REG - BAE SYSTEMS PLC - Half Yearly Report <Origin Href="QuoteRef">BAES.L</Origin> <Origin Href="QuoteRef">RR.L</Origin> - Part 1
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BAE SYSTEMS PLC
31 July 2014
BAE SYSTEMS PLC
HALF-YEARLY REPORT 2014
RESULTS IN BRIEF
Six months ended Six months ended 30 June 20131 Year ended
30 June 2014 31 December 2013
Sales2 £7,611m £8,487m £18,180m
Underlying EBITA3 £802m £867m £1,925m
Operating profit £689m £752m £806m
Underlying earnings4 per share 17.7p 17.9p 42.0p
Basic earnings per share5 13.5p 12.7p 5.2p
Order backlog2,6 £39.7bn £43.2bn £42.7bn
Dividend per share 8.2p 8.0p 20.1p
Operating business cash flow7 £287m £(815)m £147m
Net Debt (as defined by the Group)8 £(1,182)m £(1,192)m £(699)m
Ian King, Chief Executive, said "Operationally, the Group continues to perform
well, benefiting from good programme performance on its large order backlog of
almost £40bn. We continue to see a high level of activity in international
markets, including from our substantial presence in the Kingdom of Saudi
Arabia, while the US and UK environments remain more constrained. Sales are
anticipated to be weighted towards the second half of 2014, including the
timing of Typhoon aircraft deliveries. We are finalising a further £1.3bn of
international orders and are at an advanced stage of negotiations on a further
£1bn of UK sole source naval contracts. Excluding the impact of exchange
translation, the Group remains on track to deliver earnings in line with our
expectations for the full year."
FINANCIAL KEY POINTS
- The second half bias on Typhoon aircraft deliveries together with the
expected lower volumes at Land & Armaments contributed to a 10% decrease in
sales2 (6% at constant currency)
- Good margin performance in most businesses, whilst reduced volumes decreased
underlying EBITA3 by 7% (4% at constant currency)
- The benefits of the share repurchase programme and lower tax rate largely
offset the lower underlying EBITA3 resulting in underlying earnings4 per share
of 17.7p
- Large order backlog2,6 of £39.7bn after exchange translation of £0.4bn
- Interim dividend increased by 2% to 8.2p per share
- £618m returned to shareholders in the period, including £235m on the share
repurchase programme
1 Re-presented on classification of the Regional Aircraft line of business as
a continuing operation.
2 Including share of equity accounted investments.
3 Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items.
4 Earnings excluding amortisation and impairment of intangible assets,
non-cash finance movements on pensions and financial derivatives, and
non-recurring items (see note 4).
5 Basic earnings per share in accordance with International Accounting
Standard 33, Earnings per Share.
6 Order backlog comprises funded and unfunded unexecuted customer orders, and
is stated after the elimination of intra-group orders.
7 Net cash inflow/(outflow) from operating activities after capital
expenditure (net) and financial investment, and dividends from equity
accounted investments.
8 See definition below.
OPERATIONAL AND STRATEGIC HIGHLIGHTS
- Major milestone achieved with float-up of aircraft carrier, HMS Queen
Elizabeth
- UK government commitment to further Typhoon aircraft capability development
- Progress in future combat air technologies:
- Successful flight trials of Taranis unmanned combat air vehicle
- UK/French government commitment to develop joint Future Combat Air System
technology
- Reorganisation of industrial partner companies in the Kingdom of Saudi
Arabia to support their future growth
- Proposed bolt-on acquisition of US intelligence capability, Signal
Innovations Group, Inc., to augment imagery and data analysis technologies
- Selected to provide integrated flight control electronics for
next-generation Boeing 777X
- Applied Intelligence order backlog up by a further 25%, following 60%
increase in 2013
- Further streamlining of US business
OUTLOOK
Group
With the non-recurring benefit from the Salam price escalation settlement in
the second half of 2013, and before exchange translation, the Group continues
to expect reported earnings4 per share to be some 5% to 10% lower than in
2013. Exchange translation, assuming an average US$1.70 exchange rate, is
expected to impact those earnings by around one pence compared to previous
guidance.
Reporting segments
Electronic Systems: Sales2, in US dollars, in 2014 are expected to be similar
to those in 2013 with margins at the high end of a 12% to 14% range.
Cyber & Intelligence: Sales2, in US dollars, in 2014 are expected to be some
5% lower than those in 2013 with margins towards the higher end of an improved
8% to 10% range.
Platforms & Services (US): In 2014, sales2 in the Land & Armaments business
(adjusted for the transfer out of the UK Munitions business into Platforms &
Services (UK)) are expected to be in the $2.25bn to $2.4bn range with margins
slightly ahead of the previous 9% guidance. Sales2 in the Support Solutions
business are expected to be a little lower than in 2013 and, due to the
further charges taken in the first half on commercial shipbuilding, margin
guidance is reduced.
Platforms & Services (UK): As a result of the trading in 2013 of the price
escalation on the Salam Typhoon contract, and excluding the transfer in of the
UK Munitions business, sales2 are expected to reduce by around 5% with margins
expected to return to a 10% to 12% range.
Platforms & Services (International): Sales2 are expected to be similar to
2013, other than for exchange translation, with margins in a 10% to 12%
range.
2 Including share of equity accounted investments.
4 Earnings excluding amortisation and impairment of intangible assets,
non-cash finance movements on pensions and financial derivatives, and
non-recurring items (see note 4).
For further information please contact:
Investors Media Relations
Andrew Wrathall, Investor Relations Director Telephone: +44 (0)1252 383730Email: investors@baesystems.com Lindsay Walls, Director, Media Relations Telephone: +44 (0)1252 383074Email: lindsay.walls@baesystems.com
Analyst and investor presentation
A live webcast for analysts and investors will be held today (31 July 2014) at
10.00am. Details can be found on www.baesystems.com/investors, together with
presentation slides and a pdf copy of this report. A recording of the webcast
will be available later in the day.
About BAE Systems
BAE Systems serves the needs of its customers by delivering a wide range of
advanced defence, aerospace and security solutions that provide a performance
edge. With some 83,400 employees in six continents, we work together with
local partners to develop, engineer, manufacture and support the innovations
that increase defence sovereignty, sustain economies and safeguard commercial
interests.
INTERIM MANAGEMENT REPORT
Operationally, the Group continues to perform well, benefiting from good
programme performance on its large order backlog of almost £40bn. We continue
to see a high level of activity in international markets, including from our
substantial presence in the Kingdom of Saudi Arabia, while the US and UK
environments remain more constrained. Sales are anticipated to be weighted
towards the second half of 2014, including the timing of Typhoon aircraft
deliveries. We are finalising a further £1.3bn of international orders and are
at an advanced stage of negotiations on a further £1bn of UK sole source naval
contracts. Excluding the impact of exchange translation, the Group remains on
track to deliver earnings in line with our expectations for the full year.
US
As anticipated, the impact of budget reduction actions continues to constrain
activity across the Group's US business, but the bipartisan budget approval,
in December 2013, is providing improved near-term clarity.
In this environment, BAE Systems has seen an improving level of procurement
activity in Electronic Systems and Platforms & Services (US). Activity in the
Intelligence & Security domain continues to be impacted by reduced analyst
support activity in line with US troop withdrawals from Afghanistan. Last
year's performance issues on the Radford ammunition facility management
contract and in commercial shipbuilding continued to depress margins in the US
Support Solutions business into 2014.
Recognising the continued challenges in the US market, a restructuring has
been announced that has streamlined the US organisation to three operating
sectors and reduced administrative overhead across the sectors and in the
headquarters.
The Group continues to grow in commercial aircraft electronics, including
accessing additional aircraft platform positions. In July, Boeing selected BAE
Systems as its supplier of advanced, integrated flight control electronics on
its next-generation 777X programme. The business also provides digital engine
controls for GE commercial aircraft engines and is developing them for GE's
next-generation LEAP and Passport engines that will power the Boeing 737 MAX,
Airbus A320neo, Comac C919 and Bombardier Global 7000/8000 aircraft.
In July, BAE Systems agreed to the proposed acquisition of Signal Innovations
Group, Inc., a provider of imaging technologies and analytics to the US
intelligence community. The proposed acquisition is conditional upon receiving
certain regulatory approvals. It is anticipated that the proposed acquisition
will be completed during the third quarter of 2014.
UK
The UK environment remains stable following the actions to address programme
priorities identified by the Strategic Defence and Security Review in 2010 and
the subsequent rebalancing of budgets.
Activity across the military air domain continues to benefit from Typhoon
production and the Group's extensive in-service military aircraft support and
upgrade business. Twelve Typhoon aircraft were delivered by the Eurofighter
partners to European and Saudi air forces in the first half of 2014. Aircraft
deliveries are expected to have a second half bias, with a total of 30
aircraft planned to be delivered to the European and Saudi customers by the
Eurofighter partners in the second half of the year. A significant increase in
activity is underway to clear additional weapons and sensor capabilities onto
the aircraft for the four partner nations and international customers.
The Group's participation in the F-35 combat aircraft programme continues to
develop. Twenty-one F-35 aft fuselage assemblies were delivered in the period.
Significant growth is anticipated as the planned aircraft delivery rate starts
to accelerate.
The outlook for the Group's UK maritime businesses is robust. The build of two
Queen Elizabeth class aircraft carriers is progressing well. The first of
class was named in a formal ceremony by Her Majesty The Queen on 4 July and
has now been floated successfully out of the dock in which she was assembled
to continue outfitting. The block build of the second vessel is some 70%
complete.
Actions continue to implement and finalise contracts for the restructuring of
the Group's naval business following last year's agreement with the UK
government. As part of the assessment phase of the Type 26 frigate programme,
BAE Systems has made a proposal for the future phases of the programme.
Anticipated progress on Type 26 ships, together with the commitment to build
three Offshore Patrol Vessels and the UK naval shipbuilding restructuring
agreement, will provide long-term clarity for complex warship manufacture.
Discussions are underway to extend the Spearfish torpedo contract into
demonstration and full manufacture, and negotiations are at an advanced stage
on the multi-year Maritime Support Delivery Framework contract.
In the submarines business, Artful, the third of seven Astute class
submarines, was launched in May. Alongside build of Astute class boats,
engineering work continues to accelerate on the Successor programme, the
potential replacement for the Vanguard class fleet, intended to enter service
towards the end of the next decade.
In September, Scotland will hold an independence referendum. The decision on
independence from the UK is a matter for the people of Scotland. However, as
stated previously, BAE Systems has significant interests and employees in
Scotland, and it is clear that continued union offers greater certainty and
stability for our business.
BAE Systems continues to develop successfully its strategy for commercial
cyber, with growth being demonstrated and a number of recent important
contract wins in the first six months of the year. Order backlog in Applied
Intelligence has grown by 25% since 31 December 2013.
International
In Saudi Arabia, the Group is progressing the provision of capabilities,
including delivery of a further four Typhoon aircraft in the period and the
development of the Group's position as a key part of the Kingdom's defence
industrial base. Work continues to expand the capability on the aircraft,
including finalising additional orders of £1.3bn. In February, discussions on
price escalation on the Salam Typhoon programme reached agreement with the
Saudi Arabian government.
In June, BAE Systems announced a reorganisation of its portfolio of interests
in a number of industrial companies in Saudi Arabia and an enhancement of its
existing relationship with Riyadh Wings Aviation Academy LLC (Riyadh Wings).
The reorganisation is expected to enhance the growth prospects of this
portfolio of businesses and reinforce an ongoing commitment to support the
national agenda of developing an indigenous defence industry, supporting
skills and technology development, and increasing local employment.
Through a number of transactions, the reorganisation will bring together
shareholdings of BAE Systems and Riyadh Wings in Saudi companies specialising
in training, electronics and IT systems engineering under a single holding
company. Riyadh Wings will acquire a 49% stake progressively in the holding
company with BAE Systems continuing to hold a majority stake. Completion of
the transactions to effect the reorganisation is conditional on the
satisfaction of certain regulatory approvals.
In Australia, where BAE Systems is the largest defence contractor, the
government commitment to grow defence spending to 2% of Gross Domestic Product
is encouraging following a period of reductions.
The Canberra class Landing Helicopter Dock (LHD) programme for the Royal
Australian Navy is progressing well, with the first of the two ships expected
to be delivered to the customer in the second half of the year following sea
trials. The Group continues to discuss with the Australian government options
to sustain industrial capabilities and meet potentially substantial future
naval requirements following on from the LHD programme.
Across the wider international marketplace, the MBDA guided weapons joint
venture has seen increased bidding interest in some regions in response to
changing threats and defence priorities. In July, MBDA received a £250m
contract to supply the Advanced Short Range Air-to-Air Missile (ASRAAM) for
India's Jaguar aircraft fleet.
Balance sheet and capital allocation
The Group's balance sheet continues to be managed conservatively in line with
the Group's policy to retain its investment grade credit rating and to ensure
operating flexibility. Consistent with this approach, the Group expects to
continue to meet its pension obligations, pursue organic investment
opportunities, plans to pay dividends in line with its policy of long-term
sustainable cover of around two times underlying earnings and to make
accelerated returns of capital to shareholders when the balance sheet allows.
Investment in value-enhancing acquisitions will be considered where market
conditions are right and where they deliver on the Group's strategy.
Triennial funding valuations of all of the Group's UK pension schemes
commenced in April and discussions with the trustees regarding the
underpinning assumptions in determining those valuations are in progress.
In February 2013, the Group initiated a share repurchase programme of up to
£1bn over three years. As at 30 June 2014, BAE Systems had purchased 108.2
million shares for £447m under the programme. In the first half of 2014, 56.6
million shares were bought for £235m.
Directors
On 1 February 2014, Sir Roger Carr succeeded Sir Richard Olver as Chairman of
the Board of BAE Systems plc and Sir Richard stepped down from the Board on
that date.
Also on 1 February 2014, Linda Hudson retired as President and Chief Executive
Officer of BAE Systems, Inc. and as an executive director of BAE Systems plc.
On the same date, Jerry DeMuro was appointed as President and Chief Executive
Officer of BAE Systems, Inc. and as an executive director of BAE Systems plc.
Paul Anderson, a non-executive director, will retire from the Board on 31
December 2014. Consequently, Ian Tyler has succeeded him recently as chairman
of the Board's Corporate Responsibility Committee.
Dividend
The Board has declared a 2% increase in the interim dividend to 8.2p for the
first half year to 30 June 2014. At this level, the dividend is covered 2.2
times by underlying earnings and remains consistent with the Group's policy of
long-term sustainable cover of around two times.
Summarised income statement
Six months Six months
ended ended
30 June 30 June20131£m
2014
£m
Sales2 7,611 8,487
Underlying EBITA3 802 867
Profit on disposal of businesses - 4
EBITA 802 871
Amortisation of intangible assets (88) (96)
Impairment of intangible assets - (4)
Finance costs2 (169) (223)
Taxation expense2 (111) (133)
Profit for the period 434 415
Underlying earnings4 per share 17.7p 17.9p
Basic earnings per share5 13.5p 12.7p
Dividend per share 8.2p 8.0p
Exchange rates - average Six months Six months
ended ended
30 June 30 June
2014 2013
£/$ 1.669 1.544
£/E 1.218 1.175
£/A$ 1.825 1.524
Exchange rates - period end 30 June 30 June
2014 2013
£/$ 1.711 1.517
£/E 1.249 1.167
£/A$ 1.812 1.657
Exchange rates - year end 31 December
2013
£/$ 1.656
£/E 1.202
£/A$ 1.851
Segmental analysis
Sales2 Underlying EBITA3
Six months Six months Six months ended Six months
ended ended 30 June ended
30 June 30 June20131£m 2014 30 June20131£m
2014 £m
£m
Electronic Systems 1,108 1,194 143 156
Cyber & Intelligence 529 657 47 53
Platforms & Services (US) 1,662 2,085 105 182
Platforms & Services (UK) 2,844 3,231 393 386
Platforms & Services (International) 1,576 1,654 157 165
HQ* 127 145 (43) (75)
Intra-group (235) (479) - -
7,611 8,487 802 867
* In 2014, the HQ reporting segment includes, in underlying EBITA, a £30m
benefit (2013 £nil) from re-assessment of a long-term liability and a £17m
charge (2013 £32m) in respect of a US contract pricing dispute.
Income statement
Sales2 in the first half reduced by some £0.9bn to £7,611m, with £0.4bn of
that reduction due to exchange translation. The volume reductions in Land &
Armaments were as expected and there is significant second half bias in sales
due to the contracted delivery schedules for Typhoon aircraft this year.
Underlying EBITA3 was £802m (2013 £867m) after adverse exchange translation of
£33m, giving an increased return on sales of 10.5% relative to 2013 (10.2%).
Lower margins in Support Solutions have been offset by accelerated risk
reduction at Land & Armaments and Platforms & Services (UK).
Amortisation of intangible assets was £88m (2013 £96m).
Finance costs2 were £169m (2013 £223m). The underlying interest charge,
excluding pension accounting, marked-to-market revaluation of financial
instruments and foreign currency movements, was £89m (2013 £95m). Net interest
expense on the Group's pension deficit was lower at £76m (2013 £98m) mainly
reflecting the reduction in the deficit during 2013.
Taxation expense2reflects the Group's effective tax rate for the period of
20.4% (2013 24.5%). The effective tax rate for the full year is also expected
to be around 20%, with the final number dependent on the geographical mix of
profits.
Underlying earnings4 per share for the period was 17.7p (2013 17.9p)
benefiting from the Group's share repurchase programmeand lower tax rate.
Basic earnings per share5 for the period was 13.5p (2013 12.7p).
1 Re-presented on classification of the Regional Aircraft line of business as
a continuing operation.
2 Including share of equity accounted investments.
3 Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items.
4 Earnings excluding amortisation and impairment of intangible assets,
non-cash finance movements on pensions and financial derivatives, and
non-recurring items (see note 4).
5 Basic earnings per share in accordance with International Accounting
Standard 33, Earnings per Share.
Reconciliation of cash flow from operating activities to Net Debt (as defined
by the Group)
Six months Six months
ended ended
30 June 30 June
2014 2013
£m £m
Cash outflow from operating activities (30) (728)
Capital proceeds/(expenditure) (net) and financial investment 304 (97)
Dividends received from equity accounted investments 13 10
Operating business cash flow 287 (815)
Interest (76) (81)
Taxation (65) (94)
Free cash flow 146 (990)
Acquisitions and disposals - 6
Share repurchase programme (235) (90)
Other purchase of own shares (2) -
Equity dividends paid (383) (380)
Dividends paid to non-controlling interests (2) (12)
Cash flow from matured derivative financial instruments (57) 33
Movement in cash collateral (7) 2
Foreign exchange translation 63 (170)
Other non-cash movements (6) 22
Total cash outflow (483) (1,579)
Opening Net (Debt)/Cash (as defined by the Group) (699) 387
Closing Net Debt (as defined by the Group) (1,182) (1,192)
Comprising:
Debt-related derivative financial assets 3 38
Cash and cash equivalents 1,374 1,919
Loans - non-current (2,459) (2,809)
Loans and overdrafts - current (100) (338)
Less: Cash received on customers' account6 - (2)
Net Debt (as defined by the Group) (1,182) (1,192)
Operating business cash flow
Six months Six months
ended ended
30 June 30 June20131£m
2014
£m
Electronic Systems 86 73
Cyber & Intelligence 24 56
Platforms & Services (US) 109 (89)
Platforms & Services (UK) (201) (411)
Platforms & Services (International) 541 (221)
HQ (272) (223)
Operating business cash flow 287 (815)
Cash flows
Cash outflow from operating activities was £30m (2013 £728m), which includes
contributions in excess of service costs for the UK and US pension schemes
totalling £163m (2013 £192m).
As anticipated, advances continue to be consumed on the Omani Typhoon and Hawk
programme, the European Typhoon contract and the Saudi training aircraft
contract. The first of two payments under the Salam Variation of Price
settlement has been received. Costs incurred are being charged against a
number of provisions created in previous years.
The net cash proceeds from capital expenditure and financial investment of
£304m (2013 £97m outflow) includes the sale and leaseback of two properties in
Saudi Arabia, of which £418m was received in the period following the receipt
of deposits totalling £23m in 2013.
Dividends received from equity accounted investments, mainly comprising
Eurofighter and FNSS, amounted to £13m (2013 £10m).
The cash outflow in respect of the share repurchase programme of £235m (2013
£90m) represents shares purchased and cancelled under the programme announced
in February 2013.
Foreign exchange translation during the period, primarily in respect of the
Group's US dollar-denominated borrowing, reduced reported Net Debt by £63m.
Net Debt (as defined by the Group)
The Group's Net Debt at 30 June 2014 was £1,182m (30 June 2013 £1,192m), a net
outflow of £483m from the Net Debt position of £699m at the start of the
period.
A $500m, 4.95% bond was repaid at maturity in June. This repayment, together
with a £100m, 10¾% bond due to be repaid in the second half of 2014, was
largely pre-financed by the £0.4bn raised in the UK bond market in 2012.
Cash and cash equivalents of £1.4bn (30 June 2013 £1.9bn) are held primarily
for the share repurchase programme, pension deficit funding, payment of the
2014 interim dividend, repayment of £0.1bn of debt securities maturing in the
second half of 2014 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 the
foreseeable future and therefore continue to adopt the going concern basis in
preparing the accounts.
Principal risks
The principal risks facing the Group for the remainder of the year are
unchanged from those reported in the Annual Report 2013.
These risks, together with the Group's risk management process, are detailed
on pages 106 to 111 of the Annual Report 2013, and relate to the following
areas: defence spending; government customers; global market; contract award
timing; large contracts; fixed-price contracts; component availability,
subcontractor performance and key suppliers; laws and regulations;
competition; pension funding; export controls and other restrictions;
acquisitions; consortia and joint ventures; exchange rates; and cyber
security.
1 Re-presented on classification of the Regional Aircraft line of business as
a continuing operation.
6 Cash received on customers' account is the unexpended cash received from
customers in advance of delivery which is subject to advance payment
guarantees unrelated to Group performance. It is included within trade and
other payables in the consolidated balance sheet.
REPORTING SEGMENTS: ELECTRONIC SYSTEMS
Electronic Systems, with 12,500 employees1, comprises the US and UK-based
electronics activities, including electronic warfare systems and
electro-optical sensors, military and commercial digital engine and flight
controls, next-generation military communications systems and data links,
persistent surveillance capabilities, and hybrid electric drive systems.
Six months ended Six months ended Year ended
30 June 2014 30 June 2013 31 December 2013
Sales1 £1,108m £1,194m £2,466m
Underlying EBITA2 £143m £156m £346m
Return on sales 12.9% 13.1% 14.0%
Cash inflow3 £86m £73m £235m
Funded order intake1 £1,160m £1,124m £2,697m
Order backlog1,4 £3.6bn £3.7bn £3.7bn
Financial performance
The business delivered sales1 of $1.85bn (£1.1bn), in line with both last year
and guidance. Sales1 in the commercial areas of the business now stand at 22%
and growth there is helping to offset the expected pressures on the defence
side.
The return on sales achieved of 12.9% was consistent with the first half of
2013.
Cash3 conversion of underlying EBITA2 in the first half year was at 60% and an
improved conversion level is expected over the full year.
Despite the US budget pressures, order backlog1,4 of $6.2bn (£3.6bn) has been
sustained since the start of the year on further F-35 Low-Rate Initial
Production awards.
Operational performance
Electronic Combat
Electronic Systems maintains its leadership position in the US electronic
warfare market. Initial design verification testing of the electronic warfare
suite on the F-35 Lightning II programme was completed during the period.
Low-Rate Initial Production (LRIP) Lots 6 and 7 deliveries continued and the
business was awarded a $143m (£84m) contract for LRIP Lot 8.
Under contracts totalling over $0.9bn (£0.5bn) to install the Digital
Electronic Warfare System on 84 new F-15 aircraft and upgrade 70 existing F-15
aircraft for the Royal Saudi Air Force, system qualification and flight
testing continues towards initial fielding scheduled for early 2015.
Following successfulUS Defense Advanced Research Projects Agency programme
flight demonstrations, Electronic Systems is now under contract to design,
develop and deliver the electronic sensors for the Long-Range Anti-Ship
Missile in support of its rapid fielding on board F/A-18 and B-1B aircraft in
response to an urgent operational need.
Survivability & Targeting
The business completed its $38m (£22m) Common Infrared Countermeasures
technology development contract on a US Army helicopter programme and
proposals for the Engineering and Manufacturing Development phase will be
submitted in the second half of the year, with an award decision expected in
the first half of 2015.
A $496m (£290m), three-year Indefinite Delivery, Indefinite Quantity (IDIQ)
contract with the US Army was agreed in May for third-generation Common
Missile Warning Systems (CMWS). Additional CMWS orders totalling $33m (£19m)
were placed by the UK Ministry of Defence and other US customers.
Whilst the business continues to execute its $82m (£48m) Advanced Precision
Kill Weapon System full-rate production contract with the US Navy, Jordan and
the US Navy signed a Letter of Offer and Acceptance in May to progress the
first international sale of the laser-guided rocket system.
The business continues to perform on Terminal High-Altitude Area Defence
orders for 307 infrared missile seekers supporting both the US government and
Foreign Military Sales worth $340m (£199m).
Electronic Systems was awarded a five-year IDIQ contract with a potential
value of approximately $445m (£260m) to support the US Army's Enhanced Night
Vision Goggle III and Family of Weapon Sights - Individual programme. However,
this award is under protest pending a decision from the US Government
Accountability Office (GAO) and, depending on the GAO ruling, the US Army.
Communications & Control
The business continues to pursue international market opportunities, focusing
on the Middle East and Asia, with product offerings including flight controls,
displays, and communications and datalink systems.
Intelligence, Surveillance & Reconnaissance
The business provides airborne surveillance capability for the US Army and US
Air Force with the Airborne Wide Area Persistent Surveillance System and
Autonomous Real-time Ground Ubiquitous Surveillance - Imaging System, as well
as state-of-the-art mission computers and displays to Boeing for the US Navy's
P-8A Poseidon programme.
The business continues to provide Signals Intelligence capability for the US
Army and Special Operations Command. In June, BAE Systems was awarded a
two-year IDIQ contract worth up to $70m (£41m) to provide Tactical Signals
Intelligence Payloads and associated equipment for the US Army's Gray Eagle
unmanned aircraft.
In the Identification Friend or Foe market, BAE Systems was awarded an IDIQ
contract in April for 16 digital interrogators and 45 field change kits for
the US Navy and the government of Japan through a Foreign Military Sales
agreement.
Commercial Aircraft electronics
BAE Systems is a major supplier to Boeing for flight controls, and cabin and
deck systems. The business has been selected to provide the fly-by-wire
spoiler controls, flap/slat electronic unit and flight-deck electronics on the
737 MAX aircraft. In July, Boeing selected BAE Systems as its supplier of
advanced, integrated flight control electronics on its next-generation 777X
programme.The business also provides digital engine controls for GE commercial
aircraft engines and is developing them for GE's next-generation LEAP and
Passport engines that will power the Boeing 737 MAX, Airbus A320neo, Comac
C919 and Bombardier Global 7000/8000 aircraft.
The business continues to expand its aftermarket opportunities for Full
Authority Digital Engine Controls. A long-term agreement has been signed with
Southwest Airlines to provide maintenance, repair and overhaul services from
its worldwide service centre network.
Several airlines and original equipment manufacturers have expressed interest
in the Group's IntelliCabin product that provides in-seat power, LED lighting
and tablet-based wireless in-flight entertainment systems. Development
activities remain on track for initial availability in early 2015.
Both Embraer's Legacy mid-size business jet and Bombardier's CSeries regional
aircraft are engaged in flight testing enabled by several flight control
subsystems provided by BAE Systems.
HybriDrive® propulsion systems
As part of the Iveco team, BAE Systems was chosen to provide up to 600
HybriDrive® Series-E systems for hybrid city buses in Paris, France. The
business has begun deliveries of 475 HybriDrive® propulsion systems for Nova
Bus hybrids in Quebec, Canada.
Looking forward
Efforts to reduce the US government's budget deficit are expected to continue
to impact government spend. A bipartisan budget proposal was approved in
December 2013 that mitigates the full impact of the Sequester for 2014 and
2015. The Group expects lower defence spending than previously programmed, but
the cuts are not expected to be as significant or indiscriminate as they would
have been under Sequestration.
Whilst further funding reductions and the resultant slow down or cancellation
of ongoing and new programmes could impact the business, Electronic Systems
continues to be well-positioned to address the changing US Department of
Defense priorities with its balanced portfolio of programmes and customers,
and its sustained emphasis on cost reduction and research and development.
The business expects to benefit from its incumbent positions, particularly on
the F-35 Lightning II programme, and ability to provide capability upgrades on
platforms. The business anticipates increased activity on international
defence programmes and continued growth in the commercial aviation market.
1 Including share of equity accounted investments.
2 Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items.
3 Net cash inflow from operating activities after capital expenditure (net)
and financial investment, and dividends from equity accounted investments.
4 Order backlog comprises funded and unfunded unexecuted customer orders.
REPORTING SEGMENTS: CYBER & INTELLIGENCE
Cyber & Intelligence, with 7,500 employees1, comprises the US-based
Intelligence & Security business and UK-headquartered Applied Intelligence
business, and covers the Group's cyber, secure government, and commercial and
financial security activities.
Six months ended Six months ended Year ended
30 June 2014 30 June 2013 31 December 2013
Sales1 £529m £657m £1,243m
Underlying EBITA2 £47m £53m £115m
Return on sales 8.9% 8.1% 9.3%
Cash inflow3 £24m £56m £118m
Funded order intake1 £616m £610m £1,247m
Order backlog1,4 £0.8bn £0.9bn £0.7bn
Financial performance
In aggregate, sales1 reduced by 13% to $883m (£529m). The US business saw a
further 22% decrease driven largely by reduced budgets at the sector's two
largest customers along with further reductions in analysis support on
Counter-Improvised Explosive Device activity in Afghanistan. Growth in the
Applied Intelligence business was 7%.
Despite the top line performance, margins were improved to 8.9%.
Cash flow3 performance includes the capital costs of the replacement
Enterprise Resource Planning system and investment in the Global Delivery
Centre in Malaysia in the Applied Intelligence business.
Order backlog1,4 increased to £0.8bn. Despite the first half top line
pressures, backlog1,4 in the US business grew by 8% on imagery analysis and
cyber support awards. In the Applied Intelligence business, backlog1,4 grew by
25% to £328m.
Operational performance
Intelligence & Security
In all three lines of business, Intelligence & Security has continued to be
impacted by government budget reductions and the withdrawal of US troops from
Afghanistan. Whilst the US services market continues to experience significant
delays in procurement awards and increases in the number of award protests,
customers continue to look for solutions to address big data challenges and
opportunities to achieve efficiencies in IT services through consolidation and
cloud computing, areas in which the US business has deep domain expertise.
Global Analysis and Operations
In the market for Full Motion Video and Intelligence, Surveillance and
Reconnaissance analysis, the business has ongoing contracts worth over $400m
(£234m) representing over 400 analysts supporting mission critical
activities.
Execution on the Combat Intelligence Augmentation Teams task order, which
began in August 2013, continues to provide valuable augmentation and support,
with over 270 security-cleared intelligence analysts deployed in Afghanistan
alongside US defence personnel. Due to the withdrawal of US troops from
Afghanistan, the number of intelligence analyst staff on the programme is
expected to be reduced by the end of the year.
GEOINT-ISR (Geospatial Intelligence - Intelligence, Surveillance and
Reconnaissance)
The business continues to mature its capabilities in Activity-Based
Intelligence (ABI) which provides the intelligence and defence communities
with increasingly automated, efficient and reliable data processing and
management tools to transform big data into actionable intelligence. The
business achieved at least 95% award fees on its ABI contracts during the
period and submitted a $32m (£19m) Engineering Change Proposal in June, with
authorisation to proceed expected in the third quarter.
In May, the business delivered the first software release for testing of the
Mobility Air Force Automated Flight Planning Service programme and received
authorisation to proceed on the next development phase.
The business' XTS® Guard was selected by the USDefense Information Systems
Agency as an enterprise-wide security standard to ensure the agency's ability
to share information securely among authorised Department of Defense users and
across the Global Information Grid.
In the period, the National Geospatial-Intelligence Agency awarded the
business a five-year contract with an estimated total value of $335m (£196m)
to support its dynamic Map of the World project, which is giving US military
leaders clearer on-the-ground intelligence pictures to enhance situational
awareness and mission planning.
IT Solutions
The business continues to provide global networking solutions in US Korea
Command and US Africa Command under the Next-Generation Desktop Environment
programme, as well as execute under the ongoing Solutions for the Information
Technology Enterprise and Centralised Operations, Maintenance and Management
Information Technology indefinite delivery contracts.
The business continues to support the US High Performance Computing
Infrastructure Group, providing architecture, installation and administration
for a complex networking environment supporting multiple network enclaves and
high-speed data centre access to more than 3,000 users.
In May, BAE Systems was awarded a position on the US Department of Homeland
Security's $22bn (£13bn) Enterprise Acquisition Gateway for Leading Edge
Solutions II multiple-award contract. This position allows the business to
pursue task orders to provide a full range of IT solutions and services.
Applied Intelligence
The business continues to grow through the provision of solutions which
protect and enhance the operations of governments and commercial organisations
in the areas of cyber security, financial crime prevention, communications
intelligence and digital transformation.
The business continues to invest in building its skills base. Over 40% of BAE
Systems' UK graduate intake will join the Applied Intelligence business. The
Global Delivery Centre in Malaysia now has over 100 employees supporting
product development and customer project delivery.
Cyber Security continues to grow, building on its strong relationship with the
UK government, with recent orders including a £7m, multi-year contract to
address the UK Ministry of Defence's complex information assurance
challenges.
New orders for the CyberReveal cyber threat monitoring solution have been
received in the US and Europe, with continued demand from global financial
institutions.
The IndustrialProtect solution, launched in 2013, which protects
organisations' industrial control systems, received a £3m order from a major
global energy supplier.
Market interest in MobileProtect, launched in 2013 alongside a five-year
strategic partnership with Vodafone, continues to grow with a number of
contracts already signed and multiple large enterprises currently trialling
the service ahead of intended roll out. The business is also in discussions
with a number of communications service providers regarding the launch of the
service outside the UK.
The NetReveal® business provides enterprise risk, fraud and compliance
solutions internationally. Demand for multi-year managed service solutions has
increased, with NetReveal® OnDemand being selected by RSA in Canada to provide
insurance fraud solutions on a five-year contract. Expansion continues in the
capital markets sector through the 'unauthorised trading' solution launched
last year. NetReveal® continues to be recognised as an industry-leading
solution, being named 'Best-in-Class' in three out of four categories in the
'2014 Know Your Customer' technology report by CEB TowerGroup.
Communications Solutions is a provider of end-to-end communications
intelligence solutions to government and communications service providers and
is addressing opportunities in Europe, the Middle East and Asia-Pacific
regions. It continues to invest in capabilities to address customers' latest
requirements based on the changing communications landscape.
The UK Services business provides consulting and systems integration services
to major customers, with a particular focus on enabling digital
transformation. Its success continues in the Service Integration and
Applications Management market, with new and additional multi-year contracts
worth £45m awarded in the period, including a new contract with the Highways
Agency.
Looking forward
Efforts to reduce the US government's budget deficit are expected to continue
to impact government spend. A bipartisan budget proposal was approved in
December 2013 that mitigates the full impact of the Sequester for 2014 and
2015. The Group expects lower defence spending than previously programmed, but
the cuts are not expected to be as significant or indiscriminate as they would
have been under Sequestration.
Intelligence & Security is well-positioned to pursue opportunities in cyber,
special operations and Intelligence, Surveillance and Reconnaissance, which
remain priority activities in the US. Other avenues for growth exist across
the intelligence analysis spectrum. The US business is also exploring
international opportunities where its IT, cyber and analysis capabilities can
be implemented by governments or in commercial markets.
Applied Intelligence has a growing order backlog and pipeline of
opportunities, underpinning growth from both government and commercial sector
customers.
1 Including share of equity accounted investments.
2 Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items.
3 Net cash inflow from operating activities after capital expenditure (net)
and financial investment, and dividends from equity accounted investments.
4 Order backlog comprises funded and unfunded unexecuted customer orders.
REPORTING SEGMENTS: PLATFORMS & SERVICES (US)
Platforms & Services (US), with 17,400 employees1, comprises the
US-headquartered Land & Armaments business, with operations in the US, UK,
Sweden and South Africa, and the US-based services and sustainment activities,
including ship repair and munitions services.
Six months ended Six months ended Year ended
30 June 2014 30 June 2013 31 December 2013
Sales1 £1,662m £2,085m £4,196m
Underlying EBITA2 £105m £182m £265m
Return on sales 6.3% 8.7% 6.3%
Cash inflow/(outflow)3 £109m £(89)m £192m
Funded order intake1 £1,338m £1,424m £3,421m
Order backlog1,4 £5.4bn £7.8bn £7.4bn
Financial performance
Land & Armaments
Sales1 in the first half year reduced by 24% to $1.3bn (£0.8bn) or 14% after
adjusting for the transfer out of the UK Munitions business (sales in the six
months ended 30 June 2013 of $193m (£125m)). As expected, Bradley reset
activity has almost halved, the Medium Mine Protected Vehicle production
contract has completed and deliveries under US M777 lightweight howitzer
contracts have largely traded out.
Despite the expected top line reductions, the business has outperformed at the
margin level, delivering a return on sales of 10.9% (2013 9.5%) through strong
programme execution and cost reduction.
Cash flow3 was significantly improved compared to last year, with more than
100% profit conversion.
Order backlog1,4 of $4.4bn (£2.6bn) reduced in line with the sales traded
after adjusting for the transfer out of the UK Munitions business (31 December
2013 $2.2bn (£1.3bn)).
Support Solutions
Sales1 of $1.5bn (£0.9bn) in the first half year were in line with
expectations with good volumes in naval ship repair activity.
Return on sales in the period was at just 2.5% (2013 8.0%). In addition to the
lower margins arising from last year's issues on the Radford Army Ammunition
Plant contract, a further £12m of charges have had to be taken on commercial
shipbuilding programmes.
Order backlog1,4 reduced to $4.8bn (£2.8bn) on the trading of sales under the
five-year US Navy Multi-Ship, Multi-Option ship repair contracts and ordnance
programmes. The re-compete for the Hawaiian contract was secured in the first
half.
Operational performance
Land & Armaments
US Combat Vehicles
The business continued its campaign to sustain key combat vehicle industrial
base capabilities in line with the US Army's evolving requirements.
The business is achieving all milestones on the $195m (£114m) M109A7
self-propelled howitzer and M992A3 ammunition carrier (formerly referred to as
the Paladin Integrated Management programme) Low-Rate Initial Production
contract awarded in 2013.
Work on the Joint Light Tactical Vehicle programme was transitioned
successfully from the Sealy, Texas, plant, which closed in June. BAE Systems
is working with Lockheed Martin on the Low-Rate Initial Production bid, which,
if successful, would be undertaken at Lockheed Martin's Camden, Arkansas,
facility, with cab production at BAE Systems' York, Pennsylvania, facility.
The business submitted its bid for the US Army's Armoured Multi-Purpose
Vehicle in May. A major competitor has recently withdrawn from this valuable
competition to replace the US Army's large fleet of M113 vehicles. The Army
plans to award a single initial contract for the first phase, Engineering and
Manufacturing Development, around the end of the year.
The US Marine Corps has revised its amphibious strategy, creating the
Amphibious Combat Vehicle (ACV) 1.1 programme, for which BAE Systems has a
candidate vehicle to address the customer requirement.
In May, the business was awarded an initial $12m (£7m) contract by the US
Marine Corps to provide engineering design and development work related to
survivability upgrades for the AAV7A1 Assault Amphibious Vehicle.
Funding for the Ground Combat Vehicle programme has been significantly reduced
by the customer such that only a small amount of funds have been set aside for
long-term development activities.
Weapon Systems
The US Navy displayed a railgun developed by BAE Systems aboard a Joint High
Speed Vessel during July's International Electromagnetic Launch Technology
Symposium in San Diego.
In the period, the business was awarded a contract for four 57mm Mk3 naval
guns for an international customer.
The process of mothballing the M777 howitzer production line in the UK until
further orders are secured has been completed. The Karlskoga, Sweden, facility
will complete a 25% headcount reduction during the third quarter.
BAE Systems Hägglunds
The first upgraded CV90 combat vehicle for Norway was delivered in February.
Delivery of a new variant of the CV90 Armadillo was made to the Danish Army
for competitive evaluation in support of their armoured personnel carrier
requirement.
In May, the business entered into a teaming agreement with Rheinmetall Canada
Inc. to offer the BvS10 all-terrain vehicle for the Canadian Marginal Terrain
Vehicle programme.
FNSS
FNSS, BAE Systems' Turkish joint venture, continues production work on the
$559m (£327m) programme to produce 259 8x8 wheeled armoured vehicles for the
Royal Malaysian Army. Deliveries on the programme are scheduled through to
2018.
First vehicles under the $360m (£210m) contract from the Royal Saudi Land
Forces for the upgrade of 320 M113 tracked armoured personnel carriers are
scheduled for delivery in the second quarter of 2015.
The business submitted a proposal for the Oman Wheeled Armoured Personnel
Carrier programme via its FNSS joint venture and contract award decision is
expected later in 2014.
Support Solutions
The commercial shipbuilding business continued to experience challenges on a
number of ongoing contracts.
The US-based ship repair business continued to perform well and received a
Multi-Ship, Multi-Option contract for the Hawaii shipyard worth up to $200m
(£117m) over five years to maintain, repair and upgrade US Navy ships.
Operational challenges under the Radford Army Ammunition Plant contract
continued to be addressed in the period, and negotiationswith the customer to
adjust funding and other elements of this contract are ongoing.
The business is meeting all requirements in its second year of the $780m
(£456m), five-year US Army contract to operate and manage the Holston Army
Ammunition Plant in the US and purchase explosives from the plant. The
business has successfully managed and operated the plant for the last 16
years.
In December 2013, the Letter of Offer and Acceptance was finalised between the
Republic of Korea and the US government, down-selecting BAE Systems to upgrade
avionics and electronic systems and perform systems integration on more than
130 F-16 aircraft. Phase one of the contract was received in May, valued at
approximately $140m (£82m), and work has begun on the initial aircraft in Fort
Worth, Texas. Phase two is expected in the second half of the year, bringing
the total value of the programme to approximately $1.3bn (£0.8bn).
Under the $534m (£312m), eight-year US Air Force contract received in 2013 to
maintain the readiness of Minuteman III intercontinental ballistic missiles in
the US, all transition activities have been completed to assume lead
integration support contractor role.
In February, the US Air Force Space Command awarded BAE Systems a further
three-year contract extension to maintain its Solid State Phased Array Radar
System, space radars used for missile warning and space surveillance
operations, raising the value of the contract to approximately $540m (£316m).
In April, BAE Systems was informed that it had not been awarded the Automated
Installation Entry III contract, which would have extended its current work in
support of US Army installation security. The award is under protest by
multiple parties and will be re-competed as a new procurement.
Looking forward
Efforts to reduce the US government's budget deficit are expected to continue
to impact government spend. A bipartisan budget proposal was approved in
December 2013 that mitigates the full impact of the Sequester for 2014 and
2015. The Group expects lower defence spending than previously programmed, but
the cuts are not expected to be as significant or indiscriminate as they would
have been under Sequestration.
In the near term, Land & Armaments continues to operate in a challenging
environment. To remain viable in the future, the business is investing to
protect franchise programmes, including Bradley and the CV90 family, and
establish new franchise programmes, such as the M109A7/M992A3 programme
(previously referred to as the Paladin Integrated Management programme). The
US Army's Armoured Multi-Purpose Vehicle is the future
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