BAE SYSTEMS2003-02-20 22:22:39


BAE SYSTEMS and the UK Ministry of Defence (MoD) have today agreed changes to the contract structure for both the Nimrod MRA4 maritime patrol aircraft programme and the Astute attack submarine programme.
In December 2002, the company announced that additional issues had arisen in relation to these programmes and that it had become apparent that there were substantial schedule and cost implications.

Under the terms of today's agreement, the current contracts for design, development, production and support on each of the two programmes will be revised. These revisions will separate the Design and Development phase of each programme from the Production phase. Design and Development will be completed under new Target Cost Incentive Fee (TCIF) arrangements. Both programmes will be placed on a firm footing for the delivery of the Astute and Nimrod capabilities into service.

BAE SYSTEMS and the MoD have established new Target Costs and Fee levels for both programmes, and have high levels of confidence of delivering the programmes within these new target levels. Up to the Target Cost level, cost saving will be shared by the customer and company as an additional Incentive Fee for the company. Any cost overruns above the Target Cost will be shared by the customer and the company, up to the maximum level established for the company by the agreement. These new arrangements will place a significant economic incentive on the company to perform. The company has reviewed its project management of these programmes, consistent with today's best practice, and is taking actions based on lessons learned.

Pricing of the Production phase of each programme will be concluded following achievement of sufficient risk mitigation from the Design and Development phase to enable production costs to be established with confidence.

The difficulties in the Astute programme stemmed principally from moving the design of the submarine to a fully electronic CAD (Computer Aided Design) design basis - a process that neither party understood would be as difficult as it has turned out to be.
Production work on the Astute Programme will only be resumed after design maturity has been established. Design and Development, which includes the build of the First of Class, HMS Astute, will be completed under new TCIF arrangements.

Pricing for the production of HMS Ambush and HMS Artful will be established once adequate design maturity has been achieved and progress has been made on the First of Class. In order to maintain progress on the programme, General Dynamics Electric Boat Division (GD) will provide design assistance to reinforce the project team. This will enable the Astute project team to take advantage of lessons GD learned in computer-aided design on major US submarine programmes.

The difficulties in the Nimrod programme stemmed principally from issues associated with delays in design causing an increasing concurrency between design, development, and production in the programme.
Production work on the last 15 of the 18 Nimrods in the MRA4 programme will stop. This work will not be resumed until significant risk reduction has been accomplished, using the first three aircraft as development aircraft. Design and Development, including the completion of the three development aircraft currently in build, will be completed under new TCIF arrangements. Prices for the production of the last 15 aircraft will be established after Design and Development stability has been achieved.

Today's agreement enables the company to recognise the cost to complete these programmes under the new contract terms. As a consequence, exceptional costs of £750m (£572m after tax) will be charged to the 2002 accounts comprising £500m for Nimrod and £250m for Astute. These charges cover in full the company's residual exposure to higher development costs up to maximum level established for the company by this agreement.

The cash consequences of these charges, after tax, are expected to comprise £225m in 2003 and £100m in 2004 with the balance of £250m expended in 2005 and beyond.
These new terms mean that these programmes can be completed by the company with financial certainty.

While much focus has understandably been on the progress of negotiations on future terms and conditions of trade with the MoD on these and other programmes, good progress has been made across much of the balance of BAE SYSTEMS' business operations.

On 20 February the company will announce its Preliminary Results for the year ended 31 December 2002. The results will reflect the generally stronger performance, envisaged at the time of the company's 2002 Interim Results, through the second half of the year before taking account of the exceptional charges for the Nimrod and Astute programmes described above.

In 2002, the company's North America business group and Customer Solutions and Support continued their good performance. The anticipated performance in the second half of the year was delivered in the Avionics business group. As indicated previously, the performance in the International Partnerships business group was impacted by losses last year in the Astrium space systems activity that the company agreed to sell to EADS in January this year. Airbus contributed a good performance given the difficult market conditions.

Mike Turner, Chief Executive, said: "We very much welcome this agreement and appreciate the constructive approach that has been demonstrated in recognising a need to obtain a better balance between risk and reward on these two complex and technically demanding programmes. In Nimrod and Astute BAE SYSTEMS will deliver two systems of unrivalled capability to the UK's armed forces.

"Addressing these issues has been important but it should be recognised that the balance and majority of the company's business has continued to perform well. With uncertainty removed, we can now look forward to the Nimrod and Astute programmes contributing to future returns to our shareholders, and to building on our positive relationship with the MoD.�

For more information contact:
Warwick House
Po Box 87
Farnborough Aerospace Centre
GU14 6YU
United Kingdom
Tel:     + 44 1252 373232
Fax:     + 44 1252 383000



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