BAE Systems Finals

[idpickering]

Ian King, Chief Executive, said: "2016 was a good year for BAE Systems. Our strategy is well defined; we have a large order backlog, long-term programme positions, strong programme execution and a well-balanced portfolio. With an improved outlook for defence budgets in a number of our markets, we are well placed to continue to generate attractive returns for shareholders."

Financial highlights

"Financial performance measures as defined by the Group1

- Sales increased by £1.1bn to £19.0bn, almost all of which was due to exchange translation.

- Underlying EBITA increased to £1,905m, or 7% on a constant currency basis.

- Underlying earnings per share of 40.3p, 7% higher than adjusted 2015 underlying earnings per share of 37.8p5, in line with guidance.

- Operating business cash flow increased by £323m to £1,004m.

- Net debt of £1.5bn.

- Order intake3 increased by £7.5bn to £22.4bn.

- Order backlog3 increased by £5.2bn to £42.0bn.

Financial performance measures defined in IFRS2

- Revenue increased by £1.0bn to £17.8bn, almost all of which was due to exchange translation.

- Operating profit increased to £1,742m, or 10% on a constant currency basis.

- Basic earnings per share of 28.8p.

- Net cash flow from operating activities increased by £421m to £1,229m.

Other financial highlights

- Group's share of the pre-tax accounting net pension deficit increased by £1.6bn compared with 31 December 2015 to £6.1bn, largely unchanged from 30 June 2016.

- Final dividend of 12.7p per share making a total of 21.3p per share for the year, an increase of 2% over 2015."

And later on;

"After the balance sheet date, the directors proposed a final dividend of 12.7p per ordinary share. The dividend, which is subject to shareholder approval, will be paid on 1 June 2017 to shareholders registered on 21 April 2017. The ex-dividend date is 20 April 2017."

http://www.investegate.co.uk/bae-system ... 00086084X/

[flint]

Could anyone offer an opinion as to why BA. did not incur a multi-billion £ loss resulting from currency hedging ?

RR. incurred a £4.4 billion £ loss from currency hedging.

They both sell long lead items overseas often in $.

It is not likely that BA. do not hedge.

The issue of the RR. losses was raised on the Investment Strategy Board. The only explanation offered there was that their hedging contracts were marked to market. This is not an explanation that I understand. Why would it not apply to BA. ?

So, why the huge discrepancy between RR. and BA. ( I hold both in my HYP.)

[funduffer]

Good question, Flint.

I also hold both RR. and BA.

All I can find in the BA. Preliminary Announcement report on their website is the following:

"As a consequence of movements in US dollar and euro exchange rates, there was a cash inflow from
matured derivative financial instruments of £480m (2015 £12m) from rolling hedges on balances
with the Group’s subsidiaries and equity accounted investments. The inflow as a result of hedging cash
loaned internally, from the US to the UK business, partially offsets the foreign exchange translation on
the Group’s external US dollar-denominated borrowing (see below)."

And later..........................

"Currency risk
The Group’s objective is to reduce its exposure to transactional volatility in earnings and cash flows from
movements in foreign currency exchange rates, mainly the US dollar, euro, Saudi riyal and Australian dollar.
The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency
denominated transactions. All material firm transactional exposures are hedged and the Group aims, where
possible, to apply hedge accounting to these transactions.
The Group is exposed to movements in foreign currency exchange rates in respect of the translation of net assets
and income statements of foreign subsidiaries and equity accounted investments. The Group does not hedge the
translation effect of exchange rate movements on the income statements or balance sheets of foreign subsidiaries
and equity accounted investments it regards as long-term investments.
The estimated impact on foreign exchange gains and losses in net finance costs of a ten cent movement in the
closing US dollar exchange rate on the retranslation of US dollar-denominated bonds held by BAE Systems plc is
approximately £59m (2015 £58m)."

Clearly the effects of currency movement are much less on BA. than RR, where it is billions not millions.

Seems the 2 companies do take a different approach, but I cannot explain it fully.

FD

[flint]

Funduffer

Thank you for your reply.

As you say, BA. explain their policy and analyse the minor currency hedging P&L effects that resulted from it.

This only exacerbates my concern as to what on earth RR. were up to.

[funduffer]

Funduffer

Thank you for your reply.

As you say, BA. explain their policy and analyse the minor currency hedging P&L effects that resulted from it.

This only exacerbates my concern as to what on earth RR. were up to.

Whatever it is, it is nothing new. RR have had wild swings in reported profit in the past when the $ exchange rate has suddenly changed. I remember big swings in both directions in past years, all linked to mark-to-marketing the hedge book. I think you just need to look at the underlying results to get the true picture.

FD (ex RR employee)