The 1999 Report

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Lars Jagerfelt 2000-02-18 CU 00:10 E


*Sales increased 10 percent to SEK 9,053 m. (8,248)
*Operating income increased 26 percent to SEK 1,104 m. (875)
*Net income amounted to SEK 939 m. (912) and earnings per share was SEK
8.82 (8.55)
*Pre-tax return on capital employed was 21,3 percent
*Proposed dividend per share: SEK 2,50 (2,00)
*In November 1999, Saab made an offer for all shares in Celsius AB. After
that Saab's acquisition of Celsius has been approved by the European
Commission and the Swedish Government has accepted the offer from Saab
regarding the shares its own in Celsius.
*In December 1999, South Africa decided to purchase 28 Gripen aircraft

Comment by the President
"1999 was an eventful and successful year for Saab. It was another year
with good growth in both sales and operating income. A restructured
Combitech contributed significantly to the result and the IT companies
continued to expand aggressively with good profitability. In December, the
contract for the first export order for the Gripen was signed with the
South African Government. Company acquisitions in our core areas made
positive contributions to income already in the first year.

However, the most important event with regard to the future was the offer
for Celsius and the intellectual power house created by the combined
company. The transformation that has started at Saab, with a rapid
increase in the proportion of electronics and software development, will
thus continue. To Saab's approximately 2,400 engineers working with
information technology will be added some 2,000 from Celsius. The new
growth-oriented knowledge company will be able to offer both military and
commercial customers new values through its accumulated competence in
areas such as Information Technology, Decision Support and Command
Systems. Operations will be oriented towards the expanding market for new
information systems expected also on the military side, in addition to an
increasing share of technical support and service.
The new Saab will also offer a consolidated Swedish solution with
immediate access to the international arena via its owner and partner, BAE
SYSTEMS, for its total product program in the defense sector.

We expect that about one year's structural work will be required for
merging the two companies. However, significant synergies should already
be achievable during the first year."

Offer to purchase all shares in Celsius
On 16 November 1999, Saab AB stated in its offer to the shareholders in
Celsius AB that the intention is to purchase all outstanding shares. Saab
AB is offering SEK 179 in cash for each A- or B-share in Celsius AB. The
value of the offer amounts to SEK 5 billion. After adjustments for among
others Celsius' claim on SPP, provision for restructuring costs and the
result of in Celsius earlier decided structural deals, the offer is
expected to result in a goodwill of approximately SEK 700 million, which
is estimated to be amortized over 20 years. The offer is being financed
from Saab's existing banking facilities.

The Swedish Government has decided to accept the offer, regarding the A-
and B-shares it owns in Celsius, which means that the Swedish Government
sells in total 3,000,000 A-shares and 4,000,000 B-shares representing 24.9
per cent of the capital and 61.7 per cent of the votes in Celsius. This
decision follows a vote by the Swedish Parliament on February 16, 2000 in
favor of a sale of the Swedish Government's shares. On February 4, 2000,
after having reviewed the notification, the European Commission decided
not to launch a full probe into the transaction, which means that the
European Commission now has approved Saab's acquisition of Celsius.

Business areas
Military Aerospace
During 1999, 16 Gripen aircraft were delivered to the Swedish Air Force,
bringing the total to 81 out of the 204 ordered by the Defence Materiel
Administration, FMV. Three squadrons of the first of the world's fourth
generation combat aircraft are now operative in the Swedish defense. In
December, Saab received an order for warning and countermeasures systems
valued at SEK 1.2 bn, of which about SEK 600 m. will be delivered from
Celsius. In December, Saab and BAE SYSTEMS signed a contract with South
Africa for 28 Gripen aircraft and 22 Hawk aircraft with related equipment,
training, etc. The contract has a total value of approximately SEK 22 bn,
of which SEK 13 bn refer to Gripen and the 28 aircraft will be delivered
during the period 2007-2012. The order will be booked in 2000 when the
final work allocation has been made between Saab and BAE SYSTEMS. Saab's
share of the contract is estimated at about 75 percent, equivalent to
about SEK 10 bn. The agreement with South Africa for the supply of Hawk
and Gripen aircraft includes industrial collaboration commitments by Saab
and BAE SYSTEMS totally valued at about SEK 60 bn and defense and aircraft
industry commitments totaling just under SEK 13 bn. These commitments will
be fulfilled over a period of 11 years and include sales and investments
in South Africa, as well as exports from that country. The contract with
South Africa will be a profitable venture for Saab, even after taking into
account a relevant share of the costs for developing the export version of
the Gripen. During the year, several countries have shown an interest in
the RBS15 anti-ship missile and in September Dynamics signed an agreement
with the German BGT covering export cooperation on the missile. Order
bookings for Military Aerospace amounted to SEK 4,059 m. (2,544), of which
SEK 2,196 m. during the fourth quarter, and included among other further
development, add-on orders and spare parts for the Gripen, the EOS450 fire
control system for Mexico and the order from FMV for a new warning and
countermeasures system for the Gripen.

The share of sales generated from commercial telecommunications projects
has continued to grow and in 1999 accounted for 45 percent of the total.
During 1999, the most important projects in the institutional market were
SPOT, a bilateral collaboration project between France and Sweden
concerning global observation satellites, and the ESA projects METOP,
related to meteorological satellites and ROSETTA, a scientific satellite.
The principal projects in the commercial market during the year comprised
participation in Spacebus 3000, Alcatel's platform for telecommunications
satellites, deliveries to the ICO mobile communications system, and
deliveries of separation systems for a number of launch rockets. Order
bookings for Space amounted to SEK 706 m. (667), of which SEK 148 m.
during the fourth quarter. The share of the commercial market in relation
to total order bookings corresponds to the share of sales, i.e.
approximately 50 percent.

Training Systems
Approximately 90 percent of sales go to export, the major markets being
the UK, the US and Germany. During the year, initial orders were received
in two new product areas, GAMER (Gunnery and Maneuver Exercise System) and
the BT47 small arms simulator. Order bookings for Training Systems
increased through the acquisition of Barracuda Technologies and amounted
to SEK 631 m. (583), of which SEK 322 m. were received during the fourth
quarter and included among others orders for simulator equipment from
France, target equipment from Spain and multispectral camouflage screens
from FMV. In January 2000, a further order for laser simulators valued at
SEK 160 m. was received from the US.

Commercial Aircraft
In August, Collaborative Programs delivered the first pair of floor
structures to Aérospatiale Matra for Airbus A340-500/600. Saab Aircraft
Leasing's (SAL) leasing portfolio has decreased by seven aircraft during

the year and consisted at year-end of 309 regional aircraft. Order
bookings for Commercial Aircraft amounted to SEK 836 m. (1,167), of which
Saab Aircraft (Customer Support), consisting of regional aircraft spares,
accounted for SEK 666 m. (587). New orders were received from BAE SYSTEMS
and Boeing, among others. During the year, orders for SEK 82 m. were
received as part of the contract from Airbus in 1998, which carry an
estimated total contract value of about SEK 1,500 m. This means that
deliveries for a total of 63 A340-500/600 have now been recorded as order
During 1999, several companies were divested and the head office in
Jönköping phased out. Combitech now consists of the profitable niche
companies Saab Marine Electronics, Combitech Systems and Combitech
Network, together with the development company Saab Celsius
TransponderTech. Combitech Traffic Systems was also part of Combitech
during 1999, but was divested January 31, 2000 with a capital gain of SEK
55 m. Order bookings for Combitech amounted to SEK 1,270 m. (1,001), of
which SEK 366 m. during the fourth quarter. The increase was due to a
heavy rise in order bookings among all the remaining companies during

Regional Aircraft
During the year, Regional Aircraft was phased out following delivery of
the last regional aircraft. A total of 459 Saab 340 and 63 Saab 2000
aircraft have thus been delivered since the start in 1984. All in all 522

Sales, income and orders
Group sales increased by 10 percent to SEK 9,053 m. (8,248). The increase
in sales is due both to acquisitions and organic growth. January 1, 1999,
the share majority in Avionics was purchased, after which the company has
been included in the Group's sales. During 1999, Nyge Aero and Barracuda
Technologies were also acquired. The organic growth in Space and the
Combitech IT companies has been very satisfactory for several years. In
Combitech Systems for example, the growth exceeded 60 percent both in 1998
and 1999. Sales to foreign markets amounted to SEK 3,444 m. (3,403) or 38
(41) percent of total sales.

Sales of Military Aerospace increased 18 percent to SEK 5,383 m. (4,572).
The improvement is attributed mainly to the consolidation of Avionics,
although sales from Gripen activities also increased. During the year, 16
Gripen aircraft were invoiced which is in accordance with the current
delivery plan, compared with 17 in 1998. Of sales of Military Aerospace,
sales of Dynamics amounted to SEK 851 m. (853). Sales of Avionics amounted
to SEK 1,044 m. (934), which is not included in Group Sales since Avionics
was reported as an associated company in 1998. Sales of Nyge Aero amounted
to SEK 180 m., of which SEK 141 m. is included in Group sales. Sales by
Space increased 11 percent to SEK 676 m. (607) through higher volumes. The
commercial market accounted for 45 percent of total sales. Sales of
Training Systems increased to SEK 735 m. (621) through higher volumes of
laser simulators and the acquisition of Barracuda Technologies. Of
Barracuda Technologies' sales of SEK 80 m., SEK 40 m. is included in Group
sales. Sales of Commercial Aircraft decreased to SEK 812 m. (908) through
considerably lower deliveries to regional aircraft production, which
ceased during the year. SEK 115 m. (95) of sales related to deliveries to
Boeing and Airbus, among others. Sales of customer support to the fleet of
Saab 340 and Saab 2000 increased to SEK 666 m. (587). Sales of Combitech
increased to SEK 1,273 m. (1,057) mainly through the volume increase in
Traffic Systems, growth in the IT companies and acquisitions in Marine
Electronics. Compared with the previous year's sales, adjusted for company
divestments, sales increased 64 percent. Of Combitech's sales, Marine
Electronics accounted for SEK 488 m. (443) and the IT companies for SEK
510 m. (368). Sales of Regional Aircraft decreased as a result of the
termination of civil aircraft production at mid-year. During the year, 3
(25) Saab 340 and 4 (11) Saab 2000 were delivered.

Income and profitability

Operating income increased 26 percent to SEK 1,104 m. (875). All business
areas showed improved income with the exception of Military Aerospace,
which, according to plan, reported higher development costs for the export
version of the Gripen. During 1999, income was improved by the reversal of
SEK 135 m. (100) of the loss risk reserve for the basic contract for the
Gripen and SEK 255 m. (200) for the phase-out of Regional Aircraft. The
year's loss in Regional Aircraft of SEK -771 m. (-477) has been charged
against the termination reserve. Income of Saab Aircraft Leasing before
reversal of the loss risk reserve amounted to SEK -35m. (-55). Project
interest on non-utilized advance payments amounted to SEK 218 m. (263).

The increase in research and development costs is mainly due to planned
higher development costs for the export version of the Gripen and work on
Collaborative Programs, mainly in regard to the Airbus A3XX and A340-

Other operating income of SEK 181 m. (206) consists mainly of capital
gains from divesting operations, SEK 21 m. (75), reversal of provision
corresponding to the loss in Saab Aircraft, SEK 47 m. (60) and trading
income from Treasury business, capital gains and exchange rate gains,
etc., of SEK 113 m. (71). Other operating expenses of SEK -71 m. (-34)
consists among others of the capital loss from divesting Combitech

Net financial income and expenses amounted to SEK 273 m. (343), of which
Saab Aircraft Leasing accounted for SEK 74 m. (91). The deterioration is
mainly due to lower liquid funds, a lower interest level and a lower
market value of the bonds portfolio. The average return on liquid funds
was 4.75 (5.7) percent and the average liquidity was SEK 11,600 m.
(13,300). Income after financial income and expenses amounted to SEK 1,377
m. (1,218).

Current and deferred taxes amounted to SEK -391 m. (-279), corresponding
to an effective tax rate of 28 (23) percent on income after financial
income and expenses.

Net income for the year was SEK 939 m. (912), corresponding to income per
share of SEK 8.82 (8.55).

Pre-tax return on capital employed was 21.3 (21.4) percent. Return on
capital employed before items affecting comparability was 17.6 (18.2)
percent. After-tax return on shareholders' equity was 21.5 (25.6) percent.
Operating income of Military Aerospace decreased to SEK 523 m. (628),
mainly due to higher marketing and development costs for the export
version of the Gripen. Risks and guarantee commitments in the basic
contract for the Gripen have been lowered and the loss risk reserve has
thus been reduced by SEK 135 m. (100), so that it has now been eliminated.
Project interest of SEK 212 m. (252) on non-utilized advance payments is
included in operating income. The operating margin was 9.7 percent (13.7).
Operating income of Space improved to SEK 65 m. (59), due to higher
volumes with maintained margins. The operating margin was 9.6 percent
(9.7). Operating income of Training Systems was on the same level as the
previous year, SEK 165 m. (167). The operating margin decreased somewhat
to 22.4 percent (26.9), mainly due to the acquisition of Barracuda
Technologies and the fact that the previous year was on an exceptionally
high level. Operating income of Commercial Aircraft amounted to SEK -2 m.
(-15) and consists of the income of Collaborative Programs, which was
affected by investments in new activities connected with Airbus, Boeing
and other projects. Development for Saab Aircraft and Saab Aircraft
Leasing is following the plans set up in 1997, when a write-down was made
in the leasing portfolio together with provisions for future negative
income in Saab Aircraft. For Saab Aircraft, the year's income before
settlement against the loss risk reserve was SEK -47 m. (-60) and for Saab
Aircraft Leasing SEK -35 m. (-55). Operating income of Combitech improved
greatly to SEK 80 m. (-166). The improvement was largely due to higher
volumes and margins throughout the niche companies, and the fact that
there was no negative effect from Traffic Systems on income during the
year, since provisions for the expected deficit had already been made in

1998. Operating income for Marine Electronics was SEK 68 m. (37), for
Combitech Systems SEK 25 m. (15) and for Combitech Network SEK 25 m. (17).
Income for the development company Saab CelsiusTransponderTech was
negative but within the framework for this development venture. In
addition to this, income includes structure costs for closing the
Combitech head office and the result of SEK -14 m. (75) from company
divestments. Income from Corporate activities improved, especially in
regard to capital gains.

The fluctuations between the quarters for sales and operating income have
been less significant during 1999 compared to previous years. However,
reversal of the loss risk reserves for Gripen and Regional Aircraft
strengthened income during the second and the fourth quarter. Net
financial income deteriorated during the fourth quarter, mainly due to
lower liquidity and a lower market value of the bonds portfolio.

Order bookings
Group order bookings amounted to SEK 6,849 m. (5,797). The order backlog
at year end amounted to SEK 23,637 m. (23,132), and includes military
orders worth SEK 22,100 m. (20,900).
Liquidity, finance and investments
Liquid funds less deductions for external borrowing decreased by SEK 2,274
m. to SEK 10,393 m. (12,667). The decrease is partly due to the
acquisition of shares in Celsius, lower advance payments from customers
and dividend payments. The Group has a strong financial position and net
liquidity after deduction for pensions amounted to SEK 8,398 m. (10,719).
During 1999, shares in Celsius with a value of SEK 1,267 m. were acquired.

In accordance with applicable accounting practice, Saab has not reported
the bonus from SPP as an asset in the financial statements for 1999.

Group equity / assets ratio amounted to 16.8 (13.6) percent and the
interest coverage ratio, excluding items affecting comparability, was 13.9
(7.9). Equity / assets ratio excluding Regional Aircraft and Saab Aircraft
Leasing was 29.7 (26.5) percent. Shareholders' equity amounted to SEK
4,708 m. (4,033), corresponding to SEK 44.23 (37.90) per share.

Cash flow
The cash flow analysis and following comments apply to the period 1
January - 31 December 1999, as if Avionics had already been included in
the Group in 1998. The cash flow analysis for the period 31 December 1998
- 31 December 1999 is shown in the table "Summary of cash flow
statement". Group cash flow from operating activities amounted to SEK
1,861 m. (1,632). Working capital decreased by SEK 2,449 m. (28). Higher
utilization of payments for the Gripen and lower advance payments for
Regional Aircraft led to a decrease of SEK 1,136 m. in advance payments
from customers. Provisions have net decreased by SEK 929 m., of which the
year's losses in Regional Aircraft and Saab Aircraft Leasing have, in
accordance with plans, led to a decrease in provisions of SEK 806 m.
Inventories decreased by SEK 524 m., mainly attributable to Regional
Aircraft. The cash flow from investments amounted to SEK -1,780 m. (-
2,709), of which investments in Celsius AB shares accounted for SEK -1,267
m. in 1999 and investments in lease assets accounted for SEK -2,184 m. in
1998. The operating cash flow amounted to SEK -2,368 m. (-1,105), of which
Regional Aircraft SEK -404 m. (-681) and Saab Aircraft Leasing SEK 218 m.
(-1,813). The decrease is mainly due to the acquisition of shares in
Celsius, continued higher utilization of payments for the Gripen,
termination of regional aircraft production and dividend payments.

Capital expenditures
The year's capital expenditures in property, plant and equipment,
excluding lease assets, amounted to SEK 447 m. (521). The decrease
compared to 1998, is mainly due to lower investments in property. During
1998, Space and Training Systems built new houses at their respective
premises. Net investments including lease assets and intangible fixed
assets amounted to SEK 466 m. (2,529), including lease assets of SEK 83 m.

Research and development
To maintain a leading position in its business areas, the Group allocates
considerable resources to research and development, which occupies over
2,500 persons. The year's expenditure on research and development amounted
to SEK 3,081 m. (2,128). The increase compared with the previous year is
mainly attributable to the consolidation of Avionics, which is a highly
research and development intensive operation, and to the planned increases
connected with the export version of the Gripen and business ventures in
Collaborative Programs. Of the year's expenditures for research and
development, SEK 2,477 m. (1,750) relates to development paid for by

The new millennium
The transition to the New Millennium passed smoothly. The year's
expenditures amounted to SEK 23 m. (22) and the year's investments in
plant and equipment to SEK 15 m. (2). The total costs for the project
amount to SEK 48 m. and the total investment is SEK 18 m.

At year end 1999, the Group had a total of 8,031 (7,891) employees.

Future development
Products and systems
The order backlog for Gripen and the development of the aircraft system
provide an important platform for future operations. Export activities for
the Gripen are continuing in collaboration with BAE SYSTEMS in South
America, Central Europe and other areas. Although the defense electronics
operations in Dynamics and Avionics are linked to the Gripen, they also
develop high technology products used in other systems. An example is
Dynamics' participation in international missile projects. The space
operation continues to develop well. Training Systems has a market leading
position as a base and will continue to develop existing and new products,
while processing new markets. Collaborative Programs is continuing to
build up a new operation oriented towards cooperation with the major
aircraft manufacturers. Operations in Saab Aircraft Leasing and Saab
Aircraft are focused on supplying the fleet of Saab 340 and Saab 2000
aircraft. The work of realizing values in the niche companies within
Combitech will continue in accordance with the company's strategy.

In December 1997, Saab made the decision to end production of regional
aircraft and allocated a reserve of SEK 4,079 m. for restructuring the
industrial operation. Restructuring is proceeding according to plan.
During 1999, a number of structural measures were completed, mainly in
regard to production and related commitments. This has enabled a more
reliable assessment of the costs and a decision has therefore been made on
reversal of the reserve of SEK 255 m. (200) in the 1999 financial
statements. At year-end 1999, the restructuring reserve amounted to SEK
2,376 m.
In connection with the decision to cease production of regional aircraft,
a decision was also made to put a market value on the leasing portfolio of
Saab Aircraft Leasing and to make a provision in order to adjust the book
value to a calculated market value. At the end of 1997, the loss risk
reserve amounted to SEK 2,728 m. and at the end of 1999 to SEK 2,637 m. No
reversals of the reserve has been made so far, since the leasing portfolio
has a remaining life of 15-20 years.

Parent Company
Sales and income
Sales of the parent company amounted to SEK 4,933 m. (6,857). Operating
income amounted to SEK 626 m. (677). Net financial income and expenses
amounted to SEK 1,147 m. (798) and income after financial income and
expenses was SEK 1,773 m. (1,475). Of the financial net SEK 648 m. (549)
are group contributions and dividends.
After appropriations of SEK -45 m. (-79) and paid and deferred tax of SEK
-321 m. (-319), net income for the year amounted to SEK 1,407 m. (1,077).

Proposed dividend
The Board of Directors long-term dividend policy is for 20-40 percent of
the Group's net income to be distributed. For 1999, the Board of Directors
and the President propose to distribute to the shareholders SEK 2.50
(2.00) per share or a total of SEK 266 m. (213), corresponding to 28 (23)
percent of the Group's net income. April 13, 2000 has been proposed as the
record date and the dividend is expected to be distributed, April 18,

Annual General Meeting
The Annual General Meeting will be held at Saab, Linköping on Monday,
April 10, 2000 at 18.00. Saab's revised annual report will be available at
the company's head office in Linköping. The printed Annual Report will be
distributed upon request to shareholders from March 6, 2000.

Saab's principal owners are Investor AB, British Aerospace, US funds, the
Wallenberg foundations and AMF.

Accounting Principles
The report has been drawn up in accordance with earlier accounting
principles, but with the exception that Recommendation No. 8 of the
Financial Accounting Standards Council has been applied from the half-year
report 1999. The change consists of translating integrated foreign
operations in accordance with the monetary method. No restatement has been
made for earlier periods since the effect of the change of accounting
method has been considered immaterial.

Linköping February 18, 2000

Bengt Halse
President and Chief Executive Officer

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