We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register for streaming realtime charts, analysis tools, and prices.
| 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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| -43.50 | -3.19% | 1,320.00 | 1,322.50 | 1,323.50 | 1,358.00 | 1,290.00 | 1,357.00 | 9,144,795 | 16:35:16 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Aircraft | 23.23B | 1.86B | 0.6133 | 21.57 | 40.06B |
From Apr 2019 to Apr 2024
TIDMBA.
RNS Number : 7194I
BAE SYSTEMS PLC
03 April 2020
BAE Systems plc
Annual Report 2019
BAE Systems plc has today published its Annual Report and Accounts for the year ended 31 December 2019 ('Annual Report 2019'). The full document can be viewed on the Company's website at:
www.baesystems.com/investors
Copies of the Annual Report 2019 will be posted to those shareholders who have requested to receive communications from the Company in printed form.
The Strategic Report and the Directors' Report in the Annual Report were made as of 19 February 2020. Since that date, the Company issued announcements on 2nd and 3rd April 2020 which update certain information in the Annual Report including in respect of the dividend and in respect of the extension of Nick Rose's tenure as a non-executive director of BAE Systems plc.
In compliance with Section 9.6.1 of the Listing Rules, a copy of the Annual Report 2019 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 Conduct Authority's Disclosure Guidance and Transparency Rules and accordingly contains certain sections of the Annual Report 2019 in unedited full text. Page and chart references within the text of this announcement are references to pages and charts in the Annual Report 2019 that can be viewed as detailed above.
The financial information for the year ended 31 December 2019 contained in this announcement was approved by the Board on 19 February 2020. This announcement does not constitute statutory accounts of the Company within the meaning of Section 435 of the Companies Act 2006, but is derived from those accounts.
Statutory accounts for the year ended 31 December 2018 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2019 will be delivered to the Registrar of Companies in due course.
The auditor has reported on those accounts. Its reports were not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying its report, and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
The Annual Report 2019 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 Chief Executive Officer of BAE Systems, Inc. --------------------- -------------------------------------------- Peter Lynas Group Finance Director --------------------- -------------------------------------------- Revathi Advaithi Non-executive director --------------------- -------------------------------------------- Dame Elizabeth Corley Non-executive director --------------------- -------------------------------------------- Chris Grigg Non-executive director --------------------- -------------------------------------------- Stephen Pearce Non-executive director --------------------- -------------------------------------------- Nicole Piasecki 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
19 February 2020
Chief Executive's review
" The Group maintained its strong balance between production and aftermarket services in terms of both revenue and margin, and the geographic mix of the business continued to evolve as our US and International business continued to grow and our UK and Kingdom of Saudi Arabia revenues remained stable. "
Charles Woodburn Chief Executive
Introduction
In 2019, we delivered a good set of financial results underpinned by improving operational performance. Governments in our key markets continue to prioritise defence and security and there is a strong demand for our capabilities, products and services.
BAE Systems is a resilient company with long-term strength from its programmes, technologies, customer relationships and sustainability agenda. The Group maintained its strong balance between production and aftermarket services in terms of both revenue and margin, and the geographic mix of the business continued to evolve as our US and International business continued to grow and our UK and Kingdom of Saudi Arabia revenues remained stable. Following the significant international wins in recent years, as these programmes ramp-up they will become the second-largest revenue drivers for the Group behind our US-based businesses.
The Group strategy remains focused, consistent and is delivering results. Execution on the key strategic objectives of operational excellence, competitiveness and technological innovation is vital for the successful delivery of our order backlog, to deliver future growth and a high-performing sustainable business. Good progress in all areas was made in 2019.
Operationally, programme performance improvement is now being delivered. We will continue to drive programme performance to ensure successful delivery of our order backlog and the expected improvements in long-term cash generation. However, our safety performance in the year fell below our high expectations. The safety and wellbeing of our employees is paramount. To that end, we have sought external expertise to review a number of our sites and strengthened our team with new heads of safety in the UK and US to refocus and sharpen our thinking in this critical area.
Investment in self-funded research and development increased in the year and our portfolio was further bolstered by two technology-focused acquisitions. We aim to further increase technology funding in the coming years especially in Air and Electronic Systems as we look to maintain and enhance our long-term strategic positions.
We recognise that the way we do business and the actions and behaviours we demonstrate are vital for the long-term strength and sustainability of our business. Our behaviours are integral to the delivery of our strategy as we look to empower employees, create a diverse and inclusive working environment, recruit and retain talent and invest in technology and new facilities. Strong governance is at the heart of everything we do. This provides the base from which environmental and social activities are embedded in the business to deliver a positive social impact, a sustainable business, and ensure we do business in the right way.
2019 performance
US
Our US-based portfolio remains well aligned with customer priorities and the key focus areas outlined in the US National Defense Strategy.
The passage and signing of the fiscal year 2020 Defense Appropriations bill ended the Continuing Resolution and maintained funding support for many key BAE Systems programmes, including combat vehicles, F-35, electronic warfare programmes, and current and future precision weapons systems.
The fiscal year 2020 measure includes a top line budget of $738bn for defence, a 3% increase over 2019, and lawmakers have already agreed to a bipartisan deal setting the defence spending caps for fiscal year 2021 at $740.5bn. Whilst we remain cautiously optimistic about the budget process, numerous ongoing political issues may continue to detract from the timely passage of appropriations legislation.
Our US electronics business delivered another standout operational performance in 2019, especially in our core franchise positions in the high-technology areas of electronic warfare, precision-guided munitions, Intelligence, Surveillance and Reconnaissance, and electro-optics. The business closed with a record order backlog and the outlook for all its defence-focused divisions is positive with the portfolio well positioned to address key growth areas. These capabilities are also being leveraged on international as well as domestic programmes.
The Controls and Avionics and Power and Propulsion Solutions businesses are leveraging capabilities from our defence base to provide adjacencies into the commercial markets, giving exposure to the expanding civil aerospace market through our engine and flight control franchises.
The business remains focused on investment in emerging technologies and leveraging customer funding to maintain, develop and grow our strong market positions. Aligned with this strategy, Electronic Systems acquired the Riptide Autonomous Solutions business, a developer of unmanned underwater vehicles, in June 2019.
In January 2020, the Group announced two asset purchase agreements worth a total estimated $2.2bn for the proposed acquisitions of Collins Aerospace's Military Global Positioning System business and Raytheon's Airborne Tactical Radios business, both of which would be integrated into the Electronic Systems portfolio. These proposed acquisitions are conditional upon the successful closing of the pending Raytheon and United Technologies Corporation merger, as well as other customary closing conditions and required US regulatory approvals.
Platforms & Services (US) made steady progress in addressing its operational challenges. The US-based combat vehicles business is implementing a number of process and automation improvements to meet increased production volumes across multiple programmes with lessons learned being applied across the portfolio. The M109A7 met its delivery targets in the second half of the year and initial deliveries were made on the Amphibious Combat Vehicle programme. Further contract awards were received for the M88A3 modernisation and Bradley A4 programmes, strengthening the order backlog. Looking into 2020 the business will have three upgrade and three new-build programmes ramping up through its facilities.
The sector continued to shape its marketleading US naval ship repair business, maintaining a strong bid pipeline for repair and modernisation services, and working with the US Navy to improve utilisation levels. To this end, it was a strategic step forward in October when the first destroyer tandem docking in our San Diego facility was achieved. The ship repair and naval guns franchises are well supported by the growth outlook in the US Navy budget and projected fleet size. With the delivery of the final constructed ship in March and the sale of the Mobile shipyard, we exited commercial shipbuilding.
In our US-based Intelligence & Security business, we are maintaining a high level of bid activity and a strong pipeline despite a highly competitive and evolving market. The business is delivering on contracts with good programme and financial performance in the year.
UK
The UK is Europe's largest defence market. The UK government recently stated its commitment to uphold the NATO commitment to spend at least 2% of Gross Domestic Product on defence, and to increase the defence budget by at least 0.5% above inflation, in every year of the current parliament. The government is also expected to launch an Integrated Foreign Policy, Defence and Security Review during the course of 2020.
The work under the Team Tempest contract to develop next-generation combat air technologies, skills and expertise, in collaboration with UK government and industry partners, continues at pace. In the second half of the year the commitment of both Sweden and Italy to work with the UK on creating next-generation combat air capability was a welcome development.
During 2019, we remained focused on the execution of our long-term contracted positions in Air and Maritime.
In Air, the production ramp-up of rear fuselage assemblies for the F-35 Lightning II aircraft progressed well with 142 sets delivered. Full-rate production levels of approximately 160 sets are targeted in 2020. As the UK and global fleets grow, securing a long-term support position on the F-35 Lightning II remains a key focus.
With imminent completion of the current partner nation deliveries, Typhoon production is now focused on the sub-assembly build on the Kuwait and Qatar programmes, which sustain production into the mid-2020s. The potential pipeline for Typhoon additional orders remains positive, with opportunities both with partner nations and through exports with existing and new customers. Securing additional orders would extend production revenue levels.
Typhoon support delivered the expected operational performance levels and, with the Centurion standard having been declared, the UK Tornado fleet successfully retired from service on schedule.
In Maritime, the aircraft carrier build programme was completed with HMS Prince of Wales being accepted by the customer. The Offshore Patrol Vessels programme stabilised in the year delivering the second and third ships. The fourth ship was accepted in February 2020, and the final ship is expected to complete this year. Manufacturing work on the Type 26 programme in the UK continues to increase following cut steel on the second ship in August. Activity on the Dreadnought programme ramped up throughout the year with revenues now exceeding those on the Astute programme. The associated major programme of building works continued to progress.
BAE Systems will of course support the UK government in achieving its aim to ensure that the UK maintains its key role in European security and defence post-Brexit and to strengthen bilateral relationships with key partners in Europe. This will be important for ongoing collaboration in the development of defence capabilities.
The Group has relatively limited UK-EU trading and the majority of persons employed in the UK are UK nationals, with only limited movement of EU nationals into and out of the Group's UK businesses. Accordingly, the resulting Brexit near-term impacts across the business are likely to be limited.
International
Our defence and security capabilities remain highly relevant in an uncertain global environment with complex threats. During 2019, we further widened our international reach through the export win in Canada and a number of Foreign Military Sales through our Electronic Systems business. There are good prospects in existing and new international markets for our products and services in air, maritime, land and cyber security. Defence and security remains high on national agendas with the need in many cases to recapitalise or upgrade ageing equipment.
In Saudi Arabia, we continue to work closely with industry partners and UK government to ensure that the export licences required to enable us to fulfil our contractual obligations in the Kingdom are in place. On the Hawk programme, the first in-Kingdom final assembled aircraft were completed and entered into service.
BAE Systems continues to address current and potential new requirements as part of long-standing agreements between the UK government and the Saudi Arabian government as we continue to work on the localisation of defence capabilities in Saudi Arabia, in support of the Saudi Arabian government's National Transformation Plan and Vision 2030. Over many years, the Group has developed and taken shareholdings in local Saudi businesses. The Group is restructuring its portfolio of interests in these businesses and in the year, it disposed of its shareholding in Aircraft Accessories and Components Company. Following the Group's subsidiary, Overhaul and Maintenance Company, entering into a heads of terms for the sale of its 50% shareholding in Advanced Electronics Company to Saudi Arabian Military Industries, negotiations are continuing and the transaction is expected to take place in 2020.
In Qatar the contract between BAE Systems and the Government of the State of Qatar for the supply of 24 Typhoon and nine Hawk aircraft to the Qatar Amiri Air Force, along with a bespoke support and training package, is meeting its contractual milestones with Typhoon aircraft delivery now aligned to an accelerated schedule which was agreed in the year.
In Australia, the initial four-year design and productionisation phase on the Hunter Class programme commenced and the first formal integrated baseline review is scheduled to commence in Q1 2020. Production of the first ship is expected to commence in South Australia in the early 2020s. This Hunter Class programme will, over time, double the size of our current Australian business.
Following contract signing in February 2019, BAE Systems is providing the design, based on the Type 26, for the Canadian Surface Combatant programme. Mobilisation activities are progressing on the programme.
Whilst operating under a difficult geopolitical backdrop, the MBDA joint venture has continued to win orders in both domestic and international markets. The business continues to invest in new products and is well placed to benefit from defence spend increases in a number of European countries and international opportunities.
Cyber security
In our Applied Intelligence business, the UK Government Services division performed well. Following a strategic review, the Group commenced a process for the disposal of the Applied Intelligence US-based software-as-a-service business and decided to exit the UK-based Managed Security Services business. Cyber security is an increasingly important part of government security and a core element of stewardship for companies in a sophisticated and persistent threat environment. The services and products we offer in the remaining core business, including the Financial Services division, are expected to drive growth and improved returns as the market continues to develop.
Balance sheet and capital allocation
The Group's balance sheet is managed conservatively, in line with its policy, to retain its investment grade credit rating and to ensure operating flexibility.
Consistent with this approach, the Group expects to continue to meet its pension obligations, invest in research and technology and pursue other organic investment opportunities, and plans to pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings. Investment in value-enhancing acquisitions and returns to shareholders through a share buyback will be considered in line with our clear and consistent strategy and capital allocation policy.
A $1bn 6.375% bond, of which $500m had been converted to a floating rate bond by utilising interest rate swaps, matured and was repaid in June 2019.
Post-employment benefits schemes
The Group's share of the pre-tax accounting net post-employment benefits deficit increased to GBP4.5bn (2018 GBP4.0bn). The impact of lower discount rates increasing liabilities was in some part offset by good asset returns and changes in mortality assumptions.
In October 2019, six of the Group's nine UK pension schemes (including the two largest schemes) were consolidated into a single scheme. Following that consolidation, the Company agreed with the new Trustee Board to bring forward the funding valuation of the combined scheme to 31 October 2019 from the previously scheduled date of 31 March 2020.
After consultation with The Pensions Regulator in the UK, the Group has reached agreement with the Trustee Board of the combined scheme on the accelerated funding valuation and revised deficit recovery plan.
At the 31 October 2019 funding valuation date, the deficit was GBP1.9bn. The current deficit recovery plan which runs to 2026 will be replaced by a new deficit recovery plan, under which a one-off payment of GBP1bn is to be made in the coming months, with approximately GBP240m of funding payable in the scheme year ending 31 March 2020 and approximately GBP250m by 31 March 2021.
Executive Committee changes
At the start of 2019 David Armstrong was appointed as Group Business Development Director following Alan Garwood's retirement. In June, Mark Phillips was appointed Group Communications Director and in May, Andrew Wolstenholme left the Company and was replaced by Glynn Phillips as Group Managing Director Maritime. Brad Greve joined the Executive Committee in September following his appointment as Group Finance Director designate to succeed Peter Lynas and joins the BAE Systems plc Board on 1 April 2020. At the start of 2020 Ben Hudson was appointed as Chief Technology Officer, replacing Nigel Whitehead who announced his intention to retire.
Summary
Our business benefits from a large order backlog, with 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 key markets continuing to prioritise defence and security, with strong demand for our capabilities. Through execution of our strategy, BAE Systems is well placed to maximise opportunities, deal with the challenges and deliver a business focused on sustainability and generating shareholder value.
Charles Woodburn Chief Executive
Extract from
Chairman's letter
Our Board
The Board is a valuable diverse mix of gender, experience and skills with talent drawn from different countries, industries and age groups. It is a Board I feel privileged to chair and appreciative of the valuable counsel they offer in both the strategic direction and operational performance of the business. Each member continues to demonstrate great enthusiasm for their role, a deep commitment to the business and a willingness to give unselfishly of their time and knowledge. Board chemistry is excellent enabling an atmosphere that encourages freedom of expression, debate and considered decision-making.
Time served has been carefully considered and we currently have a good balance of seasoned experience and recently-recruited capability.
Non-executive directors
We are respectful of UK governance recommendations on non-executive directors serving a maximum of nine years to preserve independence. Sadly, adherence to this recommendation results in the loss of considerable talent and experience from the Board which is inevitably much missed in a complex international business.
In seeking to preserve valuable experience, in 2018 we received approval to extend the term of our Senior Independent Non-Executive Director, Nick Rose, by one year, but it is with great regret that he must now stand down in February 2020(1) .
Similarly, we were sorry to lose Harriet Green, who stepped down from the Board in November 2019 after nine years' invaluable service.
I am delighted that Paula Rosput Reynolds, who chairs our Remuneration Committee, has agreed to remain on the Board for a further year with support from our major shareholders.
During the course of 2020 we will be seeking to recruit two new non-executive directors as part of our continuous succession planning.
1 Since the Annual Report dated 19 February 2020, the Company announced on 2 April 2020 that Nick Rose has agreed to extend his term of appointment as a Non-Executive Director of the Company for up to one further year.
Executive directors
2020 will be a year of change within the executive director leadership team. Peter Lynas, the Group Finance Director, will retire in March having served the Company and its predecessor businesses since 1985. Peter reinforced the rigour, discipline and structure of our financial systems and provided wise and seasoned management oversight to ensure the quality of our earnings, the health of our balance sheet and the trust of our stakeholders.
Similarly, Jerry DeMuro, the Chief Executive Officer of BAE Systems, Inc., will retire from the Board in March having joined the Company in 2014 after an outstanding career at senior levels within the defence industry. Jerry has led our Inc. business with considerable skill and has overseen the remarkable growth of our US business, most notably, the Electronic Systems sector which is a world leader in its field.
Peter and Jerry will leave the Group having been major contributors to its operational success, cultural development and stakeholder reputation.
Following their departures, there will be a seamless transition in April by the recently-recruited Brad Greve to Group Finance Director, who will have had an induction period of seven months in the business prior to stepping up to the role and by Tom Arseneault, currently President & Chief Operating Officer of BAE Systems, Inc., to President and Chief Executive Officer of BAE Systems, Inc.
Summary
In summary, we are pleased to have delivered another year of strong performance with sales of GBP20.1bn, underlying earnings per share of 45.8p, underpinned by an order backlog of GBP45.4bn and free cash flow of GBP850m.
The fundamentals of the business are sound, the order backlog substantial and the management team strong.
The Board therefore has recommended a final dividend of 13.8p for a total of 23.2p for the full year. Subject to shareholder approval at the May 2020 Annual General Meeting, the dividend will be paid on 1 June 2020 to holders of ordinary shares registered on 17 April 2020(2) .
Sir Roger Carr Chairman
2 Since the Annual Report dated 19 February 2020, the Company announced on 3 April, 2020 that the Board believes it is in the Company`s best interests, having regard to all our stakeholders' interests, to defer the decision on the 13.8 pence per share dividend proposed by the Board when announcing the Company's 2019 results in February.
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
2019 2018
Financial performance measures as defined by the Group GBPm GBPm
------------------------------------------------------- ---- ------ ------
Sales KPI 20,109 18,407
------------------------------------------------------- ---- ------ ------
Underlying EBITA KPI 2,117 1,928
------------------------------------------------------- ---- ------ ------
Return on sales 10.5% 10.5%
------------------------------------------------------------- ------ ------
Financial performance measures defined in IFRS(1) GBPm GBPm
-------------------------------------------------- ------ ------
Revenue 18,305 16,821
--------------------------------------------------- ------ ------
Operating profit 1,899 1,605
--------------------------------------------------- ------ ------
Return on revenue 10.4% 9.5%
--------------------------------------------------- ------ ------
Reconciliation of sales to revenue GBPm GBPm
------------------------------------------------------ ---- ------- -------
Sales KPI 20,109 18,407
------------------------------------------------------ ---- ------- -------
Deduct Share of sales by equity accounted investments (2,878) (2,812)
------------------------------------------------------------ ------- -------
Add Sales to equity accounted investments 1,074 1,226
------------------------------------------------------------ ------- -------
Revenue 18,305 16,821
------------------------------------------------------------ ------- -------
Reconciliation of underlying EBITA to operating profit GBPm GBPm
--------------------------------------------------------------------------------- ----- ----- -----
Underlying EBITA KPI 2,117 1,928
--------------------------------------------------------------------------------- ------ ----- -----
Non-recurring items (27) (154)
----------------------------------------------------------------------------------------- ----- -----
Amortisation of intangible assets (109) (85)
----------------------------------------------------------------------------------------- ----- ----- Impairment of intangible assets (6) (33) ----------------------------------------------------------------------------------------- ----- ----- Financial expense of equity accounted investments (23) (13) ----------------------------------------------------------------------------------------- ----- ----- Taxation expense of equity accounted investments (53) (38) ----------------------------------------------------------------------------------------- ----- ----- Operating profit 1,899 1,605 ----------------------------------------------------------------------------------------- ----- ----- Net finance costs (273) (381) ----------------------------------------------------------------------------------------- ----- ----- Taxation expense (94) (191) ----------------------------------------------------------------------------------------- ----- ----- Profit for the year 1,532 1,033 ----------------------------------------------------------------------------------------- ----- ----- Underlying interest expense(3) (257) (215) ----------------------------------------------------------------------------------------- ----- ----- Net interest expense on post-employment benefit obligations (117) (106) ----------------------------------------------------------------------------------------- ----- ----- Fair value and foreign exchange adjustments on financial instruments and investments 78 (73) ----------------------------------------------------------------------------------------- ----- ----- Net finance costs (including equity accounted investments) (296) (394) ----------------------------------------------------------------------------------------- ----- -----
Exchange rates
Average 2019 2018 -------- ----- ----- GBP/$ 1.277 1.335 --------- ----- ----- GBP/EUR 1.141 1.130 --------- ----- ----- GBP/A$ 1.836 1.786 --------- ----- ----- Sensitivity analysis ----------------------------------------------------------------------------- ---- Estimated impact on sales of a ten cent movement in the average exchange rate GBPm ----------------------------------------------------------------------------- ---- $ 675 ----------------------------------------------------------------------------- ---- EUR 100 ----------------------------------------------------------------------------- ---- A$ 40 ----------------------------------------------------------------------------- ----
1. International Financial Reporting Standards.
2. Generally Accepted Accounting Principles.
3. Underlying net interest expense is defined as finance costs for the Group and its share of equity accounted investments, excluding net interest expense on post-employment benefit obligations and fair value and foreign exchange adjustments on financial instruments and investments.
Income statement
Sales increased by GBP1.7bn to GBP20.1bn (2018 GBP18.4bn), a 7% increase on a constant currency basis(1) .
Underlying EBITA increased to GBP2,117m (2018 GBP1,928m), giving a return on sales of 10.5% (2018 10.5%). Excluding the impacts of IFRS 16 and exchange translation, growth was 5% .
Revenue increased by GBP1.5bn to GBP18.3bn (2018 GBP16.8bn), a 7% increase on a constant currency basis(1) .
Operating profit increased by GBP294m to GBP1,899m (2018 GBP1,605m). There was a favourable exchange translation impact of GBP36m .
Non-recurring items in 2019 of GBP27m comprises a GBP36m charge relating to the derecognition of Enterprise Resource Planning software intangible assets in the Air sector, charges of GBP13m relating to legal disputes arising from historical disposals, a gain of GBP14m on the sale of the Group's 55% shareholding in BAE Systems Global Combat Systems Limited upon formation of the Rheinmetall BAE Systems Land joint venture, and a gain of GBP8m relating to the disposal of Aircraft Accessories and Components Company. Non--recurring items in 2018 of GBP154m represented a Guaranteed Minimum Pension equalisation charge of GBP114m, and a loss on disposal of the Mobile, Alabama, shipyard of GBP40m .
Amortisation of intangible assets is GBP109m (2018 GBP85m), the increase mainly a result of new IT systems becoming operational .
Impairment of intangible assets in 2019 is GBP6m. In 2018 the charge represented the impairment of Silversky customer-related intangibles in the Applied Intelligence business .
Net finance costs, including equity accounted investments, were GBP296m (2018 GBP394m). The underlying interest charge, excluding pension accounting, and fair value and foreign exchange adjustments on financial instruments and investments increased to GBP257m (2018 GBP215m). Net interest expense on the Group's pension deficit was GBP117m (2018 GBP106m). There was a credit in respect of fair value and foreign exchange adjustments of GBP78m (2018 GBP73m charge) on exchange translation of US dollar-denominated bonds .
Taxation expense, including equity accounted investments, of GBP147m (2018 GBP229m) reflects the Group's underlying effective tax rate for the year of 19%, less a GBP161m credit in respect of two items. Following agreements reached in respect of overseas tax matters, a one-off benefit has been recognised; and following review of the April 2019 EU Commission decision that concluded that the UK's Controlled Foreign Company regime partially represents State Aid, a provision has been recognised for the estimated exposure. The underlying effective rate increased to 19% from 18% in 2018 .
The calculation of the underlying effective tax rate is shown in note 6 to the Group accounts on page 174.
The underlying effective tax rate for 2020 is expected to increase from 19% to around 20%, with the final rate dependent on the geographical mix of profits.
Earnings per share
Underlying earnings per share excluding the one-off tax benefit for the year increased by 7% to 45.8p (2018 42.9p). Underlying earnings per share including the one-off tax benefit for the year was 50.8p.
Basic earnings per share was 46.4p (2018 31.3p).
The application of IFRS 16 Leases for the first time in 2019 has had no material impact on earnings per share.
Earnings per share
------------------------------------------------------------------------- ---- --------- ---------
Financial performance measures as defined by the Group 2019 2018
------------------------------------------------------------------------- ---- --------- ---------
Underlying earnings (excluding the one-off tax benefit) GBP1,457m GBP1,370m
------------------------------------------------------------------------- ---- --------- ---------
Underlying earnings per share (excluding the one-off tax benefit) KPI 45.8p 42.9p
------------------------------------------------------------------------- ---- --------- ---------
Underlying earnings (including the one-off tax benefit) GBP1,618m GBP1,370m
------------------------------------------------------------------------- ---- --------- ---------
Underlying earnings per share (including the one-off tax benefit) 50.8p 42.9p
------------------------------------------------------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
------------------------------------------------------------------------- ---- --------- ---------
Profit for the year attributable to equity shareholders GBP1,476m GBP1,000m
------------------------------------------------------------------------------- --------- ---------
Basic earnings per share 46.4p 31.3p
------------------------------------------------------------------------------- --------- ---------
Reconciliation of underlying EBITA to underlying earnings GBPm GBPm
------------------------------------------------------------------------- ---- --------- ---------
Underlying EBITA 2,117 1,928
------------------------------------------------------------------------------- --------- ---------
Underlying net interest expense (including equity accounted investments)(3) (257) (215)
------------------------------------------------------------------------------- --------- ---------
1,860 1,713
------------------------------------------------------------------------------ --------- ---------
Taxation expense (at the underlying effective tax rate,
excluding the one-off tax benefit) (347) (310)
------------------------------------------------------------------------------- --------- ---------
Non-controlling interests (56) (33)
------------------------------------------------------------------------------- --------- --------- Underlying earnings (excluding the one-off tax benefit) 1,457 1,370 ------------------------------------------------------------------------------- --------- --------- One-off tax benefit 161 - ------------------------------------------------------------------------------- --------- --------- Underlying earnings (including the one-off tax benefit) 1,618 1,370 ------------------------------------------------------------------------------- --------- --------- Reconciliation of underlying earnings to profit for the year attributable to equity shareholders GBPm GBPm ------------------------------------------------------------------------------------------------- ----- ----- Underlying earnings (excluding the one-off tax benefit) 1,457 1,370 -------------------------------------------------------------------------------------------------- ----- ----- Non-recurring items, post tax (18) (126) -------------------------------------------------------------------------------------------------- ----- ----- Amortisation and impairment of intangible assets, post tax (93) (97) -------------------------------------------------------------------------------------------------- ----- ----- Net interest expense on post-employment benefit obligations, post tax (95) (87) -------------------------------------------------------------------------------------------------- ----- ----- Fair value and foreign exchange adjustments on financial instruments and investments, post tax 64 (60) -------------------------------------------------------------------------------------------------- ----- ----- One-off tax benefit 161 - -------------------------------------------------------------------------------------------------- ----- ----- Profit for the year attributable to equity shareholders 1,476 1,000 -------------------------------------------------------------------------------------------------- ----- ----- Non-controlling interests 56 33 -------------------------------------------------------------------------------------------------- ----- ----- Profit for the year 1,532 1,033 -------------------------------------------------------------------------------------------------- ----- -----
Orders
Order intake(4) decreased by GBP9.8bn to GBP18,447m (2018 GBP28,280m).
Order backlog(4) decreased by GBP3.0bn to GBP45.4bn, with trading on multi-year, long-term contracts in the Air sector partly offset by growth in the US businesses.
Orders ------------------------------------------------------ --- ---------- ---------- Financial performance measures as defined by the Group 2019 2018 ------------------------------------------------------ --- ---------- ---------- Order intake(4) KPI GBP18,447m GBP28,280m ------------------------------------------------------ --- ---------- ---------- Order backlog(4) GBP45.4bn GBP48.4bn ------------------------------------------------------ --- ---------- ----------
1. Current year compared with prior year translated at current year exchange rates.
2. International Financial Reporting Standards.
3. Underlying net interest expense is defined as finance costs for the Group and its share of equity accounted investments, excluding net interest expense on post-employment benefit obligations and fair value and foreign exchange adjustments on financial instruments and investments.
4. Including share of equity accounted investments.
Cash flow
------------------------------------------------------- ---- ----- -----
2019 2018
Financial performance measures as defined by the Group GBPm GBPm
------------------------------------------------------- ---- ----- -----
Operating business cash flow KPI 1,307 993
------------------------------------------------------- ---- ----- -----
Financial performance measures defined in IFRS(1) GBPm GBPm
-------------------------------------------------- ----- -----
Net cash flow from operating activities 1,597 1,200
--------------------------------------------------- ----- -----
Reconciliation from operating business cash flow
to net cash flow from operating activities GBPm GBPm
------------------------------------------------------------------------------------------- ------- -----
Operating business cash flow KPI 1,307 993
------------------------------------------------------------------------------------- ---- ------- -----
Add back Net capital expenditure and financial investment 454 464
------------------------------------------------------------------------------------------- ------- -----
Add back Principal element of lease payments and receipts 230 -
------------------------------------------------------------------------------------------- ------- -----
Deduct Dividends received from equity accounted investments (142) (57)
------------------------------------------------------------------------------------------- ------- -----
Deduct Taxation (252) (200)
------------------------------------------------------------------------------------------- ------- -----
Net cash flow from operating activities 1,597 1,200
------------------------------------------------------------------------------------------- ------- -----
Net capital expenditure and financial investment (454) (464)
------------------------------------------------------------------------------------------- ------- -----
Principal element of finance lease receipts 9 -
------------------------------------------------------------------------------------------- ------- -----
Dividends received from equity accounted investments 142 57
------------------------------------------------------------------------------------------- ------- -----
Interest received 28 25
------------------------------------------------------------------------------------------- ------- -----
Acquisitions and disposals(1) 43 24
------------------------------------------------------------------------------------------- ------- -----
Net cash flow from investing activities (232) (358)
------------------------------------------------------------------------------------------- ------- -----
Interest paid (233) (203)
------------------------------------------------------------------------------------------- ------- -----
Net sale of own shares - 1
------------------------------------------------------------------------------------------- ------- -----
Equity dividends paid (724) (703)
------------------------------------------------------------------------------------------- ------- -----
Partial disposal of shareholding in subsidiary undertaking(1) 31 17
------------------------------------------------------------------------------------------- ------- -----
Dividends paid to non-controlling interests (56) (28)
------------------------------------------------------------------------------------------- ------- -----
Principal element of lease payments (239) -
------------------------------------------------------------------------------------------- ------- -----
Cash flow from matured derivative financial instruments (excluding cash flow hedges) 40 6
------------------------------------------------------------------------------------------- ------- -----
Movement in cash collateral 1 2
------------------------------------------------------------------------------------------- ------- -----
Net cash flow from loans (782) (7)
------------------------------------------------------------------------------------------- ------- -----
Net cash flow from financing activities (1,962) (915)
------------------------------------------------------------------------------------------- ------- ----- Net decrease in cash and cash equivalents (597) (73) ------------------------------------------------------------------------------------------- ------- ----- Add back Net cash flow from loans 782 7 ------------------------------------------------------------------------------------------- ------- ----- Foreign exchange translation 72 (188) ------------------------------------------------------------------------------------------- ------- ----- Other non-cash movements (96) 102 ------------------------------------------------------------------------------------------- ------- ----- Decrease/(increase) in net debt 161 (152) ------------------------------------------------------------------------------------------- ------- ----- Opening net debt (904) (752) ------------------------------------------------------------------------------------------- ------- ----- Net debt KPI (743) (904) ------------------------------------------------------------------------------------- ---- ------- ----- Operating business cash flow 1,307 993 ------------------------------------------------------------------------------------------- ------- ----- Interest paid, net of interest received (205) (178) ------------------------------------------------------------------------------------------- ------- ----- Taxation (252) (200) ------------------------------------------------------------------------------------------- ------- ----- Free cash flow (as defined by the Group)(2) 850 615 ------------------------------------------------------------------------------------------- ------- -----
1. 2018 comparatives have been reclassified to present a cash inflow of GBP17m in respect of a partial disposal of the Group's shareholding in a subsidiary undertaking within financing activities. This cash flow was previously presented in investing activities.
214 Notes 26 and 28 to the Group accounts
Cash flow
Operating business cash inflow was GBP1,307m (2018 GBP993m), which includes cash contributions in respect of pension deficit funding, over and above service costs, for the UK and US schemes totalling GBP231m on a funding basis.
Net cash inflow from operating activities was GBP1,597m (2018 GBP1,200m). Under IFRS 16 net lease cash outflows of GBP273m are now classified under financing and investing activities.
Taxation payments increased to GBP252m (2018 GBP200m) partly reflecting payments in Australia following the end of utilisation of prior year losses.
Net capital expenditure and financial investment was GBP454m (2018 GBP464m).
Dividends received from equity accounted investments of GBP142m (2018 GBP57m) were primarily receipts from MBDA (GBP73m), Advanced Electronics Company (GBP38m) and FNSS (GBP17m).
Interest received was GBP28m (2018 GBP25m).
The cash inflows in respect of acquisitions, disposals, held for sale assets and the partial disposal of shareholdings in subsidiary undertakings represent the disposal of Aircraft Accessories and Components Company (GBP26m), the disposal of the UK-based land vehicles business into the RBSL joint venture (GBP29m), the reduction in the Group's shareholding in Overhaul and Maintenance Company (GBP31m) (2018 GBP17m), less the investment in Riptide Autonomous Solutions (GBP9m) and the Prismatic acquisition (GBP3m). The cash inflow in 2018 of GBP24m included cash acquired as part of the ASC Shipbuilding acquisition (GBP14m) and cash received on the sale of the Mobile, Alabama, shipyard (GBP12m).
Interest paid was GBP233m (2018 GBP203m).
Equity dividends paid in 2019 represents the 2018 final (GBP423m) and 2019 interim (GBP301m) dividends.
Dividends paid to non-controlling interests increased to GBP56m (2018 GBP28m), reflecting a higher payment by Saudi Maintenance & Supply Chain Management Company, in which the Group has a 51% shareholding.
There was a cash inflow from matured derivative financial instruments of GBP40m (2018 GBP6m), arising from rolling hedges relating to balances within the Group's subsidiaries and equity accounted investments.
Foreign exchange translation primarily arises in respect of the Group's US dollar-denominated borrowing.
1. International Financial Reporting Standards.
2. Free cash flow is defined as operating business cash flow less interest paid (net) and taxation.
Balance sheet
------------------------------------------------------------------------------ ---- ------- -------
2019 2018
Summarised balance sheet GBPm GBPm
------------------------------------------------------------------------------ ---- ------- -------
Intangible assets 10,371 10,658
------------------------------------------------------------------------------------ ------- -------
Property, plant and equipment, right-of-use assets and investment property(1) 3,188 2,017
------------------------------------------------------------------------------------ ------- -------
Equity accounted investments and other investments 441 442
------------------------------------------------------------------------------------ ------- -------
Working capital(1,2) (2,854) (3,191)
------------------------------------------------------------------------------------ ------- -------
Lease liabilities (1,291) -
------------------------------------------------------------------------------------ ------- -------
Group's share of net IAS 19 post-employment benefits deficit(2) (4,455) (4,029)
------------------------------------------------------------------------------------ ------- -------
Net tax assets and liabilities 690 449
------------------------------------------------------------------------------------ ------- -------
Net other financial assets and liabilities 34 70
------------------------------------------------------------------------------------ ------- -------
Net debt KPI (743) (904)
------------------------------------------------------------------------------ ---- ------- -------
Net assets held for sale 130 106
------------------------------------------------------------------------------------ ------- -------
Net assets 5,511 5,618
------------------------------------------------------------------------------------ ------- -------
1. Funding received of GBP524m (2018 GBP446m) 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.
2. The Saudi Arabia end of service benefit obligation of GBP97m at 31 December 2018 has been reclassified from trade and other payables to post-retirement benefit obligations.
Components of net debt GBPm GBPm ---------------------------------------------------- ---- ------- ------- Cash and cash equivalents 2,587 3,232 ---------------------------------------------------------- ------- ------- Debt-related derivative financial instruments (net) 67 163 ---------------------------------------------------------- ------- ------- Loans - non-current (3,020) (3,514) ---------------------------------------------------------- ------- ------- Loans and overdrafts - current (377) (785) ---------------------------------------------------------- ------- ------- Net debt KPI (743) (904) ---------------------------------------------------- ---- ------- ------- Exchange rates --------------- ----- ----- Year end 2019 2018 --------------- ----- ----- GBP/$ 1.324 1.274 ---------------- ----- ----- GBP/EUR 1.180 1.114 ---------------- ----- ----- GBP/A$ 1.884 1.809 ---------------- ----- -----
Balance sheet
The GBP0.3bn decrease in intangible assets to GBP10.4bn (2018 GBP10.7bn) mainly reflects exchange translation.
Property, plant and equipment, right-of--use assets and investment property is GBP3.2bn (2018 GBP2.0bn). Under IFRS 16 Leases, the balance sheet now includes right-of-use assets and lease liabilities.
Equity accounted investments and other investments was broadly unchanged at GBP441m (2018 GBP442m) mainly reflecting the Group's share of profit for the year (GBP168m), offset by increased pension allocation from the higher deficit (GBP52m) and dividends received (GBP142m). The new investment in the RBSL joint venture more than offsets the reclassification to held for sale of Advanced Electronics Company.
The Group's share of the net IAS 19 post-employment benefits deficit increased to GBP4.5bn (2018 GBP4.0bn). The impact of lower discount rates increasing liabilities was partly offset by strong asset returns and changes in mortality assumptions. The major movements in the net deficit are shown in the bridge chart on this page.
Details of the Group's post-employment benefits schemes are provided in note 23 to the Group accounts on page 200.
A net deferred tax asset of GBP0.8bn (2018 GBP0.7bn) relating to the Group's pension deficit is included within net tax assets and liabilities.
In aggregate, there was a GBP0.3bn increase in working capital largely reflecting utilisation of provisions, some inventory build in the US businesses and timing of receivables. There was some usage of last year's customer funding on the Qatar programme.
The Group's net debt at 31 December 2019 is GBP743m, a net decrease of GBP161m from the position at the start of the year. The $1bn 6.375% bond, of which $500m had been converted into a floating rate bond by utilising interest rate swaps, matured and was repaid in June 2019. The maturity of the Group's borrowings is shown in the chart on this page.
Cash and cash equivalents of GBP2,587m (2018 GBP3,232m) are held primarily for the repayment of debt securities, pension deficit funding, payment of the 2019 final dividend and management of working capital.
Net assets held for sale represent the Applied Intelligence US-based software-as-a--service business and Advanced Electronics Company in Saudi Arabia. The 2018 net assets held for sale comprised the UK-based combat vehicles business, where the Group subsequently formed a joint venture with Rheinmetall, and the Overhaul and Maintenance Company's 85.7% shareholding in Aircraft Accessories and Components Company, the disposal of which completed in January 2019 .
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 2019) See note 1 to the Group accounts ---------------------------------------------------------------------------------------------- Carrying value of goodwill Goodwill GBP10.0bn (at 31 December 2019) See note 8 to the Group accounts ---------------------------------------------------------------------------------------------- Deferred tax asset on post-employment benefit obligations Deferred tax asset on post-employment scheme deficits GBP0.8bn (at 31 December 2019) See note 15 to the Group accounts ---------------------------------------------------------------------------------------------- Tax provisions Tax provisions GBP180m (at 31 December 2019) See note 17 to the Group accounts ---------------------------------------------------------------------------------------------- Post-employment benefit obligations Group's share of the net IAS 19 post-employment scheme deficit GBP4.5bn (at 31 December 2019) See note 23 to the Group accounts ----------------------------------------------------------------------------------------------
158 Critical accounting policies
Changes in accounting policies
With effect from 1 January 2019, the Group adopted IFRS 16 Leases. This results in almost all leases being recognised on the balance sheet by lessees. The Group has applied the modified retrospective transition approach and therefore has not restated comparative amounts for the year ended 31 December 2018.
There are no accounting policy changes which are expected to have a significant impact on the Group with effect from 1 January 2020.
Capital
Objectives
Maintain the Group's investment grade credit rating and ensure operating flexibility, whilst:
- meeting its pension obligations;
- investing in research and technology and pursuing other 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 -------- -------- ------------------
212 Note 25 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 13.8p per share making a total of 23.2p per share for the year, an increase of 4.5% over 2018. At this level, the annual dividend is covered two times by underlying earnings. Subject to shareholder approval at the 2020 Annual General Meeting, the dividend will be paid on 1 June 2020 to holders of ordinary shares registered on 17 April 2020. The ex-dividend date is 16 April 2020(2) .
At 31 December 2019, the Company had retained earnings of GBP3.0bn (2018 GBP2.8bn), the non-distributable portion of which is GBP767m (2018 GBP707m) (see page 226). Total external dividends relating to 2019 are GBP743m (2018 GBP711m), including the interim dividend paid during the year of GBP301m (2018 GBP288m) and the final dividend proposed of approximately GBP442m (2018 GBP423m). On an annual basis, the Company receives dividends from its subsidiaries to increase 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 pages 89 and 90).
2 Since the Annual Report dated 19 February 2020, the Company announced on 3 April, 2020 that the Board believes it is in the Company`s best interests, having regard to all our stakeholders' interests, to defer the decision on the 13.8 pence per share dividend proposed by the Board when announcing the Company's 2019 results in February.
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 April 2024 is available to meet 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:
(a) the income statements or balance sheets of foreign subsidiaries; and
(b) equity accounted investments it regards as long-term investments.
189 Note 14 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 July 2018 (www.cbi.org.uk/media/3710/2018-02-07-statement-of-tax-principles.pdf).
173 Note 6 to the Group accounts
Chart, note and page references used above refer to the Annual Report 2019 that can be viewed on the Company's website.
Our 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
-------------------------- ------------------------ ------------------------------------------------------------
Defence spending
The Group is dependent on defence spending.
----------------------------------------------------------------------------------------------------------------------
In 2019, 92% of the Lower defence The business is geographically
Group's spending by spread across US, UK and
sales were the Group's international defence markets:
defence--related. major customers * in the US, in July 2019 a two-year budget agreement
Defence spending by could have a was signed to lift the deficit ceiling and budget
governments material adverse caps. The fiscal year 2020 appropriations bill was
can fluctuate depending on effect on the passed in December, closing out the Continuing
change of government Group's future Resolution. The fiscal year 2020 measure and the
policy, results and currently established fiscal year 2021 defence
other political financial condition. spending cap continue to demonstrate strong
considerations, bi-partisan support for defence, and maintains
budgetary constraints, support for our medium-term planning assumptions and
specific positive momentum for military readiness and
threats and movements in modernisation programmes;
the
international oil price.
There have been * in the UK, defence and security remains a priority
constraints for the UK government. The UK government recently
on government expenditure stated its commitment to uphold the NATO commitment
in to spend at least 2% of Gross Domestic Product on
a number of the Group's defence, and to increase the defence budget by at
principal least 0.5% above inflation, in every year of the
markets, in particular in current Parliament. The government is also expected
the to launch an Integrated Foreign Policy, Defence and
UK. Security Review during the course of 2020;
* in Saudi Arabia, regional tensions continue to
dictate that defence remains a high priority; and
* in Australia, regional instability and the rapid pace
of military modernisation and technology advancement
in the Asia-Pacific region continue to drive the
government's commitment to defence spending, with
major recapitalisation programmes underway in the air,
maritime and land domains. The government has
indicated its intent to grow defence spending by
committing to spend 2% of GDP by 2020/21.
The diverse product and services
portfolio is marketed across
a range of defence markets.
BAE Systems benefits from
a large order backlog, with
established positions on
long-term programmes in the
US, UK, Saudi Arabia and
Australia.
BAE Systems has a portfolio
of commercial businesses,
including commercial avionics.
Government customers
The Group's largest customers are governments.
----------------------------------------------------------------------------------------------------------------------
The Group has Deterioration Government customers have
long-standing in the Group's sophisticated procurement
relationships and security principal government and security organisations
arrangements with a number relationships with which the Group can
of its government resulting in have long-standing relationships
customers, the failure with well-established and
including its three to obtain contracts understood terms of business.
largest or expected In the event of a customer
customers, the governments funding appropriations, terminating a contract for
of the US, UK and Saudi adverse changes convenience, the Group would
Arabia, in the terms typically be paid for work
and their agencies. It is of its arrangements done and commitments made
important with those customers at the time of termination.
that these relationships or their agencies,
and or the termination
arrangements are of contracts
maintained. could have a
In the defence and material adverse
security effect on the
industries, governments Group's future
can results and
typically modify contracts financial condition.
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
------------------------------------- ---------------------- -------------------------------------------------
International markets
The Group operates in international markets.
--------------------------------------------------------------------------------------------------------------------
BAE Systems is an international The occurrence The Group has a balanced
company conducting business of any such portfolio of businesses across
in a number of regions, including events could a number of markets internationally.
the US and the Middle East. have a material The Group benefits from a
The risks of operating in some adverse effect large order backlog, with
countries include: social and on the Group's established positions on
political changes impacting future results long-term programmes in the
the business environment; economic and financial US, UK, Saudi Arabia and
downturns, political instability condition. The Australia.
and civil disturbances; the risk of the The Group's contracts are
imposition of restraints on Group's inability often long-term in nature
the movement of capital; the to obtain and and, consequently, it may
introduction of burdensome maintain the be able to mitigate these
taxes or tariffs; change of necessary export risks over the terms of those
export control and other government licences for contracts.
policy and regulations in the our business Political risk insurance
UK, US and all other relevant in Saudi Arabia is held in respect of export
jurisdictions; and the inability could affect contracts not structured
to obtain or maintain the necessary the Group's on a government-to-government
export licences. provision of basis.
In June 2019, the Court of capability to BAE Systems has a well-established
Appeal of England and Wales the country. legal and regulatory compliance
directed the United Kingdom structure aimed at ensuring
Secretary of State for International adherence to regulatory requirements
Trade to revisit the decision-making and identifying restrictions
process for granting licences that could adversely impact
for the sale of military equipment the Group's activities, including
to the Kingdom of Saudi Arabia export control requirements.
for possible use in the conflict
in Yemen and to retake its
decisions regarding such licences
on that basis. BAE Systems
will assess the result of the
retaking by the Secretary of
State of such decisions, once
they have been made. Pursuant
to the Order of the Court,
the Secretary of State undertook
not to grant new licences for
the export of arms or military
equipment to Saudi Arabia for
possible use in the conflict
in Yemen until such decisions
have been retaken. Both the
Secretary of State and the
other party to the proceedings
have sought and obtained permission
to appeal the Court's ruling
to the Supreme Court.
------------------------------------- -------------------------------------------------
The Group is exposed to volatility The Group's policy is to
arising from movements in currency hedge all material firm transactional
exchange rates, particularly currency exchange rate exposures.
in respect of the US dollar,
euro, Saudi riyal and Australian
dollar. There has been volatility
in currency exchange rates
in the period since the EU
referendum in the UK.
------------------------------------- -------------------------------------------------
The terms of the UK's relationship BAE Systems The UK's departure from the
with the EU after the end of benefits from EU with a Withdrawal Agreement
the transition phase on 31 a large order and entry into a transition
December 2020 are currently backlog with phase has materially reduced
uncertain, rendering it difficult established the risk of an immediate
for the Group to prepare in positions on change in trading arrangements
detail for the changes in the long-term programmes with the EU. The planning
regulatory environment that in the US, UK, that the Group undertook
are likely to apply beyond Saudi Arabia for a potential no-deal Brexit
the transition phase. and Australia will help to inform our preparations
There is also a risk that, and there is for the possible range of
as a result of the UK leaving relatively limited outcomes following the end
the EU, the Group's ability UK-EU trading. of the transition phase,
to take part in collaborative In respect of including but not limited
industrial programmes in Europe people, the to customs procedures, export
could encounter new EU barriers. majority of controls, and the use of
persons employed speciality chemicals, which
in the UK are is currently authorised by
UK nationals, an EU agency.
with only limited Separately, BAE Systems will
movement of support the UK government
EU nationals in achieving its aim to ensure
into and out that the UK maintains its
of the Group's key role in European security
UK businesses. and defence post-Brexit,
Accordingly, and to strengthen bilateral
the resulting relationships with key partners
Brexit near-term in Europe. This will be important
impacts across for ongoing collaboration
the business in the development of defence
are likely to capabilities.
be limited.
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 The Group has an international,
upon its ability to win and business and multi-market presence, a
contract for high-quality new future results balanced portfolio of businesses,
programmes, an increasing number may be adversely leading capabilities and
of which are expected to be impacted if a track record of delivery
in markets outside the US and it is unable on its commitments to its
UK. to compete adequately customers.
The Group is dependent upon and obtain new The Group continues to invest
US and UK government support business in in research and development,
in relation to a number of the markets and to reduce its cost base
its business opportunities in which it and improve efficiencies,
in export markets. operates. to remain 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
------------------------------- ------------------------------ ---------------------------------------
Laws and regulations
The Group is subject to risk from a failure to comply with laws and
regulations.
------------------------------------------------------------------------------------------------------------
The Group operates in Failure by the Group, BAE Systems has a well-established
a highly-regulated environment or its sales representatives, legal and regulatory compliance
across many jurisdictions marketing advisers structure aimed at ensuring
and is subject, without or others acting adherence to regulatory requirements
limitation, to regulations on its behalf, to and identifying restrictions
relating to import-export comply with these that could adversely impact
controls, money laundering, regulations could the Group's activities.
false accounting, anti-bribery result in fines Internal and external market
and anti-boycott provisions. and penalties and/or risk assessments form an important
It is important that the suspension or element of ongoing corporate
the Group maintains a debarment of the development and training processes.
culture in which it focuses Group from government A uniform global policy and
on embedding responsible contracts or the process for the appointment
business behaviours and suspension of the of advisers engaged in business
that all employees act Group's export privileges, development is in effect.
in accordance with the which could have BAE Systems continues to reinforce
requirements of the Group's a material adverse its ethics programme globally,
policies, including the effect on the Group. driving the right behaviours
Code of Conduct, at all Reduced access to by supporting employees in
times. export markets could making ethical decisions and
Export restrictions could have a material embedding responsible business
become more stringent adverse effect on practices.
and political factors the Group's future
or changing international results and financial
circumstances could result condition.
in the Group being unable
to obtain or maintain
necessary export licences.
------------------------------- ------------------------------ ---------------------------------------
Contract risk and execution
The Group has many contracts, including a small number of large contracts
and fixed-price contracts.
------------------------------------------------------------------------------------------------------------
In 2019, 46% of the Group's The inability of Contract-related risks and
sales were generated the Group to deliver uncertainties are managed under
by its 15 largest programmes. on its contractual the Group's mandated Lifecycle
At 31 December 2019, commitments, the Management process.
the Group had seven programmes loss, expiration, A leadership development programme
with order backlog in suspension, cancellation for project directors continues
excess of GBP1bn. or termination of to be deployed across the Group,
A significant portion any one of its large covering the leadership competencies
of the Group's revenue contracts or its required to manage complex
is derived from fixed-price failure to anticipate projects containing significant
contracts. Actual costs technical problems levels of risk and uncertainty.
may exceed the projected or estimate accurately A significant proportion of
costs on which the fixed and control costs the Group's largest contracts
prices are agreed and, on fixed-price contracts are with the UK Ministry of
since these contracts could have a material Defence. In the UK, development
can extend over many adverse effect on programmes are normally contracted
years, it can be difficult the Group's future with appropriate levels of
to predict the ultimate results and financial risk being initially held by
outturn costs. condition. the customer and contract structures
It is important that are used to mitigate risk on
the Group maintains a production programmes, including
culture in which it delivers where the customer and contractor
on its projects within share cost savings and overruns
tight tolerances of quality, against target prices.
time and cost performance The Group has a well-balanced
in a reliable, predictable spread of programmes and significant
and repeatable manner. 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.
------------------------------- ------------------------------ ---------------------------------------
Contract awards and cash profiles
The Group is dependent on the award timing and cash profile of its contracts.
------------------------------------------------------------------------------------------------------------
The Group's profits and Amounts receivable The Group's balance sheet continues
cash flows are dependent, under the Group's to be managed conservatively
to a significant extent, defence contracts in line with its policy to
on the timing of, or can be substantial retain an investment grade
failure to receive, award and therefore, the credit rating and to ensure
of defence contracts timing of, or failure operating flexibility.
and the profile of cash to receive, awards The Group monitors a rolling
receipts on its contracts. and associated cash forecast of its liquidity requirements
advances and milestone to ensure that there is sufficient
payments could materially cash to meet its operational
affect the Group's needs and maintain adequate
profits and cash headroom.
flows for 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.
------------------------------- ------------------------------ ---------------------------------------
Description Impact Mitigation
--------------------------------- --------------------------- ----------------------------------------
Pension funding
The Group has an aggregate funding deficit in its defined benefit pension
schemes.
------------------------------------------------------------------------------------------------------------
In aggregate, there is Increases in pension In the UK, new employees have
an actuarial deficit scheme deficits been offered membership of
between the value of may require the defined contribution rather
the projected liabilities Group to increase than defined benefit schemes
of the Group's defined the amount of cash since April 2012 and, in the
benefit pension schemes contributions payable US, employees have not accrued
and the assets they hold. to these schemes, salary-
The funding deficits thereby reducing related benefits in defined
may be adversely affected cash available to benefit schemes since January
by changes in a number meet the Group's 2013.
of factors, including other cash allocation In October 2019 the assets
investment returns and priorities. and liabilities of six of the
members' anticipated Group's pension schemes were
longevity. consolidated into a single
scheme. This was carried out
to drive long-term efficiencies.
Following the merger, the Company
and Trustees agreed to carry
out an early triennial funding
valuation as at 31 October
2019. In February 2020 that
valuation and deficit recovery
plan were agreed with the Trustees
after consultation with The
Pensions Regulator in the UK.
The funding deficit as at 31
October 2019 was GBP1.9bn.
As part of the valuation agreement,
the Company has agreed to pay
GBP1bn into the Scheme in the
coming months, representing
an advancement of GBP1bn of
deficit contributions due between
2022 and 2026.
The next UK triennial funding
valuations for the other smaller
UK pension schemes will be
carried out as at 31 March
2020. The latest update shows
that these schemes remain in
surplus.
--------------------------------- --------------------------- ----------------------------------------
Information technology security
The Group could be negatively impacted by information technology security
threats.
------------------------------------------------------------------------------------------------------------
The security threats Failure to combat The Group has a broad range
faced by the Group include these risks effectively of measures in place, including
threats to its information could negatively appropriate tools and techniques,
technology infrastructure, impact the Group's to monitor and mitigate this
unlawful attempts to reputation among risk.
gain access to its proprietary its customers and
or classified information the public, cause
and the potential for disruption to its
business disruptions business operations,
associated with information and could result
technology failures. in a negative impact
on the Group's future
results and financial
condition.
--------------------------------- --------------------------- ----------------------------------------
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 The loss of key The Group recognises that its
strategy and business employees or inability employees are key to delivering
plan is dependent on to attract the appropriate its strategy and business plan,
its ability to compete people on a timely and focuses on developing the
to recruit and retain basis could adversely existing workforce and hiring
people with appropriate impact the Group's talented people to meet current
talent and skills, including ability to deliver and future requirements.
those with innovative its strategy, meet The Group has well-established
technological capabilities. the business plan graduate recruitment and apprenticeship
The Group's business and, accordingly, programmes and, in order to
plan is targeting an have a negative maximise the contribution that
increasing level of business impact on the Group's its workforce can make to the
in international export future results and performance of the business,
markets outside the US financial condition. has an effective through-career
and UK. It is important capability development programme.
that the Group recruits In order to seek to maximise
and retains management its talent pool, the Group
with the necessary international is committed to creating a
skills and experience diverse and inclusive environment
in the relevant jurisdictions. for its employees.
--------------------------------- --------------------------- ----------------------------------------
Acquisitions
The anticipated benefits of acquisitions may not be achieved.
------------------------------------------------------------------------------------------------------------
BAE Systems considers The diversion of The Group has established policies
investment in value-enhancing management attention in place to manage the acquisition
acquisitions where market to integration efforts process, monitor the integration
conditions are right and the performance and performance of acquired
and where they deliver of the acquired businesses, and identify potential
on its strategy. Whether businesses below impairments.
BAE Systems realises expectations could
the anticipated benefits adversely affect
from these transactions BAE Systems' business
depends upon the successful and create the risk
integration of the acquired of impairments arising
businesses as well as on goodwill and
their post-acquisition other intangible
performance in the markets assets.
in which they operate.
--------------------------------- --------------------------- ----------------------------------------
The risk entitled 'The anticipated benefits of acquisitions may not be achieved' is a new risk included in this year's report as a result of the proposed acquisitions by the Group for a total estimated $2.2bn of Collins Aerospace's Military Global Positioning System business and Raytheon's Airborne Tactical Radios business. 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 Solutions provides a depth of capability in advanced electronic warfare solutions for airborne applications, including electronic support, electronic attack, and electronic protection technologies.
Survivability, Targeting & Sensing Solutions 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 resiliency products.
Controls & Avionics Solutions develops and produces electronics for military and commercial aircraft, 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.
Technology
At the core of Electronic Systems, our FAST Labs(TM) innovation hub supports R&D across the business, developing and proving new technologies to accelerate their transition into customer programmes. Our FAST Labs scientists and engineers create and evolve technology capabilities in advanced electronics, autonomy, cyber, electronic warfare, and sensors and processing, often in partnership with the US Defense Advanced Research Projects Agency, universities, commercial technology companies and other research laboratories, to solve complex challenges in the fields of defence, aerospace and security.
Operational and strategic key points
- Growing demand for Advanced Precision Kill Weapon System (APKWS(R) ) laser-guided rockets, with production awards totalling over $400m (GBP302m) received in the year.
- Over 500 electronic warfare systems delivered for the F-35 Lightning II programme, and awarded production and Block 4 modernisation contracts worth more than $750m (GBP566m).
- Acquired Riptide Autonomous Solutions to advance capabilities in maritime mission requirements.
- Continuing growth in space resilience domain.
- Establishing new facilities in Huntsville, Alabama and Manchester, New Hampshire to meet the record order backlog.
- Active interceptors certified for Gulfstream G500 and G600 jets and in production.
- Battery electric and fuel cell electric transit systems recorded five million zero emission miles.
Financial performance
Financial performance measures as defined by the Group
2019 2018
----------------------------- ---- --------- ---------
Sales KPI GBP4,439m GBP3,965m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP687m GBP606m
----------------------------- ---- --------- ---------
Return on sales 15.5% 15.3%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP672m GBP431m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP5,023m GBP4,624m
----------------------------- ---- --------- ---------
Order backlog(1) GBP6.0bn GBP5.4bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2019 2018
------------------------------------ --------- ---------
Revenue GBP4,439m GBP3,965m
------------------------------------ --------- ---------
Operating profit GBP672m GBP590m
------------------------------------ --------- ---------
Return on revenue 15.1% 14.9%
------------------------------------- --------- ---------
Cash flow from operating activities GBP833m GBP575m
------------------------------------- --------- ---------
- Sales compared to 2018 were up 7% at $5.7bn (GBP4.4bn). Growth in the defence business was at 9% driven by the F-35 programme, APKWS(R) volumes and increased classified activity. Commercial sales of engine and flight controls and hybrid-electric drive systems also grew and at $1.2bn (GBP0.9bn) now amount to 21% of the sector.
- Underlying EBITA was up to $877m (GBP687m), delivering a return on sales of 15.5%, at the higher end of our guidance range.
- As expected, cash conversion of EBITA(3) was very strong in the second half of the year, and close to 100% for the full year.
- Order backlog was another record high, at $7.9bn (GBP6.0bn), with significant awards on F-35 for LRIP 14 and Block 4 development, APKWS(R) volumes and the Radar Warning Receiver upgrade.
06 Alternative performance measure definitions
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
3. Operating business cash flow as a percentage of underlying EBITA.
Operational performance
Electronic Combat Solutions
Staying at the forefront of emerging threats and delivering next-generation electronic warfare (EW) capabilities are important discriminators for success. As a leader in EW, we continue to see growth across our portfolio for both US and international customers.
The F-35 Lightning II programme completed deliveries for Lot 11 and achieved the milestone of delivering over 500 EW systems. In addition, the programme was awarded a Block 4 modernisation and further F-35 EW system production contracts from Lockheed Martin totalling over $750m (GBP566m). We continue to operate under a five-year Performance Based Logistics contract to provide material availability and support for the F-35 sustainment programme.
Executing on our current contract from Boeing, we continue to deliver to the United States Air Force our Eagle Passive Active Warning Survivability System, which provides advanced aircraft protection and has completed successful F-15 aircraft flight tests despite experiencing cost and schedule overruns. We were also awarded a $495m (GBP374m) contract to digitally upgrade our ALR-56 Radar Warning Receiver system, enhancing the capability of our technology on F-15 jets.
Providing advanced EW capability for international F-15 aircraft, we continue to deliver on our contract from Boeing and Warner Robins Air Logistics Complex, totalling more than $1bn (GBP0.8bn) for the installation of the Digital Electronic Warfare System (DEWS) on new and existing F-15 aircraft. We are also executing a contract worth in excess of $300m (GBP227m) to provide DEWS to support the sale of new F-15 aircraft to another international customer.
As a provider of the long-range sensor and targeting technology for the Long Range Anti--Ship Missile (LRASM), we have completed Lot 1 production for our prime contractor Lockheed Martin. In addition, we received a contract modification to a previous Lot 2 production award, increasing this contract award to $78m (GBP59m).
The Compass Call programme continues its long history of sustaining and upgrading the prime mission equipment in support of the existing EC-130H fleet. Cross-decking the mission system onto the newly-designated Gulfstream G550 jet, the programme is currently executing contracts with a total value of nearly $500m (GBP378m).
Due to the sensitive nature of electronic combat systems and technology, approximately one quarter of our revenues in this business area are driven by our work on classified programmes.
Survivability, Targeting & Sensing Solutions
Our APKWS(R) laser-guided rocket is experiencing growing demand, with over 36,000 units delivered to date. The programme received a five-year Indefinite Delivery, Indefinite Quantity contract worth up to $2.7bn (GBP2.0bn). Further production awards totalling over $400m (GBP302m) were received this year. In addition to expanding US military use, the system is generating strong international interest.
We are developing a next-generation missile warning system for the US Army under the Limited Interim Missile Warning System programme. We are completing qualification and continue to support government testing. We also received additional funding to enable fielding on other US Army aircraft variants.
Both fixed- and rotary-wing demonstrations of our Striker(R) II helmet-mounted display are ongoing and full development awaits customer funding.
C4ISR Systems
Consistent with our strategy to obtain and incubate small business innovations that can yield disruptive technology breakthroughs, our Electronic Systems FAST Labs(TM) organisation acquired the key assets of Riptide Autonomous Solutions to advance our capabilities to address expanding maritime mission requirements for integrated, flexible, modular, unmanned underwater vehicle solutions.
In the space resilience domain, we are a leading provider of space-qualified subsystems and components. We continue to experience growth in the areas of integrated on-board processors, reconfigurable processing payloads and secure communications. In May, our radiation-hardened electronic products achieved 10,000 cumulative years in orbit.
We have been awarded funding from the Defense Advanced Research Projects Agency to integrate machine-learning into platforms that exploit radio frequency signals in increasingly crowded electromagnetic spectrum environments. Our flexible, reconfigurable hardware solutions will provide commercial and military users with greater, automated situational awareness of their operating environment.
Controls & Avionics Solutions
We continue to develop the integrated flight control electronics and remote electronic units for Boeing's next-generation 777X aircraft. A successful first flight of the aircraft was conducted in January 2020 and the business is continuing software updates and systems verification testing in support of the aircraft certification efforts. During the year, our 737 MAX production rates were scaled back in line with Boeing's reduced demand.
Our active inceptors received certification for the Gulfstream G500 and G600 and are now in production. A derivative, LinkEdge(TM) (Active Parallel Actuation Subsystem), is being developed for the Chinook CH-47.
Our engine control product line continues to see strong performance from FADEC Alliance, a joint venture between GE Aviation and FADEC International (our joint venture with Safran Electronics & Defense). We have successfully completed component certification testing of the engine control for the Boeing 777X aircraft.
Under the recently-awarded Improved Turbine Engine Program, we will provide the Electronic Engine Controls to modernise the US Army's Black Hawk and Apache fleets.
Development of the F-35 vehicle management computer technology refresh is proceeding to plan and we are actively engaged with Lockheed Martin Aeronautics in moving towards a sustainment contract for the active inceptor systems.
Power & Propulsion Solutions
With 12,000 electric-hybrid propulsion transit buses in operation globally, we have launched the next-generation battery electric system to a market moving to zero emission technology. This year, our battery electric and fuel cell electric systems recorded five million zero emission miles. As cities work to reach low emission targets, this number is expected to grow significantly.
The demand for low and zero emission technology is growing in both commercial and military applications, with a number of European cities employing fully electric vehicles powered by our technology. Our first and largest transit customer, New York City Transit (Metropolitan Transportation Authority) announced its decision to purchase up to a further 435 electric-hybrid power and propulsion systems from BAE Systems. In addition, the maritime domain is now adopting green technology and our electric-hybrid systems are powering both passenger and cargo vessels .
Looking forward
Forward-looking information for the Electronic Systems reporting segment is provided later in this report.
74 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 financial security activities.
Intelligence & Security comprises the three US-based Intelligence & Security businesses.
Air Force Solutions focuses on providing the US Air Force and its combatant commands with innovative solutions to help to modernise, maintain, test, and cyber-harden aircraft, radars, missile systems, and mission applications that detect and deter threats to national security.
Integrated Defense Solutions provides the US Army, Navy, and federal civilian markets with systems engineering, integration and sustainment services for C4ISR systems and enterprise IT networks that enhance mission effectiveness. Our solutions are deployed across platforms and networks in the air, maritime, land and cyber domains.
Intelligence Solutions provides innovative mission-enabling solutions and services to enhance the collection, analysis, and processing of data across US civilian and military intelligence communities. Our business also develops and deploys high-assurance networks that facilitate the secure sharing of data amongst intelligence agencies in support of national security.
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. Our solutions are delivered as licensed technologies, software-as-a-service subscriptions, through outsourced managed services, and via consulting and systems integration projects.
Government is focused on delivering national security and intelligence solutions to the UK and allied international governments. The business also delivers enterprise-level data and digital services to UK government departments.
Financial Services delivers anti-fraud and regulatory compliance solutions to banking and insurance customers across Europe, North America, the Middle East, Africa and Asia-Pacific.
Operational and strategic key points
Intelligence & Security
- Received orders exceeding $100m (GBP76m) to provide logistics sustainment support to US Air Force Space Command.
- Awarded $437m (GBP330m) task order to provide open source support to US Army and Army Intelligence & Security Command approved partners.
- Technology offerings further developed and the business achieved four Amazon Web Services designations, recognising our technical proficiency and operational excellence.
Applied Intelligence
- Divestment of the Silversky business and exit from the UK-based Managed Security Services business in progress at year-end. Restructuring charge of GBP20m recognised in the year.
- Strong order intake and revenue growth in the Government business unit.
Financial performance
Financial performance measures as defined by the Group
2019 2018
----------------------------- ---- --------- ---------
Sales KPI GBP1,732m GBP1,678m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP91m GBP111m
----------------------------- ---- --------- ---------
Return on sales 5.3% 6.6%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP68m GBP85m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP1,846m GBP1,802m
----------------------------- ---- --------- ---------
Order backlog(1) GBP1.8bn GBP1.9bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2019 2018
------------------------------------ --------- ---------
Revenue GBP1,732m GBP1,678m
------------------------------------ --------- ---------
Operating profit GBP80m GBP59m
------------------------------------- --------- ---------
Return on revenue 4.6% 3.5%
------------------------------------- --------- ---------
Cash flow from operating activities GBP99m GBP96m
------------------------------------- --------- ---------
- In aggregate, sales were broadly unchanged on a constant currency basis at $2.2bn (GBP1.7bn). Sales in the US business were 2% lower owing to customer awards made but subsequently protested. In the Applied Intelligence business, sales were up 4%, all arising in the Government business line.
- Return on sales in the US business was in line with the prior year at 9.1%. Within Applied Intelligence, the business recorded a loss of GBP20m following the restructuring charge taken in the first half of the year.
- Disposal of the Silversky business and exit from the UK-based Managed Security Service are expected in the near future, both of which will improve profitability in future years.
- As expected, order backlog was stable at $2.3bn (GBP1.8bn), after adjusting for the expected Applied Intelligence disposals.
06 Alternative performance measure definitions
1. Including share of equity accounted investments.
2. International Financial Reporting Standards .
Operational performance
Intelligence & Security
Air Force Solutions
We received orders exceeding $100m (GBP76m) to provide logistics sustainment support to US Air Force Space Command for instrumentation tracking (radar, telemetry and optics) systems, which includes 26 agencies across the US Department of Defense, Department of Energy, National Aeronautics and Space Administration, plus six foreign governments.
On the US Air Force Intercontinental Ballistic Missile Integration Support Contractor Program, we were awarded a sole-source modification to increase the contract ceiling by $93m (GBP70m) to $1.1bn (GBP0.8bn). The period of performance remains through to January 2022, and our work includes programme management, systems engineering, integration and testing, sustainment and cyber defence.
Integrated Defense Solutions
We are executing the fourth year of a five--year, $368m (GBP278m) sole-source contract to support weapons systems on board US Ohio and UK Vanguard Class submarines, as well as future US Columbia Class and UK Dreadnought Class submarines.
The US Navy has awarded the business a five-year Indefinite Delivery, Indefinite Quantity (IDIQ) contract with an expected lifecycle value of $280m (GBP211m) to modernise and maintain command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance systems aboard new construction aircraft carriers and large deck amphibious ships.
We secured a $126m (GBP95m) contract for the US Marshals Service (USMS), a component of the US Department of Justice. The business will provide mission-critical IT infrastructure support, sustainment operations and engineering services to the USMS Information Technology Division.
The business has been awarded a $300m (GBP227m) contract to provide enterprise and mission-critical IT support to the Federal Emergency Management Agency's Operations and Maintenance Division. The programme will provide IT infrastructure modernisation, system sustainment and telecommunications, network and helpdesk services.
We were awarded a $212m (GBP160m) US Navy follow-on contract for the design, acquisition, integration and test of radio communication suites for Guided Missile Destroyers and other US Navy and Coast Guard ships. This win continues our near 50-year legacy as an integrator of mission-critical shipboard systems.
The business was awarded a five-year, $200m (GBP151m) contract to provide systems engineering, security management, modelling and simulation, and training services to help in the US government defence cyber mission.
Intelligence Solutions
The team is executing on a number of task order contracts valued at approximately $320m (GBP242m) to provide motion-imagery analysis, training, and research support services to the US intelligence community, and provide technical, functional, and general support to enhance the situational awareness and training of US Army troops deployed around the world.
A $70m (GBP53m) engineering change proposal was secured, extending the period of performance on a contract originally awarded in 2013 to provide high-performance computing and infrastructure support to the US intelligence community.
The business was awarded a significant follow-on contract and a new award with a combined value of over $490m (GBP370m) to provide critical intelligence support to the US government.
We were awarded a new $437m (GBP330m) task order to provide open source support for the Army and Army Intelligence & Security Command approved partners, to provide training, policy and governance recommendations, assessments and implementation of emerging capabilities, and to establish and manage a secure cloud hosting environment for these efforts.
The business was awarded a prime position on Solutions for Intelligence Analysis 3, a ten-year multiple award IDIQ contract. The company will provide worldwide coverage, support and assistance to the Defense Intelligence Agency delivering timely, objective and cogent military intelligence to defence planners and policy makers.
We are delivering our first Federated Secure Cloud implementation, supporting multiple independent levels of security, and leveraging this capability into adjacent customers. In addition, the business has established multiple commercial cloud partnerships to drive additional services revenue across defence and intelligence customers.
Among a number of strategic developments in 2019, the business furthered its technology offerings and attained Amazon DevOps, Government and Disaster Response and Public Safety Competencies, as well as being named an Amazon Web Services Premier Consulting Partner.
Applied Intelligence
As at the 2019 year-end, negotiations relating to the disposal of the US-based software-as-a-service business were ongoing.
Government
The Government business delivered good growth in orders. Performance was particularly strong in UK National Security which benefited from the signing of a number of transformational multi-year deals. Revenue growth followed the higher order intake, with increased headcount and continuing investment in talent in a competitive labour market for highly-skilled software engineers with enhanced security clearances. Profitability continued to benefit from cost control and greater efficiency in sales and management activity in the International business in particular.
Financial Services
The Financial Services business has seen a significant increase in business development investment in the year. The higher spend on product engineering culminated in the launch of a new version of NetReveal(R) , v8.0, in the first half of the year. Response to the product has been positive and has led to a number of pipeline opportunities for upgrades to existing customers and deployment to new customers. The conversion of these opportunities drove order intake growth in the second half of the year and positions the business for higher levels of growth in the future.
Looking forward
Forward-looking information for the Cyber & Intelligence reporting segment is provided later in this report.
74 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 naval ship repair, and the management and operation 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 and operation of 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 four operational sites in the US located on the Atlantic and Pacific coasts, and 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 Turkish and international customers.
Operational and strategic key points
- Deliveries of the M109A7 self-propelled howitzer and ammunition carrier vehicle sets are progressing and the decision to proceed to full-rate production was made in Q1 2020.
- First deliveries achieved of the Amphibious Combat Vehicle to the US Marine Corps.
- Contract modification award of $575m (GBP434m) received for LRIP vehicles on the Armored Multi-Purpose Vehicle programme.
- Work underway to upgrade 332 vehicles to the Bradley A4 configuration.
- Awarded contracts worth $466m (GBP352m) to upgrade configuration on various M88 vehicles.
- First tandem docking of two large warships in San Diego dry-dock for contracts worth more than $170m (GBP128m).
- Deliveries continue of the M777 ultra-lightweight howitzer to the Indian Army, with subsequent systems to be assembled at the Mahindra Defence Systems facility.
Financial performance
Financial performance measures as defined by the Group
2019 2018
----------------------------- ---- --------- ---------
Sales KPI GBP3,337m GBP3,005m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP267m GBP210m
----------------------------- ---- --------- ---------
Return on sales 8.0% 7.0%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP241m GBP(30)m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP4,020m GBP3,693m
----------------------------- ---- --------- ---------
Order backlog(1) GBP5.8bn GBP5.4bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2019 2018
------------------------------------ --------- ---------
Revenue GBP3,185m GBP2,864m
------------------------------------ --------- ---------
Operating profit GBP239m GBP161m
------------------------------------ --------- ---------
Return on revenue 7.5% 5.6%
------------------------------------- --------- ---------
Cash flow from operating activities GBP305m GBP31m
------------------------------------- --------- ---------
- Sales in the year were up 6% to $4.3bn (GBP3.3bn), within guidance. In the US Combat Vehicles business, the second half challenge to deliver the ramp up in M109A7 deliveries was met.
- Return on sales performance for the year improved to 8.0% with no material charges taken in the year. As regards the ramp in Combat Vehicles sales, we are trading profit on the Armored Multi-Purpose Vehicle and Amphibious Combat Vehicle programmes at an initial low level.
- Cash flow performance was very strong in the second half of the year as vehicle production deliveries increased and working capital was liquidated.
- Order backlog was further increased to $7.7bn (GBP5.8bn), with total in-year funded Combat Vehicle orders received of $2.5bn (GBP1.9bn).
06 Alternative performance measure definitions
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
Operational performance
US Combat Vehicles
The business continues to make progress towards achieving consistent production throughput across multiple programmes with the implementation of ongoing improvements and investments in modernising facilities and manufacturing technologies, including automation and robotic welding.
We are leveraging the lessons learned on the M109A7 programme and continue to integrate innovative manufacturing capabilities during the early stages of the production of new combat vehicles. While schedule adjustments have been necessary, addressing these challenges will facilitate consistency of quality and delivery for our customers, and bring long-term benefits across our vehicle programmes.
Initial Amphibious Combat Vehicles (ACVs) were delivered to the US Marine Corps under Low-Rate Initial Production (LRIP), with a third LRIP contract received in October bringing the total value to $458m (GBP346m) for 90 vehicles. Under a $67m (GBP51m) contract awarded in June, we have begun design and development activities on two new mission variants of the ACV family of vehicles.
As one of two competitors, we continue to work on the US Army's Mobile Protected Firepower programme under a $376m (GBP284m) contract for the engineering and manufacturing development phase for rapid prototyping efforts.
On the US Army's Armored Multi-Purpose Vehicle programme, we were awarded a $575m (GBP434m) contract modification, bringing the cumulative award value to $873m (GBP659m). Initial LRIP vehicles are scheduled to begin delivery in 2020.
We continue to progress the LRIP phase of the M109A7 programme, with contracts in 2018 and 2019 totalling approximately $750m (GBP566m) for 108 vehicle sets. These cumulative LRIP awards include the recent December contract modification and long-lead material funding. The decision to proceed to full-rate production was subsequently made in the first quarter of 2020. In July, we received a $45m (GBP34m) contract to support the integration of the Extended Range Cannon Artillery on the M109A7 to double the range of the gun system, which is among the Army's top priorities.
Work has begun under contracts for 332 vehicles, valued at $578m (GBP437m) to upgrade to the Bradley A4 configuration.
We continue to work on US Army contracts for production and sustainment of M88 recovery vehicles, to include upgrades from the M88A1 to the M88A2 HERCULES configuration. In September we received a $148m (GBP112m) contract to upgrade an additional 43 vehicles, and were competitively selected for a $318m (GBP240m) contract to upgrade to the next--generation M88A3 configuration to restore single-vehicle recovery.
Internationally, the delivery of an additional 11 Assault Amphibious Vehicles for Japan was completed in the second half of the year and work continues on 36 vehicles for Taiwan. The delivery of 32 M109A5+ self-propelled howitzers to the Brazilian Army was completed in the second half of the year.
Weapon Systems
Deliveries of M777 ultra-lightweight howitzers continue to the Indian Army under a $542m (GBP409m) Foreign Military Sale contract for 145 M777s. The initial guns are being built in our facilities, with at least 120 subsequent systems to be assembled in India at Mahindra Defence Systems' new facility.
We received two orders totalling $85m (GBP64m) from the US Navy to deliver six Mk45 Mod 4 gun systems, providing a solid US Navy order book of 20 Mk45 systems. We are also delivering 57mm Mk110 gun systems to the US Navy and Coast Guard, with nearly 60 systems now delivered to US maritime forces.
We continue to execute on contracts for 155mm BONUS ammunition to the Swedish Army and the US Army. Under a 2016 contract modification, we are providing 24 additional ARCHER artillery systems to the Swedish government, and we are under multiple export contracts to deliver 40 Mk4 and 57 Mk3 naval gun systems.
We continue to perform on a $183m (GBP138m) contract to provide the Maritime Indirect Fire System for the UK Royal Navy's Type 26 frigate, which includes Mk45 Mod 4 gun systems, automated ammunition handling systems and gun fire control systems.
Under the latest contract awarded in March, we are to produce 28 more Virginia Payload Module tubes for the US Navy's Block V Virginia-class submarines.
Ordnance Systems
We manage, operate and modernise the US Army's Radford and Holston munitions facilities.
At Holston, production operations impacted by a fire in January 2019 resulted in a GBP10m charge recognised in the HQ segment under the Group insurance arrangement. Modernisation activities continue under multiple contracts to construct a natural gas-fired steam facility, a waste water management facility that is nearing completion, as well as the design, construction and commissioning of new production facilities to improve efficiency and modernise energetics manufacturing.
At Radford, in addition to ongoing operations, work continues on the construction of a modernised nitrocellulose facility, and we are actively managing ongoing subcontractor performance issues, cost and schedule overruns, and related disputes .
US Ship Repair
Our US maintenance and modernisation shipyards remain in strong demand. In 2019, we secured orders across our US shipyards totalling approximately $1bn (GBP0.8bn), including awards to service the USS The Sullivans in Jacksonville and the USS Vicksburg in Norfolk.
In September, we received two contracts totalling more than $170m (GBP128m) for the repair and maintenance of the guided-missile destroyers USS Stethem and USS Decatur in San Diego, resulting in the first tandem docking of two large warships in our San Diego dry-dock.
Following a thorough analysis of the new Multiple Award Contract structure being implemented in Pearl Harbor, Hawaii, we informed the Navy we will not bid for future work in Hawaii, and will focus on completing existing contracts.
BAE Systems Hägglunds
With an installed base of nearly 1,300 CV90 vehicles in Sweden and across six other international markets, the business continues to pursue contractual opportunities, including the Czech Republic's competition to replace its fleet of BMP2 Infantry Combat Vehicles.
Work is progressing to refurbish Swedish CV90s, and initial deliveries have begun on the integration of 40 Mjölner mortar systems under a separate contract. We were selected by the Dutch Army to integrate the Elbit Systems' Iron Fist Active Protection System on its fleet of CV90s.
32 BvS10 all-terrain vehicles under contract for Austria were delivered for final acceptance .
FNSS
FNSS, our land systems joint venture based in Turkey, continues to perform under its $524m (GBP396m) programme to produce 259 8x8 wheeled armoured vehicles for the Royal Malaysian Army. Deliveries continue under a contract with Oman for PARS wheeled armoured vehicles in 8x8 and 6x6 configurations.
Work progresses under multiple contracts for the Turkish Armed Forces, including a EUR278m (GBP236m) contract for 260 anti-tank vehicles, an EUR84m (GBP71m) contract for air defence vehicles, a EUR155m (GBP131m) contract for 27 assault amphibious vehicles, and a contract worth EUR154m (GBP131m) for 100 special purpose 8x8 and 6x6 vehicles.
Looking forward
Forward-looking information for the Platforms & Services (US) reporting segment is provided later in this report.
75 Segmental looking forward
Air
Air comprises the Group's UK--based air activities for European and International Markets, and US Programmes, and its businesses in Saudi Arabia and Australia, together with its 37.5% interest in the European MBDA joint venture.
Our UK-based business includes programmes in European and International Markets for the production of Typhoon combat and Hawk trainer aircraft, support and upgrades for Typhoon, Tornado and Hawk aircraft, and development of next-generation Air Systems and defence information systems, as well as US Programmes, primarily the UK-based F-35 Lightning II manufacture, engineering development and support activity.
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 primarily delivers 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.
The Type 26 frigate was selected for the Commonwealth of Australia's Hunter Class nine-ship Future Frigate programme, with a framework agreement including the scope for the initial design and productionisation phase signed in December 2018.
MBDA is a leading global prime contractor of missiles and missile systems across the air, maritime and land domains.
Technology
Underpinning the Air strategy is a set of technology and capability enablers which allow BAE Systems to invest in evolving today's portfolio and create a pathway to future products and services, an example of this is our PHASA-35(TM) product (see page 69). Our ambitious vision of providing capable, affordable, flexible system of systems across the air, space, cyber and information space, is underpinned by an investment in key technologies that ensure our processes and facilities, from digital twins, to additive manufacturing, augmented reality, artificial intelligence and collaborative robotics, are fit for the future.
Our investment into the Laser Directed Energy Weapons area is in assessing disruptive effect technologies for use in future operations. Our investment in Reaction Engines Limited is testing the market opportunity for hypersonic-related technology applications. We are also investing in our infrastructure through our high-tech factory of the future and our evolving Air Labs and Air Works capability that looks to improve the schedule and cost performance across our design, manufacturing and support lifecycle.
In this era of rapid technological change, our engagement with innovators from across defence, commerce, government and academia seeks to quickly mature technology applications that deliver a competitive edge though our strategic technology investments.
Operational and strategic key points
- Qatar Typhoon and Hawk aircraft programme met its contractual milestones in the year. Contract amendment agreed to accelerate Typhoon deliveries.
- F-35 programme Lots 12 to 14 price negotiations concluded. 142 rear fuselage assemblies delivered in the year in line with ramp-up to full rate production in 2020.
- Tempest technology maturation programme contracted between industry and UK government. Italy and Sweden governments committed to working with UK to develop next-generation combat air capability.
- The first four Hawk aircraft assembled in Saudi Arabia were accepted and entered service in-Kingdom.
- UK Tornado fleet successfully retired from service on schedule following RAF declaration that Typhoon had met Centurion standard with embodiment across the Typhoon fleet.
- The design and production readiness phase of the Hunter Class programme for the Royal Australian Navy continues to make good progress.
Financial performance
Financial performance measures as defined by the Group
2019 2018
----------------------------- ---- --------- ----------
Sales KPI GBP7,457m GBP6,712m
----------------------------- ---- --------- ----------
Underlying EBITA KPI GBP887m GBP859m
----------------------------- ---- --------- ----------
Return on sales 11.9% 12.8%
----------------------------------- --------- ----------
Operating business cash flow KPI GBP408m GBP666m
----------------------------- ---- --------- ----------
Order intake(1) KPI GBP4,594m GBP14,845m
----------------------------- ---- --------- ----------
Order backlog(1) GBP23.9bn GBP27.4bn
----------------------------------- --------- ----------
Financial performance measures defined in IFRS(2)
2019 2018
------------------------------------ --------- ---------
Revenue GBP6,153m GBP5,579m
------------------------------------ --------- ---------
Operating profit GBP777m GBP810m
------------------------------------ --------- ---------
Return on revenue 12.6% 14.5%
------------------------------------- --------- ---------
Cash flow from operating activities GBP497m GBP719m
------------------------------------- --------- ---------
- Sales were up 11% at GBP7.5bn. As expected there was higher production activity on the new Typhoon and Hawk programme for Qatar, and the F-35 programme continues to ramp up towards full rate next year. In addition sales from MBDA grew on deliveries to Egypt and Qatar.
- The return on sales of 11.9% was ahead of expectations on strong programme execution. It reflects low initial profit recognition on the early stages of the Qatar programme, and increased self-funded research and development on the Tempest future combat air development. Last year's return on sales benefited by 70bps from the completing Oman Typhoon contract.
- Cash flow largely reflects the utilisation of provisions, timing on receivables, and the difference between joint venture profits and cash dividends received. There was also some usage of prior year Qatar funding.
- Order backlog reduced to GBP23.9bn, primarily for the trading on multi-year orders, received in prior years, for the Saudi Arabian support and Qatar programmes.
06 Alternative performance measure definitions
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
Operational performance
European and International Markets
Mobilisation activity on the 24 Typhoon and nine Hawk aircraft and associated support and training contract for the Government of the State of Qatar has progressed to plan with all initial milestones achieved. A contract amendment was agreed during the year accelerating Typhoon deliveries and contract milestones.
The first eight of 28 major units on the Kuwait Typhoon contract, secured by Italian Eurofighter partner Leonardo, have been delivered. The remaining major units are planned for delivery by 2022.
In the year, the Royal Air Force accepted the final three Typhoon aircraft from the UK final assembly facility. The German, Italian and Spanish Air Forces accepted a total of 11 aircraft in 2019, leaving one of the 88 Tranche 3 aircraft to be delivered.
Following the declaration by the Royal Air Force that Typhoon had met Centurion standard in December 2018, enabling the transition of capabilities from Tornado to Typhoon, the UK Tornado fleet successfully retired from service on schedule. Centurion standard has now been embodied across the Typhoon fleet.
In the UK, under a ten-year partnership arrangement, and in Oman, under a five-year availability service contract, we continue to support Typhoon fleets to achieve customer target flying hours. BAE Systems continues to support the European Partner Nations' own support arrangements.
Support to the Royal Air Force's UK fleet of Hawk fast jet trainer aircraft continues through the long-term availability contract. We are in discussions with the UK on future Hawk support arrangements and we continue to support users of Hawk trainer aircraft around the world.
The next phase of the Tempest technology maturation programme was contracted between industry and the UK government. This was followed by the signing of a Memorandum of Understanding between the UK and Sweden in July, and a Statement of Intent between the UK and Italy in September, committing the respective governments to working with the UK government to develop next-generation combat air capability.
Progress continues on the collaboration for the design and development phase of an indigenous fifth-generation fighter jet for the Turkish Air Force.
US Programmes
On the F-35 programme, price negotiations on Lots 12 to 14 concluded in the second half of 2019 and the business is ramping up to full-rate production by the end of 2020. In the period, 142 rear fuselage assemblies were delivered under the Low-Rate Initial Production contracts for Lots 11 to 13, bringing total deliveries on the programme to over 600.
At RAF Marham in the UK, following the declaration of Initial Operational Capability in 2018, we continue to support the customer in integrating the F-35 into its operational fleet and forward deployments.
BAE Systems continues to play a growing role on the F-35 sustainment programme including the supply of spares and technical support, software products, upgrades and specialist manpower services.
Saudi Arabia
The Group is reliant on the continued approval of export licences by a number of governments in order to continue supplies to the Kingdom of Saudi Arabia. Following extensions being granted by the German government to a number of export licences on joint collaborative programmes, we are working closely with industry partners and the UK government to continue to fulfil the contractual support arrangements in Saudi Arabia on the key European collaboration programmes.
In June 2019, the Court of Appeal of England and Wales directed the Secretary of State for International Trade to revisit the decision-making process for granting export licences for the sale of military equipment to the Kingdom of Saudi Arabia for possible use in the conflict in Yemen and to retake its decisions regarding such licences on that basis. The Company will assess the result of the retaking by the Secretary of State of such decisions, once they have been made. Pursuant to the Order of the Court, the Secretary of State undertook not to grant new licences for the export of arms or military equipment to Saudi Arabia for possible use in the conflict in Yemen until such decisions have been retaken. Both the Secretary of State and the other party to the proceedings have sought and obtained permission to appeal the Court's ruling to the Supreme Court.
In March 2018, the UK and the Kingdom of Saudi Arabia signed a Memorandum of Intent for the supply of a further 48 Typhoon aircraft, support and transfer of technology and capability. This would enable BAE Systems to continue with the localisation of defence capabilities in Saudi Arabia. Final assembly of all 48 Typhoon aircraft would be in-Kingdom.
The business continues to perform against the contract secured in 2018 to provide Typhoon support services to the Royal Saudi Air Force through to 2022.
The Saudi British Defence Co-operation Programme five-year funding agreement through to 2021 comprises a number of contracts, including support to the Tornado fleet and provision of Officer and Aircrew Training for the Royal Saudi Air Force, as well as engineering and logistics services for the Royal Saudi Naval Forces. These services continue to progress well. Previous issues relating to the availability of the Hawk trainer aircraft have been addressed and the aircraft availability is now consistent with the contractual requirements.
Four Hawk aircraft assembled in-Kingdom have been accepted and entered service with the Royal Saudi Air Force in the year. The company has delivered all of the 22 major units to meet this final assembly programme.
Work continues to reorganise our portfolio of interests in a number of industrial companies in Saudi Arabia. Riyadh Wings Aviation Academy LLC increased its ownership in 2019 to 23.5% in the Group's Overhaul and Maintenance Company (OMC) subsidiary. Additionally during the year OMC disposed of its 85.7% shareholding in Aircraft Accessories and Components Company. Following OMC entering into a heads of terms for the sale of its 50% shareholding in Advanced Electronics Company to Saudi Arabian Military Industries (SAMI), negotiations are continuing and the transaction is expected to take place in the first half of 2020.
Through the restructuring of the Group's portfolio of interests in its Kingdom of Saudi Arabia industrial companies, along with transformation activities to transfer local capability into these companies, we are working in partnership with SAMI to explore how we can collaborate to deliver further In-Kingdom Industrial Participation, in line with the Kingdom's Vision 2030.
Australia
The initial design and production readiness phase of the Hunter Class programme for the Royal Australian Navy continues to make progress, and the integration of ASC Shipbuilding into our Australian operations is progressing well. The first Integrated Baseline Review on the programme is expected to be completed in Q2 2020.
Progress continues on the Jindalee Operational Radar Network upgrade contract secured in 2018 from the Commonwealth of Australia, with the System Requirements Review completed and the first tranche programme baseline under review. On the sustainment contract, support to the three radar sites continues to see all operational milestones being achieved to plan.
Final acceptance of the Royal Australian Navy's two Landing Helicopter Docks is expected to be in 2020. Responsibility for future support has now been fully transitioned to Naval Ship Management.
Progress on the sustainment and upgrade of the Anzac fleet under the Warship Asset Management Alliance continues with the first of class, HMAS Arunta, now deployed back to operations. The second vessel, HMAS Anzac, has now undocked.
The Hawk Mk127 Lead-In Fighter project did not meet all aircraft availability requirements for the year. The pilot training programme however, was for the most part not impacted. The upgrade of the Hawk fleet to meet the F-35 training requirements has been completed.
Sustainment activity continues for the regional F-35 fleet at our Williamtown facility, with 13 aircraft now on base.
We were notified in September that we had been unsuccessful in our bid for the Land 400 Phase 3 Combat Vehicle programm e.
MBDA
During 2019, MBDA secured development contracts for Enhanced Modular Air Defence Solutions in Italy and for Enforcer missile systems in Germany. Further contracts for Meteor were secured for additional tranches in France and Germany, as well as an integration contract for the South Korean KF-X fighter aircraft. Other contract awards include ASRAAM for Typhoon in Oman and in Qatar (the latter having already ordered Meteor and Brimstone) and a number of key support contracts for both European domestic and international customers.
In June, the MBDA/Lockheed Martin joint venture submitted to the German customer the updated TLVS (Ground-Based Air Defence System) proposal.
Good progress has been made on a number of development programmes including: the next-generation MICA missile; Spear Capability 3; and Aster Block 1 New Technology. In addition, the Future Cruise/Anti-Ship Weapon (the Anglo/French co-operation programme to replace Storm Shadow/Harpoon in the UK and SCALP/Exocet in France) has successfully achieved its concept review, an important step in the decision to launch the following phases of the programme. Progress has also continued on production programmes, notably MICA missile deliveries for a number of international customers.
Looking forward
Forward-looking information for the Air reporting segment is provided later in this report.
75 Segmental looking forward
Maritime
Maritime comprises the Group's UK--based maritime and land activities.
Maritime programmes include the construction of the two Queen Elizabeth Class aircraft carriers, five River Class Offshore Patrol Vessels and seven Astute Class submarines for the Royal Navy, as well as the design and production of the Royal Navy's future Dreadnought Class submarine and Type 26 frigate. Additionally the Maritime portfolio includes in-service support, including the delivery of training services and management of HM Naval Base Portsmouth and the design and manufacture of combat systems, torpedoes and radars.
Land UK designs, develops and manufactures a comprehensive range of munitions products servicing its main customer, the UK Ministry of Defence, as well as international customers. In July 2019, the business formed a joint venture with Rheinmetall to create a joint UK-based military land vehicle design, manufacturing and support business. Land UK also develops and manufactures cased--telescoped weapons through its CTA International joint venture.
Operational and strategic key points
- HMS Prince of Wales vessel acceptance achieved in December.
- Four River Class Offshore Patrol Vessels have now been accepted, with the programme on target for completion in 2020.
- Construction commenced on second of the three contracted Type 26 frigates in August.
- Construction of the first Dreadnought Class submarine continues to advance, with GBP1.4bn of funding received in the year.
- Sea trials for the fourth Astute Class submarine are due to take place in 2020.
- A GBP230m seven-year Torpedo Repair and Maintenance contract was awarded.
- The UK combat vehicles joint venture between Rheinmetall and BAE Systems Land UK was launched on 1 July.
- Design requirements for the Canadian Surface Combatant are progressing towards finalisation with partners and the Royal Canadian Navy.
Financial performance
Financial performance measures as defined by the Group
2019 2018
----------------------------- ---- --------- ---------
Sales KPI GBP3,116m GBP2,975m
----------------------------- ---- --------- ---------
Underlying EBITA KPI GBP268m GBP209m
----------------------------- ---- --------- ---------
Return on sales 8.6% 7.0%
----------------------------------- --------- ---------
Operating business cash flow KPI GBP150m GBP67m
----------------------------- ---- --------- ---------
Order intake(1) KPI GBP2,875m GBP3,513m
----------------------------- ---- --------- ---------
Order backlog(1) GBP8.6bn GBP9.0bn
----------------------------------- --------- ---------
Financial performance measures defined in IFRS(2)
2019 2018
------------------------------------ --------- ---------
Revenue GBP3,071m GBP2,940m
------------------------------------ --------- ---------
Operating profit GBP253m GBP191m
------------------------------------ --------- ---------
Return on revenue 8.2% 6.5%
------------------------------------- --------- ---------
Cash flow from operating activities GBP289m GBP190m
------------------------------------- --------- ---------
- Sales in the Maritime businesses were up 5%, ahead of guidance, at GBP3.1bn. Whilst the Dreadnought submarine and Type 26 programmes continue to ramp up, the Carrier and Offshore Patrol Vessel programmes are close to completion. Activity levels in Portsmouth Naval Base support remained strong through the year.
- Return on sales was at 8.6%, within our guidance range.
- The operating cash inflow of GBP150m reflects utilisation of the Naval Ships provision created last year and the completion of the Carrier programme.
- Order backlog has reduced slightly to GBP8.6bn, with further awards for funding on the Dreadnought programme outweighed by trading on the Astute, Carrier and Type 26 programmes.
06 Alternative performance measure definitions
1. Including share of equity accounted investments.
2. International Financial Reporting Standards.
Operational performance
Maritime
Naval Ships
The second Queen Elizabeth Class aircraft carrier, HMS Prince of Wales, departed Rosyth in September to undertake comprehensive sea trials before entering Portsmouth for the first time in November and being accepted in December. The first Queen Elizabeth Class aircraft carrier, HMS Queen Elizabeth, celebrated a significant milestone in October with the first UK F-35s landing on board for operational trials, with HMS Dragon, the BAE Systems-designed and manufactured Type 45 destroyer, escorting.
Four of the five River Class Offshore Patrol Vessels have now been accepted by the Ministry of Defence and we are working to a schedule which would see programme completion in 2020.
The first three City Class Type 26 frigates are on contract with construction underway on the first two ships. The programme currently employs over 2,000 people and approximately one half of the First of Class, HMS Glasgow, is under construction and she remains on track to enter service in the mid-2020s. Work continues on the second ship, HMS Cardiff, following the formal start of full-scale manufacture in August. Investment in site infrastructure in our Glasgow shipyards continues with dock readiness works progressing well and new office space to be completed in early 2020.
Following the success of the Global Combat Ship design in Australia and Canada both programmes are gaining momentum as teams are mobilised. Work continues to transfer product and process knowledge, share experiences of complex operations and help to prepare the organisation in Australia for the transition of delivery responsibility. We are working closely with our partners and the Royal Canadian Navy to finalise the design requirements for the Canadian Surface Combatant.
Submarines
BAE Systems is a member of the Dreadnought Alliance, working alongside the Submarine Delivery Agency and Rolls-Royce to deliver a replacement for the Royal Navy's Vanguard class, which carries the UK's independent nuclear deterrent. The value of the programme to the Company to date is GBP5.2bn, with contract funding of GBP1.4bn received in 2019. Four Dreadnought Class submarines will be built in Barrow, with the first of these due to be in operational service in the early 2030s. Construction of the first submarine continues to advance with many of the major pressure hull units now manufactured. The major programme of investment to redevelop the Barrow site to support the delivery of Dreadnought is well underway, with several of the new facilities now complete and in operation.
The first three Astute Class submarines are in operational service with the Royal Navy. The remaining four boats are at an advanced stage of construction. The fourth boat, Audacious, is in the final stages of testing and commissioning ahead of sea trials.
Maritime Services
Our Maritime Services business is responsible for management and maintenance of HM Naval Base Portsmouth and supports more than half of the Royal Navy's surface fleet, including the Type 45 destroyers, through the Maritime Support Delivery Framework (MSDF) contract which runs to March 2020. An 18-month extension to MSDF is due to be finalised in March 2020. In November, HMS Prince of Wales arrived at HM Naval Base Portsmouth, her home port.
The company was awarded the Torpedo Repair and Maintenance contract. This seven-year contract is worth GBP230m and secured over 100 highly skilled jobs at the Broad Oak site in Portsmouth.
Progress continued on the GBP270m Spearfish torpedo upgrade programme, with the demonstration phase forecast to complete in 2020.
The company was awarded four contracts to support the repair and maintenance of over 600 small boats operated by the Royal Navy, the Royal Marines, the Royal Fleet Auxiliary, the Army and the Ministry of Defence Police over a period of six and a half years.
Land UK
The munitions business continues to provide UK and international customers with a wide range of light and heavy munitions, as well as offering complementary support services for development, testing and evaluation. We continue to work with the UK Ministry of Defence to agree a replacement to the existing Munitions Acquisition Supply Solution partnering agreement.
In July 2019, following receipt of regulatory approvals, the business formed a joint venture with Rheinmetall, Rheinmetall BAE Systems Land (RBSL), to create a joint UK-based land vehicle design, manufacturing and support business. Rheinmetall purchased a 55% stake in the existing BAE Systems UK-based combat vehicles business for GBP31.5m with BAE Systems retaining 45%. This transaction did not include the Land UK munitions business or its holding in the CTA International joint venture with Nexter.
The UK Ministry of Defence has now awarded the GBP2.3bn contract to provide the British Army with over 500 8x8 armoured vehicles. The contract was awarded to Artec GmbH, comprising Rheinmetall and Krauss-Maffei Wegmann. Rheinmetall will subcontract approximately half the production to RBSL which will undertake vehicle structure fabrication, assembly, integration and test of the vehicles at its Telford facility.
During the year, 95 40mm cased-telescopic cannons were delivered to the Ministry of Defence by CTA International, bringing cumulative deliveries to 370. This entirely new cannon design - currently being integrated in the British Army's new Ajax and upgraded Warrior vehicles - has also been selected by the Belgian Army for its Jaguar vehicles.
Looking forward
Forward-looking information for the Maritime reporting segment is provided later in this report.
75 Segmental looking forward
Segmental looking forward
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 US defence priority programmes from its strong franchise positions in electronic warfare, precision guidance and seeker solutions. Electronic Systems has a long-standing programme of research and development. Its focus remains on maintaining a diverse portfolio of defence and commercial products and capabilities for US and international customers.
The business expects to benefit from its ability to apply innovative technology solutions that meet defence customers' changing requirements. As a result, the business is well positioned for the medium term with strong significant roles on F-35 Lightning II, F-15 upgrade and classified programmes, as well as with specific products such as APKWS(R) . Over the longer term, the business is poised to leverage its technology strength in emerging areas of demand such as precision weaponry, space resilience, hyper-velocity and autonomous vehicles. In the commercial aviation market, Electronic Systems' technology innovations are enabling the business to maintain its long-standing customer positions and to compete for, and win, new business and with our electric hybrid propulsion capability we are well placed to continue to address the need for low and zero emission technology.
Cyber & Intelligence
Cyber & Intelligence comprises the US--based Intelligence & Security business and UK--headquartered Applied Intelligence business, and covers the Group's cyber security, secure government and commercial financial security activities.
Intelligence & Security
The outlook for the US government services sector is stable, although market conditions remain highly competitive and continue to evolve. The US business remains well positioned and will continue to leverage its established market positions and reputation for reliable and adaptable performance to meet customer demands for innovative, cost-effective and cyber-hardened solutions to pursue both recompeted contracts and new business across its portfolio of sustainment, integration and modernisation solutions for military and intelligence customers.
Applied Intelligence
The services and products we offer under our Government and Financial Services divisions are well placed to deliver growth and increased profitability, as cyber security becomes an increasingly important part of a nation's security and a core element of stewardship for companies in a sophisticated and persistent threat environment.
Platforms & Services (US)
Platforms & Services (US) , with operations in the US, UK and Sweden, manufactures combat vehicles, weapons and munitions, and delivers services and sustainment activities, including naval ship repair, and the management and operation of government-owned munitions facilities.
Combat Vehicles is underpinned by a growing order backlog and incumbencies on key franchise programmes. These include the US Army's Armored Multi-Purpose Vehicle, M109A7 self-propelled howitzer, Bradley upgrade programmes, Amphibious Combat Vehicle, M88, as well as the CV90 and BvS10 export programmes from BAE Systems Hägglunds. FNSS continues to execute on its order book of both Turkish and international orders. These long-term contracts and franchise positions make the combat vehicles business well placed for growth in the medium term. The team is working on, and is closely following, the US Army's acquisition plans for its next generation of combat vehicles, in particular the mobile protected firepower and robotic combat vehicle programmes.
In the maritime domain, the sector has a strong position on naval gun programmes and US Navy ship repair activities where the business has invested in facilities in key homeports. This capitalised infrastructure represents a high barrier to entry, and the business remains well aligned to the US Navy's operational strategy. The Group remains a leading provider of gun systems and precision strike capabilities and, in the complex ordnance manufacturing business, continues to manage and operate the US Army's Radford and Holston munitions facilities under previously awarded contracts.
Air
Air comprises the Group's UK--based air activities for European and International Markets, and US Programmes, and its businesses in Saudi Arabia and Australia, together with its 37.5% interest in the European MBDA joint venture.
Future Typhoon production and support sales are underpinned by existing contracts. Discussions continue in relation to potential further contract awards for Typhoon which would extend current production revenues. Production of rear fuselage assemblies for the F-35 will increase in 2020 to reach its expected peak rate for the decade. The business plays a significant role in the F-35 sustainment programme, and revenues are set to grow as the number of aircraft deployed increases over the coming years. Defence and security remain priorities for the UK government. The UK Combat Air Strategy provides the base to enable long-term planning and investment in a key strategic part of the business.
In Saudi Arabia, the In-Kingdom Industrial Participation programme continues to make good progress consistent with our long-term strategy, as well as the Saudi Arabian government's National Transformation Plan and Vision 2030. In order to provide ongoing capability to international customers, the Group is reliant on the continued approval of export licences by a number of governments. The withholding of such export licences may have an adverse effect on the Group's provision of capability to the Kingdom of Saudi Arabia and the Group will seek to work closely with the UK government to manage the impact of any such occurrence.
The Australian business has long-term sustainment and upgrade activities in maritime, air, wide-area surveillance, missile defence and electronic systems. The Hunter Class frigate programme is expected to drive growth in the coming years.
MBDA has a strong order book which is driving increasing production and sales. Development programmes continue to improve the long-term capabilities of the business, and as European nations embark on new combat air systems development, MBDA will be well placed to provide the technologies and system solutions required to deliver efficient and competitive armaments to these platforms.
Maritime
Maritime comprises the Group's UK--based maritime and land activities.
Maritime
Overall the outlook is stable based on long-term contracted positions. Within Submarines, the business is executing the Astute Class programme, with four boats still in build. On the Dreadnought programme manufacturing activities continue on the first of class boat. Investment continues in the Barrow facilities in order to provide the capabilities to deliver these long-term programmes through the next decade and beyond. In shipbuilding, following the completion of the two aircraft carriers, sales are underpinned by the manufacture of Type 26 frigates. The through-life support of surface ship platforms provides a sustainable business in technical services and mid-life upgrades.
Land UK
Future work will be underpinned by existing support contracts and the expected workshare on the Mechanised Infantry Vehicle programme.
Munitions supply continues under the Munitions Acquisition Supply Solution partnering agreement secured in 2008.
06 Alternative performance measure definitions
20 Our markets
Consolidated income statement for the year ended 31 December
2019 2018
----------------- -----------------
Total Total
Notes GBPm GBPm GBPm GBPm
------------------------------------------------------ ----- ------- -------- ------- --------
Continuing operations
------- -------
Sales 1 20,109 18,407
Deduct Share of sales by equity accounted investments 1 (2,878) (2,812)
Add Sales to equity accounted investments 1 1,074 1,226
------- -------
Revenue 1 18,305 16,821
Operating costs 2 (16,724) (15,514)
Other income 4 150 158
------------------------------------------------------ ----- ------- -------- ------- --------
Group operating profit 1,731 1,465
Share of results of equity accounted investments 1 168 140
------------------------------------------------------ ----- ------- -------- ------- --------
Underlying EBITA 1 2,117 1,928
Non-recurring items 1 (27) (154)
------- -------
EBITA 2,090 1,774
Amortisation of intangible assets 1 (109) (85)
Impairment of intangible assets 1 (6) (33)
Financial expense of equity accounted investments 5 (23) (13)
Taxation expense of equity accounted investments 6 (53) (38)
------- -------
Operating profit 1 1,899 1,605
Financial income (1) 27 26
Financial expense (1) (300) (407)
------- -------
Net finance costs 5 (273) (381)
------------------------------------------------------ ----- ------- -------- ------- --------
Profit before taxation 1,626 1,224
Taxation expense 6 (94) (191)
------------------------------------------------------ ----- ------- -------- ------- --------
Profit for the year 1,532 1,033
------------------------------------------------------ ----- ------- -------- ------- --------
Attributable to:
Equity shareholders 1,476 1,000
Non-controlling interests 56 33
------------------------------------------------------ ----- ------- -------- ------- --------
1,532 1,033
------------------------------------------------------ ----- ------- -------- ------- --------
Earnings per share 7
Basic earnings per share 46.4p 31.3p
Diluted earnings per share 46.1p 31.2p
------------------------------------------------------ ----- ------- -------- ------- --------
1. Gains on remeasurement of financial instruments at fair value through profit or loss and foreign exchange gains for the year ended 31 December 2018 have been reclassified to remove them from financial income and present all movements within financial expense. See note 5 for details.
Consolidated statement of comprehensive income for the year ended 31 December
2019 2018
----- ------------------------------ --------------------------------------
Other Retained Other
reserves(1) earnings Total reserves(1) Retained earnings Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ----- ------------ --------- ----- ------------ ----------------- -----
Profit for the year - 1,532 1,532 - 1,033 1,033
----------------------------------- ----- ------------ --------- ----- ------------ ----------------- -----
Other comprehensive income
Items that will not be reclassified
to the income statement:
Subsidiaries:
Remeasurements on
post-employment benefit
schemes - (556) (556) - 74 74
Tax on items that will not be
reclassified to the income
statement 6 - 57 57 - 5 5
Equity accounted investments (net
of tax) - (38) (38) - 6 6
Items that may be reclassified to
the income statement:
Subsidiaries:
Currency translation on
foreign currency net
investments (327) - (327) 400 - 400
Reclassification of cumulative
currency translation reserve
on disposal (8) - (8) - - -
Fair value gain arising on
hedging instruments during
the period 11 - 11 14 - 14
Cumulative fair value gain on
hedging instruments
reclassified to the income
statement (7) - (7) (39) - (39)
Tax on items that may be
reclassified to the income
statement 6 - - - 5 - 5
Equity accounted investments (net
of tax) 6 - 6 15 - 15
----------------------------------- ----- ------------ --------- ----- ------------ ----------------- -----
Total other comprehensive income
for the year (net of tax) (325) (537) (862) 395 85 480
----------------------------------- ----- ------------ --------- ----- ------------ ----------------- -----
Total comprehensive income for the
year (325) 995 670 395 1,118 1,513
----------------------------------- ----- ------------ --------- ----- ------------ ----------------- -----
Attributable to:
Equity shareholders (320) 940 620 391 1,085 1,476
Non-controlling interests (5) 55 50 4 33 37
----------------------------------- ----- ------------ --------- ----- ------------ ----------------- -----
(325) 995 670 395 1,118 1,513
----------------------------------- ----- ------------ --------- ----- ------------ ----------------- -----
1. An analysis of other reserves is provided in note 25.
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
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ----- -------- -------- ------------ ----------------- ----- --------------- -------
Balance at 1 January
2019 as originally
presented 87 1,249 6,481 (2,271) 5,546 72 5,618
Transition adjustment
upon adoption of IFRS
16 Leases 36 - - - (92) (92) - (92)
----------------------- ----- -------- -------- ------------ ----------------- ----- --------------- -------
Balance at 1 January
2019 87 1,249 6,481 (2,363) 5,454 72 5,526
-------- -------- ------------ ----------------- ----- --------------- -------
Profit for the year - - - 1,476 1,476 56 1,532
Total other
comprehensive income
for the year - - (320) (536) (856) (6) (862)
-------- -------- ------------ ----------------- ----- --------------- -------
Total comprehensive
income for the year - - (320) 940 620 50 670
Share-based payments
(inclusive of tax) 30 - - - 75 75 - 75
Cumulative fair value
gain on hedging
instruments
transferred to the
balance sheet (net of
tax) - - (5) - (5) - (5)
Ordinary share
dividends 25 - - - (724) (724) (56) (780)
Partial disposal of
shareholding in
subsidiary undertaking - - - (13) (13) 38 25
----------------------- ----- -------- -------- ------------ ----------------- ----- --------------- -------
At 31 December 2019 87 1,249 6,156 (2,085) 5,407 104 5,511
----------------------- ----- -------- -------- ------------ ----------------- ----- --------------- -------
Balance at 1 January
2018 87 1,249 6,090 (2,714) 4,712 43 4,755
-------- -------- ------------ ----------------- ----- --------------- -------
Profit for the year - - - 1,000 1,000 33 1,033
Total other
comprehensive income
for the year - - 391 85 476 4 480
-------- -------- ------------ ----------------- ----- --------------- -------
Total comprehensive
income for the year - - 391 1,085 1,476 37 1,513
Share-based payments
(inclusive of tax) 30 - - - 63 63 - 63
Net sale of own shares - - - 1 1 - 1
Ordinary share
dividends 25 - - - (703) (703) (28) (731)
Partial disposal of
shareholding in
subsidiary undertaking - - - (3) (3) 20 17
----------------------- ----- -------- -------- ------------ ----------------- ----- --------------- -------
At 31 December 2018 87 1,249 6,481 (2,271) 5,546 72 5,618
----------------------- ----- -------- -------- ------------ ----------------- ----- --------------- -------
1. An analysis of other reserves is provided in note 25.
Consolidated balance sheet as at 31 December
2019 2018(1)
Notes GBPm GBPm
--------------------------------------------------------------- ----- -------- --------
Non-current assets
Intangible assets 8 10,371 10,658
Property, plant and equipment 9 2,437 2,365
Right-of-use assets 10 1,138 -
Investment property 11 137 98
Equity accounted investments 12 428 429
Other investments 13 13
Other receivables 13 484 352
Post-employment benefit surpluses 23 302 308
Other financial assets 14 350 245
Deferred tax assets 15 726 702
--------------------------------------------------------------- ----- -------- --------
16,386 15,170
--------------------------------------------------------------- ----- -------- --------
Current assets
Inventories 16 835 774
Trade, other and contract receivables 13 5,458 5,177
Current tax 17 19 81
Other financial assets 14 210 166
Cash and cash equivalents 18 2,587 3,232
Assets held for sale 19 135 146
--------------------------------------------------------------- ----- -------- --------
9,244 9,576
--------------------------------------------------------------- ----- -------- --------
Total assets 20 25,630 24,746
--------------------------------------------------------------- ----- -------- --------
Non-current liabilities
Loans 21 (3,020) (3,514)
Lease liabilities 10 (1,116) -
Other payables 22 (1,481) (1,461)
Post-employment benefit obligations 23 (4,757) (4,337)
Other financial liabilities 14 (227) (104)
Provisions 24 (385) (427)
--------------------------------------------------------------- ----- -------- --------
(10,986) (9,843)
--------------------------------------------------------------- ----- -------- --------
Current liabilities
Loans and overdrafts 21 (377) (785)
Lease liabilities 10 (238) -
Trade and other payables 22 (7,926) (7,718)
Other financial liabilities 14 (232) (74)
Current tax 17 (55) (334)
Provisions 24 (300) (334)
Liabilities held for sale 19 (5) (40)
--------------------------------------------------------------- ----- -------- --------
(9,133) (9,285)
--------------------------------------------------------------- ----- -------- --------
Total liabilities (20,119) (19,128)
--------------------------------------------------------------- ----- -------- --------
Net assets 5,511 5,618
--------------------------------------------------------------- ----- -------- --------
Capital and reserves
Issued share capital 25 87 87
Share premium 1,249 1,249
Other reserves 25 6,156 6,481
Retained earnings - deficit (2,085) (2,271)
--------------------------------------------------------------- ----- -------- --------
Total equity attributable to equity holders of BAE Systems plc 5,407 5,546
Non-controlling interests 104 72
--------------------------------------------------------------- ----- -------- --------
Total equity 5,511 5,618
--------------------------------------------------------------- ----- -------- --------
1. The Saudi Arabia end of service benefit obligation of GBP97m at 31 December 2018 has been reclassified from trade and other payables to post-employment benefit obligations (see note 23).
Approved by the Board of BAE Systems plc on 19 February 2020 and signed on its behalf by:
C N Woodburn P J Lynas
Chief Executive Group Finance Director
Consolidated cash flow statement for the year ended 31 December
2019 2018(1)
Notes GBPm GBPm
------------------------------------------------------------------------------------------ ----- ------- -------
Profit for the year 1,532 1,033
Taxation expense 6 94 191
Research and development expenditure credits 4 (12) (27)
Share of results of equity accounted investments 1 (168) (140)
Net finance costs 5 273 381
Depreciation, amortisation, impairment and derecognition 2 660 411
Gain on investment revaluation - (7)
Profit on disposal of property, plant and equipment, and investment property 2,4 (9) (18)
(Gain)/loss in respect of held for sale assets and business disposals 2,4 (9) 9
Cost of equity-settled employee share schemes 74 64
Movements in provisions (73) (101)
Decrease in liabilities for post-employment benefit obligations (214) (153)
(Increase)/decrease in working capital:
Inventories (76) (16)
Trade, other and contract receivables (481) (757)
Trade and other payables 258 530
Taxation paid (252) (200)
------------------------------------------------------------------------------------------ ----- ------- -------
Net cash flow from operating activities 1,597 1,200
------------------------------------------------------------------------------------------ ----- ------- -------
Dividends received from equity accounted investments 12 142 57
Interest received 28 25
Principal element of finance lease receipts 9 -
Purchase of property, plant and equipment, and investment property (360) (358)
Purchase of intangible assets (110) (139)
Proceeds from sale of property, plant and equipment, and investment property 21 34
Proceeds from sale of intangible assets 1 -
Purchase of equity accounted investment - (2)
Equity accounted investment funding 12 (6) (1)
Purchase of subsidiary undertakings, net of cash and cash equivalents acquired 33 (12) 14
Cash flow in respect of held for sale assets and business disposals, net of cash and cash
equivalents disposed 55 12
------------------------------------------------------------------------------------------ ----- ------- -------
Net cash flow from investing activities (232) (358)
------------------------------------------------------------------------------------------ ----- ------- -------
Interest paid (233) (203)
Net sale of own shares - 1
Equity dividends paid 25 (724) (703)
Dividends paid to non-controlling interests (56) (28)
Partial disposal of shareholding in subsidiary undertaking 31 17
Principal element of lease payments (239) -
Cash flow from matured derivative financial instruments (excluding cash flow hedges) 40 6
Cash flow from movement in cash collateral 1 2
Cash outflow from repayment of loans (782) (7)
------------------------------------------------------------------------------------------ ----- ------- -------
Net cash flow from financing activities 27 (1,962) (915)
------------------------------------------------------------------------------------------ ----- ------- -------
Net decrease in cash and cash equivalents (597) (73)
Cash and cash equivalents at 1 January 3,232 3,264
Effect of foreign exchange rate changes on cash and cash equivalents (48) 41
------------------------------------------------------------------------------------------ ----- ------- -------
Cash and cash equivalents at 31 December 2,587 3,232
------------------------------------------------------------------------------------------ ----- ------- -------
1. 2018 comparatives have been reclassified to present a cash inflow of GBP17m in respect of a partial disposal of the Group's shareholding in a subsidiary undertaking within financing activities. This cash flow was previously presented in investing activities.
Notes to the Group accounts
31. Related party transactions
The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments (note 12) and pension schemes (note 23).
Transactions with related parties occur in the normal course of business, are priced on an arm's-length basis and settled on normal trade terms. The more significant transactions are disclosed below:
Sales to Purchases from Amounts owed by Amounts owed to Management
related parties related parties related parties related parties(1) recharges(1)
---------------- ------------------ --------------- ------------------ -------------------
2019 2018 2019 2018(2) 2019 2018 2019 2018 2019 2018
Related party GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ------- ------- --------- ------ ------- ------ ---------- ------ -----------
Advanced
Electronics
Company
Limited 41 38 215 166 - 18 35 24 - -
CTA
International
SAS 2 1 - - 1 - 13 15 - -
Eurofighter
Jagdflugzeug
GmbH 854 1,028 248 313 41 37 42 52 - -
FADEC
International
LLC 114 101 - - - - - - - -
FAST Training
Services
Limited 2 2 - - - - - - - -
MBDA SAS 28 23 164 199 8 8 1,041 864 19 18
Panavia
Aircraft GmbH 27 32 16 26 1 4 - - - -
Reaction
Engines
Limited - 1 - - - - - - - -
Rheinmetall
BAE Systems
Land Limited 4 - - - - - - - - -
BAE Systems
Pension Funds
Trustees
Limited(3) - - 20 19 - 4 225 10 - -
Other 2 - 1 - 2 - 3 - - -
-------------- ------- ------- ------- --------- ------ ------- ------ ---------- ------ -----------
1,074 1,226 664 723 53 71 1,359 965 19 18
-------------- ------- ------- ------- --------- ------ ------- ------ ---------- ------ -----------
1. Also relates to disclosures under IAS 24 Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2019, GBP862m (2018 GBP869m) was owed by BAE Systems plc and GBP497m (2018 GBP96m) by other Group subsidiaries.
2. 2018 purchases from related parties have been restated to include GBP313m of purchases from Eurofighter Jagdflugzeug GmbH.
3. Transactions with BAE Systems Pension Funds Trustees Limited represent lease arrangements for land and buildings leased by the Group. Amounts owed at 31 December 2019 include GBP225m in respect of lease liabilities measured under IFRS 16. The undiscounted minimum lease commitments to this related party at 31 December 2018 were GBP297m, which is not included within amounts owed to related parties in the table above.
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 109 to 130. Total emoluments for directors and key management personnel charged to the Consolidated income statement were:
2019 2018
GBP'000 GBP'000
----------------------------- -------- --------
Short-term employee benefits 18,163 15,140
Post-employment benefits 1,275 1,127
Share-based payments 8,538 6,578
----------------------------- -------- --------
27,976 22,845
----------------------------- -------- --------
Note and page references used above refer to the Annual Report 2019 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 news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
FR DZGGDNFFGGZG
(END) Dow Jones Newswires
April 03, 2020 05:00 ET (09:00 GMT)
1 Year Bae Systems Chart |
1 Month Bae Systems Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
