TIDMBA.
RNS Number : 8193M
BAE SYSTEMS PLC
02 August 2017
BAE Systems plc
Half-yearly Report 2017
Results in brief
Financial performance measures Financial performance measures
as defined by the Group(1) defined in IFRS(2)
Six Six Six
months Year months months Year
Six months ended ended ended ended ended
ended 30 31 30 30 31
30 June June December June June December
2017 2016 2016 2017 2016 2016
-------------------- ----------- ----------- ----------- --------------- --------- --------- ----------
Sales GBP9,565m GBP8,714m GBP19,020m Revenue GBP9,012m GBP8,278m GBP17,790m
-------------------- ----------- ----------- ----------- --------------- --------- --------- ----------
Operating
Underlying EBITA GBP945m GBP849m GBP1,905m profit GBP865m GBP776m GBP1,742m
-------------------- ----------- ----------- ----------- --------------- --------- --------- ----------
Underlying earnings Basic earnings
per share 19.8p 17.4p 40.3p per share 17.5p 12.9p 28.8p
-------------------- ----------- ----------- ----------- --------------- --------- --------- ----------
Net cash flow
Operating business from operating
cash flow GBP277m GBP(20)m GBP1,004m activities GBP341m GBP77m(3) GBP1,229m
-------------------- ----------- ----------- ----------- --------------- --------- --------- ----------
Net debt GBP(1,741)m GBP(2,036)m GBP(1,542)m
-------------------- ----------- ----------- -----------
Order intake GBP10,650m GBP7,053m GBP22,443m
-------------------- ----------- ----------- -----------
Order backlog GBP42.3bn GBP36.3bn GBP42.0bn
-------------------- ----------- ----------- -----------
Other financial
highlights
Six
months Year
Six months ended ended
ended 30 31
30 June June December
2017 2016 2016
-------------------- ----------- ----------- -----------
Group's share
of the net pension
deficit GBP(5.9)bn GBP(6.1)bn GBP(6.1)bn
-------------------- ----------- ----------- -----------
Dividend per
share 8.8p(4) 8.6p 21.3p
-------------------- ----------- ----------- -----------
Charles Woodburn, Chief Executive, said: "BAE Systems'
performance in the first half was consistent with our expectations
and guidance for the year. We have a sound platform for medium-term
growth underpinned by a clear and consistent strategy. Strong
programme execution, technology and enhanced competitive positions
will be key in driving the business forward, and we will continue
to focus on efficiency and meeting our customers' affordability
challenges. With the expected improvement in the defence budget
outlook in a number of our markets, the Group is well placed to
continue to generate good returns for shareholders."
Financial highlights
Financial performance measures as defined by the Group(1)
- Sales increased to GBP9.6bn, up 4% on a constant currency basis(5) .
- Underlying EBITA increased by 11% to GBP945m, or 5% on a constant currency basis(5) .
- Underlying earnings per share increased by 14% to 19.8p.
- Operating business cash flow of GBP277m.
- Net debt of GBP1.7bn.
- Order intake increased by GBP3.6bn to GBP10.7bn and includes
award of a production contract for the initial batch of three Type
26 frigates.
- Order backlog increased to GBP42.3bn after adverse exchange translation of GBP0.4bn.
Financial performance measures defined in IFRS(2)
- Revenue increased to GBP9.0bn, up 3% on a constant currency basis(5) .
- Operating profit increased by 11% to GBP865m, or 5% on a constant currency basis(5) .
- Basic earnings per share increased by 36% to 17.5p.
- Net cash flow from operating activities of GBP341m.
Other financial highlights
- Group's share of the pre-tax accounting net pension deficit
reduced to GBP5.9bn (31 December 2016 GBP6.1bn).
- Interim dividend increased by 2% to 8.8p per share.
1. We monitor the underlying financial performance of the Group
using alternative performance measures. These measures are not
defined in International Financial Reporting Standards (IFRS) and,
therefore, are considered to be non-GAAP (Generally Accepted
Accounting Principles) measures. Accordingly, the relevant IFRS
measures are also presented where appropriate. For alternative
performance measure definitions see glossary below.
2. International Financial Reporting Standards.
3. Re-presented to reclassify interest paid from operating to
financing activities.
4. Interim dividend declared (see note 6).
5. Current period compared with prior period translated at
current period exchange rates.
Operational and strategic highlights
- The full GBP3.7bn production contract for the initial batch of
three Type 26 frigates was signed in June, with order intake of
GBP2.8bn in the period.
- Received the full GBP1.4bn contract for the sixth Astute Class
submarine from the Royal Navy in March and, in April, the fourth
Astute boat, Audacious, was launched.
- Secured a $542m (GBP417m) contract in January to provide 145
M777 ultra-lightweight howitzers to India.
- The first two Typhoon aircraft for Oman arrived in the Sultanate of Oman in June.
- Final four aircraft delivered on the Salam Typhoon programme.
- Typhoon support contracts in Saudi Arabia meeting contractual requirements.
- Secured further awards for APKWS(TM) laser-guided rockets worth $240m (GBP185m).
- Following operational certification in February, the new San
Diego dry dock accepted its first docking. The US ship repair
business received orders of $511m (GBP393m) in the first half of
2017.
- In February, the acquisition of IAP Research, Inc. was
completed. This technology insertion enhances our position in
advanced weapon systems, such as the electromagnetic railgun.
- In June, selected as the preferred tenderer for the Jindalee
Operational Radar Network upgrade programme in Australia.
- In July, the UK High Court ruled that the UK government has
been acting lawfully in granting defence export licences to the
Kingdom of Saudi Arabia.
Guidance for 2017
In aggregate, we expect the Group's underlying earnings per
share for 2017 to be 5% to 10% higher than full-year underlying
earnings per share in 2016 of 40.3p.
This outlook remains unchanged despite moving the US$ planning
rate for the year from $1.25 to $1.28.
Whilst there is no change to the Group-level earnings guidance,
some softening in the top line of, and an anticipated second-half
restructuring charge in, Cyber & Intelligence (comprising the
US Intelligence & Security sector and Applied Intelligence) are
expected to be offset across the rest of the business. We expect
the Applied Intelligence business to be close to an underlying
break-even position by the year end excluding the anticipated
restructuring charge.
In 2017, we continue to expect a small reduction in net debt
compared with 31 December 2016.
This guidance is based on the measures used to monitor the
underlying financial performance of the Group. Reconciliations from
these measures to the financial performance measures defined in
International Financial Reporting Standards for the six months
ended 30 June 2017 are provided below.
For further information please contact:
Investors Media Relations
Martin Cooper, Rowan Pearman,
Investor Relations Director Director, Media Relations
Telephone: +44 (0)1252 383040 Telephone: +44 (0)7721 107716
Email: investors@baesystems.com Email: rowan.pearman@baesystems.com
Analyst and investor presentation
A presentation, for analysts and investors, of the Group's first
half results for 2017 will be available via webcast at 9.00am today
(2 August 2017).
Details can be found on investors.baesystems.com, together with
presentation slides and a pdf copy of this report. A recording of
the webcast will be available for replay later in the day.
About BAE Systems
At BAE Systems, our advanced defence technology protects people
and national security, and keeps critical information and
infrastructure secure. We search for new ways to provide our
customers with a competitive edge across the air, maritime, land
and cyber domains. We employ a skilled workforce of 83,500
people(1) in over 40 countries, and work closely with local
partners to support economic development by transferring knowledge,
skills and technology.
1. Including share of equity accounted investments.
Interim management report
In the first half of 2017, BAE Systems delivered a solid
performance consistent with our expectations and guidance for the
year. We continue to take the actions necessary to address costs
and to meet our customers' affordability challenges. Despite
economic and political uncertainties, governments in our major
markets continue to prioritise defence and security, with strong
demand for our capabilities. We continue to invest in our business,
our people and in the technology and skills we need to drive the
business forward. With an improving outlook for defence budgets in
a number of our markets, we are well placed to continue to generate
good returns for shareholders.
US
The US Department of Defense fiscal year 2017 budget and 2018
budget proposal support the medium-term planning assumptions for
our US businesses as we see the ramp up of production on a number
of our long-term programmes.
Our US electronics business has strong franchise positions in
the high-technology areas of electronic warfare, electro-optics and
Intelligence, Surveillance and Reconnaissance. As the electronic
warfare system supplier on the F-35 Lightning II combat aircraft
programme, we are increasing production and are also well
positioned to meet increases in production output over the coming
years to meet the requirements of US and international
customers.
The Eagle Passive Active Warning Survivability System electronic
warfare upgrade for US Air Force F-15 aircraft is progressing
through its engineering and manufacturing development phase. The
Advanced Precision Kill Weapon System (APKWS(TM)) laser-guided
rocket is increasing production under the extant US Navy contract
to meet growing demand from domestic and international
customers.
The Group's US-based combat vehicles business is underpinned by
the Armored Multi-Purpose Vehicle, M109A7 self-propelled howitzer
and Bradley upgrade programmes. The business is also experiencing
US and international demand on amphibious programmes. All 16
prototypes have been delivered to the US Marine corps under the
Amphibious Combat Vehicle 1.1 programme. We are one of two
competitors for this programme, with down-selection expected in
2018.
The contract for M777 howitzers to India under a Foreign
Military Sale was signed in January. The first two guns have been
shipped and are progressing through in-country testing. FNSS, the
Turkish land systems business in which BAE Systems holds a 49%
interest, continued to win business and holds an order book of
$1.1bn (GBP0.8bn) at 30 June.
One of the final two commercial ships is nearing completion and
being marketed for sale following the original customer's decision
not to purchase the vessel. Construction of the final ship is
planned to be completed in the second half of the year. The US
business has not contracted for any more commercial ship-build.
BAE Systems is the leading supplier of ship repair services to
the US Navy and continues to adjust its workforce and facilities to
meet evolving demand. Additional dry dock capacity at our San Diego
shipyard became operational in February.
Whilst market conditions remain highly competitive and continue
to evolve, our US-based Intelligence & Security business is
focused on delivering on its contracts and maintaining a high level
of bid activity. The implementation of additional IT services for
customers in the intelligence community has been deferred to the
second half of the year due to a delay in the acceptance of an
intelligence community programme.
UK
The result of the UK general election on 8 June has given rise
to the formation of a minority government, but one for which
defence and security is expected to remain a priority. Negotiations
on the terms of the UK's exit from the EU will provide greater
clarity as to the economic outlook in the medium term.
In the air domain, Typhoon aircraft deliveries for the Royal Air
Force continued alongside airframe sub-assembly deliveries to
European partner nations and work under the Kuwaiti Air Force
subcontract. The first two aircraft deliveries under the Oman
Typhoon programme were achieved, with the remaining deliveries
scheduled for the second half of 2017 and 2018. The first two Hawk
trainer aircraft for the Omani Royal Air Force have completed
manufacture, with delivery of all eight aircraft scheduled for the
second half of 2017.
Discussions with current and prospective operators of the
Typhoon aircraft continue to support the Group's expectations for
additional Typhoon contract awards. However, there can be no
certainty as to the timing of these orders and, in any event, any
new orders are unlikely to positively impact production delivery
rates for at least 24 months. The balance of customer demand for
aircraft and production rates will be under constant review with
adjustments made as appropriate.
Typhoon's capabilities continue to be enhanced. Work on the
integration of Storm Shadow, Meteor and Brimstone 2 missiles is
progressing and this furthers development towards the Royal Air
Force Centurion standard, which will enable transition of
capability from Tornado to Typhoon as the UK Tornado fleet is
scheduled to come out of service at the end of the decade. The
Captor E-scan radar integration also continues.
UK-based production of rear fuselage assemblies for the F-35
Lightning II aircraft is increasing, with most of the advanced
manufacturing investment in place to achieve the planned production
volumes.
Unmanned air systems activity benefited from the announcement in
2016 by the UK and French governments of a new EUR2bn (GBP1.8bn)
project to build an unmanned combat air system demonstrator
following a successful joint study phase. The feasibility and
definition phase is under way, and a proposal for the first phase
of the demonstrator programme was submitted in March. Funding of
GBP16m has been received to date.
In the maritime domain, there remains pressure on the Navy's
near-term budgets. Submarine activity is increasing with the Astute
and Dreadnought class submarines now both in production and major
redevelopment of the Barrow, UK, site to deliver the Dreadnought
programme under way. The first three Astute Class submarines are in
operational service with the Royal Navy and the fourth, Audacious,
was launched in April, with the remaining three in build.
The full GBP3.7bn production contract for the first batch of
three Type 26 frigates was signed in June, with order intake of
GBP2.8bn in the period after order intake in previous periods for
long-lead items. The cut steel ceremony was held in July.
On the Queen Elizabeth Class aircraft carrier programme,
assembly of the second ship is well under way and, in June, sea
trials commenced on the first of the two ships. Activity to prepare
the support solution in advance of the arrival of HMS Queen
Elizabeth at HM Naval Base, Portsmouth, is continuing.
On the River Class Offshore Patrol Vessels for the Royal Navy,
revised delivery dates have been agreed with the Ministry of
Defence and the first vessel, HMS Forth, will commence sea trials
in the third quarter. All five ships are now in build.
International
In Saudi Arabia, BAE Systems continues to address current and
potential new requirements as part of long-standing agreements
between the UK government and the Kingdom. Our In-Kingdom
Industrial Participation programme also continues apace.
On the Salam Typhoon programme, the final four of the contracted
72 aircraft have been delivered. Deliveries continue under the Hawk
training aircraft contracts for 44 aircraft. The Royal Saudi Air
Force has achieved high utilisation and aircraft availability
across its Typhoon, Tornado and training aircraft fleets.
In Australia, the business is underpinned by long-term support
contracts. Following the announcement in 2016 that we were one of
two down-selected on the Land 400 Phase 2 Combat Reconnaissance
Vehicle programme, vehicle evaluation and testing is under way. In
June, we were selected as the preferred tenderer for the Jindalee
Operational Radar Network upgrade programme.
The MBDA joint venture has continued to win orders and, with its
order book, forecasts sales growth over the medium term.
In India, BAE Systems has a long-standing relationship with
Hindustan Aeronautics Limited (HAL) and an order for a third batch
of HAL-built Hawk aircraft for the Indian Air Force remains under
discussion.
Cyber security
Applied Intelligence achieved double-digit sales growth in the
period. Following a review of market priorities and our competitive
position, an increasingly focused investment programme in
engineering capabilities and product development, in particular in
our commercial cyber business, will support the future growth
profile for the business. In the first half of the year, Applied
Intelligence made a loss of GBP27m, but the business is expected to
be close to an underlying break-even position across the year
excluding an anticipated restructuring charge.
Sales growth is expected to continue, as cyber security is an
increasingly important part of government security and a core
element of stewardship for commercial enterprises in a
sophisticated and persistent threat environment.
Balance sheet and capital allocation
The Group's balance sheet is managed conservatively in line with
its policy to retain its investment grade credit rating and to
ensure operating flexibility. Consistent with this approach, the
Group expects to continue to meet its pension obligations, invest
in research and technology and other organic investment
opportunities, and plans to pay dividends in line with its policy
of long-term sustainable cover of around two times underlying
earnings. Investment in value-enhancing acquisitions will be
considered where market conditions are right and where they deliver
on the Group's strategy.
Pension schemes
The Group's share of the pre-tax accounting net pension deficit
reduced to GBP5.9bn (31 December 2016 GBP6.1bn).
The UK triennial funding reviews commenced in April and, in
conjunction with the trustees of the schemes and other
stakeholders, we are currently in the process of agreeing the
various technical provisions which form the basis of calculating
the funding deficit. Once the deficit and the future investment
strategy have been agreed, we will then enter into discussions as
to the deficit funding arrangements. We aim to complete these by
the end of the year and we have already engaged with the UK
Pensions Regulator as we move through this process.
Research and technology
BAE Systems has developed some of the world's most innovative
technologies and invests in research and development to generate
future products and capabilities. We embrace disruptive technology,
drive innovation and invest appropriately in research and
development both on a self-funded basis and in conjunction with our
customers, universities, and small and medium-sized enterprises.
Company-funded research and development often leads to
customer-funded development activity as requirements mature, with
spend focused in areas such as defence and commercial electronics,
military aircraft, precision weapons and cyber security.
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 major markets continuing to prioritise defence
and security, with strong demand for our capabilities. As the
overall business environment in our major markets improves and
through execution of our strategy, we are well placed to maximise
opportunities, deal with the challenges and continue to generate
good shareholder returns.
Directors and the Board
With effect from 1 July, Charles Woodburn succeeded Ian King as
Chief Executive. Ian King retired from the Company at the end of
June having served for over 40 years, including leading BAE Systems
as Chief Executive since 2008.
Dividend
The Board has declared a 2% increase in the interim dividend to
8.8p for the half year to 30 June 2017.
Glossary
We monitor the underlying financial performance of the Group
using alternative performance measures. These measures are not
defined in International Financial Reporting Standards (IFRS) and,
therefore, are considered to be non-GAAP (Generally Accepted
Accounting Principles) measures. Accordingly, the relevant IFRS
measures are also presented where appropriate.
Definition Purpose
--------------------- ----------------------------------- ----------------------------
Financial performance measures as defined by the Group
Sales Revenue including the Allows management
Group's share of revenue to monitor the sales
of equity accounted investments. performance of subsidiaries
and equity accounted
investments.
--------------------- ----------------------------------- ----------------------------
Underlying EBITA Profit for the period Provides a measure
before amortisation and of operating profitability
impairment of intangible that is comparable
assets, finance costs over time.
and taxation expense (EBITA)
excluding non-recurring
items*.
--------------------- ----------------------------------- ----------------------------
Underlying earnings Basic earnings per share Provides a measure
per share excluding amortisation of underlying performance
and impairment of intangible that is comparable
assets, non-cash finance over time.
movements on pensions
and financial derivatives,
and non-recurring items*.
--------------------- ----------------------------------- ----------------------------
Operating business Net cash flow from operating Allows management
cash flow activities excluding taxation to monitor the operating
after net capital expenditure, cash generation
financial investment and of the Group.
dividends from equity
accounted investments.
--------------------- ----------------------------------- ----------------------------
Net debt Cash and cash equivalents, Allows management
less loans and overdrafts to monitor the indebtedness
(including debt-related of the Group.
derivative financial instruments).
--------------------- ----------------------------------- ----------------------------
Order intake Funded orders received Allows management
from customers including to monitor the order
the Group's share of order intake of subsidiaries
intake of equity accounted and equity accounted
investments. investments.
--------------------- ----------------------------------- ----------------------------
Order backlog Funded and unfunded unexecuted Supports future
customer orders including years' sales performance
the Group's share of order of subsidiaries
backlog of equity accounted and equity accounted
investments. Unfunded investments.
orders include the elements
of US multi-year contracts
for which funding has
not been authorised by
the customer.
--------------------- ----------------------------------- ----------------------------
Financial performance measures defined in IFRS
Revenue Income derived from the N/a
provision of goods and
services by the Company
and its subsidiary undertakings.
------------------- ------------------------------------- ----------------------------
Operating profit Profit for the period N/a
before finance costs and
taxation expense. This
measure includes finance
costs and taxation expense
of equity accounted investments.
------------------- ------------------------------------- ----------------------------
Basic earnings Basic earnings per share N/a
per share in accordance with International
Accounting Standard 33,
Earnings per Share.
------------------- ------------------------------------- ----------------------------
Net cash flow Net cash flow from operating N/a
from operating activities in accordance
activities with International Accounting
Standard 7, Statement
of Cash Flows.
------------------- ------------------------------------- ----------------------------
Other financial
measures
Net pension Net International Accounting N/a
deficit Standard 19, Employee
Benefits, deficit excluding
amounts allocated to equity
accounted investments.
------------------- ------------------------------------- ----------------------------
Dividend per Interim dividend paid N/a
share and final dividend proposed
per share.
------------------- ------------------------------------- ----------------------------
* Items that are relevant to an understanding of the
Group's performance with reference to their materiality
and nature (see below).
Financial performance
Income statement
Six months Six months
ended ended
30 June 30 June
2017 2016
GBPm GBPm
------------------------------------------------- ---------- ----------
Financial performance measures as defined
by the Group(1)
Sales 9,565 8,714
------------------------------------------------- ---------- ----------
Underlying EBITA 945 849
------------------------------------------------- ---------- ----------
Return on sales 9.9% 9.7%
------------------------------------------------- ---------- ----------
Financial performance measures defined
in IFRS(2)
Revenue 9,012 8,278
------------------------------------------------- ---------- ----------
Operating profit 865 776
------------------------------------------------- ---------- ----------
Return on revenue 9.6% 9.4%
------------------------------------------------- ---------- ----------
Reconciliation of sales to revenue
Sales 9,565 8,714
Deduct Share of sales by equity accounted
investments (1,155) (996)
Add Sales to equity accounted investments 602 560
------------------------------------------------- ---------- ----------
Revenue 9,012 8,278
------------------------------------------------- ---------- ----------
Reconciliation of underlying EBITA to
operating profit
Underlying EBITA 945 849
Non-recurring items (4) -
Amortisation of intangible assets (41) (43)
Financial expense of equity accounted
investments (26) (15)
Taxation expense of equity accounted investments (9) (15)
------------------------------------------------- ---------- ----------
Operating profit 865 776
Net finance costs (151) (248)
Taxation expense (155) (110)
------------------------------------------------- ---------- ----------
Profit for the period 559 418
------------------------------------------------- ---------- ----------
Segmental analysis
Financial performance measures as defined
by the Group(1)
Underlying
Sales EBITA
---------------------- ----------------------
Six months Six months Six months Six months
ended ended ended ended
30 June 30 June 30 June 30 June
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
------------------------------------- ---------- ---------- ---------- ----------
Electronic Systems 1,726 1,443 257 209
Cyber & Intelligence 923 833 35 18
Platforms & Services (US) 1,433 1,287 109 86
Platforms & Services (UK) 3,913 3,664 416 414
Platforms & Services (International) 1,771 1,739 176 158
HQ 128 104 (48) (36)
Deduct Intra-group (329) (356) - -
------------------------------------- ---------- ---------- ---------- ----------
9,565 8,714 945 849
------------------------------------- ---------- ---------- ---------- ----------
Financial performance measures
defined in IFRS(2)
Operating
Revenue profit/(loss)
---------------------- ----------------------
Six months Six months Six months Six months
ended ended ended ended
30 June 30 June 30 June 30 June
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
------------------------------------- ---------- ---------- ---------- ----------
Electronic Systems 1,726 1,443 247 200
Cyber & Intelligence 923 833 20 -
Platforms & Services (US) 1,400 1,244 99 79
Platforms & Services (UK) 3,864 3,621 406 394
Platforms & Services (International) 1,381 1,449 161 146
HQ - - (68) (43)
Deduct Intra-group (282) (312) - -
9,012 8,278 865 776
------------------------------------- ---------- ---------- ---------- ----------
Exchange rates
Six months Six months
ended ended
30 June 30 June
Average 2017 2016
--------------------------------------------- ---------- -----------
GBP/$ 1.259 1.433
GBP/EUR 1.162 1.283
GBP/A$ 1.669 1.954
--------------------------------------------- ---------- -----------
30 June 30 June
Period end 2017 2016
--------------------------------------------- ---------- -----------
GBP/$ 1.299 1.337
GBP/EUR 1.139 1.205
GBP/A$ 1.693 1.796
--------------------------------------------- ---------- -----------
31 December
Year end 2016
--------------------------------------------- ---------- -----------
GBP/$ 1.236
GBP/EUR 1.172
GBP/A$ 1.707
--------------------------------------------- ---------- -----------
Sensitivity analysis GBPm
--------------------------------------------------------- -----------
Estimated impact on annual sales of a ten
cent movement in the average exchange rate:
$ 600
EUR 80
A$ 35
--------------------------------------------- ---------- -----------
Sales in the first half increased to GBP9.6bn (2016 GBP8.7bn),
up 4% on a constant currency basis(3) . Some second half bias in
sales is expected this year.
Underlying EBITA was GBP945m (2016 GBP849m), 11% up on last
year, or 5% on a constant currency basis(3) .
Revenue increased to GBP9.0bn (2016 GBP8.3bn), up 3% on a
constant currency basis(3) .
Operating profit was GBP865m (2016 GBP776m), 11% up on last
year, or 5% on a constant currency basis(3) .
Non-recurring items in 2017 of GBP4m (2016 GBPnil) represents a
loss on the disposal of the BAE Systems San Francisco Ship Repair
business.
Amortisation of intangible assets reduced to GBP41m (2016
GBP43m).
Net finance costs were GBP151m (2016 GBP248m). The underlying
interest charge, excluding pension accounting, and fair value and
foreign exchange adjustments on financial instruments and
investments, was GBP111m (2016 GBP114m). There was a credit in
respect of fair value and foreign exchange adjustments of GBP44m
(2016 charge GBP48m) on exchange translation of US
dollar-denominated bonds.
Taxation expense, including equity accounted investments, of
GBP164m (2016 GBP125m) reflects the Group's effective tax rate for
the period of 23% (2016 23%). The effective tax rate for the full
year is expected to be around 22% with some dependency on the
geographical mix of profits.
1. For alternative performance measure definitions see glossary
above.
2. International Financial Reporting Standards.
3. Current period compared with prior period translated at
current period exchange rates.
Earnings per share
Six months Six months
ended ended
30 June 30 June
2017 2016
GBPm GBPm
---------------------------------------------- ---------- ----------
Financial performance measures as defined
by the Group(1)
Underlying earnings 628 551
---------------------------------------------- ---------- ----------
Underlying earnings per share 19.8p 17.4p
---------------------------------------------- ---------- ----------
Financial performance measures defined
in IFRS(2)
Profit for the period attributable to equity
shareholders 555 408
---------------------------------------------- ---------- ----------
Basic earnings per share 17.5p 12.9p
---------------------------------------------- ---------- ----------
Reconciliation of underlying earnings to
profit for the period attributable to equity
shareholders
Underlying earnings 628 551
Non-recurring items (4) -
Amortisation and impairment of intangible
assets, post tax (32) (33)
Net interest expense on retirement benefit
obligations, post tax (67) (69)
Fair value and foreign exchange adjustments
on financial instruments and investments,
post tax 30 (41)
Profit for the period attributable to equity
shareholders 555 408
Non-controlling interests 4 10
---------------------------------------------- ---------- ----------
Profit for the period 559 418
---------------------------------------------- ---------- ----------
Underlying earnings per share for the period increased by 14% to
19.8p (2016 17.4p).
Basic earnings per share for the period increased by 36% to
17.5p (2016 12.9p). There was a credit in respect of fair value and
foreign exchange adjustments on financial instruments and
investments reflecting exchange translation of US
dollar-denominated bonds compared with a charge in the prior
period.
1. For alternative performance measure definitions see glossary
above.
2. International Financial Reporting Standards.
Cash flow
Six
months
ended Six months
30 ended
June 30 June
2017 2016(1)
GBPm GBPm
------------------------------------------------- ------- ----------
Financial performance measures as defined
by the Group(2)
Operating business cash flow 277 (20)
------------------------------------------------- ------- ----------
Financial performance measures defined in
IFRS(3)
Net cash flow from operating activities(1) 341 77
------------------------------------------------- ------- ----------
Reconciliation from operating business cash
flow to net cash flow from operating activities
Operating business cash flow 277 (20)
Add back Net capital expenditure and financial
investment 202 186
Deduct Dividends received from equity accounted
investments (32) (23)
Deduct Taxation (106) (66)
------------------------------------------------- ------- ----------
Net cash flow from operating activities(1) 341 77
------------------------------------------------- ------- ----------
Net capital expenditure and financial investment (202) (186)
Dividends received from equity accounted
investments 32 23
Interest received 6 4
Acquisitions and disposals (5) -
------------------------------------------------- ------- ----------
Net cash flow from investing activities (169) (159)
------------------------------------------------- ------- ----------
Interest paid (107) (107)
Net (purchase)/sale of own shares (1) 1
Equity dividends paid (404) (397)
Dividends paid to non-controlling interests (8) (6)
Cash flow from matured derivative financial
instruments (43) 240
Cash flow from cash collateral (5) 25
Net cash flow from financing activities(1) (568) (244)
------------------------------------------------- ------- ----------
Net decrease in cash and cash equivalents (396) (326)
Foreign exchange translation 176 (339)
Other non-cash movements 21 51
------------------------------------------------- ------- ----------
Increase in net debt (199) (614)
Opening net debt (1,542) (1,422)
------------------------------------------------- ------- ----------
Net debt (1,741) (2,036)
------------------------------------------------- ------- ----------
Six
months
ended Six months
30 ended
June 30 June
2017 2016(1)
Segmental analysis GBPm GBPm
------------------------------------------------- ------- ----------
Financial performance measures as defined
by the Group(2)
Electronic Systems 118 105
Cyber & Intelligence 46 33
Platforms & Services (US) 38 (33)
Platforms & Services (UK) 107 (154)
Platforms & Services (International) 102 178
HQ (134) (149)
------------------------------------------------- ------- ----------
Operating business cash flow 277 (20)
------------------------------------------------- ------- ----------
Financial performance measures defined in
IFRS(3)
Electronic Systems 167 138
Cyber & Intelligence 56 43
Platforms & Services (US) 66 (19)
Platforms & Services (UK) 186 (55)
Platforms & Services (International) 106 185
HQ (134) (149)
Deduct Taxation(4) (106) (66)
------------------------------------------------- ------- ----------
Net cash flow from operating activities(1) 341 77
------------------------------------------------- ------- ----------
Operating business cash inflow was GBP277m (2016 outflow
GBP20m), which includes cash contributions in respect of pension
deficit funding, over and above service costs, for the UK and US
schemes totalling GBP86m (2016 GBP148m).
Residual advances are being consumed on the Omani and European
Typhoon production contracts. Costs are being incurred against
provisions created in previous years as we close out the US
commercial shipbuilding programmes. There was an operating cash
flow benefit from accelerated receipts of approximately GBP250m
received in December 2016, which reversed in the first half of
2017.
Net cash flow from operating activities(1) was GBP341m (2016
GBP77m).
Taxation payments increased to GBP106m (2016 GBP66m) primarily
reflecting higher payments in the US due to higher US taxable
profits and timing differences.
Net capital expenditure and financial investment increased to
GBP202m (2016 GBP186m) largely reflecting purchases of software
intangibles and the proceeds from the sale of investment property
in the prior year.
Dividends received from equity accounted investments of GBP32m
(2016 GBP23m) is primarily receipts from MBDA, FNSS and Advanced
Electronics Company.
The cash outflow in respect of acquisitions and disposals in
2017 of GBP5m primarily reflects the purchase of IAP Research,
Inc.
Equity dividends paid in 2017 represents the 2016 final
dividend.
As a consequence of movements in US dollar and euro exchange
rates, there was a cash outflow from matured derivative financial
instruments of GBP43m (2016 inflow GBP240m) from rolling hedges on
balances with the Group's subsidiaries and equity accounted
investments.
Foreign exchange translation primarily arises in respect of the
Group's US dollar-denominated borrowing.
1. Re-presented to re-classify interest paid from operating to
financing activities.
2. For alternative performance measure definitions see glossary
above.
3. International Financial Reporting Standards.
4. Taxation is managed on a Group basis.
Net debt
30 June 31 December
2017 2016
GBPm GBPm
--------------------------------------------- ------- -----------
Components of net debt
Cash and cash equivalents 2,360 2,769
Debt-related derivative financial instrument
assets less liabilities 133 114
Loans - non-current (4,230) (4,425)
Loans and overdrafts - current (4) -
--------------------------------------------- ------- -----------
Net debt (1,741) (1,542)
--------------------------------------------- ------- -----------
The Group's net debt at 30 June 2017 is GBP1,741m, a net
increase of GBP199m from the net debt position of GBP1,542m at the
start of the year. There are no material debt maturities before
2019.
Cash and cash equivalents of GBP2,360m (31 December 2016
GBP2,769m) are held primarily for the repayment of debt securities,
pension deficit funding, payment of the 2017 interim dividend and
management of working capital.
Going concern
After making due enquiries, the directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for at least 12 months from the date of
approval of this report and, therefore, continue to adopt the going
concern basis in preparing the accounts.
Principal risks
The principal risks facing the Group for the remainder of the
year are unchanged from those reported in the Annual Report 2016.
The result of the UK general election on 8 June has given rise to
the formation of a minority government, but one for which defence
and security is expected to remain a priority. Negotiations on the
terms of the UK's exit from the EU will provide greater clarity as
to the economic outlook in the medium term.
The Group's principal risks are detailed on pages 60 to 63 of
the Annual Report 2016, and relate to the following areas: defence
spending; government customers; international markets; competition
in international markets; laws and regulations; contract risk and
execution; contract cash profiles; pension funding; information
technology security; and people.
Segmental performance: Electronic Systems
Electronic Systems, with 14,200 employees(1) , comprises the US
and UK-based electronics activities, including electronic warfare
systems, electro-optical sensors, military and commercial digital
engine and flight controls, next-generation military communications
systems and data links, persistent surveillance capabilities, and
hybrid electric drive systems.
Financial performance
Financial performance measures Financial performance measures
as defined by the Group(2) defined in IFRS(3)
Six Six Six Six
months months months months
ended ended Year ended ended Year
30 30 ended 30 30 ended
June June 31 December June June 31 December
2017 2016 2016 2017 2016 2016
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Sales GBP1,726m GBP1,443m GBP3,282m Revenue GBP1,726m GBP1,443m GBP3,282m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Underlying Operating
EBITA GBP257m GBP209m GBP494m profit GBP247m GBP200m GBP474m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Return on Return on
sales 14.9% 14.5% 15.1% revenue 14.3% 13.9% 14.4%
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Operating Cash flow
business cash from operating
flow GBP118m GBP105m GBP469m activities GBP167m GBP138m GBP568m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Order intake GBP1,848m GBP1,470m GBP3,322m
--------------- --------- --------- ------------
Order backlog GBP5.1bn GBP4.7bn GBP5.2bn
--------------- --------- --------- ------------
- Sales increased by 5% to $2.2bn (GBP1.7bn). There is a
second-half weighting of deliveries of F-35 electronic warfare
systems, Advanced Precision Kill Weapon System (APKWS(TM))
laser-guided rockets and Terminal High-Altitude Area Defence
systems.
- Return on sales was 14.9% (2016 14.5%).
- Cash conversion of underlying EBITA in the first half of the
year reflects a build-up of inventory ahead of stronger sales
expected in the second half and timing of receivables.
- Order backlog of $6.6bn (GBP5.1bn) is broadly unchanged from the start of the year.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
above.
3. International Financial Reporting Standards.
Operational performance
Electronic Combat
BAE Systems has sustained its leadership position in the US
electronic warfare market and production is ramping up across a
number of programmes. Low-Rate Initial Production hardware
deliveries for the F-35 Lightning II programme continue with Lot 10
and 11 deliveries. We have received initial Lot 12 funding with an
anticipated final award value in excess of $300m (GBP231m). We have
also received a Request for Proposal for a potential block buy
encompassing multiple lots.
The business is under contracts, from Boeing and Warner Robins
Air Logistics Complex, totalling more than $1.0bn (GBP0.8bn) to
install the Digital Electronic Warfare System on select new F-15
aircraft, upgrade existing F-15 aircraft, and to provide spare
units and modules for an international customer. The programme
remains on schedule.
Following our selection by Boeing in 2015 to develop and
manufacture the next-generation digital electronic warfare system
for the US Air Force's Eagle Passive Active Warning Survivability
System programme to upgrade up to 400 F-15 aircraft, we are
currently executing the $146m (GBP112m) engineering and
manufacturing development contract.
In January, we were awarded a $67m (GBP52m) modification to a
competitively awarded contract for an electronic warfare system for
the US Air Force Special Operations Command's fleet of C-130J
aircraft. The total value of the contract, including all options,
could exceed $300m (GBP231m). In the multi-billion dollar
electronic warfare market, this award extends our position to
include our capabilities on large, fixed-wing aircraft.
We have been awarded an $81m (GBP62m) contract for the Network
Tactical Common Data Link programme to provide the US Navy with the
ability to simultaneously transmit and receive real-time
intelligence, surveillance and reconnaissance data across disparate
networks.
Due to the sensitive nature of electronic combat systems and
technology, many of our programmes are classified. As a world
leader in electronic warfare, we continue to experience growth in
these increasingly important areas.
Survivability, Targeting & Sensing
Our Advanced Precision Kill Weapon System (APKWS(TM))
laser-guided rocket is experiencing growing demand, with deliveries
exceeding 9,000 units to date. In addition to expanding its use in
the US military, the system is generating strong international
attention, with 17 nations expressing interest. In the first half
of the year, orders totalling $240m (GBP185m) were received.
We continue to perform well on the Terminal High-Altitude Area
Defence programme and expect to receive a further production
contract for Lots 9 and 10 in the second half of the year.
On the $249m (GBP192m) Common Missile Warning System Indefinite
Delivery, Indefinite Quantity contract, we continue to deliver to
schedule.
Under the five year, $434m (GBP334m) Enhanced Night Vision
Goggle III and Family of Weapon Sights - Individual Indefinite
Delivery, Indefinite Quantity contract, we are now progressing the
production qualification testing.
On the US Army's Family of Weapon Sights - Crew Served
programme, a seven-year contract with a potential value of up to
$384m (GBP296m), we are executing to plan, completing the
Preliminary Design Review and Component Critical Design Review in
the first half of the year.
The LiteHUD(R) head-up display has been selected by critical
launch customers for integration on multiple platforms, including
the Textron Scorpion jet.
Intelligence, Surveillance & Reconnaissance
Since winning the Geospatial Data Services Foundational GEOINT
Content Management programme in 2014, we have been awarded orders
valued at $180m (GBP139m). The business is meeting all delivery
requirements in assisting US intelligence community customers with
the development of advanced geospatial intelligence data collection
and processing solutions.
As a provider of signals intelligence capabilities for the US
Army and other US Department of Defense customers, we are executing
the $132m (GBP102m) Tactical Signals Intelligence Payloads
programme for the US Army's Gray Eagle unmanned aircraft.
Work continues on the US Navy's P-8A Poseidon maritime
surveillance aircraft programme to provide state-of-the-art
processing capabilities. The programme could be worth $1.2bn
(GBP0.9bn) over its life.
Controls & Avionics
BAE Systems is a major supplier of flight controls, and cabin
and flight deck systems. The development of the integrated flight
control electronics and remote electronic units for Boeing's
next-generation 777X aircraft remains on schedule and systems
integration testing is progressing to plan.
On the Boeing 737 MAX aircraft, a successful first flight was
completed on the MAX9 with our spoiler controls, flight deck
systems and utilities electronics. The development of our civil
active inceptors is progressing, with Gulfstream G500 and Embraer
KC390 aircraft flight tests, and we received industry recognition
with the Aviation Week Laureate Award for Technology.
FADEC Alliance, a joint venture between FADEC International (our
joint venture with Safran Electronics & Defense) and GE
Aviation, is delivering on contracts to provide the full authority
digital engine controls for: the Leap engine for the Airbus
A320neo, the Boeing 737 Max and the Comac C919; the Passport 20
engine for the Bombardier Global 7000/8000; the GE9x engine for the
Boeing 777X; and a new generation of advanced turboprop
engines.
On the F-35 Lightning II programme, we are in production for
vehicle management computer and active inceptor system equipment
for Low-Rate Initial Production Lot 10 and are now under contract
for Lot 11.
Power & Propulsion
We expect to deliver another 1,000 hybrid and electric transit
bus systems in 2017. As the transit bus market continues to shift
towards more electric bus systems, we have expanded our product
portfolio to include a hybrid-electric system capable of
emission-free driving up to half of the time and an all-electric
system providing zero-emission travel all of the time. Transit
operators in major cities, such as Seattle, Boston, Quebec, London
and Paris, are adopting our electric technologies to meet their
green initiatives.
Looking forward
The US Department of Defense fiscal year 2017 budget and 2018
budget proposal support the medium-term planning assumptions for
our US businesses as we see the ramp up of production on a number
of our long-term programmes.
Electronic Systems is well positioned to address current and
evolving priority programmes from its strong franchise positions in
electronic warfare, electro-optics and Intelligence, Surveillance
and Reconnaissance. Electronic Systems has a long-standing
programme of research and development, and its focus remains on
maintaining a diverse portfolio of defence and commercial products
and capabilities for US and international customers.
The business expects to benefit from its franchise positions,
particularly on the F-35 Lightning II and F-15 upgrade programmes,
and its ability to apply innovative technology solutions that meet
defence customers' changing requirements. In the commercial
aviation market, Electronic Systems' technology innovations are
enabling the business to renew long-standing customer positions and
to compete for and win new business.
Segmental performance: Cyber & Intelligence
Cyber & Intelligence, with 11,400 employees(1) , comprises
the US-based Intelligence & Security business and
UK-headquartered Applied Intelligence business, and covers the
Group's cyber security, secure government, and commercial and
financial security activities.
Financial performance
Financial performance measures Financial performance measures
as defined by the Group(2) defined in IFRS(3)
Six Six Six Six
months months months months
ended ended Year ended ended Year
30 30 ended 30 30 ended
June June 31 December June June 31 December
2017 2016 2016 2017 2016 2016
--------------- -------- -------- ------------ --------------- ------- ------- ------------
Sales GBP923m GBP833m GBP1,778m Revenue GBP923m GBP833m GBP1,778m
--------------- -------- -------- ------------ --------------- ------- ------- ------------
Underlying Operating
EBITA GBP35m GBP18m GBP90m profit GBP20m - GBP59m
--------------- -------- -------- ------------ --------------- ------- ------- ------------
Return on Return on
sales 3.8% 2.2% 5.1% revenue 2.2% 0.0% 3.3%
--------------- -------- -------- ------------ --------------- ------- ------- ------------
Operating Cash flow
business cash from operating
flow GBP46m GBP33m GBP83m activities GBP56m GBP43m GBP106m
--------------- -------- -------- ------------ --------------- ------- ------- ------------
Order intake GBP940m GBP874m GBP1,885m
--------------- -------- -------- ------------
Order backlog GBP2.2bn GBP2.2bn GBP2.4bn
--------------- -------- -------- ------------
- Sales were almost unchanged on a constant currency basis(4) at
$1.2bn (GBP0.9bn). Sales in the Intelligence & Security
business were down 6%. Take up on the programme to provide
additional IT services to the intelligence community is biased to
the last quarter. Growth in the Applied Intelligence business was
21%, benefiting from increases in all three divisions, in
particular in UK Services and International Services &
Solutions.
- Return on sales was marginally improved at 3.8% (2016 2.2%).
The loss in the first half at Applied Intelligence was GBP27m, only
slightly lower than last half year. We are in the process of
refocusing both the product portfolio and market priorities in the
Commercial Solutions division.
- Cash flow conversion continues to improve on reduced working
capital requirements in the Applied Intelligence business.
- Order backlog reduced slightly to $2.9bn (GBP2.2bn). In the
Intelligence & Security business, order backlog reduced on
trading out of certain longer-term classified contracts.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
above.
3. International Financial Reporting Standards.
4. Current period compared with prior period translated at
current period exchange rates.
Operational performance
Intelligence & Security
Global Analysis & Operations
In Full Motion Video and Intelligence, Surveillance and
Reconnaissance analysis, we secured a new four-year, $58m (GBP45m)
contract to increase the number of expert full-motion video
analysts we have supporting the intelligence community. We are
pursuing additional task orders to further expand our work in
motion-imagery analysis, analytic training, multi-media support and
research under a new Indefinite Delivery, Indefinite Quantity
contract with an estimated value of more than $400m (GBP308m).
The US Department of Treasury awarded BAE Systems a position on
its programme to support the Office of Terrorism and Financial
Intelligence in safeguarding the country's financial system against
national security threats. The maximum lifecycle value of all task
orders to be awarded under the programme is estimated at $135m
(GBP104m).
We are fulfilling the second year of a five-year contract with
an estimated ceiling value of $75m (GBP58m) to provide the US Army
with geospatial intelligence data analysis support services, and
our experts are executing on the third year of a five-year contract
worth up to $143m (GBP110m) to provide counter-terrorism analysis
services to the US government.
Integrated Electronics & Warfare Systems
We have nearly 1,000 employees working on a number of Strategic
Weapon System programmes on contracts that cover multiple classes
of US and UK submarines, as well as the US Air Force
Intercontinental Ballistic Missile Integration Support
Contract.
We are executing on the first year of a five-year, sole-source
contract worth up to $368m (GBP283m) to provide systems engineering
services to the US Navy's Strategic Systems Programs office. The
programme assists with weapons system integration and provides test
engineering services and special test equipment for weapons systems
on board US Ohio and UK Vanguard Class submarines, as well as
future Ohio Class replacement and UK Dreadnought Class
submarines.
The US Air Force issued a contract modification to the
Integration Support Contract to increase the total ceiling value
from $918m (GBP707m) to $1,011m (GBP778m). In addition to overall
programme management and systems sustainment, our work on the
contract includes cyber security assessment and defence.
We were selected for a position on a new nine-year Indefinite
Delivery, Indefinite Quantity contract to support the US Army in
developing next-generation technologies for space, high-altitude
and missile defence.
IT Solutions
We are executing on several task orders to provide IT services
to high-priority US government agencies under a ten-year,
single-award Indefinite Delivery, Indefinite Quantity contract with
a potential value of over $1.0bn (GBP0.8bn). The total value of the
task orders awarded to date is $270m (GBP208m). The implementation
of additional IT services for customers in the intelligence
community has been deferred to the second half of the year due to a
delay in the acceptance of an intelligence community programme.
We received a contract increase of $160m (GBP123m) extending the
period of performance of a major software development and IT
support contract for a US intelligence community customer.
We are executing on the first year of a five-year, $58m (GBP45m)
task order awarded by the Defense Intelligence Agency to design,
develop, engineer, install and sustain IT resources.
Work is under way on the first year of a new five-year, $49m
(GBP38m) contract with the US Air Force Research Laboratory to
develop, deploy and maintain cross domain solutions for
safeguarding the sharing of sensitive information between
government networks.
Applied Intelligence
The business has delivered revenue growth driven by continued
investment in product development, sales and marketing. We have
continued to build our cyber skills, global engineering and
delivery capabilities, including launching our Security Operations
Centre and client-facing nerve centre in Fort Lauderdale, Florida,
to deliver Managed Security Services to clients in North America.
Our work in supporting counter-terrorism efforts to analyse
intelligence that helps predict and prevent physical and cyber
attacks remains highly relevant in today's environment.
Commercial Solutions
We have continued to grow our counter-fraud and regulatory
compliance business with further contract wins for NetReveal(TM),
including: an insurance claims fraud solution for the Irish
operations of Zurich Insurance; a solution for a leading insurance
firm in the US to identify suspicious activity and protect against
identity fraud and theft; and a multi-year contract to deliver
compliance services and support for a global bank based in
Asia-Pacific.
As part of our regular commercial product review cycle, we are
refocusing our threat analytics capability from being sold as a
software product (CyberReveal(TM)) towards Managed Detection and
Response services as part of our Managed Security Services
portfolio, reflecting how commercial customers are looking to buy
their cyber defence solutions.
We have announced a partnership with O(2) to protect its
customers from cyber crime, under which we will provide O(2) 's
enterprise customers with access to Managed Security Services, as
well as threat intelligence, security testing and cyber incident
response services.
UK Services
The business continues to be a key supplier to national security
agencies in the UK, with a range of services contracts won in
support of a variety of national security intelligence and cyber
defence programmes. Demand for cyber services from large
enterprises has continued, with contract awards including the
provision of secure IT transformation services for a large
financial institution.
The business has won a number of contracts to provide data and
digital services, including: being selected by a UK
telecommunications operator to undertake an assessment against the
incoming EU General Data Protection Regulation; being selected by
one of the world's largest building societies to help develop and
implement an Enterprise Data Architecture strategy; and undertaking
a technology transformation programme for a central UK government
department.
International Services & Solutions
We have seen continued demand in Asia-Pacific and the Middle
East for national security intelligence and national-scale cyber
defence capabilities. A contract was secured to provide cyber
defence capabilities for a Middle Eastern customer and there were a
number of cyber consultancy contract wins with government agencies
in Australia. The first half of the year saw go-live of the most
complex data retention programme delivered by Applied Intelligence,
for a global telecommunications operator based in Asia-Pacific,
based around our DataRetain(TM) solution.
Looking forward
Intelligence & Security
The outlook for the US government services sector is stable,
although market conditions remain highly competitive.
The Intelligence & Security business has continued to reduce
costs to address government budget pressures, whilst pursuing
growth opportunities, particularly in critical, mission-focused
areas.
Applied Intelligence
Following a review of market priorities and our competitive
position, an increasingly focused investment programme in
engineering capabilities and product development, in particular in
our commercial cyber business, will support the future growth
profile for the business. Sales growth is expected to continue, as
cyber security is an increasingly important part of government
security and a core element of stewardship for commercial
enterprises in a sophisticated and persistent threat
environment.
The business continues to migrate towards a multi-year managed
service and subscription-based model, providing enhanced
predictability of revenues, and grow further the order backlog and
pipeline of opportunities from commercial and government customers
in North America, Europe, Asia-Pacific and the Middle East.
Segmental performance: Platforms & Services (US)
Platforms & Services (US), with 11,300 employees(1) , has
operations in the US, UK and Sweden. It produces combat vehicles,
weapons and munitions, and delivers services and sustainment
activities, including ship repair and the management of
government-owned munitions facilities.
Financial performance
Financial performance measures Financial performance measures
as defined by the Group(2) defined in IFRS(3)
Six Six Six Six
months months months months
ended ended Year ended ended Year
30 30 ended 30 30 ended
June June 31 December June June 31 December
2017 2016 2016 2017 2016 2016
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Sales GBP1,433m GBP1,287m GBP2,874m Revenue GBP1,400m GBP1,244m GBP2,783m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Underlying Operating
EBITA GBP109m GBP86m GBP211m profit GBP99m GBP79m GBP182m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Return on Return on
sales 7.6% 6.7% 7.3% revenue 7.1% 6.4% 6.5%
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Operating Cash flow
business cash from operating
flow GBP38m GBP(33)m GBP58m activities GBP66m GBP(19)m GBP129m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Order intake GBP1,785m GBP1,604m GBP3,308m
--------------- --------- --------- ------------
Order backlog GBP4.7bn GBP4.4bn GBP4.6bn
--------------- --------- --------- ------------
- Sales in the first half of the year were $1.8bn (GBP1.4bn).
There is a second-half bias in sales of amphibious combat vehicles
to international customers, and Low-Rate Initial Production volumes
on the M109A7 Paladin self-propelled howitzer programme are also
ramping up.
- Return on sales for the first half year has improved to 7.6%
(2016 6.7%). There has been a $6m (GBP5m) incremental charge on the
commercial shipbuilding contracts, with one ship nearing completion
and being marketed for sale, and the final ship planned to be
completed in the second half of the year.
- Operating business cash flow has been impacted by the
utilisation of the provisions created against the commercial
shipbuilding programmes and a build-up of inventory ahead of
stronger sales expected in the second half. The investment in the
new floating dry dock located at San Diego has completed, with the
dock now in full operational service.
- Order backlog has increased to $6.1bn (GBP4.7bn) primarily on
the award of the $542m (GBP417m) M777 ultra-lightweight howitzer
contract for India.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
above.
3. International Financial Reporting Standards.
Operational performance
US Combat Vehicles
On the US Army's Armored Multi-Purpose Vehicle programme, we
have commenced deliveries of the first 29 vehicles under the
engineering and manufacturing development phase, which has a
potential value of $1.2bn (GBP0.9bn), including options for 289
vehicles in Low-Rate Initial Production.
We continue to perform on the $670m (GBP516m) Low-Rate Initial
Production phase of the US Army's M109A7 Paladin self-propelled
howitzer programme. At 30 June, we had delivered 36 vehicle sets,
together with one additional howitzer.
The business is executing a $286m (GBP220m) Engineering Change
Proposal to address the space, weight, power and cooling
limitations of the Bradley family of vehicles and to prepare the
vehicle for communication network upgrades. The US customer's
production decision regarding the upgrade of approximately 500
vehicles over a three-year period from 2019 is expected in the
second half of the year.
In March, we received a contract from the US Army worth up to
$112m (GBP86m) for technical support and sustainment of M88
recovery vehicles. We continue to execute the conversion of 36
vehicles to the M88A2 Heavy Equipment Recovery Combat Utility Lift
Evacuation Systems (HERCULES) configuration and, in February, we
received a $36m (GBP28m) modification to add a further 11 vehicles
to the contract.
Along with industry partner Iveco Defence, we completed
deliveries of the first 16 Amphibious Combat Vehicle 1.1 prototypes
to the US Marine Corps for testing under the $158m (GBP122m)
engineering and manufacturing development phase of the programme.
We are one of two competitors for this programme, with
down-selection expected in 2018.
Internationally, we continue to work on multiple contracts for
the Japanese Ministry of Defence totalling $165m (GBP127m) for 30
new Assault Amphibious Vehicles (AAVs) and the upgrade of two AAVs.
For Brazil, we are working on an $82m (GBP63m) contract to provide
23 upgraded AAVs, a $50m (GBP38m) contract to deliver 236 M113
upgrade kits and a $54m (GBP42m) contract for 32 upgraded M109A5+
self-propelled howitzers.
Weapon Systems and Munition Operations
BAE Systems remains a leading provider of gun systems and
precision strike capabilities. In February, we completed the
acquisition of IAP Research, Inc., a US engineering company focused
on the development and production of electromagnetic launchers,
power electronics and advanced materials, further strengthening our
position as a provider of advanced weapon systems, including the US
Navy's electromagnetic railgun.
We continue to execute on a GBP183m contract to provide the gun
system known as the Maritime Indirect Fire System for the Royal
Navy's Type 26 frigate.
Following the contract modification received in 2016 from the
Swedish government formalising its purchase of an additional 24
Archer systems, production continues with deliveries expected to
begin in 2018.
In January, we received a $542m (GBP417m) Foreign Military Sale
contract from the US government to provide 145 M777
ultra-lightweight howitzers to the Indian Army. We will build the
first 25 guns, with the remaining systems assembled in India by
Mahindra & Mahindra, our selected supplier to establish an
assembly, integration and test facility. The first two guns were
shipped in the period and are progressing through in-country
testing.
In the complex ordnance business, we continue to manage the US
Army's Radford and Holston munitions facilities, operating near
capacity. We are performing on modernisation contracts totalling
$129m (GBP99m) for waste water management at Holston and a $146m
(GBP112m) contract for the construction of a nitric acid recovery
facility to produce larger quantities of insensitive munitions.
US Ship Repair and Modernisation
As a leading provider of US Navy ship repair and modernisation
services, we secured firm orders across our US shipyards totalling
approximately $511m (GBP393m) in the first half of the year and
remain well positioned to compete for future maritime projects.
We continue to adjust our workforce and facilities to meet
evolving customer demand, including the new dry dock in our San
Diego shipyard, which completed operational certification in
February and welcomed the USS New Orleans as its first vessel for
servicing.
One of the final two commercial ships is nearing completion and
being marketed for sale following the original customer's decision
not to purchase the vessel. Construction of the final ship is
planned to be completed in the second half of the year. There has
been a $6m (GBP5m) incremental charge on the commercial
shipbuilding contracts in the first half of the year.
BAE Systems Hägglunds
Series production continues on the $865m (GBP666m) contract for
the supply of CV90 Infantry Fighting Vehicles to Norway.
In the first half of the year, we received contracts from the
Estonian government for upgrade and sustainment of 44 CV90s.
We are performing to schedule on the refurbishment and upgrade
of Swedish CV90 vehicles, and sustainment and upgrade of Danish
CV90s. We are integrating Mjölner mortar systems on 40 Swedish
CV90s, and under way on testing and verification of Active
Protection Systems on Dutch CV90s.
We continue to perform on a contract to produce 32 BvS10
military vehicles for Austria.
FNSS
FNSS, our land systems joint venture based in Turkey, continues
to perform under its $524m (GBP403m) programme to produce 259 8x8
wheeled armoured vehicles for the Royal Malaysian Army.
Production has completed on a contract to upgrade M113 tracked
armoured personnel carriers for the Royal Saudi Land Forces, with
the next contract phase expected to be signed in the second half of
the year.
In support of an export contract to Oman awarded in 2015 for the
PARS Wheeled Armoured Vehicle, work continues to deliver 8x8 and
6x6 vehicles in a number of configurations. The customer received
the first vehicle in July.
Work has begun under a EUR278m (GBP244m) contract awarded in
June 2016 to supply 260 Anti-Tank Vehicles to the Turkish Land
Forces and an EUR84m (GBP74m) contract signed in December 2016 for
air defence vehicles for the Turkish Land Forces.
In March, FNSS received a EUR155m (GBP136m) contract to provide
27 amphibious assault vehicles to the Turkish Ministry of National
Defence.
Looking forward
The US Department of Defense fiscal year 2017 budget and 2018
budget proposal support the medium-term planning assumptions for
our US businesses as we see the ramp up of production on a number
of our long-term programmes.
The business is underpinned by strong positions on key franchise
programmes. In the land domain, this includes the US Army's Armored
Multi-Purpose Vehicle, M109A7 self-propelled howitzer and Bradley
upgrade programmes, and the CV90 and BvS10 export programmes from
our BAE Systems Hägglunds business.
FNSS has grown its order book with both domestic and
international orders.
These long-term contracts and our franchise position in tracked
vehicles, which offer opportunities in international markets, make
the land business well placed for growth in the medium term.
In the maritime domain, the Group has a strong position on naval
gun programmes and US Navy ship repair. Additional dry dock ship
repair capacity has been established in San Diego to support the US
Navy's rebalance to the Asia-Pacific region.
The business continues to pursue a range of domestic and
international opportunities in combat and amphibious vehicles,
weapons systems and maritime support services.
Segmental performance: Platforms & Services (UK)
Platforms & Services (UK), with 30,200 employees(1) ,
comprises the Group's UK--based air, maritime, land and shared
services activities.
Financial performance
Financial performance measures Financial performance measures
as defined by the Group(2) defined in IFRS(3)
Six Six Six Six
months months months months
ended ended Year ended ended Year
30 30 ended 30 30 ended
June June 31 December June June 31 December
2017 2016 2016 2017 2016 2016
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Sales GBP3,913m GBP3,664m GBP7,806m Revenue GBP3,864m GBP3,621m GBP7,699m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Underlying Operating
EBITA GBP416m GBP414m GBP810m profit GBP406m GBP394m GBP780m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Return on Return on
sales 10.6% 11.3% 10.4% revenue 10.5% 10.9% 10.1%
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Operating Cash flow
business cash from operating
flow GBP107m GBP(154)m GBP199m activities GBP186m GBP(55)m GBP385m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Order intake GBP4,753m GBP2,207m GBP8,024m
--------------- --------- --------- ------------
Order backlog GBP18.6bn GBP16.3bn GBP17.8bn
--------------- --------- --------- ------------
- Sales in the first half of the year were up 7% at GBP3.9bn
(2016 GBP3.7bn). Deliveries on the Saudi Typhoon programme have now
completed, with the final four aircraft accepted in the first half.
The first two Omani Typhoon aircraft were delivered in June and the
F-35 Lightning II programme is ramping up to plan.
- Return on sales in the first half of the year was 10.6% (2016
11.3%). The first half of 2016 included the benefit on the Astute
programme from the pricing of Batch 1 and initial profit
recognition on later boats.
- There was an operating business cash inflow of GBP107m (2016
outflow GBP154m) in the period. Residual customer advances were
consumed on Typhoon production contracts.
- Order backlog increased to GBP18.6bn (31 December 2016
GBP17.8bn) primarily on the awards for pricing of the sixth Astute
Class submarine and the initial batch of three frigates to be built
under the Type 26 programme.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
above.
3. International Financial Reporting Standards.
Operational performance
Military Air & Information
In the six months to 30 June, ten Typhoon aircraft were
delivered from the UK final assembly facility, of which four were
delivered to the Royal Air Force, the final four to Saudi Arabia
and two to Oman. The remaining deliveries to Oman are scheduled for
the second half of 2017 and 2018.
Good progress continues to be made on airframe manufacture for
the contract to supply 28 Typhoon aircraft to Kuwait secured by
Italian Eurofighter partner, Leonardo, in 2016.
Typhoon's capabilities continue to be enhanced. A further series
of flight trials to mature the delivery of the Storm Shadow and
Meteor weapons system enhancements was completed in the period.
Development towards the Royal Air Force Centurion standard
continues, which will enable transition of capability from Tornado
to Typhoon as the UK Tornado fleet is scheduled to come out of
service at the end of the decade.
We have continued to support our UK and European customers'
Typhoon and Tornado aircraft and their operational commitments.
Mobilisation of the ten-year partnership arrangement with the
Ministry of Defence to support the UK Typhoon fleet has proceeded
as planned with availability of aircraft being sustained at
contractual levels.
On the F-35 Lightning II programme, we have completed 38 aft
fuselage assembly deliveries for the Low-Rate Initial Production
Lot 10 and 11 contracts. Full contract award has been secured on
Lot 10. Negotiations are expected to conclude on Lot 11 in the
second half of the year.
Good progress is being made on building the engineering and
training facilities at RAF Marham in Norfolk, UK, in readiness for
the arrival of the UK's first F-35 Lightning II aircraft in
2018.
Following the announcement that the UK had been chosen as a
major European repair hub for the maintenance, repair, overhaul and
upgrade of F-35 Lightning II avionics and components, we have
established a joint venture with the UK Ministry of Defence and
Northrop Grumman, and progress on establishing the repair facility
and capability continues to plan.
Two Hawk aircraft have completed manufacture and are ready for
acceptance by the Omani Royal Air Force prior to scheduled delivery
in the second half of 2017. The remaining six aircraft are
scheduled to be available for acceptance and delivery in the second
half of 2017. Delivery of the initial support package has
commenced.
Discussions continue with Hindustan Aeronautics Limited (HAL)
for the supply of a further 32 aircraft kit sets which will result
in aircraft built under licence by HAL for the Indian Air Force and
Indian Navy.
Following an extensive review with our partner, Northrop
Grumman, of the requirements and conditions of the US Air Force
future trainer programme, both companies decided not to proceed
with the competitive bid.
A contract extension for the Anglo-French unmanned combat air
system feasibility and definition phase for GBP16m was received in
January, with a proposal for the first phase of the demonstrator
programme submitted in March.
Agreement in principle was reached for a $155m (GBP119m)
contract for collaboration on the first design and development
phase of an indigenous fifth-generation fighter jet for the Turkish
Air Force.
Maritime
On the aircraft carrier programme, sea trials on the first of
the two ships, HMS Queen Elizabeth, commenced in June. We continue
to work with the Ministry of Defence to prepare the support
solution in advance of the ship's arrival at HM Naval Base,
Portsmouth, later in 2017. On HMS Prince of Wales, large volume
installation activities progress. Sea trials on the second ship are
expected to commence in 2019.
We have continued to progress the heads of terms signed in 2016
with the Ministry of Defence and the full GBP3.7bn production
contract was signed in June for the first batch of three Type 26
frigates, with GBP2.8bn of order intake in the period after order
intake in previous periods for long-lead items. The cut steel
ceremony was held in July. The programme currently employs over
1,000 employees.
On the Offshore Patrol Vessel programme, revised delivery dates
have been agreed with the Ministry of Defence and the first vessel,
HMS Forth, will now commence sea trials during the third quarter.
All five ships are now under construction.
Under the Maritime Support Delivery Framework contract, in place
until March 2019, we provide services at HM Naval Base, Portsmouth,
and support to half of the Royal Navy's surface fleet. We remain on
track to achieve target cost. The business was unsuccessful on a
competitive bid to provide equipment procurement and equipment
management services for the Queen Elizabeth Class aircraft carriers
and Type 45 destroyers. We have, however, continued to manage the
support, maintenance and upgrade of the Royal Navy's fleet of Type
45 destroyers.
Progress continues on the GBP270m Spearfish torpedo upgrade
demonstration and manufacture phases, with the demonstration phase
currently forecast to complete in 2019.
The first three Astute Class submarines are in operational
service with the Royal Navy. Progress continues on the manufacture
of the remaining four boats, with launch of Boat 4, Audacious,
achieved in April. A full contract award for Boat 6 was secured in
March for GBP1.4bn, with GBP0.6bn of order intake in the period
after order intake in previous periods for long-lead items.
Functional and spatial design continues to advance on the
Dreadnought Class submarine, the replacement for the Royal Navy's
Vanguard Class submarine fleet, with funding in place for continued
design, initial manufacture of the first boat, material commitment
and facilities investment. The major programme of building works at
the Barrow site continues with contracts in place totalling more
than GBP390m.
Land (UK)
The business has continued to provide support to previously
supplied armoured vehicles and bridging systems, with orders of
GBP14m received in the period.
In the period, 54 40mm cased-telescopic cannons were delivered
to the Ministry of Defence by CTA International, a joint venture
between BAE Systems and Nexter, bringing cumulative deliveries to
87 of 515.
The business continues to provide UK and international customers
with a full range of light and heavy munitions, with orders
totalling GBP22m received. The business is one of two contenders
delivering the first stage of the Challenger 2 Life Extension
Project.
Looking forward
Platforms & Services (UK) has a strong order backlog of
long-term committed programmes and an enduring support business.
The result of the UK general election on 8 June has given rise to
the formation of a minority government, but one for which defence
and security is expected to remain a priority. Negotiations on the
terms of the UK's exit from the EU will provide greater clarity as
to the economic outlook in the medium term.
In Military Air & Information, as current export contracts
for Typhoon and Hawk complete, and UK Tornado support ends, sales
are underpinned by Typhoon and Hawk support, and F-35 Lightning II
aircraft production and support. There can be no certainty as to
the timing of future aircraft production orders and, in any event,
any new orders for Typhoon are unlikely to positively impact
production delivery rates for at least 24 months. The balance of
customer demand for aircraft and production rates will be under
constant review with adjustments made as appropriate.
In Maritime, there remains pressure on the Navy's near-term
budgets and a highly-competitive environment in ship support and
upgrade. Sales are underpinned by the manufacture of the Queen
Elizabeth Class aircraft carriers, River Class Offshore Patrol
Vessels and Type 26 frigates, and Astute and Dreadnought class
submarines. The through-life support of surface ship platforms
provides a sustainable business in technical services and mid-life
upgrades.
The Land (UK) business continues to deliver support to armoured
vehicle and bridging systems in UK and international markets,
munitions under the 15-year Munitions Acquisition Supply Solution
partnering agreement secured in 2008 and 40mm cased-telescopic
cannons for the UK and French armies.
Segmental performance: Platforms & Services
(International)
Platforms & Services (International), with 13,800
employees(1) , comprises the Group's businesses in Saudi Arabia,
Australia and Oman, together with its 37.5% interest in the
pan--European MBDA joint venture.
Financial performance
Financial performance measures Financial performance measures
as defined by the Group(2) defined in IFRS(3)
Six Six Six Six
months months months months
ended ended Year ended ended Year
30 30 ended 30 30 ended
June June 31 December June June 31 December
2017 2016 2016 2017 2016 2016
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Sales GBP1,771m GBP1,739m GBP3,943m Revenue GBP1,381m GBP1,449m GBP3,037m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Underlying Operating
EBITA GBP176m GBP158m GBP400m profit GBP161m GBP146m GBP365m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Return on Return on
sales 9.9% 9.1% 10.1% revenue 11.7% 10.1% 12.0%
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Operating Cash flow
business cash from operating
flow GBP102m GBP178m GBP435m activities GBP106m GBP185m GBP473m
--------------- --------- --------- ------------ --------------- --------- --------- ------------
Order intake GBP1,616m GBP995m GBP6,175m
--------------- --------- --------- ------------
Order backlog GBP12.9bn GBP10.1bn GBP13.1bn
--------------- --------- --------- ------------
- Sales for the first half of the year were GBP1.8bn (2016
GBP1.7bn). There is a material second half-year weighting due to
MBDA weapon system deliveries and higher levels of Typhoon support
in Saudi Arabia.
- Underlying EBITA in the first half of the year was GBP176m
(2016 GBP158m), with return on sales of 9.9% (2016 9.1%).
- There was an operating business cash inflow in the first half
of the year of GBP102m (2016 GBP178m). There was an acceleration of
customer receipts at the end of 2016.
- Order backlog is GBP12.9bn (31 December 2016 GBP13.1bn), with
further bookings against the five-year Saudi support contracts
being made in the first half of the year.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
above.
3. International Financial Reporting Standards.
Operational performance
Saudi Arabia
On the Salam Typhoon programme, with four aircraft deliveries in
the period, all 72 contracted aircraft have been delivered to the
customer. Typhoon capability expansion is progressing to
schedule.
The Typhoon support contracts are operating well, meeting all
contractual metrics. A contract amendment for a maximum of 20,000
additional flying hours was agreed in April.
Agreement was reached with the Saudi Arabian government in 2016
for BAE Systems to continue to provide support services to the
Royal Saudi Air Force and Royal Saudi Naval Forces under the Saudi
British Defence Co-operation Programme for a further five years to
31 December 2021. Further work is under way between the UK and
Saudi Arabian governments to finalise the details of the follow-on
contracts.
Through the Saudi British Defence Co-operation Programme, the
business continues to support the operational capabilities of the
Royal Saudi Air Force and Royal Saudi Naval Forces. The contract
for Hawk aircraft signed in 2012 is progressing with 18 aircraft
delivered and accepted at 30 June. Manufacturing for the second
batch of 22 aircraft, awarded in 2015, continues on schedule. Under
this programme, we will undertake the final assembly of these
aircraft in Saudi Arabia, with the first major units planned to be
delivered in the third quarter of the year.
The Royal Saudi Naval Forces' Minehunter mid-life update
programme progresses. Acceptance of the third and final ship is
expected in the fourth quarter of 2017.
Under the planned reorganisation of our portfolio of interests
in a number of industrial companies in Saudi Arabia, Riyadh Wings
Aviation Academy LLC acquired a 4.1% shareholding in a Group
subsidiary, Overhaul and Maintenance Company, during 2016 and is
expected to acquire a further interest up to a maximum of 49%. The
reorganisation supports our strategy to expand the customer base of
our In-Kingdom Industrial Participation programme, promoting
training, development and employment opportunities in line with the
Kingdom's National Transformation Plan and Vision 2030.
The Saudi Arabian In-Kingdom Industrial Participation programme
continues to progress. During the first half of 2017, there has
been further capability and knowledge transfer across the Typhoon,
Hawk and Tornado aircraft platforms, with additional transfer
activities scheduled on all three platforms being progressively
introduced through 2017.
Australia
We have continued to provide in-service support to the Navy's
two Landing Helicopter Docks under a four-year support contract
awarded in 2014. The final acceptance date for these vessels is
currently under review with the Navy customer.
The sixth of seven Anzac Class frigates to be modernised under
the current Anti-Ship Missile Defence programme has been accepted
into service by the Commonwealth. The final frigate is scheduled
for acceptance later in 2017. The next Anzac Class frigate
capability upgrade programme is planned to commence in the fourth
quarter of 2017.
The Warship Asset Management Alliance agreement continues to
provide sustainment services to the Navy. The agreement of the
scope of activities for the next five years of sustainment and
upgrade is anticipated to be contracted later in 2017.
The funded Risk Reduction Design Study for the SEA 5000 Future
Frigate programme has been completed and the full Request for
Tender was received in March. Further Commonwealth funding to
support the programme activities was received in the period.
Mobilisation activities for sustainment of the Regional F-35
Lightning II fleet continues to progress at our Williamtown
facility and our existing Hawk Lead-in Fighter sustainment
programme continues to meet its Key Performance Indicators. The
upgrade of the Hawk fleet to meet the training requirements of the
fifth-generation F-35 are progressing well, with 12 of the 33
aircraft modified and the Australian Air Force customer declaring
achievement of initial operating capability.
Following down-select in 2016 as one of two tenderers for the
Land 400 Phase 2 Combat Reconnaissance Vehicle programme, we
continue to deliver against the Army's Risk Mitigation Activity
contract. Final tender selection is anticipated in late 2018.
In June, the Commonwealth announced that we have been selected
as the preferred tenderer for the Jindalee Operational Radar
Network upgrade programme. Negotiations will now commence and, if
successful, we expect to sign contracts in 2018. The expected value
of the contract over the initial award term of ten years is
approximately A$1bn (GBP0.6bn).
Good technical progress has been made during the period on the
delayed JP 2008 Phase 3F programme for enhanced satellite
communications services. A revised delivery schedule and commercial
settlement have been agreed in principle with the customer.
Oman
The Oman Typhoon and Hawk aircraft programme, being undertaken
by Platforms & Services (UK), completed delivery of the first
two Typhoon aircraft in the period to 30 June, as well as
completing manufacture of two of the eight Hawk trainer aircraft
for the Omani Royal Air Force, with the remaining Hawk deliveries
scheduled for the second half of 2017. Separately, we continue to
fulfil our legacy industrial participation obligations in Oman
through delivery of an agreed training and knowledge transfer
programme and, to date, over 4,000 training places in a range of
disciplines have been taken up by Omani nationals.
MBDA
In March, MBDA secured the initial contract from the UK and
French governments for the assessment phase of the Future
Cruise/Anti-Ship Weapon, which will prepare for the replacement of
the existing missiles deployed by the UK and French armed forces.
This work follows on from the joint UK-France 2016 programme for
the mid-life refurbishment of their current inventory of
missiles.
The Meteor Beyond Visual Range Air-to-Air Missile, which is
already in service on Gripen aircraft with the Swedish Air Force,
has achieved qualification for both Typhoon and Rafale aircraft.
The Advanced Short Range Air-to-Air Missile (ASRAAM) has
successfully undertaken several qualification firings from the
F-35B.
During the period, the German Ministry of Defence and MBDA have
entered into the formal negotiation process for the German
ground-based air defence system, TLVS, a key element of the German
defence strategy.
Progress is being made in the finalisation of the financing
package for the Qatari contracts signed in 2016, which will supply
air defence systems and anti-ship missiles for the naval surface
fleet along with coastal defence systems.
Success in both domestic and export markets has resulted in the
requirement to expand MBDA's production capacities. A new
manufacturing facility is fully operational in Bolton, UK, and a
capacity enhancement is under way in Bourges, France.
Looking forward
In the Kingdom of Saudi Arabia, following agreement of the
budget for the next five years of the Saudi British Defence
Co-operation Programme, we expect to sustain our long-term presence
through delivering current programmes, addressing potential new
requirements and further industrialisation in support of the Saudi
military forces. We are focused on our ongoing commitment to
support the national objectives of local skills and technology,
increasing employment and developing an indigenous defence
industry, and will structure our business and portfolio of
interests in Saudi Arabia to meet this long-term strategy.
In Australia, the business is now structured around long-term
sustainment and upgrade activities, and we are now focusing on
mobilisation skills and progressing opportunities with the
Australian government to provide leading defence build and support
capabilities.
MBDA has a strong order book that underpins future growth built
on the effective partnerships it has established with its domestic
customers and recent export success.
Responsibility statement of the directors in respect of the
half-yearly financial report
Each of the directors (as detailed below) confirms that to the
best of his/her knowledge:
-- The condensed set of financial statements has been prepared
in accordance with IAS 34, Interim Financial Reporting, as adopted
by the European Union.
-- The interim management report on above includes a fair review
of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules
(DTR), being an indication of important events that have occurred
during the first six months of the financial year and their impact
on the condensed set of financial statements; and a description of
the principal risks and uncertainties for the remaining six months
of the financial year; and
(b) DTR 4.2.8R of the DTR, being related party transactions that
have taken place in the first six months of the current financial
year and that have materially affected the financial position or
the performance of the Company during that period; and any changes
in the related party transactions described in the last annual
report that could do so.
For and on behalf of the directors:
Sir Roger Carr
Chairman
1 August 2017
Directors
Sir Roger Carr Chairman
--------------------- -------------------------------------
Charles Woodburn Chief Executive
--------------------- -------------------------------------
President and Chief Executive Officer
Jerry DeMuro of BAE Systems, Inc.
--------------------- -------------------------------------
Peter Lynas Group Finance Director
--------------------- -------------------------------------
Elizabeth Corley Non-executive director
--------------------- -------------------------------------
Harriet Green Non-executive director
--------------------- -------------------------------------
Chris Grigg Non-executive director
--------------------- -------------------------------------
Paula Rosput Reynolds Non-executive director
--------------------- -------------------------------------
Nick Rose Non-executive director
--------------------- -------------------------------------
Ian Tyler Non-executive director
--------------------- -------------------------------------
Independent review report to BAE Systems plc
Conclusion
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2017 which comprises the Condensed
consolidated income statement, the Condensed consolidated statement
of comprehensive income, the Condensed consolidated statement of
changes in equity, the Condensed consolidated balance sheet, the
Condensed consolidated cash flow statement and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2017 is not prepared, in all material respects, in accordance
with IAS 34, Interim Financial Reporting, as adopted by the EU and
the Disclosure Guidance and Transparency Rules (the DTR) of the
UK's Financial Conduct Authority (the UK FCA).
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the Company in accordance with the
terms of our engagement to assist the Company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have
reached.
Ian Starkey
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London E14 5GL
1 August 2017
Condensed consolidated income statement
Six months Six months
ended ended
30 June 30 June
2017 2016
---------------- --------------
Notes GBPm GBPm GBPm GBPm
----------------------------------------- ----- ------- ------- ----- -------
Continuing operations
------- -----
Sales 2 9,565 8,714
Deduct Share of sales by equity
accounted investments (1,155) (996)
Add Sales to equity accounted
investments 602 560
------- -----
Revenue 2 9,012 8,278
Operating costs (8,213) (7,563)
Other income 61 51
----------------------------------------- ----- ------- ------- ----- -------
Group operating profit 860 766
Share of results of equity accounted
investments 5 10
----------------------------------------- ----- ------- ------- ----- -------
Underlying EBITA 2 945 849
Non-recurring items(1) (4) -
------- -----
EBITA 941 849
Amortisation of intangible assets (41) (43)
Financial expense of equity accounted
investments (26) (15)
Taxation expense of equity accounted
investments (9) (15)
------- -----
Operating profit 2 865 776
Financial income 261 460
Financial expense (412) (708)
------- -----
Net finance costs 3 (151) (248)
----------------------------------------- ----- ------- ------- ----- -------
Profit before taxation 714 528
Taxation expense (155) (110)
----------------------------------------- ----- ------- ------- ----- -------
Profit for the period 559 418
----------------------------------------- ----- ------- ------- ----- -------
Attributable to:
Equity shareholders 555 408
Non-controlling interests 4 10
----------------------------------------- ----- ------- ------- ----- -------
559 418
----------------------------------------- ----- ------- ------- ----- -------
Earnings per share 4
Basic earnings per share 17.5p 12.9p
Diluted earnings per share 17.4p 12.8p
----------------------------------------- ----- ------- ------- ----- -------
1. Non-recurring items represents loss on disposal of
businesses.
Condensed consolidated statement of comprehensive income
Six months
Six months ended ended
30 June 2017 30 June 2016
--------------------------- -----------------------------
Other Retained Other Retained
reserves earnings Total reserves earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- --------- --------- ----- --------- --------- -------
Profit for the period - 559 559 - 418 418
-------------------------------------------- --------- --------- ----- --------- --------- -------
Other comprehensive income
Items that will not be reclassified
to the income statement:
Subsidiaries:
Remeasurements on retirement
benefit schemes - 170 170 - (1,504) (1,504)
Tax on items that will not
be reclassified to the income
statement - (38) (38) - 305 305
Equity accounted investments
(net of tax) - 6 6 - (39) (39)
Items that may be reclassified
to the income statement:
Subsidiaries:
Currency translation on foreign
currency net investments (341) - (341) 687 - 687
Amounts credited to hedging
reserve 63 - 63 82 - 82
Tax on items that may be reclassified
to the income statement (11) - (11) (15) - (15)
Equity accounted investments
(net of tax) (4) - (4) 17 - 17
-------------------------------------------- --------- --------- ----- --------- --------- -------
Total other comprehensive
income for the period (net
of tax) (293) 138 (155) 771 (1,238) (467)
-------------------------------------------- --------- --------- ----- --------- --------- -------
Total comprehensive income
for the period (293) 697 404 771 (820) (49)
-------------------------------------------- --------- --------- ----- --------- --------- -------
Attributable to:
Equity shareholders (291) 693 402 769 (830) (61)
Non-controlling interests (2) 4 2 2 10 12
-------------------------------------------- --------- --------- ----- --------- --------- -------
(293) 697 404 771 (820) (49)
-------------------------------------------- --------- --------- ----- --------- --------- -------
Condensed consolidated statement of changes in equity
Attributable to equity
holders of the parent
-----------------------------------------------
Issued
share Share Other Retained Non-controlling Total
capital premium reserves earnings Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- -------- --------- --------- ----- --------------- -------
At 1 January 2017 87 1,249 6,685 (4,583) 3,438 26 3,464
Profit for the period - - - 555 555 4 559
Total other comprehensive
income for the period - - (291) 138 (153) (2) (155)
Share-based payments (inclusive
of tax) - - - 24 24 - 24
Net purchase of own shares - - - (1) (1) - (1)
Ordinary share dividends - - - (404) (404) (8) (412)
At 30 June 2017 87 1,249 6,394 (4,271) 3,459 20 3,479
-------------------------------- -------- -------- --------- --------- ----- --------------- -------
At 1 January 2016 87 1,249 5,277 (3,624) 2,989 13 3,002
Profit for the period - - - 408 408 10 418
Total other comprehensive
income for the period - - 769 (1,238) (469) 2 (467)
Share-based payments - - - 26 26 - 26
Net sale of own shares - - - 1 1 - 1
Ordinary share dividends - - - (397) (397) (6) (403)
At 30 June 2016 87 1,249 6,046 (4,824) 2,558 19 2,577
-------------------------------- -------- -------- --------- --------- ----- --------------- -------
Condensed consolidated balance sheet
30 June 31 December
2017 2016
Notes GBPm GBPm
-------------------------------------------- ----- -------- -----------
Non-current assets
Intangible assets 10,974 11,264
Property, plant and equipment 2,143 2,098
Investment property 114 110
Equity accounted investments 277 299
Other investments 6 6
Other receivables 334 351
Retirement benefit surpluses 5 206 223
Other financial assets 293 345
Deferred tax assets 1,150 1,251
-------------------------------------------- ----- -------- -----------
15,497 15,947
-------------------------------------------- ----- -------- -----------
Current assets
Inventories 773 744
Trade and other receivables including
amounts due from customers for contract
work 3,653 3,305
Current tax 21 5
Other financial assets 172 204
Cash and cash equivalents 2,360 2,769
Assets held for sale 23 2
-------------------------------------------- ----- -------- -----------
7,002 7,029
-------------------------------------------- ----- -------- -----------
Total assets 22,499 22,976
-------------------------------------------- ----- -------- -----------
Non-current liabilities
Loans (4,230) (4,425)
Other payables (1,072) (1,027)
Retirement benefit obligations 5 (6,066) (6,277)
Other financial liabilities (101) (102)
Deferred tax liabilities (7) (10)
Provisions (365) (372)
(11,841) (12,213)
-------------------------------------------- ----- -------- -----------
Current liabilities
Loans and overdrafts (4) -
Trade and other payables (6,476) (6,540)
Other financial liabilities (151) (212)
Current tax (318) (311)
Provisions (211) (234)
Liabilities held for sale (19) (2)
(7,179) (7,299)
-------------------------------------------- ----- -------- -----------
Total liabilities (19,020) (19,512)
-------------------------------------------- ----- -------- -----------
Net assets 3,479 3,464
-------------------------------------------- ----- -------- -----------
Capital and reserves
Issued share capital 87 87
Share premium 1,249 1,249
Other reserves 6,394 6,685
Retained earnings - deficit (4,271) (4,583)
-------------------------------------------- ----- -------- -----------
Total equity attributable to equity holders
of the parent 3,459 3,438
Non-controlling interests 20 26
-------------------------------------------- ----- -------- -----------
Total equity 3,479 3,464
-------------------------------------------- ----- -------- -----------
Condensed consolidated cash flow statement
Six months Six months
ended ended
30 June 30 June
2017 2016(1)
Notes GBPm GBPm
-------------------------------------------- ----- ---------- ----------
Profit for the period 559 418
Taxation expense 155 110
Research and development expenditure
credits (14) (6)
Share of results of equity accounted
investments (5) (10)
Net finance costs 151 248
Depreciation, amortisation and impairment 167 159
Profit on disposal of property, plant
and equipment, and investment property (1) (6)
Loss on disposal of businesses 4 -
Cost of equity-settled employee share
schemes 29 26
Movements in provisions (31) (84)
Decrease in liabilities for retirement
benefit obligations (76) (116)
(Increase)/decrease in working capital:
Inventories (74) 29
Trade and other receivables (411) (155)
Trade and other payables (6) (470)
Taxation paid (106) (66)
-------------------------------------------- ----- ---------- ----------
Net cash flow from operating activities(1) 341 77
-------------------------------------------- ----- ---------- ----------
Dividends received from equity accounted
investments 32 23
Interest received 6 4
Purchases of property, plant and equipment,
and investment property (166) (166)
Purchases of intangible assets (36) (27)
Proceeds from sale of property, plant
and equipment, and investment property 3 10
Purchase of subsidiary undertakings (3) -
Cash and cash equivalents disposed of
with subsidiary undertakings (2) -
Equity accounted investment funding (3) (3)
Net cash flow from investing activities (169) (159)
-------------------------------------------- ----- ---------- ----------
Interest paid (107) (107)
Net (purchase)/sale of own shares (1) 1
Equity dividends paid 6 (404) (397)
Dividends paid to non-controlling interests (8) (6)
Cash flow from matured derivative financial
instruments (43) 240
Cash flow from cash collateral (5) 25
Net cash flow from financing activities(1) (568) (244)
-------------------------------------------- ----- ---------- ----------
Net decrease in cash and cash equivalents (396) (326)
Cash and cash equivalents at 1 January 2,771 2,537
Effect of foreign exchange rate changes
on cash and cash equivalents (19) 29
-------------------------------------------- ----- ---------- ----------
Cash and cash equivalents at end of period 2,356 2,240
-------------------------------------------- ----- ---------- ----------
Comprising:
Cash and cash equivalents 2,360 2,240
Overdrafts (4) -
-------------------------------------------- ----- ---------- ----------
Cash and cash equivalents at end of period 2,356 2,240
-------------------------------------------- ----- ---------- ----------
1. Re-presented to reclassify interest paid from operating to
financing activities.
Notes to the condensed half-yearly financial statements
1. Preparation
Basis of preparation and statement of compliance
These condensed consolidated half-yearly financial statements of
BAE Systems plc (the Group) have been prepared in accordance with
International Accounting Standard (IAS) 34, Interim Financial
Reporting. The annual consolidated financial statements of the
Group are prepared in accordance with EU-endorsed International
Financial Reporting Standards (IFRSs). These condensed consolidated
half-yearly financial statements do not comprise statutory accounts
within the meaning of Section 435 of the Companies Act 2006 and
should be read in conjunction with the Annual Report 2016. The
comparative figures for the year ended 31 December 2016 are not the
Group's statutory accounts for that financial year. Those accounts
have been reported upon by the Group's auditors and delivered to
the registrar of companies. The report of the auditors was
unqualified, did not include a reference to any matters to which
the auditors drew attention by way of emphasis without qualifying
their report and did not contain statements under Section 498 (2)
or (3) of the Companies Act 2006.
The accounting policies adopted in the preparation of these
condensed consolidated half-yearly financial statements to 30 June
2017 are consistent with the accounting policies applied by the
Group in its consolidated financial statements as at, and for the
year ended, 31 December 2016 as required by the Disclosure Guidance
and Transparency Rules of the UK's Financial Conduct Authority,
with the exception of the presentation of interest paid which is
now classified as a financing cash flow.
Future changes in accounting policies
IFRS 9, Financial Instruments, is effective from 1 January 2018.
The standard covers recognition, classification, measurement and
impairment of financial assets and financial liabilities, together
with a new hedge accounting model. It is not expected to have a
material impact on the Group.
IFRS 15, Revenue from Contracts with Customers, is effective
from 1 January 2018. The standard requires the identification of
performance obligations in contracts with customers and allocation
of the total contractual value to each of the performance
obligations identified. Revenue is recognised as each performance
obligation is satisfied either at a point in time or over time. The
standard will replace IAS 11, Construction Contracts, and IAS 18,
Revenue. An initial impact assessment has been undertaken which
involved the review of all contract types across the Group. The
assessment indicates that revenue on the Group's long-term
contracts currently being recognised based on the completion of
separately identifiable phases (milestones) will cumulatively be
recognised earlier under IFRS 15, which reflects the continual
transfer of the benefits of the Group's performance to the
customer. It is expected that profit will continue to be recognised
progressively as risks have been mitigated and retired and,
accordingly, it is not expected that there will be a material
impact on the in-year timing of pro t recognition. The impact of
the transitional arrangements is under review and will be the
subject of an external communication in the second half. There is
no impact on the timing of cash receipts, which are determined by
the terms and conditions of contracts with the customers.
IFRS 16, Leases, issued in January 2016 with an effective date
of 1 January 2019, is not yet EU endorsed. Currently, leases
classified as operating leases are not recognised on the balance
sheet. The impact of this standard will be to recognise a lease
liability and corresponding asset on the Group's balance sheet in
respect of the majority of leases currently classified as operating
leases.
2. Segmental analysis
Sales and revenue by reporting segment
Deduct:
Share of Add:
sales by Sales to
equity equity
accounted accounted
Sales investments investments Revenue
---------------- ---------------- ---------------- ----------------
Six Six Six Six Six Six Six Six
months months months months months months months months
ended ended ended ended ended ended ended ended
30 30 30 30 30 30 30 30
June June June June June June June June
2017 2016 2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Electronic Systems 1,726 1,443 (45) (38) 45 38 1,726 1,443
Cyber & Intelligence 923 833 - - - - 923 833
Platforms &
Services (US) 1,433 1,287 (33) (43) - - 1,400 1,244
Platforms &
Services (UK) 3,913 3,664 (559) (521) 510 478 3,864 3,621
Platforms &
Services (International) 1,771 1,739 (390) (290) - - 1,381 1,449
HQ 128 104 (128) (104) - - - -
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
9,894 9,070 (1,155) (996) 555 516 9,294 8,590
Intra-group
sales/revenue (329) (356) - - 47 44 (282) (312)
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
9,565 8,714 (1,155) (996) 602 560 9,012 8,278
-------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Operating profit/(loss) by reporting segment
Financial
Amortisation and taxation
and impairment expense
of of equity
Underlying Non-recurring intangible accounted Operating
EBITA items assets investments profit/(loss)
---------------- ---------------- ----------------- ---------------- ----------------
Six Six Six Six Six Six Six Six Six Six
months months months months months months months months months months
ended ended ended ended ended ended ended ended ended ended
30 30 30 30 30 30 30 30 30 30
June June June June June June June June June June
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Electronic Systems 257 209 - - (10) (9) - - 247 200
Cyber &
Intelligence 35 18 - - (15) (18) - - 20 -
Platforms &
Services (US) 109 86 (4) - (5) (7) (1) - 99 79
Platforms &
Services (UK) 416 414 - - (8) (6) (2) (14) 406 394
Platforms &
Services
(International) 176 158 - - (3) (3) (12) (9) 161 146
HQ (48) (36) - - - - (20) (7) (68) (43)
------------------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
945 849 (4) - (41) (43) (35) (30) 865 776
------------------- ------- ------- ------- ------- -------- ------- ------- -------
Net finance
costs (151) (248)
------------------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Profit before
taxation 714 528
Taxation expense (155) (110)
------------------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Profit for the
period 559 418
------------------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
3. Net finance costs
Six
months Six
ended months
30 ended
June 30 June
2017 2016
GBPm GBPm
-------------------------------------------------- ------- --------
Net finance costs:
Group (151) (248)
Share of equity accounted investments (26) (15)
-------------------------------------------------- ------- --------
(177) (263)
-------------------------------------------------- ------- --------
Analysed as:
Underlying interest expense:
Group (111) (114)
Share of equity accounted investments (18) (6)
-------------------------------------------------- ------- --------
(129) (120)
Other:
Group:
Net interest expense on retirement benefit
obligations (84) (86)
Fair value and foreign exchange adjustments
on financial instruments and investments 44 (48)
Share of equity accounted investments:
Net interest expense on retirement benefit
obligations (3) (3)
Fair value and foreign exchange adjustments
on financial instruments and investments (5) (6)
(177) (263)
-------------------------------------------------- ------- --------
4. Earnings per share
Six months ended Six months ended
30 June 2017 30 June 2016
--------------------- ---------------------
Basic Diluted Basic Diluted
pence pence pence pence
per per per per
GBPm share share GBPm share share
------------------------------------ ---- ------ ------- ---- ------ -------
Profit for the period attributable
to equity shareholders 555 17.5 17.4 408 12.9 12.8
Add back/(deduct):
Loss on disposal of businesses 4 -
Amortisation and impairment
of intangible assets, post
tax(1) 32 33
Net interest expense on
retirement benefit obligations,
post tax(1) 67 69
Fair value and foreign exchange
adjustments on financial
instruments and investments,
post tax(1) (30) 41
Underlying earnings, post
tax 628 19.8 19.7 551 17.4 17.3
------------------------------------ ---- ------ ------- ---- ------ -------
Millions Millions Millions Millions
------------------------------- -------- -------- -------- --------
Weighted average number
of shares used in calculating
basic earnings per share 3,179 3,179 3,168 3,168
Incremental shares in respect
of employee share schemes 16 8
-------------------------------- -------- -------- -------- --------
Weighted average number
of shares used in calculating
diluted earnings per share 3,195 3,176
-------------------------------- -------- -------- -------- --------
1. The tax impact is calculated using the effective tax rate of
23% (2016 23%).
5. Retirement benefits
US and
UK other Total
GBPm GBPm GBPm
---------------------------------------------- ------- ------ -------
Total net IAS 19 deficit at 1 January
2017 (5,778) (792) (6,570)
Actual return on assets excluding amounts
included in net interest expense 433 237 670
Increase in liabilities due to changes
in financial assumptions (270) (182) (452)
Experience losses (13) (15) (28)
Additional contributions in excess of
service cost 112 - 112
Recurring contributions below service
cost (17) (9) (26)
Past service cost - plan amendments (1) - (1)
Net interest expense (75) (18) (93)
Foreign exchange adjustments - 34 34
Movement in US healthcare schemes - (3) (3)
Total net IAS 19 deficit at 30 June 2017 (5,609) (748) (6,357)
Allocated to equity accounted investments 497 - 497
---------------------------------------------- ------- ------ -------
Group's share of net IAS 19 deficit excluding
Group's share of amounts allocated to
equity accounted investments at 30 June
2017 (5,112) (748) (5,860)
---------------------------------------------- ------- ------ -------
Represented by:
Retirement benefit surpluses 122 84 206
Retirement benefit obligations (5,234) (832) (6,066)
---------------------------------------------- ------- ------ -------
(5,112) (748) (5,860)
---------------------------------------------- ------- ------ -------
Deficit allocation
MBDA participates in the Group's defined benefit schemes and, as
these are multi-employer schemes, the Group has allocated a share
of the IAS 19 pension surpluses and deficits to MBDA based on the
relative payroll contributions of active members, which is
consistent with prior years. Whilst this methodology is intended to
reflect a reasonable estimate of the share of the deficit, it may
not accurately reflect the obligations of the participating
employers.
In the event that an employer who participates in the Group's
pension schemes fails or cannot be compelled to fulfil its
obligations as a participating employer, the remaining
participating employers are obliged to collectively take on its
obligations. The Group considers the likelihood of this event
arising as remote.
Principal actuarial assumptions
The assumptions used are estimates chosen from a range of
possible actuarial assumptions which, due to the long-term nature
of the obligation covered, may not necessarily occur in
practice.
UK US
30 June 31 December 30 June 31 December
2017 2016 2017 2016
--------------------------------------
Financial assumptions
Discount rate - past service
(%) 2.6 2.7 3.9 4.2
Discount rate - future service
(%) 2.7 2.7 n/a n/a
Inflation (%) 3.1 3.2 n/a n/a
Rate of increase in salaries
(%) 3.1 3.2 n/a n/a
Rate of increase in deferred
pensions (%) 2.1/3.1 2.2/3.2 n/a n/a
Rate of increase in pensions 1.6 - 1.7 -
in payment (%) 3.7 3.7 n/a n/a
Demographic assumptions
Life expectancy of a male currently 86 - 86 -
aged 65 (years) 89 89 87 87
Life expectancy of a female currently 89 - 89 -
aged 65 (years) 90 90 89 89
Life expectancy of a male currently 88 - 88 -
aged 45 (years) 91 91 87 87
Life expectancy of a female currently 91 - 91 -
aged 45 (years) 92 92 89 89
-------------------------------------- ------- ----------- ------- -----------
Sensitivity analysis
The sensitivity information has been derived using scenario
analysis from the actuarial assumptions as at 30 June 2017 and
keeping all other assumptions the same.
Financial assumptions
Changes in the following financial assumptions would have the
following effect on the defined benefit pension obligation before
allocation to equity accounted investments:
(Increase)/
decrease
in pension
obligation
GBPbn
--------------------------------- -----------
Discount rate:
0.1 percentage point increase 0.6
0.1 percentage point decrease (0.6)
Inflation:
0.1 percentage point increase (0.5)
0.1 percentage point decrease 0.5
--------------------------------- -----------
The sensitivity analysis does not allow for the impact of the
Group's risk management activities in respect of interest rate and
inflation risk on the valuation of the scheme assets. Across all of
its pension schemes, the Group is hedged against approximately 35%
and 40% of interest rate and inflation risk, respectively, measured
relative to the funding liabilities. The Group's US schemes are not
indexed with inflation. The table below shows the estimated impact
of changes in the following financial assumptions allowing for the
impact of the Group's risk management activities in respect of
interest rate and inflation risk swaps, together with the impact on
the matched asset portfolio. It does not reflect any natural
matching that occurs in the wider asset portfolio:
(Increase)/ (Increase)/
decrease decrease
in pension in scheme
obligation assets
GBPbn GBPbn
--------------------------------- ----------- -----------
Discount rate:
0.1 percentage point increase 0.6 (0.2)
0.1 percentage point decrease (0.6) 0.2
Inflation:
0.1 percentage point increase (0.5) 0.2
0.1 percentage point decrease 0.5 (0.2)
--------------------------------- ----------- -----------
The sensitivity of the valuation of the liabilities to changes
in the inflation assumption presented above assumes that a 0.1
percentage point change to expectations of future inflation results
in a 0.1 percentage point change to all inflation-related
assumptions (rate of increase in salaries, rate of increase in
deferred pensions and rate of increase in pensions in payment) used
to value the liabilities. However, upper and lower limits exist on
the majority of inflation-related benefits such that a change in
expectations of future inflation may not have the same impact on
the inflation-related benefits, and hence will result in a smaller
change to the valuation of the liabilities. Accordingly,
extrapolation of the above results beyond the specific sensitivity
figures shown may not be appropriate. To illustrate this, the
(increase)/decrease in the defined benefit pension obligation
before allocation to equity accounted investments resulting from
larger changes in the inflation assumption would be as follows:
(Increase)/
decrease
in pension
obligation
GBPbn
--------------------------------- -----------
Inflation:
0.5 percentage point increase (1.7)
0.5 percentage point decrease 1.6
1.0 percentage point increase (3.5)
1.0 percentage point decrease 3.1
--------------------------------- -----------
Demographic assumptions
Changes in the life expectancy assumption, including the benefit
of longevity swap arrangements, would have the following effect on
the total net IAS 19 deficit before allocation to equity accounted
investments:
(Increase)/
decrease
in
net
deficit
GBPbn
--------------------- -----------
Life expectancy:
One-year increase (1.0)
One-year decrease 1.1
--------------------- -----------
6. Equity dividends
Six months Six months
ended ended
30 June 30 June
2017 2016
GBPm GBPm
--------------------------------------------- ---------- ----------
Prior year final 12.7p dividend per ordinary
share paid in the period (2016 12.5p) 404 397
--------------------------------------------- ---------- ----------
The directors have declared an interim dividend of 8.8p per
ordinary share (2016 8.6p), totalling GBP280m (2016 GBP273m). The
dividend will be paid on 30 November 2017 to shareholders
registered on 20 October 2017. The ex-dividend date is 19 October
2017.
Shareholders who do not at present participate in the Company's
Dividend Reinvestment Plan and wish to receive the final dividend
in shares rather than cash should complete a mandate form for the
Dividend Reinvestment Plan and return it to the registrars no later
than 9 November 2017.
7. Fair value measurement
Fair value of financial instruments
Certain of the Group's financial instruments are held at fair
value.
The fair value of a financial instrument is the price that would
be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the balance
sheet date.
The fair values of financial instruments held at fair value have
been determined based on available market information at the
balance sheet date, and the valuation methodologies listed
below:
- the fair values of forward foreign exchange contracts are
calculated by discounting the contracted forward values and
translating at the appropriate balance sheet rates;
- the fair values of both interest rate and cross-currency swaps
are calculated by discounting expected future principal and
interest cash flows and translating at the appropriate balance
sheet rates; and
- the fair values of loans and overdrafts have been estimated by
discounting the future cash flows to net present values using
appropriate market-based interest rates prevailing at 30 June.
Due to the variability of the valuation factors, the fair values
presented at 30 June may not be indicative of the amounts the Group
would expect to realise in the current market environment.
Fair value hierarchy
The fair value measurement hierarchy is as follows:
- Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
- Level 2 - Inputs other than quoted prices included within
level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
- Level 3 - Inputs for the asset or liability that are not based
on observable market data (i.e. unobservable inputs).
Carrying amounts and fair values of certain financial
instruments
31 December
30 June 2017 2016
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
--------------------------------------- -------- ------- -------- -------
Financial instruments measured
at fair value:
Non-current
Available-for-sale financial assets 6 6 6 6
Other receivables(1) 301 301 296 296
Other financial assets 293 293 345 345
Other financial liabilities (101) (101) (102) (102)
Other payables(1) (321) (321) (326) (326)
Current
Other financial assets 172 172 204 204
Other financial liabilities (151) (151) (212) (212)
--------------------------------------- -------- ------- -------- -------
Financial instruments not measured
at fair value:
Non-current
Loans(2) (4,230) (4,693) (4,425) (4,805)
Current
Cash and cash equivalents 2,360 2,360 2,769 2,769
Loans and overdrafts (4) (4) - -
--------------------------------------- -------- ------- -------- -------
1. Represents US deferred compensation plan assets and
liabilities.
2. US$500m of the US$800m 3.8% bond, repayable 2024, has been
converted to a floating rate bond by utilising interest rate swaps.
These derivatives have been designated as fair value hedges.
Changes in the fair value of the interest rate risk on the bond,
and gains and losses on the derivatives are recognised in the
income statement. The bond has been included in financial
instruments not measured at fair value because its carrying value
has only been adjusted for the fair value of the interest rate risk
on a portion of the bond.
All of the financial assets and liabilities measured at fair
value are classified as level 2 using the fair value hierarchy.
There were no transfers between levels during the period.
Financial assets and liabilities are either held at fair value
or their carrying value approximates to fair value, with the
exception of loans, most of which are held at amortised cost.
8. Financial risk management
Currency risk
The Group's objective is to reduce its exposure to transactional
volatility in earnings and cash flows from movements in foreign
currency exchange rates, mainly the US dollar, euro, Saudi riyal
and Australian dollar.
The Group is exposed to movements in foreign currency exchange
rates in respect of foreign currency denominated transactions. All
material firm transactional exposures are hedged and the Group
aims, where possible, to apply hedge accounting to these
transactions.
The Group is exposed to movements in foreign currency exchange
rates in respect of the translation of net assets and income
statements of foreign subsidiaries and equity accounted
investments. The Group does not hedge the translation effect of
exchange rate movements on the income statements or balance sheets
of foreign subsidiaries and equity accounted investments it regards
as long-term investments.
9. Related party transactions
Transactions with related parties are shown on page 174 of the
Annual Report 2016.
Six months Six months
ended ended
30 June 30 June
2017 2016
GBPm GBPm
-------------------------------------------- ---------- ----------
Sales to equity accounted investments 602 560
Purchases from equity accounted investments 173 205
-------------------------------------------- ---------- ----------
30 June 31 December
2017 2016
GBPm GBPm
------------------------------------------------ ------- -----------
Amounts owed by equity accounted investments 162 69
Amounts owed to equity accounted investments(1) 731 750
------------------------------------------------ ------- -----------
1. Excludes GBP285m (31 December 2016 GBP285m) included within
amounts due to long-term contract customers.
10. Annual General Meeting
The Annual General Meeting of BAE Systems plc will be held on 10
May 2018.
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 contains limits on the liability
of the directors of BAE Systems plc so that their liability is
solely to BAE Systems plc.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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