REG - BAE SYSTEMS PLC - Doc re. Annual Report <Origin Href="QuoteRef">BAES.L</Origin> - Part 3
22/03/2016 13:43
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changing international circumstances could result in the Group being unable to obtain or maintain necessary export licences. Failure by the Group, or its sales representatives, marketing advisers or others acting on its behalf, to comply with these regulations could result in fines and penalties and/or the suspension or debarment of the Group from government contracts or the suspension of the Group's export privileges, which could have a material adverse effect on the Group. Reduced access to export markets could have a material adverse effect on the Group's future results and financial condition. BAE Systems has a well-established legal and regulatory compliance structure aimed at
ensuring adherence to regulatory requirements and identifying any restrictions that
could adversely impact the Group's activities. Internal and external market risk
assessments form an important element of ongoing corporate development and training
processes. A uniform global policy and process for the appointment of advisers
engaged in business development is in effect. The special compliance officer,
appointed pursuant to commitments concerning ongoing regulatory compliance made in
the course of the 2011 settlement with the US Department of State, concluded his
monitorship in May 2014 and, at the invitation of BAE Systems, agreed to remain in a
limited capacity for a limited further period of time.
6. Contract risk and executionThe Group has many contracts, including a small number of large contracts and fixed-price contracts.
Description Impact Mitigation
In 2015, 48% of the Group's sales were generated by its 12 largest programmes. At 31 December 2015, the Group had seven programmes with order backlog in excess of £1bn. A significant portion of the Group's revenue is derived from fixed-price contracts. Actual costs may exceed the projected costs on which the fixed prices are agreed and, since these contracts can extend over many years, it can be difficult to predict the ultimate outturn costs. It is important that the Group maintains a culture in which it delivers on its projects within tight tolerances of quality, time and cost performance in a reliable, predictable and repeatable manner. The inability of the Group to deliver on its contractual commitments, the loss, expiration, suspension, cancellation or termination of any one of its large contracts or its failure to anticipate technical problems or estimate accurately and control costs on fixed-price contracts could have a material adverse effect on the Group's future results and financial condition. Contract-related risks and uncertainties are managed under the Group's mandated
Lifecycle Management process. A significant proportion of the Group's largest
contracts are with the UK Ministry of Defence. In the UK, development programmes are
normally contracted with appropriate levels of risk being initially held by the
customer and contract structures are used to mitigate risk on production programmes,
including where the customer and contractor share cost savings and overruns against
target prices. The Group has a well-balanced spread of programmes and significant
order backlog which provides forward visibility. The Group has limited exposure to
fixed-price design and development activity which is in general more risk intensive
than fixed-price production activity. Robust bid preparation and approvals processes
are well established throughout the Group, with decisions required to be taken at the
appropriate level in line with clear delegations of authority.
7. Contract cash profilesThe Group is dependent on the award timing and cash profile of its contracts.
Description Impact Mitigation
The Group's profits and cash flows are dependent, to a significant extent, on the timing of, or failure to receive, award of defence contracts and the profile of cash receipts on its contracts. Amounts receivable under the Group's defence contracts can be substantial and, therefore, the timing of, or failure to receive, awards and associated cash advances and milestone payments could materially affect the Group's profits and cash flows for the periods affected, thereby reducing cash available to meet the Group's cash allocation priorities, potentially resulting in the need to arrange external funding and impacting its investment grade credit rating. The Group's balance sheet continues to be managed conservatively in line with its
policy to retain an investment grade credit rating and to ensure operating
flexibility. The Group monitors a rolling forecast of its liquidity requirements to
ensure that there is sufficient cash to meet its operational needs and maintain
adequate headroom.
8. Pension fundingThe Group has an aggregate funding deficit in its defined benefit pension schemes.
Description Impact Mitigation
In aggregate, there is an actuarial deficit between the value of the projected liabilities of the Group's defined benefit pension schemes and the assets they hold. The deficits may be adversely affected by changes in a number of factors, including investment returns, long-term interest rate and price inflation expectations, and anticipated members' longevity. Further increases in pension scheme deficits may require the Group to increase the amount of cash contributions payable to these schemes, thereby reducing cash available to meet the Group's other cash allocation priorities. In December 2015, BAE Systems, Airbus and the scheme trustees agreed to work towards the creation of a separate Airbus section of the BAE Systems Pension Scheme (Main Scheme) in 2016 with the allocation of the deficit to the BAE Systems and Airbus sections based on each member's last employer. This allocation methodology is considered to represent a better estimate of the deficit allocation and has been reflected in the allocation of the IAS 19 pension deficit in the Main Scheme at 31 December 2015. The impact of this change on the amounts allocated at 31 December 2015 is an increase of £187m (£153m post-tax) in the Group's share of the reported IAS 19 deficit. Following triennial funding valuations of the Group's UK pension schemes during 2014,
where appropriate, revised deficit recovery plans have been agreed which run until
2026. Growth of the defined benefit pension liabilities is expected to be curtailed
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