Interim Report January-September 1999

CELSIUS INTERIM REPORT January - September 1999 *Kockums Naval Systems has merged with Howaldtswerke Deutsche Werft (HDW), and Celsius has thereby become joint owner of a global leader in the building of conventional (non-nuclear) submarines and naval surface vessels. *An agreement has been signed concerning a merger of Celsius Aerotech and the Swedish defence contracting units of TietoEnator, which are to be incorporated as a new company. *A new Group structure has been established in response to the recent implementation of a number of structural transactions. This new Group structure is expected to yield savings amounting to at least SEK 70 M. *Cutbacks affecting some 400 employees within business area Defence were implemented during the period. Notice was also given concerning further cutbacks involving an additional 400-plus employees. *Operating income for the fourth quarter, prior to non-recurring items, is expected to be at approximately the same level as for the corresponding quarter last year. The forecast includes a planned provision for structural measures amounting to c.SEK 100 M. However, the market situation confronting the Group's defence-sector operations remains uncertain. *Income after financial items amounted to SEK 79 M (387)1 for the period and operating income to SEK 103 M (375). Income was positively affected by non-recurring items amounting to SEK 53 M (194). *The level of orders received was at the same level as for the corresponding period last year, amounting to SEK 7,391 M (7,416). 1) Figures in parentheses refer to 1998 Celsius' declared strategy is to consolidate operations with a view to creating a knowledge-driven company focused on advanced products and services. The two strategically important structural transactions implemented during the third quarter were a significant step in this direction. Celsius is proactively participating in the ongoing restructuring of the European defence industry. During the period, Celsius signed contracts with two German companies, Babcock Borsig and Preussag, concerning the formation of a European shipbuilding company by merging the German company HDW (Howaldtswerke-Deutsche Werft) and Kockums Naval Systems. According to the terms of the agreement, Preussag sells 25 percent plus one of its HDW shares to Celsius. At the same time, HDW acquires all shares in Kockums Naval Systems from Celsius. The transaction will be effective as per October 1, 1999. The merger of HDW and Kockums creates a new international company that will be a leading global player in the conventional (non-nuclear) submarine and naval surface vessel sectors. An agreement has also been signed between Celsius and HDW, stating the conditions of an acquisition of Celsius' 49-percent stake in Australian submarine builder, Australian Submarine Corporation (ASC). The newly merged 'HDW Group' will have annual sales of approximately SEK 9 billion, an orderbook in excess of SEK 31.5 billion, and more than 4 300 employees. The agreement also includes an option that would allow Celsius to increase its stake in the company, as well as the right to sell its stake at some future date. The right to sell this stake may not be exercised prior to January 1, 2001, and at a predetermined price of DEM 355 M. Babcock Borsig has a call option on Celsius' 25-percent stake as of July 1, 2002, at an agreed price of DEM 370 M. Celsius will book this transaction as an exchange of shares, which will have a limited impact on net goodwill. Prior to implementation, the transaction must be approved by the respective authorities. During the period, agreement was reached concerning a merger of the Celsius subsidiary Celsius Aerotech with the defence-related operations of TietoEnator. Celsius will have a 57-percent majority holding in the new company, while TietoEnator will control the remaining 43 percent. The new company will number some 2,500 employees, with sales in excess of SEK 2.2 billion, and will be strongly focused on IT operations. Approximately two thirds of the new company is focused on the defence sector, in areas of long-term potential that have been awarded priority in defence planning. This will create a larger and stronger unit in that segment of the defence market that is expected to grow, both in Sweden and internationally. Contracts for industrial customers also offer considerable growth potential, and the companies now being merged complement each other well. The new company will formally be established at the turn of the year (1999/2000). The merger will therefore have no financial impact on Celsius prior to the year 2000. These two proprietary constellations will be assessed in terms of their market value. TietoEnator will bring its companies into Celsius Aerotech, whereby goodwill in an amount of approximately SEK 250 M will arise in Celsius' consolidated accounts. The agreement contains an option clause, which awards Celsius after 18 months the right to acquire TietoEnator's shares in the new company at a predetermined price of SEK 1,200 M. Should Celsius choose not to exercise this option, TietoEnator has in its turn the right to demand that Celsius purchase all the shares after 20 months at a predetermined price of SEK 1,100 M. The structural transactions completed during the third quarter have led to the establishment of a new Celsius Group organization. The majority of Group operations are divided into three business areas: Defence, Aerotech Services and Aviation Services. As earlier, a unit for Business Development operates in parallel to the three business areas. The Group also comprises operations in which Celsius has a significant joint interest, together with Niche Companies. This new Group structure involves an important downsizing of the central organization. In total, the new Group structure is expected to yield annual savings of at least SEK 70 M. The first nine months of 1999 have been affected by the considerable uncertainty surrounding the future focus of the Swedish Defence Forces and the consequent scale of Sweden's future defence materiel requirements. This has led to delays and postponements in order inflow, which has contributed to the very poor development of earnings. This will require further cost efficiencies and rationalization in the Company's joint defence operations. Redundancy notices affecting more than 400 employees have been issued during the period. Since Autumn 1997, the Group has been engaged in comprehensive restructuring with a view to concentrating operations to a number of selected core business areas, in both the defence and commercial sectors. In addition to the structural transactions named above, this work has resulted in a number of acquisitions and divestments during the year. During the period, Celsius formed a joint venture company with Grintek Group in South Africa, a company that will be a leading player in the field of electronic warfare, a field that is gaining increasing importance in the context of the high-tech defence forces of the future. Celsius has a 49- percent holding in the newly formed company, Avitronics: Grintek controls the outstanding 51 percent. At the beginning of the year, Celsius and Saab each acquired a 50-percent joint interest in GP&C Sweden AB from the Swedish Space Corporation. The company develops and markets a system which transmits position and identity between ships and aircraft. With this acquisition, the companies establish a solid platform for continued development, manufacturing and marketing in a segment that is expected to expand sharply over the next few years. Celsius Metech AB, which is part of business unit Celsius Aerotech, established operations in Denmark and Germany by acquiring the calibration division of Danish Aerotech. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/11/03/19991103BIT00410/bit0001.doc The full report http://www.bit.se/bitonline/1999/11/03/19991103BIT00410/bit0002.pdf The full report