TIDMBA.
RNS Number : 3936W
BAE SYSTEMS PLC
01 August 2018
BAE Systems plc
Half-yearly Report 2018
Results in brief
Financial performance measures as defined Financial performance measures defined
by the Group(1) in IFRS(2)
Six months Six months
ended Year ended Year
Six months
30 June ended ended 30 June ended
Six months 31 December 31 December
ended 2017 2017 30 June 2017 2017
30 June (restated(3) (restated(3) (restated(3) (restated(3)
2018 ) ) 2018 ) )
-------------- ----------- ------------- ------------- -------------- ---------- ------------- -------------
Order intake GBP9,701m GBP10,650m GBP20,257m Revenue GBP8,161m GBP8,915m GBP17,224m
-------------- ----------- ------------- ------------- -------------- ---------- ------------- -------------
Operating
Order backlog GBP39.7bn GBP38.7bn GBP38.7bn profit GBP792m GBP885m GBP1,419m
-------------- ----------- ------------- ------------- -------------- ---------- ------------- -------------
Basic earnings
Sales GBP8,818m GBP9,467m GBP18,487m per share 14.8p 17.9p 26.0p
-------------- ----------- ------------- ------------- -------------- ---------- ------------- -------------
Net cash flow
Underlying from operating
EBITA GBP874m GBP967m GBP1,974m activities GBP(397)m GBP341m GBP1,897m
-------------- ----------- ------------- ------------- -------------- ---------- ------------- -------------
Underlying
earnings
per share 19.8p 20.2p 42.1p
-------------- ----------- ------------- -------------
Operating
business
cash flow GBP(436)m GBP277m GBP1,752m
-------------- ----------- ------------- -------------
Net debt GBP(1,921)m GBP(1,741)m GBP(752)m
-------------- ----------- ------------- -------------
Pension and
dividend
Six months Six months Year
ended ended ended
30 June 30 June 31 December
2018 2017 2017
-------------- ----------- ------------- -------------
Group's share
of
the net
pension
deficit GBP(3.0)bn GBP(5.9)bn GBP(3.9)bn
-------------- ----------- ------------- -------------
Dividend per
share 9.0p(4) 8.8p(4) 21.8p
-------------- ----------- ------------- -------------
Charles Woodburn, Chief Executive, said: "We have made good
progress in the first half strengthening the outlook through
significant wins on the Australian SEA 5000 and US Amphibious
Combat Vehicle programmes. These, combined with the launch of the
UK Combat Air Strategy, provide good momentum into the second half
and beyond. Operationally, there have been some notably strong
performances in our Electronic Systems and Air sectors, but also
some disappointments on certain long-standing programmes in
Maritime and Platforms & Services (US), where we have now taken
steps to strengthen management and improve programme execution. In
this transition earnings year, our Group earnings guidance is
maintained and, with a large order book and a positive outlook for
defence budgets in a number of key markets, we have a strong
foundation to deliver growth and sustainable cash flow."
Guidance for 2018
In aggregate, we expect the Group's underlying earnings per
share for 2018 to be in line with the full-year underlying earnings
per share for 2017, with some small additional benefit from
exchange translation.*
* Compared with the Group's actual performance for 2017 as
re-presented to reflect the impact of the adoption of IFRS 15 from
43.5p to 42.1p and assuming a US$1.35 to sterling exchange
rate.
Whilst there is no change to Group-level earnings guidance, some
programme execution issues encountered on certain long-standing
programmes in Platforms & Services (US) and Maritime in the
first half are expected to be covered primarily by higher earnings
in the Electronic Systems business and the Cyber & Intelligence
sector.
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 2018 are provided on pages 9-13.
Financial highlights
Financial performance measures as defined by the Group(1)
- Order backlog increased to GBP39.7bn, with GBP9.7bn of orders
in the first half. Order backlog does not yet include the initial
contract on the SEA 5000 programme, or the contract for the supply
of Typhoon and Hawk aircraft to Qatar, both of which are expected
in the second half of the year.
- Sales at GBP8.8bn, down 3% on a constant currency basis(5) ,
as a result of reduced Typhoon production activity.
- Underlying EBITA at GBP874m, down 6% on a constant currency basis(5) .
- Underlying earnings per share decreased by 2% to 19.8p, or up
2% on a constant currency basis(5) . The Group's effective tax rate
for the first half of the year was 16.5%, compared to a rate of 23%
in the same period last year.
Financial performance measures defined in IFRS(2)
- Revenue decreased to GBP8.2bn, down 5% on a constant currency basis(5) .
- Operating profit decreased by 11% to GBP792m, or 7% on a constant currency basis(5) .
- Basic earnings per share decreased by 17% to 14.8p.
Pension and dividend
- The Group's share of the pre-tax accounting net pension
deficit reduced to GBP3.0bn (31 December 2017 GBP3.9bn).
- Interim dividend increased by 2% to 9.0p 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 on page 7.
2. International Financial Reporting Standards.
3. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
4. Interim dividend declared (see note 6).
5. Current period compared with prior period translated at
current period exchange rates.
Operational and strategic key points
Air
- In March, the UK government signed a Memorandum of Intent with
the Kingdom of Saudi Arabia to aim to finalise discussions for the
purchase of 48 Typhoon aircraft.
- In March, contracts worth A$1.0bn (GBP0.6bn) were agreed for
the upgrade and sustainment of the Jindalee Operational Radar
Network upgrade programme in Australia.
- In June, the Commonwealth of Australia selected the Group as
the preferred tenderer for the design and build of nine ships for
the Future Frigate programme for the Royal Australian Navy.
- In July, the UK government announced its Combat Air Strategy,
under which the UK government and industry will jointly invest in
next-generation combat air systems.
- BAE Systems and the Government of the State of Qatar signed a
contract in December 2017 for the supply of 24 Typhoon aircraft to
the Qatar Emiri Air Force along with a bespoke support and training
package, which was extended to include nine Hawk aircraft, along
with an initial support package. This contract was subject to
financing conditions and receipt by the Company of first payment.
Discussions have progressed and a number of milestones achieved,
including the issuing of a Royal Decree relating to Qatar's
financing of the contract. Financing discussions are in progress
and, when successfully concluded, it is anticipated first payment
would be received in the third quarter of 2018.
Maritime
- Andrew Wolstenholme has been appointed to lead Maritime with a
clear focus on programme schedule and cost performance.
- In March, the Group secured the full GBP1.5bn contract for
delivery of the seventh Astute Class submarine and a further
GBP0.9bn of funding on the Dreadnought programme from the Ministry
of Defence.
- The first of the five Offshore Patrol Vessels (OPV), HMS
Forth, completed sea trials in December 2017, although short-term
performance issues on the programme are being addressed which are
expected to result in cost growth, with a loss provision of GBP15m
being recognised in the first half. Maritime performance was also
impacted by more conservative margin trading on the Aircraft
Carrier programme.
Electronic Systems
- Further awards for APKWS(R) laser-guided rockets were secured worth $399m (GBP302m).
- Demand for our products in the Electronic Systems business is
growing and the portfolio is well aligned with the new US National
Defense Strategy published earlier this year and our customer
requirements. The business has a record order backlog at 30 June
2018 of $7.1bn (GBP5.3bn).
Platforms & Services (US)
- In June, a contract worth $198m (GBP150m) was secured for the
US Marine Corps Amphibious Combat Vehicle programme, with options
for a total of 204 vehicles worth up to $1.2bn (GBP0.9bn).
- The US Ship Repair business received orders totalling $607m
(GBP460m) in the first half of 2018. A further charge has been
taken in the first half of the year on the final commercial ship.
The Group has taken the decision not to pursue new contracts for
the Mobile, Alabama, shipyard, resulting in non-recurring
impairment and other charges of $45m (GBP33m) in the first half of
the year.
- Challenges with a subcontractor on the Radford facilities
programme have required a charge to be taken in the first half of
the year. Other than for this item and the Commercial Shipbuilding
charges, return on sales performance for the Platforms &
Services (US) business would have been in line with the 2017 half
year for this segment.
Cyber & Intelligence
- In our Applied Intelligence business, the restructuring
actions taken to return the business to profitability are taking
hold and the business achieved a much improved first half
performance.
For further information please contact:
Investors Media Relations
Martin Cooper, Kristina Anderson,
Investor Relations Director Director, Media Relations
Telephone: +44 (0)3300 488830 Telephone: +44 (0)7540 628673
Email: investors@baesystems.com Email: kristina.anderson@baesystems.com
Analyst and investor presentation
A presentation, for analysts and investors, of the Group's first
half results for 2018 will be available via webcast at 9.00am today
(1 August 2018).
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 83,900
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 this transition earnings year, production on a number of
programmes is ramping up with operational focus on the appropriate
actions to ensure the challenges are met and delivery improvements
made to meet the increased volume of activity across our
Submarines, US Combat Vehicles and Electronic Systems
businesses.
Governments in our key markets continue to prioritise defence
and security, and there is a strong demand for our capabilities.
Key business wins have been secured in the US on the Amphibious
Combat Vehicle for the US Marine Corps and in Australia on
selection as the preferred tenderer for the design and build of
nine ships for the Future Frigate programme. These will strengthen
our order backlog and core franchise positions, further enhancing
the growth outlook for the Group.
Execution on the three strategic priorities is key to the
successful delivery of the order backlog, to deliver future growth
and in evolving the business to become a stronger, smarter and
sharper organisation.
Operational Excellence
Raising the bar across the organisation to drive for flawless
execution of the order book remains the priority for the Group.
Whilst areas of the business are performing strongly and the
restructuring actions taken to return the Applied Intelligence
business to profitability are gaining traction, there have been
some disappointments on certain long-standing programmes in our
Maritime and Platforms & Services (US) businesses. Steps have
been taken to address these operational issues. In Maritime, Andrew
Wolstenholme has been appointed to lead that business with a clear
focus on programme schedule and cost performance. In Platforms
& Services (US), management has been strengthened to address
the specific issues and to maintain the necessary focus on
programme execution as production ramps up in combat vehicles.
Competitiveness
The new sector structure announced in 2017 is increasingly
embedded. Within procurement, global and national category managers
are now in place and efficiencies are being sought through supply
chain rationalisation and enhanced data analytics.
Technological Innovation
The accelerating pace of technological change is a disruptive
force and a key driver of competitive advantage and, increasingly,
a determinant for customers in awarding new business. Through the
Chief Technology Officer role the Group is driving greater
collaboration across the business and with industry partners and
academia. Technology plans are now in place that support the sector
strategies. The Group is aiming to increase self-funded Research
and Development spend over time, as well as working with our
customers in developing technologies for use today and into the
future. This increase will be achieved through a blend of self- and
jointly-funded customer programmes and through a pipeline of
investment opportunities and targeted bolt-on acquisitions.
US Market
The US Department of Defense fiscal year 2018 budget and the
President's proposal for 2019 maintain the positive momentum in
support for military readiness and modernisation. The Group's US
portfolio remains well aligned with customer priorities and growth
areas, providing greater certainty to our medium-term planning
assumptions.
Our US Electronic Systems business has strong franchise
positions in the high-technology areas of electronic warfare, C4ISR
systems and survivability targeting and sensing, and is well
positioned with the US National Defense Strategy. These
capabilities are also being leveraged on international as well as
domestic programmes. Within Electronic Systems, the Controls and
Avionics, and Power and Propulsion Solutions businesses provide
adjacencies into the commercial markets where we are able to fold
back capabilities from our defence base. The business is focused on
investment in emerging technologies and leveraging customer funding
to maintain, develop and grow our franchises.
The Group's US-based combat vehicles business is well positioned
for growth, underpinned by the Armored Multi-Purpose Vehicle,
M109A7 self-propelled howitzer and Bradley upgrade programmes,
which are all ramping up production. This is furthered with our
competitive win on the Amphibious Combat Vehicle 1.1 programme.
Additionally there are a number of prospects in international
markets which, if secured, would drive further growth into the next
decade.
We are a leading supplier of ship repair services and naval guns
to the US Navy. These franchises are well supported by the growth
outlook in US Navy budgets. Current utilisation levels are high in
ship repair across our facilities and we continue to adjust our
workforce and facilities to meet demand.
In our US-based Intelligence & Security business, whilst
market conditions remain highly competitive and continue to evolve,
focus is on maintaining a high level of bid activity and delivering
on contracts.
UK Market
In the UK, where our business is centred on our long-term
contracted positions in Air and Maritime, defence and security
remains a priority for the UK government. The recently announced UK
Combat Air Strategy is a significant milestone for our Air sector
and sends a strong signal of intent about the UK's commitment to
retaining a leading position in Combat Air. The strategy will
enable long-term planning in a key strategic part of the business
as UK government and industry jointly invest in cutting-edge,
next-generation combat air systems.
The first phase of the Modernising Defence Programme was
announced in July and sets the context, and the direction of
travel, for further work the Ministry of Defence will now do in
further phases. This statement re-emphasises the UK's commitment to
strong defence and security.
The final agreement of the terms of the UK's exit from the EU
after March 2019 will be important to enable companies to prepare
for potential changes in the regulatory environment. As there is
relatively limited UK-EU trading and movement of EU nationals
within our UK businesses, the resulting Brexit impact on the
business is likely to be limited, depending on the terms of any
transition and final agreements for the UK's future relationship
with the EU.
BAE Systems will support the UK government in achieving its aim
to ensure that the UK maintains its key role in European security
and defence post-Brexit, and to strengthen bilateral relationships
with key partners in Europe. This will be important for ongoing
collaboration in the development of defence capabilities.
Typhoon's capabilities continue to be enhanced with delivery of
the Royal Air Force Centurion standard expected by the end of 2018,
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.
Typhoon production is currently focused on the remaining partner
nation deliveries and sub-assembly build on the Kuwait programme.
The Qatar Typhoon programme, once effective, would sustain
production into the next decade. Securing any additional orders
would further extend production.
Production of rear fuselage assemblies for the F-35 Lightning II
aircraft is increasing with the step up to full-rate production on
track for 2020. The first four UK F-35 aircraft arrived at RAF
Marham in June and initial operational services were stood up. As
the UK and global fleets grow, securing a long-term support
position on F-35 is a key focus for the Air business.
In the Maritime sector, there remains pressure on the Royal
Navy's near-term budgets. Securing the full contract for the
delivery of Astute Boat 7 and additional funding for the
Dreadnought programme in March furthered our long-term contracted
positions. Managing the ramp-up of work on Dreadnought and Type 26,
alongside the delivery of the Astute programme, the HMS Prince of
Wales aircraft carrier and the remaining Offshore Patrol Vessels,
has given a number of challenges that are being addressed through
strengthening of the management teams.
International Markets
In an uncertain global environment and complex threat
environment, our defence and security capabilities remain highly
relevant. There are good prospects in international markets for our
products and services in Air, Land, Cyber & Intelligence and
Maritime.
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. The Memorandum of Intent
signed between the Kingdom of Saudi Arabia and the UK government in
March, continues to progress towards reaching an Agreement for a
further 48 Typhoon aircraft, support and transfer of technology and
capability. This will enable BAE Systems to continue with the
Industrialisation of Defence capabilities in the Kingdom of Saudi
Arabia, in support of the Saudi Arabian government's National
Transformation Plan and Vision 2030. The final assembly of the
Typhoon would follow on from the Hawk programme where the first
In-Kingdom final-assembled Hawk aircraft is expected to be
delivered to the Royal Saudi Air Force in 2019.
BAE Systems and the Government of the State of Qatar signed a
contract in December 2017 for the supply of 24 Typhoon aircraft to
the Qatar Emiri Air Force along with a bespoke support and training
package, which was extended to include nine Hawk aircraft, along
with an initial support package. This contract was subject to
financing conditions and receipt by the Company of first payment.
Discussions have progressed and a number of milestones achieved,
including the issuing of a Royal Decree relating to Qatar's
financing of the contract. Financing discussions are in progress
and, when successfully concluded, it is anticipated first payment
would be received in the third quarter of 2018.
In Oman, two of the contracted Typhoon aircraft were delivered
in the first half of the year with the final two of the 12 aircraft
delivered in July.
On Typhoon and Hawk, discussions with current and prospective
customers continue, supporting the Group's aspirations for
additional contract awards. However, there can be no certainty as
to the timing of these orders.
In Australia, the Group was bidding on two significant
production contracts. Whilst we were unsuccessful in our bid for
the Land 400 Phase 2 combat vehicle programme, in June, the
Commonwealth of Australia selected the Group as the preferred
tenderer for its announced A$35bn (GBP20bn) programme for the
design and build of nine Future Frigates for the Royal Australian
Navy. The Company has commenced negotiations with Australia's
Department of Defence on the initial contract for the design and
development phase, which is expected to be in place by the year
end. Production of the first ship is expected to start in the early
2020s in South Australia. This shipbuilding contract will transform
the existing Australian business which is underpinned by long-term
support contracts and was further enhanced in March by securing the
A$1bn (GBP0.6bn) Jindalee Operational Radar Network contract.
The MBDA joint venture has continued to win orders on domestic
and export programmes. The business will grow from executing on its
current order book and with a number of key bids and development
programmes underway it is well placed to benefit from defence spend
increases in a number of European countries and from export
opportunities.
Cyber security domain
In our Applied Intelligence business, the restructuring actions
taken to return the business to profitability are taking hold and
the business achieved a much improved first half performance. The
commercial market remains highly competitive, however 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 services and
products we offer are expected to drive growth and profitability as
the market develops, and as our revised organisational structure is
embedded.
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 GBP3.0bn (31 December 2017 GBP3.9bn).
Summary
Our business benefits from a large order backlog, with
established positions on long-term programmes in the US, UK, Saudi
Arabia and Australia. Our strategy is clear and well defined with
governments in our key markets continuing to prioritise defence and
security, with strong demand for our capabilities. Through
execution of our strategy, BAE Systems is well placed to maximise
opportunities, deal with the challenges and continue to generate
good shareholder returns.
Directors and the Board
With effect from 1 January 2018, Revathi Advaithi was appointed
to the Board as a non-executive director.
Dividend
The Board has declared a 2% increase in the interim dividend to
9.0p for the half year to 30 June 2018.
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 Group's Allows management to
share of revenue of equity accounted monitor the sales performance
investments. of subsidiaries and equity
accounted investments.
--------------------- ---------------------------------------- ------------------------------
Underlying EBITA Operating profit excluding amortisation Provides a measure of
and impairment of intangible operating profitability
assets, finance costs and taxation that is comparable over
expense of equity accounted investments time.
(EBITA) and
non-recurring items*.
--------------------- ---------------------------------------- ------------------------------
Underlying earnings Basic earnings per share excluding Provides a measure of
per share amortisation and impairment of underlying performance
intangible assets, non-cash finance that is comparable over
movements on pensions and financial time.
derivatives, and non-recurring
items*.
--------------------- ---------------------------------------- ------------------------------
Operating business Net cash flow from operating Allows management to
cash flow activities excluding taxation monitor the operational
and including net capital expenditure, cash generation of the
financial investment and dividends Group.
from equity accounted investments.
--------------------- ---------------------------------------- ------------------------------
Net debt Cash and cash equivalents, less Allows management to
loans and overdrafts (including monitor the indebtedness
debt-related derivative financial of the Group.
instruments).
--------------------- ---------------------------------------- ------------------------------
Order intake Funded orders received from customers Allows management to
including the Group's share of monitor the order intake
order intake of equity accounted of subsidiaries and equity
investments. accounted investments.
--------------------- ---------------------------------------- ------------------------------
Order backlog Funded and unfunded unexecuted Supports future years'
customer orders including the sales performance of
Group's share of order backlog subsidiaries and equity
of equity accounted investments. accounted investments.
Unfunded 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 provision N/a
of goods and services by the
Company and its subsidiary undertakings.
------------------------- ----------------------------------------------- ---
Operating profit Profit for the period before N/a
finance costs and taxation expense.
This measure includes finance
costs and taxation expense of
equity accounted investments.
------------------------- ----------------------------------------------- ---
Basic earnings per Basic earnings per share in accordance N/a
share with International Accounting
Standard 33 Earnings per Share.
------------------------- ----------------------------------------------- ---
Net cash flow from Net cash flow from operating N/a
operating activities activities in accordance with
International Accounting Standard
7 Statement of Cash Flows.
------------------------- ----------------------------------------------- ---
Other financial
measures
Net pension deficit Net International Accounting N/a
Standard 19 Employee Benefits,
deficit excluding amounts allocated
to equity accounted investments.
------------------------- ----------------------------------------------- ---
Dividend per share Interim dividend paid and final N/a
dividend proposed per share.
------------------------- ----------------------------------------------- ---
* Items that are not relevant to an understanding of the Group's underlying
performance (see page 11).
Financial performance
Income statement
Six months
Six months ended
ended 30 June
30 June 2017
2018 (restated(3)
)
GBPm GBPm
---------------------------------------------------------- ---------- -------------
Financial performance measures as defined by the Group(1)
Sales 8,818 9,467
---------------------------------------------------------- ---------- -------------
Underlying EBITA 874 967
---------------------------------------------------------- ---------- -------------
Return on sales 9.9% 10.2%
---------------------------------------------------------- ---------- -------------
Financial performance measures defined in IFRS(2)
Revenue 8,161 8,915
---------------------------------------------------------- ---------- -------------
Operating profit 792 885
---------------------------------------------------------- ---------- -------------
Return on revenue 9.7% 9.9%
---------------------------------------------------------- ---------- -------------
Reconciliation of sales to revenue
Sales 8,818 9,467
Deduct Share of sales by equity accounted investments (1,319) (1,154)
Add Sales to equity accounted investments 662 602
---------------------------------------------------------- ---------- -------------
Revenue 8,161 8,915
---------------------------------------------------------- ---------- -------------
Reconciliation of underlying EBITA to operating profit
Underlying EBITA 874 967
Non-recurring items (33) (4)
Amortisation of intangible assets (33) (41)
Financial expense of equity accounted investments (6) (26)
Taxation expense of equity accounted investments (10) (11)
---------------------------------------------------------- ---------- -------------
Operating profit 792 885
Net finance costs (221) (151)
Taxation expense (86) (161)
---------------------------------------------------------- ---------- -------------
Profit for the period 485 573
---------------------------------------------------------- ---------- -------------
Segmental analysis
With effect from 1 January 2018, the Group revised its reporting segments
to reflect the organisational changes announced in 2017. The five principal
reporting segments are Electronic Systems; Cyber & Intelligence; Platforms
& Services (US); Air; and Maritime. These align with the strategic
direction of the Group. Financial information for 2017 has been re-presented
to reflect these new reporting segments.
Financial performance measures as defined by the Group(1)
Sales Underlying EBITA
------------------------- -------------------------
Six months Six months
Six months ended Six months ended
ended 30 June ended 30 June
30 June 2017 30 June 2017
2018 (restated(3) 2018 (restated(3)
) )
GBPm GBPm GBPm GBPm
--------------------------------------- ---------- ------------- ---------- -------------
Electronic Systems 1,819 1,820 260 272
Cyber & Intelligence 815 917 48 38
Platforms & Services (US) 1,382 1,505 56 114
Air 3,305 3,720 459 478
Maritime 1,447 1,488 93 110
HQ 163 152 (42) (45)
Deduct Intra-group (113) (135) - -
--------------------------------------- ---------- ------------- ---------- -------------
8,818 9,467 874 967
--------------------------------------- ---------- ------------- ---------- -------------
Financial performance measures defined
in IFRS(2)
Revenue Operating profit/(loss)
------------------------- -------------------------
Six months Six months
Six months ended Six months ended
ended 30 June ended 30 June
30 June 2017 30 June 2017
2018 (restated(3) 2018 (restated(3)
) )
GBPm GBPm GBPm GBPm
--------------------------------------- ---------- ------------- ---------- -------------
Electronic Systems 1,819 1,820 252 262
Cyber & Intelligence 815 917 41 23
Platforms & Services (US) 1,328 1,472 20 104
Air 2,839 3,318 438 459
Maritime 1,432 1,475 88 105
HQ 25 23 (47) (68)
Deduct Intra-group (97) (110) - -
8,161 8,915 792 885
--------------------------------------- ---------- ------------- ---------- -------------
Exchange rates
Six months Six months
ended ended
30 June 30 June
Average 2018 2017
-------------------------------------------------------- ---------- -----------
GBP/$ 1.376 1.259
GBP/EUR 1.137 1.162
GBP/A$ 1.785 1.669
-------------------------------------------------------- ---------- -----------
30 June 30 June
Period end 2018 2017
-------------------------------------------------------- ---------- -----------
GBP/$ 1.320 1.299
GBP/EUR 1.131 1.139
GBP/A$ 1.787 1.693
-------------------------------------------------------- ---------- -----------
31 December
Year end 2017
-------------------------------------------------------- ---------- -----------
GBP/$ 1.353
GBP/EUR 1.126
GBP/A$ 1.730
-------------------------------------------------------- ---------- -----------
Sensitivity analysis GBPm
-------------------------------------------------------------------- -----------
Estimated impact on annual sales of a ten cent movement
in the average exchange rate:
$ 550
EUR 90
A$ 35
-------------------------------------------------------- ---------- -----------
Sales in the first half decreased to GBP8.8bn (2017 GBP9.5bn(3)
), down 3% on a constant currency basis(4) , as a result of reduced
Typhoon activity.
Underlying EBITA was GBP874m (2017 GBP967m(3) ), 10% down on
last year, or 6% on a constant currency basis(4) .
Revenue decreased to GBP8.2bn (2017 GBP8.9bn(3) ), down 5% on a
constant currency basis(4) .
Operating profit was GBP792m (2017 GBP885m(3) ), 11% down on
last year, or 7% on a constant currency basis(4) .
Non-recurring items in 2018 of GBP33m (2017 GBP4m) represent an
impairment of the Mobile, Alabama, shipyard (GBP28m) and costs
incurred as a result of the decision to no longer pursue contracts
for the Mobile shipyard (GBP5m). The 2017 charge of GBP4m
represents a loss on the disposal of the BAE Systems San Francisco
Ship Repair business.
Amortisation of intangible assets reduced to GBP33m (2017
GBP41m).
Net finance costs were GBP221m (2017 GBP151m). The underlying
interest charge, excluding pension accounting, and fair value and
foreign exchange adjustments on financial instruments and
investments, was GBP101m (2017 GBP111m). There was a charge in
respect of fair value and foreign exchange adjustments of GBP68m
(2017 credit GBP44m) on exchange translation of US
dollar-denominated bonds.
Taxation expense, including equity accounted investments, of
GBP96m (2017 GBP172m(3) ) reflects the Group's effective tax rate
for the period of 16.5% (2017 23%). The effective tax rate for the
full year is expected to be around 18% with some dependency on the
geographical mix of profits.
1. For alternative performance measure definitions see glossary
on page 7.
2. International Financial Reporting Standards.
3. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
4. 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
2018 (restated(3)
)
GBPm GBPm
---------------------------------------------------------- ---------- -------------
Financial performance measures as defined by the Group(1)
Underlying earnings 631 642
---------------------------------------------------------- ---------- -------------
Underlying earnings per share 19.8p 20.2p
---------------------------------------------------------- ---------- -------------
Financial performance measures defined in IFRS(2)
Profit for the period attributable to equity shareholders 471 569
---------------------------------------------------------- ---------- -------------
Basic earnings per share 14.8p 17.9p
---------------------------------------------------------- ---------- -------------
Reconciliation of underlying earnings to profit for the
period attributable to equity shareholders
Underlying earnings 631 642
Non-recurring items, post tax (28) (4)
Amortisation and impairment of intangible assets, post
tax (28) (32)
Net interest expense on retirement benefit obligations,
post tax (44) (67)
Fair value and foreign exchange adjustments on financial
instruments and investments, post tax (60) 30
Profit for the period attributable to equity shareholders 471 569
Non-controlling interests 14 4
---------------------------------------------------------- ---------- -------------
Profit for the period 485 573
---------------------------------------------------------- ---------- -------------
Underlying earnings per share for the period decreased by 2% to
19.8p (2017 20.2p(3) ).
Basic earnings per share for the period decreased by 17% to
14.8p (2017 17.9p(3) ). The decrease is a result of the lower
operating profit and increased finance costs, partly offset by the
impact of the lower effective tax rate.
1. For alternative performance measure definitions see glossary
on page 7.
2. International Financial Reporting Standards.
3. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
Cash flow
Six months Six months
ended ended
30 June 30 June
2018 2017
GBPm GBPm
------------------------------------------------------------ ---------- ----------
Financial performance measures as defined by the Group(1)
Operating business cash flow (436) 277
------------------------------------------------------------ ---------- ----------
Financial performance measures defined in IFRS(2)
Net cash flow from operating activities (397) 341
------------------------------------------------------------ ---------- ----------
Reconciliation from operating business cash flow to net
cash flow from operating activities
Operating business cash flow (436) 277
Add back Net capital expenditure and financial investment 186 202
Deduct Dividends received from equity accounted investments (16) (32)
Deduct Taxation (131) (106)
------------------------------------------------------------ ---------- ----------
Net cash flow from operating activities (397) 341
------------------------------------------------------------ ---------- ----------
Net capital expenditure and financial investment (186) (202)
Dividends received from equity accounted investments 16 32
Interest received 11 6
Cash flow in respect of acquisitions, disposals and held
for sale assets (5) (5)
------------------------------------------------------------ ---------- ----------
Net cash flow from investing activities (164) (169)
------------------------------------------------------------ ---------- ----------
Interest paid (107) (107)
Net sale/(purchase) of own shares 1 (1)
Equity dividends paid (415) (404)
Dividends paid to non-controlling interests - (8)
Cash flow from matured derivative financial instruments (60) (43)
Cash flow from cash collateral (8) (5)
Cash flow from loans (7) -
Net cash flow from financing activities (596) (568)
------------------------------------------------------------ ---------- ----------
Net decrease in cash and cash equivalents (1,157) (396)
Foreign exchange translation (83) 176
Other non-cash movements 64 21
Less cash flow from loans 7 -
------------------------------------------------------------ ---------- ----------
Increase in net debt (1,169) (199)
Opening net debt (752) (1,542)
------------------------------------------------------------ ---------- ----------
Net debt (1,921) (1,741)
------------------------------------------------------------ ---------- ----------
Segmental analysis Six months Six months
ended ended
30 June 30 June
2018 2017
GBPm GBPm
---------------------------------------------------------- ---------- ----------
Financial performance measures as defined by the Group(1)
Electronic Systems 117 118
Cyber & Intelligence 63 46
Platforms & Services (US) (46) 38
Air (167) 4
Maritime (196) 255
HQ (207) (184)
---------------------------------------------------------- ---------- ----------
Operating business cash flow (436) 277
---------------------------------------------------------- ---------- ----------
Financial performance measures defined in IFRS(2)
Electronic Systems 174 167
Cyber & Intelligence 69 56
Platforms & Services (US) (30) 66
Air (125) 38
Maritime (153) 295
HQ (201) (175)
Deduct Taxation(3) (131) (106)
---------------------------------------------------------- ---------- ----------
Net cash flow from operating activities (397) 341
---------------------------------------------------------- ---------- ----------
Operating business cash outflow was GBP436m (2017 inflow
GBP277m), primarily resulting from the reversal of timing benefits
from 2017 and working capital outflows. The outflow also includes
cash contributions in respect of pension deficit funding, over and
above service costs, for the UK schemes totalling GBP139m (2017
GBP86m).
Net cash outflow from operating activities was GBP397m (2017
inflow GBP341m).
Taxation payments increased to GBP131m (2017 GBP106m).
Net capital expenditure and financial investment decreased
marginally to GBP186m (2017 GBP202m) largely on timing of purchases
of plant and equipment.
Dividends received from equity accounted investments of GBP16m
(2017 GBP32m) is primarily receipts from FNSS, FADEC and Advanced
Electronics Company.
Equity dividends paid in 2018 represents the 2017 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 GBP60m (2017 GBP43m) 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. For alternative performance measure definitions see glossary
on page 7.
2. International Financial Reporting Standards.
3. Taxation is managed on a Group basis.
Net debt
30 June 31 December
2018 2017
GBPm GBPm
--------------------------------------------------------- ------- -----------
Components of net debt
Cash and cash equivalents 2,115 3,271
Debt-related derivative financial instrument assets
- non-current 63 79
Debt-related derivative financial instrument assets
- current 64 -
Loans - non-current (3,401) (4,069)
Loans and overdrafts - current (758) (14)
Debt-related derivative financial instrument liabilities
- current (4) (19)
--------------------------------------------------------- ------- -----------
Net debt (1,921) (752)
--------------------------------------------------------- ------- -----------
The Group's net debt at 30 June 2018 is GBP1,921m, a net
increase of GBP1,169m from the net debt position of GBP752m at the
start of the year.
Cash and cash equivalents of GBP2,115m (31 December 2017
GBP3,271m) are held primarily for the repayment of debt securities,
pension deficit funding, payment of the 2018 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 financial statements.
Principal risks
The principal risks facing the Group for the remainder of the
year are unchanged from those reported in the Annual Report 2017.
The final agreement of 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 68 to 71 of
the Annual Report 2017, and relate to the following areas: defence
spending; government customers; international markets; competition
in international markets; laws and regulations; contract risk and
execution; contract awards and cash profiles; pension funding;
information technology security; and people.
Segmental performance: Electronic Systems
Electronic Systems, with 15,500 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, precision guidance and seeker
solutions, next-generation military communications systems and data
links, persistent surveillance capabilities, and hybrid electric
drive systems.
Financial performance
Financial performance measures as defined Financial performance measures defined
by the Group(2) in IFRS(3)
Six months Six months
ended Year ended Year
Six months Six months
ended 30 June ended ended 30 June ended
31 December 31 December
30 June 2017 2017 30 June 2017 2017
(restated(4) (restated(4) (restated(4) (restated(4)
2018 ) ) 2018 ) )
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Order intake GBP2,230m GBP1,848m GBP4,175m Revenue GBP1,819m GBP1,820m GBP3,598m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
GBP5.3bn GBP4.8bn Operating GBP252m GBP521m
Order backlog GBP4.3bn profit GBP262m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Return on
Sales GBP1,819m GBP1,820m GBP3,598m revenue 13.9% 14.4% 14.5%
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Cash flow from
Underlying operating GBP569m
EBITA GBP260m GBP272m GBP541m activities GBP174m GBP167m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Return on sales 14.3% 14.9% 15.0%
--------------- ---------- ------------- -------------
Operating
business GBP117m GBP450m
cash flow GBP118m
--------------- ---------- ------------- -------------
- Order backlog grew again to $7.1bn (GBP5.3bn), following
awards for 17,500 APKWS(R) units and F-35 LRIP 13 funding.
- Sales of $2.5bn (GBP1.8bn) are up 9% over last year. Growth in
the defence businesses was 11% as the F-35 and APKWS(R) programmes
ramp up and classified activity expands.
- Return on sales was 14.3%.
- Cash conversion of EBITA in the first half of the year
reflects the usual second half bias and we therefore expect an
improved conversion level over the full year.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 7.
3. International Financial Reporting Standards.
4. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
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.
On the F-35 Lightning II programme, Lots 10 and 11 Low-Rate
Initial Production hardware deliveries continue, and we have
received initial Lot 12 and 13 funding, with an anticipated final
award value exceeding $600m (GBP454m). We are also executing an
Electronic Warfare Performance Based Logistics contract from
Lockheed Martin to provide material availability and support for
the F-35 programme over a five-year period.
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 (DEWS) on new F-15
aircraft, upgrade existing F-15 aircraft, and to provide spare
units and modules for an international customer. We are also
executing a $311m (GBP236m) contract to provide DEWS to support the
sale of new F-15 aircraft to another international customer.
Following our 2015 selection by Boeing 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 $191m (GBP145m) engineering and manufacturing
development contract, achieving our first partial system delivery
in April.
We continue to execute $87m (GBP66m) worth of modifications to a
competitively-awarded contract for an electronic warfare system for
the US Air Force Special Operations Command's fleet of C-130J
aircraft, which extends our position to include our electronic
warfare capabilities on large, fixed-wing aircraft.
Production of our sensor technology for the Long Range Anti-Ship
Missile continues following a $40m (GBP30m) order from prime
contractor Lockheed Martin. We provided the sensor technology that
supported several successful launches of the missile, demonstrating
its ability to address the US Navy's requirement for versatile,
multi-platform precision munitions that enable distributed
operations. The next production award is anticipated by year
end.
For over a decade, we have provided lifecycle support as the
prime mission system integrator for the US Air Force's EC-130H
Compass Call stand-off electronic attack platform, and we will
continue to sustain the existing EC-130H electronics as we develop,
manufacture, procure, integrate and sustain the electronics for
this programme. We are also now under contract to cross-deck the
mission electronics onto a new Gulfstream G550 business jet for the
US Air Force.
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(R) )
laser-guided rocket is experiencing growing demand, with over
15,000 units delivered to date. In addition to expanding its US
military use, the system is generating strong international
attention, with 20 nations expressing interest. Further awards
totalling $399m (GBP302m) have been received so far this year.
Production capacity is set to increase from 10,000 units per annum
to 20,000 per annum to meet the increased demand.
We continue to execute on the Terminal High-Altitude Area
Defence programme, with a $40m (GBP30m) production contract
received for long-lead material on Lots 9 and 10. Additional units
are expected under future contracts in response to increasing
demand.
On the $527m (GBP399m) Common Missile Warning System programme,
we continue to deliver to schedule.
The US Army's Family of Weapon Sights - Crew Served programme is
in development testing. This seven-year contract awarded in 2016
has a potential value of up to $384m (GBP291m).
The LiteHUD(R) Head-Up Display has been selected by critical
launch customers for integration on multiple platforms including
the Textron Scorpion jet.
We are developing a next-generation missile warning system for
the US Army under the Limited Interim Missile Warning System
programme awarded in 2017.
C4ISR Systems
As a leading provider of space-qualified subsystems and
components, we continue to experience growth in the areas of
integrated on-board processors, reconfigurable processing payloads
and secure communications.
We continue to execute the Network Tactical Common Data Link
programme to provide the US Navy with the ability to simultaneously
transmit and receive real-time intelligence, surveillance and
reconnaissance data over multiple data links for a system to be
fielded on various surface ship types.
Since winning the Geospatial Data Services Foundational GEOINT
Content Management programme in 2014, we have been awarded orders
valued at $240m (GBP182m) and are meeting delivery requirements in
assisting US intelligence community customers with the development
of advanced geospatial intelligence data collection and processing
solutions.
As a provider of signals intelligence capabilities, we are
executing the $132m (GBP100m) Tactical Signals Intelligence
Payloads programme for the US Army's Gray Eagle unmanned aircraft.
The system completed a critical assessment milestone in the first
quarter of the year and user acceptance is scheduled by year
end.
Work continues on state-of-the-art processing capabilities for
the US Navy's P-8A Poseidon maritime surveillance aircraft
programme which is expected to be worth $1.2bn (GBP0.9bn) over its
life.
Controls & Avionics
BAE Systems is a major supplier of full-authority digital engine
controls (FADECs), fly-by-wire flight controls, vehicle management
systems, mission systems, and cabin and flight deck systems. The
development of the integrated flight control electronics and remote
electronic units for Boeing's next-generation 777X aircraft remains
on schedule, with all hardware in qualification and systems
integration testing progressing to plan.
Flight testing of the Boeing 737 MAX 7 aircraft is continuing
with our spoiler controls, flight deck systems and utilities
electronics, with entry into service planned for 2019.
Development of our civil active inceptors for the Gulfstream
G500 and Embraer KC390 aircraft is complete and certification
documentation has been released. A derivative of the active
inceptors, the LinkEdge(TM) (Active Parallel Actuation Subsystem),
is being developed for the Chinook CH-47 and has successfully
completed its Hardware Critical Design Review.
FADEC Alliance, a joint venture between GE Aviation and FADEC
International (our joint venture with Safran Electronics &
Defense), has broadened its agreement with GE Aviation to include
collaboration on system architectures and technologies for future
engines. Under the agreement, FADEC Alliance will develop, produce,
and support FADECs for all future GE Aviation commercial engines.
The GE9x FADEC for the Boeing 777X remains on schedule to complete
certification testing in 2018.
On the F-35 Lightning II programme, Low-Rate Initial Production
Lot 11 is ongoing for the vehicle management computer and active
inceptor system equipment, and development has commenced on the
competitively-awarded F-35 Vehicle Management Computer Technology
Refresh.
Power & Propulsion Solutions
As the transit bus market continues to move towards cleaner
vehicles in order to meet increasingly stringent emissions targets,
the demand for our products is growing. Our hybrid-electric
propulsion systems are giving transit operators in cities such as
Vancouver, San Francisco, Boston, Montreal and London a practical
and affordable solution to meet their current goals, and
demonstrating a significant step towards totally emission-free
operations. We are also among the early providers of
Battery-Electric propulsion solutions into the transit market, with
Paris recently becoming the latest city to commit to vehicles
powered by our technology.
Looking forward
Electronic Systems is well positioned to address current and
evolving priority programmes from our strong franchise positions in
electronic warfare, precision guidance and seeker solutions. We
have a long-standing programme of research and development, and our
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 our strong programme
positions, particularly on F-35 Lightning II and F-15 upgrades, and
specific products such as APKWS(R) , which position the business
well for the medium term.
In the commercial aviation market, our technology innovations
ensure we are able to maintain our long-standing customer positions
and to compete for, and win, new business.
Segmental performance: Cyber & Intelligence
Cyber & Intelligence, with 10,100 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 as defined Financial performance measures defined
by the Group(2) in IFRS(3)
Six months Six months
ended Year ended Year
Six months Six months
ended 30 June ended ended 30 June ended
31 December 31 December
30 June 2017 2017 30 June 2017 2017
(restated(4) (restated(4) (restated(4) (restated(4)
2018 ) ) 2018 ) )
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Order intake GBP864m GBP940m GBP1,859m Revenue GBP815m GBP917m GBP1,818m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
GBP2.0bn GBP2.1bn Operating GBP41m GBP(361)m
Order backlog GBP2.3bn profit GBP23m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Return on
Sales GBP815m GBP917m GBP1,818m revenue 5.0% 2.5% (19.9)%
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Cash flow from
Underlying operating GBP69m GBP127m
EBITA GBP48m GBP38m GBP58m activities GBP56m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Return on sales 5.9% 4.1% 3.2%
--------------- ---------- ------------- -------------
Operating
business GBP63m GBP116m
cash flow GBP46m
--------------- ---------- ------------- -------------
- Order backlog reduced to $2.6bn (GBP2.0bn). In the US
Intelligence & Security sector, order backlog was adjusted for
the closed out options under a previously awarded IT services
contract.
- In aggregate, sales of $1.1bn (GBP0.8bn) were down 6% on a constant currency basis(5) .
- Sales in the US business were down 4% on a constant currency
basis(5) , the customer's decision to pursue a more federated
approach to desktop IT services having had an impact.
- In Applied Intelligence, sales declined by 10% as pursuit of
sales growth has been stepped back and refocused in order to
enhance profits.
- The aggregate return on sales for the sector improved to 5.9%.
- The US business delivered a 9.0% return on sales in the first
half, and as expected, Applied Intelligence reduced reported losses
from GBP23m in the first half of last year to GBP4m this year. The
Applied Intelligence business remains on track for a break even
position by year end.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 7.
3. International Financial Reporting Standards.
4. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
5. Current period compared with prior period translated at
current period exchange rates.
Operational performance
Intelligence & Security
Air Force Solutions
The business is focused on providing the US Air Force and
combatant commands with innovative solutions to help modernise,
maintain, test, and cyber-harden aircraft, radars, missile systems,
and mission applications that detect and deter threats to national
security.
On the US Air Force Intercontinental Ballistic Missile
Integration Support Contractor programme the total lifecycle value
and ceiling of the contract has increased to over $1.0bn
(GBP0.8bn). Our work includes programme management, systems
engineering, integration and testing, sustainment, and cyber
security assessment and defence.
Having provided obsolescence management services to the US Air
Force since 1991, we secured a new three-year, $37m (GBP28m)
contract for obsolescence management services to help mitigate
redesigns caused by changes in part availability.
Integrated Defense Solutions
In the US Army, Navy and federal civilian markets, we provide
systems engineering, integration, and sustainment services for
C4ISR systems and enterprise IT networks that enhance mission
effectiveness. These solutions are deployed across platforms and
networks in the land, air, sea, and cyber domains.
In the first quarter of the year, we were awarded a five-year,
$90m (GBP68m) US Navy contract to continue providing engineering
and technical support for a variety of fixed, airborne, and mobile
intelligence collection platforms. We also secured a four-year,
$44m (GBP33m) contract to provide munitions handling and management
support for the US Navy's Pacific fleet.
We are into the third year of a five-year, sole-source contract
to provide systems engineering services to the US Navy's Strategic
Systems Programs office. This programme carries a maximum contract
value of $368m (GBP279m) and provides support for weapons systems
on board US Ohio Class and UK Vanguard Class submarines, as well as
future Ohio Class replacement and UK Dreadnought Class
submarines.
We are executing the first year of a five-year, $41m (GBP31m)
contract with the US Department of Homeland Security, National
Protection and Programs Directorate to provide data analytics, risk
scoring, cyber security, and governance support to help federal
civilian agencies comply with government cyber security
regulations.
Intelligence Solutions
Across the US civilian and military intelligence communities,
our business provides innovative mission-enabling solutions and
services to enhance the collection, analysis, and processing of
intelligence. The business also develops and deploys high-assurance
networks that facilitate the secure exchange of data amongst
intelligence agencies in support of national security.
With the shift in the US government's IT strategy to pursue a
more federated desktop approach, in April we announced a strategic
collaboration with Dell EMC to market the first scalable, hybrid
cloud solution of its kind to the US government. The solution
offers the highest available assurance within the government cloud
market, and enables organisations to adopt a baseline solution and
add customisable options and services later.
We secured a 20-month Department of Defense contract with an
estimated total value of more than $60m (GBP45m) to continue
providing mission-critical intelligence analysis support for
forward-deployed soldiers.
During the first half, we were awarded two additional task
orders valued at approximately $50m (GBP38m) under the 2017
Indefinite Delivery, Indefinite Quantity contract to provide
motion-imagery analysis, analytic training, multi-media support and
research support services to the US intelligence community. A third
task order awarded in the period is currently under protest, though
we continue to perform as directed by the customer.
Applied Intelligence
With effect from 1 January 2018, the Applied Intelligence
business has restructured to focus on a more targeted portfolio of
products and services, delivering for customers within three core
business units: Government; Financial Services; and Technology
& Commercial. The business continues to progress towards a
break-even position by the end of the year, following the actions
taken to drive benefits in reduced headcount, operational
efficiency and relocation of activities to lower cost international
delivery operations centres. The restructuring programme is now
substantially complete.
Government
The Government business is focused on delivering national
security and intelligence solutions to the UK government and allied
international governments. The business also delivers enterprise
level data and digital services to UK government departments.
The first half of the year saw the closure of a significant
order with a value of GBP23m with a UK government department to
extend the provision of a multi-year enterprise level service
integration and management programme. A number of orders were also
closed for the provision of ongoing national security services with
key UK and international customers.
Financial Services
The Financial Services business delivers anti-fraud and
regulatory compliance solutions to banking and insurance customers
across Europe, North America, the Middle East, Africa and
Asia-Pacific.
There continues to be strong demand for our anti-fraud and
regulatory compliance products. In the first half, a number of
deals were closed in Europe and Asia Pacific as we continue to
expand our offering to existing and new customers. Continued
investment in product engineering and sales is intended to fuel
future growth.
Technology & Commercial
The Technology & Commercial business provides security
advisory and managed security services to a range of commercial
customers in the UK and North America.
Looking forward
Intelligence & Security
The outlook for the US government services sector is stable,
although market conditions remain highly competitive and continue
to evolve as the market goes through a number of
consolidations.
Whilst the shift in the US government's IT strategy to a more
federated approach impacts revenue in 2018, the announced strategy
could present new opportunities for the business.
Applied Intelligence
The restructuring is delivering a greater focus and higher
levels of operational efficiency to accelerate improvements in
competitiveness and profitability.
Sales growth is expected in the medium term as cyber security is
an increasingly important part of government security and a core
element of stewardship for commercial enterprises.
Segmental performance: Platforms & Services (US)
Platforms & Services (US), with 11,700 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 as defined Financial performance measures defined
by the Group(2) in IFRS(3)
Six months Six months
ended Year ended Year
Six months Six months
ended 30 June ended ended 30 June ended
31 December 31 December
30 June 2017 2017 30 June 2017 2017
(restated(4) (restated(4) (restated(4) (restated(4)
2018 ) ) 2018 ) )
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Order intake GBP1,479m GBP1,785m GBP3,542m Revenue GBP1,328m GBP1,472m GBP2,848m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
GBP4.6bn GBP4.2bn Operating GBP20m GBP213m
Order backlog GBP4.2bn profit GBP104m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Return on
Sales GBP1,382m GBP1,505m GBP2,951m revenue 1.5% 7.1% 7.5%
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Cash flow from
Underlying operating GBP(30)m GBP286m
EBITA GBP56m GBP114m GBP237m activities GBP66m
--------------- ---------- ------------- ------------- -------------- ---------- ------------- -------------
Return on sales 4.1% 7.6% 8.0%
--------------- ---------- ------------- -------------
Operating
business GBP(46)m GBP222m
cash flow GBP38m
--------------- ---------- ------------- -------------
- Order backlog has increased to $6.0bn (GBP4.6bn), primarily on
the award of the Amphibious Combat Vehicle contract for the US
Marine Corps, M109A7 Paladin Integrated Management and Bradley.
- Sales were broadly unchanged at $1.9bn (GBP1.4bn). As
expected, there is a significant second half sales bias with combat
vehicle production activity ramp up, particularly on M109A7 Paladin
Integrated Management and Amphibious Combat Vehicle programmes, as
well as the contract for Indian Army M777 lightweight howitzers in
Weapon Systems and Munition Operations.
- Return on sales for the first half was 4.1%. Challenges with a
subcontractor on the Radford facilities construction programme, and
further cost growth on the final ship under the Commercial
Shipbuilding contracts, have both required charges to be taken in
the first half. Other than for those two items, return on sales
performance would have been in line with the previous half
year.
- Non-recurring impairment and other charges of $45m (GBP33m)
have been recognised in the first half of the year relating to the
Mobile, Alabama, shipyard as a result of the decision to no longer
pursue new contracts for the site.
- First half cash flow reflects the utilisation of the
provisions created against the US Commercial Shipbuilding
programmes and working capital build ahead of stronger second half
deliveries.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 7.
3. International Financial Reporting Standards.
4. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
Operational performance
US Combat Vehicles
In June, BAE Systems and industry teammate Iveco Defence
Vehicles were selected to supply Amphibious Combat Vehicles (ACV)
for the US Marine Corps under the competitively-awarded ACV 1.1
programme phase. The production contract is for an initial $198m
(GBP150m) for 30 vehicles, with options for a total of 204 vehicles
worth up to $1.2bn (GBP0.9bn).
In February, we submitted our proposal to the US Army for the
Mobile Protected Firepower programme, a light tank designed to
operate in the Infantry Brigade Combat Team. The Army is expected
to down select to two competitors for the engineering and
manufacturing development phase later this year.
On the US Army's Armored Multi-Purpose Vehicle programme, we
have completed deliveries of the first 29 vehicles under the
engineering and manufacturing development phase. The contract has a
potential value of $1.2bn (GBP0.9bn), including options for 289
vehicles in Low-Rate Initial Production (LRIP). We anticipate a
contract for long-lead material for LRIP in the second half of the
year.
We are executing on a $414m (GBP314m) contract received in
December 2017 for the third LRIP option for 48 M109A7
self-propelled howitzers and M992A3 ammunition carriers under the
Paladin Integrated Management programme. In January we received a
$149m (GBP113m) contract for long-lead material to support the
first year of full-rate production of 60 vehicle sets. Additional
options could cover 120 vehicle sets over two years and if
exercised would bring the total contract value to about $1.7bn
(GBP1.3bn).
The business is executing a $286m (GBP217m) engineering and
manufacturing development contract to address the space, weight,
power and cooling limitations of the Bradley family of vehicles and
to prepare the vehicle for communication network upgrades. In June
we received a $348m (GBP264m) contract, initially funded at $132m
(GBP100m), to upgrade 164 vehicles to the Bradley A4
configuration.
We continue to work on US Army contracts awarded in 2017 for
upgrades and sustainment of M88 recovery vehicles, to include
upgrades to the Heavy Equipment Recovery Combat Utility Lift
Evacuation Systems (HERCULES) configuration. We anticipate an award
for the next phase of the HERCULES upgrade programme in the second
half.
Internationally, work continues on multiple contracts for
Assault Amphibious Vehicles (AAVs). In June, we were awarded a
Foreign Military Sales contract valued at $84m (GBP64m) to deliver
36 AAVs to Taiwan. As at 30 June, 25 of 30 AAVs have been delivered
to Japan, with the remaining five being delivered early in the
third quarter, under contracts totalling $165m (GBP125m). All 23 of
the AAVs ordered by Brazil under an $82m (GBP62m) Foreign Military
Sales contract have now been completed and 21 await formal
delivery.
Weapon Systems and Munition Operations
We are executing on a $47m (GBP36m) contract modification from
the US Navy in December 2017 to deliver four additional Mk45 Gun
Systems upgraded to increase firepower and extend range. We also
received contracts to provide additional 57mm Mk110 guns systems
for the Navy's Littoral Combat Ship programme, and the US Coast
Guard's National Security Cutter Legend Class and Offshore Patrol
Cutter programmes.
In March, we received a contract to provide eight payload tubes
for two block V version Virginia-class submarines, each featuring a
new payload module for increased firepower.
The business is executing under a 2017 contract to deliver 155mm
BONUS ammunition to the Swedish Army and is delivering 24
additional ARCHER artillery systems under a 2016 contract with the
Swedish government.
We continue to execute on a GBP183m contract to provide the
Maritime Indirect Fire System for the Royal Navy's Type 26
frigate.
Under the $542m (GBP411m) Foreign Military Sale contract to
provide 145 M777 lightweight howitzers to the Indian Army, we are
building the first 25 guns in our facilities, with the remaining
systems assembled in India by Mahindra Defence Systems, our
selected supplier to establish an assembly, integration and test
facility in India. Five guns have been shipped.
In the complex ordnance manufacturing business, we continue to
manage the US Army's Radford and Holston munitions facilities under
previously awarded contracts. At Holston, we are progressing on
modernisation contracts totalling $135m (GBP102m) for waste water
management and a $146m (GBP111m) contract for the construction of a
nitric acid recovery facility to produce larger quantities of
insensitive munitions. At Radford, operational challenges and cost
overruns on the nitrocellulose facility modernisation programme
have been encountered and these have impacted the financial
performance of the sector.
We are saddened to report that an accident involving a flash
fire on 11 June in a nitrocellulose drying facility in Radford
resulted in one fatality and injuries to two other employees. The
cause of the fire is under investigation.
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 in the
first half totalling approximately $607m (GBP460m), including
recent awards to modernise the USS Howard in our San Diego,
California, yard, and the USS Cole in our Norfolk, Virginia,
yard.
In Commercial Shipbuilding, construction of the final commercial
ship is nearing completion and sea trials are expected in the
coming months. Necessary repairs on the vessel have led to a
further charge being recognised in the first half of the year. No
new contracts will be pursued for the Mobile, Alabama, shipyard,
and non-recurring impairment and other charges of $45m (GBP33m)
have been recognised in the first half of the year.
BAE Systems Hägglunds
In January, we unveiled the MkIV version of the CV90 Infantry
Fighting Vehicle. The MkIV includes substantial upgrades to the
drivetrain and suspension, as well as to its electronics.
We continue to advance local industrial cooperation arrangements
with Czech companies in support of an anticipated bid of the CV90
for the country's next fleet of infantry fighting vehicles.
We continue to refurbish Swedish CV90 vehicles under a contract
awarded in 2016, and are integrating Mjölner mortar systems on 40
Swedish CV90s under a separate contract.
We are on schedule under the 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 (GBP397m) programme to produce 259 8x8
wheeled armoured vehicles for the Royal Malaysian Army.
Programme deliveries are on schedule under the contract to Oman
awarded in 2015 for the PARS Wheeled Armoured Vehicle to deliver
8x8 and 6x6 vehicles in a number of configurations.
Work progresses under multiple domestic contracts to Turkish
Armed Forces. These include a EUR278m (GBP246m) contract to supply
260 Anti-Tank Vehicles, an EUR84m (GBP74m) contract for air defence
vehicles, and a EUR155m (GBP137m) contract to provide 27 amphibious
assault vehicles.
Looking forward
Our Combat Vehicles business is underpinned by strong positions
on key franchise programmes. These include the US Army's Armored
Multi--Purpose Vehicle, M109A7 self-propelled howitzer and Bradley
upgrade programmes, and the CV90 and BvS10 export programmes from
our BAE Systems Hägglunds business.
Following the securing of the Amphibious Combat Vehicles
programme, we continue to pursue a range of domestic and
international opportunities in combat and amphibious vehicles as
well as weapon systems.
These long-term contracts and our franchise position in tracked
vehicles, which offer opportunities in international markets,
position the business for growth in the medium term.
In the maritime domain, the Group has a strong position on naval
gun programmes and US Navy ship repair. Additional dry dock ship
repair capacity has been established in San Diego to support the US
Navy's increased requirements in the Asia-Pacific region.
The Group remains a leading provider of gun systems and
precision strike capabilities and, in the complex ordnance
manufacturing business, we continue to manage the US Army's Radford
and Holston munitions facilities under long-term contracts.
Segmental performance: Air
Air, with 26,700 employees(1) , comprises the Group's UK--based
air activities for European and International markets and US
Programmes and our businesses in Saudi Arabia and Australia,
together with a 37.5% interest in the pan-European MBDA joint
venture.
Financial performance
Financial performance measures as defined Financial performance measures defined
by the Group(2) in IFRS(3)
Six months
Six months
ended Year ended Year
Six months Six months
ended 30 June ended ended 30 June ended
31 December 31 December
30 June 2017 2017 30 June 2017 2017
(restated(4) (restated(4) (restated(4) (restated(4)
2018 ) ) 2018 ) )
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
Order intake GBP2,699m GBP2,479m GBP6,128m Revenue GBP2,839m GBP3,318m GBP6,312m
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
GBP18.9bn GBP19.5bn Operating GBP438m GBP918m
Order backlog GBP19.3bn profit GBP459m
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
Return on
Sales GBP3,305m GBP3,720m GBP7,210m revenue 15.4% 13.8% 14.5%
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
Cash flow
from GBP(125)m GBP888m
Underlying operating
EBITA GBP459m GBP478m GBP967m activities GBP38m
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
Return on
sales 13.9% 12.8% 13.4%
-------------- ----------- ------------- -------------
Operating
business GBP(167)m GBP832m
cash flow GBP4m
-------------- ----------- ------------- -------------
- Order backlog stands at GBP18.9bn, marginally down on trading
of the long-term Typhoon support contracts for the UK, Saudi Arabia
and Oman.
- Sales were down 11% at GBP3.3bn. As expected production
activity on Typhoon for the European, Saudi and Oman contracts has
largely completed. The F-35 programme is ramping up to plan and
Middle East support volumes continue to grow.
- The adoption of IFRS 15 has introduced a change in method of
revenue recognition, with sales now being linked to cost and
activity rather than customer deliveries. However, profit will
continue to be recognised progressively based on the mitigation and
retirement of risk.
- The high return on sales of 13.9% is largely reflective of the
new IFRS 15 approach, with some profit trading coming through on
contracts with minimal sales. A sustainable return on sales
expectation for the Air Sector remains as per our guidance.
- The cash outflow of GBP167m in the period reflects full
consumption of the GBP300m early receipts seen in 2017 against the
Saudi Support programme, and utilisation of the advances on the
residual Typhoon export contracts.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 7.
3. International Financial Reporting Standards.
4. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
Operational performance
European & International markets
BAE Systems and the Government of the State of Qatar signed a
contract in December 2017 for the supply of 24 Typhoon aircraft to
the Qatar Emiri Air Force along with a bespoke support and training
package, which was extended to include nine Hawk aircraft, along
with an initial support package. This contract was subject to
financing conditions and receipt by the Company of first payment.
Discussions have progressed and a number of milestones achieved,
including the issuing of a Royal Decree relating to Qatar's
financing of the contract. Financing discussions are in progress
and, when successfully concluded, it is anticipated first payment
would be received in the third quarter of 2018.
During the period two Typhoon aircraft were delivered to the
Omani Air force, and the final two were delivered in July. The
five-year availability service contract for the aircraft continues
to deliver against contractual milestones.
Progress continues on the Kuwait Typhoon contract, secured by
Italian Eurofighter partner, Leonardo, with 25 of 28 airframes now
in work. BAE Systems' deliveries are expected to commence in
2019.
In the period, nine of the remaining 37 Tranche 3 Typhoon
aircraft were delivered, three to the UK customer and six to
European customers.
Delivery of the Royal Air Force Centurion standard is planned
for the end of 2018, which enables the transition of air
capabilities from Tornado to Typhoon. Integration of the Captor
E-Scan radar continues to progress with the first flight of the
hardware in the period.
Support to our UK and European customers' Typhoon and Tornado
aircraft and their operational commitments continues to be
delivered. In the UK under the ten-year partnership arrangement
with the Ministry of Defence to support its Typhoon fleet,
provision of flying hours is being sustained above contractual
levels.
The long-term support contract for the Royal Air Force's UK
fleet of Hawk fast jet trainer aircraft has met all contractual
milestones in the period. Support continues to be provided to users
of Hawk trainer aircraft around the world.
Mobilisation of the contract for collaboration on the first
design and development phase of an indigenous fifth-generation
fighter jet for the Turkish Air Force has progressed as
planned.
Following the 2017 announcement of a potential workforce
reduction of 1,400 employees in the business, a net headcount
reduction of approximately 170 was effected in the period, together
with mitigation of a further 219 roles.
The recently announced UK Combat Air Strategy is a significant
milestone for our Air sector and sends a strong signal of intent
about the UK's commitment to retaining a leading position in Combat
Air. The strategy will enable long-term planning in a key strategic
part of the business as UK government and industry jointly invest
in cutting-edge, next-generation combat air systems.
US Programmes
On the F-35 programme, price agreement was secured on Lot 11
with contract award expected in the second half of the year. In the
period, 40 rear fuselage assemblies were manufactured for the
Low-Rate Initial Production Lot 10 and Lot 11 contracts.
Negotiations are anticipated in the second half of the year on Lots
12-14 which will see an expected ramp-up to full-rate production by
2020.
At RAF Marham in Norfolk, the Lightning Operating Centre was
completed and handed over and the initial operational service stood
up ahead of the arrival of the UK's first four F-35 aircraft in
June.
Good progress has been made in mobilising the resources to run
the joint venture established with the UK Ministry of Defence and
Northrop Grumman for the European repair hub for the maintenance,
repair, overhaul and upgrade of F-35 avionics and components.
Saudi Arabia
The Memorandum of Intent signed between the Kingdom of Saudi
Arabia and the UK government in March continues to progress towards
reaching an Agreement for a further 48 Typhoon aircraft, support
and transfer of technology and capability. This will enable BAE
Systems to continue with the Industrialisation of Defence
capabilities in the Kingdom of Saudi Arabia. Final assembly of all
48 Typhoon aircraft will be In-Kingdom.
On the original Salam Typhoon programme all 72 contracted
Typhoon aircraft have been delivered to the customer.
The Typhoon support contracts continue to operate well, with a
contract for the ongoing support expected in the second half of the
year.
Further contracts have been received in the period under the
Saudi British Defence Co-operation Programme five-year support
services Agreement to 2021 for the Royal Saudi Air Force and Royal
Saudi Naval Forces.
The first In-Kingdom final-assembled Hawk aircraft is expected
to be delivered to the Royal Saudi Air Force in early 2019. A
further seven major units of the second contracted batch of 22 Hawk
aircraft have been delivered on schedule to meet Saudi Arabia's
final assembly programme.
The Royal Saudi Naval Forces accepted the third and final ship
in the Minehunter mid-life update programme in April. A training
services contract for the Royal Saudi Naval Forces has been
contracted in the period.
Work continues to reorganise our portfolio of interests in a
number of industrial companies in Saudi Arabia. Riyadh Wings
Aviation Academy LLC currently owns 4.1% of Overhaul and
Maintenance Company, a Group subsidiary, 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.
Australia
In March, the Commonwealth of Australia agreed upgrade and
sustainment contracts worth A$1.0bn (GBP0.6bn) for the Jindalee
Operational Radar Network, to be delivered over an initial ten-year
term.
In June, the Commonwealth of Australia selected the Group as the
preferred tenderer for the design and build of nine ships for the
Future Frigate programme for the Royal Australian Navy, under the
overall A$35bn (GBP20bn) programme announced by the government,
which includes government-furnished equipment and costs associated
with the programme. We have commenced negotiations with Australia's
Department of Defence on the initial four-year design and
development contract, which is expected to be in place by the year
end and is expected to have a value in the region of around A$2bn
(GBP1.1bn). The production scope is then expected to be negotiated
for the first batch of ships with work on the first ship expected
to start in early 2020s in South Australia.
The company was notified in March that it was unsuccessful in
its bid for the Land 400 Phase 2 Combat Reconnaissance Vehicle
programme.
Mobilisation activity for sustainment of the Regional F-35 fleet
continues to progress at our Williamtown facility, with the first
two aircraft to be supported expected to arrive in Australia at the
end of the year.
We have continued to provide in-service support to the Royal
Australian Navy's two Landing Helicopter Docks under the support
contract which was extended to run until June 2019. Trials have
identified a number of areas where rectifications are in process,
with final acceptance of the vessels under the acquisition contract
expected by the end of the year.
The sustainment and upgrade of the Anzac fleet under the Warship
Asset Management Alliance progresses to plan, with the upgrade
programme running through to 2023.
The Hawk Mk127 Lead-In Fighter Project team continues to
maintain the high level of aircraft availability required to meet
the training programme, and the Capability Assurance Programme to
upgrade the Hawk fleet to meet the F-35 training requirements
remains ahead of schedule. Five Hawk aircraft were modified in the
period, bringing the total to 25 of the contracted 33.
MBDA
During the first half of 2018, MBDA secured new contracts for
additional Taurus stand-off missiles in South Korea and for further
five-year support to the Aster system in France, Italy and the UK.
A contract to provide Marte Extended Range anti-ship missiles to
Qatar was also signed, however, this is not yet in force.
The contract announced in 2017 for the supply of Brimstone and
Meteor missiles to Qatar for the 24 Typhoon aircraft is dependent
on the customer securing financing and receipt by MBDA of first
payment. Financing discussions are in progress and, when
successfully concluded, it is anticipated first payment would be
received in the third quarter of 2018.
Negotiations on both technical specification and contract terms
between the German Ministry of Defence and the MBDA and Lockheed
Martin partners continue for the proposed German ground-based air
defence system, TLVS.
MBDA made good progress on development programmes with key test
firings successfully achieved on both Sea Venom anti-ship missile
and Land Ceptor air defence missile system.
The Sea Ceptor naval air defence missile system entered into
service with the Royal Navy in May 2018 on its Type 23
frigates.
Looking forward
In the UK, as current export contracts for Typhoon and Hawk
complete, and UK Tornado support ends, sales are underpinned by our
workshare on Typhoon for Kuwait, Typhoon and Hawk support, and F-35
Lightning II production and support. UK-based production of rear
fuselage assemblies for F-35 will increase over the next three
years to reach its expected peak rate for the next decade. We play
a significant role in the F-35 sustainment programme in support of
Lockheed Martin.
Defence and security remain priorities for the UK government,
and this was reaffirmed in the Modernising Defence Programme and
the recently announced UK Combat Air Strategy which provides the
base to enable long-term planning and investment in a key strategic
part of the business. Discussions continue with current and
prospective customers in relation to potential further contract
awards for Typhoon and Hawk.
The UK support operations are underpinned by a long-term
partnering arrangement with the Ministry of Defence. In Saudi
Arabia, the In-Kingdom Industrial Participation programme continues
to make good progress consistent with our long-term strategy, as
well as the Saudi Arabian government's National Transformation Plan
and Vision 2030.
In Australia, the business is structured around long-term
sustainment and upgrade activities, and is expected to expand into
ship production following the down select in June 2018 of the SEA
5000 Future Frigate programme.
MBDA has a strong order book which is driving increasing
production and sales. Development programmes continue to improve
the long-term capabilities of the business.
Segmental performance: Maritime
Maritime, with 15,800 employees(1) , comprises the Group's
UK-based maritime and land activities.
Financial performance
Financial performance measures as defined Financial performance measures defined
by the Group(2) in IFRS(3)
Six months Six months
ended Year ended Year
Six months Six months
ended 30 June ended ended 30 June ended
31 December 31 December
30 June 2017 2017 30 June 2017 2017
(restated(4) (restated(4) (restated(4) (restated(4)
2018 ) ) 2018 ) )
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
Order intake GBP2,422m GBP3,767m GBP4,671m Revenue GBP1,432m GBP1,475m GBP2,845m
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
GBP9.5bn GBP8.5bn Operating GBP88m GBP240m
Order backlog GBP9.1bn profit GBP105m
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
Return on
Sales GBP1,447m GBP1,488m GBP2,877m revenue 6.1% 7.1% 8.4%
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
Cash flow
from GBP(153)m GBP396m
Underlying operating
EBITA GBP93m GBP110m GBP251m activities GBP295m
-------------- ----------- ------------- ------------- ------------- ----------- ------------- -------------
Return on
sales 6.4% 7.4% 8.7%
-------------- ----------- ------------- -------------
Operating
business GBP(196)m GBP278m
cash flow GBP255m
-------------- ----------- ------------- -------------
- Order backlog has increased to GBP9.5bn following the awards
for Astute Boat 7 pricing and further funding under the Dreadnought
programme.
- Sales in the Maritime businesses for the first half of the
year of GBP1.4bn are little changed from 2017. While activity
levels on the Carrier programme are reducing, this is largely
offset by increases on the Submarine programmes.
- Underlying EBITA in the first half of the year was GBP93m,
with a return on sales of 6.4% against our guidance of 8-9%. We
have taken a charge of GBP15m against the five ship Offshore Patrol
Vessels contract and are now trading the Carrier at a more
conservative level than planned.
- There was an operating cash outflow of GBP196m including a
reversal of the GBP100m VAT timing benefit seen in 2017. Funding of
the UK munitions contract is scheduled for December.
1. Including share of equity accounted investments.
2. For alternative performance measure definitions see glossary
on page 7.
3. International Financial Reporting Standards.
4. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
Operational performance
Maritime
On the Aircraft Carrier programme, large volume installation
activities continue to progress on HMS Prince of Wales, with
commissioning of systems planned through 2018 and sea trials
beginning in 2019. Work continues to support HMS Queen Elizabeth,
which includes capability insertion in advance of fixed wing flight
trials in the second half of 2018. However, cost growth on the
programme has resulted in a more conservative trading of contract
profitability in the period.
The first batch of three Type 26 frigates continues in
production. The programme currently employs over 1,000 people and
activities will build progressively during 2018 on transition from
completion of the detailed design through to production
readiness.
The first of the five Offshore Patrol Vessels (OPV), HMS Forth,
completed sea trials in December 2017. However, ongoing quality
issues on the ship have had to be resolved resulting in
unanticipated cost growth and a GBP15m loss provision in the
period.
The Ministry of Defence has extended the Maritime Support
Delivery Framework contract to 31 March 2020, under which BAE
Systems manages and maintains HM Naval Base, Portsmouth, and
supports more than half of the Royal Navy's surface fleet. During
the first half of the year we were selected as the prime contractor
to deliver the Type 45 Power Improvement Programme, which we are
doing in collaboration with Cammell Laird and BMT.
Progress continues on the GBP270m Spearfish torpedo upgrade
programme, with the demonstration phase forecast to complete in
2020.
The first three Astute Class submarines are in operational
service with the Royal Navy. Progress continues on the manufacture
of the remaining four boats. A full contract award for the seventh
boat was secured in March.
Functional and spatial design and limited production on the
first of class continues to advance on the Dreadnought Class
submarine programme, the replacement for the Royal Navy's Vanguard
Class submarines. The contract for Delivery Phase 2 was signed in
March 2018 with GBP0.9bn of order intake.
The major programme of building works at the Barrow site
continues, with contracts in place totalling more than GBP500m.
The Dreadnought Alliance Agreement detailing the organisational,
governance and commercial arrangements between the three parties,
the Submarine Delivery Authority, BAE Systems and Rolls-Royce has
been agreed, allowing for the formal stand-up of the Alliance from
April 2018.
The proposed reduction in our Maritime Services business
workforce of around 375 roles has now been completed.
Land
The business continues to provide UK and international customers
with a full range of light and heavy munitions, and support to
previously supplied armoured vehicles and bridging systems.
During the first half of the year, 50 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 210 of 515. This is the first
entirely new medium calibre cannon and ammunition system qualified
by the British Army since the late 1960s. Also during the period an
order for GBP72m was received to deliver 110 Case Telescoped
Armament Systems to the French Army under their 6x6 combat armoured
reconnaissance vehicle programme.
The business is one of two contenders delivering the design
stages of the Challenger 2 Life Extension Programme and the British
Army's bridging system.
Looking forward
Maritime
In Maritime, there remains pressure on the Navy's near-term
budgets and a highly-competitive environment in ship support and
upgrade.
Within submarines, the business is executing the Astute Class
programme, with four boats still in build. On the Dreadnought
programme, production of the first boat of four commenced in 2016.
Investment continues in the Barrow facilities in order to provide
the capabilities for support of these long-term programmes through
the next decade.
In shipbuilding, sales are underpinned by the contracts to
manufacture the Queen Elizabeth Class aircraft carriers, Type 26
frigates and River Class Offshore Patrol Vessels.
The through-life support of surface ship platforms provides a
sustainable business in technical services and mid-life
upgrades.
Land
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.
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 pages 1 to 30 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
31 July 2018
Directors
Sir Roger Carr Chairman
--------------------- --------------------------------------------
Charles Woodburn Chief Executive
--------------------- --------------------------------------------
President and Chief Executive Officer of BAE
Jerry DeMuro Systems, Inc.
--------------------- --------------------------------------------
Peter Lynas Group Finance Director
--------------------- --------------------------------------------
Revathi Advaithi Non-executive director
--------------------- --------------------------------------------
Elizabeth Corley Non-executive director
--------------------- --------------------------------------------
Harriet Green Non-executive director
--------------------- --------------------------------------------
Chris Grigg Non-executive director
--------------------- --------------------------------------------
Paula Rosput Reynolds Non-executive director
--------------------- --------------------------------------------
Nick Rose Non-executive director
--------------------- --------------------------------------------
Ian Tyler Non-executive director
--------------------- --------------------------------------------
Independent review report to BAE Systems plc
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 2018 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 1 - 11. We have read the other information
contained in the half-yearly financial report and considered
whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of
financial statements.
This report is made solely to the Company 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 Financial
Reporting Council. Our work has been undertaken so that we might
state to the Company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company, for our review
work, for this report, or for the conclusions we have formed.
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 Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
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.
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 Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
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 2018 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London
United Kingdom
31 July 2018
Condensed consolidated income statement (unaudited)
Six months
ended
Six months
ended 30 June 2017
(restated(1)
30 June 2018 )
---------------- ----------------
Notes GBPm GBPm GBPm GBPm
----------------------------------------------------- ----- ------- ------- ------- -------
Continuing operations
------- -------
Sales 2 8,818 9,467
Deduct Share of sales by equity accounted
investments (1,319) (1,154)
Add Sales to equity accounted investments 662 602
------- -------
Revenue 2 8,161 8,915
Operating costs (7,454) (8,100)
Other income 47 61
----------------------------------------------------- ----- ------- ------- ------- -------
Group operating profit 754 876
Share of results of equity accounted investments 38 9
----------------------------------------------------- ----- ------- ------- ------- -------
Underlying EBITA 2 874 967
Non-recurring items(2) (33) (4)
------- -------
EBITA 841 963
Amortisation of intangible assets (33) (41)
Financial expense of equity accounted investments (6) (26)
Taxation expense of equity accounted investments (10) (11)
------- -------
Operating profit 2 792 885
Financial income 138 261
Financial expense (359) (412)
------- -------
Net finance costs 3 (221) (151)
----------------------------------------------------- ----- ------- ------- ------- -------
Profit before taxation 571 734
Taxation expense (86) (161)
----------------------------------------------------- ----- ------- ------- ------- -------
Profit for the period 485 573
----------------------------------------------------- ----- ------- ------- ------- -------
Attributable to:
Equity shareholders 471 569
Non-controlling interests 14 4
----------------------------------------------------- ----- ------- ------- ------- -------
485 573
----------------------------------------------------- ----- ------- ------- ------- -------
Earnings per share 4
Basic earnings per share 14.8p 17.9p
Diluted earnings per share 14.7p 17.8p
----------------------------------------------------- ----- ------- ------- ------- -------
1. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
2. Non-recurring items represent impairment and other charges
relating to the Mobile, Alabama, shipyard (2017 loss on disposal of
businesses).
Condensed consolidated statement of comprehensive income
(unaudited)
Six months ended
Six months ended 30 June 2017
30 June 2018 (restated(1) )
----------------------------- ---------------------------
Other Retained Other Retained
reserves earnings Total reserves earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------------- --------- --------- ------- --------- --------- -----
Profit for the period - 485 485 - 573 573
------------------------------------------------- --------- --------- ------- --------- --------- -----
Other comprehensive income
Items that will not be reclassified
to the income statement:
Subsidiaries:
Remeasurements on retirement benefit
schemes - 893 893 - 170 170
Tax on items that will not be reclassified
to the income statement - (154) (154) - (38) (38)
Equity accounted investments (net of
tax) - 30 30 - 6 6
Items that may be reclassified to the
income statement:
Subsidiaries:
Currency translation on foreign currency
net investments 158 - 158 (346) - (346)
Amounts credited to hedging reserve (5) - (5) 63 - 63
Tax on items that may be reclassified
to the income statement 1 - 1 (11) - (11)
Equity accounted investments (net of
tax) 3 - 3 (5) - (5)
------------------------------------------------- --------- --------- ------- --------- --------- -----
Total other comprehensive income for
the period (net of tax) 157 769 926 (299) 138 (161)
------------------------------------------------- --------- --------- ------- --------- --------- -----
Total comprehensive income for the
period 157 1,254 1,411 (299) 711 412
------------------------------------------------- --------- --------- ------- --------- --------- -----
Attributable to:
Equity shareholders 155 1,240 1,395 (297) 707 410
Non-controlling interests 2 14 16 (2) 4 2
------------------------------------------------- --------- --------- ------- --------- --------- -----
157 1,254 1,411 (299) 711 412
------------------------------------------------- --------- --------- ------- --------- --------- -----
1. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
Condensed consolidated statement of changes in equity
(unaudited)
Attributable to equity holders
of BAE Systems plc
-----------------------------------------------
Issued
share Share Other Retained Non-controlling Total
capital premium reserves earnings Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------ -------- -------- --------- --------- ----- --------------- -------
Balance at 31 December 2017 as originally
presented 87 1,249 6,098 (2,693) 4,741 43 4,784
Change in accounting policy(1) - - (8) 65 57 - 57
------------------------------------------ -------- -------- --------- --------- ----- --------------- -------
Restated total equity at 1 January
2018 87 1,249 6,090 (2,628) 4,798 43 4,841
Profit for the period - - - 471 471 14 485
Total other comprehensive income
for the period - - 155 769 924 2 926
Share-based payments (inclusive
of tax) - - - 32 32 - 32
Net sale of own shares - - - 1 1 - 1
Ordinary share dividends - - - (415) (415) - (415)
At 30 June 2018 87 1,249 6,245 (1,770) 5,811 59 5,870
------------------------------------------ -------- -------- --------- --------- ----- --------------- -------
Balance at 1 January 2017 as originally
presented 87 1,249 6,685 (4,583) 3,438 26 3,464
Change in accounting policy(1) - - - 92 92 - 92
------------------------------------------ -------- -------- --------- --------- ----- --------------- -------
Restated total equity at 1 January
2017 87 1,249 6,685 (4,491) 3,530 26 3,556
Profit for the period - - - 569 569 4 573
Total other comprehensive income
for the period - - (297) 138 (159) (2) (161)
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 6,388 (4,165) 3,559 20 3,579
------------------------------------------ -------- -------- --------- --------- ----- --------------- -------
1. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
Condensed consolidated balance sheet (unaudited)
30 June
31 December
2018 2017
(restated(1)
)
Notes GBPm GBPm
--------------------------------------------------- ----- --------- -------------
Non-current assets
Intangible assets 10,523 10,378
Property, plant and equipment 2,217 2,230
Investment property 105 101
Equity accounted investments 382 324
Other investments 6 6
Other receivables 434 387
Retirement benefit surpluses 5 421 302
Other financial assets 170 226
Deferred tax assets 518 684
--------------------------------------------------- ----- --------- -------------
14,776 14,638
--------------------------------------------------- ----- --------- -------------
Current assets
Inventories 799 733
Trade, other and contract receivables 4,726 4,244
Current tax 67 20
Other financial assets 160 89
Cash and cash equivalents 2,115 3,271
Assets held for sale 51 26
--------------------------------------------------- ----- --------- -------------
7,918 8,383
--------------------------------------------------- ----- --------- -------------
Total assets 22,694 23,021
--------------------------------------------------- ----- --------- -------------
Non-current liabilities
Loans (3,401) (4,069)
Other payables (1,249) (1,723)
Retirement benefit obligations 5 (3,385) (4,222)
Other financial liabilities (117) (133)
Deferred tax liabilities (2) (4)
Provisions (462) (435)
(8,616) (10,586)
--------------------------------------------------- ----- --------- -------------
Current liabilities
Loans and overdrafts (758) (14)
Trade and other payables (6,777) (6,755)
Other financial liabilities (74) (104)
Current tax (282) (305)
Provisions (317) (400)
Liabilities held for sale - (16)
(8,208) (7,594)
--------------------------------------------------- ----- --------- -------------
Total liabilities (16,824) (18,180)
--------------------------------------------------- ----- --------- -------------
Net assets 5,870 4,841
--------------------------------------------------- ----- --------- -------------
Capital and reserves
Issued share capital 87 87
Share premium 1,249 1,249
Other reserves 6,245 6,090
Retained earnings - deficit (1,770) (2,628)
--------------------------------------------------- ----- --------- -------------
Total equity attributable to equity holders of BAE
Systems plc 5,811 4,798
Non-controlling interests 59 43
--------------------------------------------------- ----- --------- -------------
Total equity 5,870 4,841
--------------------------------------------------- ----- --------- -------------
1. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
Condensed consolidated cash flow statement (unaudited)
Six months
Six months ended
ended 30 June
30 June 2017
2018 (restated(1)
)
Notes GBPm GBPm
----------------------------------------------------------- ----- ---------- -------------
Profit for the period 485 573
Taxation expense 86 161
Research and development expenditure credits (10) (14)
Share of results of equity accounted investments (38) (9)
Net finance costs 221 151
Depreciation, amortisation and impairment 188 167
Profit on disposal of property, plant and equipment,
and investment property (1) (1)
Loss in respect of held for sale assets and disposal
of businesses 5 4
Cost of equity-settled employee share schemes 28 29
Movements in provisions (69) 58
Decrease in liabilities for retirement benefit obligations (123) (76)
Increase in working capital:
Inventories (56) (74)
Trade, other and contract receivables (462) (427)
Trade and other payables (520) (95)
Taxation paid (131) (106)
----------------------------------------------------------- ----- ---------- -------------
Net cash flow from operating activities (397) 341
----------------------------------------------------------- ----- ---------- -------------
Dividends received from equity accounted investments 16 32
Interest received 11 6
Purchases of property, plant and equipment, and investment
property (140) (166)
Purchases of intangible assets (49) (36)
Proceeds from sale of property, plant and equipment,
and investment property 4 3
Purchase of subsidiary undertakings - (3)
Cash flow in respect of held for sale assets and
business disposals (3) (2)
Purchase of equity accounted investment (2) -
Equity accounted investment funding (1) (3)
Net cash flow from investing activities (164) (169)
----------------------------------------------------------- ----- ---------- -------------
Interest paid (107) (107)
Net sale/(purchase) of own shares 1 (1)
Equity dividends paid 6 (415) (404)
Dividends paid to non-controlling interests - (8)
Cash flow from matured derivative financial instruments (60) (43)
Cash flow from cash collateral (8) (5)
Cash flow from repayment of loans (7) -
Net cash flow from financing activities (596) (568)
----------------------------------------------------------- ----- ---------- -------------
Net decrease in cash and cash equivalents (1,157) (396)
Cash and cash equivalents at 1 January 3,264 2,771
Effect of foreign exchange rate changes on cash and
cash equivalents 8 (19)
----------------------------------------------------------- ----- ---------- -------------
Cash and cash equivalents at end of period 2,115 2,356
----------------------------------------------------------- ----- ---------- -------------
Comprising:
Cash and cash equivalents 2,115 2,360
Overdrafts - (4)
----------------------------------------------------------- ----- ---------- -------------
Cash and cash equivalents at end of period 2,115 2,356
----------------------------------------------------------- ----- ---------- -------------
1. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
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 2017. The
comparative figures for the year ended 31 December 2017 are not the
Group's statutory accounts for that financial year. Those financial
statements have been reported upon by the Group's then-auditor and
delivered to the registrar of companies. The report of the auditor
was unqualified, did not include a reference to any matters to
which the auditor drew attention by way of emphasis without
qualifying their report and did not contain statements under
Section 498 (2) or (3) of the Companies Act 2006. The financial
statements for 2017 were reported upon by KPMG LLP. Following the
Annual General Meeting on 10 May 2018, Deloitte LLP succeeded KPMG
LLP as the Company's auditor.
The accounting policies adopted in the preparation of these
condensed consolidated half-yearly financial statements to 30 June
2018 are consistent with the accounting policies applied by the
Group in its consolidated financial statements as at, and for the
year ended, 31 December 2017 as required by the Disclosure Guidance
and Transparency Rules of the UK's Financial Conduct Authority,
with the exception of the adoption of new and amended standards as
set out below.
With effect from 1 January 2018, the Group revised its reporting
segments to reflect the organisational changes announced in 2017.
The five principal reporting segments are Electronic Systems; Cyber
& Intelligence; Platforms & Services (US); Air; and
Maritime. These align with the strategic direction of the Group.
Financial information for 2017 has been re-presented to reflect
these new reporting segments.
New and amended standards adopted by the Group
A number of new or amended standards became applicable for the
current reporting period and the Group changed its accounting
policies and, where applicable, made retrospective adjustments as a
result of adopting:
- IFRS 9 Financial Instruments, and
- IFRS 15 Revenue from Contracts with Customers.
The impact of the adoption of these standards and the new
accounting policies is disclosed in note 10.
Following the adoption of IFRS 15 Revenue from Contracts with
Customers, the Group continues to recognise revenue and profit
recognition as one of its critical accounting policies, owing to
the complexity, judgement and estimation in its application and
impact on the financial statements. Note 10 provides more details
on the Group's application of IFRS 15 and its new accounting policy
for the new standard.
Impact of standards issued but not yet applied by the Group
IFRS 16 Leases is effective 1 January 2019, replacing IAS 17
Leases. Whilst lessor accounting is similar to IAS 17, lessee
accounting is significantly different. Under IFRS 16 the Group will
recognise within the balance sheet a right-of-use asset and a lease
liability for future lease payments in respect of all leases,
unless the underlying assets are of low value or the lease term is
12 months or less. Within the income statement, rental expense on
the impacted leases will be replaced with depreciation on the
right-of-use asset and interest expense on the lease liability. As
set out in note 32 of the BAE Systems Annual Report 2017, the Group
had operating lease commitments totalling GBP1.6bn at 31 December
2017 and therefore IFRS 16 will have a material impact on the
Group. The implications of the standard are currently under review
and the Group has not yet determined which transition option will
be applied.
2. Segmental analysis
Sales and revenue by reporting segment(1)
Deduct:
Share of sales Add:
by equity Sales to equity
Sales accounted investments accounted investments Revenue
----------------------- ----------------------- --------------------- -----------------------
Six Six months Six Six months Six Six Six months
months ended months ended months months ended
ended 30 June ended 30 June ended Six months ended 30 June
30 June 2017 30 June 2017 30 June ended 30 June 2017
2018 (restated(2) 2018 (restated(2) 2018 30 June 2018 (restated(2)
) ) 2017 )
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- --------- ------------ --------- ------------ -------- ----------- --------- ------------
Electronic
Systems 1,819 1,820 (42) (45) 42 45 1,819 1,820
Cyber &
Intelligence 815 917 - - - - 815 917
Platforms &
Services
(US) 1,382 1,505 (54) (33) - - 1,328 1,472
Air 3,305 3,720 (1,069) (930) 603 528 2,839 3,318
Maritime 1,447 1,488 (16) (17) 1 4 1,432 1,475
HQ 163 152 (138) (129) - - 25 23
-------------- --------- ------------ --------- ------------ -------- ----------- --------- ------------
8,931 9,602 (1,319) (1,154) 646 577 8,258 9,025
Intra-group
sales/revenue (113) (135) - - 16 25 (97) (110)
-------------- --------- ------------ --------- ------------ -------- ----------- --------- ------------
8,818 9,467 (1,319) (1,154) 662 602 8,161 8,915
-------------- --------- ------------ --------- ------------ -------- ----------- --------- ------------
Operating profit/(loss) by reporting segment(1)
Amortisation Financial
and impairment and taxation
of expense of
Underlying Non-recurring intangible equity accounted Operating
EBITA items assets investments profit/(loss)
-------------------- --------------- --------------- -------------------- ---------------------
Six Six
Six Six Six Six Six months Six months
months months months Six months Six months ended months ended
ended ended ended months ended months ended 30 ended 30
30 30 June 30 ended 30 ended 30 June 30 June
June 2017 June 30 June 30 June 2017 June 2017
2018 (restated(2) 2018 June 2018 June 2018 (restated(2) 2018 (restated(2)
) 2017 2017 ) )
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ------ ------------ ------ ------- ------ ------- ------ ------------ ------ -------------
Electronic
Systems 260 272 - - (8) (10) - - 252 262
Cyber &
Intelligence 48 38 - - (7) (15) - - 41 23
Platforms &
Services
(US) 56 114 (33) (4) (4) (5) 1 (1) 20 104
Air 459 478 - - (6) (4) (15) (15) 438 459
Maritime 93 110 - - (5) (4) - (1) 88 105
HQ (42) (45) - - (3) (3) (2) (20) (47) (68)
------------- ------ ------------ ------ ------- ------ ------- ------ ------------ ------ -------------
874 967 (33) (4) (33) (41) (16) (37) 792 885
------------- ------ ------------ ------ ------- ------ ------- ------ ------------
Net finance
costs (221) (151)
------------- ------ ------------ ------ ------- ------ ------- ------ ------------ ------ -------------
Profit before
taxation 571 734
Taxation
expense (86) (161)
------------- ------ ------------ ------ ------- ------ ------- ------ ------------ ------ -------------
Profit for
the period 485 573
------------- ------ ------------ ------ ------- ------ ------- ------ ------------ ------ -------------
1. Reporting segments have been re-presented to reflect the
organisational changes which took effect on 1 January 2018.
2. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
3. Net finance costs
Six months Six months
ended ended
30 June 30 June
2018 2017
GBPm GBPm
--------------------------------------------------------------- ---------- ----------
Net finance costs:
Group (221) (151)
Share of equity accounted investments (6) (26)
--------------------------------------------------------------- ---------- ----------
(227) (177)
--------------------------------------------------------------- ---------- ----------
Analysed as:
Underlying interest expense:
Group (101) (111)
Share of equity accounted investments - (18)
--------------------------------------------------------------- ---------- ----------
(101) (129)
Other:
Group:
Net interest expense on retirement benefit obligations (52) (84)
Fair value and foreign exchange adjustments on financial
instruments and investments (68) 44
Share of equity accounted investments:
Net interest expense on retirement benefit obligations (2) (3)
Fair value and foreign exchange adjustments on financial
instruments and investments (4) (5)
(227) (177)
--------------------------------------------------------------- ---------- ----------
4. Earnings per share
Six months ended
Six months ended 30 June 2017
30 June 2018 (restated(2) )
--------------------- ---------------------
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 471 14.8 14.7 569 17.9 17.8
Add back/(deduct):
Non-recurring items, post tax(1) 28 4
Amortisation and impairment of intangible
assets, post tax(1) 28 32
Net interest expense on retirement
benefit obligations, post tax(1) 44 67
Fair value and foreign exchange
adjustments on financial instruments
and investments, post tax(1) 60 (30)
Underlying earnings, post tax 631 19.8 19.7 642 20.2 20.1
--------------------------------------------- ---- ------ ------- ---- ------ -------
Millions Millions Millions Millions
-------------------------------------- -------- -------- -------- --------
Weighted average number of shares
used in calculating basic earnings
per share 3,190 3,190 3,179 3,179
Incremental shares in respect of
employee share schemes 13 16
--------------------------------------- -------- -------- -------- --------
Weighted average number of shares
used in calculating diluted earnings
per share 3,203 3,195
--------------------------------------- -------- -------- -------- --------
1. The tax impact, where applicable, is calculated using the
effective tax rate of 16.5% (2017 23%).
2. Prior year comparatives have been restated upon the Group's
adoption of IFRS 15 Revenue from Contracts with Customers. See note
10 for details regarding the restatement.
5. Retirement benefits
US and
UK other Total
GBPm GBPm GBPm
------------------------------------------------------------ --------- ------- ---------
Total net IAS 19 deficit at 1 January 2018 (3,680) (566) (4,246)
Actual return on assets excluding amounts included
in net interest expense (222) (227) (449)
Decrease in liabilities due to changes in assumptions
and experience 1,204 243 1,447
Contributions in excess of/(below) service cost 150 (10) 140
Past service cost - plan amendments (5) - (5)
Net interest expense (45) (11) (56)
Foreign exchange adjustments - (10) (10)
Movement in US healthcare schemes - 2 2
Total net IAS 19 deficit at 30 June 2018 (2,598) (579) (3,177)
Allocated to equity accounted investments 213 - 213
------------------------------------------------------------ --------- ------- ---------
Group's share of net IAS 19 deficit excluding Group's
share of amounts allocated to equity accounted investments
at 30 June 2018 (2,385) (579) (2,964)
------------------------------------------------------------ --------- ------- ---------
Represented by:
Retirement benefit surpluses 327 94 421
Retirement benefit obligations (2,712) (673) (3,385)
------------------------------------------------------------ --------- ------- ---------
(2,385) (579) (2,964)
------------------------------------------------------------ --------- ------- ---------
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
2018 2017 2018 2017
-----------------------------------------
Financial assumptions
Discount rate - past service (%) 2.8 2.6 4.2 3.7
Discount rate - future service (%) 2.9 2.7 4.2 3.7
Inflation (%) 3.0 3.1 n/a n/a
Rate of increase in salaries (%) 3.0 3.1 n/a n/a
Rate of increase in deferred pensions 2.0/3.0 2.1/3.1 n/a n/a
(%)
Rate of increase in pensions in payment 1.6-3.6 1.6-3.7 n/a n/a
(%)
Demographic assumptions
Life expectancy of a male currently aged
65 (years) 86-88 86-88 87 87
Life expectancy of a female currently
aged 65 (years) 88-90 88-90 89 89
Life expectancy of a male currently aged
45 (years) 88-90 88-90 87 87
Life expectancy of a female currently
aged 45 (years) 90-92 90-92 89 89
----------------------------------------- ------- ----------- ------- -----------
The Group has updated the UK demographic assumptions to use
Continuous Mortality Investigation (CMI) 2017 data, reflecting the
latest available projections published by the actuarial
profession.
Sensitivity analysis
The sensitivity information has been derived using scenario
analysis from the actuarial assumptions as at 30 June 2018 and
keeping all other assumptions the same.
Financial assumptions
The estimated impact of changes in the discount rate and
inflation assumptions on the defined benefit pension obligation,
together with the estimated impact on scheme assets, is shown in
the table below. The estimated impact on scheme assets takes into
account the Group's risk management activities in respect of
interest rate and inflation risk. The sensitivity analysis on the
defined benefit obligation is measured on an IAS 19 accounting
basis and, therefore, does not reflect the natural hedging in the
discount rate used for funding valuation purposes.
(Increase)/ Increase/
decrease (decrease)
in pension in scheme
obligation assets
GBPbn GBPbn
--------------------------------- ----------- -----------
Discount rate:
0.1 percentage point increase 0.5 (0.2)
0.1 percentage point decrease (0.5) 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 (1.3)
0.5 percentage point decrease 1.4
1.0 percentage point increase (2.8)
1.0 percentage point decrease 2.6
--------------------------------- -----------
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 (1.1)
One-year decrease 1.1
--------------------- ------------
6. Equity dividends
Six months Six months
ended ended
30 June 30 June
2018 2017
GBPm GBPm
------------------------------------------------------ ---------- ----------
Prior year final 13p dividend per ordinary share paid
in the period (2017 12.7p) 415 404
------------------------------------------------------ ---------- ----------
The directors have declared an interim dividend of 9.0p per
ordinary share (2017 8.8p), totalling GBP287m (2017 GBP280m). The
dividend will be paid on 30 November 2018 to shareholders
registered on 19 October 2018. The ex-dividend date is 18 October
2018.
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 for
receipt no later than 9 November 2018.
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; and
- 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.
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 2018 2017
----------------- -----------------
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 financial assets 170 170 226 226
Other financial liabilities (117) (117) (133) (133)
Current
Other financial assets 160 160 89 89
Other financial liabilities (74) (74) (104) (104)
---------------------------------------------- -------- ------- -------- -------
Financial instruments not measured at fair
value:
Non-current
Loans(1) (3,401) (3,617) (4,069) (4,478)
Current
Loans and overdrafts (758) (780) (14) (14)
---------------------------------------------- -------- ------- -------- -------
1. 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, which has been calculated by discounting
the future cash flows and translating at the appropriate balance
sheet rate.
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. The
fair value of loans presented in the table above is derived from
market prices.
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 193 of the
Annual Report 2017.
Six months Six months
ended ended
30 June 30 June
2018 2017
GBPm GBPm
-------------------------------------------- ---------- ----------
Sales to equity accounted investments 662 602
Purchases from equity accounted investments 172 173
-------------------------------------------- ---------- ----------
30 June 31 December
2018 2017
GBPm GBPm
--------------------------------------------- ------- -----------
Amounts owed by equity accounted investments 75 86
Amounts owed to equity accounted investments 907 927
--------------------------------------------- ------- -----------
10. Change in accounting policies
This note explains the impact of the adoption of IFRS 9
Financial Instruments, and IFRS 15 Revenue from Contracts with
Customers, on the Group's financial statements and also discloses
the new accounting policies that have been applied from 1 January
2018, where they are different from those applied in earlier
periods.
Impact on financial statements
As a result of changes in the Group's accounting policies, prior
year financial statements have been restated for the adoption of
IFRS 15 Revenue from Contracts with Customers. As explained below,
IFRS 9 was adopted without restating comparative information.
The following tables show the adjustments recognised for each
individual line item. Line items that are not affected by the
changes have not been included. As a result, the sub-totals and
totals disclosed cannot be recalculated from the numbers provided.
The adjustments are explained in more detail by standard below.
Consolidated balance sheet (extract) Impact Restated
of IFRS 31 December
15 2017
As previously
reported
31 December GBPm
2017
GBPm GBPm
-------------------------------------- -------- ------- --- ------------- -------- ------------
Non-current assets
Equity accounted investments 384 (60) 324
Deferred tax assets 724 (40) 684
-------------------------------------------------------------- ------------- -------- ------------
14,738 (100) 14,638
-------- -------------------------------------------------- ------------- -------- ------------
Current assets
Inventories 723 10 733
Trade and other receivables including
amounts due from customers for contract
work 3,586 (3,586) -
Trade, other and contract receivables - 4,244 4,244
7,715 668 8,383
-------- -------------------------------------------------- ------------- -------- ------------
Total assets 22,453 568 23,021
-------------------------------------------------------------- ------------- -------- ------------
Non-current liabilities
Trade and other payables (1,722) (1) (1,723)
Provisions (413) (22) (435)
-------------------------------------------------------------- ------------- -------- ------------
(10,563) (23) (10,586)
-------- -------------------------------------------------- ------------- -------- ------------
Current liabilities
Trade and other payables (6,322) (433) (6,755)
Provisions (345) (55) (400)
-------------------------------------------------------------- ------------- -------- ------------
(7,106) (488) (7,594)
-------- -------------------------------------------------- ------------- -------- ------------
Total liabilities (17,669) (511) (18,180)
-------------------------------------------------------------- ------------- -------- ------------
Net assets 4,784 57 4,841
-------------------------------------------------------------- ------------- -------- ------------
Other reserves 6,098 (8) 6,090
Retained earnings (2,693) 65 (2,628)
Total equity attributable to equity
holders of BAE Systems plc 4,741 57 4,798
---------------------------------------- ------- --------- ------ -------
Non-controlling interests 43 - 43
Total equity 4,784 57 4,841
-------------------------------------------------- --------- ------ -------
Income statement (extract) - six months to 30 June 2017 Impact Restated
of IFRS 30 June
As previously 15 2017
reported
30 June
2017 GBPm
GBPm GBPm
-------------------------------------------------------- ------------- ----------- --------
Sales 9,565 (98) 9,467
Deduct Share of sales of equity accounted investments (1,155) 1 (1,154)
Add Sales to equity accounted investments 602 - 602
------------- ----------- --------
Revenue 9,012 (97) 8,915
Operating costs (8,213) 113 (8,100)
Other income 61 - 61
-------------------------------------------------------- ------------- ----------- --------
Group operating profit 860 16 876
Share of results of equity accounted investments 5 4 9
-------------------------------------------------------- ------------- ----------- --------
Underlying EBITA 945 22 967
Non-recurring items (4) - (4)
------------- ----------- --------
EBITA 941 22 963
Amortisation of intangible assets (41) - (41)
Financial expense of equity accounted investments (26) - (26)
Taxation expense of equity accounted investments (9) (2) (11)
------------- ----------- --------
Operating profit 865 20 885
Financial income 261 - 261
Financial expense (412) - (412)
------------- ----------- --------
Net finance costs (151) - (151)
-------------------------------------------------------- ------------- ----------- --------
Profit before taxation 714 20 734
Taxation expense (155) (6) (161)
-------------------------------------------------------- ------------- ----------- --------
Profit for the period 559 14 573
-------------------------------------------------------- ------------- ----------- --------
Attributable to:
Equity shareholders 555 14 569
Non-controlling interests 4 - 4
-------------------------------------------------------- ------------- ----------- --------
559 14 573
-------------------------------------------------------- ------------- ----------- --------
Earnings per share
Basic earnings per share 17.5p 0.4p 17.9p
Diluted earnings per share 17.4p 0.4p 17.8p
-------------------------------------------------------- ------------- ----------- --------
Underlying EBITA 945 22 967
Underlying finance costs (129) - (129)
Underlying tax (184) (8) (192)
Non-controlling interests (4) - (4)
------------------------------- ----- ---- -----
Underlying earnings 628 14 642
------------------------------- ----- ---- -----
Underlying earnings per share 19.8p 0.4p 20.2p
------------------------------- ----- ---- -----
Statement of comprehensive income (extract) - six months Impact Restated
to 30 June 2017 As previously of IFRS 30 June
reported 15 2017
30 June
2017 GBPm
GBPm GBPm
--------------------------------------------------------------- ------------- -------- --------
Items that may be reclassified to the income statement
Subsidiaries:
Currency translation on foreign currency net investments (341) (5) (346)
Amounts credited to hedging reserve 63 - 63
Tax on items that may be reclassified to the income statement (11) - (11)
Equity accounted investments (net of tax) (4) (1) (5)
Other comprehensive income for the period (net of tax) (155) (6) (161)
--------------------------------------------------------------- ------------- -------- --------
Total comprehensive income for the period 404 8 412
--------------------------------------------------------------- ------------- -------- --------
Attributable to:
Equity shareholders 402 8 410
Non-controlling interests 2 - 2
--------------------------------------------------------------- ------------- -------- --------
404 8 412
--------------------------------------------------------------- ------------- -------- --------
IFRS 9 Financial instruments - impact of adoption
IFRS 9 replaces the provisions of IAS 39 that relate to
recognition, classification and measurement of financial assets and
financial liabilities, de-recognition of financial instruments,
impairment of financial assets and hedge accounting. The adoption
of IFRS 9 Financial Instruments from 1 January 2018 resulted in
changes in accounting policies however no adjustments were required
to the amounts recognised in the financial statements in previous
periods. The new accounting policies are set out below.
Classification and measurement
On 1 January 2018, the Group has classified its financial
instruments in the appropriate IFRS 9 categories.
The derivative financial instruments designated as cash flow
hedges and fair values hedges under IAS 39 at 31 December 2017
continue to qualify for hedge accounting under IFRS 9 at 1 January
2018 and are therefore treated as continuing hedges.
Derivative financial instruments that did not qualify for hedge
accounting under IAS 39 were classified in the "fair value through
profit or loss" category and gains and losses were recognised in
the income statement in the period. There is no change to the
classification of these financial instruments under IFRS 9 as they
fail the contractual cash flow characteristics test in IFRS 9
(4.1.2(b)) and (4.1.2A(b)).
Financial assets previously classified in the "loans and
receivables" category and measured at amortised cost under IAS 39
(being trade and other receivables and amounts owed by equity
accounted investments) continue to be classified in the "amortised
cost" category under IFRS 9.
Impairment of financial assets
The Group has three types of financial assets that are subject
to IFRS 9's new expected credit loss model:
- trade and other receivables;
- contract receivables; and
- amounts owed by equity accounted investments.
Trade and other receivables, and contract receivables, do not
contain a significant financing element and therefore expected
credit losses are measured using the simplified approach permitted
by IFRS 9, which requires expected lifetime losses to be recognised
from the initial recognition of the receivables.
The Group has assessed credit risk in relation to
defence-related sales to government customers or sub-contractors to
governments and believes it be extremely low, therefore no expected
credit loss provision is required for these trade and other
receivables, or contract receivables. The Group considers expected
credit losses for non-government commercial customers, however this
risk is not expected to be material to the financial
statements.
Amounts due from equity accounted investments primarily relate
to trading balances with no significant financing element, in
accordance with IFRS 15. The simplified approach is therefore used
for these balances.
While cash and cash equivalents are also subject to the
impairment requirements of IFRS 9, the identified impairment loss
was immaterial.
There was no IFRS 9 impact on retained earnings at 1 January
2018.
IFRS 9 Financial Instruments - accounting policies applied since
1 January 2018
Investments and other financial assets
Classification
From 1 January 2018, the Group classifies its financial assets
in the following measurement categories:
- those to be measured subsequently at fair value (either
through other comprehensive income, or through profit or loss);
and
- those to be measured at amortised cost.
Measurement
At initial recognition, the Group measures a financial asset at
its fair value plus, in the case of a financial asset not measured
at fair value through profit or loss, transaction costs that are
directly attributable to the acquisition of the financial
asset.
The Group subsequently measures derivative financial instruments
at fair value. Gains and losses on derivative financial instruments
that do not qualify for hedge accounting are recognised in the
income statement for the period. Where a derivative financial
instrument is designated as a cash flow hedge, the effective
portion of any change in the fair value of the instrument is
recognised in other comprehensive income and presented in the
hedging reserve in equity. Amounts recognised in equity are
reclassified from reserves into the cost of the underlying
transaction and recognised in the income statement when the
underlying transaction affects profit or loss. The ineffective
portion of any change in the fair value of the instrument is
recognised in profit or loss immediately. Where a derivative
financial instrument is designated as a fair value hedge, changes
in the fair value of the underlying asset or liability attributable
to the hedge risk, and gains and losses on the derivative financial
instrument, are recognised in the income statement for the
period.
The Group subsequently measures trade and other receivables,
contract receivables and amounts due from equity accounted
investments at amortised cost.
The Group subsequently measures all equity investments at fair
value and has elected to present fair value gains and losses on
equity investments in other comprehensive income. There is
therefore no subsequent reclassification of fair value gains and
losses to profit or loss following a disposal of the
investment.
Impairment
For trade and other receivables, contract receivables and
amounts due from equity accounted investments, the Group applies
the simplified approach permitted by IFRS 9, which requires
expected lifetime losses to be recognised from initial recognition
of the receivables.
Derivatives and hedging
Fair value through profit or loss
Gains and losses on derivative financial instruments that do not
qualify for hedge accounting are recognised in the income statement
for the period.
Cash flow hedges
Where a derivative financial instrument is designated as a hedge
of cash flows relating to a highly probable forecast transaction
(income or expense), the effective portion of any change in the
fair value of the instrument is recognised in other comprehensive
income and presented in the hedging reserve in equity. The
ineffective portion of any change in the fair value of the
instrument is recognised in the income statement immediately.
Fair value hedges
Where a derivative financial instrument is designated as a fair
value hedge, changes in the fair value of the underlying asset or
liability attributable to the hedged risk, and gains and losses on
the derivative instrument, are recognised in the income statement
for the period.
Financial liabilities
There are no changes to the accounting policies in respect of
loans, overdrafts, and trade and other payables, which continue to
be measured at amortised cost, except where fair value hedge
accounting is applied.
IFRS 15 Revenue from Contracts with Customers - impact of
adoption
As a result of the adoption of IFRS 15 Revenue from Contracts
with Customers from 1 January 2018, the following adjustments were
made to restate the amounts recognised in the balance sheet at 31
December 2017:
Reclassification Remeasurement IFRS 15
As reported restated
31 December 31 December
2017 GBPm GBPm 2017
GBPm GBPm
----------------------------------------- ------------ ---------------- ------------- ------------
Equity accounted investments 384 - (60) 324
Deferred tax assets 724 - (40) 684
Inventories 723 10 - 733
Trade and other receivables including
amounts due from customers for contract
work 3,586 (3,586) - -
Trade, other and contract receivables - 4,055 189 4,244
Non-current other payables (1,722) 22 (23) (1,723)
Current trade and other payables (6,322) (424) (9) (6,755)
Non-current provisions (413) (22) - (435)
Current provisions (345) (55) - (400)
----------------------------------------- ------------ ---------------- ------------- ------------
At 30 June 2018, trade, other and contract receivables includes
contract receivables of GBP2,137m (31 December 2017 GBP1,420m).
At 30 June 2018, trade and other payables includes contract
liabilities of GBP3,068m (31 December 2017 GBP3,551m).
The impact of adoption on the Group's retained earnings at 31
December 2017 and 31 December 2016 is as follows:
31 December 31 December
2017 2016
GBPm GBPm
--------------------------------------------------------- ----------- -----------
Retained earnings - as previously reported (2,693) (4,583)
--------------------------------------------------------- ----------- -----------
Recognition of revenue for over time contracts based
on costs incurred and including attributable margin 201 259
Equity accounted investments - separation of development
and production margin, net of tax (59) (48)
Licence revenue - deferral of revenue over the licence
term (32) (39)
Deferred tax (45) (80)
----------- -----------
Adjustment to retained earnings from adoption of IFRS
15 65 92
----------- -----------
Retained earnings - IFRS 15 (restated) (2,628) (4,491)
--------------------------------------------------------- ----------- -----------
IFRS 15 Revenue from Contracts with Customers - accounting
policies applied since 1 January 2018
The Group has adopted IFRS 15 fully retrospectively in
accordance with paragraph C3(a). Comparatives for the half year
ended 30 June 2017 and the year ended 31 December 2017 have been
restated. The following expedients have been or will be used in
accordance with paragraph C5:
- revenue in respect of completed contracts that begin and end
in the same accounting period has not been restated;
- revenue in respect of completed contracts with variable
consideration reflects the transaction price at the date the
contracts were completed; and
- in the financial statements for the year ending 31 December
2018, the comparative information for the year ending 31 December
2017 will not disclose the amount of the transaction price
allocated to the remaining performance obligations or an
explanation of when the Group expects to recognise that amount as
revenue.
Following the adoption of IFRS 15, the Group's accounting policy
in respect of revenue is as follows:
Revenue represents income derived from contracts for the
provision of goods and services by the Company and its subsidiary
undertakings to customers in exchange for consideration in the
ordinary course of the Group's activities.
Performance obligations
Upon approval by the parties to a contract, the contract is
assessed to identify each promise to transfer either a distinct
good or service or a series of distinct goods or services that are
substantially the same and have the same pattern of transfer to the
customer. Goods and services are distinct and accounted for as
separate performance obligations in the contract if the customer
can benefit from them either on their own or together with other
resources that are readily available to the customer and they are
separately identifiable in the contract.
Transaction price
At the start of the contract, the total transaction price is
estimated as the amount of consideration to which the Group expects
to be entitled in exchange for transferring the promised goods and
services to the customer, excluding sales taxes. Variable
consideration, such as price escalation, is included based on the
expected value or most likely amount only to the extent that it is
highly probable that there will not be a reversal in the amount of
cumulative revenue recognised. The transaction price does not
include estimates of consideration resulting from contract
modifications, such as change orders, until they have been approved
by the parties to the contract. The total transaction price is
allocated to the performance obligations identified in the contract
in proportion to their relative stand-alone selling prices. Given
the bespoke nature of many of the Group's products and services,
which are designed and/or manufactured under contract to the
customer's individual specifications, there are typically no
observable stand-alone selling prices. Instead, stand-alone selling
prices are typically estimated based on expected costs plus
contract margin consistent with the Group's pricing principles.
Revenue and profit recognition
Revenue is recognised as performance obligations are satisfied
as control of the goods and services is transferred to the
customer.
For each performance obligation within a contract, the Group
determines whether it is satisfied over time or at a point in time.
Performance obligations are satisfied over time if one of the
following criteria is satisfied:
- the customer simultaneously receives and consumes the benefits
provided by the Group's performance as it performs;
- the Group's performance creates or enhances an asset that the
customer controls as the asset is created or enhanced; or
- the Group's performance does not create an asset with an
alternative use to the Group and it has an enforceable right to
payment for performance completed to date.
The Group has determined that most of its contracts satisfy the
over time criteria, either because the customer simultaneously
receives and consumes the benefits provided by the Group's
performance as it performs (typically services or support
contracts) or the Group's performance does not create an asset with
an alternative use to the Group and it has an enforceable right to
payment for performance completed to date (typically development or
production contracts).
For each performance obligation to be recognised over time, the
Group recognises revenue using an input method, based on costs
incurred in the period. Revenue and attributable margin are
calculated by reference to reliable estimates of transaction price
and total expected costs, after making suitable allowances for
technical and other risks. Revenue and associated margin are
therefore recognised progressively as costs are incurred, and as
risks have been mitigated or retired. The Group has determined that
this method faithfully depicts the Group's performance in
transferring control of the goods and services to the customer.
If the over time criteria for revenue recognition are not met,
revenue is recognised at the point in time that control is
transferred to the customer, which is usually when legal title
passes to the customer and the business has the right to payment,
for example, on delivery.
When it is probable that total contract costs will exceed total
contract revenue, the expected loss is recognised immediately as an
expense.
Software licences
The Group sells software licences either separately or together
with other goods and services, including computer hardware and
implementation, hosting and support. Revenue recognition in respect
of software licences sold as part of a bundle of goods and services
is considered separately when the licence is determined to be a
separate performance obligation. Software licences either represent
a right to access the Group's intellectual property as it exists
throughout the licence period or a right to use the Group's
intellectual property as it exists at the point in time at which
the licence is granted. Revenue in respect of right to access
licences is recognised over the licence term or, in relation to
perpetual licences, over the related customer relationship and
revenue in respect of right to use licences is recognised upfront
on delivery to the customer. A software licence is considered to be
a right to access the Group's intellectual property as it exists
throughout the licence period if all of the following criteria are
satisfied:
- the contract requires, or the customer reasonably expects,
that the Group will undertake activities that significantly affect
the intellectual property; and
- the licence directly exposes the customer to the effects of those activities; and
- those activities do not result in the transfer of a good or service to the customer.
Contract modifications
The Group's contracts are often amended for changes in
customers' requirements and specifications. A contract modification
exists when the parties to the contract approve a modification that
either changes existing or creates new enforceable rights and
obligations. The effect of a contract modification on the
transaction price and the Group's measure of progress towards the
satisfaction of the performance obligation to which it relates is
recognised in one of the following ways:
1. Prospectively as an additional, separate contract;
2. Prospectively as a termination of the existing contract and
creation of a new contract; or
3. As part of the original contract using a cumulative catch
up.
The majority of the Group's contract modifications are treated
under either 1 (for example, the requirement for additional
distinct goods or services) or 3 (for example, a change in the
specification of the distinct goods or services for a partially
completed contract), although the facts and circumstances of any
contract modification are considered individually as the types of
modifications will vary contract-by-contract and may result in
different accounting outcomes.
Costs to obtain a contract
The Group expenses pre-contract bidding costs which are incurred
regardless of whether a contract is awarded. The Group does not
typically incur costs to obtain contracts that it would not have
incurred had the contracts not been awarded, such as sales
commission.
Costs to fulfil a contract
Contract fulfilment costs in respect of over time contracts are
expensed as incurred. Contract fulfilment costs in respect of point
in time contracts are accounted for under IAS 2 Inventories.
Inventories
Inventories includes raw materials, work-in-progress and
finished goods recognised in accordance with IAS 2 in respect of
contracts with customers which have been determined to fulfil the
criteria for point in time revenue recognition under IFRS 15. It
also includes inventories in relation to which the Group does not
have a contract. This is often because fulfilment costs have been
incurred in expectation of a contract award. The Group does not
typically build inventory to stock. Inventories are stated at the
lower of cost, including all relevant overhead expenditure, and net
realisable value.
Contract receivable
The contract receivable represents amounts for which the Group
has an unconditional right to consideration in respect of unbilled
revenue recognised at the balance sheet date and comprises costs
incurred plus attributable margin.
Contract liability
The contract liability represents the obligation to transfer
goods or services to a customer for which consideration has been
received, or consideration is due, from the customer.
11. Shareholder information
The Annual General Meeting of BAE Systems plc will be held on 9
May 2019.
Registered office
BAE Systems plc
6 Carlton Gardens
London
SW1Y 5AD
United Kingdom
Registered in England and Wales, No 1470151
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 news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR UAURRWNABOUR
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