TIDMBA.
RNS Number : 5311D
BAE SYSTEMS PLC
20 February 2020
BAE Systems plc
Preliminary Announcement 2019
Results in brief
Financial performance measures as defined Financial performance measures defined
by the Group(1) in IFRS(2)
2019 2018 2019 2018
------------------------- ----------- ----------- ------------------------- ---------- ----------
Sales GBP20,109m GBP18,407m Revenue GBP18,305m GBP16,821m
------------------------- ----------- ----------- ------------------------- ---------- ----------
Underlying EBITA(3) GBP2,117m GBP1,928m Operating profit(3) GBP1,899m GBP1,605m
------------------------- ----------- ----------- ------------------------- ---------- ----------
Underlying earnings
per share(3)
excluding one-off tax
benefit
including one-off tax 45.8p 42.9p Basic earnings per
benefit 50.8p 42.9p share(3) 46.4p 31.3p
------------------------- ----------- ------------ ------------------------ ---------- ----------
Operating business Net cash flow from
cash flow(3) GBP1,307m GBP993m operating activities(3) GBP1,597m GBP1,200m
------------------------- ----------- ------------ ------------------------ ---------- ----------
Net debt GBP(743)m GBP(904)m
------------------------- ----------- ---------------------------------------
Order intake(4) GBP18,447m GBP28,280m
------------------------- ----------- ---------------------------------------
Order backlog(4) GBP45.4bn GBP48.4bn
------------------------- ----------- ---------------------------------------
Post-employment benefits and dividend
2019 2018
--------------------- ---------- ----------
Group's share of the
net post-employment
benefits deficit(5) GBP(4.5)bn GBP(4.0)bn
--------------------- ---------- ----------
Dividend per share 23.2p 22.2p
--------------------- ---------- ----------
Charles Woodburn, Chief Executive , said: " 2019 has been a year
of significant progress for BAE Systems. We delivered a good set of
financial results in line with guidance, growing sales and
earnings, with improved operational performance and increased
investment in the business to underpin our growth outlook.
Strategically we took a number of actions to strengthen the
portfolio and the pensions agreement announced today is good for
all stakeholders. These will help to accelerate our strategy and
further our growth outlook. We have a large order backlog and
remain focused on strong programme performance to deliver a
sustainable business model with enhanced financial performance
."
Financial highlights
Financial performance measures as defined by the Group(1)
- Sales increased by GBP1.7bn, a 7% increase, excluding the impact of currency translation(6) .
- Underlying EBITA increased to GBP2,117m, a 5% increase on a
constant currency basis(6) and excluding the impact of IFRS 16(3)
.
- Underlying earnings per share(3) increased by 7% to 45.8p (excluding the one-off tax benefit).
- Operating business cash flow(3) increased by GBP314m to GBP1,307m.
- Net debt decreased to GBP743m.
- Order intake(4) of GBP18.4bn.
- Order backlog(4) of GBP45.4bn.
Financial performance measures defined in IFRS(2)
- Revenue increased by GBP1.5bn, a 7% increase, excluding the
impact of currency translation(6) .
- Operating profit(3) increased by GBP294m to GBP1,899m,
including GBP27m of non-recurring charges (2018 GBP154m).
- Basic earnings per share(3) increased by 48% to 46.4p.
- Net cash flow from operating activities(3) increased by
GBP397m to GBP1,597m. Under IFRS 16 net lease cash outflows of
GBP273m are now classified under financing and investing
activities.
Post-employment benefits and dividend
- Group's share of the pre-tax accounting net post-employment
benefits deficit increased by GBP0.5bn to GBP4.5bn compared with 31
December 2018(5) .
- After consultation with the The Pensions Regulator in the UK,
the Group has reached agreement with the Trustee Board of the
combined pension scheme on the accelerated funding valuation and a
revised deficit recovery plan.
- At the 31 October 2019 funding valuation date, the deficit was
GBP1.9bn. The current deficit recovery plan which runs to 2026 will
be replaced by a new deficit recovery plan, under which a one-off
payment of GBP1bn is to be made in the coming months, with
approximately GBP240m of funding payable in the scheme year ending
31 March 2020 and approximately GBP250m by 31 March 2021.
- Final dividend of 13.8p making a total of 23.2p per share for
the year, an increase of 4.5% over 2018.
One-off tax benefit
- A one-off tax benefit of GBP161m was recognised in the year,
arising from agreements reached in respect of overseas tax matters,
net of a provision taken in respect of the estimated exposure
arising from the EU's decision regarding the UK's Controlled
Foreign Company regime.
1. We monitor the underlying financial performance of the Group
using alternative performance measures. These measures are not
defined in International Financial Reporting Standards (IFRS) and,
therefore, are considered to be non-GAAP (Generally Accepted
Accounting Principles) measures. Accordingly, the relevant IFRS
measures are also presented where appropriate. For alternative
performance measure definitions see glossary on page 12.
2. International Financial Reporting Standards.
3. The financial impact of the adoption of IFRS 16 Leases is
described on page 15, 16, 18, 19 and 53.
4. Including share of equity accounted investments.
5. The Saudi Arabia end of service benefit obligation of GBP97m
at 31 December 2018 has been reclassified from trade and other
payables to post-employment benefit obligations.
6. Current year compared with prior year translated at current
year exchange rates.
Operational and strategic key points
Air
- Qatar Typhoon and Hawk aircraft programme met its contractual
milestones in the year. Contract amendment agreed to accelerate
Typhoon deliveries
- F-35 programme Lots 12 to 14 price negotiations concluded. 142
rear fuselage assemblies delivered in the year in line with ramp-up
to full rate production in 2020
- Tempest technology maturation programme contracted between
industry and UK government. Italy and Sweden governments committed
to working with UK to develop next-generation combat air
capability
- The first four Hawk aircraft assembled in Saudi Arabia were
accepted and entered service in-Kingdom
- UK Tornado fleet successfully retired from service on schedule
following RAF declaration that Typhoon had met Centurion standard
with embodiment across the Typhoon fleet
- The design and production readiness phase of the Hunter Class
programme for the Royal Australian Navy continues to make good
progress
Maritime
- HMS Prince of Wales vessel acceptance achieved in December
- Four River Class Offshore Patrol Vessels have now been
accepted, with the programme on target for completion in 2020
- Construction commenced on second of the three contracted Type 26 frigates in August
- Construction of the first Dreadnought Class submarine
continues to advance, with GBP1.4bn of funding received in the
year
- Sea trials for the fourth Astute Class submarine are due to take place in 2020
- A GBP230m seven-year Torpedo Repair and Maintenance contract was awarded
- The UK combat vehicles joint venture between Rheinmetall and
BAE Systems Land UK was launched on 1 July
- Design requirements for the Canadian Surface Combatant are
progressing towards finalisation with partners and the Royal
Canadian Navy
Electronic Systems
- Growing demand for Advanced Precision Kill Weapon System
(APKWS(R) ) laser-guided rockets, with production awards totalling
over $400m (GBP302m) received in the year
- Over 500 electronic warfare systems delivered for the F-35
Lightning II programme, and awarded production and Block 4
modernisation contracts worth more than $750m (GBP566m)
- Acquired Riptide Autonomous Solutions to advance capabilities in maritime mission requirements
- Continuing growth in space resilience domain
- Establishing new facilities in Huntsville, Alabama and
Manchester, New Hampshire to meet the record order backlog
- Active interceptors certified for Gulfstream G500 and G600 jets and in production
- Battery electric and fuel cell electric transit systems
recorded five million zero emission miles
Platforms & Services (US)
- Deliveries of the M109A7 self-propelled howitzer and
ammunition carrier vehicle sets are progressing and the decision to
proceed to full-rate production was made in Q1 2020
- First deliveries achieved of the Amphibious Combat Vehicle to the US Marine Corps
- Contract modification award of $575m (GBP434m) received for
LRIP vehicles on the Armored Multi-Purpose Vehicle programme
- Work underway to upgrade 332 vehicles to the Bradley A4 configuration
- Awarded contracts worth $466m (GBP352m) to upgrade configuration on various M88 vehicles
- First tandem docking of two large warships in San Diego
dry-dock for contracts worth more than $170m (GBP128m)
- Deliveries continue of the M777 ultra-lightweight howitzer to
the Indian Army, with subsequent systems to be assembled at the
Mahindra Defence Systems facility
Cyber & Intelligence
- Received orders exceeding $100m (GBP76m) to provide logistics
sustainment support to US Air Force Space Command
- Awarded $437m (GBP330m) task order to provide open source
support to US Army and Army Intelligence & Security Command
approved partners
- Technology offerings further developed and the business
achieved four Amazon Web Services designations, recognising our
technical proficiency and operational excellence
- Divestment of the Silversky business and exit from the
UK-based Managed Security Services business in progress at
year-end. Restructuring charge of GBP20m recognised in the year
- Strong order intake and revenue growth in the Government business unit
Guidance for 2020
Whilst the Group is subject to geopolitical uncertainties, the
following guidance is provided on current expected operational
performance.
Impacts from the proposed acquisitions announced in January of
the Collins Aerospace Military Global Positioning business and
Raytheon's Airborne Tactical Radios business are not included in
the following guidance.
Group guidance
For the year ending 31 December 2020, the Group's underlying
earnings per share is expected to grow by mid-single digit
percentage compared to the full-year underlying earnings per share
in 2019 of 45.8p, assuming a $1.30 to sterling exchange rate.
The guidance is based on the measures used to monitor the
underlying financial performance of the Group. Reconciliations from
these measures to the financial performance measures defined in
International Financial Reporting Standards for 2019 are provided
on pages 14 to 16.
Segmental guidance
Electronic Systems:
- Sales, in US dollar terms, are expected to show mid-single
digit percentage growth driven by a number of electronic warfare
contracts including F-35. Some 70% of projected sales are in the
2019 closing order backlog, similar to last year.
- Margin(1) is expected to be at the higher end of our 14% to 16% range.
Cyber & Intelligence :
- In aggregate, we expect sales to be in line with 2019.
- The US business, which represented some 70% of this segment in
2019, is expected to show low-single digit percentage growth.
- In the Applied Intelligence business we expect good top line
expansion in the Government and Financial Services areas. However,
the proposed disposal of the Silversky business is expected to
reduce sales by approximately $100m.
- Margin(1) in 2020 is expected to improve into the 7% to 8%
range. The US business is again expected to contribute around the
8% to 9% mark. In Applied Intelligence we expect the business to
move back into profitability absent the restructuring charge and
following the exit of the two proposed business disposals.
Platforms & Services (US):
- Sales, in US dollar terms, are expected to show high-single
digit percentage growth, with increasing volumes from the US Combat
Vehicles backlog and in ship repair. More than 80% of guidance is
within the closing order backlog, similar to last year.
- Margin(1) is expected to remain at the low end of the 8% to 9%
range. The ramp-up of vehicle deliveries primarily on the Armored
Multi-Purpose Vehicle together with trading of the Mobile Protected
Firepower development programme will continue to be at initial low
margin levels.
Air:
- Sales are expected to show mid-single digit percentage growth,
for increased activity on the Qatar Typhoon and Hawk programme and
on F-35 as full rate production levels are achieved. Close to 90%
of sales guidance is within the closing order backlog.
- Margin(1) is expected to be lower than 2019, towards the
bottom end of our 11% to 13% range. There is a headwind from higher
pension service costs, as well as the further increase in
self-funded research and development expenditure on the Tempest
programme. Partly offsetting these is an expected step up in Qatar
margin recognition.
Maritime:
- Sales are expected to be stable overall. Activity on the
Carrier and Offshore Patrol Vessel programmes is almost complete.
These are offset by increases in the Dreadnought submarine and Type
26 programmes. Around 80% of guidance is already covered by the
order backlog.
- Margin(1) levels are expected to be at the top end of our 8% to 9% range.
HQ:
- HQ costs are expected to be slightly lower than in 2019.
- Underlying finance costs are expected to be around 10% less.
There will be a full-year of benefit following the repayment of the
high coupon $1bn bond in June 2019. Net present value charges will
also be lower. These will be partly offset by the cost of the term
debt to support the planned GBP1bn of accelerated pension deficit
funding.
- The underlying effective tax rate is expected to increase from
19% to around 20%, with the final rate dependent on the
geographical mix of profits.
- Minority interest is expected to increase to around GBP75m as
we complete further sell downs in our Saudi partner companies.
- The Group is targeting free cash flow of GBP3.5bn to GBP3.8bn
in the three-year period 2020 to 2022, with close to GBP1bn
expected in 2020.
1. Underlying EBITA as a percentage of sales.
For further information please contact:
Investors Media Relations
Martin Cooper, Kristina Anderson,
Investor Relations Director Director, Media Relations
Telephone: +44 (0) 3300 488830 Telephone: +44 (0) 7540 628673
+44 (0) 1252 383455
Email: investors@baesystems.com Email: kristina.anderson@baesystems.com
Analyst and investor presentation
A presentation, for analysts and investors, of the Group's
Results for 2019 will be available via webcast at 9.00am today (20
February 2020).
Details can be found on investors.baesystems.com, together with
presentation slides and a pdf copy of this report. A recording of
the webcast will be available for replay later in the day.
About BAE Systems
At BAE Systems, we provide some of the world's most advanced,
technology-led defence, aerospace and security solutions.
We employ a skilled workforce of 87,800 people(1) in more than
40 countries. We help our customers to stay a step ahead when
protecting people and national security, critical infrastructure
and vital information. We also work closely with local partners to
support economic development through the transfer of knowledge,
skills and technology .
1. Including share of equity accounted investments.
Preliminary results statement
Introduction
In 2019, BAE Systems delivered a good set of financial results
underpinned by improving operational performance. Governments in
key markets continue to prioritise defence and security and there
is a strong demand for the Group's capabilities, products and
services.
BAE Systems is a resilient company with long-term strength from
its programmes, technologies, customer relationships and
sustainability agenda. The Group maintained its strong balance
between production and aftermarket services in terms of both
revenue and margin, and the geographic mix of the business
continued to evolve as the US and International business continued
to grow and UK and Kingdom of Saudi Arabia revenues remained
stable. Following the significant international wins in recent
years, as these programmes ramp-up they will become the
second-largest revenue drivers for the Group behind its US-based
businesses.
The Group strategy remains focused, consistent and is delivering
results. Execution on the key strategic objectives of operational
excellence, competitiveness and technological innovation is vital
for the successful delivery of the order backlog, to deliver future
growth and a high-performing sustainable business. Good progress in
all areas was made in 2019.
Operationally, programme performance improvement is now being
delivered. The business will continue to drive programme
performance to ensure successful delivery of its order backlog and
the expected improvements in long-term cash generation. However,
safety performance in the year fell below the Group's high
expectations. The safety and wellbeing of employees is paramount.
To that end, the Group has sought external expertise to review a
number of its sites and strengthened the team with new heads of
safety in the UK and US to refocus and sharpen thinking in this
critical area.
Investment in self-funded research and development increased in
the year and the Group's portfolio was further bolstered by two
technology-focused acquisitions. The business aims to further
increase technology funding in the coming years especially in Air
and Electronic Systems as it looks to maintain and enhance its
long-term strategic positions.
2019 performance
US
The Group's US-based portfolio remains well aligned with
customer priorities and the key focus areas outlined in the US
National Defense Strategy.
The passage and signing of the fiscal year 2020 Defense
Appropriations bill ended the Continuing Resolution and maintained
funding support for many key BAE Systems programmes, including
combat vehicles, F-35, electronic warfare programmes, and current
and future precision weapons systems.
The fiscal year 2020 measure includes a top line budget of
$738bn for defence, a 3% increase over 2019, and lawmakers have
already agreed to a bipartisan deal setting the defence spending
caps for fiscal year 2021 at $740.5bn. Whilst the Group remains
cautiously optimistic about the budget process, numerous ongoing
political issues may continue to detract from the timely passage of
appropriations legislation.
The US electronics business delivered another standout
operational performance in 2019, especially in its core franchise
positions in the high-technology areas of electronic warfare,
precision-guided munitions, Intelligence, Surveillance and
Reconnaissance, and electro-optics. The business closed with a
record order backlog and the outlook for all its defence-focused
divisions is positive with the portfolio well positioned to address
key growth areas. These capabilities are also being leveraged on
international as well as domestic programmes. The Controls and
Avionics and Power and Propulsion Solutions businesses are
leveraging capabilities from the Group's defence base to provide
adjacencies into the commercial markets, giving exposure to the
expanding civil aerospace market through the engine and flight
control franchises.
The business remains focused on investment in emerging
technologies and leveraging customer funding to maintain, develop
and grow its strong market positions. Aligned with this strategy,
Electronic Systems acquired the Riptide Autonomous Solutions
business, a developer of unmanned underwater vehicles, in June
2019.
In January 2020, the Group announced two asset purchase
agreements worth a total estimated $2.2bn for the proposed
acquisitions of Collins Aerospace's Military Global Positioning
System business and Raytheon's Airborne Tactical Radios business,
both of which would be integrated into the Electronic Systems
portfolio. These proposed acquisitions are conditional upon the
successful closing of the pending Raytheon and United Technologies
Corporation merger, as well as other customary closing conditions
and required US regulatory approvals.
Platforms & Services (US) made steady progress in addressing
its operational challenges. The US-based combat vehicles business
is implementing a number of process and automation improvements to
meet increased production volumes across multiple programmes with
lessons learned being applied across the portfolio. The M109A7 met
its delivery targets in the second half of the year and initial
deliveries were made on the Amphibious Combat Vehicle programme.
Further contract awards were received for the M88A3 modernisation
and Bradley A4 programmes, strengthening the order backlog. Looking
into 2020 the business will have three upgrade and three new-build
programmes ramping up through its facilities.
The sector continued to shape its market-leading US naval ship
repair business, maintaining a strong bid pipeline for repair and
modernisation services, and working with the US Navy to improve
utilisation levels. To this end, it was a strategic step forward in
October when the first destroyer tandem docking in the Group's San
Diego facility was achieved. The ship repair and naval guns
franchises are well supported by the growth outlook in the US Navy
budget and projected fleet size. With the delivery of the final
constructed ship in March and the sale of the Mobile shipyard, the
business exited commercial shipbuilding.
The US-based Intelligence & Security business is maintaining
a high level of bid activity and a strong pipeline despite a highly
competitive and evolving market. The business is delivering on
contracts with good programme and financial performance in the
year.
UK
The UK is Europe's largest defence market. The UK government
recently stated its commitment to uphold the NATO commitment to
spend at least 2% of Gross Domestic Product on defence, and to
increase the defence budget by at least 0.5% above inflation, in
every year of the current parliament. The government is also
expected to launch an Integrated Foreign Policy, Defence and
Security Review during the course of 2020.
The work under the Team Tempest contract to develop
next-generation combat air technologies, skills and expertise, in
collaboration with UK government and industry partners, continues
at pace. In the second half of the year the commitment of both
Sweden and Italy to work with the UK on creating next-generation
combat air capability was a welcome development.
During 2019, the Group remained focused on the execution of its
long-term contracted positions in Air and Maritime.
In Air, the production ramp-up of rear fuselage assemblies for
the F-35 Lightning II aircraft progressed well with 142 sets
delivered. Full-rate production levels of approximately 160 sets
are targeted in 2020. As the UK and global fleets grow, securing a
long-term support position on the F-35 Lightning II remains a key
focus.
With imminent completion of the current partner nation
deliveries, Typhoon production is now focused on the sub-assembly
build on the Kuwait and Qatar programmes, which sustain production
into the mid-2020s. The potential pipeline for Typhoon additional
orders remains positive, with opportunities both with partner
nations and through exports with existing and new customers.
Securing additional orders would extend production revenue
levels.
Typhoon support delivered the expected operational performance
levels and, with the Centurion standard having been declared, the
UK Tornado fleet successfully retired from service on schedule.
In Maritime, the aircraft carrier build programme was completed
with HMS Prince of Wales being accepted by the customer. The
Offshore Patrol Vessels programme stabilised in the year delivering
the second and third ships. The fourth ship was accepted by the
customer in February 2020, and the final ship is expected to
complete this year. Manufacturing work on the Type 26 programme in
the UK continues to increase following cut steel on the second ship
in August. Activity on the Dreadnought programme ramped up
throughout the year with revenues now exceeding those on the Astute
programme. The associated major programme of building works
continued to progress.
BAE Systems will of course support the UK government in
achieving its aim to ensure that the UK maintains its key role in
European security and defence post-Brexit and to strengthen
bilateral relationships with key partners in Europe. This will be
important for ongoing collaboration in the development of defence
capabilities.
The Group has relatively limited UK-EU trading and the majority
of persons employed in the UK are UK nationals, with only limited
movement of EU nationals into and out of the Group's UK businesses.
Accordingly, the resulting Brexit near-term impacts across the
business are likely to be limited.
International
BAE Systems' defence and security capabilities remain highly
relevant in an uncertain global environment with complex threats.
During 2019, the Group further widened its international reach
through the export win in Canada and a number of Foreign Military
Sales through the Electronic Systems business. There are good
prospects in existing and new international markets for the Group's
products and services in air, maritime, land and cyber security.
Defence and security remains high on national agendas with the need
in many cases to recapitalise or upgrade ageing equipment.
In Saudi Arabia, BAE Systems continues to work closely with
industry partners and UK government to ensure that the export
licences required to enable the Group to fulfil its contractual
obligations in the Kingdom are in place. On the Hawk programme, the
first in-Kingdom final assembled aircraft were completed and
entered into service.
BAE Systems continues to address current and potential new
requirements as part of long-standing agreements between the UK
government and the Saudi Arabian government as the Group continues
to work on the localisation of defence capabilities in Saudi
Arabia, in support of the Saudi Arabian government's National
Transformation Plan and Vision 2030. Over many years, the Group has
developed and taken shareholdings in local Saudi businesses. The
Group is restructuring its portfolio of interests in these
businesses and in the year, it disposed of its shareholding in
Aircraft Accessories and Components Company. Following the Group's
subsidiary, Overhaul and Maintenance Company, entering into a heads
of terms for the sale of its 50% shareholding in Advanced
Electronics Company to Saudi Arabian Military Industries,
negotiations are continuing and the transaction is expected to take
place in 2020.
In Qatar the contract between BAE Systems and the Government of
the State of Qatar for the supply of 24 Typhoon and nine Hawk
aircraft to the Qatar Amiri Air Force, along with a bespoke support
and training package, is meeting its contractual milestones with
Typhoon aircraft delivery now aligned to an accelerated schedule
which was agreed in the year.
In Australia, the initial four-year design and productionisation
phase on the Hunter Class programme commenced and the first formal
integrated baseline review is scheduled to commence in Q1 2020.
Production of the first ship is expected to commence in South
Australia in the early 2020s. This Hunter Class programme will,
over time, double the size of the Group's current Australian
business.
Following contract signing in February 2019, BAE Systems is
providing the design, based on the Type 26, for the Canadian
Surface Combatant programme. Mobilisation activities are
progressing on the programme.
Whilst operating under a difficult geopolitical backdrop, the
MBDA joint venture has continued to win orders in both domestic and
international markets. The business continues to invest in new
products and is well placed to benefit from defence spend increases
in a number of European countries and international
opportunities.
Cyber security
In the Group's Applied Intelligence business, the UK Government
Services division performed well. Following a strategic review, the
Group commenced a process for the disposal of the Applied
Intelligence US-based software-as-a-service business and decided to
exit the UK-based Managed Security Services business. Cyber
security is an increasingly important part of government security
and a core element of stewardship for companies in a sophisticated
and persistent threat environment. The services and products the
Group offers in the remaining core business, including the
Financial Services division, are expected to drive growth and
improved returns as the market continues to develop.
Balance sheet and capital allocation
The Group's balance sheet is managed conservatively, in line
with its policy, to retain its investment grade credit rating and
to ensure operating flexibility.
Consistent with this approach, the Group expects to continue to
meet its pension obligations, invest in research and technology and
pursue other organic investment opportunities, and plans to pay
dividends in line with its policy of long-term sustainable cover of
around two times underlying earnings. Investment in value-enhancing
acquisitions and returns to shareholders through a share buyback
will be considered in line with the Group's clear and consistent
strategy and capital allocation policy.
A $1bn 6.375% bond, of which $500m had been converted to a
floating rate bond by utilising interest rate swaps, matured and
was repaid in June 2019.
Post-employment benefits schemes
The Group's share of the pre-tax accounting net post-employment
benefits deficit increased to GBP4.5bn (2018 GBP4.0bn). The impact
of lower discount rates increasing liabilities was in some part
offset by good asset returns and changes in mortality
assumptions.
In October 2019, six of the Group's nine UK pension schemes
(including the two largest schemes) were consolidated into a single
scheme. Following that consolidation, the Company agreed with the
new Trustee Board to bring forward the funding valuation of the
combined scheme to 31 October 2019 from the previously scheduled
date of 31 March 2020.
After consultation with the The Pensions Regulator in the UK,
the Group has reached agreement with the Trustee Board of the
combined scheme on the accelerated funding valuation and revised
deficit recovery plan.
At the 31 October 2019 funding valuation date, the deficit was
GBP1.9bn. The current deficit recovery plan which runs to 2026 will
be replaced by a new deficit recovery plan, under which a one-off
payment of GBP1bn is to be made in the coming months, with
approximately GBP240m of funding payable in the scheme year ending
31 March 2020 and approximately GBP250m by 31 March 2021.
Board and Executive Committee changes
Nicole Piasecki and Stephen Pearce were appointed to the Board
as non-executive directors on 1 June 2019. Harriet Green retired
from the Board on 7 November 2019, having served as a non-executive
director for nine years. As previously announced, Peter Lynas and
Jerry DeMuro will retire from the Board on 31 March 2020. With
effect from 1 April 2020, they will be succeeded by Brad Greve and
Tom Arseneault, respectively. On joining the Board, Mr Greve will
be appointed Group Finance Director, and Mr Arseneault will be
appointed President & Chief Executive Officer of BAE Systems,
Inc.. Nick Rose, a non-executive director, will retire from the
Board on 31 March 2020 .
At the start of 2019 David Armstrong was appointed as Group
Business Development Director following Alan Garwood's retirement.
In June, Mark Phillips was appointed Group Communications Director
and in May, Andrew Wolstenholme left the Company and was replaced
by Glynn Phillips as Group Managing Director Maritime. Brad Greve
joined the Executive Committee in September following his
appointment as Group Finance Director designate. At the start of
2020 Ben Hudson was appointed as Chief Technology Officer,
replacing Nigel Whitehead who announced his intention to
retire.
Summary
The business benefits from a large order backlog, with
established positions on long-term programmes in the US, UK, Saudi
Arabia and Australia. The Group's strategy is clear and well
defined with governments in its key markets continuing to
prioritise defence and security, with strong demand for the Group's
capabilities. Through execution of its strategy, BAE Systems is
well placed to maximise opportunities, deal with the challenges and
deliver a business focused on sustainability and generating
shareholder value.
Dividends
The Board has recommended a final dividend of 13.8p for a total
of 23.2p for the full year. Subject to shareholder approval at the
May 2020 Annual General Meeting, the dividend will be paid on 1
June 2020 to holders of ordinary shares registered on 17 April
2020.
Glossary
We monitor the underlying financial performance of the Group
using alternative performance measures. These measures are not
defined in International Financial Reporting Standards (IFRS) and,
therefore, are considered to be non-GAAP (Generally Accepted
Accounting Principles) measures. Accordingly, the relevant IFRS
measures are also presented where appropriate.
Definition Purpose
------------------- ---------------------------------------- ------------------------------
Financial performance measures as defined by the Group
Sales Revenue plus the Group's share Allows management to
of revenue of equity accounted monitor the sales performance
investments. of subsidiaries and equity
accounted investments.
------------------- ---------------------------------------- ------------------------------
Underlying EBITA Operating profit excluding amortisation Provides a measure of
and impairment of intangible operating profitability
assets, finance costs and taxation that is comparable over
expense of equity accounted investments time.
(EBITA), and non-recurring items*.
------------------- ---------------------------------------- ------------------------------
Underlying earnings Basic earnings per share excluding Provides a measure of
per share amortisation and impairment of underlying performance
intangible assets, non-cash finance that is comparable over
movements on pensions and financial time.
derivatives, and non-recurring
items*.
------------------- ---------------------------------------- ------------------------------
Operating business Net cash flow from operating Allows management to
cash flow activities excluding taxation monitor the operational
and including net capital expenditure cash generation of the
and lease principal amounts, Group.
financial investment and dividends
from equity accounted investments.
------------------- ---------------------------------------- ------------------------------
Free cash flow Operating business cash flow Allows management to
less interest paid (net) and monitor utilisation of
taxation. cash in line with the
Group's capital allocation
policy.
------------------- ---------------------------------------- ------------------------------
Net debt Cash and cash equivalents, less Allows management to
loans and overdrafts (including monitor the indebtedness
debt-related derivative financial of the Group.
instruments). Net debt does not
include lease liabilities.
------------------- ---------------------------------------- ------------------------------
Order intake Funded orders received from customers Allows management to
including the Group's share of monitor the order intake
order intake of equity accounted of subsidiaries and equity
investments. accounted investments.
------------------- ---------------------------------------- ------------------------------
Order backlog Funded and unfunded unexecuted Supports future years'
customer orders including the sales performance of
Group's share of order backlog subsidiaries and equity
of equity accounted investments. accounted investments.
Unfunded orders include the elements
of US multi-year contracts for
which funding has not been authorised
by the customer.
------------------- ---------------------------------------- ------------------------------
* Non-recurring items are items of financial performance which have
been determined by management as being material by their size or incidence
and not relevant to an understanding of the Group's underlying business
performance. The Group's definition of non-recurring items includes
profit or loss on business transactions, and costs incurred which are
one-off in nature, for example non-routine costs or income relating
to post-retirement benefit schemes, and other exceptional items which
management has determined as not being relevant to an understanding
of the Group's underlying business performance.
Definition Purpose
----------------------- --------------------------------------- ---------------------
Financial performance measures defined in IFRS
Revenue Income derived from the provision N/a
of goods and services by the Company
and its subsidiary undertakings.
--------------------- ----------------------------------------- ---------------------
Operating profit Profit for the year before finance N/a
costs and taxation expense. This
measure includes finance costs
and taxation expense of equity
accounted investments.
--------------------- ----------------------------------------- ---------------------
Basic earnings Basic earnings per share in accordance N/a
per share with International Accounting
Standard 33 Earnings per Share.
--------------------- ----------------------------------------- ---------------------
Net cash flow from Net cash flow from operating activities N/a
operating activities in accordance with International
Accounting Standard 7 Statement
of Cash Flows.
--------------------- ----------------------------------------- ---------------------
Other financial
measures
Post-employment Net International Accounting Standard N/a
benefits deficit 19 Employee Benefits deficit excluding
amounts allocated to equity accounted
investments.
--------------------- ----------------------------------------- ---------------------
Dividend per share Interim dividend paid and final N/a
dividend proposed per share.
--------------------- ----------------------------------------- ---------------------
Income statement
2019 2018
GBPm GBPm
------------------------------------------------------ ------- -------
Financial performance measures as defined by the
Group(1)
Sales 20,109 18,407
------------------------------------------------------ ------- -------
Underlying EBITA 2,117 1,928
------------------------------------------------------ ------- -------
Return on sales 10.5% 10.5%
------------------------------------------------------ ------- -------
Financial performance measures defined in IFRS(2) GBPm GBPm
Revenue 18,305 16,821
------------------------------------------------------ ------- -------
Operating profit 1,899 1,605
------------------------------------------------------ ------- -------
Return on revenue 10.4% 9.5%
------------------------------------------------------ ------- -------
Reconciliation of sales to revenue GBPm GBPm
------------------------------------------------------ ------- -------
Sales 20,109 18,407
Deduct Share of sales by equity accounted investments (2,878) (2,812)
Add Sales to equity accounted investments 1,074 1,226
------------------------------------------------------ ------- -------
Revenue 18,305 16,821
------------------------------------------------------ ------- -------
Reconciliation of underlying EBITA to operating
profit GBPm GBPm
------------------------------------------------------ ------- -------
Underlying EBITA 2,117 1,928
Non-recurring items (27) (154)
Amortisation of intangible assets (109) (85)
Impairment of intangible assets (6) (33)
Financial expense of equity accounted investments (23) (13)
Taxation expense of equity accounted investments (53) (38)
------------------------------------------------------ ------- -------
Operating profit 1,899 1,605
Net finance costs (273) (381)
Taxation expense (94) (191)
------------------------------------------------------ ------- -------
Profit for the year 1,532 1,033
------------------------------------------------------ ------- -------
Underlying net interest expense(3) (257) (215)
Net interest expense on post-employment benefit
obligations (117) (106)
Fair value and foreign exchange adjustments on
financial instruments and investments 78 (73)
------------------------------------------------------ ------- -------
Net finance costs (including equity accounted
investments) (296) (394)
------------------------------------------------------ ------- -------
Exchange rates 2019 2018
------------------------------------------------ ----- -----
Average
GBP/$ 1.277 1.335
------------------------------------------------ ----- -----
GBP/EUR 1.141 1.130
------------------------------------------------ ----- -----
GBP/A$ 1.836 1.786
------------------------------------------------ ----- -----
Year end
GBP/$ 1.324 1.274
------------------------------------------------ ----- -----
GBP/EUR 1.180 1.114
------------------------------------------------ ----- -----
GBP/A$ 1.884 1.809
------------------------------------------------ ----- -----
Sensitivity analysis GBPm
------------------------------------------------ -----
Estimated impact on sales of a ten cent movement
in the average exchange rate:
$ 675
------------------------------------------------ -----
EUR 100
------------------------------------------------ -----
A$ 40
------------------------------------------------ -----
1. For alternative performance measure definitions see glossary
on page 12.
2. International Financial Reporting Standards.
3. Underlying net interest expense is defined as finance costs
for the Group and its share of equity accounted investments,
excluding net interest expense on post-employment benefit
obligations and fair value and foreign exchange adjustments on
financial instruments and investments.
Sales increased by GBP1.7bn to GBP20.1bn (2018 GBP18.4bn), a 7%
increase on a constant currency basis.
Underlying EBITA increased to GBP2,117m (2018 GBP1,928m), giving
a return on sales of 10.5% (2018 10.5%). Excluding the impacts of
IFRS 16 and exchange translation, growth was 5%.
Revenue increased by GBP1.5bn to GBP18.3bn (2018 GBP16.8bn), a
7% increase on a constant currency basis.
Operating profit increased by GBP294m to GBP1,899m (2018
GBP1,605m). There was a favourable exchange translation impact of
GBP36m.
Non-recurring items in 2019 of GBP27m comprises a GBP36m charge
relating to the derecognition of Enterprise Resource Planning
software intangible assets in the Air sector, charges of GBP13m
relating to legal disputes arising from historical disposals, a
gain of GBP14m on the sale of the Group's 55% shareholding in BAE
Systems Global Combat Systems Limited upon formation of the
Rheinmetall BAE Systems Land joint venture, and a gain of GBP8m
relating to the disposal of the Aircraft Accessories and Components
Company. Non-recurring items in 2018 of GBP154m represented a
Guaranteed Minimum Pension equalisation charge of GBP114m, and a
loss on disposal of the Mobile, Alabama, shipyard of GBP40m.
Amortisation of intangible assets is GBP109m (2018 GBP85m), the
increase mainly a result of new IT systems becoming
operational.
Impairment of intangible assets in 2019 is GBP6m. In 2018 the
charge represented the impairment of Silversky customer-related
intangibles in the Applied Intelligence business.
Net finance costs , including equity accounted investments, were
GBP296m (2018 GBP394m). The underlying interest charge, excluding
pension accounting, and fair value and foreign exchange adjustments
on financial instruments and investments increased to GBP257m (2018
GBP215m). Net interest expense on the Group's pension deficit was
GBP117m (2018 GBP106m). There was a credit in respect of fair value
and foreign exchange adjustments of GBP78m (2018 GBP73m charge) on
exchange translation of US dollar-denominated bonds.
IFRS 16 Leases has been applied for the first time in 2019, and
as a result underlying EBITA and operating profit are both
approximately GBP50m higher than the prior year as a depreciation
charge on leased assets is reported, rather than the operating
lease expense previously recognised. Net finance costs have also
increased under IFRS 16 by approximately GBP50m owing to the
recognition of the interest charge element of the lease
liabilities.
Taxation expense , including equity accounted investments, of
GBP147m (2018 GBP229m) reflects the Group's underlying effective
tax rate for the year of 19%, less a GBP161m credit in respect of
two items. Following agreements reached in respect of overseas tax
matters, a one-off benefit has been recognised; and, following
review of the April 2019 EU Commission decision that concluded that
the UK's Controlled Foreign Company regime partially represents
State Aid, a provision has been recognised for the estimated
exposure. The underlying effective rate increased to 19% from 18%
in 2018.
The underlying effective tax rate for 2020 is expected to
increase from 19% to around 20%, with the final rate dependent on
the geographical mix of profits.
Earnings per share
2019 2018
-------------------------------------------------------- --------- ---------
Financial performance measures as defined by the
Group(1)
Underlying earnings (excluding the one-off tax
benefit) GBP1,457m GBP1,370m
-------------------------------------------------------- --------- ---------
Underlying earnings per share (excluding the one-off
tax benefit) 45.8p 42.9p
-------------------------------------------------------- --------- ---------
Underlying earnings (including the one-off tax
benefit) GBP1,618m GBP1,370m
-------------------------------------------------------- --------- ---------
Underlying earnings per share (including the one-off
tax benefit) 50.8p 42.9p
-------------------------------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
Profit for the year attributable to equity shareholders GBP1,476m GBP1,000m
-------------------------------------------------------- --------- ---------
Basic earnings per share 46.4p 31.3p
-------------------------------------------------------- --------- ---------
Reconciliation of underlying EBITA to underlying
earnings GBPm GBPm
-------------------------------------------------------- --------- ---------
Underlying EBITA 2,117 1,928
Underlying net interest expense (including equity
accounted investments)(3) (257) (215)
-------------------------------------------------------- --------- ---------
1,860 1,713
Taxation expense (at the underlying effective
tax rate, excluding the one-off tax benefit) (347) (310)
Non--controlling interests (56) (33)
-------------------------------------------------------- --------- ---------
Underlying earnings (excluding the one-off tax
benefit) 1,457 1,370
-------------------------------------------------------- --------- ---------
One-off tax benefit 161 -
-------------------------------------------------------- --------- ---------
Underlying earnings (including the one-off tax
benefit) 1,618 1,370
-------------------------------------------------------- --------- ---------
Reconciliation of underlying earnings to profit
for the year
attributable to equity shareholders GBPm GBPm
-------------------------------------------------------- --------- ---------
Underlying earnings (excluding the one-off tax
benefit) 1,457 1,370
Non-recurring items, post tax (18) (126)
Amortisation and impairment of intangible assets,
post tax (93) (97)
Net interest expense on post-employment benefit
obligations, post tax (95) (87)
Fair value and foreign exchange adjustments on
financial instruments and investments, post tax 64 (60)
One-off tax benefit 161 -
Profit for the year attributable to equity shareholders 1,476 1,000
Non-controlling interests 56 33
-------------------------------------------------------- --------- ---------
Profit for the year 1,532 1,033
-------------------------------------------------------- --------- ---------
Underlying earnings per share excluding the one-off tax benefit
for the year increased by 7% to 45.8p (2018 42.9p). Underlying
earnings per share including the one-off tax benefit for the year
was 50.8p.
Basic earnings per share was 46.4p (2018 31.3p).
The application of IFRS 16 Leases for the first time in 2019 has
had no material impact on earnings per share.
1. For alternative performance measure definitions see glossary
on page 12.
2. International Financial Reporting Standards.
3. Underlying net interest expense is defined as finance costs
for the Group and its share of equity accounted investments,
excluding net interest expense on post-employment benefit
obligations and fair value and foreign exchange adjustments on
financial instruments and investments.
Cash flow
2019 2018
GBPm GBPm
-------------------------------------------------------- ------- -----
Financial performance measures as defined by the
Group(1)
Operating business cash flow 1,307 993
-------------------------------------------------------- ------- -----
Financial performance measures defined in IFRS(2) GBPm GBPm
Net cash flow from operating activities 1,597 1,200
-------------------------------------------------------- ------- -----
Reconciliation from operating business cash flow
to net cash flow from operating activities GBPm GBPm
-------------------------------------------------------- ------- -----
Operating business cash flow 1,307 993
Add back Net capital expenditure and financial
investment 454 464
Add back Principal element of lease payments and
receipts 230 -
Deduct Dividends received from equity accounted
investments (142) (57)
Deduct Taxation (252) (200)
-------------------------------------------------------- ------- -----
Net cash flow from operating activities 1,597 1,200
-------------------------------------------------------- ------- -----
Net capital expenditure and financial investment (454) (464)
Principal element of finance lease receipts 9 -
Dividends received from equity accounted investments 142 57
Interest received 28 25
Acquisitions and disposals(3) 43 24
-------------------------------------------------------- ------- -----
Net cash flow from investing activities (232) (358)
-------------------------------------------------------- ------- -----
Interest paid (233) (203)
Net sale of own shares - 1
Equity dividends paid (724) (703)
Partial disposal of shareholding in subsidiary
undertaking(3) 31 17
Dividends paid to non-controlling interests (56) (28)
Principal element of finance lease payments (239) -
Cash flow from matured derivative financial instruments
(excluding cash flow hedges) 40 6
Movement in cash collateral 1 2
Net cash flow from loans (782) (7)
-------------------------------------------------------- ------- -----
Net cash flow from financing activities (1,962) (915)
-------------------------------------------------------- ------- -----
Net decrease in cash and cash equivalents (597) (73)
Add back Net cash flow from loans 782 7
Foreign exchange translation 72 (188)
Other non-cash movements (96) 102
Decrease/(increase) in net debt 161 (152)
Opening net debt (904) (752)
-------------------------------------------------------- ------- -----
Net debt (743) (904)
-------------------------------------------------------- ------- -----
GBPm GBPm
-------------------------------------------- ----- -----
Operating business cash flow 1,307 993
Interest paid, net of interest received (205) (178)
Taxation (252) (200)
-------------------------------------------- ----- -----
Free cash flow (as defined by the Group)(4) 850 615
-------------------------------------------- ----- -----
1. For alternative performance measure definitions see glossary
on page 12.
2. International Financial Reporting Standards.
3. 2018 comparatives have been reclassified to present a cash
inflow of GBP17m in respect of a partial disposal of the Group's
shareholding in a subsidiary undertaking within financing
activities. This cash flow was previously presented within
investing activities.
4. Free cash flow is defined as operating business cash flow
less interest paid (net) and taxation.
Operating business cash inflow was GBP1,307m (2018 GBP993m),
which includes cash contributions in respect of pension deficit
funding, over and above service costs, for the UK and US schemes
totalling GBP231m on a funding basis.
Net cash inflow from operating activities was GBP1,597m (2018
GBP1,200m). Under IFRS 16 net lease cash outflows of GBP273m are
now classified under financing and investing activities.
Taxation payments increased to GBP252m (2018 GBP200m) partly
reflecting payments in Australia following the end of utilisation
of prior year losses.
Net capital expenditure and financial investment was GBP454m
(2018 GBP464m).
Dividends received from equity accounted investments of GBP142m
(2018 GBP57m) were primarily receipts from MBDA (GBP73m), Advanced
Electronics Company (GBP38m) and FNSS (GBP17m).
Interest received was GBP28m (2018 GBP25m).
The cash inflows in respect of acquisitions, disposals, held for
sale assets and the partial disposal of shareholdings in subsidiary
undertakings represent the disposal of Aircraft Accessories and
Components Company (GBP26m), the disposal of the UK-based land
vehicles business into the RBSL joint venture (GBP29m), the
reduction in the Group's shareholding in Overhaul and Maintenance
Company (GBP31m) (2018 GBP17m), less the investment in Riptide
Autonomous Solutions (GBP9m) and the Prismatic acquisition (GBP3m).
The cash inflow in 2018 of GBP24m included cash acquired as part of
the ASC Shipbuilding acquisition (GBP14m) and cash received on the
sale of the Mobile, Alabama, shipyard (GBP12m).
Interest paid was GBP233m (2018 GBP203m).
Equity dividends paid in 2019 represents the 2018 final
(GBP423m) and 2019 interim (GBP301m) dividends.
Dividends paid to non-controlling interests increased to GBP56m
(2018 GBP28m), reflecting a higher payment by Saudi Maintenance
& Supply Chain Management Company, in which the Group has a 51%
shareholding .
There was a cash inflow from matured derivative financial
instruments of GBP40m (2018 GBP6m), arising from rolling hedges
relating to balances within the Group's subsidiaries and equity
accounted investments .
Foreign exchange translation primarily arises in respect of the
Group's US dollar-denominated borrowing.
Net debt
2019 2018
GBPm GBPm
---------------------------------------------------- ------- -------
Components of net debt
Cash and cash equivalents 2,587 3,232
Debt-related derivative financial instruments (net) 67 163
Loans - non-current (3,020) (3,514)
Loans and overdrafts - current (377) (785)
---------------------------------------------------- ------- -------
Net debt (743) (904)
---------------------------------------------------- ------- -------
The Group's net debt at 31 December 2019 is GBP743m, a net
decrease of GBP161m from the position at the start of the year. The
$1bn 6.375% bond, of which $500m had been converted into a floating
rate bond by utilising interest rate swaps, matured and was repaid
in June 2019.
Cash and cash equivalents of GBP2,587m (2018 GBP3,232m) are held
primarily for the repayment of debt securities, pension deficit
funding, payment of the 2019 final dividend and management of
working capital.
Accounting policies
Changes in accounting policies
With effect from 1 January 2019, the Group adopted IFRS 16
Leases. This results in almost all leases being recognised on the
balance sheet by lessees. The Group has applied the modified
retrospective transition approach and therefore has not restated
comparative amounts for the year ended 31 December 2018.
Underlying EBITA and operating profit are both approximately
GBP50m higher than the prior year as a depreciation charge on
leased assets is reported, rather than the operating lease expense
previously recognised. Net finance costs have also increased under
IFRS 16 by approximately GBP50m owing to the recognition of the
interest charge element of the lease liabilities.
There are no accounting policy changes which are expected to
have a significant impact on the Group with effect from 1 January
2020.
Segmental review
The Group reports its performance through ve principal reporting
segments.
Year ended 31 December 2019
-----------------------------------------------------------------------------------------------------
As defined by the Group Defined in IFRS(1)
------------------------------------------------------------ ---------------------------------------
Net cash
Operating flow
Return business Operating Return from
Underlying on cash Order Order profit/ on operating
Sales EBITA sales flow intake(2) backlog(2) Revenue (loss) revenue activities
GBPm GBPm % GBPm GBPm GBPbn GBPm GBPm % GBPm
------------- ------ ---------- ------ --------- --------- ---------- ------- --------- ------- ----------
Electronic
Systems 4,439 687 15.5 672 5,023 6.0 4,439 672 15.1 833
Cyber &
Intelligence 1,732 91 5.3 68 1,846 1.8 1,732 80 4.6 99
Platforms &
Services
(US) 3,337 267 8.0 241 4,020 5.8 3,185 239 7.5 305
Air 7,457 887 11.9 408 4,594 23.9 6,153 777 12.6 497
Maritime 3,116 268 8.6 150 2,875 8.6 3,071 253 8.2 289
HQ(3) 387 (83) (232) 386 - 43 (122) (174)
Deduct
Intra-group (359) (297) (0.7) (318)
Deduct
Taxation(4) (252)
------------- ------ ---------- ------ --------- --------- ---------- ------- --------- ------- ----------
Total 20,109 2,117 10.5 1,307 18,447 45.4 18,305 1,899 10.4 1,597
------------- ------ ---------- ------ --------- --------- ---------- ------- --------- ------- ----------
Year ended 31 December 2018
-----------------------------------------------------------------------------------------------------
As defined by the Group Defined in IFRS(1)
------------------------------------------------------------ ---------------------------------------
Net cash
Operating flow
Return business Operating Return from
Underlying on cash Order Order profit/ on operating
Sales EBITA sales flow intake(2) backlog(2) Revenue (loss) revenue activities
GBPm GBPm % GBPm GBPm GBPbn GBPm GBPm % GBPm
------------- ------ ---------- ------ --------- --------- ---------- ------- --------- ------- ----------
Electronic
Systems 3,965 606 15.3 431 4,624 5.4 3,965 590 14.9 575
Cyber &
Intelligence 1,678 111 6.6 85 1,802 1.9 1,678 59 3.5 96
Platforms &
Services
(US) 3,005 210 7.0 (30) 3,693 5.4 2,864 161 5.6 31
Air 6,712 859 12.8 666 14,845 27.4 5,579 810 14.5 719
Maritime 2,975 209 7.0 67 3,513 9.0 2,940 191 6.5 190
HQ(3) 350 (67) (226) 358 0.1 41 (206) (211)
Deduct
Intra-group (278) (555) (0.8) (246)
Deduct
Taxation(4) (200)
------------- ------ ---------- ------ --------- --------- ---------- ------- --------- ------- ----------
Total 18,407 1,928 10.5 993 28,280 48.4 16,821 1,605 9.5 1,200
------------- ------ ---------- ------ --------- --------- ---------- ------- --------- ------- ----------
1. International Financial Reporting Standards.
2. Including share of equity accounted investments.
3. HQ comprises the Group's head office activities, together
with a 49% interest in Air Astana.
4. Taxation is managed on a Group-wide basis.
Segmental performance: Electronic Systems
Electronic Systems, with 16,600 employees(1) , comprises the US-
and UK -- based electronics activities, including electronic
warfare systems, electro-optical sensors, military and commercial
digital engine and flight controls, precision guidance and seeker
solutions, next-generation military communications systems and data
links, persistent surveillance capabilities, and hybrid electric
drive systems.
Operational and strategic key points
- Growing demand for Advanced Precision Kill Weapon System
(APKWS(R) ) laser-guided rockets, with production awards totalling
over $400m (GBP302m) received in the year
- Over 500 electronic warfare systems delivered for the F-35
Lightning II programme, and awarded production and Block 4
modernisation contracts worth more than $750m (GBP566m)
- Acquired Riptide Autonomous Solutions to advance capabilities in maritime mission requirements
- Continuing growth in space resilience domain
- Establishing new facilities in Huntsville, Alabama and
Manchester, New Hampshire to meet the record order backlog
- Active interceptors certified for Gulfstream G500 and G600 jets and in production
- Battery electric and fuel cell electric transit systems
recorded five million zero emission miles
Financial performance
Financial performance measures as Financial performance measures defined
defined by the Group(2) in IFRS(3)
2019 2018 2019 2018
------------------- --------- --------- ------------------------ --------- ---------
Sales GBP4,439m GBP3,965m Revenue GBP4,439m GBP3,965m
------------------- --------- --------- ------------------------ --------- ---------
Underlying EBITA GBP687m GBP606m Operating profit GBP672m GBP590m
------------------- --------- --------- ------------------------ --------- ---------
Return on sales 15.5% 15.3% Return on revenue 15.1% 14.9%
------------------- --------- --------- ------------------------ --------- ---------
Operating business Cash flow from operating
cash flow GBP672m GBP431m activities GBP833m GBP575m
------------------- --------- --------- ------------------------ --------- ---------
Order intake(1) GBP5,023m GBP4,624m
------------------- --------- ---------
Order backlog(1) GBP6.0bn GBP5.4bn
------------------- --------- ---------
- Sales compared to 2018 were up 7% at $5.7bn (GBP4.4bn). Growth
in the defence business was at 9% driven by the F-35 programme,
APKWS(R) volumes and increased classified activity. Commercial
sales of engine and flight controls and hybrid-electric drive
systems also grew and at $1.2bn (GBP0.9bn) now amount to 21% of the
sector.
- Underlying EBITA was up to $877m (GBP687m), delivering a
return on sales of 15.5%, at the higher end of our guidance
range.
- As expected, cash conversion of EBITA was very strong in the
second half of the year, and close to 100% for the full year.
- Order backlog was another record high, at $7.9bn (GBP6.0bn),
with significant awards on F-35 for LRIP 14 and Block 4
development, APKWS(R) volumes and the Radar Warning Receiver
upgrade.
Operational performance
Electronic Combat Solutions
Staying at the forefront of emerging threats and delivering
next-generation electronic warfare (EW) capabilities are important
discriminators for success. As a leader in EW, we continue to see
growth across our portfolio for both US and international
customers.
The F-35 Lightning II programme completed deliveries for Lot 11
and achieved the milestone of delivering over 500 EW systems. In
addition, the programme was awarded a Block 4 modernisation and
further F-35 system production contracts from Lockheed Martin
totalling over GBP750m (GBP566m). We continue to operate under a
five-year Performance Based Logistics contract to provide material
availability and support for the F-35 sustainment programme.
Executing on our current contract from Boeing, we continue to
deliver to the United States Air Force our Eagle Passive Active
Warning Survivability System, which provides advanced aircraft
protection and has completed successful F-15 aircraft flight tests
despite experiencing cost and schedule overruns. We were also
awarded a $495m (GBP374m) contract to digitally upgrade our ALR-56
Radar Warning Receiver system, enhancing the capability of our
technology on F-15 jets.
Providing advanced EW capability for international F-15
aircraft, we continue to deliver on our contract from Boeing and
Warner Robins Air Logistics Complex, totalling more than $1bn
(GBP0.8bn) for the installation of the Digital Electronic Warfare
System (DEWS) on new and existing F-15 aircraft. We are also
executing a contract worth in excess of $300m (GBP227m) to provide
DEWS to support the sale of new F-15 aircraft to another
international customer.
As a provider of the long-range sensor and targeting technology
for the Long Range Anti-Ship Missile (LRASM), we have completed Lot
1 production for our prime contractor Lockheed Martin. In addition,
we received a contract modification to a previous Lot 2 production
award, increasing this contract award to $78m (GBP59m).
The Compass Call programme continues its long history of
sustaining and upgrading the prime mission equipment in support of
the existing EC-130H fleet. Cross-decking the mission system onto
the newly-designated Gulfstream G550 jet, the programme is
currently executing contracts with a total value of nearly $500m
(GBP378m).
Due to the sensitive nature of electronic combat systems and
technology, approximately one quarter of our revenues in this
business area are driven by our work on classified programmes.
Survivability, Targeting & Sensing Solutions
Our APKWS(R) laser-guided rocket is experiencing growing demand,
with over 36,000 units delivered to date. The programme received a
five-year Indefinite Delivery, Indefinite Quantity contract worth
up to $2.7bn (GBP2.0bn). Further production awards totalling over
$400m (GBP302m) were received this year. In addition to expanding
US military use, the system is generating strong international
interest.
We are developing a next-generation missile warning system for
the US Army under the Limited Interim Missile Warning System
programme. We are completing qualification and continue to support
government testing. We also received additional funding to enable
fielding on other US Army aircraft variants.
Both fixed- and rotary-wing demonstrations of our Striker(R) II
helmet-mounted display are ongoing and full development awaits
customer funding.
C4ISR Systems
Consistent with our strategy to obtain and incubate small
business innovations that can yield disruptive technology
breakthroughs, our Electronic Systems FAST Labs(TM) organisation
acquired the key assets of Riptide Autonomous Solutions to advance
our capabilities to address expanding maritime mission requirements
for integrated, flexible, modular, unmanned underwater vehicle
solutions.
In the space resilience domain, we are a leading provider of
space-qualified subsystems and components. We continue to
experience growth in the areas of integrated on-board processors,
reconfigurable processing payloads and secure communications. In
May, our radiation-hardened electronic products achieved 10,000
cumulative years in orbit.
We have been awarded funding from the Defense Advanced Research
Projects Agency to integrate machine-learning into platforms that
exploit radio frequency signals in increasingly crowded
electromagnetic spectrum environments. Our flexible, reconfigurable
hardware solutions will provide commercial and military users with
greater, automated situational awareness of their operating
environment.
Controls & Avionics Solutions
We continue to develop the integrated flight control electronics
and remote electronic units for Boeing's next-generation 777X
aircraft. A successful first flight of the aircraft was undertaken
in January 2020 and the business is continuing software updates and
systems verification testing in support of the aircraft
certification efforts. During the year, our 737 MAX production
rates were scaled back in line with Boeing's reduced demand.
Our active inceptors received certification for the Gulfstream
G500 and G600 and are now in production. A derivative, LinkEdge(TM)
(Active Parallel Actuation Subsystem), is being developed for the
Chinook CH-47.
Our engine control product line continues to see strong
performance from FADEC Alliance, a joint venture between GE
Aviation and FADEC International (our joint venture with Safran
Electronics & Defense). We have successfully completed
component certification testing of the engine control for the
Boeing 777X aircraft.
Under the recently-awarded Improved Turbine Engine Program, we
will provide the Electronic Engine Controls to modernise the US
Army's Black Hawk and Apache fleets.
Development of the F-35 vehicle management computer technology
refresh is proceeding to plan and we are actively engaged with
Lockheed Martin Aeronautics in moving towards a sustainment
contract for the active inceptor systems.
Power & Propulsion Solutions
With 12,000 electric-hybrid propulsion transit buses in
operation globally, we have launched the next-generation battery
electric system to a market moving to zero emission technology.
This year, our battery electric and fuel cell electric systems
recorded five million zero emission miles. As cities work to reach
low emission targets, this number is expected to grow
significantly.
The demand for low and zero emission technology is growing in
both commercial and military applications, with a number of
European cities employing fully electric vehicles powered by our
technology. Our first and largest transit customer, New York City
Transit (Metropolitan Transportation Authority) announced its
decision to purchase up to a further 435 electric-hybrid power and
propulsion systems from BAE Systems. In addition, the maritime
domain is now adopting green technology and our electric-hybrid
systems are powering both passenger and cargo vessels.
Looking forward
Forward-looking information for the Electronic Systems reporting
segment is provided on page 37.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 12.
3. International Financial Reporting Standards.
Segmental performance: Cyber & Intelligence
Cyber & Intelligence, with 10,100 employees(1) , comprises
the US - based Intelligence & Security business and
UK-headquartered Applied Intelligence business, and covers the
Group's cyber security, secure government and commercial financial
security activities.
Operational and strategic key points
Intelligence & Security
- Received orders exceeding $100m (GBP76m) to provide logistics
sustainment support to US Air Force Space Command
- Awarded $437m (GBP330m) task order to provide open source
support to US Army and Army Intelligence & Security Command
approved partners
- Technology offerings further developed and the business
achieved four Amazon Web Services designations, recognising our
technical proficiency and operational excellence
Applied Intelligence
- Divestment of the Silversky business and exit from the
UK-based Managed Security Services business in progress at
year-end. Restructuring charge of GBP20m recognised in the year
- Strong order intake and revenue growth in the Government business unit
Financial performance
Financial performance measures as Financial performance measures defined
defined by the Group(2) in IFRS(3)
2019 2018 2019 2018
------------------- --------- --------- ------------------------ --------- ---------
Sales GBP1,732m GBP1,678m Revenue GBP1,732m GBP1,678m
------------------- --------- --------- ------------------------ --------- ---------
Underlying EBITA GBP91m GBP111m Operating profit GBP80m GBP59m
------------------- --------- --------- ------------------------ --------- ---------
Return on sales 5.3% 6.6% Return on revenue 4.6% 3.5%
------------------- --------- --------- ------------------------ --------- ---------
Operating business Cash flow from operating
cash flow GBP68m GBP85m activities GBP99m GBP96m
------------------- --------- --------- ------------------------ --------- ---------
Order intake(1) GBP1,846m GBP1,802m
------------------- --------- ---------
Order backlog(1) GBP1.8bn GBP1.9bn
------------------- --------- ---------
- In aggregate, sales were broadly unchanged on a constant
currency basis at $2.2bn (GBP1.7bn). Sales in the US business were
2% lower owing to customer awards made but subsequently protested.
In the Applied Intelligence business, sales were up 4%, all arising
in the Government business line.
- Return on sales in the US business was in line with the prior
year at 9.1%. Within Applied Intelligence, the business recorded a
loss of GBP20m following the restructuring charge taken in the
first half of the year.
- Disposal of the Silversky business and exit from the UK-based
Managed Security Service are expected in the near future, both of
which will improve profitability in future years.
- As expected, order backlog was stable at $2.3bn (GBP1.8bn),
after adjusting for the expected Applied Intelligence
disposals.
Operational performance
Intelligence & Security
Air Force Solutions
We received orders exceeding $100m (GBP76m) to provide logistics
sustainment support to US Air Force Space Command for
instrumentation tracking (radar, telemetry and optics) systems,
which includes 26 agencies across the US Department of Defense,
Department of Energy, National Aeronautics and Space
Administration, plus six foreign governments.
On the US Air Force Intercontinental Ballistic Missile
Integration Support Contractor Program, we were awarded a
sole-source modification to increase the contract ceiling by $93m
(GBP70m) to $1.1bn (GBP0.8bn). The period of performance remains
through to January 2022, and our work includes programme
management, systems engineering, integration and testing,
sustainment and cyber defence.
Integrated Defense Solutions
We are executing the fourth year of a five-year, $368m (GBP278m)
sole-source contract to support weapons systems on board US Ohio
and UK Vanguard Class submarines, as well as future US Columbia
Class and UK Dreadnought Class submarines.
The US Navy has awarded the business a five-year Indefinite
Delivery, Indefinite Quantity (IDIQ) contract with an expected
lifecycle value of $280m (GBP211m) to modernise and maintain
command, control, communications, computers, cyber, intelligence,
surveillance and reconnaissance systems aboard new construction
aircraft carriers and large deck amphibious ships.
We secured a $126m (GBP95m) contract for the US Marshals Service
(USMS), a component of the US Department of Justice. The business
will provide mission-critical IT infrastructure support,
sustainment operations and engineering services to the USMS
Information Technology Division.
The business has been awarded a $300m (GBP227m) contract to
provide enterprise and mission-critical IT support to the Federal
Emergency Management Agency's Operations and Maintenance Division.
The programme will provide IT infrastructure modernisation, system
sustainment and telecommunications, network and helpdesk
services.
We were awarded a $212m (GBP160m) US Navy follow-on contract for
the design, acquisition, integration and test of radio
communication suites for Guided Missile Destroyers and other US
Navy and Coast Guard ships. This win continues our near 50-year
legacy as an integrator of mission-critical shipboard systems.
The business was awarded a five-year, $200m (GBP151m) contract
to provide systems engineering, security management, modelling and
simulation, and training services to help in the US government
defence cyber mission.
Intelligence Solutions
The team is executing on a number of task order contracts valued
at approximately $320m (GBP242m) to provide motion-imagery
analysis, training, and research support services to the US
intelligence community, and provide technical, functional, and
general support to enhance the situational awareness and training
of US Army troops deployed around the world.
A $70m (GBP53m) engineering change proposal was secured,
extending the period of performance on a contract originally
awarded in 2013 to provide high-performance computing and
infrastructure support to the US intelligence community.
The business was awarded a significant follow-on contract and a
new award with a combined value of over $490m (GBP370m) to provide
critical intelligence support to the US government.
We were awarded a new $437m (GBP330m) task order to provide open
source support for the Army and Army Intelligence & Security
Command approved partners, to provide training, policy and
governance recommendations, assessments and implementation of
emerging capabilities, and to establish and manage a secure cloud
hosting environment for these efforts.
The business was awarded a prime position on Solutions for
Intelligence Analysis 3, a ten-year multiple award IDIQ contract.
The company will provide worldwide coverage, support and assistance
to the Defense Intelligence Agency delivering timely, objective and
cogent military intelligence to defence planners and policy
makers.
We are delivering our first Federated Secure Cloud
implementation, supporting multiple independent levels of security,
and leveraging this capability into adjacent customers. In
addition, the business has established multiple commercial cloud
partnerships to drive additional services revenue across defence
and intelligence customers.
Among a number of strategic developments in 2019, the business
furthered its technology offerings and attained Amazon DevOps,
Government and Disaster Response and Public Safety Competencies, as
well as being named an Amazon Web Services Premier Consulting
Partner.
Applied Intelligence
As at the 2019 year-end, negotiations relating to the disposal
of the US-based software-as-a-service business were ongoing.
Government
The Government business delivered good growth in orders.
Performance was particularly strong in UK National Security which
benefited from the signing of a number of transformational
multi-year deals. Revenue growth followed the higher order intake,
with increased headcount and continuing investment in talent in a
competitive labour market for highly-skilled software engineers
with enhanced security clearances. Profitability continued to
benefit from cost control and greater efficiency in sales and
management activity in the International business in
particular.
Financial Services
The Financial Services business has seen a significant increase
in business development investment in the year. The higher spend on
product engineering culminated in the launch of a new version of
NetReveal(R) , v8.0, in the first half of the year. Response to the
product has been positive and has led to a number of pipeline
opportunities for upgrades to existing customers and deployment to
new customers. The conversion of these opportunities drove order
intake growth in the second half of the year and positions the
business for higher levels of growth in the future.
Looking forward
Forward-looking information for the Cyber & Intelligence
reporting segment is provided on page 37.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 12.
3. International Financial Reporting Standards.
Segmental performance: Platforms & Services (US)
Platforms & Services (US), with 12,500 employees(1) , has
operations in the US, UK and Sweden. It manufactures combat
vehicles, weapons and munitions, and delivers services and
sustainment activities, including naval ship repair and the
management and operation of government-owned munitions
facilities.
Operational and strategic key points
- Deliveries of the M109A7 self-propelled howitzer and
ammunition carrier vehicle sets are progressing and the decision to
proceed to full-rate production was made in Q1 2020
- First deliveries achieved of the Amphibious Combat Vehicle to the US Marine Corps
- Contract modification award of $575m (GBP434m) received for
LRIP vehicles on the Armored Multi-Purpose Vehicle programme
- Work underway to upgrade 332 vehicles to the Bradley A4 configuration
- Awarded contracts worth $466m (GBP352m) to upgrade configuration on various M88 vehicles
- First tandem docking of two large warships in San Diego
dry-dock for contracts worth more than $170m (GBP128m)
- Deliveries continue of the M777 ultra-lightweight howitzer to
the Indian Army, with subsequent systems to be assembled at the
Mahindra Defence Systems facility
Financial performance
Financial performance measures as Financial performance measures defined
defined by the Group(2) in IFRS(3)
2019 2018 2019 2018
------------------- --------- --------- ------------------------ --------- ---------
Sales GBP3,337m GBP3,005m Revenue GBP3,185m GBP2,864m
------------------- --------- --------- ------------------------ --------- ---------
Underlying EBITA GBP267m GBP210m Operating profit GBP239m GBP161m
------------------- --------- --------- ------------------------ --------- ---------
Return on sales 8.0% 7.0% Return on revenue 7.5% 5.6%
------------------- --------- --------- ------------------------ --------- ---------
Operating business Cash flow from operating
cash flow GBP241m GBP(30)m activities GBP305m GBP31m
------------------- --------- --------- ------------------------ --------- ---------
Order intake(1) GBP4,020m GBP3,693m
------------------- --------- ---------
Order backlog(1) GBP5.8bn GBP5.4bn
------------------- --------- ---------
- Sales in the year were up 6% to $4.3bn (GBP3.3bn), within
guidance. In the US Combat Vehicles business, the second half
challenge to deliver the ramp up in M109A7 deliveries was met.
- Return on sales performance for the year improved to 8.0% with
no material charges taken in the year. As regards the ramp in
Combat Vehicles sales, we are trading profit on the Armored
Multi-Purpose Vehicle and Amphibious Combat Vehicle programmes at
an initial low level.
- Cash flow performance was very strong in the second half of
the year as vehicle production deliveries increased and working
capital was liquidated.
- Order backlog was further increased to $7.7bn (GBP5.8bn), with
total in-year funded Combat Vehicle orders received of $2.5bn
(GBP1.9bn).
Operational performance
US Combat Vehicles
The business continues to make progress towards achieving
consistent production throughput across multiple programmes with
the implementation of ongoing improvements and investments in
modernising facilities and manufacturing technologies, including
automation and robotic welding.
We are leveraging the lessons learned on the M109A7 programme
and continue to integrate innovative manufacturing capabilities
during the early stages of the production of new combat vehicles.
While schedule adjustments have been necessary, addressing these
challenges will facilitate consistency of quality and delivery for
our customers, and bring long-term benefits across our vehicle
programmes.
Initial Amphibious Combat Vehicles (ACVs) were delivered to the
US Marine Corps under Low-Rate Initial Production (LRIP), with a
third LRIP contract received in October bringing the total value to
$458m (GBP346m) for 90 vehicles. Under a $67m (GBP51m) contract
awarded in June, we have begun design and development activities on
two new mission variants of the ACV family of vehicles.
As one of two competitors, we continue to work on the US Army's
Mobile Protected Firepower programme under a $376m (GBP284m)
contract for the engineering and manufacturing development phase
for rapid prototyping efforts.
On the US Army's Armored Multi-Purpose Vehicle programme, we
were awarded a $575m (GBP434m) contract modification, bringing the
cumulative award value to $873m (GBP659m). Initial LRIP vehicles
are scheduled to begin delivery in 2020.
We continue to progress the LRIP phase of the M109A7 programme,
with contracts in 2018 and 2019 totalling approximately $750m
(GBP566m) for 108 vehicle sets. These cumulative LRIP awards
include the recent December contract modification and long-lead
material funding. The decision to proceed to full-rate production
was subsequently made in the first quarter of 2020. In July, we
received a $45m (GBP34m) contract to support the integration of the
Extended Range Cannon Artillery on the M109A7 to double the range
of the gun system, which is among the Army's top priorities.
Work has begun under contracts for 332 vehicles, valued at $578m
(GBP437m) to upgrade to the Bradley A4 configuration.
We continue to work on US Army contracts for production and
sustainment of M88 recovery vehicles, to include upgrades from the
M88A1 to the M88A2 HERCULES configuration. In September we received
a $148m (GBP112m) contract to upgrade an additional 43 vehicles,
and were competitively selected for a $318m (GBP240m) contract to
upgrade to the next-generation M88A3 configuration to restore
single-vehicle recovery.
Internationally, the delivery of an additional 11 Assault
Amphibious Vehicles for Japan was completed in the second half of
the year and work continues on 36 vehicles for Taiwan. The delivery
of 32 M109A5+ self-propelled howitzers to the Brazilian Army was
completed in the second half of the year.
Weapon Systems
Deliveries of M777 ultra-lightweight howitzers continue to the
Indian Army under a $542m (GBP409m) Foreign Military Sale contract
for 145 M777s. The initial guns are being built in our facilities,
with at least 120 subsequent systems to be assembled in India at
Mahindra Defence Systems' new facility.
We received two orders totalling $85m (GBP64m) from the US Navy
to deliver six Mk45 Mod 4 gun systems, providing a solid US Navy
order book of 20 Mk45 systems. We are also delivering 57mm Mk110
gun systems to the US Navy and Coast Guard, with nearly 60 systems
now delivered to US maritime forces.
We continue to execute on contracts for 155mm BONUS ammunition
to the Swedish Army and the US Army. Under a 2016 contract
modification, we are providing 24 additional ARCHER artillery
systems to the Swedish government, and we are under multiple export
contracts to deliver 40 Mk4 and 57 Mk3 naval gun systems.
We continue to perform on a $183m (GBP138m) contract to provide
the Maritime Indirect Fire System for the UK Royal Navy's Type 26
frigate, which includes Mk45 Mod 4 gun systems, automated
ammunition handling systems and gun fire control systems.
Under the latest contract awarded in March, we are to produce 28
more Virginia Payload Module tubes for the US Navy's Block V
Virginia-class submarines.
Ordnance Systems
We manage, operate and modernise the US Army's Radford and
Holston munitions facilities.
At Holston, production operations impacted by a fire in January
2019 resulted in a GBP10m charge recognised in the HQ segment under
the Group insurance arrangement. Modernisation activities continue
under multiple contracts to construct a natural gas-fired steam
facility, a waste water management facility that is nearing
completion, as well as the design, construction and commissioning
of new production facilities to improve efficiency and modernise
energetics manufacturing.
At Radford, in addition to ongoing operations, work continues on
the construction of a modernised nitrocellulose facility, and we
are actively managing ongoing subcontractor performance issues,
cost and schedule overruns, and related disputes.
US Ship Repair
Our US maintenance and modernisation shipyards remain in strong
demand. In 2019, we secured orders across our US shipyards
totalling approximately $1bn (GBP0.8bn), including awards to
service the USS The Sullivans in Jacksonville and the USS Vicksburg
in Norfolk.
In September, we received two contracts totalling more than
$170m (GBP128m) for the repair and maintenance of the
guided-missile destroyers USS Stethem and USS Decatur in San Diego,
resulting in the first tandem docking of two large warships in our
San Diego dry-dock.
Following a thorough analysis of the new Multiple Award Contract
structure being implemented in Pearl Harbor, Hawaii, we informed
the Navy we will not bid for future work in Hawaii, and will focus
on completing existing contracts.
BAE Systems Hägglunds
With an installed base of nearly 1,300 CV90 vehicles in Sweden
and across six other international markets, the business continues
to pursue contractual opportunities, including the Czech Republic's
competition to replace its fleet of BMP2 Infantry Combat
Vehicles.
Work is progressing to refurbish Swedish CV90s, and initial
deliveries have begun on the integration of 40 Mjölner mortar
systems under a separate contract. We were selected by the Dutch
Army to integrate the Elbit Systems' Iron Fist Active Protection
System on its fleet of CV90s.
32 BvS10 all-terrain vehicles under contract for Austria were
delivered for final acceptance.
FNSS
FNSS, our land systems joint venture based in Turkey, continues
to perform under its $524m (GBP396m) programme to produce 259 8x8
wheeled armoured vehicles for the Royal Malaysian Army. Deliveries
continue under a contract with Oman for PARS wheeled armoured
vehicles in 8x8 and 6x6 configurations.
Work progresses under multiple contracts for the Turkish Armed
Forces, including a EUR278m (GBP236m) contract for 260 anti-tank
vehicles, an EUR84m (GBP71m) contract for air defence vehicles, a
EUR155m (GBP131m) contract for 27 assault amphibious vehicles, and
a contract worth EUR154m (GBP131m) for 100 special purpose 8x8 and
6x6 vehicles.
Looking forward
Forward-looking information for the Platforms & Services
(US) reporting segment is provided on page 37.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 12.
3. International Financial Reporting Standards.
Segmental performance: Air
Air, with 28,300 employees(1) , comprises the Group's UK-based
air activities for European and International Markets, and US
Programmes, and its businesses in Saudi Arabia and Australia,
together with its 37.5% interest in the European MBDA joint
venture.
Operational and strategic key points
- Qatar Typhoon and Hawk aircraft programme met its contractual
milestones in the year. Contract amendment agreed to accelerate
Typhoon deliveries
- F-35 programme Lots 12 to 14 price negotiations concluded. 142
rear fuselage assemblies delivered in the year in line with ramp-up
to full rate production in 2020
- Tempest technology maturation programme contracted between
industry and UK government. Italy and Sweden governments committed
to working with UK to develop next-generation combat air
capability
- The first four Hawk aircraft assembled in Saudi Arabia were
accepted and entered service in-Kingdom
- UK Tornado fleet successfully retired from service on schedule
following RAF declaration that Typhoon had met Centurion standard
with embodiment across the Typhoon fleet
- The design and production readiness phase of the Hunter Class
programme for the Royal Australian Navy continues to make good
progress
Financial performance
Financial performance measures as Financial performance measures defined
defined by the Group(2) in IFRS(3)
2019 2018 2019 2018
------------------- --------- ---------- ------------------------ --------- ---------
Sales GBP7,457m GBP6,712m Revenue GBP6,153m GBP5,579m
------------------- --------- ---------- ------------------------ --------- ---------
Underlying EBITA GBP887m GBP859m Operating profit GBP777m GBP810m
------------------- --------- ---------- ------------------------ --------- ---------
Return on sales 11.9% 12.8% Return on revenue 12.6% 14.5%
------------------- --------- ---------- ------------------------ --------- ---------
Operating business Cash flow from operating
cash flow GBP408m GBP666m activities GBP497m GBP719m
------------------- --------- ---------- ------------------------ --------- ---------
Order intake(1) GBP4,594m GBP14,845m
------------------- --------- ----------
Order backlog(1) GBP23.9bn GBP27.4bn
------------------- --------- ----------
- Sales were up 11% at GBP7.5bn. As expected there was higher
production activity on the new Typhoon and Hawk programme for
Qatar, and the F-35 programme continues to ramp up towards full
rate next year. In addition sales from MBDA grew on deliveries to
Egypt and Qatar.
- The return on sales of 11.9% was ahead of expectations on
strong programme execution. It reflects low initial profit
recognition on the early stages of the Qatar programme, and
increased self-funded research and development on the Tempest
future combat air development. Last year's return on sales
benefited by 70bps from the completing Oman Typhoon contract.
- Cash flow largely reflects the utilisation of provisions,
timing on receivables, and the difference between joint venture
profits and cash dividends received. There was also some usage of
prior year Qatar funding.
- Order backlog reduced to GBP23.9bn, primarily for the trading
on multi-year orders, received in prior years, for the Saudi
Arabian support and Qatar programmes.
Operational performance
European & International Markets
Mobilisation activity on the 24 Typhoon and nine Hawk aircraft
and associated support and training contract for the Government of
the State of Qatar has progressed to plan with all initial
milestones achieved. A contract amendment was agreed during the
year accelerating Typhoon deliveries and contract milestones.
The first eight of 28 major units on the Kuwait Typhoon
contract, secured by Italian Eurofighter partner Leonardo, have
been delivered. The remaining major units are planned for delivery
by 2022.
In the year, the Royal Air Force accepted the final three
Typhoon aircraft from the UK final assembly facility. The German,
Italian and Spanish Air Forces accepted a total of 11 aircraft in
2019, leaving one of the 88 Tranche 3 aircraft to be delivered.
Following the declaration by the Royal Air Force that Typhoon
had met Centurion standard in December 2018, enabling the
transition of capabilities from Tornado to Typhoon, the UK Tornado
fleet successfully retired from service on schedule. Centurion
standard has now been embodied across the Typhoon fleet.
In the UK, under a ten-year partnership arrangement, and in
Oman, under a five-year availability service contract, we continue
to support Typhoon fleets to achieve customer target flying hours.
BAE Systems continues to support the European Partner Nations' own
support arrangements.
Support to the Royal Air Force's UK fleet of Hawk fast jet
trainer aircraft continues through the long-term availability
contract. We are in discussions with the UK on future Hawk support
arrangements and we continue to support users of Hawk trainer
aircraft around the world.
The next phase of the Tempest technology maturation programme
was contracted between industry and the UK government. This was
followed by the signing of a Memorandum of Understanding between
the UK and Sweden in July, and a Statement of Intent between the UK
and Italy in September, committing the respective governments to
working with the UK government to develop next-generation combat
air capability.
Progress continues on the collaboration for the design and
development phase of an indigenous fifth-generation fighter jet for
the Turkish Air Force.
US Programmes
On the F-35 programme, price negotiations on Lots 12 to 14
concluded in the second half of 2019 and the business is ramping up
to full-rate production by the end of 2020. In the period, 142 rear
fuselage assemblies were delivered under the Low-Rate Initial
Production contracts for Lots 11 to 13, bringing total deliveries
on the programme to over 600.
At RAF Marham in the UK, following the declaration of Initial
Operational Capability in 2018, we continue to support the customer
in integrating the F-35 into its operational fleet and forward
deployments.
BAE Systems continues to play a growing role on the F-35
sustainment programme including the supply of spares and technical
support, software products, upgrades and specialist manpower
services.
Saudi Arabia
The Group is reliant on the continued approval of export
licences by a number of governments in order to continue supplies
to the Kingdom of Saudi Arabia. Following extensions being granted
by the German government to a number of export licences on joint
collaborative programmes, we are working closely with industry
partners and the UK government to continue to fulfil the
contractual support arrangements in Saudi Arabia on the key
European collaboration programmes.
In June 2019, the Court of Appeal of England and Wales directed
the Secretary of State for International Trade to revisit the
decision-making process for granting export licences for the sale
of military equipment to the Kingdom of Saudi Arabia for possible
use in the conflict in Yemen and to retake its decisions regarding
such licences on that basis. The Company will assess the result of
the retaking by the Secretary of State of such decisions, once they
have been made. Pursuant to the Order of the Court, the Secretary
of State undertook not to grant new licences for the export of arms
or military equipment to Saudi Arabia for possible use in the
conflict in Yemen until such decisions have been retaken. Both the
Secretary of State and the other party to the proceedings have
sought and obtained permission to appeal the Court's ruling to the
Supreme Court.
In March 2018, the UK and the Kingdom of Saudi Arabia signed a
Memorandum of Intent for the supply of a further 48 Typhoon
aircraft, support and transfer of technology and capability. This
would enable BAE Systems to continue with the localisation of
defence capabilities in Saudi Arabia. Final assembly of all 48
Typhoon aircraft would be in-Kingdom.
The business continues to perform against the contract secured
in 2018 to provide Typhoon support services to the Royal Saudi Air
Force through to 2022.
The Saudi British Defence Co-operation Programme five-year
funding agreement through to 2021 comprises a number of contracts,
including support to the Tornado fleet and provision of Officer and
Aircrew Training for the Royal Saudi Air Force, as well as
engineering and logistics services for the Royal Saudi Naval
Forces. These services continue to progress well. Previous issues
relating to the availability of the Hawk trainer aircraft have been
addressed and the aircraft availability is now consistent with the
contractual requirements.
Four Hawk aircraft assembled in-Kingdom have been accepted and
entered service with the Royal Saudi Air Force in the year. The
company has delivered all of the 22 major units to meet this final
assembly programme.
Work continues to reorganise our portfolio of interests in a
number of industrial companies in Saudi Arabia. Riyadh Wings
Aviation Academy LLC increased its ownership in 2019 to 23.5% in
the Group's Overhaul and Maintenance Company (OMC) subsidiary.
Additionally during the year OMC disposed of its 85.7% shareholding
in Aircraft Accessories and Components Company. Following OMC
entering into a heads of terms for the sale of its 50% shareholding
in Advanced Electronics Company to Saudi Arabian Military
Industries (SAMI), negotiations are continuing and the transaction
is expected to take place in the first half of 2020.
Through the restructuring of the Group's portfolio of interests
in its Kingdom of Saudi Arabia industrial companies, along with
transformation activities to transfer local capability into these
companies, we are working in partnership with SAMI to explore how
we can collaborate to deliver further In-Kingdom Industrial
Participation, in line with the Kingdom's Vision 2030.
Australia
The initial design and production readiness phase of the Hunter
Class programme for the Royal Australian Navy continues to make
progress, and the integration of ASC Shipbuilding into our
Australian operations is progressing well. The first Integrated
Baseline Review on the programme is expected to be completed in Q2
2020.
Progress continues on the Jindalee Operational Radar Network
upgrade contract secured in 2018 from the Commonwealth of
Australia, with the System Requirements Review completed and the
first tranche programme baseline under review. On the sustainment
contract, support to the three radar sites continues to see all
operational milestones being achieved to plan.
Final acceptance of the Royal Australian Navy's two Landing
Helicopter Docks is expected to be in 2020. Responsibility for
future support has now been fully transitioned to Naval Ship
Management.
Progress on the sustainment and upgrade of the Anzac fleet under
the Warship Asset Management Alliance continues with the first of
class, HMAS Arunta, now deployed back to operations. The second
vessel, HMAS Anzac, has now undocked.
The Hawk Mk127 Lead-In Fighter project did not meet all aircraft
availability requirements for the year. The pilot training
programme however, was for the most part not impacted. The upgrade
of the Hawk fleet to meet the F-35 training requirements has been
completed.
Sustainment activity continues for the regional F-35 fleet at
our Williamtown facility, with 13 aircraft now on base.
We were notified in September that we had been unsuccessful in
our bid for the Land 400 Phase 3 Combat Vehicle programme.
MBDA
During 2019, MBDA secured development contracts for Enhanced
Modular Air Defence Solutions in Italy and for Enforcer missile
systems in Germany. Further contracts for Meteor were secured for
additional tranches in France and Germany, as well as an
integration contract for the South Korean KF-X fighter aircraft.
Other contract awards include ASRAAM for Typhoon in Oman and in
Qatar (the latter having already ordered Meteor and Brimstone) and
a number of key support contracts for both European domestic and
international customers.
In June, the MBDA/Lockheed Martin joint venture submitted to the
German customer the updated TLVS (Ground-Based Air Defence System)
proposal.
Good progress has been made on a number of development
programmes including: the next-generation MICA missile; Spear
Capability 3; and Aster Block 1 New Technology. In addition the
Future Cruise/Anti-Ship Weapon (the Anglo/French co-operation
programme to replace Storm Shadow/Harpoon in the UK and
SCALP/Exocet in France) has successfully achieved its concept
review, an important step in the decision to launch the following
phases of the programme. Progress has also continued on production
programmes, notably MICA missile deliveries for a number of
international customers .
Looking forward
Forward-looking information for the Air reporting segment is
provided on page 38.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 12.
3. International Financial Reporting Standards.
Segmental performance: Maritime
Maritime, with 16,300 employees(1) , comprises the Group's
UK-based maritime and land activities.
Operational and strategic key points
- HMS Prince of Wales vessel acceptance achieved in December
- Four River Class Offshore Patrol Vessels have now been
accepted, with the programme on target for completion in 2020
- Construction commenced on second of the three contracted Type 26 frigates in August
- Construction of the first Dreadnought Class submarine
continues to advance, with GBP1.4bn of funding received in the
year
- Sea trials for the fourth Astute Class submarine are due to take place in 2020
- A GBP230m seven-year Torpedo Repair and Maintenance contract was awarded
- The UK combat vehicles joint venture between Rheinmetall and
BAE Systems Land UK was launched on 1 July
- Design requirements for the Canadian Surface Combatant are
progressing towards finalisation with partners and the Royal
Canadian Navy
Financial performance
Financial performance measures as Financial performance measures defined
defined by the Group(2) in IFRS(3)
2019 2018 2019 2018
------------------- --------- --------- ------------------------ --------- ---------
Sales GBP3,116m GBP2,975m Revenue GBP3,071m GBP2,940m
------------------- --------- --------- ------------------------ --------- ---------
Underlying EBITA GBP268m GBP209m Operating profit GBP253m GBP191m
------------------- --------- --------- ------------------------ --------- ---------
Return on sales 8.6% 7.0% Return on revenue 8.2% 6.5%
------------------- --------- --------- ------------------------ --------- ---------
Operating business Cash flow from operating
cash flow GBP150m GBP67m activities GBP289m GBP190m
------------------- --------- --------- ------------------------ --------- ---------
Order intake(1) GBP2,875m GBP3,513m
------------------- --------- ---------
Order backlog(1) GBP8.6bn GBP9.0bn
------------------- --------- ---------
- Sales in the Maritime businesses were up 5%, ahead of
guidance, at GBP3.1bn. Whilst the Dreadnought submarine and Type 26
programmes continue to ramp up, the Carrier and Offshore Patrol
Vessel programmes are close to completion. Activity levels in
Portsmouth Naval Base support remained strong through the year.
- Return on sales was at 8.6%, within our guidance range.
- The operating cash inflow of GBP150m reflects utilisation of
the Naval Ships provision created last year and the completion of
the Carrier programme.
- Order backlog has reduced slightly to GBP8.6bn, with further
awards for funding on the Dreadnought programme outweighed by
trading on the Astute, Carrier and Type 26 programmes.
Operational performance
Naval Ships
The second Queen Elizabeth Class aircraft carrier, HMS Prince of
Wales, departed Rosyth in September to undertake comprehensive sea
trials before entering Portsmouth for the first time in November
and being accepted in December. The first Queen Elizabeth Class
aircraft carrier, HMS Queen Elizabeth, celebrated a significant
milestone in October with the first UK F-35s landing on board for
operational trials, with HMS Dragon, the BAE Systems-designed and
manufactured Type 45 destroyer, escorting.
Four of the five River Class Offshore Patrol Vessels have now
been accepted by the Ministry of Defence and we are working to a
schedule which would see programme completion in 2020.
The first three City Class Type 26 frigates are on contract with
construction underway on the first two ships. The programme
currently employs over 2,000 people and approximately one half of
the First of Class, HMS Glasgow, is under construction and she
remains on track to enter service in the mid-2020s. Work continues
on the second ship, HMS Cardiff, following the formal start of
full-scale manufacture in August. Investment in site infrastructure
in our Glasgow shipyards continues with dock readiness works
progressing well and new office space to be completed in early
2020.
Following the success of the Global Combat Ship design in
Australia and Canada both programmes are gaining momentum as teams
are mobilised. Work continues to transfer product and process
knowledge, share experiences of complex operations and help to
prepare the organisation in Australia for the transition of
delivery responsibility. We are working closely with our partners
and the Royal Canadian Navy to finalise the design requirements for
the Canadian Surface Combatant.
Submarines
BAE Systems is a member of the Dreadnought Alliance, working
alongside the Submarine Delivery Agency and Rolls-Royce to deliver
a replacement for the Royal Navy's Vanguard class, which carries
the UK's independent nuclear deterrent. The value of the programme
to the Company to date is GBP5.2bn, with contract funding of
GBP1.4bn received in 2019. Four Dreadnought Class submarines will
be built in Barrow, with the first of these due to be in
operational service in the early 2030s. Construction of the first
submarine continues to advance with many of the major pressure hull
units now manufactured. The major programme of investment to
redevelop the Barrow site to support the delivery of Dreadnought is
well underway, with several of the new facilities now complete and
in operation.
The first three Astute Class submarines are in operational
service with the Royal Navy. The remaining four boats are at an
advanced stage of construction. The fourth boat, Audacious, is in
the final stages of testing and commissioning ahead of sea
trials.
Maritime Services
Our Maritime Services business is responsible for management and
maintenance of HM Naval Base Portsmouth and supports more than half
of the Royal Navy's surface fleet, including the Type 45
destroyers, through the Maritime Support Delivery Framework (MSDF)
contract which runs to March 2020. An 18-month extension to MSDF is
due to be finalised in March 2020. In November, HMS Prince of Wales
arrived at HM Naval Base Portsmouth, her home port.
The company was awarded the Torpedo Repair and Maintenance
contract. This seven-year contract is worth GBP230m and secured
over 100 highly skilled jobs at the Broad Oak site in
Portsmouth.
Progress continued on the GBP270m Spearfish torpedo upgrade
programme, with the demonstration phase forecast to complete in
2020.
The company was awarded four contracts to support the repair and
maintenance of over 600 small boats operated by the Royal Navy, the
Royal Marines, the Royal Fleet Auxiliary, the Army and the Ministry
of Defence Police over a period of six and a half years.
Land UK
The munitions business continues to provide UK and international
customers with a wide range of light and heavy munitions, as well
as offering complementary support services for development, testing
and evaluation. We continue to work with the UK Ministry of Defence
to agree a replacement to the existing Munitions Acquisition Supply
Solution partnering agreement.
In July 2019, following receipt of regulatory approvals, the
business formed a joint venture with Rheinmetall, Rheinmetall BAE
Systems Land (RBSL), to create a joint UK-based land vehicle
design, manufacturing and support business. Rheinmetall purchased a
55% stake in the existing BAE Systems UK-based combat vehicles
business for GBP31.5m with BAE Systems retaining 45%. This
transaction did not include the Land UK munitions business or its
holding in the CTA International joint venture with Nexter.
The UK Ministry of Defence has now awarded the GBP2.3bn contract
to provide the British Army with over 500 8x8 armoured vehicles.
The contract was awarded to Artec GmbH, comprising Rheinmetall and
Krauss-Maffei Wegmann. Rheinmetall will subcontract approximately
half the production to RBSL which will undertake vehicle structure
fabrication, assembly, integration, and test of the vehicles at its
Telford facility.
During the year, 95 40mm cased-telescopic cannons were delivered
to the Ministry of Defence by CTA International, bringing
cumulative deliveries to 370. This entirely new cannon design -
currently being integrated in the British Army's new Ajax and
upgraded Warrior vehicles - has also been selected by the Belgian
Army for its Jaguar vehicles.
Looking forward
Forward-looking information for the Maritime reporting segment
is provided on page 38.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 12.
3. International Financial Reporting Standards.
Segmental looking forward
Electronic Systems
Electronic Systems comprises the US- and UK - based electronics
activities, including electronic warfare systems, electro-optical
sensors, military and commercial digital engine and flight
controls, precision guidance and seeker solutions, next-generation
military communications systems and data links, persistent
surveillance capabilities and hybrid electric drive systems.
Electronic Systems is well positioned to address current and
evolving US defence priority programmes from its strong franchise
positions in electronic warfare, precision guidance and seeker
solutions. Electronic Systems has a long-standing programme of
research and development. Its focus remains on maintaining a
diverse portfolio of defence and commercial products and
capabilities for US and international customers.
The business expects to benefit from its ability to apply
innovative technology solutions that meet defence customers'
changing requirements. As a result, the business is well positioned
for the medium term with strong significant roles on F-35 Lightning
II, F-15 upgrade and classified programmes, as well as with
specific products such as APKWS(R) . Over the longer term, the
business is poised to leverage its technology strength in emerging
areas of demand such as precision weaponry, space resilience,
hyper-velocity and autonomous vehicles. In the commercial aviation
market, Electronic Systems' technology innovations are enabling the
business to maintain its long-standing customer positions and to
compete for, and win, new business and with our electric hybrid
propulsion capability we are well placed to continue to address the
need for low- and zero-emission technology.
Cyber & Intelligence
Cyber & Intelligence comprises the US-based Intelligence
& Security business and UK-headquartered Applied Intelligence
business, and covers the Group's cyber security, secure government
and commercial financial security activities.
Intelligence & Security
The outlook for the US government services sector is stable,
although market conditions remain highly competitive and continue
to evolve. The US business remains well positioned and will
continue to leverage its established market positions and
reputation for reliable and adaptable performance to meet customer
demands for innovative, cost-effective and cyber-hardened solutions
to pursue both recompeted contracts and new business across its
portfolio of sustainment, integration and modernisation solutions
for military and intelligence customers.
Applied Intelligence
The services and products we offer under our Government and
Financial Services divisions are well placed to deliver growth and
increased profitability, as cyber security becomes an increasingly
important part of a nation's security and a core element of
stewardship for companies in a sophisticated and persistent threat
environment.
Platforms & Services (US)
Platforms & Services (US), with operations in the US, UK and
Sweden, manufactures combat vehicles, weapons and munitions, and
delivers services and sustainment activities, including naval ship
repair and the management and operation of government-owned
munitions facilities.
Combat Vehicles is underpinned by a growing order backlog and
incumbencies on key franchise programmes. These include the US
Army's Armored Multi-Purpose Vehicle, M109A7 self-propelled
howitzer, Bradley upgrade programmes, Amphibious Combat Vehicle,
M88, as well as the CV90 and BvS10 export programmes from BAE
Systems Hägglunds. FNSS continues to execute on its order book of
both Turkish and international orders. These long-term contracts
and franchise positions make the combat vehicles business well
placed for growth in the medium term. The team is working on, and
is closely following, the US Army's acquisition plans for its next
generation of combat vehicles, in particular the mobile protected
firepower and robotic combat vehicle programmes.
In the maritime domain, the sector has a strong position on
naval gun programmes and US Navy ship repair activities where the
business has invested in facilities in key homeports. This
capitalised infrastructure represents a high barrier to entry, and
the business remains well aligned to the US Navy's operational
strategy. The Group remains a leading provider of gun systems and
precision strike capabilities and, in the complex ordnance
manufacturing business, continues to manage and operate the US
Army's Radford and Holston munitions facilities under previously
awarded contracts.
Air
Air comprises the Group's UK-based air activities for European
and International Markets, and US Programmes, and its businesses in
Saudi Arabia and Australia, together with its 37.5% interest in the
European MBDA joint venture.
Future Typhoon production and support sales are underpinned by
existing contracts. Discussions continue in relation to potential
further contract awards for Typhoon which would extend current
production revenues. Production of rear fuselage assemblies for the
F-35 will increase in 2020 to reach its expected peak rate for the
decade. The business plays a significant role in the F-35
sustainment programme, and revenues are set to grow as the number
of aircraft deployed increases over the coming years. Defence and
security remain priorities for the UK government. The UK Combat Air
Strategy provides the base to enable long-term planning and
investment in a key strategic part of the business.
In Saudi Arabia, the In-Kingdom Industrial Participation
programme continues to make good progress consistent with our
long-term strategy, as well as the Saudi Arabian government's
National Transformation Plan and Vision 2030. In order to provide
ongoing capability to international customers, the Group is reliant
on the continued approval of export licences by a number of
governments. The withholding of such export licences may have an
adverse effect on the Group's provision of capability to the
Kingdom of Saudi Arabia and the Group will seek to work closely
with the UK government to manage the impact of any such
occurrence.
The Australian business has long-term sustainment and upgrade
activities in maritime, air, wide-area surveillance, missile
defence and electronic systems. The Hunter Class frigate programme
is expected to drive growth in the coming years.
MBDA has a strong order book, which is driving increased
production and sales. Development programmes continue to improve
the long-term capabilities of the business, and as European nations
embark on new combat air systems development, MBDA will be well
placed to provide the technologies and system solutions required to
deliver efficient and competitive armaments to these platforms
.
Maritime
Maritime comprises the Group's UK-based maritime and land
activities.
Maritime
Overall the outlook is stable based on long-term contracted
positions. Within Submarines, the business is executing the Astute
Class programme, with four boats still in build. On the Dreadnought
programme manufacturing activities continue on the first of class
boat. Investment continues in the Barrow facilities in order to
provide the capabilities to deliver these long-term programmes
through the next decade and beyond. In shipbuilding, following the
completion of the two aircraft carriers, sales are underpinned by
the manufacture of Type 26 frigates. The through-life support of
surface ship platforms provides a sustainable business in technical
services and mid-life upgrades.
Land UK
Future work will be underpinned by existing support contracts
and the expected workshare on the Mechanised Infantry Vehicle
programme.
Munitions supply continues under the Munitions Acquisition
Supply Solution partnering agreement secured in 2008.
Consolidated income statement
for the year ended 31 December
2019 2018
----------------- -----------------
Total Total
Notes GBPm GBPm GBPm GBPm
----------------------------------------------------- ----- ------- -------- ------- ----------
Continuing operations
------- -------
Sales 2 20,109 18,407
Deduct Share of sales by equity accounted
investments 2 (2,878) (2,812)
Add Sales to equity accounted investments 2 1,074 1,226
------- -------
Revenue 2 18,305 16,821
Operating costs (16,724) (15,514)
Other income 150 158
----------------------------------------------------- ----- ------- -------- ------- ----------
Group operating profit 1,731 1,465
Share of results of equity accounted investments 168 140
----------------------------------------------------- ----- ------- -------- ------- ----------
Underlying EBITA 2 2,117 1,928
Non-recurring items (27) (154)
------- -------
EBITA 2,090 1,774
Amortisation of intangible assets (109) (85)
Impairment of intangible assets (6) (33)
Financial expense of equity accounted investments (23) (13)
Taxation expense of equity accounted investments (53) (38)
------- -------
Operating profit 2 1,899 1,605
Financial income(1) 27 26
Financial expense(1) (300) (407)
------- -------
Net finance costs 3 (273) (381)
----------------------------------------------------- ----- ------- -------- ------- ----------
Profit before taxation 1,626 1,224
Taxation expense 4 (94) (191)
----------------------------------------------------- ----- ------- -------- ------- ----------
Profit for the year 1,532 1,033
----------------------------------------------------- ----- ------- -------- ------- ----------
Attributable to:
Equity shareholders 1,476 1,000
Non-controlling interests 56 33
----------------------------------------------------- ----- ------- -------- ------- ----------
1,532 1,033
----------------------------------------------------- ----- ------- -------- ------- ----------
Earnings per share 5
Basic earnings per share 46.4p 31.3p
Diluted earnings per share 46.1p 31.2p
----------------------------------------------------- ----- ------- -------- ------- ----------
1. Gains on remeasurement of financial instruments at fair value
through profit or loss and foreign exchange gains for the year
ended 31 December 2018 have been reclassified to remove them from
financial income and present all movements within financial
expense. See note 3 for details.
Consolidated statement of comprehensive income
for the year ended 31 December
2019 2018
----------------------------- ---------------------------
Other Retained Other Retained
reserves earnings Total reserves earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------------ --------- --------- ------- --------- --------- -----
Profit for the year - 1,532 1,532 - 1,033 1,033
------------------------------------------------ --------- --------- ------- --------- --------- -----
Other comprehensive income
Items that will not be reclassified
to the income statement:
Subsidiaries:
Remeasurements on post-employment benefit
schemes - (556) (556) - 74 74
Tax on items that will not be reclassified
to the income statement - 57 57 - 5 5
Equity accounted investments (net of
tax) - (38) (38) - 6 6
Items that may be reclassified to the
income statement:
Subsidiaries:
Currency translation on foreign currency
net investments (327) - (327) 400 - 400
Reclassification of cumulative currency
translation reserve on disposal (8) - (8) - - -
Fair value gain arising on hedging
instruments during the period 11 - 11 14 - 14
Cumulative fair value gain on hedging
instruments reclassified to the income
statement (7) - (7) (39) - (39)
Tax on items that may be reclassified
to the income statement - - - 5 - 5
Equity accounted investments (net of
tax) 6 - 6 15 - 15
------------------------------------------------ --------- --------- ------- --------- --------- -----
Total other comprehensive income for
the year (net of tax) (325) (537) (862) 395 85 480
------------------------------------------------ --------- --------- ------- --------- --------- -----
Total comprehensive income for the
year (325) 995 670 395 1,118 1,513
------------------------------------------------ --------- --------- ------- --------- --------- -----
Attributable to:
Equity shareholders (320) 940 620 391 1,085 1,476
Non-controlling interests (5) 55 50 4 33 37
------------------------------------------------ --------- --------- ------- --------- --------- -----
(325) 995 670 395 1,118 1,513
------------------------------------------------ --------- --------- ------- --------- --------- -----
Consolidated statement of changes in equity
for the year ended 31 December
Attributable to equity holders
of BAE Systems plc
-----------------------------------------------
Issued
share Share Other Retained Non-controlling Total
capital premium reserves earnings Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- -------- -------- --------- --------- ----- --------------- -------
Balance at 1 January 2019 as originally
presented 87 1,249 6,481 (2,271) 5,546 72 5,618
Transition adjustment upon adoption
of IFRS 16 Leases - - - (92) (92) - (92)
---------------------------------------- -------- -------- --------- --------- ----- --------------- -------
Balance at 1 January 2019 87 1,249 6,481 (2,363) 5,454 72 5,526
-------- -------- --------- --------- ----- --------------- -------
Profit for the year - - - 1,476 1,476 56 1,532
Total other comprehensive income
for the year - - (320) (536) (856) (6) (862)
-------- -------- --------- --------- ----- --------------- -------
Total comprehensive income for
the year - - (320) 940 620 50 670
Share-based payments (inclusive
of tax) - - - 75 75 - 75
Cumulative fair value gain on hedging
instruments transferred to the
balance sheet (net of tax) - - (5) - (5) - (5)
Ordinary share dividends - - - (724) (724) (56) (780)
Partial disposal of shareholding
in subsidiary undertaking - - - (13) (13) 38 25
At 31 December 2019 87 1,249 6,156 (2,085) 5,407 104 5,511
---------------------------------------- -------- -------- --------- --------- ----- --------------- -------
Balance at 1 January 2018 87 1,249 6,090 (2,714) 4,712 43 4,755
Profit for the year - - - 1,000 1,000 33 1,033
Total other comprehensive income
for the year - - 391 85 476 4 480
-------- -------- --------- --------- ----- --------------- -------
Total comprehensive income for
the year - - 391 1,085 1,476 37 1,513
Share-based payments (inclusive
of tax) - - - 63 63 - 63
Net sale of own shares - - - 1 1 - 1
Ordinary share dividends - - - (703) (703) (28) (731)
Partial disposal of shareholding
in subsidiary undertaking - - - (3) (3) 20 17
---------------------------------------- -------- -------- --------- --------- ----- --------------- -------
At 31 December 2018 87 1,249 6,481 (2,271) 5,546 72 5,618
---------------------------------------- -------- -------- --------- --------- ----- --------------- -------
Consolidated balance sheet
as at 31 December
2019 2018(1)
GBPm GBPm
----------------------------------------------- -------- --------
Non-current assets
Intangible assets 10,371 10,658
Property, plant and equipment 2,437 2,365
Right-of-use assets 1,138 -
Investment property 137 98
Equity accounted investments 428 429
Other investments 13 13
Other receivables 484 352
Post-employment benefit surpluses 6 302 308
Other financial assets 350 245
Deferred tax assets 726 702
------------------------------------------------ -------- --------
16,386 15,170
----------------------------------------------- -------- --------
Current assets
Inventories 835 774
Trade, other and contract receivables 5,458 5,177
Current tax 19 81
Other financial assets 210 166
Cash and cash equivalents 2,587 3,232
Assets held for sale 135 146
------------------------------------------------ -------- --------
9,244 9,576
----------------------------------------------- -------- --------
Total assets 25,630 24,746
------------------------------------------------ -------- --------
Non-current liabilities
Loans (3,020) (3,514)
Lease liabilities (1,116) -
Other payables (1,481) (1,461)
Post-employment benefit obligations 6 (4,757) (4,337)
Other financial liabilities (227) (104)
Provisions (385) (427)
(10,986) (9,843)
----------------------------------------------- -------- --------
Current liabilities
( 785
Loans and overdrafts (377) )
Lease liabilities (238) -
Trade and other payables (7,926) (7,718)
Other financial liabilities (232) (74)
Current tax (55) (334)
Provisions (300) (334)
Liabilities held for sale (5) (40)
------------------------------------------------ -------- --------
(9,133) (9,285)
----------------------------------------------- -------- --------
Total liabilities (20,119) (19,128)
------------------------------------------------ -------- --------
Net assets 5,511 5,618
------------------------------------------------ -------- --------
Capital and reserves
Issued share capital 87 87
Share premium 1,249 1,249
Other reserves 6,156 6,481
Retained earnings - deficit (2,085) (2,271)
------------------------------------------------ -------- --------
Total equity attributable to equity holders of
BAE Systems plc 5,407 5,546
Non-controlling interests 104 72
------------------------------------------------ -------- --------
Total equity 5,511 5,618
------------------------------------------------ -------- --------
1. The Saudi Arabia end of service benefit obligation of GBP97m
at 31 December 2018 has been reclassified from trade and other
payables to post-employment benefit obligations (see note 6).
Approved by the Board of BAE Systems plc on 19 February 2020 and
signed on its behalf by:
C N Woodburn P J Lynas
Chief Executive Group Finance Director
Consolidated cash flow statement
for the year ended 31 December
2019 2018(1)
Notes GBPm GBPm
----------------------------------------------------------- ----- ------- -------
Profit for the year 1,532 1,033
Taxation expense 4 94 191
Research and development expenditure credits (12) (27)
Share of results of equity accounted investments (168) (140)
Net finance costs 273 381
Depreciation, amortisation, impairment and derecognition 660 411
Gain on investment revaluation - (7)
Profit on disposal of property, plant and equipment,
and investment property (9) (18)
(Gain)/loss in respect of held for sale assets and
business disposals (9) 9
Cost of equity-settled employee share schemes 74 64
Movements in provisions (73) (101)
Decrease in liabilities for post-employment benefit
obligations (214) (153)
(Increase)/decrease in working capital:
Inventories (76) (16)
Trade, other and contract receivables (481) (757)
Trade and other payables 258 530
Taxation paid (252) (200)
----------------------------------------------------------- ----- ------- -------
Net cash flow from operating activities 1,597 1,200
----------------------------------------------------------- ----- ------- -------
Dividends received from equity accounted investments 142 57
Interest received 28 25
Principal element of finance lease receipts 9 -
Purchase of property, plant and equipment, and investment
property (360) (358)
Purchase of intangible assets (110) (139)
Proceeds from sale of property, plant and equipment,
and investment property 21 34
Proceeds from the sale of intangible assets 1 -
Purchase of equity accounted investment - (2)
Equity accounted investment funding (6) (1)
Purchase of subsidiary undertakings, net of cash and
cash equivalents acquired (12) 14
Cash flow in respect of held for sale assets and business
disposals, net of cash and cash equivalents disposed 55 12
Net cash flow from investing activities (232) (358)
----------------------------------------------------------- ----- ------- -------
Interest paid (233) (203)
Net sale of own shares - 1
Equity dividends paid 7 (724) (703)
Dividends paid to non-controlling interests (56) (28)
Partial disposal of shareholding in subsidiary undertaking 31 17
Principal element of lease payments (239) -
Cash flow from matured derivative financial instruments
(excluding cash flow hedges) 40 6
Cash flow from movement in cash collateral 1 2
Cash outflow from repayment of loans (782) (7)
----------------------------------------------------------- ----- ------- -------
Net cash flow from financing activities (1,962) (915)
----------------------------------------------------------- ----- ------- -------
Net decrease in cash and cash equivalents (597) (73)
Cash and cash equivalents at 1 January 3,232 3,264
Effect of foreign exchange rate changes on cash and
cash equivalents (48) 41
----------------------------------------------------------- ----- ------- -------
Cash and cash equivalents at 31 December 2,587 3,232
----------------------------------------------------------- ----- ------- -------
1. 2018 comparatives have been reclassified to present a cash
inflow of GBP17m in respect of a partial disposal of the Group's
shareholding in a subsidiary undertaking within financing
activities. This cash flow was previously presented within
investing activities.
Notes to the accounts
1. Preparation
Basis of preparation and statement of compliance
The consolidated financial statements of BAE Systems plc have
been prepared on a going concern basis and in accordance with
EU-endorsed International Financial Reporting Standards (IFRS) and
the Companies Act 2006 applicable to companies reporting under
IFRS.
The consolidated financial statements are presented in pounds
sterling and, unless stated otherwise, rounded to the nearest
million. They have been prepared under the historical cost
convention, as modified by the revaluation of certain financial
assets and financial liabilities (including derivative
instruments).
Changes in accounting policies
IFRS 16 Leases became effective from 1 January 2019. The impact
of adoption is set out in note 12.
2. Segmental analysis
Sales and revenue by reporting segment
Deduct
Share of sales Add
by equity Sales to equity
accounted accounted
Sales investments investments Revenue
-------------- ----------------- ------------------ --------------
2019 2018 2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- ------ ------ -------- ------- -------- -------- ------ ------
Electronic Systems 4,439 3,965 (114) (101) 114 101 4,439 3,965
Cyber & Intelligence 1,732 1,678 - - - - 1,732 1,678
Platforms & Services
(US) 3,337 3,005 (153) (141) 1 - 3,185 2,864
Air 7,457 6,712 (2,221) (2,224) 917 1,091 6,153 5,579
Maritime 3,116 2,975 (50) (37) 5 2 3,071 2,940
HQ 387 350 (344) (309) - - 43 41
-------------------------- ------ ------ -------- ------- -------- -------- ------ ------
20,468 18,685 (2,882) (2,812) 1,037 1,194 18,623 17,067
Intra-group sales/revenue (359) (278) 4 - 37 32 (318) (246)
-------------------------- ------ ------ -------- ------- -------- -------- ------ ------
20,109 18,407 (2,878) (2,812) 1,074 1,226 18,305 16,821
-------------------------- ------ ------ -------- ------- -------- -------- ------ ------
Operating profit/(loss) by reporting segment
Amortisation Financial
and impairment and taxation
of expense of
Underlying Non-recurring intangible equity accounted Operating
EBITA items(1) assets investments profit/(loss)
------------ --------------- ----------------- ------------------- ----------------
2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ----- ----- ------- ------ -------- ------- --------- -------- ------- -------
Electronic Systems 687 606 - - (15) (16) - - 672 590
Cyber & Intelligence 91 111 - - (11) (52) - - 80 59
Platforms & Services
(US) 267 210 (13) (40) (11) (8) (4) (1) 239 161
Air 887 859 (28) - (32) (12) (50) (37) 777 810
Maritime 268 209 14 - (25) (16) (4) (2) 253 191
HQ (83) (67) - (114) (21) (14) (18) (11) (122) (206)
--------------------- ----- ----- ------- ------ -------- ------- --------- -------- ------- -------
2,117 1,928 (27) (154) (115) (118) (76) (51) 1,899 1,605
--------------------- ----- ----- ------- ------ -------- ------- --------- --------
Net finance costs (273) (381)
--------------------- ----- ----- ------- ------ -------- ------- --------- -------- ------- -------
Profit before
taxation 1,626 1,224
Taxation expense (94) (191)
--------------------- ----- ----- ------- ------ -------- ------- --------- -------- ------- -------
Profit for the year 1,532 1,033
--------------------- ----- ----- ------- ------ -------- ------- --------- -------- ------- -------
1. Non-recurring items in 2019 of GBP27m comprises a GBP36m
charge relating to the derecognition of Enterprise Resource
Planning software intangible assets in the Air sector, charges of
GBP13m relating to legal disputes arising from historical
disposals, a gain of GBP14m on the sale of the Group's 55%
shareholding in BAE Systems Global Combat Systems Limited upon
formation of the Rheinmetall BAE Systems Land joint venture, and a
gain of GBP8m relating to the disposal of the Aircraft Accessories
and Components Company. Non-recurring items in 2018 of GBP154m
represented a Guaranteed Minimum Pension equalisation charge of
GBP114m, and a loss on disposal of the Mobile, Alabama, shipyard of
GBP40m.
3. Net finance costs
2019 2018
GBPm GBPm
--------------------------------------------------------------- ----- -----
Interest income on cash and other financial instruments 26 26
Interest income on finance lease receivables 1 -
Financial income(1) 27 26
--------------------------------------------------------------- ----- -----
Interest expense on bonds and other financial instruments (187) (204)
Facility fees (4) (4)
Interest expense on lease liabilities (48) -
Net present value adjustments on provisions and other payables (28) (31)
Net interest expense on post-employment benefit obligations (114) (103)
(Loss)/gain on remeasurement of financial instruments at
fair value through profit or loss(2) (73) 146
Foreign exchange gains/(losses)(3) 154 (211)
--------------------------------------------------------------- ----- -----
Financial expense(1) (300) (407)
--------------------------------------------------------------- ----- -----
Net finance costs (273) (381)
--------------------------------------------------------------- ----- -----
1. Gains on remeasurement of financial instruments at fair value
through profit or loss of GBP186m and foreign exchange gains of
GBP16m were previously presented within financial income in 2018.
The Group believes it is more representative to present these items
within financial expense, since the gains and losses relate to the
same underlying transactions. Accordingly, amounts previously
included within financial income in 2018 have been reclassified to
financial expense.
2. Comprises gains and losses on derivative financial
instruments, including derivative instruments to manage the Group's
exposure to interest rate fluctuations on external borrowings and
exchange rate fluctuations on balances with the Group's
subsidiaries and equity accounted investments.
3. The foreign exchange gains and losses primarily reflect
exchange rate movements on US dollar-denominated borrowings.
Additional analysis
2019 2018
GBPm GBPm
------------------------------------------------------------------ ----- -----
Net finance costs:
Group (273) (381)
Share of equity accounted investments (23) (13)
------------------------------------------------------------------ ----- -----
(296) (394)
------------------------------------------------------------------ ----- -----
Analysed as:
Underlying net interest expense(1) :
Group (240) (213)
Share of equity accounted investments (17) (2)
------------------------------------------------------------------ ----- -----
(257) (215)
Other:
Group:
Net interest expense on post-employment benefit obligations (114) (103)
Fair value and foreign exchange adjustments on financial
instruments and investments(2) 81 (65)
Share of equity accounted investments:
Net interest expense on post-employment benefit obligations (3) (3)
Fair value and foreign exchange adjustments on financial
instruments and investments (3) (8)
------------------------------------------------------------------ ----- -----
(296) (394)
------------------------------------------------------------------ ----- -----
1. Underlying net interest expense is defined as finance costs
for the Group and its share of equity accounted investments,
excluding net interest expense on post-employment benefit
obligations, and fair value and foreign exchange adjustments on
financial instruments and investments.
2. The net gain (2018 loss) primarily reflects foreign exchange
translational gains (2018 losses) on US dollar-denominated bonds
held by BAE Systems plc.
4. Taxation expense
Reconciliation of taxation expense
The following table reconciles the theoretical income tax
expense, using the UK corporation tax rate, to the reported tax
expense. The reconciling items represent, besides the impact of tax
rate differentials and changes, non-taxable benefits or
non-deductible expenses arising from differences between the local
tax base and the reported financial statements.
2019 2018
GBPm GBPm
------------------------------------------------------------- ----- -----
Profit before taxation 1,626 1,224
------------------------------------------------------------- ----- -----
UK corporation tax rate 19% 19%
------------------------------------------------------------- ----- -----
Expected income tax expense (309) (233)
Effect of tax rates in foreign jurisdictions, including
US state taxes (52) (43)
Effect of intra-group financing - 14
Expenses not tax effected (14) (14)
Income not subject to tax 61 18
Research and development tax credits and patent box benefits 10 14
Non-taxable non-recurring items 4 -
Chargeable gains (3) (1)
Utilisation of previously unrecognised tax losses 3 1
Current year losses not tax effected (3) -
Adjustments in respect of prior years 192 37
Adjustments in respect of equity accounted investments 32 27
Tax rate adjustment (1) 5
Other (14) (16)
------------------------------------------------------------- ----- -----
Taxation expense (94) (191)
------------------------------------------------------------- ----- -----
Calculation of the underlying effective tax rate
2019 2018
GBPm GBPm
------------------------------------------------------------------- ------ -----
Profit before taxation 1,626 1,224
Add back: Taxation expense of equity accounted investments 53 38
Deduct: Non-taxable non-recurring items (22) -
Adjusted profit before taxation 1,657 1,262
------------------------------------------------------------------- ------ -----
Taxation expense (94) (191)
Taxation expense of equity accounted investments (53) (38)
Exclude: One-off tax benefit ( 161) -
Adjusted taxation expense (including equity accounted investments) (308) (229)
------------------------------------------------------------------- ------ -----
Underlying effective tax rate 19% 18%
------------------------------------------------------------------- ------ -----
The one-off tax benefit relates to two items. Firstly, following
agreements reached in respect of overseas tax matters, a benefit
has been recognised. Secondly, following review of the April 2019
EU Commission decision that concluded that the UK's Controlled
Foreign Company regime partially represents State Aid, a provision
has been recognised for the estimated exposure. There remains
uncertainty surrounding HMRC's likely approach to the assessment of
the deemed State Aid and recovery of amounts which they consider to
be due, and, accordingly, developments will continue to be
monitored and assessed.
5. Earnings per share
2019 2018
------------------------- -------------------------
Basic Diluted Basic Diluted
pence pence pence pence
per per per per
GBPm share share GBPm share share
--------------------------------------------- ----- -------- -------- ----- -------- --------
Profit for the year attributable
to equity shareholders 1,476 46.4 46.1 1,000 31.3 31.2
Add back/(deduct):
Amortisation and impairment of intangible
assets, post tax(1) 93 97
Net interest expense on post-employment
benefit obligations, post tax(1) 95 87
Fair value and foreign exchange
adjustments on financial instruments
and investments, post tax(1) (64) 60
Non-recurring items, post tax(1) 18 126
Underlying earnings, post tax 1,618 50.8 50.5 1,370 42.9 42.8
--------------------------------------------- ----- -------- -------- ----- -------- --------
One-off tax benefit (161) -
--------------------------------------------- ----- -------- -------- ----- -------- --------
Underlying earnings, excluding one-off
tax benefit 1,457 45.8 45.5 1,370 42.9 42.8
--------------------------------------------- ----- -------- -------- ----- -------- --------
Millions Millions Millions Millions
--------------------------------------------- ----- -------- -------- ----- -------- --------
Weighted average number of shares
used in calculating basic earnings
per share 3,183 3,183 3,192 3,192
Incremental shares in respect of
employee share schemes 18 9
--------------------------------------------- ----- -------- -------- ----- -------- --------
Weighted average number of shares
used in calculating diluted earnings
per share 3,201 3,201
--------------------------------------------- ----- -------- -------- ----- -------- --------
1. The tax impact is calculated using the underlying effective
tax rate of 19% (2018 18%). The calculation of the underlying
effective tax rate is shown in note 4.
6. Post-employment benefits
Funding
Introduction
The majority of the UK and US defined benefit pension schemes
are funded by the Group's subsidiaries and equity accounted
investments. The individual pension schemes' funding requirements
are based on actuarial measurement frameworks set out in their
funding policies.
For funding valuation purposes, pension scheme assets are
included at market value at the valuation date, whilst the
liabilities are measured on an actuarial funding basis using the
projected unit credit method and discounted to their present value
based on prudent assumptions set by the trustees following
consultation with scheme actuaries.
The funding valuations are performed by professionally qualified
independent actuaries and include assumptions which differ from the
actuarial assumptions used for IAS 19 accounting purposes shown on
page 49. The purpose of the funding valuations is to design funding
plans which ensure that the schemes have sufficient funds available
to meet future benefit payments.
UK valuations
Funding valuations of the Group's UK defined benefit pension
schemes are performed every three years. Following the merger of
several of the Group's UK pension schemes in October 2019, the
Company and trustees agreed to carry out an early triennial funding
valuation for the BAE Systems Pension Scheme (Main Scheme) as at 31
October 2019. The next funding valuations for the other UK schemes
will have an effective date of no later than 31 March 2020.
The results of the most recent triennial valuations are shown
below. These valuations and, where necessary, deficit recovery
plans were agreed with the trustees and certified by the scheme
actuaries after consultation with The Pensions Regulator in the
UK.
Main Other
Scheme as schemes
at as at
31 October 31 March
2019 2017
GBPbn GBPbn
---------------------------------------------- ----------- ---------
Market value of assets 20.6 2.2
Present value of liabilities (22.5) (2.0)
------------------------------------------------ ----------- ---------
Funding (deficit)/surplus (1.9) 0.2
------------------------------------------------ ----------- ---------
Percentage of accrued benefits covered by the
assets at the valuation date 92% 110%
------------------------------------------------ ----------- ---------
The valuations in 2017 and 2019 were determined using the
following mortality assumptions:
Life expectancy of a male currently aged 65 (years) 86 - 89
Life expectancy of a female currently aged 65 (years) 87 - 90
Life expectancy of a male currently aged 45 (years) 88 - 92
Life expectancy of a female currently aged 45 (years) 90 - 93
------------------------------------------------------ -------
The discount rate assumptions used in the 2017 and 2019
valuations were directly based on prudent levels of expected
returns for the assets held by the schemes, reflecting the planned
investment strategies and maturity profiles of each scheme. The
discount rates are curves which provide a different rate for each
year into the future.
The inflation assumptions were derived using data from the Bank
of England which is based on the difference between the yields on
index-linked and fixed interest long-term government bonds. The
inflation assumption is a curve which provides a different rate for
each year into the future.
The funding valuations resulted in a significantly lower deficit
than under IAS 19, largely due to lower liabilities reflecting the
higher discount rate assumption. Under IAS 19, the discount rate
for accounting purposes is based on third-party AA corporate bond
yields whereas, for funding valuation purposes, the discount rate
is based on a prudent level of expected returns from the broader
and mixed types of investments reflected in the schemes' investment
strategies, which are expected overall to yield higher returns than
bonds.
The 2019 funding agreement is underpinned by a contingency plan,
which includes a commitment by the Group to a further GBP50m of
deficit funding in each of 2021 and 2022 into the Main Scheme prior
to the next triennial valuation in the event that the scheme
funding level were to fall below pre-determined parameters. In
addition, the Group would be required to pay GBP187m in respect of
the Main Scheme if the funding level were to fall significantly and
were to remain at or below those levels for nine months.
There have been no changes to the contributions or benefits, as
set out in the rules of the schemes, for pension scheme members as
a result of the new funding valuations.
The results of future triennial valuations and associated
funding requirements will be impacted by a number of factors,
including the future performance of investment markets and
anticipated members' longevity.
US valuations
The Group's US pension schemes are valued annually, with the
latest valuations performed as at 1 January 2019.
Contributions
Under the terms of the trust deeds of the UK schemes, the Group
is required to have a funding plan determined at the conclusion of
the triennial funding valuations.
Equity accounted investments make regular contributions to the
schemes in which they participate in line with the schedule of
contributions and are allocated a share of deficit funding
contributions.
In 2019, total employer contributions to the Group's pension
schemes were GBP461m (2018 GBP554m), including amounts funded by
equity accounted investments of GBP40m (2018 GBP38m), and included
approximately GBP231m (2018 GBP211m) of deficit recovery payments
in respect of the UK schemes and GBPnil (2018 GBP119m) in respect
of the US schemes.
Deficit contributions will further increase in line with any
percentage growth in dividend payments made by the Group. As part
of the 31 October 2019 valuation agreement, the Company has agreed
to pay GBP1bn into the Main Scheme in the coming months
representing an advancement of GBP1bn in deficit contributions that
were due, under the 2017 valuation deficit recovery plan, between
2022 and 2026. The annual payments are expected to end in 2021 and
the deficit is expected to be cleared in 2026.
In 2020, Group contributions to the US pension schemes are
expected to increase by approximately GBP60m.
IAS 19 accounting
Principal actuarial assumptions
The assumptions used are estimates chosen from a range of
possible actuarial assumptions which, due to the long-term nature
of the obligation covered, may not necessarily occur in
practice.
UK US
------------------------- ----------------
2019 2018 2017 2019 2018 2017
---------------------------------------- ------- ------- ------- ---- ---- ----
Financial assumptions
Discount rate - past service (%) 2.1 2.9 2.6 3.1 4.2 3.7
Discount rate - future service (%) 2.2 3.0 2.7 3.1 4.2 3.7
Retail Prices Index (RPI) inflation
(%) 2.8 3.1 3.1 n/a n/a n/a
Rate of increase in salaries (%) 2.8 3.1 3.1 n/a n/a n/a
Rate of increase in deferred pensions
(%) 2.0/2.8 2.1/3.1 2.1/3.1 n/a n/a n/a
Rate of increase in pensions in payment 1.5 - 1.6 - 1.6 -
(%) 3.6 3.7 3.7 n/a n/a n/a
Demographic assumptions
Life expectancy of a male currently
aged 65 (years) 87 - 88 86 - 88 86 - 88 87 87 87
Life expectancy of a female currently
aged 65 (years) 88 - 90 88 - 90 88 - 90 89 89 89
Life expectancy of a male currently
aged 45 (years) 88 - 89 88 - 90 88 - 90 87 87 87
Life expectancy of a female currently
aged 45 (years) 89 - 91 90 - 91 90 - 92 89 89 89
---------------------------------------- ------- ------- ------- ---- ---- ----
Summary of movements in post-employment benefit obligations
US and
UK other Total
GBPm GBPm GBPm
------------------------------------------------------------ ------- ------ -------
Total net IAS 19 deficit at 1 January 2019(1) (3,554) (779) (4,333)
Actual return on assets excluding amounts included
in net interest expense 1,491 766 2,257
Increase in liabilities due to changes in financial
assumptions (2,547) (638) (3,185)
Decrease in liabilities due to changes in demographic
assumptions 448 19 467
Experience losses (96) (28) (124)
Contributions in excess of/(below) service cost 243 (22) 221
Past service cost - plan amendments (4) - (4)
Net interest expense (92) (28) (120)
Foreign exchange adjustments - 28 28
Movement in other schemes - 14 14
------------------------------------------------------------ ------- ------ -------
Total net IAS 19 deficit at 31 December 2019 (4,111) (668) (4,779)
Allocated to equity accounted investments 324 - 324
------------------------------------------------------------ ------- ------ -------
Group's share of net IAS 19 deficit excluding Group's
share of amounts allocated to equity accounted investments
at 31 December 2019 (3,787) (668) (4,455)
------------------------------------------------------------ ------- ------ -------
1. At 31 December 2018 the Saudi Arabia end of service benefit
of GBP97m was presented within trade and other payables. The
comparative balance sheet has been reclassified to include this
balance within post-employment benefits as the Group considers this
to be a more appropriate presentation.
Sensitivity analysis
The sensitivity information has been derived using scenario
analysis from the actuarial assumptions as at 31 December 2019 and
keeping all other assumptions as set out above.
Financial assumptions
The estimated impact of changes in the discount rate and
inflation assumptions on the defined benefit pension obligation,
together with the estimated impact on scheme assets, is shown in
the table below. The estimated impact on scheme assets takes into
account the Group's risk management activities in respect of
interest rate and inflation risk. The sensitivity analysis on the
defined benefit obligation is measured on an IAS 19 accounting
basis and, therefore, does not reflect the natural hedging in the
discount rate used for funding valuation purposes.
(Increase)/decrease Increase/(decrease)
in pension obligation(1) in scheme assets(1)
GBPbn GBPbn
--------------------------------- ------------------------- --------------------
Discount rate:
0.1 percentage point increase 0.5 (0.3)
0.1 percentage point decrease (0.5) 0.3
Inflation:
0.1 percentage point increase (0.4) 0.2
0.1 percentage point decrease 0.3 (0.2)
--------------------------------- ------------------------- --------------------
1. Before allocation to equity accounted investments.
The sensitivity of the valuation of the liabilities to changes
in the inflation assumption presented above assumes that a 0.1
percentage point change to expectations of future inflation results
in a 0.1 percentage point change to all inflation-related
assumptions (rate of increase in salaries, rate of increase in
deferred pensions and rate of increase in pensions in payment) used
to value the liabilities. However, upper and lower limits exist on
the majority of inflation-related benefits such that a change in
expectations of future inflation may not have the same impact on
the inflation-related benefits, and hence will result in a smaller
change to the valuation of the liabilities. Accordingly,
extrapolation of the above results beyond the specific sensitivity
figures shown may not be appropriate. To illustrate this, the
(increase)/decrease in the defined benefit pension obligation
resulting from larger changes in the inflation assumption would be
as follows:
(Increase)/decrease
in pension obligation(1)
GBPbn
--------------------------------- -------------------------
Inflation:
0.5 percentage point increase (1.5)
0.5 percentage point decrease 1.4
1.0 percentage point increase (3.0)
1.0 percentage point decrease 2.8
--------------------------------- -------------------------
1. Before allocation to equity accounted investments.
Demographic assumptions
Changes in the life expectancy assumption, including the benefit
of longevity swap arrangements, would have the following effect on
the total net IAS 19 deficit:
(Increase)/decrease
in net deficit(1)
GBPbn
--------------------- -------------------
Life expectancy:
One-year increase (1.3)
One-year decrease 1.3
--------------------- -------------------
1. Before allocation to equity accounted investments.
7. Equity dividends
2019 2018
GBPm GBPm
----------------------------------------------------- ----- -----
Prior year final 13.2p dividend per ordinary share
paid in the year (2018 13.0p) 423 415
Interim 9.4p dividend per ordinary share paid in the
year (2018 9.0p) 301 288
----------------------------------------------------- ----- -----
724 703
----------------------------------------------------- ----- -----
After the balance sheet date, the directors proposed a final
dividend of 13.8p per ordinary share. The dividend, which is
subject to shareholder approval, will be paid on 1 June 2020 to
shareholders registered on 17 April 2020. The ex-dividend date is
16 April 2020.
Shareholders who do not at present participate in the Company's
Dividend Reinvestment Plan and wish to receive the final dividend
in shares rather than cash should complete a mandate form for the
Dividend Reinvestment Plan and return it to the registrars no later
than 7 May 2020.
8. Fair value measurement
Fair value of financial instruments
Certain of the Group's financial instruments are held at fair
value.
The fair value of a financial instrument is the price that would
be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the balance
sheet date.
The fair values of financial instruments held at fair value have
been determined based on available market information at the
balance sheet date, and the valuation methodologies listed
below:
- the fair values of forward foreign exchange contracts are
calculated by discounting the contracted forward values and
translating at the appropriate balance sheet rates;
- the fair values of both interest rate and cross-currency swaps
are calculated by discounting expected future principal and
interest cash flows and translating at the appropriate balance
sheet rates; and
- the fair values of money market funds are calculated by
multiplying the net asset value per share by the investment held at
the balance sheet date.
Due to the variability of the valuation factors, the fair values
presented at 31 December may not be indicative of the amounts the
Group would expect to realise in the current market
environment.
Fair value hierarchy
The fair value measurement hierarchy is as follows:
- Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
- Level 2 - Inputs other than quoted prices included within
level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
- Level 3 - Inputs for the asset or liability that are not based
on observable market data (i.e. unobservable inputs).
Carrying amounts and fair values of certain financial
instruments
2019 2018
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
---------------------------------------------- -------- ------- -------- -------
Financial instruments measured at fair value:
Non-current
Equity investments at fair value through
profit and loss 13 13 13 13
Other financial assets 350 350 245 245
Other financial liabilities (227) (227) (104) (104)
Current
Other financial assets 210 210 166 166
Money market funds 680 680 908 908
Other financial liabilities (232) (232) (74) (74)
---------------------------------------------- -------- ------- -------- -------
Financial instruments not measured at fair
value:
Non-current
Loans (3,020) (3,315) (3,514) (3,597)
Current
Cash and cash equivalents (excluding money
market funds) 1,907 1,907 2,324 2,324
Loans and overdrafts (377) (380) (785) (794)
---------------------------------------------- -------- ------- -------- -------
All of the financial assets and liabilities measured at fair
value are classified as level 2 using the fair value hierarchy,
except for money market funds, which are classed as level 1. There
were no transfers between levels during the year.
Financial assets and liabilities in the Group's Consolidated
balance sheet are either held at fair value or their carrying value
approximates to fair value, with the exception of loans, which are
held at amortised cost. The fair value of loans presented in the
table above is derived from market prices, classified as level 1
using the fair value hierarchy.
9. Financial risk management
Currency risk
The Group's objective is to reduce its exposure to transactional
volatility in earnings and cash flows from movements in foreign
currency exchange rates, mainly the US dollar, euro, Saudi riyal
and Australian dollar.
The Group is exposed to movements in foreign currency exchange
rates in respect of foreign currency denominated transactions. All
material firm transactional exposures are hedged using foreign
exchange forward contracts and the Group aims, where possible, to
apply cash flow hedge accounting to these transactions.
The Group is exposed to movements in foreign currency exchange
rates in respect of the translation of net assets and income
statements of foreign subsidiaries and equity accounted
investments. 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.
The estimated impact on foreign exchange gains and losses in net
finance costs of a ten cent movement in the closing sterling to US
dollar exchange rate on the retranslation of US dollar-denominated
bonds held by BAE Systems plc is approximately GBP52m (2018
GBP56m).
10. Related party transactions
Transactions with related parties occur 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:
Year ended Year ended
31 December 31 December(1)
2019 2018
GBPm GBPm
----------------------------------- ------------- ----------------
Sales to related parties 1,074 1,226
Purchases from related parties 664 723
----------------------------------- ------------- ----------------
31 December 31 December
2019 2018
GBPm GBPm
----------------------------------- ------------- ----------------
Amounts owed by related parties 53 71
Amounts owed to related parties(2) 1,359 965
----------------------------------- ------------- ----------------
1. 2018 purchases from related parties have been restated to
include GBP313m of purchases from Eurofighter Jagdflugzeug
GmbH.
2. At 31 December 2019, GBP862m (2018 GBP869m) was owed by BAE
Systems plc and GBP497m (2018 GBP96m) by other Group subsidiaries.
Amounts owed to related parties at 31 December 2019 include GBP225m
in respect of lease liabilities measured under IFRS 16 payable to
BAE Systems Pension Funds Trustees Limited. The undiscounted
minimum lease commitments to this related party at 31 December 2018
were GBP297m, which is not included in amounts owed to related
parties in the table above.
11. Events after the reporting period
In January 2020, the Group announced that it has entered into a
definitive Asset Purchase Agreement to acquire Collins Aerospace's
Military Global Positioning System business for $1.9bn in cash,
subject to customary closing adjustments. The Group has also
entered into a definitive Asset Purchase Agreement to acquire
Raytheon's Airborne Tactical Radios business for $275m in cash,
subject to customary closing adjustments. Completion of both
acquisitions is subject to successful closure of the
Raytheon-United Technologies Corporation merger, as well as
customary regulatory approvals and conditions.
In October 2019, six of the Group's nine UK pension schemes
(including the two largest schemes) were consolidated into a single
scheme. Following that consolidation, the Company agreed with the
new Trustee Board to bring forward the funding valuation of the
combined scheme to 31 October 2019 from the previously scheduled
date of 31 March 2020.
After consultation with the The Pensions Regulator in the UK,
the Group has reached agreement with the Trustee Board of the
combined scheme on the accelerated funding valuation and revised
deficit recovery plan.
At the 31 October 2019 funding valuation date, the deficit was
GBP1.9bn. The current deficit recovery plan which runs to 2026 will
be replaced by a new deficit recovery plan, under which a one-off
payment of GBP1bn is to be made in the coming months, with
approximately GBP240m of funding payable in the scheme year ending
31 March 2020 and approximately GBP250m by 31 March 2021.
12. Adoption of IFRS 16 Leases
IFRS 16 became effective from 1 January 2019 and has replaced
IAS 17 Leases and related interpretations. It has resulted in
almost all leases being recognised on the balance sheet by lessees,
as the distinction between operating and finance leases is removed.
Under the new standard, a right-of-use asset and a financial
liability for future lease payments are recognised. The only
exceptions are short-term leases, low-value leases and leases of
intangible assets.
The Group has applied the modified retrospective transition
approach and has not restated comparative amounts for the year
ended 31 December 2018. In the majority of cases the Group has
elected to measure right-of-use assets at the amount of the lease
liability on adoption (adjusted for any lease prepayments or
accrued lease expenses, onerous lease provisions and leased assets
which have subsequently been subleased). For a number of property
leases the Group has elected to measure the right-of-use asset as
if IFRS 16 had been applied since the start of the lease, but using
the incremental borrowing rate at 1 January 2019, with the
difference between the right-of-use asset and the lease liability
taken to retained earnings.
The Group has elected to adopt the following practical
expedients on transition:
- not to capitalise a right-of-use lease asset or related lease
liability where the lease expires before 31 December 2019;
- not to reassess contracts to determine if the contract
contains a lease and not to separate lease and non-lease
elements;
- where an onerous lease provision is in existence, to utilise
this provision to reduce the right-of-use asset value rather than
undertaking an impairment review;
- to use hindsight in determining the lease term;
- to exclude initial direct costs from the measurement of the right-of-use asset; and
- to apply the portfolio approach where a group of leases has similar characteristics.
Impact of adoption of IFRS 16 Leases
Balance sheet
Upon transition on 1 January 2019, the Group recognised a
right-of-use lease asset of GBP1,298m (after adjustments for
onerous lease provisions, lease prepayments and accrued lease
expenses at 31 December 2018), and lease liabilities of GBP1,486m
(non-current GBP1,270m; current GBP216m), along with a deferred tax
asset of GBP2m. A sublease finance receivable of GBP72m was also
recognised. A transition adjustment of GBP92m was recognised as a
debit to retained earnings. The Group did not capitalise low-value
leases on transition, or those which expire before 31 December
2019, and has opted not to apply IFRS 16 to leases relating to
intangible assets. The right-of-use lease asset principally
consists of property.
Income statement
Under IFRS 16 the Group sees a different pattern of expense
within the income statement, as the IAS 17 operating lease expense
is replaced by depreciation and interest charges. In 2019, the
Group's EBITA metric has improved by approximately GBP50m under
IFRS 16 as the new depreciation expense is lower than the IAS 17
operating lease charge; however the new finance costs have broadly
offset this, such that net profit after tax and the underlying
earnings metrics are not materially different compared to the
previous IAS 17 reporting basis.
Cash flow statement
The change in presentation as a result of the adoption of IFRS
16 has seen an improvement in 2019 of approximately GBP46m in
operating business cash flow, offset by a corresponding decline in
cash flow from financing activities. There is no overall cash flow
impact from the adoption of the new Standard.
Lessor accounting under IFRS 16 is largely unchanged from IAS
17.
Impact on Consolidated balance sheet at 1 January 2019
(extract)
The following table shows the effect of adopting IFRS 16 on the
Consolidated balance sheet at 1 January 2019.
GBPm
-------------------------------------- -------
Non-current assets
Right-of-use assets 1,255
Investment property 43
Equity accounted investments (11)
Finance lease receivable 62
Deferred tax assets 2
------------------------------------------ -------
1,351
-------------------------------------- -------
Current assets
Finance lease receivable 10
Trade, other and contract receivables (26)
------------------------------------------ -------
(16)
-------------------------------------- -------
Total assets 1,335
------------------------------------------ -------
Non-current liabilities
Lease liabilities (1,270)
Provisions 24
(1,246)
-------------------------------------- -------
Current liabilities
Lease liabilities (216)
Trade and other payables 28
Provisions 7
(181)
-------------------------------------- -------
Total liabilities (1,427)
------------------------------------------ -------
Net assets (92)
------------------------------------------ -------
Capital and reserves
Retained earnings (92)
------------------------------------------------------- ----
Total equity attributable to equity holders of BAE
Systems plc (92)
Non-controlling interests -
--------------------------------------------------- ----
Total equity (92)
------------------------------------------------------- ----
The weighted average incremental borrowing rate applied to lease
liabilities was 3.4%.
Reconciliation between operating lease commitments and lease
liability
The following table explains the difference between the
operating lease commitments disclosed applying IAS 17 at 31
December 2018 and the lease liability recognised on adoption of
IFRS 16 at 1 January 2019.
GBPm
---------------------------------------------------------- -----
Total minimum lease payments reported at 31 December 2018
under IAS 17 1,706
Change in assessment of lease term under IFRS 16 107
Leases outside the scope of IFRS 16 (81)
Impact of discounting lease liability under IFRS 16 (246)
----------------------------------------------------------- -----
Lease liability recognised on transition to IFRS 16 at
1 January 2019 1,486
----------------------------------------------------------- -----
13. Annual General Meeting
This year's Annual General Meeting will be held on 7 May 2020.
Details of the resolutions to be proposed at that meeting will be
included in the notice of Annual General Meeting that will be sent
to shareholders at the end of March 2020.
14. Other information
The financial information for the year ended 31 December 2019
contained in this preliminary announcement was approved by the
Board on 19 February 2020. 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 2018 have been
delivered to the Registrar of Companies. Statutory accounts for the
year ended 31 December 2019 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.
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 contains 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, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR GPURGPUPUPUB
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February 20, 2020 02:00 ET (07:00 GMT)
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