Interim Results Statement 13 September 2006
BAE Systems continued to build on the successes of 2005 with further good progress in the first six months of 2006. The results reflect good programme execution and schedule adherence in the businesses together with the benefit of sound implementation of Group strategy.
Sales for the six months to June 2006 of £8,214m increased 21% from £6,773m for the same period in 2005.
EBITA1 increased 39% to £788m (2005 £566m) and return on sales increased 1.2% to 9.6% (2005 8.4%). Included within EBITA1 is a £63m one-off accounting gain in the Electronics, Intelligence & Support business group arising from a reduction in the net pension liability following the changes to the calculation of final US pensionable salaries.
These results reflect the benefit of six months of trading from the former United Defense activities acquired in June 2005, which contributed sales of £777m and EBITA1 of £85m in the period. Integration of these activities is now complete and the acquisition has achieved the financial benefits planned for its first full year of ownership. Order intake continues to support the acquisition case.
The publication in December last year of the UK government’s Defence Industrial Strategy (DIS) was a significant step forward. The paper details a strategy that identifies key UK technologies required to deliver capability for the UK’s armed forces and outlines a framework for partnership between industry and government to deliver that capability. Although challenges will result from this newly defined path, BAE Systems welcomes this strategy and is committed to ensuring its success and believes that, through its implementation, benefits will flow to both industry and its customer.
BAE Systems now has a well established, growing and successful through-life capability business in the air sector, working closely with both the UK Ministry of Defence (MoD) and the Royal Air Force (RAF). Progress also has been made in the land systems sector, developing a similar armoured vehicle through-life support partnership with the Defence Logistics Organisation and the British Army to that pioneered in the air sector. Opportunities are being developed also in the UK naval sector.
In April, BAE Systems and VT Group announced they were discussing the possibility of a joint bid for Babcock International plc. Although no bid resulted from these discussions, BAE Systems continues to review options for consolidation of the naval industry in the UK with the aim of delivering better value for its customers and enhanced returns to shareholders consistent with the DIS.
BAE Systems’ strategy to build on its strong customer relationship in Saudi Arabia, by establishing significant business operations and capability within the Kingdom, has made good progress. The government-togovernment agreement signed in December 2005 established a partnership between the UK and Saudi Arabia for the modernisation of the Kingdom’s armed forces and was a key development in this strategy. In August, the required commercial principles, which will effectively initiate the purchase of Typhoon aircraft and the associated commitment to the industrial plan, were agreed.
In April, BAE Systems announced that it had entered into discussions with EADS regarding the disposal of its minority shareholding in Airbus. In July, BAE Systems announced that the price payable by EADS in relation to the proposed disposal of the Airbus shareholding had been determined by an independent expert to be €2.75bn (£1.9bn). On 6 September the board of directors announced that they considered the proposed disposal to be in the best interest of BAE Systems and its shareholders as a whole.
The recommended disposal requires the approval of ordinary shareholders at an Extraordinary General Meeting, details of which have been included in the circular issued to shareholders2.
Following repayment of debts outstanding between BAE Systems and Airbus at completion and the payment of transaction related costs, net cash proceeds to BAE Systems are estimated to be approximately £1.2bn.
Subject to shareholders agreeing to its disposal, the Board proposes to return up to £500m to shareholders by way of on-market purchases of shares following completion of the sale of the Airbus interest. The Board also intends to consult with the trustees of the Group’s pension schemes and the Pension Regulator with regard to any further investment in those schemes.
The remaining proceeds, together with the Group’s other cash resources, will be available for debt repayments and future investment in the Group, and to pursue selected value enhancing acquisitions in the core business.
Resolution of the actuarial funding deficit in BAE Systems’ UK pension schemes has been a priority. In June, BAE Systems announced that it had agreed with the trustees of the main UK pension schemes a package of measures that, over time, will eliminate the current actuarial funding deficit. These measures include increased annual company and employee contribution rates, one-off company contributions of cash and assets, together with a reduction to pension liabilities from revised retirement benefits.
In addressing the funding requirement of the schemes, the new arrangements had the immediate impact of reducing the deficit on the balance sheet. These changes contributed £0.6bn of the reduction in the net retirement benefit obligations on the balance sheet (as defined under IAS 19) from £4.1bn at 31 December 2005 to £3.1bn at 30 June 2006, the remainder of the decrease being primarily attributable to an increase in discount rates.
1 earnings before amortisation and impairment of intangible assets, finance costs and taxation expense
