Performance in 2016
Our 2016 Annual Report includes full commentary on our financial and operational performance and as usual this morning we have issued a trading update on 2017 performance to date, reconfirming our outlook for the year.
I’ll focus my comments today on the key points of our performance and provide a brief overview of the market environment and our future prospects.
Looking first at 2016 financial performance, sales increased compared to the previous year to £19bn, primarily from the benefit of a stronger US dollar on translating our US dollar sales into sterling.
Underlying earnings per share for the year increased to 40.3p, around 7% higher than adjusted 2015 underlying earnings per share. This was in line with our guidance.
Operating cash inflow of £1bn and Net Debt at the end of the year of £1.5bn were ahead of expectations.
Our order Backlog increased 14% over the year to £42bn – providing good visibility and confidence in the prospects of the business.
We continue to deliver value to our shareholders, with a dividend for the year of 21.3 pence per share, up 2% on 2015 - the thirteenth consecutive year of dividend growth.
Turning now to the operational highlights.
Governments in our major markets continue to prioritise defence and security, with strong demand for our capabilities.
In the year we secured important long-term positions on major defence programmes, strengthening our core franchises and securing highly skilled jobs and industrial capability in our major markets for years to come.
Many programmes such as F-35, Type 26, AMPV and Dreadnought are in their early phases, with the full value not yet reflected in our order backlog.
In the UK, notwithstanding the General Election next month, the economic outlook remains somewhat uncertain following the EU referendum last June. However, the defence and security of the nation is the first responsibility of all governments and we do not expect that to change.
Our businesses continue to perform well, delivering vital capabilities and services to the MOD and UK government agencies.
We signed a Typhoon support arrangement in July, expected to be worth £2.1bn over ten years, and we received £1.3bn of funding on the Dreadnought Class submarine programme.
We also reached agreement with the Ministry of Defence on the intention to build eight Type 26 ships on the Clyde in Scotland.
In the US, we are seeing encouraging signs of modest growth in defence budgets, and improved prospects for our core franchises, including a significant ramp up in production on a number of long-term programmes.
BAE Systems’ US electronics business performed well, with strong programme execution and good order intake.
The Group’s US-based combat vehicles business is underpinned by the Armored Multi-Purpose Vehicle and the Palladin contracts. We are also seeing continued domestic and international demand for amphibious vehicles.
Our US ship repair business is a leading supplier to the US Navy. In December last year the new dry dock arrived at our San Diego shipyard. With the dock now operational, our investment in additional capacity will enable us to benefit from increased US Navy activity in the Asia-Pacific region.
In the Kingdom of Saudi Arabia, we operate as prime contractor to the UK Government in order to supply equipment and support under the government to government agreements.
In 2016, an agreement was reached with the Saudi Arabian government to continue the provision of support services until 2021 under the Saudi British Defence Co-operation Programme.
Our Australian business is stable, underpinned by ongoing sustainment activities and in 2016 we were awarded long term support contracts for Anzac Frigates and F-35 aircraft.
In India, we secured a contract to supply 145 M777 howitzers to the Indian Army.
Earlier this year we signed a heads of agreement with Turkish Aerospace Industries to collaborate on the design and development phase of an indigenous next generation fighter for the Turkish Air Force. The initial contract will have a value in excess of £100m.
Our US-based Intelligence and Security business performed well and won a number of new multi-year service contracts.
Our cyber security business, Applied Intelligence, continues to grow, with double digit order intake and sales growth in the year. Our ongoing investment in engineering capabilities, product development and marketing impacted short-term profitability but have enhanced our product offering and strengthened the underlying business fundamentals for the future.
BAE Systems is the third largest global defence company.
We must continue to invest in our business and people and in the technology and skills we need to drive the business forward. We are constantly looking to advance our technology and it is vital that we stay ahead of the curve.
That means embracing disruptive technology, driving innovation and investing in research and development in partnership with government, universities and SMEs.
In 2016 we invested a total of £1.4bn on research and development across the group; this included a 23% increase in company-funded R&D.
In February 2017 we completed the acquisition of one of our partners in the electromagnetic railgun programme, IAP Research, bringing together our advanced weapon systems engineering and manufacturing capabilities.
Responsible behaviour remains an essential element of our company, culture and values. All of our people are subject to mandatory annual training on our code of conduct and the standards of behaviour we expect from everybody.
In summary, the good momentum achieved in 2016 has continued into 2017, and the business is performing well.
Our order backlog grew in 2016 and we have continued to win new orders this year, providing a solid platform for future growth.
BAE Systems’ strategy is well defined and delivering for our customers and shareholders.
With an improving outlook for defence budgets in a number of our markets, we continue to expect 5-10% growth in underlying earnings in 2017 from a portfolio that remains well positioned for the future.
In my final AGM I want to thank you our shareholders for your continued support for BAE Systems.
On my retirement at the end of June I hand over to a highly capable leader in Charles Woodburn, and I know that Charles and all of our people will continue our proud history of delivering world-leading capabilities for our customers and generating attractive returns for our shareholders.
I’ll now hand back to the Chairman to commence the formal proceedings of today’s meeting.