REG - BAE SYSTEMS PLC - BAE Systems Final Results
24/02/2022 07:00
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RNS Number : 6351C BAE SYSTEMS PLC 24 February 2022
BAE Systems plc
Preliminary Announcement 2021
Results in brief
Financial performance measures as defined by the Group(1) Financial performance measures derived from IFRS(2)
2021 2020 2021 2020
Sales £21,310m £20,862m Revenue £19,521m £19,277m
Underlying EBIT(3) £2,205m £2,037m Operating profit £2,389m £1,930m
Underlying earnings per share(3) 47.8p 44.3p Basic earnings per share 55.2p 40.7p
excluding one-off tax benefit (2021 only)(4)
including one-off tax benefit (2021 only)(4) 50.7p 44.3p
Free cash flow(3) £1,864m £1,367m Net cash flow from operating activities £2,447m £1,166m
excluding £1bn pension contribution (2020 only)
including £1bn pension contribution (2020 only) £1,864m £367m
Net debt (excluding lease liabilities) £(2,160)m £(2,718)m Order book £35.5bn £36.3bn
Order intake(5) £21,458m £20,915m Dividend per share(6) 25.1p 23.7p
Order backlog(5) £44.0bn £45.2bn Group's share of net post-employment benefits deficit £(2.1)bn £(4.5)bn
Charles Woodburn, Chief Executive, said: "Our strong results reflect the
outstanding efforts of our employees who have continued to adapt and work
closely with our customers, suppliers and trades unions to deliver
capabilities which keep nations and citizens safe.
"We are continuing to evolve our business, increasing our investments in
advanced technologies to deliver differentiated solutions to meet our
customers' priorities.
"Our diverse portfolio, together with our focus on programme execution, cash
generation and efficiencies, is helping us to navigate the challenging
operating environment, meaning we are well positioned for sustained top line
and margin growth in the coming years."
Our financial highlights
Financial performance measures as defined by the Group(1)
- Sales increased by £0.4bn to £21.3bn, a 5% increase, excluding the
impact of currency translation(7).
- Underlying EBIT(3) increased to £2,205m, a 13% increase on a constant
currency basis(7).
- Underlying earnings per share(3) increased by 12% on a constant
currency basis(7) to 47.8p, excluding the impact of the current year one‑off
tax benefit(4).
- Free cash flow(3) was £1,864m (2020 inflow of £1,367bn, excluding
the £1bn contribution into the UK pension scheme).
- Net debt (excluding lease liabilities) decreased to £2,160m (2020
£2,718m).
- Order intake(5) increased by £0.6bn to £21.5bn (2020 £20.9bn).
- Order backlog(5) decreased by £1.2bn to £44.0bn (2020 £45.2bn).
Financial performance measures derived from IFRS(2)
- Revenue increased by £0.2bn to £19.5bn.
- Operating profit increased by £459m to £2,389m (2020 £1,930m).
- Basic earnings per share was 55.2p (2020 40.7p).
- Net cash flow from operating activities was £2,447m (2020 £1,166m,
including the effect of the £1bn contribution to the UK pension scheme).
- Order book decreased by £0.8bn to £35.5bn.
- Group's share of the pre-tax accounting net post-employment benefits
deficit decreased to £2.1bn, driven by higher discount rates and strong asset
performance (2020 deficit of £4.5bn).
Dividends and share buyback
- Final dividend of 15.2p per share making a total of 25.1p per share in
respect of the year ending 31 December 2021, an increase of 6% over dividends
in respect of the year ended 31 December 2020 of 23.7p per share. The total of
37.5p per share for 2020 includes an interim dividend of 13.8p per share in
respect of the year ended 31 December 2019, which was originally proposed as a
2019 final dividend but subsequently deferred in the light of the COVID-19
pandemic.
- The £500m share buyback programme announced on 29 July 2021 was
completed in February 2022.
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.
The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 12.
2. International Financial Reporting Standards.
3. With effect from 2021, the Group adopted the underlying EBIT profitability
measure, to include charges relating to software and development intangible
amortisation, in place of the underlying EBITA measure. It reflects a better
measure of underlying profitability, by including amortisation of software and
development intangibles as these charges are viewed as a recurring operational
cost for the business. Underlying earnings per share has also been
recalculated to ensure consistency with the updated operational profitability
measure. The underlying performance for 2020 of segments and the Group has
been re-presented on this new basis. During 2020 the Group determined that
Free cash flow was its key performance measure for utilisation of cash at a
Group level. The Group continues to use Operating business cash flow as its
key segment metric, to monitor operational cash generation.
4. A one-off tax benefit of £94m was recognised in the year, in respect of
agreements reached regarding the exposure arising from the April 2019 European
Commission decision regarding the UK's Controlled Foreign Company regime.
5. Including share of equity accounted investments.
6. The 2020 dividend per share of 23.7p is in respect of the year ended 31
December 2020. An interim dividend of 13.8p per share was paid in 2020, in
respect of the year ended 31 December 2019, having been proposed as a 2019
final dividend but deferred in light of the pandemic.
7. Current year compared with prior year translated at current year exchange
rates.
Operational and strategic key points
Electronic Systems
- Cumulatively more than 1,000 electronic warfare systems delivered on
F-35 programme
- Limited Interim Missile Warning System indefinite delivery, indefinite
quantity sustainment and support contract awarded worth $872m (£644m) over
ten years
- EPAWSS testing underway on F-15E and F-15EX aircraft
- Contract received from Defense Logistics Agency valued at more than
$640m (£473m) to deliver Increment 1 M-Code devices
- Rising demand for low and zero emission vehicles in our Power &
Propulsion Solutions business
- Demand in our Controls & Avionics Solutions commercial markets
starting to recover from pandemic impacts
Platforms & Services (US)
- Selected to participate in the design concept phase for the US Army's
Optionally Manned Fighting Vehicle programme
- Consistent deliveries of the M109A7 Self-Propelled Howitzer enabled
the programme to surpass 350 cumulative system deliveries
- Received a $600m (£443m) sustainment and technical support services
contract for Armored Multi-Purpose Vehicle, and AMPV deliveries continued
against the rebaselined customer schedule
- Amphibious Combat Vehicle deliveries against LRIP and design
development have begun on mission variants
- Contract received worth approximately $200m (£148m) from Sweden for
127 BvS10s
- Contract received exceeding $500m (£369m) for mid-life upgrades of
Dutch CV90s
- US Ship Repair was significantly impacted by the pandemic, but has
seen some recent signs of recovery
- Ordnance Systems awarded additional contracts for modernisation
projects at Holston
Air
- Qatar Typhoon and Hawk programme is progressing well, with first Qatar
Typhoon flight achieved in November and deliveries on schedule to commence in
2022
- F-35 rear fuselage production reached full rate levels, with 151
assemblies completed in the year
- Production progressing to plan on the German Typhoon programme
- Initial entry into service of the future electronically scanned
European Common Radar Solution was achieved in December
- Tempest next-generation Future Combat Air System programme continues
to progress well, with initial Concept & Assessment Phase contract secured
- Air sector continues to work closely with industry partners and the UK
government to continue to fulfil contractual support arrangements in Saudi
Arabia
- Australia Hunter Class Frigate programme continues through
prototyping, with good engagement with the Commonwealth to agree revised
schedule for production to commence
- MBDA won several export orders on air platforms
Maritime
- Construction of first three City Class Type 26 frigates for the Royal
Navy is now underway
- Canadian Surface Combatant programme entered a key design milestone in
December, ahead of moving into the next Functional Design phase
- Fifth Astute Class submarine, Anson, launched in April, with final
installation and commissioning activities continuing to ready her for
scheduled exit in 2022
- Construction of the first two Dreadnought Class submarines continues
to advance
- Contract awarded and early design and concept work underway on Royal
Navy's next generation of submarines
- Contracts worth more than £1bn received under UK Ministry of
Defence's Future Maritime Support Programme
- Maritime Services provided preparation and support capabilities to the
UK's Carrier Strike Group ahead of, and during, its first operational
deployment
- RBSL secured the Challenger 3 Main Battle Tank upgrade contract
Cyber & Intelligence
Intelligence & Security
- US-based Intelligence & Security business continues to maintain
its bid pipeline, perform on existing contracts and win new orders
- Awarded a five-year, up to $478m (£353m) Systems Engineering and
Integration Support Services contract from the US Navy Strategic Systems
Programs office
- Awarded classified contracts from Department of Defense and
Intelligence Community customers in excess of $0.8bn (£0.6bn) to deliver
mission-enabling engineering services
- Agreement announced for the proposed acquisition of Bohemia
Interactive Simulations, a global software developer of simulation and
training solutions for allied military customers
Applied Intelligence
- Strong order intake and revenue growth driven by the government- and
defence-facing business units
- Increasing profitability, supported by strong programme execution,
productivity and cost base optimisation. Financial Services' profitability
benefited from restructuring in 2020
- Acquisition of In-Space Missions, a UK-based satellite and satellite
systems company, to accelerate our Space capabilities
Guidance for 2022
While the Group is subject to geopolitical and other uncertainties, the
following guidance is provided on current expected operational performance.
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 2021 are provided in the Group financial review on pages 12 to 20.
Group guidance
With a strong year behind us, we look forward to continued top-line growth
with margin expansion and good cash delivery against our rolling targets.
Guidance is provided on the basis of an exchange rate of $1.38:£1, which is
in line with the actual 2021 exchange rate, therefore guidance is the same for
both reported and constant exchange rates.
For the year ending 31 December 2022, the Group's sales are expected to grow
in the 2% to 4% range over 2021. Sales growth is expected in the Electronic
Systems, Air, Maritime and Cyber & Intelligence segments, whilst Platforms
& Services (US) is expected to be stable. Approximately 75% of the
expected sales are already in the order backlog.
Underlying EBIT is expected to increase in the range of 4% to 6%.
Finance costs are expected to be approximately £240m, with an effective tax
rate expected to be around 20%, and non-controlling interest expected to be
around £70m.
Underlying earnings per share is expected to increase in the range of 4% to
6%. Sensitivity to EPS is around one pence for every five cent movement.
Free cash flow for 2022 is anticipated to be in excess of £1bn, with a
three-year target for 2022 to 2024 in excess of £4bn. The three-year cash
flow target for the period 2020 to 2022, originally set at £3.5bn to £3.8bn,
has been upgraded to be in excess of £4bn.
Segment guidance(1)
The following table provides guidance by segment, aligned to the Group
guidance:
Year ended 31 December 2022 Expected sales Expected underlying EBIT margin(2,3)
Electronic Systems Up 2% to 4% 16% to 17%
Platforms & Services (US) Stable 8% to 9%
Air Up 2% to 4% 10% to 11%
Maritime Up 3% to 5% 8% to 9%
Cyber & Intelligence Up 3% to 5% 8% to 9%
1. The above guidance ranges do not reflect the establishment, in
2022, of the Group's new Digital Intelligence business nor the transition of
our BAE Systems Australia business from the Air segment to the Maritime
segment. The re-presentation of 2021 segments to reflect these changes will be
issued in due course.
2. Underlying EBIT as percentage of Sales.
3. In 2022, HQ underlying EBIT is expected to be broadly similar to
2021 (expense of £120m).
For further information please contact:
Investors Media Relations
Martin Cooper, Kristina Anderson,
Investor Relations Director
Director, Media Relations
Telephone: +44 (0) 1252 383455 Telephone: +44 (0) 7540 628673
Email: investors@baesystems.com (mailto:investors@baesystems.com) Email: kristina.anderson@baesystems.com
(mailto:kristina.anderson@baesystems.com)
Analyst and investor presentation
A presentation, for analysts and investors, of the Group's Results for 2021
will be available via webcast at 11am today (24 February 2022).
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 90,500 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
Overview
At the start of 2021, we set out a refreshed investment case reflecting the
Group today, our competitive advantages, operational focus areas to accelerate
our evolution, and the financial outputs we are seeking to drive. Against the
backdrop of the ongoing global pandemic and associated global macro impacts,
we are pleased at the progress we have made against these key operational
themes.
Thanks to the outstanding efforts of our employees we have been resilient and
agile in adapting to the ever-evolving environment, to address and meet
customer requirements.
We delivered a strong set of financial results across all our key measures as
positive momentum from last year was maintained on operational and cash flow
performance, enabling us to increase our returns to shareholders through a
higher dividend and also through the buyback programme announced in July 2021.
This reflects our confidence in the outlook and our ongoing focus on a
balanced and efficient capital allocation policy of investing in the business
and shareholder returns. The Group maintained its strong sales balance between
production and aftermarket services.
Our strategy remains consistent and is delivering results. This year we have
focused on our operational performance, continued to invest in technology,
made progress on our competitiveness and accelerated our sustainability
agenda.
We have long-term strength from our programmes, technologies and customer
relationships, with continued demand for our products and services and we are
leveraging our leading capabilities in evolving markets. We take great pride
in our role not only in supporting national security, but also in contributing
to the economic prosperity of the countries in which we operate.
Our geographically diverse portfolio is aligned with growing defence budgets
and as expected, the near-term Brexit impacts across the business have been
limited. This geographic mix, the programme spread and longevity of the
positions mean we are not overly dependent on a small number of programmes.
These are key factors in our resilience against a number of global macro
challenges and also underline the strength of our outlook.
Safety and wellbeing
The safety and wellbeing of our employees is paramount and it remained our
primary consideration as we continued to manage our response to the global
pandemic throughout the year. Our response highlighted the positive societal
impact this business can bring as we deployed our capabilities, people and
time, and worked with our supply chains to support our communities and health
services. We are hugely proud of how our employees responded to the day-to-day
challenges. The strength of the relationships and collaborative working with
our customers, suppliers and trades unions has been exceptional and a huge
testament to all. Like all businesses, we experienced challenges during this
pandemic. We have had to be agile and adapt, and make difficult decisions, but
thanks to the early actions we took to enhance the resilience of our business
and the remarkable fortitude of our people, we have continued to deliver on
our customers' priorities whilst also supporting the social needs of our
governments and communities.
As we worked to strengthen our culture of safety, we faced additional
challenges from the pandemic, which has required significant changes in how we
work. We remain focused on safety across our enterprise and we are targeting
our most challenging sites through a comprehensive improvement plan including
campaigns across employee groups, implementing virtual reality safety
training, and introducing new and improved systems to reduce risk related to
safety, health, and environmental impacts.
The importance of our employees' wellbeing has been enhanced during the
pandemic as we have balanced work and personal commitments. Our wellbeing
programmes support employees in managing their work and personal
responsibilities. We continue to promote mental health awareness programmes
across the business and have worked hard this year to increase our
communications and engagement along with introducing training for employees.
ESG
2021 has been about evolving, accelerating and integrating our sustainability
agenda which is fundamental to our business performance. It aligns stakeholder
priorities with the Group's ESG risks and opportunities so that we can drive
the success of the Company for the benefit of our stakeholders.
We recognise that the way we do business and the actions and behaviours we
demonstrate are vital for the future strength of our business and we want to
continue to increase our ambitions and accelerate our progress. We made some
real strides in 2021, with some notable highlights being: setting ourselves
the target of achieving net zero greenhouse gas emissions across our
operations by 2030 and joining the United Nations 'Race to Zero' campaign;
driving a bolder set of diversity ambitions to be recognised as a leading
employer in defence and security for valuing diversity and inclusion;
committing to cease handling white phosphorus; and gaining accreditation as a
real living wage UK employer. All are examples of accelerated progress
achieved through stakeholder engagement underpinned by a strategic rationale.
The long-term outlook for the Group and the defence industry means we need to
anticipate change and ensure that we can continue to improve upon what we do
today, and into the future. We are committed to building a sustainable future
by having a clear sustainability agenda focused on valuing and developing our
people, making a positive social and economic contribution to our communities,
developing innovative technology and collaborating with our supply chains and
reducing the environmental impacts of our operations and products.
We will continue to review ways to integrate sustainability practices
holistically into our business, driven through, and aligned with, our
strategic objectives as we look to develop sustainable solutions to meet
ever-evolving customer requirements. The progress we are making on our
sustainability agenda has been reflected with an improvement in our CDP score,
and we have maintained our AA leader class rating with MSCI.
2021 operational performance
Execution on the key strategic objectives of operational excellence,
competitiveness and technological innovation is vital for the successful
delivery of our order backlog, to deliver future growth and a high-performing
sustainable business.
Continually pushing operational performance improvement is central to our
strategy to ensure delivery of our order backlog and improvements in long-term
cash generation.
We have been pleased with our operational performance in 2021 and it is a
great testament to our people that we can talk about an almost 'normal'
delivery given the environment in which we have been operating over the last
two years. We will look to make further improvements and our increasing
confidence in our programme execution capabilities underlines our outlook for
sales growth, margin expansion and our rolling three-year cash targets.
Electronic Systems delivered another year of growth and good programme
execution. Sales were up 5% but were held back in the last quarter as the
Omicron surge tightened an already pandemic-constrained labour market, and
caused some supply chain delays and disruptions. These challenges dampened
what were positive contributions from the 2020 acquisitions and strong
execution across key franchises, such as the electronic warfare and
precision-guided munition programmes. Our civil market operations continue to
be impacted by the COVID-19 pandemic, though there are some signs of demand
recovery in the commercial Controls & Avionics Solutions and Power &
Propulsion Solutions businesses where we have leading positions.
In Platforms & Services (US), combat vehicle deliveries continued, with
the investment in new production capabilities and processes enabling the
business to consistently deliver at increased volumes over multiple
programmes. Compared to last year, vehicle delivery volumes increased by more
than 60%. US Ship Repair made good progress resolving several challenged ship
modernisation programmes and recovering from COVID-19 and other operational
impacts. Work remains to be done to return to pre-pandemic levels of
performance.
The Air sector grew and maintained good operational performance. Production
moved to full rate levels on F-35 rear fuselage assemblies, Typhoon production
and support revenues increased as we delivered on our build programmes, and we
continued to provide Typhoon operators with ongoing support and training
services to deliver availability, maintenance and upgrade enhancements. The
Tempest technology maturation programme is progressing well and we secured the
first contract for the Future Combat Air System Concept & Assessment
Phase.
In Maritime, we sustained the performance improvements seen last year.
Manufacturing levels increased on Type 26 with the first three ships now in
production and we launched the fifth Astute Class submarine. Construction of
the first two Dreadnought submarines is progressing and in the Maritime
Services business we successfully supported the first major UK Carrier Strike
Group deployment.
Cyber and Intelligence delivered an increase in margin with Applied
Intelligence delivering much-improved profitability, benefiting from
heightened demand in the Government sector, together with the results of our
restructuring. Intelligence & Security delivered growth in sales and
profit as it performed on its long-term support contracts, some of which are
on the most sensitive and critical US national security programmes. The
business maintained its bid pipeline to deliver a strong, stable backlog
position at year end.
Driving competitiveness and efficiency
On competitiveness, we have a number of programmes to achieve efficiency and
simplification across the Group building on the lessons learned in the last
year on working practices and cost savings. We are also bringing data
analytics to bear across the Group to benchmark and improve efficiency, as
well as investment in new technologies and production techniques to maintain
our drive to continuously improve operational performance and value for our
customers.
Areas highlighted to date include the streamlining of processes, general and
administration cost savings, office footprint requirements, flexible working
practices and how we can be more agile and adaptable to deliver our
commitments in different ways.
Portfolio
We continue to evaluate and increase value creation from our portfolio through
acquisitions and disposals as we align to our customer needs and priorities in
addressing the evolving threat environment. The US acquisitions completed in
2020 are performing well and construction is progressing on the new facility
for the GPS business to maintain delivery of market-leading technologies. In
respect of disposals, we sold the Filton and Broughton sites generating a good
cash result, the BAE Systems Rokar International business, and our stake in
Advanced Electronics Company, one of our Saudi Arabian portfolio companies. We
completed two new acquisitions in 2021, both in the UK, firstly a small
technology bolt-on which enhances our data and digital capabilities, and
secondly In-Space Missions, a company that designs, builds and operates
satellites and satellite systems, enabling us to combine BAE Systems'
experience in highly secure satellite communications with In-Space Missions'
full lifecycle satellite capability. We also announced we had entered into a
definitive agreement to acquire Bohemia Interactive Simulations, a leading
developer of advanced military simulation and training software, headquartered
in the US.
Advancing and further leveraging our technology
Investment in advanced technology and innovation is a benefit which spans the
breadth of the business, supporting operational performance, competitiveness,
our sustainability objectives and growth aspirations. The threat environment
consists not just of the physical risks but also those in the grey zone which
need to be addressed. It is critical to our customers to have a fully
integrated combination of capabilities to negate these threats. Against this
backdrop we are increasing our self-funded research and development
investments and positioning the Group towards future growth areas aligned to
our customer priorities, by identifying collaboration opportunities and
investing in our leading capabilities and technologies across electronic
warfare, combat aircraft, precision weaponry, cyber and the underwater
battlespace. From these established positions we are developing, linking and
transitioning solutions into priority areas such as multi-domain networks,
data analysis, autonomy, space and sustainability-driven technology
developments. While our R&D investments are important, we sustain our
leading positions through collaboration with our customers, educational
institutions and in partnership with defence laboratories and research
institutions such as the Defence Science and Technology Laboratory, DARPA, the
Air Force Research Laboratory and the Office of Naval Research. Additionally
we accelerate the pace and reach of our innovation by collaborating across our
global enterprise.
Reflecting the importance of technology investment, in 2022 we launched the
BAE Systems Digital Intelligence business which brings together many of our
digital transformation, cyber security, complex data analysis and
communication and information systems capabilities from across the Group. We
have exceptional talent and world-leading innovation in these areas and the
new business will allow greater collaboration across the Group, and in time
bring a greater range of capabilities to our customers.
Demand outlook
We have a large order backlog and exceptional programme positions, providing
visibility of growth which was further supported by order flow in 2021 that
exceeded targets.
Our defence and security capabilities remain highly relevant in an uncertain
global environment with complex threats, the requirement in many cases to
recapitalise or upgrade ageing equipment, and with the additional need for
governments to drive a domestic economic prosperity agenda in a post-pandemic
world. This backdrop has resulted in good prospects in existing and new
international markets for our products and services in air, maritime, land,
space and cyber security.
The US continues to represent the world's largest defence budget and accounts
for around 46% of our revenues.
Through a range of innovative technologies and proven capabilities, our US
business continues to sustain its robust backlog and diverse portfolio of
long-term defence programmes for the US Armed Forces and international allies.
The business portfolio remains closely aligned with enduring customer
priorities and key focus areas outlined in the US National Defense Strategy,
to modernise and maintain military readiness, which we expect to continue with
the upcoming 2022 National Defense Strategy. The business has been operating
under extended Continuing Resolutions in fiscal year 2022. While the
Congressional budget and appropriations impasse is not without risk, the
threat environment remains and is expected to result in continued support for
US defence spending in the coming years.
In the UK, the Defence Command Paper renewed commitments to our major
long-term programmes in complex warship, submarine and combat aircraft design
and build, allowing for long-term investment in these key sovereign
capabilities, as well as strong support for cyber. The opportunity pipeline is
positive with domestic, export and collaboration opportunities identified. We
also have the capabilities to support our UK customer with its space
ambitions.
Our portfolio is well positioned to benefit from increased defence spending in
Asia Pacific through our Australia business, which is already set to grow
significantly due to our contracted positions, and through export
opportunities from our UK, US and Australian business to the region. The AUKUS
announcement in September 2021 is strategically significant. As the largest
defence provider in the UK and Australia and a top ten prime contractor to the
US Department of Defense we are well positioned to support our government
customers in these nations as discussions progress. This is a clear example of
how nations are looking to coordinate capabilities in multi-domain operations
to address the threat environment.
In Europe, a number of nations including Germany and France continue to
increase their defence budgets to address the threat environment and in order
to meet their NATO commitments. We remain well placed through our positions on
the Eurofighter Typhoon, our shareholding in MBDA and our BAE Systems
Hägglunds land business based in Sweden, and we are pursuing a number of
significant opportunities in the region.
In the Middle East, our long-standing relationships at government and company
levels, continued regional instability and the nature of our long-term
contracts, mean we expect defence and security to remain a priority. The
renewal of certain existing long-term support contracts is tracking in line
with expectations and we continue to progress a number of opportunities with
existing customers.
The civil aerospace market accounts for around 3% of Group sales. COVID-19 has
significantly impacted this market, and a recovery to 2019 levels is likely to
be a number of years away. We are seeing some signs of recovery and this
remains an important franchise for us in which we have leading capabilities in
flight and engine controls across new, developing and more mature programmes
with capabilities transferable from defence air platforms.
Balance sheet and capital allocation
The Group recognises the importance to investors of a clear and consistent
capital allocation policy. 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. The Group expects to continue to meet its
pension obligations, invest in research and technology and 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.
Consistent with this approach, the Group initiated a share repurchase
programme of up to £500m on 30 July which was completed in February 2022.
Investment in value-enhancing acquisitions will continue to be considered
where market conditions are right, where they deliver on the Group's strategy
and where they offer greater long-term value than repurchasing the Group's own
shares.
Post-employment benefit schemes
The Group's share of the pre-tax accounting net post-employment benefits
deficit improved to a year end position of £2.1bn from £4.5bn, driven by
higher discount rates and strong asset performance.
Under the funding deficit recovery plan agreed in February 2020 all scheduled
lump sum Company contributions were made in 2020.
Board and Executive Committee changes
Dame Carolyn Fairbairn, Dr Ewan Kirk and Crystal E. Ashby were appointed to
the Board as non-executive directors of the Company on 1 March, 1 June and 1
September 2021 respectively.
At the end of 2021 Cliff Robson was appointed Group Managing Director of the
Air sector, replacing Chris Boardman who retired.
Following the formation of the Group's new Digital Intelligence business with
effect from 2022, the following changes were made to the Executive Committee.
David Armstrong was appointed Group Managing Director, Digital Intelligence.
Karin Hoeing was appointed Group ESG, Culture & Business Transformation
Director, and was succeeded as Group Human Resources Director by Tania
Gandamihardja. Gabby Costigan was appointed Group Managing Director, Business
Development. She was succeeded as Chief Executive, BAE Systems Australia by
Ben Hudson. In turn, Julian Cracknell was appointed Chief Technology &
Information Officer. Simon Barnes, Managing Director, BAE Systems Saudi
Arabia, also joined the Executive Committee.
Summary
The fundamentals of our business remain strong, and the strategy of the Group
is unchanged. Our business benefits from a large order backlog, with
established positions on long-term programmes in the US, UK, Saudi Arabia and
Australia. Relationships with, and support from, our customers remain strong,
with defence and security continuing to be a priority for governments in our
key markets, with continued demand for our capabilities. This backdrop,
together with our focus on programme execution, positions us to grow our sales
profitably and increase cash conversion in the coming years. We are evolving
the business to have an appropriate sustainability agenda embedded at its
core, with a constant focus on operational performance and value creation. As
demonstrated this year, higher cash generation gives us increased strategic
flexibility focused on technology and aligned to our customers' priorities,
and enables us to deliver increased cash returns to shareholders.
Dividends
The Board has recommended a final dividend of 15.2p for a total of 25.1p for
the full year. Subject to shareholder approval at the May 2022 Annual General
Meeting, the dividend will be paid on 1 June 2022 to holders of Ordinary
shares registered on 22 April 2022.
Financial glossary
We monitor the underlying financial performance of the Group using alternative
performance measures (APMs). 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.
The Group uses these APMs as a mechanism to support year-on-year business
performance and cash generation comparisons, and to enhance management's
planning and decision making on the allocation of resources. The APMs are also
used to provide information in line with the expectations of investors, and
when setting guidance on expected future business performance. The Group
presents these measures to the users to enhance their understanding of how the
business has performed in the year, and do not consider them to be more
important than, or superior to, their equivalent IFRS measures.
Measure Definition Purpose
Financial performance measures as defined by the Group
Sales Revenue plus the Group's share of revenue of equity accounted investments, Enables management to monitor the revenue of both the Group's own subsidiaries
excluding subsidiaries' revenue from equity accounted investments. as well as its strategically important equity accounted investments, to ensure
programme performance is understood and in line with expectations.
Underlying EBIT(1) Operating profit excluding amortisation of programme, customer-related and Provides a measure of operating profitability, excluding one-off events, to
other intangible assets, impairment of intangible assets, finance costs and enable management to monitor the performance of recurring operations over
taxation expense of equity accounted investments (EBIT), and non-recurring time, and which is comparable across the Group.
items(2). The exclusion of amortisation of acquisition-related intangible
assets is to allow consistent comparability internally and externally between
our businesses, regardless of whether they have been grown organically or via
acquisition.
Return on sales Underlying EBIT as a percentage of sales. Provides a measure of operating profitability, excluding one-off events, to
enable management to monitor the performance of recurring operations over
time, and which is comparable across the Group.
Underlying earnings per share(1) Profit for the year attributable to shareholders, excluding post-tax impact of Provides a measure of the Group's underlying performance, which enables
amortisation of programme, customer-related and other intangible assets, management to compare the profitability of the Group's recurring operations
impairment of intangible assets, non-cash finance movements on pensions and over time.
financial derivatives, and non-recurring items(2) attributable to
shareholders, being underlying earnings, divided by number of shares as
defined for Basic EPS in accordance with IAS 33 Earnings per Share.
Underlying interest Net finance costs for the Group and its share of equity accounted investments, Provides a measure of finance costs associated with the operational borrowings
excluding net interest expense on post-employment benefit obligations and fair of the Group that is comparable over time.
value and foreign exchange adjustments on financial instruments and
investments.
Measure Definition Purpose
Underlying effective tax rate Taxation expense for the Group and its share of equity accounted investments, Provides a measure of taxation for the Group, excluding one-off items, that is
excluding any one-off tax benefit/expense, as a percentage of adjusted profit comparable over time.
before taxation, being Profit before tax plus taxation expense of equity
accounted investments, adjusted for non‑recurring items(2).
Operating business cash flow Net cash flow from operating activities excluding taxation and including net Provides a measure of cash generated by the Group's operations, to service
capital expenditure and lease principal amounts, financial investment and debt and meet tax obligations, and in turn available for use in line with the
dividends from equity accounted investments. Group's capital allocation policy.
Free cash flow Operating business cash flow less interest paid (net) and taxation. Provides a measure of cash generated by the Group's operations after servicing
debt and tax obligations, available for use in line with the Group's capital
allocation policy.
Net debt (excluding lease liabilities) Cash and cash equivalents, less loans and overdrafts (including debt-related Allows management to monitor indebtedness of the Group, to ensure the Group's
derivative financial instruments). Net debt does not include lease capital structure is appropriate and capital allocation policy decisions are
liabilities. suitably informed.
Order intake Funded orders received from customers including the Group's share of order Allows management to monitor the order intake of the Group's own subsidiaries
intake of equity accounted investments. as well as its strategically important equity accounted investments, providing
insight into future years' sales performance.
Order backlog Funded and unfunded unexecuted customer orders including the Group's share of Supports future years' sales performance of subsidiaries and equity accounted
order backlog of equity accounted investments. Unfunded orders include the investments.
elements of US multi-year contracts for which funding has not been authorised
by the customer.
1. With effect from 2021, the Group adopted the underlying EBIT
profitability measure, to include charges relating to software and development
intangible amortisation, in place of the previously reported underlying EBITA
measure, as it reflects a better measure of underlying profitability, by
including amortisation of software and development intangibles as these
charges are viewed as a recurring operational cost for the business.
Underlying earnings per share has also been recalculated to ensure consistency
with the updated operational profitability measure. The underlying performance
for 2020 of segments and the Group has been re-presented on this new basis.
2. Items that are not relevant to an understanding of the Group's
underlying performance (see page 15).
Measure Definition
Financial performance measures derived from IFRS
Revenue Income derived from the provision of goods and services by the Company and its
subsidiary undertakings.
Operating profit Profit for the year before finance costs and taxation expense. This measure
includes finance costs and taxation expense of equity accounted investments.
Return on revenue Operating profit as a percentage of revenue.
Basic earnings per share Basic earnings per share in accordance with IAS 33 Earnings per Share.
Net cash flow from operating activities Net cash flow from operating activities in accordance with IAS 7 Statement of
Cash Flows.
Order book The transaction price allocated to unsatisfied and partially satisfied
performance obligations as defined by IFRS 15 Revenue from Contracts with
Customers.
Net post-employment benefits deficit Net IAS 19 Employee Benefits deficit, excluding amounts allocated to equity
accounted investments.
Dividend per share Interim dividends paid and final dividend proposed per share.
Income statement summary
2021 2020
£m
£m
Financial performance measures as defined by the Group(1)
Sales 21,310 20,862
Underlying EBIT 2,205 2,037
Return on sales 10.3% 9.8%
Financial performance measures derived from IFRS(2) £m £m
Revenue 19,521 19,277
Operating profit 2,389 1,930
Return on revenue 12.2% 10.0%
Reconciliation of sales to revenue £m £m
Sales 21,310 20,862
Deduct Group's share of revenue of equity accounted investments (2,979) (2,652)
Add Subsidiaries' revenue from equity accounted investments 1,190 1,067
Revenue 19,521 19,277
Reconciliation of underlying EBIT to operating profit £m £m
Underlying EBIT 2,205 2,037
Non-recurring items 350 19
Amortisation of programme, customer-related and other intangible assets (86) (42)
Impairment of intangible assets (15) (4)
Financial expense of equity accounted investments (27) (32)
Taxation expense of equity accounted investments (38) (48)
Operating profit 2,389 1,930
Net finance costs (279) (334)
Taxation expense (198) (225)
Profit for the year 1,912 1,371
Underlying interest expense (241) (255)
Net interest expense on post-employment benefit obligations (67) (70)
Fair value and foreign exchange adjustments on financial instruments and 2 (41)
investments
Net finance costs (including equity accounted investments) (306) (366)
Exchange rates 2021 2020
Average
£/$ 1.376 1.283
£/€ 1.163 1.125
£/A$ 1.832 1.862
Year end
£/$ 1.354 1.367
£/€ 1.191 1.117
£/A$ 1.863 1.770
Sensitivity analysis £m
Estimated impact on sales of a ten cent movement in the average exchange rate
$ 625
€ 115
A$ 45
1. The purposes and definitions of non-GAAP measure are provided in the
Financial glossary on page 12.
2. International Financial Reporting Standards.
Sales increased by £0.4bn to £21.3bn (2020 £20.9bn), a 5% increase on a
constant currency basis(1).
Underlying EBIT increased to £2,205m (2020 £2,037m), giving a return on
sales of 10.3% (2020 9.8%). Excluding the impact of exchange translation, the
increase was 13%.
Revenue increased by £0.2bn to £19.5bn (2020 £19.3bn).
Operating profit increased by £459m to £2,389m (2020 £1,930m).
Non-recurring items in 2021 reflect a gain of £350m, comprising a gain in HQ
on the sale of the Filton and Broughton sites of £182m, gains on disposal of
Advanced Electronics Company in the Air sector (£132m, of which £63m is
attributable to non-controlling interests) and on disposal of a business in
our Electronic Systems segment (£26m), and a net £10m gain relating to
historical and current year acquisitions. The credit of £19m in 2020
comprised a settlement gain on a US pension annuity buy-out of £64m, offset
by charges relating to acquisitions and disposals of £38m and a Guaranteed
Minimum Pension equalisation charge of £7m.
Amortisation of programme, customer-related and other intangible assets is
£86m (2020 £42m), the increase being driven by amortisation charges in the
Electronic Systems businesses acquired during 2020.
Impairment of intangible assets in 2021 is £15m (2020 £4m).
Net finance costs, including equity accounted investments, were £306m (2020
£366m). The underlying interest charge, excluding pension accounting, and
fair value and foreign exchange adjustments on financial instruments and
investments was £241m (2020 £255m). Net interest expense on the Group's
pension deficit was £67m (2020 £70m).
Taxation expense, including equity accounted investments, of £236m reflects
the Group's underlying effective tax rate for the year of 18%, plus the tax
charge on non-recurring items, less a one-off tax benefit of £94m in respect
of agreements reached regarding the exposure arising from the April 2019
European Commission decision regarding the UK's Controlled Foreign Company
regime and the impact of the UK tax rate adjustment (see note 4). The 2020
charge of £273m reflected the Group's underlying effective tax rate for the
year of 17%.
The calculation of the underlying effective tax rate is shown in note 4 on
page 48.
1. Current year compared with prior year translated at current year exchange
rates.
Earnings per share
2021 2020
Financial performance measures as defined by the Group(1)
Underlying earnings (excluding the 2021 one-off tax benefit) £1,523m £1,414m
Underlying earnings per share (excluding the 2021 one-off tax benefit) 47.8p 44.3p
Underlying earnings (including the 2021 one-off tax benefit) £1,617m £1,414m
Underlying earnings per share (including the 2021 one-off tax benefit) 50.7p 44.3p
Financial performance measures derived from IFRS(2)
Profit for the year attributable to equity shareholders £1,758m £1,299m
Basic earnings per share 55.2p 40.7p
Reconciliation of underlying EBIT to underlying earnings £m £m
Underlying EBIT 2,205 2,037
Underlying interest expense (241) (255)
1,964 1,782
Taxation expense (at the underlying effective tax rate, excluding the 2021 (350) (296)
one-off tax benefit)
Non‑controlling interests (91) (72)
Underlying earnings (excluding the 2021 one-off tax benefit) 1,523 1,414
One-off tax benefit 94 -
Underlying earnings (including the 2021 one-off tax benefit) 1,617 1,414
Reconciliation of underlying earnings to profit for the year £m £m
attributable to equity shareholders
Underlying earnings (excluding the 2021 one-off tax benefit) 1,523 1,414
Non-recurring items, post tax 279 15
Amortisation of programme, customer-related and other intangible assets, and (84) (38)
impairment of intangibles, post tax
Net interest expense on post-employment benefit obligations, post tax (55) (58)
Fair value and foreign exchange adjustments on financial instruments and 1 (34)
investments, post tax
One-off tax benefit (2021) 94 -
Profit for the year attributable to equity shareholders 1,758 1,299
Non-controlling interests 154 72
Profit for the year 1,912 1,371
Underlying earnings per share for the year (excluding the one-off tax benefit)
increased by 12%, excluding the impact of exchange translation, to 47.8p (2020
44.3p).
Basic earnings per share was 55.2p (2020 40.7p).
Orders
Financial performance measures as defined by the Group(1) 2021 2020
Order intake(3) £21,458m £20,915m
Order backlog(3) £44.0bn £45.2bn
Financial performance measures derived from IFRS(2)
Order book £35.5bn £36.3bn
Order intake(3) increased by £543m to £21,458m (2020 £20,915m). Our
US-managed businesses had a book-to-bill ratio(4) of more than one.
Order backlog(3) decreased by £1.2bn to £44.0bn.
Order book decreased by £0.8bn to £35.5bn.
1. The purposes and definitions of non-GAAP measure are provided in the
Financial glossary on page 12.
2. International Financial Reporting Standards.
3. Including share of equity accounted investments.
4. Ratio of Order intake to Sales.
Cash flow
2021 2020
£m
£m
Financial performance measures as defined by the Group(1)
Free cash flow 1,864 367
Financial performance measures derived from IFRS(2) £m £m
Net cash flow from operating activities 2,447 1,166
Reconciliation from free cash flow to net cash flow from operating activities £m £m
Free cash flow 1,864 367
Add back Interest paid, net of interest received 224 208
Add back Taxation 234 251
Operating business cash flow 2,322 826
Add back Net capital expenditure and financial investment 209 392
Add back Principal element of lease payments and receipts 207 226
Deduct Dividends received from equity accounted investments (57) (27)
Deduct Taxation (234) (251)
Net cash flow from operating activities 2,447 1,166
Net capital expenditure and financial investment (209) (392)
Principal element of finance lease receipts 10 10
Dividends received from equity accounted investments 57 27
Interest received 23 19
Acquisitions and disposals 185 (1,701)
Net cash flow from investing activities 66 (2,037)
Interest paid (247) (227)
Equity dividends paid (777) (746)
Purchase of own shares (368) -
Partial disposal of shareholding in subsidiary undertaking 28 27
Dividends paid to non-controlling interests (202) (19)
Principal element of lease payments (217) (236)
Cash flow from derivative financial instruments (excluding cash flow hedges) (88) 16
Movement in cash collateral (18) (2)
Net cash flow from loans (367) 2,160
Net cash flow from financing activities (2,256) 973
Net increase in cash and cash equivalents 257 102
Add back/(deduct) Net cash flow from loans 367 (2,160)
Foreign exchange translation (50) 220
Other non-cash movements (16) (137)
Decrease/(increase) in net debt (excluding lease liabilities) 558 (1,975)
Opening net debt (excluding lease liabilities) (2,718) (743)
Net debt (excluding lease liabilities) (2,160) (2,718)
1. The purposes and definitions of non-GAAP measure are provided in the
Financial glossary on page 12.
2. International Financial Reporting Standards.
Free cash flow was £1,864m (2020 £367m, including the impact of the Group's
£1bn contribution into the UK pension scheme). The strong inflow in the year
was driven by our sharp focus on liquidity, good operational performance and
improved working capital management including some accelerated collections.
Net cash inflow from operating activities was £2,447m (2020 £1,166m,
including the effect of the £1bn contribution to the UK pension scheme).
Taxation payments were £234m (2020 £251m).
Net capital expenditure and financial investment was £209m (2020 £392m)
which includes the impact of an inflow from the proceeds of the site sales of
£271m.
Dividends received from equity accounted investments amounted to £57m (2020
£27m).
Interest received was £23m (2020 £19m).
Cash flows in respect of acquisitions, disposals and held for sale assets
comprises a net inflow of £185m, primarily in relation to the divestment of
the Advanced Electronics Company. The cash outflows in 2020 in respect of
acquisitions, disposals, held for sale assets and the partial disposal of
shareholdings in subsidiary undertakings primarily represent the two US
acquisitions and that of Techmodal, with an inflow of £27m from the reduction
in the Group's shareholding in Overhaul and Maintenance Company (OMC).
Interest paid was £247m (2020 £227m).
Equity dividends paid in 2021 represents the 2020 final dividend (£461m) and
the 2021 interim dividend (£316m).
The share buyback saw an outflow of £368m in the year. The full £500m
programme completed in February 2022.
Dividends paid to non-controlling interests were £202m (2020 £19m),
primarily reflecting payments made by our partially-owned subsidiaries in
Saudi Arabia.
There was a cash outflow from derivative financial instruments of £88m (2020
£16m inflow), 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
Components of net debt (excluding lease liabilities) 2021 2020
£m
£m
Cash and cash equivalents 2,917 2,768
Debt-related derivative financial instruments (net) (16) (62)
Loans - non-current (4,604) (4,957)
Loans and overdrafts - current (457) (467)
Net debt (excluding lease liabilities) (2,160) (2,718)
The Group's net debt (excluding lease liabilities) at 31 December 2021 is
£2,160m, a net decrease of £558m from the position at the start of the year.
This is primarily a result of the strong Free cash flow performance, partially
offset by dividends paid and the share buyback.
Cash and cash equivalents of £2,917m (2020 £2,768m) are held primarily for
the repayment of debt securities, pension deficit funding when required,
payment of the 2021 final dividend, funding of the completion of the share
buyback programme announced in July 2021 and management of working capital.
Accounting policies
Changes in accounting policies
No new or amended standards which became applicable for the year ending 31
December 2021 had a material impact on the Group or required the Group to
change its accounting policies.
Segmental review
The Group reports its performance through six reporting segments.
Year ended 31 December 2021
As defined by the Group Derived from IFRS(1)
Sales Underlying EBIT Return Operating business cash flow Order Order Revenue Operating profit Return on revenue Net cash flow from operating activities Order book
£m
£m
on sales
£m
£m
£m
%
£m
£bn
% Intake(2) Backlog(2)
£m £bn
Electronic Systems 4,491 766 17.1 774 4,923 7.2 4,491 715 15.9 951 5.7
Platforms & Services (US) 3,395 259 7.6 287 3,236 5.6 3,318 252 7.6 351 5.3
Air 8,321 856 10.3 628 7,186 20.3 6,913 930 13.5 743 14.7
Maritime 3,416 288 8.4 321 4,336 9.9 3,340 289 8.7 457 9.4
Cyber & Intelligence 1,752 156 8.9 173 1,817 1.6 1,752 152 8.7 202 1.0
HQ(3) 307 (120) 139 320 - 36 51 (23) -
Deduct Intra-group (372) (360) (0.6) (329) (0.6)
Deduct Taxation(4) (234)
Total 21,310 2,205 10.3 2,322(5) 21,458 44.0 19,521 2,389 12.2 2,447 35.5
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.
5. At a Group level, the key cash flow metric is Free cash flow (see Financial
glossary on page 12). Free cash flow was £1,864m (2020 £367m).
Segmental performance: Electronic Systems
Electronic Systems, with 16,400 employees(1), comprises the US- and UK‑based
electronics activities, including electronic warfare systems, navigation
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, space electronics and electric drive propulsion systems.
Operational and strategic key points
- Cumulatively more than 1,000 electronic warfare systems delivered on
F-35 programme.
- Limited Interim Missile Warning System indefinite delivery, indefinite
quantity sustainment and support contract awarded worth $872m (£644m) over
ten years.
- EPAWSS testing underway on F-15E and F-15EX aircraft.
- Contract received from Defense Logistics Agency valued at more than
$640m (£473m) to deliver Increment 1 M-Code devices.
- Rising demand for low and zero emission vehicles in our Power &
Propulsion Solutions business.
- Demand in our Controls & Avionics Solutions commercial markets
starting to recover from pandemic impacts.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS(3)
2021 2020 2021 2020
Sales £4,491m £4,557m Revenue £4,491m £4,557m
Underlying EBIT £766m £674m Operating profit £715m £649m
Return on sales 17.1% 14.8% Return on revenue 15.9% 14.2%
Operating business cash flow £774m £580m Cash flow from operating activities £951m £767m
Order intake(1) £4,923m £4,722m Order book £5.7bn £5.3bn
Order backlog(1) £7.2bn £6.5bn
- Sales grew by 5%(4) with growth from the Electronic Combat Solutions
and Precision Strike & Sensing Solutions businesses.
- Commercial revenues were flat as the pandemic continued to impact.
- Return on sales of 17.1% on strong operational performance and
significant contribution from 2020 acquisitions.
- Increase in operating business cash flow reflected good working
capital management and programme execution.
- Key orders secured on F-35, Precision Strike and C4ISR programmes.
Operational performance
Electronic Combat Solutions
The F-35 Lightning II programme completed deliveries for Lot 13 and has
delivered a cumulative total of more than 1,000 electronic warfare (EW)
systems. We are also supporting the Block 4 modernisation efforts under
multiple contracts worth over $870m (£642m), and we continue to
operate under a five-year Performance-Based Logistics contract to provide EW
module availability and support for the F-35 sustainment programme.
Under contract from Boeing, we continue to deliver our next-generation
electronic warfare Eagle Passive Active Warning Survivability System to
support the upgrade of the US Air Force F-15 platform and testing on F-15E
and F-15EX test aircraft at both Eglin and Edwards Air Force bases. During
2021 BAE Systems was awarded $210m (£155m) for the low-rate initial
production phase, hardware redesign for cost reduction, obsolete parts
provisioning, and other support requirements.
We are also under contract to install the Digital Electronic Warfare System
on new and existing F-15 aircraft for multiple international customers,
including the provision of hardware and software to support the first
successful flight of the F-15QA fighter under a Qatar Foreign Military Sale
programme.
We continue to collaborate with Boeing in the pursuit of all F-15 EW upgrade
opportunities, both domestic and international.
We are providing Lots 2 and 3 of the sensor hardware/software functionality
for the Long Range Anti-Ship Missile (LRASM), and in April we received a
contract totalling $117m (£86m) from Lockheed Martin for LRASM sensor
production Lots 4 and 5. We are also executing Diminishing Material Sources
contracts for the next configuration of LRASM.
Due to the sensitive nature of electronic combat systems and technology,
many of our programmes are classified. These include our work as a world
leader in electronic warfare providing next-generation defence technologies.
Countermeasure & Electromagnetic Attack Solutions
The Compass Call programme is currently executing contracts valued at more
than $1bn (£0.7bn), focused on the cross-decking of prime mission equipment
to the new EC-37B aircraft while sustaining and upgrading the existing
EC-130H fleet. Integration and test of the EC-37B mission system is ongoing,
as well as a second phase of testing to demonstrate the Small Adaptive Bank
of Electronic Resources technology on the EC-130H. The EC-37B platform is
targeted to field in 2024.
We received an indefinite delivery, indefinite quantity contract from the US
Army to provide life cycle sustainment and technical support to the Limited
Interim Missile Warning System programme. The ten-year contract has a
ceiling value of $872m (£644m).
Precision Strike & Sensing Solutions
The APKWS(®) guidance kit programme is executing at full-rate production
under an indefinite delivery contract, with awards worth over $100m (£74m)
received in the first half. Government qualification on the Block Upgrade
Variant is complete, and the new version is approved and on contract. The
upgraded guidance kits are now in production and will be delivered to
customers starting in early 2022.
Navigation and Sensor Systems was awarded a contract valued at more
than $325m (£240m) from the Defense Logistics Agency to deliver Increment 1
M-Code devices through to 2030. An additional contract option executed by
the Defense Logistics Agency in November is valued at $316m (£233m).
The Terminal High Altitude Area Defense (THAAD) seeker programme is
executing at full-rate production levels, providing critical targeting
technology that helps to protect the US and its allies from
ballistic missiles. The programme is currently working to design and
manufacture next-generation THAAD infrared seekers valued at $150m (£111m).
On 1 April, we completed the sale of BAE Systems Rokar International
Ltd., an international defence electronics company, to Elbit Systems for
approximately $31m (£22m). We continue to work with Rokar as an important
supplier under licences and other agreements.
C4ISR Systems
We continue to progress our strategic integration of last year's
acquisition to advance our presence in the communications marketplace,
bringing together technology in communications, cryptography, and navigation
to compete and grow our portfolio in joint all-domain command and control
markets. We completed a successful prototype demonstration implementing
modular open system architecture for the US Army's Enduring Fleet while
providing a path to support Future Vertical Lift and Ground platforms. We have
been competitively down selected for Airborne High Frequency Radio
Modernization with an anticipated award in 2022.
We successfully captured a highly competitive space technology development
programme. The team will demonstrate and qualify the next-generation,
radiation-hardened Application Specific Integrated Circuit (ASIC) Library
technology, and will develop the infrastructure to offer ASIC design
services. This win positions us well to continue as a leading provider in
the space domain.
We continue to experience steady growth in our signals intelligence
portfolio. Within our classified programmes, we had a successful customer
design review in April leading to future system upgrades.
Controls & Avionics Solutions
We are seeing a continued uptick in airline traffic and, more importantly, in
business travel. Consequently, demand for Original Equipment Manufacturer
deliveries and aftermarket services is showing an improvement. Long-term
fundamentals remain strong and underpin the demand for more than 40,000 new
aircraft over the next two decades. We also see a trend towards more
electric aircraft, specifically in the emerging advanced air
mobility segment, for which the business is developing energy management
and power conversion systems.
The business continues to develop the integrated flight control electronics
and remote electronic units for the new Boeing 777X aircraft family. The
flight control system is performing as expected during flight testing, and
we continue to incorporate software updates and conduct systems verification
testing.
Our engine control products, offered through FADEC International (our
joint venture with Safran Electronics & Defense) and FADEC Alliance (a
joint venture between GE Aviation and FADEC International), continue to
perform well across our entire portfolio. The LEAP(®) FADEC family achieved
a major milestone, delivering the 10,000th unit, making it our fastest
ramp-to-rate engine control product. On the military side, the GE T901
FADEC is under development, the T700 engine replacement for the UH-60 Black
Hawk and AH-64 Apache along with the US Army's Future Attack Reconnaissance
Aircraft.
Deliveries of the F-35 vehicle management computer and active inceptor
systems have successfully ramped up, and we are enabling the first US Depot
stand-up scheduled for 2022. Development of the advanced vehicle control
system for the UK Dreadnought submarine programme remains on plan.
We continue to progress and mature our autonomous control technologies
through a series of successful crewed-uncrewed teaming flight test events,
including a recently successful capstone flight demonstration event, on a US
Department of Defense funded programme. The objective of this programme is
to develop autonomous technologies and mission capabilities for US military
platforms.
Power & Propulsion Solutions
Despite the impacts on travel from the pandemic, the demand for low and
zero emission vehicles is rising as air quality and climate change ascend
the global agenda. In addition to existing low emission electric hybrid and
zero emission battery electric options, BAE Systems now offers a
hydrogen fuel cell electric propulsion system in collaboration with Plug
Power, Inc.
Hybrid bus procurements continue in cities such as Namur, Belgium and Boston,
Massachusetts, in the US, and we anticipate large procurements in
Philadelphia, Pennsylvania and Mississauga in Canada. Bus manufacturer
Nova Bus has successfully integrated our Gen3 electric drive system to power
its new LFSe+ battery electric buses and has sold these electric buses into
ten transit properties, including San Francisco Municipal Transportation
Authority, which will begin to transition its fleet from BAE
Systems-supplied electric hybrid systems to our Gen3 fully electric drive
system.
We are expanding our clean energy footprint in the maritime domain, receiving
multiple contracts to deliver low and zero emission passenger transport and
research vessels. We are taking hydrogen fuel cells to the waterways, with
Switch Maritime's Sea Change undergoing sea trials using our electric drive
propulsion system. In addition, we secured an opportunity to collaborate with
other maritime industry leaders to demonstrate our proven maritime propulsion
solutions for use on the River Thames in London. In the air domain, we
continue to progress technologies that will enable lighter weight,
cost-competitive energy storage solutions for hybrid engines in aircraft.
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 Financial glossary on
page 12.
3. International Financial Reporting Standards.
4. Constant currency basis.
Segmental performance: Platforms & Services (US)
Platforms & Services (US), with 12,300 employees(1), has operations in the
US, UK and Sweden. It manufactures and upgrades 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
- Selected to participate in the design concept phase for the US Army's
Optionally Manned Fighting Vehicle programme.
- Consistent deliveries of the M109A7 Self-Propelled Howitzer enabled
the programme to surpass 350 cumulative system deliveries.
- Received a $600m (£443m) sustainment and technical support services
contract for Armored Multi-Purpose Vehicle, and AMPV deliveries continued
against the rebaselined customer schedule.
- Amphibious Combat Vehicle deliveries against LRIP and design
development have begun on mission variants.
- Contract received worth approximately $200m (£148m) from Sweden for
127 BvS10s.
- Contract received exceeding $500m (£369m) for mid-life upgrades of
Dutch CV90s.
- US Ship Repair was significantly impacted by the pandemic, but has
seen some recent signs of recovery.
- Ordnance Systems awarded additional contracts for modernisation
projects at Holston.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS(3)
2021 2020 2021 2020
Sales £3,395m £3,503m Revenue £3,318m £3,399m
Underlying EBIT £259m £190m Operating profit £252m £183m
Return on sales 7.6% 5.4% Return on revenue 7.6% 5.4%
Operating business cash flow £287m £382m Cash flow from operating activities £351m £458m
Order intake(1) £3,236m £4,137m Order book £5.3bn £5.6bn
Order backlog(1) £5.6bn £6.1bn
- Sales grew by 3%(4) on higher combat vehicle deliveries and ramp up of
CV90 upgrade programmes.
- Return on sales grew by more than 200bps with continued recovery and
operational improvement in Combat Mission Systems and Ship Repair.
- Operating business cash flow was lower as 2020 benefited from
pandemic-related customer actions and advances on exports.
- Multiple combat vehicle programme orders of $2.7bn (£2.0bn) and
almost $700m (£517m) of new work in Ship Repair.
Operational performance
Combat Mission Systems
Combat Mission Systems continues to make progress towards achieving
consistent production throughput, with volumes at a heightened level across
multiple programmes. Throughout the period, the team has worked closely with
customers to address pandemic-related disruptions and schedule impacts.
Investments in facilities and new manufacturing technologies,
including automation and robotic welding, are delivering positive returns,
and we look to leverage these process improvements to benefit our performance
as we move to full rate production across a number of platforms.
We continue to deliver Amphibious Combat Vehicles (ACVs) to the US Marine
Corps under low-rate initial production contracts totalling approximately
$600m (£443m) for 116 vehicles, and two full-rate production contracts for
an additional 105 vehicles at a value of $552m (£408m). Design and
development has begun on new ACV mission variants to include integrating a
30mm unmanned gun system for the ACV-30 variant and studying reconnaissance
capabilities for the ACV.
On the US Army's Armored Multi-Purpose Vehicle (AMPV) programme, we
are working under production contracts worth $1.3bn (£1.0bn). Deliveries of
the five variants continued this year according to the rebaselined customer
schedule, which was contractually agreed with the Army in December. In July we
also received a contract worth up to $600m (£443m) for AMPV sustainment
and technical support services.
Progress continues on the M109A7 programme under cumulative low rate initial
production totalling approximately $1.5bn (£1.2bn) for 204 vehicle sets. We
received a $339m (£250m) full-rate production contract for 48 vehicle sets in
2020. In the second half of the year, we received early order material awards
totalling $97m (£72m) to support further production.
Work to upgrade Bradley vehicles to the A4 configuration continues.
Following several modifications, the contract is valued at $809m
(£597m) for 459 vehicles and spares.
We are executing on a $32m (£24m) prototype contract received last
year from the US Army's Rapid Capabilities and Critical Technologies Office
to integrate a hybrid-electric drive system onto Bradley Fighting Vehicles.
We continue to produce and sustain the US Army's M88 recovery vehicles under
previously awarded contracts, upgrading 43 vehicles from the M88A1 to the
M88A2 HERCULES configuration, and developing the next-generation M88A3
configuration to restore single-vehicle recovery capability. In December we
received a $79m (£58m) contract to deliver the first M88A3 prototypes.
In July, we were selected to participate in the design concept phase for
the US Army's Optionally Manned Fighting Vehicle programme.
We are producing Mk 41 Vertical Launching System (VLS) missile canisters for
the US Navy under awards totalling $350m (£258m), with a total potential
value of more than $695m (£513m) if all options are exercised. In April, we
successfully competed for a $164m (£121m), five-year contract to remain the
Navy's design agent for missile canisters and the mechanical portion of the
VLS.
Under 2019 and 2020 contract modifications, we are working to deliver Mk45
Mod 4 gun systems to the US Navy. In October, we received a $26m
(£19m) contract to provide 57mm Mk110 naval gun systems for the Navy's new
Constellation class frigates and Coast Guard Argus class patrol cutters. In
December, we received a $24m (£18m) contract to deliver Mk38 Mod 3
25mm machine gun systems designed to counter unmanned aerial gun systems to
the Navy.
Deliveries continue on a contract to provide 37 Virginia Payload Module tubes
for the US Navy's Block V Virginia Class submarines.
Ordnance Systems
We continue to operate and modernise the US Army's Radford and Holston
ammunition plants under a total of $1.7bn (£1.3bn) in modernisation
contracts. The Army has awarded a two-year extension for Radford operations as
we make progress towards a cumulative five-year extension for Radford and a
competition for the operation of Holston.
At Holston, modernisation activities continue, including the construction of a
Weak Acetic Acid Recovery Plant, multiple contracts for a natural gas-fired
steam facility, a wastewater management facility, and the design, construction
and commissioning of new production facilities. Contracts totalling $372m
£(275)m were awarded in the year for energetics facilities at Holston in
continuation of the Army's $1bn (£0.7bn) investment to increase production
capabilities.
At Radford, construction of a modern nitrocellulose facility has been
completed, and the facility is in the commissioning and product qualification
phase.
US Ship Repair
The US Ship Repair business continues to conduct modernisation and
maintenance activities for the US Navy's non-nuclear fleet. Our shipyards
and programmes were significantly impacted by the COVID-19 pandemic, though
recent trends show a lessening of those impacts, coupled with higher than
usual levels of customer-added work to existing contracts. Our
investments in operational excellence and additional resources are
delivering benefits as we address several challenged ship modernisation
programmes and work to recover from pandemic and other operational
disruptions.
During the year, we received contracts with a cumulative value of $651m
(£481m) for maintenance and modernisation, including on the USS Detroit,
USS Minneapolis-St. Paul, USS St. Louis and USS Winston S. Churchill in our
Jacksonville yard; the USS Makin Island, USS Manchester, USS Russell and USS
San Diego in our San Diego shipyard; and the USS Mitscher and
post-construction work on three LPD 17 class ships, starting with USS
Fort Lauderdale in our Norfolk shipyard.
BAE Systems Hägglunds
We are executing on a contract with the Netherlands to upgrade and
extend the life of its CV9035 fleet, including the integration of Elbit
Systems' Iron Fist Active Protection System and an anti-tank guided-missile
system. Under a 2020 contract to convert the Dutch fleet of CV90s to rubber
band track, we delivered the first vehicle on time, cost and quality in
2021. A new contract exceeding $500m (£369m) for mid-life upgrades was
received in 2021.
Work is progressing to refurbish the Swedish CV90 fleet, and deliveries
of 40 Mjölner mortar systems were finalised on time, at cost and quality.
Under a 2020 contract, we are extending the expected life of 186 Swiss Army
CV90s to 2040. Norway awarded us a contract exceeding $50m (£37m) in
February for an additional 20 vehicles. We continue to pursue the Czech
Republic's procurement for new fighting vehicles.
We received a contract worth approximately $200m (£148m) from Sweden
for 127 BvS10s. Our Beowulf unarmoured variant was selected along with
a competitor to participate in trials this year for the US Army's Cold
Weather All-Terrain Vehicle programme.
Additionally, we received a contract from the French Army to sustain and
maintain readiness of its BvS10 fleet.
BAE Systems Bofors
We continue to deliver on Swedish and US Army contracts for 155mm BONUS
ammunition, including a third order in October. The 24 additional ARCHER
systems for Sweden are nearing completion, and ARCHER successfully
demonstrated its capabilities during a US Army evaluation.
We are under multiple export contracts to deliver 40Mk4 and 57Mk3 naval gun
systems, including a recent order for five 57Mk3s and ten 40Mk4s for the UK
Royal Navy's Type 31 frigates. We are also delivering 57mm (Mk110) gun systems
to the US Navy and Coast Guard. In February, we were selected to provide 12
40Mk4s to the Belgian and Dutch navies in a joint procurement.
Weapon Systems UK
Production of 145 M777s for the Indian Army continues under a $542m
(£400m) Foreign Military Sales contract. We proposed plans to cease M777
manufacturing operations at our Barrow-in-Furness site due to
lower projected workload.
FNSS
FNSS, our land systems joint venture based in Turkey, continues to
produce 8x8 wheeled armoured vehicles for the Royal Malaysian Army.
Production has started on medium-weight tanks for delivery to Indonesia, and
work has started for specialist engineering vehicles for the Philippines.
Multiple contracts for the Turkish Armed Forces worth in excess of €800m
(£672m) are progressing. These include contracts for air defence vehicles,
assault amphibious vehicles, and special purpose 8x8 and 6x6 vehicles. In
September a contract extension was signed for a further 84 anti-tank
vehicles in addition to the 260 already delivered or in production. Work has
also started on a programme to modernise 133 armoured combat vehicles for
the Turkish Armed Forces.
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 Financial glossary on
page 12.
3. International Financial Reporting Standards.
4. Constant currency basis.
Segmental performance: Air
Air, with 29,700 employees(1), comprises the Group's UK‑based air activities
for European and International Markets, US Programmes, and development of
Future Combat Air Systems, alongside 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 programme is progressing well, with first Qatar
Typhoon flight achieved in November and deliveries on schedule to commence in
2022.
- F-35 rear fuselage production reached full rate levels, with 151
assemblies completed in the year.
- Production progressing to plan on the German Typhoon programme.
- Initial entry into service of the future electronically scanned
European Common Radar Solution was achieved in December.
- Tempest next-generation Future Combat Air System programme continues
to progress well, with initial Concept & Assessment Phase contract
secured.
- Air sector continues to work closely with industry partners and the UK
government to continue to fulfil contractual support arrangements in Saudi
Arabia.
- Australia Hunter Class Frigate programme continues through
prototyping, with good engagement with the Commonwealth to agree revised
schedule for production to commence.
- MBDA won several export orders on air platforms.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS(3)
2021 2020 2021 2020
Sales £8,321m £7,910m Revenue £6,913m £6,593m
Underlying EBIT £856m £909m Operating profit £930m £861m
Return on sales 10.3% 11.5% Return on revenue 13.5% 13.1%
Operating business cash flow £628m £718m Cash flow from operating activities £743m £917m
Order intake(1) £7,186m £6,494m Order book £14.7bn £16.5bn
Order backlog(1) £20.3bn £22.5bn
- Sales growth of nearly 6%(4), driven by F-35, Typhoon support
activity, continued ramp in production on Qatar programmes, commencement of
German Typhoon programme and MBDA volumes.
- Return on sales of 10.3% delivered by good operational performance,
with increased R&D on Tempest programme and maturity mix of projects
driving the margin reduction compared to 2020.
- Operating business cash flow reflects some utilisation of advances and
timing on supplier spend.
- Orders included initial Tempest Concept & Assessment phase,
Typhoon upgrades, further F-35 awards, strong MBDA demand and Hawk support
contract renewal in Australia.
Operational performance
European and International Markets
Activity on the 24 Typhoon and nine Hawk aircraft and associated support and
training contract for the State of Qatar is progressing well. The first five
Hawk aircraft have been accepted by the customer and entered into service at
RAF Leeming, in line with the agreement to base the Qatari Hawk aircraft in
the UK. A Qatar Typhoon aircraft completed its first flight in November,
in advance of Typhoon deliveries commencing in 2022.
Eight deliveries of major units under the Kuwait Typhoon contract, secured by
Italian Eurofighter partner Leonardo, were completed during the year. The
five remaining Kuwait major unit deliveries are planned to be completed
during 2022.
Production progresses to plan with ten front fuselages in build on the
£1.3bn German Air Force order for 38 aircraft to replace its original
Typhoon Tranche 1 aircraft, received at the end of 2020.
The UK Typhoon fleet continues to achieve the contracted flying hours under
its ten-year partnership arrangement and support to the Royal Air Force's UK
fleet of Hawk fast jet trainer aircraft continues under an interim
agreement. The follow-on arrangement for the long-term Hawk availability is
expected to be contracted in the first half of 2022.
Initial entry into service of the export standard electronically scanned
European Common Radar was achieved in December with delivery of the first
two Kuwait Typhoon aircraft by Leonardo, and this capability will be extended
to Qatar in 2022. National radar variants for the UK, German, Italian and
Spanish Air Forces will continue post completion of export standard radar
development activities. The UK continues to fund development activity for the
future UK Typhoon weapon system and sensors, as part of the Partner Nations'
commitment to the ten-year Typhoon capability enhancement programme.
Future Combat Air System
The Tempest technology maturation programme is progressing well.
During the year, the Group secured an initial £250m order for the Future
Combat Air System Concept & Assessment Phase. Working with industry
partners and the Ministry of Defence, the contract will enable development
of a range of digital concepts, embedding new tools and techniques
to design, evaluate and shape the final design and capability requirements
of Tempest.
The Defence Information business is well positioned for future opportunities
across the multi-domain, information and digital areas identified in the UK
Defence Command Paper.
The Group continues to invest in promising new and innovative technologies
for the future. Discussions are underway with a number of customers across a
range of potential services for the PHASA-35(®) solar-electric powered
unmanned aircraft. Development of the platform continues with the first
stratospheric flight planned for in 2022.
US Programmes
F-35 rear fuselage manufacturing reached full rate production during 2021
with 151 rear fuselage assemblies completed for the contracts Lots 12, 13,
14, and 15 in line with customer expectations. Pricing has now been agreed
on Lots 15 to 17.
The global F-35 sustainment strategy continues to transition towards
multi-year service agreements. In line with this, a five-year contract from
January 2021 to December 2025 was awarded during the year, covering the
provision of manpower services in support of key sustainment activities
located in both the UK and the US.
Saudi Arabia
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, with
examples of the benefits of the programme including our in-Kingdom employee
base reflecting a 75% Saudisation rate, 94% of our in-Kingdom female employees
being Saudi nationals and the development of our footprint across seven
locations, resulting in demonstrable contributions to our local communities.
The Group is reliant on the continued approval of export licences by a number
of governments in order to continue to support programme operations in the
Kingdom of Saudi Arabia. We are working closely with industry partners and
the UK government to continue to fulfil our contractual support arrangements
in the Kingdom.
BAE Systems continues to perform against the contract secured in 2018 to
provide Typhoon support services to the Royal Saudi Air Force through to the
end of 2022. Through this contract, the business also supports the
Industrialisation of Defence capabilities in Saudi Arabia.
Under the Saudi British Defence Cooperation Programme (SBDCP) agreement, the
Group discharges a number of contracts, including support to the Tornado
fleet, provision of officer and aircrew training and technician training for
the Royal Saudi Air Force, as well as technical training, engineering
and logistics services for the Royal Saudi Naval Forces.
The current five-year SBDCP funding arrangement concluded on 31
December 2021, and agreement has been reached in principle with the Saudi
Arabian government for BAE Systems to continue to provide services for a
further five years, to 31 December 2026. Negotiations regarding this have
progressed well with initial orders received to ensure continuity of
activities. Full contract award for these services is planned to be
concluded during 2022.
19 of the contracted 22 Hawk aircraft assembled in-Kingdom have now
been completed and formally accepted by the Royal Saudi Air Force, including
14 during the year. The remaining aircraft are scheduled to be completed
during the first half of 2022.
We continue to review our portfolio of interests in a number of
industrial companies in Saudi Arabia. The Saudi Arabia Military Industries
purchase of Advanced Electronics Company completed in February 2021. We
continue to explore opportunities to collaborate with key local partners,
including Saudi defence entities, to deliver further In-Kingdom Industrial
Participation, in line with the Kingdom's National Transformation Plan and
Vision 2030.
Australia
Work on the Hunter Class Frigate programme continues with progress seen
through prototyping where the first unit has successfully validated a number
of the new shipyard processes. Design Separation and the Systems Definition
Review have both been successfully achieved during the year. Work continues to
agree a revised schedule with the Commonwealth of Australia following the
announcement of an 18-month delay that will maximise ship design maturity
before production commences.
The Jindalee Operational Radar Network programme has been re-baselined and a
revised contract agreed with the customer. The programme is delivering against
this schedule and operational support to the systems continues to meet
availability requirements.
Hawk Mk127 Lead-In Fighter aircraft availability continues to meet customer
expectations for Australian Defence Force pilot training. An extension of our
In-Service-Support contract to 2031 was signed during the year, this included
a contract for the upgrade of 33 engines across the Australian Hawk fleet.
Sustainment activity continues at our F-35 South Pacific Regional Airframe
Depot at Williamtown, with the completion of the first F-35 airframe
maintenance events. The ANZAC frigate upgrade programme continues to meet
customer requirements.
Research and development activity in Australia has continued to grow, with
progress made supporting both the Boeing Australia Loyal Wingman programme,
which achieved its first flight in March 2021, and the Australian Army
assessment of autonomous M113 armoured personnel carriers.
MBDA
During 2021, MBDA has continued to win domestic and export orders, with
several key bids underway. The business is well placed to benefit from defence
spending in a number of European countries and International opportunities.
In the year, a number of new contracts were signed, including the development
of the SAMP/T NG (New Generation) ground-based air defence system for the
French and Italian customers, Aster air defence missile Mid-Life Update for
the UK and Italian customers, additional batches of MICA NG next-generation
interception, combat and self-defence missiles for the French customer, the
F-35 integration contract for Meteor/Spear and the Assessment Phase contract
for the Future Cruise/Anti-Ship Weapon (the Anglo/French cooperation programme
to replace Storm Shadow/Harpoon in the UK and SCALP/Exocet in France). In
export markets, contracts for weapons packages in Greece, Saudi Arabia and
Egypt were received.
Good progress continues on several development programmes including MICA Next
Generation, Spear Capability 3, Brimstone 3, Teseo Mk2 Evolved, Aster Block 1
New Technology, as well as the MHT battlefield engagement missiles to be
integrated on the Tiger Mk3 attack helicopter and Enforcer for the German
Armed Forces.
Looking forward
Forward-looking information for the Air reporting segment is provided on page
37.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see Financial glossary on
page 12.
3. International Financial Reporting Standards.
4. Constant currency basis.
Segmental performance: Maritime
Maritime, with 18,200 employees(1), comprises the Group's UK-based maritime
and land activities.
Operational and strategic key points
- Construction of first three City Class Type 26 frigates for the Royal
Navy is now underway.
- Canadian Surface Combatant programme entered a key design milestone in
December, ahead of moving into the next Functional Design phase.
- Fifth Astute Class submarine, Anson, launched in April, with final
installation and commissioning activities continuing to ready her for
scheduled exit in 2022.
- Construction of the first two Dreadnought Class submarines continues
to advance.
- Contract awarded and early design and concept work underway on Royal
Navy's next generation of submarines.
- Contracts worth more than £1bn received under UK Ministry of
Defence's Future Maritime Support Programme.
- Maritime Services provided preparation and support capabilities to the
UK's Carrier Strike Group ahead of, and during, its first operational
deployment.
- RBSL secured the Challenger 3 Main Battle Tank upgrade contract.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS(3)
2021 2020 2021 2020
Sales £3,416m £3,257m Revenue £3,340m £3,195m
Underlying EBIT £288m £279m Operating profit £289m £272m
Return on sales 8.4% 8.6% Return on revenue 8.7% 8.5%
Operating business cash flow £321m £243m Cash flow from operating activities £457m £317m
Order intake(1) £4,336m £3,772m Order book £9.4bn £8.5bn
Order backlog(1) £9.9bn £9.1bn
- Sales grew by 5%, driven by continued ramp in Dreadnought and Type 26
activity.
- Return on sales of 8.4% driven by continued strong operational
performance across highly complex programmes.
- Operating business cash flow reflects good programme execution and
working capital management.
- Orders included ongoing Dreadnought funding, contracts under UK
Ministry of Defence Future Maritime Support Programme, and RBSL flow down of
work on Challenger 3 Main Battle Tank programme.
Operational performance
Naval Ships
The Type 26 programme continues to progress, with construction now underway on
the first three City Class Type 26 frigates. All units of first of class,
Glasgow, have completed fabrication and the forward and aft blocks have now
been linked as one ship. The second of class, Cardiff, now has 70% of her
units in construction. Belfast, third of class, entered the manufacturing
phase at our Govan yard in June 2021 at a ceremony led by HRH Duke of
Cambridge.
The Canadian Surface Combatant Programme entered its Preliminary Design Review
in December 2021, a key design gate ahead of moving into the next Functional
Design phase of the programme. This will achieve a design consideration for
the modifications required to the Type 26 core design to serve Canada's needs.
In our Combat Systems business, the successful delivery of major upgrades to
the combat system capabilities on board both HMS Queen Elizabeth and HMS
Prince of Wales enabled Carrier Strike Group tasking whilst achieving 99.5%
equipment availability for the fleet.
Submarines
Our Submarines business is a member of the Dreadnought Alliance, working
alongside the Submarine Delivery Agency (SDA) and Rolls-Royce to deliver the
replacement for the Royal Navy's Vanguard Class, which carries the UK's
nuclear deterrent. The value of the programme to the Group to date is £7.8bn,
with additional contract funding of £1.9bn received in 2021. 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 and second
submarines continues to advance.
The major programme of investment to redevelop the Barrow site to support the
delivery of Dreadnought is progressing, with a number of newly-constructed
facilities now in operation.
Four Astute Class submarines have been delivered to the Royal Navy, while the
fifth, Anson, was launched in April. Final installation and commissioning
activities continue to ready her for exit, which is scheduled to take place in
2022. The remaining two submarines, Agamemnon and Agincourt, are at an
advanced stage of construction at our Barrow site.
The business has also commenced early design and concept work on the Royal
Navy's next generation of submarines, under an £85m contract from the
Ministry of Defence announced in September 2021. BAE Systems will work
alongside the SDA, Rolls-Royce, Babcock and other industry partners on a new
class of nuclear powered attack submarines, which will eventually replace the
Astute class. The programme currently supports approximately 250
highly-skilled jobs.
Maritime Services
Our Maritime Services business secured two HM Naval Base Portsmouth contracts,
Ship Engineering Management, and, in a joint venture with KBR, Hard Facilities
Management and Alongside Services, worth more than £1bn under the UK Ministry
of Defence's Future Maritime Support Programme (FMSP). Service delivery under
these contracts came into effect on 1 October and will continue for at least
five years. The KBS Maritime joint venture with KBR was established and is
delivering the Hard Facilities Management and Alongside Services contract.
The UK's Carrier Strike Group 2021 deployment was supported from Portsmouth
and in various locations along the deployment route. BAE Systems coordinated
the support to all vessels in the group. In addition to deployed support to
the Mediterranean, Indian Ocean and Pacific Ocean for the Carrier Strike
Group, all five of the Royal Navy's Batch 2 Offshore Patrol Vessels are being
supported around the globe by our teams.
In the Underwater Weapons business stream, the Torpedo Repair and Maintenance
contract for in-service support to the UK's Royal Navy continues to perform
well. The £270m Spearfish torpedo upgrade programme, delivered for the UK
Ministry of Defence and Royal Navy, continues and the Ministry of Defence
granted approval for Defence Munitions to proceed with the build of the
upgraded weapons in October. This represents a key milestone towards
concluding the development and initial manufacture phase of the programme.
A £119m export order for our Commander land radar was secured. The
development of a new production line at our Cowes site is underway to support
the delivery of this contract.
Techmodal, the applied data science consultancy we acquired in August 2020,
secured a number of contracts and was selected in October as the Royal Navy's
digital services programme partner for data science.
The Maritime Services business continues to support a range of customer trials
and experimentation programmes to develop and implement new technologies. In
2021, these have included Navy X trials of our autonomous RIB with HMS Argyll,
the Royal Navy's submarine firing trials of the upgraded Spearfish torpedo,
and the testing of enhanced radar capabilities during the NATO Formidable
Shield 21 exercise.
Land UK
Following the award of the Next Generation Munitions Solution (NGMS) contract
in November 2020, the business enacted plans to ensure an effective transition
between the current munitions supply contract and NGMS. Transition plans are
progressing well and the business is on-track to meet the jointly agreed
timeline for the closure of the current contract. In support of the new
contract, the business has commenced a £90m programme to update and expand
its manufacturing equipment and infrastructure.
Mobilisation of the Challenger 3 contract, secured in 2021 by the RBSL joint
venture, is progressing well. The contract, worth £300m to BAE Systems, will
see RBSL upgrade 148 Challenger 2 Main Battle Tanks into the Challenger 3
configuration for the British Army.
Challenger 3 will be a network-enabled, digital Main Battle Tank with
state-of-the-art lethality, upgraded survivability, plus world-class
surveillance and target acquisition capabilities. The vehicles will be
manufactured at RBSL's Telford facility, with support from other RBSL sites
near Bristol, Newcastle and Bovington.
The programme is expected to create and sustain more than 200 skilled jobs
within RBSL and provide opportunities to more than 60 apprentices over the
coming years. The contract will also create and sustain more than 450 jobs
across the UK supply chain, helping to protect engineering and manufacturing
skills. The Challenger 3 contract, together with the Mechanised Infantry
Vehicle contract, secured at the end of 2020, will provide workload for the
business for the next ten years.
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 Financial glossary on
page 12.
3. International Financial Reporting Standards.
Segmental performance: Cyber & Intelligence
Cyber & Intelligence, with 9,600 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
- US-based Intelligence & Security business continues to maintain
its bid pipeline, perform on existing contracts and win new orders.
- Awarded a five-year, up to $478m (£353m) Systems Engineering and
Integration Support Services contract from the US Navy Strategic Systems
Programs office.
- Awarded classified contracts from Department of Defense and
Intelligence Community customers in excess of $0.8bn (£0.6bn) to deliver
mission-enabling engineering services.
- Agreement announced for the proposed acquisition of Bohemia
Interactive Simulations, a global software developer of simulation and
training solutions for allied military customers.
Applied Intelligence
- Strong order intake and revenue growth from the government- and
defence-facing business units.
- Increasing profitability, supported by strong programme execution,
productivity and cost base optimisation. Financial Services' profitability
benefited from restructuring in 2020.
- Acquisition of In-Space Missions, a UK-based satellite and satellite
systems company, to accelerate our Space capabilities.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS(3)
2021 2020 2021 2020
Sales £1,752m £1,812m Revenue £1,752m £1,812m
Underlying EBIT £156m £135m Operating profit £152m £138m
Return on sales 8.9% 7.5% Return on revenue 8.7% 7.6%
Operating business cash flow £173m £221m Cash flow from operating activities £202m £251m
Order intake(1) £1,817m £1,987m Order book £1.0bn £1.1bn
Order backlog(1) £1.6bn £1.7bn
- Sales in Applied Intelligence were stable as growth in government and
defence businesses was offset by impact of commercial businesses disposed of
in 2020.
- US Intelligence & Security business saw sales growth of 3%
excluding the impact of exchange translation.
- Return on sales expanded by 140bps as both Applied Intelligence and
Intelligence & Security delivered strong programme performance, high
utilisation levels and more efficient cost structures.
- Operating business cash flow reflects good programme execution.
- Applied Intelligence saw high demand in its government and defence
business, with a book-to-bill(4) ratio of 1.1.
Operational performance
Intelligence & Security
Air & Space Force Solutions
On the US Air Force Intercontinental Ballistic Missile Integration Support
Contractor (ISC) programme, we continue to provide programme management,
systems engineering, integration and testing, sustainment and cyber defence
support, with cumulative funding approaching the $1.1bn (£0.8bn) contractual
ceiling. We submitted a proposal for the recompete of the programme in January
2021 for the next 18-year contract. The US government advised us that it
expects to announce the ISC 2.0 award in the first quarter of 2022. As a
result, the US Air Force approved a one-year ISC 1.0 contract extension
modification of $185m (£137m).
We were awarded Delivery Order 3 valued at $32m (£24m), taking our total
award value to $70m (£52m) on a multi-year Indefinite Delivery, Indefinite
Quantity contract to provide electronic hardware and engineering services for
a US government customer, with an expected lifecycle value of $474m (£350m).
We were awarded Lots 15 to 19 of the Network Daughter Board production on the
F-35 programme with Lockheed Martin, valued at $42m (£31m).
Integrated Defense Solutions
We were awarded a five-year, $478m (£353m) sole-source contract to continue
supporting weapon systems on board US Ohio and UK Vanguard Class submarines,
as well as future US Columbia Class and UK Dreadnought Class submarines.
Continuing more than 30 years of strong performance for the Naval Air Warfare
Center, we were awarded a five-year, $140m (£103m) follow-on contract to
provide research and development, evaluation, engineering, integration,
testing, logistics, alteration, installation, training and hardware support
services across a variety of fixed and mobile, shipboard and shore-based and
airborne platforms.
We were awarded a five-year, $68m (£50m) contract to provide air traffic
control and landing systems (ATC&LS) platform sustainment and engineering
services to develop, produce, equip, test, sustain and update key
expeditionary ATC aviation systems.
We were awarded two contracts totalling $140m (£103m) by the Defense
Logistics Agency to provide preventative and corrective maintenance for
Automated Fuel Systems around the globe.
We were awarded a five-year, Indefinite Delivery, Indefinite Quantity,
contract worth up to $154m (£114m) to support the US Navy with rapid
integration and sustainment of command, control, communications, computers,
combat systems, intelligence, surveillance and reconnaissance (C5ISR) systems.
We also were awarded a five-year, $137m (£101m) US Navy contract to provide
lifecycle sustainment of C5ISR systems, including integrated product support,
configuration management and technical and project management.
Intelligence Solutions
BAE Systems is executing on a $506m (£374m) contract to provide
industry-leading and multi-disciplinary analytic support capabilities
supporting first responders, warfighters and policy makers. These tailored
analytic services span a multitude of mission specifications and operating
environments. Services include, but are not limited to: source discovery and
collection; time-dominant and long-term analytic assessments; cartographic
production; and multi-media content generation.
We are delivering a transformative software delivery approach increasing the
pace and responsiveness of enabling business systems on a $108m (£80m)
contract provided by a US government customer. BAE Systems is leveraging a
user experience-driven design methodology to understand the nuances of
end-user requirements and accelerating capability delivery through DevSecOps.
Additionally, BAE Systems is pioneering the implementation of the Portfolio
Delivery model to ensure end-to-end utility and satisfaction across
stakeholder groups.
Following our 2020 award of one of three Phase I contracts from the US Marine
Corps to develop a state-of-the-art wargaming system for the new Wargaming
Center in Quantico, Virginia, we were subsequently down-selected as the single
prime contractor in Phase II. As the Lead Systems Integrator, we are
conducting integrated prototyping of modelling and simulation tools,
developing a cloud-based environment which will be deployed for operations
during Phase III.
We have seen strong growth in our Federal Civilian business as we continue to
execute cybersecurity and cloud programmes for agencies such as Federal
Emergency Management Agency, Cybersecurity and Infrastructure Security Agency
and the Department of Justice.
In November we announced the proposed acquisition of Bohemia Interactive
Simulations (BISim), a privately held global software developer of simulation
and training solutions for military organisations around the world. BISim is
headquartered in Orlando, Florida, with more than 325 employees in the US, UK,
Australia, the Czech Republic, and Slovakia. The acquisition is subject to
regulatory approvals and other pre-closing conditions.
Applied Intelligence
The business performed strongly in 2021, delivering revenue growth and a
further increase in profitability. We have continued to see strong levels of
demand for our products and services, as our core customers continue to invest
in building cyber, data, digital and analytical capabilities. This has
resulted in further growth in order intake, driven by our National Security
and Defence & Space business units in particular. Ongoing investment in
resourcing, learning and development has supported growth in our headcount
which, coupled with strong levels of utilisation and productivity, has enabled
us to drive significant revenue growth. Programme execution continues to be
strong and well controlled across all areas supporting underlying margin
growth. Operating costs have reduced compared with the prior year as the
impact of a restructuring and operational efficiency initiative continues to
deliver positive results.
In September we announced the acquisition of In-Space Missions, a UK-based
company that designs, builds and operates satellites and satellite systems.
This acquisition supports our ambition to accelerate our space capabilities to
include a range of satellites and systems, reflecting government
prioritisation of space to defend and protect their nations, people and
businesses in a digital world. This acquisition and associated technological
developments will further help deliver information advantage for our customers
in the continued integration of land, sea, air, space and cyber domains.
Government
The National Security business continues to grow strongly supported by
increasing government investment in operational cyber and digital
transformation within the National Security community. Key customers have
continued to demonstrate their confidence in our business through multi-year
deals and frameworks that will enable us to grow and deliver capability to
best support their strategic aims. The business continues to invest in
training and development academies in addition to recruiting experienced
cleared resources to drive future growth.
The International Government business has delivered revenue growth driven by
new work across key accounts and continued positive delivery on major
programmes. Travel limitations have had some minor impacts on delivery but
these have been largely overcome by effective remote working and ongoing
optimisation of operating costs.
The UK Central Government business has delivered significant revenue growth as
a result of a number of new account wins and ongoing involvement in a number
of major programmes across central government departments. A particularly
significant programme relates to the data and digital work being undertaken
with the UK Home Office supporting UK Border Force in its strategy to create
the most effective border in the world.
Within our Defence & Space business unit we are seeing increasing levels
of demand due to increased levels of defence funding and the UK Strategic
Command commitment to substantial investment in data, digitisation,
intelligence and cyber. This has resulted in strong demand for our solutions
in cyber and electromagnetic activities, digital transformation and complex
communications, driving an increase in order intake and revenue for the
business unit. The acquisition of In-Space Missions in addition to ongoing
organic investment is supporting our ambition to develop space capability,
recognising space as an area for increasing investment and focus for
customers. Resourcing and investment in skills remains a key focus to drive
further growth going forward.
Financial Services
The Financial Services business has delivered a significant improvement in
profitability in the year, the result of the restructuring activity completed
in 2020. Order intake has grown year on year boosted by large account wins in
North America and Europe. Ongoing investment in our market-leading NetReveal
platform continues to deliver anti-money laundering regulatory compliance and
anti-fraud capabilities to our global customer base.
Looking forward
Forward-looking information for the Cyber & Intelligence reporting segment
is provided on page 38.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see Financial glossary on
page 12.
3. International Financial Reporting Standards.
4. Ratio of Order intake to Sales.
Segmental looking forward
Electronic Systems
Electronic Systems comprises the US- and UK-based electronics activities,
including electronic warfare systems, navigation 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, space electronics and
electric drive propulsion systems.
Electronic Systems is well positioned for growth in the medium term as it
continues to address current and evolving US defence priority programmes from
its strong franchise positions in electronic warfare, navigation systems,
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 significant roles on F-35 Lightning II,
F-15 upgrade, M-Code GPS upgrades and classified programmes, as well as with
specific products such as APKWS(®). 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.
With our electric drive propulsion capabilities we are well placed to continue
to address the need for low and zero emission technology across an increasing
number of platforms.
The commercial aviation market has been negatively impacted by the pandemic
and whilst we are seeing a degree of recovery it is expected to take several
years to reach previous levels. The business has been scaled appropriately and
Electronic Systems' technology innovations are enabling the business to
maintain its long-standing customer positions and adjust as the market
evolves.
Platforms & Services (US)
Platforms & Services (US), with operations in the US, UK and Sweden,
manufactures and upgrades 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 Mission Systems is underpinned by a strong 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, M88 HERCULES recovery vehicle, the US Marine Corps' Amphibious
Combat Vehicle, 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.
In the maritime domain, the sector has a strong position on naval gun and
missile launch programmes and US Navy ship repair activities where the
business has invested in capitalised infrastructure and its facilities in key
home ports. The business remains well aligned to the US Navy's operational
strategy and projected fleet increase.
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.
Air
Air comprises the Group's UK-based air activities for European and
International Markets, US Programmes, and development of Future Combat Air
Systems, alongside 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. Production of rear fuselage assemblies for the F-35 has
reached full rate levels and is expected to be sustained at these current
levels. The business plays a significant role in the F-35 sustainment
programme in support of Lockheed Martin. 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. Our
in-Kingdom support business is expected to remain stable underpinned by
long-standing contracts renewed every five years.
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 continue 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.
It has expanded into ship design and production on the Hunter Class Frigate
programme, which will drive growth in the coming years and is pursuing a
number of further opportunities.
MBDA has a strong order backlog supporting future years' sales. Development
programmes continue to improve the long-term capabilities of the business in
air, land and sea domains.
Maritime
Maritime comprises the Group's UK-based maritime and land activities.
Maritime
The outlook is stable based on long-term contracted positions with a number of
UK domestic and international opportunities to further this outlook. Within
Submarines, the business is executing on two long-term programmes. On the
Astute Class programme, the fifth of class is undergoing final commissioning
activities and the two remaining boats are in build. On the Dreadnought
programme, manufacturing activities continue on the first two boats of a
four-boat programme. Investment continues in the Barrow facilities in order to
provide the capabilities to deliver these long-term programmes through the
decade and beyond. In shipbuilding, 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 in-service support contracts and
the contracted workshare on the Mechanised Infantry Vehicle and Challenger 3
Main Battle Tank programmes. Munitions supply continues under the Munitions
Acquisition Supply Solution partnering agreement which will be followed in
2023 by the recently-agreed 15-year Next Generation Munitions Solution.
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 with the
opportunity for modest mid-term growth, although market conditions remain
highly competitive and continue to evolve in response to shifting government
priorities. The Intelligence & Security (I&S) business will continue
to leverage its established market positions, reputation for reliable
performance and its proven digital engineering expertise to support the
government's modernisation initiatives. As a trusted partner, I&S is well
positioned to meet customer demands for innovative, cost-effective and
cyber-hardened solutions to pursue both recompete contracts and new business
across its portfolio of sustainment, system integration and modernisation
solutions for military, intelligence and Federal Civilian agency customers.
Applied Intelligence
The services and products we offer in our Government businesses ensure that we
are well placed to deliver growth as UK cyber, data and digital budgets
increase and cyber security and information advantage continue to be an
important part of a nation's security and economic prosperity.
We continue to invest in the Financial Services division to deliver growth
given the ongoing market demand for anti-fraud and regulatory compliance
solutions.
Effective from 2022, a new operating business, BAE Systems Digital
Intelligence, has been formed, bringing together many of our world-leading
digital transformation, cybersecurity, complex data analysis, and
communication and information capabilities from across the Group. This
includes the whole of the Applied Intelligence business.
This activity will enable even closer collaboration across the Group to help
our customers operate successfully, safely and efficiently in the digital
world, and in time bringing a greater range of capabilities to our customers.
Consolidated income statement
for the year ended 31 December
2021 2020
Notes £m Total £m Total
£m
£m
Continuing operations
Revenue 2 19,521 19,277
Operating costs (17,743) (17,686)
Other income 472 270
Share of results of equity accounted investments 139 69
Operating profit 2 2,389 1,930
Financial income 32 17
Financial expense (311) (351)
Net finance costs 3 (279) (334)
Profit before taxation 2,110 1,596
Taxation expense 4 (198) (225)
Profit for the year 1,912 1,371
Attributable to:
Equity shareholders 1,758 1,299
Non-controlling interests 154 72
1,912 1,371
Earnings per share 5
Basic earnings per share 55.2p 40.7p
Diluted earnings per share 54.7p 40.5p
Consolidated statement of comprehensive income
for the year ended 31 December
2021 2020
Other Retained earnings Total Other Retained earnings Total
reserves
£m
£m
reserves
£m
£m
£m
£m
Profit for the year - 1,912 1,912 - 1,371 1,371
Other comprehensive income
Items that will not be reclassified to the income statement:
Consolidated:
Remeasurements on post-employment benefit schemes - 2,451 2,451 - (1,361) (1,361)
Tax on items that will not be reclassified to the income statement - (394) (394) - 330 330
Share of the other comprehensive income of associates and joint ventures - 64 64 - (55) (55)
accounted for using the equity method (net of tax)
Items that may be reclassified to the income statement:
Consolidated:
Currency translation on foreign currency net investments - (224) - (224)
32 32
Reclassification of cumulative currency translation reserve on disposal of - (35) - (35)
subsidiary
(9) (9)
Fair value gain arising on hedging instruments during the period 11 - 11 46 - 46
Cumulative fair value (gain)/loss on hedging instruments reclassified to the (32) - (32) 42 - 42
income statement
Tax on items that may be reclassified to the income statement 4 - 4 (16) - (16)
Share of the other comprehensive income of associates and joint ventures (4) - (4) (3) - (3)
accounted for using the equity method (net of tax)
Total other comprehensive income for the year (net of tax) 2 2,121 2,123 (190) (1,086) (1,276)
Total comprehensive income for the year 2 4,033 4,035 (190) 285 95
Attributable to:
Equity shareholders (3) 3,882 3,879 (176) 213 37
Non-controlling interests 5 151 156 (14) 72 58
2 4,033 4,035 (190) 285 95
Consolidated statement of changes in equity
for the year ended 31 December
Attributable to equity holders of BAE Systems plc
Issued Share Other Retained earnings Total Non-controlling Total
share
premium
reserves
£m
£m
interests
equity
capital
£m
£m
£m
£m
£m
Balance at 1 January 2021 87 1,249 5,923 (2,616) 4,643 278 4,921
Profit for the year - - - 1,758 1,758 154 1,912
Total other comprehensive income for the year - - (3) 2,124 2,121 2 2,123
Total comprehensive income for the year - - (3) 3,882 3,879 156 4,035
Share-based payments (inclusive of tax) - - - 94 94 - 94
Cumulative fair value gain on hedging instruments transferred to the balance - - (35) - (35) - (35)
sheet (net of tax)
Ordinary share dividends - - - (777) (777) (202) (979)
Purchase of own shares (2) - 2 (371) (371) - (371)
Unclaimed assets programme proceeds - 3 - - 3 - 3
At 31 December 2021 85 1,252 5,887 212 7,436 232 7,668
Balance at 1 January 2020 87 1,249 6,156 (2,085) 5,407 104 5,511
Profit for the year - - - 1,299 1,299 72 1,371
Total other comprehensive income for the year - - (176) (1,086) (1,262) (14) (1,276)
Total comprehensive income for the year - - (176) 213 37 58 95
Share-based payments (inclusive of tax) - - - 73 73 - 73
Cumulative fair value gain on hedging instruments transferred to the balance - - (35) - (35) - (35)
sheet (net of tax)
Ordinary share dividends - - - (746) (746) (28) (774)
Partial disposal of shareholding in subsidiary undertaking - - (22) (71) (93) 144 51
At 31 December 2020 87 1,249 5,923 (2,616) 4,643 278 4,921
Consolidated balance sheet
as at 31 December
Notes 2021 2020
£m £m
Non-current assets
Intangible assets 11,716 11,745
Property, plant and equipment 2,852 2,655
Right-of-use assets 1,091 1,053
Investment property 67 128
Equity accounted investments 554 409
Other investments 76 -
Other receivables 551 506
Post-employment benefit surpluses 6 483 408
Other financial assets 305 248
Deferred tax assets 622 972
18,317 18,124
Current assets
Inventories 811 858
Trade, other and contract receivables 4,825 5,491
Current tax 71 6
Other financial assets 194 189
Cash and cash equivalents 2,917 2,768
Assets held for sale - 94
8,818 9,406
Total assets 27,135 27,530
Non-current liabilities
Loans (4,604) (4,957)
Lease liabilities (1,083) (1,020)
Contract liabilities (519) (524)
Other payables (1,248) (1,164)
Post-employment benefit obligations 6 (2,607) (4,893)
Other financial liabilities (302) (282)
Deferred tax liabilities (77) -
Provisions (331) (386)
(10,771) (13,226)
Current liabilities
Loans and overdrafts (457) (467)
Lease liabilities (212) (236)
Contract liabilities (2,874) (3,238)
Trade and other payables (4,636) (4,898)
Other financial liabilities (214) (181)
Current tax (27) (72)
Provisions (276) (291)
(8,696) (9,383)
Total liabilities (19,467) (22,609)
Net assets 7,668 4,921
Capital and reserves
Issued share capital 85 87
Share premium 1,252 1,249
Other reserves 5,887 5,923
Retained earnings/(deficit) 212 (2,616)
Total equity attributable to equity holders of BAE Systems plc 7,436 4,643
Non-controlling interests 232 278
Total equity 7,668 4,921
Approved by the Board of BAE Systems plc on 23 February 2022 and signed on its
behalf by:
C N Woodburn B M Greve
Chief Executive Group Finance Director
Consolidated cash flow statement
for the year ended 31 December
Notes 2021 2020
£m
£m
Profit for the year 1,912 1,371
Taxation expense 4 198 225
Adjustment in respect of research and development expenditure credits (16) (28)
Share of results of equity accounted investments (139) (69)
Net finance costs 279 334
Depreciation, amortisation and impairment 720 675
Gain on investment revaluation - (6)
Profit on disposal of property, plant and equipment, and investment property (192) (25)
Profit on sale and leaseback - (21)
(Gain)/loss in respect of held for sale assets and business disposals (158) 5
Cost of equity-settled employee share schemes 92 74
Movements in provisions (66) (30)
Difference between pension funding contributions paid and the pension charge (18) (1,396)
(Increase)/decrease in working capital:
Inventories 54 24
Trade, other and contract receivables 610 -
Trade and other payables, and contract liabilities (615) 122
Research and development expenditure credits - cash received 20 162
Taxation paid (234) (251)
Net cash flow from operating activities 2,447 1,166
Dividends received from equity accounted investments 57 27
Interest received 23 19
Principal element of finance lease receipts 10 10
Purchase of property, plant and equipment, and investment property (366) (385)
Purchase of intangible assets (96) (92)
Purchase of non-current other investments (15) -
Proceeds from sale of property, plant and equipment, and investment property 271 68
Proceeds from sale of non-current other investments - 19
Equity accounted investment funding (3) (2)
Purchase of subsidiary undertakings, net of cash and cash equivalents acquired (30) (1,706)
Cash flow in respect of held for sale assets and business disposals, net of 215 5
cash and cash equivalents disposed
Net cash flow from investing activities 66 (2,037)
Interest paid (247) (227)
Equity dividends paid 7 (777) (746)
Purchase of own shares (368) -
Dividends paid to non-controlling interests (202) (19)
Partial disposal of shareholding in subsidiary undertaking 28 27
Principal element of lease payments (217) (236)
Cash inflow from derivative financial instruments (excluding cash flow hedges) 61 59
Cash outflow from derivative financial instruments (excluding cash flow (149) (43)
hedges)
Cash flow from movement in cash collateral (18) (2)
Cash inflow from loans - 2,666
Cash outflow from repayment of loans (367) (506)
Net cash flow from financing activities (2,256) 973
Net increase in cash and cash equivalents 257 102
Cash and cash equivalents at 1 January 2,667 2,587
Effect of foreign exchange rate changes on cash and cash equivalents (7) (22)
Cash and cash equivalents at 31 December 2,917 2,667
Comprising:
Cash and cash equivalents 2,917 2,768
Overdrafts - (101)
Cash and cash equivalents at 31 December 2,917 2,667
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 UK-adopted International
Financial Reporting Standards (IFRS) and the Companies Act 2006 applicable to
companies reporting under IFRS. These condensed consolidated financial
statements do not comprise statutory accounts within the meaning of Section
435 of the Companies Act 2006 and should be read in conjunction with the
Annual Report 2021. The comparative figures for the year ended 31 December
2020 are not the Group's statutory accounts for that financial year. Those
financial statements have been reported upon by the Group's auditor and
delivered to the registrar of companies. The report of the auditor was
unqualified, did not include a reference to any matters to which the auditor
drew attention by way of emphasis without qualifying their report and did not
contain statements under Section 498 (2) or (3) of the Companies Act 2006.
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).
2. Segmental analysis and revenue recognition
Sales and revenue by reporting segment
Sales Deduct Add Revenue
Share of revenue of equity accounted investments
Subsidiaries' revenue from equity accounted investments
2021 2020 2021 2020 2021 2020 2021 2020
£m
£m
£m
£m
£m £m £m £m
Electronic Systems 4,491 4,557 (54) (45) 54 45 4,491 4,557
Platforms & Services (US) 3,395 3,503 (79) (108) 2 4 3,318 3,399
Air 8,321 7,910 (2,505) (2,289) 1,097 972 6,913 6,593
Maritime 3,416 3,257 (79) (65) 3 3 3,340 3,195
Cyber & Intelligence 1,752 1,812 - - - - 1,752 1,812
HQ 307 190 (271) (151) - 1 36 40
21,682 21,229 (2,988) (2,658) 1,156 1,025 19,850 19,596
Intra-group sales/revenue (372) (367) 9 6 34 42 (329) (319)
21,310 20,862 (2,979) (2,652) 1,190 1,067 19,521 19,277
Operating profit/(loss) by reporting segment
Underlying Non-recurring Amortisation of programme, customer-related and other intangible assets, and Financial and taxation expense of equity accounted investments Operating
EBIT(1)
items(2) impairment of intangibles
profit/(loss)
2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
£m
£m
£m
£m
£m
£m
£m
£m £m £m
Electronic Systems 766 674 33 15 (84) (40) - - 715 649
Platforms & Services (US) 259 190 - 7 (1) (1) (6) (13) 252 183
Air 856 909 132 - (13) - (45) (48) 930 861
Maritime 288 279 6 - (2) (4) (3) (3) 289 272
Cyber & Intelligence 156 135 (3) 3 (1) - - - 152 138
HQ (120) (150) 182 (6) - (1) (11) (16) 51 (173)
2,205 2,037 350 19 (101) (46) (65) (80) 2,389 1,930
Net finance costs (279) (334)
Profit before taxation 2,110 1,596
Taxation expense (198) (225)
Profit for the year 1,912 1,371
1. With effect from 2021, the Group adopted the underlying EBIT profitability
measure, to include charges relating to software and development intangible
amortisation, in place of the previously reported underlying EBITA measure, as
it reflects a better measure of underlying profitability, by including
amortisation of software and development intangibles as these charges are
viewed as a recurring operational cost for the business. Underlying earnings
per share has also been recalculated to ensure consistency with the updated
operational profitability measure. The underlying performance for 2020 of
segments and the Group has been re-presented on this new basis.
2. Non-recurring items in 2021 reflect a gain of £350m, comprising a gain in
HQ on the sale of the Filton and Broughton sites (£182m), gains on disposal
of Advanced Electronics Company in the Air sector (£132m, of which £63m is
attributable to non-controlling interests), and on disposal of a business in
our Electronic Systems segment (£26m), and a net £10m gain relating to
historical and current year acquisitions. Non-recurring items in 2020
comprises a settlement gain on a US pension annuity buy-out of £64m,
partially offset by acquisition-related costs of £20m, a £13m impairment
charge relating to Platforms & Services (US)'s legacy Commercial
Shipbuilding business which the business exited in 2018, a Guaranteed Minimum
Pension equalisation charge of £7m and a loss on business disposals of £5m.
3. Net finance costs
2021 2020
£m
£m
Interest income on cash and other financial instruments 29 16
Interest income on finance lease receivables 1 1
Net present value adjustments 2 -
Financial income 32 17
Interest expense on bonds and other financial instruments (206) (196)
Facility fees (3) (4)
Interest expense on lease liabilities (43) (44)
Net present value adjustments on provisions and other payables - (8)
Net interest expense on post-employment benefit obligations (65) (68)
Loss on remeasurement of financial instruments at fair value through profit or (29) (158)
loss(1,2)
Foreign exchange gains(2,3) 35 127
Financial expense (311) (351)
Net finance costs (279) (334)
1. 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.
2. The net gain or loss on remeasurement of financial instruments at fair
value through profit or loss and the net gain or loss on foreign exchange are
presented within finance costs as the gains and losses relate to the same
underlying transactions.
3. The foreign exchange gains primarily reflect exchange rate movements on US
dollar-denominated borrowings.
Additional analysis
2021 2020
£m
£m
Net finance costs:
Group (279) (334)
Share of equity accounted investments (27) (32)
Total of Group and equity accounted investments' finance costs (306) (366)
Analysed as:
Underlying net interest expense:
Group (220) (235)
Share of equity accounted investments (21) (20)
(241) (255)
Other:
Group:
Net interest expense on post-employment benefit obligations (65) (68)
Fair value and foreign exchange adjustments on financial instruments and 6 (31)
investments
Share of equity accounted investments:
Net interest expense on post-employment benefit obligations (2) (2)
Fair value and foreign exchange adjustments on financial instruments and (4) (10)
investments
Total of Group and equity accounted investments' finance costs (306) (366)
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.
2021 2020
£m
£m
Profit before taxation 2,110 1,596
UK corporation tax rate 19% 19%
Expected income tax expense (401) (303)
Effect of tax rates in foreign jurisdictions, including US state taxes (56) (45)
Expenses not tax effected (5) (6)
Income not subject to tax 70 54
Research and development tax credits 23 12
Non-recurring items 48 (1)
Chargeable gains (3) (1)
Utilisation of previously unrecognised tax losses 2 1
Current year losses not tax effected - (3)
Adjustments in respect of prior years 109 44
Adjustments in respect of equity accounted investments 26 13
Tax rate adjustment 10 20
Other (21) (10)
Taxation expense (198) (225)
Calculation of the underlying effective tax rate
2021 2020
£m
£m
Profit before taxation 2,110 1,596
Add back: Taxation expense of equity accounted investments 38 48
(Deduct): Taxable non-recurring items (347) -
(Deduct)/add back: Non-taxable non-recurring items (3) 4
Adjusted profit before taxation 1,798 1,648
Taxation expense (198) (225)
Taxation expense of equity accounted investments (38) (48)
Exclude: One-off tax benefit(1) (94) -
Exclude: Taxation adjustments in respect of taxable non-recurring items 19 -
Exclude: Tax rate adjustment (10) -
Adjusted taxation expense (including equity accounted investments) (321) (273)
Underlying effective tax rate 18% 17%
1. The one-off tax benefit of £94m in 2021 is in respect of agreements
reached regarding the exposure arising from the April 2019 European Commission
decision regarding the UK's Controlled Foreign Company regime.
The Group's underlying effective tax rate is sensitive to the geographic mix
of profits and may be impacted when multiple territories implement the
Organisation for Economic Co-operation and Development's Base Erosion and
Profit Shifting (BEPS) 2 model guidance. It is not currently possible to
accurately assess the impact of the model rules, but we will continue to
monitor their progress as they proceed towards statutory enactment.
5. Earnings per share
2021 2020
£m Basic Diluted pence £m Basic Diluted pence
pence
per share
pence
per share
per share
per share
Profit for the year attributable to equity shareholders 1,758 55.2 54.7 1,299 40.7 40.5
Add back/(deduct):
Amortisation of programme, customer-related and other intangible assets, and 84 38
impairment of intangibles, post tax(1)
Net interest expense on post-employment benefit obligations, post tax(1) 55 58
Fair value and foreign exchange adjustments on financial instruments and (1) 34
investments, post tax(1)
Non-recurring items attributable to shareholders, post tax(2) (279) (15)
Underlying earnings, post tax 1,617 50.7 50.4 1,414 44.3 44.0
One-off tax benefit (94) -
Underlying earnings, excluding 2021 one-off tax benefit 1,523 47.8 47.4 1,414 44.3 44.0
Millions Millions Millions Millions
Weighted average number of shares used in calculating basic earnings per share 3,187 3,187 3,191 3,191
Incremental shares in respect of employee share schemes 24 19
Weighted average number of shares used in calculating diluted earnings per 3,211 3,210
share
1. The tax impact is calculated using the underlying effective tax rate of 18%
(2020 17%). The calculation of the underlying effective tax rate is shown in
note 4.
2. In 2021, £63m of the gain on disposal of AEC was attributable to
non-controlling interest. Therefore, only the gain attributable to
shareholders has been removed in calculating the underlying earnings
attributable to shareholders. See note 12 for more details. The tax on
non-recurring items has been determined using the actual tax due on those
items, see note 4 for details.
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 51. 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 Main Scheme as at 31 October
2019.
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 at schemes as at
31 October 2019 31 March 2020
£bn
£bn
Market value of assets 20.6 2.1
Present value of liabilities (22.5) (2.0)
Funding (deficit)/surplus (1.9) 0.1
Percentage of accrued benefits covered by the assets at the valuation date 92% 105%
The valuations in 2019 and 2020 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 - 91
Life expectancy of a male currently aged 45 (years) 87 - 91
Life expectancy of a female currently aged 45 (years) 89 - 92
The discount rate assumptions used in the 2019 and 2020 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 £50m 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
£187m 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 2021.
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 2021, total employer contributions to the Group's pension schemes were
£324m (2020 £1,701m), including amounts funded by equity accounted
investments of £39m (2020 £133m), and included approximately £90m (2020
£1,422m) of deficit recovery payments in respect of the UK schemes and no
contributions (2020 £70m) in respect of the US schemes.
The Group does not plan to make any cash contributions to the US pension
schemes in 2022.
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
2021 2020 2019 2021 2020 2019
Financial assumptions
Discount rate - past service (%) 1.9 1.4 2.1 2.8 2.4 3.1
Discount rate - future service (%) 1.9 1.6 2.2 2.8 2.4 3.1
Retail Prices Index (RPI) inflation (%) 3.1 2.7 2.8 n/a n/a n/a
Rate of increase in salaries (%) 3.1 2.7 2.8 n/a n/a n/a
Rate of increase in deferred pensions (%) 2.4/3.1 2.0/2.7 2.0/2.8 n/a n/a n/a
Rate of increase in pensions in payment (%) 1.7 - 3.7 1.6 - 3.6 1.5 - 3.6 n/a n/a n/a
Demographic assumptions
Life expectancy of a male currently aged 65 (years) 86 - 89 86 - 88 87 - 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) 86 - 90 87 - 89 88 - 89 87 87 87
Life expectancy of a female currently aged 45 (years) 89 - 91 89 - 91 89 - 91 89 88 89
Summary of movements in post-employment benefit obligations
UK US and Total
£m
other
£m
£m
Total net IAS 19 deficit at 1 January 2021 (4,362) (483) (4,845)
Actual return on assets excluding amounts included in net interest expense 2,274 49 2,323
Decrease in liabilities due to changes in financial assumptions 1,145 220 1,365
Decrease/(increase) in liabilities due to changes in demographic assumptions 74 (8) 66
Experience losses (1,109) (8) (1,117)
Contributions in excess of service cost 64 (9) 55
Past service cost - plan amendments (3) - (3)
Net interest expense (56) (10) (66)
Transfer to other investments(1) - (56) (56)
Foreign exchange adjustments - 6 6
Movement in other schemes - (14) (14)
Total net IAS 19 deficit at 31 December 2021 (1,973) (313) (2,286)
Allocated to equity accounted investments 162 - 162
Group's share of net IAS 19 deficit excluding Group's share of amounts (1,811) (313) (2,124)
allocated to equity accounted investments at 31 December 2021
1. £56m of the US pension assets have been reclassified as Other Investments.
These relate to deferred compensation schemes which hold assets associated
with the US unfunded pension obligation.
Sensitivity analysis
The sensitivity information has been derived using scenario analysis from the
actuarial assumptions as at 31 December 2021 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)
£bn £bn
Discount rate:
0.1 percentage point increase 0.5 (0.3)
0.1 percentage point decrease (0.6) 0.3
0.5 percentage point increase 2.5 (1.5)
0.5 percentage point decrease (2.9) 1.7
Inflation:
0.1 percentage point increase (0.5) 0.2
0.1 percentage point decrease 0.5 (0.2)
0.5 percentage point increase (1.5) 1.1
0.5 percentage point decrease 1.5 (1.0)
1.0 percentage point increase (3.0) 2.4
1.0 percentage point decrease 2.9 (1.9)
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)
£bn
Life expectancy:
One-year increase (1.4)
One-year decrease 1.4
1. Before allocation to equity accounted investments.
7. Equity dividends
2021 2020
£m
£m
Interim 13.8p dividend per ordinary share paid in the year in respect of year - 444
ended 31 December 2019
Final 14.3p dividend per ordinary share paid in the year (2020 nil) 461 -
Interim 9.9p dividend per ordinary share paid in the year (2020 9.4p) 316 302
777 746
After the balance sheet date, the directors proposed a final dividend of 15.2p
per ordinary share. The dividend, which is subject to shareholder approval,
will be paid on 1 June 2022 to shareholders registered on 22 April 2022. The
ex-dividend date is 21 April 2022.
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 11 May 2022.
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 will realise in the
future.
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
2021 2020
Carrying amount Fair Carrying amount Fair
£m
value
£m
value
£m
£m
Financial instruments measured at fair value:
Non-current
Other investments at fair value through profit and loss 76 76 - -
Other financial assets 305 305 248 248
Other financial liabilities (302) (302) (282) (282)
Current
Other financial assets 194 194 189 189
Money market funds 1,171 1,171 966 966
Other financial liabilities (214) (214) (181) (181)
Financial instruments not measured at fair value:
Non-current
Loans (4,604) (5,045) (4,957) (5,737)
Current
Cash and cash equivalents (excluding money market funds) 1,746 1,746 1,802 1,802
Loans and overdrafts (457) (462) (467) (479)
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 classified 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 £203m (2020 £226m).
Credit risk
For trade receivables, contract receivables, amounts due from equity accounted
investments and finance lease receivables, the Group measures a provision for
expected credit losses at an amount equal to lifetime expected credit losses,
estimated by reference to past experience and relevant forward-looking
factors.
The Group's assessment is that credit risk in relation to defence-related
sales to government customers or subcontractors to governments is extremely
low as the probability of default is insignificant; therefore the provision
for expected credit losses is immaterial in respect of receivables from these
customers. For all non-government commercial customers, the Group assesses
expected credit losses, including risk arising amid the COVID-19 pandemic;
however, this is not considered material to the financial statements. The
Group considers that default has occurred when a receivable is past 180 days
overdue, because historical experience indicates that these receivables are
generally not recoverable. The Group recognises a provision of 100% against
all receivables over 180 days past due unless there is evidence that
individual receivables in this category are recoverable.
For contract receivables, amounts due from equity accounted investments and
finance lease receivables the expected credit loss provision is immaterial as
the probability of default is insignificant.
Cash management
Cash flow forecasting is performed by the businesses on a monthly basis. The
Group monitors a rolling forecast of its liquidity requirements to ensure that
there is sufficient cash to meet operational needs and maintain adequate
headroom.
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
2021
2020
£m
£m
Sales to related parties 1,190 1,067
Purchases from related parties 586 831
31 December 31 December
2021
2020
£m
£m
Amounts owed by related parties 34 69
Amounts owed to related parties(1) 1,137 1,379
1. At 31 December 2021, £907m (2020 £967m) was owed by BAE Systems plc and
£230m (2020 £412m) by other Group subsidiaries.
11. Acquisition of businesses
Businesses acquired during 2021
On 4 March 2021, the Group acquired 100% of the share capital of Pulse Power
and Measurement Limited for a consideration of £21m. The provisional net
assets acquired, including intangible assets identified, have been valued at
£11m, resulting in a provisional goodwill of £10m.
On 14 September 2021, the Group acquired 100% of the share capital of In-Space
Missions Limited for a fair value consideration of £15m. The provisional net
assets acquired, including intangible assets identified, have been valued at
£5m, resulting in a provisional goodwill of £10m.
Businesses acquired during 2020
All fair values provisionally disclosed in 2020 have been finalised, with no
change in the provisional values recognised.
On 2 May 2020, the Group completed the acquisition of the assets and
liabilities of Raytheon Technologies Corporation's Airborne Tactical Radios
business (Airborne Tactical Radios business), for consideration of £216m. The
acquisition augments the Group's Electronic Systems portfolio in airborne
communications with broad-spectrum, multi-band, multi-channel radios that
feature robust anti-jamming and encryption capabilities.
On 31 July 2020, the Group completed the acquisition of the assets and
liabilities of the Collins Aerospace Military Global Positioning System
business (Military GPS business) from Raytheon Technologies Corporation, for
consideration of £1,472m. The acquisition augments the Group's Electronic
Systems portfolio, adding technology that advances the Group's existing GPS
and precision-guided munitions capabilities.
On 19 August 2020, the Group completed the acquisition of Techmodal Limited
(Techmodal), a UK-based consultancy and digital services company, for
consideration of £38m. Techmodal has a number of long-term contracts with the
UK Ministry of Defence and complements the Group's existing digital, data and
technical service capabilities.
The results and financial position of all three acquired businesses have been
consolidated from the date of acquisition.
Purchase consideration and fair value of net assets acquired
The fair values of the assets and liabilities acquired and the consideration
for all acquisitions in 2020 were as follows:
Airborne Tactical Radios business Military GPS business Techmodal Total
£m
£m
£m
£m
Identifiable intangible assets 84 468 14 566
Property, plant and equipment 8 20 - 28
Right-of-use assets 3 9 - 12
Inventories 4 53 - 57
Trade, other and contract receivables 13 28 3 44
Cash and cash equivalents - - 5 5
Lease liabilities (3) (9) - (12)
Trade and other payables (8) (17) (4) (29)
Deferred tax - - (3) (3)
Provisions (3) (1) - (4)
Net identifiable assets acquired 98 551 15 664
Goodwill arising 118 921 23 1,062
Net assets acquired 216 1,472 38 1,726
Satisfied by:
Cash 216 1,472 23 1,711
Contingent consideration - - 15 15
Total consideration 216 1,472 38 1,726
The contingent consideration due for Techmodal has been finalised, and
resulted in a gain being recognised in non-recurring items of £6m.
The net outflow of cash in respect of the purchase of businesses in 2020 was
as follows:
Airborne Tactical Radios business Military GPS business Techmodal Total
£m
£m
£m
£m
Cash consideration 216 1,472 23 1,711
Cash and cash equivalents acquired - - (5) (5)
Net cash outflow in respect of the purchase of businesses 216 1,472 18 1,706
The goodwill recognised on these acquisitions is primarily attributable to
expected synergies.
12. Business disposals
Business disposals during 2021
Advanced Electronics Company
In December 2020, the Group's Overhaul and Maintenance Company (OMC) entered
into a heads of terms for the sale of its 50% shareholding in Advanced
Electronics Company Limited (AEC) to Saudi Arabian Military Industries, and
was reported in the financial statements for the year ending 31 December 2020
as assets held for sale. The sale was completed on 23 February 2021. AEC was
included in the Air segment.
The gain recognised on disposal was as follows:
2021
£m
Cash received or receivable:
Cash 182
Deferred consideration 32
Total disposal consideration 214
Carrying amount of net assets sold (see below) (91)
Gain on sale before tax and reclassification of foreign currency translation 123
reserve
Reclassification of foreign currency translation reserves 9
Gain on sale before tax 132
Attributable to:
Equity shareholders 69
Non-controlling interests 63
132
Net cash inflow arising on disposal:
Cash consideration received 193
Less: cash and cash equivalents disposed -
193
Of the total consideration receivable, £32m was deferred to be received over
the 18 months following disposal. £11m of this contingent consideration was
received in 2021 in relation to the sale of AEC, in addition to the cash
received on disposal. The gain on disposal has been included in the profit for
the period from continuing operations, as a component of Other income, and
recognised as a non-recurring item.
The Group's share of the net assets of AEC as at the date of disposal was as
follows:
£m
Intangible assets including goodwill 16
Property, plant and equipment 8
Equity accounted investments 67
Net assets disposed 91
Attributable to:
Equity shareholders 69
Non-controlling interests 63
132
Net cash inflow arising on disposal:
Cash consideration received 193
Less: cash and cash equivalents disposed -
193
Of the total consideration receivable, £32m was deferred to be received over
the 18 months following disposal. £11m of this contingent consideration was
received in 2021 in relation to the sale of AEC, in addition to the cash
received on disposal. The gain on disposal has been included in the profit for
the period from continuing operations, as a component of Other income, and
recognised as a non-recurring item.
The Group's share of the net assets of AEC as at the date of disposal was as
follows:
£m
Intangible assets including goodwill 16
Property, plant and equipment 8
Equity accounted investments 67
Net assets disposed 91
BAE Systems Rokar International
On 1 April 2021 BAE Systems agreed the sale of BAE Systems Rokar International
Limited (Rokar) for $31m (£22m) net of cash held by Rokar. This resulted in
consideration received of $47m (£34m), a disposal of net assets of $12m
(£8m), including $16m (£12m) of cash, and a gain before tax on disposal of
$35m (£26m) which has been included in the profit for the period from
continuing operations as a component of Other income, and recognised as a
non-recurring item. Rokar was within the Electronic Systems segment.
Business disposals during 2020
Silversky
The divestment of the Silversky business completed on 2 November 2020.
Silversky was included in the Cyber & Intelligence segment.
The loss recognised on the disposal of Silversky was as follows:
2020
£m
Fair value of consideration received 14
Net assets disposed (51)
Expenses incurred on disposal (3)
Cumulative currency translation gain 35
Loss on disposal (5)
Net cash inflow arising on disposal:
Cash consideration received 10
Less: cash and cash equivalents disposed (5)
5
13. Events after the reporting period
There were no events after the reporting period which would materially impact
the balances reported in this Annual Report.
14. Annual General Meeting
This year's Annual General Meeting will be held on 5 May 2022. 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
2022.
15. Other information
The financial information for the year ended 31 December 2021 contained in
this preliminary announcement was approved by the Board on 23 February 2022.
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 2020 have been delivered to
the Registrar of Companies. Statutory accounts for the year ended 31 December
2021 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
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