REG - BAE SYSTEMS PLC - Final Results
20/02/2020 07:00
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RNS Number : 5311D BAE SYSTEMS PLC 20 February 2020
BAE Systems plc
Preliminary Announcement 2019
Results in brief
Financial performance measures as defined by the Group(1) Financial performance measures defined in IFRS(2)
2019 2018 2019 2018
Sales £20,109m £18,407m Revenue £18,305m £16,821m
Underlying EBITA(3) £2,117m £1,928m Operating profit(3) £1,899m £1,605m
Underlying earnings per share(3) 45.8p 42.9p Basic earnings per share(3) 46.4p 31.3p
excluding one-off tax benefit 50.8p 42.9p
including one-off tax benefit
Operating business £1,307m £993m Net cash flow from operating activities(3) £1,597m £1,200m
cash flow(3)
Net debt £(743)m £(904)m
Order intake(4) £18,447m £28,280m
Order backlog(4) £45.4bn £48.4bn
Post-employment benefits and dividend
2019 2018
Group's share of the net post-employment benefits deficit(5) £(4.5)bn £(4.0)bn
Dividend per share 23.2p 22.2p
Charles Woodburn, Chief Executive, said: "2019 has been a year of significant
progress for BAE Systems. We delivered a good set of financial results in line
with guidance, growing sales and earnings, with improved operational
performance and increased investment in the business to underpin our growth
outlook. Strategically we took a number of actions to strengthen the portfolio
and the pensions agreement announced today is good for all stakeholders. These
will help to accelerate our strategy and further our growth outlook. We have a
large order backlog and remain focused on strong programme performance to
deliver a sustainable business model with enhanced financial performance."
Financial highlights
Financial performance measures as defined by the Group(1)
- Sales increased by £1.7bn, a 7% increase, excluding the impact of
currency translation(6).
- Underlying EBITA increased to £2,117m, a 5% increase on a constant
currency basis(6) and excluding the impact of IFRS 16(3).
- Underlying earnings per share(3) increased by 7% to 45.8p (excluding
the one-off tax benefit).
- Operating business cash flow(3) increased by £314m to £1,307m.
- Net debt decreased to £743m.
- Order intake(4) of £18.4bn.
- Order backlog(4) of £45.4bn.
Financial performance measures defined in IFRS(2)
- Revenue increased by £1.5bn, a 7% increase, excluding the impact of
currency translation(6).
- Operating profit(3) increased by £294m to £1,899m, including £27m
of non-recurring charges (2018 £154m).
- Basic earnings per share(3) increased by 48% to 46.4p.
- Net cash flow from operating activities(3) increased by £397m to
£1,597m. Under IFRS 16 net lease cash outflows of £273m are now classified
under financing and investing activities.
Post-employment benefits and dividend
- Group's share of the pre-tax accounting net post-employment benefits
deficit increased by £0.5bn to £4.5bn compared with 31 December 2018(5).
- After consultation with the The Pensions Regulator in the UK, the
Group has reached agreement with the Trustee Board of the combined pension
scheme on the accelerated funding valuation and a revised deficit recovery
plan.
- At the 31 October 2019 funding valuation date, the deficit was
£1.9bn. The current deficit recovery plan which runs to 2026 will be replaced
by a new deficit recovery plan, under which a one-off payment of £1bn is to
be made in the coming months, with approximately £240m of funding payable in
the scheme year ending 31 March 2020 and approximately £250m by 31 March
2021.
- Final dividend of 13.8p making a total of 23.2p per share for the
year, an increase of 4.5% over 2018.
One-off tax benefit
- A one-off tax benefit of £161m was recognised in the year, arising
from agreements reached in respect of overseas tax matters, net of a provision
taken in respect of the estimated exposure arising from the EU's decision
regarding the UK's Controlled Foreign Company regime.
1. We monitor the underlying financial performance of the Group using
alternative performance measures. These measures are not defined in
International Financial Reporting Standards (IFRS) and, therefore, are
considered to be non-GAAP (Generally Accepted Accounting Principles) measures.
Accordingly, the relevant IFRS measures are also presented where appropriate.
For alternative performance measure definitions see glossary on page 12.
2. International Financial Reporting Standards.
3. The financial impact of the adoption of IFRS 16 Leases is described on page
15, 16, 18, 19 and 53.
4. Including share of equity accounted investments.
5. The Saudi Arabia end of service benefit obligation of £97m at 31 December
2018 has been reclassified from trade and other payables to post-employment
benefit obligations.
6. Current year compared with prior year translated at current year exchange
rates.
Operational and strategic key points
Air
- Qatar Typhoon and Hawk aircraft programme met its contractual
milestones in the year. Contract amendment agreed to accelerate Typhoon
deliveries
- F-35 programme Lots 12 to 14 price negotiations concluded. 142 rear
fuselage assemblies delivered in the year in line with ramp-up to full rate
production in 2020
- Tempest technology maturation programme contracted between industry
and UK government. Italy and Sweden governments committed to working with UK
to develop next-generation combat air capability
- The first four Hawk aircraft assembled in Saudi Arabia were accepted
and entered service in-Kingdom
- UK Tornado fleet successfully retired from service on schedule
following RAF declaration that Typhoon had met Centurion standard with
embodiment across the Typhoon fleet
- The design and production readiness phase of the Hunter Class
programme for the Royal Australian Navy continues to make good progress
Maritime
- HMS Prince of Wales vessel acceptance achieved in December
- Four River Class Offshore Patrol Vessels have now been accepted, with
the programme on target for completion in 2020
- Construction commenced on second of the three contracted Type 26
frigates in August
- Construction of the first Dreadnought Class submarine continues to
advance, with £1.4bn of funding received in the year
- Sea trials for the fourth Astute Class submarine are due to take place
in 2020
- A £230m seven-year Torpedo Repair and Maintenance contract was
awarded
- The UK combat vehicles joint venture between Rheinmetall and BAE
Systems Land UK was launched on 1 July
- Design requirements for the Canadian Surface Combatant are progressing
towards finalisation with partners and the Royal Canadian Navy
Electronic Systems
- Growing demand for Advanced Precision Kill Weapon System (APKWS(®))
laser-guided rockets, with production awards totalling over $400m (£302m)
received in the year
- Over 500 electronic warfare systems delivered for the F-35 Lightning
II programme, and awarded production and Block 4 modernisation contracts worth
more than $750m (£566m)
- Acquired Riptide Autonomous Solutions to advance capabilities in
maritime mission requirements
- Continuing growth in space resilience domain
- Establishing new facilities in Huntsville, Alabama and Manchester, New
Hampshire to meet the record order backlog
- Active interceptors certified for Gulfstream G500 and G600 jets and in
production
- Battery electric and fuel cell electric transit systems recorded five
million zero emission miles
Platforms & Services (US)
- Deliveries of the M109A7 self-propelled howitzer and ammunition
carrier vehicle sets are progressing and the decision to proceed to full-rate
production was made in Q1 2020
- First deliveries achieved of the Amphibious Combat Vehicle to the US
Marine Corps
- Contract modification award of $575m (£434m) received for LRIP
vehicles on the Armored Multi-Purpose Vehicle programme
- Work underway to upgrade 332 vehicles to the Bradley A4 configuration
- Awarded contracts worth $466m (£352m) to upgrade configuration on
various M88 vehicles
- First tandem docking of two large warships in San Diego dry-dock for
contracts worth more than $170m (£128m)
- Deliveries continue of the M777 ultra-lightweight howitzer to the
Indian Army, with subsequent systems to be assembled at the Mahindra Defence
Systems facility
Cyber & Intelligence
- Received orders exceeding $100m (£76m) to provide logistics
sustainment support to US Air Force Space Command
- Awarded $437m (£330m) task order to provide open source support to US
Army and Army Intelligence & Security Command approved partners
- Technology offerings further developed and the business achieved four
Amazon Web Services designations, recognising our technical proficiency and
operational excellence
- Divestment of the Silversky business and exit from the UK-based
Managed Security Services business in progress at year-end. Restructuring
charge of £20m recognised in the year
- Strong order intake and revenue growth in the Government business unit
Guidance for 2020
Whilst the Group is subject to geopolitical uncertainties, the following
guidance is provided on current expected operational performance.
Impacts from the proposed acquisitions announced in January of the Collins
Aerospace Military Global Positioning business and Raytheon's Airborne
Tactical Radios business are not included in the following guidance.
Group guidance
For the year ending 31 December 2020, the Group's underlying earnings per
share is expected to grow by mid-single digit percentage compared to the
full-year underlying earnings per share in 2019 of 45.8p, assuming a $1.30 to
sterling exchange rate.
The guidance is based on the measures used to monitor the underlying financial
performance of the Group. Reconciliations from these measures to the financial
performance measures defined in International Financial Reporting Standards
for 2019 are provided on pages 14 to 16.
Segmental guidance
Electronic Systems:
- Sales, in US dollar terms, are expected to show mid-single digit
percentage growth driven by a number of electronic warfare contracts including
F-35. Some 70% of projected sales are in the 2019 closing order backlog,
similar to last year.
- Margin(1) is expected to be at the higher end of our 14% to 16% range.
Cyber & Intelligence:
- In aggregate, we expect sales to be in line with 2019.
- The US business, which represented some 70% of this segment in 2019,
is expected to show low-single digit percentage growth.
- In the Applied Intelligence business we expect good top line expansion
in the Government and Financial Services areas. However, the proposed disposal
of the Silversky business is expected to reduce sales by approximately $100m.
- Margin(1) in 2020 is expected to improve into the 7% to 8% range. The
US business is again expected to contribute around the 8% to 9% mark. In
Applied Intelligence we expect the business to move back into profitability
absent the restructuring charge and following the exit of the two proposed
business disposals.
Platforms & Services (US):
- Sales, in US dollar terms, are expected to show high-single digit
percentage growth, with increasing volumes from the US Combat Vehicles backlog
and in ship repair. More than 80% of guidance is within the closing order
backlog, similar to last year.
- Margin(1) is expected to remain at the low end of the 8% to 9% range.
The ramp-up of vehicle deliveries primarily on the Armored Multi-Purpose
Vehicle together with trading of the Mobile Protected Firepower development
programme will continue to be at initial low margin levels.
Air:
- Sales are expected to show mid-single digit percentage growth, for
increased activity on the Qatar Typhoon and Hawk programme and on F-35 as full
rate production levels are achieved. Close to 90% of sales guidance is within
the closing order backlog.
- Margin(1) is expected to be lower than 2019, towards the bottom end of
our 11% to 13% range. There is a headwind from higher pension service costs,
as well as the further increase in self-funded research and development
expenditure on the Tempest programme. Partly offsetting these is an expected
step up in Qatar margin recognition.
Maritime:
- Sales are expected to be stable overall. Activity on the Carrier and
Offshore Patrol Vessel programmes is almost complete. These are offset by
increases in the Dreadnought submarine and Type 26 programmes. Around 80% of
guidance is already covered by the order backlog.
- Margin(1) levels are expected to be at the top end of our 8% to 9%
range.
HQ:
- HQ costs are expected to be slightly lower than in 2019.
- Underlying finance costs are expected to be around 10% less. There
will be a full-year of benefit following the repayment of the high coupon $1bn
bond in June 2019. Net present value charges will also be lower. These will be
partly offset by the cost of the term debt to support the planned £1bn of
accelerated pension deficit funding.
- The underlying effective tax rate is expected to increase from 19% to
around 20%, with the final rate dependent on the geographical mix of profits.
- Minority interest is expected to increase to around £75m as we
complete further sell downs in our Saudi partner companies.
- The Group is targeting free cash flow of £3.5bn to £3.8bn in the
three-year period 2020 to 2022, with close to £1bn expected in 2020.
1. Underlying EBITA as a percentage of sales.
For further information please contact:
Investors Media Relations
Martin Cooper, Kristina Anderson,
Investor Relations Director
Director, Media Relations
Telephone: +44 (0) 3300 488830 Telephone: +44 (0) 7540 628673
+44 (0) 1252 383455
Email: investors@baesystems.com (mailto:investors@baesystems.com) Email: kristina.anderson@baesystems.com
(mailto:kristina.anderson@baesystems.com)
Analyst and investor presentation
A presentation, for analysts and investors, of the Group's Results for 2019
will be available via webcast at 9.00am today (20 February 2020).
Details can be found on investors.baesystems.com, together with presentation
slides and a pdf copy of this report. A recording of the webcast will be
available for replay later in the day.
About BAE Systems
At BAE Systems, we provide some of the world's most advanced, technology-led
defence, aerospace and security solutions.
We employ a skilled workforce of 87,800 people(1) in more than 40 countries.
We help our customers to stay a step ahead when protecting people and national
security, critical infrastructure and vital information. We also work closely
with local partners to support economic development through the transfer of
knowledge, skills and technology.
1. Including share of equity accounted investments.
Preliminary results statement
Introduction
In 2019, BAE Systems delivered a good set of financial results underpinned by
improving operational performance. Governments in key markets continue to
prioritise defence and security and there is a strong demand for the Group's
capabilities, products and services.
BAE Systems is a resilient company with long-term strength from its
programmes, technologies, customer relationships and sustainability agenda.
The Group maintained its strong balance between production and aftermarket
services in terms of both revenue and margin, and the geographic mix of the
business continued to evolve as the US and International business continued to
grow and UK and Kingdom of Saudi Arabia revenues remained stable. Following
the significant international wins in recent years, as these programmes
ramp-up they will become the second-largest revenue drivers for the Group
behind its US-based businesses.
The Group strategy remains focused, consistent and is delivering results.
Execution on the key strategic objectives of operational excellence,
competitiveness and technological innovation is vital for the successful
delivery of the order backlog, to deliver future growth and a high-performing
sustainable business. Good progress in all areas was made in 2019.
Operationally, programme performance improvement is now being delivered. The
business will continue to drive programme performance to ensure successful
delivery of its order backlog and the expected improvements in long-term cash
generation. However, safety performance in the year fell below the Group's
high expectations. The safety and wellbeing of employees is paramount. To that
end, the Group has sought external expertise to review a number of its sites
and strengthened the team with new heads of safety in the UK and US to refocus
and sharpen thinking in this critical area.
Investment in self-funded research and development increased in the year and
the Group's portfolio was further bolstered by two technology-focused
acquisitions. The business aims to further increase technology funding in the
coming years especially in Air and Electronic Systems as it looks to maintain
and enhance its long-term strategic positions.
2019 performance
US
The Group's US-based portfolio remains well aligned with customer priorities
and the key focus areas outlined in the US National Defense Strategy.
The passage and signing of the fiscal year 2020 Defense Appropriations bill
ended the Continuing Resolution and maintained funding support for many key
BAE Systems programmes, including combat vehicles, F-35, electronic warfare
programmes, and current and future precision weapons systems.
The fiscal year 2020 measure includes a top line budget of $738bn for defence,
a 3% increase over 2019, and lawmakers have already agreed to a bipartisan
deal setting the defence spending caps for fiscal year 2021 at $740.5bn.
Whilst the Group remains cautiously optimistic about the budget process,
numerous ongoing political issues may continue to detract from the timely
passage of appropriations legislation.
The US electronics business delivered another standout operational performance
in 2019, especially in its core franchise positions in the high-technology
areas of electronic warfare, precision-guided munitions, Intelligence,
Surveillance and Reconnaissance, and electro-optics. The business closed with
a record order backlog and the outlook for all its defence-focused divisions
is positive with the portfolio well positioned to address key growth areas.
These capabilities are also being leveraged on international as well as
domestic programmes. The Controls and Avionics and Power and Propulsion
Solutions businesses are leveraging capabilities from the Group's defence base
to provide adjacencies into the commercial markets, giving exposure to the
expanding civil aerospace market through the engine and flight control
franchises.
The business remains focused on investment in emerging technologies and
leveraging customer funding to maintain, develop and grow its strong market
positions. Aligned with this strategy, Electronic Systems acquired the Riptide
Autonomous Solutions business, a developer of unmanned underwater vehicles, in
June 2019.
In January 2020, the Group announced two asset purchase agreements worth a
total estimated $2.2bn for the proposed acquisitions of Collins Aerospace's
Military Global Positioning System business and Raytheon's Airborne Tactical
Radios business, both of which would be integrated into the Electronic Systems
portfolio. These proposed acquisitions are conditional upon the successful
closing of the pending Raytheon and United Technologies Corporation merger, as
well as other customary closing conditions and required US regulatory
approvals.
Platforms & Services (US) made steady progress in addressing its
operational challenges. The US-based combat vehicles business is implementing
a number of process and automation improvements to meet increased production
volumes across multiple programmes with lessons learned being applied across
the portfolio. The M109A7 met its delivery targets in the second half of the
year and initial deliveries were made on the Amphibious Combat Vehicle
programme. Further contract awards were received for the M88A3 modernisation
and Bradley A4 programmes, strengthening the order backlog. Looking into 2020
the business will have three upgrade and three new-build programmes ramping up
through its facilities.
The sector continued to shape its market-leading US naval ship repair
business, maintaining a strong bid pipeline for repair and modernisation
services, and working with the US Navy to improve utilisation levels. To this
end, it was a strategic step forward in October when the first destroyer
tandem docking in the Group's San Diego facility was achieved. The ship repair
and naval guns franchises are well supported by the growth outlook in the US
Navy budget and projected fleet size. With the delivery of the final
constructed ship in March and the sale of the Mobile shipyard, the business
exited commercial shipbuilding.
The US-based Intelligence & Security business is maintaining a high level
of bid activity and a strong pipeline despite a highly competitive and
evolving market. The business is delivering on contracts with good programme
and financial performance in the year.
UK
The UK is Europe's largest defence market. The UK government recently stated
its commitment to uphold the NATO commitment to spend at least 2% of Gross
Domestic Product on defence, and to increase the defence budget by at least
0.5% above inflation, in every year of the current parliament. The government
is also expected to launch an Integrated Foreign Policy, Defence and Security
Review during the course of 2020.
The work under the Team Tempest contract to develop next-generation combat air
technologies, skills and expertise, in collaboration with UK government and
industry partners, continues at pace. In the second half of the year the
commitment of both Sweden and Italy to work with the UK on creating
next-generation combat air capability was a welcome development.
During 2019, the Group remained focused on the execution of its long-term
contracted positions in Air and Maritime.
In Air, the production ramp-up of rear fuselage assemblies for the F-35
Lightning II aircraft progressed well with 142 sets delivered. Full-rate
production levels of approximately 160 sets are targeted in 2020. As the UK
and global fleets grow, securing a long-term support position on the F-35
Lightning II remains a key focus.
With imminent completion of the current partner nation deliveries, Typhoon
production is now focused on the sub-assembly build on the Kuwait and Qatar
programmes, which sustain production into the mid-2020s. The potential
pipeline for Typhoon additional orders remains positive, with opportunities
both with partner nations and through exports with existing and new customers.
Securing additional orders would extend production revenue levels.
Typhoon support delivered the expected operational performance levels and,
with the Centurion standard having been declared, the UK Tornado fleet
successfully retired from service on schedule.
In Maritime, the aircraft carrier build programme was completed with HMS
Prince of Wales being accepted by the customer. The Offshore Patrol Vessels
programme stabilised in the year delivering the second and third ships. The
fourth ship was accepted by the customer in February 2020, and the final ship
is expected to complete this year. Manufacturing work on the Type 26 programme
in the UK continues to increase following cut steel on the second ship in
August. Activity on the Dreadnought programme ramped up throughout the year
with revenues now exceeding those on the Astute programme. The associated
major programme of building works continued to progress.
BAE Systems will of course support the UK government in achieving its aim to
ensure that the UK maintains its key role in European security and defence
post-Brexit and to strengthen bilateral relationships with key partners in
Europe. This will be important for ongoing collaboration in the development of
defence capabilities.
The Group has relatively limited UK-EU trading and the majority of persons
employed in the UK are UK nationals, with only limited movement of EU
nationals into and out of the Group's UK businesses. Accordingly, the
resulting Brexit near-term impacts across the business are likely to be
limited.
International
BAE Systems' defence and security capabilities remain highly relevant in an
uncertain global environment with complex threats. During 2019, the Group
further widened its international reach through the export win in Canada and a
number of Foreign Military Sales through the Electronic Systems business.
There are good prospects in existing and new international markets for the
Group's products and services in air, maritime, land and cyber security.
Defence and security remains high on national agendas with the need in many
cases to recapitalise or upgrade ageing equipment.
In Saudi Arabia, BAE Systems continues to work closely with industry partners
and UK government to ensure that the export licences required to enable the
Group to fulfil its contractual obligations in the Kingdom are in place. On
the Hawk programme, the first in-Kingdom final assembled aircraft were
completed and entered into service.
BAE Systems continues to address current and potential new requirements as
part of long-standing agreements between the UK government and the Saudi
Arabian government as the Group continues to work on the localisation of
defence capabilities in Saudi Arabia, in support of the Saudi Arabian
government's National Transformation Plan and Vision 2030. Over many years,
the Group has developed and taken shareholdings in local Saudi businesses. The
Group is restructuring its portfolio of interests in these businesses and in
the year, it disposed of its shareholding in Aircraft Accessories and
Components Company. Following the Group's subsidiary, Overhaul and Maintenance
Company, entering into a heads of terms for the sale of its 50% shareholding
in Advanced Electronics Company to Saudi Arabian Military Industries,
negotiations are continuing and the transaction is expected to take place in
2020.
In Qatar the contract between BAE Systems and the Government of the State of
Qatar for the supply of 24 Typhoon and nine Hawk aircraft to the Qatar Amiri
Air Force, along with a bespoke support and training package, is meeting its
contractual milestones with Typhoon aircraft delivery now aligned to an
accelerated schedule which was agreed in the year.
In Australia, the initial four-year design and productionisation phase on the
Hunter Class programme commenced and the first formal integrated baseline
review is scheduled to commence in Q1 2020. Production of the first ship is
expected to commence in South Australia in the early 2020s. This Hunter Class
programme will, over time, double the size of the Group's current Australian
business.
Following contract signing in February 2019, BAE Systems is providing the
design, based on the Type 26, for the Canadian Surface Combatant programme.
Mobilisation activities are progressing on the programme.
Whilst operating under a difficult geopolitical backdrop, the MBDA joint
venture has continued to win orders in both domestic and international
markets. The business continues to invest in new products and is well placed
to benefit from defence spend increases in a number of European countries and
international opportunities.
Cyber security
In the Group's Applied Intelligence business, the UK Government Services
division performed well. Following a strategic review, the Group commenced a
process for the disposal of the Applied Intelligence US-based
software-as-a-service business and decided to exit the UK-based Managed
Security Services business. Cyber security is an increasingly important part
of government security and a core element of stewardship for companies in a
sophisticated and persistent threat environment. The services and products the
Group offers in the remaining core business, including the Financial Services
division, are expected to drive growth and improved returns as the market
continues to develop.
Balance sheet and capital allocation
The Group's balance sheet is managed conservatively, in line with its policy,
to retain its investment grade credit rating and to ensure operating
flexibility.
Consistent with this approach, the Group expects to continue to meet its
pension obligations, invest in research and technology and pursue other
organic investment opportunities, and plans to pay dividends in line with its
policy of long-term sustainable cover of around two times underlying earnings.
Investment in value-enhancing acquisitions and returns to shareholders through
a share buyback will be considered in line with the Group's clear and
consistent strategy and capital allocation policy.
A $1bn 6.375% bond, of which $500m had been converted to a floating rate bond
by utilising interest rate swaps, matured and was repaid in June 2019.
Post-employment benefits schemes
The Group's share of the pre-tax accounting net post-employment benefits
deficit increased to £4.5bn (2018 £4.0bn). The impact of lower discount
rates increasing liabilities was in some part offset by good asset returns and
changes in mortality assumptions.
In October 2019, six of the Group's nine UK pension schemes (including the two
largest schemes) were consolidated into a single scheme. Following that
consolidation, the Company agreed with the new Trustee Board to bring forward
the funding valuation of the combined scheme to 31 October 2019 from the
previously scheduled date of 31 March 2020.
After consultation with the The Pensions Regulator in the UK, the Group has
reached agreement with the Trustee Board of the combined scheme on the
accelerated funding valuation and revised deficit recovery plan.
At the 31 October 2019 funding valuation date, the deficit was £1.9bn. The
current deficit recovery plan which runs to 2026 will be replaced by a new
deficit recovery plan, under which a one-off payment of £1bn is to be made in
the coming months, with approximately £240m of funding payable in the scheme
year ending 31 March 2020 and approximately £250m by 31 March 2021.
Board and Executive Committee changes
Nicole Piasecki and Stephen Pearce were appointed to the Board as
non-executive directors on 1 June 2019. Harriet Green retired from the Board
on 7 November 2019, having served as a non-executive director for nine years.
As previously announced, Peter Lynas and Jerry DeMuro will retire from the
Board on 31 March 2020. With effect from 1 April 2020, they will be succeeded
by Brad Greve and Tom Arseneault, respectively. On joining the Board, Mr Greve
will be appointed Group Finance Director, and Mr Arseneault will be appointed
President & Chief Executive Officer of BAE Systems, Inc.. Nick Rose, a
non-executive director, will retire from the Board on 31 March 2020.
At the start of 2019 David Armstrong was appointed as Group Business
Development Director following Alan Garwood's retirement. In June, Mark
Phillips was appointed Group Communications Director and in May, Andrew
Wolstenholme left the Company and was replaced by Glynn Phillips as Group
Managing Director Maritime. Brad Greve joined the Executive Committee in
September following his appointment as Group Finance Director designate. At
the start of 2020 Ben Hudson was appointed as Chief Technology Officer,
replacing Nigel Whitehead who announced his intention to retire.
Summary
The business benefits from a large order backlog, with established positions
on long-term programmes in the US, UK, Saudi Arabia and Australia. The Group's
strategy is clear and well defined with governments in its key markets
continuing to prioritise defence and security, with strong demand for the
Group's capabilities. Through execution of its strategy, BAE Systems is well
placed to maximise opportunities, deal with the challenges and deliver a
business focused on sustainability and generating shareholder value.
Dividends
The Board has recommended a final dividend of 13.8p for a total of 23.2p for
the full year. Subject to shareholder approval at the May 2020 Annual General
Meeting, the dividend will be paid on 1 June 2020 to holders of ordinary
shares registered on 17 April 2020.
Glossary
We monitor the underlying financial performance of the Group using alternative
performance measures. These measures are not defined in International
Financial Reporting Standards (IFRS) and, therefore, are considered to be
non-GAAP (Generally Accepted Accounting Principles) measures. Accordingly, the
relevant IFRS measures are also presented where appropriate.
Definition Purpose
Financial performance measures as defined by the Group
Sales Revenue plus the Group's share of revenue of equity accounted investments. Allows management to monitor the sales performance of subsidiaries and equity
accounted investments.
Underlying EBITA Operating profit excluding amortisation and impairment of intangible assets, Provides a measure of operating profitability that is comparable over time.
finance costs and taxation expense of equity accounted investments (EBITA),
and non-recurring items*.
Underlying earnings per share Basic earnings per share excluding amortisation and impairment of intangible Provides a measure of underlying performance that is comparable over time.
assets, non-cash finance movements on pensions and financial derivatives, and
non-recurring items*.
Operating business cash flow Net cash flow from operating activities excluding taxation and including net Allows management to monitor the operational cash generation of the Group.
capital expenditure and lease principal amounts, financial investment and
dividends from equity accounted investments.
Free cash flow Operating business cash flow less interest paid (net) and taxation. Allows management to monitor utilisation of cash in line with the Group's
capital allocation policy.
Net debt Cash and cash equivalents, less loans and overdrafts (including debt-related Allows management to monitor the indebtedness of the Group.
derivative financial instruments). Net debt does not include lease
liabilities.
Order intake Funded orders received from customers including the Group's share of order Allows management to monitor the order intake of subsidiaries and equity
intake of equity accounted investments. accounted investments.
Order backlog Funded and unfunded unexecuted customer orders including the Group's share of Supports future years' sales performance of subsidiaries and equity accounted
order backlog of equity accounted investments. Unfunded orders include the investments.
elements of US multi-year contracts for which funding has not been authorised
by the customer.
* Non-recurring items are items of financial performance which have been
determined by management as being material by their size or incidence and not
relevant to an understanding of the Group's underlying business performance.
The Group's definition of non-recurring items includes profit or loss on
business transactions, and costs incurred which are one-off in nature, for
example non-routine costs or income relating to post-retirement benefit
schemes, and other exceptional items which management has determined as not
being relevant to an understanding of the Group's underlying business
performance.
Definition Purpose
Financial performance measures defined in IFRS
Revenue Income derived from the provision of goods and services by the Company and its N/a
subsidiary undertakings.
Operating profit Profit for the year before finance costs and taxation expense. This measure N/a
includes finance costs and taxation expense of equity accounted investments.
Basic earnings per share Basic earnings per share in accordance with International Accounting Standard N/a
33 Earnings per Share.
Net cash flow from operating activities Net cash flow from operating activities in accordance with International N/a
Accounting Standard 7 Statement of Cash Flows.
Other financial measures
Post-employment benefits deficit Net International Accounting Standard 19 Employee Benefits deficit excluding N/a
amounts allocated to equity accounted investments.
Dividend per share Interim dividend paid and final dividend proposed per share. N/a
Income statement
2019 2018
£m
£m
Financial performance measures as defined by the Group(1)
Sales 20,109 18,407
Underlying EBITA 2,117 1,928
Return on sales 10.5% 10.5%
Financial performance measures defined in IFRS(2) £m £m
Revenue 18,305 16,821
Operating profit 1,899 1,605
Return on revenue 10.4% 9.5%
Reconciliation of sales to revenue £m £m
Sales 20,109 18,407
Deduct Share of sales by equity accounted investments (2,878) (2,812)
Add Sales to equity accounted investments 1,074 1,226
Revenue 18,305 16,821
Reconciliation of underlying EBITA to operating profit £m £m
Underlying EBITA 2,117 1,928
Non-recurring items (27) (154)
Amortisation of intangible assets (109) (85)
Impairment of intangible assets (6) (33)
Financial expense of equity accounted investments (23) (13)
Taxation expense of equity accounted investments (53) (38)
Operating profit 1,899 1,605
Net finance costs (273) (381)
Taxation expense (94) (191)
Profit for the year 1,532 1,033
Underlying net interest expense(3) (257) (215)
Net interest expense on post-employment benefit obligations (117) (106)
Fair value and foreign exchange adjustments on financial instruments and 78 (73)
investments
Net finance costs (including equity accounted investments) (296) (394)
Exchange rates 2019 2018
Average
£/$ 1.277 1.335
£/€ 1.141 1.130
£/A$ 1.836 1.786
Year end
£/$ 1.324 1.274
£/€ 1.180 1.114
£/A$ 1.884 1.809
Sensitivity analysis £m
Estimated impact on sales of a ten cent movement in the average exchange rate:
$ 675
€ 100
A$ 40
1. For alternative performance measure definitions see glossary on page 12.
2. International Financial Reporting Standards.
3. Underlying net interest expense is defined as finance costs for the Group
and its share of equity accounted investments, excluding net interest expense
on post-employment benefit obligations and fair value and foreign exchange
adjustments on financial instruments and investments.
Sales increased by £1.7bn to £20.1bn (2018 £18.4bn), a 7% increase on a
constant currency basis.
Underlying EBITA increased to £2,117m (2018 £1,928m), giving a return on
sales of 10.5% (2018 10.5%). Excluding the impacts of IFRS 16 and exchange
translation, growth was 5%.
Revenue increased by £1.5bn to £18.3bn (2018 £16.8bn), a 7% increase on a
constant currency basis.
Operating profit increased by £294m to £1,899m (2018 £1,605m). There was a
favourable exchange translation impact of £36m.
Non-recurring items in 2019 of £27m comprises a £36m charge relating to the
derecognition of Enterprise Resource Planning software intangible assets in
the Air sector, charges of £13m relating to legal disputes arising from
historical disposals, a gain of £14m on the sale of the Group's 55%
shareholding in BAE Systems Global Combat Systems Limited upon formation of
the Rheinmetall BAE Systems Land joint venture, and a gain of £8m relating to
the disposal of the Aircraft Accessories and Components Company. Non-recurring
items in 2018 of £154m represented a Guaranteed Minimum Pension equalisation
charge of £114m, and a loss on disposal of the Mobile, Alabama, shipyard of
£40m.
Amortisation of intangible assets is £109m (2018 £85m), the increase mainly
a result of new IT systems becoming operational.
Impairment of intangible assets in 2019 is £6m. In 2018 the charge
represented the impairment of Silversky customer-related intangibles in the
Applied Intelligence business.
Net finance costs, including equity accounted investments, were £296m (2018
£394m). The underlying interest charge, excluding pension accounting, and
fair value and foreign exchange adjustments on financial instruments and
investments increased to £257m (2018 £215m). Net interest expense on the
Group's pension deficit was £117m (2018 £106m). There was a credit in
respect of fair value and foreign exchange adjustments of £78m (2018 £73m
charge) on exchange translation of US dollar-denominated bonds.
IFRS 16 Leases has been applied for the first time in 2019, and as a result
underlying EBITA and operating profit are both approximately £50m higher than
the prior year as a depreciation charge on leased assets is reported, rather
than the operating lease expense previously recognised. Net finance costs have
also increased under IFRS 16 by approximately £50m owing to the recognition
of the interest charge element of the lease liabilities.
Taxation expense, including equity accounted investments, of £147m (2018
£229m) reflects the Group's underlying effective tax rate for the year of
19%, less a £161m credit in respect of two items. Following agreements
reached in respect of overseas tax matters, a one-off benefit has been
recognised; and, following review of the April 2019 EU Commission decision
that concluded that the UK's Controlled Foreign Company regime partially
represents State Aid, a provision has been recognised for the estimated
exposure. The underlying effective rate increased to 19% from 18% in 2018.
The underlying effective tax rate for 2020 is expected to increase from 19% to
around 20%, with the final rate dependent on the geographical mix of profits.
Earnings per share
2019 2018
Financial performance measures as defined by the Group(1)
Underlying earnings (excluding the one-off tax benefit) £1,457m £1,370m
Underlying earnings per share (excluding the one-off tax benefit) 45.8p 42.9p
Underlying earnings (including the one-off tax benefit) £1,618m £1,370m
Underlying earnings per share (including the one-off tax benefit) 50.8p 42.9p
Financial performance measures defined in IFRS(2)
Profit for the year attributable to equity shareholders £1,476m £1,000m
Basic earnings per share 46.4p 31.3p
Reconciliation of underlying EBITA to underlying earnings £m £m
Underlying EBITA 2,117 1,928
Underlying net interest expense (including equity accounted investments)(3) (257) (215)
1,860 1,713
Taxation expense (at the underlying effective tax rate, excluding the one-off (347) (310)
tax benefit)
Non‑controlling interests (56) (33)
Underlying earnings (excluding the one-off tax benefit) 1,457 1,370
One-off tax benefit 161 -
Underlying earnings (including the one-off tax benefit) 1,618 1,370
Reconciliation of underlying earnings to profit for the year £m £m
attributable to equity shareholders
Underlying earnings (excluding the one-off tax benefit) 1,457 1,370
Non-recurring items, post tax (18) (126)
Amortisation and impairment of intangible assets, post tax (93) (97)
Net interest expense on post-employment benefit obligations, post tax (95) (87)
Fair value and foreign exchange adjustments on financial instruments and 64 (60)
investments, post tax
One-off tax benefit 161 -
Profit for the year attributable to equity shareholders 1,476 1,000
Non-controlling interests 56 33
Profit for the year 1,532 1,033
Underlying earnings per share excluding the one-off tax benefit for the year
increased by 7% to 45.8p (2018 42.9p). Underlying earnings per share including
the one-off tax benefit for the year was 50.8p.
Basic earnings per share was 46.4p (2018 31.3p).
The application of IFRS 16 Leases for the first time in 2019 has had no
material impact on earnings per share.
1. For alternative performance measure definitions see glossary on page 12.
2. International Financial Reporting Standards.
3. Underlying net interest expense is defined as finance costs for the Group
and its share of equity accounted investments, excluding net interest expense
on post-employment benefit obligations and fair value and foreign exchange
adjustments on financial instruments and investments.
Cash flow
2019 2018
£m
£m
Financial performance measures as defined by the Group(1)
Operating business cash flow 1,307 993
Financial performance measures defined in IFRS(2) £m £m
Net cash flow from operating activities 1,597 1,200
Reconciliation from operating business cash flow to net cash flow from £m £m
operating activities
Operating business cash flow 1,307 993
Add back Net capital expenditure and financial investment 454 464
Add back Principal element of lease payments and receipts 230 -
Deduct Dividends received from equity accounted investments (142) (57)
Deduct Taxation (252) (200)
Net cash flow from operating activities 1,597 1,200
Net capital expenditure and financial investment (454) (464)
Principal element of finance lease receipts 9 -
Dividends received from equity accounted investments 142 57
Interest received 28 25
Acquisitions and disposals(3) 43 24
Net cash flow from investing activities (232) (358)
Interest paid (233) (203)
Net sale of own shares - 1
Equity dividends paid (724) (703)
Partial disposal of shareholding in subsidiary undertaking(3) 31 17
Dividends paid to non-controlling interests (56) (28)
Principal element of finance lease payments (239) -
Cash flow from matured derivative financial instruments (excluding cash flow 40 6
hedges)
Movement in cash collateral 1 2
Net cash flow from loans (782) (7)
Net cash flow from financing activities (1,962) (915)
Net decrease in cash and cash equivalents (597) (73)
Add back Net cash flow from loans 782 7
Foreign exchange translation 72 (188)
Other non-cash movements (96) 102
Decrease/(increase) in net debt 161 (152)
Opening net debt (904) (752)
Net debt (743) (904)
£m £m
Operating business cash flow 1,307 993
Interest paid, net of interest received (205) (178)
Taxation (252) (200)
Free cash flow (as defined by the Group)(4) 850 615
1. For alternative performance measure definitions see glossary on page 12.
2. International Financial Reporting Standards.
3. 2018 comparatives have been reclassified to present a cash inflow of £17m
in respect of a partial disposal of the Group's shareholding in a subsidiary
undertaking within financing activities. This cash flow was previously
presented within investing activities.
4. Free cash flow is defined as operating business cash flow less interest
paid (net) and taxation.
Operating business cash inflow was £1,307m (2018 £993m), which includes cash
contributions in respect of pension deficit funding, over and above service
costs, for the UK and US schemes totalling £231m on a funding basis.
Net cash inflow from operating activities was £1,597m (2018 £1,200m). Under
IFRS 16 net lease cash outflows of £273m are now classified under financing
and investing activities.
Taxation payments increased to £252m (2018 £200m) partly reflecting payments
in Australia following the end of utilisation of prior year losses.
Net capital expenditure and financial investment was £454m (2018 £464m).
Dividends received from equity accounted investments of £142m (2018 £57m)
were primarily receipts from MBDA (£73m), Advanced Electronics Company
(£38m) and FNSS (£17m).
Interest received was £28m (2018 £25m).
The cash inflows in respect of acquisitions, disposals, held for sale assets
and the partial disposal of shareholdings in subsidiary undertakings represent
the disposal of Aircraft Accessories and Components Company (£26m), the
disposal of the UK-based land vehicles business into the RBSL joint venture
(£29m), the reduction in the Group's shareholding in Overhaul and Maintenance
Company (£31m) (2018 £17m), less the investment in Riptide Autonomous
Solutions (£9m) and the Prismatic acquisition (£3m). The cash inflow in 2018
of £24m included cash acquired as part of the ASC Shipbuilding acquisition
(£14m) and cash received on the sale of the Mobile, Alabama, shipyard
(£12m).
Interest paid was £233m (2018 £203m).
Equity dividends paid in 2019 represents the 2018 final (£423m) and 2019
interim (£301m) dividends.
Dividends paid to non-controlling interests increased to £56m (2018 £28m),
reflecting a higher payment by Saudi Maintenance & Supply Chain Management
Company, in which the Group has a 51% shareholding.
There was a cash inflow from matured derivative financial instruments of £40m
(2018 £6m), arising from rolling hedges relating to balances within the
Group's subsidiaries and equity accounted investments.
Foreign exchange translation primarily arises in respect of the Group's US
dollar-denominated borrowing.
Net debt
2019 2018
£m
£m
Components of net debt
Cash and cash equivalents 2,587 3,232
Debt-related derivative financial instruments (net) 67 163
Loans - non-current (3,020) (3,514)
Loans and overdrafts - current (377) (785)
Net debt (743) (904)
The Group's net debt at 31 December 2019 is £743m, a net decrease of £161m
from the position at the start of the year. The $1bn 6.375% bond, of which
$500m had been converted into a floating rate bond by utilising interest rate
swaps, matured and was repaid in June 2019.
Cash and cash equivalents of £2,587m (2018 £3,232m) are held primarily for
the repayment of debt securities, pension deficit funding, payment of the 2019
final dividend and management of working capital.
Accounting policies
Changes in accounting policies
With effect from 1 January 2019, the Group adopted IFRS 16 Leases. This
results in almost all leases being recognised on the balance sheet by lessees.
The Group has applied the modified retrospective transition approach and
therefore has not restated comparative amounts for the year ended 31 December
2018.
Underlying EBITA and operating profit are both approximately £50m higher than
the prior year as a depreciation charge on leased assets is reported, rather
than the operating lease expense previously recognised. Net finance costs have
also increased under IFRS 16 by approximately £50m owing to the recognition
of the interest charge element of the lease liabilities.
There are no accounting policy changes which are expected to have a
significant impact on the Group with effect from 1 January 2020.
Segmental review
The Group reports its performance through five principal reporting segments.
Year ended 31 December 2019
As defined by the Group Defined in IFRS(1)
Sales Underlying EBITA Return Operating business cash flow Order Order Revenue Operating profit/ Return on revenue Net cash flow from operating activities
£m
£m
on sales
£m
£m
(loss)
%
£m
% intake(2) backlog(2)
£m
£m £bn
Electronic Systems 4,439 687 15.5 672 5,023 6.0 4,439 672 15.1 833
Cyber & Intelligence 1,732 91 5.3 68 1,846 1.8 1,732 80 4.6 99
Platforms & Services (US) 3,337 267 8.0 241 4,020 5.8 3,185 239 7.5 305
Air 7,457 887 11.9 408 4,594 23.9 6,153 777 12.6 497
Maritime 3,116 268 8.6 150 2,875 8.6 3,071 253 8.2 289
HQ(3) 387 (83) (232) 386 - 43 (122) (174)
Deduct Intra-group (359) (297) (0.7) (318)
Deduct Taxation(4) (252)
Total 20,109 2,117 10.5 1,307 18,447 45.4 18,305 1,899 10.4 1,597
Year ended 31 December 2018
As defined by the Group Defined in IFRS(1)
Sales Underlying EBITA Return Operating business cash flow Order Order Revenue Operating profit/ Return on revenue Net cash flow from operating activities
£m
£m
on sales
£m
£m
(loss)
%
£m
% intake(2) backlog(2)
£m
£m £bn
Electronic Systems 3,965 606 15.3 431 4,624 5.4 3,965 590 14.9 575
Cyber & Intelligence 1,678 111 6.6 85 1,802 1.9 1,678 59 3.5 96
Platforms & Services (US) 3,005 210 7.0 (30) 3,693 5.4 2,864 161 5.6 31
Air 6,712 859 12.8 666 14,845 27.4 5,579 810 14.5 719
Maritime 2,975 209 7.0 67 3,513 9.0 2,940 191 6.5 190
HQ(3) 350 (67) (226) 358 0.1 41 (206) (211)
Deduct Intra-group (278) (555) (0.8) (246)
Deduct Taxation(4) (200)
Total 18,407 1,928 10.5 993 28,280 48.4 16,821 1,605 9.5 1,200
1. International Financial Reporting Standards.
2. Including share of equity accounted investments.
3. HQ comprises the Group's head office activities, together with a 49%
interest in Air Astana.
4. Taxation is managed on a Group-wide basis.
Segmental performance: Electronic Systems
Electronic Systems, with 16,600 employees(1), comprises the US- and UK‑based
electronics activities, including electronic warfare systems, electro-optical
sensors, military and commercial digital engine and flight controls, precision
guidance and seeker solutions, next-generation military communications systems
and data links, persistent surveillance capabilities, and hybrid electric
drive systems.
Operational and strategic key points
- Growing demand for Advanced Precision Kill Weapon System (APKWS(®))
laser-guided rockets, with production awards totalling over $400m (£302m)
received in the year
- Over 500 electronic warfare systems delivered for the F-35 Lightning
II programme, and awarded production and Block 4 modernisation contracts worth
more than $750m (£566m)
- Acquired Riptide Autonomous Solutions to advance capabilities in
maritime mission requirements
- Continuing growth in space resilience domain
- Establishing new facilities in Huntsville, Alabama and Manchester, New
Hampshire to meet the record order backlog
- Active interceptors certified for Gulfstream G500 and G600 jets and in
production
- Battery electric and fuel cell electric transit systems recorded five
million zero emission miles
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures defined in IFRS(3)
2019 2018 2019 2018
Sales £4,439m £3,965m Revenue £4,439m £3,965m
Underlying EBITA £687m £606m Operating profit £672m £590m
Return on sales 15.5% 15.3% Return on revenue 15.1% 14.9%
Operating business cash flow £672m £431m Cash flow from operating activities £833m £575m
Order intake(1) £5,023m £4,624m
Order backlog(1) £6.0bn £5.4bn
- Sales compared to 2018 were up 7% at $5.7bn (£4.4bn). Growth in the
defence business was at 9% driven by the F-35 programme, APKWS(®) volumes and
increased classified activity. Commercial sales of engine and flight controls
and hybrid-electric drive systems also grew and at $1.2bn (£0.9bn) now amount
to 21% of the sector.
- Underlying EBITA was up to $877m (£687m), delivering a return on
sales of 15.5%, at the higher end of our guidance range.
- As expected, cash conversion of EBITA was very strong in the second
half of the year, and close to 100% for the full year.
- Order backlog was another record high, at $7.9bn (£6.0bn), with
significant awards on F-35 for LRIP 14 and Block 4 development, APKWS(®)
volumes and the Radar Warning Receiver upgrade.
Operational performance
Electronic Combat Solutions
Staying at the forefront of emerging threats and delivering next-generation
electronic warfare (EW) capabilities are important discriminators for success.
As a leader in EW, we continue to see growth across our portfolio for both US
and international customers.
The F-35 Lightning II programme completed deliveries for Lot 11 and achieved
the milestone of delivering over 500 EW systems. In addition, the programme
was awarded a Block 4 modernisation and further F-35 system production
contracts from Lockheed Martin totalling over £750m (£566m). We continue to
operate under a five-year Performance Based Logistics contract to provide
material availability and support for the F-35 sustainment programme.
Executing on our current contract from Boeing, we continue to deliver to the
United States Air Force our Eagle Passive Active Warning Survivability System,
which provides advanced aircraft protection and has completed successful F-15
aircraft flight tests despite experiencing cost and schedule overruns. We were
also awarded a $495m (£374m) contract to digitally upgrade our ALR-56 Radar
Warning Receiver system, enhancing the capability of our technology on F-15
jets.
Providing advanced EW capability for international F-15 aircraft, we continue
to deliver on our contract from Boeing and Warner Robins Air Logistics
Complex, totalling more than $1bn (£0.8bn) for the installation of the
Digital Electronic Warfare System (DEWS) on new and existing F-15 aircraft. We
are also executing a contract worth in excess of $300m (£227m) to provide
DEWS to support the sale of new F-15 aircraft to another international
customer.
As a provider of the long-range sensor and targeting technology for the Long
Range Anti-Ship Missile (LRASM), we have completed Lot 1 production for our
prime contractor Lockheed Martin. In addition, we received a contract
modification to a previous Lot 2 production award, increasing this contract
award to $78m (£59m).
The Compass Call programme continues its long history of sustaining and
upgrading the prime mission equipment in support of the existing EC-130H
fleet. Cross-decking the mission system onto the newly-designated Gulfstream
G550 jet, the programme is currently executing contracts with a total value of
nearly $500m (£378m).
Due to the sensitive nature of electronic combat systems and technology,
approximately one quarter of our revenues in this business area are driven by
our work on classified programmes.
Survivability, Targeting & Sensing Solutions
Our APKWS(®) laser-guided rocket is experiencing growing demand, with over
36,000 units delivered to date. The programme received a five-year Indefinite
Delivery, Indefinite Quantity contract worth up to $2.7bn (£2.0bn). Further
production awards totalling over $400m (£302m) were received this year. In
addition to expanding US military use, the system is generating strong
international interest.
We are developing a next-generation missile warning system for the US Army
under the Limited Interim Missile Warning System programme. We are completing
qualification and continue to support government testing. We also received
additional funding to enable fielding on other US Army aircraft variants.
Both fixed- and rotary-wing demonstrations of our Striker(®) II
helmet-mounted display are ongoing and full development awaits customer
funding.
C4ISR Systems
Consistent with our strategy to obtain and incubate small business innovations
that can yield disruptive technology breakthroughs, our Electronic Systems
FAST Labs™ organisation acquired the key assets of Riptide Autonomous
Solutions to advance our capabilities to address expanding maritime mission
requirements for integrated, flexible, modular, unmanned underwater vehicle
solutions.
In the space resilience domain, we are a leading provider of space-qualified
subsystems and components. We continue to experience growth in the areas of
integrated on-board processors, reconfigurable processing payloads and secure
communications. In May, our radiation-hardened electronic products achieved
10,000 cumulative years in orbit.
We have been awarded funding from the Defense Advanced Research Projects
Agency to integrate machine-learning into platforms that exploit radio
frequency signals in increasingly crowded electromagnetic spectrum
environments. Our flexible, reconfigurable hardware solutions will provide
commercial and military users with greater, automated situational awareness of
their operating environment.
Controls & Avionics Solutions
We continue to develop the integrated flight control electronics and remote
electronic units for Boeing's next-generation 777X aircraft. A successful
first flight of the aircraft was undertaken in January 2020 and the business
is continuing software updates and systems verification testing in support of
the aircraft certification efforts. During the year, our 737 MAX production
rates were scaled back in line with Boeing's reduced demand.
Our active inceptors received certification for the Gulfstream G500 and G600
and are now in production. A derivative, LinkEdge™ (Active Parallel
Actuation Subsystem), is being developed for the Chinook CH-47.
Our engine control product line continues to see strong performance from FADEC
Alliance, a joint venture between GE Aviation and FADEC International (our
joint venture with Safran Electronics & Defense). We have successfully
completed component certification testing of the engine control for the Boeing
777X aircraft.
Under the recently-awarded Improved Turbine Engine Program, we will provide
the Electronic Engine Controls to modernise the US Army's Black Hawk and
Apache fleets.
Development of the F-35 vehicle management computer technology refresh is
proceeding to plan and we are actively engaged with Lockheed Martin
Aeronautics in moving towards a sustainment contract for the active inceptor
systems.
Power & Propulsion Solutions
With 12,000 electric-hybrid propulsion transit buses in operation globally, we
have launched the next-generation battery electric system to a market moving
to zero emission technology. This year, our battery electric and fuel cell
electric systems recorded five million zero emission miles. As cities work to
reach low emission targets, this number is expected to grow significantly.
The demand for low and zero emission technology is growing in both commercial
and military applications, with a number of European cities employing fully
electric vehicles powered by our technology. Our first and largest transit
customer, New York City Transit (Metropolitan Transportation Authority)
announced its decision to purchase up to a further 435 electric-hybrid power
and propulsion systems from BAE Systems. In addition, the maritime domain is
now adopting green technology and our electric-hybrid systems are powering
both passenger and cargo vessels.
Looking forward
Forward-looking information for the Electronic Systems reporting segment is
provided on page 37.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary on page 12.
3. International Financial Reporting Standards.
Segmental performance: Cyber & Intelligence
Cyber & Intelligence, with 10,100 employees(1), comprises the US-based
Intelligence & Security business and UK-headquartered Applied Intelligence
business, and covers the Group's cyber security, secure government and
commercial financial security activities.
Operational and strategic key points
Intelligence & Security
- Received orders exceeding $100m (£76m) to provide logistics
sustainment support to US Air Force Space Command
- Awarded $437m (£330m) task order to provide open source support to US
Army and Army Intelligence & Security Command approved partners
- Technology offerings further developed and the business achieved four
Amazon Web Services designations, recognising our technical proficiency and
operational excellence
Applied Intelligence
- Divestment of the Silversky business and exit from the UK-based
Managed Security Services business in progress at year-end. Restructuring
charge of £20m recognised in the year
- Strong order intake and revenue growth in the Government business unit
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures defined in IFRS(3)
2019 2018 2019 2018
Sales £1,732m £1,678m Revenue £1,732m £1,678m
Underlying EBITA £91m £111m Operating profit £80m £59m
Return on sales 5.3% 6.6% Return on revenue 4.6% 3.5%
Operating business cash flow £68m £85m Cash flow from operating activities £99m £96m
Order intake(1) £1,846m £1,802m
Order backlog(1) £1.8bn £1.9bn
- In aggregate, sales were broadly unchanged on a constant currency
basis at $2.2bn (£1.7bn). Sales in the US business were 2% lower owing to
customer awards made but subsequently protested. In the Applied Intelligence
business, sales were up 4%, all arising in the Government business line.
- Return on sales in the US business was in line with the prior year at
9.1%. Within Applied Intelligence, the business recorded a loss of £20m
following the restructuring charge taken in the first half of the year.
- Disposal of the Silversky business and exit from the UK-based Managed
Security Service are expected in the near future, both of which will improve
profitability in future years.
- As expected, order backlog was stable at $2.3bn (£1.8bn), after
adjusting for the expected Applied Intelligence disposals.
Operational performance
Intelligence & Security
Air Force Solutions
We received orders exceeding $100m (£76m) to provide logistics sustainment
support to US Air Force Space Command for instrumentation tracking (radar,
telemetry and optics) systems, which includes 26 agencies across the US
Department of Defense, Department of Energy, National Aeronautics and Space
Administration, plus six foreign governments.
On the US Air Force Intercontinental Ballistic Missile Integration Support
Contractor Program, we were awarded a sole-source modification to increase the
contract ceiling by $93m (£70m) to $1.1bn (£0.8bn). The period of
performance remains through to January 2022, and our work includes programme
management, systems engineering, integration and testing, sustainment and
cyber defence.
Integrated Defense Solutions
We are executing the fourth year of a five-year, $368m (£278m) sole-source
contract to support weapons systems on board US Ohio and UK Vanguard Class
submarines, as well as future US Columbia Class and UK Dreadnought Class
submarines.
The US Navy has awarded the business a five-year Indefinite Delivery,
Indefinite Quantity (IDIQ) contract with an expected lifecycle value of $280m
(£211m) to modernise and maintain command, control, communications,
computers, cyber, intelligence, surveillance and reconnaissance systems aboard
new construction aircraft carriers and large deck amphibious ships.
We secured a $126m (£95m) contract for the US Marshals Service (USMS), a
component of the US Department of Justice. The business will provide
mission-critical IT infrastructure support, sustainment operations and
engineering services to the USMS Information Technology Division.
The business has been awarded a $300m (£227m) contract to provide enterprise
and mission-critical IT support to the Federal Emergency Management Agency's
Operations and Maintenance Division. The programme will provide IT
infrastructure modernisation, system sustainment and telecommunications,
network and helpdesk services.
We were awarded a $212m (£160m) US Navy follow-on contract for the design,
acquisition, integration and test of radio communication suites for Guided
Missile Destroyers and other US Navy and Coast Guard ships. This win continues
our near 50-year legacy as an integrator of mission-critical shipboard
systems.
The business was awarded a five-year, $200m (£151m) contract to provide
systems engineering, security management, modelling and simulation, and
training services to help in the US government defence cyber mission.
Intelligence Solutions
The team is executing on a number of task order contracts valued at
approximately $320m (£242m) to provide motion-imagery analysis, training, and
research support services to the US intelligence community, and provide
technical, functional, and general support to enhance the situational
awareness and training of US Army troops deployed around the world.
A $70m (£53m) engineering change proposal was secured, extending the period
of performance on a contract originally awarded in 2013 to provide
high-performance computing and infrastructure support to the US intelligence
community.
The business was awarded a significant follow-on contract and a new award with
a combined value of over $490m (£370m) to provide critical intelligence
support to the US government.
We were awarded a new $437m (£330m) task order to provide open source support
for the Army and Army Intelligence & Security Command approved partners,
to provide training, policy and governance recommendations, assessments and
implementation of emerging capabilities, and to establish and manage a secure
cloud hosting environment for these efforts.
The business was awarded a prime position on Solutions for Intelligence
Analysis 3, a ten-year multiple award IDIQ contract. The company will provide
worldwide coverage, support and assistance to the Defense Intelligence Agency
delivering timely, objective and cogent military intelligence to defence
planners and policy makers.
We are delivering our first Federated Secure Cloud implementation, supporting
multiple independent levels of security, and leveraging this capability into
adjacent customers. In addition, the business has established multiple
commercial cloud partnerships to drive additional services revenue across
defence and intelligence customers.
Among a number of strategic developments in 2019, the business furthered its
technology offerings and attained Amazon DevOps, Government and Disaster
Response and Public Safety Competencies, as well as being named an Amazon Web
Services Premier Consulting Partner.
Applied Intelligence
As at the 2019 year-end, negotiations relating to the disposal of the US-based
software-as-a-service business were ongoing.
Government
The Government business delivered good growth in orders. Performance was
particularly strong in UK National Security which benefited from the signing
of a number of transformational multi-year deals. Revenue growth followed the
higher order intake, with increased headcount and continuing investment in
talent in a competitive labour market for highly-skilled software engineers
with enhanced security clearances. Profitability continued to benefit from
cost control and greater efficiency in sales and management activity in the
International business in particular.
Financial Services
The Financial Services business has seen a significant increase in business
development investment in the year. The higher spend on product engineering
culminated in the launch of a new version of NetReveal(®), v8.0, in the first
half of the year. Response to the product has been positive and has led to a
number of pipeline opportunities for upgrades to existing customers and
deployment to new customers. The conversion of these opportunities drove order
intake growth in the second half of the year and positions the business for
higher levels of growth in the future.
Looking forward
Forward-looking information for the Cyber & Intelligence reporting segment
is provided on page 37.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary on page 12.
3. International Financial Reporting Standards.
Segmental performance: Platforms & Services (US)
Platforms & Services (US), with 12,500 employees(1), has operations in the
US, UK and Sweden. It manufactures combat vehicles, weapons and munitions, and
delivers services and sustainment activities, including naval ship repair and
the management and operation of government-owned munitions facilities.
Operational and strategic key points
- Deliveries of the M109A7 self-propelled howitzer and ammunition
carrier vehicle sets are progressing and the decision to proceed to full-rate
production was made in Q1 2020
- First deliveries achieved of the Amphibious Combat Vehicle to the US
Marine Corps
- Contract modification award of $575m (£434m) received for LRIP
vehicles on the Armored Multi-Purpose Vehicle programme
- Work underway to upgrade 332 vehicles to the Bradley A4 configuration
- Awarded contracts worth $466m (£352m) to upgrade configuration on
various M88 vehicles
- First tandem docking of two large warships in San Diego dry-dock for
contracts worth more than $170m (£128m)
- Deliveries continue of the M777 ultra-lightweight howitzer to the
Indian Army, with subsequent systems to be assembled at the Mahindra Defence
Systems facility
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures defined in IFRS(3)
2019 2018 2019 2018
Sales £3,337m £3,005m Revenue £3,185m £2,864m
Underlying EBITA £267m £210m Operating profit £239m £161m
Return on sales 8.0% 7.0% Return on revenue 7.5% 5.6%
Operating business cash flow £241m £(30)m Cash flow from operating activities £305m £31m
Order intake(1) £4,020m £3,693m
Order backlog(1) £5.8bn £5.4bn
- Sales in the year were up 6% to $4.3bn (£3.3bn), within guidance. In
the US Combat Vehicles business, the second half challenge to deliver the ramp
up in M109A7 deliveries was met.
- Return on sales performance for the year improved to 8.0% with no
material charges taken in the year. As regards the ramp in Combat Vehicles
sales, we are trading profit on the Armored Multi-Purpose Vehicle and
Amphibious Combat Vehicle programmes at an initial low level.
- Cash flow performance was very strong in the second half of the year
as vehicle production deliveries increased and working capital was liquidated.
- Order backlog was further increased to $7.7bn (£5.8bn), with total
in-year funded Combat Vehicle orders received of $2.5bn (£1.9bn).
Operational performance
US Combat Vehicles
The business continues to make progress towards achieving consistent
production throughput across multiple programmes with the implementation of
ongoing improvements and investments in modernising facilities and
manufacturing technologies, including automation and robotic welding.
We are leveraging the lessons learned on the M109A7 programme and continue to
integrate innovative manufacturing capabilities during the early stages of the
production of new combat vehicles. While schedule adjustments have been
necessary, addressing these challenges will facilitate consistency of quality
and delivery for our customers, and bring long-term benefits across our
vehicle programmes.
Initial Amphibious Combat Vehicles (ACVs) were delivered to the US Marine
Corps under Low-Rate Initial Production (LRIP), with a third LRIP contract
received in October bringing the total value to $458m (£346m) for 90
vehicles. Under a $67m (£51m) contract awarded in June, we have begun design
and development activities on two new mission variants of the ACV family of
vehicles.
As one of two competitors, we continue to work on the US Army's Mobile
Protected Firepower programme under a $376m (£284m) contract for the
engineering and manufacturing development phase for rapid prototyping efforts.
On the US Army's Armored Multi-Purpose Vehicle programme, we were awarded a
$575m (£434m) contract modification, bringing the cumulative award value to
$873m (£659m). Initial LRIP vehicles are scheduled to begin delivery in 2020.
We continue to progress the LRIP phase of the M109A7 programme, with contracts
in 2018 and 2019 totalling approximately $750m (£566m) for 108 vehicle sets.
These cumulative LRIP awards include the recent December contract modification
and long-lead material funding. The decision to proceed to full-rate
production was subsequently made in the first quarter of 2020. In July, we
received a $45m (£34m) contract to support the integration of the Extended
Range Cannon Artillery on the M109A7 to double the range of the gun system,
which is among the Army's top priorities.
Work has begun under contracts for 332 vehicles, valued at $578m (£437m) to
upgrade to the Bradley A4 configuration.
We continue to work on US Army contracts for production and sustainment of M88
recovery vehicles, to include upgrades from the M88A1 to the M88A2 HERCULES
configuration. In September we received a $148m (£112m) contract to upgrade
an additional 43 vehicles, and were competitively selected for a $318m
(£240m) contract to upgrade to the next-generation M88A3 configuration to
restore single-vehicle recovery.
Internationally, the delivery of an additional 11 Assault Amphibious Vehicles
for Japan was completed in the second half of the year and work continues on
36 vehicles for Taiwan. The delivery of 32 M109A5+ self-propelled howitzers to
the Brazilian Army was completed in the second half of the year.
Weapon Systems
Deliveries of M777 ultra-lightweight howitzers continue to the Indian Army
under a $542m (£409m) Foreign Military Sale contract for 145 M777s. The
initial guns are being built in our facilities, with at least 120 subsequent
systems to be assembled in India at Mahindra Defence Systems' new facility.
We received two orders totalling $85m (£64m) from the US Navy to deliver six
Mk45 Mod 4 gun systems, providing a solid US Navy order book of 20 Mk45
systems. We are also delivering 57mm Mk110 gun systems to the US Navy and
Coast Guard, with nearly 60 systems now delivered to US maritime forces.
We continue to execute on contracts for 155mm BONUS ammunition to the Swedish
Army and the US Army. Under a 2016 contract modification, we are providing 24
additional ARCHER artillery systems to the Swedish government, and we are
under multiple export contracts to deliver 40 Mk4 and 57 Mk3 naval gun
systems.
We continue to perform on a $183m (£138m) contract to provide the Maritime
Indirect Fire System for the UK Royal Navy's Type 26 frigate, which includes
Mk45 Mod 4 gun systems, automated ammunition handling systems and gun fire
control systems.
Under the latest contract awarded in March, we are to produce 28 more Virginia
Payload Module tubes for the US Navy's Block V Virginia-class submarines.
Ordnance Systems
We manage, operate and modernise the US Army's Radford and Holston munitions
facilities.
At Holston, production operations impacted by a fire in January 2019 resulted
in a £10m charge recognised in the HQ segment under the Group insurance
arrangement. Modernisation activities continue under multiple contracts to
construct a natural gas-fired steam facility, a waste water management
facility that is nearing completion, as well as the design, construction and
commissioning of new production facilities to improve efficiency and modernise
energetics manufacturing.
At Radford, in addition to ongoing operations, work continues on the
construction of a modernised nitrocellulose facility, and we are actively
managing ongoing subcontractor performance issues, cost and schedule overruns,
and related disputes.
US Ship Repair
Our US maintenance and modernisation shipyards remain in strong demand. In
2019, we secured orders across our US shipyards totalling approximately $1bn
(£0.8bn), including awards to service the USS The Sullivans in Jacksonville
and the USS Vicksburg in Norfolk.
In September, we received two contracts totalling more than $170m (£128m) for
the repair and maintenance of the guided-missile destroyers USS Stethem and
USS Decatur in San Diego, resulting in the first tandem docking of two large
warships in our San Diego dry-dock.
Following a thorough analysis of the new Multiple Award Contract structure
being implemented in Pearl Harbor, Hawaii, we informed the Navy we will not
bid for future work in Hawaii, and will focus on completing existing
contracts.
BAE Systems Hägglunds
With an installed base of nearly 1,300 CV90 vehicles in Sweden and across six
other international markets, the business continues to pursue contractual
opportunities, including the Czech Republic's competition to replace its fleet
of BMP2 Infantry Combat Vehicles.
Work is progressing to refurbish Swedish CV90s, and initial deliveries have
begun on the integration of 40 Mjölner mortar systems under a separate
contract. We were selected by the Dutch Army to integrate the Elbit Systems'
Iron Fist Active Protection System on its fleet of CV90s.
32 BvS10 all-terrain vehicles under contract for Austria were delivered for
final acceptance.
FNSS
FNSS, our land systems joint venture based in Turkey, continues to perform
under its $524m (£396m) programme to produce 259 8x8 wheeled armoured
vehicles for the Royal Malaysian Army. Deliveries continue under a contract
with Oman for PARS wheeled armoured vehicles in 8x8 and 6x6 configurations.
Work progresses under multiple contracts for the Turkish Armed Forces,
including a €278m (£236m) contract for 260 anti-tank vehicles, an €84m
(£71m) contract for air defence vehicles, a €155m (£131m) contract for 27
assault amphibious vehicles, and a contract worth €154m (£131m) for 100
special purpose 8x8 and 6x6 vehicles.
Looking forward
Forward-looking information for the Platforms & Services (US) reporting
segment is provided on page 37.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary on page 12.
3. International Financial Reporting Standards.
Segmental performance: Air
Air, with 28,300 employees(1), comprises the Group's UK-based air activities
for European and International Markets, and US Programmes, and its businesses
in Saudi Arabia and Australia, together with its 37.5% interest in the
European MBDA joint venture.
Operational and strategic key points
- Qatar Typhoon and Hawk aircraft programme met its contractual
milestones in the year. Contract amendment agreed to accelerate Typhoon
deliveries
- F-35 programme Lots 12 to 14 price negotiations concluded. 142 rear
fuselage assemblies delivered in the year in line with ramp-up to full rate
production in 2020
- Tempest technology maturation programme contracted between industry
and UK government. Italy and Sweden governments committed to working with UK
to develop next-generation combat air capability
- The first four Hawk aircraft assembled in Saudi Arabia were accepted
and entered service in-Kingdom
- UK Tornado fleet successfully retired from service on schedule
following RAF declaration that Typhoon had met Centurion standard with
embodiment across the Typhoon fleet
- The design and production readiness phase of the Hunter Class
programme for the Royal Australian Navy continues to make good progress
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures defined in IFRS(3)
2019 2018 2019 2018
Sales £7,457m £6,712m Revenue £6,153m £5,579m
Underlying EBITA £887m £859m Operating profit £777m £810m
Return on sales 11.9% 12.8% Return on revenue 12.6% 14.5%
Operating business cash flow £408m £666m Cash flow from operating activities £497m £719m
Order intake(1) £4,594m £14,845m
Order backlog(1) £23.9bn £27.4bn
- Sales were up 11% at £7.5bn. As expected there was higher production
activity on the new Typhoon and Hawk programme for Qatar, and the F-35
programme continues to ramp up towards full rate next year. In addition sales
from MBDA grew on deliveries to Egypt and Qatar.
- The return on sales of 11.9% was ahead of expectations on strong
programme execution. It reflects low initial profit recognition on the early
stages of the Qatar programme, and increased self-funded research and
development on the Tempest future combat air development. Last year's return
on sales benefited by 70bps from the completing Oman Typhoon contract.
- Cash flow largely reflects the utilisation of provisions, timing on
receivables, and the difference between joint venture profits and cash
dividends received. There was also some usage of prior year Qatar funding.
- Order backlog reduced to £23.9bn, primarily for the trading on
multi-year orders, received in prior years, for the Saudi Arabian support and
Qatar programmes.
Operational performance
European & International Markets
Mobilisation activity on the 24 Typhoon and nine Hawk aircraft and associated
support and training contract for the Government of the State of Qatar has
progressed to plan with all initial milestones achieved. A contract amendment
was agreed during the year accelerating Typhoon deliveries and contract
milestones.
The first eight of 28 major units on the Kuwait Typhoon contract, secured by
Italian Eurofighter partner Leonardo, have been delivered. The remaining major
units are planned for delivery by 2022.
In the year, the Royal Air Force accepted the final three Typhoon aircraft
from the UK final assembly facility. The German, Italian and Spanish Air
Forces accepted a total of 11 aircraft in 2019, leaving one of the 88 Tranche
3 aircraft to be delivered.
Following the declaration by the Royal Air Force that Typhoon had met
Centurion standard in December 2018, enabling the transition of capabilities
from Tornado to Typhoon, the UK Tornado fleet successfully retired from
service on schedule. Centurion standard has now been embodied across the
Typhoon fleet.
In the UK, under a ten-year partnership arrangement, and in Oman, under a
five-year availability service contract, we continue to support Typhoon fleets
to achieve customer target flying hours. BAE Systems continues to support the
European Partner Nations' own support arrangements.
Support to the Royal Air Force's UK fleet of Hawk fast jet trainer aircraft
continues through the long-term availability contract. We are in discussions
with the UK on future Hawk support arrangements and we continue to support
users of Hawk trainer aircraft around the world.
The next phase of the Tempest technology maturation programme was contracted
between industry and the UK government. This was followed by the signing of a
Memorandum of Understanding between the UK and Sweden in July, and a Statement
of Intent between the UK and Italy in September, committing the respective
governments to working with the UK government to develop next-generation
combat air capability.
Progress continues on the collaboration for the design and development phase
of an indigenous fifth-generation fighter jet for the Turkish Air Force.
US Programmes
On the F-35 programme, price negotiations on Lots 12 to 14 concluded in the
second half of 2019 and the business is ramping up to full-rate production by
the end of 2020. In the period, 142 rear fuselage assemblies were delivered
under the Low-Rate Initial Production contracts for Lots 11 to 13, bringing
total deliveries on the programme to over 600.
At RAF Marham in the UK, following the declaration of Initial Operational
Capability in 2018, we continue to support the customer in integrating the
F-35 into its operational fleet and forward deployments.
BAE Systems continues to play a growing role on the F-35 sustainment programme
including the supply of spares and technical support, software products,
upgrades and specialist manpower services.
Saudi Arabia
The Group is reliant on the continued approval of export licences by a number
of governments in order to continue supplies to the Kingdom of Saudi Arabia.
Following extensions being granted by the German government to a number of
export licences on joint collaborative programmes, we are working closely with
industry partners and the UK government to continue to fulfil the contractual
support arrangements in Saudi Arabia on the key European collaboration
programmes.
In June 2019, the Court of Appeal of England and Wales directed the Secretary
of State for International Trade to revisit the decision-making process for
granting export licences for the sale of military equipment to the Kingdom of
Saudi Arabia for possible use in the conflict in Yemen and to retake its
decisions regarding such licences on that basis. The Company will assess the
result of the retaking by the Secretary of State of such decisions, once they
have been made. Pursuant to the Order of the Court, the Secretary of State
undertook not to grant new licences for the export of arms or military
equipment to Saudi Arabia for possible use in the conflict in Yemen until such
decisions have been retaken. Both the Secretary of State and the other party
to the proceedings have sought and obtained permission to appeal the Court's
ruling to the Supreme Court.
In March 2018, the UK and the Kingdom of Saudi Arabia signed a Memorandum of
Intent for the supply of a further 48 Typhoon aircraft, support and transfer
of technology and capability. This would enable BAE Systems to continue with
the localisation of defence capabilities in Saudi Arabia. Final assembly of
all 48 Typhoon aircraft would be in-Kingdom.
The business continues to perform against the contract secured in 2018 to
provide Typhoon support services to the Royal Saudi Air Force through to 2022.
The Saudi British Defence Co-operation Programme five-year funding agreement
through to 2021 comprises a number of contracts, including support to the
Tornado fleet and provision of Officer and Aircrew Training for the Royal
Saudi Air Force, as well as engineering and logistics services for the Royal
Saudi Naval Forces. These services continue to progress well. Previous issues
relating to the availability of the Hawk trainer aircraft have been addressed
and the aircraft availability is now consistent with the contractual
requirements.
Four Hawk aircraft assembled in-Kingdom have been accepted and entered service
with the Royal Saudi Air Force in the year. The company has delivered all of
the 22 major units to meet this final assembly programme.
Work continues to reorganise our portfolio of interests in a number of
industrial companies in Saudi Arabia. Riyadh Wings Aviation Academy LLC
increased its ownership in 2019 to 23.5% in the Group's Overhaul and
Maintenance Company (OMC) subsidiary. Additionally during the year OMC
disposed of its 85.7% shareholding in Aircraft Accessories and Components
Company. Following OMC entering into a heads of terms for the sale of its 50%
shareholding in Advanced Electronics Company to Saudi Arabian Military
Industries (SAMI), negotiations are continuing and the transaction is expected
to take place in the first half of 2020.
Through the restructuring of the Group's portfolio of interests in its Kingdom
of Saudi Arabia industrial companies, along with transformation activities to
transfer local capability into these companies, we are working in partnership
with SAMI to explore how we can collaborate to deliver further In-Kingdom
Industrial Participation, in line with the Kingdom's Vision 2030.
Australia
The initial design and production readiness phase of the Hunter Class
programme for the Royal Australian Navy continues to make progress, and the
integration of ASC Shipbuilding into our Australian operations is progressing
well. The first Integrated Baseline Review on the programme is expected to be
completed in Q2 2020.
Progress continues on the Jindalee Operational Radar Network upgrade contract
secured in 2018 from the Commonwealth of Australia, with the System
Requirements Review completed and the first tranche programme baseline under
review. On the sustainment contract, support to the three radar sites
continues to see all operational milestones being achieved to plan.
Final acceptance of the Royal Australian Navy's two Landing Helicopter Docks
is expected to be in 2020. Responsibility for future support has now been
fully transitioned to Naval Ship Management.
Progress on the sustainment and upgrade of the Anzac fleet under the Warship
Asset Management Alliance continues with the first of class, HMAS Arunta, now
deployed back to operations. The second vessel, HMAS Anzac, has now undocked.
The Hawk Mk127 Lead-In Fighter project did not meet all aircraft availability
requirements for the year. The pilot training programme however, was for the
most part not impacted. The upgrade of the Hawk fleet to meet the F-35
training requirements has been completed.
Sustainment activity continues for the regional F-35 fleet at our Williamtown
facility, with 13 aircraft now on base.
We were notified in September that we had been unsuccessful in our bid for the
Land 400 Phase 3 Combat Vehicle programme.
MBDA
During 2019, MBDA secured development contracts for Enhanced Modular Air
Defence Solutions in Italy and for Enforcer missile systems in Germany.
Further contracts for Meteor were secured for additional tranches in France
and Germany, as well as an integration contract for the South Korean KF-X
fighter aircraft. Other contract awards include ASRAAM for Typhoon in Oman and
in Qatar (the latter having already ordered Meteor and Brimstone) and a number
of key support contracts for both European domestic and international
customers.
In June, the MBDA/Lockheed Martin joint venture submitted to the German
customer the updated TLVS (Ground-Based Air Defence System) proposal.
Good progress has been made on a number of development programmes including:
the next-generation MICA missile; Spear Capability 3; and Aster Block 1 New
Technology. In addition the Future Cruise/Anti-Ship Weapon (the Anglo/French
co-operation programme to replace Storm Shadow/Harpoon in the UK and
SCALP/Exocet in France) has successfully achieved its concept review, an
important step in the decision to launch the following phases of the
programme. Progress has also continued on production programmes, notably MICA
missile deliveries for a number of international customers.
Looking forward
Forward-looking information for the Air reporting segment is provided on page
38.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary on page 12.
3. International Financial Reporting Standards.
Segmental performance: Maritime
Maritime, with 16,300 employees(1), comprises the Group's UK-based maritime
and land activities.
Operational and strategic key points
- HMS Prince of Wales vessel acceptance achieved in December
- Four River Class Offshore Patrol Vessels have now been accepted, with
the programme on target for completion in 2020
- Construction commenced on second of the three contracted Type 26
frigates in August
- Construction of the first Dreadnought Class submarine continues to
advance, with £1.4bn of funding received in the year
- Sea trials for the fourth Astute Class submarine are due to take place
in 2020
- A £230m seven-year Torpedo Repair and Maintenance contract was
awarded
- The UK combat vehicles joint venture between Rheinmetall and BAE
Systems Land UK was launched on 1 July
- Design requirements for the Canadian Surface Combatant are progressing
towards finalisation with partners and the Royal Canadian Navy
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures defined in IFRS(3)
2019 2018 2019 2018
Sales £3,116m £2,975m Revenue £3,071m £2,940m
Underlying EBITA £268m £209m Operating profit £253m £191m
Return on sales 8.6% 7.0% Return on revenue 8.2% 6.5%
Operating business cash flow £150m £67m Cash flow from operating activities £289m £190m
Order intake(1) £2,875m £3,513m
Order backlog(1) £8.6bn £9.0bn
- Sales in the Maritime businesses were up 5%, ahead of guidance, at
£3.1bn. Whilst the Dreadnought submarine and Type 26 programmes continue to
ramp up, the Carrier and Offshore Patrol Vessel programmes are close to
completion. Activity levels in Portsmouth Naval Base support remained strong
through the year.
- Return on sales was at 8.6%, within our guidance range.
- The operating cash inflow of £150m reflects utilisation of the Naval
Ships provision created last year and the completion of the Carrier programme.
- Order backlog has reduced slightly to £8.6bn, with further awards for
funding on the Dreadnought programme outweighed by trading on the Astute,
Carrier and Type 26 programmes.
Operational performance
Naval Ships
The second Queen Elizabeth Class aircraft carrier, HMS Prince of Wales,
departed Rosyth in September to undertake comprehensive sea trials before
entering Portsmouth for the first time in November and being accepted in
December. The first Queen Elizabeth Class aircraft carrier, HMS Queen
Elizabeth, celebrated a significant milestone in October with the first UK
F-35s landing on board for operational trials, with HMS Dragon, the BAE
Systems-designed and manufactured Type 45 destroyer, escorting.
Four of the five River Class Offshore Patrol Vessels have now been accepted by
the Ministry of Defence and we are working to a schedule which would see
programme completion in 2020.
The first three City Class Type 26 frigates are on contract with construction
underway on the first two ships. The programme currently employs over 2,000
people and approximately one half of the First of Class, HMS Glasgow, is under
construction and she remains on track to enter service in the mid-2020s. Work
continues on the second ship, HMS Cardiff, following the formal start of
full-scale manufacture in August. Investment in site infrastructure in our
Glasgow shipyards continues with dock readiness works progressing well and new
office space to be completed in early 2020.
Following the success of the Global Combat Ship design in Australia and Canada
both programmes are gaining momentum as teams are mobilised. Work continues to
transfer product and process knowledge, share experiences of complex
operations and help to prepare the organisation in Australia for the
transition of delivery responsibility. We are working closely with our
partners and the Royal Canadian Navy to finalise the design requirements for
the Canadian Surface Combatant.
Submarines
BAE Systems is a member of the Dreadnought Alliance, working alongside the
Submarine Delivery Agency and Rolls-Royce to deliver a replacement for the
Royal Navy's Vanguard class, which carries the UK's independent nuclear
deterrent. The value of the programme to the Company to date is £5.2bn, with
contract funding of £1.4bn received in 2019. Four Dreadnought Class
submarines will be built in Barrow, with the first of these due to be in
operational service in the early 2030s. Construction of the first submarine
continues to advance with many of the major pressure hull units now
manufactured. The major programme of investment to redevelop the Barrow site
to support the delivery of Dreadnought is well underway, with several of the
new facilities now complete and in operation.
The first three Astute Class submarines are in operational service with the
Royal Navy. The remaining four boats are at an advanced stage of construction.
The fourth boat, Audacious, is in the final stages of testing and
commissioning ahead of sea trials.
Maritime Services
Our Maritime Services business is responsible for management and maintenance
of HM Naval Base Portsmouth and supports more than half of the Royal Navy's
surface fleet, including the Type 45 destroyers, through the Maritime Support
Delivery Framework (MSDF) contract which runs to March 2020. An 18-month
extension to MSDF is due to be finalised in March 2020. In November, HMS
Prince of Wales arrived at HM Naval Base Portsmouth, her home port.
The company was awarded the Torpedo Repair and Maintenance contract. This
seven-year contract is worth £230m and secured over 100 highly skilled jobs
at the Broad Oak site in Portsmouth.
Progress continued on the £270m Spearfish torpedo upgrade programme, with the
demonstration phase forecast to complete in 2020.
The company was awarded four contracts to support the repair and maintenance
of over 600 small boats operated by the Royal Navy, the Royal Marines, the
Royal Fleet Auxiliary, the Army and the Ministry of Defence Police over a
period of six and a half years.
Land UK
The munitions business continues to provide UK and international customers
with a wide range of light and heavy munitions, as well as offering
complementary support services for development, testing and evaluation. We
continue to work with the UK Ministry of Defence to agree a replacement to the
existing Munitions Acquisition Supply Solution partnering agreement.
In July 2019, following receipt of regulatory approvals, the business formed a
joint venture with Rheinmetall, Rheinmetall BAE Systems Land (RBSL), to create
a joint UK-based land vehicle design, manufacturing and support business.
Rheinmetall purchased a 55% stake in the existing BAE Systems UK-based combat
vehicles business for £31.5m with BAE Systems retaining 45%. This transaction
did not include the Land UK munitions business or its holding in the CTA
International joint venture with Nexter.
The UK Ministry of Defence has now awarded the £2.3bn contract to provide the
British Army with over 500 8x8 armoured vehicles. The contract was awarded to
Artec GmbH, comprising Rheinmetall and Krauss-Maffei Wegmann. Rheinmetall will
subcontract approximately half the production to RBSL which will undertake
vehicle structure fabrication, assembly, integration, and test of the vehicles
at its Telford facility.
During the year, 95 40mm cased-telescopic cannons were delivered to the
Ministry of Defence by CTA International, bringing cumulative deliveries to
370. This entirely new cannon design - currently being integrated in the
British Army's new Ajax and upgraded Warrior vehicles - has also been selected
by the Belgian Army for its Jaguar vehicles.
Looking forward
Forward-looking information for the Maritime reporting segment is provided on
page 38.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary on page 12.
3. International Financial Reporting Standards.
Segmental looking forward
Electronic Systems
Electronic Systems comprises the US- and UK-based electronics activities,
including electronic warfare systems, electro-optical sensors, military and
commercial digital engine and flight controls, precision guidance and seeker
solutions, next-generation military communications systems and data links,
persistent surveillance capabilities and hybrid electric drive systems.
Electronic Systems is well positioned to address current and evolving US
defence priority programmes from its strong franchise positions in electronic
warfare, precision guidance and seeker solutions. Electronic Systems has a
long-standing programme of research and development. Its focus remains on
maintaining a diverse portfolio of defence and commercial products and
capabilities for US and international customers.
The business expects to benefit from its ability to apply innovative
technology solutions that meet defence customers' changing requirements. As a
result, the business is well positioned for the medium term with strong
significant roles on F-35 Lightning II, F-15 upgrade and classified
programmes, as well as with specific products such as APKWS(®). Over the
longer term, the business is poised to leverage its technology strength in
emerging areas of demand such as precision weaponry, space resilience,
hyper-velocity and autonomous vehicles. In the commercial aviation market,
Electronic Systems' technology innovations are enabling the business to
maintain its long-standing customer positions and to compete for, and win, new
business and with our electric hybrid propulsion capability we are well placed
to continue to address the need for low- and zero-emission technology.
Cyber & Intelligence
Cyber & Intelligence comprises the US-based Intelligence & Security
business and UK-headquartered Applied Intelligence business, and covers the
Group's cyber security, secure government and commercial financial security
activities.
Intelligence & Security
The outlook for the US government services sector is stable, although market
conditions remain highly competitive and continue to evolve. The US business
remains well positioned and will continue to leverage its established market
positions and reputation for reliable and adaptable performance to meet
customer demands for innovative, cost-effective and cyber-hardened solutions
to pursue both recompeted contracts and new business across its portfolio of
sustainment, integration and modernisation solutions for military and
intelligence customers.
Applied Intelligence
The services and products we offer under our Government and Financial Services
divisions are well placed to deliver growth and increased profitability, as
cyber security becomes an increasingly important part of a nation's security
and a core element of stewardship for companies in a sophisticated and
persistent threat environment.
Platforms & Services (US)
Platforms & Services (US), with operations in the US, UK and Sweden,
manufactures combat vehicles, weapons and munitions, and delivers services and
sustainment activities, including naval ship repair and the management and
operation of government-owned munitions facilities.
Combat Vehicles is underpinned by a growing order backlog and incumbencies on
key franchise programmes. These include the US Army's Armored Multi-Purpose
Vehicle, M109A7 self-propelled howitzer, Bradley upgrade programmes,
Amphibious Combat Vehicle, M88, as well as the CV90 and BvS10 export
programmes from BAE Systems Hägglunds. FNSS continues to execute on its order
book of both Turkish and international orders. These long-term contracts and
franchise positions make the combat vehicles business well placed for growth
in the medium term. The team is working on, and is closely following, the US
Army's acquisition plans for its next generation of combat vehicles, in
particular the mobile protected firepower and robotic combat vehicle
programmes.
In the maritime domain, the sector has a strong position on naval gun
programmes and US Navy ship repair activities where the business has invested
in facilities in key homeports. This capitalised infrastructure represents a
high barrier to entry, and the business remains well aligned to the US Navy's
operational strategy. The Group remains a leading provider of gun systems and
precision strike capabilities and, in the complex ordnance manufacturing
business, continues to manage and operate the US Army's Radford and Holston
munitions facilities under previously awarded contracts.
Air
Air comprises the Group's UK-based air activities for European and
International Markets, and US Programmes, and its businesses in Saudi Arabia
and Australia, together with its 37.5% interest in the European MBDA joint
venture.
Future Typhoon production and support sales are underpinned by existing
contracts. Discussions continue in relation to potential further contract
awards for Typhoon which would extend current production revenues. Production
of rear fuselage assemblies for the F-35 will increase in 2020 to reach its
expected peak rate for the decade. The business plays a significant role in
the F-35 sustainment programme, and revenues are set to grow as the number of
aircraft deployed increases over the coming years. Defence and security remain
priorities for the UK government. The UK Combat Air Strategy provides the base
to enable long-term planning and investment in a key strategic part of the
business.
In Saudi Arabia, the In-Kingdom Industrial Participation programme continues
to make good progress consistent with our long-term strategy, as well as the
Saudi Arabian government's National Transformation Plan and Vision 2030. In
order to provide ongoing capability to international customers, the Group is
reliant on the continued approval of export licences by a number of
governments. The withholding of such export licences may have an adverse
effect on the Group's provision of capability to the Kingdom of Saudi Arabia
and the Group will seek to work closely with the UK government to manage the
impact of any such occurrence.
The Australian business has long-term sustainment and upgrade activities in
maritime, air, wide-area surveillance, missile defence and electronic systems.
The Hunter Class frigate programme is expected to drive growth in the coming
years.
MBDA has a strong order book, which is driving increased production and sales.
Development programmes continue to improve the long-term capabilities of the
business, and as European nations embark on new combat air systems
development, MBDA will be well placed to provide the technologies and system
solutions required to deliver efficient and competitive armaments to these
platforms.
Maritime
Maritime comprises the Group's UK-based maritime and land activities.
Maritime
Overall the outlook is stable based on long-term contracted positions. Within
Submarines, the business is executing the Astute Class programme, with four
boats still in build. On the Dreadnought programme manufacturing activities
continue on the first of class boat. Investment continues in the Barrow
facilities in order to provide the capabilities to deliver these long-term
programmes through the next decade and beyond. In shipbuilding, following the
completion of the two aircraft carriers, sales are underpinned by the
manufacture of Type 26 frigates. The through-life support of surface ship
platforms provides a sustainable business in technical services and mid-life
upgrades.
Land UK
Future work will be underpinned by existing support contracts and the expected
workshare on the Mechanised Infantry Vehicle programme.
Munitions supply continues under the Munitions Acquisition Supply Solution
partnering agreement secured in 2008.
Consolidated income statement
for the year ended 31 December
2019 2018
Notes £m Total £m Total
£m
£m
Continuing operations
Sales 2 20,109 18,407
Deduct Share of sales by equity accounted investments 2 (2,878) (2,812)
Add Sales to equity accounted investments 2 1,074 1,226
Revenue 2 18,305 16,821
Operating costs (16,724) (15,514)
Other income 150 158
Group operating profit 1,731 1,465
Share of results of equity accounted investments 168 140
Underlying EBITA 2 2,117 1,928
Non-recurring items (27) (154)
EBITA 2,090 1,774
Amortisation of intangible assets (109) (85)
Impairment of intangible assets (6) (33)
Financial expense of equity accounted investments (23) (13)
Taxation expense of equity accounted investments (53) (38)
Operating profit 2 1,899 1,605
Financial income(1) 27 26
Financial expense(1) (300) (407)
Net finance costs 3 (273) (381)
Profit before taxation 1,626 1,224
Taxation expense 4 (94) (191)
Profit for the year 1,532 1,033
Attributable to:
Equity shareholders 1,476 1,000
Non-controlling interests 56 33
1,532 1,033
Earnings per share 5
Basic earnings per share 46.4p 31.3p
Diluted earnings per share 46.1p 31.2p
1. Gains on remeasurement of financial instruments at fair value through
profit or loss and foreign exchange gains for the year ended 31 December 2018
have been reclassified to remove them from financial income and present all
movements within financial expense. See note 3 for details.
Consolidated statement of comprehensive income
for the year ended 31 December
2019 2018
Other Retained earnings Total Other Retained earnings Total
reserves
£m
£m
reserves
£m
£m
£m
£m
Profit for the year - 1,532 1,532 - 1,033 1,033
Other comprehensive income
Items that will not be reclassified to the income statement:
Subsidiaries:
Remeasurements on post-employment benefit schemes - (556) (556) - 74 74
Tax on items that will not be reclassified to the income statement - 57 57 - 5 5
Equity accounted investments (net of tax) - (38) (38) - 6 6
Items that may be reclassified to the income statement:
Subsidiaries:
Currency translation on foreign currency net investments - 400 - 400
(327) (327)
Reclassification of cumulative currency translation reserve on disposal - - - -
(8) (8)
Fair value gain arising on hedging instruments during the period 11 - 11 14 - 14
Cumulative fair value gain on hedging instruments reclassified to the income (7) - (7) (39) - (39)
statement
Tax on items that may be reclassified to the income statement - - - 5 - 5
Equity accounted investments (net of tax) 6 - 6 15 - 15
Total other comprehensive income for the year (net of tax) (325) (537) (862) 395 85 480
Total comprehensive income for the year (325) 995 670 395 1,118 1,513
Attributable to:
Equity shareholders (320) 940 620 391 1,085 1,476
Non-controlling interests (5) 55 50 4 33 37
(325) 995 670 395 1,118 1,513
Consolidated statement of changes in equity
for the year ended 31 December
Attributable to equity holders of BAE Systems plc
Issued Share Other Retained earnings Total Non-controlling Total
share
premium
reserves
£m
£m
interests
equity
capital
£m
£m
£m
£m
£m
Balance at 1 January 2019 as originally presented 87 1,249 6,481 (2,271) 5,546 72 5,618
Transition adjustment upon adoption of IFRS 16 Leases - - - (92) (92) - (92)
Balance at 1 January 2019 87 1,249 6,481 (2,363) 5,454 72 5,526
Profit for the year - - - 1,476 1,476 56 1,532
Total other comprehensive income for the year - - (320) (536) (856) (6) (862)
Total comprehensive income for the year - - (320) 940 620 50 670
Share-based payments (inclusive of tax) - - - 75 75 - 75
Cumulative fair value gain on hedging instruments transferred to the balance - - (5) - (5) - (5)
sheet (net of tax)
Ordinary share dividends - - - (724) (724) (56) (780)
Partial disposal of shareholding in subsidiary undertaking - - - (13) (13) 38 25
At 31 December 2019 87 1,249 6,156 (2,085) 5,407 104 5,511
Balance at 1 January 2018 87 1,249 6,090 (2,714) 4,712 43 4,755
Profit for the year - - - 1,000 1,000 33 1,033
Total other comprehensive income for the year - - 391 85 476 4 480
Total comprehensive income for the year - - 391 1,085 1,476 37 1,513
Share-based payments (inclusive of tax) - - - 63 63 - 63
Net sale of own shares - - - 1 1 - 1
Ordinary share dividends - - - (703) (703) (28) (731)
Partial disposal of shareholding in subsidiary undertaking - - - (3) (3) 20 17
At 31 December 2018 87 1,249 6,481 (2,271) 5,546 72 5,618
Consolidated balance sheet
as at 31 December
2019 2018(1)
£m £m
Non-current assets
Intangible assets 10,371 10,658
Property, plant and equipment 2,437 2,365
Right-of-use assets 1,138 -
Investment property 137 98
Equity accounted investments 428 429
Other investments 13 13
Other receivables 484 352
Post-employment benefit surpluses 6 302 308
Other financial assets 350 245
Deferred tax assets 726 702
16,386 15,170
Current assets
Inventories 835 774
Trade, other and contract receivables 5,458 5,177
Current tax 19 81
Other financial assets 210 166
Cash and cash equivalents 2,587 3,232
Assets held for sale 135 146
9,244 9,576
Total assets 25,630 24,746
Non-current liabilities
Loans (3,020) (3,514)
Lease liabilities (1,116) -
Other payables (1,481) (1,461)
Post-employment benefit obligations 6 (4,757) (4,337)
Other financial liabilities (227) (104)
Provisions (385) (427)
(10,986) (9,843)
Current liabilities
Loans and overdrafts (377) (785)
Lease liabilities (238) -
Trade and other payables (7,926) (7,718)
Other financial liabilities (232) (74)
Current tax (55) (334)
Provisions (300) (334)
Liabilities held for sale (5) (40)
(9,133) (9,285)
Total liabilities (20,119) (19,128)
Net assets 5,511 5,618
Capital and reserves
Issued share capital 87 87
Share premium 1,249 1,249
Other reserves 6,156 6,481
Retained earnings - deficit (2,085) (2,271)
Total equity attributable to equity holders of BAE Systems plc 5,407 5,546
Non-controlling interests 104 72
Total equity 5,511 5,618
1. The Saudi Arabia end of service benefit obligation of £97m at 31 December
2018 has been reclassified from trade and other payables to post-employment
benefit obligations (see note 6).
Approved by the Board of BAE Systems plc on 19 February 2020 and signed on its
behalf by:
C N Woodburn P J Lynas
Chief Executive Group Finance Director
Consolidated cash flow statement
for the year ended 31 December
Notes 2019 2018(1)
£m
£m
Profit for the year 1,532 1,033
Taxation expense 4 94 191
Research and development expenditure credits (12) (27)
Share of results of equity accounted investments (168) (140)
Net finance costs 273 381
Depreciation, amortisation, impairment and derecognition 660 411
Gain on investment revaluation - (7)
Profit on disposal of property, plant and equipment, and investment property (9) (18)
(Gain)/loss in respect of held for sale assets and business disposals (9) 9
Cost of equity-settled employee share schemes 74 64
Movements in provisions (73) (101)
Decrease in liabilities for post-employment benefit obligations (214) (153)
(Increase)/decrease in working capital:
Inventories (76) (16)
Trade, other and contract receivables (481) (757)
Trade and other payables 258 530
Taxation paid (252) (200)
Net cash flow from operating activities 1,597 1,200
Dividends received from equity accounted investments 142 57
Interest received 28 25
Principal element of finance lease receipts 9 -
Purchase of property, plant and equipment, and investment property (360) (358)
Purchase of intangible assets (110) (139)
Proceeds from sale of property, plant and equipment, and investment property 21 34
Proceeds from the sale of intangible assets 1 -
Purchase of equity accounted investment - (2)
Equity accounted investment funding (6) (1)
Purchase of subsidiary undertakings, net of cash and cash equivalents acquired (12) 14
Cash flow in respect of held for sale assets and business disposals, net of 55 12
cash and cash equivalents disposed
Net cash flow from investing activities (232) (358)
Interest paid (233) (203)
Net sale of own shares - 1
Equity dividends paid 7 (724) (703)
Dividends paid to non-controlling interests (56) (28)
Partial disposal of shareholding in subsidiary undertaking 31 17
Principal element of lease payments (239) -
Cash flow from matured derivative financial instruments (excluding cash flow 40 6
hedges)
Cash flow from movement in cash collateral 1 2
Cash outflow from repayment of loans (782) (7)
Net cash flow from financing activities (1,962) (915)
Net decrease in cash and cash equivalents (597) (73)
Cash and cash equivalents at 1 January 3,232 3,264
Effect of foreign exchange rate changes on cash and cash equivalents (48) 41
Cash and cash equivalents at 31 December 2,587 3,232
1. 2018 comparatives have been reclassified to present a cash inflow of £17m
in respect of a partial disposal of the Group's shareholding in a subsidiary
undertaking within financing activities. This cash flow was previously
presented within investing activities.
Notes to the accounts
1. Preparation
Basis of preparation and statement of compliance
The consolidated financial statements of BAE Systems plc have been prepared on
a going concern basis and in accordance with EU-endorsed International
Financial Reporting Standards (IFRS) and the Companies Act 2006 applicable to
companies reporting under IFRS.
The consolidated financial statements are presented in pounds sterling and,
unless stated otherwise, rounded to the nearest million. They have been
prepared under the historical cost convention, as modified by the revaluation
of certain financial assets and financial liabilities (including derivative
instruments).
Changes in accounting policies
IFRS 16 Leases became effective from 1 January 2019. The impact of adoption is
set out in note 12.
2. Segmental analysis
Sales and revenue by reporting segment
Sales Deduct Add Revenue
Share of sales by equity
Sales to equity
accounted investments
accounted investments
2019 2018 2019 2018 2019 2018 2019 2018
£m
£m
£m
£m
£m £m £m £m
Electronic Systems 4,439 3,965 (114) (101) 114 101 4,439 3,965
Cyber & Intelligence 1,732 1,678 - - - - 1,732 1,678
Platforms & Services (US) 3,337 3,005 (153) (141) 1 - 3,185 2,864
Air 7,457 6,712 (2,221) (2,224) 917 1,091 6,153 5,579
Maritime 3,116 2,975 (50) (37) 5 2 3,071 2,940
HQ 387 350 (344) (309) - - 43 41
20,468 18,685 (2,882) (2,812) 1,037 1,194 18,623 17,067
Intra-group sales/revenue (359) (278) 4 - 37 32 (318) (246)
20,109 18,407 (2,878) (2,812) 1,074 1,226 18,305 16,821
Operating profit/(loss) by reporting segment
Underlying Non-recurring Amortisation and impairment of Financial and taxation expense of equity accounted investments Operating
EBITA
items(1)
intangible assets
profit/(loss)
2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
£m
£m
£m
£m
£m
£m
£m
£m £m £m
Electronic Systems 687 606 - - (15) (16) - - 672 590
Cyber & Intelligence 91 111 - - (11) (52) - - 80 59
Platforms & Services (US) 267 210 (13) (40) (11) (8) (4) (1) 239 161
Air 887 859 (28) - (32) (12) (50) (37) 777 810
Maritime 268 209 14 - (25) (16) (4) (2) 253 191
HQ (83) (67) - (114) (21) (14) (18) (11) (122) (206)
2,117 1,928 (27) (154) (115) (118) (76) (51) 1,899 1,605
Net finance costs (273) (381)
Profit before taxation 1,626 1,224
Taxation expense (94) (191)
Profit for the year 1,532 1,033
1. Non-recurring items in 2019 of £27m comprises a £36m charge relating to
the derecognition of Enterprise Resource Planning software intangible assets
in the Air sector, charges of £13m relating to legal disputes arising from
historical disposals, a gain of £14m on the sale of the Group's 55%
shareholding in BAE Systems Global Combat Systems Limited upon formation of
the Rheinmetall BAE Systems Land joint venture, and a gain of £8m relating to
the disposal of the Aircraft Accessories and Components Company. Non-recurring
items in 2018 of £154m represented a Guaranteed Minimum Pension equalisation
charge of £114m, and a loss on disposal of the Mobile, Alabama, shipyard of
£40m.
3. Net finance costs
2019 2018
£m
£m
Interest income on cash and other financial instruments 26 26
Interest income on finance lease receivables 1 -
Financial income(1) 27 26
Interest expense on bonds and other financial instruments (187) (204)
Facility fees (4) (4)
Interest expense on lease liabilities (48) -
Net present value adjustments on provisions and other payables (28) (31)
Net interest expense on post-employment benefit obligations (114) (103)
(Loss)/gain on remeasurement of financial instruments at fair value through (73) 146
profit or loss(2)
Foreign exchange gains/(losses)(3) 154 (211)
Financial expense(1) (300) (407)
Net finance costs (273) (381)
1. Gains on remeasurement of financial instruments at fair value through
profit or loss of £186m and foreign exchange gains of £16m were previously
presented within financial income in 2018. The Group believes it is more
representative to present these items within financial expense, since the
gains and losses relate to the same underlying transactions. Accordingly,
amounts previously included within financial income in 2018 have been
reclassified to financial expense.
2. Comprises gains and losses on derivative financial instruments, including
derivative instruments to manage the Group's exposure to interest rate
fluctuations on external borrowings and exchange rate fluctuations on balances
with the Group's subsidiaries and equity accounted investments.
3. The foreign exchange gains and losses primarily reflect exchange rate
movements on US dollar-denominated borrowings.
Additional analysis
2019 2018
£m
£m
Net finance costs:
Group (273) (381)
Share of equity accounted investments (23) (13)
(296) (394)
Analysed as:
Underlying net interest expense(1):
Group (240) (213)
Share of equity accounted investments (17) (2)
(257) (215)
Other:
Group:
Net interest expense on post-employment benefit obligations (114) (103)
Fair value and foreign exchange adjustments on financial instruments and 81 (65)
investments(2)
Share of equity accounted investments:
Net interest expense on post-employment benefit obligations (3) (3)
Fair value and foreign exchange adjustments on financial instruments and (3) (8)
investments
(296) (394)
1. Underlying net interest expense is defined as finance costs for the Group
and its share of equity accounted investments, excluding net interest expense
on post-employment benefit obligations, and fair value and foreign exchange
adjustments on financial instruments and investments.
2. The net gain (2018 loss) primarily reflects foreign exchange translational
gains (2018 losses) on US dollar-denominated bonds held by BAE Systems plc.
4. Taxation expense
Reconciliation of taxation expense
The following table reconciles the theoretical income tax expense, using the
UK corporation tax rate, to the reported tax expense. The reconciling items
represent, besides the impact of tax rate differentials and changes,
non-taxable benefits or non-deductible expenses arising from differences
between the local tax base and the reported financial statements.
2019 2018
£m
£m
Profit before taxation 1,626 1,224
UK corporation tax rate 19% 19%
Expected income tax expense (309) (233)
Effect of tax rates in foreign jurisdictions, including US state taxes (52) (43)
Effect of intra-group financing - 14
Expenses not tax effected (14) (14)
Income not subject to tax 61 18
Research and development tax credits and patent box benefits 10 14
Non-taxable non-recurring items 4 -
Chargeable gains (3) (1)
Utilisation of previously unrecognised tax losses 3 1
Current year losses not tax effected (3) -
Adjustments in respect of prior years 192 37
Adjustments in respect of equity accounted investments 32 27
Tax rate adjustment (1) 5
Other (14) (16)
Taxation expense (94) (191)
Calculation of the underlying effective tax rate
2019 2018
£m
£m
Profit before taxation 1,626 1,224
Add back: Taxation expense of equity accounted investments 53 38
Deduct: Non-taxable non-recurring items (22) -
Adjusted profit before taxation 1,657 1,262
Taxation expense (94) (191)
Taxation expense of equity accounted investments (53) (38)
Exclude: One-off tax benefit (161) -
Adjusted taxation expense (including equity accounted investments) (308) (229)
Underlying effective tax rate 19% 18%
The one-off tax benefit relates to two items. Firstly, following agreements
reached in respect of overseas tax matters, a benefit has been recognised.
Secondly, following review of the April 2019 EU Commission decision that
concluded that the UK's Controlled Foreign Company regime partially represents
State Aid, a provision has been recognised for the estimated exposure. There
remains uncertainty surrounding HMRC's likely approach to the assessment of
the deemed State Aid and recovery of amounts which they consider to be due,
and, accordingly, developments will continue to be monitored and assessed.
5. Earnings per share
2019 2018
£m Basic Diluted pence £m Basic Diluted pence
pence
per share
pence
per share
per share
per share
Profit for the year attributable to equity shareholders 1,476 46.4 46.1 1,000 31.3 31.2
Add back/(deduct):
Amortisation and impairment of intangible assets, post tax(1) 93 97
Net interest expense on post-employment benefit obligations, post tax(1) 95 87
Fair value and foreign exchange adjustments on financial instruments and (64) 60
investments, post tax(1)
Non-recurring items, post tax(1) 18 126
Underlying earnings, post tax 1,618 50.8 50.5 1,370 42.9 42.8
One-off tax benefit (161) -
Underlying earnings, excluding one-off tax benefit 1,457 45.8 45.5 1,370 42.9 42.8
Millions Millions Millions Millions
Weighted average number of shares used in calculating basic earnings per share 3,183 3,183 3,192 3,192
Incremental shares in respect of employee share schemes 18 9
Weighted average number of shares used in calculating diluted earnings per 3,201 3,201
share
1. The tax impact is calculated using the underlying effective tax rate of 19%
(2018 18%). The calculation of the underlying effective tax rate is shown in
note 4.
6. Post-employment benefits
Funding
Introduction
The majority of the UK and US defined benefit pension schemes are funded by
the Group's subsidiaries and equity accounted investments. The individual
pension schemes' funding requirements are based on actuarial measurement
frameworks set out in their funding policies.
For funding valuation purposes, pension scheme assets are included at market
value at the valuation date, whilst the liabilities are measured on an
actuarial funding basis using the projected unit credit method and discounted
to their present value based on prudent assumptions set by the trustees
following consultation with scheme actuaries.
The funding valuations are performed by professionally qualified independent
actuaries and include assumptions which differ from the actuarial assumptions
used for IAS 19 accounting purposes shown on page 49. The purpose of the
funding valuations is to design funding plans which ensure that the schemes
have sufficient funds available to meet future benefit payments.
UK valuations
Funding valuations of the Group's UK defined benefit pension schemes are
performed every three years. Following the merger of several of the Group's UK
pension schemes in October 2019, the Company and trustees agreed to carry out
an early triennial funding valuation for the BAE Systems Pension Scheme (Main
Scheme) as at 31 October 2019. The next funding valuations for the other UK
schemes will have an effective date of no later than 31 March 2020.
The results of the most recent triennial valuations are shown below. These
valuations and, where necessary, deficit recovery plans were agreed with the
trustees and certified by the scheme actuaries after consultation with The
Pensions Regulator in the UK.
Main Other
Scheme as at schemes as at
31 October 2019 31 March 2017
£bn
£bn
Market value of assets 20.6 2.2
Present value of liabilities (22.5) (2.0)
Funding (deficit)/surplus (1.9) 0.2
Percentage of accrued benefits covered by the assets at the valuation date 92% 110%
The valuations in 2017 and 2019 were determined using the following mortality
assumptions:
Life expectancy of a male currently aged 65 (years) 86 - 89
Life expectancy of a female currently aged 65 (years) 87 - 90
Life expectancy of a male currently aged 45 (years) 88 - 92
Life expectancy of a female currently aged 45 (years) 90 - 93
The discount rate assumptions used in the 2017 and 2019 valuations were
directly based on prudent levels of expected returns for the assets held by
the schemes, reflecting the planned investment strategies and maturity
profiles of each scheme. The discount rates are curves which provide a
different rate for each year into the future.
The inflation assumptions were derived using data from the Bank of England
which is based on the difference between the yields on index-linked and fixed
interest long-term government bonds. The inflation assumption is a curve which
provides a different rate for each year into the future.
The funding valuations resulted in a significantly lower deficit than under
IAS 19, largely due to lower liabilities reflecting the higher discount rate
assumption. Under IAS 19, the discount rate for accounting purposes is based
on third-party AA corporate bond yields whereas, for funding valuation
purposes, the discount rate is based on a prudent level of expected returns
from the broader and mixed types of investments reflected in the schemes'
investment strategies, which are expected overall to yield higher returns than
bonds.
The 2019 funding agreement is underpinned by a contingency plan, which
includes a commitment by the Group to a further £50m of deficit funding in
each of 2021 and 2022 into the Main Scheme prior to the next triennial
valuation in the event that the scheme funding level were to fall below
pre-determined parameters. In addition, the Group would be required to pay
£187m in respect of the Main Scheme if the funding level were to fall
significantly and were to remain at or below those levels for nine months.
There have been no changes to the contributions or benefits, as set out in the
rules of the schemes, for pension scheme members as a result of the new
funding valuations.
The results of future triennial valuations and associated funding requirements
will be impacted by a number of factors, including the future performance of
investment markets and anticipated members' longevity.
US valuations
The Group's US pension schemes are valued annually, with the latest valuations
performed as at 1 January 2019.
Contributions
Under the terms of the trust deeds of the UK schemes, the Group is required to
have a funding plan determined at the conclusion of the triennial funding
valuations.
Equity accounted investments make regular contributions to the schemes in
which they participate in line with the schedule of contributions and are
allocated a share of deficit funding contributions.
In 2019, total employer contributions to the Group's pension schemes were
£461m (2018 £554m), including amounts funded by equity accounted investments
of £40m (2018 £38m), and included approximately £231m (2018 £211m) of
deficit recovery payments in respect of the UK schemes and £nil (2018 £119m)
in respect of the US schemes.
Deficit contributions will further increase in line with any percentage growth
in dividend payments made by the Group. As part of the 31 October 2019
valuation agreement, the Company has agreed to pay £1bn into the Main Scheme
in the coming months representing an advancement of £1bn in deficit
contributions that were due, under the 2017 valuation deficit recovery plan,
between 2022 and 2026. The annual payments are expected to end in 2021 and the
deficit is expected to be cleared in 2026.
In 2020, Group contributions to the US pension schemes are expected to
increase by approximately £60m.
IAS 19 accounting
Principal actuarial assumptions
The assumptions used are estimates chosen from a range of possible actuarial
assumptions which, due to the long-term nature of the obligation covered, may
not necessarily occur in practice.
UK US
2019 2018 2017 2019 2018 2017
Financial assumptions
Discount rate - past service (%) 2.1 2.9 2.6 3.1 4.2 3.7
Discount rate - future service (%) 2.2 3.0 2.7 3.1 4.2 3.7
Retail Prices Index (RPI) inflation (%) 2.8 3.1 3.1 n/a n/a n/a
Rate of increase in salaries (%) 2.8 3.1 3.1 n/a n/a n/a
Rate of increase in deferred pensions (%) 2.0/2.8 2.1/3.1 2.1/3.1 n/a n/a n/a
Rate of increase in pensions in payment (%) 1.5 - 3.6 1.6 - 3.7 1.6 - 3.7 n/a n/a n/a
Demographic assumptions
Life expectancy of a male currently aged 65 (years) 87 - 88 86 - 88 86 - 88 87 87 87
Life expectancy of a female currently aged 65 (years) 88 - 90 88 - 90 88 - 90 89 89 89
Life expectancy of a male currently aged 45 (years) 88 - 89 88 - 90 88 - 90 87 87 87
Life expectancy of a female currently aged 45 (years) 89 - 91 90 - 91 90 - 92 89 89 89
Summary of movements in post-employment benefit obligations
UK US and Total
£m
other
£m
£m
Total net IAS 19 deficit at 1 January 2019(1) (3,554) (779) (4,333)
Actual return on assets excluding amounts included in net interest expense 1,491 766 2,257
Increase in liabilities due to changes in financial assumptions (2,547) (638) (3,185)
Decrease in liabilities due to changes in demographic assumptions 448 19 467
Experience losses (96) (28) (124)
Contributions in excess of/(below) service cost 243 (22) 221
Past service cost - plan amendments (4) - (4)
Net interest expense (92) (28) (120)
Foreign exchange adjustments - 28 28
Movement in other schemes - 14 14
Total net IAS 19 deficit at 31 December 2019 (4,111) (668) (4,779)
Allocated to equity accounted investments 324 - 324
Group's share of net IAS 19 deficit excluding Group's share of amounts (3,787) (668) (4,455)
allocated to equity accounted investments at 31 December 2019
1. At 31 December 2018 the Saudi Arabia end of service benefit of £97m was
presented within trade and other payables. The comparative balance sheet has
been reclassified to include this balance within post-employment benefits as
the Group considers this to be a more appropriate presentation.
Sensitivity analysis
The sensitivity information has been derived using scenario analysis from the
actuarial assumptions as at 31 December 2019 and keeping all other assumptions
as set out above.
Financial assumptions
The estimated impact of changes in the discount rate and inflation assumptions
on the defined benefit pension obligation, together with the estimated impact
on scheme assets, is shown in the table below. The estimated impact on scheme
assets takes into account the Group's risk management activities in respect of
interest rate and inflation risk. The sensitivity analysis on the defined
benefit obligation is measured on an IAS 19 accounting basis and, therefore,
does not reflect the natural hedging in the discount rate used for funding
valuation purposes.
(Increase)/decrease Increase/(decrease)
in pension obligation(1) in scheme assets(1)
£bn £bn
Discount rate:
0.1 percentage point increase 0.5 (0.3)
0.1 percentage point decrease (0.5) 0.3
Inflation:
0.1 percentage point increase (0.4) 0.2
0.1 percentage point decrease 0.3 (0.2)
1. Before allocation to equity accounted investments.
The sensitivity of the valuation of the liabilities to changes in the
inflation assumption presented above assumes that a 0.1 percentage point
change to expectations of future inflation results in a 0.1 percentage point
change to all inflation-related assumptions (rate of increase in salaries,
rate of increase in deferred pensions and rate of increase in pensions in
payment) used to value the liabilities. However, upper and lower limits exist
on the majority of inflation-related benefits such that a change in
expectations of future inflation may not have the same impact on the
inflation-related benefits, and hence will result in a smaller change to the
valuation of the liabilities. Accordingly, extrapolation of the above results
beyond the specific sensitivity figures shown may not be appropriate. To
illustrate this, the (increase)/decrease in the defined benefit pension
obligation resulting from larger changes in the inflation assumption would be
as follows:
(Increase)/decrease
in pension obligation(1)
£bn
Inflation:
0.5 percentage point increase (1.5)
0.5 percentage point decrease 1.4
1.0 percentage point increase (3.0)
1.0 percentage point decrease 2.8
1. Before allocation to equity accounted investments.
Demographic assumptions
Changes in the life expectancy assumption, including the benefit of longevity
swap arrangements, would have the following effect on the total net IAS 19
deficit:
(Increase)/decrease
in net deficit(1)
£bn
Life expectancy:
One-year increase (1.3)
One-year decrease 1.3
1. Before allocation to equity accounted investments.
7. Equity dividends
2019 2018
£m
£m
Prior year final 13.2p dividend per ordinary share paid in the year (2018 423 415
13.0p)
Interim 9.4p dividend per ordinary share paid in the year (2018 9.0p) 301 288
724 703
After the balance sheet date, the directors proposed a final dividend of 13.8p
per ordinary share. The dividend, which is subject to shareholder approval,
will be paid on 1 June 2020 to shareholders registered on 17 April 2020. The
ex-dividend date is 16 April 2020.
Shareholders who do not at present participate in the Company's Dividend
Reinvestment Plan and wish to receive the final dividend in shares rather than
cash should complete a mandate form for the Dividend Reinvestment Plan and
return it to the registrars no later than 7 May 2020.
8. Fair value measurement
Fair value of financial instruments
Certain of the Group's financial instruments are held at fair value.
The fair value of a financial instrument is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the balance sheet date.
The fair values of financial instruments held at fair value have been
determined based on available market information at the balance sheet date,
and the valuation methodologies listed below:
- the fair values of forward foreign exchange contracts are calculated
by discounting the contracted forward values and translating at the
appropriate balance sheet rates;
- the fair values of both interest rate and cross-currency swaps are
calculated by discounting expected future principal and interest cash flows
and translating at the appropriate balance sheet rates; and
- the fair values of money market funds are calculated by multiplying
the net asset value per share by the investment held at the balance sheet
date.
Due to the variability of the valuation factors, the fair values presented at
31 December may not be indicative of the amounts the Group would expect to
realise in the current market environment.
Fair value hierarchy
The fair value measurement hierarchy is as follows:
- Level 1 - Quoted prices (unadjusted) in active markets for identical
assets or liabilities;
- Level 2 - Inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
- Level 3 - Inputs for the asset or liability that are not based on
observable market data (i.e. unobservable inputs).
Carrying amounts and fair values of certain financial instruments
2019 2018
Carrying amount Fair Carrying amount Fair
£m
value
£m
value
£m
£m
Financial instruments measured at fair value:
Non-current
Equity investments at fair value through profit and loss 13 13 13 13
Other financial assets 350 350 245 245
Other financial liabilities (227) (227) (104) (104)
Current
Other financial assets 210 210 166 166
Money market funds 680 680 908 908
Other financial liabilities (232) (232) (74) (74)
Financial instruments not measured at fair value:
Non-current
Loans (3,020) (3,315) (3,514) (3,597)
Current
Cash and cash equivalents (excluding money market funds) 1,907 1,907 2,324 2,324
Loans and overdrafts (377) (380) (785) (794)
All of the financial assets and liabilities measured at fair value are
classified as level 2 using the fair value hierarchy, except for money market
funds, which are classed as level 1. There were no transfers between levels
during the year.
Financial assets and liabilities in the Group's Consolidated balance sheet are
either held at fair value or their carrying value approximates to fair value,
with the exception of loans, which are held at amortised cost. The fair value
of loans presented in the table above is derived from market prices,
classified as level 1 using the fair value hierarchy.
9. Financial risk management
Currency risk
The Group's objective is to reduce its exposure to transactional volatility in
earnings and cash flows from movements in foreign currency exchange rates,
mainly the US dollar, euro, Saudi riyal and Australian dollar.
The Group is exposed to movements in foreign currency exchange rates in
respect of foreign currency denominated transactions. All material firm
transactional exposures are hedged using foreign exchange forward contracts
and the Group aims, where possible, to apply cash flow hedge accounting to
these transactions.
The Group is exposed to movements in foreign currency exchange rates in
respect of the translation of net assets and income statements of foreign
subsidiaries and equity accounted investments. The Group does not hedge the
translation effect of exchange rate movements on the income statements or
balance sheets of foreign subsidiaries and equity accounted investments it
regards as long-term investments.
The estimated impact on foreign exchange gains and losses in net finance costs
of a ten cent movement in the closing sterling to US dollar exchange rate on
the retranslation of US dollar-denominated bonds held by BAE Systems plc is
approximately £52m (2018 £56m).
10. Related party transactions
Transactions with related parties occur in the normal course of business, are
priced on an arm's-length basis and settled on normal trade terms. The more
significant transactions are disclosed below:
Year ended Year ended
31 December
31 December(1)
2019
2018
£m
£m
Sales to related parties 1,074 1,226
Purchases from related parties 664 723
31 December 31 December
2019
2018
£m
£m
Amounts owed by related parties 53 71
Amounts owed to related parties(2) 1,359 965
1. 2018 purchases from related parties have been restated to include £313m of
purchases from Eurofighter Jagdflugzeug GmbH.
2. At 31 December 2019, £862m (2018 £869m) was owed by BAE Systems plc and
£497m (2018 £96m) by other Group subsidiaries. Amounts owed to related
parties at 31 December 2019 include £225m in respect of lease liabilities
measured under IFRS 16 payable to BAE Systems Pension Funds Trustees Limited.
The undiscounted minimum lease commitments to this related party at 31
December 2018 were £297m, which is not included in amounts owed to related
parties in the table above.
11. Events after the reporting period
In January 2020, the Group announced that it has entered into a definitive
Asset Purchase Agreement to acquire Collins Aerospace's Military Global
Positioning System business for $1.9bn in cash, subject to customary closing
adjustments. The Group has also entered into a definitive Asset Purchase
Agreement to acquire Raytheon's Airborne Tactical Radios business for $275m in
cash, subject to customary closing adjustments. Completion of both
acquisitions is subject to successful closure of the Raytheon-United
Technologies Corporation merger, as well as customary regulatory approvals and
conditions.
In October 2019, six of the Group's nine UK pension schemes (including the two
largest schemes) were consolidated into a single scheme. Following that
consolidation, the Company agreed with the new Trustee Board to bring forward
the funding valuation of the combined scheme to 31 October 2019 from the
previously scheduled date of 31 March 2020.
After consultation with the The Pensions Regulator in the UK, the Group has
reached agreement with the Trustee Board of the combined scheme on the
accelerated funding valuation and revised deficit recovery plan.
At the 31 October 2019 funding valuation date, the deficit was £1.9bn. The
current deficit recovery plan which runs to 2026 will be replaced by a new
deficit recovery plan, under which a one-off payment of £1bn is to be made in
the coming months, with approximately £240m of funding payable in the scheme
year ending 31 March 2020 and approximately £250m by 31 March 2021.
12. Adoption of IFRS 16 Leases
IFRS 16 became effective from 1 January 2019 and has replaced IAS 17 Leases
and related interpretations. It has resulted in almost all leases being
recognised on the balance sheet by lessees, as the distinction between
operating and finance leases is removed. Under the new standard, a
right-of-use asset and a financial liability for future lease payments are
recognised. The only exceptions are short-term leases, low-value leases and
leases of intangible assets.
The Group has applied the modified retrospective transition approach and has
not restated comparative amounts for the year ended 31 December 2018. In the
majority of cases the Group has elected to measure right-of-use assets at the
amount of the lease liability on adoption (adjusted for any lease prepayments
or accrued lease expenses, onerous lease provisions and leased assets which
have subsequently been subleased). For a number of property leases the Group
has elected to measure the right-of-use asset as if IFRS 16 had been applied
since the start of the lease, but using the incremental borrowing rate at 1
January 2019, with the difference between the right-of-use asset and the lease
liability taken to retained earnings.
The Group has elected to adopt the following practical expedients on
transition:
- not to capitalise a right-of-use lease asset or related lease
liability where the lease expires before 31 December 2019;
- not to reassess contracts to determine if the contract contains a
lease and not to separate lease and non-lease elements;
- where an onerous lease provision is in existence, to utilise this
provision to reduce the right-of-use asset value rather than undertaking an
impairment review;
- to use hindsight in determining the lease term;
- to exclude initial direct costs from the measurement of the
right-of-use asset; and
- to apply the portfolio approach where a group of leases has similar
characteristics.
Impact of adoption of IFRS 16 Leases
Balance sheet
Upon transition on 1 January 2019, the Group recognised a right-of-use lease
asset of £1,298m (after adjustments for onerous lease provisions, lease
prepayments and accrued lease expenses at 31 December 2018), and lease
liabilities of £1,486m (non-current £1,270m; current £216m), along with a
deferred tax asset of £2m. A sublease finance receivable of £72m was also
recognised. A transition adjustment of £92m was recognised as a debit to
retained earnings. The Group did not capitalise low-value leases on
transition, or those which expire before 31 December 2019, and has opted not
to apply IFRS 16 to leases relating to intangible assets. The right-of-use
lease asset principally consists of property.
Income statement
Under IFRS 16 the Group sees a different pattern of expense within the income
statement, as the IAS 17 operating lease expense is replaced by depreciation
and interest charges. In 2019, the Group's EBITA metric has improved by
approximately £50m under IFRS 16 as the new depreciation expense is lower
than the IAS 17 operating lease charge; however the new finance costs have
broadly offset this, such that net profit after tax and the underlying
earnings metrics are not materially different compared to the previous IAS 17
reporting basis.
Cash flow statement
The change in presentation as a result of the adoption of IFRS 16 has seen an
improvement in 2019 of approximately £46m in operating business cash flow,
offset by a corresponding decline in cash flow from financing activities.
There is no overall cash flow impact from the adoption of the new Standard.
Lessor accounting under IFRS 16 is largely unchanged from IAS 17.
Impact on Consolidated balance sheet at 1 January 2019 (extract)
The following table shows the effect of adopting IFRS 16 on the Consolidated
balance sheet at 1 January 2019.
£m
Non-current assets
Right-of-use assets 1,255
Investment property 43
Equity accounted investments (11)
Finance lease receivable 62
Deferred tax assets 2
1,351
Current assets
Finance lease receivable 10
Trade, other and contract receivables (26)
(16)
Total assets 1,335
Non-current liabilities
Lease liabilities (1,270)
Provisions 24
(1,246)
Current liabilities
Lease liabilities (216)
Trade and other payables 28
Provisions 7
(181)
Total liabilities (1,427)
Net assets (92)
Capital and reserves
Retained earnings (92)
Total equity attributable to equity holders of BAE Systems plc (92)
Non-controlling interests -
Total equity (92)
The weighted average incremental borrowing rate applied to lease liabilities
was 3.4%.
Reconciliation between operating lease commitments and lease liability
The following table explains the difference between the operating lease
commitments disclosed applying IAS 17 at 31 December 2018 and the lease
liability recognised on adoption of IFRS 16 at 1 January 2019.
£m
Total minimum lease payments reported at 31 December 2018 under IAS 17 1,706
Change in assessment of lease term under IFRS 16 107
Leases outside the scope of IFRS 16 (81)
Impact of discounting lease liability under IFRS 16 (246)
Lease liability recognised on transition to IFRS 16 at 1 January 2019 1,486
13. Annual General Meeting
This year's Annual General Meeting will be held on 7 May 2020. Details of the
resolutions to be proposed at that meeting will be included in the notice of
Annual General Meeting that will be sent to shareholders at the end of March
2020.
14. Other information
The financial information for the year ended 31 December 2019 contained in
this preliminary announcement was approved by the Board on 19 February 2020.
This announcement does not constitute statutory accounts of the Company within
the meaning of Section 435 of the Companies Act 2006, but is derived from
those accounts.
Statutory accounts for the year ended 31 December 2018 have been delivered to
the Registrar of Companies. Statutory accounts for the year ended 31 December
2019 will be delivered to the Registrar of Companies following the Company's
Annual General Meeting.
The auditors have reported on those accounts. Their reports were not
qualified, did not include a reference to any matters to which the auditors
drew attention by way of emphasis without qualifying their report, and did not
contain a statement under Section 498(2) or (3) of the Companies Act 2006.
Cautionary statement:
All statements other than statements of historical fact included in this
document, including, without limitation, those regarding the financial
condition, results, operations and businesses of BAE Systems and its strategy,
plans and objectives and the markets and economies in which it operates, are
forward-looking statements. Such forward-looking statements which reflect
management's assumptions made on the basis of information available to it at
this time, involve known and unknown risks, uncertainties and other important
factors which could cause the actual results, performance or achievements of
BAE Systems or the markets and economies in which BAE Systems operates to be
materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. BAE Systems plc and
its directors accept no liability to third parties in respect of this report
save as would arise under English law. Accordingly, any liability to a person
who has demonstrated reliance on any untrue or misleading statement or
omission shall be determined in accordance with Schedule 10A of the Financial
Services and Markets Act 2000. It should be noted that Schedule 10A contains
limits on the liability of the directors of BAE Systems plc so that their
liability is solely to BAE Systems plc.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
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