Doc re. Annual Financial Report
BAE Systems plc
Annual Report 2014
BAE Systems plc has today published its Annual Report and Accounts for the year ended 31 December 2014 ('Annual Report 2014'). The full document can be viewed on the Company's website at:
Copies of the Annual Report 2014 will be posted to those shareholders who have requested to receive communications from the Company in printed form on 27 March 2015.
In compliance with Section 9.6.1 of the Listing Rules, a copy of the Annual Report 2014 has also been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM
This announcement contains regulated information issued in accordance with Section 6.3 of the Financial Services Authority's Disclosure and Transparency Rules and accordingly contains certain sections of the Annual Report 2014 in unedited full text. Page and chart references within the text of this announcement are references to pages and charts in the Annual Report 2014 that can be viewed as detailed above.
The financial information for the year ended 31 December 2014 contained in this announcement was approved by the Board on 18 February 2015. This announcement does not constitute statutory accounts of the Company within the meaning of Section 435 of the Companies Act 2006, but is derived from those accounts.
Statutory accounts for the year ended 31 December 2013 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2014 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
The auditors have reported on those accounts. Their reports were not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
The Annual Report 2014 contains the following responsibility statement:
Responsibility statement of the directors in respect of the Annual Report and financial statements
Each of the directors listed below confirms that to the best of their knowledge:
‑ the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company, and the undertakings included in the consolidation taken as a whole; and
‑ the Strategic Report and Directors' Report, taken together, include a fair review of the development and performance of the business, and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
In addition, each of the directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
|
Sir Roger Carr |
Chairman |
|
Ian King |
Chief Executive |
|
Jerry DeMuro |
President and Chief Executive Officer of BAE Systems, Inc. |
|
Peter Lynas |
Group Finance Director |
|
Harriet Green |
Non-executive director |
|
Chris Grigg |
Non-executive director |
|
Paula Rosput Reynolds |
Non-executive director |
|
Nick Rose |
Non-executive director |
|
Carl Symon |
Non-executive director |
|
Ian Tyler |
Non-executive director |
On behalf of the Board
Sir Roger Carr
Chairman
18 February 2015
CHIEF EXECUTIVE'S REVIEW
"BAE SYSTEMS HAS DELIVERED A SOLID OVERALL PERFORMANCE IN 2014."
Ian King, Chief Executive
2014 has seen signs of greater stability and improving clarity emerge in markets where budgets have been constrained in recent years by the wider economic backdrop. In this challenging but stabilising environment, BAE Systems has delivered a solid overall performance in 2014, building on the good programme execution of recent years.
Defence and security continues as a high priority in a number of the Group's domestic and international markets, including the Kingdom of Saudi Arabia. The Group has also continued to win significant new business. Order intake of £4.3bn was achieved from international markets outside the US and the UK contributing to the £40.5bn order backlog at year end. That large order backlog provides good, multi-year visibility across many of the Group's businesses. In addition, the Group has achieved over £10bn of order intake in the US and UK each year over the last three years. These US and UK programmes provide the Group with the intellectual property which can be used to develop international and support businesses for the future.
US
In January 2014, a US bipartisan budget agreement provided a two-year window of defence funding visibility and some emerging stability. Only minor trading disruption was apparent in the last quarter of 2014 as the government operated under a Continuing Resolution until the mid-December passage of an omnibus appropriations bill for the 2015 fiscal year. This included stable Department of Defense funding compared with 2014, and included funding for ground vehicle programmes and for additional F-35 Lightning II aircraft.
US budgets are now relatively stable, with some early indications of a modest improvement in 2016.
On 1 February 2014, Jerry DeMuro was appointed as President and Chief Executive Officer of BAE Systems, Inc. Following his appointment, and recognising the need for continued competitive enhancement, the Group's US organisation was streamlined into three operating sectors with resultant reductions to administrative overhead.
The Group's Intelligence & Security business continued to face a challenging environment serving US government security community customers.
The Group's Electronic Systems activities benefited from the broad base of high-technology defence systems and equipment and continued good growth in commercial aircraft electronics. We have maintained our leadership position in the US electronic warfare market. The selection of BAE Systems to supply an advanced, integrated electronic flight control system for Boeing's new 777X programme was a notable achievement, expected to generate significant new business in future years. The award adds to established positions providing flight and engine controls across multiple commercial aircraft platforms.
There was strong margin performance in the Land & Armaments business and a number of order awards on programmes that sustain key combat vehicle industrial base capabilities. In December, BAE Systems was awarded a contract for the engineering and manufacturing development phase of the Armored Multi-Purpose Vehicle programme, which will sustain these capabilities in the longer term.
BAE Systems is a major provider of ship repair services to the US Navy. Consistent with the US Navy's increased focus on Asia-Pacific operations, the Group committed a $103m (£66m) investment to install new floating dry dock facilities in its San Diego shipyard.
Performance issues identified in 2013 in commercial shipbuilding continued to depress margins in the US Support Solutions business. There were also further charges taken in 2014. The operational challenges identified in 2013 on the Radford ammunition facility maintenance contract have been mitigated significantly during the year.
In November, the Group was disappointed to learn that the Republic of Korea had decided to terminate for convenience the US Air Force's Foreign Military Sales contract with BAE Systems to upgrade Korea's F-16 aircraft fleet.
UK
In the UK, the defence and security market has been stable. Notwithstanding the continued constraints on public spending in some sectors, BAE Systems continues to benefit from long-term contracts in the air and naval domains. Both major political parties in the UK are committed to carrying out a Strategic Defence and Security Review after the general election in May. The Group benefits from a large order backlog of long-term committed programmes with many key decisions now addressed for several years.
We recognise that the economic environment in the UK remains challenging, placing further pressure on many areas of public spending, including the UK defence budget. Through a continued focus on cost control, programme execution and efficiency, the Group is working to deliver continuous improvements in affordability for the UK customer to ensure that the Group's large, long-term contracts deliver both value and world-class capability.
In the air domain, Typhoon production and the Group's extensive in-service military aircraft support and upgrade business in the UK provide a strong core of high-performing business. 2014 has seen a significant acceleration of capability expansion onto the Typhoon combat aircraft platform. Activity is underway to integrate additional weapons and sensors onto the aircraft for the four European partner nations and international customers. In November, the formal launch of a funded, multi-nation development programme for an advanced, electronically-scanned radar was a key milestone in the Typhoon platform's evolution.
Our participation in the F-35 Lightning II combat aircraft programme includes UK-manufactured rear fuselage and empennage assemblies as well as electronic systems content from the Group's US-based business. The Group expects significant growth in production volume with the planned acceleration of aircraft deliveries.
The outlook for the Group's UK maritime businesses is robust. The build of two Queen Elizabeth Class aircraft carriers is progressing well. The first of Class was named in a formal ceremony by Her Majesty The Queen on 4 July and subsequently floated out of the dock in which she was assembled, enabling assembly of blocks for the second vessel to commence as the first vessel continues outfitting alongside. BAE Systems welcomed the decision, announced by Prime Minister David Cameron at the NATO Summit held in the UK in October, to commit to the operation of both vessels, providing a continuous-at-sea UK carrier capability.
Actions continue to implement and finalise contracts for the restructuring of the Group's naval ships business following last year's agreement with the UK government. In August, the Group was awarded a contract for the build of three Offshore Patrol Vessels for the Royal Navy, sustaining shipbuilding skills between the Carrier programme and the start of manufacture for the anticipated Type 26 frigate programme. The Group continues to work on the Type 26 assessment phase and is discussing proposals with the UK Ministry of Defence for the future phases of the programme. The Type 26 programme will provide long-term clarity for UK complex warship manufacture, including at the Group's facilities on the River Clyde in Scotland.
Following the Scottish independence referendum in September, the people of Scotland decided to remain within the Union. The decision was welcomed, removing uncertainty for the Group's employees and its business based in Scotland.
In October, the Group agreed a multi-year Maritime Support Delivery Framework contract for the operation of the Royal Naval Base at Portsmouth and global support for half of the Royal Navy's surface fleet.
In December, a significant contract for the upgrade of the Spearfish torpedo was secured.
In the submarines business, Artful, the third of a planned seven Astute Class submarines, was launched in May. Alongside build of Astute Class boats, engineering work continues to accelerate as part of the assessment phase of the Successor submarine programme. The Successor programme is the potential replacement of Vanguard Class submarines, intended to enter service towards the end of the next decade.
Cyber security
BAE Systems continues to develop its strategy for commercial cyber security, with growth being delivered and a number of important contract wins in the year. Order backlog in the Applied Intelligence business grew by 37% in the year, building on the 60% increase in 2013.
We continue to target strong growth opportunities in commercial cyber security markets and the acquisition of SilverSky in December accelerates the Group's strategy to grow in the commercial cyber market, providing an established channel to US customers.
International
In Saudi Arabia, the Group delivered a further 11 Typhoon aircraft in the year and developed its position as a key part of the Kingdom's defence industrial base.
In February 2014, agreement was reached with the Saudi Arabian government on price escalation for the Salam Typhoon programme under the current 72-aircraft contract.
In June, we announced a reorganisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia and an enhancement of its existing relationship with Riyadh Wings Aviation Academy LLC (Riyadh Wings). The reorganisation brings together shareholdings of BAE Systems and Riyadh Wings in Saudi companies specialising in training, electronics and IT systems engineering under a single holding company. The reorganisation is intended to enhance the growth prospects of this portfolio of businesses and reinforce an ongoing commitment to increasing local employment.
In Australia, where BAE Systems is the largest defence contractor, the government approved, in May 2014, a commitment to grow defence spending within a decade to 2% of Gross Domestic Product.
The Group delivered the first of two Canberra Class Landing Helicopter Dock (LHD) vessels for the Royal Australian Navy and manufacture of the second ship is progressing well. Following the high level of activity on this programme, there is currently no material follow-on workload contracted. BAE Systems and the Australian government continue to discuss options to sustain industrial capabilities and meet future naval requirements following on from the high level of workload on the LHD programme.
BAE Systems is a 37.5% shareholder in the MBDA guided weapons joint venture. MBDA benefits from sales to equip a range of air and naval platforms across European and wider international applications. In December, MBDA received a €301m (£234m) contract to supply the air-to-air missiles for India's Jaguar aircraft fleet. The MBDA business has seen increased bidding interest on ground-based air defence systems in some regions.
M&A
In August, the Group announced an agreement for the proposed sale of its 75% holding in BAE Systems Land Systems South Africa (Pty) Limited to Denel (SOC) Limited for cash consideration of approximately 641 million Rand (£36m), subject to closing adjustments. The sale is expected to be completed in 2015.
As part of the reorganisation of the Group's interests in Saudi Arabia, in September, BAE Systems acquired an additional 59% shareholding in Saudi Development and Training Company for 440 million Saudi Riyal (£72m).
In September, the Group completed the $21m (£13m) acquisition of Signal Innovations Group, Inc., a small-scale, high-technology provider of imaging technologies and analytics to the US intelligence community.
In December, BAE Systems completed the acquisition of SilverSky for $232m (£149m).
In December, BAE Systems entered into an agreement with Esterline Corporation for the proposed acquisition of Eclipse Electronic Systems, Inc. for cash consideration of approximately $28m (£18m), subject to closing adjustments. The Texas-based business employs approximately 90 people and provides highly-advanced Intelligence, Surveillance and Reconnaissance products and services to the US defence and intelligence community. The proposed acquisition has not yet completed.
Balance sheet and capital allocation
Following the triennial funding valuations of all of the Group's UK pension schemes and subsequent discussions with trustees, new funding agreements have been concluded, with overall deficit funding remaining broadly consistent with 2014.
In February 2013, the Group initiated a share repurchase programme of up to £1bn over three years. As at 31 December 2014, BAE Systems had purchased 119 million shares for £495m under the programme.
The Group's balance sheet continues to be managed conservatively in line with the Group's policy to retain its investment grade credit rating and to ensure operating flexibility. Consistent with this approach, the Group meets its pension obligations, pursues organic investment opportunities, plans to pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings and to make accelerated returns of capital to shareholders when the balance sheet allows. Investment in value-enhancing acquisitions are considered where market conditions are right and where they deliver on the Group's strategy.
Responsible business
The way the Group conducts its business is of equal importance as product delivery. We continue to embed responsible business conduct throughout the Group. During 2014, our employees received business conduct refresher training and our Code of Conduct was updated and will be rolled out to all employees during the first half of 2015.
The safety of our employees and those using our products is a priority for the Group. We continue to drive safety improvements and, in 2014, achieved an 11% reduction in the Recordable Accident Rate (see page 20), which represents the seventh consecutive year of improvement.
Management
Kevin Taylor, previously Group Strategy Director, has been appointed as Managing Director, Applied Intelligence, to lead the business as it enters the next phase of its strategy to target accelerated growth and further develop our technology for government and commercial customers. Kevin will remain an Executive Committee member.
Looking forward
BAE Systems benefits from a large order backlog, long-term programmes and high-technology capabilities. The Group continues to address customers' needs across a broad international market base. In addition, BAE Systems has established a good balance of business activities in both advanced products and value-added support services. The Group is well positioned to continue to deliver shareholder value by addressing customers' continuing defence and security needs as economies recover in domestic markets and defence priorities continue to evolve.
Ian King, Chief Executive
Page references used above refer to the Annual Report 2014 that can be viewed on the Company's website.
Extract from
CHAIRMAN'S LETTER
Directors
I succeeded Sir Richard Olver as Chairman of the Board on 1 February 2014 and Sir Richard stepped down from the Board on that date.
On 1 February 2014, Linda Hudson retired as President and Chief Executive Officer of BAE Systems, Inc. and as an executive director of BAE Systems plc. Linda made a material contribution to both the development of our US operations and its important role within the Group. On the same date, Jerry DeMuro was appointed as President and Chief Executive Officer of BAE Systems, Inc. and as an executive director of BAE Systems plc.
Paul Anderson, a non-executive director, retired from the Board on 31 December 2014 after six years of service. Throughout the two terms of his appointment, Paul made a major contribution to the strategic thinking of the Company in addition to chairing the Corporate Responsibility Committee.
On behalf of colleagues and shareholders, I thank both Linda and Paul for all they have done for the Company and wish them well for the future.
Ian Tyler has now taken over the role of chairman of the Corporate Responsibility Committee.
During the course of the year, the Nominations Committee commenced a long-term succession planning review and agreed that our immediate priority was to search for a replacement for Paul who would have a general management background, international experience, be capable of assuming responsibility for the Remuneration Committee and improve the diversity of the Board. The search is now in process.
Dividend
The Board has recommended a final dividend of 12.3p per share making a total of 20.5p per share for the year, an increase of 2% over 2013. At this level, the annual dividend is covered 1.85 times by underlying earnings (2013 2.1 times). Subject to shareholder approval at the 2015 Annual General Meeting, the dividend will be paid on 1 June 2015 to holders of ordinary shares registered on 17 April 2015.
FINANCIAL REVIEW
FINANCIAL HIGHLIGHTS
£925m returned to shareholders in 2014, including £283m on the share repurchase programme and £642m in dividends
Sales1 decreased by £1.5bn to £16.6bn. Around £0.6bn of that reduction was due to exchange translation. The volume reductions in Land & Armaments of £0.4bn were as expected. Last year's sales1 included the retrospective benefit of £0.3bn from the price escalation settlement on the Salam programme
Underlying EBITA2 decreased by £223m, to £1,702m, giving a return on sales of 10.2%. Of that reduction, £49m was due to exchange translation and £183m for the retrospective benefit traded in 2013 from the Salam price escalation
Excluding the prior year 4.4p benefit from the Salam price escalation settlement, underlying earnings3 per share increased to 38.0p
Large order backlog1,4 of £40.5bn after exchange translation benefit of £0.3bn
Total dividend increased by 2% to 20.5p per share
INCOME STATEMENT
|
|
|
2014 |
2013 |
|
Sales1 |
KPI |
16,637 |
18,180 |
|
|
|
|
|
|
Underlying EBITA2 |
KPI |
1,702 |
1,925 |
|
Return on sales |
|
10.2% |
10.6% |
|
Non-recurring items |
|
- |
6 |
|
EBITA |
|
1,702 |
1,931 |
|
Amortisation of intangible assets |
|
(184) |
(189) |
|
Impairment of intangible assets |
|
(170) |
(887) |
|
Finance costs1 |
|
(448) |
(392) |
|
Taxation expense1 |
|
(148) |
(287) |
|
Profit for the year |
|
752 |
176 |
EARNINGS PER SHARE
|
|
|
2014 |
2013 |
|
Underlying earnings3 per share |
KPI |
38.0p |
42.0p |
|
Basic earnings per share |
|
23.4p |
5.2p |
EXCHANGE RATES - AVERAGE
|
|
2014 |
2013 |
|
£/$ |
1.647 |
1.564 |
|
£/€ |
1.241 |
1.178 |
|
£/A$ |
1.827 |
1.623 |
EXCHANGE RATES - SENSITIVITY ANALYSIS
|
Estimated impact on sales1 of a ten cent movement in the average exchange rate |
£m |
|
$ |
350 |
|
€ |
60 |
|
A$ |
40 |
Income statement
Sales1 reduced by £1.5bn to £16.6bn (2013 £18.2bn). The prior year included the £0.3bn retrospective benefit from the trading of the price escalation on the Salam Typhoon programme. The volume reductions of £0.4bn in the Land & Armaments business were as expected. Approximately £0.6bn of the reduction in sales1 was due to exchange translation.
Underlying EBITA2 reduced by £223m to £1,702m (2013 £1,925m), giving a return on sales of 10.2% (2013 10.6%). The prior year included a £183m retrospective benefit from the Salam price escalation settlement. Charges totalling £74m were taken in 2014 on US commercial shipbuilding programmes in the Support Solutions business. Adverse exchange translation amounted to £49m.
Non-recurring items in 2014 includes a £47m accounting gain on the Group's existing 40% shareholding in Saudi Development and Training Company following the acquisition of an additional 59% shareholding in the company offset by a £47m charge on classification of the Saudi Aircraft Accessories and Components Company (AACC) as held for sale.
Amortisation of intangible assets was £184m (2013 £189m).
Impairment of intangible assets includes goodwill impairment charges of £87m against the carrying value of Support Solutions reflecting the performance issues in the US commercial shipbuilding business and £74m against the carrying value of the South African business expected to be sold in 2015.
Finance costs1 were £448m (2013 £392m). The underlying interest charge, excluding pension accounting, marked-to-market revaluation of financial instruments and foreign currency movements, increased to £204m (2013 £179m), primarily from a higher level of net present value charges. Net interest expense on the Group's pension deficit was lower at £155m (2013 £195m) mainly reflecting the reduction in the deficit during 2013.
Taxation expense1 reflects the Group's underlying effective tax rate for the period of 19% (2013 22%), partially offset by a £51m credit in respect of the re-assessment of existing tax provisions. The calculation of the underlying effective tax rate is shown in note 6 to the Group accounts on page 115. The effective tax rate for 2015 is expected to be around 20%, with the final rate dependent on the geographical mix of profits.
Earnings per share
Underlying earnings3 per share for the year was 38.0p (2013 42.0p). The prior year included a 4.4p retrospective benefit from the Salam price escalation settlement.
Basic earnings per share, in accordance with International Accounting Standard 33, Earnings per Share, was 23.4p (2013 5.2p). The increase on the prior year mainly reflects the £887m of impairment charges taken in 2013 which are excluded from underlying earnings3 per share.
P18 Performance against our 2014 objectives
P27 Segmental performance
RECONCILIATION OF CASH INFLOW FROM OPERATING ACTIVITIES TO NET DEBT (AS DEFINED BY THE GROUP)
|
|
|
2014 |
2013 |
|
Cash inflow from operating activities |
|
913 |
205 |
|
Capital proceeds/(expenditure) (net) and financial investment |
|
215 |
(153) |
|
Dividends received from equity accounted investments |
|
63 |
95 |
|
Operating business cash flow5 |
KPI |
1,191 |
147 |
|
Interest |
|
(145) |
(166) |
|
Taxation |
|
(92) |
(138) |
|
Free cash flow |
|
954 |
(157) |
|
Acquisitions and disposals |
|
(230) |
4 |
|
Cash classified as held for sale |
|
(6) |
- |
|
Share repurchase programme |
|
(283) |
(212) |
|
Other net sale of own shares |
|
2 |
- |
|
Equity dividends paid |
|
(642) |
(638) |
|
Dividends paid to non-controlling interests |
|
(14) |
(11) |
|
Cash flow from matured derivative financial instruments |
|
8 |
(47) |
|
Movement in cash collateral |
|
10 |
(10) |
|
Movement in cash received on customers' account6 |
|
1 |
1 |
|
Foreign exchange translation |
|
(146) |
3 |
|
Other non-cash movements |
|
13 |
(19) |
|
Total cash outflow |
|
(333) |
(1,086) |
|
Opening net (debt)/cash (as defined by the Group) |
|
(699) |
387 |
|
Closing net debt (as defined by the Group) |
KPI |
(1,032) |
(699) |
Cash flow
Cash inflow from operating activities was £913m (2013 £205m), which includes cash contributions in respect of pension deficit funding, over and above service costs, for the UK and US schemes totalling £391m (2013 £389m).
As anticipated, advances received in prior years continue to be consumed on the Omani Typhoon and Hawk, Saudi training aircraft, European Typhoon Tranche 2 and Indian Hawk programmes. Costs incurred are also being charged against provisions created in previous years on the Oman Offshore Patrol Vessel contract, rationalisation and settlement of a US contract pricing dispute. The first of two payments in respect of the Salam price escalation settlement was received as expected.
The net cash proceeds from capital expenditure and financial investment of £215m (2013 £153m outflow) includes the sale and leaseback of two properties in Saudi Arabia, for which £418m was received in the year.
Dividends received from equity accounted investments reduced by £32m to £63m (2013 £95m) reflecting a dividend received from the Group's 50% shareholding in Gripen International in 2013.
Interest payments were £21m lower at £145m (2013 £166m) primarily reflecting the timing of interest payments on US dollar bonds and lower facility fees.
Taxation payments reduced to £92m (2013 £138m) mainly due to settlement of a US contract pricing dispute and other US issues.
There was a cash outflow in respect of acquisitions and disposals reflecting the acquisition of SilverSky (£147m) and Signal Innovations Group (£12m) and an additional 59% shareholding in Saudi Development and Training Company (£71m).
The cash outflow in respect of the share repurchase programme of £283m (2013 £212m) represents shares purchased and cancelled under the programme announced in February 2013.
Equity dividends paid in 2014 include payments in respect of the 2013 final (£383m) and 2014 interim (£259m) dividends.
As a consequence of movements in US dollar and Euro exchange rates during the year, there has been a cash inflow from matured derivative financial instruments of £8m (2013 £47m outflow) from rolling hedges on balances with the Group's subsidiaries and equity accounted investments.
Foreign exchange translation, primarily in respect of the Group's US dollar-denominated borrowing, increased reported net debt by £146m.
COMPONENTS OF NET DEBT (AS DEFINED BY THE GROUP)
|
|
|
2014 |
2013 |
|
Debt-related derivative financial instrument assets |
|
10 |
6 |
|
Cash and cash equivalents |
|
2,314 |
2,222 |
|
Less: Cash classified as held for sale |
|
(6) |
- |
|
|
|
2,318 |
2,228 |
|
Loans - non-current |
|
(2,868) |
(2,524) |
|
Loans and overdrafts - current |
|
(482) |
(402) |
|
Less: Cash received on customers' account6 |
|
- |
(1) |
|
|
|
(3,350) |
(2,927) |
|
Net debt (as defined by the Group) |
KPI |
(1,032) |
(699) |
Net debt (as defined by the Group)
The Group's net debt at 31 December 2014 is £1,032m, a net outflow of £333m from the net debt position of £699m at the start of the year.
A $500m (£298m) 4.95% bond and a £100m, 10¾% bond were repaid at maturity in June and December, respectively. These repayments had been largely pre-financed by the £0.4bn raised in the UK bond market in 2012.
In October, the Group issued $800m (£495m) 3.8% and $300m (£184m) 4.75% bonds maturing in 2024 and 2044, respectively, intended for general corporate purposes, including the repayment of debt securities at maturity in 2015 and 2016.
Cash and cash equivalents of £2,314m (2013 £2,222m) are held primarily for the repayment of £0.7bn of debt securities maturing in 2015 and 2016, the share repurchase programme, pension deficit funding, payment of the 2014 final dividend and management of working capital.
BALANCE SHEET
|
|
|
2014 |
2013 |
|
Intangible assets |
|
9,983 |
9,735 |
|
Property, plant and equipment, and investment property |
|
1,718 |
2,071 |
|
Equity accounted investments and other investments |
|
236 |
286 |
|
Other financial assets and liabilities (net) |
|
(112) |
(23) |
|
Pension deficit (net) |
|
(5,368) |
(3,509) |
|
Tax assets and liabilities (net) |
|
865 |
405 |
|
Working capital |
|
(4,466) |
(4,988) |
|
Net assets held for sale |
|
53 |
140 |
|
Net debt (as defined by the Group) |
KPI |
(1,032) |
(699) |
|
Net assets |
|
1,877 |
3,418 |
EXCHANGE RATES - YEAR END
|
|
2014 |
2013 |
|
£/$ |
1.559 |
1.656 |
|
£/€ |
1.287 |
1.202 |
|
£/A$ |
1.908 |
1.851 |
Balance sheet
The £248m increase in intangible assets to £10.0bn (2013 £9.7bn) arises from business acquisitions made in the year (£289m) and exchange translation (£258m), partly offset by the impairment of goodwill relating to the US commercial shipbuilding and South African businesses (£161m), and the year's amortisation charge (£179m).
Property, plant and equipment, and investment property reduced to £1.7bn (2013 £2.1bn) reflecting the disposal of a residential and office facility in Saudi Arabia.
Equity accounted investments and other investments reduced to £236m (2013 £286m) mainly reflecting the dividends of £63m received in the year. Note 12 to the Group accounts on page 125 identifies the Group's principal joint ventures, Eurofighter, MBDA and Air Astana, and, this year, provides additional information in respect of the Group's interests in those companies.
The £1.9bn increase in the Group's share of the pre-tax pension deficit mainly reflects an increase in liabilities due to a 0.7 percentage point decrease in the real discount rate to 0.4% in the UK and a 0.8 percentage point decrease in the nominal discount rate to 4.1% in the US. Details of the Group's pension schemes are provided in note 21 to the Group accounts on page 134.
The triennial funding valuations of all of the Group's UK pension schemes were performed in 2014 and showed an aggregate funding deficit of £2.7bn. New funding arrangements, including deficit recovery plans which run until 2026, have been concluded with the trustees of those schemes.
A net deferred tax asset of £1.2bn (2013 £0.7bn) relating to the Group's pension deficit is included within net tax assets and liabilities.
There was a £0.5bn increase in working capital mainly reflecting a net reduction in advance contract funding and utilisation of provisions.
At 31 December 2014, the South African land vehicles business (£41m) and AACC (£12m), both expected to be sold in 2015, are classified as held for sale. The disposal of the residential and office facility in Saudi Arabia classified as held for sale at 31 December 2013 (£140m) was completed on 9 January 2014.
1. Including share of equity accounted investments.
2. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
3. Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, non-recurring items and, in 2014, a credit in respect of the re-assessment of existing tax provisions (see note 8 to the Group accounts).
4. Comprises funded and unfunded unexecuted customer orders, and is stated after the elimination of intra-group orders.
5. Net cash inflow from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.
6. Cash received on customers' account is the unexpended cash received from customers in advance of delivery which is subject to advance payment guarantees unrelated to Group performance. It is included within trade and other payables in the consolidated balance sheet.
CRITICAL ACCOUNTING POLICIES
Certain of the Group's principal accounting policies are considered by the directors to be critical because of the level of complexity, judgement or estimation involved in their application and their impact on the consolidated financial statements:
|
Revenue and profit recognition |
|
|
Sales |
£16.6bn (year ended 31 December 2014) |
|
Carrying value of intangible assets |
|
|
Intangible assets |
£10.0bn (at 31 December 2014) |
|
Valuation of retirement benefit obligations |
|
|
Group's share of IAS 19 deficit, net |
£5.4bn (at 31 December 2014) |
P102 For more information
TREASURY
The Group's treasury activities are overseen by the Treasury Review Management Committee (TRMC). Two executive directors are members of the TRMC, including the Group Finance Director who chairs the Committee. The TRMC also has representatives with legal and tax expertise. The Group operates a centralised treasury department that is accountable to the TRMC for managing treasury activities in accordance with the treasury policies approved by the Board.
Objectives/policies
Net debt
Maintain a balance between the continuity, flexibility and cost of debt funding through the use of borrowings from a range of markets with a range of maturities, currencies and interest rates, reflecting the Group's risk profile.
‑ Material borrowings are arranged by the central treasury department and funds raised are lent onward to operating subsidiaries as required.
Interest rates
Manage the exposure to interest rate fluctuations on borrowings through varying the proportion of fixed rate debt relative to floating rate debt with derivative instruments, including interest rate and cross-currency swaps.
‑ A minimum of 50% and a maximum of 90% of gross debt is maintained at fixed interest rates.
Liquidity
Maintain adequate undrawn committed borrowing facilities.
‑ An undrawn committed Revolving Credit Facility of £2bn contracted to December 2018 and £1.8bn contracted from December 2018 to December 2019 is available to meet expected general corporate funding requirements.
Monitor and control counterparty credit risk and credit limit utilisation.
‑ The Group adopts a conservative approach to the investment of its surplus cash. It is deposited with financial institutions with the strongest credit ratings for short periods.
Currency
Reduce the Group's exposure to transactional volatility in earnings and cash flows from movements in foreign currency exchange rates.
‑ All material firm transactional exposures are hedged.
‑ The Group does not hedge the translation effect of exchange rate movements on the income statements or balance sheets of foreign subsidiaries and equity accounted investments it regards as long-term investments.
P150 Note 28 to the Group accounts
TAX
Objectives
The Group's tax strategy is to:
‑ ensure compliance with all applicable tax laws and regulations; and
‑ manage the Group's tax expense in a way that is consistent with its values and its legal obligations in all relevant jurisdictions.
Policies
The Group seeks to build constructive working relationships with tax authorities, following a policy of open disclosure in order to achieve early agreement and certainty in relation to its tax affairs. Whilst the Group aims to maximise the tax efficiency of its business transactions, it does not use structures in its tax planning that are against the spirit of the law and actively considers the implications of any planning for the Group's wider corporate reputation. Arm's length principles are applied in the pricing of all intra-group transactions of goods and services in accordance with Organisation for Economic Co-operation and Development guidelines. Where appropriate, the Group engages with governments to help shape proposed legislation and tax policy. The Group endorses the statement of tax principles issued by the Confederation of British Industry in May 2013 (www.cbi.org.uk/media/2051390/statement_of_principles.pdf).
BAE Systems operates internationally and is subject to tax in many different jurisdictions. The Group employs professional tax managers and takes appropriate advice from reputable professional firms. The Group is routinely subject to tax audits and reviews which can take a considerable period of time to conclude. Provision is made for known issues based on interpretation of country-specific legislation and the likely outcome of negotiations or litigation. The assessment and management of tax risks are regularly reviewed by the Group's Audit Committee.
P114 Note 6 to the Group accounts
CAPITAL
Objectives
Maintain the Group's investment grade credit rating and ensure operating flexibility, whilst: meeting its pension obligations; pursuing organic investment opportunities; paying dividends in line with the Group's policy of long-term sustainable cover of around two times underlying earnings; making accelerated returns of capital to shareholders when the balance sheet allows; and investing in value-enhancing acquisitions, where market conditions are right and where they deliver on the Group's strategy.
Policies
The Group funds its operations through a mixture of equity funding and debt financing, including bank and capital market borrowings. The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. Three credit rating agencies publish credit ratings for the Group:
|
Agency |
Rating |
Outlook |
Category |
|
Moody's Investors Service |
Baa2 |
Stable |
Investment grade |
|
Standard & Poor's Ratings Services |
BBB+ |
Stable |
Investment grade |
|
Fitch Ratings |
BBB+ |
Stable |
Investment grade |
P143 Note 23 to the Group accounts
Note and page references used above refer to the Annual Report 2014 that can be viewed on the Company's website.
PRINCIPAL RISKS
Risks are identified as principal based on the likelihood of occurrence and the potential impact on the Group. The Group's principal risks are identified below, together with a description of how we mitigate those risks.
|
1. DEFENCE SPENDING The Group is dependent on defence spending. |
||||
|
Description - In 2014, 93% of the Group's sales were defence-related. - Defence spending by governments can fluctuate depending on political considerations, budgetary constraints, specific threats and movements in the international oil price. - There have been constraints on government expenditure in a number of the Group's principal markets, in particular in the US and UK, and there is a risk that there may be further reductions. - With the Eurozone area experiencing financial difficulties, affordability continues to be a key focus for customers. |
|
Impact - Lower defence spending by the Group's major customers could have a material adverse effect on the Group's future results and financial condition. |
|
Mitigation - The business is geographically spread across US, UK and international defence markets. - The diverse product and services portfolio is marketed across a range of defence markets. - BAE Systems has a growing portfolio of commercial businesses, including commercial avionics and the commercial areas of the Applied Intelligence business. Sales in commercial markets represented 7% of the Group's sales in 2014. - In Saudi Arabia, regional tensions continue to dictate that defence remains a high priority. |
|
2. GOVERNMENT CUSTOMERS The Group's largest customers are governments. |
||||
|
Description - The Group has long-standing relationships and security arrangements with a number of its government customers, including its three largest customers, the governments of the UK, US and Saudi Arabia, and their agencies. It is important that these relationships and arrangements are maintained. - In the defence and security industries, governments can typically modify contracts or terminate them at short notice. Long-term US government contracts, for example, are funded annually and are subject to cancellation if funding appropriations for subsequent periods are not made. - The Group's performance on its contracts with some government customers is subject to financial audits and other reviews which can result in adjustments to prices and costs. |
|
Impact - Deterioration in the Group's principal government relationships resulting in the failure to obtain contracts or expected funding appropriations, adverse changes in the terms of its arrangements with those customers or their agencies, or the termination of contracts could have a material adverse effect on the Group's future results and financial condition. |
|
Mitigation - Government customers have sophisticated procurement and security organisations with which the Group can have long-standing relationships with well-established and understood terms of business. - In the event of a customer termination for convenience, the Group would typically be paid for work done and commitments made at the time of termination. |
|
3. INTERNATIONAL MARKET The Group operates in an international market. |
||||
|
Description - BAE Systems is an international company conducting business in a number of regions, including the US and Middle East. - The risks of operating in some countries include: political changes impacting the business environment; economic downturns, political instability and civil disturbances; changes in government regulations and administrative policies; the imposition of restraints on the movement of capital; and the introduction of burdensome taxes or tariffs. - The Group is exposed to volatility in currency exchange rates, particularly in respect of the US dollar, Euro and Saudi Riyal. |
|
Impact - The occurrence of any such events could have a material adverse effect on the Group's future results and financial condition. |
|
Mitigation - The Group has a balanced portfolio of businesses across a number of markets internationally. - The Group's policy is to hedge all material firm transactional exposures.
|
|
4. COMPETITION IN INTERNATIONAL MARKETS The Group's business is subject to significant competition in international markets. |
||||
|
Description - The Group's business plan depends upon its ability to win and contract for high-quality new programmes, an increasing number of which are expected to be in non-UK/US markets. - The Group is dependent upon UK and US government support in relation to a number of its business opportunities in export markets. In the UK, export contracts are often structured on a government-to-government basis and government support can also involve military training, ministerial support for promotional activities and financial support through UK Export Finance. In the US, most of the Group's defence export sales are delivered through the Foreign Military Sales process, under which the importing government contracts with the US government. |
|
Impact - The Group's business and future results may be adversely impacted if it is unable to compete adequately and obtain new business in the markets in which it operates. |
|
Mitigation - The Group has an international, multi-market presence, a balanced portfolio of businesses, leading capabilities and a track record of delivery on its commitments to its customers. - The Group continues to invest in research and development, and to reduce its cost base and improve efficiencies, to remain competitive.
|
|
5. LAWS AND REGULATIONS The Group is subject to risk from a failure to comply with laws and regulations. |
||||
|
Description - The Group operates in a highly-regulated environment across many jurisdictions and is subject, without limitation, to regulations relating to import-export controls, money laundering, false accounting, anti-bribery and anti-boycott provisions. It is important that the Group maintains a culture in which it focuses on embedding responsible business behaviours. - Export restrictions could become more stringent and political factors or changing international circumstances could result in the Group being unable to obtain necessary export licences.
|
|
Impact - Failure by the Group, or its sales representatives, marketing advisers or others acting on its behalf, to comply with these regulations could result in fines and penalties and/or the suspension or debarment of the Group from government contracts or the suspension of the Group's export privileges, which could have a material adverse effect on the Group. - Reduced access to export markets could have a material adverse effect on the Group's future results and financial condition.
|
|
Mitigation - BAE Systems has a well-established legal and regulatory compliance structure aimed at ensuring adherence to regulatory requirements and identifying any restrictions that could adversely impact the Group's activities. A programme is underway to enhance resources dedicated to regulatory compliance. - Internal and external market risk assessments form an important element of ongoing corporate development and training processes. - A uniform global policy and process for the appointment of advisers engaged in business development is in effect. - The special compliance officer, appointed pursuant to commitments concerning ongoing regulatory compliance made in the course of the 2011 settlement with the US Department of State, concluded his monitorship in May 2014 and, at the invitation of BAE Systems, agreed to remain in a limited capacity for a limited further period of time. |
|
6. CONTRACT RISK AND EXECUTION The Group has many contracts, including a small number of large contracts and fixed-price contracts. |
||||
|
Description - In 2014, 43% of the Group's sales were generated by its 12 largest programmes. At 31 December 2014, the Group had seven programmes with order backlog in excess of £1bn. - A significant portion of the Group's revenue is derived from fixed-price contracts. Actual costs may exceed the projected costs on which the fixed prices are agreed and, since these contracts can extend over many years, it can be difficult to predict the ultimate outturn costs. - It is important that the Group maintains a culture in which it delivers on its projects within tight tolerances of quality, time and cost performance in a reliable, predictable and repeatable manner. |
|
Impact - The inability of the Group to deliver on its contractual commitments, the loss, expiration, suspension, cancellation or termination of any one of its large contracts or its failure to anticipate technical problems or estimate accurately and control costs on fixed-price contracts could have a material adverse effect on the Group's future results and financial condition. |
|
Mitigation - Contract-related risks and uncertainties are managed under the Group's mandated Lifecycle Management process. - A significant proportion of the Group's largest contracts are with the UK Ministry of Defence. In the UK, development programmes are normally contracted with appropriate levels of risk being initially held by the customer and contract structures are used to mitigate risk on production programmes, including where the customer and contractor share cost savings and overruns against target prices. - The Group has a well-balanced spread of programmes and significant order backlog which provides forward visibility. - The Group has limited exposure to fixed-price design and development activity which is in general more risk intensive than fixed-price production activity. - Robust bid preparation and approvals processes are well established throughout the Group, with decisions required to be taken at the appropriate level in line with clear delegations of authority. |
|
7. CONTRACT CASH PROFILES The Group is dependent on the award timing and cash profile of its contracts. |
||||
|
Description - The Group's profits and cash flows are dependent, to a significant extent, on the timing of, or failure to receive, award of defence contracts and the profile of cash receipts on its contracts. |
|
Impact - Amounts receivable under the Group's defence contracts can be substantial and, therefore, the timing of, or failure to receive, awards and associated cash advances and milestone payments could materially affect the Group's profits and cash flows for the periods affected, thereby reducing cash available to meet the Group's cash allocation priorities, potentially resulting in the need to arrange external funding and impacting its investment grade credit rating. |
|
Mitigation - The Group's balance sheet continues to be managed conservatively in line with its policy to retain an investment grade credit rating and to ensure operating flexibility. - The Group monitors a rolling forecast of its liquidity requirements to ensure that there is sufficient cash to meet its operational needs and maintain adequate headroom. |
|
8. PENSION FUNDING The Group has an aggregate funding deficit in its defined benefit pension schemes. |
||||
|
Description - In aggregate, there is an actuarial deficit between the value of the projected liabilities of the Group's defined benefit pension schemes and the assets they hold. - The deficits may be adversely affected by changes in a number of factors, including investment returns, long-term interest rate and price inflation expectations, and anticipated members' longevity.
|
|
Impact - Further increases in pension scheme deficits may require the Group to increase the amount of cash contributions payable to these schemes, thereby reducing cash available to meet the Group's cash allocation priorities. |
|
Mitigation - Following triennial funding valuations of the Group's UK pension schemes during 2014, where appropriate, revised deficit recovery plans have been agreed which run until 2026. - Growth of the defined benefit pension liabilities is expected to be curtailed as, in the UK, new employees have been offered defined contribution benefits since April 2012 and, in the US, with effect from January 2013, employees no longer accrue salary-related benefits in defined benefit schemes. - In 2013, the trustees of a number of UK pension schemes entered into arrangements to insure against longevity risk for current pensioners, covering £4.4bn of liabilities, and, in 2014, 38% of BAE Systems Pension Scheme pensioners opted to exchange future increases on part of their pensions for higher non-increasing pensions. |
|
9. INFORMATION TECHNOLOGY SECURITY The Group could be negatively impacted by information technology security threats. |
||||
|
Description - The security threats faced by the Group include threats to its information technology infrastructure, unlawful attempts to gain access to its proprietary or classified information and the potential for business disruptions associated with information technology failures. |
|
Impact - Failure to combat these risks effectively could negatively impact the Group's reputation among its customers and the public, cause disruption to its business operations, and could result in a negative impact on the Group's future results and financial condition. |
|
Mitigation - The Group has a broad range of measures in place, including appropriate tools and techniques, to monitor and mitigate this risk. |
|
10. PEOPLE The Group's strategy is dependent on its ability to recruit and retain people with appropriate talent and skills. All employees are required to act in accordance with the Group's policies. |
||||
|
Description - Delivery of the Group's strategy and business plan is dependent on its ability to compete to recruit and retain people with appropriate talent and skills, including those with innovative technological capabilities. - With constraints on defence spending in its UK and US markets, the Group's business plan is targeting an increasing level of business in international export markets. It is important that the Group recruits and retains management with the necessary international skills and experience in the relevant jurisdictions. - It is important that all employees act in accordance with the requirements of the Group's policies, including the Code of Conduct, at all times. |
|
Impact - The loss of key employees or inability to attract the appropriate people on a timely basis, in particular to deliver the Group's strategy in international markets, could adversely impact its ability to meet the business plan and, accordingly, have a negative impact on the Group's future results and financial condition. |
|
Mitigation - The Group recognises that its employees are key to delivering its strategy and business plan, and focuses on developing the existing workforce and hiring talented people to meet current and future requirements. - The Group has well-established graduate recruitment and apprenticeship programmes and, in order to maximise the contribution that its workforce can make to the performance of the business, has an effective through-career capability development programme. - In order to seek to maximise its talent pool, the Group is committed to creating a diverse and inclusive environment for its employees. - BAE Systems continues to embed its ethics programme globally, driving the right behaviours by supporting employees in making ethical decisions and embedding responsible business practices. |
|
Changes in principal risks |
|
|
As a result of its assessment of the Group's principal risks referred to on page 48, the Board has determined that the following risks, identified as principal risks in the 2013 Annual Report, while still risks for the Group, are no longer considered to be principal risks: |
|
|
1. |
THE GROUP IS DEPENDENT UPON COMPONENT AVAILABILITY, SUBCONTRACTOR PERFORMANCE AND KEY SUPPLIERS In the improving global economic environment, the Group has not identified any specific, material risks in relation to its strategically important subcontractors or suppliers. |
|
2. |
THE ANTICIPATED BENEFITS OF ACQUISITIONS MAY NOT BE ACHIEVED The Group has not engaged in acquisitions other than bolt-on acquisitions in the last three years. |
|
3. |
THE GROUP IS INVOLVED IN CONSORTIA, JOINT VENTURES AND EQUITY HOLDINGS WHERE IT DOES NOT HAVE CONTROL Whilst the Group has such joint ventures, the principal ones being Eurofighter, MBDA and Air Astana (as referred to on page 125), its relationships with the joint venture partners are such that the risk of disagreement leading to failure to meet the strategic objectives of those joint ventures is not currently regarded as a principal risk to the Group. |
|
|
|
|
Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an adverse effect on the business or financial condition of the Group. |
|
Page references used above refer to the Annual Report 2014 that can be viewed on the Company's website.
SEGMENTAL PERFORMANCE
ELECTRONIC SYSTEMS
Electronic Systems comprises the US and UK-based electronics activities, including electronic warfare systems and electro-optical sensors, military and commercial digital engine and flight controls, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.
Electronic Systems has advanced technology, high-integrity electronics capabilities with a large portfolio of annually-funded contracts and significant Group-funded research and development investment.
Electronic Combat combines the Electronic Protection, Electronic Warfare and Electronic Attack product lines, and provides a depth of capability in integrated electromagnetic systems for airborne applications.
Survivability & Targeting includes threat warning and infrared countermeasures systems for aircraft, handheld targeting and thermal devices, precision guidance systems, electro-optic sensor products and enhanced situational awareness systems.
Communications & Control contains radio frequency communication and datalinks, and provides military aircraft controls and displays, together with platform integration capabilities.
Intelligence, Surveillance & Reconnaissance (ISR) addresses the market for airborne persistent surveillance, identification systems, signals intelligence and space products.
Commercial Aircraft Solutions addresses the commercial aircraft electronics market, including fly-by-wire flight controls, full authority digital engine controls, cockpit controls, head-up displays, cabin management systems and power management systems.
HybriDrive® Solutions delivers electric propulsion and power management performance, with products and solutions that advance vehicle efficiency in the transit, marine and defence markets.
OPERATIONAL AND STRATEGIC HIGHLIGHTS
Maintained a leadership position in the US electronic warfare market
Received a three-year contract from the US Army for third-generation Common Missile Warning Systems
Next-generation Striker® II helmet-mounted display unveiled
Two-year contract awarded to provide Tactical Signals Intelligence Payloads and associated equipment for the US Army's Gray Eagle unmanned aircraft
Strengthened position in the high-growth commercial aircraft electronics market, with wins on several Boeing aircraft, including 777X, and other aircraft
Research and development expenditure2 at 7% of sales1 in 2014
1. Including share of equity accounted investments.
2. Includes Group-funded and customer-funded expenditure.
Operational performance
Electronic Combat
Electronic Systems maintains its leadership position in the US electronic warfare market. Initial design verification testing of the electronic warfare suite on the F-35 Lightning II programme was completed during the year. Low-Rate Initial Production (LRIP) Lots 7 and 8 deliveries continue, and the business has received initial funding on Lots 9 and 10, with anticipated negotiations in 2015.
The business is under contracts, from Boeing and Warner Robins Air Logistics Complex, totalling over $0.9bn (£0.6bn) to install the Digital Electronic Warfare System (DEWS) on 84 new F-15 aircraft and upgrade the DEWS on 70 existing F-15 aircraft for the Royal Saudi Air Force. System verification and flight testing continues on schedule in advance of initial fielding in the second half of 2015.
The US Air Force has defined its requirements for the next-generation electronic warfare system, Eagle Passive Active Warning Survivability System, for more than 400 existing F-15 aircraft. The programme will consist of the design, development, integration and delivery of a passive and active electronic warfare suite. The business has submitted a proposal to Boeing and, in competition, an award decision is expected in the third quarter of 2015.
Following successful US Defense Advanced Research Projects Agency flight demonstrations, Electronic Systems has received an $86m (£55m) contract to design, develop and deliver initial electronic sensors for the Long-Range Anti-Ship Missile in support of its initial fielding in 2018 on board B-1B aircraft.
In 2014, BAE Systems was not awarded the technology development contract for the Next-Generation Jammer.
Survivability & Targeting
Electronic Systems completed its $38m (£24m) Common Infrared Countermeasures technology development contract on a US Army helicopter programme. A proposal for the engineering and manufacturing development phase, together with options for two LRIP phases, was submitted in November and, in competition, an award decision is expected in 2015.
A three-year Indefinite Delivery, Indefinite Quantity (IDIQ) contract with the US Army, with a potential value of approximately $496m (£318m), was agreed in May for third-generation Common Missile Warning Systems. The US Army has determined that this will be the baseline for export to international customers.
Electronic Systems continues to execute its $37m (£24m) Advanced Precision Kill Weapon System (APKWS™) Full-Rate Production Lot 3 contract with the US Navy, with more than 3,500 systems delivered to 31 December 2014. The APKWS laser-guided rocket achieved an Air Worthiness Release and successfully completed initial live testing on the US Army Apache D/E aircraft in 2014. The $45m (£29m) Full-Rate Production Lot 4 contract was finalised in December. The US Army is working closely with the US Navy to acquire APKWS for initial fielding in 2015.
Jordan and the US Navy have signed a Letter of Offer and Acceptance to progress the first international sale of the APKWS system. Other international opportunities were progressed, with the successful completion of a ground trial in Australia and, in November, the US Defense Security Cooperation Agency began the Congressional Notification process on a potential Foreign Military Sale to Iraq for up to 2,000 systems.
The business continues to perform on the Terminal High-Altitude Area Defence orders for 307 infrared missile seekers supporting both the US government and Foreign Military Sales worth $340m (£218m).
In May, Electronic Systems was awarded a five-year IDIQ contract with a potential value of approximately $445m (£285m) to support the US Army's Enhanced Night Vision Goggle III and Family of Weapon Sights - Individual programme. Following a protest by a competitor and re-competition, BAE Systems was awarded the contract in December. However, this new award has been further protested, with the next decision expected in March 2015.
Communications & Control
Electronic Systems continues to deliver on programmes in Korea, providing flight control systems, head-up displays, mission computers and automatic test equipment systems.
On the F-35 Lightning II programme, BAE Systems successfully completed Lot 7 deliveries of the vehicle management computer in support of Lockheed Martin's production programme. Lots 8 and 9 are under contract.
The next-generation Striker® II helmet-mounted display was unveiled at the Farnborough Airshow in July. The system is a digital upgrade of the current product, in service on Typhoon and Gripen aircraft, providing seamless day and night capability through an integrated digital night vision camera.
Intelligence, Surveillance & Reconnaissance
Electronic Systems continues to provide Airborne Surveillance capability for the US Air Force and US Army based on two wide-area, high-resolution imaging sensor systems - the Airborne Wide Area Persistent Surveillance System, which has been operational for more than 23,000 hours in theatre, and the Autonomous Real-time Ground Ubiquitous Surveillance - Imaging System.
The business provides state-of-the-art processing capabilities for the US Navy's P-8A Poseidon programme, which has entered Full-Rate Production and delivered 28 mission computer and display systems. Eight additional systems have been delivered to Boeing for its first international customer and four systems were procured by Australia.
Electronic Systems continues to provide Signals Intelligence capability for the US Army and other US Department of Defense customers. In June, BAE Systems was awarded a two-year Indefinite Delivery, Indefinite Quantity contract worth up to $70m (£45m) to provide Tactical Signals Intelligence Payloads and associated equipment for the US Army's Gray Eagle unmanned aircraft.
In December, BAE Systems entered into an agreement with Esterline Corporation for the proposed acquisition of Eclipse Electronic Systems, Inc. for cash consideration of approximately $28m (£18m), subject to closing adjustments. The Texas-based business provides highly-advanced Intelligence, Surveillance and Reconnaissance products and services to the US defence and intelligence community. The proposed acquisition has not yet completed.
Commercial Aircraft Solutions
BAE Systems is a major supplier to Boeing for flight controls, and cabin and flight deck systems. In July, Boeing selected BAE Systems to provide the integrated flight control electronics on its next-generation 777X programme, which is projected to be worth over $1bn (£0.6bn) over the life of the aircraft. Development of subsystems for the 737 MAX aircraft has also continued on schedule, with the fly-by-wire spoiler units delivered to Boeing for system integration.
FADEC Alliance, a joint venture between FADEC International (the Group's joint venture with Sagem) and GE Aviation, completed first flight of the full authority digital engine controls on the Leap engine which will power the Boeing 737 MAX and Airbus A320neo aircraft.
The business completed development of the flight control system for the Embraer Legacy 500 business jet and is currently developing active side-sticks for Gulfstream G500 and G600 business jets, as well as Embraer's KC-390 cargo aircraft for the Brazilian Air Force.
Several airlines and original equipment manufacturers have expressed interest in the IntelliCabin™ product, a next-generation cabin system that provides in-seat power, LED lighting and tablet-based, wireless in-flight entertainment systems. Development activities are on schedule for system availability in 2015.
HybriDrive® Solutions
BAE Systems has 4,500 propulsion systems in service in transit buses around the world and is delivering its HybriDrive Series-E system into major cities, including Hong Kong, Quebec, Paris, Seattle and Baltimore. The business continues to deliver systems to Washington, D.C., in the US and London in the UK, and will begin deliveries in 2015 to Boston and Honolulu.
FINANCIAL PERFORMANCE
|
|
|
2014 |
2013 |
|
Sales1 |
KPI |
£2,415m |
£2,466m |
|
Underlying EBITA2 |
KPI |
£373m |
£346m |
|
Return on sales |
|
15.4% |
14.0% |
|
Cash inflow3 |
KPI |
£246m |
£235m |
|
Order intake1 |
KPI |
£2,341m |
£2,697m |
|
Order backlog1,4 |
|
£3.9bn |
£3.7bn |
Sales1 compared to 2013 increased by 3% to just under $4bn (£2.4bn). The commercial areas of the business now amount to 21%, having seen sales1 growth in the year of 7%. On the defence side, sales1 increased by 2% in the year, largely from the F-35 Lightning II programme in the Electronic Warfare area.
The return on sales achieved was 15.4% (2013 14.0%) largely reflecting continued strong programme execution and risk retirement. There was a 0.5 percentage point non-recurring gain from a contract pricing settlement.
Cash3 conversion of underlying EBITA2 for the year was 66% but, excluding pension deficit funding, that conversion rate was 80%.
Despite the US budget pressures, order backlog1,4 was sustained at $6.1bn (£3.9bn). The contract award for the Enhanced Night Vision Goggle programme has been protested again and is, therefore, not included within the reported order backlog1,4.
1. Including share of equity accounted investments.
2. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 23).
3. Net cash inflow from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.
4. Comprises funded and unfunded unexecuted customer orders.
LOOKING FORWARD
Whilst the longer-term outlook remains uncertain, the 2015 fiscal year omnibus appropriations legislation passed in December 2014 included stable Department of Defense funding and support for major programmes, including F-35 Lightning II aircraft.
Whilst further funding reductions and the resultant slowdown or cancellation of ongoing and new programmes could impact the business, Electronic Systems remains well-positioned to address changing US Department of Defense priorities. Its focus remains on maintaining a diverse portfolio of defence and commercial products and capabilities, with both US and international customers, and sustained emphasis on cost reduction and research and development.
The business expects to benefit from its incumbent positions, particularly on the F-35 Lightning II programme, increased activity on international defence programmes and continued commercial aviation market growth.
CYBER & INTELLIGENCE
Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered Applied Intelligence business, and covers the Group's cyber, secure government, and commercial and financial security activities.
Intelligence & Security delivers a broad range of services to enable the US military and government to recognise, manage and defeat threats.
GEOINT-ISR develops and supports mission software and systems for intelligence and defence customers, leveraging domain expertise in geospatial, Intelligence, Surveillance and Reconnaissance (ISR) and mission management.
Global Analysis and Operations provides innovative, mission-enabling analytic solutions and support to operations to US federal, state and local agencies across the homeland security, law enforcement, defence, intelligence and counter-intelligence communities.
IT Solutions delivers operational secure solutions that enable national security and critical infrastructure customers to perform operations and protect their data and networks.
Applied Intelligence collects, manages and exploits information to enable government and commercial clients to reveal intelligence, maintain security, manage risk and optimise performance.
Alongside its secure government-focused activities, the business is a supplier of solutions that combine large-scale data exploitation, intelligence-grade security and complex services and solutions integration to commercial customers, with a focus on financial services, telecommunications, and energy and utility companies.
Primary operations are in the UK, Denmark, Ireland, Australia, Malaysia and the US.
OPERATIONAL AND STRATEGIC HIGHLIGHTS
INTELLIGENCE & SECURITY
US business impacted by US budget pressures and reductions in overseas operations
First task order awards under the Geospatial Data Services contract
Awarded a five-year contract for counter-terrorism analysis services
Awarded a five-year purchase agreement to support IT applications for the Bureau of Labor Statistics
Acquisition of Signal Innovations Group, a leading-edge technology company with activity-based intelligence expertise
APPLIED INTELLIGENCE
Selected by a UK government customer as one of four strategic suppliers on a technology framework
Important multi-year customer wins for NetReveal® OnDemand managed services
Awarded multi-year framework contracts for Service Integration and Applications Management services
Acquisition of SilverSky, a commercial cyber service provider, to enhance commercial cyber growth strategy
Operational performance
Intelligence & Security
Whilst the US services market continued to experience challenges due to budget uncertainties, unpredictable and delayed acquisition and funding cycles, and the US withdrawal from Afghanistan, the Intelligence & Security business continues to focus on leveraging its core capabilities and domain expertise to pursue opportunities in intelligence analysis, special operations support, and Intelligence, Surveillance and Reconnaissance programmes, which remain priority activities in the US.
GEOINT-ISR (Geospatial Intelligence - Intelligence, Surveillance and Reconnaissance)
BAE Systems continues to mature its capabilities in activity-based intelligence which provides the intelligence and defence communities with increasingly automated, efficient and reliable data processing and management tools to transform big data into actionable intelligence. The business received authorisation to proceed on a $32m (£21m) Engineering Change Proposal for activity-based intelligence services.
In 2014, the business delivered the first two software releases for testing of the Mobility Air Force Automated Flight Planning Service programme and passed final quality test on the Aero Advisory Notification Tool capability in support of the US Air Force's transition to a consolidated mission planning architecture. Development continues on the third release of the software.
The National Geospatial-Intelligence Agency awarded the business the first six task orders, totalling $56m (£36m), under the five-year Geospatial Data Services contract to assist in transforming the collection, maintenance and utilisation of geospatial intelligence data and products. The contract has an estimated total value of $335m (£215m).
In September, BAE Systems acquired Signal Innovations Group, a leading provider of imaging technologies and analytics to the US intelligence community.
Global Analysis and Operations
In the market for Full Motion Video and Intelligence, Surveillance and Reconnaissance analysis, the business has ongoing contracts worth over $400m (£257m), which includes the services of over 400 analysts supporting mission critical activities.
The business continues to provide security-cleared intelligence analyst support.
In August, BAE Systems won a five-year contract worth up to $145m (£93m) to provide an intelligence community customer with counter-terrorism analysis services.
IT Solutions
On the Solutions for the Information Technology Enterprise Indefinite Delivery, Indefinite Quantity contract, with task orders worth $476m (£305m), the business has transitioned the customer from a costly regional support model to a less costly and more efficient enterprise support model.
In May, BAE Systems was awarded a position on the US Department of Homeland Security's Enterprise Acquisition Gateway for Leading Edge Solutions II multiple-award contract as one of 15 down-selected prime contractors to provide a broad range of IT solutions and services.
In August, BAE Systems was awarded a five-year purchase agreement valued at up to $126m (£81m) to operate, maintain and develop IT applications for the Bureau of Labor Statistics.
Applied Intelligence
Applied Intelligence continues to operate in competitive markets with fast-moving customer requirements. The business continues to grow through the provision of solutions which protect and enhance the operations of governments and commercial organisations in the areas of cyber security, financial crime prevention, communications intelligence and digital transformation, and is demonstrating its ability to win large, multi-year contracts.
Applied Intelligence continues to invest in building its skills base, with over 100 graduates joining the business in 2014, representing over one-third of BAE Systems' UK graduate intake. A Global Delivery Centre in Malaysia now supports product development and customer project delivery.
In December, BAE Systems acquired SilverSky, a provider of cloud-based hosting, protection and monitoring of information that operates in the fast-growing cyber security market largely focused on the US.
Cyber Security
The business continues to grow, building on its strong relationship with the UK government, with orders including a £7m multi-year contract to address the UK Ministry of Defence's complex information assurance challenges.
The IndustrialProtect™ solution to protect industrial control systems was launched in the US and Middle East and received a £3m order from a major global energy supplier.
New orders for the CyberReveal™ cyber threat monitoring solution have been received in the US and Europe.
Market interest in MobileProtect™, launched in 2013 alongside a five-year strategic partnership with Vodafone, continues to grow with multiple large enterprises currently trialling the service. In 2015, the business is targeting to achieve an additional 150,000 subscribers to the MobileProtect™ service.
Financial Crime
Applied Intelligence provides enterprise risk, fraud and compliance solutions internationally.
Applied Intelligence has won additional work with existing customers, including HSBC, which has procured NetReveal® Discovery, a suite of solutions that enable global financial crime investigations across borders. Demand for multi-year managed service solutions has increased, with NetReveal® OnDemand being selected by RSA in Canada to provide insurance fraud solutions under a five-year contract. Growth in the US continues with an order from a large US-based global personal and business payment provider.
Expansion is being achieved in other sectors, including healthcare with a £4m contract to provide Medicaid fraud prevention in Rhode Island and capital markets in the UK, Europe and Australia through a solution, launched in 2013, to protect against unauthorised trading, providing risk management controls to investment bank trading floors.
Communications Solutions
The business is a provider of end-to-end communications intelligence solutions to government and communications service providers and is addressing opportunities in Europe, the Middle East and Asia-Pacific regions. It continues to win new clients, most recently in Asia-Pacific, and is developing follow-on business with existing clients as a result of new products from continued product investment.
UK Services
Applied Intelligence provides consulting and systems integration services, with a particular focus on enabling digital transformation. The business continues to support UK government agencies in their intelligence missions and has been selected by a UK government customer as one of four strategic suppliers on a long-term framework that covers application development, systems integration and managed services.
Further success in the Service Integration and Applications Management market was achieved, with new and additional multi-year contracts worth £45m awarded, including new contracts with the Highways Agency and Skills Funding Agency.
FINANCIAL PERFORMANCE
|
|
|
2014 |
2013 |
|
Sales1 |
KPI |
£1,085m |
£1,243m |
|
Underlying EBITA2 |
KPI |
£123m |
£115m |
|
Return on sales |
|
11.3% |
9.3% |
|
Cash inflow3 |
KPI |
£71m |
£118m |
|
Order intake1 |
KPI |
£1,163m |
£1,247m |
|
Order backlog1,4 |
|
£0.9bn |
£0.7bn |
In aggregate, sales1 in the year reduced by 8%. The US business saw a 17% decrease driven largely by reduced budgets at the sector's two largest customers, along with further reductions in intelligence analyst support. Organic growth in the Applied Intelligence business was at 10%, almost all of which was from commercial customers. Completion of the SilverSky transaction occurred in mid-December and, therefore, only $4m (£3m) of sales trading has been recognised from that business.
Despite the top line performance, the margin achieved was 11.3% (2013 9.3%), with profitability in the Applied Intelligence business increasing ahead of plan.
Cash3 conversion of underlying EBITA2 for the year was at 58% due to the capital costs of the replacement Enterprise Resource Planning system and set-up of the Malaysian Global Delivery Centre in the Applied Intelligence business.
In aggregate, order backlog1,4 increased to $1.4bn (£0.9bn). Despite the top line pressures, order backlog1,4 in the US business grew by 7% largely on imagery analysis and cyber support awards. In the Applied Intelligence business, order book increased by 37% over the year, 22% organically and 15% from the SilverSky acquisition.
1. Including share of equity accounted investments.
2. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 23).
3. Net cash inflow from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.
4. Comprises funded and unfunded unexecuted customer orders.
LOOKING FORWARD
In the US, whilst the longer-term outlook remains uncertain, the 2015 fiscal year omnibus appropriations legislation passed in December 2014 included stable Department of Defense funding.
Intelligence & Security has reduced costs to address government budgets, whilst pursuing growth opportunities, particularly in critical, mission-focused areas.
Recognising the continued challenges in the US market, a restructuring was announced in 2014 that realigned the Support Solutions business across the remaining US operating sectors. A Support Solutions business area which develops and maintains systems supporting critical missions for the US military was integrated with Intelligence & Security. This integrated portfolio provides critical mass and economies of scale over a full spectrum of services and capabilities to the US military and other government agencies.
Applied Intelligence has a growing order backlog and pipeline of opportunities, underpinning expected growth from both government and commercial customers. In order to most effectively deliver against these opportunities, the business restructured into three divisions with effect from 1 January 2015: UK Services; International Services and Solutions; and Commercial Solutions. In 2015, the acquired SilverSky business will be integrated into the Commercial Solutions division, accelerating the growth strategy.
PLATFORMS & SERVICES (US)
Platforms & Services (US) comprises the US-headquartered Land & Armaments business, with operations in the US, UK, Sweden and South Africa, and the US-based services and sustainment activities, including ship repair and munitions services.
Land & Armaments
The Land & Armaments business includes a range of funded development activity, and fixed-price production and services contracts. Land & Armaments is engaged in the design, development, production, support and upgrade of armoured combat vehicles, artillery systems, naval guns, missile launchers and munitions.
US Combat Vehicles focuses on the tracked and amphibious vehicles markets, servicing both US and international customers.
Weapon Systems focuses on naval weapons, munitions and artillery markets, servicing US, UK and international customers. Products include naval gun systems, artillery systems, munitions and missile launchers.
BAE Systems Hägglunds focuses on the tracked vehicle market for Swedish and international customers.
FNSS, BAE Systems' Turkish joint venture, produces and upgrades tracked and wheeled military vehicles for international customers.
Support Solutions
The Support Solutions business includes services, sustainment and systems integration activities, which may be contracted over multi-year arrangements.
Support Solutions is a major supplier of ship repair services to the US Navy and complex munitions facilities management for the Holston and Radford facilities. Other activities in the US include fixed and rotary wing aircraft support services.
OPERATIONAL AND STRATEGIC HIGHLIGHTS
LAND & ARMAMENTS
In-year awards sustain vehicle programme positions
Engineering and manufacturing development contract award worth up to $1.2bn (£0.8bn) on the US Army's Armored Multi-Purpose Vehicle programme
Option worth $142m (£91m) exercised to continue Low-Rate Initial Production of M109A7 self-propelled howitzers
Continued focus on cost reduction
Sale of 75% interest in Land Systems South Africa business announced, with completion expected in 2015
SUPPORT SOLUTIONS
$1.5bn (£1.0bn) of US Navy ship repair contracts awarded
Performance impacted by $122m (£74m) of charges taken on commercial shipbuilding programmes
Improved performance on the Radford Army Ammunition Plant contract, with operational challenges mitigated significantly during the year
Korean F-16 upgrade contract terminated for convenience by the customer
Restructuring announced in 2014 realigned Support Solutions across the remaining US operating sectors
Operational performance
Land & Armaments
As the defence market stabilises, BAE Systems retains its focus on maintaining key programmes and building a strong domestic and international pipeline, whilst shaping the business portfolio and scaling operational resources for optimised competitiveness.
US Combat Vehicles
The business has focused on maintaining and enhancing its positions on vehicle programmes, with a number of significant contracts received during the year.
In December, the US Army awarded BAE Systems a contract worth up to $1.2bn (£0.8bn) for the engineering and manufacturing development and Low-Rate Initial Production of the Armored Multi-Purpose Vehicle. The initial award, valued at $383m (£246m), is for a 52-month base term during which the business will produce 29 vehicles, with an option to produce an additional 289.
In December, the business received a $34m (£22m) contract to convert 49 M3A3 Cavalry Bradley Fighting Vehicles to the M2A3 Infantry configuration, extending the Bradley production line through the first half of 2016.
The business received a $154m (£99m) follow-on contract for the upgrade of an additional 53 vehicles to the M88A2 HERCULES configuration, which will maintain the M88 production line to the end of 2016.
In November, the US Army exercised an option, valued at $142m (£91m), to continue Low-Rate Initial Production of the M109A7 self-propelled howitzer, with the first deliveries expected in the second quarter of 2015.
BAE Systems' significant experience with amphibious vehicle platforms has resulted in its selection as one of two contractors competing for the US Marine Corps Assault Amphibious Vehicle survivability upgrade programme. The business is also competing for the engineering and manufacturing development phase of the Amphibious Combat Vehicle 1.1 contract. Down-selects for both programmes are expected in 2015.
Work on the Joint Light Tactical Vehicle (JLTV) programme was transitioned successfully from the Sealy, Texas, plant, which closed in June. BAE Systems, as a strategic partner to Lockheed Martin on the JLTV programme, completed limited user testing of the engineering and manufacturing development vehicles in the fourth quarter of 2014 in support of the competitive pursuit of a Low-Rate Initial Production award.
Following the US Army's decision to discontinue the Ground Combat Vehicle programme, BAE Systems was awarded a follow-on bridge contract in June to continue related technology development efforts and maintain critical engineering talent.
Weapon Systems
The business was awarded a contract for four 57mm Mk3 naval guns for an international customer.
The business did not secure an order from India for M777 ultra-lightweight howitzers, but continues to pursue this prospect.
BAE Systems continues to develop its position in the advanced weapons market through its Electromagnetic Railgun programme, having competitively won contracts in excess of $100m (£64m) for land and sea-based demonstrators, pulse power modules and the next development phase of the hyper velocity projectile programme.
Following the Norwegian government's decision to withdraw from the Archer artillery system programme, the business signed a contract amendment with Sweden establishing a new technical and schedule baseline for the contract, which has initial deliveries planned for the second half of 2015.
BAE Systems Hägglunds
Work on the $865m (£555m) CV90 vehicles contract for the Norwegian Army remains on schedule, with series production of the 144 vehicles continuing until 2017.
BAE Systems has offered the CV90 Armadillo concept for the Danish Armoured Personnel Carrier programme. Four manufacturers submitted bids in December and an award decision is expected in the first half of 2015.
FNSS
FNSS, BAE Systems' Turkish joint venture, has continued production under the $559m (£359m) programme to produce 259 8x8 wheeled armoured vehicles for the Royal Malaysian Army.
Production continued under a $360m (£231m) contract to upgrade 32 M113 tracked armoured personnel carriers for the Royal Saudi Land Forces. The business is pursuing other armoured vehicle prospects elsewhere in the Middle East region.
Business disposal
BAE Systems expects to complete the disposal of its Land Systems South Africa business in 2015 following the agreement of a proposed sale of the company in 2014.
Support Solutions
Under Multi-Ship, Multi-Option (MSMO) contract vehicles with the US Navy, the US-based ship repair business received orders totalling $1.5bn (£1.0bn) for the repair, maintenance and modernisation of various vessels during the year. The business was awarded a new five-year MSMO contract at its Hawaii shipyard to support the maintenance and modernisation of a range of US Navy ships.
The commercial shipbuilding business continued to experience challenges, taking $122m (£74m) of charges against ongoing contracts in 2014.
BAE Systems manages the operations of the Holston and Radford Army Ammunition Plants, receiving in excess of $400m (£257m) of contracts in 2014 for explosives, propellant and facility modernisation. Following the operational challenges at the Radford plant identified during 2013, performance has improved reflecting the award of new contracts, pricing adjustments on existing contracts and operational efficiencies.
In 2012, BAE Systems was selected to upgrade the Republic of Korea's fleet of F-16 aircraft. The US government approved the selection in 2013 and, whilst the business was successfully executing phase one of the programme, in November, Korea requested the termination for convenience of the US Air Force's contract with BAE Systems. BAE Systems expects to recover all of its programme costs under normal terms of a termination for convenience. In response to the Korean government's claim for approximately $43m (£28m) under a bid guarantee on the programme, the Group has asked a US federal court to rule that it does not owe any monies to Korea.
Under the eight-year, $534m (£343m) US Air Force contract, received in 2013, to maintain the readiness of Minuteman III intercontinental ballistic missiles in the US, the business completed the nine-month transition period from the incumbent on schedule in June and performed a successful test launch in September, a major milestone for the programme.
In February 2014, the US Air Force Space Command awarded BAE Systems a further three-year contract extension to maintain its Solid State Phased Array Radar System, space radars used for missile warning and space surveillance operations, raising the cumulative value of the contract to approximately $540m (£346m). This contract is expected to complete in 2018.
In April, BAE Systems was informed that it had not been awarded the Automated Installation Entry III contract, which would have extended its current work in support of US Army installation security. BAE Systems' protest of the award was upheld and the contract is being re-solicited.
In August, BAE Systems was one of five companies awarded the ability to compete for task orders under an Indefinite Delivery, Indefinite Quantity contract to build-to-print a secure afloat network for the US Navy.
In September, the US Navy's Strategic Systems Programmes Office awarded BAE Systems a four-year, $72m (£46m) contract to continue the provision of logistics and supply systems support for the Trident II D-5 submarine-launched ballistic missile.
In December, the US Navy's Naval Air Systems Command awarded BAE Systems a five-year contract to provide full lifecycle engineering and technical support for communication and combat systems on land and at sea. The initial award is valued at $28m (£18m), with the total value of the five-year contract estimated at $147m (£94m).
Also in December, the US Navy awarded BAE Systems the nine-year DDG VI Radio Communications Systems contract to support radio and communications systems design and integration for 13 guided missile destroyers. The initial award is valued at $28m (£18m), with the total value of the nine-year contract estimated at $187m (£120m).
FINANCIAL PERFORMANCE
|
|
|
2014 |
20131 |
|
Sales2 |
KPI |
£3,266m |
£3,912m |
|
Underlying EBITA3 |
KPI |
£147m |
£229m |
|
Return on sales |
|
4.5% |
5.9% |
|
Cash inflow4 |
KPI |
£201m |
£191m |
|
Order intake2 |
KPI |
£3,191m |
£3,315m |
|
Order backlog2,5 |
|
£5.8bn |
£6.1bn |
Land & Armaments
Sales2 in the year declined to $2.3bn (£1.4bn). Bradley reset activity has more than halved, the Medium Mine Protected Vehicle (MMPV) production contract has completed and deliveries under US M777 lightweight howitzer contracts have largely traded out.
Despite the expected top line reductions, the business has delivered an improved margin of 10.3% (2013 8.8%) through good programme execution and cost reduction.
Cash flow4 generation was again strong, with good cash conversion of working capital.
Order backlog2,5 reduced from $5.0bn (£3.0bn) to $4.4bn (£2.8bn) largely from the trading out of deliveries on MMPV and M777. We have not recognised within order backlog the $0.8bn (£0.5bn) of Low-Rate Initial Production options under December's Armored Multi-Purpose Vehicle programme award.
Support Solutions
Sales2 of $3.1bn (£1.9bn) were 1% lower than in 2013.
The year's margin has been materially impacted by cost overruns on the commercial shipbuild contracts. Charges taken in the first and second half year totalled $122m (£74m). The Radford munitions contract has now been stabilised, with no additional provisioning necessary.
Order backlog2,5 decreased from $5.1bn (£3.1bn) to $4.6bn (£3.0bn) on the sales trading out under the five-year US Navy ship repair contracts. The re-competes for the Hawaiian and San Diego contracts were both successfully secured in the year.
1. Re-presented for the transfer of the UK Munitions business to Platforms & Services (UK) from 1 January 2014.
2. Including share of equity accounted investments.
3. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 23).
4. Net cash inflow from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.
5. Comprises funded and unfunded unexecuted customer orders.
LOOKING FORWARD
Whilst the longer-term outlook remains uncertain, the 2015 fiscal year omnibus appropriations legislation passed in December 2014 included stable Department of Defense funding and support for major programmes, including the Group's Bradley and M88 HERCULES vehicles, as well as requested funding for US Navy ship maintenance and the Armored Multi-Purpose Vehicle (AMPV) programme.
The business is investing to protect existing combat vehicle programmes and to establish new domestic and international programmes, such as the US Army's AMPV, amphibious vehicles and international combat vehicle opportunities to sustain the Group's US combat vehicle manufacturing base. The services and sustainment activities provide continuing opportunities for multi-year contracts on existing platforms.
Recognising the continued challenges in the US market, a restructuring was announced in 2014 that realigned the Support Solutions business across the remaining US operating sectors. A business area which develops and maintains systems supporting critical missions for the US military will be reported in Intelligence & Security in 2015. As a result of the realignment of Support Solutions, the reporting segment retains all of the Land & Armaments businesses, as well as Ship Repair, Ordnance Systems and Protection Systems from Support Solutions. This change will allow the business to deliver more comprehensive, integrated and cost-effective product and service offerings across a full range of naval, land and individual warfighter platforms.
PLATFORMS & SERVICES (UK)
Platforms & Services (UK) comprises the Group's UK-based air, maritime, combat vehicle, munitions and shared services activities.
Platforms & Services (UK) is the focus for the Group's UK prime contracting platform and systems integration contracts, with a large order backlog of multi-year development, production and services contracts.
Military Air & Information includes programmes for the production of Typhoon combat and Hawk trainer aircraft, F-35 Lightning II sub-assembly manufacture, support and upgrades for Typhoon, Tornado and Hawk aircraft, and development of next-generation Unmanned Air Systems and defence information systems.
Maritime programmes include the manufacture of two Queen Elizabeth Class aircraft carriers, three River Class Offshore Patrol Vessels and seven Astute Class submarines for the Royal Navy, the design of the Successor submarine and Type 26 frigate, and in-service support, including the Portsmouth Naval Base contract.
Combat Vehicles (UK) provides upgrades and support to the British Army and international customers.
Munitions focuses on the design, development and manufacture of a comprehensive range of products, servicing its main customer, the UK Ministry of Defence, as well as international customers. The business is a principal supplier of general munitions to the British armed forces.
OPERATIONAL AND STRATEGIC HIGHLIGHTS
Eurofighter partner nation commitment to the full integration of the Captor E-Scan radar onto Typhoon aircraft
Major milestone achieved with floating of the aircraft carrier, HMS Queen Elizabeth
£348m contract awarded to construct three new River Class Offshore Patrol Vessels for the Royal Navy
First two Khareef Class corvettes for Oman achieved final acceptance and third achieved interim acceptance
Awarded the five-year, £600m Maritime Support Delivery Framework contract for support to the Royal Navy
£270m order received for the upgrade of Spearfish torpedoes
Third Astute Class submarine, Artful, launched in May
Announced potential management redundancies in the Military Air & Information business to align with its strategy and to improve competitiveness
Operational performance
Military Air & Information
In the year, deliveries of Typhoon Tranche 2 aircraft to the four Eurofighter partner nations totalled 16, bringing the cumulative number of Tranche 2 aircraft delivered to 219 of the contracted 236. Eighteen Tranche 3 front fuselage sub-assemblies were manufactured in the year. During 2014, there have been certain issues regarding acceptance of Typhoon Tranche 3 aircraft. Whilst the UK customer has continued to accept the aircraft, acceptances by Germany, Italy and Spain are held pending the completion of further technical and safety reviews by the NATO Eurofighter and Tornado Management Agency, which are planned to be concluded during the first quarter of 2015.
Work on the Omani Typhoon and Hawk aircraft contract continues, with sub-assembly manufacture for both aircraft types commencing and first deliveries on schedule for 2017.
In July, BAE Systems was awarded a three-year, £72m contract by the UK Ministry of Defence to de-risk E-Scan radar development for the Royal Air Force's Typhoon aircraft fleet. In November, the four partner nations placed a contract with Eurofighter for the full integration of the Captor E-Scan radar onto Typhoon aircraft and, as the system integrator, this award is worth £365m.
BAE Systems continues to support its UK and European customers' Typhoon and Tornado aircraft and their operational commitments. The business supports its UK customer through availability-based service contracts. A £125m contract extension was received in the year to provide support to the Royal Air Force's Tornado GR4 fleet until the aircraft's planned retirement in 2019. In December, BAE Systems was awarded a £112m contract to extend the Typhoon Availability Service for the in-service support of the Royal Air Force's Typhoon fleet by 15 months.
On the F-35 Lightning II programme, BAE Systems has continued to deliver aircraft fuselages for the sixth and seventh Low-Rate Initial Production (LRIP) contracts, with a total of 45 assemblies delivered to Lockheed Martin in 2014. Contract award for LRIP 8 for 43 assemblies was received in the year and manufacturing commenced. Proposals for LRIP 9 and 10 have been submitted with negotiations to commence in 2015.
Support continues to be provided to users of Hawk trainer aircraft around the world. In 2014, the Indian Navy and Air Force received four and 15 Hawk aircraft, respectively, built under the Batch 2 licence for 57 aircraft by Hindustan Aeronautics Limited. A response to a proposal for an additional 20 Hawk aircraft for the Indian Air Force's aerobatic display team has been submitted.
Working jointly with Dassault Aviation, progress is being made in maturing and demonstrating critical technology and operational aspects for an Unmanned Combat Air System. In November, the signature of a two-year feasibility study, worth a total of £120m to the six participating companies, was announced by the UK and French governments to continue joint Future Combat Air System technology development. The contract value to BAE Systems is £34m.
Taranis, the stealthy unmanned combat air vehicle demonstrator designed and built by BAE Systems with UK industry partners and the Ministry of Defence, has successfully completed a second phase of flight testing. During these latest tests, Taranis flew in a fully stealthy configuration.
The business undertook a review to ensure that its organisational operating model was aligned with its strategy and to improve competitiveness, which resulted in the announcement of 440 potential management redundancies in October.
Maritime
The consolidation of BAE Systems' UK shipbuilding operations in Glasgow is progressing to plan, with shipbuilding operations at Portsmouth ceasing in the second half of 2014. The restructuring programme concludes in 2016.
BAE Systems has continued to negotiate contracts with the Ministry of Defence to enact the restructuring of its naval ships business. During the year, contracts were signed for the recovery of associated rationalisation costs and the revised target cost arrangements for the delivery of the Queen Elizabeth Class aircraft carriers. In August, BAE Systems was awarded a £348m contract to construct three new River Class Offshore Patrol Vessels for the Royal Navy, sustaining shipbuilding skills between the Carrier programme and the start of manufacture for the anticipated Type 26 frigate programme.
On the aircraft carrier programme, HMS Queen Elizabeth was officially named by Her Majesty The Queen and floated for the first time at Rosyth in July. The second ship block build programme is now 80% complete and assembly at Rosyth has commenced. Under the revised target cost arrangements, the industrial participants' fee includes a 50:50 risk share arrangement providing greater cost performance incentives.
The assessment phase contract for the Type 26 frigate continues, with over 700 employees now working on the programme. A contract for the demonstration phase of the programme, including procurement of long lead items, is expected to be placed in the first half of 2015, with a full manufacture contract anticipated in 2016.
The third Khareef Class corvette for the Royal Navy of Oman achieved interim acceptance in May, with final acceptance planned for 2015. The first two ships completed their final acceptance trials in Oman during the second half of the year.
The five-year, £600m Maritime Support Delivery Framework contract for the delivery of services at Portsmouth Naval Base and support to half of the Royal Navy's surface fleet was secured in the year.
In June, the Ministry of Defence awarded BAE Systems a £70m contract extension to manage the support, maintenance and upgrade of the Type 45 destroyers at Portsmouth Naval Base and on all their operations in the UK and globally through July 2014 to November 2016.
A £270m contract for upgrade of the Spearfish torpedo was secured in December.
Artful, the third of class attack submarine for the Royal Navy, was launched in May. Progress continues on the remaining four boats, with further funding of £207m received in the year.
Progress continues on the design and development phase of the Successor submarine programme, the potential replacement to the Vanguard Class fleet, with more than 1,400 people now employed on the programme. Initial long lead orders were placed during 2014. The Ministry of Defence has agreed to fund £389m of capital investment in preparation for the Successor manufacturing programme.
Combat Vehicles (UK)
Following delivery of all 60 Terrier combat engineering vehicles to the customer, 55 of these were completed to the final accepted build standard in the year, with the final five due for completion at the Telford site in 2015. The Newcastle facility closed at the end of 2014 following delivery of the Terrier vehicles.
Orders totalling £106m for ongoing support activity were received in the year.
Munitions
Following submission of the next five-year pricing proposal for its 15-year Munitions Acquisition Supply Solution partnering agreement with the Ministry of Defence, negotiations continue with a contract amendment expected in 2015.
Transformation of the Munitions facilities under the original £200m capital programme was completed during the year.
FINANCIAL PERFORMANCE
|
|
|
2014 |
20131 |
|
Sales2 |
KPI |
£6,623m |
£7,174m |
|
Underlying EBITA3 |
KPI |
£772m |
£915m |
|
Return on sales |
|
11.7% |
12.8% |
|
Cash inflow4 |
KPI |
£173m |
£60m |
|
Order intake2 |
KPI |
£5,386m |
£6,085m |
|
Order backlog2 |
|
£20.1bn |
£21.6bn |
The year's sales2 of £6.6bn were 8% lower than 2013, or 4% excluding last year's retrospective trading of price escalation on the Salam Typhoon programme. This reduction is largely due to a lower level of intra-group trading in 2014 and, therefore, has no impact to the total Group numbers.
Return on sales was at 11.7% (2013 12.8%).
Cash performance was better than expected with a cash inflow4 of £173m (2013 £60m). Consumption of customer advances was at a lower level in the year than anticipated. Provisions were utilised against costs incurred on rationalisation and on the Oman Offshore Patrol Vessel programme.
Order backlog2 reduced to £20.1bn (2013 £21.6bn) primarily from trading on the Typhoon aircraft, Indian Hawk and aircraft carrier programmes.
1. Re-presented for the transfer of the UK Munitions business from Land & Armaments from 1 January 2014.
2. Including share of equity accounted investments.
3. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 23).
4. Net cash inflow from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.
LOOKING FORWARD
Platforms & Services (UK) has a strong order backlog of long-term committed programmes and an enduring support business.
In Military Air & Information, sales are underpinned by aircraft production on Typhoon and F-35 Lightning II, and in-service support for existing and legacy combat and Hawk trainer aircraft. There are a number of opportunities to secure future Typhoon export sales.
In Maritime, sales are underpinned by the design and subsequent build of the Successor submarine and Type 26 frigates, and the build of the Queen Elizabeth Class aircraft carriers and Astute Class submarines. The through-life support of these platforms, plus the Type 45 destroyer, together with their associated command and combat systems, provides a sustainable business in technical services and mid-life upgrades.
Combat Vehicles (UK) continues to provide engineering support to a large installed base of vehicles across UK and export markets. The business is pursuing obsolescence and upgrade programmes for the Challenger 2 main battle tank and land bridging systems.
The Munitions business is underpinned by the 15-year Munitions Acquisition Supply Solution partnering agreement with the Ministry of Defence secured in 2008.
PLATFORMS & SERVICES (INTERNATIONAL)
Platforms & Services (International) comprises the Group's businesses in Saudi Arabia, Australia and Oman, together with its 37.5% interest in the pan-European MBDA joint venture.
In Saudi Arabia, the business provides operational capability support to the country's air and naval forces on UK/Saudi government-to-government contracts. Contracts include multi-year agreements, such as the Saudi British Defence Co-operation Programme and Salam Typhoon programme.
In Australia, the business delivers production, upgrade and support programmes for customers in the defence and commercial sectors across the air, naval and land domains. Services contracts include the provision of sustainment, training solutions and upgrades. Platforms contracts include naval ships, such as the Landing Helicopter Dock programme for the Australian Navy. Contracts are often multi-year and fixed price.
In Oman, the business is developing its position building on a long history of relationships with the Omani armed forces, through the provision, support and upgrade of defence platforms and cyber security services. Resulting orders are placed with the relevant reporting segments.
MBDA is a leading global prime contractor of missiles and missile systems across the air, naval and land domains.
OPERATIONAL AND STRATEGIC HIGHLIGHTS
11 Typhoon aircraft delivered to Saudi Arabia under the Salam programme
Continued support to the operational capabilities of the Royal Saudi Air Force and Royal Saudi Naval Forces under the Saudi British Defence Co-operation Programme
Reorganisation of portfolio interests in industrial companies in the Kingdom of Saudi Arabia and enhanced relationship with Riyadh Wings
Customer acceptance of the first of two Landing Helicopter Dock ships in Australia
Four-year, A$190m (£100m) contract awarded to provide in-service support for the two Landing Helicopter Docks
MBDA secured a UK/French government order worth €600m (£466m) for the joint development and production of the Future Anti-Ship Guided Weapon
€301m (£234m) contract secured by MBDA for the Advanced Short Range Air-to-Air Missile (ASRAAM) for India's Jaguar aircraft fleet
Operational performance
Saudi Arabia
On the Salam Typhoon programme, UK final assembly of the 72 aircraft continues. At 31 December 2014, 45 aircraft have been delivered to the customer. Work on enhancing Typhoon's capability is progressing to schedule.
The five-year Typhoon support contract received in 2013 is operating well with all contractual Key Performance Indicators met during the year. The first of 30 aircraft completed its scheduled maintenance and upgrade under a contract also received in 2013.
Through the Saudi British Defence Co-operation Programme (SBDCP), the business continues to support the operational capabilities of the Royal Saudi Air Force (RSAF) and Royal Saudi Naval Forces (RSNF). The modernisation of the RSAF's training aircraft fleet continues to programme, with the first deliveries of Pilatus PC-21 aircraft made in 2014 and Hawk aircraft progressing through manufacturing. Training delivery and support under five-year contracts awarded in 2012 continue.
The orders received in 2013 for the upgrade of Tornado aircraft and equipment procurement are proceeding to plan. During the year, the business received a contract for Typhoon role equipment.
Under the minehunter mid-life update programme, the second ship is scheduled for acceptance back into the RSNF fleet in 2015.
A planned reorganisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia was announced during the year, enhancing its existing relationship with Riyadh Wings Aviation Academy LLC. As part of the reorganisation, BAE Systems acquired an additional 59% shareholding in Saudi Development and Training Company. This reorganisation is being undertaken in support of BAE Systems' strategy to expand further its In-Kingdom Industrial Participation programme, and to promote training, development and employment opportunities for Saudi national personnel.
In 2014, the Group's In-Kingdom industrial partner, Advanced Electronics Company, was accredited as an approved maintenance and repair agent for Typhoon avionics equipment.
Australia
The customer has formally accepted and taken delivery of the first Landing Helicopter Dock warship, HMAS Canberra. The hull for the second ship arrived at the Williamstown shipyard in February 2014 and work is progressing towards delivery in the second half of 2015.
After delivery of the second Landing Helicopter Dock, there is then no contracted shipbuilding programme for the Williamstown shipyard. BAE Systems continues to engage with the Australian government with a view to sustaining appropriate shipbuilding capability.
In September, the business was awarded a four-year, A$190m (£100m) contract to provide in-service support for the two Landing Helicopter Docks. The majority of the work will be undertaken in Sydney, the home port of these warships, creating over 40 new jobs.
The customer has accepted the second and third ANZAC Class frigates to be modernised under the Anti-Ship Missile Defence programme. The fourth and fifth frigates continue to undergo refurbishment.
In October, the business was awarded a A$25m (£13m) contract to produce an additional three blocks for the Air Warfare Destroyer programme at its Williamstown shipyard. The additional blocks will bring the total number constructed by BAE Systems to 21, of which 11 have already been delivered.
In October, the Flight Training Centre at Tamworth, New South Wales, where BAE Systems trains Australian Defence Force pilots, achieved a significant milestone, reaching 250,000 flying hours. Since 1992, the centre has helped to train more than 5,000 students from the Australian Defence Force and other military and commercial operations throughout the Asia-Pacific region.
BAE Systems remains in negotiations with the Commonwealth to agree a revised schedule for the delayed delivery of the JP 2008 Phase 3F programme for enhanced satellite communications services to the Australian Defence Force. The business expects these negotiations to conclude in the first half of 2015.
Oman
The two major contracts in Oman, Typhoon and Hawk aircraft and Khareef Class corvettes, are being undertaken by Platforms & Services (UK).
On the Typhoon and Hawk aircraft programme, sub-assembly manufacture has commenced.
On the Khareef Class corvette programme, the first two ships achieved final acceptance and the third ship achieved interim acceptance.
See pages 38 and 39 for further information on the operational performance of these contracts.
BAE Systems has provided a substantial proportion of Oman's in-service military equipment and works closely with the Omani armed forces in supporting this equipment.
The business is making good progress in addressing its industrial participation obligations in Oman through delivery of an agreed training and knowledge transfer programme, which covers over 80% of the Group's total obligations. BAE Systems continues to work with the Omani government to develop plans to discharge its remaining commitments.
MBDA
In January 2014, the UK and French governments signed an agreement worth €600m (£466m) for the joint development and production of the MBDA Future Anti-Ship Guided Weapon - Anti-Navire Léger missile for their armed forces.
On the Meteor development programme, an updated certificate of design, recording the final design standard of the missiles, was submitted to the customer at the end of 2014. Deliveries, against almost 1,100 production-standard missiles ordered by the six partner nation customers, have now commenced.
In December, MBDA received a €301m (£234m) contract to supply the Advanced Short Range Air-to-Air Missile (ASRAAM) for India's Jaguar aircraft fleet.
Work continues towards securing German government commitment to a German/Italian collaborative programme (TLVS) to replace the current trilateral arrangement with the US which expired at the end of 2014. The programme will provide a new generation of air and missile defence with improved inter-operability, mobility and full 360-degree defence capability.
FINANCIAL PERFORMANCE
|
|
|
2014 |
2013 |
|
Sales1 |
KPI |
£3,572m |
£4,063m |
|
Underlying EBITA2 |
KPI |
£366m |
£429m |
|
Return on sales |
|
10.2% |
10.6% |
|
Cash inflow/(outflow)3 |
KPI |
£881m |
£(189)m |
|
Order intake1 |
KPI |
£3,398m |
£7,221m |
|
Order backlog1 |
|
£11.6bn |
£12.3bn |
Sales1 were £0.5bn lower at £3.6bn. The reduction against 2013 includes £143m in respect of exchange translation arising on the Australian dollar and Euro. The trading reductions were in the Australian business, as the Landing Helicopter Dock programme ramps down, last year's sales trading arising from the Salam price escalation and the higher Saudi equipment deliveries in 2013.
Underlying EBITA2 of £366m (2013 £429m) generated a return on sales of 10.2% (2013 10.6%).
There was an operating cash inflow3 of £881m (2013 £189m outflow), which includes a net £349m from the sale and leaseback, and initial rentals, of the two Saudi residential compounds. Some £200m of receivables were collected in December, earlier than expected, and there were down-payments received on Saudi equipment awards.
Order backlog1 has reduced from last year end's high following the awards in 2013 of the five-year support contracts and equipment packages in Saudi Arabia.
1. Including share of equity accounted investments.
2. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 23).
3. Net cash inflow/(outflow) from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.
LOOKING FORWARD
In the Kingdom of Saudi Arabia, the Group expects to sustain its long-term presence through delivering current programmes and industrialisation, and developing new business in support of the Saudi military forces. The planned reorganisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia is intended to increase growth prospects and reinforce an ongoing commitment to support the national objectives of local skills and technology development, increasing employment and developing an indigenous defence industry.
In Australia, the government has increased the defence budget by 8% for the 2014-15 fiscal year and remains on track to increase annual defence expenditure to 2% of Gross Domestic Product within a decade. Following delivery of the second Landing Helicopter Dock in 2015, the Williamstown shipyard needs a follow-on shipbuilding programme to sustain capability. In the longer term, there are significant opportunities in the naval domain as Australia modernises its submarine and surface fleets to strengthen its ability to secure access to sea lines of communication across the Indo-Pacific region.
In Oman, the business continues to provide support to its products in service to position for future requirements.
MBDA continues to build on the effective partnerships it has established with its domestic customers and is pursuing actively a significant number of export opportunities, including substantial air defence requirements and weapons packages linked to prospective aircraft and naval procurements.
Page references used above refer to the Annual Report 2014 that can be viewed on the Company's website.
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER
|
|
|
2014 |
|
2013 |
||
|
|
Notes |
£m |
Total |
|
£m |
Total |
|
Continuing operations |
|
|
|
|
|
|
|
Combined sales of Group and share of equity accounted investments |
1 |
|
16,637 |
|
|
18,180 |
|
Less: share of sales of equity accounted investments |
1 |
|
(1,207) |
|
|
(1,316) |
|
Revenue |
1 |
|
15,430 |
|
|
16,864 |
|
Operating costs |
2 |
|
(14,387) |
|
|
(16,297) |
|
Other income |
4 |
|
174 |
|
|
128 |
|
Group operating profit |
|
|
1,217 |
|
|
695 |
|
Share of results of equity accounted investments |
1 |
|
83 |
|
|
111 |
|
|
|
|
|
|
|
|
|
Underlying EBITA1 |
1 |
1,702 |
|
|
1,925 |
|
|
Non-recurring items |
1 |
- |
|
|
6 |
|
|
EBITA |
|
1,702 |
|
|
1,931 |
|
|
Amortisation of intangible assets |
1,9 |
(184) |
|
|
(189) |
|
|
Impairment of intangible assets |
9 |
(170) |
|
|
(887) |
|
|
Financial expense of equity accounted investments |
5 |
(30) |
|
|
(8) |
|
|
Taxation expense of equity accounted investments |
|
(18) |
|
|
(41) |
|
|
Operating profit |
1 |
|
1,300 |
|
|
806 |
|
|
|
|
|
|
|
|
|
Financial income |
|
241 |
|
|
216 |
|
|
Financial expense |
|
(659) |
|
|
(600) |
|
|
Finance costs |
5 |
|
(418) |
|
|
(384) |
|
Profit before taxation |
|
|
882 |
|
|
422 |
|
Taxation expense |
6 |
|
(130) |
|
|
(246) |
|
Profit for the year |
|
|
752 |
|
|
176 |
|
|
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
|
|
Equity shareholders |
|
|
740 |
|
|
168 |
|
Non-controlling interests |
|
|
12 |
|
|
8 |
|
|
|
|
752 |
|
|
176 |
|
|
|
|
|
|
|
|
|
Earnings per share |
8 |
|
|
|
|
|
|
Basic earnings per share |
|
|
23.4p |
|
|
5.2p |
|
Diluted earnings per share |
|
|
23.3p |
|
|
5.2p |
1. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
Note references used above are references to notes to the Group accounts in the Annual Report 2014 that can be viewed on the Company's website.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER
|
|
|
2014 |
|
2013 |
||||
|
|
Notes |
Other reserves1 £m |
Retained earnings |
Total |
|
Other reserves1 £m |
Retained earnings |
Total |
|
Profit for the year |
|
- |
752 |
752 |
|
- |
176 |
176 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
Items that will not be reclassified to the income statement: |
|
|
|
|
|
|
|
|
|
Remeasurements on retirement benefit schemes: |
|
|
|
|
|
|
|
|
|
Subsidiaries |
|
- |
(2,023) |
(2,023) |
|
- |
918 |
918 |
|
Equity accounted investments |
|
- |
(73) |
(73) |
|
- |
8 |
8 |
|
Tax on items that will not be reclassified to the income statement |
6 |
- |
503 |
503 |
|
- |
(421) |
(421) |
|
Items that may be reclassified to the income statement: |
|
|
|
|
|
|
|
|
|
Currency translation on foreign currency net investments: |
|
|
|
|
|
|
|
|
|
Subsidiaries |
|
251 |
- |
251 |
|
(246) |
- |
(246) |
|
Equity accounted investments |
|
13 |
- |
13 |
|
(3) |
- |
(3) |
|
Reclassification of cumulative currency translation reserve on disposal |
|
- |
- |
- |
|
(8) |
- |
(8) |
|
Fair value gain on available-for-sale financial assets |
|
- |
4 |
4 |
|
- |
- |
- |
|
Amounts (charged)/credited to hedging reserve |
14 |
(92) |
- |
(92) |
|
53 |
- |
53 |
|
Tax on items that may be reclassified to the income statement |
6 |
19 |
- |
19 |
|
(14) |
- |
(14) |
|
Total other comprehensive income for the year (net of tax) |
|
191 |
(1,589) |
(1,398) |
|
(218) |
505 |
287 |
|
Total comprehensive income for the year |
|
191 |
(837) |
(646) |
|
(218) |
681 |
463 |
|
|
|
|
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
|
|
|
|
Equity shareholders |
|
191 |
(849) |
(658) |
|
(212) |
673 |
461 |
|
Non-controlling interests |
|
- |
12 |
12 |
|
(6) |
8 |
2 |
|
|
|
191 |
(837) |
(646) |
|
(218) |
681 |
463 |
1. An analysis of other reserves is provided in note 23.
Note references used above are references to notes to the Group accounts in the Annual Report 2014 that can be viewed on the Company's website.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
|
|
Attributable to equity holders of the parent |
|
|
||||
|
|
Issued |
Share |
Other reserves1 £m |
Retained earnings |
Total |
Non-controlling |
Total |
|
At 1 January 2014 |
89 |
1,249 |
4,868 |
(2,825) |
3,381 |
37 |
3,418 |
|
Profit for the year |
- |
- |
- |
740 |
740 |
12 |
752 |
|
Total other comprehensive income for the year |
- |
- |
191 |
(1,589) |
(1,398) |
- |
(1,398) |
|
Share-based payments |
- |
- |
- |
42 |
42 |
- |
42 |
|
Net purchase of own shares |
(2) |
- |
2 |
(281) |
(281) |
- |
(281) |
|
Ordinary share dividends |
- |
- |
- |
(642) |
(642) |
(14) |
(656) |
|
At 31 December 2014 |
87 |
1,249 |
5,061 |
(4,555) |
1,842 |
35 |
1,877 |
|
|
|
|
|
|
|
|
|
|
At 1 January 2013 |
90 |
1,249 |
5,079 |
(2,698) |
3,720 |
54 |
3,774 |
|
Profit for the year |
- |
- |
- |
168 |
168 |
8 |
176 |
|
Total other comprehensive income for the year |
- |
- |
(212) |
505 |
293 |
(6) |
287 |
|
Share-based payments |
- |
- |
- |
49 |
49 |
- |
49 |
|
Net purchase of own shares |
(1) |
- |
1 |
(212) |
(212) |
- |
(212) |
|
Ordinary share dividends |
- |
- |
- |
(638) |
(638) |
(11) |
(649) |
|
Disposal of non-controlling interest |
- |
- |
- |
1 |
1 |
(8) |
(7) |
|
At 31 December 2013 |
89 |
1,249 |
4,868 |
(2,825) |
3,381 |
37 |
3,418 |
1. An analysis of other reserves is provided in note 23.
Note references used above are references to notes to the Group accounts in the Annual Report 2014 that can be viewed on the Company's website.
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER
|
|
Notes |
2014 |
2013 |
|
Non-current assets |
|
|
|
|
Intangible assets |
9 |
9,983 |
9,735 |
|
Property, plant and equipment |
10 |
1,589 |
1,936 |
|
Investment property |
11 |
129 |
135 |
|
Equity accounted investments |
12 |
229 |
283 |
|
Other investments |
|
7 |
3 |
|
Other receivables |
13 |
347 |
321 |
|
Retirement benefit surpluses |
21 |
162 |
156 |
|
Other financial assets |
14 |
38 |
42 |
|
Deferred tax assets |
15 |
1,327 |
901 |
|
|
|
13,811 |
13,512 |
|
Current assets |
|
|
|
|
Inventories |
16 |
690 |
680 |
|
Trade and other receivables including amounts due from customers for contract work |
13 |
2,850 |
3,038 |
|
Current tax |
|
7 |
8 |
|
Other financial assets |
14 |
46 |
81 |
|
Cash and cash equivalents |
17 |
2,308 |
2,222 |
|
Assets held for sale |
7 |
76 |
140 |
|
|
|
5,977 |
6,169 |
|
Total assets |
18 |
19,788 |
19,681 |
|
Non-current liabilities |
|
|
|
|
Loans |
19 |
(2,868) |
(2,524) |
|
Other payables |
20 |
(932) |
(1,160) |
|
Retirement benefit obligations |
21 |
(5,530) |
(3,665) |
|
Other financial liabilities |
14 |
(79) |
(59) |
|
Deferred tax liabilities |
15 |
(21) |
(7) |
|
Provisions |
22 |
(436) |
(403) |
|
|
|
(9,866) |
(7,818) |
|
Current liabilities |
|
|
|
|
Loans and overdrafts |
19 |
(482) |
(402) |
|
Trade and other payables |
20 |
(6,670) |
(7,074) |
|
Other financial liabilities |
14 |
(107) |
(81) |
|
Current tax |
|
(448) |
(497) |
|
Provisions |
22 |
(315) |
(391) |
|
Liabilities held for sale |
7 |
(23) |
- |
|
|
|
(8,045) |
(8,445) |
|
Total liabilities |
|
(17,911) |
(16,263) |
|
Net assets |
|
1,877 |
3,418 |
|
|
|
|
|
|
Capital and reserves |
|
|
|
|
Issued share capital |
23 |
87 |
89 |
|
Share premium |
|
1,249 |
1,249 |
|
Other reserves |
23 |
5,061 |
4,868 |
|
Retained earnings - deficit |
|
(4,555) |
(2,825) |
|
Total equity attributable to equity holders of the parent |
|
1,842 |
3,381 |
|
Non-controlling interests |
|
35 |
37 |
|
Total equity |
|
1,877 |
3,418 |
Approved by the Board on 18 February 2015 and signed on its behalf by:
|
I G King |
P J Lynas |
|
Chief Executive |
Group Finance Director |
Note references used above are references to notes to the Group accounts in the Annual Report 2014 that can be viewed on the Company's website.
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER
|
|
Notes |
2014 |
2013 |
|
Profit for the year |
|
752 |
176 |
|
Taxation expense |
6 |
130 |
246 |
|
Share of results of equity accounted investments |
1 |
(83) |
(111) |
|
Finance costs |
5 |
418 |
384 |
|
Depreciation, amortisation and impairment |
2 |
657 |
1,397 |
|
Profit on disposal of property, plant and equipment |
2,4 |
(20) |
(6) |
|
Profit on disposal of investment property |
2,4 |
(12) |
(13) |
|
Profit on disposal of businesses |
2,4 |
- |
(6) |
|
Fair value gain |
4 |
(47) |
- |
|
Cost of equity-settled employee share schemes |
|
42 |
49 |
|
Movements in provisions |
|
(153) |
63 |
|
Decrease in liabilities for retirement benefit obligations |
|
(345) |
(337) |
|
(Increase)/decrease in working capital: |
|
|
|
|
Inventories |
|
(1) |
(35) |
|
Trade and other receivables |
|
197 |
(275) |
|
Trade and other payables |
|
(622) |
(1,327) |
|
Cash inflow from operating activities |
|
913 |
205 |
|
Interest paid |
|
(152) |
(177) |
|
Taxation paid |
|
(92) |
(138) |
|
Net cash inflow/(outflow) from operating activities |
|
669 |
(110) |
|
Dividends received from equity accounted investments |
12 |
63 |
95 |
|
Interest received |
|
7 |
11 |
|
Purchase of property, plant and equipment, and investment property |
|
(263) |
(236) |
|
Purchase of intangible assets |
|
(59) |
(33) |
|
Proceeds from sale of property, plant and equipment, and investment property |
|
539 |
93 |
|
Proceeds from sale of intangible assets |
|
- |
28 |
|
Purchase of subsidiary undertakings |
24 |
(233) |
(1) |
|
Cash and cash equivalents acquired from purchase of subsidiary undertakings |
24 |
3 |
- |
|
Equity accounted investment funding |
12 |
(2) |
(5) |
|
Proceeds from sale of subsidiary undertakings (net of cash disposed) |
|
- |
5 |
|
Net cash inflow/(outflow) from investing activities |
|
55 |
(43) |
|
Net purchase of own shares |
|
(281) |
(212) |
|
Equity dividends paid |
23 |
(642) |
(638) |
|
Dividends paid to non-controlling interests |
|
(14) |
(11) |
|
Cash inflow/(outflow) from matured derivative financial instruments |
|
8 |
(47) |
|
Cash inflow/(outflow) from movement in cash collateral |
|
10 |
(10) |
|
Cash inflow from loans |
|
679 |
- |
|
Cash outflow from repayment of loans |
|
(398) |
- |
|
Net cash outflow from financing activities |
|
(638) |
(918) |
|
Net increase/(decrease) in cash and cash equivalents |
|
86 |
(1,071) |
|
Cash and cash equivalents at 1 January |
|
2,222 |
3,334 |
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
5 |
(41) |
|
Cash and cash equivalents at 31 December |
|
2,313 |
2,222 |
|
Comprising: |
|
|
|
|
Cash and cash equivalents |
17 |
2,308 |
2,222 |
|
Cash and cash equivalents (included within assets held for sale) |
7 |
6 |
- |
|
Overdrafts |
19 |
(1) |
- |
|
Cash and cash equivalents at 31 December |
|
2,313 |
2,222 |
Note references used above are references to notes to the Group accounts in the Annual Report 2014 that can be viewed on the Company's website.
30. RELATED PARTY TRANSACTIONS
The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments (note 12) and pension schemes (note 21).
Transactions occur with the equity accounted investments in the normal course of business, are priced on an arm's-length basis and settled on normal trade terms. The more significant transactions are disclosed below:
|
|
Sales to |
|
Purchases from related party |
|
Amounts owed by related party |
|
Amounts owed to related party1 |
|
Management recharges1 |
|||||
|
Related party |
2014 |
2013 |
|
2014 |
2013 |
|
2014 |
2013 |
|
2014 |
2013 |
|
2014 |
2013 |
|
Advanced Electronics Company Limited |
9 |
1 |
|
56 |
50 |
|
- |
- |
|
- |
- |
|
- |
- |
|
CTA International SAS |
3 |
1 |
|
- |
- |
|
2 |
1 |
|
- |
- |
|
- |
- |
|
Eurofighter Jagdflugzeug GmbH |
1,087 |
1,048 |
|
11 |
- |
|
64 |
30 |
|
77 |
92 |
|
- |
- |
|
FADEC International LLC |
74 |
61 |
|
- |
- |
|
- |
- |
|
- |
- |
|
- |
- |
|
Gripen International KB |
- |
- |
|
- |
- |
|
15 |
17 |
|
14 |
16 |
|
- |
- |
|
MBDA SAS |
22 |
17 |
|
90 |
134 |
|
6 |
6 |
|
403 |
454 |
|
17 |
17 |
|
Panavia Aircraft GmbH |
34 |
39 |
|
44 |
64 |
|
5 |
2 |
|
- |
- |
|
- |
- |
|
Saudi Development and Training Company Limited (SDT)2 |
- |
1 |
|
8 |
15 |
|
n/a |
- |
|
n/a |
1 |
|
- |
- |
|
|
1,229 |
1,168 |
|
209 |
263 |
|
92 |
56 |
|
494 |
563 |
|
17 |
17 |
In October, the Group sold a freehold property to MBDA SAS for cash consideration of £12m.
1. Also relates to disclosures under Financial Reporting Standard 8, Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2014, £453m (2013 £560m) was owed by BAE Systems plc and £41m (2013 £3m) by other Group subsidiaries.
2. For the period from 1 January 2014 to 15 September 2014 when the Group accounted for its share of the results of SDT under the equity method, in accordance with IAS 28, Investments in Associates and Joint Ventures (revised 2011).
The Group considers key management personnel as defined under IAS 24, Related Party Disclosures, to be the members of the Group's Executive Committee and the Company's non-executive directors. Fuller disclosures on directors' remuneration are set out in the Annual Remuneration Report on pages 69 to 82. Total emoluments for directors and key management personnel charged to the Consolidated Income Statement were:
|
|
2014 |
2013 |
|
Short-term employee benefits |
14,383 |
13,418 |
|
Post-employment benefits |
1,678 |
1,676 |
|
Termination benefits |
1,702 |
611 |
|
Share-based payments |
3,320 |
4,163 |
|
|
21,083 |
19,868 |
Note and page references used above refer to the Annual Report 2014 that can be viewed on the Company's website.
Cautionary statement: All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of BAE Systems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements, which reflect management's assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of BAE Systems or the markets and economies in which BAE Systems operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. BAE Systems plc and its directors accept no liability to third parties in respect of this report save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Schedule 10A of the Financial Services and Markets Act 2000. It should be noted that Schedule 10A and Section 463 of the Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that their liability is solely to BAE Systems plc.
This information is provided by RNS
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