BAE Systems once again performed well in 2007, demonstrating the significant fundamental strengths and quality of the business. EBITA1 increased by 22% to £1,477m on sales2 of £15,710m, up 14% compared with 2006. Underlying earnings3 per share increased 30% to 31.0p for the year. The Group had net cash of £700m at year end, having invested $4.5bn (£2.2bn) excluding fees in the acquisition of Armor Holdings, Inc. during the year.
Each of the four business sectors delivered good profitability with return on sales exceeding 8.5% in all sectors. This profitability stems from good programme cost and schedule performance across the Group.
Underlying this performance are principles of ethical conduct, good governance, our values and policies and processes that guide the Group’s business and the behaviour of its people, with a clear system of delegated authority within a ‘One Company’ approach. BAE Systems is determined that the business policies and processes mandated across the organisation align with global best practice.
BAE Systems is a global company with a strategy currently focused around six home markets. Together these home markets were responsible for generating 85% of Group sales2 in 2007 (2006 84%).
The Group is benefiting from a well-executed strategy with good profitable growth generated from substantial business operations in its home markets and especially the United States. A notable success is the very strong growth in the land systems business in recent years. Following the earlier acquisitions of Alvis in 2004 and United Defense in 2005, the acquisition of Armor Holdings, Inc. in 2007 has established BAE Systems as having a clear leadership position in the land sector.
Our multi-home market business focus continues to generate opportunities for growth, especially in the Kingdom of Saudi Arabia where the Group has a growing home market position.
United States
BAE Systems is a valued, trusted and high-performing part of the US defence industrial base and is one of the top ten largest defence companies in the US.
In the US, the Group is a market leader in advanced information technology, intelligence analysis, geospatial exploitation software and the development of knowledge-based systems. In addition, BAE Systems continues to see strong demand for sophisticated electronic warfare and protection systems, and in its support solutions business the ship repair facilities have remained fully utilised.
In the land systems sector, further contracts to reset Bradley combat vehicles and other US tracked vehicles to ‘as new’ condition were awarded, providing extended visibility of throughput at the current high level of activity. In addition to the high volume of reset activity, strong demand for vehicle upgrades with new digital systems continues, in part driven by the move in the US to modular forces requiring the fielding of a common standard of more capable vehicles.
To complement BAE Systems’ tracked vehicle position in the US, the Group has been executing a wheeled vehicle strategy to meet a valuable, near-term, urgent operational requirement for Mine Resistant Ambush Protected (MRAP) vehicles. This has resulted in the establishment of a new assembly facility for the RG33 mine protected vehicle in York, Pennsylvania, alongside the Bradley reset facility. Following the substantial contract award for RG33 MRAP vehicles in 2007, manufacturing volume has increased rapidly in the last months of 2007 with the completion of 23 vehicles in October rising to 102 in December.
The acquisition of Armor Holdings, Inc. delivered further progress as regards the wheeled vehicle strategy. The business is a key player in the tactical wheeled vehicle market and in the increasingly vital areas of armour protection and survivability. With strong demand for its products, notably for the Family of Medium Tactical Vehicles (FMTV) and the Caiman mine protected vehicle derivative, the Armor Holdings acquisition is well on track to deliver our required return on investment.
BAE Systems has worked across its global businesses rapidly to design, produce and deliver vehicles to protect the armed forces. The Group’s role on the MRAP programme involves collaboration across sites and businesses globally, including the integration of the former Armor Holdings’ capabilities. The programme brings together more than 35 years of experience in mine protected wheeled vehicle expertise and highly survivable combat platforms.
In December 2007, the Group announced the proposed acquisition of MTC Technologies, Inc. MTC complements BAE Systems’ existing readiness and sustainment capabilities in the US.
United Kingdom
The Group’s UK-based businesses are performing well with good programme schedule and cost performance. This performance improvement included a recovery to profitable trading for the land systems business in the UK.
BAE Systems continues to make progress in developing integrated through-life support business in partnering arrangements with the UK MoD and the UK’s armed forces. Benefits are now apparent as some of the earlier programme relationships mature. For example, the National Audit Office has concluded that the partnered support arrangements for the Tornado combat aircraft have contributed to a 51% reduction in cost per flying hour and cost savings over the past five years of £1.3bn. BAE Systems is similarly involved in support for a number of other UK air platforms and is addressing through-life support for the UK’s armoured fighting vehicle fleet. The Group identifies further opportunities to develop such arrangements in air, land and naval support.
The UK government’s commitment to the new Carrier programme in July enabled BAE Systems to enter into a Framework Agreement with VT Group for the establishment of a joint venture which would, subject to completion, bring together BAE Systems’ and VT Group’s respective surface warship building and surface warship through-life support operations.
Other home markets
Saudi Arabia continues to be an important home market for BAE Systems, building on a performance track record established over many decades.
The large programme of support for Tornado is being maintained and the modernisation of existing assets continues. In September 2007, under the new defence co-operation programme known as ‘Project Salam’, contracts were signed between the UK government and the Kingdom of Saudi Arabia for the supply of 72 Typhoon aircraft.
We continue to invest within Saudi Arabia in both the expansion of the Kingdom’s industrial capability and new secure residential accommodation. The first of two new compounds for our employees is now being occupied in Riyadh.
In Sweden, production of the CV90 infantry fighting vehicle is underway for the Dutch Army, continuing the good export performance of this business.
In Australia, the Group continues to build on its position as a through-life capability partner to the Australian Defence Force, including a follow-on multi-year support contract for the Hawk aircraft.
The selection by Australia of the FMTV as the basis for the Land 121 vehicle programme will generate substantial industrial involvement in Australia. BAE Systems is also a major subcontractor on the Australian Wedgetail Airborne Early Warning and Control programme, where we are jointly engaged with Boeing and the customer to re-baseline this programme.
In January 2008, the Group announced the proposed acquisition of Tenix Defence, a leading Australian defence contractor. The acquisition will more than double BAE Systems’ presence in Australia, making it the largest in-country supplier to the Australian Defence Force. The organisations are an excellent fit and have largely complementary programmes and capabilities. This acquisition is a significant step in the implementation of the Group’s strategy to develop as the premier global defence and aerospace company by growing the business in Australia, one of the Group’s six home markets.
In South Africa, the land systems OMC business is achieving growth through exports with its RG31 and RG32 mine protected vehicles.
Summary and outlook
BAE Systems has a successful track record of identifying and addressing market opportunities through organic investments and acquisitions. Following the acquisition of Armor Holdings, Inc., the Group has maintained a strong balance sheet and is performing well. The Group continues to look for further value enhancing opportunities across its home markets and remains focused on delivering good business performance and generating value, to the benefit of customers and shareholders.
The Group is continuing to deliver its strategy with strong financial and programme performance. It is delivering value for money and capability to its customers and is well positioned for the future with an established footprint in six home markets. BAE Systems is a quality business based on a strong, well-balanced portfolio and is well positioned to continue to deliver shareholder value in line with our long-term plans.
We have excellent forward visibility and a further year of good growth is anticipated in 2008, including a full year contribution from the former Armor Holdings business. In addition, part-year contributions are expected following the anticipated completion in 2008 of the proposed acquisitions of MTC Technologies and Tenix Defence.
Mike Turner Chief Executive
1 earnings before amortisation and impairment of intangible assets, finance costs and taxation expense
2 including share of equity accounted investments
3 earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and uplift on acquired inventories (see note 10 to the Group accounts)
