Interim Results
BAE SYSTEMS PLC
13 September 2001
Interim Report 2001
BAE SYSTEMS
Highlights
The company has made good progress despite the difficulties reported in our
January trading statement. Reported earnings are marginally ahead of those for
this time last year. Operating cash flow performance is in line with plan,
with net debt representing around 10% of market capitalisation at the half
year.
A key milestone since the last Annual Report was the UK Government's
announcement in respect of its far-sighted procurement strategy for the Type
45 Destroyer. This sustains a long-term workload for our shipyards.
The integration of the former British Aerospace and Marconi Electronic Systems
businesses has been highly successful. Integration of the newly acquired North
American businesses is also on plan.
These results include the first six months' contribution from the new
integrated joint Airbus company, which has made further progress in financial
performance.
Profit before interest Profit before tax Diluted Dividend Net debt Order
(1) (1) EPS (1) per share book
£551m £482m 10.2p 3.5p £1,035m £45bn
Up 9% Up 4% Up 2% Up 6% Up 15% Up 10%
Outlook
Business performance for the full year remains on track.
The rationalisation programme announced in January is being implemented, and
growth in the company's performance is expected to resume in 2002 as planned.
This is underpinned by the progression of the Eurofighter Typhoon programme
into production, together with a strong business position now established in
the growing US defence systems market, and also continuing progress through
our joint venture company, Airbus.
(1)excluding goodwill amortisation and exceptional items
Chairman's statement
Dear Shareholder
I am pleased to report that the company has made good progress despite the
difficulties reported earlier in the year, and performance for the first half
of 2001 has been in line with plan. Profit before interest(1) increased on the
same period last year, resulting in broadly unchanged earnings per share.
Business performance for the full year remains on track.
The rationalisation programme announced in January, designed to address
capacity issues, is being implemented and, as programme activity recovers, we
expect growth in the company's performance to resume in 2002 as planned. The
6% increase in the interim dividend to 3.5 pence per share is a reflection of
our confidence in the group's outlook.
Excellent progress has been made in the UK market. The UK Government took a
major step in announcing a far-sighted procurement strategy for the Type 45
Destroyer. Our Marine business will assemble and launch all of this class of
up to 12 ships, of which the UK Government has already committed to the first
six. This is good news and will sustain a long-term workload for our
shipyards. It is allowing us to plan and invest in our naval facilities and,
despite the previously announced near-term redundancies, will result in more
stable employment for the future.
Airbus continues to consolidate its strong position in its markets. In
particular, the A380 completes the top end of the range. An order backlog of
over 1,700 Airbus aircraft places the business in a good position as the
commercial aircraft industry enters a period of uncertainty following the
slowdown in the global economy. The newly formed integrated joint Airbus
company, in which we have a 20% interest, gives us a strong and dedicated
management structure to respond to the anticipated changes in the economic
environment.
Our positioning and growth in the important US market has provided increased
profitability and reinforces our involvement as a global systems business. We
are now involved in many major US programmes, including Joint Strike Fighter,
and are well placed to play an important part in the largest defence market in
the world.
Integration of the former British Aerospace and Marconi Electronic Systems
businesses has been highly successful and is essentially complete. Anticipated
synergy savings are being achieved in line with our plans. Good results from
our North America business, which acquired two former Lockheed Martin
operations last year, reflect our ability to integrate acquired businesses
successfully.
The key to delivering our existing commitments and future aspirations remains
the people in the BAE SYSTEMS team. The demands placed on our employees at all
levels are significant, especially when set against a background of continuing
challenge, innovation and change. It is through the ability and commitment of
BAE SYSTEMS people that these challenges are met and I am grateful for the
team's dedication.
Sir Richard Evans
Chairman
(1)excluding goodwill amortisation and exceptional items.
'The outlook for the year remains in line with our 2000 result and we expect
growth to resume in 2002 as planned.'
Summarised profit and loss account
Restated(1) Restated(1)
Six Six Year to
months months
to 30 to 30 31
June June December
2001 2000 2000
Unaudited Unaudited Audited
£m £m £m
Sales 6,292 5,663 12,185
Operating profit (2) 393 500 807
Share of operating profit of joint ventures (2) 158 7 143
Net interest (69) (43) (91)
Profit before tax, goodwill amortisation and
exceptional items 482 464 859
Profit before tax, after goodwill amortisation
and 171 214 179
exceptional items
Tax (142) (128) (198)
Minority interests (6) (5) (6)
Profit/(loss) for the period 23 81 (25)
Basic earnings per share(2) 10.3p 10.2p 18.8p
Diluted earnings per share (2) 10.2p 10.0p 18.8p
Dividend per share 3.5p 3.3p 8.5p
(1) see note 6
(2) excluding goodwill amortisation and
exceptional items as appropriate
Segmental analysis
Sales Profit/(loss)
Restated(1) Restated(1)
Six months Six months Six months Six months
to 30 June to 30 June to 30 June To 30 June
2001 2000 2001 2000
Unaudited Unaudited Unaudited Unaudited
£m £m £m £m
Programmes 1,049 1,005 34 129
Customer Solutions & Support 1,023 881 190 230
(CS&S)
International Partnerships 799 805 51 27
Avionics 433 594 37 54
North America 1,264 745 112 71
Operations 656 628 13 (31)
Commercial Aerospace 1,509 1,448 117 34
Centre 16 11 (3) (7)
6,749 6,117 551 507
Less: intra-group (457) (454)
Net interest (69) (43)
482 464
Goodwill amortisation,
including joint (246) (183)
ventures
Exceptional items (note 2) (65) (67)
6,292 5,663 171 214
(1) see note 6
Chief Executive's review
The group's performance in the first six months has been in line with plan.
Pre-exceptional and pre-goodwill EPS has been broadly the same over the
comparable period. Sales of £6.3bn were 11% higher compared to the same period
in 2000, this growth coming principally from acquisitions. Profit before
interest(1) of £551m increased 9%. Interest costs rose to £69m, leaving pre-tax
profits(1) up 4% at £482m. Operating cash flow performance is in line with
plan, with net debt at £1.0bn representing around 10% of market capitalisation
at the half year.
Stronger trading is expected in the second half. Seasonality continues to be a
feature of a number of our business groups. In particular in the second half,
Programmes will benefit from cost reduction actions and the achievement of a
significantly higher number of milestones on Eurofighter Typhoon. Avionics
will also benefit from increased Eurofighter Typhoon equipment deliveries.
Order book at the end of June stands at £45.4bn with a strong order intake
performance from Airbus and CS&S, the latter driven by more spares and repairs
activity. Order intake for engineering work relating to sustaining the
capability of in-service aircraft for the UK MoD has recovered well and is
expected to finish the year slightly better than plan.
Programmes
Delays in military aircraft order intake for our Programmes business group
were a key factor in the challenges identified in our January trading
statement. Good progress has been made in restructuring to align business
capacity with anticipated throughput, and this work continues. Production of
the Hawk aircraft is a significant aspect of the throughput plan for
Programmes. Prospects for the sale of further Hawk aircraft remain good with
campaigns leading to potential sales of 100-200 aircraft over the next 10
years. We are gaining greater confidence that Hawk will form the fast jet
trainer solution to the UK MoD's Military Flying Training System requirements.
The Nimrod programme, though demanding, is progressing towards maturity.
Notable achievements in the first half have been the completion of the
airframe and systems design. We are proceeding according to the revised plan
resulting from the 2000 review. Lessons learned from this contract have
strengthened our prime contracting processes.
The first production Eurofighter Typhoon is progressing well for delivery in
2002, building on a successful development programme which is now nearing
completion. Although we were disappointed by the decision of the Greek
Government to postpone its planned Eurofighter Typhoon contract, overall
export marketing activity at this early stage of the programme is encouraging.
Headway has been made on our naval programmes. All major procurement items
have been awarded under the prime contract for Astute, the next generation of
nuclear powered attack submarines, and construction of the first boat is under
way.
North America
The North America business group, which operates in our largest global market,
has achieved strong order intake and prospects are encouraging as US defence
budget priorities become clearer. In general, the US defence budgets are
increasing, although much of the extra spend is expected to be channelled more
towards improving the quality of life for forces personnel than towards
equipment procurement. While we anticipate that total US defence procurement
spending will increase in the future, clarification will be obtained from
Congressional budget approval, expected by year end. In the meantime, the
Pentagon has already announced the launch of low rate production of the F-22
combat aircraft and decisions on other major programmes are also expected
before year end.
Our existing involvement in major US programme platforms and our presence in
North America leave us well-positioned to benefit from the changing defence
marketplace.
Customer Solutions & Support
The CS&S business group has produced a strong sales performance in the first
half, being 16% ahead of the first half of 2000. Growth in support services
is another important market opportunity as customers seek suppliers with a
broad range of capability and the ability to integrate and support complex
solutions through their full lifecycle. We are well-placed to meet these
requirements as they materialise and we continue to work closely with our
customers to ensure that BAE SYSTEMS will deliver value from profitable
opportunities as they emerge.
Avionics
As referred to above, results for Avionics reflect the phasing of equipment
deliveries for Eurofighter Typhoon. This second half year will see over 70%
of the Eurofighter Typhoon radar systems for this year being delivered. This
production ramp up will continue into 2002 with the initial electronic warfare
protection systems being delivered for the aircraft.
Commercial Aerospace
Since January, Airbus has been operating as an integrated joint company. The
legal formalities have now also been completed, giving BAE SYSTEMS a 20%
shareholding. Airbus continues to enjoy a strong market performance with
aircraft orders of 309 in the first half before 49 cancellations. The 380-seat
A340-600 made its maiden flight in April 2001 and Airbus established its
position in the ultra-large airliner market with the A380. Since its launch
the A380 has attracted significant interest, with firm orders already
totalling 48 aircraft by the end of June. Airbus now offers a full family of
aircraft with a high degree of commonality.
The market for large jet aircraft is softening in line with the global
economic outlook. Deliveries of Airbus aircraft are expected to continue to
rise next year from some 330 this year. Airbus performance is underpinned by a
greater number of the more valuable larger, long-range aircraft expected to be
delivered over future years.
Confirmation of the first order for the new RJX regional jet from British
European was a notable success for our Aircraft Services group. RJX flight
development started in April and is proceeding successfully with prospects to
build the order book further.
Operations
Our Operations business group delivered the planned improvement in
profitability. First half results have moved to a profit of £13m from a loss
of £31m in 2000. Features supporting this improvement include the securing of
a five-year supply agreement with Airbus for aerostructures work and further
improvements in manufacturing efficiency across the Operations business group.
The medium and long-term outlook for our Marine shipyard business is more
stable since the UK Government announced its Type 45 procurement strategy in
July. Progress on design of the Type 45 has been good and we are looking
forward to working with Vosper Thornycroft which will be responsible for
approximately 15% of the Type 45 steelwork.
The commitment in July of the UK Government to a further three Type 45
Destroyers, taking the total to six, is expected to result in an extra £0.7bn
of orders by 2004. In the near-term, however, a planned reduction of some
1,150 jobs in the shipyards will go ahead. Steps are being taken to mitigate
the impact on individuals affected by the redundancy programme with particular
emphasis on redeployment and re-skilling, where appropriate.
International Partnerships
Our International Partnerships business group is showing a sustained recovery
as development programmes mature and move into production.
In July, Thales, which partners BAE SYSTEMS in the Thomson Marconi Sonar (TMS)
joint venture, declared its intention to exercise its right to purchase our
49.9% holding in TMS.
We are particularly pleased to have reached a definitive agreement with EADS
and Finmeccanica to enhance the MBD joint venture, by merging the missile and
missile system activities of Matra BAE Dynamics, Aerospatiale Matra Missiles
and Alenia Marconi Systems (AMS) to form MBDA. This joint venture is awaiting
regulatory clearance but, once this has been given, it will be the second
largest company in the missile and missile systems field. BAE SYSTEMS will
have a 37.5% interest in this new company.
In another important restructuring of the European defence industry, the naval
radar and combat systems businesses of BAE SYSTEMS and AMS will be combined to
form a newly focused joint venture in which we will have a 50% interest.
Outlook
In summary, the business has performed to plan over the half year, which is
expected to continue to the year end. We have made some important strategic
progress and are well-positioned to resume growth in 2002.
John Weston
Chief Executive
(1) excluding goodwill amortisation and exceptional items.
Major business drivers
Eurofighter Typhoon Good progress continues on the development of the
aircraft towards service entry later next year. Assembly of the first
production standard aircraft is well advanced with first flight planned around
year end.
Gripen Following the first export sale to South Africa, further export
prospects are being pursued and joint marketing activity with Saab is being
enhanced by the recent formation of a new joint venture company - Gripen
International.
Military aircraft engineering Order intake for engineering activity to
sustain the capability of in-service aircraft for the UK MoD has recovered
from the low level experienced in 2000. Order intake in the first half was
slightly ahead of plan.
Hawk Manufacturing capacity is being addressed to match near-term reduction in
production of the Hawk. Good prospects remain for further sales.
JSF The company has substantial involvement with both contenders for the US
Joint Strike Fighter programme. Selection to proceed with either proposal,
after the competitive 'concept definition' phase concludes this autumn, will
be a substantial business opportunity.
North America A strong business position has been established in the growing
US defence systems market with the expansion of this business group, following
acquisitions last year. BAE SYSTEMS has become a major supplier, including for
support services, on many in-service US programmes and is well placed to make
a significant contribution to emerging programmes such as the F-22 and Joint
Strike Fighter.
Customer Solutions & Support Growth in support activity is being delivered,
including spares and support in Saudi Arabia under the Al Yamamah programme
and other support activity in the UK. Opportunities for substantial growth
from outsourcing and Public Private Partnerships in the UK remain good.
Astute Good progress continues on this prime contract. Assembly of the major
sections for the first of this class of nuclear submarine is under way.
Type 45 As prime contractor, the company is well-advanced in the selection and
procurement of major systems for this Air Defence Destroyer programme.
UK naval shipbuilding The agreement with the UK MoD on the build strategy for
the Type 45 Destroyer will result in greater stability for shipbuilding
throughput and capacity. Plans for investment in our shipyards are now being
implemented.
Airbus Airbus has been successful in the large commercial jet market and has
further strengthened its position in the first half of the year. Airbus is
facing the weakening market with a combination of the newly integrated joint
company, a large order book and new products entering the market.
Consolidated profit and loss account
Restated(see note 6)
Six Six Year to
months months 31
to 30 to 30 December
June June
2001 2000 2000
Unaudited Unaudited Audited
Sales Notes £m £m £m
Less: adjustment for share of joint venture 6,292 5,663 12,185
sales
(1,872) (1,142) (2,539)
Turnover 4,420 4,521 9,646
Operating costs
Excluding goodwill amortisation and (4,027) (4,021) (8,839)
exceptional items
Goodwill amortisation (197) (162) (330)
Exceptional items 2 (65) (67) (288)
(4,289) (4,250) (9,457)
Operating profit 131 271 189
Share of operating profit/(loss) of joint
ventures
Share of operating profit before goodwill
amortisation 158 7 143
and exceptional items
Goodwill amortisation (49) (21) (43)
Exceptional items - - (19)
109 (14) 81
Profit before interest
Excluding goodwill amortisation and 551 507 950
exceptional items
Goodwill amortisation and exceptional items (311) (250) (680)
240 257 270
Interest
Net interest excluding joint ventures (87) (57) (114)
Share of net interest of joint ventures 18 14 23
(69) (43) (91)
Profit before tax on ordinary activities
Excluding goodwill amortisation and 482 464 859
exceptional items
Goodwill amortisation and exceptional items (311) (250) (680)
171 214 179
Tax
Tax on profit excluding exceptional items (154) (145) (270)
Tax on exceptional items 12 17 72
(142) (128) (198)
Profit/(loss) after tax on ordinary 29 86 (19)
activities
Equity minority interests (6) (5) (6)
Profit/(loss) for the period 23 81 (25)
Dividends
Equity: ordinary shares 4 (107) (99) (257)
Non-equity: preference shares (10) (11) (21)
(117) (110) (278)
Retained loss (94) (29) (303)
Basic earnings per share
Including goodwill amortisation and 0.4p 2.3p (1.5p)
exceptional items
Excluding goodwill amortisation and 10.3p 10.2p 18.8p
exceptional items
Diluted earnings per share
Including goodwill amortisation and 0.4p 2.3p (1.5p)
exceptional items
Excluding goodwill amortisation and 10.2p 10.0p 18.8p
exceptional items
All results arise from continuing operations.
Consolidated balance sheet
Restated (see note
6)
30 June 30 June 31
December
2001 2000 2000
Unaudited Unaudited Audited
Notes £m £m £m
Fixed assets
Intangible assets 1 7,097 6,153 7,274
Tangible assets 1,844 2,154 2,356
Investments 1
Share of gross assets of joint ventures 7,306 5,245 5,676
Share of gross liabilities of joint ventures (6,024) (4,617) (4,988)
Share of joint ventures 1,282 628 688
Others 42 21 40
1,324 649 728
10,265 8,956 10,358
Current assets
Stocks 1,340 1,654 1,536
Debtors due within one year 2,289 3,011 2,210
Debtors due after one year 907 710 732
Investments 1,042 1,862 1,159
Cash at bank and in hand 1,570 1,053 1,475
7,148 8,290 7,112
Current liabilities
Loans and overdrafts (2,044) (2,103) (2,397)
Creditors 3 (5,129) (4,501) (4,743)
(7,173) (6,604) (7,140)
Net current (liabilities)/assets (25) 1,686 (28)
Total assets less current liabilities 10,240 10,642 10,330
Liabilities falling due after one year
Loans (1,554) (1,260) (1,063)
Creditors 3 (594) (531) (619)
Provisions for liabilities and charges 3 (1,138) (1,537) (1,571)
6,954 7,314 7,077
Capital and reserves
Called up share capital 143 142 143
Share premium account 371 290 341
Statutory reserve 202 202 202
Other reserves 5,440 5,442 5,440
Profit and loss account 775 1,142 851
Shareholders' funds
Equity: ordinary shares 6,665 6,952 6,711
Non-equity: preference shares 266 266 266
6,931 7,218 6,977
Equity minority interests 23 96 100
6,954 7,314 7,077
Consolidated cash flow
Six Six Year to
months months
to 30 to 30 31
June June December
2001 2000 2000
Unaudited Unaudited Audited
Notes £m £m £m
Net cash inflow from operating activities
Operating profit 131 271 189
Depreciation, amortisation and impairment 323 300 639
Profit on disposal of fixed assets and (20) (14) (29)
investments
Movement in provisions for liabilities and
charges 5 (376) (127) (215)
excluding deferred tax
Decrease/(increase) in working capital:
Stocks (494) (90) 47
Debtors (340) 644 1,620
Creditors 446 (502) (580)
Customer stage payments 339 28 223
9 510 1,894
Cash flow statement
Net cash inflow from operating activities 9 510 1,894
Dividends from joint ventures 10 12 18
Returns on investments and servicing of finance (46) (63) (97)
Taxation 1 (4) (59)
Capital expenditure and financial investment (83) (84) (283)
Acquisitions and disposals
Acquisitions - former Lockheed Martin businesses - - (1,560)
Other - (45) (45)
Disposal of subsidiary undertakings and joint
ventures 82 55 115
Equity dividends paid (158) (101) (202)
Net cash (outflow)/inflow before financing and
management of liquid resources (185) 280 (219)
Management of liquid resources 125 (254) 497
Financing 298 (14) (123)
Net increase in cash available on demand 238 12 155
Reconciliation of net cash flow to net movement in
net funds
Net increase in cash available on demand 238 12 155
Net (decrease)/increase in liquid resources (125) 254 (497)
(Increase)/decrease in other loans included within (293) 34 194
net funds
Change in net funds from cash flows (180) 300 (148)
Finance lease obligations relinquished on disposal of
subsidiary undertakings 9 - -
Other non cash movements 12 (22) 48
Net (decrease)/increase in net funds (159) 278 (100)
Net debt at start of period (826) (726) (726)
Net debt at end of period 5 (985) (448) (826)
Reconciliation to movement in net debt as defined by
the group
Net (decrease)/increase in net funds (159) 278 (100)
Decrease in cash on customers' account 5 23 24 26
Net (decrease)/increase for the period (136) 302 (74)
Statement of total recognised gains and losses
Restated (see note
6)
Six Six Year to
months months
to 30 to 30 31
June June December
2001 2000 2000
Unaudited Unaudited Audited
£m £m £m
Profit/(loss) for the period
Group excluding joint ventures (49) 90 (103)
Joint ventures 72 (9) 78
Total profit/(loss) for the period 23 81 (25)
Currency translation on foreign currency net
investments, 11 (8) (20)
including joint ventures
Goodwill on disposal of Flight Simulation and 18 - -
Training Inc
Revaluation of land and buildings - (14) (14)
Other recognised gains and losses relating to the 29 (22) (34)
period (net)
Total recognised gains and losses relating to the 52 59 (59)
period
Prior year adjustment in respect of the adoption (175)
of FRS 19 (see note 6)
Total recognised gains and losses (123)
Reconciliation of movements in shareholders' funds
Restated (see note
6)
Six Six Year to
months months
to 30 to 30 31
June June December
2001 2000 2000
Unaudited Unaudited Audited
£m £m £m
Profit/(loss) for the period 23 81 (25)
Dividends (117) (110) (278)
(94) (29) (303)
Other recognised gains and losses relating to the 29 (22) (34)
period (net)
Issuance of shares to QUEST 14 10 17
Exercise of share options, warrants and scrip 5 62 100
dividend issue
Net increase in shareholders' funds (46) 21 (220)
Opening shareholders' funds (restated) 6,977 7,197 7,197
Closing shareholders' funds 6,931 7,218 6,977
Notes to the interim report
1 Acquisitions and disposals
Integrated joint Airbus company
The integrated joint Airbus company was formed with effect from 1 January 2001
to take on the combined operations of the Airbus Industrie GIE partners, BAE
SYSTEMS and EADS, together with Airbus Industrie GIE itself. BAE SYSTEMS
holds a 20% interest in the new company with EADS holding the balance. The
20% investment in the new Airbus company is accounted for as a joint venture,
with provisional goodwill arising on the transaction of £1,103m included
within joint venture share of gross assets. This goodwill is being amortised
over its estimated useful economic life, assessed at 20 years.
Business disposals
In April 2001 the group disposed of its Flight Simulation and Training
business based in Tampa, Florida to CAE, Toronto, Canada, for a consideration
of US$75m (£53m).
In April 2001 the group disposed of its 54% interest in BAE SYSTEMS Canada
Inc. to ONCAP for a consideration of Can$310m (£138m).
In June 2001 the group disposed of its 50% interest in its US joint venture,
LH Systems, to Leica Geosystems for a consideration of US$15m (£11m).
Net cash inflow on business disposals (after accounting for cash retained in
those businesses of £120m) amounted to £82m in the period (30 June 2000 £55m;
31 December 2000 £115m).
2 Exceptional items
Six Six Year to
months months
to 30 to 30 31
June June December
2001 2000 2000
Unaudited Unaudited Audited
£m £m £m
Exceptional loss included within profit before
interest
2000 rationalisation programme (44) - (109)
1999 defence sector rationalisation - (10) (47)
MES integration costs (21) (57) (151)
(65) (67) (307)
Net exceptional loss included
within profit before tax (65) (67) (307)
2000 rationalisation programme
Costs associated with the 2000 rationalisation programme continue to be
forecast at £225m before a tax credit of £52m. Cumulatively £153m has been
charged to 30 June 2001.
Of this, £44m has been charged in the first half of 2001, with an associated
tax credit of £8m. A net cash outflow of £27m arose in the first half of 2001
in respect of these costs.
BAe/MES integration
Costs associated with the integration of the former MES and British Aerospace
businesses totalling £21m before a tax credit of £4m were incurred in the
first half of 2001. A net cash outflow of £19m arose in the first half of
2001 in respect of these costs.
Costs relating to the actions taken to integrate these businesses will
continue through to 31 December 2002.
3 Commercial aircraft financing
Commercial aircraft are frequently sold for cash with the manufacturer
retaining some financial exposure. Aircraft financing commitments of the
group can be categorised as either direct or indirect. Direct commitments
arise where the group has sold the aircraft to a third party lessor and then
leased it back under an operating lease (or occasionally a finance lease)
prior to an onward lease to an operator. Indirect commitments (contingent
liabilities) may arise where the group has sold aircraft to third parties who
either operate the aircraft themselves or lease the aircraft on to operators.
In these cases the group may give guarantees in respect of the residual values
of the related aircraft or certain head lease and finance payments to be made
by either the third parties or the operators. The group's exposure to these
commitments is offset by future lease rentals and the residual value of the
related aircraft.
The group has entered into arrangements which reduce its exposure from
commercial aircraft financing by obtaining insurance cover from a syndicate of
leading insurance companies over a significant proportion of the contracted
and expected income stream from the aircraft portfolio including those
aircraft where the group has provided residual value guarantees.
SYSTEMS 2001 Asset Trust
On 19 June 2001, the group restructured its obligations in respect of that
element of the aircraft portfolio covered by the insurance arrangements. In
summary, SYSTEMS 2001 Asset Trust (an independent group of companies which has
entered into a servicing contract with the group) has assumed the aircraft
head lease obligations and sub-lease income streams in return for the issuance
of four tranches of promissory notes and a guaranteed funding facility from
the group, required to meet any short-term funding requirements.
As a result of the transaction, those liabilities previously classified as
provisions in the group's accounts which now relate to the first tranche
(promissory note A) have been transferred to creditors.
Given the long term nature of the promissory notes, the directors believe it
is appropriate to state the related creditor and provisions at their net
present value.
Recourse provision
Movements in the recourse provision in the period are summarised as follows:
£m
Recourse provision at 31 December 2000 399
Utilisation in period (24)
Net present value top up 17
Transferred to creditors in respect of promissory note A (282)
At 30 June 2001 110
The estimated liability in respect of tranches two, three and four is included
within the remaining recourse provision at 30 June 2001.
Joint Ventures
Both the new integrated joint Airbus company and Saab AB also have aircraft
financing commitments and contingent liabilities arising from guarantees in
connection with aircraft sales.
Where these joint ventures are exposed to financial risk from aircraft sales,
they make provision against the expected net exposure on a net present value
basis, after taking into account the expected future sub-lease income and
residual values of the aircraft. The group's exposure is limited to its
respective shareholdings in these businesses.
4 Dividends
The directors have declared the payment of an interim dividend of 3.5p per
ordinary share (2000 3.3p). The dividend will be paid on 30 November 2001 to
shareholders registered on 19 October 2001. The ex-dividend date will be 17
October 2001.
5 Cash flow items
Net debt
Net debt disclosed on page 1 at £1,035m on 30 June 2001 (30 June 2000 £523m;
31 December 2000 £899m) excludes cash received on customers' account of £50m
(30 June 2000 £75m; 31 December 2000 £73m) which is included within creditors
on the consolidated balance sheet.
Net debt as disclosed on the face of the Cash Flow Statement on page 6
includes these amounts received on customers' account.
SYSTEMS 2001 Asset Trust
Included within the movement in provisions for liabilities and charges is a
decrease of £282m with a corresponding increase in creditors as a result of
the SYSTEMS 2001 Asset Trust transaction. This is explained further in note 3.
6 Restatements in accounts
Segmental analysis of sales
In prior years, sales to joint ventures were eliminated in full before the
presentation of sales by business segment.
As a result of the formation of the integrated joint Airbus company the
directors have reconsidered this presentation and have determined a more
appropriate treatment is, at business segment level, to eliminate sales only
to JVs included in the respective business segment. All other JV sales
eliminations are included in the overall intra-group adjustment. Comparative
figures have been restated accordingly.
Financial Reporting Standard 19 - Deferred Tax
Financial Reporting Standard 19 - Deferred Tax has been adopted for the first
time by the group in this Interim Report.
In previous years the group had complied with Statement of Standard Accounting
Practice 15 - Deferred Taxation (SSAP 15) which has been superseded by the
introduction of FRS 19. SSAP 15 required provision for deferred tax to be
made using the liability method to the extent that net deferred tax assets or
liabilities were likely to crystallise in the foreseeable future. This method
was commonly referred to as the partial provision method. FRS 19, by
contrast, requires a form of full provisioning.
The effect of the implementation of FRS 19 on reported results is as follows:
Six months Six months Year to
to 30 June to 30 June 31 December
2001 2000 2000
Unaudited Unaudited Audited
£m £m £m
Tax on profit excluding exceptionals (5) (6) (12)
Reduction in profit for the period (5) (6) (12)
30 June 30 June 31 December
2001 2000 2000
Unaudited Unaudited Audited
£m £m £m
Goodwill (82) (82) (82)
Deferred tax assets 201 170 159
Deferred tax provisions (299) (257) (252)
Net assets (180) (169) (175)
The adoption of FRS 19 has resulted in the provision for additional deferred
tax liabilities primarily in respect of accelerated capital allowances,
pensions and tax deductible goodwill arising in the US. In addition deferred
tax assets arise on provisions, losses and other short term timing differences
which were not recognised previously under SSAP 15.
The reduction in goodwill is in respect of deferred tax assets previously
unrecognised on the acquisition of MES in 1999.
Recourse provision adjustment to net present value
In prior years, long term recourse provisions had been established on a
discounted net present value basis, and accordingly an adjustment was made in
the year, and charged to interest, to maintain the net present value of these
provisions. Prior to the 2000 year end Annual Report that part of the
adjustment relating to provisions established as exceptional items had been
treated as an exceptional charge within interest. As part of the 2000 year
end reporting process the directors reconsidered this presentation in the
light of the more common treatment of such adjustments to discounted
provisions and accordingly this charge was included within the normal interest
payable for the group in the 2000 year end Annual Report. The presentation of
comparative 30 June 2000 figures has been restated in this year's Interim
Report in consequence and in accordance with FRS 18.
There is no net impact on profit reported for the comparative six month
period, or on net assets. The adjustment for 30 June 2000, amounting to £16m,
is included within the net interest charge of £57m. The associated tax credit
of £4m and the earnings per share excluding exceptionals and goodwill
amortisation have been restated for this change of presentation. The effect
of this change is to reduce profit before tax excluding goodwill amortisation
and exceptional items by £16m for that period.
7 Other information
Segmental analysis
The segmental analysis of results for the six months ended 30 June 2001 set
out on page 3 forms a part of these notes to the Interim Report.
Other
The comparative figures for the year ended 31 December 2000 and the other
financial information contained in these interim results do not constitute
statutory accounts of the group within the meaning of section 240 of the
Companies Act 1985.
Statutory accounts for the year ended 31 December 2000 have been delivered to
the Registrar of Companies. The auditors have reported on those accounts,
their report was not qualified and did not contain a statement under section
237(2) or (3) of the Companies Act 1985. The accounting policies adopted in
the preparation of the results to 30 June 2001 are consistent with those set
out in the 2000 Annual Report, with the exception of the adoption of FRS 19
for the first time in this report (see note 6).
This report is being sent to shareholders. Copies are also available to the
public from the company's registered office.
Independent review report by KPMG Audit Plc
to BAE SYSTEMS plc
Introduction
We have been instructed by the company to review the financial information set
out on pages 6 to 12 and we have read the other information contained in the
Interim Report and considered whether it contains any apparent misstatements
or material inconsistencies with the financial information.
Directors' responsibilities
The Interim Report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Listing
Rules of the Financial Services Authority require that the accounting policies
and presentation applied to the interim figures should be consistent with
those applied in preparing the preceding annual accounts except where they are
to be changed in the next annual accounts in which case any changes, and the
reasons for them, are to be disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999
/4; Review of Interim Financial Information issued by the Auditing Practices
Board. A review consists principally of making enquiries of management and
applying analytical procedures to the financial information and underlying
financial data and, based thereon, assessing whether the accounting policies
and presentation have been consistently applied unless otherwise disclosed. A
review is substantially less in scope than an audit performed in accordance
with Auditing Standards and therefore provides a lower level of assurance than
an audit. Accordingly we do not express an audit opinion on the financial
information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2001.
KPMG Audit Plc
Chartered Accountants
London
12 September 2001
Shareholder information
The Annual General Meeting of BAE SYSTEMS plc for 2002 will be held on 3 May
2002.
Registered Office
6 Carlton Gardens
London
SW1Y 5AD
Telephone: 01252 373232
(Registered in England & Wales No. 1470151)
Registrars
Lloyds TSB Registrars
The Causeway
Worthing, West Sussex BN99 6DA
Telephone: 0870 600 3982 (+44 1903 502541 from outside the UK)
If you have any queries regarding your shareholding, please contact the
Registrars.
Website details
Company website: www.baesystems.com
Investor relations website: http://ir.baesystems.com
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