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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Bae Systems Plc | LSE:BA. | London | Ordinary Share | GB0002634946 | ORD 2.5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 20.00 | 1.52% | 1,340.00 | 1,344.00 | 1,345.00 | 1,345.50 | 1,307.00 | 1,323.50 | 6,183,295 | 16:35:29 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Aircraft | 23.23B | 1.86B | 0.6133 | 21.91 | 40.69B |
From Apr 2019 to Apr 2024
TIDMBA.
RNS Number : 0791J
BAE SYSTEMS PLC
27 March 2018
BAE Systems plc
Annual Report 2017
BAE Systems plc has today published its Annual Report and Accounts for the year ended 31 December 2017 ('Annual Report 2017'). The full document can be viewed on the Company's website at:
www.baesystems.com/investors
Copies of the Annual Report 2017 will be posted to those shareholders who have requested to receive communications from the Company in printed form on 29 March 2018.
In compliance with Section 9.6.1 of the Listing Rules, a copy of the Annual Report 2017 has also been submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM
This announcement contains regulated information issued in accordance with Section 6.3 of the Financial Services Authority's Disclosure and Transparency Rules and accordingly contains certain sections of the Annual Report 2017 in unedited full text. Page and chart references within the text of this announcement are references to pages and charts in the Annual Report 2017 that can be viewed as detailed above.
The financial information for the year ended 31 December 2017 contained in this announcement was approved by the Board on 21 February 2018. This announcement does not constitute statutory accounts of the Company within the meaning of Section 435 of the Companies Act 2006, but is derived from those accounts.
Statutory accounts for the year ended 31 December 2016 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2017 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
The auditors have reported on those accounts. Their reports were not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
The Annual Report 2017 contains the following responsibility statement:
Responsibility statement of the directors in respect of the Annual Report and financial statements
Each of the directors listed below confirms that to the best of their knowledge:
-- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company, and the undertakings included in the consolidation taken as a whole; and
-- the Strategic report and Directors' report, taken together, include a fair review of the development and performance of the business, and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
In addition, each of the directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Sir Roger Carr Chairman --------------------- ---------------------------------------------------------- Charles Woodburn Chief Executive --------------------- ---------------------------------------------------------- Jerry DeMuro President and Chief Executive Officer of BAE Systems, Inc. --------------------- ---------------------------------------------------------- Peter Lynas Group Finance Director --------------------- ---------------------------------------------------------- Revathi Advaithi Non-executive director --------------------- ---------------------------------------------------------- Elizabeth Corley Non-executive director --------------------- ---------------------------------------------------------- Harriet Green Non-executive director --------------------- ---------------------------------------------------------- Chris Grigg Non-executive director --------------------- ---------------------------------------------------------- Paula Rosput Reynolds Non-executive director --------------------- ---------------------------------------------------------- Nick Rose Non-executive director --------------------- ---------------------------------------------------------- Ian Tyler Non-executive director --------------------- ----------------------------------------------------------
On behalf of the Board
Sir Roger Carr
Chairman
21 February 2018
Chief Executive's review
"BAE Systems delivered a good performance in 2017, consistent with our expectations for the year."
Charles Woodburn Chief Executive
Introduction
BAE Systems delivered a good performance in 2017, consistent with our expectations for the year. We are taking the actions necessary to address costs and to meet our customers' affordability challenges. Despite economic and political uncertainties, governments in our major markets continue to prioritise defence and security, with strong demand for our capabilities. We are investing in our business, our people, and in the technology and skills we need to drive the business forward. With an improving outlook for defence budgets in a number of our markets and a solid foundation for medium-term growth, we are well placed to generate good returns for shareholders.
Since taking on the role of Chief Executive, I have reiterated that we are a strong company, with a number of key advantages, pursuing the right strategy.
We have a broad geographic footprint and diversified market positions. Importantly, our track record of successful partnerships in international markets to develop local industry, employment and skills is now becoming a key requirement to do business in those markets.
We have world-class technologies in the fields of electronic warfare, autonomous systems, advanced manufacturing, robotics and data analytics, and we continue to invest in research and development, often alongside our customers, to identify and develop emerging technologies. The speed of change in technology means that we must continually build on our technological advantage, and attract and retain the right talent in order to stay competitive.
It is important to recognise that in a tough, competitive market, we need to become a stronger, smarter and sharper organisation to win new business and grow, which means increasing our focus and efforts in three priority areas:
Operational excellence
We have a number of major programmes under way on which we are ramping up production, so it is vital that we maintain our focus on operational excellence by delivering for our customers. There is simply no better way to highlight our skills and capabilities and, therefore, win new business.
Competitiveness
Good progress has been made in making the organisation more efficient over the last few years, and there are further opportunities with procurement and enhanced collaboration at the forefront.
Technological innovation
We have a long heritage of developing and integrating cutting-edge technologies to create complex systems that give our customers a capability advantage. The accelerating pace of technological change is a disruptive force and a key driver of competitive advantage and, increasingly, a determinant for our customers in awarding new business.
Driving performance in these three areas will be key for the development of the business as we execute on our strategy in 2018 and beyond.
2017 performance
US
After seven months under a Continuing Resolution that maintained funding at the prior year's level, the fiscal year 2017 defence budget ultimately rose by approximately 4%. Similarly, fiscal year 2018 has begun under multiple Continuing Resolutions. On 9 February 2018, Congress passed, and the President signed, a budget agreement that supports the medium-term planning assumptions for our US businesses. This budget agreement increases the budget caps for two years, and extends the current Continuing Resolution to 23 March 2018 to allow lawmakers to pass a fiscal year 2018 omnibus appropriations bill.
We see continued support for increased defence spending in the President's recently-released fiscal year 2019 budget request. This request maintains positive momentum in funding for military readiness and modernisation, and provides greater near-term certainty. Our US-based portfolio remains well aligned with customer priorities and growth areas, such as the ramp-up of production on a number of our long-term programmes.
Our US electronics business delivered good operational performance across our core franchise positions in the high-technology areas of electronic warfare, precision-guided munitions, Intelligence, Surveillance and Reconnaissance, and electro-optics.
BAE Systems has sustained its leadership position in the US electronic warfare market and production is ramping up to execute orders across a number of programmes, some of which are classified. As the electronic warfare system supplier on the F-35 Lightning II combat aircraft programme, we are increasing production and are well positioned to meet further increases in output rates over the coming years to meet the requirements of both US and international customers. On F-15, upgrade programmes are contracted and progressing for the US Air Force and international customers.
The Group's US-based combat vehicles business is underpinned by programmes for the manufacture of Armored Multi-Purpose Vehicles and M109A7 self-propelled howitzers, and Bradley upgrades which all progressed in the year. In the amphibious vehicle market, 16 prototypes have been delivered to the US Marine Corps under the Amphibious Combat Vehicle 1.1 programme. We are one of two competitors for this programme, with final down-selection expected in 2018.
BAE Systems is a leading supplier of ship repair services to the US Navy and continues to adjust its workforce and facilities to meet evolving demand. Additional dry dock capacity at our San Diego shipyard became operational in February 2017 and accepted its first ship during the year.
Whilst market conditions remain highly competitive and continue to evolve, our US-based Intelligence & Security business is focused on delivering on its contracts and maintaining a high level of bid activity.
UK
Defence and security remains a priority for the UK government. We expect this to be reaffirmed in the National Security Capability Review, and in the Modernising Defence Programme, which was announced in January 2018 by the Defence Secretary.
Transition arrangements after March 2019 will be important to enable companies to prepare for potential changes in the regulatory environment. As there is relatively limited UK-EU trading and movement of EU nationals into and out of BAE Systems' UK businesses, the resulting Brexit impact on the business is likely to be limited, depending on the terms of any transition and final agreements for the UK's future relationship with the European Union.
We will support the government in achieving its aim to ensure that the UK maintains its key role in European security and defence post-Brexit, and to strengthen bilateral relationships with key partners in Europe. This will be important for ongoing collaboration in the development of defence capabilities.
In December, BAE Systems and the Government of Qatar entered into a contract, valued at approximately GBP5bn, for the supply of 24 Typhoon aircraft. Alongside supplying the aircraft, the agreement provides for the supply of ground support to the Qatar Armed Forces and delivery of technical and pilot training in Qatar. The contract is subject to financing conditions and receipt by the Group of first payment which are expected to be fulfilled no later than mid-2018.
Discussions with current and prospective operators of the Typhoon aircraft continue to support the Group's expectations for additional Typhoon contract awards. However, there can be no certainty as to the timing of these orders.
As a result of reducing production activity on Typhoon and Hawk, and also taking into account the changes to support requirements as the Royal Air Force transitions from Tornado to F-35 Lightning II, the business announced in October a total proposed headcount reduction of up to 1,400 roles over the next three years.
The Typhoon aircraft's progression towards the Royal Air Force Centurion standard will enable transition of capability from Tornado to Typhoon as the UK Tornado fleet is scheduled to come out of service at the end of the decade.
UK-based production of rear fuselage assemblies for the F-35 Lightning II aircraft increased to 82 in the year, with most of the advanced manufacturing investment in place to achieve the planned increase in production volumes. In readiness for the arrival of the UK's first F-35 Lightning II aircraft in 2018, good progress has been made on the support facilities for the stand-up of the operational service at RAF Marham in Norfolk.
In the maritime domain, there remains pressure on the Navy's near-term budgets.
On the aircraft carrier programme, HMS Queen Elizabeth successfully concluded initial sea trials and entered HM Naval Base, Portsmouth, for the first time in August, with operational handover to the Royal Navy in December.
Following contract award for the first batch of three Type 26 frigates, worth GBP3.7bn, production for the first ship, Glasgow, commenced in July. The National Shipbuilding Strategy announced in September committed to all eight Type 26 frigates to be built in our Scottish manufacturing facilities. In October, we announced a teaming agreement with Cammell Laird for their bid for the UK Ministry of Defence's proposed Type 31e general purpose frigate programme.
Submarine activity is increasing with the Astute and Dreadnought class submarines now both in production and major redevelopment of the Barrow site to deliver the Dreadnought programme under way.
International
The Saudi Arabian In-Kingdom Industrial Participation programme continues to make good progress and we have commenced discussions with the new Saudi Arabian Military Industries (SAMI) organisation to explore how we can collaborate to deliver further In-Kingdom Industrial Participation. All of these activities are aligned with our long-term industrialisation strategy, as well as the Saudi Arabian government's National Transformation Plan and Vision 2030.
On the Salam Typhoon programme, all contracted 72 aircraft have now been delivered and the Typhoon support contracts are operating well, exceeding the baseline flying programme contracted with the customer.
Discussions with the Saudi Arabian customer through 2017 resulted in contractual agreements under the Saudi British Defence Co-operation Programme being formalised. These provide support services to the Royal Saudi Air Force and Royal Saudi Naval Forces for a further five years to 31 December 2021.
In Australia, the business is underpinned by long-term support contracts, whilst activity progresses on two major bid opportunities.
Firstly, as one of two tenderers for the Land 400 Phase 2 Combat Reconnaissance Vehicle programme, we have completed the Risk Mitigation Activity contract and submitted our final proposal, with final preferred tender selection anticipated in the first half of 2018.
Secondly, our initial tender response for the Commonwealth's nine-ship SEA 5000 Future Frigate programme was submitted in August and we anticipate a preferred tender selection in 2018.
The MBDA joint venture has continued to win orders in both domestic and export markets. The increase in business volumes has resulted in the requirement to expand production capacities in the UK and France.
Cyber security
Applied Intelligence achieved sales growth from the continued delivery of national security solutions for the UK and international governments. In addition, we have deployed anti-fraud, regulatory compliance, and cyber security products and services across a large range of commercial customers.
In 2017, Applied Intelligence reported an underlying loss of GBP61m, including a GBP24m restructuring charge. The first half loss of GBP27m was followed by a reduced second half loss, before the restructuring charge, of GBP10m as cost reduction actions started to deliver bottom-line benefit. A goodwill impairment of GBP384m was taken in 2017 reflecting the future level and timing of expected returns from the business.
Effective 1 January 2018, the business changed its operating model to deliver a more targeted portfolio of products and services focused on customers within three core business units: Government; Financial Services; and Technology & Commercial. The restructuring will enable a greater focus on customer needs and higher levels of operational efficiency, in the commercial business, that will accelerate improvements in competitiveness and profitability.
Balance sheet and capital allocation
The Group's balance sheet is managed conservatively, in line with its policy, to retain its investment grade credit rating and to ensure operating flexibility. Consistent with this approach, the Group expects to continue to meet its pension obligations, invest in research and technology and other organic investment opportunities, and plans to pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings 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.
Pension schemes
The 2017 UK triennial pension funding valuations concluded in November, with the aggregate funding deficit as at 31 March 2017 across the UK schemes at GBP2.1bn. The deficit recovery plan on the Group's largest pension scheme, the BAE Systems Pension Scheme, continues to March 2026, with the other schemes now with reduced repayment periods or fully funded.
The UK funding deficit at 31 March 2017 is some GBP3bn lower than the accounting deficit, using like-for-like mortality assumptions and asset values at 31 December 2017, largely due to lower liabilities as a result of the discount rate assumption based on the expected returns on the investments held by the schemes.
Research and technology
BAE Systems has developed some of the world's most innovative technologies and invests in research and development to generate future products and capabilities. We embrace disruptive technology, drive innovation and invest appropriately both on a self-funded basis and in conjunction with our customers, universities, and small and medium-sized enterprises. Company-funded research and development contributes, along with customer funding, in driving focused investment in areas such as defence and commercial electronics, military aircraft, precision weapons and cyber security.
Responsible business
We continue to build a culture where our people are empowered to make the right decisions and know where to go to seek help or guidance. During 2017, we rolled out further ethics training across the Group to support employees and, in January 2018, launched our revised Code of Conduct.
The safety of our employees, and anybody who works on, or visits, our sites, remains a key priority. Our safety culture and our employees demand high standards for all aspects of health and safety. In 2017, there was a 3% reduction in the Recordable Accident Rate and a 28% reduction in the total number of major injuries recorded as we continued to focus on reducing risk and embedding safety culture to drive improvement.
Recruiting and retaining talented people is a key priority. We want every employee to reach their full potential within a diverse and inclusive work environment. We have programmes in place across the business to support strategic workforce planning, career development and retention, as well as to improve diversity and inclusion.
Organisational changes
In October, we announced a restructure of our operations outside of the US-managed business in support of our three priorities of delivering operational excellence, honing our competitive edge and accelerating our technology innovation. The new operating model, effective 1 January 2018, will simplify our management structure to create strengthened Air and Maritime reporting segments, whilst changes to our UK-based Applied Intelligence cyber security business are focused on meeting customer needs and accelerating improvements in competitiveness and profitability.
Our 2017 results are re-presented on page 56 to reflect the organisational changes and our segmental guidance for 2018 is presented on page 57 on a consistent basis. On pages 58 and 59, we summarise the short-to medium-term prospects for our five principal reporting segments from 1 January 2018.
Summary
Our business benefits from a large order backlog, strong franchises and established positions on long-term programmes in the US, UK, Saudi Arabia and Australia. Our strategy is clear and well defined, with governments in our major markets continuing to prioritise defence and security, with strong demand for our capabilities. Through execution of a consistent strategy, we are well placed to maximise opportunities, deal with the challenges and continue to generate good shareholder returns.
Charles Woodburn Chief Executive
Extract from
Chairman's letter
Board and Executive Committee
With effect from 1 July, Charles Woodburn succeeded Ian King as Chief Executive. Ian retired after a career spanning more than 40 years at the Company, including leading BAE Systems as Chief Executive since 2008.
Building a pipeline of talent and managing succession at all levels in the business is, of course, an essential part of strategic planning. Our Nominations Committee consistently reviews membership of the Board and Executive Committee. In this respect, in 2017, we were fortunate to recruit Revathi Advaithi as a non-executive director bringing wide international operational experience with strong engineering and digital credentials, and Karin Hoeing as Group Human Resources Director and member of the Executive Committee. As we look forward, beyond the current year, we will continue to refresh the Board and Executive Committee to ensure our experience and skillset is fit for purpose in a changing world.
To avoid complacency and in the pursuit of excellence, we conduct rigorous annual reviews of the Board with the employment of an external advisor every other year. The key findings of the 2018 Independent Board Evaluation are outlined in the Chairman's Governance letter on page 72 of this report. As a Board, we debate and review our culture each year to ensure we continue to treat everyone respectfully, trade responsibly, act with integrity and govern scrupulously.
Summary
In summary, we have been pleased to deliver another year of good performance with sales of GBP19.6bn and underlying earnings per share of 43.5p, underpinned by an order backlog of GBP41.2bn.
Against the background of a strong Board, and a refreshed and committed management team, we are both content with the year's performance and positive about our future prospects.
The Board therefore has recommended a final dividend of 13p for a total of 21.8p per share for the full year. Subject to shareholder approval at the May 2018 Annual General Meeting, the dividend will be paid on 1 June 2018 to holders of ordinary shares registered on 20 April 2018.
Sir Roger Carr Chairman
Financial review
We monitor the underlying financial performance of the Group using the alternative performance measures defined on page 6. These measures are not defined in IFRS(1) and, therefore, are considered to be non--GAAP(2) measures. Accordingly, the relevant IFRS(1) measures are also presented where appropriate.
P06 Alternative performance measure definitions
Income statement
Hot Features
Premium
2017 2016
Financial performance measures as defined by the Group GBPm GBPm
------------------------------------------------------- ---- ------ ------
Sales KPI 19,626 19,020
------------------------------------------------------- ---- ------ ------
Underlying EBITA KPI 2,034 1,905
------------------------------------------------------- ---- ------ ------
Return on sales 10.4% 10.0%
------------------------------------------------------------- ------ ------
Financial performance measures defined in IFRS(1) GBPm GBPm
-------------------------------------------------- ------ ------
Revenue 18,322 17,790
--------------------------------------------------- ------ ------
Operating profit 1,480 1,742
--------------------------------------------------- ------ ------
Return on revenue 8.1% 9.8%
--------------------------------------------------- ------ ------
Reconciliation of sales to revenue GBPm GBPm
------------------------------------------------------ ---- ------- -------
Sales KPI 19,626 19,020
------------------------------------------------------ ---- ------- -------
Deduct Share of sales by equity accounted investments (2,575) (2,427)
------------------------------------------------------------ ------- -------
Add Sales to equity accounted investments 1,271 1,197
------------------------------------------------------------ ------- -------
Revenue 18,322 17,790
------------------------------------------------------------ ------- -------
Reconciliation of underlying EBITA to operating profit GBPm GBPm
--------------------------------------------------------------------------------- ----- ----- -----
Underlying EBITA KPI 2,034 1,905
--------------------------------------------------------------------------------- ------ ----- -----
Non-recurring items (13) (12)
----------------------------------------------------------------------------------------- ----- -----
Amortisation of intangible assets (86) (87)
----------------------------------------------------------------------------------------- ----- -----
Impairment of goodwill (384) -
----------------------------------------------------------------------------------------- ----- -----
Financial expense of equity accounted investments (34) (28)
----------------------------------------------------------------------------------------- ----- -----
Taxation expense of equity accounted investments (37) (36)
----------------------------------------------------------------------------------------- ----- -----
Operating profit 1,480 1,742
----------------------------------------------------------------------------------------- ----- -----
Net finance costs (346) (591)
----------------------------------------------------------------------------------------- ----- -----
Taxation expense (250) (213)
----------------------------------------------------------------------------------------- ----- -----
Profit for the year 884 938
----------------------------------------------------------------------------------------- ----- -----
Underlying interest expense (245) (257)
----------------------------------------------------------------------------------------- ----- -----
Net interest expense on retirement benefit obligations (173) (177)
----------------------------------------------------------------------------------------- ----- -----
Fair value and foreign exchange adjustments on financial instruments and investments 38 (185)
----------------------------------------------------------------------------------------- ----- -----
Net finance costs (including equity accounted investments) (380) (619)
----------------------------------------------------------------------------------------- ----- -----
Exchange rates
Average 2017 2016 -------- ----- ----- GBP/$ 1.289 1.354 --------- ----- ----- GBP/EUR 1.141 1.223 --------- ----- ----- GBP/A$ 1.681 1.823 --------- ----- ----- Sensitivity analysis ----------------------------------------------------------------------------- ---- Estimated impact on sales of a ten cent movement in the average exchange rate GBPm ----------------------------------------------------------------------------- ---- $ 550 ----------------------------------------------------------------------------- ---- EUR 75 ----------------------------------------------------------------------------- ---- A$ 35 ----------------------------------------------------------------------------- ----
Income statement
Sales increased by GBP0.6bn to GBP19.6bn (2016 GBP19.0bn) largely reflecting currency translation.
Underlying EBITA increased by GBP129m to GBP2,034m (2016 GBP1,905m), giving a return on sales of 10.4% (2016 10.0%). There was an exchange translation benefit of GBP50m. Growth on a constant currency basis(4) was at 4%.
Revenue increased by GBP0.5bn to GBP18.3bn (2016 GBP17.8bn) largely reflecting currency translation.
Operating profit decreased by GBP262m to GBP1,480m (2016 GBP1,742m). 2017 includes a GBP384m impairment in respect of the Applied Intelligence business, which is excluded from underlying EBITA. There was an exchange translation benefit of GBP39m.
Non-recurring items in 2017 of GBP13m represents a loss on the disposal of the BAE Systems San Francisco Ship Repair business. Non-recurring items in 2016 of GBP12m represented an impairment taken in respect of that business.
Amortisation of intangible assets is in line with the prior year at GBP86m (2016 GBP87m).
Impairment of goodwill in 2017 represents the impairment of goodwill in Applied Intelligence reflecting the future level and timing of expected returns from the business.
Net finance costs, including equity accounted investments, were GBP380m (2016 GBP619m). The underlying interest charge, excluding pension accounting, and fair value and foreign exchange adjustments on financial instruments and investments decreased marginally to GBP245m (2016 GBP257m). Net interest expense on the Group's pension deficit was GBP173m (2016 GBP177m). There was a credit in respect of fair value and foreign exchange adjustments of GBP38m (2016 GBP185m charge) on exchange translation of US dollar-denominated bonds.
Taxation expense, including equity accounted investments, of GBP287m (2016 GBP249m) reflects the Group's underlying effective tax rate for the year of 21%, partially offset by a GBP40m credit in respect of US tax reform enacted in December 2017. The US federal tax rate has been reduced from 35% to 21% with effect from 1 January 2018, while the estimated state tax rate has increased from 5% to 6%. In line with this change, the rate applying to US deferred tax assets and liabilities at 31 December 2017 has been reduced from 40% to 27%, creating a rate adjustment in 2017, which is partly reflected in the income statement.
The calculation of the underlying effective tax rate is shown in note 6 to the Group accounts on page 155.
The underlying effective tax rate for 2018 is expected to reduce from 21% to around 18% benefiting from US tax reform, with the final rate dependent on the geographical mix of profits.
Looking beyond 2018, the effective tax rate will depend principally on whether there are any changes in tax legislation in the Group's most significant countries of operation, the geographical mix of profits and the resolution of open issues.
1. International Financial Reporting Standards.
2. Generally Accepted Accounting Principles.
3. Including share of equity accounted investments.
4. Current year compared with prior year translated at current year exchange rates.
Earnings per share
Underlying earnings per share for the year increased by 8% to 43.5p (2016 40.3p). The in-year loss at Applied Intelligence was offset by good performance across the rest of the Group.
Basic earnings per share was 26.8p (2016 28.8p). Basic earnings per share is lower than underlying earnings per share mainly reflecting the GBP384m goodwill impairment charge taken in 2017 which is excluded from underlying earnings per share.
Earnings per share
Financial performance measures as defined by the Group 2017 2016
------------------------------------------------------- ---- --------- ---------
Underlying earnings GBP1,383m GBP1,277m
------------------------------------------------------- ---- --------- ---------
Underlying earnings per share KPI 43.5p 40.3p
------------------------------------------------------- ---- --------- ---------
Financial performance measures defined in IFRS(1)
-------------------------------------------------------- ------- -------
Profit for the year attributable to equity shareholders GBP854m GBP913m
--------------------------------------------------------- ------- -------
Basic earnings per share 26.8p 28.8p
--------------------------------------------------------- ------- -------
Reconciliation of underlying EBITA to underlying earnings GBPm GBPm
--------------------------------------------------------------------- ----- -----
Underlying EBITA 2,034 1,905
---------------------------------------------------------------------- ----- -----
Underlying interest expense (including equity accounted investments) (245) (257)
---------------------------------------------------------------------- ----- -----
1,789 1,648
--------------------------------------------------------------------- ----- -----
Taxation expense (at the underlying effective tax rate) (376) (346)
---------------------------------------------------------------------- ----- -----
Non-controlling interests (30) (25)
---------------------------------------------------------------------- ----- -----
Underlying earnings 1,383 1,277
---------------------------------------------------------------------- ----- -----
Reconciliation of underlying earnings to profit for the year attributable to equity shareholders GBPm GBPm
------------------------------------------------------------------------------------------------- ----- -----
Underlying earnings 1,383 1,277
-------------------------------------------------------------------------------------------------- ----- -----
Impact of US tax reform enacted in December 2017 40 -
-------------------------------------------------------------------------------------------------- ----- -----
Non-recurring items, post tax (10) (9)
-------------------------------------------------------------------------------------------------- ----- -----
Amortisation and impairment of intangible assets, post tax (68) (69)
-------------------------------------------------------------------------------------------------- ----- -----
Impairment of goodwill (384) -
-------------------------------------------------------------------------------------------------- ----- -----
Net interest expense on retirement benefit obligations, post tax (137) (140)
-------------------------------------------------------------------------------------------------- ----- -----
Fair value and foreign exchange adjustments on financial instruments and investments, post
tax 30 (146)
-------------------------------------------------------------------------------------------------- ----- -----
Profit for the year attributable to equity shareholders 854 913
-------------------------------------------------------------------------------------------------- ----- -----
Non-controlling interests 30 25
-------------------------------------------------------------------------------------------------- ----- -----
Profit for the year 884 938
-------------------------------------------------------------------------------------------------- ----- -----
P157 Note 7 to the Group accounts
Orders
Order intake(2) decreased by GBP2.2bn to GBP20,257m (2016 GBP22,443m). The most significant award was the production contract for the first batch of three Type 26 frigates, with GBP2.8bn of order intake in the year.
Order backlog(2) decreased by GBP0.8bn to GBP41.2bn (2016 GBP42.0bn) reflecting currency translation.
Orders
Financial performance measures as defined by the Group
------------------------------------------------------------
2017 2016
----------------------- ----- ------------- -------------
Order intake(2) KPI GBP20,257m GBP22,443m
----------------------- ----- ------------- -------------
Order backlog(2) GBP41.2bn GBP42.0bn
----------------------- ----- ------------- -------------
1. International Financial Reporting Standards.
2. Including share of equity accounted investments.
Cash flow
2017 2016(2)
Financial performance measures as defined by the Group GBPm GBPm
------------------------------------------------------- ---- ----- -------
Operating business cash flow KPI 1,752 1,004
------------------------------------------------------- ---- ----- -------
Financial performance measures defined in IFRS(1) GBPm GBPm
-------------------------------------------------- ----- -----
Net cash flow from operating activities 1,897 1,229
--------------------------------------------------- ----- -----
Reconciliation from operating business cash flow
to net cash flow from operating activities GBPm GBPm
------------------------------------------------------------------ ------- -------
Operating business cash flow KPI 1,752 1,004
------------------------------------------------------------ ---- ------- -------
Add back Net capital expenditure and financial investment 444 450
------------------------------------------------------------------ ------- -------
Deduct Dividends received from equity accounted investments (72) (38)
------------------------------------------------------------------ ------- -------
Deduct Taxation (227) (187)
------------------------------------------------------------------ ------- -------
Net cash flow from operating activities 1,897 1,229
------------------------------------------------------------------ ------- -------
Net capital expenditure and financial investment (444) (450)
------------------------------------------------------------------ ------- -------
Dividends received from equity accounted investments 72 38
------------------------------------------------------------------ ------- -------
Interest received 23 10
------------------------------------------------------------------ ------- -------
Acquisitions and disposals (11) 6
------------------------------------------------------------------ ------- -------
Net cash flow from investing activities (360) (396)
------------------------------------------------------------------ ------- -------
Interest paid (204) (210)
------------------------------------------------------------------ ------- -------
Net (purchase)/sale of own shares (1) 3
------------------------------------------------------------------ ------- -------
Equity dividends paid (684) (670)
------------------------------------------------------------------ ------- -------
Dividends paid to non-controlling interests (8) (24)
------------------------------------------------------------------ ------- -------
Cash flow from matured derivative financial instruments (83) 480
------------------------------------------------------------------ ------- -------
Movement in cash collateral (15) 32
------------------------------------------------------------------ ------- -------
Net cash flow from loans - (286)
------------------------------------------------------------------ ------- -------
Net cash flow from financing activities (995) (675)
------------------------------------------------------------------ ------- -------
Net increase in cash and cash equivalents 542 158
------------------------------------------------------------------ ------- -------
Add back Net cash flow from loans - 286
------------------------------------------------------------------ ------- -------
Add back/(deduct) Cash classified as held for sale 2 (2)
------------------------------------------------------------------ ------- -------
Foreign exchange translation 301 (621)
------------------------------------------------------------------ ------- -------
Other non-cash movements (55) 59
------------------------------------------------------------------ ------- -------
Decrease/(increase) in net debt 790 (120)
------------------------------------------------------------------ ------- -------
Opening net debt (1,542) (1,422)
------------------------------------------------------------------ ------- -------
Net debt KPI (752) (1,542)
------------------------------------------------------------ ---- ------- -------
1. International Financial Reporting Standards.
2. Re-presented to reclassify interest paid from investing to financing activities.
P187 and P188 Notes 24 and 26 to the Group accounts
Cash flow
Operating business cash flow was GBP1,752m (2016 GBP1,004m), which includes cash contributions in respect of pension deficit funding, over and above service costs, for the UK and US schemes totalling GBP271m on a funding basis.
The remainder of the advances received in 2012 on the Omani Typhoon and Hawk order, as well as European Typhoon production, are almost all now consumed. On the Saudi support contracts renewal, some GBP300m of cash was received in 2017 representing advance funding to be utilised in 2018 and 2019. Costs have been incurred against provisions created in previous years as the US commercial shipbuilding programmes are closed out. Approximately GBP100m of VAT payments rolled from December 2017 into January 2018.
Taxation payments increased to GBP227m (2016 GBP187m) in line with the increase in adjusted profit before taxation as calculated in note 6 to the Group accounts on page 155.
Net capital expenditure and financial investment was GBP444m (2016 GBP450m). As planned, capital investment was made in support of the production ramp-up in our US Electronic Systems and Combat Vehicles businesses.
Dividends received from equity accounted investments of GBP72m (2016 GBP38m) is primarily receipts from MBDA, FNSS and Advanced Electronics Company. There was a higher dividend from MBDA in 2017.
Interest received was GBP23m (2016 GBP10m).
The cash outflow in respect of acquisitions and disposals in 2017 of GBP11m reflects costs incurred in respect of the disposal of BAE Systems San Francisco Ship Repair and the acquisition of IAP Research, Inc. The cash inflow in 2016 of GBP6m reflected the sale of a 4.1% shareholding in a subsidiary company in Saudi Arabia.
Interest paid was GBP204m (2016 GBP210m).
Equity dividends paid in 2017 represents the 2016 final (GBP404m) and 2017 interim (GBP280m) dividends.
Dividends paid to non-controlling interests decreased to GBP8m (2016 GBP24m) reflecting a lower payment by Saudi Maintenance & Supply Chain Management Company in which the Group has a 51% shareholding.
There was a cash outflow from matured derivative financial instruments of GBP83m (2016 GBP480m inflow) from rolling hedges relating to balances with the Group's subsidiaries and equity accounted investments. The cash flow partially offsets the foreign exchange translation on the Group's external US dollar-denominated borrowing (see below).
Net cash flow from loans in 2016 represented repayment of a $350m (GBP286m) 3.5% bond at maturity.
Foreign exchange translation primarily arises in respect of the Group's US dollar-denominated borrowing. In 2016, this was materially offset by the cash flow from matured derivative financial instruments (see above).
Balance sheet
2017 2016
Summarised balance sheet GBPm GBPm
------------------------------------------------------------ ---- ------- -------
Intangible assets 10,378 11,264
------------------------------------------------------------------ ------- -------
Property, plant and equipment, and investment property(1) 1,977 1,999
------------------------------------------------------------------ ------- -------
Equity accounted investments and other investments 390 305
------------------------------------------------------------------ ------- -------
Working capital(1) (3,752) (3,564)
------------------------------------------------------------------ ------- -------
Group's share of the net IAS 19 pension deficit (see below) (3,920) (6,054)
------------------------------------------------------------------ ------- -------
Net tax assets and liabilities 435 935
------------------------------------------------------------------ ------- ------- Net other financial assets and liabilities 18 121 ------------------------------------------------------------------ ------- ------- Net debt KPI (752) (1,542) ------------------------------------------------------------ ---- ------- ------- Net assets held for sale 10 - ------------------------------------------------------------------ ------- ------- Net assets 4,784 3,464 ------------------------------------------------------------------ ------- -------
1. Funding received from the UK government for property, plant and equipment at Barrow-in-Furness, UK, relating to the Dreadnought submarine programme included in working capital in the Consolidated balance sheet is presented here in property, plant and equipment, and investment property.
Components of net debt GBPm GBPm ---------------------------------------------------- ---- ------- ------- Cash and cash equivalents 3,271 2,769 ---------------------------------------------------------- ------- ------- Debt-related derivative financial instrument assets 60 114 ---------------------------------------------------------- ------- ------- Loans - non-current (4,069) (4,425) ---------------------------------------------------------- ------- ------- Loans and overdrafts - current (14) - ---------------------------------------------------------- ------- ------- Net debt KPI (752) (1,542) ---------------------------------------------------- ---- ------- -------
Exchange rates
Year end 2017 2016 --------- ----- ----- GBP/$ 1.353 1.236 ---------- ----- ----- GBP/EUR 1.126 1.172 ---------- ----- ----- GBP/A$ 1.730 1.707 ---------- ----- -----
Balance sheet
The GBP0.9bn decrease in intangible assets to GBP10.4bn (2016 GBP11.3bn) mainly reflects exchange translation (GBP0.5bn) and the Applied Intelligence goodwill impairment (GBP0.4bn).
Property, plant and equipment, and investment property is GBP2.0bn (2016 GBP2.0bn).
Equity accounted investments and other investments increased to GBP390m (2016 GBP305m) reflecting the Group's share of profit for the year (GBP116m) and reduced pension allocation from the lower deficit (GBP66m), less dividends received (GBP72m).
The Group's share of the net IAS 19 pension deficit reduced to GBP3.9bn (2016 GBP6.1bn) mainly reflecting asset returns, updated mortality tables and allowances for future mortality improvements. The major movements in the net pension deficit are shown in the bridge chart below.
In November, the 2017 UK triennial funding valuations and, where necessary, deficit recovery plans were agreed with the trustees and certified by the scheme actuaries after consultation with the Pensions Regulator.
The funding deficit across the UK schemes at 31 March 2017 was GBP2.1bn. The UK accounting deficit, using like-for-like mortality assumptions and asset values at 31 December 2017, is approximately GBP3bn higher than the funding deficit. The discount rate applied to liabilities for accounting purposes reflects the yield on high-quality corporate bonds. The discount rate for funding purposes reflects a prudent assessment of expected returns on the investments held by the schemes.
Based on the new funding valuations, the Group will increase current annual deficit recovery payments to the UK schemes to GBP220m a year from 1 April 2018.
Details of the Group's pension schemes are provided in note 21 to the Group accounts on page 174.
A net deferred tax asset of GBP0.7bn (2016 GBP1.2bn) relating to the Group's pension deficit is included within net tax assets and liabilities.
In aggregate, there was a GBP0.2bn decrease in working capital largely reflecting advance funding on support contracts in Saudi Arabia and timing of VAT payments, partly offset by previous advances now largely utilised.
The Group's net debt at 31 December 2017 is GBP752m, a net decrease of GBP790m from the net debt position of GBP1,542m at the start of the year. There are no material debt maturities before 2019. The maturity of the Group's borrowings is shown in the chart on page 32.
Cash and cash equivalents of GBP3,271m (2016 GBP2,769m) are held primarily for the repayment of debt securities, pension deficit funding, payment of the 2017 final dividend and management of working capital.
Net assets held for sale represents the Aircraft Accessories and Components Company expected to be sold in 2018.
Accounting policies
Critical accounting policies
Certain of the Group's significant accounting policies are considered by the directors to be critical because of the level of complexity, judgement or estimation involved in their application and their impact on the consolidated financial statements:
Revenue and profit recognition Revenue GBP18.3bn (year ended 31 December 2017) See note 1 to the Group accounts ======================================================================================== Carrying value of goodwill Goodwill GBP10.0bn (at 31 December 2017) See note 8 to the Group accounts ======================================================================================== Deferred tax asset on retirement benefit obligations Deferred tax asset on pension/retirement scheme deficits GBP0.7bn (at 31 December 2017) See note 14 to the Group accounts ======================================================================================== Tax provisions Tax provisions GBP351m (at 31 December 2017) See note 16 to the Group accounts ======================================================================================== Retirement benefit obligations Group's share of the net IAS 19 pension deficit GBP3.9bn (at 31 December 2017) See note 21 to the Group accounts ========================================================================================
P142 For more information
Changes in accounting policies
Effective 1 January 2018, BAE Systems adopted IFRS 15, Revenue from Contracts with Customers. The Group's results announcement for the half year ending 30 June 2018 will be the first to be prepared under IFRS 15.
The new Standard does not change the way in which we manage our contracts under Lifecycle Management, our mandated project management process, or the lifetime profitability and cash flow.
Revenue on the majority of contracts, currently being recognised based on the completion of milestones or deliveries, will cumulatively be recognised earlier.
The provisional impact of restating our results for the adoption of IFRS 15 is a reduction in underlying earnings per share of 1.4p to 42.1p for the year ended 31 December 2017 and an increase in net assets of GBP57m at 31 December 2017. The restated results will be used as the comparatives for the Group's financial statements for the year ending 31 December 2018. The earnings impact on 2018 and beyond is not expected to be material.
Details of the impact of IFRS 15 are provided in note 34 to the Group accounts on page 199.
Capital
Objectives
Maintain the Group's investment grade credit rating and ensure operating flexibility, whilst:
-- meeting its pension obligations; -- pursuing organic investment opportunities;
-- paying dividends in line with the Group's policy of long-term sustainable cover of around two times underlying earnings;
-- making accelerated returns of capital to shareholders when the balance sheet allows and when the return from doing so is in excess of the Group's Weighted Average Cost of Capital; and
-- investing in value-enhancing acquisitions, where market conditions are right and where they deliver on the Group's strategy.
Policies
The Group funds its operations through a mixture of equity funding and debt financing, including bank and capital market borrowings.
The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. Three credit rating agencies publish credit ratings for the Group:
Rating Outlook Category -------- -------- ------------------ Moody's Investors Service Baa2 Stable Investment grade -------- -------- ------------------ Standard & Poor's Ratings Services BBB Stable Investment grade -------- -------- ------------------ Fitch Ratings BBB Stable Investment grade -------- -------- ------------------
P185 Note 23 to the Group accounts
Dividends
As part of the Group's capital allocation policy, the Group plans to pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings.
The Board has recommended a final dividend of 13p per share making a total of 21.8p per share for the year, an increase of 2% over 2016. At this level, the annual dividend is covered two times. Subject to shareholder approval at the 2018 Annual General Meeting, the dividend will be paid on 1 June 2018 to holders of ordinary shares registered on 20 April 2018. The ex-dividend date is 19 April 2018.
At 31 December 2017, the Company had retained earnings of GBP2.6bn (2016 GBP2.1bn), the non-distributable portion of which is GBP649m (2016 GBP604m) (see page 202). Total external dividends relating to 2017 are GBP694m (2016 GBP677m), including the interim dividend paid during the year of GBP280m (2016 GBP273m) and the final dividend proposed of approximately GBP414m (2016 GBP404m). On an annual basis, the Company receives dividends from its subsidiaries to increase further its distributable reserves and, accordingly, the Company expects to have sufficient distributable reserves to support its dividend policy.
The Group's dividend policy is underpinned by its viability and going concern statements (see page 81).
Treasury
The Group's treasury activities are overseen by the Treasury Review Management Committee (TRMC). Two executive directors are members of the TRMC, including the Group Finance Director who chairs the Committee. The TRMC also has representatives with legal and tax expertise. The Group operates a centralised treasury department that is accountable to the TRMC for managing treasury activities in accordance with the treasury policies approved by the Board.
Objectives/policies
Net debt
Maintain a balance between the continuity, flexibility and cost of debt funding through the use of borrowings from a range of markets with a range of maturities, currencies and interest rates, reflecting the Group's risk profile.
-- Material borrowings are arranged by the central treasury department and funds raised are lent onward to operating subsidiaries as required.
Interest rates
Manage the exposure to interest rate fluctuations on borrowings through varying the proportion of fixed rate debt relative to floating rate debt with derivative instruments, including interest rate and cross-currency swaps.
-- A minimum of 50% and a maximum of 90% of gross debt is maintained at fixed interest rates.
Liquidity
Maintain adequate undrawn committed borrowing facilities.
-- An undrawn committed Revolving Credit Facility of GBP2bn contracted to December 2018 and GBP1.9bn contracted from December 2018 to December 2020 is available to meet expected general corporate funding requirements.
Monitor and control counterparty credit risk and credit limit utilisation.
-- The Group adopts a conservative approach to the investment of its surplus cash. It is deposited with financial institutions with strong credit ratings for short periods.
Currency
Reduce the Group's exposure to transactional volatility in earnings and cash flows from movements in foreign currency exchange rates.
-- All material firm transactional exposures are hedged.
-- The Group does not hedge the translation effect of exchange rate movements on the income statements or balance sheets of foreign subsidiaries and equity accounted investments it regards as long-term investments.
P190 Note 28 to the Group accounts
Tax strategy
The Group's tax strategy is to:
-- ensure compliance with all applicable tax laws and regulations; and
-- manage the Group's tax expense in a way that is consistent with its values and its legal obligations in all relevant jurisdictions.
The Group does not tolerate activities designed to facilitate tax evasion offences.
The Group promotes collaborative professional working with tax authorities in order to build open, transparent and trusted relationships. As part of this, the Group engages in open and early dialogue to discuss tax planning, strategy, risks and significant transactions, and discloses any significant uncertainties in relation to tax matters. Queries and information requests by tax authorities are responded to in a timely fashion and the Group ensures that tax authorities are kept informed about how issues are progressing. The Group seeks to resolve issues in real time and before returns are filed where possible. Fair, accurate and timely disclosures are made in tax returns, reports and documents that the Group files with, or submits to, tax authorities. Where disagreements over tax arise, the Group works proactively to seek to resolve all issues by agreement (where possible) and reach reasonable solutions. In the UK, the Group is subject to an annual risk assessment by HM Revenue & Customs and strives to achieve as low a risk rating as can be achieved by a group of BAE Systems' size and complexity.
Whilst the Group aims to maximise the tax efficiency of its business transactions, it does not use structures in its tax planning that are contrary to the intentions of the relevant legislature. The Group interprets relevant tax laws in a reasonable way and ensures that transactions are structured in a way that is consistent with a relationship of co-operative compliance with tax authorities. It also actively considers the implications of any planning for the Group's wider corporate reputation.
The Group is open and transparent with regard to decision-making, governance and tax planning in its business, keeping tax authorities informed of who has responsibility, how decisions are reached, how the business is structured and where different parts of the business are located.
BAE Systems operates internationally and is subject to tax in many different jurisdictions. The Group employs professional tax managers and takes appropriate advice from reputable professional firms. The Group is routinely subject to tax audits and reviews which can take a considerable period of time to conclude. Provision is made for known issues based on management's interpretation of country-specific legislation and the likely outcome of negotiations or litigation. The assessment and management of tax risks are regularly reviewed by the Audit Committee, as is the Group's tax strategy.
Arm's-length principles are applied in the pricing of all intra-group transactions of goods and services in accordance with Organisation for Economic Co-operation and Development guidelines. Where appropriate, the Group engages with governments in relation to proposed legislation and tax policy. The Group endorses the statement of tax principles issued by the Confederation of British Industry in May 2013 (www.cbi.org.uk/cbi-prod/assets/File/pdf/statement-of-tax-principles.pdf).
P154 Note 6 to the Group accounts
Chart, note and page references used above refer to the Annual Report 2017 that can be viewed on the Company's website.
Principal risks
Risks are identified based on the likelihood of occurrence and the potential impact on the Group. The Group's principal risks are identified below, together with a description of how we mitigate those risks.
Description Impact Mitigation
------------------------- -----------------------------------------------------------
1. Defence spending
The Group is dependent on defence spending.
----------------------------------------------------------------------------------------------------------------------
In 2017, 92% of the Lower defence spending by The business is geographically spread across US, UK and
Group's sales were the Group's major international defence markets:
defence-related. customers could have a * In the US, after seven months under a Continuing
Defence spending by material adverse effect Resolution that maintained funding at the prior
governments can fluctuate on the Group's future year's level, the fiscal year 2017 defence budget
depending on change of results and financial ultimately rose by approximately 4%. Whilst the
government policy, other condition. fiscal year 2018 budget remains under a Continuing
political considerations, Resolution, the bipartisan budget agreement passed on
budgetary constraints, 9 February 2018 would increase the US defence budget
specific threats and by approximately 10% over current levels, reflecting
movements in the continued growth in defence spending to $700bn
international (GBP518bn) for the fiscal year ending 30 September
oil price. 2018. This budget agreement increases the budget caps
There have been for two years and extends the Continuing Resolution
constraints on government to 23 March 2018 to allow lawmakers to pass a 2018
expenditure in a number of spending bill. The US business has become adept at
the Group's principal managing through Continuing Resolutions and brief
markets, in particular in government shutdowns, mitigating any short-term
the US and UK. A National interruptions across our portfolio.
Security Capability Review
is being undertaken
by the Cabinet Office, and * The UK is Europe's largest defence market and, after
a Modernising Defence a period of budgetary decline, defence spending has
Programme was announced in stabilised. The 2017 Spring Budget reinforced
January 2018 by previous commitments to increase defence spending, as
the Defence Secretary. The well as the continued pledge to maintain spending at
outcome of both is aimed 2% of GDP.
to be announced by the
summer of 2018.
The result of the EU * In Saudi Arabia, regional tensions continue to
referendum in the UK has dictate that defence remains a high priority.
led to a period of
uncertainty and, in the
longer The diverse product and services portfolio is marketed
term, there is a risk across a range of defence markets.
relating to the Group's BAE Systems benefits from a large order backlog, with
ability to participate in established positions on long-term programmes
further collaborative in the US, UK, Saudi Arabia and Australia.
defence programmes in BAE Systems has a growing portfolio of commercial
Europe. businesses, including commercial avionics
and the commercial areas of the Applied Intelligence
business.
We will support the government in achieving its aim to
ensure that the UK maintains its key
role in European security and defence post-Brexit, and to
strengthen bilateral relationships
with key partners in Europe. This will be important for
ongoing collaboration in the development
of defence capabilities.
-------------------------- ------------------------- -----------------------------------------------------------
Description Impact Mitigation
------------------------- -----------------------------------------------------------
2. Government customers
The Group's largest customers are governments.
----------------------------------------------------------------------------------------------------------------------
The Group has Deterioration in the Government customers have sophisticated procurement and
long-standing Group's principal security organisations with which
relationships and security government relationships the Group can have long-standing relationships with
arrangements with a number resulting in the failure well-established and understood terms
of its government to of business.
customers, including its obtain contracts or In the event of a customer terminating a contract for
three largest customers, expected funding convenience, the Group would typically
the governments of the US, appropriations, adverse be paid for work done and commitments made at the time of
UK and Saudi changes in the terms of termination.
Arabia, and their its arrangements
agencies. It is important with those customers or
that these relationships their agencies, or the
and arrangements are termination of contracts
maintained. could have a material
In the defence and adverse effect on the
security industries, Group's future results
governments can typically and financial condition.
modify contracts for their
convenience or terminate
them at short notice.
Long-term US government
contracts, for example,
are funded annually and
are subject to
cancellation if funding
appropriations for
subsequent
periods are not made.
Governments also from time
to time review their terms
of trade and underlying
policies and seek to
impose such new terms and
policies when entering
into new contracts.
The Group's performance on
its contracts with some
government customers is
subject to financial
audits and other reviews
which can result in
adjustments to prices and
costs.
Description Impact Mitigation
------------------------------------- ------------------------------------- ------------------------------------
3. International markets
The Group operates in international markets.
----------------------------------------------------------------------------------------------------------------------
BAE Systems is an international The occurrence of any such events The Group has a balanced portfolio
company conducting business in a could have a material adverse effect of businesses across a number of
number of regions, including on the Group's future markets internationally.
the US and the Middle East. results and financial condition. The Group benefits from a large
The risks of operating in some order backlog, with established
countries include: social and positions on long-term programmes
political changes impacting the in the US, UK, Saudi Arabia and
business environment; economic Australia.
downturns, political instability and The Group's policy is to hedge all
civil disturbances; the material firm transactional currency
imposition of restraints on the exchange rate exposures.
movement of capital; the introduction The Group's contracts are often
of burdensome taxes long-term in nature and,
or tariffs; change of government consequently, it may be able to
policy and regulations in the UK, US mitigate
and all other relevant these risks over the terms of those
jurisdictions; and the inability to contracts.
obtain or maintain the necessary Political risk insurance is held in
export licences. respect of export contracts not
The Group is exposed to volatility structured on a
arising from movements in currency government-to-government
exchange rates, particularly basis.
in respect of the US dollar, euro, BAE Systems has a well-established
Saudi riyal and Australian dollar. legal and regulatory compliance
There has been volatility structure aimed at ensuring
in currency exchange rates in the adherence to regulatory requirements
period since the EU referendum in the and identifying restrictions that
UK. could adversely impact
In July 2017, the High Court of the Group's activities, including
England and Wales ruled that the UK export control requirements.
government has been acting
lawfully in granting defence export
licences to the Kingdom of Saudi
Arabia. The Court of
Appeal is currently considering
whether to permit an appeal of the
High Court's decision.
4. Competition in international markets
The Group's business is subject to significant competition in international markets.
----------------------------------------------------------------------------------------------------------------------
The Group's business plan depends The Group's business and future The Group has an international,
upon its ability to win and contract results may be adversely impacted if multi-market presence, a balanced
for high-quality new it is unable to compete portfolio of businesses,
programmes, an increasing number of adequately and obtain new business in leading capabilities and a track
which are expected to be in markets the markets in which it operates. record of delivery on its
outside the US and commitments to its customers.
UK. The Group continues to invest in
The Group is dependent upon US and UK research and development, and to
government support in relation to a reduce its cost base and
number of its business improve efficiencies, to remain
opportunities in export markets. competitive.
In the UK, export contracts can be
structured on a
government-to-government basis and
government
support can also involve military
training, ministerial support for
promotional activities
and financial support through UK
Export Finance. In the US, most of
the Group's defence export
sales are delivered through the
Foreign Military Sales process,
under which the importing
government contracts with the US
government.
Description Impact Mitigation
------------------------- ------------------------------------
5. Laws and regulations
The Group is subject to risk from a failure to comply
with laws and regulations.
--------------------------------------------------------------------------------------------------------------------
The Group operates Failure by the BAE Systems has a well-established
in a highly-regulated Group, or its legal and regulatory
environment across sales representatives, compliance structure
many jurisdictions marketing advisers aimed at ensuring adherence
and is subject, or others acting to regulatory requirements
without limitation, on its behalf, and identifying restrictions
to regulations relating to comply with that could adversely
to import-export these regulations impact the Group's activities.
controls, money could result Internal and external
laundering, false in fines and market risk assessments
accounting, anti-bribery penalties and/or form an important element
and anti-boycott the suspension of ongoing corporate
provisions. It is or debarment development and training
important that the of the Group processes.
Group maintains from government A uniform global policy
a culture in which contracts or and process for the
it focuses on embedding the suspension appointment of advisers
responsible business of the Group's engaged in business
behaviours and that export privileges, development is in effect.
all employees act which could BAE Systems continues
in accordance with have a material to reinforce its ethics
the requirements adverse effect programme globally,
of the Group's policies, on the Group. driving the right behaviours
including the Code Reduced access by supporting employees
of Conduct, at all to export markets in making ethical decisions
times. could have a and embedding responsible
Export restrictions material adverse business practices.
could become more effect on the The special compliance
stringent and political Group's future officer, appointed pursuant
factors or changing results and to commitments concerning
international circumstances financial condition. ongoing regulatory compliance
could result in made in the course of
the Group being the 2011 settlement
unable to obtain with the US Department
or maintain necessary of State, concluded
export licences. his monitorship in May
2014 and, at the invitation
of BAE Systems, agreed
to remain in a limited
capacity for a limited
further period of time.
6. Contract risk and execution
The Group has many contracts, including a small number
of large contracts and fixed-price contracts.
--------------------------------------------------------------------------------------------------------------------
In 2017, 47% of The inability Contract-related risks
the Group's sales of the Group and uncertainties are
were generated by to deliver on managed under the Group's
its 15 largest programmes. its contractual mandated Lifecycle Management
At 31 December 2017, commitments, process.
the Group had five the loss, expiration, A leadership development
programmes with suspension, programme for project
order backlog in cancellation directors has been deployed
excess of GBP1bn. or termination across the Group, covering
A significant portion of any one of the leadership competencies
of the Group's revenue its large contracts required to manage complex
is derived from or its failure projects containing
fixed-price contracts. to anticipate significant levels of
Actual costs may technical problems risk and uncertainty.
exceed the projected or estimate A significant proportion
costs on which the accurately and of the Group's largest
fixed prices are control costs contracts are with the
agreed and, since on fixed-price UK Ministry of Defence.
these contracts contracts could In the UK, development
can extend over have a material programmes are normally
many years, it can adverse effect contracted with appropriate
be difficult to on the Group's levels of risk being
predict the ultimate future results initially held by the
outturn costs. and financial customer and contract
It is important condition. structures are used
that the Group maintains to mitigate risk on
a culture in which production programmes,
it delivers on its including where the
projects within customer and contractor
tight tolerances share cost savings and
of quality, time overruns against target
and cost performance prices.
in a reliable, predictable The Group has a well-balanced
and repeatable manner. spread of programmes
and significant order
backlog which provides
forward visibility.
The Group has limited
exposure to fixed-price
design and development
activity which is in
general more risk intensive
than fixed-price production
activity.
Robust bid preparation
and approvals processes
are well established
throughout the Group,
with decisions required
to be taken at the appropriate
level in line with clear
delegations of authority.
Description Impact Mitigation
------------------------- ------------------------------------
7. Contract awards and cash profiles
The Group is dependent on the award timing and cash
profile of its contracts.
--------------------------------------------------------------------------------------------------------------------
The Group's profits Amounts receivable The Group's balance
and cash flows are under the Group's sheet continues to be
dependent, to a defence contracts managed conservatively
significant extent, can be substantial in line with its policy
on the timing of, and, therefore, to retain an investment
or failure to receive, the timing of, grade credit rating
award of defence or failure to and to ensure operating
contracts and the receive, awards flexibility.
profile of cash and associated The Group monitors a
receipts on its cash advances rolling forecast of
contracts. and milestone its liquidity requirements
payments could to ensure that there
materially affect is sufficient cash to
the Group's meet its operational
profits and needs and maintain adequate
cash flows for headroom.
the periods
affected, thereby
reducing cash
available to
meet the Group's
cash allocation
priorities,
potentially
resulting in
the need to
arrange external
funding and
impacting its
investment grade
credit rating.
8. Pension funding
The Group has an aggregate funding deficit in its defined
benefit pension schemes.
----------------------------------------------------------------------------------------------------------------------
In aggregate, there Increases in In the UK, new employees
is an actuarial pension scheme have been offered membership
deficit between deficits may of defined contribution
the value of the require the rather than defined benefit
projected liabilities Group to increase schemes since April 2012
of the Group's defined the amount of and, in the US, employees
benefit pension cash contributions have not accrued salary-related
schemes and the payable to these benefits in defined benefit
assets they hold. schemes, thereby schemes since January
The funding deficits reducing cash 2013.
may be adversely available to In November, the 2017
affected by changes meet the Group's UK triennial funding
in a number of factors, other cash allocation valuations and, where
including investment priorities. necessary, deficit recovery
returns and anticipated plans were agreed with
members' longevity. the trustees and certified
by the scheme actuaries
after consultation with
the Pensions Regulator.
The funding deficit across
the UK schemes at 31
March 2017 was GBP2.1bn.
Based on the new funding
valuations, the Group
will increase current
annual deficit recovery
payments to the UK schemes
to GBP220m a year from
1 April 2018. The deficits
in each of the schemes
are expected to be cleared
between 2021 and 2026.
Under the last agreement
made in 2014, all scheme
deficits were only projected
to be cleared in 2026.
Description Impact Mitigation
------------------------------------- ------------------------------------
9. Information technology security
The Group could be negatively impacted by information technology security threats.
----------------------------------------------------------------------------------------------------------------------
The security threats faced by the Failure to combat these risks The Group has a broad range of
Group include threats to its effectively could negatively impact measures in place, including
information technology the Group's reputation among appropriate tools and techniques,
infrastructure, its customers and the public, cause to monitor and mitigate this risk.
unlawful attempts to gain access to disruption to its business
its proprietary or classified operations, and could result
information and the potential in a negative impact on the Group's
for business disruptions associated future results and financial
with information technology condition.
failures.
10. People
The Group's strategy is dependent on its ability to recruit and retain people with appropriate
talent and skills.
----------------------------------------------------------------------------------------------------------------------
Delivery of the Group's strategy The loss of key employees or The Group recognises that its
and business plan is dependent on inability to attract the appropriate employees are key to delivering its
its ability to compete people on a timely basis strategy and business plan,
to recruit and retain people with could adversely impact its ability to and focuses on developing the
appropriate talent and skills, deliver its strategy, meet the existing workforce and hiring
including those with innovative business plan and, accordingly, talented people to meet current
technological capabilities. have a negative impact on the Group's and future requirements.
The Group's business plan is future results and financial The Group has well-established
targeting an increasing level of condition. graduate recruitment and
business in international export apprenticeship programmes and, in
markets outside the US and UK. It order to maximise the contribution
is important that the Group that its workforce can make to the
recruits and retains management performance of the business,
with the necessary international has an effective through-career
skills and experience in the capability development programme.
relevant jurisdictions. In order to seek to maximise its
talent pool, the Group is committed
to creating a diverse
and inclusive environment for its
employees.
Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an adverse effect on the business or financial condition of the Group.
Segmental review
Electronic Systems
Electronic Systems comprises the US and UK-based electronics activities, including electronic warfare systems, electro-optical sensors, military and commercial digital engine and flight controls, precision guidance and seeker solutions, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.
Electronic Combat includes the Integrated Electronic Warfare, Low Observable Tactical Aircraft Electronic Warfare and Tactical Aircraft Electronic Warfare product lines. The business provides a depth of capability in integrated electronic warfare systems for airborne applications, including electronic support, electronic attack and electronic protection technologies.
Survivability, Targeting & Sensing exploits the electro-optical and infrared spectrum to provide leading threat warning and infrared countermeasures systems, precision guidance and seeker solutions, advanced targeting solutions, head-up displays and state-of-the-art tactical imaging systems.
C4ISR Systems addresses the market for actionable intelligence through innovative technical solutions for airborne persistent surveillance, identification systems, signals intelligence, underwater and surface warfare solutions, and space products.
Controls & Avionics addresses the commercial and military aircraft electronics markets, including fly-by-wire flight controls, full authority digital engine controls, flight deck systems, cabin management systems and mission computers.
Power & Propulsion Solutions delivers electric propulsion and power management performance, with innovative products and solutions that advance vehicle mobility, efficiency and capability in the transit, military, marine and rail markets.
P06 Alternative performance measure definitions
Operational and strategic highlights
-- Orders worth over $450m (GBP333m) received for F-35 Lightning II hardware production and support
-- Invested more than $100m (GBP74m) in our 'Ramp to Rate' initiative to prepare the business for future Electronic Warfare growth
-- Received a $311m (GBP230m) contract to provide the Digital Electronic Warfare System (DEWS) to support the sale of new aircraft to an international customer
-- Growing demand for APKWS(TM) laser-guided rockets, with awards totalling approximately $300m (GBP222m) during the year
-- LiteHUD(R) Head-Up Display selected by critical launch customers, with first flights in 2017
-- The FADEC Alliance joint venture transitioned to Full-Rate Production of the full authority digital engine control for the LEAP commercial aircraft engine
-- Major milestone achieved with the delivery of our 8,000th hybrid-electric system
Financial performance
Financial performance measures as defined by the Group
2017 2016
----------------------------- ---- --------- ---------
Sales KPI GBP3,635m GBP3,282m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP562m GBP494m
----------------------------- ---- --------- ---------
Return on sales 15.5% 15.1%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP450m GBP469m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP4,175m GBP3,322m
----------------------------- ---- --------- ---------
Order backlog(1) GBP5.4bn GBP5.2bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2017 2016
------------------------------------ --------- ---------
Revenue GBP3,635m GBP3,282m
------------------------------------ --------- ---------
Operating profit GBP542m GBP474m
------------------------------------ --------- ---------
Return on revenue 14.9% 14.4%
------------------------------------- --------- ---------
Cash flow from operating activities GBP569m GBP568m
------------------------------------- --------- ---------
-- Sales compared with 2016 were up 5% at $4.7bn (GBP3.6bn). The growth came in the electronic warfare business from the F-35 Lightning II and DEWS programmes, as well as increasing classified activity. Volumes of the APKWS(TM) product almost doubled over the year and now represent one of the top five sales lines.
-- The return on sales achieved of 15.5% (2016 15.1%) reflects continued strong programme execution and risk retirement.
-- Cash conversion of underlying EBITA for the full year was at 85% (2016 97%), excluding pension deficit funding.
-- Order backlog was at a record high of $7.3bn (GBP5.4bn) following further awards for F-35 Lightning II systems, classified Electronic Warfare activity and APKWS(TM) product.
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
Operational performance
Electronic Combat
BAE Systems has sustained its leadership position in the US electronic warfare market and production is ramping up across a number of programmes, some of which are classified.
Low-Rate Initial Production (LRIP) hardware deliveries for the F-35 Lightning II programme continue with Lot 10 and 11 deliveries. We have received initial Lot 12 funding, with an anticipated final award value in excess of $300m (GBP222m), and a Request for Proposal for a potential block buy encompassing multiple lots.
BAE Systems reached a price agreement with Lockheed Martin on a $155m (GBP115m) Electronic Warfare Performance Based Logistics contract. The award provides Electronic Warfare material availability and support for the F-35 Lightning II aircraft over a five-year period.
The business is under contracts from Boeing and Warner Robins Air Logistics Complex, totalling more than $1.0bn (GBP0.7bn), to install the Digital Electronic Warfare System on select new F-15 aircraft, upgrade existing F-15 aircraft, and to provide spare units and modules for an international customer. The programme remains on schedule. BAE Systems has also received a $311m (GBP230m) contract to provide the Digital Electronic Warfare System to support the sale of new F-15 aircraft to another international customer.
Following our selection by Boeing in 2015 to develop and manufacture the next-generation digital electronic warfare system for the US Air Force's Eagle Passive Active Warning Survivability System programme to upgrade up to 400 F-15 aircraft, we are currently executing the $161m (GBP119m) engineering and manufacturing development contract. The programme could be worth more than $1.0bn (GBP0.7bn) over its life.
We have been awarded $87m (GBP64m) worth of modifications to a competitively awarded contract for an electronic warfare system for the US Air Force Special Operations Command's fleet of C-130J aircraft. The total value of the contract, including all options, could exceed $300m (GBP222m). This award extends our position to include our electronic warfare capabilities on large, fixed-wing aircraft.
Production of our sensor technology for the Long Range Anti-Ship Missile has commenced following a $40m (GBP30m) order from prime contractor Lockheed Martin. We provided the sensor technology that supported a successful launch of the missile, demonstrating its ability to address the US Navy's requirement for versatile, multi-platform precision munitions that enable distributed operations.
For over a decade, we have provided full lifecycle support as the prime mission system integrator for the US Air Force's EC-130H Compass Call stand-off electronic attack platform. We are under contract to cross-deck the mission electronics onto a new Gulfstream G550 business jet for the US Air Force. BAE Systems will continue to sustain the existing EC-130H electronics as we develop, manufacture, procure, integrate and sustain the electronics. The programme could be worth more than $2.0bn (GBP1.5bn) over the next decade.
Due to the sensitive nature of electronic combat systems and technology, many of our programmes are classified. As a world leader in electronic warfare, we continue to experience growth in these increasingly important areas.
Survivability, Targeting & Sensing
Our Advanced Precision Kill Weapon System (APKWS(TM)) laser-guided rocket is experiencing growing demand, with over 13,000 units delivered as at 31 December 2017. In addition to expanding its use in the US military, the system is generating strong international attention, with 19 nations expressing interest. The programme received awards totalling approximately $300m (GBP222m) during the year.
We continue to execute on the Terminal High-Altitude Area Defence programme. We have received a $30m (GBP22m) production contract for long-lead material on Lots 9 and 10, and anticipate that additional units will be added in response to increasing demand.
On the $236m (GBP174m) Common Missile Warning System programme, we continue to deliver to schedule.
Under the five-year, $434m (GBP321m) Enhanced Night Vision Goggle III and Family of Weapon Sights - Individual Indefinite Delivery, Indefinite Quantity contract, we continued to progress the production qualification testing.
The US Army's Family of Weapon Sights - Crew Served programme completed its System Critical Design Review during the year. This seven-year contract awarded in 2016 has a potential value of up to $384m (GBP284m).
The LiteHUD(R) Head-Up Display has been selected by critical launch customers for integration on multiple platforms. In 2017, it had its first flights on a C-130J aircraft, a Textron Scorpion jet and our advanced Hawk demonstrator aircraft.
In December, the US Department of Defense announced that we were awarded a contract by the US Army for the Limited Interim Missile Warning System programme.
C4ISR Systems
In September, the Communications & Navigation Solutions product line joined the Intelligence, Surveillance & Reconnaissance business to form a new C4ISR Systems business that spans the entire mission lifecycle (sensing, processing, exploitation and dissemination).
As a leading provider of space-qualified subsystems and components, we continue to experience growth in the areas of integrated on-board processors, reconfigurable processing payloads and secure communications.
We have been awarded an $81m (GBP60m) contract for the Network Tactical Common Data Link programme to provide the US Navy with the ability to simultaneously transmit and receive real-time intelligence, surveillance and reconnaissance data over multiple data links with a system to be fielded on various surface ship types.
Since winning the Geospatial Data Services Foundational GEOINT Content Management programme in 2014, we have been awarded orders valued at $214m (GBP158m). The business is meeting all delivery requirements in assisting US intelligence community customers with the development of advanced geospatial intelligence data collection and processing solutions.
As a provider of signals intelligence capabilities, we are executing the $132m (GBP98m) Tactical Signals Intelligence Payloads programme for the US Army's Gray Eagle unmanned aircraft.
Work continues on the US Navy's P-8A Poseidon maritime surveillance aircraft programme to provide state-of-the-art processing capabilities. The programme is expected to be worth $1.2bn (GBP0.9bn) over its life.
Controls & Avionics
BAE Systems is a major supplier of engine controls, flight controls, and cabin and flight deck systems. The development of the integrated flight control electronics and remote electronic units for Boeing's next-generation 777X aircraft remains on schedule, with all hardware in qualification and systems integration testing progressing to plan.
On the Boeing 737 MAX aircraft, a successful first flight was completed on the MAX 9 with our spoiler controls, flight deck systems and utilities electronics.
The development of our civil active inceptors is progressing, with Gulfstream G500 and Embraer KC390 aircraft continuing flight tests with positive pilot feedback. A derivative of the civil inceptors for the Boeing CH-47 Chinook helicopter, LinkEdge(TM) (Active Parallel Actuation Subsystem), has successfully completed its Preliminary Design Review.
FADEC Alliance, a joint venture between FADEC International (our joint venture with Safran Electronics & Defense) and GE Aviation, has transitioned the full authority digital engine control (FADEC) for the LEAP engine to Full-Rate Production. The LEAP engine powers the Airbus A320neo, the Boeing 737 MAX and the Comac C919. The development of the FADEC for the GE9x engine for the Boeing 777X is on schedule, with certification planned for 2018.
On the F-35 Lightning II programme, LRIP Lot 11 is ongoing for the current vehicle management computer and active inceptor system equipment. Orders for Lot 12 are expected in 2018.
BAE Systems has been awarded a multi-million dollar contract to provide flight control computers, active inceptors, accelerometers and integrated colour display systems for new Taiwanese Air Force training aircraft. The award establishes our footprint on a new platform.
Power & Propulsion Solutions
With the transit bus market continuing its shift towards more electric bus systems to meet emission targets and to satisfy an environmentally-conscious public, BAE Systems achieved a major milestone with the delivery of its 8,000th hybrid-electric system. Transit operators around the world are looking for reliable, low-emission technologies and major cities, such as Seattle, Boston, Quebec, London and Paris, are adopting our advanced hybrid solutions, which are capable of emission-free driving up to half of the time.
P56 Re-presentation of 2017 results
Looking forward
Forward-looking information for the Electronic Systems reporting segment is provided later in this report.
P58 Segmental looking forward
Cyber & Intelligence
Cyber & Intelligence comprises the US--based Intelligence & Security business and UK--headquartered Applied Intelligence business, and covers the Group's cyber security, secure government, and commercial and financial security activities.
Intelligence & Security delivers a broad range of services to the US military and government.
Global Analysis & Operations provides innovative, mission-enabling analytic solutions and support to the US government.
Integrated Electronics & Warfare Systems provides systems engineering, integration and through-life support services for US defence and coalition partner customers.
IT Solutions delivers secure solutions and services that enable US national security customers to perform mission-sensitive operations and protect their data and networks.
Applied Intelligence provides data intelligence solutions which enable governments and commercial organisations to defend against national-scale threats, protect their networks and data against sophisticated attacks and operate successfully in cyberspace. Its solutions are delivered as licensed technologies, software-as-a-service subscriptions, through outsourced managed services, and via consulting and systems integration projects.
UK Services delivers cyber security, data analytics, and digital transformation consulting and systems integration services to national security, government and large enterprises in the UK.
International Services & Solutions provides cyber intelligence and defence solutions to international government agencies and communications service providers.
Commercial Solutions provides cyber defence, counter-fraud and financial compliance products to commercial organisations globally.
P06 Alternative performance measure definitions
Operational and strategic highlights
Intelligence & Security
-- Six task orders secured valued at more than $180m (GBP133m) for Full-Motion Video Intelligence, Surveillance and Reconnaissance analysis support
-- Won a position on a US Department of Treasury programme to support the Office of Terrorism and Financial Intelligence, with a maximum lifecycle value of $135m (GBP100m)
-- Awarded three US Navy contracts with an estimated lifecycle value of approximately $180m (GBP133m) to provide engineering and integration support for critical mission systems
-- Selected by the US Navy to pursue orders to provide equipment and support services for Space and Naval Warfare Systems Center Atlantic
Applied Intelligence
Contracts won with UK government and commercial customers for secure IT transformation and cyber defence
Restructuring activities under way, including headcount and facility reductions and a move to a revised operating model, effective 1 January 2018, to drive profitable growth
Financial performance
Financial performance measures as defined by the Group
2017 2016
----------------------------- ---- --------- ---------
Sales KPI GBP1,820m GBP1,778m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP52m GBP90m
----------------------------- ---- --------- ---------
Return on sales 2.9% 5.1%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP116m GBP83m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP1,859m GBP1,885m
----------------------------- ---- --------- ---------
Order backlog(1) GBP2.1bn GBP2.4bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2017 2016
------------------------------------ --------- ---------
Revenue GBP1,820m GBP1,778m
------------------------------------ --------- ---------
Operating (loss)/profit GBP(367)m GBP59m
------------------------------------- --------- ---------
Return on revenue (20.2)% 3.3%
------------------------------------- --------- ---------
Cash flow from operating activities GBP127m GBP106m
------------------------------------- --------- ---------
-- In aggregate, sales were marginally lower at $2.3bn (GBP1.8bn). The Intelligence & Security business saw a 4% decrease largely in the highly competitive area of IT support services to the intelligence community. Growth in Applied Intelligence was at 6%, benefiting from increases in the UK Services and International Services & Solutions divisions.
-- Return on sales was 2.9% (2016 5.1%), after a restructuring charge taken in the Applied Intelligence business. Return on sales in the Intelligence & Security business was similar to last year at 8.8%. In Applied Intelligence, the underlying loss for the year was GBP61m, including GBP24m for the restructuring charge. The first half loss of GBP27m was followed by a reduced second half loss, before the restructuring charge, of GBP10m as the cost-reduction actions under the ongoing restructuring started to deliver bottom-line benefit.
-- There was an operating loss of GBP367m (2016 profit GBP59m), which includes a GBP384m goodwill impairment in Applied Intelligence reflecting the future level and timing of expected returns from the business.
-- Cash conversion of underlying EBITA for the year was in excess of 100%. -- Order backlog reduced marginally to $2.9bn (GBP2.1bn).
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
Operational performance
Intelligence & Security
Global Analysis & Operations
We are pursuing task orders under a new Indefinite Delivery, Indefinite Quantity contract with an estimated value of more than $400m (GBP296m) to expand our work in motion-imagery analysis, analytic training, multi-media support and research for the US intelligence community. During the year, the business secured six task order contracts valued at more than $180m (GBP133m).
We won a position on a US Department of Treasury programme to support the Office of Terrorism and Financial Intelligence. The maximum lifecycle value of all task orders to be awarded under the programme is estimated at $135m (GBP100m).
Integrated Electronics & Warfare Systems
The business is executing on the second year of a five-year, sole-source contract worth up to $368m (GBP272m) to provide systems engineering services to the US Navy's Strategic Systems Programs office. The programme provides support for weapons systems on board US Ohio and UK Vanguard Class submarines, as well as future Ohio Class replacement and UK Dreadnought Class submarines.
US Navy contract awards in the year include: a new five-year, $42m (GBP31m) multiple-award contract with the Naval Undersea Warfare Center Division to install submarine multi-mission trainer systems at bases in the US, Guam and Australia; a 22-month, $76m (GBP56m) contract to support the rapid design, development, fabrication, customisation and lifecycle maintenance of new and existing communication and electronic platforms for the Naval Warfare Center Aircraft Division; and a five-year, $64m (GBP47m) contract to provide lifecycle systems engineering and technical support for a variety of deployed systems that ensure operational readiness of the fleet.
In addition, the US Navy awarded BAE Systems a position on a five-year Indefinite Delivery, Indefinite Quantity contract to provide research, development, test and evaluation services support for the Naval Warfare Center Aircraft Division's Aircraft Prototype Systems Division. The potential lifecycle value of all task orders under this contract across the eight awardees could reach $487m (GBP360m).
The US Navy has also selected BAE Systems to provide equipment and support services for Space and Naval Warfare Systems Center Atlantic. As one of several companies involved, we will pursue future orders as part of this five-year, Indefinite Delivery, Indefinite Quantity contract. The total value of all orders to be awarded over the life of the contract is estimated at $180m (GBP133m).
On the US Air Force Intercontinental Ballistic Missile Integration Support Contractor programme, we were awarded over $29m (GBP21m) of additional engineering change proposals in 2017, raising the total lifecycle value of the contract to $922m (GBP682m). Our work includes programme management, systems sustainment, and cyber security assessment and defence.
We continue to pursue task orders on a nine-year Indefinite Delivery, Indefinite Quantity contract to support the US Army in developing next-generation technologies for space, high-altitude and missile defence.
IT Solutions
Our contract to connect a number of US agencies under one shared IT environment passed significant security testing and was authorised for adoption into the government IT infrastructure. Although we executed on our task orders and provided IT services to foster greater systems integration and information sharing for the intelligence community, we have been advised that future contract options will not be exercised as the government reassesses its acquisition strategy in favour of a more federated desktop approach. We therefore do not anticipate any future awards beyond the $164m (GBP121m) of funding to date.
Our business was awarded a contract increase of $160m (GBP118m) to extend the period of performance of a major software development and IT support contract for a US intelligence community customer.
We received a five-year, $41m (GBP30m) contract with the US Department of Homeland Security, National Protection and Programs Directorate to provide data analytics, risk scoring and systems engineering support, as well as cyber security assessment, governance and training to ensure all federal civilian agencies are in compliance with government cyber security regulations.
Organisational changes
Effective 12 February 2018, the business moved to a revised operating model to position for growth through three customer-focused business areas: Integrated Defence Solutions; Intelligence Solutions; and Air Force Solutions.
Applied Intelligence
The business has delivered revenue growth from the continued delivery of national security solutions for the UK and international governments, as well as deployment of anti-fraud, regulatory compliance, and cyber security products and services to commercial customers.
UK Services
The business continues to invest in engineering disciplines and specialist expertise in the cyber, digital and data domains to support our customers in national security intelligence, national-scale cyber defence, commercial cyber security and regulatory compliance.
We have won a number of contracts with both UK government and commercial enterprises, helping our customers to maximise the benefits of secure IT transformation and cyber defence.
International Services & Solutions
The business was underpinned by significant demand for our national-scale cyber defence capabilities. We continue to work with key national security customers in Asia-Pacific and the Middle East. Our technical capability in multi-source intelligence analytics has advanced significantly. In order to improve the cost competitiveness of our engineering, we are continuing to expand our off-shore service operations and delivery centres.
Commercial Solutions
We have a focused set of cyber security, anti-fraud and regulatory compliance solutions.
We continue to see demand for our NetReveal(TM) anti-fraud and compliance suite, with solutions being deployed to an increasing number of prominent multi-national customers in the financial services sector. Customers are increasingly consuming these solutions as multi-year managed services.
We are continuing to renew existing long-term customer contracts where we deploy a comprehensive portfolio of products. Provision of our anti-fraud and anti-money laundering capabilities continues to see demand with financial services customers.
Organisational changes
In the second half of the year, the business commenced a restructuring that resulted in a headcount reduction and, effective 1 January 2018, the business moved to a revised operating model to deliver a more targeted portfolio of products and services focused on customers within three core business units: Government; Financial Services; and Technology & Commercial. The restructuring will enable a greater focus on customer needs and higher levels of operational efficiency, in the commercial business, that will accelerate improvements in competitiveness and profitability.
P56 Re-presentation of 2017 results
Looking forward
Forward-looking information for the Cyber & Intelligence reporting segment is provided later in this report.
P58 Segmental looking forward
Platforms & Services (US)
Platforms & Services (US), with operations in the US, UK and Sweden, manufactures combat vehicles, weapons and munitions, and delivers services and sustainment activities, including ship repair and the management of government-owned munitions facilities.
US Combat Vehicles focuses on a portfolio of tracked combat vehicles, amphibious vehicles, accessories, protection systems and tactical support services for the US military and international customers.
Weapon Systems focuses on naval weapons, artillery, advanced weapons, precision munitions, high explosives and propellants for US, UK and international customers.
Services include complex munition site management for the US Army's Holston and Radford facilities.
US Ship Repair is a major provider of non-nuclear ship repair, modernisation, overhaul and conversions to the US Navy, government and commercial maritime customers. It has five operational sites in the US on the Atlantic, Gulf of Mexico and Pacific coasts, as well as in Hawaii.
BAE Systems Hägglunds focuses on the tracked vehicle market for Swedish and international customers.
FNSS, the Turkish land systems business in which BAE Systems holds a 49% interest, produces and upgrades tracked and wheeled military vehicles for domestic and international customers.
P06 Alternative performance measure definitions
Operational and strategic highlights
-- Vehicle deliveries nearing completion under the engineering and manufacturing development phase of the Armored Multi-Purpose Vehicle programme
-- Awarded a $414m (GBP306m) contract for the third and final option for Low-Rate Initial Production under the Paladin Integrated Management programme
-- Completed deliveries of the 16 Amphibious Combat Vehicle prototypes to the US Marine Corps
-- First two M777 lightweight howitzers shipped to India for testing under the $542m (GBP401m) contract awarded in January 2017
-- $140m (GBP104m) contract awarded for the modernisation of USS Tortuga
-- Construction of the final commercial ship is nearing completion and the ship is expected to be delivered in the first half of 2018
-- FNSS received a EUR155m (GBP138m) contract to provide 27 amphibious assault vehicles to the Turkish Ministry of National Defence
Financial performance
Financial performance measures as defined by the Group
2017 2016
----------------------------- ---- --------- ---------
Sales KPI GBP2,928m GBP2,874m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP242m GBP211m
----------------------------- ---- --------- ---------
Return on sales 8.3% 7.3%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP222m GBP58m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP3,542m GBP3,308m
----------------------------- ---- --------- ---------
Order backlog(1) GBP4.6bn GBP4.6bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2017 2016
------------------------------------ --------- ---------
Revenue GBP2,825m GBP2,783m
------------------------------------ --------- ---------
Operating profit GBP218m GBP182m
------------------------------------ --------- ---------
Return on revenue 7.7% 6.5%
------------------------------------- --------- ---------
Cash flow from operating activities GBP286m GBP129m
------------------------------------- --------- ---------
-- Sales reduced by 3% to $3.8bn (GBP2.9bn) as deliveries of land vehicles to Brazil and Japan slipped into the first half of 2018.
-- The business delivered an improved return on sales of 8.3% (2016 7.3%). Charges taken in the year on the commercial shipbuilding programmes amounted to $16m (GBP12m), with just one contract now remaining for completion.
-- Cash conversion of underlying EBITA was significantly improved despite the impact from the use of provisions on the commercial shipbuilding programmes.
-- Order backlog was increased to $6.3bn (GBP4.6bn), supportive of future growth expectations. Key awards in the year included the $0.5bn (GBP0.4bn) Indian order for M777 howitzers, $0.4bn (GBP0.3bn) for Paladin production and a total of $1.3bn (GBP1.0bn) in the Ship Repair business.
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
Operational performance
US Combat Vehicles
The business continues to perform on a number of key franchise combat vehicle programmes across both domestic and international markets.
On the US Army's Armored Multi-Purpose Vehicle programme, we have nearly concluded deliveries of the first 29 vehicles under the engineering and manufacturing development phase. The contract, which has a potential value of $1.2bn (GBP0.9bn), including options for 289 vehicles in Low-Rate Initial Production, brings the US Army closer to achieving its objective to replace its legacy M113 armoured personnel carriers.
In December, we received a $414m (GBP306m) contract for the third and final option for Low-Rate Initial Production of 48 M109A7 self-propelled howitzers and M992A3 ammunition carriers under the Paladin Integrated Management programme. With options for Full-Rate Production of a further 180 vehicle sets over three years, the award is worth approximately $1.7bn (GBP1.3bn).
The business is executing a $286m (GBP211m) engineering and manufacturing development contract to address the space, weight, power and cooling limitations of the Bradley family of vehicles and to prepare the vehicle for communication network upgrades. The US customer's production decision regarding the upgrade of approximately 500 vehicles over a three-year period is expected in 2018.
In September, we received a contract from the US Army worth up to $69m (GBP51m) for the conversion of the next 20 M88A1 recovery vehicles to the more capable Heavy Equipment Recovery Combat Utility Lift Evacuation Systems (HERCULES) configuration. In March, we received a contract from the US Army worth up to $112m (GBP83m) for technical support and sustainment of M88 recovery vehicles.
Teamed with Iveco Defence, we completed deliveries of the 16 Amphibious Combat Vehicle (ACV) 1.1 prototypes to the US Marine Corps for testing under the $158m (GBP117m) engineering and manufacturing development phase of the programme. We are one of two competitors for this programme, with final down-selection expected in 2018.
Whilst we have encountered some production challenges, work continues on multiple contracts totalling $165m (GBP122m) for Assault Amphibious Vehicles (AAVs) for the Japanese Ministry of Defence, including a contract for 30 new AAVs, and an $82m (GBP61m) contract with Brazil to provide 23 upgraded AAVs.
Weapon Systems
BAE Systems remains a leading provider of gun systems and precision strike capabilities. In February 2017, we completed the acquisition of IAP Research, Inc., a US engineering company focused on the development and production of electromagnetic launchers, power electronics and advanced materials.
We continue to execute on a GBP183m contract to provide the gun system known as the Maritime Indirect Fire System for the Royal Navy's Type 26 frigate.
Following the contract modification received in 2016 from the Swedish government formalising its purchase of an additional 24 Archer systems, production work continues with deliveries expected to begin in 2018. In October, we received a contract to deliver additional Bofors 155mm BONUS smart anti-armour munitions to the Swedish Army in 2019.
In January 2017, we received a $542m (GBP401m) Foreign Military Sale contract from the US government to provide 145 M777 lightweight howitzers to the Indian Army. We will build the first 25 guns in our facilities, with the remaining systems assembled in India by Mahindra Defence Services, our selected supplier to establish an assembly, integration and test facility in India. The first two guns were shipped during the year and are progressing through in-country testing.
In July, we received a $47m (GBP35m) contract for the continued development of the precision-guided Hypervelocity Projectile, a next-generation, low-drag projectile capable of executing multiple missions from a number of gun systems.
In the complex ordnance manufacturing business, we continue to manage the US Army's Radford and Holston munitions facilities, operating near capacity. In 2017, we received additional funding of $177m (GBP131m) to continue construction of a new nitrocellulose facility in Radford. At Holston, we are performing on modernisation contracts totalling $135m (GBP100m) for waste water management and a $146m (GBP108m) contract for the construction of a nitric acid recovery facility to produce larger quantities of insensitive munitions.
US Ship Repair
As a leading provider of US Navy ship repair and modernisation services, we secured firm orders across our US shipyards totalling approximately $1.3bn (GBP1.0bn) in 2017, including a $140m (GBP104m) contract for the modernisation of the USS Tortuga at our Norfolk shipyard.
We continue to adjust our workforce and facilities to meet evolving customer demand, including the new dry dock in our San Diego shipyard, which completed operational certification in February and welcomed the USS New Orleans as its first vessel for servicing.
One of the final two commercial ships is complete and awaiting acceptance sea trials pending identification of a buyer following the original customer's decision not to take delivery of the vessel. Construction of the final ship is nearing completion and the ship is expected to be delivered in the first half of 2018.
BAE Systems Hägglunds
Series production of CV90 Infantry Fighting Vehicles for Norway was completed during the year under the $865m (GBP640m) contract.
We have received contracts from the Estonian government for a sustainment programme for 44 CV90s. We are performing to schedule on the refurbishment of Swedish CV90 vehicles, and the sustainment and upgrade of Danish CV90s. We are integrating Mjölner mortar systems on 40 Swedish CV90s, and testing and verification of Active Protection Systems on Dutch CV90s is under way, together with significant vehicle upgrades.
We continue to perform on a contract to produce 32 BvS10 military vehicles for Austria.
FNSS
FNSS, our land systems joint venture based in Turkey, continues to perform under its $524m (GBP387m) programme to produce 259 8x8 wheeled armoured vehicles for the Royal Malaysian Army.
Production has completed on a contract to upgrade M113 tracked armoured personnel carriers for the Royal Saudi Land Forces. The next phase of the contract is expected in 2018.
In support of an export contract to Oman awarded in 2015 for the PARS Wheeled Armoured Vehicle, work continues to deliver 8x8 and 6x6 vehicles in a number of configurations. Deliveries of the first 8x8 and 6x6 vehicles have been accepted, with the first production batch of 8x8 vehicles delivered in December.
Work has begun under two Turkish Land Forces contracts, a EUR278m (GBP247m) contract signed in June 2016 to supply 260 Anti-Tank Vehicles and an EUR84m (GBP75m) contract signed in December 2016 for air defence vehicles.
In March, FNSS received a EUR155m (GBP138m) contract to provide 27 amphibious assault vehicles to the Turkish Ministry of National Defence.
P56 Re-presentation of 2017 results
Looking forward
Forward-looking information for the Platforms & Services (US) reporting segment is provided later in this report.
P58 Segmental looking forward
Platforms & Services (UK)
Platforms & Services (UK) comprises the Group's UK--based air, maritime, land and shared services activities.
Military Air & Information includes programmes for the production of Typhoon combat and Hawk trainer aircraft, F-35 Lightning II manufacture and support, support and upgrades for Typhoon, Tornado and Hawk aircraft, and development of next-generation Unmanned Air Systems and defence information systems.
Maritime programmes include the construction of two Queen Elizabeth Class aircraft carriers, five River Class Offshore Patrol Vessels and seven Astute Class submarines for the Royal Navy, the design and production of the Dreadnought Class submarine and Type 26 frigate, and in-service support, including the delivery of services at HM Naval Base, Portsmouth.
Land UK provides combat vehicle upgrades and support to the British Army and international customers, and designs, develops and manufactures a comprehensive range of munitions products servicing its main customer, the UK Ministry of Defence, as well as international customers. The business also develops and manufactures cased-telescoped weapons through its CTA International joint venture.
Organisational changes
Effective 1 January 2018, BAE Systems revised its reporting segments to reflect the organisational changes described on page 17. The Platforms & Services (UK) and Platforms & Services (International) management structures have been removed with the organisation streamlined, and strengthened Air and Maritime reporting segments created.
P06 Alternative performance measure definitions
Operational and strategic highlights
-- Contract valued at approximately GBP5bn signed in December to supply 24 Typhoon aircraft and support to Qatar, subject to financing conditions and receipt by the Group of first payment
-- First eight Typhoon and all eight Hawk aircraft for Oman delivered to the Sultanate of Oman -- Signed the full GBP3.7bn production contract for the initial batch of three Type 26 frigates
-- Received the full GBP1.4bn contract for the sixth Astute Class submarine from the Royal Navy in March, and the fourth Astute boat, Audacious, was launched in April
-- Rationalisation activities announced, including potential headcount reductions in the Military Air & Information and Maritime Services businesses
Financial performance
Financial performance measures as defined by the Group
2017 2016
----------------------------- ---- --------- ---------
Sales KPI GBP7,682m GBP7,806m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP794m GBP810m
----------------------------- ---- --------- ---------
Return on sales 10.3% 10.4%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP427m GBP199m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP6,817m GBP8,024m
----------------------------- ---- --------- ---------
Order backlog(1) GBP16.8bn GBP17.8bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2017 2016
------------------------------------ --------- ---------
Revenue GBP7,624m GBP7,699m
------------------------------------ --------- ---------
Operating profit GBP774m GBP780m
------------------------------------ --------- ---------
Return on revenue 10.2% 10.1%
------------------------------------- --------- ---------
Cash flow from operating activities GBP607m GBP385m
------------------------------------- --------- ---------
-- Sales of GBP7.7bn (2016 GBP7.8bn) were marginally lower than 2016. Activity levels on the submarine programmes were ahead of plan.
-- Return on sales was at 10.3% (2016 10.4%).
-- There was a cash inflow of GBP427m (2016 GBP199m), which includes a GBP106m temporary benefit relating to VAT. Consumption of customer advances on the Omani, Saudi Arabian and European Typhoon contracts has now largely completed.
-- Order backlog reduced to GBP16.8bn (2016 GBP17.8bn). The GBP5bn order received from Qatar in December for 24 Typhoon aircraft and support has not yet been taken into order backlog, pending completion of the financing package which we expect in the coming months.
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
Operational performance
Military Air & Information
In December, BAE Systems and the Government of Qatar entered into a contract, valued at approximately GBP5bn, for the supply of 24 Typhoon aircraft. Alongside supplying the aircraft, the agreement provides for the supply of ground support to the Qatar Armed Forces and delivery of technical and pilot training in Qatar. The contract is subject to financing conditions and receipt by the Group of first payment which are expected to be fulfilled no later than mid-2018.
In the year, 20 Typhoon aircraft were delivered from the UK final assembly facility, of which four were delivered to Saudi Arabia, completing the contract for 72 aircraft. All 236 Tranche 2 aircraft have been delivered to the UK, Germany, Italy and Spain, together with 51 of the 88 contracted Tranche 3 aircraft.
There were eight Typhoon and eight Hawk aircraft deliveries to the Oman customer in the year, with the remaining four Typhoon aircraft scheduled to be delivered in 2018.
Good progress continues to be made on airframe manufacture for the contract to supply 28 Typhoon aircraft to Kuwait secured by Italian Eurofighter partner, Leonardo, in 2016, with fuselage deliveries due to commence in 2018.
Development towards the Royal Air Force Centurion standard continues, which will enable transition of air capabilities from Tornado to Typhoon. Flight testing for Storm Shadow and Meteor weapons capability enhancements was completed during the year. Integration of the Captor E-Scan radar continues.
We have continued to support our UK and European customers' Typhoon and Tornado aircraft and their operational commitments. The ten-year partnership arrangement with the Ministry of Defence to support the UK Typhoon fleet continues as planned, with availability of aircraft being sustained at contractual levels.
The initial support package has been substantially delivered as part of the contract to commence operations at a new operating air base at Adam in Oman.
On the F-35 Lightning II programme, full contract award was secured on Lot 10 and 82 rear fuselage assemblies were manufactured for the Low-Rate Initial Production Lot 10 and 11 contracts. Negotiations continued on Lot 11, with additional order intake received in the year of GBP248m. Lot 11 negotiations are expected to conclude during the first quarter of 2018, with the balance of the order intake also expected in this timeframe.
At RAF Marham in Norfolk, good progress has been made on construction of the engineering and training facilities and the stand-up of the operational service in readiness for the arrival of the UK's first F-35 Lightning II aircraft in 2018.
Following the announcement that the UK had been chosen as a major European repair hub for the maintenance, repair, overhaul and upgrade of F-35 Lightning II avionics and components, we have established a joint venture with the UK Ministry of Defence and Northrop Grumman, and progress on establishing the repair facility and capability continues to plan.
Support continues to be provided to users of Hawk trainer aircraft around the world. The long-term support contract for the Royal Air Force's UK fleet of Hawk fast jet trainer aircraft continues to deliver against all contractual milestones.
Discussions continue with the Government of India and Hindustan Aeronautics Limited (HAL) for the supply of additional kit sets which will result in aircraft built under licence by HAL for the Indian Air Force and Indian Navy.
Following an extensive review with our partner, Northrop Grumman, of the requirements and conditions of the US Air Force future trainer programme, both companies decided not to proceed with the competitive bid.
An initial contract for the Anglo-French unmanned combat air system feasibility and definition phase of GBP16m was received during the year. It is anticipated that an Anglo-French follow-on programme will be agreed in 2018.
A GBP119m contract was secured for collaboration on the first design and development phase of an indigenous fifth-generation fighter jet for the Turkish Air Force.
As a result of reducing production activity on Typhoon and Hawk, and also taking into account the changes to support requirements as the Royal Air Force transitions from Tornado to F-35 Lightning II, the business announced in October a total proposed headcount reduction of up to 1,400 roles over the next three years.
Maritime
On the aircraft carrier programme, HMS Queen Elizabeth successfully concluded initial sea trials and entered HM Naval Base, Portsmouth, for the first time in August. Operational handover and acceptance by the Royal Navy took place in December. HMS Prince of Wales floated out of the dock at Rosyth in December. Large volume installation activities continue to progress, with commissioning of systems planned to commence in 2018 and sea trials beginning in 2019.
The full GBP3.7bn production contract was signed in June for the first batch of three Type 26 frigates, with GBP2.8bn of order intake in the year, following funding in previous years for long-lead items. Production of the first ship, Glasgow, commenced in July. The programme currently employs over 1,000 people and production activities will progressively build up during 2018 as more of the ship transitions from completion of the detailed design through to production readiness.
The first Offshore Patrol Vessel (OPV), HMS Forth, completed sea trials in December and was accepted by the Ministry of Defence in January 2018. Construction of the remaining four OPVs on the Clyde continues.
Under the Maritime Support Delivery Framework contract, which the Ministry of Defence has agreed in principle to extend until 31 March 2020, we provide services at HM Naval Base, Portsmouth, and support to half of the Royal Navy's surface fleet. We remain on track to achieve target cost. The business was unsuccessful on a competitive bid to provide equipment procurement and equipment management services for the Queen Elizabeth Class aircraft carriers and Type 45 destroyers.
BAE Systems provides significant support and maintenance to the Royal Navy's fleet of Type 45 destroyers, and has responded to a Ministry of Defence competitive proposal on its power improvement project, with the award decision expected in 2018.
Progress continues on the GBP270m Spearfish torpedo upgrade demonstration and manufacture phases, with the demonstration phase forecast to complete in 2020.
Evolving customer requirements and a focus on improved efficiency and removing cost in the Maritime Services business have led to the announcement in October of a proposed headcount reduction of around 375 roles. The proposed rationalisation will more closely align capacity with workload and improve competitiveness to retain and grow our position on key programmes, while retaining critical skills.
The first three Astute Class submarines are in operational service with the Royal Navy. Progress continues on the manufacture of the remaining four boats, with launch of the fourth boat, Audacious, achieved in April. A full contract award for the sixth boat, Agamemnon, was secured in March for GBP1.4bn, with GBP0.6bn of order intake in the year after order intake in previous years for long-lead items. Further funding of GBP80m was received for the seventh boat.
Functional and spatial design, and the production of the first of class continues to advance on the Dreadnought Class submarine, the replacement for the Royal Navy's Vanguard Class submarine. The next phase of the contract is scheduled to commence in April 2018.
The major programme of building works at the Barrow site continues, with contracts in place totalling more than GBP500m, with two further major buildings being completed during the year.
The detailed arrangements for the Dreadnought Alliance, including the organisational, governance and commercial arrangements between the three parties, the Ministry of Defence, BAE Systems and Rolls-Royce, continue to be developed.
Land UK
The business continues to provide UK and international customers with a full range of light and heavy munitions, with orders totalling GBP133m received in the year.
During the year, 131 40mm cased-telescopic cannons were delivered to the Ministry of Defence by CTA International, a joint venture between BAE Systems and Nexter, bringing cumulative deliveries to 160 of 515. This is the first entirely new medium calibre cannon and ammunition system qualified by the British Army since the late 1960s.
The business has continued to provide support to previously supplied armoured vehicles and bridging systems, with orders of GBP48m received in the year. The business is one of two contenders delivering the design stages of the Challenger 2 Life Extension Programme and the British Army's bridging system.
P56 Re-presentation of 2017 results
Looking forward
Forward-looking information reflecting the organisational changes described on page 48 is provided later in this report.
P58 Segmental looking forward
Platforms & Services (International)
Platforms & Services (International) comprises the Group's businesses in Saudi Arabia, Australia and Oman, together with its 37.5% interest in the pan--European MBDA joint venture.
In Saudi Arabia, the business provides operational capability support to the country's air and naval forces through UK/Saudi government-to-government programmes. The Saudi British Defence Co-operation Programme and Salam Typhoon project provide for multi-year contracts between the governments.
In Australia, the business delivers production, upgrade and support programmes for customers in the defence and commercial sectors across the air, maritime and land domains. Services contracts include the provision of sustainment, training solutions and upgrades.
In Oman, the business is developing its position building on a long history of relationships with the Omani armed forces through the provision, support and upgrade of defence platforms and cyber security services. Business generated in Oman is executed through our relevant reporting segments.
MBDA is a leading global prime contractor of missiles and missile systems across the air, maritime and land domains.
Organisational changes
Effective 1 January 2018, BAE Systems revised its reporting segments to reflect the organisational changes described on page 17. The Platforms & Services (UK) and Platforms & Services (International) management structures have been removed with the organisation streamlined, and strengthened Air and Maritime reporting segments created.
P06 Alternative performance measure definitions
Operational and strategic highlights
-- Final four of 72 Typhoon aircraft delivered to Saudi Arabia on the Salam Typhoon programme
-- The Typhoon support contracts are operating well and a contract for support to additional flying hours was agreed in April
-- Contracts agreed to provide ongoing support services to the Royal Saudi Air Force and Royal Saudi Naval Forces for a further five years
-- The first major units of the second batch of Hawk aircraft delivered on schedule to Saudi Arabia allowing final assembly to commence
-- Assigned the role of F-35 Regional Warehouse provider for the Asia-Pacific region
-- Selected as the preferred tenderer for the Jindalee Operational Radar Network upgrade programme
-- MBDA signed a contract in December to supply Brimstone and Meteor missiles to Qatar, subject to financing conditions and receipt of first payment
-- MBDA contracts for naval fleet air defence and coastal defence in Qatar became effective in July
Financial performance
Financial performance measures as defined by the Group
2017 2016
----------------------------- ---- --------- ---------
Sales KPI GBP4,138m GBP3,943m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP472m GBP400m
----------------------------- ---- --------- ---------
Return on sales 11.4% 10.1%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP671m GBP435m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP4,365m GBP6,175m
----------------------------- ---- --------- ---------
Order backlog(1) GBP13.3bn GBP13.1bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2017 2016
------------------------------------ --------- ---------
Revenue GBP3,136m GBP3,037m
------------------------------------ --------- ---------
Operating profit GBP427m GBP365m
------------------------------------ --------- ---------
Return on revenue 13.6% 12.0%
------------------------------------- --------- ---------
Cash flow from operating activities GBP669m GBP473m
------------------------------------- --------- ---------
-- Sales of GBP4.1bn (2016 GBP3.9bn) were 5% up over 2016. With all 72 Salam Typhoon aircraft now in service, we have seen higher levels of support. In addition, we have seen the expected ramp-up from MBDA's strong order backlog.
-- Underlying EBITA of GBP472m (2016 GBP400m) and the return on sales of 11.4% (2016 10.1%) benefited from improving performance from our Saudi partner companies and stronger performance at MBDA.
-- Operating cash inflow was GBP671m (2016 GBP435m), although approximately GBP300m of this was for an advance payment on the Saudi support programme.
-- Order backlog was marginally higher at GBP13.3bn (2016 GBP13.1bn) as further order intake was booked under the renewal of the five-year support contract in Saudi Arabia and Qatari naval orders became effective within MBDA.
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
Operational performance
Saudi Arabia
On the Salam Typhoon programme, with four deliveries in the year, all 72 contracted aircraft have been delivered to the customer. Typhoon capability development programmes continue to progress.
The Typhoon support contracts are operating well and a contract for support to additional flying hours was agreed in April.
Discussions have continued with the Saudi Arabian customer though 2017, resulting in contractual agreements under the Saudi British Defence Co-operation Programme to provide ongoing support services to the Royal Saudi Air Force and Royal Saudi Naval Forces for a further five years to 31 December 2021.
Final aircraft deliveries for the first batch of 22 Hawk aircraft were completed in the second half of the year. The first major units of the second batch of 22 aircraft, contracted in 2015, have been delivered on schedule to Saudi Arabia allowing final assembly to commence.
Under the Royal Saudi Naval Forces' Minehunter mid-life update programme, acceptance of the third and final ship is expected in the first half of 2018.
Under the planned reorganisation of our portfolio of interests in a number of industrial companies in Saudi Arabia, Riyadh Wings Aviation Academy LLC acquired a 4.1% shareholding in a Group subsidiary, Overhaul and Maintenance Company, during 2016 and is expected to acquire a further interest up to a maximum of 49%. The reorganisation supports our strategy to expand the customer base of our In-Kingdom Industrial Participation programme, promoting training, development and employment opportunities in line with the Kingdom's National Transformation Plan and Vision 2030.
The Saudi Arabian In-Kingdom Industrial Participation programme continues to make good progress. During 2017, there has been further capability and knowledge transfer on the Typhoon and Hawk platforms. The first Hawk aircraft assembled in Saudi Arabia will come off the production line in 2018 for delivery to the Royal Saudi Air Force.
We have commenced discussions with the new Saudi Arabian Military Industries (SAMI) organisation to explore how we can collaborate to deliver further In-Kingdom Industrial Participation. All of these activities are aligned with our long-term industrialisation strategy, as well as the Saudi Arabian government's National Transformation Plan and Vision 2030.
Australia
We have continued to provide in-service support to the Navy's two Landing Helicopter Docks under a four-year support contract awarded in 2014. Final acceptance of these vessels is expected in 2018.
HMAS Stuart, the final Anzac Class frigate to be modernised under the Anti-Ship Missile Defence programme, has been accepted into service by the Commonwealth.
The scope of activities for the next five years of sustainment and upgrade of the Anzac fleet under the Warship Asset Management Alliance has been agreed and contracts totalling A$561m (GBP324m) have been awarded to BAE Systems.
The next upgrade cycle for the Anzac frigate fleet, the Mid-Life Capability Assurance Programme, has commenced, with the first ship, HMAS Arunta, being docked at our Henderson shipyard during the second half of the year. The upgrade programme is planned to run through to 2023.
The delayed JP 2008 Phase 3F programme to provide enhanced defence satellite communications services was formally accepted by the Commonwealth in November. We will continue to provide in-service support to the system under a five-year support contract.
Mobilisation activities for sustainment of the Regional F-35 Lightning II fleet continues to progress at our Williamtown facility, with an increased scope following the announcement in August that BAE Systems was assigned the role of F-35 Regional Warehouse provider for the Asia-Pacific region.
Our existing Hawk Mk127 Lead-in Fighter sustainment contracts continue to perform strongly.
The Capability Assurance Programme to upgrade the Hawk fleet to meet the training requirements of the fifth-generation F-35 Lightning II is progressing ahead of schedule, with 20 of the 33 aircraft modified at the end of 2017. During 2017, the Australian Air Force customer declared achievement of initial operating capability and has commenced training with the aircraft.
In June, the Commonwealth announced that we have been selected as the preferred tenderer for the Jindalee Operational Radar Network upgrade programme. If successful, the expected value of the contract over the initial award term of ten years is approximately A$1.0bn (GBP0.6bn).
Following down-select in 2016 as one of two tenderers for the Land 400 Phase 2 Combat Reconnaissance Vehicle programme, we have completed the Risk Mitigation Activity contract and submitted our final proposal to the Commonwealth in August. Customer evaluation is ongoing, with final preferred tender selection anticipated in the first half of 2018.
Our tender response for the Commonwealth's nine-ship SEA 5000 Future Frigate programme was submitted in August. The Commonwealth continues to fund Schedule Protection Activity to support its evaluation timetable and we anticipate a preferred tender selection in the first half of 2018.
Oman
The Oman Typhoon and Hawk aircraft programme, being undertaken by Platforms & Services (UK), completed delivery of the first eight Typhoon aircraft and all eight Hawk trainer aircraft in 2017. The remaining four Typhoon aircraft are scheduled to be delivered in 2018.
Separately, we continue to fulfil our legacy industrial participation obligations in Oman through delivery of an agreed training and knowledge transfer programme.
MBDA
In March, MBDA secured a contract from the UK and French governments for a three-year concept phase of the Future Cruise/Anti-Ship Weapon, which will prepare for the replacement of the existing missiles deployed by the UK and French armed forces. This contract follows on from the joint UK-France 2016 programme for the mid-life refurbishment of their current inventory of missiles.
In July, MBDA finalised the financing package to secure effectivity of the Qatari contracts signed in 2016, which will supply air defence systems and anti-ship missiles for the naval surface fleet along with coastal defence systems.
The German Ministry of Defence and MBDA have entered into a formal negotiation process for the German ground-based air defence system, TLVS, a key element of the German defence strategy. Lockheed Martin will be the joint venture partner with MBDA on this programme.
Significant progress has been made in securing positions on a number of fast jet platforms. The Meteor Beyond Visual Range Air-to-Air Missile is already in operational service on Gripen with the Swedish Air Force and has now achieved qualification for both Typhoon and Rafale aircraft. A contract has been received to procure further Brimstone missiles to equip Typhoon. Integration of MBDA missiles on F-35 Lightning II has progressed well, with successful Advanced Short Range Air-to-Air Missile qualification firings achieved and contracts received from the UK to integrate Meteor.
In December, MBDA entered into a contract with Qatar for the supply of Brimstone and Meteor missiles. The contract is subject to financing conditions and receipt by MBDA of first payment which are expected to be fulfilled no later than mid-2018.
Success in both domestic and export markets has significantly increased MBDA's production volumes resulting in the requirement to expand production capacities. A new manufacturing facility is fully operational in Bolton, UK, and a capacity enhancement is under way in Bourges, France.
P56 Re-presentation of 2017 results
Looking forward
Forward-looking information reflecting the organisational changes described on page 52 is provided later in this report.
P58 Segmental looking forward
Re-presentation of 2017 results
Effective 1 January 2018, BAE Systems revised its reporting segments to reflect the organisational changes described on page 17 and adopted International Financial Reporting Standard (IFRS) 15, Revenue from Contracts with Customers.
P06 Alternative performance measure definitions
Financial performance measures for the year ended 31 December 2017 as re-presented to reflect the organisational changes are as follows:
As defined by the Group Defined in IFRS(1)
------------- ------------------------------------------------------------ -------------------------------------------
KPI
KPI KPI KPI Net cash
Return Operating Order Order Return flow from
Year ended Underlying on business intake(2) backlog(2) Operating on operating
31 December Sales EBITA sales cash flow Revenue profit/(loss) revenue activities
2017 GBPm GBPm % GBPm GBPm GBPbn GBPm GBPm % GBPm
------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Electronic
Systems 3,635 562 15.5 450 4,175 5.4 3,635 542 14.9 569
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Cyber &
Intelligence 1,820 52 2.9 116 1,859 2.1 1,820 (367) (20.2) 127
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Platforms &
Services (US) 2,928 242 8.3 222 3,542 4.6 2,825 218 7.7 286
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Air 8,059 1,000 12.4 832 6,128 20.4 7,120 952 13.4 888
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Maritime 3,151 258 8.2 278 4,671 9.1 3,119 247 7.9 396
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
HQ(3) 336 (80) (146) 337 - 47 (112) (142)
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Deduct
Intra-group (303) (455) (0.4) (244)
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Deduct
Taxation(4) (227)
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Total 19,626 2,034 10.4 1,752 20,257 41.2 18,322 1,480 8.1 1,897
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Financial performance measures for the year ended 31 December 2017 as re-presented to reflect both the organisational changes and the impact of the adoption of IFRS 15 are as follows:
As defined by the Group Defined in IFRS(1)
------------- ------------------------------------------------------------ -------------------------------------------
KPI
KPI KPI KPI Net cash
Return Operating Order Order Return flow from
Underlying on business intake(2) backlog(2) Operating on operating
Year ended 31 Sales EBITA sales cash flow Revenue profit/(loss) revenue activities
December 2017 GBPm GBPm % GBPm GBPm GBPbn GBPm GBPm % GBPm
------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Electronic
Systems 3,598 541 15.0 450 4,175 4.8 3,598 521 14.5 569
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Cyber &
Intelligence 1,818 58 3.2 116 1,859 2.1 1,818 (361) (19.9) 127
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Platforms &
Services (US) 2,951 237 8.0 222 3,542 4.2 2,848 213 7.5 286
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Air 7,210 967 13.4 832 6,128 19.5 6,312 921 14.6 888
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Maritime 2,877 251 8.7 278 4,671 8.5 2,845 240 8.4 396
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
HQ(3) 336 (80) (146) 337 - 47 (112) (142)
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Deduct
Intra-group (303) (455) (0.4) (244)
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Deduct
Taxation(4) (227)
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
Total 18,487 1,974 10.7 1,752 20,257 38.7 17,224 1,422 8.3 1,897
-------------- ------ ---------- ------ --------- --------- ---------- ------- ------------- ------- ----------
The Group and segmental guidance for 2018 shown opposite is based on the Group's actual financial performance for 2017 as re-presented to reflect both the organisational changes and the impact of the adoption of IFRS 15.
1. International Financial Reporting Standards.
2. Including share of equity accounted investments.
3. HQ comprises the Group's UK-based head office and shared services activities, together with a 49% interest in Air Astana.
4. Taxation is managed on a Group-wide basis.
Segmental looking forward
Effective 1 January 2018, BAE Systems has five principal reporting segments, Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air and Maritime, which align with the strategic direction of the Group.
Electronic Systems
Electronic Systems comprises the US and UK-based electronics activities, including electronic warfare systems, electro-optical sensors, military and commercial digital engine and flight controls, precision guidance and seeker solutions, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.
Electronic Systems is well positioned to address current and evolving priority programmes from its strong franchise positions in electronic warfare, precision guidance and seeker solutions. Electronic Systems has a long-standing programme of research and development, and its focus remains on maintaining a diverse portfolio of defence and commercial products and capabilities for US and international customers.
The business expects to benefit from its ability to apply innovative technology solutions that meet defence customers' changing requirements. That, along with strong programme positions, particularly on F-35 Lightning II and F-15 upgrades, and specific products such as APKWS(TM), position the business well for the medium term.
In the commercial aviation market, Electronic Systems' technology innovations are enabling the business to maintain its long-standing customer positions and to compete for, and win, new business.
Cyber & Intelligence
Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered Applied Intelligence business, and covers the Group's cyber security, secure government, and commercial and financial security activities.
Intelligence & Security
The outlook for the US government services sector is stable, although market conditions remain highly competitive and continue to evolve.
Whilst the government's decision not to exercise future options on our contract to develop a shared IT environment for US agencies could impact revenue in 2018, the shift in the government's IT strategy could present new opportunities for the business.
With effect from 12 February 2018, the business has restructured to better align with its customer base and position the business to more effectively compete and grow in critical, mission-focused areas with three business areas: Integrated Defence Solutions; Intelligence Solutions; and Air Force Solutions.
Applied Intelligence
With effect from 1 January 2018, the Applied Intelligence business has restructured to focus on a more targeted portfolio of products and services, delivering for customers within three core business units: Government; Financial Services; and Technology & Commercial. The restructuring will enable a greater focus on customer needs and higher levels of operational efficiency, in the commercial business, that will accelerate improvements in competitiveness and profitability.
Sales growth is expected to continue as cyber security is an increasingly important part of government security and a core element of stewardship for commercial enterprises in a sophisticated and persistent threat environment.
P06 Alternative performance measure definitions
P19 Our markets
Platforms & Services (US)
Platforms & Services (US), with operations in the US, UK and Sweden, manufactures combat vehicles, weapons and munitions, and delivers services and sustainment activities, including ship repair and the management of government-owned munitions facilities.
The land vehicles business is underpinned by strong positions on key franchise programmes. These include the US Army's Armored Multi-Purpose Vehicle, M109A7 self-propelled howitzer and Bradley upgrade programmes, and the CV90 and BvS10 export programmes from our BAE Systems Hägglunds business.
The business continues to pursue a range of domestic and international opportunities in combat and amphibious vehicles as well as weapon systems.
FNSS has grown its order book with both domestic and international orders.
These long-term contracts and our franchise position in tracked vehicles, which offer opportunities in international markets, make the land business well placed for growth in the medium term.
In the maritime domain, the Group has a strong position on naval gun programmes and US Navy ship repair. Additional dry dock ship repair capacity has been established in San Diego to support the US Navy's increased requirements in the Asia-Pacific region.
The Group remains a leading provider of gun systems and precision strike capabilities and, in the complex ordnance manufacturing business, we continue to manage the US Army's Radford and Holston munitions facilities under long-term contracts.
Air
Air comprises the Group's UK-based air activities for European and International markets and US Programmes and its businesses in Saudi Arabia and Australia, together with its 37.5% interest in the pan-European MBDA joint venture.
In the UK, as current export contracts for Typhoon and Hawk complete, and UK Tornado support ends, sales are underpinned by our workshare on Typhoon for Kuwait, Typhoon and Hawk support, and F-35 Lightning II production and support. UK-based production of rear fuselage assemblies for F-35 Lightning II will increase over the next three years to reach its expected peak rate for the next decade. We play a significant role in the F-35 Lightning II sustainment programme in support of Lockheed Martin.
Discussions continue with current and prospective operators on contract awards for Typhoon and Hawk, and we continue to develop long-standing international partnerships in the air domain, maintaining our skills and capabilities.
The UK and Saudi support operations are underpinned by long-term contracts. In Saudi Arabia, the In-Kingdom Industrial Participation programme continues to make good progress consistent with our long-term strategy, as well as the Saudi Arabian government's National Transformation Plan and Vision 2030.
In Australia, the business is structured around long-term sustainment and upgrade activities, and we are progressing significant opportunities with the Australian government in the maritime and land domains.
MBDA has a strong order book which is driving increasing production and sales. Development programmes continue to improve the long-term capabilities of the business.
Maritime
Maritime comprises the Group's UK-based maritime and land activities.
Maritime
In Maritime, there remains pressure on the Navy's near-term budgets and a highly-competitive environment in ship support and upgrade.
Within submarines, the business is executing on the Astute Class programme, with four boats still in build. On the Dreadnought programme, production on the first boat of four commenced in 2016. Investment continues in the Barrow facilities to provide the capability on these long-term programmes through the next decade.
In shipbuilding, sales are underpinned by the contracts to manufacture the Queen Elizabeth Class aircraft carriers, Type 26 frigates and River Class Offshore Patrol Vessels.
The through-life support of surface ship platforms provides a sustainable business in technical services and mid-life upgrades.
Land UK
The Land UK business continues to deliver support to armoured vehicle and bridging systems in UK and international markets, munitions under the 15-year Munitions Acquisition Supply Solution partnering agreement secured in 2008 and 40mm cased-telescopic cannons for the UK and French armies.
US defence budget
Whilst we continue to operate under a Continuing Resolution, the bipartisan budget agreement passed on 9 February 2018 would increase the US defence budget by approximately 10% over current levels, reflecting continued growth in defence spending to $700bn (GBP518bn) for the fiscal year ending 30 September 2018. This budget agreement increases the budget caps for two years and extends the Continuing Resolution to 23 March 2018 to allow lawmakers to pass a 2018 spending bill.
Page references used above refer to the Annual Report 2017 that can be viewed on the Company's website.
Consolidated income statement
for the year ended 31 December
2017 2016
Total Total
Notes GBPm GBPm GBPm GBPm
------------------------------------------------------ ----- ------- -------- ------- --------
Continuing operations
------- -------
Sales 1 19,626 19,020
Deduct Share of sales by equity accounted investments 1 (2,575) (2,427)
Add Sales to equity accounted investments 1 1,271 1,197
------- -------
Revenue 1 18,322 17,790
Operating costs 2 (17,089) (16,274)
Other income 4 131 136
------------------------------------------------------ ----- ------- -------- ------- --------
Group operating profit 1,364 1,652
Share of results of equity accounted investments 1 116 90
------------------------------------------------------ ----- ------- -------- ------- --------
Underlying EBITA 1 2,034 1,905
Non-recurring items 1 (13) (12)
------- -------
EBITA 2,021 1,893
Amortisation of intangible assets 1 (86) (87)
Impairment of intangible assets 1 (384) -
Financial expense of equity accounted investments 5 (34) (28)
Taxation expense of equity accounted investments 6 (37) (36)
------- -------
Operating profit 1 1,480 1,742
Financial income 416 713
Financial expense (762) (1,304)
------- -------
Net finance costs 5 (346) (591)
------------------------------------------------------ ----- ------- -------- ------- --------
Profit before taxation 1,134 1,151
Taxation expense 6 (250) (213)
------------------------------------------------------ ----- ------- -------- ------- --------
Profit for the year 884 938
------------------------------------------------------ ----- ------- -------- ------- --------
Attributable to:
Equity shareholders 854 913
Non-controlling interests 30 25
------------------------------------------------------ ----- ------- -------- ------- --------
884 938
------------------------------------------------------ ----- ------- -------- ------- --------
Earnings per share 7
Basic earnings per share 26.8p 28.8p
Diluted earnings per share 26.7p 28.7p
------------------------------------------------------ ----- ------- -------- ------- --------
Consolidated statement of comprehensive income
for the year ended 31 December
2017 2016
Other Retained Other
reserves(1) earnings Total reserves(1) Retained earnings Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ----- ------------ --------- ----- ------------ ----------------- -------
Profit for the year - 884 884 - 938 938
--------------------------------- ----- ------------ --------- ----- ------------ ----------------- -------
Other comprehensive income
Items that will not be
reclassified to the income
statement:
Subsidiaries:
Remeasurements on
retirement benefit
schemes - 2,105 2,105 - (1,468) (1,468)
Tax on items that will not
be reclassified to the
income statement 6 - (490) (490) - 260 260
Equity accounted investments
(net of tax) - 53 53 - (53) (53)
Items that may be reclassified to
the income statement:
Subsidiaries:
Currency translation on
foreign currency net
investments (625) - (625) 1,287 - 1,287
Amounts credited to
hedging reserve 59 - 59 96 - 96
Tax on items that may be
reclassified to the
income statement 6 (11) - (11) (17) - (17)
Equity accounted investments
(net of tax) (15) - (15) 45 - 45
--------------------------------- ----- ------------ --------- ----- ------------ ----------------- -------
Total other comprehensive income
for the year (net of tax) (592) 1,668 1,076 1,411 (1,261) 150
--------------------------------- ----- ------------ --------- ----- ------------ ----------------- -------
Total comprehensive income for
the year (592) 2,552 1,960 1,411 (323) 1,088
--------------------------------- ----- ------------ --------- ----- ------------ ----------------- -------
Attributable to:
Equity shareholders (587) 2,522 1,935 1,408 (348) 1,060
Non-controlling interests (5) 30 25 3 25 28
--------------------------------- ----- ------------ --------- ----- ------------ ----------------- -------
(592) 2,552 1,960 1,411 (323) 1,088
--------------------------------- ----- ------------ --------- ----- ------------ ----------------- -------
1. An analysis of other reserves is provided in note 23.
Consolidated statement of changes in equity
for the year ended 31 December
Attributable to equity holders of BAE Systems plc
Issued
share Share Other Non-controlling Total
capital premium reserves(1) Retained earnings Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- -------- ------------ ----------------- ----- --------------- -------
At 1 January 2017 87 1,249 6,685 (4,583) 3,438 26 3,464
Profit for the year - - - 854 854 30 884
Total other comprehensive income
for the year - - (587) 1,668 1,081 (5) 1,076
Share-based payments (inclusive
of tax) - - - 53 53 - 53
Net purchase of own shares - - - (1) (1) - (1)
Ordinary share dividends - - - (684) (684) (8) (692)
-------------------------------- -------- -------- ------------ ----------------- ----- --------------- -------
At 31 December 2017 87 1,249 6,098 (2,693) 4,741 43 4,784
-------------------------------- -------- -------- ------------ ----------------- ----- --------------- -------
At 1 January 2016 87 1,249 5,277 (3,624) 2,989 13 3,002
Profit for the year - - - 913 913 25 938
Total other comprehensive income
for the year - - 1,408 (1,261) 147 3 150
Share-based payments (inclusive
of tax) - - - 59 59 - 59
Net sale of own shares - - - 3 3 - 3
Ordinary share dividends - - - (670) (670) (24) (694)
Partial disposal of shareholding
in subsidiary undertaking - - - (3) (3) 9 6
-------------------------------- -------- -------- ------------ ----------------- ----- --------------- -------
At 31 December 2016 87 1,249 6,685 (4,583) 3,438 26 3,464
-------------------------------- -------- -------- ------------ ----------------- ----- --------------- -------
1. An analysis of other reserves is provided in note 23.
Consolidated balance sheet
as at 31 December
2017 2016
Notes GBPm GBPm
----------------------------------------------------------------------------------- ----- -------- --------
Non-current assets
Intangible assets 8 10,378 11,264
Property, plant and equipment 9 2,230 2,098
Investment property 10 101 110
Equity accounted investments 11 384 299
Other investments 6 6
Other receivables 12 387 351
Retirement benefit surpluses 21 302 223
Other financial assets 13 226 345
Deferred tax assets 14 724 1,251
----------------------------------------------------------------------------------- ----- -------- --------
14,738 15,947
----------------------------------------------------------------------------------- ----- -------- --------
Current assets
Inventories 15 723 744
Trade and other receivables including amounts due from customers for contract work 12 3,586 3,305
Current tax 16 20 5
Other financial assets 13 89 204
Cash and cash equivalents 17 3,271 2,769
Assets held for sale 26 2
----------------------------------------------------------------------------------- ----- -------- --------
7,715 7,029
----------------------------------------------------------------------------------- ----- -------- --------
Total assets 18 22,453 22,976
----------------------------------------------------------------------------------- ----- -------- --------
Non-current liabilities
Loans 19 (4,069) (4,425)
Other payables 20 (1,722) (1,027)
Retirement benefit obligations 21 (4,222) (6,277)
Other financial liabilities 13 (133) (102)
Deferred tax liabilities 14 (4) (10)
Provisions 22 (413) (372)
(10,563) (12,213)
Current liabilities
Loans and overdrafts 19 (14) -
Trade and other payables 20 (6,322) (6,540)
Other financial liabilities 13 (104) (212)
Current tax 16 (305) (311)
Provisions 22 (345) (234)
Liabilities held for sale (16) (2)
----------------------------------------------------------------------------------- ----- -------- --------
(7,106) (7,299)
----------------------------------------------------------------------------------- ----- -------- --------
Total liabilities (17,669) (19,512)
----------------------------------------------------------------------------------- ----- -------- --------
Net assets 4,784 3,464
----------------------------------------------------------------------------------- ----- -------- --------
Capital and reserves
Issued share capital 23 87 87
Share premium 1,249 1,249
Other reserves 23 6,098 6,685
Retained earnings - deficit (2,693) (4,583)
----------------------------------------------------------------------------------- ----- -------- --------
Total equity attributable to equity holders of BAE Systems plc 4,741 3,438
Non-controlling interests 43 26
----------------------------------------------------------------------------------- ----- -------- --------
Total equity 4,784 3,464
----------------------------------------------------------------------------------- ----- -------- --------
Approved by the Board on 21 February 2018 and signed on its behalf by:
C N Woodburn P J Lynas Chief Executive Group Finance Director
Consolidated cash flow statement
for the year ended 31 December
2017 2016(1)
Notes GBPm GBPm
----------------------------------------------------------------------------- ----- ----- -------
Profit for the year 884 938
Taxation expense 6 250 213
Research and development expenditure credits 4 (20) (22)
Share of results of equity accounted investments 1 (116) (90)
Net finance costs 5 346 591
Depreciation, amortisation and impairment 2 728 345
Profit on disposal of property, plant and equipment 2,4 (1) (5)
Profit on disposal of investment property 2,4 (9) (12)
Loss on disposal of businesses 2 13 -
Cost of equity-settled employee share schemes 61 55
Movements in provisions 150 (122)
Decrease in liabilities for retirement benefit obligations (138) (214)
(Increase)/decrease in working capital:
Inventories (29) 95
Trade and other receivables (449) (93)
Trade and other payables 454 (263)
Taxation paid (227) (187)
----------------------------------------------------------------------------- ----- ----- -------
Net cash flow from operating activities 1,897 1,229
----------------------------------------------------------------------------- ----- ----- -------
Dividends received from equity accounted investments 11 72 38
Interest received(1) 23 10
Purchase of property, plant and equipment, and investment property (389) (408)
Purchase of intangible assets (87) (82)
Proceeds from sale of property, plant and equipment, and investment property 34 45
Proceeds from sale of intangible assets 1 -
Purchase of subsidiary undertakings (3) -
Equity accounted investment funding 11 (3) (5)
Cash flow from sale of subsidiary undertakings (6) 6
Cash and cash equivalents disposed of with subsidiary undertakings (2) -
----------------------------------------------------------------------------- ----- ----- -------
Net cash flow from investing activities (360) (396)
----------------------------------------------------------------------------- ----- ----- -------
Interest paid(1) (204) (210)
Net (purchase)/sale of own shares (1) 3
Equity dividends paid 23 (684) (670)
Dividends paid to non-controlling interests (8) (24)
Cash flow from matured derivative financial instruments (83) 480
Cash flow from movement in cash collateral (15) 32
Cash flow from repayment of loans - (286)
----------------------------------------------------------------------------- ----- ----- -------
Net cash flow from financing activities 25 (995) (675)
----------------------------------------------------------------------------- ----- ----- -------
Net increase in cash and cash equivalents 542 158
Cash and cash equivalents at 1 January 2,771 2,537
Effect of foreign exchange rate changes on cash and cash equivalents (49) 76
----------------------------------------------------------------------------- ----- ----- -------
Cash and cash equivalents at 31 December 3,264 2,771
----------------------------------------------------------------------------- ----- ----- -------
Comprising:
Cash and cash equivalents 17 3,271 2,769
Overdrafts 19 (7) -
Cash classified as held for sale - 2
----------------------------------------------------------------------------- ----- ----- -------
Cash and cash equivalents at 31 December 3,264 2,771
----------------------------------------------------------------------------- ----- ----- -------
1. Re-presented to reclassify interest paid from investing to financing activities.
Notes to the Group accounts
30. Related party transactions
The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments (note 11) and pension schemes (note 21).
Transactions occur with the equity accounted investments 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:
Sales to Purchases from Amounts owed by Amounts owed to Management
related party related party related party related party(1) recharges(1)
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
Related party GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ------- ------- ------- ------- ------- ------- -------- -------- -----------
Advanced
Electronics
Company
Limited 86 27 158 95 24 - 5 - - -
CTA
International
SAS 8 6 - - 3 4 - - - -
Eurofighter
Jagdflugzeug
GmbH 1,004 997 - 3 47 41 49 126 - -
FADEC
International
LLC 95 79 - - - - - - - -
FAST Training
Services
Limited 2 - - - - - - - - -
Gripen
International
KB - - - - - 18 - 16 - -
MBDA SAS(2) 28 24 199 199 9 2 873 608 16 16
Panavia
Aircraft GmbH 48 64 51 79 3 4 - - - -
-------------- ------- ------- ------- ------- ------- ------- ------- -------- -------- -----------
1,271 1,197 408 376 86 69 927 750 16 16
-------------- ------- ------- ------- ------- ------- ------- ------- -------- -------- -----------
1. Also relates to disclosures under IAS 24, Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2017, GBP884m (2016 GBP631m) was owed by BAE Systems plc and GBP43m (2016 GBP119m) by other Group subsidiaries.
2. Amounts owed to related party in 2016 excludes GBP285m included within amounts due to long-term contract customers.
The Group considers key management personnel as defined under IAS 24, Related Party Disclosures, to be the members of the Group's Executive Committee and the Company's non-executive directors. Fuller disclosures on directors' remuneration are set out in the Annual remuneration report on pages 96 to 115. Total emoluments for directors and key management personnel charged to the Consolidated income statement were:
2017 2016
GBP'000 GBP'000
----------------------------- -------- --------
Short-term employee benefits 16,878 19,389
Post-employment benefits 1,661 1,931
Share-based payments 5,123 5,744
----------------------------- -------- --------
23,662 27,064
----------------------------- -------- --------
Note and page references used above refer to the Annual Report 2017 that can be viewed on the Company's website.
Cautionary statement: All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of BAE Systems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements, which reflect management's assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of BAE Systems or the markets and economies in which BAE Systems operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. BAE Systems plc and its directors accept no liability to third parties in respect of this report save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Schedule 10A of the Financial Services and Markets Act 2000. It should be noted that Schedule 10A and Section 463 of the Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that their liability is solely to BAE Systems plc.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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