Final Results

22nd Feb 2007 07:01

BAE SYSTEMS PLC22 February 2007 BAE Systems plcPreliminary Announcement 2006 Results in brief Results from continuing operations 2006 Restated(6) 2005Sales(1) £13,765m £12,581mEBITA(2) £1,207m £909mOperating profit £1,054m £761mUnderlying earnings(3) per share 23.8p 18.4pBasic earnings per share(4) 19.9p 13.9pOrder book(5) £31.7bn £30.8bnOther results including discontinued operationsDividend per share 11.3p 10.3pCash inflow from operating activities £778m £2,099mNet cash/(debt) as defined by the Group £435m £(1,277)m Highlights - Good financial performance- Continued growth from US businesses- Implementation of UK Defence Industrial Strategy underway- European business portfolio restructuring completed- UK pension funding deficit addressed- Airbus sale completed- Underlying earnings(3) per share up 29.3% at 23.8p- Dividend increased 9.7% to 11.3p per share for the year Outlook Looking forward to 2007 we anticipate a further year of good growth led by ourUS businesses, in particular from the Land & Armaments sector, and from furtherprogress in the Programmes business. We anticipate good operating cash flow again in 2007. (1) including share of equity accounted investments(2) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense(3) earnings 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 £0.8bn (2005 £0.9bn)(6) restated following the sale of Airbus SAS A strong platform for future performance Year in review BAE Systems delivered another year of good financial performance, underpinned byprogramme schedule and cost adherence across the Group and reflecting thebenefits now flowing from our world-class Lifecycle Management and PerformanceCentred Leadership processes. Sales(1) increased 9% from £12,581m to £13,765m. Organic growth was 5%. Sales inthe full year from the former United Defense activities, acquired in June 2005,were £1,670m (2005 £789m). EBITA(2) increased 33% to £1,207m (2005 £909m). The growth includes the benefit of a full year's trading from the former United Defense activities, acquired inJune 2005, which contributed EBITA(2) of £169m (2005 £60m) in the year. Asreported at the half year, included within EBITA(2) is a £61m one-off accountinggain in the Electronics, Intelligence & Support business group arising from areduction in the net pension liability following the changes to the calculationof final US pensionable salaries. Losses at Regional Aircraft amounted to £114m,these are reported within HQ and other businesses. Return on sales (EBITA(2) adjusted for uplift on acquired inventories expressedas a percentage of sales) for the Group increased from 7.6% to 8.8%. Return onsales excluding the one-off pension gain referred to above was 8.3%. Order book increased to £31.7bn, primarily on US awards in the Land & Armamentsbusiness and on securing the Availability Transformation - Tornado AircraftContract (ATTAC) in Customer Solutions & Support. The performance of the US businesses has again been excellent with the Group'sexpansion in the US market over recent years generating good returns. Goodprogress has continued in the UK businesses with programmes on track and meetingtheir key milestones. A number of export opportunities have also progressed, most notably in theKingdom of Saudi Arabia where, under an agreement between the Kingdom of SaudiArabia and the UK government, the Group is working to modernise the Saudi armedforces including progressing towards a contract for 72 Typhoon aircraft. We have continued to divest those businesses that were non-core to our strategy.In May the Group initiated the sale of its 20% shareholding in Airbus. Thedecision to sell the Airbus stake was consistent with our strategy of maximisingvalue from that business, recognising it was facing an increasing number ofchallenges. The sale was completed in October following shareholder approval.The proceeds will be directed to developing the core business and a repurchaseof up to £500m of the Group's shares is underway. The sale of the Aerostructures business was completed in March and the sale ofAtlas Elektronik was completed in August. A big concern for the Group in recent years has been the funding of its pensionschemes. Agreements were concluded during 2006 to address funding deficits. Therevised funding plan in the UK schemes includes a combination of higher companyand employee contribution rates, reductions in future benefits for employees andone-off cash and asset contributions by the Group. This shared approach hasachieved a good outcome for all parties. The Board is in consultation with thetrustees of the Group's pension schemes to consider the implication of theAirbus sale on pension scheme funding. US businesses In the US, the integration of the former United Defense activities into BAESystems has been completed successfully. The land, armaments and ship repairactivities that comprised the acquired United Defense business are performingwell. The Electronics, Intelligence & Support business continued to achieve growthahead of the addressable US Department of Defense (DoD) budget, withlike-for-like sales up 6%. Contributing to this growth was strong demand forelectronic protection systems. The business continues to lay the foundations forsustained performance with new business wins, including substantial contractsfor Common Missile Warning Systems to protect aircraft. A number of significant new support business wins include the award of a primecontract to provide software development and management support services to theDepartment of Homeland Security. BAE Systems continues to look for opportunities to grow its US business byacquisition following the successful additions to the Group over recent years.Progress has been slowed by sustained high valuations of businesses that wouldalign with the Group's strategy. Further acquisitions will have to continue tomeet our strict value creation criteria. In the meantime, organic growth in theUS businesses continues. The focus on current operations in Afghanistan and Iraq is generating a highlevel of armoured vehicle reset activity such as the return of Bradley vehiclesto 'as new' condition. Substantial funding for such reset activities has beenavailable through supplemental budgets in support of current militaryoperations. Supplemental spending is expected to continue in the near term butthe Group's business plans are based on more prudent longer-term assumptions. BAE Systems is a leader in electronic warfare technology including electronicprotection systems. Such advanced protection systems are expected to continue tobe a funding priority. Equipment modernisation is also expected to continue and the Group is activelyinvolved in current and new generation land systems, including Future CombatSystem variants. In addition, the digitised, A3, version of the Bradley is acore element of the modernisation and modularisation of US forces. BAE Systems is a high technology business and a major participant in forcetransformation activities including new generation Intelligence, Surveillanceand Reconnaissance programmes. As a result of strong positions in these priority areas, and notwithstandingexpectations for a flattening of growth in overall defence spend, organic growthin the US businesses is expected to continue at a level above the underlying DoDaddressable budget growth. UK businesses The performance on large complex weapon system programmes in the UK has beengood and is expected to continue to progress as more programmes move toproduction. Deliveries of Typhoon continue to schedule. 113 aircraft have been delivered tothe four partner nations including 38 now in service with the UK's Royal AirForce (RAF). Flight development of the Nimrod MRA4 programme continues and the formalproduction contract was received in July for nine aircraft together with anoption for the conversion of the three aircraft currently in flight developmentto production standard. In October, a production order for 28 Hawk Mk128 aircraft for the RAF wassecured. Following the launch of the first of class Type 45 destroyer, outfitting isprogressing to programme. The second ship was launched on 23 January 2007 andmajor steel sections are also well underway for the third and fourth ships. Theplanned build efficiencies from one ship to the next are being met or exceeded.Following successful risk reduction, a small amount of profit has beenrecognised on the programme. Both of the Landing Ship Dock (Auxiliary) ships originally contracted to BAESystems for the UK's Royal Fleet Auxiliary were completed. The Group was askedto assist with completion of the fourth ship in addition to taking over leadyard responsibility for the ship class. Development and assembly of the first of class Astute submarine progressed well.A key 2006 milestone, electrical power to switchboards, was achieved enablingcommissioning activity on the boat to commence. Work on the second boat, Ambush,is also proceeding well with major milestones, such as the closure of thereactor compartment, demonstrating significant schedule advance compared withthe first boat. Pricing discussions on boats two and three, together with theinitial phase of boat four, are well advanced. In addition to UK weapon system procurement programmes, the development of thesupport business continues. BAE Systems is delivering a reduction in the UKMinistry of Defence's (MoD) in-service cost, improving equipment availabilityand consequently front-line capability for the armed forces. Furtheropportunities for valuable support business growth remain. Pioneering work that BAE Systems previously undertook through a series of smallpilot support programmes, in partnership with the UK Defence LogisticsOrganisation, is now being applied across the MoD's fixed wing aircraft fleet.In December the Group signed a 10 year availability based partnership agreementproviding all support up to the front-line for the UK's Tornado aircraft. Within the land sector, the successful introduction of the armoured fightingvehicle partnering arrangement is underway with the in-service date achieved, onschedule, for the upgraded FV430 Bulldog armoured fighting vehicle. In addition,progress continues towards the transformation of arrangements for the supply ofmunitions. At the end of 2005 the UK government published its Defence Industrial Strategy(DIS). DIS is a very significant change programme for both industry and the UKMoD. It will help determine the future level of BAE Systems' involvement in theUK defence industrial base as it is implemented. It is intended that long-term partnering agreements, currently being discussedwith the UK MoD in all three air, land and sea sectors, will form the basis formuch of the implementation of DIS. These long-term partnering agreements willspecify the future capabilities and requirements for each sector, enabling boththe UK MoD and industry to make long-term investment decisions with a greaterdegree of certainty than has been possible previously. The UK MoD has committed to a complex weapon long-term partnering agreement thatwill preserve capabilities and business within the MBDA guided weapons jointventure. An integral part of DIS is the identification of those technologies that arelikely to remain key to the future capability of the UK armed forces and thatneed to be retained on-shore. A good early example was the launch of an UnmannedCombat Air Vehicle technology demonstrator programme in December. At the heart of this strategic framework is the recognition that industry has todemonstrate and deliver value for money and through-life capability for the UKarmed forces, whilst also generating appropriate returns for shareholders. BAESystems is well positioned to address these requirements. In response to encouragement from DIS, BAE Systems has been consideringopportunities for a more integrated UK naval capability. Such considerationsincluded discussions with VT Group regarding the possibility of a bid forBabcock. These initial discussions were not taken forward but opportunities forconsolidation of the UK naval industry continue to be explored, and, inDecember, the Group announced discussions with VT Group with a view tointegrating the naval surface ship activities. Other markets In addition to its strong positions in the UK and US markets, BAE Systems has asignificant presence in the other important markets of Australia, Saudi Arabia,South Africa and Sweden. In all six countries, BAE Systems is recognised as an important on-shore defenceand aerospace supplier. The Group continues to look for opportunities tostrengthen its position as part of the defence industrial base of thosecountries. A major growth opportunity is the Group's role in supporting the partnershipbetween the UK government and the Kingdom of Saudi Arabia to update thecapability of the Kingdom's armed forces. A key feature of this agreement isalso to assist the Kingdom in developing its defence industrial base and thetraining of its workforce. BAE Systems has been pursuing a strategy to transition its Saudi business from aUK-centric operation to a major in-Kingdom presence. Consistent with thisstrategy BAE Systems continues to invest in the Kingdom. Recognising that the security and welfare of the 4,600 employees and theirdependants in Saudi Arabia is paramount, a major construction programme is wellunderway to create two new residential and workplace facilities. These investments establish a significant industrial footprint in Saudi Arabiawith a growing in-Kingdom technical capability. This will enable the Group tosatisfy many of its Saudi customer's needs from on-shore companies. Industrialisation is a key feature of the modernisation programme and thecommitment to Typhoon will allow us to build on the established Tornado supportactivity. Opportunities for new business in other areas of the Kingdom's armedforces are also being considered. As in the UK, Typhoon and Tornado are expected to operate side by side for manyyears and these in-country investments are expected to generate returns forshareholders over many decades. Finance costs Finance costs, including the Group's share of the finance costs of equityaccounted investments, were £174m (2005 £196m). The underlying interest chargeof £157m (2005 £191m) was increased by a net charge of £17m (2005 £5m) arisingfrom pension accounting, marked-to-market revaluation of financial instrumentsand foreign currency movements. Underlying interest cover based on EBITA(2) increased from 4.8 times to 7.7 times. Taxation The Group's effective tax rate for continuing operations for the year was 26%(2005 22%). The increase in the rate arises principally due to recognition in2005 of an Australian deferred tax asset previously unrecognised. Earnings per share Underlying earnings(3) per share from continuing operations for 2006 increased by 29% to 23.8p compared with 2005. Basic earnings per share, in accordance with IAS 33 Earnings per Share, fromcontinuing operations, increased by 43% to 19.9p (2005 13.9p). Basic earnings per share, in respect of discontinued operations amounted to30.8p, primarily arising from the gain made on the disposal of the Group's 20%interest in Airbus to EADS (see note 5). Dividend The Board is recommending a final dividend of 6.9p per share (2005 6.3p),bringing the total dividend for the year to 11.3p per share (2005 10.3p), anincrease of 9.7%. The proposed dividend is covered 2.1 times by earnings(3) from continuingoperations (2005 1.8 times) which is consistent with the policy of growing thedividend whilst maintaining a long-term sustainable earnings cover ofapproximately two times. Cash flows Cash inflow from operating activities was £778m (2005 £2,099m), which includes£441m one-off contributions into the UK pension schemes, representing cash of£199m and proceeds from the sale of property of £242m. A one-off contribution of$100m (£54m) was also made into the US pension schemes in December 2006. Good conversion of EBITA(2) to operating business cash flow was delivered acrossthe Group. There was an outflow from net capital expenditure and financial investment of£141m (2005 £250m). This includes the receipt of £242m from the disposal ofGroup property to fund the additional contributions made to the UK pensionfunds. Excluding this item, the underlying net capital expenditure and financialinvestment cash outflow was £383m (2005 £250m). The resulting operating business cash inflow of £782m (2005 £1,937m) gave riseto free cash inflow, after interest, preference dividends and taxation, of £490m(2005 £1,758m). The net cash inflow from acquisitions and disposals was £1,330m including thereceipt of net proceeds of £1,212m from the October disposal of the Airbusshareholding. Net cash of the Group at 31 December 2006 was £435m, a net inflow of £1,712mfrom the net debt position of £1,277m at the start of the year. In summary, BAE Systems is progressing well. The Group's strategy is deliveringa focused, high performing, defence and aerospace business with good positionsin key markets around the globe. As a result, the Group has a robust plan todeliver profitable growth for our shareholders. Summarised income statement from continuing operations 2006 2005(4) £m £m Sales(1) 13,765 12,581EBITA(2) 1,207 909Amortisation (105) (77)Impairment (34) (45)Net finance costs(1) (174) (196)Taxation expense(1) (248) (147)Profit for the year 646 444 Basic earnings per share 19.9p 13.9pUnderlying earnings(3) per share 23.8p 18.4pDividend per share 11.3p 10.3p Exchange rates 2006 2005£/• - average 1.467 1.462£/$ - average 1.844 1.819£/• - year end 1.484 1.455£/$ - year end 1.957 1.718 Segmental analysis Sales(1) EBITA(2) 2006 2005(4) 2006 2005(4) £m £m £m £m Electronics, Intelligence & Support 4,007 3,697 429 324Land & Armaments 2,115 1,270 168 42Programmes 2,927 2,819 167 133Customer Solutions & Support 3,180 2,923 477 419Integrated Systems & Partnerships 1,748 1,834 113 109HQ and other businesses 295 471 (147) (118)Intra-group (507) (433) - - 13,765 12,581 1,207 909 Reconciliation of cash flow from operating activities to net cash/(debt) Excluding one-off One-off pension pension funding funding 2006 2005 £m £m £m £m Cash flow from operating activities 1,273 (495) 778 2,099Capital expenditure (net) and (383) 242 (141) (250)financial investmentDividends received from equity 145 - 145 88accounted investmentsOperating business cash flow 1,035 (253) 782 1,937Interest and preference dividends (207) (152)Taxation (85) (27)Free cash flow 490 1,758Equity dividends paid (346) (315)Acquisitions and disposals 1,330 (1,836)Other non-cash movements (5) (52)(Purchase)/issue of equity shares (71) 373Foreign exchange 323 (219)Movement in cash on customers' account(5) (9) (35) 1,712 (326)Opening net debt as defined by the Group (1,277) (668)Adoption of IAS 32 and IAS 39 - (283)Closing net cash/(debt) as defined by the 435 (1,277)GroupAnalysed as:Term deposits - non-current 4 -Other investments - current 503 634Cash and cash equivalents 3,100 2,581Loans - non-current (2,776) (3,534)Loans - current (308) (815)Overdrafts - current (26) (90)Loans and overdrafts - current (334) (905)Cash on customers' account(5) (62) (53)(included within payables)Closing net cash/(debt) as defined by the 435 (1,277)Group Operating business cash flow 2006 2005(4)Electronics, Intelligence & Support 273 323Land & Armaments 137 168Programmes 173 285Customer Solutions & Support 289 850Integrated Systems & Partnerships 158 17HQ and other businesses (225) (79)Discontinued businesses (23) 373 782 1,937 (1) including share of equity accounted investments(2) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense(3) earnings 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) restated following the sale of Airbus SAS(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 Group performance Electronics, Intelligence & Support The Electronics, Intelligence & Support business group, with 31,700 employees(1)and headquartered in the US, is a provider of defence and aerospace systems,sub-systems and services. It comprises two operating groups: Electronics &Integrated Solutions and Customer Solutions. Financial highlights - Organic sales growth of 6% over 2005- Return on sales improved to 9.2% (excluding one-off accounting gain)- Good conversion of EBITA(2) to operating cash flow 2006 2005 2004Sales(1) £4,007m £3,697m £3,063mEBITA(2) £429m £324m £256mReturn on sales 10.7% 8.8% 8.4%Cash inflow(3) £273m £323m £190mOrder intake(1) £4,311m £3,659m £3,310mOrder book(1) £3.4bn £3.5bn £3.1bn (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 Key points - Strong demand for electronic warfare systems- Key support solutions business wins- Group-wide capabilities combined to win FastTrack contract- Key Federal information technology solutions awards 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, whilst developing capabilities to transform the futureforce. BAE Systems will continue to focus on offering tailored, mission-enablingsupport solutions and lifecycle services to the US defence, intelligence,Federal and civilian markets. The business is positioned to capitalise on recent organisational andintegration actions to reduce costs. Reducing costs will make the business morecompetitive and enable further investment in new business opportunities to drivetop line growth. Electronics, Intelligence & Support During 2006, Electronics, Intelligence & Support achieved EBITA(2) of £429m (2005 £324m) on sales(1) of £4,007m (2005 £3,697m) and generated an operating cash inflow(3) of £273m (2005 £323m). 2006 EBITA(2) includes a £61m accounting gain relating to a revision to pensionbenefits arising from changes to the calculation of final pensionable salaries. A one-off cash contribution of $100m (£54m) was made to the principal US pensionfund at the end of the year. The Ship Repair business of United Defense, acquired in June 2005, contributedfull year sales(1) of £316m (2005 £164m) and EBITA(2) of £23m (2005 £15m). Electronics & Integrated Solutions (E&IS) E&IS designs, develops and produces electronic systems and sub-systems for awide range of military and commercial applications. The business focuses on fiveprimary capabilities: electronic warfare (EW), including information operations;communications, with emphasis on integrated C4ISR(4) and tactical networking;avionics, flight and engine controls; sensor systems, providing remote sensingtechnology, mission sub-systems and missile seekers; and intelligence systems. E&IS delivered the first EW system for the Joint Strike Fighter F-35 LightningII aircraft and received funding for the system's Low Rate Initial Production. E&IS also delivered the first production digital EW system for the US Air ForceF-22A Raptor. Current production quantities are for 183 aircraft, taking F-22Aproduction through 2011. The National Geospatial-Intelligence Agency selected E&IS to lead the team todevelop a Web-based surveillance and targeting system, Global Net-CentricSurveillance and Targeting, which will rapidly identify battlefield targets tospeed decision-making by intelligence analysts and military personnel. BAE Systems continues to hold a leadership position in the development ofAdvanced Threat Infrared Countermeasure (ATIRCM) systems. In 2006, E&IS beganphase three of a Department of Homeland Security programme to develop acommercial version of the ATIRCM system, JETEYE(TM), which seeks to defeat thethreat of shoulder-fired anti-aircraft missiles. BAE Systems was selected to develop the active inceptor system for the US Army'sUH-60M Black Hawk helicopter programme. The Black Hawk will be the firstproduction helicopter to combine active inceptor technology with a fly-by-wiresystem that saves weight and provides pilots with intuitive tactile cues foreasier aircraft handling and reduced workload. BAE Systems is the world's leading supplier of hybrid propulsion systems forurban transit buses. New orders received in 2006 totalled 415 HybriDrive(R)propulsion systems. E&IS is a supplier of state-of-the-art infrared, millimetre-wave, and lasertechnologies for missile seekers, guided munitions and target designators. Usinga BAE Systems seeker, the THAAD (Terminal High Altitude Area Defense) missilesystem successfully detected and intercepted an incoming ballistic missiletarget. This demonstration of 'a bullet hitting a bullet' was a key milestone inthe development of this defence against missile-borne weapons of massdestruction. The US Army fully funded the Thermal Weapon Sight (TWS) at $285m (£146m) withfull production to produce and deliver 29,600 units by mid-2008. In 2006, morethan 4,500 TWS units were delivered on time or ahead of schedule to meetcritical fielding. To increase focus on through-life product and logistics support, E&IS opened itsfirst Readiness & Sustainment centre adjacent to Robins Air Force Base, Georgia.E&IS also signed partnership agreements with the US Army's Tobyhanna Depot inPennsylvania to enhance communications and electronics lifecycle management andwith the US Air Force's Open Air Logistics Center, Utah, to support aircraftsustainment. Customer Solutions Customer Solutions comprises three businesses: - BAE Systems Information Technology (IT)- Technology Solutions and Services (TSS)- BAE Systems Ship Repair BAE Systems IT capabilities include enterprise-wide managed IT operations,mission-critical application development and lifecycle support informationanalysis and assured delivery. TSS provides services including systemengineering and technical assistance, system and sub-system integration,operations and maintenance. Ship Repair is the US's leading non-nuclear shiprepair company and also provides conversion and modernisation services,principally in the home ports of the US Navy. Customer Solutions integrates communications systems, builds and maintainsprecision tracking radars, and is one of the largest service providers to the USNavy. The business is also a leader in air and missile defence systems and isone of the world's largest manufacturers of explosives. During 2006, significant contract wins were secured, underpinning the futuregrowth in the Customer Solutions business. BAE Systems was awarded a prime contract, worth approximately $250m (£128m),from the Department of Homeland Security to improve efficiency and reduce ITcosts. The business also received an estimated $250m (£128m) award from the USArmy under the Information Technology Enterprise Solution - 2 Services contract.This contract provides IT services to support the Army's enterprise informationinfrastructure requirements and goals. BAE Systems IT was also successful in100% of its recompetes in 2006. TSS won the US Air Force Space Command's potential 12-year, $509m (£260m)contract for operation and maintenance of the Solid State Phased Array RadarSystems at five radar sites worldwide. The US Army Space and Missile DefenseCommand's Future Warfare Center signed an agreement with BAE Systems worth up to$482m (£246m) under the Concepts and Operations for Space and Missile DefenseIntegration Capabilities contract. BAE Systems Ship Repair provides a full array of ship repair services in supportof US Navy vessels. In 2006, the Ship Repair business was awarded a servicecontract for guided missile cruiser class ships home ported in Norfolk,Virginia, potentially valued at $169m (£86m). A second multi-ship, multi-optioncontract was awarded for repair and maintenance of all US Navy surface shipshome ported in Hawaii, potentially valued at $270m (£138m). Land & Armaments Land & Armaments business group, with 11,600 employees(1) and 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. Financial highlights - Sales of £1.4bn from acquired United Defense business- Improvements in UK business performance- Order book growth 2006 2005 2004Sales(1) £2,115m £1,270m £482mEBITA(2) £168m £42m £(8)mReturn on sales 7.9% 3.3% (1.7)%Cash inflow(3) £137m £168m £60mOrder intake(1) £2,964m £1,541m £869mOrder book(1) £4.9bn £4.4bn £2.2bn (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 Key points - Benefiting from high volume of reset and upgrade activity- Good progress in next generation technology programmes- Accelerated rationalisation in the UK business- Wheeled armoured vehicle successes Looking forward In the near term, US Land & Armaments operations are expected to continue tobenefit from operational requirements in Iraq and Afghanistan. In the longerterm, the business may be impacted by increased pressure on defence budgets. UK operations will continue their emphasis on performance improvements, securinga leadership role on the Future Rapid Effect System (FRES) programme and onreaching resolution on a mutually beneficial, sustainable munitions contractwith the UK MoD. The businesses in Sweden and South Africa aim to deliver growth through both newdomestic government business and building on their track record of securingexport opportunities. Land & Armaments During 2006, Land & Armaments achieved EBITA(2) of £168m (2005 £42m) on sales(1) of £2,115m (2005 £1,270m) and generated an operating cash inflow(3) of £137m (2005 £168m). The United Defense Land & Armaments business, acquired in June 2005, contributedfull year sales(1) of £1,354m (2005 £625m) and EBITA(2) of £146m (2005 £45m). Following rationalisation activity in 2005 and further announcements in 2006,the UK managed business returned to profit a year ahead of plan. United States The US business has substantial US Army contracts for the refurbishment andupgrade of Bradley, M88 Hercules improved recovery vehicles and M113 fightingvehicles. These contracts involve restoring current systems to combat-readycondition following extensive operational use and upgrading them to moreadvanced configurations. Following the final US FY07 Defense Appropriations Bill, Land & Armamentsreached agreement with the US Army in November 2006 for contracts for 610 reset/upgraded Bradley vehicles, 113 M88 Hercules vehicles and upgrade of 447 M113fighting vehicles at a total value of $1.6bn (£0.8bn). In May 2006, BAE Systems was awarded its first wheeled vehicle contract in theUS to manufacture the Iraqi Light Armoured Vehicle, designed to protect Iraqiarmed forces against roadside bombs and mine blasts. Under this $187m (£96m)contract, Land & Armaments will supply an initial 378 vehicles for Iraqi forces.If all contract options are exercised, delivery orders could total 1,050vehicles. Progress on the Future Combat Systems programme continues with the successfulcompletion of preliminary design and commencement of system functional reviewsand critical design reviews on manned ground and armed robotic vehicles.Integration of the first Non-Line of Sight-Cannon (NLOS-C) prototype systemcommenced with the mission module testing using tactical software inMinneapolis, Minnesota, and chassis fabrication in York, Pennsylvania. TheNLOS-C firing platform was unveiled during ceremonies in September. The platformwas delivered to the US Army's Yuma Proving Ground ahead of schedule andsuccessfully fired its first live test round in October, beginning two years oflive fire testing. The US Army has ordered two additional prototypes for a totalof eight to be delivered by early 2009. Development of the 155mm Advanced Gun System (AGS) and the Long Range LandAttack Projectile (LRLAP) for the US Navy's new destroyer, DDG-1000, continues.In live fire testing, the AGS achieved a sustained firing rate of 10 rounds perminute at ranges of up to 63 nautical miles with accuracy well within US Navyrequirements. In September 2006, Land & Armaments received a $251m (£128m)contract for LRLAP. In addition, Land & Armaments is designing and testing a newVertical Launching System that will enable the DDG-1000 ship to launch a widerange of missiles. In the medium-calibre naval gun system arena, the BAE Systems 57mm gun has beenselected for the DDG-1000, the US Navy's Littoral Combat Ship and the CoastGuard's Deepwater programme. United Kingdom Initial production deliveries of the M777 Lightweight Artillery System to the USArmy and Marine Corps have been completed, and full rate production has begun.The M777 system has also been ordered by Canada and fielded in Afghanistan. Engineering Tank Systems deliveries continue on schedule with 17 bridge-layingTitan vehicles and 17 Trojan obstacle-clearing vehicles delivered to the BritishArmy. During 2006, the British Army identified urgent operational requirements forFV430 Bulldog armoured personnel carriers to support requirements in Iraq. Intotal, Land & Armaments received orders for FV430 vehicles valued at £36m. A Framework Partnering Agreement is the current basis for the supply ofmunitions to the UK MoD. BAE Systems and the UK MoD are evaluating a follow-onMunitions Acquisition Supply Solution in order to build a sustainable munitionsbusiness and provide long-term savings to the customer. The Land & Armaments businesses in the UK and Sweden are cooperating toestablish a strong position to develop the FRES programme. The Swedish ModularArmoured Tactical Vehicle Programme (SEP) is the basis of one of the proposalsfrom BAE Systems. Sweden During 2006, the Land & Armaments Swedish businesses (Hagglunds and Bofors)were combined under one newly created company called BAE Systems AB. This willleverage strengths of the individual businesses in engineering and production,while also allowing BAE Systems to become a more effective solutions provider. BAE Systems AB was awarded a £19m contract for an additional 52 Bv206S armouredall terrain vehicles from the Swedish government. The company has manufacturedmore than 11,000 Bv206 vehicles, which have been sold to nearly 40 countries,including customers in France, Germany, Sweden, Netherlands, UK, Italy andSpain. In the area of intelligent munitions for artillery and mortar systems, the USArmy has declared Excalibur ready for formal testing prior to acceleratedfielding to US and Canadian forces in Iraq and Afghanistan early in 2007. Amajor milestone was achieved when a guided firing of the 155mm Excalibur from anArcher self propelled artillery platform was successfully completed. Through December 2006, deliveries of 155mm BONUS Mk 2 munitions to the Swedishgovernment continued to schedule. BONUS is also being evaluated by the US and UKgovernments. South Africa The growing international need for mine-protected vehicles has continued togenerate new orders for the four-wheeled RG-31 and RG-32 from the business inSouth Africa. In October, Land & Armaments successfully unveiled the RG-33L MineProtected Vehicle at the Association of United States Army trade show. A sevenmonth collaborative effort between operations in the US and South Africaproduced the RG-33L mine-protected vehicle that has the potential to meet urgentmine protection needs of US, UK and coalition forces in Afghanistan and Iraq. Programmes The Programmes business group, with 17,900 employees(1) and based in the UK,comprises the Group's air systems, naval ships and submarines activities, withthe UK Ministry of Defence its principal customer. Financial highlights - Sales growth of 4% over 2005- Margin further improved- EBITA(2) up 26%- Good cash performance 2006 2005 2004Sales(1) £2,927m £2,819m £2,219mEBITA(2) £167m £133m £10mReturn on sales 5.7% 4.7% 0.5%Cash inflow(3) £173m £285m £442mOrder intake(1) £2,772m £2,101m £5,264mOrder book(1) £12.1bn £12.3bn £13.0bn (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 Key points - Good schedule and cost adherence- Programmes transitioning from development to production- Hawk and Nimrod production orders secured- UAV technology agreements secured Looking forward The future of Programmes is closely linked to UK MoD funding both to meet futurerequirements of the UK's armed forces and to subsequently generate exportbusiness. For Air Systems, growth in the short term is dependent upon anticipated higheractivity, as UK development programmes move to production, and on potential Hawkand Typhoon export sales. Naval Ships expects to be involved in the implementation of the DefenceIndustrial Strategy in the maritime sector. Growth prospects include the UK'sFuture Carrier (CVF) programme and the MARS (Military Afloat Reach andSustainability) programme. The Submarines business is expected to grow with increased activity on theAstute programme and the anticipated build of a major block of the FutureCarrier. Completion of pricing of boats 2 and 3 and securing orders for Astuteboats 4 to 7 is key in retaining the necessary skill base in order to design andbuild the next generation nuclear deterrent submarine. Programmes During 2006, Programmes achieved EBITA(2) of £167m (2005 £133m) on sales(1) of£2,927m (2005 £2,819m) and generated an operating cash inflow(3) of £173m (2005£285m). Air Systems The Air Systems group is responsible for delivering five major programmes:Typhoon, Nimrod MRA4, Hawk, F-35 Lightning II (JSF) and Autonomous Systems &Future Capability (Air). Deliveries of Typhoon aircraft to the air forces of the four partner nationscontinued with a further 40 aircraft delivered in the year. BAE Systemscontinues to provide support to the UK's Royal Air Force (RAF) training andoperational build up, with aircraft operating in three squadrons in the UK.Negotiations to establish ongoing integrated logistics support contractscontinue. In addition, the UK MoD has awarded an initial contract combiningscheduled maintenance work with upgrade activity. Final assembly of the first of 236 Tranche 2 aircraft is underway, in additionto the first of 18 aircraft for Austria. Further export possibilities are being pursued, including the supply of Typhoonaircraft to Saudi Arabia. During the year the UK MoD awarded the Nimrod MRA4 production contract,signalling renewed confidence in the programme and in the capability theaircraft will deliver. The design and development programme is on target toachieve the product maturity contained within the production bid assumptions.Activities are now concentrated in developing, jointly with the customer, aninnovative support solution for the first five years of service. Development of the UK's Hawk Advanced Jet Trainer proceeded to plan and helpedsecure the production order for 28 Hawk Mk128 aircraft from the UK MoD. Hawk iswell positioned to meet continued market demand for training aircraft, includingexisting Hawk customers who wish to upgrade their fleet. All six Hawk aircraft for Bahrain were delivered on time, the India contract isproceeding to plan, with the first flight of an Indian Hawk achieved inDecember, and fifteen aircraft have been delivered to South Africa. BAE Systems is partnered with Lockheed Martin and Northrop Grumman on the JSFprogramme, having responsibility for the design and manufacture of the rearfuselage and empennage and for the supply of certain air vehicle systems. The first flight of the System Development and Demonstration aircraft wasachieved in December. 2007 will see the substantial completion of the detailed design for each of theF-35 variants and the acceleration of the manufacture and delivery of majorunits for the remaining development aircraft in the System Development andDemonstration phase of the programme. Low rate initial production is expected tocommence in 2007. Discussions between the UK and US governments on appropriatelevels of technology sharing on the JSF programme progressed during the year. The medium-altitude long-endurance Unmanned Air Vehicle (UAV) system (HERTI) wasunveiled in 2006 and the ASTRAEA programme was launched - a multi-faceted UKprogramme working towards creating the right conditions for operating unmannedaircraft in UK airspace. Risk reduction activities were completed for the Strategic Unmanned Air Vehicle(Experiment) (SUAV(E)) project with the UK MoD and, in December, a follow-ontechnology demonstration programme, Taranis, to support MoD evaluation ofunmanned air combat vehicle technologies, was secured. The business is focused on working with the UK MoD to deliver the SUAV(E) andTaranis demonstration contracts to establish the role of UAVs/UCAVs in thefuture force mix and transitioning the HERTI demonstration system into aproduction programme. Naval Ships The second of the originally contracted Landing Ship Dock (Auxiliary) ships, RFACardigan Bay, was handed over in August. The contract was expanded as the UK MoDcontracted to Naval Ships the responsibility for completion of the final vessel,Lyme Bay, together with class design and warranty authority. With four Type 45 ships in various stages of production, a high level ofactivity and resource load has been reached. To meet this demand, over 500 newstaff joined the business in 2006, largely in production areas. Whilst the major focus remains on the setting-to-work and commissioning of theType 45 first of class, Daring, in readiness for sea trials in the second halfof 2007, excellent progress was made on the second and third ships, with buildefficiency targets met or exceeded. Milestone achievements continue to plan and these, combined with successful riskreducing system integration work in the Maritime Integration Support Centre,have enabled initial profit recognition on the programme in 2006. The Group is currently working with the customer to restructure the existingcontract around a new six ship proposal to provide a cost effective solutionthat ensures timely delivery of agreed capability across the class under ajointly managed risk profile. This is expected to conclude in mid-2007. The Carrier Alliance has established a set of contracts with the variousalliance partners for the demonstration phase of the CVF programme. One of thekey components to this work has been to prepare full cost, schedule andprogramme inputs in support of the UK MoD Main Gate Review for the approval ofthe whole programme. BAE Systems, holding significant responsibilities acrossthe total CVF scope of work, is committed to working with the other alliancepartners to secure a successful outcome. The arbitration process over the acceptance of the three offshore patrol vesselsfor Brunei continues. A letter of intent was signed with the government of Malaysia for two frigates.Negotiations continue to convert this agreement into a contract. Submarines The construction of the first of class boat, Astute, is largely completed withthe test and commissioning activities now the major focus. The Astute programme continued its improved performance with nine of its ten keymilestones achieved in the year, eight being achieved ahead of plan and onebehind plan. The remaining milestone was achieved early in 2007. The launch ofAstute has been brought forward by three months to June 2007. Productivity improvements are being addressed through innovative buildstrategies. These include increased use of modular assembly and verticaloutfitting of full sections, in addition to investment in facilities,simplification of processes, systems and design to reduce cost. These measuresare aimed at reducing the cost of production following the first of class boat. Customer Solutions & Support The Customer Solutions & Support (CS&S) business group, with 14,600 employees(1), provides partnered, through-life support solutions and capability to the UK MoD and manages the Group's business in Saudi Arabia and Australia. Financial highlights - Sales growth of 9% over 2005- Return on sales maintained at c.15%- Cash flow includes £130m incurred on Saudi infrastructure 2006 2005 2004Sales(1) £3,180m £2,923m £2,856mEBITA(2) £477m £419m £497mReturn on sales 15.0% 14.3% 17.4%Cash inflow(3) £289m £850m £1,102mOrder intake(1) £4,367m £3,280m £3,543mOrder book(1) £6.0bn £5.0bn £4.6bn (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 Key points - Tornado ATTAC agreement signed in the UK- Kingdom of Saudi Arabia modernisation programme underway- Investment in the Kingdom of Saudi Arabia continues- Australian Hawk support contract secured Looking forward CS&S will continue to seek to sustain its long-term presence in Saudi Arabiathrough developing new business and delivering on current support commitments. CS&S will continue to work with the UK customer to provide smarter, moreintegrated support and capability solutions on customer bases. Development ofthese solutions will be underpinned by the migration of the AvailabilityTransformation - Tornado Aircraft Contract (ATTAC) model to other future UKplatforms. CS&S During 2006, CS&S achieved EBITA(2) of £477m (2005 £419m) on sales(1) of £3,180m(2005 £2,923m) and generated an operating cash inflow(3) of £289m (2005 £850m). Saudi Arabia BAE Systems has a major presence in the Kingdom of Saudi Arabia where it acts asprime contractor for the UK government-to-government defence agreement. Over thelast two decades the programme has included the provision of aircraft,associated hardware, support, infrastructure and manpower training for the RoyalSaudi Air Force (RSAF). On 21 December 2005 the UK and Saudi Arabian governmentssigned an Understanding Document outlining plans to modernise the Saudi armedforces. Modernisation activities are now underway. Under the terms of the signeddocument, Typhoon aircraft will replace Tornado Air Defence Variant aircraft andothers currently in service with the RSAF. Detailed negotiations are continuingto progress the Understanding Document towards a contract for the delivery ofTyphoon aircraft. Around 4,600 people are employed by the Group in the Kingdom of Saudi Arabia, ofwhom more than half are Saudi nationals. The business is continuing to developits presence in Saudi Arabia and is helping to develop a greater indigenouscapability in the Kingdom. The security of employees is the highest priority andprogress on new residential and office facilities as well as increased securitymeasures continues. Occupation of the first new residential compound and newoffice facilities began on schedule in late 2006. Performance on the Saudi support programme in 2006 has progressed well. Marginshave stabilised following increased indigenous Saudi content in repair andoverhaul work. United Kingdom In the UK, CS&S continued to develop its successful partnering arrangement withthe UK MoD's Defence Logistics Organisation focusing on through-life capabilitymanagement and value for money in line with the UK's Defence Industrial Strategy(DIS). A key message from DIS is the need for investment in supply chain skills,capabilities and technologies. BAE Systems has established a supply chaincapability project to further develop its suite of high-quality supportprocesses across the business. In air support, performance under the Tornado Combined Maintenance and Upgradecontract remains strong with 11 aircraft returned to front-line service sincecontract award in December 2005. In December, the Tornado ATTAC contract was signed. The contract offers a fullTornado availability service for the next ten years with an initial value of£947m. ATTAC will deliver reduced costs and increased operational efficiencieswith improved aircraft availability to the front-line. Experience of the ATTAC bid is being used to progress a similar availabilitycontract for the Harrier aircraft, with negotiations on an initial riskreduction package on Harrier well advanced. The Harrier Joint Upgrade andMaintenance Programme at RAF Cottesmore is already helping to meet urgentoperational requirements for the front-line in Afghanistan while at the sametime maintaining the GR9 upgrade programme. In September, the in-service date for the Harrier GR9 upgrade was achieved onschedule. The GR9 upgrade is carried out in a partnered arrangement with the UKMoD based at RAF Cottesmore. The programme has delivered cost savings andreduced aircraft 'downtime' from 52 to 35 weeks during the upgrade. The ATTAC model should also provide the blueprint for future supportarrangements on Typhoon. In support of the Hawk programme a bid was submitted to provide availabilitysupport to the RAF's TMk1 aircraft and an extension to the existing NimrodIntegrated Support contract was received in June. Naval In the naval domain the reactivation of three ex-Royal Navy frigates for theChilean Navy is progressing. The handover and commissioning of AlmiranteCochrane on 22 November was a significant milestone in the programme. The firstof a series of Memoranda of Understanding with the customer with respect todelivering a support solution for the vessels was signed in October. The naval joint ventures performed well. BAE Systems has 50% interests in FleetSupport Limited (FSL) and Flagship Training Limited (FTL). In parallel with thenaval base review announced by the UK Secretary of State for Defence inSeptember 2006, FSL has been involved in a number of cost saving initiatives. In October, FSL signed a Memorandum of Understanding (MoU) between FSL, DML andBabcock and the Minister of Defence Procurement in support of the Surface ShipSupport Alliance. This activity will develop throughout 2007 to jointly identifya more effective model for the support of surface ships with projected savingsof £90m per year. The results of the UK MoD naval base review are expected in 2007. The delivery of high quality training solutions continues, primarily through FTLwhich, building on the strong partnering relationship with the Royal Navy, wasawarded a £45m contract for the planning and delivery of a number of courses forexisting and future naval personnel. FTL formed part of the MC3 Training bid for the Defence Training Reviewprogramme. However, in January 2007, it was announced that this programme was tobe awarded to the competing consortium led by QinetiQ. The business was unsuccessful in its bid for an integrated through-life supportcontract to support the Victoria Class submarines in Canada. Australia CS&S Australia performed well in 2006 securing a number of contracts andstrengthening its position as a through-life capability partner to theAustralian Defence Force. Negotiations for a five year A$343m (£138m) support contract for the AustralianHawk Lead-In Fighter aircraft were successfully completed, and the business isalso a key supplier in providing a new airborne early warning system to SouthKorea. Integrated Systems & Partnerships The Integrated Systems & Partnerships business group, with 10,500 employees(1), is a portfolio of high-technology defence systems businesses comprising thewholly-owned Integrated System Technologies and Underwater Systems, togetherwith a 37.5% interest in the pan-European MBDA joint venture, a 20.5% interestin Saab of Sweden and a 50% interest in the Gripen International joint venture. Financial highlights - Results reflect further portfolio restructuring in the year- Margin further improved to 6.5% 2006 2005 2004Sales(1) £1,748m £1,834m £2,022mEBITA(2) £113m £109m £95mReturn on sales 6.5% 5.9% 4.7%Cash inflow(3) £158m £17m £59mOrder intake(1) £1,655m £1,516m £1,756mOrder book(1) £5.8bn £5.9bn £7.0bn (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 Key points - European portfolio restructuring complete- Major Insyte communication systems wins in UK- MBDA programme milestones achieved- Saab's acquisition of Ericsson Microwave Systems complete Looking forward Implementation of the UK's Defence Industrial Strategy (DIS) is material to theUK activities of the Integrated Systems & Partnerships business group. Growth is anticipated from the Insyte business, building on the UK naval systemsmarket position and recent success in land systems. For Underwater Systems, the follow-on activities from DIS will play an importantrole in shaping the future position of the business. The announcement in 2006 by the UK MoD of the creation of 'Team CW' (ComplexWeapons) led by MBDA represented a significant step forward in theimplementation of DIS in this sector. Integrated Systems & Partnerships During 2006, Integrated Systems & Partnerships achieved EBITA(2) of £113m (2005£109m) on sales(1) of £1,748m (2005 £1,834m) and generated an operating cashinflow(3) of £158m (2005 £17m). This result follows the significant restructuring of the Group's portfolio of European defence businesses in 2005. In August the Group disposed of its wholly-owned Atlas Elektronik business for€149m, (£103m) generating a profit on disposal of £3m. In addition to its main businesses, the results of which are explained in moredetail below, the Group has a 25% interest in Selex Sensors and Airborne SystemsSpA. This is subject to a put option at an agreed value of £268m exercisable byBAE Systems in the three month period from the beginning of June 2007 and a calloption by Finmeccanica at any time to August 2007. Integrated System Technologies (Insyte) The Insyte business completed its first full year of trading as a wholly ownedsubsidiary. Order book grew primarily on receipt of the FALCON Increment Acontract (£267m). FALCON will provide the British armed forces with a newmobile, high capacity, secure information system infrastructure at theoperational and tactical levels of command. The business secured its first significant national security contract in 2006and was contracted as the mission system prime contractor on the CVF programmeand was also awarded the T93 Radar Replacement contract to support the UK AirDefence Systems. The business has a number of key programmes. Sampson radar, the CommandManagement System and Long Range Radar Development and Production contracts forthe Type 45 destroyers, and the Seawolf Midlife Upgrade for Type 22 and 23destroyers all achieved their key milestones in the year. Underwater Systems The Sting Ray lightweight torpedo main production order for the UK MoD isprogressing on schedule with the second batch of torpedoes being accepted inDecember 2006. The Archerfish product was selected as the Common Mine Clearance Neutraliser forthe US Navy and is to be used on three different programmes. Talisman, which is a Group funded Unmanned Underwater Vehicle, achieved what isbelieved to be a world first by launching and controlling another weapon whileitself operating at a distance from the mother ship. This successful test wasobserved by potential customers. The business continues discussions with the UK MoD on a long-term partneringagreement to sustain capability for the longer term. MBDA (37.5%) MBDA performed well with increases in both sales and EBITA(2) as 4,000 missileswere produced and delivered including the Storm Shadow and Scalp airborne cruisemissiles, Mica air-to-air weapon, Exocet anti-ship missile, and the Tauruscruise missile. The new Customer Service & Support division also reportedsuccessful sales and orders in the year. A number of export orders were secured in the year, including a €450m (£303m)order from the UAE (Exocet Blocks 2 and 3), a contract from Saudi Arabia for theMistral air defence system, an order from India for the ATAM missile system forthe new ALH helicopter, as well as orders from Chile for the new Seawolf Block 2naval missile and Exocet. Domestic orders remained strong underpinned by theAster/PAAMS programme, a contract from France for the new Scalp Naval cruisemissile and an order from Germany for the Pars 3 next generation anti-armourweapon for the Tiger helicopter. MBDA has been selected by the UK MoD to lead the UK's Complex Weapons sectorunder the Defence Industrial Strategy, working with the UK MoD to develop aStrategic Partnering Agreement which will underpin the sovereign UK capabilityin complex weapons technologies, design, development and manufacturing for thefuture. It is anticipated that 2007 will see this work brought to fruition. Important progress has been made during the year on MBDA's developmentprogrammes. Significant milestones included the successful air-launcheddemonstration firings of the new Meteor beyond visual range air-to-air missile,the first system qualification of the Franco-Italian Aster/PAAMS (E) naval airdefence system and qualification firings of the SAMP/T land-based system. Inaddition, the PAAMS programme for the Royal Navy's Type 45 destroyer is nowprogressing through integration and testing following deliveries of the Sampsonradar. MBDA also achieved development successes with the first firing of the newExocet Block 3 coastal attack missile, completion of development of the MarteMk2/S helicopter-launched anti-ship weapon and Milan ER anti-armour missile. The acquisition of the German missile company LFK was completed in March 2006,with integration well advanced. Financial performance of the acquired businesshas exceeded expectations to date. Saab (20.5%) Sales rose by 9% to SEK21bn (£1.55bn), of which 65% is attributable to salesoutside Sweden. Operating income rose to SEK1,745m (£129m), producing anoperating margin after restructuring costs of 8.3%. Order intake issubstantially improved compared with 2005, mainly attributable to the SEK5.5bn(£411m) order from Pakistan for an airborne surveillance system together with aSEK1bn (£75m) order from the Swedish government for the continued development ofthe Gripen system. The acquisition of Ericsson Microwave Systems for SEK3.75bn (£280m) wascompleted on 1 September. This acquisition added radar and sensor operations toSaab's existing portfolio in the areas of defence, aviation, space and civilsecurity. Saab's order book at the end of the year was SEK51bn (£3.8bn). Gripen International (50%) The first Gripen test aircraft arrived in South Africa and has commenced theintegration and development test programme. Deliveries of aircraft to Hungarycommenced in the year and the contractual offset obligations to both Hungary andthe Czech Republic are being met. HQ and other businesses HQ and other businesses, with 2,300 employees(1), comprises the regional aircraft asset management and support activities, head office and UK shared services activity, including research centres and property management. Financial highlights and key points - Total Regional Aircraft loss of £114m- Cash outflow from Regional Aircraft of £66m- Aerostructures sale completed- UK pension funding deficit addressed Restated(4) Restated(4) 2006 2005 2004 Sales(1) £295m £471m £464mEBITA(2) £(147)m £(118)m £(50)mCash (outflow)/inflow(3) £(225)m £(79)m £57mOrder intake(1) £267m £398m £264mOrder book(1) £0.3bn £0.6bn £0.5bn (1) including share of equity accounted investments(2) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense(3) net cash (outflow)/inflow from operating activities after capital expenditure (net) and financial investment, and dividends from equity accounted investments(4) restated following the sale of Airbus SAS Looking forward The regional aircraft leasing market remains challenging with new markets likelyto be dominated by higher risk customers. Support revenues are dependent onmaintaining aircraft in service and conversion of new customers to managedservices such as power-by-the-hour contracts. Losses are expected to continue inthis difficult market, albeit at levels lower than in the preceding two years. HQ and other businesses During 2006, HQ and other businesses reported a loss of £147m (2005 £118m) andhad an operating cash outflow(3) of £225m (2005 £79m). Of this, the reported loss for Regional Aircraft was £114m (2005 £95m), and operating cash outflow was £66m (2005 £73m). Regional Aircraft The regional aircraft leasing market continued to be impacted by high oil pricesand over supply of aircraft. The leasing team was successful in securingextensions in 2006 to existing leases with both large established operators inEurope as well as new business in India, Nepal and the Middle East. Leases werealso secured for a number of aircraft converted to freighter configuration withfurther demand expected. Other leasing opportunities continue to emerge althoughmarkets remain highly competitive. Support revenues grew with a number of orders secured during the year forpower-by-the-hour contracts and aircraft modifications. The majority of the leasing business is underpinned by the Group's FinancialRisk Insurance Programme (FRIP) which makes good shortfalls in actual leaseincome against originally estimated future income. The Regional Aircraft results for the year include £37m for costs incurred inmanaging the leased aircraft portfolio and supporting the fleet, and £77m forprovisions taken. Aerostructures In March 2006, the sale of the UK Aerostructures business to Spirit AeroSystemsInc. was completed, for a cash consideration of £80m. This disposal generated aprofit of £11m arising from the resultant reduction of pension liabilities. Consolidated income statementfor the year ended 31 December Restated(1) Total Restated(1) Total 2006 2006 2005 2005 Notes £m £m £m £mContinuing operationsCombined sales of Group andequity accounted investments 13,765 12,581Less: share of equityaccounted investments (1,432) (1,562) Revenue 12,333 11,019Operating costs (11,763) (10,579)Other income 371 247 Group operating profitexcluding amortisation andimpairment of intangible assets 1,080 809Amortisation (105) (77)Impairment (34) (45)Group operating profit 941 687Share of results of equityaccounted investmentsexcluding finance costs and taxation expense 127 100Financial income of equityaccounted investments 21 8Taxation expense of equityaccounted investments (35) (34)Share of results of equityaccounted investments 113 74 Earnings before amortisationand impairment of intangibleassets, finance costs andtaxation expense (EBITA) 1,207 909Amortisation (105) (77)Impairment (34) (45)Financial income of equityaccounted investments 21 8Taxation expense of equityaccounted investments (35) (34)Operating profit 1,054 761Finance costs 2Financial income 1,330 1,224Financial expense (1,525) (1,428) (195) (204)Profit before taxation 859 557Taxation expense 3UK taxation (97) (37)Overseas taxation (116) (76) (213) (113)Profit for the year fromcontinuing operations 646 444Profit for the year fromdiscontinued operations 4 993 111Profit for the year 1,639 555Attributable to:BAE Systems shareholders 1,636 553Minority interests 3 2 1,639 555 Earnings per share 5Continuing operations:Basic earnings per share 19.9p 13.9pDiluted earnings per share 19.8p 14.1pDiscontinued operations:Basic earnings per share 30.8p 3.5pDiluted earnings per share 29.4p 3.3pTotal:Basic earnings per share 50.7p 17.4pDiluted earnings per share 49.2p 17.4p (1) restated following the sale of Airbus SAS (note 4) Consolidated balance sheetas at 31 December Notes 2006 2005 £m £mNon-current assetsIntangible assets 7,595 8,217Property, plant and equipment 1,746 1,704Investment property 123 218Equity accounted investments 6 671 1,721Other investments 11 9Other receivables 569 912Other financial assets 51 65Deferred tax assets 1,077 1,331 11,843 14,177Current assetsInventories 395 485Trade and other receivables including amounts duefrom customers for contract work 2,253 1,877Current tax 3 20Other investments 503 634Other financial assets 50 54Cash and cash equivalents 3,100 2,581 6,304 5,651Non-current assets and disposal groups held for sale - 407 6,304 6,058Total assets 18,147 20,235Non-current liabilitiesLoans (2,776) (3,534)Trade and other payables (465) (432)Retirement benefit obligations 7 (2,499) (4,101)Other financial liabilities (45) (45)Deferred tax liabilities (15) (23)Provisions (271) (375) (6,071) (8,510)Current liabilitiesLoans and overdrafts (334) (905)Trade and other payables (6,717) (7,006)Other financial liabilities (50) (81)Current tax (417) (316)Provisions (424) (343) (7,942) (8,651)Liabilities directly associated with non-currentassets and disposal groups held for sale - (270) (7,942) (8,921)Total liabilities (14,013) (17,431)Net assets 4,134 2,804Capital and reservesIssued share capital 8 81 80Share premium 8 841 782Equity option of convertible preference shares 8 76 78Other reserves 8 4,330 4,720Retained earnings 8 (1,211) (2,872)Total equity attributable to equity holders of theparent 4,117 2,788Minority interests 8 17 16Total equity 4,134 2,804 Approved by the Board on 21 February 2007 and signed on its behalf by:M J Turner G W RoseChief Executive Group Finance Director Consolidated cash flow statementfor the year ended 31 December Notes 2006 Restated(1) £m 2005 £mProfit for the yearContinuing operations 646 444Discontinued operations 993 111 1,639 555Taxation expense (includes £4m (2005 £1m) fromdiscontinued operations) 217 114Share of results of equity accounted investments(includes £70m (2005 £139m) from discontinuedoperations) (183) (213)Net finance costs (includes income £2m (2005expense £3m) from discontinued operations) 193 207Depreciation, amortisation and impairment 422 524(Gain)/loss on disposal of property, plant andequipment (60) 2Gain on disposal of investment property (84) (43)(Gain)/loss on disposal of business - continuingoperations (13) 4(Gain)/loss on disposal of business - discontinuedoperations 4 (925) 8Impairment of other investments 2 2Cost of equity-settled employee share schemes 21 16Movements in provisions 47 99Decrease in liabilities for retirement benefitobligations (834) (98)Decrease/(increase) in working capital:Inventories 28 54Trade and other receivables (187) (4)Trade and other payables 495 872Cash inflow from operating activities 778 2,099Interest paid (315) (213)Interest element of finance lease rental payments (11) (17)Taxation paid (85) (27)Net cash inflow from operating activities 367 1,842Dividends received from equity accountedinvestments (including £88m (2005 £64m) fromdiscontinued operations) 145 88Interest received 139 99Purchases of property, plant and equipment (419) (318)Capital expenditure on investment property - (12)Purchases of intangible assets (27) (17)Proceeds from sale of property, plant and equipment 135 30Proceeds from sale of investment property 174 54Proceeds from sale of non-current other investments 1 30Purchase of non-current other investments (5) (17)Purchase of subsidiary undertakings (12) (2,262)Net cash acquired with subsidiary undertakings - 128Purchase of equity accounted investments (4) -Proceeds from sale of subsidiary undertakings 174 460Cash and cash equivalents disposed of withsubsidiary undertakings (40) 1Proceeds from sale of equity accounted investments 4 1,212 125Proceeds from sale of Exchange Property 557 -Net proceeds from (purchase)/sale of otherdeposits/securities (468) 45Net cash inflow/(outflow) from investing activities 1,562 (1,566)Capital element of finance lease rental payments (45) (89)Proceeds from issue of share capital 8 53 373Purchase of treasury shares 8 (112) -Purchase of own shares by ESOP 8 (12) -Equity dividends paid 10 (346) (315)Dividends paid on preference shares (20) (21)Cash inflow from loans 66 1,005Cash outflow from repayment of loans (921) (357)Net cash (outflow)/inflow from financing activities (1,337) 596Net increase in cash and cash equivalents 592 872Cash and cash equivalents at 1 January 2,491 1,650Effect of foreign exchange rate changes on cash andcash equivalents (9) (31)Cash and cash equivalents at 31 December 3,074 2,491Comprising: Cash and cash equivalents 3,100 2,581Overdrafts (26) (90)Cash and cash equivalents at 31 December 3,074 2,491 (1) restated following the sale of Airbus SAS (note 4) Consolidated statement of recognised income and expensefor the year ended 31 December Notes 2006 2005 £m £mCurrency translation on foreign currency netinvestments:Subsidiaries (162) 53Equity accounted investments 6 (26) (23)Amounts credited/(charged) to hedging reserve 221 (688)Actuarial gains/(losses) on defined benefit pensionschemes:Subsidiaries 692 (652)Equity accounted investments 72 (72)Current tax on items taken directly to equity 21 (3)Deferred tax on items taken directly to equity:Subsidiaries (227) 193Equity accounted investments (92) 276Recycling of cumulative currency translation ondisposal:Continuing operations 3 -Discontinued operations 4 11 -Recycling of cumulative net hedging reserve on disposal- discontinued operations 4 (448) -Net income/(expense) recognised directly in equity 65 (916)Profit for the year 1,639 555Total recognised income and expense 1,704 (361)Adoption of IAS 32 and IAS 39 - 422 1,704 61Attributable to:Equity shareholders 1,701 (363)Minority interests 3 2 1,704 (361) Notes to the accounts 1. Accounting policies Statement of compliance The consolidated financial statements of BAE Systems plc have been prepared inaccordance with EU endorsed International Financial Reporting Standards (IFRS),International Financial Reporting Interpretations Committee interpretations(IFRICs) and the Companies Act 1985 applicable to companies reporting underIFRS. With effect from 1 January 2006 the Group has adopted IFRIC 4, Determiningwhether an Arrangement contains a Lease. However the interpretation does nothave a significant impact on the Group. The Group early adopted the following amendments (effective for accountingperiods beginning on or after 1 January 2006) in the financial statements forthe year ended 31 December 2005: - Amendment to IAS 19, Employee Benefits - Actuarial gains and losses, groupplans and disclosure; - Amendment to IAS 21, The Effects of Changes in Foreign Exchange Rates; - Amendment to IAS 39, Cash flow hedge accounting for forecast intra-grouptransactions; and - Amendment to IAS 39, Financial instruments: Recognition and Measurement - thefair value option. The following standards, amendments and interpretations to published standardsare effective for accounting periods beginning on or after 1 January 2006: - IFRS 6, Exploration for and Evaluation of Mineral Resources; - IFRIC 5, Rights to Interests arising from Decommissioning, Restoration andEnvironmental Rehabilitation Funds; and - IFRIC 6, Liabilities arising from participating in a specific market - Wasteelectrical and electronic equipment. None of these have any significant impact on the Group's accounts. 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 2006 2005 £m £mInterest income 143 123Net present value adjustments 39 23Expected return on pension scheme assets 739 632Net gain on remeasurement of financial instruments 259 159Net gain on remeasurement of embedded derivatives 3 59Foreign exchange gains 147 228Financial income 1,330 1,224Interest expense:On bank loans and overdrafts (9) (13)On finance leases (11) (17)On bonds and other financial instruments (277) (253)On preference debt (28) (27) (325) (310)Facilities fees (4) (10)Net present value adjustments (31) (25)Interest charge on pension scheme liabilities (694) (633)Net loss on remeasurement of investments at fair valuethrough profit or loss (42) (75)Net loss on remeasurement of financial instruments at fairvalue through profit or loss (172) (217)Foreign exchange losses (257) (158)Financial expense (1,525) (1,428)Net finance costs (195) (204) Additional analysis of finance costs Restated 2006 2005 £m £mFinance costs - Group (195) (204)Finance costs - share of equity accounted investments 21 8 (174) (196)Analysed as:Net interest:Interest income 143 123Interest expense (325) (310)Facility fees (4) (10)Net present value adjustments 8 (2)Share of equity accounted investments 21 8 (157) (191)Other finance costs - Group (17) (5) (174) (196) 3. Taxation expense 2006 2005 £m £mCurrent taxation expenseUK corporation taxCurrent tax (91) (105)Double tax relief 35 14Adjustment in respect of prior years (93) 33 (149) (58)Overseas tax chargesCurrent year (91) (91)Adjustment in respect of prior years 15 18 (76) (73) (225) (131)Deferred taxation expenseUKOrigination and reversal of temporary differences 25 (22)Adjustment in respect of prior years 27 43OverseasOrigination and reversal of temporary differences (49) 4Adjustment in respect of prior years 5 (28)Attributable to recoverable deferred tax assets(1) 4 21 12 18Taxation expense (213) (113) (1) The recoverable deferred tax asset of £4m (2005 £21m) arises in Australiaprimarily in respect of tax losses previously unrecognised, but which have nowbeen recognised to the extent it is probable that future taxable profits willallow the deferred tax asset to be recovered. 4. Disposals Discontinued operations On 4 October 2006, the Group's shareholders approved the resolution to disposeof the Group's shareholding in Airbus SAS to EADS for €2.75bn (£1.8bn) in cash.The sale was completed on 13 October 2006. The results of Airbus SAS have beenclassified as a discontinued operation and the 2005 consolidated incomestatement has been restated accordingly. The results from the discontinued operations, which have been included in theconsolidated income statement, are derived as below. The results for the yearended 31 December 2005 include the results of the Avionics business which wasdisposed of on 29 April 2005. Restated 2006 2005 £m £m Revenue - 111Expenses - (127)EBITA(1) - (16)Share of results of equity accounted investmentsexcluding finance costs and taxation expense 144 273Finance costs of equity accounted investments (25) (19)Taxation expense of equity accounted investments (49) (115)Share of results of equity accounted investments 70 139Financial income/(expense), net 2 (3)Profit before taxation 72 120Taxation expense (4) (1)Profit for the year 68 119Profit/(loss) on disposal of discontinued operations 925 (8)Profit for the year from discontinued operations 993 111 The Group's share of the assets and liabilities of Airbus SAS at the date ofdisposal were as follows: £mNon-current assets 1,650Current assets 2,896Non-current liabilities (2,388)Current liabilities (1,919)Share of net assets 239Goodwill 1,063Net assets disposed of 1,302 Total consideration 1,846Transaction costs - paid (9)Transaction costs - accrued (4)Net assets disposed of (1,302)Liabilities retained (43)Cumulative net hedging gain 448Cumulative currency translation loss (11)Profit on disposal 925 Proceeds from the sale of equity accounted investments in the consolidated cashflow statement of £1,212m comprise total consideration (£1,846m), lesstransaction costs paid (£9m) and cash deposits from Airbus SAS held by the Group(£625m). Continuing operations In March 2006 the Group sold its UK Aerostructures business for £80m in cash.The disposal generated a profit of £11m arising from the resultant reduction ofpension liabilities. The sale of the previously wholly-owned Atlas Elektronik GmbH to EADS andThyssenKrupp for €149m (£103m) was completed on 3 August 2006. The disposalgenerated a profit of £3m. Proceeds from the sale of subsidiary undertakings in the consolidated cash flowstatement of £174m comprise the disposals of Aerostructures (£80m), AtlasElektronik (£103m) and Atlanta Purchasing Group (£2m), less transaction costs(£11m). (1) earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 5. Earnings per share 2006 Restated 2005 Basic Diluted Basic Diluted pence pence pence pence per per per per £m share £m share £m share £m share Profit for the year attributable to 1,636 1,636 553 553equity shareholdersInterest on the debt instrument of the - 28 - 27convertible preference sharesProfit for the year after adjusting for 1,636 50.7 1,664 49.2 553 17.4 580 17.4interest on the debt instrument of theconvertible preference sharesRepresented by:Continuing operations 643 19.9 671 19.8 442 13.9 469 14.1Discontinued operations 993 30.8 993 29.4 111 3.5 111 3.3Add back/(deduct): Net financing (credit)/charge on (33) (33) 1 1pensions, post tax Uplift on acquired inventories, post - - 34 34tax Market value movements on 55 55 3 3derivatives, post tax Amortisation and impairment of 79 79 60 60intangible assets, post tax Impairment of goodwill 32 32 45 45Underlying earnings 1,769 54.9 1,797 53.1 696 21.9 723 21.7Represented by: Continuing operations 767 23.8 795 23.5 585 18.4 612 18.4 Discontinued operations 1,002 31.1 1,002 29.6 111 3.5 111 3.3 1,769 54.9 1,797 53.1 696 21.9 723 21.7 Underlying earnings excluding profit on 844 26.2 872 25.8 n/a n/a n/a n/adisposal of Airbus SAS (£925m)Represented by: Continuing operations 767 23.8 795 23.5 n/a n/a n/a n/a Discontinued operations 77 2.4 77 2.3 n/a n/a n/a n/a 844 26.2 872 25.8 n/a n/a n/a n/a Millions Millions Millions MillionsWeighted average number of shares used in 3,225 3,225 3,183 3,183calculating basic earnings per shareAdd: Incremental shares in respect of employee share schemes 32 21 Incremental shares in respect of convertible preference shares 125 128Weighted average number of shares used in calculating diluted earnings per share 3,382 3,332 Underlying earnings per share is presented in addition to that required by IAS33 Earnings per share as the directors consider that this gives a moreappropriate indication of underlying performance. 6. Equity accounted investments Carrying value of equity accounted investments Share of net Purchased Carrying assets goodwill value £m £m £m At 1 January 2005 616 1,623 2,239Share of results after tax - continuing operations 74 - 74Share of results after tax - discontinued operations (note 4) 139 - 139Acquired through acquisition 23 - 23Disposal 140 (136) 4Reduction in shareholding (62) (68) (130)Dividends (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 1,721Share of results after tax - continuing operations 113 - 113Share of results after tax - discontinued operations (note 4) 70 - 70Acquired through acquisition (62) 66 4Reclassified from intangible assets - 28 28Disposal (239) (1,063) (1,302)Dividends (145) - (145)Market value adjustments in respect of derivative financial instruments, net of tax 144 - 144Actuarial gains on defined benefit pension schemes, net of tax 59 - 59Revaluation of net assets acquired by equity accounted investments(1) 5 - 5Foreign exchange adjustment (24) (2) (26)At 31 December 2006 238 433 671 (1) The revaluation gain has arisen as a result of MBDA SAS acquiringcontrol of LFK GmbH, which was previously accounted for as a trade investment.The £5m gain reflects a fair value uplift in respect of the carrying value ofthe original investment. The gain has been reflected as a credit to equity (note8). On 13 October 2006 the sale of the Group's shareholding in Airbus SAS to EADSwas completed. In accordance with IAS 1 Presentation of Financial Statements andIFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, the resultsof Airbus are reclassified as arising from discontinuing operations, rather thancontinuing operations in the consolidated income statement, consolidated cashflow statement and notes. Included within purchased goodwill is £113m (2005 £47m) relating to the goodwillarising on acquisitions made by the Group's equity accounted investmentssubsequent to their acquisition by the Group. The market value of the Group's shareholding in Saab AB at 31 December 2006 was£350m (2005 £278m). 7. Retirement benefit obligations Amounts recognised on the balance sheet 2006 2005 UK UK defined US and defined US and benefit other US benefit other US pension pension healthcare pension pension healthcare plans plans plans Total plans plans plans Total £m £m £m £m £m £m £m £m Present value of unfunded obligations - (80) (15) (95) - (145) - (145)Present value of funded obligations (15,445) (1,931) (111) (17,487) (15,492) (2,130) (144) (17,766)Fair value of plan assets 12,579 1,710 91 14,380 10,833 1,628 92 12,553Total IAS 19 deficit, net (2,866) (301) (35) (3,202) (4,659) (647) (52) (5,358)Allocated to equity accounted 774 - - 774 1,210 - - 1,210investments and other participatingemployers(1)Group's share of IAS 19 deficit, net (2,092) (301) (35) (2,428) (3,449) (647) (52) (4,148) Group's share of IAS 19 deficit of (83) - - (83) (303) - - (303)equity accounted investmentsRepresented by:Pension prepayments (within trade and 35 25 11 71 - 20 - 20other receivables)Retirement benefit obligations (2,127) (326) (46) (2,499) (3,449) (600) (52) (4,101)Liabilities directly associated with - - - - - (67) - (67)non-current assets and disposal groupsheld for sale (2,127) (326) (46) (2,499) (3,449) (667) (52) (4,168)Group's share of IAS 19 deficit, net (2,092) (301) (35) (2,428) (3,449) (647) (52) (4,148) (1) Certain of the Group's equity accounted investments participate in theGroup's defined benefit plans as well as Airbus SAS, the Group's share of whichwas disposed of during the year. As these plans are multi-employer plans theGroup has allocated an appropriate share of the IAS 19 pension deficit to theequity accounted investments and to Airbus SAS based upon a reasonable andconsistent allocation method intended to reflect a reasonable approximation oftheir share of the deficit. The Group's share of the IAS 19 pension deficitallocated to the equity accounted investments is included in the balance sheetwithin 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 interests equity £m £m £m £m £m £m £m £m Balance at 1 January 2005 77 412 78 6,014 (3,504) 3,077 10 3,087Reclassification(1) - - - (636) 636 - - -Total recognised income and expense - - - (658) 295 (363) 2 (361)Share-based payments - - - - 16 16 - 16Shares issued 3 370 - - - 373 - 373Other - - - - - - 4 4Ordinary share dividends - - - - (315) (315) - (315)At 31 December 2005 80 782 78 4,720 (2,872) 2,788 16 2,804Total recognised income and expense - - - (476) 2,177 1,701 3 1,704Share-based payments(2) - - - - 46 46 - 46Share options: Proceeds from shares issued 1 52 - - - 53 - 53 Purchase of own shares by ESOP - - - - (12) (12) - (12)Conversion of preference shares - 7 (2) 6 (6) 5 - 5Purchase of treasury shares - - - - (112) (112) - (112)Release of unrealised gain on the sale of - - - (11) - (11) - (11)Atlas ElektronikRevaluation of net assets acquired by - - - - 5 5 - 5equity accounted investmentsReclassification - - - 91 (91) - - -Other - - - - - - (2) (2)Ordinary share dividends - - - - (346) (346) - (346)At 31 December 2006 81 841 76 4,330 (1,211) 4,117 17 4,134 Other reserves includes a merger reserve of £4,589m (2005 £4,589m), a statutoryreserve(3) of £202m (2005 £202m), a translation reserve of £259m debit (2005 £85mdebit) and a hedging reserve of £27m (2005 £225m). (1) At 31 December 2004, the fair value reserve of £636m represented theunrealised gain on the Group's holdings in the shares of Vodafone Group Plc thatarose on uplifting the shares from historical cost to market 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 orloss. As a result, from 1 January 2005 movements in the market value of theseshares are recorded through the income statement. Accordingly, this wasreclassified into retained earnings. (2) The credit in respect of share-based payments for the year ended 31December 2006 comprises £21m in respect of equity-settled share-based paymentschemes, £21m relating to a change in the terms of certain share-based paymentschemes from cash-settled to equity-settled and £4m relating to discontinuedoperations. (3) Under section 4 of the British Aerospace Act 1980 the statutory reserve mayonly be applied in paying up unissued shares of the Group to be allotted tomembers of the Group as fully paid bonus shares. 9. Aircraft financing contingent liabilities Included within provisions is an exposure of £27m as discussed below: 31 December 2006 31 December 2005 £m £mPotential future cash flow payments in respect of aircraft financing obligations 191 460Anticipated aircraft values (159) (391)Adjustments to net present values (5) (4)Net exposure provided 27 65 The Group has provided residual value guarantees (RVGs) in respect of certaincommercial aircraft sold. At 31 December 2006 the Group's exposure to makefuture payments in respect of these arrangements was £191m (2005 £460m). Certainof these arrangements are covered by a Financial Risk Insurance Programme (FRIP)under which the Group would place reliance on insurance cover for theanticipated aircraft values if the guarantees were called. After taking account of the FRIP and independent appraisal valuations thedirectors consider that the Group's net exposure to these guarantees is coveredby the provisions held and the residual values of the related aircraft. The Group is also exposed to actual and contingent liabilities arising fromcommercial aircraft financing and RVGs given by Saab AB. Provision is madeagainst the expected net exposures on a net present value basis within theaccounts of Saab. The Group's share of such exposure is limited to itspercentage shareholding in Saab. The reduction in the net exposure reflects the settlement of the commitment inrespect of 47 RVGs in the period. 10. Dividends 2006 2005 £m £mEquity dividendsPrior year final 6.3p dividend per ordinary share paid in the year (2005 5.8p) 203 186Interim 4.4p dividend per ordinary share paid in the year (2005 4.0p) 143 129 346 315 After the balance sheet date, the directors proposed a final dividend of 6.9p(2005 6.3p). The dividend, which is subject to shareholder approval, will bepaid on 1 June 2007 to shareholders registered on 20 April 2007. The ex-dividenddate is 18 April 2007. Shareholders who do not at present participate in the Company's DividendReinvestment Plan and wish to receive the final dividend in shares rather thancash should complete a mandate form for the Dividend Reinvestment Plan andreturn it to the registrars no later than 10 May 2007. 11. Events after the balance sheet date On 17 January 2007, the Group completed the sale of its 50% interest in HREnterprise Limited to Xchanging HR Services for a cash consideration of £10m. 12. Annual General Meeting This year's Annual General Meeting will be held on 9 May 2007. 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 March2007. 13. Other information The financial information for the years ended 31 December 2006 and 31 December2005 contained in this preliminary announcement was approved by the Board on 21February 2007. 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 2005 have been delivered tothe Registrar of Companies. Statutory accounts for the year ended 31 December2006 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

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