24th Feb 2005 07:04
BAE SYSTEMS PLC24 February 2005 BAE SYSTEMS plc Preliminary Announcement 2004 Results in brief 2004 2003Order book1 £50.1 billion £46.0 billionSales2 £13,479 million £12,572 millionProfit before interest3 £1,013 million £980 million(Loss)/profit before interest £(25) million £453 millionAdjusted earnings per share3 18.0p 16.6pLoss per share4 (16.0)p (0.5)pDividend per share 9.5p 9.2pOperating cash inflow £2,071 million £836 millionNet cash/(debt) £5 million £(870) million Highlights Programmes business outlook improving - benefiting from elimination of excessive risk - new commercial agreement for Typhoon signed Customer Solutions & Support addressing UK growth opportunities Land sector position strengthened with acquisition of Alvis plc North America delivering good growth Airbus performing well - outlook improving Strong cash flow Adjusted earnings per share3 up 8.4% at 18.0p Record order book Final dividend increased, making 9.5p per share for the year Outlook* An increase in contribution from the Programmes business group is anticipated asit benefits from the revised Typhoon contract. In addition, continued goodgrowth is expected from the company's North American operations including thebenefit of full year contributions from acquisitions completed during the courseof 2004. The CS&S and Land Systems business is expected to achieve further growth in theUK support activities together with a full year contribution from Alvis. Theseperformance improvements will be more than offset by the previously announcedstep down in profitability in export support activities. The completion of the Eurosystems transaction will remove the profitcontribution from disposed activities. The transaction is expected to bemarginally dilutive to earnings in 2005. Overall, the performance of the company's defence businesses is expected tocontinue to improve in 2005 albeit at a lower rate of growth than that achievedin 2004. Commercial Aerospace is expected to contribute to some growth with the benefitof a planned increase in Airbus aircraft deliveries. Some reversal of the strong 2004 operating cash inflow is anticipated in 2005 ascustomer prepayments are utilised to fund rising production activity. BAE Systems is now delivering well against its strategy and objectives. Whilstthere remains much to do, the achievements to date, together with the actionscontinuously being taken to improve performance, enable the group to lookforward with confidence to delivering growing returns to its shareholders. * this outlook statement is based on the accounting standards used to preparethe 2004 accounts 1 including share of joint ventures' order books and after the elimination ofintra-group orders of £1.8bn (2003 £1.9bn) 2 including share of joint ventures' sales 3 before goodwill amortisation and impairment of £1,038m (2003 £518m) andexceptional items of £nil (2003 £9m) 4 basic earnings per share after goodwill amortisation and impairment andexceptional items (in accordance with Financial Reporting Standard 14) 2004 Preliminary results statement Commenting on these results: Dick Olver, Chairman, said "The company's executive, together with the commitment and hard work of thewider BAE Systems team, has delivered a good operational performance in 2004establishing a solid base for future growth." Mike Turner, Chief Executive, added "We look forward with confidence to delivering growing returns to ourshareholders in the future." BAE Systems performed well in 2004, both in delivering good financial resultsand executing actions that will underpin performance improvement over the longerterm. Profit before interest2 increased to £1,013m from £980m in 2003, on sales1 of£13,479m (2003 £12,572m). Adjusted earnings per share2 for 2004 increased by8.4% to 18.0p compared with 2003. These earnings were underpinned by strong cash generation with operating cashinflow totalling £2,071m (2003 £836m). The weakening US dollar and Euro reduced reported sales and profit ontranslation by £424m and £31m respectively. After deducting goodwill amortisation and impairment and exceptional items, theloss per share was 16.0p compared with a loss per share of 0.5p in 2003. Thiswas primarily due to an increased charge for goodwill impairment. The signing of contracts for the next, Tranche 2, phase of the EurofighterTyphoon programme established a way forward for the programme. This completesthe actions taken over recent years to address excessive risk in our UK Ministryof Defence programmes businesses. These actions will result in a sustainable growth in profitability in an area ofour business that, in the past, had overshadowed the performance of the majorityof the company's portfolio. The 2.2% return on sales for Programmes continues to reflect the substantialsales generating no profit contribution from the Nimrod and Astute programmes.In addition, a higher level of sales on Typhoon was recognised with no profit.Increased Type 45 destroyer sales were recognised at zero margin, with theprogramme at an early stage of maturity. Positive contributions to profit were made by Underwater Systems and sustainingengineering activity on Tornado and Harrier. The F-35 Joint Strike Fighter(JSF), a cost plus award fee systems design and development contract, also madea positive contribution. BAE Systems has the leading naval systems business in the UK. Like its UK airsystems activities, the performance of the naval business in recent times hasbeen affected by the company having agreed, in prior years, to contracts forprogrammes with excessive risk. In addition, over many years, the UK naval shipbuilding industry has sufferedfrom a lack of strategic planning and the company commenced an evaluation of theoptions for its shipyards. Whilst that evaluation was underway the companywelcomed the UK government initiative to determine a strategy for navalshipbuilding in the UK, in dialogue with all industry participants. BAE Systemswelcomes this dialogue as a real opportunity to secure a future for the UK'snaval shipbuilding capabilities that will deliver value for money to the UKgovernment and an acceptable return to shareholders of the companies concerned. CS&S continued to perform well and delivered on all its key targets in 2004. Thebenefit to the Al Yamamah programme of the high oil price has flowed through tooperating cash flow. Building on the company's record in growing support business in the air sector,BAE Systems identified a substantial support opportunity in the land sector. Theacquisition of Alvis plc was a key step in delivering a land sector supportstrategy. Support solutions lie at the heart of BAE Systems relationship with the Kingdomof Saudi Arabia. BAE Systems has a long and successful history providingintegrated support to the Saudi armed forces. The company has for some timeadopted a strategy to integrate progressively greater local Saudi content in theprogramme. Consistent with this in-Kingdom strategy BAE Systems has invested in aerospaceand defence companies in Saudi Arabia which will enable the company to work inpartnership with Saudi investors whilst undertaking aircraft and avionicsmaintenance and upgrade work in-Kingdom. Whilst this trend to greater indigenouscontent will reduce margins, these partnerships will provide significanttechnology and employment benefits to the Kingdom and long-term value for BAESystems. The North America business produced organic sales growth of 12% with 8.4% returnon sales. In sterling terms, sales and profits were reduced by the translationeffect of the weakening dollar by £334m and £25m respectively. The order bookincreased to $4.9bn, resulting from successful re-competes, new contract winsand acquisitions, providing a good foundation for future organic sales growth. In the US, five acquisitions were completed. The largest transaction,DigitalNet, elevates BAE Systems to rank as a top 10 provider of IT systemssupport to the US Department of Defense and other government agencies. Withthese acquisitions BAE Systems now generates annualised sales of some $5.6bn inits North America business and now employs over 27,000 people across the US. Profitability in International Partnerships continued to improve. All of thejoint venture companies contributed to that improvement. Good progress was also made in re-focusing our joint businesses in Europe. Recognising the complexity of the earlier proposed Eurosystems transaction withFinmeccanica a simpler model has now been agreed. The revised agreement, signedin January 2005, provides for BAE Systems to take full ownership of the UKactivities of the former AMS joint venture in exchange for the group's existing50% of the Italian activities and a cash equalisation payment. The group hasalso agreed to sell to Finmeccanica its defence communications business andcertain avionics activities comprising principally the UK-based airborne radarand electronic warfare business. When completed, this transaction will generate substantial cash and improvemanagement control and business performance in the strategically important fieldof network-enabled capability. Airbus continues to build upon the strong performance of 2003 despite a numberof challenges in the current commercial aircraft market and against a backdropof rising fuel prices and adverse US dollar exchange rates. Driven by increasing demand from the low cost carrier sector, Airbus secured netnew orders for a further 366 commercial aircraft, which represents a 57% marketshare of orders placed during 2004. Group operating cash inflow was £2,071m (2003 £836m). Net capital expenditureand financial investment was £256m (2003 £248m) including increases in capitalexpenditure together with the investment in aerospace and defence companies inSaudi Arabia (2003 included the initial £74m investment in Alvis plc). Group operating business cash inflow3 was £1,884m compared with £625m in 2003.Cash flow improvements were achieved at Programmes as customer stage paymentswere received on the renegotiated Typhoon contract and the Indian Hawk contract.CS&S cash flow benefitted from the strong oil price during 2004. North Americacash flow was also strong. Commercial Aerospace included an outflow on theregional aircraft recourse provision, almost entirely offset by another strongcash performance by Airbus despite product development and capital expenditureon the A380 programme. Avionics cash outflows were mainly due to some increasein working capital on Typhoon equipment and cash outflows on prior yearrationalisation programmes. Free cash inflow, after interest and preference dividends and taxation, was£1,733m compared with £562m in 2003. Summarised profit and loss account for the year ended 31 December 2004 2003 £m £mSales1 13,479 12,572Operating profit2 691 670Share of operating profit of joint ventures2 322 310Profit before interest2 1,013 980Net interest (207) (220)Profit before tax, goodwill amortisation and 806 760impairment and exceptional itemsGoodwill amortisation and impairment, including (1,038) (518)joint venturesExceptional items - (9)(Loss)/profit before tax (232) 233Tax (234) (225)Minority interests (1) (2)(Loss)/profit for the year (467) 6Basic and diluted loss per share (16.0)p (0.5)pBasic and diluted earnings per share excludinggoodwillamortisation and impairment and exceptional items 18.0p 16.6pDividend per share 9.5p 9.2p Exchange rates 2004 2003£/• - average 1.474 1.445£/$ - average 1.832 1.635£/• - year end 1.417 1.417£/$ - year end 1.932 1.786 Reconciliation of operating cash flow to net cash/(debt) 2004 2003 £m £mOperating cash flow (FRS 1) 2,071 836Capital expenditure (net) and financial investment (256) (248)Dividends received from joint ventures 69 37Operating business cash flow 1,884 625Interest and preference dividends (120) (138)Taxation (31) 75Free cash inflow 1,733 562Equity dividends paid (281) (281)Acquisitions, including cash and loans acquired (630) (62)Adjustment to Exchange Property 13 121Other non-cash movements (4) -Foreign currency exchange 57 72Movements in cash on customers' account (13) 16Movement in net cash/(debt) 875 428Opening net debt (870) (1,298)Closing net cash/(debt) as defined by the group 5 (870) Cash outflow on acquisitions was £550m comprising cash consideration of £663mless cash, net of overdrafts, acquired of £113m. In addition, loans acquiredwere £80m. Foreign currency translation movements in net debt of £57m primarily comprisesthe benefit of translating US dollar denominated debt at the closing rate of £1/$1.932. Net cash was £5m (2003 net debt £870m) at the end of the year. The net interest charge decreased to £207m from £220m in 2003. This reflectedlower net interest payable on loans, overdrafts and financial instruments of£110m (2003 £122m) due to lower gross borrowings when compared with 2003 and netpresent value adjustments on aircraft lease provisions of £28m (2003 £41m) andother net present value adjustments of £11m (2003 £7m). There was also a chargeof £28m (2003 £24m) relating to a net present value adjustment to aircraftfinancing liabilities due to changes in the expected timing of receipts andpayments. Share of net interest of joint ventures was £30m (2003 £26m). Interestwas covered 4.9 times by earnings2 (2003 4.5 times). The group has continued to account for retirement benefits under SSAP 24. Thepension charge for the year on UK and US defined benefit schemes, excluding thegroup's share of pension costs charged by joint venture companies, on a SSAP 24basis was £192m (2003 £127m). FRS 17 requires the group to calculate its netpension liabilities, valuing assets and liabilities at a point in time ratherthan matching expectations of assets and liabilities over time. The deficit onUK and US schemes calculated on an FRS 17 basis was £3.0bn after tax (2003£2.1bn after tax). Investment returns were better than expected, but were offsetby an increase in liabilities due to changes in mortality assumptions and areduction in real discount rates during 2004. Full adoption of FRS 17 would have resulted in a charge to operating profit of£151m (2003 £172m), a reduction of £41m (2003 increase of £45m) when comparedwith the pension charge on a SSAP 24 basis. Reserves would have been reduced by£3.3bn (2003 £2.4bn). The effective rate of tax was 29% (2003 30%) which compares with the UKcorporation tax rate of 30% for the calendar year 2004 (2003 30%) and remainsour planning rate for the foreseeable future. The Board is recommending an increased final ordinary dividend of 5.8p pershare, making a total of 9.5p for the year. At this level the annual dividend iscovered 1.9 times by earnings2 (2003: 1.8 times). Lord Hesketh will retire from the board of directors immediately after thecompany's AGM to be held on 4 May 2005. BAE Systems is greatly indebted to LordHesketh for his unflagging support over the last 11 years. This period has seenthe organisation develop from being a European aerospace company into a globalplayer in defence systems integration. His knowledge of the realities ofpolitics coupled with a genuine enthusiasm for engineering has given him aunique understanding of the business and ensured that his contribution hasalways been much valued. It is for this reason that the group has asked him toremain on the Board until the AGM to assist the Board in choosing suitableadditions to the Board and he has kindly agreed to do so. The last few years have seen our business turned around, with clear managementtargets set and consistently delivered. Scale has been achieved in the US andour business with the UK MoD has been de-risked to acceptable and manageablelevels. We look forward with confidence to delivering growing returns for ourshareholders in the future. Segmental analysis for the year ended 31 December Sales1 Profit/(loss) before tax 2004 2003 2004 2003 £m £m £m £mProgrammes 2,867 2,436 64 56Customer Solutions & Support 2,243 2,166 413 411International Partnerships 1,907 1,685 109 65Avionics 1,103 1,127 32 12North America 2,771 2,700 233 232Commercial Aerospace 2,880 2,924 176 204HQ and other businesses 560 316 (14) - 14,331 13,354 1,013 980Less: intra-group (852) (782)Net interest (207) (220) 13,479 12,572 806 760Goodwill amortisation andimpairment,including joint ventures (1,038) (518)Exceptional items - (9) 13,479 12,572 (232) 233 1 including share of joint ventures' sales 2 before goodwill amortisation and impairment and exceptional items (statutorypresentation is shown on page 15) 3 from operating activities after capital expenditure (net) and financialinvestment and dividends from joint ventures Business group reviews Programmes The Programmes business group operates primarily in the UK defence market andcomprises the company's principal air systems, naval systems and C4ISR6- relatedprime contract activities. 2004 2003Order book1 £14.3bn £11.3bnSales2 £2.9bn £2.4bnProfit3 £64m £56mCash inflow4 £505m £33mNumber of employees5 18,400 19,400 In 2004, the Programmes business made a profit3 of £64m (2003 £56m) on sales2 of£2,867m (2003 £2,436m) and generated an operating cash inflow4 of £505m (2003inflow £33m). The 2.2% return on sales for Programmes continues to reflect the substantialsales generating no profit contribution from the Nimrod and Astute programmes.In addition, a higher level of sales on Typhoon was recognised with no profit.Increased Type 45 destroyer sales were recognised at zero margin, with theprogramme at an early stage of maturity. Positive contributions to profit were made by Underwater Systems and sustainingengineering activity on Tornado and Harrier in the UK and export markets. TheF-35 Joint Strike Fighter (JSF), a cost plus award fee systems design anddevelopment contract, also made a positive contribution. The outlook at Programmes is for increased sales in 2005 as deliveries on theTyphoon programme increase, together with increases on Hawk, Nimrod and Type 45.Overall, Programmes profit will show further improvement in 2005 from salesgrowth and margin enhancement as benefit flows from the concluded Typhoonnegotiations. The UK defence equipment budget is expected to continue to be constrained, withlow real growth having implications for the sustainability of long-term fundingfor future defence technologies and engineering capability in the UK. Air systems businesses The air forces of the four Eurofighter Typhoon partner nations, UK, Germany,Italy and Spain, completed the acceptance of their initial 30 twin seat standardaircraft with the 28 aircraft delivered in 2004. In-service training andoperational evaluations by the four nations have progressed significantly in thefirst year of Typhoon's service life. Over 600 hours have been flown in the UKand a significant number of air and ground crew trained. The delivery, inDecember 2004, of the first single seat aircraft for operational use marks thenext planned step in Typhoon capability. This capability growth will continueincrementally through the life of the programme. Contracts to secure Tranche 2, comprising the next 236 aircraft for the fournations, were concluded at the end of the year. The conclusion of agreements forTranche 2 has, in the UK, led to a revision to the Tranche 1 contracts toaddress production continuity. Significant progress has been made in the year in securing the future of thehighly successful Hawk business. In April, the government of India placed an order for 66 Hawk aircraft and, inDecember, the UK MoD signed a design and development contract for a new variantof the Hawk, the Advanced Jet Trainer (AJT). The customer is working closelywith BAE Systems to manage the design of the avionics architecture, and delivertwo trials aircraft to support the development and test flying. Contracts for Hawk with Canada, South Africa and Bahrain are progressing toschedule. There was good progress on Nimrod with the first development aircraft, PA01,flying in the summer and progressing successfully through its flight testprogramme. PA02, the first aircraft fitted with a full mission system, achievedits first flight in December 2004. Programme reforms continue to reinforcestability in the programme on both cost and schedule. Confirmation of future Nimrod production is awaited following the UKgovernment's announcement in the summer of a requirement for some 12 aircraftfor the maritime role, subject to affordability and performance. BAE Systems is partnered with Lockheed Martin and Northrop Grumman on the JSFprogramme. In addition to substantial avionics sub-systems and equipmentinvolvement in North America, BAE Systems participation in the programmeinvolves the design and manufacture of the rear fuselage and stabilisers in theUK. In August 2004, a key milestone was reached with the start of the JSF productionprocess comprising assembly of the rear fuselage. Work has progressed on the JSF System Development and Demonstration contract.The primary focus has been the detailed engineering design effort across the JSFvariants, in preparation for the increase in manufacturing activity in 2005.First flight of the Conventional Take-off and Landing variant is planned forlate 2006. Successful Harrier GR9 carrier landings took place to schedule as part of amajor Harrier upgrade programme. Contracts received include the continuation ofthe Harrier GR9 sustainment and upgrade programme, the support of TornadoSecondary Power Systems and the Tornado Structures contract. Naval systems businesses BAE Systems is building two 16,160 tonne Landing Ship Dock (Auxiliary) vessels.The first vessel, RFA Mounts Bay, was launched in April 2004 and the secondvessel, RFA Cardigan Bay, is on schedule to be launched in April 2005. Good progress has been made on the first of the Type 45 class next generationdestroyer for the Royal Navy, HMS Daring. Major power and propulsion equipmenthas been installed in the engine compartments. The official steel cuttingceremony for the second vessel, HMS Dauntless, took place in August 2004. A successful programme to design and build three sophisticated Brunei OffshorePatrol Vessels has been followed by acceptance delays. Work on the Astute attack submarine has progressed well during the year with allkey milestones achieved on schedule. An accelerated programme resulted in the delivery of HMS Bulwark, the secondLanding Platform Dock, ahead of the revised programme schedule. The shipsuccessfully completed its trials after leaving Barrow in May 2004 and washanded over to the Royal Navy in July 2004. The early delivery enabled the Navyto bring forward the in-service date by one month to December 2004. Following the completion of HMS Bulwark a redundancy programme commenced, whichresulted in the loss of some 500 positions across the Submarines business. The tactical weapons systems update programme for the Trafalgar class submarinesremains on schedule. Underwater Systems had another good year, achieving all programmed deliveries.The development of the Sting Ray Mod 1 lightweight torpedo was completed and theUK production order commenced with the successful demonstration of the firstbuild torpedoes. The Spearfish heavyweight torpedo in-service support programme completed 10years of on-time deliveries to the Royal Navy's submarine fleet. The newArcherfish airborne mine neutralisation system, ordered for the US Navy, issuccessfully progressing through development and will commence formal test andevaluation in 2005. C4ISR The C4ISR business has a key role in developing and delivering the UK's networkenabled capability. BAE Systems is working towards establishing a central rolewith the MoD in creating and developing the MoD's overall systems architecture. Customer Solutions & Support The Customer Solutions & Support business group provides systems and solutionsfor current and future military capability. It addresses the trend within armedforces to work more closely with industry to optimise their military capabilityin the most cost-effective and efficient manner. 2004 2003Order book1 £2.9bn £2.6bnSales2 £2.2bn £2.2bnProfit3 £413m £411mCash inflow4 £1,001m £518mNumber of employees5 10,700 10,800 In 2004, the CS&S business group made a profit3 of £413m (2003 £411m) on sales2of £2,243m (2003 £2,166m). The business generated an operating cash inflow4 of£1,001m (2003 £518m). CS&S continued to perform well and delivered on all its key targets in 2004. Thebenefit to the Al Yamamah programme of the high oil price has flowed through tooperating cash flow, reducing programme debtors. In August, the group's offer to acquire Alvis plc was declared unconditional.The Alvis plc and RO Defence businesses have been integrated to create a newLand Systems business. The formation of this business is consistent with thegroup's land sector strategy. The results, in 2004, of the RO Defence and Alvisbusinesses are reported within HQ and other businesses. From January 2005 theresults of these businesses will be reported within a Customer Solutions &Support and Land Systems sector. BAE Systems has a major presence in the Kingdom of Saudi Arabia, as primecontractor for the UK government-to-government defence agreement, Al Yamamah.The business employs almost 4,700 people, of whom more than half are Saudinationals, in support of the Saudi Royal Air Force and the Royal Saudi Navy. BAESystems provides complete support to the Kingdom's ground defence infrastructureand naval minehunters. Performance on the Al Yamamah programme in Saudi Arabia was good, with cashflows benefiting from the strong oil price throughout the year. UK support activity is increasing as the partnering relationship with the MoD'sDefence Logistics Organisation (DLO) develops. Performance in support of key UKin-service air platforms, Tornado, Harrier, Nimrod and VC10, remains on plan. AtRAF Wyton the DLO and CS&S have set up a joint integrated project team toaddress the next phase of partnering on the Tornado programme. The reactivation and upgrade of two Type 22 frigates for Romania has progressedwell with the first ship accepted on schedule in September and the second shipdue to be delivered in the first half of 2005. The final Upholder classsubmarine to be reactivated for the Canadian Navy was handed over in the lastquarter of the year. BAE Systems has 50% interests in Fleet Support and Flagship Training. Thesesupport and services joint ventures continue to form an integral part of the CS&S strategy and both returned strong results in 2004. The performance of FlagshipTraining Limited, which manages the Royal Navy training establishments andmarkets their training courses to overseas customers was particularlyencouraging. Contracts won this year included the training of the Romanianfrigate crew. Fleet Support Limited continued to perform well, underpinned bythe partnering agreement at the UK's Portsmouth naval base which was signed in2003. CS&S has also made further progress in developing a coherent information andlogistics infrastructure in support of both in-service and new systems andplatforms. A final bid was submitted in December 2004 to the UK MoD under theFuture Defence Supply Chain initiative for the planning and operation of a fullyintegrated supply chain network. In August 2004, CS&S agreed the purchase of the remaining 50% interest inAeroSystems International (AeI) not already owned by the group for £15m. AeI isa leading company in the analysis, design, development and delivery of complex,software intensive systems for the aerospace and defence sectors and is part ofthe development of the group's air support capability. Looking forward, the CS&S business group will work to sustain a long-termpresence in Saudi Arabia, deliver to schedule on the current support contracts,and expand the relationship with the DLO as the group provides more integratedsupport programmes on customer bases. Tornado support will be the major driverof activity during 2005 and should also provide the blueprint of future supportarrangements for Typhoon and JSF. In bringing together Alvis and RO Defence to form a Land Systems business, thecombined capabilities are able to provide customers with efficient solutions andto create opportunities for increased systems content. The business will reflectthe strong drive towards integrated through-life support of the large number ofin-service vehicles and platforms within the UK and export markets. BAE Systems has for some time signalled a progressive reduction in margin for CS&S. This anticipated margin reduction is a consequence of both a larger volumeof lower margin UK MoD support activity and a reduction in margin within its AlYamamah support operations in Saudi Arabia as the programme embraces greaterlocal content in-Kingdom. The increased pace of indigenous Saudi content in theAl Yamamah programme, including greater in-Kingdom repair and overhaul work, isexpected to bring forward that margin reduction with a step down in 2005,resulting in a lower CS&S business group contribution in 2005. Al Yamamahsupport margins are expected to stabilise from 2005. International Partnerships MBDA designs and builds a wide range of missiles for numerous platforms aroundthe world. AMS designs, manufactures and supplies command and control managementsystems, radar sensors, simulation and training systems. Saab is focused on thedesign and manufacture of integrated defence systems. Gripen International is ajoint venture with Saab to market the Gripen combat aircraft. Atlas Elektronikproduces complete underwater sensor to shooter systems. 2004 2003Order book1 £6.5bn £6.8bnSales2 £1.9bn £1.7bnProfit3 £109m £65mCash inflow4 £48m £69mNumber of employees5 13,200 13,600 The International Partnerships business group comprises interests, at 31December 2004, in the following: MBDA 37.5%AMS 50%Saab 34.2%Gripen International 50%Atlas Elektronik 100% 2004 has been a successful year for International Partnerships with an operatingprofit3 of £109m (2003 £65m). Sales2 grew by 13.2% to £1,907m. In sterling termssales and profits were reduced by the translation effect of a weakening Euro by£37m and £2m respectively. The business group generated cash flow4 of £48m (2003£69m). These results have been achieved with a number of key programmes movingout of development into full production. Another solid year of delivery and growth has seen MBDA's sales increase by morethan 20% with good operating profit growth. This strong performance was drivenduring the year by significant deliveries of Storm Shadow and Scalp EG to theRAF and French Air Force, respectively; significant deliveries of Mica andExocet to export customers; and continued deliveries of ASRAAM to the RAF.ASRAAM also entered service with the Royal Australian Air Force during 2004.Solid development progress on the Aster-PAAMS and Meteor programmes alsocontributed to MBDA's growth, with Meteor meeting all of its key developmentmilestones in the year. Important orders for MBDA during the year includedExocet Block 3, a significant aircraft package for Greece, plus the PAAMSFollow-On Ship contract. Profitability of the AMS joint venture has continued to improve. Order intakehas included the Network Enabled Combat System for the United Arab Emirates andan extension to a Private Finance Initiative contract for Astute trainingservices in the UK. Saab's operating profit in 2004 improved on 2003, after having recognised thecost of rationalisation. Gripen International is now well established in the export market, with ordersfrom South Africa, Hungary and the Czech Republic, for a current total of 56aircraft. The joint investment to develop the export baseline standard for theGripen combat aircraft is nearing completion, and the first delivery to theCzech Republic is scheduled for May 2005. Production for deliveries to SouthAfrica and Hungary is underway. During 2004, it was agreed that Saab will, from1 January 2005, assume responsibility for marketing for new Gripen exportbusiness. Saab and BAE Systems will continue to have joint responsibility forany Gripen activity in the three established export markets and may co-operateon future Gripen exports when appropriate. In recognition of the changes to the Gripen joint venture agreement BAE Systemswill reduce its shareholding in Saab AB over time. BAE Systems will retain atleast a 20% shareholding. Atlas Elektronik completed its first full year as a BAE Systems wholly ownedbusiness. During 2004, Atlas completed the acquisition of the Danish Maridanautonomous underwater vehicles business. In January 2005, BAE Systems and Finmeccanica signed the Eurosystems agreement.The Eurosystems transaction will bring the UK part of AMS into 100% BAE Systemsownership in exchange for the group's 50% share of the Italian businesscurrently under joint control and a cash equalisation payment. Looking to 2005, sales are expected to remain broadly flat across InternationalPartnerships as a whole with margins slightly reduced owing to the recentlyannounced rationalisation programme in AMS. Avionics The Avionics business group designs and develops electronic systems for air,naval and land defence platforms. The businesses within this reporting sectorcomprise five areas of activity: sensor systems; electronic warfare; inertialsystems; avionic systems; and communications. 2004 2003Order book1 £2.5bn £2.3bnSales2 £1.1bn £1.1bnProfit3 £32m £12mCash outflow4 £(16)m £(28)mNumber of employees5 8,900 9,400 In 2004, the Avionics business group made an operating profit3 of £32m (2003£12m) on sales2 of £1,103m (2003 £1,127m). The business had an operating cashoutflow4 of £16m (2003 outflow of £28m). Avionics group results in 2004 improved compared with 2003. Equipment deliverieson Typhoon increased and the business benefited from completion of therationalisation programme announced in 2003. Avionics is a major supplier of systems on the Typhoon programme. These includetwo principal sub-systems, the Captor multi-mode radar and the Defensive AidsSub-System (DASS). Deliveries of Captor radar systems continued to be in linewith the programme with the 100th radar system for Typhoon being delivered inthe year. The build-up of DASS equipment deliveries, while slower than planned,reached targeted throughput rates by year end. Investment in the business continued with the opening of a major new facilityfor the electronic warfare business in the UK. Investment in infrastructure inprevious years contributed to the award of a number of prizes for manufacturingexcellence. Furthermore, the benefits of investment in the technology base ofthe business and its position as a leading European sensor and integrated systembusiness were confirmed by a number of successes across the technologyportfolio. The delivery of the 500th infra-red countermeasure system (in partnership withNorthrop Grumman) in the autumn showed the significant position that thepartnership has in this technological area. Other notable achievements in theelectro-optical sector included the award of the contract for the surveillance,targeting and weapon system for the Future Combat and Liaison Vehicle,demonstrations in both the UK and US of laser-based burst illuminationtechnology, and continuing successful development of the laser systems for theJSF electro-optical targeting system. The development of a new electronically scanned radar resulted in successfultrials of the new E7000 radar for helicopters and border protection. Battlefieldsystems activities included international trials of the HALO artillery locationsystem and a contract to support the Northrop Grumman Communications, Navigationand Identification suite for the F-35 JSF was also received. Orders for the electronic warfare suite for the Boeing Apache helicopter forboth Kuwait and Greece reinforces the group's position as a leading electronicwarfare export supplier. These successes emphasise the importance of helicoptercrew self-protection systems and the key role of Avionics in this area. Also inelectronic warfare, the full UK acceptance of the Siren off-board ship decoysystem was achieved and further deliveries have been made to the UK MoD. The Australian business has continued to drive its strategy to place itself asthe Australian Defence Forces' capability partner in integrated military systemsand support solutions. The completion of the Eurosystems transaction will result in the major part ofthe Avionics group (Radar, Electro Optics, Defensive Aids and Communications)coming under Finmeccanica management control with a 25% retained BAE Systemsinterest. BAE Systems retained activities in this sector will be managed throughthe North America Platform Solutions business. The North America business isprimarily associated with military aircraft, flight control and navigationsystems, and head-up and helmet-mounted displays. The Australian business willalso be retained and managed through the existing CS&S structure. The Eurosystems transaction will see businesses that contributed sales2 of £718mand profit3 of £33m in 2004 sold to Finmeccanica. The outlook for the retainedbusiness is for a good recovery in 2005 as rationalisation activities announcedin 2003 were concluded. North America BAE Systems North America is a leading national security, aerospace andinformation systems business and a leading provider of electronic andinformation-based systems and knowledge-based solutions. 2004 2003Order book1 £2.5bn £2.4bnSales £2.8bn £2.7bnProfit2 £233m £232mCash inflow3 £204m £162mNumber of employees 27,400 23,150Figures in underlying dollars 2004 2003Order book1 $4.9bn $4.2bnSales $5.1bn $4.4bnProfit2 $427m $379mCash inflow3 $374m $264m In 2004, the North America business group made an operating profit2 of £233m(2003 £232m) on sales of £2,771m (2003 £2,700m). The business had an operatingcash inflow3 of £204m (2003 £162m). The US is an attractive marketplace for BAE Systems. The US defence market hasgrown significantly in recent years. The combination of the high priorityafforded to US national security, a strong commitment to research anddevelopment and contracting terms that balance risk and reward provide a healthyenvironment for the defence industry. US defence expenditure is expected tocontinue at the current high level, but with some substitution of spend, to fundthe global war on terror and peace keeping operations, impacting projecteddefence equipment outlays. Despite some curtailment of expectations forequipment procurement, BAE Systems participates in sectors of the defence marketsuch as homeland security and support for the intelligence community. Theseactivities are expected to continue to present good growth opportunities. BAE Systems presently ranks among the top 10 suppliers to the US military. In2004, in excess of 25% of BAE Systems group defence related sales were in theUS. The BAE Systems North America business group has strengthened its coreleadership positions in electronic warfare and electronic protection, militarycommunications, battlespace management, imagery exploitation, intelligencesystems and digital engine and flight control systems throughout 2004 throughacquisitions and organic growth. The business group met or exceeded all financial and business targets for 2004,maintaining its good performance track record. The business produced organic sales growth of 12% with 8.4% return on sales. Insterling terms, sales and profits were reduced by the translation effect of theweakening dollar by £334m and £25m respectively. The business continued to achieve good conversion of operating profits tooperating cash flow. The order book increased to $4.9bn, resulting from successful re-competes, newcontract wins and acquisitions, providing a good foundation for future organicsales growth. Strategic growth In addition to good organic sales growth in the year, the North America businessgroup acquired five businesses with annualised sales for 2004 of some $700m. STI Government Systems was acquired on 10 May for $26m. The business is a goodstrategic fit with the company's core competencies in advanced hyperspectralimaging and sensor fusion. Practical Imagineering was acquired on 17 August for $9m, adding significantcapabilities in the design and build of custom digital signal processingalgorithms, software and hardware. Boeing Commercial Electronics was acquired on 13 August for $66m. The businessrepresents the addition of highly complementary skills and capacity to theexisting commercial aerospace electronic equipment business. This acquisitionalso enhances the group's relationship with Boeing and its capability as adeveloper and producer of avionic products and systems for commercial aircraft. DigitalNet was acquired on 25 October for $520m. DigitalNet is a leadingprovider of networked infrastructure and information assurance solutions to USgovernment agencies and the national intelligence community, one of the fastestgrowing segments of the federal information technology market. The combinationof DigitalNet with the group's previously established business operating in thesame market, creates the necessary critical mass to target and win business onprime federal information technology and assurance programmes. Alphatech was acquired on 5 November for $88m. The company specialises in imageand signal processing, multi-intelligence fusion and intelligent systems. Theacquisition makes a significant contribution to the group's capabilities toaddress the network centric warfare requirements of the national security andintelligence communities. These five strategically important acquisitions enabled the group to achieve itsstrategy of expanding its core competencies in electronic systems, informationtechnology and services capabilities. BAE Systems is one of the US's leading providers of communications and networkcentric systems supporting the transformational programmes and technologiesidentified as priorities in the US defence and security market. The lines ofbusiness across BAE Systems North America are focused on horizontal integrationto provide multi-discipline solutions and to continue to operate as ahigh-performance enterprise. BAE Systems North America is also transforming its services business to meet thedynamic mission requirements of its customers, as they respond to new andevolving threats and challenges on a global scale. The services activities nowcomprise a logistics Solutions Center of Excellence (SCE), a systems engineeringand technical assistance SCE, a sub-systems integration SCE, and an operationsand maintenance SCE. This new organisation will better align the servicesbusiness to develop innovative solutions and meet customers' increasinglycomplex requirements. Transformational technologies and solutions The business continues to grow its leadership position in C4ISR capabilities anddefence electronics systems. BAE Systems is developing the integrated air andground communications suite for the US Army's largest acquisition programme, theFuture Combat System (FCS). Participation in transformational communications programmes such as FCS ispositioning BAE Systems as a key provider of situational awareness andsituational understanding to the warfighter. As a FCS One Team partner, BAESystems is designing and producing the complementary communications systems thatcomprise the Network Communications System, including Warfighter InformationNetwork - Tactical (WIN-T) and Joint Tactical Radio System (JTRS) Clusters 1 and5. By offering transformational communications, together with advanced technologies developed in precision and time-critical targeting, geospatial imageryprocessing, battlespace management, command and control, and information andintelligence systems integration, BAE Systems is contributing to major C4ISRprogrammes being undertaken by the US Department of Defense (DoD). Support for the Department of Homeland Security BAE Systems North America was selected to continue into Phase 2 of theDepartment of Homeland Security's development of technologies to protectcommercial airliners from the threat of man-portable anti-aircraft missilesystems. The company is also a member of the winning Federal Emergency Management Agency(FEMA) multi-hazard map modernisation contract team. The provision of technical services BAE Systems is one of the largest suppliers of technical services and solutionsto the US government. The Naval Sea Systems Command (NAVSEA) awarded BAE Systemsfollow-on contracts for Program Executive Office (PEO) integrated warfaresystems. These wins were key awards in which BAE Systems won all five of itscompetitive bids in the services market. Major contracts were also won toprovide continued support services to the Federal Aviation Administration (FAA)on surveillance systems programmes. Development and delivery of electronic and information systems A core strength of BAE Systems is integrating intelligent electronic systemswith information technology systems, and providing enterprise-wide and networkedsystems, particularly in the area of battlespace management and C4ISR. Recentcontract performance underpins future growth in this market: - the group won the US Army five-year, Indefinite Delivery Indefinite Quantity(IDIQ) award for the immediate delivery of Advanced Threat InfraredCountermeasures System/Common Missile Warning System (ATIRCM/CMWS). The systemprovides next-generation, directable, laser and lamp based countermeasures forthe protection of aircraft against heat-seeking missiles. ATIRCM is planned forinstallation on US Army AH-64D, UH-60, CH-47 and various Special Operationshelicopters. CMWS is in production for the UK Apache, ASTOR and maritime patrolaircraft; - the group's work on the JSF programme resulted in a number of Best in Classaward fees, culminating in early delivery of the mission-critical electronicwarfare suite for the JSF and the Outstanding Contractor Award on the programme; - BAE Systems extended its successful partnership with General Dynamics on theWIN-T programme and on the Littoral Combat Ship study; - the group successfully demonstrated the capabilities of the WolfPackunattended ground sensors programme. This will lead to additional developmentand fielding of the system to support US Army commanders' real-time battlefieldintelligence needs from safe distances; - the key US Air Force Autonomous Approach Landing Capability (AALC) contractwas won. This strategically positions BAE Systems on a programme to give fixedand rotary wing air crews the ability to land, taxi and take-off in zerovisibility conditions safely; - BAE Systems was named a prime contractor under the unique Advanced TechnologySupport Program III (ATSP3) contracting programme. Under ATSP3, the DoD hasstreamlined the procurement process to receive the full capability of the groupto resolve technologically complex problems and keep the warfighter operationalby upgrading fielded systems quickly and efficiently; - the group has secured new contracts for avionics and flight control componentson the USAF C-17, building on its selection as Sikorsky's preferred supplier offly-by-wire flight controls and sub-systems for the S-92/H-92 helicopters; - BAE Systems spans the spectrum from acoustic through optical frequencies toprovide ground-based, submarine, surface ship, airborne, and space applicationsfor such information dominance programs as Compass Call, Co-operative OUTBOARDLogistics Update, and Adaptive Joint C4ISR Node; - follow-on contracts were signed including Turkish F-16 Self ProtectionElectronic Warfare System (SPEWS II) orders, reinforcing BAE Systems as a leaderin providing the world's foremost electronic warfare protection systems to bothnew and legacy military aircraft; - in space, the company's capabilities were demonstrated by the NationalAeronautics and Space Administration's (NASA) successful landing of two MarsRovers with BAE Systems-built, radiation-hardened protected computer systemsperforming vital data functions. The international Cassini-Huygens spacecraftreached Saturn after seven years and 2.2 billion miles of travel with seven BAESystems Advanced Spaceborne Computer Module (ASCM) microprocessors on board. Inaddition, BAE Systems RAD6000 computers have provided critical missionmanoeuvring capabilities onboard NASA's Swift Mission. Building for the future With its 2004 acquisitions, BAE Systems North America is poised to capitalise onthe US defence industry trend toward awarding large, complex contracts.Anticipated future acquisitions will further the group's strategy to acquireprofitable, growing businesses with strong, differentiated technologies thatcomplement the company's broad range of capabilities to provide integratedsystems and transformational solutions to customers. Looking ahead, BAE Systems North America is well positioned to compete in anincreasingly competitive environment. The business group has identified thestrategic capabilities that must be developed, and the strategic actions thatwill lead to the attainment of these capabilities. BAE Systems North Americastrives to generate customer loyalty through performance and best valuesolutions. Fundamental to the business is the application of superiortechnologies that are essential to mission success and the safety of our armedforces. The 2004 order wins and acquisitions underpin future growth. Margins areanticipated to remain close to 2004 levels. Commercial Aerospace The Commercial Aerospace business group principally comprises BAE Systems 20%interest in Airbus. Other activities include subcontract manufacture ofaerostructures components and assemblies and the regional aircraft assetmanagement business and associated support activities. 2004 2003Order book1 £20.9bn £21.4bnSales2 £2.9bn £2.9bnProfit3 £176m £204mCash outflow4 £(24)m £(143)mNumber of employees5 12,600 12,150 The Commercial Aerospace business group made an operating profit3 of £176m (2003£204m) on sales2 of £2,880m (2003 £2,924m). Airbus contributed a profit of £196m(2003 £211m) on sales of £2,666m (2003 £2,683m). This was after charging £256mof development costs (2003 £252m), of which £158m (2003 £150m) related to theA380 programme. In sterling, Airbus sales and profit were adversely impactedfrom the translation effect of a weakening Euro by £53m and £4m respectively. The operating cash outflow4 of £24m (2003 outflow of £143m) includes £278moutflow in Regional Aircraft, mainly relating to prior year provisionutilisation, offset by a strong cash inflow of £251m in Airbus. The performanceat Airbus reflects a lower than anticipated impact from manufacturer's salesfinance for airline customers. Airbus Airbus continues to build upon the strong performance of 2003 despite a numberof challenges in the current commercial aircraft market and against a backdropof rising fuel prices and adverse US dollar exchange rates. Driven by increasing demand from the low cost carrier sector, Airbus secured netnew orders for a further 366 commercial aircraft, which represents a 57% marketshare of orders placed during 2004. Significant new orders were received fromprevious Airbus customers including China Southern Airlines, China EasternAirlines, Jetblue Airways and THY as well as attracting new customers includingAir Berlin, Etihad Airways and Spirit Airlines. During December 2004 shareholder approval was granted for Airbus to offer theA350 aircraft which will target the large 220-300 seat market. Airbus delivered 320 commercial aircraft during 2004 compared with 305 lastyear. BAE Systems 20% share of the Airbus closing order book at 31 December 2004is over £20bn. The A380 marketing and development programme is progressing with first flightplanned for 2005 and entry into service in 2006. The firm order book at December2004 stood at 139 aircraft. The A400M military transport aircraft development programme, whilst in its earlystages, is continuing to plan. The commercial aerospace market is emerging from a period of prolonged weakness.Whilst credit capacity of many of the world's airlines remains poor, trafficdemand has begun to recover. Airbus has secured a rising share of this improvingmarket and higher production volumes are now planned. Commercial aircraft are primarily priced in US dollars. Airbus sources much ofits bought-in equipment in US dollars and also has a substantial cost reductionprogramme underway. Airbus deliveries for 2005 are expected to be some 10% higher than in 2004,albeit with a weaker mix. Aerostructures The Aerostructures business returned to profitability in 2004, with an operatingprofit of £6m on sales of £192m. The A380 inboard leading edge programme hassuccessfully transitioned from development into production. Regional Aircraft BAE Systems continues to provide customer support and services in respect ofregional aircraft. The regional aircraft market remains difficult. The 2004 results include a lossof £26m on this activity as a small additional provision was made againstaircraft residual values and as spares and support volume fell on lowerutilisation across the aircraft fleet, a trend expected to continue. 2004 was the peak year for cash outflows on the recourse fleet. The cash outflowon Regional Aircraft recourse in 2005 will amount to £170m. There will befurther reductions to recourse cash outflows in both 2006 and 2007. HQ and other businesses HQ and other businesses comprises the company's head office functions togetherwith the Land Systems business formed by the combination of RO Defence and Alvisin 2004. In addition, HQ and other businesses includes the contract managementfor the assessment phase work on the UK Future Carrier and property services. 2004 2003Order book1 £2.3bn £1.1bnSales2 £0.6bn £0.3bn(Loss)/profit3 £(14)m -Cash inflow4 £166m £14mNumber of employees5 6,300 4,000 HQ and other businesses made a loss3 of £14m in 2004 (2003 break-even) on sales2Related Shares:
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