a syndicate of leading
insurance companies over a significant proportion of the contracted and
expected income stream from the aircraft portfolio, including those aircraft
where the Group has provided residual value guarantees. At the start of the
insurance arrangements £2.2 billion of income was underwritten, of which £1.9
billion remained underwritten as at 31 December 1999.
The net exposure of the Group to aircraft financing as at 31 December was:
1999 1998
£m £m
Direct operating lease commitments 722 854
Direct finance lease commitments 5 6
Indirect exposure through aircraft contingent liabilities 1,589 1,481
Exposure to residual value guarantees 542 504
Income guaranteed through insurance arrangements (1,885) (2,053)
--------- -------
Net exposure 973 792
Expected income not covered by insurance arrangements (43) (43)
Expected income on aircraft delivered post insurance
arrangements (330) (99)
Adjustment to net present value (158) (160)
--------- -------
Recourse provision 442 490
========= =======
Income guaranteed through insurance arrangements represents the future income
stream from the aircraft assets guaranteed under the insurance arrangements
after deducting the policy excess.
The external review identified likely income of £250 million above the level
guaranteed under the insurance arrangements. Expected income not covered by
insurance arrangements represents the amount of this income assumed by
management for the purpose of provisioning.
Expected income on aircraft delivered post insurance arrangements represents
the level of future income anticipated on aircraft delivered since the start
of the insurance arrangements.
Given the long term nature of the liabilities, the Directors believe it is
appropriate to state the recourse provision at its net present value. The
provision covers costs to be incurred over a forecast period of 13 years from
the balance sheet date. The adjustment to net present value reduces the
expected liabilities from their outturn amounts to their anticipated net
present value.
Saab AB
The Group is involved in similar transactions through its shareholding in Saab
AB including aircraft financing commitments and contingent liabilities arising
from guarantees in connection with aircraft sales.
Where Saab AB is exposed to financial risk from the above transactions, it
makes provision against the expected net exposure on a net present value
basis, after taking into account the expected future sub-lease income and
residual values of the aircraft. The Group's exposure is limited to its 35%
shareholding in Saab AB.
Airbus
The Group is involved in similar transactions through its participation in
Airbus Industrie GIE (AI) including aircraft financing commitments and
contingent liabilities arising from credit guarantees and financing
receivables under customer financing programmes.
Where AI is exposed to financial risk from the above transactions, it makes
provision against the expected net exposure, after taking into account future
sub-lease rentals and residual values of related aircraft where appropriate.
Provision for the net exposure is included within the Group's share of the
results of AI. The Group's obligations under the financing commitments of AI
are joint and several with the other Partners.
4 Dividends
The Directors propose a final dividend of 5.0p per ordinary share which, with
the interim dividend, makes a total dividend of 8.0p per ordinary share for
the year (1998 6.5p). The dividend will be paid on 1 June 2000 to
shareholders registered on 17 March 2000. The ex-dividend date will be 13
March 2000.
5 Authority To Purchase the Company's Shares
A resolution will be put to shareholders at this year's Annual General Meeting
to give a general authority to make market purchases of the Company's shares
up to a maximum of 10 per cent of the share capital of the Company. Further
details of the resolution will be included in the Notice of Annual General
Meeting that will be sent to shareholders at the end of March.
6 Cash on customers' account
Net cash excludes cash received on customers' account of £99 million (1998 £16
million) which is included within creditors on the consolidated balance sheet.
7 Exchangeable Bond
On 21 July 1999 the Company issued £686 million 3.75% Senior Unsecured
Exchangeable Bonds due 2006 (the Bonds). In summary as at 31 December 1999 the
Bonds were exchangeable with the Company's investment in the ordinary shares
of Orange plc and Mannesmann AG (the Exchange Property). Since the year end
the Exchange Property has become subject to the offer to acquire Mannesmann AG
by Vodafone AirTouch plc. The Bondholders have the right, at any time on or
after August 1999, to exchange their Bonds; although, at the option of the
Company, the Bonds may be settled in cash based on the prevailing market value
of the Exchange Property. Notwithstanding that the bondholders currently have
exchange rights (the bonds accordingly are being disclosed as a current
liability) the Company does not at present anticipate any material exchange
much before maturity in 2006.
Consistent with the Company's strategy of disposing of its non-core assets,
the Company does not intend to settle any amounts due to a Bondholder in cash.
The substance of the transaction has therefore been to affect the probable
future disposal of the Exchange Property at the issue price of the Bonds. To
reflect this the Exchange Property has been transferred from fixed asset
investments to current asset investments, and is recorded at the effective
realisable value being the issue price of the Bonds of £686 million. One
effect of transferring the Exchange Property to current asset investments has
been to include it within net debt at 31 December 1999 at that value.
The Bonds are recorded at issue price (less unamortised issue costs) within
current liabilities, being the Group's maximum economic exposure.
8 New Financial Reporting Standards
Financial Reporting Standard 16 - Current Taxation has been adopted for the
first time in this preliminary statement. Its adoption has had no material
impact upon reported results, and comparative figures have not needed
restatement in consequence. Financial Reporting Standard 15 - Tangible Fixed
Assets has not been adopted in this preliminary statement, but will be adopted
in 2000, once a full assessment of its impact on the enlarged Group has been
completed.
9 Other information
The financial information for the years ended 31 December 1999 and 31 December
1998 contained in these preliminary results, which were approved by the Board
on 2 March 2000, does not constitute statutory accounts of the Company within
the meaning of section 240 of the Companies Act 1985.
Statutory accounts for the year ended 31 December 1998 have been delivered to
the Registrar of Companies. Statutory accounts for the year ended 31 December
1999 will be delivered to the Registrar of Companies following the Company's
Annual General Meeting. The auditors have reported on both these sets of
accounts. Their reports were not qualified and did not contain statements
under section 237(2) or (3) of the Companies Act 1985.
Issued by British Aerospace plc
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