REG - BAE SYSTEMS PLC - Final Results <Origin Href="QuoteRef">BAES.L</Origin> - Part 2

BAE SystemsAnnouncement

19/02/2015 07:01

- Part 2: For the preceding part double click  ID:nRSS2980Fa 

EBITA2 for the year was at 58% due to the
capital costs of the replacement Enterprise Resource Planning system and
set-up of the Malaysian Global Delivery Centre in the Applied Intelligence
business. 
 
In aggregate, order backlog1,4 increased to $1.4bn (£0.9bn). Despite the top
line pressures, order backlog1,4 in the US business grew by 7% largely on
imagery analysis and cyber support awards. In the Applied Intelligence
business, order book increased by 37% over the year, 22% organically and 15%
from the SilverSky acquisition. 
 
LOOKING FORWARD 
 
In the US, whilst the longer-term outlook remains uncertain, the 2015 fiscal
year omnibus appropriations legislation passed in December 2014 included
stable Department of Defense funding. 
 
Intelligence & Security has reduced costs to address government budgets,
whilst pursuing growth opportunities, particularly in critical,
mission-focused areas. 
 
Recognising the continued challenges in the US market, a restructuring was
announced in 2014 that realigned the Support Solutions business across the
remaining US operating sectors. A Support Solutions business area which
develops and maintains systems supporting critical missions for the US
military was integrated with Intelligence & Security. This integrated
portfolio provides critical mass and economies of scale over a full spectrum
of services and capabilities to the US military and other government
agencies. 
 
Applied Intelligence has a growing order backlog and pipeline of
opportunities, underpinning expected growth from both government and
commercial customers. In order to most effectively deliver against these
opportunities, the business restructured into three divisions with effect from
1 January 2015: UK Services; International Services and Solutions; and
Commercial Solutions. In 2015, the acquired SilverSky business will be
integrated into the Commercial Solutions division, accelerating the growth
strategy. 
 
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. 
 
SEGMENTAL PERFORMANCE: PLATFORMS & SERVICES (US) 
 
Platforms & Services (US), with 16,900 employees2, comprises the
US-headquartered Land & Armaments business, with operations in the US, UK,
Sweden and South Africa, and the US-based services and sustainment activities,
including ship repair and munitions services. 
 
                    2014     20131    
 Sales2             £3,266m  £3,912m  
 Underlying EBITA3  £147m    £229m    
 Return on sales    4.5%     5.9%     
 Cash inflow4       £201m    £191m    
 Order intake2      £3,191m  £3,315m  
 Order backlog2,5   £5.8bn   £6.1bn   
 
 
OPERATIONAL AND STRATEGIC HIGHLIGHTS 
 
LAND & ARMAMENTS 
 
-    In-year awards sustain vehicle programme positions 
 
-    Engineering and manufacturing development contract award worth up to
$1.2bn (£0.8bn) on the US Army's Armored Multi-Purpose Vehicle programme 
 
-    Option worth $142m (£91m) exercised to continue Low-Rate Initial
Production of M109A7 self-propelled howitzers 
 
-    Continued focus on cost reduction 
 
-    Sale of 75% interest in Land Systems South Africa business announced,
with completion expected in 2015 
 
SUPPORT SOLUTIONS 
 
-    $1.5bn (£1.0bn) of US Navy ship repair contracts awarded 
 
-    Performance impacted by $122m (£74m) of charges taken on commercial
shipbuilding programmes 
 
-    Improved performance on the Radford Army Ammunition Plant contract, with
operational challenges mitigated significantly during the year 
 
-    Korean F-16 upgrade contract terminated for convenience by the customer 
 
-    Restructuring announced in 2014 realigned Support Solutions across the
remaining US operating sectors 
 
OPERATIONAL PERFORMANCE 
 
Land & Armaments 
 
As the defence market stabilises, BAE Systems retains its focus on maintaining
key programmes and building a strong domestic and international pipeline,
whilst shaping the business portfolio and scaling operational resources for
optimised competitiveness. 
 
US Combat Vehicles 
 
The business has focused on maintaining and enhancing its positions on vehicle
programmes, with a number of significant contracts received during the year. 
 
In December, the US Army awarded BAE Systems a contract worth up to $1.2bn
(£0.8bn) for the engineering and manufacturing development and Low-Rate
Initial Production of the Armored Multi-Purpose Vehicle. The initial award,
valued at $383m (£246m), is for a 52-month base term during which the business
will produce 29 vehicles, with an option to produce an additional 289. 
 
In December, the business received a $34m (£22m) contract to convert 49 M3A3
Cavalry Bradley Fighting Vehicles to the M2A3 Infantry configuration,
extending the Bradley production line through the first half of 2016. 
 
The business received a $154m (£99m) follow-on contract for the upgrade of an
additional 53 vehicles to the M88A2 HERCULES configuration, which will
maintain the M88 production line to the end of 2016. 
 
In November, the US Army exercised an option, valued at $142m (£91m), to
continue Low-Rate Initial Production of the M109A7 self-propelled howitzer,
with the first deliveries expected in the second quarter of 2015. 
 
BAE Systems' significant experience with amphibious vehicle platforms has
resulted in its selection as one of two contractors competing for the US
Marine Corps Assault Amphibious Vehicle survivability upgrade programme. The
business is also competing for the engineering and manufacturing development
phase of the Amphibious Combat Vehicle 1.1 contract. Down-selects for both
programmes are expected in 2015. 
 
Work on the Joint Light Tactical Vehicle (JLTV) programme was transitioned
successfully from the Sealy, Texas, plant, which closed in June. BAE Systems,
as a strategic partner to Lockheed Martin on the JLTV programme, completed
limited user testing of the engineering and manufacturing development vehicles
in the fourth quarter of 2014 in support of the competitive pursuit of a
Low-Rate Initial Production award. 
 
Following the US Army's decision to discontinue the Ground Combat Vehicle
programme, BAE Systems was awarded a follow-on bridge contract in June to
continue related technology development efforts and maintain critical
engineering talent. 
 
Weapon Systems 
 
The business was awarded a contract for four 57mm Mk3 naval guns for an
international customer. 
 
The business did not secure an order from India for M777 ultra-lightweight
howitzers, but continues to pursue this prospect. 
 
BAE Systems continues to develop its position in the advanced weapons market
through its Electromagnetic Railgun programme, having competitively won
contracts in excess of $100m (£64m) for land and sea-based demonstrators,
pulse power modules and the next development phase of the hyper velocity
projectile programme. 
 
Following the Norwegian government's decision to withdraw from the Archer
artillery system programme, the business signed a contract amendment with
Sweden establishing a new technical and schedule baseline for the contract,
which has initial deliveries planned for the second half of 2015. 
 
BAE Systems Hägglunds 
 
Work on the $865m (£555m) CV90 vehicles contract for the Norwegian Army
remains on schedule, with series production of the 144 vehicles continuing
until 2017. 
 
BAE Systems has offered the CV90 Armadillo concept for the Danish Armoured
Personnel Carrier programme. Four manufacturers submitted bids in December and
an award decision is expected in the first half of 2015. 
 
FNSS 
 
FNSS, BAE Systems' Turkish joint venture, has continued production under the
$559m (£359m) programme to produce 259 8x8 wheeled armoured vehicles for the
Royal Malaysian Army. 
 
Production continued under a $360m (£231m) contract to upgrade 32 M113 tracked
armoured personnel carriers for the Royal Saudi Land Forces. The business is
pursuing other armoured vehicle prospects elsewhere in the Middle East
region. 
 
Business disposal 
 
BAE Systems expects to complete the disposal of its Land Systems South Africa
business in 2015 following the agreement of a proposed sale of the company in
2014. 
 
Support Solutions 
 
Under Multi-Ship, Multi-Option (MSMO) contract vehicles with the US Navy, the
US-based ship repair business received orders totalling $1.5bn (£1.0bn) for
the repair, maintenance and modernisation of various vessels during the year.
The business was awarded a new five-year MSMO contract at its Hawaii shipyard
to support the maintenance and modernisation of a range of US Navy ships. 
 
The commercial shipbuilding business continued to experience challenges,
taking $122m (£74m) of charges against ongoing contracts in 2014. 
 
BAE Systems manages the operations of the Holston and Radford Army Ammunition
Plants, receiving in excess of $400m (£257m) of contracts in 2014 for
explosives, propellant and facility modernisation. Following the operational
challenges at the Radford plant identified during 2013, performance has
improved reflecting the award of new contracts, pricing adjustments on
existing contracts and operational efficiencies. 
 
In 2012, BAE Systems was selected to upgrade the Republic of Korea's fleet of
F-16 aircraft. The US government approved the selection in 2013 and, whilst
the business was successfully executing phase one of the programme, in
November, Korea requested the termination for convenience of the US Air
Force's contract with BAE Systems. BAE Systems expects to recover all of its
programme costs under normal terms of a termination for convenience. In
response to the Korean government's claim for approximately $43m (£28m) under
a bid guarantee on the programme, the Group has asked a US federal court to
rule that it does not owe any monies to Korea. 
 
Under the eight-year, $534m (£343m) US Air Force contract, received in 2013,
to maintain the readiness of Minuteman III intercontinental ballistic missiles
in the US, the business completed the nine-month transition period from the
incumbent on schedule in June and performed a successful test launch in
September, a major milestone for the programme. 
 
In February 2014, the US Air Force Space Command awarded BAE Systems a further
three-year contract extension to maintain its Solid State Phased Array Radar
System, space radars used for missile warning and space surveillance
operations, raising the cumulative value of the contract to approximately
$540m (£346m). This contract is expected to complete in 2018. 
 
In April, BAE Systems was informed that it had not been awarded the Automated
Installation Entry III contract, which would have extended its current work in
support of US Army installation security. BAE Systems' protest of the award
was upheld and the contract is being re-solicited. 
 
In August, BAE Systems was one of five companies awarded the ability to
compete for task orders under an Indefinite Delivery, Indefinite Quantity
contract to build to print a secure afloat network for the US Navy. 
 
In September, the US Navy's Strategic Systems Programmes Office awarded BAE
Systems a four-year, $72m (£46m) contract to continue the provision of
logistics and supply systems support for the Trident II D-5 submarine-launched
ballistic missile. 
 
In December, the US Navy's Naval Air Systems Command awarded BAE Systems a
five-year contract to provide full lifecycle engineering and technical support
for communication and combat systems on land and at sea. The initial award is
valued at $28m (£18m), with the total value of the five-year contract
estimated at $147m (£94m). 
 
Also in December, the US Navy awarded BAE Systems the nine-year DDG VI Radio
Communications Systems contract to support radio and communications systems
design and integration for 13 guided missile destroyers. The initial award is
valued at $28m (£18m), with the total value of the nine-year contract
estimated at $187m (£120m). 
 
FINANCIAL PERFORMANCE 
 
Land & Armaments 
 
Sales2 in the year declined to $2.3bn (£1.4bn). Bradley reset activity has
more than halved, the Medium Mine Protected Vehicle (MMPV) production contract
has completed and deliveries under US M777 lightweight howitzer contracts have
largely traded out. 
 
Despite the expected top line reductions, the business has delivered an
improved margin of 10.3% (2013 8.8%) through good programme execution and cost
reduction. 
 
Cash flow4 generation was again strong, with good cash conversion of working
capital. 
 
Order backlog2,5 reduced from $5.0bn (£3.0bn) to $4.4bn (£2.8bn) largely from
the trading out of deliveries on MMPV and M777. We have not recognised within
order backlog the $0.8bn (£0.5bn) of Low-Rate Initial Production options under
December's Armored Multi-Purpose Vehicle programme award. 
 
Support Solutions 
 
Sales2 of $3.1bn (£1.9bn) were 1% lower than in 2013. 
 
The year's margin has been materially impacted by cost overruns on the
commercial shipbuild contracts. Charges taken in the first and second half
year totalled $122m (£74m). The Radford munitions contract has now been
stabilised, with no additional provisioning necessary. 
 
Order backlog2,5 decreased from $5.1bn (£3.1bn) to $4.6bn (£3.0bn) on the
sales trading out under the five-year US Navy ship repair contracts. The
re-competes for the Hawaiian and San Diego contracts were both successfully
secured in the year. 
 
LOOKING FORWARD 
 
Whilst the longer-term outlook remains uncertain, the 2015 fiscal year omnibus
appropriations legislation passed in December 2014 included stable Department
of Defense funding and support for major programmes, including the Group's
Bradley and M88 HERCULES vehicles, as well as requested funding for US Navy
ship maintenance and the Armored Multi-Purpose Vehicle (AMPV) programme. 
 
The business is investing to protect existing combat vehicle programmes and to
establish new domestic and international programmes, such as the US Army's
AMPV, amphibious vehicles and international combat vehicle opportunities to
sustain the Group's US combat vehicle manufacturing base. The services and
sustainment activities provide continuing opportunities for multi-year
contracts on existing platforms. 
 
Recognising the continued challenges in the US market, a restructuring was
announced in 2014 that realigned the Support Solutions business across the
remaining US operating sectors. A business area which develops and maintains
systems supporting critical missions for the US military will be reported in
Intelligence & Security in 2015. As a result of the realignment of Support
Solutions, the reporting segment retains all of the Land & Armaments
businesses, as well as Ship Repair, Ordnance Systems and Protection Systems
from Support Solutions. This change will allow the business to deliver more
comprehensive, integrated and cost-effective product and service offerings
across a full range of naval, land and individual warfighter platforms. 
 
1. Re-presented for the transfer of the UK Munitions business to Platforms &
Services (UK) 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. 
 
4. Net cash inflow from operating activities after capital expenditure (net),
financial investment and dividends from equity accounted investments. 
 
5. Comprises funded and unfunded unexecuted customer orders. 
 
SEGMENTAL PERFORMANCE: PLATFORMS & SERVICES (UK) 
 
Platforms & Services (UK), with 29,600 employees2, comprises the Group's
UK-based air, maritime, combat vehicle, munitions and shared services
activities. 
 
                    2014     20131    
 Sales2             £6,623m  £7,174m  
 Underlying EBITA3  £772m    £915m    
 Return on sales    11.7%    12.8%    
 Cash inflow4       £173m    £60m     
 Order intake2      £5,386m  £6,085m  
 Order backlog2     £20.1bn  £21.6bn  
 
 
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