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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