Interim Results
BAE SYSTEMS PLC
12 September 2002
Interim Report 2002
BAE SYSTEMS
The systems company innovating for a safer world.
Overview
• Performance in the first six months supports our plans for the full year.
• Interim dividend increased by 5.7%.
• Strong performance from our North America and Customer Solutions & Support
business groups and at Airbus, together with an improving position in our
Air Systems activities, enables us to maintain our plan for 2002 despite
pressures elsewhere in the company.
• We continue to plan for a resumption of growth in 2003, although we face a
number of challenges.
• Outlook depends on the impact of the change in programme emphasis as a
result of the New Chapter to the Strategic Defence Review, which places
greater emphasis on Network Centric Capabilities. As the creation of our
C4ISR(3) business demonstrates, we see this as a major growth area and
opportunity for the company.
• Order book(1) £42.9bn
• Sales £5,703m
• Profit before interest(2) £461m
• Earnings per share(2) 7.7p
• Dividend per share 3.7p
• Operating cash outflow £262m
• Net debt £1,551m
(1) including joint ventures and after the elimination of inter-business group
orders
(2) before goodwill amortisation and exceptional items
(3) Command, Control, Communication and Computing, Intelligence, Surveillance
and Reconnaissance
Dear Shareholder,
The first half performance demonstrates the resilience of BAE SYSTEMS in a
period where we have had to address a number of unforeseen issues.
Strong performance from our North America and Customer Solutions & Support
business groups and at Airbus, together with an improving position in our Air
Systems activities, enables us to maintain our plan for 2002 despite pressures
elsewhere in the company.
To complement our strong presence in Europe, we continue to seek to expand our
position in North America, which is where we see most opportunity for
significant growth. In pursuit of this strategy, we recently embarked on a bid
for the defence businesses of TRW. Whilst unsuccessful, we gained valuable
experience from the process and we shall continue to look at value enhancing
opportunities to develop our North America business group as they arise.
We continue to plan for a resumption of growth in 2003, although we face a
number of challenges. In particular, the outlook depends on the impact of the
change in programme emphasis as a result of the New Chapter to the Strategic
Defence Review, which places greater emphasis on Network Centric Capabilities.
As the creation of our C4ISR business demonstrates, we see this as a major
growth area and opportunity for the company.
We have also seen a reshaping of our senior management team. As chief executive,
Mike Turner brings his own skills and strengths to the role, building on John
Weston's good work. We have recently appointed two new executive directors.
Following HM Government's relaxation of nationality controls, Mark Ronald, a US
citizen and president of our North America business group, joined the board in
May. Chris Geoghegan, chief operating officer, joined the board in June.
The abilities and dedication of every member of BAE SYSTEMS has ensured that we
have achieved the progress made over the first half year, and I am grateful for
the team's commitment.
Sir Richard Evans
Chairman
11 September 2002
Chief executive's review
Performance in the first six months supports our plans for the full year,
despite some change in the mix of contributions from the businesses. We
anticipate a stronger performance in the second half year.
In the Programmes business group, military aircraft activities responded to the
remedial actions taken in 2001, but progress here was more than offset by
significant short-term challenges in certain residual UK shipbuilding programmes
that incurred contract losses in the first half. We see a positive future for
our Air and Sea Systems businesses, supported by strong order books leading to a
commensurate increase in activity.
Our Customer Solutions & Support business group has performed strongly. Activity
on established support packages remains high and we have been awarded a number
of longer-term integrated platform support packages on Tornado aircraft. Similar
plans are being developed across other in-service platforms as we support the
drive of the UK Defence Logistics Organisation for cost efficiencies. Other
notable highlights included an 11 year extension to our partnership with the
Royal Navy at the Portsmouth naval base.
The performance of a number of our International Partnerships continued to be
disappointing, particularly the Astrium space systems joint venture where losses
have increased. Disposal of our interest in Astrium was announced in July and we
expect to complete this transaction by the end of the year. Notwithstanding the
disposal of our interest in Astrium, which is subject to the satisfaction of a
number of conditions, sales in the second half will be significantly higher
across the remaining International Partnerships businesses, most notably at MBDA
where around 75% of the year's sales are planned for the second half.
The Avionics business group profitability for the first half has been negatively
impacted by one-off charges associated with two contracts, primarily related to
equipment delivery delays, together with restructuring costs. Sales at Avionics
increased by 6% during the first half and, as last year, will be skewed to the
second half. Deliveries of radar sets and Defensive Aids Sub-Systems (DASS) for
Eurofighter Typhoon are planned to be significantly higher in the second half
and will contribute to good sales growth for 2002.
Our North America business group continues to perform well. The reported sales
growth was 5%. However, the first half of 2001 included disposed businesses, and
on a like-for-like basis, sales growth was 10% and profit increased by 7%. North
America is well positioned to capture more growth from the increasing US defence
budgets.
In the Commercial Aerospace business group, our Airbus joint venture has
performed ahead of expectations in a difficult market. This underlines our view
that this is a high quality business that will deliver longer-term profitable
growth. Airbus has benefited from its restructuring last year into an integrated
company, and its management team has coped well with the market downturn.
Aircraft deliveries in the first half are on track for the planned 300 for the
full year. A detailed review of airline customer demand has indicated planned
deliveries for 2003 at a similar level. However, a number of airlines are
experiencing significant financial challenges, and we will continue to monitor
the position. Development of the high capacity A380 continues to plan.
Finally, I want to thank the BAE SYSTEMS team for its support in my first few
months as chief executive.
Mike Turner
Chief executive
11 September 2002
Summarised profit and loss account
Six months Six months Year to
to 30 June to 30 June 31 December
2002 2001 2001
Unaudited Unaudited Audited
£m £m £m
Sales 5,703 6,292 13,138
Operating profit(1) 354 393 956
Share of operating profit of joint ventures(1) 107 158 304
Profit before interest(1) 461 551 1,260
Net interest (102) (69) (177)
Profit before tax, goodwill
amortisation and exceptional items 359 482 1,083
Profit before tax, after goodwill amortisation
and exceptional items 41 171 70
Tax (104) (142) (198)
Minority interests - (6) (6)
(Loss)/profit for the period (63) 23 (134)
Basic earnings per share(1) 7.7p 10.3p 23.4p
Diluted earnings per share(1) 7.7p 10.2p 23.4p
Dividend per share 3.7p 3.5p 9.0p
Business group analysis
30 June 2002 unaudited Restated(2) 30 June 2001 unaudited
Order book Sales Profit Number of Order book Sales Profit Number of
employees(3) employees(3)
£bn £m £m £bn £m £m
Programmes 11.7 955 3 20,000 11.1 1,374 53 21,100
Customer 2.2 1,065 220 8,800 2.2 1,023 190 10,200
Solutions &
Support
International 5.9 658 2 16,400 6.0 799 51 18,000
Partnerships
Avionics 2.7 459 4 10,300 2.7 433 37 10,200
North America 2.4 1,327 115 21,000 2.7 1,264 112 20,400
Commercial 19.3 1,389 122 13,000 22.0 1,555 110 14,800
Aerospace
HQ and other 0.9 159 (5) 4,700 0.9 153 (2) 4,800
businesses
45.1 6,012 461 94,200 47.6 6,601 551 99,500
Less:
intra-group (2.2) (309) (2.2) (309)
Net interest (102) (69)
359 482
Goodwill (279) (246)
amortisation,
including joint
ventures
Exceptional (39) (65)
items (see note
1)
42.9 5,703 41 45.4 6,292 171
(1) before goodwill amortisation and exceptional items
(2) see note 7
(3) includes share of joint venture employees
Business group reviews
Programmes
Despite initial delays in the first flight of the production standard aircraft,
Typhoon has progressed well in achieving a high standard of system maturity.
Significant development milestones have been achieved resulting in the expansion
of the flight performance envelope to meet the aircraft specification,
successful firing of a long range air-to-air missile and the inclusion of
in-flight refuelling. The first production aircraft are now also contributing to
the flight test programme. The Austrian federal government recently selected
Typhoon.
The F-35 Joint Strike Fighter (JSF) programme, in which BAE SYSTEMS is a partner
with Lockheed Martin and Northrop Grumman, is gathering momentum and we have
demonstrated our commitment with a planned £40m investment in manufacturing and
assembly facilities.
Turning to other Air Systems programmes, three Nimrod aircraft are in final
assembly and first flight will be around the end of the year. The Hawk advanced
jet trainer continues to generate interest as an adaptable and cost effective
training platform. The Royal Bahraini Air Force recently announced that it had
selected Hawk to meet its future training requirements and a number of other
opportunities are being pursued.
The Sea Systems activity has been impacted by residual UK shipbuilding
programmes. The Auxiliary Oiler and Landing Platform Dock programmes have been
challenging, incurring contract losses to completion which have been charged in
the first half. The medium and long-term prospects are improved for our next
generation naval systems programmes with a strong throughput of activity now in
the order book.
Customer Solutions & Support
The CS&S business group has had a strong first half year, with order book, sales
and profit ahead of plan. Order intake includes the extension of the Portsmouth
naval base partnering contract for the next 11 years. We have also seen higher
than planned levels of orders and sales from the Al Yamamah programme.
Support services are a key element of the company's strategy for growth, and we
are pursuing a number of opportunities that will continue to deliver that
growth. Our partnership with customers demonstrates our capability to provide
integral support to complex solutions and full lifecycle support for our
products.
International Partnerships
MBDA has been successfully restructured and now includes our former interests in
Matra BAe Dynamics and the guided weapons activities of Alenia Marconi Systems
(AMS). The business has built a strong order book but delays in moving the
Meteor (beyond visual range air-to-air missile) programme to contract have been
experienced. MBDA is expected to show continued improvement from 2003, and the
quality of its order book reflects the good prospects of this business over the
medium-term.
AMS, also restructured in 2001, has recently won a contract for five new
generation 3D long range fixed air defence radar (FADR) systems. A further
contract win for the integration of non-defence work in Italy helps to confirm
the credentials of the business as a complete systems integrator in air traffic
control.
Saab, in which BAE SYSTEMS has a 35% interest, continues to perform
satisfactorily. Gripen International, the company formed by BAE SYSTEMS and Saab
to market Gripen fighters in export markets, has been successful in winning
orders in Hungary. Gripen had been selected in the Czech Republic, although
procurement in that country has been postponed as a result of the recent severe
flooding.
Earlier this year the space systems joint venture Astrium was selected to supply
Skynet 5, the next generation of military communications satellites for the UK
MoD. In July, BAE SYSTEMS agreed the sale of its 27.5% economic interest in
Astrium to EADS for Euro165m. Completion of the Astrium disposal is anticipated
by the year end. BAE SYSTEMS will lead the service provision for Skynet 5.
Discussions continue with our partner Rheinmetall in the STN Atlas joint venture
to focus our interest on the naval activities within the STN business.
Avionics
The Avionics business group performance has been impacted during the first half
by costs associated with delivery delays on certain equipment programmes and
restructuring charges. The delayed programmes are now running at the planned
rate.
Avionics is a major supplier of sub-systems for the Typhoon programme including
the radar and DASS systems. The margins on these contracts remain as previously
forecast and underpin a strong margin recovery at Avionics that will be
delivered during the second half.
North America
The North America business group continues its track record of strong financial
performance. The business is well positioned to participate in the growing US
defence market, and in particular the C4ISR sector. The North America business
group is a major supplier of airborne avionics and electronic warfare systems.
The launch of the system design and development for the JSF programme, and the
launch into low rate initial production of the F-22, represent strong positions
on major US airborne systems. The win in the first half of the year of the US
Joint Tactical Radio System (JTRS), where we are teamed with Boeing, represents
a good example of our ability to team, win and participate in large US defence
programmes.
The controls systems activity in the North America business group is a major
provider of commercial flight and engine controls. It has experienced some
reduction in activity reflecting the downturn in the commercial aircraft market.
Commercial Aerospace
Following the restructuring of Airbus last year, BAE SYSTEMS retains a 20%
interest in the Airbus joint venture. Benefiting from this restructuring, Airbus
performed well in the half year to June 2002.
Airbus order intake for the first half of the year was 104 aircraft, compared to
net orders for the first six months of last year of 260. Reflecting the
generally weak airline market, production plans were reduced at the end of 2001
and the company is on track for 300 aircraft deliveries this year with a similar
output now planned for 2003. The development of the A380 continues to plan and
market interest in this high capacity new aircraft remains strong, with current
orders for 95 aircraft.
In addition to its involvement in the Airbus joint venture BAE SYSTEMS retains
wholly-owned Aerostructures activities. The Aerostructures business continued to
reduce costs to remain competitive in the civil aircraft subcontracting market.
HQ and other businesses
Following a realignment of the company's organisational structure (see note 7)
announced in July 2002, the RO Defence business is now reported within HQ and
other businesses. RO Defence completed a good half year performance. The company
was selected by the UK MoD for the Terrier programme, the next generation
air-transportable armoured combat engineer vehicle.
Consolidated profit and loss account
Six months to Six months to Year to
30 June 2002 30 June 2001 31 December 2001
Unaudited Unaudited Audited
£m £m £m £m £m £m
Sales 5,703 6,292 13,138
Less: adjustment for (1,869) (1,872) (4,097)
share of joint venture
sales
Turnover 3,834 4,420 9,041
Operating costs
Excluding goodwill (3,480) (4,027) (8,085)
amortisation and
exceptional items
Goodwill amortisation (188) (197) (397)
Exceptional items (see (9) (65) (136)
note 1)
(3,677) (4,289) (8,618)
Operating profit 157 131 423
Share of operating profit of joint
ventures
Excluding goodwill 107 158 304
amortisation and
exceptional items
Goodwill amortisation (91) (49) (98)
(see note 2)
Exceptional items (see - - (12)
note 1)
16 109 194
173 240 617
Non-operating exceptional item
Cessation/reorganisation
of commercial
aerospace activities (see (30) - (370)
note 1)
Profit before interest 143 240 247
Excluding goodwill 461 551 1,260
amortisation and
exceptional items
Goodwill amortisation (279) (246) (495)
Exceptional items (see (39) (65) (518)
note 1)
Interest
Net interest (94) (87) (174)
Share of net interest of (8) 18 (3)
joint ventures
(102) (69) (177)
Profit on ordinary activities before 41 171 70
taxation
Tax
Tax on profit excluding (115) (154) (346)
exceptional items
Tax on exceptional items 11 12 148
(104) (142) (198)
(Loss)/profit on ordinary activities after (63) 29 (128)
taxation
Equity minority interests - (6) (6)
(Loss)/profit for the period (63) 23 (134)
Dividends
Equity: ordinary shares (113) (107) (275)
(see note 3)
Non-equity: preference (10) (10) (21)
shares
(123) (117) (296)
Retained loss (186) (94) (430)
Basic earnings per share
Including goodwill (2.4)p 0.4p (5.1)p
amortisation and
exceptional items
Excluding goodwill 7.7p 10.3p 23.4p
amortisation and
exceptional items
Diluted earnings per share
Including goodwill (2.4)p 0.4p (5.1)p
amortisation and
exceptional items
Excluding goodwill 7.7p 10.2p 23.4p
amortisation and
exceptional items
All results arise from continuing operations.
Consolidated balance sheet
30 June 30 June 31 December
2002 2001 2001
Unaudited Unaudited Audited
Notes £m £m £m
Fixed assets
Intangible assets 6,646 7,097 6,909
Tangible assets 1,732 1,844 1,776
Investments
Share of gross assets of 7,122 7,306 7,248
joint ventures
Share of gross liabilities (5,710) (6,024) (5,826)
of joint ventures
Share of joint ventures 1,412 1,282 1,422
Others 35 42 35
1,447 1,324 1,457
9,825 10,265 10,142
Current assets
Stocks 1,232 1,340 1,046
Debtors due within one 2,722 2,289 2,633
year
Debtors due after one year 706 907 811
Investments 5 934 1,042 1,069
Cash at bank and in hand 641 1,570 1,505
6,235 7,148 7,064
Liabilities falling due within one year
Loans and overdrafts (1,031) (2,044) (1,256)
Creditors 6 (5,113) (5,129) (5,281)
(6,144) (7,173) (6,537)
Net current assets/(liabilities) 91 (25) 527
Total assets less current liabilities 9,916 10,240 10,669
Liabilities falling due after one year
Loans (2,074) (1,554) (2,119)
Creditors 6 (583) (594) (611)
(2,657) (2,148) (2,730)
Provisions for liabilities and charges 6 (1,048) (1,138) (1,281)
6,211 6,954 6,658
Capital and reserves
Called up share capital 143 143 143
Share premium account 409 371 374
Statutory reserve 202 202 202
Other reserves 5 5,186 5,440 5,438
Profit and loss account 250 775 481
Shareholders' funds
Equity: ordinary shares 5,924 6,665 6,372
Non-equity: preference 266 266 266
shares
6,190 6,931 6,638
Equity minority interests 21 23 20
6,211 6,954 6,658
Consolidated cash flow
Six months Six months Year to
to 30 June to 30 June 31 December
2002 2001 2001
Unaudited Unaudited Audited
Notes £m £m £m
Net cash (outflow)/inflow from operating activities
Operating profit 157 131 423
Depreciation, amortisation and impairment 292 323 636
Profit on disposal of fixed assets and investments (12) (20) (42)
Movement in provisions for liabilities and charges excluding (294) (376) (207)
deferred tax
(Increase)/decrease in working capital
Stocks (191) (494) (340)
Debtors (34) (340) (716)
Creditors (273) 446 612
Customer stage payments 93 339 405
(262) 9 771
Cash flow statement
Net cash (outflow)/inflow from operating activities (262) 9 771
Dividends from joint ventures 10 10 19
Returns on investments and servicing of finance (60) (46) (210)
Taxation (9) 1 (94)
Capital expenditure and financial investment (71) (83) (359)
Acquisitions and disposals
Disposal of subsidiary undertakings and joint ventures - 82 135
Equity dividends paid (168) (158) (266)
Net cash outflow before financing and management
of liquid resources (560) (185) (4)
Management of liquid resources (113) 125 162
Financing (91) 298 495
Net (decrease)/increase in cash available on demand (764) 238 653
Reconciliation of net cash flow to net movement in net funds
Net (decrease)/increase in cash available on demand (764) 238 653
Net increase/(decrease) in liquid resources 113 (125) (162)
Decrease/(increase) in other loans included within net funds 121 (293) (465)
Change in net funds from cash flows (530) (180) 26
Revaluation of Exchange Property 4,5 (248) - -
Other non-cash movements 49 21 (1)
Net (decrease)/increase in net funds (729) (159) 25
Net funds at start of period (801) (826) (826)
Net funds at end of period 4 (1,530) (985) (801)
Reconciliation to movement in net debt as defined by the group
Net (decrease)/increase in net funds (729) (159) 25
Decrease in cash on customers' account 4 9 23 43
Net movement for the period (720) (136) 68
Statement of total recognised gains and losses
Six months Six months Year to
to 30 June to 30 June 31 December
2002 2001 2001
Notes Unaudited Unaudited Audited
£m £m £m
(Loss)/profit for the period
Group, excluding joint ventures (33) (49) (200)
Joint ventures (30) 72 66
Total (loss)/profit for the period (63) 23 (134)
Currency translation on foreign currency net investments - subsidiaries (68) 14 61
- joint ventures 27 (3) (10)
Goodwill on disposal of Flight Simulation and Training Inc. - 18 18
Revaluation of Exchange Property 5 (248) - -
Other recognised gains and losses relating to the period (net) (289) 29 69
Total recognised gains and losses relating to the period (352) 52 (65)
Prior year adjustment in respect of the adoption of FRS 19 - (175) (175)
Total recognised gains and losses (352) (123) (240)
Reconciliation of movements in shareholders' funds
Six months Six months Year to
to 30 June to 30 June 31 December
2002 2001 2001
Unaudited Unaudited Audited
£m £m £m
(Loss)/profit for the period (63) 23 (134)
Dividends 3 (123) (117) (296)
(186) (94) (430)
Issue of shares to the QUEST and exercise of share options 27 19 22
Other recognised gains and losses relating to the period (net) (289) 29 69
Net decrease in shareholders' funds (448) (46) (339)
Opening shareholders' funds 6,638 6,977 6,977
Closing shareholders' funds 6,190 6,931 6,638
Notes to the Interim Report
1 Exceptional items
Six months Six months Year to
to 30 June to 30 June 31 December
2002 2001 2001
Unaudited Unaudited Audited
£m £m £m
Operating exceptional items
Prior year rationalisation programmes (8) (44) (95)
BAe/MES integration costs (1) (21) (53)
(9) (65) (148)
Non-operating exceptional item
Cessation/reorganisation of commercial
aerospace activities (30) - (370)
Exceptional loss included within
profit before interest and tax (39) (65) (518)
Prior year rationalisation programmes
Rationalisation programmes were initiated in 1999 and 2000 in response to
capacity excesses across a number of business groups.
The total costs associated with these programmes were estimated at the time of
the respective announcements at £475m. To date costs of £457m have been recorded
as exceptional charges. The profit and loss impact in the first half of 2002 has
been a charge of £8m, before a tax credit of £2m. A net cash outflow of £10m
arose in the first half of 2002 in respect of these costs, before taking into
account the cash benefits of tax relief.
BAe/MES integration costs
Costs associated with the integration of the former British Aerospace and MES
businesses totalling £1m were incurred in the first half of 2002, matched by a
net cash outflow of £1m, before taking into account the cash benefits of tax
relief.
Cessation/reorganisation of commercial aerospace activities
In 2001 the group decided to close its regional jet manufacturing operations and
reorganise certain other commercial aerospace activities at a cost of £400m. The
profit and loss impact in 2001 was £370m, before a tax credit of £111m. The
remaining £30m, before a tax credit of £9m, has been charged in the first half
of 2002. The cash outflow in the first half of 2002 in respect of these costs
was £106m.
2 Joint venture goodwill amortisation
Included in the £91m amortisation charge is a £44m impairment in respect of the
group's interest in Astrium NV.
3 Dividends
The directors have declared the payment of an interim dividend of 3.7p per
ordinary share (2001 3.5p). The dividend will be paid on 29 November 2002 to
shareholders registered on 18 October 2002. The ex-dividend date will be 16
October 2002.
4 Net debt
Net debt includes a non-cash movement of £248m related to the revaluation of the
Exchange Property. This is explained further in note 5.
Net debt disclosed on page 1 at £1,551m (2001 £1,035m) excludes cash received on
customers' account of £21m (2001 £50m) which is included within creditors in the
consolidated balance sheet. Net funds as disclosed under FRS 1 in the cash flow
statement on page 10 includes these amounts received on customers' account.
5 Revaluation of Exchange Property
The company has in issue £676m (2001 £676m) 3.75% Senior Unsecured Exchangeable
Bonds, due in 2006 (the Bonds). At any time prior to the due date the
Bondholders have the right to exchange the Bonds for the Exchange Property,
which is represented by the group's holding in the ordinary share capital of
Vodafone Group Plc. The Exchange Property has been recorded within current asset
investments.
The value of the Exchange Property was initially based on the issue price of the
Bonds which represented the realisable value to the group. The historical cost
of the Exchange Property to the group is negligible, and the uplift to match the
Exchange Property to the value of the Bonds was recorded as an unrealised gain
within other reserves.
At 30 June 2002 the value of the group's holding in Vodafone Group Plc was less
than the redemption value of the Bonds. Accordingly the group has written down
the value of the Exchange Property to its market value at that date. This
reduction of £248m in the carrying value has been charged against the original
revaluation within other reserves and is disclosed as a non-cash movement in the
consolidated cash flow statement.
6 Commercial aircraft financing
30 June 2002 (unaudited)
FRIP Post-FRIP Total
aircraft aircraft
£m £m £m
Future cash flow payments in respect
of aircraft financing obligations 2,861 360 3,221
Amounts pre-financed (see below) (762) - (762)
2,099 360 2,459
Income guaranteed through insurance (1,467) - (1,467)
Anticipated residual values - (360) (360)
Adjustment to net present value (104) - (104)
Exposure at net present value
(31 December 2001 £542m) 528 - 528
Amounts included within:
Creditors 279 - 279
Provisions 249 - 249
528 - 528
The group provides guarantees in respect of residual values or head lease and
finance payments in respect of certain commercial aircraft sold. At 30 June 2002
the group's future cash flow payments in respect of these arrangements was
£3,221m (31 December 2001 £3,379m). As part of a restructuring of its gross
obligations through the issue of a limited recourse bond in 2001, the group
pre-financed the residual value guarantees. The future cash flows associated
with this pre-financing totalled £762m at 30 June 2002. A significant proportion
of the net exposure of £2,459m is covered by a Financial Risk Insurance
Programme (FRIP) which provides insurance cover in respect of potential
shortfalls in contracted and expected income. Any anticipated liability in
respect of uninsured amounts is accounted for on a net present value basis.
Since the inception of the FRIP, the group has sold further aircraft with
residual value guarantees totalling £360m. The directors consider that the
group's exposure to these guarantees is covered by the residual values of the
related aircraft.
The group is also exposed to actual and contingent liabilities arising from
commercial aircraft financing and residual value guarantees given by its joint
venture partners, Saab AB and Airbus SAS. Provision is made against the expected
net exposures on a net present value basis. The group's exposure is limited to
its respective shareholding in each of these joint ventures.
7 Business group analysis
The business group analysis of results for the six months ended 30 June 2002 set
out on page 4 forms a part of these notes to the Interim Report. The group has
realigned its organisational structure resulting in changes in management
responsibility for certain business units. The principal areas of change involve
businesses previously managed as part of the former Operations business group.
Under the new structure, Marine shipbuilding and Underwater Weapons activities
now report as part of the Programmes business group and the Aerostructures
activities now report within the Commercial Aerospace business group. RO
Defence, being the balance of the former Operations business group, is reported
within HQ and other businesses. The business group analysis for 2001 has been
restated in line with these changes. However, had the realignment of the
organisational structure not taken place, the business group analysis would have
been as follows:
Six months Six months
to 30 June 2002 to 30 June 2001
Unaudited Unaudited
Sales Profit/(loss)(1) Sales Profit/(loss)(1)
£m £m £m £m
Programmes 782 57 1,049 34
Customer Solutions & Support 1,065 220 1,023 190
International Partnerships 658 2 799 51
Avionics 459 4 433 37
North America 1,327 115 1,264 112
Operations 443 (44) 656 13
Commercial Aerospace 1,360 124 1,509 117
Centre 12 (17) 16 (3)
6,106 461 6,749 551
Less: intra-group (403) (457)
5,703 461 6,292 551
(1) before interest, goodwill amortisation and exceptional items
8 Pensions
The Accounting Standards Board has proposed to defer the full implementation of
FRS 17. As at 30 June 2002, the valuation basis that would be used shows an
increase in the FRS 17 pension deficit to £1,300m after taking assumed deferred
taxation into account.
However, the group's pension funding requirements are derived from separate
independent actuarial valuations which are currently being produced. At this
stage these indicate no additional cash funding requirements for 2002, £30m for
2003 and £60m per annum thereafter.
9 Other information
The comparative figures for the year ended 31 December 2001 and 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 2001 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 2002 are consistent with those set out in
the 2001 Annual Report.
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 8 to 13 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 directors
are responsible for preparing the Interim Report in accordance with the Listing
Rules of the Financial Services Authority which 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 for use in the United Kingdom. A review consists principally of making
enquiries of BAE SYSTEMS plc 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 2002.
KPMG Audit Plc
Chartered Accountants
London
11 September 2002
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