REG - BAE SYSTEMS PLC - Final Results <Origin Href="QuoteRef">BAES.L</Origin> - Part 2
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services group. The business has also been awarded a position on the UK
government's Defence Science and Technology Laboratory framework for
electronic warfare and cyber research.
Applied Intelligence's digital and data transformation business continues to
grow, with new contracts including a data migration strategy project for the
Atomic Weapons Establishment, a secure, cloud-based, open-source IT platform
for Lloyd's Register and a digital capability assessment project for a leading
UK television and broadband provider in support of its digital transformation
programme.
International Services & Solutions
International Services & Solutions focuses on cyber and communications
intelligence services and solutions for international governments and
communications service providers, pulling through Applied Intelligence's
commercial product-based solutions where relevant.
The business continues to see demand in Asia-Pacific and the Middle East in
support of protection against national threats. In Europe, the business was
awarded a contract to provide a long-term government partner with a solution
to investigate new concepts for situational awareness using the
IntelligenceReveal all-source analysis solution.
In the second half of the year, the business won major contracts to provide
integrated intelligence solutions to support the missions of South European
and Asian customers. It also won a substantial cyber security services
contract in Asia to build an advanced Security Operations Centre.
Looking forward
Intelligence & Security
In the US, further clarity regarding potential market improvement was gained
after Congress reached agreement on a new budget deal that provides for
defence and domestic programme spending above the Budget Control Act caps
through 2017.
In April, BAE Systems announced that it had engaged advisers to support a
strategic assessment of the Intelligence & Security sector's Global Analysis &
Operations, Integrated Electronics & Warfare Systems and IT Solutions
businesses. The review determined that retaining the businesses within BAE
Systems, Inc. delivers greater value.
Following a period of market contraction in the US government services sector,
the Group believes the outlook is now stabilising.
Intelligence & Security has reduced costs to address government budgets,
whilst pursuing growth opportunities, particularly in critical,
mission-focused areas.
Applied Intelligence
Applied Intelligence has invested in engineering and product development and
the sales team to grow further its order backlog and pipeline of opportunities
from commercial and government customers in North America, Europe,
Asia-Pacific and the Middle East.
1. Including share of equity accounted investments.
2. Re-presented for the reallocation of the Integrated Electronics & Warfare
Systems activities from Platforms & Services (US) to Cyber & Intelligence.
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 (US)
Platforms & Services (US), with 11,500 employees1 and operations in the US, UK
and Sweden, produces combat vehicles, weapons and munitions, and delivers
US-based services and sustainment activities, including ship repair and the
management of government-owned munitions facilities.
Operational and strategic highlights
- Award of a five-year contract worth up to $332m (£225m) to perform
technical support for the US Army's Bradley Fighting Vehicle and M113 family
of vehicles
- Low-Rate Initial Production contract options awarded, worth $245m
(£166m), for US Army M109A7 (Paladin) self-propelled howitzers
- Contract worth $104m (£71m) awarded for the engineering and manufacturing
development phase of the competition for the Amphibious Combat Vehicle 1.1
programme
- Secured naval gun system contracts with the US, Canada and Brazil
- FNSS received a new export order for the PARS wheeled armoured vehicle
- Continued challenges on commercial shipbuilding programmes
- Workforce reductions announced in commercial shipbuilding, ship repair
and BAE Systems Hägglunds
- Sale of 75% interest in Land Systems South Africa completed
Financial performance
2015 20142
Sales1 £2,779m £2,689m
Underlying EBITA3 £177m £117m
Return on sales 6.4% 4.4%
Cash inflow4 £100m £147m
Order intake1 £2,737m £2,565m
Order backlog1,5 £3.9bn £4.7bn
- Sales1 reduced by 4% to $4.2bn (£2.8bn), or by just 1% on a like-for-like
basis after adjusting for exchange translation and the South African business
disposal. Higher than expected sales were seen on both ship repair activity
and munitions volume.
- The business has delivered an improved return on sales of 6.4% (2014
4.4%). Whilst further charges had to be taken in the year on the commercial
shipbuilding programmes, these were partly offset by improvements to the
Radford munitions contract.
- Cash4 conversion of underlying EBITA3 was impacted by the utilisation of
provisions on commercial shipbuilding programmes and of customer advances on
the CV90 Norway contract, as well as the investment in the new floating dry
dock facilities in San Diego.
- Order backlog1,5 reduced to $5.8bn (£3.9bn) largely for the trading out
of the five-year Multi-Ship, Multi-Option contracts in the ship repair
business and the CV90 Norway programme.
Operational performance
As the US defence market stabilises, the business retains its focus on
sustaining its franchise programmes and building a strong domestic and
international pipeline, whilst optimising competitiveness by shaping and
scaling operations.
US Combat Vehicles
In May, the US Army awarded BAE Systems a contract worth $110m (£75m) to
convert 36 M88A1 recovery vehicles to the M88A2 Heavy Equipment Recovery
Combat Utility Lift Evacuation System (HERCULES) configuration. The M88 plays
an important role in maintaining the combat vehicle industrial base, with the
first vehicle delivery scheduled for 2017. In October, BAE Systems received
awards worth $31m (£21m) from the US Army to produce six M88A2 HERCULES
vehicles and associated spare parts for the Australian government, as well as
an additional vehicle and parts for the US Marine Corps.
Work has commenced on the US Army's Armored Multi-Purpose Vehicle (AMPV)
programme and a preliminary design review was completed in June. BAE Systems
is producing 29 vehicles under the engineering and manufacturing development
phase. The total potential contract value for the initial programme phases is
$1.2bn (£0.8bn), including options to produce 289 vehicles under Low-Rate
Initial Production (LRIP). Anticipated full-rate production is expected to
approach 3,000 vehicles.
The business was awarded a $29m (£20m) follow-on contract for trade studies
and analysis related to the future infantry fighting vehicle. Under the
contract, BAE Systems will develop concepts that span from modernising the
Bradley vehicle to a new design, and will capitalise on technology created
under the Ground Combat Vehicle programme.
In July, the US Army awarded BAE Systems a five-year contract worth up to
$332m (£225m) to support ongoing service and improvements for the Bradley
Fighting Vehicle and the M113 family of vehicles.
The business was notified in August that the Lockheed Martin Joint Light
Tactical Vehicle team, of which BAE Systems was a member, was not selected for
the LRIP contract. This competition outcome is currently in litigation.
In October, the business was awarded the final LRIP contract options, worth
$245m (£166m), for the M109A7 self-propelled howitzers (Paladin) and their
associated ammunition carriers. In March, the business delivered the first
vehicles to the US Army under the previously awarded $335m (£227m) LRIP
contract. The US Army's total acquisition objective is for 581 vehicle sets.
During the fourth quarter, BAE Systems completed contractor testing of six
Bradley Engineering Change Proposal (ECP) 2 vehicles. Efforts are now underway
to build an additional ten vehicles for US Army testing, with deliveries to
begin in 2016. The Bradley ECP 2 programme helps to restore automotive
performance to the Bradleys with a modified engine and transmission, and an
upgraded generator and power distribution system.
In November, the US Marine Corps awarded BAE Systems, along with partner IVECO
Defence, a contract worth $104m (£71m) for the engineering and manufacturing
development phase of the Amphibious Combat Vehicle 1.1 programme. The award is
one of two contracts for this phase, during which the BAE Systems team will
produce 16 prototypes for Marine Corps testing. This competition outcome is
currently being protested.
In 2015, BAE Systems was awarded two international Assault Amphibious Vehicle
(AAV) contracts: an $82m (£56m) contract for the Brazilian Marine Corps under
the US government's Foreign Military Sales programme to upgrade 23 vehicles,
with deliveries expected in 2017; and an award from another international
customer for advance work related to an expected production order for AAVs in
2016.
Weapon Systems and Munition Operations
In May, BAE Systems was awarded a contract for five Bofors 40 Mk4 naval guns
for the Brazilian Navy. Series production of the guns has commenced, including
local content in Brazil. Deliveries are scheduled to begin in 2016.
BAE Systems continues to work with the governments of India and the US to
secure an award for M777 155mm lightweight howitzers. BAE Systems has proposed
the establishment of an assembly, integration and test facility in partnership
with an Indian company, which supports the Indian prime minister's 'Make in
India' initiative.
In August, the business was awarded a contract to deliver up to six modified
25mm Mk 38 machine gun systems for the Royal Canadian Navy's Arctic Offshore
Patrol Ship programme. Also in August, the US Navy awarded BAE Systems an $80m
(£54m) contract to upgrade six Mk 45 naval guns to the Mod 4 configuration,
with an option for four additional guns for an additional $50m (£34m) expected
to be exercised in 2016.
In September, the business confirmed its selection by the UK Ministry of
Defence as the preferred bidder to provide the gun system, known as the
Maritime Indirect Fires System, for the Type 26 frigate. Subject to contract
award, the business will provide the integrated gunnery system, which includes
the Mk 45 Mod 4 naval gun system, along with an automated ammunition handling
system, gun fire control system and qualified ammunition.
BAE Systems is executing on the re-baselined Archer artillery system for the
Swedish government. The business delivered the first system in September, with
deliveries planned to continue at a rate of two guns per month during 2016.
BAE Systems continues its partnership with the US Navy on the development of
the Hyper Velocity Projectile and an Electromagnetic Railgun.
BAE Systems continues to manage operations at the Holston and Radford Army
ammunition plants, receiving a $50m (£34m) contract for the continued
production of MK 90 propellant grains, as well as a $30m (£20m) contract to
modernise the Insensitive Munitions ingredient facility at Holston. In
September, the business received $35m (£23m) in closing an historical pricing
agreement. The business remains focused on enhancing performance under major
facility modernisation contracts.
US Ship Repair and Modernisation
In the first quarter of 2015, BAE Systems announced a $100m (£68m) capital
improvement programme at its San Diego, California, shipyard, principally for
the construction of a new dry dock in anticipation of increased activity to
support the US Navy's re-balance to the Pacific coast.
In the second half of 2015, the business received a number of fixed-price
orders as the US Navy began to transition its contracting strategy for ship
modernisation and repair. For over a decade, the Navy had awarded Multi-Ship,
Multi-Option cost-plus contracts, which effectively bundled the maintenance of
a class of ships into one multi-year contract. Starting on the East coast in
the first half of 2016, the Navy is expected to award Indefinite Delivery,
Indefinite Quantity repair orders with fixed-price terms on a ship-to-ship
basis. During the year, the ship repair business received a total of $1.2bn
(£0.8bn) in orders from the US Navy.
The Jacksonville, Florida, shipyard delivered its third Platform Support
Vessel (PSV) during the summer for service in the Gulf of Mexico. In early
2016, the business delivered the fourth and final ship of the PSV class to the
customer. Four additional ships are in various stages of construction in
Jacksonville, Florida, and Mobile, Alabama, and the business expects to
deliver these ships in 2016. The commercial shipbuilding business continued to
experience challenges in the year, taking a $73m (£48m) charge against ongoing
contracts, principally driven by the Mobile shipbuilding programmes.
The business is responding to lower demand due to declining US Navy ship
repair and commercial shipbuilding and repair work by reducing workforce
numbers. Redundancies initiated in 2015 could impact approximately 1,100
employees in Norfolk, Virginia, and Jacksonville, Florida, through the first
quarter of 2016.
BAE Systems Hägglunds
Series production has commenced on the $865m (£587m) contract for CV90
Infantry Fighting Vehicles to Norway. The business completed BvS10 vehicle
deliveries to Sweden in 2015 and will continue to execute retrofitting and
provide spare parts and documentation.
In September, the business launched a new vehicle based on the BvS10 called
the BvS10 BEOWULF, a highly mobile, modular and fully-amphibious vehicle with
an impressive payload.
At the September Defence and Security Equipment International trade show in
London, BAE Systems launched its BattleView 360 system that employs
cutting-edge display and sensor technology to improve situational awareness
for soldiers inside combat vehicles.
In 2015, the business completed 130 redundancies related to the unsuccessful
CV90 Armoured Personnel Carrier bid in Denmark. With two major production
programmes winding down, in the first quarter of 2016, the business initiated
an additional redundancy notification that could impact up to 150 employees
during the second half of the year.
FNSS
FNSS, the Turkish land systems joint venture, has continued production under
the $524m (£356m) programme to produce 259 8x8 wheeled armoured vehicles for
the Royal Malaysian Army.
FNSS received a new export order for the PARS wheeled armoured vehicle. Under
this new contract, FNSS will deliver the PARS vehicle to its new customer in
multiple configurations.
Production is underway on a contract to upgrade M113 tracked armoured
personnel carriers for the Royal Saudi Land Forces.
Four competitive proposals have been submitted for combat vehicle programmes
in Turkey and the Middle East, with award decisions expected in 2016 or 2017.
Business disposal
In April, the Group completed the sale of its shareholding in Land Systems
South Africa.
Looking forward
In the US, further clarity regarding potential market improvement was gained
after Congress reached agreement on a new budget deal that provides for
defence and domestic programme spending above the Budget Control Act caps
through 2017.
The business is underpinned by strong positions on key franchise programmes.
These include, in the land domain, the US Army's AMPV, Bradley and Paladin
programmes, and the CV90 for Norway. In the maritime domain, the Group has a
strong position on naval gun programmes and US Navy ship repair. Some
near-term reduction in ship repair and construction activity is anticipated as
commercial shipbuilding contracts are completed and with expected changes to
the basing of US Navy ships. Actions to address reduced workload at the
Group's US East and Gulf coast shipyards are underway alongside measures to
support anticipated subsequent expansion of ship repair operations in San
Diego, California.
The business continues to pursue a range of domestic and international
opportunities in combat vehicles, weapon systems and maritime support
services.
1. Including share of equity accounted investments.
2. Re-presented for the reallocation of the Integrated Electronics & Warfare
Systems activities from Platforms & Services (US) to Cyber & Intelligence.
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 employees1, comprises the Group's
UK-based air, maritime, combat vehicle, munitions and shared services
activities.
Operational and strategic highlights
- The Strategic Defence and Security Review announced in November 2015
provided clarity, continuity and stability for the UK business
- Contracts awarded for the expansion of Typhoon's capabilities
- £203m of F-35 Lightning II Lot 9 Low-Rate Initial Production orders
received
- £859m demonstration phase contract awarded for the Type 26 frigate
programme
- Full £1.3bn contract awarded for the fifth Astute Class submarine
- Artful, the third Astute Class submarine, accepted by the Royal Navy in
November
- Third and final Khareef Class corvette accepted by the Royal Navy of
Oman
- E188m (£139m) contract award for 515 cased-telescopic cannons for the
Ministry of Defence secured by our 50% joint venture, CTA International
Financial performance
2015 2014
Sales1 £7,405m £6,623m
Underlying EBITA2 £721m £772m
Return on sales 9.7% 11.7%
Cash inflow3 £220m £173m
Order intake1 £4,944m £5,386m
Order backlog1 £17.8bn £20.1bn
- Sales1 of £7.4bn were 12% higher than 2014. The increase came from a
higher number of Saudi aircraft deliveries, trading of Radar and Defensive
Aids Sub-System equipment on the European Typhoon Tranche 3 programme and the
increasing activity in the Submarines business.
- The return on sales was at 9.7% (2014 11.7%). An impact from lower
pension discount rates has been that the service cost charged to the income
statement increases and, in 2015, that amounted to 0.5 percentage points of
margin compared with 2014. In addition, the 2015 result includes the in-year
impact from the announced Typhoon production slowdown decision.
- Cash performance was as expected with a cash inflow3 of £220m (2014
£173m). Consumption of customer advances occurred on the Omani, Saudi and
European Typhoon contracts. There have also been rationalisation costs charged
against provisions created in prior years.
- Order backlog1 reduced to £17.8bn (2014 £20.1bn) primarily from trading
on the Typhoon aircraft and aircraft carrier programmes.
Operational performance
Military Air & Information
In the year, 18 Typhoon aircraft were delivered from the UK final assembly
facility, of which 12 were delivered to Saudi Arabia. Cumulative aircraft
deliveries to the UK, Germany, Italy and Spain total 227 of the contracted 236
Tranche 2 aircraft and 22 of the contracted 88 Tranche 3 aircraft. The 2014
issues delaying acceptance of Typhoon Tranche 3 aircraft from the Group's
partners in Germany, Italy and Spain were resolved.
The Oman Typhoon and Hawk aircraft programme continues to meet all contractual
milestones and is on track for commencement of deliveries in 2017.
In order to meet existing and anticipated orders and delivery schedules, BAE
Systems is reducing the rate of Typhoon major unit production. This will help
reduce production discontinuity and provide a more sustainable and competitive
position for Typhoon manufacturing in the years ahead. The action involves a
proposed workforce reduction of up to 371 roles.
Typhoon's capabilities continue to expand with the integration of the Captor
E-Scan radar and Brimstone 2 missile.
BAE Systems continues to successfully support its UK and European customers'
Typhoon and Tornado aircraft in delivering their operational commitments. The
business supports its UK customer through availability-based service
contracts, and contract extensions totalling £147m were received in the year.
On the F-35 Lightning II programme, BAE Systems completed delivery of 43 aft
fuselage assemblies for the Low-Rate Initial Production (LRIP) Lot 8 contract.
A £203m contract on LRIP Lot 9 for 57 aircraft sets was received in the year,
with 11 aft fuselage assemblies completed. The forward price for LRIP Lot 10
for 94 aircraft sets has been agreed, with full contract award for both Lots 9
and 10 anticipated during 2016. A proposal for LRIP Lot 11 has been submitted
to Lockheed Martin in advance of negotiations commencing in 2016.
Support continues to be provided to users of Hawk trainer aircraft around the
world. In 2015, the Indian Navy and Air Force received five and 15 Hawk
aircraft, respectively, built under the Batch 2 licence for 57 aircraft by
Hindustan Aeronautics Limited. An order for a further 20 Hawk aircraft from
the Indian Air Force is currently being negotiated.
Orders for £255m were received in the year for continued support to the RAF
advanced jet training facility in North Wales.
Working jointly with Dassault Aviation, progress is being made in maturing and
demonstrating critical technology and operational aspects for an unmanned
combat air system.
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 further phases of flight trials in the year.
During 2015, the business concluded 236 management redundancies following the
announcement in October 2014, with a further 204 potential redundancies
mitigated through redeployment within either the business or the wider Group.
In October, BAE Systems agreed to invest £20.6m in Reaction Engines Limited
(REL) to acquire 20% of its share capital and also enter into a working
partner relationship. REL is a privately-held company based in the UK
developing the technologies needed for SABRE™ (Synergetic Air-Breathing Rocket
Engine), a new aerospace engine class.
Maritime
The consolidation of BAE Systems' UK shipbuilding operations into Glasgow
concluded in 2015.
Following completion of the assessment phase contract for the Type 26 frigate
in March, an £859m demonstration phase contract was secured, covering detailed
design activities and enabling BAE Systems to subcontract for key equipment
with companies throughout the supply chain. The programme continues to employ
over 1,000 employees.
The government's reaffirmed commitment to shipbuilding continuity in
November's UK Strategic Defence and Security Review provides clarity and
future opportunities for the Group's shipbuilding facilities and workforce in
Scotland. This includes maintaining a fleet of 19 frigates and destroyers,
including eight Type 26 frigates and a planned concept study followed by the
design and build of a new class of lighter, flexible, general purpose
frigates. There is also a commitment to build two additional Offshore Patrol
Vessels.
On the aircraft carrier programme, HMS Queen Elizabeth commenced the
commissioning of its key systems, which will continue through to the second
half of 2016. Construction of HMS Prince of Wales continued, with the
integration of the bow, forward island and bridge during the year. The final
manufacturing block was delivered to Rosyth in December.
HMS Forth, the first of a second batch of River Class Offshore Patrol Vessels
for the Royal Navy, is planned for delivery in 2017. The construction of HMS
Medway, the second ship, commenced in June and the third ship, HMS Trent, in
October. This programme supports shipbuilding skills and provides the
springboard to transform the business between the carrier programme and the
start of manufacture for the Type 26 frigate programme.
Following successful sea trials, final acceptance of the third and final
Khareef Class corvette for the Royal Navy of Oman was achieved during the
second half of the year.
Under the five-year, £600m Maritime Support Delivery Framework contract,
secured in 2014, the business provides services at HM Naval Base Portsmouth
and support to half of the Royal Navy's surface fleet. The provision of
services under the contract progresses well with cost savings remaining on
target.
BAE Systems manages the support, maintenance and upgrade of the Royal Navy's
fleet of Type 45 destroyers.
Successful completion of the first in-water trials was achieved on the £270m
Spearfish torpedo upgrade programme. The demonstration phase of the contract
is planned to complete in 2019 prior to full manufacture.
The first phase of the joint UK and French Maritime Mine Counter Measures
demonstrator programme, which may form the basis of a future Royal Navy
unmanned system to combat the threat of underwater sea mines, progresses.
Following handover and customer acceptance in November, Artful, the third
Astute Class attack submarine, is now being operated by the Royal Navy. Good
progress continues on the remaining four boats. The full £1.3bn contract for
the fifth boat was secured in November and further limit of liability funding
of £30m for the seventh boat was also received.
The Successor submarine, the replacement for the Vanguard Class fleet,
continues to advance functional and spatial design as the programme approaches
its production stage. Preparations include a major programme of building works
to ensure the Barrow site will be ready to begin manufacturing when the
anticipated UK Ministry of Defence's investment decision is approved in 2016.
At 31 December, BAE Systems has almost 8,000 employees and contractors in the
Submarines business.
Combat Vehicles (UK)
The final five Terrier combat engineering vehicles were completed in the
year.
A £7m contract for the assessment phase of the upgrade to the British Army
land bridging system was secured in December.
Other orders totalling £50m for ongoing support to the previously supplied
armoured and bridging vehicles were received in the year.
Munitions
Negotiations on the pricing for the next five years of the 15-year Munitions
Acquisition Supply Solution partnering agreement with the Ministry of Defence,
secured in 2008, continue.
A E188m (£139m) contract for 515 cased-telescopic cannons for the Ministry of
Defence was secured in March by CTA International, a 50% joint venture between
BAE Systems and Nexter.
Looking forward
Platforms & Services (UK) has a strong order backlog of long-term committed
programmes and an enduring support business. The Strategic Defence and
Security Review announced in November 2015 provided clarity, continuity and
stability for the UK business.
In Military Air & Information, sales are underpinned by Typhoon and F-35
Lightning II aircraft production and in-service support. There are
opportunities to secure future Typhoon export sales, supported by the
announcement made in September relating to the supply of 28 aircraft for the
Kuwait Air Force.
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, River Class Offshore Patrol Vessels and Astute Class
submarines. The through-life support of existing and new platforms, together
with their associated command and combat systems, provides a sustainable
business in technical services and mid-life upgrades.
Combat Vehicles (UK) continues to pursue obsolescence management and upgrade
programmes.
The Munitions business is underpinned by the 15-year Munitions Acquisition
Supply Solution partnering agreement with the Ministry of Defence secured in
2008.
With the aim of continuously improving business delivery and efficiency, the
Combat Vehicles (UK) and Munitions businesses, with effect from 1 January
2016, merged to form one business, BAE Systems Land (UK).
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.
Segmental performance: Platforms & Services (International)
Platforms & Services (International), with 13,600 employees1, comprises the
Group's businesses in Saudi Arabia, Australia and Oman, together with its
37.5% interest in the pan-European MBDA joint venture.
Operational and strategic highlights
- 12 Typhoon aircraft delivered to Saudi Arabia in the year
- Continued support to the operational capabilities of the Royal Saudi Air
Force and Royal Saudi Naval Forces
- Contract awarded in Saudi Arabia for a further 22 Hawk aircraft
- Re-organisation of portfolio of interests in industrial companies in
Saudi Arabia progressed
- Customer acceptance of the second of two Landing Helicopter Dock ships in
Australia
- Headcount reductions and an impairment of assets at the Williamstown
shipyard
- Announced a consolidation of Australian operating divisions to reduce
management costs and remain competitive
- The UK and French governments signed a treaty relating to complex weapons
technology
- MBDA secured weapons package orders with Egypt and Qatar worth E1.1bn
(£0.8bn) as part of agreed export contracts for Rafale aircraft
Financial performance
2015 2014
Sales1 £3,742m £3,572m
Underlying EBITA2 £335m £366m
Return on sales 9.0% 10.2%
Cash inflow3 £164m £881m
Order intake1 £3,046m £3,398m
Order backlog1 £10.2bn £11.6bn
- Sales1 of £3.7bn were 5% up over 2014, or 9% on a constant currency
basis, due to higher levels of support to the Salam Typhoon aircraft now in
service and higher volumes of weapon systems.
- Underlying EBITA2 of £335m (2014 £366m) is after charges totalling £53m
in respect of the impairment and rationalisation in the Australian business.
- There was an operating cash inflow3 of £164m (2014 £881m) which includes
the second payment under the Salam Variation of Price agreement. However, some
£200m of receivables were collected in December 2014, ahead of the contracted
2015 dates. In addition, customer advances were utilised against the Saudi
aircraft training programme.
- Order backlog1 continues to reduce as the 2013 awards of the five-year
support contracts in Saudi Arabia trade out.
Operational performance
Saudi Arabia
On the Salam Typhoon programme, 12 aircraft were delivered in the year and, as
at 31 December, 57 aircraft had been delivered to the Royal Saudi Air Force.
Work on enhancing Typhoon's air-to-ground capability is progressing to
schedule.
The Typhoon support contracts are operating well with all Key Performance
Indicators meeting contractual levels.
Through the Saudi British Defence Co-operation Programme, the business
continues to support the operational capabilities of the Royal Saudi Air Force
(RSAF) and Royal Saudi Naval Forces. The modernisation of the RSAF's training
aircraft fleet has been extended with an agreement for the supply of a further
22 Hawk aircraft, associated ground equipment and training aids. The original
contract continues on schedule, with all 22 Hawk aircraft in advanced stages
of production and the first aircraft having flown in September. Deliveries are
due to commence in 2016. As at 31 December, a total of 46 of the 55 Pilatus
PC-21 aircraft had been delivered. Training and support under five-year
contracts continues.
The upgrade of Tornado aircraft and associated equipment procurement
continues.
Under the Royal Saudi Naval Forces' Minehunter mid-life update programme,
acceptance of the second ship is now expected in 2016 following the delayed
completion of sea trials during the year. The third ship is due to be
initiated into the upgrade programme in 2016. However, delivery timescales
will be impacted by previous programme delays.
The planned re-organisation of the Group's portfolio of interests in a number
of industrial companies in Saudi Arabia continues. Riyadh Wings Aviation
Academy LLC has contracted to acquire a 49% shareholding in a Group
subsidiary, Overhaul and Maintenance Company. The re-organisation supports BAE
Systems' strategy to expand the customer base of its In-Kingdom Industrial
Participation programme, promoting training, development and employment
opportunities in line with the Saudi National Objective. As part of the
re-organisation, the business plans to transfer a material proportion of its
Saudi-based workforce to one of the local Saudi industrial companies. Work is
ongoing to secure the necessary regulatory and stakeholder approvals to allow
this to commence.
The In-Kingdom Industrial Participation programme continues to progress, with
the Al Salam Aircraft Company being accredited as a repair agent for Typhoon
windscreens and transparencies. Advanced Electronics Company, in which BAE
Systems has a 50% shareholding, has secured further accreditations as a repair
agent for Typhoon avionics equipment and produced critical avionics for use on
the Hawk trainer aircraft. These capability transfer successes demonstrate BAE
Systems' long-standing commitment to the development and growth of the Saudi
Arabian aerospace industry, which plays a significant and increasing role in
the delivery of its contracts in the country.
Australia
The second and final Landing Helicopter Dock warship, HMAS Adelaide, was
accepted by the Australian customer in October and was commissioned into the
fleet in December. In-service support to both Landing Helicopter Dock ships is
provided by BAE Systems under a four-year contract.
Construction of ship blocks for the Air Warfare Destroyer (AWD) programme at
the Williamstown shipyard continues, with production complete and acceptance
achieved on 18 of the 21 contracted blocks at 31 December.
There is no contracted shipbuilding programme for the Williamstown shipyard
following completion of the Landing Helicopter Dock programme in 2015 and
delivery of the remaining AWD blocks in early 2016. As a result, BAE Systems
announced, on 12 November, workforce reductions of up to 340 shipbuilding
roles, of which 200 had been completed as at 31 December, with the remainder
in the first half of 2016. Rationalisation and restructuring charges relating
to these workforce reductions totalling A$37m (£18m) have been taken. In
addition, a non-cash impairment charge of A$48m (£24m) has been taken against
the carrying value of the Williamstown facility.
The fourth of the seven Anzac Class frigates to be modernised under the
current Anti-Ship Missile Defence programme was accepted in September as
planned. The fifth and sixth ships are undergoing their refits at the
Henderson shipyard and are scheduled for acceptance during 2016.
BAE Systems has been selected as the Asia-Pacific regional prime contractor to
undertake airframe maintenance, repair and overhaul for the F-35 Lightning II
programme. This represents a significant growth opportunity and is expected to
underpin the Group's aerospace sustainment activities in Australia over the
next decade and beyond.
Negotiations have been completed with the Commonwealth on a revised delivery
schedule for the delayed JP 2008 Phase 3F programme for enhanced satellite
communications services to the Australian Defence Force.
In September, the business submitted its proposal for the multi-billion
Australian dollar Land 400 Phase 2 Combat Reconnaissance Vehicle programme to
the Commonwealth. The successful tenderers are participating in funded risk
mitigation trials during 2016.
On 12 November, further headcount reductions were announced as part of a
restructuring to improve efficiency and management costs that reduced the
number of operating divisions from three to two.
Oman
The two major contracts in Oman, the Typhoon and Hawk aircraft programme and
the Khareef Class corvette programme, are being undertaken by Platforms &
Services (UK).
The Typhoon and Hawk programme continues to meet all contracted milestones.
The third of three Khareef Class corvettes achieved final acceptance during
the year.
BAE Systems has provided a significant proportion of Oman's in-service
military equipment and the Group works closely with the Omani armed forces in
supporting this equipment.
The business continues to fulfil its industrial participation obligations in
Oman through delivery of an agreed training and knowledge transfer programme.
An expansion of this programme has been contracted and, when delivered, will
satisfy all of the Group's outstanding industrial participation obligations.
MBDA
Following completion of the Meteor development programme at the end of 2014,
deliveries of production-standard missiles ordered by the six partner nation
customers and first export customer continue to plan.
MBDA has secured a contract, worth £89m to BAE Systems, for the UK Advanced
Short Range Air-to-Air Missile (ASRAAM) development and production programme.
The German government has announced its intention to buy the Medium Extended
Air Defence System (MEADS) missile defence system being developed by MBDA in
partnership with Lockheed Martin. Contract signature is expected in 2016,
subject to German political approval. This decision provides an opportunity
for MEADS to compete for significant export opportunities worldwide.
In November, a treaty was signed between the UK and French governments under
which both countries committed to principles of inter-dependency and joint
sovereignty in the field of key complex weapons technology.
MBDA has been awarded weapons package orders, worth E1.1bn (£0.8bn) to BAE
Systems, as part of agreed export contracts for Rafale aircraft in Egypt and
Qatar.
A significant number of ground-based air defence export campaigns continue to
be pursued in central Europe and the Gulf region.
Looking forward
In the Kingdom of Saudi Arabia, the Group expects to sustain its long-term
presence through delivering current programmes and industrialisation, and
developing new business in support of the Saudi military forces. The planned
re-organisation of the Group's portfolio of interests in a number of
industrial companies in Saudi Arabia is intended to increase growth prospects
and reinforce an ongoing commitment to support the national objectives of
local skills and technology development, increasing employment and developing
an indigenous defence industry.
In Australia, the 2015 Federal Budget statement confirmed the government's
commitment to increasing annual defence expenditure to 2% of Gross Domestic
Product within a decade of the budget. The Group continues to reinforce its
commitment to Australia and is exploring further opportunities to provide
leading defence capabilities across all domains.
In Oman, the business continues to provide support to its products in service
to position for future requirements. The Typhoon and Hawk aircraft programme
is on track for commencement of deliveries in 2017.
MBDA continues to build on the effective partnerships it has established with
its domestic customers and has secured export opportunities that underpin
future growth.
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.
Consolidated income statement
for the year ended 31 December
2015 2014
Notes £m Total £m Total
£m £m
Continuing operations
Combined sales of Group and share of equity accounted investments 2 17,904 16,637
Less: share of sales of equity accounted investments 2 (1,117) (1,207)
Revenue 2 16,787 15,430
Operating costs (15,622) (14,387)
Other income 227 174
Group operating profit 1,392 1,217
Share of results of equity accounted investments 110 83
Underlying EBITA1 1,683 1,702
Non-recurring items 26 -
EBITA 1,709 1,702
Amortisation of intangible assets (108) (184)
Impairment of intangible assets (78) (170)
Financial income/(expense) of equity accounted investments 3 (30)
Taxation expense of equity accounted investments (24) (18)
Operating profit 2 1,502 1,300
Financial income 241 241
Financial expense (653) (659)
Finance costs 3 (412) (418)
Profit before taxation 1,090 882
Taxation expense 4 (147) (130)
Profit for the year 943 752
Attributable to:
Equity shareholders 918 740
Non-controlling interests 25 12
943 752
Earnings per share 5
Basic earnings per share 29.0p 23.4p
Diluted earnings per share 28.9p 23.3p
1. Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items.
Consolidated statement of comprehensive income
for the year ended 31 December
2015 2014
Other Retained earnings Total Other Retained earnings Total
reserves £m £m reserves £m £m
£m £m
Profit for the year - 943 943 - 752 752
Other comprehensive income
Items that will not be reclassified to the income statement:
Remeasurements on retirement benefit schemes:
Subsidiaries - 864 864 - (2,023) (2,023)
Equity accounted investments - 21 21 - (73) (73)
Tax on items that will not be reclassified to the income statement - (261) (261) - 503 503
Items that may be reclassified to the income statement:
Currency translation on foreign currency net investments:
Subsidiaries 260 - 260 2771 - 2771
Equity accounted investments (45) - (45) (13)1 - (13)1
Reclassification of cumulative currency translation reserve on disposal 20 - 20 - - -
Fair value (loss)/gain on available-for-sale financial assets - (1) (1) - 4 4
Amounts credited/(charged) to hedging reserve:
Subsidiaries 11 - 11 (92) - (92)
Equity accounted investments (36) - (36) - - -
Tax on items that may be reclassified to the income statement 5 - 5 19 - 19
Total other comprehensive income for the year (net of tax) 215 623 838 191 (1,589) (1,398)
Total comprehensive income for the year 215 1,566 1,781 191 (837) (646)
Attributable to:
Equity shareholders 216 1,541 1,757 191 (849) (658)
Non-controlling interests (1) 25 24 - 12 12
215 1,566 1,781 191 (837) (646)
1. Restated.
Consolidated statement of changes in equity
for the year ended 31 December
Attributable to equity holders of the parent
Issued Share Other Retained earnings Total Non-controlling Total
share premium reserves £m £m interests equity
capital £m £m £m £m
£m
At 1 January 2015 87 1,249 5,061 (4,555) 1,842 35 1,877
Profit for the year - - - 918 918 25 943
Total other comprehensive income for the year - - 216 623 839 (1) 838
Share-based payments - - - 44 44 - 44
Net sale of own shares - - - 1 1 - 1
Ordinary share dividends - - - (655) (655) (40) (695)
Disposal of non-controlling interest - - - - - (6) (6)
At 31 December 2015 87 1,249 5,277 (3,624) 2,989 13 3,002
At 1 January 2014 89 1,249 4,868 (2,825) 3,381 37 3,418
Profit for the year - - - 740 740 12 752
Total other comprehensive income for the year - - 191 (1,589) (1,398) - (1,398)
Share-based payments - - - 42 42 - 42
Net purchase of own shares (2) - 2 (281) (281) - (281)
Ordinary share dividends - - - (642) (642) (14) (656)
At 31 December 2014 87 1,249 5,061 (4,555) 1,842 35 1,877
Consolidated balance sheet
as at 31 December
Notes 2015 2014
£m £m
Non-current assets
Intangible assets 10,117 9,983
Property, plant and equipment 1,698 1,589
Investment property 120 129
Equity accounted investments 250 229
Other investments 6 7
Other receivables 275 347
Retirement benefit surpluses 6 193 162
Other financial assets 107 38
Deferred tax assets 985 1,327
13,751 13,811
Current assets
Inventories 726 690
Trade and other receivables including amounts due from customers for contract work 2,940 2,850
Current tax 4 7
Other financial assets 105 46
Cash and cash equivalents 2,537 2,308
Assets held for sale 20 76
6,332 5,977
Total assets 20,083 19,788
Non-current liabilities
Loans (3,775) (2,868)
Other payables (1,020) (932)
Retirement benefit obligations 6 (4,694) (5,530)
Other financial liabilities (72) (79)
Deferred tax liabilities (13) (21)
Provisions (354) (436)
(9,928) (9,866)
Current liabilities
Loans and overdrafts (237) (482)
Trade and other payables (6,162) (6,670)
Other financial liabilities (130) (107)
Current tax (315) (448)
Provisions (301) (315)
Liabilities held for sale (8) (23)
(7,153) (8,045)
Total liabilities (17,081) (17,911)
Net assets 3,002 1,877
Capital and reserves
Issued share capital 87 87
Share premium 1,249 1,249
Other reserves 5,277 5,061
Retained earnings - deficit (3,624) (4,555)
Total equity attributable to equity holders of the parent 2,989 1,842
Non-controlling interests 13 35
Total equity 3,002 1,877
Approved by the Board on 17 February 2016 and signed on its behalf by:
I G King P J Lynas
Chief Executive Group Finance Director
Consolidated cash flow statement
for the year ended 31 December
Notes 2015 2014
£m £m
Profit for the year 943 752
Taxation expense 147 130
Research and development expenditure credits (65) -
Share of results of equity accounted investments (110) (83)
Finance costs 412 418
Depreciation, amortisation and impairment
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