BBA Aviation plc - Interim Financial Report

These are a solid set of results for BBA Aviation and are in line with our expectations. Both Signature and ASIG have significantly outperformed against their markets, Legacy Support continues to grow strongly overall, and in Engine Repair and Overhaul and APPH we have implemented substantial cost reductions to mitigate the impact of weaker trading conditions.

US dollar exchange rates are a significant factor in the comparison of figures with the prior year, with average rates much lower than the comparative period at $1.50 (H1 2008: $1.98), and a period end spot rate of $1.65 (December 2008: $1.44; June 2008: $1.99).

Revenue decreased by 2% impacted by significantly lower fuel prices but benefitted from the translation impact of the higher average US dollar exchange rate. Excluding the impact of exchange rates, fuel prices and acquisitions and disposals, the organic revenue reduction was 13%. Underlying operating profits of £50.6m were 2% lower (2008: £51.6m) with the benefit of management initiatives, exchange rates and accelerated engine sales in ERO (which contributed £3.2m of operating earnings) largely offsetting the impact of reduced activity levels. Operating margins for the Group were maintained at 9.2% (2008: 9.2%) although the comparison is aided by the lower fuel prices. On a constant fuel price basis operating margins would have been 8.1% with the reduction this year being principally caused by lower volumes and margins in Signature.

At the time of the 2008 preliminary results, we announced that we would be undertaking cost reduction actions in 2009 that would deliver £10m of annualised savings to add to the £6m of annualised savings undertaken in 2008. These difficult but necessary actions were delivered in the period, and we are now undertaking or planning further steps that will increase the total annualised savings from 2008 and 2009 initiatives by a further £14m to £30m, of which £25m is expected to be realised in 2009. The majority of these savings are as a result of headcount reduction, but we are also closely controlling all discretionary expenditure. The structural reduction in full time equivalents ("FTEs") since 2008 is now close to a thousand heads, or 10% of the workforce.

The net interest charge was £12.2m (2008: £7.8m) with the increase over the prior year mostly due to the lower US dollar exchange rate which increased the translated value of dollar interest payments by £4.9m. The benefit of lower interest rates was largely offset by reduced interest income from the UK pension scheme and the impact of higher average net debt following the Hawker Beechcraft acquisition in the second half of 2008. Interest cover was 6.4 times (2008: 6.5 times).

Underlying profit before tax decreased to £38.4m (2008: £43.8m). Adjusted earnings per share declined to 7.2p (2008: 7.8p) with the increased interest charge partially mitigated by the reduction of the tax rate to 22.5% (2008: 27.0%) as a result of a new financing structure implemented in 2008.

Profit before tax reduced to £25.8m (2008: £46.7m) due to the inclusion in the current year of exceptional items amounting to £12.6m (2008: credit £2.9m) of which £9.6m was non-cash. The exceptional items include £3.7m in restructuring expenses associated with the cost reduction initiatives outlined above (2008: £1.3m), a £1.5m loss on the closure of a small engineering business (2008: £nil), as well as a £5.6m non-cash impairment charge against our investment in ASIG Thailand (2008: £nil). Amortisation of acquired intangibles amounted to £1.8m (2008: £0.7m). The prior period included a £4.9m gain from the Washington Reagan closure claim. Unadjusted earnings per share were 5.0p (2008: 8.1p).

Free cash flow more than trebled compared with the prior year at £65.8m (2008: £19.9m), due to a working capital inflow of £30.8m (2008: outflow £6.1m), substantially lower capital expenditure at £9.3m (2008: £19.4m) and lower tax payments at £5.5m (2008: £9.1m). The strong cash flow benefited from the accelerated sale and leaseback of a number of engines by Dallas Airmotive which generated cash of £12.8m. The cash dividend payment in the period was reduced to £15.8m (2008: £22.1m) as a result of a 28% take-up of the scrip dividend alternative. Net debt decreased by more than £100m to £448.6m (2008 year end: £554.4m) with a net cash inflow of £46.1m and the balance of the decrease since the end of last year relating to the strengthening of sterling against the US dollar. Net debt to EBITDA was 3.0 times which was broadly unchanged from the position at the end of 2008 (2.9 times).

  A maintained interim dividend of 2.30p has been recommended by the Board. A scrip alternative is again being offered in order to give shareholders the opportunity to increase their shareholding without incurring dealing costs or stamp duty whilst at the same time the Group will be able to retain cash in the business which would otherwise be paid out as a dividend.

Flight Support

In the face of a substantial reduction in market activity, Flight Support revenue of £323.3m declined by 7% with the positive impact of lower exchange rates (£93.7m) being largely offset by lower fuel prices (£70.8m) and the impact of the Hawker Beechcraft acquisition made in 2008 which contributed revenue of £13.5m. Overall there was an organic decline in revenue of 11%. Underlying operating profits reduced by 10% to £30.9m (2008: £34.5m) and by 29% on a constant currency basis, due principally to the impact of significantly lower activity levels. Operating margins were slightly down on last year at 9.6% (2008: 9.9%), although at constant fuel prices would have been 7.8% with the reduction from the prior year caused by lower fuel volumes and margins.

The Flight Support businesses generated operating cash flow of £33.5m compared with £8.7m in the prior period, an increase of 285%, with a cash conversion ratio of 108% against 25% previously. The return on invested capital (including goodwill previously written off to reserves)† declined to 7.9% (2008 full year: 9.7%).

Signature

The continued global economic downturn has affected Signature's markets as expected. In North America business and general aviation activity was down 24% in the period compared with the prior year. However, Signature's performance was well ahead of the market, with organic volumes only down 14%. Fractional volumes declined in line with the market, whereas non-fractional volumes were down 5% compared with last year reflecting the continued success of pricing initiatives launched in 2008. Since the start of the year, Signature has successfully agreed nine new network-wide customer contracts with an annualised impact in excess of three million gallons. In Europe, market activity was down 18%, whereas Signature outperformed with organic volumes down by 15%, although at the revenue level the outperformance was significantly higher, as outlined below.

From the peak of the market in 2007 to current activity levels, aircraft movements in Signature's served markets have fallen by 32%. We were at this level for the last three months of the period, and in July this improved to 27% down from July 2007. We have also now seen several months where rolling-average volumes have been fairly stable.

Revenue of £214.1m (2008: £250.6m) declined by 33% on a constant currency basis, with an overall organic decline of 14%, and the balance accounted for by lower fuel prices (£64.7m). In the USA revenue declined by 15% organically but in Europe the decline was limited to 8% due to an improved mix towards larger aircraft with longer average stays.

Signature reduced headcount by 142 FTEs across the US and Europe early in 2009, and further operational initiatives to be undertaken in the second half will result in significant further reductions in the underlying cost base.

In May of this year, Signature entered into a commercial partnership with Aviapartner to provide business and general aviation services at Nice Airport, Europe's 5th biggest airport for business and general aviation movements. The previously anticipated sale of the Hawker Beechcraft FBO at Indianapolis is underway and is expected to be completed before the end of the financial year.

BBA Aviation now has a total of 84 wholly owned locations worldwide, of which 60 are located in the USA. These cover 47 of the top 50 US Metropolitan Areas, 18 of the top 30 US hub airports, as well as 29 of the top 50 fractional operations airports. In addition, Signature has a minority interest in 20 other FBO locations in Brazil, Hong Kong and the USA and since May a commercial partnership at Nice.

ASIG

Against a backdrop of a market reduction in flight activity of 10%, ASIG was able to limit its organic revenue decline to 4% and produced total revenue of £109.2m (2008: £96.4m). Revenue in the prior period would have been £122.5m at 2009 exchange rates. De-icing revenue was in line with last year and lower fuel prices reduced revenue by £6.1m compared with 2008.

† Based on 12 month rolling operating profit and 13 month average capital employed at constant currency

  ASIG made a headcount reduction of 235 FTEs in the period, reduced overtime and also restricted other discretionary expenditure. Furthermore, ASIG has been successful in securing a number of rate increases to offset the economic impact of the reduction in flight activity.

During the period ASIG won new contracts to provide ground handling services to El Al at JFK International Airport, ground handling and into-plane refuelling for Allegiant at Los Angeles International Airport, and to provide technical services to Siemens at Los Angeles and to LAWA at Los Angeles and Ontario. In total these contracts are expected to generate £5m of revenue in a full year.

In Thailand where we started up an into-plane refuelling business in 2006 we are being adversely impacted by local market dynamics that are affecting our ability to generate appropriate margins in the short-term, although the business is operating on a cash-neutral basis. As a result of this, we have booked a non-cash accounting impairment charge of £5.6m against the investment. We remain committed to the market and to our customers and continue to value the strategic importance of this foothold in the fast-growing Asia-Pacific region.

Aftermarket Services and Systems

Revenue in our Aftermarket Services and Systems businesses grew by 6% to £226.9m (2008: £213.5m).  The organic revenue decline amounted to 16% which was more than offset by the impact of exchange rates. Operating profits increased by 8% to £24.6.m (2008: £22.7m) but fell by 15% on a constant currency basis as a result of decreased activity in Engine Repair and APPH. Operating margins increased slightly to 10.8% (2008: 10.6%).

Operating cash flow for the segment amounted to £50.9m, a 249% increase over the prior year (2008: £14.6m). This represents a cash conversion ratio of 207% (2008: 64%). The return on invested capital (including goodwill previously written off to reserves) for the first half decreased to 10.7% (2008 full year: 11.3%).

Engine Repair and Overhaul (Incl. Parts Distribution)

In Engine Repair and Overhaul (ERO) revenue of £172.2m (2008: £161.0m) reflected a substantial reduction in trading activity with the market weakening particularly on legacy engine programmes such as PT6 and JT15D which was more than offset by the beneficial impact of foreign exchange translation (£43.5m). On an organic basis revenue declined by 18%. Despite the weaker market conditions ERO won new long-term contracts with the Brazilian Air Force for PW100 engines (£10.0m over five years), and US based fractional provider Avantair for PT6 (£3.3m over five years). It successfully secured the sale of a number of lease engines generating cash of £12.8m, consistent with our aim of reducing our investment in these types of assets.

Significant and timely cost reductions were undertaken early in the first half of the year in response to the rapid decline in market activity. Since the beginning of the year ERO has reduced its headcount by 195 FTEs, adding to the 47 reduction in 2008, in total some 18% of the workforce. Further actions have been announced since the end of the period to continue to address the cost base of the business to ensure that ERO continues to trade robustly through this phase of the cycle.

ERO continued successfully to execute its strategy, opening a turbine engine shop inside Cessna's facility in Wichita, Kansas, a regional turbine centre (RTC) in Belo Horizonte, Brazil and two field technical support offices in Johannesburg and Mumbai thus further strengthening ERO's global service support capability. A significant new authorisation was secured for the PT6T (Twinpac) helicopter engine in Europe at a cost of £5.7m for the licence and other assets (deferred until 2010) which should generate annual revenues in excess of £5.0m once fully adopted. Additional authorisations were secured for the Hamilton Sunstrand T40-1 APU used on Sikorsky Blackhawk and Seahawk helicopters, and JT15D for the Pratt Witney Canada ESP Maintenance Programme.

Legacy Support

Total revenue of £23.6m (2008: £15.5m) grew by 16% on a constant currency basis as a result of the new licences acquired in 2008. The adoption of the Honeywell 7000 series APU licence is proceeding to plan, and growth in revenue from both this and from the Kidde Gravener Gaseous Emergency Oxygen Equipment licence is expected to accelerate in the second half of the year.

Weakness in demand for engine accessories in IGS, which is exposed to a similar cycle to ERO, was offset by continued organic growth in Ontic US where demand has remained strong. The Ontic order book grew further and at the end of the period stood in excess of $50m, positioning the business for continued growth in the second half of the year and into 2010.

Ontic UK has now established its new facility from which it will service the Kidde Gravener licence, and is in the process of acquiring the required accreditation that will allow it to commence assembly in the second half of the year. This gives Legacy Support the springboard from which to develop its licence support capability in the UK.

Overall market conditions for licensing remain robust as slowing new aircraft orders, coupled with still significant backlog, lead commercial and business aircraft OEMs to realign resources and capacity and in turn create new legacy product licence opportunities for Ontic. The military market is also projected to be strong in light of on-going US military activity worldwide which requires the continued maintenance of the many legacy aircraft and systems supporting these engagements.

Landing Gear and Hydraulics

Sales of £30.7m (2008: £34.2m) fell by 13% on an organic basis as a result of greater than expected reductions in the order book for original equipment to Cessna and Hawker Beechcraft and the downturn in the regional turboprop market where we support landing gear and hydraulic systems on a fleet of mature BAE Systems and Saab platforms. Military programs remain relatively firm.

We have taken a number of steps to address the cost base of the business, including the closure of a small wheel and brake facility at Basingstoke in the first quarter of the year, and the consolidation of our Houston operations from two locations into one site. Total FTE numbers have now been reduced by 22% since 2008, both through headcount reduction and the introduction of a 4-day working week at two of the UK facilities.

In support of the new Cessna CJ4 business jet, APPH was awarded a contract to supply the engine throttle quadrants. A number of units have been manufactured and supplied for the pre-production aircraft programme. Our focus on emerging markets resulted in a contract being won from Hindustan Aeronautics in India for the Light Combat Helicopter hydraulic system power pack. In France, we have supplied the first prototype landing gear system for qualification testing for the new EC175 helicopter programme.

Other Financial Information

Unallocated central costs were reduced by 13% to £4.9m (2008: £5.6m) as a result of a reduction in current service costs on the UK pension scheme.

On the basis of asset values as at 30 June 2009, and liability assumptions based on our last actuarial valuation of 31 March 2007, but updated to 30 June 2009 where necessary, our UK defined benefit pension scheme shows a deficit of £28.3m (Year-end 2008: £nil). Whilst UK pension schemes generally have been exposed to substantial volatility in the period, a significant proportion of our liability has been protected from these market movements as a result of the annuity purchased from Legal & General in April 2008. The deficit on the US defined benefit pension schemes was slightly improved at £18.7m (Year-end 2008: £23.3m).

At the end of the period $344m (£208m) of the total bank facilities of $1,175m (£712m) remained undrawn and the key leverage ratio was broadly unchanged from year-end at 3.0x (Year-end 2008: 2.9x).

At the end of the period the Group had $550m of cross-currency swaps. At the balance sheet date the mark-to-market loss on these swaps amounted to £43.3m (Year-end 2008: £97.7m). Since the end of the period $150m of these swaps have been closed out at a cash cost of £2.9m.

Cross-currency swaps have been used in the past to hedge our overseas net assets. This policy has been reviewed and it has been decided that in future hedging will only be undertaken with debt. This policy change has been implemented due to the fact that shareholders' funds are no longer as relevant in our banking covenants, and in adopting this approach we will minimise the volatility in the leverage ratio in the event of dramatic changes in exchange rates in the future.

Going Concern

The directors have carried out a review of the Group's trading outlook and borrowing facilities (as outlined in the section above), with due regard to the risks and uncertainties to which the Group is exposed, the uncertain economic climate and the impact that this could have on trading performance. Based on this review, the directors believe that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis.

Dividend

The Board is recommending an interim dividend of 2.30p (2008: 2.30p). In a difficult trading environment this reflects the Board's confidence in the continued resilience of and the longer-term prospects for the business. A scrip alternative will be offered giving shareholders the opportunity to increase their shareholding without incurring dealing costs or stamp duty.

Outlook

Whilst we continue to experience some short term volatility, we have seen stabilisation in the majority of our markets in recent months. We will continue to manage our businesses proactively to deliver a robust performance in the remainder of the year and we will maintain our focus on cash generation and debt reduction. This will position us well to take advantage of any opportunities that arise and to benefit from a recovery when it comes.

Directors' Responsibilities

The directors confirm that to the best of their knowledge:

(a) the condensed consolidated set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";

(b) the interim financial report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and,

(c) the interim financial report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

(c) Centre for Asia Pacific Aviation. Date posted: 7-Aug-09