24 Feb 22 With continuing focus on improving efficiency, execution and delivery together with cash generation and building what is already a diverse international business portfolio, adapting and positioning itself for what looks to be a very interesting future, BAE Systems has rewarded investors with underlying earnings before interest and tax being 13% ahead of the previous year and a full year dividend rise of 6%.
CEO Charles Woodburn said in the statement that “Our strong results reflect the outstanding efforts of our employees who have continued to adapt and work closely with our customers, suppliers and trades unions to deliver capabilities which keep nations and citizens safe.
“We are continuing to evolve our business, increasing our investments in advanced technologies to deliver differentiated solutions to meet our customers’ priorities.
“Our diverse portfolio, together with our focus on programme execution, cash generation and efficiencies, is helping us to navigate the challenging operating environment, meaning we are well positioned for sustained top line and margin growth in the coming years.”
FY21 highlights are a 5% increase in sales to £21,3bn, underlying earnings per share on a constant currency basis and excluding impact of the current year one-off tax benefit up 12% to 47.8p and free cash flow (excluding a £1bn contribution to the UK pension scheme) of £1,864 million, order intake during the year was £21.5bn and the order backlog at year end stood at £44bn.The company ended the year with net debt of £2.16bn against a previous year £2.7bn and the company confirmed that the £5000m share buyback programme announced with the interim results last July has already been completed.
In respect of current year guidance, BAE Systems told investors that it anticipated sales growth in the 2% to 4% range over 2021 with particular emphasis of growth coming from Electronic Systems, Air, Maritime and Cyber & Intelligence segments with Platforms & Services (US) expected to be stable. Approximately 75% of the expected sales are already in the order backlog. Underlying EBIT is expected to increase in the range of 4% to 6%, Underlying earnings per share is expected to increase in the range of 4% to 6%.
Free cash flow for FY22 is anticipated to be in excess of £1bn, with a three-year target for 2022 to 2024 in excess of £4bn. The three-year cash flow target for the period 2020 to 2022, originally set at £3.5bn to £3.8bn has been upgraded to be in excess of £4bn.
By any standards imaginable these are in my view to be regarded as an excellent set of results in what has been a year marred by the global impact of C-19.
BAE Systems forward strategy remains to provide consistent operational improvement in performance, further improve competitiveness, accelerate sustainability, invest in technology and to leverage the leading capabilities that it clearly has in abundance and finally, continuing to evolve in changing markets. I am in little doubt that BAE Systems looks to be very well placed to achieve the many objectives that it has set. Defence thrives on uncertainty and that, as we are seeing unfold once again in Eastern Europe, is a reminder of why companies such as BAE Systems are so important.
With a diverse and already strong international portfolio of interests combined with growing defence budgets across the world, already established resilience and the ability to meet global macro-economic challenges, the future for BAE Systems looks excellent.
BAE Systems fundamentals and forward outlook remain very strong and the excellent unchanged strategy designed by CEO Charles Woodburn shows through in the excellent FY21 results reported today. With its very well-established positions on long term programmes in the UK, US, Saudi Arabia and Australia, a very strong focus on execution, delivery and in meeting customer requirements, BAE Systems is not only demonstrating the ability to grow revenues and profits in the years ahead but through its continuing investment in new technology areas, is looking forward to the future with ever increasing confidence.
I view the rise in Free Cash Flow in FY21 to be another interesting marker for the future. It is this that allows the company to invest in its own future whilst at the same time delivering increased cash returns to shareholders.
Flexible and with the ability and energy to adapt to change, focussed programme execution, internal performance objectives and investing in new and aligned technologies, BAE Systems agenda looks set fair in my view to further benefit and reward investors well through the years ahead.
In respect of divisional performance:
Electronic Systems delivered another year of growth and good programme execution. Sales were up 5% but were held back in the last quarter as the Omicron surge tightened an already pandemic-constrained labour market, and caused some supply chain delays and disruptions. These challenges dampened what were positive contributions from the 2020 acquisitions and strong execution across key franchises, such as the electronic warfare and precision-guided munition programmes. Our civil market operations continue to be impacted by the COVID-19 pandemic, though there are some signs of demand recovery in the commercial Controls & Avionics Solutions and Power & Propulsion Solutions businesses where we have leading positions.
Platforms & Services (US) – Combat vehicle deliveries continued, with the investment in new production capabilities and processes enabling the business to consistently deliver at increased volumes over multiple programmes. Compared to the previous year, vehicle delivery volumes increased by more than 60%. US Ship Repair made good progress resolving several challenged ship modernisation programmes and recovering from C-19 and other operational impacts. Work remains to be done to return to pre-pandemic levels of performance.
The Air sector grew and maintained good operational performance. Production moved to full rate levels on F-35 rear fuselage assemblies, Typhoon production and support revenues increased as the company delivered on its build programmes and continued to provide Typhoon operators with ongoing support and training services in order to deliver good availability, maintenance and upgrade enhancements. The company confirmed that the Tempest technology maturation programme is progressing well and that it secured the first contract for the Future Combat Air System Concept & Assessment Phase.
In Maritime, the company sustained performance improvements seen last year. Manufacturing levels increased on the Type 26 programme for the Royal Navy with the first three ships now in production. The company confirmed that a fifth Astute Class submarine was launched, that construction of the first two Dreadnought submarines is progressing and that Maritime Services had successfully supported the first major UK Carrier Strike Group deployment.
Cyber and Intelligence delivered increased margins with Applied Intelligence delivering much-improved profitability as it benefiting from heightened demand in the Government sector, together with the results of our restructuring. Intelligence & Security delivered growth in sales and profit as it performed on its long-term support contracts, some of which are on the most sensitive and critical US national security programmes. The business maintained its bid pipeline to deliver a strong, stable backlog position at year end.
The company completed two new acquisitions during 2021, both being in the UK. The first was a small technology bolt-on acquisition – a company that will enhances BAE Systems data and digital capabilities and the second, In-Space Missions which is a company that designs, builds and operates satellites and satellite systems and that the company says will enable it to combine BAE Systems’ experience in highly secure satellite communications with In-Space Missions’ full lifecycle satellite capability. Finally, the company announced that it had entered into a definitive agreement to acquire Bohemia Interactive Simulations, a leading developer of advanced military simulation and training software and which is headquartered in the US.
BAE Systems has a long and very successful history of investing in its own future and the past year is no exception. In the FY21 results statement the company said:
“Investment in advanced technology and innovation is a benefit which spans the breadth of the business, supporting operational performance, competitiveness, our sustainability objectives and growth aspirations. The threat environment consists not just of the physical risks but also those in the grey zone which need to be addressed. It is critical to our customers to have a fully integrated combination of capabilities to negate these threats.
Against this backdrop we are increasing our self-funded research and development investments and positioning the Group towards future growth areas aligned to our customer priorities, by identifying collaboration opportunities and investing in our leading capabilities and technologies across electronic warfare, combat aircraft, precision weaponry, cyber and the underwater battlespace. From these established positions we are developing, linking and transitioning solutions into priority areas such as multi-domain networks, data analysis, autonomy, space and sustainability-driven technology developments.
While our R&D investments are important, we sustain our leading positions through collaboration with our customers, educational institutions and in partnership with defence laboratories and research institutions such as the Defence Science and Technology Laboratory, DARPA, the Air Force Research Laboratory and the Office of Naval Research. Additionally, we accelerate the pace and reach of our innovation by collaborating across our global enterprise.
Reflecting the importance of technology investment, in 2022 we launched the BAE Systems Digital Intelligence business which brings together many of our digital transformation, cyber security, complex data analysis and communication and information systems capabilities from across the Group. We have exceptional talent and world-leading innovation in these areas and the new business will allow greater collaboration across the Group, and in time bring a greater range of capabilities to our customers”.
With a large order backlog and exceptional international programme positions, BAE said in its detailed and very interesting full year results statement that:
“Our defence and security capabilities remain highly relevant in an uncertain global environment with complex threats, the requirement in many cases to recapitalise or upgrade ageing equipment, and with the additional need for governments to drive a domestic economic prosperity agenda in a post-pandemic world. This backdrop has resulted in good prospects in existing and new international markets for our products and services in air, maritime, land, space and cyber security.
The US continues to represent the world’s largest defence budget and accounts for around 46% of our revenues.
Through a range of innovative technologies and proven capabilities, our US business continues to sustain its robust backlog and diverse portfolio of long-term defence programmes for the US Armed Forces and international allies. The business portfolio remains closely aligned with enduring customer priorities and key focus areas outlined in the US National Defense Strategy, to modernise and maintain military readiness, which we expect to continue with the upcoming 2022 National Defense Strategy. The business has been operating under extended Continuing Resolutions in fiscal year 2022. While the Congressional budget and appropriations impasse is not without risk, the threat environment remains and is expected to result in continued support for US defence spending in the coming years.
In the UK, the Defence Command Paper renewed commitments to our major long-term programmes in complex warship, submarine and combat aircraft design and build, allowing for long-term investment in these key sovereign capabilities, as well as strong support for cyber. The opportunity pipeline is positive with domestic, export and collaboration opportunities identified. We also have the capabilities to support our UK customer with its space ambitions.
Our portfolio is well positioned to benefit from increased defence spending in Asia Pacific through our Australia business, which is already set to grow significantly due to our contracted positions, and through export opportunities from our UK, US and Australian business to the region.
The AUKUS announcement in September 2021 is strategically significant. As the largest defence provider in the UK and Australia and a top ten prime contractor to the US Department of Defense we are well positioned to support our government customers in these nations as discussions progress. This is a clear example of how nations are looking to coordinate capabilities in multi-domain operations to address the threat environment.
In Europe, a number of nations including Germany and France continue to increase their defence budgets to address the threat environment and in order to meet their NATO commitments. We remain well placed through our positions on the Eurofighter Typhoon, our shareholding in MBDA and our BAE Systems Hägglunds land business based in Sweden, and we are pursuing a number of significant opportunities in the region.
In the Middle East, our long-standing relationships at government and company levels, continued regional instability and the nature of our long-term contracts, mean we expect defence and security to remain a priority. The renewal of certain existing long-term support contracts is tracking in line with expectations and we continue to progress a number of opportunities with existing customers.
The civil aerospace market accounts for around 3% of Group sales. COVID-19 has significantly impacted this market, and a recovery to 2019 levels is likely to be a number of years away. We are seeing some signs of recovery and this remains an important franchise for us in which we have leading capabilities in flight and engine controls across new, developing and more mature programmes with capabilities transferable from defence air platforms”.
CHW (London – 24th February 2022)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785