Annual Report • Dec 31, 2014
Annual Report
Open in ViewerOpens in native device viewer
We employ a skilled workforce of 83,400 people1 in 40 countries. Working with customers and local partners, we develop, engineer, manufacture and support products and systems to deliver military capability, protect national security and people, and keep critical information and infrastructure secure.
| STRATEGIC REPORT | |
|---|---|
| 2014 at a glance | 01 |
| Outlook for 2015 | 03 |
| Chairman's letter | 04 |
| Our business at a glance | 06 |
| Group Strategic Framework | 10 |
| How our business works | 12 |
| Chief Executive's review | 14 |
| Performance against our 2014 objectives | 18 |
| Financial review | 22 |
| Segmental performance | 27 |
| Electronic Systems | 28 |
| Cyber & Intelligence | 31 |
| Platforms & Services (US) | 34 |
| Platforms & Services (UK) | 37 |
| Platforms & Services (International) | 40 |
| Responsible business | 43 |
| How we manage risk | 48 |
| Principal risks | 50 |
The Strategic Report was approved by the board of directors on 18 February 2015. David Parkes, Company Secretary
| GOVERNANCE | |
|---|---|
| Governance summary | 54 |
| Board of directors | 56 |
| Corporate Governance Report | 58 |
| Audit Committee Report | 61 |
| Corporate Responsibility Committee Report |
64 |
| Nominations Committee | 66 |
| Remuneration Committee Report | 67 |
| Annual Remuneration Report | 69 |
| Preface to the Directors' Remuneration Policy |
83 |
| Directors' Remuneration Policy | 84 |
| Directors' Report | 93 |
| Independent Auditor's Report | 98 |
| FINANCIAL STATEMENTS | |
|---|---|
| Index to the nancial statements | 101 |
INVESTOR RESOURCES
Shareholder information 164
COVER IMAGE: Taranis, the stealthy unmanned combat vehicle demonstrator which successfully completed a second phase of ight testing in 2014, with Typhoon, the advanced multi-role/ swing-role combat aircraft.
Cautionary statement: All statements other than statements of historical fact included in this document, including, without limitation, those regarding the nancial 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 reect 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.
Sales1 were £16.6bn. The year-on-year reduction of £1.5bn reected £0.6bn of adverse exchange rate translation, the expected volume reductions in Land & Armaments and the previous year's benet from the one-off price settlement for Salam Typhoon.
Underlying EBITA2 was £1,702m. The year-on-year position was broadly unchanged after allowing for exchange rate translation and the one-off 2013 price settlement.
Margin performance delivered a return on sales of 10.2%.
Underlying earnings3 per share increased from 37.6p to 38.0p after excluding the benet from the price escalation settlement in 2013.
£925m returned to shareholders in 2014, from share repurchase programme and dividends.
Large order backlog1,4 of £40.5bn.
| SALES1 KPI |
UNDERLYING EBITA2 KPI |
UNDERLYING EARNINGS3 PER SHARE KPI |
|---|---|---|
| £16,637M | £1,702M | 38.0P |
| £18,180m (2013) | £1,925m (2013) | 42.0p (2013) |
| ORDER BACKLOG1,4 | OPERATING PROFIT | BASIC EARNINGS PER SHARE5 |
| £40.5BN | £1,300M | 23.4P |
| £42.7bn (2013) | £806m (2013) | 5.2p (2013) |
| OPERATING BUSINESS CASH FLOW6 KPI |
NET DEBT (AS DEFINED BY THE GROUP)7 KPI |
DIVIDEND PER SHARE |
| £1,191M | £(1,032)M | 20.5P |
| £147m (2013) | £(699)m (2013) | 20.1p (2013) |
KPI References to Key Performance Indicators (KPIs) throughout the Annual Report
Including share of equity accounted investments.
Comprises cash and cash equivalents, less loans and overdrafts (including debt-related derivative nancial instruments) and cash received on customers' account (see page 24).
01 BAE Systems Annual Report 2014
Strategic Report
Further development of the Typhoon aircraft platform, including European partner nation commitment to the full integration of the Captor E-Scan radar and work on enhancing the aircraft's capability
Major milestone achieved with naming and oat-up of HMS Queen Elizabeth aircraft carrier. Over £1bn of Royal Navy contracts awarded
Contract awards received for the Armored Multi-Purpose Vehicle and on other land programmes in support of the US combat vehicle industrial base
BAE Systems selected to provide the integrated ight control electronics and other systems for next-generation Boeing 777X aircraft, building on positions across multiple major commercial aircraft platforms
Further streamlining of the US-managed business to improve competitiveness, including a sector reorganisation, reduced administrative overhead and agreed sale of the Group's 75% interest in Land Systems South Africa
Successful acquisition of SilverSky, to enhance the Group's commercial cyber growth strategy, and of Signal Innovations Group, to strengthen the Group's activity-based intelligence capabilities
Reorganisation of industrial partner companies in the Kingdom of Saudi Arabia to support their future growth
Applied Intelligence, the Group's UK-headquartered cyber security business, delivered organic sales growth of 10% and increased its order book by a further 37%, following the 60% increase achieved in 2013
In 2015, the Group's underlying earnings1 per share are expected to be marginally higher than in 2014, including some reliance on anticipated naval and aircraft orders.
| ELECTRONIC SYSTEMS | ||
|---|---|---|
Sales2 (in US\$) are expected to be similar to 2014, with growth from commercial business offsetting small reductions in defence.
Margins are expected to be at the top end of a 12% to 14% guidance range.
Sales2 are expected to reduce by around 10%, or 8% like-for-like excluding the disposal of the South African land business.
Margins are expected to be in a 6% to 8% range, reecting continued margin dilution from sales trading on the Radford and commercial shipbuilding contracts.
Comprising the US Intelligence & Security sector (2014 79% of sales) and UK-headquartered Applied Intelligence:
Mid-single digit sales2 growth expected in 2015; with strong sales growth planned of around 30% in Applied Intelligence offsetting marginally lower sales in Intelligence & Security.
Margins anticipated within an 8% to 10% range, but at the lower end after integration costs of SilverSky and continued investment in the Applied Intelligence business.
is based on restated comparatives for 2014.
FOR FURTHER INFORMATION VISIT BAESYSTEMS.COM/INVESTORS
Sales2 are expected to increase by approximately 5% with higher sales from Salam Typhoon deliveries and the Astute and Successor submarine programmes more than offsetting reduced trading on the Queen Elizabeth Class carrier programme.
Margins expected to be at the lower end of a 10% to 12% range, reecting the impact of increased UK pension service costs due to the lower discount rate.
Sales2 in 2015 are expected to be approximately 10% higher than in 2014, including increased levels of support to the Salam Typhoon aircraft now in service and from higher volumes of weapon systems.
Margins are expected to be similar to 2014.
HQ costs are expected to be a little higher than those in 2014. Underlying nance costs are expected to be similar to 2014. The effective tax rate is expected to be around 20% with some dependency on the geographic mix of prots.
*Following a restructuring of its US operations in 2014 to improve competitiveness, including reduced management and administrative overhead, some activities previously included in the Group's Platforms & Services (US) segment will, from 1 January 2015, be reported within the Cyber & Intelligence segment. The impact of the restructuring on the Group's external reporting segments will be reected in 2015 and, therefore, the segmental outlook for 2015
This outlook is based on an exchange rate planning assumption of US\$1.55/£1.
P14 Chief Executive's review
Strategic Report
Sir Roger Carr, Chairman
My rst year as Chairman of the Company has been both stimulating and engaging. I have visited our businesses throughout the United Kingdom, the United States of America, the Kingdom of Saudi Arabia and Australia.
Without exception, I have been impressed by the remarkable skills of our people, reassured by our commitment to good corporate governance and proud of our determination to serve, supply and protect those that serve and protect us across the world.
The capabilities and pride of our people in what we do was particularly evident at the naming ceremony in Scotland of the HMS Queen Elizabeth aircraft carrier in July, and at the prize-giving ceremony for the Chairman's Awards in Washington, D.C., in December.
The executive team has continued to demonstrate their professionalism by effectively managing cost in a challenging business environment, and delivering underlying growth in earnings per share after adjusting for the one-off, retrospective benet from the Saudi Arabian price agreement in 2013. Group cash ow has continued to permit the buyback of shares, the support of our pension obligations and the recommendation of a nal dividend of 12.3p per share, making a total of 20.5p per share for the year.
The growing uncertainty and political instability in many parts of the world have undoubtedly increased many governments' focus on defence and helped to stabilise budgets.
The message delivered by President Obama and Prime Minister Cameron at the NATO Summit in Wales, UK, calling for members to allocate 2% of Gross Domestic Product to their defence budgets, reected the change in tone and sentiment, and reinforced the importance of a thriving and innovative defence industry in the UK, US and with other allies overseas.
Throughout the year, the Company continued to enjoy a privileged position as a strategic supplier to the UK, US, Kingdom of Saudi Arabia and Australia. We have earned these positions over time through a mix of product excellence, service ethic and a commitment to working with each host nation to build local capability. This approach was particularly visible this year in the Kingdom of Saudi Arabia, where we announced a reorganisation of our industrial interests which will enhance our local relationships and will provide high-quality employment for young people in the years to come.
In the second quarter of the year, the Board initiated a comprehensive review of all our businesses in order to deepen our understanding of current activity and establish a platform for longer-term strategic planning. The review conrmed the importance of maintaining the breadth of our geographic balance, continued investment in the development of our wide product offering and the value of the service relationships we enjoy with the armed forces of the countries in which we operate. We will manage the Group's business portfolio to address changes in markets and emerging opportunities. Whilst still a relatively small segment of the Group, prospects for growth in our Applied Intelligence business, which capitalises on our deep intelligence roots and benets from our wide commercial reach, are encouraging. In electronics, the leading-edge capability we have in military areas was considered to offer material opportunities for further penetration of the civil aircraft and adjacent commercial markets. The review also encompassed our commitment to apprenticeships, lifetime learning and bench-strength development to ensure we continue to attract and retain the nest engineering talent available in the marketplace.
Looking back, it has been a year of steady progress and achievement. We now look to 2015 with condence based on the existing programmes in which we are engaged and the depth of order backlog we have secured. With some reliance on anticipated naval and aircraft orders, there is, however, no room for complacency in a world where competitive pressures are increasing, customer demands for service and value unrelenting, and government nances constrained. We will respond to these challenges with energy, enthusiasm and vigour, recognising that we cannot rely on past achievement for future success. Picking up the pace, valuing the customer, driving down costs and preserving quality will be the watchwords of the business model and the hallmarks of our performance.
I succeeded Sir Richard Olver as Chairman of the Board on 1 February 2014 and Sir Richard stepped down from the Board on that date.
On 1 February 2014, Linda Hudson retired as President and Chief Executive Ofcer of BAE Systems, Inc. and as an executive director of BAE Systems plc. Linda made a material contribution to both the development of our US operations and its important role within the Group. On the same date, Jerry DeMuro was appointed as President and Chief Executive Ofcer of BAE Systems, Inc. and as an executive director of BAE Systems plc.
Paul Anderson, a non-executive director, retired from the Board on 31 December 2014 after six years of service. Throughout the two terms of his appointment, Paul made a major contribution to the strategic thinking of the Company in addition to chairing the Corporate Responsibility Committee.
| 2014 | 20.5 |
|---|---|
| 2013 | 20.1 |
| 2012 | 19.5 |
| 2011 | 18.8 |
| 2010 | 17.5 |
On behalf of colleagues and shareholders, I thank both Linda and Paul for all they have done for the Company and wish them well for the future.
Ian Tyler has now taken over the role of chairman of the Corporate Responsibility Committee.
During the course of the year, the Nominations Committee commenced a long-term succession planning review and agreed that our immediate priority was to search for a replacement for Paul who would have a general management background, international experience, be capable of assuming responsibility for the Remuneration Committee and improve the diversity of the Board. The search is now in process.
The Board has recommended a nal dividend of 12.3p per share making a total of 20.5p per share for the year, an increase of 2% over 2013. At this level, the annual dividend is covered 1.85 times by underlying earnings (2013 2.1 times). Subject to shareholder approval at the 2015 Annual General Meeting, the dividend will be paid on 1 June 2015 to holders of ordinary shares registered on 17 April 2015.
Sir Roger Carr, Chairman
Strategic Report
BAE Systems is an international defence, aerospace and security company with leading air, naval, land and cyber capabilities, supplying both defence and commercial customers.
Including share of equity accounted investments.
Excludes £1.1bn (7%) of sales generated under the Typhoon workshare agreement with Euroghter Jagdugzeug GmbH included within Rest of Europe.
Comprises funded and unfunded unexecuted customer orders, and is stated after the elimination of intra-group orders.
We have strong, established positions supplying equipment and services, including advanced electronics, for air, naval and land forces, and commercial aerospace customers.
In addition, we have a growing position in the cyber domain.
P08 For further information
SALES1 BY DOMAIN
STRATEGIC REPORT
Our £40.5bn order backlog1,3 provides long-term visibility of sales.
| 2014 | 40.5 |
|---|---|
| 2013 | 42.7 |
| 2012 | 42.5 |
| 2011 | 39.1 |
GOVERNANCE
45
We have a diverse portfolio, broadly balanced between long-term platforms programmes, electronic systems, an enduring services and support business, and activities in cyber security. SALES1 BY ACTIVITY (%) A B D C A Military and technical services and support B Cyber and intelligence 7 C Platforms 34 D Electronic systems 14
FINANCIAL STATEMENTS
BAE Systems has strong, established positions in the air, naval and land domains, as well as a growing position in the cyber domain.
Sole provider of design and manufacture of submarines for the Royal Navy
Major provider of warship repair and modernisation services for the US, UK and Australian navies, and provider of commercial shipbuilding in the US
Major supplier of large calibre naval gun systems to the US, UK and other international navies
Design, manufacture and support of torpedoes and radars, and command and combat systems for the Royal Navy
Sampson naval radar UK
Leading supplier of cyber, intelligence and security capabilities to government agencies
Growing supplier of cyber and network security capabilities for the commercial market
Activity-based intelligence analysts US
B
Strategic Report
Our strategy sets out what we aim to achieve as a company.
Our strategy has guided us through challenging market conditions in recent years. Government spending is still under pressure in the US and UK, our largest markets, and competition is increasing around the world. We have responded by focusing on meeting our commitments to customers and on improving efciency, affordability and nancial performance.
All of these are essential to sustaining and winning new business in these competitive times. We have also continued to invest in our business and people and to develop the technology and skills we need to drive the business forward.
The operating environment is still challenging, but we have positive momentum and a strong foundation to build on. Our strategy has evolved in a number of areas, to provide a clear focus for our stakeholders.
Our vision is to be the premier international defence, aerospace and security company – a change from 'global' to recognise that, as a defence contractor, not all markets are accessible to the Group.
Our mission has been updated to recognise the important role we play in protecting and enhancing our customers' vital interests, from defence and national security to critical infrastructure and commercial information.
Our strategy sets out ve key longer-term areas of focus to help us achieve our vision. Maintaining and growing our defence businesses remains a core part of our strategy. We also continue to pursue growth in adjacent markets, including cyber security and commercial avionics. We are a trusted partner to the governments of a number of countries around the world and we continue to expand our international business. We will continue to support and develop our people and enhance competitiveness to drive success.
We dene our strategic objectives, which set near-term priorities and help employees to align their personal objectives to the Group's strategy. This year, we have added a sixth strategic objective to accelerate plans to use our technology and engineering capabilities to nd new ways to create value.
Each year, the Group has an overall objective to meet its nancial targets and each Executive Committee member has specic annual objectives which focus on deliverables in support of the Group's six strategic objectives.
Our values underpin our strategy, dene how we work and represent a clear denition of our corporate culture.
...IDENTIFYING OPPORTUNITIES WITH CUSTOMERS…
We deliver advanced defence, aerospace and security solutions as a strategic partner to many governments and customers around the world.
Our largest customers are governments, but we also sell to large prime contractors and commercial businesses.
We work with our customers to understand their requirements and to identify new business opportunities.
We take on and solve some of our customers' most complex and challenging engineering and technology projects, including responding to urgent operational requirements for our government customers.
We assess opportunities and risk rigorously before deciding to bid.
Defence export sales, which are subject to export control regulations, are agreed with government customers either on a prime contract or subcontract basis, or through government-to-government agreements as subcontractors. Export contracts may include agreeing industrial participation, skills or technology transfer arrangements.
We design, develop, build, test and deliver products and/or services. For some contracts, we do this via a partnering agreement or joint venture.
We engineer and manufacture some of the world's most advanced, technology-centred platforms, products and systems across the physical and digital world.
US UK Saudi Arabia
Australia
...AND, INCREASINGLY, IN INTERNATIONAL EXPORT MARKETS.
We provide through-life support, including maintenance, upgrade and training.
45% of our sales are services-related contracts that are typically longer term.
We may assist with disposal at the end of a product's life, or re-contract to provide a new product, or both.
P31
ELECTRONIC SYSTEMS
PLATFORMS & SERVICES (US)
– meeting our pension obligations
– continuing to pursue organic investment opportunities
– paying dividends in line with our policy of long-term sustainable cover
– making accelerated returns of capital to shareholders when the balance sheet allows
– investing in value-enhancing acquisitions
RISK MANAGEMENT P48
– have a Lifecycle Management process that promotes the application of best practice programme execution
Our Operational Framework sets out how business is done across BAE Systems. It is based on principles of good governance, and details the values, policies and processes that are mandated, and how the Board delegates authority to the executive team.
We understand and support our customers' national security and other requirements.
...RESPONSIBLE TRADING PRINCIPLES...
2.
We have robust procedures for risk management and internal control to identify, analyse, evaluate and mitigate both nancial and non-nancial risks.
| CODE OF CONDUCT P44 |
|
|---|---|
| We operate to high standards of | |
| ethical business conduct as a | |
GOVERNANCE
STRATEGIC REPORT
all that we do.
1.
We continue to embed a 'safety rst' approach by providing training and tools for employees.
We apply robust standards of product safety as it is critical that the Group's products perform as designed.
We are committed to creating an inclusive workplace where a diverse range of talented people can work together.
DIVERSITY AND INCLUSION P45
We work to BAE Systems' values (Trusted, Innovative and Bold) in
We assess carefully our products and services with the objective that neither BAE Systems nor our customers are exposed to signicant reputational risk.
3.
We focus on minimising the impact on the environment of our operations and products, and using resources more efciently.
We are as open as practicable about the nature of our business.
4.
We are committed to investing in the communities in which we operate.
Ian King, Chief Executive
2014 has seen signs of greater stability and improving clarity emerge in markets where budgets have been constrained in recent years by the wider economic backdrop. In this challenging but stabilising environment, BAE Systems has delivered a solid overall performance in 2014, building on the good programme execution of recent years.
Defence and security continues as a high priority in a number of the Group's domestic and international markets, including the Kingdom of Saudi Arabia. The Group has also continued to win signicant new business. Order intake of £4.3bn was achieved from international markets outside the US and the UK contributing to the £40.5bn order backlog at year end. That large order backlog provides good, multi-year visibility across many of the Group's businesses. In addition, the Group has achieved over £10bn of order intake in the US and UK each year over the last three years. These US and UK programmes provide the Group with the intellectual property which can be used to develop international and support businesses for the future.
In January 2014, a US bipartisan budget agreement provided a two-year window of defence funding visibility and some emerging stability. Only minor trading disruption was apparent in the last quarter of 2014 as the government operated under a Continuing Resolution until the mid-December passage of an omnibus appropriations bill for the 2015 scal year. This included stable Department of Defense funding compared with 2014, and included funding for ground vehicle programmes and for additional F-35 Lightning II aircraft.
US budgets are now relatively stable, with some early indications of a modest improvement in 2016.
On 1 February 2014, Jerry DeMuro was appointed as President and Chief Executive Ofcer of BAE Systems, Inc. Following his appointment, and recognising the need for continued competitive enhancement, the Group's US organisation was streamlined into three operating sectors with resultant reductions to administrative overhead.
The Group's Intelligence & Security business continued to face a challenging environment serving US government security community customers.
The Group's top 12 programmes, which include platforms, services and electronic systems contracts, contributed 43% of the Group's sales1 in 2014. These contracts are multi-year and will continue to deliver a signicant proportion of the Group's sales1 over the next ve years, providing long-term visibility and sustainment of revenues.
At 31 December 2014, these programmes represented 36% of the £40.5bn order backlog1,2.
The Group's Electronic Systems activities beneted from the broad base of high-technology defence systems and equipment and continued good growth in commercial aircraft electronics. We have maintained our leadership position in the US electronic warfare market. The selection of BAE Systems to supply an advanced, integrated electronic ight control system for Boeing's new 777X programme was a notable achievement, expected to generate signicant new business in future years. The award adds to established positions providing ight and engine controls across multiple commercial aircraft platforms.
There was strong margin performance in the Land & Armaments business and a number of order awards on programmes that sustain key combat vehicle industrial base capabilities. In December, BAE Systems was awarded a contract for the engineering and manufacturing development phase of the Armored Multi-Purpose Vehicle programme, which will sustain these capabilities in the longer term.
BAE Systems is a major provider of ship repair services to the US Navy. Consistent with the US Navy's increased focus on Asia-Pacic operations, the Group committed a \$103m (£66m) investment to install new oating dry dock facilities in its San Diego shipyard.
Performance issues identied in 2013 in commercial shipbuilding continued to depress margins in the US Support Solutions business. There were also further charges taken in 2014. The operational challenges identied in 2013 on the Radford ammunition facility maintenance contract have been mitigated signicantly during the year.
In November, the Group was disappointed to learn that the Republic of Korea had decided to terminate for convenience the US Air Force's Foreign Military Sales contract with BAE Systems to upgrade Korea's F-16 aircraft eet.
In the UK, the defence and security market has been stable. Notwithstanding the continued constraints on public spending in some sectors, BAE Systems continues to benet from long-term contracts in the air and naval domains. Both major political parties
in the UK are committed to carrying out a Strategic Defence and Security Review after the general election in May. The Group benets from a large order backlog of long-term committed programmes with many key decisions now addressed for several years.
We recognise that the economic environment in the UK remains challenging, placing further pressure on many areas of public spending, including the UK defence budget. Through a continued focus on cost control, programme execution and efciency, the Group is working to deliver continuous improvements in affordability for the UK customer to ensure that the Group's large, long-term contracts deliver both value and world-class capability.
In the air domain, Typhoon production and the Group's extensive in-service military aircraft support and upgrade business in the UK provide a strong core of high-performing business. 2014 has seen a signicant acceleration of capability expansion onto the Typhoon combat aircraft platform. Activity is underway to integrate additional weapons and sensors onto the aircraft for the four European partner nations and international customers. In November, the formal launch of a funded, multi-nation development programme for an advanced, electronically-scanned radar was a key milestone in the Typhoon platform's evolution.
Our participation in the F-35 Lightning II combat aircraft programme includes UK-manufactured rear fuselage and empennage assemblies as well as electronic systems content from the Group's US-based business. The Group expects signicant growth in production volume with the planned acceleration of aircraft deliveries.
The outlook for the Group's UK maritime businesses is robust. The build of two Queen Elizabeth Class aircraft carriers is progressing well. The rst of Class was named in a formal ceremony by Her Majesty The Queen on 4 July and subsequently oated out of the dock in which she was assembled, enabling assembly of blocks for the second vessel to commence as the rst vessel continues outtting alongside. BAE Systems welcomed the decision, announced by Prime Minister David Cameron at the NATO Summit held in the UK in October, to commit to the operation of both vessels, providing a continuous-at-sea UK carrier capability.
BAE Systems has a signicant workshare on the world's largest defence programme. The Group designs and manufactures sub-assemblies, including the aft fuselage and empennage, in the UK and provides key capabilities, including the electronic warfare suite, in the US.
BAE Systems is executing contracts for Bradley modications. With its Bradley-based solution, BAE Systems has been awarded a contract for engineering and manufacturing development on the US Army's Armored Multi-Purpose Vehicle programme that will help to sustain the Group's US combat vehicle industrial base.
P35
P35
A series of Multi-Ship, Multi-Option contracts for non-nuclear naval ship repair, maintenance and upgrade at facilities located on the East, West and Gulf coasts of the US, as well as Hawaii. This repair and modernisation work is central to the US Navy's lifecycle maintenance and service life objectives.
European Typhoon aircraft End-user: Air forces of the UK, Germany, Italy and Spain
Manufacture of 236 Tranche 2 and 88 Tranche 3A Typhoon combat aircraft. There were 16 Tranche 2 aircraft deliveries in 2014. As at 31 December 2014, 219 of the 236 contracted Tranche 2 aircraft had been delivered to the four partner nations.
P38
P29⁄ P38
Actions continue to implement and nalise contracts for the restructuring of the Group's naval ships business following last year's agreement with the UK government. In August, the Group was awarded a contract for the build of three Offshore Patrol Vessels for the Royal Navy, sustaining shipbuilding skills between the Carrier programme and the start of manufacture for the anticipated Type 26 frigate programme. The Group continues to work on the Type 26 assessment phase and is discussing proposals with the UK Ministry of Defence for the future phases of the programme. The Type 26 programme will provide long-term clarity for UK complex warship manufacture, including at the Group's facilities on the River Clyde in Scotland.
Following the Scottish independence referendum in September, the people of Scotland decided to remain within the Union. The decision was welcomed, removing uncertainty for the Group's employees and its business based in Scotland.
In October, the Group agreed a multi-year Maritime Support Delivery Framework contract for the operation of the Royal Naval Base at Portsmouth and global support for half of the Royal Navy's surface eet.
In December, a signicant contract for the upgrade of the Spearsh torpedo was secured.
In the submarines business, Artful, the third of a planned seven Astute Class submarines, was launched in May. Alongside build of Astute Class boats, engineering work continues to accelerate as part of the assessment phase of the Successor submarine programme. The Successor programme is the potential replacement of Vanguard Class submarines, intended to enter service towards the end of the next decade.
BAE Systems continues to develop its strategy for commercial cyber security, with growth being delivered and a number of important contract wins in the year. Order backlog in the Applied Intelligence business grew by 37% in the year, building on the 60% increase in 2013.
We continue to target strong growth opportunities in commercial cyber security markets and the acquisition of SilverSky in December accelerates the Group's strategy to grow in the commercial cyber market, providing an established channel to US customers.
In Saudi Arabia, the Group delivered a further 11 Typhoon aircraft in the year and developed its position as a key part of the Kingdom's defence industrial base.
In February 2014, agreement was reached with the Saudi Arabian government on price escalation for the Salam Typhoon programme under the current 72-aircraft contract.
In June, we announced a reorganisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia and an enhancement of its existing relationship with Riyadh Wings Aviation Academy LLC (Riyadh Wings). The reorganisation brings together shareholdings of BAE Systems and Riyadh Wings in Saudi companies specialising in training, electronics and IT systems engineering under a single holding company. The reorganisation is intended to enhance the growth prospects of this portfolio of businesses and reinforce an ongoing commitment to increasing local employment.
In Australia, where BAE Systems is the largest defence contractor, the government approved, in May 2014, a commitment to grow defence spending within a decade to 2% of Gross Domestic Product.
The Group delivered the rst of two Canberra Class Landing Helicopter Dock (LHD) vessels for the Royal Australian Navy and manufacture of the second ship is progressing well. Following the high level of activity on this programme, there is currently no material follow-on workload contracted. BAE Systems and the Australian government continue to discuss options to sustain industrial capabilities and meet future naval requirements following on from the high level of workload on the LHD programme.
BAE Systems is a 37.5% shareholder in the MBDA guided weapons joint venture. MBDA benets from sales to equip a range of air and naval platforms across European and wider international applications. In December, MBDA received a €301m (£234m) contract to supply the air-to-air missiles for India's Jaguar aircraft eet. The MBDA business has seen increased bidding interest on ground-based air defence systems in some regions.
European Typhoon support End-user: Air forces of the UK, Germany, Italy and Spain Availability-based service contracts for support to the customers' operational commitments on Typhoon aircraft, including maintenance, support and training.
Queen Elizabeth Class aircraft carriers End-user: Royal Navy Design and manufacture of two 65,000 tonne aircraft carriers. The rst of class, HMS Queen Elizabeth, achieved oat-up in July and continues outtting in advance of sea trials in 2016. Block build for the second ship is 80% complete and assembly at Rosyth has commenced. The ships are expected to enter service in 2017 and 2019, respectively.
P39
UK ship support End-user: Royal Navy The ve-year Maritime Support Delivery Framework contract for support to half of the Royal Navy's surface eet on UK and global operations, as well as the management of Portsmouth
Naval Base.
Astute Class submarines
End-user: Royal Navy Design and manufacture of seven nuclear-powered attack submarines. Artful, the third of class, was launched in May and completed her maiden dive in October. The remaining four boats are at various stages of manufacture, with the seventh and nal boat expected to enter service towards the middle of the next decade.
P38 P39 P39
In August, the Group announced an agreement for the proposed sale of its 75% holding in BAE Systems Land Systems South Africa (Pty) Limited to Denel (SOC) Limited for cash consideration of approximately 641 million Rand (£36m), subject to closing adjustments. The sale is expected to be completed in 2015.
As part of the reorganisation of the Group's interests in Saudi Arabia, in September, BAE Systems acquired an additional 59% shareholding in Saudi Development and Training Company for 440 million Saudi Riyal (£72m).
In September, the Group completed the \$21m (£13m) acquisition of Signal Innovations Group, Inc., a small-scale, high-technology provider of imaging technologies and analytics to the US intelligence community.
In December, BAE Systems completed the acquisition of SilverSky for \$232m (£149m).
In December, BAE Systems entered into an agreement with Esterline Corporation for the proposed acquisition of Eclipse Electronic Systems, Inc. for cash consideration of approximately \$28m (£18m), subject to closing adjustments. The Texas-based business employs approximately 90 people and provides highly-advanced Intelligence, Surveillance and Reconnaissance products and services to the US defence and intelligence community. The proposed acquisition has not yet completed.
Following the triennial funding valuations of all of the Group's UK pension schemes and subsequent discussions with trustees, new funding agreements have been concluded, with overall decit funding remaining broadly consistent with 2014.
In February 2013, the Group initiated a share repurchase programme of up to £1bn over three years. As at 31 December 2014, BAE Systems had purchased 119 million shares for £495m under the programme.
The Group's balance sheet continues to be managed conservatively in line with the Group's policy to retain its investment grade credit rating and to ensure operating exibility. Consistent with this approach, the Group meets its pension obligations, pursues organic investment opportunities, 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 are considered where market conditions are right and where they deliver on the Group's strategy.
The way the Group conducts its business is of equal importance as product delivery. We continue to embed responsible business conduct throughout the Group. During 2014, our employees received business conduct refresher training and our Code of Conduct was updated and will be rolled out to all employees during the rst half of 2015.
The safety of our employees and those using our products is a priority for the Group. We continue to drive safety improvements and, in 2014, achieved an 11% reduction in the Recordable Accident Rate (see page 20), which represents the seventh consecutive year of improvement.
Kevin Taylor, previously Group Strategy Director, has been appointed as Managing Director, Applied Intelligence, to lead the business as it enters the next phase of its strategy to target accelerated growth and further develop our technology for government and commercial customers. Kevin will remain an Executive Committee member.
BAE Systems benets from a large order backlog, long-term programmes and high-technology capabilities. The Group continues to address customers' needs across a broad international market base. In addition, BAE Systems has established a good balance of business activities in both advanced products and value-added support services. The Group is well positioned to continue to deliver shareholder value by addressing customers' continuing defence and security needs as economies recover in domestic markets and defence priorities continue to evolve.
Ian King, Chief Executive
Successor submarine End-user: Royal Navy Design and development of a nuclear-powered submarine as the potential replacement for the Vanguard Class eet to carry the UK's Trident nuclear deterrent towards the end of the next decade.
Salam Typhoon aircraft End-user: Royal Saudi Air Force Supply of 72 Typhoon combat aircraft. As at 31 December 2014, 45 aircraft had been delivered under the contract. We continue to advance the capability and through-life support of these aircraft.
P39 P41
P41
End-user: Royal Saudi Air Force Five-year output-based maintenance, support and training contract awarded in 2013 for Typhoon aircraft as they progressively enter service. Flying hours and key performance indicators continue to meet contracted levels.
Saudi British Defence Co-operation Programme
End-user: Royal Saudi Air Force and Royal Saudi Naval Forces Provision of support to operational capability, including contracts awarded in 2012 to provide manpower, logistics and training to the end of 2016 and to upgrade training aircraft, and in 2013 to upgrade Tornado aircraft.
P41
FINANCIAL STATEMENTS
Meet 2014 nancial targets Order intake1 (£bn) Order intake represents the value of funded orders received from customers in the year. Order intake is a measure of in-year performance and supports future years' sales performance.
UK/US order intake1, which increased by 8% to £10.8bn (2013 £10.0bn), beneted from the award of over £1bn of Royal Navy contracts. Non-UK/US order intake1 was lower than last year at £4.3bn (2013 £9.3bn) reecting the ve-year support contracts in Saudi Arabia renewed during 2013.
OBJECTIVE MEASUREMENT 2014 PERFORMANCE KEY PERFORMANCE INDICATOR
| 2014 | 15.1 | |
|---|---|---|
| 2013 | 19.3 | |
| 2012 | 22.3 | |
15% UK executive directors' annual bonus6 ✓ Target7
Sales represents the amounts derived from the provision of goods and services, and includes the Group's share of sales of its equity accounted investments.
(£bn)
Sales1
Prior year sales1 included a £0.3bn retrospective benet from the trading of the price escalation on the Salam Typhoon programme. The volume reductions in the Land & Armaments business were as expected. Approximately £0.6bn of the reduction in sales1 was due to exchange translation.
P72
| 2014 | 16.6 |
|---|---|
| 2013 | 18.2 |
| 2012 | 17.9 |
| P108 Note 1 to the Group accounts | |
|---|---|
Underlying EBITA excludes amortisation and impairment of intangible assets, nance costs and taxation expense, and non-recurring items (prot/loss on disposal of businesses). Underlying EBITA is used by the Group for internal performance analysis as a measure of operating protability that is comparable over time.
Prior year underlying EBITA2 included a £183m retrospective benet from the Salam price escalation settlement. Charges totalling £74m were taken in 2014 on commercial shipbuilding programmes in the US Support Solutions business. Adverse exchange translation amounted to £49m.
| –12% | |
|---|---|
| 2014 | 1,702 |
|---|---|
| 2013 | 1,925 |
| 2012 | 1,862 |
P108 Note 1 to the Group accounts
Including share of equity accounted investments.
Earnings before amortisation and impairment of intangible assets, nance costs and taxation expense (EBITA) excluding non-recurring items (see page 23).
Earnings excluding amortisation and impairment of intangible assets, non-cash nance movements on pensions and nancial derivatives,
non-recurring items and, in 2014, a credit in respect of the re-assessment of existing tax provisions (see note 8 to the Group accounts).
The Executive Committee sets annual objectives which focus on deliverables in support of both short-term results and the overall long-term strategy. The Board uses a range of quantitative and qualitative performance indicators to monitor performance against these objectives. Executive directors' remuneration is linked to certain of these measures.
| OBJECTIVE | MEASUREMENT | 2014 PERFORMANCE | KEY PERFORMANCE INDICATOR |
|---|---|---|---|
| 1. FINANCIAL PERFORMANCE Meet 2014 nancial targets |
Underlying earnings3 per share (pence) Underlying earnings represent prot for the year attributable to equity shareholders excluding amortisation and impairment of intangible assets, non-cash nance movements on pensions and nancial derivatives, non-recurring items and, in 2014, a credit in respect of the re-assessment of existing tax provisions. Underlying earnings per share provides a measure of shareholder return that is comparable over time. |
Prior year underlying earnings3 per share included a 4.4p retrospective benet from the Salam price escalation settlement. The other principal drivers of the year-on-year variance are shown in the underlying earnings3 per share bridge chart on page 23. |
–10% 38.0 2014 42.0 2013 38.7 2012 P117 Note 8 to the Group accounts |
| 40% UK executive directors' annual bonus6 |
Target7 ✓ achieved |
P72 | |
| Operating business cash ow4 (£m) Operating business cash ow represents net cash ow from operating activities after capital expenditure (net), nancial investment and dividends from equity accounted investments. Operating business cash ow is the measure used to assess the operating cash generation of the Group. |
Operating business cash ow4 beneted from the sale and leaseback of two properties in Saudi Arabia, for which £418m was received in the year. Some £200m of receivables in the Saudi Arabian business were collected in December, earlier than expected. |
1,191 2014 147 2013 2,692 2012 P145 Note 24 to the Group accounts |
|
| Net (debt)/cash as dened by the Group5 (£m) Net (debt)/cash comprises cash and cash equivalents, less loans and overdrafts (including debt-related derivative nancial instruments) and cash received on customers' account. |
Net debt5 increased by £333m. The £925m returned to shareholders and the £230m cash cost of business acquisitions was funded by operating business cash ow4. There was adverse exchange translation of £146m. |
(1,032) 2014 (699) 2013 387 2012 P146 Note 25 to the Group accounts |
|
| 25% UK executive directors' annual bonus6 |
Target7 ✓ achieved |
P72 |
FINANCIAL STATEMENTS
Comprises cash and cash equivalents, less loans and overdrafts (including debt-related derivative nancial instruments) and cash received on customers' account (see page 24).
85% of the UK executive directors' bonuses are based on the achievement of objectives aligned to certain Executive Committee objectives measured on Group-level quantitative key performance indicators, with the remaining 15% based on the achievement of personal objectives aligned to the delivery of
specic elements of the Group's strategy measured using both quantitative and qualitative performance indicators.
| 2. CUSTOMER FOCUS AND PROGRAMME EXECUTION |
Programme margin variation Programme margin variation measures outturn projections of, and movements in, margin of key customer-funded projects. |
Overall, there was a net improvement in programme margin over the year. |
The data for the programme margin variation metric covers 101 contracts, representing more than 60% of the Group's funded order backlog. |
|
|---|---|---|---|---|
| Continued focus on improving customer satisfaction and programme execution |
It provides an indicator of the Group's ability to effectively manage major programmes. |
|||
| 3. RESPONSIBLE BEHAVIOUR Progress towards recognised leading positions |
Safety The Recordable Accident Rate, which focuses on the number of accidents, is the principal metric used by the Group's businesses to monitor performance in safety and drive improvements in accident prevention. The Group also monitors programmes to reduce safety risk and to drive improvements in safety awareness and culture. |
The Group achieved an 11% reduction in the Recordable Accident Rate1, consistent with the target for the year. The number of major (most serious) injuries1 reduced from 65 to 44, which is an improvement of more than 30%. Each area of the business demonstrated improvements in safety risk management, and progressed a range of activities to increase awareness and enhance further a strong safety culture. |
Recordable Accident Rate (per 100,000 employees)1 11% IMPROVEMENT 863 2014 965 2013 1,162 2012 |
|
| 5% UK executive directors' annual bonus2 |
Target ✓ achieved |
P72 | ||
| Diversity and inclusion, and environment The Group has improvement plans in place to address diversity and inclusion, and environment. |
Plans were set and implemented at business level to address specic issues or strategic aims. All businesses reported progress. |
Plans to increase diversity and inclusion in line with business goals are included within each Executive Committee member's annual performance review. |
||
| The individual businesses set site or business-specic environmental targets covering energy, water and waste improvement. |
||||
| 4. ENGAGEMENT Inspire and engage our people to deliver success |
Employee Pulse survey As part of BAE Systems' journey to become a great workplace, employees had the opportunity once again to share their views through the 2014 Employee Pulse survey. Employees were |
Across BAE Systems, employees provided feedback on their pride in working for the Group and the high levels of trust present in their teams as they work to support customers. This reects the Group's ongoing commitment |
59% participation rate (2013 58%) 65% |
|
| invited to participate in the survey. As US employees |
to creating environments in which employees can contribute |
OBJECTIVE MEASUREMENT 2014 PERFORMANCE KEY PERFORMANCE INDICATOR
See summary of Deloitte assurance on page 47.
85% of the UK executive directors' bonuses are based on the achievement of objectives aligned to certain Executive Committee objectives measured on Group-level quantitative key performance indicators, with the remaining 15% based on the achievement of personal objectives aligned to the delivery of specic elements of the Group's strategy measured using both quantitative and qualitative performance indicators.
to the success of the Group.
employee engagement
(2013 66%)
completed a full survey in 2013, 20% were selected to participate in 2014.
| OBJECTIVE | 2014 PERFORMANCE | REFERENCE |
|---|---|---|
| 5. ELECTRONIC SYSTEMS Be agile, sustain revenues and deliver strong bottom line performance |
Electronic Systems outperformed its major competitors by delivering a 3% increase in like-for-like sales1, with an improved margin of 15.4% (2013 14.0%). The business achieved important contract wins in defence markets and, in the high-growth commercial aircraft electronics market, Electronic Systems strengthened its positions across major aircraft platforms, with wins on Boeing contracts, including the 777X programme. |
P28 |
| 6. CYBER & INTELLIGENCE Enhance and grow our positions in cyber, intelligence and security |
Whilst the Intelligence & Security business continued to face challenging market conditions, with budget pressures impacting its US government customers, order backlog1,2 increased by 7%. In September, Intelligence & Security acquired Signal Innovations Group, a leading provider of imaging technologies and analytics to the US intelligence community. Applied Intelligence delivered organic sales growth of 10% and order book grew by a further 37% following a 60% increase in 2013. A UK government customer selected the business as one of four strategic suppliers on a technology framework and multi-year framework contracts were awarded for Service Integration and Applications Management services. In December, Applied Intelligence acquired SilverSky, a commercial cyber service provider, to enhance its commercial cyber growth strategy. |
P31 |
| 7. PLATFORMS & SERVICES (US) Drive value from our land portfolio and deliver sustainable, protable growth in the services sector |
In Land & Armaments, there was continued focus on cost reduction and margin increased to 10.3% (2013 8.8%). Efforts to sustain and grow vehicle programmes resulted in signicant awards, including the US Army's Armored Multi-Purpose Vehicle programme, Bradley and M88 vehicles, and the Low-Rate Initial Production of the M109A7 self-propelled howitzer. In Support Solutions, whilst performance was impacted by charges taken on commercial shipbuilding programmes, the US-based ship repair business continued to perform well, receiving orders totalling \$1.5bn (£1.0bn) on various US Navy vessels, and operational challenges on the Radford Army Ammunition Plant contract were mitigated signicantly. Whilst successfully executing phase one of the Korean F-16 upgrade programme, the contract was terminated for convenience by the customer in November. |
P34 |
| 8. PLATFORMS & SERVICES (UK) Deliver sustainably protable through-life businesses in the air, maritime, combat vehicles and munitions sectors |
Strong programme performance delivered a return on sales of 11.7%. Development of the Typhoon platform continued and a £365m contract was received for the integration of the E-Scan radar onto the aircraft. Potential management redundancies were announced to align the organisational operating model of the air business with its strategy and to improve competitiveness. The consolidation of UK shipbuilding operations in Glasgow progressed to plan, with shipbuilding operations in Portsmouth ceasing during the year. Over £1bn of contracts were awarded by the Royal Navy, including for the construction of three Offshore Patrol Vessels, support to the surface eet and Spearsh torpedo upgrade. |
P37 |
| 9. PLATFORMS & SERVICES (INTERNATIONAL) Grow our Platforms & Services (International) business |
Sales1 reduced by £0.5bn to £3.6bn, including £143m for exchange translation. In Saudi Arabia, the Group continued to support the operational capabilities of the Royal Saudi Air Force and Royal Saudi Naval Forces, and to develop the industrial base. A reorganisation of industrial partner companies in Saudi Arabia to support their future growth commenced. In Australia, whilst activity on the Landing Helicopter Dock programme ramped down, a four-year contract was awarded to support the two vessels in service and BAE Systems continues to engage with the Australian government regarding the sustainment of shipbuilding capability following delivery of the second ship in 2015. Additional blocks were contracted on the Air Warfare Destroyer programme. MBDA received a number of signicant contracts and is pursuing actively a number of export opportunities. |
P40 |
Including share of equity accounted investments.
Comprises funded and unfunded unexecuted customer orders.
FINANCIAL STATEMENTS
STRATEGIC REPORT
GOVERNANCE
£925m returned to shareholders in 2014, including £283m on the share repurchase programme and £642m in dividends
Sales1 decreased by £1.5bn to £16.6bn. Around £0.6bn of that reduction was due to exchange translation. The volume reductions in Land & Armaments of £0.4bn were as expected. Last year's sales1 included the retrospective benet of £0.3bn from the price escalation settlement on the Salam programme
Underlying EBITA2 decreased by £223m, to £1,702m, giving a return on sales of 10.2%. Of that reduction, £49m was due to exchange translation and £183m for the retrospective benet traded in 2013 from the Salam price escalation
Excluding the prior year 4.4p benet from the Salam price escalation settlement, underlying earnings3 per share increased to 38.0p
Large order backlog1,4 of £40.5bn after exchange translation benet of £0.3bn
Total dividend increased by 2% to 20.5p per share
Peter Lynas, Group Finance Director
Sales1 reduced by £1.5bn to £16.6bn (2013 £18.2bn). The prior year included the £0.3bn retrospective benet from the trading of the price escalation on the Salam Typhoon programme. The volume reductions of £0.4bn in the Land & Armaments business were as expected. Approximately £0.6bn of the reduction in sales1 was due to exchange translation.
Underlying EBITA2 reduced by £223m to £1,702m (2013 £1,925m), giving a return on sales of 10.2% (2013 10.6%). The prior year included a £183m retrospective benet from the Salam price escalation settlement. Charges totalling £74m were taken in 2014 on US commercial shipbuilding programmes in the Support Solutions business. Adverse exchange translation amounted to £49m.
Non-recurring items in 2014 includes a £47m accounting gain on the Group's existing 40% shareholding in Saudi Development and Training Company following the acquisition of an additional 59% shareholding in the company offset by a £47m charge on classication of the Saudi Aircraft Accessories and Components Company (AACC) as held for sale.
Amortisation of intangible assets was £184m (2013 £189m).
Impairment of intangible assets includes goodwill impairment charges of £87m against the carrying value of Support Solutions reecting the performance issues in the US commercial shipbuilding business and £74m against the carrying value of the South African business expected to be sold in 2015.
Finance costs1 were £448m (2013 £392m). The underlying interest charge, excluding pension accounting, marked-to-market revaluation of nancial instruments and foreign currency movements, increased to £204m (2013 £179m), primarily from a higher level of net present value charges. Net interest expense on the Group's pension decit was lower at £155m (2013 £195m) mainly reecting the reduction in the decit during 2013.
Taxation expense1 reects the Group's underlying effective tax rate for the period of 19% (2013 22%), partially offset by a £51m credit in respect of the re-assessment of existing tax provisions. The calculation of the underlying effective tax rate is shown in note 6 to the Group accounts on page 115. The effective tax rate for 2015 is expected to be around 20%, with the nal rate dependent on the geographical mix of prots.
Underlying earnings3 per share for the year was 38.0p (2013 42.0p). The prior year included a 4.4p retrospective benet from the Salam price escalation settlement.
Basic earnings per share, in accordance with International Accounting Standard 33, Earnings per Share, was 23.4p (2013 5.2p). The increase on the prior year mainly reects the £887m of impairment charges taken in 2013 which are excluded from underlying earnings3 per share.
| INCOME STATEMENT | |||
|---|---|---|---|
| 2014 £m |
2013 £m |
||
| Sales1 | KPI | 16,637 | 18,180 |
| Underlying EBITA2 | KPI | 1,702 | 1,925 |
| Return on sales | 10.2% | 10.6% | |
| Non-recurring items | – | 6 | |
| EBITA | 1,702 | 1,931 | |
| Amortisation of intangible assets | (184) | (189) | |
| Impairment of intangible assets | (170) | (887) | |
| Finance costs1 | (448) | (392) | |
| Taxation expense1 | (148) | (287) | |
| Prot for the year | 752 | 176 |
| BRIDGE (£BN) SALES1 |
KPI |
|---|---|
| 2013 | 18.2 |
| Salam price escalation | (0.3) |
| Land & Armaments volumes | (0.4) |
| Foreign exchange translation | (0.6) |
| Other | (0.3) |
| 2014 | 16.6 |
| EARNINGS PER SHARE | |||
|---|---|---|---|
| 2014 | 2013 | ||
| Underlying earnings3 per share | KPI | 38.0p | 42.0p |
| Basic earnings per share | 23.4p | 5.2p |
| PER SHARE BRIDGE (PENCE) UNDERLYING EARNINGS3 |
KPI |
|---|---|
| 2013 | 42.0 |
| Salam price escalation | (4.4) |
| Land & Armaments volumes | (0.9) |
| Commercial shipbuilding charges | (1.9) |
| Foreign exchange translation | (1.2) |
| Finance costs | (0.6) |
| Reduced share base | 0.9 |
| Tax rate | 1.6 |
| Other performance improvements | 2.5 |
| 2014 | 38.0 |
P117 Note 8 to the Group accounts
| EXCHANGE RATES – AVERAGE | ||
|---|---|---|
| 2014 | 2013 | |
| £/\$ | 1.647 | 1.564 |
| £/€ | 1.241 | 1.178 |
| £/A\$ | 1.827 | 1.623 |
| EXCHANGE RATES – SENSITIVITY ANALYSIS | |
|---|---|
| Estimated impact on sales1 of a ten cent movement in the average exchange rate |
£m |
| \$ | 350 |
| € | 60 |
| A\$ | 40 |
| P18 | P27 |
|---|---|
| Performance against our 2014 objectives | Segmental performance |
Cash inow from operating activities was £913m (2013 £205m), which includes cash contributions in respect of pension decit funding, over and above service costs, for the UK and US schemes totalling £391m (2013 £389m).
As anticipated, advances received in prior years continue to be consumed on the Omani Typhoon and Hawk, Saudi training aircraft, European Typhoon Tranche 2 and Indian Hawk programmes. Costs incurred are also being charged against provisions created in previous years on the Oman Offshore Patrol Vessel contract, rationalisation and settlement of a US contract pricing dispute. The rst of two payments in respect of the Salam price escalation settlement was received as expected.
The net cash proceeds from capital expenditure and nancial investment of £215m (2013 £153m outow) includes the sale and leaseback of two properties in Saudi Arabia, for which £418m was received in the year.
Dividends received from equity accounted investments reduced by £32m to £63m (2013 £95m) reecting a dividend received from the Group's 50% shareholding in Gripen International in 2013.
Interest payments were £21m lower at £145m (2013 £166m) primarily reecting the timing of interest payments on US dollar bonds and lower facility fees.
Taxation payments reduced to £92m (2013 £138m) mainly due to settlement of a US contract pricing dispute and other US issues.
| RECONCILIATION OF CASH INFLOW FROM OPERATING | |||
|---|---|---|---|
| ACTIVITIES TO NET DEBT (AS DEFINED BY THE GROUP) | |||
| 2014 | 2013 | ||
| £m | £m | ||
| Cash inow from operating activities | 913 | 205 | |
| Capital proceeds/(expenditure) | |||
| (net) and nancial investment | 215 | (153) | |
| Dividends received from equity | |||
| accounted investments | 63 | 95 | |
| Operating business cash ow5 | KPI 1,191 |
147 | |
| Interest | (145) | (166) | |
| Taxation | (92) | (138) | |
| Free cash ow | 954 | (157) | |
| Acquisitions and disposals | (230) | 4 | |
| Cash classied as held for sale | (6) | – | |
| Share repurchase programme | (283) | (212) | |
| Other net sale of own shares | 2 | – | |
| Equity dividends paid | (642) | (638) | |
| Dividends paid to non-controlling | |||
| interests | (14) | (11) | |
| Cash ow from matured derivative | |||
| nancial instruments | 8 | (47) | |
| Movement in cash collateral | 10 | (10) | |
| Movement in cash received | |||
| on customers' account6 | 1 | 1 | |
| Foreign exchange translation | (146) | 3 | |
| Other non-cash movements | 13 | (19) | |
| Total cash outow | (333) | (1,086) | |
| Opening net (debt)/cash | |||
| (as dened by the Group) | (699) | 387 | |
| Closing net debt (as dened by the Group) |
KPI (1,032) |
(699) |
There was a cash outow in respect of acquisitions and disposals reecting the acquisition of SilverSky (£147m) and Signal Innovations Group (£12m) and an additional 59% shareholding in Saudi Development and Training Company (£71m).
The cash outow in respect of the share repurchase programme of £283m (2013 £212m) represents shares purchased and cancelled under the programme announced in February 2013.
Equity dividends paid in 2014 include payments in respect of the 2013 nal (£383m) and 2014 interim (£259m) dividends.
As a consequence of movements in US dollar and Euro exchange rates during the year, there has been a cash inow from matured derivative nancial instruments of £8m (2013 £47m outow) from rolling hedges on balances with the Group's subsidiaries and equity accounted investments.
Foreign exchange translation, primarily in respect of the Group's US dollar-denominated borrowing, increased reported net debt by £146m.
The Group's net debt at 31 December 2014 is £1,032m, a net outow of £333m from the net debt position of £699m at the start of the year.
A \$500m (£298m) 4.95% bond and a £100m, 10¾% bond were repaid at maturity in June and December,
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Debt-related derivative nancial | ||
| instrument assets | 10 | 6 |
| Cash and cash equivalents | 2,314 | 2,222 |
| Less: Cash classied as | ||
| held for sale | (6) | – |
| 2,318 | 2,228 | |
| Loans – non-current | (2,868) | (2,524) |
| Loans and overdrafts – current | (482) | (402) |
| Less: Cash received on | ||
| customers' account6 | – | (1) |
| (3,350) | (2,927) | |
| Net debt (as dened by the Group) | KPI (1,032) |
(699) |
respectively. These repayments had been largely pre-nanced by the £0.4bn raised in the UK bond market in 2012.
In October, the Group issued \$800m (£495m) 3.8% and \$300m (£184m) 4.75% bonds maturing in 2024 and 2044, respectively, intended for general corporate purposes, including the repayment of debt securities at maturity in 2015 and 2016.
Cash and cash equivalents of £2,314m (2013 £2,222m) are held primarily for the repayment of £0.7bn of debt securities maturing in 2015 and 2016, the share repurchase programme, pension decit funding, payment of the 2014 nal dividend and management of working capital.
The £248m increase in intangible assets to £10.0bn (2013 £9.7bn) arises from business acquisitions made in the year (£289m) and exchange translation (£258m), partly offset by the impairment of goodwill relating to the US commercial shipbuilding and South African businesses (£161m), and the year's amortisation charge (£179m).
Property, plant and equipment, and investment property reduced to £1.7bn (2013 £2.1bn) reecting the disposal of a residential and ofce facility in Saudi Arabia.
Equity accounted investments and other investments reduced to £236m (2013 £286m) mainly reecting the dividends of £63m received in the year. Note 12 to the Group accounts on page 125 identies the Group's
| MATURITY OF THE GROUP'S BORROWINGS (£BN) | |
|---|---|
| 2014 | 3.4 |
| 2015 | 2.9 |
| 2016 | 2.6 |
| 2017 | 2.6 |
| 2018 | 2.6 |
| 2019 | 2.0 |
| 2020 | 2.0 |
| 2021 | 1.7 |
| 2022 | 1.3 |
| 2023 | 1.3 |
| 2024 | 0.8 |
| 2025 | 0.8 |
| 2026 | 0.8 |
| 2027* | 0.4 |
P132 Note 19 to the Group accounts
* Repayable in 2041 (£254m) and 2044 (£190m).
principal joint ventures, Euroghter, MBDA and Air Astana, and, this year, provides additional information in respect of the Group's interests in those companies.
The £1.9bn increase in the Group's share of the pre-tax pension decit mainly reects an increase in liabilities due to a 0.7 percentage point decrease in the real discount rate to 0.4% in the UK and a 0.8 percentage point decrease in the nominal discount rate to 4.1% in the US. Details of the Group's pension schemes are provided in note 21 to the Group accounts on page 134.
The triennial funding valuations of all of the Group's UK pension schemes were performed in 2014 and showed an aggregate funding decit of £2.7bn. New funding arrangements, including decit recovery plans which run until 2026, have been concluded with the trustees of those schemes.
A net deferred tax asset of £1.2bn (2013 £0.7bn) relating to the Group's pension decit is included within net tax assets and liabilities.
There was a £0.5bn increase in working capital mainly reecting a net reduction in advance contract funding and utilisation of provisions.
At 31 December 2014, the South African land vehicles business (£41m) and AACC (£12m), both expected to be sold in 2015, are classied as held for sale. The disposal of the residential and ofce facility in Saudi Arabia classied as held for sale at 31 December 2013 (£140m) was completed on 9 January 2014.
| BALANCE SHEET | ||
|---|---|---|
| 2014 £m |
2013 £m |
|
| Intangible assets | 9,983 | 9,735 |
| Property, plant and equipment, and investment property |
1,718 | 2,071 |
| Equity accounted investments and other investments |
236 | 286 |
| Other nancial assets and liabilities (net) |
(112) | (23) |
| Pension decit (net) | (5,368) | (3,509) |
| Tax assets and liabilities (net) | 865 | 405 |
| Working capital | (4,466) | (4,988) |
| Net assets held for sale | 53 | 140 |
| KPI Net debt (as dened by the Group) |
(1,032) | (699) |
| Net assets | 1,877 | 3,418 |
| EXCHANGE RATES – YEAR END | ||
|---|---|---|
| 2014 | 2013 | |
| £/\$ | 1.559 | 1.656 |
| £/€ | 1.287 | 1.202 |
| £/A\$ | 1.908 | 1.851 |
| MOVEMENT IN THE GROUP'S PENSION DEFICIT (£BN) | |||||
|---|---|---|---|---|---|
| 2013 | 3.5 | ||||
| Real discount rate | 3.0 | ||||
| Return on assets | (1.2) | ||||
| Decit funding | (0.4) | ||||
| Other | 0.5 | ||||
| 2014 | 5.4 |
P134 Note 21 to the Group accounts
Certain of the Group's principal 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 nancial statements:
| Revenue and prot recognition | |
|---|---|
| Sales | £16.6bn (year ended 31 December 2014) |
| See note 1 to the Group accounts | |
| Carrying value of intangible assets | |
| Intangible assets | £10.0bn (at 31 December 2014) |
| See note 9 to the Group accounts | |
| Valuation of retirement benet obligations | |
| Group's share of IAS 19 | £5.4bn (at 31 December 2014) |
| decit, net | See note 21 to the Group accounts |
P102 For more information
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.
Maintain a balance between the continuity, exibility and cost of debt funding through the use of borrowings from a range of markets with a range of maturities, currencies and interest rates, reecting the Group's risk prole.
– Material borrowings are arranged by the central treasury department and funds raised are lent onward to operating subsidiaries as required.
Manage the exposure to interest rate uctuations on borrowings through varying the proportion of xed rate debt relative to oating 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 xed interest rates.
Maintain adequate undrawn committed borrowing facilities.
– An undrawn committed Revolving Credit Facility of £2bn contracted to December 2018 and £1.8bn contracted from December 2018 to December 2019 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 nancial institutions with the strongest credit ratings for short periods.
Reduce the Group's exposure to transactional volatility in earnings and cash ows from movements in foreign currency exchange rates.
The Group's tax strategy is to:
The Group seeks to build constructive working relationships with tax authorities, following a policy of open disclosure in order to achieve early agreement and certainty in relation to its tax affairs. Whilst the Group aims to maximise the tax efciency of its business transactions, it does not use structures in its tax planning that are against the spirit of the law and actively considers the implications of any planning for the Group's wider corporate reputation. 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 to help shape 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/media/2051390/ statement_of_principles.pdf).
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 rms. 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 interpretation of country-specic legislation and the likely outcome of negotiations or litigation. The assessment and management of tax risks are regularly reviewed by the Group's Audit Committee.
P114 Note 6 to the Group accounts
Maintain the Group's investment grade credit rating and ensure operating exibility, 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 investing in value-enhancing acquisitions, where market conditions are right and where they deliver on the Group's strategy.
The Group funds its operations through a mixture of equity funding and debt nancing, including bank and capital market borrowings. The capital structure of the Group reects the judgement of the directors of an appropriate balance of funding required. Three credit rating agencies publish credit ratings for the Group:
| Agency | 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 |
P143 Note 23 to the Group accounts
P150 Note 28 to the Group accounts
| KPI | KPI | KPI | KPI | |||||
|---|---|---|---|---|---|---|---|---|
| Number of | Sales1 | Underlying EBITA2 |
Return on sales |
Cash flow3 |
Order intake1 |
Order backlog1,4 |
||
| ELECTRONIC SYSTEMS P28 |
Electronic Systems comprises the US and UK-based electronics activities, including electronic warfare systems and electro-optical sensors, military and commercial digital engine and flight controls, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems. |
employees1 12,500 |
£m 2,415 |
£m 373 |
% 15.4 |
£m 246 |
£m 2,341 |
£bn 3.9 |
| CYBER & INTELLIGENCE | Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered Applied Intelligence business, and covers the Group's cyber, secure |
7,900 | 1,085 | 123 | 11.3 | 71 | 1,163 | 0.9 |
| P31 | government, and commercial and financial security activities. |
|||||||
| PLATFORMS & SERVICES (US) P34 |
Platforms & Services (US) comprises the US-headquartered Land & Armaments business, with operations in the US, UK, Sweden and South Africa, and the US-based services and sustainment activities, including ship repair and munitions services. |
16,900 | 3,266 | 147 | 4.5 | 201 | 3,191 | 5.8 |
| PLATFORMS & SERVICES (UK) P37 |
Platforms & Services (UK) comprises the Group's UK-based air, maritime, combat vehicle, munitions and shared services activities. |
29,600 | 6,623 | 772 | 11.7 | 173 | 5,386 | 20.1 |
| PLATFORMS & SERVICES (INTERNATIONAL) | Platforms & Services (International) comprises the Group's businesses in Saudi Arabia, Australia and Oman, together with its 37.5% interest in the pan-European MBDA joint venture. |
14,000 | 3,572 | 366 | 10.2 | 881 | 3,398 | 11.6 |
| P40 | ||||||||
| HQ | HQ comprises the Group's business in India and head office activities, together with a 49% interest in Air Astana. |
2,500 | 279 | (79) | (381) | 277 | – | |
| LESS: INTRA-GROUP | (603) | (634) | (1.8) | |||||
| TOTAL | 83,400 | 16,637 | 1,702 | 10.2 | 1,191 | 15,122 | 40.5 | |
| 1. Including share of equity accounted investments. 2. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 23). 3. Net cash inflow/(outflow) from operating activities after capital expenditure (net), |
||||||||
| financial investment and dividends from equity accounted investments. 4. Comprises funded and unfunded unexecuted customer orders. |
P22 | Financial review |
FINANCIAL STATEMENTS
STRATEGIC REPORT
GOVERNANCE
Electronic Systems comprises the US and UK-based electronics activities, including electronic warfare systems and electro-optical sensors, military and commercial digital engine and ight controls, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.
APKWS is a laser-guided rocket that provides a low-cost surgical strike capability. At 31 December 2014, Electronic Systems has delivered more than 3,500 systems under its Full-Rate Production Lot 3 contract with the US Navy. The US Army is working closely with the US Navy to acquire APKWS for initial elding in 2015. Jordan and the US Navy have signed a Letter of Offer and Acceptance to progress the rst international sale of the APKWS system and other international opportunities are being progressed.
Electronic Systems has advanced technology, high-integrity electronics capabilities with a large portfolio of annually-funded contracts and signicant Group-funded research and development investment.
Electronic Combat combines the Electronic Protection, Electronic Warfare and Electronic Attack product lines, and provides a depth of capability in integrated electromagnetic systems for airborne applications.
Survivability & Targeting includes threat warning and infrared countermeasures systems for aircraft, handheld targeting and thermal devices, precision guidance systems, electro-optic sensor products and enhanced situational awareness systems.
Communications & Control contains radio frequency communication and datalinks, and provides military aircraft controls and displays, together with platform integration capabilities.
Intelligence, Surveillance & Reconnaissance (ISR) addresses the market for airborne persistent surveillance, identication systems, signals intelligence and space products.
Commercial Aircraft Solutions addresses the commercial aircraft electronics market, including y-by-wire ight controls, full authority digital engine controls, cockpit controls, head-up displays, cabin management systems and power management systems.
HybriDrive® Solutions delivers electric propulsion and power management performance, with products and solutions that advance vehicle efciency in the transit, marine and defence markets.
Defence Commercial
Maintained a leadership position in the US electronic warfare market
Received a three-year contract from the US Army for third-generation Common Missile Warning Systems
Next-generation Striker®II helmet-mounted display unveiled
Two-year contract awarded to provide Tactical Signals Intelligence Payloads and associated equipment for the US Army's Gray Eagle unmanned aircraft
Strengthened position in the high-growth commercial aircraft electronics market, with wins on several Boeing aircraft, including 777X, and other aircraft
Research and development expenditure2 at 7% of sales1 in 2014
BAE Systems is a major supplier to Boeing for ight controls, and cabin and ight deck systems. In July, Boeing selected BAE Systems to provide the integrated ight control electronics on its next-generation 777X programme which is projected to be worth over \$1bn (£0.6bn) over the life of the aircraft. The system will control the ight surfaces of the aircraft and integrate additional functionality unique to the 777X.
Electronic Systems maintains its leadership position in the US electronic warfare market. Initial design verication testing of the electronic warfare suite on the F-35 Lightning II programme was completed during the year. Low-Rate Initial Production (LRIP) Lots 7 and 8 deliveries continue, and the business has received initial funding on Lots 9 and 10, with anticipated negotiations in 2015.
The business is under contracts, from Boeing and Warner Robins Air Logistics Complex, totalling over \$0.9bn (£0.6bn) to install the Digital Electronic Warfare System (DEWS) on 84 new F-15 aircraft and upgrade the DEWS on 70 existing F-15 aircraft for the Royal Saudi Air Force. System verication and ight testing continues on schedule in advance of initial elding in the second half of 2015.
The US Air Force has dened its requirements for the next-generation electronic warfare system, Eagle Passive Active Warning Survivability System, for more than 400 existing F-15 aircraft. The programme will consist of the design, development, integration and delivery of a passive and active electronic warfare suite. The business has submitted a proposal to Boeing and, in competition, an award decision is expected in the third quarter of 2015.
Following successful US Defense Advanced Research Projects Agency ight demonstrations, Electronic Systems has received an \$86m (£55m) contract to design, develop and deliver initial electronic sensors for the Long-Range Anti-Ship Missile in support of its initial elding in 2018 on board B-1B aircraft.
In 2014, BAE Systems was not awarded the technology development contract for the Next-Generation Jammer.
Electronic Systems completed its \$38m (£24m) Common Infrared Countermeasures technology development contract on a US Army helicopter programme. A proposal for the engineering and manufacturing development phase, together with options for two LRIP phases, was submitted in November and, in competition, an award decision is expected in 2015.
A three-year Indenite Delivery, Indenite Quantity (IDIQ) contract with the US Army, with a potential value of approximately \$496m (£318m), was agreed in May for third-generation Common Missile Warning Systems. The US Army has determined that this will be the baseline for export to international customers.
Electronic Systems continues to execute its \$37m (£24m) Advanced Precision Kill Weapon System (APKWS™) Full-Rate Production Lot 3 contract with the US Navy, with more than 3,500 systems delivered to 31 December 2014. The APKWS laser-guided rocket achieved an Air Worthiness Release and successfully completed initial live testing on the US Army Apache D/E aircraft in 2014. The \$45m (£29m) Full-Rate Production Lot 4 contract was nalised in December. The US Army is working closely with the US Navy to acquire APKWS for initial elding in 2015.
Jordan and the US Navy have signed a Letter of Offer and Acceptance to progress the rst international sale of the APKWS system. Other international opportunities were progressed, with the successful completion of a ground trial in Australia and, in November, the US Defense Security Cooperation Agency began the Congressional Notication process on a potential Foreign Military Sale to Iraq for up to 2,000 systems.
The business continues to perform on the Terminal High-Altitude Area Defence orders for 307 infrared missile seekers supporting both the US government and Foreign Military Sales worth \$340m (£218m).
In May, Electronic Systems was awarded a ve-year IDIQ contract with a potential value of approximately \$445m (£285m) to support the US Army's Enhanced Night Vision Goggle III and Family of Weapon Sights – Individual programme. Following a protest by a competitor and re-competition, BAE Systems was awarded the contract in December. However, this new award has been further protested, with the next decision expected in March 2015.
Electronic Systems continues to deliver on programmes in Korea, providing ight control systems, head-up displays, mission computers and automatic test equipment systems.
On the F-35 Lightning II programme, BAE Systems successfully completed Lot 7 deliveries of the vehicle management computer in support of Lockheed Martin's production programme. Lots 8 and 9 are under contract.
The next-generation Striker®II helmet-mounted display was unveiled at the Farnborough Airshow in July. The system is a digital upgrade of the current product, in service on Typhoon and Gripen aircraft, providing seamless day and night capability through an integrated digital night vision camera.
Electronic Systems continues to provide Airborne Surveillance capability for the US Air Force and US Army based on two wide-area, high-resolution imaging sensor systems – the Airborne Wide Area Persistent Surveillance System, which has been operational for more than 23,000 hours in theatre, and the Autonomous Real-time Ground Ubiquitous Surveillance – Imaging System.
The business provides state-of-the-art processing capabilities for the US Navy's P-8A Poseidon programme, which has entered Full-Rate Production and delivered 28 mission computer and display systems. Eight additional systems have been delivered to Boeing for its rst international customer and four systems were procured by Australia.
Electronic Systems continues to provide Signals Intelligence capability for the US Army and other US Department of Defense customers. In June, BAE Systems was awarded a two-year Indenite Delivery, Indenite Quantity contract worth up to \$70m (£45m) to provide Tactical Signals Intelligence Payloads and associated equipment for the US Army's Gray Eagle unmanned aircraft.
In December, BAE Systems entered into an agreement with Esterline Corporation for the proposed acquisition of Eclipse Electronic Systems, Inc. for cash consideration of approximately \$28m (£18m), subject to closing adjustments. The Texas-based business provides highly-advanced Intelligence, Surveillance and Reconnaissance products and services to the US defence and intelligence community. The proposed acquisition has not yet completed.
BAE Systems is a major supplier to Boeing for ight controls, and cabin and ight deck systems. In July, Boeing selected BAE Systems to provide the integrated ight control electronics on its next-generation 777X programme, which is projected to be worth over \$1bn (£0.6bn) over the life of the aircraft. Development of subsystems for the 737 MAX aircraft has also continued on schedule, with the y-by-wire spoiler units delivered to Boeing for system integration.
FADEC Alliance, a joint venture between FADEC International (the Group's joint venture with Sagem) and GE Aviation, completed rst ight of the full authority digital engine controls on the Leap engine which will power the Boeing 737 MAX and Airbus A320neo aircraft.
The business completed development of the ight control system for the Embraer Legacy 500 business jet and is currently developing active side-sticks for Gulfstream G500 and G600 business jets, as well as Embraer's KC-390 cargo aircraft for the Brazilian Air Force.
Several airlines and original equipment manufacturers have expressed interest in the IntelliCabin™ product, a next-generation cabin system that provides in-seat power, LED lighting and tablet-based, wireless in-ight entertainment systems. Development activities are on schedule for system availability in 2015.
BAE Systems has 4,500 propulsion systems in service in transit buses around the world and is delivering its HybriDrive Series-E system into major cities, including Hong Kong, Quebec, Paris, Seattle and Baltimore. The business continues to deliver systems to Washington, D.C., in the US and London in the UK, and will begin deliveries in 2015 to Boston and Honolulu.
| FINANCIAL PERFORMANCE | |||||||
|---|---|---|---|---|---|---|---|
| 2014 | 2013 | ||||||
| Sales1 | KPI | £2,415m £2,466m | |||||
| Underlying EBITA2 | KPI | £373m | £346m | ||||
| Return on sales | 15.4% | 14.0% | |||||
| Cash inow3 | KPI | £246m | £235m | ||||
| Order intake1 | KPI | £2,341m £2,697m | |||||
| Order backlog1,4 | £3.9bn | £3.7bn |
Sales1 compared to 2013 increased by 3% to just under \$4bn (£2.4bn). The commercial areas of the business now amount to 21%, having seen sales1 growth in the year of 7%. On the defence side, sales1 increased by 2% in the year, largely from the F-35 Lightning II programme in the Electronic Warfare area.
The return on sales achieved was 15.4% (2013 14.0%) largely reecting continued strong programme execution and risk retirement. There was a 0.5 percentage point non-recurring gain from a contract pricing settlement.
Cash3 conversion of underlying EBITA2 for the year was 66% but, excluding pension decit funding, that conversion rate was 80%.
Despite the US budget pressures, order backlog1,4 was sustained at \$6.1bn (£3.9bn). The contract award for the Enhanced Night Vision Goggle programme has been protested again and is, therefore, not included within the reported order backlog1,4.
Whilst the longer-term outlook remains uncertain, the 2015 scal year omnibus appropriations legislation passed in December 2014 included stable Department of Defense funding and support for major programmes, including F-35 Lightning II aircraft.
Whilst further funding reductions and the resultant slowdown or cancellation of ongoing and new programmes could impact the business, Electronic Systems remains well-positioned to address changing US Department of Defense priorities. Its focus remains on maintaining a diverse portfolio of defence and commercial products and capabilities, with both US and international customers, and sustained emphasis on cost reduction and research and development.
The business expects to benet from its incumbent positions, particularly on the F-35 Lightning II programme, increased activity on international defence programmes and continued commercial aviation market growth.
SILVERSKY ACQUISITION In December, BAE Systems acquired SilverSky, a provider of cloud-based hosting, protection and monitoring of information that operates in the fast-growing cyber security market largely focused on the US. Its customer base includes approximately 5,500 customers in the nancial services, retail, healthcare, energy, critical infrastructure and manufacturing sectors.
GOVERNANCE
Strategic Report
Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered Applied Intelligence business, and covers the Group's cyber, secure government, and commercial and nancial security activities.
Intelligence & Security delivers a broad range of services to enable the US military and government to recognise, manage and defeat threats.
GEOINT–ISR develops and supports mission software and systems for intelligence and defence customers, leveraging domain expertise in geospatial, Intelligence, Surveillance and Reconnaissance (ISR) and mission management.
Global Analysis and Operations provides innovative, mission-enabling analytic solutions and support to operations to US federal, state and local agencies across the homeland security, law enforcement, defence, intelligence and counter-intelligence communities.
IT Solutions delivers operational secure solutions that enable national security and critical
infrastructure customers to perform operations and protect their data and networks.
Applied Intelligence collects, manages and exploits information to enable government and commercial clients to reveal intelligence, maintain security, manage risk and optimise performance.
Alongside its secure government-focused activities, the business is a supplier of solutions that combine large-scale data exploitation, intelligence-grade security and complex services and solutions integration to commercial customers, with a focus on nancial services, telecommunications, and energy and utility companies.
Primary operations are in the UK, Denmark, Ireland, Australia, Malaysia and the US.
US business impacted by US budget pressures and reductions in overseas operations
First task order awards under the Geospatial Data Services contract
Awarded a ve-year contract for counter-terrorism analysis services
Awarded a ve-year purchase agreement to support IT applications for the Bureau of Labor Statistics
Acquisition of Signal Innovations Group, a leading-edge technology company with activity-based intelligence expertise
Selected by a UK government customer as one of four strategic suppliers on a technology framework
Important multi-year customer wins for NetReveal® OnDemand managed services
Awarded multi-year framework contracts for Service Integration and Applications Management services
Acquisition of SilverSky, a commercial cyber service provider, to enhance commercial cyber growth strategy
The National Geospatial-Intelligence Agency (NGA) has awarded BAE Systems a ve-year contract with an estimated total value of \$335m (£215m). The award supports NGA's dynamic Map of the World project, which is giving US military leaders clearer on-the-ground intelligence pictures to enhance situational awareness and mission planning.
Whilst the US services market continued to experience challenges due to budget uncertainties, unpredictable and delayed acquisition and funding cycles, and the US withdrawal from Afghanistan, the Intelligence & Security business continues to focus on leveraging its core capabilities and domain expertise to pursue opportunities in intelligence analysis, special operations support, and Intelligence, Surveillance and Reconnaissance programmes, which remain priority activities in the US.
BAE Systems continues to mature its capabilities in activity-based intelligence which provides the intelligence and defence communities with increasingly automated, efcient and reliable data processing and management tools to transform big data into actionable intelligence. The business received authorisation to proceed on a \$32m (£21m) Engineering Change Proposal for activity-based intelligence services.
In 2014, the business delivered the rst two software releases for testing of the Mobility Air Force Automated Flight Planning Service programme and passed nal quality test on the Aero Advisory Notication Tool capability in support of the US Air Force's transition to a consolidated mission planning architecture. Development continues on the third release of the software.
The National Geospatial-Intelligence Agency awarded the business the rst six task orders, totalling \$56m (£36m), under the ve-year Geospatial Data Services contract to assist in transforming the collection, maintenance and utilisation of geospatial intelligence data and products. The contract has an estimated total value of \$335m (£215m).
In September, BAE Systems acquired Signal Innovations Group, a leading provider of imaging technologies and analytics to the US intelligence community.
In the market for Full Motion Video and Intelligence, Surveillance and Reconnaissance analysis, the business has ongoing contracts worth over \$400m (£257m), which includes the services of over 400 analysts supporting mission critical activities.
The business continues to provide security-cleared intelligence analyst support. In August, BAE Systems won a ve-year contract worth up to \$145m (£93m) to provide an intelligence community customer with counter-terrorism analysis services.
On the Solutions for the Information Technology Enterprise Indenite Delivery, Indenite Quantity contract, with task orders worth \$476m (£305m), the business has transitioned the customer from a costly regional support model to a less costly and more efcient enterprise support model.
In May, BAE Systems was awarded a position on the US Department of Homeland Security's Enterprise Acquisition Gateway for Leading Edge Solutions II multiple-award contract as one of 15 down-selected prime contractors to provide a broad range of IT solutions and services.
In August, BAE Systems was awarded a ve-year purchase agreement valued at up to \$126m (£81m) to operate, maintain and develop IT applications for the Bureau of Labor Statistics.
Applied Intelligence continues to operate in competitive markets with fast-moving customer requirements. The business continues to grow through the provision of solutions which protect and enhance the operations of governments and commercial organisations in the areas of cyber security, nancial crime prevention, communications intelligence and digital transformation, and is demonstrating its ability to win large, multi-year contracts.
Applied Intelligence continues to invest in building its skills base, with over 100 graduates joining the business in 2014, representing over one-third of BAE Systems' UK graduate intake. A Global Delivery Centre in Malaysia now supports product development and customer project delivery.
In December, BAE Systems acquired SilverSky, a provider of cloud-based hosting, protection and monitoring of information that operates in the fast-growing cyber security market largely focused on the US.
The business continues to grow, building on its strong relationship with the UK government, with orders including a £7m multi-year contract to address the UK Ministry of Defence's complex information assurance challenges.
The IndustrialProtect™ solution to protect industrial control systems was launched in the US and Middle East and received a £3m order from a major global energy supplier.
New orders for the CyberReveal™ cyber threat monitoring solution have been received in the US and Europe.
Market interest in MobileProtect™, launched in 2013 alongside a ve-year strategic partnership with Vodafone, continues to grow with multiple large enterprises currently trialling the service. In 2015, the business is targeting to achieve an additional 150,000 subscribers to the MobileProtect™ service.
Applied Intelligence provides enterprise risk, fraud and compliance solutions internationally.
Applied Intelligence has won additional work with existing customers, including HSBC, which has procured NetReveal® Discovery, a suite of solutions that enable global nancial crime investigations across borders. Demand for multi-year managed service solutions has increased, with NetReveal® OnDemand being selected by RSA in Canada to provide insurance fraud solutions under a ve-year contract. Growth in the US continues with an order from a large US-based global personal and business payment provider.
Expansion is being achieved in other sectors, including healthcare with a £4m contract to provide Medicaid fraud prevention in Rhode Island and capital markets in the UK, Europe and Australia through a solution, launched in 2013, to protect against unauthorised trading, providing risk management controls to investment bank trading oors.
The business is a provider of end-to-end communications intelligence solutions to government and communications service providers and is addressing opportunities in Europe, the Middle East and Asia-Pacic regions. It continues to win new clients, most recently in Asia-Pacic, and is developing follow-on business with existing clients as a result of new products from continued product investment.
Applied Intelligence provides consulting and systems integration services, with a particular focus on enabling digital transformation. The business continues to support UK government agencies in their intelligence missions and has been selected by a UK government customer as one of four strategic suppliers on a long-term framework that covers application development, systems integration and managed services.
Further success in the Service Integration and Applications Management market was achieved, with new and additional multi-year contracts worth £45m awarded, including new contracts with the Highways Agency and Skills Funding Agency.
| FINANCIAL PERFORMANCE | ||||||
|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
| Sales1 | KPI | £1,085m £1,243m | ||||
| Underlying EBITA2 | KPI | £123m | £115m | |||
| Return on sales | 11.3% | 9.3% |
Cash inow3 KPI £71m £118m Order intake1 KPI £1,163m £1,247m Order backlog1,4 £0.9bn £0.7bn In aggregate, sales1 in the year reduced by 8%. The US business saw a 17% decrease driven largely by reduced budgets at the sector's two largest customers, along
with further reductions in intelligence analyst support. Organic growth in the Applied Intelligence business was at 10%, almost all of which was from commercial customers. Completion of the SilverSky transaction occurred in mid-December and, therefore, only \$4m (£3m) of sales trading has been recognised from that business.
Despite the top line performance, the margin achieved was 11.3% (2013 9.3%), with protability in the Applied Intelligence business increasing ahead of plan.
Cash3 conversion of underlying EBITA2 for the year was at 58% due to the capital costs of the replacement Enterprise Resource Planning system and set-up of the Malaysian Global Delivery Centre in the Applied Intelligence business.
In aggregate, order backlog1,4 increased to \$1.4bn (£0.9bn). Despite the top line pressures, order backlog1,4 in the US business grew by 7% largely on imagery analysis and cyber support awards. In the Applied Intelligence business, order book increased by 37% over the year, 22% organically and 15% from the SilverSky acquisition.
In the US, whilst the longer-term outlook remains uncertain, the 2015 scal year omnibus appropriations legislation passed in December 2014 included stable Department of Defense funding.
Intelligence & Security has reduced costs to address government budgets, whilst pursuing growth opportunities, particularly in critical, mission-focused areas.
Recognising the continued challenges in the US market, a restructuring was announced in 2014 that realigned the Support Solutions business across the remaining US operating sectors. A Support Solutions business area which develops and maintains systems supporting critical missions for the US military was integrated with Intelligence & Security. This integrated portfolio provides critical mass and economies of scale over a full spectrum of services and capabilities to the US military and other government agencies.
Applied Intelligence has a growing order backlog and pipeline of opportunities, underpinning expected growth from both government and commercial customers. In order to most effectively deliver against these opportunities, the business restructured into three divisions with effect from 1 January 2015: UK Services; International Services and Solutions; and Commercial Solutions. In 2015, the acquired SilverSky business will be integrated into the Commercial Solutions division, accelerating the growth strategy.
GOVERNANCE
Platforms & Services (US) comprises the US-headquartered Land & Armaments business, with operations in the US, UK, Sweden and South Africa, and the US-based services and sustainment activities, including ship repair and munitions services.
The Land & Armaments business includes a range of funded development activity, and xed-price production and services contracts. Land & Armaments is engaged in the design, development, production, support and upgrade of armoured combat vehicles, artillery systems, naval guns, missile launchers and munitions.
US Combat Vehicles focuses on the tracked and amphibious vehicles markets, servicing both US and international customers.
Weapon Systems focuses on naval weapons, munitions and artillery markets, servicing US, UK and international customers. Products include naval gun systems, artillery systems, munitions and missile launchers.
Platforms Services
BAE Systems Hägglunds focuses on the tracked vehicle market for Swedish and international customers.
FNSS, BAE Systems' Turkish joint venture, produces and upgrades tracked and wheeled military vehicles for international customers.
The Support Solutions business includes services, sustainment and systems integration activities, which may be contracted over multi-year arrangements.
Support Solutions is a major supplier of ship repair services to the US Navy and complex munitions facilities management for the Holston and Radford facilities. Other activities in the US include xed and rotary wing aircraft support services.
In December, the US Army awarded BAE Systems a contract worth up to \$1.2bn (£0.8bn) for the engineering and manufacturing development and Low-Rate Initial Production of the Armored Multi-Purpose Vehicle. The initial award, valued at \$383m (£246m), is for a 52-month base term during which the business will produce 29 vehicles, with an option to produce an additional 289. The programme addresses a critical need to replace Vietnam-era M113 vehicles and the award conrms BAE Systems' role as a leading provider of combat vehicles.
In-year awards sustain vehicle programme positions
Engineering and manufacturing development contract award worth up to \$1.2bn (£0.8bn) on the US Army's Armored Multi-Purpose Vehicle programme
Option worth \$142m (£91m) exercised to continue Low-Rate Initial Production of M109A7 self-propelled howitzers
Continued focus on cost reduction
Sale of 75% interest in Land Systems South Africa business announced, with completion expected in 2015
\$1.5bn (£1.0bn) of US Navy ship repair contracts awarded
Performance impacted by \$122m (£74m) of charges taken on commercial shipbuilding programmes
Improved performance on the Radford Army Ammunition Plant contract, with operational challenges mitigated signicantly during the year
Korean F-16 upgrade contract terminated for convenience by the customer
Restructuring announced in 2014 realigned Support Solutions across the remaining US operating sectors
In 2014, the business was selected to continue ve-year Multi-Ship, Multi-Option (MSMO) contracts supporting various US Navy ships at its Hawaii and San Diego shipyards. The new contracts, together with similar MSMO contracts in Norfolk, Virginia, and Mayport, Florida, reinforce the Group's trusted partnership with the US Navy. BAE Systems has successfully completed more than 300 cruiser and destroyer availabilities over the last 20 years.
As the defence market stabilises, BAE Systems retains its focus on maintaining key programmes and building a strong domestic and international pipeline, whilst shaping the business portfolio and scaling operational resources for optimised competitiveness.
The business has focused on maintaining and enhancing its positions on vehicle programmes, with a number of signicant contracts received during the year.
In December, the US Army awarded BAE Systems a contract worth up to \$1.2bn (£0.8bn) for the engineering and manufacturing development and Low-Rate Initial Production of the Armored Multi-Purpose Vehicle. The initial award, valued at \$383m (£246m), is for a 52-month base term during which the business will produce 29 vehicles, with an option to produce an additional 289.
In December, the business received a \$34m (£22m) contract to convert 49 M3A3 Cavalry Bradley Fighting Vehicles to the M2A3 Infantry conguration, extending the Bradley production line through the rst half of 2016.
The business received a \$154m (£99m) follow-on contract for the upgrade of an additional 53 vehicles to the M88A2 HERCULES conguration, which will maintain the M88 production line to the end of 2016.
In November, the US Army exercised an option, valued at \$142m (£91m), to continue Low-Rate Initial Production of the M109A7 self-propelled howitzer, with the rst deliveries expected in the second quarter of 2015.
BAE Systems' signicant experience with amphibious vehicle platforms has resulted in its selection as one of two contractors competing for the US Marine Corps Assault Amphibious Vehicle survivability upgrade programme. The business is also competing for the engineering and manufacturing development phase of the Amphibious Combat Vehicle 1.1 contract. Down-selects for both programmes are expected in 2015.
Work on the Joint Light Tactical Vehicle (JLTV) programme was transitioned successfully from the Sealy, Texas, plant, which closed in June. BAE Systems, as a strategic partner to Lockheed Martin on the JLTV programme, completed limited user testing of the engineering and manufacturing development vehicles in the fourth quarter of 2014 in support of the competitive pursuit of a Low-Rate Initial Production award.
Following the US Army's decision to discontinue the Ground Combat Vehicle programme, BAE Systems was awarded a follow-on bridge contract in June to continue related technology development efforts and maintain critical engineering talent.
The business was awarded a contract for four 57mm Mk3 naval guns for an international customer.
The business did not secure an order from India for M777 ultra-lightweight howitzers, but continues to pursue this prospect.
BAE Systems continues to develop its position in the advanced weapons market through its Electromagnetic Railgun programme, having competitively won contracts in excess of \$100m (£64m) for land and sea-based demonstrators, pulse power modules and the next development phase of the hyper velocity projectile programme.
Following the Norwegian government's decision to withdraw from the Archer artillery system programme, the business signed a contract amendment with Sweden establishing a new technical and schedule baseline for the contract, which has initial deliveries planned for the second half of 2015.
Work on the \$865m (£555m) CV90 vehicles contract for the Norwegian Army remains on schedule, with series production of the 144 vehicles continuing until 2017.
BAE Systems has offered the CV90 Armadillo concept for the Danish Armoured Personnel Carrier programme. Four manufacturers submitted bids in December and an award decision is expected in the rst half of 2015.
FNSS, BAE Systems' Turkish joint venture, has continued production under the \$559m (£359m) programme to produce 259 8x8 wheeled armoured vehicles for the Royal Malaysian Army.
Production continued under a \$360m (£231m) contract to upgrade 32 M113 tracked armoured personnel carriers for the Royal Saudi Land Forces. The business is pursuing other armoured vehicle prospects elsewhere in the Middle East region.
BAE Systems expects to complete the disposal of its Land Systems South Africa business in 2015 following the agreement of a proposed sale of the company in 2014.
Under Multi-Ship, Multi-Option (MSMO) contract vehicles with the US Navy, the US-based ship repair business received orders totalling \$1.5bn (£1.0bn) for the repair, maintenance and modernisation of various vessels during the year. The business was awarded a new ve-year MSMO contract at its Hawaii shipyard to support the maintenance and modernisation of a range of US Navy ships.
The commercial shipbuilding business continued to experience challenges, taking \$122m (£74m) of charges against ongoing contracts in 2014.
BAE Systems manages the operations of the Holston and Radford Army Ammunition Plants, receiving in excess of \$400m (£257m) of contracts in 2014 for explosives, propellant and facility modernisation. Following the operational challenges at the Radford plant identied during 2013, performance has improved reecting the award of new contracts, pricing adjustments on existing contracts and operational efciencies.
In 2012, BAE Systems was selected to upgrade the Republic of Korea's eet of F-16 aircraft. The US government approved the selection in 2013 and, whilst the business was successfully executing phase one of the programme, in November, Korea requested the termination for convenience of the US Air Force's contract with BAE Systems. BAE Systems expects to recover all of its programme costs under normal terms of a termination for convenience. In response to the Korean government's claim for approximately \$43m (£28m) under a bid guarantee on the programme, the Group has asked a US federal court to rule that it does not owe any monies to Korea.
Under the eight-year, \$534m (£343m) US Air Force contract, received in 2013, to maintain the readiness of Minuteman III intercontinental ballistic missiles in the US, the business completed the nine-month transition period from the incumbent on schedule in June and performed a successful test launch in September, a major milestone for the programme.
In February 2014, the US Air Force Space Command awarded BAE Systems a further three-year contract extension to maintain
its Solid State Phased Array Radar System, space radars used for missile warning and space surveillance operations, raising the cumulative value of the contract to approximately \$540m (£346m). This contract is expected to complete in 2018.
In April, BAE Systems was informed that it had not been awarded the Automated Installation Entry III contract, which would have extended its current work in support of US Army installation security. BAE Systems' protest of the award was upheld and the contract is being re-solicited.
In August, BAE Systems was one of ve companies awarded the ability to compete for task orders under an Indenite Delivery, Indenite Quantity contract to build-to-print a secure aoat network for the US Navy.
In September, the US Navy's Strategic Systems Programmes Ofce awarded BAE Systems a four-year, \$72m (£46m) contract to continue the provision of logistics and supply systems support for the Trident II D-5 submarine-launched ballistic missile.
In December, the US Navy's Naval Air Systems Command awarded BAE Systems a ve-year contract to provide full lifecycle engineering and technical support for communication and combat systems on land and at sea. The initial award is valued at \$28m (£18m), with the total value of the ve-year contract estimated at \$147m (£94m).
Also in December, the US Navy awarded BAE Systems the nine-year DDG VI Radio Communications Systems contract to support radio and communications systems design and integration for 13 guided missile destroyers. The initial award is valued at \$28m (£18m), with the total value of the nine-year contract estimated at \$187m (£120m).
Whilst the longer-term outlook remains uncertain, the 2015 scal year omnibus appropriations legislation passed in December 2014 included stable Department of Defense funding and support for major programmes, including the Group's Bradley and M88 HERCULES vehicles, as well as requested funding for US Navy ship maintenance and the Armored Multi-Purpose Vehicle (AMPV) programme.
The business is investing to protect existing combat vehicle programmes and to establish new domestic and international programmes, such as the US Army's AMPV, amphibious vehicles and international combat vehicle opportunities to sustain the Group's US combat vehicle manufacturing base. The services and sustainment activities provide continuing opportunities for multi-year contracts on existing platforms.
Recognising the continued challenges in the US market, a restructuring was announced in 2014 that realigned the Support Solutions business across the remaining US operating sectors. A business area which develops and maintains systems supporting critical missions for the US military will be reported in Intelligence & Security in 2015. As a result of the realignment of Support Solutions, the reporting segment retains all of the Land & Armaments businesses, as well as Ship Repair, Ordnance Systems and Protection Systems from Support Solutions. This change will allow the business to deliver more comprehensive, integrated and cost-effective product and service offerings across a full range of naval, land and individual warghter platforms.
Sales2 in the year declined to \$2.3bn (£1.4bn). Bradley reset activity has more than halved, the Medium Mine Protected Vehicle (MMPV) production contract has completed and deliveries under US M777 lightweight howitzer contracts have largely traded out.
Despite the expected top line reductions, the business has delivered an improved margin of 10.3% (2013 8.8%) through good programme execution and cost reduction.
Cash ow4 generation was again strong, with good cash conversion of working capital.
Order backlog2,5 reduced from \$5.0bn (£3.0bn) to \$4.4bn (£2.8bn) largely from the trading out of deliveries on MMPV and M777. We have not recognised within order backlog the \$0.8bn (£0.5bn) of Low-Rate Initial Production options under December's Armored Multi-Purpose Vehicle programme award.
Sales2 of \$3.1bn (£1.9bn) were 1% lower than in 2013.
The year's margin has been materially impacted by cost overruns on the commercial shipbuild contracts. Charges taken in the rst and second half year totalled \$122m (£74m). The Radford munitions contract has now been stabilised, with no additional provisioning necessary.
Order backlog2,5 decreased from \$5.1bn (£3.1bn) to \$4.6bn (£3.0bn) on the sales trading out under the ve-year US Navy ship repair contracts. The re-competes for the Hawaiian and San Diego contracts were both successfully secured in the year.
1. Re-presented for the transfer of the UK Munitions business to Platforms & Services (UK) from 1 January 2014.
Platforms & Services (UK) comprises the Group's UK-based air, maritime, combat vehicle, munitions and shared services activities.
Platforms & Services (UK) is the focus for the Group's UK prime contracting platform and systems integration contracts, with a large order backlog of multi-year development, production and services contracts.
Military Air & Information includes programmes for the production of Typhoon combat and Hawk trainer aircraft, F-35 Lightning II sub-assembly manufacture, support and upgrades for Typhoon, Tornado and Hawk aircraft, and development of next-generation Unmanned Air Systems and defence information systems.
Maritime programmes include the manufacture of two Queen Elizabeth Class aircraft carriers, three River Class Offshore Patrol Vessels and seven Astute Class submarines for the Royal Navy, the design of the Successor submarine and Type 26 frigate, and in-service support, including the Portsmouth Naval Base contract.
BY LINE OF BUSINESS (%) SALES1
& Information
C Combat Vehicles (UK)
ANALYSIS: PLATFORMS AND SERVICES
D A C A
B Maritime 39
D Munitions 4
61% 39% Platforms Services
55
2
SALES1
B
SALES1
Combat Vehicles (UK) provides upgrades and support to the British Army and international customers.
Munitions focuses on the design, development and manufacture of a comprehensive range of products, servicing its main customer, the UK Ministry of Defence, as well as international customers. The business is a principal supplier of general munitions to the British armed forces.
B
In July, 13 days after the vessel was named by Her Majesty The Queen, the UK's largest ever warship, HMS Queen Elizabeth, was successfully oated out of the dock in which she was assembled.
GOVERNANCE
Euroghter partner nation commitment to the full integration of the Captor E-Scan radar onto Typhoon aircraft
Major milestone achieved with oating of the aircraft carrier, HMS Queen Elizabeth
£348m contract awarded to construct three new River Class Offshore Patrol Vessels for the Royal Navy
First two Khareef Class corvettes for Oman achieved nal acceptance and third achieved interim acceptance
Awarded the ve-year, £600m Maritime Support Delivery Framework contract for support to the Royal Navy
£270m order received for the upgrade of Spearsh torpedoes
Third Astute Class submarine, Artful, launched in May
Announced potential management redundancies in the Military Air & Information business to align with its strategy and to improve competitiveness
In November, BAE Systems welcomed the news that the four Euroghter partner nations had placed a contract for the full integration of the Captor E-Scan radar onto Typhoon aircraft. The E-Scan radar will give the aircraft one of the most advanced radar systems in the world providing a wider eld of regard than any other combat aircraft. Other benets include increased detection and tracking ranges, advanced air-to-surface capability and enhanced electronic protection measures.
In the year, deliveries of Typhoon Tranche 2 aircraft to the four Euroghter partner nations totalled 16, bringing the cumulative number of Tranche 2 aircraft delivered to 219 of the contracted 236. Eighteen Tranche 3 front fuselage sub-assemblies were manufactured in the year. During 2014, there have been certain issues regarding acceptance of Typhoon Tranche 3 aircraft. Whilst the UK customer has continued to accept the aircraft, acceptances by Germany, Italy and Spain are held pending the completion of further technical and safety reviews by the NATO Euroghter and Tornado Management Agency, which are planned to be concluded during the rst quarter of 2015.
Work on the Omani Typhoon and Hawk aircraft contract continues, with sub-assembly manufacture for both aircraft types commencing and rst deliveries on schedule for 2017.
In July, BAE Systems was awarded a three-year, £72m contract by the UK Ministry of Defence to de-risk E-Scan radar development for the Royal Air Force's Typhoon aircraft eet. In November, the four partner nations placed a contract with Euroghter for the full integration of the Captor E-Scan radar onto Typhoon aircraft and, as the system integrator, this award is worth £365m.
BAE Systems continues to support its UK and European customers' Typhoon and Tornado aircraft and their operational commitments. The business supports its UK customer through availability-based service contracts. A £125m contract extension was received in the year to provide support to the Royal Air Force's Tornado GR4 eet until the aircraft's planned retirement in 2019. In December, BAE Systems was awarded a £112m contract to extend the Typhoon Availability Service for the in-service support of the Royal Air Force's Typhoon eet by 15 months.
On the F-35 Lightning II programme, BAE Systems has continued to deliver aircraft fuselages for the sixth and seventh Low-Rate Initial Production (LRIP) contracts, with a total of 45 assemblies delivered to Lockheed Martin in 2014. Contract award for LRIP 8 for 43 assemblies was received in the year and manufacturing commenced. Proposals for LRIP 9 and 10 have been submitted with negotiations to commence in 2015.
Support continues to be provided to users of Hawk trainer aircraft around the world. In 2014, the Indian Navy and Air Force received four and 15 Hawk aircraft, respectively, built under the Batch 2 licence for 57 aircraft by Hindustan Aeronautics Limited. A response to a proposal for an additional 20 Hawk aircraft for the Indian Air Force's aerobatic display team has been submitted.
Working jointly with Dassault Aviation, progress is being made in maturing and demonstrating critical technology and operational aspects for an Unmanned Combat Air System. In November, the signature of a two-year feasibility study, worth a total of £120m to the six participating companies, was announced by the UK and French governments to continue joint Future Combat Air System technology development. The contract value to BAE Systems is £34m.
Taranis, the stealthy unmanned combat air vehicle demonstrator designed and built by BAE Systems with UK industry partners and the Ministry of Defence, has successfully completed a second phase of ight testing. During these latest tests, Taranis ew in a fully stealthy conguration.
The business undertook a review to ensure that its organisational operating model was aligned with its strategy and to improve competitiveness, which resulted in the announcement of 440 potential management redundancies in October.
The consolidation of BAE Systems' UK shipbuilding operations in Glasgow is progressing to plan, with shipbuilding operations at Portsmouth ceasing in the second half of 2014. The restructuring programme concludes in 2016.
BAE Systems has continued to negotiate contracts with the Ministry of Defence to enact the restructuring of its naval ships business. During the year, contracts were signed for the recovery of associated rationalisation costs and the revised target cost arrangements for the delivery of the Queen Elizabeth Class aircraft carriers. In August, BAE Systems was awarded a £348m contract to construct three new River Class Offshore Patrol Vessels for the Royal Navy, sustaining shipbuilding skills between the Carrier programme and the start of manufacture for the anticipated Type 26 frigate programme.
On the aircraft carrier programme, HMS Queen Elizabeth was ofcially named by Her Majesty The Queen and oated for the rst time at Rosyth in July. The second ship block build programme is now 80% complete and assembly at Rosyth has commenced. Under the revised target cost arrangements, the industrial participants' fee includes a 50:50 risk share arrangement providing greater cost performance incentives.
The assessment phase contract for the Type 26 frigate continues, with over 700 employees now working on the programme. A contract for the demonstration phase of the programme, including procurement of long lead items, is expected to be placed in the rst half of 2015, with a full manufacture contract anticipated in 2016.
The third Khareef Class corvette for the Royal Navy of Oman achieved interim acceptance in May, with nal acceptance planned for 2015. The rst two ships completed their nal acceptance trials in Oman during the second half of the year.
The ve-year, £600m Maritime Support Delivery Framework contract for the delivery of services at Portsmouth Naval Base and support to half of the Royal Navy's surface eet was secured in the year.
In June, the Ministry of Defence awarded BAE Systems a £70m contract extension to manage the support, maintenance and upgrade of the Type 45 destroyers at Portsmouth Naval Base and on all their operations in the UK and globally through July 2014 to November 2016.
A £270m contract for upgrade of the Spearsh torpedo was secured in December. Artful, the third of class attack submarine for the Royal Navy, was launched in May. Progress continues on the remaining four boats, with further funding of £207m received in the year.
Progress continues on the design and development phase of the Successor submarine programme, the potential replacement to the Vanguard Class eet, with more than 1,400 people now employed on the programme. Initial long lead orders were placed during 2014. The Ministry of Defence has agreed to fund £389m of capital investment in preparation for the Successor manufacturing programme.
Following delivery of all 60 Terrier combat engineering vehicles to the customer, 55 of these were completed to the nal accepted build standard in the year, with the nal ve due for completion at the Telford site in 2015. The Newcastle facility closed at the end of 2014 following delivery of the Terrier vehicles.
Orders totalling £106m for ongoing support activity were received in the year.
Following submission of the next ve-year pricing proposal for its 15-year Munitions Acquisition Supply Solution partnering agreement with the Ministry of Defence, negotiations continue with a contract amendment expected in 2015.
Transformation of the Munitions facilities under the original £200m capital programme was completed during the year.
| FINANCIAL PERFORMANCE | |||
|---|---|---|---|
| 2014 | 20131 | ||
| Sales2 | KPI | £6,623m | £7,174m |
| Underlying EBITA3 | KPI | £772m | £915m |
| Underlying EBITA3 | KPI | £772m | £915m |
|---|---|---|---|
| Return on sales | 11.7% | 12.8% | |
| Cash inow4 | KPI | £173m | £60m |
| Order intake2 | KPI | £5,386m £6,085m | |
| Order backlog2 | £20.1bn | £21.6bn |
The year's sales2 of £6.6bn were 8% lower than 2013, or 4% excluding last year's retrospective trading of price escalation on the Salam Typhoon programme. This reduction is largely due to a lower level of intra-group trading in 2014 and, therefore, has no impact to the total Group numbers.
Return on sales was at 11.7% (2013 12.8%).
Cash performance was better than expected with a cash inow4 of £173m (2013 £60m). Consumption of customer advances was at a lower level in the year than anticipated. Provisions were utilised against costs incurred on rationalisation and on the Oman Offshore Patrol Vessel programme.
Order backlog2 reduced to £20.1bn (2013 £21.6bn) primarily from trading on the Typhoon aircraft, Indian Hawk and aircraft carrier programmes.
Platforms & Services (UK) has a strong order backlog of long-term committed programmes and an enduring support business.
In Military Air & Information, sales are underpinned by aircraft production on Typhoon and F-35 Lightning II, and in-service support for existing and legacy combat and Hawk trainer aircraft. There are a number of opportunities to secure future Typhoon export sales.
In Maritime, sales are underpinned by the design and subsequent build of the Successor submarine and Type 26 frigates, and the build of the Queen Elizabeth Class aircraft carriers and Astute Class submarines. The through-life support of these platforms, plus the Type 45 destroyer, together with their associated command and combat systems, provides a sustainable business in technical services and mid-life upgrades.
Combat Vehicles (UK) continues to provide engineering support to a large installed base of vehicles across UK and export markets. The business is pursuing obsolescence and upgrade programmes for the Challenger 2 main battle tank and land bridging systems.
The Munitions business is underpinned by the 15-year Munitions Acquisition Supply Solution partnering agreement with the Ministry of Defence secured in 2008.
FINANCIAL STATEMENTS
Platforms & Services (International) comprises the Group's businesses in Saudi Arabia, Australia and Oman, together with its 37.5% interest in the pan-European MBDA joint venture.
In Saudi Arabia, the business provides operational capability support to the country's air and naval forces on UK/Saudi government-to-government contracts. Contracts include multi-year agreements, such as the Saudi British Defence Co-operation Programme and Salam Typhoon programme.
In Australia, the business delivers production, upgrade and support programmes for customers in the defence and commercial sectors across the air, naval and land domains. Services contracts include the provision of sustainment, training solutions and upgrades. Platforms contracts include naval ships, such as the Landing Helicopter Dock programme for the Australian Navy. Contracts are often multi-year and xed price.
In Oman, the business is developing its position building on a long history of relationships with the Omani armed forces, through the provision, support and upgrade of defence platforms and cyber security services. Resulting orders are placed with the relevant reporting segments.
MBDA is a leading global prime contractor of missiles and missile systems across the air, naval and land domains.
Through the build-up of the Typhoon aircraft eet and the continued development of the in-country industrial base, the Group remains committed to developing a greater indigenous capability in Saudi Arabia. On the Salam Typhoon programme, UK nal assembly of the 72 aircraft continues. At 31 December 2014, 45 aircraft have been delivered to the customer.
11 Typhoon aircraft delivered to Saudi Arabia under the Salam programme
Continued support to the operational capabilities of the Royal Saudi Air Force and Royal Saudi Naval Forces under the Saudi British Defence Co-operation Programme
Reorganisation of portfolio interests in industrial companies in the Kingdom of Saudi Arabia and enhanced relationship with Riyadh Wings
Customer acceptance of the rst of two Landing Helicopter Dock ships in Australia
Four-year, A\$190m (£100m) contract awarded to provide in-service support for the two Landing Helicopter Docks
MBDA secured a UK/French government order worth €600m (£466m) for the joint development and production of the Future Anti-Ship Guided Weapon
€301m (£234m) contract secured by MBDA for the Advanced Short Range Air-to-Air Missile (ASRAAM) for India's Jaguar aircraft eet
The Australian customer has formally accepted and taken delivery of the rst of two Landing Helicopter Dock ships, HMAS Canberra. The BAE Systems team at the Williamstown shipyard, along with key subcontractors, has consolidated the Australian-built superstructure and masts, installed and integrated platform, combat and communication systems, and conducted a comprehensive series of harbour and sea trials.
progressing to schedule.
On the Salam Typhoon programme, UK nal assembly of the 72 aircraft continues. At 31 December 2014, 45 aircraft have been delivered to the customer. Work on enhancing Typhoon's capability is
The ve-year Typhoon support contract received in 2013 is operating well with all contractual Key Performance Indicators met during the year. The rst of 30 aircraft completed its scheduled maintenance and upgrade under a contract also received in 2013.
Through the Saudi British Defence Co-operation Programme (SBDCP), the business continues to support the operational capabilities of the Royal Saudi Air Force (RSAF) and Royal Saudi Naval Forces (RSNF). The modernisation of the RSAF's training aircraft eet continues to programme, with the rst deliveries of Pilatus PC-21 aircraft made in 2014 and Hawk aircraft progressing through manufacturing. Training delivery and support under ve-year contracts awarded in 2012 continue.
The orders received in 2013 for the upgrade of Tornado aircraft and equipment procurement are proceeding to plan. During the year, the business received a contract for Typhoon role equipment.
Under the minehunter mid-life update programme, the second ship is scheduled for acceptance back into the RSNF eet in 2015.
A planned reorganisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia was announced during the year, enhancing its existing relationship with Riyadh Wings Aviation Academy LLC. As part of the reorganisation, BAE Systems acquired an additional 59% shareholding in Saudi Development and Training Company. This reorganisation is being undertaken in support of BAE Systems' strategy to expand further its In-Kingdom Industrial Participation programme, and to promote training, development and employment opportunities for Saudi national personnel.
In 2014, the Group's In-Kingdom industrial partner, Advanced Electronics Company, was accredited as an approved maintenance and repair agent for Typhoon avionics equipment.
The customer has formally accepted and taken delivery of the rst Landing Helicopter Dock warship, HMAS Canberra. The hull for the second ship arrived at the Williamstown shipyard in February 2014 and work is progressing towards delivery in the second half of 2015.
After delivery of the second Landing Helicopter Dock, there is then no contracted shipbuilding programme for the Williamstown shipyard. BAE Systems continues to engage with the Australian government with a view to sustaining appropriate shipbuilding capability.
In September, the business was awarded a four-year, A\$190m (£100m) contract to provide in-service support for the two Landing Helicopter Docks. The majority of the work will be undertaken in Sydney, the home port of these warships, creating over 40 new jobs.
The customer has accepted the second and third ANZAC Class frigates to be modernised under the Anti-Ship Missile Defence programme. The fourth and fth frigates continue to undergo refurbishment.
In October, the business was awarded a A\$25m (£13m) contract to produce an additional three blocks for the Air Warfare Destroyer programme at its Williamstown shipyard. The additional blocks will bring the total number constructed by BAE Systems to 21, of which 11 have already been delivered.
In October, the Flight Training Centre at Tamworth, New South Wales, where BAE Systems trains Australian Defence Force pilots, achieved a signicant milestone, reaching 250,000 ying hours. Since 1992, the centre has helped to train more than 5,000 students from the Australian Defence Force and other military and commercial operations throughout the Asia-Pacic region.
BAE Systems remains in negotiations with the Commonwealth to agree a revised schedule for the delayed delivery of the JP 2008 Phase 3F programme for enhanced satellite communications services to the Australian Defence Force. The business expects these negotiations to conclude in the rst half of 2015.
The two major contracts in Oman, Typhoon and Hawk aircraft and Khareef Class corvettes, are being undertaken by Platforms & Services (UK).
On the Typhoon and Hawk aircraft programme, sub-assembly manufacture has commenced.
On the Khareef Class corvette programme, the rst two ships achieved nal acceptance and the third ship achieved interim acceptance.
See pages 38 and 39 for further information on the operational performance of these contracts.
BAE Systems has provided a substantial proportion of Oman's in-service military equipment and works closely with the Omani armed forces in supporting this equipment.
The business is making good progress in addressing its industrial participation obligations in Oman through delivery of an agreed training and knowledge transfer programme, which covers over 80% of the Group's total obligations. BAE Systems continues to work with the Omani government to develop plans to discharge its remaining commitments.
In January 2014, the UK and French governments signed an agreement worth €600m (£466m) for the joint development and production of the MBDA Future Anti-Ship Guided Weapon – Anti-Navire Léger missile for their armed forces.
On the Meteor development programme, an updated certicate of design, recording the nal design standard of the missiles, was submitted to the customer at the end of 2014. Deliveries, against almost 1,100 production-standard missiles ordered by the six partner nation customers, have now commenced.
In December, MBDA received a €301m (£234m) contract to supply the Advanced Short Range Air-to-Air Missile (ASRAAM) for India's Jaguar aircraft eet.
Work continues towards securing German government commitment to a German/ Italian collaborative programme (TLVS) to replace the current trilateral arrangement with the US which expired at the end of 2014. The programme will provide a new generation of air and missile defence with improved inter-operability, mobility and full 360-degree defence capability.
Order intake1 KPI £3,398m £7,221m Order backlog1 £11.6bn £12.3bn
Sales1 were £0.5bn lower at £3.6bn. The reduction against 2013 includes £143m in respect of exchange translation arising on the Australian dollar and Euro. The trading reductions were in the Australian business, as the Landing Helicopter Dock programme ramps down, last year's sales trading arising from the Salam price escalation and the higher Saudi equipment deliveries in 2013.
Underlying EBITA2 of £366m (2013 £429m) generated a return on sales of 10.2% (2013 10.6%).
There was an operating cash inow3 of £881m (2013 £189m outow), which includes a net £349m from the sale and leaseback, and initial rentals, of the two Saudi residential compounds. Some £200m of receivables were collected in December, earlier than expected, and there were down-payments received on Saudi equipment awards.
Order backlog1 has reduced from last year end's high following the awards in 2013 of the ve-year support contracts and equipment packages in Saudi Arabia.
In the Kingdom of Saudi Arabia, the Group expects to sustain its long-term presence through delivering current programmes and industrialisation, and developing new business in support of the Saudi military forces. The planned reorganisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia is intended to increase growth prospects and reinforce an ongoing commitment to support the national objectives of local skills and technology development, increasing employment and developing an indigenous defence industry.
In Australia, the government has increased the defence budget by 8% for the 2014–15 scal year and remains on track to increase annual defence expenditure to 2% of Gross Domestic Product within a decade. Following delivery of the second Landing Helicopter Dock in 2015, the Williamstown shipyard needs a follow-on shipbuilding programme to sustain capability. In the longer term, there are signicant opportunities in the naval domain as Australia modernises its submarine and surface eets to strengthen its ability to secure access to sea lines of communication across the Indo-Pacic region.
In Oman, the business continues to provide support to its products in service to position for future requirements.
MBDA continues to build on the effective partnerships it has established with its domestic customers and is pursuing actively a signicant number of export opportunities, including substantial air defence requirements and weapons packages linked to prospective aircraft and naval procurements.
We are a business that operates responsibly and with integrity, delivering on customer requirements by being a trusted partner.
| Trust and integrity Continue to improve and evolve the Group's business conduct programme. Undertake external assessment of ethical culture and environment. |
Code of Conduct refresher training rolled out to employees across the Group. Developed a refreshed Code of Conduct which will be rolled out across the Group in 2015. Ethical Leadership Group (NAVEX Global) conducted an external assessment of the Group's business conduct programme and concluded that BAE Systems has all the elements of a best practice programme in place and should continue to evolve the programme. |
Roll out refreshed Code of Conduct. Implement Ethical Leadership Group (NAVEX Global) recommendations to ensure continued improvement. Continue to drive alignment and integration of the business conduct programme with human resources, legal and audit activities. |
|---|---|---|
| Our employees Continue the drive towards a world-class level of safety. Use benchmarking against leading companies to identify key areas for improvement and focus. Increase diversity and inclusion within the organisation in accordance with business goals. Diversity and inclusion plans to be aligned with business plans and Key Performance Indicators identified for monitoring and tracking against plans. |
The Group achieved an 11% reduction in the Recordable Accident Rate1. The number of major (most serious) injuries1 was reduced by 32%. Benchmarking against external companies showed that a number of our businesses are achieving a world-class level of safety management. All businesses set diversity and inclusion plans to address specific issues or strategic aims. These were supported at Group level by the Senior Women Mentoring Programme and extensive involvement in both national and regional education schemes to encourage more students from different backgrounds, at all stages, into science and engineering. |
Continue drive towards a world-class level of safety performance. Achieve a 10% reduction (15% stretch target) in the Recordable Accident Rate. Maintain focus on, and management and reduction of, significant safety risk. Continue to drive a strong safety culture through communication, awareness and visible leadership. All businesses to continue to drive a diversity and inclusion agenda to address business needs and strategic aims. |
| Resource efficiency Set environmental improvement targets to include energy, water and waste. |
All businesses set and met improvement targets for energy, water and waste, except where additional work opportunities and extremes of climate impacted. |
All businesses to continue to drive improvements in management of materials and resources. |
2014 priorities 2014 progress 2015 priorities
To identify and train the next generation of talent, our UK business initiated a cross‑business internship programme and partnered with universities and government on early employment programmes. From the 1,000+ applications received for the programme, just over 100 were accepted onto our paid 12-week summer programme.
In 2015, we plan to recruit nearly 300 graduates in the UK with a particular focus on cyber security. Around one-third of our total graduate intake will join the Applied Intelligence business. In the UK, we will also be taking on over 800 apprentices in 2015, two-thirds of whom will be employed in engineering-related roles.
In order to support the delivery of the strategy, our responsible business activities focus on the wider impacts of our business which have the most potential to affect the long-term value of the Group. Specically, we focus on ethics and governance, employee safety and wellbeing, diversity and inclusion, and operational environmental impacts.
Areas, such as ethics, are managed at Group level. Others, such as diversity and inclusion, are managed locally, where teams apply local knowledge to making a difference and drive change.
Achievement of objectives for employee safety is directly linked to the remuneration of executive directors and other members of the Executive Committee.
Priorities for diversity and inclusion were set within each member of the Executive Committee's personal development plan. An assessment of progress against these actions is determined by the Chief Executive as part of each Executive Committee member's annual performance review.
To earn and retain our customers' trust, we need to manage our operations responsibly and conduct our business in an ethical way.
We continue to embed our ethics programme globally, driving the right behaviours by supporting employees in making ethical decisions and embedding responsible business practices.
We have reinforced our commitment to ethical behaviour, with our employees receiving ethics training during 2014. Additional compliance-based e-learning training was also targeted at employees throughout the year. A refreshed Code of Conduct will be rolled out to all employees during the rst half of 2015.
If employees (or third parties) need help or guidance in addition to that provided by the Code of Conduct, or want to report a concern, they can call the Ethics Helpline, which is managed by a third party and is available 24 hours of every day using a freephone number from most countries. Employees can also get independent advice and support, or report concerns, via Ethics Ofcers, now in place across the business, or via the Ethics Helpline e-mail address, which is also made available to third parties via our website. During 2014, 1,037 enquiries were reported to Ethics Ofcers and through the Ethics Helpline1.
Our governance framework covers the products we make and export. Our Responsible Trading Principles, Product Trading Policy and Pursuit of Export Opportunities Policy help employees to make informed decisions about the business opportunities we pursue and to address any responsible trading risks.
We are committed to respecting human rights in our operations, within our sphere of inuence.
During 2014, the Ethical Leadership Group, now called the Advisory Services Practice of NAVEX Global, conducted an assessment of our business conduct programme. During the assessment, NAVEX Global assessed documents, conducted interviews with senior leaders and held focus groups with our employees globally to assess perceptions of the programme.
NAVEX Global's report concludes that our business conduct programme continues to make progress and is now, in many respects, a best practice programme.
NAVEX Global's report ndings focused on further embedding and maturing the Group's business conduct programme, including recommendations for continued improvements in socialising and embedding new and existing processes consistently across the Group; ongoing assessment and improvement of the programme elements; and training for line managers and supervisors.
| 2014 | 1,037 |
|---|---|
| 2013 | 1,043 |
| 2012 | 1,024 |
| 2011 | 1,011 |
| 2010 | 734 |
All enquiries reported to Ethics Ofcers and via the Ethics Helpline were reviewed and reported either to the Ethics Review Committee or, in BAE Systems, Inc., to the Ethics Review Oversight Committee.
| 2014 | 286 |
|---|---|
| 2013 | 265 |
| 2012 | 292 |
| 2011 | 298 |
| 2010 | 355 |
If an employee is found to be in breach of the Group's Code of Conduct or any other relevant policies, appropriate disciplinary action, which may include dismissal, is taken.
Our employees are integral to our success. We value the talents and skills that our global workforce of 83,4001 people in 40 countries brings to our business.
Engaging and developing our workforce for current and future business is key to delivering our strategy successfully. We are, therefore, committed to attracting, selecting, developing and retaining the best people to deliver this.
Global training and development programmes support employees in making the most of their talents. Programmes are focused on continuous learning and development, using a blend of e-learning, classroom training and partnerships with academic institutions.
We work with the education sectors in each of our markets to help shape the workforce of the future with a particular emphasis on encouraging young people to pursue careers in Science, Technology, Engineering and Mathematics (STEM).
During 2014, we recruited 275 graduates and 583 apprentices to support the talent pipeline in the UK.
The US business contributed in excess of \$2m (£1m) to support accredited institutions and organisations that develop teachers and our future workforce by encouraging students to pursue and thrive in STEM disciplines. BAE Systems, Inc. recruited approximately 2,400 employees within the STEM disciplines during 2014, representing approximately 40% of employees recruited.
We are committed to creating an inclusive work environment where a diverse range of talented people can work together to ensure business delivery. Diversity amongst our workforce is a signicant force for innovation.
We focus on our goal of building a diverse workforce which reects that of the populations we recruit from. A particular current focus is increasing female representation in the pipeline for senior roles.
Engaging our employees to help them make the fullest contribution to the business is important. Through a variety of media, we seek to listen to employees' views and opinions, and keep them informed about developments and prospects for the business. Regular internal communication, including e-enabled channels, leadership blogs, newsletters, management and team meetings, monthly team briefs and the intranet, keeps employees informed, involved and engaged.
The Group welcomes employees becoming shareholders in BAE Systems and offers a number of employee share plans to support this.
During 2014, employees had the opportunity to provide feedback via our engagement survey (see page 20).
Safety of our employees, and anybody who works on, or visits, our sites, is a key priority. We continue to embed a 'safety rst' approach by providing training and tools that help employees to understand the importance of a safe workplace, and encouraging employees to take responsibility for their own safety and the safety of those around them. Senior leadership plays a key role in maintaining the focus on safety and leading through example.
In 2014, the Executive Committee progressed actions to grow the female talent pipeline at senior executive levels:
Fostering a culture of inclusion – further to the unconscious bias training for all leaders which was rolled out during 2013, there was a focus in 2014 on raising further awareness and understanding. This included a UK-wide 'Diversity and Inclusion Week', which was the rst targeted awareness campaign for all employees in the UK. In the US, a month-long celebration of the UN's 'Do One Thing for Diversity and Inclusion' campaign and 'Going Global' engagement events were conducted at several sites.
Accelerating the development of high-potential women – an Executive Committee mentoring programme was launched in 2012 providing support and development to 46 participants in two cohorts. The programme has supported 90% of the rst cohort and 50% of the second to promotions or moves into broader roles.
Increasing leadership diversity – to ensure diverse candidate lists for leadership roles, where possible, executive search rms were employed with a track record of open and inclusive recruitment processes, and drawing from an appropriately diverse pool of candidates, with the overall aim of appointing the best person for the role. During 2014, the percentage of external female candidates hired in the leadership population was 20%.
and succession plans is monitored.
Measuring performance – on a national basis, dened goals and actions have been put in place to increase gender diversity. Gender diversity in leadership positions
| Number of males |
Number of females |
Total number |
Male % |
Female % |
|
|---|---|---|---|---|---|
| Board | 9 | 2 | 11 | 82 | 18 |
| Executive Committee | 9 | 2 | 11 | 82 | 18 |
| Senior managers2 | |||||
| Employees in senior executive positions3 | 235 | 38 | 273 | 86 | 14 |
| Directors of subsidiary companies | |||||
| (excluding employees in senior executive positions) | 84 | 12 | 96 | 88 | 12 |
| Total senior managers3 | 319 | 50 | 369 | 86 | 14 |
| Total employees4,5 | 61,000 | 15,000 | 76,000 | 80 | 20 |
Including share of equity accounted investments.
Senior managers are dened as employees who have responsibility for planning, directing or controlling the activities
of the Group or a strategically signicant part of the Group and/or who are directors of subsidiary companies.
Excludes executive directors.
Excluding share of equity accounted investments and rounded to the nearest thousand employees.
See summary of Deloitte assurance on page 47.
FINANCIAL STATEMENTS
GOVERNANCE
The metric used to measure workplace injuries is the Recordable Accident Rate which, along with the number of major injuries, is used to determine an element of executive bonus. During 2014, the Recordable Accident Rate1 decreased by 11%, consistent with the improvement target set. This progress represents a seventh consecutive year of improvement. The number of major injuries1 was reduced by 32% to 44 (see page 20).
We recognise that a healthy workforce is a more engaged and productive one and, during 2014, we continued to promote an enterprise-wide campaign on employee wellbeing.
Our employees are critical to the delivery of our strategy, but it is also how we work responsibly with others that supports our success.
We work with suppliers who embrace standards of ethical behaviour consistent with our own.
We require our suppliers to comply with local legislation. We expect and encourage all our suppliers to embrace ethical values of a comparable standard to our own. Our standards include issues such as ethical conduct, health and safety, environment and human rights. Compliance to required standards is evaluated during the supplier selection process and, for existing suppliers, as part of ongoing quality and approvals assurance.
Advisers can only work for us after they have been approved via our due diligence process and authorised by an external panel.
We continue to work with peers across the defence industry to improve ethical standards. During 2014, we participated in the International Forum on Business Ethical Conduct's industry working group on collective action.
We are committed to strengthening relationships and investing in the communities in which we operate. This is done via local recruitment and employment, contracting with local suppliers where possible, the taxes we pay and by supporting local charities and not-for-prot organisations.
Globally, we and our employees, through the Community Investment programme, contributed more than £11m1 during 2014 to local, national and international charities and not-for-prot organisations.
We have global leadership programmes to deliver executive development for high-potential individuals looking to accelerate their career and leadership capability. The diversity, career progression and retention of participants is monitored on a regular basis to measure the effectiveness of these development programmes.
In Australia, our Accelerated Development Programme is open to those who are identied as high-potential individuals, and who have the energy and focus to accelerate their development. The programme is designed to accelerate high-potential leaders through a two-year on-the-job development experience.
Employees are required to participate in a range of development activities, including: mentoring by a management board or senior lead team member; leading business projects that grow and stretch them professionally; building a targeted individual development plan that addresses areas for improvement; access to career development coaching; and the opportunity to push their career with up to one role change during the programme.
Radway Green, the Group's centre of excellence for the design, manufacture, proong and supply of small arms ammunition at the Munitions business in the UK, has won a prestigious Royal Society for the Prevention of Accidents (RoSPA) Gold Medal for reducing injuries and its commitment to continuous improvement in accident and ill-health prevention at work. The medal is awarded once a company has received ve consecutive Gold awards in RoSPA's annual Occupational Health and Safety Awards.
Other Munitions sites, Bishopton Environmental Test Facility, Ridsdale Range and Washington, each received an individual 2014 RoSPA Gold award.
In April, our San Diego shipyard received two awards for its sustainability efforts.
The rst award came from the Port of San Diego, which honoured environmentally-conscious port businesses that have shown exemplary environmental achievements. During a 12-month assessment period, the San Diego yard achieved a reduction in energy, water and waste. The shipyard currently uses oily water separators, which process large quantities of industrial waste water and remove the free-oating oil, grease and raw petroleum hydrocarbons from waste water, allowing for reduction of the amount of hazardous waste disposed.
The second award came from the County of San Diego on Earth Day. The sustainable business award was given, in part, for the shipyard's efforts to manage waste with an 80% diversion rate to landlls. Paper waste produced in ofces is 100% recycled. Metals and abrasive blasting materials are recycled and diverted.
Minimising the impact on the environment of our operations and products, and using resources more efciently are focus areas.
Our primary operational impacts on the environment are through the use of energy used for heating and lighting work spaces. We have relatively few energy-intensive processes. Water use is typically linked to employee numbers, apart from in our Munitions business where water is used via steam and cooling. In the majority of businesses, waste is of high value and recycled wherever possible.
Our businesses have targets in place to reduce the environmental impact of their operations and products by reducing energy, water and waste at a local level. These targets address specic issues or strategic aims. At Group level, we monitor business performance against targets and review
global trend data. During 2014, at Group level, we decreased the amount of electricity and natural gas used, and hazardous waste generated. However, water used and non-hazardous waste generated increased reecting throughput on programmes, particularly at shipyard, submarine and munitions sites.
Our reported greenhouse gas emissions have decreased by 4% between 2013 and 2014. The reduction in Scope 1 and 2 emissions has been mainly due to a decrease in purchased electricity across our business as a result of various energy management initiatives. Our Scope 3 emissions have reduced by 9% largely due to improvements in the environmental efciency of commercial ights and a marginal decrease in business travel. We have maintained a per employee rate of 18 tonnes CO2e.
Businesses have environmental management systems in place that monitor
and manage impacts from greenhouse gas emissions, material and solvent use, waste products and emissions to the atmosphere.
Environmental considerations are taken into account throughout a product's lifecycle from concept, design and manufacture through to use and disposal. This includes reducing the environmental impacts of our products during research and development, minimising waste materials during manufacturing, and helping to reduce the impact of our products when they are used, upgraded or disposed of.
| Total emissions –4% |
TONNES CO2E |
|
|---|---|---|
| 20141 | TONNES 1,336,751 |
|
| 20132 | CO2E | 1,393,646 |
Combustion of fuel within BAE Systems facilities –1% and vehicles (Scope 1)
| 20141 | TONNES 585,233 |
|---|---|
| 20132 | CO2E 590,451 |
Electricity and steam purchased for BAE Systems –6% use (Scope 2)
| 20141 | TONNES 594,866 |
|
|---|---|---|
| 20132 | CO2E 630,522 |
Business travel in non-BAE Systems vehicles –9% (Scope 3)
| 20141 | 156,652 |
|---|---|
| 20132 | 172,673 |
See summary of Deloitte assurance above.
Our published 2013 greenhouse gas emissions have been re-calculated as the conversion factors used in the
calculations have changed.
Methodology
The sources of greenhouse gas emissions fall within the Group's consolidated nancial statements. Emissions from joint ventures and pension scheme properties not occupied by the Group are not included. The greenhouse gas emissions data is in line with the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (revised version) and emission factors for fuels and electricity from the UK government's Department for Environment Food & Rural Affairs (DEFRA), published at www.ukconversionfactorscarbonsmart.co.uk/
The CO2e associated with carbon dioxide, methane and nitrous oxide is reported. Greenhouse gas emissions associated with hydrouorocarbons, peruorocarbons and sulphur hexauoride are estimated to be immaterial to total emissions.
The principal record of the Group's worldwide facilities is its legal department's Global Property Database.
Greenhouse gas emissions are primarily calculated from energy consumption records reported via the Group's global environmental database. Where actual usage data is not available for facilities and residences within the Global Property Database, an estimated consumption is used based on the type of building.
Greenhouse gas emissions related to business travel include air travel data for the majority of the global business and rail data for business units operating in the UK and US. These data are taken from suppliers' procurement records.
programme donations; and
TO SEE OUR BASIS OF REPORTING 2014 VISIT BAESYSTEMS.COM/ 2014CRDATA
DELOITTE ASSURANCE
split by gender;
This year, Deloitte LLP has provided limited assurance on the following performance indicators at Group level:
Ethics – employee and third-party enquiries to Ethics Helpline and dismissals for reasons relating to unethical behaviour; Diversity and inclusion – total employees
Safety – Recordable Accident Rate and the number of major injuries recorded;
Community – total Community Investment
Environment – greenhouse gas emissions.
Effective management of risks and opportunities is essential to the delivery of the Group's strategic objectives, achievement of sustainable shareholder value, protection of its reputation and meeting the requirements of good corporate governance.
The Board has overall responsibility for determining the nature and extent of the risk it is willing to take within the strategy, and ensuring that risks are managed effectively across the Group.
Risk is a regular agenda item at Board meetings and the Board reviews risk as part of its annual strategy review process. This provides the Board with an appreciation of the key risks within the business and oversight of how they are being managed.
The Board delegates certain risk management activities to the Audit and Corporate Responsibility committees as follows.
The Audit Committee monitors the Group's key risks identied by the risk assessment processes and reports its ndings to the Board twice a year. It is also responsible for reviewing in detail the effectiveness of the Group's system of internal control policies, and procedures for the identication, assessment and reporting of risk.
The Corporate Responsibility Committee monitors the Group's performance in managing the Group's signicant non-nancial risks, including those arising in respect of business conduct, health and safety, and the environment, and reports its ndings to the Board on a regular basis.
The Group's approach to risk management is aimed at the early identication of key risks, mitigating the effect of those risks before they occur and dealing with them effectively if they crystallise.
The Group is committed to the protection of its assets, which include human, intellectual and physical property, and nancial resources, through an effective risk management process, underpinned where appropriate by insurance.
Reporting within the Group is structured so that key issues are escalated through the management team and ultimately to the Board where appropriate. The underlying principles of the Group's risk management policy are that risks are monitored continuously, associated action plans reviewed, appropriate contingencies provisioned and this information reported through established management control procedures.
The Board has conducted a review of the effectiveness of the Group's systems of risk management and internal control processes, including nancial, operational and compliance controls and risk management systems, in accordance with the UK Corporate Governance Code. The Company has developed a system of internal controls that was in place throughout 2014 and to the date of this report.
As with any system of internal control, the policies and processes that are mandated in the Operational Framework are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, and not absolute, assurance against material misstatement or loss.
Financial risks expose the Group to potential costs which are quantiable on the basis that their probability and impact can be understood adequately and related to the nancial statements.
Non-nancial risks cannot be assessed readily in nancial terms and, therefore, cannot be reected reliably in the nancial statements.
The responsibility for risk identication, analysis, evaluation and mitigation rests with the line management of the businesses. They are also responsible for reporting and monitoring key risks in accordance with established processes under the Group's Operational Framework.
The Group's risk management process is set out in the Risk Management Policy, a mandated policy under the Operational Framework, and, in respect of projects, in the Lifecycle Management Framework, a core business process under the Operational Framework. Further guidance is provided by a Risk Management Maturity self-assessment tool.
Identied risks are documented in risk registers showing: the risks that have been identied; characteristics of the risk; the basis for determining mitigation strategy; and what reviews and monitoring are necessary. Each risk is allocated an owner who has authority and responsibility for assessing and managing it.
Project risks are reported and monitored in Group-mandated format Contract Review Packs, which are reviewed by management at monthly Contract Reviews. The nancial performance of projects is reported and monitored using Contract Status Reports, which form part of the Contract Review Pack. These include programme margin metrics, which are reviewed regularly by the Executive Committee and Board (see page 20). Project
margin is recognised after making suitable allowances for technical and other risks related to performance milestones yet to be achieved.
In addition, every six months, the businesses complete an Operational Assurance Statement (OAS), which is a mandated policy under the Operational Framework. The OAS is in two parts: a self-assessment of compliance with the Operational Framework; and a report showing the key nancial and non-nancial risks for the relevant business. Together with reviews undertaken by Internal Audit and the work of the external auditors, the OAS forms the Group's process for reviewing the effectiveness of the system of internal controls.
The key nancial and non-nancial risks identied by the businesses from the risk assessment processes are collated and reviewed by the Executive Committee to identify those issues where the cumulative risk, or possible reputational impacts, could be signicant.
Management responsibility for the management of the Group's most signicant non-nancial risks is determined by the Executive Committee. The OAS and non-nancial Risk registers are reviewed regularly by the Executive Committee to monitor the status and progression of mitigation plans, and these key risks are reported to the Board on a regular basis.
The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity. Such risks have been identied as principal based on the likelihood of occurrence and the potential impact on the Group, and have been identied through the application of the policies and processes outlined above. These risks, together with details of how they are being mitigated and managed, are detailed on pages 50 to 53.
As a result of its assessment of the Group's principal risks, the Board has determined that a number of risks identied as being principal risks in the 2013 Annual Report, while still risks for the Group, are no longer considered to be principal risks and has added an additional risk relating to the Group's employees (see page 53).
P50 Principal risks
Strategic Report
Risks are identied as principal based on the likelihood of occurrence and the potential impact on the Group. The Group's principal risks are identied below, together with a description of how we mitigate those risks.
Impact
nancial condition.
– 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 nancial condition.
– Lower defence spending by the Group's major customers could have a material adverse effect on the Group's future results and
– The occurrence of any such events could have a material adverse effect on the Group's future results and nancial condition.
The Group's business is subject to signicant competition in international 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 is subject to risk from a failure to comply with laws and regulations.
Impact
The Group has many contracts, including a small number of large contracts and xed-price contracts.
– 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 xed-price contracts could have a material adverse effect on the Group's future results and nancial condition.
The Group is dependent on the award timing and cash prole of its contracts.
– The Group's prots and cash ows are dependent, to a signicant extent, on the timing of, or failure to receive, award of defence contracts and the prole 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 prots and cash ows 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 has an aggregate funding decit in its dened benet pension schemes.
– Further increases in pension scheme decits may require the Group to increase the amount of cash contributions payable to these schemes, thereby reducing cash available to meet the Group's cash allocation priorities.
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 classied information and the potential for business disruptions associated with information technology failures.
Impact – 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 nancial condition.
– The Group has a broad range of measures in place, including appropriate tools and techniques, to monitor and mitigate this risk.
The Group's strategy is dependent on its ability to recruit and retain people with appropriate talent and skills. All employees are required to act in accordance with the Group's policies.
– The loss of key employees or inability to attract the appropriate people on a timely basis, in particular to deliver the Group's strategy in international markets, could adversely impact its ability to meet the business plan and, accordingly, have a negative impact on the Group's future results and nancial condition.
STRATEGIC REPORT
GOVERNANCE
As a result of its assessment of the Group's principal risks referred to on page 48, the Board has determined that the following risks, identied as principal risks in the 2013 Annual Report, while still risks for the Group, are no longer considered to be principal risks:
| 1. | THE GROUP IS DEPENDENT UPON COMPONENT AVAILABILITY, SUBCONTRACTOR PERFORMANCE AND KEY SUPPLIERS In the improving global economic environment, the Group has not identied any specic, material risks in relation to its strategically important subcontractors or suppliers. |
|---|---|
| 2. | THE ANTICIPATED BENEFITS OF ACQUISITIONS MAY NOT BE ACHIEVED The Group has not engaged in acquisitions other than bolt-on acquisitions in the last three years. |
| 3. | THE GROUP IS INVOLVED IN CONSORTIA, JOINT VENTURES AND EQUITY HOLDINGS WHERE IT DOES NOT HAVE CONTROL Whilst the Group has such joint ventures, the principal ones being Euroghter, MBDA and Air Astana (as referred to on page 125), its relationships with the joint venture partners are such that the risk of disagreement leading to failure to meet the strategic objectives of those joint ventures is not currently regarded as a principal risk to the Group. |
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 nancial condition of the Group.
Governance
'Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.'
UK Corporate Governance Code
The Company seeks to maintain the highest standards of governance to ensure that it is performance-driven, but value-led. The Board is focused not simply on how much money the Company makes for its shareholders, but how it makes money.
To achieve this objective, the Board comprises both a strong executive and a majority of independent non-executive directors who have been selected to deliver an appropriate mix of diversity, skills and experience.
The Board is led by an independent Chairman, who in turn is well-supported by a Senior Independent Director.
Board members populate a range of formal committees to oversee nancial and cultural behaviour in the areas of audit, remuneration and corporate responsibility. Each committee is chaired by an independent non-executive director.
Membership and make-up of the Board, both for executive and non-executive roles, is carefully considered on a regular basis. The Nominations Committee is led by the Chairman and includes all non-executive directors. The Committee considers all Board appointments. In addition, the Committee reviews the bench strength of the senior executive team in conjunction with the Group Human Resources Director to assess development needs, resourcing and succession planning to meet the strategy of the Company.
As part of the succession planning process, external search rms are engaged to identify suitable candidates for both Board executive and non-executive roles when appropriate. All appointments are made on ability and merit, but the Committee recognises and values the benet of diversity in Board composition and executive management roles.
As a governing body, the Board focuses on the principles of openness and transparency to ensure the atmospherics and dynamics within the boardroom remain constructive and healthy. To review progress, the Board commissions an external independent evaluation every two years. In the intervening years, the Board undertakes an internal review comprising a questionnaire completed by all Board members supplemented by individual discussion when required. Following collective Board discussion on the ndings of the review, a plan for performance improvement is developed, implemented and monitored at six-monthly intervals as a Board agenda item.
Details of governance processes and procedures are listed opposite.
Sir Roger Carr, Chairman
The Company was compliant with the provisions of the UK Corporate Governance Code as published in September 2012 throughout 2014 and the Board has applied its principles in its governance structure and operations.
| LEADERSHIP | |||
|---|---|---|---|
| An effective board collectively responsible for the long-term success of the company |
Board of directors Board effectiveness |
P56 P59 |
|
| A clear division of responsibilities at the head of the company between the running of the board and the executive. No one individual should have unfettered powers of decision |
The Board and its responsibilities | P58 | |
| The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role |
The Board and its responsibilities | P58 | |
| Non-executive directors should constructively challenge and help develop proposals on strategy |
How we manage risk The Board and its responsibilities |
P48 P58 |
|
| REMUNERATION | |||
| Levels of remuneration should be sufcient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A signicant proportion of executive directors' remuneration should be structured so as to link rewards to corporate and individual performance |
Remuneration Committee Report | P67 | |
| There should be a formal and transparent procedure for developing policy on executive remuneration and for xing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration |
Remuneration Committee Report | P67 | |
| ACCOUNTABILITY | |||
| The board should present a fair, balanced and understandable assessment of the company's position and prospects |
Strategic Report Going concern |
P01 P60 |
|
| The Code | The board is responsible for determining the nature and extent of the signicant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems |
How we manage risk | P48 |
| The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles, and for maintaining an appropriate relationship with the company's auditors |
Audit Committee Report | P61 | |
| EFFECTIVENESS | |||
| The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively |
Nominations Committee Board of directors |
P66 P56 |
|
| There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board |
Nominations Committee Chairman's governance letter |
P66 P54 |
|
| All directors should be able to allocate sufcient time to the company to discharge their responsibilities effectively |
Board attendance table Board effectiveness |
P58 P59 |
|
| All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge |
Board effectiveness | P59 | |
| The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties |
Board effectiveness | P59 | |
| The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors |
Board effectiveness | P59 | |
| All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance |
Board effectiveness | P59 | |
| RELATIONS WITH SHAREHOLDERS | |||
| There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole is responsible for ensuring that a satisfactory dialogue with shareholders takes place |
Shareholder engagement | P60 | |
| The board should use the AGM to communicate with investors and to encourage their participation |
Shareholder engagement | P60 |
of external committees, including the Higgs Committee on Corporate Governance and Business for New Europe.
Chairman
Ian King Chief Executive
Jerry DeMuro President and Chief Executive Ofcer of BAE Systems, Inc.
Peter Lynas Group Finance Director
to become BAE Systems.
Harriet Green OBE Non-executive director
at the US Department of Defense.
| Other appointments |
Member of the UK Prime Minister's Business Advisory Group and a senior adviser to Kohlberg Kravis Roberts. Fellow of the Royal Society for the encouragement of Arts, Manufactures and Commerce, an honorary fellow of the Institute of Chartered Secretaries and Administrators, and a visiting fellow to the Saïd Business School, Oxford |
Non-executive director of Aero Communications, Inc. |
Non-executive director of SSE plc and chairman of its audit committee |
Non-executive director of Emerson Electric Co. |
|
|---|---|---|---|---|---|
| Other past appointments |
Chairman of Thames Water plc and Mitchells & Butlers plc |
Non-executive director and senior independent director of Rotork p.l.c. |
Senior vice president of Arrow Electronics, Inc. |
||
| Committee membership |
Chairman of the Nominations Committee and the Non-Executive Directors' Fees Committee |
Non-Executive Directors' Fees Committee |
Non-Executive Directors' Fees Committee |
Corporate Responsibility Committee and Nominations Committee |
Chris Grigg Non-executive director Paula Rosput Reynolds Non-executive director
Nick Rose
Non-executive director and Senior Independent Director
Carl Symon Non-executive director Ian Tyler Non-executive director
of Cable & Wireless Communications Plc
| 2013 | 2011 | 2010 | 2008 | 2013 |
|---|---|---|---|---|
| Chris Grigg is Chief Executive of The British Land Company PLC and has more than 30 years' experience in the nancial and real estate industries in a range of leadership roles. Prior to joining British Land as its Chief Executive in 2009, he was an executive with Barclays Bank and previously spent over 20 years at Goldman Sachs where he rose to the position of partner. |
Paula Rosput Reynolds is Chief Executive Ofcer and President of the business advisory group, PreferWest, LLC. She had previously spent over 20 years in the energy sector, culminating in her appointment as President and Chief Executive Ofcer of AGL Resources in 2002. She subsequently served as President and Chief Executive Ofcer of Safeco Corporation, an insurance company located in Seattle. She was then appointed as Vice Chairman and Chief Restructuring Ofcer of American International Group, Inc. (AIG) from October 2008 to September 2009. |
Nick Rose held the position of Chief Financial Ofcer of Diageo plc for over ten years until October 2010 where, in addition to his nance responsibilities, he was also responsible for supply, procurement, strategy and IT on a global basis. His nancial experience has encompassed a number of roles at Diageo, including group treasurer and group controller, having spent his earlier career with Ford Finance. |
Carl Symon has an extensive background in global business operations and management, retiring in 2001 after a long career at IBM during which he held senior executive positions in the US, Canada, Latin America, Asia and Europe, including that of Chairman and Chief Executive Ofcer of IBM UK. |
Ian Tyler served as Chief Executive of Balfour Beatty plc for a period of eight years, stepping down from that position in 2013. A Chartered Accountant, he joined Balfour Beatty as Finance Director in 1996 having spent his earlier career in a variety of nance roles. |
| Non-executive director of Delta Air Lines, Inc., Anadarko Petroleum Corporation and TransCanada Corporation |
Chairman of Williams Grand Prix Holdings PLC. Non-executive director and senior independent director of BT Group plc. Adviser to |
Non-executive director and senior independent director of Thomas Cook Group plc |
Chairman of Cairn Energy PLC, Bovis Homes Group PLC and Al Noor Hospitals Group plc, and a non-executive director |
Non-executive director of Coca-Cola Enterprises, Inc. and Air Products and Chemicals, Inc. Non-executive director of Edwards Group Limited, Moët Hennessy SNC and Scottish Power plc Non-executive director of BT Group plc, Rexam PLC and Rolls-Royce Group plc, and Chairman of HMV Group plc Non-executive director of VT Group plc Remuneration Committee and Nominations Committee Audit Committee and Nominations Committee Chairman of the Audit Committee, and member of the Nominations Committee and Remuneration Committee Chairman of the Remuneration Committee and member of the Nominations Committee Chairman of the Corporate Responsibility Committee, and member of the Audit Committee and Nominations Committee
CCMP Capital Advisors, LLC
FINANCIAL STATEMENTS
The Board has adopted a governance structure based on the principles of the UK Corporate Governance Code as published in September 2012 (the Code), which includes the following governance principles:
Strategy – reviewing and agreeing strategy for the Company;
Performance – overseeing the performance of the Group and also evaluating its own performance;
Standards and values – setting standards and values to guide the affairs of the Group;
Oversight – monitoring the effectiveness of the Company's risk management and internal control systems; and
People – ensuring the Group is managed by individuals with the necessary skills and experience, and that appointments to the Board are managed effectively.
Pursuant to these principles, the Board has put in place a detailed governance framework, the Operational Framework, which includes the Company's Code of Conduct. It sets out how we do business across BAE Systems and encapsulates the Company's values, policies and processes, together with clear levels of delegated authority aimed at ensuring that all of its employees and businesses act in a clear, accountable and consistent manner.
| ATTENDANCE BY INDIVIDUAL DIRECTORS AT MEETINGS OF THE BOARD AND ITS COMMITTEES IN 2014 | |
|---|---|
| Director | Board | Audit Committee |
Corporate Responsibility Committee |
Nominations Committee |
Remuneration Committee |
|---|---|---|---|---|---|
| Paul Anderson | 11/11 | – | 2/2 | 2/2 | – |
| Sir Roger Carr | 11/11 | – | – | 2/2 | – |
| Jerry DeMuro | 11/11 | – | – | – | – |
| Harriet Green | 8/11 | – | 4/4 | 1/1 | – |
| Chris Grigg | 11/11 | – | – | 1/1 | 6/6 |
| Ian King | 11/11 | – | – | – | – |
| Peter Lynas | 11/11 | – | – | – | – |
| Paula Rosput Reynolds | 10/11 | 7/7 | – | 1/1 | – |
| Nick Rose | 11/11 | 7/7 | – | 2/2 | 6/6 |
| Carl Symon | 11/11 | – | – | 1/1 | 6/6 |
| Ian Tyler | 11/11 | 7/7 | 4/4 | 1/1 | – |
There is a clear division of responsibility at the head of the Company and these are detailed in the Operational Framework. The Chairman leads the Board and is responsible for ensuring that it discharges its duties effectively. The Chief Executive is responsible for the implementation and delivery of the strategy agreed by the Board.
The Senior Independent Director acts as a sounding board for the Chairman and acts as an intermediary for the other directors when necessary. He is also available to shareholders if they have concerns which cannot be addressed through the normal channels. The Company Secretary is responsible to the Board for ensuring that board procedures are complied with.
In general, non-executive directors help develop the Company's strategy, scrutinise the performance of management in meeting agreed goals and objectives, and monitor the reporting of performance. The Board considers all of the non-executive directors, with the exception of the Chairman, to be independent for the purposes of the Code.
All directors seek election on an annual basis at the Annual General Meeting.
Attendance by individual directors at meetings of the Board and its committees in 2014 is shown above.
| BOARD OF DIRECTORS | |||
|---|---|---|---|
| AUDIT COMMITTEE P61 |
CORPORATE RESPONSIBILITY COMMITTEE P64 |
NOMINATIONS COMMITTEE P66 |
REMUNERATION COMMITTEE P67 |
| Nick Rose (Chairman) |
Ian Tyler (Chairman) |
Sir Roger Carr (Chairman) |
Carl Symon (Chairman) |
| Paula Rosput Reynolds | Harriet Green | Harriet Green | Chris Grigg |
| Ian Tyler | Chris Grigg | Nick Rose | |
| Paula Rosput Reynolds | |||
| Nick Rose | |||
| Carl Symon | |||
| Ian Tyler | |||
This section considers the effectiveness of the board of directors and the way in which the provisions of the Code have been addressed.
The Board's evaluation in respect of performance in 2014 was facilitated internally by way of a questionnaire produced by the Company Secretary and completed by all directors. This included questions on the quality of the decisions made, the process used to reach those decisions and the contribution of individual members of the Board. The completed questionnaires were analysed by the Chairman and also by the Senior Independent Director. The results of the survey as they applied to the Board were discussed collectively and objectives for 2015 agreed. The Chairman will meet with each director to provide feedback on individual performance. Feedback on the Chairman's own performance will be provided by the Senior Independent Director, Nick Rose.
Having reviewed the analysis of the feedback provided by directors, the Board has agreed objectives for 2015, which will be monitored and progressed at the board meetings
scheduled for the year. These include objectives concerning Board succession planning and how the Company identies and develops future leaders. Objectives have also been agreed that will build on the strategy work the Board undertook last year, and ensure that directors continue to develop the depth of their understanding of both strategic and key operational matters. Finally, the Board will continue to rene its processes to ensure that the use of modern technology improves the efciency and effectiveness of reporting.
The Board evaluation also included an assessment of performance against the objectives agreed for last year. The table below summarises this assessment.
On appointment, all non-executive directors are advised of the likely time commitments and are asked to seek approval from the Nominations Committee if they wish to take on additional external appointments. The ability of individual directors to allocate sufcient time to the discharge of their responsibilities is, where necessary, part of the directors' annual evaluation process overseen by the Chairman.
An induction programme is agreed for all new directors aimed at ensuring they are able to develop an understanding and awareness of the Company's core processes, its people and businesses. In addition, as part of the induction process, new directors will typically visit the Group's principal operations in order to meet employees, and gain an understanding of the Group's products and services. Ongoing training is provided for the Board and individual directors as required.
The Chairman, with the assistance of the Company Secretary, is responsible for ensuring that directors are supplied with information in a timely manner that is in a form and of a quality appropriate to enable them to discharge their duties.
In the normal course of business, such information is provided by the Chief Executive in a regular report to the Board that includes information on operational matters, strategic developments, reports on the performance of Group operations, nancial performance relative to the business plan, business development, corporate responsibility and investor relations.
| i. | |
|---|---|
| ess | |
| BOARD OBJECTIVES AND ACHIEVEMENTS | |
|---|---|
| 2014 OBJECTIVES | 2014 ACHIEVEMENTS |
| Strategy Focus on developing a more detailed strategic understanding of the Company's businesses and markets. |
During 2014, the Board undertook a comprehensive review of the business, which has provided a deeper understanding of current activity and has established a platform for longer-term strategic planning. |
| Ensure that the strategy for the Company's Applied Intelligence business is optimised to access fully the growth potential of the cyber security market. |
The strategy for Applied Intelligence continued to develop during the year, with the SilverSky acquisition accelerating the Group's strategy to grow its commercial cyber business. |
| Succession planning Engage with all directors on executive development and succession planning. |
The membership of the Nominations Committee was expanded to include all non-executive directors during the year. This has helped facilitate wider board-level engagement on executive development and succession planning. |
| Increase the levels of diversity and bench strength in key roles and make progress against the Company's diversity objectives. |
During the year, the Board initiated additional work on diversity and succession planning for key roles, but it is recognised that there is more to do in these areas and this is reected in the Board's 2015 objectives. |
| Risk and risk management The Board to continue reviewing the level of risk it is willing to take in achieving its strategic objectives. |
A review of principal risks was incorporated into the Board's strategy review process. |
| Board development Develop a wider understanding by all directors of the use and management of commercial offset arrangements. |
Facilitated by the Group Finance Director and Group Business Development executives, non-executive directors participated in a training session aimed at developing a deeper understanding of the management of commercial offset. |
| Use site visits by individual non-executive directors to help develop a deeper understanding of the Company. |
Whilst some site visits were undertaken by directors during the year, additional emphasis will be placed on this in 2015. |
The Company has developed an annual Integrated Business Planning (IBP) process, which comprises a strategic plan, a nancial forecast for the current year and nancial projections for the next ve years. The IBP represents a common process with standard outputs and requirements that produces consolidated plans at both the Group level and at a number of levels within the Company. The plan is reviewed each year by the Board as part of its strategy review process. Once approved by the Board, the IBP is cascaded down across all the Company's businesses and provides the basis for setting all detailed nancial budgets and strategic actions that are subsequently used by the Board to monitor performance.
In undertaking its review of the IBP in 2014, the Board considered the prospects of the Company over the one and ve-year periods covered by the process. The one-year planning period has a greater level of certainty and is, therefore, used to set detailed budgetary targets at all levels across the Group – it is also used by the Remuneration Committee to set targets for the annual incentive. The ve-year period provides less certainty of outcome, but provides a robust planning tool against which strategic decisions can be made. On the basis of this and other matters considered and reviewed by the Board during the year, the Board has reasonable expectations that the Company will be able to continue in operation and meet its liabilities as they fall due over the periods used for the assessment. In doing so, it is recognised that such future assessments are subject to a level of uncertainty that increases with time and, therefore, future outcomes cannot be guaranteed or predicted with certainty. Also, this assessment was made recognising the principal risks that could have an impact on the future performance of the Company (see pages 50 to 53).
Accounting standards require that directors satisfy themselves that it is reasonable for them to conclude whether it is appropriate to prepare nancial statements on a going concern basis. The Group's business activities, together with factors that are likely to affect its future development and position, are set out in the segmental performance section on pages 27 to 42. The nancial position of the Group, including information on cash ow, can be found in the nancial review section on pages 22 to 26. Principal risks are detailed on pages 50 to 53. In addition, the nancial statements include, amongst other things, notes on nance costs (page 113) and nancial risk management, including treasury policies on interest rate, liquidity, currency and credit risk (pages 150 and 151). After making due enquiry, the directors have a reasonable expectation that the Group has adequate resources to continue operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.
The Company has a well-developed investor relations programme managed by the Chief Executive, Group Finance Director and Investor Relations Director. In addition, the Chairman is available to meet with major shareholders and is in regular contact with them so as to keep them informed of progress on corporate governance matters. In order to assist in developing an understanding of the views of major shareholders, each year the Company commissions a survey of investors undertaken by external consultants.
The results of the survey are presented to the Board.
The Company's Annual General Meeting provides all shareholders with the opportunity to vote on the resolutions put to shareholders either electronically via the Company's website or by post. All resolutions detailed in the Notice of Meeting are voted on by way of a poll so as to ensure that all votes are counted on the basis of one vote for every share held. The results of the voting on all resolutions are published on the Company's website.
| The Chief Executive has established the Executive Committee as the executive forum in which the most senior Line and Functional Leaders come together to communicate, review |
CHIEF EXECUTIVE Ian King1 Ian King |
|
|---|---|---|
| and agree on issues and actions of Company-wide signicance. |
LINE LEADERS | FUNCTIONAL LEADERS |
| Jerry DeMuro1 President and Chief Executive Ofcer of BAE Systems, Inc. |
Peter Lynas1 Group Finance Director |
|
| Chief Operating Ofcer of BAE Systems, Inc. |
Group General Counsel | |
| Group Managing Director, Programmes & Support |
Group Business Development Director |
|
| Group Managing Director, International |
Group Human Resources Director |
|
| Managing Director, Applied Intelligence |
Group Communications Director |
CHAIRMAN OF THE AUDIT COMMITTEE
Nick Rose (Chairman)
Paula Rosput Reynolds
Ian Tyler
The Audit Committee was in place throughout 2014 and held seven meetings, plus one joint meeting with the Corporate Responsibility Committee. All its members are independent in accordance with the provisions of the Code.
Reviewing the effectiveness of the Group's nancial reporting, internal control policies, and procedures for the identication, assessment and reporting of risk
Monitoring the integrity of the Group's nancial statements
Monitoring the role and effectiveness of the Internal Audit function
Approving an annual programme of internal audit work and reviewing the output
Making recommendations to the Board on the appointment of the Auditors
Agreeing the scope of the Auditors' annual audit programme and reviewing the output
Keeping the relationship with the Auditors under review
Assessing the effectiveness of the audit process
Developing and implementing policy on the engagement of the Auditors to supply non-audit services
The Committee's full Terms of Reference, which are reviewed each year by the Board, are available on the Company's website.
The Committee invites the following to its regular meetings:
Chairman; Chief Executive; Group Finance Director; and Director, Financial Control and Reporting;
Internal Audit Director, together with other senior members of the Internal Audit function, as appropriate;
Other representatives from businesses and functions, as appropriate; and
The senior KPMG partner responsible for the BAE Systems audit, together with other senior audit partners, as appropriate.
The Committee holds private sessions with the Auditors and Internal Audit Director without management present, and the Committee Chairman meets privately with both internal and external audit.
The Committee Chairman provides regular updates to the Board on the key issues discussed at the Committee's meetings.
Business risk continues to be a much discussed topic in boardrooms and governance circles, placing continual emphasis on the importance of boards understanding the principal risks in their businesses and how they are being managed effectively. As reported on page 48, the Board as a whole has been reviewing risk with the Audit Committee supporting this activity and also considering the Group's risk disclosures and reporting.
During the year, Ian Tyler assumed chairmanship of the Corporate Responsibility Committee which provides a helpful crossover for us in terms of his wider understanding of non-nancial and reputational risk. I also sit on the Remuneration Committee where I contribute to discussion on risk and reward.
Effective management of risks and opportunities is essential to the delivery of the Group's strategic objectives, achievement of sustainable shareholder value, protection of its reputation and meeting the requirement of good corporate governance.
As set out on page 48, the Board has overall responsibility for determining the nature and extent of the risk it is willing to take, and ensuring that risks are managed effectively across the Group. At the Board's request, the Committee has reviewed the Company's principal risks in the light of new provisions in the 2014 UK Corporate Governance Code covering the assessment of principal risks, as well as the Financial Reporting Council's (FRC) associated Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. Whilst the 2014 UK Corporate Governance Code does not apply to the Company until the next nancial year, the Board has elected to report on certain of the risk management and internal control principles in the new code on a best practice basis.
The way in which the Company manages risk is set out on pages 48 and 49, with the principal risks facing the Group set out on pages 50 to 53.
We have reviewed the ongoing effectiveness of the Company's risk management processes as part of our wider review of the effectiveness of internal controls.
Our review of internal controls has also encompassed a review of the reports relating to the six-monthly Operational Assurance Statements, which are submitted by each business or function as a mandated policy under the Group-wide Operational Framework, and controls reports and audit reports from both internal and external auditors.
A key controls focus for the Committee is the controls environment surrounding Lifecycle Management (LCM). LCM is integral to the successful execution of the Group's projects and programmes, and of particular importance in the early identication of programme risk and the determination of prot recognition or provisioning. We have discussed the outputs of general nancial and LCM controls testing, and any required improvement actions, with management, and internal and external audit, with a view to ensuring the ongoing robustness of programme execution and risk mitigation.
During the year, we met with local senior management of the US Support Solutions business with regard to performance issues identied on commercial shipbuilding contracts as well as operational challenges identied on the Radford ammunition facility maintenance contract. We reviewed and discussed with management the wider control environment and risk management processes surrounding these businesses, including programme management controls and lessons learned, and the steps being taken to address the issues.
We have also received and discussed a report from the Group General Counsel on compliance with the Company's Export Control Policy.
The Committee reviews all signicant issues concerning the nancial statements. The principal matters we considered concerning the 2014 nancial statements were:
Impairments: the Group has incurred a goodwill impairment of £161m, of which £87m relates to performance issues in the US commercial shipbuilding business and £74m relates to the proposed disposal of the Group's interest in BAE Systems Land Systems South Africa (Pty) Limited.
Acquisitions: we considered the acquisition accounting for acquisitions made in 2014 as set out in note 26 on page 147, these being SilverSky, Saudi Development and Training Company, and Signal Innovations Group, Inc.
We noted that the Company and the trustees of the UK pension schemes have agreed recovery plans (where necessary) to address the funding positions resulting from the actuarial valuations carried out on the Group's UK dened benet schemes in 2014. The Board as a whole has been kept apprised of progress in this regard.
– Taxation: Whilst tax policy is ultimately a matter for the Board's determination, we reviewed the Group's tax strategy as set out on page 26. On a twice-yearly basis, we reviewed the Group's tax charge and tax provisions.
Taking into account the revised FRC guidance referred to above, the Committee agreed the parameters of, and reviewed the supporting report for, the going concern statement and the statement on the Board's assessment of the prospects of the Company on the one and ve-year periods used in the Integrated Business Plan.
An intrinsic requirement of a group's nancial statements is for the report and accounts to be fair, balanced and understandable. The co-ordination and review of the Group-wide input into the Annual Report is an extensive exercise performed within an exacting time frame which runs alongside the formal audit process undertaken by the Auditors.
The process to ensure that the Committee, and then the Board, are satised with the overall fairness, balance and clarity of the document has been underpinned by:
a verication process dealing with the factual content of the reports;
comprehensive reviews undertaken at different levels in the Group that aim to ensure consistency and overall balance; and
The Company's Auditors are KPMG LLP. The Committee has been kept up-to-date with the development of new EU-wide regulations concerning audit tenure and the longevity of audit rm relationships with the companies they audit. Under current EU transitional arrangements, the Company would be required to rotate its auditor by June 2020.
Continuity and consistency of audit quality are important, however the Committee is also mindful of the fact that KPMG LLP, and their legacy predecessors, have been in place as the Company's Auditors since 1981 without re-tender and it remains our present intention to initiate an audit re-tendering process not later than 2017 (for the 2018 accounts) prior to the rotation of the current audit engagement partner. This is in line with best practice provisions on audit rotation in the Code. The Committee will keep this re-tendering time frame under review and will use our regular reviews of auditor effectiveness to assess whether an earlier date for a re-tender would be desirable. There are no contractual obligations that would restrict the selection of a different auditor.
It is the Committee's view that, given the complexity of the audit process at BAE Systems, a signicant transition period will be required. Plans are being formulated to address this and the Committee's Terms of Reference have been amended to enable it to oversee the tender process.
The Committee maintains oversight over the effectiveness of the Company's Auditors principally by way of an annual review of audit effectiveness at the conclusion of each year-end audit and to supplement this with an in-depth review of audit effectiveness on a triennial basis. We undertook our triennial review midway through 2014 which enabled us to take a deeper look at the service provided by our Auditors. This included the enhancements made by our lead engagement partner after he had completed one full annual audit cycle, for example:
KPMG's plans to support us through our future audit transition were outlined and discussed. We also looked at fees from a value-for-money perspective.
We have since assessed the output of the annual review undertaken at the close of the 2014 year-end audit. This review was based on a Group-wide evaluation at management and functional level, and covered areas such as:
We provided feedback to the Auditors from the evaluation and will assess how the related actions have been incorporated into the 2015 audit plan when the latter has been formulated.
On the basis of the reviews undertaken in 2014, and the review following the 2014 year-end audit, the Committee proposed to the Board that it recommend that shareholders support the re-appointment of KPMG LLP at the 2015 Annual General Meeting.
Internal Audit plays an important role in assessing the effectiveness of internal controls by a programme of reviews based on a continuing assessment of business risk across the Group.
The annual internal audit programme is agreed jointly by the Audit and Corporate Responsibility committees to ensure that the over-arching internal audit programme includes the assessment of the effectiveness of policies and processes relating to key areas of ethical and reputational risk, as well as nancial risk. The Committee considered the output from the 2014 annual internal audit programme of assurance work on a six-monthly basis.
Over the past year, the Committee has beneted from interactive sessions with the respective heads of Internal Audit for the UK businesses, the US businesses and the international businesses. This has complemented the regular reporting we receive from, and private meetings we have with, the Internal Audit Director. As part of the annual evaluation of the Internal Audit function that the Committee oversees each year, we have discussed with the Internal Audit Director the level of skilling and resourcing required to deliver the 2015 internal audit programme.
Chairman of the Audit Committee
The Committee has a formal policy governing the engagement of the Auditors to provide non-audit services which we review on an annual basis. The Policy prohibits certain activities from being undertaken by the Auditors such as book-keeping and work relating to the preparation of accounting records and nancial statements that will ultimately be subject to external audit; nancial information system design and implementation; internal auditing; and any work where a mutuality of interest is created that could compromise the independence of the Auditors. The Policy also places restrictions on the employment of former employees of the Auditors.
Recognising that the Auditors are best placed to undertake certain work of a non-audit nature, the Policy permits the provision of Audit-Related Services and Permitted Non-Audit Services up to limits that are pre-approved by the Committee, with specic approvals required beyond such limits by the Committee. A copy of the policy is available on the Company's website.
Details of fees payable to the Auditors are set out on page 111. In 2014, non-audit fees represented 30% of the audit fee. The principal non-audit services provided by the Auditors related to tax compliance and advisory services, the interim review and equity advisory services.
reviewed and challenged the external audit plan to gauge whether it was appropriately focused;
considered the accounting, nancial control and audit issues reported by the Auditors that owed from the audit work;
reviewed the conrmation and information received from KPMG on the arrangements that it has in place to safeguard its independence and objectivity;
reviewed and discussed on a quarterly basis the nature and level of non-audit fees, and undertaken an annual review of the Non-Audit Services Policy which we concluded was still appropriate (see above);
reviewed the effectiveness of the Company's helpline procedures in respect of the reporting of possible accounting, nancial control or other nancial irregularities, which form part of our wider Ethics Helpline procedures, and concluded that the procedures continue to work effectively;
reviewed on a twice-yearly basis the procedures for the identication, assessment and reporting of risk; and
considered corporate governance and accounting developments.
CHAIRMAN OF THE CORPORATE RESPONSIBILITY COMMITTEE
Members
Ian Tyler (Chairman)
Harriet Green
The Corporate Responsibility Committee was in place throughout 2014 and held four meetings. Its members are independent in accordance with the provisions of the Code.
Assisting the Board in overseeing the development of strategy, and policy on social, environmental and ethical matters
Keeping under review the effectiveness of the Company's internal control policies and procedures for the identication, assessment, management and reporting of reputational and other non-nancial risks
Monitoring and reviewing the role and effectiveness of the Company's Internal Audit function in relation to corporate responsibility
Providing oversight of the Company's compliance with corporate responsibility-related policies and procedures
Reviewing audit and assurance reports produced by the corporate responsibility assurer
Overseeing and supporting key stakeholder engagement on social, environmental and ethical issues
Making proposals to the Remuneration Committee regarding appropriate corporate responsibility-related performance objectives for executive directors
Reviewing the Company's arrangements for employees to obtain further advice on ethical issues in condence
Ensuring that the Code of Conduct is regularly reviewed and reects best practice for such codes
Ensuring the Company's Annual Report includes an examination of ethical business conduct within the Company
The Committee invites the following to its regular meetings:
Chairman; Chief Executive; Managing Director Corporate Responsibility; Group General Counsel; and Internal Audit Director
The Committee Chairman provides regular updates to the Board on the key issues discussed at the Committee's meetings.
This is the rst Corporate Responsibility Committee Report since I succeeded Paul Anderson as chairman of the Committee in September last year. During Paul's chairmanship, the Committee placed a strong focus on ethical conduct, safety, and diversity and inclusion. These areas will continue to be our priorities.
Last year, the Committee reported that, ve years on from the Woolf Committee Report on business conduct in BAE Systems, it had agreed a number of actions aimed at maintaining the impetus and energy we have seen in this area. One of the key recommendations was that we engaged an independent third party to undertake a survey of ethical business culture to follow up on a similar survey undertaken in 2011.
This survey was undertaken by Ethical Leadership Group (NAVEX Global). It was completed during 2014 and the Committee reviewed the ndings. The survey concluded that BAE Systems has all the elements of a best practice programme in place and should continue to review and mature this. However, one of the key messages that we took from the report was the need to continually reinforce the key messages regarding responsible behaviour so as to ensure that these are understood across the Company at all levels. It emphasised also the importance of continuing to communicate the standards of behaviour we expect of employees and, in particular, to provide training and support to those with supervisory responsibilities to ensure they have the necessary skills to provide leadership at all levels across the Company.
The Committee will continue to monitor the implementation of the recommendations in the report.
As part of the Company's planned activities, responsible behaviour training has been undertaken across the Group in 2014 and the refresh of the Code of Conduct has been completed. This will be issued to all employees in 2015.
It is essential that the Company has an effective means by which all employees have a means of raising matters of concern in condence. BAE Systems has both an Ethics Helpline through which such matters can be raised and also a network of Ethics Ofcers to whom employees can raise matters in condence. The Company continues to
expand its network of Ethics Ofcers who are able to provide condential support and advice to employees on business conduct matters and also act as ambassadors for the Code of Conduct. The Committee oversees the effectiveness of these means of raising matters in condence and, twice a year, we review the number and nature of the issues raised, and monitor how they are resolved.
The Committee's overall safety goal for the Company remains one of achieving world-class levels of safety management. Whilst some parts of the Company are now achieving these levels, we continue to drive for further improvement, and see a focus on reducing signicant risks and the promotion of a strong safety culture as key to achieving continual improvement in safety performance. Benchmarking is important and, as a Committee, we look at a range of performance indicators that provide us with comparable information on the Company's safety performance relative to other major companies. In addition, the leadership shown by senior management in driving the right behaviours and expectations is critical to achieving our safety objectives, and performance in this area is part of the executive annual incentive plan, for which the Committee sets performance targets and makes recommendations to the Remuneration Committee on levels of achievement.
The Committee continues to monitor corporate responsibility-related risks and it reviews the output from the Company's Internal Audit function regularly so that we can be responsive to possible emerging issues and trends. Also, to help develop a better understanding of particular matters, our meetings have included deep dives into particular issues. By way of example, in 2014, we spent time looking at the anti-bribery and corruption compliance processes used by the Group Business Development function and how they are applied in practice in overseas markets.
The future agenda that we have set for the Committee aims to ensure that we maintain focus over the priority areas that we believe are most important for the Company in terms of corporate responsibility. During 2015, we will undertake a number of deep dives into key areas. These will include diversity and inclusion, which remains an important focus for the Committee and where we will be reviewing the progress being made against the actions the Company has in place to grow the female talent pipeline at senior levels. Also, our annual programme of meetings includes a whole day visit to one of the Company's sites. We have undertaken a number of such visits in the past and they have proved to be an excellent means of providing in-depth rst-hand experience of corporate responsibility matters.
Chairman of the Corporate Responsibility Committee
During the year, the Committee has:
reviewed the Company's product trading policies;
reviewed and received regular updates on the development of the Company's US International Trafc in Arms Regulations (ITAR) export control compliance programme and associated assurance work;
received reports and presentations from the Internal Audit Director on audit work undertaken during the year, particularly with regards to corporate responsibility-related matters;
received a report on the management of offset commitments;
considered the output from the non-nancial risk reviews undertaken by the Executive Committee and the status of associated mitigation activity;
agreed the scope of the work to be undertaken by Deloitte LLP pursuant to their assurance statement included in this report;
reviewed the Responsible Behaviour training package as rolled out across all parts of the Group in 2014; and
met with the heads of the Company's UK and US Government Relations departments and reviewed the Company's lobbying activities and associated controls.
| Members | |
|---|---|
| Sir Roger Carr (Chairman) | |
| Harriet Green | |
| Chris Grigg | |
| Paula Rosput Reynolds | |
| Nick Rose | |
| Carl Symon | |
Ian Tyler
Sir Richard Olver was chairman of the Committee prior to Sir Roger Carr succeeding him on 1 February 2014. During the year, the membership of the Committee was widened to comprise all the non-executive directors. Paul Anderson was a member of the Committee up to 31 December 2014.
The Nominations Committee was in place throughout 2014 and held two meetings during the year. It is chaired by the Chairman of the Company. Whilst he is not deemed to be independent, the other members of the Committee are independent non-executive directors in accordance with the provisions of the UK Corporate Governance Code.
Reviewing the balance of skills, experience, diversity (including gender), knowledge and independence, and recommending any changes to the Board's membership that it believes are necessary or desirable as a result of such review
Planning the orderly succession of new directors to the Board by reviewing on a regular basis the Company's senior management resource
Identifying and nominating for the Board's approval suitable candidates to ll any vacancies for non-executive or executive directors
Recommending to the Board the membership and chairmanship of the Audit, Corporate Responsibility and Remuneration committees
Nominating suitable candidates for the role of Senior Independent Director
Reviewing, and making recommendations to the Board on, the re-appointment of non-executive directors at the conclusion of their specic terms of ofce, having given due regard to their performance and ability to continue to contribute to the Board
The Board has adopted the following statement to act as a guide to future Board succession planning activity and to make a clear public statement of its support for greater diversity in the boardroom:
There are currently two women on the Board (2014 two), 20% (2014 18%) of the total membership.
CHAIRMAN OF THE REMUNERATION COMMITTEE
Carl Symon (Chairman)
Chris Grigg
Nick Rose
The Remuneration Committee was in place throughout 2014 and held six meetings. All its members are independent in accordance with the provisions of the Code.
The Chief Executive and the Company's Chairman attend Committee meetings by invitation only. They do not attend where their individual remuneration is discussed and no director is involved in deciding his own remuneration.
Agreeing a policy for the remuneration of the Chairman, executive directors, members of the Executive Committee (EC), the Company Secretary and other senior executives
Within the agreed policy, determining individual remuneration packages for the Chairman, executive directors and EC members
Agreeing the policy on terms and conditions to be included in service agreements for the Chairman, executive directors, EC members, the Company Secretary and other senior executives, including termination payments and compensation commitments, where applicable
Approving any employee share-based incentive schemes and any performance conditions to be used for such schemes
Determining any share scheme performance targets
The Committee's full Terms of Reference, which are reviewed each year by the Board, are available on the Company's website.
On behalf of the Board, I am delighted to present the Remuneration Committee's Report for 2014.
We were pleased by the level of shareholder support received for our 2013 Remuneration Committee Report in our rst year of reporting under the new reporting regulations. In implementing the Directors' Remuneration Policy (the Policy), we stated that it would apply for three years with 2015 being the rst year of operation. I am pleased to conrm that, for 2015, no revisions are proposed to our executive remuneration framework which would constitute a change to the Policy. However, we remain committed to continued transparency and engagement with our shareholders and have consulted with our major shareholders on proposed changes to our executive remuneration arrangements for 2015 which may be made at the discretion of the Remuneration Committee as follows:
The current LTI performance metrics of 5% to 11% average annual EPS growth with nil vesting at threshold were developed during a period of high-growth expectations from our shareholders commensurate with the then market opportunities. The metrics are no longer deemed appropriate given the recent changes in the market for defence companies. It is proposed to set a performance range of 3% to 7% average annual EPS growth for 2015 awards of Performance Shares under the Long-Term Incentive Plan (LTIP) as this will provide executives with an appropriately challenging and meaningful incentive to drive performance which, at the same time, delivers a level of nancial performance which supports capital market expectations. Achievement of performance at the threshold level represents signicant challenge due to the dependency on winning several pivotal orders.
For this reason, it is proposed that there should be a level of reward equal to 25% of maximum for achievement of threshold. Average annual EPS growth of 5% will achieve 50% vesting with full vesting requiring 7% growth. Whilst not 'straight-line' vesting (as currently), this vesting prole will provide a potential reward for the executives which reects the unique set of market challenges which are expected in the next several years. It is intended that the revised EPS performance condition is also subject to the same 'quality of earnings' performance hurdle as applies to the Total Shareholder Return (TSR) condition, such that awards will not vest unless the Board is satised that there has been a sustained
improvement in the underlying nancial performance of the Company (taking account of items such as cash, order book, risk and project performance).
The Committee intends to review the performance condition again for 2016.
Reecting the changes to the malus and clawback provisions in the 2014 UK Corporate Governance Code, the Committee has determined the following:
We will also maintain our requirement for executive directors to build up a signicant personal shareholding, which stands at 300% of salary for the Chief Executive, 350% for the President and Chief Executive Ofcer of BAE Systems, Inc. and at 200% for the Group Finance Director.
In 2014, BAE Systems delivered a solid overall performance. Pages 18 to 21 set out the performance against our 2014 annual objectives, which focus on deliverables in support of both short-term results and the overall long-term strategy. For the purpose of incentives applicable to the executive directors:
– an 11% reduction was achieved in the Recordable Accident Rate and a reduction of over 30% in the number of major (most serious) injuries.
In relation to performance over the three-year period 2012 to 2014:
Our remuneration strategy is to motivate our key talent to realise the Company's strategic objectives, deliver on customer commitments, lead and inspire employees, and drive value for our shareholders. It recognises the need to be competitive in those markets in which we operate and compete for talent. A core
design objective is an appropriate balance of short-term and long-term incentives, focused on Group performance, business segment performance and leadership behaviours that underpin a Total Performance culture.
The focus of changes to our reward framework in recent years has been to improve alignment with shareholder value creation and address the perceived complexity of our long-term incentive arrangements by simplifying our arrangements. We believe the approval of the single LTI plan at the 2014 AGM achieves simplication of our arrangements and have, therefore, focused this year on ensuring that our long-term incentives are appropriately rewarding our executive team only when their performance delivers tangible business results in line with the Group's strategy.
For the purposes of the Companies Act 2006, the legally binding restrictions under the Policy took legal effect from 1 January 2015. As stated in last year's Annual Report, the Policy has been operated in practice from the 2014 AGM.
On behalf of the Board
Chairman of the Remuneration Committee
| P70 Executive directors' remuneration |
|---|
| P72 Annual bonus |
| P73 Long-Term Incentive Plans |
This section details the remuneration of the executive and non-executive directors (including the Chairman) during the nancial year ended 31 December 2014 and will be proposed for an advisory vote by shareholders at the 2015 Annual General Meeting (AGM). It has been prepared on the basis prescribed in the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
| CONTENTS | |
|---|---|
| Directors' remuneration in the year ending 31 December 2015 |
69 |
| Single total gure of remuneration: | |
| – for the Chairman and non-executive directors | 70 |
| – for the executive directors | 70 |
| Annual bonus | 72 |
| Long-Term Incentive Plan (LTIP) performance | 73 |
| Total Shareholder Return (TSR) performance and Chief Executive pay |
74 |
| Relative importance of spend on pay | 74 |
| Pension entitlements | 75 |
| Share interests: | |
| – scheme interests awarded in 2014 | 76 |
| – share plans and related performance conditions | 77 |
| – directors' shareholdings and share interests | 78 |
| Voting on the 2013 Annual Remuneration Report | 81 |
| Remuneration Committee composition and advisers | 82 |
| Non-Executive Directors' Fees Committee | 82 |
As stated in the Remuneration Committee Chairman's letter on page 68, for the purposes of the Companies Act 2006, the Directors' Remuneration Policy (the Policy) took legal effect on 1 January 2015. The Policy has been operating in practice since the date of its approval on 7 May 2014 at the 2014 AGM. The remuneration for 2015 will be implemented as follows:
SINGLE TOTAL FIGURE OF REMUNERATION FOR THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS
| Fees | Benets | Other | Total | |||||
|---|---|---|---|---|---|---|---|---|
| 2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
|
| Chairman | ||||||||
| Sir Roger Carr1 | 602 | 19 | – | – | – | – | 602 | 19 |
| Sir Richard Olver2 | 60 | 725 | 1 | 15 | – | – | 61 | 740 |
| Non-executive directors | ||||||||
| P M Anderson3 | 84 | 95 | 1 | – | 23 | 23 | 108 | 118 |
| H Green | 75 | 75 | – | – | 9 | 9 | 84 | 84 |
| C M Grigg4 | 75 | 38 | – | – | 9 | – | 84 | 38 |
| Sir Peter Mason5 | n/a | 28 | n/a | – | n/a | 5 | n/a | 33 |
| L A McIntire5 | n/a | 47 | n/a | – | n/a | 18 | n/a | 65 |
| P Rosput Reynolds | 75 | 75 | 1 | – | 23 | 23 | 99 | 98 |
| N C Rose | 120 | 119 | 1 | – | 9 | 14 | 130 | 133 |
| C G Symon | 95 | 95 | 1 | – | 23 | 23 | 119 | 118 |
| I P Tyler4 | 85 | 49 | 1 | – | 9 | 5 | 95 | 54 |
Appointed to the Board in 2013 and as Chairman on 1 February 2014.
Retired from the Board on 1 February 2014.
Retired from the Board on 31 December 2014.
Appointed in 2013.
Retired or resigned in 2013.
Sir Roger Carr was appointed to the Board as Chairman designate on 1 October 2013 at a fee of £75,000 per annum (pro-rata) until 1 February 2014 when he succeeded Sir Richard Olver as Chairman. His annual fee thereafter was £650,000 per annum (pro-rata). This fee will not be reviewed during his initial three-year term as Chairman.
To assist in completing handover activities and as agreed pursuant to the notice period under his letter of appointment, Sir Richard Olver's services were retained by the Company up to 16 May 2014. For these services, he was paid his then annual fee of £725,000 (pro-rata) and retained use of a chauffeur-driven car: the fee for these services was £211,458 and the car-related benet totalled £5,380. His pro-rated fee and benet gures for the period from 1 January to 1 February 2014 are given in the table above; the benet gure relates to private use of a chauffeur-driven car.
The fee structure for 2014 for the non-executive directors on a per annum basis was as follows: (i) Chairman, Audit Committee: £100,000; (ii) Chairman, Corporate Responsibility Committee: £95,000; (iii) Chairman, Remuneration Committee: £95,000; (iv) Other non-executive directors: £75,000; and (v) Additional fee for Senior Independent Director: £20,000. These amounts are shown in the 'Fees' column above. A travel allowance of £4,500 per meeting is also paid on each occasion that a non-executive director's travel necessitates air travel of more than ve hours (one way) to the meeting location, subject to a maximum of six travel allowances per year. These amounts are shown in the 'Other' column. The amounts in the 'Benets' column relate to travel expenses and subsistence.
The above table has been subject to audit.
| SINGLE TOTAL FIGURE OF REMUNERATION FOR THE EXECUTIVE DIRECTORS | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Base salary | Taxable benets1 | Bonus2 | LTIP3,7 | Pension4 | Other5 | Total | ||||||||
| 2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
2014 £'000 |
2013 £'000 |
|
| I G King | 963 | 963 | 45 | 41 | 1,610 | 1,156 | 690 | – | 210 | 338 | 1 | 1 | 3,519 | 2,499 |
| P J Lynas | 546 | 546 | 46 | 64 | 651 | 477 | 391 | – | 369 | 698 | – | 1 | 2,003 | 1,786 |
| J DeMuro†6 | 529 | n/a | 22 | n/a | 671 | n/a | – | n/a | 9 | n/a | 575 | n/a | 1,806 | n/a |
| L P Hudson††7 | 56 | 668 | 20 | 143 | 60 | 735 | 261 | – | – | 56 | – | 686 | 397 | 2,288 |
† Jerry DeMuro was appointed to the Board on 1 February 2014. His remuneration arrangements are set out in note 6 below.
†† Linda Hudson retired from the Board on 1 February 2014. Further detail is provided below.
The benets received by Ian King include the provision of a car allowance and the private use of a chauffeur-driven car (2014 £45k; 2013 £41k). The benets received by Peter Lynas include the provision of a car allowance and the private use of a chauffeur-driven car (2014 £18k; 2013 £17k). In addition, he received a second residence allowance of £28k (2013 £47k) as disclosed in previous years. Jerry DeMuro's benets include private use of a chauffeur-driven car and parking (£2k); medical and dental benets (£9k); insured life and disability benets (£6k); and the private use of a company aircraft (£5k). Linda Hudson's benets include the provision of a cash allowance for a car and parking and the private use of a chauffeur-driven car (2014 £5k; 2013 £48k); medical and dental benets (2014 £288; 2013 £4k); insured life and disability benets (2014 £1k; 2013 £8k); and the private use of a company aircraft (2014 £14k; 2013 £83k).
Linda Hudson ceased to be an executive director on 1 February 2014 and a Group employee on 31 May 2014. There was no change in her accrued benet between 31 December 2013 and 31 January 2014, based on pay and service to that date and calculated (i) using one-twelfth of the prescribed ination gure to cover the month of January 2014; and (ii) taking one-fth of the dened contributions over her period of employment from 1 January to 31 May 2014. She subsequently took her accrued pension entitlements as cash lump sums (see page 76) in accordance with the rules of the US pension arrangements; there are no further benets due.
After the Termination Date, Linda Hudson will serve as a non-executive director of BAE Systems, Inc. until April 2015. For the period from 1 June 2014 to 31 December 2014, the fee paid to her in this regard was \$73,667.
The above table has been subject to audit.
GOVERNANCE
Bonuses for the 2014 year are paid in March 2015. The breakdown of bonus measures, achievement and pay-out for each executive director is shown below. One-third of the bonus payment is subject to compulsory deferral into BAE Systems shares for a three-year period, for which there is no additional performance condition.
| CHIEF EXECUTIVE | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Weight (as a percentage |
Actual performance against targets set | Target for | Actual | Percentage of maximum |
|||||
| Measures | of target) | Below | Threshold | Target | Stretch | 2014 | performance4 | opportunity | |
| Financial | Group EPS | 40.0 | 38.5p | 39.1p | 58.6% | ||||
| Group cash | 25.0 | £(1,916)m | £(743)m | 100.0% | |||||
| Group order intake | 15.0 | £13.5bn | £14.8bn | 63.8% | |||||
| Personal | Safety | 5.0 | See note 1 below | 60.0% | |||||
| Key strategic objectives | 15.0 | See note 2 below | 88.8% | ||||||
Total bonus (as a percentage of maximum) 74.3%
| GROUP FINANCE DIRECTOR | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Weight (as a | Actual performance against targets set | Percentage of | |||||||
| Measures | percentage of target) |
Below | Threshold | Target | Stretch | Target for 2014 |
Actual performance4 |
maximum opportunity |
|
| Financial | Group EPS | 40.0 | 38.5p | 39.1p | 58.6% | ||||
| Group cash | 25.0 | £(1,916)m | £(743)m | 100.0% | |||||
| Group order intake | 15.0 | £13.5bn | £14.8bn | 63.8% | |||||
| Personal | Safety | 5.0 | See note 1 below | 60.0% | |||||
| Key strategic objectives | 15.0 | See note 2 below | 90.0% | ||||||
Total bonus (as a percentage of maximum) 74.5%
| PRESIDENT AND CHIEF EXECUTIVE OFFICER OF BAE SYSTEMS, INC. | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Weight (as a | Actual performance against targets set | Percentage of | |||||||
| Measures | percentage of target) |
Below | Threshold | Target | Stretch | Target for 2014 |
Actual performance4 |
maximum opportunity |
|
| Financial | Group EPS | 13.3 | 38.5p | 39.1p | 58.6% | ||||
| Group cash | 8.3 | £(1,916)m | £(743)m | 100.0% | |||||
| Group order intake | 5.0 | £13.5bn | £14.8bn | 63.8% | |||||
| BAE Systems, Inc. prot | 26.7 | \$1,030m | \$959m | 0.0% | |||||
| BAE Systems, Inc. cash | 16.7 | \$(3,903)m \$(3,430)m | 100.0% | ||||||
| BAE Systems, Inc. order intake | 10.0 | \$10.5bn | \$10.5bn | 50.0% | |||||
| Personal | Safety | 5.0 | See note 3 below | 37.5% | |||||
| Key strategic objectives | 15.0 | See note 2 below | 90.0% | ||||||
Total bonus (as a percentage of maximum) 56.5%
to reduction in signicant risk rating and driving improvements in behavioural safety were also met.
of the Group's strategic objectives and demonstration of leadership behaviours. 3. The US business did not meet the 11% target for reduction in the Recordable Accident Rate. The other elements of the objective relating to
reduction in signicant risk rating and driving improvements in behavioural safety were met.
The above table has been subject to audit.
| ANNUAL AVERAGE EPS GROWTH Outperformance of performance conditions ending on 31 December 2014 |
Target | Maximum | Actual | Percentage of maximum achieved |
|---|---|---|---|---|
| 2014 EPS requirement | 56.3p | 60.4p | 37.9p | |
| Annual average EPS growth | 5% | 11% | <5% | 0% |
| RELATIVE TSR AGAINST COMPARATOR GROUP |
| Percentage of | ||||
|---|---|---|---|---|
| Outperformance of performance conditions ending on 31 December 2014 | Target | Maximum | Actual | maximum achieved |
| TSR against comparator group | 95.4% | 157.1% | 96.9% | 26.7% |
The following awards had performance periods that ended on 31 December 2014:
– Performance conditions: half on relative TSR against comparator group, half on EPS growth of 5% to 11% per annum. The TSR performance condition ended on 31 December 2014 and resulted in 26.7% vesting of the TSR portion. The Committee is satised that there has been a sustained improvement in the Company's underlying nancial performance and that it is appropriate for vesting at 26.7% of the TSR portion. The EPS growth was not achieved and, accordingly, this portion will lapse. For the US executive director, 50% of the performance condition was based on EPS and 50% on long-term operating cash performance at the level of the US businesses. The long-term operating cash target was not met and, therefore, that portion also lapsed.
– Performance condition: relative TSR against comparator group. The TSR performance condition ended on 31 December 2014 and resulted in 26.7% vesting.
– 2:1 match on shares deferred from 2011 annual incentive based on a performance condition of EPS growth of 5% to 11% per annum. The EPS growth was not achieved and, accordingly, this portion will lapse.
The following award had a performance period that ended on 31 March 2014:
– Performance conditions: half on relative TSR against comparator group, half on EPS growth of 5% to 11% per annum. The Company's TSR for the 50% of awards of shares granted in May 2011 under the TSR portion of the PSP was below the median position when compared against the comparator group of other defence and aerospace companies, and the award accordingly lapsed. The EPS performance period for the EPS portion of the award ended on 31 December 2013 and was reported on last year.
A summary of TSR performance to 31 December 2014 on outstanding TSR-related LTIP awards is illustrated in the chart below.
The coloured boxes show the range of TSR required for 25% vesting to full vesting and the grey boxes show BAE Systems' TSR. The proportion that would vest is shown in the boxes at the top of the chart.
The graph below shows the value by 31 December 2014, on a Total Shareholder Return basis, of £100 invested in BAE Systems on 31 December 2008 compared with the value of £100 invested in the FTSE 100 index. The FTSE 100 is considered to be an appropriate comparator for this purpose as it is a broad equity index of which BAE Systems is a constituent member. The equivalent data is shown for the PSP comparator group.
| BAE Systems FTSE 100 PSP comparator group |
||||||
|---|---|---|---|---|---|---|
| £250 | ||||||
| £200 | ||||||
| £150 | ||||||
| £100 | ||||||
| £50 | ||||||
| £0 | ||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| CHANGE IN CHIEF EXECUTIVE'S REMUNERATION OVER SIX YEARS | ||||||
| Chief Executive's single gure (£'000) | 4,030 | 4,810 | 4,613 | 2,574 | 2,499 | 3,519 |
Bonus paid as a percentage of maximum 83.0% 71.0% 68.6% 55.6% 53.4% 74.3% LTI as a percentage of maximum vesting 65.5% 57.6% 44.3% nil nil 16.8%
Note: Total remuneration includes the value of share plans vesting that were granted prior to appointment as Chief Executive.
The percentage change from 2013 to 2014 in remuneration of the Chief Executive and average UK employee was as follows:
| Change in Chief Executive's remuneration % |
Change in average UK employee1 remuneration % |
|
|---|---|---|
| Salary | 0 | +1 |
| Benets | +9 | +1 |
| Bonus | +39 | +33 |
The following charts set out underlying EBITA1, amounts paid in returns to shareholders, total employee costs and average headcount for the years ended 31 December 2013 and 2014.
Earnings before amortisation and impairment of intangible assets, nance costs and taxation expense (EBITA) excluding non-recurring items (see page 23).
Includes share buyback of £283m (2013 £212m).
Excluding share of equity accounted investments.
| Age | Normal retirement age |
Accrued benet at 1 January 20141,2 £ per annum |
Accrued benet at 31 December 20141,2,3 £ per annum |
Added pension value received in the year from dened benet scheme2 £ |
Added pension value received in the year from dened contribution scheme £ |
Total £ |
|---|---|---|---|---|---|---|
| 58 | 62 | 759,728 | 794,973 | 209,908 | – | 209,908 |
| 56 | 62 | 378,285 | 409,350 | 368,987 | – | 368,987 |
| 59 | 65 | – | 8,601 | – | 8,601 | 8,601 |
| TOTAL PENSION ENTITLEMENTS | Figures in the remuneration table on page 70 |
Accrued benets are reduced if they are taken before the normal retirement date of the scheme. In addition, a longevity adjustment factor applies to UK pension accrued after 5 April 2006.
The dened benet gure includes both funded and unfunded arrangements for Ian King and Peter Lynas.
Accrued benet for Ian King and Peter Lynas is annual pension payable on retirement. Accrued benet for Jerry DeMuro is the sum of the dened contribution scheme contributions.
Note: The gures in this table relate to directors with a prospective benet. Linda Hudson left employment with the BAE Systems Group during 2014 and encashed her benet entitlements as detailed below; no 2014 gures have therefore been included for her in the table above.
The above table has been subject to audit.
Current UK executive directors are members of the BAE Systems Executive Pension Scheme (ExPS) and the BAE Systems 2000 Pension Plan (2000 Plan) which together provide a pension for executive directors payable at 62 of 1/30th of three-year nal average salary for each year of service subject to the payment of members' contributions (currently 8%). Benets paid prior to age 62 will be subject to actuarial reduction.
The ExPS tops up the underlying employee plan to provide a target benet for executive directors payable from normal retirement age of 1/30th of Final Pensionable Pay (FPP) for each year of ExPS pensionable service (subject to a maximum of two-thirds of FPP). FPP is dened as annual base salary averaged over the last 12 months prior to leaving service in respect of service accrued to 5 April 2006 and 36 months prior to leaving in respect of service from 6 April 2006. The ExPS also provides a lump sum death-in-service benet equal to four times base salary at date of death, and a spouse's death-in-service pension equal to two-thirds of the prospective pension at normal retirement age. Children's allowances are also payable, usually up to the age of 18. Spouses' pensions and children's allowances are also payable upon death in retirement and death after leaving the Company's employment with a deferred pension. Once in payment, pensions are increased annually by the rise in the Retail Prices Index subject to a maximum increase of 5% per year in respect of pre-6 April 2006 service and 2.5% per year in respect of service from 6 April 2006.
The review of pension policies carried out in 2010 by the Committee concluded that the pension benets should continue to be based on the Company's registered pension schemes and that, in appropriate circumstances, the Company will continue to have the option to offer an unfunded pension promise so as to mitigate the impact of further reductions to the Lifetime Allowance (introduced in 2006) and the impact of the reduced Annual Allowance. The current executive directors were given the choice to remain in the current arrangement and pay the increased tax or to take an unfunded promise: they both elected for the latter. The Committee has decided that in cases where the Company is to pay an unfunded promise, executives will be given the choice to commute some or all of the benet for a taxable lump sum, or take it as pension. Where an unfunded pension is taken, ten years after retirement, the executive will be given a further opportunity to commute the residual value of the unfunded pension for a lump sum.
As stated above, Ian King and Peter Lynas already have an unfunded promise from the Company arising from the 2006 changes to the taxation of pension benets, which has been extended to cover the reduced Annual Allowance at no additional cost to the Company.
Ian King and Peter Lynas are both members of the 2000 Plan, applicable to former employees of Marconi Electronic Systems (MES), and members of the ExPS with a normal retirement age of 62. The 2000 Plan provides a pension of 1/50th of Final Pensionable Earnings (FPE) for each year of pensionable service, payable from a normal retirement age of 65 and members pay contributions of 8% of Pensionable Earnings. FPE under the 2000 Plan is the best consecutive three-year average of base salary and bonus in the ten Plan Years prior to leaving, less an offset for State pensions. The Company decided in 2006 to limit pensionable bonuses in the 2000 Plan in the 2006/07 Plan Year to 20% of base salary and to 10% of base salary for the 2007/08 Plan Year and thereafter. However, there is a guarantee that the FPE gure for benets in respect of service prior to 6 April 2007 will not be less than the FPE gure at 5 April 2007 to ensure that employees do not lose the benet of contributions paid on past bonuses. Ian King and Peter Lynas joined the ExPS in 1999. Therefore, their individual total pensions are the sum of their 2000 Plan benets plus the top up from the ExPS, most of which is provided through the unfunded promise referred to above.
Jerry DeMuro participates in a Section 401(k) dened contribution arrangement set up for US employees in which the company will match his contributions up to a maximum contribution of 6% of salary, up to regulatory limits (for 2015 \$265,000). In 2014, the company paid contributions of \$13,408 into this 401(k) arrangement.
Linda Hudson stepped down from the Board on 1 February 2014 and ceased to be a Group employee on 31 May 2014. Her leaving arrangements were disclosed in the 2013 Annual Remuneration Report (and on page 71). Linda Hudson was a member of a US retirement plan which provides a cash sum at retirement equal to a percentage of career average pay. After her departure from the company, she received full payment of her qualied and non-qualied pension benets in the amounts of \$141,420 and \$1,404,625, respectively.
In addition, Linda Hudson participated in a Section 401(k) dened contribution arrangement set up for US employees in which the company will match employee contributions up to a limit. In 2014, the company paid contributions of \$15,600 into this 401(k) arrangement.
Fees retained in 2014 by executive directors during the period in which they served in that capacity in respect of non-executive directorships were: Ian King £23,481 in respect of his (then) non-executive directorship of Rotork p.l.c.; Peter Lynas £36,875 in respect of his directorship of SSE plc; Jerry DeMuro \$45,833 in respect of his directorship of Aero Communications, Inc.; and Linda Hudson \$20,000 in respect of her non-executive directorship of Bank of America. These amounts are not included in the remuneration table on page 70.
| SCHEME INTERESTS AWARDED DURING THE FINANCIAL YEAR | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Scheme | Type of interest | Date of grant |
Number of shares |
Basis of award | Face value of award1 £ |
Exercise price £ |
Date to which performance is measured |
Performance condition |
Percentage of interests receivable if minimum performance achieved |
| Ian King | |||||||||
| PSPTSR | Performance Shares/nil cost option |
26.03.14 | 292,542 | 125% of salary | 1,203,810 | nil | Three years to 31.12.16 |
TSR/ secondary nancial measure |
25% |
| PSPEPS | Performance Shares/nil cost option |
26.03.14 | 292,543 | 125% of salary | 1,203,814 | nil | Three years to 31.12.16 |
EPS | 0%2 |
| ExSOP2012 | Share option | 26.03.14 | 702,102 | 300% of salary | 2,889,150 | 4.12 | Three years to 31.12.16 |
TSR | 25% |
| Peter Lynas | |||||||||
| PSPTSR | Performance Shares/nil cost option |
26.03.14 | 142,636 | 107.5% of salary | 586,947 | nil | Three years to 31.12.16 |
TSR/ secondary nancial measure |
25% |
| PSPEPS | Performance Shares/nil cost option |
26.03.14 | 142,637 | 107.5% of salary | 586,951 | nil | Three years to 31.12.16 |
EPS | 0%2 |
| ExSOP2012 | Share option | 26.03.14 | 398,055 | 300% of salary | 1,637,996 | 4.12 | Three years to 31.12.16 |
TSR | 25% |
| Jerry DeMuro | |||||||||
| PSPTSR | Performance Shares |
26.03.14 | 169,258 | 121% of salary | 696,497 | n/a | Three years to 31.12.16 |
TSR/ secondary nancial measure |
25% |
| PSPEPS | Performance Shares |
26.03.14 | 169,258 | 121% of salary | 696,497 | n/a | Three years to 31.12.16 |
EPS | 0%2 |
| ExSOP2012 | Share option | 26.03.14 | 545,543 | 390% of salary | 2,244,909 | 4.12 | Three years to 31.12.16 |
TSR | 25% |
| RSP | Retention | 26.03.14 | 139,882 | 100% of salary | 575,614 | n/a | n/a | n/a | n/a |
The table above has been subject to audit.
Note: PSP and RSP – Shares under award attract dividends prior to vesting. The nil cost options under the PSP are intended to be free share awards and are structured as an option to give the participant more exibility as to the timing of the benet. For the US executive director, grants under the PSP are classied as contingent awards (rather than share options) and are deliverable on the third, fourth and fth anniversary of grant, subject to attainment of the performance condition.
Shares under award vest after satisfaction of the three-year performance condition. Shares under award attract dividends prior to vesting. Awards that vest are exercisable in three tranches between the third and seventh anniversary of vesting (being capable of exercise on a phased basis from the third, fourth and fth anniversary of grant). For US participants, the awards are automatically delivered at the end of years three, four and ve, subject to the performance condition being achieved. In 2015, shares will be awarded under the Long-Term Incentive Plan (a single umbrella plan) that was approved at the 2014 AGM as detailed on pages 83 and 85.
Awards made to the UK executive directors since 2008 have been weighted 50% on the PSPEPS performance condition and 50% on the PSPTSR performance condition. Awards made to the US executive director were weighted in the same way until 2011 and in 2014. In 2012 and 2013, the weighting for the US executive director was 50% on the PSPEPS performance condition and 50% on the PSPOCF performance condition. The TSR comparator groups are shown below.
| Plan | Performance condition |
|---|---|
| PSPEPS | For awards made in 2015, rate of average annual EPS growth over the three-year performance period, with 25% vesting at 3% average growth per annum, 50% vesting at 5% average growth per annum and 100% vesting at 7% average growth per annum, with vesting on a straight-line basis between these parameters. Awards will not vest unless the Board is satised that there has been a sustained improvement in the underlying nancial performance of the Company (taking account of items such as cash, order book, risk and project performance). |
| Pre-2015, rate of average annual EPS growth over the three-year performance period, with nil vesting at 5% average growth per annum and 100% vesting at 11% average growth per annum, with vesting on a straight-line basis between these two parameters. |
|
| PSPTSR | The proportion of the award capable of exercise is determined by: |
| (i) the Company's TSR (share price growth plus dividends) ranking relative to a comparator group of 12 other international defence companies over a three-year performance period. No shares vest if the Company's TSR is outside the top 50% of TSRs achieved by the sectoral comparator group, with 25% vesting at median, 100% vesting if it is in the top quintile and vesting on a straight-line basis between these two parameters; and |
|
| (ii) whether there has been a sustained improvement in the Company's underlying nancial performance. In taking such a view, the Committee may consider (but not exclusively) the following nancial metrics: net cash/debt; EBITA1; order book; turnover; risk; and underlying project performance. |
|
| PSPOCF | Long-term operating cash performance at the level of the US businesses over a three-year performance period. The Committee is of the view that cash performance gures are commercially sensitive and that it would be detrimental to the interests of the Company to disclose them in advance. |
| The TSR comparator group referred to above comprises: | |||
|---|---|---|---|
| Cobham | L-3 Communications | Raytheon | |
| Finmeccanica | Lockheed Martin | SAIC | |
| General Dynamics | Meggitt | Thales | |
| ITT Exelis | Northrop Grumman | United Technologies | |
| The comparator group for PSPTSR awards from 2008 to 2011 comprises: | |||
| Boeing | General Dynamics | Raytheon | |
| Cobham | GKN | Rockwell Collins | |
| Dassault Aviation | Goodrich2 | Rolls-Royce | |
| EADS Embraer PN |
Honeywell International Lockheed Martin |
Smiths Group Thales |
Options are normally exercisable between the third and tenth anniversary of their grant, subject to the performance condition set out below being achieved. In 2015, shares will be awarded under the single umbrella plan (the Long-Term Incentive Plan) that was approved at the 2014 AGM as detailed on pages 83 and 85. Awards made from 2015 will be subject to a further two-year clawback period after the three-year vesting period.
ExSOP2012 The proportion of the award capable of exercise is determined by the Company's TSR (share price growth plus dividends) ranking relative to a comparator group of 12 other international defence companies over a three-year performance period. No shares vest if the Company's TSR is outside the top 50% of TSRs achieved by the sectoral comparator group, with 25% vesting at median, 100% vesting if it is in the top quintile and vesting on a straight-line basis between these two parameters.
The RSP is not subject to a performance condition as it is designed to address retention issues principally in the US. The shares are subject only to the condition that the participant remains employed by the Group at the end of the vesting date (three years after the award date). Shares under award attract dividends prior to vesting. In 2015, shares will be awarded under the single umbrella plan that was approved at the 2014 AGM as detailed on pages 83 and 85. Awards made from 2015 will be subject to a further two-year clawback period after the initial three-year vesting period.
The SMP was a standalone investment plan linked to the award under the Annual Incentive Plan. It operated for the nal time in 2013 in relation to the annual incentive relating to 2012 performance. Executive directors were required to invest at least one-third (and maximum 50%) of their annual incentive into the SMP and were granted a conditional award of matching shares against the gross value of the annual incentive invested. The matching shares attract dividends during the three-year deferral period, released on vesting of any matching shares.
| SMP | In respect of a three-year performance period, nil match for average EPS growth of 5% per annum increasing |
|---|---|
| uniformly to a maximum 2:1 match at 11% growth per annum. |
Executive directors are compulsorily required to establish and maintain a minimum personal shareholding equal to a set percentage of base salary. An Initial Value must be achieved as quickly as possible using shares vesting or options exercised through the executive share option schemes and Long-Term Incentive schemes by retaining 50% of the net value (i.e. the value after deduction of exercise costs and tax) of shares acquired under these schemes. Once the Initial Value is achieved, a Subsequent Value must be achieved in the same way, except that a minimum of 25% of the net value must be retained on each exercise or acquisition. Shares owned benecially by the director and his/her spouse count towards the MSR. The MSR does not apply after the individual has ceased to be a director. Any case of non-compliance would be dealt with by the Committee.
The following table sets out MSR Initial Value and Subsequent Value:
| Director | Initial Value | Subsequent Value |
|---|---|---|
| Ian King | 150% | 300% |
| Peter Lynas | 100% | 200% |
| Jerry DeMuro | 175% | 350% |
| Linda Hudson | 175% | 350% |
Ian King and Peter Lynas were both in excess of their 'Subsequent Value' MSR at 31 December 2014. Following the announcement in 2013 of Linda Hudson's retirement in 2014, the Committee agreed to reduce her MSR to 175% and she subsequently retained a holding to that level until she ceased to be a director. Jerry DeMuro joined the Board in 2014 and does not yet hold shares in the Company.
There are no shareholding requirements for the Chairman or the non-executive directors.
The interests of the directors who served during the year ended 31 December 2014 in the shares of BAE Systems plc, or scheme interests in relation to those shares, were as follows:
| Shares Scheme interests: Options and awards over shares |
||||||
|---|---|---|---|---|---|---|
| Share awards with performance |
Share awards without performance |
Share options with performance |
Share options with performance, vested but unexercised |
Total scheme interests |
||
| P M Anderson1 | 10,000 | – | – | – | – | – |
| Sir Roger Carr | 50,246 | – | – | – | – | – |
| J DeMuro2 | – | 338,516 | 139,882 | 545,543 | – | 1,023,941 |
| H Green | – | – | – | – | – | – |
| C M Grigg | 24,555 | – | – | – | – | – |
| L P Hudson3 | 264,846 | 1,490,991 | 515,227 | 1,542,390 | 133,740 | 3,682,348 |
| I G King | 1,731,836 | 685,460 | – | 3,699,419 | 319,403 | 4,704,282 |
| P J Lynas | 332,627 | 183,624 | – | 2,050,939 | 171,820 | 2,406,383 |
| Sir Richard Olver3 | 53,343 | – | – | – | – | – |
| P Rosput Reynolds | 21,200 | – | – | – | – | – |
| N C Rose | 55,000 | – | – | – | – | – |
| C G Symon | 20,000 | – | – | – | – | – |
| I P Tyler | – | – | – | – | – | – |
Retired from the Board on 31 December 2014.
Appointed to the Board on 1 February 2014.
Retired from the Board on 1 February 2014.
The above table has been subject to audit.
The interests of directors include those of their connected persons. The shares held by Paula Rosput Reynolds are represented by 5,300 American Depositary Shares. Details of the share interests in options and awards held by the executive directors as at 31 December 2014 are given on pages 80 and 81, together with details of share options exercised in 2014.
Awards under the PSP are classied as share awards with performance for the US executive director and as share options with performance for the UK executive directors.
Since 31 December 2014, Ian King has acquired an additional 80 shares under the partnership and matching shares elements of the Share Incentive Plan so that his benecial shareholding at the date of this report stood at 1,731,916.
| 31 December 2014 | Date of grant | Exercise price £ |
Date from which exercisable or part exercisable |
|---|---|---|---|
| 199,9681 | 29.03.12 | nil | 29.03.15 |
| 199,9691 | 29.03.12 | nil | 29.03.15 |
| 154,7712 | 25.03.13 | nil | 25.03.16 |
| 154,7712 | 25.03.13 | nil | 25.03.16 |
| 292,5422 | 26.03.14 | nil | 26.03.17 |
| 292,5432 | 26.03.14 | nil | 26.03.17 |
| 1,294,564 | |||
| 145,4433 | 12.04.06 | 4.28 | 12.04.09 |
| 173,9603 | 30.03.07 | 4.57 | 30.03.10 |
| 959,8501 | 29.03.12 | 3.01 | 29.03.15 |
| 742,9032 | 25.03.13 | 3.89 | 25.03.16 |
| 702,1022 | 26.03.14 | 4.12 | 26.03.17 |
| 2,724,258 | |||
| 479,0481 | 29.03.12 | n/a | 29.03.15 |
| 206,4122 | 25.03.13 | n/a | 25.03.16 |
| 685,460 | |||
| PETER LYNAS | ||||
|---|---|---|---|---|
| 31 December 2014 | Date of grant | Exercise price £ |
Date from which exercisable or part exercisable |
|
| PSPEPS | 9,0253 | 24.03.09 | nil | 24.03.14 |
| PSPTSR | 113,3721 | 29.03.12 | nil | 29.03.15 |
| PSPEPS | 113,3721 | 29.03.12 | nil | 29.03.15 |
| PSPTSR | 87,7472 | 25.03.13 | nil | 25.03.16 |
| PSPEPS | 87,7472 | 25.03.13 | nil | 25.03.16 |
| PSPTSR | 142,6362 | 26.03.14 | nil | 26.03.17 |
| PSPEPS | 142,6372 | 26.03.14 | nil | 26.03.17 |
| 696,536 | ||||
| ExSOP | 13,3863 | 22.12.05 | 3.56 | 22.12.08 |
| ExSOP | 75,8873 | 12.04.06 | 4.28 | 12.04.09 |
| ExSOP | 73,5223 | 30.03.07 | 4.57 | 30.03.10 |
| ExSOP2012 | 544,1861 | 29.03.12 | 3.01 | 29.03.15 |
| ExSOP2012 | 421,1872 | 25.03.13 | 3.89 | 25.03.16 |
| ExSOP2012 | 398,0552 | 26.03.14 | 4.12 | 26.03.17 |
| 1,526,223 | ||||
| SMP | 101,1561 | 29.03.12 | n/a | 29.03.15 |
| SMP | 82,4682 | 25.03.13 | n/a | 25.03.16 |
| 183,624 |
JERRY DEMURO
| 31 December 2014 | Date of grant | Exercise price £ |
Date from which exercisable or part exercisable |
|
|---|---|---|---|---|
| PSPTSR | 169,2582 | 26.03.14 | nil | 26.03.17 |
| PSPEPS | 169,2582 | 26.03.14 | nil | 26.03.17 |
| 338,516 | ||||
| ExSOP2012 | 545,5432 | 26.03.14 | 4.12 | 26.03.17 |
| RSP | 139,882 | 26.03.14 | n/a | 26.03.17 |
The outstanding award will lapse, or partially lapse, after the end of the nancial year having not met the full performance condition.
Performance condition yet to be tested.
| LINDA HUDSON | ||||
|---|---|---|---|---|
| Exercise price | Normal date from which exercisable |
|||
| 1 February 2014 | Date of grant | £ | or part exercisable | |
| PSPEPS | 14,8211 | 24.03.09 | nil | 24.03.14 |
| PSPTSR | 147,3762 | 18.05.11 | nil | 18.05.14 |
| PSPEPS | 147,3762 | 18.05.11 | nil | 18.05.14 |
| PSPOCF | 158,8183,4 | 29.03.12 | nil | 29.03.15 |
| PSPEPS | 158,8193,4 | 29.03.12 | nil | 29.03.15 |
| PSPOCF | 127,9073,5 | 25.03.13 | nil | 25.03.16 |
| PSPEPS | 127,9083,5 | 25.03.13 | nil | 25.03.16 |
| 883,025 | ||||
| ExSOP | 133,7401 | 30.03.07 | 4.57 | 30.03.10 |
| ExSOP2012 | 854,3343,6 | 29.03.12 | 3.01 | 29.03.15 |
| ExSOP2012 | 688,0563,5 | 25.03.13 | 3.89 | 25.03.16 |
| 1,676,130 | ||||
| SMP | 219,6102 | 18.05.11 | n/a | 18.05.14 |
| SMP | 208,0323,4 | 29.03.12 | n/a | 29.03.15 |
| SMP | 180,3243,5 | 25.03.13 | n/a | 25.03.16 |
| 607,966 | ||||
| RSP | 119,7437 | 18.05.11 | n/a | 18.05.14 |
| RSP | 219,0603,7 | 29.03.12 | n/a | 29.03.15 |
| RSP | 176,4243,7 | 25.03.13 | n/a | 25.03.16 |
| 515,227 |
Note: Linda Hudson retired as a director on 1 February 2014 and ceased to be a Group employee on 31 May 2014.
Performance condition already met.
Award lapsed in 2014 having not met the performance condition.
Award subsequently time pro-rated after ceasing to be a Group employee.
Residual time pro-rated award will lapse after end of the nancial year having not met the performance condition.
Residual time pro-rated award is subject to a performance condition that is yet to be tested.
Residual time pro-rated award will partially lapse after the end of the nancial year having not met the full performance condition.
Award, or residual time pro-rated award, vested.
| IAN KING | ||
|---|---|---|
| Exercised during the year |
Exercise price £ |
Date of grant | Date of exercise | Market price on exercise £ |
|
|---|---|---|---|---|---|
| PSPEPS | 32,610 | nil | 08.09.08 | 27.03.14 | 4.10 |
| PSPEPS | 46,412 | nil | 24.03.09 | 27.03.14 | 4.10 |
| ExSOP | 221,903 | 2.64 | 24.03.05 | 13.08.14 | 4.31 |
The two PSP options exercised by Ian King attracted reinvested dividends which equated to an additional 10,918 shares.
The tables on pages 80 and 81 have been subject to audit.
Performance conditions for the PSP, ExSOP2012 and SMP are detailed on pages 77 and 78. The ExSOP (Executive Share Option Plan) was established in 2001 and its ten-year life expired in 2011. Options granted under this plan are usually exercisable between the third and tenth anniversary of grant. The existing options granted between 2005 and 2007 have met their performance condition (EPS growth of 5% or more per annum over the three-year performance period).
Shareholder voting on the resolutions to approve the Directors' Remuneration Policy and the Annual Remuneration Report put to the 2014 AGM was as follows:
| DIRECTORS' REMUNERATION POLICY | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Votes for | % | Votes against | % | Total votes cast | Votes withheld (abstentions) |
|||||
| 2,141,307,622 | 92.95 | 162,437,084 | 7.05 | 2,303,744,706 | 19,304,785 | |||||
| ANNUAL REMUNERATION REPORT | ||||||||||
| Votes withheld | ||||||||||
| Votes for | % | Votes against | % | Total votes cast | (abstentions) | |||||
| 2,159,108,550 | 93.23 | 156,853,937 | 6.77 | 2,315,962,487 | 7,087,004 |
The Committee members comprise Carl Symon (Chairman), Chris Grigg and Nick Rose. Advisers to the Remuneration Committee are shown below.
| Adviser | Services provided | Appointment | Governance | Fees |
|---|---|---|---|---|
| Kepler Associates | Advises Committee members on |
Committee appointment. | Kepler engage directly with the members of the Committee. |
£30,000 |
| remuneration matters, including independent advice on the |
Kepler do not undertake any other work for the Company. |
Fee basis: Hourly | ||
| information and proposals presented to the Committee by Company executives. |
Kepler are members of the Remuneration Consultants Group (RCG) and are signatories to the RCG's code of conduct. |
|||
| Linklaters | Legal services, principally regarding remuneration policy |
By the Company with the approval of the Committee. |
Only provide legal compliance, legal drafting and review services, and do not advise the Committee. |
£66,674 (in respect of services provided to the Committee) |
| regulations and the drafting of share plan rules in accordance with the policy determined by the Committee. |
The Committee is aware that Linklaters are one of a number of legal rms that provide legal advice and services to the Company on a range of matters. |
Fee basis: Hourly | ||
| Linklaters are regulated by the Law Society. |
||||
| PricewaterhouseCoopers | Information on market trends and the competitive positioning |
By the Company at the request of the Committee. |
The Committee is aware that PricewaterhouseCoopers provide a variety of other services to the |
£68,250 (in respect of services provided to the Committee) |
| of packages. | Company, including tax and pensions advice. They also provide a range of consultancy services. |
Fee basis: Hourly | ||
| The nature of the advice provided to the Committee is primarily related to market comparator information and does not include advice on the design of remuneration policy. |
||||
| PricewaterhouseCoopers are members of the Remuneration Consultants Group (RCG) and are signatories to the RCG's code of conduct. |
||||
| Hewitt New Bridge Street | Advice on the TSR outcomes as required for assessing the performance condition under the Performance Share Plan. |
By the Company. | The Committee is aware that Hewitt New Bridge Street provide a variety of other HR-related services to the Company. |
£9,750 (in respect of services provided to the Committee) Fee basis: Fixed fee |
| The nature of the advice provided to the Committee is limited to factual information concerning the performance of the Company's shares. |
||||
| Hewitt New Bridge Street are members of the Remuneration Consultants Group (RCG) and are signatories to the RCG's code of conduct. |
During the year, the Committee received material assistance and advice on remuneration policy from the Group Human Resouces Director, Lynn Minella, and the Human Resources Director, Reward, Paul Farley. Ian King, Chief Executive, also provided advice that was of material assistance to the Committee.
The non-executive directors' fees are set by the Non-Executive Directors' Fees Committee which, since 1 February 2014, has comprised Sir Roger Carr, Philip Bramwell, Jerry DeMuro and Ian King. From 1 January to 31 January 2014, this Committee comprised Sir Richard Olver, Philip Bramwell, Linda Hudson and Ian King.
The Directors' Remuneration Policy ('the Policy') set out on pages 84 to 92 was agreed by shareholders at the Annual General Meeting (AGM) on 7 May 2014. For the purposes of the Companies Act 2006, the Policy took legal effect on 1 January 2015. As stated in last year's Annual Report, this Policy has been operating in practice from the 2014 AGM. The approved policy has been re-printed verbatim from the 2013 Annual Report, updated only so that the page numbers refer to the 2014 Annual Report in order to aid readability.
For 2015, it remains our intention to operate the Policy that was agreed by shareholders at the 2014 AGM. This section sets out how the Policy will apply in 2015.
Following approval of the single Long-Term Incentive Plan (LTIP) at the 2014 AGM, the rst awards will be made under this plan in Spring 2015. As set out in our Remuneration Committee Chairman's letter on page 67, the Committee intends to make the following changes to our executive remuneration arrangements for 2015 which do not constitute a change to the Policy approved by shareholders in 2014:
It is proposed to set a performance range of 3% to 7% average annual EPS growth for the 2015 awards of Performance Shares under the LTIP. Achievement of threshold performance will result in 25% vesting; there will be 50% vesting for 5% average annual EPS growth and 100% vesting for 7% average annual EPS growth, with pro-rata vesting for intermediate performance. The revised EPS performance condition will be subject to the same 'quality of earnings' performance hurdle as applies to the Total Shareholder Return (TSR) condition, such that awards will not vest unless the Board is satised that there has been a sustained improvement in the underlying nancial performance of the Company (taking account of items such as cash, order book, risk and project performance).
In accordance with the changes to the UK Corporate Governance Code in 2014, the Committee has strengthened the malus and clawback provisions applicable to incentive awards made to the executive directors and to all members of the Executive Committee from and including 2015 as follows:
The following charts show the value of the package each of the executive directors would receive based on 2015 base salaries, remuneration and 2015 LTI awards assuming the following scenarios: minimum xed pay (including salary, benets and pension as provided in the single gure table on page 70); pay receivable assuming on-target performance is met; and maximum pay assuming variable elements pay out in full. The scenarios below exclude any share price appreciation and dividends.
UK legislation requires that these charts are given in relation to the rst year in which the remuneration policy takes legal effect. As detailed in last year's Annual Report, the charts below are reporting the actual levels for 2015.
| MAXIMUM | 19% | 33% | 48% | 6,517 | ||
|---|---|---|---|---|---|---|
| ON-TARGET | 36% | 32% 32% | 3,387 | |||
| MINIMUM | 100% | 1,221 | ||||
| 0 | 2,000 | 4,000 | 6,000 | 8,000 | ||
| Value of package (£'000) |
| MAXIMUM | 28% | 26% | 46% | 3,479 | ||
|---|---|---|---|---|---|---|
| ON-TARGET | 49% | 23% 28% | 1,972 | |||
| MINIMUM | 100% | 973 | ||||
| 0 | 1,000 | 2,000 | 3,000 | 4,000 |
Value of package (£'000)
| MAXIMUM | 27% | 29% | 44% | 7,438 | |
|---|---|---|---|---|---|
| ON-TARGET | 47% | 26% 27% | 4,174 | ||
| MINIMUM | 100% | 1,968 | |||
| 0 | 2,000 | 4,000 | 6,000 | 8,000 |
Value of package (\$'000)
Fixed elements of remuneration
Annual bonus Performance Shares and Share Options
TO VIEW THE POLICY ONLINE VISIT BAESYSTEMS.COM/INVESTORS
83 BAE Systems Annual Report 2014
FINANCIAL STATEMENTS
GOVERNANCE
It is intended in practice to operate the Directors' Remuneration Policy ('the Policy') from the 2014 AGM. For the purposes of the Companies Act 2006, the Policy will only take legal effect on 1 January 2015 subject to shareholder approval at the 2014 AGM.
The Committee considers remuneration policy annually to ensure that it remains aligned with business needs and is appropriately positioned relative to the market. However, in the absence of exceptional or unexpected circumstances which may necessitate a change to the Policy, there is currently no intention to revise the Policy more frequently than every three years. We use target performance to estimate the total potential reward and benchmark it against reward packages paid by BAE Systems' competitors.
Our Policy is to set base salary with reference to the relevant market-competitive level. Actual total direct reward reects the performance of the individual and the Company as a whole. The aim is to deliver an overall remuneration package for executive directors which provides an appropriate balance between short-term and long-term reward and between xed and variable reward as described in the table below.
Whilst our long-term incentive plans provide the Committee with discretion in respect of vesting outcomes that affect the actual level of reward payable to individuals, such discretion would only be used in exceptional circumstances and, if exercised, disclosed at the latest in the report on implementation of the remuneration policy (i.e. the Annual Remuneration Report) for the year in question.
Recognise market value of role and individual's skills, experience and performance to ensure the business can attract and retain talent.
Salaries are reviewed annually. Business and individual performance, skills, the scope of the role and the individual's time in the role are taken into account when assessing salaries, as is market data for similar roles in the relevant market comparator group.
The comparator group for UK executive directors is comprised of selected companies from the top 70 of the FTSE 100 and is constructed to position BAE Systems around the median in terms of market capitalisation. For the President and Chief Executive Ofcer of BAE Systems, Inc., the comparator group is drawn from companies in the US aerospace and defence sectors, together with similar organisations in the general industry sector where BAE Systems, Inc. is positioned at the median of the comparator group by reference to revenue size.
When considering salary increases for the executive directors in their current roles, the Committee considers the general level of salary increase across the Group and in the relevant external market.
Actual increases for the executive directors in their current roles will generally not exceed the average percentage increase for employees as a whole, taking account of the level of movement within the relevant UK/US comparator group.
As a maximum, in exceptional circumstances (such as a material increase in job size or complexity, or a recently appointed executive director where the salary is positioned low against the market), the increase will not exceed 10% in any single year.
ANNUAL INCENTIVE
Drive and reward annual performance of individuals and teams on both nancial and non-nancial metrics, including leadership behaviours in order to deliver sustainable growth in shareholder value.
Compulsory deferral into shares increases alignment with shareholder interests.
75–80% of the annual incentive is driven off in-year nancial performance, and 20–25% is based on driving performance and improvement in the area of corporate responsibility and other non-nancial objectives supporting the Group's strategy.
One-third of the total annual incentive amount is subject to compulsory deferral for three years in BAE Systems shares without any matching.
A clawback mechanism exists under which part or all of the deferred bonus can be recovered if performance for which the bonus was awarded is subsequently restated or shown to be materially inaccurate or misleading or where the executive's employment can be terminated for cause.
Cash dividends are payable to the participants on the shares during this three-year deferral period.
Chief Executive and the President and Chief Executive Ofcer of BAE Systems, Inc.: 225% of salary
Group Finance Director: 160% of salary
The pay-out for maximum performance is 200% of on-target. The pay-out for achieving a threshold performance is 40% of the target, with no pay-out for achieving less than this. Pay-out for performance between targets is calculated on a straight-line basis.
Metrics and weightings applicable in 2014: Group earnings per share (EPS) – 40% Group cash – 25% Order intake – 15% Safety – 5% Personal objectives – 15%
Performance is assessed on an annual basis, using a combination of the Group's main performance indicators for the year. The measures include nancial and non-nancial metrics as well as the achievement of personal objectives. Measures will be weighted each year according to business priorities.
See notes 4 and 5 on page 88 regarding the selection and weighting of performance metrics.
Notwithstanding performance against the above metrics, all bonus payments are at the discretion of the Remuneration Committee, which will be based on an assessment of the individual's personal contribution to business performance over the relevant year and leadership behaviours demonstrated in making that contribution, relative to others.
All awards are granted based on a percentage of salary and share price at the date of grant.
Dividend equivalents in respect of vested shares are paid at the time of vesting and are not taken into account when determining individual limits.
Pre-vesting clawback provisions apply to all awards and are intended to cover situations, for example, where results are restated or otherwise turn out to be materially inaccurate or where the executive's employment can be terminated for cause.
The Committee will establish the targets for each measure at the start of each performance period based on Group projections and market expectations for the business. The performance conditions for previous awards are described in the Annual Remuneration Report.
Awards and performance conditions can be adjusted to take account of variations of share capital and other transactions or events.
On a change of control or similar transaction, awards generally will vest to the extent performance conditions are then satised (if applicable) and then be pro-rated to reect the acceleration of vesting unless the Committee decides otherwise. Alternatively, awards may be exchanged for equivalent awards over shares in the acquiring company.
The share plan rules may be amended from time-to-time by the Committee in certain circumstances including minor changes for administrative, tax or other regulatory purposes.
Subject to this Policy, performance conditions may be amended in other circumstances if the Committee considers it appropriate.
See notes 4 and 5 on page 88 regarding the selection and weighting of performance metrics.
It is proposed to consolidate the three long-term incentive plans described below into a single umbrella plan with effect from 1 January 2015, subject to shareholder approval at the 2014 AGM1.
Subject to shareholder approval of the proposed umbrella plan at the 2014 AGM1, over the lifetime of this remuneration policy, the Committee will have discretion to vary the weighting and mix of different types of awards within the following limits:
UK executive directors: Between 50% and 75% of overall LTI Expected Value (EV)
US executive directors: Between 25% and 50% of overall LTI EV
Between 25% and 50% of overall LTI EV
Applicable to US executive directors only. No more than one-third of overall LTI EV
The maximum opportunity in respect of each element is as set out below.
See below in relation to Performance Shares and Share Options.
See notes 4 and 5 on page 88.
Drive and reward delivery of sustained long-term EPS and Total Shareholder Return (TSR) performance aligned to the interests of shareholders.
Awards, typically in the form of nil-cost options, vest and become exercisable in three tranches on the third, fourth and fth anniversary of grant, subject to performance conditions.
For US participants, awards are delivered as conditional share awards (RSUs) which vest automatically on the third, fourth and fth anniversary of grant, subject to performance conditions.
Chief Executive: 250% of salary
Group Finance Director: 215% of salary
President and Chief Executive Ofcer of BAE Systems, Inc.: 242% of salary
Metrics and weightings applicable to 2014 awards:
See notes 4 and 5 on page 88.
Drive and reward delivery of TSR performance and sustained improvement in the Company's share price.
Subject to a TSR performance condition. Market value options are normally exercisable between the third and tenth anniversary of their grant.
Chief Executive: 300% of salary
President and Chief Executive Ofcer of BAE Systems, Inc.: 390% of salary
Performance metrics used, weighting and time period applicable
For share option awards made to the executive directors only, exercise is subject to a TSR performance condition as set out above. See notes 4 and 5 on page 88.
Provide long-term reward through time-vesting awards principally in the Company's US market.
The shares are subject only to the condition that the participant remains employed by the Group on the vesting date (three years after the award date). These awards are not subject to a performance condition as it is designed to address retention issues principally in the US.
Chief Executive and Group Finance Director: Not eligible
President and Chief Executive Ofcer of BAE Systems, Inc.: 100% of salary
None.
See notes 4 and 5 on page 88.
Provide employment benets which ensure that the overall package is market competitive when these elements are taken into account.
Benets include provision of a company car (or cash equivalent), life assurance and ill-health benet cover which are provided directly or through membership of the Company's pension schemes.
Opportunity for UK executive directors to participate in the Share Incentive Plan, a tax approved all-employee plan.
Additional benets such as relocation assistance may also be provided in certain circumstances if considered reasonable and appropriate by the Committee.
Benets are set at a level which the Remuneration Committee considers to be appropriate against comparable roles in companies of similar size in the relevant market.
Relocation assistance comprises reimbursement for direct items of expenditure, such as legal, estate agency, removals and temporary accommodation, based on actual costs incurred which are linked to the size and value of the property, plus a maximum relocation allowance of £2,500.
Benets are as reported and itemised within the single total gure shown as part of the Annual Remuneration Report on page 70. The main benets in the UK include a car allowance (£16,000 per annum) and private use of a chauffeur-driven car, plus life assurance and ill-health benet cover provided through membership of the Company's pension schemes. In the US, the benets include a cash allowance for car and parking (\$20,900 per annum) and private use of a chauffeur-driven car, medical and dental benets, and insured life and disability benets. The maximum cost of such benets will reect the associated market-competitive cost of provision.
Participation limits for the Share Incentive Plan are those set by the UK tax authorities from time-to-time.
None.
Provide competitive post-retirement benets or cash allowance equivalent.
For any new externally appointed executive directors in the UK, membership of the Company's executive dened contribution plan is offered with Company contributions set as a percentage of base salary. Individuals may elect to receive some or all of their pension contribution as a cash allowance.
Current UK executive directors are members of the BAE Systems Executive Pension Scheme and members of the underlying employee pension plan, which provide a target benet for executive directors payable at normal retirement age (62) of 1/30th of nal pensionable earnings (FPE) for each year of service up to a maximum of two-thirds of FPE. Member contributions are currently 8%. Further detail is provided on page 75 as part of the Annual Remuneration Report.
Any new externally appointed US executive directors would be offered membership of the US dened contribution plan.
Company contribution of 19% (in addition to employee contribution of 6%) of base salary only.
Under the existing dened benet scheme, a maximum of two-thirds of FPE accrued at 1/30th for each year of service.
The US dened contribution plan provides 100% company matching contributions up to a maximum of 6% of base salary, subject to US statutory limits.
Where executive directors' pension entitlement or accrual is restricted to the Lifetime Allowance and/or the Annual Allowance under the relevant pension scheme the Company may offer an unfunded pension promise to offset the impact of these restrictions.
The difference between the value of the registered pension scheme benets as restricted to the Lifetime Allowance and Annual Allowance and the full value of those registered pension scheme benets that would be payable if there were no Annual Allowance or Lifetime Allowance restrictions.
Remuneration policy for other employees
6 The Committee has agreed a policy whereby the executive directors are required to establish and maintain a minimum personal shareholding equal to a set percentage of base salary. An Initial Value must be achieved as quickly as possible using shares vesting or options exercised through the executive share option schemes and other Long-Term Incentive schemes by retaining 50% of the net value (i.e. the value after deduction of exercise costs and tax) of shares acquired under these schemes. Once the Initial Value is achieved, a Subsequent Value must be achieved in the same way, except that a minimum of 25% of the net value must be retained on each exercise or acquisition. Shares owned benecially by the director and his/her spouse count towards the MSR. The MSR does not apply after the individual has ceased to be a director. Any case of non-compliance would be dealt with by the Committee.
The following table sets out MSR Initial Value and Subsequent Value:
| Initial Value | Subsequent Value | |
|---|---|---|
| Chief Executive | 150% | 300% |
| Group Finance Director | 100% | 200% |
| President and Chief Executive Ofcer of BAE Systems, Inc. | 175% | 350% |
The charts opposite show the value of the package each of the executive directors would receive based on 2014 base salaries, remuneration and 2014 LTI awards assuming the following scenarios: minimum xed pay (including salary, benets and pension as provided in the single gure table on page 70); pay receivable assuming on-target performance is met; and maximum pay assuming variable elements pay out in full. The scenarios opposite exclude any share price appreciation and dividends.
UK legislation requires that these charts are given in relation to the rst year in which the remuneration policy takes legal effect. Rather than providing further charts for assumed 2015 remuneration and awards, we invite shareholders to assume similar levels for 2015 and we will report on actual levels in 2015.
| MAXIMUM | 20% | 33% | 47% | 6,643 | |||
|---|---|---|---|---|---|---|---|
| ON-TARGET | 38% | 31% 31% | 3,513 | ||||
| MINIMUM | 100% | 1,346 | |||||
| 0 | 2,000 | 4,000 | 6,000 | 8,000 | |||
| Value of package (£'000) |
| MAXIMUM | 35% | 23% | 42% | 3,746 | |
|---|---|---|---|---|---|
| ON-TARGET | 57% | 19% 24% | 2,268 | ||
| MINIMUM | 100% | 1,289 | |||
| 0 | 1,000 | 2,000 | 3,000 | 4,000 |
Value of package (£'000)
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF BAE SYSTEMS, INC. (\$'000)
| MAXIMUM | 27% | 29% | 44% | 7,321 | ||
|---|---|---|---|---|---|---|
| ON-TARGET | 47% | 26% 27% | 4,121 | |||
| MINIMUM | 100% | 1,959 | ||||
| 0 | 2,000 | 4,000 | 6,000 | 8,000 | ||
| Value of package (\$'000) |
Fixed elements of remuneration Annual bonus
PSP and Share options
To attract NEDs who have a broad range of experience and skills to provide independent judgement on issues of strategy, performance, resources and standards of conduct.
NEDs fees are set by the Non-Executive Directors' Fees Committee.
NEDs receive a basic fee with an additional fee for those who are chairmen of committees and/or undertake the role of Senior Independent Director.
NEDs also receive a travel allowance per meeting on each occasion that a scheduled Board meeting necessitates air travel of more than ve hours (one way) to the meeting location, subject to a maximum of six travel allowances per year.
Fees are typically reviewed annually, taking into account time commitment requirements and responsibility of the individual roles, and after reviewing practice in other comparable companies.
The Chairman's fees are set by the Remuneration Committee on a three-year basis and not normally subject to review during that period.
Actual fee levels are disclosed in the Annual Remuneration Report for the relevant nancial year.
The current Chairman's fee has been set at £650,000 and xed at this level for three years from the date of appointment (1 February 2014).
The aggregate cost of fees and benets paid to NEDs (including the Chairman) will not exceed an annual limit of £2.5m.
Performance metrics used, weighting and time period applicable None.
Reimbursement for reasonable and documented expenses incurred in the performance of duties.
NEDs are not eligible to participate in any pension benets provided by the Company, nor do they participate in any performance-related incentives.
The Chairman is provided with a chauffeur-driven car. This may be used for non-Company business, but the cost of the benet of such usage shall be paid by the Chairman.
Reimbursement of travel and subsistence costs (including payment of the associated tax cost) incurred by the director or his/her spouse whilst undertaking duties on behalf of the Company that may be assessed as a benet for tax purposes.
See the aggregate limit under 'Fees' above.
The Company will honour any commitments made in respect of executive director and non-executive director remuneration before the date on which either: (i) the Directors' Remuneration Policy becomes effective or (ii) an individual becomes a director, even where such commitments are not consistent with the policy prevailing at the time any such commitment is fullled. This includes (without limitation) all existing share awards as detailed on pages 80 and 81 under the PSP, SMP, RSP, ExSOP and ExSOP2012, Linda Hudson's leaving arrangements as detailed on page 71 and Peter Lynas' second residence allowance as detailed on page 70.
The recruitment policy provides an appropriate framework within which to attract individuals of the required calibre to lead a company of BAE Systems' size, scale and complexity. The Remuneration Committee determines the remuneration package for any appointment to an executive director position, either from within or outside BAE Systems.
The Remuneration Committee will take into consideration all relevant factors, including overall total remuneration, the type of remuneration being offered and the jurisdiction from which the candidate was recruited, and will operate in order to ensure that arrangements are in the best interests of the Company and its shareholders without paying more than is necessary to secure the individual of the required calibre.
The fees and benets applicable to the appointment of any new non-executive directors will be in accordance with the policy table on page 89.
The Committee seeks to align the remuneration package offered with the policy set out in the executive directors' policy table above recognising that participation under the policy above varies by geography.
The Committee may make awards on hiring an external candidate to 'buy-out' existing equity or, in exceptional circumstances, other elements of remuneration forfeited on leaving the previous employer. In doing so, the Committee will take account of relevant factors including any performance conditions attached to these awards, the form in which they were granted (e.g. cash or shares) and the time over which they would have vested. Buy-out awards would be capped to be no higher, on recruitment, than the fair value of those forfeited. Full details will be disclosed in the next Annual Remuneration Report following recruitment which will include details of the need to grant a buy-out award.
The salary level will be set in accordance with the policy described in the executive directors' policy table above.
The executive director shall be eligible to participate in applicable BAE Systems' employee benet plans, including coverage under applicable executive and employee pension and benet programmes in accordance with the terms and conditions of such plans, as may be amended by the Company in its sole discretion from time to time.
In the case of promotion of an existing Group employee to an executive directorship on the Board, commitments made before such promotion will continue to be honoured whether or not they are consistent with the remainder of this policy.
The appointed executive director will be eligible to earn a discretionary annual bonus in accordance with the Annual Incentive framework as described in the executive directors' policy table above.
The level of opportunity will be consistent with the policy disclosed in the executive directors' policy table in this report and subject to the maximums referred to therein.
The executive director will be eligible for equity awards in such amounts as the Committee may determine in its sole discretion, subject to this policy and the rules of the Long-Term Incentive Plans.
The level of opportunity will be consistent with the policy set out in the executive directors' policy table above and subject to the maximums referred to therein.
For internal and external appointments, the Committee may agree that the Company will meet certain relocation expenses in accordance with the provisions described under the Benets section of the policy table on page 87.
Executive directors
In accordance with long-established policy, all executive directors have rolling service agreements which may be terminated in accordance with the terms of these agreements.
Dates of appointment for executive directors
| Name | Date of appointment | Notice period |
|---|---|---|
| Ian King | 27 June 2008 | 12 months either party |
| Peter Lynas | 1 April 2011 | 12 months either party |
| Jerry DeMuro | 1 February 2014 | 90 days either party1 |
1 Jerry DeMuro's contract of employment automatically renews for one-year periods from 31 December each year, unless one party gives at least 90 days' notice of non-renewal.
The Committee's policy is that the service contracts of executive directors will not exceed 12 months. In exceptional circumstances, in relation to newly recruiting an executive director operating in a US environment, the notice period may be extended to a maximum of 24 months and structured such that it automatically reduces to 12 months at the end of the rst complete year of service.
No executive director has provisions in his service contract that relate to a change of control of the Company.
The Chairman's appointment is documented in a letter of appointment and he is required to devote no fewer than two days a week to his duties as Chairman. His appointment as Chairman will automatically terminate if he ceases to be a director of the Company. His appointment is for a term of three years from 1 February 2014 unless terminated earlier in accordance with the Company's Articles of Association or by the Company or the Chairman giving not less than six months' notice. The Chairman's appointment is to be reviewed by the Nominations Committee prior to the end of the three-year term and the Chairman may be invited to serve for an additional period.
The non-executive directors do not have service contracts but do have letters of appointment detailing the basis of their appointment. The dates of their original appointment are shown below:
| Name | Date of appointment | Expiry of current term |
|---|---|---|
| Paul Anderson1 | 08.10.2009 | – |
| Harriet Green | 01.11.2010 | 31.10.2016 |
| Chris Grigg | 01.07.2013 | 30.06.2016 |
| Paula Rosput Reynolds | 01.04.2011 | 31.03.2017 |
| Nick Rose | 08.02.2010 | 07.02.2016 |
| Carl Symon | 11.06.2008 | 10.06.2015 |
| Ian Tyler | 08.05.2013 | 07.05.2016 |
Note: The above table has been amended to reect the position as of 18 February 2015.
The non-executive directors are normally appointed for an initial three-year term that, subject to review, may be extended subsequently for further such terms. Any third term of three years is subject to rigorous review, taking into account the need progressively to refresh the Board. They do not have periods of notice and the Company has no obligation to pay compensation when their appointment terminates.
In accordance with the UK Corporate Governance Code, all directors are subject to annual election or re-election at the Company's AGM.
The policy on payment for loss of ofce provides a clear set of principles that govern the payments that will be made for loss of ofce, and take account of the need to ensure a smooth transition for leadership roles during times of change. The policy that will apply for a specic executive director's payment for loss of ofce will be the policy that was in place at the point when the payment for loss of ofce was agreed for the executive director in question.
Executive directors' contracts allow for termination with contractual notice from either party or termination by way of payment in lieu of notice, at the Company's discretion. Neither notice nor a payment in lieu of notice will be given in the event of gross misconduct. In the event of the termination of an executive director's contract, it is the Committee's policy to seek to limit any payment made in lieu of notice to a payment of not more than one year's base salary.
Any compensation payment made in connection with the departure of an executive director will be subject to approval by the Remuneration Committee, having regard to the terms of the service contract and the specic circumstances surrounding the termination, including whether the scenario aligns to an example under the approved leaver criteria, performance, service and health or other circumstances that may be relevant.
Jerry DeMuro's contract of employment automatically renews for one-year periods from 31 December each year, unless one party gives at least 90 days' notice of non-renewal. If the employment is (a) terminated by the Company (other than for cause as dened in the contract) or (b) he resigned for a 'Good Reason' (as dened in his contract), he is entitled to a termination payment equal to (i) one year's base salary and (ii) a pro-rated bonus for the relevant nancial year. He will also be entitled to a continuation of medical benets for 18 months (or a cash payment in lieu).
As governed by the rules of the relevant pension plan. No enhancement for leavers will be made.
The Remuneration Committee may exercise its discretion to make an annual incentive payment as part of the termination package.
Where an executive director's employment is terminated after the end of a performance year but before the payment is made, the executive director will remain eligible for an annual incentive award for that performance year subject to an assessment based on performance achieved over the period. No award will be made in the event of gross misconduct.
Where an executive director leaves by reason of death, ill-heath, retirement, a transfer of business or redundancy, the Remuneration Committee may use its discretion to determine that an executive director is entitled to receive a bonus (subject to an assessment based on performance over the period and pro-rated for time) in respect of the nancial year in which the individual ceased employment.
If the Remuneration Committee regards it necessary to use their discretion, it must be shown how this is in the interests of the Company and its shareholders.
The Committee's policy is not to award an annual incentive for any portion of the notice period not served.
The treatment of outstanding share awards in the event that an executive director leaves is governed by the relevant share plan rules.
Under the Long-Term Incentive Plans, awards and options generally vest and/or become exercisable where an executive director leaves by reason of ill-health, injury, disability, retirement with the agreement of the Company, redundancy or leaving in such circumstances as the Committee determines (each an 'approved leaver'). Awards and options generally continue and vest on the normal vesting date (or, in the case of Performance Shares, the rst normal vesting date), unless the Committee determines that the awards should vest on cessation. Any performance conditions will be applied at the time of vesting.
In the event of death, awards generally vest at the time of death subject to the satisfaction of any performance conditions at that time. Awards are then pro-rated as set out below.
On the vesting and/or exercise of awards and/or options as set out above, the number of shares received will, unless the Committee decides otherwise, be reduced pro-rata to reect the period in which the executive director was in employment as a proportion of the relevant vesting or performance period (as applicable).
Where an executive director's employment is terminated for any other reason, his awards and options will lapse.
If the Remuneration Committee regards it necessary to exercise its discretion as permissible under the share plan rules, then disclosure will include an explanation of how the application of discretion was in the best interests of the Company and its shareholders.
Where an executive director's employment is terminated or an executive director is under notice of termination for any reason at the date of award of any Long-Term Incentive awards, no Long-Term Incentive awards will be made.
The Remuneration Committee does not consult directly with employees as part of the process for reviewing executive pay. When considering salary increases for the executive directors, the Remuneration Committee considers the general level of salary increase across the Group and in the external market.
The Remuneration Committee conducts an annual programme of consultation with major shareholders in order to seek their input to the development of remuneration policy or plans.
BAE Systems plc is registered in England and Wales with the registered number 1470151.
The current directors who served during the 2014 nancial year are listed on pages 56 and 57. Of those directors, Jerry DeMuro was appointed to the Board on 1 February 2014. Paul Anderson served as a director throughout the period until his retirement from the Board on 31 December 2014. Sir Richard Olver and Linda Hudson also served as directors during the period until their retirement from the Board on 1 February 2014.
An interim dividend of 8.2p per share was paid on 1 December 2014. The directors propose a nal dividend of 12.3p per ordinary share. Subject to shareholder approval, the nal dividend will be paid on 1 June 2015 to shareholders on the share register on 17 April 2015. Information on dividend waivers is given on page 143.
The Company's AGM will be held on 7 May 2015. The Notice of Annual General Meeting is enclosed with this Annual Report and details the resolutions to be proposed at the meeting.
The following items are set out in the Strategic Report on pages 1 to 53:
As a consequence of the merger between British Aerospace and the former Marconi Electronic Systems businesses in 1999, the Company gave certain undertakings to the Secretary of State for Trade and Industry (now the Secretary of State for Business, Innovation and Skills). In February 2007, the Company was released from the majority of these undertakings and the remainder have been superseded and varied by a new set of undertakings. Compliance with the undertakings is monitored by a compliance ofcer. Further information regarding the undertakings and the contact details of the compliance ofcer may be obtained through the Company Secretary at the Company's registered ofce or through the Company's website.
In its half-year results announcement on 31 July 2014, the Group made the following statement, which is regarded as a prot forecast for the purposes of the Financial Services Authority's Listing Rule 9.2.18 (and which replaced the prot forecast made in the Group's full-year results announcement on 20 February 2014 and in the Annual Report 2013):
"With the non-recurring benet from the Salam price escalation settlement in the second half of 2013, and before exchange translation, the Group continues to expect reported earnings per share to be some 5% to 10% lower than in 2013. Exchange translation, assuming an average US\$1.70 exchange rate, is expected to impact those earnings by around one pence compared to previous guidance."
Underlying earnings per share was 42.0p in 2013. In 2014, underlying earnings per share was 38.0p. The average US\$ exchange rate for 2014 was 1.647.
The Group is committed to giving full and fair consideration to applications for employment from disabled people who meet the requirements for roles, and making available training opportunities and appropriate accommodation to disabled people employed by the Group.
No political donations were made in 2014.
As at 31 December 2014, BAE Systems' issued share capital of £86,720,655 comprised 3,468,826,200 ordinary shares of 2.5p each and one Special Share of £1.
During the year, 67,417,000 ordinary shares of 2.5p each were repurchased under the buyback programme announced on 21 February 2013 and such repurchased shares have been cancelled. The total consideration for the purchase of the shares, including commission and stamp duty, was £282,501,089. The percentage of called up share capital (excluding treasury shares) as at 31 December 2014, which the shares repurchased in 2014 represents, is 2.1%.
As at 1 January 2014, the number of shares held in treasury totalled 327,644,952 (having a total nominal value of £8,191,124 and representing 9.3% of the Company's called up share capital at 1 January 2014). During 2014, the Company used 11,818,338 treasury shares (having a total nominal value of £295,458 and representing 0.3% of the Company's called up share capital at 31 December 2014) to satisfy awards under the Free and Matching elements of the Share Incentive Plan (6,051,063 shares in aggregate), awards vested under the Performance Share Plan (1,043,407 shares) and the Restricted Share Plan (3,193,509 shares), and options exercised under the Executive Share Option Plan (1,530,359 shares). The treasury shares utilised in respect of the Share Incentive Plan, the Performance Share Plan and the Restricted Share Plan were disposed of by the Company for nil consideration. The 1,530,359 shares disposed of by the Company in respect of the Executive Share Option Plan were disposed of by the Company for an aggregate consideration of £4,775,649. As at 31 December 2014, the number of shares held in treasury totalled 315,826,614 (having a total nominal value of £7,895,665 and representing 9.1% of the Company's called up share capital at 31 December 2014).
The rights to treasury shares are restricted in accordance with the Companies Act and, in particular, the voting rights attaching to these shares are automatically suspended.
On a show of hands at a general meeting every holder of ordinary shares present in person and entitled to vote shall have one vote, and every proxy entitled to vote shall have one vote (unless the proxy is appointed by more than one member in which case the proxy has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution; or if the proxy has been instructed by one or more shareholders to vote either for or against a resolution and by one or more of those shareholders to use his discretion how to vote). On a poll, every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. Subject to the relevant statutory provisions and the Company's Articles of Association, holders of ordinary shares are entitled to a dividend where declared or paid out of prots available for such purposes. Subject to the relevant statutory provisions and the Company's Articles of Association, on a return of capital on a winding-up, holders of ordinary shares are entitled, after repayment of the £1 Special Share, to participate in such a return. There are no redemption rights in relation to the ordinary shares.
The Special Share is held on behalf of the Secretary of State for Business, Innovation and Skills (the 'Special Shareholder'). Certain provisions of the Company's Articles of Association cannot be amended without the consent of the Special Shareholder. These provisions include the requirement that no foreign person, or foreign persons acting in concert, can have more than a 15% voting interest in the Company, the requirement that the majority of the directors are British, and the requirement that the Chief Executive and any executive Chairman are British.
The holder of the Special Share is entitled to attend a general meeting, but the Special Share carries no right to vote or any other rights at any such meeting, other than to speak in relation to any business in respect of the Special Share. Subject to the relevant statutory provisions and the Company's Articles of Association, on a return of capital on a winding-up, the holder of the Special Share shall be entitled to repayment of the £1 capital paid up on the Special Share in priority to any repayment of capital to any other members.
The holder of the Special Share has the right to require the Company to redeem the Special Share at par or convert the Special Share into one ordinary share at any time.
The restrictions on the transfer of shares in the Company are as follows:
– awards of shares made under the Company's Long-Term Incentive Plan 2014, Deferred Bonus Plan and Share Incentive Plan are subject to restrictions on the transfer of shares prior to vesting and/or release.
The Company is not aware of any arrangements between its shareholders that may result in restrictions on the transfer of shares and/or voting rights.
As at 18 February 2015, the Company had been advised of the following signicant direct and indirect interests in the issued ordinary share capital of the Company:
| Name of shareholder | Percentage notied |
|---|---|
| AXA S.A. and its group of companies | 5.00% |
| Barclays PLC | 3.98% |
| BlackRock, Inc. | 5.00% |
| The Capital Group Companies, Inc. | 6.13% |
| Franklin Resources Inc., and afliates | 4.92% |
| Invesco Limited | 9.97% |
| Silchester International Investors LLP | 3.01% |
The Trustees of the employee trusts do not seek to exercise voting rights on shares held in the employee trusts other than on the direction of the underlying beneciaries. No voting rights are exercised in relation to shares unallocated to individual beneciaries.
The notice of any general meeting shall specify the deadline for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be proposed at the general meeting. The number of proxy votes for, against or withheld in respect of each resolution are publicised on the Company's website after the meeting.
Subject to certain nationality requirements mentioned below, the Company may by ordinary resolution appoint any person to be a director.
The majority of directors holding ofce must be British. Otherwise, the directors who are not British shall vacate ofce in such order that those who have been in ofce for the shortest period since their appointment shall vacate their ofce rst, unless all of the directors otherwise agree among themselves. Any director who holds the ofce of either Chairman (in an executive capacity) or Chief Executive shall also be British.
The Company must have six directors holding ofce at all times. If the number is reduced to below six, then such number of persons shall be appointed as directors as soon as is reasonably practicable to reinstate the number of directors to six. The Company may by ordinary resolution from time to time vary the minimum number of directors.
At each AGM of the Company, any director who was elected or last re-elected at or before the AGM held in the third calendar year before the then current calendar year must retire by rotation and such further directors must retire by rotation so that in total one-third of the directors retire by rotation each year. A retiring director is eligible for re-election. It is the Board's intention that all directors will stand for election or re-election in 2015 in compliance with the UK Corporate Governance Code.
The Company's Articles of Association may only be amended by a special resolution at a general meeting of shareholders. Where class rights are varied, such amendments must be approved by the members of each class of shares separately.
In addition, certain provisions of the Articles of Association cannot be amended without the consent of the Special Shareholder. These provisions include the requirement that no foreign person, or foreign persons acting in concert, can have more than a 15% voting interest in the Company, the requirement that the majority of the directors are British, and the requirement that the Chief Executive and any executive Chairman are British.
The directors are responsible for the management of the business of the Company and may exercise all powers of the Company subject to applicable legislation and regulation, and the Articles of Association.
At the 2014 AGM, the directors were given the power to buy back a maximum number of 317,455,371 ordinary shares at a minimum price of 2.5p each. The maximum price was the higher of (i) an amount equal to 105% of the average of the middle market quotations of the Company's ordinary shares as derived from the London Stock Exchange Daily Ofcial List for the ve business days immediately preceding the day on which such ordinary shares are contracted to be purchased, and (ii) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange as stipulated in Article 5(1) of the Buy-back and Stabilisation Regulation.
This power will expire at the earlier of the conclusion of the 2015 AGM or 30 June 2015. A special resolution will be proposed at the 2015 AGM to renew the Company's authority to acquire its own shares.
At the 2014 AGM, the directors were given the power to issue new shares up to a nominal amount of £26,451,968. This power will expire on the earlier of the conclusion of the 2015 AGM or 30 June 2015. Accordingly, a resolution will be proposed at the 2015 AGM to renew the Company's authority to issue further new shares. At the 2014 AGM, the directors were also given the power to issue new issue shares up to a further nominal amount of £26,451,968 in connection with an offer by way of a rights issue. This authority too will expire on the earlier of the conclusion of the 2015 AGM or 30 June 2015, and a resolution will be proposed at the 2015 AGM to renew this additional authority.
As permitted under the Companies Act 2006, the Company's Articles of Association contain provisions which enable the Board to authorise conicts or potential conicts that individual directors may have.
To avoid potential conicts of interest the Board requires the Nominations Committee to check that any individuals it nominates for appointment to the Board are free of potential conicts. In addition, the Board's procedures and the induction programme for new directors emphasise a director's personal responsibility for complying with the duties relating to conicts of interest. The procedure adopted by the Board for the authorisation of conicts reminds directors of the need to consider their duties as directors and not grant an authorisation unless they believe, in good faith, that this would be likely to promote the success of the Company. As required by law, the potentially conicted director cannot vote on an authorisation resolution or be counted in the quorum. Any authorisation granted may be terminated at any time and the director is informed of the obligation to inform the Company without delay should there be any material change in the nature of the conict or potential conict so authorised.
The Company has entered into deeds of indemnity with all its current directors and those persons who were directors for any part of 2014 which are qualifying indemnity provisions for the purpose of the Companies Act 2006.
The directors of BAE Systems Pension Funds Trustees Limited, BAE Systems 2000 Pension Plan Trustees Limited, BAE Systems Executive Pension Scheme Trustees Limited and Alvis Pension Scheme Trustees Limited benet from indemnities in the governing documentation of the BAE Systems Pension Scheme, the BAE Systems 2000 Pension Plan, the BAE Systems Executive Pension Scheme and the Alvis Pension Scheme, respectively, which are qualifying indemnity provisions for the purpose of the Companies Act 2006.
All such indemnity provisions are in force as at the date of this Directors' Report.
Change of control – signicant agreements The following signicant agreements contain provisions entitling the counterparties to exercise termination, alteration or other similar rights in the event of a change of control of the Company:
The Company and EADS have agreed that if Finmeccanica acquires a controlling interest in the Company, EADS will increase its shareholding in MBDA to 50% by purchasing the appropriate number of shares in MBDA at fair market value.
– The Company, BAE Systems, Inc., BAE Systems (Holdings) Limited and BAE Systems Holdings Inc. entered into a Special Security Agreement dated 8 November 2010 with the US Department of Defense regarding the management of BAE Systems, Inc. in order to comply with the US government's national security requirements. In the event of a change of control of the Company, the Agreement may be terminated or altered by the US Department of Defense.
– In July 2009, BVT Surface Fleet Limited (now BAE Systems Surface Ships Limited) and the UK Ministry of Defence (MoD) entered into a denitive Terms of Business Agreement (ToBA) which sets out a 15-year partnering arrangement, including lead roles for the BVT business on dened surface shipbuilding and support programmes. Where the MoD considers that a proposed change of control of BAE Systems Surface Ships Limited would be contrary to the defence, national security or national interest of the UK, then the change of control shall not proceed until agreement with the MoD is established. In the event that there is a change of control of BAE Systems Surface Ships Limited notwithstanding the objection of the MoD on such grounds, the MoD shall be entitled to terminate the ToBA immediately without compensation or termination charges.
On 30 September 2014, BAE Systems Surface Ships Limited and the MoD entered into an agreement which sets out terms for the progressive suspension, amendment and termination of the ToBA through the entering into of other contracts, such as the Maritime Support Delivery Framework (MSDF) agreement (see below) which triggered the deletion of elements of the ToBA relating to surface ship support. The current scope of the ToBA has, therefore, been reduced to focus on surface shipbuilding and the MoD retains its right to terminate the ToBA if there is a change of control notwithstanding the objection of the MoD.
– The MSDF agreement between BAE Systems Surface Ships Limited and the MoD became effective on 1 October 2014 and establishes a framework until March 2019 for the provision of surface ship support work and services relating to HM Naval Base Portsmouth. Where the MoD considers that a proposed change of control of BAE Systems Surface Ships Limited would be contrary to the defence, national security or national interest of the UK, then the change of control shall not proceed until agreement with the MoD is established. If there is a change of control without notice or notwithstanding the objection of the MoD, the MoD shall be entitled to terminate the MSDF.
In addition, the Company's share plans contain provisions as a result of which options and awards may vest and become exercisable on a change of control of the Company in accordance with the rules of the plans.
KPMG LLP have indicated their willingness to be re-appointed as the auditors for the Company and a resolution proposing their re-appointment will be put to the AGM.
The directors are responsible for preparing the Annual Report, and the Group and parent company nancial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare Group and parent company nancial statements for each nancial year. Under that law they are required to prepare the Group nancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and applicable law, and have elected to prepare the parent company nancial statements in accordance with UK accounting standards and applicable law (UK Generally Accepted Accounting Practice).
Under company law the directors must not approve the nancial statements unless they are satised that they give a true and fair view of the state of affairs of the Group and parent company, and of their prot or loss for that period. In preparing each of the Group and parent company nancial statements, the directors are required to:
The directors are responsible for keeping adequate accounting records that are sufcient to show and explain the parent company's transactions, and disclose with reasonable accuracy at any time the nancial position of the parent company and enable them to ensure that its nancial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group, and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a strategic report, directors' report, directors' remuneration report and corporate governance statement that comply with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and nancial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of nancial statements may differ from legislation in other jurisdictions.
The directors who held ofce at the date of approval of this Directors' Report conrm that, so far as they are each aware, there is no relevant audit information of which the Company's auditors are unaware; and each director has taken all the steps that he/she ought to have taken to make himself/herself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.
On behalf of the Board
Company Secretary 18 February 2015
Each of the directors listed below conrms that to the best of their knowledge:
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 performance, business model and strategy.
| Sir Roger Carr | Chairman |
|---|---|
| Ian King | Chief Executive |
| Jerry DeMuro | President and Chief Executive Ofcer of BAE Systems, Inc. |
| Peter Lynas | Group Finance Director |
| Harriet Green | Non-executive director |
| Chris Grigg | Non-executive director |
| Paula Rosput Reynolds | Non-executive director |
| Nick Rose | Non-executive director |
| Carl Symon | Non-executive director |
| Ian Tyler | Non-executive director |
On behalf of the Board
Chairman 18 February 2015
to the members of BAE Systems plc only
We have audited the nancial statements of BAE Systems plc for the year ended 31 December 2014 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Group and parent company balance sheets, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and related notes. In our opinion:
In arriving at our audit opinion above on the nancial statements the risks of material misstatement that had the greatest effect on our audit were as follows:
Refer to page 62 (Audit Committee Report) and page 108 (accounting policy and nancial disclosures)
A signicant proportion of the Group's revenues and prots are derived from long-term contracts.
These contracts include complex technical and commercial risks and often specify performance milestones to be achieved throughout the contract period, which can last many years. This results in estimates and assumptions being made to:
The risk of misstatement is that the accounting for the Group's signicant contracts does not accurately reect the status of the relevant contract.
The directors have detailed procedures and processes, called Lifecycle Management (LCM), in place to manage the commercial, technical and nancial aspects of the Group's long-term contracts. The LCM process includes the regular preparation of a Contract Status Report (CSR) which includes key accounting information for the relevant contract.
We considered the design and tested the effective operation of key controls within the LCM process and supporting contract-related balances, including:
For signicant contracts, determined on the basis of the current and future technical or commercial complexity, nancial signicance and any forecast to be in signicant loss-making positions, we also:
The contracts requiring the highest degree of judgement that occupied a signicant proportion of the audit effort and discussion with management included:
We also considered the adequacy of the Group's segmental disclosures in respect of changes in the status of contracts which had a material impact on the Group's nancial performance for the year.
Refer to page 62 (Audit Committee Report) and page 118 (accounting policy and nancial disclosures)
An impairment charge of £87m was recognised against the US Cash-Generating Units in the period (2013 £865m impairment).
The uncertainty over future US defence spending and the importance of securing certain export contracts increases the risk that the goodwill allocated to the Group's US Cash-Generating Units will not be recoverable.
Due to the inherent uncertainty involved in forecasting and discounting future cash ows, which are the basis of the assessment of recoverability, this is one of the key judgemental areas that our audit is concentrated on.
The directors' annual goodwill impairment testing is based on the Group's ve-year Integrated Business Plan, as approved by the Board.
We considered the Group's budgeting procedures upon which the forecasts are based and the principles and integrity of the Group's discounted cash ow model. To support the reasonableness of those cash ows, we assessed the historical accuracy of the Group's forecasting and considered the forecasts with reference to publicly available information regarding future defence expenditure.
We compared the Group's assumptions to externally-derived data (for example, bond yields and ination statistics) where possible. We conducted our own assessments in relation to other key inputs, such as projected economic growth and gearing leverage. We also used our own valuation specialists in assessing the overall discount rates used.
As an additional sense check to challenge the recoverable values of Cash-Generating Units, we performed a breakeven analysis on the key assumptions and compared the sum of discounted cash ows to the Group's market capitalisation.
We assessed whether the Group's disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reected the risks inherent in the valuation of goodwill.
Refer to page 62 (Audit Committee Report) and page 134 (accounting policy and nancial disclosures)
As presented in note 21 of the nancial statements, the Group's share of the pension schemes' net decit was £5.5bn after allocating £1.4bn to equity accounted investments and other participating employers.
Small changes in assumptions and estimates used to value the Group's retirement benet obligation, including those supporting the proportion allocated to equity accounted investments and other participating employers, have a signicant impact on the Group's share of the retirement benet obligation.
In respect of the multi-employer allocation: We considered whether the methodology used by the directors, to allocate a proportion of the Group's retirement benet obligation to the equity accounted investments and other participating employers, was appropriate. We assessed this estimate with reference to agreements between the Group and the equity accounted investments and other participating employers, which we examined.
We challenged the key assumptions supporting the Group's retirement benet obligations valuation, with input from our own actuarial specialists. This included a comparison of the discount rate, ination and life expectancy assumptions used against externally-derived data. In order to sense check the reasonableness of these assumptions, we performed a benchmarking exercise against comparator companies' assumptions. We also agreed scheme assets to external valuations.
We considered the adequacy of the Group's disclosures in respect of these key assumptions, including the sensitivity of the decit to changes.
Accruals for tax contingencies require the directors to make judgements and estimates in relation to tax risks. This is one of the key judgemental areas that our audit is concentrated on due to the Group operating in a number of tax jurisdictions and the complexities of international tax legislation.
The tax matters are at various stages, from preliminary discussions with tax authorities through to tax tribunal or court proceedings where the matters can take many years to resolve. The risk to the nancial statements is that the eventual resolution of a matter with tax authorities is at an amount materially different to the estimated accrual.
Together with our own tax specialists, we considered any large or unusual items in the effective tax reconciliation and whether or not these current year items would indicate a requirement for further accruals.
In considering the judgements and estimates of tax accruals, we used our own international and local tax specialists to assess the Group's tax positions. This included the assessment of its correspondence with the relevant tax authorities and the Company's external tax advisers; we also used our knowledge and experience of the application of the international and local legislation by the relevant authorities and courts in order to challenge the positions taken by management. In support of these discussions, we separately met with certain key external tax advisers of the Company.
We have also considered the adequacy of the Group's tax disclosures.
calculations.
The materiality for the Group nancial statements as a whole was set at £80m, determined with reference to a benchmark of Group prot before tax, excluding the impairment charge for the year of £170m as disclosed on the face of the Consolidated Income Statement. This represents 7.6% of the adjusted benchmark.
We reported to the Audit Committee any corrected or uncorrected identied misstatements exceeding £4m for income statement items, in addition to other identied misstatements that warranted reporting on qualitative grounds.
FINANCIAL STATEMENTS
GOVERNANCE
Governance
Of the Group's 36 reporting components, we subjected ten to audits for Group reporting purposes and nine to specied risk-focused audit procedures. The latter were not individually nancially signicant enough to require an audit for Group reporting purposes, but did present specic individual risks that needed to be addressed.
The components within the scope of our work accounted for the following percentages of the Group's results:
| Number of components |
Group revenue % |
Group prot before tax % |
Group total assets % |
|
|---|---|---|---|---|
| Audits for Group reporting purposes1 | 10 | 68 | 73 | 83 |
| Specied risk-focused audit procedures2 | 9 | 24 | 16 | 13 |
| Total | 19 | 92 | 89 | 96 |
In the UK, US, Saudi Arabia and Australia.
In the UK and US.
For the remaining components, we performed analysis at an aggregated level to re-examine our assessment that there were no signicant risks of material misstatement within these.
The Group audit team instructed component auditors as to the signicant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team approved the component materialities, which ranged from £8m to £40m, having regard to the mix of size and risk prole of the Group across the components. The work on 17 of the 19 components was performed by component auditors and the rest by the Group audit team.
The Group audit team held a global audit conference in the year, where all signicant components came together in London to consider the audit risk and strategy. In addition, the Group audit team visited component teams in the UK, US, Saudi Arabia and Australia, to assess the audit risk and strategy, discuss and moderate the results of controls testing and discuss preliminary ndings of components' nal procedures. Video and telephone conference meetings were also held with these component auditors and the others that were not physically visited. At these visits and meetings, the ndings reported to the Group audit team were discussed in more detail, and any further work required by the Group audit team was then performed by the component auditor.
Under International Standards on Auditing (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identied other information in the Annual Report that contains a material inconsistency with either that knowledge or the nancial statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
Under the Listing Rules we are required to review:
We have nothing to report in respect of the above responsibilities.
As explained more fully in the directors' responsibilities statement set out on page 97, the directors are responsible for the preparation of the nancial statements and for being satised that they give a true and fair view. A description of the scope of an audit of nancial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the Company's members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/ auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
Senior Statutory Auditor
For and on behalf of
KPMG LLP Statutory Auditor
Chartered Accountants 15 Canada Square London, E14 5GL 18 February 2015
| GROUP ACCOUNTS | |
|---|---|
| Preparation | 102 |
| Consolidated Income Statement | 104 |
| Consolidated Statement | |
| of Comprehensive Income | 105 |
| Consolidated Statement | |
| of Changes in Equity | 105 |
| Consolidated Balance Sheet | 106 |
| Consolidated Cash Flow Statement | 107 |
| 1. Segmental analysis | 108 |
| 2. Operating costs | 111 |
| 3. Employees | 112 |
| 4. Other income | 112 |
| 5. Finance costs | 113 |
| 6. Taxation expense | 114 |
| 7. Held for sale | 117 |
| 8. Earnings per share | 117 |
| 9. Intangible assets | 118 |
| 10. Property, plant and equipment | 121 |
| 11. Investment property | 124 |
| 12. Equity accounted investments | 125 |
| 13. Trade and other receivables | 127 |
| 14. Other nancial assets and liabilities | 128 |
|---|---|
| 15. Deferred tax | 129 |
| 16. Inventories | 131 |
| 17. Cash and cash equivalents | 131 |
| 18. Geographical analysis of assets | 131 |
| 19. Loans and overdrafts | 132 |
| 20. Trade and other payables | 133 |
| 21. Retirement benet obligations | 134 |
| 22. Provisions | 142 |
| 23. Share capital and other reserves | 143 |
| 24. Cash ow analysis | 145 |
| 25. Net (debt)/cash | |
| (as dened by the Group) | 146 |
| 26. Acquisitions | 147 |
| 27. Fair value measurement | 149 |
| 28. Financial risk management | 150 |
| 29. Share-based payments | 152 |
| 30. Related party transactions | 154 |
| 31. Contingent liabilities | |
| and commitments | 155 |
| 32. Group entities | 156 |
| COMPANY ACCOUNTS | |
|---|---|
| Company Balance Sheet | 157 |
| Notes to the Company accounts | 158 |
Group accounting policies
Accounting policies are included within the relevant note to the Group accounts.
The consolidated financial statements of BAE Systems plc have been prepared on a going concern basis, as discussed in the Corporate Governance Report on page 60, and in accordance with EU-endorsed International Financial Reporting Standards (IFRS) and the Companies Act 2006 applicable to companies reporting under IFRS.
The consolidated financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest million. They have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and other relevant financial assets and financial liabilities (including derivative instruments).
Transactions in foreign currencies are translated at the exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rates ruling at the balance sheet date. These exchange differences are recognised in the income statement.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out in the relevant notes. These policies have been applied consistently to all the years presented, unless otherwise stated.
Certain of the Group's principal 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. The critical accounting policies are listed below and explained in more detail in the relevant notes to the Group accounts:
| Critical accounting policy | Description | Notes |
|---|---|---|
| Revenue and profit recognition | 1 | |
| – The recognition of revenue and profit on long-term contracts. |
The majority of long-term contracts are accounted for under IAS 11, Construction Contracts. Revenue on long-term contracts is recognised when performance milestones have been completed. |
|
| The ultimate profitability of long-term contracts is estimated based on estimates of revenue and costs, including allowances for technical and other risks, which are reliant on the knowledge and experience of the Group's project managers, engineers, and finance and commercial professionals. Material changes in these estimates could affect the profitability of individual contracts. |
||
| Revenue and cost estimates are reviewed and updated at least quarterly, and more frequently as determined by events or circumstances. |
||
| Profit is recognised progressively as risks have been mitigated or retired. | ||
| Carrying value of intangible assets | 9 | |
| – The valuation of acquired intangible assets; and |
Acquired intangible assets, excluding goodwill, are valued in line with internationally used models, which require the use of estimates that may differ from actual outcomes. These assets are amortised over their estimated useful lives. Future results are impacted by the amortisation periods adopted and, potentially, any differences between estimated and actual circumstances related to individual intangible assets. |
|
| – the determination of assumptions underpinning goodwill impairment testing. |
Goodwill is not amortised, but is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment review calculations require the use of estimates related to the future profitability and cash-generating ability of the acquired businesses and the pre-tax discount rate used in discounting these projected cash flows. |
|
| Valuation of retirement benefit obligations | 21 | |
| – The determination of assumptions underpinning the valuation of retirement benefit obligations for defined benefit pension schemes; and |
Pension scheme accounting valuations are prepared by independent actuaries. For each of the actuarial assumptions used to measure the Group's pension scheme liabilities, there is a range of possible values and management exercises judgement in deciding the point within that range that most appropriately reflects the Group's circumstances. Small changes in these assumptions can have a significant impact on the size of the deficit. |
|
| – the determination of the share of the pension deficit allocated to the Group's equity accounted investments and other participating employers. |
The Group has allocated a share of the pension deficit to its equity accounted investments and other participating employers using a consistent allocation method intended to reflect a reasonable approximation of their share of the deficit. |
In addition to the critical accounting policies, the directors exercise judgement to determine the amount of tax provisions. Provision is made for known issues based on interpretation of country-specific legislation and the likely outcome of negotiations or litigation. The resolution of tax positions taken by the Group can take a considerable period of time to conclude and, in some cases, it is difficult to predict the outcome. To the extent that the outcome differs from the estimates made, tax adjustments may be required in future periods.
The directors believe that the consolidated financial statements reflect appropriate judgements and estimates, and provide a true and fair view of the Group's financial performance and position.
With effect from 1 January 2014, the Group has adopted the following new standards and amendments to existing standards:
− IAS 28, Investments in Associates and Joint Ventures (revised 2011)
With the exception of new disclosure requirements, none of these have impacted the consolidated financial statements of the Group.
There are no other EU-endorsed IFRSs or IFRIC interpretations that are not yet effective that are expected to have a material impact on the Group.
IFRS 15, Revenue from Contracts with Customers, issued in May 2014, is not yet EU endorsed. Management is in the process of reviewing the impact that this will have on the Group.
IFRS 9, Financial Instruments, issued in July 2014, is not yet EU endorsed. It is not expected to have a material impact on the Group.
The financial statements of the Group consolidate the results of the Company and its subsidiary entities, and include its share of its joint ventures' results accounted for under the equity method, all of which are prepared to 31 December.
A subsidiary is an entity controlled by the Group. The Group controls a subsidiary when it is exposed, or has the rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.
The results of subsidiaries are included in the income statement from the date of acquisition.
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.
Joint ventures are accounted for under the equity method where the Consolidated Income Statement includes the Group's share of their profits and losses, and the Consolidated Balance Sheet includes its share of their net assets within equity accounted investments.
The assets and liabilities of overseas subsidiaries and equity accounted investments are translated at the exchange rates ruling at the balance sheet date. The income statements of such entities are translated at average rates of exchange during the year. All resulting exchange differences are recognised directly in a separate component of equity.
Translation differences that arose before the transition date to IFRS (1 January 2004) are presented in equity, but not as a separate component. When a foreign operation is sold, the cumulative exchange differences recognised in equity since 1 January 2004 are recognised in the income statement as part of the profit or loss on sale.
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| Notes | £m | Total £m |
£m | Total £m |
|
| Continuing operations | |||||
| Combined sales of Group and share of equity accounted investments | 1 | 16,637 | 18,180 | ||
| Less: share of sales of equity accounted investments | 1 | (1,207) | (1,316) | ||
| Revenue | 1 | 15,430 | 16,864 | ||
| Operating costs | 2 | (14,387) | (16,297) | ||
| Other income | 4 | 174 | 128 | ||
| Group operating profit | 1,217 | 695 | |||
| Share of results of equity accounted investments | 1 | 83 | 111 | ||
| Underlying EBITA1 | 1 | 1,702 | 1,925 | ||
| Non-recurring items | 1 | – | 6 | ||
| EBITA | 1,702 | 1,931 | |||
| Amortisation of intangible assets | 1,9 | (184) | (189) | ||
| Impairment of intangible assets | 9 | (170) | (887) | ||
| Financial expense of equity accounted investments | 5 | (30) | (8) | ||
| Taxation expense of equity accounted investments | (18) | (41) | |||
| Operating profit | 1 | 1,300 | 806 | ||
| Financial income | 241 | 216 | |||
| Financial expense | (659) | (600) | |||
| Finance costs | 5 | (418) | (384) | ||
| Profit before taxation | 882 | 422 | |||
| Taxation expense | 6 | (130) | (246) | ||
| Profit for the year | 752 | 176 | |||
| Attributable to: | |||||
| Equity shareholders | 740 | 168 | |||
| Non-controlling interests | 12 | 8 | |||
| 752 | 176 | ||||
| Earnings per share | 8 | ||||
| Basic earnings per share | 23.4p | 5.2p | |||
| Diluted earnings per share | 23.3p | 5.2p | |||
| 2014 | 2013 | ||||||
|---|---|---|---|---|---|---|---|
| Notes | Other reserves1 £m |
Retained earnings £m |
Total £m |
Other reserves1 £m |
Retained earnings £m |
Total £m |
|
| Profit for the year | – | 752 | 752 | – | 176 | 176 | |
| Other comprehensive income | |||||||
| Items that will not be reclassified to the income statement: | |||||||
| Remeasurements on retirement benefit schemes: | |||||||
| Subsidiaries | – | (2,023) | (2,023) | – | 918 | 918 | |
| Equity accounted investments | – | (73) | (73) | – | 8 | 8 | |
| Tax on items that will not be reclassified to the income statement |
6 | – | 503 | 503 | – | (421) | (421) |
| Items that may be reclassified to the income statement: | |||||||
| Currency translation on foreign currency net investments: | |||||||
| Subsidiaries | 251 | – | 251 | (246) | – | (246) | |
| Equity accounted investments | 13 | – | 13 | (3) | – | (3) | |
| Reclassification of cumulative currency translation reserve on disposal |
– | – | – | (8) | – | (8) | |
| Fair value gain on available-for-sale financial assets | – | 4 | 4 | – | – | – | |
| Amounts (charged)/credited to hedging reserve | 14 | (92) | – | (92) | 53 | – | 53 |
| Tax on items that may be reclassified to the income | |||||||
| statement | 6 | 19 | – | 19 | (14) | – | (14) |
| Total other comprehensive income for the year (net of tax) | 191 | (1,589) | (1,398) | (218) | 505 | 287 | |
| Total comprehensive income for the year | 191 | (837) | (646) | (218) | 681 | 463 | |
| Attributable to: | |||||||
| Equity shareholders | 191 | (849) | (658) | (212) | 673 | 461 | |
| Non-controlling interests | – | 12 | 12 | (6) | 8 | 2 | |
| 191 | (837) | (646) | (218) | 681 | 463 | ||
| Issued share capital £m |
Share premium £m |
Other reserves1 £m |
Retained earnings £m |
Total £m |
Non controlling interests £m |
Total equity £m |
|
|---|---|---|---|---|---|---|---|
| 89 | 1,249 | 4,868 | (2,825) | 3,381 | 37 | 3,418 | |
| – | – | – | 740 | 740 | 12 | 752 | |
| – | – | 191 | (1,589) | – | (1,398) | ||
| – | – | – | 42 | 42 | – | 42 | |
| (2) | – | 2 | (281) | – | (281) | ||
| – | – | – | (642) | (14) | (656) | ||
| 87 | 1,249 | 5,061 | (4,555) | 1,842 | 35 | 1,877 | |
| 90 | 1,249 | 5,079 | (2,698) | 3,720 | 54 | 3,774 | |
| – | – | – | 168 | 168 | 8 | 176 | |
| – | – | (212) | 505 | 293 | (6) | 287 | |
| – | – | – | 49 | 49 | – | 49 | |
| (1) | – | 1 | (212) | – | (212) | ||
| – | – | – | (638) | (11) | (649) | ||
| – | – | – | 1 | 1 | (8) | (7) | |
| 89 | 1,249 | 4,868 | (2,825) | 3,381 | 37 | 3,418 | |
| Attributable to equity holders of the parent | (1,398) (281) (642) (212) (638) |
| 2014 | 2013 | ||
|---|---|---|---|
| Notes | £m | £m | |
| Non-current assets | |||
| Intangible assets | 9 | 9,983 | 9,735 |
| Property, plant and equipment | 10 | 1,589 | 1,936 |
| Investment property | 11 | 129 | 135 |
| Equity accounted investments | 12 | 229 | 283 |
| Other investments | 7 | 3 | |
| Other receivables | 13 | 347 | 321 |
| Retirement benefit surpluses | 21 | 162 | 156 |
| Other financial assets | 14 | 38 | 42 |
| Deferred tax assets | 15 | 1,327 | 901 |
| 13,811 | 13,512 | ||
| Current assets | |||
| Inventories | 16 | 690 | 680 |
| Trade and other receivables including amounts due from customers for contract work | 13 | 2,850 | 3,038 |
| Current tax | 7 | 8 | |
| Other financial assets | 14 | 46 | 81 |
| Cash and cash equivalents | 17 | 2,308 | 2,222 |
| Assets held for sale | 7 | 76 | 140 |
| 5,977 | 6,169 | ||
| Total assets | 18 | 19,788 | 19,681 |
| Non-current liabilities | |||
| Loans | 19 | (2,868) | (2,524) |
| Other payables | 20 | (932) | (1,160) |
| Retirement benefit obligations | 21 | (5,530) | (3,665) |
| Other financial liabilities | 14 | (79) | (59) |
| Deferred tax liabilities | 15 | (21) | (7) |
| Provisions | 22 | (436) | (403) |
| (9,866) | (7,818) | ||
| Current liabilities | |||
| Loans and overdrafts | 19 | (482) | (402) |
| Trade and other payables | 20 | (6,670) | (7,074) |
| Other financial liabilities | 14 | (107) | (81) |
| Current tax | (448) | (497) | |
| Provisions | 22 | (315) | (391) |
| Liabilities held for sale | 7 | (23) | – |
| (8,045) | (8,445) | ||
| Total liabilities | (17,911) | (16,263) | |
| Net assets | 1,877 | 3,418 | |
| Capital and reserves | |||
| Issued share capital | 23 | 87 | 89 |
| Share premium | 1,249 | 1,249 | |
| Other reserves | 23 | 5,061 | 4,868 |
| Retained earnings – deficit | (4,555) | (2,825) | |
| Total equity attributable to equity holders of the parent | 1,842 | 3,381 | |
| Non-controlling interests | 35 | 37 | |
| Total equity | 1,877 | 3,418 |
Approved by the Board on 18 February 2015 and signed on its behalf by:
I G King P J Lynas
Chief Executive Group Finance Director
| Notes | 2014 £m |
2013 £m |
|
|---|---|---|---|
| Profit for the year | 752 | 176 | |
| Taxation expense | 6 | 130 | 246 |
| Share of results of equity accounted investments | 1 | (83) | (111) |
| Finance costs | 5 | 418 | 384 |
| Depreciation, amortisation and impairment | 2 | 657 | 1,397 |
| Profit on disposal of property, plant and equipment | 2,4 | (20) | (6) |
| Profit on disposal of investment property | 2,4 | (12) | (13) |
| Profit on disposal of businesses | 2,4 | – | (6) |
| Fair value gain | 4 | (47) | – |
| Cost of equity-settled employee share schemes | 42 | 49 | |
| Movements in provisions | (153) | 63 | |
| Decrease in liabilities for retirement benefit obligations | (345) | (337) | |
| (Increase)/decrease in working capital: | |||
| Inventories | (1) | (35) | |
| Trade and other receivables | 197 | (275) | |
| Trade and other payables | (622) | (1,327) | |
| Cash inflow from operating activities | 913 | 205 | |
| Interest paid | (152) | (177) | |
| Taxation paid | (92) | (138) | |
| Net cash inflow/(outflow) from operating activities | 669 | (110) | |
| Dividends received from equity accounted investments | 12 | 63 | 95 |
| Interest received | 7 | 11 | |
| Purchase of property, plant and equipment, and investment property | (263) | (236) | |
| Purchase of intangible assets | (59) | (33) | |
| Proceeds from sale of property, plant and equipment, and investment property | 539 | 93 | |
| Proceeds from sale of intangible assets | – | 28 | |
| Purchase of subsidiary undertakings | 24 | (233) | (1) |
| Cash and cash equivalents acquired from purchase of subsidiary undertakings | 24 | 3 | – |
| Equity accounted investment funding | 12 | (2) | (5) |
| Proceeds from sale of subsidiary undertakings (net of cash disposed) | – | 5 | |
| Net cash inflow/(outflow) from investing activities | 55 | (43) | |
| Net purchase of own shares | (281) | (212) | |
| Equity dividends paid | 23 | (642) | (638) |
| Dividends paid to non-controlling interests | (14) | (11) | |
| Cash inflow/(outflow) from matured derivative financial instruments | 8 | (47) | |
| Cash inflow/(outflow) from movement in cash collateral | 10 | (10) | |
| Cash inflow from loans | 679 | – | |
| Cash outflow from repayment of loans | (398) | – | |
| Net cash outflow from financing activities | (638) | (918) | |
| Net increase/(decrease) in cash and cash equivalents | 86 | (1,071) | |
| Cash and cash equivalents at 1 January | 2,222 | 3,334 | |
| Effect of foreign exchange rate changes on cash and cash equivalents | 5 | (41) | |
| Cash and cash equivalents at 31 December | 2,313 | 2,222 | |
| Comprising: | |||
| Cash and cash equivalents | 17 | 2,308 | 2,222 |
| Cash and cash equivalents (included within assets held for sale) | 7 | 6 | – |
| Overdrafts | 19 | (1) | – |
| Cash and cash equivalents at 31 December | 2,313 | 2,222 |
Sales include the Group's share of sales of equity accounted investments. Revenue represents sales made by the Company and its subsidiary undertakings, excluding the Group's share of sales of equity accounted investments.
The majority of the Group's long-term contract arrangements are accounted for under IAS 11, Construction Contracts. Sales are recognised when the Group has obtained the right to consideration in exchange for its performance. This is usually when title passes or a separately identifiable phase (milestone) of a contract or development has been completed.
No profit is recognised on contracts until the outcome of the contract can be reliably estimated. Profit is calculated by reference to reliable estimates of contract revenue and forecast costs after making suitable allowances for technical and other risks related to performance milestones yet to be achieved. Profit is recognised progressively as risks have been mitigated or retired.
When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised immediately as an expense.
Revenue is measured at the fair value of the consideration received or receivable, net of returns, rebates and other similar allowances.
Revenue from the sale of goods not under a long-term contract is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, there is no continuing management involvement with the goods, and the amount of revenue and costs can be measured reliably. Profit is recognised at the time of sale.
Revenue from the provision of services not under a long-term contract is recognised in the income statement in proportion to the stage of completion of the contract at the reporting date. The stage of completion is measured on the basis of direct expenses incurred as a percentage of total expenses to be incurred for material contracts and labour hours delivered as a percentage of total labour hours to be delivered for time contracts.
Sales and profits on intercompany trading are determined on an arm's length basis.
The Group undertakes research and development activities either on its own behalf or on behalf of customers.
Where the research and development activity is performed on behalf of customers, the revenue arising is recognised in the income statement in accordance with the Group's revenue recognition policy.
Management uses an underlying profit measure to monitor the year-on-year profitability of the Group, which is defined as earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items. This definition is referred to as underlying EBITA. Underlying EBITA is the measure of profit on which segmental performance is monitored by management. As such, underlying EBITA is disclosed on page 110 on a segmental basis and reconciled to the reporting segment result and operating profit in the consolidated financial statements.
Non-recurring items are defined as items that are relevant to an understanding of the Group's performance with reference to their materiality and nature. As part of a planned reorganisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia and an enhancement of its existing relationship with Riyadh Wings Aviation Academy LLC (Riyadh Wings), BAE Systems has acquired an additional 59% shareholding in Saudi Development and Training Company (SDT) from Riyadh Wings and expects to complete the disposal of its 85.7% shareholding in Aircraft Accessories and Components Company (AACC) during 2015, subject to the satisfaction of certain regulatory approvals. Accordingly, AACC is presented as held for sale at 31 December 2014. Upon classification of AACC as held for sale, the carrying value of the business was in excess of the expected proceeds of the proposed disposal and, therefore, a charge of £47m has been taken in 2014. Upon acquisition of the additional shareholding in SDT and control of the company, the Group has recognised a £47m fair value gain on its existing 40% shareholding. The Group considers the combined impact of these two transactions in Saudi Arabia to meet its definition of non-recurring items, being profit/loss on business transactions, and, therefore, they have been presented within non-recurring items in the Group's income statement.
The Group has six reporting segments which align with the Group's strategic direction:
Management monitors the results of these reporting segments to assess performance and make decisions about the allocation of resources. Segment performance is evaluated based on combined sales of the Group and its share of equity accounted investments, and underlying EBITA. Finance costs and taxation expense are managed on a Group basis.
Following a restructuring of its US operations in 2014 to improve competitiveness, including reduced management and administrative overhead, some activities previously included in the Group's Platforms & Services (US) segment will, from 1 January 2015, be reported within the Cyber & Intelligence segment. Consistent with financial information regularly reviewed by the Group's Executive Committee, the impact of the restructuring on the Group's external reporting segments will be reflected in 2015 and comparatives for 2014 restated at that time.
| Combined sales of Group and share of equity |
Less: sales by equity |
Add: sales to equity |
||||||
|---|---|---|---|---|---|---|---|---|
| accounted investments 2014 |
20131 | accounted investments 2014 |
20131 | accounted investments 2014 |
20131 | Revenue 2014 |
20131 | |
| Electronic Systems | £m 2,415 |
£m 2,466 |
£m (74) |
£m (61) |
£m 74 |
£m 61 |
£m 2,415 |
£m 2,466 |
| Cyber & Intelligence | 1,085 | 1,243 | – | – | – | – | 1,085 | 1,243 |
| Platforms & Services (US) | 3,266 | 3,912 | (83) | (68) | – | – | 3,183 | 3,844 |
| Platforms & Services (UK) | 6,623 | 7,174 | (1,207) | (1,176) | 1,104 | 1,078 | 6,520 | 7,076 |
| Platforms & Services (International) | 3,572 | 4,063 | (793) | (873) | – | – | 2,779 | 3,190 |
| HQ | 279 | 306 | (279) | (306) | – | – | – | – |
| 17,240 | 19,164 | (2,436) | (2,484) | 1,178 | 1,139 | 15,982 | 17,819 | |
| Intra-group sales/revenue | (603) | (984) | – | – | 51 | 29 | (552) | (955) |
| 16,637 | 18,180 | (2,436) | (2,484) | 1,229 | 1,168 | 15,430 | 16,864 |
| Intra-group revenue | Revenue from external customers |
||||
|---|---|---|---|---|---|
| 2014 £m |
20131 £m |
2014 £m |
20131 £m |
||
| Electronic Systems | 104 | 100 | 2,311 | 2,366 | |
| Cyber & Intelligence | 21 | 21 | 1,064 | 1,222 | |
| Platforms & Services (US) | 40 | 36 | 3,143 | 3,808 | |
| Platforms & Services (UK) | 381 | 792 | 6,139 | 6,284 | |
| Platforms & Services (International) | 6 | 6 | 2,773 | 3,184 | |
| 552 | 955 | 15,430 | 16,864 |
| Intra-group revenue | external customers | |||
|---|---|---|---|---|
| 2014 £m |
20131 £m |
2014 £m |
20131 £m |
|
| Electronic Systems | 104 | 100 | 2,311 | 2,366 |
| Cyber & Intelligence | 21 | 21 | 1,064 | 1,222 |
| Platforms & Services (US) | 40 | 36 | 3,143 | 3,808 |
| Platforms & Services (UK) | 381 | 792 | 6,139 | 6,284 |
| Platforms & Services (International) | 6 | 6 | 2,773 | 3,184 |
| 552 | 955 | 15,430 | 16,864 | |
| Sales and revenue by customer location | ||||
| Sales | Revenue | |||
| 2014 | 2013 | 2014 | 2013 | |
| UK | £m 3,703 |
£m 3,678 |
£m 3,518 |
£m 3,515 |
| Rest of Europe2 | 2,215 | 2,361 | 1,514 | 1,565 |
| US | 5,979 | 6,686 | 5,978 | 6,685 |
| Canada | 51 | 49 | 51 | 49 |
| Saudi Arabia | 3,320 | 3,556 | 3,153 | 3,430 |
| Rest of Middle East | 154 | 241 | 124 | 130 |
| Australia | 682 | 822 | 680 | 819 |
| Rest of Asia and Pacific | 420 | 616 | 326 | 516 |
| Africa, and Central and South America | 113 | 171 | 86 | 155 |
| 16,637 | 18,180 | 15,430 | 16,864 |
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Long-term contracts | 8,687 | 9,618 |
| Sale of goods | 3,211 | 3,576 |
| Provision of services | 3,518 | 3,665 |
| Royalty income | 14 | 5 |
| 15,430 | 16,864 |
Re-presented for the transfer of the UK Munitions business from Platforms & Services (US) to Platforms & Services (UK) from 1 January 2014.
Includes £1.1bn (2013 £1.0bn) generated under the Typhoon work share agreement with Eurofighter Jagdflugzeug GmbH.
Revenue from the Group's three principal customers, which individually represent over 10% of total revenue, is as follows:
| 2014 £m |
2013 £m |
|
|---|---|---|
| UK Ministry of Defence1 | 4,230 | 4,196 |
| US Department of Defense | 3,655 | 4,347 |
| Kingdom of Saudi Arabia Ministry of Defence and Aviation | 3,124 | 3,399 |
Revenue from the UK Ministry of Defence and the US Department of Defense was generated by the five principal reporting segments. Revenue from the Kingdom of Saudi Arabia Ministry of Defence and Aviation was generated by the Platforms & Services (UK) and Platforms & Services (International) reporting segments.
| Underlying EBITA2 | Non-recurring items4 | Amortisation of intangible assets |
Impairment of intangible assets |
Reporting segment result |
||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 20133 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 20133 | |
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| Electronic Systems | 373 | 346 | – | – | (14) | (15) | (1) | (4) | 358 | 327 |
| Cyber & Intelligence | 123 | 115 | – | – | (58) | (63) | – | (425) | 65 | (373) |
| Platforms & Services (US) | 147 | 229 | – | 7 | (18) | (21) | (169) | (458) | (40) | (243) |
| Platforms & Services (UK) | 772 | 915 | – | – | (84) | (84) | – | – | 688 | 831 |
| Platforms & Services | ||||||||||
| (International) | 366 | 429 | – | (1) | (10) | (6) | – | – | 356 | 422 |
| HQ5 | (79) | (109) | – | – | – | – | – | – | (79) | (109) |
| 1,702 | 1,925 | – | 6 | (184) | (189) | (170) | (887) | 1,348 | 855 | |
| Financial expense of equity accounted investments |
(30) | (8) | ||||||||
| Taxation expense of equity accounted investments |
(18) | (41) | ||||||||
| Operating profit | 1,300 | 806 | ||||||||
| Finance costs | (418) | (384) | ||||||||
| Profit before taxation | 882 | 422 | ||||||||
| Taxation expense | (130) | (246) | ||||||||
| Profit for the year | 752 | 176 | ||||||||
| Share of results of equity accounted investments within reporting segments | ||||||||||
| 2014 £m |
20133 £m |
|||||||||
| Underlying EBITA2: | ||||||||||
| Electronic Systems | 2 | 3 | ||||||||
| Platforms & Services (US) | 12 | 5 | ||||||||
| Platforms & Services (UK) | 21 | 15 | ||||||||
| Platforms & Services (International) | 70 | 112 | ||||||||
| HQ | 31 | 25 | ||||||||
| 136 | 160 | |||||||||
| Amortisation of intangible assets | (5) | – | ||||||||
| Financial expense | (30) | (8) | ||||||||
| Taxation expense | (18) | (41) | ||||||||
| 83 | 111 |
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
Re-presented for the transfer of the UK Munitions business from Platforms & Services (US) to Platforms & Services (UK) from 1 January 2014.
In 2014, Platforms & Services (International) comprises a £47m gain upon acquisition of an additional 59% shareholding in Saudi Development and Training Company and control of the company, and a £47m charge against the carrying value of Aircraft Accessories and Components Company upon classification of the business as held for sale (see note 7).
In 2014, the HQ reporting segment includes a £30m benefit (2013 £nil) from re-assessment of a long-term liability. In 2013, there was a £32m charge in respect of a US contract pricing dispute.
Payments, including any incentives, made under operating leases are recognised in the income statement on a straight-line basis over the lease term.
Lease incentives granted are charged to the income statement over the term of the lease.
The Group undertakes research and development activities either on its own behalf or on behalf of customers.
Group-funded expenditure on both research and development activities not meeting the conditions for capitalisation is written off as incurred and charged to the income statement.
Customer-funded expenditure on research and development activities is held in long-term contract balances as a contract cost within trade and other receivables and recognised in the income statement in accordance with the Group's revenue recognition policy.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Raw materials, subcontracts and other bought-in items | 6,114 | 6,205 |
| Change in inventories of finished goods and work-in-progress | 8 | 275 |
| Cost of inventories expensed | 6,122 | 6,480 |
| Staff costs (note 3) | 4,827 | 5,054 |
| Depreciation, amortisation and impairment | 657 | 1,397 |
| Loss on disposal of property, plant and equipment, and investment property | 1 | 9 |
| Loss on disposal of businesses | – | 4 |
| Other operating charges | 2,780 | 3,353 |
| Operating costs | 14,387 | 16,297 |
| Included within the analysis of operating costs are the following expenses: | ||
| Lease and sublease expense | 242 | 185 |
| Research and development expense including amounts funded under contract | 1,343 | 1,0371 |
|---|---|---|
| 2014 | 2013 | ||||||
|---|---|---|---|---|---|---|---|
| UK £'000 |
Overseas £'000 |
Total £'000 |
UK £'000 |
Overseas £'000 |
Total £'000 |
||
| Fees payable to the Company's auditor for the audit of the Company's annual accounts* |
1,669 | – | 1,669 | 1,621 | – | 1,621 | |
| Fees payable to the Company's auditor and its associates for other services pursuant to legislation: |
|||||||
| The audit of the Company's subsidiaries* | 2,652 | 3,388 | 6,040 | 2,628 | 3,994 | 6,622 | |
| Interim review* | 485 | – | 485 | 486 | – | 486 | |
| Other | 200 | 2 | 202 | 41 | 2 | 43 | |
| Audit-related assurance services: | |||||||
| Advice on accounting matters | 9 | 2 | 11 | 9 | 1 | 10 | |
| Tax compliance services | 7 | 637 | 644 | 76 | 512 | 588 | |
| Tax advisory services | 59 | 141 | 200 | 63 | 185 | 248 | |
| Corporate finance services: | |||||||
| M&A | – | – | – | 108 | – | 108 | |
| Other assurance services: | |||||||
| Due diligence | – | 134 | 134 | – | 40 | 40 | |
| IT advisory | 123 | – | 123 | 77 | – | 77 | |
| Financial model reviews | – | – | – | 169 | – | 169 | |
| Other non-audit services | 515 | 19 | 534 | 88 | 93 | 181 | |
| Total fees payable to the Company's auditor and its associates | 5,719 | 4,323 | 10,042 | 5,366 | 4,827 | 10,193 | |
| * Total fees payable to the Company's auditor and its associates | |||||||
| for audit services and interim review | 8,194 | 8,729 | |||||
| Fees in respect of BAE Systems pension schemes: | |||||||
| Audit | 139 | 214 | 353 | 146 | 256 | 402 | |
| Tax compliance | 44 | – | 44 | 47 | 6 | 53 | |
| Tax advisory | – | – | – | 31 | – | 31 | |
| 183 | 214 | 397 | 224 | 262 | 486 |
FINANCIAL STATEMENTS
GOVERNANCE STRATEGIC REPORT
The weekly average and year-end numbers of employees, excluding those in equity accounted investments, were as follows:
| Weekly average | At year end | ||||
|---|---|---|---|---|---|
| 2014 Number '000 |
20131 Number '000 |
2014 Number '000 |
20131 Number '000 |
||
| Electronic Systems | 12 | 12 | 12 | 12 | |
| Cyber & Intelligence | 8 | 8 | 8 | 8 | |
| Platforms & Services (US) | 17 | 19 | 16 | 18 | |
| Platforms & Services (UK) | 29 | 29 | 29 | 29 | |
| Platforms & Services (International) | 10 | 11 | 10 | 10 | |
| HQ | 1 | 1 | 1 | 1 | |
| 77 | 80 | 76 | 78 |
The aggregate staff costs of Group employees, excluding employees of equity accounted investments, were as follows:
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Wages and salaries | 4,184 | 4,367 |
| Social security costs | 334 | 352 |
| Share-based payments (note 29) | 14 | 21 |
| Pension costs – defined contribution plans (note 21) | 125 | 130 |
| Pension costs – defined benefit plans (note 21) | 169 | 183 |
| US healthcare costs (note 21) | 1 | 1 |
| 4,827 | 5,054 |
Rental income is recognised in other income on a straight-line basis over the term of the relevant lease.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Rental income from operating leases – investment property | 21 | 21 |
| Rental income from operating leases – other | 20 | 20 |
| Profit on disposal of property, plant and equipment | 21 | 12 |
| Profit on disposal of investment property | 12 | 16 |
| Profit on disposal of businesses | – | 10 |
| Fair value gain1 (note 26) | 47 | – |
| Management recharges to equity accounted investments (note 30) | 17 | 17 |
| Other2 | 36 | 32 |
| Other income | 174 | 128 |
company (see non-recurring items in note 1).
Interest income and borrowing costs are recognised in the income statement in the period in which they are incurred.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Interest income | 28 | 48 |
| Gain on remeasurement of financial instruments at fair value through profit or loss | 99 | 51 |
| Foreign exchange gains | 114 | 117 |
| Financial income | 241 | 216 |
| Interest expense on bonds and other financial instruments | (177) | (197) |
| Facility fees | (4) | (11) |
| Net present value adjustments | (48) | (20) |
| Net interest expense on retirement benefit obligations (note 21) | (147) | (186) |
| Loss on remeasurement of financial instruments at fair value through profit or loss | (75) | (146) |
| Foreign exchange losses | (208) | (40) |
| Financial expense | (659) | (600) |
| Finance costs | (418) | (384) |
| Additional analysis | ||
| 2014 | 2013 | |
| £m | £m | |
| Finance costs: | ||
| Group | (418) | (384) |
| Share of equity accounted investments | (30) | (8) |
| (448) | (392) | |
| Analysed as: | ||
| Underlying interest (expense)/income: | ||
| Group | (201) | (180) |
| Share of equity accounted investments | (3) | 1 |
| (204) | (179) | |
| Other: | ||
| Group: | ||
| Net interest expense on retirement benefit obligations | (147) | (186) |
| Fair value and foreign exchange adjustments on financial instruments and investments | (70) | (18) |
| Share of equity accounted investments: | ||
| Net interest expense on retirement benefit obligations | (8) | (9) |
| Fair value and foreign exchange adjustments on financial instruments and investments | (19) | – |
| (448) | (392) |
Income tax expense comprises current and deferred tax. Current and deferred tax is recognised in profit or loss except to the extent that it relates to a business combination or items recognised directly in equity or other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for temporary differences:
– arising on the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Current taxation | ||
| UK: | ||
| Current tax | (90) | (179) |
| Double tax relief | 1 | 1 |
| Adjustment in respect of prior years | 24 | (16) |
| (65) | (194) | |
| Overseas: | ||
| Current year | (56) | (106) |
| Adjustment in respect of prior years1 | 20 | 22 |
| (36) | (84) | |
| (101) | (278) |
Deferred taxation
| UK: | |
|---|---|
| Origination and reversal of temporary differences | 21 | 22 |
|---|---|---|
| Adjustment in respect of prior years | 8 | 25 |
| Tax rate adjustment2 | – | (8) |
| 29 | 39 | |
| Overseas: | ||
| Origination and reversal of temporary differences | (67) | 6 |
| Adjustment in respect of prior years | 9 | (13) |
| (58) | (7) | |
| (29) | 32 | |
| Taxation expense | (130) | (246) |
| UK | (36) | (155) |
| Overseas | (94) | (91) |
| Taxation expense | (130) | (246) |
2014 includes a £51m credit in respect of the re-assessment of existing tax provisions. The complexity and duration of some of the Group's activities can result in delays in agreeing and closing certain tax positions. The Group continually updates its estimates for those positions whenever new information becomes available. The £51m credit relates to one such position in respect of an overseas issue where information received in the year enabled the estimate to be updated.
The UK current tax rate was reduced from 23% to 21% with effect from 1 April 2014, and will be reduced to 20% with effect from 1 April 2015. In line with this change, the rate applying to UK deferred tax assets and liabilities was reduced from 23% to 20%, creating a rate adjustment in 2013, which is partly reflected in the Consolidated Income Statement and partly in the Consolidated Statement of Comprehensive Income.
The following table reconciles the theoretical income tax expense, using the UK corporation tax rate, to the reported tax expense. The reconciling items represent, besides the impact of tax rate differentials and changes, non-taxable benefits or non-deductible expenses arising from differences between the local tax base and the reported financial statements.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Profit before taxation | 882 | 422 |
| UK corporation tax rate | 21.5% | 23.25% |
| Expected income tax expense | (190) | (98) |
| Effect of tax rates in foreign jurisdictions, including US state taxes | (18) | (24) |
| Expenses not tax effected | (12) | (9) |
| Income not subject to tax | 17 | 17 |
| Research and development tax credits and patent box benefits | 29 | 39 |
| Non-deductible goodwill impairment | (35) | (201) |
| Chargeable gains and non-taxable gains/non-deductible losses on disposal of businesses | – | (1) |
| Utilisation of previously unrecognised tax losses | 3 | 5 |
| Recoverable deferred tax asset previously unrecognised | – | 5 |
| Adjustments in respect of prior years1 | 61 | 18 |
| Adjustments in respect of equity accounted investments | 18 | 26 |
| Tax rate adjustment2 | – | (8) |
| Other | (3) | (15) |
| Taxation expense | (130) | (246) |
| Calculation of the underlying effective tax rate | ||
| 2014 | 2013 | |
| £m | £m | |
| Profit before taxation | 882 | 422 |
| Add back/(deduct): | ||
| Taxation expense of equity accounted investments (note 1) | 18 | 41 |
| Non-recurring items (note 1) | – | (6) |
| Goodwill impairment (note 9) | 161 | 865 |
| 1,061 | 1,322 | |
| Taxation expense | (130) | (246) |
| Taxation expense of equity accounted investments (note 1) | (18) | (41) |
| Taxation expense (including equity accounted investments) | (148) | (287) |
| Exclude: Re-assessment of existing tax provisions1 | (51) | – |
| Underlying taxation expense (including equity accounted investments) | (199) | (287) |
2014 includes a £51m credit in respect of the re-assessment of existing tax provisions. The complexity and duration of some of the Group's activities can result in delays in agreeing and closing certain tax positions. The Group continually updates its estimates for those positions whenever new information becomes available. The £51m credit relates to one such position in respect of an overseas issue where information received in the year enabled the estimate to be updated.
The UK current tax rate was reduced from 23% to 21% with effect from 1 April 2014, and will be reduced to 20% with effect from 1 April 2015. In line with this change, the rate applying to UK deferred tax assets and liabilities was reduced from 23% to 20%, creating a rate adjustment in 2013, which is partly reflected in the Consolidated Income Statement and partly in the Consolidated Statement of Comprehensive Income.
| 2014 | 2013 | |||||
|---|---|---|---|---|---|---|
| Before tax |
Tax benefit/ (expense) |
Net of tax | Before tax |
Tax benefit/ (expense) |
Net of tax | |
| £m | £m | £m | £m | £m | £m | |
| Items that will not be reclassified to the income statement: | ||||||
| Remeasurements on retirement benefit schemes: | ||||||
| Subsidiaries | (2,023) | 482 | (1,541) | 918 | (323) | 595 |
| Equity accounted investments | (73) | 16 | (57) | 8 | (7) | 1 |
| Share-based payments | – | 4 | 4 | – | 4 | 4 |
| Other | – | 1 | 1 | – | 1 | 1 |
| Tax rate adjustment1 | – | – | – | – | (96) | (96) |
| Items that may be reclassified to the income statement: | ||||||
| Currency translation on foreign currency net investments: | ||||||
| Subsidiaries | 251 | – | 251 | (246) | – | (246) |
| Equity accounted investments | 13 | – | 13 | (3) | – | (3) |
| Fair value gain on available-for-sale financial assets | 4 | – | 4 | – | – | – |
| Reclassification of cumulative currency translation reserve | ||||||
| on disposal | – | – | – | (8) | – | (8) |
| Amounts (charged)/credited to hedging reserve | (92) | 19 | (73) | 53 | (14) | 39 |
| (1,920) | 522 | (1,398) | 722 | (435) | 287 | |
| Other | 2014 Retained |
Other | 2013 Retained |
|||
| reserves | earnings | Total | reserves | earnings | Total | |
| £m | £m | £m | £m | £m | £m | |
| Current tax | ||||||
| Financial instruments | – | – | – | 1 | – | 1 |
| Pensions | – | 59 | 59 | – | 60 | 60 |
| Other | – | 1 | 1 | – | 2 | 2 |
| – | 60 | 60 | 1 | 62 | 63 | |
| Deferred tax | ||||||
| Subsidiaries | 19 | 427 | 446 | (15) | (380) | (395) |
| Tax rate adjustment1 | – | – | – | – | (96) | (96) |
| Equity accounted investments – pensions | – | 16 | 16 | – | (7) | (7) |
| 19 | 443 | 462 | (15) | (483) | (498) | |
| Tax on other comprehensive income | 19 | 503 | 522 | (14) | (421) | (435) |
Held for sale comprises assets and liabilities that are expected to be recovered primarily through sale rather than continuing use. Assets and liabilities held for sale are measured at the lower of their carrying value and fair value less costs to sell.
In August, the Group announced an agreement for the proposed sale of its 75% holding in BAE Systems Land Systems South Africa (Pty) Limited (LSSA) for cash consideration of 641 million Rand (£36m), subject to closing adjustments. The proposed disposal, which is conditional upon receiving regulatory and other approvals, is expected to complete during 2015. Accordingly, LSSA is presented as held for sale at 31 December 2014.
As part of a planned reorganisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia, BAE Systems expects to complete the disposal of its 85.7% shareholding in Aircraft Accessories and Components Company (AACC) during 2015, subject to the satisfaction of certain regulatory approvals. Accordingly, AACC is presented as held for sale at 31 December 2014.
| Liabilities held for sale | (15) | (8) | (23) |
|---|---|---|---|
| Provisions (note 22) | (4) | – | (4) |
| Deferred tax liabilities (note 15) | (2) | – | (2) |
| Payables | (9) | (8) | (17) |
| Assets held for sale | 56 | 20 | 76 |
| Cash and cash equivalents (note 17) | 6 | – | 6 |
| Deferred tax assets (note 15) | 3 | – | 3 |
| Receivables | 12 | 9 | 21 |
| Inventories | 7 | 11 | 18 |
| Property, plant and equipment (note 10) | 9 | – | 9 |
| Intangible assets (note 9) | 19 | – | 19 |
| LSSA1 £m |
AACC £m |
Total £m |
The carrying value of LSSA includes a non-controlling interest of £5m.
EARNINGS PER SHARE
Underlying earnings per share is presented in addition to that required by IAS 33, Earnings per Share, to align the adjusted earnings measure with the performance measure reviewed by the directors. The directors consider that this gives a more appropriate indication of underlying performance.
| 2014 | 2013 | |||||
|---|---|---|---|---|---|---|
| £m | Basic pence per share |
Diluted pence per share |
£m | Basic pence per share |
Diluted pence per share |
|
| Profit for the year attributable to equity shareholders | 740 | 23.4 | 23.3 | 168 | 5.2 | 5.2 |
| (Deduct)/add back: | ||||||
| Re-assessment of existing tax provisions | (51) | – | ||||
| Non-recurring items | – | (6) | ||||
| Net interest expense on retirement benefit obligations, post tax | 126 | 153 | ||||
| Fair value and foreign exchange adjustments on financial instruments and investments, post tax |
72 | 14 | ||||
| Amortisation and impairment of intangible assets, post tax | 156 | 165 | ||||
| Impairment of goodwill | 161 | 865 | ||||
| Underlying earnings, post tax | 1,204 | 38.0 | 37.9 | 1,359 | 42.0 | 41.8 |
| Millions | Millions | Millions | Millions | |||
| Weighted average number of shares used in calculating basic | ||||||
| earnings per share | 3,165 | 3,165 | 3,234 | 3,234 | ||
| Incremental shares in respect of employee share schemes | 10 | 14 | ||||
| Weighted average number of shares used in calculating diluted earnings per share |
3,175 | 3,248 |
Intangible assets are carried at cost or valuation, less accumulated amortisation and impairment losses.
Intangible assets arising from a business combination are recognised at fair value, amortised over their estimated useful lives and subject to impairment testing. The Group's accounting policy on business combinations is included in note 26.
Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of joint ventures and associates is included in the carrying value of equity accounted investments. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
The most significant intangible assets recognised by the Group are in relation to ongoing programmes within businesses acquired, mainly in respect of customer relationships and order backlog.
Other intangible assets include:
Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of the intangible assets.
For programme-related intangibles, amortisation is set on a programme-by-programme basis over the life of the individual programme. Amortisation for customer-related intangibles is also set on an individual basis.
The estimated useful lives are as follows:
| up to 15 years |
|---|
| 2 to 5 years |
| 2 to 5 years |
| up to 10 years |
| up to 20 years |
| up to 10 years |
The Group has no indefinite life intangible assets other than goodwill.
The carrying amounts of the Group's intangible assets, property, plant and equipment, investment property and equity accounted investments are reviewed at each balance sheet date to determine whether there is any indication of impairment as required by IAS 36, Impairment of Assets. If any such indication exists, the asset's recoverable amount is estimated. For intangible assets that are not yet available for use, impairment testing is performed annually.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.
The recoverable amount is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using an appropriate pre-tax discount rate. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
Impairment losses are recognised in the income statement.
An impairment loss in respect of goodwill is not reversed.
An impairment loss in respect of other intangible assets, property, plant and equipment, investment property and equity accounted investments is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised or if there has been a change in the estimate used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
| Goodwill | Programme and customer related |
Other | Total | |
|---|---|---|---|---|
| Cost or valuation | £m | £m | £m | £m |
| At 1 January 2013 | 13,358 | 1,859 | 551 | 15,768 |
| Additions: | ||||
| Acquired separately | – | – | 24 | 24 |
| Internally developed | – | – | 12 | 12 |
| Disposals1 | – | (95) | (62) | (157) |
| Business disposals | (25) | (6) | (16) | (47) |
| Foreign exchange adjustments | (153) | (29) | (5) | (187) |
| At 31 December 2013 | 13,180 | 1,729 | 504 | 15,413 |
| Additions: | ||||
| Acquired separately | – | – | 33 | 33 |
| Internally developed | – | – | 23 | 23 |
| Business acquisitions (note 26) | 208 | 51 | 30 | 289 |
| Disposals1 | – | (1,061) | (77) | (1,138) |
| Transfer to held for sale | (19) | – | (3) | (22) |
| Transfer from property, plant and equipment | – | – | 9 | 9 |
| Transfer from inventories | – | – | 4 | 4 |
| Foreign exchange adjustments | 339 | 20 | 10 | 369 |
| At 31 December 2014 | 13,708 | 739 | 533 | 14,980 |
| Amortisation and impairment | ||||
| At 1 January 2013 | 2,992 | 1,485 | 363 | 4,840 |
| Amortisation charge | – | 141 | 48 | 189 |
| Impairment charge | 865 | 5 | 17 | 887 |
| Disposals1 | – | (95) | (34) | (129) |
| Business disposals | (20) | (6) | (12) | (38) |
| Foreign exchange adjustments | (38) | (28) | (5) | (71) |
| At 31 December 2013 | 3,799 | 1,502 | 377 | 5,678 |
| Amortisation charge | – | 142 | 37 | 179 |
| Impairment charge | 161 | 8 | 1 | 170 |
| Disposals1 | – | (1,061) | (77) | (1,138) |
| Transfer to held for sale | – | – | (3) | (3) |
| Foreign exchange adjustments | 84 | 18 | 9 | 111 |
| At 31 December 2014 | 4,044 | 609 | 344 | 4,997 |
| Net book value | ||||
| At 31 December 2014 | 9,664 | 130 | 189 | 9,983 |
| At 31 December 2013 | 9,381 | 227 | 127 | 9,735 |
| At 1 January 2013 | 10,366 | 374 | 188 | 10,928 |
In order to calculate the recoverable amount of the Group's goodwill, all goodwill balances have been considered with regard to value-in-use calculations.
The value-in-use calculations use risk-adjusted future cash flow projections based on the Group's five-year Integrated Business Plan (IBP) and include a terminal value based on the projections for the final year of that plan, with growth rate assumptions applied. The IBP process includes the use of historic experience, available government spending data and the Group's order backlog. Pre-tax discount rates, derived from the Group's post-tax weighted average cost of capital of 7.12% (2013 7.96%) (adjusted for risks specific to the market in which the Cash-Generating Unit (CGU) operates), have been used in discounting these projected risk-adjusted cash flows.
Goodwill allocated to CGUs which are largely dependent on US government spending on defence, aerospace and security represents £7.3bn (2013 £7.1bn) of the Group's total goodwill balance. The Group monitors changes in defence budgets on an ongoing basis.
| Allocated goodwill | Pre-tax discount rate | ||||
|---|---|---|---|---|---|
| Cash-Generating Unit | Key assumptions | 2014 £bn |
20131 £bn |
2014 % |
2013 % |
| Electronic Systems | Continued demand from the US government for electronic warfare systems (where the business has a leadership position), other technology-based solutions and growth in the commercial avionics market |
3.2 | 3.1 | 9.4 | 10.8 |
| Intelligence & Security (within Cyber & Intelligence) |
Continued demand in the US for the Group's services in the areas of homeland security, law enforcement and counter-intelligence |
1.0 | 0.9 | 9.4 | 10.8 |
| Land & Armaments (within Platforms & Services (US)) |
Continued demand in the Group's principal markets for existing and successor military tracked vehicles, naval guns, missile launchers, artillery systems, munitions, upgrade programmes and support |
2.2 | 2.2 | 8.8 | 9.6 |
| Support Solutions (within Platforms & Services (US)) |
Continued demand in the US for complex infrastructure, maritime and aviation services, and operations support |
0.9 | 0.9 | 9.3 | 10.8 |
The final year growth rate assumption in the value-in-use calculations is in the range 1% to 2%.
The headroom, calculated as the difference between net assets including allocated goodwill as at 31 December 2014 and the value-in-use calculations, for the CGUs listed above, is shown below. The table also shows the headroom assuming a 1% reduction in the terminal value growth rate assumption and a 1% increase in the discount rate used in the value-in-use calculations.
| Headroom as at 31 December |
Headroom assuming a 1% reduction in the terminal value growth rate assumption |
Headroom assuming a 1% increase in the discount rate |
|||||
|---|---|---|---|---|---|---|---|
| Cash-Generating Unit | 2014 £bn |
2013 £bn |
2014 £bn |
2013 £bn |
2014 £bn |
2013 £bn |
|
| Electronic Systems | 1.6 | 0.3 | 0.8 | (0.2) | 0.6 | (0.3) | |
| Intelligence & Security | 0.1 | – | (0.1) | (0.1) | (0.1) | (0.2) | |
| Land & Armaments | 0.5 | – | – | (0.3) | (0.1) | (0.4) | |
| Support Solutions | – | 0.2 | (0.2) | – | (0.2) | (0.1) |
The remaining goodwill balance of £2.4bn (2013 £2.3bn) is allocated across multiple CGUs, including £0.5bn (2013 £0.5bn) in the Applied Intelligence CGU, with no individual CGU exceeding 10% of the Group's total goodwill balance. The majority of the projected cash flows within these CGUs are underpinned by expected levels of primarily UK government spending on defence, aerospace and security, and the Group's ability to capture a broadly consistent market share. In the case of Applied Intelligence, the future cash flow projections are based on the expectation of growth in cyber and intelligence, in the UK and overseas government markets, together with increasing demand for products and services in commercial markets.
In 2014, the impairment charge of £161m comprises the Support Solutions CGU (£87m), reflecting performance issues at the US commercial shipbuilding business, and the Land & Armaments CGU (£74m), reflecting the agreement to sell the Group's 75% holding in BAE Systems Land Systems South Africa (Pty) Limited at a price below its total carrying value.
In 2013, the impairment charge of £865m comprised the US Intelligence & Security (£417m) and Land & Armaments (£448m) CGUs.
In 2014, the impairment charge of £9m relates to the Electronic Systems (£1m) and Platforms & Services (US) (£8m) reporting segments.
In 2013, the impairment charge of £22m related to the Electronic Systems (£4m), Cyber & Intelligence (£8m) and Platforms & Services (US) (£10m) reporting segments.
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of demonstration assets is written off as incurred.
Assets held for leasing out under operating leases are included in property, plant and equipment at cost less accumulated depreciation and impairment losses.
Depreciation is provided, normally on a straight-line basis, to write off the cost of property, plant and equipment over their estimated useful lives to any estimated residual value, using the following rates:
| Buildings | up to 50 years, or the lease term if shorter | ||
|---|---|---|---|
| Plant and machinery: | |||
| Computing equipment and motor vehicles | 4 to 5 years | ||
| Other equipment | 10 to 20 years, or the project life if shorter |
For certain items of plant and equipment in the Group's US businesses, depreciation is normally provided on a basis consistent with cost reimbursement profiles under US government contracts. Typically this provides for a faster rate of depreciation than would otherwise arise on a straight-line basis.
No depreciation is provided on freehold land and assets in the course of construction.
The assets' residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each balance sheet date.
The carrying amounts of the Group's property, plant and equipment are reviewed at each balance sheet date to determine whether there is any indication of impairment in accordance with the policy shown in note 9.
| Land and buildings £m |
Plant and machinery £m |
Total £m |
|
|---|---|---|---|
| Cost | |||
| At 1 January 2013 | 2,385 | 2,724 | 5,109 |
| Additions | 66 | 147 | 213 |
| Business acquisitions | 1 | – | 1 |
| Transfer to investment property | (22) | – | (22) |
| Transfer to held for sale1 | (215) | – | (215) |
| Transfer from held for sale2 | 4 | 86 | 90 |
| Reclassification between categories | 18 | (18) | – |
| Disposals | (68) | (157) | (225) |
| Business disposals | (9) | (5) | (14) |
| Foreign exchange adjustments | (57) | (42) | (99) |
| At 31 December 2013 | 2,103 | 2,735 | 4,838 |
| Additions | 55 | 208 | 263 |
| Business acquisitions (note 26) | – | 7 | 7 |
| Transfer from long-term contract balances | – | 21 | 21 |
| Transfer to other intangible assets | – | (9) | (9) |
| Transfer to held for sale | (11) | (24) | (35) |
| Disposals | (463) | (244) | (707) |
| Foreign exchange adjustments | 38 | 59 | 97 |
| At 31 December 2014 | 1,722 | 2,753 | 4,475 |
| Depreciation and impairment | |||
| At 1 January 2013 | 951 | 1,873 | 2,824 |
| Depreciation charge for the year | 131 | 173 | 304 |
| Impairment charge for the year | 9 | 4 | 13 |
| Transfer to investment property | (11) | – | (11) |
| Transfer to held for sale1 | (75) | – | (75) |
| Transfer from held for sale2 | 4 | 86 | 90 |
| Disposals | (33) | (149) | (182) |
| Business disposals | (6) | (4) | (10) |
| Foreign exchange adjustments | (24) | (27) | (51) |
| At 31 December 2013 | 946 | 1,956 | 2,902 |
| Depreciation charge for the year | 91 | 157 | 248 |
| Impairment charge for the year | 48 | 8 | 56 |
| Transfer from provisions | 10 | – | 10 |
| Transfer to held for sale | (6) | (20) | (26) |
| Disposals | (145) | (220) | (365) |
| Foreign exchange adjustments | 19 | 42 | 61 |
| At 31 December 2014 | 963 | 1,923 | 2,886 |
| Net book value | |||
| At 31 December 2014 | 759 | 830 | 1,589 |
| At 31 December 2013 | 1,157 | 779 | 1,936 |
| At 1 January 2013 | 1,434 | 851 | 2,285 |
Represents a residential and office facility in Saudi Arabia (net book value £140m). A sale and leaseback transaction was completed in January 2014.
Represents the property, plant and equipment of the Regional Aircraft Support & Engineering business, which was reclassified from held for sale in 2013 (net book value £nil).
| Net book value | |||
|---|---|---|---|
| Land and buildings £m |
Plant and machinery £m |
Total £m |
|
| Freehold property | 612 | – | 612 |
| Long leasehold property | 23 | – | 23 |
| Short leasehold property | 124 | – | 124 |
| Plant and machinery | – | 732 | 732 |
| Fixtures, fittings and equipment | – | 98 | 98 |
| At 31 December 2014 | 759 | 830 | 1,589 |
| Impairment |
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Electronic Systems | – | 2 |
| Platforms & Services (US) | 1 | 9 |
| Platforms & Services (UK) | 4 | 2 |
| Platforms & Services (International) | 51 | – |
| 56 | 13 |
The impairment in Platforms & Services (International) includes the charge against the carrying value of AACC upon classification of the business as held for sale (see note 7).
The Platforms & Services (US) impairment of £9m mainly reflected a charge in respect of the carrying value of land and buildings at the Sealy, Texas, facility due to its closure in 2014.
| Land and buildings £m |
Plant and machinery £m |
Total £m |
|
|---|---|---|---|
| At 31 December 2014 | 36 | 154 | 190 |
| At 31 December 2013 | 33 | 94 | 127 |
The future aggregate minimum lease income from the non-cancellable elements of operating leases for assets capitalised (including investment property (see note 11)) are as follows:
| 2014 £m |
2013 £m |
||
|---|---|---|---|
| Receipts due: | |||
| Not later than one year | 23 | 23 | |
| Later than one year and not later than five years | 84 | 87 | |
| Later than five years | 99 | 118 | |
| 206 | 228 |
Under the terms of the lease agreements, no contingent rents are receivable. The leases have varying terms including escalation clauses and renewal rights. None of these terms represent unusual arrangements or create material onerous or beneficial rights or obligations.
Land and buildings that are leased to non-Group entities are classified as investment property. The Group measures investment property at its cost less accumulated depreciation and impairment losses.
Depreciation is provided, on a straight-line basis, to write off the cost of investment property over its estimated useful life of up to 50 years.
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
The carrying amounts of the Group's investment property are reviewed at each balance sheet date to determine whether there is any indication of impairment in accordance with the policy shown in note 9.
| £m | |
|---|---|
| Cost | |
| At 1 January 2013 | 171 |
| Additions | 24 |
| Transfer from property, plant and equipment | 22 |
| Disposals | (18) |
| At 31 December 2013 | 199 |
| Additions | 8 |
| Disposals | (21) |
| At 31 December 2014 | 186 |
| Depreciation and impairment | |
| At 1 January 2013 | 49 |
| Depreciation charge for the year | 4 |
| Transfer from property, plant and equipment | 11 |
| At 31 December 2013 | 64 |
| Depreciation charge for the year | 4 |
| Disposals | (11) |
| At 31 December 2014 | 57 |
| Net book value | |
| At 31 December 2014 | 129 |
| At 31 December 2013 | 135 |
| At 1 January 2013 | 122 |
| Fair value | |
| At 31 December 2014 | 226 |
| At 31 December 2013 | 263 |
The fair values above are based on and reflect current market values as prepared by in-house professionals who have the appropriate professional qualifications and recent experience of valuing properties in the location and of the type being valued.
A joint venture is a joint arrangement whereby the parties that have joint control have rights to the net assets of the arrangement.
The carrying value of an equity accounted investment comprises the Group's share of net assets and purchased goodwill, and is assessed for impairment as a single asset. The carrying amounts of the Group's equity accounted investments are reviewed at each balance sheet date to determine whether there is any indication of impairment in accordance with the policy shown in note 9.
| Joint ventures | Principal activities | Group interest in allotted capital |
Principally operates in |
Country of incorporation |
|---|---|---|---|---|
| Eurofighter Jagdflugzeug GmbH (Held by BAE Systems plc) |
Management and control of the European Typhoon programme |
33% ordinary |
Germany | Germany |
| MBDA SAS (Held via BAE Systems Electronics Limited and BAE Systems (Overseas Holdings) Limited) |
Development and manufacture of guided weapons |
37.5% ordinary |
Europe | France |
| Air Astana (Held by BAE Systems (Kazakhstan) Limited) |
Carriage by air of passengers and cargo |
49% common |
Kazakhstan Kazakhstan |
The Company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by providing information only in relation to equity accounted investments whose results or financial position, in the opinion of the directors, principally affected the financial statements. Accordingly, the equity accounted investments listed in the table above are those that represent more than 5% of total Group sales or underlying EBITA1 or that represent a significant proportion of the total carrying value of equity accounted investments. A full list of subsidiary, equity accounted investments and other associated undertakings as at 31 December 2014 will be annexed to the Company's next annual return filed with the Registrar of Companies.
The following tables summarise the financial information of the Group's principal equity accounted investments included in their own financial statements, as adjusted for fair value adjustments at acquisition and differences in accounting policies, and reconcile this to the Group's interest in those equity accounted investments.
| 2014 | 2013 | ||||||
|---|---|---|---|---|---|---|---|
| Eurofighter Jagdflugzeug £m |
MBDA £m |
Air Astana £m |
Eurofighter Jagdflugzeug £m |
MBDA £m |
Air Astana £m |
||
| Revenue (100%) | 3,281 | 1,929 | 570 | 3,166 | 2,402 | 625 | |
| EBITA1 excluding depreciation | 46 | 215 | 91 | 37 | 354 | 63 | |
| Depreciation and amortisation | – | (54) | (28) | (1) | (65) | (12) | |
| Financial income | 2 | 68 | – | 2 | 65 | 1 | |
| Financial expense | (1) | (79) | (44) | – | (77) | (4) | |
| Taxation expense | (13) | (19) | (6) | (11) | (85) | (11) | |
| Profit for the year (100%) | 34 | 131 | 13 | 27 | 192 | 37 | |
| Remeasurements on retirement benefit schemes, | |||||||
| net of tax | – | (151) | – | 19 | (16) | – | |
| Foreign exchange adjustments | – | (6) | (29) | – | (1) | (4) | |
| Total comprehensive income for the year (100%) | 34 | (26) | (16) | 46 | 175 | 33 | |
| Group's share of total comprehensive income for the year | |||||||
| before elimination of unrealised profit | 11 | (10) | (8) | 15 | 66 | 16 | |
| Elimination of unrealised profit | – | (4) | – | – | – | – | |
| Group's share of total comprehensive income for the year | 11 | (14) | (8) | 15 | 66 | 16 | |
| Non-current assets | 9 | 1,507 | 358 | 10 | 1,501 | 353 | |
| Cash and cash equivalents | 6 | 1,182 | 16 | – | 1,260 | 9 | |
| Current assets excluding cash and cash equivalents | 1,102 | 2,940 | 194 | 1,413 | 2,947 | 174 | |
| Current assets | 1,108 | 4,122 | 210 | 1,413 | 4,207 | 183 | |
| Non-current financial liabilities excluding trade and other payables, and provisions |
– | (10) | (267) | – | (12) | (221) | |
| Other non-current liabilities | (18) | (903) | – | (17) | (771) | – | |
| Non-current liabilities | (18) | (913) | (267) | (17) | (783) | (221) | |
| Current financial liabilities excluding trade and other | |||||||
| payables, and provisions | (4) | (20) | (26) | (4) | (11) | (23) | |
| Other current liabilities | (1,062) | (4,580) | (103) | (1,382) | (4,649) | (109) | |
| Current liabilities | (1,066) | (4,600) | (129) | (1,386) | (4,660) | (132) | |
| Net assets (100%) | 33 | 116 | 172 | 20 | 265 | 183 |
FINANCIAL STATEMENTS
GOVERNANCE STRATEGIC REPORT
| 2014 | 2013 | |||||
|---|---|---|---|---|---|---|
| Eurofighter Jagdflugzeug £m |
MBDA £m |
Air Astana £m |
Eurofighter Jagdflugzeug £m |
MBDA £m |
Air Astana £m |
|
| Group's share of net assets | 11 | 43 | 84 | 7 | 99 | 90 |
| Elimination of unrealised profit | – | (4) | – | – | – | – |
| Goodwill | – | 15 | – | – | 18 | – |
| Carrying value | 11 | 54 | 84 | 7 | 117 | 90 |
| 2014 | 2013 | |||||
| Eurofighter Jagdflugzeug £m |
MBDA £m |
Air Astana £m |
Eurofighter Jagdflugzeug £m |
MBDA £m |
Air Astana £m |
|
| Dividends received | 6 | 44 | 3 | 9 | 33 | 7 |
The Group also has a number of individually immaterial joint ventures. The following table shows a reconciliation of opening to closing carrying value for both the Group's principal and immaterial joint ventures in aggregate.
| Air Astana Other Total £m £m £m At 1 January 2013 165 100 265 Group's share of profit for the year 98 13 111 Group's share of remeasurements on retirement benefit schemes 8 – 8 (7) – (7) Tax on items that will not be reclassified to the income statement Foreign exchange adjustments (2) – (2) Group's share of total comprehensive income for the year 97 13 110 Equity accounted investment funding – 5 5 Dividends received from equity accounted investments (49) (46) (95) Business disposals – (1) (1) Foreign exchange adjustments 1 (2) (1) At 31 December 2013 214 69 283 Group's share of profit for the year 67 16 83 (73) – (73) Group's share of remeasurements on retirement benefit schemes Tax on items that will not be reclassified to the income statement 16 – 16 Foreign exchange adjustments (17) 1 (16) Elimination of unrealised profit (4) – (4) Group's share of total comprehensive income for the year (11) 17 6 Equity accounted investment funding – 2 2 Dividends received from equity accounted investments (53) (10) (63) Business disposals (note 26) – (2) (2) Foreign exchange adjustments (1) 4 3 At 31 December 2014 149 80 229 |
Eurofighter Jagdflugzeug, MBDA and |
|
|---|---|---|
The Group is not aware of any material contingent liabilities in respect of its equity accounted investments.
Trade and other receivables are stated at their cost less provision for bad debts. A provision for bad debt is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. Receivables with a short-term duration are not discounted.
A loss on provision for bad debt is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.
Amounts due from customers for contract work includes long-term contract balances and amounts due from contract customers, less attributable progress payments.
Long-term contract balances are stated at cost less provision for any anticipated losses. Provisions for losses on contracts are recorded when it becomes probable that total estimated contract costs will exceed total contract revenues. Such provisions are recorded as write downs of long-term contract balances for that portion of the work which has already been completed, and the remainder is included as amounts due to long-term contract customers within trade and other payables. Losses are determined on the basis of estimated results on completion of contracts and are updated regularly.
Progress payments are amounts received from customers in accordance with the terms of contracts which specify payments in advance of delivery and are credited, as progress payments, against any expenditure incurred for the particular contract. Any unexpended balance in respect of progress payments is held in trade and other payables as customer stage payments or, if the amounts are subject to advance payment guarantees unrelated to Group performance, as cash received on customers' account.
Amounts due from contract customers represent unbilled income and are stated at cost, plus attributable profit.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Non-current | ||
| Prepayments and accrued income1 | 85 | 62 |
| US deferred compensation plan assets | 238 | 211 |
| Other receivables | 24 | 48 |
| 347 | 321 | |
| Current | ||
| Long-term contract balances | 6,183 | 6,085 |
| Less: Attributable progress payments | (5,341) | (5,526) |
| Amounts due from contract customers | 476 | 843 |
| Amounts due from customers for contract work2 | 1,318 | 1,402 |
| Trade receivables | 935 | 1,138 |
| Amounts owed by equity accounted investments (note 30) | 92 | 56 |
| Prepayments and accrued income1 | 251 | 232 |
| Other receivables | 254 | 210 |
| 2,850 | 3,038 |
The aggregate amount of costs incurred and recognised profits (less recognised losses) to date in respect of contracts in progress at 31 December 2014 are estimated to be £30.2bn (2013 £31.7bn).
Trade receivables are disclosed net of a provision for bad debts. Disclosures relating to the ageing of trade receivables and movements in the provision for bad debts are provided in note 28.
Other receivables do not contain assets which are considered to be impaired.
The global nature of the Group's business means it is exposed to volatility in currency exchange rates. In order to protect itself against currency fluctuations, the Group's policy is to hedge all material firm transactional exposures. The Group also uses interest rate derivative instruments to manage the Group's exposure to interest rate fluctuations on its borrowings and deposits by varying the proportion of fixed rate debt relative to floating rate debt over the forward time horizon. The Group aims to achieve hedge accounting treatment for all derivatives that hedge material foreign currency exposures and those interest rate exposures where hedge accounting can be achieved.
In accordance with its treasury policy, the Group does not hold derivative financial instruments for trading purposes.
Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, such instruments are stated at fair value at the balance sheet date. Gains and losses on derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement for the period.
Where a derivative financial instrument is designated as a hedge of cash flows relating to a highly probable forecast transaction (income or expense), the effective portion of any change in the fair value of the instrument is recognised in other comprehensive income and presented in the hedging reserve in equity. Amounts recognised in equity are reclassified from reserves into the cost of the underlying transaction and recognised in the income statement when the underlying transaction affects profit or loss. The ineffective portion of any change in the fair value of the instrument is recognised in the income statement immediately.
Where a derivative financial instrument is designated as a fair value hedge, changes in the fair value of the underlying asset or liability attributable to the hedged risk, and gains and losses on the derivative instrument, are recognised in the income statement for the period.
| 2014 Assets £m |
2014 Liabilities £m |
2013 Assets £m |
2013 Liabilities £m |
|
|---|---|---|---|---|
| Non-current | ||||
| Cash flow hedges – foreign exchange contracts | 28 | (79) | 42 | (55) |
| Other foreign exchange/interest rate contracts | – | – | – | (4) |
| Debt-related derivative financial instruments – assets1 | 10 | – | – | – |
| 38 | (79) | 42 | (59) | |
| Current | ||||
| Cash flow hedges – foreign exchange contracts | 41 | (97) | 60 | (59) |
| Other foreign exchange/interest rate contracts | 5 | (10) | 15 | (22) |
| Debt-related derivative financial instruments – assets1 | – | – | 6 | – |
| 46 | (107) | 81 | (81) |
The debt-related derivative financial liabilities are presented as a component of loans and overdrafts (see note 19).
The hedged, highly probable forecast transactions denominated in foreign currency are predominantly expected to occur at various stages during the next 12 months. The majority of those extending beyond 12 months are expected to have been transacted within five years of the balance sheet date.
Amounts charged to the hedging reserve in respect of cash flow hedges were £92m (2013 credited £53m), including a £1m credit on reclassification to profit and loss on maturity and a £93m charge on contracts held at 31 December 2014.
The loss arising in the income statement on fair value hedging instruments was £2m (2013 £7m). The loss arising in the income statement on the fair value of the underlying hedged items was £1m (2013 gain £7m). The ineffective portion recognised in the income statement arising from fair value hedges was £3m (2013 £nil).
A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
| Deferred tax assets | Deferred tax liabilities | Net balance at 31 December |
||||
|---|---|---|---|---|---|---|
| 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |
| £m | £m | £m | £m | £m | £m | |
| Property, plant and equipment | 15 | 20 | (93) | (82) | (78) | (62) |
| Intangible assets | 4 | – | (39) | (45) | (35) | (45) |
| Provisions and accruals | 287 | 308 | – | – | 287 | 308 |
| Goodwill | – | – | (273) | (221) | (273) | (221) |
| Pension/retirement schemes: | ||||||
| Deficits | 1,154 | 692 | – | – | 1,154 | 692 |
| Additional contributions and other1 | 121 | 124 | – | – | 121 | 124 |
| Share-based payments | 21 | 19 | – | – | 21 | 19 |
| Financial instruments | 26 | 7 | (5) | (6) | 21 | 1 |
| Other items | 66 | 59 | – | – | 66 | 59 |
| Rolled over capital gains | – | – | (13) | (13) | (13) | (13) |
| Capital losses carried forward | 13 | 13 | – | – | 13 | 13 |
| Trading losses carried forward | 22 | 19 | – | – | 22 | 19 |
| Deferred tax assets/(liabilities) | 1,729 | 1,261 | (423) | (367) | 1,306 | 894 |
| Set off of tax | (402) | (360) | 402 | 360 | – | – |
| Net deferred tax assets/(liabilities) | 1,327 | 901 | (21) | (7) | 1,306 | 894 |
| At 1 January 2014 £m |
Foreign exchange adjustments £m |
Acquisitions and disposals1 £m |
Recognised in income £m |
Recognised in equity £m |
At 31 December 2014 £m |
|
|---|---|---|---|---|---|---|
| Property, plant and equipment | (62) | (6) | – | (10) | – | (78) |
| Intangible assets | (45) | 1 | (29) | 38 | – | (35) |
| Provisions and accruals | 308 | 13 | (2) | (32) | – | 287 |
| Goodwill | (221) | (15) | – | (37) | – | (273) |
| Pension/retirement schemes: | ||||||
| Deficits | 692 | 15 | – | 12 | 435 | 1,154 |
| Additional contributions and other2 | 124 | 7 | – | 2 | (12) | 121 |
| Share-based payments | 19 | – | – | (2) | 4 | 21 |
| Financial instruments | 1 | – | – | 1 | 19 | 21 |
| Other items | 59 | (3) | – | 10 | – | 66 |
| Rolled over capital gains | (13) | – | – | – | – | (13) |
| Capital losses carried forward | 13 | – | – | – | – | 13 |
| Trading losses carried forward | 19 | 1 | 13 | (11) | – | 22 |
| 894 | 13 | (18) | (29) | 446 | 1,306 |
| At 1 January 2013 £m |
Foreign exchange adjustments £m |
Acquisitions and disposals £m |
Recognised in income £m |
Recognised in equity £m |
At 31 December 2013 £m |
|
|---|---|---|---|---|---|---|
| Property, plant and equipment | (81) | 1 | (1) | 19 | – | (62) |
| Intangible assets | (91) | (1) | – | 44 | 3 | (45) |
| Provisions and accruals | 317 | (11) | (1) | 3 | – | 308 |
| Goodwill | (186) | 6 | – | (41) | – | (221) |
| Pension/retirement schemes: | ||||||
| Deficits | 1,144 | 8 | – | 5 | (465) | 692 |
| Additional contributions and other2 | 137 | (2) | – | 6 | (17) | 124 |
| Share-based payments | 16 | – | – | – | 3 | 19 |
| Financial instruments | 8 | – | – | 8 | (15) | 1 |
| Other items | 62 | (4) | – | 1 | – | 59 |
| Rolled over capital gains | (15) | – | – | 2 | – | (13) |
| Capital losses carried forward | 15 | – | – | (2) | – | 13 |
| Trading losses carried forward | 36 | (4) | – | (13) | – | 19 |
| 1,362 | (7) | (2) | 32 | (491) | 894 |
Includes net deferred tax liabilities on acquisition of subsidiaries (£17m) (see note 26) and the transfer of net deferred tax assets to held for sale (£1m) (see note 7).
Includes deferred tax assets on US deferred compensation plans.
Deferred tax assets have not been recognised in respect of the following items:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Deductible temporary differences, including tax credits | 2 | 1 |
| Capital losses carried forward | 38 | 36 |
| Trading and other losses carried forward | 62 | 62 |
| 102 | 99 |
These assets have not been recognised as the incidence of future profits in the relevant countries and legal entities cannot be accurately predicted at this time.
Under the Finance Act 2013, the UK current tax rate reduced from 23% to 21% with effect from 1 April 2014, and will then reduce to 20% with effect from 1 April 2015. This will reduce future current tax charges accordingly.
The reduction from 23% to 20% was substantively enacted before 31 December 2013. In line with this change, the rate applying to UK deferred tax assets and liabilities was reduced from 23% to 20%, creating a rate adjustment in 2013, which was partly reflected in the Consolidated Income Statement and partly in the Consolidated Statement of Comprehensive Income. Accordingly, both recognised and unrecognised UK deferred tax balances as at 31 December 2013 were calculated at 20% and this rate continues to apply as at 31 December 2014.
Inventories are stated at the lower of cost, including all relevant overhead expenditure, and net realisable value.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Short-term work-in-progress | 439 | 381 |
| Raw materials and consumables | 189 | 227 |
| Finished goods and goods for resale | 62 | 72 |
| 690 | 680 |
The Group recognised £4m (2013 £4m) as a write down of inventories to net realisable value.
Cash and cash equivalents includes cash in hand, call and term deposits, and other short-term liquid investments with original maturities of three months or less and which are subject to an insignificant risk of change in value. For the purpose of the cash flow statement, cash and cash equivalents also includes bank overdrafts that are repayable on demand.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Cash | 537 | 460 |
| Short-term deposits | 1,777 | 1,762 |
| 2,314 | 2,222 | |
| Less: Cash and cash equivalents (included within assets held for sale) (note 7) | (6) | – |
| 2,308 | 2,222 |
| Analysis of non-current assets by geographical location | |||
|---|---|---|---|
| Asset location | Notes | 2014 £m |
2013 £m |
| UK | 2,505 | 2,705 | |
| Rest of Europe | 546 | 667 | |
| US | 8,444 | 8,078 | |
| Saudi Arabia | 316 | 453 | |
| Australia | 469 | 494 | |
| Rest of Asia and Pacific | 2 | 1 | |
| Africa, and Central and South America | 2 | 15 | |
| Non-current segment assets | 12,284 | 12,413 | |
| Other financial assets | 14 | 74 | 117 |
| Inventories | 16 | 690 | 680 |
| Current trade and other receivables | 13 | 2,850 | 3,038 |
| Total segment assets | 15,898 | 16,248 | |
| Retirement benefit surpluses | 21 | 162 | 156 |
| Tax | 1,334 | 909 | |
| Cash (as defined by the Group)1 | 25 | 2,318 | 2,228 |
| Assets held for sale | 7 | 76 | 140 |
| Consolidated total assets | 19,788 | 19,681 |
Loans and overdrafts are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, loans and overdrafts are stated at either amortised cost or, where hedge accounting has been adopted, fair value in respect of the hedged risk. Any difference between the amount initially recognised and the redemption value is recognised in the income statement over the period of the borrowings on an effective interest basis.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Non-current | ||
| US\$750m 5.2% bond, repayable 2015 | – | 453 |
| US\$350m 3.5% bond, repayable 2016 | 224 | 211 |
| Albertville Hangar bond, repayable 2018 | 6 | 6 |
| US\$1bn 6.375% bond, repayable 2019 | 642 | 607 |
| US\$500m 4.75% bond, repayable 2021 | 320 | 301 |
| £400m 4.125% bond, repayable 2022 | 398 | 397 |
| US\$800m 3.8% bond, repayable 2024 | 514 | – |
| US\$500m 7.5% bond, repayable 2027 | 319 | 299 |
| US\$400m 5.8% bond, repayable 2041 | 254 | 238 |
| US\$300m 4.75% bond, repayable 2044 | 190 | – |
| Debt-related derivative financial instruments – liabilities | 1 | 12 |
| 2,868 | 2,524 | |
| Current | ||
| Euro-Sterling £100m 10¾% bond, repayable 2014 | – | 100 |
| US\$500m 4.95% bond, repayable 2014 | – | 302 |
| US\$750m 5.2% bond, repayable 2015 | 481 | – |
| Overdrafts | 1 | – |
| 482 | 402 |
US\$500m of the US\$1bn 6.375% bond, repayable 2019, has been converted to a floating rate bond utilising a series of interest rate swaps that mature in June 2019 and give an effective rate during 2014 of 4.8%.
The US\$500m 7.5% bond, repayable 2027, was converted at issue to a sterling fixed rate bond by utilising cross-currency swaps and has an effective interest rate of 7.7%.
On 7 October, BAE Systems issued US\$800m of 3.8% fixed rate debt maturing in October 2024 and US\$300m of 4.75% fixed rate debt maturing in October 2044. Subsequently, the Group entered into interest rate derivatives to swap US\$500m of the ten-year fixed rate debt into a floating rate to October 2019. The swaps are at an average rate of LIBOR +1.9% for each three-month period and the initial fixing was at 2.1% inclusive of LIBOR, giving an effective rate during 2014 of 2.8%. US\$500m of the US\$800m bond is measured at fair value.
The debt-related derivative financial instruments represent the fair value of interest rate and cross-currency derivatives relating to the US\$500m 7.5% bond, repayable 2027, and the US\$800m 3.8% bond, repayable 2024. These derivatives have been entered into specifically to manage the Group's exposure to foreign exchange or interest rate risk. Debt-related derivative financial liabilities are presented within loans and overdrafts above and debt-related derivative financial assets are presented within other financial assets (see note 14).
| Trade and other payables are stated at their cost. | |||||||
|---|---|---|---|---|---|---|---|
| ---------------------------------------------------- | -- | -- | -- | -- | -- | -- | -- |
| 2014 £m |
2013 £m |
|
|---|---|---|
| Non-current | ||
| Amounts due to long-term contract customers | 404 | 699 |
| Amounts owed to equity accounted investments (note 30) | 40 | – |
| Accruals and deferred income | 45 | 39 |
| US deferred compensation plan liabilities | 262 | 237 |
| Other payables | 181 | 185 |
| 932 | 1,160 | |
| Current | ||
| Amounts due to long-term contract customers | 3,713 | 4,023 |
| Amounts due to other customers | 285 | 232 |
| Cash received on customers' account1 | – | 1 |
| Trade payables | 599 | 651 |
| Amounts owed to equity accounted investments (note 30) | 454 | 563 |
| Other taxes and social security costs | 76 | 82 |
| Accruals and deferred income | 1,181 | 1,019 |
| Other payables | 362 | 503 |
| 6,670 | 7,074 |
Included above:
| Amounts due to long-term contract customers, including contract losses | 4,117 | 4,722 |
|---|---|---|
| Advances from long-term contract customers | 3,935 | 4,498 |
Obligations for contributions are recognised as an expense in the income statement as incurred.
The cost of providing benefits is determined periodically by independent actuaries and charged to the income statement in the period in which those benefits are earned by the employees. Remeasurements, including actuarial gains and losses, are recognised in the Consolidated Statement of Comprehensive Income in the period in which they occur. Past service costs resulting from a plan amendment or curtailment are recognised immediately in the income statement.
The retirement benefit obligation recognised in the Group's balance sheet represents the present value of the defined benefit obligations calculated using a number of actuarial assumptions as set out on page 136 reduced by the fair value of scheme assets.
Certain of the Group's equity accounted investments participate in the Group's defined benefit schemes as well as Airbus SAS, the Group's share of which was disposed of in 2006. As these schemes are multi-employer schemes, the Group has allocated a share of the IAS 19, Employee Benefits, pension deficit to its equity accounted investments and other participating employers using a consistent allocation method intended to reflect a reasonable approximation of their share of the deficit. The deficit allocation method for all schemes is based on the BAE Systems Pension Scheme's (Main Scheme) schedule of contributions agreed with the sponsoring employers and trustees as part of the triennial funding valuations performed in 2014. Following the completion of the triennial funding valuations, there will be discussions between the participating employers on the allocation of the deficit and the outcome of those discussions will be reflected in the allocation of the IAS 19 deficit. The Group's share of the IAS 19 pension deficit allocated to the equity accounted investments is included in the balance sheet within equity accounted investments. In the event that an employer who participates in the Group's pension schemes fails or cannot be compelled to fulfil its obligations as a participating employer, the remaining participating employers are obliged to collectively take on its obligations. The Group considers the likelihood of this event arising as remote.
BAE Systems plc operates pension schemes for the Group's qualifying employees in the UK, US and other countries. The principal schemes in the UK and US are funded defined benefit schemes, and the assets are held in separate trustee administered funds. The two largest funded defined benefit schemes are the Main Scheme and the BAE Systems 2000 Pension Plan (2000 Plan) which, in aggregate, represent 71% (2013 72%) of the total IAS 19 defined benefit obligation at 31 December 2014. The schemes in other countries are primarily defined contribution schemes.
At 31 December 2014, the weighted average durations of the UK and US defined benefit pension obligations were 19 years (2013 18 years) and 12 years (2013 12 years), respectively.
The split of the defined benefit pension liability on a funding basis between active, deferred and pensioner members for the Main Scheme, 2000 Plan and US schemes in aggregate is set out below:
| Active % |
Deferred % |
Pensioner % |
|
|---|---|---|---|
| Main Scheme1 | 32 | 19 | 49 |
| 2000 Plan2 | 14 | 29 | 57 |
| US schemes3 | 35 | 18 | 47 |
Source: Main Scheme actuarial valuation report as at 31 March 2014.
Source: 2000 Plan actuarial valuation report as at 31 March 2014.
Source: Annual updates of the US schemes as at 1 January 2014.
The funded UK schemes are registered and subject to the statutory scheme specific-funding requirements outlined in UK legislation, including the payment of levies to the Pension Protection Fund as set out in the Pension Act 2004. These schemes were established under trust and the responsibility for their governance lies jointly with the trustees and the Group.
The funded US schemes are tax-qualified pension schemes regulated by the Pension Protection Act 2006 and insured by the Pension Benefit Guarantee Corporation (PBGC) up to certain limits. These schemes were established under and are governed by the US Employee Retirement Income Security Act 1974 and the BAE Systems Administrative Committee is a named fiduciary with the authority to manage their operation.
The UK defined benefit schemes provide benefits to members in the form of a set level of pension payable for life based on members' final salaries. The benefits attract inflation-related increases both in deferment and payment. All UK defined benefit schemes are closed to new entrants, with benefits for new employees being provided through a defined contribution scheme. The Normal Retirement Age for active members of the Main Scheme and 2000 Plan is 65. Specific benefits applicable to members differ between schemes. Further details on the benefits provided by each scheme are provided on the BAE Systems Pensions website: www.baesystemspensions.com.
The US defined benefit schemes ceased to be final salary schemes in January 2013. The benefits accrued based on the final salaries of members at that point will become payable on retirement. The Normal Retirement Age for the largest scheme in the US is 65.
The majority of the UK and US defined benefit pension schemes are funded by the Group's subsidiaries, equity accounted investments and other participating employers. The individual pension schemes' funding requirements are based on actuarial measurement frameworks set out in their funding policies.
For funding valuation purposes, pension scheme assets are included at market value, whilst the liabilities are determined based on prudent assumptions set by the trustees following consultation with scheme actuaries.
The separate actuarial valuations for funding purposes include assumptions which differ from the actuarial assumptions used for IAS 19 accounting purposes shown on page 136. The latest valuations of the Main Scheme and 2000 Plan were performed as at 31 March 2014 and showed a funding deficit of £2.6bn. The total net funding deficit in respect of all of the UK schemes was £2.7bn. Deficit recovery plans agreed with the trustees of the relevant schemes run until 2026.
The results of future triennial valuations and associated funding requirements will be impacted by the future performance of investment markets, and interest and inflation rates.
The total Group contributions made to the defined benefit schemes in the year ended 31 December 2014 were £548m (2013 £560m) excluding those amounts allocated to equity accounted investments and participating employers of £92m (2013 £86m). This includes additional contributions of £108m into the UK schemes relating to the share buyback programme (2013 £44m).
In 2015, the Group expects to make contributions at a similar level to the recurring contributions and deficit funding as made in 2014.
The Group incurred a charge in respect of cash contributions of £125m (2013 £130m) paid to defined contribution schemes for employees.
The defined benefit pension schemes expose the Group to actuarial risks, including market (investment) risk, interest rate risk, inflation risk and longevity risk.
| Risk | Mitigation | ||
|---|---|---|---|
| Market (investment) risk | |||
| Asset returns may not move in line with the liabilities and may be subject to volatility. |
The investment portfolios are highly diversified, investing in a wide range of assets, in order to provide reasonable assurance that no single security or type of security could have a materially adverse impact on the total portfolio. To reduce volatility, certain assets are held in a matching portfolio, which largely consists of index-linked bonds, gilts and swaps, designed to mirror movements in corresponding liabilities. |
||
| Some 46% (2013 50%) of the Group's pension scheme assets are held in equities and pooled investment vehicles due to the higher expected level of return over the long term. |
|||
| Some of the Group's pension schemes use derivative financial instruments as part of their investment strategy to manage the level of market risk. In August 2013, the Main Scheme implemented a long-dated equity option strategy protecting £1.4bn of assets against a significant fall in equity markets. |
|||
| Interest rate risk Liabilities are sensitive to movements in interest rates, with lower interest rates leading to an increase in the valuation of liabilities. |
In addition to investing in bonds as part of the matching portfolio, the principal UK schemes invest in interest rate swaps to reduce the exposure to movements in interest rates. The swaps are held with several banks to reduce counterparty risk. |
||
| Inflation risk | |||
| Liabilities are sensitive to movements in inflation, with higher inflation leading to an increase in the valuation of liabilities. |
In addition to investing in index-linked bonds as part of the matching portfolio, the principal UK schemes invest in long-term inflation swaps to reduce the exposure to movements in inflation. The swaps are held with several banks to reduce counterparty risk. |
||
| Effective 1 May 2014, the Main Scheme implemented a pension increase exchange to allow retired members to elect for a higher current pension in exchange for foregoing certain rights to future pension increases. |
|||
| Longevity risk | |||
| Liabilities are sensitive to life expectancy, with increases in life expectancies leading to an increase in the valuation of liabilities. |
Longevity Adjustment Factors are used in the majority of the UK pension schemes in order to adjust the pension benefits payable so as to share the cost of people living longer with employees. |
||
| In February 2013, with the agreement of the Company, the trustees of the 2000 Plan entered into an arrangement with Legal & General to insure against longevity risk for the current pensioner population, covering £2.7bn of pension scheme liabilities. In December 2013, similar arrangements were entered into, with Legal & General, by the trustees of the Royal Ordnance Pension Scheme and Shipbuilding Industries Pension Scheme, covering £0.9bn and £0.8bn of pension scheme liabilities, respectively. These arrangements will reduce the funding volatility relating to increasing life expectancy. |
|||
The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the long-term nature of the obligation covered, may not necessarily occur in practice.
| UK | US | |||||
|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |
| Financial assumptions | ||||||
| Discount rate (%) | 3.6 | 4.5 | 4.5 | 4.1 | 4.9 | 4.1 |
| Inflation (%) | 3.2 | 3.4 | 2.9 | n/a | n/a | n/a |
| Rate of increase in salaries (%) | 3.2 | 3.4 | 3.4 | n/a | n/a | 3.7 |
| Rate of increase in pensions in payment (%) | 1.8 – 3.6 | 1.9 – 3.7 | 1.8 – 3.5 | n/a | n/a | n/a |
| Rate of increase in deferred pensions (%) | 2.3/3.2 | 2.5/3.4 | 2.3/2.9 | n/a | n/a | n/a |
| Demographic assumptions | ||||||
| Life expectancy of a male currently aged 65 (years) | 87 – 89 | 87 – 89 | 87 – 89 | 87 | 84 | 84 |
| Life expectancy of a female currently aged 65 (years) | 89 – 90 | 89 – 90 | 89 – 90 | 89 | 86 | 86 |
| Life expectancy of a male currently aged 45 (years) | 89 – 91 | 88 – 90 | 88 – 90 | 87 | 84 | 84 |
| Life expectancy of a female currently aged 45 (years) | 91 – 92 | 91 – 92 | 91 – 92 | 89 | 86 | 86 |
Discount rate assumptions are based on third-party AA corporate bond indices and yields that reflect the maturity profile of the expected benefit payments.
In the UK, the inflation assumptions are derived by reference to the difference between the yields on index-linked and fixed-interest long-term government bonds, or advice from the local actuary depending on the available information. In the US, inflation assumptions are not significant as the Group's US pension schemes are not indexed with inflation.
The rate of increase in salaries for the UK schemes is assumed to be Retail Prices Index (RPI) inflation of 3.2% (2013 RPI inflation of 3.4%), plus a promotional scale. From 1 January 2013, employees in the US schemes no longer accrue salary-related benefits.
The rate of increase in pensions in payment differs between UK schemes. Different tranches of the schemes increase at rates based on either RPI or Consumer Prices Index (CPI) inflation, and some are subject to an inflation cap. With the exception of two smaller schemes, the rate of increase in pensions in payment is based on RPI inflation.
The rate of increase in deferred pensions for the UK schemes is based on CPI inflation of 2.3% (2013 CPI inflation of 2.5%), with the exception of the 2000 Plan, which is based on RPI inflation of 3.2% (2013 RPI inflation of 3.4%). For all UK schemes, the rate of increase in deferred pensions is subject to inflation caps.
For its UK pension schemes, the Group has used the Self-Administered Pension Schemes S2 mortality tables based on year of birth (as published by the Institute of Actuaries) for both pensioner and non-pensioner members in conjunction with the results of an investigation into the actual mortality experience of scheme members. In addition, to allow for future improvements in longevity, the Continuous Mortality Investigation 2013 tables (published by the Institute of Actuaries) have been used, with an assumed long-term rate of future annual mortality improvements of 1.25% (2013 1%), for both pensioner and non-pensioner members.
In October 2014, the Society of Actuaries in the US released updated mortality assumptions reflecting the results of its comprehensive mortality study. For the majority of the US schemes, the mortality tables used at 31 December 2014 are a blend of the fully generational RP-2014 Aggregate table and the RP-2014 White Collar table, both projected using Scale MP-2014. The mortality table changes have resulted in a £0.3bn increase in the US defined benefit obligations. IRS approval of the mortality tables is expected in 2017, following which the tables are expected to be adopted for funding valuation purposes.
The Group operates a number of non-pension retirement benefit schemes, under which certain employees are eligible to receive benefits after retirement, the majority of which relate to the provision of medical benefits to retired employees of the Group's subsidiaries in the US. The latest valuations of the principal schemes, covering retiree medical and life insurance schemes in certain US subsidiaries, were performed by independent actuaries as at 1 January 2014. These valuations were rolled forward to reflect the information at 31 December 2014. The method of accounting for these is similar to that used for defined benefit pension schemes.
The assumption for long-term healthcare cost increases is 5.3% (2013 5.3%) based on the assumptions that the increases are 7.9% in 2015 reducing to 5% by 2023 and 5% each year thereafter for pre-retirement, and 7.5% in 2015 reducing to 5% by 2023 and 5% each year thereafter for post-retirement.
The disclosures below relate to post-retirement benefit schemes in the UK, US and other countries which are accounted for as defined benefit schemes in accordance with IAS 19. The valuations used for the IAS 19 disclosures are based on the most recent actuarial valuation undertaken by independent qualified actuaries as updated to take account of the requirements of IAS 19 to assess the deficits of the schemes at 31 December each year.
| US and | |||
|---|---|---|---|
| UK | other | Total | |
| £m | £m | £m | |
| Total IAS 19 deficit at 1 January 2014 | (4,272) | (266) | (4,538) |
| Actual return on assets excluding amounts included in interest expense | 1,240 | 208 | 1,448 |
| Increase in liabilities due to changes in financial assumptions | (3,273) | (405) | (3,678) |
| Increase in liabilities due to changes in demographic assumptions | (341) | (283) | (624) |
| Experience gains/(losses) | 435 | (6) | 429 |
| Additional contributions in excess of service cost | 275 | – | 275 |
| Recurring contributions in excess of service cost | 48 | 68 | 116 |
| Past service cost – plan amendments | (3) | (1) | (4) |
| Net interest expense | (175) | (14) | (189) |
| Foreign exchange adjustments | – | (35) | (35) |
| Movement in US healthcare schemes | – | (12) | (12) |
| Total IAS 19 deficit at 31 December 2014 | (6,066) | (746) | (6,812) |
| Allocated to equity accounted investments and other participating employers | 1,444 | – | 1,444 |
| Group's share of IAS 19 deficit excluding Group's share of amounts allocated to equity accounted | |||
| investments and other participating employers at 31 December 2014 | (4,622) | (746) | (5,368) |
The bid values of scheme assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present values of scheme liabilities, which are derived from cash flow projections over long periods and therefore inherently uncertain, as at 31 December are shown in the following tables.
| 2014 | 2013 | |||||||
|---|---|---|---|---|---|---|---|---|
| UK defined benefit pension schemes £m |
US and other pension schemes £m |
US healthcare schemes £m |
Total £m |
UK defined benefit pension schemes £m |
US and other pension schemes £m |
US healthcare schemes £m |
Total £m |
|
| Present value of unfunded obligations | (41) | (138) | – | (179) | (53) | (130) | – | (183) |
| Present value of funded obligations | (26,195) | (4,132) | (146) | (30,473) | (22,550) | (3,210) | (117) | (25,877) |
| Fair value of scheme assets | 20,170 | 3,505 | 165 | 23,840 | 18,331 | 3,043 | 148 | 21,522 |
| Total IAS 19 (deficit)/surplus, net | (6,066) | (765) | 19 | (6,812) | (4,272) | (297) | 31 | (4,538) |
| Allocated to equity accounted investments and other participating employers |
1,444 | – | – | 1,444 | 1,029 | – | – | 1,029 |
| Group's share of IAS 19 (deficit)/surplus, net |
(4,622) | (765) | 19 | (5,368) | (3,243) | (297) | 31 | (3,509) |
| Represented by: | ||||||||
| Retirement benefit surpluses | 89 | 41 | 32 | 162 | 79 | 41 | 36 | 156 |
| Retirement benefit obligations | (4,711) | (806) | (13) | (5,530) | (3,322) | (338) | (5) | (3,665) |
| (4,622) | (765) | 19 | (5,368) | (3,243) | (297) | 31 | (3,509) | |
| Group's share of IAS 19 deficit of equity accounted investments |
(165) | – | – | (165) | (115) | – | – | (115) |
Total cumulative actuarial losses recognised in equity since the transition to IFRS are £6.0bn (2013 £3.9bn).
Changes in the fair value of scheme assets before allocation to equity accounted investments and other participating employers
| Value of scheme assets at 31 December 2014 | 20,170 | 3,505 | 165 | 23,840 |
|---|---|---|---|---|
| Benefits paid | (861) | (170) | (5) | (1,036) |
| Foreign exchange translation | – | 201 | 10 | 211 |
| Administrative expenses | (31) | (9) | (1) | (41) |
| Members' contributions | 12 | – | – | 12 |
| Total contributions by employer | 659 | 86 | 1 | 746 |
| Contributions by employer in respect of employee salary sacrifice arrangements | 105 | – | – | 105 |
| Contributions by employer | 554 | 86 | 1 | 641 |
| Actual return on assets | 2,060 | 354 | 12 | 2,426 |
| Actual return on assets excluding amounts included in interest income | 1,240 | 208 | 5 | 1,453 |
| Interest income | 820 | 146 | 7 | 973 |
| Value of scheme assets at 31 December 2013 | 18,331 | 3,043 | 148 | 21,522 |
| Benefits paid | (831) | (175) | (5) | (1,011) |
| Foreign exchange translation | – | (69) | (6) | (75) |
| Administrative expenses | (30) | (10) | – | (40) |
| Members' contributions | 13 | – | – | 13 |
| Total contributions by employer | 633 | 117 | 2 | 752 |
| Contributions by employer in respect of employee salary sacrifice arrangements | 104 | – | – | 104 |
| Contributions by employer | 529 | 117 | 2 | 648 |
| Actual return on assets | 1,935 | 337 | 28 | 2,300 |
| Actual return on assets excluding amounts included in interest income | 1,190 | 214 | 23 | 1,427 |
| Interest income | 745 | 123 | 5 | 873 |
| Value of scheme assets at 1 January 2013 | 16,611 | 2,843 | 129 | 19,583 |
| schemes £m |
schemes £m |
schemes £m |
Total £m |
|
| pension | pension | healthcare | ||
| UK defined benefit |
US and other |
US |
| 2014 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| UK | US and other | Total | |||||||
| Quoted £m |
Unquoted £m |
Total £m |
Quoted £m |
Unquoted £m |
Total £m |
Quoted £m |
Unquoted £m |
Total £m |
|
| Equities: | |||||||||
| UK1 | 4,183 | – | 4,183 | – | – | – | 4,183 | – | 4,183 |
| Overseas | 2,920 | – | 2,920 | 640 | – | 640 | 3,560 | – | 3,560 |
| Pooled investment vehicles2 | 2,487 | 270 | 2,757 | 454 | – | 454 | 2,941 | 270 | 3,211 |
| Fixed interest securities: | |||||||||
| UK gilts | 2,332 | – | 2,332 | – | – | – | 2,332 | – | 2,332 |
| UK corporates | 2,464 | – | 2,464 | – | – | – | 2,464 | – | 2,464 |
| Overseas government | – | – | – | 158 | – | 158 | 158 | – | 158 |
| Overseas corporates | 377 | – | 377 | 2,044 | – | 2,044 | 2,421 | – | 2,421 |
| Index-linked securities: | |||||||||
| UK gilts | 2,198 | – | 2,198 | – | – | – | 2,198 | – | 2,198 |
| UK corporates | 1,508 | – | 1,508 | – | – | – | 1,508 | – | 1,508 |
| Property3 | 1,176 | 159 | 1,335 | – | 165 | 165 | 1,176 | 324 | 1,500 |
| Derivatives | – | (509) | (509) | – | – | – | – | (509) | (509) |
| Cash: | |||||||||
| Sterling | 288 | – | 288 | – | – | – | 288 | – | 288 |
| Foreign currency | 172 | – | 172 | 36 | – | 36 | 208 | – | 208 |
| Other | – | 145 | 145 | – | 8 | 8 | – | 153 | 153 |
| Total | 20,105 | 65 | 20,170 | 3,332 | 173 | 3,505 | 23,437 | 238 | 23,675 |
| 2013 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| UK | US and other | Total | ||||||||
| Quoted £m |
Unquoted £m |
Total £m |
Quoted £m |
Unquoted £m |
Total £m |
Quoted £m |
Unquoted £m |
Total £m |
||
| Equities: | ||||||||||
| UK1 | 4,139 | – | 4,139 | – | – | – | 4,139 | – | 4,139 | |
| Overseas | 2,909 | – | 2,909 | 788 | – | 788 | 3,697 | – | 3,697 | |
| Pooled investment vehicles2 | 2,064 | 374 | 2,438 | 340 | – | 340 | 2,404 | 374 | 2,778 | |
| Fixed interest securities: | ||||||||||
| UK gilts | 2,261 | – | 2,261 | – | – | – | 2,261 | – | 2,261 | |
| UK corporates | 2,081 | – | 2,081 | – | – | – | 2,081 | – | 2,081 | |
| Overseas government | 103 | – | 103 | 172 | – | 172 | 275 | – | 275 | |
| Overseas corporates | 205 | – | 205 | 1,514 | – | 1,514 | 1,719 | – | 1,719 | |
| Index-linked securities: | ||||||||||
| UK gilts | 1,822 | – | 1,822 | – | – | – | 1,822 | – | 1,822 | |
| UK corporates | 1,120 | – | 1,120 | – | – | – | 1,120 | – | 1,120 | |
| Property3 | 1,043 | 176 | 1,219 | – | 184 | 184 | 1,043 | 360 | 1,403 | |
| Derivatives | – | (315) | (315) | – | – | – | – | (315) | (315) | |
| Cash: | ||||||||||
| Sterling | 242 | – | 242 | – | – | – | 242 | – | 242 | |
| Foreign currency | 65 | – | 65 | 37 | – | 37 | 102 | – | 102 | |
| Other | 4 | 38 | 42 | – | 8 | 8 | 4 | 46 | 50 | |
| Total | 18,058 | 273 | 18,331 | 2,851 | 192 | 3,043 | 20,909 | 465 | 21,374 |
Includes £14m of the Company's own ordinary shares (2013 £32m).
Primarily comprises equities.
Includes £282m of property occupied by Group companies (2013 £259m).
Changes in the present value of the defined benefit obligations before allocation to equity accounted investments and other participating employers
| Defined benefit obligations at 31 December 2014 | (26,236) | (4,270) | (146) | (30,652) |
|---|---|---|---|---|
| Benefits paid | 861 | 170 | 5 | 1,036 |
| Foreign exchange translation | – | (236) | (9) | (245) |
| Interest expense | (995) | (160) | (5) | (1,160) |
| Experience gains/(losses) | 435 | (6) | (3) | 426 |
| Actuarial loss due to changes in demographic assumptions | (341) | (283) | (6) | (630) |
| Actuarial loss due to changes in financial assumptions | (3,273) | (405) | (10) | (3,688) |
| Past service cost – plan amendments | (3) | (1) | – | (4) |
| Members' contributions | (12) | – | – | (12) |
| Total current service cost | (305) | (9) | (1) | (315) |
| Contributions by employer in respect of employee salary sacrifice arrangements | (105) | – | – | (105) |
| Current service cost | (200) | (9) | (1) | (210) |
| Defined benefit obligations at 31 December 2013 | (22,603) | (3,340) | (117) | (26,060) |
| Benefits paid | 831 | 175 | 5 | 1,011 |
| Foreign exchange translation | – | 49 | 2 | 51 |
| Interest expense | (945) | (152) | (5) | (1,102) |
| Experience gains | 146 | 21 | 5 | 172 |
| Actuarial (loss)/gain due to changes in financial assumptions | (896) | 330 | 11 | (555) |
| Past service cost – plan amendments | (11) | – | – | (11) |
| Members' contributions | (13) | – | – | (13) |
| Total current service cost | (309) | (12) | (1) | (322) |
| Contributions by employer in respect of employee salary sacrifice arrangements | (104) | – | – | (104) |
| Current service cost | (205) | (12) | (1) | (218) |
| Defined benefit obligations at 1 January 2013 | (21,406) | (3,751) | (134) | (25,291) |
| benefit pension schemes £m |
other pension schemes £m |
US healthcare schemes £m |
Total £m |
|
| UK defined | US and |
Amounts recognised in the income statement after allocation to equity accounted investments and other participating employers
| 2014 | 2013 | |||||||
|---|---|---|---|---|---|---|---|---|
| UK defined benefit pension schemes £m |
US and other pension schemes £m |
US healthcare schemes £m |
Total £m |
UK defined benefit pension schemes £m |
US and other pension schemes £m |
US healthcare schemes £m |
Total £m |
|
| Included in operating costs: | ||||||||
| Current service cost | (156) | (9) | (1) | (166) | (160) | (12) | (1) | (173) |
| Past service cost – plan amendments | (3) | (1) | – | (4) | (11) | – | – | (11) |
| (159) | (10) | (1) | (170) | (171) | (12) | (1) | (184) | |
| Administrative expenses | (25) | (9) | (1) | (35) | (24) | (10) | – | (34) |
| (184) | (19) | (2) | (205) | (195) | (22) | (1) | (218) | |
| Included in finance costs: | ||||||||
| Net interest (expense)/income on retirement benefit obligations |
(135) | (14) | 2 | (147) | (157) | (29) | – | (186) |
| Included in share of results of equity accounted investments: |
||||||||
| Group's share of equity accounted investments' operating costs |
(8) | – | – | (8) | (9) | – | – | (9) |
| Group's share of equity accounted investments' finance costs |
(5) | – | – | (5) | (5) | – | – | (5) |
The sensitivity information has been derived using scenario analysis from the actuarial assumptions as at 31 December 2014 and keeping all other assumptions as set out on page 136.
Changes in the following financial assumptions would have the following effect on the defined benefit pension obligation:
| (Increase)/decrease £bn |
|
|---|---|
| Discount rate: | |
| 0.1 percentage point increase | 0.5 |
| 0.1 percentage point decrease | (0.5) |
| Inflation: | |
| 0.1 percentage point increase | (0.5) |
| 0.1 percentage point decrease | 0.5 |
The sensitivity of the valuation of the liabilities to changes in the inflation assumption presented above assumes that a 0.1 percentage point change to expectations of future inflation results in a 0.1 percentage point change to all inflation-related assumptions used to value the liabilities. However, upper and lower limits exist on the majority of inflation-related benefits such that a change in expectations of future inflation may not have the same impact on the inflation-related benefits, and hence will result in a smaller change to the valuation of the liabilities. Accordingly, extrapolation of the above results beyond the specific sensitivity figures shown may not be appropriate. To illustrate this, the (increase)/decrease in the defined benefit pension obligation resulting from larger changes in the inflation assumption would be as follows:
| (Increase)/decrease | |
|---|---|
| £bn | |
| Inflation: | |
| 0.5 percentage point increase | (1.8) |
| 0.5 percentage point decrease | 1.7 |
| 1.0 percentage point increase | (3.6) |
| 1.0 percentage point decrease | 3.3 |
| Demographic assumptions Changes in the life expectancy assumption, including the benefit of longevity swap arrangements (see longevity risk on page 135), |
would have the following effect on the total IAS 19 deficit:
| (Increase)/decrease £bn |
|
|---|---|
| Life expectancy: | |
| One-year increase | (0.9) |
| One-year decrease | 0.9 |
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and the amount has been reliably estimated. If the effect is material, provisions are determined by discounting the expected future cash flows at an appropriate pre-tax discount rate.
Warranties and after-sales service are provided in the normal course of business with provisions for associated costs being made based on an assessment of future claims with reference to past experience. A provision for warranties is recognised when the underlying products and services are sold. The provision is based on historical warranty data and a weighting of possible outcomes against their associated probabilities.
A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been publicly announced. The costs associated with the reorganisation programmes are supported by detailed plans and based on previous experience as well as other known factors. Future operating costs are not provided for.
The Group holds provisions for expected legal, contractual and environmental costs that it expects to incur over an extended period. These costs are based on past experience of similar items and other known factors and represent management's best estimate of the likely outcome.
Other provisions include provisions for onerous contracts, which are recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract.
| Warranties | Legal, contractual |
||||
|---|---|---|---|---|---|
| and after-sales |
|||||
| service £m |
Reorganisations £m |
and environmental £m |
Other £m |
Total £m |
|
| Non-current | 55 | 41 | 232 | 75 | 403 |
| Current | 47 | 81 | 193 | 70 | 391 |
| At 1 January 2014 | 102 | 122 | 425 | 145 | 794 |
| Created | 48 | 67 | 62 | 20 | 197 |
| Utilised | (45) | (45) | (143) | (21) | (254) |
| Released | (24) | (7) | (32) | (34) | (97) |
| Transfer to held for sale | (2) | – | – | (2) | (4) |
| Transfer from other balance sheet categories | – | – | 74 | – | 74 |
| Net present value adjustments | – | – | 20 | 6 | 26 |
| Foreign exchange adjustments | 1 | – | 10 | 4 | 15 |
| At 31 December 2014 | 80 | 137 | 416 | 118 | 751 |
| Represented by: | |||||
| Non-current | 50 | 46 | 281 | 59 | 436 |
| Current | 30 | 91 | 135 | 59 | 315 |
| 80 | 137 | 416 | 118 | 751 |
Warranty and after-sales service costs are generally incurred within three years post-delivery. Whilst actual events could result in potentially significant differences to the quantum, but not the timing, of the outflows in relation to the provisions, management has reflected current knowledge in assessing the provision levels.
Reorganisation costs are generally incurred within one to three years. There is limited volatility around the timing and amount of the ultimate outflows related to these provisions.
Reflecting the inherent uncertainty within many legal proceedings, the timing and amount of the outflows could differ significantly from the amount provided.
Includes a provision taken in 2013 in respect of the Radford Army Ammunition Plant contract. There are no other individually significant provisions included within other provisions.
| Share capital | |||||
|---|---|---|---|---|---|
| Equity Ordinary shares of 2.5p each |
Total | ||||
| Number of shares m |
Nominal value £m |
Number of shares |
Nominal value £ |
Nominal value £m |
|
| Issued and fully paid | |||||
| At 1 January 2013 | 3,588 | 90 | 1 | 1 | 90 |
| Repurchased and cancelled | (52) | (1) | – | – | (1) |
| At 31 December 2013 | 3,536 | 89 | 1 | 1 | 89 |
| Repurchased and cancelled | (67) | (2) | – | – | (2) |
| At 31 December 2014 | 3,469 | 87 | 1 | 1 | 87 |
One Special Share of £1 in the Company is held on behalf of the Secretary of State for Business, Innovation and Skills (the Special Shareholder). Certain provisions of the Company's Articles of Association cannot be amended without the consent of the Special Shareholder. These provisions include the requirement that no foreign person, or foreign persons acting in concert, can have more than a 15% voting interest in the Company, the requirement that the majority of the directors are British, and the requirement that the Chief Executive and any executive Chairman are British citizens. The effect of these requirements can also be amended by regulations made by the directors and approved by the Special Shareholder.
The Special Shareholder may require the Company at any time to redeem the Special Share at par or to convert the Special Share into one ordinary voting share. The Special Shareholder is entitled to receive notice of and to attend general meetings and class meetings of the Company's shareholders, but has no voting right, nor other rights, other than to speak in relation to any business in respect of the Special Share.
In 2014, 67,417,000 (2013 51,595,000) ordinary shares of 2.5p were repurchased under the buyback programme.
As at 31 December 2014, 315,826,614 (2013 327,644,952) ordinary shares of 2.5p each with an aggregate nominal value of £7,895,665 (2013 £8,191,124) were held in treasury. During 2014, 11,818,338 (2013 9,169,044) treasury shares were used to satisfy awards and options under the Share Incentive Plan, Performance Share Plan, Restricted Share Plan and Executive Share Option Plan.
Own shares held, including treasury shares and shares held by BAE Systems Employee Share Option Plan (ESOP) Trust, are recognised as a deduction from retained earnings.
The Group has an ESOP discretionary trust to administer the share plans and to acquire Company shares, using funds loaned by the Group, to meet commitments to Group employees. A dividend waiver was in operation for shares within the ESOP Trust, other than those owned beneficially by the participants, for the dividends paid in June and December 2014.
At 31 December 2014, the ESOP held 1,509,844 (2013 1,451,631) ordinary shares of 2.5p each, with a market value of £7m (2013 £6m). The shares held by the ESOP are recorded at cost and deducted from retained earnings until such time as the shares vest unconditionally to employees.
Dividend waivers were in operation for the dividends paid in June and December 2014 over shares in the Group All-Employee Free Shares Plan Trust other than those shares owned beneficially by participants. A dividend waiver was also in operation for the dividends paid in June and December 2014 over shares within the Company's Share Incentive Plan Trust other than those shares owned beneficially by the participants.
Equity dividends on ordinary share capital are recognised as a liability in the period in which they are declared. The interim dividend is recognised when it has been approved by the Board and the final dividend is recognised when it has been approved by the shareholders at the Annual General Meeting.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Prior year final 12.1p dividend per ordinary share paid in the year (2013 11.7p) | 383 | 380 |
| Interim 8.2p dividend per ordinary share paid in the year (2013 8.0p) | 259 | 258 |
| 642 | 638 |
After the balance sheet date, the directors proposed a final dividend of 12.3p per ordinary share. The dividend, which is subject to shareholder approval, will be paid on 1 June 2015 to shareholders registered on 17 April 2015. The ex-dividend date is 16 April 2015.
Shareholders who do not at present participate in the Company's Dividend Reinvestment Plan and wish to receive the final dividend in shares rather than cash should complete a mandate form for the Dividend Reinvestment Plan and return it to the registrars no later than 8 May 2015.
| At 31 December 2014 | 4,589 | 202 | 10 | 299 | (42) | 3 | 5,061 |
|---|---|---|---|---|---|---|---|
| Net purchase of own shares | – | – | – | – | – | 2 | 2 |
| Tax on other comprehensive income | – | – | – | – | 19 | – | 19 |
| Amounts charged to hedging reserve | – | – | – | – | (92) | – | (92) |
| Equity accounted investments | – | – | – | 13 | – | – | 13 |
| Subsidiaries | – | – | – | 251 | – | – | 251 |
| Currency translation on foreign currency net investments: | |||||||
| At 31 December 2013 | 4,589 | 202 | 10 | 35 | 31 | 1 | 4,868 |
| Net purchase of own shares | – | – | – | – | – | 1 | 1 |
| Tax on other comprehensive income | – | – | – | – | (14) | – | (14) |
| Amounts credited to hedging reserve | – | – | – | – | 53 | – | 53 |
| Reclassification of cumulative currency translation reserve on disposal |
– | – | – | (8) | – | – | (8) |
| Equity accounted investments | – | – | – | (3) | – | – | (3) |
| Subsidiaries | – | – | – | (240) | – | – | (240) |
| Currency translation on foreign currency net investments: | |||||||
| At 1 January 2013 | 4,589 | 202 | 10 | 286 | (8) | – | 5,079 |
| Merger reserve £m |
Statutory reserve £m |
Revaluation reserve £m |
Translation reserve £m |
Hedging reserve £m |
Capital redemption reserve £m |
Total £m |
The merger reserve arose on the acquisition of the Marconi Electronic Systems (MES) business by British Aerospace in 1999 to form BAE Systems, and represents the amount by which the fair value of the shares issued by British Aerospace as consideration exceeded their nominal value.
Under Section 4 of the British Aerospace Act 1980, this reserve may only be applied in paying up unissued shares of the Company to be allotted to members of the Company as fully paid bonus shares.
The revaluation reserve relates to the revaluation at fair value of the net assets of the BVT joint venture previously held as an equity accounted investment on the acquisition of the remaining 45% interest in 2009.
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.
The capital redemption reserve represents the cumulative nominal value of the Company's ordinary shares repurchased and subsequently cancelled. During the year ended 31 December 2014, 67,417,000 (2013 51,595,000) ordinary shares with a nominal value of £2m (2013 £1m) were repurchased and have been subsequently cancelled.
The Group funds its operations through a mixture of equity funding and debt financing, including bank and capital market borrowings.
At 31 December 2014, the Group's capital was £1,919m (2013 £3,387m), which comprises total equity of £1,877m (2013 £3,418m), excluding amounts accumulated in equity relating to cash flow hedges of £42m (2013 £31m credit). Net debt (as defined by the Group) was £1,032m (2013 £699m).
The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. The Group's policy is to maintain an investment grade credit rating and ensure operating flexibility, whilst:
| Operating business cash flow Cash inflow from operating activities Purchase of property, plant and equipment, and investment property Purchase of intangible assets Proceeds from sale of property, plant and equipment, and investment property |
2014 £m 913 (263) (59) 539 – |
2013 £m 205 93 |
|---|---|---|
| (236) (33) |
||
| Proceeds from sale of intangible assets | 28 | |
| Equity accounted investment funding | (2) | (5) |
| Dividends received from equity accounted investments | 63 | 95 |
| Operating business cash flow | 1,191 | 147 |
| 2014 £m |
20131 £m |
|
| Electronic Systems | 246 | 235 |
| Cyber & Intelligence | 71 | 118 |
| Platforms & Services (US) | 201 | 191 |
| Platforms & Services (UK) | 173 | 60 |
| Platforms & Services (International) | 881 | (189) |
| HQ | (381) | (268) |
| Operating business cash flow | 1,191 | 147 |
| 2014 £m |
2013 £m |
|
|---|---|---|
| Proceeds from sale of subsidiary undertakings | – | 7 |
| Cash and cash equivalents disposed of with subsidiary undertakings | – | (2) |
| Proceeds from sale of subsidiary undertakings (net of cash disposed) | – | 5 |
| Purchase of subsidiary undertakings | (233) | (1) |
| Cash and cash equivalents acquired from purchase of subsidiary undertakings | 3 | – |
| Acquisitions and disposals | (230) | 4 |
Net (debt)/cash comprises cash and cash equivalents, less loans and overdrafts (including debt-related derivative financial instruments) and cash received on customers' account1.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Operating business cash flow (note 24) | 1,191 | 147 |
| Interest | (145) | (166) |
| Taxation | (92) | (138) |
| Free cash inflow/(outflow) | 954 | (157) |
| Acquisitions and disposals (note 24) | (230) | 4 |
| Net purchase of own shares | (281) | (212) |
| Equity dividends paid | (642) | (638) |
| Dividends paid to non-controlling interests | (14) | (11) |
| Cash inflow/(outflow) from matured derivative financial instruments | 8 | (47) |
| Cash inflow/(outflow) from movement in cash collateral | 10 | (10) |
| Cash inflow from loans | 679 | – |
| Cash outflow from repayment of loans | (398) | – |
| Net increase/(decrease) in cash and cash equivalents | 86 | (1,071) |
| Foreign exchange adjustments | (146) | 3 |
| Other non-cash movements | 13 | (19) |
| Less: Cash classified as held for sale | (6) | – |
| Less: Movement in cash received on customers' account1 | 1 | 1 |
| Less: Cash inflow from loans | (679) | – |
| Less: Cash outflow from repayment of loans | 398 | – |
| Movement in net debt (as defined by the Group) | (333) | (1,086) |
| Opening net (debt)/cash (as defined by the Group) | (699) | 387 |
| Closing net debt (as defined by the Group) | (1,032) | (699) |
| Components of net (debt)/cash (as defined by the Group) | ||
| 2014 | 2013 | |
| £m | £m | |
| Debt-related derivative financial instrument assets – non-current (note 14) | 10 | – |
| Debt-related derivative financial instrument assets – current (note 14) | – | 6 |
| Cash and cash equivalents (note 17) | 2,314 | 2,222 |
| Less: Cash classified as held for sale (note 7) | (6) | – |
| Cash (as defined by the Group) (note 18) | 2,318 | 2,228 |
| Loans – non-current (note 19) | (2,868) | (2,524) |
| Loans and overdrafts – current (note 19) | (482) | (402) |
| Less: Cash received on customers' account1 (note 20) | – | (1) |
| Debt (as defined by the Group) | (3,350) | (2,927) |
| Net debt (as defined by the Group) | (1,032) | (699) |
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group measures goodwill as the acquisition-date fair value of the consideration transferred, including the amount of any non-controlling interest in the acquiree, less the net of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed, including contingent liabilities as required by IFRS 3.
Consideration transferred includes the fair values of assets transferred, liabilities incurred by the Group to the previous owners of the acquiree, equity interests issued by the Group, contingent consideration, and share-based payment awards of the acquiree that are replaced in the business combination. Any contingent consideration payable is recognised at fair value at the acquisition date. Subsequent changes to the fair value of contingent consideration that is not classified as equity are recognised in the income statement.
Transaction costs that the Group incurs in connection with a business combination, such as finder's fees, legal fees, due diligence fees, and other professional and consulting fees, are expensed as incurred.
In 2014, BAE Systems acquired: Perimeter Internetworking Corp., trading as SilverSky; an additional 59% shareholding in Saudi Development and Training Company (SDT); and Signal Innovations Group, Inc. (SIG).
If the acquisitions had occurred on 1 January 2014, combined sales of Group and share of equity accounted investments would have been £16.7bn, revenue £15.5bn and profit £752m for the year ended 31 December 2014.
For all acquisitions made in the year, fair values remain provisional, but will be finalised within 12 months of acquisition.
| Acquisition | Description | Acquisition date | Percentage share acquired |
Consideration Currency |
Consideration £m |
|---|---|---|---|---|---|
| SilverSky | Commercial cyber service provider in the US | 11 December 2014 | 100% | \$232m | 149 |
| SDT1 | Provider of technical and professional training in Saudi Arabia |
15 September 2014 | 59% | SAR440m | 72 |
| SIG | Provider of imaging technologies and analytics to the US intelligence community |
30 September 2014 | 100% | \$21m | 13 |
| Consolidated results for the period from acquisition to | 31 December 2014 | |||
|---|---|---|---|---|
| Acquisition | Support for residual goodwill2 | Revenue £m |
EBITA3 £m |
Profit after tax4 £m |
| SilverSky | Complements Applied Intelligence's existing cyber, intelligence and security products and capabilities; |
3 | – | – |
| Enhances existing knowledge and expertise in commercial markets, and better positions the Group to compete for new customers, particularly in the US; |
||||
| Increases penetration of target markets through existing sales and marketing capabilities; and |
||||
| Provides a skilled assembled workforce. | ||||
| SDT | Complements existing training activities in the Kingdom of Saudi Arabia; | 65 | 2 | 2 |
| Enhances existing knowledge and expertise, and better positions the Group to compete for future work from the existing customer base; and |
||||
| Creates the opportunity to access new customers in the Kingdom of Saudi Arabia and also in new geographies. |
Goodwill recognised is attributable to specific opportunities and synergies which do not translate into separately identifiable intangible assets, but represent a proportion of the assessed value within each acquired entity.
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense.
Profit after tax includes amortisation charges on acquired intangible assets totalling £1m.
Intra-group.
The post-acquisition results above exclude acquisition-related costs of £3m incurred by the Group. These expenses relate to external legal fees and due diligence costs, and are included in operating costs.
The acquisitions had the following effect on the Group's assets and liabilities:
| SilverSky £m |
SDT £m |
SIG £m |
Total £m |
|
|---|---|---|---|---|
| Intangible assets | 81 | – | – | 81 |
| Property, plant and equipment | 7 | – | – | 7 |
| Inventories | – | 1 | – | 1 |
| Receivables | 8 | 6 | 1 | 15 |
| Deferred tax assets | 14 | – | – | 14 |
| Payables | (11) | (4) | – | (15) |
| Deferred tax liabilities | (31) | – | – | (31) |
| Cash and cash equivalents | 2 | 1 | – | 3 |
| Net assets acquired | 70 | 4 | 1 | 75 |
| Goodwill | 79 | 117 | 12 | 208 |
| Fair value of net assets acquired and goodwill arising | 149 | 121 | 13 | 283 |
| Cash consideration (note 24) | 149 | 72 | 12 | 233 |
| Amounts payable in respect of purchase price adjustments | – | – | 1 | 1 |
| Consideration | 149 | 72 | 13 | 234 |
| Carrying value of existing 40% shareholding in SDT (note 12) | – | 2 | – | 2 |
| Fair value gain on existing 40% shareholding in SDT (note 4) | – | 47 | – | 47 |
| Fair value of net assets acquired and goodwill arising | 149 | 121 | 13 | 283 |
The intangible assets acquired as part of the acquisition of SilverSky of £81m include customer relationships (£47m), software (£30m) and order backlog (£4m).
Receivables include trade receivables with a fair value and gross contractual value of £10m, which are expected to be fully recoverable.
The goodwill is not expected to be deductible for tax purposes.
Certain of the Group's financial instruments are held at fair value.
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the balance sheet date.
The fair values of financial instruments held at fair value have been determined based on available market information at the balance sheet date, and the valuation methodologies listed below:
Due to the variability of the valuation factors, the fair values presented at 31 December may not be indicative of the amounts the Group would expect to realise in the current market environment.
The fair value measurement hierarchy is as follows:
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| Notes | Carrying amount £m |
Fair value £m |
Carrying amount £m |
Fair value £m |
|
| Financial instruments measured at fair value: | |||||
| Non-current | |||||
| Available-for-sale financial assets | 7 | 7 | 3 | 3 | |
| Other receivables1 | 13 | 238 | 238 | 211 | 211 |
| Other financial assets | 14 | 38 | 38 | 42 | 42 |
| Other financial liabilities | 14 | (79) | (79) | (59) | (59) |
| Loans | 19 | (325) | (325) | (307) | (307) |
| Trade and other payables1 | 20 | (262) | (262) | (237) | (237) |
| Current | |||||
| Other financial assets | 14 | 46 | 46 | 81 | 81 |
| Other financial liabilities | 14 | (107) | (107) | (81) | (81) |
| Financial instruments not measured at fair value: | |||||
| Non-current | |||||
| Loans | 19 | (2,543) | (2,900) | (2,217) | (2,367) |
| Current | |||||
| Cash and cash equivalents | 17 | 2,308 | 2,308 | 2,222 | 2,222 |
Loans and overdrafts 19 (482) (494) (402) (414)
All of the financial assets and liabilities measured at fair value are classified as level 2 using the fair value hierarchy. There were no transfers between levels during the year.
Financial assets and liabilities in the Group's Consolidated Balance Sheet are either held at fair value or their carrying value approximates to fair value, with the exception of loans, most of which are held at amortised cost.
The fair value of total loans and overdrafts estimated using market prices at 31 December 2014 is £3,719m (2013 £3,088m).
The Group's objective is to manage its 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.
The Group's interest rate management policy is that a minimum of 50% (2013 50%) and a maximum of 90% (2013 90%) of gross debt is maintained at fixed interest rates. At 31 December 2014, the Group had 81% (2013 69%) of fixed rate debt and 19% (2013 31%) of floating rate debt based on a gross debt of £3.3bn, including debt-related derivative financial assets (2013 £2.9bn).
Based on contracted maturities and/or repricing dates, the following amounts are exposed to interest rate risk over the future as shown below:
| Between | ||
|---|---|---|
| Less than | one | More than |
| one | and two | two |
| year | years | years |
| £m | £m | £m |
| Cash and cash equivalents 2,308 |
– | – |
| Loans and overdrafts (644) |
(643) | (643) |
The floating rate debt has been predominantly achieved by entering into interest rate swaps which swap the fixed rate US dollar interest payable on debt into either floating rate sterling or US dollars. At the end of 2014, the Group had a total of \$1.0bn (2013 \$1.5bn) of this type of swap outstanding with a weighted average duration of 4.6 years (2013 2.3 years). In respect of the fixed rate debt, the weighted average period in respect of which interest is fixed was 10.1 years (2013 9.6 years).
Given the level of short-term interest rates during the year, the average cost of the floating rate debt was 4.1% (2013 3.3%) on US dollars. The cost of the fixed rate debt was 5.4% (2013 5.7%).
A change of 100 basis points in short-term rates applied to the average fixed/floating mix and level of borrowings would vary the interest cost to the Group by £6m (2013 £6m).
In respect of cash deposits, given the fluctuation in the Group's working capital requirements, cash is generally invested for short-term periods based at floating interest rates. A change of 100 basis points in the average interest rates during the year applied to the average cash deposits would vary the interest receivable by £9m (2013 £13m).
The contracted cash flows on loans and overdrafts, and derivative financial instruments at the reporting date are shown below, classified by maturity. The cash flows are shown on a gross basis, are not discounted and include estimated interest payments where applicable.
| 31 December 2014 | 31 December 2013 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Contracted cash flow | Contracted cash flow | |||||||||
| Carrying amount £m |
Less than one year £m |
Between one and five years £m |
More than five years £m |
Total £m |
Carrying amount £m |
Less than one year £m |
Between one and five years £m |
More than five years £m |
Total £m |
|
| Loans and overdrafts | (3,350) | (655) | (1,420) | (2,926) | (5,001) | (2,926) | (558) | (1,129) (2,513) | (4,200) | |
| (Sale)/purchase contracts: | ||||||||||
| US dollar | (39) | (41) | 71 | (9) | (197) | (69) | 97 | (169) | ||
| Euro | 707 | 761 | 47 | 1,515 | 683 | 1,079 | 61 | 1,823 | ||
| Sterling | (696) | (696) | (118) | (1,510) | (620) | (894) | (159) | (1,673) | ||
| Other | 24 | (27) | – | (3) | 134 | (122) | – | 12 | ||
| Cash flow hedges – foreign | ||||||||||
| exchange contracts | (107) | (4) | (3) | – | (7) | (12) | – | (6) | (1) | (7) |
| Purchase/(sale) contracts: | ||||||||||
| US dollar | 1,399 | (9) | – | 1,390 | 809 | – | – | 809 | ||
| Euro | 507 | – | – | 507 | 551 | – | – | 551 | ||
| Sterling | (2,044) | 9 | – | (2,035) | (1,591) | – | – | (1,591) | ||
| Other | 138 | – | – | 138 | 233 | – | – | 233 | ||
| Interest rate contracts | 4 | (4) | – | – | 8 | (5) | (3) | – | ||
| Other foreign exchange/interest | ||||||||||
| rate contracts | (5) | 4 | (4) | – | – | (11) | 10 | (5) | (3) | 2 |
| Debt-related derivative financial instruments |
10 | 6 | 2 | 23 | 31 | 6 | 6 | – | – | 6 |
| Other financial assets and liabilities | (102) | 6 | (5) | 23 | 24 | (17) | 16 | (11) | (4) | 1 |
Contractual cash flows in respect of all other financial liabilities are equal to the balance sheet carrying amount. Current contractual amounts relating to other financial liabilities, such as trade payables, are settled within the normal operating cycle of the business.
The Group's objective is to maintain adequate undrawn committed borrowing facilities.
At 31 December 2014, the Group had a committed Revolving Credit Facility (RCF) of £2bn (2013 £2bn). The RCF is contracted until 2018 at £2bn and from 2018 to 2019 at £1.8bn. The RCF was undrawn throughout the year.
Cash flow forecasting is performed by the businesses on a monthly basis. The Group monitors a rolling forecast of its liquidity requirements to ensure that there is sufficient cash to meet operational needs and maintain adequate headroom.
Surplus cash held by the businesses over and above balances required for working capital management is loaned to the Group's centralised treasury department. Surplus cash is invested in interest bearing current accounts, term deposits, money market deposits and marketable securities, choosing instruments with appropriate maturities or sufficient liquidity to provide sufficient headroom as determined by cash forecasts.
The Group's objective is to 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 the strongest credit ratings for short periods. The cash and cash equivalents balance at 31 December 2014 of £2,308m (2013 £2,222m) was invested with 30 (2013 27) financial institutions. A credit limit is allocated to each institution taking account of its market capitalisation, credit rating and credit default swap price. The Group has no exposure to Greek, Irish, Italian, Portuguese or Spanish banks. Additionally, the Group monitors its exposure to banks which have exposure to these countries.
The cash and cash equivalents of the Group are invested in non-speculative financial instruments which are usually highly liquid, such as short-term deposits. The Group, therefore, believes it has reduced its exposure to counterparty credit risk through this process.
The Group's objective is to reduce its exposure to transactional volatility in earnings and cash flows from movements in foreign currency exchange rates, mainly the US dollar, Euro and Saudi Riyal.
The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency denominated transactions. All material firm transactional exposures are hedged and the Group aims, where possible, to apply hedge accounting to these transactions.
The Group is exposed to movements in foreign currency exchange rates in respect of the translation of net assets and income statements of foreign subsidiaries and equity accounted investments. The Group does not hedge the translation effect of exchange rate movements on the income statements or balance sheets of foreign subsidiaries and equity accounted investments it regards as long-term investments.
The Group has material receivables due from the UK, US and Saudi Arabian governments where credit risk is not considered an issue. For the remaining trade receivables, a provision for bad debts has been calculated taking into account individual assessments based on past credit history and prior knowledge of debtor insolvency or other credit risk, and no one counterparty constitutes more than 7% of the balance (2013 5%).
The ageing of trade receivables is detailed below:
| 2014 | 2013 | ||||||
|---|---|---|---|---|---|---|---|
| Gross £m |
Provision £m |
Net £m |
Gross £m |
Provision £m |
Net £m |
||
| Not past due and not impaired | 611 | – | 611 | 919 | – | 919 | |
| Up to 180 days overdue and not impaired | 266 | – | 266 | 153 | – | 153 | |
| Up to 180 days overdue and impaired | – | – | – | 1 | (1) | – | |
| Past 180 days overdue and not impaired | 58 | – | 58 | 66 | – | 66 | |
| Past 180 days overdue and impaired | 28 | (28) | – | 26 | (26) | – | |
| 963 | (28) | 935 | 1,165 | (27) | 1,138 |
Movements on the provision for bad debts are as follows:
| 2014 £m |
2013 £m |
|
|---|---|---|
| At 1 January | 27 | 31 |
| Created | 15 | 14 |
| Utilised | (4) | (2) |
| Released | (11) | (16) |
| Foreign exchange adjustments | 1 | – |
| At 31 December | 28 | 27 |
GOVERNANCE STRATEGIC REPORT
The Group has granted equity-settled share options and Long-Term Incentive Plan (LTIP) arrangements, and cash-settled share appreciation rights to employees.
Equity-settled share options and LTIP arrangements are measured at fair value at the date of grant using an option pricing model.
The fair value is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the number of shares that will actually vest.
Cash-settled share options are measured at fair value at the balance sheet date. The Group recognises a liability at the balance sheet date based on these fair values, and taking into account the estimated number that will actually vest and the relative completion of the vesting period. Changes in the value of this liability are recognised in the income statement for the year.
Details of the terms and conditions of each share-based payment plan are given in the Annual Remuneration Report on pages 69 to 82.
| 2014 | 2013 | |||||
|---|---|---|---|---|---|---|
| Equity-settled £m |
Cash-settled £m |
Total £m |
Equity-settled £m |
Cash-settled £m |
Total £m |
|
| Executive Share Option Plan | 4 | – | 4 | 3 | 3 | 6 |
| Performance Share Plan | 5 | – | 5 | 8 | – | 8 |
| Restricted Share Plan | 5 | – | 5 | 7 | – | 7 |
| 14 | – | 14 | 18 | 3 | 21 |
The Group also incurred a charge of £28m (2013 £31m) in respect of the equity-settled all-employee free shares and matching Partnership Shares elements of the Share Incentive Plan.
| 2014 | 2013 | |||
|---|---|---|---|---|
| Number of shares '000 |
Weighted average exercise price £ |
Number of shares '000 |
Weighted average exercise price £ |
|
| Equity-settled options | ||||
| Outstanding at the beginning of the year | 30,959 | 3.52 | 23,014 | 3.24 |
| Granted during the year | 10,578 | 4.12 | 12,293 | 3.90 |
| Exercised during the year | (1,644) | 3.07 | (1,918) | 2.37 |
| Expired during the year | (4,299) | 3.71 | (2,430) | 3.62 |
| Outstanding at the end of the year | 35,594 | 3.70 | 30,959 | 3.52 |
| Exercisable at the end of the year | 3,633 | 4.30 | 5,674 | 3.95 |
| Cash-settled share appreciation rights | ||||
| Outstanding at the beginning of the year | 1,802 | 2.38 | 4,063 | 2.20 |
| Exercised during the year | (1,078) | 2.19 | (2,125) | 2.03 |
| Expired during the year | (30) | 2.07 | (136) | 2.30 |
| Outstanding at the end of the year | 694 | 2.69 | 1,802 | 2.38 |
| Exercisable at the end of the year | 694 | 2.69 | 1,802 | 2.38 |
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| Equity-settled | Cash-settled | Equity-settled | Cash-settled | ||
| Range of exercise price of outstanding options (£) | 2.64 – 4.79 | 2.64 – 3.56 | 2.01 – 4.79 2.01 – 3.58 | ||
| Weighted average remaining contracted life (years) | 8 | – | 8 | 1 | |
| Weighted average fair value of options granted (£) | 0.64 | – | 0.61 | – |
| Performance Share Plan | Share Matching Plan | Restricted Share Plan | ||||
|---|---|---|---|---|---|---|
| 2014 Number of shares '000 |
2013 Number of shares '000 |
2014 Number of shares '000 |
2013 Number of shares '000 |
2014 Number of shares '000 |
2013 Number of shares '000 |
|
| Outstanding at the beginning of the year | 21,693 | 26,834 | 11,201 | 13,334 | 6,070 | 7,519 |
| Granted during the year | 8,678 | 5,753 | – | 2,766 | 1,205 | 1,373 |
| Exercised during the year | (637) | (1,097) | – | – | (2,872) | (1,887) |
| Expired during the year | (10,866) | (9,797) | (5,583) | (4,899) | (643) | (935) |
| Outstanding at the end of the year | 18,868 | 21,693 | 5,618 | 11,201 | 3,760 | 6,070 |
| Exercisable at the end of the year | 266 | 720 | – | – | – | – |
| 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |
| Weighted average remaining contracted life (years) | 5 | 5 | 1 | 1 | 5 | 5 |
| Weighted average fair value of awards granted (£) | 3.01 | 3.51 | – | 3.89 | 4.12 | 3.90 |
All awards are equity-settled.
The exercise price for the Performance Share Plan and Restricted Share Plan is £nil (2013 £nil).
The fair value of equity-settled options/awards granted in the year has been measured using the weighted average inputs below and the following valuation models:
Executive Share Option Plan – Binomial model
Performance Share Plan – Monte Carlo
Restricted Share Plan – Dividend valuation model
| 2014 | 2013 | |
|---|---|---|
| Range of share price at date of grant (£) | 4.12 – 4.51 3.89 – 4.40 | |
| Expected option/award life (years) | 3 – 10 | 3 – 10 |
| Volatility (%) | 21 – 24 | 24 – 25 |
| Risk free interest rate (%) | 1.0 – 1.2 | 0.2 – 0.9 |
Volatility was calculated with reference to the Group's weekly share price volatility, after allowing for dividends and stock splits, for the greater of 30 weeks or for the period until vest date.
The average share price in the year was £4.33 (2013 £4.07).
The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments (note 12) and pension schemes (note 21).
Transactions occur with the equity accounted investments 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 party |
Purchases from related party |
Amounts owed by related party |
Amounts owed to related party1 |
Management recharges1 |
||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Related party | 2014 £m |
2013 £m |
2014 £m |
2013 £m |
2014 £m |
2013 £m |
2014 £m |
2013 £m |
2014 £m |
2013 £m |
| Advanced Electronics Company Limited | 9 | 1 | 56 | 50 | – | – | – | – | – | – |
| CTA International SAS | 3 | 1 | – | – | 2 | 1 | – | – | – | – |
| Eurofighter Jagdflugzeug GmbH | 1,087 1,048 | 11 | – | 64 | 30 | 77 | 92 | – | – | |
| FADEC International LLC | 74 | 61 | – | – | – | – | – | – | – | – |
| Gripen International KB | – | – | – | – | 15 | 17 | 14 | 16 | – | – |
| MBDA SAS | 22 | 17 | 90 | 134 | 6 | 6 | 403 | 454 | 17 | 17 |
| Panavia Aircraft GmbH | 34 | 39 | 44 | 64 | 5 | 2 | – | – | – | – |
| Saudi Development and Training Company Limited (SDT)2 |
– | 1 | 8 | 15 | n/a | – | n/a | 1 | – | – |
| 1,229 1,168 | 209 | 263 | 92 | 56 | 494 | 563 | 17 | 17 |
In October, the Group sold a freehold property to MBDA SAS for cash consideration of £12m.
£453m (2013 £560m) was owed by BAE Systems plc and £41m (2013 £3m) by other Group subsidiaries. 2. For the period from 1 January 2014 to 15 September 2014 when the Group accounted for its share of the results of SDT under the equity method, in accordance with IAS 28, Investments in Associates and Joint Ventures (revised 2011).
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 69 to 82. Total emoluments for directors and key management personnel charged to the Consolidated Income Statement were:
| 2014 | 2013 | |
|---|---|---|
| £'000 | £'000 | |
| Short-term employee benefits | 14,383 | 13,418 |
| Post-employment benefits | 1,678 | 1,676 |
| Termination benefits | 1,702 | 611 |
| Share-based payments | 3,320 | 4,163 |
| 21,083 | 19,868 |
The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business and regards these as insurance contracts. Provision is made for any amounts that the directors consider may become payable under such arrangements.
The Group leases various offices, factories and shipyards under non-cancellable operating lease agreements. The leases have varying terms including escalation clauses, renewal rights and purchase options. None of these terms represent unusual arrangements or create material onerous or beneficial rights or obligations.
The future aggregate minimum lease payments under non-cancellable operating leases and associated future minimum sublease income are as follows:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Payments due: | ||
| Not later than one year | 213 | 166 |
| Later than one year and not later than five years | 678 | 506 |
| Later than five years | 810 | 630 |
| 1,701 | 1,302 | |
| Total of future minimum sublease income under non-cancellable subleases | 159 | 166 |
Capital expenditure contracted for but not provided for in the accounts is as follows:
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Property, plant and equipment | 142 | 91 |
| Intangible assets | 3 | 18 |
| 145 | 109 |
| Principal subsidiary undertakings | Principal activities | Group interest in allotted capital |
Principally operates in |
Country of incorporation |
|---|---|---|---|---|
| BAE Systems (Operations) Limited (Held via BAE Systems Enterprises Limited and BAE Systems (Overseas Holdings) Limited) |
Defence and commercial aerospace activities |
100% ordinary |
UK | England and Wales |
| BAE Systems Controls Inc. (Held via BAE Systems, Inc.) |
Designs, develops and manufactures electronic systems for commercial and military applications |
100% common |
US | US |
| BAE Systems Information and Electronic Systems Integration Inc. (Held via BAE Systems, Inc.) |
Designs, develops and manufactures electronic systems and subsystems |
100% common |
US | US |
| BAE Systems Information Solutions Inc. (Held via BAE Systems Technology Solutions & Services Inc.) |
Full-service information technology solution provider |
100% common |
US | US |
| BAE Systems Land & Armaments LP 2000 North 15th Street, 11th Floor, Arlington, VA 22201, USA (Partners: BAE Systems Land & Armaments Inc. and BAE Systems Land & Armaments Holdings Inc.) |
Manufactures and supports military vehicles |
100% | US | US |
| BAE Systems Surface Ships Limited (Held via BAE Systems Surface Ships (Holdings) Limited) |
Designs, develops and constructs surface ships in the naval arena, and provides fleet support services |
100% ordinary |
UK | England and Wales |
The Company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by providing information only in relation to subsidiary undertakings whose results or financial position, in the opinion of the directors, principally affected the financial statements. Accordingly, the subsidiaries listed in the table above are those that represent more than 5% of total Group sales or underlying EBITA1. A full list of subsidiary, equity accounted investments and other associated undertakings as at 31 December 2014 will be annexed to the Company's next annual return filed with the Registrar of Companies.
No subsidiary undertakings are excluded from the Group accounts.
| 2014 | 2013 | ||
|---|---|---|---|
| Fixed assets | Notes | £m | £m |
| Intangible assets | 10 | – | |
| Tangible assets | 9 | 10 | |
| Investments in subsidiary undertakings | 2 | 8,169 | 8,057 |
| 8,188 | 8,067 | ||
| Current assets | |||
| Debtors due within one year | 3 | 3,257 | 3,662 |
| Debtors due after one year | 9 | 22 | |
| Other financial assets due within one year | 4 | 128 | 126 |
| Other financial assets due after one year | 4 | 105 | 80 |
| Cash at bank and in hand | 1,792 | 1,732 | |
| 5,291 | 5,622 | ||
| Liabilities falling due within one year | |||
| Loans and overdrafts | 5 | (1) | (100) |
| Creditors | 6 | (7,690) | (8,223) |
| Other financial liabilities | 4 | (134) | (141) |
| (7,825) | (8,464) | ||
| Net current liabilities | (2,534) | (2,842) | |
| Total assets less current liabilities | 5,654 | 5,225 | |
| Liabilities falling due after one year | |||
| Loans | 5 | (1,197) | (1,159) |
| Creditors | 6 | (25) | (21) |
| Other financial liabilities | 4 | (98) | (86) |
| (1,320) | (1,266) | ||
| Provisions for liabilities and charges | 7 | (120) | (52) |
| Net assets | 4,214 | 3,907 | |
| Capital and reserves | |||
| Issued share capital | 9 | 87 | 89 |
| Share premium account | 11 | 1,249 | 1,249 |
| Statutory reserve | 11 | 202 | 202 |
| Other reserves | 11 | 100 | 88 |
| Profit and loss account | 11 | 2,576 | 2,279 |
| Equity shareholders' funds | 4,214 | 3,907 |
Approved by the Board on 18 February 2015 and signed on its behalf by:
I G King P J Lynas
Chief Executive Group Finance Director
The financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss, and in accordance with applicable accounting standards in the UK (UK GAAP). The going concern basis has been applied in these accounts.
In accordance with Section 408(3) of the Companies Act 2006, the Company is exempt from the requirement to present its own profit and loss account. The amount of profit for the financial year of the Company is disclosed in note 11 to these accounts. The Company has no other recognised gains or losses in the current or preceding year and, therefore, no statement of total recognised gains or losses is presented.
The Company is exempt under the terms of FRS 1, Cash Flow Statements, from the requirement to publish its own cash flow statement, as its cash flows are included within the Consolidated Cash Flow Statement of the Group.
Transactions in foreign currencies are translated at the exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rates ruling at the balance sheet date. These exchange differences are recognised in the profit and loss account unless they qualify for hedge accounting treatment, in which case the effective portion is recognised directly in a separate component of equity.
Software development costs that are directly associated with the production of identifiable and unique software products controlled by the Company, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.
Depreciation is provided, normally on a straight-line basis, to write off the cost or valuation of tangible fixed assets over their estimated useful economic lives to any estimated residual value using the following rates:
| Buildings | up to 50 years, or the lease term if shorter |
|---|---|
| Computing equipment | 5 years |
No depreciation is provided on freehold land and assets in the course of construction.
Impairment reviews are undertaken if there are indications that the carrying values may not be recoverable.
Rental payments under operating leases are charged to the profit and loss account on a straight-line basis in arriving at operating profit.
The Company's investment in shares in Group companies is stated at cost less provision for impairment.
The policies disclosed in note 14 to the Group accounts for recognition, measurement and presentation of financial instruments are applied in the Company accounts.
The charge for taxation is based on the profit for the year and takes account of taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred tax is recognised on an undiscounted basis in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date where there is an obligation to pay more tax, or a right to pay less tax, in the future.
The Company contributes to Group pension schemes operated in the UK. Details of the principal schemes and the financial assumptions used are contained in note 21 to the Group accounts. As permitted by FRS 17, Retirement Benefits, the schemes are accounted for as defined contribution schemes, as the employer cannot identify its share of the underlying assets and liabilities of the schemes. The employer's contributions are set in relation to the current service period and also to fund a series of agreed measures to address the pension scheme funding deficits.
The Company has granted equity-settled share options and Long-Term Incentive Plan (LTIP) arrangements to Group employees. Equity-settled share options and LTIP arrangements are measured at fair value at the date of grant. The fair value of awards granted to employees of the Company is expensed on a straight-line basis over the vesting period, based on the Company's estimate of the number of shares that will actually vest. The cost of awards to employees of subsidiary undertakings is accounted for as an additional investment in the employing subsidiary.
In accordance with Urgent Issues Task Force (UITF) Abstract 25, National Insurance Contributions on Share Option Gains, the Company provides in full for the employer's national insurance liability estimated to arise on the future exercise of share options and LTIP arrangements granted, except where the employee has agreed to settle the employer's national insurance liability as a condition of grant.
As required under UITF Abstract 38, Accounting for ESOP Trusts, the cost to the Company of own shares held is shown as a deduction from shareholders' funds within the profit and loss account. Consideration paid or received for the purchase or sale of the Company's own shares in the ESOP Trust is shown separately in the reconciliation of movements in shareholders' funds.
Dividends received and receivable are credited to the Company's profit and loss account.
Equity dividends on ordinary share capital are recognised as a liability in the period in which they are declared. The interim dividend is recognised when it has been approved by the Board and the final dividend is recognised when it has been approved by the shareholders at the Annual General Meeting.
A new financial reporting framework in the UK was effective on 1 January 2015. As a result, BAE Systems plc has adopted FRS 101 Reduced Disclosure Framework for the year ending 31 December 2015.
| £m | |
|---|---|
| Cost | |
| At 1 January 2014 | 8,118 |
| Additions1 | 153 |
| Disposals | (88) |
| At 31 December 2014 | 8,183 |
| Impairment provisions | |
| At 1 January 2014 | 61 |
| Disposals | (47) |
| At 31 December 2014 | 14 |
| Net carrying value | |
| At 31 December 2014 | 8,169 |
| At 31 December 2013 | 8,057 |
| 2014 £m |
2013 £m |
|||
|---|---|---|---|---|
| Due within one year | ||||
| Corporation tax recoverable | 32 | 32 | ||
| Amounts owed by subsidiary undertakings | 3,182 | 3,585 | ||
| Amounts owed by Group joint ventures | 5 | 5 | ||
| Prepayments and accrued income | 23 | 24 | ||
| Other debtors | 15 | 16 | ||
| 3,257 | 3,662 | |||
| 2014 Assets £m |
2014 Liabilities £m |
2013 Assets £m |
2013 Liabilities £m |
|
| Due within one year | ||||
| Cash flow hedges – foreign exchange contracts | 2 | – | – | (2) |
| Other foreign exchange/interest rate contracts | 126 | (134) | 126 | (139) |
| 128 | (134) | 126 | (141) | |
| Due after one year | ||||
| Cash flow hedges – foreign exchange contracts | 4 | – | – | (2) |
| Other foreign exchange/interest rate contracts | 95 | (98) | 80 | (84) |
| Debt-related derivative financial instruments – assets1 | 6 | – | – | – |
| 105 | (98) | 80 | (86) |
Full disclosures relating to the Group's other financial assets and liabilities, and financial risk management strategies are given in notes 14, 27 and 28 to the Group accounts.
Financial statements
| 5. LOANS AND OVERDRAFTS | ||
|---|---|---|
| 2014 £m |
2013 £m |
|
| Due within one year | ||
| Euro-Sterling £100m 10¾% bond, repayable 2014 | – | 100 |
| Overdrafts | 1 | – |
| 1 | 100 | |
| Due after one year | ||
| US\$350m 3.5% bond, repayable 2016 | 224 | 211 |
| US\$500m 4.75% bond, repayable 2021 | 320 | 301 |
| £400m 4.125% bond, repayable 2022 | 398 | 397 |
| US\$400m 5.8% bond, repayable 2041 | 254 | 238 |
| Debt-related derivative financial instruments – liabilities | 1 | 12 |
| 1,197 | 1,159 | |
| 6. CREDITORS | ||
| 2014 | 2013 | |
| £m | £m | |
| Due within one year | ||
| Amounts owed to subsidiary undertakings | 7,035 | 7,338 |
| Amounts owed to Group joint ventures | 453 | 560 |
| Accruals and deferred income | 46 | 45 |
| Other creditors | 156 | 280 |
| 7,690 | 8,223 | |
| Due after one year | ||
| Other creditors | 25 | 21 |
| 25 | 21 | |
| 7. PROVISIONS FOR LIABILITIES AND CHARGES | ||
| Contracts and other |
||
| £m | ||
| At 1 January 2014 | 52 | |
| Created | 2 | |
| Transfer from other balance sheet categories | 84 | |
| Utilised | (16) | |
| Released | (7) |
At 31 December 2014 120 The Company holds provisions for contractual costs that it expects to incur over an extended period. These costs are based on past experience of similar items and represent management's best estimate of the likely outcome.
Net present value adjustments 5
Borrowings by subsidiary undertakings totalling £2,146m (2013 £1,661m) which are included in the Group's borrowings have been guaranteed by the Company.
| Equity | Non-equity Special Share of £1 |
Total | |||
|---|---|---|---|---|---|
| Ordinary shares of 2.5p each | |||||
| Number of shares m |
Nominal value £m |
Number of shares |
Nominal value £ |
Nominal value £m |
|
| Issued and fully paid | |||||
| At 1 January 2013 | 3,588 | 90 | 1 | 1 | 90 |
| Repurchased and cancelled | (52) | (1) | – | – | (1) |
| At 31 December 2013 | 3,536 | 89 | 1 | 1 | 89 |
| Repurchased and cancelled | (67) | (2) | – | – | (2) |
| At 31 December 2014 | 3,469 | 87 | 1 | 1 | 87 |
One Special Share of £1 in the Company is held on behalf of the Secretary of State for Business, Innovation and Skills (the Special Shareholder). Certain provisions of the Company's Articles of Association cannot be amended without the consent of the Special Shareholder. These provisions include the requirement that no foreign person, or foreign persons acting in concert, can have more than a 15% voting interest in the Company, the requirement that the majority of the directors are British, and the requirement that the Chief Executive and any executive Chairman are British citizens. The effect of these requirements can also be amended by regulations made by the directors and approved by the Special Shareholder.
The Special Shareholder may require the Company at any time to redeem the Special Share at par or to convert the Special Share into one ordinary voting share. The Special Shareholder is entitled to receive notice of and to attend general meetings and class meetings of the Company's shareholders but has no voting right, nor other rights, other than to speak in relation to any business in respect of the Special Share.
In 2014, 67,417,000 (2013 51,595,000) ordinary shares of 2.5p were repurchased under the buyback programme.
As at 31 December 2014, 315,826,614 (2013 327,644,952) ordinary shares of 2.5p each with an aggregate nominal value of £7,895,665 (2013 £8,191,124) were held in treasury. During 2014, 11,818,338 (2013 9,169,044) treasury shares were used to satisfy awards and options under the Share Incentive Plan, Performance Share Plan, Restricted Share Plan and Executive Share Option Plan.
Options over shares of the ultimate parent undertaking, BAE Systems plc, have been granted to employees of the Company under various plans. Details of the terms and conditions of each share-based payment plan are given in the Annual Remuneration Report on pages 69 to 82.
| Executive Share Option Plan 2014 2013 Weighted average Number of exercise Number of |
||||
|---|---|---|---|---|
| shares '000 |
price £ |
shares '000 |
Weighted average exercise price £ |
|
| Outstanding at the beginning of the year | 11,709 | 3.57 | 9,601 | 3.30 |
| Granted during the year | 3,692 | 4.12 | 3,798 | 3.90 |
| Exercised during the year | (1,022) | 2.93 | (1,056) | 2.06 |
| Expired during the year | (594) | 3.86 | (634) | 3.92 |
| Outstanding at the end of the year | 13,785 | 3.75 | 11,709 | 3.57 |
| 2014 | 2013 | |||
| Weighted average remaining contracted life (years) | 7 | 7 | ||
| Weighted average fair value of options granted (£) | 0.59 | 0.59 | ||
| Range of exercise price of outstanding options (£) | 2.64 – 4.79 | 2.01 – 4.79 | ||
| Expense recognised for the year (£m) | 2 | 1 |
| Performance Share Plan | Share Matching Plan | Restricted Share Plan | ||||
|---|---|---|---|---|---|---|
| 2014 Number of shares '000 |
2013 Number of shares '000 |
2014 Number of shares '000 |
2013 Number of shares '000 |
2014 Number of shares '000 |
2013 Number of shares '000 |
|
| Outstanding at the beginning of the year | 8,281 | 10,519 | 5,167 | 5,690 | 29 | 101 |
| Granted during the year | 3,710 | 1,798 | – | 1,446 | 9 | 10 |
| Exercised during the year | (375) | (500) | – | – | (9) | (53) |
| Expired during the year | (3,974) | (3,536) | (1,946) | (1,969) | (1) | (29) |
| Outstanding at the end of the year | 7,642 | 8,281 | 3,221 | 5,167 | 28 | 29 |
| 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |
| Weighted average remaining contracted life (years) | 5 | 5 | 1 | 1 | 5 | 5 |
| Weighted average fair value of awards granted (£) | 2.73 | 3.18 | – | 3.89 | 4.12 | 3.89 |
| Expense recognised for the year (£m) | 3 | 3 | – | – | – | – |
The exercise price for the Performance Share Plan, Share Matching Plan and Restricted Share Plan is £nil (2013 £nil).
Information on options/awards granted in the year can be found in note 29 to the Group accounts.
| Share premium account £m |
Statutory reserve £m |
Other reserves £m |
Profit and loss account £m |
|
|---|---|---|---|---|
| At 31 December 2013 | 1,249 | 202 | 88 | 2,279 |
| Profit for the year | – | – | – | 1,183 |
| Dividends paid | – | – | – | (642) |
| Share-based payments | – | – | – | 37 |
| Purchase of own shares | – | – | 2 | (281) |
| Movements in hedging reserve | – | – | 10 | – |
| At 31 December 2014 | 1,249 | 202 | 100 | 2,576 |
Under Section 4 of the British Aerospace Act 1980, this reserve may only be applied in paying up unissued shares of the Company to be allotted to members of the Company as fully paid bonus shares.
Other reserves for the Company comprise: capital reserve £24m (2013 £24m); hedging reserve £6m credit (2013 £4m debit); capital redemption reserve £3m (2013 £1m) and non-distributable reserve arising from property disposals to other Group undertakings £67m (2013 £67m). The non-distributable reserve arising from property disposals to other Group undertakings relates to the revaluation surplus realised by the Company on properties which were sold to other Group companies as part of operational reorganisations in prior years. Amounts within this reserve are transferred to the profit and loss account as distributable when the related properties are disposed of outside the Group, or written down following impairment.
The Company's profit for the financial year was £1,183m (2013 £758m). The non-distributable portion of the profit and loss account is £196m (2013 £196m).
Own shares held, including treasury shares and shares held by BAE Systems Employee Share Option Plan (ESOP) Trust, are recognised as a deduction from retained earnings.
The Group has an ESOP discretionary trust to administer the share plans and to acquire Company shares, using funds loaned by the Group, to meet commitments to Group employees. A dividend waiver was in operation for shares within the ESOP Trust, other than those owned beneficially by the participants, for the dividends paid in June and December 2014.
At 31 December 2014, the ESOP held 1,509,844 (2013 1,451,631) ordinary shares of 2.5p each with a market value of £7m (2013 £6m). The shares held by the ESOP are recorded at cost and deducted from retained earnings until such time as the shares vest unconditionally to employees.
Dividend waivers were in operation for the dividends paid in June and December 2014 over shares in the Group All-Employee Free Shares Plan Trust other than those shares owned beneficially by participants. A dividend waiver was also in operation for the dividends paid in June and December 2014 over shares within the Company's Share Incentive Plan Trust other than those shares owned beneficially by the participants.
The total number of employees of the Company at 31 December 2014 was 1,189 (2013 831). Total staff costs, excluding charges for share-based payments, were £128m (2013 £102m).
Under Schedule 5 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (Schedule 5), total directors' emoluments, excluding Company pension contributions, were £6,601,189 (2013 £6,289,295); these amounts are calculated on a different basis to emoluments in the Annual Remuneration Report which are calculated under Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (Schedule 8 (2013)). These emoluments were paid for their services on behalf of the BAE Systems Group. No emoluments related specifically to their work for the Company. Under Schedule 5, the aggregate gains made by directors from the exercise of share options in 2014 as at the date of exercise was £739,401 (2013 £1,909,962) and the net aggregate value of assets received by directors in 2014 from Long-Term Incentive Plans as calculated at the date of vesting was £nil (2013 £129,722); these amounts are calculated on a different basis from the valuation of share plan benefits under Schedule 8 (2013) in the Annual Remuneration Report.
Fees payable to the Company's auditor for the audit of the Company's annual accounts totalled £1,669,000 (2013 £1,621,000).
Details of related party transactions are detailed in note 30 to the Group accounts.
The Company also has a related party relationship with its directors and key management personnel, and pension schemes.
6 Carlton Gardens London SW1Y 5AD United Kingdom
Telephone: +44 (0)1252 373232
Registered in England and Wales, No. 1470151
Equiniti Limited (0140) Aspect House Spencer Road Lancing West Sussex BN99 6DA United Kingdom
If you have any queries regarding your shareholding or need to notify any changes to your personal details, please contact Equiniti.
Equiniti's website (https://help.shareview.co.uk) includes a comprehensive set of answers to many frequently asked questions relating to managing a shareholding. If you cannot find the answer to your question, there is an online email form, which will help to ensure your question is directed to the most appropriate team for a response. Alternatively, you can call the BAE Systems Helpline on 0871 384 2044* or, from outside the UK, +44 121 415 7058.
* Calls to the above number are charged at 8p per minute plus network extras. Lines are open from 8.30am to 5.30pm Monday to Friday.
In addition, the following services are offered to shareholders:
More information on all these services can be found on Equiniti's website (www.shareview.co.uk).
BAE Systems plc American Depositary Receipts (ADRs) are traded on the Over The Counter market (OTC) under the symbol BAESY. One ADR represents four BAE Systems plc ordinary shares.
JPMorgan Chase Bank, N.A. is the depositary. If you should have any queries, please contact:
JPMorgan Chase & Co PO Box 64504 St Paul MN 55164-0504 USA
Telephone number for general queries: (800) 990 1135
Telephone number from outside the US: +1 651 453 2128
ShareGift, the share donation charity (registered charity number 1052686), accepts donations of small parcels of shares which may be uneconomic to sell. Details of the scheme are available from ShareGift at www.sharegift.org, by telephone on 020 7930 3737 or by email: [email protected]
The middle market price of the Company's ordinary shares on 31 December 2014 was 472.0p and the range during the year was 376.0p to 481.7p.
Visit the Shareholder information section of our website: www.baesystems.com/investors
| FINANCIAL CALENDAR | |
|---|---|
| Financial year end | 31 December |
| Annual General Meeting | 7 May 2015 |
| 2014 final ordinary dividend payable | 1 June 2015 |
| 2015 half-yearly results announcement | 30 July 2015 |
| 2015 interim ordinary dividend payable | 30 November 2015 |
| 2015 full-year results: | |
| – preliminary announcement | February 2016 |
| – Annual Report | March 2016 |
| 2015 final ordinary dividend payable | June 2016 |
Fraudsters use persuasive and high-pressure tactics to lure investors into scams.
They may offer to sell shares that turn out to be worthless or non-existent, or to buy shares at an inflated price in return for an upfront payment. While high profits are promised, if you buy or sell shares in this way you will probably lose your money.
5,000 people contact the Financial Conduct Authority about share fraud each year, with victims losing an average of £20,000.
If you are approached by fraudsters please tell the FCA using the share fraud reporting form at www.fca.org.uk/scams, where you can find out more about investment scams.
You can also call the FCA Consumer Helpline on 0800 111 6768.
If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040.
BAE Systems Investor Relations App gives you all the latest investor and nancial media information you need in an iPad-optimised App.
Printed by Park Communications on FSC®certied paper.
Park is an EMAS certied company and its Environmental Management System is certied to ISO 14001.
100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average 99% of any waste associated with this production will be recycled.
The papers are the combination of 100% virgin bre and 50% recycled bre sourced from well-managed, responsible, FSC®certied forests. The pulp for each is bleached using an Elemental Chlorine Free (ECF) process.
Designed and produced by Radley Yeldar.
BAE Systems plc 6 Carlton Gardens London SW1Y 5AD United Kingdom Telephone: +44 (0) 1252 373232 www.baesystems.com Registered in England and Wales No. 1470151 © BAE Systems plc 2015. All rights reserved BAE SYSTEMS is a registered trade mark of BAE Systems plc.
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.