REG - BAE SYSTEMS PLC - Doc re. Annual Financial Report <Origin Href="QuoteRef">BAES.L</Origin> - Part 4

BAE SystemsAnnouncement

18/03/2015 12:51

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Naval Base
contract. 
 
Combat Vehicles (UK) provides upgrades and support to the British Army and
international customers. 
 
Munitions focuses on the design, development and manufacture of a
comprehensive range of products, servicing its main customer, the UK Ministry
of Defence, as well as international customers. The business is a principal
supplier of general munitions to the British armed forces. 
 
OPERATIONAL AND STRATEGIC HIGHLIGHTS 
 
Eurofighter partner nation commitment to the full integration of the Captor
E-Scan radar onto Typhoon aircraft 
 
Major milestone achieved with floating of the aircraft carrier, HMS Queen
Elizabeth 
 
£348m contract awarded to construct three new River Class Offshore Patrol
Vessels for the Royal Navy 
 
First two Khareef Class corvettes for Oman achieved final acceptance and third
achieved interim acceptance 
 
Awarded the five-year, £600m Maritime Support Delivery Framework contract for
support to the Royal Navy 
 
£270m order received for the upgrade of Spearfish torpedoes 
 
Third Astute Class submarine, Artful, launched in May 
 
Announced potential management redundancies in the Military Air & Information
business to align with its strategy and to improve competitiveness 
 
Operational performance 
 
Military Air & Information 
 
In the year, deliveries of Typhoon Tranche 2 aircraft to the four Eurofighter
partner nations totalled 16, bringing the cumulative number of Tranche 2
aircraft delivered to 219 of the contracted 236. Eighteen Tranche 3 front
fuselage sub-assemblies were manufactured in the year. During 2014, there have
been certain issues regarding acceptance of Typhoon Tranche 3 aircraft. Whilst
the UK customer has continued to accept the aircraft, acceptances by Germany,
Italy and Spain are held pending the completion of further technical and
safety reviews by the NATO Eurofighter and Tornado Management Agency, which
are planned to be concluded during the first quarter of 2015. 
 
Work on the Omani Typhoon and Hawk aircraft contract continues, with
sub-assembly manufacture for both aircraft types commencing and first
deliveries on schedule for 2017. 
 
In July, BAE Systems was awarded a three-year, £72m contract by the UK
Ministry of Defence to de-risk E-Scan radar development for the Royal Air
Force's Typhoon aircraft fleet. In November, the four partner nations placed a
contract with Eurofighter for the full integration of the Captor E-Scan radar
onto Typhoon aircraft and, as the system integrator, this award is worth
£365m. 
 
BAE Systems continues to support its UK and European customers' Typhoon and
Tornado aircraft and their operational commitments. The business supports its
UK customer through availability-based service contracts. A £125m contract
extension was received in the year to provide support to the Royal Air Force's
Tornado GR4 fleet until the aircraft's planned retirement in 2019. In
December, BAE Systems was awarded a £112m contract to extend the Typhoon
Availability Service for the in-service support of the Royal Air Force's
Typhoon fleet by 15 months. 
 
On the F-35 Lightning II programme, BAE Systems has continued to deliver
aircraft fuselages for the sixth and seventh Low-Rate Initial Production
(LRIP) contracts, with a total of 45 assemblies delivered to Lockheed Martin
in 2014. Contract award for LRIP 8 for 43 assemblies was received in the year
and manufacturing commenced. Proposals for LRIP 9 and 10 have been submitted
with negotiations to commence in 2015. 
 
Support continues to be provided to users of Hawk trainer aircraft around the
world. In 2014, the Indian Navy and Air Force received four and 15 Hawk
aircraft, respectively, built under the Batch 2 licence for 57 aircraft by
Hindustan Aeronautics Limited. A response to a proposal for an additional 20
Hawk aircraft for the Indian Air Force's aerobatic display team has been
submitted. 
 
Working jointly with Dassault Aviation, progress is being made in maturing and
demonstrating critical technology and operational aspects for an Unmanned
Combat Air System. In November, the signature of a two-year feasibility study,
worth a total of £120m to the six participating companies, was announced by
the UK and French governments to continue joint Future Combat Air System
technology development. The contract value to BAE Systems is £34m. 
 
Taranis, the stealthy unmanned combat air vehicle demonstrator designed and
built by BAE Systems with UK industry partners and the Ministry of Defence,
has successfully completed a second phase of flight testing. During these
latest tests, Taranis flew in a fully stealthy configuration. 
 
The business undertook a review to ensure that its organisational operating
model was aligned with its strategy and to improve competitiveness, which
resulted in the announcement of 440 potential management redundancies in
October. 
 
Maritime 
 
The consolidation of BAE Systems' UK shipbuilding operations in Glasgow is
progressing to plan, with shipbuilding operations at Portsmouth ceasing in the
second half of 2014. The restructuring programme concludes in 2016. 
 
BAE Systems has continued to negotiate contracts with the Ministry of Defence
to enact the restructuring of its naval ships business. During the year,
contracts were signed for the recovery of associated rationalisation costs and
the revised target cost arrangements for the delivery of the Queen Elizabeth
Class aircraft carriers. In August, BAE Systems was awarded a £348m contract
to construct three new River Class Offshore Patrol Vessels for the Royal Navy,
sustaining shipbuilding skills between the Carrier programme and the start of
manufacture for the anticipated Type 26 frigate programme. 
 
On the aircraft carrier programme, HMS Queen Elizabeth was officially named by
Her Majesty The Queen and floated for the first time at Rosyth in July. The
second ship block build programme is now 80% complete and assembly at Rosyth
has commenced. Under the revised target cost arrangements, the industrial
participants' fee includes a 50:50 risk share arrangement providing greater
cost performance incentives. 
 
The assessment phase contract for the Type 26 frigate continues, with over 700
employees now working on the programme. A contract for the demonstration phase
of the programme, including procurement of long lead items, is expected to be
placed in the first half of 2015, with a full manufacture contract anticipated
in 2016. 
 
The third Khareef Class corvette for the Royal Navy of Oman achieved interim
acceptance in May, with final acceptance planned for 2015. The first two ships
completed their final acceptance trials in Oman during the second half of the
year. 
 
The five-year, £600m Maritime Support Delivery Framework contract for the
delivery of services at Portsmouth Naval Base and support to half of the Royal
Navy's surface fleet was secured in the year. 
 
In June, the Ministry of Defence awarded BAE Systems a £70m contract extension
to manage the support, maintenance and upgrade of the Type 45 destroyers at
Portsmouth Naval Base and on all their operations in the UK and globally
through July 2014 to November 2016. 
 
A £270m contract for upgrade of the Spearfish torpedo was secured in
December. 
 
Artful, the third of class attack submarine for the Royal Navy, was launched
in May. Progress continues on the remaining four boats, with further funding
of £207m received in the year. 
 
Progress continues on the design and development phase of the Successor
submarine programme, the potential replacement to the Vanguard Class fleet,
with more than 1,400 people now employed on the programme. Initial long lead
orders were placed during 2014. The Ministry of Defence has agreed to fund
£389m of capital investment in preparation for the Successor manufacturing
programme. 
 
Combat Vehicles (UK) 
 
Following delivery of all 60 Terrier combat engineering vehicles to the
customer, 55 of these were completed to the final accepted build standard in
the year, with the final five due for completion at the Telford site in 2015.
The Newcastle facility closed at the end of 2014 following delivery of the
Terrier vehicles. 
 
Orders totalling £106m for ongoing support activity were received in the
year. 
 
Munitions 
 
Following submission of the next five-year pricing proposal for its 15-year
Munitions Acquisition Supply Solution partnering agreement with the Ministry
of Defence, negotiations continue with a contract amendment expected in 2015. 
 
Transformation of the Munitions facilities under the original £200m capital
programme was completed during the year. 
 
FINANCIAL PERFORMANCE 
 
                         2014     20131    
 Sales2             KPI  £6,623m  £7,174m  
 Underlying EBITA3  KPI  £772m    £915m    
 Return on sales         11.7%    12.8%    
 Cash inflow4       KPI  £173m    £60m     
 Order intake2      KPI  £5,386m  £6,085m  
 Order backlog2          £20.1bn  £21.6bn  
 
 
The year's sales2 of £6.6bn were 8% lower than 2013, or 4% excluding last
year's retrospective trading of price escalation on the Salam Typhoon
programme. This reduction is largely due to a lower level of intra-group
trading in 2014 and, therefore, has no impact to the total Group numbers. 
 
Return on sales was at 11.7% (2013 12.8%). 
 
Cash performance was better than expected with a cash inflow4 of £173m (2013
£60m). Consumption of customer advances was at a lower level in the year than
anticipated. Provisions were utilised against costs incurred on
rationalisation and on the Oman Offshore Patrol Vessel programme. 
 
Order backlog2 reduced to £20.1bn (2013 £21.6bn) primarily from trading on the
Typhoon aircraft, Indian Hawk and aircraft carrier programmes. 
 
1. Re-presented for the transfer of the UK Munitions business from Land &
Armaments from 1 January 2014. 
 
2. Including share of equity accounted investments. 
 
3. Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items (see page
23). 
 
4. Net cash inflow from operating activities after capital expenditure (net),
financial investment and dividends from equity accounted investments. 
 
LOOKING FORWARD 
 
Platforms & Services (UK) has a strong order backlog of long-term committed
programmes and an enduring support business. 
 
In Military Air & Information, sales are underpinned by aircraft production on
Typhoon and F-35 Lightning II, and in-service support for existing and legacy
combat and Hawk trainer aircraft. There are a number of opportunities to
secure future Typhoon export sales. 
 
In Maritime, sales are underpinned by the design and subsequent build of the
Successor submarine and Type 26 frigates, and the build of the Queen Elizabeth
Class aircraft carriers and Astute Class submarines. The through-life support
of these platforms, plus the Type 45 destroyer, together with their associated
command and combat systems, provides a sustainable business in technical
services and mid-life upgrades. 
 
Combat Vehicles (UK) continues to provide engineering support to a large
installed base of vehicles across UK and export markets. The business is
pursuing obsolescence and upgrade programmes for the Challenger 2 main battle
tank and land bridging systems. 
 
The Munitions business is underpinned by the 15-year Munitions Acquisition
Supply Solution partnering agreement with the Ministry of Defence secured in
2008. 
 
PLATFORMS & SERVICES (INTERNATIONAL) 
 
Platforms & Services (International) comprises the Group's businesses in Saudi
Arabia, Australia and Oman, together with its 37.5% interest in the
pan-European MBDA joint venture. 
 
In Saudi Arabia, the business provides operational capability support to the
country's air and naval forces on UK/Saudi government-to-government contracts.
Contracts include multi-year agreements, such as the Saudi British Defence
Co-operation Programme and Salam Typhoon programme. 
 
In Australia, the business delivers production, upgrade and support programmes
for customers in the defence and commercial sectors across the air, naval and
land domains. Services contracts include the provision of sustainment,
training solutions and upgrades. Platforms contracts include naval ships, such
as the Landing Helicopter Dock programme for the Australian Navy. Contracts
are often multi-year and fixed price. 
 
In Oman, the business is developing its position building on a long history of
relationships with the Omani armed forces, through the provision, support and
upgrade of defence platforms and cyber security services. Resulting orders are
placed with the relevant reporting segments. 
 
MBDA is a leading global prime contractor of missiles and missile systems
across the air, naval and land domains. 
 
OPERATIONAL AND STRATEGIC HIGHLIGHTS 
 
11 Typhoon aircraft delivered to Saudi Arabia under the Salam programme 
 
Continued support to the operational capabilities of the Royal Saudi Air Force
and Royal Saudi Naval Forces under the Saudi British Defence Co-operation
Programme 
 
Reorganisation of portfolio interests in industrial companies in the Kingdom
of Saudi Arabia and enhanced relationship with Riyadh Wings 
 
Customer acceptance of the first of two Landing Helicopter Dock ships in
Australia 
 
Four-year, A$190m (£100m) contract awarded to provide in-service support for
the two Landing Helicopter Docks 
 
MBDA secured a UK/French government order worth E600m (£466m) for the joint
development and production of the Future Anti-Ship Guided Weapon 
 
E301m (£234m) contract secured by MBDA for the Advanced Short Range Air-to-Air
Missile (ASRAAM) for India's Jaguar aircraft fleet 
 
Operational performance 
 
Saudi Arabia 
 
On the Salam Typhoon programme, UK final assembly of the 72 aircraft
continues. At 31 December 2014, 45 aircraft have been delivered to the
customer. Work on enhancing Typhoon's capability is progressing to schedule. 
 
The five-year Typhoon support contract received in 2013 is operating well with
all contractual Key Performance Indicators met during the year. The first of
30 aircraft completed its scheduled maintenance and upgrade under a contract
also received in 2013. 
 
Through the Saudi British Defence Co-operation Programme (SBDCP), the business
continues to support the operational capabilities of the Royal Saudi Air Force
(RSAF) and Royal Saudi Naval Forces (RSNF). The modernisation of the RSAF's
training aircraft fleet continues to programme, with the first deliveries of
Pilatus PC-21 aircraft made in 2014 and Hawk aircraft progressing through
manufacturing. Training delivery and support under five-year contracts awarded
in 2012 continue. 
 
The orders received in 2013 for the upgrade of Tornado aircraft and equipment
procurement are proceeding to plan. During the year, the business received a
contract for Typhoon role equipment. 
 
Under the minehunter mid-life update programme, the second ship is scheduled
for acceptance back into the RSNF fleet in 2015. 
 
A planned reorganisation of the Group's portfolio of interests in a number of
industrial companies in Saudi Arabia was announced during the year, enhancing
its existing relationship with Riyadh Wings Aviation Academy LLC. As part of
the reorganisation, BAE Systems acquired an additional 59% shareholding in
Saudi Development and Training Company. This reorganisation is being
undertaken in support of BAE Systems' strategy to expand further its
In-Kingdom Industrial Participation programme, and to promote training,
development and employment opportunities for Saudi national personnel. 
 
In 2014, the Group's In-Kingdom industrial partner, Advanced Electronics
Company, was accredited as an approved maintenance and repair agent for
Typhoon avionics equipment. 
 
Australia 
 
The customer has formally accepted and taken delivery of the first Landing
Helicopter Dock warship, HMAS Canberra. The hull for the second ship arrived
at the Williamstown shipyard in February 2014 and work is progressing towards
delivery in the second half of 2015. 
 
After delivery of the second Landing Helicopter Dock, there is then no
contracted shipbuilding programme for the Williamstown shipyard. BAE Systems
continues to engage with the Australian government with a view to sustaining
appropriate shipbuilding capability. 
 
In September, the business was awarded a four-year, A$190m (£100m) contract to
provide in-service support for the two Landing Helicopter Docks. The majority
of the work will be undertaken in Sydney, the home port of these warships,
creating over 40 new jobs. 
 
The customer has accepted the second and third ANZAC Class frigates to be
modernised under the Anti-Ship Missile Defence programme. The fourth and fifth
frigates continue to undergo refurbishment. 
 
In October, the business was awarded a A$25m (£13m) contract to produce an
additional three blocks for the Air Warfare Destroyer programme at its
Williamstown shipyard. The additional blocks will bring the total number
constructed by BAE Systems to 21, of which 11 have already been delivered. 
 
In October, the Flight Training Centre at Tamworth, New South Wales, where BAE
Systems trains Australian Defence Force pilots, achieved a significant
milestone, reaching 250,000 flying hours. Since 1992, the centre has helped to
train more than 5,000 students from the Australian Defence Force and other
military and commercial operations throughout the Asia-Pacific region. 
 
BAE Systems remains in negotiations with the Commonwealth to agree a revised
schedule for the delayed delivery of the JP 2008 Phase 3F programme for
enhanced satellite communications services to the Australian Defence Force.
The business expects these negotiations to conclude in the first half of
2015. 
 
Oman 
 
The two major contracts in Oman, Typhoon and Hawk aircraft and Khareef Class
corvettes, are being undertaken by Platforms & Services (UK). 
 
On the Typhoon and Hawk aircraft programme, sub-assembly manufacture has
commenced. 
 
On the Khareef Class corvette programme, the first two ships achieved final
acceptance and the third ship achieved interim acceptance. 
 
See pages 38 and 39 for further information on the operational performance of
these contracts. 
 
BAE Systems has provided a substantial proportion of Oman's in-service
military equipment and works closely with the Omani armed forces in supporting
this equipment. 
 
The business is making good progress in addressing its industrial
participation obligations in Oman through delivery of an agreed training and
knowledge transfer programme, which covers over 80% of the Group's total
obligations. BAE Systems continues to work with the Oman