21st Feb 2008 07:00
BAE SYSTEMS PLC21 February 2008 BAE Systems plc Preliminary Announcement 2007 Results in brief Results from continuing operations 2007 2006 Sales1 £15,710m £13,765m EBITA2 £1,477m £1,207m Operating profit £1,177m £1,054m Underlying earnings3 per share 31.0p 23.8p Basic earnings per share4 26.0p 19.9p Order book5 £38.6bn £31.7bn Other results including discontinued operations Dividend per share 12.8p 11.3p Cash inflow from operating activities £2,162m £778m Net cash as defined by the Group £700m £435m Highlights - Good financial performance - Continued growth from US businesses - Leadership position established in global land systems sector - Underlying earnings3 per share up 30% to 31.0p - Dividend increased 13.3% to 12.8p per share for the year Outlook We have excellent forward visibility and a further year of good growth isanticipated in 2008, including a full year contribution from the former ArmorHoldings business. In addition, part-year contributions are expected followingthe anticipated completion in 2008 of the proposed acquisitions of MTCTechnologies and Tenix Defence. 1 including share of equity accounted investments 2 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 3 earnings excluding amortisation and impairment of intangible assets, non-cashfinance movements on pensions and financial derivatives, and uplift on acquiredinventories (see note 5) 4 basic earnings per share in accordance with International Accounting Standard33 5 including share of equity accounted investments' order books and after theelimination of intra-group orders of £1.4bn (2006 £1.0bn) "BAE Systems once again performed well in 2007. Each of the four businesssectors delivered good profitability underpinned by good programme schedule andcost performance across the Group." BAE Systems once again performed well in 2007, demonstrating the significantfundamental strengths and quality of the business. EBITA2 increased by 22% to£1,477m on sales1 of £15,710m, up 14% compared with 2006. Underlying earnings3per share increased 30% to 31.0p for the year. The Group had net cash of £700mat year end, having invested $4.5bn (£2.2bn) excluding fees in the acquisitionof Armor Holdings, Inc. during the year. Each of the four business sectors delivered good profitability with return onsales exceeding 8.5% in all sectors. This profitability stems from goodprogramme cost and schedule performance across the Group. Underlying this performance are principles of ethical conduct, good governance,our values and policies and processes that guide the Group's business and thebehaviour of its people, with a clear system of delegated authority within a 'One Company' approach. BAE Systems is determined that the business policies andprocesses mandated across the organisation align with global best practice. BAE Systems is a global company with a strategy currently focused around sixhome markets. Together these home markets were responsible for generating 85% ofGroup sales in 2007 (2006 84%). The Group is benefiting from a well executed strategy with good profitablegrowth generated from substantial business operations in its home markets andespecially the United States. A notable success is the very strong growth in theland systems business in recent years. Following the earlier acquisitions ofAlvis in 2004 and United Defense in 2005, the acquisition of Armor Holdings in2007 has established BAE Systems as having a clear leadership position in theland sector. Our multi-home market business focus continues to generate opportunities forgrowth, especially in the Kingdom of Saudi Arabia where the Group has a growinghome market position. United States BAE Systems is a valued, trusted and high-performing part of the US defenceindustrial base and is one of the top ten largest defence companies in the US. In the US, the Group is a market leader in advanced information technology,intelligence analysis, geospatial exploitation software, and the development ofknowledge-based systems. In addition, BAE Systems continues to see strong demandfor sophisticated electronic warfare and protection systems, and in its supportsolutions business the ship repair facilities have remained fully utilised. In the land systems sector, further contracts to reset Bradley combat vehiclesand other US tracked vehicles to 'as new' condition were awarded, providingextended visibility of throughput at the current high level of activity. Inaddition to the high volume of reset activity, strong demand for vehicleupgrades with new digital systems continues, in part driven by the move in theUS to modular forces requiring the fielding of a common standard of more capablevehicles. To complement BAE Systems' tracked vehicle position in the US, the Group hasbeen executing a wheeled vehicle strategy to meet a valuable, near-term, urgentoperational requirement for Mine Resistant Ambush Protected (MRAP) vehicles.This has resulted in the establishment of a new assembly facility for the RG33mine protected vehicle in York, Pennsylvania, alongside the Bradley resetfacility. Following the substantial contract award for RG33 MRAP vehicles in2007, manufacturing volume has increased rapidly in the last months of 2007 withthe completion of 23 vehicles in October rising to 102 in December. The acquisition of Armor Holdings, Inc. delivered further progress as regardsthe wheeled vehicle strategy. The business is a key player in the tacticalwheeled vehicle market and in the increasingly vital areas of armour protectionand survivability. With strong demand for its products, notably for the Familyof Medium Tactical Vehicles (FMTV) and the Caiman mine protected vehiclederivative, the Armor Holdings acquisition is well on track to deliver ourrequired return on investment. BAE Systems has worked across its global businesses rapidly to design, produceand deliver vehicles to protect the armed forces. The Group's role on the MRAPprogramme involves collaboration across sites and businesses globally includingthe integration of the former Armor Holdings' capabilities. The programme bringstogether more than 35 years of experience in mine protected wheeled vehicleexpertise and highly survivable combat platforms. In December 2007, the Group announced the proposed acquisition of MTCTechnologies, Inc. MTC complements BAE Systems' existing readiness andsustainment capabilities in the US. United Kingdom The Group's UK-based businesses are performing well with good programme scheduleand cost performance. This performance improvement included a recovery toprofitable trading for the land systems business in the UK. BAE Systems continues to make progress in developing integrated through-lifesupport business in partnering arrangements with the UK MoD and the UK's armedforces. Benefits are now apparent as some of the earlier programme relationshipsmature. For example, the National Audit Office has concluded that the partneredsupport arrangements for the Tornado combat aircraft have contributed to a 51%reduction in cost per flying hour and cost savings over the past five years of£1.3bn. BAE Systems is similarly involved in support for a number of other UKair platforms and is addressing through-life support for the UK's armouredfighting vehicle fleet. The Group identifies further opportunities to developsuch arrangements in air, land and naval support. The UK government's commitment to the new Carrier programme in July enabled BAESystems to enter into a Framework Agreement with VT Group for the establishmentof a joint venture which would, subject to completion, bring together BAESystems' and VT Group's respective surface warship building and surface warshipthrough-life support operations. Other home markets Saudi Arabia continues to be an important home market for BAE Systems, buildingon a performance track record established over many decades. The large programmeof support for Tornado is being maintained and the modernisation of existingassets continues. In September 2007, under the new defence co-operationprogramme known as 'Project Salam', contracts were signed between the UKgovernment and the Kingdom of Saudi Arabia for the supply of 72 Typhoonaircraft. We continue to invest within Saudi Arabia in both the expansion of the Kingdom'sindustrial capability and new secure residential accommodation. The first of twonew compounds for our employees is now being occupied in Riyadh. In Sweden, production of the CV90 infantry fighting vehicle is underway for theDutch Army, continuing the good export performance of this business. In Australia, the Group continues to build on its position as a through-lifecapability partner to the Australian Defence Force, including a follow-onmulti-year support contract for the Hawk aircraft. The selection by Australia of the FMTV as the basis for the Land 121 vehicleprogramme will generate substantial industrial involvement in Australia. BAESystems is also a major sub-contractor on the Australian Wedgetail AirborneEarly Warning and Control programme, where we are jointly engaged with Boeingand the customer to re-baseline this programme. In January 2008, the Group announced the proposed acquisition of Tenix Defence,a leading Australian defence contractor. The acquisition will more than doubleBAE Systems' presence in Australia, making it the largest in-country supplier tothe Australian Defence Force. The organisations are an excellent fit and havelargely complementary programmes and capabilities. This acquisition is asignificant step in the implementation of the Group's strategy to develop as thepremier global defence and aerospace company by growing the business inAustralia, one of the Group's six home markets. In South Africa, the land systems OMC business is achieving growth throughexports with its RG31 and RG32 mine protected vehicles. Summarised income statement from continuing operations 2007 2006 £m £mSales1 15,710 13,765EBITA2 1,477 1,207Amortisation (149) (105)Impairment (148) (34)Net finance costs1 93 (174)Taxation expense1 (373) (248)Profit for the year 900 646 Basic earnings per share 26.0p 19.9pUnderlying earnings3 per share 31.0p 23.8pDividend per share 12.8p 11.3p Exchange rates 2007 2006£/• - average 1.461 1.467£/$ - average 2.002 1.844£/• - year end 1.361 1.484£/$ - year end 1.988 1.957 Segmental analysis Sales1 EBITA2 2007 Restated4 2007 Restated4 £m 2006 £m 2006 £m £mElectronics, Intelligence & Support 3,916 4,007 429 429Land & Armaments 3,538 2,115 312 168Programmes & Support 5,327 4,615 456 342International Businesses 3,359 3,428 435 415HQ & Other Businesses 243 295 (155) (147)Intra-group (673) (695) - - 15,710 13,765 1,477 1,207 Sales1 increased 14% from £13,765m to £15,710m. Sales in the full year from theArmor Holdings business, acquired in July 2007, were £725m. Like for likegrowth, after adjusting for the impact of exchange translations and acquisitionsand disposals, was also 14%. US-led businesses were responsible for 47% of salesand sales generated from home markets represented 85% of the Group total. EBITA2 increased 22% to £1,477m (2006 £1,207m). The growth includes the benefitof five months trading from the Armor Holdings business, acquired in July 2007,which contributed EBITA2 of £77m in the year. Translation of US$ generatedresults decreased EBITA2 by £47m when compared with 2006. US-led businessesdelivered 50% of the Group's EBITA2. Return on sales (EBITA2 adjusted for uplift on acquired inventories expressed asa percentage of sales) for the Group increased from 8.8% to 9.5%. Amortisation and impairment The impairment charge of £148m includes £145m in respect of the goodwillassociated with the Group's Insyte business. Order book1 increased to £38.6bn, primarily on the award of the Saudi Typhooncontract, MRAP orders and the acquisition of Armor Holdings. Net finance costs1 Financial income, including the Group's share of the finance costs of equityaccounted investments, was £93m (2006 £174m financial expense). The underlyingnet interest charge of £38m (2006 £157m) was offset by a net credit of £131m(2006 increased by a net charge of £17m) arising from pension accounting,marked-to-market revaluation of financial instruments and foreign currencymovements. Finance costs were reduced in 2007, primarily as a result of thebenefit of the October 2006 Airbus net disposal proceeds (£1.2bn). Underlying interest cover based on EBITA2 increased from 7.7 times to 39 times. Taxation The Group's effective tax rate for continuing operations for the year wasunchanged from 2006 at 26%. Earnings per share Underlying earnings3 per share from continuing operations for 2007 increased by30% to 31.0p. Basic earnings per share, in accordance with IAS 33 Earnings per Share, fromcontinuing operations, increased by 31% to 26.0p (2006 19.9p). Dividend The Board is recommending a final dividend of 7.8p per share (2006 6.9p),bringing the total dividend for the year to 12.8p per share (2006 11.3p), anincrease of 13.3%. The proposed dividend is covered 2.4 times by earnings3 from continuingoperations (2006 2.1 times), which is consistent with the Group's policy ofgrowing the dividend whilst maintaining a long-term sustainable earnings coverof approximately two times. Cash flows Cash inflow from operating activities was £2,162m (2006 £778m), which is after£76m (2006 £441m) special contributions to the UK pension schemes. There was an outflow from net capital expenditure and financial investment of£262m (2006 £141m). Dividends from equity accounted investments, primarily MBDA, GripenInternational, Eurofighter and Saab, amounted to £78m. The resulting operating business cash inflow of £1,978m (2006 £782m) gave riseto free cash inflow, after interest, preference dividends and taxation, of£1,801m (2006 £490m). On 31 July 2007, the Group acquired Armor Holdings, Inc. for $4.5bn (£2.2bn)excluding fees. Net cash outflow from all acquisitions and disposals was£2,112m. In the period, 33 million shares were purchased under the buyback programmeannounced in October 2006, generating a cash outflow of £152m. In May, £750m,before costs, was raised following the placing of new ordinary shares to partfinance the proposed acquisition of Armor Holdings, Inc. Conversion of the outstanding 260 million 7.75p (net) cumulative redeemablepreference shares into ordinary shares removed the debt element of thesepreference shares, giving rise to an increase in reported cash of £245m. The Group's net cash at 31 December 2007 was £700m, a net inflow of £265m fromthe net cash position of £435m at the start of the year. Summary and outlook BAE Systems has a successful track record of identifying and addressing marketopportunities through organic investments and acquisitions. Following theacquisition of Armor Holdings the Group has maintained a strong balance sheetand is performing well. The Group continues to look for further value enhancingopportunities across its home markets and remains focused on delivering goodbusiness performance and generating value, to the benefit of customers andshareholders. The Group is continuing to deliver its strategy with strong financial andprogramme performance. It is delivering value for money and capability to itscustomers and is well positioned for the future with an established footprint insix home markets. BAE Systems is a quality business based on a strong, wellbalanced portfolio and is well-positioned to continue to deliver shareholdervalue in line with our long-term plans. We have excellent forward visibility and a further year of good growth isanticipated in 2008, including a full year contribution from the former ArmorHoldings business. In addition, part-year contributions are expected followingthe anticipated completion in 2008 of the proposed acquisitions of MTCTechnologies and Tenix Defence. Reconciliation of cash inflow from operating activities to net cash 2007 2006 £m £m Cash inflow from operating activities 2,162 778Capital expenditure (net) and financial investment (262) (141)Dividends received from equity accounted investments 78 145 Operating business cash flow 1,978 782Interest and preference dividends (65) (207)Taxation (112) (85) Free cash flow 1,801 490Acquisitions and disposals (1,574) 1,330Debt acquired on acquisition of subsidiary (538) -Issue/(purchase) of equity shares 603 (71)Equity dividends paid (396) (346)Dividends paid to minority interests (1) -Preference share conversion 245 6Other non-cash movements 57 (11)Foreign exchange 36 323Movement in cash on customers' account5 32 (9) 265 1,712Opening net cash/(debt) as defined by the Group 435 (1,277)Closing net cash as defined by the Group 700 435 Analysed as:Term deposits - non-current - 4Term deposits - current 164 503Cash and cash equivalents 3,062 3,100Loans - non-current (2,197) (2,776)Loans - current (283) (308)Overdrafts - current (16) (26)Loans and overdrafts - current (299) (334)Cash on customers' account5 (included within payables) (30) (62) Closing net cash as defined by the Group 700 435 Operating business cash flow Restated4 2007 2006 £m £m Electronics, Intelligence & Support 302 273Land & Armaments 10 137Programmes & Support 807 449International Businesses 678 171HQ & Other Businesses 181 (225)Discontinued businesses - (23) 1,978 782 1 including share of equity accounted investments 2 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 3 earnings excluding amortisation and impairment of intangible assets, non-cashfinance movements on pensions and financial derivatives, and uplift on acquiredinventories (see note 5) 4 restated following changes to the Group's organisational structure 5 cash on customers' account is the unexpended cash received from customers inadvance of delivery which is subject to advance payment guarantees unrelated toGroup performance Electronics, Intelligence & Support The Electronics, Intelligence & Support business group, with 30,600 employees1and its headquarters 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 - Like for like organic sales1 growth of 7% over 2006 - Return on sales improved to 11% 2007 2006 2005 Sales1 £3,916m £4,007m £3,697m EBITA2 £429m £429m £324m Return on sales 11.0% 10.7% 8.8% Cash inflow3 £302m £273m £323m Order intake1 £4,178m £4,311m £3,659m Order book1 £3.5bn £3.4bn £3.5bn Key points - Continued leadership in the provision of electronic warfare systems - New markets developing for the HybriDrive(R) propulsion systems - Stable demand for ship repair services Looking forward 2008 should see continued organic growth with an anticipated part-yearcontribution from the proposed acquisition of MTC Technologies. Profitable growth is anticipated in the electronic warfare and other defence andaerospace electronics activities, based on the business' strong legacytechnology and services positions, combined with its continued investments inkey capabilities. Ship repair activity is expected to remain stable. Growth inthe IT and services businesses is dependent on the near-term priorities of theUS Department of Defense. Electronics, Intelligence & Support During 2007, Electronics, Intelligence & Support achieved EBITA2 of £429m (2006£429m) on sales1 of £3,916m (2006 £4,007m) and generated operating cash inflow3of £302m (2006 £273m). In 2006, the return on sales benefited from a £61m pension-related accountinggain. In 2007, US$ translations decreased sales1 and EBITA2 when compared with 2006 by£296m and £35m respectively. In August, BAE Systems completed the sale of its Inertial Products business for$140m (£70m). In December, the Group agreed to sell its Surveillance and Attackbusiness in Lansdale, Pensylvannia for a cash consideration of $240m (£121m).Also in December, the Group announced the proposed $448m (£225m) acquisition ofMTC Technologies, Inc., a company providing technical and professional services,and equipment integration and modernisation for the US military and intelligenceagencies. 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 operating group isfocused on four primary capabilities: electronic warfare, commercial andmilitary avionics, flight and engine controls, and tactical and national networksystems. During 2007, E&IS delivered its 100th F-22A electronic warfare (EW) system, thefirst F-35 Lightning II (Joint Strike Fighter) EW system and its 1,000th CommonMissile Warning System to protect US Army helicopters and aircraft fromheat-seeking missiles. E&IS continued its role with the US Department ofHomeland Security to develop a commercial version of BAE Systems DirectedInfrared Countermeasures (DIRCM) system, JETEYETM, which seeks to defeat thethreat of shoulder-fired anti-aircraft missiles. The Thermal Weapon Sight (TWS) programme achieved a production rate of more than1,500 units per month, surpassing 18,000 total deliveries by the year end. Themicrobolometer technology that underpins TWS was also used to secure importantnight vision goggle and remote weapon stations contracts. E&IS received a contract for the production of 50 fire fielding units of theTerminal High Altitude Area Defense (THAAD) missile, supporting the transitionto production of this ballistic missile defence system. Building on its strong legacy in C4ISR4 systems, E&IS has begun initialdeployment of its First InterCommTM system, which enables emergency servicesfirst responders to communicate more effectively using their existing radios andfrequencies. The business received an order to build more than 1,000 helmetassemblies for Typhoon and introduced new helmet-mounted, heads-up displaytechnology. BAE Systems' commercial hybrid propulsion business continues to grow and revealnew opportunities. HybriDrive(R) propulsion technology is in daily service onmore than 1,100 transit buses in the United States and Canada, and tenprototypes are scheduled to enter the London bus fleet in 2008. Orders werereceived for an additional 1,500 systems in 2007 from New York City, Toronto,Ottawa and Houston. As part of its initiative to integrate commercial and defence capabilities, E&ISdemonstrated the first hybrid electric drive system for ground combat vehiclesas part of the US Army's Future Combat Systems (FCS) programme and has developedand demonstrated a common modular power system to meet the increasing electricpower demand on board military vehicles. E&IS continues to focus on through-life product and logistics support for the USmilitary through its Readiness & Sustainment efforts. An on-site presence atWarner Robins Air Force Base and Tobyhanna Army Depot provides a first-handperspective to forecast and develop upgrades. Customer Solutions Customer Solutions comprises three lines of business: BAE Systems InformationTechnology (IT); Technology Solutions and Services (TSS); and BAE Systems ShipRepair. 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 US air and missile defence systems. BAE Systems IT capabilities include enterprise-wide managed IT operations,mission-critical application development and lifecycle information assurancesolutions and analytical services. TSS provides services and solutions, systemand sub-system integration, equipment sustainment, and operations andmaintenance. BAE Systems Ship Repair is the leading non-nuclear ship repaircompany in the US providing conversion and modernisation services principally inthe home ports of the US Navy. BAE Systems IT operates within the large US government information technologymarket and continues to deliver mission-enabling support to its customers. BAESystems ranked sixth in Computerworld's 'Best Places to Work in IT' for 2007.Contract successes include an award as a prime contractor for the GeneralServices Administration (GSA) Alliant government-wide acquisition contract, aten-year, $50bn (£25bn) multiple award/indefinite-delivery indefinite-quantity(IDIQ) programme designed to provide full IT lifecycle support services insupport of the US defence, intelligence and civilian government markets. Thebusiness was also awarded a competitive $120m (£60m), five-year contract todevelop applications for the US Department of Labor. A variety of contracts weresecured by winning re-competes and new business to provide key services such asnetwork implementation and operation, and lifecycle software developmentengineering to the US government. TSS won more than 98% of its re-competes, including technical support to the USMissile Defense Agency and Federal agencies, US Air Force range radar depot andengineering support work, and US Navy communications station operations andmaintenance in Hawaii. TSS expanded into adjacent markets by supporting the USArmy with critical personnel for the global war on terror and by obtaining theintegrator role for the new US Air Force Battle Control System. BAE Systems Ship Repair secured a five-year, multi-ship multi-option contractfrom the US Navy to maintain and repair all Arleigh Burke-class destroyershomeported or visiting San Diego, with a total potential value in excess of$150m (£75m). Ship Repair also secured a three-year contract from the US Navyfor work on three newly commissioned San Antonio-class amphibious transport dockships and a contract from the US Navy for modernisation of the Ticonderoga-classguided missile cruiser USS Bunker Hill. 1 including share of equity accounted investments 2 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 3 net cash inflow from operating activities after capital expenditure (net) andfinancial investment, and dividends from equity accounted investments 4 Command, Control, Communications, Computing, Intelligence, Surveillance andReconnaissance Land & Armaments The Land & Armaments business group, with 20,700 employees1 and its headquartersin the US, is a leader in the design, development, production, through-lifesupport and upgrade of armoured combat vehicles, tactical wheeled vehicles,naval guns, missile launchers, artillery systems and intelligent munitions. Financial highlights - Like for like organic sales growth of 41% over 2006 - Post-acquisition sales of $1.5bn from Armor Holdings - Success in wheeled vehicle market - Order book growth on core products and urgent operational requirements 2007 2006 2005Sales1 £3,538m £2,115m £1,270mEBITA2 £312m £168m £42mReturn on sales 8.8% 7.9% 3.3%Cash inflow3 £10m £137m £168mOrder intake1 £4,535m £2,964m £1,541mOrder book1 £7.3bn £4.9bn £4.4bn Key points - High volume of vehicle reset and upgrade activity - UK business returned to profitability - Wheeled armoured vehicle successes - Good progress in next-generation combat vehicle programmes Looking forward Further organic growth is anticipated in 2008 together with a full year'scontribution from the former Armor Holdings business. In the near term, US Land & Armaments operations are expected to continue tobenefit from operational requirements in Iraq and Afghanistan and the Group'sinvestment made in the wheeled vehicle market. In the longer term, the outlookwill be dependent on the land sector continuing to be a priority area of spendfor the US and the UK. UK operations will continue their emphasis on performance improvements, seekingto secure an integrator role on the Future Rapid Effect System (FRES) programmeand on reaching resolution on a mutually beneficial, sustainable munitionscontract with 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 orders. Land & Armaments During 2007, Land & Armaments achieved EBITA2 of £312m (2006 £168m) on sales1 of£3,538m (2006 £2,115m) and generated operating cash inflow3 of £10m (2006£137m). The 2007 results showed strong organic growth on core products inaddition to success in winning new business in the mine-protected vehiclemarket. The results include five months of operations from the former ArmorHoldings, Inc. business. At the end of July, BAE Systems completed the $4.5bn acquisition of ArmorHoldings, Inc. This acquisition has enhanced the Land & Armaments global landsystems business, most notably in the increasingly important tactical wheeledvehicle sector, together with technology in the vital areas of armour andsurvivability. Sales and EBITA2 from the acquired business amounted to $1,452m(£725m) and $155m (£77m) respectively. United States During the year, US Army contracts were secured for the refurbishment andupgrade of Bradley, M88 Hercules improved recovery vehicles and M113 fightingvehicles totalling $2.3bn (£1.2bn). As expected, during the first half of 2007, the US Army announced its intentionto terminate the M113 fighting vehicle programme. Sales of M113 vehicles in 2007totalled $105m (£52m). BAE Systems is one of several companies providing the US Army and Marine Corpswith new Mine Resistant Ambush Protected (MRAP) wheeled vehicles. In February2007, the US business received an initial order for 94 MRAP vehicles. Followingevaluation and testing, follow-on awards have been received for 3,485 MRAPvehicles with a total value of $2.2bn (£1.1bn). MRAP vehicles are produced as4x4 and 6x6 wheeled vehicles including the Heavy Armed Ground Ambulance andSpecial Operation variants. BAE Systems has been awarded approximately 35% ofall MRAP vehicle orders placed to date. BAE Systems continued to make substantial progress on the Manned Ground Vehiclesof the Future Combat Systems programme. Land & Armaments delivered theNon-Line-of-Sight Mortar (NLOS-M) prototype firing platform in early 2007. Testfiring of the Non-Line-of-Sight Cannon (NLOS-C) continues at the Yuma ProvingGround with the first pre-production prototype delivery scheduled for May 2008.October saw the opening of a temporary facility as well as the commencement ofconstruction for a 150,000 square foot NLOS-C integration facility in Elgin,Oklahoma. The new facility will be adjacent to the US Army Field ArtillerySchool at Fort Sill and is targeted for completion in early 2009. Development of the 155mm Advanced Gun System (AGS) and the Long Range LandAttack Projectile for the US Navy's DDG-1000 programme continues, with design,integration and production awards secured totalling $386m (£194m). Land &Armaments conducted a successful interim baseline review in August of AGS andproduction is ramping-up at a new production site in Alabama. Land & Armamentsis designing and testing a Vertical Launching System that will enable the USNavy's DDG-1000 to launch a wide range of missiles. Land & Armaments is also providing a 57mm medium-calibre gun for the DDG-1000,the US Navy's Littoral Combat Ship and the Coast Guard's Deepwater programme. United Kingdom The British Army's operations in Afghanistan and Iraq have resulted in numerousurgent operational requirement orders to enhance FV430 and Warrior vehicles andmany small and medium-calibre ammunition orders in excess of £400m. Full rate production of the M777 lightweight howitzer is on track with deliveryof an initial 151 guns to the US Army completed. An additional award for 173guns was received in December. The M777 system has also been deployed inAfghanistan by the Canadian Army. Engineering Tank Systems production continues with a total of 33 bridge-layingTitan vehicles and 33 Trojan obstacle-clearing vehicles being delivered to theBritish Army. The Panther programme completed Reliability Qualification Testingin August and is scheduled to deliver 408 vehicles by May 2009. The Terrierarmoured tractor programme is experiencing delays and a revised programmebaseline is under discussion with the customer. In order to provide long-term savings to the customer and deliver a sustainablemunitions business, discussions continue with the UK MoD aimed at agreeing arevised long-term contractual arrangement for the Munitions Acquisition SupplySolution. Land & Armaments continues to compete for the vehicle integrator role on theFuture Rapid Effect System (FRES) programme. BAE Systems is the UK partner andDesign Authority for much of the UK Armoured Fighting Vehicle fleet. Sweden BAE Systems received a funding contract for £24m on the Archer self-propelledartillery programme demonstrating Sweden and Norway's joint commitment tocontinue the final phase of the development programme. Deliveries of CV9035 armed vehicles to the Netherlands and Denmark commencedduring the fourth quarter of the year, under a multi-year contract to provide229 vehicles through to 2010. In the area of intelligent munitions for artillery and mortar systems, the 155mmExcalibur supplied to the US Army performed well in theatre. In November, Land & Armaments acquired Pitch Technologies, an innovativecomputer-based training and research simulation technologies company for £5m.The combination of BAE Systems and Pitch creates a world-class capability inenterprise-level simulation interoperability and solutions for training andsimulation. South Africa The growing international requirement for mine-protected wheeled vehiclescontinues to generate new orders for the RG31 and RG32 vehicles built by OMC,Land & Armaments' South African subsidiary. Land & Armaments received an initialaward in February 2007 from the prime contractor, General Dynamics, for theproduction of 24 RG31 MRAP vehicles for the US Marine Corps. This was followedby a further order in August for 600 vehicles, of which 305 are being producedby OMC in South Africa. 1 including share of equity accounted investments 2 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 3 net cash inflow from operating activities after capital expenditure (net) andfinancial investment, and dividends from equity accounted investments Programmes & Support The Programmes & Support business group, with 29,100 employees1, comprises theGroup's UK-based air, naval and underwater systems activities and the IntegratedSystem Technologies business. Financial highlights - Sales1 growth of 15% - Return on sales improved to 8.6% - Order book1 at a new high of £20.9bn Restated4 Restated4 2007 2006 2005 Sales1 £5,327m £4,615m £4,660m EBITA2 £456m £342m £261m Return on sales 8.6% 7.4% 5.6% Cash inflow3 £807m £449m £441m Order intake1 £9,091m £5,178m £4,186m Order book1 £20.9bn £17.0bn £16.8bn Key points - RAF Typhoons now operational - Full six ship Type 45 destroyer contract awarded - Launch of first of class Astute submarine - Orders received for second and third Astute Class submarines - Offshore Patrol Vessel arbitration settled Looking forward The future of Programmes & Support is linked to MoD funding in order to meetcurrent UK armed forces operational requirements and delivery of the DefenceIndustrial Strategy. In the air sector, short-term growth is dependent both upon production executionand in-service support performance in the UK and on export deliveries. The naval sector expects the creation of the joint venture, BVT Surface FleetLimited. Growth prospects for the joint venture include the UK's Future Carrier(CVF) programme and the Military Afloat Reach and Sustainability programme. Thesix ship Type 45 programme underpins the business for the next few years. The Submarines business is focused on the Astute programme and securing conceptdesign work on the Future Submarine programme. Securing orders for Astute Boats4 to 7 is key in retaining the necessary skill base in order to design and buildthe next generation nuclear deterrent submarine. Programmes & Support During 2007, Programmes & Support achieved EBITA2 of £456m (2006 £342m) onsales1 of £5,327m (2006 £4,615m) and generated an operating cash inflow3 of£807m (2006 £449m). Return on sales benefited by 0.8% arising from one-off gains recorded in thefirst half of 2007, including completion of the Offshore Patrol Vesselarbitration process. Order intake includes the appropriate work share of the award of the SaudiTyphoon contract. Military Air Solutions Military Air Solutions is responsible for delivering five major programmes:Typhoon, Hawk, Nimrod MRA4, F-35 Lightning II (Joint Strike Fighter), andAutonomous Systems & Future Capability. In addition, it is responsible forthrough-life support for these programmes as well as for the UK's Royal AirForce (RAF) fleets of Harrier, Tornado, Nimrod MR2 and VC-10 aircraft. The business made strong progress during 2007; both on delivering its programmecommitments and working in partnership with its customers to enhance theirmilitary capability. Work continues towards the creation of an air sectorLong-Term Partnering Agreement (LTPA) as envisaged in the Defence IndustrialStrategy, published in December 2005. A foundation contract, setting out thepartnering principles and providing a framework for detailed negotiations, wasagreed in March. This has enabled the Group to generate a shared view of thebusiness and is helping to direct investment. Delivery of Typhoon aircraft to the four partner nations continues with a totalof 53 aircraft delivered to the RAF and 84 across the other European partnernations as at 31 December 2007. Five of the 15 contracted aircraft for Austriawere also delivered during the year. In the UK, RAF Typhoons are operational in air defence and Quick Reaction Alertroles. Discussions to establish long-term integrated logistics support contractsare progressing well. Tranche 2 aircraft are now in final assembly with thefirst delivery planned for 2008. Work has also commenced on furtherair-to-ground capability enhancements. Good progress is being made on development and production of the UK RAF HawkAdvanced Jet Trainer, where the first production aircraft is now structurallycomplete. On the Hawk contract for India, ten aircraft have been accepted by the customerduring the year. Twenty Hawk aircraft for South Africa have been delivered, withthe remaining aircraft due for delivery in the first half of 2008. In March, the200th T-45 Goshawk aircraft was delivered to the US Navy and the ongoing T-45production programmes continue to schedule. The Nimrod MRA4 aircraft development programme is progressing and the productionprogramme continues to perform to the contractual milestones. A StabilityAugmentation System has now been embodied into the aircraft. The support contracts for the VC-10 and Nimrod MR2 aircraft continue and VC-10fleet maintenance has now been extended to 2013. The Tornado availability programme, ATTAC, is fully effective and a contractexpansion has been agreed. This increases the scope of ATTAC to include theremaining areas of the Tornado aircraft. The Harrier GR9 aircraft has transitioned successfully into service. Harrier hassupported UK military operations with high recognition for the capability it isproviding. Military Air Solutions is partnered with Lockheed Martin and Northrop Grumman onthe F-35 Lightning II programme, with responsibility for the design andmanufacture of the rear fuselage, empennage and delivery of a number of keyaircraft systems. Three aircraft variants are in development; Carrier,Conventional Take-Off and Landing (CTOL) and Short Take-Off and Vertical Landing(STOVL). The Carrier variant completed its final Critical Design Reviewsuccessfully in June and manufacture and assembly has now commenced. All threeaircraft variants are now in various stages of manufacture and assembly. Successful trials of a highly autonomous medium-altitude long-endurance unmannedair system, HERTI, took place in 2007. The Taranis unmanned combat air vehicle technology demonstration programmecontinues on plan and to cost with the first metal cut of the demonstrationvehicle in September. Taranis is a key enabler to the UK MoD's evaluation offuture capability requirements. In-country flight testing of the first South African Gripen is proceeding toplan. Surface Fleet Solutions In August, the Type 45 six ship contract was signed, capturing the remainingscope of work to complete all six destroyers and establishing a jointly managedrisk profile against a robust schedule, that met the MoD's cost aspirations. The second and third ships, Dauntless and Diamond, were launched in January andNovember 2007 respectively, whilst the first of class, HMS Daring, commenced seatrials in July. The final vessel of the Bay Class Landing Ship Dock (Auxiliary), RFA Lyme Bay,was handed over to the customer in June - two months ahead of the contract date. Two of the three ex-Royal Navy Type 23 frigates for the Chilean Navy completedtheir reactivation and were delivered to the customer. The third ship is plannedto be handed over to the Chilean Navy in May 2008. The CVF programme passed the UK MoD Main Gate Review in 2007. Contracts for themanufacturing phase are now in the final stages of negotiation. The arbitration process in respect of the Offshore Patrol Vessels was settledand title to all three vessels transferred to the customer in April 2007. The naval joint ventures continue to perform to plan. Upon creation of the newmaritime sector Joint Venture, BVT Surface Fleet Limited, BAE Systems will sellits share of Flagship Training Limited to VT Group, and Fleet Support Limitedwill become wholly owned by BVT Surface Fleet Limited. Submarine Solutions The first of class boat, HMS Astute, was launched in June 2007 and has completedTrim & Basin Trials successfully. The boat is on schedule for delivery to theNovember 2008 contracted date. Construction activities on Boats 2 and 3 are alsoprogressing well. Agreement of pricing of Boats 2 and 3 was reached and an orderreceived to allow the start of production on Boat 4. Integrated System Technologies (Insyte) and Underwater Systems The Sampson Radar, the Combat Management System and Long Range Radar programmesfor the Type 45 destroyers continue to meet all key milestones. The first ofclass radar has been successfully installed onto HMS Daring. The Seawolf Mid-Life Update Tracker completed all of its trials at theshore-based facility, HMS Collingwood. The Falcon programme continues to progress to schedule and will provide the UKArmed Forces with a new tactical communications network, providing a secureinformation infrastructure capability. The Sting Ray lightweight torpedo main production order remains on schedule withthe third batch accepted in October 2007. The Archerfish mine disposal system has successfully passed initialqualification trials as the Common Neutraliser for sea mines with the US Navy. Talisman, the company-funded Unmanned Underwater Vehicle, has been developedfurther, reducing the size, unit cost and the underwater drag while retainingthe payload capacity. It has undertaken exercises with the US Navy. 1 including share of equity accounted investments 2 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 3 net cash inflow from operating activities after capital expenditure (net) andfinancial investment, and dividends from equity accounted investments 4 restated following changes to the Group's organisational structure International Businesses The International Businesses business group, with 15,300 employees1, comprisesthe Group's businesses in Saudi Arabia and Australia, together with a 37.5%interest in the pan-European MBDA joint venture and a 20.5% interest in Saab ofSweden. Financial highlights - Sales1 increased by 1%, net of 2006 Atlas disposal - Return on sales increased to 13.0% - Cash flow3 generation of £678m, including Saudi Typhoon milestones Restated4 Restated4 2007 2006 2005 Sales1 £3,359m £3,428m £3,138m EBITA2 £435m £415m £400m Return on sales 13.0% 12.1% 12.7% Cash inflow3 £678m £171m £711m Order intake1 £3,876m £3,854m £3,235m Order book1 £7.9bn £7.1bn £6.7bn Key points - Saudi Typhoon contract secured - Investment in the Kingdom of Saudi Arabia continues - Down-selection for the provision of vehicles for the Australian Defence Force - Proposed acquisition of Tenix Defence announced in January 2008 Looking forward The Group seeks to sustain its long-term presence in the Kingdom of Saudi Arabiathrough delivering on current support and investment commitments, and developingnew business, and to reinforce its business in Australia as through-lifecapability partner to the Australian Defence Force, including land sectorsupport. In January 2008 the Group announced its proposed acquisition of Tenix Defencewhich will, on completion, be integrated with BAE Systems' Australianoperations. International Businesses During 2007, International Businesses achieved EBITA2 of £435m (2006 £415m) onsales1 of £3,359m (2006 £3,428m) and generated an operating cash inflow3 of£678m (2006 £171m). Sales1 and EBITA2 in 2006 included £99m and £2m respectively for the AtlasElektronik business that was disposed of in August 2006. CS&S International 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) and Royal Saudi Naval Force (RSNF). Progress is beingmade on modernising the Saudi armed forces in line with the UnderstandingDocument signed on 21 December 2005 between the UK and Saudi Arabiangovernments. Under the terms of the signed document, Typhoon aircraft willreplace Tornado Air Defence Variant aircraft and others currently in servicewith the RSAF. A contract for the delivery of 72 Typhoon aircraft was agreed inthe year with delivery of the first aircraft scheduled for June 2009.Discussions are ongoing with the RSAF to define and agree the support andtraining solutions to enable their entry into service during 2009. Around 4,300 people are employed by the Group in the Kingdom of Saudi Arabia, ofwhom approximately half are Saudi nationals. The business is continuing todevelop its presence in Saudi Arabia, including the relocation of staff from theUK, and is helping to develop a greater indigenous capability in the Kingdom. The security of employees is the highest priority and progress is well advancedon new residential and office facilities as well as increased security measures.Employees are in occupation at the first new residential compound and officefacility. Through the core Saudi support programme, the business continues to providesignificant support to both the RSAF and RSNF operations and their operationalcapability. In particular, steps are being taken with the RSAF to maintain thecapability of the Tornado aircraft while extending its operational life. BAESystems investment and support for infrastructure development in the Kingdom ofSaudi Arabia includes the creation of training and youth welfare programmes. In December 2007, the first 22 RSAF Tornado Technicians to undertake a new 'multi-skilled training programme', graduated. The programme, designed inpartnership with the RSAF, is aimed at producing multi-skilled, rather thansingle-skilled, aircraft technicians. BAE Systems also makes valuable contributions to the communities in SaudiArabia. Youth sports partnership activities between Saudi Arabia and the UnitedKingdom began in 1987 with a formal Memorandum of Understanding on sportsexchange. Since that time, 1,000 Saudi coaches have successfully undertakenSports Coach UK qualification courses. In addition, national team training campsin a range of sports have taken place annually in both Saudi Arabia and the UK. Australia BAE Systems Australia continues to reinforce its position as a through-lifecapability partner to the Australian Defence Force (ADF). Work has commenced onthe Electronic Support Measures mid-life upgrade on the AP-3C aircraft, andcontinues under the second five-year support contract for the Australian HawkLead-In Fighter aircraft. A five-year support contract, with two five-year options, has been agreed withthe ADF for the ongoing upgrade, operation and support of the Jindaleeover-the-horizon radar. The Nulka active missile decoy has received exportapproval in principle from both the US and Australian authorities. To date theNulka active missile decoy has been fitted to over 100 ships across theAustralian, Canadian and US navies. BAE Systems has recently been down-selected by the Australian Government toprovide medium/heavy capability vehicles to replace the Army's wheeled tacticallogistic vehicle fleet. The business is a subcontractor to Boeing on the Wedgetail airborne, earlywarning and control system for the Royal Australian Air Force. The programme isbehind schedule and BAE Systems is engaged jointly with Boeing and the customerto re-baseline the programme. Saab (20.5% shareholding) Sales rose by 9.5% to SEK23bn (£1.7bn), with export sales accounting for 65%.Operating income rose to SEK2,607m (£193m), including non-recurring items ofSEK453m (£34m) producing an operating margin of 11.3%. Although reduced incomparison with 2006, order intake remained strong at SEK20.8bn (£1.5bn). Thisincluded orders from FMV to upgrade 31 Gripen fighters and helmet mounteddisplays, from the Royal Australian Navy for combat and fire control managementsystems, from Tenix Marine for combat management systems on Australian Navy'slanding helicopter dock class ships and from the Royal Netherlands Army for aMobile Battalion Combat Training Centre. Saab's order book at the end of the year was SEK47.3bn (£3.7bn) which included areduction for the Pakistan airborne surveillance system being re-negotiated tosupply fewer systems than was originally recorded in 2006. MBDA (37.5% interest) MBDA continued to maintain strong deliveries across a number of key programmes.Key domestic deliveries included the Brimstone air-launched anti-armour weapon,Mica air-to-air missile, Storm Shadow, SCALP and Taurus cruise missiles. Whilein the export market key deliveries included air weapons packages to Greece andUAE and Aster and Rapier short-range air defence missiles. Development programmes also progressed well. The six-nation Meteor beyond visualrange air-to-air missile continues to meet its development milestones with thesuccessful completion of the four key development milestones and a continuingactive firing campaign. The Principal Anti-Air Missile System (PAAMS) programme for the Royal Navy isnow entering firing trials in preparation for qualification while thetri-national MEADS area defence system is preparing for the critical designreview phase. MBDA is leading negotiations towards the Team Complex Weapons strategicpartnering agreement under the UK's Defence Industrial Strategy. During 2007 MBDA acquired the German rocket motor company Bayern Chemie GmbH,supplier of the ramjet for the Meteor missile. 1 including share of equity accounted investments 2 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 3 net cash inflow from operating activities after capital expenditure (net) andfinancial investment, and dividends from equity accounted investments 4 restated following changes to the Group's organisational structure HQ & Other Businesses HQ & Other Businesses, with 1,800 employees1, comprises the regional aircraftasset management and support activities, head office and UK shared servicesactivity, including research centres and property management. Financial highlights and key points - Agreements reached with the majority of reinsurers under the Group's FinancialRisk Insurance Programme (FRIP) - Regional Aircraft fleet valuation methodology changed 2007 2006 2005 Sales1 £243m £295m £471m EBITA2 £(155)m £(147)m £(118)m Cash inflow/(outflow)3 £181m £(225)m £(79)m Order intake1 £345m £267m £398m Order book1 £0.4bn £0.3bn £0.6bn Looking forward The leasing market for BAE Systems aircraft continues to remain challenging,with new markets likely to be dominated by higher risk customers. Supportrevenues are expected to remain stable but are dependent on maintaining aircraftin service. Following the charges taken in 2007 against the carrying value ofthe assets, future losses are expected to be reduced. HQ & Other Businesses During 2007, HQ & Other Businesses reported a loss of £155m (2006 loss £147m) onsales1 of £243m (2006 £295m) and had an operating cash inflow3 of £181m (2006outflow £225m). Of this, the reported loss for Regional Aircraft was £101m (2006loss £114m) with operating cash inflow of £175m (2006 outflow £66m). The reduction in sales when compared with 2006 was due to the disposal in March2006 of the Aerostructures business. During the period the Regional Aircraft leasing team made significant progresssecuring leases for 64 aircraft, including Avro RJ Jets to CityJet of Ireland,Blue1 of Denmark and British Airways. The market continues to be challenging.Compared with last year, revenues remained stable. A freighter conversionprogramme for the 146 Jet was launched after the success of a similar programmefor the ATP fleet. Much of the leasing business was underpinned by the Group's Financial RiskInsurance Programme (FRIP) which makes good shortfalls in actual lease incomeagainst originally estimated future income for a 15 year period from 1998 to2013. Since 2006, BAE Systems and certain of the reinsurers have been in disputeover several areas of the policy. During 2007, agreement was reached with almostall reinsurers and settlements have been paid by them based on the net presentvalue of estimated future claims. Arbitration proceedings now continue with oneremaining reinsurer. The Regional Aircraft loss for the year includes net charges of £76m (2006 £77m)against the carrying value of the assets of the business of which £61m was takenin the first half year. These charges include the effect of a change to theGroup's aircraft valuation methodology and will reduce the future depreciationcharged on these aircraft. A gain of £44m was recorded in respect of the disposal of the Group's 50%interest in the Xchanging Procurement Services and Xchanging HR Services jointventures. A charge of £35m was taken for an onerous lease provision following the subleaseof two vacated buildings at the Group's Farnborough site. 1 including share of equity accounted investments 2 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 3 net cash inflow/(outflow) from operating activities after capital expenditure(net) and financial investment, and dividends from equity accounted investments Consolidated income statementFor the year ended 31 December Notes 2007 Total Total £m 2007 2006 2006 £m £m £mContinuing operationsCombined sales of Group and equity accounted investments 15,710 13,765Less: share of equity accounted investments (1,401) (1,432)Revenue 14,309 12,333Operating costs (13,480) (11,763)Other income 209 371 Group operating profit excluding amortisation and impairment of intangible assets 1,335 1,080Amortisation (149) (105)Impairment (148) (34)Group operating profit 1,038 941Share of results of equity accounted investments excluding 142 127finance costs and taxation expenseFinancial income of equity accounted investments 35 21Taxation expense of equity accounted investments (38) (35)Share of results of equity accounted investments 6 139 113 1Earnings before amortisation and impairment of intangible 1,477 1,207assets, finance costs and taxation expense (EBITA)Amortisation (149) (105)Impairment (148) (34)Financial income of equity accounted investments 35 21Taxation expense of equity accounted investments (38) (35)Operating profit 1,177 1,054Finance costs 2Financial income 1,257 1,330Financial expense (1,199) (1,525) 58 (195) Profit before taxation 1,235 859Taxation expense 3UK taxation (201) (97)Overseas taxation (134) (116) (335) (213)Profit for the year from continuing operations 900 646Profit for the year from discontinued operations 4 22 993Profit for the year 922 1,639 Attributable to:BAE Systems shareholders 901 1,636Minority interests 21 3 922 1,639 Earnings per share 5Continuing operations:Basic earnings per share 26.0p 19.9pDiluted earnings per share 25.8p 19.8pDiscontinued operations:Basic earnings per share 0.6p 30.8pDiluted earnings per share 0.6p 29.4pTotal:Basic earnings per share 26.6p 50.7pDiluted earnings per share 26.4p 49.2p Consolidated balance sheet as at 31 December 2007 Notes 2007 2006 £m £mNon-current assetsIntangible assets 9,559 7,595Property, plant and equipment 1,774 1,746Investment property 113 123Equity accounted investments 6 781 671Other investments 6 11Other receivables 322 569Other financial assets 48 51Deferred tax assets 567 1,077 13,170 11,843Current assetsInventories 701 395Trade and other receivables including amounts due from customers for 2,933 2,253contract workCurrent tax 35 3Other investments 164 503Other financial assets 101 50Cash and cash equivalents 3,062 3,100 6,996 6,304Non-current assets and disposal groups held for sale 94 - 7,090 6,304Total assets 20,260 18,147Non-current liabilitiesLoans (2,197) (2,776)Trade and other payables (413) (465)Retirement benefit obligations 7 (1,629) (2,499)Other financial liabilities (26) (45)Deferred tax liabilities (40) (15)Provisions (399) (271) (4,704) (6,071)Current liabilitiesLoans and overdrafts (299) (334)Trade and other payables (8,245) (6,717)Other financial liabilities (71) (50)Current tax (499) (417)Provisions (410) (424) (9,524) (7,942)Liabilities directly associated with disposal groups held for sale (30) - (9,554) (7,942)Total liabilities (14,258) (14,013)Net assets 6,002 4,134Capital and reservesIssued share capital 9 90 81Share premium 9 1,222 841Equity option of convertible preference shares 9 - 76Other reserves 9 4,631 4,330Retained earnings 9 23 (1,211)Total equity attributable to equity holders of the parent 5,966 4,117Minority interests 9 36 17 Total equity 6,002 4,134 Approved by the Board on 20 February 2008 and signed on its behalf by: M J Turner Chief Executive G W Rose Group Finance Director Consolidated cash flow statementFor the year ended 31 December Notes 2007 2006 £m £m Profit for the year from continuing operations 900 646Profit for the year from discontinued operations 22 993 Profit for the year 922 1,639Taxation expense - continuing operations 335 213Taxation expense - discontinued operations - 4Share of results of equity accounted investments - continuing operations 6 (139) (113) Share of results of equity accounted investments - discontinued operations - (70)Net finance costs - continuing operations (58) 195Net finance costs - discontinued operations - (2)Depreciation, amortisation and impairment 610 422Loss/(gain) on disposal of property, plant and equipment 3 (60)Gain on disposal of investment property (47) (84)Gain on disposal of non-current other investments (8) -Gain on disposal of businesses - continuing operations (40) (13)Gain on disposal of businesses - discontinued operations (22) (925)Impairment of other investments - 2Cost of equity-settled employee share schemes 34 21Movements in provisions 52 47Decrease in liabilities for retirement benefit obligations (233) (834)(Increase)/decrease in working capital:Inventories (188) 28Trade and other receivables (271) (187)Trade and other payables 1,212 495Cash inflow from operating activities 2,162 778Interest paid (224) (315)Interest element of finance lease rental payments (6) (11)Taxation paid (112) (85)Net cash inflow from operating activities 1,820 367Dividends received from equity accounted investments - continuing operations 78 57Dividends received from equity accounted investments - discontinued operations - 88Interest received 175 139Purchases of property, plant and equipment (307) (419)Purchases of intangible assets (31) (27)Equity accounted investment funding (4) -Proceeds from sale of property, plant and equipment 13 135Proceeds from sale of investment property 53 174Proceeds from sale of non-current other investments 15 1Purchase of non-current other investments (1) (5)Purchase of subsidiary undertakings 4,10 (1,731) (12)Net cash acquired with subsidiary undertakings 10 6 -Purchase of equity accounted investments 10 (1) (4)Proceeds from sale of subsidiary undertakings 4,10 96 174Cash and cash equivalents disposed of with subsidiary undertakings 10 (1) (40)Proceeds from sale of equity accounted investments 4,10 57 1,212Proceeds from sale of Exchange Property - 557Net proceeds from sale/(purchase) of other deposits/securities 343 (468) Net cash (outflow)/inflow from investing activities (1,240) 1,562 Capital element of finance lease rental payments (25) (45)Proceeds from issue of share capital 9 805 53Purchase of treasury shares 9 (152) (112)Purchase of own shares 9 (50) (12)Equity dividends paid 11 (396) (346)Dividends paid to minority interests (1) -Dividends paid on preference shares (10) (20)Cash inflow from loans - 66Cash outflow from repayment of loans (782) (921) Net cash outflow from financing activities (611) (1,337) Net (decrease)/increase in cash and cash equivalents (31) 592Cash and cash equivalents at 1 January 3,074 2,491Effect of foreign exchange rate changes on cash and cash equivalents 3 (9) Cash and cash equivalents at 31 December 3,046 3,074 Comprising: Cash and cash equivalents 3,062 3,100Overdrafts (16) (26) Cash and cash equivalents at 31 December 3,046 3,074 Consolidated statement of recognised income and expenseFor the year ended 31 December Notes 2007 2006 £m £mCurrency translation on foreign currency net investments:Subsidiaries (1) (162)Equity accounted investments 6 43 (26)Amounts credited to hedging reserve 41 221Net actuarial gains on defined benefit pension schemes:Subsidiaries 544 692Equity accounted investments 24 72Fair value movements on available-for-sale investments 5 -Current tax on items taken directly to equity 96 21Deferred tax on items taken directly to equity:Subsidiaries (259) (227)Tax rate adjustment1 (19) -Equity accounted investments (6) (92)Recycling of fair value movements on disposal of available-for-sale investments (6) -Recycling of cumulative currency translation on disposal:Continuing operations - 3Discontinued operations - 11Recycling of cumulative net hedging reserve on disposal - discontinued operations - (448) Net income recognised directly in equity 462 65Profit for the year 922 1,639 Total recognised income and expense 1,384 1,704 Attributable to:Equity shareholders 1,363 1,701Minority interests 21 3 1,384 1,704 1 The UK current tax rate will be reduced from 30% to 28% with effect from 1April 2008. In line with this change, the rate applying to UK deferred taxassets and liabilities has also been reduced from 30% to 28%, creating a rateadjustment, which is partly reflected in the consolidated income statement andpartly in the consolidated statement of recognised income and expense. 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 2007 the Group has adopted IFRS 7, FinancialInstruments: Disclosures. This introduces new disclosures for financialinstruments, but does not have any impact on the consolidated income statementor balance sheet. The following amendments and interpretations to published standards areeffective for accounting periods beginning on or after 1 January 2007: - IFRIC 7, Applying the restatement approach under IAS 29; - IFRIC 8, Scope of IFRS 2; - IFRIC 9, Reassessment of embedded derivatives; - IFRIC 10, Interim financial reporting and impairment; and - Amendment to IAS 1, Presentation of financial statements - capitaldisclosures. 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 other relevant financial assets andfinancial liabilities (including derivative instruments). 2. Finance costs 2007 2006 £m £m Interest income 169 143Net present value adjustments 21 39Expected return on pension scheme assets 845 739Net gain on remeasurement of financial instruments 135 259Net gain on remeasurement of embedded derivatives - 3Gain on sale of available-for-sale investments 6 -Foreign exchange gains 81 147 Financial income 1,257 1,330 Interest expense:On bank loans and overdrafts (4) (9)On finance leases (6) (11)On bonds and other financial instruments (218) (277)On preference debt (13) (28) (241) (325)Facility fees (4) (4)Net present value adjustments (22) (31)Interest charge on pension scheme liabilities (753) (694)Net loss on remeasurement of investments at fair value through profit or loss - (42)Net loss on remeasurement of financial instruments at fair value through profit or loss (77) (172)Foreign exchange losses (102) (257) Financial expense (1,199) (1,525) Net finance costs 58 (195) Additional analysis of finance costs 2007 2006 £m £m Net finance costs - Group 58 (195)Net finance costs - share of equity accounted investments 35 21 93 (174)Analysed as:Net interest:Interest income 169 143Interest expense (241) (325)Facility fees (4) (4)Net present value adjustments (1) 8Gain on sale of available-for-sale investments 6 -Share of equity accounted investments 33 21 (38) (157)Other finance costs:Group:Net financing credit on pensions 92 45Other 37 (62)Share of equity accounted investments 2 - 93 (174) 3. Taxation expense 2007 2006 £m £mCurrent taxation expenseUK corporation taxCurrent tax (140) (91)Double tax relief 29 35Adjustment in respect of prior years (21) (93) (132) (149)Overseas tax chargesCurrent year (160) (91)Adjustment in respect of prior years - 15 (160) (76) (292) (225)Deferred taxation expenseUKOrigination and reversal of temporary differences (103) 25Adjustment in respect of prior years 39 27Tax rate adjustment1 (5) -OverseasOrigination and reversal of temporary differences 22 (49)Adjustment in respect of prior years 4 5Attributable to recoverable deferred tax assets - 4 (43) 12 Taxation expense (335) (213) 1 The UK current tax rate will be reduced from 30% to 28% with effect from 1April 2008. In line with this change, the rate applying to UK deferred taxassets and liabilities has also been reduced from 30% to 28%, creating a rateadjustment, which is partly reflected in the consolidated income statement andpartly in the consolidated statement of recognised income and expense. 4. Acquisitions and disposals Acquisitions On 31 July 2007, the Group acquired 100% of the issued share capital of ArmorHoldings, Inc. (Armor), in the US, for a consideration of £1,696m, excludingtransaction costs incurred by the acquiree (£26m). Goodwill arising onconsolidation amounted to £1,554m. Armor is a major manufacturer of tacticalwheeled vehicles and a leading provider of vehicle and individual armour systemsand survivability technologies for the military and for the law enforcement andcommercial security markets. In the period from acquisition to 31 December 2007, Armor contributed EBITA1 of£77m and profit after tax of £18m to the Group's consolidated results. Other acquisitions include the acquisition of Pitch Technologies AB and iSC fora consideration of £5m and £4m, respectively. In each case, 100% of the shareswere acquired. As a result of these acquisitions, an additional £9m of goodwillwas generated in the year. During 2006, the Group acquired 100% of the shares of National Sensor Systems,LLC. for £5m in cash and paid deferred consideration of £7m in respect of itsacquisition, in May 2005, of OMC Group. Disposals - continuing operations On 17 January 2007, the Group completed the sale of its 50% shareholdinginterest in HR Enterprise Limited and its subsidiary, Xchanging HR ServicesLimited, (together 'XHRS') to HR Holdco Limited (a company within the Xchanginggroup) for a cash consideration of £10m. On 6 March 2007, the Group completed the sale of its 50% shareholding interestin Xchanging Procurement Services (Holdco) Limited (XPS), to XUK Holdco (No.2)Limited (a company within the Xchanging group) for a cash consideration of £47m. On 20 August 2007, the Group completed the sale of its Inertial Productsbusiness to investment affiliates of J. F. Lehman & Company, the US privateequity firm, for a cash consideration of $140m (£70m), subject to potentialadjustment according to the level of working capital and net debt or net cash inthe business at closing. On 13 December 2007, the Group completed the sale of its Customer TrainingCentre (CTC) at Woodford, Manchester, UK, to Flight Academy UK Limited for acash consideration of £6m. Profit on disposal of businesses of £48m comprises the disposals of XHRS (£nil),XPS (£44m) and CTC (£4m). Loss on disposal of businesses of £8m comprises the disposals of InertialProducts (£6m) and the TEMPEST products business (£2m). Disposals - discontinued operations On 30 March 2007, the sale of the Group's remaining 25% interest in SELEX Sensorand Airbourne Systems SpA (SELEX) was completed following the exercise byFinmeccanica SpA of its call option granted as part of the original disposaltransaction in 2005. Net proceeds of £24m comprise the consideration of £277m,less £253m which was assigned to the BAE Systems 2000 Pension Plan in 2006. A profit of £22m was recognised during the year upon settlement of warrantiesand similar obligations. The results from discontinued operations, which have been included in theconsolidated income statement, are shown below. The results for the year ended31 December 2006 include the results of Airbus SAS for the period to disposal on13 October 2006. 2007 2006 £m £m Revenue - -Expenses - - EBITA1 - -Share of results of equity accounted investments excluding finance costs and taxation expense - 144Finance costs of equity accounted investments - (25)Taxation expense of equity accounted investments - (49)Share of results of equity accounted investments - 70Financial income, net - 2 Profit before taxation - 72Taxation expense - (4) Profit for the year - 68Profit on disposal of discontinued operations 22 925 Profit for the year from discontinued operations 22 993 Proceeds from the sale of subsidiary undertakings in the consolidated cash flowstatement of £96m in 2007 comprise the disposals of Inertial Products (£70m),SELEX (£24m), CTC (£6m) and TEMPEST (£1m), less transaction costs (£5m). 1 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 5. Earnings per share 2007 2006 £m Basic £m Diluted £m Basic £m Diluted pence pence pence pence per per per per share share share shareProfit for the year attributable to equity 901 901 1,636 1,636shareholders Interest on the debt instrument of the - 13 - 28convertible preference sharesProfit for the year after adjusting for 901 26.6 914 26.4 1,636 50.7 1,664 49.2interest on the debt instrument of theconvertible preference sharesRepresented by:Continuing operations 879 26.0 892 25.8 643 19.9 671 19.8Discontinued operations 22 0.6 22 0.6 993 30.8 993 29.4Add back/(deduct):Net financing credit on pensions, post tax (68) (68) (33) (33)Uplift on acquired inventories, post tax 9 9 - -Market value movements on derivatives, post (29) (29) 55 55taxAmortisation and impairment of intangible 110 110 79 79assets, post taxImpairment of goodwill 148 148 32 32 Underlying earnings 1,071 31.6 1,084 31.3 1,769 54.9 1,797 53.1 Represented by:Continuing operations 1,049 31.0 1,062 30.7 767 23.8 795 23.5Discontinued operations 22 0.6 22 0.6 1,002 31.1 1,002 29.6 1,071 31.6 1,084 31.3 1,769 54.9 1,797 53.1 Underlying earnings excluding profit on 844 26.2 872 25.8disposal of Airbus SAS (2006 £925m)Represented by:Continuing operations 767 23.8 795 23.5Discontinued operations 77 2.4 77 2.3 844 26.2 872 25.8 Millions Millions Millions Millions Weighted average number of shares used in 3,386 3,386 3,225 3,225calculating basic earnings per shareAdd:Incremental shares in respect of employee share 24 32schemesIncremental shares in respect of convertible 56 125preference sharesWeighted average number of shares used in calculating diluted earnings per share 3,466 3,382 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. In accordance with IAS 33, the diluted earnings per share are without referenceto adjustments in respect of outstanding share options and convertiblepreference shares where the impact would be anti-dilutive. 6. Equity accounted investments Carrying value of equity accounted investments Share of net Purchased Carrying assets goodwill value £m £m £m At 1 January 2006 317 1,404 1,721Share of results after tax - continuing operations 113 - 113Share of results after tax - discontinued operations 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 144 - 144taxActuarial gains on defined benefit pension schemes, net of tax 59 - 59Revaluation of net assets acquired by equity accounted investments1 5 - 5Foreign exchange adjustment (24) (2) (26) At 31 December 2006 238 433 671Share of results after tax - continuing operations 139 - 139Acquired through acquisition 1 - 1Adjustment to provisional fair values 3 (3) -Disposal (10) - (10)Dividends (78) - (78)Market value adjustments in respect of derivative financial instruments, net of (2) - (2)taxActuarial gains on defined benefit pension schemes, net of tax 17 - 17Foreign exchange adjustment 13 30 43 At 31 December 2007 321 460 781 1 The revaluation gain in 2006 arose as a result of MBDA SAS acquiring controlof LFK GmbH, which was previously accounted for as a trade investment. The £5mgain reflects a fair value uplift in respect of the carrying value of theoriginal investment. The gain is reflected as a credit to equity (note 9). Included within purchased goodwill is £110m (2006 £113m) relating to thegoodwill arising on acquisitions made by the Group's equity accountedinvestments subsequent to their acquisition by the Group. The market value of the Group's shareholding in Saab AB at 31 December 2007 was£225m (2006 £350m). 7. Retirement benefit obligations Amounts recognised on the balance sheet 2007 2006 UK defined US and US Total UK US and US Total benefit other health £m defined other healthcare £m pension pension care benefit pension plans plans plans plans pension plans £m £m £m £m £m plans £mPresent value of unfunded obligations (1) (97) (13) (111) - (80) (15) (95)Present value of funded obligations (15,099) (1,912) (103) (17,114) (15,445) (1,931) (111) (17,487)Fair value of plan assets 13,192 1,918 95 15,205 12,579 1,710 91 14,380 Total IAS 19 deficit, net (1,908) (91) (21) (2,020) (2,866) (301) (35) (3,202)Allocated to equity accounted 450 - - 450 774 - - 774investments and other participatingemployers1Group's share of IAS 19 deficit, net (1,458) (91) (21) (1,570) (2,092) (301) (35) (2,428) Group's share of IAS 19 deficit of equity accounted investments (49) - - (49) (83) - - (83) Represented by:Pension prepayments (within trade and other receivables) 14 32 13 59 35 25 11 71Retirement benefit obligations (1,472) (123) (34) (1,629) (2,127) (326) (46) (2,499) Group's share of IAS 19 deficit, net (1,458) (91) (21) (1,570) (2,092) (301) (35) (2,428) 1 Certain of the Group's equity accounted investments participate in the Group'sdefined benefit plans as well as Airbus SAS, the Group's share of which wasdisposed of during the year ended 31 December 2006. As these plans aremulti-employer plans the Group has allocated an appropriate share of the IAS 19pension deficit to the equity accounted investments and to Airbus SAS based upona reasonable and consistent allocation method intended to reflect a reasonableapproximation of their share of the deficit. The Group's share of the IAS 19pension deficit allocated to the equity accounted investments is included in thebalance sheet within equity accounted investments. 8. Aircraft financing contingent liabilities Included within provisions is an exposure of £70m as discussed below: 2007 2006 £m £m Potential future cash flow payments in respect of aircraft financing obligations 134 191Anticipated aircraft values (55) (159)Adjustments to net present values (9) (5)Net exposure provided 70 27 The Group has provided residual value guarantees (RVGs) in respect of certaincommercial aircraft sold. At 31 December 2007 the Group's exposure to makefuture payments in respect of these arrangements was £134m (2006 £191m). TheGroup's net exposure to these guarantees is covered by the provisions held andthe residual values of the related aircraft. The net exposure has increased during the year as a result of the re-assessmentof anticipated aircraft values and the settlement of the commitments of sixRVGs. 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. 9. Reconciliation of movement in capital and reserves Attributable to equity holders of the parent Issued Share Equity Other Retained Total Minority Total share premium option of reserves earnings £m interests equity capital £m preference £m £m £m £m £m shares £m Balance at 1 January 2006 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 payments1 - - - - 46 46 - 46Share options:Proceeds from shares issued 1 52 - - - 53 - 53Purchase 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 investments (note 6)Reclassification - - - 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 4,134Total recognised income and expense - - - 72 1,291 1,363 21 1,384Placing of shares (net of costs) 5 - - - 736 741 - 741Share-based payments - - - - 34 34 - 34Share options:Proceeds from shares issued 1 63 - - - 64 - 64Purchase of own shares - - - - (50) (50) - (50)Conversion of preference shares 3 318 (76) 229 (229) 245 - 245Purchase of treasury shares - - - - (152) (152) - (152)Other - - - - - - (1) (1)Ordinary share dividends - - - - (396) (396) (1) (397) At 31 December 2007 90 1,222 - 4,631 23 5,966 36 6,002 Other reserves includes a merger reserve of £4,589m (2006 £4,589m), a statutoryreserve of £202m (2006 £202m), a translation reserve of £217m debit (2006 £259mdebit) and a hedging reserve of £57m (2006 £27m). Under Section 4 of the BritishAerospace Act 1980 the statutory reserve may only be applied in paying upunissued shares of the Group to be allotted to members of the Group as fullypaid bonus shares. 1 The credit in respect of share-based payments for the year ended 31 December2006 comprises £21m in respect of equity-settled share-based payment schemes,£21m relating to a change in the terms of certain share-based payment schemesfrom cash-settled to equity-settled and £4m relating to discontinued operations. 10. Cash flows in relation to acquisitions and disposals Equity accounted Subsidiaries investments Armor Other Total Inertial Other Total XPS/ Holdings acquisitions1 acquisitions Products SELEX disposals1 disposals XHRS Other Total# £m £m £m £m £m £m £m £m £m £mCash (consideration)/ proceeds (1,696) (9) (1,705) 65 24 7 96 57 (1) (1,553)Transaction costs (26) - (26) - - - - - - (26)incurred by acquiree (1,722) (9) (1,731) 65 24 7 96 57 (1) (1,579) Cash and cash equivalents net ofoverdrafts acquired/(disposed) 6 - 6 (1) - - (1) - - 5 Acquisitions and disposals (1,716) (9) (1,725) 64 24 7 95 57 (1) (1,574)Debt acquired on acquisition ofsubsidiary (538) - (538) - - - - - - (538) (2,254) (9) (2,263) 64 24 7 95 57 (1) (2,112) 1 other acquisitions and disposals are described in note 4 11. Dividends 2007 2006 £m £mEquity dividendsPrior year final 6.9p dividend per ordinary share paid in the year (2006 6.3p) 221 203Interim 5.0p dividend per ordinary share paid in the year (2006 4.4p) 175 143 396 346 After the balance sheet date, the directors proposed a final dividend of 7.8p(2006 6.9p). The dividend, which is subject to shareholder approval, will bepaid on 2 June 2008 to shareholders registered on 18 April 2008. The ex-dividenddate is 16 April 2008. 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 9 May 2008. 12. Events after the balance sheet date In January 2008, BAE Systems entered into an agreement to acquire Tenix Defence,a leading Australian defence contractor, for up to A$775m (£342m) in cash. Theacquisition of Tenix Defence will more than double BAE Systems' presence inAustralia making it the largest in-country defence supplier to the AustralianDefence Force. 13. Annual General Meeting This year's Annual General Meeting will be held on 7 May 2008. 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 March2008. 14. Other information The financial information for the years ended 31 December 2007 and 31 December2006 contained in this preliminary announcement was approved by the Board on 20February 2008. 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 2006 have been delivered tothe Registrar of Companies. Statutory accounts for the year ended 31 December2007 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 ExchangeRelated Shares:
BAE Systems