Ian King

We are seeing high-quality performance execution across the business and continued improvement in returns, particularly here in the UK, as some of our larger programmes mature.  We continue to demonstrate a highly disciplined approach to cost control.  This includes taking decisions to address capacity where we see pressures.  We are not sitting and waiting – in this environment, it is not a luxury that any business can afford. 

I believe our proactive and highly-focused approach to cost is making us increasingly competitive and is one of the reasons for our success in winning new business.

Our broad geographic spread is helping to make our business more resilient … at a time when some of our markets are constrained by economic pressures.   US defence budgets have flattened, and we expect them to decline as measures are introduced to address federal deficits.  In the UK, the defence market remains stable following the programme changes announced in 2010. 

Against this challenging background, our strategic response has been to target international markets outside the US and UK.  As Dick mentioned, this strategy has seen us make excellent progress with order intake of £11.2bn in those markets, more than double the £4.8bn achieved in 2011.  We also generated a further £11bn of orders from the US and UK.  We recorded an 8% increase to our order backlog to over £42bn, which is the highest level since 2009.

Financial Performance

Sales reduced by 7% to £17.8bn.  Of this, £0.8bn came from the expected Land volume reductions and £0.4bn resulted from there being no contracted Typhoon aircraft deliveries in 2012 on the Salam programme in Saudi Arabia.

Underlying EBITA, the measure of operating profit, reduced by 6%, to £1.9bn due to the impact of the Salam Typhoon pricing delay.  The return on sales was 10.6%.

We have yet to reach agreement on the Salam price escalation, and negotiations continue. However, as I have said before quantum, not timing, is what is driving us.  We will do the right deal for our shareholders.

Despite this challenging environment, underlying Earnings per Share, an important measure of performance for our shareholders, fell by only 2% to 38.9 pence.  And, as you’ve heard from Dick, the dividend for the year has been increased to 19.5 pence per share, up 4% on the 2011 dividend.  At this level, the dividend is covered two times by underlying Earnings Per Share, remaining in line with the Group’s policy.

2012 delivered exceptionally strong Operating Cashflow of £2,692m and, as a result, we closed the year with Net Cash of £387m. 


The safety of our people and those using our products is of paramount importance to me and every other member of our Board.  We continue our unrelenting efforts to improve the Health & Safety performance of the business, and in 2012, the Recordable Accident rate decreased by 30% some of our sites now benchmark with those companies we consider to be world class.  

But we can still do better and we intend to. We will not take the focus off driving an improved safety culture throughout the organisation.  Recent sad events with fatalities in Afghanistan and Mobile, Alabama only make us want to do more. 

US Defence Environment

Looking forward our businesses in the US have felt the dual pressure of reduced activity in support of deployed operations, and the start of measures to reduce US federal budget deficits.  As we previously forecast, our US land vehicles business has seen significant year-on-year reductions. 
Last year’s US elections have introduced some additional uncertainty around defence procurement with the Administration extending the period of Continuing Resolution through the 2013 Fiscal Year.  As anticipated this has resulted in a modest impact on the volume of activity to date.
In truth, we do not yet know what scale of defence cuts we are dealing with. However, what we can say with certainty is that we plan conservatively and are continuing to address our cost base effectively. As the situation becomes clearer, we will seek to mitigate any impacts. 

UK Defence Environment

In the UK, the defence budget is expected to remain flat.  We have a large, multi-year, order backlog in the UK and the combination of good execution and the maturity of these programmes is contributing to good performance.

In Military Air, European Typhoon deliveries have continued and deliveries to the Royal Saudi Air Force resumed last month.  We’re continuing to deliver assemblies for the F-35 programme in line with our planning assumptions.

Our UK maritime business is experiencing a high level of activity.  The last of the six Type 45 Destroyers have now completed sea trials and was handed over to the Ministry of Defence in March.  And we’re continuing to make good progress on the Carrier programme, with the delivery of major blocks underway.   

Work also continues on the design of the Type 26 ships to replace the UK’s Type 23 frigates from the end of this decade.  Type 26 production, as recognised under the 15 year Naval Ships Terms of Business agreement, will utilise a lower level of build capacity than the Carrier programme and discussions continue with the UK government to determine how best to sustain the capability to deliver complex warships in the UK.

Good growth is anticipated in the Submarines business on the back of the multi-year Astute programme and the build-up of engineering workload on the Successor Programme.  We now have over 1,000 people working on Successor.

International Markets

Turning to our businesses outside of the US and UK, we continue to build on our positions in international markets.  

In June, our land systems business received a significant boost with the £500m, CV90 vehicle contract for Norway.

We’re continuing to develop our business in India.  Our Hawk customer Hindustan Aeronautics Limited is maintaining its schedule on local assembly of Hawk aircraft, with negotiations for a third batch of aircraft expected to begin this year.  The Indian Government recently confirmed its intention to buy the first batch of the M777 artillery system, under a US Foreign Military Sales programme.

In December, the £2.5bn contract for 12 Typhoon and 8 Hawk aircraft, together with associated training and support, was signed in Oman.  This represents significant new business for the UK, boosting our order backlog and generating a large cash prepayment.  

Turning to the Kingdom of Saudi Arabia.  Following on from the budget approvals at the end of 2011, we were awarded a £1.6bn contract in May for Hawk and Pilatus training aircraft.  Also under the Saudi British Defence Co-operation Programme, we received orders at the year-end for five-year support arrangements.

The Salam Typhoon programme progresses well with the first 24 Typhoon aircraft now in service.  Deliveries under the current contract continue through to 2017.

Discussions have started on the next phase of Salam support, following on from the original three-year agreement that formed part of the arrangements for entry to service of the Typhoon aircraft

Our Strategy

Our ongoing strategy is to drive shareholder value through a combination of further improvements in financial performance and enhanced competitive positions across the business.  The Group’s major focus areas include growth in our cyber, intelligence and security businesses, where the recent Vodafone announcement represents a key milestone in developing this sector; addressing growth opportunities in electronic systems; driving further value from the Group’s broad base of platforms and services positions and increased business in international markets outside of the UK and US.

As we pursue these goals we have also re-enforced a key objective this year that is to inspire and develop our people to drive our success. I have always said that the greatest strength of this company is the capabilities of our employees, and the pride and passion they have for the products and the services which support our customers and safeguard their vital interests.  To us, that is inspired work.  A genuine source of competitive advantage and I believe essential to sustain the momentum we achieved in 2012.
In summary, we’re continuing to deliver a robust performance against a challenging background of budget constraints in many of our markets. 

Our strategy is built around a solid foundation and demonstrating resilience to changing market dynamics.  We’ve grown our international order book while maintaining a solid footprint in our core UK and US markets.  At the same time, we are adapting and responding to changing customer needs to ensure we remain relevant into the future.  This journey continues to be demanding but we are starting to see the fruits of our previous years’ efforts, and I want to thank all of our employees and our shareholders for your support and commitment.