Final Results

BAE Systems PLC 1 March 2001 Preliminary Announcement 2000 BAE SYSTEMS Overview of Results Profit* before interest £950m ------------------------------------------------------------------ Diluted earnings per share decreased 30% ------------------------------------------------------------------ Dividend per share increased 6% ------------------------------------------------------------------ Operating cash inflow £1.9bn ------------------------------------------------------------------ Net debt at 31 December £0.9bn ------------------------------------------------------------------ Order book increased 12% to £41.0bn ------------------------------------------------------------------ * excluding goodwill amortisation and exceptional items 2000 Preliminary results statement 2000 has been an exciting and exacting year in successfully bringing together two outstanding companies to form a global systems, defence and aerospace company. The integration of British Aerospace and Marconi Electronic Systems is now delivering the planned synergies. Profit before interest, excluding goodwill amortisation and exceptional items, was £950m (1999 proforma £1,115m) on sales of £12.2bn, and £859m after net interest charges. A significant issue affecting the 2000 result is the major reassessment of the Nimrod contract, which resulted in a charge for the year of £300m. This had the impact of reducing diluted earnings per share from 25.8 pence to 19.2 pence. Cash performance across the business was strong with net operating cash inflows of £1.9bn. After the US acquisitions of the Control Systems and AES electronics businesses from Lockheed Martin for $2.3bn (£1.6bn) the resultant net indebtedness of the group at the year end marginally increased to £0.9bn. Order book at the year end is again strong at £41.0bn, benefiting from a £ 1.2bn contract to design, develop, manufacture, test and deliver the first Type 45 destroyers for the Royal Navy together with the strong market performance from Airbus. Order intake from the UK MoD is falling short of expected levels, which, with lower than anticipated Hawk export orders, is resulting in a lower level of activity. As a consequence capacity, primarily in the Programmes business group, is being reduced with a restructuring programme resulting in exceptional charges to profits for 2000 and 2001. This restructuring programme, which was announced in January 2001, will strengthen the business as it bridges the period between production of Tornado and Eurofighter Typhoon military aircraft. We have continued to make good progress with the rest of the business. The agreement with our partner EADS to form an integrated joint company to manage the Airbus business became effective 1 January 2001. Airbus is entering a phase of strong profitable growth built on a forward order book of some 1,626 aircraft valued at $121bn. In addition further growth will be achieved with the launch of the A380 family of very large, long range aircraft typically seating 480/650 passengers. The new Airbus company, into which BAE SYSTEMS is transferring its wing manufacturing facility in return for a 20% interest, will generate substantial savings and enhance customer focus from a streamlined organisation and result in a very significant uplift in value for BAE SYSTEMS. The acquisitions of the US Control Systems and AES electronics businesses are a major step forward, further strengthening BAE SYSTEMS position as a significant competitor in the key US defence market. Looking to the future the results in 2001, excluding restructuring provisions, are expected to be broadly unchanged compared with the underlying performance in 2000 before the Nimrod charge. A resumption of growth in 2002 and beyond is confidently anticipated as the company benefits from its investments in the US and from Airbus growth, together with the progression of Eurofighter Typhoon and naval programmes into the production phase. In line with the Board's confidence in the resumption of growth an increase in the dividend per share for the year to 8.5p (1999: 8.0p) is being proposed. This dividend payment is covered 3.0 times against diluted earnings per share before taking into account the Nimrod charge. Commenting on these results, Sir Richard Evans, Chairman, said:- 'We have achieved our long-term objective of being positioned as a world-leading systems, defence and aerospace company. In the short-term we have had to face some challenges but have had some important successes as well. Following the acquisitions in the US, the company has emerged as a significant competitor in this important market and the restructuring of Airbus into an integrated joint company will prove to be particularly valuable to BAE SYSTEMS shareholders.' John Weston, Chief Executive, added:- 'The merger has been a real success. We are, today, operating as one fully integrated company and achieving everything we set out to do in this regard. Looking ahead, BAE SYSTEMS is now a well-balanced company underpinned by a strong order book, strong balance sheet and excellent cash generation.' Summarised profit and loss account for the year ended 31 December Restated (2) 2000 1999 £m £m Sales 12,185 8,929 ------------------------------------------------------- --------------- --------Operating profit (1) 807 769 Share of operating profit/(loss) of joint ventures (1) 143 (6) Net interest (1,2) (91) (9) ------------------------------------------------------ ---------------- -------- Profit before tax, goodwill amortisation and exceptional 859 754 items ------------------------------------------------------ ------------ --------- Profit before tax 179 459 Tax (186) (131) Minority interests (6) (4) ------------------------------------------------------- --------------- -------- (Loss)/profit for the year (13) 324 ------------------------------------------------------- --------------- -------- Basic earnings per share (1) 19.2p 29.4p Diluted earnings per share (1) 19.2p 27.6p Dividend per share 8.5p 8.0p Segmental analysis for the year ended 31 December Sales -------------- ---------- ------- Proforma Published (3) 2000 1999 1999 £m £m £m Programmes 2,415 2,608 2,599 Customer Solutions & Support 1,820 1,958 1,712 International Partnerships 1,858 1,779 983 Avionics 1,060 1,184 317 North America 1,663 1,436 202 Operations 1,308 1,183 731 Commercial Aerospace 2,868 2,970 2,970 Centre 42 35 16 --------------------------------------------------- -------------- ------------- 13,034 13,153 9,530 Less: intra-group (849) (764) (601) --------------------------------------------------- ------------- -------------- 12,185 12,389 8,929 ========= ========= ========= for the year ended 31 December Profit/ (loss) ------------ --------- --------- Proforma Published (3) 2000 1999 1999 £m £m £m Programmes 3 390 390 Customer Solutions & Support 434 444 409 International Partnerships 117 71 33 Avionics 107 95 1 North America 165 149 22 Operations (33) - (67) Commercial Aerospace 149 (10) (10) Centre 8 (24) (15) --------------------------------------------------- -------------- ------------- 950 1,115 763 Net interest excluding exceptional items (91) (9) --------------------------------------------------- -------------- ------------- 859 754 Goodwill amortisation, including joint (373) (63) ventures Exceptional items (note 2) (307) (232) --------------------------------------------------- -------------- ------------- 179 459 ================================= ========= ========= ========= (1) excluding goodwill amortisation and/or exceptional items as appropriate. (2) as restated - see note 8. (3) restated for new business groups. Review of operations Programmes - Performance in the Programmes business group in 2000 was significantly weighted to the second half, as planned, arising from timing of Eurofighter Typhoon milestones and deliveries of Hawk aircraft. As announced in January 2001 the Programmes business group is being restructured. This follows an unprecedented 63% shortfall in order intake for routine engineering work on in-service aircraft compared to the average of the previous three years. This, together with lower than anticipated Hawk export orders, has resulted in lower capacity requirements. The Eurofighter production programme is progressing well with first deliveries on track to meet the planned 2002 delivery schedule. Eurofighter will be a mainstay of activity for this business group well into the next decade. There is strong interest in the aircraft from a number of export customers, with the Greek government having selected Eurofighter to meet its requirements. The operating result was impacted by a £300m contract loss charge for the Nimrod programme. The programme has been analysed in depth, and the charge is expected to cover all the costs of completion of the current contract. Headway has been made in other aspects of this programme, including agreeing Heads of Agreement with the UK MoD for the future through-life support of the programme which has the potential to double the scale of this business and generate good returns. Good progress is being made with assembly now started for the first of three, next generation, Astute class attack submarines under a £1.9bn prime contract. In December 2000, a £1.2bn prime contract was secured for the design and construction of the first three, of a potential 12, Type 45 destroyers. The Hawk programme has seen a record year for deliveries in 2000 with aircraft deliveries to the Nato flying training programme in Canada and first deliveries to Australia. In addition, work commenced on a three-year programme to supply airframe kits to upgrade early Royal Air Force Hawks. Whilst work is progressing well in securing further Hawk order intake, throughput is set to reduce from current levels before deliveries to South Africa commence in 2005. The medium term outlook for Programmes remains good, with growth expected to return in 2003. Sales for Programmes in 2004 are anticipated to be some 40% higher than in 2001. Commercial Aerospace - Our Airbus operations performed strongly in 2000 with a combination of an improved result from the partnership and improved operating performance from the UK business primarily engaged in wing manufacture. Better UK performance resulted from productivity improvements and volume benefits along with the substantial reduction in launch aid repayments to the UK Government in respect of the Airbus single aisle programme. Among the most notable achievements during 2000 was the agreement in June to restructure Airbus Industrie from its partnership structure operated since its formation in 1970 to form a new joint integrated Airbus company. This new joint company, owned by BAE SYSTEMS (20%) and EADS (80%), effectively commenced trading on 1 January 2001. Restructuring of Airbus in this way will enable significant savings to be made. The streamlined organisation heralds a new phase in the evolution of Airbus, which is entering a stage of strong, profitable, growth. Airbus continued to strengthen its position in the market during 2000. Orders for 520 aircraft were received valued at $37bn. The forward order book at the end of December 2000 amounted to 1,626 aircraft valued at $121bn. In addition there were a further 50 orders for the new A380, which was formally launched in December 2000 following a period of technical assessment and customer consultation, from which strong market support was confirmed. The Avro regional jet activity sustained its recent record of achieving a breakeven performance on a low volume of RJ aircraft deliveries. Whilst market conditions remain difficult, the order book was maintained, closing the year at 11 aircraft. Orders are being pursued for the new RJX variant, which is currently being developed. The asset management activity continued to ensure a high utilisation of the company's aircraft portfolio and was also successful in the year in generating additional revenues by selling related services to the aircraft market. North America - Four acquisitions in 2000 have enhanced the company's position in the US market. Early in the year, the relatively small acquisitions of Femtometrics and Watkins Johnson expanded the company's involvement in chemical agent detection and communications equipment respectively. These additions were followed in the second half by the acquisition of two former Lockheed Martin businesses, Control Systems and AES, the latter primarily comprising the Sanders electronics systems business. Together, these acquisitions contributed £6m to operating profits, consistent with a contribution of £77m on a pro forma basis for the full year. Following these acquisitions, the North American business has a strong position in information systems, electronic warfare and airborne electronics including data links and test equipment. With the outlook for anticipated growth in US defence spend, we are well placed to build on the good profitability and strong cash flow in this market. Following the addition of the Lockheed Martin businesses in North America and having complementary capabilities in the UK-based Avionics business, BAE SYSTEMS is now a world leader in the supply of digital flight control systems and digital engine controls and also a leading supplier of electronic warfare solutions in the US and in Europe. BAE SYSTEMS North America also has a strong, well-established presence in the services and support market. It is the largest single technical support contractor for the US Navy, with a legacy relationship of more than 35 years, and in 2000 was awarded a $450m contract to provide systems engineering and technical assistance for the Federal Aviation Administration's air traffic control programme. Customer Solutions & Support - This business group is the largest military services and support provider in the UK and among one of the leading players world-wide. The Al Yamamah programme in Saudi Arabia integrates operational support with services capability to provide a total solutions package to the customer. This involves some 5,000 people and is expected to continue to contribute substantially to the performance of the company. Investment is planned to expand our Saudi relationships and other international prospects in support of future growth. In the UK, MoD is well advanced in utilising Private Public Partnerships (PPP) in defence support, and linked to this a successful early step was the company's financing of a synthetic training facility for flying instructors at RAF Valley. The RAF has now gone out to tender under a similar PPP service provision to replace its ageing tanker aircraft fleet. BAE SYSTEMS and Boeing are teaming to support this bid and look to extend the partnership beyond the UK to the world-wide tanker aircraft market. Additionally, the company is developing a partnering approach with the UK Defence Logistics Organisation (DLO) to deliver more cost effective and efficient ways of providing integrated platform support packages. Key programmes have been identified and jointly resourced through Integrated Project Teams. Avionics - In 2000 Avionics made excellent progress with the Eurofighter Typhoon radar moving from the development stage into production, and the first system being delivered on schedule in early 2001. The high value-added content of Avionics-supplied equipment on each Eurofighter Typhoon aircraft will benefit this business group as aircraft deliveries commence. Avionics is a major supplier of equipment to other prime contractors. In 2000 the business group delivered the 1,000th primary flight control system for the Boeing 777. Avionics has substantial equipment selected on several US military aircraft programmes, including both the Boeing and Lockheed Martin contenders in the competition to produce the next generation Joint Strike Fighter (JSF). Important contract awards were also achieved to update GR4 Tornado aircraft with state-of-the-art technology active matrix liquid crystal displays. The programme involved a close working relationship with the customer, the DLO, through an Integrated Project Team. This was identified as one of the best examples of process within the UK MoD's Smart Procurement initiative. The performance of this business group is expected to benefit further in 2001 from a recovery of BAE SYSTEMS Australia for which Avionics has responsibility. International Partnerships - Good progress has been made in improving profitability through our international partnerships. Headway has been made through our 35% interest in Saab AB following its acquisition of Celsius where the enlarged business is progressing well and generating the anticipated synergy savings. BAE SYSTEMS is also partnered with Saab to offer the Gripen combat aircraft in the export market. Following early success with the aircraft ordered by South Africa, strong interest has emerged in a number of other markets. One of the company's larger international partnerships is the Matra BAE Dynamics (MBD) guided weapons business. MBD has secured a strong forward order book and has a good growth outlook as future missile programmes move from the development phase to production. A key programme is Meteor, which won an important UK selection competition. Meteor is a beyond visual range air-to-air missile (BVRAAM) which will arm Eurofighter Typhoon and other combat aircraft in Europe, from later this decade. It will be the technology leader in a wider market for this class of weapon. In conjunction with EADS, the company's space systems activity was enhanced by the expansion of the former Matra Marconi Space to form Astrium, in which BAE SYSTEMS now has a 27.5% economic share. Astrium's £2.2bn order book at the end of 2000, provides a good platform for future growth. The Thomson Marconi Sonar (TMS) naval sonar systems business, in which BAE SYSTEMS has a 49.9% interest, is in discussions about a revised programme with the UK MoD for the challenging 2076 sonar. Operations - The Operations business is progressing in line with plan, and had strong cashflow in 2000. At the end of 1999 RO Defence (formerly Royal Ordnance) secured a long-term agreement with the UK MoD for the supply of ammunition and explosives. This agreement, valued at £1bn over a ten-year period, has enabled the business to plan against a stable workload and, following substantial restructuring, its performance is recovering. The aerostructures activity is also progressing well with the award of multi-year orders for wing sub-assemblies for Airbus and Boeing aircraft. Migration of workload from regional aircraft activities to the higher value-added increased volumes of this activity has resulted in an underlying improvement in the near term outlook. The shipyard operations have seen a good level of activity over the past year. In September 2000, the auxiliary oiler Wave Knight was launched and its sister vessel Wave Ruler followed in February 2001. These ships at 12,500 tonnes are the largest vessels produced for some years. During the year, the last of the Type 23 class frigates, HMS St Albans, was launched. In January 2001, the first of three offshore patrol vessels for Brunei was launched. The Operations business group loss included a £16m contract loss provision, taken in the first half results, on landing craft. In October 2000 Operations was selected for a contract for two ALSL (Alternative Landing Ship Logistics) vessels for the Royal Navy. Consolidated profit and loss account for the year ended 31 December Continuing operations Restated (1) ---------- ------------ Notes Ongoing Acquisitions Total Total 2000 2000 2000 1999 £m £m £m £m Sales 12,055 130 12,185 8,929 Less: adjustment for share of (2,539) - (2,539) (1,886) joint venture sales ------------- --------------- --------- Turnover 9,516 130 9,646 7,043 Operating costs Excluding goodwill amortisation (8,722) (117) (8,839) (6,274) and exceptional items Goodwill amortisation (323) (7) (330) (43) Exceptional items 2 (288) - (288) (210) ------------- --------------- --------- (9,333) (124) (9,457) (6,527) ----------------------------------- ------- ------------- --------------- ------ Operating profit 183 6 189 516 Share of operating profit/(loss) of joint ventures Before goodwill amortisation and 143 - 143 (6) exceptional items Goodwill amortisation (43) - (43) (20) Exceptional items 2 (19) - (19) - ------------- --------------- --------- 81 - 81 (26) ----------------------------------- ------- ------------- -------------- ------- Profit before interest Excluding goodwill amortisation 937 13 950 763 and exceptional items Goodwill amortisation and (673) (7) (680) (273) exceptional items ------------- --------------- --------- 264 6 270 490 ----------------------------------- ------- ------------- --------------- ------ Interest 8 Net interest arising on activities (105) (9) (114) (33) excluding exceptional items Share of net interest of joint 23 - 23 24 ventures Exceptional finance charges 2 - - - (22) ------------- --------------- --------- (82) (9) (91) (31) ----------------------------------- ------- ------------- --------------- ------ Profit/(loss) on ordinary activities before taxation Excluding goodwill amortisation 855 4 859 754 and exceptional items Goodwill amortisation and (673) (7) (680) (295) exceptional items ------------- --------------- --------- 182 (3) 179 459 Tax Tax on profit excluding (258) (177) exceptional items Tax on exceptional items 72 46 --------- ----- (186) (131) ----------------------------------- ------- ------------- --------------- ------ (Loss)/profit on ordinary (7) 328 activities after taxation Equity minority interests (6) (4) ----------------------------------- ------- ------------- --------------- ------ (Loss)/profit for the financial (13) 324 year Dividends Equity: ordinary shares (257) (202) Non-equity: preference shares (21) (21) --------- ----- (278) (223) ----------------------------------- ------- ------------- --------------- ------ Retained (loss)/profit (291) 101 ======================= ==== ======== ========= ===== ====== Basic earnings per share Including goodwill amortisation (1.1p) 16.2p and exceptional items ==== ======== ========= ===== ====== Excluding goodwill amortisation 19.2p 29.4p and exceptional items ======================= ==== ======== ========= ===== ====== Diluted earnings per share Including goodwill amortisation (1.1p) 15.6p and exceptional items ==== ======== ========= ===== ====== Excluding goodwill amortisation 19.2p 27.6p and exceptional items ======================= ==== ======== ========= ===== ====== (1) see note 8. Consolidated balance sheet as at 31 December 2000 1999 Note £m £m Fixed assets Intangible assets 1 7,356 6,365 Tangible assets 2,356 2,167 Investments Share of gross assets of joint ventures 5,676 5,208 Share of gross liabilities of joint ventures (4,988) (4,573) ------------- --------- Share of joint ventures 688 635 Others 40 25 ------------- --------- 728 660 ----------------------------------------------------------- --------- ---------- 10,440 9,192 ----------------------------------------------------------- --------- ---------- Current assets Stocks 1,536 1,559 Debtors due within one year 2,210 3,647 Debtors due after one year 573 512 Investments 1,159 1,713 Cash at bank and in hand 1,475 811 ----------------------------------------------------------- --------- ---------- 6,953 8,242 Liabilities falling due within one year Loans and overdrafts (2,397) (2,025) Creditors (4,743) (4,871) ----------------------------------------------------------- --------- ---------- (7,140) (6,896) Net current (liabilities)/assets (187) 1,346 ----------------------------------------------------------- --------- ---------- Total assets less current liabilities 10,253 10,538 ----------------------------------------------------------- --------- ---------- Liabilities falling due after one year Loans (1,063) (1,155) Creditors (619) (542) ------------- --------- (1,682) (1,697) Provisions for liabilities and charges - (1,319) (1,396) ----------------------------------------------------------- -------- ----------- 7,252 7,445 ----------------------------------------------------------- --------- ---------- Capital and reserves Called up share capital 143 140 Shares to be issued - 255 Share premium account 341 212 Statutory reserve 202 202 Other reserves 5,440 5,212 Profit and loss account 1,026 1,339 ----------------------------------------------------------- --------- ---------- Shareholders' funds Equity: ordinary shares 6,886 7,091 Non-equity: preference shares 266 269 7,152 7,360 Equity minority interests 100 85 ----------------------------------------------------------- --------- ---------- 7,252 7,445 ----------------------------------------------------------- --------- ---------- Consolidated cash flow for the year ended 31 December 2000 1999 Notes £m £m Net cash inflow from operating activities Operating profit 189 516 Tangible fixed assets depreciation and impairment 309 211 Goodwill amortisation 330 43 Profit on disposal of fixed assets (29) (4) Movement in provisions for liabilities and charges (215) (116) excluding deferred tax Decrease/(increase) in working capital: Stocks 47 100 Debtors 1,620 122 Creditors (580) (409) Customer stage payments 223 (44) ------------------------------------------------------------ -------- ---------- 1,894 419 ======================================== ===== ======== ======= Cash flow statement Net cash inflow from operating activities 1,894 419 Dividends from joint ventures 18 30 Returns on investments and servicing of finance (97) (62) Taxation (59) (81) Capital expenditure and financial investment (283) (132) Acquisitions and disposals Acquisitions - Lockheed Martin businesses (1,560) - Acquisitions - MES - (1,357) Acquisitions - other (45) (18) Disposal of subsidiary undertakings and joint 115 42 ventures Equity dividends paid (202) (100) ------------------------------------------------------------ -------- ---------- Net cash outflow before financing and management of (219) (1,259) liquid resources Management of liquid resources 497 234 Financing (123) 1,686 ------------------------------------------------------------ -------- ---------- Net increase in cash available on demand 155 661 ------------------------------------------------------------ -------- ---------- Reconciliation of net cash flow to net movement in net funds Net increase in cash available on demand 155 661 Net decrease in liquid resources (497) (234) Decrease/(increase) in other loans included within 194 (957) net funds ------------------------------------------------------------ -------- ---------- Change in net funds from cash flows (148) (530) Investments, loans and finance leases assumed on - (435) acquisition of MES Other non cash movements 48 27 ------------------------------------------------------------ -------- ---------- Net decrease in net funds (100) (938) Net (debt)/funds at 1 January (726) 212 ------------------------------------------------------------ -------- ---------- Net funds at 31 December (826) (726) ======================================== ==== ======== ====== Reconciliation to movement in net debt as defined by the group Net decrease in net funds (100) (938) Decrease/(increase) in cash on customers' account 26 (83) ------------------------------------------------------------ -------- ---------- Net movement for the year 6 (74) (1,021) ======================================== ===== ======== ======= Statement of total recognised gains and losses 2000 1999 £m £m (Loss)/profit for the financial year Group, excluding joint ventures (91) 339 Joint ventures 78 (15) ------------------------------------------------------------ -------- ---------- Total (loss)/profit for the financial year (13) 324 Currency translation on foreign currency net (20) (9) investments, including joint ventures Revaluation of current asset investment - 563 Impairment of land and buildings (14) (10) Other recognised gains and losses relating to the year (34) 544 (net) ------------------------------------------------------------ -------- ---------- Total recognised gains and losses relating to the year (47) 868 ======================================== ==== ======== ======= Reconciliation of movements in shareholders' funds 2000 1999 £m £m (Loss)/profit for the financial year (13) 324 Dividends (278) (223) ------------------------------------------------------------ -------- ---------- (291) 101 Other recognised gains and losses relating to the year (34) 544 (net) New share capital subscribed - 29 Merger reserve arising on the issuance of shares - 4,336 relating to the MES acquisition Shares to be issued in relation to the MES acquisition - 255 Issuance of shares to the QUEST 17 7 Exercise of share options, warrants and dividend scrip 100 68 issue ------------------------------------------------------------ -------- ---------- Net (decrease)/increase in shareholders' funds (208) 5,340 Opening shareholders' funds 7,360 2,020 ------------------------------------------------------------ -------- ---------- Closing shareholders' funds 7,152 7,360 ======================================== ==== ======= ====== Notes to the preliminary results 1 Acquisitions and disposals The group acquired two former Lockheed Martin businesses during 2000, the Control Systems business in September for a cash purchase consideration of $510m (£346m) and the AES business in November for a cash purchase consideration of $1.67bn (£1.18bn). In addition to the purchase price other costs associated with these two acquisitions totalled $105m (£73m). After provisional fair value adjustments (£98m) together with accounting policy realignments (£101m), goodwill arising on consolidation of these two acquisitions amounted to £1,327m, and is being amortised over its expected useful life of 20 years. In addition to these two acquisitions, other minor acquisitions in the period were made, with total cash consideration of £45m, and goodwill arising on consolidation of £65m. Fair value adjustments in respect of the 1999 MES acquisition totalling £24m (net of tax) have been made, in consequence increasing goodwill arising on that transaction by the same amount. During the year the group disposed of Actuation Systems Inc. and its Avionics Power and Controls business for a total consideration of £115m. 2 Exceptional items Year to 31 Year to 31 December December 2000 1999 £m £m Exceptional loss included within profit before interest 2000 rationalisation programme (109) - 1999 defence sector rationalisation (47) (198) BAe/MES integration costs (151) (12) ------------- ------------- (307) (210) ======== ======== Exceptional finance charges Finance charges relating to the MES acquisition - (22) ======== ======== Net exceptional loss included within profit before (307) (232) tax ======== ======== 2000 rationalisation programme As a result of capacity excesses across a number of business groups a rationalisation programme has been initiated. The total cost of this rationalisation is estimated at £225m before a tax credit of £52m, of which £109m (including joint venture charges of £19m) before a tax credit of £23m (joint ventures £nil) has been charged at 31 December 2000. The balance is expected to be charged in 2001. The associated net cash outflow in 2000 amounted to £33m. 1999 defence sector rationalisation On 24 June 1999 the group announced a rationalisation of defence sector activities including redundancy programmes across a number of business units. The total cost of this rationalisation was estimated at £250m before a tax credit of £60m, of which £198m before a tax credit of £43m was charged at 31 December 1999. The profit and loss impact of this rationalisation has been finalised in 2000 with £47m charged before a tax credit of £12m. There was an associated net cash outflow of £84m, related to this rationalisation programme. BAe/MES integration costs Following the merger of BAe and MES on 29 November 1999 the group has embarked on a process of integrating this business within the enlarged organisation. Costs in 2000 associated with this process amounted to £151m before a tax credit of £37m. A net cash outflow of £125m arose in 2000 in respect of these costs. Further integration costs are expected to be incurred in the next two financial years. 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 insurance arrangements, future lease rentals and the residual value of the related aircraft. The net exposure of the group to aircraft financing as at 31 December was: 2000 1999 £m £m Direct operating lease commitments 600 722 Direct finance lease commitments 4 5 Indirect exposure through aircraft contingent 1,414 1,589 liabilities Exposure to residual value guarantees 693 542 Income guaranteed through insurance arrangements (1,727) (1,885) --------------- ---------- Net exposure 984 973 Expected income not covered by insurance arrangements (43) (43) Expected income on aircraft delivered post insurance (388) (330) arrangements Adjustment to net present value (154) (158) --------------- ---------- Recourse provision 399 442 ========== ========== Saab AB The group is involved in similar arrangements 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 arrangements, 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. Further, in November 2000, Saab entered into a Financial Risk Insurance Programme similar in nature to that implemented by BAE SYSTEMS. This programme covers the majority of the Saab aircraft portfolio and in consequence significantly reduces the risk of potential future liabilities in that company. Airbus At 31 December 2000 the group was involved in similar arrangements 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 arrangements, 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. As at 31 December 2000 the group's obligation under the financing arrangements of AI were joint and several with its partner EADS. 4 Dividends The directors propose a final dividend of 5.2p per ordinary share which, with the interim dividend, makes a total dividend of 8.5p per ordinary share for the year (1999 8.0p). The dividend will be paid on 1 June 2001 to shareholders registered on 20 April 2001. The ex-dividend date will be 18 April 2001. 5 Authority to purchase the company's shares A resolution will be put to shareholders at this year's Annual General Meeting to renew the 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 Net debt The company's net debt position comprises: 2000 1999 £m £m Current assets Current asset investments 1,159 1,643 Cash at bank and in hand 1,475 811 Current liabilities Loans and overdrafts (2,397) (2,025) Liabilities falling due after one year Loans (1,063) (1,155) ------------- ------------- Net funds (826) (726) Cash on customers' account (73) (99) ------------- ------------- Net debt (899) (825) ======== ======== 7 New Financial Reporting Standards Financial Reporting Standard 15 - Tangible Fixed Assets and Financial Reporting Standard 18 - Accounting Policies have been adopted for the first time in the 2000 accounts. As permitted by FRS 15 the company's policy in respect of the revaluation of tangible fixed assets is to continue to carry those assets which have been subject to prior period revaluations at their depreciated revalued amounts, but not to undertake any revaluation of tangible fixed assets in this or future reporting periods. Financial Reporting Standard 17 - Retirement Benefits and Financial Reporting Standard 19 - Deferred Tax were both issued by the Accounting Standards Board close to the end of 2000, and will be addressed in the preparation of the 2001 accounts. 8 Restatement of results The directors have reconsidered the accounting treatment in respect of the interest adjustment on certain net present value recourse provisions. In prior years the element of the adjustment relating to exceptional provisions had been treated as an exceptional charge within interest. This charge is now included within the normal interest payable for the group. 1999 figures have been restated in consequence. There is no net impact on profit reported for the year or on net assets. The adjustment for 2000 amounting to £32m, is included within the net interest charge of £114m. The 1999 adjustment amounted to £36m and is now included within the net interest charge of £33m for that year. The associated tax credit of £10m (1999 £11m) and the earnings per share figure excluding goodwill amortisation and exceptional items have been restated for this change of presentation. The effect of the change is to reduce profit before tax excluding goodwill amortisation and exceptional items by £32m (1999 £36m). 9 Post balance sheet events Airbus An integrated joint Airbus company was formed with effect from 1 January 2001 comprising the previously held 100% operations of the Airbus Industrie GIE partners, BAE SYSTEMS and EADS, together with Airbus Industrie GIE itself. BAE SYSTEMS will hold a 20% interest in the new company with EADS holding the balance. Business divestments In February 2001 agreement was reached for the sale of the company's 54% owned subsidiary BAE SYSTEMS Canada Inc. to ONCAP, an investment fund located in Toronto, Canada. The transaction, which is subject to both Canadian and US regulatory approvals, is expected to complete in the first half of 2001. In February 2001 the company reached agreement to sell its Flight Simulation and Training business based in Tampa, Florida, to CAE, Toronto, Canada. Completion of this transaction is expected in the first half of 2001, subject to regulatory approval in the US. 10 Other information The financial information for the years ended 31 December 2000 and 31 December 1999 contained in these preliminary results, which were approved by the Board on 28 February 2001, 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 1999 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2000 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.

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