Britain's biggest defense company reports robust performance in second quarter

Britain’s biggest defense company reports robust performance in second quarter

Britain’s biggest defense company BAE Systems reported that sales increased by 4% on a constant currency basis and excluding the impact of acquisitions, to £9.9bn or $13 billion.

“We have delivered a robust performance in the first half of the year, thanks to the efforts of all of our employees. We started the year from a strong position and we have taken actions to enhance our resilience, ensuring we continued to deliver against our customer priorities, whilst keeping our employees safe,” said Chief Executive, BAE Systems adding that: “Assuming no significant COVID-19 resurgence, we expect a good second half to the year. Demand for our capabilities remains high and we recognise our role not only in supporting national security, but also in contributing to the economies of the countries in which we operate.”

BAE Systems expects the Group’s underlying earnings per share to be a mid-single digit percentage lower than last year’s 45.8p, assuming a US$1.25 to sterling exchange rate and at a tax rate now expected to be 19%, in line with last year. The final rate is dependent on the geographic mix of profits.

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In 2020 the Group now expects free cash flow as defined by the Group, excluding the £1bn pension payment, to be approximately £800m for the full year, close to our original guidance allowing for the lower earnings.

Financial performance measures as defined by the Group

  • Sales increased by 4% on a constant currency basis and excluding the impact of acquisitions, to £9.9bn.
  • Underlying EBITA of £895m decreased by 11% on a constant currency basis and excluding the impact of acquisitions.
  • Underlying earnings per share decreased by 15% to 18.7p, excluding the impact in 2019 of the one-off tax benefit. The Group’s underlying effective tax rate for the first half of the year was 19%.
  • Operating business cash outflow of £880m, including the impact of the £1bn injection into the UK pension scheme.
  • Net debt at £2,038m (£743m at 31 December 2019) following the £1bn bond issuance to fund the UK pension deficit, and the acquisition of the Airborne Tactical Radios business for cash of £217m.
  • Order backlog has increased in the first half of the year to £46.1bn. Trading on multi-year, long-term contracts in the Air sector was offset by a 7% increase in our US business and a foreign exchange benefit.

BAE Systems operational and strategic key points:

Air

  • The Qatar Typhoon programme achieved key milestones ahead of schedule.
    Production of F-35 rear fuselage assemblies will ramp up to full rate by 2021. 50 assemblies have been delivered in the period.
  • The sector continues to work closely with industry partners and the UK government to continue to fulfil contractual support arrangements in Saudi Arabia on the key European collaboration programmes.
  • Negotiations for the transition through to mid-2022 to a reduced scope support solution for the OmaniTyphoon fleet are ongoing and expected to conclude early in the second half of the year.
  • The next phase of the Tempest next-generation Future Combat Air programme continues.
  • In Australia the Hunter Class frigate programme is progressing to plan and ASC Shipbuilding has been integrated into our Australian operations.

Maritime and Land UK

  • The build phase of the River Class Offshore Patrol Vessel programme remains on target for completion in 2020, with the fourth vessel, HMS Tamar, accepted by the customer in the period.
  • Construction of the first two City Class Type 26 frigates for the Royal Navy continues to progress.
  • The fourth Astute Class submarine, HMS Audacious, was accepted and left our Barrow site in April to begin sea trials with the Royal Navy.
  • Construction of the first two Dreadnought Class submarines continues to advance.
    An 18-month extension to the Maritime Support Delivery Framework (MSDF) to provide engineering and support services to Portsmouth Naval Base and the Portsmouth flotilla was signed in March.
  • Ship support maintained at Portsmouth Naval Base under challenging COVID-19 conditions.
  • RBSL is expected to secure the contract for its share of work on the Mechanised Infantry Vehicle programme in the second half of the year.

Electronic Systems

  • F-35 electronic warfare systems deliveries for Lot 12 completed, with over 650 electronic warfare systems delivered to date.
  • Successful demonstration of APKWS® ground-launch capability.
    Terminal High Altitude Area Defense (THAAD) seeker is executing at full rate production and received an additional order to design and manufacture next-generation infrared seekers.
  • The business continues to experience growth in classified work.
    Demand in the commercial business lines of Controls & Avionics Solutions, and Power & Propulsion Solutions, has been impacted by COVID-19.
  • Acquired the Airborne Tactical Radios business from Raytheon Technologies Corporation, expanding our full spectrum communications portfolio with multi-band radios and advanced cryptographic technologies.

Platforms & Services (US)

  • Implementation of process and automation improvements is under way in Combat Mission Systems production.
  • M109A7 vehicle consistently delivering at full rate production levels.
  • Armored Multi-Purpose Vehicle Low-Rate Initial Production under way, with the first vehicle to be completed in the second half of the year.
  • Amphibious Combat Vehicle Low-Rate Initial Production continues along with design development of two new mission variants.
  • Bradley award for $267m (£216m) received in June.
  • The US Ship Repair business received orders totalling $430m (£348m) in the period, including a $200m (£162m) award to service the USS Boxer in San Diego.
  • US Navy awards totalling $166m (£134m) for the production of missile canisters supporting the Vertical Launching System, with a maximum value of up to $955m (£773m) over five years if all options are exercised.

Cyber & Intelligence

  • The US-based Intelligence & Security business continues to increase its bid pipeline, perform on existing contracts and win new orders.
  • Exit from the loss-making UK-based Enterprise Managed Security Services business was completed.
  • Discussions regarding the sale of the Applied Intelligence US-based software-as-a-service business are continuing.
  • Applied Intelligence’s Government business continues to perform well, and the Financial Services business delivered growth in order intake in the period despite COVID-19 disruption.

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