Celsius interim report Jan-Sep 1998

CELSIUS INTERIM REPORT JANUARY - SEPTEMBER 1998 Income after financial income/expenses amounted to SEK 387 M (206)1. Non- recurring items have positively affected income in an amount of SEK 194 M (0). Operating income, excl. non-recurring items, amounted to SEK 181 M (125) for the period. Of this sum SEK 66 M (37) was generated during the third quarter. Sales increased by approx. 27 percent, amounting to SEK 9,823 M (7,711). The level of orders received declined by approx. 12 percent, amounting to SEK 7,416 M (8,380). Income after net financial items is expected to exceed SEK 500 M for the full twelve month period, which is in line with the earlier forecast. 1) Figures in parentheses refer to 1997 2) Billion = 1,000 million The third quarter has been coloured by the debate about the future focus of the Swedish armed forces. To ensure long-term profitability targets, Celsius is engaged in extensive restructuring, in line with anticipated developments in Sweden. This change process is focused on consolidating operations to fewer product areas, increased internationalization and a major commitment to developing commercial (non-military) business opportunities, especially in the field of commercial aviation services. Furthermore, the Company is engaged in implementing ongoing and extensive efficiency measures. Within the Swedish organization, this process has required cutbacks involving almost 200 jobs. During the period, the three Nordic defence contractors - Celsius Corp., Patria Industries Oyj of Finland and Raufoss ASA of Norway - have formed a joint Nordic ammunition company. The new company, Nammo AS, is reported as a minority interest in the accounts of the Celsius Group as per July 1, 1998. The company is expected to generate net annual sales of approximately NOK 1.5 billion, with some 1,400 employees. Celsius and Patria each hold a 27.5 percent stake in the company, while Raufoss ASA has a 45 percent holding. Nammo AS commands a very strong market position, with a broad product range and substantial research, development and marketing resources. Formal approval has yet to be confirmed by certain authorities. During the period, Celsius and Patria also formed a joint company for the production of propellants and explosives, Nexplo Industries AB. The new company which is headquartered in Sweden, is expected to generate sales in the range of SEK 450 M with some 400 employees, 280 of whom will be in Karlskoga. Celsius has a 60-percent majority interest, Patria holding the remaining 40 percent. The new company, which became a subsidiary of the Group on October 1, 1998, has a commanding position on the Nordic market, and every prospect of becoming a leading European player. Celsius strengthened its position in commercial aviation services by further expansion, and by acquisition of the Australian aviation services company Hawker Pacific - with operations in Australia, New Zealand and Southeast Asia - and the American company, Amtec, which operates in Miami, Florida. The two companies generate joint annual sales in the range of SEK 800 M. As part of the Group's consolidation strategy, Celsius has sold its stake in BPA, amounting to slightly less than 5 percent, generating a capital gain of about SEK 35 M. Götaverken Miljö and its French subsidiary Socrématic was sold too, generating a modest capital gain. Celsius also divested its 30-percent stake in the Safe Jasminia accommodation platform, generating a capital gain of approximately SEK 50 M. Consistent with the Group's declared strategic goal of securing a stronger position on the Australian market, Celsius decided on participation in a consortium. This will enable the Group to play an active role in the restructure of the Australian defence industry and to participate in bidding for ADI (Australian Defence Industries) when the company is privatized in 1999. ORDERS RECEIVED Orders received declined by about 12 percent, amounting to SEK 7,416 M. This decline derived from business area Defence, while Commercial Aviation Services increased order inflow by more than 40 percent. Business area Defence accounted for some 60 percent (71) of the total order inflow, Commercial Aviation Services for approximately 27 percent (17), Business Development for approximately 5 percent (4), and Niche Companies for 8 percent (8). ORDER BACKLOG The Group's order backlog declined by approximately SEK 3 billion during the period, totalling SEK 15.8 billion. This decline derives primarily from the operations of business area Defence, which accounts for more than 90 percent of the order backlog. The other business areas have shorter throughput times and, therefore, lower order backlogs. SALES AND INCOME Group sales increased by approximately 27 percent to SEK 9,823 M (7,711). All business areas have posted increased sales for the report period. Business area Defence noted an increase of approximately SEK 500 M, while business area Commercial Aviation Services posted a sales increase of approximately SEK 560 M. This increase derives mainly from this business area's operations in Florida, in the U.S.A. - within AeroThrust and Amtec - as well as from the operations of newly acquired Hawker Pacific, in Australia. Business area Business Development reports an increase of approximately SEK 100 M, and Niche Companies report an increase of almost SEK 900 M. The increase posted by the latter is attributable, almost in its entirety, to the conversion of the Petrobras XXIII drilling rig, recently returned to the Brazilian customer, Petrobras. Income after net financial items for the period amounted to SEK 387 M (206). As well as capital gains on the sale of the Safe Jasminia accommodation platform and Götaverken Miljö, the settlement of a claim against Förvaltnings AB Stattum, in connection with earlier pension liabilities, had a sharply positive effect on income. The provision for pension liabilities, which Celsius took over in connection with the acquisition of FFV, has proved insufficient to meet the undertakings entered into prior to the acquisition. Celsius has therefore been awarded compensation amounting to approximately SEK 100 M. An additional non-recurring item, in the form of a capital gain of approximately SEK 35 M on the sale of shares in BPA, has further improved income. Operating income for the period amounts to SEK 375 M (125). Excluding non- recurring items, operating income totalled SEK 181 M, an increase of SEK 56 M compared with the corresponding period in the preceding year. With the exception of Business Development, all business areas have contributed to this improvement. Financial net amounted to SEK 12 M (81) for the period. Celsius' financial net was negatively affected in an amount of approximately SEK 60 M, due to accrual accounting of interest income on certain advances over the full term of projects conducted by business area Defence. Income after net financial items amounted to SEK 387 M (206). FINANCIAL POSITION Celsius Group liquid funds, which amounted to SEK 1,547 M at the close of the period, have declined by approximately SEK 500 M since year-end 1997, primarily a consequence of acquisitions made during the period. Group capital expenditure on property, machinery and equipment amounted to SEK 188 M (230) for the same period. Depreciation amounted to SEK 232 M (247). Total assets have increased by about SEK 450 M since year-end 1997, amounting to SEK 12,297 M by the close of the report period. The equity/assets ratio at the close of the period was 26 percent, which is an improvement of 1 percentage unit compared to year-end 1997. Group equity increased by SEK 242 M to SEK 3,190 M during the period, compared with SEK 2,948 M at the start of the year. NUMBER OF EMPLOYEES The number of Group employees has decreased by some 280 persons since year-end 1997, totalling approximately 10,660 persons at the close of the period. Acquisitions made by business area Commercial Aviation Services accounted for an increase amounting to some 600 personnel, while business area Defence decreased its workforce by some 550 persons, in connection with the formation of Nammo AS. Other reductions derive from the implementation of previously planned cutbacks. COMMENTS BY BUSINESS AREA Defence The inflow of orders for business area Defence has declined compared with the same period last year, amounting to SEK 4,522 M (6,121). This change is primarily attributable to the fact that last year's figures for the period included orders for continued series deliveries of the CV 90 combat vehicle, amounting to approximately SEK 950 M, as well as a contract to refit a number of decommissioned Swedish submarines, purchased from the Swedish Navy by Singapore. Sales increased, however, rising to SEK 6,261 M (5,749). During the year, the order backlog has decreased by some SEK 2.2 billion to SEK 14.6 billion. Approximately SEK 500 M of this decrease derives from the formation of Nammo AS. Operating income improved by SEK 65 M compared with the corresponding period in the preceding year, to SEK 122 (57). Business area Defence numbered 7,457 (8,605) employees at the close of the period. Order inflows amounted to SEK 1,399 M during the third quarter, having amounted to SEK 964 M during the second quarter and SEK 2,159 M during the first quarter. Significant variations in the level of order inflows reported from one quarter to another are symptomatic of the type of projects conducted by this business area. During the third quarter, Bofors Weapon Systems received an order from the Swedish Defence Materiel Administration (FMV) for a comprehensive technology package for the CV 9040 B combat vehicle, worth about SEK 120 M. This order represents an expansion of the original series order for the CV 9040 B combat vehicle, estimated to be worth a total of approximately SEK 1 billion, which was placed in September 1997. Another order which Bofors Weapons Systems also received during the third quarter, in partnership with GIAT Industries, was placed by FMV and its French counterpart, DGA. The order concerns preparations for production of the 155 BONUS sensor-fuzed anti-armour shell. Bofors Weapons Systems, with its French partner GIAT Industries, has developed the 155 BONUS shell according to a plan finalised in the autumn of 1993. The order, which covers production equipment and preparations for future series production, estimated at about SEK 100 M, will be divided between the two companies. Furthermore, FMV has placed an order for further development of the Stirling air-independent propulsion system for the next generation of submarines. Worth approximately SEK 50 M, this order comprises the first phase of a six-year development programme. The first phase covers the first two years, up until the year 2000. The contract includes an option on the subsequent phases. The U.S. Army has placed new orders for ammunition for the Carl-Gustaf weapon system. These orders have a combined value of approximately SEK 70 M. The European Commission in Brussels has awarded approximately SEK 30 M in EU funds to a consortium, led by Celsius, to implement a project to develop a humanitarian mine clearance system. The project, which has been selected in stiff competition with other project proposals, is a clear endorsement of the mine-clearance know-how represented by the Celsius-led consortium. Notable large orders received in the first part of the report period included the signing of a contract by Bofors Weapon Systems with FMV, concerning development, testing and supply of the new smart all-purpose 57 mm 3P programmable ammunition. The order is worth approximately SEK 120 M. An order has also been placed by the Brazilian Navy for a further four naval guns, to a total value of approximately SEK 60 M. The German defence materiel administration has placed an order for the MAW TAURUS air-to-surface missile. The development project is initially scheduled to take three-and-a-half years, although it contains options to conduct preparations for series production and, eventually, for series production. The German decision to invest in the continued development of the TAURUS missile will be of major significance to the Celsius Group in the coming years. The project will involve continuing collaboration between Celsius and Germany's DASA-LFK. CelsiusTech Systems has received an order from FMV for the 9LV CETRIS combat- management and fire-control system for the new Visby-class corvette. The order is worth in excess of SEK 700 M. This order confirms CelsiusTech Systems' global leading position in the field of combat-management and fire-control systems. A further order has been received from FMV, worth approximately SEK 100 M, concerning the modification of STRIC, the Swedish Armed Forces' new integrated command-and-control system, whose multiple capability will include full tactical integration of the JAS 39 Gripen combat aircraft system. Furthermore, CelsiusTech Australia received an order from the Royal Australian Navy (RAN) covering maintenance of the ANZAC frigates' combat- management systems. The order, worth more than SEK 140 M, covers an initial five-year period, including an option to extend the contract up to eight years. Commercial Aviation Services The strong growth reported by Celsius Aviation Services continues, attributable to organic growth as well as to corporate acquisitions. The American company Amtec, located in Miami, Florida, with estimated annual sales of approximately SEK 300 M, has formed part of the Group since April this year. Operations focus on the sale and leasing of JT8D, JT9 and CFM 56 jet engines and spares. Operations are closely related to Celsius' current activities in the aircraft engine sector. The Australian aviation services company Hawker Pacific, with operations in Australia, New Zealand and Southeast Asia, has formed part of the Group since May this year. Hawker Pacific has annual sales of approximately SEK 500 M. This was followed by the acquisition of Furst Aircraft and Furst Instrument at the beginning of the year, two small American companies focused on the maintenance and stocking of replacement components for aircraft. These latter activities generate annual sales in the range of SEK 25 M. Celsius Aviation Services also acquired RIAS, Radio Instrument Avionics Servicecenter BV, which operates at Amsterdam's Schiphol International Airport. The company has sales of about SEK 15 M. The inflow of orders for business area Commercial Aviation Services rose by approximately 40 percent, amounting to SEK 2,064 M (1,447). Sales noted a similar increase, amounting to SEK 1,911 M (1,348). Operating income rose by some 37 percent to SEK 149 M (109). Celsius Aviation Services numbered 1,692 (1,032) employees at the close of the period. Large orders include a framework agreement signed by Aero Systems Engineering Inc. (ASE) with America's NASA Langley Research Center, worth approximately USD 38 M, concerning the maintenance, servicing and upgrade of a wind-tunnel. The agreement runs over a period of five years. ASE has also received an order from Boeing, concerning modernization of Boeing's transonic wind-tunnel facility in Seattle, Washington. The contract involves design, fabrication, equipment supply and installation of a major portion of the tunnel. The work is expected to continue over a period of two- and-a-half years. During the report period, Celsius Aviocomp has extended existing maintenance contracts and signed new ones to a combined value of approximately SEK 150 M. Contracts have been signed with Canadian Regional, Canada, and Horizon Air, in the U.S.A., as well as with Aerolitoral, Mexico, and LOT Polish Airlines. Business Development Business area Business Development comprises business units Celsius Infomatics, Nexplo Industries and Celsius Materials Technology. These business units differ widely in terms of products and markets, but share one thing in common: significant growth potential. The inflow of orders for business area Business Development amounted to SEK 373 M (371), while sales for the period totalled SEK 441 M (328). The business area posted an operating deficit of SEK 25 M (+16). This business area, which is one of Celsius' priority areas, is burdened by development costs incurred with a view to future profit generation. Notable projects include an advanced automotive radar system, which is the key component of a "smart" system for maintaining and adapting the speed of road vehicles to driving conditions. The business area numbered 596 employees (525) at the close of the period. Niche Companies Business area Niche Companies consists of a number of companies focused on strictly commercial (non-military) operations. The business area is engaged in the offshore, engineering and shipyard sectors. The inflow of orders for the period amounted to SEK 610 M (668), sales totalling SEK 1,435 M (548). This substantial increase is attributable almost entirely to redelivery of the Petrobras XXIII drilling rig to Petrobras in Brazil, subsequent to its conversion. Operating income amounted to SEK 82 M (- 41), of which approximately SEK 54 M is attributable to non-recurring items. These items comprise the capital gain arising on the sale of Celsius' interest in the accommodation platform, Safe Jasminia. Business area Niche Companies numbered 770 (744) employees at the close of the period. Large orders include an order received by Öresundsvarvet concerning conversion of the M/V Svetlomor from supply vessel to seismic research vessel. The contract is worth SEK 56 M. Götaverken Cityvarvet has signed three contracts concerning major conversions for customers in Sweden, Norway and Singapore. The combined order value of these three contracts exceeds SEK 110 M. Celsius, via its subsidiary company Kockums Holdings, has signed a partnership agreement with an international oil company to develop and commercialize the AlphaPRIME underwater system, a modular system for processing oil and gas on the seabed. OWNERSHIP STRUCTURE The number of shareholders has declined by some 1,000 since year-end 1997, amounting to some 14,000 as of September 30 this year. As before, the Swedish State retains 25 percent of the share capital. Swedish investment funds and insurance companies held approximately 36 percent, while other Swedish investors accounted for about 13 percent. The percentage held by foreign investors, which amounted to 16 percent of the share capital at year-end 1997, rose to 26 percent. THE MILLENNIUM CHANGEOVER The Celsius Group is currently engaged in an extensive programme to ensure that its intra-Group systems, as well as those supplied to customers, will continue to operate reliably through and beyond the millennium changeover in the year 2000. Operationally, the work will be conducted by the individual business units, under the supervision of specially appointed "Year-2000" managers. These will report to a central working committee, under the direction of an IT board, at Group level. The declared goal is that all necessary modification and verification of priority areas of operation shall have been completed by the end of June, 1999. PROSPECTS FOR THE CURRENT YEAR Income after net financial items is expected to exceed SEK 500 M, which is in line with the earlier forecast. Stockholm, November 2, 1998. Lars G. Josefsson President & CEO NEXT REPORT The year-end report for 1998 will be published on Thursday, February 25, 1999. Jan-Sep Jan-Sep Full year Key indicators SEK 1998 1997 1997 M Sales 9,823 7,711 11,644 Operating income 375 125 248 Income after 387 206 281 financial items Total assets 12,297 11,338 11,853 Liquid funds 1,547 1,671 2,009 Equity 3,190 2,896 2,948 Return on average capital employed ( %) -1) -1) 8 Return on average equity after taxes (%) -1) -1) 7 Equity/assets ratio 26 26 25 (%) No. of employees on 10,659 10,960 10,938 closing day Sales by business area SEK M Defence 6,261 5,749 8,141 Commercial 1,911 1,348 1,821 Aviation Services Business 441 328 576 Development Niche Companies 1,435 548 1,106 Eliminations -225 -262 0 Group 9,823 7,711 11,644 Operating income, by business area SEK M Defence 122 57 140 Commercial 149 109 133 Aviation Service Business -25 16 24 Development Niche Companies 822) -41 -17 Joint Group income/expenses and eliminations 473) -16 -32 Group 375 125 248 1) reported for full year only. 2) of which a capital gain of SEK 54 M. 3) of which compensation amounting to approximately SEK 100 M in settlement of a claim against Förvaltnings AB Stattum concerning pension obligations, as well as a capital gain on the sale of shares in BPA to a value of approximately SEK 35 M. J a n - J a n - S e p S e p Funds statement SEK M 19 9 8 19 9 7 Income after tax 3 2 4 1 5 8 Depreciation added 3 7 0 3 7 6 back Other items not - 4 8 2 - 2 7 0 affecting liquidity Change in working - 1 7 - 4 7 7 capital Funds generated by 1 9 5 - 2 1 3 operations Investments, net - 6 8 9 - 2 3 1 Funds generated after -4 9 4 -4 4 4 investments Financing 11 4 - 3 3 Dividend to - 9 5 - 9 5 shareholders Change in liquid funds, excluding translation -4 7 5 -5 7 2 differences Translation 1 3 - 1 0 differences Change in liquid funds -4 6 2 -5 8 2 Consolidated income Jan-Sep Jan-Sep Full year statement SEK M 1998 1997 1997 Sales 9,823 7,711 11,644 Cost of sales -8,220 -6,238 -9,472 Gross profit 1,603 1,473 2,172 Selling, administrative expenses and R&D costs -1,387 -1,309 -1,844 Other operating 107 -43 -95 income/expenses, net Share of income in 52 4 15 associated companies Operating income 375 125 248 Financial income and 12 81 33 expenses, net Income after financial 387 206 281 items Minority participations -1 2 -1 in net income Income before taxes 386 208 280 Taxes -62 -50 -73 Net income 324 158 207 Consolidated Sep 30, Dec 31, balance sheet SEK M 1998 1997 Assets Intangible assets 571 436 Property, plant and 2,436 2,489 equipment Financial assets, 1,049 805 interest bearing non interest bearing 662 558 Inventories 3,223 2,934 Current receivables, 186 13 interest bearing non interest bearing 2,623 2,609 Financial current 1,547 2,009 assets Total assets 12,297 11,853 Sharholders' equity and liabilities Shareholders' equity 3,190 2,948 Minority participations 22 17 Provisions, interest 1,805 1,738 bearing non interest bearing 796 1,244 Long-term liabilities, 827 474 interest bearing non interest bearing 91 145 Customer advances, net 2,461 2,424 Other current 399 191 liabilities, interest bearing non interest bearing 2,706 2,672 Shareholders' equity and 12,29 11,85 total liabilities 7 3 Sep Dec 30, 31, Key share data 1998 1997 Number of shares 28,06 28,06 (thousands) 6 6 Profit per share after 11.50 7.40 taxes (SEK) Equity per share (SEK) 114 105 This interim report has not been subject to examination by the Company´s auditors. Press information November 2, 1998. us: ontinued improvement in operating income. welve-month earnings forecast in excess of SEK 500 M holds. The attached interim report for the first nine months of 1998 includes the following information: Income after financial income/expenses amounted to SEK 387 M (206)1. Non- recurring items have positively affected income in an amount of SEK 194 (0). Sales increased by approx. 27 percent, amounting to SEK 9,823 M (7,711). The level of orders received declined by approx. 12 percent, amounting to SEK 7,416 M (8,380). igures in parentheses refer to 1997 illion = 1,000 million "Group operating income continues to note a favourable trend, totalling SEK 375 M (125) for the period. Adjusted for non-recurring items, operating income totals SEK 181 M, an increase of SEK 56 M compared with the corresponding period last year. Of this sum, SEK 66 M (37) was generated during the third quarter. This improvement continues to derive mainly from the operations of the Group's two core business areas, Defence and Commercial Aviation Services," states Celsius' CEO Lars G. Josefsson, commenting on the figures. "The lower level of orders received can be attributed in part to the fact that the corresponding period last year featured several major defence-related orders, such as continued series deliveries of the CV 90 combat vehicle and refits for submarines sold to the Singaporean Navy." "The ongoing programme of restructuring, designed to achieve long-term profitability goals, continues with unabated vigour. The positive effect of this change process remains consistent with predicted gains and provides additional support to the earlier forecast of annual earnings in excess of SEK 500 M." "The favourable trend reported by Commercial Aviation Services continues. Operating income improved by approximately 37 percent during the period. Sales and orders received increased by 40 percent compared with the corresponding period last year. One result of the sharp expansion noted by commercial aviation services is that commercial (non-military) business now accounts for about 40 percent of the Group's overall business activities," adds Lars G. Josefsson. "Celsius monitors defence policy discussions in Sweden and the rest of Europe very carefully. With respect to the debate on Sweden's domestic defence policy, we wish to stress the importance of adopting a long-term view when considering areas of specialist industrial competence and industrial resources, and of taking into account the economic parameters required when discussing overall planning. Once lost, specialist defence-industry competence cannot be recreated within practicable time or cost parameters," says Lars G. Josefsson. "The restructure of the European defence industry is accelerating all the time, a process in which we are actively participating, with our industry colleagues, to develop efficient structures for the future defence industry." "By means of further consolidation of Group operations, increased internationalization and an intra-Group rationalization programme, we are adopting an aggressive approach to new market conditions to achieve our long- term profit targets," concludes Lars G. Josefsson. _______________________________________________________ For further details, please contact Celsius CEO Lars G. Josefsson on +46 8 463 00 00, or Celsius' Executive Vice President, Nils-Ove Andersson, also on +46 8 463 00 00. ------------------------------------------------------------ Please visit <A HREF="http://www.bit.se">http://www.bit.se</A> for further information The following files are available for download: http://www.bit.se/bitonline/1998/11/02/19981102BIT00150/bit0001.doc http://www.bit.se/bitonline/1998/11/02/19981102BIT00150/bit0002.pdf