BAE Systems plc good progress in the first half

BAE Systems plc (LON:BA.), today announced half year report 2018.

Charles Woodburn, Chief Executive, said: “We have made good progress in the first half strengthening the outlook through significant wins on the Australian SEA 5000 and US Amphibious Combat Vehicle programmes. These, combined with the launch of the UK Combat Air Strategy, provide good momentum into the second half and beyond. Operationally, there have been some notably strong performances in our Electronic Systems and Air sectors, but also some disappointments on certain long-standing programmes in Maritime and Platforms & Services (US), where we have now taken steps to strengthen management and improve programme execution. In this transition earnings year, our Group earnings guidance is maintained and, with a large order book and a positive outlook for defence budgets in a number of key markets, we have a strong foundation to deliver growth and sustainable cash flow.”

Financial highlights

Financial performance measures as defined by the Group1

– Order backlog increased to £39.7bn, with £9.7bn of orders in the first half. Order backlog does not yet include the initial contract on the SEA 5000 programme, or the contract for the supply of Typhoon and Hawk aircraft to Qatar, both of which are expected in the second half of the year.

– Sales at £8.8bn, down 3% on a constant currency basis5, as a result of reduced Typhoon production activity.

– Underlying EBITA at £874m, down 6% on a constant currency basis5.

– Underlying earnings per share decreased by 2% to 19.8p, or up 2% on a constant currency basis5. The Group’s effective tax rate for the first half of the year was 16.5%, compared to a rate of 23% in the same period last year.

Financial performance measures defined in IFRS2

– Revenue decreased to £8.2bn, down 5% on a constant currency basis5.

– Operating profit decreased by 11% to £792m, or 7% on a constant currency basis5.

– Basic earnings per share decreased by 17% to 14.8p.

Pension and dividend

– The Group’s share of the pre-tax accounting net pension deficit reduced to £3.0bn (31 December 2017 £3.9bn).

– Interim dividend increased by 2% to 9.0p per share.

1. We monitor the underlying financial performance of the Group using alternative performance measures. These measures are not defined in International Financial Reporting Standards (IFRS) and, therefore, are considered to be non-GAAP (Generally Accepted Accounting Principles) measures. Accordingly, the relevant IFRS measures are also presented where appropriate. For alternative performance measure definitions see glossary on page 7.

2. International Financial Reporting Standards.

3. Prior year comparatives have been restated upon the Group’s adoption of IFRS 15 Revenue from Contracts with Customers. See note 10 for details regarding the restatement.

4. Interim dividend declared (see note 6).

5. Current period compared with prior period translated at current period exchange rates.

Operational and strategic key points

Air

– In March, the UK government signed a Memorandum of Intent with the Kingdom of Saudi Arabia to aim to finalise discussions for the purchase of 48 Typhoon aircraft.

– In March, contracts worth A$1.0bn (£0.6bn) were agreed for the upgrade and sustainment of the Jindalee Operational Radar Network upgrade programme in Australia.

– In June, the Commonwealth of Australia selected the Group as the preferred tenderer for the design and build of nine ships for the Future Frigate programme for the Royal Australian Navy.

– In July, the UK government announced its Combat Air Strategy, under which the UK government and industry will jointly invest in next-generation combat air systems.

– BAE Systems and the Government of the State of Qatar signed a contract in December 2017 for the supply of 24 Typhoon aircraft to the Qatar Emiri Air Force along with a bespoke support and training package, which was extended to include nine Hawk aircraft, along with an initial support package. This contract was subject to financing conditions and receipt by the Company of first payment. Discussions have progressed and a number of milestones achieved, including the issuing of a Royal Decree relating to Qatar’s financing of the contract. Financing discussions are in progress and, when successfully concluded, it is anticipated first payment would be received in the third quarter of 2018.

Maritime

– Andrew Wolstenholme has been appointed to lead Maritime with a clear focus on programme schedule and cost performance.

– In March, the Group secured the full £1.5bn contract for delivery of the seventh Astute Class submarine and a further £0.9bn of funding on the Dreadnought programme from the Ministry of Defence.

– The first of the five Offshore Patrol Vessels (OPV), HMS Forth, completed sea trials in December 2017, although short-term performance issues on the programme are being addressed which are expected to result in cost growth, with a loss provision of £15m being recognised in the first half. Maritime performance was also impacted by more conservative margin trading on the Aircraft Carrier programme.

Electronic Systems

– Further awards for APKWS® laser-guided rockets were secured worth $399m (£302m).

– Demand for our products in the Electronic Systems business is growing and the portfolio is well aligned with the new US National Defense Strategy published earlier this year and our customer requirements. The business has a record order backlog at 30 June 2018 of $7.1bn (£5.3bn).

Platforms & Services (US)

– In June, a contract worth $198m (£150m) was secured for the US Marine Corps Amphibious Combat Vehicle programme, with options for a total of 204 vehicles worth up to $1.2bn (£0.9bn).

– The US Ship Repair business received orders totalling $607m (£460m) in the first half of 2018. A further charge has been taken in the first half of the year on the final commercial ship. The Group has taken the decision not to pursue new contracts for the Mobile, Alabama, shipyard, resulting in non-recurring impairment and other charges of $45m (£33m) in the first half of the year.

– Challenges with a subcontractor on the Radford facilities programme have required a charge to be taken in the first half of the year. Other than for this item and the Commercial Shipbuilding charges, return on sales performance for the Platforms & Services (US) business would have been in line with the 2017 half year for this segment.

Cyber & Intelligence

– In our Applied Intelligence business, the restructuring actions taken to return the business to profitability are taking hold and the business achieved a much improved first half performance.