Final Results
BAE SYSTEMS PLC
20 February 2003
Preliminary Announcement 2002
BAE SYSTEMS
Highlights
Trading during 2002 has been adversely impacted by lower contributions from our
Programmes and International Partnerships businesses.
North America and the Customer Solutions & Support businesses again contributed
strong performances during the year and Avionics delivered the expected improved
results in the second half.
The results from Airbus were good despite the difficult commercial airline
market.
The 2002 results in International Partnerships reflected a difficult trading
environment for the Astrium space systems joint venture.
Two large UK Ministry of Defence contracts in Programmes, Nimrod and Astute,
have severely impacted the overall results for the year. However, with the
exception of the continued difficult trading in Astrium, the balance of the
company's operations delivered an anticipated stronger performance during the
second half of the year.
Results in brief
Order book(2) £42.5 billion
Sales £12,145 million
Profit before interest(1) £1,002 million
Earnings per share(1) 17.3p
Dividend per share 9.2p
Operating cash inflow £136 million
Net debt £1,298 million
Outlook
The underlying trading performance for the company's defence businesses in 2003
is expected to remain broadly in line with that for 2002 before taking account
of the exceptional charges for the Nimrod and Astute contracts.
Programmes performance is expected to be restrained by low export activity and
with production programmes still in early phases of maturity. Restructuring of
the Nimrod and Astute contracts is expected to benefit future performance over
the long term and good sustained growth is anticipated in UK defence support
activity and across the company's operations in North America.
Airbus plans a similar volume of activity for 2003, however the commercial
airline market remains difficult to predict.
(1) before goodwill amortisation and impairment and exceptional items
(statutory presentation is shown in the consolidated profit and loss account and
see note 5)
(2) including joint ventures and after the elimination of intra-group orders
Commenting on these results:
Sir Richard Evans, chairman, said
'The management team has moved swiftly to address serious issues in our UK
Programmes. The outlook for our business in the UK is now much improved and
complements our strong and growing position in the US market.'
Mike Turner, chief executive, added
'The actions taken to address the challenges in the UK Programmes business and
strength elsewhere in the company provide a strong foundation for future
growth.'
2002 Preliminary results statement
In recent years BAE SYSTEMS has made good progress in building its position as a
prime contractor and growing its capabilities towards the higher value systems
sector of the defence market on both sides of the Atlantic. We see the company's
systems skills as a clear differentiator as customers place greater emphasis on
network enabled capabilities.
Profit before interest(1) reduced to £1,002m from £1,260m in 2001, on reduced
sales of £12,145m, down 7.6% on 2001.
The reassessment of the Astute and Nimrod programmes has resulted in an
exceptional charge of £750m for the year.
Earnings per share(1) for 2002 are down 26% to 17.3p compared to 2001. The Board
is recommending a final dividend of 5.5p per share, bringing the total dividend
for the year to 9.2p. At this level, the annual dividend is covered 1.9 times by
earnings(1) and interest cover(1) remains strong at 4.9 times (2001 7.1 times).
Net debt at the year end was £1,298m, reflecting operating cash flow generation
in the second half of the year. Year end net debt represents 22.9% (2001 12.5%)
of shareholders' funds.
We have reached agreement to restructure the Nimrod and Astute fixed-price
design and development and production contracts with new terms.
The UK Ministry of Defence (MoD) and BAE SYSTEMS have recognised that these
programmes have been impacted by factors that neither party could have envisaged
at the time that the contracts were entered into. In retrospect, it is now clear
that the original contracting and pricing arrangements built excessive risks
into both programmes.
The contracts will now be restructured to replace the current overall firm price
arrangements with a new 'target price incentive fee' contract for design and
development. The design and development phase will include build of the first of
class Astute boat and, in the case of Nimrod, the first three aircraft for
development and test. The production phases will be priced at a later date.
In line with the agreements, a provision is required of £500m for Nimrod and
£250m for the Astute programme to recognise fully the residual design and
development risk on these contracts.
We have reviewed the underlying causes of the issues in our UK Programmes
business. As a result, a series of actions are underway to improve application
and adherence to existing processes and the management of key programme risks.
The Board, with external assistance, will monitor the implementation and
delivery of these actions.
Although UK programme prime contracting issues dominated much of 2002, the
company has achieved a number of successes. Our Customer Solutions & Support
business has performed well and remains a key element of our growth strategy. In
particular, we have been successful in winning industrial support business for
the MoD Defence Logistics Organisation (DLO) and the UK armed forces. This is
expected to remain an important growth activity for the company. In addition,
Airbus is performing well in a difficult market.
2002 has also been a formative year for the Eurofighter Typhoon programme as it
moved into production. Typhoon is a valuable programme for the company through
both the aircraft systems integration and airframe manufacture activity in Air
Systems and the very substantial electronic systems contributions of our
Avionics business. Typhoon, together with participation in other aircraft
programmes, is expected to generate future growth in our Avionics business.
We were pleased to be selected in January 2003 as prime contractor for the next
generation UK aircraft carrier programme. This valuable and prestigious
programme will be an important building block in the relationship and terms of
trade between the company and the UK government as both customer and partner.
BAE SYSTEMS has also continued to build its position in the US, the world's
largest, and growing defence market. We have established a strong trading
position with the Department of Defense (DoD) and other agencies, and we want to
continue to build on this mutually advantageous and profitable relationship. We
are proud to be recognised as a high quality performer in the US defence
industry.
Our ambitions in the US are for further growth. We plan to grow organically and
to continue to look for appropriate acquisitions where they meet our criteria
for increased shareholder value as well as being a good strategic fit.
After 33 years with the company, Sir Charles Masefield will be retiring from the
Board on 28 February 2003 but will remain an employee of the company, on a part
time basis, continuing in his current overseas representational and
ambassadorial role. Sir Robin Biggam and Keith Brown will be retiring at the
conclusion of this year's Annual General Meeting. Sir Peter Mason will replace
Sir Robin as the Board's nominated senior independent director. In addition,
the Board will be forming separate nomination and remuneration committees, to be
chaired by Sir Peter Mason and Professor Sue Birley respectively. The Board is
looking to appoint an additional non-executive director to chair the Board's
Audit Committee in succession to Keith Brown. The company's chairman, Sir
Richard Evans, will be retiring at next year's Annual General Meeting. Sir
Peter Mason will lead the search for his successor.
We are committed to achieving an acceptable return for shareholders and
continuous improvement in the capability and quality of our systems and support
for our customers world-wide. We believe that the actions taken to address the
challenges in the UK Programmes business and the strength elsewhere in the group
provide a strong foundation for future value growth.
Looking forward to 2003 and beyond we expect that we will benefit from sustained
growth in our UK defence support activity and US businesses along with
partnering and programme opportunities in Europe. All this will consolidate our
position as one of the world's leading defence systems companies.
(1) before goodwill amortisation and impairment and exceptional items
(statutory presentation is shown in the consolidated profit and loss account and
see note 5)
Summarised profit and loss account
for the year ended 31 December
2002 2001
£m £m
Sales 12,145 13,138
Operating profit(1) 810 956
Share of operating profit of joint ventures(1) 192 304
Profit before interest(1) 1,002 1,260
Net interest (206) (177)
Profit before tax, goodwill amortisation
and impairment and exceptional items 796 1,083
Goodwill amortisation and impairment,
including joint ventures (615) (495)
Exceptional items (note 4) (797) (518)
(Loss)/profit before tax (616) 70
Tax (70) (198)
Minority interests - (6)
Loss for the year (686) (134)
Basic and diluted earnings per share
Including goodwill and exceptional items (23.2)p (5.1)p
Excluding goodwill and exceptional items 17.3p 23.4p
Dividend per share 9.2p 9.0p
Segmental analysis
for the year ended 31 December
Sales Profit/(loss)
2002 2001(2) 2002 2001(2)
£m £m £m £m
Programmes 2,171 2,847 69 161
Customer Solutions & Support 2,258 2,042 454 414
International Partnerships 1,648 1,816 (11) 102
Avionics 1,085 1,027 66 109
North America 2,627 2,577 247 250
Commercial Aerospace 2,773 3,114 195 213
HQ and other businesses 345 387 (18) 11
12,907 13,810 1,002 1,260
Less: intra-group (762) (672)
Net interest (206) (177)
796 1,083
Goodwill amortisation and impairment,
including joint ventures (615) (495)
Exceptional items (note 4) (797) (518)
12,145 13,138 (616) 70
(1) before goodwill amortisation and impairment and exceptional items
(statutory presentation is shown in the consolidated profit and loss account)
(2) as restated - see note 12
Business group reviews
Programmes
2002 2001(3)
Order book(2) £11.0bn £11.0bn
Sales £2.2bn £2.8bn
Profit(1) £69m £161m
Number of employees(4) 20,500 20,000
Disappointing cost and programme performance on the Auxiliary Oiler (AO),
Landing Platform Dock (LPD) and Astute programmes have severely impacted the
group results in 2002. The Astute programme has been delayed mainly as a result
of unforeseen difficulties in design and development, including implementing new
computer aided design tools on submarines for the first time in the UK.
Following an agreement to revise the Astute contract, an exceptional charge of
£250m, before a tax credit of £28m, has been recognised in 2002 to provide fully
for the residual design and development risk.
The two AOs, Wave Knight and Wave Ruler, were delivered in October 2002. Despite
the earlier programme issues the customer, The Royal Fleet Auxiliary, has
praised the quality of the ships.
The first of the two LPDs, HMS Albion, undertook sea trials in December 2002.
These ships will spearhead UK operations abroad, supporting the deployment of
armed forces ashore.
Three Offshore Patrol Vessels in build for Brunei are progressing well. The
first has recently undergone successful sea trials for the major elements of the
weapon systems and is on track to be delivered to the customer later this year.
The Type 45 Destroyer programme constitutes a large part of the order book for
Sea Systems and represents one of the first of the new generation of MoD
contracts with a much improved balance of risk and reward. Contracts for two
batches of three ships each have now been awarded.
Progress on the Type 45 Destroyer programme remains generally on track, with a
major design review having been completed in October 2002. Detailed design
activity is well advanced with the first release of the design to production
planned during 2003.
The first flight of the Nimrod MRA4 aircraft has been delayed as a result of
design issues identified late in the year. A substantial increase in the overall
cost of completion of the development, testing and initial manufacturing work
has subsequently been evaluated. Following an agreement with the MoD to revise
the Nimrod contract, a provision of £500m, before a tax credit of £150m, has
been charged in 2002 to recognise fully the consequences of the delay and the
residual design and development risk.
Progress has been made on the design and development of the Typhoon aircraft,
including the first flight of a production aircraft and successful missile
firing. We are discussing with the customer the specification and timing of the
second tranche of this aircraft which will incorporate additional ground attack
capabilities. We expect to conclude contract and specification negotiations with
the customer in 2003.
The F-35 Joint Strike Fighter (JSF) programme has had a successful first year
with rapid build up of engineering activity in support of the systems design and
development phase of the programme. BAE SYSTEMS' participation in the JSF
programme involves the design and manufacture of the rear fuselage, stabilisers
and substantial avionics sub-systems and equipment. The JSF contract has made a
profitable contribution in the year.
As anticipated there has been a particularly low level of Hawk jet trainer
aircraft production activity during the year. A further reduction of 450 in the
workforce was announced in December 2002 to match capacity with current
throughput.
Customer Solutions & Support
2002 2001
Order book(2) £2.6bn £2.6bn
Sales £2.3bn £2.0bn
Profit(1) £454m £414m
Number of employees(4) 10,900 10,000
Our Customer Solutions & Support business group continues to perform strongly.
Activity on the Al Yamamah programme in Saudi Arabia is strong. Work in support
of UK platforms remains high. Progress has been made in 2002 working closely
with the DLO to establish long-term support contracts on Tornado, Harrier and
Nimrod MR2. In addition, the Harrier capability upgrade to the GR9 standard is
now well defined with the initial contracts in place.
An 11-year partnering agreement, potentially worth £800m, centred at the
Portsmouth Naval Base has been won by the Fleet Support joint venture in which
BAE SYSTEMS has a 50% interest.
International Partnerships
2002 2001
Order book(2) £6.3bn £5.6bn
Sales £1.6bn £1.8bn
(Loss)/profit(1) £(11)m £102m
Number of employees(4) 16,300 16,500
The International Partnerships business group recorded a loss for the year
caused largely by the substantial underperformance of the Astrium business. In
July 2002, BAE SYSTEMS announced its intention to exit the Astrium space systems
joint venture through the sale of its 27.5% economic interest to its partner,
EADS. In January 2003, revised terms were agreed reflecting the significant
deterioration in the Astrium performance through the course of 2002. The revised
agreement involves the transfer to EADS of our participation in the UK
Government's Skynet 5 programme and the Paradigm joint venture formed to provide
Skynet 5 service.
The MBDA guided weapons joint venture, in which BAE SYSTEMS has a 37.5%
interest, has made good progress and ended the year marginally ahead of plan.
During the year it secured a Euro1.8bn contract for Meteor, selected to equip
Typhoon, and completed development of the Storm Shadow missile.
2002 has proved to be a successful year for AMS with significant orders on
radar, air traffic control and electronic warfare training facilities.
Saab AB, in which BAE SYSTEMS holds a 35% interest, made good progress.
Gripen International, formed in 2001 to exploit export markets for the Gripen
fighter, has taken part in a number of campaigns during the year.
STN Atlas has improved its performance during 2002 in line with expectations.
Avionics
2002 2001
Order book(2) £2.5bn £2.9bn
Sales £1.1bn £1.0bn
Profit(1) £66m £109m
Number of employees(4) 10,000 10,400
As previously indicated, the performance of our Avionics business during the
second half of 2002 improved significantly over the first half. Overall,
underlying sales growth of 10% was achieved in the year.
The business has passed a number of significant milestones this year. Deliveries
of equipment for Typhoon increased, including Captor radar systems and the
aircraft's Defensive Aids Sub-System. In addition, flight control computers,
Head-Up Displays and numerous other avionics systems were delivered into the
programme.
Several programmes have successfully progressed from development into the early
phase of production and towards acceptance into service by the MoD. These
include HALO, an acoustic locator for artillery, and DLH, a missile detector and
jammer for naval applications.
North America
2002 2001
Order book(2) £2.3bn £2.4bn
Sales £2.6bn £2.6bn
Profit(1) £247m £250m
Number of employees 21,600 20,900
North America delivered a strong performance in 2002. The businesses generated
underlying sales growth, at constant exchange rates, of 9% during the year. It
had several significant programme wins and successes, including the Joint
Tactical Radio System (JTRS), a US military programme to replace a wide range of
tactical radios. A series of study and development contracts from Boeing for the
US Army's Future Combat System was also won. Low rate initial production
contracts were achieved to supply the US Navy with Integrated Defensive
Electronic Countermeasures and Radio Frequency Countermeasures systems. A
contract was also won from Boeing to develop the Integrated Vehicle Management
System Computer for the X-45B Unmanned Combat Air Vehicle. A range of
engineering and technical service and support contracts, primarily for the US
Navy, was also secured.
Two small, but strategically significant, companies were acquired in the US.
Corbett Technologies, acquired in November, is a leading information technology
and information security business that complements our C4ISR strategy. Condor
Pacific Industries, a leading producer of aerospace sensors and guidance
systems, acquired in December, complements our market leadership position in
aircraft control electronics.
Commercial Aerospace
2002 2001(3)
Order book(2) £18.7bn £20.5bn
Sales £2.8bn £3.1bn
Profit(1) £195m £213m
Number of employees(4) 12,500 14,400
Commercial Aerospace mainly comprises the group's 20% interest in Airbus
together with the Aerostructures business. Against a background of difficult
trading conditions for the airline industry, 2002 was a successful year for
Airbus.
Airbus delivered 303 aircraft in line with plans for the year and secured net
orders for 233 aircraft. Restructured in 2001, with a focused management team
and an advanced, cost-effective product family, Airbus is poised to benefit from
any future market recovery.
Our Aerostructures business has established itself as a cost-competitive
supplier in the civil aircraft subcontracting market.
HQ & other businesses
2002 2001(3)
Order book(2) £1.1bn £1.0bn
Sales £0.3bn £0.4bn
(Loss)/profit(1) £(18)m £11m
Number of employees(4) 4,500 4,900
BAE SYSTEMS realigned its organisational structure, during 2002, with Royal
Ordnance Defence (RO) now reported within HQ and other businesses. RO has
performed well in the year. Significant orders during 2002 included a contract
for the low rate initial production of the M777 lightweight 155mm howitzer for
the US Marine Corps and the Terrier, the UK's next generation air-transportable
armoured combat engineer vehicle.
At the beginning of 2003 the UK Government announced the selection of BAE
SYSTEMS as prime contractor for the design and development and production of two
new aircraft carriers for the Royal Navy. Negotiations are now expected to lead
to contract award in early 2004 with manufacture expected to start in 2007.
(1) before goodwill amortisation and impairment and exceptional items
(statutory presentation is shown in the consolidated profit and loss account and
see note 5)
(2) including joint ventures and before the elimination of intra-group orders
(3) as restated - see note 12
(4) including share of joint venture employees
Consolidated profit and loss account
for the year ended 31 December
Total Total
2002 2002 2001 2001
Notes £m £m £m £m
Sales 12,145 13,138
Less: adjustment for share of joint venture sales (4,069) (4,097)
Turnover 8,076 9,041
Operating costs
Excluding goodwill amortisation and impairment
and exceptional items (7,266) (8,085)
Goodwill amortisation and impairment (403) (397)
Exceptional items 4 (797) (136)
(8,466) (8,618)
Operating (loss)/profit (390) 423
Share of operating (loss)/profit of joint ventures
Excluding goodwill amortisation and impairment
and exceptional items 192 304
Goodwill amortisation and impairment (212) (98)
Exceptional items 4 - (12)
(20) 194
(410) 617
Non-operating exceptional items
Cessation/reorganisation of commercial aerospace activities 4 (30) (370)
Profit on sale of operations 4 2 -
Profit on fixed asset disposals 4 28 -
(Loss)/profit before interest (410) 247
Excluding goodwill amortisation and impairment
and exceptional items 1,002 1,260
Goodwill amortisation and impairment (615) (495)
Exceptional items (797) (518)
Interest
Net interest (194) (174)
Share of net interest of joint ventures (12) (3)
(206) (177)
(Loss)/profit on ordinary activities before taxation (616) 70
Tax
Tax on profit excluding exceptional items (247) (346)
Tax on exceptional items 177 148
(70) (198)
Loss on ordinary activities after taxation (686) (128)
Equity minority interests - (6)
Loss for the financial year (686) (134)
Dividends 6
Equity: ordinary shares (281) (275)
Non-equity: preference shares (21) (21)
(302) (296)
Retained loss (988) (430)
Basic and diluted earnings per share
Including goodwill amortisation and impairment and exceptional items 5 (23.2)p (5.1)p
Excluding goodwill amortisation and impairment and exceptional items 5 17.3p 23.4p
The results for 2002 and 2001 arise from continuing activities.
Consolidated balance sheet
as at 31 December
2002 2001
£m £m
Fixed assets
Intangible assets 6,417 6,909
Tangible assets 1,709 1,776
Investments
Share of gross assets of joint ventures, including goodwill 7,147 7,248
Share of gross liabilities of joint ventures (5,654) (5,826)
Share of joint ventures 1,493 1,422
Others 33 35
1,526 1,457
9,652 10,142
Current assets
Stocks 768 1,046
Debtors due within one year 2,673 2,633
Debtors due after one year 805 811
Investments 776 1,069
Cash at bank and in hand 930 1,505
5,952 7,064
Liabilities falling due within one year
Loans and overdrafts (1,070) (1,256)
Creditors (5,489) (5,281)
(6,559) (6,537)
Net current (liabilities)/assets (607) 527
Total assets less current liabilities 9,045 10,669
Liabilities falling due after one year
Loans (1,913) (2,119)
Creditors (449) (611)
(2,362) (2,730)
Provisions for liabilities and charges (987) (1,281)
5,696 6,658
Capital and reserves
Called up share capital 143 143
Share premium account 412 374
Statutory reserve 202 202
Other reserves 5,260 5,438
Profit and loss account (341) 481
Shareholders' funds
Equity: ordinary shares 5,410 6,372
Non-equity: preference shares 266 266
5,676 6,638
Equity minority interests 20 20
5,696 6,658
Consolidated cash flow
for the year ended 31 December
2002 2001
Notes £m £m
Net cash inflow from operating activities 10 136 771
Dividends from joint ventures 78 19
Returns on investments and servicing of finance (171) (210)
Taxation (89) (94)
Capital expenditure and financial investment (183) (359)
Acquisitions and disposals 41 135
Equity dividends paid (281) (266)
Net cash outflow before financing and management of liquid resources (469) (4)
Management of liquid resources (20) 162
Financing (236) 495
Net (decrease)/increase in cash available on demand (725) 653
Reconciliation of net cash flow to net debt
for the year ended 31 December
2002 2001
Notes £m £m
Net (decrease)/increase in cash available on demand (725) 653
Net increase/(decrease) in liquid resources 20 (162)
(Increase)/decrease in other loans included within net funds 268 (465)
Change in net funds from cash flows (437) 26
Adjustment to Exchange Property 7 (136) -
Exchange movements 97 (1)
Net (decrease)/increase in net funds (476) 25
Net funds at 1 January (801) (826)
Net funds at 31 December (1,277) (801)
Cash on customers' account (21) (30)
Net debt as defined by the group (1,298) (831)
Statement of total recognised gains and losses
for the year ended 31 December
2002 2001
Notes £m £m
(Loss)/profit for the financial year
Group, excluding joint ventures (565) (200)
Joint ventures (121) 66
Total loss for the financial year (686) (134)
Currency translation on foreign currency net investments - subsidiaries (92) 61
- joint ventures 192 (10)
Adjustment to Exchange Property 7 (136) -
Other recognised gains and losses relating to the year (net) (36) 51
Total recognised gains and losses relating to the year (722) (83)
Prior year adjustment in respect of the adoption of FRS 19 - (175)
Total recognised gains and losses (722) (258)
Note of historical cost profits and losses
for the year ended 31 December
2002 2001
£m £m
Reported (loss)/profit before tax on ordinary activities (616) 70
Difference between historical cost and revalued amount
Depreciation on land and buildings 2 2
Disposal of land and buildings 40 -
Historical cost (loss)/profit before tax on ordinary activities (574) 72
Historical cost loss for the year retained after tax, minority interests and dividends (946) (428)
Reconciliation of movements in shareholders' funds
for the year ended 31 December
2002 2001
£m £m
Loss for the financial year (686) (134)
Dividends (302) (296)
(988) (430)
Other recognised gains and losses (net) (36) 51
Issuance of shares to QUEST 27 18
Exercise of share options 3 4
Writeback of goodwill on disposals 32 18
Net decrease in shareholders' funds (962) (339)
Opening shareholders' funds 6,638 6,977
Closing shareholders' funds 5,676 6,638
Notes to the preliminary results
1 Business acquisitions
In October 2002, the group acquired a further 13% share of Flagship Training Ltd
from Johnson Controls Ltd, for a total cash consideration of £5m. Goodwill
arising on acquisition amounted to £5m. The group now has a 50/50 joint venture.
In November 2002, the group acquired 100% of Corbett Technologies, Inc in the US
for a total cash consideration of £9m. Goodwill arising on consolidation
amounted to £9m. The company provides information assurance solutions for the US
market.
In December 2002, the group acquired 100% of Condor Pacific Industries, Inc in
the US for a total cash consideration of £40m. Goodwill arising on consolidation
amounted to £54m. The company is a producer of sensors and guidance systems for
the US aerospace market.
2 Business disposals
In November 2002, the group disposed of its Advanced Systems' Gaithersburg
operation in the US. Further information is provided in note 4.
In December 2002, the group disposed of the Heckler & Koch small arms business.
Further information is provided in note 4.
3 Joint venture goodwill
The agreement for the sale by BAE SYSTEMS of the Astrium space systems joint
venture to EADS was completed in January 2003. The sale is subject to regulatory
approval. The sale is to be effected for nil consideration and, therefore, BAE
SYSTEMS has written down the carrying value of its investment in Astrium to nil
at the year end. In consequence, the charge for joint venture goodwill
amortisation and impairment for the year of £212m includes an amount of £117m
relating to the impairment of the goodwill in Astrium.
4 Exceptional items
2002 2001
£m £m
Operating exceptional items
Contract loss provisions (750) -
Prior year rationalisation programmes (45) (95)
BAe/MES Integration costs (2) (53)
(797) (148)
Non-operating exceptional items
Cessation/reorganisation of
commercial aerospace activities (30) (370)
Profit on sale of operations 2 -
Profit on fixed asset disposals 28 -
- (370)
Exceptional loss included within profit
before interest and tax (797) (518)
Contract loss provisions - Nimrod
A substantial increase in the overall cost of completion of the development,
testing and initial manufacturing work was identified late in the year.
Following agreement with the MoD to revise the Nimrod contract an exceptional
provision of £500m, before a tax credit of £150m, has been charged in 2002 to
recognise fully the consequences of the delay and the residual design and
development risk.
Contract loss provisions - Astute
The Astute programme has been delayed as a result of the unforeseen difficulties
in the design and development. Following agreement with the MoD to revise the
Astute contract an exceptional charge of £250m, before a tax credit of £28m, has
been recognised in 2002 to provide in full for the residual design and
development risk.
Prior year rationalisation programmes
Rationalisation programmes were initiated in prior years in response to capacity
excesses across a number of business groups.
The total costs associated with these programmes were estimated at the time of
the respective announcements at £475m. To date costs of £494m have been recorded
as exceptional charges. The profit and loss impact in 2002 has been a charge of
£45m (2001 £95m), before a tax credit of £12m (2001 £25m).
Cessation/reorganisation of commercial aerospace activities
In 2001 the group decided to close its regional jet manufacturing operations and
reorganise certain other commercial aerospace activities at a cost of £400m. The
profit and loss impact in 2001 was £370m, before a tax credit of £111m. The
remaining £30m, before a tax credit of £9m, has been charged in 2002. The net
cash outflow in 2002 amounted to £155m (2001 £2m) before taking into account the
cash benefits of tax relief.
Sale of operations
The disposal of the group's Advanced Systems' Gaithersburg operation in the US
for a cash consideration of £88m in November 2002, resulted in an exceptional
gain of £50m, before a tax charge of £17m.
The disposal of the group's Heckler & Koch small arms business for £48m in
December 2002, resulted in an exceptional loss of £48m, including goodwill of
£32m previously written off to reserves. The tax effect of this is nil.
Fixed asset disposals
In 2002 the group disposed of certain of its surplus properties, realising a
profit on disposal of £28m, before a tax charge of £6m, arising from the prior
year rationalisation programmes referred to above.
5 Earnings per share
2002 2001
Basic Basic
and diluted and diluted
pence per pence per
£m share £m share
Loss for the financial year (686) (134)
Preference dividends (21) (21)
Earnings including goodwill
amortisation, impairment
and exceptional items (707) (23.2)p (155) (5.1)p
Add back goodwill
amortisation and
impairment 615 20.2p 495 16.3p
Exceptional items (note 4) 797 26.1p 518 17.1p
Tax on exceptional items (177) (5.8)p (148) (4.9)p
Earnings excluding goodwill
amortisation, impairment
and exceptional items 528 17.3p 710 23.4p
2002 2001
Number Number
m m
Weighted average number of shares used
in calculating earnings per share 3,053 3,034
Earnings per share is calculated by reference to earnings excluding goodwill
amortisation, impairment and exceptional items in addition to that required by
Financial Reporting Standard 14 - Earnings per share (FRS 14) as the directors
consider that this gives a more appropriate indication of underlying
performance.
In accordance with FRS 14 the diluted earnings per share calculations are
without reference to adjustments in respect of options and preference shares, as
assumed conversion would be anti-dilutive.
6 Dividends
The directors propose a final dividend of 5.5p per ordinary share which, with
the interim dividend, makes a total of 9.2p per ordinary share for the year
(2001 9.0p). The dividend, subject to shareholders' approval, will be paid on 2
June 2003 to shareholders registered on 22 April 2003. The ex-dividend date is
16 April 2003.
Shareholders who do not at present participate in the company's Dividend
Reinvestment Plan and wish to receive the final dividend in shares rather than
cash should complete a mandate form for the Dividend Reinvestment Plan and
return it to the registrars no later than 8 May 2003.
7 Exchangeable Bonds and Exchange Property
The company has in issue £676m (2001 £676m) 3.75% Senior Unsecured Exchangeable
Bonds, due in 2006 (the Bonds). At any time prior to the due date the
Bondholders have the right to request to exchange their Bonds for the Exchange
Property, which is represented by the group's holding in the ordinary share
capital of Vodafone Group Plc. The Exchange Property has been recorded within
current asset investments.
The value of the Exchange Property was initially based on the issue price of the
Bonds which represented the realisable value to the group. The historical cost
of the Exchange Property to the group is negligible, and the uplift to match the
Exchange Property to the value of the Bonds was recorded as an unrealised gain
within other reserves.
At 31 December 2002 the value of the group's holding in Vodafone Group Plc was
less than the redemption value of the Bonds. Accordingly the group has written
down the value of the Exchange Property to the market value at that date. This
reduction of £136m in the carrying value has been charged against the original
unrealised gain within other reserves and is disclosed as a non-cash movement in
the consolidated cash flow statement.
8 Commercial aircraft financing
31 December 2002 31 December 2001
FRIP Post-FRIP Total FRIP Post-FRIP Total
aircraft aircraft aircraft aircraft
£m £m £m £m £m £m
Future payments in respect
of aircraft financing obligations 2,702 375 3,077 3,022 357 3,379
Amounts pre-financed (see below) (740) - (740) (783) - (783)
1,962 375 2,337 2,239 357 2,596
Income guaranteed through (1,400) - (1,400) (1,550) - (1,550)
insurance
Anticipated residual values - (375) (375) - (357) (357)
Adjustments to net present value (87) - (87) (126) - (126)
Exposure at net present value 475 - 475 563 - 563
Amounts included within
Creditors 237 - 237 285 - 285
Provisions 238 - 238 278 - 278
475 - 475 563 - 563
The group provides guarantees in respect of residual values or head lease and
finance payments in respect of certain commercial aircraft sold. At 31 December
2002 the group's future payments in respect of these arrangements was £3,077m
(2001 £3,379m).
As part of a restructuring of its gross obligations through the issue of a
limited recourse bond in 2001, the group pre-financed the residual value
guarantees.
The future cash flows associated with this pre-financing totalled £740m at 31
December 2002 (2001 £783m).
A significant proportion of the net exposure of £2,337m (2001 £2,596m) is
covered by a Financial Risk Insurance Programme (FRIP) which provides insurance
cover in respect of potential shortfalls in contracted and expected income. Any
anticipated liability in respect of uninsured amounts is accounted for on a net
present value basis.
Since the inception of the FRIP, the group has granted residual value guarantees
in respect of aircraft sold totalling £375m (2001 £357m). The directors consider
that the group's exposure to these guarantees is covered by the residual values
of the related aircraft.
The group is also exposed to actual and contingent liabilities arising from
commercial aircraft financing and residual value guarantees given by, Saab AB
and Airbus SAS. Provision is made against the expected net exposures on a net
present value basis. The group's share of such exposure is limited to its
percentage shareholding in each of these joint ventures.
9 Net debt
The company's net debt position comprises:
2002 2001
£m £m
Current assets
Current asset investments 776 1,069
Cash at bank and in hand 930 1,505
Current liabilities
Loans and overdrafts (1,070) (1,256)
Liabilities falling due after one year
Loans (1,913) (2,119)
Net funds (1,277) (801)
Cash on customers' account (21) (30)
Net debt (1,298) (831)
10 Net cash inflow from operating activities
2002 2001
£m £m
Operating (loss)/profit (390) 423
Depreciation, amortisation and impairment 615 636
Profit on disposal of fixed assets and investments (22) (42)
Movement in provisions for liabilities and charges
excluding deferred tax (280) (207)
(Increase)/decrease in working capital
Stocks 224 (340)
Debtors (124) (716)
Creditors (386) 612
Customer stage payments 499 405
Net cash inflow from operating activities 136 771
11 FRS17 - Post retirement benefit schemes
The Accounting Standards Board has proposed to defer the full mandatory
implementation of FRS17, which is not now expected before the year ending 31
December 2005. Had it been adopted in full at 31 December 2002 a shortfall in
post retirement pension assets when compared with the respective liabilities
amounting to £2,164m (after taking assumed deferred tax into account) would have
been recognised. The liability for healthcare schemes of £46m (after taking
assumed deferred tax into account) is already provided for.
The group's pension funding requirements are derived from separate independent
actuarial valuations. There were no additional cash funding requirements for
2002 and there are anticipated additional cash funding requirements of £30m for
2003 and £60m for 2004, thereafter subject to the next actuarial valuations.
12 Business group analysis
The group has realigned its organisational structure resulting in changes in
management responsibility for certain business units. The principal areas of
change involve businesses previously managed as part of the former Operations
business group. Under the new structure, Marine shipbuilding and Underwater
Weapons activities now report as part of the Programmes business group and the
Aerostructures activities now report within the Commercial Aerospace business
group. RO Defence, being the balance of the former Operations business group, is
reported within HQ and other businesses. The business group analysis for 2001
has been restated in line with these changes.
13 Annual General Meeting
This year's Annual General Meeting will be held on 29 April 2003. Details of the
resolutions to be proposed at that meeting will be included in the notice of
Annual General Meeting that will be sent to shareholders at the end of March
2003.
14 Other information
The financial information for the years ended 31 December 2002 and 31 December
2001 contained in this preliminary announcement was approved by the Board on 19
February 2003. This announcement 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 2001 have been delivered to
the Registrar of Companies. Statutory accounts for the year ended 31 December
2002 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 a statement under
section 237(2) of the Companies Act 1985.
This information is provided by RNS
The company news service from the London Stock Exchange
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