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STRONG EARNINGS 2

BAE Systems

Half Yearly Report

29 Jul 10. BAE Systems plc Half-yearly Report 2010

Results in brief

Results from continuing operations

Six months ended
30 June 2010 30 June 2009

Sales2 £10,643m £9,747m
Underlying
EBITA3 £1,114m £978m

Operating
Profit £866m £507m

Underlying
Earnings4
per share 20.4p 17.9p

Basic earnings/(loss)
per share5 16.1p (2.1)p

Order book6 £43.6bn £44.3bn

Highlights
– Sales growth of 9%
– Underlying EBITA3 up 14% to £1,114m
– Underlying earnings per share increased by 14%
– Operating cash outflow of £185m
– Interim dividend increased by 9% to 7.0p per share
– £449m market purchase of shares

Outlook

In aggregate, and despite a planned lower level of land vehicle activity, the Group continues to expect growth for 2010, based on constant exchange rate assumptions.

BAE Systems has continued to perform well in the first half of 2010. The first half year’s performance continues to support the Group’s previously stated outlook for the full year.

Headline sales growth in the six months was 9%. On a like-for-like basis, sales increased by 7%. Growth in underlying EBITA3 on a like-for-like basis was 12%. As anticipated, there was a cash outflow from operating activities of £185m.

The Group anticipates a challenging trading environment as governments look for cost savings to address budgetary pressures and enhance value for money. A substantial programme of cost reduction and efficiency improvements is already well underway within the Group to address such issues. This cost reduction programme, including a net headcount2 reduction of 3,300 during the first half year, will be of sustained benefit to the Group’s performance. It will also enhance competitiveness and deliver further improved value for customers.

Following a review of markets and customers’ needs in the US, changes to the Group’s organisation are being implemented to realign BAE Systems, Inc. to better deliver its strategy. Reductions in costs, benefiting both the Group and its customers, will flow from a simplified organisation. This will result in the business in the US being more competitive in a challenging environment and more agile in responding effectively to customer needs.

The US Quadrennial Defense Review (QDR) was released in early February. The accompanying US defence budget for Fiscal Year 2011 identified growth in the investment account allocations. The QDR restated the US’s commitment to the large, next generation, F-35 Lightning II combat aircraft programme. BAE Systems, through both its US and UK businesses, is a significant participant on this programme.

A Strategic Defence and Security Review is underway in the UK and is expected to initially report in the Autumn. The review is expected to provide greater clarity as to the UK’s defence and security priorities over the coming years.

As a key step in the Group’s strategy to develop India as one of its home markets, a new, land systems-focused, joint venture defence company, Defence Land Systems India Private Limited, was formed with Mahindra & Mahindra Limited in April. BAE Systems has a 26% investment in the joint venture.

A key differentiator for BAE Systems in the defence and security markets is its substantial presence in customer support and services activities. These activities include provision of cyber and security services to, primarily, government customers, and readiness and sustainment business in the air, land and naval sectors of defence. The Group has successfully grown this customer support and services business, delivering enhanced capabilities whilst reducing costs for its customers.

In July, the Group completed the acquisition of Atlantic Marine Holding Company, a naval services and marine fabrication business, for $352m (£235m). The business employs approximat

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