9th Aug 2007 07:01
BAE SYSTEMS PLC09 August 2007 BAE Systems plcInterim Report 2007 Results in briefResults from continuing operations Restated6 Six months to Six months to 30 June 2007 30 June 2006 Sales1 £6,891m £6,376mEBITA2 £700m £600mOperating profit £643m £540mUnderlying earnings3 per share 15.3p 11.6pBasic earnings per share4 15.3p 9.1pOrder book5 £31.7bn £30.2bnOther results including discontinued operationsInterim dividend per share 5.0p 4.4pCash inflow/(outflow) from operating activities £165m £(293)mNet cash/(debt) as defined by the Group £1,266m £(1,582)m Highlights - 43% sales growth in the Land & Armaments business - Underlying earnings3 per share up 31.9% at 15.3p - Interim dividend increased 13.6% to 5.0p per share - Acquisition of Armor Holdings Inc. completed on 31 July - Formation of UK naval surface ship joint venture announced Outlook Building on the strong first half performance, the previously anticipated goodgrowth outlook for 2007 as a whole is expected to benefit further from theUS-led Land & Armaments and UK Programmes & Support sectors where growth isahead of expectations. We anticipate good operating cash flow for the full year. 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, andnon-cash finance movements on pensions and financial derivatives (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 £1.2bn) 6 restated following the sale of the Group's interest in Airbus SAS Interim results statement "BAE Systems is performing well and is committed to maintaining its focus oncontinued value generation and its drive to embed a high performance culture." BAE Systems' performance continues to benefit from a combination of good,profitable growth and programme execution, as well as from the successfulimplementation of its strategy as the premier global defence and aerospacecompany. In particular, the Group is successfully identifying and accessing thehigher growth sectors of the US defence market. In the first half of 2007 BAESystems' US-derived businesses achieved organic growth of 12%. The high tempo of military operations continues to generate growth inrequirements for land systems in support of US and UK armed forces deployed onoverseas operations. The implementation of the Group's strategy to establish astrong position in the land sector has been a notable success over the pastthree years, with both current and anticipated demand for land vehicles andsystems supporting the strategy. To complement the Group's now well-established tracked combat vehicles position,BAE Systems has been evolving a strategy to address newly emerging growthopportunities in the wheeled utility vehicle sector. In particular, recognisingthat the past distinction between front-line and support theatres of operationhave become less distinct, BAE Systems has identified significant businessopportunities for improved survivability and capability in the utility vehiclefleets. Increasingly the capability of these utility vehicles will converge withthat of combat vehicles. In July, BAE Systems completed the acquisition of Armor Holdings Inc. for $4.5bn(£2.2bn). Armor Holdings is a leading provider of utility vehicles and armourtechnology. The transaction was financed from a combination of existingresources and £750m raised earlier in the year by way of a share placing. Negotiations continue towards a contract for the supply of Typhoon aircraft andassociated training and support under the Understanding Document signed inDecember 2005 between the UK government and the Kingdom of Saudi Arabia. BAESystems continues to progress its strategy in Saudi Arabia as a key home marketwith substantial employment and investment in future in-Kingdom industrialcapability. Consistent with the UK government's defence industrial strategy and followingtheir commitment to the new Carrier programme and a Terms of Business Agreementsupporting a long-term relationship between industry and the UK Ministry ofDefence (MoD), the Group announced the formation of a new joint venture,consolidating the UK naval surface ship activities of BAE Systems and the VTGroup. At the beginning of the year the Group revised its organisation to reflect theUK customer's focus on managing defence equipment on a through-life capabilitybasis. With the resulting integration of the UK programmes and former UKcustomer support activities, the Group is now reported through five businessgroups as described in the reviews that follow. Corruption allegations continue to be made against the Group. The long-runninginvestigation by the UK's Serious Fraud Office into business in a number ofmarkets continues and, in June, BAE Systems was notified by the US Department ofJustice that it had commenced a formal investigation relating to the Group'scompliance with anti-corruption laws, including its business concerning theKingdom of Saudi Arabia. The Group will co-operate with such investigations tothe fullest extent possible. Notwithstanding these investigations, BAE Systems is performing well and iscommitted to maintaining its focus on continued value generation and its driveto embed a high performance culture. The Group continues to seek to apply thevery highest standards in its business practices and, as part of that drive, theBoard has asked the UK's former Lord Chief Justice, Lord Woolf, to form anindependent committee to consider and evaluate the application of BAE Systems'policies and processes relating to ethics and business conduct. The Committee'sconclusions and recommendations will be published in full and the Board hascommitted to implement the findings of the Committee. Summarised income statement from continuing operations Restated4 Six months to Six months to 30 June 2007 30 June 2006 Unaudited Unaudited £m £m Sales1 6,891 6,376 EBITA2 700 600Amortisation (50) (53)Net finance costs1 31 (150)Taxation expense1 (180) (104) Profit for the period 501 293 Basic earnings per share 15.3p 9.1pUnderlying earnings3 per share 15.3p 11.6pDividend per share 5.0p 4.4p Exchange rates Six months to 30 Six months to June 2007 30 June 2006 £/• - average 1.482 1.455£/$ - average 1.970 1.791£/• - period end 1.486 1.446£/$ - period end 2.007 1.849 Segmental analysis Sales1 EBITA2 Restated4,5 Restated4,5 Six months to Six months Six months to Six months 30 June 2007 to 30 June 30 June 2007 to 30 June Unaudited 2006 Unaudited 2006 Unaudited Unaudited £m £m £m £m Electronics, Intelligence & Support 1,958 2,090 193 260Land & Armaments 1,201 892 117 76Programmes & Support 2,354 2,018 231 153International Businesses 1,550 1,545 221 176HQ & Other Businesses 124 178 (62) (65)Intra-group (296) (347) - - 6,891 6,376 700 600 Sales1 In the first half, sales1 from continuing operations increased by 8% to £6,891m(2006 £6,376m). Like for like growth, after adjusting for the impacts ofexchange translation and acquisitions and disposals, was 15%. EBITA2 EBITA2 increased 17% to £700m (2006 £600m) and return on sales increased to10.2% (2006 9.4%). Translation of US$ generated results decreased EBITA2 by £26mwhen compared with the first half of 2006. A one-off pension accounting gain of£63m was recorded in the first half of 2006 arising from a reduction in the netpension liability for the changes made in calculating final US pensionablesalaries. Net finance costs1 Financial income, including the Group's share of the finance costs of equityaccounted investments, was £31m (2006 financial expense £150m). The underlyinginterest charge of £20m (2006 £93m) was reduced by a net credit of £51m (2006increased by a net charge of £57m) arising from pension accounting,marked-to-market revaluation of financial instruments and foreign currencymovements. Taxation expense1 The Group's effective tax rate for continuing operations for the period was 26%(2006 25%). Earnings per share Underlying earnings3 per share from continuing operations for the periodincreased by 31.9% to 15.3p compared with 2006 (11.6p). Basic earnings per share, in accordance with IAS 33 Earnings per Share, fromcontinuing operations, increased by 68% to 15.3p (2006 9.1p). Dividend The Board has declared an interim dividend of 5.0p per share (2006 4.4p),representing an increase of 13.6%. The dividend is covered 3.1 times by earnings3 from continuing operations (20062.6 times) which is consistent with the policy of growing the dividend whilstmaintaining a long-term sustainable earnings cover of approximately two times. Reconciliation of cash flow from operating activities to net cash/(debt) Six months to Six months to 30 June 2007 30 June 2006 Unaudited Unaudited £m £m Cash inflow/(outflow) from operating activities 165 (293)Capital expenditure (net) and financial investment (82) 63Dividends received from equity accounted investments 41 110 Operating business cash inflow/(outflow) 124 (120)Interest and preference dividends (29) (112)Taxation (43) (55) Free cash inflow/(outflow) 52 (287)Equity dividends paid (221) (203)Acquisitions and disposals 75 80Other non-cash movements 6 (101)Issue of equity shares (net) 604 26Preference share conversion 242 6Foreign exchange 50 188Movement in cash on customers' account6 23 (14) 831 (305)Opening net cash/(debt) as defined by the Group 435 (1,277) Closing net cash/(debt) as defined by the Group 1,266 (1,582) Analysed as:Term deposits - non-current 4 - - current 134 568Cash and cash equivalents 3,856 2,116Loans - non-current (2,407) (3,313) Loans - current (255) (849)Overdrafts - current (27) (37) Loans and overdrafts - current (282) (886)Cash on customers' account6 (included within payables) (39) (67) Closing net cash/(debt) as defined by the Group 1,266 (1,582) Operating business cash flow Restated4,5 Six months to Six months to 30 June 2007 30 June 2006 Unaudited Unaudited £m £m Electronics, Intelligence & Support 95 176Land & Armaments (47) (50)Programmes & Support 184 55International Businesses 26 (119)HQ & Other Businesses (134) (287)Discontinued businesses - 105 124 (120) Cash flows Cash inflow from operating activities was £165m (2006 outflow £293m), whichincludes £66m (2006 £406m) additional contributions into the UK pension schemes. There was an outflow from net capital expenditure and financial investment of£82m (2006 inflow £63m). Dividends from equity accounted investments, primarily Gripen International,Eurofighter GmbH and Saab, amounted to £41m. The resulting operating business cash inflow of £124m (2006 outflow £120m) gaverise to free cash inflow, after interest, preference dividends and taxation, of£52m (2006 outflow £287m). Disposal of the Group's shareholding in Xchanging Procurement Services (XPS) andXchanging HR Services (XHRS) in the period gave rise to a cash inflow of £57m. In the period, 33 million shares were purchased under the buyback programmeannounced in October 2006, generating a cash outflow of £152m. In May, £750m was raised following the placing of new ordinary shares to partfinance the proposed acquisition of Armor Holdings Inc. Following conversion of 257 million of the 7.75p (net) cumulative redeemablepreference shares into ordinary shares, the debt element of these preferenceshares has been redeemed, giving rise to a reduction in reported debt of £242m. The Group's net cash at 30 June 2007 was £1,266m, a net inflow of £831m from thenet cash position of £435m at the start of the year. Retirement benefit obligations Following higher contributions, better than expected investment returns, anincrease in real discount rates and the adoption of new mortality tables, theGroup's share of the pension deficit decreased to £1,493m from £2,428m at 31December 2006 after allocation to equity accounted investments and otherparticipating employers. Further disclosure on the above is given in note 6 ofthis report. Critical accounting policies The Group's critical accounting policies are outlined in the Annual Report 2006.These include: - retirement benefit plans;- contract revenue and profit recognition;- regional aircraft valuations; and- intangible assets. 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, andnon-cash finance movements on pensions and financial derivatives (see note 5) 4 restated following the sale of the Group's interest in Airbus SAS 5 restated following changes to the Group's organisational structure 6 cash on customers' account is the unexpended cash received from customers inadvance of delivery which is subject to advance payment guarantees unrelated toGroup performance Business group reviews Electronics, Intelligence & Support The Electronics, Intelligence & Support business group, with 31,300 employees1and headquartered in the US, is a provider of defence and aerospace systems,sub-systems and services. It comprises two operating groups: Electronics &Integrated Solutions and Customer Solutions. Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 Unaudited Unaudited Audited Sales1 £1,958m £2,090m £4,007mEBITA2 £193m £260m £429mReturn on sales 9.9% 12.4% 10.7%Cash inflow3 £95m £176m £273mOrder intake1 £1,969m £2,100m £4,311mOrder book1 £3.3bn £3.3bn £3.4bn In the first half of 2007, Electronics, Intelligence & Support achieved EBITA2of £193m (2006 £260m) on sales1 of £1,958m (2006 £2,090m) and generated anoperating cash inflow3 of £95m (2006 £176m). The 2006 first half EBITA2 included an accounting gain of £63m relating to arevision to US pension benefits. US$ exchange rate translation decreased sales1 and EBITA2 when compared with thefirst half of 2006 by £184m and £18m respectively. The underlying sales growth, after adjusting for a small disposal made in thesecond half of 2006 and excluding the impact of currency translation, was 2.7%. Electronics & Integrated Solutions (E&IS) E&IS designs, develops and produces electronic systems and sub-systems for awide range of military and commercial applications. The business group isfocused on four primary capabilities: electronic warfare, commercial andmilitary avionics, flight and engine controls and, following an internalreorganisation in March, a new line of business focused on tactical and nationalnetwork systems. In electronic warfare (EW), E&IS delivered its 100th F-22A EW system and signeda $318m (£158m) Memorandum of Agreement in anticipation of a multi-year orderfor further EW systems and spares. BAE Systems was a member of the F-22A teamthat accepted the US National Aeronautics Association's 2006 Collier Trophy,considered the most prestigious award in the US for aeronautical and spacedevelopment. The F-35 Lightning II (Joint Strike Fighter) EW/countermeasure system design anddevelopment remains on schedule and awaits award of low rate initial productionfunding. E&IS delivered its 1,000th Common Missile Warning System that protects US Armyhelicopters and aircraft from heat-seeking missiles. Flight testing of thecommercial version of the countermeasure against shoulder-fired missiles, JETEYE(TM), continues, with passenger aircraft testing scheduled by the end of the year. The Thermal Weapon Sight programme continues at a production rate of more than1,000 units per month, surpassing 10,000 total deliveries in June. E&IS receivedan award in the first half year for production of 50 fire fielding units of theTerminal High Altitude Area Defense missile, supporting the transition toproduction of this ballistic missile defence system. BAE Systems' commercial hybrid technology business continues to grow. HybriDrive(R) propulsion technology is in daily service on 900 transit buses. Bythe first half of 2007, the fleet accumulated 30 million miles on the road andprevented an estimated 36,000 tons of carbon dioxide emissions. In the period337 hybrid electric vehicle systems have been delivered to New York City, SanFrancisco and Toronto for a value of $41m (£21m). In April, BAE Systems announced its intent to sell its Inertial Productsbusiness for $140m (£70m). Customer Solutions The US Customer Solutions group comprises three businesses: BAE SystemsInformation Technology (IT), Technology Solutions & Services (TSS), and BAESystems Ship Repair. BAE Systems Ship Repair secured a five-year multi-ship option contract from theUS Navy to maintain and repair all DDG51 destroyer class ships home ported orvisiting San Diego, representing an opportunity of approximately $151m (£75m).Ship Repair also secured a three-year contract for work on two San Antonio-classamphibious transport dock ships and a $27m (£13m) contract for preparation andconversion of an amphibious ship for the Indian navy. TSS won 96% of its contract recompetes in the period. These services contractsare expected to extend delivery periods for at least five years with a totalpotential value of approximately $411m (£205m). BAE Systems IT operates within the large US government information technologymarket and continues to deliver mission-enabling support to its customers.During the first half of 2007, a variety of contracts worth up to $331m (£165m)were secured, including winning recompetes worth $90m (£45m), to provide keyservices, such as network implementation and operation, life-cycle softwaredevelopment engineering and other support activities to the federal government. Looking forward Further growth is anticipated in the electronic warfare and other defence andaerospace electronics activities. Ship repair activity is expected to remainstable. Growth in the IT and services business will be subject to the near-termpriorities of the US Department of Defense. Land & Armaments Land & Armaments business group, with 11,700 employees1 and headquartered in theUS, is a leader in the design, development, production and through-life supportand upgrade of armoured combat vehicles, naval guns, missile launchers,artillery systems and intelligent munitions. Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 Unaudited Unaudited Audited Sales1 £1,201m £892m £2,115mEBITA2 £117m £76m £168mReturn on sales 9.7% 8.5% 7.9%Cash (outflow)/inflow3 £(47)m £(50)m £137mOrder intake1 £1,380m £887m £2,964mOrder book1 £5.0bn £4.2bn £4.9bn In the first half of 2007, Land & Armaments achieved EBITA2 of £117m (2006 £76m)on sales1 of £1,201m (2006 £892m) and had an operating cash outflow3 of £47m(2006 £50m). Strong organic growth continued into the first half of 2007, more thanoffsetting adverse US$ exchange rate translation which reduced sales1 by £73mand EBITA2 by £8m when compared with the first half of 2006. Sales growth,excluding the impact of currency translation, amounted to 43% compared with thesame period in 2006. In July, BAE Systems completed the $4.5bn (£2.2bn) acquisition of Armor HoldingsInc., which had reported sales in 2006 of $2.4bn. This acquisition will furtherenhance the Group's global land systems business, most notably in theincreasingly important tactical wheeled vehicle sector, together with technologyin the vital areas of armour and survivability. Whilst not impacting thereported first half results, there will be a benefit to the full year for thefive-month post acquisition period. United States Further US Army contracts were secured for the refurbishment and upgrade ofBradley, M88 Hercules Improved Recovery Vehicles and M113 fighting vehiclestotalling $484m (£241m) in the first half of the year. Recent uncertainty regarding funding for the Future Combat System is expected tobe clarified later this year. BAE Systems is one of several companies bidding to provide the US armed forceswith new Mine Resistant Ambush Protected (MRAP) wheeled vehicles. In February,the business received an initial order for 94 RG33 MRAP vehicles and in June,following evaluation testing, a $214m (£107m) contract for 441 RG33 MRAPvehicles was received. As expected, during the period the US Army announced termination of the M113fighting vehicle programme. Sales in 2006 from this programme amounted to $87m(£49m). Development of the 155mm Advanced Gun System (AGS) and the Long Range LandAttack Projectile (LRLAP) for the US Navy's DDG1000 programme continues, with a$110m (£55m) award for AGS detailed design and integration secured in April. United Kingdom The British Army's operations in Afghanistan and Iraq have resulted in numerousurgent operational requirement orders for FV430 and Warrior vehicles and manysmall and medium calibre ammunition packages. The UK government down-selected the Future Rapid Effects System (FRES) utilityplatform vehicles to three vehicles, excluding the Swedish SEP-based platformproposed by BAE Systems. The Group believes that opportunities remain for thisplatform and continues to pursue the vehicle and systems integration role on theFRES programme. Discussions continue with the UK MoD as to a revised long-term arrangement forthe provision of munitions. South Africa The growing international requirement for mine-protected wheeled vehiclescontinues to generate new orders for the RG31 and RG32 vehicles built by OMC,the Group's South African subsidiary. Further awards were received for theproduction of RG31 MRAP vehicles for General Dynamics to supply to the US MarineCorps. Sweden Sweden and Norway agreed to jointly continue the final phase of development forthe Archer self-propelled artillery programme. Production of CV9035 armed vehicles for the Netherlands is underway. Looking forward The Land & Armaments business is seeing strong demand for several establishedcore products, as well as new wheeled vehicle offerings, driven primarily bycombat experiences in Afghanistan and Iraq. While operations in these regionscontinue, near-term growth is anticipated. Land & Armaments is well positionedon vehicle modernisation programmes and the mine-protected vehicle business. Programmes & Support The Programmes & Support business group, with 28,500 employees1 and based in theUK, comprises the Group's air, naval and underwater systems activities, theIntegrated System Technologies business and a 50% interest in the GripenInternational joint venture. Restated4 Restated4 Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 Unaudited Unaudited Audited Sales1 £2,354m £2,018m £4,615mEBITA2 £231m £153m £342mReturn on sales 9.8% 7.6% 7.4%Cash inflow3 £184m £55m £449mOrder intake1 £2,553m £1,911m £5,178mOrder book1 £17.3bn £16.6bn £17.0bn In the first half of 2007, Programmes & Support achieved EBITA2 of £231m (2006£153m) on sales1 of £2,354m (2006 £2,018m) and generated an operating cashinflow3 of £184m (2006 £55m). Return on sales benefited by 1.8% in the first half from one-off gains,including completion of an export ship programme. 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 to the above programmes as well as to the UK's Royal AirForce (RAF) fleets of Harrier, Tornado, Nimrod MR2 and VC10 aircraft. Military Air Solutions made strong progress during the first half of the year;both on delivering its programme commitments and working alongside its customersto enhance their military capability. An important step towards a Long TermPartnering Agreement (LTPA) between BAE Systems and the UK Ministry of Defence(MoD) was achieved in March when a Foundation Contract was signed. Consistentwith the Group's strategy, the contract paves the way for a full LTPA coveringsupport and upgrade of the current and future fixed wing aircraft fleet. Deliveries of Typhoon aircraft to the air forces of the four partner nationscontinue with a total of 46 aircraft now delivered to the RAF and 77 across theother European partner nations. BAE Systems is also supporting the RAF'straining and operational build-up. Discussions to establish long-term integratedlogistics support contracts continue. The initial contract combining scheduledmaintenance work with upgrade activity is progressing well and will be developedfurther to include maintenance activities at RAF Coningsby. Tranche 2 aircraftare now in production and a contract has been signed to include furtherair-to-ground capability enhancements. Progress on both the design and development, and production contracts for the UKRAF Hawk Advanced Jet Trainer remains on schedule. The Indian and South Africanprogrammes remain on track, with Indian aircraft completing interim acceptancesand delivery of one aircraft taking place in South Africa with an increaseddelivery rate scheduled for the second half of the year. In March, the 200thT-45 Goshawk was delivered to the US Navy. The UK Hawk Integrated Operational Service contract was secured in February.This is an availability contract for the UK RAF's TMk1 Hawk fleet anddemonstrates the successful migration of the Tornado availability contractingmodel to other air platforms. The Nimrod MRA4 development programme continues through its planned flighttesting schedule. Work is underway to determine the basis of funding for thefirst five years of in-service support. VC10 and Nimrod MR2 support contracts continue to perform well. The VC10 supportcontract was extended to 2013, increasing its value by £120m. The Tornado availability contract initial service delivery was achieved asplanned in March. Full service delivery is due at the end of the year.Complementary to this will be an increase in the scope of the contract to coverthe remaining areas of the Tornado aircraft which are currently provided asGovernment Furnished Equipment. In addition, a Capability Sustainment Servicecontract is anticipated to ensure Tornado sustains its operational effectivenessfor the foreseeable future. The Harrier Component Support Package contract was awarded in May. This providessupport for Harrier GR9's major avionics equipment and the continued supply ofreplacement components. This award represents a significant step towardssecuring a through-life Harrier availability contract. BAE Systems is partnered with Lockheed Martin and Northrop Grumman on the JointStrike Fighter programme and has responsibility for the design and manufactureof the rear fuselage and empennage and for the supply of certain air vehiclesystems. The rear fuselage and the vertical tails for the first Short Take Off andVertical Landing aircraft were delivered to schedule during the period. Thefinal Critical Design Review for the Carrier Variant was completed in June. Contract award for F-35 low rate initial production is expected later this year. A medium-altitude long-endurance unmanned air vehicle system, HERTI,successfully completed further flight trials. The Taranis unmanned combat air vehicle technology demonstration programme,designed to help inform the UK on the development of future requirements,achieved all programme milestones on schedule. In-country flight testing of the first South African Gripen is proceeding, withdelivery of five aircraft scheduled for early 2008. Surface Fleet Solutions On the Type 45 destroyer programme, the first of class, HMS Daring, commencedsea trials in July. The second ship, Dauntless, was launched at the end ofJanuary 2007 and all sections of the third ship, Diamond, are in place on theberth ahead of schedule. At the end of May, BAE Systems and the UK MoD signed a Heads of Agreementsetting out the basis for completing the class of six ships. This agreement isintended to lead to a signed contract in the second half of the year. The Landing Ship Dock (Auxiliary) contract has gone well, with delivery of thefourth and final ship, Lyme Bay, scheduled for the second half of 2007. The demonstration phase of the CVF programme continues with further ordersexpected in the second half of the year to cover detailed design work andpre-production items. Progress on the reactivation of three ex-Royal Navy Type 23 frigates for theChilean Navy continues. The second ship, Almirante Lynch, was handed over asplanned in March, and the third is forecast to be handed over in early 2008. The naval joint venture businesses, Flagship Training Limited and Fleet SupportLimited, continue to perform well. As part of the UK's Surface Ship SupportAlliance, Fleet Support Limited is working to develop a cost effective model forfuture surface ship support and is also awaiting the outcome of the UK MoD NavalBase Review. In March, Flagship Training Limited finalised a four year extensionto their existing partnering agreement with the UK MoD to provide trainingfacilities management services to the Royal Navy. The arbitration process in respect of the Brunei Offshore Patrol Vessels wassettled and title to all three vessels transferred to the customer in April. Submarines The launch, ahead of schedule, of HMS Astute, the first of class boat, tookplace on 8 June. This performance demonstrates the stability of the overallprogramme. Pricing on Boats 2 and 3 was agreed with the UK MoD together with an order forthe start of Boat 4 production. This, together with the UK government'sannouncement on the next generation submarine programme, provides a sustainablebase for the business. Integrated System Technologies The Falcon programme is scheduled to achieve Equipment Acceptance Trials in2009. Falcon will provide the UK Armed Forces with a new mobile high capacity,secure information infrastructure capability. Design and development of the Mission System for the CVF programme continues. The T93 radar replacement contract has seen good progress and the business isnow positioned as the lead radar provider for the UK's air defence systems. The programmes for Sampson radar, the combat management system and long-rangeradar for the Type 45 destroyers, have met all their key milestones during thefirst six months of the year. The first production system for the Seawolf mid-life update for Type 22 and 23frigates has been delivered and installed at HMS Collingwood. Underwater Systems Deliveries on the Sting Ray lightweight torpedo programme for the UK MoDcontinue. The Archerfish mine neutralising programme continues to make excellent progress,having achieved qualification for US Navy use. Talisman, an unmanned underwater vehicle, has successfully completed its firstfunded trial and is progressing towards demonstrating its capability in keyexport markets. Looking forward The solid performance in the first half of the year is expected to continue intothe second half across all major programmes. Strategic partnering agreementswith the UK MoD across a range of businesses in this sector continue to bepursued. International Businesses The International Businesses business group, with 15,100 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. Restated4 Restated4 Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 Unaudited Unaudited Audited Sales1 £1,550m £1,545m £3,428mEBITA2 £221m £176m £415mReturn on sales 14.3% 11.4% 12.1%Cash inflow/(outflow)3 £26m £(119)m £171mOrder intake1 £1,711m £1,364m £3,854mOrder book1 £7.2bn £7.0bn £7.1bn In the first half of 2007, International Businesses achieved EBITA2 of £221m(2006 £176m) on sales1 of £1,550m (2006 £1,545m) and generated an operating cashinflow3 of £26m (2006 outflow £119m). Return on sales has increased to 14.3% in the first half. This is a result of ashort-term change in mix towards more value added spares and repairs activity.Sales1 and EBITA2 in the first half of 2006 included £83m and £(1)m respectivelyin respect of the Atlas Elektronik business that was disposed of in August 2006. Customer Solutions & Support 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). Progress is being made on modernising the Saudi armedforces in line with the Understanding Document signed on 21 December 2005between the UK and Saudi Arabian governments. Under the terms of the signeddocument, Typhoon aircraft will replace Tornado Air Defence Variant aircraft andothers currently in service with the RSAF. Detailed negotiations are continuingto progress the Understanding Document towards a contract for the delivery ofTyphoon aircraft. Around 4,700 people are employed by the Group in the Kingdom of Saudi Arabia, ofwhom more than half are Saudi nationals. The business is continuing to developits presence in Saudi Arabia, including the relocation of staff from the UK, andis helping to develop a greater indigenous capability in the Kingdom. Thesecurity of employees is the highest priority and progress is well advanced onnew residential and office facilities as well as increased security measures.Occupation of the first new residential compound and new office facilities isnow complete. Performance on the core Saudi support programme has progressed well. Developmentof new business outside of the core programme continues. The £128m contract for200 armoured vehicles remains on schedule and, during the first half, a $448m(£223m) order for a C4I5 system for the Kingdom of Saudi Arabia was received. Australia BAE Systems Australia secured a number of contracts to reinforce its position asa through-life capability partner to the Australian Defence Force. A A$70m(£30m) contract was signed for the Electronic Support Measures System mid-lifeupgrade on the AP-3C aircraft. Work has commenced under the second five-yearsupport contract for the Australian Hawk Lead-In Fighter aircraft. Support continues, under subcontract to Boeing, on the Airborne Early Warningand Control system for the Royal Australian Air Force. The programme is behindschedule and BAE Systems is jointly engaged with Boeing and the customer todeliver recovery actions. MBDA MBDA's missile delivery programmes are progressing well for both domestic andexport customers. During the period there were significant deliveries ofstand-off weapons, with the completion of deliveries of Scalp to France and asignificant number of Taurus missiles to Germany. Mica air-to-air missiles,Rapier surface-to-air missiles and the Brimstone air-launched anti-armour weaponhave also been delivered in volume. Development programmes are proceeding satisfactorily with another successfulfiring in May of the six-nation Meteor beyond visual range air-to-air missileand the completion of the final key technical maturity programme milestone. Thefinal system qualification firing of the Franco-Italian Aster Principal Anti-AirMissile System naval air defence weapon took place in May. The UK equivalentmissile has been delivered to the Royal Navy's first of class Type 45 destroyer,HMS Daring. A final qualification firing of the Exocet Block 3 anti-ship missilewas successfully carried out in April. Key orders received during the period were from Kuwait for an Aspide systemupgrade, from France for Eryx missiles, from Estonia which has selected Mistralfor its air defence requirements and from South Africa for the new digitisedMilan Advanced Technology fire-support weapon. The acquisition, subject to regulatory approval, of Bayern-Chemie GmbH, theGerman rocket motor company, was announced in May. The disposal of the non-coreaerospace equipment activities of Alkan S.A. was completed in May. Saab Sales rose by 15% to SEK10,852m (£794m) and operating income by 10% to SEK1,044m(£76m) with an operating margin of 9.6%. Key orders won during the first half of 2007 include a A$104m (£44m) order toupgrade and maintain the combat management systems and fire control systems forthe Royal Australian Navy's ANZAC class frigates and a SEK350m (£25m) order fromthe Royal Netherlands Army for a Mobile Battalion Combat Training Centre. Looking forward The Group seeks to sustain its long-term presence in Saudi Arabia throughdeveloping new business including Typhoon and delivering on current supportcommitments. 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. Restated4 Six months to Six months to Year to 30 June 2007 30 June 2006 31 December 2006 Unaudited Unaudited Audited Sales1 £124m £178m £295mEBITA2 £(62)m £(65)m £(147)mCash outflow3 £(134)m £(287)m £(225)mOrder intake1 £177m £136m £267mOrder book1 £0.3bn £0.3bn £0.3bn In the first half of 2007, HQ & Other Businesses reported a loss2 of £62m (2006£65m) and had an operating cash outflow3 of £134m (2006 £287m). Of this, thereported loss for Regional Aircraft was £65m (2006 £46m), and operating cashoutflow was £14m (2006 £40m). 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. Regional Aircraft During the period the Regional Aircraft leasing team secured leases for 37aircraft, including ten Avro RJ jets to CityJet. However, the market continuesto present challenges with defaults by airlines increasing and markets remaininghighly competitive. Support revenues remained stable compared with last year. A freighter conversion programme for the 146 Jet has been launched after thesuccess of a similar programme for the turboprop fleet. Much of the leasing business is underpinned by the Group's Financial RiskInsurance Programme (FRIP) which makes good shortfalls in actual lease incomeagainst originally estimated future income. The Group continues to placereliance on this insurance programme. Arbitration proceedings continue inrelation to claims advanced by the insurers as to their liability under theirreinsurance contracts. These claims are being vigorously defended. A charge of £61m has been taken against the carrying value of those regionalaircraft outside of the FRIP programme. This represents a change to the Group'svaluation methodology and will reduce the future depreciation charged on theseaircraft. Looking forward The leasing market for BAE Systems' aircraft continues to remain difficult withnew markets likely to be dominated by higher risk customers. Support revenuesare dependent on maintaining aircraft in service and the conversion of newcustomers to managed services such as power by the hour contracts. Losses areexpected to continue. 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 4 restated following the sale of the Group's interest in Airbus SAS and changesto the Group's organisational structure 5 Command, Control, Communications, Computing and Intelligence 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 2007 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 that have been reviewed. We have read the other information contained inthe interim report and considered whether it contains any apparent misstatementsor material inconsistencies 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 so that we might state to the company thosematters we are required to state to it in this report and for no other purpose.To the fullest extent permitted by law, we do not accept or assumeresponsibility to anyone other than the company for our review work, for thisreport, 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 1999/4: Review of interim financial information issued by the Auditing PracticesBoard for use in the UK. A review consists principally of making enquiries ofgroup management and applying analytical procedures to the financial informationand underlying financial data and, based thereon, assessing whether theaccounting policies and presentation have been consistently applied unlessotherwise disclosed. A review excludes audit procedures such as tests ofcontrols and verification of assets, liabilities and transactions. It issubstantially less in scope than an audit performed in accordance withInternational Standards on Auditing (UK and Ireland) and therefore provides alower level of assurance than an audit. Accordingly, we do not express an auditopinion 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 2007. KPMG Audit PlcChartered AccountantsLondon8 August 2007 Consolidated income statement Restated1 Year to Six months to Six months to 31 December 30 June 2007 30 June 2006 2006 Unaudited Unaudited Audited Notes £m £m £m £m £m £mContinuing operationsCombined sales of Group and equity accounted 6,891 6,376 13,765investmentsLess: share of equity accounted investments (545) (616) (1,432) Revenue 2 6,346 5,760 12,333Operating costs (5,850) (5,514) (11,763)Other income 97 253 371 Group operating profit excluding amortisation and 643 552 1,080impairment of intangible assetsAmortisation (50) (53) (105)Impairment - - (34) Group operating profit 593 499 941 Share of results of equity accounted investments 57 48 127excluding finance costs and taxation expenseFinancial income of equity accounted investments 3 17 12 21Taxation expense of equity accounted investments (24) (19) (35) Share of results of equity accounted investments 50 41 113 Earnings before amortisation and impairment of 2 700 600 1,207intangible assets, finance costs and taxation expense(EBITA)Amortisation (50) (53) (105)Impairment - - (34)Financial income of equity accounted investments 3 17 12 21Taxation expense of equity accounted investments (24) (19) (35) Operating profit 643 540 1,054Finance costs 3Financial income 661 738 1,330Financial expense (647) (900) (1,525) 14 (162) (195) Profit before taxation 657 378 859Taxation expenseUK taxation (102) 20 (97)Overseas taxation (54) (105) (116) (156) (85) (213) Profit for the period from continuing operations 501 293 646Profit for the period from discontinued operations 17 113 993Profit for the period 518 406 1,639Attributable to:BAE Systems shareholders 515 405 1,636Minority interests 3 1 3 518 406 1,639 Earnings per share 5Continuing operations:Basic earnings per share 15.3p 9.1p 19.9pDiluted earnings per share 15.0p 9.1p 19.8pDiscontinued operations:Basic earnings per share 0.5p 3.5p 30.8pDiluted earnings per share 0.5p 3.3p 29.4pTotal:Basic earnings per share 15.8p 12.6p 50.7pDiluted earnings per share 15.5p 12.4p 49.2p Dividends per ordinary share 9Prior year final dividend paid in the period £221m (2006 6.9p 6.3p 6.3p£203m)Interim dividend declared £175m (2006 paid £143m) 5.0p 4.4p 4.4p 1 restated following the sale of the Group's interest in Airbus SAS Consolidated balance sheet Notes 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited £m £m £mNon-current assetsIntangible assets 7,445 7,888 7,595Property, plant and equipment 1,632 1,662 1,746Investment property 123 143 123Equity accounted investments 673 1,941 671Other investments 11 9 11Other receivables 815 616 569Other financial assets 50 47 51Deferred tax assets 704 1,118 1,077 11,453 13,424 11,843 Current assetsInventories 410 456 395Trade and other receivables including amounts due from customers for 2,934 2,245 2,253contract workCurrent tax - 43 3Other investments 134 568 503Other financial assets 80 95 50Cash and cash equivalents 3,856 2,116 3,100 7,414 5,523 6,304 Non-current assets and disposal groups held for sale 96 277 - 7,510 5,800 6,304 Total assets 18,963 19,224 18,147 Non-current liabilitiesLoans (2,407) (3,313) (2,776)Trade and other payables (502) (498) (465)Retirement benefit obligations 6 (1,788) (3,044) (2,499)Other financial liabilities (38) (40) (45)Deferred tax liabilities (15) (19) (15)Provisions (311) (327) (271) (5,061) (7,241) (6,071) Current liabilitiesLoans and overdrafts (282) (886) (334)Trade and other payables (6,877) (6,855) (6,717)Other financial liabilities (51) (49) (50)Current tax (434) (276) (417)Provisions (471) (331) (424) (8,115) (8,397) (7,942) Liabilities directly associated with non-current assets and disposal (24) (222) -groups held for sale (8,139) (8,619) (7,942) Total liabilities (13,200) (15,860) (14,013) Net assets 5,763 3,364 4,134 Capital and reservesIssued share capital 89 81 81Share premium 1,204 814 841Equity option of convertible preference shares 1 76 76Other reserves 4,514 4,758 4,330Retained earnings (65) (2,380) (1,211) Total equity attributable to equity holders of the parent 5,743 3,349 4,117Minority interests 20 15 17 Total equity 8 5,763 3,364 4,134 Consolidated cash flow statement Restated1 Six months Six months Year to to 30 June to 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited £m £m £m Profit for the period from continuing operations 501 293 646Profit for the period from discontinued operations 17 113 993Profit for the period 518 406 1,639Taxation expense - continuing operations 156 85 213 - discontinued operations - - 4Share of results of equity accounted investments - continuing operations (50) (41) (113) - discontinued operations - (113) (70)Net finance costs - continuing operations (14) 162 195 - discontinued operations - - (2)Depreciation, amortisation and impairment 205 173 422Gain on disposal of property, plant and equipment - (44) (60)Gain on disposal of investment property (10) (65) (84)Gain on disposal of non-current other investments (8) - -Gain on disposal of business - continuing operations (44) (11) (13) - discontinued operations (17) - (925)Impairment of other investments - (1) 2Cost of equity-settled employee share schemes 17 10 21Movements in provisions 101 (37) 47Decrease in liabilities for retirement benefit obligations (112) (642) (834)(Increase)/decrease in working capital:Inventories (54) (10) 28Trade and other receivables (739) (165) (187)Trade and other payables 216 - 495 Cash inflow/(outflow) from operating activities 165 (293) 778Interest paid (113) (156) (315)Interest element of finance lease rental payments (4) (5) (11)Taxation paid (43) (55) (85) Net cash inflow/(outflow) from operating activities 5 (509) 367 Dividends received from equity accounted investments - continuing operations 41 22 57 - discontinued operations - 88 88Interest received 98 59 139Purchases of property, plant and equipment (99) (178) (419)Purchases of intangible assets (15) (11) (27)Proceeds from sale of property, plant and equipment 7 115 135Proceeds from sale of investment property 11 137 174Proceeds from sale of non-current other investments 15 1 1Purchase of non-current other investments (1) (1) (5)Purchase of subsidiary undertakings - - (12)Purchase of equity accounted investments (1) - (4)Proceeds from sale of subsidiary undertakings 19 80 174Cash and cash equivalents disposed of with subsidiary undertakings - - (40)Proceeds from sale of equity accounted investments 57 - 1,212Proceeds from sale of Exchange Property - - 557Net proceeds from sale/(purchase) of other deposits/securities 369 17 (468) Net cash inflow from investing activities 501 329 1,562 Capital element of finance lease rental payments (14) (28) (45)Proceeds from issue of share capital 790 26 53Purchase of treasury shares (152) - (112)Purchase of own shares (34) - (12)Equity dividends paid (221) (203) (346)Dividends paid on preference shares (10) (10) (20)Cash inflow from loans - - 66Cash outflow from repayment of loans (111) (39) (921) Net cash inflow/(outflow) from financing activities 248 (254) (1,337) Net increase/(decrease) in cash and cash equivalents 754 (434) 592Cash and cash equivalents at 1 January 3,074 2,491 2,491Effect of foreign exchange rate changes on cash and cash equivalents 1 22 (9) Cash and cash equivalents at end of period 3,829 2,079 3,074 Comprising: Cash and cash equivalents 3,856 2,116 3,100 Overdrafts (27) (37) (26) Cash and cash equivalents at end of period 3,829 2,079 3,074 1 restated following the sale of the Group's interest in Airbus SAS Consolidated statement of recognised income and expense Six months Six months Year to to 30 June to 30 31 December June 2007 2006 2006 Unaudited Unaudited Audited £m £m £mCurrency translation on foreign currency net investments:Subsidiaries (33) (104) (162)Equity accounted investments (8) (11) (26)Amounts (charged)/credited to hedging reserve (2) 218 221Actuarial gains on defined benefit pension schemes:Subsidiaries 775 340 692Equity accounted investments 17 54 72Fair value movements on available-for-sale investments 6 - -Current tax on items taken directly to equity 52 21 21Deferred tax on items taken directly to equity:Subsidiaries (327) (110) (227)Equity accounted investments (5) (91) (92)Recycling of fair value movements on disposal of available-for-sale (6) - -investmentsRecycling of cumulative currency translation on disposal:Continuing operations - - 3Discontinued operations - - 11Recycling of cumulative net hedging reserve on disposal - discontinued - - (448)operations Net income recognised directly in equity 469 317 65Profit for the period 518 406 1,639 Total recognised income and expense 987 723 1,704 Attributable to:Equity shareholders 984 722 1,701Minority interests 3 1 3 987 723 1,704 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 ending 31 December 2007. 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 2006. Thecomparative figures for the year ended 31 December 2006 are not the Group'sstatutory accounts for that financial year. Those accounts have been reportedupon by the Group's auditors and delivered to the registrar of companies. Thereport of the auditors was unqualified, did not include a reference to anymatters to which the auditors drew attention by way of emphasis withoutqualifying their report and did not contain statements under Section 237(2) or(3) of the Companies Act 1985. Except as described below, the accounting policies adopted in the preparation ofthese condensed consolidated interim financial statements to 30 June 2007 areconsistent with the policies applied by the Group in its consolidated financialstatements as at, and for the year ended, 31 December 2006. Changes in accounting policies Amendments to IAS 1 Presentation of financial statements - capital disclosuresand IFRS 7 Financial Instruments: Disclosures are effective for the Group forthe year ending 31 December 2007. These introduce new requirements for capitaldisclosures and disclosures for financial instruments respectively and as suchhave no impact on the consolidated income statement or balance sheet. International Financial Reporting Interpretations Committee interpretation(IFRIC) 7 Applying the restatement approach under IAS 29, IFRIC 8 Scope of IFRS2, IFRIC 9 Reassessment of embedded derivatives and IFRIC 10 Interim financialreporting and impairment are all effective for the Group for the year ending 31December 2007. The Group has reviewed the effect of these IFRICs and hasconcluded that IFRIC 7 is not relevant for the Group and that IFRICs 8, 9 and 10do not have an impact on these condensed consolidated interim financialstatements. 2. Segmental analysis (unaudited) Combined sales of Less: Add: Revenue Group and equity accounted sales by equity sales to equity investments accounted accounted investments investments Restated1 Restated1 Restated1 Restated1 Six Six months Six Six months Six Six months Six months to months to months to months Six to to to to months to 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 2007 2006 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £m £m £m Electronics, Intelligence 1,958 2,090 (5) (6) - - 1,953 2,084& SupportLand & Armaments 1,201 892 - - - - 1,201 892Programmes & Support 2,354 2,018 (569) (596) 453 443 2,238 1,865International Businesses 1,550 1,545 (501) (530) - - 1,049 1,015HQ & Other Businesses 124 178 - (3) - - 124 175 7,187 6,723 (1,075) (1,135) 453 443 6,565 6,031Intra-business group (296) (347) - - 77 76 (219) (271)sales/revenue 6,891 6,376 (1,075) (1,135) 530 519 6,346 5,760 EBITA2 Amortisation of Business intangible assets group result Restated1 Restated1 Restated1 Six Six months Six months Six months Six Six months months to to 30 June to 30 June to 30 June months to to 30 June 30 June 30 June 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £m Electronics, Intelligence & Support 193 260 (7) (7) 186 253Land & Armaments 117 76 (31) (34) 86 42Programmes & Support 231 153 (10) (9) 221 144International Businesses 221 176 (2) (3) 219 173HQ & Other Businesses (62) (65) - - (62) (65) 700 600 (50) (53) 650 547 Financial income of equity accounted 17 12investmentsTaxation expense of equity accounted (24) (19)investments Operating profit 643 540Finance costs 14 (162) Profit before taxation 657 378Taxation expense (156) (85) Profit for the period from continuing 501 293operations 1 restated following the sale of the Group's interest in Airbus SAS and changesto the Group's organisational structure 2 earnings before amortisation and impairment of intangible assets, financecosts and taxation expense 3. Finance costs Restated1 Six months to Six months to Year to 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited £m £m £m Financial income/(expense) - Group 14 (162) (195)Financial income - share of equity accounted investments 17 12 21 31 (150) (174)Analysed as:Net interest:Interest income 98 62 143Interest expense (137) (177) (325)Facility fees (2) (2) (4)Net present value adjustments (1) 12 8Gain on sale of available-for-sale investments 6 - -Share of equity accounted investments 16 12 21 (20) (93) (157)Other financial income/(expense):Group 50 (57) (17)Share of equity accounted investments 1 - - 31 (150) (174) 1 restated following the sale of the Group's interest in Airbus SAS Other financial income of £51m (2006 expense £57m) represents the market valueand foreign exchange movements on financial instruments and investments of £2m(2006 £(72)m) and a net financing credit on pensions of £49m (2006 £15m). 4. Disposals and discontinued operations Disposals On 17 January 2007, the Group completed the sale of its 50% shareholdinginterest in HR Enterprise Limited and its subsidiary, Xchanging HR ServicesLimited, to HR Holdco Limited (a company within the Xchanging group) for a cashconsideration of £10.1m. On 6 March 2007, the Group completed the sale of its 50% shareholding interestin Xchanging Procurement Services (Holdco) Limited to XUK Holdco (No.2) Limited(a company within the Xchanging group) for a cash consideration of £46.8m. Assets held for sale On 24 April 2007, the Group agreed the sale of its Inertial Products business toinvestment affiliates of J. F. Lehman & Company, the US private equity firm, fora cash consideration of $140m (£70m), subject to adjustment according to thelevel of working capital and net debt or net cash in the business at closing.Completion of the sale is conditional upon regulatory and other approvals beinggiven and is expected to take place in the second half of 2007. Accordingly thebusiness is presented as held for sale on the balance sheet as at 30 June 2007. Discontinued operations On 4 October 2006, the Group's shareholders approved the resolution to disposeof the Group's shareholding in Airbus SAS to EADS for €2.75bn (£1.8bn) in cash.The sale was completed on 13 October 2006. The results of Airbus SAS wereclassified as a discontinued operation and the June 2006 consolidated incomestatement has been restated accordingly. 5. Earnings per share (unaudited) Six months to 30 June 2007 Restated1 Six months to 30 June 2006 £m Basic £m Diluted £m Basic £m Diluted pence pence pence pence per per per per share share share share Profit for the period attributable to equity 515 515 405 405shareholdersInterest on the debt instrument of the convertible - 13 - 14preference shares Profit for the period after adjusting for interest 515 15.8 528 15.5 405 12.6 419 12.4on the debt instrument of the convertiblepreference shares Represented by:Continuing operations 498 15.3 511 15.0 292 9.1 306 9.1Discontinued operations 17 0.5 17 0.5 113 3.5 113 3.3 Add back/(deduct):Net financing credit on pensions, post tax (36) (36) (11) (11)Market value movements on derivatives, post tax (1) (1) 64 64Amortisation and impairment of intangible assets, 37 37 40 40post tax Underlying earnings 515 15.8 528 15.5 498 15.4 512 15.1 Represented by:Continuing operations 498 15.3 511 15.0 375 11.6 389 11.5Discontinued operations 17 0.5 17 0.5 123 3.8 123 3.6 515 15.8 528 15.5 498 15.4 512 15.1 Millions Millions Millions Millions Weighted average number of shares used in calculating 3,262 3,262 3,220 3,220basic earnings per shareAdd:Incremental shares in respect of employee share schemes 25 34Incremental shares in respect of convertible preference 113 127shares Weighted average number of shares used in calculating 3,400 3,381diluted earnings per share 1 restated following the sale of the Group's interest in Airbus SAS 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. Retirement benefit obligations (unaudited) UK defined US and benefit other pension pension plans plans Total £m £m £mDeficit in defined benefit pension plans at 31 December 2006 (2,866) (301) (3,167)Actual return on assets above expected return 53 63 116Decrease in liabilities due to changes in assumptions 914 133 1,047Increase in liabilities due to changes in mortality assumptions (198) - (198)Current service cost (68) (29) (97)Employer contributions 222 25 247Other movements 38 15 53 Deficit in defined benefit pension plans at 30 June 2007 (1,905) (94) (1,999)US healthcare plans (19) Total IAS 19 deficit (2,018)Allocated to equity accounted investments and other participating 525employers1 Group's share of IAS 19 deficit excluding the Group's share of amounts (1,493)allocated to equity accounted investments and other participatingemployers Group's share of IAS 19 deficit of equity accounted investments 59 Represented by:Pension receivables (within trade and other receivables) 295Retirement benefit obligations (1,788) Group's share of IAS 19 deficit excluding the Group's share of amounts (1,493)allocated to equity accounted investments and other participatingemployers 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 2006. As these plans are multi-employer plans the Group hasallocated an appropriate share of the IAS 19 pension deficit to the equityaccounted investments and to Airbus SAS based upon a reasonable and consistentallocation method intended to reflect a reasonable approximation of their shareof the deficit. The Group's share of the IAS 19 pension deficit allocated to theequity accounted investments is included in the balance sheet within equityaccounted investments. The decrease in liabilities due to changes in assumptions is primarily due to anincrease in the discount rates used to calculate the liabilities of the pensionplans as at 30 June 2007. For its UK pension arrangements the Group has, for the purpose of calculatingits liabilities as at 30 June 2007, used the most recent mortality tablespublished by the Institute of Actuaries known as PA 00 medium cohort tablesbased on year of birth for both pensioner and non-pensioner members inconjunction with the results of an investigation into the actual mortalityexperience of plan members. For its US pension arrangements the mortality tablesused for pensioners and non-pensioners are RP 2000 projected to 2010. For thepension and healthcare arrangements the post-retirement mortality assumptionsallow for expected increases in longevity. The Group's share of the IAS 19 deficit excluding the Group's share of amountsallocated to equity accounted investments and other participating employers is£1,064m after tax. 7. Aircraft financing contingent liabilities 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited £m £m £m Potential future cash flow payments in respect of aircraft financing 176 240 191obligationsAnticipated aircraft values (91) (210) (159)Adjustments to net present values (16) (6) (5) Net exposure provided 69 24 27 The Group has provided residual value guarantees (RVGs) in respect of certaincommercial aircraft sold. At 30 June 2007 the Group's exposure to make futurepayments in respect of these arrangements was £176m (31 December 2006 £191m).Certain of these arrangements are covered by a Financial Risk InsuranceProgramme (FRIP) under which the Group places reliance on insurance cover forthe anticipated aircraft values if the guarantees are called. After taking account of the FRIP, the directors consider that the Group's netexposure to these guarantees is covered by the provisions held and the residualvalues of the related aircraft. The Group is also exposed to actual and contingent liabilities arising fromcommercial aircraft financing and RVGs given by Saab AB. Provision is madeagainst the expected net exposures on a net present value basis within theaccounts of Saab. The Group's share of such exposure is limited to itspercentage shareholding in Saab. The increase in the net exposure reflects the reassessment in the period ofcertain of the anticipated aircraft values. 8. Reconciliation of movements in total equity 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited £m £m £m Total equity at beginning of period 4,134 2,804 2,804Total recognised income and expense 987 723 1,704Share placing (net of costs) 741 - -Share options:Share-based payments 17 10 46Proceeds from shares issued 49 26 53Purchase of own shares (34) - (12)Conversion of preference shares 242 5 5Purchase of treasury shares (152) - (112)Release of unrealised gain on the sale of Atlas Elektronik GmbH - - (11)Revaluation of net assets acquired by equity accounted investments - - 5Other - (1) (2)Ordinary share dividends (221) (203) (346) Total equity at end of period 5,763 3,364 4,134 On 8 May 2007, 174,418,605 new ordinary shares were issued by a share placing.The placing structure utilised attracted merger relief under Section 131 of theCompanies Act 1985, resulting in a credit to the merger reserve of £736m.Subsequent internal transactions required to complete the placing structure haveresulted in this part of the merger reserve being transferred to the retainedearnings reserve. On 14 June 2007, 257,152,626 preference shares were converted into ordinaryshares on the basis of 0.47904 ordinary shares for every preference share. During the period, the Group repurchased 33,270,000 shares under the buybackprogramme announced in October 2006. These shares are held in treasury. 9. Dividends The directors have declared an interim dividend of 5.0p per ordinary share (20064.4p), totalling £175m (2006 declared £142m). The dividend will be paid on 30November 2007 to shareholders registered on 19 October 2007. The ex-dividenddate is 17 October 2007. Shareholders who do not at present participate in the Company's DividendReinvestment Plan and wish to receive the final dividend in shares rather thancash should complete a mandate form for the Dividend Reinvestment Plan andreturn it to the registrars no later than 9 November 2007. 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 Six months Year to 31 to 30 June to 30 June December 2007 2006 2006 Unaudited Unaudited Audited £m £m £m Sales to related parties 530 566 1,483Purchases from related parties 97 91 204Amounts owed by related parties 258 109 218Amounts owed to related parties 698 1,292 692 11. Events after the balance sheet date Armor Holdings Inc. On 31 July 2007, the Group acquired Armor Holdings Inc. for $4.5bn (£2.2bn)excluding fees. With headquarters in Florida, Armor Holdings 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. UK naval surface ship joint venture On 25 July 2007, the Group announced that it had entered into a legally bindingFramework Agreement with VT Group plc (VT) to establish a joint venture, whichwill be the UK's premier provider of surface warships and through-life support.It is intended that the joint venture will comprise the following assets: BAESystems Surface Fleet Solutions, which includes surface warship building andsurface warship through-life support; VT's surface warship building andthrough-life support operations; and each of BAE Systems' and VT's 50%shareholdings in their existing surface warship through-life support jointventure, Fleet Support Limited. Completion of the transaction is conditional oncompletion of legally binding Terms of Business Agreement arrangements, the twojoint venture parties entering into a definitive transaction agreement, thereceipt of required regulatory clearances and the approval of VT's shareholders.The joint venture is expected to be established by the end of 2007. 12. Annual General Meeting The Annual General Meeting of BAE Systems plc will be held on 7 May 2008. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BAE Systems