Interim Results Part 1.
BRITISH AEROSPACE PLC
16 September 1999
PART 1
British Aerospace plc Interim Report 1999
Highlights
Profit before interest increased 11.7%*
Earnings per share increased 2.1%* **
Dividend per share increased 27.7%
Net cash balance at 30 June £362m
Order book £27.9bn
* excluding exceptional items and goodwill amortisation
** undiluted
Chairman's statement
I am pleased to report that the performance of British Aerospace continues to
make good progress with strong first half trading as enhanced margins are
delivered.
Profit before interest, excluding exceptional items and goodwill amortisation,
increased by 11.7%. This performance, coupled with lower interest income in
the period compared to 1998, resulted in profit before tax of £358m (1998
£349m). Earnings per share increased 2.1% to 14.8p (1998 14.5p) on the same
basis.
Sales growth in Airbus is anticipated to continue with rising production
deliveries, and sales in defence are expected to be higher in the second half.
The Company has continued to maintain a strong order book, which at the end of
June stood at £27.9bn.
We see performance of the business continuing to strengthen into the second
half and, with our confidence in the outlook, the net interim dividend per
share has increased 27.7% to 3.0p.
The Company maintains a strong balance sheet with net cash of £362m at the end
of June 1999. A positive cash flow of £166m in the first half of the year
reflects a combination of cash movements across the business. There was a
small positive cash flow associated with defence export contracts where cash
received during the period was marginally higher than cash expenditures in
those activities. In addition, working capital and capital expenditure
investment increased across a number of programmes with rising activity.
Airbus product development spend was slightly higher as was expenditure on
certain defence development contracts, notably Nimrod and Eurofighter Typhoon.
British Aerospace holds 5% of the shares in Orange plc. Consistent with the
Company's strategy to focus its portfolio on aerospace and defence activities,
in June a seven year Bond was launched, valued at £686m, the proceeds of which
were received in July. The Bond is exchangeable with British Aerospace's
Orange shares at a premium to the share price prevailing at the time of the
agreement.
In addition to pursuing the maximum value from current business operations,
significant progress is being made in the strategic development of the
Company. Discussions have continued with others in the industry to establish
a more consolidated global aerospace and defence industry. The proposal to
merge Marconi Electronic Systems (MES) with British Aerospace, announced in
January, is part of this strategy.
A definitive agreement between British Aerospace and GEC was signed on 27
April 1999 and consultation with the appropriate regulatory authorities has
taken place through the summer months, resulting in UK regulatory clearance
being received on 9 September 1999 subject to acceptance of certain
undertakings, which in our opinion will not compromise the delivery of
synergies. Regulatory clearance from the US is awaited. It is anticipated
that, subject to shareholder approval, the transaction will be completed later
this year.
The merger represents a major step in the consolidation of the industry and
creates the Worlds second largest defence company. The enlarged Company will
be the most globally based aerospace and defence enterprise with a significant
operational presence in nine 'home' markets.
The new Company will be able to apply Research and Technology investment more
efficiently and enable it to compete more effectively in the global market to
meet customers needs across the airborne, naval and land systems sectors.
Significant synergies will result from the merger, which will increase
profitability and enhance earnings per share.
Sir Richard Evans
Chairman
Major business drivers
Eurofighter Typhoon
First production components are now being assembled with a major investment
programme underway for production of 620 aircraft for the four partner
nations. Development programme maturity is now enabling profit recognition.
Military aircraft exports
Export campaigns are underway for Hawk, Gripen and Typhoon. Export sales
continue to be an important source of growth in future years.
Al Yamamah
The transition from equipment supply to ongoing in-Kingdom support is now
complete with associated reduced volume of activity. Partial funding via oil
trading results in cash flow variability.
Nimrod
Initial difficulties in resourcing this large complex programme have been
addressed and a revised delivery timetable has now been agreed with the
customer, the UK MoD.
Customer support
A focused customer support activity has been recently established to improve
operational performance and recognise the substantial growth in business that
will result as opportunities to support armed forces become available to
industry.
Future military aircraft projects
Future aircraft programme activity includes partnering Lockheed Martin for the
US led Joint Strike Fighter (JSF) and concept definition studies for a Future
Offensive Air System (FOAS) programme to enter service in the UK from 2018.
Land & Sea Systems
Sales growth is anticipated with good outlook for new programmes in this
sector. Margin improvement is anticipated as benefits of integration of
businesses flow to bottom line.
Future land systems projects
British Aerospace is leading a consortium to equip the UK Armed Forces with
the new generation communications system, Bowman. The Company is teamed with
Lockheed Martin in bidding for a joint UK / US requirement for the Tracer
battlefield reconnaissance system.
Future sea systems projects
Participation on a number of new naval programmes is being sought including
the UK's new Type 45 Frigate and the replacement Carrier programme.
Matra BAe Dynamics (MBD)
Outlook for the MBD guided weapons joint venture is good with new guided
weapons programmes entering production in a growth market. Anglo-French
procurement of the Storm Shadow missile is now leading to wider export sales.
Future MBD programmes
The integrated anti-air missile system, PAAMS, has recently been ordered to
arm the UK's next generation of Frigates. MBD, in collaboration with other
European countries, is bidding Meteor to meet the UK requirement to arm
Typhoon with an advanced air-to-air missile.
Royal Ordnance
Difficult trading, due to reducing demand for ordnance, is being addressed
through rationalisation of facilities and reduced manpower. Discussions with
the UK MoD on a new partnership based approach to procurement are progressing
well.
Airbus - Trading performance
Delivery volumes continue to rise. Performance improvement is being delivered
but is offset by weak pricing from earlier years' order intake. Higher Launch
Aid repayments are also restraining profit growth this year but reduce
materially next year. Airbus order intake has continued strongly, achieving
well over 50% of new orders placed in the first half.
Airbus - Future developments
Development of the new A340-500/600 long range, stretched aircraft is
utilising cash, but will provide enhancement to business mix as deliveries
commence in 2002. A3XX funding continues to impact profit and cash performance
ahead of any formal launch decision.
Summarised profit and loss account
Six months Six months Year to
to 30 June to 30 June 31 December
1999 1998 1998
Unaudited Unaudited Audited
£m £m £m
Sales 4,092 4,237 8,611
===== ===== =====
Operating profit* 365 304 666
Share of operating (loss)/profit
of joint ventures* (22) 3 (28)
Net interest* 15 42 70
----- ----- -----
Profit before tax, exceptional items
and goodwill amortisation 358 349 708
===== ===== =====
Profit before tax 132 725 973
Tax (40) (214) (280)
Minority interests (2) - (1)
----- ----- -----
Profit for the period 90 511 692
===== ===== =====
Basic earnings per share* 14.8p 14.5p 29.4p
Diluted earnings per share* 14.2p 13.5p 27.1p
Dividend per share 3.00p 2.35p 6.50p
* excluding exceptional items and goodwill amortisation
Segmental analysis
Sales Profit/(loss)
---------------------- ---------------------
Six months Six months Six months Six months
to 30 June to 30 June to 30 June to 30 June
1999 1998 1999 1998
Unaudited Unaudited Unaudited Unaudited
£m £m £m £m
Defence 2,829 3,101 349 308
Commercial aerospace 1,415 1,253 - 8
Other businesses and head
office 16 27 (6) (9)
----- ----- ----- -----
4,260 4,381 343 307
Less: intra-group (168) (144)
Net interest excluding
exceptional items 15 42
Exceptional items (note 1) (208) 381
Goodwill amortisation,
including joint ventures (18) (5)
----- ----- ----- -----
4,092 4,237 132 725
===== ===== ===== =====
Review of operations
Defence
The defence businesses produced another good performance with increased
operating profit of £349m (1998 £308m) on sales of £2,829m (1998 £3,101m).
Sales are expected to be higher in the second half.
Order intake during the period of £1.5bn resulted in an achievement of a
defence order book of £14.8bn at the end of June (31 December 1998 £16.1bn).
Sales in the Defence sector were a combination of increased sales from
acquired activities in Defence Systems businesses which were offset by a
reduced level of sales in military aircraft. Military aircraft activities
reflected the transition of the Al Yamamah programme, in the Kingdom of Saudi
Arabia, from a high level of equipment deliveries to continued in-service
support.
Recognising the need to improve operational performance and capture the
anticipated growth in business now accessible to the defence industry in
ongoing support activities for other customers, including the UK MoD, a new
Customer Support Services unit has been established within the military
aircraft business.
Sales for the military aircraft activities totalled £2,233m, and sales in 2000
are anticipated to remain around these levels. Subsequent growth is expected
to result with the commencement of deliveries of export orders for Eurofighter
Typhoon and Gripen.
The principal determinants of margin progression within military aircraft will
be the reduction in the technical risk profile as development programmes move
into production. In addition, the solid order book provides a base from which
to drive continuous productivity improvement.
A number of major programmes are now starting their production phase.
Components for the first Eurofighter Typhoon production aircraft were being
assembled earlier this year and a very significant production tooling
investment is well advanced.
Each new generation of military aircraft creates an opportunity for a step
change in the technologies and skills used in the engineering and
manufacturing process. These changes enable major improvements in efficiency
and productivity to be achieved. For example, investment to maximise
operational efficiency on the Eurofighter Typhoon combat aircraft is realising
significant returns. The new aircraft require only 18 months to build
compared to 36 months for its Tornado predecessor.
Such productivity improvements are changing the skills and manpower
requirements for the new programmes. A voluntary redundancy programme has
been launched in response to these changes which has currently confirmed 1,400
candidates.
With a reducing workload associated with the Harrier programme the Dunsfold
site will close. As previously announced, it is anticipated that this closure
will result in a further 800 redundancies.
Whilst employment in some manufacturing processes is reducing, employment in
other areas is increasing. Resources are being re-deployed, where
appropriate, to help meet such demand alongside significant recruitment in
engineering disciplines.
Nimrod, a major programme to provide a replacement maritime patrol aircraft
for the UK MoD, is a significant employer of such engineering resource. The
programme is now moving forward well following a difficult start which has
resulted in a renegotiated programme timetable.
Defence programme timescales are extensive and the Company is investing in two
major programme opportunities for the future. British Aerospace is
participating in a competitive concept definition programme, teamed with
Lockheed Martin, for the US new Joint Strike Fighter and is engaged in studies
for a Future Offensive Air System for the UK MoD, to replace Tornado strike
aircraft from 2018.
The Defence Systems businesses generated sales totalling £546m in the first
half.
With the acquisition last year of the other 50% share of the BAeSEMA joint
venture the wholly owned activity has now been merged with the former Siemens
Plessey Systems to form an integrated Land & Sea Systems business.
A number of major new naval systems programmes are anticipated over coming
years. These programmes, which include the UK replacement Carrier and Type 45
Frigates, present opportunities for complete system prime contracting, system
integration and sub-system supply. With the development of the Company's
strategy to migrate capabilities in airborne systems to naval and land systems
British Aerospace is well placed to access growth in sales in these sectors.
Defence Systems margins have been below the average for the combined Defence
sector but the elimination of overlap in central administration in Land & Sea
Systems businesses will contribute to margin improvement in this sector.
The guided weapons joint venture, Matra BAe Dynamics, continues to make good
progress with sales growth anticipated as the strong order book is delivered.
Royal Ordnance continues to suffer from weak demand. Discussions continue
with the principal customer, the UK MoD, to assess likely future requirements
and restructuring continues to match the current reduced business volume.
The rationalisation in Royal Ordnance together with the restructuring across
the other defence businesses referred to earlier will result in pre-tax
exceptional charges totalling £250m. £190m is charged to the first half
accounts with the balance charged next year. The cash cost of these actions
will be some £150m net of tax of which approximately £100m will have been
incurred by the end of 1999.
Margins in defence continue to strengthen, increasing to 12.3% compared to
9.9% for 1998. The actions to restructure the defence businesses will
accelerate plans for productivity improvements and will sustain performance as
the very substantial order book is delivered.
Commercial aerospace
The commercial aerospace activities produced sales of £1,415m (1998 £1,253m).
The 12.9% increase in sales was largely the result of higher deliveries of
Airbus aircraft. Profit before interest for the sector was breakeven (1998
£8m).
Avro maintained a breakeven trading performance and support for the fleet of
previously supplied regional aircraft continues as planned.
The Avro regional jet business delivered 13 RJ aircraft during the first half
of 1999. Orders for five RJ aircraft were achieved. The forward order book
for RJ aircraft stood at 18 aircraft at the end of June with options on a
further four aircraft. Engineering development continues for an RJX variant
of the RJ aircraft offering enhanced performance and reduced operating cost.
The Airbus trading result was a combination of volume benefits from increased
aircraft deliveries offset by substantially higher repayments of Launch Aid to
the UK Government. In addition, some impact of poor product pricing on
contracts, taken in earlier years for delivery this year, offset the benefits
of continuing productivity improvement. Deliveries are expected to rise
further this year and next with the benefit of lower Launch Aid repayments
becoming apparent early next year.
Airbus order intake continued to build on the exceptionally strong market
performance of recent years. The commercial aerospace order book at the
half-year stood at £13.3bn compared to £12.0bn at 31 December 1998.
Airlines placed net orders for 222 new Airbus airliners valued at $13.2bn.
Net of cancellations, the order book for Airbus airliners stood at 1,393
aircraft, valued at $97.0bn, at the end of June.
In the first six months of 1999 Airbus Industrie delivered 138 aircraft (1998
110). Airbus anticipates delivering some 290 aircraft this year.
With higher aircraft delivery rates the repayments under UK Government Launch
Aid arrangements have increased during 1999. Some £65m was repaid in the
first half of 1999 compared to £57m in 1998. Total repayments for the whole
of 1999 will be some £185m (1998 £122m), of which approximately £74m will be
on the single-aisle programme.
Airbus continues to develop its family of airliners. British Aerospace is
investing in the launch of the A340-500 and -600 long range, stretched
aircraft and continues to invest in technology required for a proposed A3XX
family of very high capacity aircraft.
The conversion of the Airbus partnership into a Single Corporate Entity has
not progressed materially since the end of last year. Discussions continue
however to determine how some of the benefits of the SCE might still be
accessed at a programme management level.
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