Interim Report 2003 - Investis Digitalfiles.investis.com/bae/presentation/interimreport03_withcover.pdf‘EuroSystems’ structure. I was particularly pleased to receive a strong endorsement

Interim Report 2003

Interim_from_OPX 3 11/9/03 1:12 am Page 1

BAE SYSTEMS Innovating for a safer world

BAE SYSTEMS is an international company engaged in the development,delivery and support of advanced defenceand aerospace systems in the air, on land,at sea and in space.The company designs, manufactures andsupports military aircraft, surface ships,submarines, radar, avionics,communications, electronics and guidedweapon systems. It is at the forefront of innovation, workingto develop the next generation of intelligentdefence systems.

BAE SYSTEMS has major operationsacross five continents and customers insome 130 countries. The companyemploys over 90,000 people andgenerates annual sales of approximately£12 billion through its wholly-owned andjoint venture operations.


BAE SYSTEMS Interim report 2003 1

Highlights

1including joint ventures and after the elimination of intra-group orders of £2.4bn2before goodwill amortisation and impairment and exceptional items (statutory presentation is shown on page 8)

Order book1 £46.4 billion

Sales £5,682 million

Profit before interest2 £465 million

Earnings per share2 7.2p

Dividend per share 3.7p

Operating cash inflow £273 million

Net debt £1,254 million

- A solid operating performance in the first half with results in line with expectations

- North America, Customer Solutions & Support and Commercial Aerospace businesses have continued to perform well

- Good cash performance with net debt at the end of the period better than expectations

- Decisive steps taken to ensure best practice programme management is applied consistently across the company

- Interim dividend maintained at 3.7p per share

The good progress underlying the company’s defence businesses in the first half is expected to continue through the second half of the year.

The UK government’s announcement to proceed with the acquisition of new generation Hawk aircraft has removed a major uncertainty for

near term performance delivery. As previously indicated, we anticipate the underlying trading performance for the company’s defence

businesses to remain broadly in line with 2002, before taking account of the exceptional charges last year.

Airbus delivered a good first half performance in what remains a difficult market and we anticipate a similar number of aircraft deliveries to last

year.

Outlook

Results in brief


2 BAE SYSTEMS Interim report 2003

The company produced a solid operating result inthe first half of this year which supports ourplans for the full year. The management teamfocused on delivering an improved performanceacross our businesses and addressing the keyissues arising from the challenges of 2002.While good progress has been made, werecognise that there is much more to do todeliver acceptable profitable growth andincreased shareholder value.

We made good progress in building ourcapabilities in the higher value, and growing,systems sector of the defence market on bothsides of the Atlantic. Our systems integrationexpertise gives us a clear competitive edge ascustomers put greater emphasis on increasinglysophisticated defence systems, as seen in therecent Iraq conflict. Our international reach andthe breadth and quality of our offering mean weare well positioned to capitalise on future growthin the global defence market.

Given the progress made in the first half of theyear and the underlying strength of the business,the Board is recommending a maintained interimdividend of 3.7p per share.

At our Annual General Meeting in April, Sir Robin Biggam retired from the Board and wassucceeded by Sir Peter Mason, as ournominated senior independent non-executivedirector. Sir Peter now chairs the NominationsCommittee and is leading the search for my

“Our key priorities are to deliver sustained profitable growth and increased shareholder value. We will do this by continuing to focus on improving performance across our businesses.”

Sir Richard EvansChairman10 September 2003

successor. I am also pleased to welcome to theBoard another independent non-executivedirector, Michael Hartnall, who chairs the AuditCommittee. These two new directors, with theirstrong business backgrounds, will be valuableadditions to our Board.

Under chief executive Mike Turner’s leadershipwe have made considerable progress in reducingspecific risks in our businesses. The agreementsstruck at the beginning of the year with ourmajor UK customer, the Ministry of Defence,were a major step forward. In addition toaddressing risk in our programmes, we haveidentified areas where the management of ourkey programmes can be improved and action isbeing taken to good effect. Only customersatisfaction, underpinned by sound commercialcontracts, will deliver the success ourshareholders demand.

Our key priorities are to deliver sustainedprofitable growth and increased shareholdervalue. We will do this by continuing to focus onimproving performance across our businesses.The outlook for the second half of the year ispositive and I am confident that themanagement team will continue to build on oursolid first half and deliver sustained improvementin performance.

Chairman’s letter to shareholders



PerformanceSales for the half year were £5,682m. Operatingprofit1 was £465m. Profit before tax was £56m.There has been a particular focus on cashperformance across the business and net debt atthe end of June stood at £1,254m, ahead ofexpectations. Cash performance will continue tobe a key management focus, with an improvedcash flow outlook, against previous expectations,for the second half. Interest cost in the half yearwas higher than the previous year mainly due toregional aircraft cash outflows being earlier thanpreviously expected.

Overall, our business groups performed to planand produced a solid operational performance. Inparticular, there were again good performancesfrom our North America, Customer Solutions &Support and Commercial Aerospace businesses,including a robust performance by Airbus.

The management team shares an absolutedetermination to deliver improved performanceacross the company. My priorities are to deliversustained profitable growth and increaseshareholder value.

HighlightsSome 60% of the company’s sales now derivefrom electronic systems and software and fromsupport services, with defence platformprogrammes contributing approximately 20% andthe balance coming from commercial aircraft,primarily through our 20% ownership of Airbus.

We made good progress on our major UK Ministryof Defence (MoD) programmes. We welcomed thedecision by the MoD in July to purchase the HawkAdvanced Jet Trainer and, more recently, the

“We are all determined to build on our strong market positions and deliver greater value from our large order book. In that way we will deliver sustained profitable growth and increased shareholder value.”

Indian government announced selection of theHawk aircraft. On Typhoon, we achieved the keymilestone of Type Acceptance in June.

Customer Solutions & Support produced a strongperformance, reflecting a positive relationshipwith the MoD’s Defence Logistics Organisationand continued export support activity. A numberof significant orders were won, including a Hawktraining contract with the Royal Bahraini Air Forceand a programme to reactivate two ex-Royal NavyType 22 frigates for the Romanian Navy.

We continued to develop our systems capabilityand secured a number of C4ISR2-relatedcontracts. In an exciting new venture we werepleased to be appointed lead contractor in apartnership, NITEworks, set up between the MoDand industry, as a catalyst to optimise networkenabled capability for the UK armed forces.

We secured a position on the Northrop Grummanteam, one of the two successful down-selectwinners, for the UK Watchkeeper UnmannedAerial Vehicle Programme.

The company continued to grow its leadershipposition in C4ISR in North America, along withdefence electronics and services.

The North America business met all keymilestones and customer ratings continued to beexcellent. Two acquisitions were completed:Advanced Power Technologies, Inc., anengineering research and development firm; andMEVATEC Corporation, a specialist in systemsengineering and missile defence.

1 before goodwill amortisationand impairment and exceptional items (statutory presentation is shown on page 8)2 Command, Control, Communication and Computing, Intelligence, Surveillance and Reconnaissance

Despite the continuing difficult commercialaerospace environment, the Airbus managementteam delivered a strong performance in the firsthalf. The signing in May of the contract for theA400M military transport aircraft will deliversignificant benefits to Airbus in the future.

In July, we signed a memorandum ofunderstanding with Finmeccanica to seek torestructure our European avionics, C4ISR andcommunications businesses under a new‘EuroSystems’ structure.

I was particularly pleased to receive a strongendorsement from the MoD for our contributionto the recent Iraq conflict, providing systems,equipment and personnel to the allied forces.Making all this possible was the knowledge,expertise and dedication of the people inBAE SYSTEMS and its joint ventures and I wouldlike to thank them for their continued support inthese challenging times.

Pension fundingThe company’s cash contribution to its pensionfunds in the first half was £87m.

Earlier this year the company introduced changesin its main UK and US pension schemes. Thesechanges include an agreement to increaseemployees’ contributions to the main scheme inthe UK and to establish employee contributionsfor much of our US workforce. Together withchanges in the outlook for an increase in thevolume of non-competitive contracting, againstwhich pension costs are allowable, thesechanges represent a considerable mitigation ofany future pension cost increases.

Chief executive’s review


In Air Systems, for example, 200 senior managershave already passed through the assessmentcentre and benefited from training. A substantialnumber of other staff in the business will beassessed and trained over the next two years.

We are all determined to build on our strongmarket positions and deliver greater value fromour large order book. In that way we will deliversustained profitable growth and increasedshareholder value.

Summarised profit and loss account

Six months Six months Year toto 30 June to 30 June 31 December

2003 2002 2002Unaudited Unaudited Audited

£m £m £m

Sales 5,682 5,703 12,145

Operating profit1 362 354 810

Share of operating profit of joint ventures1 103 107 192

Profit before interest1 465 461 1,002

Net interest (132) (102) (206)

Profit before tax, goodwill amortisationand impairment and exceptional items 333 359 796

Goodwill amortisation and impairment,including joint ventures (274) (279) (615)

Exceptional items (note 2) (3) (39) (797)

Profit/(loss) before tax 56 41 (616)

Tax (102) (104) (70)

Minority interests (1) – –

Loss for the period (47) (63) (686)

Basic and diluted earnings per share

Including goodwill amortisation and impairmentand exceptional items (1.9)p (2.4)p (23.2)p

Excluding goodwill amortisation and impairment and exceptional items 7.2p 7.7p 17.3p

Dividend per share 3.7p 3.7p 9.2p


The company is also required under theaccounting standard FRS 17 to calculate its netpension liabilities on an alternative basis. Thistakes a snapshot of the value of assets andliabilities rather than matching expectations ofassets and liabilities over time.

The deficit assessed on an FRS 17 basisincreased to £2.5bn (net of tax) compared to£2.2bn (net of tax) at the 2002 year end. Theimprovement in stock markets in the first half wasmore than offset by reductions in bond yields,which have had the effect of increasingdiscounted pension liabilities. At the date of thisreport the deficit on an FRS 17 basis hasreduced to £2.0bn (net of tax), as stock marketshave improved and bond yields have increasedsince 30 June 2003. The FRS 17 assessmenthas no direct bearing on cash contributions to thepension schemes.

Sales Profit/(loss) Sales Profit/(loss)£m £m £m £m

Programmes 976 18 955 3

Customer Solutions & Support 1,018 210 1,065 220

International Partnerships 650 8 658 2

Avionics 488 4 459 4

North America 1,365 122 1,327 115

Commercial Aerospace 1,341 88 1,389 122

HQ and other businesses 147 15 159 (5)

5,985 465 6,012 461

Less: intra-group (303) (309)

Net interest (132) (102)

5,682 333 5,703 359Goodwill amortisation and

impairment, including joint ventures (274) (279)

Exceptional items (note 2) (3) (39)

5,682 56 5,703 41

Programme managementWe have taken decisive steps to ensure that, inour management of programmes, our bestpractice processes are applied consistently andeffectively throughout the company. We alsorecognise that the knowledge and expertise of ouremployees, who implement the processes, areabsolutely crucial and this has been a particularfocus of management attention. We havechanged senior personnel where necessary,stepped up our training and improved incentivesfor those in these key roles.

There have been major changes of teampersonnel and clear improvement targets havebeen set covering schedule performance, costand customer satisfaction. An assessment centrehas been established to gauge the technical,commercial and personal strengths of programmemanagers and their teams.

Segmental analysis

1before goodwill amortisation and impairment and exceptional items (statutory presentation is shown on page 8)

Mike TurnerChief executive10 September 2003

Six months to30 June 2003

Unaudited

Six months to30 June 2002

Unaudited



ProgrammesThe Programmes business group comprises thecompany’s principal air systems, sea systemsand C4ISR5-related prime contract activities.

PerformanceActivities were rebaselined following thechallenges last year on the Nimrod and Astuteprogrammes and the associated exceptionalcharges. Operating profit reflects the goodperformance on the F-35 Joint Strike Fighter(JSF) and in export ships. Sales growthreflects the higher activity on a number ofprogrammes, most notably on Typhoon as itprogressed into production. The Type 45 airdefence destroyer programme continued toprogress well with a significant number of theprogressive design acceptance criteriacleared. Build of the first ship commenced inAugust with a high standard of designmaturity, drawing on lessons learned fromearlier large platform contracts.

HighlightsThe F-35 JSF programme, in which BAE SYSTEMS is a partner with LockheedMartin and Northrop Grumman, continued tomake good progress, highlighted by thecompletion of the Preliminary Design Reviewin June of the conventional take-off andlanding variant.

Good progress was also made with theMinistry of Defence (MoD) on therestructuring of the Nimrod contract andproject management reforms are beingprogressively implemented.

Production of Hawk aircraft for South Africacontinued and, in March, a contract for sixaircraft for Bahrain was received.

Following the decision by the MoD topurchase the Hawk aircraft to meet the UK’sadvanced fast jet trainer requirement, the keypriority for the second half of the year is tosecure a definitive contract and sustain thedevelopment project on this fourth generationtrainer programme.

Typhoon development milestones wereachieved, with Type Acceptance at the end ofJune leading to the start of production aircraftdeliveries to the four partner nations. The firstTyphoon export contract, for 18 aircraft, wassigned by the Austrian government in July.

A priority is the negotiation, to removeuncertainty, in respect of the second trancheof contracts for Typhoon and related revisionsto the production programme.

During the first half, Sea Systems activitieswere reorganised to focus submarinecapabilities at the Barrow yard and surfaceships on the Clyde.

A key focus is the restructuring of the Astutecontract to reflect the agreement reachedwith the MoD in February. The two AuxiliaryOiler ships, Wave Knight and Wave Ruler,have now entered service and the first of thetwo Landing Platform Dock (LPD) ships, HMSAlbion, completed its programme acceptance

Six months to 30 June Six months to 30 June2003 2002

Order book1 £11.7bn £11.7bn

Sales £976m £955m

Profit2 £18m £3m

Cash outflow3 £(35)m £(222)m

Number of employees4 19,500 20,000

BAE SYSTEMS made good progress in the first six months of the year in addressing operationalpriorities, principally performance delivery.

1including joint ventures and before the elimination of intra-group orders2before goodwill amortisation and impairment and exceptional items 3net cash outflow from operating activities after capital expenditure and financial investment 4including share of joint venture employees5Command, Control, Communication and Computing, Intelligence, Surveillance and Reconnaissance

in April. The second LPD, HMS Bulwark, isscheduled for customer handover next year.

Two important long-term underwater systemscontracts were achieved with an order fromthe MoD for an advanced variant of the StingRay torpedo, and with a key market entrycontract for the Airborne Mine NeutralisationSystem for the US Navy.

A number of opportunities in C4ISR-relatedactivities are being pursued. The company hassecured a position on the Northrop Grummanteam, one of the two successful down-selectwinners, bidding for the UK WatchkeeperUnmanned Aerial Vehicle Programme.

BAE SYSTEMS has been working, with Alvis,on another UK programme, the Future RapidEffect System (FRES). It is expected that theFRES assessment phase will be agreed in thesecond half of the year and the company iswell positioned to benefit from theprogramme. Further, on 2 September 2003, BAE SYSTEMS completed the purchase of29% of the issued share capital of Alvis plc,for £73m in cash.

Business group reviews



International PartnershipsThe International Partnerships business groupcomprises a 35% interest in Saab AB, a 50%interest in Gripen International, a 50%interest in AMS, a 37.5% interest in MBDAand a 100% interest in Atlas Elektronik(exchanged for the company’s 49% interest inSTN Atlas).

PerformanceThe business group improved its profitabilityfollowing completion of the disposal of its27.5% interest in the loss making Astriumsatellite business.

Customer delivery schedules at both MBDAand AMS are heavily weighted to the secondhalf of the year and will be fully reflected inthe year end results.

HighlightsFurther work is continuing on the company’sportfolio of joint venture interests. Of mostsignificance is the agreement withFinmeccanica to seek to restructure thecombined European avionics, C4ISR andcommunications businesses of bothcompanies, under a new ‘EuroSystems’structure. Under this structure joint ventureswill be established in each of thesebusinesses. Majority ownership by one of thepartners and clear operational leadership arekey features of these proposals.

On 7 August 2003, the final separation of theSTN Atlas business was agreed, whereby BAE SYSTEMS has exchanged its 49%interest in STN Atlas for a 100% interest inthe naval systems business, Atlas Elektronik.

1including joint ventures and before the elimination of intra-group orders2before goodwill amortisation and impairment and exceptional items 3net cash inflow/(outflow) from operating activities after capital expenditure and financial investment and dividends from joint ventures4including share of joint venture employees

Customer Solutions & Support The Customer Solutions & Support (CS&S)business group provides integrated through-life support and service solutions,reflecting the continued trend within armedforces to seek longer-term, added valuepartnerships with industry, as they focus ontheir front line commitments.

PerformanceCS&S produced a strong performance,through continued work from export supportactivity and increased activity with the MoD’sDefence Logistics Organisation.

HighlightsSignificant orders included a contract tosupply the Royal Bahraini Air Force with acomplete solution for an indigenous flyingacademy, including the Hawk advanced jettraining aircraft. In addition, the order toreactivate and upgrade two Type 22 frigatesfor Romania was confirmed. The Al Yamamahprogramme in Saudi Arabia continued toperform well.

The group made further progress towards itsgoal of providing solutions for smarter, moreflexible, integrated through-life capabilityprogrammes. In particular, a bid wassubmitted, with the company’s partnersBoeing, Serco and Spectrum Capital, for theFuture Strategic Tanker Aircraft programme,designed to meet the future air-to-airrefuelling needs of the Royal Air Force.

Support for UK air platforms progressed well.The final delivery in the successful programmeto upgrade 142 Tornado aircraft to theenhanced GR4 standard was achieved inJune. The highly effective GR4 system wasrecently deployed extensively in operations inIraq. The capability upgrade to GR9 standardfor the Harrier made good progress includingthe successful first flight. Progress continuedon establishing long-term support contractsfor Harrier, Tornado and Nimrod.

AvionicsThe Avionics business group supplieselectronics systems primarily for military air,sea and land platforms.

PerformancePerformance in the first half reflected theanticipated level of activity and the mix ofbusiness.

HighlightsThe DLH shipborne decoy system and HALOartillery locating system were accepted anddeliveries of HIDAS, the world’s first fullyintegrated defensive aids system, progressedwell.

Deliveries of the Captor radar for Typhooncontinued to programme, with production forthe aircraft’s Defensive Aid Sub-Systemsbuilding up and significantly higher volumesanticipated in the second half of the year.

In addition, contract extensions were won onthe Falcon and Bowman communicationssystems programmes.



Sales £1,018m £1,065m

Profit2 £210m £220m

Cash inflow3 £302m £85m




Sales £650m £658m

Profit2 £8m £2m





Sales £488m £459m

Profit2 £4m £4m

Cash (outflow)/inflow3 £(51)m £5m




North AmericaThe North America business group designs,develops, integrates, manufactures andsupports a wide range of advanced aerospaceproducts and intelligent electronic systems, forgovernment and commercial customers.

PerformanceThe business performed ahead of plan for allkey measures. Underlying sales growth of14%, at constant exchange rates, wasachieved in the half year. Customer ratings asexpressed by award fees continue to beexcellent, averaging above 95% - benchmarkperformance among the company’s USindustrial peers.

HighlightsTwo businesses were acquired in the first half:Advanced Power Technologies, Inc., anengineering research and development firm;and MEVATEC Corporation, a specialist insystems engineering and missile defence.These acquisitions complement the existingNorth American businesses and representcontinued good progress in expanding the USbusiness through organic growth andacquisition.

The business continued to grow its leadershipposition in C4ISR, defence electronics andservices. Orders were won to design andproduce upgraded flight control subsystemson the C-17 transport aircraft. Also achievedwere the first delivery of the VehicleManagement System (VMS) for the F-35 JointStrike Fighter, the first flight of the VMS forthe BA 609 tilt-rotor and the autopilot onEmbraer’s AL-X Amazon surveillance aircraft.

Following the Joint Tactical Radio System winin 2002, a key position was secured on theWarfighter Information Network - Tacticalprogramme in partnership with GeneralDynamics. In July, the company was selectedto provide the Airborne Platform and GroundPlatform Communications Systems for theFuture Combat System, the US networkenabled capability programme.

The award of the Compass Call systemsintegrator role cemented the company’sleadership position in electroniccountermeasures for the US military.Additionally, a number of significant researchand development contracts were awardedfrom the Defence Advanced Research ProjectsAgency.

The contract to manage the Holston ArmyAmmunition Depot was extended for anadditional five years and several sizeableorders for explosives were won.

Commercial AerospaceThe Commercial Aerospace business groupprincipally comprises BAE SYSTEMS 20%interest in Airbus. In addition, the businessgroup includes subcontract aerostructuresactivity.

PerformanceCommercial Aerospace performed wellagainst a difficult industry background,reflecting a robust performance by Airbus.

HighlightsAirbus had a successful first half of the year,despite a difficult airline market which wasadversely impacted by the Iraq war and theSARS virus. Against this backdrop, it securednet orders for 175 commercial aircraft inaddition to the significant A400M militarytransport aircraft order for 180 aircraft. Thiscompares to 104 aircraft orders in the firsthalf of last year.

The A380 development programme continuesto progress to plan and market demandremains good. Airbus had secured 116 firmorders for the A380 by the end of June.

Further good progress is expected in thesecond half with a more valuable mix ofaircraft deliveries anticipated, across a similarlevel of deliveries, to the 149 aircraftdelivered in the first half.

HQ and other businesses

Future CarrierFollowing the UK government’s announcementin January of the selection of BAE SYSTEMSas prime contractor for the design anddevelopment and production of two newaircraft carriers for the Royal Navy, substantialprogress has been made in establishing ahighly effective industrial alliance with Thales.A single alliance team under the leadership ofBAE SYSTEMS has been established toexecute the contract, bringing together thesubstantial strengths of both organisations.

Under the current assessment phasecontract, much work has been undertakenover recent months to optimise the carrierdesign to balance both capability and cost.The next phase of the assessment contractwill commence during September, which willgo through to the spring of next year, inanticipation of a full approval for the Designand Manufacture Stage of the programme.Good progress has also been made with theMoD regarding a contracting mechanism thatwill allow costs to be progressively firmed up,as and when risks have been suitablyquantified and properly understood, during thecourse of the Design and Manufacturingcontract.

RO DefenceRO Defence is a volume producer of landsystems, artillery and ammunition.

RO Defence delivered a strong performance inthe first half of the year reflecting the benefitsfrom previous years’ restructuring programmesand the increase in activity in support of alliedoperations in Iraq.

The business made good progress on two keyorders: Terrier, the UK’s next generation air-transportable armoured combatengineering vehicle; and the M777 lightweight155mm field howitzer for the US MarineCorps.



Sales £1,365m £1,327m



Number of employees 22,700 21,000



Sales £1,341m £1,389m






Sales £147m £159m

Profit/(loss)2 £15m £(5)m





Consolidated profit and loss account

£m £m £m £m £m £m

Sales 5,682 5,703 12,145Less: adjustment for share of joint venture sales (1,822) (1,869) (4,069)

Turnover 3,860 3,834 8,076Operating costs

Excluding goodwill amortisation and impairment and exceptional items (3,498) (3,480) (7,266)

Goodwill amortisation and impairment (213) (188) (403)Exceptional items (see note 2) (3) (9) (797)

22222 22222 22222

(3,714) (3,677) (8,466)

Operating profit/(loss) 146 157 (390)Share of operating profit of joint ventures

Excluding goodwill amortisation and impairment andexceptional items 103 107 192

Goodwill amortisation and impairment (61) (91) (212)22222 22222 22222

42 16 (20)

188 173 (410)Non-operating exceptional items

Cessation/reorganisation ofcommercial aerospace activities – (30) (30)

Profit on sale of operations – – 2Profit on fixed asset disposals – – 28

Profit/(loss) before interest 188 143 (410)Excluding goodwill amortisation and impairment and

exceptional items 465 461 1,002Goodwill amortisation and impairment (274) (279) (615)Exceptional items (see note 2) (3) (39) (797)

InterestNet interest (118) (94) (194)Share of net interest of joint ventures (14) (8) (12)

22222 22222 22222

(132) (102) (206)

Profit/(loss) on ordinary activities before taxation 56 41 (616)

TaxTax on profit excluding exceptional items (103) (115) (247)Tax on exceptional items 1 11 177

22222 22222 22222

(102) (104) (70)

Loss on ordinary activities after taxation (46) (63) (686)Equity minority interests (1) – –

Loss for the period (47) (63) (686)Dividends

Equity: ordinary shares (see note 3) (113) (113) (281)Non-equity: preference shares (10) (10) (21)

22222 22222 22222

(123) (123) (302)

Retained loss (170) (186) (988)

Basic and diluted earnings per shareIncluding goodwill amortisation and impairment andexceptional items (1.9)p (2.4)p (23.2)p

Excluding goodwill amortisation and impairment andexceptional items 7.2p 7.7p 17.3p

All results arise from continuing activities.

Six months to 30 June 2003

Unaudited

Six months to 30 June 2002

Unaudited

Year to31 December 2002

Audited



30 June 30 June 31 December2003 2002 2002

Unaudited Unaudited AuditedNotes £m £m £m

Fixed assetsIntangible assets 6,274 6,646 6,417Tangible assets 1,715 1,732 1,709

InvestmentsShare of gross assets of joint ventures, including goodwill 7,360 7,122 7,147Share of gross liabilities of joint ventures (5,901) (5,710) (5,654)

Share of joint ventures 1,459 1,412 1,493Others 32 35 33

1,491 1,447 1,526

9,480 9,825 9,652

Current assetsStocks 926 1,232 768Debtors due within one year 2,406 2,722 2,673Debtors due after one year 903 706 805Investments 4 827 934 776Cash at bank and in hand 651 641 930

5,713 6,235 5,952Liabilities falling due within one year

Loans and overdrafts (881) (1,031) (1,070)Creditors 5 (5,409) (5,113) (5,489)

(6,290) (6,144) (6,559)

Net current (liabilities)/assets (577) 91 (607)

Total assets less current liabilities 8,903 9,916 9,045

Liabilities falling due after one yearLoans (1,839) (2,074) (1,913)Creditors 5 (444) (583) (449)

(2,283) (2,657) (2,362)Provisions for liabilities and charges 5 (1,018) (1,048) (987)

5,602 6,211 5,696

Capital and reservesCalled up share capital 143 143 143Share premium account 412 409 412Statutory reserve 202 202 202Other reserves 4 5,296 5,186 5,260Profit and loss account (471) 250 (341)

Shareholders’ fundsEquity 5,316 5,924 5,410Non-equity 266 266 266

5,582 6,190 5,676Equity minority interests 20 21 20

5,602 6,211 5,696

Consolidated balance sheet



Six months Six months Year toto 30 June 2003 to 30 June 2002 31 December 2002


Net cash inflow/(outflow) from operating activities 7 273 (262) 136Dividends from joint ventures 7 10 78Returns on investments and servicing of finance (66) (60) (171)Taxation 70 (9) (89)Capital expenditure and financial investment (63) (71) (183)Acquisitions and disposals (62) – 41Equity dividends paid (168) (168) (281)

Net cash outflow before financing and management ofliquid resources (9) (560) (469)

Management of liquid resources 3 (113) (20)Financing (247) (91) (236)

Net decrease in cash available on demand (253) (764) (725)

Reconciliation of net cash flow to net debt

Six months Six months Year toto 30 June 2003 to 30 June 2002 31 December 2002


Net decrease in cash available on demand (253) (764) (725)Net (decrease)/increase in liquid resources (3) 113 20Decrease in other loans included within net funds 247 121 268

Change in net funds from cash flows (9) (530) (437)Adjustment to Exchange Property 4 25 (248) (136)Foreign exchange movements 19 49 97

Net increase/(decrease) in net funds 35 (729) (476)Net funds at start of period (1,277) (801) (801)

Net funds at end of period (1,242) (1,530) (1,277)Cash on customers’ account (12) (21) (21)

Net debt as defined by the group (1,254) (1,551) (1,298)

Consolidated cash flow statement



Statement of total recognised gains and losses



Notes £m £m £m

Loss for the periodGroup, excluding joint ventures (34) (33) (565)Joint ventures (13) (30) (121)

Total loss for the period (47) (63) (686)

Currency translation on foreign currency net investments – subsidiaries (44) (68) (92)– joint ventures 84 27 192

Adjustment to Exchange Property 4 25 (248) (136)Unrealised gain on exchange of interests 1 11 – –

Other recognised gains and losses relating to the period (net) 76 (289) (36)

Total recognised gains and losses relating to the period 29 (352) (722)

Reconciliation of movements in shareholders’ funds



Notes £m £m £m

Loss for the period (47) (63) (686)Dividends 3 (123) (123) (302)

(170) (186) (988)Other recognised gains and losses relating to the period (net) 76 (289) (36)Issuance of shares to QUEST – 25 27Exercise of share options – 2 3Writeback of goodwill on disposals – – 32

Net decrease in shareholders’ funds (94) (448) (962)Opening shareholders’ funds 5,676 6,638 6,638

Closing shareholders’ funds 5,582 6,190 5,676


At 30 June 2003 the value of the group’s holding in Vodafone Group Plc was less thanthe redemption value of the Bonds. Accordingly the group has recorded the value of theExchange Property at its market value at that date.

At 31 December 2002 the market value was £540m, resulting in a reduction of£136m in the carrying value being charged against the original unrealised gain of£638m within other reserves, and disclosed as a non-cash movement in theconsolidated cash flow.

At 30 June 2003 the market value of the Exchange Property had risen to £565m,resulting in an increase in the carrying value of £25m since the year end. This has beentaken to other reserves, so as to offset the movement recorded at the year end againstthe original unrealised gain within other reserves, and disclosed as a non-cashmovement in the consolidated cash flow.

5 Commercial aircraft financing

30 June 2003 (unaudited)

FRIP Post-FRIP Totalaircraft aircraft

£m £m £mFuture cash flow payments in respect

of aircraft financing obligations 2,510 375 2,885Amounts pre-financed (636) – (636)

1,874 375 2,249Income guaranteed through insurance (1,331) – (1,331)Anticipated residual values – (375) (375)Adjustment to net present value (63) – (63)

Exposure at net present value 480 – 480

Amounts included within:Creditors 208 – 208Provisions 272 – 272

480 – 480

The group provides guarantees in respect of residual values or head lease and financepayments in respect of certain commercial aircraft sold. At 30 June 2003, the group’sfuture payments in respect of these arrangements were £2,885m (31 December2002 £3,077m). As part of a restructuring of its gross obligations through the issue ofa limited recourse bond in 2001, the group pre-financed certain residual valueguarantees. The future cash flows associated with this pre-financing totalled £636m at30 June 2003 (31 December 2002 £740m).

A significant proportion of the net exposure of £2,249m (31 December 2002£2,337m) is covered by a Financial Risk Insurance Programme (FRIP) which providesinsurance cover in respect of potential shortfalls in contracted and expected income. At30 June 2003, the anticipated liability in respect of uninsured amounts, accounted foron a net present value basis, of £480m is provided (31 December 2002 £475m).

Since the inception of the FRIP, the group has granted residual value guarantees inrespect of aircraft sold totalling £375m. The directors consider that the group’sexposure to these guarantees is covered by the residual values of the related aircraft.

The group is also exposed to actual and contingent liabilities arising from commercialaircraft financing and residual value guarantees given by Saab AB and Airbus SAS.Provision is made against the expected net exposures on a net present value basis. Thegroup’s share of such exposure is limited to its percentage shareholding in each ofthese joint ventures.


Notes to the interim report

1 Acquisitions and exchange of interestsMEVATEC CorporationIn March 2003, the group acquired 100% of MEVATEC Corporation, in the US, for acash consideration of £53m. Provisional goodwill arising on consolidation amounted to£47m. The company provides professional technical services to the US market and hasbeen renamed BAE SYSTEMS Analytical Solutions.

Advanced Power Technologies, Inc.In March 2003, the group acquired 100% of Advanced Power Technologies, Inc., in theUS, for a total cash consideration of £18m. Provisional goodwill arising on consolidationamounted to £16m. The company provides communications and networking solutionsto the US market and has been renamed BAE SYSTEMS Advanced Technologies.

Atlas ElektronikOn 7 August 2003, agreement was reached on the final separation of the STN Atlasbusiness, whereby the group’s 49% interest in STN Atlas was exchanged for a 100%interest in its naval systems business, Atlas Elektronik. BAE SYSTEMS has held fullcontrol of the naval business since 1 January 2003, so this has been deemed the dateof the transaction for accounting purposes.

A provisional unrealised gain arising from this exchange of interests of £11m has beentaken directly to reserves, in accordance with UITF 31.

2 Exceptional itemsSix months Six months Year toto 30 June to 30 June 31 December


£m £m £mOperating exceptional itemsContract loss provisions – – (750)Prior year rationalisation programmes (2) (8) (45)BAe/MES integration costs (1) (1) (2)

(3) (9) (797)Non-operating exceptional itemsCessation/reorganisation of commercial

aerospace activities – (30) (30)Profit on sale of operations – – 2Profit on fixed asset disposals – – 28Exceptional loss included within

profit before interest and tax (3) (39) (797)

3 DividendsThe directors have declared the payment of an interim dividend of 3.7p per ordinaryshare (2002 3.7p). The dividend will be paid on 1 December 2003 to shareholdersregistered on 17 October 2003. The ex-dividend date will be 15 October 2003.

4 Adjustment to Exchange PropertyThe company has in issue £676m (2002 £676m) 3.75% Senior UnsecuredExchangeable Bonds (the Bonds), due in 2006. At any time prior to the due date theBondholders have the right to request to exchange the Bonds for the Exchange Property,which is represented by the group's holding in the ordinary share capital of VodafoneGroup Plc. The Exchange Property has been recorded within current asset investments.

The value of the Exchange Property was initially based on the issue price of the Bonds,which represented the realisable value to the group. The historical cost of the ExchangeProperty to the group is negligible, and the uplift to match the Exchange Property to thevalue of the Bonds was recorded as an unrealised gain within other reserves.



9 Other informationThe comparative figures for the year ended 31 December 2002 and other financialinformation contained in these interim results do not constitute statutory accounts ofthe group within the meaning of section 240 of the Companies Act 1985.

Statutory accounts for the year ended 31 December 2002 have been delivered to theRegistrar of Companies. The auditors have reported on those accounts, their reportwas not qualified and did not contain a statement under section 237(2) or (3) of theCompanies Act 1985. The accounting policies adopted in the preparation of theresults to 30 June 2003 are consistent with those set out in the 2002 Annual Report.

This report is being sent to shareholders. Copies are also available to the public fromthe company’s registered office.

Independent review report by KPMG Audit Plc to BAE SYSTEMS plc

IntroductionWe have been engaged by the company to review the financial information set out onpages 8 to 13 and we have read the other information contained in the interim reportand considered whether it contains any apparent misstatements or materialinconsistencies with the financial information.

This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the Listing Rules ofthe Financial Services Authority. Our review has been undertaken so that we mightstate to the company those matters we are required to state to it in this report and forno 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 this report, orfor the conclusions we have reached.

Directors’ responsibilitiesThe interim report, including the financial information contained therein, is theresponsibility of, and has been approved by, the directors. The directors areresponsible for preparing the interim report in accordance with the Listing Rules whichrequire that the accounting policies and presentation applied to the interim figuresshould be consistent with those applied in preparing the preceding annual accountsexcept where they are to be changed in the next annual accounts in which case anychanges, and the reasons for them, are to be disclosed.

Review work performedWe conducted our review in accordance with guidance contained in Bulletin 1999/4:Review of interim financial information issued by the Auditing Practices Board for usein the United Kingdom. A review consists principally of making enquiries ofBAE SYSTEMS plc management and applying analytical procedures to the financialinformation and underlying financial data and, based thereon, assessing whether theaccounting policies and presentation have been consistently applied unless otherwisedisclosed. A review is substantially less in scope than an audit performed inaccordance with Auditing Standards and therefore provides a lower level of assurancethan an audit. Accordingly we do not express an audit opinion on the financialinformation.

Review conclusionOn the basis of our review we are not aware of any material modifications that shouldbe made to the financial information as presented for the six months ended 30 June2003.

KPMG Audit PlcChartered AccountantsLondon 10 September 2003

6 PensionsThe group has continued to account for pensions in accordance with SSAP 24.

Under FRS 17 the movement in the deficit during the period would be:Total£m

Deficit in pension schemes at 1 January 2003 (3,125)(Assets of £8,127m less liabilities of £11,252m)

Actual return on assets in excess of expected return 188Increase in liabilities (683)Other movements (12)Deficit in pension schemes at 30 June 2003 (3,632)(Assets of £8,521m less liabilities of £12,153m)

Related deferred tax asset 1,122

Net pension liability (2,510)

The increase in liabilities in the half year is principally due to reductions in thediscount rates: UK rate reduced from 5.75% to 5.5%; US rate reduced from 6.75%to 6.25%.

Other movements principally comprise service costs less contributions.

7 Net cash inflow/(outflow) from operating activities



£m £m £mOperating profit/(loss) 146 157 (390)Depreciation, amortisation and impairment 319 292 615Profit on disposal of fixed assets and investments (17) (12) (22)Movement in provisions for liabilities and charges

excluding deferred tax (62) (294) (280)(Increase)/decrease in working capital:

Stocks (101) (191) 224Debtors 300 (34) (124)Creditors (534) (273) (386)Customer stage payments 222 93 499

Net cash inflow/(outflow) from operating activities 273 (262) 136

Capital expenditure and financial investment (63) (71) (183)Dividends from joint ventures 7 10 78

217 (323) 31

Programmes (35) (222) (177)Customer Solutions & Support 302 85 323International Partnerships 41 39 77Avionics (51) 5 83North America 143 84 213Commercial Aerospace (154) (138) (396)HQ and other businesses (29) (176) (92)

217 (323) 31

8 Post balance sheet eventOn 22 August 2003, the company agreed to purchase 31,882,534 shares,representing approximately 29% of the issued share capital, in Alvis plc from GKN plc for £73m in cash (equivalent to 230p per Alvis share). The acquisitionwas completed on 2 September 2003.

Alvis is one of the world’s leading manufacturers of armoured fighting vehicles. Ithas operations in the UK, Scandinavia and South Africa. Its vehicles combineadvanced software and electronics systems with leading-edge vehicle, weapon andprotection technology.


09.03.IR.001

The Annual General Meeting of BAE SYSTEMS plc for 2004 will be held on 5 May 2004.

Registered Office6 Carlton GardensLondon SW1Y 5ADUnited KingdomTelephone: +44 (0)1252 373232(Registered in England & Wales No. 1470151)

Website detailsCompany website: www.baesystems.comInvestor relations website: http://ir.baesystems.com

RegistrarsLloyds TSB RegistrarsThe CausewayWorthing West Sussex BN99 6DAUnited KingdomTelephone: 0870 600 3982

(+44 121 433 8000 from outside the UK)

If you have any queries regarding your shareholding, please contact the Registrars.

Shareholder information


Documents

Interim Report 2003 - Investis Digitalfiles.investis.com/bae/presentation/interimreport03_withcover.pdf‘EuroSystems’ structure. I was particularly pleased to receive a strong endorsement