REG - BAE SYSTEMS PLC - Half-year Report
02/08/2023 07:00
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RNS Number : 9810H BAE SYSTEMS PLC 02 August 2023
This announcement includes inside information relating to BAE Systems plc.
Issued by: Martin Cooper,
Investor Relations Director
BAE Systems plc, London
Half-yearly
Report
2023
BAE Systems plc
Half-yearly Report 2023
Financial highlights
Financial performance measures as defined by the Group(1)
· Order intake of £21.1bn, resulting in a record order backlog of
£66.2bn.
· Sales increased by 11%(2) to £12.0bn.
· Underlying EBIT up 10%(2) to £1.3bn.
· Underlying earnings per share increased by 17%(2) to 29.6p.
· Free cash flow of £1.1bn.
Financial performance measures as derived from IFRS(1)
· Revenue increased by 13%(3) to £11.0bn.
· Operating profit up 20%(3) to £1.2bn.
· Basic earnings per share up 62%(3) to 31.8p.
· Net cash flow from operating activities of £1.5bn.
Capital distributions
· The directors have declared an interim dividend of 11.5p per share in
respect of the half year ended 30 June 2023. This represents an increase of
11% compared to the interim dividend declared in respect of the half year
ended 30 June 2022. This will be paid on 30 November 2023 in line with our
usual dividend timetable.
· Commenced third tranche of £1.5bn share buyback programme on 1 June
2023. As at 30 June 2023, the Company had repurchased 123.5m shares under this
programme in aggregate at a total price, including transaction fees, of
£1.0bn, with 40.5m shares repurchased since 1 January 2023 at a total price,
including transaction fees, of £0.4bn.
· The directors have also approved a further share buyback programme of
up to £1.5bn. This further programme is expected to roll-on after completion
of the current buyback programme and complete within three years of its
commencement.
Results in brief
Financial performance measures as defined by the Group(1) Six months ended Six months ended Year
30 June
30 June
ended
( )
2023
2022
31 December 2022
Sales £12,018m £10,581m £23,256m
Underlying EBIT £1,258m £1,112m £2,479m
Underlying earnings per share 29.6p 24.5p 55.5p
Free cash flow £1,070m £123m £1,950m
Net debt (excluding lease liabilities) £(1,833)m £(3,135)m £(2,023)m
Order intake £21.1bn £18.0bn £37.1bn
Order backlog £66.2bn £52.7bn £58.9bn
Financial performance measures as derived from IFRS(1) Six months ended Six months Year
30 June
ended
ended
2023
30 June
31 December 2022
2022
Revenue £10,997m £9,739m £21,258m
Operating profit £1,233m £1,028m £2,384m
Basic earnings per share 31.8p 19.6p 51.1p
Dividend per share 11.5p 10.4p 27.0p
Net cash flow from operating activities £1,484m £493m £2,839m
Group's share of net post-employment benefits surplus £638m £940m £646m
Order book £55.3bn £42.5bn £48.9bn
1. We monitor the underlying financial performance of the Group using
alternative performance measures. These measures are not defined in
International Financial Reporting Standards (IFRS) and therefore are
considered to be non-GAAP (Generally Accepted Accounting Principles) measures.
Accordingly, the relevant IFRS measures are also presented where appropriate.
The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 46.
2. Growth rate on a constant currency basis.
3. Growth rate on a reported currency basis.
Charles Woodburn, Chief Executive, said: "We've delivered a strong financial
performance in the first half of the year, thanks to the outstanding efforts
of our employees.
"Our global footprint, deep customer relationships and leading technologies
enable us to effectively support the national security requirements and
multi-domain ambitions of our government customers in an increasingly
uncertain world.
"With a record order backlog and good operational performance, we're well
positioned to continue delivering sustained growth in the coming years, giving
us confidence to continue investing in new technologies, facilities,
highly-skilled jobs and in our local communities."
Strategic progress
During the first half of the year, we have continued to deliver against our
strategic priorities to: drive operational excellence; continuously improve
competitiveness and efficiency; and advance and further leverage our
technology. Examples of this in the period include:
· On 13 March, as part of the AUKUS trilateral programme between
Australia, the United Kingdom and the United States, it was announced that BAE
Systems will play a key role in helping Australia to acquire its first nuclear
powered submarines. The three nations will deliver a trilaterally-developed
submarine, based on the UK's next-generation design, incorporating technology
from all three nations. Australia and the UK will operate SSN-AUKUS as their
submarines of the future, with construction expected to begin this decade.
· BAE Systems has received new investment from the Ministry of Defence
to boost technologies for the UK's future combat aircraft. The contract
extension, worth £0.7bn, will build on the innovative science, research and
engineering already completed under the first phase of the contract delivered
by UK Tempest partners BAE Systems, Leonardo UK, MBDA UK and Rolls-Royce.
· BAE Systems and Heart Aerospace, a Swedish electric airplane maker,
announced a collaboration to define the battery system for Heart's ES-30
regional electric airplane. The battery will be the first-of-its-kind to be
integrated into an electric conventional take-off and landing (eCTOL) regional
aircraft, allowing it to efficiently operate with zero emissions and low
noise.
· BAE Systems and Microsoft have signed a strategic agreement aiming to
support faster and easier development, deployment and management of digital
defence capabilities for our customers.
Operational highlights
· On 24 May, the Czech Republic awarded BAE Systems Hägglunds a
contract to produce 246 CV90 MkIV infantry fighting vehicles in seven
different variants. The contract is valued at £1.8bn. The CV90s will be
developed and delivered through an industrial partnership with Czech industry
to meet the requirements of the Czech Ministry of Defence and the intention of
maintaining national sovereignty for the Czech Republic.
· In Electronic Systems, our newest state-of-the-art facilities, which
were recently opened in: Manchester, New Hampshire; Cedar Rapids, Iowa; and
Austin, Texas, are now providing world-class work environments that support
innovation, production and teamwork, which will help us to continue to deliver
cutting-edge technology to our customers.
· Our Combat Mission Systems business, within our Platforms &
Services sector, once again received the James S. Cogswell Outstanding
Industrial Security Achievement Award from the Defense Counterintelligence and
Security Agency (DCSA) for two of its facilities. This award has a rigorous
selection process with only 19 facilities receiving the award from around
13,000 cleared facilities.
· In our Air sector, activity on our Qatar Typhoon and Hawk programmes
continued. Four further Typhoon deliveries took place in the period, with a
total of 12 aircraft now in service with the Qatar Emiri Air Force.
· MBDA has been contracted by the Polish Armament Agency to supply
Launchers and Common Anti-Air Module Missiles (CAMM) for Poland's PILICA+ Air
Defence upgrade programme. The contract is the largest European short-range
Air Defence acquisition programme in NATO.
· In Maritime, the fifth Astute class submarine, HMS Anson, left our
Submarines site in Barrow-in-Furness during February to begin sea trials with
the Royal Navy. The steel cut ceremony for the fourth of eight Type 26
frigates, HMS Birmingham, took place in April.
Brad Greve, Group Finance Director said: "This is a strong set of half-year
results delivering good sales and earnings growth, and giving us confidence to
increase our year-end guidance for sales, underlying EBIT, underlying earnings
per share and free cash flow. The record order backlog and continued good
operational performance gives us more visibility and confidence in our three
financial priorities - sales growth, margin expansion and high sustained cash
conversion, operating under a disciplined capital allocation policy."
2023 Upgraded Group guidance
While the Group is subject to geopolitical and other uncertainties, the
following upgraded 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 IFRS are provided in
our financial review on pages 9 to 15.
Sales guidance is increased by 200 bps to 5% to 7%, reflecting the accelerated
spend profile on the Dreadnought programme and good demand and operational
performance across all sectors.
Underlying EBIT guidance is increased by 200 bps to 6% to 8%, reflecting the
sales profile and good operational performance.
Underlying earnings per share guidance is increased by 500 bps to 10% to 12%,
reflecting higher profit, higher interest income and a reduction in the
expected tax rate to 19%.
Cash generation for the first half of the year was strong, driven by advance
payments, and is expected to be maintained through the year and we are
therefore increasing our in-year free cash guide by £600m to >£1.8bn.
Our three-year cumulative free cash flow guidance has been upgraded, as shown
in the table below.
Group guidance
Guidance is provided on the basis of an exchange rate of $1.24:£1, which is
in line with the actual 2022 exchange rate, and therefore guidance is the same
for both reported and constant exchange rates.
Year ended 31 December 2023 Year ended 31 December 2022
Results
Updated Guidance Previous Guidance
Sales Increase by 5% to 7% Increase by 3% to 5% £23,256m
Underlying EBIT Increase by 6% to 8% Increase by 4% to 6% £2,479m
Underlying earnings per share Increase by 10% to 12% Increase by 5% to 7% 55.5p
Free cash flow >£1.8bn >£1.2bn £1,950m
Cumulative free cash flow guidance Updated Guidance Previous Guidance
Cumulative free cash flow 2023-2025 £4.5bn to £5.5bn £4bn to £5bn
Cumulative free cash flow 2022-2024 In excess of £5.0bn In excess of £4.5bn
Cumulative free cash flow 2021-2023 In excess of £5.5bn In excess of £5.0bn
· Underlying finance costs c.£220m
· Effective tax rate c.19%
· Non-controlling interests c.£80m
Sensitivity to foreign exchange rates: the Group operates in a number of
currencies, the most significant of which is the US dollar. As a guide, a 5
cent movement in the £/$ exchange rate will impact sales by c.£400m,
underlying EBIT by c.£55m and underlying earnings per share by c.1p.
For further information please contact:
Investors Media Relations
Martin Cooper, Kristina Anderson,
Investor Relations Director
Digital and Media Relations Director
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 Half-yearly results
for 2023 will be available at 7.15am today (2 August 2023) on the investor
website, followed by a Q&A at 11.00am UK time.
Details can be found on investors.baesystems.com
(https://investors.baesystems.com/) , together with presentation slides and a
pdf copy of this report. A recording of the Q&A 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
96,200 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 the Group's share of equity accounted investments.
Interim management report
Half-year overview
We have delivered a strong set of half-year results building on the
operational and financial performance momentum of recent years. In the first
half of 2023, we have:
· continued to assist our customers in delivering urgent mission critical
capability;
· sustained good operational performance and cash flow generation;
· secured £21.1bn of orders to set a record order backlog of £66.2bn;
· delivered increased sales and profit, and effectively managed our
supply chain;
· continued to invest in our people, R&D and capital expenditure to
underpin our growth outlook;
· advanced our ESG agenda and engagement across our stakeholders;
· made strong progress against our three-year £1.5bn share buyback
programme, and announced a further three-year share buyback programme of up to
£1.5bn expected to commence after completion of the current programme;
· made significant long-term strategic progress with the AUKUS
announcement and advanced discussions with our international partners on the
Global Combat Air Programme (GCAP) in line with the trilateral government
agreements made at the end of 2022; and
· further developed a number of industry collaborations across several
domains.
Our markets - increasing exposure to structurally growing major defence
markets
In the elevated global threat environment, our international presence and
diverse portfolio of products and services provides us with positive
differentiation and high visibility for top-line growth in the coming years,
along with a significant opportunity pipeline.
The AUKUS announcement in March 2023 is significant for the Group. Together
with the GCAP announcement in December 2022, with Japan and Italy, these
multi-national endeavours further highlight our global reach and the scale and
longevity of our business. As always, we are working closely with our
customers to deliver on their critical long-term programmes, which are
reflective of a structural upwards shift in defence spending in our
addressable markets.
In the US, the President's 2024 Budget Request increased the defence budget by
over 3% above
FY 2023 base levels to $842bn (£662bn) and we remain well aligned to US
National Defense Strategy priorities.
In the UK, the Integrated Defence Review refresh provided a further increase
to defence spending, with the uplifts particularly focused on submarines and
munitions, and an expectation to reach 2.25% of GDP by 2025. The recently
published refresh of the Defence Command Paper reaffirmed the new national
aspiration to invest 2.5% of GDP on defence when economic circumstances allow
and committed additional funding on munitions over the coming decade.
In Europe, Finland joined NATO on 4 April 2023 and many countries continue to
increase their annual and long-term defence spending plans as they look to
enhance, recapitalise and replenish their capabilities to meet NATO
commitments. We are well placed to continue to benefit through our position on
Eurofighter Typhoon, our shareholding in MBDA, our BAE Systems Hägglunds and
Bofors businesses in Sweden, as well as through US Foreign Military sales.
In the Middle East, we have long-standing relationships at Government and
company level. Defence and security remains a priority in the region and we
are well positioned through existing long-term contracts. We are progressing a
number of opportunities with existing customers for new products and
services.
2023 operational performance
Overall operational performance was good across all Sectors in the first half
and we continued to effectively manage the macroeconomic impacts of supply
chain and inflationary pressures. We expect to deliver year-on-year margin
expansion at the Group level, through a combination of expected continued good
programme performance, business mix and by driving our operational efficiency
and simplification programmes.
A significant amount of BAE Systems equipment has been provided by our
government customers to Ukraine and, as the war in Ukraine continues, we
remain closely engaged with our customers around the world to provide
effective ongoing support.
Advancing and further leveraging our technology
Our focus on technology continues to be aligned with the national defence
strategies of our major markets as our customers address the evolving global
threat environment. Across the domains of air, land, sea, space and cyber, BAE
Systems is investing in transformational technologies that advance
state-of-the-art capabilities in defence systems. Artificial Intelligence (AI)
is also becoming more important in every area, from design and manufacturing
through to certain aspects of vehicle control. The first half of the year has
seen significant progress in these areas. Our efforts to expand our portfolio
of uncrewed platforms includes the launch of the Strix™ Tactical UAS
concept, alongside collaborations with strategic university partners to
develop new AI engineering capabilities.
We are continuing to build our digital footprint by combining our own
expertise, which includes previous acquisitions such as Pitch Technologies and
Bohemia Interactive Simulations, with that of innovative start-ups, such as
Hadean, to develop next-generation synthetic environments. These environments,
underpinned by our understanding of the operational challenges our customers
face in all domains, will enhance both our internal product development and
the services, such as training, that we offer to our customers. As part of
this approach, we have a signed strategic agreement to collaborate with
Microsoft, aiming to support faster and easier development, deployment and
management of digital defence capabilities in an increasingly data-centric
world.
In the domestic security domain, in April we announced our partnership with
the Home Office to develop data analysis technology designed to help protect
the UK's border. This is part of our digital transformation work with UK
Government to connect and secure civil networks.
2023 half-year financial performance and guidance
We have delivered a strong set of half-year financial results and have made
progress against our three financial priorities of: sales growth, margin
expansion and high sustained cash conversion.
On a constant currency basis, sales growth was 11%, with all sectors
delivering sales growth in the first half. Acceleration of funding on the
Dreadnought programme drove Maritime's growth, whilst our Platforms &
Services sector posted growth in Hägglunds, Ship Repair, and higher
activities at our Holston munitions location. The Air sector saw higher
activity on Tempest along with MBDA and air support volumes. Electronic
Systems growth was led by continued recovery in civil aviation, power and
propulsion and electronic combat systems. The Cyber & Intelligence
business grew as a result of increased classified, sustainment and systems
integration work in the Intelligence & Security business, while, outside
the US, we saw a sharp increase in National Security cyber sales.
Revenue growth in the first half of the year was up 13%, on a reported
currency basis, reflective of the same drivers behind the increase in sales
for the period.
Underlying EBIT was up 10%, to £1.3bn, and underlying earnings per share was
up 17% to 29.6p, both on a constant currency basis. Operating profit increased
20% to £1.2bn, on a reported currency basis. The Air sector posted the
highest margin expansion in the period, whilst Platforms & Services also
saw an increase in its return on sales in the first half. Maritime's return on
sales reflects the accelerated funding on the Dreadnought programme, which
trades in a regulated profit environment. As expected, the margin reduction in
the Cyber & Intelligence sector reflects the additional investments being
made in the business around space and multi-domain networking.
The growth in underlying earnings per share has also been impacted by the
ongoing share buyback programme, with an additional 40.5m shares repurchased
and cancelled in the first half.
Order intake, at £21.1bn, was up 16% on a constant currency basis, leading to
a record order backlog of £66.2bn. Details of awards in the period are
included in the segmental reviews on pages 16 to 25, the three largest orders
were:
· In our Platforms & Services business, BAE Systems Hägglunds
received a contract award from the Czech Republic to produce 246 CV90 MkIV
infantry fighting vehicles in seven different variants. The contract is valued
at £1.8bn.
· In Air, we have agreed with the Saudi Arabian Government to continue
to provide Salam Typhoon support services for a further five years through to
the end of 2027, valued at £3.7bn.
· In Maritime, we received an order of £2.4bn in the period for the
continued Delivery Phase 3 activity on the Dreadnought class submarine
programme.
We expect continued strong order flow for the remainder of the year.
Free cash flow of £1,070m was driven by the good operational performance and
order flow generating a number of advance customer payments.
Reflecting this strong performance in the first half of the year, we have
upgraded the 2023 full-year Group Guidance for sales, underlying EBIT,
underlying earnings per share and free cash flow, as reported in full on page
3 of this report.
Balance sheet and capital allocation
BAE Systems closed the half-year with a strong balance sheet, featuring a cash
position of £3.2bn, net debt (excluding lease liabilities) of £1.8bn and a
net pension position in an accounting surplus, by virtue of the Group's
funding commitments over the years and the higher interest rate environment.
We maintain a capital allocation policy that prioritises investing in people,
equipment and facilities, and R&D and provides for returning value to
shareholders through dividends. Investments in acquisitions will continue to
be considered where market conditions are right, and where they deliver on the
Group's strategy and offer long-term value.
The Company can also return cash to shareholders in the form of share
buybacks. In July 2022, the Company announced a three-year share buyback
programme of up to £1.5bn. As at 30 June 2023, the Company had repurchased
123.5m shares under this programme in aggregate at a total price, including
transaction fees, of £1.0bn, with 40.5m shares repurchased since 1 January
2023 at a total price, including transaction fees, of £0.4bn. The directors
have also approved a further share buyback programme of up to £1.5bn. This
further programme is expected to commence after completion of the current
buyback programme and complete within three years of its commencement.
Our ESG agenda
In 2023, we are progressing our four key pillars of focus: addressing climate
risks; ideas, innovation and technology; creating opportunity for people and
communities; and success through partnering. We shall provide a progress
update against these at our annual ESG investor event later in the year.
Global events have demonstrated the need for strong defence and security in
the face of aggression by nation states. At BAE Systems, we provide critical
capabilities and support to our government customers and their allies to
fulfil their primary obligations to keep citizens safe, as well as providing
important economic and social contributions through the provision of
sustainable high-quality jobs.
A recent independent report from Oxford Economics showed that, in 2022, we
contributed £11.1bn to UK Gross Domestic Product (GDP) and supported 132,000
full-time equivalent jobs across the UK. The report also showed that we spent
£4.1bn with around 6,000 suppliers in the UK. We also exported £3.7bn of
goods and services, almost 0.5% of all UK exports.
Sustainability is one of our five focus areas for technology innovation in the
Group. Our ambition is to deliver more sustainable products without
compromising performance, even enhancing performance where possible.
Additionally, our capability development and investment in furthering our
sustainable technologies continues to make good progress and in the first half
we announced a collaboration with Heart Aerospace, a Swedish electric airplane
maker, to define the battery system for Heart's ES-30 regional electric
airplane. The battery will be the first-of-its-kind to be integrated into an
electric conventional take-off and landing regional aircraft.
Board changes
As previously announced, Sir Roger Carr stood down as Chairman of the Board
and Non-executive director at the AGM on 4 May 2023, having served his full
allowable term. He was succeeded by
Cressida Hogg, who has served as a Non-executive director of the Company and
Chair designate since
1 November 2022.
Summary investment points
As we stated at the start of the year, and have reinforced in the year to
date, we see significant potential in the years ahead due to:
· our continued focus on operational excellence underpinned by a robust
operating model;
· continued investment in the business to support future growth;
· a large order backlog providing the foundation for growth over the
medium term;
· leading technology solutions for our customers;
· the strength of our diversity across geographies and technology;
· our global opportunity pipeline to further enhance growth;
· scope to drive further margin expansion; and
· our strong balance sheet with good cash generation, supporting
value-enhancing capital allocation.
Group financial review
Income statement summary
Six months Six months
ended
ended
30 June
30 June
2023
2022
£m
£m
Financial performance measures as defined by the Group(1)
Sales 12,018 10,581
Underlying EBIT 1,258 1,112
Return on sales 10.5% 10.5%
Financial performance measures derived from IFRS £m £m
Revenue 10,997 9,739
Operating profit 1,233 1,028
Return on revenue 11.2% 10.6%
Reconciliation of sales to revenue £m £m
Sales 12,018 10,581
Deduct Group's share of revenue of equity accounted investments (1,807) (1,459)
Add Subsidiaries' revenue from equity accounted investments 786 617
Revenue 10,997 9,739
Reconciliation of underlying EBIT to operating profit £m £m
Underlying EBIT 1,258 1,112
Adjusting items 48 (8)
Amortisation of programme, customer-related and other intangible assets (56) (51)
Financial income/(expense) of equity accounted investments 2 (9)
Taxation expense of equity accounted investments (19) (16)
Operating profit 1,233 1,028
Net finance costs (35) (249)
Taxation expense (193) (132)
Profit for the period 1,005 647
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 46.
Segmental analysis
Financial performance measures as defined by the Group(1)
Sales Underlying EBIT
Six months Six months ended Six months Six months
ended
30 June
ended
ended
30 June
2022
30 June
30 June
2023
2023
2022
£m
£m £m £m
Electronic Systems 2,583 2,276 391 359
Platforms & Services 1,891 1,638 172 146
Air 3,786 3,497 454 362
Maritime 2,603 2,155 193 182
Cyber & Intelligence 1,157 1,050 96 123
HQ 214 157 (48) (60)
Deduct Intra-group (216) (192) - -
12,018 10,581 1,258 1,112
Financial performance measures derived from IFRS
Revenue Operating profit/(loss)
Six months Six months Six months Six months
ended
ended
ended
ended
30 June
30 June
30 June
30 June
2023
2022
2023
2022
£m £m £m £m
Electronic Systems 2,583 2,276 386 316
Platforms & Services 1,864 1,616 172 143
Air 3,054 2,863 456 345
Maritime 2,541 2,100 192 180
Cyber & Intelligence 1,157 1,050 88 108
HQ 5 5 (61) (64)
Deduct Intra-group (207) (171) - -
10,997 9,739 1,233 1,028
Exchange rates
Average Six months Six months ended
ended
30 June
30 June
2022
2023
£/$ 1.233 1.298
£/€ 1.141 1.188
£/A$ 1.826 1.804
Period end 30 June 30 June
2023
2022
£/$ 1.271 1.215
£/€ 1.165 1.163
£/A$ 1.910 1.764
Year end 31 December
2022
£/$ 1.203
£/€ 1.127
£/A$ 1.773
Sensitivity analysis £m
Estimated impact on annual sales of a five cent movement in the average
exchange rate:
$ 400
€ 65
A$ 25
Sales(1) in the first half increased by £1.4bn to £12.0bn (2022 £10.6bn),
an 11% increase on a constant currency(2) basis.
Revenue increased to £11.0bn (2022 £9.7bn), an increase of 13%.
Underlying EBIT(1) increased to £1,258m (2022 £1,112m), giving a steady
return on sales of 10.5% (2022 10.5%).
Operating profit increased to £1,233m (2022 £1,028m) and includes a gain
from adjusting items of £48m (2022 charge of £8m).
Adjusting items(1) in 2023 reflects a gain of £48m, comprising a settlement
gain on a US pension annuity buy-out of £51m, offset by charges relating to
historical acquisitions and disposals of £3m. 2022 comprised a charge of £8m
related to historical business transactions.
Amortisation of programme, customer-related and other intangible assets was
£56m (2022 £51m), the increase being driven by amortisation charges from
businesses acquired during 2022.
Net finance costs for the Group amounted to £35m (2022 £249m). The
underlying interest charge(1) for the Group was £116m (2022 £117m), offset
by a net fair value gain of £62m (2022 charge of £113m) in respect of
foreign exchange and financial derivatives.
Taxation expense of £193m (2022 £132m) reflects the Group's underlying
effective tax rate for the period of 18%, adjusted for the impact of tax on
adjusting items and of the UK tax rate adjustment.
The calculation of the underlying effective tax rate is shown in note 4 on
page 39.
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 46.
2. Current period compared with prior period translated at current period
exchange rates.
Earnings per share
Six months Six months
ended
ended
30 June
30 June
2023
2022
Financial performance measures as defined by the Group(1)
Underlying earnings £901m £768m
Underlying earnings per share 29.6p 24.5p
Financial performance measures derived from IFRS
Profit for the period attributable to equity shareholders £965m £615m
Basic earnings per share 31.8p 19.6p
Reconciliation of underlying earnings to profit for the period £m £m
attributable to equity shareholders
Underlying earnings 901 768
Adjustments:
Adjusting items attributable to shareholders 48 (8)
Amortisation of programme, customer-related and other intangible assets, and (56) (51)
impairment of intangibles
Net interest income/(expense) on post-employment benefit obligations 20 (20)
Fair value and foreign exchange adjustments on financial instruments and 58 (116)
investments
Tax impact of adjustments(2) (6) 42
Profit for the period attributable to equity shareholders 965 615
Non-controlling interests 40 32
Profit for the period 1,005 647
Underlying earnings per share(1) for the period increased by 17%, excluding
the impact of exchange translation, to 29.6p (2022 24.5p).
Basic earnings per share increased to 31.8p (2022 19.6p). The increase was
driven by the improved underlying performance, gains on adjusting items, fair
value movements on financial instruments and the ongoing impact of share
buybacks under the 2022 buyback programme.
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 46.
2. The tax impact is calculated using the underlying effective tax rate of 18%
(2022 19%), with the exception of adjusting items which has been determined
using the actual tax due on those items. The calculation of the underlying
effective tax rate is shown in note 4.
Cash flow summary
Six months Six months
ended
ended
30 June
30 June
2023
2022
£m
£m
Financial performance measures as defined by the Group(1)
Free cash flow 1,070 123
Operating business cash flow 1,307 410
Financial performance measures derived from IFRS £m £m
Net cash flow from operating activities 1,484 493
Reconciliation from free cash flow to net cash flow from operating activities £m £m
Free cash flow 1,070 123
Add back Interest paid, net of interest received 110 119
Add back Taxation paid 127 168
Operating business cash flow 1,307 410
Add back Net capital expenditure and financial investment 303 201
Add back Principal element of lease payments and receipts 124 137
Deduct Dividends received from equity accounted investments (123) (87)
Deduct Taxation paid (127) (168)
Net cash flow from operating activities 1,484 493
Net capital expenditure and financial investment (303) (201)
Principal element of finance lease receipts 5 5
Dividends received from equity accounted investments 123 87
Interest received 49 9
Acquisitions and disposals (3) (161)
Net cash flow from investing activities (129) (261)
Interest paid (159) (128)
Equity dividends paid (508) (480)
Purchase of own shares (376) (130)
Dividends paid to non-controlling interests (12) (75)
Principal element of lease payments (129) (142)
Cash inflow from derivative financial instruments (excluding cash flow hedges) 60 160
Cash outflow from derivative financial instruments (excluding cash flow (242) (53)
hedges)
Net cash flow from loans 166 (400)
Net cash flow from financing activities (1,200) (1,248)
Net increase/(decrease) in cash and cash equivalents 155 (1,016)
Add back Net cash flow from loans (166) 400
Foreign exchange translation 229 (477)
Other non-cash movements (28) 118
Decrease/(increase) in net debt (excluding lease liabilities) 190 (975)
Opening net debt (excluding lease liabilities) (2,023) (2,160)
Net debt (excluding lease liabilities) (1,833) (3,135)
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 46.
Segmental analysis Six months Six months
ended
ended
30 June
30 June
2023
£m 2022
£m
Financial performance measures as defined by the Group(1)
Electronic Systems 157 93
Platforms & Services 21 (59)
Air 1,330 380
Maritime (79) (22)
Cyber & Intelligence 51 69
HQ (173) (51)
Operating business cash flow 1,307 410
Taxation paid(2) (127) (168)
Interest paid, net of interest received (110) (119)
Free cash flow 1,070 123
Financial performance measures derived from IFRS
Electronic Systems 225 187
Platforms & Services 95 (20)
Air 1,307 378
Maritime 37 46
Cyber & Intelligence 86 85
HQ (139) (15)
Deduct Taxation paid(2) (127) (168)
Net cash flow from operating activities 1,484 493
Free cash flow(1) was an inflow of £1,070m (2022 £123m), reflecting strong
operational performance and order flow generating a number of advance customer
payments. Operating business cash flow(1) was an inflow of £1,307m (2022
£410m).
Net cash inflow from operating activities was £1,484m (2022 £493m).
Net capital expenditure and financial investment was a net outflow of £303m
(2022 £201m), reflecting additional investment in new facilities across our
Platforms & Services, Maritime and Cyber & Intelligence sectors.
Cash flows in respect of acquisitions, disposals and held for sale assets
amounted to an outflow of £3m in relation to a historical business disposal.
The outflow of £161m for the comparative period comprised cash paid for the
acquisition of Bohemia Interactive Simulations, deferred consideration for
historical acquisitions, plus cash classified as held for sale for the
divestment of the Financial Services business which completed in October 2022.
Share buybacks amounted to £376m (2022 £130m) in the first half, reflecting
repurchases under the £1.5bn share buyback programme that commenced in July
2022. The 2021 share buyback programme
for £500m was completed in February 2022, of which £130m was spent in the
comparative period to
30 June 2022. In total, £884m (2022 £610m) has been returned to shareholders
through share buybacks and dividends in the period.
There was a net cash outflow from derivative financial instruments of £182m
(2022 £107m net inflow) arising from rolling hedges on balances with the
Group's subsidiaries and equity accounted investments.
Net cash inflow from loans of £166m (2022 outflow of £400m) represented
funds raised from a US private placement to fund the modern shiplift and
land-level repair complex at our Jacksonville, Florida shipyard in the
Platforms & Services sector. The outflow of £400m in the comparative
period reflects repayment of a £400m bond in June 2022.
Foreign exchange translation primarily arises in respect of the Group's US
dollar-denominated borrowings.
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 46.
2. Taxation is managed on a Group basis.
Net debt
Components of net debt (excluding lease liabilities)(1) 30 June 31 December
2023
2022
£m
£m
Cash and cash equivalents 3,204 3,107
Debt-related derivative financial instrument assets - non-current 117 147
Loans - non-current (5,070) (5,189)
Loans and overdrafts - current (51) (53)
Debt-related derivative financial instrument liabilities - non-current (33) (35)
Net debt (excluding lease liabilities)(1) (1,833) (2,023)
The Group's net debt (excluding lease liabilities)(1) at 30 June 2023 was
£1,833m, a decrease of £190m on the position at the beginning of the period.
This is primarily as a result of strong free cash flow performance, partially
offset by increased shareholder returns through dividends and share buybacks
which amounted to £884m (2022 £610m) in the period.
Cash and cash equivalents of £3,204m (2022 £3,107m) are held primarily for
the repayment of debt securities, committed shareholder returns and management
of working capital.
Going concern
After making due enquiries, the directors have a reasonable expectation that
the Group has adequate resources to continue in operational existence for at
least 12 months from the date of approval of this report and, therefore,
continue to adopt the going concern basis in preparing the financial
statements.
The Group continues to conduct ongoing risk assessments in relation to its
business operations and liquidity. Demand from the Group's key customers
remains strong, underpinned by our order backlog, programme positions and
pipeline of opportunities across all sectors. The Group also continues to work
with and support its supply chain to actively address the risk of disruption.
The Group's liquidity and solvency has remained strong. Cash flow forecasting
is performed by the businesses on a monthly basis. The Group also monitors a
rolling forecast of its liquidity requirements to ensure that there is
sufficient cash to meet operational needs and maintain adequate headroom.
Having undertaken these assessments, the directors consider that the Group
will be able to continue in operational existence for the foreseeable future.
For this reason they continue to adopt the going concern basis in preparing
the Group's Condensed Consolidated Interim Financial Statements.
Principal risks and uncertainties
Having considered recent geopolitical and macroeconomic events, the Group
believes the principal risks and uncertainties facing the Group for the
remainder of the year are included in, and are therefore unchanged from, those
reported in the Annual Report 2022.
The Group's principal risks and uncertainties at 31 December 2022 were
detailed on pages 119 to 125 of the Annual Report 2022, and related to the
following areas: government customers, defence spending and terms of trade;
international markets; contract risk, execution and supply chain; cyber
security; competition in international markets; people; outbreak of contagious
diseases; pension funding; climate change and the environment; laws and
regulations; and acquisitions.
Accounting policies
On the 19 July 2023, the UK endorsed the amendments to IAS 12 Income Taxes,
issued by the International Accounting Standards Board on 23 May 2023, which
grants companies a temporary exemption from applying IAS 12 to the
International Tax Reform: Pillar Two Model Rules. For the Half-yearly Report
2023, the Group has adopted the amendments to IAS 12.
No other new or amended standards which became applicable for the period
ending 30 June 2023 had a material impact on the Group or required the Group
to change its accounting policies.
Segmental review
The Group has five sectors which, together with HQ, make its six reporting
segments as defined by
IFRS 8 Operating Segments.
1. The purposes and definitions of non-GAAP measures are provided in the
Financial glossary on page 46.
Segmental performance: Electronic Systems
Electronic Systems, with 17,300 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.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS
Six months ended Six months ended Year Six months ended Six months ended Year
30 June 2023
30 June
ended
30 June 2023
30 June
ended
2022
31 December 2022
2022
31 December 2022
Sales £2,583m £2,276m £5,057m Revenue £2,583m £2,276m £5,057m
Underlying EBIT £391m £359m £838m Operating profit £386m £316m £747m
Return on sales 15.1% 15.8% 16.6% Return on revenue 14.9% 13.9% 14.8%
Operating business cash flow £93m Cash flow from operating activities £225m £187m £860m
£157m £650m
Order intake £3.1bn £2.3bn £5.4bn Order book £6.9bn £6.4bn £6.7bn
Order backlog £8.1bn £7.7bn £8.1bn
- Sales of £2.6bn increased 8% on a constant currency basis(3), due to
improvements in supply chain constraints in the period and stronger demand in
our commercial aviation operations.
- Return on sales was 15.1%, reflecting an expected lower profit
weighting in the first half.
- Operating business cash flow was £157m and reflects a more usual
second half weighted business cycle.
- Order backlog is at £8.1bn, after accounting for FX variances. Order
intake in the period of £3.1bn reflects key awards such as a further
five-year F-22 support contract from Lockheed Martin and multiple awards
across the commercial aviation business.
1. Including the Group's share of equity accounted investments.
2. The purposes and definitions of non-GAAP measures are provided in
the Financial glossary on page 46.
3. Current period compared with prior period translated at current
period exchange rates.
Operational performance
We continued to experience strong demand amongst our customer base for
Electronic Systems in the first half of 2023 as evidenced by our order
generation. Operational initiatives, which the team developed during the
pandemic to address challenges caused by the global shortage of
microelectronics and labour shortages, are helping to mitigate the impacts of
the supply chain constraints and we are seeing increased stability and an
easing in some areas. We supported existing customers on key electronic
warfare and precision guided munition production programmes, while pursuing
and maturing new opportunities aligned to defence budgets and a growing global
defence market.
In our commercial businesses, airline traffic and business travel is
increasing, resulting in stronger demand for Original Equipment Manufacturer
(OEM) deliveries and aftermarket services. Clean air regulations continue to
drive the transportation industry toward alternative energy sources, such as
our propulsion solutions, and we are seeing enhanced demand for our products.
Operational highlights
· The F-35 Lightning II programme is delivering on Lot 15 electronic
warfare (EW) systems and has delivered a cumulative total of over 1,250 EW
systems. We are also supporting the Block 4 modernisation efforts under
multiple contracts, including a recent contract for future Lot 17/18
production worth $491m (£398m).
· We completed the development, integration, and first flight of the
EC-37B Compass Call Cross Deck aircraft, targeted to enter formal
developmental and operational testing by the end of the financial year.
· In January, we conducted an Advanced Precision Kill Weapon System
(APKWS(®)) test event and demonstrated new capabilities for critical mission
sets in support of US and allied forces.
· Our newest state-of-the-art facilities which opened last year in:
Manchester, New Hampshire; Cedar Rapids, Iowa; and Austin, Texas are now
providing world-class work environments that support innovation, production,
and teamwork, which will help us to continue to deliver cutting-edge
technology to our customers.
Strategic and order highlights
· We received a five-year follow-on Agile Sustainment for Raptor
contract from Lockheed Martin to provide repair, technical, spares, and depot
lay-in material support of the F-22. This long-term contracting approach
provides continued cost-effective support of the subsystem to meet the
aircraft availability.
· The APKWS(®) guidance kit programme continues to execute production
under an Indefinite Delivery, Indefinite Quantity contract, with awards worth
$158m (£128m) in the first half.
· We are taking a leadership position in energy and power management
for all-electric and hybrid-electric aircraft. In March, we announced a
collaboration with Heart Aerospace to define the battery system for Heart's
ES-30 regional electric airplane and are in discussions with other leading
OEMs in the emerging Air Mobility segment.
· Our Power & Propulsion Solutions business was selected for North
America's largest battery electric bus award as our Gen3 system will power up
to 1,229 Nova Bus battery electric buses for L'Association du transport urbain
du Québec (ATUQ) transportation organisations in Quebec, Canada.
Looking forward
· Our Electronic Systems sector is well positioned for growth in the
medium term as the team continues to address current and evolving priority
programmes from its strong franchise positions and long-standing commitment to
research and development.
· The team maintains 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 upgrades, M-Code GPS upgrades and classified
programmes, as well as a number of precision weapon products.
· Over the longer term, we are poised to leverage our technology
strengths in emerging areas of demand such as precision weaponry, space
resilience, hyper-velocity projectiles and autonomous platforms, and the
development of multi-domain capabilities.
· In our commercial portfolio, we will continue to leverage our leading
electric drive propulsion capabilities to address the growing global demand
for low and zero emission technology across an increasing number of civil
platforms, with opportunities to migrate these technologies to the defence
arena. We hold leading positions in our commercial aviation business lines and
their outlook remains positive in the near term, as pandemic impacts continue
to ease and demand returns to near
pre-pandemic levels.
· We continue to invest in our people, R&D and in our facilities, a
number of which opened in 2022, in order to ensure capacity is in place to
capitalise on the positive outlook across our defence and commercial markets
for electronics.
Segmental performance: Platforms & Services
Platforms & Services, with 12,300 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.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS
Six months ended Six months ended Year Six months ended Six months ended Year
30 June
30 June
ended
30 June
30 June
ended
2022
31 December 2022
2022
31 December 2022
2023 2023
Sales £1,891m £1,638m £3,688m Revenue £1,864m £1,616m £3,598m
Underlying EBIT £172m £146m £326m Operating profit £172m £143m £322m
Return on sales 9.1% 8.9% 8.8% Return on revenue 9.2% 8.8% 8.9%
Operating business cash flow £(59)m Cash flow from operating activities £95m £(20)m £633m
£21m £525m
Order intake £4.1bn £1.5bn £5.7bn Order book £9.3bn £5.6bn £7.7bn
Order backlog £9.6bn £5.9bn £8.1bn
- Sales were £1.9bn, an increase of 11% on a constant currency
basis(3), driven by increased volumes across Ship Repair, Combat Vehicles and
Munitions.
- Return on sales was 9.1%, an increase of 20bps, driven by improved
operational performance.
- Operating business cash inflow was £21m, reflecting the usual second
half business weighting. Additional capex spend has also been incurred in the
period, which is offset by working capital management.
- Order backlog reached £9.6bn, after accounting for FX variances.
Order intake of £4.1bn reflects a number of awards in the period but
primarily relates to the Czech Republic award for 246 CV90 MkIV infantry
fighting vehicles worth $2.2bn (£1.8bn).
1. Including the Group's share of equity accounted investments.
2. The purposes and definitions of non-GAAP measures are provided in
the Financial glossary on page 46.
3. Current period compared with prior period translated at current
period exchange rates.
Operational performance
With the war in Ukraine and a changing global landscape that is prioritising
defence spending to enhance and replenish capabilities, we remain focused on
meeting increased customer demand for our products and services, including
munitions, tracked combat vehicles, artillery systems and support services.
Our BAE Systems Hägglunds team continued to build its order book with the
Czech Republic contract valued at $2.2bn (£1.8bn) for 246 CV90 MkIV infantry
fighting vehicles. The Sweden business has also seen a renewed interest in
arctic operations, leading to additional sales of our BvS10 all-terrain family
of combat vehicles.
In the US, our Combat Mission Systems team is achieving consistent production
throughput at heightened volumes across multiple programmes, drawing upon our
extensive manufacturing network and engineering capability spanning the US, to
include expanded operations at our York, Pennsylvania site to enable increased
production of Armored Multi-Purpose Vehicles (AMPVs) and Amphibious Combat
Vehicles (ACVs) to match customer requirements.
In our support services operations, modernisation and maintenance activities
continue in our US shipyards for the US Navy's non-nuclear fleet, and we
continue to operate and modernise the US Army's Radford and Holston
ammunition plants under modernisation contracts.
Operational highlights
· Hägglunds announced a strategic partnership with Norway's Ritek AS
to produce two new CV90 variants for the Swedish Armed Forces. This new
programme creates opportunities for international industrial co-operation with
local industry, and represents just one element of the team's ongoing efforts
to expand its workforce and facilities to address recent significant orders.
· The UK Government selected the ARCHER for its interim mobile
artillery solution requirement through a Government-to-Government agreement
with Sweden.
· Our US shipyards were recognised for Safety Leadership, and the
Holston Army Ammunition Plant received the US Army Materiel Command's
Excellence in Explosive Safety Award.
· In April, construction began on a modern shiplift and land-level
repair complex at our Jacksonville, Florida shipyard.
· In response to lower demand for ship repair services over the
remainder of the year, our San Diego shipyard is expected to scale back its
workforce by approximately 325 positions by the end of August.
Strategic and order highlights
· On 24 May, the Czech Republic awarded BAE Systems Hägglunds a
contract to produce 246 CV90 MkIV infantry fighting vehicles in seven
different variants. The contract is valued at $2.2bn (£1.8bn).
· Building on past awards, Combat Mission Systems received a $256m
(£208m) full-rate production contract from the US Marine Corps for additional
ACVs and a $246m (£199m) undefinitized contract action for the purchase of
early order materials in support of a full-rate AMPV production award,
expected in the second half of 2023.
· In our Naval Guns business, we received a $219m (£178m) contract to
equip the Royal Navy's Type 26 frigates with five Mk45 Maritime Indirect Fire
Systems.
· Following the joint procurement agreement among Sweden, Germany and
the UK, Germany purchased an additional 227 ultra-mobile, protected,
all-terrain BvS10s valued at c.$400m (£324m). This investment from Germany,
under the three-nation framework agreement, will extend deliveries which are
set to begin in 2024 and continue until 2030.
· The US Ship Repair business continues to conduct modernisation and
maintenance activities for the US Navy and was awarded a $145m (£118m)
contract for USS Nitze modernisation.
· Following from the previous 10-year programme, our Weapon Systems UK
team was awarded a five-year contract for the delivery of M777 support
services for the US, Australia, and Canada M777 fleets with the initial year
funded at $17m (£14m).
· We were not selected to participate in the follow-on phases of the US
Army's Optionally Manned Fighting Vehicle programme. We remain a critical
provider of Army combat vehicles with our current franchises of AMPV, M109A7,
M88 and Bradley vehicles.
Looking forward
· We continue to focus on long-term planning to address the increased
demand from the US and international customers. The uplift in European and
allied countries' defence spending is in addition to our strong order backlog
on key franchise programmes, including the US Army's AMPV, M109A7
self-propelled howitzer, Bradley upgrades, M88 HERCULES recovery vehicle, and
the US Marine Corps' ACV.
· Our 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, as well as our FNSS joint venture.
· We continue to manage and operate the US Army's Radford and Holston
munitions facilities, and focus on key modernisation activities.
· We have maintained a strong position on naval guns, missile launch
programmes, and submarine programmes, as well as US Navy ship repair
activities where the business has invested in capitalised infrastructure and
our facilities in key home ports. The business remains well aligned to the US
Navy's operational strategy and fleet projections, scaling our operations to
match the timing of Navy requirements.
Segmental performance: Air
Air, with 24,900 employees(1), comprises the Group's UK‑based air activities
for European and International markets, US Programmes, development of Future
Combat Air Systems and FalconWorks(®), alongside its business in the Kingdom
of Saudi Arabia, together with its 37.5% interest in the European MBDA joint
venture.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS
Six months ended Six months ended Year Six months ended Six months ended Year
30 June
30 June
ended
30 June
30 June
ended
2022
31 December 2022
2022
31 December 2022
2023 2023
Sales £3,786m £3,497m £7,698m Revenue £3,054m £2,863m £6,286m
Underlying EBIT £454m £362m £849m Operating profit £456m £345m £809m
Return on sales 12.0% 10.4% 11.0% Return on revenue 14.9% 12.1% 12.9%
Operating business cash flow £380m Cash flow from operating activities £1,307m £378m £1,202m
£1,330m £1,140m
Order intake £8.4bn £8.9bn £14.0bn Order book £20.9bn £16.3bn £17.4bn
Order backlog £28.7bn £23.3bn £24.4bn
- Sales were £3.8bn, an increase of 7% on a constant currency basis(3),
driven by increased activities in Tempest and MBDA, and higher air support
volumes.
- Return on sales of 12.0% reflects good operational performance and
risk retirement.
- Operating business cash flow of £1.3bn reflects the timing of
customer advances and down payments from recent awards.
- Order backlog of £28.7bn has been driven up by the order intake of
£8.4bn in the period. Significant orders include agreement of a further
five-year Salam Typhoon support contract, valued at £3.7bn, as well as
multiple awards in MBDA across both the import and export markets.
1. Including the Group's share of equity accounted investments.
2. The purposes and definitions of non-GAAP measures are provided in
the Financial glossary on page 46.
3. Current period compared with prior period translated at current
period exchange rates.
Operational performance
We continue to work with our customers in both supporting their existing
platforms and in providing new enhanced capabilities. Deliveries of Typhoon to
Qatar continue, alongside support to the in-service fleet. In the Kingdom of
Saudi Arabia, our rolling five-year support for Typhoon has been extended. In
our US Programmes division, we are focused on delivery execution across all
production lines with 150 F-35 aft fuselages planned to be completed in 2023.
The formation of our new FalconWorks(®) organisation and ongoing progress on
the future combat air activities are of importance to future growth as we
invest in our people, facilities and cutting-edge technologies.
Operational highlights
· Activity on our Qatar Typhoon and Hawk programmes continued. Four
further Typhoon deliveries took place in the period, with a total of 12
aircraft now in service with the Qatar Emiri Air Force. We are working with
the Qatari customer on timescales for delivering the contracted capabilities
of the Typhoon platform.
· F-35 rear fuselage manufacturing continues at full rate production
through 2023, with 74 rear fuselages completed during the first half and a
further 76 planned for the second half.
· Work continues on development of the UK flying demonstrator, Tempest,
set to fly within four years. The programme is focused on key technology areas
of flight simulation, aerodynamic engine testing, and crew escape.
· Our FalconWorks(®) organisation, formed during the period to lead on
developing and bringing to market new products and technologies in our Air
Sector, is leading the development and testing of the BAE Systems PHASA-35(®)
platform, with successful flight trials taking place in June 2023.
· Delivery of services under the five-year Saudi British Defence
Co-operation Programme (SBDCP) continues, with mobilisation of the Tornado
Support Service providing an enhanced and modernised solution for the Royal
Saudi Air Force.
Strategic and order highlights
· Further UK Ministry of Defence funding of £656m was awarded to
progress the concepting and technology of the next generation combat aircraft
(known as Tempest in the UK), providing continuity of contractual cover on
conception and assessment work to 2025. Progress on the programme continues
and, in the second half of 2023, we will progress discussions with Leonardo
SpA and Mitsubishi Heavy Industries to establish an International Arrangement
to lead the Global Combat Air Programme (GCAP).
· Across the Typhoon platform further funding of £535m was secured for
European Common Radar System (ECRS) Mk2 Radar development for the Typhoon
weapon system, and we continue to support the Royal Air Force of Oman's
Typhoon fleet as negotiations for a long-term follow-on support contract
continue.
· The Lightning Air System National Availability Equipment Capability
Enterprise (LANCE) contract was awarded in March 2023, which extends BAE
Systems' leadership of UK F-35 support at RAF Marham until the end of 2027.
· Following the completion of the previous five-year Salam Typhoon
support contract on
31 December 2022, we have reached an agreement with the Saudi Arabian
Government to continue to provide these services for a further five years
through to the end of 2027, valued at £3.7bn.
· We continue to evaluate opportunities for unmanned aircraft systems
and how they will integrate into future multi-domain operational environments,
and are working in collaboration with a number of industrial partners on
electric aviation technology programmes through our FalconWorks(®)
organisation.
· MBDA has won significant orders, including an order for the
production of medium-range ASTER B1 & B1NT missiles for use across the
Italian and French armed forces and a contract from the Polish Armament Agency
to supply Launchers and Common Anti-Air Module Missiles (CAMM) for Poland's
PILICA+ Air Defence upgrade programme. The contract is the largest European
short-range Air Defence acquisition programme in NATO.
Looking forward
· Defence and security remains a priority for governments across the
globe. The UK Future Combat Air System is a key element of the UK Combat Air
Strategy which enables long-term planning and investment in a key strategic
part of the business, ensuring we have a sustainable long-term combat aircraft
design, development and manufacturing capability.
· We will continue to focus on ensuring that deliveries of Typhoon
aircraft and support are made in line with agreed customer milestones. Future
Typhoon production and support sales are underpinned by existing contracts and
discussions continue in relation to potential further contract awards for
Typhoon.
· 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 Kingdom of Saudi Arabia Government's
National Transformation Plan and Vision 2030. Our in-Kingdom support business
is expected to remain stable underpinned by long-standing contracts renewed
every five years, while we also continue the development of our footprint
across the Kingdom.
· MBDA has a strong order backlog supporting future years' revenues.
Development programmes continue to improve the long-term capabilities of the
business in Air, Land and Sea domains and MBDA continues to be well placed to
benefit from increased defence spending in Europe and internationally.
Segmental performance: Maritime
Maritime, with 25,200 employees(1), comprises the Group's UK-based maritime
and land activities, as well as the Group's Australian business.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS
Six months ended Six months ended Year Six months ended Six months ended Year
30 June
30 June
ended
30 June
30 June
ended
2022
31 December 2022
2022
31 December 2022
2023 2023
Sales £2,603m £2,155m £4,598m Revenue £2,541m £2,100m £4,484m
Underlying EBIT £193m £182m £356m Operating profit £192m £180m £352m
Return on sales 7.4% 8.4% 7.7% Return on revenue 7.6% 8.6% 7.9%
Operating business cash flow £(22)m Cash flow from operating activities £37m £46m £418m
£(79)m £235m
Order intake £4.2bn £4.1bn £9.7bn Order book £17.6bn £13.3bn £16.6bn
Order backlog £18.5bn £14.2bn £17.2bn
- Sales of £2.6bn were up 21% on a constant currency basis(3), due to
accelerated funding on the Dreadnought programme.
- Return on sales of 7.4% reflects the high volume of Dreadnought sales
in a regulated profit environment.
- Operating business cash outflow of £79m reflects additional capex
investment in Shipbuilding facilities in Glasgow and the Munitions business in
Glascoed.
- Order intake of £4.2bn in the period has pushed order backlog to
£18.5bn, primarily driven by the award of additional funding of £2.4bn for
the continued Delivery Phase 3 activity on the Dreadnought class submarine
programme.
1. Including the Group's share of equity accounted investments.
2. The purposes and definitions of non-GAAP measures are provided in
the Financial glossary on page 46.
3. Current period compared with prior period translated at current
period exchange rates.
Operational performance
Our major platform programmes continue to perform well, with sea trials
commencing for HMS Anson, the fifth Astute class submarine, as well as the
start of construction of both the third Dreadnought class submarine, HMS
Warspite, and the fourth Type 26 frigate, HMS Birmingham. The Hunter Class
Frigate Programme (HCFP) in Australia has achieved key production milestones
and we continue to meet customer delivery and support requirements in both
Munitions and Maritime Services. Ongoing investments in our facilities and our
people support this delivery and, with the AUKUS trilateral programme
announcing a key role for BAE Systems Submarines, position the sector for
future growth.
Operational highlights
· The fifth Astute class submarine, HMS Anson, left our Submarines site
in Barrow-in-Furness, during February to begin sea trials with the Royal Navy.
She joins HMS Astute, HMS Ambush, HMS Artful and HMS Audacious at their
operational base, His Majesty's Naval Base, Clyde. The remaining submarines in
the Astute class, Agamemnon and Agincourt, are at an advanced stage of
construction in Barrow-in-Furness.
· The steel cut ceremony for the fourth Type 26 frigate, HMS
Birmingham, took place in April. HMS Glasgow is docked at Scotstoun where
outfitting continues and remains on track for delivery in the mid-2020s, while
construction of HMS Cardiff, HMS Belfast and HMS Birmingham progresses at our
facilities in Govan.
· In Australia, the HCFP continues to make strong progress towards a
production contract for Batch 1. During May, construction commenced on the
first schedule protection block at Osborne Naval Shipyard in South Australia.
This block, along with three others, will be capable of being used in the
first Hunter frigate. Alongside this, upgrade and sustainment of Australia's
Anzac class frigates continues at pace with the sixth ship, HMAS Stuart,
delivered to the Royal Australia Navy for sea trials.
· The new £2.4bn 15-year contract with the UK Ministry of Defence, the
Next Generation Munitions Solution (NGMS), commenced on 1 January 2023.
Building on this, the business has also received additional orders for the
supply of munitions to the UK Ministry of Defence. The orders, worth £280m,
with the option to increase to more than £400m, will significantly increase
the production of vital defence stocks such as 155mm artillery shells, 30mm
medium calibre rounds and 5.56mm ammunition. These are core products which the
British Army relies on to deliver maximum effectiveness on the battlefield. To
deliver these contracts, investment activity across the business continues at
pace and now totals £150m. This includes two new semi-finish machining lines
in Washington and an explosive filling facility at Glascoed.
· In RBSL, we commenced manufacture of the Mechanised Infantry Vehicle
(Boxer) for the British Army in March as planned, while the Challenger 3
programme achieved its Critical Design Review and is progressing towards
delivery of prototype platforms.
Strategic and order highlights
· We received an order intake of £2.4bn in the period for the
continued Delivery Phase 3 activity on the Dreadnought class submarine
programme. Construction of the first three boats in the Dreadnought class is
underway at Barrow-in-Furness, with a ceremony to mark the official steel cut
on the third submarine, HMS Warspite, held in February.
· In March, Australia, the UK, and the US announced the pathway for
Australia to acquire nuclear powered submarines as part of the AUKUS
programme. The three nations will deliver a trilaterally-developed submarine,
based on the UK's next-generation Astute replacement design. Australia and the
UK will operate SSN-AUKUS, as it will be known, incorporating technology from
all three nations to ensure commonality across the fleets.
· Investment in our people and facilities to better enable us to
deliver on our customer commitments and secure the long-term future for
complex shipbuilding in Glasgow progresses, with groundworks underway in
preparation for a new ship assembly hall in Govan and planning permission
submitted for a new Applied Shipbuilding Academy in Scotstoun.
· At the Avalon Airshow in March, we unveiled Strix™, a vertical
take-off and landing (VTOL) uncrewed aerial system and RAZER, a low cost
precision guided munition. Both are being designed in Australia and are
intended for domestic and export markets.
· In June, we were awarded a 10-year contract worth £270m to support
the Royal Navy's three main radar systems. Under the contract, BAE Systems
engineers will provide maintenance support and upgrades to existing radars,
including a roll-out of technology upgrades to systems already in use as well
as those being installed on the new Type 26 frigates, currently under
construction in Glasgow.
Looking forward
· The sector outlook remains positive based on long-term contracted
positions, with a number of UK, Australian and international opportunities.
· Our Submarines business is executing across three long-term
programmes; Astute, Dreadnought and SSN-AUKUS. Investment continues in the
facilities at our Barrow-in-Furness shipyard in order to provide the
capabilities to deliver these long-term programmes.
· In Shipbuilding, sales are underpinned by the manufacture of Type 26
frigates. In Warship Support, the Fleet Time Support, Upkeeps and Capability
Insertions across a number of vessel classes provide a sustainable business in
technical services and upgrades.
· The Australian Defence Strategic Review confirmed the acquisition of
conventionally-armed, nuclear-powered submarines as part of AUKUS Pillar 1 and
also the Australian Government's commitment to continuous naval shipbuilding.
Our Australian business is well positioned to respond to future opportunities
this creates.
· As the UK Ministry of Defence's long-term strategic partner for
munitions supply, we are actively mobilising our operations in support of our
NATO allies. This includes investment across our facilities and infrastructure
and recruitment activity to support the increased demand.
Segmental performance: Cyber & Intelligence
Cyber & Intelligence, with 10,700 employees(1), comprises the US-based
Intelligence & Security and UK-headquartered Digital Intelligence
businesses, covering the Group's cyber security and secure government
activities.
Financial performance
Financial performance measures as defined by the Group(2) Financial performance measures derived from IFRS
Six months ended Six months ended Year Six months ended Six months ended Year
30 June 2023
30 June
ended
30 June
30 June
ended
2022
31 December 2022
2022
31 December 2022
2023
Sales £1,157m £1,050m £2,205m Revenue £1,157m £1,050m £2,205m
Underlying EBIT £96m £123m £232m Operating profit £88m £108m £291m
Return on sales 8.3% 11.7% 10.5% Return on revenue 7.6% 10.3% 13.2%
Operating business cash flow £69m Cash flow from operating activities £86m £85m £191m
£51m £154m
Order intake £1.4bn £1.3bn £2.4bn Order book £1.5bn £1.6bn £1.4bn
Order backlog £2.2bn £2.3bn £2.1bn
- Sales increased by 7% on a constant currency basis(3), to £1.2bn,
with both the UK and US businesses seeing increased operations in the period.
- Return on sales was down by 340bps, in line with expectations,
following additional investment in the period in space and multi-domain
networking.
- Operating business cash flow in the first half was £51m, which
included additional capex investment in the Digital Intelligence business.
- Order backlog has remained steady against year end, with a
book-to-bill ratio of 1.2.
1. Including the Group's share of equity accounted investments.
2. The purposes and definitions of non-GAAP measures are provided in
the Financial glossary on page 46.
3. Current period compared with prior period translated at current
period exchange rates.
Operational performance
Our Intelligence & Security business has performed well in the first half,
supporting government customers across the US Department of Defense, federal
agencies and civilian organisations with innovative, mission-enabling
solutions. We continue to focus on cultivating a strong pipeline of qualified
business opportunities across our US-based business units - Air & Space
Force Solutions, Integrated Defense Solutions and Intelligence Solutions.
In Digital Intelligence, we have had a good operational first half and, as
planned, stepped up our investment in the business for future growth. Our
services, solutions and products span customers in law enforcement, national
security, central government and government enterprises, critical national
infrastructure, telecommunications, military and space, and we continue to
provide cyber, intelligence and security expertise to help protect nations,
businesses and citizens.
Operational highlights
· To continue to address the growing modelling & simulation and
synthetic training markets, Pitch Technologies transitioned from Platforms
& Services to our Intelligence & Security business, effective 1 April
2023. The addition of Pitch Technologies builds on the acquisition of Bohemia
Interactive Simulations (BISim) as we address the increased demand for
innovative, cost-effective, and sustainable training and simulation software
products.
· BISim recently announced its strategic partnership with
blackshark.ai, a developer of AI-based geospatial technologies, to deliver
unprecedented realism in whole-Earth terrain generation, marking a major step
towards meeting the industry-wide demand for a military metaverse.
· Our businesses continue to deliver strong performance on existing
contracts with US Navy, US Army, US Air Force, and federal/civilian agencies -
including the $699m (£567m), five-year contract for operations, maintenance,
and management services for the US Army's Defense Supercomputing Resource
Center and the $478m (£388m), five-year sole-source contract to support
weapon systems on US and UK submarine classes.
· In Digital Intelligence, investments in new products for space and
international markets continue to progress well, and all major external
projects are delivering against schedules.
Strategic and order highlights
· In March, we were awarded task orders valued at $457m (£371m) to
support critical mission operations for a government customer.
· In June 2022, the US Air Force awarded the Integration Support
Contract (ISC) 2.0 re-compete to BAE Systems with an 18-year period of
performance and $12bn (£10bn) total contract ceiling. The ISC 2.0 contract
award was protested, and the Government Accountability Office (GAO) sustained
the protest in October 2022. The Air Force is taking corrective action to
address the GAO issues, and we continue to support the ISC programme under a
$652m (£529m) contract extension, received in January 2023.
· In Digital Intelligence, we are making positive progress in expanding
our multi-domain communications footprint in the UK defence sector and we have
secured a number of multi-year deals with Central Government and National
Security customers.
Looking forward
· The outlook for our US Government Services Sector is robust with the
opportunity for mid-term growth, though market conditions remain highly
competitive and continue to shift in response to government priorities.
· The Intelligence & Security team maintains a strong pipeline of
qualified business opportunities and is seeing an increase in demand driven by
global security threats, even with some delays in Department of Defense
procurements.
· The modelling, simulation and synthetic training environment markets
both in the US and internationally, support a positive outlook for our BISim
and Pitch Technologies teams.
· In the space domain, we are focusing on delivering our Azalea
milestones, a programme investing in developing and building Low Earth Orbit
satellites for the defence market.
· In Digital Intelligence, where our capabilities are well aligned to
growing UK security and digital budgets, we continue to recruit talent into
the business and invest in our people through our training academies and the
opening of a new facility in the North West of England.
Responsibility statement of the directors in respect of the half-yearly
financial report
Each of the directors (as detailed below) confirms that to the best of his /
her knowledge:
- The condensed set of financial statements has been prepared in accordance
with United Kingdom adopted International Accounting Standard 34 Interim
Financial Reporting.
- The interim management report on pages 1 to 25 includes a fair review of the
information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules (DTR), being
an indication of important events that have occurred during the first six
months of the financial year and their impact on the condensed set of
financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the financial year; and
(b) DTR 4.2.8R of the DTR, being related party transactions that have taken
place in the first six months of the current financial year and that have
materially affected the financial position or the performance of the Company
during that period; and any changes in the related party transactions
described in the last annual report that could do so.
For and on behalf of the directors:
Cressida Hogg
Chair
1 August 2023
Directors
Cressida Hogg Chair
Charles Woodburn Chief Executive
Tom Arseneault President and Chief Executive Officer of BAE Systems, Inc.
Brad Greve Group Finance Director
Nick Anderson Non-executive director
Crystal E. Ashby Non-executive director
Dame Elizabeth Corley Non-executive director
Jane Griffiths Non-executive director
Chris Grigg Non-executive director
Ewan Kirk Non-executive director
Stephen Pearce Non-executive director
Nicole Piasecki Non-executive director
Lord Mark Sedwill Non-executive director
Independent review report to BAE Systems plc
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2023 which comprises the Condensed consolidated income statement,
Condensed consolidated statement of comprehensive income, Condensed
consolidated statement of changes in equity, the Condensed consolidated
balance sheet, Condensed consolidated cash flow statement and related notes 1
to 11.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2023 is not prepared, in all
material respects, in accordance with United Kingdom adopted International
Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of
the United Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim
financial information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
As disclosed in note 1, the annual financial statements of the Group are
prepared in accordance with United Kingdom adopted international accounting
standards. The condensed set of financial statements included in this
half-yearly financial report has been prepared in accordance with United
Kingdom adopted International Accounting Standard 34, "Interim Financial
Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This Conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410; however future events or conditions may cause the entity to
cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the Group's ability to continue as a going concern, disclosing
as applicable, matters related to going concern and using the going concern
basis of accounting unless the directors either intend to liquidate the
Company or to cease operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly financial report, we are responsible for
expressing to the Company a Conclusion on the condensed set of financial
statements in the half-yearly financial report. Our Conclusion, including our
Conclusion relating to going concern, is based on procedures that are less
extensive than audit procedures, as described in the Basis for Conclusion
paragraph of this report.
Use of our report
This report is made solely to the Company in accordance with ISRE (UK) 2410.
Our work has been undertaken so that we might state to the Company those
matters we are required to state to it in an independent review report and for
no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company, for our review work,
for this report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London
United Kingdom
1 August 2023
Condensed consolidated income statement (unaudited)
Six months ended 30 June 2023 Six months ended 30 June 2022
Notes £m £m £m £m
Continuing operations
Revenue 2 10,997 9,739
Operating costs (9,926) (8,816)
Other income 102 58
Share of results of equity accounted investments 60 47
Operating profit 2 1,233 1,028
Financial income 69 13
Financial expense (104) (262)
Net finance costs 3 (35) (249)
Profit before taxation 1,198 779
Taxation expense 4 (193) (132)
Profit for the period 1,005 647
Attributable to:
Equity shareholders 965 615
Non-controlling interests 40 32
1,005 647
Earnings per share 5
Basic earnings per share 31.8p 19.6p
Diluted earnings per share 31.4p 19.4p
Condensed consolidated statement of comprehensive income (unaudited)
Six months ended Six months ended
30 June 2023 30 June 2022
Other Retained earnings Total Other Retained earnings Total
reserves
£m
£m
reserves
£m
£m
£m
£m
Profit for the period - 1,005 1,005 - 647 647
Other comprehensive income
Items that will not be reclassified to the income statement:
Consolidated:
Remeasurements on post-employment benefit schemes and other investments - (157) (157) - 3,142 3,142
Tax on items that will not be reclassified to the income statement - (6) (6) - (351) (351)
Share of the other comprehensive income of associates and joint ventures - (9) (9) - 100 100
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 - -
(589) (589) 1,008 1,008
Fair value gain/(loss) arising on hedging instruments during the period 23 - 23 (95) - (95)
Cumulative fair value (gain)/loss on hedging instruments reclassified to the (20) - (20) 1 - 1
income statement
Tax on items that may be reclassified to the income statement - - - 24 - 24
Share of the other comprehensive income of associates and joint ventures 6 - 6 20 - 20
accounted for using the equity method (net of tax)
Total other comprehensive (expense)/income for the period (net of tax) (580) (172) (752) 958 2,891 3,849
Total comprehensive (expense)/income for the period (580) 833 253 958 3,538 4,496
Attributable to:
Equity shareholders (570) 793 223 937 3,493 4,430
Non-controlling interests (10) 40 30 21 45 66
(580) 833 253 958 3,538 4,496
Condensed consolidated statement of changes in equity (unaudited)
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 2023 82 1,252 6,951 2,930 11,215 185 11,400
Profit for the period - - - 965 965 40 1,005
Total other comprehensive expense for the period - - (570) (172) (742) (10) (752)
Total comprehensive (expense)/income for the period - - (570) 793 223 30 253
Share-based payments (inclusive of tax) - - - 50 50 - 50
Cumulative fair value loss on hedging instruments transferred to the balance - - 9 - 9 - 9
sheet (net of tax)
Ordinary share dividends - - - (508) (508) (12) (520)
Purchase of own shares (1) - 1 (371) (371) - (371)
At 30 June 2023 81 1,252 6,391 2,894 10,618 203 10,821
Balance at 1 January 2022 85 1,252 5,887 212 7,436 232 7,668
Profit for the period - - - 615 615 32 647
Total other comprehensive income for the period - - 937 2,878 3,815 34 3,849
Total comprehensive income for the period - - 937 3,493 4,430 66 4,496
Share-based payments (inclusive of tax) - - - 66 66 - 66
Cumulative fair value loss on hedging instruments transferred to the balance - - 5 - 5 - 5
sheet (net of tax)
Ordinary share dividends - - - (480) (480) (75) (555)
Purchase of own shares (1) - 1 (130) (130) - (130)
At 30 June 2022 84 1,252 6,830 3,161 11,327 223 11,550
Condensed consolidated balance sheet (unaudited)
Notes 30 June 2023 31 December 2022
£m £m
Non-current assets
Intangible assets 12,132 12,644
Property, plant and equipment 3,318 3,235
Right-of-use assets 1,324 1,425
Investment property 61 63
Equity accounted investments 696 787
Other investments 109 99
Other receivables 612 618
Post-employment benefit surpluses 6 1,171 1,297
Other financial assets 269 322
Deferred tax assets 326 338
20,018 20,828
Current assets
Inventories 1,047 976
Trade, other and contract receivables 6,380 6,166
Current tax 111 133
Other financial assets 203 252
Cash and cash equivalents 3,204 3,107
10,945 10,634
Total assets 30,963 31,462
Non-current liabilities
Loans (5,070) (5,189)
Lease liabilities (1,291) (1,375)
Contract liabilities (958) (945)
Other payables (1,504) (1,441)
Post-employment benefit obligations 6 (533) (651)
Other financial liabilities (211) (272)
Deferred tax liabilities (5) (5)
Provisions (324) (338)
(9,896) (10,216)
Current liabilities
Loans and overdrafts (51) (53)
Lease liabilities (198) (241)
Contract liabilities (4,388) (3,882)
Trade and other payables (4,955) (4,990)
Other financial liabilities (315) (328)
Current tax (109) (103)
Provisions (230) (249)
(10,246) (9,846)
Total liabilities (20,142) (20,062)
Net assets 10,821 11,400
Capital and reserves
Issued share capital 81 82
Share premium 1,252 1,252
Other reserves 6,391 6,951
Retained earnings 2,894 2,930
Total equity attributable to equity holders of BAE Systems plc 10,618 11,215
Non-controlling interests 203 185
Total equity 10,821 11,400
Condensed consolidated cash flow statement (unaudited)
Notes Six months ended Six months ended
30 June 2023 30 June 2022
£m
£m
Profit for the period 1,005 647
Taxation expense 4 193 132
Adjustment in respect of research and development expenditure credits (19) (19)
Share of results of equity accounted investments (60) (47)
Net finance costs 3 35 249
Depreciation, amortisation and impairment 386 361
Gain on disposal of property, plant and equipment, and investment property - (2)
Gain on disposal of businesses and non-current other investments - (7)
Cost of equity-settled employee share schemes 52 47
Movements in provisions (15) (28)
Difference between pension funding contributions paid and the pension charge (117) 25
(Increase)/decrease in working capital:
Inventories (114) (74)
Trade, other and contract receivables (468) (692)
Trade and other payables, and contract liabilities 733 69
Taxation paid net of research and development expenditure credits received (127) (168)
Net cash flow from operating activities 1,484 493
Dividends received from equity accounted investments 123 87
Interest received 49 9
Principal element of finance lease receipts 5 5
Purchase of property, plant and equipment, and investment property(1) (332) (247)
Purchase of intangible assets (49) (28)
Purchase of non-current other investments - (8)
Proceeds from funding related to assets(1) 73 71
Proceeds from sale of property, plant and equipment, and investment property 4 4
Proceeds from sale of intangible assets 1 -
Proceeds from sale of non-current other investments - 7
Purchase of subsidiary undertakings, net of cash and cash equivalents acquired - (162)
Cash flow in respect of held for sale assets and business disposals, net of (3) 1
cash and cash equivalents disposed
Net cash flow from investing activities (129) (261)
Interest paid (159) (128)
Equity dividends paid 7 (508) (480)
Purchase of own shares 7 (376) (130)
Dividends paid to non-controlling interests (12) (75)
Principal element of lease payments (129) (142)
Cash inflow from derivative financial instruments (excluding cash flow hedges) 60 160
Cash outflow from derivative financial instruments (excluding cash flow (242) (53)
hedges)
Cash inflow from loans 166 -
Cash outflow from repayment of loans - (400)
Net cash flow from financing activities (1,200) (1,248)
Net increase/(decrease) in cash and cash equivalents 155 (1,016)
Cash and cash equivalents at 1 January 3,107 2,917
Effect of foreign exchange rate changes on cash and cash equivalents (58) 55
Cash and cash equivalents at 30 June 3,204 1,956
1. To align with further detail provided in the current period cash flow
statement, funding received from the UK Government for the construction of
assets for the period ended 30 June 2022 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 condensed half-yearly accounts
1. Preparation of the consolidated financial statements
Basis of preparation and statement of compliance
The annual financial statements of the Group will be prepared in accordance
with UK-adopted International Accounting Standards (IAS), in conformity with
the requirements of the Companies Act 2006. The condensed consolidated set of
financial statements included in this Half-yearly Report have been prepared in
accordance with UK-adopted IAS 34 Interim Financial Reporting and the
Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial
Conduct Authority. 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 2022 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 accounting policies adopted in the preparation of these condensed
consolidated half-yearly financial statements to 30 June 2023 are consistent
with the accounting policies applied by the Group in its consolidated
financial statements as at, and for the year ended, 31 December 2022 as
required by the Disclosure Guidance and
Transparency Rules of the UK's Financial Conduct Authority.
New and amended standards adopted by the Group
On the 19 July 2023, the UK endorsed the amendments to IAS 12 Income Taxes,
issued by the International Accounting Standards Board on 23 May 2023, which
grants companies a temporary exemption from applying
IAS 12 to the International Tax Reform: Pillar Two Model Rules. For the
Half-yearly Report 2023, the Group has adopted the amendments to IAS 12.
No other new or amended standards which became applicable for the period
ending 30 June 2023 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. 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 analysis and revenue recognition
Sales(1) and revenue by reporting segment
Sales(1) Deduct: Add: Revenue
Share of revenue of equity accounted investments
Subsidiaries' revenue from equity accounted investments
Six months Six months ended Six months ended Six months ended Six months Six months ended Six months ended Six months
ended
30 June
30 June 2023
30 June
ended
30 June 2022
30 June 2023
ended
30 June 2023
2022
£m
2022
30 June 2023
£m
£m
30 June
£m
£m
£m
£m
2022
£m
Electronic Systems 2,583 2,276 (115) (27) 115 27 2,583 2,276
Platforms & Services 1,891 1,638 (27) (22) - - 1,864 1,616
Air 3,786 3,497 (1,391) (1,207) 659 573 3,054 2,863
Maritime 2,603 2,155 (65) (58) 3 3 2,541 2,100
Cyber & Intelligence 1,157 1,050 - - - - 1,157 1,050
HQ 214 157 (209) (152) - - 5 5
12,234 10,773 (1,807) (1,466) 777 603 11,204 9,910
Intra-group sales/revenue (216) (192) - 7 9 14 (207) (171)
12,018 10,581 (1,807) (1,459) 786 617 10,997 9,739
Intra-group revenue Revenue from external customers
Six months Six months ended Six months ended Six months
ended
30 June 2022
30 June 2023
ended
30 June 2023
£m
£m
30 June
£m
2022
£m
Electronic Systems 73 54 2,510 2,222
Platforms & Services 26 17 1,838 1,599
Air 17 12 3,037 2,851
Maritime 27 27 2,514 2,073
Cyber & Intelligence 59 56 1,098 994
HQ 5 5 - -
207 171 10,997 9,739
Sales(1) and revenue by customer location
Sales(1) Revenue
Six months Six months ended Six months ended Six months
ended
30 June 2022
30 June 2023
ended
30 June 2023
£m
£m
30 June
£m
2022
£m
UK 3,226 2,603 2,545 2,036
Rest of Europe 1,118 839 1,017 840
US 5,191 4,653 5,189 4,648
Canada 81 57 81 57
Kingdom of Saudi Arabia 1,223 1,061 1,220 1,069
Qatar 305 531 225 429
Rest of Middle East 133 156 113 114
Australia 469 416 468 416
Rest of Asia and Pacific 207 209 113 112
Africa, and Central and South America 65 56 26 18
12,018 10,581 10,997 9,739
Revenue from external customers by
domain
Six months ended Six months ended
30 June 2023 30 June 2022
Air Maritime Land Cyber Total Air Maritime Land Cyber Total
£m
£m
£m
£m
£m
£m
£m
£m
£m £m
Electronic Systems 2,122 95 293 - 2,510 1,993 76 153 - 2,222
Platforms & Services 19 550 1,269 - 1,838 18 474 1,107 - 1,599
Air 3,015 22 - - 3,037 2,835 16 - - 2,851
Maritime 165 2,219 130 - 2,514 113 1,792 168 - 2,073
Cyber & Intelligence 131 159 49 759 1,098 131 209 74 580 994
5,452 3,045 1,741 759 10,997 5,090 2,567 1,502 580 9,739
Underlying EBIT(1) and 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(1)
items(2) impairment of intangibles
profit/(loss)
Six months ended 30 June 2023 Six months ended 30 June 2022 Six months ended 30 June 2023 Six months ended Six months ended Six months ended Six months ended 30 June 2023 Six months ended Six months ended 30 June 2023 Six
£m
£m
£m
30 June 2022
30 June 2023
30 June 2022
£m
30 June 2022
£m
months ended
£m
£m
£m
£m
30 June 2022
£m
Electronic Systems 391 359 40 - (45) (43) - - 386 316
Platforms & Services 172 146 5 - - - (5) (3) 172 143
Air 454 362 - (1) - - 2 (16) 456 345
Maritime 193 182 - - - - (1) (2) 192 180
Cyber & Intelligence 96 123 3 (7) (11) (8) - - 88 108
HQ (48) (60) - - - - (13) (4) (61) (64)
1,258 1,112 48 (8) (56) (51) (17) (25) 1,233 1,028
Net finance costs (35) (249)
Profit before taxation 1,198 779
Taxation expense (193) (132)
Profit for the period 1,005 647
Performance obligations
The Group's order book(3), reconciled to order backlog(1) as defined by the
Group, is shown below.
30 June 31 December
2023 2022
£bn
£bn
Order backlog(1) as defined by the Group 66.2 58.9
Deduct: Unfunded order backlog (2.1) (2.3)
Deduct: Share of order backlog(1) of equity accounted investments (13.2) (12.0)
Add: Order book(3) in respect of orders from equity accounted investments 4.4 4.3
Order book(3) 55.3 48.9
1. The purposes and definitions of non-GAAP measures are provided in
the Financial glossary on page 46.
2. Adjusting items were referred to as non-recurring items in the
comparative period. 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. Adjusting items in 2023 reflects a gain of £48m,
comprising a settlement gain on a US pension annuity buy-out of £51m, offset
by charges relating to historical acquisitions and disposals of £3m. 2022
comprised a charge of £8m related to historical business transactions.
3. 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
Six months ended Six months ended 30 June 2022
30 June
£m
2023
£m
Financial income 69 13
Financial expense (104) (262)
Group net finance costs (35) (249)
Net finance costs:
Group (35) (249)
Share of equity accounted investments 2 (9)
Total of Group and equity accounted investments' finance costs (33) (258)
Analysed as:
Underlying net interest expense(1):
Group (116) (117)
Share of equity accounted investments 5 (5)
(111) (122)
Other:
Group:
Net interest income/(expense) on post-employment benefit obligations 19 (19)
Fair value and foreign exchange adjustments on financial instruments and 62 (113)
investments
Share of equity accounted investments:
Net interest income/(expense) on post-employment benefit obligations 1 (1)
Fair value and foreign exchange adjustments on financial instruments and (4) (3)
investments
Total of Group and equity accounted investments finance costs (33) (258)
1. Underlying net interest expense is an alternative performance
measure defined in the Financial glossary on page 46, it is presented here to
provide additional information on performance to the user, and to reconcile to
the equivalent IFRS measure.
4. Taxation expense
Taxation expense
Six months ended Six months ended
30 June
30 June 2022
2023
£m
£m
Taxation expense (193) (132)
Calculation of the underlying effective tax rate
Six months ended Six months ended 30 June 2022
30 June
£m
2023
£m
Profit before taxation 1,198 779
Add back: Taxation expense of equity accounted investments 19 16
(Deduct)/add back: Taxable adjusting items (50) 1
Deduct: Non-taxable adjusting items 2 7
Adjusted profit before taxation 1,169 803
Taxation expense (193) (132)
Taxation expense of equity accounted investments (19) (16)
Exclude: Tax rate adjustment and adjustments in respect of taxable adjusting 2 (6)
items
Adjusted taxation expense (including equity accounted investments) (210) (154)
Underlying effective tax rate(1) 18% 19%
The taxation expense has been determined by calculating an estimated annual
tax rate for each country or entity, and then applying those rates to the half
year profits or losses.
The Group's underlying effective tax rate is sensitive to the geographic mix
of profits and may be impacted, from 2024 onwards, by the UK's substantive
enactment of the Organisation for Economic Co-operation and Development's
Global Anti-Base Erosion Model Rules (Pillar Two). For the Half-yearly Report
2023 the Group has adopted the International Accounting Standards Board's
temporary exemption from applying IAS 12 to Pillar Two. At this stage the
Group does not have sufficient information to determine the potential
quantitative impact of
Pillar Two.
1. Underlying effective tax rate is an alternative performance measure
defined in the Financial glossary on page 46.
5. Earnings per share
Six months ended Six months ended
30 June 2023
30 June 2022
£m Basic Diluted pence £m Basic Diluted pence
pence
per share
pence
per share
per share
per share
Profit for the period attributable to equity shareholders 965 31.8 31.4 615 19.6 19.4
Adjustments:
Amortisation of programme, customer-related and other intangible assets, and 56 51
impairment of intangibles
Net interest (income)/expense on post-employment benefit obligations (20) 20
Fair value and foreign exchange adjustments on financial instruments and (58) 116
investments
Adjusting items attributable to shareholders (48) 8
Tax impact of adjustments(1) 6 (42)
Underlying earnings(2), post tax 901 29.6 29.3 768 24.5 24.3
Millions Millions Millions Millions
Ordinary shares in issue as at 1 January 3,297 3,404
Less:
Treasury shares as at 1 January (220) (237)
Shares held in trust which were contingently returnable as at 1 January (22) (23)
Number of ordinary shares outstanding as at 1 January 3,055 3,144
Net weighted average number of ordinary shares repurchased in period (16) (13)
Weighted average number of ordinary shares used in calculating basic earnings 3,039 3,039 3,131 3,131
per share
Incremental ordinary shares in respect of employee share schemes 37 32
Weighted average number of ordinary shares used in calculating diluted 3,076 3,163
earnings per share
1. The tax impact is calculated using the underlying effective tax rate of 18%
(2022 19%), with the exception of adjusting items which has been determined
using the actual tax due on those items. The calculation of the underlying
effective tax rate is shown in note 4.
2. Underlying earnings per share is an alternative performance measure defined
in the Financial glossary on page 46, it is presented here to provide
additional information on performance to the user, and to reconcile to the
equivalent IFRS measure.
6. Post-employment benefits
Summary of movements in post-employment benefit obligations
UK US and Total
£m
other
£m
£m
Total net IAS 19 surplus/(deficit) at 1 January 2023 (net of withholding tax) 1,236 (483) 753
Add back: withholding tax on surpluses 722 - 722
Total net IAS 19 surplus/(deficit) at 1 January 2023 1,958 (483) 1,475
Actual return on assets excluding amounts included in net interest income (1,001) 107 (894)
Decrease/(increase) in liabilities due to changes in financial assumptions 945 (24) 921
Experience losses (282) (19) (301)
Contributions in excess of service cost 90 (6) 84
Settlements - 51 51
Net interest income/(expense) 51 (10) 41
Foreign exchange adjustments - 19 19
Movement in other schemes - (9) (9)
Total IAS 19 surplus/(deficit) at 30 June 2023 1,761 (374) 1,387
Withholding tax on surpluses (649) - (649)
Total net IAS 19 surplus/(deficit) at 30 June 2023 (net of withholding tax) 1,112 (374) 738
Allocated to equity accounted investments (100) - (100)
Group's share of net IAS 19 surplus/(deficit) excluding Group's share of 1,012 (374) 638
amounts allocated to equity accounted investments at 30 June 2023
Represented by:
Post-employment benefit surpluses 1,100 71 1,171
Post-employment benefit obligations (88) (445) (533)
1,012 (374) 638
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
30 June 31 December 30 June 31 December
2023
2022
2023
2022
Financial assumptions
Discount rate - past service (%) 5.2 4.8 5.0 5.0
Discount rate - future service (%) 5.1 4.8 5.0 5.0
Retail Prices Index (RPI) inflation (%) 3.0 3.0 n/a n/a
Rate of increase in salaries (%) 3.0 3.0 n/a n/a
Rate of increase in deferred pensions (%) 2.3/3.0 2.3/3.0 n/a n/a
Rate of increase in pensions in payment (%) 1.7-3.7 1.7-3.6 n/a n/a
Demographic assumptions
Life expectancy of a male currently aged 65 (years) 86-89 86-89 87 87
Life expectancy of a female currently aged 65 (years) 88-90 88-90 89 89
Life expectancy of a male currently aged 45 (years) 87-90 87-90 87 87
Life expectancy of a female currently aged 45 (years) 89-91 89-91 89 89
For its UK pension schemes, the Group has used the Self-Administered Pension
Schemes S3 mortality tables based on year of birth (as published by the
Institute of Actuaries) for both pensioner and non-pensioner members, in
conjunction with the results of an investigation into the actual mortality
experience of scheme members and information on the demographic profile of the
scheme's membership.
To allow for future improvements in longevity, the Continuous Mortality
Investigation 2021 tables (published by the Institute of Actuaries) have been
used (in 2022, the same tables were used), with an assumed long-term rate of
future annual mortality improvements of 1.0% per annum (2022 1.0%), an initial
rate adjustment parameter ('A') of 0.25% (2022 0.25%) in conjunction with a
smoothing parameter ('S(k)') of 7 for all members (2022 7). The Group has
chosen to apply a weighting to the 2020 and 2021 data in recognition of the
abnormal excess deaths as a result of COVID-19. No further adjustments have
been made to improvements expected in future years. The impacts of COVID-19
will continue to be monitored and assessed at future reporting dates.
For the majority of the US schemes, the mortality tables used are a blend of
the fully generational PRI-2012 White Collar table and the PRI-2012 Blue
Collar table, both projected using Scale MP-2021.
Settlement gain
In May 2023 $1.2bn (£1.0bn) of the US defined benefit obligation liabilities
were settled via a transfer to an insurance company. The premium of $1.1bn
(£0.9bn) was approximately 95% of the IAS 19 liability carrying value,
creating a one-off accounting gain of $63m (£51m). This gain has been
recognised as an Adjusting item in the income statement.
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 30 June 2023 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 obligations, 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 1.2/(1.4) (1.2)/1.3
1.0 percentage point increase / decrease 2.3/(2.9) (2.2)/2.7
2.0 percentage point increase / decrease 4.3/(6.5) (4.1)/6.1
3.0 percentage point increase / decrease 5.9/(11.1) (5.6)/10.5
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 (0.1)/0.1 0.1/(0.1)
0.5 percentage point increase / decrease (0.7)/0.7 0.6/(0.5)
1.0 percentage point increase / decrease (1.3)/1.3 1.2/(1.0)
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 (0.7)/0.7
1. Before allocation to equity accounted investments and deduction of
withholding tax.
7. Equity dividends
Six months ended Six months ended
30 June
30 June
2023
2022
£m
£m
Prior year final 16.6p dividend per ordinary share paid in the period (2022 508 480
15.2p)
The directors have declared an interim dividend of 11.5p per ordinary share in
respect of the period ended
30 June 2023, totalling approximately £382m. This will be paid on 30
November 2023 to shareholders registered
on 20 October 2023. The ex-dividend date is 19 October 2023. This is in line
with our usual dividend timetable.
Shareholders who do not at present participate in the Company's Dividend
Reinvestment Plan and wish to receive the interim dividend in shares rather
than cash should complete a mandate form for the Dividend Reinvestment Plan
and return it to the registrars for receipt no later than 3 November 2023.
Purchase of own shares
2022 buyback
In July 2022, the Company announced a three-year share buyback programme of up
to £1.5bn (the '2022 buyback programme'). In the period to 31 December 2022,
82,997,065 ordinary shares were repurchased for a total price, including
transaction costs, of £664m.
During 2023, the 2022 share buyback programme has continued, and on 1 June
2023 the Company commenced the third tranche of the 2022 share buyback
programme. During the period to 30 June 2023, 40,460,554 ordinary shares were
repurchased for a total price, including transaction costs, of £371m. These
ordinary shares were subsequently cancelled, with the nominal value of
ordinary shares cancelled deducted from share capital against the capital
redemption reserve. This brings the total number of ordinary shares
repurchased under the 2022 buyback programme to 123,457,619 for a total price,
including transaction costs, of £1.0bn.
2021 buyback
In July 2021, the Company announced the details of a 12-month £500m share
buyback programme (the '2021 buyback programme').
The 2021 share buyback programme was completed on 2 February 2022. During the
period to 30 June 2022, 24,253,065 ordinary shares were repurchased for a
total price, including transaction costs, of £132m. In total 87,525,938
ordinary shares were repurchased under the 2021 buyback programme for a total
price, including transaction costs, of £503m.
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
30 June 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
30 June 2023 31 December 2022
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 other comprehensive income 109 109 99 99
Other financial assets 269 269 322 322
Other financial liabilities (211) (211) (272) (272)
Current
Other financial assets 203 203 252 252
Money market funds 828 828 1,149 1,149
Other financial liabilities (315) (315) (328) (328)
Financial instruments not measured at fair value:
Non-current
Loans (5,070) (4,361) (5,189) (4,588)
Current
Loans and overdrafts (51) (51) (53) (53)
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, level 2 and level 3. The total value of investments
classified as level 2 and level 3 are immaterial. There were no transfers
between levels during the period.
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. Related party transactions
The Group has a related party relationship with its equity accounted
investments, other investments and pension schemes. 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:
Six months ended Six months ended
30 June
30 June
2023
2022
£m
£m
Sales to related parties 786 617
Purchases from related parties 287 223
Management recharges 4 4
30 June 31 December
2023
2022
£m
£m
Amounts owed by related parties 24 77
Amounts owed to related parties 1,469 1,262
10. Contingent liabilities
The Group has entered into a number of guarantee and performance bond
arrangements in the normal course of business. From time to time various Group
undertakings are parties to legal actions, investigations and claims which
arise in the normal course of business. Provision is made for any amounts that
the directors consider may become payable. The Group takes legal advice as to
the likelihood of success of claims and actions and no provision is made where
the directors consider, based on that advice, that the action is unlikely to
succeed, or that the Group cannot make a sufficiently reliable estimate of the
potential obligation.
11. Events after the reporting period
There were no events after the reporting period which would materially impact
the balances reported in this Report.
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 period-on-period 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 period, 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, Revenue
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. Page 36
Underlying EBIT Provides a measure of operating profitability, excluding one-off events or Operating profit excluding amortisation of programme, customer-related and Operating profit
adjusting items that are not considered to be part of the ongoing operational other intangible assets(1), impairment of intangible assets, finance costs and
transactions of the business, to enable management to monitor the performance taxation expense of equity accounted investments, and adjusting items(2). The Page 37
of recurring operations over time, and which is comparable across the Group. 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. Return on revenue
enable management to monitor the performance of recurring operations over
time, and which is comparable across the Group. Page 9
Underlying earnings per share Provides a measure of the Group's underlying performance, which enables Profit for the period attributable to shareholders, excluding post-tax impact Basic earnings per share
management to compare the profitability of the Group's recurring operations of amortisation of programme, customer-related and other intangible assets,
over time. impairment of intangible assets, non-cash finance movements on pensions and Page 40
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, Net finance costs
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 Page 38
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, Taxation expense
comparable over time. excluding any one-off tax benefit/expense, as a percentage of adjusted profit
before taxation, being profit before taxation plus taxation expense of equity Page 39
accounted investments, adjusted for adjusting items(2).
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 Net cash flow from operating activities
debt and capital expenditure (net of proceeds
meet tax obligations, and in turn available for use in line with the Group's
from funding of assets) and lease principal amounts, financial investment and Page 13
capital allocation policy. 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. Net cash flow from operating activities
debt and tax obligations, available for use in line with the Group's capital
allocation policy. Page 13
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 Order book
investments. order backlog of equity accounted investments. Unfunded orders include the
elements of US multi-year contracts for which funding has not been authorised Page 37
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 period 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. Other intangible assets consists of patents, trademarks and licenses.
2. 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 comparative
period. 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 period.
Shareholder information
The Annual General Meeting of BAE Systems plc will be held on 9 May 2024.
Registered office
BAE Systems plc
6 Carlton Gardens
London
SW1Y 5AD
United Kingdom
Registered in England and Wales, No 01470151
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condition, results, operations and businesses of BAE Systems and its strategy,
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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
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