REG - BAE SYSTEMS PLC - Doc re. Annual Report <Origin Href="QuoteRef">BAES.L</Origin> - Part 4
22/03/2016 13:43
- Part 4: For the preceding part double click ID:nRSV9018Sc
as, in the UK, new employees have been offered defined contribution benefits since
April 2012 and, in the US, with effect from January 2013, employees no longer accrue
salary-related benefits in defined benefit schemes. In 2013, the trustees of a number
of UK pension schemes entered into arrangements to insure against longevity risk for
current pensioners, covering a total of £4.4bn of liabilities, and, in 2014, 38% of
eligible Main Scheme pensioners opted to exchange future increases on part of their
pensions for higher non-increasing pensions.
9. Information technology securityThe Group could be negatively impacted by information technology security threats.
Description Impact Mitigation
The security threats faced by the Group include threats to its information technology infrastructure, unlawful attempts to gain access to its proprietary or classified information and the potential for business disruptions associated with information technology failures. Failure to combat these risks effectively could negatively impact the Group's reputation among its customers and the public, cause disruption to its business operations, and could result in a negative impact on the Group's future results and financial condition. The Group has a broad range of measures in place, including appropriate tools and
techniques, to monitor and mitigate this risk.
10. PeopleThe Group's strategy is dependent on its ability to recruit and retain people with appropriate talent and skills.
Description Impact Mitigation
Delivery of the Group's strategy and business plan is dependent on its ability to compete to recruit and retain people with appropriate talent and skills, including those with innovative technological capabilities. With constraints on defence spending in its UK and US markets, the Group's business plan is targeting an increasing level of business in international export markets. It is important that the Group recruits and retains management with the necessary international skills and experience in the relevant jurisdictions. The loss of key employees or inability to attract the appropriate people on a timely basis, could adversely impact its ability to deliver its strategy, meet the business plan and, accordingly, have a negative impact on the Group's future results and financial condition. The Group recognises that its employees are key to delivering its strategy and
business plan, and focuses on developing the existing workforce and hiring talented
people to meet current and future requirements. The Group has well-established
graduate recruitment and apprenticeship programmes and, in order to maximise the
contribution that its workforce can make to the performance of the business, has an
effective through-career capability development programme. In order to seek to
maximise its talent pool, the Group is committed to creating a diverse and inclusive
environment for its employees. BAE Systems continues to embed its ethics programme
globally, driving the right behaviours by supporting employees in making ethical
decisions and embedding responsible business practices.
Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an adverse effect on the business or financial condition of the Group.
6. Contract risk and executionThe Group has many contracts, including a small
number of large contracts and fixed-price contracts.
Description
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.
Impact
The inability of the Group to deliver on its contractual commitments, the
loss, expiration, suspension, cancellation or termination of any one of its
large contracts or its failure to anticipate technical problems or estimate
accurately and control costs on fixed-price contracts could have a material
adverse effect on the Group's future results and financial condition.
Mitigation
Contract-related risks and uncertainties are managed under the Group's
mandated Lifecycle Management process.
A significant proportion of the Group's largest contracts are with the UK
Ministry of Defence. In the UK, development programmes are normally contracted
with appropriate levels of risk being initially held by the customer and
contract structures are used to mitigate risk on production programmes,
including where the customer and contractor share cost savings and overruns
against target prices.
The Group has a well-balanced spread of programmes and significant order
backlog which provides forward visibility.
The Group has limited exposure to fixed-price design and development activity
which is in general more risk intensive than fixed-price production activity.
Robust bid preparation and approvals processes are well established throughout
the Group, with decisions required to be taken at the appropriate level in
line with clear delegations of authority.
7. Contract cash profilesThe Group is dependent on the award timing and cash
profile of its contracts.
Description
The Group's profits and cash flows are dependent, to a significant extent, on
the timing of, or failure to receive, award of defence contracts and the
profile of cash receipts on its contracts.
Impact
Amounts receivable under the Group's defence contracts can be substantial and,
therefore, the timing of, or failure to receive, awards and associated cash
advances and milestone payments could materially affect the Group's profits
and cash flows for the periods affected, thereby reducing cash available to
meet the Group's cash allocation priorities, potentially resulting in the need
to arrange external funding and impacting its investment grade credit rating.
Mitigation
The Group's balance sheet continues to be managed conservatively in line with
its policy to retain an investment grade credit rating and to ensure operating
flexibility.
The Group monitors a rolling forecast of its liquidity requirements to ensure
that there is sufficient cash to meet its operational needs and maintain
adequate headroom.
8. Pension fundingThe Group has an aggregate funding deficit in its defined
benefit pension schemes.
Description
In aggregate, there is an actuarial deficit between the value of the projected
liabilities of the Group's defined benefit pension schemes and the assets they
hold.
The deficits may be adversely affected by changes in a number of factors,
including investment returns, long-term interest rate and price inflation
expectations, and anticipated members' longevity.
Impact
Further increases in pension scheme deficits may require the Group to increase
the amount of cash contributions payable to these schemes, thereby reducing
cash available to meet the Group's 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.
Mitigation
Following triennial funding valuations of the Group's UK pension schemes
during 2014, where appropriate, revised deficit recovery plans have been
agreed which run until 2026.
Growth of the defined benefit pension liabilities is expected to be curtailed
as, in the UK, new employees have been offered defined contribution benefits
since April 2012 and, in the US, with effect from January 2013, employees no
longer accrue salary-related benefits in defined benefit schemes.
In 2013, the trustees of a number of UK pension schemes entered into
arrangements to insure against longevity risk for current pensioners, covering
a total of £4.4bn of liabilities, and, in 2014, 38% of eligible Main Scheme
pensioners opted to exchange future increases on part of their pensions for
higher non-increasing pensions.
9. Information technology securityThe Group could be negatively impacted by
information technology security threats.
Description
The security threats faced by the Group include threats to its information
technology infrastructure, unlawful attempts to gain access to its proprietary
or classified information and the potential for business disruptions
associated with information technology failures.
Impact
Failure to combat these risks effectively could negatively impact the Group's
reputation among its customers and the public, cause disruption to its
business operations, and could result in a negative impact on the Group's
future results and financial condition.
Mitigation
The Group has a broad range of measures in place, including appropriate tools
and techniques, to monitor and mitigate this risk.
10. PeopleThe Group's strategy is dependent on its ability to recruit and
retain people with appropriate talent and skills.
Description
Delivery of the Group's strategy and business plan is dependent on its ability
to compete to recruit and retain people with appropriate talent and skills,
including those with innovative technological capabilities.
With constraints on defence spending in its UK and US markets, the Group's
business plan is targeting an increasing level of business in international
export markets. It is important that the Group recruits and retains management
with the necessary international skills and experience in the relevant
jurisdictions.
Impact
The loss of key employees or inability to attract the appropriate people on a
timely basis, could adversely impact its ability to deliver its strategy, meet
the business plan and, accordingly, have a negative impact on the Group's
future results and financial condition.
Mitigation
The Group recognises that its employees are key to delivering its strategy and
business plan, and focuses on developing the existing workforce and hiring
talented people to meet current and future requirements.
The Group has well-established graduate recruitment and apprenticeship
programmes and, in order to maximise the contribution that its workforce can
make to the performance of the business, has an effective through-career
capability development programme.
In order to seek to maximise its talent pool, the Group is committed to
creating a diverse and inclusive environment for its employees.
BAE Systems continues to embed its ethics programme globally, driving the
right behaviours by supporting employees in making ethical decisions and
embedding responsible business practices.
Additional risks and uncertainties currently unknown to the Group, or which
the Group currently deems immaterial, may also have an adverse effect on the
business or financial condition of the Group.
Page references used above refer to the Annual Report 2015 that can be viewed
on the Company's website.
Segmental performance
Electronic Systems
Electronic Systems, with 12,400 employees1, comprises the US and UK-based
electronics activities, including electronic warfare systems, electro-optical
sensors, military and commercial digital engine and flight controls,
next-generation military communications systems and data links, persistent
surveillance capabilities, and hybrid electric drive systems.
Electronic Combat includes the Electronic Protection, Electronic Warfare and
Electronic Attack product lines, and provides a depth of capability in
integrated electromagnetic systems for airborne applications, mission planning
and battle management solutions, secure networked communications and
navigation systems, radio frequency communication and data links.
Survivability, Targeting & Sensing exploits the electro-optical and infrared
spectrum to provide leading threat warning and infrared countermeasures
systems, precision guidance and seeker solutions, advanced targeting
solutions, head-up displays and state-of-the-art tactical imaging systems.
Intelligence, Surveillance & Reconnaissance addresses the market for
actionable intelligence through innovative technical solutions for airborne
persistent surveillance, identification systems, signals intelligence,
underwater and surface warfare solutions, and space products.
Controls & Avionics addresses the military and commercial aircraft electronics
markets, including fly-by-wire flight controls, full authority digital engine
controls, flight deck systems, cabin management systems and mission
computers.
HybriDrive® Solutions delivers electric propulsion and power management
performance, with innovative products and solutions that advance vehicle
mobility, efficiency and capability in the transit, military, marine and rail
markets.
Operational and strategic highlights
- Selected for the Eagle Passive Active Warning Survivability System
programme with Boeing, potentially worth over $1.0bn (£0.7bn) over the life of
the programme, to upgrade up to 400 US Air Force F-15 aircraft
- Delivered the first international order for the Advanced Precision Kill
Weapon System (APKWS)
- Awarded a five-year contract for the US Army's Enhanced Night Vision
Goggle III and Family of Weapon Sights - Individual programme, with a
potential value of $435m (£295m)
- Acquired Eclipse Electronic Systems, Inc., a provider of leading-edge
communications intelligence receivers and services
- Selected by Boeing to provide the entire flight control electronics suite
on the next-generation 777X aircraft programme following the award, in 2015,
for the remote electronic units
- Opened a state-of-the-art aviation technology manufacturing facility in
Fort Wayne, Indiana
Financial performance
2015 2014
Sales1 KPI £2,638m £2,415m
Underlying EBITA2 KPI £396m £373m
Return on sales 15.0% 15.4%
Cash inflow3 KPI £323m £246m
Order intake1 KPI £2,523m £2,341m
Order backlog1,4 £4.2bn £3.9bn
- Sales1 compared to 2014 increased marginally to $4.0bn (£2.6bn). The
commercial areas of the business now amount to 23% having seen sales growth in
the year of 7%. On the defence side, sales were stable with growth on the F-35
Lightning II programme offsetting contracts completing in 2014.
- The return on sales achieved of 15.0% benefited from continued strong
programme execution and risk retirement. Last year's return on sales of 15.4%
included a 0.5 percentage point non-recurring gain from a contract pricing
settlement.
- Cash3 conversion of underlying EBITA2 for the year was at 89%, excluding
pension deficit funding.
- Order backlog1,4 was sustained at $6.1bn (£4.2bn) benefiting from awards
for Enhanced Night Vision Goggles, F-15 electronic warfare upgrades,
production of P-8A Poseidon mission computers and F-35 Lightning II Low-Rate
Initial Production Lots 9 to 11.
1. Including share of equity accounted investments.
2. Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items.
3. Net cash inflow from operating activities after capital expenditure (net),
financial investment and dividends from equity accounted investments.
4. Comprises funded and unfunded unexecuted customer orders.
Operational performance
Electronic Combat
Electronic Systems has sustained its leadership position in the US electronic
warfare market and production is ramping up across a number of programmes.
Low-Rate Initial Production hardware deliveries on the F-35 Lightning II
programme continue with Lot 8 and 9 deliveries, and Lot 10 deliveries expected
to commence in 2016. The business has received initial funding for Lot 11,
with negotiations anticipated in 2016.
The business is under contracts, from Boeing and Warner Robins Air Logistics
Complex, totalling over $1.0bn (£0.7bn) to install the Digital Electronic
Warfare System (DEWS) on 84 new F-15 aircraft, upgrade 70 existing F-15
aircraft with DEWS and provide spare units and modules for an international
customer. Hardware and software deliveries, and system verification testing
remain on schedule.
BAE Systems has been selected by Boeing to develop and manufacture the
next-generation digital electronic warfare system for the US Air Force's Eagle
Passive Active Warning Survivability System programme to upgrade up to 400
F-15 aircraft. The programme could be worth over $1.0bn (£0.7bn) over its
life.
BAE Systems was selected by the US Special Operations Command to develop a new
electronic warfare system for its fleet of C-130J aircraft. The initial
contract, worth more than $20m (£14m), is the first phase of a multi-phase
programme to provide product development and platform integration work over
the next 12 months. The lifecycle value of the contract could exceed $400m
(£271m).
Due to the sensitive nature of electronic combat systems and technology, many
of the business's programmes are classified. As a world leader in electronic
warfare systems, the business continues to experience growth in this
increasingly important area.
Survivability, Targeting & Sensing
The US Army continues to field the third-generation upgrade to its Common
Missile Warning Systems and has placed its first Foreign Military Sales orders
for systems to Qatar, the Republic of Korea, Indonesia and Turkey.
Electronic Systems continues to deliver on Advanced Precision Kill Weapon
System (APKWS™) Full-Rate Production Lots 3 and 4, now worth a total of $115m
(£78m) with the US Navy. BAE Systems received customer recognition for the
completion of the 5,000th production unit during September and the first
Foreign Military Sales order of 110 systems for Jordan was completed in
October. The US Army acquired an initial quantity of APKWS™ laser-guided
rockets from the US Navy for use in ongoing operations.
The business continues to perform on the Terminal High-Altitude Area Defence
Full-Rate Production contract, valued at $340m (£231m), for 307 infrared
missile seekers supporting both the US government and Foreign Military Sales.
A five-year, Indefinite Delivery, Indefinite Quantity (IDIQ) contract to
support the US Army's Enhanced Night Vision Goggle III and Family of Weapon
Sights - Individual programme was awarded to BAE Systems in March. The
contract has a potential value of approximately $435m (£295m). The programme
has commenced initial deliveries to support user evaluation and reliability
testing.
The next-generation Striker® II helmet-mounted display has completed initial
flight trials, successfully demonstrating the performance of the integrated
digital night vision camera.
The business was unsuccessful in bidding for the US Army's Common Infrared
Countermeasures programme.
Intelligence, Surveillance & Reconnaissance
The business continues to provide Airborne Surveillance capability for the US
Air Force and US Army based on two wide-area, high-resolution imaging sensor
systems - the Airborne Wide Area Persistent Surveillance System, which has
been operational for more than 28,000 hours in theatre, and the Autonomous
Real-time Ground Ubiquitous Surveillance - Imaging System.
The business provides state-of-the-art processing capabilities for the US
Navy's P-8A Poseidon programme, which has entered Full-Rate Production, and
delivered 35 mission computer and display systems during the year. Four
systems were purchased by Australia in 2015.
Electronic Systems continues to provide Signals Intelligence capability for
the US Army and other US Department of Defense customers. BAE Systems was
awarded $28m (£19m) for additional enhancements to the existing two-year
contract valued in excess of $95m (£64m) to provide Tactical Signals
Intelligence Payloads and associated equipment for the US Army's Gray Eagle
unmanned aircraft. Deliveries of pods and ground stations have commenced.
In June, BAE Systems completed the acquisition of Eclipse Electronic Systems,
Inc., a Texas-based provider of highly-advanced Intelligence, Surveillance and
Reconnaissance products and services to the US defence and intelligence
community.
Controls & Avionics
BAE Systems is a major supplier to Boeing for flight controls, and cabin and
flight deck systems. In February, the Group was selected to provide the remote
electronic units on Boeing's next-generation 777X aircraft programme. With
this new award, BAE Systems will now provide the entire flight control suite
for 777X aircraft.
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