Interim Results

BAE Systems PLC 14 September 2000 Interim Report 2000 BAE SYSTEMS The seven new BAE SYSTEMS business groups Programmes Recognising the concentration of value in key projects, such as Eurofighter Typhoon and the naval programmes, the company's new organisation brings together its major programmes in a single business group in order to maximise programme visibility and the efficient utilisation of resources. Customer Solutions & Support This business provides solutions for through-life support for a range of projects and programmes operated by our customers. This can cover the provision of spares and repairs to customer in-service equipment, through to the complete management of customers' outsourced support operations. International Partnerships The company has many cross border partnerships including a 35% interest in Saab AB, a 50% interest in the Matra BAe Dynamics guided weapons joint venture, a 49% interest in the German STN Atlas business, a 50% interest in the Anglo-Italian AMS systems business, a 49.9% interest in the TMS sonar business and a 27.5% economic interest in the recently formed Astrium space systems business. Avionics The Avionics business group is the world's leading supplier and integrator of avionic displays, flight control and associated subsystems. The business group supplies avionics systems to existing and future platforms. North America BAE SYSTEMS has a substantial presence in the North American market as a leading defence, aerospace and information technology business currently employing some 18,500 people in the US and Canada. This business will be enhanced significantly on successful completion of the acquisition of the Lockheed Martin digital controls and electronic warfare businesses. Operations Much of the company's manufacturing capability, including aerostructures, shipbuilding and ordnance facilities are managed within the Operations business group. Bringing these operations together in this way maximises the opportunities in working from an efficient and effective manufacturing base. Commercial Aerospace The principal commercial aerospace activities include the design and manufacture of all wings for Airbus aircraft, together with the 20% participation in the Airbus consortium. The company has agreed with its partner, EADS, to restructure Airbus into a jointly controlled integrated company. This business group also includes the asset management and regional aircraft support activities together with the production of the RJ regional jet. Highlights Profit before interest £507m* Up 47.8% on 1999 Diluted earnings per share 10.6p Down 25.4% on 1999 Dividend per share 3.3p Up 10.0% on 1999 Net debt at 30 June £523m Order book at 30 June £37.0bn * excluding goodwill amortisation and exceptional items 'Good progress has been made in integrating BAE SYSTEMS following the merger of British Aerospace with Marconi Electronic Systems (MES) at the end of November last year.' Sir Richard Evans Dear Shareholder, The merger between British Aerospace and MES has established BAE SYSTEMS as one of the world's leading systems, defence and aerospace companies with global market reach. The integration of these two businesses has gone well and we remain confident of the delivery of the £55m synergies planned for the current year, with the benefit of these savings flowing in the second half. These first half results are in line with our plans in a year with significant trading bias to the second half. As previously indicated we expect modest dilution of fully diluted pre-exceptional EPS this year ahead of future synergies from the merger. Looking to the future, we see three principal strands to our strategy for developing our business. The drive to reduce costs will continue undiminished. We will pursue those areas of the market where we see most opportunity for growth, notably in the systems content of defence procurement, customer support and in Airbus where we see strong demand for large commercial jets. We will also continue to pursue opportunities to derive value from industry consolidation. We remain committed to playing a central role in the ongoing consolidation of our industry. In Europe the agreement with our partner EADS in June to restructure Airbus as a jointly controlled integrated company was a key development for this business. Turning to North America, opportunities have also emerged for significant further business development. Earlier this year we agreed the acquisition of both the Controls Systems business and the Aerospace Electronic Systems business from Lockheed Martin. These businesses will substantially enhance our position in the important US aerospace and defence markets. We will also be maintaining our programme of selective disposals as part of this process. Budget constraints on many of our customers in recent years continue to impact business in the nearer term. In particular, orders in some activities have fallen short of expectations, giving rise to a need for further rationalisation of capacity, as indicated earlier this year. Part of this rationalisation is in addition to actions that we are undertaking to deliver the synergy benefits from the BAe/MES merger. We shall continue to take the actions necessary to maintain a competitive cost base. Despite the significant competitive pressures across our markets we have maintained a strong order book and the market outlook over the medium term is improving, with procurement expenditure in some markets now expected to rise for the first time in a number of years. The financial strength of BAE SYSTEMS, underpinned by good cash generation, is a significant competitive advantage. This facilitates the strategic development of the business through both appropriate acquisitions and winning new business in emerging markets where customers are seeking greater partnership in their relationships with suppliers. We have made good progress in the first half of this year. Near term challenges of course remain but I believe that the outlook for the business remains good, with your company having an enviable market position and financial strength to exploit opportunities as they arise. I would like to thank all members of the BAE SYSTEMS team for their contribution at this important time of the group's development. Sir Richard Evans Chairman 14 September 2000 Summarised profit and loss account Six months Six months Year to to 30 June to 30 June 31 December 2000 1999 1999 Unaudited Unaudited Audited £m £m £m Sales 5,663 4,092 8,929 ========================================= ========== ========== =========== Operating profit* 500 365 769 Share of operating profit/(loss) of joint 7 (22) (6) ventures* Net interest* (27) 15 27 ----------------------------------------- ---------- ---------- ----------- Profit before tax, goodwill amortisation 480 358 790 and exceptional items ========================================= ========== ========== =========== Profit before tax 214 132 459 Tax (122) (40) (131) Minority interests (5) (2) (4) ----------------------------------------- ---------- ---------- ----------- Profit for the period 87 90 324 ========================================= ========== ========== =========== Basic earnings per share* 10.8p 14.8p 30.8p Diluted earnings per share* 10.6p 14.2p 28.8p Dividend per share 3.3p 3.0p 8.0p * excluding goodwill amortisation and exceptional items as appropriate Segmental analysis Sales Profit/(loss) --------- --------- ------------- --------- Proforma* Proforma* Six Six Six months Six months months months to 30 to 30 to 30 June to 30 June June June 2000 1999 2000 1999 Unaudited Unaudited Unaudited Unaudited £m £m £m £m Programmes 1,005 1,255 129 164 Customer Solutions & Support 881 1,048 230 230 International Partnerships 805 820 27 13 Avionics 548 578 54 56 North America 745 708 71 69 Operations 617 511 (31) (27) Commercial Aerospace 1,448 1,415 34 - Centre 11 34 (7) (1) ------------------------------ --------- --------- ------------- --------- 6,060 6,369 507 504 Less: intra-group (397) (395) Net interest excluding (27) exceptional items ------------------------------ --------- --------- ------------- --------- 480 Goodwill amortisation, (183) including joint ventures Exceptional items (note 2) (83) ------------------------------ --------- --------- ------------- --------- 5,663 5,974 214 ============================== ========= ========= ============= ========= *proforma information shows the aggregate results of the former MES and BAe businesses, including joint ventures Chief Executive's review Profit before tax, excluding exceptional items and goodwill amortisation, increased to £480m (1999 £358m) with the company continuing to perform in line with its plans. This continued progress has enabled the net dividend per share for the half year to be increased 10% to 3.3p. This increase is consistent with our commitment for the annual dividend paid to be covered by at least 3.25 times earnings (before goodwill and exceptional items). The company has maintained a strong order book, which at the end of June stood at £37.0bn. Several major programmes are currently projected to achieve higher trading milestones and product deliveries in the second half. In addition, it is anticipated that Airbus profitability will continue to improve. The integration of the former MES and BAe businesses continues on track. Actions have been taken to deliver the planned synergies of some £55m for the current year with that performance benefit also flowing in the second half. We are on track to achieve the necessary run rate required to meet the anticipated savings from the merger of not less than £275m in the third year. Further savings are targeted from direct procurement. The agreement with Boeing, Lockheed Martin, Raytheon and B2B specialist Commerce One to form a joint e- commerce trading exchange, Exostar, is an important element in that drive. The balance sheet is strong with net debt reducing by £302m in the first half to £523m at the end of June 2000. The positive cash flow in the first half of the year reflects a combination of cash movements across the business. Positive cash flow associated with defence export contracts more than offset cashexpenditures in other activities where working capital and capital expenditure investment increased with rising activity, notably in Airbus and in the Avionics business. Airbus product development spend continues as development of the A340- 500/600 programme progresses and with some pre-launch engineering spend on the A3XX programme. The Avionics business and North American electronic systems business contributed a strong first half performance and generated positive cash flow. The interest charge in the period for the group, excluding joint ventures, of £27m (1999 £15m credit) arises primarily as a result of the £0.4bn CALS issued and the £1.4bn debt assumed in respect of the BAe/MES merger. Good cash performance is expected to be a continuing feature of BAE SYSTEMS. The company will retain financial strength whilst developing its business portfolio. The indebtedness associated with the BAe/MES merger has been further reduced, although this is before financing the recently announced $0.5bn acquisition of the Lockheed Martin Controls Systems business and the $1.7bn acquisition of their Aerospace Electronic Systems (AES) business. Both of these acquisitions were subject to regulatory approval, which has now been obtained for the Controls Systems business. These acquisitions will strengthen the company's systems capability and expand programme involvement in the US market. The Controls Systems business has a good market position in the supply of digital flight controls, primarily for military aircraft, and digital engine controls with a strong commercial aircraft engine market position. AES has a strong position in the US market for airborne and naval electronic warfare systems, including substantial involvement in both upgrade of legacy systems and new programmes. The conclusion of the negotiations in forming the Airbus Integrated Company was a major success. The agreement is a good one for BAE SYSTEMS, creating value through the access to the synergies of the whole Airbus system, the sharing of launch finance liabilities, and the realisation of value reflecting BAE SYSTEMS contribution to the Airbus consortium. This agreement also paved the way for the offer of the A3XX to airlines, which have responded very positively. The decision by the UK Government to participate in the A400M programme was also a significant success in the first half. The subsequent signature of the government to government MoU at Farnborough was a further step forward in this programme. Cost reduction and rationalisation will continue to be a feature of BAE SYSTEMS business, with the objective of not only improving margins but also addressing reducing volume where demanded by the changing nature of our business. Good progress has been made during this half year on Eurofighter Typhoon, A3XX, Astute, and Type 45. Nimrod continues to be a challenging programme. The application of new Life Cycle Management techniques, currently being deployed across our major programmes, is bringing greater focus and visibility to Nimrod and other long term complex programmes. Deliveries of a new Hawk variant to Australia have now commenced alongside deliveries to the Canadian based Nato Flying Training Programme. These deliveries will be followed by the South African programme which was won last year. We are monitoring closely the opportunities for further Hawk sales which are being pursued currently. The decision of the UK Government to reopen competition on the Bowman communications system for the army was a disappointment. This has minimal cost implications for the company, due to the current relatively low value added for BAE SYSTEMS. We are awaiting the revised specification from the customer, but it is difficult to see how we can generate value from the situation which has now developed. Substantial opportunities reside within our joint venture businesses. The Matra BAe Dynamics (MBD) guided weapons business will further develop its strong order book with the award of Meteor. Several development programmes are currently progressing to production. The rationalisation opportunities offered by the expansion of the business to include the guided weapons activities of Alenia Marconi Systems and the Aerospatiale guided weapons business, will lead to enhanced financial performance. Although the cancellation of the Medium Range Trigat programme, also announced at Farnborough, was disappointing following the progress that has been made recently, MBD remains well positioned to benefit from the revised requirement. Astrium was formed on 1 May 2000 as a joint venture between Aerospatiale Matra, DASA, and BAE SYSTEMS, creating one of the world's leading space companies. BAE SYSTEMS has a 27.5% economic interest in this joint venture. On 3 March 2000 Saab, our 35% joint venture partner, acquired another Swedish aerospace and defence business, Celsius, for cash consideration of £385m. This further enhances the group's presence in the Scandinavian region. Commercial Aerospace results were a combination of a breakeven trading performance from the Avro regional jet business, and improved performance at Airbus which benefited from a higher volume of aircraft deliveries together with reduced repayments of Launch Aid to the UK Government. Airbus deliveries are expected to continue to rise this year and next on the continuing strong order intake. Airlines placed orders, net of cancellations, for 234 Airbus airliners in the first half, valued at $15.4bn. The order book for Airbus airliners stood at 1,534 aircraft, valued at $110.6bn, at the end of June. In the first six months of the year Airbus Industrie delivered 145 aircraft (138 in 1999). The near term outlook for the company is a combination of the impact of reduced demand in Programmes and Regional Aircraft, with growth in Avionics, the North American electronic systems businesses and Airbus. Growth is expected to resume in Programmes as development activity moves to production with potential further upside as export orders are achieved and as the significant opportunities in Customer Solutions & Support are secured. John Weston Chief Executive 14 September 2000 Major business drivers Eurofighter Typhoon Good progress continues on the development of Typhoon with profit now being recognised on this phase of activity. Preparation for production is now well advanced with final assembly having recently commenced. Gripen Gripen is the only 4th generation fighter currently in operation. Saab and BAE SYSTEMS have created the Gripen joint venture to adapt, manufacture, market and support the Gripen fighter aircraft internationally. To date, the joint venture has seen success in South Africa where 28 Gripen have been ordered. Marketing activities continue across a number of countries. Type 45 Destroyer The company has now been selected as prime contractor on the First of Class. This programme is progressing towards contract award later this year with the UK MoD having recently confirmed their requirement for a class of up to 12 ships. Nimrod This remains a challenging programme. Agreement with the customer to realign the programme to a later in-service date has enabled revised milestones to be met but with limited scope to accommodate further technical risk. JSF The company has significant involvement in both competing teams for the Joint Strike Fighter in the United States. Our electronic businesses are scheduled to supply to both consortia, and our military aircraft business is partnered with Lockheed Martin. The addition of the Lockheed AES businesses, which also have a strong position on both teams, will add significantly to our position on what could be a large programme. Al Yamamah This programme is progressing to plan with the provision of support services to the Kingdom of Saudi Arabia. Astute Under a £2bn prime contract BAE SYSTEMS is undertaking the design, build and initial in-service support of three 7,500 tonne Astute class submarines Type SSN for the Royal Navy. Preliminary discussions are underway on the procurement of an additional three boats in this class. Meteor The UK Government has selected Meteor as the air-to-air missile system for Eurofighter Typhoon. It will enhance the high technology base in the UK and the rest of Europe ensuring more than one million man years of employment over the next 20 years. Airbus future developments Work continues to assess the market for the A3XX large capacity aircraft. Substantial airline interest has already been confirmed and orders placed, conditional on formal launch of the programme by the Airbus partners, BAE SYSTEMS and EADS. The UK Government has agreed the provision of £530m of repayable launch finance for the programme. Airbus operations The continued success of Airbus in the market for large commercial jets is resulting in further increases in planned aircraft deliveries. Significant programme efficiencies are anticipated from the agreement earlier this year to restructure Airbus as a single integrated company. Global presence The planned acquisitions of the Lockheed Martin Controls Systems and AES businesses complement our established positions in the systems, defence and aerospace markets worldwide and strengthens us as a major player in the global defence market. Consolidated profit and loss account Six months Six months Year to to 30 June to 30 June 31 December 2000 1999 1999 Unaudited Unaudited Audited Notes £m £m £m Sales 5,663 4,092 8,929 Less: adjustment for share of (1,142) (771) (1,886) joint venture sales ---------------------------------- ----- ---------- ---------- ----------- Turnover 4,521 3,321 7,043 Operating costs Excluding goodwill amortisation (4,021) (2,956) (6,274) and exceptional items Goodwill amortisation (162) (8) (43) Exceptional items 2 (67) (190) (210) ---------- ---------- ----------- (4,250) (3,154) (6,527) ---------------------------------- ----- ---------- ---------- ----------- Operating profit 271 167 516 Share of operating (loss) of joint ventures Share of operating profit/(loss) 7 (22) (6) before goodwill amortisation Goodwill amortisation (21) (10) (20) ---------- ---------- ----------- (14) (32) (26) ---------------------------------- ----- ---------- ---------- ----------- Profit before interest Excluding goodwill amortisation 507 343 763 and exceptional items Goodwill amortisation and (250) (208) (273) exceptional items ---------- ---------- ----------- 257 135 490 ---------------------------------- ----- ---------- ---------- ----------- Interest Net interest arising on activities (41) - 3 excluding exceptional items Share of net interest of joint 14 15 24 ventures Exceptional interest charges 2 (16) (18) (58) ---------- ---------- ----------- (43) (3) (31) ---------------------------------- ----- ---------- ---------- ----------- Profit before tax on ordinary activities Excluding goodwill amortisation 480 358 790 and exceptional items Goodwill amortisation and (266) (226) (331) exceptional items ---------- ---------- ----------- 214 132 459 Tax Tax on profit excluding (143) (85) (188) exceptional items Tax on exceptional items 21 45 57 ---------- ---------- ----------- (122) (40) (131) ---------------------------------- ----- ---------- ---------- ----------- Profit after tax on ordinary 92 92 328 activities Equity minority interests (5) (2) (4) ---------------------------------- ----- ---------- ---------- ----------- Profit for the period 87 90 324 Dividends Equity: ordinary shares 4 (99) (53) (202) Non-equity: preference shares (11) (10) (21) ---------- ---------- ----------- (110) (63) (223) ---------------------------------- ----- ---------- ---------- ----------- Retained (loss)/profit (23) 27 101 ---------------------------------- ----- ---------- ---------- ----------- Basic earnings per share Including goodwill amortisation 2.6p 4.5p 16.2p and exceptional items ================================== ===== ========== ========== =========== Excluding goodwill amortisation 10.8p 14.8p 30.8p and exceptional items ================================== ===== ========== ========== =========== Diluted earnings per share Including goodwill amortisation 2.5p 4.3p 15.6p and exceptional items ================================== ===== ========== ========== =========== Excluding goodwill amortisation 10.6p 14.2p 28.8p and exceptional items ================================== ===== ========== ========== =========== All results arise from continuing operations Consolidated balance sheet 30 June 30 June 31 December 2000 1999 1999 Unaudited Unaudited Audited Note £m £m £m Fixed assets Intangible assets 1 6,235 316 6,365 Tangible assets 2,154 1,621 2,167 Investments 1 Share of gross assets of joint 5,245 3,434 5,208 ventures Share of gross liabilities of (4,617) (3,007) (4,573) joint ventures ---------- ---------- ----------- Share of joint ventures 628 427 635 Others 21 141 25 ---------- ---------- ----------- 649 568 660 ---------------------------------- ----- ---------- ---------- ----------- 9,038 2,505 9,192 ---------------------------------- ----- ---------- ---------- ----------- Current assets Stocks 1,654 1,510 1,559 Debtors due within one year 3,011 2,852 3,647 Debtors due after one year 540 400 512 Investments 1,862 1,127 1,713 Cash at bank and in hand 1,053 368 811 ---------------------------------- ----- ---------- ---------- ----------- 8,120 6,257 8,242 Current liabilities Loans and overdrafts (2,103) (227) (2,025) Creditors (4,501) (3,880) (4,871) ---------------------------------- ----- ---------- ---------- ----------- (6,604) (4,107) (6,896) Net current assets 1,516 2,150 1,346 ---------------------------------- ----- ---------- ---------- ----------- Total assets less current 10,554 4,655 10,538 liabilities ---------------------------------- ----- ---------- ---------- ----------- Liabilities falling due after one year Loans (1,260) (895) (1,155) Creditors (531) (479) (542) Provisions for liabilities and (1,280) (1,211) (1,396) charges ---------------------------------- ----- ---------- ---------- ----------- 7,483 2,070 7,445 ================================== ===== ========== ========== =========== Capital and reserves Called up share capital 142 111 140 Shares to be issued - - 255 Share premium account 290 134 212 Statutory reserve 202 202 202 Other reserves 5,442 324 5,212 Profit and loss account 1,311 1,291 1,339 ---------------------------------- ----- ---------- ---------- ----------- Shareholders' funds Equity: ordinary shares 7,121 1,792 7,091 Non-equity: preference shares 266 270 269 ---------- ---------- ----------- 7,387 2,062 7,360 Equity minority interests 96 8 85 ---------------------------------- ----- ---------- ---------- ----------- 7,483 2,070 7,445 ================================== ===== ========== ========== =========== Consolidated cash flow Six months Six months Year to to 30 June to 30 June 31 December 2000 1999 1999 Unaudited Unaudited Audited £m £m £m Net cash inflow from operating activities Operating profit 271 167 516 Depreciation, amortisation and impairment 300 110 254 Profit on disposal of fixed assets and (14) - (4) investments Movement in provisions for liabilities (127) 109 (116) and charges excluding deferred tax Decrease/(increase) in working capital: Stocks (90) (75) 100 Debtors 644 319 122 Creditors (502) (359) (409) Customer stage payments 28 26 (44) ----------------------------------------- ---------- ---------- ----------- 510 297 419 ========================================= ========== ========== =========== Cash flow statement Net cash inflow from operating activities 510 297 419 Dividends from joint ventures 12 8 30 Returns on investments and servicing of (63) (3) (62) finance Taxation (4) (6) (81) Capital expenditure and financial (84) (108) (132) investment Acquisitions and disposals Acquisitions - MES - - (1,357) Other (45) (14) (18) Disposal of subsidiary undertakings and 55 42 42 joint ventures Equity dividends paid (101) (50) (100) ----------------------------------------- ---------- ---------- ----------- Net cash inflow/(outflow) before 280 166 (1,259) financing and management of liquid resources Management of liquid resources (254) (61) 234 Financing (14) (43) 1,686 ----------------------------------------- ---------- ---------- ----------- Net increase in cash available on demand 12 62 661 ========================================= ========== ========== =========== Reconciliation of net cash flow to net movement in net funds Net increase in cash available on demand 12 62 661 Net increase/(decrease) in liquid 254 61 (234) resources Decrease/(increase) in other loans 34 44 (957) included within net funds ----------------------------------------- ---------- ---------- ----------- Change in net funds from cash flows 300 167 (530) Investments, loans and finance leases - - (435) assumed on acquisition of MES Other non cash movements (22) (6) 27 ----------------------------------------- ---------- ---------- ----------- Net increase/(decrease) in net funds 278 161 (938) Net (debt)/funds at start of period (726) 212 212 ----------------------------------------- ---------- ---------- ----------- Net (debt)/funds at end of period (448) 373 (726) ========================================= ========== ========== =========== Reconciliation to movement in net (debt)/cash as defined by the group Net increase/(decrease) in net funds 278 161 (938) Decrease/(increase) in cash on customers' 24 5 (83) account ----------------------------------------- ---------- ---------- ----------- Net increase/(decrease) for the period 302 166 (1,021) ========================================= ========== ========== =========== Statement of total recognised gains and losses Six months Six months Year to to 30 June to 30 June 31 December 2000 1999 1999 Unaudited Unaudited Audited £m £m £m Profit for the period Group excluding joint ventures 96 113 339 Joint ventures (9) (23) (15) ----------------------------------------- ---------- ---------- ----------- Total profit for the period 87 90 324 Currency translation on foreign currency (8) (9) (9) net investments, including joint ventures Revaluation of current asset investment - - 563 Revaluation of land and buildings (14) - (10) ---------- ---------- ----------- Other recognised gains and losses (22) (9) 544 relating to the period (net) ----------------------------------------- ---------- ---------- ----------- Total recognised gains and losses 65 81 868 relating to the period ========================================= ========== ========== =========== Reconciliation of movements in shareholders' funds Six months Six months Year to to 30 June to 30 June 31 December 2000 1999 1999 Unaudited Unaudited Audited £m £m £m Profit for the period 87 90 324 Dividends (110) (63) (223) ----------------------------------------- ---------- ---------- ----------- (23) 27 101 Other recognised gains and losses (22) (9) 544 relating to the period (net) New share capital subscribed - - 29 Merger reserve arising on the issuance of - - 4,336 shares relating to the MES acquisition Shares to be issued in relation to the - - 255 MES acquisition Issuance of shares to QUEST 10 - 7 Exercise of share options, warrants and 62 24 68 scrip dividend issue ----------------------------------------- ---------- ---------- ----------- Net increase in shareholders' funds 27 42 5,340 Opening shareholders' funds 7,360 2,020 2,020 ----------------------------------------- ---------- ---------- ----------- Closing shareholders' funds 7,387 2,062 7,360 ========================================= ========== ========== =========== Notes to the interim report 1 Acquisitions and disposals On 14 January 2000 the group acquired the Watkins Johnson Telecommunications Group in the US for total consideration of £38 million ($59 million) cash. Goodwill arising on consolidation amounted to £25 million and is being amortised over its expected useful life of 20 years. Watkins Johnson is a producer of electronic communications hardware to the US defence market. On 20 March 2000 the group disposed of Actuation Systems Inc. for a net cash consideration of £55 million ($87 million). Actuation Systems Inc. was acquired by the group as a part of the acquisition of MES businesses on 29 November 1999 and had been held as a business for resale from that date. On 3 March 2000 Saab AB, in which the group has a 35% equity interest, acquired 100% of the equity share capital of Celsius AB, a Swedish aerospace and defence company, for a cash consideration of SEK 5 billion (£385 million). BAE SYSTEMS did not contribute cash to Saab AB in relation to this acquisition. The group's share of goodwill arising on the acquisition of Celsius by Saab amounted to £18 million and is being amortised over its expected useful life of 20 years. 2 Exceptional items Six months Six months Year to to 30 June to 30 June 31 December 2000 1999 1999 Unaudited Unaudited Audited £m £m £m Exceptional loss included within operating profit 1999 defence sector rationalisation (10) (190) (198) MES integration costs (57) - (12) ---------- ---------- ----------- (67) (190) (210) ---------- ---------- ----------- Exceptional interest Finance charges relating to the MES - - (22) acquisition Adjustment to net present value (16) (18) (36) provisions ---------- ---------- ----------- (16) (18) (58) ---------- ---------- ----------- Net exceptional loss included within (83) (208) (268) profit before tax ========== ========== =========== 1999 defence sector rationalisation Costs associated with the defence sector rationalisation programme announced in 1999 continue to be forecast at £250 million before a tax credit of £60 million. £208 million has been charged to 30 June 2000, with the balance anticipated to be charged in the second half of 2000 as an exceptional item. Of this, £10 million has been charged in the first half of 2000, with an associated tax credit of £3 million. A net cash outflow of £4 million arose in the first half of 2000 in respect of these costs. MES integration Costs associated with the integration of the former MES and British Aerospace businesses totalling £57 million before a tax credit of £14 million were incurred in the first half of 2000. A net cash outflow of £39 million arose in the first half of 2000 in respect of these costs. Adjustment to net present value provisions Adjustments have been included to maintain the net present value of certain Commercial Aerospace business group recourse provisions which were established as exceptional items on a net present value basis in prior years. The taxation effect of these adjustments in the first half of 2000 is £4 million. These adjustments have no cash flow effect. 3 Commercial aircraft financing Commercial aircraft are frequently sold for cash with the manufacturer retaining some financial exposure. Aircraft financing commitments of the group can be categorised as either direct or indirect. Direct commitments arise where the group has sold the aircraft to a third party lessor and then leased it back under an operating lease (or occasionally a finance lease) prior to an onward lease to an operator. Indirect commitments (contingent liabilities) may arise where the group has sold aircraft to third parties who either operate the aircraft themselves or lease the aircraft on to operators. In these cases the group may give guarantees in respect of the residual values of the related aircraft or certain head lease and finance payments to be made by either the third parties or the operators. The group's exposure to these commitments is offset by future lease rentals and the residual value of the related aircraft. During 1998, an external review was commissioned of the likely income to be generated from the portfolio of aircraft to which the group has either direct or indirect financing exposures. This review identified a most likely level of income of some £2.4 billion. Following this analysis, in September 1998, the group entered into arrangements which reduced its exposure from commercial aircraft financing by obtaining insurance cover from a syndicate of leading insurance companies over a significant proportion of the contracted and expected income stream from the aircraft portfolio, including those aircraft where the group has provided residual value guarantees. At the start of the insurance arrangements £2.2 billion of income was underwritten, of which £1.8 billion remained underwritten as at 30 June 2000. The net exposure of the group to aircraft financing was: 30 June 31 December 2000 1999 £m £m Direct operating lease commitments 659 722 Direct finance lease commitments 5 5 Indirect exposure through aircraft contingent 1,424 1,589 liabilities Exposure to residual value guarantees 667 542 Income guaranteed through insurance arrangements (1,797) (1,885) ----------- ----------- Net exposure 958 973 Expected income not covered by insurance (43) (43) arrangements Expected income on aircraft delivered post insurance (342) (330) arrangements Adjustment to net present value (156) (158) ----------- ----------- Recourse provision 417 442 =========== =========== Income guaranteed through insurance arrangements represents the future income stream from the aircraft assets guaranteed under the insurance arrangements after deducting the policy excess. The external review identified likely income of £250 million above the level guaranteed under the insurance arrangements. Expected income not covered by insurance arrangements represents the amount of this income assumed by management for the purpose of provisioning. Expected income on aircraft delivered post insurance arrangements represents the level of future income anticipated on aircraft delivered since the start of the insurance arrangements. Given the long term nature of the liabilities, the Directors believe it is appropriate to state the recourse provision at its net present value. The provision covers costs to be incurred over a forecast period of 12.5 years from the balance sheet date. The adjustment to net present value reduces the expected liabilities from their outturn amounts to their anticipated net present value. Saab AB The group is involved in similar transactions through its shareholding in Saab AB including aircraft financing commitments and contingent liabilities arising from guarantees in connection with aircraft sales. Where Saab AB is exposed to financial risk from the above transactions, it makes provision against the expected net exposure on a net present value basis, after taking into account the expected future sub-lease income and residual values of the aircraft. The group's exposure is limited to its 35% shareholding in Saab AB. Airbus The group is involved in similar transactions through its participation in Airbus Industrie GIE (AI) including aircraft financing commitments and contingent liabilities arising from credit guarantees and financing receivables under customer financing programmes. Where AI is exposed to financial risk from the above transactions, it makes provision against the expected net exposure, after taking into account future sub-lease rentals and residual values of related aircraft where appropriate. Provision for the net exposure is included within the group's share of the results of AI. The group's obligations under the financing commitments of AI are joint and several with our partner, EADS. 4 Dividends The Directors have declared the payment of an interim dividend of 3.3p per ordinary share (1999 3.0p). The dividend will be paid on 30 November 2000 to shareholders registered on 6 October 2000. The ex-dividend date will be 2 October 2000. Following the termination of the Scrip Dividend Scheme the new Dividend Reinvestment Plan will be available for shareholders who wish to take the dividend in the form of shares rather than cash. 5 Net debt Net debt disclosed on page 1 excludes cash received on customers' account of £75 million (30 June 1999 £11 million; 31 December 1999 £99 million) which is included within creditors on the consolidated balance sheet. 6 Shares to be issued On 29 November 1999 the company allotted 1,167,811,580 new ordinary shares of 2.5p, such shares to be issued to former GEC shareholders as part of the consideration for the MES business. On 31 December 1999 a total of 1,103,367,741 shares had been issued with 64,443,839 shares remaining unissued pending the receipt of the necessary declaration required pursuant to the company's Articles of Association concerning the nationality of the allottee. On 30 June 2000 all such shares had been issued. 7 New Financial Reporting Standards Financial Reporting Standard 15 - Tangible Fixed Assets has been adopted for the first time by the group in this Interim Report. Its adoption has had no material impact upon reported results and comparative figures have not needed restatement in consequence. As permitted by FRS 15, the company has, on adoption, elected to freeze revalued tangible fixed assets' carrying values, with future adjustments being made only in respect of ongoing depreciation, and where necessary, as a result of an assessed impairment. 8 Other information Segmental analysis The segmental analysis of results for the six months ended 30 June 2000 set out on page 3 forms a part of these notes to the Interim Report. This analysis has been revised from 1999 to reflect the performance of the seven new business groups. Proforma comparative figures have been included within the segmental analysis to show the aggregated sales and operating profits of the former MES and British Aerospace businesses including joint ventures, in the first half of 1999. The segmental analysis of profit/(loss) before tax on ordinary activities excluding exceptional items and including joint ventures, and profit/(loss) before tax on ordinary activities, as shown in note 2 to the 1999 Annual Report were stated before the allocation of internal interest between business sectors. After allocation of such interest, the analysis was as follows: Profit/(loss) before tax, exceptionals, Profit/(loss) & incl. JVs before tax 1999 1999 £m £m Defence 757 559 Commercial Aerospace (95) (131) MES businesses 1 1 Other businesses and head office 61 27 ------------ ------------ 724 456 Unallocated interest 3 3 ------------ ------------ 727 459 ============ ============= From 2000, segmental analysis, including that set out on page 3, will be presented before the allocation of internal interest between business groups. This represents a change from prior periods where such allocations were made for all analysis presented with the exception of that noted above. Other The comparative figures for the year ended 31 December 1999 and the other financial information contained in these interim results do not constitute statutory accounts of the group within the meaning of section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 December 1999 have been delivered to the Registrar of Companies. The auditors have reported on those accounts, their report was not qualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The accounting policies adopted in the preparation of the results to 30 June 2000 are consistent with those set out in the 1999 Annual Report, with the exception of the adoption of FRS 15 for the first time in this report (see note 7). This report incorporates all published accounting standards up to FRS 16. This report is being sent to shareholders. Copies are also available to the public from the company's registered office. Independent review report by KPMG Audit Plc to BAE SYSTEMS plc Introduction We have been instructed by the company to review the financial information set out on pages 6 to 12 and we have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The Interim Report, including the financial information contained therein, is the responsibility of, and has been approved by, the Directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where they are to be changed in the next annual accounts in which case any changes, and the reasons for them, are to be 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 Practices Board. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2000. KPMG Audit Plc Chartered Accountants London 14 September 2000 Shareholder information The first Annual General Meeting of BAE SYSTEMS plc will be held on 3 May 2001. Registered Office Warwick House PO Box 87 Farnborough Aerospace Centre Farnborough, Hampshire GU14 6YU Telephone: 01252 373232 Website: www.baesystems.com (Registered in England & Wales No. 1470151) Registrars Lloyds TSB Registrars The Causeway Worthing, West Sussex BN99 6DA Telephone: 0870 600 3982 If you have any queries regarding your shareholding, please contact the Registrars. BAE SYSTEMS plc Registered Office Warwick House PO Box 87 Farnborough Aerospace Centre Farnborough, Hampshire GU14 6YU Telephone 01252 373232

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