Final Results

23rd Feb 2006 07:02

BAE SYSTEMS PLC23 February 2006 BAE Systems plc Preliminary results Results in brief 2005 20041 Results from continuing operationsSales2 £15,411m £13,222mEBITA3 £1,182m £1,016mOperating profit £900m £774mUnderlying earnings per share4 22.5p 17.4pBasic earnings per share5 18.3p 14.2p Other results including discontinued operationsDividend per share 10.3p 9.5pCash inflow from operating activities £2,099m £2,350mNet debt as defined by the Group £1,277m £668mOrder book6 £59.8bn £50.1bn Highlights • Delivering US growth strategy • Global land systems business established • Programmes business profitability and risk profile improved • Growth from UK MoD partnered support • European business portfolio restructuring • Strong Airbus order intake • Strong operating cash flow • Underlying earnings per share4 up 29.3% at 22.5p • Dividend increased 8.4% to 10.3p per share for the year Outlook Looking forward to 2006, we anticipate an improved performance from our defencebusinesses with modest organic growth and a full year contribution from theformer United Defense activities. We also anticipate an increased contributionfrom the commercial aerospace sector. We expect to translate operating profit into operating cash flow, other thansome small utilisation of customer advances. We intend to make one-off cashcontributions to the pension schemes in 2006. 1 as restated under International Financial Reporting Standards 2 including share of equity accounted investments' sales 3 earnings before amortisation and impairment of intangible assets, finance costs and taxation expense 4 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) 5 basic earnings per share in accordance with International Accounting Standard 33 6 including share of equity accounted investments' order books and after the elimination of intra-group orders of £0.9bn (2004 £2.6bn) BAE Systems has performed well against its objectives in 2005. Financial resultshave been delivered in line with plan and further significant steps have beentaken to implement the Company's strategy. In particular, the acquisition ofUnited Defense builds on the Company's strong defence technology business in theUnited States and complements its established position as the largest defencecompany in the UK and Europe. The United Defense acquisition has elevated BAE Systems to the second largestsupplier in the global land systems market. The former United Defense activitieshave been integrated with BAE Systems Land Systems, which comprised the formerRO Defence and Alvis activities including Hagglunds. Integration of theseoperations has resulted in a single US headquartered global land systemsbusiness with operations in the US, UK, Sweden and South Africa. In 2005, the Company has continued to improve performance through a combinationof good project execution, cost and productivity improvements within thebusiness operations together with the benefit of actions over recent years toeliminate inappropriate risk and improve returns, especially in its UK Ministryof Defence (MoD) Programmes business. Sales1 increased 17% from £13,222m to £15,411m. The growth reflects sales of£789m from the acquired United Defense business together with the benefit of2004 acquisitions and increased deliveries across the majority of the Group.This was partially offset by the impact of the reduced Saab shareholding. EBITA2 increased 16% from £1,016m to £1,182m. EBITA has been reduced byrationalisation provisions of £89m and is stated after United Defenseacquisition accounting adjustments of £44m. Losses at Regional Aircraft amountedto £95m. Underlying earnings per share3 from continuing operations for 2005 increased by29.3% to 22.5p compared with 2004. Basic earnings per share, in accordance withIAS 33, from continuing operations increased by 28.9% to 18.3p (2004 14.2p). The outlook for the UK Programmes business is now good. Following agreement onthe way forward for the Typhoon programme, it is now making a significantcontribution to the Company's performance. Other UK platform programmes such asthe Type 45 destroyer, Nimrod MRA4, Hawk and Astute submarine are also expectedto progress to make good contributions when they transition from design toproduction. Alongside the good operational execution now being delivered we continue tostrive to further embed a high performance culture across the Company. Theformation of the Centre for Performance Excellence will help ensure consistencyof performance measurement and provide leadership and focus for the sharing ofbest practice across the Company. In December, the Company welcomed thepublication by the UK government of a Defence Industrial Strategy followingextensive consultation with industry. The strategy paper recognises the need forgovernment and industry to work in partnership to secure the best technologiesto meet the needs of the UK's armed forces. The paper also identifies the skillsand capabilities required to equip and support the UK armed forces whilstensuring the UK maintains a world class defence industry. BAE Systems recognisesthat implementing the Defence Industrial Strategy sets challenges for both theMoD and industry. Addressing pension deficits is a challenge. Reduced discount rates used to valuescheme liabilities and the need to address changes in assumptions for increasedlife-expectancy combined to create a significant deficit in the funding of theCompany's pension schemes. The Company has recently finalised a plan for the largest of its funds, the MainScheme. The plan addresses the deficit through increased contributions andbenefit concessions from employee scheme members and contributions of cash andproperty assets from the Company. These actions enable the Company to maintainthis defined benefit pension scheme for existing scheme members, at a costacceptable to the Company, eliminating the substantial funding deficit andintroducing flexibility into the benefit structure to self fund any furtherincreases in employee longevity going forward. A continuing success for the Company is the provision of defence supportsolutions. The Company has a large and growing business providing support forarmed forces and government agencies. Through-life support and upgrades forin-service defence equipment is expected to become an increasingly importantactivity for BAE Systems as air, naval and land sector platforms are expected toremain in service for many decades and require progressive upgrades incapability with advances in technology. In partnership with the MoD's Defence Logistics Organisation (DLO) the Companyhas continued to develop and grow its support solutions activities for the UK'sarmed forces. The successful delivery of cost savings, together with improvedequipment availability across a number of pilot air systems activities, hasenabled the Company to broaden the scope of its DLO support activities to the UKland sector. Further support opportunities have been identified with thepotential to deliver further cost savings and improved system availability forthe UK customer and to deliver future profitable growth for the benefit ofshareholders. BAE Systems continues to provide extensive support in Saudi Arabia, principallyto the Royal Saudi Air Force, building on a relationship spanning severaldecades. BAE Systems employ some 4,600 people within the Kingdom on wide-rangingactivities including flying training and support for aircraft previouslysupplied. The Company has recently invested in facilities to enhance in-kingdomcapability for the maintenance and sustainment of capability of in-serviceaircraft. In December 2005, the governments of the Kingdom of Saudi Arabia and the UKsigned an Understanding Document, intended to establish a greater partnership inmodernising the Saudi Arabian Armed Forces and developing closeservice-to-service contacts especially through joint training and exercises.Under the terms of the Understanding, the two governments recognise therequirement to provide enhanced capabilities to existing military assets andensure that they can be supported by local industry. It is also intended thatTyphoon aircraft will replace Tornado Air Defence Variant aircraft and otheraircraft in service with the Royal Saudi Air Force. The details of thesearrangements are confidential. Support is also now a substantial component of the Company's business in the US.Following the acquisition of United Defense, its marine repair business has beenadded to the Company's established US Navy and federal systems supportactivities to form an integrated support solutions business in the US. Drawing on the depth of experience now residing on both sides of the Atlantic, across-company support solutions council has been formed to share best practice. A number of actions have been taken to rationalise the Company's portfolio ofactivities in Europe and to manage non-strategic businesses for optimum value. In March 2005, BAE Systems agreed a reduced involvement in marketing the Gripencombat aircraft and reduced its equity interest in Saab AB from 34.2% to 20.5%. Under the Eurosystems transaction, completed in April 2005, the AMS jointventure was restructured with BAE Systems acquiring the UK based operations ofAMS and Finmeccanica acquiring the Italian operations. In a related transactionBAE Systems sold its UK based sensor systems and electronic warfare avionicsactivities to Finmeccanica. The agreement includes the deferred sale of aretained 25% interest in the resulting enlarged avionics business, Selex. Thewholly owned UK activities of the former AMS business have been combined withBAE Systems' other C4ISR5 activities to form Integrated System Technologies(Insyte). The integration of systems into digital networks, or Network Enabled Capability(NEC), is transforming defence capabilities. Insyte is working in partnership with the UK MoD, to deliver transformationalcapabilities to the UK armed forces through the application of emerging NECtechnologies. The sale of Atlas Elektronik, the naval electronics business based in Germany,jointly to ThyssenKrupp and EADS was agreed in December 2005 and is expected tocomplete in the first half of 2006, subject to regulatory approval. BAE Systems has valuable interests in the MBDA guided weapons joint venture andAirbus. MBDA continues to perform well with good order intake. A further step in theconsolidation of the European guided weapons industry was achieved with theagreement to fully integrate the German missile business LFK into MBDA. Airbus produced another strong financial performance despite a continued highlevel of investment in new product development. Order intake was substantiallyahead of plan, benefiting from strength in a number of markets including China,India and the Middle East. Aircraft demand has also been stimulated by theenhanced operating economics of new products such as the A380 and A350 airlinersnow under development. Cash inflow from operating activities was £2,099m (2004 £2,350m). Operating business cash flow was £1,937m (2004 £2,134m). Good conversion ofEBITA2 to operating cash flow was experienced across much of the Group togetherwith the cash benefits of securing advance payments at Land & Armaments andprogramme debt reduction at Customer Solutions & Support. Free cash flow, after interest, preference dividends and taxation, was £1,758m(2004 £1,924m). The net cash outflow on acquisitions and disposals was £1,548m. In addition,debt acquired on acquisitions was £288m. During the year the Group completed theacquisition of 100% of the issued share capital of United Defense Industries,Inc, in the US, for a total consideration of £2,205m. In addition the Groupcompleted the Eurosystems transaction, resulting in a net cash inflow of £402m. Finance costs, including the Group's share of the finance costs of equityaccounted investments, were £215m (2004 £176m). The underlying interest chargeof £210m (2004 £200m) was increased by a net charge of £5m (2004 gain £24m)arising from pension accounting, marked to market revaluations of financialinstruments and foreign currency movements. The net debt of the Group at 31 December 2005 was £1,277m, an increase of £326mfrom £951m at the start of the year, after adjusting for IAS 32 and IAS 39.Interest cover based on EBITA2 decreased from 5.8 times to 5.5 times. The Group's effective tax rate for the year was 29% (2004 32%). The tax rate in the 2006 financial year is expected to be in line with 2005. The Board is recommending a final dividend of 6.3p per share (2004 5.8p),bringing the total dividend for the year to 10.3p per share (2004 9.5p), anincrease of 8.4%. The proposed dividend is covered 2.2 times by earnings3 fromcontinuing operations (2004 1.8 times). In summary, BAE Systems has had a good year, delivering a strong set offinancial results and meeting its overall objectives for 2005. BAE Systems is successfully executing its strategy and has further strengthenedits position in the US, restructured its portfolio of business interests inEurope and, through a combination of factors now has a much enhanced outlook forthe business in the UK. Shareholder value is being delivered by the premiertransatlantic defence and aerospace company. The Company is now very well balanced, not overly dependent on any one sectorbut generating good returns for shareholders from a broad base of operations inthe world's key defence and aerospace markets. "The executive team and all employees have demonstrated their ability to deliverresults and I applaud their hard work and dedication." Dick Olver, Chairman "Financial results have been delivered in line with our plan and furthersignificant steps have been taken to implement the Company strategy." Mike Turner, Chief Executive Summarised income statement from continuing operations 2005 20044 £m £mSales1 15,411 13,222EBITA2 - subsidiaries 809 668EBITA2 - equity accounted investments 373 348EBITA2 1,182 1,016Amortisation (77) (13)Impairment (45) (97) Net finance costs1 (215) (176) Taxation expense1 (262) (273)Profit for the year 583 457 Basic earnings per share 18.3p 14.2pUnderlying earnings per share3 22.5p 17.4pDividend per share 10.3p 9.5p Exchange rates 2005 2004£/• - average 1.462 1.474£/$ - average 1.819 1.832£/• - year end 1.455 1.417£/$ - year end 1.718 1.932 Segmental analysis Sales1 EBITA2 2005 2004 2005 2004 £m £m £m £mElectronics, Intelligence & Support 3,697 3,063 324 256Land & Armaments 1,270 482 42 (8)Programmes 2,819 2,219 133 10Customer Solutions & Support 2,923 2,856 419 497Integrated Systems & Partnerships 1,834 2,022 109 95Commercial Aerospace 3,232 2,924 179 201HQ and other businesses 69 73 (24) (35)Intra-group (433) (417) - - 15,411 13,222 1,182 1,016 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 as restated under International Financial Reporting Standards 5 Command, Control, Communications and Computing, Intelligence, Surveillance and Reconnaissance Reconciliation of cash flow from operating activities to net debt 2005 2004 £m £mCash flow from operating activities 2,099 2,350Capital expenditure (net) and financial investment (250) (285)Dividends from equity accounted investments 88 69Operating business cash flow 1,937 2,134Interest and preference dividends (152) (179)Taxation (27) (31)Free cash inflow 1,758 1,924Acquisitions and disposals (1,548) (550)Debt acquired on acquisition of subsidiary undertaking (288) (80)Proceeds from issue of share capital 373 -Equity dividends paid (315) (281)Other non-cash movements (52) 9Foreign exchange (219) 129Movement in cash received on customers' account* (35) (13)Movement in net debt (326) 1,138Opening net debt as defined by the Group (668) (1,806)Adoption of IAS 32 and IAS 39 (283) -Closing net debt as defined by the Group (1,277) (668) Net debt as defined by the Group 2005 2004 £m £mOther investments - current 634 763Cash and cash equivalents 2,581 1,651 3,215 2,414Loans - non current (3,534) (2,113) Loans - current (815) (950) Overdrafts- current (90) (1)Loans and overdrafts - current (905) (951)Cash received on customers' account* (included within payables) (53) (18) (4,492) (3,082)Closing net debt as defined by the Group (1,277) (668) Operating business cash flow 2005 2004 £m £mElectronics, Intelligence & Support 323 190Land & Armaments 168 60Programmes 285 442Customer Solutions & Support 850 1,102Integrated Systems & Partnerships 17 59Commercial Aerospace 327 226HQ and other businesses (3) 82Discontinued businesses (30) (27)Operating business cash flow 1,937 2,134 *Cash on customers' account is the unexpended cash received from customers inadvance of delivery which is subject to advance payment guarantees unrelated tocompany performance Business Group reviews Electronics, Intelligence & Support Business overview 2005 20044 Sales1 £3,697m £3,063m EBITA2 £324m £256m Cash inflow3 £323m £190m Number of employees1 32,900 30,000 Order book1 £3.5bn £3.1bn Electronics, Intelligence & Support (EI&S) is headquartered in the US, and isresponsible for the former businesses of BAE Systems North America, the group'sUK-based displays and inertial systems activities and US marine repairactivities. EI&S comprises two businesses, Electronics & Integrated Solutionsand Customer Solutions. During 2005, Electronics, Intelligence & Support achieved EBITA2 of £324m (2004£256m) on sales1 of £3,697m (2004 £3,063m). The business group generatedoperating cash inflow3 of £323m (2004 £190m). Electronics & Integrated Solutions The Electronics & Integrated Solutions (E&IS) business is a major defence andaerospace electronics business with products and services encompassing: • Communications, including tactical networking • Electronic warfare, including electronic protection and information warfare • Avionics and controls • Sensors • Integrated systems E&IS is an industry leader in a variety of military communications, electronicidentification, navigation, and guidance systems. The Company has wide technicalexpertise in C4ISR5 and C3I6 systems and is a provider of network centricwarfare solutions to command centres, platforms and individual soldiers in thebattle space. It has a prominent position integrating communications on the US Army's FutureCombat System, including provision of an Integrated Global Positioning andInertial Navigation System for the programme. In 2005 the Company was alsoselected to provide the new mobile military communications system for the Slovakarmed forces. The Company is a major supplier of integrated avionics systems for militaryaircraft. Such systems include the electronic countermeasures for the US AirForce's F-22 Raptor, and development of the electronic combat suite for the F-35Joint Strike Fighter. In 2005 the Company was selected by the US Navy to developthe Tactical Aircraft Directable Infrared Countermeasures (TADIRCM) system andhas been successfully flight testing a related Infra red missile countermeasuressystem for commercial aircraft. E&IS provides signals and information management solutions for defence andgovernment agencies. Its Diamond Software product family architecture underpinsthe latest generation of electronic support measures for the UK Shamancommunications programme. The Company's radiation hardened computers have guidedspacecraft on missions to Mars and to intercept a comet. As a market leader in advanced information technology, geospatial exploitationsoftware and data production, integration of knowledge-based systems andavionics test equipment, the Company was selected as one of the primecontractors for the US Air Force Mission Planning consolidation in 2005. Anotherprogramme, Gridlock, gives the war fighter distinctive advantages with its 'smart imaging' targeting that rapidly generates accurate target coordinatesusing still or motion imagery from tactical manned and unmanned platforms. Capabilities in vehicle management, human-machine interface, precision guidance,and power systems provide improved operational safety and enhanced missioneffectiveness. Contract awards in 2005 included the digital electronic enginecontrols for the T700 Engine that will make BAE Systems the leader in the Armyhelicopter segment. BAE Systems also provides the HybriDrive propulsion system, used on commercialbuses, which improves fuel economy by 35% and dramatically reduces emissions.500 systems for operation in New York City were ordered in 2005. In a relatedtechnology, the US Office of Naval Research selected BAE Systems to develop anon-board power system for the Marine Corps' High-Mobility Multipurpose WheeledVehicle (the Humvee). The Company is a supplier of state-of-the-art infrared, millimetre-wave, andlaser technologies for missile seekers, guided munitions, and targetdesignators. It is upgrading the technology for the Theater High Altitude AreaDefense (THAAD) seeker for Lockheed Martin. In an important entry point to the$1bn military thermal imaging market, the Company is producing the new thermalweapons sights to equip the US Army and Marine Corps, and is to manufacture theTIM1500 thermal imaging module for the US Army's Stryker armoured vehicle. In 2005, BAE Systems won the US Air Force's (USAF) key Design and EngineeringSupport Program II, leveraging expertise in aircraft modifications andoperations. The business operates two technology organisations focused on enhancing itstechnology base, Advanced Systems and Technology and the Center forTransformation. Advanced Systems and Technology identifies strategic technology needs anddelivers that technology in four major domains: Sensors and Signal Processing;Radio Frequency; Electro-Optical and Infrared; and Networking and InformationProcessing. Major customers include the US Defense Advanced Research ProjectsAgency and other government laboratories, with R&D programmes ranging frommulti-functional low-observable antenna systems to high performance scalablesignal processing technologies, mixed-signal (digital, RF and optical) devices,and advanced sensors. The Center for Transformation focuses on development of advanced programmes andconcepts in the C4ISR5 domain and deploys leading-edge technology solutions tosolve time-critical problems. Customer Solutions Customer Solutions comprises three business units: • BAE Systems Information Technology (IT)• Technology Solutions and Services (TSS)• BAE Systems Ship Repair IT capabilities include enterprise-wide managed IT operations, mission-criticalperformance and information analysis and assured delivery. TSS provides servicesincluding system engineering and technical assistance, system and sub-systemintegration and operations and maintenance. Ship Repair provides non-nuclearship repair, conversion and modernisation, principally in the home ports of theUS Navy. The business provides a broad range of services in the areas of systemsintegration, systems engineering and technical assistance, operations andmaintenance and logistics. It also develops communications systems and precisiontracking radars, is one of the largest suppliers to the US Navy, is a leader inair and missile defence systems and is one of the world's largest manufacturersof explosives. It also includes the US's leading non-nuclear ship repaircompany. During 2005, the major projects for the US government included a blanketpurchase agreement for the supply of information technology support andservices, a cost-plus award fee/level of effort contract for operations andmaintenance support for IT systems. Combined annual sales for these areestimated at $94m. TSS provides professional engineering services to the NAVSEA DDG51 ShipbuildingProgram Office under a $863m contract which will run until 2015. It also handlesthe SETAC contract, for which the primary customer is the Army Space and MissileDefense Command. The full year sales for SETAC are $90m. BAE Systems Ship Repair has continued to support the US Navy repairs,alterations and continuous repair work on Landing Platform Dock/Landing ShipDock (LPD/LSD) class vessels in San Diego, as well as similar LSD Multi-ShipMulti-Option in Norfolk, Virginia. Looking forward Defence spending in the US continues to be robust for the near term, howeverfiscal pressures may make the budget environment more challenging in subsequentyears. Customers will need to balance priorities to equip effectively thecurrent fighting force, while developing capabilities to transform the futureforce. EI&S was reorganised in 2005 to enable it to compete more effectively. Thebusiness group can now leverage a breadth of capability in critical domains,while rapidly aligning technologies and resources to those sub-segments of themarket which are likely to see higher than market growth. 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 as restated under International Financial Reporting Standards 5 Command, Control, Communications and Computing, Intelligence, Surveillance and Reconnaissance 6 Command, Control, Communications and Intelligence Land & ArmamentsBusiness overview 2005 20044Sales1 £1,270m £482mEBITA2 £42m £(8)mUnderlying EBITA5 £86m £(2)mCash inflow3 £168m £60mNumber of employees1 10,600 4,800Order book1 £4.4bn £2.2bn The Land & Armaments business group, headquartered in the US, is a global leaderin the design, development, production and service support of armoured combatvehicles, major and minor calibre naval guns, missile launchers, canisters,artillery systems and intelligent munitions. During 2005, Land & Armaments achieved EBITA2 of £42m (2004 £(8)m) on sales1 of£1,270m (2004 £482m), and generated an operating cash inflow3 of £168m (2004£60m). This group was established in June 2005 from the newly acquired United DefenseIndustries, Inc. and the existing Land Systems (formed by the integration of RODefence and Alvis in 2004). This global business has operations in the US, UK,South Africa and Sweden, with markets in more than two dozen countries. The Land & Armaments business is shaped by the contracts awarded for itsproducts by primarily the governments of the US, the UK and Sweden. The successof the business results from its history of securing key government contractsand the ability to satisfy customer needs in its various home and exportmarkets. In the US, the Army's requirement to restore its current systems tocombat-ready condition following extensive operational use and to upgrade andremanufacture to the most advanced configurations is the subject of one of thelargest ongoing programmes being undertaken by the group. Land Contract awards on current systems have been exceptional. Most noteworthy werethe orders in 2005 worth some $1.5bn for the refurbishment and upgrade ofBradley and M113 fighting vehicles, demonstrating the value and potential of theUnited Defense acquisition. Other contracts on current systems included theremanufacture and upgrade of 59 M88A2 HERCULES Improved Recovery Vehicles. The M777 lightweight 155mm howitzer, 495 of which were ordered for the USMarines and US Army in 2005, has now expanded its market with the first deliveryof guns to the Canadian Department of National Defense. In addition to mine protection, current survivability programmes include anarmouring programme of M113 personnel carriers in Iraq, the manufacture andinstallation of Transparent Armour Gun Shield kits for Humvees, trucks, M2Bradleys, M1 Abrams and add-on armour for the Stryker. In the area of development, Land & Armaments is well positioned for key futureforces programmes including the Future Combat Systems (FCS) programme for the USArmy, Future Rapid Effect System programme for the UK and the Swedish ModularArmoured Tactical System. Land & Armaments continues to make substantial progress on the development andmaturation of the Non-Line-of-Sight- Cannon (NLOS-C), the lead system of the USArmy's FCS manned ground vehicles. In 2005, company engineers and the Armycompleted functional and preliminary design reviews. The NLOS-C remains on trackto deliver prototypes in 2008 and achieve system fielding in 2010. Other contract wins and ongoing development programmes related to Manned GroundVehicles for the US Army's FCS include the Integrated Army Active ProtectionSystem and the common Traction Drive Subsystem for all FCS manned groundvehicles. The group secured two key contracts in robotic systems - the acceleration of theFCS Armed Robotic Vehicle (ARV), together with Carnegie Mellon University, andthe US Marine Corps' Gladiator Tactical Unmanned Ground Vehicle. It also showedits own internally-developed Armed Robotic Demonstrator at the annual meeting ofthe Association of the US Army. In the UK, the award of the AS90 Equipment Support Contract followed by thecontract to upgrade 500 of the British Army's FV430 tracked vehicles, are keyenablers in becoming the through-life support and capability provider to the UKarmed forces. In the UK and export markets Trojan, an obstacle-crossing vehicle and Titan, atank bridgelayer, are both based on Challenger 2. Roll out of the firstproduction vehicles is scheduled for the first quarter of 2006. Over the past ten years, some £25m has been invested in developing insensitivemunitions technology and in UK production facilities. The first contract wasawarded in 2005 by the MoD for the manufacture of 105mm improved ammunition forthe L18 Light Gun. Subsequent awards have been contracts to qualify 155mmammunition for the L15 and L21 and 4.5" improved ammunition. The premium that militaries are placing on accuracy and precision in both areaand point target fires has raised the importance of intelligent munitions forartillery and mortar systems. Land & Armaments has a leading role in theaccelerated fielding of Excalibur to US and Canadian forces in Iraq andAfghanistan. BONUS, a sensor fused 155mm munition fielded in Sweden and France,is being evaluated by the US and UK. BAE Systems operations in Sweden continue their strong presence in the northernEuropean armoured fighting vehicles market with further orders for the CV90. Thenewest customer, Denmark, brings to six the number of European countriesfielding this highly successful infantry fighting vehicle. The growing international need for mine-protected vehicles has generated ordersfor the four-wheeled RG-31 from South Africa including the sale of 148 vehiclesto the US with further exports to Canada and the United Arab Emirates undercontract. Naval One immediate benefit of the United Defense acquisition for BAE Systems was theopportunity to meet the US Navy's urgent need for a superior medium-calibre gunand ammunition for the DD(X) next-generation destroyer and the Coast Guard'sDeepwater modernisation programme. Both have selected the Land & Armaments' 57mmMk 110, as a close-in gun system for the DD(X) and as the main battery for theMaritime Security Cutter Large. Partnering with Northrop Grumman Ship Systems,the first Mk 110 will be delivered in December 2006. The weapon system is alsobaselined on both the General Dynamics and Lockheed Martin designs for theLittoral Combat Ship for the US Navy. Development of the 155mm Advanced Gun System (AGS) and the Long Range LandAttack Projectile (LRLAP) for the US Navy continues to support Navy and MarineCorps expeditionary and joint operations forces engaged near the coastline anddeep inland. The AGS will be capable of a maximum sustained firing rate of 10rounds per minute at ranges of up to 60 nautical miles with an objective ofbeing able to reach targets beyond 80 nautical miles. In 2005, the engineeringdevelopment models successfully demonstrated the key requirements to support theDD(X) ship design. Tests have already established the propulsion approach forthe LRLAP needed to meet the challenging range targets. In addition to key new gun systems, BAE Systems is designing and testing a newVertical Launching System (VLS), Mk 57. This next generation VLS will providecapabilities for the DD(X) ship to launch a wide range of missile designs. Looking forward Land & Armaments is expected to contribute growth in 2006 driven largely by theongoing requirements in the US to both re-set and upgrade the Bradley family ofvehicles. Re-set is the need to repair vehicles to return them to a fullyoperational condition as a result of wear incurred by sustained militaryoperations. Upgrade activity is enhancing the vehicles' mobility, lethality andsurvivability to effectively support the US Army as it drives to deploy amodular force. In the UK, there will be continued emphasis on improving profitability andestablishing a role on the Future Rapid Effect System (FRES) programme. Thebusinesses in both Sweden and South Africa continue to perform well in both homemarkets and in securing export opportunities. In the longer term, progress on the US Army's Future Combat Systems programme,where BAE Systems has a major role for both manned and unmanned vehicles, willbe a major sensitivity for the business. 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 as restated under International Financial Reporting Standards 5 earnings before amortisation and impairment of intangible assets, uplift on acquired inventories, finance costs and taxation ProgrammesBusiness overview 2005 20044Sales1 £2,819m £2,219mEBITA2 £133m £10mCash inflow3 £285m £442mNumber of employees1 16,200 15,700Order book1 £12.3bn £13.0bn 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 Company'sair systems, naval ships and submarines activities together with the Company'sparticipation in the UK's Future Carrier (CVF) programme. During 2005, Programmes achieved EBITA2 of £133m (2004 £10m) on sales1 of£2,819m (2004 £2,219m), and generated an operating cash inflow3 of £285m (2004£442m). Air Systems The principal Air Systems programmes are: Typhoon The introduction of the Typhoon to the Royal Air Force (RAF) was successfullyimplemented under the Case White initial support arrangement. The contractedflying hours were completed ahead of schedule, and the first two RAF squadronshave now been deployed to their operational base at RAF Coningsby. A total of 74aircraft have been accepted by the air forces of the four partner nations fordeployment to operational and training squadrons across Europe. Discussions areunderway regarding further development to enhance the capability of theaircraft. In addition to the sale of 18 aircraft to Austria further exportpossibilities are being pursued. Hawk The Hawk Advanced Jet Trainer (AJT) development programme made good progressduring 2005, with a successful maiden flight for the first RAF Mk. 128 in July,two months ahead of schedule. A production order is expected in 2006. Exportcontracts for Bahrain, South Africa and India were progressed during the year. Nimrod MRA4 Nimrod passed a number of key milestones in 2005, and the development fleet ofthree aircraft continues its extensive flight testing programme. Design anddevelopment continues to meet the targets to support the production bid, whichwas submitted in July, and to serve as the technical baseline for future work. F-35 Joint Strike Fighter (JSF) Air Systems is partnered with Lockheed Martin and Northrop Grumman on the JSFprogramme, with responsibility for the design and manufacture of the rearfuselage and empennage. Work progressed on the system development anddemonstration contract, with the successful delivery of the first rear fuselageand empennage to Lockheed Martin. The first conventional takeoff and landingflight is planned for 2006. Activity has also continued in preparation for thebid for the first JSF production contract, with the contract award expected in2007. Unmanned Air Vehicles (UAVs) In July 2005, the MoD formed the Strategic UAVs (Experiment) integrated projectteam. This will assemble evidence to allow the UK to make informed decisionsabout the potential role of UAVs in future force mixes. BAE Systems has beenselected as prime contractor, and has received a series of contracts forde-risking work. Naval Ships and Submarines The principal Naval Ships and Submarine programmes are: Type 45 The Company is the prime contractor and design authority for the Type 45destroyer, which will be the largest and most powerful air defence destroyerever deployed by the Royal Navy. Of a projected eight ships, six are undercontract of which the first, HMS Daring, was launched in February 2006. Build onships 2 and 3 is progressing well, with anticipated build efficiencies alreadybeing achieved between first and second of class. LSD(A) Two Landing Ship Dock (Auxiliaries) for the Royal Fleet Auxiliary (RFA) areunder contract. The first, RFA Mounts Bay, was handed over in December 2005; andRFA Cardigan Bay will be delivered in mid-2006. OPV The customer's refusal to accept the three Brunei Offshore Patrol Vessels is nowsubject to arbitration. Astute The Astute programme has achieved milestones on or ahead of schedule throughoutthe year with closure of the pressure hull now complete. In 2005, every modulewas shipped ahead of schedule with the Main Propulsion Package shipped 40 daysearly in June, the Command Deck Module 5 weeks early in November, while shopfloor-led innovation enabled the Bridge Fin and Casings to be completed 22 weeksearly in October 2005. An innovative all employee bonus scheme has stronglycontributed to this performance. CVF The CVF project will be executed within an Alliance structure comprising MoD,BAE Systems, VT Group, Babcock, Thales and KBR. Within the Alliance framework,BAE Systems continues to play a significant role in the leadership and executionof the CVF project. The Roles and Responsibilities agreement signed in December2005 formally appointed BAE Systems to lead the overarching design andintegration of the two ships, as well as continuing to lead the Mission systemselements of the project. From a ship building perspective, BAE Systems willdesign and build two of the four major blocks at both its facilities in Glasgowand in Barrow. The MoD has approved a further £300m for the next phase ("Demonstration PhaseContract") which will fund the Alliance for a further 18 months for continueddesign evolution and procurement of long lead materials. Looking forward The future of Programmes is closely linked to the future requirements of theUK's armed forces as well as its ability to generate profitable export business. For Air Systems the outlook is for reduced sizes of aircraft fleets, leading toincreasing levels of weapons system upgrades, as customers seek to incorporatetechnological improvements into existing platforms. There is continued demandfor training aircraft offering improved cost effectiveness and the ability totrain operators for the latest combat aircraft. In the UK this need is beingaddressed by the advanced mission training capabilities of the Hawk Mk128. Thereis increased interest in the potential of UAVs. In the naval domain, the CVF programme and the longer term MARS (Military AfloatReach and Sustainability) programme to replace the RFA fleet with new ships by2020 offer encouraging growth prospects. BAE Systems is a key participant in theUK government's Maritime Industrial Strategy review. In the medium to longer term, growth prospects are dependent on anticipatedhigher activity, as UK development programmes move to production, and thepotential for Hawk, Typhoon and naval ships exports. 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 as restated under International Financial Reporting Standards Customer Solutions & SupportBusiness overview 2005 20044Sales1 £2,923m £2,856mEBITA2 £419m £497mCash inflow3 £850m £1,102mNumber of employees1 14,300 13,800Order book1 £5.0bn £4.6bn The Customer Solutions & Support (CS&S) business group provides supportsolutions for current and future requirements. It addresses the trend withinarmed forces to work more closely with industry to optimise their militarycapability in the most effective manner. Key capabilities include theintegration and delivery of effective supply chain and logistics management,spares, maintenance, repair and overhaul, capability upgrade, technicalinformation services, facilities management and manpower services. CS&S is theprime contractor on the Al Yamamah contract. During 2005, CS&S achieved EBITA2 of £419m (2004 £497m) on sales1 of £2,923m(2004 £2,856m), and generated an operating cash inflow3 of £850m (2004 £1,102m). As previously indicated, margins have been reduced within the Al Yamamah supportoperations as the programme embraces greater indigenous Saudi content in repairand overhaul work. BAE Systems has a major presence in Saudi Arabia, as prime contractor for theUK's largest export contract. The contract includes the provision of aircraftand associated hardware, radar and communications support, manpower training andinfrastructure for the Royal Saudi Air Force. The business group employs some4,600 people in the Kingdom of Saudi Arabia, of whom more than half are Saudinationals. Performance on the programme in Saudi Arabia remains on plan. TheCompany continues to develop a greater indigenous presence in Saudi and has madea number of investments in offset companies. The security of our employees isthe highest of our priorities and a significant investment is being made in newresidential facilities and increased security measures. In the UK, CS&S has continued the evolution of its successful partneringrelationship with the UK Defence Logistics Organisation (DLO) during 2005. Thisrelationship is underpinned by a partnering arrangement which is being refreshedto reflect the drive for through-life capability management as emphasised in theUK's Defence Industrial Strategy. Key highlights in the air domain include securing major orders on VC10, Harrier,a major third party support contract on E3D Sentry and Tornado. A joint DLO/BAE Systems team gained MoD approval in November for the next phaseof Tornado support to deliver increased availability and operational flexibilityat much reduced cost. This "ATTAC" programme (Availability Transformation:Tornado Aircraft Contract) will integrate all non-engine Tornado support andupgrade activity into one incentivised arrangement. In the Naval domain, BAE Systems secured the sale of three ex-Royal Navyfrigates to Chile. This follows the successful reactivation and upgrade of thetwo Type 22 frigates for Romania completed on schedule in April 2005. In addition, the naval joint ventures continue to perform strongly. BAE Systemshas 50% interests in Fleet Support Limited and Flagship Training Limited. Thesesupport and services joint ventures form an integral part of the CS&S strategy.Flagship Training Limited, which manages the Royal Navy training establishmentsand markets their courses to overseas customers, has had another strong year.Fleet Support Limited also continued to perform well underpinned by thepartnering agreement at the UK's Portsmouth naval base. CS&S continues to develop a coherent information and logistics infrastructure insupport of both new and in-service systems. Trilogi, a web-based documentationsystem jointly developed by BAE Systems and the DLO, has now been selected formore than 20 UK MoD programmes and the F-35 Joint Strike Fighter. In July 2005, the MoD announced that Defence Logistic Solutions (DLS), in whichBAE Systems was a partner, was unsuccessful in the bid for the Future DefenceSupply Chain initiative. BAE Systems' Australian business has made considerable progress in realising itsstrategy of becoming the Australian Defence Force's capability partner of choicein integrated military systems and support solutions. An important milestone isagreeing the wider industrial participation with Boeing on the Wedgetailprogramme and with Lockheed Martin on JSF. Looking forward CS&S will continue to work closely with the UK Defence Logistics Organisation toprovide smarter, more integrated, support solutions on customer bases. Goodprogress is being made on the future support model for the UK Tornado aircraft.Opportunities for similar support arrangements exist on other UK platforms. Looking forward, CS&S will continue to work to sustain a long-term presence inSaudi Arabia, delivering on our commitments on current support contracts anddeveloping new business following the signing of the Understanding Document inDecember 2005, between the governments of the Kingdom of Saudi Arabia and theUK. 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 as restated under International Financial Reporting Standards Integrated Systems & Partnerships Business overview 2005 20044Sales1 £1,834m £2,022mEBITA2 £109m £95mCash inflow3 £17m £59mNumber of employees1 12,000 13,900Order book1 £5.9bn £7.0bn Integrated Systems & Partnerships is a portfolio of high-technology defencesystems businesses comprising the wholly-owned Integrated System Technologies,Underwater Systems, and Atlas Elektronik, together with a 37.5% interest in thepan-European MBDA joint venture, a 20.5% interest in Saab of Sweden and a 50%interest in the Gripen International joint venture. The Integrated Systems & Partnerships business group generated EBITA2 of £109m(2004 £95m) on sales1 of £1,834m (2004 £2,022m). There was an operating cashinflow3 of £17m (2004 £59m). A significant restructuring of the Company's portfolio of European defencesystems business interests was accomplished in 2005. The Eurosystems transaction, which was completed in April 2005, restructured theAMS joint venture with the UK based defence systems activities being retained byBAE Systems and with Finmeccanica retaining the Italian based activities. As part of this transaction the electronic warfare systems and sensor systemsactivities of the former UK based avionics business group were sold toFinmeccanica. The Eurosystems transaction realised a net cash inflow of £402m in 2005 with afurther £268m receivable subject to a put option exercisable by BAE Systems inthe three month period from the beginning of June 2007 and a call option byFinmeccanica at any time to August 2007. The group also reduced its equity interest in Saab from 34.2% to 20.5%generating cash of £125m. In a revision to the earlier joint marketingarrangements for the Gripen combat aircraft, Saab has now assumed responsibilityfor winning new export business. Integrated System Technologies The Integrated System Technologies (Insyte) business was formed in May 2005 fromthe UK based defence system activities of the AMS joint venture and existing BAESystems UK based C4ISR5 activities. Insyte projects include the full scale engineering development of the Sampsonmulti-function radar. A revised timetable has been agreed to address maturity inthe systems software, currently impacting the Principal Anti-Air Missile System(PAAMS) for the Type 45 destroyer programme. Insyte has been selected for two key UK transformational technology networkenabled capability systems, the Falcon communications infrastructure programmeand the Shamen communications electronic support measures system for the RoyalNavy. Insyte also secured the order for the Maritime Composite Training System (MCTS)working as the lead in the SEABRIDGE team, with partners AerosystemsInternational, EDS, Flagship Training, MDA and Serco. MCTS will provide theRoyal Navy with a new shore-based warfare operator training capability that willmeet the training needs of the Type 45 destroyer in 2007, and current in-serviceships. The creation of the Insyte business gives BAE Systems a new strength in theintegration of high technology systems. MBDA (37.5%) 2005 saw MBDA's sales increase by 6% to €3.2bn and EBITA2 grow by 19%. Thisperformance was driven by significant deliveries of the Storm Shadow and ScalpEG precision strike cruise missile to the French and UK customers in addition tofirst deliveries to the Italian air force. Significant deliveries of the Micaair-to-air missile to both the French air force and export customers alsounderpinned the sales performance together with the entry into service of theadvanced air-launched anti-armour weapon system, Brimstone, to the Royal AirForce. MBDA's order book of €12.6bn at 31 December 2005 benefited from the award of thedesign and development phase of the new Medium Extended range Air Defense System(MEADS), which is a mobile ground-to-air missile defence system to provideprotection from future air and missile defence threats. MBDA's share of theMEADS order was €512m. Other orders in the year included the French contract forthe development and production of over 2,000 of the new Mistral RMV air defencemissiles for the new FREMM multi-mission frigate programme for which MBDA is theprimary combat system partner. Two important export orders, including for India,for the Exocet anti-ship weapon, were also achieved. MBDA has made good progress on the multi-national Meteor and Aster-PAAMSprogrammes. Meteor met its key development milestones in the year culminating inflight trials of the missile on the Gripen and Rafale aircraft by the end ofDecember. Key firings were also successfully completed of the Aster 30 missile,an integral part of the PAAMS air defence system for the Royal Navy's new Type45 destroyers, while the new 180km-range Exocet Block 3 anti-ship weaponcommenced qualification. The acquisition of the German missile company, LFK, was agreed at the end of2005 and the process to obtain regulatory approval is currently in progress. Atlas Elektronik Atlas Elektronik, the Bremen-based naval systems business, had a year of goodprogress with the completion of trials for the COSYS Malaysia system. Importantprogress has also been made towards completing the development of the DM2A4heavyweight torpedo and in successfully concluding the NATO trials for the IMCMSmine counter measures system for the Netherlands and Belgium navies. Exportorders for DM2A4 contributed to good order intake in the year. On 30 December, an agreement was entered into for the disposal of AtlasElektronik jointly to ThyssenKrupp and EADS for a cash consideration ofapproximately €145m. In addition, pension and related liabilities valued at 31December 2005 of €96m will remain with Atlas following the sale. In 2005, AtlasElektronik contributed sales of £216m and EBITA2 of £10m. Completion of the sale, which is conditional upon regulatory clearances, isexpected to take place in the first half of 2006. Underwater Systems The main production order for Sting Ray Mod1, an autonomouselectrically-propelled lightweight torpedo, is well under way. The firsttorpedoes will enter service in 2006. In April 2005, the Company secured anextension to the existing support arrangements for the Spearfish torpedo in acontract worth £58m over three years. Securing a UK MoD agreement for the upgrade of the Spearfish heavyweight torpedowill be an important feature in determining the future shape of the business. Saab (20.5%) 2005 has seen a number of important developments in the Saab business. InOctober, the company's participation in Neuron, a European Unmanned Combat AirVehicle demonstrator project was effectively confirmed with the Swedishgovernment announcement of its involvement in the programme. In the same month, Saab signed a provisional contract to supply airbornesurveillance systems to Pakistan, with a value of approximately SEK5.5bn(£400m). Important conditions do remain to be met before the contract becomeseffective and order intake should be recognised in 2006. Saab financial performance for 2005 was affected by difficulties on a contractfor the supply of tactical mission systems for 18 Swedish helicopters. Gripen International (50%) Gripen International has been responsible for the design and sale of the exportvariant of the Gripen new generation, multi-role combat aircraft. The aircrafthas been ordered by South African, Hungarian and Czech Republic air forces. Thefirst of the aircraft for South Africa flew in November, ahead of schedule.Deliveries of Gripen combat aircraft to the Czech Republic continued as part ofa leasing arrangement, with final aircraft deliveries completed in August 2005.Hungary has also ordered 14 Gripen with deliveries commencing in 2006. Boththese countries will be the first Gripen operators within NATO. The UK EmpireTest Pilots' School (ETPS) is also operating Gripen as an advanced fast jettraining platform for test pilots worldwide. Looking forward The Integrated Systems & Partnerships businesses are expected to face continuedbudget pressures in their principal domestic and export markets. The substantialorder books and strong positions of the businesses in their respective marketsectors are expected to sustain activity over the near term. With a number ofdevelopment programmes maturing, the MBDA business is expected to progress to ahigher proportion of production activity going forward. Realignment of the business portfolio continues with the completion of the saleof Atlas Elektronik anticipated in the first half of 2006. 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 as restated under International Financial Reporting Standards 5 Command, Control, Communications and Computing, Intelligence, Surveillance and Reconnaissance Commercial Aerospace Business overview 2005 20044Sales1 £3,232m £2,924mEBITA2 £179m £201mCash inflow3 £327m £226mNumber of employees1 12,500 12,600Order book1 £29.5bn £20.9bn The Commercial Aerospace sector comprises the Company's 20% interest in Airbustogether with the Aerostructures business and the regional aircraft assetmanagement and support activities. In 2005, Commercial Aerospace generated EBITA2 of £179m (2004 £201m) on sales1of £3,232m (2004 £2,924m). Airbus contributed EBITA2 of £273m (2004 £196m) onsales1 of £3,002m (2004 £2,666m) after charging £227m of development costs (2004£235m). The Company's Regional Aircraft business has been impacted by poor lease ratesin a weak regional aircraft market and by adjustments to residual valueassumptions resulting from airlines operating in the US under Chapter 11protection. Of the loss for the Regional Aircraft business of £95m in 2005,approximately half arose from airlines moving into Chapter 11. Airbus generated a strong operating cash inflow3 of £403m. Cash outflow3 atRegional Aircraft was £73m. Airbus Airbus is the leading supplier of large commercial jets with 378 aircraftdelivered in 2005. Airbus offers a comprehensive range of passenger aircraftfrom 100 seats to over 555 seats in the new A380 long range airliner. In addition to commercial jet airliners Airbus produces freighter aircraft andis developing the A400M military transport aircraft. Good growth in the global market for large commercial jets above 100 seats hascontinued through 2005. Orders for more than 2,000 aircraft were placed duringthe year of which Airbus secured a net 1,055 representing 51% of the market.Growth was driven by a combination of factors. Passenger traffic has continuedto recover as confidence returned following the terrorist activity in 2001. Themarket has also benefited from the rise in low cost carriers, making air travelaffordable and accessible to a wider population. Similarly strong growth isunderway and expected to continue in certain regional markets, notably China,India and in the Middle East. In a drive to maximise value from its large order book Airbus continues toreduce costs. A programme, targeting cost reductions across the Airbus businessof approximately £1bn between 2003 and the end of 2006, is on track.Manufacturing and supply agreements are being implemented in growth marketsincluding China, to support growth and further reduce costs. A number of major new product development programmes are presently underway atAirbus. A380 When it enters service towards the end of 2006 the A380 will be the world'slargest passenger airliner. It will typically be configured with 555 seats ontwo full length passenger decks. The first flight of the A380 took place inApril 2005 with two further aircraft joining the flight development programmeduring the year. A350 The A350 is the latest addition to the Airbus product range. This 250 seatall-new airliner programme was launched in October 2005 and the aircraft isexpected to enter service in 2010. The A350 will make use of a number oftechnical innovations applied to the A380, such as new materials, to deliversignificant enhancements to range and fuel consumption over comparable earliergeneration aircraft. A400M The A400M is an advanced military transport designed with a load capacity of 37tons and up to 120 personnel. 180 aircraft are being produced for sevenparticipating nations. The first export contract was secured in 2005 with anorder for eight aircraft from South Africa. The first flight of the A400M isplanned for the end of 2007, with entry into service scheduled for 2009. Aerostructures Aerostructures is a supply chain management and assembly business. It hascustomer relationships with the major aircraft manufacturers providing airframecomponents and assemblies for commercial aircraft and business jets. Contractsinclude assemblies for Airbus commercial aircraft. The Aerostructures businessproduces the leading and trailing edges for the A380 wing as well as wingstructures for the Boeing B777 and B767 and major structures for Raytheon'sHawker 800XP business jet. All product lines met customer requirements in 2005. In August 2005, BAE Systems sold Precision Aerostructures, its US based aircraftcomponent machining and fabrication facility. In January 2006, the sale of the UK Aerostuctures business to Spirit AeroSystemsInc. was announced, for a cash consideration of £80m. Completion is expected totake place in the first half of 2006. In 2005, Aerostructures contributed salesof £223m and EBITA of £8m. Regional Aircraft In 2005 Asset Management, BAE Systems' commercial aircraft leasing team,successfully reached agreements securing over US$240m of income on over 100aircraft from its Jet/Turboprop portfolio. These included lease deals with SNBrussels for 23 Regional Jets and Eurowings/Air Dolomiti for 11 BAe 146aircraft. Additionally the team successfully facilitated a number of airlinecredit restructurings, securing ongoing income on portfolio aircraft. Regional Aircraft derives 80% of its support business from spares and logisticssales. An increasing proportion of this activity is provided under power by thehour contracts that now cover over 50% of the regional jet fleet. Looking forward The commercial aviation market continues to grow despite the financial fragilityof many airlines, exacerbated by high oil prices. Near-term prospects for Airbus remain good, with a strong order book. Airbusaircraft deliveries are expected to continue to increase, with growth from lowcost carriers in the single-aisle market and as airline customers in Asia andthe Far East equip with longer-range aircraft. The regional aircraft market remains difficult and underlying losses in thesupport business will continue. 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 as restated under International Financial Reporting Standards Consolidated income statementfor the year ended 31 December Total Total 2005 2005 2004 2004 Notes £m £m £m £mContinuing operationsCombined sales of Group and equity accounted 15,411 13,222investmentsLess: share of equity accounted investments (4,392) (4,405)Revenue 11,019 8,817Operating costs (10,579) (8,369)Other income 247 110 Group operating profit excluding amortisation and impairment of intangible assets 809 668 Amortisation (77) (13) Impairment (45) (97)Group operating profit 687 558 Share of results of equity accounted investments excluding finance costs and taxation expense 373 348 Finance costs (11) (27) Taxation expense (149) (105)Share of results of equity accounted investments 213 216 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) 1,182 1,016 Amortisation (77) (13) Impairment (45) (97) Finance costs of equity accounted investments (11) (27) Taxation expense of equity accounted investments (149) (105)Operating profit 900 774Finance costs 2Financial income 1,224 609Financial expense (1,428) (758) (204) (149)Profit before taxation 696 625Taxation expense 3UK taxation (37) (58)Overseas taxation (76) (110) (113) (168)Profit for the year from continuing operations 583 457Loss for the year from discontinued operations 4 (28) (454)Profit for the year 555 3 Attributable to: BAE Systems shareholders 553 2 Minority interests 2 1 555 3 Earnings per share 5Continuing operations: Basic earnings per share 18.3p 14.2p Diluted earnings per share 18.2p 14.2pDiscontinued operations: Basic loss per share (0.9)p (14.8)p Diluted loss per share (0.8)p (14.8)pTotal: Basic earnings/(loss) per share 17.4p (0.6)p Diluted earnings/(loss) per share 17.4p (0.6)p Dividends per ordinary share Prior year final paid 5.8p £186m Current year interim paid 4.0p £129m Current year final proposed 6.3p £203m Consolidated balance sheetas at 31 December 2005 2004 Notes £m £mNon-current assetsIntangible assets 8,217 6,115Property, plant and equipment 1,704 1,746Investment property 218 155Equity accounted investments 6 1,721 1,469Other investments 9 66Other receivables 912 511Other financial assets 65 -Deferred tax assets 1,331 1,090 14,177 11,152Current assetsInventories 485 498Trade and other receivables including amounts due from customers for contract 1,877 2,198workCurrent tax 20 -Other investments 634 763Other financial assets 54 -Cash and cash equivalents 2,581 1,651 5,651 5,110Non-current assets and disposal groups held for sale 407 - 6,058 5,110Total assets 20,235 16,262Non-current liabilitiesLoans (3,534) (2,113)Trade and other payables (432) (464)Retirement benefit obligations 7 (4,101) (3,210)Other financial liabilities (45) -Deferred tax liabilities (23) (14)Provisions (375) (241) (8,510) (6,042)Current liabilitiesLoans and overdrafts (905) (951)Trade and other payables (7,006) (6,154)Other financial liabilities (81) -Current tax (316) (200)Provisions (343) (250) (8,651) (7,555)Liabilities directly associated with non-current assets and disposal groups held (270) -for sale (8,921) (7,555)Total liabilities (17,431) (13,597)Net assets 2,804 2,665Capital and reservesIssued share capital 8 80 143Share premium 8 782 412Equity option of convertible preference shares 8 78 -Other reserves 8 4,720 5,323Retained earnings 8 (2,872) (3,223)Total equity attributable to equity holders of the parent1 2,788 2,655Minority interests 8 16 10Total equity1 2,804 2,665 1 2004 includes £266m non-equity shareholders' funds Approved by the Board on 22 February 2006 and signed on its behalf by: M J Turner Chief ExecutiveG W Rose Group Finance Director Consolidated cash flow statementfor the year ended 31 December 2005 2004 Notes £m £mProfit/(loss) for the year Continuing operations 583 457 Discontinued operations (28) (454) 555 3Taxation expense (includes £1m (2004 £7m) from discontinued operations) 114 175Share of results of equity accounted investments (213) (216)Net finance costs (includes £3m (2004 £nil) from discontinued operations) 207 149Depreciation, amortisation and impairment 524 861(Gain)/loss on disposal of property, plant and equipment 2 12(Gain)/loss on disposal of investment property (43) (40)(Gain)/loss on disposal of business - continuing operations 12 -(Gain)/loss on disposal of business - discontinued operations 8 -Impairment of other investments 2 5Cost of equity-settled employee share schemes 16 8Movements in provisions 99 46Increase in liabilities for retirement benefit obligations (98) (7)(Increase)/decrease in working capital: Inventories 54 (58) Trade and other receivables (4) 703 Trade and other payables 864 709Cash inflow from operating activities 2,099 2,350Interest paid (213) (197)Interest element of finance lease rental payments (17) (27)Taxation paid (27) (31)Net cash inflow from operating activities 1,842 2,095Dividends received from equity accounted investments 88 69Interest received 99 66Purchases of property, plant and equipment (318) (343)Capital expenditure on investment property (12) -Purchases of intangible assets (17) (23)Proceeds from sale of property, plant and equipment 30 81Proceeds from sale of investment property 54 50Proceeds from sale of non-current investments 30 -Purchase of non-current other investments (17) (50)Purchase of subsidiary undertakings 9 (2,262) (663)Net cash acquired with subsidiary undertakings 9 128 113Proceeds from sale of subsidiary undertakings 9 460 -Cash and cash equivalents disposed of with subsidiary undertakings 9 1 -Proceeds from sale of equity accounted investments 9 125 -Net proceeds from sale/(purchase) of other deposits/securities 45 (51)Net cash outflow from investing activities (1,566) (751)Capital element of finance lease rental payments (89) (141)Proceeds from issue of share capital 373 -Equity dividends paid (315) (281)Dividends paid on preference shares (21) (21)Cash inflow from loans 1,005 -Cash outflow from repayment of loans (357) (219)Net cash inflow/(outflow) from financing activities 596 (662)Net increase in cash and cash equivalents 872 682Cash and cash equivalents at 1 January 1,650 970Effect of foreign exchange rate changes on cash and cash equivalents (31) (2)Cash and cash equivalents at 31 December 2,491 1,650 Cash and cash equivalents 2,581 1,651Overdrafts (90) (1)Cash and cash equivalents at 31 December 2,491 1,650 Consolidated statement of recognised income and expensefor the year ended 31 December 2005 2004 £m £mCurrency translation on foreign currency net investments: Subsidiaries 53 (56) Equity accounted investments (23) (59)Change in fair value of Exchange Property - 13Adjustment to interest in net assets of Saab AB - 2Amounts charged to hedging reserve (688) -Actuarial losses on defined benefit pension schemes: Subsidiaries (652) (838) Equity accounted investments (72) (111)Current tax on items taken directly to equity (3) -Deferred tax on items taken directly to equity: Subsidiaries 193 281 Equity accounted investments 276 35Net income recognised directly in equity (916) (733)Profit for the year 555 3Total recognised income and expense (361) (730)Adoption of IAS 32 and IAS 39 422 - 61 (730)Attributable to: Equity shareholders (363) (730) Minority interest 2 - (361) (730) Notes to the accounts 1 Accounting policies Statement of compliance The Group has adopted International Financial Reporting Standards (IFRS) asadopted for use in the EU in its consolidated accounts for accounting periodsfrom 1 January 2005. The financial statements for the year ended 31 December2005 have been prepared in accordance with all IFRS's including StandingInterpretations Committee and International Financial Reporting InterpretationsCommittee interpretations issued by the International Accounting Standards Board(IASB). In preparing this financial information, the Group has decided to adopt earlythe amendment issued in December 2004 to IAS 19 Employee Benefits - ActuarialGains and Losses, Group Plans and Disclosures. With effect from 1 January 2005 the Group has adopted IAS 39 FinancialInstruments: Recognition and Measurement (IAS 39). The effect of adopting IAS 39at 1 January 2005 is presented as a movement in the Group's consolidatedstatement of recognised income and expense for 2005. The financial information for the year to 31 December 2004 has been prepared onthe same basis with the exception of IAS 32 Financial Instruments: Disclosureand Presentation (IAS 32) and IAS 39 which have been applied from 1 January2005. The comparative financial information for financial assets and financialliabilities are accounted for on the basis of applicable UK Generally AcceptedAccounting Practices (UK GAAP). Basis of preparation The consolidated financial statements are presented in pounds sterling and,unless stated otherwise, rounded to the nearest million. They have been preparedunder the historical cost convention, as modified by the revaluation ofavailable-for-sale financial assets and financial assets and financialliabilities (including derivative instruments) at fair value through profit orloss. 2 Finance costs 2005 2004 £m £mInterest income 123 57Net present value adjustments 23 10Expected return on pension scheme assets 632 542Net gain on remeasurement of financial instruments 159 -Net gain on remeasurement of embedded derivative 59 -Foreign exchange gains 228 -Financial income 1,224 609Interest expense: On bank loans and overdrafts (13) (11) On finance leases (17) (25) On bonds and other financial instruments (253) (190) On preference debt (27) - (310) (226)Facility fees (10) -Net present value adjustments (25) (11)Interest charge on pension scheme liabilities (633) (521)Net loss on remeasurement of investments at fair value through profit or loss (75) -Net loss on remeasurement of financial instruments at fair value through profit (217) -or lossForeign exchange losses (158) -Financial expense (1,428) (758)Net finance costs (204) (149) Additional analysis of finance costs 2005 2004 £m £mFinance costs - Group (204) (149)Finance costs - share of equity accounted investments (11) (27) (215) (176)Analysed as: Net interest: Interest income 123 57 Interest expense (310) (226) Facility fees (10) - Net present value adjustments (2) (1) Share of equity accounted investments (11) (30) (210) (200)Other finance costs - Group (5) 21Other finance costs - share of equity accounted investments - 3 (215) (176) 3 Taxation expense 2005 2004 £m £mCurrent tax expenseUK corporation tax Current tax (105) (1) Double tax relief 14 - Adjustment in respect of prior years 33 19 (58) 18Overseas tax charges Current year (91) (41) Adjustment in respect of prior years 18 (12) (73) (53) (131) (35)Deferred tax expenseUK Origination and reversal of temporary differences (22) (73) Adjustment in respect of prior years 43 (3)Overseas Origination and reversal of temporary differences 4 (57) Adjustment in respect of prior years (28) - Attributable to recoverable deferred tax assets 21 - 18 (133)Taxation expense (113) (168) 4 Discontinued operations EurosystemsOn 29 April 2005, the Group announced the completion of the Eurosystems transaction with Finmeccanica SpA.The Eurosystems transaction comprised the sale of BAE Systems Avionics Limited and the UK communicationsbusiness, and the dissolution of AMS, the 50/50 joint venture of BAE Systems and Finmeccanica. BAE SystemsAvionics Limited represented substantially all of the previously reported Avionics business group. BAE Systems Avionics Limited and Galileo Avionica SpA merged to form a new Avionics business owned 75% byFinmeccanica and 25% by BAE Systems. The Group's 25% interest in the newly merged business is subject to aput option exercisable by BAE Systems in the three month period from the beginning of June 2007 and a calloption by Finmeccanica at any time to August 2007. At completion, BAE Systems received net consideration of£374m plus an £89m working capital adjustment. BAE Systems will receive a further amount of £268m upon theexercise of either the put or call option over the remaining 25% stake. Accordingly, the Group is treatingthe remaining amount of £233m, after discounting to the balance sheet date, as deferred consideration as itdoes not exercise any control or significant influence over the new Avionics business. BAE Systems sold itsUK communications business to Selenia Communications Limited, a wholly owned subsidiary of Finmeccanica, for£25m in cash. The results from the discontinued operations, which have been included in the consolidated income statement,are derived as follows: 2005 2004 £m £mRevenue 111 365Expenses (127) (328)EBITA (16) 37Goodwill impairment - (484)Finance costs, net (3) -Loss before taxation (19) (447)Taxation (1) (7)Loss for the year (20) (454)Loss on disposal of discontinued operations (8) -Loss for the year from discontinued operations (28) (454) The assets and liabilities of the discontinued operations at the date of disposal were as follows: 2005 £mIntangible assets 731Property, plant and equipment 87Inventories 104Trade and other receivables 172Deferred tax assets 4Cash and cash equivalents, net of overdrafts (1)Trade and other payables (354)Provisions (32)Net assets 711Consideration: BAE Systems Avionics Limited (including working capital adjustment) 731 UK communications business 25 756Less: Deferred consideration (268)Total consideration received, in cash 488Transaction costs paid (37)Net cash inflow from sale of subsidiary entities 451Net cash inflow from sale of subsidiary entities 451Overdrafts disposed of with subsidiary entities 1 452 5 Earnings per share 2005 2004 Basic Basic and pence per diluted share Diluted pence pence per share per share £m £m £mProfit for the period attributable to equity 553 553 2shareholdersPreference dividends - 27 (21)Profit/(loss) for the period after adjustingfor preference dividends 553 17.4 580 17.4 (19) (0.6) Represented by: Continuing operations 581 18.3 608 18.2 435 14.2 Discontinued operations (28) (0.9) (28) (0.8) (454) (14.8)Add back/(deduct): Net financing charge/(credit) on pensions, post tax 1 1 (15) Uplift on acquired inventories, post tax 31 31 4 Market value movements on derivatives, post tax 3 3 - Amortisation of intangible assets, post tax 54 54 13 Impairment of goodwill 45 45 581Underlying earnings 687 21.6 714 21.4 564 18.4Represented by: Continuing operations 715 22.5 742 22.2 534 17.4 Discontinued operations (28) (0.9) (28) (0.8) 30 1.0 687 21.6 714 21.4 564 18.4 Millions Millions MillionsWeighted average number of shares used in calculatingbasic earnings per share 3,183 3,183 3,058 Add: Incremental shares in respect of employee share schemes 21 - Incremental shares in respect of convertible preference shares 128 - Weighted average number of shares used incalculating diluted earnings per share 3,332 3,058 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 2004 diluted earnings per share calculations are without reference toadjustments in respect of outstanding share options and convertible preference shares, as assumed conversionwould be anti-dilutive. 6 Equity accounted investments Share of net Purchased Carrying assets goodwill value £m £m £m At 31 December 2004 (154) 1,623 1,469Adoption of IAS 39 770 - 770At 1 January 2005 616 1,623 2,239 Share of results after tax 213 - 213Acquired through acquisition 23 - 23Disposal 140 (136) 4Reduction in shareholding (62) (68) (130)Dividends receivable (88) - (88)Market value adjustments in respect of derivative financial instruments, net of tax (470) - (470)Actuarial losses on defined benefit pension schemes, net of tax (47) - (47)Foreign exchange adjustment (8) (15) (23) At 31 December 2005 317 1,404 1,721 As stated in note 1, the Group has adopted IAS 39 from 1 January 2005. As a result, the Group is requiredto recognise its share of the market value of the equity accounted investments' derivative contracts as at1 January 2005. On 25 February 2005, the Group announced the sale of 13.2 million B series shares in the capital of Saab ABfor a net consideration of £125m. Following the sale and subsequent conversion of 1.2m A series shares to Bseries shares and the exercise of the over allotment option of a further 1.8m B series shares, BAE Systemsowns 20.5% of Saab AB. 7 Post retirement benefit schemes 2005 2004 UK UK defined US and US defined US and US benefit other health benefit other health pension pension care pension pension care plans plans plans Total plans plans plans Total £m £m £m £m £m £m £m £mPresent value ofunfunded obligations - (145) - (145) - (73) - (73)Present value of fundedobligations (15,492) (2,130) (144) (17,766) (13,074) (1,335) (108) (14,517)Fair value of schemeassets 10,833 1,628 92 12,553 9,199 944 39 10,182Total IAS 19 deficit, (4,659) (647) (52) (5,358) (3,875) (464) (69) (4,408)net Allocated to equityaccounted investments1 1,210 - - 1,210 1,198 - - 1,198 Group's share of IAS 19deficit, net (3,449) (647) (52) (4,148) (2,677) (464) (69) (3,210) Group's share of IAS 19deficit of equityaccounted investments (303) - - (303) (370) - - (370) Represented by:Pension receivables(within non-currentreceivables) - 20 - 20 - - - - Retirement benefitobligations (3,449) (600) (52) (4,101) (2,677) (464) (69) (3,210) Liabilities directlyassociated withnon-current assets anddisposal groups heldfor sale - (67) - (67) - - - - (3,449) (667) (52) (4,168) (2,677) (464) (69) (3,210) Group's share of IAS 19deficit, net (3,449) (647) (52) (4,148) (2,677) (464) (69) (3,210) 1 Certain of the Group's equity accounted investments participate in the Group's defined benefit plans. Asthese plans are multi-employer plans the Group has allocated an appropriate share of the IAS 19 pensiondeficit to the equity accounted investments based upon a reasonable and consistent allocation methodintended to reflect a reasonable approximation of the equity accounted investments' share of the deficit.The Group's share of the IAS 19 pension deficit allocated to the equity accounted investments is includedin the balance sheet within equity accounted investments. 8 Reserves Attributable to equity holders of the parent Equity Issued option of Share Share preference Other Retained Minority Total capital premium shares reserves earnings Total interest equity £m £m £m £m £m £m £m £mBalance at 1 January2004 143 412 - 5,425 (2,301) 3,679 10 3,689Total recognised incomeand expense - - - (102) (628) (730) - (730)Share based payments - - - - 8 8 - 8Ordinary share dividends - - - - (281) (281) - (281)Preference sharedividends - - - - (21) (21) - (21) At 31 December 2004 143 412 - 5,323 (3,223) 2,655 10 2,665Adoption of IAS 32 andIAS 39 (66) - 78 691 (281) 422 - 422 At 1 January 2005 77 412 78 6,014 (3,504) 3,077 10 3,087Reclassification1 - - - (636) 636 - - -Total recognised incomeand expense - - - (658) 295 (363) 2 (361)Share based payments - - - - 16 16 - 16Shares issued 3 370 - - - 373 - 373Other - - - - - - 4 4Ordinary sharedividends - - - - (315) (315) - (315) At 31 December 2005 80 782 78 4,720 (2,872) 2,788 16 2,804 1 At 31 December 2004, the fair value reserve of £636m represented the unrealised gain on the Group'sholdings in the shares of Vodafone Group Plc that arose on uplifting the shares from historical cost tomarket value at that date. On adoption of IAS 32, and in accordance with IFRS 1, the Group's holding inthese shares was designated as a financial asset at fair value through profit or loss. As a result from 1January 2005, movements in the market value of these shares will be recorded through the income statement.Accordingly, this has been reclassified into retained earnings. 9 Cash flows in relation to acquisitions and disposals United Other Total Avionics Precision Total Saab Total Defense acquisitions acquisitions Aerostructures disposals £m £m £m £m £m £m £m £mCash (consideration)/pro-ceeds (2,204) (58) (2,262) 451 9 460 125 (1,677) Cash and cashequivalents net ofoverdrafts acquired/disposed 130 (2) 128 1 - 1 - 129 Acquisitions and (2,074) (60) (2,134) 452 9 461 125 (1,548)disposalsDebt acquired onacquisition ofsubsidiary (283) (5) (288) - - - - (288) (2,357) (65) (2,422) 452 9 461 125 (1,836) 10 Aircraft financing contingent liabilities 31 December 1 January 31 December 2005 2005 2004 £m £m £mPotential future cash flow payments in respect ofaircraft financing obligations 460 628 755Anticipated aircraft values (391) (604) (727)Adjustments to net present values (4) (4) (5)Net exposure provided 65 20 23 As stated in note 1, the Group has adopted IAS 39 from 1 January 2005. As a result the Group has restated theamounts shown above to the appropriate exchange rate as at 1 January 2005. In accordance with IFRS 1, theGroup is not required to restate comparative information which is presented under UK GAAP. The Group has provided residual value guarantees (RVGs) in respect of certain commercial aircraft sold. At 31December 2005 the Group's exposure to make future payments in respect of these arrangements was £460m (31December 2004 £755m). 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 ifthe guarantees were called. After taking account of the FRIP and independent appraisal valuations the directors consider that the Group'snet exposure to these guarantees is covered by the provisions held, and the residual values of the relatedaircraft. The Group is also exposed to actual and contingent liabilities arising from commercial aircraft financing andRVGs given by Saab AB and Airbus SAS. Provision is made against the expected net exposures on a net presentvalue basis. The Group's share of such exposure is limited to its percentage shareholding in each of theseequity accounted investments. 11 Events after the balance sheet date On 31 January 2006, the Group agreed the disposal of its UK Aerostructuresbusiness to Spirit AeroSystems Inc. for £80m in cash. 12 Transition to International Financial Reporting Standards As stated in note 1, these are the Group's first consolidated financialstatements prepared in accordance with IFRS. The Group published its transitiondocument on 28 April 2005 explaining the balance sheet and income statementimpact for the Group of the transition to IFRS. In preparing its opening IFRSbalance sheet, the Group has adjusted amounts previously reported in financialstatements prepared in accordance with UK GAAP. The most significant changes at the date of transition to IFRS for the Groupbetween reporting on a UK GAAP basis and IFRS are as follows: • the consolidation of the regional aircraft financing special purpose entities under IFRS; • the recognition, on the balance sheet, of pension scheme liabilities, after allocation to joint ventures and associates; • the inclusion of a fair value charge in respect of outstanding employee share options; • the cessation of goodwill amortisation; • no longer recognising proposed dividends as a liability at the balance sheet date. The most significant changes on adoption of IAS 32 and IAS 39 are as follows: • the recognition, on the balance sheet, of all financial instruments as either financial assets or financial liabilities; • the separate accounting treatment as a liability of the embedded derivative in the Vodafone Exchangeable Bond; • the reclassification of the debt component of the convertible preference shares as a liability. 13 Annual General Meeting This year's Annual General Meeting will be held on 4 May 2006. Details of theresolutions to be proposed at that meeting will be included in the notice ofAnnual General Meeting that will be sent to shareholders at the end of March2006. 14 Other information The financial information for the years ended 31 December 2005 and 31 December2004 contained in this preliminary announcement was approved by the Board on 22February 2006. This announcement does not constitute statutory accounts of theCompany within the meaning of section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 December 2004 have been delivered tothe Registrar of Companies. Statutory accounts for the year ended 31 December2005 will be delivered to the Registrar of Companies following the Company'sAnnual General Meeting. The auditors have reported on both these sets of accounts. Their reports werenot qualified and did not contain a statement under section 237(2) or (3) of theCompanies Act 1985. This information is provided by RNS The company news service from the London Stock Exchange

---

Related Shares:

BAE Systems