Half Yearly Report

RNS Number : 5304W

BAE SYSTEMS PLC

30 July 2009

 



BAE Systems plc

Half-yearly Report 2009

Results in brief

Results from continuing operations	Six months ended  30 June 2009	Six months ended  30 June 2008
Sales1	£9,941m	£7,751m
Underlying EBITA2	£979m	£820m
Operating profit	£500m	£789m
Underlying earnings3 per share	17.8p	16.2p
Basic (loss)/earnings per share4	(2.3)p	16.7p
Order book5	£45.0bn	£41.1bn
Interim dividend per share	6.4p	5.8p
Cash inflow/(outflow) from operating activities	£448m	£(387)m
Net debt as defined by the Group6	£(316)m	£(708)m

Highlights 

- Sales1 growth of 28%

- Underlying EBITA2 up 19% to £979m

- Underlying earnings3 per share increased by 10%

- Operating cash inflow of £448m

- Interim dividend increased by 10.3% to 6.4p per share

Outlook

The Group continues to expect good growth for 2009 as a whole, despite a lower level of land vehicle sales. Compared to 2008, the Group's trading results are expected to benefit from any continued weakness of sterling against the US dollar. We anticipate a stronger operating cash inflow in the second half year.

1 Including share of equity accounted investments.

2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding profit/(loss) on disposal of businesses and uplift on acquired inventories. Restated to exclude profit/(loss) on disposal of businesses.

3 Earnings excluding amortisation and impairment of intangible assets, and non-cash finance movements on pensions and financial derivatives, profit/(loss) on disposal of businesses and uplift on acquired inventories (see note 4). Restated to exclude profit/(loss) on disposal of businesses.

4 Basic (loss)/earnings per share in accordance with International Accounting Standard 33. 

5 Including share of equity accounted investments' order books and after the elimination of intra-group orders of £1.9bn (2008 £1.3bn). 

6 See definition below.

Cautionary statement 

All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of BAE Systems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements which reflect management's assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of BAE Systems or the markets and economies in which BAE Systems operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Nothing in this document shall be regarded as a profit forecast. BAE Systems plc and its directors accept no liability to third parties in respect of this report save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with section 90A of the Financial Services and Markets Act 2000. It should be noted that section 90A and section 463 Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that their liability is solely to BAE Systems plc.

 'BAE Systems continues to perform well with performance in the first half of 2009 underpinning the Group's expectations of good growth for the full year.'

BAE Systems continues to perform well with performance in the first half of 2009 underpinning the Group's expectations of good growth for the full year. Headline sales1 growth in the six months was 28%. On a like-for-like basis, sales grew by 6%. Growth in underlying EBITA2 on a like-for-like basis was 3%. There was a cash inflow from operating activities of £448m in the first six months.

BAE Systems' strategy of investment in businesses with strong positions in attractive sectors of the defence and security markets continues. Despite the difficult economic environment and changes in priorities in many of its markets, the Group continues to develop plans for growth over the medium term.

In the US, the Group's activities are well aligned to the changes in defence programme priorities announced by the US Secretary of Defense in April. The Group's position in advanced electronic warfare systems is expected to deliver growth from the transition of F-22 systems to the production of systems for the F-35 Lightning II. The combination of electronic systems content in the US and significant UK airframe manufacturing makes BAE Systems a major participant in the F-35 programme. 

With the F-35 programme expected to progress to high volume production over the coming years and increasing near-term volumes on the Typhoon programme, tactical combat aircraft are becoming a major driver of growth in the Group following the recent period of strong growth from the Group's land systems activities. 

Power management continues to be a business with significant further growth potential. Globally, BAE Systems has supplied almost 2,000 hybrid electric drive systems, forming part of integrated power management systems for urban transport vehicles, and was selected, in the first half of 2009, to supply up to an additional 700 systems.

In June, BAE Systems completed the acquisition of Advanced Ceramics Research, Inc. for $14m (£9m). The acquisition supports BAE Systems' global Unmanned Aircraft Systems (UAS) strategy, adding small UAS platforms and ground segment capability to complement the Group's existing UAS capabilities.

The agreement between the four partner governments on the Eurofighter Typhoon programme to procure an initial third tranche of Typhoon aircraft was an important step. The agreement, when contracted, will represent order intake of approximately £2bn, and secures the development path to enhanced capabilities for the air forces of the partner nations and other potential customers.

Through-life support activities continue to be a major element of the Group's business. New contracts were awarded in the first half totalling over £1bn supporting the Royal Air Force Harrier and Typhoon aircraft in service. 

In July, BVT Surface Fleet Limited (BVT) and the UK Ministry of Defence entered into a definitive Terms of Business Agreement which sets out a 15-year partnering arrangement, including lead roles for the BVT business on defined surface shipbuilding and support programmes. 

On 10 July, VT Group plc (VT) served a Put Option Intention Notice in relation to its proposed exit from the BVT joint venture. This is the first step in the exit process, which requires the provision of certain information by BVT prior to VT being in a position to exercise its option to sell to BAE Systems its 45% interest in BVT. Negotiations continue with VT regarding a possible injection of capital by VT into the BVT business arising from the underperformance of two export contracts contributed to the joint venture by VT.

BAE Systems is making good progress in the development of its security business where the strategy is focused on the growth in the information and intelligence sector. The acquisition of Detica in September 2008 was a major step in the implementation of that strategy. The combination of Detica's capabilities with those of the wider BAE Systems group, along with the continued government focus on cyberthreat, particularly in the Group's US and UK markets, is expected to generate growth opportunity in this segment of the security market.

The Group continues to implement its strategy to migrate capability across its home markets where sustainable long-term growth opportunities are envisaged. In Australia, the government recently published its strategy for defence. This confirmed it as a market with good sustainable growth, underpinning the Group's strategy to establish a leading position in Australia's defence industry.

In June, the Group successfully raised US$1.5bn in the US bond market. This is consistent with the policy of maintaining a strong balance sheet with prudent financing.

The Group is committed to becoming a recognised leader in responsible business conduct within the global business community. We remain on schedule with our three-year programme implementing the 23 recommendations in the Woolf Report. Progress made on the programme this year includes the launch of our global Code of Conduct. Our target is for all employees to have been personally briefed on the Code and received initial training by the end of this year.

The Group announced the resignation of Walt Havenstein in June. Walt was a director of BAE Systems plc, and President and CEO of BAE Systems, Inc.. General Anthony Zinni (USMC Ret.) was appointed Chairman of the BAE Systems, Inc. Board and, pending appointment of a permanent successor to Walt Havenstein, Acting President and CEO of BAE Systems, Inc..

Summarised income statement from continuing operations 

	Six months ended  30 June 2009 Unaudited £m	Six months ended  30 June 2008 Unaudited £m
Sales1	9,941	7,751
Underlying EBITA2	979	820
(Loss)/profit on disposal of businesses	(9)	61
Amortisation of intangible assets	(154)	(102)
Impairment of intangible assets	(302)	-
Finance costs1	(535)	30
Taxation expense1	(49)	(210)
(Loss)/profit for the period	(70)	599
Basic (loss)/earnings per share3	(2.3)p	16.7p
Underlying earnings4 per share	17.8p	16.2p
Dividend per share	6.4p	5.8p

Exchange rates

	Six months ended  30 June 2009	Six months ended  30 June 2008
£/$ - average	1.493	1.975
£/€ - average	1.119	1.291
£/$ - period end	1.647	1.989
£/€ - period end	1.174	1.264

Segmental analysis

	Sales1			Underlying EBITA2
	Six months ended  30 June 2009 Unaudited £m	Six months ended  30 June 2008 Unaudited £m		Six months ended  30 June 2009 Unaudited £m	Six months ended  30 June 2008 Unaudited £m
Electronics, Intelligence & Support	2,862	1,959		268	198
Land & Armaments	3,219	2,595		262	241
Programmes & Support	2,399	1,917		277	191
International	1,610	1,397		161	219
HQ & Other Businesses	133	113		11	(29)
Intra-group	(282)	(230)		-	-
	9,941	7,751		979	820

Sales1

In the first half of 2009, sales1 increased by 28% to £9,941m (2008 £7,751m). This includes a full half-year of sales from the MTC, Tenix Defence and Detica businesses acquired during the prior year. Like-for-like growth, after adjusting for the impact of exchange translation, and acquisitions and disposals, was 6%. 

As in 2008, sales in 2009 are expected to have a strong second half bias, as deliveries of Typhoon for the European partner nations and the Kingdom of Saudi Arabia increase.

Underlying EBITA2

Underlying EBITA2 increased by 19% to £979m (2008 £820m). Exchange translation, primarily relating to US dollar-denominated businesses, generated £126m of the increase. Return on sales decreased to 9.8% (2008 10.6%) largely reflecting the expensing of Mine Resistant Ambush Protected (MRAP) All-Terrain Vehicles (ATV) research and development, and bid costs in the Land & Armaments business, and lower margins in the International operating group. 

Impairment of intangible assets

The impairment charge includes £256m in respect of the US-based Products Group business and £34m relating to the Detica business. Further disclosure is provided in note 2 of this report.

Finance costs1

Net financial expense1 was £535m (2008 net financial income £30m). The underlying interest charge increased to £90m (2008 £32m) primarily as a result of the cash cost of business acquisitions made in 2008 and the lower level of interest received on cash held. A net expense of £445m (2008 net credit £62m) arose from pension accounting, marked-to-market revaluation of financial instruments and foreign currency movements, reversing much of the net income recorded in full year 2008 from these items.

Taxation expense1

As expected, the Group's effective tax rate for the period increased to 28% (2008 26%). The effective tax rate is calculated on profit before taxation excluding goodwill impairment of £180m (2008 £nil).

Earnings per share

Basic loss per share3 from continuing operations for the period was 2.3p compared with basic earnings per share3 of 16.7p in 2008.

Underlying earnings4 per share from continuing operations for the period increased by 10% to 17.8p compared with 2008 (16.2p).

Dividend

The Board has declared an interim dividend of 6.4p per share (2008 5.8p), representing an increase of 10.3%. 

Balance sheet

A decrease in real discount rates has resulted in the Group's share of the pre-tax pension deficit as defined by the Group increasing to £4,503m from £3,325m at 31 December 2008 after allocation to equity accounted investments and other participating employers. Further disclosure is provided in note 5 of this report.

The Group's net assets have reduced from £7,289m at 31 December 2008 to £5,040m at 30 June 2009, largely driven by the loss for the period, actuarial losses on the Group's defined benefit pension schemes, movements in reserves for foreign exchange and hedging, and payment of the 2008 final dividend. Further disclosure is provided in the condensed consolidated statements of comprehensive income and changes in equity below.

  Reconciliation of cash flow from operating activities to net debt

	Six months ended  30 June 2009  Unaudited £m	Six months ended  30 June 2008  Unaudited £m
Cash inflow/(outflow) from operating activities	448	(387)
Capital expenditure (net) and financial investment	(246)	(216)
Dividends received from equity accounted investments	14	17
Assets contributed to Trust	(125)	-
Operating business cash flow	91	(586)
Interest	(87)	(29)
Taxation	(233)	(160)
Free cash flow	(229)	(775)
Acquisitions and disposals	(7)	(384)
Debt acquired on acquisition of subsidiaries	(1)	(32)
Purchase of equity shares (net)	(20)	(19)
Equity dividends paid	(307)	(274)
Dividends paid to minority interests	(5)	-
Cash inflow/(outflow) from matured derivative financial instruments	138	(3)
Movement in cash collateral	(13)	22
Other non-cash movements	(172)	29
Foreign exchange	260	10
Movement in cash received on customers' account5	1	18
	(355)	(1,408)
Opening net cash as defined by the Group	39	700
Closing net debt as defined by the Group	(316)	(708)
Analysed as:
Debt-related derivative financial assets	31	-
Other investments - current	49	2
Cash and cash equivalents	3,007	1,712
Loans - non-current	(3,144)	(2,112)
Loans and overdrafts - current	(129)	(298)
Cash received on customers' account5	(6)	(12)
Assets held in Trust	(124)	-
Closing net debt as defined by the Group	(316)	(708)
Operating business cash flow
	Six months ended  30 June 2009 Unaudited £m	Six months ended  30 June 2008  Unaudited £m
Electronics, Intelligence & Support	127	28
Land & Armaments	164	84
Programmes & Support	(47)	134
International	125	(739)
HQ & Other Businesses	(278)	(93)
	91	(586)

Cash flows

Cash inflow from operating activities was £448m (2008 outflow £387m), which includes £74m (2008 £94m) of additional contributions into the UK pension schemes. 

There was an outflow from net capital expenditure and financial investment of £246m (2008 £216m).

Dividends from equity accounted investments, primarily Eurofighter GmbH and Saab, amounted to £14m (2008 £17m).

During the period, the Group contributed £125m into Trust for the benefit of the Group's Main pension scheme. £48m of this contribution is reported within other investments - current (after a fair value loss of £1m) and £76m is reported within cash and cash equivalents at 30 June 2009. The use of these assets is restricted under the terms of the Trust and so they are excluded from the Group's definition of net cash/(debt). The Group also considers the contribution as being equivalent to the other one-off contributions it makes into the Group's pension schemes, and for consistency, is presenting the contribution within operating business cash flow.

The resulting operating business cash inflow of £91m (2008 outflow £586m) gave rise to free cash outflow, after interest and taxation, of £229m (2008 £775m).

Net debt

The Group's net debt at 30 June 2009 was £316m (2008 £708m), a net outflow of £355m from the net cash position of £39m at the start of the year. 

Financing

In June, the Group successfully raised US$1.5bn in the US bond market. The financing was accomplished through the issue of two tranches of notes, US$500m due in June 2014 with a coupon of 4.95% and US$1bn due in June 2019 with a coupon of 6.375%.

Critical accounting policies

The Group's critical accounting policies are detailed in the Annual Report 2008, a copy of which is available on the Group's website at www.baesystems.com. These include:
- contract revenue and profit recognition;
- retirement benefit plans; and
- intangible assets.

Principal risks

In addition to the principal risks identified in the Annual Report 2008, the following additional risk concerning dependence on component availability, subcontractor performance and key suppliers has been identified:

The Group is dependent upon the delivery of materials by suppliers and the assembly of components and subsystems by subcontractors used in its products in a timely and satisfactory manner and in full compliance with applicable terms and conditions. Some of the Group's suppliers or subcontractors may be impacted by the current economic environment and constraints on available financing, which could impair their ability to meet their obligations to the Group. In addition, some products require relatively scarce raw materials. The Group is generally subject to specific procurement requirements, which may, in effect, limit the suppliers and subcontractors the Group may utilise. In some instances, the Group is dependent on sole-source suppliers. If any of these suppliers or subcontractors fails to meet the Group's needs, the Group may not, in the short term, have readily available alternatives. While the Group enters into long-term or volume purchase agreements with certain suppliers and takes other actions to ensure the availability of needed materials, components and subsystems, the Group cannot be sure that such items will be available in the quantities the Group requires, if at all. If the Group experiences a material supplier or subcontractor problem, its ability to satisfactorily and timely complete its customer obligations could be negatively impacted which could result in reduced sales, termination of contracts and damage to its reputation and relationships with its customers. The Group could also incur additional costs in addressing such a problem. Any of these events could have a negative impact on the Group's future results of operations and financial condition.

The Group continues to monitor this risk and has experienced no material negative impact to date.

The other principal risks, together with the Group's risk management process, are detailed on pages 56 to 61 of the Annual Report 2008 and relate to the following areas: defence spending; large contracts; government contracts; contract timing; fixed-price contracts; global market; export controls and other restrictions; consortia and joint ventures; competition; pension funding; acquisitions; laws and regulations; and exchange rates.

1 Including share of equity accounted investments. 

2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding profit/(loss) on disposal of businesses and uplift on acquired inventories. Restated to exclude profit/(loss) on disposal of businesses.

3 Basic (loss)/earnings per share in accordance with International Accounting Standard 33.

4 Earnings excluding amortisation and impairment of intangible assets, and non-cash finance movements on pensions and financial derivatives, profit/(loss) on disposal of businesses and uplift on acquired inventories (see note 4). Restated to exclude profit/(loss) on disposal of businesses.

5 Cash received on customers' account is the unexpended cash received from customers in advance of delivery which is subject to advance payment guarantees unrelated to Group performance. It is included within trade and other payables in the Group's balance sheet.

  Electronics, Intelligence & Support

The Electronics, Intelligence & Support (EI&S) operating group, with 33,900 employees1 and headquartered in the US, designs, develops, produces and services systems and subsystems for a wide range of military and commercial applications. Detica's US operations, acquired in September 2008, were integrated into the operating group in June.

	Six months ended  30 June 2009  Unaudited	Six months ended  30 June 2008  Unaudited	Year ended  31 December 2008  Audited
Sales1	£2,862m	£1,959m	£4,459m
Underlying EBITA2	£268m	£198m	£506m
Return on sales	9.4%	10.1%	11.3%
Cash inflow3	£127m	£28m	£380m
Order intake1	£2,781m	£2,050m	£4,904m
Order book1	£4.5bn	£3.6bn	£5.2bn

In the first half of 2009, Electronics, Intelligence & Support achieved underlying EBITA2 of £268m (2008 £198m) on sales1 of £2,862m (2008 £1,959m) and generated an operating cash inflow3 of £127m (2008 £28m).

On a like-for-like basis, sales growth in the first half year was 8%, building on the 6% growth achieved in the full year 2008.

Electronic Solutions

Low-rate initial production (LRIP) of F-35 Lightning II electronic warfare suites continues. Deliveries on the first four LRIP contracts will conclude in 2012, and future contracts are expected in accordance with the F-35 delivery plan for both the US government and international partner countries.

The US Army awarded a $137m (£83m) order for continued production of thermal weapon sights as part of the five-year Indefinite-Delivery/Indefinite-Quantity (IDIQ) contract, bringing the value of the contract to more than $563m (£342m) and extending deliveries through to the end of 2010. More than 51,000 sights have now been delivered in support of combat operations. 

In May, the US Army placed two additional orders valued at more than $100m (£61m) for Common Missile Warning Systems (CMWS). CMWS is a helicopter missile warning system that detects incoming missiles, rejects false alarms, and cues the onboard infrared jamming system to the missile's location.

Information Solutions 

During the first half, Information Solutions won new and follow-on contracts with a potential through-life value of $440m (£267m). These contracts are from customers across the US federal, defence and intelligence markets, and provide information technology, cybersecurity services, global analysis services, and other IT mission-enabling support services. 

Information Solutions also received orders with an aggregate value of $225m (£137m), including $45m (£27m) under last year's Encore II award from the Defense Information Systems Agency. Awards included positions on contracts with the General Services Administration for large-scale IT requirements and services, and the US Department of Homeland Security's Federal Emergency Management Agency for IT operations and maintenance.

Platform Solutions 

Following the successful launch in 2008 of its enhanced HybriDrive® propulsion system in the first ever integration of advanced lithium ion energy storage systems into urban transport fleets, the power management business has continued to expand its presence globally during the period with key partnerships in the US and UK. In the US, the business was selected, in the first half of 2009, to supply up to an additional 700 systems. In the UK, in partnership with UK-based manufacturer, Alexander Dennis, 12 double-deck hybrid electric buses have been delivered to Transport for London and have now covered nearly 100,000 miles in London, delivering excellent reliability and fuel performance.

Support Solutions

Support Solutions received a subcontract to provide socio-cultural dynamic support capabilities to the US Africa Command. The contract will be performed by both Support Solutions and Information Solutions employees. 

New task orders in the first half included the provision of training to US Air Force combat air crews under the Future Flexible Acquisition and Sustainment Tool contract. 

The Ship Repair business was extremely active in the period, servicing nearly 20 US Navy and commercial ships. This includes work on ten US Navy ships under the multi-ship/multi-option contract to provide maintenance and modernisation work aboard destroyers, cruisers, amphibious assault ships, and landing platform dock ships. A high-profile cruiser modernisation programme was successfully completed on the guided missile cruiser, USS Bunker Hill.

Advanced Ceramics Research, Inc. (ACR), based in Tucson, Arizona, was acquired in June for $14m (£9m). ACR produces unmanned aircraft systems for the US military and civil government agencies, as well as advanced materials for aerospace applications. 

Looking forward

In spite of downward pressures on the US defence budget, EI&S expects continued growth through strategic contract wins in information, mission support and services. Growth is driven by leveraging technical discriminators and customer relationships in the core and adjacent markets of electronics, information, support and power management, and through investment in research and development, particularly in cybersecurity in both the defence and commercial domains.

Land & Armaments 

The Land & Armaments operating group, with 21,400 employees1 and headquartered in the US, is a global leader in the design, development, production, through-life support and upgrade of armoured combat vehicles, tactical wheeled vehicles, naval guns, missile launchers, artillery systems and munitions.

	Six months ended  30 June 2009 Unaudited	Six months ended  30 June 2008 Unaudited	Year ended  31 December 2008 Audited
Sales1	£3,219m	£2,595m	£6,407m
Underlying EBITA2	£262m	£241m	£566m
Return on sales	8.1%	9.3%	8.8%
Cash inflow3	£164m	£84m	£467m
Order intake1	£1,990m	£3,262m	£8,568m
Order book1	£9.3bn	£7.9bn	£11.5bn

In the first half of 2009, Land & Armaments achieved underlying EBITA2 of £262m (2008 £241m) on sales1 of £3,219m (2008 £2,595m) and generated an operating cash inflow3 of £164m (2008 £84m).

On a like-for-like basis, sales in the first half year were unchanged. Margins reduced as costs of £42m associated with the Mine Resistant Ambush Protected (MRAP) All-Terrain Vehicles (ATV) bid were expensed.

United States

Deliveries have commenced under the $1.6bn (£972m) 10,000 vehicle contract for Family of Medium Tactical Vehicles (FMTVs) in the Long-Term Armour Strategy configuration. Contracts totalling approximately $300m (£182m) for FMTV utility vehicles and armour kits were received in the period. A proposal was submitted in May to compete for the 2010-2014 FMTV production with contract award expected later this year.

BAE Systems is competing on the Joint Light Tactical Vehicle (JLTV) programme. The Group has two technology development and testing phase contracts underway - one to BAE Systems Global Tactical Systems/Lockheed Martin and the other to BAE Systems US Combat Systems/Navistar. Full JLTV production is expected to begin in 2013 for the winning vehicle. 

Upgrades and improvements continue to the Caiman and RG33 MRAP vehicles. A $139m (£84m) contract was awarded for support and capability enhancements for the Caiman vehicle.

In the period, Land & Armaments received contracts totalling $113m (£69m) from the US Army to repair and upgrade Bradley Fighting Vehicles. Land & Armaments also proposed a common platform family of vehicles based on the Bradley chassis as a possible replacement for the US Army's M113 family of vehicles.

In June, the US government announced that a competitor had been selected for the MRAP-ATV programme.

In April, the US Secretary of Defense announced the termination of the Future Combat Systems (FCS) Manned Ground Vehicle programme and indicated that the US Army would be developing requirements for a new vehicle modernisation programme. This was further supported by the issuance in June of a US Department of Defense Acquisition Decision Memorandum. Land & Armaments will utilise technologies already developed under FCS and plans to compete in the anticipated new vehicle programme when announced by the Pentagon.

United Kingdom

The munitions business has a 15-year partnering agreement with the UK Ministry of Defence (MoD). The agreement covers approximately 80% of general munitions consumed by UK armed forces, including small arms and medium-calibre ammunitions, mortar bombs, tank ammunition and artillery shells. 

Orders worth £70m were received for an additional 63 M777 lightweight howitzers from both the US armed forces and the Canadian Army. The total number of M777s on order is now 800 and extends full production on the programme through to the end of 2011. 

Land & Armaments has delivered the first batch of Panther vehicles under an Urgent Operational Requirement for operations in Afghanistan and has service representatives on the ground supporting their deployment. The re-baselined Terrier programme is proceeding to plan, with key reliability growth trials contracted for early 2010.

In April, 500 job losses and three site closures (Leeds, Guildford and Telford) were announced. These are expected to be completed by mid-2010, as part of the ongoing transformation programme in the vehicles business.

Sweden

The joint programme to produce the 155mm Archer self-propelled artillery system for Norway and Sweden is progressing to plan. 

An order for an additional nine BVS10 Viking vehicles was received from the UK MoD. Deliveries under the CV90 contracts to the Netherlands and Denmark continue to schedule. 

In June, the Swedish Defence Materiel Administration, FMV, announced that the Group's SEP vehicle had not been selected for the Armoured Wheeled Vehicle (AWV) contract. In February, the vehicles business announced the redundancies of 100 employees in Sweden and a further 320 redundancies were announced following the loss of the AWV contract.

South Africa

The final 440 RG-31 MRAP vehicles were delivered to the US military in the first half of the year. Deliveries on the Spanish programme are underway.

Looking forward

As expected, sales at Land & Armaments in 2009 are set to decline compared with 2008. The significant reduction in deliveries on the US MRAP programme is expected to only partially be offset by increases on other programmes, principally Bradley and FMTV.

Land & Armaments continues to pursue opportunities globally, leveraging leadership positions in tracked vehicles, medium tactical vehicles, mine resistant vehicles, armour and survivability technologies, and artillery systems.

  Programmes & Support 

The Programmes & Support operating group, with 29,900 employees1, comprises the Group's UK-based air and naval activities, the Detica security business and the Integrated System Technologies business.

	Six months ended  30 June 2009 Unaudited	Six months ended  30 June 2008  Unaudited	Year ended  31 December 2008 Audited
Sales1	£2,399m	£1,917m	£4,638m
Underlying EBITA2	£277m	£191m	£491m
Return on sales	11.5%	10.0%	10.6%
Cash (outflow)/inflow3	£(47)m	£134m	£651m
Order intake1	£3,916m	£1,711m	£4,195m
Order book1	£21.2bn	£20.7bn	£19.8bn

In the first half of 2009, Programmes & Support achieved underlying EBITA2 of £277m (2008 £191m) on sales1 of £2,399m (2008 £1,917m) and generated an operating cash outflow3 of £47m (2008 inflow £134m).

On a like-for-like basis, sales growth of 20% over the first half of 2008 is largely due to the commencement of aircraft deliveries on the Salam Typhoon programme, and the increased aircraft deliveries of the Typhoon Tranche 2 standard and Hawk Advanced Jet Trainer to the Royal Air Force (RAF).

Military Air Solutions 

Military Air Solutions is responsible for delivering a range of military programmes, including Typhoon, Hawk, Nimrod MRA4, F-35 Lightning II and autonomous air vehicles. In addition, it is responsible for through-life support of Typhoon, Harrier, Hawk, Tornado, Nimrod MR2, E-3D Sentry and VC-10 aircraft.

In the period, the business has secured contracts in excess of £1bn for availability support on the UK's Typhoon and Harrier aircraft fleets.

Delivery of Typhoon aircraft to the four partner nations and Austria continues with 178 aircraft delivered as at 30 June 2009, including 24 Tranche 2 aircraft. In May, the UK government confirmed its support for Tranche 3 and the contract is expected in the second half year.

The first two of 72 Typhoons were delivered to the Royal Saudi Air Force (RSAF) in June. Equipment has been delivered to support the aircraft in operation. The first group of RSAF mechanics has successfully completed training. The first four pilots have completed their training and a further two are currently undergoing training at RAF Conningsby.

Progress on the Hawk contract for India continues with successful weapons training being carried out. Hawk aircraft deliveries for South Africa are complete and the programme is now in the support phase.

Aircraft acceptances of the Hawk Mk128 for the RAF are progressing well, with 13 of 28 now accepted. Support to the TMk1A aircraft under the Integrated Operational Support programme continues, with availability consistently in excess of the 95% target.

The Nimrod MRA4 aircraft development programme is progressing. Completion of the flight test programme is expected in 2009 followed by the commencement of production standard aircraft deliveries in line with the UK MoD's stated in-service date of December 2010.

The UK MoD announced its intention to order three instrumented F-35 test aircraft for Operational Test and Evaluation purposes. Prices for Lots 2 and 3 of the low-rate initial production aircraft have been agreed with Lockheed Martin taking the number of production units under contract to 31.

In Unmanned Aircraft Systems, progress continues on the Taranis and Mantis advanced technology demonstrator programmes. The first production standard HERTI surveillance system made its initial flight during trials in Australia in April. 

Detica

Detica's strategy is based on the three mission areas of Border Security, Cybersecurity and Information Assurance, and Counter-Terrorism and Organised Crime. Detica helps clients to tackle terrorism and serious crime by helping them collect, manage and exploit information to reveal actionable intelligence. 

Detica's national security business continues to sell strongly into the UK market with increasing overseas sales in the US, Europe, Asia and Central America. Further key sales have been made to civil government clients, such as the Department of Transport and Transport for London, and to major telecommunications and media clients. 

Detica continues to deliver existing system integration contracts into the Metropolitan Police Service, the UK Border Agency and HM Revenue and Customs.

The Detica NetReveal® solution for detecting fraud and organised crime has continued to show strong global sales growth. 

In response to the challenging market conditions, the Financial Services business has been restructured to focus on fraud and other data-centric intelligence solutions.

BVT Surface Fleet Limited (BVT) (55% interest)

The BVT joint venture has made good progress with the integration of its business, delivery on key programmes and the establishment of a sustainable through-life naval business.

The Type 45 destroyer programme continues to meet all key milestones. The first of class ship, HMS Daring, entered her home port of Portsmouth in the UK at the end of January and has now been formally commissioned into the Royal Navy fleet.

Following the UK MoD's equipment review, BVT has continued to work as part of the Carrier Alliance towards re-baselining the Queen Elizabeth Class aircraft carrier programme to meet the new delivery requirements. A revised build strategy was announced in March resulting in additional construction work to be undertaken by BVT.

Good progress continues on the contract with Elefsis Shipbuilding to build Fast Attack Craft for the Hellenic Navy. 

In April, a £136m (£75m at our 55% share) contract was signed for the upgrade of the Royal Saudi Navy minehunters.

The contracts to build three ocean patrol vessels for the Royal Navy of Oman and three offshore patrol vessels for the Trinidad and Tobago Coastguard are projected to incur significant losses. As a result of a review of these export contracts, which were contributed by VT Group plc (VT) into BVT, BAE Systems remains in negotiations with VT regarding an injection of capital by VT into the BVT business.

On 10 July, VT served a Put Option Intention Notice in relation to its proposed exit from the BVT joint venture. This is the first step in the exit process, which requires the provision of certain information by BVT prior to VT being in a position to exercise its option to sell to BAE Systems its 45% interest in BVT. VT have announced that they expect the transaction to be completed later this year.

Integrated System Technologies (Insyte)

The Queen Elizabeth Class aircraft carrier mission system, Type 45 destroyer combat system and Sampson radar contracts continue to progress to the agreed programmes.

The Falcon programme will provide the UK armed forces with a new mobile tactical high capacity, secure communications capability. Equipment acceptance trials will commence in the second half of 2009.

In May, the first Type 102 Commander radar was handed over to the UK MoD. The second and final system is scheduled for acceptance in the second half of 2009.

The Seawolf mid-life update system has now completed firing trials on the Type 23 HMS Sutherland.

The Maritime Composite Training System is in use at HMS Collingwood and the Royal Navy's Devonport training facilities, and is targeted to be declared 'ready for training' in the second half of 2009.

The £102m ARTISAN 3D medium-range radar programme is progressing through a challenging technical and mobilisation review.

The Sting Ray lightweight torpedo main production order for the Royal Navy remains on schedule. In the first half of 2009, a £99m export order for Sting Ray torpedoes was awarded by the government of Norway. Negotiations continue with the UK MoD to agree a ten-year support contract to maintain their torpedo capability.

Submarine Solutions

Astute, the First of Class, has experienced testing and commissioning delays which have impacted the timing of customer sea trials. These are expected to commence in the second half of the year. It will be the first time since the Vanguard Class boats were successfully accepted in 1999 that a new to service submarine has undertaken sea trials in the UK.

Looking forward

Programmes & Support is driven by its existing order book, and the level of future UK MoD funding to meet current UK armed forces operational requirements and delivery of the Defence Industrial Strategy. 

In the air sector, short-term growth is linked to increased combat aircraft production activity and in-service support performance both in the UK and on export programmes. 

BVT signed a definitive Terms of Business Agreement with the UK MoD in July which sets out a 15-year partnering arrangement, including lead roles for the BVT business on defined surface shipbuilding and support programmes. The business is underpinned by the six ship Type 45 destroyer programme and the manufacturing phase of the Queen Elizabeth Class aircraft carrier programme.

Detica's position in the UK market and the recent UK government White Paper on cybersecurity mean that the business is well-positioned to benefit from the continuing government focus on intelligence, security and resilience.

The Submarine Solutions business remains focused on the Astute programme, and on delivering the concept design work for the Successor Programme. Securing follow-on orders for Astute is key to retaining the skill base necessary to design and build a next-generation nuclear deterrent submarine.

In view of the pressures on the defence budget, the UK MoD has announced a Strategic Defence Review which will begin after the general election in 2010.

International 

The International operating group, with 19,700 employees1, comprises the Group's businesses in Saudi Arabia and Australia, together with a 37.5% interest in the pan-European MBDA joint venture, a 20.5% shareholding in Saab of Sweden and a 49% shareholding in Air Astana.

	Six months ended  30 June 2009 Unaudited	Six months ended  30 June 2008  Unaudited	Year ended  31 December 2008 Audited
Sales1	£1,610m	£1,397m	£3,333m
Underlying EBITA2	£161m	£219m	£435m
Return on sales	10.0%	15.7%	13.1%
Cash inflow/(outflow)3	£125m	£(739)m	£163m
Order intake1	£2,515m	£1,520m	£4,065m
Order book1	£11.5bn	£9.8bn	£11.0bn

In the first half of 2009, International achieved underlying EBITA2 of £161m (2008 £219m) on sales1 of £1,610m (2008 £1,397m) and had an operating cash inflow3 of £125m (2008 outflow £739m). 

Return on sales in the period was similar to that reported in the second half of 2008. Margins are lower than the comparative period due to Saab's move to expensing more research and development costs rather than capitalising, margins in the acquired Tenix business being below the historic margin of this operating group, and a second half sales bias in 2009 on the higher margin Tornado Sustainment Programme.

Customer Solutions & Support International

BAE Systems has a major presence in the Kingdom of Saudi Arabia where it acts as prime contractor for the UK government-to-government defence agreement and also holds certain direct contracts with the Saudi government. Progress continues to be made to modernise the Saudi armed forces in line with the Understanding Document signed in December 2005 between the UK and Saudi Arabian governments.

Around 4,700 people are employed by the Group in the Kingdom of Saudi Arabia of whom approximately half are Saudi nationals. The business continues to develop its presence in Saudi Arabia and remains committed to developing a greater indigenous capability in the Kingdom. This strategy will be enhanced by the entry into service of the Typhoon aircraft and the subsequent development of the Typhoon industrial base in Saudi Arabia.

The first two Typhoon aircraft, of the 72 contracted in 2007 under the Salam programme, were delivered on schedule in June. Negotiations continue with the Royal Saudi Air Force (RSAF) to agree the initial support and training solutions contract.

The Saudi British Defence Co-operation Programme continues to provide support and operational capability to both the RSAF and Royal Saudi Naval Forces operations. Significant orders were received in the period for the ongoing Tornado Sustainment Programme, Naval Minehunter Mid-Life Update and a multi-year Naval Training Programme. 

Challenges remain on the C4I4 Al Diriyah programme to agree the definition of a solution that meets the customer requirement.

The first Tactica land vehicles were delivered to the Saudi Arabia National Guard in June. Further opportunities are likely from the Royal Saudi Land Force's programme of capability enhancements and equipment upgrades.

Australia

BAE Systems Australia has consolidated its position as a major capability provider to the Australian Defence Force across the aerospace, land, maritime and joint sectors. 

Recent readiness and sustainment contract awards include deep maintenance of the Royal Australian Air Force's F/A-18 Hornet fighter fleet and Integrated Materiel Support services for the Royal Australian Navy's four guided missile frigates.

Under the Royal Australian Navy's new Air Warfare Destroyers (AWD) programme, a contract worth up to £150m has been agreed with ASC Pty Limited to construct 12 modular hull blocks for each of the three destroyers.

The business also secured a £20m contract to install five new integrated satellite communications terminals on board the Royal Australian Navy's AWD and Landing Helicopter Dock (LHD) vessels.

BAE Systems Australia is a subcontractor to Boeing to deliver the ground and air subsystems of the 'Wedgetail' Airborne Early Warning and Control programme. The business has now substantially handed over the ground subsystem to the prime contractor and is working to deliver the Electronic Warfare systems in support of the aircraft integration programme.

The Australian government has issued a revised request for the supply of medium and heavy tactical trucks under its Land 121 programme. BAE Systems Australia has partnered with BAE Systems Land & Armaments and Scania, and is currently participating in a customer trial of heavy vehicles that is due to be completed by December 2009. 

Four inshore patrol vessels have been delivered to the New Zealand MoD. Two remaining offshore patrol vessels are expected to be presented for acceptance later in 2009. The multi-role vessel has been accepted by the customer, but a number of subsequent warranty claims are currently in mediation. 

The contract to supply two LHD ships to the Royal Australian Navy is subject to ongoing intensive management focus to ensure that all contracted outcomes are delivered.

The completion accounting process continues with the former owners of the Tenix Defence business in Australia. 

MBDA (37.5% interest)

MBDA achieved a good level of new orders in the first half of 2009, including, in export markets, Marte to United Arab Emirates, being the first ship-based contract for this anti-ship weapon, and Vertical Launch Mica air defence weapon to a Middle-Eastern country, being the launch customer for the ground-based version.

Key domestic deliveries included Mica air-to-air missiles and Seawolf naval air defence missiles. Key export deliveries included Aster and Mistral surface-to-air missiles. 

Development programmes continue to progress. The Assessment Phase contracts for new Complex Weapon Programmes awarded in 2008 have advanced well. Discussions on the next phase are underway.

Saab (20.5% shareholding)

Saab's sales were SEK11.7bn (£963m). Operating income was SEK622m (£51m) producing an operating margin of 5.3 %, compared with 8.6% in the first half of 2008, reflecting a changed accounting approach to the capitalisation of research and development costs in line with their results announcement in February.

Key orders won during the first half of 2009 include a SEK700m (£55m) order within the civil security area, and Gripen orders from the Swedish Defence Materiel Administration, FMV, of approximately SEK1bn (£78m) to support operational capacity and future capability studies.

In response to changing market conditions, Saab announced 670 redundancies across its Dynamics and Commercial Aircraft areas of business.

The Group has taken an impairment in underlying EBITA2 of £8m against the carrying value of its shareholding in Saab, reflecting a reduction in Saab's share price since the year end.

Looking forward

The Group seeks to sustain its long-term presence in the Kingdom of Saudi Arabia through delivering on current programmes and industrialisation commitments, and developing new business.

In May, the Australian government released its Defence White Paper and 2009-10 Budget which included a commitment to increased defence funding for the next decade. BAE Systems Australia is well placed to secure a strategic share of new defence procurement and sustainment activities.

HQ & Other Businesses

HQ & Other Businesses, with 2,200 employees1, comprises the regional aircraft asset management and support activities, head office and UK shared services activity, including research centres and property management.

	Six months ended  30 June 2009 Unaudited	Six months ended  30 June 2008  Unaudited	Year ended  31 December 2008 Audited
Sales1	£133m	£113m	£235m
Underlying EBITA2	£11m	£(29)m	£(101)m
Cash outflow3	£(278)m	£(93)m	£(66)m
Order intake1	£100m	£149m	£212m
Order book1	£0.4bn	£0.4bn	£0.4bn

In the first half of 2009, HQ & Other Businesses reported underlying EBITA2 of £11m (2008 loss £29m) and had an operating cash outflow3 of £278m (2008 £93m). Of this, Regional Aircraft reported underlying EBITA2 of £39m (2008 loss £2m) and operating cash inflow of £10m (2008 £22m).

Regional Aircraft

Despite the difficult trading environment in the aviation industry, the business has been able to place 19 aircraft through sales, new leases and lease extensions with existing operators in the period. The business recognised underlying EBITA2 of £39m following favourable settlement of some outstanding commercial items and profits on sale of aircraft.

The business continues to liaise closely with operators as to their future fleet requirements with marketing activity continuing to focus on both the uncontracted idle aircraft and those returning off lease.

Whilst market conditions have impacted the general level of financing available to operators globally, the portfolio operator base is relatively robust and the business continues to monitor operator performance against default risk.

The balance sheet carrying value of aircraft (£207m) is based on the net present value of future net leasing or forecast disposal income.

In the period, a settlement with the remaining insurer under the Group's Financial Risk Insurance Programme was completed.

Looking forward

Market conditions for the airline sector continue to provide a challenging trading environment due to the impact of the global economic downturn and tightened availability of funding to operators. 

1    Including share of equity accounted investments.

2    Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding profit/(loss) on disposal of businesses and uplift on acquired inventories. Restated to exclude profit/(loss) on disposal of businesses.

3    Net cash inflow/(outflow) from operating activities after capital expenditure (net) and financial investment, dividends from equity accounted investments and assets contributed to Trust.

4    Command, Control, Communications and Computing, and Intelligence.

  Responsibility statement

Each of the directors (as detailed below) confirms that, to the best of his knowledge, this condensed set of financial statements has been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the European Union, and that the interim management report herein includes a fair review of the information required by the Disclosure and Transparency Rules of the UK's Financial Services Authority, paragraphs DTR 4.2.7R and DTR 4.2.8R. 

For and on behalf of the directors: 

R L Olver Chairman 

29 July 2009

Directors
Dick Olver	Chairman
Ian King	Chief Executive
George Rose	Group Finance Director
Phil Carroll	Non-executive director
Michael Hartnall	Non-executive director
Andy Inglis	Non-executive director
Sir Peter Mason	Non-executive director
Roberto Quarta	Non-executive director
Sir Nigel Rudd	Non-executive director
Carl Symon	Non-executive director
Ravi Uppal	Non-executive director

  Independent review report to BAE Systems plc 

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2009 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules (the DTR) of the UK's Financial Services Authority (the UK FSA). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union (EU). The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

A G Cates
for and on behalf of KPMG Audit Plc 

Chartered Accountants
8 Salisbury Square
London
EC4Y 8BB

29 July 2009

  Condensed consolidated income statement

			Six months  ended  30 June 2009 Unaudited			Six months  ended  30 June 2008 Unaudited			Year ended  31 December 2008  Audited
	Notes		£m	£m		£m	£m		£m	£m
Continuing operations
Combined sales of Group and equity accounted investments	2			9,941			7,751			18,543
Less: share of equity accounted investments	2			(849)			(657)			(1,872)
Revenue	2			9,092			7,094			16,671
Operating costs				(8,718)			(6,493)			(15,386)
Other income				61			121			415
Group operating profit excluding amortisation and impairment of intangible assets			891			824			2,003
Amortisation			(154)			(102)			(247)
Impairment			(302)			-			(56)
Group operating profit				435			722			1,700
Share of results of equity accounted investments excluding finance costs and taxation expense			87			57			132
Financial income of equity accounted investments	3		9			28			44
Taxation expense of equity accounted investments			(23)			(18)			(37)
Share of results of equity accounted investments			73			67			139
Goodwill impairment in respect of equity accounted investments			-			-			(121)
Impairment in respect of equity accounted investments2			(8)			-			-
Contribution from equity accounted investments				65			67			18
EBITA1 excluding profit/(loss) on disposal of businesses and uplift on acquired inventories	2		979			820			1,897
(Loss)/profit on disposal of businesses3	2		(9)			61			238
EBITA1			970			881			2,135
Amortisation	2		(154)			(102)			(247)
Impairments	2		(302)			-			(177)
Financial income of equity accounted investments	3		9			28			44
Taxation expense of equity accounted investments			(23)			(18)			(37)
Operating profit				500			789			1,718
Finance costs	3
Financial income			1,206			718			3,380
Financial expense			(1,750)			(716)			(2,727)
				(544)			2			653
(Loss)/profit before taxation				(44)			791			2,371
Taxation expense
UK taxation			27			(82)			(351)
Overseas taxation			(53)			(110)			(252)
				(26)			(192)			(603)
(Loss)/profit for the period				(70)			599			1,768
Attributable to:
BAE Systems shareholders				(82)			586			1,745
Minority interests				12			13			23
				(70)			599			1,768
(Loss)/earnings per share	4
Basic (loss)/earnings per share				(2.3)p			16.7p			49.6p
Diluted (loss)/earnings per share				(2.3)p			16.6p			49.5p
Dividends per ordinary share	7
Prior year final dividend paid in the period £307m (2008 £274m)				8.7p			7.8p			7.8p
Interim dividend declared £226m (2008 paid £204m)				6.4p			5.8p			5.8p

1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense. 

2 Included in EBITA.

3 Included in other income.

  Condensed consolidated statement of comprehensive income

	Six months ended  30 June  2009 Unaudited £m		Six months ended  30 June  2008 Unaudited £m		Year  ended  31 December 2008 Audited £m
(Loss)/profit for the period	(70)		599		1,768
Other comprehensive income
Currency translation on foreign currency net investments:
Subsidiaries	(307)		(4)		807
Equity accounted investments	(104)		60		197
Amounts (charged)/credited to hedging reserve	(406)		61		469
Net actuarial losses on defined benefit pension schemes:
Subsidiaries	(1,480)		(839)		(1,937)
Equity accounted investments	(132)		(13)		(60)
Fair value movements on available-for-sale investments	(1)		-		-
Recycling of cumulative currency translation on disposal	-		1		1
Current tax on items taken directly to equity	31		37		58
Deferred tax on items taken directly to equity:
Subsidiaries	494		195		425
Equity accounted investments	38		4		17
Total other comprehensive income for the period (net of tax)	(1,867)		(498)		(23)
Total comprehensive income for the period	(1,937)		101		1,745
Attributable to:
Equity shareholders	(1,949)		88		1,722
Minority interests	12		13		23
	(1,937)		101		1,745

Condensed consolidated statement of changes in equity 

	Attributable to equity holders of the parent
	Issued share capital £m	Share premium £m	Other reserves £m	Retained earnings £m	Total £m	Minority interests £m	Total equity £m
At 1 January 2009	90	1,238	5,974	(68)	7,234	55	7,289
Total comprehensive income for the period	-	-	(704)	(1,245)	(1,949)	12	(1,937)
Share-based payments	-	-	-	22	22	-	22
Share options:
Proceeds from shares issued	-	4	-	-	4	-	4
Purchase of own shares	-	-	-	(24)	(24)	-	(24)
Other	-	-	-	-	-	(2)	(2)
Ordinary share dividends	-	-	-	(307)	(307)	(5)	(312)
At 30 June 2009 (unaudited)	90	1,242	5,270	(1,622)	4,980	60	5,040
At 1 January 2008	90	1,222	4,631	23	5,966	36	6,002
Total comprehensive income for the period	-	-	99	(11)	88	13	101
Share-based payments	-	-	-	26	26	-	26
Share options:
Proceeds from shares issued	-	13	-	-	13	-	13
Purchase of own shares	-	-	-	(32)	(32)	-	(32)
Ordinary share dividends	-	-	-	(274)	(274)	-	(274)
At 30 June 2008 (unaudited)	90	1,235	4,730	(268)	5,787	49	5,836

  Condensed consolidated balance sheet

	Notes		30 June  2009 Unaudited £m		30 June  2008 Unaudited £m		31 December 2008  Audited £m
Non-current assets
Intangible assets			11,025		9,966		12,306
Property, plant and equipment			2,332		1,911		2,446
Investment property			110		111		112
Equity accounted investments			887		886		1,034
Other investments			6		6		6
Other receivables			178		315		162
Other financial assets			158		69		514
Deferred tax assets			1,414		703		1,026
			16,110		13,967		17,606
Current assets
Inventories			1,023		735		926
Trade and other receivables including amounts due from customers for contract work			3,573		3,848		3,831
Current tax			16		20		14
Other investments			49		2		-
Other financial assets			219		167		674
Cash and cash equivalents			3,007		1,712		2,624
			7,887		6,484		8,069
Total assets	2		23,997		20,451		25,675
Non-current liabilities
Loans			(3,144)		(2,112)		(2,608)
Trade and other payables			(536)		(503)		(701)
Retirement benefit obligations	5		(4,662)		(2,288)		(3,365)
Other financial liabilities			(240)		(24)		(383)
Deferred tax liabilities			-		(21)		(80)
Provisions			(447)		(419)		(459)
			(9,029)		(5,367)		(7,596)
Current liabilities
Loans and overdrafts			(129)		(298)		(173)
Trade and other payables			(8,728)		(8,092)		(9,165)
Other financial liabilities			(206)		(59)		(362)
Current tax			(477)		(405)		(704)
Provisions			(388)		(394)		(386)
			(9,928)		(9,248)		(10,790)
Total liabilities			(18,957)		(14,615)		(18,386)
Net assets			5,040		5,836		7,289
Capital and reserves
Issued share capital			90		90		90
Share premium			1,242		1,235		1,238
Other reserves			5,270		4,730		5,974
Retained earnings			(1,622)		(268)		(68)
Total equity attributable to equity holders of the parent			4,980		5,787		7,234
Minority interests			60		49		55
Total equity			5,040		5,836		7,289

  Condensed consolidated cash flow statement

	Six months ended  30 June  2009 Unaudited £m		Six months ended  30 June  2008 Unaudited £m		Year  ended  31 December 2008 Audited £m
(Loss)/profit for the period	(70)		599		1,768
Taxation expense	26		192		603
Share of results of equity accounted investments	(65)		(67)		(139)
Finance costs	544		(2)		(653)
Depreciation, amortisation and impairment	607		237		755
Gain on disposal of property, plant and equipment	(5)		(9)		(33)
Gain on disposal of investment property	-		(8)		(5)
Loss/(gain) on disposal of businesses	9		(61)		(238)
Cost of equity-settled employee share schemes	22		20		51
Movements in provisions	7		(34)		(115)
Decrease in liabilities for retirement benefit obligations	(105)		(134)		(272)
(Increase)/decrease in working capital:
Inventories	(253)		(13)		46
Trade and other receivables	78		(834)		(5)
Trade and other payables	(347)		(273)		246
Cash inflow/(outflow) from operating activities	448		(387)		2,009
Interest paid	(115)		(93)		(249)
Interest element of finance lease rental payments	(2)		(5)		(5)
Taxation paid	(233)		(160)		(261)
Net cash inflow/(outflow) from operating activities	98		(645)		1,494
Dividends received from equity accounted investments	14		17		89
Interest received	30		69		156
Purchases of property, plant and equipment	(238)		(213)		(520)
Purchases of intangible assets	(19)		(19)		(32)
Proceeds from sale of property, plant and equipment	11		16		44
Proceeds from sale of investment property	-		-		5
Purchase of subsidiary undertakings	(9)		(509)		(1,078)
Cash and cash equivalents acquired with subsidiary undertakings	-		1		2
Purchase of equity accounted investments	-		-		(12)
Proceeds from sale of subsidiary undertakings	2		131		131
Cash and cash equivalents disposed of with subsidiary undertakings	-		(7)		(60)
Proceeds from sale of equity accounted investments	-		-		16
Net proceeds from (purchase)/sale of other deposits/securities	(50)		162		164
Net cash outflow from investing activities	(259)		(352)		(1,095)
Capital element of finance lease rental payments	(11)		(4)		(18)
Proceeds from issue of share capital	4		13		16
Purchase of own shares	(24)		(32)		(43)
Equity dividends paid	(307)		(274)		(478)
Dividends paid to minority interests	(5)		-		(11)
Cash inflow/(outflow) from matured derivative financial instruments	138		(3)		(440)
Cash (outflow)/inflow from movement in cash collateral	(13)		22		106
Cash inflow from loans	920		-		-
Cash outflow from repayment of loans	(79)		(85)		(306)
Net cash inflow/(outflow) from financing activities	623		(363)		(1,174)
Net increase/(decrease) in cash and cash equivalents	462		(1,360)		(775)
Cash and cash equivalents at 1 January	2,605		3,046		3,046
Effect of foreign exchange rate changes on cash and cash equivalents	(75)		8		334
Cash and cash equivalents at end of period	2,992		1,694		2,605
Comprising:
Cash and cash equivalents	3,007		1,712		2,624
Overdrafts	(15)		(18)		(19)
Cash and cash equivalents at end of period	2,992		1,694		2,605

Notes to the condensed half-yearly financial statements

1. Accounting policies 

Basis of preparation and statement of compliance

These condensed consolidated half-yearly financial statements of BAE Systems plc (the Group) have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, and have been prepared on the basis of International Financial Reporting Standards (IFRSs) as adopted by the European Union that are effective for the year ending 31 December 2009. They do not include all of the information required for full annual financial statements. These condensed consolidated half-yearly financial statements do not comprise statutory accounts within the meaning of Section 435 of the Companies Act 2006, and should be read in conjunction with the Annual Report 2008. The comparative figures for the year ended 31 December 2008 are not the Group's statutory accounts for that financial year. Those accounts have been reported upon by the Group's auditors and delivered to the registrar of companies. The report of the auditors was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain statements under section 237(2) or (3) of the Companies Act 1985.

Except as described below, the accounting policies adopted in the preparation of these condensed consolidated half-yearly financial statements to 30 June 2009 are consistent with the policies applied by the Group in its consolidated financial statements as at, and for the year ended, 31 December 2008.

Changes in accounting policies

The following amendments to existing standards and interpretations are effective for the Group for the half year ended 30 June 2009:

 - IAS 1 (revised 2007), Presentation of Financial Statements, requires that the Group present a 'statement of comprehensive income' and a 'consolidated statement of changes in equity' as primary statements. The standard is concerned with disclosure only and has no impact on the reported results or financial position of the Group;

 - IAS 23 (revised 2007), Borrowing Costs, requires borrowing costs which are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of the cost of that asset. This has not had a significant impact on the Group's accounts for the half year ended 30 June 2009; and

 - the Group has reviewed the effect of the following amendments and interpretations, and has concluded that they have no impact on these condensed consolidated half-yearly financial statements: 

 - Amendments to IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures; 

 - Amendment to IFRS 2, Share-based Payment: Vesting Conditions and Cancellations; 

 - Amendments to IAS 32, Financial Instruments, and IAS 1, Presentation of Financial Statements: Puttable Financial Instruments and Obligations Arising on Liquidation; 

 - Amendments to IFRS 1, First-time Adoption of IFRS, and IAS 27, Consolidated and Separate Financial Statements: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate; 

 - Improvements to IFRSs 2008, the first standard issued under the International Accounting Standards Board's annual improvement process; 

 - International Financial Reporting Interpretations Committee (IFRIC) 12, Service Concession Arrangements;

 - IFRIC 13, Customer Loyalty Programmes;

 - IFRIC 14, IAS 19, The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction; and

 - IFRIC 16, Hedges of a Net Investment in a Foreign Operation.

  2. Segmental analysis

	Combined sales of Group and equity accounted  investments			Less:  sales by equity  accounted investments			Add:  sales to equity  accounted  investments			Revenue
	Six months ended 30 June 2009 Unaudited £m	Six  months ended 30 June 2008 Unaudited £m		Six months ended 30 June 2009 Unaudited £m	Six  months ended 30 June 2008 Unaudited £m		Six months ended 30 June 2009 Unaudited £m	Six  months ended 30 June 2008 Unaudited £m		Six months ended 30 June 2009 Unaudited £m	Six  months ended 30 June 2008 Unaudited £m
Electronics, Intelligence & Support	2,862	1,959		-	-		-	-		2,862	1,959
Land & Armaments	3,219	2,595		-	-		-	-		3,219	2,595
Programmes & Support	2,399	1,917		(759)	(478)		495	341		2,135	1,780
International	1,610	1,397		(622)	(568)		-	-		988	829
HQ & Other Businesses	133	113		-	-		-	-		133	113
	10,223	7,981		(1,381)	(1,046)		495	341		9,337	7,276
Intra-operating group sales/revenue	(282)	(230)		8	12		29	36		(245)	(182)
	9,941	7,751		(1,373)	(1,034)		524	377		9,092	7,094

	Underlying  EBITA1			(Loss)/profit on disposal of businesses			Amortisation of  intangible assets				Impairment of  intangible assets2			Operating  group result
	Six months ended 30 June 2009 Unaudited £m	Six months ended 30 June 2008 Unaudited £m		Six  months ended 30 June 2009 Unaudited £m	Six  months ended 30 June 2008 Unaudited £m		Six  months ended 30 June 2009 Unaudited £m		Six months ended 30 June 2008 Unaudited £m		Six  months ended 30 June 2009 Unaudited £m	Six  months ended 30 June 2008 Unaudited £m		Six  months ended 30 June 2009 Unaudited £m	Six  months ended 30 June 2008 Unaudited £m
Electronics, Intelligence & Support	268	198		-	61			(15)	(13)		(8)	-		245	246
Land & Armaments	262	241		-	-			(94)	(78)		(260)	-		(92)	163
Programmes & Support	277	191		(9)	-			(24)	(10)		(34)	-		210	181
International	161	219		-	-			(21)	(1)		-	-		140	218
HQ & Other Businesses	11	(29)		-	-			-	-		-	-		11	(29)
	979	820		(9)	61			(154)	(102)		(302)	-		514	779
Financial income of equity accounted investments														9	28
Taxation expense of equity accounted investments														(23)	(18)
Operating profit														500	789
Finance costs														(544)	2
(Loss)/profit before taxation														(44)	791
Taxation expense														(26)	(192)
(Loss)/profit for the period														(70)	599

1    Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding profit/(loss) on disposal of businesses and uplift on acquired inventories. Restated to exclude profit/(loss) on disposal of businesses.

2    The impairment charge includes £256m in respect of the US-based Products Group business and £34m relating to the Detica business. The Products Group impairment comprises goodwill (£142m) and other intangible assets (£114m). The Products Group business was acquired as part of the Armor Holdings transaction in 2007. The outlook for this business has weakened as spending from customer discretionary budgets has reduced in both domestic and export markets. Following the impairment, the goodwill and other intangible assets relating to the Products Group business in the Group's balance sheet are £50m and £88m, respectively. The Detica impairment charge relates to the Financial Services business which was not a core part of the original acquisition.

	Total assets
	30 June 2009 Unaudited  £m	30 June  2008  Unaudited £m	31 December 2008 Audited £m
Electronics, Intelligence & Support	6,989	6,204	7,230
Land & Armaments	6,919	6,049	7,731
Programmes & Support	1,871	1,749	1,958
International	2,857	2,974	3,141
HQ & Other Businesses	809	997	1,708
	19,445	17,973	21,768
Tax	1,430	723	1,040
Pension prepayment	35	41	40
Cash as defined by the Group	3,087	1,714	2,827
Consolidated total assets	23,997	20,451	25,675

3. Finance costs

	Six months ended 30 June 2009 Unaudited £m	Six months ended 30 June 2008 Unaudited £m	Year ended  31 December 2008 Audited £m
Net financial (expense)/income - Group	(544)	2	653
Net financial income - share of equity accounted investments	9	28	44
	(535)	30	697
Analysed as:
Net interest:
Interest income	30	67	147
Interest expense	(115)	(108)	(260)
Facility fees	(2)	(2)	(4)
Net present value adjustments	(16)	(17)	(27)
Share of equity accounted investments	13	28	42
	(90)	(32)	(102)
Other net financial (expense)/income:
Group:
Net financing (charge)/credit on pensions	(64)	21	51
Market value and foreign exchange movements on financial instruments and investments1	(377)	41	746
Share of equity accounted investments	(4)	-	2
	(535)	30	697

1 These amounts primarily reflect the impact of movements in the US dollar exchange rate on the unhedged element of an intercompany loan from the UK to the US businesses. The net expense in 2009 reverses much of the net income recorded in full year 2008.

  4. Earnings per share (unaudited)

	Six months ended  30 June 2009				Six months ended  30 June 2008 (restated)1
	£m	Basic  pence per  share	Diluted pence per  share		£m	Basic  pence per  share	Diluted pence per  share
(Loss)/profit for the period attributable to equity shareholders	(82)	(2.3)	(2.3)		586	16.7	16.6
Add back/(deduct):
Loss/(profit) on disposal of businesses, post tax	9				(45)
Net financing charge/(credit) on pensions, post tax	48				(16)
Market value movements on derivatives, post tax	273				(30)
Amortisation and impairment of intangible assets, post tax	199				75
Impairment of goodwill	180				-
Underlying earnings, post tax	627	17.8	17.8		570	16.2	16.2

	Millions	Millions		Millions	Millions
Weighted average number of shares used in calculating basic earnings per share	3,529	3,529		3,516	3,516
Incremental shares in respect of employee share schemes		5			12
Weighted average number of shares used in calculating diluted earnings per share		3,534			3,528

1 Restated following a change in the definition of underlying earnings to exclude profit/(loss) on disposal of businesses.

Underlying earnings per share is presented in addition to that required by IAS 33, Earnings per Share, as the directors consider that this gives a more appropriate indication of underlying performance.

In accordance with IAS 33, the diluted earnings per share are without reference to adjustments in respect of outstanding share options where the impact would be anti-dilutive.

5. Retirement benefit obligations (unaudited)

	UK defined benefit pension plans £m	US and other pension plans £m	Total £m
Deficit in defined benefit pension plans at 1 January 2009	(3,072)	(1,083)	(4,155)
Actual return on assets below expected return	(611)	(12)	(623)
Increase in liabilities due to changes in assumptions	(1,294)	(17)	(1,311)
Current service cost	(98)	(35)	(133)
Employer contributions	297	3	300
Exchange translation	-	135	135
Other movements	(67)	(19)	(86)
Deficit in defined benefit pension plans at 30 June 2009	(4,845)	(1,028)	(5,873)
US healthcare plans			(53)
Total IAS 19 deficit			(5,926)
Allocated to equity accounted investments and other participating employers1			1,299
Group's share of IAS 19 deficit excluding the Group's share of amounts allocated to equity accounted investments and other participating employers			(4,627)
Represented by:
Pension prepayment (within trade and other receivables)			35
Retirement benefit obligations			(4,662)
			(4,627)
Group's share of IAS 19 deficit of equity accounted investments			(297)

1 Certain of the Group's equity accounted investments participate in the Group's defined benefit plans as well as Airbus SAS, the Group's share of which was disposed of during 2006. As these plans are multi-employer plans the Group has allocated an appropriate share of the IAS 19 pension deficit to the equity accounted investments and to Airbus SAS based upon a reasonable and consistent allocation method intended to reflect a reasonable approximation of their share of the deficit. The Group's share of the IAS 19 pension deficit allocated to the equity accounted investments is included in the balance sheet within equity accounted investments.

As a result of the performance of global stock markets the actual return on assets is below that expected.

The increase in liabilities due to changes in assumptions is primarily due to a reduction in real discount rates used to calculate the liabilities of the pension plans as at 30 June 2009. 

The Group's share of the IAS 19 deficit excluding the Group's share of amounts allocated to equity accounted investments and other participating employers is £3,228m (31 December 2008 £2,210m) after tax.

During the period, the Group contributed £125m into Trust for the benefit of the Group's Main pension scheme. The contribution is reported within other investments - current (£48m after a fair value loss of £1m) and cash and cash equivalents (£76m) in the consolidated balance sheet at 30 June 2009, and the use of these assets is restricted under the terms of the Trust. However, the Group considers this contribution to be equivalent to the other one-off contributions it makes into the Group's pension schemes and, accordingly, presents below a definition of the pension deficit to include this contribution.

	30 June  2009 Unaudited £m
Group's share of IAS 19 deficit	(4,627)
Assets held in Trust	124
Pension deficit as defined by the Group	(4,503)

6. Contingent liabilities

Aircraft financing contingent liabilities 

	30 June  2009  Unaudited  £m	30 June  2008 Unaudited £m	31 December 2008 Audited £m
Potential future cash flow payments in respect of aircraft financing obligations	74	123	97
Anticipated aircraft values	(25)	(52)	(37)
Adjustments to net present values	(1)	-	(2)
Net exposure provided	48	71	58

The Group has provided residual value guarantees (RVGs) in respect of certain commercial aircraft sold. At 30 June 2009, the Group's exposure to make future payments in respect of these arrangements was £74m (31 December 2008 £97m). The Group's net exposure to these guarantees is covered by the provisions held and the residual values of the related aircraft.

The Group is also exposed to actual and contingent liabilities arising from commercial aircraft financing and RVGs given by Saab AB. Provision is made against the expected net exposures on a net present value basis within the accounts of Saab. The Group's share of such exposure is limited to its percentage shareholding in Saab.

Other contingent liabilities 

The Group is subject to an ongoing investigation by the UK Serious Fraud Office (the SFO) in connection with marketing of the Group's products. The Group is co-operating fully with the SFO.

At this stage management cannot determine whether or not it might lead to any proceedings being brought against the Group. Accordingly, the potential for fines or other penalties cannot currently be assessed. As the investigation is ongoing it is not possible to identify the timescale in which these issues might be resolved. 

In addition, in June 2007, the US Department of Justice notified the Group that it had commenced a formal investigation relating to the Group's compliance with anti-corruption laws, including its business concerning the Kingdom of Saudi Arabia. Again, given the status of this matter it is not possible to provide any details of any possible future financial effects that might result from the investigation and any subsequent actions or events that might occur as a result of the investigation. Equally it is not possible to provide any timescale in which these issues might be resolved.

Should any financial effects arise as a result of these investigations the directors consider it unlikely that there is any likelihood of reimbursement for such costs from any sources other than certain rights to recover reimbursement of the legal costs under the Group's insurance policies.

7. Dividends

The directors have declared an interim dividend of 6.4p per ordinary share (2008 5.8p), totalling £226m (2008 £204m). The dividend will be paid on 30 November 2009 to shareholders registered on 23 October 2009. The ex-dividend date is 21 October 2009.

Shareholders who do not at present participate in the Company's Dividend Reinvestment Plan and wish to receive the final dividend in shares rather than cash should complete a mandate form for the Dividend Reinvestment Plan and return it to the registrars no later than 9 November 2009.

8. Acquisitions (unaudited)

The Group acquired Advanced Ceramics Research, Inc. on 8 June 2009 for a consideration of $14m (£9m). The provisional net assets and goodwill at acquisition included in the Group's consolidated balance sheet are £1m and £8m, respectively.

During the year ended 31 December 2008, the Group acquired MTC Technologies, Inc., Tenix Defence Holdings Pty Limited, Tenix Toll Defence Logistics Pty Limited, Detica Group Plc and IST Dynamics. Certain of the fair values assigned to the net assets at the dates of acquisition were provisional, and in accordance with IFRS 3, Business Combinations, the Group has adjusted the fair values attributable to these acquisitions in the half year ended 30 June 2009, resulting in a net increase in goodwill of £5m. This has not had a material impact on the consolidated accounts and, as such, the Group has not restated the balance sheets as at 30 June 2008 and 31 December 2008.

The formation of the joint venture BVT Surface Fleet Limited (BVT) was also completed during the year ended 31 December 2008. The Group has adjusted certain of the provisional fair values assigned to the share of net assets acquired resulting in an increase in goodwill of £48m. Of this amount, £34m relates to an increase in loss provisions on export contracts and £10m relates to a reduction in intangible assets.

9. Related party transactions

The Group has an interest in a number of equity accounted investments. Transactions with the equity accounted investments occur in the normal course of business and are priced on an arm's length basis and settled on normal trade terms. The more significant of these transactions are disclosed below:

	Six months  ended  30 June 2009  Unaudited £m	Six months  ended 30 June 2008  Unaudited  £m	Year  ended 31 December  2008 Audited £m
Sales to related parties	524	377	1,081
Purchases from related parties	159	79	147
Amounts owed by related parties	204	223	200
Amounts owed to related parties	1,313	885	1,476

10. Events after the balance sheet date

On 10 July, VT Group plc (VT) served a Put Option Intention Notice in relation to its proposed exit from the BVT joint venture. This is the first step in the exit process, which requires the provision of certain information by BVT prior to VT being in a position to exercise its option to sell to BAE Systems its 45% interest in BVT for a minimum of £380m (subject to adjustment). 

11. Annual General Meeting

The Annual General Meeting of BAE Systems plc will be held on 5 May 2010.

 

END

 

 

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