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 Â£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) Â£46.4 billion Sales Â£5,682 million Profit before interest(2) Â£465 million Earnings per share(2) 7.2p Dividend per share 3.7p Operating cash inflow Â£273 million Net debt Â£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 Â£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 Â£5,682m. Operating profit(1) was Â£465m. Profit before tax was Â£56m. There has been a particular focus on cash performance across the business and net debt at the end of June stood at Â£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 Â£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 Â£2.5bn (net of tax) compared to Â£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 Â£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 Â£m Â£m Â£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) Â£m Â£m Â£m Â£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 Â£11.7bn Â£11.7bn _______________________________________________________________________________ Sales Â£976m Â£955m _______________________________________________________________________________ Profit2 Â£18m Â£3m _______________________________________________________________________________ Cash outflow3 Â£(35)m Â£(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 Â£73m in cash. Customer Solutions & Support Six months to Six months to 30 June 30 June 2003 2002 Order book1 Â£2.1bn Â£2.2bn _______________________________________________________________________________ Sales Â£1,018m Â£1,065m _______________________________________________________________________________ Profit2 Â£210m Â£220m _______________________________________________________________________________ Cash inflow3 Â£302m Â£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 Â£6.1bn Â£5.9bn _______________________________________________________________________________ Sales Â£650m Â£658m _______________________________________________________________________________ Profit2 Â£8m Â£2m _______________________________________________________________________________ Cash inflow3 Â£41m Â£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 Â£2.5bn Â£2.7bn _______________________________________________________________________________ Sales Â£488m Â£459m _______________________________________________________________________________ Profit2 Â£4m Â£4m _______________________________________________________________________________ Cash (outflow)/inflow3 Â£(51)m Â£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 Â£2.5bn Â£2.4bn _______________________________________________________________________________ Sales Â£1,365m Â£1,327m _______________________________________________________________________________ Profit2 Â£122m Â£115m _______________________________________________________________________________ Cash inflow3 Â£143m Â£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 Â£22.9bn Â£19.3bn _______________________________________________________________________________ Sales Â£1,341m Â£1,389m _______________________________________________________________________________ Profit2 Â£88m Â£122m _______________________________________________________________________________ Cash outflow3 Â£(154)m Â£(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 Â£1.0bn Â£0.9bn _______________________________________________________________________________ Sales Â£147m Â£159m _______________________________________________________________________________ Profit/(loss)2 Â£15m Â£(5)m _______________________________________________________________________________ Cash outflow3 Â£(29)m Â£(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 __________________ ___________________ ___________________ Â£m Â£m Â£m Â£m Â£m Â£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 Â£m Â£m Â£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 Â£m Â£m Â£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 Â£m Â£m Â£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 Â£m Â£m Â£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 Â£m Â£m Â£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 Â£53m. Provisional goodwill arising on consolidation amounted to Â£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 Â£18m. Provisional goodwill arising on consolidation amounted to Â£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 Â£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 Â£m Â£m Â£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 Â£676m (2002 Â£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 Â£540m, resulting in a reduction of Â£136m in the carrying value being charged against the original unrealised gain of Â£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 Â£565m, resulting in an increase in the carrying value of Â£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 Â£m Â£m Â£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 Â£2,885m (31 December 2002 Â£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 Â£636m at 30 June 2003 (31 December 2002 Â£740m). A significant proportion of the net exposure of Â£2,249m (31 December 2002 Â£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 Â£480m is provided (31 December 2002 Â£475m). Since the inception of the FRIP, the group has granted residual value guarantees in respect of aircraft sold totalling Â£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 Â£m Deficit in pension schemes at 1 January 2003 (3,125) (Assets of Â£8,127m less liabilities of Â£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 Â£8,521m less liabilities of Â£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 Â£m Â£m Â£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 Â£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 This information is provided by RNS The company news service from the London Stock Exchange

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