Interim Results
BAE SYSTEMS PLC
13 September 2006
BAE Systems plc
Interim Report 2006
Results in brief
Six months to 30 Six months to 30
June 2006 June 2005
Results from continuing operations
Sales(1) £8,214m £6,773m
EBITA(2) £788m £566m
Operating profit £653m £488m
Underlying earnings per share(3) 15.4p 10.7p
Basic earnings per share(4) 12.6p 10.9p
Other results including discontinued operations
Interim dividend per share 4.4p 4.0p
Cash (outflow)/inflow from operating activities £(293)m £586m
Net debt as defined by the Group £1,582m £2,239m
Order book(5) £56.9bn £52.5bn
Highlights
- Sales(1) up 21% at £8,214m
- EBITA(2) up 39% at £788m, including £63m one-off accounting gain in
the US
- Underlying earnings per share(3) up 44% at 15.4p
- US businesses delivering good organic growth
- United Defense integration complete
- Good programme execution
- Airbus share sale recommended
- UK pension funding deficit addressed
- Interim dividend increased 10% to 4.4p
Outlook
The good first half results underpin the outlook for the full year; that is for
modest organic growth from our defence businesses together with a full year
contribution from the former United Defense activities. Some weakening of the
Airbus contribution is anticipated in the second half following a good first
half performance and before taking account of the timing of the recommended
disposal of the Group's 20% shareholding in that business. We expect to turn
operating profits into cash in the second half with this year's additional
contributions to the UK pension schemes mostly concluded in the first half.
'BAE Systems has delivered a good first half financial performance, with good
programme schedule and cost execution right across the Group.'
Mike Turner, Chief Executive
(1) including share of equity accounted investments' sales
(2) earnings before amortisation and impairment of intangible assets,
finance costs and taxation expense
(3) earnings per share excluding amortisation and impairment of
intangible assets, non-cash finance movements on pensions and financial
derivatives, and uplift on acquired inventories (see note 5)
(4) basic earnings per share in accordance with International
Accounting Standard 33
(5) including share of equity accounted investments' order books and
after the elimination of intra-group orders of £0.9bn (2005 £1.0bn)
Interim results statement
BAE Systems continued to build on the successes of 2005 with further good
progress in the first six months of 2006. The results reflect good programme
execution and schedule adherence in the businesses together with the benefit of
sound implementation of Group strategy.
Sales for the six months to June 2006 of £8,214m increased 21% from £6,773m for
the same period in 2005.
EBITA(1) increased 39% to £788m (2005 £566m) and return on sales increased 1.2%
to 9.6% (2005 8.4%). Included within EBITA(1) is a £63m one-off accounting gain
in the Electronics, Intelligence & Support business group arising from a
reduction in the net pension liability following the changes to the calculation
of final US pensionable salaries.
These results reflect the benefit of six months of trading from the former
United Defense activities acquired in June 2005, which contributed sales of
£777m and EBITA(1) of £85m in the period. Integration of these activities is now
complete and the acquisition has achieved the financial benefits planned for its
first full year of ownership. Order intake continues to support the acquisition
case.
The publication in December last year of the UK government's Defence Industrial
Strategy (DIS) was a significant step forward. The paper details a strategy that
identifies key UK technologies required to deliver capability for the UK's armed
forces and outlines a framework for partnership between industry and government
to deliver that capability. Although challenges will result from this newly
defined path, BAE Systems welcomes this strategy and is committed to ensuring
its success and believes that, through its implementation, benefits will flow to
both industry and its customer.
BAE Systems now has a well established, growing and successful through-life
capability business in the air sector, working closely with both the UK Ministry
of Defence (MoD) and the Royal Air Force (RAF). Progress also has been made in
the land systems sector, developing a similar armoured vehicle through-life
support partnership with the Defence Logistics Organisation and the British Army
to that pioneered in the air sector. Opportunities are being developed also in
the UK naval sector.
In April, BAE Systems and VT Group announced they were discussing the
possibility of a joint bid for Babcock International plc. Although no bid
resulted from these discussions, BAE Systems continues to review options for
consolidation of the naval industry in the UK with the aim of delivering better
value for its customers and enhanced returns to shareholders consistent with the
DIS.
BAE Systems' strategy to build on its strong customer relationship in Saudi
Arabia, by establishing significant business operations and capability within
the Kingdom, has made good progress. The government-to-government agreement
signed in December 2005 established a partnership between the UK and Saudi
Arabia for the modernisation of the Kingdom's armed forces and was a key
development in this strategy. In August, the required commercial principles,
which will effectively initiate the purchase of Typhoon aircraft and the
associated commitment to the industrial plan, were agreed.
In April, BAE Systems announced that it had entered into discussions with EADS
regarding the disposal of its minority shareholding in Airbus. In July, BAE
Systems announced that the price payable by EADS in relation to the proposed
disposal of the Airbus shareholding had been determined by an independent expert
to be €2.75bn (£1.9bn). On 6 September the board of directors announced that
they considered the proposed disposal to be in the best interest of BAE Systems
and its shareholders as a whole.
The recommended disposal requires the approval of ordinary shareholders at an
Extraordinary General Meeting, details of which have been included in the
circular issued to shareholders(2).
Following repayment of debts outstanding between BAE Systems and Airbus at
completion and the payment of transaction related costs, net cash proceeds to
BAE Systems are estimated to be approximately £1.2bn.
Subject to shareholders agreeing to its disposal, the Board proposes to return
£500m to shareholders by way of on-market purchases of shares following
completion of the sale of the Airbus interest. The Board also intends to consult
with the trustees of the Group's pension schemes and the Pensions Regulator with
regard to any further investment in those schemes.
The remaining proceeds, together with the Group's other cash resources, will be
available for debt repayments and future investment in the Group, and to pursue
selected value enhancing acquisitions in the core business.
Resolution of the actuarial funding deficit in BAE Systems' UK pension schemes
has been a priority. In June, BAE Systems announced that it had agreed with the
trustees of the main UK pension schemes a package of measures that, over time,
will eliminate the current actuarial funding deficit. These measures include
increased annual company and employee contribution rates, one-off company
contributions of cash and assets, together with a reduction to pension
liabilities from revised retirement benefits.
In addressing the funding requirement of the schemes, the new arrangements had
the immediate impact of reducing the deficit on the balance sheet. These changes
contributed £0.6bn of the reduction in the net retirement benefit obligations on
the balance sheet (as defined under IAS 19) from £4.1bn at 31 December 2005 to
£3.1bn at 30 June 2006, the remainder of the decrease being primarily
attributable to an increase in discount rates.
(1) earnings before amortisation and impairment of intangible assets,
finance costs and taxation expense
(2) see note 13
Earnings per share
Underlying earnings per share(3) for the half year increased by 44% to 15.4p
when compared with the equivalent period in 2005.
Basic earnings per share in accordance with International Accounting Standard 33
Earnings per Share, from continuing operations, increased by 16% to 12.6p (2005
10.9p).
Finance costs
Finance costs, including the Group's share of the finance costs of equity
accounted investments, were £174m (2005 £56m). The underlying interest charge
was £102m (2005 £96m). Net charges arising from pension accounting,
marked-to-market revaluations of financial instruments and foreign currency
movements were £72m (2005 net gain £40m).
Underlying interest cover based on EBITA2 increased from 5.9 times to 7.7 times.
Taxation
The Group's effective tax rate for the period was 27% (2005 29%). The reduction
in the rate arises from the ongoing benefit of the UK research and development
tax credit scheme and benefits from the one-off pension contributions made in
the period.
Dividend
The Board has declared an interim dividend of 4.4p per share (2005 4.0p)
representing an increase of 10%. The dividend is covered 3.5 times by
earnings(3) from continuing operations (2005 2.7 times) consistent with the
policy of growing the dividend whilst maintaining a long-term sustainable
earnings cover of approximately two times.
Cash flows
Cash outflow from operating activities was £293m (2005 inflow £586m) which
includes £406m one-off contributions into the UK pension schemes, representing
cash of £164m and proceeds from the sale of property of £242m.
There was an inflow from net capital expenditure and financial investment of
£63m (2005 outflow £175m) reflecting the receipt of £242m from the disposal of
company property to fund the additional contributions made to the UK pension
funds (see note 6). Excluding this item, the underlying net capital expenditure
and financial investment cash outflow was £179m.
The resulting operating business cash outflow of £120m (2005 inflow £493m) gave
rise to free cash outflow, after interest, preference dividends and taxation, of
£287m (2005 inflow £421m).
Excluding the above one-off pension contributions, operating business cash
inflow was £44m.
Net debt of the Group at 30 June 2006 was £1,582m, an increase of £305m (2005
£1,288m) from £1,277m at the start of the year.
Critical accounting policies
The Group's critical accounting policies are outlined in the Annual Report 2005.
These include:
- retirement benefit plans;
- contract revenue and profit recognition;
- regional aircraft valuations; and
- intangible assets.
Summarised income statement from continuing operations
Six months Six months
to 30 June to 30 June
2006 2005
Unaudited Unaudited
£m £m
Sales(1) 8,214 6,773
EBITA(2) - subsidiaries 552 363
EBITA(2) - equity accounted investments 236 203
EBITA(2) 788 566
Amortisation (53) (19)
Net finance costs(1) (174) (56)
Taxation expense(1) (155) (147)
Profit for the period 406 344
Basic earnings per share(4) 12.6p 10.9p
Underlying earnings per share(3) 15.4p 10.7p
Dividend per share 4.4p 4.0p
Exchange rates
Six months Six months
to 30 June to 30 June
2006 2005
£/€ - average 1.455 1.459
£/$ - average 1.791 1.873
£/€ - period end 1.446 1.481
£/$ - period end 1.849 1.792
Segmental analysis
Sales(1) EBITA(2)
Six months Six months Six months Six months
to 30 June to 30 June to 30 June to 30 June
2006 2005 2006 2005
Unaudited Unaudited Unaudited Unaudited
£m £m £m £m
Electronics, Intelligence & Support 2,090 1,715 260 151
Land & Armaments 892 337 76 8
Programmes 1,186 1,207 57 88
Customer Solutions & Support 1,462 1,279 215 185
Integrated Systems & Partnerships 798 722 57 17
Commercial Aerospace 1,984 1,660 155 154
HQ and other businesses 32 34 (32) (37)
Intra-group (230) (181) - -
8,214 6,773 788 566
Reconciliation of cash flow from operating activities to net debt
Excluding
one-off One-off Six months to Six months
pension pension 30 June to 30 June
funding funding 2006 2005
Unaudited Unaudited Unaudited Unaudited
£m £m £m £m
Cash inflow/(outflow) from operating activities 113 (406) (293) 586
Capital expenditure (net) and financial
investment (179) 242 63 (175)
Dividends from equity accounted investments 110 - 110 82
Operating business cash inflow/(outflow) 44 (164) (120) 493
Interest and preference dividends (112) (55)
Taxation (55) (17)
Free cash (outflow)/inflow (287) 421
Acquisitions and disposals 80 (1,517)
Debt acquired on acquisition of subsidiary
undertaking - (283)
Proceeds from issue of share capital 26 358
Equity dividends paid (203) (186)
Other non-cash movements (95) 56
Foreign exchange 188 (131)
Movement in cash received on customers'
account(5) (14) (6)
Increase in net debt (305) (1,288)
Opening net debt as defined by the Group (1,277) (668)
Adoption of IAS 32 and IAS 39 - (283)
Closing net debt as defined by the Group (1,582) (2,239)
Net debt as defined by the Group
Six months to Six months
30 June to 30 June
2006 2005
Unaudited Unaudited
£m £m
Other investments - current 568 673
Cash and cash equivalents 2,116 1,705
2,684 2,378
Loans - non-current (3,313) (2,509)
Loans - current (849) (1,787)
Overdrafts - current (37) (297)
Loans and overdrafts - current (886) (2,084)
Cash received on customers' account(5) (included within payables) (67) (24)
(4,266) (4,617)
Closing net debt as defined by the Group (1,582) (2,239)
Operating business cash flow
Six months to Six months
30 June to 30 June
2006 2005
Unaudited Unaudited
£m £m
Electronics, Intelligence & Support 176 173
Land & Armaments (50) (50)
Programmes (33) (88)
Customer Solutions & Support 2 429
Integrated Systems & Partnerships (33) (106)
Commercial Aerospace 57 294
HQ and other businesses (239) (130)
Discontinued businesses - (29)
Operating business cash flow (120) 493
(1) including share of equity accounted investments
(2) earnings before amortisation and impairment of intangible assets,
finance costs and taxation expense
(3) earnings per share excluding amortisation and impairment of
intangible assets, non-cash finance movements on pensions and financial
derivatives, and uplift on acquired inventories (see note 5)
(4) basic earnings per share in accordance with International Accounting
Standard 33
(5) cash on customers' account is the unexpended cash received from
customers in advance of delivery which is subject to advance payment
guarantees unrelated to Company performance
Business group reviews
Electronics, Intelligence & Support
Business overview
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
Sales(1) £2,090m £1,715m £3,697m
EBITA(2) £260m £151m £324m
Cash inflow(3) £176m £173m £323m
Number of employees(1) 31,500 32,800 32,900
Order book(1) £3.3bn £3.4bn £3.5bn
The Electronics, Intelligence & Support business group, headquartered in the US,
is a provider of aerospace and defence systems, sub-systems and services. The
business group comprises two operating groups; Electronics & Integrated
Solutions and Customer Solutions.
In the first half of 2006, Electronics, Intelligence & Support achieved EBITA(2)
of £260m (2005 £151m) on sales(1) of £2,090m (2005 £1,715m). The business group
generated operating cash inflow3 of £176m (2005 £173m).
EBITA(2) includes a £63m accounting gain relating to a revision to US pension
benefits arising from the changes to the calculation of final pensionable
salaries.
The acquired United Defense business contributed sales1 of £159m and EBITA(2) of
£14m.
Electronics & Integrated Solutions
Electronics & Integrated Solutions designs, develops and produces electronic
systems and sub-systems for a wide range of military and commercial
applications. The business focuses on five primary capabilities: communications,
with emphasis on integrated C4ISR4 and tactical networking; electronic warfare
(EW), including information operations; avionics, flight and engine controls;
sensor systems; and intelligence systems.
In April, Electronics & Integrated Solutions delivered the first EW system for
the F-35 Lightning II, the recently re-named F-35 Joint Strike Fighter (JSF),
and in May also delivered the first digital electronic warfare system for the US
Air Force F22 Raptor fighter.
In May, BAE Systems received a sole-source contract to provide its Common
Missile Warning System (CMWS) to protect US Army helicopters and aircraft from
heat-seeking missiles, which could represent $1.4bn (£0.8bn) in future revenue.
CMWS is also part of a larger protection system - Advanced Threat Infrared
Countermeasures (ATIRCM). A civil version of ATIRCM is being tested on civilian
jets to determine its defence applicability against shoulder-fired man-portable
air defence systems (MANPADS).
In April, BAE Systems was selected as the prime contractor for the US Army's
Advanced Precision Kill Weapon System II (APKWS II) laser-guided rocket, which
could represent $2bn (£1.1bn) in future production revenue.
Electronics & Integrated Solutions opened its first Readiness and Sustainment
centre adjacent to Robins Air Force Base in Georgia to support and upgrade US
Air Force equipment as the business increases its focus on this segment of the
market.
Customer Solutions
The US Customer Solutions business focuses on three primary capabilities:
information technology services; technical services and support, including
engineering operations and maintenance, logistics and integrated service
solutions; and a full spectrum of ship repair services.
BAE Systems Information Technology serves the large $60bn (£32bn) US government
information technology market. The business was awarded a prime contract for the
Department of Homeland Security's Enterprise Acquisition Gateway for Leading
Edge solutions (EAGLE) programme, a multiple award programme that could
represent $250m (£135m) of future revenue.
In the Technical Services business, BAE Systems was awarded the Solid State
Phased Array Radar contract, with a potential value of $509m (£275m), to provide
operations, maintenance and support services on a sophisticated network of
missile warning and space surveillance sites. BAE Systems now operates all of
the US Air Force Space Command's early warning radar operation and maintenance
contracts worldwide.
Customer Solutions provides a full array of shipyard services in support of US
Navy vessels including non-nuclear ship repair, alterations and life extending
upgrades. In June, the business was awarded a services contract for guided
missile cruiser class ships, with a potential value of $168m (£91m).
Looking Forward
Although tighter future defence spending is anticipated, the business group is
effectively positioned to grow faster than the overall market given its strong
legacy positions, its focus on rapidly providing armed forces with the mission
capability they require, and increased focus on readiness and sustainment.
Electronics, Intelligence & Support is continuing its reorganisation efforts to
enable it to compete more effectively in the future.
Land & Armaments
Business overview
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
Sales(1) £892m £337m £1,270m
EBITA(2) £76m £8m £42m
Cash (outflow)/inflow(3) £(50)m £(50)m £168m
Number of employees(1) 11,200 10,300 10,600
Order book(1) £4.2bn £4.4bn £4.4bn
The Land & Armaments business group, headquartered in the US, is a leader in the
design, development, production and through-life support and upgrade of armoured
combat vehicles, naval guns, missile launchers, artillery systems and
intelligent munitions.
In the first half of 2006, Land & Armaments achieved EBITA(2) of £76m (2005 £8m)
on sales(1) of £892m (2005 £337m). The business group had an operating cash
outflow(3) of £50m (2005 £50m).
The acquired United Defense business contributed sales1 of £618m and EBITA(2) of
£71m.
US operations
The US business includes US Army contracts for the refurbishment and upgrade of
M2 Bradley and M113 fighting vehicles. These contracts restore systems to
combat-ready condition following extensive operational use, and remanufacture
them to the most advanced configurations.
Total orders received in the six months to June 2006 totalled $1,060m (£592m).
In May 2006, Land & Armaments was awarded a $180m (£97m) contract for the
manufacture of 378 light armoured vehicles. These new medium four-by-four
wheeled vehicles are designed to protect Iraqi armed forces against roadside
bombs and mine blasts. If all contract options are exercised, delivery orders
could total 1,050 vehicles.
Land & Armaments continued its progress on the Future Combat Systems Manned
Ground Vehicles and Armed Robotic Vehicles with the successful completion of
systems functional review and the commencement of preliminary design.
Fabrication and integration of the first Non-Line-of-Sight-Cannon prototype has
commenced and remains on track to deliver prototypes to the US Army in 2008 and
for system fielding in 2010.
Development of the 155mm Advanced Gun System and the Long Range Land Attack
Projectile for the US Navy's new destroyer, DDG1000, continues. In addition, BAE
Systems is designing and testing a new Vertical Launching System (VLS), Mk 57.
This next generation VLS will provide capabilities for the DDG1000 ship to
launch a wide range of missile designs.
In the medium calibre naval gun system market, the 57mm gun has been selected
for the DDG1000 destroyer, the US Navy's Littoral Combat Ship and the US Coast
Guard's Deepwater programme.
UK operations
The land sector is on target to achieve all milestones included within the
armoured fighting vehicle partnering agreement with the UK MoD under DIS.
The UK MoD is still considering options for progressing the acquisition strategy
for the Future Rapid Effects System (FRES) programme. In the meantime, BAE
Systems is funding investment to demonstrate technologies applicable to future
land systems and keep the programme moving forward.
In February, the UK business received funding for the M777 Lightweight Artillery
System. Initial production deliveries to the US Army and Marine Corps continue
with full rate production expected to commence later this year. The M777
Lightweight Artillery System has also been selected by Canada for deployment in
Afghanistan. The business has also received orders under urgent operational
requirements for the fighting vehicle, FV430.
There were continued operating losses in the UK munitions business. Discussions
on new contracting arrangements with the UK MoD are ongoing.
South African operations
The requirement for mine-protected vehicles has continued to generate new orders
for the RG-31 vehicle built by the Company's South African subsidiary, OMC.
Swedish operations
In the area of intelligent munitions for artillery and mortar systems, Land &
Armaments continues its leading role in the accelerated fielding of Excalibur to
US and Canadian forces in Iraq and Afghanistan. The first Swedish guided firing
of the 155mm Excalibur round was successfully carried out in May 2006 and
production contract funding was awarded in July 2006.
Land & Armaments was awarded a £19m order from Sweden to supply 52 Bv206S
armoured all terrain vehicles and work continues on the CV90 family of vehicles.
Looking forward
The Land & Armaments business has seen strong growth in the US paced by the
ongoing conflicts in Iraq and Afghanistan. The level of activity in these
regions will continue to drive near-term growth, but it is anticipated that
these requirements will stabilise at projected 2006 levels. In the longer term,
the Future Combat System in the US and the FRES programme in the UK represent
growth opportunities. In addition, actions to address current under performance
in the UK operations are being implemented and a return to profitability next
year is expected.
Programmes
Business overview
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
Sales(1) £1,186m £1,207m £2,819m
EBITA(2) £57m £88m £133m
Cash (outflow)/inflow3 £(33)m £(88)m £285m
Number of employees1 16,800 15,700 16,200
Order book1 £12.0bn £12.9bn £12.3bn
The Programmes business group is a major contributor to the defence of the UK,
with the MoD its principal customer. The business group comprises the Group's
air systems, naval ships and submarines activities.
In the first half of 2006, Programmes achieved EBITA2 of £57m (2005 £88m) on
sales(1) of £1,186m (2005 £1,207m). The business group had an operating cash
outflow(3) of £33m (2005 £88m). The result for 2005 included a £30m benefit from
risk retirement.
Air Systems
A total of 86 Typhoon aircraft had been accepted at the end of June by the air
forces of the four partner nations. In the UK, the RAF now has two squadrons
fully formed, with a third being built up at RAF Coningsby. BAE Systems
continues to provide support to RAF training and operational build up. Early
work has been commissioned by the four nations further to enhance the capability
of the aircraft.
In addition to the contract for the sale of 18 Typhoon aircraft to Austria,
further export possibilities are being pursued. A government-to-government
understanding between the UK and the Kingdom of Saudi Arabia has been reached
which furthers both countries' defence interests and includes the procurement of
Typhoon aircraft.
Hawk contracts with India and Bahrain are progressing to schedule with the first
Bahrain aircraft accepted in June. Initial aircraft acceptance also has been
achieved on the South Africa contract. Confirmation of the UK MoD Advanced Jet
Trainer production order is expected in the second half of 2006.
The Nimrod MRA4 design and development programme continues to achieve its key
milestones on schedule. The programme remains on target to meet the product
maturity assumptions contained within the production bid submitted in July 2005.
Customer long lead funding enabled initial build to commence ahead of the
production award received in July 2006.
Air Systems is partnered with Lockheed Martin and Northrop Grumman on the F-35
Joint Strike Fighter (JSF), Lightning II, programme, with responsibility for the
design and manufacture of the rear fuselage and empennage. During February, the
programme completed and passed its Critical Design Review for the conventional
take off and landing (CTOL) variant and the short take off and vertical landing
(STOVL) variant. This was an important milestone for the programme,
demonstrating good progression of the detailed design.
Following the assembly of the aircraft's major units, including the BAE Systems
rear fuselage and empennage units, the first CTOL aircraft is undergoing ground
testing prior to first flight scheduled for the last quarter of 2006. In
addition, assembly started on the aft fuselage for the STOVL variant, in May, as
programmed.
Preparation for initial production of JSF has progressed in the period, with
contract receipt for long lead activities. Full contract award for the initial
production quantities is expected in 2007.
BAE Systems has been selected as prime contractor in support of the UK MoD's
capability assessment with respect to the potential role of Unmanned Air
Vehicles (UAVs) in future operational roles. Supporting this activity, during
the first half of 2006, the Company successfully delivered on a series of
contracts for de-risking work.
The MoD is currently assessing a BAE Systems proposal for a programme to
demonstrate UAV technologies and this is expected to commence in the second half
of 2006.
Naval Ships and Submarines
Since the launch in February of the first of class Type 45 destroyer, HMS
Daring, the ship has moved into dry dock to complete fitting out prior to the
start of 'setting to work' of major systems later this year. All hull sections
for the second of class, HMS Dauntless, have been completed and launch is
planned for January 2007. The required build efficiencies are being achieved on
the second and third ships.
Award of the Type 45 Batch 2 order to extend the contract to six full warships
is now expected in 2007.
The second Landing Ship Dock (Auxiliary), Cardigan Bay, was handed over in
August, following sea trials early this year. The fourth ship, Lyme Bay, has
been relocated to the Clyde where it will be completed.
The arbitration process following the non-acceptance by Brunei of the three
Offshore Patrol Vessels commenced in June, with an award not expected before
October.
An initial order for the Demonstration Phase of CVF, the UK's new aircraft
carrier programme, has been received, totalling £30m. There are two key
activities within this phase. The first is to progress design, the second is to
work in the Alliance to support a satisfactory 'Main Gate' submission to the MoD
Investment Appraisal Board. This is a key milestone for the whole CVF programme
that requires delivery of a fully understood and integrated schedule, cost and
risk assessment to the customer.
In July, BAE Systems received a letter of intent from the government of Malaysia
for the procurement of two naval frigates.
The Astute submarine project has maintained its significantly improved
performance with all key milestones for the first six months of 2006 being
achieved on or ahead of plan. The launch of the first of class submarine has
been brought forward to June 2007, demonstrating the good progress made on the
programme since the contract renegotiation in 2003.
Looking forward
With good performance across the major programmes, the outlook for the year
remains positive with improvements in margin performance anticipated.
Customer Solutions & Support
Business overview
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
Sales(1) £1,462m £1,279m £2,923m
EBITA(2) £215m £185m £419m
Cash inflow(3) £2m £429m £850m
Number of employees(1) 14,500 13,900 14,300
Order book(1) £4.8bn £4.2bn £5.0bn
The Customer Solutions & Support (CS&S) business group provides partnered,
through-life support and capability solutions to the UK's Defence Logistics
Organisation (DLO) as well as managing the businesses in Saudi Arabia and
Australia.
In the first half of 2006, CS&S achieved EBITA(2) of £215m (2005 £185m) on
sales(1) of £1,462m (2005 £1,279m). The business group generated an operating
cash inflow(3) of £2m (2005 £429m).
BAE Systems has a major presence in the Kingdom of Saudi Arabia where it acts as
prime contractor for the UK's government-to-government defence contract. The
contract includes the provision of aircraft, capability upgrades, associated
hardware, support, infrastructure and manpower training for the Royal Saudi Air
Force (RSAF). An Understanding Document signed on 21 December 2005 between the
UK and Saudi Arabian governments outlined plans to modernise the Saudi armed
forces. Under the terms of the signed document Typhoon aircraft will replace
Tornado air defence variant aircraft and other aircraft currently in service
with the RSAF.
Around 4,600 people are employed by the Company in the Kingdom of Saudi Arabia,
of whom more than half are Saudi nationals. BAE Systems is continuing to develop
its presence in the Kingdom and is committed to developing a greater indigenous
capability there. The security of employees is the Company's highest priority
and progress on new facilities is proceeding to plan.
Performance on the core Saudi support and modernisation programme in the first
half of 2006 was good, in line with our plans, and with margins maintained at
last year's levels.
In the UK, CS&S continues to develop its partnering arrangement with the DLO
focusing on through-life capability management and value for money, in line with
the UK's Defence Industrial Strategy.
CS&S has continued to make significant progress in air support. In February
2006, the Tornado ATTAC (Availability Transformation - Tornado Aircraft
Contracts) proposal was submitted to the DLO. The proposal offers a full Tornado
airframe availability service for the next ten years and is valued at
approximately £1.5 billion. The experience from ATTAC is being used to make
sound progress on a similar availability contract for the RAF's Harrier
aircraft. The ATTAC model also should provide the blueprint for future support
arrangements on Typhoon.
Towards the end of last year the Tornado Combined Maintenance and Upgrade
contract worth approximately £130m was agreed. Performance against the contract
has been strong with the first aircraft already returned to front line service.
CS&S continues to demonstrate its support capabilities across all air support
programmes, and is moving towards significant milestones, including the 200th
T-45 Goshawk fuselage delivered to Boeing and the millionth flying hour for the
RAF's Hawk aircraft.
In support of the Hawk programme a bid to provide availability support to the
RAF's existing TMk1 aircraft has been submitted. In addition, an extension to
the existing Nimrod Integrated Support Contract was received in July.
In the naval domain the reactivation of three ex-Royal Navy frigates for the
Chilean Navy is progressing. The naval joint ventures are performing well. BAE
Systems has 50% interests in Fleet Support Limited and Flagship Training
Limited. Fleet Support's performance has been underpinned by the partnering
agreement with the MoD/Royal Navy at the Portsmouth naval base. Flagship
Training has recently signed a Heads of Terms to extend its long-term partnering
agreement with the Naval Training Command.
CS&S is part of a consortium which recently submitted a bid for the UK's Defence
Training Review programme, under which the successful bidder will take
responsibility for managing the provision of training and services to the MoD,
and all three services, for a period of 25 years. Downselection of the
successful bidder is expected by the end of 2006.
Work continues on the programme to support the Canadian Victoria Class
submarines. The existing Engineering Support Management contract has been
extended for one year.
CS&S Australia had a good first half in 2006, securing a number of contracts and
strengthening its position as a through-life capability partner to the
Australian Defence Force. A contract extension for A$49m (£20m) was signed at
the end of June ensuring continued support to the Hawk Lead-In Fighter aircraft,
whilst negotiations are ongoing for a five year support contract.
Looking forward
CS&S will continue to work with the UK DLO to provide smarter, more integrated
support solutions on the customer's bases. Development of these solutions will
be underpinned by the migration of the model proposed in Tornado ATTAC to other
future UK platforms.
CS&S will continue to seek to sustain a long-term presence in Saudi Arabia
through developing new business under the Understanding Document and through
delivering on its current support commitments. Finalising the contractual terms
for supply of Typhoons to Saudi Arabia is a high priority for BAE Systems.
Integrated Systems & Partnerships
Business overview
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
Sales(1) £798m £722m £1,834m
EBITA(2) £57m £17m £109m
Cash (outflow)/inflow3 £(33)m £(106)m £17m
Number of employees1 12,000 12,300 12,000
Order book1 £6.4bn £6.0bn £5.9bn
Integrated Systems & Partnerships is a portfolio of high-technology defence
systems businesses comprising the wholly-owned Integrated System Technologies
and Underwater Systems, together with a 37.5% interest in the pan-European MBDA
joint venture, a 20.5% interest in Saab of Sweden and a 50% interest in the
Gripen International joint venture.
In the first half of 2006, Integrated Systems & Partnerships achieved a
significant improvement in performance with EBITA2 of £57m (2005 £17m) on sales1
of £798m (2005 £722m). The business group had an operating cash outflow3 of £33m
(2005 £106m).
Integrated System Technologies (Insyte)
Insyte projects include the full-scale engineering development of the Sampson
multi-function radar for the Royal Navy's Type 45 destroyer. The first radar was
shipped to the customer's test site in June 2006, representing a significant
maturity point in the programme.
In March 2006, Insyte was awarded a £267m contract by the UK MoD for FALCON
Increment A. FALCON will provide the backbone for the information system
infrastructure across the battlespace, both at home and when deployed overseas.
MBDA (37.5%)
MBDA's missile delivery programmes remain on schedule for all customers, both
domestic and export. During the period there were significant deliveries of
Stand-Off Weapons, Mica air-to-air missiles, Brimstone air-launched anti-armour
weapon and the Rapier/Jernas air defence system.
The acquisition of LFK, the German missile company, was completed in March 2006
and integration of this business into MBDA is progressing well.
Key export orders were won for the Exocet anti-ship missile and Vertical Launch
Seawolf naval air defence weapon and support contracts in excess of €140m
(£97m).
2006 is an important year for the business, with key milestones to be met across
a range of development programmes. Good progress has been made on these
programmes, including successful firing of the Meteor Beyond Visual Range
Air-to-Air Missile. In addition, full operational capability of Storm Shadow, a
conventionally-armed stand-off air-to-ground missile, was declared by the UK
customer in early April.
Another key development programme, the Principal Anti-Aircraft Missile System
naval area defence weapon is also progressing satisfactorily.
Saab (20.5%)
Saab had a successful first half year including the acquisition, subject to
regulatory clearances, of Ericsson Microwave Systems for SEK 3.8bn (£287m) in
June. This key acquisition will add world-leading radar and sensor operations to
Saab's portfolio in the areas of defence, aviation, space and civil security.
Key orders in the period include an SEK 8.3bn (£627m) airborne surveillance
system for Pakistan, which includes Saab 2000 turboprop aircraft equipped with
the Ericsson Microwave Systems airborne radar system, Erieye.
Gripen International (50%)
Since its maiden flight in November 2005, the first Gripen dual-seat export
aircraft continues its successful flight test programme in Sweden, with the
first production aircraft scheduled for delivery to South Africa in 2008. Both
the Hungarian and Czech Gripen programmes are performing satisfactorily.
Underwater Systems
The Sting Ray Mod 1 lightweight torpedo programme progresses to schedule.
Activity continues with the aim of securing a UK MoD agreement for the upgrade
of the Spearfish heavyweight torpedo.
The Talisman low-observable autonomous unmanned underwater vehicle (UUV) was
launched in March. This is the latest-generation modular multi-role UUV, capable
of a wide range of maritime littoral operations.
Atlas Elektronik
The sale of the previously wholly-owned Atlas Elektronik GmbH for €149m (£103m)
was completed on 3 August 2006.
Looking forward
Implementation of the UK's DIS is material to both the MBDA and Underwater
Systems businesses. The announcement in July by the MoD of the creation of 'Team
CW' (Complex Weapons) led by MBDA represented a significant step forward in the
implementation of the DIS in this sector. All parties are committed to the
completion of a strategic partnering agreement before the end of the year. For
Underwater Systems, the follow-on activities from the DIS will play an important
role in shaping the future position of the business and the MoD has signalled an
intent to develop a way ahead by the end of 2006.
During the second half of 2006 Saab will focus on consolidation of the successes
achieved during the first half year, primarily the completion of the acquisition
of Ericsson Microwave Systems, and its effective integration into the company.
Commercial Aerospace
Business overview
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
Sales(1) £1,984m £1,660m £3,232m
EBITA(2) £155m £154m £179m
Cash inflow(3) £57m £294m £327m
Number of employees(1) 11,900 12,400 12,500
Order book(1) £27.0bn £22.4bn £29.5bn
The Commercial Aerospace business group comprises the Group's 20% interest in
Airbus together with the Regional Aircraft asset management and support
activities. Until March 2006, the business group also included the
Aerostructures business.
In the first half of 2006, Commercial Aerospace achieved EBITA(2) of £155m (2005
£154m) on sales1 of £1,984m (2005 £1,660m). The business group generated
operating cash inflow3 of £57m (2005 £294m).
Airbus contributed EBITA(2) of £188m (2005 £176m) and a cash inflow of £105m (2005
£350m). This was after charging £131m (2005 £107m) of development costs, of
which £64m (2005 £55m) related to the A380 programme.
Airbus
Airbus secured 101 net new orders in the period with major orders received from
Indian Airlines, Air China and Finnair. First half deliveries of 219 aircraft
compares with the 189 aircraft delivered in the same period last year.
The first A380 is planned for delivery in late 2006. In June, Airbus announced a
delay in the manufacturing ramp-up for the A380 programme. Airbus continues to
work with the airlines to mitigate the impact of this delay.
In July, Airbus announced the development of the proposed new A350 XWB (Extra
Wide Body) aircraft.
On 7 June 2006, BAE Systems served notice exercising the put option in respect
of its 20% shareholding in Airbus. Under the terms of the shareholders'
agreement, an independent bank was appointed in June to undertake the valuation
of the Airbus stake, which resulted in a valuation of €2.75bn (£1.9bn). On 5
July 2006, BAE Systems announced its intention to undertake an audit of the
Airbus group in order to assist the Board in assessing its recommendation with
regard to the proposed disposal. Following the audit conducted during August, a
circular5 recommending the disposal has been posted to shareholders.
Regional Aircraft
The regional aircraft leasing market remains challenging with high oil prices
continuing to dominate airline economics. The aircraft leasing team have
continued to make progress with new turboprop markets identified in India and
Nepal and initial deliveries of aircraft to customers achieved.
Opportunities for both turboprop and jet aircraft continue to emerge,
particularly in Eastern Europe, although these markets remain highly
competitive. The business has successfully removed significant future exposures
(residual value guarantees) on 37 regional jet aircraft.
The performance of Regional Aircraft is reliant upon a successful aircraft lease
placement programme and sustained aircraft lease income rates. The business is
underpinned by the Group's Financial Risk Insurance Programme (FRIP) which makes
good shortfalls in actual income against estimated future income.
Arbitration proceedings are ongoing between BAE Systems and certain of the FRIP
reinsurers. Some reinsurers claim to be entitled either to terminate or to be
discharged from liability under their reinsurance contracts. On the basis of the
legal advice it has received, BAE Systems believes these claims to be without
merit and is vigorously defending them. As at 30 June 2006, the net present
value of anticipated income under the programme was £291m.
Aerostructures
In March 2006, the sale of the UK Aerostructures business to Spirit AeroSystems
Inc. was completed, for a cash consideration of £80m. This disposal generated a
profit of £11m arising from the resultant reduction of pension liabilities.
Looking forward
The losses in Regional Aircraft continue and no improvement is anticipated in
this market.
(1) including share of equity accounted investments
(2) earnings before amortisation and impairment of intangible assets,
finance costs and taxation expense
(3) net cash inflow from operating activities after capital expenditure
(net) and financial investment, and dividends from equity accounted
investments
(4) Command, Control, Communications and Computing, Intelligence,
Surveillance and Reconnaissance
(5) see note 13
Independent review report to BAE Systems plc
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 June 2006 which comprises the Consolidated Income
Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement,
the Consolidated Statement of Recognised Income and Expense, and the related
notes. 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 of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the UK. A review consists
principally of making enquiries of group 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 excludes audit
procedures such as tests of controls and verification of assets, liabilities and
transactions. It is substantially less in scope than an audit performed in
accordance with International Statements on Auditing (UK and Ireland) 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 2006.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London
12 September 2006
Consolidated income statement
Six months to Six months to Year to 31
30 June 2006 30 June 2005 December 2005
Unaudited Unaudited Audited
Notes £m £m £m £m £m £m
Continuing operations
Combined sales of Group and equity accounted
investments 8,214 6,773 15,4 11
Less: share of equity accounted investments (2,454) (2,140) (4,392)
Revenue 2 5,760 4,633 11,019
Operating costs (5,514) (4,326) (10,579)
Other income 253 37 247
Group operating profit excluding amortisation 552 363 809
and impairment of intangible assets
Amortisation (53) (19) (77)
Impairment - - (45)
Group operating profit 499 344 687
Share of results of equity accounted investments 236 203 373
excluding finance costs and taxation expense
Finance costs 3 (12) 6 (11)
Taxation expense (70) (65) (149)
Share of results of equity accounted investments 154 144 213
Earnings before amortisation and impairment of
intangible assets, finance costs and taxation
expense (EBITA) 2 788 566 1,182
Amortisation (53) (19) (77)
Impairment - - (45)
Finance costs of equity accounted investments 3 (12) 6 (11)
Taxation expense of equity accounted investments (70) (65) (149)
Operating profit 653 488 900
Finance costs 3
Financial income 738 610 1,224
Financial expense (900) (672) (1,428)
(162) (62) (204)
Profit before taxation 491 426 696
Taxation expense
UK taxation 20 (5) (37)
Overseas taxation (105) (77) (76)
(85) (82) (113)
Profit for the period from continuing operations 406 344 583
Loss for the period from discontinued operations 4 - (26) (28)
Profit for the period 406 318 555
Attributable to:
BAE Systems shareholders 405 317 553
Minority interests 1 1 2
406 318 555
Earnings per share 5
Continuing operations:
Basic earnings per share 12.6p 10.9p 18.3p
Diluted earnings per share 12.4p 10.8p 18.2p
Discontinued operations:
Basic earnings per share - p (0.8)p (0.9)p
Diluted earnings per share - p (0.8)p (0.8)p
Total:
Basic earnings per share 12.6p 10.1p 17.4p
Diluted earnings per share 12.4p 10.0p 17.4p
Dividends per ordinary share 9
Prior year final dividend paid in the period
£203m (2005 £186m) 6.3p 5.8p 5.8p
Interim dividend declared £142m (2005 declared/
paid £129m) 4.4p 4.0p 4.0p
Consolidated balance sheet
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
Notes £m £m £m
Non-current assets
Intangible assets 7,888 8,220 8,217
Property, plant and equipment 1,662 1,861 1,704
Investment property 143 203 218
Equity accounted investments 1,941 1,781 1,721
Other investments 9 34 9
Other receivables 616 526 912
Other financial assets 47 69 65
Deferred tax assets 1,118 1,332 1,331
13,424 14,026 14,177
Current assets
Inventories 456 578 485
Trade and other receivables including amounts due from customers 2,245 2,588 1,877
for contract work
Current tax 43 - 20
Other investments 568 673 634
Other financial assets 95 44 54
Cash and cash equivalents 2,116 1,705 2,581
5,523 5,588 5,651
Non-current assets and disposal groups held for sale 277 - 407
5,800 5,588 6,058
Total assets 19,224 19,614 20,235
Non-current liabilities
Loans (3,313) (2,509) (3,534)
Trade and other payables (498) (787) (432)
Retirement benefit obligations 6 (3,044) (4,112) (4,101)
Other financial liabilities (40) (48) (45)
Deferred tax liabilities (19) (14) (23)
Provisions (327) (424) (375)
(7,241) (7,894) (8,510)
Current liabilities
Loans and overdrafts (886) (2,084) (905)
Trade and other payables (6,855) (6,162) (7,006)
Other financial liabilities (49) (114) (81)
Current tax (276) (251) (316)
Provisions (331) (185) (343)
(8,397) (8,796) (8,651)
Liabilities directly associated with non-current assets and
disposal groups held for sale (222) - (270)
(8,619) (8,796) (8,921)
Total liabilities (15,860) (16,690) (17,431)
Net assets 3,364 2,924 2,804
Capital and reserves
Issued share capital 81 80 80
Share premium 814 767 782
Equity option of convertible preference shares 76 78 78
Other reserves 4,758 4,802 4,720
Retained earnings (2,380) (2,814) (2,872)
Total equity attributable to equity holders of the parent 3,349 2,913 2,788
Minority interests 15 11 16
Total equity 8 3,364 2,924 2,804
Consolidated cash flow statement
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
£m £m £m
Profit/(loss) for the period
Continuing operations 406 344 583
Discontinued operations - (26) (28)
406 318 555
Taxation expense 85 83 114
Share of results of equity accounted investments (154) (144) (213)
Net finance costs 162 65 207
Depreciation, amortisation and impairment 173 181 524
(Gain)/loss on disposal of property, plant and equipment (44) (6) 2
Gain on disposal of investment property (65) - (43)
(Gain)/loss on disposal of business - continuing
operations (11) 5 12
(Gain)/loss on disposal of business - discontinued
operations - 6 8
Impairment of other investments (1) - 2
Cost of equity-settled employee share schemes 10 26 16
Movements in provisions (37) (3) 99
Decrease in liabilities for retirement benefit
obligations (642) - (98)
(Increase)/decrease in working capital:
Inventories (10) 35 54
Trade and other receivables (165) (52) (4)
Trade and other payables - 72 864
Cash (outflow)/inflow from operating activities (293) 586 2,099
Interest paid (156) (150) (213)
Interest element of finance lease rental payments (5) (10) (17)
Taxation paid (55) (17) (27)
Net cash (outflow)/inflow from operating activities (509) 409 1,842
Dividends received from equity accounted investments 110 82 88
Interest received 59 105 99
Purchases of property, plant and equipment (178) (173) (318)
Capital expenditure on investment property - - (12)
Purchases of intangible assets (11) (4) (17)
Proceeds from sale of property, plant and equipment 115 6 30
Proceeds from sale of investment property 137 10 54
Proceeds from sale of non-current investments 1 - 30
Purchase of non-current other investments (1) (14) (17)
Purchase of subsidiary undertakings - (2,227) (2,262)
Net cash acquired with subsidiary undertakings - 136 128
Proceeds from sale of subsidiary undertakings 80 448 460
Cash and cash equivalents disposed of with subsidiary - 1 1
undertakings
Proceeds from sale of equity accounted investments - 125 125
Net proceeds from sale of other deposits/securities 17 59 45
Net cash inflow/(outflow) from investing activities 329 (1,446) (1,566)
Capital element of finance lease rental payments (28) (73) (89)
Proceeds from issue of share capital 26 358 373
Equity dividends paid (203) (186) (315)
Dividends paid on preference shares (10) - (21)
Cash inflow from loans - 976 1,005
Cash outflow from repayment of loans (39) (283) (357)
Net cash (outflow)/inflow from financing activities (254) 792 596
(Decrease)/increase in cash and cash equivalents (434) (245) 872
Cash and cash equivalents at start of period 2,491 1,650 1,650
Effect of foreign exchange rate changes on cash and cash
equivalents 22 3 (31)
Cash and cash equivalents at end of period 2,079 1,408 2,491
Cash and cash equivalents comprise:
Cash and cash equivalents 2,116 1,705 2,581
Overdrafts (37) (297) (90)
Cash and cash equivalents at end of period 2,079 1,408 2,491
Consolidated statement of recognised income and expense
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
Notes £m £m £m
Currency translation on foreign currency net
investments:
Subsidiaries (104) 66 53
Equity accounted investments (11) (47) (23)
Amounts credited/(charged) to hedging reserve 8 218 (480) (688)
Actuarial gains/(losses) on defined benefit pension
schemes:
Subsidiaries 340 (555) (652)
Equity accounted investments 54 (34) (72)
Current tax on items taken directly to equity 21 - (3)
Deferred tax on items taken directly to equity:
Subsidiaries (110) 187 193
Equity accounted investments (91) 202 276
Net income/(expense) recognised directly in equity 317 (661) (916)
Profit for the period 406 318 555
Total recognised income and expense 723 (343) (361)
Adoption of IAS 32 and IAS 39 1 - 422 422
723 79 61
Attributable to:
Equity shareholders 722 (344) (363)
Minority interest 1 1 2
723 (343) (361)
Notes to the interim report
1 Accounting policies
Basis of preparation and statement of compliance
These condensed consolidated interim financial statements of BAE Systems plc
(the Group) have been prepared in accordance with International Accounting
Standard 34 Interim Financial Reporting (IAS 34), and have been prepared on the
basis of International Financial Reporting Standards (IFRSs) as adopted by the
European Union that are effective for the year ended 31 December 2006. They do
not include all of the information required for full annual financial
statements. These condensed consolidated interim financial statements do not
comprise statutory accounts within the meaning of Section 240 of the Companies
Act 1985, and should be read in conjunction with the Annual Report 2005. The
statutory accounts for the year ended 31 December 2005 have been reported upon
by the Group's auditors and delivered to the registrar of companies. The report
of the auditors was unqualified and did not contain statements under section 237
(2) or (3) of the Companies Act 1985.
Adoption of IAS 32 and IAS 39
The Group adopted IAS 32 Financial Instruments: Disclosure and Presentation (IAS
32) and IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) on 1
January 2005. The effect of adopting IAS 39 at 1 January 2005 is presented as a
movement in the Group's consolidated statement of recognised income and expense
for 2005. Further details relating to the adoption of these and other
International Accounting Standards are provided within the Annual Report 2005.
Except as described below, the accounting policies adopted in the preparation of
these condensed consolidated interim financial statements to 30 June 2006 are
consistent with the policies applied by the Group in its consolidated financial
statements as at, and for the year ended, 31 December 2005.
Changes in accounting policies
International Financial Reporting Interpretations Committee 4 (IFRIC 4) '
Determining whether an Arrangement contains a Lease is effective' for the Group
for the year ending 31 December 2006. The Group has reviewed its contracts and
the interpretation does not have a significant impact on the Group.
These condensed consolidated interim financial statements were approved for
issue by the board of directors on 12 September 2006.
2 Segmental analysis (unaudited)
Sales Less: adjustment Add: sales to equity Revenue
for share of equity accounted
account ed investments
investments
Six Six Six Six Six Six months Six Six
months to months months to months to months to to 30 June months months
30 June to 30 30 June 30 June 30 June 2005 to 30 to 30
2006 June 2006 2005 2006 June June
2005 2006 2005
£m £m £m £m £m £m £m £m
Electronics,
Intelligence & Support 2,090 1,715 (6) (8) 18 12 2,102 1,719
Land & Armaments 892 337 - - 7 - 899 337
Programmes 1,186 1,207 (427) (585) 427 585 1,186 1,207
Customer Solutions &
Support 1,462 1,279 (191) (189) 31 27 1,302 1,117
Integrated Systems &
Partnerships 798 722 (508) (542) 34 6 324 186
Commercial Aerospace 1,984 1,660 (1,884) (1,531) 46 82 146 211
HQ and other businesses 32 34 (4) - 3 3 31 37
8,444 6,954 (3,020) (2,855) 566 715 5,990 4,814
Intra-business group
sales/revenue (230) (181) - - - - (230) (181)
8,214 6,773 (3,020) (2,855) 566 715 5,760 4,633
EBITA(1) Amortisation of Business group
intangible assets result
Six Six Six Six months Six Six
months to months to months to to 30 June months months
30 June 30 June 30 June 2005 to 30 to 30
2006 2005 2006 June June
2006 2005
£m £m £m £m £m £m
Electronics, Intelligence & Support 260 151 (7) (4) 253 147
Land & Armaments 76 8 (34) (10) 42 (2)
Programmes 57 88 (3) (3) 54 85
Customer Solutions & Support 215 185 (3) - 212 185
Integrated Systems & Partnerships 57 17 (6) (1) 51 16
Commercial Aerospace 155 154 - (1) 155 153
HQ and other businesses (32) (37) - - (32) (37)
788 566 (53) (19) 735 547
Less:
Financial expense of equity accounted
investments (12) 6
Taxation expense of equity accounted
investments (70) (65)
Operating profit 653 488
(1) earnings before amortisation and impairment of intangible assets,
finance costs and taxation expense
3 Finance costs
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
£m £m £m
Finance costs - Group (162) (62) (204)
Finance costs - share of equity accounted investments (12) 6 (11)
(174) (56) (215)
Analysed as:
Net interest:
Interest income 62 76 123
Interest expense (177) (168) (310)
Facility fees (2) - (10)
Net present value adjustments 12 6 (2)
Share of equity accounted investments 3 (10) (11)
(102) (96) (210)
Other finance costs:
Group (57) 24 (5)
Share of equity accounted investments (15) 16 -
(174) (56) (215)
Other finance costs of £(72)m (2005 £40m) represent the market value and foreign
exchange movements on financial instruments and investments of £(87)m (2005
£41m) and a net financing credit on pensions of £15m (2005 charge £1m).
4 Disposals and discontinued operations
Disposals
In March 2006 the Group sold its UK Aerostructures business for £80m in cash.
This disposal generated a profit of £11m arising from the resultant reduction of
pension liabilities.
Discontinued operations
The results of the discontinued operations, which have been included in the
consolidated income statement, were as follows:
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
£m £m £m
Revenue - 111 111
Expenses - (127) (127)
EBITA(1) - (16) (16)
Finance costs, net - (3) (3)
Loss before taxation - (19) (19)
Taxation - (1) (1)
Loss for the period - (20) (20)
Loss on disposal of discontinued operations - (6) (8)
Loss for the period from discontinued operations - (26) (28)
(1) earnings before amortisation and impairment of intangible assets,
finance costs and taxation expense
5 Earnings per share (unaudited)
Six months to 30 June 2006 Six months to 30 June 2005
£m Basic £m Diluted £m Basic £m Diluted
pence pence per pence pence per
per share per share
share share
Profit for the period attributable to equity
shareholders 405 405 317 317
Preference dividends - 14 - 14
Profit/(loss) for the period after adjusting
for preference dividends 405 12.6 419 12.4 317 10.1 331 10.0
Represented by:
Continuing operations 405 12.6 419 12.4 343 10.9 357 10.8
Discontinued operations - - - - (26) (0.8) (26) (0.8)
(Deduct)/add back:
Net financing credit on pensions, post
tax (11) (11) 1 1
Uplift on acquired inventories, post tax - - 4 4
Market value movements on financial
derivatives, post tax 63 63 (30) (30)
Amortisation of intangible assets, post
tax 39 39 19 19
Underlying earnings 496 15.4 510 15.1 311 9.9 325 9.9
Represented by:
Continuing operations 496 15.4 510 15.1 337 10.7 351 10.7
Discontinued operations - - - - (26) (0.8) (26) (0.8)
496 15.4 510 15.1 311 9.9 325 9.9
Reconciliation of weighted average number of shares
Millions Millions Millions Millions
Weighted average number of shares used in
calculating basic earnings per share 3,220 3,220 3,152 3,152
Add:
Incremental shares in respect of employee
share schemes - 34 - 19
Incremental shares in respect of convertible
preference shares - 127 - 127
Weighted average number of shares used in
calculating diluted earnings per share 3,220 3,381 3,152 3,298
Underlying earnings per share is presented in addition to that required by IAS
33 Earnings per Share (IAS 33) as the directors consider that this gives a more
appropriate indication of underlying performance.
In accordance with IAS 33, the diluted earnings per share calculations are
without reference to adjustments in respect of outstanding share options and
convertible preference shares, as assumed conversion would be anti-dilutive.
6 Retirement benefit obligations (unaudited)
UK US and other Total
£m £m £m
Deficit in defined benefit pension plans at 31 December 2005 (4,659) (647) (5,306)
Actual return on assets below expected return (207) (10) (217)
Decrease in liabilities due to changes in assumptions 492 189 681
Current service cost (93) (31) (124)
Employer contributions - ordinary 132 14 146
Employer contributions - additional 644 - 644
Curtailment gains1 52 63 115
Other movements 5 36 41
Deficit in defined benefit pension plans at 30 June 2006 (3,634) (386) (4,020)
US healthcare plans (37)
Total IAS 19 deficit, net (4,057)
Allocated to equity accounted investments 989
Group's share of IAS 19 deficit, net (3,068)
Group's share of IAS 19 deficit of equity accounted investments (248)
Represented by:
Pension assets (within non-current receivables) 44
Retirement benefit obligations (3,044)
Liabilities directly associated with non-current assets and disposal groups held
for sale (68)
Group's share of IAS 19 deficit, net (3,068)
In June 2006, the Group announced it had agreed a programme of measures to
address the funding deficit in its principal UK pension schemes. The measures
included one-off contributions of £644m and agreed changes to the members'
benefits to reduce future liabilities.
The one-off contributions of £644m included certain properties valued at £242m,
the right to receive a share of the deferred consideration under the put/call
option arrangement arising from the Eurosystems transaction in 2005 and valued
at £238m, and £164m in cash. The properties were sold to the scheme at market
value, generating a profit on disposal of £100m. Within EBITA, this profit on
disposal was offset by an operating charge of £100m relating to various funding
arrangements with the Group's equity accounted investments.
The curtailment gains1 arising in the period were a result of certain benefit
changes made. The Group's share of the £115m curtailment gains shown above is
£114m after allocation to equity accounted investments. Of this £114m gain, £63m
related to the reduction in the net pension liability arising from the changes
to the calculation of the final US pensionable salaries and £11m as a result of
the disposal of the UK Aerostructures business in March 2006. The remainder is
largely offset by an increase in UK service costs in the period due to the
movement in discount rates.
The following analysis summarises how these items have been reflected in the
consolidated income statement and the consolidated cash flow statement:
Income statement items:
£m
Included within operating costs of £5,514m (100)
Included within other income of £253m:
Gain on disposal of property, plant and equipment, and investment property 100
Curtailment gains(1) 113
Curtailment gains within share of results of equity accounted investments excluding finance costs 1
and taxation expense
Earnings before amortisation and impairment of intangible assets, finance costs and taxation
expense (EBITA) 114
Cash flow statement items:
£m
Profit for the period 114
Share of results of equity accounted investments (1)
Gain on disposal of property (35)
Gain on disposal of investment property (65)
Gain on disposal of business - continuing operations (11)
Decrease in liabilities for retirement benefit obligations (625)
Decrease in working capital:
Trade and other receivables 217
Cash outflow from operating activities (406)
Proceeds from sale of property, plant and equipment 242
Operating business cash outflow (164)
(1) a curtailment gain represents the reduction in the retirement benefit
obligation as a result of either a material reduction in the number of
employees in the scheme and/or a change in the benefit structure, but
where in both cases the company retains part or all of the future pension
liability
7 Aircraft financing contingent liabilities
Included within Group provisions of £658m is an exposure of £24m as discussed
below:
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
£m £m £m
Potential future cash flow payments in respect of aircraft financing
obligations 240 583 460
Anticipated aircraft values (210) (565) (391)
Adjustments to net present values (6) (5) (4)
Net exposure provided 24 13 65
The Group has provided residual value guarantees (RVGs) in respect of certain
commercial aircraft sold. At 30 June 2006 the Group's exposure to make future
payments in respect of these arrangements was £240m (31 December 2005 £460m).
Certain of these arrangements are covered by a Financial Risk Insurance
Programme (FRIP) under which the Group would place reliance on insurance cover
for the anticipated aircraft values if the guarantees were called.
After taking account of the FRIP and independent appraisal valuations the
directors consider that the Group's net exposure to these guarantees is covered
by the provisions held and the residual values of the related aircraft.
The Group is also exposed to actual and contingent liabilities arising from
commercial aircraft financing and RVGs given by Saab AB and Airbus SAS.
Provision is made against the expected net exposures on a net present value
basis within the accounts of Airbus and Saab. The Group's share of such exposure
is limited to its percentage shareholding in each of these equity accounted
investments.
The reduction in the net exposure reflects the settlement of the commitment in
respect of 37 RVGs in the period.
8 Reconciliation of movements in total equity
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
£m £m £m
Total equity at beginning of period 2,804 2,665 2,665
Adoption of IAS 32 and IAS 39 (note 1) - 422 422
2,804 3,087 3,087
Total recognised income and expense 723 (342) (361)
Share-based payments 10 7 16
Shares issued 33 358 373
Other (3) - 4
Equity dividends paid (203) (186) (315)
Total equity at end of period 3,364 2,924 2,804
£33m of shares were issued on the exercise of share options for £26m cash, and
the conversion of 6,116,123 cumulative redeemable preference shares into
2,929,867 ordinary shares for £7m.
Amounts credited/(charged) to the hedging reserve shown in the consolidated
statement of recognised income and expense represent the gains/(losses) arising
as a result of the market value movements in the period on certain derivative
financial instruments.
9 Equity dividends
The directors have declared an interim dividend of 4.4p per ordinary share (2005
4.0p), totalling £142m (2005 £129m). The dividend will be paid on 30 November
2006. The ex-dividend date is 18 October 2006, with a record date of 20 October
2006.
Shareholders who do not at present participate in the Company's Dividend
Reinvestment Plan and wish to invest the interim dividend in shares should
complete a mandate form for the Dividend Reinvestment Plan and return it to the
Registrars no later than 9 November 2006.
10 Related party transactions
The Group has an interest in a number of equity accounted investments.
Transactions with the equity accounted investments occur in the normal course of
business and are priced on an arm's length basis and settled on normal trade
terms. The more significant of these transactions are disclosed below:
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Unaudited Unaudited Audited
£m £m £m
Sales to related parties 566 715 1,569
Purchases from related parties 91 12 135
Amounts owed by related parties 109 162 62
Amounts owed to related parties 1,292 1,142 1,266
11 Events after the balance sheet date
The sale of the previously wholly-owned Atlas Elektronik GmbH to EADS and
Thyssen Krupp for €149m (£103m) was completed on 3 August 2006.
12 Annual General Meeting
The Annual General Meeting of BAE Systems plc will be held on 9 May 2007.
13 Circular to shareholders
On 11 September a class 1 circular was posted to shareholders explaining the
background of the proposed Airbus disposal and recommending that shareholders
vote for the resolution to dispose of the Airbus shareholding, on the basis set
out in the circular, at the Extraordinary General Meeting to be held on 4
October 2006. Copies of this circular can be obtained from the Company's
registered office.
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