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BAE SYSTEMS PLC (BA.)

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Wednesday 27 March, 2019

BAE SYSTEMS PLC

Annual Financial Report

RNS Number : 1578U
BAE SYSTEMS PLC
27 March 2019
 

BAE Systems plc
Annual Report 2018

BAE Systems plc has today published its Annual Report and Accounts for the year ended 31 December 2018 ('Annual Report 2018'). The full document can be viewed on the Company's website at:
www.baesystems.com/investors

Copies of the Annual Report 2018 will be posted to those shareholders who have requested to receive communications from the Company in printed form on 28 March 2019.

In compliance with Section 9.6.1 of the Listing Rules, a copy of the Annual Report 2018 has also been submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM

This announcement contains regulated information issued in accordance with Section 6.3 of the Financial Services Authority's Disclosure and Transparency Rules and accordingly contains certain sections of the Annual Report 2018 in unedited full text. Page and chart references within the text of this announcement are references to pages and charts in the Annual Report 2018 that can be viewed as detailed above.

The financial information for the year ended 31 December 2018 contained in this announcement was approved by the Board on 20 February 2019. This announcement does not constitute statutory accounts of the Company within the meaning of Section 435 of the Companies Act 2006, but is derived from those accounts.

Statutory accounts for the year ended 31 December 2017 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2018 will be delivered to the Registrar of Companies in due course.

The auditor has reported on those accounts. Its reports were not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying its report, and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

The Annual Report 2018 contains the following responsibility statement:

Responsibility statement of the directors in respect of the Annual Report and financial statements

Each of the directors listed below confirms that to the best of their knowledge:

·    the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company, and the undertakings included in the consolidation taken as a whole; and

·    the Strategic report and Directors' report, taken together, include a fair review of the development and performance of the business, and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

In addition, each of the directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Sir Roger Carr

Chairman

Charles Woodburn

Chief Executive

Jerry DeMuro

President and Chief Executive Officer of BAE Systems, Inc.

Peter Lynas

Group Finance Director

Revathi Advaithi

Non-executive director

Elizabeth Corley

Non-executive director

Harriet Green

Non-executive director

Chris Grigg

Non-executive director

Paula Rosput Reynolds

Non-executive director

Nick Rose

Non-executive director

Ian Tyler

Non-executive director

On behalf of the Board

Sir Roger Carr

Chairman
20 February 2019

Chief Executive's review

"The Group made good progress in strengthening the outlook and geographic base of the business, with a number of significant contract wins, leading to a record high defence order backlog."

Charles Woodburn Chief Executive

Introduction

2018 was both a year of geopolitical turbulence and a transition year in terms of earnings for the Group. Production on a number of programmes began rampingup especially in our Electronic Systems, US Combat Vehicles and Submarines businesses whilst Typhoon and Hawk production stepped down, and the Aircraft Carrier build programme moved towards completion. The order backlog grew by 25% to a record high. Key business wins were secured globally: for example on the Amphibious Combat Vehicle for the US Marine Corps; in Australia for the design and build of nine ships for the Future Frigate programme; in Qatar for the provision of 24 Typhoon and nine Hawk aircraft; and in Canada where the Type 26 design was selected for the Canadian Surface Combatant programme. These wins further strengthened the outlook and the geographic base of the Group.

Governments in our key markets continue to prioritise defence and security, and there is a growing demand for our capabilities, products and services. BAE Systems is a diverse and resilient company, pursuing the right strategy for long-term performance. We have a strong order backlog giving multi-year visibility, a broad portfolio with long-term positions on key programmes with strong customer relationships, and a track record of successful partnerships in international markets to develop local industry, employment and skills.

Within the core strategy, execution on the key strategic objectives of operational excellence, competitiveness and technological innovation is vital for the successful delivery of the order backlog to deliver future growth and in evolving our business to become a stronger, smarter and sharper organisation.

Operational excellence

Raising the bar operationally to improve delivery of the record defence order book remains the priority for the Group, in order to drive growth, strengthen customer relationships and win new and repeat work in the future. 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 were 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 was appointed to lead that business with a clear focus on programme schedule and cost performance. In Platforms & Services (US), the new leadership team is maintaining a keen focus on programme execution as investments are made in operational processes and automation to meet the ramp-to-rate challenges in US Combat Vehicles and position the business for successful programme delivery during its upcoming growth phase.

Competitiveness

The Group continues to take the necessary steps to be competitive. Our customers demand value for money and it is important that we can demonstrate exactly that. The new organisational structure announced in 2017 became effective in 2018. Within procurement, global and national category managers are now in place and efficiencies are being delivered through supply chain rationalisation and enhanced data analytics. Increasing collaboration across the Group, industry partners and academia is becoming more important in delivering competitive offerings. The Group structure and functional councils are in place to ensure this remains a key focus area and we will be relentless in our pursuit of competitiveness and efficiency.

Technological innovation

We have a long heritage of developing and integrating cutting-edge technologies to create complex systems that give our customers a capability advantage. The accelerating pace of technological change is a disruptive force and a key driver of competitive advantage and, increasingly, a determinant for our customers in awarding new business. Coordinated through the Chief Technology Officer, 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. In 2018, technology plans were established that supported the sector strategies. The increase in spend 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.

2018 performance

US

On 28 September, the fiscal year 2019 Defense Appropriations bill was enacted. This is the first time since 2008 that the Department of Defense had funding in place by the 1 October start of the fiscal year, and provided near-term clarity for the industry and demonstrated strong bi-partisan support for defence funding under the two-year agreement passed in early 2018.

The enacted Defense Appropriations bill maintains support for our medium-term planning assumptions and positive momentum for military readiness and modernisation programmes. Our US-based portfolio remains well aligned with customer priorities and growth areas with support for many key BAE Systems programmes, including combat vehicles, F-35 Lightning II, electronic warfare programmes, and current and future precision-weapons systems.

Our US electronics business delivered a stand-out operational performance in 2018 especially in our core franchise positions in the high-technology areas of electronic warfare, precision-guided munitions, intelligence, surveillance and reconnaissance, and electro-optics. The business closed with a record order backlog with the portfolio well aligned with the US National Defense Strategy. We continue to leverage these defence electronics capabilities for international programmes.

Platforms and Services (US) worked to address a number of operational challenges in the year, preparing for significant production rate increases in the US Combat Vehicles business. To help position the business to deliver during its upcoming growth phase, management changes have been made and process and automation improvements are being implemented.

Growth in the US-based Combat Vehicles business is underpinned by the ramp-up of production on the Armored Multi-Purpose Vehicle, M109A7 self-propelled howitzer and Bradley upgrade programmes, and the growth outlook was advanced in 2018 with our competitive win on the Amphibious Combat Vehicle 1.1 programme and our selection as one of two companies to proceed to the engineering and manufacturing development phase for the Mobile Protected Firepower programme.

Across our US shipyards, Platforms and Services (US) continues to be a leading supplier of ship repair and modernisation services to the US Navy. The ship repair and our naval gun franchises are well supported by the growth outlook in US Navy budget funding.

In our US-based Intelligence & Security business, whilst market conditions remain highly competitive, the business is maintaining a high level of bid activity, and secured a number of successful wins on recompeted contracts and new business awards in mission-critical areas. The business is delivering on contracts with good programme and financial performance in the period.

We are saddened to report that an accident on 11 June in a nitrocellulose drying facility in Radford resulted in one fatality and injuries to two employees. The health and safety of our employees has always been and continues to be our highest priority.

UK

Defence and security remain a priority for the UK government. This was reaffirmed in the Modernising Defence Programme and budget updates in the year. In July, the UK government launched its Combat Air Strategy, a significant milestone for our Air sector which 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.

During 2018 we remained focused on the execution of our long-term contracted positions in Air and Maritime.

In Air, the production ramp-up of rear fuselage assemblies for the F-35 Lightning II aircraft is progressing, and we are on track to achieve full rate production in 2020. The first nine UK F-35 Lightning II aircraft arrived at RAF Marham during the year and initial operational services were stood up. As the UK and global fleets grow, securing a long-term support position on F-35 Lightning II remains a key focus for the Air business.

Following delivery of the final four Typhoon aircraft to the Royal Air Force of Oman, Typhoon production is now focused on the remaining partner nations' deliveries, sub-assembly build on the Kuwait programme and the commencement of the Qatar programme, which sustains production into the next decade. Whilst a degree of geopolitical turbulence exists, the potential pipeline for Typhoon remains positive, with opportunities both with partner nations and through exports. Securing any additional orders would further extend production. Typhoon support continues to be a high-performing line of business for the Group and the Royal Air Force has declared Typhoon meets the Centurion standard, enabling the transition of capabilities from Tornado to Typhoon as the UK Tornado fleet comes out of service in 2019.

In Maritime, there remains pressure on the Royal Navy's near-term budgets. The Offshore Patrol Vessels programme was impacted in the year by quality issues which led to a provision being taken. Lessons learned are being applied to the other ships in build. The programme is due to complete in 2020. The Type 26 programme is on track for the first of class contractual date in the mid-2020s. Initial flight trials on HMS Queen Elizabeth off the coast of the US were completed successfully and HMS Prince of Wales is due to commence sea trials in the next year.

The strengthened management team in Barrow is delivering improved performance on both the Astute and Dreadnought submarine programmes. The major site development work at Barrow continues, and in November the new Submarines Academy for Skills and Knowledge was opened.

In January 2019, we entered into an agreement with Rheinmetall to create a joint UK-based military land vehicle design, manufacturing and support business subject to regulatory approvals. Joining forces with Rheinmetall will bring the strength of both businesses together to be more competitive in the UK and international markets whilst maintaining many jobs in the UK. Rheinmetall will purchase a 55% stake in the existing BAE Systems UK-based combat vehicles business for £28.6m, with BAE Systems retaining 45%.

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. There is relatively limited UK-EU trading and movement of EU nationals into and out of BAE Systems' UK businesses, and the resulting Brexit near-term impacts across the business are likely to be limited. BAE Systems will support the UK government in achieving its aim of ensuring that the UK maintains its key role in European security and defence post-Brexit, and to strengthen bilateral relationships with key partners in Europe.

International

In an uncertain global environment with complex threats, our defence and security capabilities remain highly relevant. 2018 was a strong year in widening our international reach and there are good prospects in existing and new international markets for our products and services in air, maritime, land and cyber.

The contract between BAE Systems and the Government of the State of Qatar for the supply of 24 Typhoon and nine Hawk aircraft to the Qatar Emiri Air Force, along with a bespoke support and training package, became effective in September, and production has commenced.

In Oman, following delivery of the final Typhoons we are delivering on a five-year availability service for their Typhoon and a support package for Hawk aircraft.

In Australia, the Group submitted bids on two significant production contracts. Whilst unsuccessful in the bid for the Land 400 Phase 2 combat vehicle programme, in June, the Commonwealth of Australia selected us as the preferred tenderer for the Hunter Class Frigate programme to deliver nine Future Frigates for the Royal Australian Navy.

The contract providing the framework for the design and build of the ships was signed in December. The build scope is to be negotiated in due course and production of the first ship is expected to commence in South Australia in the early 2020s. This Hunter Class programme is expected, over time, to double the size of the Australian business which is currently underpinned by long-term support and upgrade programmes.

Building on this success, in February 2019, the Canadian government together with Irving Shipbuilding selected Lockheed Martin Canada, using BAE Systems' Type 26 design, as subcontractor for the Canadian Surface Combatant programme.

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 2018 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. Agreement has been reached with the Saudi Arabian government for BAE Systems to continue to provide Typhoon support services to the Royal Saudi Air Force.

It should be recognised that the Group is reliant on the continued approval of export licences by a number of governments in order to continue supplies to the Kingdom of Saudi Arabia. Significant changes in the policies of such governments may affect our own provision of capability to the country and we are liaising closely with the UK government in working to reduce the impact of any such occurrence.

The MBDA joint venture has continued to win orders in both domestic and export markets with the order backlog once again increasing, giving clear visibility of growth in the coming years. The business also continues to invest in new products and is well placed to benefit from defence spend increases in a number of European countries and from export opportunities.

Cyber security

The UK-managed Applied Intelligence business delivered a much-improved performance following restructuring actions taken in 2017 and achieved a break-even position for the year. Focused recruitment in the second half of the year positions the business for a return to growth and profitability as the market develops. 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.

Balance sheet and capital allocation

The Group's balance sheet is managed conservatively, in line with its policy, to retain its investment grade credit rating and to ensure operating flexibility.

Consistent with this approach, the Group expects to continue to meet its pension obligations, invest in research and technology and other organic investment opportunities, and plans to pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings and to make accelerated returns of capital to shareholders when the balance sheet allows. Investment in value-enhancing acquisitions will be considered where market conditions are right and where they would deliver on the Group's strategy.

Pension schemes

The Group's share of the pre-tax accounting net pension deficit reduced to £3.9bn (2017 £4.0bn).

Executive Committee changes

Reflecting the new organisational structure from the start of 2018 there were a number of changes to the Executive Committee. Members appointed as a result of the new structure were Chris Boardman as head of Air, Andrew Wolstenholme as head of Maritime and Julian Cracknell as head of Applied Intelligence. Other new appointments were Karin Hoeing as Group Human Resources Director and at the start of 2019 David Armstrong as Group Business Development Director following Alan Garwood's retirement.

Responsible business

We continue to build a culture where our people are empowered to make the right decisions and know where to go to seek help or guidance.

Recruiting and retaining talented people is a key priority. We want every employee to reach their full potential within a diverse and inclusive work environment. We have programmes in place across the business to support strategic workforce planning, career development and retention, as well as to improve diversity and inclusion.

Summary

Our business benefits from a large order backlog, with established positions on long-term programmes in the US, UK, Saudi Arabia and Australia along with a growing presence in other international markets. Our strategy is working, it is clear and well defined. With governments in our major markets continuing to prioritise defence and security there is a strong demand for our capabilities. Through improved programme execution and maintaining the strategy and capital allocation policy, BAE Systems is well placed to maximise opportunities, manage the challenges and continue to generate good shareholder returns.

 

Charles Woodburn Chief Executive

 

Extract from

Chairman's letter

Our Board

The Board continues to benefit from a high-quality team that is diverse in gender, skill, experience, country of origin and time served. With Revathi Advaithi joining us at the beginning of 2018, currently 28% have been Board members for up to three years, 36% for between three and six years, and 36% for over six years, with an average tenure of five and a half years.

Board chemistry is excellent with candour, mutual respect and collective commitment providing a healthy dynamic for debate, challenge and decision making.

Board succession planning is key to preserving this position, and to that end we have been fortunate to appoint two new non-executive directors recently, Nicole Piasecki and Stephen Pearce, both of whom will join the Board on 1 June 2019. Nicole is a former senior executive with Boeing who has a strong track record in strategic planning and international operations and relations. Stephen is Finance Director of Anglo American plc at present, and as such has the skills and experience necessary to succeed Nick Rose as Chairman of our Audit Committee from the beginning of next year. I am pleased that Nick has agreed to stay on until then, which will allow us to continue to draw on his experience and his oversight of the new auditor, during what is a period of change and geopolitical turbulence. This will also allow Stephen to develop his knowledge of BAE Systems before taking on the chairmanship of an important Board committee.

Summary

In summary, we are pleased to have delivered another year of strong performance with sales of £18.4bn and underlying earnings per share of 42.9p, underpinned by an order backlog of £48.4bn.

Whilst the fundamentals of the business are sound, the order backlog substantial and the management team strong, the geopolitics in which we operate have become increasingly challenging and unstable.

As we look forward to 2019 and beyond our focus will be on reinforcing our customer relationships, providing exceptional products and services, preserving our culture, investing in technology and developing our people. By remaining steadfast in our approach, we will seek to continue to deliver for all our stakeholders.

The Board therefore has recommended a final dividend of 13.2p for a total of 22.2p for the full year. Subject to shareholder approval at the May 2019 Annual General Meeting, the dividend will be paid on 3 June 2019 to holders of ordinary shares registered on 23 April 2019.

 

Sir Roger Carr Chairman

 

Financial review

We monitor the underlying financial performance of the Group using the alternative performance measures defined on page 6. These measures are not defined in IFRS1 and, therefore, are considered to be non‑GAAP2 measures. Accordingly, the relevant IFRS1 measures are also presented where appropriate.

P06 Alternative performance measure definitions

Income statement

Financial performance measures as defined by the Group

2018

£m

2017

(restated)3

£m

Sales

KPI

18,407

18,487

Underlying EBITA

KPI

1,928

1,974

Return on sales


10.5%

10.7%

 

Financial performance measures defined in IFRS1

£m

£m

Revenue


16,821

17,224

Operating profit


1,605

1,419

Return on revenue


9.5%

8.2%

 

Reconciliation of sales to revenue

£m

£m

Sales

KPI

18,407

18,487

Deduct Share of sales by equity accounted investments


(2,812)

(2,534)

Add Sales to equity accounted investments


1,226

1,271

Revenue


16,821

17,224

 

Reconciliation of underlying EBITA to operating profit



£m

£m

Underlying EBITA

KPI


1,928

1,974

Non-recurring items



(154)

(13)

Amortisation of intangible assets



(85)

(86)

Impairment of intangible assets



(33)

(384)

Financial expense of equity accounted investments



(13)

(34)

Taxation expense of equity accounted investments



(38)

(38)

Operating profit



1,605

1,419

Net finance costs



(381)

(346)

Taxation expense



(191)

(216)

Profit for the year



1,033

857






Underlying interest expense



(215)

(245)

Net interest expense on retirement benefit obligations



(106)

(173)

Fair value and foreign exchange adjustments on financial instruments and investments

(73)

38

Net finance costs (including equity accounted investments)



(394)

(380)

 

Exchange rates

Average

2018

2017

£/$


1.335

1.289

£/€


1.130

1.141

£/A$


1.786

1.681

 

Sensitivity analysis


Estimated impact on sales of a ten cent movement in the average exchange rate

£m

$

600

90

A$

35

Income statement

Sales3 decreased by £0.1bn to £18.4bn (2017 £18.5bn) as the expected reduction in Typhoon production activity was largely offset by growth in our US businesses.

Underlying EBITA3 decreased by £46m to £1,928m (2017 £1,974m), giving a return on sales of 10.5% (2017 10.7%). There was an adverse exchange translation impact of £34m.

Revenue3 decreased by £0.4bn to £16.8bn (2017 £17.2bn), a 1% decline on a constant currency basis4.

Operating profit3 increased by £186m to £1,605m (2017 £1,419m). 2017 included a £384m impairment in respect of the Applied Intelligence business, which is excluded from underlying EBITA. There was an adverse exchange translation impact of £31m.

Non-recurring items in 2018 of £154m comprises a Guaranteed Minimum Pension equalisation charge of £114m, and a loss on disposal of the Mobile, Alabama, shipyard of £40m. Nonrecurring items in 2017 of £13m represented a loss on the disposal of the BAE Systems San Francisco Ship Repair business.

Amortisation of intangible assets is in line with the prior year at £85m (2017 £86m).

Impairment of intangible assets in 2018 related to Silversky customer-related intangibles in the Applied Intelligence business. In 2017, the charge represented the impairment of goodwill in Applied Intelligence reflecting the future level and timing of expected returns from the business.

Net finance costs, including equity accounted investments, were £394m (2017 £380m). The underlying interest charge, excluding pension accounting, and fair value and foreign exchange adjustments on financial instruments and investments decreased to £215m (2017 £245m). Net interest expense on the Group's pension deficit was £106m (2017 £173m). There was a charge in respect of fair value and foreign exchange adjustments of £73m (2017 £38m credit) on exchange translation of US dollar-denominated bonds.

Taxation expense3, including equity accounted investments, of £229m (2017 £254m) reflects the Group's underlying effective tax rate for the year of 18% which reduced from 21% in 2017, benefiting from the reductions to federal taxes in the US.

The calculation of the underlying effective tax rate is shown in note 6 to the Group accounts on page 158.

The underlying effective tax rate for 2019 is expected to increase from 18% to around 20%, with the final rate dependent on the geographical mix of profits.

Looking beyond 2019, the effective tax rate will depend principally on whether there are any changes in tax legislation in the Group's most significant countries of operation, the geographical mix of profits and the resolution of open tax positions.

1.  International Financial Reporting Standards.

2.  Generally Accepted Accounting Principles.

3.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

4.  Current year compared with prior year translated at current year exchange rates.

Earnings per share

Underlying earnings per share1 for the year increased by 2% to 42.9p (2017 42.1p).

Basic earnings per share1 was 31.3p (2017 26.0p).

Earnings per share

Financial performance measures as defined by the Group

2018

2017
(restated)1

Underlying earnings


£1,370m

£1,338m

Underlying earnings per share

KPI

42.9p

42.1p

 

Financial performance measures defined in IFRS2



Profit for the year attributable to equity shareholders

£1,000m

£827m

Basic earnings per share


31.3p

26.0p

 

Reconciliation of underlying EBITA to underlying earnings

£m

£m

Underlying EBITA


1,928

1,974

Underlying interest expense (including equity accounted investments)

(215)

(245)



1,713

1,729

Taxation expense (at the underlying effective tax rate)


(310)

(361)

Non-controlling interests


(33)

(30)

Underlying earnings


1,370

1,338

 

Reconciliation of underlying earnings to profit for the year attributable to equity shareholders


£m

£m

Underlying earnings


1,370

1,338

Impact of US tax reform enacted in December 2017

-

58

Non-recurring items, post tax


(126)

(10)

Amortisation and impairment of intangible assets, post tax


(97)

(68)

Impairment of goodwill


-

(384)

Net interest expense on retirement benefit obligations, post tax


(87)

(137)

Fair value and foreign exchange adjustments on financial instruments and investments, post tax


(60)

30

Profit for the year attributable to equity shareholders


1,000

827

Non-controlling interests


33

30

Profit for the year


1,033

857

1.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

2.  International Financial Reporting Standards.

P160 Note 7 to the Group accounts

Orders

Order intake1 increased by £8.0bn to £28,280m (2017 £20,257m). The most significant order intakes were for the Qatar Typhoon and Hawk aircraft and support package (£5.1bn), Saudi Arabian Typhoon support continuation (£3.2bn) and a £1.1bn initial contract for the Australian Hunter Class frigate programme.

Order backlog1,2 increased by £9.7bn to £48.4bn (2017 £38.7bn) following the year's record order intake.

Orders

Financial performance measures as defined by the Group



2018

2017
(restated)2

Order intake1

KPI

£28,280m

£20,257m

Order backlog1


£48.4bn

£38.7bn

1.  Including share of equity accounted investments.

2.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

Cash flow

Financial performance measures as defined by the Group


2018
£m

2017
£m

Operating business cash flow

KPI

993

1,752

 

Financial performance measures defined in IFRS1


£m

£m

Net cash flow from operating activities


1,200

1,897

 

Reconciliation from operating business cash flow
to net cash flow from operating activities

£m

£m

Operating business cash flow

KPI

993

1,752

Add back Net capital expenditure and financial investment


464

444

Deduct Dividends received from equity accounted investments


(57)

(72)

Deduct Taxation


(200)

(227)

Net cash flow from operating activities


1,200

1,897

Net capital expenditure and financial investment


(464)

(444)

Dividends received from equity accounted investments


57

72

Interest received


25

23

Acquisitions and disposals


41

(11)

Net cash flow from investing activities


(341)

(360)

Interest paid


(203)

(204)

Net sale/(purchase) of own shares


1

(1)

Equity dividends paid


(703)

(684)

Dividends paid to non-controlling interests


(28)

(8)

Cash flow from matured derivative financial instruments


6

(83)

Movement in cash collateral


2

(15)

Net cash flow from loans


(7)

-

Net cash flow from financing activities


(932)

(995)

Net increase in cash and cash equivalents


(73)

542

Add back Net cash flow from loans


7

-

Add back Cash classified as held for sale


-

2

Foreign exchange translation


(188)

301

Other non-cash movements


102

(55)

(Increase)/decrease in net debt


(152)

790

Opening net debt


(752)

(1,542)

Net debt

KPI

(904)

(752)

1.  International Financial Reporting Standards.

P192 and P193 Notes 25 and 27 to the Group accounts

Cash flow

Operating business cash flow was £993m (2017 £1,752m), which includes cash contributions in respect of pension deficit funding, over and above service costs, for the UK and US schemes totalling £330m on a funding basis.

On the Qatar contract there was a net inflow of approximately £400m to be utilised in 2019. Timing benefits of £400m seen in 2017 on the Saudi support contract and UK VAT payment reversed in 2018. In the Platforms & Services (US) business there has been working capital growth on utilisation of advance payments on international programmes, some late customer receipts, delivery delays to be recovered in the near term and new business ramp-up.

Taxation payments decreased to £200m (2017 £227m) primarily reflecting lower payments in the US due to the reduction in the US federal tax rate.

Net capital expenditure and financial investment was £464m (2017 £444m). Planned capital investment was made to support production ramp-up in Electronic Systems.

Dividends received from equity accounted investments of £57m (2017 £72m) was primarily receipts from MBDA, FNSS and Advanced Electronics Company.

Interest received was £25m (2017 £23m).

The cash inflow in respect of acquisitions and disposals in 2018 of £41m reflects the reduction in the Group's shareholding in Overhaul Maintenance Company (£17m), cash acquired as part of the ASC Shipbuilding acquisition (£14m) and cash received on the sale of the Mobile, Alabama, shipyard (£12m), offset by purchases of equity accounted investments. The cash outflow in 2017 of £11m reflected costs incurred in respect of the disposal of BAE Systems San Francisco Ship Repair and the acquisition of IAP Research, Inc.

Interest paid was £203m (2017 £204m).

Equity dividends paid in 2018 represents the 2017 final (£415m) and 2018 interim (£288m) dividends.

Dividends paid to non-controlling interests increased to £28m (2017 £8m), reflecting a higher payment by Saudi Maintenance & Supply Chain Management Company, in which the Group has a 51% shareholding.

There was a cash inflow from matured derivative financial instruments of £6m (2017 £83m outflow). The prior year outflow arose from rolling hedges relating to balances within the Group's subsidiaries and equity accounted investments.

Foreign exchange translation primarily arises in respect of the Group's US dollar-denominated borrowing.

 

Balance sheet

Summarised balance sheet

2018

£m

2017
(restated)1

£m

Intangible assets


10,658

10,378

Property, plant and equipment, and investment property2


2,017

1,977

Equity accounted investments and other investments


442

328

Working capital2


(3,288)

(3,595)

Group's share of the net IAS 19 pension deficit (see below)


(3,932)

(4,022)

Net tax assets and liabilities


449

413

Net other financial assets and liabilities


70

18

Net debt

KPI

(904)

(752)

Net assets held for sale


106

10

Net assets


5,618

4,755

1.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers and to correct a prior year error in respect of the accounting valuation of a longevity swap held by one of the Group's defined benefit pension schemes. See note 37 to the Group accounts for details regarding the restatement.

2.  Funding received from the UK government for property, plant and equipment at Barrow-in-Furness, UK, relating to the Dreadnought submarine programme included in working capital in the Consolidated balance sheet is presented here in property, plant and equipment, and investment property.

Components of net debt

£m

£m

Cash and cash equivalents


3,232

3,271

Debt-related derivative financial instrument assets


163

60

Loans - non-current


(3,514)

(4,069)

Loans and overdrafts - current


(785)

(14)

Net debt

KPI

(904)

(752)

Exchange rates

Year end

2018

2017

£/$


1.274

1.353

£/€


1.114

1.126

£/A$


1.809

1.730

Balance sheet

The £0.3bn increase in intangible assets to £10.7bn (2017 £10.4bn) mainly reflects exchange translation.

Property, plant and equipment, and investment property is £2.0bn (2017 £2.0bn).

Equity accounted investments and other investments increased to £442m (2017 £328m) mainly reflecting the Group's share of profit for the year (£140m) and reduced pension allocation from the lower deficit (£8m), less dividends received (£57m).

The Group's share of the net IAS 19 pension deficit reduced to £3.9bn (2017 £4.0bn1) mainly reflecting a decrease in liabilities due to an increase in the discount rate in the UK and US, partly offset by lower returns on scheme assets. The major movements in the net pension deficit are shown in the bridge chart below.

Details of the Group's pension schemes are provided in note 22 to the Group accounts on page 178.

A net deferred tax asset of £0.7bn (2017 £0.7bn) relating to the Group's pension deficit is included within net tax assets and liabilities.

In aggregate, there was a £0.3bn increase in working capital largely reflecting the reversal of 2017 timing benefits, costs incurred against provisions, advance payment utilisation, delivery timings and new business ramp-up, partly offset by the Qatar net inflow.

The Group's net debt at 31 December 2018 is £904m, a net increase of £152m from the position at the start of the year, of which £86m relates to exchange translation. In June 2019, a $1.0bn (£0.8bn) bond will become due for repayment. The maturity of the Group's borrowings is shown in the chart on the previous page.

Cash and cash equivalents of £3,232m (2017 £3,271m) are held primarily for the repayment of debt securities, pension deficit funding, payment of the 2018 final dividend and management of working capital.

Net assets held for sale represent the UK-based combat vehicles business, where the Group has entered into an agreement with Rheinmetall to form a joint military land vehicle design, manufacturing and support business, in which BAE Systems will retain a 45% stake, and also the Group's 75.6% shareholding in Aircraft Accessories and Components Company, the disposal of which completed in January 2019.

1.  The prior year deficit has been restated to correct a prior year error in respect of the accounting valuation of a longevity swap held by one of the Group's defined benefit pension schemes.

Accounting policies

Critical accounting policies

Certain of the Group's significant accounting policies are considered by the directors to be critical because of the level of complexity, judgement or estimation involved in their application and their impact on the consolidated financial statements:

Revenue and profit recognition

Revenue £16.8bn (year ended 31 December 2018)
See note 1 to the Group accounts

Carrying value of goodwill

Goodwill £10.2bn (at 31 December 2018)
See note 8 to the Group accounts

Deferred tax asset on retirement benefit obligations

Deferred tax asset on pension/retirement scheme deficits £0.7bn (at 31 December 2018)
See note 14 to the Group accounts

Tax provisions

Tax provisions £361m (at 31 December 2018)
See note 16 to the Group accounts

Retirement benefit obligations

Group's share of the net IAS 19 pension deficit £3.9bn (at 31 December 2018)
See note 22 to the Group accounts

P142 For more information

Changes in accounting policies

Effective 1 January 2019, BAE Systems adopted IFRS 16 Leases. The Group's results announcement for the half year ending 30 June 2019 will be the first to be prepared under IFRS 16. The Group will transition in accordance with the modified retrospective approach, and prior year information will not be restated.

IFRS 16 requires a lessee to recognise assets and liabilities for almost all leases. In the income statement, operating lease charges will be replaced by depreciation and interest expenses. The estimated impact on the Group in 2019 is expected to be an increase in EBITA of £50m, offset by an increase in finance costs of £50m, with an immaterial impact on profit after tax and underlying earnings. On transition, right-of-use assets will be recognised on the balance sheet of £1,300m with a lease liability of £1,486m and a transition adjustment of £92m will be recognised as a debit to retained earnings. The Group will also recognise a finance lease receivable balance of £70m, a reduction in our investment in equity accounted investments of £11m and a deferred tax asset of £2m. Details of the impact of IFRS 16 are provided in note 38 to the Group accounts on page 210.

Capital

Objectives

Maintain the Group's investment grade credit rating and ensure operating flexibility, whilst:

·      meeting its pension obligations;

·      pursuing organic investment opportunities;

·      paying dividends in line with the Group's policy of long-term sustainable cover of around two times underlying earnings;

·      making accelerated returns of capital to shareholders when the balance sheet allows and when the return from doing so is in excess of the Group's Weighted Average Cost of Capital; and

·      investing in value-enhancing acquisitions, where market conditions are right and where they deliver on the Group's strategy.

Policies

The Group funds its operations through a mixture of equity funding and debt financing, including bank and capital market borrowings.

The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. Three credit rating agencies publish credit ratings for the Group:

Rating

Outlook

Category

Moody's Investors Service

Baa2

Stable

Investment grade

Standard & Poor's Ratings Services

BBB

Stable

Investment grade

Fitch Ratings

BBB

Stable

Investment grade

 

P190 Note 24 to the Group accounts

Dividends

As part of the Group's capital allocation policy, the Group plans to pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings.

The Board has recommended a final dividend of 13.2p per share making a total of 22.2p per share for the year, an increase of 2% over 2017. At this level, the annual dividend is covered 1.9 times. Subject to shareholder approval at the 2019 Annual General Meeting, the dividend will be paid on 3 June 2019 to holders of ordinary shares registered on 23 April 2019. The ex-dividend date is 18 April 2019.

At 31 December 2018, the Company had retained earnings of £2.8bn (2017 £2.6bn), the non-distributable portion of which is £701m (2017 £649m) (see page 212). Total external dividends relating to 2018 are £710m (2017 £695m), including the interim dividend paid during the year of £288m (2017 £280m) and the final dividend proposed of approximately £422m (2017 £415m). On an annual basis, the Company receives dividends from its subsidiaries to increase further its distributable reserves and, accordingly, the Company expects to have sufficient distributable reserves to support its dividend policy.

The Group's dividend policy is underpinned by its viability and going concern statements (see pages 81 and 82).

Treasury

The Group's treasury activities are overseen by the Treasury Review Management Committee (TRMC). Two executive directors are members of the TRMC, including the Group Finance Director who chairs the Committee. The TRMC also has representatives with legal and tax expertise. The Group operates a centralised treasury department that is accountable to the TRMC for managing treasury activities in accordance with the treasury policies approved by the Board.

Objectives/policies

Net debt

Maintain a balance between the continuity, flexibility and cost of debt funding through the use of borrowings from a range of markets with a range of maturities, currencies and interest rates, reflecting the Group's risk profile.

·      Material borrowings are arranged by the central treasury department and funds raised are lent onward to operating subsidiaries as required.

Interest rates

Manage the exposure to interest rate fluctuations on borrowings through varying the proportion of fixed rate debt relative to floating rate debt with derivative instruments, including interest rate and cross-currency swaps.

·      A minimum of 50% and a maximum of 90% of gross debt is maintained at fixed interest rates.

Liquidity

Maintain adequate undrawn committed borrowing facilities.

·      An undrawn committed Revolving Credit Facility of £2bn contracted to April 2023 is available to meet expected general corporate funding requirements.

Monitor and control counterparty credit risk and credit limit utilisation.

·      The Group adopts a conservative approach to the investment of its surplus cash. It is deposited with financial institutions with strong credit ratings for short periods.

Currency

Reduce the Group's exposure to transactional volatility in earnings and cash flows from movements in foreign currency exchange rates.

·      All material firm transactional exposures are hedged.

·      The Group does not hedge the translation effect of exchange rate movements on the income statements or balance sheets of foreign subsidiaries and equity accounted investments it regards as long-term investments.

P195 Note 29 to the Group accounts

 

 

Tax strategy

The Group's tax strategy is to:

·      ensure compliance with all applicable tax laws and regulations; and

·      manage the Group's tax expense in a way that is consistent with its values and its legal obligations in all relevant jurisdictions.

The Group does not tolerate activities designed to facilitate tax evasion offences.

The Group promotes collaborative professional working with tax authorities in order to build open, transparent and trusted relationships. As part of this, the Group engages in open and early dialogue to discuss tax planning, strategy, risks and significant transactions, and discloses any significant uncertainties in relation to tax matters. Queries and information requests by tax authorities are responded to in a timely fashion and the Group ensures that tax authorities are kept informed about how issues are progressing. The Group seeks to resolve issues in real time and before returns are filed where possible. Fair, accurate and timely disclosures are made in tax returns, reports and documents that the Group files with, or submits to, tax authorities. Where disagreements over tax arise, the Group works proactively to seek to resolve all issues by agreement (where possible) and reach reasonable solutions. In the UK, the Group is subject to an annual risk assessment by HM Revenue & Customs and strives to achieve as low a risk rating as can be achieved by a group of BAE Systems' size and complexity.

Whilst the Group aims to maximise the tax efficiency of its business transactions, it does not use structures in its tax planning that are contrary to the intentions of the relevant legislature. The Group interprets relevant tax laws in a reasonable way and ensures that transactions are structured in a way that is consistent with a relationship of co-operative compliance with tax authorities. It also actively considers the implications of any planning for the Group's wider corporate reputation.

The Group is open and transparent with regard to decision-making, governance and tax planning in its business, keeping tax authorities informed of who has responsibility, how decisions are reached, how the business is structured and where different parts of the business are located.

BAE Systems operates internationally and is subject to tax in many different jurisdictions. The Group employs professional tax managers and takes appropriate advice from reputable professional firms. The Group is routinely subject to tax audits and reviews which can take a considerable period of time to conclude. Provision is made for known issues based on management's interpretation of country-specific legislation and the likely outcome of negotiations or litigation. The assessment and management of tax risks are regularly reviewed by the Audit Committee, as is the Group's tax strategy.

Arm's-length principles are applied in the pricing of all intra-group transactions of goods and services in accordance with Organisation for Economic Co-operation and Development guidelines. Where appropriate, the Group engages with governments in relation to proposed legislation and tax policy. The Group endorses the statement of tax principles issued by the Confederation of British Industry in May 2013 (www.cbi.org.uk/cbi-prod/assets/File/pdf/statement-of-tax-principles.pdf).

P157 Note 6 to the Group accounts

Chart, note and page references used above refer to the Annual Report 2018 that can be viewed on the Company's website.

Our principal risks

Risks are identified based on the likelihood of occurrence and the potential impact on the Group. The Group's principal risks are identified below, together with a description of how we mitigate those risks.

Description


Impact


Mitigation

1. Defence spending

The Group is dependent on defence spending.

In 2018, 91% of the Group's sales were defence-related.

Defence spending by governments can fluctuate depending on change of government policy, other political considerations, budgetary constraints, specific threats and movements in the international oil price.

There have been constraints on government expenditure in a number of the Group's principal markets, in particular in the UK.


Lower defence spending by the Group's major customers could have a material adverse effect on the Group's future results and financial condition.


The business is geographically spread across US, UK and international defence markets:

·      In the US, the fiscal year 2019 Defense Appropriations bill was enacted in September 2018 providing near-term clarity and support for the industry. The enacted bill maintains support for our medium-term planning assumptions and positive momentum for military readiness and modernisation programmes.

·      In the UK, the Modernising Defence Programme has outlined a clear direction of travel for the Ministry of Defence. This statement re-emphasises the UK's commitment to strong defence and security.

·      In Saudi Arabia, regional tensions continue to dictate that defence remains a high priority.

·      In Australia, regional instability and the pace of military modernisation in the Asia-Pacific region continue to drive the government's commitment to defence spending, with major recapitalisation programmes under way. The government has indicated its intent to grow defence spending by committing to spend 2% of GDP by 2020/21.

The diverse product and services portfolio is marketed across a range of defence markets. BAE Systems benefits from a large order backlog, with established positions on long-term programmes in the US, UK, Saudi Arabia and Australia.

BAE Systems has a growing portfolio of commercial businesses, including commercial avionics and the commercial areas of the Applied Intelligence business.

 

Description


Impact


Mitigation

2. Government customers

The Group's largest customers are governments.

The Group has long-standing relationships and security arrangements with a number of its government customers, including its three largest customers, the governments of the US, UK and Saudi Arabia, and their agencies. It is important that these relationships and arrangements are maintained.

In the defence and security industries, governments can typically modify contracts for their convenience or terminate them at short notice. Long-term US government contracts, for example, are funded annually and are subject to cancellation if funding appropriations for subsequent periods are not made. Governments also from time to time review their terms of trade and underlying policies and seek to impose such new terms and policies when entering into new contracts.

The Group's performance on its contracts with some government customers is subject to financial audits and other reviews which can result in adjustments to prices and costs.

 


Deterioration in the Group's principal government relationships resulting in the failure to obtain contracts or expected funding appropriations, adverse changes in the terms of its arrangements with those customers or their agencies, or the termination of contracts could have a material adverse effect on the Group's future results and financial condition.


Government customers have sophisticated procurement and security organisations with which the Group can have long-standing relationships with well-established and understood terms of business.

In the event of a customer terminating a contract for convenience, the Group would typically be paid for work done and commitments made at the time of termination.

 

Description


Impact


Mitigation

3. International markets

The Group operates in international markets.

BAE Systems is an international company conducting business in a number of regions, including the US and the Middle East.

The risks of operating in some countries include: social and political changes impacting the business environment; economic downturns, political instability and civil disturbances; the imposition of restraints on the movement of capital; the introduction of burdensome taxes or tariffs; change of export control and other government policy and regulations in the UK, US and all other relevant jurisdictions; and the inability to obtain or maintain the necessary export licences.

In July 2017, the High Court of England and Wales ruled that the UK government has been acting lawfully in granting defence export licences to the Kingdom of Saudi Arabia. The Court of Appeal has given permission for the decision of the High Court to be appealed and the hearing and determination of the appeal is awaited.

 

The Group is exposed to volatility arising from movements in currency exchange rates, particularly in respect of the US dollar, euro, Saudi riyal and Australian dollar. There has been volatility in currency exchange rates in the period since the EU referendum in the UK.

 

The terms of the UK's exit from the EU on 29 March 2019 are currently uncertain, rendering it difficult for the Group to prepare for potential changes in the regulatory environment. In particular, a no-deal Brexit could have an impact on programmes which depend on the movement of goods between the UK and the EU.

There is also a risk that, as a result of the UK leaving the EU, the Group's ability to take part in collaborative industrial programmes in Europe could encounter new EU barriers.

 


The occurrence of any such events could have a material adverse effect on the Group's future results and financial condition. The risk of the Group's inability to obtain and maintain the necessary export licences for our business in the Kingdom of Saudi Arabia could affect the Group's provision of capability to the country.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BAE Systems benefits from a large order backlog with established positions on long-term programmes in the US, UK, Saudi Arabia and Australia and there is relatively limited UK-EU trading. In respect of people, the majority of persons employed in the UK are UK nationals, with only small movements of EU nationals into and out of the Group's UK businesses. Accordingly, the resulting Brexit near-term impacts across the business are likely to be limited.  


The Group has a balanced portfolio of businesses across a number of markets internationally. The Group benefits from a large order backlog, with established positions on long-term programmes in the US, UK, Saudi Arabia and Australia.

The Group's contracts are often long-term in nature and, consequently, it may be able to mitigate these risks over the terms of those contracts.

Political risk insurance is held in respect of export contracts not structured on a government-to-government basis.

BAE Systems has a well-established legal and regulatory compliance structure aimed at ensuring adherence to regulatory requirements and identifying restrictions that could adversely impact the Group's activities, including export control requirements.

 

 

 

 

 

 

 

The Group's policy is to hedge all material firm transactional currency exchange rate exposures.

 

 

 

 

If there is no deal before the UK leaves the EU, it will

require the Group to put in place a set of actions and mitigations to prepare for the change that might take place in relation to a range of business activities. These include customs procedures, export control, and the use of speciality chemicals whose use is currently authorised by an EU agency.

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.

 

 

 

 


Description


Impact


Mitigation

4. Competition in international markets

The Group's business is subject to significant competition in international markets.

The Group's business plan depends upon its ability to win and contract for high-quality new programmes, an increasing number of which are expected to be in markets outside the US and UK.

The Group is dependent upon US and UK government support in relation to a number of its business opportunities in export markets.

 

 

 

 

 

 

 

 


The Group's business and future results may be adversely impacted if it is unable to compete adequately and obtain new business in the markets in which it operates.


The Group has an international, multi-market presence, a balanced portfolio of businesses, leading capabilities and a track record of delivery on its commitments to its customers.

The Group continues to invest in research and development, and to reduce its cost base and improve efficiencies, to remain competitive.

In the UK, export contracts can be structured on a government-to-government basis and government support can also involve military training, ministerial support for promotional activities and financial support through UK Export Finance. In the US, most of the Group's defence export sales are delivered through the Foreign Military Sales process, under which the importing government contracts with the US government.

 

5. Laws and regulations

The Group is subject to risk from a failure to comply with laws and regulations.

 

The Group operates in a highly-regulated environment across many jurisdictions and is subject, without limitation, to regulations relating to import-export controls, money laundering, false accounting, anti-bribery and anti-boycott provisions. It is important that the Group maintains a culture in which it focuses on embedding responsible business behaviours and that all employees act in accordance with the requirements of the Group's policies, including the Code of Conduct, at all times.

Export restrictions could become more stringent and political factors or changing international circumstances could result in the Group being unable to obtain or maintain necessary export licences.

 

 


Failure by the Group, or its sales representatives, marketing advisers or others acting on its behalf, to comply with these regulations could result in fines and penalties and/or the suspension or debarment of the Group from government contracts or the suspension of the Group's export privileges, which could have a material adverse effect on the Group.

Reduced access to export markets could have a material adverse effect on the Group's future results and financial condition.


BAE Systems has a well-established legal and regulatory compliance structure aimed at ensuring adherence to regulatory requirements and identifying restrictions that could adversely impact the Group's activities.

Internal and external market risk assessments form an important element of ongoing corporate development and training processes.

A uniform global policy and process for the appointment of advisers engaged in business development is in effect.

BAE Systems continues to reinforce its ethics programme globally, driving the right behaviours by supporting employees in making ethical decisions and embedding responsible business practices.

 

 

 

 


 

Description


Impact


Mitigation

 

 

6. Contract risk and execution

The Group has many contracts, including a small number of large contracts and fixed-price contracts.

 

In 2018, 44% of the Group's sales were generated by its 15 largest programmes. At 31 December 2018, the Group had eight programmes with order backlog in excess of £1bn.

A significant portion of the Group's revenue is derived from fixed-price contracts. Actual costs may exceed the projected costs on which the fixed prices are agreed and, since these contracts can extend over many years, it can be difficult to predict the ultimate outturn costs.

It is important that the Group maintains a culture in which it delivers on its projects within tight tolerances of quality, time and cost performance in a reliable, predictable and repeatable manner.


The inability of the Group to deliver on its contractual commitments, the loss, expiration, suspension, cancellation or termination of any one of its large contracts or its failure to anticipate technical problems or estimate accurately and control costs on fixed-price contracts could have a material adverse effect on the Group's future results and financial condition.

 


Contract-related risks and uncertainties are managed under the Group's mandated Lifecycle Management process.

A leadership development programme for project directors has been deployed across the Group, covering the leadership competencies required to manage complex projects containing significant levels of risk and uncertainty.

A significant proportion of the Group's largest contracts are with the UK Ministry of Defence. In the UK, development programmes are normally contracted with appropriate levels of risk being initially held by the customer and contract structures are used to mitigate risk on production programmes, including where the customer and contractor share cost savings and overruns against target prices.

The Group has a well-balanced spread of programmes and significant order backlog which provides forward visibility.

The Group has limited exposure to fixed-price design and development activity which is in general more risk intensive than fixed-price production activity.

Robust bid preparation and approvals processes are well established throughout the Group, with decisions required to be taken at the appropriate level in line with clear delegations of authority.


 

7. Contract awards and cash profiles

The Group is dependent on the award timing and cash profile of its contracts.

 

The Group's profits and cash flows are dependent, to a significant extent, on the timing of, or failure to receive, award of defence contracts and the profile of cash receipts on its contracts.


Amounts receivable under the Group's defence contracts can be substantial and, therefore, the timing of, or failure to receive, awards and associated cash advances and milestone payments could materially affect the Group's profits and cash flows for the periods affected, thereby reducing cash available to meet the Group's cash allocation priorities, potentially resulting in the need to arrange external funding and impacting its investment grade credit rating.

 


The Group's balance sheet continues to be managed conservatively in line with its policy to retain an investment grade credit rating and to ensure operating flexibility.

The Group monitors a rolling forecast of its liquidity requirements to ensure that there is sufficient cash to meet its operational needs and maintain adequate headroom.

 

Description


Impact


Mitigation

 

8. Pension funding

The Group has an aggregate funding deficit in its defined benefit pension schemes.

In aggregate, there is an actuarial deficit between the value of the projected liabilities of the Group's defined benefit pension schemes and the assets they hold.

The funding deficits may be adversely affected by changes in a number of factors, including investment returns and members' anticipated longevity.


Increases in pension scheme deficits may require the Group to increase the amount of cash contributions payable to these schemes, thereby reducing cash available to meet the Group's other cash allocation priorities.


In the UK, new employees have been offered membership of defined contribution rather than defined benefit schemes since April 2012 and, in the US, employees have not accrued salary-related benefits in defined benefit schemes since January 2013.

In November 2017, the UK triennial funding valuations and, where necessary, deficit recovery plans were agreed with the trustees and certified by the scheme actuaries after consultation with the Pensions Regulator. The funding deficit across the UK schemes at 31 March 2017 was £2.1bn. Based on the new funding valuations, deficit recovery payments to the UK schemes were £211m in 2018. The deficits in each of the schemes are expected to be cleared between 2021 and 2026.

 

 

9. Information technology security

The Group could be negatively impacted by information technology security threats.

 

The security threats faced by the Group include threats to its information technology infrastructure, unlawful attempts to gain access to its proprietary or classified information and the potential for business disruptions associated with information technology failures.


Failure to combat these risks effectively could negatively impact the Group's reputation among its customers and the public, cause disruption to its business operations, and could result in a negative impact on the Group's future results and financial condition.

 


The Group has a broad range of measures in place, including appropriate tools and techniques, to monitor and mitigate this risk.

 

10. People

The Group's strategy is dependent on its ability to recruit and retain people with appropriate talent and skills.

 

Delivery of the Group's strategy and business plan is dependent on its ability to compete to recruit and retain people with appropriate talent and skills, including those with innovative technological capabilities.

The Group's business plan is targeting an increasing level of business in international export markets outside the US and UK. It is important that the Group recruits and retains management with the necessary international skills and experience in the relevant jurisdictions.


The loss of key employees or inability to attract the appropriate people on a timely basis could adversely impact its ability to deliver its strategy, meet the business plan and, accordingly, have a negative impact on the Group's future results and financial condition.


The Group recognises that its employees are key to delivering its strategy and business plan, and focuses on developing the existing workforce and hiring talented people to meet current and future requirements.

The Group has well-established graduate recruitment and apprenticeship programmes and, in order to maximise the contribution that its workforce can make to the performance of the business, has an effective through-career capability development programme.

In order to seek to maximise its talent pool, the Group is committed to creating a diverse and inclusive environment for its employees.

 

 

Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an adverse effect on the business or financial condition of the Group.

 

Segmental review

Electronic Systems

Electronic Systems comprises the US- and UK-based electronics activities, including electronic warfare systems, electro-optical sensors, military and commercial digital engine and flight controls, precision guidance and seeker solutions, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.

Electronic Combat provides a depth of capability in advanced electronic warfare systems for airborne applications, including electronic support, electronic attack and electronic protection technologies.

Survivability, Targeting & Sensing exploits the electro-optical and infrared spectrum to provide leading threat warning and infrared countermeasures systems, precision guidance and seeker solutions, advanced targeting solutions, head-up displays and state-of-the-art tactical imaging systems.

C4ISR Systems addresses the market for actionable intelligence through innovative technical solutions for airborne persistent surveillance, identification systems, signals intelligence, underwater and surface warfare solutions, and space resiliency products.

Controls & Avionics develops and produces electronics for military and commercial aircraft, including fly-by-wire flight controls, full authority digital engine controls, flight deck systems, cabin management systems, and mission computers.

Power & Propulsion Solutions delivers electric propulsion and power management performance, with innovative products and solutions that advance vehicle mobility, efficiency and capability in the transit, military, marine and rail markets.

 

P06 Alternative performance measure definitions

Operational and strategic key points

·      Continued production rampups on F35 Lightning II hardware, with initial funding on LowRate Initial Production Lot 13

·      Further awards for APKWS® laserguided rockets secured worth nearly $400m (£314m) and production capacity ramping towards 25,000 units per annum

·      Continued growth in classified work, increasing to 11% of the business

·      New facilities being established in Huntsville, Alabama and Manchester, New Hampshire to increase capacity and expand operations

·      Delivered the 10,000th electric hybrid bus system and continue to pursue expanding capabilities in the air and maritime domains

Financial performance

Financial performance measures as defined by the Group



2018

2017
(restated)2

Sales

KPI

£3,965m

£3,598m

Underlying EBITA

KPI

£606m

£541m

Return on sales


15.3%

15.0%

Operating business cash flow

KPI

£431m

£450m

Order intake1

KPI

£4,624m

£4,175m

Order backlog1


£5.4bn

£4.8bn

 

Financial performance measures defined in IFRS3



2018

2017
(restated)2

Revenue


£3,965m

£3,598m

Operating profit


£590m

£521m

Return on revenue


14.9%

14.5%

Cash flow from operating activities


£575m

£569m

 

·      Sales compared to 2017, in US dollar terms, were up 14% at $5.3bn (£4.0bn). The growth came in the electronic warfare business from the F-35 programme as well as increasing classified activity. As expected, sales of the APKWS® product doubled over the year and now represent one of the top three sales lines in the segment. Commercial sales of engine and flight controls, and hybrid electric drive units also grew, and amount to some 22% of the segment.

·      Underlying EBITA was up to $809m (£606m), delivering a return on sales of 15.3%, within our guidance range.

·      As expected, cash conversion of EBITA improved in the second half of the year and was at 81% for the full year excluding pension deficit funding. Capital expenditure in the business amounted to some $200m (£150m).

·      Order backlog was secured at a record high of $6.9bn (£5.4bn), following awards for further F-35 systems, classified electronic warfare activity and APKWS® units.

1.  Including share of equity accounted investments.

2.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

3.  International Financial Reporting Standards.

Operational performance

Electronic Combat

BAE Systems continues to sustain its leadership position in the US electronic warfare market with production continuing to ramp-up across a number of programmes, some of which are classified.

Low-Rate Initial Production Lot 11 hardware deliveries continue on the F-35 Lightning II programme. We have received initial Lot 12 and 13 funding, and are currently negotiating Lots 12, 13 and 14 with an anticipated final award value exceeding $1bn (£0.8bn). BAE Systems is 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.

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 (EPAWSS) programme to upgrade up to 200 F-15E aircraft, we are currently executing the $194m (£152m) engineering and manufacturing development contract, with a critical system delivery completed in 2018.

Under a contract by Boeing and Warner Robins Air Logistics Complex totalling more than $1bn (£0.8bn), BAE Systems completed the installation of the Digital Electronic Warfare System (DEWS) on new F-15 aircraft, and continues to upgrade existing F-15 aircraft and provide spare units and modules for an international customer. We are also executing a $311m (£244m) contract to provide DEWS to support the sale of new F-15 aircraft to another international customer.

Production of BAE Systems' sensor technology for the Long Range Anti-Ship Missile (LRASM) continues with orders from prime contractor Lockheed Martin. We provided the sensor technology that supported several successful tests of LRASM leading to a successful Early Operational Capability on the B1-B platform. We have also been awarded the LRASM Radio Frequency Sensor 110 Production Build valued at over $75m (£59m).

For over a decade, we have provided full-lifecycle support as the prime mission system integrator for the US Air Force's EC-130H Compass Call stand-off electronic attack platform, and we will continue to sustain the existing EC-130H electronics. We also execute multiple contracts 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®) laser-guided rocket is experiencing growing demand, with over 25,000 units produced as at year end. In addition to expanding US military use, the system is generating strong international attention, with 20 nations expressing formal interest. The programme has received awards totalling nearly $400m (£314m) this year, as part of a 2016 Indefinite Delivery, Indefinite Quantity contract. Production capacity is set to increase from 10,000 units per annum to 25,000 units per annum to meet the increased demand for cost-effective guided munitions for US armed forces and allied international customers.

We are developing a next-generation missile warning system for the US Army under the Limited Interim Missile Warning System programme awarded in 2017. Critical design reviews and initial prototypes have been completed on 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 (£301m).

Both fixed and rotary-wing demonstrations of our Striker® II helmet-mounted display (HMD) are ongoing and we continue to validate it as a readily accessible HMD for existing aircraft with analogue-based or digital electronic systems.

The LiteHUD® Head-Up Display has completed development testing and has been selected by critical launch customers for integration on multiple platforms, including the Textron Scorpion jet.

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. The programme completed Critical Design Review in 2018.

Since winning the Geospatial Data Services Foundational GEOINT Content Management programme in 2014, we have been awarded orders valued at $240m (£188m) 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, user acceptance under the $132m (£104m) Tactical Signals Intelligence Payloads programme for the US Army's Gray Eagle unmanned aircraft is complete. Follow-on awards are expected in 2019.

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 (£0.9bn) over its life. We have delivered our hundredth system. 

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 is progressing, with all hardware in qualification and systems integration testing to support a 2019 first flight.

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. Initial development has begun on the changes required for the MAX 10 variant.

Development of our civil active inceptors for the Gulfstream G500 and Embraer KC390 aircraft is complete and aircraft certification has been received. A derivative of the active inceptors, the LinkEdge™ (Active Parallel Actuation Subsystem), is being developed for the Chinook CH-47 and is currently in integration testing.

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. FADEC Alliance will develop, produce and support FADECs for all future GE Aviation commercial engines. The GE9X FADEC for the Boeing 777X has completed certification testing and Low-Rate Initial Production will begin in 2019.

Development has begun on the next-generation advanced digital flight control computer for the F-16 aircraft for the United Arab Emirates.

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 a successful systems requirements review was held on the competitively-awarded F-35 vehicle management computer technology refresh.

Power & Propulsion Solutions

This year we achieved a major milestone, delivering our 10,000th electric hybrid bus system and we continue to pursue expanding our capabilities for application in the maritime domain, and for the airborne market by marrying our safety-critical know-how from the Controls & Avionics business with our hybrid electric expertise. As transit operators in cities such as San Francisco, Boston, Montreal, London and Brussels lean toward more electric power, our solutions meet operational goals towards totally emission-free operations. We are prepared for the future of transit with zero emission solutions as early providers of battery-electric propulsion solutions and hydrogen fuel cell-based systems. Paris has recently become the latest city to commit to battery-electric vehicles powered by our technology and in the US more than 20 hydrogen fuel cell transit buses are operating with our propulsion systems, which are expected to pave the way for the world's first passenger vessel powered by hydrogen in 2019.

We are also using our clean technology to power passenger vessels, research vessels, and inland towboats to address the increased demand for environmentally friendly marine vessels.

Looking forward

Forward-looking information for the Electronic Systems reporting segment is provided later in this report.

P64 Segmental looking forward

 

Cyber & Intelligence

Cyber & Intelligence comprises the USbased Intelligence & Security business and UKheadquartered Applied Intelligence business, and covers the Group's cyber security, secure government, and commercial and financial security activities.

Intelligence & Security comprises the three US-based Intelligence & Security businesses.

Air Force Solutions focuses on providing the US Air Force and its combatant commands with innovative solutions to help modernise, maintain, test, and cyber-harden aircraft, radars, missile systems, and mission applications that detect and deter threats to national security.

Integrated Defense Solutions provides the US Army, Navy, and federal civilian markets with systems engineering, integration, and sustainment services for C4ISR systems and enterprise IT networks that enhance mission effectiveness. Our solutions are deployed across platforms and networks in the air, maritime, land and cyber domains.

Intelligence Solutions provides innovative mission-enabling solutions and services to enhance the collection, analysis, and processing of data across the US civilian and military intelligence communities. Our business also develops and deploys high-assurance networks that facilitate the secure sharing of data amongst intelligence agencies in support of national security.

Applied Intelligence provides data intelligence solutions which enable governments and commercial organisations to defend against national-scale threats, protect their networks and data against sophisticated attacks and operate successfully in cyberspace. Our solutions are delivered as licensed technologies, software-as-a-service subscriptions, through outsourced managed services, and via consulting and systems integration projects.

Government is focused on delivering national security and intelligence solutions to the UK government and allied international governments. The business also delivers enterprise-level data and digital services to UK government departments.

Financial Services delivers anti-fraud and regulatory compliance solutions to banking and insurance customers across Europe, North America, the Middle East, Africa and Asia-Pacific.

Technology & Commercial provides security advisory and managed security services to a range of commercial customers in the UK and North America.

P06 Alternative performance measure definitions

Operational and strategic key points

Intelligence & Security

·      New awards valued at approximately $320m (£251m) to provide motion-imagery analysis, training and research support services to the US intelligence community

·      Secured a five-year, $90m (£71m) US Navy contract to provide engineering and technical support for fixed, airborne and mobile intelligence collection platforms

·      Awarded additional change proposals worth $55m (£43m) to support the US Air Force ICBM Integration Support Contractor programme

Applied Intelligence

·      2017 restructuring programme completed, returning the business to break-even

Financial performance

Financial performance measures as defined by the Group



2018

2017
(restated)2

Sales

KPI

£1,678m

£1,818m

Underlying EBITA

KPI

£111m

£58m

Return on sales


6.6%

3.2%

Operating business cash flow

KPI

£85m

£116m

Order intake1

KPI

£1,802m

£1,859m

Order backlog1


£1.9bn

£2.1bn

 

Financial performance measures defined in IFRS3



2018

2017
(restated)2

Revenue


£1,678m

£1,818m

Operating profit/(loss)

£59m

£(361)m

Return on revenue


3.5%

(19.9)%

Cash flow from operating activities


£96m

£127m

 

·      In aggregate, sales were 5% lower on a constant currency basis at $2.2bn (£1.7bn). The US Intelligence & Security business saw a 4% decrease, largely as a result of the customer's decision to end a shared IT services environment contract. In the Applied Intelligence business sales declined by 9% as pursuit of sales growth was tempered to enhance profit performance.

·      Despite the sales reduction, the aggregate return on sales for the sector was improved to 6.6%. In the US business the return on sales was similar to last year at 9.0%. The Applied Intelligence business returned to break-even as the cost reduction actions under the 2017 restructuring programme delivered to plan.

·      Cash conversion of EBITA for the year was at 95%, excluding pension deficit funding.

·      In aggregate, order backlog reduced to $2.4bn (£1.9bn). In the US Intelligence & Security business, order backlog was adjusted for the closed out service contract.

1.  Including share of equity accounted investments.

2.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

3.  International Financial Reporting Standards.

Operational performance

Intelligence & Security

Air Force Solutions

We were awarded engineering change proposals valued at more than $55m (£43m) under the US Air Force Intercontinental Ballistic Missile Integration Support Contractor programme. The awards increased the total lifecycle value of the programme to $972m (£763m). Our work includes programme management, systems engineering, integration and testing, sustainment, and cyber defence.

To support US Air Force testing and training operations, we were awarded contracts totalling just over $58m (£46m) in 2018 to provide a proprietary electronic warfare/electronic attack solution.

Our business earned a position on a new nine-year Indefinite Delivery, Indefinite Quantity contract with the US Department of Defense, which positions us to bid on upcoming research, development, testing, and evaluation task orders to support the future needs of the US military across physical and digital domains. The contract affords us opportunities to leverage our investments in artificial intelligence and machine learning.

We secured a three-year, $37m (£29m) contract to continue providing the US Air Force with obsolescence management support for which we have been the provider of choice since 1991.

Integrated Defense Solutions

Our US Navy Strategic Systems Program experts are executing the third year of a five-year, $368m (£289m) sole-source contract to support weapons systems on board US Ohio and UK Vanguard Class submarines, as well as future Ohio Class replacement and UK Dreadnought Class submarines.

In October, we secured a five-year, $106m (£83m) contract to continue providing logistics and information technology support services to the US Navy's Strategic Systems Program. Our team provides logistics support for the US and UK Navies' Trident II submarines, US submarine support facilities and US Ohio Class guided-missile submarines.

In November, we earned a five-year, $79m (£62m) contract to continue maintaining and operating multiple electronic, communication, and computing platforms for the US Navy. The programme, which supports the Naval Computer and Telecommunications Area Master Station, Pacific, provides 24/7 mission support for ship-to-shore, shore-to-aircraft, and shore-to-shore long-range communications systems.

Also in the maritime domain, we received a five-year, $90m (£71m) US Navy contract to continue providing engineering and technical support for a variety of fixed, airborne, and mobile intelligence collection platforms. The business also secured a four-year, $44m (£35m) contract to provide munitions handling and management support for the US Navy's Pacific fleet.

We were selected for Indefinite Delivery, Indefinite Quantity contracts to pursue new work in support of the US government. Two of the contracts are single-award, with a total potential value of more than $150m (£118m) to support the rapid integration and sustainment of command, control, communications, reconnaissance, and combat systems for the Naval Air Warfare Center Aircraft Division. Under the third contract, which has a maximum value of $72m (£57m), we will compete for future task orders to provide equipment modification, system safety work, test bed operations, and technical services to support air traffic control and landing systems on ships and at US Navy facilities.

Intelligence Solutions

New task order contracts valued at approximately $320m (£251m) were won to provide motion-imagery analysis, training, and research support services to the US intelligence community.

The US Army awarded the business a four-year, $100m (£79m) contract to provide technical, functional, and general support to enhance the overall situational awareness and training of troops deployed around the world.

A US Department of Defense contract to continue providing mission-critical intelligence analysis support for forward-deployed soldiers was revised by the customer to a total lifecycle value of more than $110m (£86m) over an 18-month period.

We secured a five-year, $73m (£57m) contract to expand our analysis portfolio in support of the US intelligence community.

Applied Intelligence

Applied Intelligence delivered a full year break-even position as a result of significant benefits from the restructuring activity undertaken at the end of 2017. This improvement in profitability has been delivered through removing surplus delivery capacity, relocating roles to lower cost international delivery centres, exiting certain unprofitable markets and improving the organisational structure. Following the embedding of the organisational changes, the second half of the year has seen an increase in headcount and focused investment initiatives to drive higher levels of growth in the future.

Government

The Government business has delivered growth in orders from key accounts across UK government customers as demand for our national security and intelligence offerings remains strong. There has been an increased focus on investment in our people throughout the year to enhance capability required to support specialist customer requirements while also improving employee retention in a competitive labour market.

Financial Services

The business has continued to see steady demand for anti-fraud and regulatory compliance products across multi-national financial institutions. Strong customer loyalty has been maintained through a number of product upgrades with established key accounts. Investment in product engineering, primarily NetReveal® and Managed Security Services, has increased in the year to drive higher levels of demand in 2019 and beyond. Emerging product offerings, such as broader data and digital services, are also proving to be in demand.

Technology & Commercial

The business has won a number of significant multi-year Managed Security Services deals with UK and US commercial customers in the year, facilitated by investment in the product offering to enhance customer experience. We continue to see high levels of demand for the outsourcing of security monitoring through specialist operations centres, driven in the main by the increasing importance companies are placing on mitigating everincreasing cyber risks. The level of customer churn with US small and medium-sized businesses has increased in the year, contributing to reduced revenue levels in this area.

Looking forward

Forward-looking information for the Cyber & Intelligence reporting segment is provided later in this report.

P64 Segmental looking forward

 

Platforms & Services (US)

Platforms & Services (US), with operations in the US, UK and Sweden, manufactures combat vehicles, weapons and munitions, and delivers services and sustainment activities, including naval ship repair, and the management and operation of government-owned munitions facilities.

US Combat Vehicles focuses on a portfolio of tracked combat vehicles, amphibious vehicles, accessories, protection systems and tactical support services for the US military and international customers.

Weapon Systems focuses on naval weapons, artillery, advanced weapons, precision munitions, high explosives and propellants for US, UK and international customers. Services include complex munition site management and operation of the US Army's Holston and Radford facilities.

US Ship Repair is a major provider of non-nuclear ship repair, modernisation, overhaul and conversions to the US Navy, government and commercial maritime customers. It has four operational sites in the US located on the Atlantic and Pacific coasts and Hawaii.

BAE Systems Hägglunds focuses on the tracked vehicle market for Swedish and international customers.

FNSS, the Turkish land systems business in which BAE Systems holds a 49% interest, produces and upgrades tracked and wheeled military vehicles for Turkish and international customers.

P06 Alternative performance measure definitions

Operational and strategic key points

·      Selected by the US Marine Corps for the Amphibious Combat Vehicle 1.1 programme

·      One of two competitors selected for the US Army's Mobile Protected Firepower programme

·      Deliveries of the first batch of M777 ultra-lightweight howitzers to the Indian Army

·      Continued to deliver Mk45 Gun Systems to US and international customers

·      Secured $1.3bn (£1.0bn) in new orders across the four US shipyards

·      In commercial shipbuilding, activities continue to complete the final ship

·      Divested the Mobile, Alabama shipbuilding yard

·      Management changes made and investment in process and automation improvements to position the business for its upcoming growth phase

·      An accident in a nitrocellulose drying facility at Radford sadly resulted in one fatality and injuries to two employees

Financial performance

Financial performance measures as defined by the Group



2018

2017
(restated)2

Sales

KPI

£3,005m

£2,951m

Underlying EBITA

KPI

£210m

£237m

Return on sales


7.0%

8.0%

Operating business cash flow

KPI

£(30)m

£222m

Order intake1

KPI

£3,693m

£3,542m

Order backlog1


£5.4bn

£4.2bn

 

Financial performance measures defined in IFRS3



2018

2017
(restated)2

Revenue


£2,864m

£2,848m

Operating profit


£161m

£213m

Return on revenue


5.6%

7.5%

Cash flow from operating activities


£31m

£286m

 

·      Sales in the year, in US dollar terms, were up 5% to $4.0bn (£3.0bn) but growth was behind guidance, due to the delayed Paladin production order award, and the Ship Repair customer requirement to award each ship individually, rather than multi-ship awards, meant we have not been able to maximise shipyard utilisation.

·      Return on sales for the year was at 7.0% following the charges taken in the first half of the year on the remaining commercial shipbuilding contract and for the subcontractor performance issues on the Radford facilities construction programme. There were no further charges taken on those programmes in the second half of the year. The charges impacted return on sales by 150bps.

·      Cash flow performance in the year reflects advance payment utilisation on international programmes, some late customer receipts, delivery delays to be recovered in the near term, and new business ramp-up.

·      Order backlog increased to $6.8bn (£5.4bn), supportive of future growth expectations. Key awards in the year included Low-Rate Initial Production for the Amphibious Combat Vehicle for the US Marine Corps, the Armored Multi-Purpose Vehicle, Low-Rate Initial Production on Paladin, and the Mobile Protected Firepower engineering and manufacturing development phase for the US Army, as well as growth in Ship Repair.

1.  Including share of equity accounted investments.

2.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

3.  International Financial Reporting Standards.

 

Operational performance

US Combat Vehicles

The business continues to address manufacturing and execution challenges on some programmes as it ramps-up production levels. Measures undertaken in the period include management changes and investments in modernising facilities and manufacturing technologies, to include automation and robotic welding.

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. Low-Rate Initial Production has begun under a contract initially valued at $198m (£155m) for 30 vehicles, with options for a total of 204 vehicles worth up to $1.2bn (£0.9bn). A second, $140m (£110m) contract for Low-Rate Initial Production 2 for an additional 30 vehicles was awarded in December.

In December, the US Army awarded us a $376m (£295m) contract under the Mobile Protected Firepower programme for the engineering and manufacturing development phase for rapid prototyping efforts and with Low-Rate Initial Production options included. We were one of two competitors selected for this phase. The Army is expected to down select to a single contractor for the Low-Rate Initial Production phase in the first half of 2022.

On the US Army's Armored Multi-Purpose Vehicle programme, we received a $298m (£234m) contract to procure long-lead material to support Low-Rate Initial Production. Including the engineering and manufacturing development phase with options for 280 to 300 vehicles under Low-Rate Initial Production, the programme has a potential cumulative value of $1.2bn (£0.9bn). In 2019 we have been awarded contract modifications worth up to $575m (£451m) for Low-Rate Initial Production options.

Work continues on a $365m (£287m) contract for the fourth Low-Rate Initial Production phase for 48 Paladin self-propelled howitzer and ammunition carrier vehicles sets, with an option for an additional 12. A full-rate production decision is expected in 2019.

The business is nearing completion on a $322m (£253m) 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 (£273m) contract, initially funded at $132m (£104m), 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. In July, we received a $114m (£90m) contract for the follow-on production.

Internationally, we completed deliveries in 2018 of 41 Assault Amphibious Vehicles (AAVs) to Japan under contracts totalling $165m (£130m). We continue to work on an additional 11 vehicles for Japan. All of the 23 AAVs ordered by Brazil under an $82m (£64m) contract were also delivered, and work has begun on an $84m (£66m) contract with Taiwan for 36 AAVs.

We continue to execute a $54m (£42m) contract to provide 32 upgraded self-propelled howitzers to the Brazilian Army, with first deliveries to take place in 2019.

Weapon Systems

We have delivered the first M777 ultralightweight howitzers to the Indian Army under a $542m (£426m) Foreign Military Sale contract to provide 145 M777s. We are building the first 25 guns in our facilities, with the remaining systems assembled in India by Mahindra Defence Systems, our selected supplier, who has established an assembly and integration facility in India.

We are executing on a $47m (£37m) 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 gun 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.

Work continues under a 2017 contract to deliver 155mm BONUS ammunition to the Swedish Army, and we were awarded a further contract in 2018 for delivery of the round to the US Army. The business is delivering 24 additional Archer artillery systems under a 2016 contract modification with the Swedish government. In December, we received a contract from the Swedish Armed Forces for two of the newest 40 Mk4 gun systems.

We continue to execute on a $183m (£144m) contract to provide the Maritime Indirect Fire System for the Royal Navy's Type 26 frigate.

We achieved a fifth consecutive award term providing world-wide lifecycle support for the M777 ultra-lightweight howitzers that are in service with the US Marine Corps and Army. This support contract includes engineering maintenance, parts repair/replacement and other field- and depot-level service support. The M777 team, from both the US and UK, has now scored five consecutive 'excellent' ratings, a 100% record, resulting in the contract's extension until May 2023.

In the complex ordnance manufacturing business, we continue to manage and operate the US Army's Radford and Holston munitions facilities under previously-awarded contracts. In September, the Army awarded a $97m (£76m) contract modification for the construction of a natural gas-fired steam facility at Holston. Also at Holston, we are progressing on modernisation contracts totalling $135m (£106m) for waste water management and a $146m (£115m) contract for the construction of a nitric acid recovery facility to produce larger quantities of insensitive munitions. At Radford, subcontractor performance issues and cost overruns on the nitrocellulose facility modernisation programme have been encountered, impacting the financial performance of the sector.

We are saddened to report that an accident on 11 June in a nitrocellulose drying facility in Radford resulted in one fatality and injuries to two employees. The health and safety of our employees has always been and continues to be our highest priority. Investigations concluded the accident likely resulted from unique set of conditions, and processes were modified to prevent future occurrences.

US Ship Repair

As a leading provider of US Navy ship repair and modernisation services, we are strategically located in four of the US Navy's primary ports, with the homeported fleet projected to grow in San Diego and Jacksonville. Our shipyards are equipped to service a broad range of maritime vessels, to include cruisers, destroyers, amphibious warships and littoral combat ships for the US Navy, as well as select private and commercial vessels.

In 2018, we secured firm orders across our US shipyards totalling approximately $1.3bn (£1.0bn), including awards to modernise the USS Philippine Sea in Jacksonville; the USS Gettysburg in Norfolk; and the USS Sterett in San Diego.

In commercial shipbuilding, completion, outfitting and delivery activities for the final ship, Hull 113, continued. Hull 112 remains a completed asset held on our balance sheet awaiting the identification of a new buyer and final sea trials.

Earlier in 2018, we ceased operations at our Mobile shipyard and in October, we completed the divestiture of the shipyard.

BAE Systems Hägglunds

With an installed base of nearly 1,300 CV90 vehicles in Sweden and across six other international markets, the business continues to execute and pursue a number of significant CV90 contracts.

We continue to evaluate the opportunity for the CV90 into Australia's LAND 400 Phase 3 competition for a Mounted Close Combat Capability family of vehicles. Our bid with teammate Patria for the LAND 400 Phase 2 Combat Reconnaissance Vehicle was unsuccessful.

We continue to advance local industrial co-operation arrangements with Czech companies in support of an anticipated bid of the CV90 for the country's next fleet of infantry fighting vehicles.

Work continues to refurbish Swedish CV90 vehicles under a contract awarded in 2016, and we are integrating Mjölner mortar systems on 40 Swedish CV90s under a separate contract.

Initial deliveries have begun under a contract for 32 BvS10 all-terrain vehicles for Austria. We are also pursuing opportunities for the BvS10 and its unarmoured sister Beowulf vehicle in the US.

FNSS

FNSS, our land systems joint venture based in Turkey, continues to perform under its $524m (£411m) programme to produce 259 8x8 wheeled armoured vehicles for the Royal Malaysian Army.

Programme deliveries are on schedule under the contract with Oman for PARS Wheeled Armoured Vehicles in 8x8 and 6x6 configurations.

Work progresses under multiple contracts to Turkish Armed Forces, including a €278m (£250m) contract to supply 260 Anti-Tank Vehicles, an €84m (£75m) contract for air defence vehicles, and a €155m (£139m) contract to provide 27 amphibious assault vehicles.

Looking forward

Forward-looking information for the Platforms & Services (US) reporting segment is provided later in this report.

 

P65 Segmental looking forward

 

 

Air

Air comprises the Group's UKbased air activities for European and International Markets, and US Programmes, and its businesses in Saudi Arabia and Australia, together with its 37.5% interest in the European MBDA joint venture.

Our UK-based business includes programmes in European and International Markets for the production of Typhoon combat and Hawk trainer aircraft, support and upgrades for Typhoon, Tornado and Hawk aircraft, and development of next-generation Unmanned Air Systems and defence information systems, as well as US Programmes, primarily the UK-based F-35 Lightning II manufacture, engineering development and support activity.

In Saudi Arabia, the business provides operational capability support to the country's air and naval forces through UK/Saudi government-to-government programmes. The Saudi British Defence Cooperation Programme and Salam Typhoon project provide for multi-year contracts between the governments.

In Australia, the business primarily delivers upgrade and support programmes for customers in the defence and commercial sectors across the air, maritime and land domains. Services contracts include the provision of sustainment, training solutions and upgrades.

The Type 26 frigate was selected for the Commonwealth of Australia's Hunter Class nine-ship Future Frigate programme, with a framework agreement including the scope for the initial design and productionisation phase signed in December.

MBDA is a leading global prime contractor of missiles and missile systems across the air, maritime and land domains.

P06 Alternative performance measure definitions

Operational and strategic key points

·      Contract with the Qatar government for the supply of 24 Typhoon and nine Hawk aircraft, air and ground training, and ground support became effective in September. MBDA contract for the supply of missiles also became effective

·      Signature in March 2018 of a Memorandum of Intent between the Kingdom of Saudi Arabia and the UK government to aim to finalise discussions for the purchase of a further 48 Typhoon aircraft

·      RAF declaration of Typhoon Centurion standard, enabling transition of capabilities from Tornado to Typhoon

·      Announcement of UK Combat Air Strategy and launch of the Tempest programme

·      Completion of the final four of 12 Typhoon deliveries to Oman

·      In November the first flight of a Hawk assembled in Saudi Arabia took place

·      Integration of F-35 Lightning II onto aircraft carrier HMS Queen Elizabeth commenced, and the first F-35 deck landing completed

·      Order intake of £3.2bn for support services up to 2022 in respect of the continuation of Typhoon support to Saudi Arabia

·      Current German government position on export licensing may affect the Group's ability to provide capability to Saudi Arabia which may have a consequential impact on the Group's financial performance and relationships

·      Type 26 frigate selected for the Commonwealth of Australia's Hunter Class nine-ship Future Frigate programme with the framework agreement including the A$1.9bn (£1.1bn) scope for the initial design and productionisation phase signed in December

Financial performance

Financial performance measures as defined by the Group



2018

2017
(restated)2

Sales

KPI

£6,712m

£7,210m

Underlying EBITA

KPI

£859m

£967m

Return on sales


12.8%

13.4%

Operating business cash flow

KPI

£666m

£832m

Order intake1

KPI

£14,845m

£6,128m

Order backlog1


£27.4bn

£19.5bn

 

Financial performance measures defined in IFRS3



2018

2017
(restated)2

Revenue


£5,579m

£6,312m

Operating profit


£810m

£918m

Return on revenue


14.5%

14.5%

Cash flow from operating activities


£719m

£888m

 

·    Sales were down 7% at £6.7bn. As expected production activity on Typhoon for the European, Saudi and Oman contracts has largely completed. The F-35 programme continues to ramp-up to plan and Middle East support volumes continue to grow

·    The return on sales of 12.8% was at the top end of our guidance. There has been some profit trading on completing the Typhoon Oman contract with minimal sales, and that has generated a 70bps benefit within the reported return on sales

·    The £666m of cash inflow in the year reflects full consumption of the £300m early receipts seen in 2017 against the Saudi Arabia support programme, utilisation of advances on the residual Typhoon export contracts, and a net advance now held on the Qatar programme

·    Order backlog stands at £27.4bn, significantly higher following the awards for the £5.1bn Qatar Typhoon and Hawk programme, the £1.1bn initial contract under the Australian Hunter Class frigate programme, and in respect of the £3.2bn continuation of Typhoon support through 2022 in Saudi Arabia

1.  Including share of equity accounted investments.

2.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

3.  International Financial Reporting Standards.

Operational performance

European and International Markets

The contract entered into between BAE Systems and the Government of the State of Qatar, valued at approximately £5bn, for the supply of 24 Typhoon and nine Hawk aircraft became effective during September. The agreement also provides for the supply of ground support and training to the Qatar Armed Forces. The business has begun mobilising resources and supply chain.

The final four out of a total of 12 Typhoon aircraft were delivered to the Royal Air Force of Oman during the year. The five-year availability service contract for the aircraft continues.

Production is ongoing under the Kuwait Typhoon contract, secured by Italian Eurofighter partner Leonardo, with all 28 major units now in work. BAE Systems deliveries will commence in 2019.

In the year, the Royal Air Force accepted seven Typhoon aircraft from the UK final assembly facility. The German, Italian and Spanish Air Forces accepted a total of 15 aircraft, which brings deliveries of Tranche 3 aircraft to 73 of the 88 contracted.

The Royal Air Force declared Typhoon to have met Centurion standard, enabling the transition of capabilities from Tornado to Typhoon. Integration of the Captor E-Scan radar continues to progress as we conduct first flight trials to develop and improve the radar's capability.

In the UK we continue to support the Ministry of Defence Typhoon fleet under a ten-year partnership arrangement which provides flying hours and we also support the European Partner Nations support arrangements at above contractual levels.

Following the £119m contract secured in 2017 for collaboration on the first design and development phase of an indigenous fifth-generation fighter jet for the Turkish Air Force, activity has focused on mobilising resources.

Discussions with the Government of India and Hindustan Aeronautics Limited for the supply of Hawk aircraft kit sets to be used to build additional aircraft under licence in India for the Indian Air Force and Navy, have ceased pending a clearer understanding of their requirements.

Support to the Royal Air Force's UK fleet of Hawk fast jet trainer aircraft continues through the long-term availability contract, along with support to users of Hawk trainer aircraft around the world.

The UK Combat Air Strategy, announced in the year, is a significant milestone for the Air sector and sends a strong signal of intent about the UK's commitment to retaining a leading position in Combat Air. The Tempest programme is a key enabler to deliver this strategy and the business is currently mobilising resources against a contract awarded in July, whilst also engaging with industry partners and the Ministry of Defence to define and mature the technologies and capabilities that are required.

US Programmes

Final price agreement was secured on F-35 Lot 11. Negotiations on Lots 12 to 14 are expected to conclude in the first half of 2019, which will enable an expected ramp-up to full-rate production by 2020. In the year, 110 rear fuselage assemblies were delivered for the Low-Rate Initial Production contracts across Lots 10, 11 and 12.

At RAF Marham in Norfolk, following acceptance of the Lightning Operating Centre, the UK's first four F-35 aircraft arrived in June, and a further five aircraft arrived during September, enabling the UK government to declare Initial Operational Capability in December. The integration of F-35 onto the Queen Elizabeth Aircraft Carrier has commenced, with the initial phase of First of Class Flight trials now complete.

During the second half of the year, contract award for the Performance Based Logistics arrangements for BAE Systems equipment responsibilities was achieved, underpinning a growing contribution by BAE Systems to the F-35 global fleet support.

Saudi Arabia

The Memorandum of Intent signed between the Kingdom of Saudi Arabia and the UK government in March 2018 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.

The Typhoon support contracts continue to operate well. Agreement has been reached with the Saudi Arabian government for BAE Systems to continue to provide Typhoon support services to the Royal Saudi Air Force against which we have booked order intake of £3.2bn in December 2018 for support services up to and including 2022.

The Royal Saudi Air Force will receive their first In-Kingdom final-assembled Hawk aircraft in early 2019. The company has delivered 14 of 22 major units on schedule, to meet this final assembly programme and first flight of a Hawk assembled in Saudi Arabia occurred in November.

The Royal Saudi Naval Forces accepted the third and final ship in the Minehunter mid-life update programme in April, with a training services contract signed in the year.

Work continues to reorganise our portfolio of interests in a number of industrial companies in Saudi Arabia. During the year Riyadh Wings Aviation Academy LLC increased its ownership to 11.85% in the Group's Overhaul and Maintenance Company (OMC) subsidiary, and is contracted to acquire a further interest up to 49%. OMC has disposed of its 85.7% shareholding in Aircraft Accessories and Components Company to Saudi Arabian Military Industries (SAMI) in 2019. These reorganisations are in support of our strategy to develop indigenous supply in Saudi Arabia through our In-Kingdom Industrial Participation programme, promoting training, development and employment opportunities in line with the Kingdom's National Transformation Plan and Vision 2030.

Through the restructuring of the Group's portfolio of interests in a number of Kingdom of Saudi Arabia industrial companies along with sustaining current industrialised capability and building on our strong history in Saudi Arabia, we are working in partnership to continue to deliver these priorities with the SAMI organisation to explore how we can collaborate to deliver further In-Kingdom Industrial Participation.

It should be recognised that the Group is reliant on the continued approval of export licences by a number of governments in order to continue supplies to the Kingdom of Saudi Arabia. Significant changes in policies of such governments may affect our own provision of capability to the country and we are liaising closely with the UK government in working to reduce the impact of any such occurrence.

Australia

In March, the Commonwealth of Australia agreed upgrade and sustainment contracts worth A$1.0bn (£0.6bn) for the Jindalee Operational Radar Network, to be delivered over an initial ten-year term. Mobilisation of the acquisition and support teams has been completed and support of all radar sites transferred to the business.

In June, the Commonwealth of Australia selected the Group as the preferred tenderer for the design and build of up to nine ships for the Hunter Class programme for the Royal Australian Navy. We subsequently agreed the contract and scope for the initial four-year design and productionisation phase with a value of A$1.9bn (£1.1bn). The production scope is to be negotiated in due course for the first batch of ships.

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 in 2019. However, in December, the Commonwealth announced that we had not been selected for the next stage of Landing Helicopter Dock support.

Progress continues on the sustainment and upgrade of the Anzac fleet under the Warship Asset Management Alliance.

The Hawk Mk127 Lead-In Fighter project team continues to maintain the high level of aircraft availability required. The Capability Assurance Programme to upgrade the Hawk fleet to meet the F-35 training requirements remains on schedule.

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 arriving in Australia in December.

We were notified in March 2018 that we had been unsuccessful in our bid for the Land 400 Phase 2 Combat Reconnaissance Vehicle programme.

MBDA

During the year MBDA secured new contracts for additional Taurus stand-off missiles in South Korea and for Marte Extended Range anti-ship missiles to Qatar. The contract for the supply of missiles to Qatar for the 24 Typhoon aircraft became effective in September.

MBDA also secured the development and manufacture of next-generation MICA air-to-air missiles in France, and further five-year support to the Aster system in France, Italy and the UK.

An amended Request for Proposal was received for the proposed future German ground-based air defence system, TLVS. MBDA is partnered with Lockheed Martin on this opportunity.

MBDA made good progress on development programmes with key test firings successfully achieved in the year for both Sea Venom anti-ship and Land Ceptor air defence missiles.

The Sea Ceptor naval air defence missile system entered into service with the Royal Navy Type 23 frigates in May. Meteor entered into service with the Royal Air Force on Typhoon. The French Army introduced in operations the new fifth-generation land combat missile MMP.

 

 

Looking forward

Forward-looking information for the Air reporting segment is provided later in this report.

P65 Segmental looking forward

 

Maritime

Maritime comprises the Group's UK-based maritime and land activities.

Maritime programmes include the construction of the second of the Queen Elizabeth Class aircraft carriers, five River Class Offshore Patrol Vessels and seven Astute Class submarines for the Royal Navy; as well as the design and production of the Royal Navy's future Dreadnought Class submarine and Type 26 frigate. Additionally the Maritime portfolio includes in-service support, including the delivery of training services and management of HM Naval Base, Portsmouth, and the design and manufacture of combat systems, torpedoes and radars.

Land UK provides combat vehicle upgrades and support to the British Army and international customers, and designs, develops and manufactures a comprehensive range of munitions products servicing its main customer, the UK Ministry of Defence, as well as international customers. The business also develops and manufactures casedtelescoped weapons through its CTA International joint venture.

P06 Alternative performance measure definitions

Operational and strategic key points

·      HMS Queen Elizabeth has undergone successful initial F-35 Lightning II flight trials

·      Cost growth on the Aircraft Carrier programme has resulted in a more conservative trading of contract profitability. Sea trials for HMS Prince of Wales are expected within the next year

·      Type 26 selected as the design for the Canadian Surface Combatant programme

·      Receipt of the full £1.6bn contract for the seventh Astute Class submarine, Agincourt, with order intake in the year of £0.7bn

·      Further £1.3bn funding extension for the Dreadnought programme received

·      Offshore Patrol Vessel programme quality issues have required the creation of a £47m loss provision

·      Management strengthened across segment to focus on programme schedule, execution and cost performance

·      CTA International, BAE Systems' joint venture with Nexter, delivered 115 40mm cased-telescopic cannons

·      In January 2019, entered into an agreement with Rheinmetall to create a joint UK-based military land vehicle design, manufacturing and support business, subject to regulatory clearances

Financial performance

Financial performance measures as defined by the Group



2018

2017
(restated)2

Sales

KPI

£2,975m

£2,877m

Underlying EBITA

KPI

£209m

£251m

Return on sales


7.0%

8.7%

Operating business cash flow

KPI

£67m

£278m

Order intake1

KPI

£3,513m

£4,671m

Order backlog1


£9.0bn

£8.5bn

 

Financial performance measures defined in IFRS3



2018

2017
(restated)2

Revenue


£2,940m

£2,845m

Operating profit


£191m

£240m

Return on revenue


6.5%

8.4%

Cash flow from operating activities


£190m

£396m

 

·      Sales of £3.0bn are marginally higher than 2017. As expected, whilst the Dreadnought submarine and Type 26 programmes continue to ramp-up, activity levels on the Carrier programme are reducing.

·      Return on sales for the year was at 7.0%. Further charges on the five-ship Offshore Patrol Vessels contract were taken and trading on the Carrier programme was at a more conservative level than planned. Performance in the submarines business was ahead of plan on improved milestone achievement and risk retirement.

·      There was an operating cash inflow of £67m. Reported performance reflects the reversal of the £106m VAT timing benefit from last year.

·      Order backlog increased to £9.0bn following the awards in the first half of the year for Astute Boat 7 pricing and further funding under the Dreadnought programme.

1.  Including share of equity accounted investments.

2.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

3.  International Financial Reporting Standards.

 

Operational performance

Maritime

Naval Ships

On the aircraft carrier programme, large volume installation activities continue to progress on HMS Prince of Wales, with commissioning of systems continuing through 2019 and sea trials also scheduled to take place in 2019.

Work continues to support HMS Queen Elizabeth. Following the completion of a Capability Insertion Period, successful fixed wing flight trials took place in the second half of 2018, with the first F-35 Lightning II deck landing completed. However, cost growth on the programme has resulted in a more conservative trading of contract profitability in the period.

The first of the five Offshore Patrol Vessels, HMS Forth, completed sea trials in December 2017. However, quality issues have had to be resolved resulting in unanticipated programme cost growth and a £47m loss provision has been recorded in the year. Lessons learned are being applied to the other ships in build. Sea trials on the second ship, HMS Medway, took place in November 2018 and the ship is due to be delivered to the customer in the first quarter of 2019. Construction of the remaining three Offshore Patrol Vessels on the Clyde continues through 2019.

The three Type 26 ships continue in production. The programme currently employs over 1,500 people and activities have continued to build progressively during 2018 on transition from detailed design through to production readiness and the commencement of unit build.

Our Type 26 platform design has opened up opportunities abroad and in February 2019, the Canadian government together with Irving Shipbuilding selected Lockheed Martin Canada, using our Type 26 platform design, as subcontractor for the Canadian Surface Combatant programme. This is a further endorsement of the Global Combat Ship as one of the world's most advanced anti-submarine warships.

Submarines

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, Agincourt, was secured in March.

Functional and spatial design and production on the first of class continues to advance on the Dreadnought Class submarine programme, the replacement for the Vanguard Class submarines. Contract funding of £1.3bn was received through 2018.

The major programme of building works at the Barrow site continues, with contracts in place totalling more than £0.5bn.

The Dreadnought Alliance Agreement detailing the organisational, governance and commercial arrangements between the three parties, the Submarine Delivery Agency, BAE Systems and Rolls-Royce was agreed, allowing for the formal stand-up of the Alliance from April 2018.

Maritime Services

BAE Systems continues to manage and maintain HM Naval Base, Portsmouth, and supports more than half of the Royal Navy's surface fleet through the Maritime Support Delivery Framework contract. The Ministry of Defence extended this contract to March 2020 in the early part of the year.

During the second half of the year, we have mobilised the Type 45 Power Improvement Programme in collaboration with Cammell Laird and BMT, having been selected as prime contractor in the first half of 2018.

Progress continues on the £270m Spearfish torpedo programme, with the demonstration phase forecast to complete in 2020.

Maritime Services has delivered a transformation programme through 2018 to streamline its processes and ensure it is able to deliver value for money as we continue to provide the Royal Navy with the capability it needs to protect the nation's interests.

Land UK

The business continues to provide UK and international customers with a wide range of light and heavy munitions, and support to previously supplied armoured vehicles and bridging systems.

During the year, 115 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 275 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 £72m 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.

In January 2019 the business entered into an agreement with Rheinmetall to create a joint UK-based military land vehicle design, manufacturing and support business. Rheinmetall will purchase a 55% stake in the existing BAE Systems UK-based combat vehicles business for £28.6m with BAE Systems retaining 45%. The transaction is subject to regulatory approvals which are anticipated to be completed in the first half of 2019. The transaction does not include Land UK's munitions business or its holding in the CTAI joint venture with Nexter.

 

Looking forward

Forward-looking information for the Maritime reporting segment is provided later in this report.

P65 Segmental looking forward

 

Segmental looking forward

Effective 1 January 2018, BAE Systems has five principal reporting segments, Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air and Maritime, which align with the strategic direction of the Group.

Electronic Systems

Electronic Systems comprises the US- and UK-based electronics activities, including electronic warfare systems, electro-optical sensors, military and commercial digital engine and flight controls, precision guidance and seeker solutions, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.

Electronic Systems is well positioned to address current and evolving priority programmes from its strong franchise positions in electronic warfare, precision guidance and seeker solutions. Electronic Systems has a long-standing programme of research and development, and its focus remains on maintaining a diverse portfolio of defence and commercial products and capabilities for US and international customers.

The business expects to benefit from its ability to apply innovative technology solutions that meet defence customers' changing requirements. As a result, the business is well positioned for the medium term with strong significant roles on F-35 Lightning II and classified programmes, as well as with specific products such as APKWS®. Over the longer term, the business is poised to leverage its technology strength in emerging areas of demand such as space resilience and autonomous vehicles.

In the commercial aviation market, Electronic Systems' technology innovations are enabling the business to maintain its long-standing customer positions and to compete for, and win, new business.

Cyber & Intelligence

Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered Applied Intelligence business, and covers the Group's cyber security, secure government, and commercial and financial security activities.

Intelligence & Security

The outlook for the US government services sector is stable, although market conditions remain highly competitive and continue to evolve. The US business remains well positioned and will continue to leverage its established market positions and reputation for reliable and adaptable performance to meet customer demands for innovative, cost-effective and cyber-hardened solutions to pursue recompeted contracts and new business across its portfolio of sustainment, integration and modernisation solutions for military, intelligence and nuclear triad customers.

Applied Intelligence

Strong market demand and continued investment in people and products position the business for revenue growth in the medium term. Profitability is expected to continue to benefit from focus on operational efficiency and cost control.

Platforms & Services (US)

Platforms & Services (US), with operations in the US, UK and Sweden, manufactures combat vehicles, weapons and munitions, and delivers services and sustainment activities, including ship repair, and the management and operation of government-owned munitions facilities.

The combat vehicles business is underpinned by a growing order backlog and incumbencies on key franchise programmes. These include the US Army's Armored MultiPurpose Vehicle, M109A7 self-propelled howitzer, Bradley upgrade programmes, the Amphibious Combat Vehicle; and the CV90 and BvS10 export programmes from our BAE Systems Hägglunds business.

FNSS continues to execute on its order book of both Turkish and international orders.

These long-term contracts and franchise positions make the combat vehicles business well placed for growth in the medium term and the team is closely following the US Army's acquisition plans for its next generation of combat vehicles.

In the maritime domain, the sector has a strong position on naval gun programmes and US Navy ship repair activities where the business has invested in facilities in key homeports. This capitalised infrastructure represents a high barrier to entry, and the business remains well aligned to the US Navy's operational strategy.

The Group remains a leading provider of gun systems and precision strike capabilities and, in the complex ordnance manufacturing business, continues to manage and operate the US Army's Radford and Holston munitions facilities under previously awarded contracts.

Air

Air comprises the Group's UKbased air activities for European and International Markets, and US Programmes, and its businesses in Saudi Arabia and Australia, together with its 37.5% interest in the European MBDA joint venture.

Future UK sales are underpinned by existing contracts for both Typhoon production and support. Production of rear fuselage assemblies for F-35 Lightning II will increase over the next two years to reach its expected peak rate for the next decade. The business plays a significant role in the F-35 sustainment programme in support of Lockheed Martin.

Defence and security remain priorities for the UK government, 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 Typhoon support operation is 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 order to provide ongoing capability to international customers, the company is reliant on the continued approval of export licences by a number of governments. Any significant change in UK or foreign government policy in this regard may have an adverse effect on the Group's provision of capability to the Kingdom of Saudi Arabia and the Group is liaising closely with the UK government in working to reduce the impact of any such occurrence.

The Australian business has long-term sustainment and upgrade activities in maritime, air, wide-area surveillance, missile defence and electronic systems. It will expand into ship design and productionisation on the Hunter Class frigate programme from 2019.

MBDA has a strong order book which is driving increasing production and sales. Development programmes continue to improve the long-term capabilities of the business.

Maritime

Maritime comprises the Group's UK-based maritime and land activities.

Maritime

In Maritime, there remains pressure on the Royal Navy's near-term budgets and a highlycompetitive environment in ship support and upgrade. Overall the outlook is stable based on the long-term contracted positions.

Within Submarines, the business is executing the Astute Class programme, with four boats still in build. On the Dreadnought programme manufacturing activities continue on the first of class boat. Investment continues in the Barrow facilities in order to provide the capabilities to deliver these long-term programmes through the next decade and beyond.

In shipbuilding, sales are underpinned by the contracts to manufacture the Queen Elizabeth Class aircraft carriers, Type 26 frigates and River Class Offshore Patrol Vessels. The through-life support of surface ship platforms provides a sustainable business in technical services and mid-life upgrades.

Land UK

The Land UK business continues to deliver support to armoured vehicle and bridging systems in UK and international markets, munitions under the 15-year Munitions Acquisition Supply Solution partnering agreement secured in 2008 and 40mm cased-telescopic cannons for the UK and French armies.

In January 2019 BAE Systems entered into an agreement with Rheinmetall to create a joint UK-based military land vehicle design, manufacturing and support business. Rheinmetall will purchase a 55% stake in the existing BAE Systems UK-based combat vehicles business for £28.6m, with BAE Systems retaining 45%. The new business is well positioned to address the upcoming Challenger II upgrade programme.

Page references used above refer to the Annual Report 2018 that can be viewed on the Company's website.

P06 Alternative performance measure definitions

P19 Our markets

 

Consolidated income statement

for the year ended 31 December




2018


2017 (restated)1


Notes


£m

Total

£m


£m

Total

£m

Continuing operations








Sales

1


18,407



18,487


Deduct Share of sales by equity accounted investments

1


(2,812)



(2,534)


Add Sales to equity accounted investments

1


1,226



1,271


Revenue

1



16,821



17,224

Operating costs

2



(15,514)



(16,043)

Other income

4



158



131

Group operating profit




1,465



1,312

Share of results of equity accounted investments

1



140



107









Underlying EBITA

1


1,928



1,974


Non-recurring items

1


(154)



(13)


EBITA



1,774



1,961


Amortisation of intangible assets

1


(85)



(86)


Impairment of intangible assets

1


(33)



(384)


Financial expense of equity accounted investments

5


(13)



(34)


Taxation expense of equity accounted investments

6


(38)



(38)


Operating profit

1



1,605



1,419









Financial income



228



416


Financial expense



(609)



(762)


Net finance costs

5



(381)



(346)

Profit before taxation




1,224



1,073

Taxation expense

6



(191)



(216)

Profit for the year




1,033



857









Attributable to:








Equity shareholders




1,000



827

Non-controlling interests




33



30





1,033



857









Earnings per share

7







Basic earnings per share




31.3p



26.0p

Diluted earnings per share




31.2p



25.9p

1.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 to the Group accounts for details regarding the restatement.

 

Consolidated statement of comprehensive income

for the year ended 31 December




2018


2017 (restated)1


Notes


Other

reserves2

£m

Retained

earnings

£m

Total

£m


Other

reserves2

£m

Retained earnings

£m

Total

£m

Profit for the year



-

1,033

1,033


-

857

857

Other comprehensive income










Items that will not be reclassified to the income statement:










Subsidiaries:










Remeasurements on retirement benefit schemes



-

74

74


-

2,056

2,056

Tax on items that will not be reclassified to the income statement

6


-

5

5


-

(481)

(481)

Equity accounted investments (net of tax)



-

6

6


-

52

52

Items that may be reclassified to the income statement:










Subsidiaries:










Currency translation on foreign currency net investments



400

-

400


(630)

-

(630)

Amounts (charged)/credited to hedging reserve



(25)

-

(25)


59

-

59

Tax on items that may be reclassified to the income statement

6


5

-

5


(11)

-

(11)

Equity accounted investments (net of tax)



15

-

15


(18)

-

(18)

Total other comprehensive income for the year (net of tax)



395

85

480


(600)

1,627

1,027

Total comprehensive income for the year



395

1,118

1,513


(600)

2,484

1,884











Attributable to:










Equity shareholders



391

1,085

1,476


(595)

2,454

1,859

Non-controlling interests



4

33

37


(5)

30

25




395

1,118

1,513


(600)

2,484

1,884

1.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers and to correct a prior year error in respect of the accounting valuation of a longevity swap held by one of the Group's defined benefit pension schemes. See note 37 for details regarding the restatement.

2.  An analysis of other reserves is provided in note 24.

 

Consolidated statement of changes in equity

for the year ended 31 December



Attributable to equity holders of BAE Systems plc



Notes

Issued

share

capital

£m

Share

premium

£m

Other

reserves2

£m

Retained earnings

£m

Total

£m

Non-controlling

interests

£m

Total

equity

£m

Balance at 1 January 2018 as originally presented


87

1,249

6,098

(2,693)

4,741

43

4,784

Restatement1


-

-

(8)

(21)

(29)

-

(29)

Restated total equity at 1 January 2018


87

1,249

6,090

(2,714)

4,712

43

4,755

Profit for the year


-

-

-

1,000

1,000

33

1,033

Total other comprehensive income for the year


-

-

391

85

476

4

480

Total comprehensive income for the year


-

-

391

1,085

1,476

37

1,513

Share-based payments (inclusive of tax)

30

-

-

-

63

63

-

63

Net sale of own shares


-

-

-

1

1

-

1

Ordinary share dividends

24

-

-

-

(703)

(703)

(28)

(731)

Partial disposal of shareholding in subsidiary undertaking


-

-

-

(3)

(3)

20

17

At 31 December 2018


87

1,249

6,481

(2,271)

5,546

72

5,618









Balance at 1 January 2017 as originally presented


87

1,249

6,685

(4,583)

3,438

26

3,464

Restatement1


-

-

-

47

47

-

47

Restated total equity at 1 January 2017


87

1,249

6,685

(4,536)

3,485

26

3,511

Profit for the year


-

-

-

827

827

30

857

Total other comprehensive income for the year


-

-

(595)

1,627

1,032

(5)

1,027

Total  comprehensive income for the year


-

-

(595)

2,454

1,859

25

1,884

Share-based payments (inclusive of tax)

30

-

-

-

53

53

-

53

Net purchase of own shares


-

-

-

(1)

(1)

-

(1)

Ordinary share dividends

24

-

-

-

(684)

(684)

(8)

(692)

At 31 December 2017


87

1,249

6,090

(2,714)

4,712

43

4,755

1.    Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers and to correct a prior year error in respect of the accounting valuation of a longevity swap held by one of the Group's defined benefit pension schemes. See note 37 for details regarding the restatement.

2.  An analysis of other reserves is provided in note 24.

 

Consolidated balance sheet

as at 31 December


Notes


2018
£m

2017
(restated)1
£m

2016
(restated)1
£m

Non-current assets






Intangible assets

8


10,658

10,378

11,264

Property, plant and equipment

9


2,365

2,230

2,098

Investment property

10


98

101

110

Equity accounted investments

11


429

322

250

Other investments



13

6

6

Other receivables

12


352

387

351

Retirement benefit surpluses

22


308

302

223

Other financial assets

13


245

226

345

Deferred tax assets

14


702

702

1,181




15,170

14,654

15,828

Current assets






Inventories

15


774

733

776

Trade, other and contract receivables

12


5,177

4,244

3,959

Current tax

16


81

20

5

Other financial assets

13


166

89

204

Cash and cash equivalents

17


3,232

3,271

2,769

Assets held for sale

18


146

26

2




9,576

8,383

7,715

Total assets

19


24,746

23,037

23,543

Non-current liabilities






Loans

20


(3,514)

(4,069)

(4,425)

Other payables

21


(1,536)

(1,723)

(1,040)

Retirement benefit obligations

22


(4,240)

(4,324)

(6,330)

Other financial liabilities

13


(104)

(133)

(102)

Deferred tax liabilities

14


-

(4)

(10)

Provisions

23


(427)

(435)

(392)




(9,821)

(10,688)

(12,299)

Current liabilities






Loans and overdrafts

20


(785)

(14)

-

Trade and other payables

21


(7,740)

(6,755)

(6,917)

Other financial liabilities

13


(74)

(104)

(212)

Current tax

16


(334)

(305)

(311)

Provisions

23


(334)

(400)

(291)

Liabilities held for sale

18


(40)

(16)

(2)




(9,307)

(7,594)

(7,733)

Total liabilities



(19,128)

(18,282)

(20,032)

Net assets



5,618

4,755

3,511







Capital and reserves






Issued share capital

24


87

87

87

Share premium



1,249

1,249

1,249

Other reserves

24


6,481

6,090

6,685

Retained earnings - deficit



(2,271)

(2,714)

(4,536)

Total equity attributable to equity holders of BAE Systems plc



5,546

4,712

3,485

Non-controlling interests



72

43

26

Total equity



5,618

4,755

3,511

1.    Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers and to correct a prior year error in respect of the accounting valuation of a longevity swap held by one of the Group's defined benefit pension schemes. See note 37 for details regarding the restatement.

Approved by the Board on 20 February 2019 and signed on its behalf by:

 

C N Woodburn     P J Lynas
Chief Executive       Group Finance Director

 

Consolidated cash flow statement

for the year ended 31 December


Notes


2018
£m

2017
(restated)
1
£m

Profit for the year



1,033

857

Taxation expense

6


191

216

Research and development expenditure credits

4


(27)

(20)

Share of results of equity accounted investments

1


(140)

(107)

Net finance costs

5


381

346

Depreciation, amortisation and impairment

2


411

728

Gain on investment revaluation



(7)

-

Profit on disposal of property, plant and equipment, and investment property

2,4


(18)

(10)

Loss in respect of held for sale assets and business disposals

2


9

13

Cost of equity-settled employee share schemes



64

61

Movements in provisions



(101)

150

Decrease in liabilities for retirement benefit obligations



(153)

(138)

(Increase)/decrease in working capital:





Inventories



(16)

(29)

Trade, other and contract receivables



(757)

(397)

Trade and other payables



530

454

Taxation paid



(200)

(227)

Net cash flow from operating activities



1,200

1,897

Dividends received from equity accounted investments

11


57

72

Interest received



25

23

Purchase of property, plant and equipment, and investment property



(358)

(389)

Purchase of intangible assets



(139)

(87)

Proceeds from sale of property, plant and equipment, and investment property



34

34

Proceeds from sale of intangible assets



-

1

Purchase of subsidiary undertakings



-

(3)

Purchase of equity accounted investment



(2)

-

Partial disposal of shareholding in subsidiary undertaking



17

-

Equity accounted investment funding

11


(1)

(3)

Cash and cash equivalents acquired with subsidiary undertakings

34


14

-

Cash flow in respect of held for sale assets and business disposals



12

(6)

Cash and cash equivalents disposed of with subsidiary undertakings



-

(2)

Net cash flow from investing activities



(341)

(360)

Interest paid



(203)

(204)

Net sale/(purchase) of own shares



1

(1)

Equity dividends paid

24


(703)

(684)

Dividends paid to non-controlling interests



(28)

(8)

Cash flow from matured derivative financial instruments (excluding cash flow hedges)



6

(83)

Cash flow from movement in cash collateral



2

(15)

Cash flow from repayment of loans



(7)

-

Net cash flow from financing activities

26


(932)

(995)

Net (decrease)/increase in cash and cash equivalents



(73)

542

Cash and cash equivalents at 1 January



3,264

2,771

Effect of foreign exchange rate changes on cash and cash equivalents



41

(49)

Cash and cash equivalents at 31 December



3,232

3,264

Comprising:





Cash and cash equivalents

17


3,232

3,271

Overdrafts

20


-

(7)

Cash and cash equivalents at 31 December



3,232

3,264

1.  Prior year comparatives have been restated upon the Group's adoption of IFRS 15 Revenue from Contracts with Customers. See note 37 for details regarding the restatement.

 

Notes to the Group accounts

31. Related party transactions

The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments (note 11) and pension schemes (note 22).

Transactions with related parties occur in the normal course of business, are priced on an arm's-length basis and settled on normal trade terms. The more significant transactions are disclosed below:


Sales to
related parties


Purchases from
related parties


Amounts owed by related parties


Amounts owed to related parties1


Management recharges1

Related party

2018
£m

2017
£m


2018
£m

2017
£m


2018
£m

2017
£m


2018
£m

2017
£m


2018
£m

2017
£m

Advanced Electronics Company Limited

38

86


166

158


18

24


24

5


-

-

CTA International SAS

1

8


-

-


-

3


15

-


-

-

Eurofighter Jagdflugzeug GmbH

1,028

1,004


-

-


37

47


52

49


-

-

FADEC International LLC

101

95


-

-


-

-


-

-


-

-

FAST Training Services Limited

2

2


-

-


-

-


-

-


-

-

MBDA SAS

23

28


199

199


8

9


864

873


18

16

Panavia Aircraft GmbH

32

48


26

51


4

3


-

-


-

-

Reaction Engines Limited

1

-


-

-


-

-


-

-


-

-

BAE Systems Pensions Trust Limited2

-

-


19

17


4

4


10

11


-

-


1,226

1,271


410

425


71

90


965

938


18

16

1.  Also relates to disclosures under IAS 24 Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2018, £869m (2017 £884m) was owed by BAE Systems plc and £96m (2017 £54m) by other Group subsidiaries.

2.  Transactions with BAE Systems Pensions Trust Limited represent lease arrangements for land and buildings leased by the Group.

 

The Group considers key management personnel as defined under IAS 24 Related Party Disclosures, to be the members of the Group's Executive Committee and the Company's non-executive directors. Fuller disclosures on directors' remuneration are set out in the Annual remuneration report on pages 97 to 115. Total emoluments for directors and key management personnel charged to the Consolidated income statement were: 


2018
£'000

2017
£'000

Short-term employee benefits

15,140

16,878

Post-employment benefits

1,127

1,661

Share-based payments

6,578

5,123


22,845

23,662

 

Note and page references used above refer to the Annual Report 2018 that can be viewed on the Company's website.

 

Cautionary statement: All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of BAE Systems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements, which reflect management's assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of BAE Systems or the markets and economies in which BAE Systems operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. BAE Systems plc and its directors accept no liability to third parties in respect of this report save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Schedule 10A of the Financial Services and Markets Act 2000. It should be noted that Schedule 10A and Section 463 of the Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that their liability is solely to BAE Systems plc.

 


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