2005 Preliminary Results Statement (23 February 2006)
BAE Systems has performed well against its objectives in 2005. Financial results have been delivered in line with plan and further significant steps have been taken to implement the Company’s strategy. In particular, the acquisition of United Defense builds on the Company’s strong defence technology business in the United States and complements its established position as the largest defence company in the UK and Europe.
The United Defense acquisition has elevated BAE Systems to the second largest supplier in the global land systems market. The former United Defense activities have been integrated with BAE Systems Land Systems, which comprised the former RO Defence and Alvis activities including Hagglunds. Integration of these operations has resulted in a single US headquartered global land systems business with operations in the US, UK, Sweden and South Africa.
In 2005, the Company has continued to improve performance through a combination of good project execution, cost and productivity improvements within the business operations together with the benefit of actions over recent years to eliminate inappropriate risk and improve returns, especially in its UK Ministry of Defence (MoD) Programmes business.
Sales increased 17% from £13,222m to £15,411m. The growth reflects sales of £789m from the acquired United Defense business together with the benefit of 2004 acquisitions and increased deliveries across the majority of the Group. This was partially offset by the impact of the reduced Saab shareholding.
EBITA increased 16% from £1,016m to £1,182m. EBITA has been reduced by rationalisation provisions of £89m and is stated after United Defense acquisition accounting adjustments of £44m. Losses at Regional Aircraft amounted to £95m.
Underlying earnings per share from continuing operations for 2005 increased by 29.3% to 22.5p compared with 2004. Basic earnings per share in accordance with IAS 33 from continuing operations increased by 28.9% to 18.3p (2004 14.2p).
The outlook for the UK Programmes business is now good. Following agreement on the way forward for the Typhoon programme, it is now making a significant contribution to the Company’s performance. Other UK platform programmes such as the Type 45 destroyer,Nimrod MRA4, Hawk and Astute submarine are also expected to progress to make good contributions when they transition from design to production.
Alongside the good operational execution now being delivered we continue to strive to further embed a high performance culture across the Company.
The formation of the Centre for Performance Excellence will help ensure consistency of performance measurement and provide leadership and focus for the sharing of best practice across the Company.
In December, the Company welcomed the publication by the UK government of a Defence Industrial Strategy following extensive consultation with industry. The strategy paper recognises the need for government and industry to work in partnership to secure the best technologies to meet the needs of the UK’s armed forces. The paper also identifies the skills and capabilities required to equip and support the UK armed forces whilst ensuring the UK maintains a world class defence industry. BAE Systems recognises that implementing the Defence Industrial Strategy sets challenges for both the MoD and industry.
Addressing pension deficits is a challenge. Reduced discount rates used to value scheme liabilities and the need to address changes in assumptions for increased life-expectancy combined to create a significant deficit in the funding of the Company’s pension schemes.
The Company has recently finalised a plan for the largest of its funds, the Main Scheme. The plan addresses the deficit through increased contributions and benefit concessions from employee scheme members and contributions of cash and property assets from the Company. These actions enable the Company to maintain this defined benefit pension scheme for existing scheme members, at a cost acceptable to the Company, eliminating the substantial funding deficit and introducing flexibility into the benefit structure to self fund any further increases in employee longevity going forward.
A continuing success for the Company is the provision of defence support solutions. The Company has a large and growing business providing support for armed forces and government agencies. Through-life support and upgrades for in-service defence equipment is expected to become an increasingly important activity for BAE Systems as air, naval and land sector platforms are expected to remain in service for many decades and require progressive upgrades in capability with advances in technology.
In partnership with the MoD’s Defence Logistics Organisation (DLO) the Company has continued to develop and grow its support solutions activities for the UK’s armed forces. The successful delivery of cost savings, together with improved equipment availability across a number of pilot air systems activities, has enabled the Company to broaden the scope of its DLO support activities to the UK land sector. Further support opportunities have been identified with the potential to deliver further cost savings and improved system availability for the UK customer and to deliver future profitable growth for the benefit of shareholders.
BAE Systems continues to provide extensive support in Saudi Arabia, principally to the Royal Saudi Air Force, building on a relationship spanning several decades. BAE Systems employs some 4,600 people within the Kingdom on wideranging activities including flying training and support for aircraft previously supplied. The Company has recently invested in facilities to enhance in-kingdom capability for the maintenance and sustainment of capability of in-service aircraft.
In December 2005, the governments of the Kingdom of Saudi Arabia and the UK signed an Understanding Document, intended to establish a greater partnership in modernising the Saudi Arabian Armed Forces and developing close service-to-service contacts especially through joint training and exercises. Under the terms of the Understanding, the two governments recognise the requirement to provide enhanced capabilities to existing military assets and ensure that they can be supported by local industry. It is also intended that Typhoon aircraft will replace Tornado Air Defence Variant aircraft and other aircraft in service with the Royal Saudi Air Force. The details of these arrangements are confidential.
Support is also now a substantial component of the Company’s business in the US. Following the acquisition of United Defense, its marine repair business has been added to the Company’s established US Navy and federal systems support activities to form an integrated support solutions business in the US.
Drawing on the depth of experience now residing on both sides of the Atlantic, a cross-company support solutions council has been formed to share best practice.
A number of actions have been taken to rationalise the Company’s portfolio of activities in Europe and to manage nonstrategic businesses for optimum value.
In March 2005, BAE Systems agreed a reduced involvement in marketing the Gripen combat aircraft and reduced its equity interest in Saab AB from 34.2% to 20.5%.
Under the Eurosystems transaction, completed in April 2005, the AMS joint venture was restructured with BAE Systems acquiring the UK based operations of AMS and Finmeccanica acquiring the Italian operations. In a related transaction BAE Systems sold its UK based sensor systems and electronic warfare avionics activities to Finmeccanica. The agreement includes the deferred sale of a retained 25% interest in the resulting enlarged avionics business, Selex. The wholly owned UK activities of the former AMS business have been combined with BAE Systems’ other C4ISR activities to form Integrated System Technologies (Insyte).
The integration of systems into digital networks, or Network Enabled Capability (NEC), is transforming defence capabilities.
Insyte is working in partnership with the UK MoD, to deliver transformational capabilities to the UK armed forces through the application of emerging NEC technologies.
The sale of Atlas Elektronik, the naval electronics business based in Germany, jointly to ThyssenKrupp and EADS was agreed in December 2005 and is expected to complete in the first half of 2006, subject to regulatory approval.
BAE Systems has valuable interests in the MBDA guided weapons joint venture and Airbus.
MBDA continues to perform well with good order intake. A further step in the consolidation of the European guided weapons industry was achieved with the agreement to fully integrate the German missile business LFK into MBDA.
Airbus produced another strong financial performance despite a continued high level of investment in new product development. Order intake was substantially ahead of plan, benefiting from strength in a number of markets including China, India and the Middle East. Aircraft demand has also been stimulated by the enhanced operating economics of new products such as the A380 and A350 airliners now under development.
Cash inflow from operating activities was £2,099m (2004 £2,350m).
Operating business cash flow was £1,937m (2004 £2,134m). Good conversion of EBITA to operating cash flow was experienced across much of the Group together with the cash benefits of securing advance payments at Land & Armaments and programme debt reduction at Customer Solutions & Support.
Free cash flow, after interest, preference dividends and taxation,was £1,758m (2004 £1,924m).
The net cash outflow on acquisitions and disposals was £1,548m. In addition, debt acquired on acquisitions was £288m. During the year the Group completed the acquisition of 100% of the issued share capital of United Defense Industries, Inc, in the US, for a total consideration of £2,205m. In addition the Group completed the Eurosystems transaction resulting in a net cash inflow of £402m.
Finance costs, including the Group’s share of the finance costs of equity accounted investments,were £215m (2004 £176m). The underlying interest charge of £210m (2004 £200m) was increased by a net charge of £5m (2004 gain £24m) arising from pension accounting, marked to market revaluations of financial instruments and foreign currency movements.
The net debt of the Group at 31 December 2005 was £1,277m, an increase of £326m from £951m at the start of the year, after adjusting for IAS 32 and IAS 39. Interest cover based on EBITA decreased from 5.8 times to 5.5 times.
The Group’s effective tax rate for the year was 29% (2004 32%).
The tax rate in the 2006 financial year is expected to be in line with 2005.
The Board is recommending a final dividend of 6.3p per share (2004 5.8p), bringing the total dividend for the year to 10.3p per share (2004 9.5p) an increase of 8.4%. The proposed dividend is covered 2.2 times by earnings from continuing operations (2004 1.8 times).
In summary, BAE Systems has had a good year, delivering a strong set of financial results and meeting its overall objectives for 2005.
BAE Systems is successfully executing its strategy and has further strengthened its position in the US, restructured its portfolio of business interests in Europe and, through a combination of factors now has a much enhanced outlook for the business in the UK. Shareholder value is being delivered by the premier transatlantic defence and aerospace company.
The Company is now very well balanced, not overly dependent on any one sector but generating good returns for shareholders from a broad base of operations in the world’s key defence and aerospace markets.
