Good operational performance and net cash inflow from operating activities, continuing execution of a sound forward strategy, full year guidance unchanged, a three year share buyback plan, an 11.9% increase in underlying earnings per share on sales up 2.8% on a constant currency basis, a 5% increase in the half year interim dividend, an order backlog of £52.7bn and importantly, completion of UK triennial pension review confirming that a hitherto £2.1bn deficit at the end of last year has been reversed to a £0.9bn surplus are the main features from what are an excellent set of interim results posted by BAE Systems this morning.
The company moves forward from here in a position of great strength. These are very interesting times in respect of defence and as the largest defence contractor in Europe and the seventh largest in the world, this is a company that is very well positioned to take advantage of very necessary increased levels of spending by governments on defence. BAE Systems has a large and geographically diverse portfolio of interests and will clearly benefit in the years ahead from rising defence spending in the many market that it serves. The company’s view on defence spending and the outlook for its key markets’ states:
“Our geographic diversity positions us strongly as many of the countries in which we operate have announced or are making plans to increase spending to counter the elevated and evolving threat environment on multiple fronts.
In the US, the spending outlook is positive. The Fiscal Year 2022 Omnibus Appropriations bill was signed into law on 9 March. This FY22 budget of $743bn (£612bn) maintains funding support for many of our key programmes: combat vehicles; F-35 and other electronic warfare programmes; and precision weapon systems. The President’s Fiscal Year 2023 Budget Request includes $773bn (£636bn) for the Department of Defense (DoD) and the business remains well aligned to the current US National Defense Strategy readiness and modernisation priorities of the US military services.
In the UK, the 2021 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 the cyber domain.
The opportunity pipeline is positive with domestic, export and collaboration opportunities identified and we have the capabilities to support our UK customer in its space ambitions. In Europe, the shifts in defence expenditure have been profound with the significant step up in German defence expenditure, Sweden and Finland looking to join NATO and other nations increasing their defence budgets to, and even beyond, their NATO 2% of GDP commitments.
We remain increasingly well placed to secure a number of significant opportunities through our positions on Eurofighter Typhoon, our shareholding in MBDA, our BAE Systems Hägglunds and Bofors businesses based in Sweden, and through US FMS. 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 businesses to the region.
The AUKUS announcement is strategically significant and a clear example of how nations are looking to co-ordinate capabilities in multi-domain operations to address the threat environment.
As the largest defence provider in the UK and Australia and a top 10 prime contractor to the US DoD, we are well positioned to support our government customers in these nations as discussions progress. In the Middle East, our longstanding 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.”
Financial performance from Platforms and Services together with those from Cyber and Intelligence in the first half of the year was spectacular and while performance from Air and Electronics Systems was below that of last year and Maritime was stable, as it does across the group timing, currencies and other factors play a part.
For the avoidance of doubt, the 37.4% decrease in basic earnings per share reported was driven by non-recurring gains that occurred in 2021 in respect of disposals of investment property and the £157m from gains of subsidiary disposals reported last year. Excluding one-off tax benefits reported in H1 2021, underlying earnings per share and which is the important figure to note in these results, increased by 11.9% in the first half period to 24.5p from 21.9p reported last year.
Liquidity remains strong and net debt at the half year period end stood at £3.1bn. The company completed the acquisition of Bohemia Interactive Simulations during the period and with effect from this year the company has established a new Digital Intelligence business that brings together non-US digital and data capabilities and that is now reported within the Cyber & Intelligence division. In addition, BAE Systems Australia has been transitioned from the Air segment to Maritime.
In respect of Electronic Systems, sales of £2.3bn are in line with those of 2021 on a constant currency basis, reflecting challenges in the supply chain and resourcing constraints. – Return on sales was 15.8%, up 20bps reflecting good programme execution, with the usual second half weighting. – Operating business cash flow of £93m reflects a more usual second half weighted business cycle compared with last year. – Order backlog grew since year-end, with a book-to-bill ratio5 of 1.0 driven by awards on F-35, Precision Strike and C4ISR capabilities.
Platforms and Services employs 12,200 personnel and has operations in the US, UK and Sweden. Sales of £1.6bn declined by 3% on a constant currency basis. The decline was driven by lower US Ship Repair volumes, while combat vehicles volumes were maintained. – Return on sales performance for the half year was 8.9%, an improvement of 210bps driven by improved efficiencies in Ship Repair and improved operational performance in combat vehicles. – The first half saw cash outflow of £59m, which reflects the utilisation of advances received in the prior year. – Book-to-bill ratio5 of 0.9 reflects further awards on M109 and Amphibious Combat Vehicles.
Air has a total of 24,200 employees and comprises UK-based air activities for European and International markets, US Programmes and development of Future Combat Air Systems, alongside its business in Saudi Arabia, together with its 37.5% interest in the European MBDA joint venture. H1 sales of £3.49bn were reported, a figure that was relatively similar to last year although the order backlog has risen from £17.8bn at FY21 year end to £23.3bn at the end of June.
Of additional note is that activity on the 24 Typhoon and 9 Hawk aircraft and associated support and training contract for the State of Qatar is progressing well. Seven Hawk aircraft have been accepted by the customer and entered into service at RAF Leeming, in line with the agreement to base the Qatari Hawk aircraft in the UK. The first Typhoon aircraft remains on schedule for delivery in Q3 this year, and in total six Typhoon aircraft are planned to be delivered before the end of 2022.
Deliveries of major units continue under the Kuwait Typhoon contract, secured by Italian Eurofighter partner Leonardo. Four major units were completed in the first half of 2022, with the one remaining delivery planned for the second half of the year.
Production of major units is progressing to plan on the £1.3bn German Air Force order for 38 aircraft to replace its original Typhoon Tranche 1 aircraft, with 15 major units now having commenced build, and completion of the first front fuselage planned for the second half of 2022.
During the first half of 2022 BAE Systems received an order for our workshare valued at in excess of £0.5bn for an additional 20 aircraft for the Spanish Air Force. During the first half period BAE Systems secured an eleven-year follow-on contract valued at £0.6bn for support to the Royal Air Force’s fleet of Hawk fast jet trainer and Royal Air Force Aerobatic Team aircraft. Alongside this, the ten-year partnership arrangement for support to the Royal Air Force’s Typhoon fleet continues to deliver the contracted flying hours.
Following initial entry into service of the export standard electronically scanned European Common Radar in late 2021 further deliveries continue in 2022. Development continues on the national radar variants for the UK, German, Italian and Spanish Air Forces. The UK continues to fund development activity for the future UK Typhoon weapon system and sensors, as part of the Partner Nations’ commitment to the ten-year Typhoon capability enhancement programme.
In respect of the Future Combat Air System, the Tempest technology maturation programme is progressing well, and work continues to plan on the contract received in 2021 for the Future Combat Air System Concept & Assessment Phase. Working with national and international industry partners and the Ministry of Defence, this contract enables the development of a range of digital concepts, embedding new tools and techniques to design, evaluate and shape the final design and capability requirements of Tempest. The project will deliver the first flying combat air demonstrator within the next five years.
The F-35 rear fuselage manufacturing continues at full rate production through 2022 with 74 rear fuselage assemblies completed during the first half, and a further 76 planned for the second half, in line with the programmes for Lot 14, 15 and 16 contracts. Following the award in 2021 of a five-year contract award for F-35 sustainment services to December 2025, the company continues to provide services for both the UK and US customers in support of key F-35 sustainment activities.
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. Our in-Kingdom Saudi employee base continues to grow with 76% Saudisation, and 94% of in-Kingdom female employees are Saudi nationals.
The company continues the development of our footprint across the Kingdom, with demonstrable contributions to our local communities. Clearly, the company is reliant on the continued approval of export licences by a number of governments in order to continue to support programme operations in the Kingdom of Saudi Arabia and it is working closely with industry partners and the UK government to continue to fulfil contractual support arrangements in the Kingdom.
BAE Systems continues to perform against the current five-year contract to provide Typhoon support services to the Royal Saudi Air Force, which will complete at the end of 2022. Through this contract, the business also supports the Industrialisation of Defence capabilities in Saudi Arabia. Discussions have commenced with the customer for the company to continue to provide these support services for a further five years. Under the Saudi British Defence Co-operation Programme (SBDCP) agreement, the Group discharges a number of contracts, including support to the Tornado fleet, provision of Officer and Aircrew Training and Technician training for the Royal Saudi Air Force, as well as technical training, engineering and logistics services for the Royal Saudi Naval Forces. Following the completion of the previous five-year SBDCP funding arrangement on 31 December 2021, the company has reached an agreement with the Saudi Arabian government to continue to provide these services for a further five years through to 31 December 2026 and an ‘Instruction To Proceed’ for the full five-year contract has now been received from the Royal Saudi Air Force.
All 22 BAE Hawk aircraft assembled in-Kingdom have now been completed. The final aircraft remains subject to formal acceptance by the Royal Saudi Air Force and this is anticipated to occur by the end of July 2022.
Following the Saudi Arabia Military Industries purchase of Advanced Electronics Company in 2021, BAE Systems continues to review our portfolio of interests in a number of industrial companies in Saudi Arabia. The company states that it will continue to explore opportunities to collaborate with key local partners, including Saudi defence entities in order to deliver further In-Kingdom Industrial Participation, in line with the Kingdom’s National Transformation Plan and Vision 2030.
BAE Systems continues to invest in promising new and innovative technologies for the future including the exploration and development of e-products capability with a number of partners. One example of this BAE Systems being a member of a consortium of investors in the Eve Urban Air Mobility (UAM) electric vertical take-off and landing (eVTOL) company, aimed at designing, testing, and manufacturing small, zero-emission aircraft. The company has also signed a Memorandum of Understanding with Embraer S.A. confirming its intention to create a joint venture to develop a defence variant of Eve’s eVTOL aircraft.
After winning a number of key domestic and export orders in 2021, MBDA has continued this success in the first half of 2022, and the business is well placed to benefit from increased defence spending in a number of European countries along with further international opportunities. In the period, significant export market orders were received.
Aligned with the Rafale platform sales, MBDA has been awarded an air weapons package from the UAE and a further air weapons package for Greece. Following the Naval Group Defence and Intervention Frigate platform success in Greece, MBDA has been awarded a Naval Based Air Defence weapons package for the frigates.
With European countries recognising the importance of sovereign capabilities in the missile sector and re-evaluating their needs, Poland has accelerated its ground-based air defence campaign, awarding the first phase to MBDA for the Common Anti Air Modular Missiles and launchers. Production is being maintained across the MBDA product range, despite supply chain pressure in the aftermath of the pandemic and as a result of the Ukraine crisis. Progress continues across a number of assessment and development phase programmes including Future Cruise and Anti-Ship Weapon; MICA Next Generation, Spear Capability 3 and Aster Block New Technology.
Looking forward, future Typhoon production and support sales are underpinned by existing contracts. Discussions continue in relation to potential further contract awards for Typhoon, which would extend current production revenues. Production of rear fuselage assemblies for the F-35 is expected to be sustained at the current full rate levels. The business plays a significant role in the F-35 sustainment programme in support of Lockheed Martin, and revenues will continue to grow as the number of aircraft deployed increases over the coming years.
Defence and security remains a priority for the UK government. The UK Combat Air Strategy provides the base to enable long-term planning and investment in a key strategic part of the business. 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. The in-Kingdom (Saudi) support business is expected to remain stable, underpinned by long-standing contracts renewed every five years. In order to provide ongoing capability to international customers, the Group is reliant on the continued approval of export licences by a number of governments. The withholding of such export licences may have an adverse effect on the Group’s provision of capability to the Kingdom of Saudi Arabia and the Group will seek to work closely with the UK government to manage the impact of any such occurrence. MBDA has a strong order backlog and positively evolving opportunity pipeline supporting future years’ sales. Development programmes continue to improve the long-term capabilities of the business in air, land and sea domains.
Sales were up by 6% at £2.2bn on a constant currency basis, due to increased volumes on Dreadnought and Type 26 programmes. Return on sales was at 8.4%. 2021 had benefitted from risk releases across a number of programmes. Operating business cash outflow was £22m, reflecting utilisation of UK munitions advanced funding and the Order backlog increased to £14.2bn, reflecting ongoing Dreadnought funding.
In respect of Naval Ships, the Type 26 programme continues to progress with construction underway on the first three City Class Type 26 frigates. Preparations continue for the first of class, HMS Glasgow, to depart from Govan shipyard and enter the water later this year. She will then transition to BAE’s Scotstoun shipyard where further outfit, test and commissioning will take place.
Half of the major units of the second ship in class, HMS Cardiff have been erected, while the third ship, HMS Belfast, continues to progress after entering manufacture in June 2021.
The Canadian Surface Combatant programme work is progressing on the Definition Phase Contract, where BAE Systems has responsibility for Warship Design and are currently in the Preliminary Design Review stage. Work is also progressing on the Support Services subcontract, which is a four-year framework agreement to provide technical assistance to Irving Shipbuilding Inc., through intellectual property licensing, and the provision of consultancy services to help upskill its workforce ahead of cutting steel on the first ship.
In the Combat Systems business, the successful delivery of major upgrades to the combat system capabilities on board both HMS Queen Elizabeth and HMS Prince of Wales enabled Carrier Strike Group tasking whilst achieving 99.5% equipment availability for the fleet. Our Combat Systems business also continues to focus on the future, forging new partnerships and investing in new open architecture and cloud-ready mission systems.
The Submarines business is a member of the Dreadnought Alliance, working alongside the Submarine Delivery Agency (SDA) and Rolls-Royce to deliver the replacement for the Royal Navy’s Vanguard Class which currently carries the UK’s nuclear deterrent.
Four Dreadnought Class submarines will be built in Barrow, with the first of these due to be in operational service in the early 2030s. Construction of the first and second submarines continues to advance. The value of the programme to the company to date is £10.3bn, with additional contract funding of £2.5bn received to date in 2022 as part of Delivery Phase 3 (DP3). DP3 will see the first submarine, Dreadnought, exit our Barrow site to begin sea trials, laying the foundation to sustain the Continuous at Sea Deterrent.
In April, BAE Systems Submarines entered into the Submarine Build Capability Contract with the SDA, which maintains the business’ role as the lead for the design and build of nuclear submarines within the UK submarine enterprise.
Four Astute Class submarines have now been delivered to the Royal Navy, while the fifth boat, HMS Anson, is scheduled to exit the Barrow shipyard for sea trials later this year. The remaining two submarines, HMS Agamemnon and HMS Agincourt, are at an advanced stage of construction in Barrow.
Early design and mobilisation activities for the Submersible Ship Nuclear Replacement (SSNR), the programme to deliver a replacement for the Astute class, are progressing, with the programme recently entering the Functional Design phase.
The Maritime Services business has successfully delivered continued support to the UK Ministry of Defence and the Royal Navy at HM Naval Base Portsmouth. Service delivery under the Ministry of Defence’s Future Maritime Support Programme (FMSP) came into effect on 1 October 2021 and will continue for at least five years.
The Hard Facilities Management Services contract is delivered by the KBS Maritime joint venture with KBR which was established last year. Under the FMSP Ship Engineering Management contract, BAE Systems continues to maintain, repair, upgrade and prepare the Portsmouth flotilla. This includes support to HMS Prince of Wales, currently the NATO flagship, ahead of and during Exercise Cold Response 2022, a major NATO exercise in Norway. We are supporting the Royal Navy’s Batch 2 Offshore Patrol Vessels around the globe with our teams deployed to North America, the Caribbean, the South Atlantic and the Indo-Pacific regions during the period. The company has maintained more than 98% availability for these five vessels.
The Type 45 Propulsion Improvement Programme is progressing, with three ships simultaneously in the programme during the period. HMS Dauntless is scheduled to conclude sea trials in Q3 ahead of a return to the fleet, HMS Daring has commenced her work in Birkenhead, and HMS Dragon’s upgrade is being conducted alongside a deep maintenance upkeep in Portsmouth.
An agreement was signed with Barzan Maintenance Shield and the Qatar Emiri Naval Force (QENF) outlining the parties’ intent to develop Warship and Naval Base Management Services for the QENF.
In the Underwater Weapons business stream, the Torpedo Repair and Maintenance contract for in-service support to the UK’s Royal Navy continues to perform well. The £270m Spearfish torpedo upgrade programme, delivered for the UK Ministry of Defence and Royal Navy, continues to produce modification kits as part of the production phase which commenced in 2021. Land UK The business has started transitioning to the Next Generation Munitions Supply Solution (NGMS) contract, which supersedes the Munitions Acquisition Supply Solution (MASS) contract at the end of this year and details the supply of munitions to the Ministry of Defence for the next 15 years. Both the MASS and NGMS programmes are progressing well and the business is on track to achieve agreed timelines.
The £90m NGMS investment programme is also advancing at pace, with £20m of this committed to updating and expanding manufacturing equipment and infrastructure by the end of 2023.
Mobilisation of the Challenger 3 and Mechanised Infantry Vehicle contracts secured by the RBSL joint venture are progressing well. Supply chain manufacturing has begun, with the first steel cut on the vehicle’s turret structures. RBSL’s multi-million-pound investment at the Telford manufacturing site has included the installation of grit blast and paint booths. Additional works to complete the facility upgrade ready for Challenger 3 and Boxer production are progressing as planned.
In Australia, work on the Hunter Class Frigate programme continues, with three prototype blocks now under construction. Following the successful achievement of the Systems Definition Review, the programme is now undergoing a Preliminary Design Review process, which is a technical evaluation that ensures the design is operationally effective and sets the pace for detailed design and planning phases.
The business and the Commonwealth of Australia have agreed to revise the cut steel date for the first ship, which will allow an accelerated build schedule as greater design maturity will reduce the risk of rework, allowing the ships to be built more efficiently.
The Jindalee Operational Radar Network programme is delivering against schedule and operational support continues to meet availability requirements. Trials of prototype technology have been successfully demonstrated to the customer at site and proven the maturity of the hardware design.
The Hawk Mk127 Lead-In Fighter aircraft availability continues to meet customer expectations for Australian Defence Force pilot training. F-35 Sustainment activity is continuing to build at Williamtown across the South Pacific Regional Airframe Depot, Squadron Operational Maintenance Support and Warehousing. The Maritime Sustainment line of business is achieving significant progress with the recent undocking of HMAS Toowoomba at the Henderson Shipyard in Western Australia. HMAS Ballarat and HMAS Stuart are currently the focus of significant upgrade activity in the shipyard. Red Ochre LABS, our internal Australian R&D hub, continues to grow.
Expertise is being developed and exploited in autonomous systems, high speed weapons, high frequency systems and electronic warfare. Emerging and disruptive technologies are being applied to deliver complex solutions like common autonomous architectures, artificially intelligent uncrewed ground vehicles and leading electronic support measures like Mantlet©.
Looking forward, there remains a positive outlook in Maritime – this based on long-term contracted positions on major programmes and an increasing pipeline of opportunities.
Within Submarines, the business is executing on two long-term build programmes, Astute and Dreadnought, and has commenced early-stage design activities for SSNR. On the Astute Class programme, the fifth of class vessel is undergoing final commissioning activities and the two remaining boats are in build.
On the Dreadnought programme, manufacturing activities continue on the first two boats of a four-boat programme. Investment continues in the Barrow facilities in order to provide the capabilities to deliver these long-term programmes through the decade and beyond.
On the SSNR programme, work has recently begun on the Functional Design. In shipbuilding, sales through the decade and beyond are underpinned by the manufacture of Type 26 frigates. The through-life support of surface ship platforms provides a sustainable business in technical services and mid-life upgrades.
The Australian business has long-term sustainment and upgrade activities in maritime, air, wide-area surveillance, missile defence and electronic systems. It has expanded into ship design and production on the Hunter Class Frigate programme, which will drive growth in the coming years.
Land UK Future work will be underpinned by existing support contracts and the contracted workshare on the Mechanised Infantry Vehicle and Challenger 3 Main Battle Tank programmes. Munitions supply continues under the Munitions Acquisition Supply Solution partnering agreement which will be followed in 2023 by the recently-agreed 15-year Next Generation Munitions Supply Solution.
Cyber & Intelligence
Cyber & Intelligence, with 10,900 employees comprises the US-based Intelligence & Security business and the newly-formed UK-headquartered Digital Intelligence business, and covers the Group’s cyber security, secure government and defence, and data and digital activities.
The Digital Intelligence business saw 7% sales growth driven by good utilisation and performance. The US Intelligence & Security business grew sales by 6% on a constant currency basis, driven by the Bohemia Interactive Simulations acquisition. On a reported exchange rate basis, segment sales were up 11.2%. – Return on sales was 11.7%, an expansion of 140bps led by good utilisation and programme performance. – Operating business cash flow in the first half of the year was £69m. – Order backlog remained in line with the year-end, with a book-to-bill ratio of 1.2.
The Company has today announced that Cressida Hogg will join the Board as a non-executive director and Chair designate, with effect from 1 November 2022. Subject to election at the Company’s AGM next year, she will succeed Sir Roger Carr as Chair at the conclusion of that meeting, due to be held on 4 May 2023.
The BAE Interim results statement summary concluded:
“The fundamentals of our business remain strong and the strategy of the Group is unchanged. We remain well placed to deliver against our business and financial objectives and are managing the material risks associated with global macroeconomic challenges. Our business benefits from a large order backlog, with established positions on long-term programmes in the US, UK, Saudi Arabia and Australia. Governments in our key markets now more than ever are prioritising defence and security, with strong demand for our capabilities. This backdrop, together with our focus on programme execution, positions us to grow our sales profitably and increase cash conversion in the coming years. We are evolving the business to have an appropriate ESG agenda embedded at its core with a constant focus on operational performance and value creation. Higher cash generation gives us increased strategic flexibility focused on technology aligned to our customers’ priorities and enables us to deliver increased cash returns to shareholders”
CHW (London – 28th July 2022)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785