Sales1 increased 14% from £13,765m to £15,710m. Sales in the full year from the Armor Holdings business, acquired in July 2007, were £725m. Like-for-like growth, after adjusting for the impact of exchange translations and acquisitions and disposals, was also 14%. US-led businesses were responsible for 47% of sales1 and sales1 generated from home markets represented 85% of the Group total.
EBITA2 increased 22% to £1,477m (2006 £1,207m). The growth includes the benefit of five months trading from the Armor Holdings business, acquired in July 2007, which contributed EBITA2 of £77m in the year. Translation of US$ generated results decreased EBITA2 by £47m when compared with 2006. US-led businesses delivered 50% of the Group’s EBITA2.
Return on sales (EBITA2 adjusted for uplift on acquired inventories expressed as a percentage of sales) for the Group increased from 8.8% to 9.5%.
Amortisation and impairment
The impairment charge of £148m includes £145m in respect of the goodwill associated with the Group’s Insyte business.
Order book1 increased to £38.6bn, primarily on the award of the Saudi Typhoon contract, MRAP orders and the acquisition of Armor Holdings.
Net finance costs1
Financial income, including the Group’s share of the finance costs of equity accounted investments, was £93m (2006 £174m financial expense). The underlying net interest charge of £38m (2006 £157m) was offset by a net credit of £131m (2006 increased by a net charge of £17m) arising from pension accounting, marked-to-market revaluation of financial instruments and foreign currency movements.
Finance costs were reduced in 2007, primarily as a result of the benefit of the October 2006 Airbus net disposal proceeds (£1.2bn).
Underlying interest cover based on EBITA2 increased from 7.7 times to 39 times.
Taxation
The Group’s effective tax rate for continuing operations for the year was unchanged from 2006 at 26%.
Earnings per share
Underlying earnings3 per share from continuing operations for 2007 increased by 30% to 31.0p.
Basic earnings per share, in accordance with IAS 33 Earnings per Share, from continuing operations, increased by 31% to 26.0p (2006 19.9p).
Dividend
The Board is recommending a final dividend of 7.8p per share (2006 6.9p), bringing the total dividend for the year to 12.8p per share (2006 11.3p), an increase of 13.3%.
The proposed dividend is covered 2.4 times by earnings3 from continuing operations (2006 2.1 times), which is consistent with the Group’s policy of growing the dividend whilst maintaining a long-term sustainable earnings cover of approximately two times.
Reconciliation of cash inflow from operating activities to net cash
| 2007 £m |
2006 £m |
|
| Cash flow from operating activities | 2,162 | 778 |
|---|---|---|
| Capital expenditure (net) and financial investment | (262) | (141) |
| Dividends received from equity accounted investments | 78 | 145 |
| Operating business cash flow | 1,978 | 782 |
| Interest and preference dividends | (65) | (207) |
| Taxation | (112) | (85) |
| Free cash flow | 1,801 | 490 |
| Acquisitions and disposals | (1,574) | 1,330 |
| Debt acquired on acquisition of subsidiary | (538) | – |
| Issue/(purchase) of equity shares | 603 | (71) |
| Equity dividends paid | (396) | (346) |
| Dividends paid to minority interests | (1) | – |
| Preference share conversion | 245 | 6 |
| Other non-cash movements | 57 | (11) |
| Foreign exchange | 36 | 323 |
| Movement in cash on customers’ account6 | 32 | (9) |
| 265 | 1,712 | |
| Opening net cash/(debt) as defined by the Group | 435 | (1,277) |
| Closing net cash as defined by the Group | 700 | 435 |
| Analysed as: | ||
| Term deposits – non-current | – | 4 |
| Term deposits – current | 164 | 503 |
| Cash and cash equivalents | 3,062 | 3,100 |
| Loans – non-current | (2,197) | (2,776) |
| Loans – current | (283) | (308) |
| Overdrafts – current | (16) | (26) |
| Loans and overdrafts – current | (299) | (334) |
| Cash on customers’ account6 (included within trade and other payables) | (30) | (62) |
| Closing net cash as defined by the Group | 700 | 435 |
Cash flows
Cash inflow from operating activities was £2,162m (2006 £778m), which is after £76m (2006 £441m) special contributions to the UK pension schemes.
There was an outflow from net capital expenditure and financial investment of £262m (2006 £141m).
Dividends from equity accounted investments, primarily MBDA, Gripen International, Eurofighter and Saab, amounted to £78m.
The resulting operating business cash inflow of £1,978m (2006 £782m) gave rise to free cash inflow, after interest, preference dividends and taxation, of £1,801m (2006 £490m).
On 31 July 2007, the Group acquired Armor Holdings, Inc. for $4.5bn (£2.2bn) excluding fees. Net cash outflow from all acquisitions and disposals was £2,112m.
In the period, 33 million shares were purchased under the buyback programme announced in October 2006. The cash outflow in respect of this programme was £152m in the period. In May, £750m, before costs, was raised following the placing of new ordinary shares to part finance the proposed acquisition of Armor Holdings, Inc.
Conversion of the outstanding 260 million 7.75p (net) cumulative redeemable preference shares into ordinary shares removed the debt element of these preference shares, giving rise to an increase in reported cash of £245m.
The Group’s net cash at 31 December 2007 was £700m, a net inflow of £265m from the net cash position of £435m at the start of the year.
Retirement benefit obligations
The movement in retirement benefit obligations during the year was as follows:
| £m | |
| Deficit in defined benefit pension plans at 1 January 2007 | (3,167) |
|---|---|
| Decrease in liabilities due to changes in assumptions | 952 |
| Actual return on assets below expected returns | (156) |
| One-off contributions | 76 |
| Recurring contributions over service cost | 214 |
| Transfers arising on acquisitions | (22) |
| Other movements | 104 |
| Deficit in defined benefit pension plans at 31 December 2007 | (1,999) |
| US healthcare plans | (21) |
| Total IAS 19 deficit | (2,020) |
| Allocated to equity accounted investments and other participating employers | 450 |
| Group’s share of IAS 19 deficit at 31 December 2007 | (1,570) |
Following higher regular contributions and an increase in real discount rates partly offset by lower than expected investment returns and the adoption of new mortality tables, the Group’s share of the pension deficit decreased to £1,570m from £2,428m at 31 December 2006 after allocations to equity accounted investments and other participating employer companies.
A net deferred tax asset of £522m is disclosed in note 8 to the Group accounts relating to the above deficit.
Further disclosure on the above is provided in note 22 to the Group accounts.
Exchange rates
The principal exchange rates impacting the Group are as follows:
| 2007 | 2006 | |
| £/€ – average | 1.461 | 1.467 |
|---|---|---|
| £/$ – average | 2.002 | 1.844 |
| £/€ – year end | 1.361 | 1.484 |
| £/$ – year end | 1.988 | 1.957 |
The following charts illustrate the underlying performance of the Group, identifying separately the impact of currency and the acquisition of Armor Holdings.
EBITA2 – continuing operations (£m)
Underlying earnings3 per share – continuing operations (pence per share)
Treasury policy
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 taxation expertise.
The Group operates a centralised treasury department that is accountable to the TRMC for managing treasury activities in accordance with the framework of treasury policies and guidelines approved by the Board. It is an overriding policy that trading in financial instruments for the purpose of profit generation is prohibited, with all financial instruments being used solely for risk management purposes.
Other key policies are:
- to maintain a balance between continuity of funding and flexibility through the use of borrowings with a range of maturities, currencies and fixed/floating rates of interest reflecting the Group risk profile;
- to maintain adequate undrawn committed borrowing facilities;
- to mitigate the exposure to interest rate fluctuations on borrowings and deposits by utilising interest rate swaps, interest rate options and forward rate agreements; and
- to hedge all material firm transactional exposures, unless otherwise approved as an exception by the TRMC, as well as to manage anticipated economic cash flows over the medium term.
Within this policy framework the treasury department’s principal responsibilities are:
- to manage the Group’s core funding and liquidity;
- to manage exposure to interest rate movements;
- to manage exposure to foreign currency movements;
- to control and monitor bank credit risk and credit capacity utilisation; and
- to manage the Group’s relationship with debt capital market investors, banks and rating agencies.
The treasury department transacts with an extensive range of counterparty banks and financial institutions, and adopts a systematic approach to the control and monitoring of counterparty credit risk. A credit limit is allocated to each counterparty with reference to its relevant credit rating. For internal credit risk purposes, all transactions are marked-to-market and the resultant exposure is allocated against the credit limit.
The Group, through its internal audit department, monitors compliance against the principal policies and guidelines (including the utilisation of credit) and any exceptions found are reported to the TRMC.
Further disclosure on financial instruments is set out in note 32 to the Group accounts.
Capital structure
The Group funds its operations through a mixture of shareholders’ funds and borrowing facilities, including bank and capital market borrowings. All the Group’s material borrowings are arranged by the central treasury function and funds raised are lent onward to operating subsidiaries as required. The Group’s objective is to ensure the continuity of competitively priced funding by borrowing from a range of markets and spreading the maturity dates of the various facilities.
Details of the Group’s debt are included in note 20 to the Group accounts. During 2007, the US$200m Bond and the Eurofighter GmbH loans were repaid. No new long or medium-term debt was raised during the year. It remains the Group’s intention to ensure the business is funded conservatively and to be proactive in accessing the bank and capital markets in achieving this aim.
Liquidity
Strong cash generation in recent years and a prudent financing strategy has resulted in the Group currently being well positioned to withstand the credit crisis in the bank and capital markets. The Group had cash and short-term investments at 31 December 2007 of £3,226m (2006 £3,603m). This, together with an undrawn committed Revolving Credit Facility (RCF) of £1.5bn (which is syndicated amongst the Group’s core relationship banks), is available to meet any general corporate funding requirement. The RCF provides standby funding for the Group’s US Commercial Paper programme which is not currently utilised. The RCF was contracted originally for five years until 2010. However, it has been extended by two one-year extension agreements until 2012, although the available amount for the final year has been reduced from £1.5bn to £1.3bn. The RCF remained undrawn throughout the year.
Since the start of the credit crisis in the summer of 2007, the Group has adopted a more conservative approach to the investment of its surplus cash, with money market deposits being placed with relatively stronger financial institutions for shorter periods. Bank counterparty credit risk is monitored closely on a systematic and ongoing basis, taking account of the size of the institution, its credit rating and its credit default swap price.
Generally, excluding the impact of acquisition or disposal financing, the net cash/debt of the Group is driven by operational performance, the level of receipts on the major contracts and the performance of the equity accounted investments. Historically, the net cash/debt position of the Group is usually at its best at the year end.
Insurance
The Group operates a policy of partial self-insurance, with the majority of cover placed in the external market. The Group continues to monitor its insurance arrangements to ensure the quality and adequacy of cover.
Credit rating
Three credit rating agencies, Moody’s Investors Service, Standard and Poor’s Ratings Services and Fitch’s Investors Service, publish credit ratings for the Group. During the year Standard & Poor’s improved their rating to BBB+ and all three maintained the outlook for their rating as stable.
As at 31 December 2007, the Group’s long-term credit ratings provided by these agencies were as follows:
| Rating agency | Rating | Outlook | Category |
|---|---|---|---|
| Moody’s | Baa2 | Stable | Investment grade |
| Standard & Poor’s | BBB+ | Stable | Investment grade |
| Fitch | BBB | Stable | Investment grade |
The Board continues to view the maintenance of an investment grade credit rating as important to the efficient operation of the Group’s activities.
1 including share of equity accounted investments
2 earnings before amortisation and impairment of intangible assets, finance costs and taxation expense
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)
4 net cash inflow/(outflow) from operating activities after capital expenditure (net) and financial investment, and dividends from equity accounted investments
5 restated following changes to the Group’s organisational structure
6 cash on customers’ account is the unexpended cash received from customers in advance of delivery which is subject to advance payment guarantees unrelated to Group performance
