13th Sep 2006 07:02
BAE SYSTEMS PLC13 September 2006 BAE Systems plc Interim Report 2006 Results in brief Six months to 30 Six months to 30 June 2006 June 2005Results from continuing operationsSales(1) £8,214m £6,773mEBITA(2) £788m £566mOperating profit £653m £488mUnderlying earnings per share(3) 15.4p 10.7pBasic earnings per share(4) 12.6p 10.9p Other results including discontinued operationsInterim dividend per share 4.4p 4.0pCash (outflow)/inflow from operating activities £(293)m £586mNet debt as defined by the Group £1,582m £2,239mOrder book(5) £56.9bn £52.5bn Highlights - Sales(1) up 21% at £8,214m - EBITA(2) up 39% at £788m, including £63m one-off accounting gain in the US - Underlying earnings per share(3) up 44% at 15.4p - US businesses delivering good organic growth - United Defense integration complete - Good programme execution - Airbus share sale recommended - UK pension funding deficit addressed - Interim dividend increased 10% to 4.4p Outlook The good first half results underpin the outlook for the full year; that is formodest organic growth from our defence businesses together with a full yearcontribution from the former United Defense activities. Some weakening of theAirbus contribution is anticipated in the second half following a good firsthalf performance and before taking account of the timing of the recommendeddisposal of the Group's 20% shareholding in that business. We expect to turnoperating profits into cash in the second half with this year's additionalcontributions to the UK pension schemes mostly concluded in the first half. "BAE Systems has delivered a good first half financial performance, with goodprogramme schedule and cost execution right across the Group." Mike Turner, Chief Executive (1) including share of equity accounted investments' sales (2) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (3) earnings per share excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and uplift on acquired inventories (see note 5) (4) basic earnings per share in accordance with International Accounting Standard 33 (5) including share of equity accounted investments' order books and after the elimination of intra-group orders of £0.9bn (2005 £1.0bn) Interim results statement BAE Systems continued to build on the successes of 2005 with further goodprogress in the first six months of 2006. The results reflect good programmeexecution and schedule adherence in the businesses together with the benefit ofsound implementation of Group strategy. Sales for the six months to June 2006 of £8,214m increased 21% from £6,773m forthe same period in 2005. EBITA(1) increased 39% to £788m (2005 £566m) and return on sales increased 1.2%to 9.6% (2005 8.4%). Included within EBITA(1) is a £63m one-off accounting gainin the Electronics, Intelligence & Support business group arising from areduction in the net pension liability following the changes to the calculationof final US pensionable salaries. These results reflect the benefit of six months of trading from the formerUnited Defense activities acquired in June 2005, which contributed sales of£777m and EBITA(1) of £85m in the period. Integration of these activities is nowcomplete and the acquisition has achieved the financial benefits planned for itsfirst full year of ownership. Order intake continues to support the acquisitioncase. The publication in December last year of the UK government's Defence IndustrialStrategy (DIS) was a significant step forward. The paper details a strategy thatidentifies key UK technologies required to deliver capability for the UK's armedforces and outlines a framework for partnership between industry and governmentto deliver that capability. Although challenges will result from this newlydefined path, BAE Systems welcomes this strategy and is committed to ensuringits success and believes that, through its implementation, benefits will flow toboth industry and its customer. BAE Systems now has a well established, growing and successful through-lifecapability business in the air sector, working closely with both the UK Ministryof Defence (MoD) and the Royal Air Force (RAF). Progress also has been made inthe land systems sector, developing a similar armoured vehicle through-lifesupport partnership with the Defence Logistics Organisation and the British Armyto that pioneered in the air sector. Opportunities are being developed also inthe UK naval sector. In April, BAE Systems and VT Group announced they were discussing thepossibility of a joint bid for Babcock International plc. Although no bidresulted from these discussions, BAE Systems continues to review options forconsolidation of the naval industry in the UK with the aim of delivering bettervalue for its customers and enhanced returns to shareholders consistent with theDIS. BAE Systems' strategy to build on its strong customer relationship in SaudiArabia, by establishing significant business operations and capability withinthe Kingdom, has made good progress. The government-to-government agreementsigned in December 2005 established a partnership between the UK and SaudiArabia for the modernisation of the Kingdom's armed forces and was a keydevelopment in this strategy. In August, the required commercial principles,which will effectively initiate the purchase of Typhoon aircraft and theassociated commitment to the industrial plan, were agreed. In April, BAE Systems announced that it had entered into discussions with EADSregarding the disposal of its minority shareholding in Airbus. In July, BAESystems announced that the price payable by EADS in relation to the proposeddisposal of the Airbus shareholding had been determined by an independent expertto be €2.75bn (£1.9bn). On 6 September the board of directors announced thatthey considered the proposed disposal to be in the best interest of BAE Systemsand its shareholders as a whole. The recommended disposal requires the approval of ordinary shareholders at anExtraordinary General Meeting, details of which have been included in thecircular issued to shareholders(2). Following repayment of debts outstanding between BAE Systems and Airbus atcompletion and the payment of transaction related costs, net cash proceeds toBAE Systems are estimated to be approximately £1.2bn. Subject to shareholders agreeing to its disposal, the Board proposes to return£500m to shareholders by way of on-market purchases of shares followingcompletion of the sale of the Airbus interest. The Board also intends to consultwith the trustees of the Group's pension schemes and the Pensions Regulator withregard to any further investment in those schemes. The remaining proceeds, together with the Group's other cash resources, will beavailable for debt repayments and future investment in the Group, and to pursueselected value enhancing acquisitions in the core business. Resolution of the actuarial funding deficit in BAE Systems' UK pension schemeshas been a priority. In June, BAE Systems announced that it had agreed with thetrustees of the main UK pension schemes a package of measures that, over time,will eliminate the current actuarial funding deficit. These measures includeincreased annual company and employee contribution rates, one-off companycontributions of cash and assets, together with a reduction to pensionliabilities from revised retirement benefits. In addressing the funding requirement of the schemes, the new arrangements hadthe immediate impact of reducing the deficit on the balance sheet. These changescontributed £0.6bn of the reduction in the net retirement benefit obligations onthe balance sheet (as defined under IAS 19) from £4.1bn at 31 December 2005 to£3.1bn at 30 June 2006, the remainder of the decrease being primarilyattributable to an increase in discount rates. (1) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (2) see note 13 Earnings per share Underlying earnings per share(3) for the half year increased by 44% to 15.4p when compared with the equivalent period in 2005. Basic earnings per share in accordance with International Accounting Standard 33Earnings per Share, from continuing operations, increased by 16% to 12.6p (200510.9p). Finance costs Finance costs, including the Group's share of the finance costs of equityaccounted investments, were £174m (2005 £56m). The underlying interest chargewas £102m (2005 £96m). Net charges arising from pension accounting,marked-to-market revaluations of financial instruments and foreign currencymovements were £72m (2005 net gain £40m). Underlying interest cover based on EBITA2 increased from 5.9 times to 7.7 times. Taxation The Group's effective tax rate for the period was 27% (2005 29%). The reductionin the rate arises from the ongoing benefit of the UK research and developmenttax credit scheme and benefits from the one-off pension contributions made inthe period. Dividend The Board has declared an interim dividend of 4.4p per share (2005 4.0p)representing an increase of 10%. The dividend is covered 3.5 times byearnings(3) from continuing operations (2005 2.7 times) consistent with thepolicy of growing the dividend whilst maintaining a long-term sustainableearnings cover of approximately two times. Cash flows Cash outflow from operating activities was £293m (2005 inflow £586m) whichincludes £406m one-off contributions into the UK pension schemes, representingcash of £164m and proceeds from the sale of property of £242m. There was an inflow from net capital expenditure and financial investment of£63m (2005 outflow £175m) reflecting the receipt of £242m from the disposal ofcompany property to fund the additional contributions made to the UK pensionfunds (see note 6). Excluding this item, the underlying net capital expenditureand financial investment cash outflow was £179m. The resulting operating business cash outflow of £120m (2005 inflow £493m) gaverise to free cash outflow, after interest, preference dividends and taxation, of£287m (2005 inflow £421m). Excluding the above one-off pension contributions, operating business cashinflow was £44m. Net debt of the Group at 30 June 2006 was £1,582m, an increase of £305m (2005£1,288m) from £1,277m at the start of the year. Critical accounting policies The Group's critical accounting policies are outlined in the Annual Report 2005.These include: - retirement benefit plans; - contract revenue and profit recognition; - regional aircraft valuations; and - intangible assets. Summarised income statement from continuing operations Six months Six months to 30 June to 30 June 2006 2005 Unaudited Unaudited £m £m Sales(1) 8,214 6,773 EBITA(2) - subsidiaries 552 363EBITA(2) - equity accounted investments 236 203 EBITA(2) 788 566Amortisation (53) (19)Net finance costs(1) (174) (56)Taxation expense(1) (155) (147) Profit for the period 406 344 Basic earnings per share(4) 12.6p 10.9pUnderlying earnings per share(3) 15.4p 10.7pDividend per share 4.4p 4.0p Exchange rates Six months Six months to 30 June to 30 June 2006 2005 £/• - average 1.455 1.459£/$ - average 1.791 1.873£/• - period end 1.446 1.481£/$ - period end 1.849 1.792 Segmental analysis Sales(1) EBITA(2) Six months Six months Six months Six months to 30 June to 30 June to 30 June to 30 June 2006 2005 2006 2005 Unaudited Unaudited Unaudited Unaudited £m £m £m £m Electronics, Intelligence & Support 2,090 1,715 260 151Land & Armaments 892 337 76 8Programmes 1,186 1,207 57 88Customer Solutions & Support 1,462 1,279 215 185Integrated Systems & Partnerships 798 722 57 17Commercial Aerospace 1,984 1,660 155 154HQ and other businesses 32 34 (32) (37)Intra-group (230) (181) - - 8,214 6,773 788 566 Reconciliation of cash flow from operating activities to net debt Excluding one-off One-off Six months to Six months pension pension 30 June to 30 June funding funding 2006 2005 Unaudited Unaudited Unaudited Unaudited £m £m £m £m Cash inflow/(outflow) from operating activities 113 (406) (293) 586Capital expenditure (net) and financial investment (179) 242 63 (175)Dividends from equity accounted investments 110 - 110 82 Operating business cash inflow/(outflow) 44 (164) (120) 493 Interest and preference dividends (112) (55)Taxation (55) (17) Free cash (outflow)/inflow (287) 421Acquisitions and disposals 80 (1,517)Debt acquired on acquisition of subsidiary undertaking - (283)Proceeds from issue of share capital 26 358Equity dividends paid (203) (186)Other non-cash movements (95) 56Foreign exchange 188 (131)Movement in cash received on customers' account(5) (14) (6) Increase in net debt (305) (1,288)Opening net debt as defined by the Group (1,277) (668)Adoption of IAS 32 and IAS 39 - (283) Closing net debt as defined by the Group (1,582) (2,239) Net debt as defined by the Group Six months to Six months 30 June to 30 June 2006 2005 Unaudited Unaudited £m £m Other investments - current 568 673Cash and cash equivalents 2,116 1,705 2,684 2,378Loans - non-current (3,313) (2,509) Loans - current (849) (1,787) Overdrafts - current (37) (297) Loans and overdrafts - current (886) (2,084)Cash received on customers' account(5) (included within payables) (67) (24) (4,266) (4,617)Closing net debt as defined by the Group (1,582) (2,239) Operating business cash flow Six months to Six months 30 June to 30 June 2006 2005 Unaudited Unaudited £m £m Electronics, Intelligence & Support 176 173Land & Armaments (50) (50)Programmes (33) (88)Customer Solutions & Support 2 429Integrated Systems & Partnerships (33) (106)Commercial Aerospace 57 294HQ and other businesses (239) (130)Discontinued businesses - (29) Operating business cash flow (120) 493 (1) including share of equity accounted investments (2) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (3) earnings per share excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and uplift on acquired inventories (see note 5) (4) basic earnings per share in accordance with International Accounting Standard 33 (5) cash on customers' account is the unexpended cash received from customers in advance of delivery which is subject to advance payment guarantees unrelated to Company performance Business group reviews Electronics, Intelligence & Support Business overview Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited Sales(1) £2,090m £1,715m £3,697mEBITA(2) £260m £151m £324mCash inflow(3) £176m £173m £323mNumber of employees(1) 31,500 32,800 32,900Order book(1) £3.3bn £3.4bn £3.5bn The Electronics, Intelligence & Support business group, headquartered in the US,is a provider of aerospace and defence systems, sub-systems and services. Thebusiness group comprises two operating groups; Electronics & IntegratedSolutions and Customer Solutions. In the first half of 2006, Electronics, Intelligence & Support achieved EBITA(2)of £260m (2005 £151m) on sales(1) of £2,090m (2005 £1,715m). The business groupgenerated operating cash inflow3 of £176m (2005 £173m). EBITA(2) includes a £63m accounting gain relating to a revision to US pensionbenefits arising from the changes to the calculation of final pensionablesalaries. The acquired United Defense business contributed sales1 of £159m and EBITA(2) of£14m. Electronics & Integrated Solutions Electronics & Integrated Solutions designs, develops and produces electronicsystems and sub-systems for a wide range of military and commercialapplications. The business focuses on five primary capabilities: communications,with emphasis on integrated C4ISR4 and tactical networking; electronic warfare(EW), including information operations; avionics, flight and engine controls;sensor systems; and intelligence systems. In April, Electronics & Integrated Solutions delivered the first EW system forthe F-35 Lightning II, the recently re-named F-35 Joint Strike Fighter (JSF),and in May also delivered the first digital electronic warfare system for the USAir Force F22 Raptor fighter. In May, BAE Systems received a sole-source contract to provide its CommonMissile Warning System (CMWS) to protect US Army helicopters and aircraft fromheat-seeking missiles, which could represent $1.4bn (£0.8bn) in future revenue.CMWS is also part of a larger protection system - Advanced Threat InfraredCountermeasures (ATIRCM). A civil version of ATIRCM is being tested on civilianjets to determine its defence applicability against shoulder-fired man-portableair defence systems (MANPADS). In April, BAE Systems was selected as the prime contractor for the US Army'sAdvanced Precision Kill Weapon System II (APKWS II) laser-guided rocket, whichcould represent $2bn (£1.1bn) in future production revenue. Electronics & Integrated Solutions opened its first Readiness and Sustainmentcentre adjacent to Robins Air Force Base in Georgia to support and upgrade USAir Force equipment as the business increases its focus on this segment of themarket. Customer Solutions The US Customer Solutions business focuses on three primary capabilities:information technology services; technical services and support, includingengineering operations and maintenance, logistics and integrated servicesolutions; and a full spectrum of ship repair services. BAE Systems Information Technology serves the large $60bn (£32bn) US governmentinformation technology market. The business was awarded a prime contract for theDepartment of Homeland Security's Enterprise Acquisition Gateway for LeadingEdge solutions (EAGLE) programme, a multiple award programme that couldrepresent $250m (£135m) of future revenue. In the Technical Services business, BAE Systems was awarded the Solid StatePhased Array Radar contract, with a potential value of $509m (£275m), to provideoperations, maintenance and support services on a sophisticated network ofmissile warning and space surveillance sites. BAE Systems now operates all ofthe US Air Force Space Command's early warning radar operation and maintenancecontracts worldwide. Customer Solutions provides a full array of shipyard services in support of USNavy vessels including non-nuclear ship repair, alterations and life extendingupgrades. In June, the business was awarded a services contract for guidedmissile cruiser class ships, with a potential value of $168m (£91m). Looking Forward Although tighter future defence spending is anticipated, the business group iseffectively positioned to grow faster than the overall market given its stronglegacy positions, its focus on rapidly providing armed forces with the missioncapability they require, and increased focus on readiness and sustainment.Electronics, Intelligence & Support is continuing its reorganisation efforts toenable it to compete more effectively in the future. Land & ArmamentsBusiness overview Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited Sales(1) £892m £337m £1,270mEBITA(2) £76m £8m £42mCash (outflow)/inflow(3) £(50)m £(50)m £168mNumber of employees(1) 11,200 10,300 10,600Order book(1) £4.2bn £4.4bn £4.4bn The Land & Armaments business group, headquartered in the US, is a leader in thedesign, development, production and through-life support and upgrade of armouredcombat vehicles, naval guns, missile launchers, artillery systems andintelligent munitions. In the first half of 2006, Land & Armaments achieved EBITA(2) of £76m (2005 £8m)on sales(1) of £892m (2005 £337m). The business group had an operating cashoutflow(3) of £50m (2005 £50m). The acquired United Defense business contributed sales1 of £618m and EBITA(2) of£71m. US operations The US business includes US Army contracts for the refurbishment and upgrade ofM2 Bradley and M113 fighting vehicles. These contracts restore systems tocombat-ready condition following extensive operational use, and remanufacturethem to the most advanced configurations. Total orders received in the six months to June 2006 totalled $1,060m (£592m). In May 2006, Land & Armaments was awarded a $180m (£97m) contract for themanufacture of 378 light armoured vehicles. These new medium four-by-fourwheeled vehicles are designed to protect Iraqi armed forces against roadsidebombs and mine blasts. If all contract options are exercised, delivery orderscould total 1,050 vehicles. Land & Armaments continued its progress on the Future Combat Systems MannedGround Vehicles and Armed Robotic Vehicles with the successful completion ofsystems functional review and the commencement of preliminary design.Fabrication and integration of the first Non-Line-of-Sight-Cannon prototype hascommenced and remains on track to deliver prototypes to the US Army in 2008 andfor system fielding in 2010. Development of the 155mm Advanced Gun System and the Long Range Land AttackProjectile for the US Navy's new destroyer, DDG1000, continues. In addition, BAESystems is designing and testing a new Vertical Launching System (VLS), Mk 57.This next generation VLS will provide capabilities for the DDG1000 ship tolaunch a wide range of missile designs. In the medium calibre naval gun system market, the 57mm gun has been selectedfor the DDG1000 destroyer, the US Navy's Littoral Combat Ship and the US CoastGuard's Deepwater programme. UK operations The land sector is on target to achieve all milestones included within thearmoured fighting vehicle partnering agreement with the UK MoD under DIS. The UK MoD is still considering options for progressing the acquisition strategyfor the Future Rapid Effects System (FRES) programme. In the meantime, BAESystems is funding investment to demonstrate technologies applicable to futureland systems and keep the programme moving forward. In February, the UK business received funding for the M777 Lightweight ArtillerySystem. Initial production deliveries to the US Army and Marine Corps continuewith full rate production expected to commence later this year. The M777Lightweight Artillery System has also been selected by Canada for deployment inAfghanistan. The business has also received orders under urgent operationalrequirements for the fighting vehicle, FV430. There were continued operating losses in the UK munitions business. Discussionson new contracting arrangements with the UK MoD are ongoing. South African operations The requirement for mine-protected vehicles has continued to generate new ordersfor the RG-31 vehicle built by the Company's South African subsidiary, OMC. Swedish operations In the area of intelligent munitions for artillery and mortar systems, Land &Armaments continues its leading role in the accelerated fielding of Excalibur toUS and Canadian forces in Iraq and Afghanistan. The first Swedish guided firingof the 155mm Excalibur round was successfully carried out in May 2006 andproduction contract funding was awarded in July 2006. Land & Armaments was awarded a £19m order from Sweden to supply 52 Bv206Sarmoured all terrain vehicles and work continues on the CV90 family of vehicles. Looking forward The Land & Armaments business has seen strong growth in the US paced by theongoing conflicts in Iraq and Afghanistan. The level of activity in theseregions will continue to drive near-term growth, but it is anticipated thatthese requirements will stabilise at projected 2006 levels. In the longer term,the Future Combat System in the US and the FRES programme in the UK representgrowth opportunities. In addition, actions to address current under performancein the UK operations are being implemented and a return to profitability nextyear is expected. Programmes Business overview Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited Sales(1) £1,186m £1,207m £2,819mEBITA(2) £57m £88m £133mCash (outflow)/inflow3 £(33)m £(88)m £285mNumber of employees1 16,800 15,700 16,200Order book1 £12.0bn £12.9bn £12.3bn The Programmes business group is a major contributor to the defence of the UK,with the MoD its principal customer. The business group comprises the Group'sair systems, naval ships and submarines activities. In the first half of 2006, Programmes achieved EBITA2 of £57m (2005 £88m) onsales(1) of £1,186m (2005 £1,207m). The business group had an operating cashoutflow(3) of £33m (2005 £88m). The result for 2005 included a £30m benefit fromrisk retirement. Air Systems A total of 86 Typhoon aircraft had been accepted at the end of June by the airforces of the four partner nations. In the UK, the RAF now has two squadronsfully formed, with a third being built up at RAF Coningsby. BAE Systemscontinues to provide support to RAF training and operational build up. Earlywork has been commissioned by the four nations further to enhance the capabilityof the aircraft. In addition to the contract for the sale of 18 Typhoon aircraft to Austria,further export possibilities are being pursued. A government-to-governmentunderstanding between the UK and the Kingdom of Saudi Arabia has been reachedwhich furthers both countries' defence interests and includes the procurement ofTyphoon aircraft. Hawk contracts with India and Bahrain are progressing to schedule with the firstBahrain aircraft accepted in June. Initial aircraft acceptance also has beenachieved on the South Africa contract. Confirmation of the UK MoD Advanced JetTrainer production order is expected in the second half of 2006. The Nimrod MRA4 design and development programme continues to achieve its keymilestones on schedule. The programme remains on target to meet the productmaturity assumptions contained within the production bid submitted in July 2005.Customer long lead funding enabled initial build to commence ahead of theproduction award received in July 2006. Air Systems is partnered with Lockheed Martin and Northrop Grumman on the F-35Joint Strike Fighter (JSF), Lightning II, programme, with responsibility for thedesign and manufacture of the rear fuselage and empennage. During February, theprogramme completed and passed its Critical Design Review for the conventionaltake off and landing (CTOL) variant and the short take off and vertical landing(STOVL) variant. This was an important milestone for the programme,demonstrating good progression of the detailed design. Following the assembly of the aircraft's major units, including the BAE Systemsrear fuselage and empennage units, the first CTOL aircraft is undergoing groundtesting prior to first flight scheduled for the last quarter of 2006. Inaddition, assembly started on the aft fuselage for the STOVL variant, in May, asprogrammed. Preparation for initial production of JSF has progressed in the period, withcontract receipt for long lead activities. Full contract award for the initialproduction quantities is expected in 2007. BAE Systems has been selected as prime contractor in support of the UK MoD'scapability assessment with respect to the potential role of Unmanned AirVehicles (UAVs) in future operational roles. Supporting this activity, duringthe first half of 2006, the Company successfully delivered on a series ofcontracts for de-risking work. The MoD is currently assessing a BAE Systems proposal for a programme todemonstrate UAV technologies and this is expected to commence in the second halfof 2006. Naval Ships and Submarines Since the launch in February of the first of class Type 45 destroyer, HMSDaring, the ship has moved into dry dock to complete fitting out prior to thestart of 'setting to work' of major systems later this year. All hull sectionsfor the second of class, HMS Dauntless, have been completed and launch isplanned for January 2007. The required build efficiencies are being achieved onthe second and third ships. Award of the Type 45 Batch 2 order to extend the contract to six full warshipsis now expected in 2007. The second Landing Ship Dock (Auxiliary), Cardigan Bay, was handed over inAugust, following sea trials early this year. The fourth ship, Lyme Bay, hasbeen relocated to the Clyde where it will be completed. The arbitration process following the non-acceptance by Brunei of the threeOffshore Patrol Vessels commenced in June, with an award not expected beforeOctober. An initial order for the Demonstration Phase of CVF, the UK's new aircraftcarrier programme, has been received, totalling £30m. There are two keyactivities within this phase. The first is to progress design, the second is towork in the Alliance to support a satisfactory 'Main Gate' submission to the MoDInvestment Appraisal Board. This is a key milestone for the whole CVF programmethat requires delivery of a fully understood and integrated schedule, cost andrisk assessment to the customer. In July, BAE Systems received a letter of intent from the government of Malaysiafor the procurement of two naval frigates. The Astute submarine project has maintained its significantly improvedperformance with all key milestones for the first six months of 2006 beingachieved on or ahead of plan. The launch of the first of class submarine hasbeen brought forward to June 2007, demonstrating the good progress made on theprogramme since the contract renegotiation in 2003. Looking forward With good performance across the major programmes, the outlook for the yearremains positive with improvements in margin performance anticipated. Customer Solutions & Support Business overview Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited Sales(1) £1,462m £1,279m £2,923mEBITA(2) £215m £185m £419mCash inflow(3) £2m £429m £850mNumber of employees(1) 14,500 13,900 14,300Order book(1) £4.8bn £4.2bn £5.0bn The Customer Solutions & Support (CS&S) business group provides partnered,through-life support and capability solutions to the UK's Defence LogisticsOrganisation (DLO) as well as managing the businesses in Saudi Arabia andAustralia. In the first half of 2006, CS&S achieved EBITA(2) of £215m (2005 £185m) onsales(1) of £1,462m (2005 £1,279m). The business group generated an operatingcash inflow(3) of £2m (2005 £429m). BAE Systems has a major presence in the Kingdom of Saudi Arabia where it acts asprime contractor for the UK's government-to-government defence contract. Thecontract includes the provision of aircraft, capability upgrades, associatedhardware, support, infrastructure and manpower training for the Royal Saudi AirForce (RSAF). An Understanding Document signed on 21 December 2005 between theUK and Saudi Arabian governments outlined plans to modernise the Saudi armedforces. Under the terms of the signed document Typhoon aircraft will replaceTornado air defence variant aircraft and other aircraft currently in servicewith the RSAF. Around 4,600 people are employed by the Company in the Kingdom of Saudi Arabia,of whom more than half are Saudi nationals. BAE Systems is continuing to developits presence in the Kingdom and is committed to developing a greater indigenouscapability there. The security of employees is the Company's highest priorityand progress on new facilities is proceeding to plan. Performance on the core Saudi support and modernisation programme in the firsthalf of 2006 was good, in line with our plans, and with margins maintained atlast year's levels. In the UK, CS&S continues to develop its partnering arrangement with the DLOfocusing on through-life capability management and value for money, in line withthe UK's Defence Industrial Strategy. CS&S has continued to make significant progress in air support. In February2006, the Tornado ATTAC (Availability Transformation - Tornado AircraftContracts) proposal was submitted to the DLO. The proposal offers a full Tornadoairframe availability service for the next ten years and is valued atapproximately £1.5 billion. The experience from ATTAC is being used to makesound progress on a similar availability contract for the RAF's Harrieraircraft. The ATTAC model also should provide the blueprint for future supportarrangements on Typhoon. Towards the end of last year the Tornado Combined Maintenance and Upgradecontract worth approximately £130m was agreed. Performance against the contracthas been strong with the first aircraft already returned to front line service.CS&S continues to demonstrate its support capabilities across all air supportprogrammes, and is moving towards significant milestones, including the 200thT-45 Goshawk fuselage delivered to Boeing and the millionth flying hour for theRAF's Hawk aircraft. In support of the Hawk programme a bid to provide availability support to theRAF's existing TMk1 aircraft has been submitted. In addition, an extension tothe existing Nimrod Integrated Support Contract was received in July. In the naval domain the reactivation of three ex-Royal Navy frigates for theChilean Navy is progressing. The naval joint ventures are performing well. BAESystems has 50% interests in Fleet Support Limited and Flagship TrainingLimited. Fleet Support's performance has been underpinned by the partneringagreement with the MoD/Royal Navy at the Portsmouth naval base. FlagshipTraining has recently signed a Heads of Terms to extend its long-term partneringagreement with the Naval Training Command. CS&S is part of a consortium which recently submitted a bid for the UK's DefenceTraining Review programme, under which the successful bidder will takeresponsibility for managing the provision of training and services to the MoD,and all three services, for a period of 25 years. Downselection of thesuccessful bidder is expected by the end of 2006. Work continues on the programme to support the Canadian Victoria Classsubmarines. The existing Engineering Support Management contract has beenextended for one year. CS&S Australia had a good first half in 2006, securing a number of contracts andstrengthening its position as a through-life capability partner to theAustralian Defence Force. A contract extension for A$49m (£20m) was signed atthe end of June ensuring continued support to the Hawk Lead-In Fighter aircraft,whilst negotiations are ongoing for a five year support contract. Looking forward CS&S will continue to work with the UK DLO to provide smarter, more integratedsupport solutions on the customer's bases. Development of these solutions willbe underpinned by the migration of the model proposed in Tornado ATTAC to otherfuture UK platforms. CS&S will continue to seek to sustain a long-term presence in Saudi Arabiathrough developing new business under the Understanding Document and throughdelivering on its current support commitments. Finalising the contractual termsfor supply of Typhoons to Saudi Arabia is a high priority for BAE Systems. Integrated Systems & PartnershipsBusiness overview Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited Sales(1) £798m £722m £1,834mEBITA(2) £57m £17m £109mCash (outflow)/inflow3 £(33)m £(106)m £17mNumber of employees1 12,000 12,300 12,000Order book1 £6.4bn £6.0bn £5.9bn Integrated Systems & Partnerships is a portfolio of high-technology defencesystems businesses comprising the wholly-owned Integrated System Technologiesand Underwater Systems, together with a 37.5% interest in the pan-European MBDAjoint venture, a 20.5% interest in Saab of Sweden and a 50% interest in theGripen International joint venture. In the first half of 2006, Integrated Systems & Partnerships achieved asignificant improvement in performance with EBITA2 of £57m (2005 £17m) on sales1of £798m (2005 £722m). The business group had an operating cash outflow3 of £33m(2005 £106m). Integrated System Technologies (Insyte) Insyte projects include the full-scale engineering development of the Sampsonmulti-function radar for the Royal Navy's Type 45 destroyer. The first radar wasshipped to the customer's test site in June 2006, representing a significantmaturity point in the programme. In March 2006, Insyte was awarded a £267m contract by the UK MoD for FALCONIncrement A. FALCON will provide the backbone for the information systeminfrastructure across the battlespace, both at home and when deployed overseas. MBDA (37.5%) MBDA's missile delivery programmes remain on schedule for all customers, bothdomestic and export. During the period there were significant deliveries ofStand-Off Weapons, Mica air-to-air missiles, Brimstone air-launched anti-armourweapon and the Rapier/Jernas air defence system. The acquisition of LFK, the German missile company, was completed in March 2006and integration of this business into MBDA is progressing well. Key export orders were won for the Exocet anti-ship missile and Vertical LaunchSeawolf naval air defence weapon and support contracts in excess of €140m(£97m). 2006 is an important year for the business, with key milestones to be met acrossa range of development programmes. Good progress has been made on theseprogrammes, including successful firing of the Meteor Beyond Visual RangeAir-to-Air Missile. In addition, full operational capability of Storm Shadow, aconventionally-armed stand-off air-to-ground missile, was declared by the UKcustomer in early April. Another key development programme, the Principal Anti-Aircraft Missile Systemnaval area defence weapon is also progressing satisfactorily. Saab (20.5%) Saab had a successful first half year including the acquisition, subject toregulatory clearances, of Ericsson Microwave Systems for SEK 3.8bn (£287m) inJune. This key acquisition will add world-leading radar and sensor operations toSaab's portfolio in the areas of defence, aviation, space and civil security.Key orders in the period include an SEK 8.3bn (£627m) airborne surveillancesystem for Pakistan, which includes Saab 2000 turboprop aircraft equipped withthe Ericsson Microwave Systems airborne radar system, Erieye. Gripen International (50%) Since its maiden flight in November 2005, the first Gripen dual-seat exportaircraft continues its successful flight test programme in Sweden, with thefirst production aircraft scheduled for delivery to South Africa in 2008. Boththe Hungarian and Czech Gripen programmes are performing satisfactorily. Underwater Systems The Sting Ray Mod 1 lightweight torpedo programme progresses to schedule. Activity continues with the aim of securing a UK MoD agreement for the upgradeof the Spearfish heavyweight torpedo. The Talisman low-observable autonomous unmanned underwater vehicle (UUV) waslaunched in March. This is the latest-generation modular multi-role UUV, capableof a wide range of maritime littoral operations. Atlas Elektronik The sale of the previously wholly-owned Atlas Elektronik GmbH for €149m (£103m)was completed on 3 August 2006. Looking forward Implementation of the UK's DIS is material to both the MBDA and UnderwaterSystems businesses. The announcement in July by the MoD of the creation of 'TeamCW' (Complex Weapons) led by MBDA represented a significant step forward in theimplementation of the DIS in this sector. All parties are committed to thecompletion of a strategic partnering agreement before the end of the year. ForUnderwater Systems, the follow-on activities from the DIS will play an importantrole in shaping the future position of the business and the MoD has signalled anintent to develop a way ahead by the end of 2006. During the second half of 2006 Saab will focus on consolidation of the successesachieved during the first half year, primarily the completion of the acquisitionof Ericsson Microwave Systems, and its effective integration into the company. Commercial Aerospace Business overview Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited Sales(1) £1,984m £1,660m £3,232mEBITA(2) £155m £154m £179mCash inflow(3) £57m £294m £327mNumber of employees(1) 11,900 12,400 12,500Order book(1) £27.0bn £22.4bn £29.5bn The Commercial Aerospace business group comprises the Group's 20% interest inAirbus together with the Regional Aircraft asset management and supportactivities. Until March 2006, the business group also included theAerostructures business. In the first half of 2006, Commercial Aerospace achieved EBITA(2) of £155m (2005£154m) on sales1 of £1,984m (2005 £1,660m). The business group generatedoperating cash inflow3 of £57m (2005 £294m). Airbus contributed EBITA(2) of £188m (2005 £176m) and a cash inflow of £105m (2005£350m). This was after charging £131m (2005 £107m) of development costs, ofwhich £64m (2005 £55m) related to the A380 programme. Airbus Airbus secured 101 net new orders in the period with major orders received fromIndian Airlines, Air China and Finnair. First half deliveries of 219 aircraftcompares with the 189 aircraft delivered in the same period last year. The first A380 is planned for delivery in late 2006. In June, Airbus announced adelay in the manufacturing ramp-up for the A380 programme. Airbus continues towork with the airlines to mitigate the impact of this delay. In July, Airbus announced the development of the proposed new A350 XWB (ExtraWide Body) aircraft. On 7 June 2006, BAE Systems served notice exercising the put option in respectof its 20% shareholding in Airbus. Under the terms of the shareholders'agreement, an independent bank was appointed in June to undertake the valuationof the Airbus stake, which resulted in a valuation of €2.75bn (£1.9bn). On 5July 2006, BAE Systems announced its intention to undertake an audit of theAirbus group in order to assist the Board in assessing its recommendation withregard to the proposed disposal. Following the audit conducted during August, acircular5 recommending the disposal has been posted to shareholders. Regional Aircraft The regional aircraft leasing market remains challenging with high oil pricescontinuing to dominate airline economics. The aircraft leasing team havecontinued to make progress with new turboprop markets identified in India andNepal and initial deliveries of aircraft to customers achieved. Opportunities for both turboprop and jet aircraft continue to emerge,particularly in Eastern Europe, although these markets remain highlycompetitive. The business has successfully removed significant future exposures(residual value guarantees) on 37 regional jet aircraft. The performance of Regional Aircraft is reliant upon a successful aircraft leaseplacement programme and sustained aircraft lease income rates. The business isunderpinned by the Group's Financial Risk Insurance Programme (FRIP) which makesgood shortfalls in actual income against estimated future income. Arbitration proceedings are ongoing between BAE Systems and certain of the FRIPreinsurers. Some reinsurers claim to be entitled either to terminate or to bedischarged from liability under their reinsurance contracts. On the basis of thelegal advice it has received, BAE Systems believes these claims to be withoutmerit and is vigorously defending them. As at 30 June 2006, the net presentvalue of anticipated income under the programme was £291m. 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. Looking forward The losses in Regional Aircraft continue and no improvement is anticipated inthis market. (1) including share of equity accounted investments (2) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (3) net cash inflow from operating activities after capital expenditure (net) and financial investment, and dividends from equity accounted investments (4) Command, Control, Communications and Computing, Intelligence, Surveillance and Reconnaissance (5) see note 13 Independent review report to BAE Systems plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2006 which comprises the Consolidated IncomeStatement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement,the Consolidated Statement of Recognised Income and Expense, and the relatednotes. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the UK. A review consistsprincipally of making enquiries of group management and applying analyticalprocedures to the financial information and underlying financial data and, basedthereon, assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review excludes auditprocedures such as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with International Statements on Auditing (UK and Ireland) andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. KPMG Audit PlcChartered AccountantsRegistered AuditorLondon 12 September 2006 Consolidated income statement Six months to Six months to Year to 31 30 June 2006 30 June 2005 December 2005 Unaudited Unaudited Audited Notes £m £m £m £m £m £mContinuing operationsCombined sales of Group and equity accounted investments 8,214 6,773 15,4 11Less: share of equity accounted investments (2,454) (2,140) (4,392)Revenue 2 5,760 4,633 11,019Operating costs (5,514) (4,326) (10,579)Other income 253 37 247 Group operating profit excluding amortisation 552 363 809 and impairment of intangible assets Amortisation (53) (19) (77) Impairment - - (45)Group operating profit 499 344 687 Share of results of equity accounted investments 236 203 373 excluding finance costs and taxation expense Finance costs 3 (12) 6 (11) Taxation expense (70) (65) (149)Share of results of equity accounted investments 154 144 213 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) 2 788 566 1,182 Amortisation (53) (19) (77) Impairment - - (45) Finance costs of equity accounted investments 3 (12) 6 (11) Taxation expense of equity accounted investments (70) (65) (149)Operating profit 653 488 900Finance costs 3Financial income 738 610 1,224Financial expense (900) (672) (1,428) (162) (62) (204) Profit before taxation 491 426 696Taxation expenseUK taxation 20 (5) (37)Overseas taxation (105) (77) (76) (85) (82) (113) Profit for the period from continuing operations 406 344 583Loss for the period from discontinued operations 4 - (26) (28) Profit for the period 406 318 555 Attributable to: BAE Systems shareholders 405 317 553 Minority interests 1 1 2 406 318 555 Earnings per share 5Continuing operations: Basic earnings per share 12.6p 10.9p 18.3p Diluted earnings per share 12.4p 10.8p 18.2p Discontinued operations: Basic earnings per share - p (0.8)p (0.9)p Diluted earnings per share - p (0.8)p (0.8)p Total: Basic earnings per share 12.6p 10.1p 17.4p Diluted earnings per share 12.4p 10.0p 17.4p Dividends per ordinary share 9 Prior year final dividend paid in the period £203m (2005 £186m) 6.3p 5.8p 5.8p Interim dividend declared £142m (2005 declared/ paid £129m) 4.4p 4.0p 4.0p Consolidated balance sheet 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited Notes £m £m £mNon-current assetsIntangible assets 7,888 8,220 8,217Property, plant and equipment 1,662 1,861 1,704Investment property 143 203 218Equity accounted investments 1,941 1,781 1,721Other investments 9 34 9Other receivables 616 526 912Other financial assets 47 69 65Deferred tax assets 1,118 1,332 1,331 13,424 14,026 14,177 Current assetsInventories 456 578 485Trade and other receivables including amounts due from customers 2,245 2,588 1,877for contract workCurrent tax 43 - 20Other investments 568 673 634Other financial assets 95 44 54Cash and cash equivalents 2,116 1,705 2,581 5,523 5,588 5,651 Non-current assets and disposal groups held for sale 277 - 407 5,800 5,588 6,058 Total assets 19,224 19,614 20,235 Non-current liabilitiesLoans (3,313) (2,509) (3,534)Trade and other payables (498) (787) (432)Retirement benefit obligations 6 (3,044) (4,112) (4,101)Other financial liabilities (40) (48) (45)Deferred tax liabilities (19) (14) (23)Provisions (327) (424) (375) (7,241) (7,894) (8,510) Current liabilitiesLoans and overdrafts (886) (2,084) (905)Trade and other payables (6,855) (6,162) (7,006)Other financial liabilities (49) (114) (81)Current tax (276) (251) (316)Provisions (331) (185) (343) (8,397) (8,796) (8,651) Liabilities directly associated with non-current assets and disposal groups held for sale (222) - (270) (8,619) (8,796) (8,921)Total liabilities (15,860) (16,690) (17,431) Net assets 3,364 2,924 2,804 Capital and reservesIssued share capital 81 80 80Share premium 814 767 782Equity option of convertible preference shares 76 78 78Other reserves 4,758 4,802 4,720Retained earnings (2,380) (2,814) (2,872) Total equity attributable to equity holders of the parent 3,349 2,913 2,788Minority interests 15 11 16 Total equity 8 3,364 2,924 2,804 Consolidated cash flow statement Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited £m £m £mProfit/(loss) for the period Continuing operations 406 344 583 Discontinued operations - (26) (28) 406 318 555Taxation expense 85 83 114Share of results of equity accounted investments (154) (144) (213)Net finance costs 162 65 207Depreciation, amortisation and impairment 173 181 524(Gain)/loss on disposal of property, plant and equipment (44) (6) 2Gain on disposal of investment property (65) - (43)(Gain)/loss on disposal of business - continuing operations (11) 5 12(Gain)/loss on disposal of business - discontinued operations - 6 8Impairment of other investments (1) - 2Cost of equity-settled employee share schemes 10 26 16Movements in provisions (37) (3) 99Decrease in liabilities for retirement benefit obligations (642) - (98)(Increase)/decrease in working capital: Inventories (10) 35 54 Trade and other receivables (165) (52) (4) Trade and other payables - 72 864 Cash (outflow)/inflow from operating activities (293) 586 2,099Interest paid (156) (150) (213)Interest element of finance lease rental payments (5) (10) (17)Taxation paid (55) (17) (27) Net cash (outflow)/inflow from operating activities (509) 409 1,842 Dividends received from equity accounted investments 110 82 88Interest received 59 105 99Purchases of property, plant and equipment (178) (173) (318)Capital expenditure on investment property - - (12)Purchases of intangible assets (11) (4) (17)Proceeds from sale of property, plant and equipment 115 6 30Proceeds from sale of investment property 137 10 54Proceeds from sale of non-current investments 1 - 30Purchase of non-current other investments (1) (14) (17)Purchase of subsidiary undertakings - (2,227) (2,262)Net cash acquired with subsidiary undertakings - 136 128Proceeds from sale of subsidiary undertakings 80 448 460Cash and cash equivalents disposed of with subsidiary - 1 1undertakingsProceeds from sale of equity accounted investments - 125 125Net proceeds from sale of other deposits/securities 17 59 45 Net cash inflow/(outflow) from investing activities 329 (1,446) (1,566) Capital element of finance lease rental payments (28) (73) (89)Proceeds from issue of share capital 26 358 373Equity dividends paid (203) (186) (315)Dividends paid on preference shares (10) - (21)Cash inflow from loans - 976 1,005Cash outflow from repayment of loans (39) (283) (357) Net cash (outflow)/inflow from financing activities (254) 792 596 (Decrease)/increase in cash and cash equivalents (434) (245) 872Cash and cash equivalents at start of period 2,491 1,650 1,650Effect of foreign exchange rate changes on cash and cash equivalents 22 3 (31) Cash and cash equivalents at end of period 2,079 1,408 2,491 Cash and cash equivalents comprise:Cash and cash equivalents 2,116 1,705 2,581Overdrafts (37) (297) (90) Cash and cash equivalents at end of period 2,079 1,408 2,491 Consolidated statement of recognised income and expense Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited Notes £m £m £mCurrency translation on foreign currency netinvestments: Subsidiaries (104) 66 53 Equity accounted investments (11) (47) (23)Amounts credited/(charged) to hedging reserve 8 218 (480) (688)Actuarial gains/(losses) on defined benefit pensionschemes: Subsidiaries 340 (555) (652) Equity accounted investments 54 (34) (72)Current tax on items taken directly to equity 21 - (3)Deferred tax on items taken directly to equity: Subsidiaries (110) 187 193 Equity accounted investments (91) 202 276Net income/(expense) recognised directly in equity 317 (661) (916)Profit for the period 406 318 555Total recognised income and expense 723 (343) (361)Adoption of IAS 32 and IAS 39 1 - 422 422 723 79 61Attributable to: Equity shareholders 722 (344) (363) Minority interest 1 1 2 723 (343) (361) Notes to the interim report 1 Accounting policies Basis of preparation and statement of compliance These condensed consolidated interim financial statements of BAE Systems plc(the Group) have been prepared in accordance with International AccountingStandard 34 Interim Financial Reporting (IAS 34), and have been prepared on thebasis of International Financial Reporting Standards (IFRSs) as adopted by theEuropean Union that are effective for the year ended 31 December 2006. They donot include all of the information required for full annual financialstatements. These condensed consolidated interim financial statements do notcomprise statutory accounts within the meaning of Section 240 of the CompaniesAct 1985, and should be read in conjunction with the Annual Report 2005. Thestatutory accounts for the year ended 31 December 2005 have been reported uponby the Group's auditors and delivered to the registrar of companies. The reportof the auditors was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. Adoption of IAS 32 and IAS 39 The Group adopted IAS 32 Financial Instruments: Disclosure and Presentation (IAS32) and IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) on 1January 2005. The effect of adopting IAS 39 at 1 January 2005 is presented as amovement in the Group's consolidated statement of recognised income and expensefor 2005. Further details relating to the adoption of these and otherInternational Accounting Standards are provided within the Annual Report 2005. Except as described below, the accounting policies adopted in the preparation ofthese condensed consolidated interim financial statements to 30 June 2006 areconsistent with the policies applied by the Group in its consolidated financialstatements as at, and for the year ended, 31 December 2005. Changes in accounting policies International Financial Reporting Interpretations Committee 4 (IFRIC 4) 'Determining whether an Arrangement contains a Lease is effective' for the Groupfor the year ending 31 December 2006. The Group has reviewed its contracts andthe interpretation does not have a significant impact on the Group. These condensed consolidated interim financial statements were approved forissue by the board of directors on 12 September 2006. 2 Segmental analysis (unaudited) Sales Less: adjustment Add: sales to equity Revenue for share of equity accounted account ed investments investments Six Six Six Six Six Six months Six Six months to months months to months to months to to 30 June months months 30 June to 30 30 June 30 June 30 June 2005 to 30 to 30 2006 June 2006 2005 2006 June June 2005 2006 2005 £m £m £m £m £m £m £m £m Electronics, Intelligence & Support 2,090 1,715 (6) (8) 18 12 2,102 1,719Land & Armaments 892 337 - - 7 - 899 337Programmes 1,186 1,207 (427) (585) 427 585 1,186 1,207Customer Solutions & Support 1,462 1,279 (191) (189) 31 27 1,302 1,117Integrated Systems & Partnerships 798 722 (508) (542) 34 6 324 186Commercial Aerospace 1,984 1,660 (1,884) (1,531) 46 82 146 211HQ and other businesses 32 34 (4) - 3 3 31 37 8,444 6,954 (3,020) (2,855) 566 715 5,990 4,814Intra-business group sales/revenue (230) (181) - - - - (230) (181) 8,214 6,773 (3,020) (2,855) 566 715 5,760 4,633 EBITA(1) Amortisation of Business group intangible assets result Six Six Six Six months Six Six months to months to months to to 30 June months months 30 June 30 June 30 June 2005 to 30 to 30 2006 2005 2006 June June 2006 2005 £m £m £m £m £m £m Electronics, Intelligence & Support 260 151 (7) (4) 253 147Land & Armaments 76 8 (34) (10) 42 (2)Programmes 57 88 (3) (3) 54 85Customer Solutions & Support 215 185 (3) - 212 185Integrated Systems & Partnerships 57 17 (6) (1) 51 16Commercial Aerospace 155 154 - (1) 155 153HQ and other businesses (32) (37) - - (32) (37) 788 566 (53) (19) 735 547 Less: Financial expense of equity accounted investments (12) 6 Taxation expense of equity accounted investments (70) (65) Operating profit 653 488 (1) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense 3 Finance costs Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited £m £m £m Finance costs - Group (162) (62) (204)Finance costs - share of equity accounted investments (12) 6 (11) (174) (56) (215) Analysed as:Net interest: Interest income 62 76 123 Interest expense (177) (168) (310) Facility fees (2) - (10) Net present value adjustments 12 6 (2) Share of equity accounted investments 3 (10) (11) (102) (96) (210) Other finance costs: Group (57) 24 (5) Share of equity accounted investments (15) 16 - (174) (56) (215) Other finance costs of £(72)m (2005 £40m) represent the market value and foreignexchange movements on financial instruments and investments of £(87)m (2005£41m) and a net financing credit on pensions of £15m (2005 charge £1m). 4 Disposals and discontinued operations Disposals In March 2006 the Group sold its UK Aerostructures business for £80m in cash.This disposal generated a profit of £11m arising from the resultant reduction ofpension liabilities. Discontinued operations The results of the discontinued operations, which have been included in theconsolidated income statement, were as follows: Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited £m £m £m Revenue - 111 111Expenses - (127) (127) EBITA(1) - (16) (16)Finance costs, net - (3) (3) Loss before taxation - (19) (19)Taxation - (1) (1) Loss for the period - (20) (20)Loss on disposal of discontinued operations - (6) (8) Loss for the period from discontinued operations - (26) (28) (1) earnings before amortisation and impairment of intangible assets, finance costs and taxation expense 5 Earnings per share (unaudited) Six months to 30 June 2006 Six months to 30 June 2005 £m Basic £m Diluted £m Basic £m Diluted pence pence per pence pence per per share per share share share Profit for the period attributable to equity shareholders 405 405 317 317Preference dividends - 14 - 14 Profit/(loss) for the period after adjusting for preference dividends 405 12.6 419 12.4 317 10.1 331 10.0Represented by: Continuing operations 405 12.6 419 12.4 343 10.9 357 10.8 Discontinued operations - - - - (26) (0.8) (26) (0.8) (Deduct)/add back: Net financing credit on pensions, post tax (11) (11) 1 1 Uplift on acquired inventories, post tax - - 4 4 Market value movements on financial derivatives, post tax 63 63 (30) (30) Amortisation of intangible assets, post tax 39 39 19 19Underlying earnings 496 15.4 510 15.1 311 9.9 325 9.9 Represented by: Continuing operations 496 15.4 510 15.1 337 10.7 351 10.7 Discontinued operations - - - - (26) (0.8) (26) (0.8) 496 15.4 510 15.1 311 9.9 325 9.9 Reconciliation of weighted average number of shares Millions Millions Millions Millions Weighted average number of shares used in calculating basic earnings per share 3,220 3,220 3,152 3,152Add: Incremental shares in respect of employee share schemes - 34 - 19 Incremental shares in respect of convertible preference shares - 127 - 127 Weighted average number of shares used in calculating diluted earnings per share 3,220 3,381 3,152 3,298 Underlying earnings per share is presented in addition to that required by IAS33 Earnings per Share (IAS 33) as the directors consider that this gives a moreappropriate indication of underlying performance. In accordance with IAS 33, the diluted earnings per share calculations arewithout reference to adjustments in respect of outstanding share options andconvertible preference shares, as assumed conversion would be anti-dilutive. 6 Retirement benefit obligations (unaudited) UK US and other Total £m £m £m Deficit in defined benefit pension plans at 31 December 2005 (4,659) (647) (5,306)Actual return on assets below expected return (207) (10) (217)Decrease in liabilities due to changes in assumptions 492 189 681Current service cost (93) (31) (124)Employer contributions - ordinary 132 14 146Employer contributions - additional 644 - 644Curtailment gains1 52 63 115Other movements 5 36 41 Deficit in defined benefit pension plans at 30 June 2006 (3,634) (386) (4,020)US healthcare plans (37) Total IAS 19 deficit, net (4,057)Allocated to equity accounted investments 989 Group's share of IAS 19 deficit, net (3,068) Group's share of IAS 19 deficit of equity accounted investments (248) Represented by:Pension assets (within non-current receivables) 44Retirement benefit obligations (3,044)Liabilities directly associated with non-current assets and disposal groups held for sale (68) Group's share of IAS 19 deficit, net (3,068) In June 2006, the Group announced it had agreed a programme of measures toaddress the funding deficit in its principal UK pension schemes. The measuresincluded one-off contributions of £644m and agreed changes to the members'benefits to reduce future liabilities. The one-off contributions of £644m included certain properties valued at £242m,the right to receive a share of the deferred consideration under the put/calloption arrangement arising from the Eurosystems transaction in 2005 and valuedat £238m, and £164m in cash. The properties were sold to the scheme at marketvalue, generating a profit on disposal of £100m. Within EBITA, this profit ondisposal was offset by an operating charge of £100m relating to various fundingarrangements with the Group's equity accounted investments. The curtailment gains1 arising in the period were a result of certain benefitchanges made. The Group's share of the £115m curtailment gains shown above is£114m after allocation to equity accounted investments. Of this £114m gain, £63mrelated to the reduction in the net pension liability arising from the changesto the calculation of the final US pensionable salaries and £11m as a result ofthe disposal of the UK Aerostructures business in March 2006. The remainder islargely offset by an increase in UK service costs in the period due to themovement in discount rates. The following analysis summarises how these items have been reflected in theconsolidated income statement and the consolidated cash flow statement: Income statement items: £m Included within operating costs of £5,514m (100)Included within other income of £253m: Gain on disposal of property, plant and equipment, and investment property 100 Curtailment gains(1) 113 Curtailment gains within share of results of equity accounted investments excluding finance costs 1and taxation expense Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) 114 Cash flow statement items: £mProfit for the period 114Share of results of equity accounted investments (1)Gain on disposal of property (35)Gain on disposal of investment property (65)Gain on disposal of business - continuing operations (11)Decrease in liabilities for retirement benefit obligations (625)Decrease in working capital: Trade and other receivables 217 Cash outflow from operating activities (406)Proceeds from sale of property, plant and equipment 242 Operating business cash outflow (164) (1) a curtailment gain represents the reduction in the retirement benefit obligation as a result of either a material reduction in the number of employees in the scheme and/or a change in the benefit structure, but where in both cases the company retains part or all of the future pension liability 7 Aircraft financing contingent liabilities Included within Group provisions of £658m is an exposure of £24m as discussedbelow: 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited £m £m £m Potential future cash flow payments in respect of aircraft financing obligations 240 583 460Anticipated aircraft values (210) (565) (391)Adjustments to net present values (6) (5) (4) Net exposure provided 24 13 65 The Group has provided residual value guarantees (RVGs) in respect of certaincommercial aircraft sold. At 30 June 2006 the Group's exposure to make futurepayments in respect of these arrangements was £240m (31 December 2005 £460m).Certain of these arrangements are covered by a Financial Risk InsuranceProgramme (FRIP) under which the Group would place reliance on insurance coverfor the anticipated 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 and Airbus SAS.Provision is made against the expected net exposures on a net present valuebasis within the accounts of Airbus and Saab. The Group's share of such exposureis limited to its percentage shareholding in each of these equity accountedinvestments. The reduction in the net exposure reflects the settlement of the commitment inrespect of 37 RVGs in the period. 8 Reconciliation of movements in total equity 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited £m £m £m Total equity at beginning of period 2,804 2,665 2,665Adoption of IAS 32 and IAS 39 (note 1) - 422 422 2,804 3,087 3,087Total recognised income and expense 723 (342) (361)Share-based payments 10 7 16Shares issued 33 358 373Other (3) - 4Equity dividends paid (203) (186) (315) Total equity at end of period 3,364 2,924 2,804 £33m of shares were issued on the exercise of share options for £26m cash, andthe conversion of 6,116,123 cumulative redeemable preference shares into2,929,867 ordinary shares for £7m. Amounts credited/(charged) to the hedging reserve shown in the consolidatedstatement of recognised income and expense represent the gains/(losses) arisingas a result of the market value movements in the period on certain derivativefinancial instruments. 9 Equity dividends The directors have declared an interim dividend of 4.4p per ordinary share (20054.0p), totalling £142m (2005 £129m). The dividend will be paid on 30 November2006. The ex-dividend date is 18 October 2006, with a record date of 20 October2006. Shareholders who do not at present participate in the Company's DividendReinvestment Plan and wish to invest the interim dividend in shares shouldcomplete a mandate form for the Dividend Reinvestment Plan and return it to theRegistrars no later than 9 November 2006. 10 Related party transactions The Group has an interest in a number of equity accounted investments.Transactions with the equity accounted investments occur in the normal course ofbusiness and are priced on an arm's length basis and settled on normal tradeterms. The more significant of these transactions are disclosed below: Six months to Six months to Year to 30 June 30 June 31 December 2006 2005 2005 Unaudited Unaudited Audited £m £m £m Sales to related parties 566 715 1,569Purchases from related parties 91 12 135Amounts owed by related parties 109 162 62Amounts owed to related parties 1,292 1,142 1,266 11 Events after the balance sheet date The sale of the previously wholly-owned Atlas Elektronik GmbH to EADS andThyssen Krupp for €149m (£103m) was completed on 3 August 2006. 12 Annual General Meeting The Annual General Meeting of BAE Systems plc will be held on 9 May 2007. 13 Circular to shareholders On 11 September a class 1 circular was posted to shareholders explaining thebackground of the proposed Airbus disposal and recommending that shareholdersvote for the resolution to dispose of the Airbus shareholding, on the basis setout in the circular, at the Extraordinary General Meeting to be held on 4October 2006. Copies of this circular can be obtained from the Company'sregistered office. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BAE Systems