Performance in 2014
As the Chairman has outlined, your company performed well in 2014, with a solid operational performance and good progress on key strategic objectives. This performance enabled us to continue to create value for our shareholders and we returned a total of some £925 million through dividends and buying back shares.
Sales of £16.6bn were lower than the previous year, but in line with expectations. Exchange rate movements, expected lower sales in our US land and armaments business and the absence of the prior year benefit of a price settlement with Saudi Arabia reduced revenues compared to 2013. Stripping out the benefit of the 2013 price settlement, underlying earnings per share of 38p were slightly higher than the previous year. We also achieved above-target cash performance and order intake of £15 billion.
We continued to secure new orders from international markets, and, for the third year running, we secured over £10 billion of orders in the UK and US. This funding sustains our core defence programmes, which in turn provide the foundation for services contracts and international sales.
We started the year with a robust order backlog of some £40.5 billion, giving us good, multi-year visibility of future sales and confidence for the future.
During 2014, our businesses achieved a number of key milestones.
We delivered a total of 21 Typhoon aircraft from our UK assembly line to the UK RAF and Saudi Arabia. We also made progress in expanding Typhoon’s capabilities, including a contract to integrate electronically scanned radar, to secure Typhoon’s position as one of the most capable military aircraft in the world today.
We have an extensive military air support and upgrade business and in 2014, we extended contracts with the Royal Air Force to support the availability of Tornado and Typhoon aircraft.
We also have a significant position on the F-35 fighter jet programme, manufacturing rear fuselage assemblies in the UK and supplying electronics from our US business. Production volumes are now starting to ramp up and in Australia, we have recently been selected as the regional hub for F-35 airframe maintenance.
We are continuing to develop a way forward for future combat air systems, including unmanned – this developmental work represents the next evolution of aviation technologies. Building on the successful Taranis flight demonstrations, we now have both UK national funded activity and an agreement for a collaborative way forward with France.
Not everything went to plan, however, and we were disappointed that the South Korean and US governments terminated for convenience our contract to upgrade Korea’s F16 aircraft, despite good performance on the initial phase. Let me say though, that this was not a core programme for us and we have emerged with our US customer relationship intact.
In the maritime sector, we received over £1 billion of orders for the UK Royal Navy and a further $1.5 billion of US Navy ship repair contracts, underlining our leading position in both markets.
In the UK, HMS Artful, the third of seven Astute class submarines, was launched in May and Her Majesty the Queen named the first of two aircraft carriers in a formal ceremony in July. Assembly of the second carrier is also making good progress.
Construction of three Offshore Patrol Vessels in Glasgow is underway and will sustain key shipbuilding skills ahead of the anticipated construction of 13 Type 26 frigates starting in 2016. In February of this year, the UK government further signalled its commitment to the Type 26 programme with £859 million of further funding received.
In the US, we secured extensions to support contracts at our Hawaii and San Diego shipyards and we recently announced an investment of around $110 million in new floating dry dock facilities in our San Diego shipyard, to support the US Navy’s increased focus on the Asia-Pacific region.
Our US commercial shipbuilding business has some operational problems, as we signalled last year, but is now making progress, assisted by a detailed review by our UK naval shipbuilding business.
In Australia, we successfully delivered the first of two Landing Helicopter Dock ships to the Navy. We also secured a four year, 190 million Australian dollar contract for in-service support for those two ships.
We saw particularly encouraging developments in our US land business with the award in December of a contract worth up to $1.2 billion for the Armored Multi-Purpose Vehicle programme. This is a key win, creating a new long-term franchise for the company.
Since our initial acquisition of Detica in 2008, we have been progressively growing our Applied Intelligence business into a leading cyber security business for government and, increasingly, commercial customers. In 2014, we took another significant step with the acquisition of SilverSky, a commercial cyber business that has complementary products and cloud-based technologies, a large installed customer base and an established sales force, providing access to commercial customers in the US and other countries.
Our US-managed Electronic Systems business is a technology powerhouse, supplying leading defence electronic systems but also a range of capabilities to the commercial aviation sector, where we can leverage our skills and technology. We continued to strengthen our position across the major aircraft types. In particular, wins on Boeing contracts, including for its new 777X programme, will generate significant new business in future years. We announced two smaller acquisitions in the US during the year – Eclipse and Signal Innovations Group – to provide additional imaging and intelligence, surveillance and reconnaissance capabilities.
In summary, in 2014 we delivered a solid overall performance from a diverse portfolio, broadly balanced between long-term platforms programmes, electronic systems, an enduring services and support business and growing activities in cyber security.
Our business is making good progress in 2015. Other than for exchange translation, trading for the period has been consistent with management expectations at the time of the 2014 results announcement and the Group's outlook remains unchanged. The Group’s underlying earnings per share are expected to be marginally higher than in 2014, including some reliance on anticipated naval and aircraft orders.
We continue to win new business, meet key milestones on our major programmes and develop technologies and skills that underpin our future success.
In terms of defence spending, in the US, as we said in February, we believe budgets are now relatively stable for 2015, with some early indicators of a modest improvement for 2016.
International markets - given world events - continue to place a high priority on defence spending.
In the UK, today is clearly an important day in determining the future government. We have worked constructively with several different governments and administrations in the past and I am confident that our relationship with the next government will be no exception. Our focus, as ever, will remain on delivering on our programme commitments to provide our customers with key capabilities and continuously improve affordability.
Both major political parties are committed to holding a Strategic Defence and Security Review after the election. We welcome the opportunity to review and determine the UK’s future position and place in the world. Public spending remains under pressure, but security and prosperity cannot be disentangled and national security is the first priority for any government.
Our important role
As a company. we play an important role in society, supporting our customers to protect national security, critical infrastructure and key commercial interests. We have a talented and diverse workforce of close to 84,000 people in 40 countries, with the engineering expertise to take on our customers’ most complex challenges.
We develop skills and technology that contribute to economic prosperity in the markets we serve. Our programmes drive vibrant local supply chains and enable the transfer of technology and skills. In particular, we place great emphasis on investing in education and training for the next generation of highly-skilled engineers and our existing workforce.
We are particularly proud of our apprenticeship programme and this year we will recruit a record intake of more than 800 apprentices in the UK.
Our community investment activities extend to each of our major markets. Globally, we contributed more than £11 million during 2014 to local, national and international charities and not-for-profit organisations.
Over the past several years we have worked to embed leading ethical policies and practices across the group. We conduct our business responsibly and we ensure all of our people receive regular training on our code of conduct and responsible business policies.
The majority of our employees are in highly skilled engineering and advanced manufacturing roles. We have a diverse supply chain which benefits local companies in each of our markets. In the UK, we work with some 9,000 companies, almost a third of which are SMEs. Every job in our UK business supports a further 2.5 jobs in the UK economy, creating an important multiplier effect.
In summary, BAE Systems provides some of the world’s most advanced, technology-led defence, aerospace and security solutions. We continue to benefit from a large order backlog, long-term programmes and high-technology capabilities to support our customers in protecting national security and commercial interests across a broad, international market base.
I’ll now hand back to the Chairman to commence the formal proceedings of today’s meeting.