Interim Results
BAE SYSTEMS PLC
11 September 2003
Interim Report 2003
BAE SYSTEMS
BAE SYSTEMS is an international company engaged in the development, delivery and
support of advanced defence and aerospace systems in the air, on land, at sea
and in space.
The company designs, manufactures and supports military aircraft, surface ships,
submarines, radar, avionics, communications, electronics and guided weapon
systems.
BAE SYSTEMS has major operations across five continents and customers in some
130 countries. The company employs over 90,000 people and generates annual sales
of approximately £12 billion through its wholly-owned and joint venture
operations.
BAE SYSTEMS Innovating for a safer world
Highlights
- A solid operating performance in the first half with results in line with
expectations
- North America, Customer Solutions & Support and Commercial Aerospace
businesses have continued to perform well
- Good cash performance with net debt at the end of the period better than
expectations
- Decisive steps taken to ensure best practice programme management is
applied consistently across the company
- Interim dividend maintained at 3.7p per share
Results in brief
Order book(1) £46.4 billion
Sales £5,682 million
Profit before interest(2) £465 million
Earnings per share(2) 7.2p
Dividend per share 3.7p
Operating cash inflow £273 million
Net debt £1,254 million
Outlook
The good progress underlying the company's defence businesses in the first half
is expected to continue through the second half of the year. The UK government's
announcement to proceed with the acquisition of new generation Hawk aircraft has
removed a major uncertainty for near term performance delivery. As previously
indicated, we anticipate the underlying trading performance for the company's
defence businesses to remain broadly in line with 2002, before taking account of
the exceptional charges last year.
Airbus delivered a good first half performance in what remains a difficult
market and we anticipate a similar number of aircraft deliveries to last year.
(1)including joint ventures and after the elimination of intra-group orders of
£2.4bn
(2)before goodwill amortisation and impairment and exceptional items (statutory
presentation is shown in the Consolidated profit and loss account below)
Chairman's letter to shareholders
'Our key priorities are to deliver sustained profitable growth and increased
shareholder value. We will do this by continuing to focus on improving
performance across our businesses.'
Dear Shareholder,
The company produced a solid operating result in the first half of this year
which supports our plans for the full year. The management team focused on
delivering an improved performance across our businesses and addressing the key
issues arising from the challenges of 2002. While good progress has been made,
we recognise that there is much more to do to deliver acceptable profitable
growth and increased shareholder value.
We made good progress in building our capabilities in the higher value, and
growing, systems sector of the defence market on both sides of the Atlantic. Our
systems integration expertise gives us a clear competitive edge as customers put
greater emphasis on increasingly sophisticated defence systems, as seen in the
recent Iraq conflict. Our international reach and the breadth and quality of our
offering mean we are well positioned to capitalise on future growth in the
global defence market.
Given the progress made in the first half of the year and the underlying
strength of the business, the Board is recommending a maintained interim
dividend of 3.7p per share.
At our Annual General Meeting in April, Sir Robin Biggam retired from the Board
and was succeeded by Sir Peter Mason, as our nominated senior independent
non-executive director. Sir Peter now chairs the Nominations Committee and is
leading the search for my successor. I am also pleased to welcome to the Board
another independent non-executive director, Michael Hartnall, who chairs the
Audit Committee. These two new directors, with their strong business
backgrounds, will be valuable additions to our Board.
Under chief executive Mike Turner's leadership we have made considerable
progress in reducing specific risks in our businesses. The agreements struck at
the beginning of the year with our major UK customer, the Ministry of Defence,
were a major step forward. In addition to addressing risk in our programmes, we
have identified areas where the management of our key programmes can be improved
and action is being taken to good effect. Only customer satisfaction,
underpinned by sound commercial contracts, will deliver the success our
shareholders demand.
Our key priorities are to deliver sustained profitable growth and increased
shareholder value. We will do this by continuing to focus on improving
performance across our businesses. The outlook for the second half of the year
is positive and I am confident that the management team will continue to build
on our solid first half and deliver sustained improvement in performance.
Sir Richard Evans
Chairman
10 September 2003
Chief executive's review
'We are all determined to build on our strong market positions and deliver
greater value from our large order book. In that way we will deliver sustained
profitable growth and increased shareholder value.'
Performance
Sales for the half year were £5,682m. Operating profit(1) was £465m. Profit
before tax was £56m. There has been a particular focus on cash performance
across the business and net debt at the end of June stood at £1,254m, ahead of
expectations. Cash performance will continue to be a key management focus, with
an improved cash flow outlook, against previous expectations, for the second
half. Interest cost in the half year was higher than the previous year mainly
due to regional aircraft cash outflows being earlier than previously expected.
Overall, our business groups performed to plan and produced a solid operational
performance. In particular, there were again good performances from our North
America, Customer Solutions & Support and Commercial Aerospace businesses,
including a robust performance by Airbus.
The management team shares an absolute determination to deliver improved
performance across the company. My priorities are to deliver sustained
profitable growth and increase shareholder value.
Highlights
Some 60% of the company's sales now derive from electronic systems and software
and from support services, with defence platform programmes contributing
approximately 20% and the balance coming from commercial aircraft, primarily
through our 20% ownership of Airbus.
We made good progress on our major UK Ministry of Defence (MoD) programmes. We
welcomed the decision by the MoD in July to purchase the Hawk Advanced Jet
Trainer and, more recently, the Indian government announced selection of the
Hawk aircraft. On Typhoon, we achieved the key milestone of Type Acceptance in
June.
Customer Solutions & Support produced a strong performance, reflecting a
positive relationship with the MoD's Defence Logistics Organisation and
continued export support activity. A number of significant orders were won,
including a Hawk training contract with the Royal Bahraini Air Force and a
programme to reactivate two ex-Royal Navy Type 22 frigates for the Romanian
Navy.
We continued to develop our systems capability and secured a number of
C4ISR(2)-related contracts. In an exciting new venture we were pleased to be
appointed lead contractor in a partnership, NITEworks, set up between the MoD
and industry, as a catalyst to optimise network enabled capability for the UK
armed forces.
We secured a position on the Northrop Grumman team, one of the two successful
down-select winners, for the UK Watchkeeper Unmanned Aerial Vehicle Programme.
The company continued to grow its leadership position in C4ISR in North America,
along with defence electronics and services.
The North America business met all key milestones and customer ratings continued
to be excellent. Two acquisitions were completed: Advanced Power Technologies,
Inc., an engineering research and development firm; and MEVATEC Corporation, a
specialist in systems engineering and missile defence.
Despite the continuing difficult commercial aerospace environment, the Airbus
management team delivered a strong performance in the first half. The signing in
May of the contract for the A400M military transport aircraft will deliver
significant benefits to Airbus in the future.
In July, we signed a memorandum of understanding with Finmeccanica to seek to
restructure our European avionics, C4ISR and communications businesses under a
new 'EuroSystems' structure.
I was particularly pleased to receive a strong endorsement from the MoD for our
contribution to the recent Iraq conflict, providing systems, equipment and
personnel to the allied forces. Making all this possible was the knowledge,
expertise and dedication of the people in BAE SYSTEMS and its joint ventures and
I would like to thank them for their continued support in these challenging
times.
Pension funding
The company's cash contribution to its pension funds in the first half was £87m.
Earlier this year the company introduced changes in its main UK and US pension
schemes. These changes include an agreement to increase employees' contributions
to the main scheme in the UK and to establish employee contributions for much of
our US workforce. Together with changes in the outlook for an increase in the
volume of non-competitive contracting, against which pension costs are
allowable, these changes represent a considerable mitigation of any future
pension cost increases.
The company is also required under the accounting standard FRS 17 to calculate
its net pension liabilities on an alternative basis. This takes a snapshot of
the value of assets and liabilities rather than matching expectations of assets
and liabilities over time.
The deficit assessed on an FRS 17 basis increased to £2.5bn (net of tax)
compared to £2.2bn (net of tax) at the 2002 year end. The improvement in stock
markets in the first half was more than offset by reductions in bond yields,
which have had the effect of increasing discounted pension liabilities. At the
date of this report the deficit on an FRS 17 basis has reduced to £2.0bn (net of
tax), as stock markets have improved and bond yields have increased since 30
June 2003. The FRS 17 assessment has no direct bearing on cash contributions to
the pension schemes.
Programme management
We have taken decisive steps to ensure that, in our management of programmes,
our best practice processes are applied consistently and effectively throughout
the company. We also recognise that the knowledge and expertise of our
employees, who implement the processes, are absolutely crucial and this has been
a particular focus of management attention. We have changed senior personnel
where necessary, stepped up our training and improved incentives for those in
these key roles.
There have been major changes of team personnel and clear improvement targets
have been set covering schedule performance, cost and customer satisfaction. An
assessment centre has been established to gauge the technical, commercial and
personal strengths of programme managers and their teams.
In Air Systems, for example, 200 senior managers have already passed through the
assessment centre and benefited from training. A substantial number of other
staff in the business will be assessed and trained over the next two years.
We are all determined to build on our strong market positions and deliver
greater value from our large order book. In that way we will deliver sustained
profitable growth and increased shareholder value.
Mike Turner
Chief executive
10 September 2003
(1) before goodwill amortisation and impairment and exceptional items (statutory
presentation is shown in the Consolidated profit and loss account below)
(2) Command, Control, Communication and Computing, Intelligence, Surveillance
and Reconnaissance
Summarised profit and loss account
Six months Six months Year to
to 30 June to 30 June 31 December
2003 2002 2002
Unaudited Unaudited Audited
£m £m £m
Sales 5,682 5,703 12,145
_______________________________________________________________________________
Operating profit1 362 354 810
Share of operating profit of joint
ventures1 103 107 192
_______________________________________________________________________________
Profit before interest1 465 461 1,002
Net interest (132) (102) (206)
_______________________________________________________________________________
Profit before tax, goodwill
amortisation
and impairment and exceptional items 333 359 796
Goodwill amortisation and impairment,
including joint ventures (274) (279) (615)
Exceptional items (note 2) (3) (39) (797)
_______________________________________________________________________________
Profit/(loss) before tax 56 41 (616)
Tax (102) (104) (70)
Minority interests (1) - -
_______________________________________________________________________________
Loss for the period (47) (63) (686)
_______________________________________________________________________________
Basic and diluted earnings per share
Including goodwill amortisation and
impairment and exceptional items (1.9)p (2.4)p (23.2)p
Excluding goodwill amortisation and impairment
and exceptional items 7.2p 7.7p 17.3p
Dividend per share 3.7p 3.7p 9.2p
1 before goodwill amortisation and impairment and exceptional items (statutory
presentation is shown in the Consolidated profit and loss account below)
Segmental analysis
Six months to Six months to
30 June 2003 30 June 2002
Unaudited Unaudited
__________________________ _________________________
Sales Profit/(loss) Sales Profit/(loss)
£m £m £m £m
Programmes 976 18 955 3
Customer Solutions &
Support 1,018 210 1,065 220
International Partnerships 650 8 658 2
Avionics 488 4 459 4
North America 1,365 122 1,327 115
Commercial Aerospace 1,341 88 1,389 122
HQ and other businesses 147 15 159 (5)
_______________________________________________________________________________
5,985 465 6,012 461
Less: intra-group (303) (309)
Net interest (132) (102)
_______________________________________________________________________________
5,682 333 5,703 359
Goodwill amortisation
and impairment, including
joint ventures (274) (279)
Exceptional items (note 2) (3) (39)
_______________________________________________________________________________
5,682 56 5,703 41
_______________________________________________________________________________
Business group reviews
BAE SYSTEMS made good progress in the first six months of the year in addressing
operational priorities, principally performance delivery.
Programmes
Six months to Six months to
30 June 30 June
2003 2002
Order book1 £11.7bn £11.7bn
_______________________________________________________________________________
Sales £976m £955m
_______________________________________________________________________________
Profit2 £18m £3m
_______________________________________________________________________________
Cash outflow3 £(35)m £(222)m
_______________________________________________________________________________
Number of employees4 19,500 20,000
_______________________________________________________________________________
The Programmes business group comprises the company's principal air systems, sea
systems and C4ISR5-related prime contract activities.
Performance
Activities were rebaselined following the challenges last year on the Nimrod and
Astute programmes and the associated exceptional charges. Operating profit
reflects the good performance on the F-35 Joint Strike Fighter (JSF) and in
export ships. Sales growth reflects the higher activity on a number of
programmes, most notably on Typhoon as it progressed into production. The Type
45 air defence destroyer programme continued to progress well with a significant
number of the progressive design acceptance criteria cleared. Build of the first
ship commenced in August with a high standard of design maturity, drawing on
lessons learned from earlier large platform contracts.
Highlights
The F-35 JSF programme, in which BAE SYSTEMS is a partner with Lockheed Martin
and Northrop Grumman, continued to make good progress, highlighted by the
completion of the Preliminary Design Review in June of the conventional take-off
and landing variant.
Good progress was also made with the Ministry of Defence (MoD) on the
restructuring of the Nimrod contract and project management reforms are being
progressively implemented.
Production of Hawk aircraft for South Africa continued and, in March, a contract
for six aircraft for Bahrain was received.
Following the decision by the MoD to purchase the Hawk aircraft to meet the UK's
advanced fast jet trainer requirement, the key priority for the second half of
the year is to secure a definitive contract and sustain the development project
on this fourth generation trainer programme.
Typhoon development milestones were achieved, with Type Acceptance at the end of
June leading to the start of production aircraft deliveries to the four partner
nations. The first Typhoon export contract, for 18 aircraft, was signed by the
Austrian government in July.
A priority is the negotiation, to remove uncertainty, in respect of the second
tranche of contracts for Typhoon and related revisions to the production
programme.
During the first half, Sea Systems activities were reorganised to focus
submarine capabilities at the Barrow yard and surface ships on the Clyde.
A key focus is the restructuring of the Astute contract to reflect the agreement
reached with the MoD in February. The two Auxiliary Oiler ships, Wave Knight and
Wave Ruler, have now entered service and the first of the two Landing Platform
Dock (LPD) ships, HMS Albion, completed its programme acceptance in April. The
second LPD, HMS Bulwark, is scheduled for customer handover next year.
Two important long-term underwater systems contracts were achieved with an order
from the MoD for an advanced variant of the Sting Ray torpedo, and with a key
market entry contract for the Airborne Mine Neutralisation System for the US
Navy.
A number of opportunities in C4ISR-related activities are being pursued. The
company has secured a position on the Northrop Grumman team, one of the two
successful down-select winners, bidding for the UK Watchkeeper Unmanned Aerial
Vehicle Programme.
BAE SYSTEMS has been working, with Alvis, on another UK programme, the Future
Rapid Effect System (FRES). It is expected that the FRES assessment phase will
be agreed in the second half of the year and the company is well positioned to
benefit from the programme. Further, on 2 September 2003, BAE SYSTEMS completed
the purchase of 29% of the issued share capital of Alvis plc, for £73m in cash.
Customer Solutions & Support
Six months to Six months to
30 June 30 June
2003 2002
Order book1 £2.1bn £2.2bn
_______________________________________________________________________________
Sales £1,018m £1,065m
_______________________________________________________________________________
Profit2 £210m £220m
_______________________________________________________________________________
Cash inflow3 £302m £85m
_______________________________________________________________________________
Number of employees4 10,900 9,700
_______________________________________________________________________________
The Customer Solutions & Support (CS&S) business group provides integrated
through-life support and service solutions, reflecting the continued trend
within armed forces to seek longer-term, added value partnerships with industry,
as they focus on their front line commitments.
Performance
CS&S produced a strong performance, through continued work from export support
activity and increased activity with the MoD's Defence Logistics Organisation.
Highlights
Significant orders included a contract to supply the Royal Bahraini Air Force
with a complete solution for an indigenous flying academy, including the Hawk
advanced jet training aircraft. In addition, the order to reactivate and upgrade
two Type 22 frigates for Romania was confirmed. The Al Yamamah programme in
Saudi Arabia continued to perform well.
The group made further progress towards its goal of providing solutions for
smarter, more flexible, integrated through-life capability programmes. In
particular, a bid was submitted, with the company's partners Boeing, Serco and
Spectrum Capital, for the Future Strategic Tanker Aircraft programme, designed
to meet the future air-to-air refuelling needs of the Royal Air Force.
Support for UK air platforms progressed well. The final delivery in the
successful programme to upgrade 142 Tornado aircraft to the enhanced GR4
standard was achieved in June. The highly effective GR4 system was recently
deployed extensively in operations in Iraq. The capability upgrade to GR9
standard for the Harrier made good progress including the successful first
flight. Progress continued on establishing long-term support contracts for
Harrier, Tornado and Nimrod.
International Partnerships
Six months to Six months to
30 June 30 June
2003 2002
Order book1 £6.1bn £5.9bn
_______________________________________________________________________________
Sales £650m £658m
_______________________________________________________________________________
Profit2 £8m £2m
_______________________________________________________________________________
Cash inflow3 £41m £39m
_______________________________________________________________________________
Number of employees4 13,600 16,400
_______________________________________________________________________________
The International Partnerships business group comprises a 35% interest in Saab
AB, a 50% interest in Gripen International, a 50% interest in AMS, a 37.5%
interest in MBDA and a 100% interest in Atlas Elektronik (exchanged for the
company's 49% interest in STN Atlas).
Performance
The business group improved its profitability following completion of the
disposal of its 27.5% interest in the loss making Astrium satellite business.
Customer delivery schedules at both MBDA and AMS are heavily weighted to the
second half of the year and will be fully reflected in the year end results.
Highlights
Further work is continuing on the company's portfolio of joint venture
interests. Of most significance is the agreement with Finmeccanica to seek to
restructure the combined European avionics, C4ISR and communications businesses
of both companies, under a new 'EuroSystems' structure. Under this structure
joint ventures will be established in each of these businesses. Majority
ownership by one of the partners and clear operational leadership are key
features of these proposals.
On 7 August 2003, the final separation of the STN Atlas business was agreed,
whereby
BAE SYSTEMS has exchanged its 49% interest in STN Atlas for a 100% interest in
the naval systems business, Atlas Elektronik.
Avionics
Six months to Six months to
30 June 30 June
2003 2002
Order book1 £2.5bn £2.7bn
_______________________________________________________________________________
Sales £488m £459m
_______________________________________________________________________________
Profit2 £4m £4m
_______________________________________________________________________________
Cash (outflow)/inflow3 £(51)m £5m
_______________________________________________________________________________
Number of employees4 9,500 10,300
_______________________________________________________________________________
The Avionics business group supplies electronics systems primarily for military
air, sea and land platforms.
Performance
Performance in the first half reflected the anticipated level of activity and
the mix of business.
Highlights
The DLH shipborne decoy system and HALO artillery locating system were accepted
and deliveries of HIDAS, the world's first fully integrated defensive aids
system, progressed well.
Deliveries of the Captor radar for Typhoon continued to programme, with
production for the aircraft's Defensive Aid Sub-Systems building up and
significantly higher volumes anticipated in the second half of the year.
In addition, contract extensions were won on the Falcon and Bowman
communications systems programmes.
North America
Six months to Six months to
30 June 30 June
2003 2002
Order book1 £2.5bn £2.4bn
_______________________________________________________________________________
Sales £1,365m £1,327m
_______________________________________________________________________________
Profit2 £122m £115m
_______________________________________________________________________________
Cash inflow3 £143m £84m
_______________________________________________________________________________
Number of employees 22,700 21,000
_______________________________________________________________________________
The North America business group designs, develops, integrates, manufactures and
supports a wide range of advanced aerospace products and intelligent electronic
systems, for government and commercial customers.
Performance
The business performed ahead of plan for all key measures. Underlying sales
growth of 14%, at constant exchange rates, was achieved in the half year.
Customer ratings as expressed by award fees continue to be excellent, averaging
above 95% - benchmark performance among the company's US industrial peers.
Highlights
Two businesses were acquired in the first half: Advanced Power Technologies,
Inc., an engineering research and development firm; and MEVATEC Corporation, a
specialist in systems engineering and missile defence. These acquisitions
complement the existing North American businesses and represent continued good
progress in expanding the US business through organic growth and acquisition.
The business continued to grow its leadership position in C4ISR, defence
electronics and services. Orders were won to design and produce upgraded flight
control subsystems on the C-17 transport aircraft. Also achieved were the first
delivery of the Vehicle Management System (VMS) for the F-35 Joint Strike
Fighter, the first flight of the VMS for the BA 609 tilt-rotor and the autopilot
on Embraer's AL-X Amazon surveillance aircraft.
Following the Joint Tactical Radio System win in 2002, a key position was
secured on the Warfighter Information Network - Tactical programme in
partnership with General Dynamics. In July, the company was selected to provide
the Airborne Platform and Ground Platform Communications Systems for the Future
Combat System, the US network enabled capability programme.
The award of the Compass Call systems integrator role cemented the company's
leadership position in electronic countermeasures for the US military.
Additionally, a number of significant research and development contracts were
awarded from the Defence Advanced Research Projects Agency.
The contract to manage the Holston Army Ammunition Depot was extended for an
additional five years and several sizeable orders for explosives were won.
Commercial Aerospace
Six months to Six months to
30 June 30 June
2003 2002
Order book1 £22.9bn £19.3bn
_______________________________________________________________________________
Sales £1,341m £1,389m
_______________________________________________________________________________
Profit2 £88m £122m
_______________________________________________________________________________
Cash outflow3 £(154)m £(138)m
_______________________________________________________________________________
Number of employees4 12,100 13,000
_______________________________________________________________________________
The Commercial Aerospace business group principally comprises BAE SYSTEMS 20%
interest in Airbus. In addition, the business group includes subcontract
aerostructures activity.
Performance
Commercial Aerospace performed well against a difficult industry background,
reflecting a robust performance by Airbus.
Highlights
Airbus had a successful first half of the year, despite a difficult airline
market which was adversely impacted by the Iraq war and the SARS virus. Against
this backdrop, it secured net orders for 175 commercial aircraft in addition to
the significant A400M military transport aircraft order for 180 aircraft. This
compares to 104 aircraft orders in the first half of last year.
The A380 development programme continues to progress to plan and market demand
remains good. Airbus had secured 116 firm orders for the A380 by the end of
June.
Further good progress is expected in the second half with a more valuable mix of
aircraft deliveries anticipated, across a similar level of deliveries, to the
149 aircraft delivered in the first half.
HQ and other businesses
Six months to Six months to
30 June 30 June
2003 2002
Order book1 £1.0bn £0.9bn
_______________________________________________________________________________
Sales £147m £159m
_______________________________________________________________________________
Profit/(loss)2 £15m £(5)m
_______________________________________________________________________________
Cash outflow3 £(29)m £(176)m
_______________________________________________________________________________
Number of employees4 4,000 4,700
_______________________________________________________________________________
Future Carrier
Following the UK government's announcement in January of the selection of BAE
SYSTEMS as prime contractor for the design and development and production of two
new aircraft carriers for the Royal Navy, substantial progress has been made in
establishing a highly effective industrial alliance with Thales. A single
alliance team under the leadership of BAE SYSTEMS has been established to
execute the contract, bringing together the substantial strengths of both
organisations.
Under the current assessment phase contract, much work has been undertaken over
recent months to optimise the carrier design to balance both capability and
cost. The next phase of the assessment contract will commence during September,
which will go through to the spring of next year, in anticipation of a full
approval for the Design and Manufacture Stage of the programme. Good progress
has also been made with the MoD regarding a contracting mechanism that will
allow costs to be progressively firmed up, as and when risks have been suitably
quantified and properly understood, during the course of the Design and
Manufacturing contract.
RO Defence
RO Defence is a volume producer of land systems, artillery and ammunition.
RO Defence delivered a strong performance in the first half of the year
reflecting the benefits from previous years' restructuring programmes and the
increase in activity in support of allied operations in Iraq.
The business made good progress on two key orders: Terrier, the UK's next
generation air-transportable armoured combat engineering vehicle; and the M777
lightweight 155mm field howitzer for the US Marine Corps.
1 including joint ventures and before the elimination of intra-group orders
2 before goodwill amortisation and impairment and exceptional items
3 net cash inflow/(outflow) from operating activities after capital expenditure
and financial investment and dividends from joint ventures
4 including share of joint venture employees
5 Command, Control, Communication and Computing, Intelligence, Surveillance and
Reconnaissance
Consolidated profit and loss account
Six months to Six months to Year to
30 June 2003 30 June 2002 31 December 2002
Unaudited Unaudited Audited
__________________ ___________________ ___________________
£m £m £m £m £m £m
Sales 5,682 5,703 12,145
Less: adjustment for (1,822) (1,869) (4,069)
share of joint venture
sales
__________________________________________________________________________________________
Turnover 3,860 3,834 8,076
Operating costs
Excluding goodwill
amortisation and
impairment and
exceptional items (3,498) (3,480) (7,266)
Goodwill amortisation (213) (188) (403)
and impairment
Exceptional items (see (3) (9) (797)
note 2) ________ ________
(3,714) (3,677) (8,466)
__________________________________________________________________________________________
Operating
profit/(loss) 146 157 (390)
Share of operating profit of
joint ventures
Excluding goodwill
amortisation and
impairment and
exceptional items 103 107 192
Goodwill amortisation (61) (91) (212)
and impairment ________ ________ ________
42 16 (20)
__________________________________________________________________________________________
188 173 (410)
Non-operating exceptional
items
Cessation/reorganisation
of commercial aerospace
activities - (30) (30)
Profit on sale of
operations - - 2
Profit on fixed asset - - 28
disposals
__________________________________________________________________________________________
Profit/(loss)
before interest 188 143 (410)
Excluding goodwill
amortisation and
impairment and
exceptional items 465 461 1,002
Goodwill amortisation (274) (279) (615)
and impairment
Exceptional items (see (3) (39) (797)
note 2)
Interest
Net interest (118) (94) (194)
Share of net interest of (14) (8) (12)
joint ventures _______ _______ _______
(132) (102) (206)
__________________________________________________________________________________________
Profit/(loss) on ordinary
activities before
taxation 56 41 (616)
Tax
Tax on profit excluding (103) (115) (247)
exceptional items
Tax on exceptional 1 11 177
items _______ _______ _______
(102) (104) (70)
__________________________________________________________________________________________
Loss on ordinary
activities
after taxation (46) (63) (686)
Equity minority
interests (1) - -
__________________________________________________________________________________________
Loss for the period (47) (63) (686)
Dividends
Equity: ordinary shares (113) (113) (281)
(see note 3)
Non-equity: preference (10) (10) (21)
shares _______ _______ _______
(123) (123) (302)
__________________________________________________________________________________________
Retained loss (170) (186) (988)
__________________________________________________________________________________________
Basic and diluted earnings
per share
Including goodwill
amortisation and
impairment and
exceptional items (1.9)p (2.4)p (23.2)p
__________________________________________________________________________________________
Excluding goodwill
amortisation and
impairment and
exceptional items 7.2p 7.7p 17.3p
__________________________________________________________________________________________
All results arise from continuing activities.
Consolidated balance sheet
30 June 30 June 31 December
2003 2002 2002
Unaudited Unaudited Audited
Notes £m £m £m
Fixed assets
Intangible assets 6,274 6,646 6,417
Tangible assets 1,715 1,732 1,709
Investments
_____________________________________
Share of gross assets of joint 7,360 7,122 7,147
ventures, including goodwill
Share of gross liabilities of (5,901) (5,710) (5,654)
joint ventures _____________________________________
Share of joint ventures 1,459 1,412 1,493
Others 32 35 33
_____________________________________
1,491 1,447 1,526
_______________________________________________________________________________
9,480 9,825 9,652
_______________________________________________________________________________
Current assets
Stocks 926 1,232 768
Debtors due within one year 2,406 2,722 2,673
Debtors due after one year 903 706 805
Investments 4 827 934 776
Cash at bank and in hand 651 641 930
_______________________________________________________________________________
5,713 6,235 5,952
Liabilities falling due within one
year
_____________________________________
Loans and overdrafts (881) (1,031) (1,070)
Creditors 5 (5,409) (5,113) (5,489)
_____________________________________
(6,290) (6,144) (6,559)
_______________________________________________________________________________
Net current
(liabilities)/assets (577) 91 (607)
_______________________________________________________________________________
Total assets
less current
liabilities 8,903 9,916 9,045
_______________________________________________________________________________
Liabilities falling due after one
year
_____________________________________
Loans (1,839) (2,074) (1,913)
Creditors 5 (444) (583) (449)
_____________________________________
(2,283) (2,657) (2,362)
Provisions for
liabilities
and charges 5 (1,018) (1,048) (987)
_______________________________________________________________________________
5,602 6,211 5,696
_______________________________________________________________________________
Capital and reserves
Called up share capital 143 143 143
Share premium account 412 409 412
Statutory reserve 202 202 202
Other reserves 4 5,296 5,186 5,260
Profit and loss account (471) 250 (341)
_______________________________________________________________________________
Shareholders' funds
_____________________________________
Equity 5,316 5,924 5,410
Non-equity 266 266 266
_____________________________________
5,582 6,190 5,676
Equity
minority
interests 20 21 20
_______________________________________________________________________________
5,602 6,211 5,696
_______________________________________________________________________________
Consolidated cash flow statement
Six months Six months Year to
to 30 June 2003 to 30 June 2002 31 December
2002
Unaudited Unaudited Audited
Notes £m £m £m
Net cash inflow/(outflow)
from operating activities 7 273 (262) 136
Dividends from joint ventures 7 10 78
Returns on investments and
servicing of finance (66) (60) (171)
Taxation 70 (9) (89)
Capital expenditure and
financial investment (63) (71) (183)
Acquisitions and disposals (62) - 41
Equity dividends paid (168) (168) (281)
_______________________________________________________________________________
Net cash outflow before
financing and management
of liquid resources (9) (560) (469)
Management of
liquid resources 3 (113) (20)
Financing (247) (91) (236)
_______________________________________________________________________________
Net decrease in
cash available on
demand (253) (764) (725)
_______________________________________________________________________________
Reconciliation of net cash flow to net debt
Six months Six months Year to
to 30 June 2003 to 30 June 2002 31 December
2002
Unaudited Unaudited Audited
Notes £m £m £m
Net decrease in
cash available on demand (253) (764) (725)
Net (decrease)/increase in
liquid resources (3) 113 20
Decrease in other
loans included
within net funds 247 121 268
_______________________________________________________________________________
Change in net
funds from cash flows (9) (530) (437)
Adjustment to
Exchange Property 4 25 (248) (136)
Foreign exchange
movements 19 49 97
_______________________________________________________________________________
Net increase/(decrease)
in net funds 35 (729) (476)
Net funds at
start of period (1,277) (801) (801)
_______________________________________________________________________________
Net funds at end
of period (1,242) (1,530) (1,277)
Cash on customers' account (12) (21) (21)
_______________________________________________________________________________
Net debt as
defined by the group (1,254) (1,551) (1,298)
_______________________________________________________________________________
Statement of total recognised gains and losses
Six months Six months Year to
to 30 June to 30 June 31 December
2003 2002 2002
Unaudited Unaudited Audited
Notes £m £m £m
Loss for the period
Group, excluding joint (34) (33) (565)
ventures
Joint ventures (13) (30) (121)
__________________________________________________________________________________________
Total loss for
the period (47) (63) (686)
____________________________________
Currency translation on - (44) (68) (92)
foreign currency net subsidiaries
investments
- joint 84 27 192
ventures
Adjustment to Exchange 4 25 (248) (136)
Property
Unrealised gain on 1 11 - -
exchange of interests ____________________________________
Other recognised
gains and losses
relating to
the period (net) 76 (289) (36)
__________________________________________________________________________________________
Total recognised
gains and losses
relating to
the period 29 (352) (722)
__________________________________________________________________________________________
Reconciliation of movements in shareholders' funds
Six months Six months Year to
to 30 June to 30 June 31 December
2003 2002 2002
Unaudited Unaudited Audited
Notes £m £m £m
Loss for the period (47) (63) (686)
Dividends 3 (123) (123) (302)
____________________________________________________________________________________
(170) (186) (988)
Other recognised gains and
losses relating to the
period 76 (289) (36)
(net)
Issuance of shares to QUEST - 25 27
Exercise of share options - 2 3
Writeback of goodwill on
disposals - - 32
____________________________________________________________________________________
Net decrease in
shareholders' (94) (448) (962)
funds
Opening shareholders' funds 5,676 6,638 6,638
____________________________________________________________________________________
Closing shareholders' funds 5,582 6,190 5,676
____________________________________________________________________________________
Notes to the interim report
1 Acquisitions and exchange of interests
MEVATEC Corporation
In March 2003, the group acquired 100% of MEVATEC Corporation, in the US, for a
cash consideration of £53m. Provisional goodwill arising on consolidation
amounted to £47m. The company provides professional technical services to the US
market and has been renamed BAE SYSTEMS Analytical Solutions.
Advanced Power Technologies, Inc.
In March 2003, the group acquired 100% of Advanced Power Technologies, Inc., in
the US, for a total cash consideration of £18m. Provisional goodwill arising on
consolidation amounted to £16m. The company provides communications and
networking solutions to the US market and has been renamed BAE SYSTEMS Advanced
Technologies.
Atlas Elektronik
On 7 August 2003, agreement was reached on the final separation of the STN Atlas
business, whereby the group's 49% interest in STN Atlas was exchanged for a 100%
interest in its naval systems business, Atlas Elektronik. BAE SYSTEMS has held
full control of the naval business since 1 January 2003, so this has been deemed
the date of the transaction for accounting purposes.
A provisional unrealised gain arising from this exchange of interests of £11m
has been taken directly to reserves, in accordance with UITF 31.
2 Exceptional items
Six months Six months Year to
to 30 June to 30 June 31 December
2003 2002 2002
Unaudited Unaudited Audited
£m £m £m
Operating exceptional items
Contract loss provisions - - (750)
Prior year
rationalisation
programmes (2) (8) (45)
BAe/MES integration
costs (1) (1) (2)
________________________________________________________________________________
(3) (9) (797)
Non-operating exceptional items
Cessation/reorganisation of commercial
aerospace activities - (30) (30)
Profit on sale of
operations - - 2
Profit on fixed asset
disposals - - 28
________________________________________________________________________________
Exceptional loss included within
profit before interest and tax (3) (39) (797)
________________________________________________________________________________
3 Dividends
The directors have declared the payment of an interim dividend of 3.7p per
ordinary share (2002 3.7p). The dividend will be paid on 1 December 2003 to
shareholders registered on 17 October 2003. The ex-dividend date will be 15
October 2003.
4 Adjustment to Exchange Property
The company has in issue £676m (2002 £676m) 3.75% Senior Unsecured Exchangeable
Bonds (the Bonds), due in 2006. At any time prior to the due date the
Bondholders have the right to request 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 2003 the value of the group's holding in Vodafone Group Plc was less
than the redemption value of the Bonds. Accordingly the group has recorded the
value of the Exchange Property at its market value at that date.
At 31 December 2002 the market value was £540m, resulting in a reduction of
£136m in the carrying value being charged against the original unrealised gain
of £638m within other reserves, and disclosed as a non-cash movement in the
consolidated cash flow.
At 30 June 2003 the market value of the Exchange Property had risen to £565m,
resulting in an increase in the carrying value of £25m since the year end. This
has been taken to other reserves, so as to offset the movement recorded at the
year end against the original unrealised gain within other reserves, and
disclosed as a non-cash movement in the consolidated cash flow.
5 Commercial aircraft financing
30 June 2003 (unaudited)
____________________________
FRIP Post-FRIP Total
aircraft aircraft
£m £m £m
Future cash flow payments in respect
of aircraft financing obligations 2,510 375 2,885
Amounts pre-financed (636) - (636)
________________________________________________________________________________
1,874 375 2,249
Income guaranteed
through insurance (1,331) - (1,331)
Anticipated residual
values - (375) (375)
Adjustment to net
present value (63) - (63)
________________________________________________________________________________
Exposure at net
present value 480 - 480
________________________________________________________________________________
Amounts included within:
Creditors 208 - 208
Provisions 272 - 272
________________________________________________________________________________
480 - 480
________________________________________________________________________________
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
2003, the group's future payments in respect of these arrangements were £2,885m
(31 December 2002 £3,077m). As part of a restructuring of its gross obligations
through the issue of a limited recourse bond in 2001, the group pre-financed
certain residual value guarantees. The future cash flows associated with this
pre-financing totalled £636m at 30 June 2003 (31 December 2002 £740m).
A significant proportion of the net exposure of £2,249m (31 December 2002
£2,337m) is covered by a Financial Risk Insurance Programme (FRIP) which
provides insurance cover in respect of potential shortfalls in contracted and
expected income. At 30 June 2003, the anticipated liability in respect of
uninsured amounts, accounted for on a net present value basis, of £480m is
provided (31 December 2002 £475m).
Since the inception of the FRIP, the group has granted residual value guarantees
in respect of aircraft sold totalling £375m. 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 Saab AB and
Airbus SAS. Provision is made against the expected net exposures on a net
present value basis. The group's share of such exposure is limited to its
percentage shareholding in each of these joint ventures.
6 Pensions
The group has continued to account for pensions in accordance with SSAP 24.
Under FRS 17 the movement in the deficit during the period would be:
Total
£m
Deficit in pension
schemes at 1 January 2003 (3,125)
(Assets of £8,127m less liabilities of £11,252m)
Actual return on assets
in excess of expected
return 188
Increase in liabilities (683)
Other movements (12)
________________________________________________________________________________
Deficit in pension
schemes at 30 June 2003 (3,632)
(Assets of £8,521m less liabilities of £12,153m)
Related deferred tax
asset 1,122
________________________________________________________________________________
Net pension liability (2,510)
________________________________________________________________________________
The increase in liabilities in the half year is principally due to reductions in
the discount rates: UK rate reduced from 5.75% to 5.5%; US rate reduced from
6.75% to 6.25%.
Other movements principally comprise service costs less contributions.
7 Net cash inflow/(outflow) from operating activities
Six months Six months Year to
to 30 June to 30 June 31 December
2003 2002 2002
Unaudited Unaudited Audited
£m £m £m
Operating profit/(loss) 146 157 (390)
Depreciation, amortisation and
impairment 319 292 615
Profit on disposal of fixed
assets and investments (17) (12) (22)
Movement in provisions for liabilities
and charges
excluding deferred tax (62) (294) (280)
(Increase)/decrease in working capital:
Stocks (101) (191) 224
Debtors 300 (34) (124)
Creditors (534) (273) (386)
Customer stage payments 222 93 499
________________________________________________________________________________
Net cash inflow/(outflow) from
operating activities 273 (262) 136
Capital expenditure and
financial investment (63) (71) (183)
Dividends from joint ventures 7 10 78
________________________________________________________________________________
217 (323) 31
________________________________________________________________________________
Programmes (35) (222) (177)
Customer Solutions & Support 302 85 323
International Partnerships 41 39 77
Avionics (51) 5 83
North America 143 84 213
Commercial Aerospace (154) (138) (396)
HQ and other businesses (29) (176) (92)
________________________________________________________________________________
217 (323) 31
________________________________________________________________________________
8 Post balance sheet event
On 22 August 2003, the company agreed to purchase 31,882,534 shares,
representing approximately 29% of the issued share capital, in Alvis plc from
GKN plc for £73m in cash (equivalent to 230p per Alvis share). The acquisition
was completed on 2 September 2003.
Alvis is one of the world's leading manufacturers of armoured fighting vehicles.
It has operations in the UK, Scandinavia and South Africa. Its vehicles combine
advanced software and electronics systems with leading-edge vehicle, weapon and
protection technology.
9 Other information
The comparative figures for the year ended 31 December 2002 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 2002 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 2003 are consistent with those set out in
the 2002 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 engaged 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.
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 Listing
Rules of the Financial Services Authority. 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 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 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 2003.
KPMG Audit Plc
Chartered Accountants
London
10 September 2003
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