Interim Results Part 2
BRITISH AEROPSPACE PLC
16 September 1999
PART 2
Consolidated profit and loss account
Restated Restated
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
Less: adjustment for share of
joint venture sales (771) (778) (1,569)
----- ----- -----
Turnover 3,321 3,459 7,042
Operating costs
Excluding exceptional items
and goodwill amortisation (2,956) (3,155) (6,376)
Exceptional items (note 1) (190) - (51)
Goodwill amortisation (8) (2) (12)
(3,154) (3,157) (6,439)
----- ----- -----
Operating profit 167 302 603
Share of operating (loss)/profit
of joint ventures
Share of operating (loss)/profit
before goodwill amortisation (22) 3 (28)
Goodwill amortisation (10) (3) (11)
(32) - (39)
Non-operating exceptional items (note 1)
Profit on disposal of fixed asset
investments - 401 401
Loss on sale and closure of operations - - (22)
- 401 379
----- ----- -----
Profit before interest
Excluding exceptional items and
goodwill amortisation 343 307 638
Exceptional items and goodwill
amortisation (208) 396 305
135 703 943
Interest
Net interest arising on activities
excluding exceptional items - 44 45
Share of net interest of joint ventures 15 (2) 25
Exceptional adjustment to net
present value provisions (note 1) (18) (20) (40)
(3) 22 30
----- ----- -----
Profit before tax on ordinary
activities
Excluding exceptional items and
goodwill amortisation 358 349 708
Exceptional items and goodwill
amortisation (226) 376 265
132 725 973
Tax
Tax on profit excluding
exceptional items (85) (86) (172)
Tax on exceptional items (note 1) 45 (128) (108)
(40) (214) (280)
----- ----- -----
Profit after tax on ordinary activities 92 511 693
Equity minority interests (2) - (1)
----- ----- -----
Profit for the period 90 511 692
Dividends
Equity: ordinary shares (note 4) (53) (41) (114)
Non-equity: preference shares (10) (10) (21)
----- ----- -----
(63) (51) (135)
----- ----- -----
Retained profit 27 460 557
===== ===== =====
Basic earnings per share:
Including exceptional items and
goodwill amortisation 4.5p 28.7p 38.4p
===== ===== =====
Excluding exceptional items and
goodwill amortisation 14.8p 14.5p 29.4p
===== ===== =====
Fully diluted earnings per share:
Including exceptional items and
goodwill amortisation 4.3p 26.2p 35.1p
===== ===== =====
Excluding exceptional items
and goodwill amortisation 14.2p 13.5p 27.1p
===== ===== =====
All results arise from continuing operations. Comparative figures have been
restated to show exceptional items and goodwill amortisation separately.
Consolidated balance sheet
Restated
30 June 30 June 31 December
1999 1998 1998
Unaudited Unaudited Audited
£m £m £m
Fixed assets
Intangible assets 316 268 322
Tangible assets 1,621 1,545 1,604
Investments 568 281 596
----- ----- -----
2,505 2,094 2,522
Current assets
Stocks 1,510 1,577 1,442
Debtors due within one year 2,852 2,522 3,201
Debtors due after one year 400 399 511
Investments 1,127 1,510 1,066
Cash at bank and in hand 368 277 308
----- ----- -----
6,257 6,285 6,528
Current liabilities
Loans and overdrafts (227) (308) (264)
Creditors (3,880) (3,642) (4,069)
----- ----- -----
(4,107) (3,950) (4,333)
Net current assets 2,150 2,335 2,195
----- ----- -----
Total assets less current liabilities 4,655 4,429 4,717
Liabilities falling due after one year
Loans (895) (897) (898)
Creditors (479) (555) (701)
Provisions for liabilities and
charges (1,211) (1,056) (1,092)
----- ----- -----
Net assets 2,070 1,921 2,026
Equity minority interests (8) - (6)
----- ----- -----
Shareholders' funds 2,062 1,921 2,020
===== ===== =====
30 June 1998 comparative figures have been restated following the adoption of
FRS 12.
Statement of total recognised gains and losses
Restated
Six months Six months Year to
to 30 June to 30 June 31 December
1999 1998 1998
Unaudited Unaudited Audited
£m £m £m
Profit for the period 90 511 692
Currency translation on foreign
currency net investments,
including joint ventures (9) (9) (7)
Deferred tax on revalued assets - - (37)
----- ----- -----
Total recognised gains and losses
relating to the period 81 502 648
=====
Prior period adjustment in respect of
the adoption of FRS 12 (284) (284)
----- -----
Total recognised gains and losses 218 364
===== =====
30 June 1998 comparative figures have been restated following the adoption of
FRS 12.
Consolidated cash flow
Six months Six months Year to
to 30 June to 30 June 31 December
1999 1998 1998
Unaudited Unaudited Audited
£m £m £m
Net cash inflow/(outflow) from
operating activities
Operating profit 167 302 603
Depreciation and amortisation 110 75 150
(Profit) on disposal of fixed assets - - (19)
Movement in provisions for liabilities
and charges excluding deferred tax 109 (80) (93)
Decrease/(increase) in working capital:
Stocks (75) 134 62
Debtors 319 (996) (1,647)
Creditors (359) 41 469
Customer stage payments 26 10 (31)
----- ----- -----
297 (514) (506)
===== ===== =====
Cash flow statement
Net cash inflow/(outflow) from
operating activities 297 (514) (506)
Dividends from joint ventures 8 - 5
Returns on investments and servicing
of finance (3) 41 94
Taxation (6) (72) (136)
Capital expenditure and financial
investment (108) 660 419
Acquisitions and disposals
Acquisitions (14) (282) (612)
Disposal of joint ventures and
subsidiary undertakings 42 - 201
Equity dividends paid (50) (42) (60)
----- ----- -----
Net cash inflow/(outflow) before
financing and management of liquid
resources 166 (209) (595)
Management of liquid resources (61) 351 785
Financing (43) (146) (127)
----- ----- -----
Net increase/(decrease) in cash
available on demand 62 (4) 63
===== ===== =====
Reconciliation of net cash flow to net
movement in net funds
Net increase/(decrease) in cash
available on demand 62 (4) 63
Net increase/(decrease) in liquid
resources 61 (351) (785)
Decrease in other loans included within
net funds 44 154 145
----- ----- -----
Change in net funds from cash flows 167 (201) (577)
Foreign exchange (6) (5) 1
----- ----- -----
Net increase/(decrease) in net funds 161 (206) (576)
Net funds at start of period 212 788 788
----- ----- -----
Net funds at end of period 373 582 212
===== ===== =====
Reconciliation to movement in net cash
as defined by the Group
Net increase/(decrease) in net funds 161 (206) (576)
Decrease/(increase) in cash on
customers' account 5 (42) 11
----- ----- -----
Net increase/(decrease) in net cash 166 (248) (565)
===== ===== =====
Reconciliation of movements in shareholders' funds
Restated
Six months Six months Year to
to 30 June to 30 June 31 December
1999 1998 1998
Unaudited Unaudited Audited
£m £m £m
Profit for the period 90 511 692
Dividends (63) (51) (135)
----- ----- -----
27 460 557
Currency translation on foreign
currency net investments,
including joint ventures (9) (9) (7)
Deferred tax on revalued assets - - (37)
Write back of goodwill on disposal
of the Arlington Securities business - - 4
Exercise of share options, warrants
and dividend scrip issue 24 18 51
----- ----- -----
Net increase in shareholders' funds 42 469 568
Opening shareholders' funds 2,020 1,452 1,452
----- ----- -----
Closing shareholders' funds 2,062 1,921 2,020
===== ===== =====
30 June 1998 comparative figures have been restated following the adoption of
FRS 12.
Notes to the interim report
1 Exceptional items
-------------------
Six months Six months Year to
to 30 June to 30 June 31 December
1999 1998 1998
Unaudited Unaudited Audited
£m £m £m
Exceptional loss included within
operating profit
Financial Risk Insurance Programme
costs - - (51)
Defence sector rationalisation (190) - -
----- ----- -----
(190) - (51)
----- ----- -----
Exceptional profit/(loss) not included
within operating profit
Profit on partial sale of investment
in Orange plc - 368 368
Profit on sale of investment in Orion
Network Services Inc - 33 33
Loss on sale of the Arlington
Securities business - - (22)
----- ----- -----
- 401 379
----- ----- -----
Exceptional (loss)/profit included
within profit before interest (190) 401 328
----- ----- -----
Exceptional interest
Adjustment to net present value
provisions (18) (20) (40)
----- ----- -----
Net exceptional (loss)/profit included
within profit before tax (208) 381 288
===== ===== =====
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 £190 million before a tax credit of £45
million has been provided at 30 June 1999. The balance is expected to be
provided in 2000.
Adjustment to net present value provisions
Adjustments have been included to maintain the net present value of certain
recourse provisions which were established as exceptional items on a net
present value basis in prior years.
2 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 onto 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 had 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 a minimum level of income of £2.2 billion was
underwritten.
As a consequence the net exposure of the Group to aircraft financing has been
reduced by the insured amount and as at 30 June 1999 was:
30 June 31 December
1999 1998
Unaudited Audited
£m £m
Direct operating lease commitments 786 854
Direct finance lease commitments 6 6
Indirect exposure through aircraft contingent
liabilities 1,605 1,481
Exposure to residual value guarantees 510 504
Income guaranteed through insurance
arrangements (1,969) (2,053)
----- -----
Net exposure 938 792
Expected income not covered by insurance
arrangements (43) (43)
Expected income on aircraft delivered post
insurance arrangements (295) (99)
Adjustment to net present value (139) (160)
----- -----
Recourse provision 461 490
===== =====
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 14 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.
In the event that AI is unable to meet its obligations, each of the Partners
is responsible for its respective share of AI's obligation.
3 Post balance sheet event
--------------------------
On 21 July 1999 the Group raised £686 million through the issue of
seven year Bonds exchangeable into its remaining stake in Orange plc. The
Bonds carry a coupon of 3.75% and an exchange premium of 29.4%.
4 Dividends
-----------
The Directors have declared the payment of an interim dividend of 3.00p (1998
2.35p) per ordinary share on 30 November 1999 to shareholders registered on 1
October 1999. The ex-dividend date is 27 September 1999. The British Aerospace
Scrip Dividend Scheme will be available for shareholders who wish to take the
dividend in the form of shares rather than cash.
5 Cash on customers' account
----------------------------
Net cash excludes cash received on customers' account of £11 million (30 June
1998 £69 million; 31 December 1998 £16 million) which is included within
creditors on the consolidated balance sheet.
6 Year 2000
-----------
The Group's Year 2000 programme, which began in 1994, is sponsored by the
Chief Executive and organised under four strategic elements - products,
infrastructure, IT and supply chain.
By the end of 1998 the key milestone of identification of solutions for
conformance in all business, mission and safety related critical systems had
been achieved. However, given the complexity of the millennium problem, no
programme can guarantee complete Year 2000 compliance.
Work has continued in line with plan during 1999, with activities outstanding
now principally relating to the roll out of new IT hardware, which is nearing
completion, and receiving written compliance statements from the supply chain.
A Year 2000 corporate risk register has been created that captures risks
across the whole Group which enables effective risk management and facilitates
contingency planning.
The supply chain initiative, Aerospace Club 2000, together with site visits to
suppliers provides the main source of information relating to supplier
compliance. Aerospace Club 2000 now has over a thousand participating members
which enables effective benchmarking of the supply chain to be achieved.
A set of policies, procedures and guidelines is being developed that will
comprise the Millennium Operating Regime. This will minimise the likelihood of
disruption during the transition period by providing a short term variation to
normal business operations. In addition, contingency plans in place will
reduce the impact of any major residual risks to the business.
All major contracts between the Group and third parties have been subject to a
Year 2000 risk assessment, with, in some cases, review by an external legal
expert to establish whether potential liabilities to Year 2000 failures could
exist. No significant risks have been found in this area.
No material projects are expected to be delayed due to focus on the Year 2000
programme. It is recognised, however, that the proposed merger with MES and
related integration activities places additional requirements on the Group
resources in the short term.
External Year 2000 costs, excluding enhancements, continue to be estimated at
£90 million.
7 Other information
-------------------
30 June restatement
Since the issuance of the 1998 Interim Report, the Group has adopted Financial
Reporting Standard 12 - Provisions, contingent liabilities and contingent
assets. The adoption of this Standard has led to a restatement of net assets
as at 30 June 1998. In previous years, expenditure on rationalisation schemes
initiated before 1991 was included within development properties to the extent
that it was recoverable from the estimated disposal proceeds. FRS 12 does not
permit such expected gains to be taken into account when assessing the level
of provision relating to such schemes. These rationalisation costs which
amounted to £267 million at 31 December 1997 are now no longer included.
Other liabilities and provisions have been reviewed and amended as
appropriate. The net effect of this restatement has been to reduce net assets
as at 30 June 1998 by £284 million. The adoption of FRS 12 has had no impact
on reported profits for the six months ended 30 June 1998.
Segmental analysis
The segmental analysis of results for the six months ended 30 June 1999 set
out on page 3 forms a part of these notes to the Interim Report.
Other
The comparative figures for the year ended 31 December 1998 and the other
financial information contained in these interim results do not constitute
statutory accounts of the Group 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. The auditors have reported on those accounts,
their report was not qualified and did not contain a statement under section
237(2) or (3) of the Companies Act 1985. The accounting policies adopted in
the preparation of the results to 30 June 1999 are consistent with those set
out in the 1998 Annual Report which incorporated all published accounting
standards up to FRS 14. The Company is considering the implications of FRS 15
which will become mandatory for accounts published for the year ending 31
December 2000.
This report is being sent to shareholders. Copies are also available to the
public at the Company's registered office.
Independent review report by KPMG Audit Plc
to British Aerospace plc
Introduction
We have been instructed by the Company to review the financial information set
out on pages 6 to 12 and we have read the other information contained in the
Interim Report and considered whether it contains any apparent misstatements
or material inconsistencies with the financial information.
Directors' responsibilities
The Interim Report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Listing
Rules of the London Stock Exchange require that the accounting policies and
presentation applied to the interim figures should be consistent with those
applied in preparing the preceding annual accounts except where they are to be
changed in the next annual accounts in which case any changes, and the reasons
for them, are to be disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin
1999/4; Review of interim financial information issued by the Auditing
Practices Board. A review consists principally of making enquiries of
management and applying analytical procedures to the financial information and
underlying financial data and, based thereon, assessing whether the accounting
policies and presentation have been consistently applied unless otherwise
disclosed. A review is substantially less in scope than an audit performed in
accordance with Auditing Standards and therefore provides a lower level of
assurance than an audit. Accordingly we do not express an audit opinion on
the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 1999.
KPMG Audit Plc
Chartered Accountants
London
15 September 1999
Shareholder information
The twentieth Annual General Meeting of British Aerospace Public Limited
Company will be held on 4 May 2000.
If you have any queries regarding your shareholding, please contact the
Registrars: Lloyds TSB Registrars, The Causeway, Worthing,
West Sussex, BN99 6DA, Telephone: 01903 502541.
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