REG - BAE SYSTEMS PLC - Final Results
23/02/2023 07:00
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RNS Number : 7701Q BAE SYSTEMS PLC 23 February 2023
BAE Systems plc
Preliminary Announcement 2022
Financial highlights
- Record Order intake of £37.1bn propelled Order backlog to £58.9bn.
- Sales increased by 4.4%(1) to £23.3bn.
- Expanded Return on sales by 20bps(1), to 10.7%.
- Underlying earnings per share increased by 9.5%(1) to 55.5p.
- Free cash flow of £2.0bn exceeded expectations.
- Increased investment in capital expenditure and R&D.
- Share repurchases totalling £0.8bn in the year.
- Dividend increased by 7.6%.
Results in brief
Financial performance measures as defined by the Group(2)
Year ended 31 December 2022 Year ended 31 December 2021
Variance(3)
Sales £23,256m £21,310m +4.4%
Underlying EBIT £2,479m £2,205m +5.5%
Underlying earnings per share 55.5p 47.8p
excluding one-off tax benefit (2021 only)(4) 55.5p 50.7p +9.5%
including one-off tax benefit (2021 only)(4)
Free cash flow £1,950m £1,864m +£86m
Net debt (excluding lease liabilities) £(2,023)m £(2,160)m +£137m
Order intake(5) £37,093m £21,458m +£15,635m
Order backlog(5) £58.9bn £44.0bn +£14.9bn
Financial performance measures as derived from IFRS(2)
Year ended 31 December 2022 Year ended 31 December 2021
Variance(3)
Revenue £21,258m £19,521m +8.9%
Operating profit £2,384m £2,389m -
Basic earnings per share 51.1p 55.2p -7.4%
Dividend per share 27.0p 25.1p +7.6%
Net cash flow from operating activities £2,839m £2,447m +£392m
Group's share of net post-employment benefits surplus/(deficit) £0.6bn £(2.1)bn
+£2.7bn
Order book £48.9bn £35.5bn +£13.4bn
1. Growth rate on a constant currency basis.
2. 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.
The purposes and definitions of non-GAAP measures are provided in the
Financial performance metrics on page 8.
3. Growth rates for sales, Underlying EBIT and Underlying EPS are on a
constant currency basis (i.e. current year compared with prior year translated
at current year exchange rates). All other growth rates and year-on-year
movements are on a reported currency basis.
4. A one-off tax benefit of £94m was recognised in the prior year, in respect
of agreements reached regarding the exposure arising from the April 2019
European Commission decision regarding the UK's Controlled Foreign Company
regime.
5. Including share of equity accounted investments.
Charles Woodburn, Chief Executive, said: "We've delivered another year of
strong results across the Group. Our employees have done an outstanding job to
effectively manage supply chain and inflationary pressures whilst delivering
critical capabilities and driving efficiencies for our customers.
"Our diverse geographic footprint, deep customer relationships and highly
relevant, leading defence technologies mean we're well positioned to support
national security requirements in an elevated threat environment.
"Our record orders and financial performance give us confidence in delivering
long-term growth and to continue investing in new technologies, facilities and
thousands of highly skilled jobs, whilst increasing shareholder returns."
Strategic progress
- Shaped portfolio with acquisition and integration of Bohemia
Interactive Simulations (BISim) into the US‑based Intelligence &
Security business and divested our non-strategic financial crime detection
business in Digital Intelligence.
- Group pension schemes are in a net accounting surplus, resulting in a
stronger balance sheet and improved financial flexibility for capital
allocation priorities such as dividend growth, M&A and share repurchases.
- Evolved our ESG agenda, supporting our employees and our communities,
maintaining high standards of corporate governance, and progressing towards
our Net Zero 2030 target.
- Increased self-funded R&D and capital expenditure, as well as
apprentice and graduate intake in the year to support our growth outlook.
Operational highlights
Electronic Systems
- Opened state-of-the-art facilities in Manchester, New Hampshire;
Cedar Rapids, Iowa; and Austin, Texas.
- Maintained electronic warfare system deliveries across F-35, F-15E and
F-15EX and other aircraft platforms.
- Selected to design energy management components for GE Aviation's
megawatt class hybrid electric propulsion system, supporting NASA's
Electrified Powertrain Flight Demonstration project.
Platforms & Services
- Maintained high production tempo on combat vehicles.
- Major new orders and production increases for CV90 and BvS10 vehicles
at Hägglunds.
- Ship Repair business activity continues to rebound from COVID-19
related headwinds.
Air
- UK, Japanese and Italian governments reached agreement to merge
Tempest sixth generation fighter with Japanese F-X programme to form the
Global Combat Air Programme (GCAP).
- Delivered first eight of 24 Eurofighter Typhoons to Qatar.
- F-35 rear fuselage production at full rate levels, with 150 assemblies
completed in the year.
Maritime
- Astute Boat five, HMS Anson, exited our Barrow shipyard to commence
sea trials in February 2023.
- First Type 26 frigate entered the water and is being outfitted at
Scotstoun shipyard in Glasgow.
- Continued progress on UK's Dreadnought submarine programme and
Australia's Hunter Class frigates programme.
Cyber & Intelligence
- Established Digital Intelligence by combining cyber, space, data
analysis, digital transformation, and other advanced capabilities into one
unit.
- Strong order intake, revenue growth and programme execution in both
Intelligence & Security and Digital Intelligence.
- Completed the acquisition of BISim, which provides cutting-edge
virtual training for allied militaries.
Brad Greve, Group Finance Director said, "We've delivered sales, underlying
EPS and free cash flow all above guidance which is a testament to our people
and their continued, long-term focus on operational excellence.
"Our backlog is at £59bn, we're accelerating our investment in the business
and making excellent progress on our share buyback programme, which
complements the proposed increase in the dividend.
"For 2023, we're forecasting further top-line growth, continued margin
expansion, higher EPS and we're also increasing our rolling three-year cash
targets, all of which demonstrate that the business has growing momentum for
the future."
Guidance for 2023
While the Group is subject to geopolitical and other uncertainties, the
following guidance is provided on current expected operational performance.
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 2022 are provided in our financial review on pages 11 to 16.
With a strong year behind us, we look forward to continued top-line growth
with increased return on sales and good free cash delivery against our rolling
targets. Our guidance uses the same exchange rate we averaged in 2022 of
$1.24:£1.
Year ended Year ended 31 December 2022
Results
31 December
2023
Guidance
Sales Increase by 3% to 5% £23,256m
Underlying EBIT Increase by 4% to 6% £2,479m
Underlying EPS Increase by 5% to 7% 55.5p
Free cash flow >£1.2bn £1,950m
Cumulative free cash flow 2023-2025 £4bn - £5bn
For further information please contact:
Investors Media Relations
Martin Cooper, Kristina Anderson,
Investor Relations Director
Director, Media Relations
Telephone: +44 (0) 1252 383455 Telephone: +44 (0) 7540 628673
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 2022
will be available via webcast at 11.00am today (23 February 2023).
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
93,100 people(1) in around 40 countries. Working with customers and local
partners, we develop, engineer, manufacture, and support products and systems
to deliver military capability, protect national security, and keep critical
information and infrastructure secure.
1. Including share of equity accounted investments.
Preliminary results statement
Overview
BAE Systems delivered another strong year of performance in 2022, both
financially and operationally. This was achieved despite the headwinds
presented by the COVID-19 pandemic, continued supply chain disruptions, rising
inflation and ongoing labour shortages. Whilst we expect that some of these
challenges will persist, we enter 2023 with a robust competitive position,
multiple new business opportunities, and significant financial resources - all
of which point to another productive year ahead for BAE Systems and our
shareholders.
These outcomes were driven by our people, their unwavering focus on our
purpose - "to serve, supply and protect those who serve and protect us" - and
a values-driven culture, committed to sustainable business practices and
inclusion. This is underpinned by a robust governance structure and high
ethical standards.
In 2022, global events resulted in a renewed recognition of the importance of
the defence industry and our role in assisting governments in protecting their
countries and citizens.
As one of the world's largest defence contractors, our technologies,
capabilities and global footprint ensure we play a leading role in helping our
customers meet an elevated threat environment.
This past year, the Group designed, developed, and manufactured a cutting-edge
set of products - across the domains of air, land, sea, cyber and space - that
our customers count on. Our exceptional product portfolio is enhanced with
enabling technologies including artificial intelligence, autonomy,
cryptography, and cyber defence, ensuring we remain at the forefront of
national security-related technologies.
In addition to our defence portfolio, we continued to see a recovery in our
commercial aviation product lines, as passenger flying hours continue to
increase. Further, demand for our low and zero emission hybrid and fully
electric drive and propulsion systems continued to grow, with emerging
opportunities to take these applications into the defence arena, as well as
maritime and air applications.
Our markets
A differentiating strength of BAE Systems is our geographic diversity and
exposure to many of the world's largest national defence budgets. Most of the
countries in which we operate have either announced increases or are making
plans to increase spending to address the elevated threat environment. Whilst
global economic and fiscal pressures weigh on governments, the commitment to
defence in our major markets remains robust.
Our standing as the UK's largest defence company, a top 10 defence prime
contractor in the US, the largest defence company in Australia, our enduring
relationships with multiple customers in the Middle East, and strong European
presence contributed to a record annual order intake of £37bn, driving our
defence order backlog up to £59bn. This geographic footprint also provides us
with the ability to export from the US, the UK, Australia and Sweden into
countries which are also planning to increase defence spending.
In the US, by far the world's largest defence market, we are well aligned to
the Department of Defense (DoD)'s emphasis on advanced technologies, which is
the fastest growing part of the US budget. In areas like electronic warfare,
multi-domain operations, Command, Control, Communications, Computers,
Intelligence, Surveillance and Reconnaissance (C4ISR) systems and advanced
Defense Advanced Research Projects Agency (DARPA) projects, BAE Systems
technologies are world-class and map directly into priorities in the US
National Defense Strategy. In addition, we expect the renewed importance of
armoured combat vehicles in the Ukraine conflict to benefit our combat
vehicles business.
In the UK, the 2021 Defence Command Paper renewed commitments to our major
programmes in complex warship, submarine and combat aircraft design and build,
allowing for long-term investment in these key sovereign capabilities, as well
as strong support for the cyber domain.
Our healthy opportunity pipeline is growing with domestic, export and
collaboration opportunities, and we have the capabilities to support our UK
customer in its emerging space ambitions.
In Europe, where the threat level is acute, the need for new equipment is most
urgent and many defence budgets are rising. Our involvement in the Eurofighter
Typhoon consortium, shareholding in missile-maker MBDA, ownership of the
growing Hägglunds and Bofors businesses, acquisition of Bohemia Interactive
Simulations and participation in US foreign military sales enable us to serve
the European/NATO market through multiple channels.
The Air sector continues to support a global customer base and we have a
significant operational business presence in the Middle East, notably in the
Kingdom of Saudi Arabia, Qatar and Oman.
In December 2022, the governments of the UK, Japan and Italy, announced their
shared ambition to develop a next generation fighter aircraft under a new
Global Combat Air Programme (GCAP). The launch of GCAP firmly positions the
UK, alongside Japan and Italy, as leaders in the design, development and
production of next generation combat air capability. Working closely with our
UK industry partners, the Air sector intends to strengthen its ties with
Japanese and Italian industries as we work together to deliver this programme.
2022 financial performance
Our key financial metrics of sales, margin, underlying earnings per share, and
free cash flow increased despite supply chain interruptions, labour shortages
and the inflationary environment. This was possible because of the excellent
work of our employees on programme execution, as well as by the internal
efficiency and competitiveness initiatives we have underway.
On a constant currency basis, we grew sales by 4%, increased return on sales
by 20 basis points, grew underlying earnings per share by 9%, and recorded
another exceptional year for free cash flow of £2.0bn. Together with 2020 and
2021, we over-performed on our stated three-year free cash flow target by more
than £1bn.
This collection of strong results was enhanced by our share repurchase
programmes. In 2022, we repurchased £793m of our shares, or about 3% of our
outstanding shares, completing the remainder of the Board's 2021 £500m
authorisation and the initial tranche of the Board's three-year £1.5bn
authorisation, approved in mid-2022.
Balance sheet strength
BAE Systems ended 2022 with a strong balance sheet, featuring a cash position
of £3.1bn, a net debt (excluding lease liabilities) of £2.0bn, and a net
pension position that has swung from a significant accounting deficit to an
accounting surplus, thanks to the Group's funding commitments over the years
and the higher interest rate environment.
The outcome of the triennial review with the pension Trustee and the Pensions
Regulator was positive and has enabled the Group to move forward with a
sensible capital allocation strategy that prioritises investing in the
business for the long term through R&D and acquisitions in high
growth/high return parts of the business, and capital expenditures to ensure
our systems and facilities are modern and can support the Group's expected
growth. We are also committed to returning value to shareholders through an
attractive dividend, which has increased for 19 consecutive years, and share
buybacks based on our confidence in the outlook.
2022 operational performance
Set against the backdrop of macro-economic challenges and heightened global
tensions, we made excellent progress in meeting the strategic objectives we
have been pursuing for several years. Our intense focus on operational
excellence continues to benefit our customers and shareholders as we execute
on complex, long-duration programmes like the Astute and Dreadnought submarine
programmes, Type 26 and Hunter Class frigates, Typhoon and F-35 fighter jets,
electronic warfare systems, and a leading portfolio of land combat vehicles,
among many other programmes. This relentless attention to delivering for our
customers has positioned the Group as a trusted supplier of advanced
technology solutions and industrial capabilities to help customers achieve
their critical national and global security missions.
Each of our business sectors contributed to making 2022 a strong year for the
Group:
Our Electronic Systems sector was the business unit most impacted by the
global shortage of microelectronics, as well as by labour and staffing
shortages within our operations and across our supply chain. The team
developed operational approaches that helped mitigate the schedule and
financial impacts of the supply chain constraints, producing another solid
year with continued high margins and a robust order book. We are optimistic
that these supply chain pressures will continue to ease in the near term.
Our Platforms & Services sector maintained relatively stable sales, whilst
delivering margin expansion in 2022. The impacts from the COVID-19 pandemic
negatively affecting the business began to abate in 2022. Our US combat
vehicles business has ramped up the production of key programmes like the
Armoured Multi-Purpose Vehicle (AMPV) and Amphibious Combat Vehicle (ACV), and
our Swedish Hägglunds business recorded outstanding levels of new orders.
Margins in our Ship Repair business have improved as we worked to address
workforce challenges and operational performance post-COVID.
Our Air sector posted steady sales growth and increased margins, highlighted
by the production of Typhoon fighters for Qatar, Germany and other customers,
and the delivery of F-35 aft fuselage tail sections. The Tempest technology
maturation programme is progressing well, and work continues to plan on the
Future Combat Air System (FCAS) Concept & Assessment Phase, a contract we
received in 2021. In 2022, the UK government announced plans to lead the
development of a new flying combat air demonstrator, set to fly within the
next five years, and the GCAP coalition with Japan and Italy. In addition, we
renewed a major portion of our Saudi support business for another five years
under a UK-Saudi government-to-government agreement.
Our Maritime sector posted good sales growth in 2022, and maintained steady
margins, as major submarine and ship programmes continued to ramp up. Margin
performance reflected the high volume of Dreadnought sales and increased
Company-funded R&D expenditure. The Dreadnought nuclear deterrent
submarine and the Global Combat Ship programmes (UK's Type 26, Australia's
Hunter Class and Canada's licensed frigate) all grew year-over-year.
The Cyber & Intelligence sector recorded good sales growth and margin
performance. The sector benefited from better workforce utilisation and
efficiency following the worst of the pandemic. In the US, the Intelligence
& Security business continued to demonstrate the value of its
differentiated systems integration expertise, providing leading engineering,
modelling and simulation capabilities to its customers, expanding in this area
through the acquisition of Bohemia Interactive Simulations. In the UK, we
established the Digital Intelligence business, bringing together capabilities
in cyber, space, intelligence, security and data into one organisation to
improve our customer alignment.
Our ESG agenda
We operate our business for the long term and place incorporating sustainable
business practices in all aspects of our operations at the core of our
approach. This includes, for example, our focus on employee safety and
wellbeing, creating a diverse and inclusive workspace, supporting and engaging
with the communities in which we operate, and delivering leading apprentice
and graduate programmes to prepare the next generation of workers for the
future. It also includes our focus on responsible environmental stewardship in
our operations. We underpin everything with a robust governance structure that
applies to all aspects and required adherence to our Code of Conduct.
We are exceptionally proud of what the Group accomplished in 2022. We hired a
record number of UK apprentices and graduates and are particularly pleased
that we increased the number of women to 30% of that intake. We progressed our
climate resilience programmes and each of our sectors developed
decarbonisation roadmaps to outline short-, medium- and long-term activities
to support the Group's net zero ambition by 2030 (Scope 1 and 2). Our
employees continue to be engaged in our sustainability programmes, actively
participating across many elements. We have made substantial progress in our
sustainability agenda over the past several years, and we recognise there is
more work to do in the years ahead. These efforts will make us a better,
higher-performing company in the future.
Board changes
At the Company's AGM in May last year, two non-executive directors, Dame
Carolyn Fairbairn and Ian Tyler, stepped-down from the Board. At the beginning
of November, Lord Mark Sedwill joined the Board as a non-executive director.
New Chair
This year's Annual General Meeting of shareholders will mark the conclusion of
Sir Roger Carr's remarkable tenure as Chair. We have named Cressida Hogg as
Sir Roger's successor, completing an intensive search for the most qualified
candidate to fill the role. We all look forward to benefiting from her
experience, wisdom and energy in the coming years. She joined the Board as a
non-executive director and Chair designate on 1 November 2022 and will succeed
Sir Roger as Chair at the conclusion of this year's AGM, due to be held on 4
May 2023.
Executive Committee changes
In the second half of 2022, we welcomed two new members to our Executive
Committee (EC). Caitlin Hayden has joined as Group Communications Director
following her role as Senior Vice President of Communications at BAE Systems,
Inc. in the US. Ed Gelsthorpe also joined the EC as Group General Counsel. Ed
has enjoyed a long and varied career in the Group and has served in several
senior legal leadership positions.
Summary
As we close the book on 2022, the fundamentals of the business are strong, the
outlook is bright, and our team is focused on our purpose - "to serve, supply
and protect those who serve and protect us." While it is tragic that it took a
war in Europe to raise the awareness of the importance of defence around the
globe, BAE Systems is well positioned to help national governments keep their
citizens safe and secure in an elevated threat environment.
For shareholders, the record order intake and increased order backlog, our
position on major and enduring programmes, the pension accounting surplus, and
management's continued attention to operational excellence and financial
discipline together provide a high level of visibility for sales growth,
margin expansion, cash generation and capital returns over the coming years.
Dividends
The Board has recommended a final dividend of 16.6p for a total of 27.0p for
the full year. Subject to shareholder approval at the May 2023 Annual General
Meeting, the dividend will be paid on 1 June 2023 to shareholders on the share
register on 21 April 2023.
Financial glossary
We monitor the underlying financial performance of the Group using alternative
performance measures (APMs). 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.
The Group uses these APMs as a mechanism to support year-on-year business
performance and cash generation comparisons, and to enhance management's
planning and decision making on the allocation of resources. The APMs are also
used to provide information in line with the expectations of investors, and
when setting guidance on expected future business performance. The Group
presents these measures to the users to enhance their understanding of how the
business has performed within the year, and does not consider them to be more
important than, or superior to, their equivalent IFRS measures.
Financial performance measures defined by the Group
Measure Closest IFRS measure and reconciliation
Purpose Definition
Sales Enables management to monitor the revenue of both the Group's own subsidiaries Revenue plus the Group's share of revenue of equity accounted investments, Page 11
as well as its strategically important equity accounted investments, to ensure excluding subsidiaries' revenue from equity accounted investments.
programme performance is understood and in line with expectations.
Underlying EBIT Provides a measure of operating profitability, excluding one-off events or Operating profit excluding amortisation of programme, customer-related and Page 11
adjusting items that are not considered to be part of the ongoing operational other intangible assets, impairment of intangible assets, finance costs and
transactions of the business, to enable management to monitor the performance taxation expense of equity accounted investments (EBIT), and adjusting
of recurring operations over time, and which is comparable across the Group. items(1). The exclusion of amortisation of acquisition-related intangible
assets is to allow consistent comparability internally and externally between
our businesses, regardless of whether they have been grown organically or via
acquisition.
Return on sales Provides a measure of operating profitability, excluding one-off events, to Underlying EBIT as a percentage of sales. Also referred to as margin. Page 11
enable management to monitor the performance of recurring operations over
time, and which is comparable across the Group
Underlying earnings per share Provides a measure of the Group's underlying performance, which enables Profit for the year attributable to shareholders, excluding post-tax impact of Page 13
management to compare the profitability of the Group's recurring operations amortisation of programme, customer-related and other intangible assets,
over time. impairment of intangible assets, non-cash finance movements on pensions and
financial derivatives, and adjusting items(1) attributable to shareholders,
being underlying earnings, divided by number of shares as defined for Basic
EPS in accordance with IAS 33 Earnings per Share.
Measure Closest IFRS measure and reconciliation
Purpose Definition
Underlying interest expense Provides a measure of finance costs associated with the operational borrowings Net finance costs for the Group and its share of equity accounted investments, Page 46
of the Group that is comparable over time. excluding net interest expense on post-employment benefit obligations and fair
value and foreign exchange adjustments on financial instruments and
investments.
Underlying effective tax rate Provides a measure of taxation for the Group, excluding one-off items, that is Taxation expense for the Group and its share of equity accounted investments, Page 47
comparable over time. excluding any one-off tax benefit/expense, as a percentage of adjusted profit
before taxation, being Profit before tax plus taxation expense of equity
accounted investments, adjusted for adjusting items(1).
Operating business cash flow Provides a measure of cash generated by the Group's operations, to service Net cash flow from operating activities excluding taxation and including net Page 14
debt and meet tax obligations, and in turn available for use in line with the capital expenditure (net of proceeds from funding of assets) and lease
Group's capital allocation policy. principal amounts, financial investment and dividends from equity accounted
investments.
Free cash flow Provides a measure of cash generated by the Group's operations after servicing Operating business cash flow less interest paid (net) and taxation. Page 14
debt and tax obligations, available for use in line with the Group's capital
allocation policy.
Net debt (excluding lease liabilities) Allows management to monitor indebtedness of the Group, to ensure the Group's Cash and cash equivalents, less loans and overdrafts (including debt-related n/a
capital structure is appropriate and capital allocation policy decisions derivative financial instruments). Net debt does not include lease
are suitably informed. liabilities.
Order intake Allows management to monitor the order intake of the Group's own subsidiaries Funded orders received from customers including the Group's share of order n/a
as well as its strategically important equity accounted investments, providing intake of equity accounted investments.
insight into future years' sales performance.
Order backlog Supports future years' sales performance of subsidiaries and equity accounted Funded and unfunded unexecuted customer orders including the Group's share of Page 13
investments. order backlog of equity accounted investments. Unfunded orders include the
elements of US multi-year contracts for which funding has not been authorised
by the customer.
Financial performance measures derived from IFRS
Measure
Definition
Revenue Income derived from the provision of goods and services by the Company and its
subsidiary undertakings.
Operating profit Profit for the year before finance costs and taxation expense. This measure
includes finance costs and taxation expense of equity accounted investments.
Return on revenue Operating profit as a percentage of revenue.
Basic earnings per share Basic earnings per share in accordance with
International Accounting Standard 33 Earnings
per Share.
Net cash flow from operating activities Net cash flow from operating activities in accordance
with International Accounting Standard 7 Statement
of Cash Flows.
Order book The transaction price allocated to unsatisfied and
partially satisfied performance obligations as
defined by IFRS 15 Revenue from Contracts with
Customers.
Net post-employment benefits surplus/deficit Net International Accounting Standard 19 Employee
Benefits surplus or deficit, excluding amounts allocated to
equity accounted investments.
1. Adjusting 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.
Adjusting items were referred to as non-recurring items in the prior year. No
change has been made to the definition of these items, but the name has been
changed to reflect that some items could be considered recurring in nature.
The Group's definition of adjusting items includes profit or loss on business
transactions, the impact of substantively enacted tax rate changes, and costs
incurred which are one-off in nature, for example non-routine costs or income
relating to post-retirement benefit schemes, and other items which management
has determined as not being relevant to an understanding of the Group's
underlying business performance. Note 2 Segmental analysis and revenue
recognition includes more information on those items reported as adjusting in
the year.
Income statement summary
2022 2021
£m
£m
Financial performance measures as defined by the Group(1)
Sales 23,256 21,310
Underlying EBIT 2,479 2,205
Return on sales 10.7% 10.3%
Financial performance measures derived from IFRS(2) £m £m
Revenue 21,258 19,521
Operating profit 2,384 2,389
Return on revenue 11.2% 12.2%
Reconciliation of sales to revenue £m £m
Sales 23,256 21,310
Deduct Group's share of revenue of equity accounted investments (3,342) (2,979)
Add Subsidiaries' revenue from equity accounted investments 1,344 1,190
Revenue 21,258 19,521
Reconciliation of underlying EBIT to operating profit £m £m
Underlying EBIT 2,479 2,205
Adjusting items 91 350
Amortisation of programme, customer-related and other intangible assets (110) (86)
Impairment of intangible assets (1) (15)
Financial expense of equity accounted investments (25) (27)
Taxation expense of equity accounted investments (50) (38)
Operating profit 2,384 2,389
Net finance costs (395) (279)
Taxation expense (315) (198)
Profit for the year 1,674 1,912
Exchange rates 2022 2021
Average
£/$ 1.236 1.376
£/€ 1.173 1.163
£/A$ 1.778 1.832
Year end
£/$ 1.203 1.354
£/€ 1.127 1.191
£/A$ 1.773 1.863
£m
Sensitivity analysis
Estimated impact on sales of a five cent movement in the average exchange rate
$ 400
€ 55
A$ 25
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 8.
2. International Financial Reporting Standards.
Sales increased by £2.0bn to £23.3bn (2021 £21.3bn), a 4% increase on a
constant currency basis(1), or 9% on a reported basis.
Revenue increased by £1.7bn, 9%, to £21.3bn (2021 £19.5bn).
Underlying EBIT increased to £2,479m (2021 £2,205m), giving a return on
sales of 10.7% (2021 10.3%). Excluding the impact of exchange translation,
the increase was 5%. On a reported basis this was 12%.
Operating profit remained stable at £2,384m (2021 £2,389m) with the one off
gains in 2021 on the sale of Advanced Electronics Company (£132m) and the
Filton and Broughton sites (£182m) offset by the gain on sale of the
Financial Services business (£94m) and underlying growth in 2022.
Adjusting items in 2022 reflect a gain of £91m, comprising a £94m gain on
the disposal of the Financial Services business in Digital Intelligence and a
£13m gain related to past service cost on the pension scheme, offset by £16m
of costs related to current and historical business transactions. The credit
of £350m in 2021 comprised a £182m gain in HQ on the sale of the Filton and
Broughton sites, a £132m gain on disposal of the Advanced Electronics Company
and £26m on disposal of a business in our Electronic Systems segment and a
net £10m gain relating to historical acquisitions.
Amortisation of programme, customer-related and other intangible assets was
£110m (2021 £86m), the increase being driven by amortisation charges from
businesses acquired during 2022 and a full year of cost from those acquired in
2021.
Impairment of intangible assets in 2022 is £1m (2021 £15m).
Net finance costs were £395m (2021 £279m). The underlying interest expense,
including share of equity accounted investments, and excluding pension
accounting and fair value and foreign exchange adjustments on financial
instruments and investments, was £246m (2021 £241m). Net interest expense on
the Group's pension surplus/(deficit), including equity accounted investments,
was £38m (2021 £67m).
Taxation expense, including equity accounted investments, of £365m reflects
the Group's underlying effective tax rate for the year of 19%, adjusted for
the impact of the UK tax rate adjustment. The 2021 charge of £236m reflected
the Group's underlying effective tax rate for the year of 18%, less the impact
of a one-off tax benefit of £94m in respect of agreements reached regarding
the exposure arising from the April 2019 European Commission decision
regarding the UK's Controlled Foreign Company regime (see note 4).
The calculation of the underlying effective tax rate is shown in note 4 on
page 47.
1. Current year compared with prior year translated at current year exchange
rates.
Earnings per share
2022 2021
Financial performance measures as defined by the Group(1)
Underlying earnings (excluding the 2021 one-off tax benefit) £1,728m £1,523m
Underlying earnings per share (excluding the 2021 one-off tax benefit) 55.5p 47.8p
Underlying earnings (including the 2021 one-off tax benefit) £1,728m £1,617m
Underlying earnings per share (including the 2021 one-off tax benefit) 55.5p 50.7p
Financial performance measures derived from IFRS(2)
Profit for the year attributable to equity shareholders £1,591m £1,758m
Basic earnings per share 51.1p 55.2p
Reconciliation of underlying earnings to profit for the year £m £m
attributable to equity shareholders
Underlying earnings (excluding the 2021 one-off tax benefit) 1,728 1,523
Adjusting items, post tax 94 279
Amortisation of programme, customer-related and other intangible assets, and (90) (84)
impairment of intangibles, post tax
Net interest expense on post-employment benefit obligations, post tax (31) (55)
Fair value and foreign exchange adjustments on financial instruments and (110) 1
investments, post tax
One-off tax benefit (2021) - 94
Profit for the year attributable to equity shareholders 1,591 1,758
Non-controlling interests 83 154
Profit for the year 1,674 1,912
Underlying earnings per share for the year increased by 9%, excluding the
impact of exchange translation, to 55.5p (2021 47.8p excluding the one-off tax
benefit).
Basic earnings per share was 51.1p (2021 55.2p). The decrease being due to
lower gains on the adjusting items in 2022, and the one-off tax benefit in
2021, partially offset by the benefit of the share buybacks.
Orders
Financial performance measures as defined by the Group(1) 2022 2021
Order intake(3) £37,093m £21,458m
Order backlog(3) £58.9bn £44.0bn
Financial performance measures derived from IFRS(2)
Order book(4) £48.9bn £35.5bn
Order intake(3) increased by £15,635m to £37,093m (2021 £21,458m). Our
US-managed businesses had a book‑to-bill ratio(5) of more than one.
Order backlog(3) increased by £14.9bn to £58.9bn (2021 £44.0bn).
Order book(4) increased by £13.4bn to £48.9bn (2021 £35.5bn).
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 8.
2. International Financial Reporting Standards.
3. Including share of equity accounted investments.
4. Order book represents the transaction price allocated to unsatisfied and
partially satisfied performance obligations as defined by IFRS 15 Revenue from
Contracts with Customers.
5. Ratio of Order intake to Sales.
Cash flow
2022 2021
£m
£m
Financial performance measures as defined by the Group(1)
Free cash flow 1,950 1,864
Financial performance measures derived from IFRS(2) £m £m
Net cash flow from operating activities 2,839 2,447
Reconciliation from free cash flow to net cash flow from operating activities £m £m
Free cash flow 1,950 1,864
Add back Interest paid, net of interest received 237 224
Add back Taxation 365 234
Operating business cash flow(1) 2,552 2,322
Add back Net capital expenditure and financial investment 519 209
Add back Principal element of lease payments and receipts 227 207
Deduct Dividends received from equity accounted investments (94) (57)
Deduct Taxation (365) (234)
Net cash flow from operating activities 2,839 2,447
Net capital expenditure and financial investment (519) (209)
Principal element of finance lease receipts 9 10
Dividends received from equity accounted investments 94 57
Interest received 32 23
Acquisitions and disposals (38) 185
Net cash flow from investing activities (422) 66
Interest paid (269) (247)
Equity dividends paid (802) (777)
Purchase of own shares (788) (368)
Partial disposal of shareholding in subsidiary undertaking - 28
Dividends paid to non-controlling interests (166) (202)
Principal element of lease payments (236) (217)
Cash inflow from derivative financial instruments (excluding cash flow hedges) 533 61
Cash outflow from derivative financial instruments (excluding cash flow (205) (149)
hedges)
Movement in cash collateral - (18)
Net cash flow from loans (400) (367)
Net cash flow from financing activities (2,333) (2,256)
Net increase in cash and cash equivalents 84 257
Add back Net cash flow from loans 400 367
Foreign exchange translation (478) (50)
Other non-cash movements 131 (16)
Decrease in net debt (excluding lease liabilities) 137 558
Opening net debt (excluding lease liabilities) (2,160) (2,718)
Net debt (excluding lease liabilities) (2,023) (2,160)
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 8.
2. International Financial Reporting Standards.
Free cash flow was £1,950m (2021 £1,864m) after shareholder returns of
£1,590m (2021 £1,145m). The strong performance this year was driven by
continued good operational performance and working capital management.
Net cash inflow from operating activities was £2,839m (2021 £2,447m). The
inflow reflects operational business performance, and working capital
management.
Taxation payments were £365m (2021 £234m).
Net capital expenditure and financial investment was £519m (2021 £209m),
increasing mainly as a result of the proceeds from the Filton and Broughton
sites offsetting the expenditure in 2021.
Dividends received from equity accounted investments amounted to £94m (2021
£57m).
Cash flows in respect of acquisitions and disposals comprises a net outflow of
£38m. This was primarily due to the cash outflow on the acquisition of
Bohemia Interactive Simulations of £146m, being offset by the cash received
on the sale of the Financial Services business of £101m. The cash inflow in
2021 in respect of acquisitions and disposals, of £185m was primarily in
relation to the divestment of the Advanced Electronics Company.
Equity dividends paid in 2022 represents the 2021 final dividend (£480m) and
the 2022 interim dividend (£322m).
Share buybacks saw an outflow of £788m in the year. The full 2021 programme
of £500m completed in February 2022, of which £130m was spent in 2022. In
July, a further three-year, £1.5bn share buyback programme was announced.
During the year, payments of £658m were made towards share buybacks in
relation to this three-year programme.
Dividends paid to non-controlling interests were £166m (2021 £202m),
primarily reflecting payments made by our partially-owned subsidiaries in the
Kingdom of Saudi Arabia.
There was a net cash inflow from derivative financial instruments of £328m
(2021 £88m net outflow), 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
Components of net debt (excluding lease liabilities) 2022 2021
£m
£m
Cash and cash equivalents 3,107 2,917
Debt-related derivative financial instruments (net) 112 (16)
Loans - non-current (5,189) (4,604)
Loans and overdrafts - current (53) (457)
Net debt (excluding lease liabilities) (2,023) (2,160)
The Group's net debt (excluding lease liabilities) at 31 December 2022 was
£2,023m, a net decrease of £137m from the position at the start of the year.
This is primarily a result of strong Free cash flow performance, partially
offset by increased shareholder returns through dividends and share buybacks.
Cash and cash equivalents of £3,107m (2021 £2,917m) are held primarily for
the repayment of debt securities, pension funding when required, payment of
the 2022 final dividend, funding of further share buybacks under the £1.5bn
programme announced in July 2022, and management of working capital.
Accounting policies
Changes in accounting policies
No new or amended standards which became applicable for the year ending 31
December 2022 had a material impact on the Group or required the Group to
change its accounting policies.
Segmental review
The Group reports its performance through six reporting segments.
Year ended 31 December 2022
As defined by the Group Derived from IFRS
Sales Underlying EBIT Return Operating business cash flow Order Order Revenue Operating profit Return on revenue Net cash flow from operating activities Order book
£m
£m
on sales
£m
£m
£m
%
£m
£bn
% Intake(1) Backlog(1)
£m £bn
Electronic Systems 5,057 838 16.6 650 5,444 8.1 5,057 747 14.8 860 6.7
Platforms & Services 3,688 326 8.8 525 5,719 8.1 3,598 322 8.9 633 7.7
Air 7,698 849 11.0 1,140 14,042 24.4 6,286 809 12.9 1,202 17.4
Maritime 4,598 356 7.7 235 9,716 17.2 4,484 352 7.9 418 16.6
Cyber & Intelligence 2,205 232 10.5 154 2,443 2.1 2,205 291 13.2 191 1.4
HQ(2) 420 (122) (152) 426 - 10 (137) (100) -
Deduct Intra-group (410) (697) (1.0) (382) (0.9)
Deduct Taxation(3) (365)
Total 23,256 2,479 10.7 2,552(4) 37,093 58.9 21,258 2,384 11.2 2,839 48.9
1. Including share of equity accounted investments.
2. HQ comprises the Group's head office activities, together with a 49%
interest in Air Astana.
3. Taxation is managed on a Group-wide basis.
4. At a Group level, the key cash flow metric is Free cash flow (see Financial
glossary on page 8). In 2022, Free cash flow was £1,950m (2021 £1,864m).
Segmental review: Electronic Systems
Electronic Systems, with 16,900 employees(1), comprises the US- and UK‑based
electronics activities, including electronic warfare systems, navigation
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, space electronics and electric drive propulsion systems.
Operational and strategic key points
- Opened state-of-the-art facilities in Manchester, New Hampshire; Cedar
Rapids, Iowa; and Austin, Texas.
- Cumulatively more than 1,200 electronic warfare systems delivered on
F-35 programme.
- Deliveries continue of next-generation EW Eagle Passive Active Warning
Survivability System to support upgrade of US Air Force F-15 platform and
testing on F-15E and F-15EX test aircraft.
- Selected to design, test and supply energy management components for
GE Aviation's megawatt class hybrid electric propulsion system supporting
NASA's Electrified Powertrain Flight Demonstration project.
- The Long-Range Precision Guidance Kit programme reached a critical
benchmark with the successful completion of its structural survivability test
in the US Army's Extended Range Cannon Artillery.
- Delivered the 3,000(th) Multi-functional Information Distribution
System Joint Tactical Radio System through our Data Link Solutions joint
venture with Collins Aerospace.
Financial performance
Financial performance measures as defined by the Group Financial performance measures derived from IFRS
2022 2021 2022 2021
Sales £5,057m £4,491m Revenue £5,057m £4,491m
Underlying EBIT £838m £766m Operating profit £747m £715m
Return on sales 16.6% 17.1% Return on revenue 14.8% 15.9%
Operating business cash flow £650m £774m Cash flow from operating activities £860m £951m
Order intake(1) £5,444m £4,923m Order book £6.7bn £5.7bn
Order backlog(1) £8.1bn £7.2bn
- Results reflect the impact of the global shortage of microelectronics,
as well as labour and staffing shortages within the operations and supply
chain.
- Despite these challenges, sales grew by 2%(2), driven by growth in the
Electronic Combat Solutions business.
- Return on sales of 16.6% was in line with 2022 guidance, and steady on
a constant currency basis.
- Operating business cash flow has decreased due to the timing of
programme executions.
- Key orders secured on C4ISR, Electronic Combat and Precision Strike
and Sensing Solutions.
- Expect supply chain pressures to continue to ease in the near term, to
allow enhanced growth and margin performance.
Operational performance
Electronic Combat Solutions
The F-35 Lightning II programme is delivering on Lot 15 electronic warfare
(EW) systems and has delivered a cumulative total of over 1,200 EW systems. We
are also supporting the Block 4 modernisation efforts under multiple contracts
worth over $957m (£796m), and operating on our next Performance-Based
Logistics contract worth $290m (£241m) to provide critical sustainment
support for the F-35 EW system.
Under a contract from Boeing, we continue to deliver our next-generation EW
Eagle Passive Active Warning Survivability System (EPAWSS) to support the
upgrade of the US Air Force F-15 platform and testing on F-15E and F-15EX test
aircraft. In July, EPAWSS modifications began on two operational US Air Force
F-15Es and work began on the $36m (£30m) low-rate initial production phase
two contract.
We continue to collaborate with Boeing in the pursuit of all F-15 EW upgrade
opportunities, both domestic and international.
We are also under contract to supply the Digital Electronic Warfare System on
new and existing F-15 aircraft for multiple international customers with a
value of $91m (£76m).
On Long Range Anti-Ship Missile (LRASM) we began delivering on Lot 4 in
November. This marked the first delivery of the new LRASM 1.1 configuration
developed under the completed Diminishing Material Sources contracts.
Due to the sensitive nature of electronic combat systems and technology, many
of our programmes are classified. These include our work as a world leader in
electronic warfare providing next-generation defence technology.
Countermeasure & Electromagnetic Attack Solutions
Our Limited Interim Missile Warning System programme received $62m (£52m) in
US Army funding for the fourth production lot order, bringing production lot
order totals to $250m (£208m).
The Compass Call programme is executing contracts valued at more than $1bn
(£0.8bn), focused on the cross-decking of prime mission equipment to the new
EC-37B aircraft while sustaining and upgrading the existing EC-130H fleet. We
successfully tested third-party applications on Compass Call's Small Adaptive
Bank of Electronic Resources (SABER) technology, enabling fielding of SABER on
the EC-130H. We delivered key components for the US Air Force's first EC-37B
Compass Call aircraft, which is targeted to initially field in 2024, and have
started sustainment preparation.
We received approximately $14m (£12m) for the Smart D2™ technology as part
of the US Navy's ALE-47 Common Carriage programme, representing the first
purchase of the technology by the Department of Defense. Smart D2™
technology increases expendable payload capacity, incorporates a smart stores
communication interface and enables the future replacement of key elements
without replacing an aircraft's entire ALE-47 system to support real-time
updates to next-generation countermeasures.
Precision Strike & Sensing Solutions
The APKWS(®) guidance kit programme continues to execute production under an
Indefinite Delivery, Indefinite Quantity contract, with awards worth over $48m
(£40m) received in the year. Multiple test events in 2022 demonstrated new
capabilities, proving enhanced capabilities in support of US and allied
forces' precision strike missions.
The Long-Range Precision Guidance Kit programme reached a critical benchmark
with the successful completion of its structural survivability test in the US
Army's Extended Range Cannon Artillery, securing funding for further
development and bringing the total contract value to $99m (£82m).
The Terminal High Altitude Area Defense (THAAD) seeker programme provides the
THAAD interceptor with critical targeting capability to defeat ballistic
missile threats against the US and our allies. The programme is currently in
full-rate production, with a follow-on order worth $209m (£174m). To keep
pace with the evolving threat, BAE Systems has an ongoing effort valued at
$150m (£125m) to design and prototype the next-generation THAAD infrared
seekers.
We continue to execute a contract with Space Systems Command to develop an
M-Code Increment II Miniature Serial Interface GPS receiver for ground
embedded applications with next generation Application Specific Integrated
Circuit technology valued at more than $278m (£231m).
C4ISR Systems
We are executing key programmes that provide full spectrum communications to
meet customer needs for information sharing to support joint all-domain
command and control. We have completed a system requirements review for the
Airborne High Frequency Radio Modernization programme awarded in early 2022,
and we have delivered the 3,000(th) Multi-functional Information Distribution
System Joint Tactical Radio System through our Data Link Solutions Joint
Venture with Collins Aerospace.
To bring our disruptive technology to the space domain, we are performing on
the agreement to launch an experimental satellite. We continue to deliver
radiation-hardened electronics to support space programmes of national
importance, such as the James Webb Space Telescope, and are developing the
next generation of radiation-hardened Application Specific Integrated Circuit
libraries.
We transitioned our Mobility Air Forces Automated Flight Planning Service
operations to Cloud One to align with the US Air Force's transformation
objectives, providing increased storage, computing, processing flexibility and
faster software upgrades.
Controls & Avionics Solutions
Airline traffic and business travel continue to improve, resulting in
returning demand for Original Equipment Manufacturer deliveries and
aftermarket services.
The business remains focused on supporting Boeing's aircraft deliveries and
developing the integrated flight control electronics and remote electronic
units for the new Boeing 777X aircraft, with the 777X flight control system
performing as expected during flight testing.
Our full-authority digital engine controls, offered through the FADEC
International and FADEC Alliance (joint ventures), continue to perform well
across our portfolio. The business, through FADEC Alliance, is supporting CFM
International's Revolutionary Innovation for Sustainable Engines programme by
maturing new technologies that will enable a reduction in both fuel
consumption and emissions. On the military side, GE achieved a successful
First Engine to Test milestone in June, with our T901 FADEC.
We are engaged in developing the energy storage systems and controls for
all-electric aircraft, particularly in the emerging air mobility segment.
Specifically, we are executing the design, test and supply of advanced battery
packs for GE Aviation's megawatt class hybrid electric propulsion system in
support of NASA's Electrified Powertrain Flight Demonstration project. In
October, Supernal selected BAE Systems to define the architecture of a
lightweight, fly-by-wire system for its autonomous-capable aircraft.
Deliveries of F-35 vehicle management computers and active inceptor systems
have successfully ramped up, and we supported the first US Depot stand-up. We
continue to advance our autonomous control technologies through successful
crewed-uncrewed teaming flight tests under a US Department of Defense
programme. Separately, our development of an advanced vehicle control system
for the UK's Dreadnought submarine programme remains on plan.
Power & Propulsion Solutions
As the global transit industry accelerates efforts to decarbonise, interest
grows for our low and zero emission propulsion solutions. This year, US-based
bus manufacturers Hometown Manufacturing and ElDorado National both chose our
latest Gen3 electric drive technology to power their zero emission vehicles.
Hometown Manufacturing will power their battery electric trolley buses and
ElDorado National will power both hydrogen fuel cell electric buses and
battery electric buses with Gen3 products. Also using our Gen3 electric drive
system, Nova Bus continues to win battery electric bus bids in cities such as
New York and Houston in the US, as well as Halifax, Nova Scotia in Canada.
Our new Gen3 power electronics incorporate advanced materials enabling
smaller, lighter, more efficient systems with modular and scalable components.
The flexibility of our systems increases our ability to address a broader
range of markets, such as heavy-duty vocational vehicles and maritime vessels.
Global fast ferry manufacturer, Green City Ferries, selected our Gen3 electric
drive systems to power both their zero emission hydrogen fuel cell and battery
electric ferries and Glas Ocean Electric chose our systems to power fishing
fleets in North America and the Caribbean.
Looking forward
Forward-looking information for the Electronic Systems reporting segment is
provided on page 34.
1. Including share of equity accounted investments.
2. Constant currency basis.
Segmental review: Platforms & Services
Platforms & Services, with 12,200 employees(1), has operations in the US,
UK and Sweden. It manufactures and upgrades 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
- Significant increase in order intake largely driven by the Hägglunds
business.
- US Army selected the BAE Systems Beowulf for its Cold Weather
All-Terrain Vehicle (CATV) programme to replace the Small Unit Support
Vehicles, with a contract estimated to be worth up to $278m (£231m) for 110
vehicles.
- Submitted a proposal for the design concept phase for the US Army's
Optionally Manned Fighting Vehicle programme.
- Our US shipyards marked continued performance improvements and secured
$1.2bn (£1.0bn) in ship modernisation and repair orders.
- Received a five-year contract extension for Ordnance Systems Radford
operations through to 2026 and a one-year extension through to 2024 for the
Holston facility and supply contracts.
- Contract received worth $1.4bn (£1.2bn) to supply 152 CV9035 infantry
fighting vehicles to replace the Slovakian Army's infantry fighting vehicle
fleet.
- Czech government selected CV90 to replace its infantry fighting
vehicle fleet. Contract expected in first half of 2023.
Financial performance
Financial performance measures as defined by the Group Financial performance measures derived from IFRS
2022 2021 2022 2021
Sales £3,688m £3,395m Revenue £3,598m £3,318m
Underlying EBIT £326m £259m Operating profit £322m £252m
Return on sales 8.8% 7.6% Return on revenue 8.9% 7.6%
Operating business cash flow £525m £287m Cash flow from operating activities £633m £351m
Order intake(1) £5,719m £3,236m Order book £7.7bn £5.3bn
Order backlog(1) £8.1bn £5.6bn
- Sales remained steady on a constant currency basis, as guided to for
the year.
- Return on sales increased to 8.8%, as the impacts from the COVID-19
pandemic began to abate in 2022.
- The increase in operating business cash reflects timing of customer
advances, primarily from orders in the Hägglunds business.
Operational performance
Combat Mission Systems
Combat Mission Systems is achieving consistent production throughput, at
heightened volumes, across multiple programmes. Investments in facilities and
new manufacturing technologies, including automation and robotic welding, are
delivering positive returns as the business moves to full rate production
across a number of platforms.
We delivered Amphibious Combat Vehicles (ACVs) to the US Marine Corps under
low-rate initial production (LRIP) contracts totalling approximately $600m
(£499m) for 116 vehicles. This completed the LRIP phase, and we transitioned
to delivery on three full-rate production contracts for an additional 185
vehicles at a value of $973m (£809m). We received a $35m (£29m) contract for
the design and development of a new ACV recovery variant in March, an $88m
(£73m) contract in August to build three ACV-30 Production Representative
Test Vehicles (PRTVs) and are working on additional variants. The new
amphibious swim facility at York is now operational. In addition, we delivered
an advanced Command, Control, Communication and Computers/Uncrewed Aerial
Systems (ACV C4/UAS) variant of the ACV to the US Marine Corps, which will
evaluate it as a capable, cost-effective Government-Off-The-Shelf solution for
the Advanced Reconnaissance Vehicle programme.
On the US Army's Armoured Multi-Purpose Vehicle (AMPV) programme, we have
received LRIP contracts worth $1.3bn (£1.1bn). Deliveries of the five
variants continued in 2022 in accordance with the December 2021 schedule. We
are also working under a July 2021 contract worth up to $600m (£499m) for
AMPV System Technical Support (STS). We expect to receive a full-rate
production contract for the AMPV programme in the first half of 2023. In
support of this production award, the US Department of Defense has indicated
its intention to procure over 100 additional AMPV vehicles to replace the 200
in-service M113 armoured personnel carriers provided to Ukraine.
On the M109A7 programme, contracts worth a total of $1.5bn (£1.2bn), all 133
LRIP vehicles and over 300 full-rate production vehicles have been delivered.
We are now executing on fiscal year 2020 and 2021 full-rate production
contracts totalling $750m (£624m) for 176 vehicles, including a $299m
(£249m) contract received in June. We have also received early order material
awards totalling $24m (£20m) for fiscal year 2022 full-rate production.
Work on the Bradley family of vehicles continues, and we received a five-year
$383m (£318m) contract from the US Army to perform technical and sustainment
support services for its fleet of Bradley Fighting Vehicles and M993 Multiple
Launch Rocket System carriers. We continue the contract to upgrade Bradley
vehicles to the A4 configuration valued at $809m (£673m) for 459 vehicles and
spares. We are working on a five-year follow-on production contract to add
about $258m (£215m) for 80 vehicles through 2023, with quantities to be
determined for the remaining four years.
We are executing on a $32m (£27m) prototype contract received in 2020 from
the US Army's Rapid Capabilities and Critical Technologies Office to integrate
a hybrid-electric drive system onto Bradley Fighting Vehicles.
We continue to produce and sustain the US Army's M88 recovery vehicles under
previously awarded contracts, and develop next-generation M88A3 prototypes
under a $336m (£279m) contract.
In November 2022, we submitted a competitive proposal for the design and
prototype phase for the US Army's Optionally Manned Fighting Vehicle
programme.
We are producing Mk 41 Vertical Launching System (VLS) missile canisters for
the US Navy under awards totalling $433m (£360m), with a total potential
value of more than $624m (£519m). We are also working on a $164m (£136m),
five-year contract as the Navy's design agent for missile canisters and the
mechanical portion of the VLS.
Ordnance Systems
We continue to operate and modernise the US Army's Radford and Holston
ammunition plants under a total of $1.5bn (£1.2bn) in modernisation
contracts. The Army awarded a five-year contract extension, through December
2026, for Radford operations; and a one-year contract extension, through
December 2024, for the current Holston Army Ammunition Plant facility and
supply contracts.
At Holston, modernisation activities continue, including the construction of a
Weak Acetic Acid Recovery Plant, and the design, construction and
commissioning of new production facilities. Contracts totalling $211m (£175m)
were awarded in the year for energetics facilities at Holston.
At Radford, construction of a modern nitrocellulose facility has been
completed, and the facility is in the commissioning and product qualification
phase.
US Ship Repair
During the year, we received contracts with a cumulative value of $1.2bn
(£1.0bn) for maintenance and modernisation across our Jacksonville, Florida;
Norfolk, Virginia; and San Diego, California shipyards.
The US Ship Repair business continues to conduct modernisation and maintenance
activities for the US Navy's non-nuclear fleet. Our shipyards were impacted by
delayed starts to ship repair contracts due to operational naval tasking,
coupled with delays to pending contract awards and higher than usual levels of
customer-added work to existing contracts. Our investments in operational
excellence and additional resources are delivering benefits as we address
several challenged ship modernisation programmes.
BAE Systems Hägglunds
To accommodate significant new orders received over the past 24 months, the
business continues to expand its workforce and facilities.
The US Army selected our Beowulf unarmoured all-terrain vehicle and we
received a contract worth up to $278m (£231m) for 110 Cold Weather
All-Terrain Vehicles. The Beowulf will replace the original BV206 Small Unit
Support Vehicles.
The team is executing on a contract to upgrade and extend the life of the
Netherlands CV9035 fleet, including the integration of an Active Protection
System, anti-tank guided-missile system, and the addition of rubber band
tracks to increase effectiveness. In addition, we continue to conduct mid-life
upgrades on the Dutch CV90 fleet under a contract worth more than $500m
(£416m), which includes the development and testing of a new turret. The
first newly-upgraded CV90 was unveiled in October 2022, at our facility in
northern Sweden.
In March 2022, we received a new contract to equip 20 CV90s with the Mjölner
mortar system for Sweden, following the delivery of the first 40 systems on
time, at cost and to quality. We have secured a $90m (£75m) contract to
develop two new CV90 variants for the Swedish Army as part of the ongoing RENO
programme.
While our work continues to extend the life of 186 Swiss Army CV90s to 2040,
the first four of 20 CV90 vehicles for Norway were delivered on time and at
cost in May under a contract exceeding $50m (£42m). We also received a
seven-year contract in January for support, sustainment and readiness of 144
Norwegian CV90s. We also continue to upgrade and extend the life of CV90s in
the Finnish Army fleet under an ongoing contract.
Slovakia and the Czech Republic selected CV90 in separate evaluations to
replace their legacy infantry fighting vehicle fleets. Both contracts are
supported by overarching government-to-government agreements with the Swedish
government. Contract negotiations with the Government of Slovakia have
completed and a contract was signed on 12 December at a value of $1.4bn
(£1.2bn) for 152 CV9035 infantry fighting vehicles. We expect the contract
negotiations with the Czech Republic to culminate in the first half of 2023.
The business is also working under contract from Sweden for 127 BvS10s worth
approximately $200m (£166m), as well as sustaining and maintaining readiness
to various customers of the BvS10 and CV90 fleets.
In December, Sweden, Germany, and the United Kingdom announced they have
signed an agreement with BAE Systems to purchase 436 BvS10 all-terrain
vehicles under a joint procurement in support of Arctic operations for the
Collaborative All-Terrain Vehicle (CATV) programme, which could grow to a
total of more than 10,000 all-terrain vehicles in the next 10 years. Sweden is
procuring an additional 40 BvS10s in a separate contract, valued at
approximately $50m (£42m).
BAE Systems Bofors
The 24 additional ARCHER systems for Sweden have been delivered, and we
continue a number of ARCHER pursuits in our home and export markets. ARCHER
was selected as one of two systems under consideration by the Swiss government
for its future artillery system.
We are under multiple export contracts to deliver 40Mk4 and 57Mk3 naval gun
systems, including five 57Mk3s and ten 40Mk4s for the UK Royal Navy's Type 31
frigates, as well as 12 40Mk4s to the Belgian and Dutch navies, and new 57mm
(Mk110) gun systems to the US Navy and Coast Guard.
Weapon Systems UK
Production of 145 M777s for the Indian Army was completed in December, with
all guns delivered to India under a $542m (£451m) Foreign Military Sales
contract. In light of recent global events, we have received a number of
inquiries about the availability of future M777 systems, as well as spare
parts and support. In conjunction with the US Government, we are evaluating
potential options to restart production.
FNSS
FNSS, our land systems joint venture based in Turkey, continues to produce 8x8
wheeled armoured vehicles for the Royal Malaysian Army. Production continues
on medium-weight tanks for delivery to Indonesia, and work has begun for
specialist engineering vehicles for the Philippines.
Multiple contracts for the Turkish Armed Forces worth in excess of €700m
(£621m) are progressing. These include contracts for assault amphibious
vehicles, weapons carriers and special purpose 8x8 and 6x6 vehicles. In
December 2022, a follow on contract was signed to modernise a further 52
armoured combat vehicles for the Turkish Armed Forces, in addition to the 133
armoured combat vehicles already delivered or in production.
Looking forward
Forward-looking information for the Platforms & Services reporting segment
is provided on page 34.
1. Including share of equity accounted investments.
Segmental review: Air
Air, with 24,400 employees(1), comprises the Group's UK‑based air activities
for European and International Markets, US Programmes, and development of
Future Combat Air Systems, alongside its business in the Kingdom of Saudi
Arabia, together with its 37.5% interest in the European MBDA joint venture.
Operational and strategic key points
- Excellent progress on Tempest - the governments of the UK, Japan and
Italy announced a new Global Combat Air Programme (GCAP), which will bring
together the Tempest and F-X programmes.
- Qatar Typhoon and Hawk programme is progressing well, with all nine
Hawk aircraft accepted by the customer and eight Typhoon aircraft now
delivered and in service with the Qatari Emiri Air Force.
- Work continues on the Typhoon programme and the production programme
has been extended following the award of 20 further aircraft for Spain during
the year, for which BAE Systems supplies major units.
- 11-year contract signed to continue to support to the Royal Air
Force's fleet of Hawk fast jet trainer and Royal Air Force Aerobatic Team
aircraft.
- F-35 rear fuselage production continued at full rate levels, with 150
assemblies completed in the year.
- During the year, The Saudi British Defence Co-operation Programme was
renewed for another five‑year term.
- All 22 Hawk aircraft have now been completed and have entered into
service with the Royal Saudi Air Force.
Financial performance
Financial performance measures as defined by the Group Financial performance measures derived from IFRS
2022 2021(2) 2022 2021(2)
Sales £7,698m £7,449m Revenue £6,286m £6,041m
Underlying EBIT £849m £772m Operating profit £809m £849m
Return on sales 11.0% 10.4% Return on revenue 12.9% 14.1%
Operating business cash flow £1,140m £548m Cash flow from operating activities £1,202m £638m
Order intake(1) £14,042m £5,695m Order book £17.4bn £12.2bn
Order backlog(1) £24.4bn £17.8bn
- Sales growth of 3%(3) following delivery of Typhoon fighters for
Qatar, Germany and other customers and delivery of F-35 aft fuselage tail
sections during the year.
- Return on sales of 11.0%, reflects an increase in underlying EBIT of
7%(3).
- The increase in operating business cash flow reflects timing of
customer advances and down payments.
- Order intake secured in the year includes the renewal of a major
portion of our Saudi Support business, as well as multiple export orders in
MBDA.
Operational performance
European and International Markets
Activity on the 24 Typhoon and nine Hawk aircraft and associated support and
training contract for the State of Qatar continues to progress in accordance
with our contractual milestones. All nine Hawk aircraft have been accepted by
the customer and delivered to RAF Leeming, in line with the agreement to base
the Qatari Hawk aircraft in the UK. Deliveries of Typhoon aircraft commenced
in the second half of the year, with eight Typhoon aircraft delivered ahead of
the 2022 FIFA World Cup and in service with the Qatari Emiri Air Force.
The final five major units were delivered during the year under the Kuwait
Typhoon contract, secured by Italian Eurofighter partner Leonardo.
During the year, BAE Systems received an order for our workshare valued at in
excess of £0.5bn for an additional 20 aircraft for the Spanish Air Force. Our
Major Unit production on this contract has been combined with the £1.3bn
order received in 2020 for 38 aircraft to replace Germany's original Typhoon
Tranche 1 fleet. The first three front fuselage units are contracted to
complete in 2023, and in total 22 major units have now commenced assembly.
During the year, the Group secured an 11-year follow-on contract valued at
£0.6bn to continue support to the Royal Air Force's fleet of Hawk fast jet
trainer and Royal Air Force Aerobatic Team aircraft.
Alongside this, the ten-year partnership arrangement for support to the Royal
Air Force's Typhoon fleet continues to deliver the contracted flying hours.
Following initial entry into service of the export standard electronically
scanned European Common Radar in late 2021 further deliveries were made
through 2022. Development continues on the radar variants for the UK, German,
Italian and Spanish Air Forces. During the year, the Group received further
funding of £684m for development of the Typhoon weapon system and sensors, as
part of the Partner Nations' commitment to the continual advancement of the
Typhoon platform.
Future Combat Air System
The Tempest technology maturation programme is progressing well, and work
continues to plan on the contract received in 2021 for the Future Combat Air
System Concept & Assessment Phase. Working with national and international
industry partners and the UK Ministry of Defence, this contract enables the
development of a range of digital concepts, embedding new tools and techniques
to design, evaluate and shape the final design and capability requirements of
Tempest. During the second half of the year, the UK government confirmed plans
for the UK to lead the development of a new flying combat air demonstrator,
set to fly within the next five years, and has confirmed its commitment to an
international coalition with Japan and Italy, under the Global Combat Air
Programme.
US Programmes
F-35 rear fuselage manufacturing continued at full rate production through
2022 with 150 rear fuselage assemblies completed during the year, in line with
the programmes for Lot 14, 15 and 16 contracts. This production rate is
expected to continue into 2023.
Following the award in 2021 of a five-year contract for F-35 sustainment
services to December 2025, we continue to provide services for both the UK and
US customers in support of key F-35 sustainment activities.
Kingdom of Saudi Arabia
In the Kingdom of Saudi Arabia, the In-Kingdom Industrial Participation
programme continues to make good progress consistent with our long-term
strategy, while satisfying and supporting the Saudi Arabian government's
National Transformation Plan and Vision 2030. Our in-Kingdom Saudi employee
base shows 78% Saudisation, and 90% of our in-Kingdom female employees are
Saudi nationals. We also continue the development of our footprint across the
Kingdom, with demonstrable contributions to our local communities.
The Group is reliant on the continued approval of export licences by a number
of governments in order to continue to support programme operations in the
Kingdom of Saudi Arabia. We are working closely with industry partners and the
UK government to continue to fulfil our contractual support arrangements in
the Kingdom.
The previous five-year contract to provide Salam Typhoon support services to
the Royal Saudi Air Force (RSAF) completed at the end of 2022. An interim
agreement for the continuation of this service has been reached with the RSAF,
and discussions are ongoing for us to continue to support the RSAF Typhoon
fleet for a further five years. A full contract is expected to be agreed
during 2023.
Under the Saudi British Defence Co-operation Programme (SBDCP) agreement, the
Group discharges a number of contracts, including support to the Tornado
fleet, provision of Officer and Aircrew training and Technician training for
the RSAF, as well as technical training, engineering and logistics services
for the Royal Saudi Naval Forces.
Following the completion of the previous five-year SBDCP funding arrangement
on 31 December 2021, agreement has been reached with the Saudi Arabian
government for the Group to continue to provide these services for a further
five years through to 31 December 2026, and contracts to this effect were
entered into during the second half of 2022.
All 22 Hawk aircraft assembled in-Kingdom have now been completed and have
entered into service with the Royal Saudi Air Force.
We continue to review our portfolio of interests in a number of industrial
companies in the Kingdom of Saudi Arabia, whilst exploring new business
opportunities in the marketplace and through our Kingdom Partner Companies to
collaborate with key local partners and deliver further In-Kingdom Industrial
Participation. We remain aligned to the Kingdom's National Transformation Plan
and Vision 2030 requirements.
Future Programmes
The Group continues to invest in promising new technologies, including through
a number of industry collaborations related to the exploration and development
of Air Electric Products. BAE Systems is one of a consortium of investors in
the Eve Urban Air Mobility electric vertical take-off and landing (eVTOL)
company, aimed at developing zero emission Air Vehicles. This investment led
to further cooperation with Embraer S.A, resulting in the signing of a
memorandum of understanding setting out an intent to create a commercial
partnership to develop a defence variant of the Eve eVTOL aircraft.
Beyond Eve, BAE Systems has also established collaborative relationships in
respect of Electric Products with UK-based Malloy Aeronautics, aiming to
develop the T-650 Uncrewed Air Vehicle, and with Pipistrel Aircraft who have
the first EASA certified light aircraft, Velis Electro.
MBDA
After winning a number of key domestic and export orders in 2021, MBDA has had
continued success in 2022 continuing to be well placed to benefit from
increased defence spending in a number of European countries along with
further International opportunities.
Domestic market orders have been received in 2022, Italy has awarded a GBAD
contract for Launchers and Common Anti-Air Modular Missiles Extended Range and
a Development contract amendment for Teseo Mk2 Evolved.
Significant export market orders have been received in 2022. Aligned with the
Rafale platform sales, MBDA has been awarded an air weapons package from the
UAE and a further air weapons package for Greece. Following the Naval Group
Intervention Frigate platform sale in Greece, MBDA has been awarded a Naval
Based Air Defence weapons package for the frigates. A number of International
customers have also awarded customer support contracts on their asset
inventories. With European countries recognising the importance of sovereign
capabilities in the missile sector and re-evaluating their needs, Poland has
accelerated its ground-based air defence campaign, awarding MBDA an order for
GBAD Launchers and Common Anti-air Modular Missiles.
Despite supply chain pressure in the aftermath of the pandemic, and as a
result of the Ukraine crisis, MBDA is maintaining production across its
product range. Progress continues across a number of assessment and
development phase programmes including Future Cruise and Anti-Ship Weapon;
MICA Next Generation, Spear Capability 3 and Aster Block 1 New Technology.
Looking forward
Forward-looking information for the Air reporting segment is provided on page
34.
1. Including share of equity accounted investments.
2. From 1 January 2022, the BAE Systems Australia Business transitioned from
the Air segment to the Maritime segment. Comparative segmental financial
information for 2021 has been re-presented to reflect the new business
structure.
3. Constant currency basis.
Segmental review: Maritime
Maritime, with 24,200 employees(1), comprises the Group's UK-based maritime
and land activities, as well as the Group's Australian business.
Operational and strategic key points
- The UK Ministry of Defence awarded a £4.2bn contract to BAE Systems
to manufacture the next five City Class Type 26 frigates for the Royal Navy in
Glasgow.
- First City Class Type 26 frigate entered the water and is being
outfitted at Scotstoun shipyard in Glasgow.
- £3.4bn of further contract funding awarded as part of Delivery Phase
3 for the Dreadnought programme.
- The fifth Astute Class submarine, HMS Anson, exited our Barrow
shipyard to commence sea trials in February 2023. The remaining two
submarines, Agamemnon and Agincourt, are at advanced stages of construction.
- Construction of the first two Dreadnought Class submarines is well
advanced and, in September 2022, build activities commenced on the third of
class submarine. A formal steel cut ceremony for the third boat was held in
Barrow in February 2023.
- RBSL's multi-million pound investment in its Telford manufacturing
site completed in 2022, with manufacturing activities due to commence in 2023.
- A$1.5bn (£0.8bn) extended 'In Service Support' contract for the Hawk
aircraft commenced in 2022 for the Royal Australian Air Force.
Financial performance
Financial performance measures as defined by the Group Financial performance measures derived from IFRS
2022 2021(2) 2022 2021(2)
Sales £4,598m £4,169m Revenue £4,484m £4,093m
Underlying EBIT £356m £351m Operating profit £352m £347m
Return on sales 7.7% 8.4% Return on revenue 7.9% 8.5%
Operating business cash flow £235m £374m Cash flow from operating activities £418m £534m
Order intake(1) £9,716m £5,688m Order book £16.6bn £11.6bn
Order backlog(1) £17.2bn £12.1bn
- Sales grew by 10%(3), driven by significant milestones being achieved
on major submarine and ship programmes during the year.
- Margin reflects high volume of Dreadnought sales, and increased
Company-funded R&D expenditure.
- Operating cash flow reflects the unwind of customer advances in UK
Munitions.
- Significant orders were secured in the year, including further
contract funding for the next phase of Dreadnought and the build of five
further City Class Type 26 frigates for the Royal Navy.
Operational performance
Naval Ships
The Type 26 programme continues to progress with construction underway on the
first three City Class Type 26 frigates. The first City Class Type 26, HMS
Glasgow, entered the water for the first time in December 2022 and has
transitioned to our Scotstoun shipyard where further outfit, test and
commissioning is underway. HMS Cardiff progressed through her unit erect
programme following the installation of her gearbox and propulsion motors in
2022 in preparation for roll out and block integration in 2023. HMS Belfast
continues to progress after entering manufacture in June 2021. In November,
the UK Ministry of Defence awarded a £4.2bn contract to BAE Systems to
manufacture the next five City Class Type 26 frigates for the Royal Navy in
Glasgow. The cut steel ceremony for the first ship from this order is expected
to take place in the first half of 2023.
We have committed circa £300m investment to better enable us to deliver on
our customer commitments and secure the long-term future for complex warship
shipbuilding in Glasgow. Key investments include a new ship assembly hall in
the Govan yard, a new multi-function panel line and a new Applied Shipbuilding
Academy in Scotstoun. We are also making significant investments to digitalise
manufacturing operations, giving colleagues working across our yards dynamic
access to data and information.
The Canadian Surface Combatant programme continues to progress under the
Definition Phase Contract where BAE Systems has responsibility for Warship
Design, and is now moving into the Functional Design stage, having held the
Preliminary Design Review in December 2022. Work is also progressing on the
Support Services subcontract, which is a four-year framework agreement to
provide technical assistance to Irving Shipbuilding Inc., through intellectual
property licensing, and the provision of consultancy services to help upskill
its workforce ahead of cutting steel on the first ship.
Our Combat Systems business continues to provide the combat system
capabilities across the Carrier Strike Group whilst achieving an average of
99.75% equipment availability for the fleet. The business has now opened a
collaboration centre at the Maritime Integration and Support Centre (MISC) in
Portsmouth which provides space, capability and mentoring for SMEs, academia
and global technology companies to co-develop new solutions for our customers,
exploiting existing and emerging digital capabilities.
Submarines
Our Submarines business is a member of the Dreadnought Alliance and continues
to work alongside the Submarine Delivery Agency (SDA) and Rolls-Royce to
deliver the replacement for the Royal Navy's Vanguard Class, which carries the
UK's nuclear deterrent. Four Dreadnought Class submarines will be built at our
site in Barrow, with the first of these due to enter operational service in
the early 2030s.
Construction of the first two Dreadnought Class submarines is well advanced
and, in September 2022, build activities commenced on the third of class
submarine. A formal steel cut ceremony for the third boat was held in Barrow
in February 2023. The value of the programme to the Group to date is £11.2bn,
with additional contract funding of £3.4bn received in 2022 as part of
Delivery Phase 3 (DP3). DP3 will see the first of class submarine,
Dreadnought, exit our Barrow site to begin sea trials.
The fifth Astute, HMS Anson, exited our Barrow shipyard to commence sea trials
in February 2023. The remaining two submarines, Agamemnon and Agincourt, are
at advanced stages of construction in Barrow.
Early design and mobilisation activities continue on the Submersible Ship
Nuclear Replacement (SSNR) programme, which will deliver a replacement for the
Astute class.
Maritime Services
Our Maritime Services business has successfully delivered continued support to
the UK Ministry of Defence and the Royal Navy at HM Naval Base Portsmouth.
Service delivery under the Ministry of Defence's Future Maritime Support
Programme (FMSP) came into effect on 1 October 2021, and will continue until
at least September 2026.
Under the FMSP Ship Engineering Management and Delivery contract, we continued
to maintain, repair, upgrade and prepare the Portsmouth flotilla. This
includes support to the aircraft carriers, destroyers, frigates and
minehunters based in Portsmouth.
We continued to support the Royal Navy's Batch 2 Offshore Patrol Vessels
(OPVs) around the globe with our teams deployed to North America, the
Caribbean, the South Atlantic and the Indo-Pacific regions during the year.
The Type 45 Power Improvement Project is progressing and the first ship, HMS
Dauntless, successfully completed her programme during the year. PIP
embodiment work on HMS Daring in Birkenhead was also completed in the year,
and HMS Dragon's upgrade is being conducted alongside a deep maintenance
upkeep in Portsmouth.
In our Underwater Weapons business, the Torpedo Repair and Maintenance
contract for in-service support to the UK's Royal Navy continues to perform
well. The £270m Spearfish heavyweight torpedo upgrade programme, delivered
for the UK Ministry of Defence and Royal Navy, continues to produce
modification kits for weapon conversion as part of the production phase which
commenced in 2021.
Land UK
Our munitions business has recently transitioned between munitions supply
contracts, with the UK Ministry of Defence. A number of activities have been
undertaken to close out the Munitions Acquisition, the Supply Solution (MASS)
contract and plans enacted for the launch of the Next Generation Munitions
Solution (NGMS) contract, which superseded the MASS contract. This contract is
effective from 1 January 2023, and details the supply of munitions for the
next 15 years.
The £90m NGMS investment programme is advancing at pace, with £20m of this
committed to updating and expanding manufacturing equipment and
infrastructure. A new state-of the-art automated machining line has been
installed at our munitions plant in Washington, Tyne and Wear and a new Tube
Vent Electrics manufacturing plant at Radway Green in Cheshire launched in the
final quarter of 2022. This secured an additional sovereign capability for
this UK Ministry of Defence component, that was last produced in the UK ten
years ago. Similarly, at Glascoed in Monmouthshire, a new manufacturing
facility for 40mm cased telescoped ammunition was finalised in 2022.
RBSL's multi-million pound investment in its Telford manufacturing site
completed in 2022, with manufacturing activities starting in early 2023. The
Challenger 3 Demonstration Phase is progressing in line with the programme
plan, with work on the first eight prototypes underway. The Boxer programme is
progressing with technology transfer proceeding as planned. Supply chain
activities for both programmes are proceeding well with notable focus on
securing UK supply chain resilience.
Australia
Australia's current geopolitical climate has brought about a sharpened focus
on the defence market. BAE Systems Australia is well placed to be a strong
partner to the Australian Government through focused and disciplined delivery
on major programmes such as the Hunter Frigate and the Jindalee Operational
Radar Network (JORN), and is well positioned to support future needs driven by
the AUKUS alliance.
The Hunter Class Frigate programme is progressing strongly with the fifth and
final prototype block being manufactured at the world-class Osborne digital
shipyard in South Australia, ahead of cutting steel on the first schedule
protection blocks for Ship 1 in 2023.
In the Maritime Sustainment business, the Group secured a six-year contract,
expected to be worth circa A$155m (£87m), to optimise the capability of the
Hobart Class Destroyers in October 2022. BAE Systems Australia's participation
in the sustainment and upgrade of the fleet on eight ANZAC class frigates at
our Henderson facility continued at pace delivering HMAS Toowoomba to the
Royal Australian Navy for sea trials in 2022.
In December, a four year extension to the Warship Management Alliance
Agreement was agreed which will see completion of the current capability
uplifts on all ANZAC class frigates and preparation for the next programme of
upgrade under the Future Maritime Sustainment Model (FMSM).
In the aerospace sector, the A$1.5bn (£0.8bn) extended 'In Service Support'
contract for the Hawk aircraft commenced in 2022 and will see BAE Systems
Australia provide this Lead In Fighter training capability until at least
2031. The contract includes software and hardware upgrades and new engines for
the 33-strong fleet, which will align the aircraft with the UK Royal Air
Force's T2 Hawk.
Aircraft sustainment activity continues to ramp up, aligned to the expansion
of the Australian F-35 Joint Strike Fighter fleet. Australia is committed to a
fleet of 72 aircraft and is on track to have received all by the end of 2023.
The JORN programme upgrade is being delivered against a revised schedule.
Technology developed at the Group's Edinburgh Parks facility has been
successfully demonstrated to the customer and is being integrated to enhance
and sustain the network which is a key defence capability to protect
Australia's northern approaches.
BAE Systems Australia's Research and Development business, Red Ochre LABS, is
supporting the development of bespoke sovereign capabilities for the
Australian customer in autonomous systems, high frequency systems and
electronic warfare. Emerging and disruptive technologies are being applied to
deliver complex solutions including common autonomous architectures, uncrewed
ground vehicles equipped with an artificial intelligence capability and market
leading electronic support measures.
Looking forward
Forward-looking information for the Maritime reporting segment is provided on
page 35.
1. Including share of equity accounted investments.
2. From 1 January 2022, the BAE Systems Australia Business transitioned from
the Air segment to the Maritime segment. Comparative segmental financial
information for 2021 has been re-presented to reflect the new business
structure.
3. Constant currency basis.
Segmental review: Cyber & Intelligence
Cyber & Intelligence, with 10,500 employees(1), comprises the US-based
Intelligence & Security business and UK-headquartered Digital Intelligence
business, and covers the Group's cyber security, and secure government
activities.
Operational and strategic key points
Intelligence & Security
- Won a $699m (£581m) contract for operations, maintenance, and
management services for the US Army's Defense Supercomputing Resources Center.
- Awarded one of the prime positions on a multi-award $300m (£249m)
Indefinite Delivery, Indefinite Quantity contract to support critical mission
operations for a government customer.
- Multiple additional contract awards, including a $143m (£119m)
five-year contract from the US Navy to support the integration of mission
equipment, combat systems, and computer programmes for the Surface Combat
Systems Center.
- Completed the acquisition of Bohemia Interactive Simulations (BISim)
which has been fully integrated into BAE Systems and continues to provide
cutting-edge virtual training for allied militaries, including the $9m (£7m)
DVS2 contract from the UK Ministry of Defence.
Digital Intelligence
- Strong order intake and revenue growth.
- Continued integration and growth of the acquired In-Space Missions
business.
- In October 2022, the business completed the sale of its financial
crime detection business.
Financial performance
Financial performance measures as defined by the Group Financial performance measures derived from IFRS
2022 2021(2) 2022 2021(2)
Sales £2,205m £1,923m Revenue £2,205m £1,923m
Underlying EBIT £232m £179m Operating profit £291m £177m
Return on sales 10.5% 9.3% Return on revenue 13.2% 9.2%
Operating business cash flow £154m £201m Cash flow from operating activities £191m £233m
Order intake(1) £2,443m £2,034m Order book £1.4bn £1.2bn
Order backlog(1) £2.1bn £1.8bn
- Sales increased by 7%(3) on a constant currency basis, with the US
Intelligence & Security business benefitting from the acquisition of BISim
during the year.
- Return on sales increased to 10.5%, reflecting better workforce
utilisation and efficiencies.
- Multiple contract awards secured in the year, across both the Digital
Intelligence business and the US Intelligence and Security business.
- Digital Intelligence ended the year with a book-to-bill(4) ratio of
1.2.
Operational performance
Intelligence & Security
Air & Space Force Solutions
On the US Air Force Intercontinental Ballistic Missile Integration Support
Contractor (ISC 1.0) programme, we continue to provide programme management,
systems engineering, integration and testing, sustainment and cyber defence
support, with cumulative funding approaching the previously increased $1.3bn
(£1.1bn) contractual ceiling. In late June 2022, the Air Force awarded the
recompete of the programme to BAE Systems under an 18-year ISC 2.0 contract
with a ceiling value of $12bn (£10bn). The award was protested, and following
the Government Accountability Office (GAO) ISC 2.0 protest sustainment
decision issued in mid-October, all 2.0 transition activities were put on
hold. The Air Force intends to take corrective action to address the GAO
issues and we continue to support the ISC programme under a contract extension
received in January 2023.
We were awarded a $15m (£12m) Indefinite Delivery, Indefinite Quantity
contract by the Naval Air Warfare Aircraft Division, to integrate the C-27J
into the US Coast Guard's (USCG) Medium Range Surveillance Aircraft Fleet. The
aircraft will help the USCG to fulfil its maritime patrol, drug and migrant
interdiction, disaster response, and search and rescue missions more
effectively.
In the year, the business successfully completed multiple prototype tests of
its Multiple Object Tracking Radar, a mobile instrumentation radar,
demonstrating its ability to meet critical performance parameters - range,
transportability, accuracy, and beacon tracking - that other radars of
comparable cost, size, weight and power cannot.
Integrated Defense Solutions
We continue to perform on the five-year, $478m (£397m) sole-source contract
to support weapon systems on board the US Ohio and UK Vanguard Class
submarines, as well as the future US Columbia Class and UK Dreadnought Class
submarines.
The US Army awarded a $699m (£581m), five-year contract for Defense
Supercomputing Resource Center operations, maintenance, and management
services. Under this contract, we are providing technical support to advance
high-performance computer services, capabilities, and infrastructure across
five sites in the US.
We were awarded a $143m (£119m), five-year contract from the US Navy to
continue to support the integration of mission equipment, combat systems, and
computer programmes for the Surface Combat Systems Center in Wallops Island,
Virginia. These mission-essential systems are used across the fleet for all
current and future cruiser, destroyer, and amphibious ship modernisation
initiatives.
Intelligence Solutions
We continue to execute on a $506m (£421m) contract to provide
industry-leading and multi-disciplinary analytic support capabilities
supporting first responders, war fighters and policy makers. These tailored
analytic services span a multitude of mission specifications and operating
environments. Services include, but are not limited to: source discovery and
collection, time-dominant and long-term analytic assessments, cartographic
production, and multi-media content generation.
We were awarded one of the prime positions on a multi-award $300m (£249m)
Indefinite Delivery, Indefinite Quantity contract to support critical mission
operations for a government customer.
A government agency awarded us two contracts to support the customer's IT
environment at their site in Washington, DC. In September 2022, we were
awarded a seven-year, $137m (£114m) contract to provide 365/24/7 Network
Operations support; and in October 2022, we were awarded another seven-year,
$108m (£90m) contract to continue to support the integration of
commercial-off-the-shelf and government off-the-shelf applications.
In March 2022, we completed the acquisition of BISim, a global software
developer of simulation and training solutions for military organisations
around the world (see note 35 to the Group accounts on page 288 for more
details).
Digital Intelligence
The business performed well in 2022, increasing order backlog and delivering
revenue and profit growth in line with expectations through a period of
reorganisation.
Programme execution continues to be strong and well controlled across all
areas, supporting underlying margin growth. Operating costs continue to be
tightly controlled with investment expenditure being prioritised to deliver
future growth.
The National Security business has continued to grow order backlog and revenue
through investing in skills and capability that support long-term customer
strategic aims.
The International Government business has successfully delivered a number of
key programmes to existing customers during the year. Bidding activity in new
markets is beginning to pick up, as a result of easing of travel restrictions
during the year.
The UK Central Government business has renewed various key programmes across
the Foreign, Commonwealth and Development Office, UK Border Force and Health
sectors. The team also signed a framework contract for £40m, which secures a
key Home Office programme for the next three years.
Within our Defence & Space business unit, we have formed an integrated
team bringing together expertise from BAE Systems and In-Space Missions to
develop Azalea, a cluster of highly resilient satellites which are capable of
gathering, analysing and communicating Synthetic Aperture Radar, optical and
radio frequency signals.
Within our Digital Defence Services business, demand for both product and
service solutions remains high. Strong delivery performance in C5ISR has
helped strengthen margins and investment in developing space products, in
collaboration with In-Space Missions, remains a key area of focus. The
business continues to invest in future talent through development academies to
address national labour and skills shortages.
On 28 October 2022, the sale of the financial crime detection business was
completed. Further details can be found in note 20 to the Group accounts on
page 263.
Looking forward
Forward-looking information for the Cyber & Intelligence reporting segment
is provided on page 35.
1. Including share of equity accounted investments.
2. From 1 January 2022, the Group established a new Digital Intelligence
business, bringing together our non-US digital and data capabilities for our
customers. The new Digital Intelligence business is reported within the Cyber
& Intelligence segment. Comparative segmental financial information for
2021 has been re-presented to reflect the new business structure.
3. Constant currency basis.
4. Ratio of Order intake to Sales.
Looking forward by segment
BAE Systems' reporting segments, Electronic Systems, Platforms & Services,
Air, Maritime and Cyber & Intelligence, align with the strategic direction
of the Group.
Electronic Systems
Electronic Systems is well positioned for growth in the medium-term as it
continues to address current and evolving US defence priority programmes from
its strong franchise positions, which are supported by a long-standing
programme of research and development. The sector's focus remains on
maintaining a diverse portfolio of defence and commercial products and
capabilities for US and international customers, and it expects to benefit by
applying innovative technology solutions to meet defence customers' existing
and changing requirements, building on its significant roles on F-35 Lightning
II, F-15 upgrade, M-Code GPS upgrades and classified programmes, as well as a
number of precision weapon products. Over the longer term, the sector is
poised to leverage its technology strengths in emerging areas of demand such
as precision weaponry, space resilience, hyper-velocity projectiles and
autonomous platforms. With our electric drive propulsion capabilities, we
continue to address the need for low and zero emission technology across an
increasing number of civil platforms, with opportunities to migrate these
technologies to the defence arena.
The commercial aviation market was negatively impacted by the pandemic, and,
whilst a recovery in air travel continues to develop, it is expected to take
several years to reach previous demand levels. With the positive outlook for
the sector, we continue to invest in our people, R&D and in new
facilities, a number of which opened in 2022.
Platforms & Services
Combat Mission Systems is underpinned by a strong order backlog and
incumbencies on key franchise programmes, to include the US Army's Armored
Multi-Purpose Vehicle, M109A7 self-propelled howitzer, Bradley upgrade
programmes, M88 HERCULES recovery vehicle, and the US Marine Corps' Amphibious
Combat Vehicle. This US vehicle portfolio is augmented by the CV90 and BvS10
domestic and export programmes from BAE Systems Hägglunds and artillery
systems from BAE Systems Bofors, and the FNSS joint venture continues to
execute on its order book of both Turkish and international orders. These
long-term contracts, franchise positions and the renewed demand environment
for land systems make the combat vehicle and artillery product lines well
placed for growth in the medium term.
In the maritime domain, the sector has a strong position on naval gun and
missile launch programmes, as well as US Navy ship repair activities where the
business has invested in capitalised infrastructure and its facilities in key
home ports. The business remains well aligned to the US Navy's operational
strategy and fleet projections.
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.
Air
Future Typhoon production and support sales are underpinned by existing
contracts. Discussions continue in relation to potential further contract
awards for Typhoon. Production of rear fuselage assemblies for the F-35 has
reached full rate levels and is expected to be sustained at these current
levels. The business plays a significant role in the F-35 sustainment
programme in support of Lockheed Martin and support volumes should increase as
the number of jets in service continues to increase. The GCAP agreement with
Japan and Italy is fundamental to meeting the goals set out in the UK
government's Combat Air Strategy and represents a significant step forward for
the Air sector in ensuring we have a sustainable long-term combat aircraft
manufacturing capability.
In the Kingdom of 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. Our in-Kingdom support business is expected to remain
stable, underpinned by the recent renewal of the Saudi British Defence
Co-operation Programme, a key long-standing contract, for another five years,
and negotiations with the Salam Project Office, to agree Phase 4 of the
Typhoon Support Solution Service, which remain ongoing and which we expect to
conclude during the course of 2023.
MBDA has a strong order backlog supporting future years' sales. Development
programmes continue to improve the long-term capabilities of the business in
air, land and sea domains.
Maritime
The outlook is positive based on long-term contracted positions and with a
number of UK, Australian and international opportunities to further this
outlook. Within Submarines, the business is executing on two long-term
programmes. On the Astute Class programme, the fifth of class exited our
Barrow Shipyard to commence sea trials in February 2023, and the two remaining
boats are in build. On the Dreadnought programme, manufacturing activities
continue on the first three boats of a four-boat programme. Investment
continues in the facilities at our Barrow shipyard in order to provide the
capabilities to deliver these long-term programmes through the decade and
beyond. In shipbuilding, sales are underpinned by the manufacture of Type 26
frigates. The through-life support of UK surface ship platforms provides a
sustainable business in technical services and mid-life upgrades.
Future work in Land UK will be underpinned by existing in-service support
contracts and the contracted workshare on the Mechanised Infantry Vehicle
(Boxer) and Challenger 3 Main Battle Tank programmes. Munitions supply from
2023 will be delivered under the 15-year Next Generation Munitions Solution
and volumes are expected to increase in the coming years given the elevated
threat requirements.
The Australian business has long-term sustainment and upgrade activities in
maritime, air, wide-area surveillance, missile defence and electronic systems.
It has expanded into ship design and production on the Hunter Class Frigate
programme, which will drive growth in the coming years and is pursuing a
number of further opportunities.
Cyber & Intelligence
Intelligence & Security
The outlook for the US government services sector is robust with the
opportunity for mid-term growth. Market conditions remain highly competitive
and continue to evolve in response to shifting government priorities. 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 recompete contracts and new business across its portfolio of
system integration, sustainment and modernisation solutions for military and
intelligence customers. The addition in 2022 of Bohemia Interactive
Simulations positions the business well to enhance and grow its synthetic
training operations to the US military and its allies.
Digital Intelligence
In 2022, we formed a new operating business, BAE Systems Digital Intelligence,
bringing together many of our world leading digital transformation, cyber
security, complex data analysis, and communication and information
capabilities from across the Group. This activity will enable even closer
collaboration across the Group to help our customers operate successfully,
safely and efficiently in the digital world, and in time bring a greater range
of capabilities to our customers.
Consolidated income statement
for the year ended 31 December
2022 2021
Notes £m Total £m Total
£m
£m
Continuing operations
Revenue 2 21,258 19,521
Operating costs (19,269) (17,743)
Other income 215 472
Share of results of equity accounted investments 180 139
Operating profit 2 2,384 2,389
Financial income 47 32
Financial expense (442) (311)
Net finance costs 3 (395) (279)
Profit before taxation 1,989 2,110
Taxation expense 4 (315) (198)
Profit for the year 1,674 1,912
Attributable to:
Equity shareholders 1,591 1,758
Non-controlling interests 83 154
1,674 1,912
Earnings per share 5
Basic earnings per share 51.1p 55.2p
Diluted earnings per share 50.5p 54.7p
Consolidated statement of comprehensive income
for the year ended 31 December
2022 2021
Other Retained earnings Total Other Retained earnings Total
reserves
£m
£m
reserves
£m
£m
£m
£m
Profit for the year - 1,674 1,674 - 1,912 1,912
Other comprehensive income
Items that will not be reclassified to the income statement:
Consolidated:
Remeasurements on post-employment benefit schemes and other investments - 2,851 2,851 - 2,451 2,451
Tax on items that will not be reclassified to the income statement - (357) (357) - (394) (394)
Share of the other comprehensive income of associates and joint ventures - 116 116 - 64 64
accounted for using the equity method (net of tax)
Items that may be reclassified to the income statement:
Consolidated:
Currency translation on foreign currency net investments - -
1,172 1,172 32 32
Reclassification of cumulative currency translation reserve on disposal of - (9) - (9)
subsidiaries
(17) (17)
Fair value (loss)/gain arising on hedging instruments during the year (102) - (102) 11 - 11
Cumulative fair value loss/(gain) on hedging instruments reclassified to the 5 - 5 (32) - (32)
income statement
Tax on items that may be reclassified to the income statement 24 - 24 4 - 4
Share of the other comprehensive income of associates and joint ventures (8) - (8) (4) - (4)
accounted for using the equity method (net of tax)
Total other comprehensive income for the year (net of tax) 1,074 2,610 3,684 2 2,121 2,123
Total comprehensive income for the year 1,074 4,284 5,358 2 4,033 4,035
Attributable to:
Equity shareholders 1,053 4,186 5,239 (3) 3,882 3,879
Non-controlling interests 21 98 119 5 151 156
1,074 4,284 5,358 2 4,033 4,035
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 2021 87 1,249 5,923 (2,616) 4,643 278 4,921
Profit for the year - - - 1,758 1,758 154 1,912
Total other comprehensive income for the year - - (3) 2,124 2,121 2 2,123
Total comprehensive income for the year - - (3) 3,882 3,879 156 4,035
Share-based payments (inclusive of tax) - - - 94 94 - 94
Cumulative fair value gain on hedging instruments transferred to the balance - - (35) - (35) - (35)
sheet (net of tax)
Ordinary share dividends - - - (777) (777) (202) (979)
Purchase of own shares (2) - 2 (371) (371) - (371)
Unclaimed assets programme proceeds - 3 - - 3 - 3
At 31 December 2021 85 1,252 5,887 212 7,436 232 7,668
Profit for the year - - - 1,591 1,591 83 1,674
Total other comprehensive income for the year - - 1,053 2,595 3,648 36 3,684
Total comprehensive income for the year - - 1,053 4,186 5,239 119 5,358
Share-based payments (inclusive of tax) - - - 127 127 - 127
Cumulative fair value loss on hedging instruments transferred to the balance - - 8 - 8 - 8
sheet (net of tax)
Ordinary share dividends - - - (802) (802) (166) (968)
Purchase of own shares (3) - 3 (793) (793) - (793)
At 31 December 2022 82 1,252 6,951 2,930 11,215 185 11,400
Consolidated balance sheet
as at 31 December
Notes 2022 2021
£m £m
Non-current assets
Intangible assets 12,644 11,716
Property, plant and equipment 3,235 2,852
Right-of-use assets 1,425 1,091
Investment property 63 67
Equity accounted investments 787 554
Other investments 99 76
Other receivables 618 551
Post-employment benefit surpluses 6 1,297 483
Other financial assets 322 305
Deferred tax assets 338 622
20,828 18,317
Current assets
Inventories 976 811
Trade, other and contract receivables 6,166 4,825
Current tax 133 71
Other financial assets 252 194
Cash and cash equivalents 3,107 2,917
10,634 8,818
Total assets 31,462 27,135
Non-current liabilities
Loans (5,189) (4,604)
Lease liabilities (1,375) (1,083)
Contract liabilities (945) (519)
Other payables (1,441) (1,248)
Post-employment benefit obligations 6 (651) (2,607)
Other financial liabilities (272) (302)
Deferred tax liabilities (5) (77)
Provisions (338) (331)
(10,216) (10,771)
Current liabilities
Loans and overdrafts (53) (457)
Lease liabilities (241) (212)
Contract liabilities (3,882) (2,874)
Trade and other payables (4,990) (4,636)
Other financial liabilities (328) (214)
Current tax (103) (27)
Provisions (249) (276)
(9,846) (8,696)
Total liabilities (20,062) (19,467)
Net assets 11,400 7,668
Capital and reserves
Issued share capital 82 85
Share premium 1,252 1,252
Other reserves 6,951 5,887
Retained earnings 2,930 212
Total equity attributable to equity holders of BAE Systems plc 11,215 7,436
Non-controlling interests 185 232
Total equity 11,400 7,668
Approved by the Board of BAE Systems plc on 22 February 2023 and signed on its
behalf by:
C N Woodburn B M Greve
Chief Executive Group Finance Director
Consolidated cash flow statement
for the year ended 31 December
Notes 2022 2021
£m
£m
Profit for the year 1,674 1,912
Taxation expense 4 315 198
Adjustment in respect of research and development expenditure credits (35) (16)
Share of results of equity accounted investments (180) (139)
Net finance costs 3 395 279
Depreciation, amortisation and impairment 767 720
Gain on disposal of property, plant and equipment, and investment property (3) (192)
Gain in respect of held for sale assets and business disposals (93) (158)
Gain on disposal of non-current investments (7) -
Cost of equity-settled employee share schemes 101 92
Movements in provisions (54) (66)
Difference between pension funding contributions paid and the pension charge 1 (18)
(Increase)/decrease in working capital:
Inventories (93) 54
Trade, other and contract receivables (1,069) 610
Trade and other payables, and contract liabilities 1,485 (615)
Research and development expenditure credits - cash received - 20
Taxation paid (365) (234)
Net cash flow from operating activities 2,839 2,447
Dividends received from equity accounted investments 94 57
Interest received 32 23
Principal element of finance lease receipts 9 10
Purchase of property, plant and equipment, and investment property(1) (599) (516)
Purchase of intangible assets (94) (96)
Purchase of non-current other investments (8) (15)
Proceeds from funding related to assets(1) 157 150
Proceeds from sale of property, plant and equipment, and investment property 18 271
Proceeds from sale of non-current other investments 7 -
Equity accounted investment funding - (3)
Purchase of subsidiary undertakings, net of cash and cash equivalents acquired (162) (30)
Cash flow in respect of business disposals, net of cash and cash equivalents 124 215
disposed
Net cash flow from investing activities (422) 66
Interest paid (269) (247)
Equity dividends paid 7 (802) (777)
Purchase of own shares (788) (368)
Dividends paid to non-controlling interests (166) (202)
Partial disposal of shareholding in subsidiary undertaking - 28
Principal element of lease payments (236) (217)
Cash inflow from derivative financial instruments (excluding cash flow hedges) 533 61
Cash outflow from derivative financial instruments (excluding cash flow (205) (149)
hedges)
Cash flow from movement in cash collateral - (18)
Cash outflow from repayment of loans (400) (367)
Net cash flow from financing activities (2,333) (2,256)
Net increase in cash and cash equivalents 84 257
Cash and cash equivalents at 1 January 2,917 2,667
Effect of foreign exchange rate changes on cash and cash equivalents 106 (7)
Cash and cash equivalents at 31 December 3,107 2,917
1. To align with further detail provided in the current year cash flow
statement, funding received from the UK Government for the construction of
assets for the year ended 31 December 2021 has been presented in equivalent
detail with the cash inflow now shown separately as "Proceeds from funding
related to assets" to cash outflows on the "Purchase of property, plant and
equipment, and investment property.
Notes to the accounts
1. Preparation of the consolidated financial statements
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 UK-adopted international
accounting standards and the Companies Act 2006 applicable to companies
reporting under IFRS. These condensed consolidated financial statements do not
comprise statutory accounts within the meaning of Section 435 of the Companies
Act 2006 and should be read in conjunction with the Annual Report 2022. The
comparative figures for the year ended 31 December 2021 are not the Group's
statutory accounts for that financial year. Those financial statements have
been reported upon by the Group's auditor and delivered to the registrar of
companies. The report of the auditor was unqualified, did not include a
reference to any matters to which the auditor drew attention by way of
emphasis without qualifying their report and did not contain statements under
Section 498 (2) or (3) of the Companies Act 2006.
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).
New and amended standards adopted by the Group
No new or amended standards which became applicable for the current reporting
year had a material impact on the Group or required the Group to change its
accounting policies.
Key Sources of estimation uncertainty
The application of the Group's accounting policies requires the use of
estimates. In response to the potential impact of risks and uncertainties, the
Group undertakes risk assessments and scenario planning in order to be able to
respond to potential rapid changes in circumstances. The Group therefore
considers a range of estimates and assumptions in the application of its
accounting policies and management's assessment of the carrying values of
assets and liabilities. In the event that these estimates or assumptions prove
to be incorrect, there may be an adjustment to the carrying values of assets
and liabilities within the next year. Potential areas of the Group's financial
statements which could be materially impacted may include, but are not limited
to:
Revenue and profit recognition
The Group accounts for revenue in accordance with IFRS 15 Revenue from
Contracts with Customers. For most of the Group's contracts, revenue and
associated margin are recognised progressively over time as costs are
incurred, and as risks have been mitigated or retired.
The ultimate profitability of contracts is based on estimates of revenue and
costs, including allowances for technical and other risks which are reliant on
the knowledge and experience of the Group's project managers, engineers and
finance and commercial professionals. Material changes in these estimates
could affect the profitability of individual contracts. Revenue and cost
estimates are reviewed and updated at least quarterly, and more frequently as
determined by events or circumstances.
The long-term nature of many of the Group's contracts means that judgements
are made in estimating future costs on a contract, as well as when risks will
be mitigated or retired. The impact of global supply chain issues, volatility
in global gas and energy prices, and the ongoing response to climate change,
have increased uncertainty in relation to these judgements and estimates. The
Group continues to work closely and collaboratively with its key customers to
continue to deliver effectively on its contracts and commitments. However, the
volume, scale, complexity and long-term nature of its programmes mean that a
range of calculated potential sensitivities would be wide-ranging and not
practicable to calculate. Owing to the ongoing uncertainty regarding the
potential future impact of the current uncertainties, the Group's estimates
and assumptions related to revenue recognition could be impacted by issues
such as reduced productivity as a result of operation disruption, production
delays and increased costs as a result of disruption to the supply chain,
changing working practices to move towards net zero, or where there is
uncertainty as to the recovery from customers of programme costs incurred.
In 2022, the Group recognised £0.3bn of revenue in respect of performance
obligations satisfied or partially satisfied in previous years (2021 £0.3bn).
This continues to provide an approximation of the potential revenue
sensitivity arising as a result of management's estimates and assumptions for
variable consideration, future costs, and technical and other risks, however
may not reflect the full potential impact on the contract receivables and
contract liabilities balances.
Post-employment benefit obligations
A number of actuarial assumptions are made in assessing the value of
post-employment benefit obligations, including discount rate, inflation rate,
and mortality assumptions. For each of the actuarial assumptions used there is
a wide range of possible values and management estimates a point within that
range which most appropriately reflects the Group's circumstances.
If estimates relating to these actuarial assumptions are no longer valid or
change due to changing economic and social conditions, then the potential
obligations due under these schemes could change significantly.
Discount and inflation rates could change significantly as a result of a
prolonged economic downturn, monetary policy decisions and interventions or
other macroeconomic issues. The impact of estimates made with regard to
mortality projections may also change.
Similarly, the values of many assets are subject to estimates and assumptions,
in particular those which are held in unquoted pooled investment vehicles. The
associated fair value of these unquoted pooled investments is estimated with
consideration of the most recently available valuations provided by the
investment or fund managers. These valuations inherently incorporate a number
of assumptions including the impact of climate change on the underlying
investments. The overall level of estimation uncertainty in valuing these
assets could therefore give rise to a material change in valuation within the
next 12 months.
Furthermore, estimates are required around the Group's ability to access its
defined benefit surpluses, and on what basis, which then determines the
associated rate of tax to apply. Depending on the outcome, judgement is then
required to determine the presentation of any tax payable in recovering a
surplus.
Note 6 provides information on the key assumptions and analysis of their
sensitivities.
Critical Judgements made in applying accounting policies
No critical judgements have been made in the process of applying the Group's
accounting policies, other than those involving estimates, that have had a
significant effect on the amounts recognised in the financial statements.
2. Segmental(1) analysis and revenue recognition
Sales(2) and revenue by reporting segment
Sales(2) Deduct Add Revenue
Share of revenue of equity accounted investments
Subsidiaries' revenue from equity accounted investments
2022 2021(1) 2022 2021(1) 2022 2021(1) 2022 2021(1)
£m
£m
£m
£m
£m £m £m £m
Electronic Systems 5,057 4,491 (73) (54) 73 54 5,057 4,491
Platforms & Services 3,688 3,395 (90) (79) - 2 3,598 3,318
Air 7,698 7,449 (2,651) (2,505) 1,239 1,097 6,286 6,041
Maritime 4,598 4,169 (119) (79) 5 3 4,484 4,093
Cyber & Intelligence 2,205 1,923 - - - - 2,205 1,923
HQ 420 281 (410) (271) - - 10 10
23,666 21,708 (3,343) (2,988) 1,317 1,156 21,640 19,876
Intra-group sales/revenue (410) (398) 1 9 27 34 (382) (355)
23,256 21,310 (3,342) (2,979) 1,344 1,190 21,258 19,521
Intra-group revenue Revenue from external customers
2022 2021(1) 2022 2021(1)
£m
£m
£m
£m
Electronic Systems 115 101 4,942 4,390
Platforms & Services 43 34 3,555 3,284
Air 29 19 6,257 6,022
Maritime 71 80 4,413 4,013
Cyber & Intelligence 114 111 2,091 1,812
HQ 10 10 - -
382 355 21,258 19,521
Sales(2) and revenue by customer location
Sales(2) Revenue
2022 2021 2022 2021
£m
£m
£m
£m
UK 4,608 4,201 4,324 3,935
Rest of Europe 3,021 2,435 1,824 1,502
US 10,166 9,109 10,157 9,108
Canada 125 141 125 141
Kingdom of Saudi Arabia 2,539 2,497 2,540 2,476
Qatar 1,156 1,267 885 1,014
Rest of Middle East 263 326 225 275
Australia 854 763 853 762
Rest of Asia and Pacific 420 449 283 285
Africa, and Central and South America 104 122 42 23
23,256 21,310 21,258 19,521
Revenue from external customers by
domain
2022 2021(1)
Air Maritime Land Cyber Total Air Maritime Land Cyber Total
£m
£m
£m
£m
£m
£m
£m
£m
£m £m
Electronic Systems 4,404 145 393 - 4,942 3,846 87 457 - 4,390
Platforms & Services 41 1,043 2,471 - 3,555 37 1,061 2,186 - 3,284
Air 6,223 34 - - 6,257 5,987 33 2 - 6,022
Maritime 268 3,778 367 - 4,413 255 3,417 341 - 4,013
Cyber & Intelligence 250 274 127 1,440 2,091 264 411 136 1,001 1,812
HQ - - - - - - - - - -
11,186 5,274 3,358 1,440 21,258 10,389 5,009 3,122 1,001 19,521
Operating profit/(loss) by reporting segment
Underlying Adjusting Amortisation of programme, customer-related and other intangible assets, and Financial and taxation expense of equity accounted investments Operating
EBIT(2)
items(3) impairment of intangibles
profit/(loss)
2022 2021(1) 2022 2021(1) 2022 2021(1) 2022 2021(1) 2022 2021(1)
£m
£m
£m
£m
£m
£m
£m
£m £m £m
Electronic Systems 838 766 - 33 (91) (84) - - 747 715
Platforms & Services 326 259 - - - (1) (4) (6) 322 252
Air 849 772 (1) 132 (1) (10) (38) (45) 809 849
Maritime 356 351 - - - (1) (4) (3) 352 347
Cyber & Intelligence 232 179 78 3 (19) (5) - - 291 177
HQ (122) (122) 14 182 - - (29) (11) (137) 49
2,479 2,205 91 350 (111) (101) (75) (65) 2,384 2,389
Net finance costs (395) (279)
Profit before taxation 1,989 2,110
Taxation expense (315) (198)
Profit for the year 1,674 1,912
Performance obligations
The Group's order book(4), reconciled to order backlog as defined by the
Group, is shown below.
2022 2021
£bn
£bn
Order backlog(2) as defined by the Group 58.9 44.0
Deduct: Unfunded order backlog (2.3) (2.3)
Deduct: Share of order backlog(2) of equity accounted investments (12.0) (10.1)
Add: Order backlog(2) in respect of orders from equity accounted investments 4.3 3.9
Order book(4) 48.9 35.5
Prior year re-presentation
With effect from 2022, the Group established a new Digital Intelligence
business, bringing together our non‑US digital and data capabilities to
further strengthen how we deliver these services and capabilities for our
customers. The new Digital Intelligence business is reported within the Cyber
& Intelligence segment. In addition, our BAE Systems Australia business
transitioned from the Air segment to the Maritime segment. Comparative
segmental financial information for 2021 has been re-presented in this report
to reflect the new business structures. The below table outlines the impact on
the key reported line items:
2021
Sales(2) Revenue
As reported Adjustment Re-presented As reported Adjustment Re-presented
£m £m £m £m £m £m
Electronic Systems 4,491 - 4,491 4,491 - 4,491
Platforms & Services 3,395 - 3,395 3,318 - 3,318
Air 8,321 (872) 7,449 6,913 (872) 6,041
Maritime 3,416 753 4,169 3,340 753 4,093
Cyber & Intelligence 1,752 171 1,923 1,752 171 1,923
HQ 307 (26) 281 36 (26) 10
21,682 26 21,708 19,850 26 19,876
Intra-group sales/revenue (372) (26) (398) (329) (26) (355)
21,310 - 21,310 19,521 - 19,521
Underlying EBIT(2) Operating Profit
As reported Adjustment Re-presented As reported Adjustment Re-presented
£m £m £m £m £m £m
Electronic Systems 766 - 766 715 - 715
Platforms & Services 259 - 259 252 - 252
Air 856 (84) 772 930 (81) 849
Maritime 288 63 351 289 58 347
Cyber & Intelligence 156 23 179 152 25 177
HQ (120) (2) (122) 51 (2) 49
2,205 - 2,205 2,389 - 2,389
1. With effect from 2022, the Group established a new Digital
Intelligence business, bringing together our non-US digital and data
capabilities to further strengthen how we deliver these services and
capabilities for our customers. The new Digital Intelligence business is
reported within the Cyber & Intelligence segment. In addition, our BAE
Systems Australia business transitioned from the Air segment to the Maritime
segment. Comparative segmental financial information for 2021 has been
re-presented in this report to reflect the new business structures.
2. Sales, underlying EBIT and Order backlog are alternative
performance measures defined in the Financial glossary on page 8, they are
presented here as our internal measure of segmental performance, to provide
additional information on performance to the user, and to reconcile to the
equivalent IFRS measure.
3. Adjusting items in 2022 comprises a £94m gain on the disposal of
the Financial Services business in Digital Intelligence, £16m costs related
to current and historical business transactions, and a £13m gain related to
past service on pension schemes. (2021 comprises a £182m gain on disposal of
investment property in HQ, a £7m gain in Electronic Systems in relation to a
historical acquisition, and £157m from gains on disposal of subsidiaries and
equity accounted investments recognised in Electronic Systems (£26m) and Air
(£131m). £63m of the gain on disposal of AEC recognised in 2021 is
attributable to non-controlling interest, details of which are available in
note 12).
4. Order book represents the transaction price allocated to
unsatisfied and partially satisfied performance obligations as defined by IFRS
15 Revenue from Contracts with Customers.
3. Net finance costs
2022 2021
£m
£m
Interest income on cash and other financial instruments 34 29
Interest income on finance lease receivables 1 1
Net present value adjustments 12 2
Financial income 47 32
Interest expense on bonds and other financial instruments (221) (206)
Facility fees (4) (3)
Interest expense on lease liabilities (48) (43)
Net present value adjustments on provisions and other payables (4) -
Net interest expense on post-employment benefit obligations (37) (65)
Gain/(loss) on remeasurement of financial instruments at fair value through 396 (29)
profit or loss(1,2)
Foreign exchange (losses)/gains(2,3) (524) 35
Financial expense (442) (311)
Net finance costs (395) (279)
1. Comprises gains and losses on derivative financial instruments, principally
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.
2. The net gain or loss on remeasurement of financial instruments at fair
value through profit or loss and the net gain or loss on foreign exchange are
presented within finance costs as the gains and losses relate to the same
underlying transactions.
3. The foreign exchange losses/gains primarily reflects exchange rate
movements on US dollar denominated borrowings.
Additional analysis
2022 2021
£m
£m
Net finance costs:
Group (395) (279)
Share of equity accounted investments (25) (27)
Total of Group and equity accounted investments' finance costs (420) (306)
Analysed as:
Underlying net interest expense(1):
Group (230) (220)
Share of equity accounted investments (16) (21)
(246) (241)
Other:
Group:
Net interest expense on post-employment benefit obligations (37) (65)
Fair value and foreign exchange adjustments on financial instruments and (128) 6
investments
Share of equity accounted investments:
Net interest expense on post-employment benefit obligations (1) (2)
Fair value and foreign exchange adjustments on financial instruments and (8) (4)
investments
Total of Group and equity accounted investments' finance costs (420) (306)
1. Underlying net interest expense is an alternative performance measure
defined in the Financial glossary on page 8, it is presented here to provide
additional information on performance to the user, and to reconcile to the
equivalent IFRS measure.
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.
2022 2021
£m
£m
Profit before taxation 1,989 2,110
UK corporation tax rate 19% 19%
Expected income tax expense (378) (401)
Effect of tax rates in foreign jurisdictions, including US state taxes (54) (56)
Expenses not tax effected (19) (5)
Income not subject to tax 68 70
Research and development tax credits 15 23
Adjusting items 17 48
Chargeable gains - (3)
Utilisation of previously unrecognised tax losses - 2
Adjustments in respect of prior years 8 109
Adjustments in respect of equity accounted investments 34 26
Tax rate adjustment 3 10
Other (9) (21)
Taxation expense (315) (198)
Calculation of the underlying effective tax rate
2022 2021
£m
£m
Profit before taxation 1,989 2,110
Add back: Taxation expense of equity accounted investments 50 38
Add back/(Deduct): Taxable adjusting items 1 (347)
Deduct: Non-taxable adjusting items (92) (3)
Adjusted profit before taxation 1,948 1,798
Taxation expense (315) (198)
Taxation expense of equity accounted investments (50) (38)
Exclude: One-off tax benefit(1) - (94)
Exclude: Taxation adjustments in respect of taxable adjusting items - 19
Exclude: Tax rate adjustment (3) (10)
Adjusted taxation expense (including equity accounted investments) (368) (321)
Underlying effective tax rate(2) 19% 18%
1. The one-off tax benefit of £94m in 2021 was in respect of agreements
reached regarding the exposure arising from the April 2019 European Commission
decision regarding the UK's Controlled Foreign Company regime.
2. Underlying effective tax rate is an alternative performance measure defined
in the Financial glossary on page 8.
The Group's underlying effective tax rate is sensitive to the geographic mix
of profits and may be impacted when multiple territories implement the
Organisation for Economic Co-operation and Development's Global Anti-Base
Erosion Model Rules (Pillar Two). Management is closely monitoring the
progress of the tax legislation process in each jurisdiction in which the
Group operates. As at the balance sheet date, none of the jurisdictions in
which the Group operates had enacted or substantively enacted tax legislation
related to Pillar Two. The Group does not have sufficient information at this
stage to determine the potential quantitative impact.
5. Earnings per share
2022 2021
£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 1,591 51.1 50.5 1,758 55.2 54.7
Add back/(deduct):
Amortisation of programme, customer-related and other intangible assets, and 90 84
impairment of intangibles, post tax(1)
Net interest expense on post-employment benefit obligations, post tax(1) 31 55
Fair value and foreign exchange adjustments on financial instruments and 110 (1)
investments, post tax(1)
Adjusting items attributable to shareholders, post tax(2) (94) (279)
Underlying earnings(3), post tax 1,728 55.5 54.8 1,617 50.7 50.4
One-off tax benefit(4) - (94)
Underlying earnings(3), excluding one-off tax benefit 1,728 55.5 54.8 1,523 47.8 47.4
Millions Millions Millions Millions
Ordinary shares in issue as at 1 January 3,404 3,467
Less:
Treasury shares as at 1 January (237) (249)
Shares held in trust which were contingently returnable as at 1 January (23) (23)
Number of ordinary shares outstanding as at 1 January 3,144 3,195
Net weighted average number of ordinary shares repurchased in year (32) (8)
Weighted average number of ordinary shares used in calculating basic earnings 3,112 3,112 3,187 3,187
per share
Incremental ordinary shares in respect of employee share schemes 41 24
Weighted average number of ordinary shares used in calculating diluted 3,153 3,211
earnings per share
1. The tax impact is calculated using the underlying effective tax rate of 19%
(2021 18%). The calculation of the underlying effective tax rate is shown in
note 4.
2. In 2021, £63m of the gain on disposal of AEC was attributable to
non-controlling interest. Therefore, only the gain attributable to
shareholders has been removed in calculating the underlying earnings
attributable to shareholders. The tax on adjusting items has been determined
using the actual tax due on those items, see note 4 for details.
3. Underlying earnings per share is an alternative performance measure defined
in the Financial glossary on page 8, it is presented here to provide
additional information on performance to the user, and to reconcile to the
equivalent IFRS measure.
4. The one-off tax benefit of £94m in 2021 was in respect of agreements
reached regarding the exposure arising from the April 2019 European Commission
decision regarding the UK's Controlled Foreign Company regime.
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 50. 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 at least every three years. Following the accelerated payment in
2021 of the remaining sponsor deficit reduction contributions under the
previously agreed deficit recovery plan, the Group and Trustees agreed to
carry out an early triennial funding valuation for the Main Scheme as at 31
March 2021, this valuation was concluded and signed off on 30 June 2022.
The results of the most recent triennial valuations are shown below. These
valuations 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 March 2021 31 March 2020
£bn
£bn
Market value of assets 22.9 2.1
Present value of liabilities (22.9) (2.0)
Funding surplus - 0.1
Percentage of accrued benefits covered by the assets at the valuation date 100% 105%
The valuations in 2020 and 2021 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 at age 65, currently aged 45 (years) 88 - 91
Life expectancy of a female at age 65, currently aged 45 (years) 90 - 93
As part of the process of the Main Scheme's 2021 valuation, the Trustees and
the Group agreed to update the methodology to use a cash flow matching
strategy, such that assets are invested with the aim of the expected income
directly matching the expected benefit payments of the Scheme. The cash flow
matching strategy aims to manage risk through a defined amount of risk buffer
assets, which equate to the agreed prudence margin in the valuation. The risk
buffer assets are measured over time to assure the Scheme is sufficiently
funded. The asset portfolio is currently invested in a selection of bonds
designed to match the pension payments for current pensioners, as well as a
mix of growth seeking assets aimed to generate returns for the pension
payments for future pensioners. Over time, assets from the return seeking
portfolio will be realised to purchase additional, lower risk assets to match
the increasing current pensioner portfolio.
The 2020 valuations for the other schemes use a different method in that
discount rates 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 for each of the valuations 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.
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.
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 2022.
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 funding contributions.
In 2022, total employer contributions to the Group's pension schemes were
£267m (2021 £324m), including amounts funded by equity accounted investments
of £23m (2021 £39m), and included approximately £45m (2021 £90m) of
deficit recovery payments in respect of the UK schemes.
Contributions in 2023, for both UK and US schemes, are expected to be at a
similar level to 2022.
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
2022 2021 2020 2022 2021 2020
Financial assumptions
Discount rate - past service (%) 4.8 1.9 1.4 5.0 2.8 2.4
Discount rate - future service (%) 4.8 1.9 1.6 5.0 2.8 2.4
Retail Prices Index (RPI) inflation (%) 3.0 3.1 2.7 n/a n/a n/a
Rate of increase in salaries (%) 3.0 3.1 2.7 n/a n/a n/a
Rate of increase in deferred pensions (%) 2.3/3.0 2.4/3.1 2.0/2.7 n/a n/a n/a
Rate of increase in pensions in payment (%) 1.7 - 3.6 1.7 - 3.7 1.6 - 3.6 n/a n/a n/a
Demographic assumptions
Life expectancy of a male currently aged 65 (years) 86 - 89 86 - 89 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) 87 - 90 86 - 90 87 - 89 87 87 87
Life expectancy of a female currently aged 45 (years) 89 - 91 89 - 91 89 - 91 89 89 88
Summary of movements in post-employment benefit obligations
UK US and Total
£m
other
£m
£m
Total net IAS 19 deficit at 1 January 2022 (1,973) (313) (2,286)
Actual return on assets excluding amounts included in net interest expense (5,094) (1,199) (6,293)
Decrease in liabilities due to changes in financial assumptions 10,745 1,067 11,812
Increase in liabilities due to changes in demographic assumptions (39) - (39)
Experience losses (1,672) (6) (1,678)
Contributions in excess of service cost 8 (9) (1)
Past service cost - plan amendments 14 2 16
Net interest expense (31) (6) (37)
Foreign exchange adjustments - (24) (24)
Movement in other schemes - 5 5
Total IAS 19 surplus/(deficit) at 31 December 2022 1,958 (483) 1,475
Withholding tax on surpluses (722) - (722)
Total net IAS 19 surplus/(deficit) at 31 December 2022 (net of withholding 1,236 (483) 753
tax)
Allocated to equity accounted investments (107) - (107)
Group's share of net IAS 19 surplus/(deficit) excluding Group's share of 1,129 (483) 646
amounts allocated to equity accounted investments at 31 December 2022
Surplus recognition
A number of schemes are in an accounting surplus position. The surpluses have
been recognised on the basis that the future economic benefits are
unconditionally available to the Group, which is assumed to be via a refund.
These have been recognised after deducting a 35% withholding tax which would
be levied prior to the future refunding of any surplus and have been presented
on a net basis as this is not deemed to be an income tax of the Group.
Sensitivity analysis
The sensitivity information has been derived using scenario analysis from the
actuarial assumptions as at 31 December 2022 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.
Decrease/(increase) (Decrease)/increase
in pension obligation(1) in scheme assets(1)
£bn £bn
Discount rate:
0.5 percentage point increase / decrease 1.4/(1.5) (1.2)/1.4
1.0 percentage point increase / decrease 2.6/(3.2) (2.3)/2.9
2.0 percentage point increase / decrease 4.7/(7.2) (4.3)/6.6
3.0 percentage point increase / decrease 6.5/(12.4) (5.9)/11.4
1. Before allocation to equity accounted investments and deduction of
withholding tax.
(Increase)/decrease Increase/(decrease)
in pension obligation(1) in scheme assets(1)
£bn £bn
Inflation:
0.1 percentage point increase / decrease (0.2)/0.2 0.1/(0.1)
0.5 percentage point increase / decrease (0.8)/0.8 0.7/(0.6)
1.0 percentage point increase / decrease (1.5)/1.5 1.4/(1.1)
1. Before allocation to equity accounted investments and deduction of
withholding tax.
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
surplus:
(Decrease)/increase
in net surplus(1)
£bn
Life expectancy:
One-year increase/decrease (0.8)/0.7
1. Before allocation to equity accounted investments and deduction of
withholding tax.
7. Equity dividends
2022 2021
£m
£m
Final 15.2p dividend per ordinary share paid in the year (2021 14.3p) 480 461
Interim 10.4p dividend per ordinary share paid in the year (2021 9.9p) 322 316
802 777
After the balance sheet date, the directors proposed a final dividend of 16.6p
per ordinary share. The dividend proposed amounts to approximately £511m,
although the final payment is likely to be lower as a result of the impact of
share buybacks. The dividend, which is subject to shareholder approval, will
be paid on 1 June 2023 to shareholders registered on 21 April 2023. The
ex-dividend date is 20 April 2023.
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 5 May 2023.
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 will realise in the
future.
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
2022 2021
Carrying amount Fair Carrying amount Fair
£m
value
£m
value
£m
£m
Financial instruments measured at fair value:
Non-current
Other investments at fair value through OCI 99 99 76 76
Other financial assets 322 322 305 305
Other financial liabilities (272) (272) (302) (302)
Current
Other financial assets 252 252 194 194
Money market funds 1,149 1,149 1,171 1,171
Other financial liabilities (328) (328) (214) (214)
Financial instruments not measured at fair value:
Non-current
Loans (5,189) (4,588) (4,604) (5,045)
Current
Loans and overdrafts (53) (53) (457) (462)
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 classified as level 1, and other investments which are at a
combination of level 1 and level 3. The total value of investments classified
as level 3 are immaterial. 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 amortised cost. With the exception of loans, the
carrying value of financial instruments measured at amortised cost
approximates their fair value. 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 £258m (2021 £203m).
The Group enters into cash flow hedges in order to manage all material firm
transactional exposures. The estimated impact on fair value gains and losses
in other reserves of a ten cent movement in the closing sterling to US dollar
exchange rates on the transactional cash flow hedges is approximately £94m
(2021 £111m). The estimated impact of a ten cent movement in the closing
sterling to Euro exchange rate on the transactional cash flow hedges is
approximately £35m (2021 £39m).
Credit risk
For trade receivables, contract receivables, amounts due from equity accounted
investments and finance lease receivables, the Group measures a provision for
expected credit losses at an amount equal to lifetime expected credit losses,
estimated by reference to past experience and relevant forward-looking
factors.
The Group's assessment is that credit risk in relation to defence-related
sales to government customers or subcontractors to governments is extremely
low as the probability of default is insignificant; therefore the provision
for expected credit losses is immaterial in respect of receivables from these
customers. For all non-government commercial customers, the Group assesses
expected credit losses, including risk arising from global economic
uncertainty; however, this is not considered material to the financial
statements. The Group considers that default has occurred when a receivable is
past 180 days overdue, because historical experience indicates that these
receivables are generally not recoverable. The Group recognises a provision of
100% against all receivables over 180 days past due unless there is evidence
that individual receivables in this category are recoverable.
For contract receivables, amounts due from equity accounted investments and
finance lease receivables the expected credit loss provision is immaterial as
the probability of default is insignificant.
Cash management
Cash flow forecasting is performed by the businesses on a monthly basis. The
Group monitors a rolling forecast of its liquidity requirements to ensure that
there is sufficient cash to meet operational needs and maintain adequate
headroom.
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
2022
2021
£m
£m
Sales to related parties 1,344 1,190
Purchases from related parties 615 586
31 December 31 December
2022
2021
£m
£m
Amounts owed by related parties 77 34
Amounts owed to related parties(1) 1,262 1,137
1. At 31 December 2022, £1,021m (2021 £907m) was owed by BAE Systems
plc and £241m (2021 £230m) by other Group subsidiaries.
11. Acquisition of businesses
Businesses acquired during 2022
On 11 November 2021, the Group announced its intention to acquire 100% of the
share capital of BIS Invest S.a.r.l. and its subsidiaries, together the
Bohemia Interactive Simulations Group (BISim Group) for a consideration of
$200m (£151m). On 4 March 2022, this deal passed all required pre-closing
activities, and the acquisition was completed. Using the latest game-based
technology, the experienced BISim team of engineers develops high-fidelity,
cost-effective training and simulation software products and components to
meet the growing demand for defence applications. BISim forms part of the
Cyber & Intelligence segment.
The results and financial position of the acquired business have been
consolidated from the date of acquisition. The purchase price allocation
exercise was finalised in the year and summarised below.
Acquisition consideration and fair value of net assets acquired
£m
Intangible assets 71
Property, plant and equipment 1
Right of use assets 1
Receivables 10
Deferred tax assets 1
Lease liabilities (1)
Payables (8)
Deferred tax liabilities (14)
Provisions (6)
Cash and cash equivalents 5
Net identifiable assets acquired 60
Goodwill 91
Net assets acquired 151
Satisfied by:
Cash consideration 151
Total consideration 151
The net outflow of cash in respect of the acquisition of BISim is as follows:
£m
Cash consideration 151
Cash and cash equivalents acquired (5)
Net cash outflow in respect of the acquisition of business 146
The goodwill recognised is primarily attributable to expected synergies. No
goodwill is expected to be deductible for tax purposes. Goodwill has been
allocated to the Intelligence and Security business. No impairment losses have
been recognised in respect of goodwill in the year ended 31 December 2022.
The acquisition contributed £38m to the Group's revenue and £8m to the
Group's underlying EBIT(1) between the date of acquisition and 31 December
2022. If it had been completed on 1 January 2022, the Group's revenue from the
acquisition would have been £42m, and the Group's underlying EBIT(1) would
have been £8m for the year ended 31 December 2022.
Contractual cash flows on trade, other and contract receivables are recognised
net of expected credit losses. No contingent liabilities have been recognised
or require disclosure in respect of this acquisition.
Businesses acquired during 2021
On 4 March 2021, the Group acquired 100% of the share capital of Pulse Power
and Measurement Limited for a consideration of £21m. The net assets acquired,
including intangible assets identified, were valued at £11m, resulting in a
goodwill of £10m.
On 14 September 2021, the Group acquired 100% of the share capital of In-Space
Missions Limited for a fair value consideration of £15m. The provisional net
assets acquired, including intangible assets identified, have been valued at
£5m, resulting in a provisional goodwill of £10m. The purchase price
allocation for all 2021 acquisitions was finalised within the current year.
1. Underlying EBIT is an alternative performance measure defined in the
Financial glossary on page 8, it is presented here as our internal measure of
segmental performance, to provide additional information on performance to the
user, and to reconcile to the equivalent IFRS measure.
12. Business disposals
Business disposals during 2022
On 9 July 2022 the Group entered into an agreement for the sale of BAE
Systems' financial crime detection business from the Digital Intelligence
business in our Cyber & Intelligence segment. The sale to SymphonyAI
completed on 28 October 2022. Disposal costs of £25m were incurred in
relation to the sale, relating to costs incurred in the sale and operational
separation of the business.
The gain recognised on disposal was as follows:
£m
Cash received or receivable:
Cash 131
Total disposal consideration 131
Carrying amount of net assets sold (see below) (29)
Disposal costs (25)
Cumulative currency translation gain 17
Gain on sale before tax 94
Net cash inflow arising on disposal:
Cash consideration received 131
Less: cash and cash equivalents disposed (17)
Less: disposal costs (13)
101
Net cash inflow arising on disposal:
Cash consideration received 131
Less: cash and cash equivalents disposed (17)
Less: disposal costs (13)
101
Assets and liabilities presented as at the date of disposal were as follows:
£m
Intangible assets including goodwill 23
Right-of-use assets 3
Trade, other and contract receivables 26
Cash and cash equivalents 17
Total assets 69
Lease liabilities (3)
Contract liabilities (9)
Trade and other payables (27)
Provisions (1)
Total liabilities (40)
Net assets disposed 29
Business disposals during 2021
In December 2020, the Group's Overhaul and Maintenance Company (OMC) entered
into a heads of terms for the sale of its 50% shareholding in Advanced
Electronics Company Limited (AEC) to Saudi Arabian Military Industries, and
this was reported in the financial statements for the year ending 31 December
2020 as assets held for sale. The sale was completed on 23 February 2021. AEC
was included in the Air segment.
13. Events after the reporting period
There were no events after the reporting period which would materially impact
the balances reported in this Report.
14. Annual General Meeting
This year's Annual General Meeting will be held on 4 May 2023. 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
2023.
15. Other information
The financial information for the year ended 31 December 2022 contained in
this preliminary announcement was approved by the Board on 22 February 2023.
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 2021 have been delivered to
the Registrar of Companies. Statutory accounts for the year ended 31 December
2022 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 and
Section 463 of the Companies Act 2006 contain limits on the liability of the
directors of BAE Systems plc so that their liability is solely to BAE Systems
plc.
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