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News and Commentary

Shephard Media - UK airborne early warning programme approaches milestone - 8/4/2021

Military Aviation Authority clears STS and Boeing to begin Wedgetail conversion.

For the complete story see: https://www.shephardmedia.com/news/air-warfare/uk-airborne-early-warning-programme-approaches-mil/

Defense World.Net - BAE Systems to Develop Mechanisms that Enable Wideband Receivers Use in contested Environments - 8/4/2021

BAE Systems will design mechanisms for the U.S. Defense Advanced Research Projects Agency (DARPA) that protect emerging wideband receivers from interference, enabling their use in contested and congested environments.

For the complete story see: https://www.defenseworld.net/news/29297/BAE_Systems_to_Develop_Mechanisms_that_Enable_Wideband_Receivers_Use_in_contested_Environments#.YHGa6TgzaCg

Defense Industry Daily - BAE Systems Wins CMWS Contract - 7/4/2021

BAE Systems won a $21 million contract from the UK Ministry of Defense.

For the complete story see: https://www.defenseindustrydaily.com/xq-58a-opens-weapons-bay-door-in-flight-uk-qatar-expand-defense-partnership-bae-systems-wins-cmws-contract-045480/

DefenseNews - British Army wants more punch in its Boxer vehicle fleet - 6/4/2021

The British Army is looking at how it can increase the firepower of its new Boxer mechanized infantry vehicles to compensate for the decision to ax the more heavily armed Warrior armored vehicle from its lineup.

For the complete story see: https://www.defensenews.com/global/europe/2021/04/06/british-army-wants-more-punch-in-its-boxer-vehicle-fleet/

UPI Defense - British, French, U.S. commands prepare for Warfighter 21-4 exercise - 2/4/2021

Warfighter 21-4, a corps-level combat exercise starting April 6, will involve U.S., French and British troops, a U.S. Army press release said this week.

For the complete story see: https://www.upi.com/Defense-News/2021/04/02/france-britain-warfighter-exercise/3921617385467/

Shephard Media - BAE Systems wins two RN support deals - 2/4/2021

Future Maritime Support Programme contracts for BAE Systems are worth up to £1.3 billion.

For the complete story see: https://www.shephardmedia.com/news/mil-log/bae-systems-wins-two-rn-support-deals/

IHS Janes - UK stands-up Space Command - 1/4/2021

The United Kingdom has stood up its new Space Command, with operations being formally launched on 1 April.

For the complete story see: https://www.janes.com/defence-news/news-detail/uk-stands-up-space-command

Shephard Media - UK selects BAE Systems missile warning equipment support and sustainment - 1/4/2021

BAE Systems continues to support its Common Missile Warning System in UK service.

For the complete story see: https://www.shephardmedia.com/news/digital-battlespace/uk-selects-bae-systems-missile-warning-equipment-s/

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Media Releases

Qinetiq - QinetiQ Collaborate: Tackling Modern Slavery - 9/4/2021

Tom O'Byrne, Head of Supply Chain Development

Summary

As part of our QinetiQ Collaborate event series, last week saw us host a virtual event on the topic of Tackling Modern Slavery, where we invited a number of organisations from our supply chain to participate in an open and honest discussion around approaches to mitigating the risk of Modern Slavery and Human Trafficking in our collective supply network.

About Modern Slavery

Modern slavery is the exploitation of people for personal or commercial gain with victims being controlled through violence or threats, forced into inescapable debt, or have had their passport taken away and are being threatened with deportation.

It is estimated that 40 million people are trapped in modern slavery worldwide and over 10,000 victims were identified in the UK in 2019 alone*.

Industry Network

Modern slavery is a complex problem and we believe that collaboration and transparency are the key to driving change. Creating a trusted environment where we can learn from each other will strengthen all of us.

Despite the severity of this subject, it is not uncommon for organisations or individuals to fail to draw a link between their own industry and the risk of Modern Slavery and Human Trafficking (it happens "elsewhere"). Like many relationships, our industries do not operate in isolation, and often connect to a variety of other industries through common products, services and suppliers often layered through complex supply chains. Within our sector of Defence & Security, we are connected through our supply chain to industries which may, on paper, be at higher risk to Modern Slavery and Human Trafficking and therefore it is imperative we continue to take action in preventing such risks from materialising within our own sector.

To visually illustrate the industry-bridges in which Modern Slavery may pose a risk, we featured a number of sectors on the 'tube map' diagram below. The 'train lines' demonstrate the exposure and crossing of paths with other industries, while the 'stations' represent strong industry relationships.

Taking some of the industries from the tube map, the image below explores some example cases of Modern Slavery, some as recent as during the COVID-19 global pandemic, showing the severity of the issue around the world. Sources for these examples can be found at the bottom of this blog.

https://www.qinetiq.com/en/blogs/modern-slavery

Babcock - Babcock awarded five year contract extension for Royal Navy 4.5 Medium Calibre Gun - 9/4/2021

Babcock International, the Aerospace and Defence Company, and BAE Systems, have been awarded a five year contract extension by the Ministry of Defence to continue in-service support to the Royal Navy's 4.5 Mk8 Medium Calibre Gun (MCG).

The agreement is worth c. £43m and will see the continuation of in-service support to the 4.5 MCG across 19 Type 23 Frigates and Type 45 Destroyers as well as HMS Collingwood. The continued collaboration between Babcock and BAE Systems, the Gun's designer, offers the capacity, proven capabilities and infrastructure to safely and effectively run in-service support.

Babcock has also opted to implement innovative Digital Twin technology to drive an increase in reliability and availability of the weapons system and work to extend its service life. The effort to increase efficiency will also see the roll out of BAE Systems' design interventions.

The Digital Twin enables digital connection with the asset presenting near real time insight to the materiel state of the Gun. It combines Babcock proprietary data capture technology and data science capability, augmenting Babcock's engineering pedigree in Naval Gun support. The technology provides the on-board maintainer with the information they need to optimise maintenance and provides Babcock the foresight needed to predict future faults and proactively intervene to keep the asset operational and increase availability.

Will Erith, CEO Babcock Marine said: "The 4.5 MCG is a key weapons system on board the fleet, helping to keep personnel safe during operations. By creating a digital twin to better predict performance and define maintenance requirements, we are delivering real-world use of technology for our customer. It's an exciting new era for the 4.5 MCG and with our proven track record, expertise and capability on this programme, it means we can effectively maintain asset availability for our customer.

"We look forward to continuing to deliver a first-class service package, in conjunction with BAE Systems, to the Royal Navy."

The Mk8 MCG is a modern, semi-automatic variant and can rapidly fire high explosive rounds against land and sea targets with pinpoint accuracy.

https://www.babcockinternational.com/news/babcock-awarded-five-year-contract-extension-for-royal-navy-4-5-medium-calibre-gun/

Meggitt - Meggitt PLC signs a £multi-million contract with ENPPI for the supply of pioneering Printed Circuit Heat Exchangers - 7/4/2021

Meggitt PLC, a leading international company specialising in high performance components and subsystems for the aerospace, defence and selected energy markets, has secured a contract with ENPPI for the supply of Printed Circuit Heat Exchangers (PCHEs) for the Western Desert Gas Complex (WDGC) expansion in El-Amreya, Alexandria, Egypt. The multi-million pound contract will be supplied by Meggitt's Heatric organisation.

Meggitt's advanced PCHE technology provides ENPPI with an optimised solution for their specific process challenges which the incumbent Brazed Aluminium Heat Exchanger (BAHE) technology could not achieve.

Adrian Tattersall, General Manager of Meggitt's Heatric organisation said "We are seeing an increased demand for PCHE technology in traditional BAHE applications and are delighted to secure this first contract with ENPPI. The award demonstrates Heatric's ability to work closely with customers and deliver proven solutions to address diverse technical challenges; especially those related to demanding environments and process conditions".

https://www.meggitt.com/news/meggitt-plc-signs-a-multi-million-contract-with-enppi-for-the-supply-of-pioneering-printed-circuit-heat-exchangers/

BAE Systems - DARPA awards BAE Systems two awards under Wideband Adaptive RF Protection (WARP) program - 7/4/2021

Technology to protect emerging wideband receivers from interference, enabling their use in contested and congested environments.

BAE Systems will design mechanisms for the U.S. Defense Advanced Research Projects Agency (DARPA) that protect emerging wideband receivers from interference, enabling their use in contested and congested environments. DARPA awarded two contracts to BAE Systems totaling $5 million under the Wideband Adaptive RF Protection (WARP) program which is designed to develop wideband adaptive filtering and signal cancellation architectures to safeguard emerging wideband receivers against both external and self-interference.

Within the Department of Defense, radio frequency (RF) systems must operate within an increasingly crowded electromagnetic spectrum and contend with mission-compromising interference from friendly and hostile sources.

"The ability to control signal strength across the electromagnetic spectrum is critical to the robust operation of wideband RF electronics," said Chris Rappa, product line director at BAE Systems' FAST Labs[TM] research and development organization. "WARP signal filters and cancellers will sense and adapt to the electromagnetic environment through the intelligent control of adaptive hardware."

The technical areas of the program focus on enhancing electronic warfare technology to improve adaptive control of electromagnetic spectrum - enabling allied forces to freely operate while denying that advantage to adversaries. Specifically, Technical Area 1 is focused on mitigating external interference and Technical Area 2 is focused on mitigating self-interference from co-located transmitters to enable same-frequency simultaneous transmit and receive, also known as STAR.

The WARP awards add to the advanced defense electronics and electronic warfare research and development portfolio and are based on many years of investment on various programs including T-MUSIC, CONverged Collaborative Elements for RF Task Operations (CONCERTO) and Radio Frequency Field Programmable Gate Arrays (RF-FPGA).

https://www.baesystems.com/en/article/darpa-awards-bae-systems-two-awards-under-wideband-adaptive-rf-protection--warp--program

BAE Systems - BAE Systems secures Future Maritime Support Programme contracts worth over £1 billion - 2/4/2021

BAE Systems will retain its key role supporting the Royal Navy at Portsmouth Naval Base, with the Company securing two contracts as part of the Ministry of Defence's (MOD) Future Maritime Support Programme (FMSP) competition. The contracts, worth up to £1.3 billion over five years, will commence on 1 October 2021 following a transition period.

BAE Systems will continue to deliver ship asset management, repair and maintenance for the entire Portsmouth flotilla under a £900 million contract. It will also establish a Joint Venture with KBR to deliver technology-led and data-driven facilities management and dockside services at the base, under a £365 million contract. The joint venture - to be called KBS Maritime - will combine the expertise of KBR as a global leader in the infrastructure asset management and services market, with BAE Systems' experience and capability within Portsmouth Naval Base.

David Mitchard, Managing Director of BAE Systems' Maritime Services business, said: "These new contracts will enable us to continue our vital role in supporting the Royal Navy, at home and abroad, building on our long history of delivery, investment and collaboration at Portsmouth Naval Base.

These new contracts will enable us to continue our vital role in supporting the Royal Navy, at home and abroad, building on our long history of delivery, investment and collaboration at Portsmouth Naval Base.

David Mitchard, Managing Director of BAE Systems Maritime Services

"Working with our customer, we're proud of the improvements we've made at the base, delivering significant infrastructure improvements and reducing carbon emissions by 65%. We're excited by the opportunity to continue delivering transformation alongside KBR and other new service providers to support the Royal Navy at Portsmouth, mitigating environmental impact of operations, whilst maintaining critical military outputs."

The first of the FMSP contracts secured by BAE Systems (Ship Engineering Delivery and Management) covers Class Output Management (strategy), Design Services (technical planning and design) and Ship Engineering (maintenance, repair and upgrade).

The second contract (Hard Facilities Management & Alongside Services) covers strategic estate management, infrastructure programme development and delivery and provision of operations, maintenance and alongside services. KBS Maritime will further develop the Portsmouth base infrastructure, securing investment in the local community and ensuring fit-for-purpose, world-leading naval fleet support for the Royal Navy and the UK.

BAE Systems and its legacy companies have a proud heritage of supporting the Royal Navy at Portsmouth Naval Base for more than 20 years, with the last seven years successfully delivering the Maritime Support Delivery Framework (MSDF) as part of Team Portsmouth. Under this contract, BAE Systems has managed the entire Portsmouth Naval Base estate and supported the Portsmouth-based flotilla.

As well as improving ship delivery, and through a successful partnership with the MOD, BAE Systems has helped deliver a number of major improvements to the base under MSDF. These include a Centre of Specialisation for Aircraft Carriers, major improvements to 14 and 15 dock and creation of a new D lock.

The Company has also helped reduce carbon emissions from approximately 100,000 tonnes to 35,000 tonnes per year over the last 15 years, supported by the creation of a state-of-the-art Combined Heat and Power (CHP) plant to supply power to the Aircraft Carriers and the introduction of electric vehicles to the base. The Company has also helped the customer to develop its carbon profile and roadmap for Portsmouth Naval Base, and will support the implementation of the roadmap to achieve the MOD's net zero goals by 2050.

https://www.baesystems.com/en/article/bae-systems-secures-future-maritime-support-programme-contracts-worth-over-1-billion

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Latest Research

Electronic warfare asset management system

James R. Jolly, George P. Merrill

Abstract

An electronic warfare asset management system allows for pre-mission planning and ranking of emitter targets within a theater of operations while further allowing real-time adjustments to the emitter rankings. The asset management system may further evaluate and optimize asset architecture to allow multiple assets to work in parallel to increase the probability of intercept for any specific target emitter.

https://patents.google.com/patent/US20200166607A1/en

The Industry

Reassessing SIPRI's military expenditure estimate for the United Kingdom - 9/2/2021

In November 2020, in the midst of the 'second wave' of COVID-19 and despite a projected 10.4 per cent decrease in the United Kingdom's gross domestic product in 2020, the British Government announced a £16.5 billion budget boost for 'defence'. The realities of this announcement however remain unclear. The definition of what constitutes the UK's total military expenditure, continues to be probed in recent years by the House of Commons, think tanks and non-governmental organization experts alike. In particular, it remains opaque why there is a discrepancy between what the British Ministry of Defence (MOD) itself reports as the defence budget (£38 billion for 2019) and what it reports to the North Atlantic Treaty Organization (NATO) as 'defence expenditures' (£46.5 billion for 2019).

For its estimate of British military spending, SIPRI uses net cash requirement (NCR) data, as reported in the MOD's annual reports and accounts since the British fiscal year 2000/2001 ('the MOD's NCR figures'). For the years from 1949 until 2000, SIPRI uses NATO defence expenditure data. This enabled SIPRI to publish a consistent time series following accounting changes in British Government spending in the early 2000s. While the MOD's NCR figures were reasonably close to the UK's 'defence expenditure' figures reported to NATO up to 2012, the two data series began to diverge significantly in subsequent years. In 2019 the difference between the two figures was £8.5 billion.

These discrepancies raise two questions: what are the additional spending items that the UK includes in its NATO defence expenditure figures? Moreover, is SIPRI's estimate missing parts of British military spending that come from budgets other than the MOD's NCR?

Possible additional categories of military spending in the United Kingdom

The MOD's answer to a recent Freedom of Information (FOI) request indicated that the elements outside the core MOD budget-understood as the MOD NCR-included in the UK's report to NATO were:

Elements of the Conflict Stability and Security Fund (CSSF) relating to peacekeeping activities undertaken by the MOD;

Elements of the 'single intelligence account' (SIA) spending;

Expenditure on MOD civil service pensions and the Armed Forces Pensions and Compensation Schemes (AFPS);

Income generated by the MOD;

The additional cost of military operations funded through Her Majesty's (HM) Treasury Special Reserve; and

Joint Security Fund Spending by other government departments.

This SIPRI Topical Backgrounder examines these six categories to determine whether they fall under the SIPRI definition of military expenditure; whether they are in fact already included in the MOD core budget (MOD NCR figure) and are therefore already included in SIPRI's estimate; and whether a consistent data series can be created.

As a result of this in-depth examination, SIPRI has revised its data series for the UK to include four of the six identified additional categories of military spending. This update will take effect in SIPRI's upcoming military expenditure data launch on 26 April 2021.

Peacekeeping operations and the Conflict, Stability and Security Fund

SIPRI's definition of military expenditure includes spending on 'peacekeeping forces'. In its answer to the FOI request the MOD stated that 'elements of the Conflict, Security and Stability Fund relating to peacekeeping activities undertaken by Defence' are included in the UK's defence expenditures reported to NATO.

The CSSF is an annual fund that allocates resources to various British government ministries to be used in response to fragility and conflict in 84 countries and territories around the world. Among other things, it includes funding for MOD activities related to peacekeeping, such as operations in Cyprus, Somalia and South Sudan. The CSSF annual report states that funding allocated to MOD peacekeeping activities amounted to £197.5 million for the fiscal year 2019/20.

There appears to be another link between the CSSF and military spending. The MOD's 2019/20 Annual Report and Accounts shows that the MOD's NCR figure already includes a line item related to the CSSF, amounting to £84.5 million in 2019/20. The figure of £84.5 million matches the MOD's Departmental Resources statistical series for 'MOD Operations and Peacekeeping Costs', which indicates spending of £85 million for CSSF activities in the fiscal year 2019/20. However it remains unclear as to how this figure relates to the £197.5m reported in the CSSF annual report.

Only the $197.5m figure (the figure reported in the CSSF annual report) will be included in SIPRI's revised estimate of British military spending. It remains uncertain as to whether or not the $197.5m includes the £84.5m figure reported in the MOD's 2019/20 Annual Report and Accounts. The CSSF is an additional line item which is not part of the MOD NCR and was not previously included in SIPRI's estimate.

The inclusion of this additional element should go back to 2001, when predecessor mechanisms for the CSSF were first created. The estimates from 2001-2020 will thus be revised to include this element. For the years 2015-19, information on CSSF allocations is available in ministers' written statements to the Parliament and in CSSF annual reports. However, prior to 2015, the UK's cross-government aid and peacekeeping spending was organized under a funding instrument known as the 'Conflict Pool'. The annual reports for the Conflict Pool do not provide expenditure breakdowns to the same level of detail as the CSSF reports since 2015.

Due to the difficulty in reconciling the CSSF with the Conflict Resources Settlement (the funding mechanism for the Conflict Pool), SIPRI's new assessment uses two different estimates, one for 2011-14 and one for fiscal years 2001/2002 to 2010/11, based on data availability.

In years prior to 2015, MOD operations accounted for 15 per cent of the total CSSF for 2015-19. For the years 2011-14, where data for the Conflict Resources Settlement exists, 15 per cent of that total is used. Another estimate has to be made for the years from 2001 until 2010, since no data series was uncovered by SIPRI for the Conflict Resources Settlement in this period. This is done by using the average 0.24 per cent of total British military spending that the Conflict Pool funding accounted for during 2011-15.

Military-related spending by the security and intelligence agencies

SIPRI includes the military activities of intelligence services in its definition of military spending. The UK's three intelligence agencies are distinct from the MOD and are funded through the SIA budget. The SIA's NCR figure is available in the British Treasury's main supply estimates, but is not part of the MOD's core budget. However, there is no detailed information as to how the allocated amount is distributed between MI5 (the Security Service), MI6 (the Secret Intelligence Service) and GCHQ (Government Communications Headquarters). These intelligence agencies engage in a range of both military and civilian activities. For SIPRI to include part of this budget in its military expenditure figures for the UK, an estimate of the proportion of military activities for these three agencies as against their civilian activities must be made.

MI5 is mainly concerned with internal security, such as counterterrorism, counterespionage and the protection of critical infrastructure. It should therefore be entirely excluded from the scope of British military spending. MI6 performs both civilian and military activities, with the latter including counterterrorism and the disruption of 'hostile state activity'. GCHQ's missions include counterterrorism; cybersecurity; 'managing threats from hostile states and shaping the international environment'; countering serious and organized crime; and support to defence. Given their mission statements, an assumption can be made that about 50 per cent of the respective activities of MI6 and GCHQ are military in nature.

The distribution of resources between these three intelligence agencies can be estimated based on an assessment of their respective personnel numbers. The Intelligence and Security Parliamentary Committee's annual reports provide the number of staff per agency. For the years where data was available, MI5 employed on average 31 per cent of total SIA staff, MI6 employed 23 per cent and GCHQ employed 46 per cent. Assuming that the budget distribution is equivalent to that of personnel, and based on the assumption that 50 per cent of the respective activities of MI6 and GCHQ are military in nature, SIPRI assesses that 34.5 per cent of the total SIA budget should be added to the British military spending estimate. In 2019 this amounted to £1.1 billion or 2.4 per cent of total British military spending.

Expenditure on Ministry of Defence civil service pensions and the Armed Forces Pension & Compensation Schemes

SIPRI's definition of military expenditure includes 'retirement pensions of military personnel'. In the British system, military pensions are divided into two types. On the one hand, there is the 'War Pensions Scheme', which is already part of the MOD's core budget and therefore included in SIPRI's estimate. On the other hand, the 'Armed Forces Pension & Compensation Schemes' has a separate budget entity and is not included in the MOD's core budget figure. Spending on the AFPS should be added to SIPRI's estimate of British military expenditure. The data for the AFPS is available (in NCR figures) in the yearly main supply estimates. In 2019 AFPS spending was £1.4 billion accounting for 3.0 per cent of total British military spending.

SIPRI's definition also encompasses pensions for civilians who have been working at the MOD, as their service contributed to the UK's military activities. There is no indication as to which budget the MOD's civilian pensions originate from. According to the MOD's Departmental Resources statistical series, the MOD's 'resources DEL' for 'civilian personnel cost' include pensions contributions. This would suggest that civilian pensions are already included in the MOD's core budget. This is also noted in the Main Estimates memorandum for 2019-20. Moreover, this memorandum indicates that in fiscal year 2019/20, the MOD's resources DEL received additional funding of £708 million 'to reflect the increase in employers' contributions for the current valuations of both military and civilian pension schemes'. At the same time, the MOD's answer to the FOI request mentioned above stated that civilian pensions are added to the MOD budget in the NATO defence expenditure report. This would mean that civilian pensions are not already in the MOD's core budget.

However, no available official data could be uncovered by SIPRI. A 2015 report by the Royal United Services Institute (RUSI) indicated that civilian pensions for the MOD were 'perhaps around £200 million' but this was not verifiable by SIPRI. Due to the uncertainty of the data, SIPRI will not include an estimate for MOD civil service pensions in its revised assessment.

External income generated by the Ministry of Defence

The MOD generates some income by providing services to other organizations. This includes military support to foreign governments or other British government departments. Other sources of income are rental income, proceeds from the sale of property and equipment, dividends, and income from investments.

This data is available in the MOD's departmental resources statistical series published yearly by the MOD back to fiscal year 2005/2006. For previous fiscal years (2000/2001 to 2005/2006) the figure is available under 'operating income' in archived MOD annual reports and accounts. In 2019 income generated by the MOD amounted to £1.7 billion or 3.7 per cent of total British military spending. Assuming that this income is then re-used by the MOD for military activities, it serves the purpose of funding military activities and is included in SIPRI's revised estimate of British military spending.

Additional costs of operations

Expenditure on military operations falls under SIPRI's definition of military expenditure. In its budget request each year, the MOD includes initial costs of military operations. As operations unfold during the British fiscal year (from April to March each year), they generate additional costs. These 'net additional costs' are funded by the HM Treasury Special Reserve. However, as shown by the MOD's annual report and accounts, these additional costs are already included in the yearly MOD NCR (in tables entitled 'Statement of Parliamentary Supply (SoPS) Note 1.1 - Analysis of Net Resource Outturn, and Note 3 - Reconciliation of the Net Resource Outturn to Net Cash Requirement').

Adding the net additional cost of operations to the MOD's NCR would therefore lead to double counting. Thus, this category of spending is not included in the new SIPRI estimate.

The Joint Security Fund

In the 2015 Strategic Defence and Security Review (SDSR) the MOD announced the Joint Security Fund (JSF)-a shared fund between the MOD, the Foreign and Commonwealth Office, the Department for International Development and the intelligence agencies. The MOD stated that the JSF would be used 'to fund and deliver the MOD's SDSR commitments in full, maintaining the current levels of the Armed Forces and building four new submarines to renew the nuclear deterrent'. However, there is little available information on it and no additional information could be found by SIPRI on the origins of the fund or how it is spent.

A commentary by RUSI in 2019 noted that: 'the £41 299 million settlement for 2020/21 includes Joint Security Fund allocations which, at Main Estimates, are due to be transferred out of the MOD to the SIA cyber and other non-MOD budgets. The 2019/20 equivalent to this transfer, projected to amount to some £480 million for 2020/21, has already been made in the baseline figures for 2019/20 used in Spending Round 2019.' This would mean that the total JSF is first included in the MOD's total spending, and then part of it is transferred to the other departments.

The 2015 Spending Review stated that, over five years, the MOD would receive £2.1 billion or £420 million per year from the JSF and the SIA £1.3 billion, with £100 million saved for reserves. However, SIPRI could not locate a data series that provided a breakdown of the JSF by annual spending by department or by spending category.

Given the uncertainty about whether the JSF is initially included in the MOD's NCR and the lack of information on annual departmental spending, there is insufficient available data to make a yearly estimate of the JSF. It is therefore not included as a category in SIPRI's new estimate of British military expenditure.

SIPRI's new assessment of British military spending

Table 1 shows the components of the new estimate as outlined above: the MOD's NCR; elements of the CSSF dedicated to MOD peacekeeping operations; estimates of military intelligence expenditure based on the SIA NCR; the AFPS's NCR; and MOD external income.

Table 1. Composition of the new SIPRI estimate for the 2019/20 fiscal year (2019 data)

Category Amount (£m.) Comment

MOD's NCR/SIPRI's old estimate 41481 The MOD's annual NCR as reported in the main supply estimates.

Peacekeeping operations and the Conflict, Stability and Security Fund 198 The portion of the CSSF dedicated to MOD involvement in peacekeeping operations, as reported in the CSSF annual report.

Military-related spending by the security and intelligence agencies 1085 This represents 34.5 per cent of the SIA NCR as reported in the main supply estimates. The figure is based on the average share of total personnel of MI5, MI6 and GCHQ and the assessed proportion of military-related activities.

Expenditure on Armed Forces Pension & Compensation Schemes 1369 The AFPS NCR as reported in the main supply estimates.

Civil services pensions - Not added to the new estimate. No sufficient information available.

External income generated by the Ministry of Defence 1700 Based on data for the last available year, as reported in the MOD Departmental Resources Financial Bulletin.

Additional costs of operations - Not added to the new estimate. This category of spending is already included in the MOD's NCR.

Joint Security Fund - Not added to the new estimate. No sufficient information available.

Total 45833

Notes: - = figure not added to new SIPRI estimate; AFPS = Armed Forces Pension and Compensation Scheme; CSSF = Conflict, Stability and Security Fund; GCHQ = Government Communications Headquarters; JSF = Joint Security Fund; MOD = Ministry of Defence; MI5 = Security Service; MI6 = Secret Intelligence Service; NCR = Net Cash Requirements; SIA = Security and Intelligence Agency.

The new SIPRI estimate is higher than the old one, which uses only the MOD NCR, but remains slightly lower than the figure in the UK's report to NATO for 2019 (£46.5 billion). This difference could be explained by the fact that SIPRI excludes civilian pensions, the JSF and the net additional cost of operations from its revised estimate, which the MOD stated are added to its NATO data.

The new estimate takes into consideration more categories that do fall under the SIPRI definition of military expenditure and therefore can be seen as an improvement to the data series. The full new data series will be available with the upcoming release of the updated SIPRI Military Expenditure Database, on 26 April 2021.

This SIPRI Topical Backgrounder shows that, even in a highly developed democracy (such as the UK), which releases numerous budgetary documents, it is not always possible to fully estimate total military spending. This makes it more difficult to assess opportunity costs at a time when, in a possibly more fiscally constrained environment after Covid-19, the allocation of resources-in particular to the healthcare system-will come under greater scrutiny.

Source: Stockholm International Peace Research Institute (SIPRI)

https://www.sipri.org/commentary/topical-backgrounder/2021/reassessing-sipris-military-expenditure-estimate-united-kingdom

Facts & Figures 2020 - 19/6/2020

The UK's Aerospace, Defence, Security and Space industries make a significant and valuable contribution to economic prosperity and national security.

The 2019 ADS Industry Facts and Figures guide shows the extent to which companies in our sectors serve as the industrial backbone of the UK - delivering the well-paid jobs and high-tech exports we need to secure a prosperous future.

In 2019, the UK aerospace, defence, security and space sectors' contribution to the UK was:

As the national trade association for the UK's aerospace, defence, security and space sectors, ADS works to promote and support their interests both at home and abroad. Spanning the length and breadth of the UK, ADS has more than 1,000 member companies which includes over 950 SMEs.

Working in partnership with the government, our members are investing in innovation, skills and supply chains throughout the UK in order to generate country-wide growth, boost productivity and strengthen our competitive advantage in fast-growing global markets.

UK AEROSPACE SECTOR

The UK's aerospace sector is world-leading, generating well-paid jobs, high-tech exports and sustainable growth across the country.

UK DEFENCE SECTOR

The UK is the second largest defence exporter in the world, which helps deliver the equipment and services our armed forces and security services need to safeguard national security.

UK SECURITY & RESILIENCE SECTOR

The UK's security and resilience sector provides solutions to the challenges we all face today, from cyber security to products and services which address the threats of terrorism and all other aspects of national security.

UK SPACE SECTOR

The UK's space sector is at the cutting edge of exploring the universe and connecting people to the world around them.

The UK's Aerospace, Defence, Security and Space industries make a significant and valuable contribution to economic prosperity and national security.

The annual ADS Industry Facts and Figures guide shows the extent to which companies in our sectors serve as the industrial backbone of the UK - delivering the well-paid jobs and high-tech exports we need to secure a prosperous future.

In 2019, the UK aerospace, defence, security and space sectors' contribution to the UK was:

As the national trade association for the UK's aerospace, defence, security and space sectors, ADS works to promote and support their interests both at home and abroad. Spanning the length and breadth of the UK, ADS has more than 1,100+ member companies which includes over 1,000 SMEs that span the length and breadth of the UK.

Working in partnership with the government, our members are investing in innovation, skills and supply chains throughout the UK in order to generate country-wide growth, boost productivity and strengthen our competitive advantage in fast-growing global markets.

All 2019 data is based on ADS estimates that were completed before the COVID-19 crisis.

UK AEROSPACE SECTOR

The UK's aerospace sector is world-leading, generating well-paid jobs, high-tech exports and sustainable growth across the country.

Sources: ONS,BEIS, ADS Industrial Trends Survey 2020

UK DEFENCE SECTOR

The UK is the second largest defence exporter in the world, which helps deliver the equipment and services our armed forces and security services need to safeguard national security.

Sources: ONS, DIT, Oxford Economics, ADS Industrial Trends Survey 2020

UK SECURITY & RESILIENCE SECTOR

The UK's security and resilience sector provides solutions to the challenges we all face today, from cyber security to products and services which address the threats of terrorism and all other aspects of national security.

Sources: ONS, Oxford Economics, UK Government, Grand View Research, Inc. and ADS Industrial Trends Survey 2020

UK SPACE SECTOR

The UK's space sector is at the cutting edge of exploring the universe and connecting people to the world around them.

Sources: UK Space Agency, ADS Industrial Trends Survey 2020

Source: ADS

https://www.adsgroup.org.uk/facts/facts-figures-2020/

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Leading Companies

Babcock International Group (LSE: BAB)

About Babcock

Babcock is a leading provider of critical, complex engineering services which support national defence, save lives and protect communities.

We focus on three highly regulated markets - defence, emergency services and civil nuclear - delivering vital services and managing complex assets in the UK and internationally. We are a trusted partner who understands the key roles that our technology, our expertise, our infrastructure and our assets play in ensuring our customers can deliver. We share risk with them in delivering innovation, and we share the benefits.

Our Sectors

We deliver our services through our four sectors: Marine, Nuclear, Land and Aviation

Marine

We ensure the UK Royal Navy goes to sea safely by supporting their ships and crew around the world

We support navies around the world through the delivery of complex ship and submarine sustainment programmes

We deliver marine technology solutions to improve our customers complex,safety-critical operations

Nuclear

In defence, we sustain the entirety of the UK's submarine fleet, including delivering through-life support and life extension of Vanguard, Trafalgar and Astute Classes. We also manage and operate two of the three UK Naval Bases (HMNB Clyde and HMNB Devonport).

We have supported the continuous at sea deterrent for 50 years

We sustain the entirety of the UK's submarine fleet

We take a leading role in all civil nuclear: from new build, training and operational support to decommissioning

Land

We ensure the British Army can focus on their missions safely by supporting all of their vehicles

We enable the British Army to do their job with our technical training programmes

Our people support the British Army by contributing to front line support and joining reserve forces

Aviation

We save lives with our aerial emergency medical and search and rescue services

We protect communities with our firefighting operations

We support the defence of nations by supporting air forces in the UK and overseas

https://www.babcockinternational.com/what-we-do/

Babcock International Group PLC half year results for the period ended 30 September 2020

25 November 2020

Resilient revenue but operating profit reflects disposals, the impact of civil nuclear insourcing, COVID-19 and weakness in civil aviation

Financial results

30 September 2020 30 September 2019

Order book £17.2bn £16.9bn

Revenue £2,109.6m £2,194.8m

Underlying revenue1 £2,243.7m £2,457.8m

Operating profit £76.2m £168.7m

Underlying operating profit2 £143.1m £250.6m

Basic earnings per share 10.5p 25.6p

Underlying basic earnings per share 3 15.7p 32.5p

Cash generated from operations £149.3m £150.5m

Underlying free cash flow (post pension payments)4 £58.4m £6.8m

Net debt incl. lease obligations £1,519m £1,754.2m

Net debt excl. lease obligations5 £871.3m £1,138.0m

Net debt/EBITDA6 2.0x 1.9x

David Lockwood, Chief Executive Officer, said:

"I have been enormously impressed by the way in which our people have adapted to the COVID-19 pandemic and continued to prioritise meeting the needs of our customers. Nevertheless, while demand for our critical services has remained resilient overall, the additional costs incurred and inefficiencies created have impacted our profitability. Our operating profit performance in the first half reflects this COVID-19 impact as well as disposals, the impact of government insourcing of Magnox and Dounreay, and weak trading in civil aviation.

"In my first three months at Babcock I have spent time seeing many parts of the business. Our strengths are clear. We have many high-quality businesses, with a deep understanding of our customers, operating in markets where demand for our expertise is strong. At the same time, there are areas that need to be addressed if we are to achieve our full potential. The most important aspect will be delivering sustainable free cash flow.

"In the coming months, we will be reviewing our strategic priorities, execution and delivery. I look forward to reporting back on this in May. In the meantime, we remain focused on delivering for our customers, employees and shareholders and continue to look to the future with confidence."

Financial highlights

* Underlying revenue down 9% (down 7% excl. disposals and FX). Excluding Magnox, rest of businesses down 2%

* Underlying operating profit down 43% (down 39% excl. disposals and FX)

* Nuclear JVs profit declined £12 million year-on-year with the rest of the businesses down 34%, mainly reflecting COVID-19 and weak trading in our civil aviation businesses

* Statutory operating profit of £76 million was down 55% on last year

* Exceptional items (net of tax) of £2 million with a gain on disposals offset by new charges. Small associated net cash costs

* Free cash flow of £58 million with working capital better than expected, including a £40 million VAT timing benefit across Europe

* Net debt (excl. leases) reduced to £871 million, partly from self-help of Holdfast disposal

* Net debt / EBITDA of 2.0 times, well within covenant levels; BBB credit rating confirmed

* Significant liquidity with £1.4 billion headroom at September 2020

* No interim dividend declared given continued uncertainty around the impact of COVID-19

Operational highlights

* COVID-19 saw a huge response across our businesses. Demand held up in the majority of areas but there was a disproportionate impact on profitability with additional costs and reduced efficiency limiting our margin in many areas * Contract wins: Dreadnought programme, extensions to Met Police vehicle contract and c.£500 million of new civil aviation contracts

* Type 31 UK frigate programme on track

* Dounreay contract to be taken in-house by the NDA in March 2021

* Restructuring programmes progressing for civil aviation and civil nuclear businesses

* Progress on fleet rationalisation programme with more to follow

* Completed sales of Holdfast business (joint venture) in June for £85 million and Conbras in October for £7 million

Outlook

* Our performance is typically second half weighted. This weighting is expected to be more pronounced this year as we gradually improve our efficiency month by month under COVID-19

* Uncertainty remains around the impact of the pandemic in our markets including government and customer responses. Given this, we continue to not provide financial guidance for this financial year

https://www.babcockinternational.com/wp-content/uploads/2020/11/Babcock-HY21-results-statement-25.11.2020.pdf

BAE SYSTEMS (LSE: BA)

About BAE Systems

At BAE Systems, our advanced defence technology protects people and national security, and keeps critical information and infrastructure secure. We search for new ways to provide our customers with a competitive edge across the air, maritime, land and cyber domains. We employ a skilled workforce of 85,800 people in more than 40 countries, and work closely with local partners to support economic development by transferring knowledge, skills and technology.

https://www.baesystems.com/en/our-company/about-us

Our Business

Our businesses cover everything from electronic warfare systems to intelligence gathering to armoured vehicles.

Air sector

Today, we operate across the globe, in multiple markets to support our customers - wherever, whenever and whatever their challenges may be. We support them across the whole life cycle of the air sector - from design, development and production, through to provision of aircraft, training, support and maintenance.

BAE Systems Applied Intelligence

Our Applied Intelligence division delivers solutions which help our clients to protect and enhance their critical assets in the intelligence age. These solutions combine large-scale data exploitation, 'intelligence-grade' security and complex services and solutions integration

BAE Systems Australia

A leading supplier of communications, electronic warfare systems, military air support, air defence, mission support systems and intelligence, surveillance and reconnaissance to the Australian Defence Force.

BAE Systems India

We are a first mover amongst international companies to make a direct investment in local manufacturing in partnership with Indian industry.

BAE Systems Saudi Arabia

Supporting customers in the air, land, command and control and naval sectors, and supplies solutions in mechanical engineering, electronics repair and manufacturing, IT, logistics and manpower development.

Electronic Systems

Offer a broad portfolio from flight and engine controls to electronic warfare and night vision systems, surveillance and reconnaissance sensors, secure networked communications equipment, and power and energy management systems.

Intelligence & Security

Intelligence & Security delivers a broad range of solutions and services enabling militaries and governments to successfully carry out their missions. The company provides large-scale systems engineering, integration, and sustainment services across air, land, sea, space, and cyber domains.

Platforms & Services

Platforms & Services is a leading provider of tracked and wheeled armored combat vehicles, naval guns, naval ship repair and modernization, artillery and missile launching systems, advanced precision strike munitions and ordnance, and other technologies for U.S. and international customers.

Maritime

We design and manufacture naval ships and submarines, as well as their combat systems and equipment.

Regional Aircraft

A leading provider of regional aircraft and support services to regional airlines throughout the world.

Shared Services

Provide shared capabilities and support services, principally to BAE Systems internal customers. Shared technology and professional capabilities are knowledge-based, tailored to customer needs and focus on adding value.

https://www.baesystems.com/en/our-company/our-businesses

2020 full-year results

25 February 2021

Today we announced the Group's full-year results for 2020.

Thanks to the outstanding efforts of our employees and close cooperation with our customers, suppliers and trades unions, we have delivered a strong set of results against a challenging backdrop of the global pandemic. Throughout 2020, we focused on keeping our people safe and supporting our communities, whilst continuing to deliver for our customers. In 2021, we will continue to drive operational performance, progress our sustainability agenda and invest in high-end discriminating technologies to meet our customers' priorities, which will ensure we are well positioned to grow the business and contribute to the economic prosperity of the countries in which we operate.

Charles Woodburn, Chief Executive

Our financial highlights

Financial performance measures as defined by the Group1

Sales increased by £0.8bn to £20.9bn, a 4% increase, excluding the impact of currency translation5.

Underlying EBITA increased to £2,132m, a 1% increase on a constant currency basis5.

Underlying earnings per share increased by 2% to 46.8p, excluding the impact of the prior year one-off tax benefit6.

Free cash flow3 was £367m after the impact of the £1bn contribution into the UK pension scheme. Excluding this contribution free cash flow was £1.4bn.

Net debt increased to £2,718m, following the £1bn bond issuance to fund the UK pension scheme, and the $2.2bn (£1.7bn) acquisitions of the Airborne Tactical Radios and Military Global Positioning System businesses.

Order intake4 increased to £20.9bn.

Order backlog4 of £45.2bn.

Financial performance measures defined in IFRS2

Revenue increased by £1.0bn to £19.3bn.

Operating profit increased by £31m to £1,930m, including the non-recurring credit of £19m (2019 £27m charge).

Basic earnings per share decreased by 12% to 40.7p. 2019 included the impact of the one-off tax benefit of £161m.

Net cash flow from operating activities decreased by £431m to £1,166m, including the effect of the £1bn contribution to the UK pension scheme.

- Order book of £36.3bn (2019 £37.2bn).

Post-employment benefits and dividend

Group's share of the pre-tax accounting net post-employment benefits deficit was in line with the prior year at £4.5bn.

Final dividend of 14.3p per share making a total of 23.7p per share in respect of the year ending 31 December 2020. The total of 37.5p per share for the year includes an interim dividend of 13.8p per share in respect of the year ended 31 December 2019, which was originally proposed as a 2019 final dividend but subsequently deferred in the light of the COVID-19 pandemic.

Operational and strategic key points

Air

Contract secured to support the production of 38 Typhoon aircraft for the German Air Force

Qatar Typhoon and Hawk aircraft programme met its contractual milestones in the year

F-35 programme Lots 12 to 14 contract definitised following price agreement. 126 rear fuselage assemblies completed in the year, below the contracted level as a result of COVID-19 disruption. Ramp up to full-rate production in 2021

Governments of Italy and Sweden committed to working with the UK to develop next-generation combat air capability

A further six Hawk aircraft assembled in Saudi Arabia were accepted and entered service in-Kingdom

The design and production readiness phase of the Hunter Class Frigate programme for the Royal Australian Navy continues to make good progress

Sale of Advanced Electronics Company to Saudi Arabian Military Industries completed in February 2021

Maritime

The fourth Astute Class submarine, HMS Audacious, 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

The build phase of the River Class Offshore Patrol Vessel programme is now complete, with the fourth ship, HMS Tamar, handed over to the Royal Navy in March, and HMS Spey, the fifth and final ship, handed over in October

Construction of the first two City Class Type 26 frigates for the Royal Navy continues to progress

Acquisition of Techmodal, a UK data consultancy and digital services business, completed in August

Announcement of a 15-year agreement with the UK Ministry of Defence to supply the Next Generation Munitions Solution between 2023 and 2037

RBSL has secured its share of the Mechanised Infantry Vehicle Boxer programme

Electronic Systems

Airborne Tactical Radios and Military Global Positioning System acquisitions completed, performing well and integrations are progressing

F-35 electronic warfare systems for Lot 12 completed, surpassing cumulative programme deliveries of 800 electronic warfare systems as of year end

Successful demonstration of APKWS® ground-launch capability

Terminal High Altitude Area Defense (THAAD) seeker executing at full-rate production, and receipt of additional order to design and manufacture next-generation infrared seekers

Continued classified work

Demand in the commercial business lines of Controls & Avionics Solutions and Power & Propulsion Solutions has been negatively impacted by COVID-19

Platforms & Services (US)

Delivery of the first production Armored Multi-Purpose Vehicles took place in the second half; one of each of the five variants delivered by year end

Amphibious Combat Vehicle programme moved to full-rate production phase after Initial Operational Capability declared

Delivery of more than 50 production Bradley A4 vehicles

New US Navy contract modifications totalling $114m (£83m) for Mk45 Mod 4 upgrades

Initial deliveries of Virginia Payload Module tubes completed

Ship Repair secured more than $1bn (£0.7bn) in US Navy maintenance and modernisation orders

Ordnance Systems received $233m (£170m) in modernisation contracts

Contracted to provide five 57Mk3 and ten 40Mk4 naval gun systems for the UK Royal Navy's Type 31 frigates

Operational delays and disruptions related to the COVID-19 pandemic were experienced across manufacturing and shipyard facilities

Cyber & Intelligence

Intelligence & Security

US-based Intelligence & Security business continues to maintain its bid pipeline, perform on existing contracts and win new orders. All three businesses delivered a book to bill1 ratio of over one.

Awarded a seven-year, $495m (£362m) contract on Instrumentation Range Support Programme

Multi-year Indefinite Delivery, Indefinite Quantity contract received to provide electronic hardware and engineering services for a US government customer

Our Federated Secure Cloud technology approach and processes are being employed to maintain and secure US Army Cyber Command's virtual desktop infrastructure

Applied Intelligence

Strong order intake, revenue and profitability performance in the core underlying business driven by the Government business unit

Significant profit growth year-on-year due to cycling the restructuring of the Technology & Commercial business in 2019

Sale of the US-based software-as-a-service business completed in November

Ratio of Order intake to Sales.

Guidance for 2021

Whilst the Group is subject to geopolitical and other uncertainties, the following guidance is provided on current expected operational performance.

The guidance is based on the measures used to monitor the underlying financial performance of the Group. Reconciliations from these measures to the financial performance measures defined in International Financial Reporting Standards for 2020 are provided in the Group financial review on pages 14 to 19.

Group guidance

With a strong year behind us against a challenging backdrop of the global pandemic, we look forward to another year of top line growth, with a year of margin expansion and good cash flow, all reflected in our Group guidance. Guidance is provided on the basis of an exchange rate of $1.35:£1.

For the year ending 31 December 2021, the Group's sales are expected to grow in the 3% to 5% range over 2020. Excluding the impact of foreign exchange, we expect growth to be between 5% to 7%.

Sales growth is expected in Air and Electronic Systems, including the full year impact of the acquisitions, partially offset by continued weakness in commercial aerospace revenues. Approximately 80% of expected sales is already in Order backlog.

Underlying EBITA is expected to increase in the range of 6% to 8%. Excluding the impact of foreign exchange, we anticipate growth in excess of 10%, with improved performance in Platforms & Services (US), continued expansion in Applied Intelligence, and a full year of contribution from the acquisitions in Electronic Systems.

Finance costs are expected to be approximately £270m with an effective tax rate expected to be around 18%, and non-controlling interest expected to be around £85m.

Underlying earnings per share is expected to increase in the range of 3% to 5%. A 10 cent movement in the exchange rate impacts underlying EPS by around 2 pence.

Free cash flow for 2021 is anticipated to be in excess of £1bn, with a three-year target for 2021 to 2023 in excess of £4bn.

Segment guidance

The following table provides guidance by segment, aligned to the Group guidance:

Electronic Systems Cyber & Intelligence Platforms & Services (US)

Air

Maritime

Sales

Guidance ($1.35:£1) Up 4% to 6% Down 3% to 5% Down 3% to 5% Up 7% to 9% Up 2% to 4%

Constant currency basis1 Up 10% to 12% Stable Stable Up 7% to 9% Up 2% to 4%

Underlying EBITA margin2 15% to 16% 7% to 8% 8% to 9% 10% to 12% 9% to 10%

Constant currency growth rates eliminate the impact of foreign exchange translation.

Underlying EBITA as percentage of Sales.

HQ costs are expected to be 10% lower than 2020.

Revised profit performance measures

During 2021, management will adopt the underlying EBIT profitability measure, to include charges relating to software and development intangible amortisation, in place of the underlying EBITA measure, as it reflects a better measure of underlying profitability. Underlying earnings per share will also be recalculated to ensure consistency with the updated operational profitability measures. Revised guidance for these updated measures will be issued in due course. The change in profit measure has no impact on the Group's existing business performance or cash guidance.

https://www.baesystems.com/en/article/2020-full-year-results

Chemring Group (LSE: CHG)

About Chemring

For over 100 years, in over 50 countries, Chemring has been supplying the world's most demanding customers - in aerospace, defence and security - with innovative solutions.

We solve critical problems to help make the world a safer and better place, with countermeasures, sensors and energetic solutions.

We work with all our customers - the military, agencies and businesses - in pursuit of one common goal: positive change.

https://www.chemring.co.uk/about-us

At Chemring, we use our world-class expertise and innovation to protect people, platforms, missions and information against constantly-changing threats. Supported by our core values of safety, excellence and innovation, we help to make the world a safer place for our customers with our high-tech sensors, information, countermeasures and energetics solutions.

Sensors & Information

Innovation is core to solving our clients' difficult problems. Operating across Commercial, National Security and Defence domains, we enable our clients to deliver competitive advantage, defend their people, assets and secrets and defeat their adversaries.

We operate across the whole life cycle providing advice, engineering, design, research and solutions created from our products and services.

With over 350 scientists, engineers and consultants, our Sensors and Information Sector continues to invest in technologies that safeguard and protect in an uncertain world.

Countermeasures & Energetics

Chemring is the world leader in the design, development and manufacture of advanced expendable countermeasures and countermeasure suites for protecting air, sea and land platforms against the growing threat of guided missiles.

We combine a deep understanding of platform signatures, missile seekers and chemical formulations to develop new decoys against new threats.

Our world-class energetics capabilities include cutting edge raw materials to meet unique client product requirements, actuators, air crew safety systems, and missile and rocket components.

Every day, our products, services, and experts enable militaries and security forces for screening and illumination, NASA to take rockets into orbit, and navies to ensure their missiles self-destruct.

https://www.chemring.co.uk/what-we-do

Results for the year ended 31 October 2020

15 December 2020

As reported At 2019 exchange rates

2020 Change 2020 Change 2019

Continuing operations

Revenue (£m) 402.5 + 20% 406.4 + 21% 335.2

Underlying EBITDA* (£m)** 74.6 + 22% 75.9 + 24% 61.2

Underlying operating profit* (£m) 54.7 + 24% 55.7 + 27% 44.0

Underlying profit before tax* (£m) 51.7 + 31% 52.7 + 34% 39.4

Underlying basic earnings per share* (pence) 15.1 + 35% 15.4 + 38% 11.2

Statutory operating profit (£m) 46.3 + 48% 31.3

Dividend per share (pence) 3.9 + 8% 3.6

Net debt at 31 October 2020 (£m) ** 48.2 - 36% 75.7

Key points

2020 performance was ahead of the Board's expectations with strong performance in both segments

All businesses remained open and operational despite the challenges caused by COVID-19

Safety remains a core value. Investment in the Group's manufacturing infrastructure is driving improvements in safety, efficiency and enhancing operational resilience

Strong growth in orders and revenue for Roke including strategically important first Electronic Warfare order for Resolve into the US DoD

Good progress made on securing new business in the UK, the US and Australia for the supply of global countermeasures, including the receipt by Chemring Australia of a definitised contract of $107m in support of the F-35

Continued progress on the US Programs of Record. Further orders received in the year for the next phase of HMDS delivery, with the IDIQ increased by $200m, and customer approval and contract awarded for Low Rate Initial Production for the EMBD programme

Significant reduction in net debt from strong operational cash generation, partially offset by scheduled capital expenditure and the adoption of IFRS16

Board's expectations for 2021 are unchanged. Approximately 78% of expected 2021 revenue is covered by the order book

Michael Ord, Group Chief Executive, commented:

"Our focus in recent years has been on putting in place the foundations on which to build a stronger, higher quality business. The resilience of the Group in response to the coronavirus pandemic is a consequence of the dedication and commitment of all our people and clearly demonstrates the significant progress that we have made. We set ourselves demanding goals and our teams across the Group have risen to those challenges, delivering a financial performance that was ahead of the Board's expectations.

"Trading since the start of the current financial year has been in line with expectations. With 78% of 2021 expected revenue covered by the order book, the Board's expectations for 2021 performance remain unchanged. Chemring is well placed, with a robust strategy, market-leading positions across different geographies and sectors, and with products and services that are critical to our government and blue-chip customers. Chemring's long-term prospects remain strong."

Notes:

* All profit and earnings per share figures in this news release relate to underlying business performance (as defined below) unless otherwise stated.

** The 2020 net debt balance reflects the initial recognition of a £6.5m finance lease liability and £1.8m of the increase in underlying EBITDA is as a result of applying IFRS 16 Leases (effective 1 November 2019). The 2019 net debt balance and underlying EBITDA have not been restated, in line with the modified retrospective approach taken.

The principal Alternative Performance Measures ("APMs") presented are the underlying measures of earnings which exclude discontinued operations, exceptional items, gain or loss on the movement on the fair value of derivative financial instruments, the amortisation of acquired intangibles and the associated tax impact on these items. The Directors believe that these APMs improve the comparability of information between reporting periods as well as reflect the key performance indicators used within the business to measure performance. The term underlying is not defined under IFRS and may not be comparable with similarly titled measures used by other companies.

A reconciliation of underlying measures to statutory measures is provided below:

Group - continuing operations: Underlying Non-underlying Statutory

EBITDA (£m) 74.6 0.5 75.1

Operating profit (£m) 54.7 (8.4) 46.3

Profit before tax (£m) 51.7 (8.4) 43.3

Tax charge (£m) (9.1) 0.5 (8.6)

Profit after tax (£m) 42.6 (7.9) 34.7

Basic earnings per share (pence) 15.1 12.3

Diluted earnings per share (pence) 14.8 12.0

Group - discontinued operations:

(Loss)/profit after tax (£m) (0.1) 0.1 -

Segments - continuing operations:

Sensors & Information EBITDA (£m) 30.7 - 30.7

Sensors & Information operating profit (£m) 27.4 (6.4)

21.0

Countermeasures & Energetics EBITDA (£m) 56.5 - 56.5

Countermeasures & Energetics operating profit (£m) 39.9 (2.5) 37.4

The adjustments to continuing operations comprise:

amortisation of acquired intangibles of £8.9m (2019: £12.1m)

gain on the movement in the fair value of derivative financial instruments of £0.5m (2019: £0.6m loss)

The discontinued operations loss after tax primarily relates to the businesses which were "held for sale" at 31 October 2018, which have subsequently been divested from the Group or closed during the last two years:

operating loss of £0.1m (2019: £3.5m loss)

exceptional items of £0.1m profit (2019: £3.8m loss)

tax credit on the above of £nil (2019: £6.1m credit)

https://www.chemring.co.uk/media/press-releases/2020/15-12-2020

Cobham (LSE: COB)

About Cobham

Cobham offers an innovative range of technologies and services to solve challenging problems in commercial, defence and security markets, from deep space to the depths of the ocean.

We employ around 10,000 people primarily in the USA, UK, Europe and Australia, and have customers and partners in over 100 countries, with market leading positions in: wireless, audio, video and data communications, including satellite communications; defence electronics; air-to-air refuelling; aviation services; life support and mission equipment.

Our Businesses

Advanced Electronic Solutions

We provide critical solutions on land, at sea, and in the air and space, by moving data through off-the-shelf and customised products including RF, microwave, and high reliability microelectronics, antenna subsystems and motion control solutions.

Aviation Services

We deliver outsourced aviation services for military and civil customers worldwide through military training, special mission flight operations, outsourced commercial aviation and aircraft engineering.

Communications and Connectivity

We are recognised as a world leading supplier of robust, high performance equipment and solutions that enable reliable connectivity anywhere, anytime, in the most demanding environments. Our solutions give our customers a competitive edge in aerospace, avionics, satellite and radio, wireless and mobile connectivity markets.

Mission Systems

The most capable critical control solutions for extreme environments.

As the world's leading supplier of critical control solutions, we help our customers to increase the safety and mission capabilities of their personnel and equipment in extreme environments.

Our proven and trusted solutions in air-to-air refuelling, life support, weapons carriage and unmanned systems, deliver assured performance and class-leading through-life costs that enable our customers to bring complex projects to market quickly, and with minimal risk.

https://www.cobham.com/

INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2019

25 July 2019

''Improving operational and financial performance with recommended cash offer for Cobham announced at 165p per share."

Note Statutory results Underlying results1

£m H1 2019 H1 2018 H1 2019 H1 2018

Order intake 970.2 1,027.1 970.2 1,027.1

Revenue 1,028.9 924.5 1,028.9 924.5

Organic revenue growth 2 11% - 11% -

Operating profit 68.7 213.9 107.1 95.5

Operating margin 10.4% 10.3%

Earnings per share 2.0p 7.0p 3.2p 2.0p

Operating cash conversion 3 60% 40%

Free cash flow (15.7) 9.2

Net debt 4 (148.3) (195.3) (148.3) (195.3)

Net debt/EBITDA

Interim dividend per share 4

0.4p

- nil

0.4p 0.2x

-

* Recommended cash offer for Cobham at a price of 165p* per share by funds managed by Advent International. For details, refer to Rule 2.7 firm offer announcement released this morning

* Strong Group organic revenue growth of 11% driven by programme timing and from increased demand; all Sectors contributing to organic revenue growth

* Underlying operating profit increased 12% to £107.1m, reflecting another strong Mission Systems result and improving performance in Communications and Connectivity. Actions to improve execution and reduce overheads in Advanced Electronic Solutions in place

* Risk significantly reduced by KC-46 tanker settlement and resolution of UK tax dispute, although some risk remains

* Free cash better than previously expected with a £15.7m outflow, after settlement of KC-46 (£48.7m) and taxation (£69.5m) disputes

* Balance Sheet remains strong with net debt/EBITDA5 gearing ratio at nil

* Strategic review of Aviation Services in Australia commenced

* Resumption of dividend as previously announced; interim payment 0.4p*

* Full year expectations unchanged

David Lockwood, Cobham Chief Executive Officer, said: "We have continued to make good progress to improve operational performance and to significantly reduce the Group's risk profile. These results include organic revenue growth across all the Sectors. Underlying operating profit increased 12%, driven by another strong performance from Mission Systems and an improving result from Communications and Connectivity. The Board has confidence that the necessary actions to drive operational performance are in place across the Group, which will underpin our expectations for this year and into the longer term."

http://www.cobhaminvestors.com/~/media/Files/C/Cobham-IR-V2/documents/Cobham%20-%20Interims%20Announcement%20to%2030%20June%202019%20Website.pdf

GKN Aerospace

About GKN

GKN Aerospace is the original aerospace innovator. For decades, GKN Aerospace technologies have inspired and industrialized the aerospace industry, combining engineering excellence and technology leadership.

Today we are truly global, with 18,000 employees in 50 manufacturing locations in 15 countries around the world. All major aircraft and engine manufacturers rely on our advanced technologies. Our aerostructures, engine systems and special products improve the performance of more than 100,000 flights every day.

By working closely together with universities, knowledge institutes, suppliers and customers, we lead the industry in developing new technology to improve aircraft efficiency: lowering aircraft cost, weight and emissions.

We were among the first to implement lightweight materials like thermoplastic composites and fibre metal laminates in aircraft components 30 years ago, achieving comparative weight savings of around 25% for major passenger aircraft. Since then, we have equipped the majority of advanced aircraft platforms worldwide with successive generations of the technology including the Airbus A350XWB, A380 and Boeing 737.

We set the standard in highlighting the unlimited possibilities of additive manufacturing (AM) for the aerospace industry and are currently at the cutting-edge of technology leadership worldwide. Around 15 years ago, we manufactured the Ariane 5 rocket engine nozzle and reinforced it with our AM wire deposition technologies. Today, GKN Aerospace has five global centers of excellence that enable the most advanced aircraft to take to the sky with ground-breaking AM components.

GKN Aerospace's operational excellence and high volume production capabilities are now driving the global development towards more automation, higher performance and smart industry solutions. The result is shorter production lead times and more affordability for our global customers.

Every day, around the world, we help aircraft fly further, faster and greener.

Overview

GKN Aerospace is a leading global tier one supplier of airframe and engine structures, landing gear, electrical interconnection systems, transparencies, and aftermarket services.

It supplies products and services to a wide range of commercial and military aircraft and engine prime contractors, and other tier one suppliers.

SALES IN 2018 - £3,53bn

EMPLOYEES - 18,000

MANUFACTURING LOCATIONS - 50

COUNTRIES - 15

Executive team

GKN Aerospace's Executive Team is responsible for the long-term success of the Division, focusing on meeting Aerospace's strategic objectives in a sustainable and responsible manner.

Product

Airframe structures, including wing/empennage and flight control surface assemblies, fuselage structures and landing gear.

Engine structures, including fixed and rotating propulsion products, fan cases, exhaust systems, nacelles and other components.

Electrical wiring interconnection systems for aerostructures and engine products.

Niche products such as ice protection, fuel systems, transparencies including specially coated cockpit and cabin windows, and flotation devices.

https://www.gknaerospace.com/en/about-gkn-aerospace/

Trading Update

Melrose Industries PLC ("Melrose" or the "Group") publishes the following trading update for the half year period ended 30 June 2020 (the "Period") prior to the publication of its interim results. All numbers are calculated at constant currency.

Overview

The Period covered by the trading update has been extraordinary. For part of this Period the Automotive and Powder Metallurgy businesses had factories that were largely closed in Europe and the Americas, and the Aerospace and Nortek businesses had factories which were largely open but with hugely reduced requirements. As a consequence, your Board cancelled the final dividend due in May 2020, negotiated waivers for its EBITDA to net debt covenant for June and December 2020, and focused the Group on cash generation. Your Board is grateful for the swift and unanimous support of its lending banks in renegotiating these banking arrangements which has been a significant benefit to Melrose stakeholders.

As a result of this cash focus, the Group has generated c.£200 million of free cash flow, before restructuring costs and the acquisition of Forecast 3D in January 2020, resulting in net debt, at constant currency, reducing by c.£90 million in the Period. Consequently, the committed bank headroom has increased to over £1.1 billion as at 30 June 2020. Additional to this headroom the Group has cash in hand of over £300 million. The Group therefore beat its target of being cash neutral in what was a hugely difficult trading environment and your Board is pleased with this achievement.

It is natural that, as the businesses recover from the consequences of closed factories, some working capital requirements will need to increase as factories re-open. Importantly, there is still the opportunity to reduce inventories in the Group by over £150 million to significantly mitigate this, which is in addition to the c.£200 million of reduction in inventory and capital expenditure achieved since March 2020.

It is also necessary to adapt the businesses for the new economic environment, which means that there has to be an even stronger focus on cost reduction throughout the Group with some inevitable impact on employee numbers. Your Board estimates that such cost reduction measures taken this year will have a net beneficial contribution to the Group of c.£100 million in 2021 after assuming the scheduled withdrawal of worldwide government support schemes and furlough.

Trading update

In the Period Group revenue declined by 27% which was reflective of trading in line with expectations until mid-March 2020 followed by a steep decline in the second quarter. The focus on cash and reducing working capital has some detrimental effect on profitability for the year. The Group was loss-making in the second quarter of this year, but rebounded to be breakeven at the adjusted operating profit level in the month of June as recovery started to take place. This means Melrose is likely to make a small adjusted operating profit in the Period. Bearing in mind the focus on cash generation, your Board regards this as a significant achievement.

In line with the industry, sales in Aerospace for the Period reduced by approximately 18% and are not expected to recover in the second half of the year. Overall it is anticipated that sales for the year are likely to reduce by approximately 25-30% year-on-year and for the business to broadly breakeven. Therefore, a substantial reduction of the Aerospace cost structure is underway. This will significantly improve this business's performance in 2021 without relying on sales growth from the level anticipated this year. This is a world leading business and as such is well positioned in its market to adjust to the demands of the new aerospace environment.

The Automotive and Powder Metallurgy businesses saw very similar trends to each other in the Period with a sharp decline in the second quarter due to many of their factories being shut and sales in the Period subsequently being down 36%. However, these businesses are also now seeing recovery. With COVID-19 cases currently rising in parts of the world and an unknown effect of customer restocking it cannot be certain these trends will continue at their current strength, but at present trading in China is ahead of last year (and has been for a couple of months), trading in the US is forecast over the summer to be within 10% of last year and there are some signs of improving European demand. All of this currently gives hope for a faster recovery than was sometimes feared would be the case though it is too early to be certain of this.

Existing travel restrictions mean that the Automotive Investor Day in New York, intended to be held in October 2020, will be rescheduled.

Nortek Air Management is performing well, and as a result, sales in the Period were only down 7%. The exciting StatePoint technology, aimed at improving the energy and water usage in data centres around the world, is gaining significant traction, with forecast sales this year of over $100 million. The business is receiving significant interest in its products from a number of data centre providers. Melrose announced on 5 March 2020 that it had appointed advisers to explore the strategic options for Nortek Air Management: this review was suspended later in March this year. Whilst there remains uncertainty on timing, it is the intention to revisit these options early in 2021. In the meantime, there is confidence that the improvements in these businesses this year (StatePoint and elsewhere) have further enhanced the quality of this division.

The Other Industrial businesses are in various end markets impacted by COVID-19 to variable extents. Brush is benefiting from the significant restructuring projects which it completed in 2019 and Ergotron has seen strong demand for its health sector products.

While the COVID-19 crisis has been challenging for all our businesses, the Group has sought to protect investment in R&D and continue to develop world leading technologies. Aerospace is investing in ground-breaking technologies for both electric and hydrogen powered aircraft. Automotive pressed ahead with its investment in e-Drive auto systems and recently produced its millionth e-Drive unit. Powder Metallurgy has continued to develop its 3D printing capability including the acquisition of Forecast 3D. Nortek Air Management, as stated above, is also continuing to develop its revolutionary StatePoint technology. Further development of these and other exciting projects are key to the successful development of the Group.

While we are encouraged by the strong cash performance in the Period, your Board does not consider it appropriate to pay an interim dividend to shareholders in 2020. The Company will publish its full interim results on 3 September 2020.

Simon Peckham, CEO of Melrose Industries PLC said:

"This has been an extraordinary period which has needed our management teams and employees to carry out difficult actions with speed and determination. As a result we have generated £200 million of free cash flow and started to adapt our world leading businesses to take advantage of the market and acquisition opportunities the future will bring. For this year the focus is on cost control and cash generation, but we have protected investment in innovation for the future. Whilst timetables will have been affected, we remain confident that our businesses will adapt and produce good returns for our shareholders."

https://www.melroseplc.net/media/announcements/2020/trading-update-220720/

Meggitt (LSE: MGGT)

About Meggitt PLC

Innovation is at the heart of everything we do

It's why we consistently deliver solutions for the most challenging environments and why customers worldwide rely on our advanced technologies, products and services for aerospace, defence and selected energy applications.

Headquartered in the United Kingdom, this international group operates in North America, Europe and Asia. Known for its specialised extreme environment engineering, Meggitt is a world leader in aerospace, defence and energy. Meggitt employs more than 12,000 people at over 40 manufacturing facilities and regional offices worldwide.

Our Market

AEROSPACE

Through engineering expertise, we take the world further

Civil aerospace accounts for 54% of Group revenue, with products and sub-systems installed on almost every jet airliner, regional aircraft and business jet in service.

DEFENCE

Trusted by defence forces worldwide

Military business accounted for 34% of Group revenues in 2017. We have equipment on an installed base of around 22,000 fixed wing and rotary aircraft and a significant number of ground vehicles and training applications.

ENERGY & EQUIPMENT

Keeping the lights on

Energy and other revenue comes from a variety of industries including power generation, oil and gas, medical and automotive and accounted for 12% of Group revenue in 2017.

https://www.meggitt.com/about-us/

Group Activity

The Meggitt Group's antecedents can be traced back to the mid-19th century with innovations such as early aviation instruments for hot air balloons including the world's first altimeter. Today it is known for designing and manufacturing high performance components and subsystems for aerospace and defence markets and applies its core sensing and control technologies to hydro, steam and gas turbomachinery generators, oil and gas applications and the medical, mainstream industrial, test engineering and transportation sectors.

The group employs c. 11,700 people across 45 operating facilities.

In 2018 Meggitt was organised into five divisions, integrating the design and development capabilities and product portfolios of complementary Meggitt business units. These units focus on operational excellence while reporting to strong divisional management encompassing key functions including finance, strategy, sales and marketing, engineering, HR, trade compliance and procurement.

Organisation structure

Effective 1 January 2019, Meggitt's organisation comprises four customerfocused divisions organised into product groups.

Airframe Systems brings together an extensive range of capabilities called upon by the world's leading commercial, business and military aircraft manufacturers such as Airbus, Boeing, Gulfstream, Dassault, Bombardier, Textron and Lockheed Martin.

Engine Systems brings together the Group's capabilities offered to aero-engine manufacturers including Pratt & Whitney, General Electric, Safran and Rolls-Royce.

Energy & Equipment encompasses strong niche positions in energy, non-aerospace military and industrial equipment.

Services & Support continues to provide the range of distribution and maintenance, repair and operations (MRO) services to

To Fly

Expertise relied upon by customers to enable safe, costeffective and environmentally responsible flight.

To Power

Products and services which enable customers to reliably operate critical infrastructure without disruption.

To Live

Innovative technologies which make the world more secure.

https://www.meggitt.com/wp-content/uploads/2019/04/Fact_sheet_June_2019.pdf

2020 Year End Results

4 March 2021

Strong execution on strategy with the Group well placed for the recovery Meggitt PLC ("Meggitt" or "the Group"), a leading international engineering company specialising in high performance components and sub-systems for the aerospace, defence and selected energy markets, today announces audited results for the twelve months ended 31 December 2020.

Tony Wood, Chief Executive, commented:

"Our focus throughout 2020 and as we move into 2021, continues to be ensuring the safety and well-being of our people, protecting our sites, serving our customers and communities and executing our strategy. I want to thank all of my colleagues for their hard work and dedication in helping us navigate our way through the year.

Faced with a reduction in activity and demand in one of our core markets, we acted fast, executed well operationally and took decisive action while positioning the Group for the recovery in civil aerospace. While our full year performance has clearly been impacted by the ongoing effects of COVID-19, it also reflects the resilience and diverse nature of the Group, including the mitigating impact of our defence and energy businesses.

The roll-out of vaccines, coupled with significant pent-up demand to travel, provides a supportive backdrop for the recovery in civil aerospace in 2021, although this positive development is likely to take time to feed through into growth in global flight activity and the aftermarket. Based on the significant progress we've made over the last four years to transform the Group, the effective actions we've taken in 2020, diverse end market exposure and leading market positions, we are well placed to benefit from the recovery and to continue to deliver long-term profitable growth."

Operational and strategic highlights

* Introduced measures to ensure the well-being of our people and safe operations at all our global sites * Rapid and decisive action taken to reduce cost, protect cash and resize the Group

* Continued progress on key strategic initiatives:

Completed the streamlining of our portfolio with the sale of our Training Systems business

Addition of 14 SMARTSupport® contracts, securing further market share in the aftermarket

Further reduction in global footprint, now 34% below 2016 levels

Investment in operational capability with the opening and fit out of our new campus in Ansty Park, UK

Accelerated our existing sustainability strategy under our People, Planet and Technology framework

Financial summary

* Performance of the Group reflects the impact of COVID-19 on the civil aerospace sector

* Group revenue of £1,684m down 22% on an organic basis, with a robust performance in defence, where organic revenue grew 4%

* Underlying operating profit 53% lower at £191m (FY 2019: £403m)

* Statutory operating loss of £297m (FY 2019: profit of £325m) as a result of the non-cash impairment of intangible assets and other asset write downs

* Successful delivery of in-year cash savings of £450m

* Positive free cash flow of £32m (FY 2019: £268m) and reduction of £138m in net debt to £773m (FY 2019: £911m)

* Ratios of net debt:EBITDA of 2.2x and interest cover of 9.8x at 31 December, well within covenant limits

* Robust liquidity position with headroom of £908m on committed facilities of £1,537m at 31 December

* Extended maturity of our debt with a forward start on our RCF to September 2022; and raised $300m in USPP market in November 2020

* In light of ongoing challenging and uncertain market conditions, the Board has recommended not to pay a final dividend for 2020

Outlook for 2021

* While the rollout of vaccines is expected to ease lockdowns and drive a gradual increase in air traffic activity, we anticipate the trends seen in civil aerospace during the second half of 2020 are likely to continue in the first half of 2021, with recovery weighted more towards the second half of the year. Conditions in our defence and energy end markets are expected to remain robust in 2021. Assuming no further disruption to normal operations during the year as a result of additional lockdowns, in 2021 we expect the Group to generate:

o Revenue broadly in line with 2020;

o An increase in underlying operating profit versus 2020; and

o Positive free cash flow.

MARKET CONTEXT AND CONDITIONS

Civil Aerospace

The outbreak of COVID-19 and subsequent lockdowns across the world caused a significant and unprecedented reduction in commercial air traffic in 2020, with global air traffic, as measured by RPKs and ASKs down 65.9% and 56.5% respectively for the full year 2020, compared with 2019 levels.

While positive signs started to emerge at the end of the second quarter with airlines gradually increasing capacity and future flight schedules, particularly in domestic markets, the level of air traffic and customer demand remained highly sensitive to subsequent spikes in COVID-19 infection rates, the imposition of new lockdowns and other measures such as post-flight quarantining. Accordingly, the recovery in global passenger numbers plateaued in the fourth quarter with global RPKs and ASKs ending the year for the month of December down 69.7% and 56.7% respectively, showing only a slight improvement from September's figures down 72.0% and 60.8%.

While all regions have been adversely affected, there have been variations in the extent of traffic reductions as follows: Asia Pacific down 62%; Europe down 70%; and North America down 65%. There has also been a difference between domestic and international air travel, reflecting the closure of international borders at certain times during the year, with domestic traffic down 49% in 2020 compared with international traffic down 76%. In some domestic markets, notably China and Russia, traffic levels recovered in 2020 to be in line with or slightly above 2019 levels.

Within civil aerospace, the extent to which different platform categories have been affected has also varied, with global business jet utilisation down 21% in the year compared with down 48% for the wider global commercial fleet (which comprises large and regional jets). In the month of December 2020, business jet utilisation had recovered to 95% of the levels seen in December 2019 reflecting its attraction to air travellers as an alternative to commercial flights.

As a result of the severe slowdown across civil aerospace, demand from airlines and operators for new build aircraft significantly reduced in FY 2020, with Airbus and Boeing deliveries down 34% and 59% respectively. Deliveries of regional and business jets in the year were down 46% and 21% respectively. In response to the lower demand for aircraft, airframe and engine OEMs significantly reduced their production rates during the year, a key driver of the Group's OE revenue.

In the first two months of 2021, high infection rates across many countries, border closures and lockdowns have held back the recovery and resulted in the continuation of low overall levels of air traffic activity and passenger numbers. However, against this backdrop, the development and rollout of vaccines globally over the last few months has been encouraging and underpins a positive outlook for the continued recovery in civil aerospace, with the expectation that lockdown restrictions will be eased and passenger confidence returns particularly in the second half of 2021. With overall business jet activity having recovered strongly, ending 2020 close to prior year levels, we expect regional jets and narrow bodies to recover next as short haul and domestic routes are restored, with wide body levels coming back last reflecting a change in consumer attitudes towards long haul, including business travel.

Looking further ahead, most industry commentators now expect air traffic to return to 2019 levels by around 2023/2024 (IATA forecasting 2024) and new aircraft production rates to recover to pre-COVID-19 levels in 2024 /2025. Beyond the recovery period, we firmly believe that the drivers supporting air traffic growth over the long term remain in place with IATA forecasting a growth rate in global passenger journeys of 3.7% per annum over the next 20 years.

Defence

While the defence sector has not been immune from the effects of COVID-19, spending in the US (which represents over 70% of our annual defence revenue) and overall defence activity levels remained robust in 2020, a trend reflected in our own defence business. For fiscal year 2020, defence spending in the US was up 6%, with spending in RDT&E and procurement both up 12%, with good outlays for major fixed wing and rotary platforms including F-35, KC-46A, F-15EX and AH-64. In January 2021, the US DoD budget of $696bn for fiscal year 2021 was approved, broadly in line with the level of outlays in 2020, providing a supportive backdrop over the short to medium-term.

Energy

In energy, both supply and demand side factors led to volatility in the oil price moving from $57 per barrel in January to below $20 per barrel in April. While the oil price subsequently increased off its lows, trading in a range of $37-$49 per barrel in the second half, this dampened overall capital expenditure levels and delayed certain projects across the oil sector during the year, while LNG and renewables project capex remained robust.

Group full year performance

2020

£'m 2019

£'m Change

Reported % Organic1 %

Orders

1,547.1

2,468.4

(37)

(38)

Revenue 1,684.1 2,276.2 (26) (22)

Underlying2

EBITDA3 296.9 507.3 (41) (40)

Operating profit 190.5 402.8 (53) (50)

Profit before tax 159.5 370.3 (57) (55)

Earnings per share (p) 16.5 37.3 (56)

Statutory

Operating (loss)/profit (297.3) 325.3 (191)

(Loss)/profit before tax (334.0) 286.7 (217)

(Loss)/earnings per share (p) (40.4) 28.8 (240)

Free cash flow4 31.9 267.8 (88)

Net cash flow5 136.0 205.7 (34)

Net debt 773.0 911.2 (15)

Dividend (p) - 5.55

MARKET CONTEXT AND CONDITIONS

Civil Aerospace

The outbreak of COVID-19 and subsequent lockdowns across the world caused a significant and unprecedented reduction in commercial air traffic in 2020, with global air traffic, as measured by RPKs and ASKs down 65.9% and 56.5% respectively for the full year 2020, compared with 2019 levels.

While positive signs started to emerge at the end of the second quarter with airlines gradually increasing capacity and future flight schedules, particularly in domestic markets, the level of air traffic and customer demand remained highly sensitive to subsequent spikes in COVID-19 infection rates, the imposition of new lockdowns and other measures such as post-flight quarantining. Accordingly, the recovery in global passenger numbers plateaued in the fourth quarter with global RPKs and ASKs ending the year for the month of December down 69.7% and 56.7% respectively, showing only a slight improvement from September's figures down 72.0% and 60.8%.

While all regions have been adversely affected, there have been variations in the extent of traffic reductions as follows: Asia Pacific down 62%; Europe down 70%; and North America down 65%. There has also been a difference between domestic and international air travel, reflecting the closure of international borders at certain times during the year, with domestic traffic down 49% in 2020 compared with international traffic down 76%. In some domestic markets, notably China and Russia, traffic levels recovered in 2020 to be in line with or slightly above 2019 levels.

Within civil aerospace, the extent to which different platform categories have been affected has also varied, with global business jet utilisation down 21% in the year compared with down 48% for the wider global commercial fleet (which comprises large and regional jets). In the month of December 2020, business jet utilisation had recovered to 95% of the levels seen in December 2019 reflecting its attraction to air travellers as an alternative to commercial flights.

As a result of the severe slowdown across civil aerospace, demand from airlines and operators for new build aircraft significantly reduced in FY 2020, with Airbus and Boeing deliveries down 34% and 59% respectively. Deliveries of regional and business jets in the year were down 46% and 21% respectively. In response to the lower demand for aircraft, airframe and engine OEMs significantly reduced their production rates during the year, a key driver of the Group's OE revenue.

In the first two months of 2021, high infection rates across many countries, border closures and lockdowns have held back the recovery and resulted in the continuation of low overall levels of air traffic activity and passenger numbers. However, against this backdrop, the development and rollout of vaccines globally over the last few months has been encouraging and underpins a positive outlook for the continued recovery in civil aerospace, with the expectation that lockdown restrictions will be eased and passenger confidence returns particularly in the second half of 2021. With overall business jet activity having recovered strongly, ending 2020 close to prior year levels, we expect regional jets and narrow bodies to recover next as short haul and domestic routes are restored, with wide body levels coming back last reflecting a change in consumer attitudes towards long haul, including business travel.

Looking further ahead, most industry commentators now expect air traffic to return to 2019 levels by around 2023/2024 (IATA forecasting 2024) and new aircraft production rates to recover to pre-COVID-19 levels in 2024 /2025. Beyond the recovery period, we firmly believe that the drivers supporting air traffic growth over the long term remain in place with IATA forecasting a growth rate in global passenger journeys of 3.7% per annum over the next 20 years.

Defence

While the defence sector has not been immune from the effects of COVID-19, spending in the US (which represents over 70% of our annual defence revenue) and overall defence activity levels remained robust in 2020, a trend reflected in our own defence business. For fiscal year 2020, defence spending in the US was up 6%, with spending in RDT&E and procurement both up 12%, with good outlays for major fixed wing and rotary platforms including F-35, KC-46A, F-15EX and AH-64. In January 2021, the US DoD budget of $696bn for fiscal year 2021 was approved, broadly in line with the level of outlays in 2020, providing a supportive backdrop over the short to medium-term.

Energy

In energy, both supply and demand side factors led to volatility in the oil price moving from $57 per barrel in January to below $20 per barrel in April. While the oil price subsequently increased off its lows, trading in a range of $37-$49 per barrel in the second half, this dampened overall capital expenditure levels and delayed certain projects across the oil sector during the year, while LNG and renewables project capex remained robust.

FAST AND EFFECTIVE ACTION IN RESPONSE TO THE CRISIS

Leveraging our experience of navigating previous downturns in civil aerospace and through close communication with our customers and supply chain, the Group moved quickly to implement a revised demand scenario for planning purposes and adjusted production levels early in the second quarter. During 2020, we took a series of decisive actions in areas within our control in response to the crisis, focused on reducing costs, preserving cash and resizing the business:

Safeguarding our people - our number one priority and the focus of our COVID-19 Crisis Management Team has been, and continues to be, to ensure the safety of our employees, where we have followed local government and health authority guidelines as they relate to safe working practices at our sites. These measures have included the introduction of social distancing, provision of personal protective equipment, variations in working patterns including split shifts, enhanced cleaning regimes and providing the necessary tools and support for those employees able to work from home.

Supporting the community - in response to COVID-19, our employees and sites have supported their local communities in the regions where we operate around the world. In the UK, we were part of the Ventilator UK Challenge with responsibility for programme management of the consortium's production of an additional 13,000 ventilators to help patients hospitalised with COVID-19 fight the disease. We have also had numerous examples of employees at our sites leveraging their capabilities to produce a wide range of personal protective equipment for key workers and employees.

Business continuity - the majority of our manufacturing facilities remained open during the year to support our customers in the critical markets that we serve in defence, energy and in aerospace for repatriation of citizens and transport of food, freight and medical supplies. As part of the US national response to COVID-19, we were granted $15m in funding under the CARES Act from the US Department of Defense to sustain critical industrial base capability for military grade fuel bladders at our Rockmart, US facility.

Throughout the year, the majority of our employees continued to work at our sites while adhering to enhanced procedures relating to personal protection and cleaning, with the remainder either working from home or on furlough. We have remained agile and reacted to changes in lockdown restrictions on a regional basis allowing more office-based employees to return to work safely where possible. We have also supported our suppliers through supplier financing programmes and increased their awareness of local government support schemes during the year.

Reducing costs, protecting cash and resizing the Group - in April we announced a series of actions to help the Group navigate the crisis and enable us to deliver substantial cash savings in the year. These actions were based on our scenario planning exercises incorporating the most likely impact on the Group's revenue and cash flow in 2020 and expectations on the timing of the recovery:

Reducing costs - cancellation of all pay rises, pay reductions for the Board of Directors and Executive Committee and material cuts in discretionary spend including travel;

Protecting cash - in addition to the cost measures, we have also preserved cash through targeted reductions and deferral of certain cash expenditure including: capital expenditure; absolute reduction in inventory levels; and the cancellation of the final dividend for 2019 and interim dividend for 2020; and

Resizing the Group - having taken action to reduce variable costs, including accessing furlough schemes and reducing temporary labour, we took the difficult decision to reduce the size of our global workforce to ensure that our internal capacity across our civil aerospace business reflects the reduction in demand. As at the end of December 2020, our total global headcount was 26% lower (including the sale of our Training Systems business) than the end of 2019.

As a result of the hard work and focus of our global teams to deliver our in-year cash savings, the Group generated £31.9m of free cash flow which was slightly better than our expectations at the time of our half year results. The free cash inflow, combined with proceeds from the sale of Training Systems, meant the Group ended the year with net debt of £773.0m, £138.2m lower than 2019, testament to the Group's focus on tight management of the balance sheet during the most challenging of times.

FULL YEAR RESULTS FOR 2020

Group Orders and Revenue

Our full year results reflect the effects of COVID-19 and the unprecedented reduction in civil aerospace activity with key financial metrics, both on a statutory and underlying basis, declining in the period.

In our half year results, we reported that Group revenue for the six months ended 30 June 2020 was 14% lower than the comparative period. This reflected the marked deterioration in trading in our civil aerospace business in the second quarter as a result of the significant reduction in commercial air traffic and grounding of a large proportion of the global fleet, which more than offset a strong performance from our defence business.

While the level of global civil aerospace flight activity recovered in the second half, market conditions remained challenging with the recovery impacted by second waves of COVID-19 and further lockdowns in the fourth quarter. In the second half, Group civil aerospace organic revenue was 53% lower than the comparative period, with OE down 51% (large jets -55%, regional -59% and business jets -37%) and aftermarket down 54% (large jets -52%, regional -63% and business jets -49%). After a strong first half with organic growth of 8% (excluding Training Systems), defence revenue was flat in the second half on an organic basis. Energy revenue was down 11% organically in the second half, partly reflecting the timing of projects and phasing of revenue.

For the full year, Group orders were 38% lower on an organic basis with book to bill of 0.88x. Our order book in defence remains robust with an organic book to bill of 1.05x. Group organic revenue was down 22% with lower revenue in civil aerospace and energy more than offsetting a good performance in defence where revenue grew 4%. In civil aerospace, revenue was 41% lower, with sales from civil OE and civil AM down 40% and 41% respectively. Energy revenue was 8% lower on an organic basis. Reported Group revenue of £1,684m (FY 2019: £2,276m) decreased by 26% as analysed in the table below:

£'m Impact %

FY 2019 revenue 2,276.2

Business disposals (103.9) (4)

Currency movements (12.4) -

Organic movement (475.8) (22)

FY 2020 revenue 1,684.1 (26)

The adjustments for business disposals include the sale of: Angouleme (completed in March 2019); Orange County product lines (completed in June to December 2019); Training Systems (completed in June 2020); and our Dunstable business and associated product lines (completed in January 2021).

Currency movements in the year reflect the slight strengthening of pound sterling against our trading currencies, principally the US dollar. The organic revenue decline reflects the impact of COVID-19 on civil aerospace partially offset by defence.

Profit and earnings per share

In common with previous years, underlying profit is used by the Board to measure the underlying trading performance of the Group and excludes certain items including: amounts arising on the acquisition, disposal and closure of businesses; amortisation of intangible assets acquired in business combinations; movements in financial instruments; and exceptional operating items.

As a result of the reduction in Group revenue, and notwithstanding the significant action taken to reduce costs to mitigate the impact of lower volumes and under absorption of fixed costs, the Group's underlying operating margins decreased by 640 basis points, to 11.3% (FY 2019: 17.7%), with underlying operating profit 53% lower in the year at

£190.5m (FY 2019: £402.8m).

Underlying profit before tax decreased by 57% to £159.5m (FY 2019: £370.3m) with underlying earnings per share down 56% at 16.5 pence (FY 2019: 37.3 pence).

The level of exceptional costs at £428.7m is significantly higher than forecast at the start of the year, including impairment of goodwill and asset write-downs arising from the unprecedented downturn in civil aerospace during the year, resulting in Group underlying operating profit becoming an operating loss of £297.3m at the statutory level. Within exceptional costs, £374.2m relates to impairment losses and other asset write downs comprising: goodwill (£335.7m); development costs (£24.5m); inventory (£8.6m); and trade receivables (£5.4m). Further details relating to impairment losses and other asset write-downs are set out in note 8.

As a result of the impairment losses and other asset write downs, Group loss before tax was £334.0m (FY 2019:

£286.7m profit) and basic loss per share was 40.4 pence (FY 2019: earnings per share of 28.8 pence).

Reconciliation between underlying operating profit and statutory operating loss

2020

£'m

Underlying operating profit 190.5

Impairment losses and other asset write-downs (374.2)

COVID-19 incremental non-recurring costs (22.0)

Site consolidations (33.5)

Other 1.0

Exceptional operating items (428.7)

Amortisation of intangible assets arising on acquisition of businesses (88.2)

Financial instruments (2.9)

Amounts arising on the acquisition, disposal and closure of businesses 32.0

Statutory operating loss (297.3)

Dividends

The Board concluded that it was prudent not to pay a final dividend for 2019, and in light of ongoing challenging market conditions, the Board did not recommend the payment of an interim or final dividend for 2020. This has helped retain cash within the Group, ensured the continued management of net debt levels and preserved financial flexibility. The Board is very aware of the importance of dividends to our shareholders and looks forward to restoring dividend payments when the recovery in civil aerospace is more established.

Cash flow

The Group generated a free cash inflow of £31.9m (FY 2019: £267.8m inflow), which was ahead of our guidance issued in September 2020, reflecting the work done across the Group to offset the impact of the lower operating result, including a reduction in absolute inventory levels and planned levels of capex.

Full year cash flow statement £m

2020

£'m 2019

£'m

Underlying operating profit

190.5

402.8

Depreciation and amortisation 106.4 104.5

Working capital movements 8.1 (21.0)

Net interest paid (32.1) (33.1)

Tax paid (42.1) (14.4)

Exceptional operating items paid (49.3) (27.3)

Purchase of property, plant and equipment (89.7) (94.4)

Proceeds from disposal of property, plant and equipment 1.3 23.1

Capitalised development costs/programme participation costs (43.0) (56.7)

Retirement benefit deficit reduction payments (21.7) (35.2)

Other 3.5 19.5

Free cash flow 31.9 267.8

Net proceeds from disposal/acquisition of businesses 104.2 68.9

Dividends paid to Company's shareholders - (130.4)

Issue of equity share capital 0.3 -

Other (0.4) (0.6)

Net cash generated 136.0 205.7

Lease liabilities entered (11.4) (54.2)

Lease liabilities disposed with business 5.6 -

Exchange differences 7.6 31.2

Other movements 0.4 (19.8)

Net debt movements 138.2 162.9

Net debt at 1 January (911.2) (1,074.1)

Net debt at 31 December (773.0) (911.2)

Investment in capital expenditure was £89.7m (FY 2019: £94.4m) and working capital was an inflow of £8.1m (FY 2019: £21.0m outflow). Higher cash tax payments of £42.1m (FY 2019: £14.4m) reflects the phasing of payments in the US and the increase in cash exceptional costs to £49.3m (FY 2019: £27.3m), includes £18.9m of non-recurring COVID-19 related costs and site consolidation costs as we continue to rationalise our global footprint. Deficit payments made in respect of retirement benefit schemes were £21.7m (FY 2019: £35.2m) following an agreement with the trustees of the UK scheme to defer four months of payments totalling £9.6m that will now be spread across the 2021 to 2023 period. The free cash inflow of £31.9m was augmented by proceeds from the sale of Training Systems which generated net proceeds of £117.0m, with a net cash inflow for the Group of £136.0m for the full year (FY 2019: £205.7m inflow).

As a result, at the end of December 2020, our net debt was £773.0m (FY 2019: £911.2m), including lease liabilities of

£144.3m, a decrease of £138.2m from December 2019 after taking into account proceeds from the sale of Training Systems and favourable currency movements of £7.6m and we had significant headroom of £908.1m on committed facilities of £1,536.8m.

Debt structure and financing

In June and October 2020, we repaid $125m and $150m respectively on the maturity of two separate tranches of 2010 US Private Placement Notes. In November 2020, we raised $300m in aggregate of three and five year senior notes providing us with additional liquidity and financial flexibility as we look ahead to 2021 and beyond.

In April 2020, the Group was confirmed as an eligible issuer under the Bank of England and HM Treasury's Covid Corporate Financing Facility (CCFF), under which the Group is able to draw up to £600m. While the Group issued commercial paper under this facility during the year, as at the end of December 2020, there were no borrowings under this facility. The Group has retained access to the CCFF and is eligible to issue commercial paper using this facility (subject to certain terms and restrictions) up to and including 22 March 2021, with a maturity date of up to twelve months. In May 2020, we extended the duration of our debt by securing a forward start on our revolving credit facility, with the signing of a new one year $575m multi-currency facility maturing in September 2022.

There are two main financial covenants in our financing agreements. The net borrowings:underlying EBITDA ratio, which must not exceed 3.5x, was at 2.2x at 31 December 2020 (December 2019: 1.5x) and interest cover, which must be not less than 3.0x, was 9.8x (December 2019: 16.3x). At the end of 2020, the Group had significant headroom against both key covenant ratios, and net borrowings:underlying EBITDA is within our target range of 1.5x to 2.5x.

OUTLOOK FOR 2021

While the rollout of vaccines is expected to ease lockdowns and drive a gradual increase in air traffic activity, which is a positive indicator for the civil aerospace sector and the Group, uncertainties remain in predicting the timing and pace of the civil recovery. At the current time, our assumption is that the trends seen in civil aerospace during the second half of 2020 are likely to continue in the first half of 2021, with recovery weighted more towards the second half of the year. Conditions in our defence and energy end markets are expected to remain robust in 2021.

Assuming no further disruption to normal operations during the year as a result of additional lockdowns, in 2021 we expect the Group to generate:

Revenue broadly in line with 2020;

An increase in underlying operating profit versus 2020; and

Positive free cash flow

We will continually review our assumptions as the year progresses and as we gain greater clarity on the path to recovery in civil aerospace.

While we recognise the need to remain agile and respond quickly to changes in the external environment, based on the significant progress we have made over the last four years to transform the Group, the effective actions we've taken in 2020, our diverse end market exposure and leading market positions, we are well placed to benefit from the recovery in civil aerospace and to deliver long-term profitable growth.

ENABLING OUR SUSTAINABLE FUTURE

At Meggitt, we work in partnership with all our stakeholders to enable a sustainable future and have adopted a framework to support our ambition of net zero greenhouse gas emissions by 2050, focusing on three core pillars: People, Planet and Technology. This framework is aligned with the United Nations Sustainability Development Goals and the Taskforce on Climate Related Financial Disclosures:

People - through our core values of Teamwork, Integrity and Excellence and our high performance culture we are committed to creating a rewarding, safe and productive working environment for our employees and supporting our local communities. During 2020, we started the rollout of our leadership programme in Operations, introduced our Extraordinary People recognition scheme and expanded the number of Employee Resource Groups to eight with further initiatives planned for 2021.

Planet - our goal is to contribute to a cleaner future by continuously improving and adapting our operational systems across our sites to promote efficiencies and improvements by harnessing green energy, driving operational excellence and reducing harmful emissions, where we have set a target to reduce net carbon emissions by 50% by 2025. While we made progress in a number of areas during the year, including the completion of several sustainability projects at our sites, and from March 2021 sourcing 100% of electricity from green sources in the UK, we recognise that we still have more work to do. We have set reduction targets for our sites in 2021 covering reducing our electricity and natural gas usage, consumption of water and rates of waste to landfill, as we look to build on the progress we have made over the last few years.

Technology - to support the evolving needs of our global customers and building on our rich heritage, we continue to invest in innovative new technologies to support and enable sustainable aviation in areas including thermal and electric aircraft systems, fire protection, composites and optical sensing. In 2020, we made very good progress on a number of these technologies and specific customer projects as set out in our Strategy section.

STRATEGY UPDATE

Strategic Portfolio

We focus investment in attractive markets where we have, or can develop, a leading position. This encompasses organic investment in differentiated products and manufacturing technologies; targeted, value-enhancing acquisitions; and selective non-core disposals. More than 70% of revenue is generated from sole-source, life of programme positions underpinned by Meggitt-owned intellectual property. As such, the continued strengthening of our technology portfolio remains a critical priority of the Group.

In June 2020, we further focused our portfolio with the sale of Training Systems, consistent with our strategy to focus on businesses of scale in markets where leading positions offer exposure to aftermarket revenue, greater potential for growth and operational efficiencies. In January 2021, we completed the sale of our Dunstable (UK) business of designing and manufacturing ducting products for a range of space, defence and civil customers. As a result of these disposals, over 80% of our revenue is now generated from businesses in attractive markets and where we have a strong competitive position, above our target set out three years ago.

Despite the challenges posed by COVID-19 and the need to preserve cash, we sustained our investment in differentiated technology. During the year, we met our target of prioritising at least two-thirds of our investment in Applied Research & Technology to enable our customers to deliver the next generation of more sustainable aircraft. Despite changes in normal working patterns, we also maintained strong milestone adherence on our major development and customer programmes. A summary of our key highlights and progress are as follows:

Next generation of fuel efficient engines - we are positioning and promoting the breadth of our technology with our customers to play a critical role in enabling the development of the next generation of fuel efficient engines specifically leveraging our capabilities in: thermal management; high temperature optical sensing; and engine composites. For example, in 2020, our Thermal Systems programme patented technology for six products which will allow a step change in engine thermal management applications.

Green fire suppression - we have made good progress working with major aircraft OEMs with VERDAGENT[TM], Meggitt's new, proprietary 'green' fire suppressant agent to replace ozone depleting Halon 1301, with further tests in Europe and the US to approve its engine APU and cargo applications scheduled for 2021.

Optical sensing - we successfully completed the first customer trials of our optical dynamic pressure sensing system for ground-based industrial gas turbines and now have an installation running with a major energy customer. We also remain on track to install this new technology on a demonstrator aero engine with a major OEM in 2021.

Engine composites - we made significant progress in development of manufacturing processes for advanced 'gas path' engine composite components with thin wall, high structural integrity requirements.

Electric flight - working closely with a customer we have supplied electric motors and motor drive units to support the development of a leading electric urban/air mobility prototype which is undergoing trials.

We have also continued to leverage advanced manufacturing technology and processes across our sites:

Additive layer manufacturing (ALM) - working with our UK joint-venture partner HiETA, we have applied ALM to build prototype heat exchangers to operate at high temperatures for industrial and aero applications. We have also expanded our US additive manufacturing capability to develop flow valves and production tooling.

Digital manufacturing - the rollout of advanced digital work instructions and greater use of automation at our sites has resulted in a meaningful increase in productivity and quality, and we are working on plans to deploy this technology more extensively across the Group in 2021.

As reported at the half year, we have intensified our focus on driving improved margin and return on capital in braking systems, while continuing to remain highly selective on investing in new opportunities. Recognising the change in fleet dynamics as a result of the downturn in civil aerospace, where possible we have re-phased our investment in both carbon and brakes production capacity with a proportion of our capital commitments in this area moving into 2021 and beyond.

While our focus remains on three core markets: aerospace, defence and selected energy, over the medium-term we also look to increase the application of our aero-derivative intellectual property and technology in adjacent markets, including space and ground vehicles, to further strengthen the portfolio.

Customers

Our success in moving from a transactional approach to building long term relationships through our customer- aligned divisions, extends our visibility of near term customer requirements and has enabled us to better support the demand for original equipment and spare parts and maintenance, repair and overhaul ('MRO') from our three global hubs for the aftermarket.

During the year, we maintained close contact with our customers which was critical in the creation of our scenarios for planning purposes, including the adjustment of production schedules for original equipment based on new build rates from the OEMs and tracking customer sentiment and buying behaviour by region in the aftermarket.

In the period, we continued to win a number of new customer contracts including orders for:

$73m from Bell Textron Inc for the supply of composite ice protection components on the V22 Osprey;

$27m for the supply of liquid palletised cooling units for the Boeing P-8A aircraft;

$21m for the supply of high temperature cables for a nuclear energy application;

$20m from Northrop Grumman for the supply of fuel bladders on the F/A-18 Super Hornet;

$15m from the Defence Logistics Agency to support the supply of fuel bladders; and

£8m from MODEC for the supply of Heatric printed circuit heat exchangers, representing the largest order for that business for over five years

In Services & Support, we saw continued momentum with SMARTSupport®, our long-term contract offering for aftermarket customers, adding an additional 14 agreements, including those with ST Aerospace, Derco and Ameco Beijing, taking the total number to 39 with an aggregate value of £187m, with a number of additional opportunities in the pipeline. These long-term contracts underpin our aftermarket and market share growth in the future and provide better insights into customer requirements and order patterns.

Competitiveness

While our priority during the year has been to ensure that people and sites operate safely as we respond to the challenges posed by COVID-19, we remained focused on driving operational improvements in line with our strategy.

We made further progress reducing our global footprint, with site closures and consolidations in the UK (Basingstoke) and the US (Orange County) and the divestment of Training Systems. As a result of these actions and the recent sale of our Dunstable (UK) business, we now have 37 Meggitt manufacturing sites, reduced from our original 56 sites in 2016 and 42 sites at the end of December 2019, and have identified additional opportunities to reduce our footprint by 50% from our 2016 baseline by 2023.

In June 2020, we opened our new UK manufacturing and engineering centre for Braking Systems, Thermals systems and Services & Support together with our relocated Group Headquarters at Ansty Park in the Midlands, providing office-based employees that have been working from home with the flexibility to return to the workplace as restrictions allowed. The successful relocation of our teams to Ansty Park will promote more integrated and efficient ways of working across both the Group central functions and the divisions.

Having been deferred due to the disruption caused by COVID-19, the full transition of manufacturing from four UK sites into Ansty Park is well underway, with the capital expenditure associated with this transition also moving into 2021. The transition to Ansty Park is scheduled to be completed by the end of the third quarter in 2021.

On inventory, where we have brought significant improvements in recent years and steadily increased inventory turns from just above 2.0x in 2016 to 2.7x in 2019, our priority in 2020 was to reduce absolute inventory levels as part of our cash preservation measures as we responded to the change in demand from our customers. We used the change in market conditions as an opportunity to tighten our supply parameters and production scheduling (including moving from monthly to weekly deliveries of raw materials). While we made very good progress reducing absolute inventory levels during the year, this will remain a focus area in 2021.

Within purchasing, we continued to offer our suppliers access to an ePayables scheme and supported them gaining access to government schemes in the US, UK and France. Alongside this, we have taken the opportunity to further strengthen and consolidate our supply chain, including identifying opportunities to derive further savings by moving more of our supply base to low cost countries where appropriate.

Our recovery plan in Engine Composites continued as we applied engineering and process improvements to achieve higher quality and further improvements in yields. During the year, our facility in Saltillo, Mexico received approval for the manufacture and direct shipment of additional high volume composite parts to end customers. In addition, lower production of aircraft engines caused by COVID-19 allowed us to accelerate the adoption of new manufacturing technology and transfer of production lines to Mexico, with further high volume parts transitioning in 2021.

Culture

Our priority in 2020 was to ensure the health and well-being of our people across our sites and their response to the crisis has been outstanding, enabling us to support all our stakeholders in what have been extremely challenging circumstances. During the year, our teams used their capabilities to support our local communities in a variety of ways - from supporting the production of critical ventilators for the NHS in the UK, to visors, masks and other protective equipment for key workers.

Over the last three years we have worked hard to build and nurture a high performance culture (HPC) and improve engagement where our ambitious and diverse teams help us to accelerate the execution of our strategy. The progress we have made in this area and the support of our employees has been instrumental in the Group being able to respond strongly to the crisis during 2020. While our focus on responding to the crisis necessitated deferring a lot of planned HPC activities into 2021, we did deliver a number of training sessions virtually and in person during the year.

In addition, our customer-aligned organisational structure and more integrated approach to working across teams has been a key enabler as we moved quickly to respond to a significant adjustment in demand across our civil business. Despite the huge challenges presented by the need to respond to the pandemic and the re-sizing of the business, our Group-wide Engagement score was maintained at the High Performance Norm6 with our scores for Alignment and Agility increasing by 2% and 4% respectively, providing reassuring feedback on the manner in which the Group engaged with all employees as we responded to the COVID-19 crisis.

We further strengthened our commitment to Diversity and Inclusion, including a series of activities during our Inclusion Week in October 2020 and the introduction of an additional three Employee Resource Groups, bringing the total number of groups to eight.

END MARKET TRADING SUMMARY

Revenue (£'m) Growth (%)

2020 2019 Reported Organic

Civil OE

306.0

518.6

(41)

(40)

Civil AM 419.6 715.9 (41) (41)

Total civil 725.6 1,234.5 (41) (41)

Defence 768.4 824.6 (7) 4

Energy 131.1 142.7 (8) (8)

Other 59.0 74.4 (21) 11

TOTAL 1,684.1 2,276.2 (26) (22)

Civil aerospace

Meggitt operates in three main segments of the civil aerospace market: large jets, regional aircraft and business jets. The large jet fleet includes over 24,000 aircraft, the regional aircraft fleet over 7,000 and business jets around 20,000. The Group has products on the vast majority of these platforms and hence a large, installed base. With 54% of our civil aftermarket revenue (for full year 2019) generated from platforms under 10 years old, we are well placed to continue to generate good returns over the coming years as the market recovers.

The split of civil revenue in the full year, which accounted for 43% of the Group total, was 58% aftermarket and 42% original equipment (OE).

In the year, civil OE revenue was down 40% organically reflecting lower demand for original equipment from the OEMs, with large jets, the largest component of our OE revenue, down 44% and regional jets down 46%. Business jet OE was down 25%. Within the year, civil OE was down 29% and 51% in the first and second halves respectively.

As a result of lower levels of air traffic activity in the period, civil aftermarket revenue was down 41% organically as airlines and other aftermarket customers deferred orders for spare parts and repairs, with large jets down 41%, regional down 49% and business jets down 32%. Within the year, civil AM was down 26% and 54% in the first and second halves respectively.

Overall, Group civil aerospace revenue (OE and AM combined) was 41% lower in the year on an organic basis.

Defence

Our defence business accounted for 46% of Group revenues in 2020 (including Training Systems) generating 59% of revenue from OE and 41% from the aftermarket. We have equipment on an installed base of around 22,000 fixed wing and rotary aircraft and a significant number of ground vehicles and are well placed having secured strong positions on some of the newest and hardest worked platforms. Direct sales to US customers accounted for 74% of defence revenue, with 18% to European customers and 8% to the rest of the world.

Defence spending remained robust during the year with continuing good outlays by the US DoD and our order book remains healthy with an organic book to bill of 1.05x, underpinned by a number of multi-year contracts.

Defence revenue grew 4% on an organic basis (excluding Training Systems) with strong growth in the first half of 8%. Defence revenue was flat in the second half on an organic basis (compared with the same period in 2019). In OE, revenue grew 14% organically driven by continuing strong growth on parts for the F-35 Joint Strike Fighter, Eurofighter, F/A- 18 Hornet and in rotary wing, the AH-64 Apache. Aftermarket revenue was 7% lower organically reflecting the disruption to military exercises caused by COVID-19, with growth in fighters more than offset by lower revenue in rotary wing and military transports.

Energy and other

Energy and other revenues, which represents 11% of Group total, come from a variety of end markets of which the single most significant is energy (8% of Group total). Our energy capabilities centre on providing valves and condition-monitoring equipment for power generation installations, including ground-based gas and wind turbines, and printed circuit heat exchangers used primarily in the oil and gas market. Other markets (3% of Group total) include the automotive, industrial, test, consumer goods and medical sectors.

Energy revenue was down 8% on an organic basis, reflecting volatile end market conditions in the first half and some disruption in both the supply chain and our sites caused by COVID-19 towards the end of the year. In Heatric, organic revenue was down 7% with revenue derived from our valve and condition monitoring business 12% lower on an organic basis. Revenue from other markets was up 11% organically on the comparative period.

The near-term and medium-term outlook for our energy businesses remains good, with a robust order book as we entered 2021. We have differentiated aero-derivative technologies which play a critical role in the extraction of deep water offshore gas reserves and the growth in demand for alternative, lower carbon energy sources including renewables, positions this business well for the future.

DIVISIONAL PERFORMANCE

The focus across all four divisions during 2020 has been to protect our people, support our communities and keep our sites open and operating safely to support our customers. Faced with the reduction in civil aerospace demand, the divisions responded quickly to reduce costs and preserve cash, each making an important contribution to the overall Group cash targets during the year.

The financial performance of the individual divisions is summarised in the table below:

Revenue Underlying Operating Profit/(Loss)

2020 20197 % Growth 2020 20197 % Growth

£'m £'m Reported Organic £'m £'m Reported Organic

Airframe Systems

793.1

1,029.5

(23.0)

(22.4)

120.5

247.7

(51.4)

(52.2)

Engine Systems 233.6 329.5 (29.1) (28.4) (13.2) 27.2 (148.5) (150.4)

Energy & Equipment 335.0 412.5 (18.8) 6.5 42.4 53.4 (20.6) 18.1

Services & Support 322.4 499.1 (35.4) (34.8) 40.8 74.0 (44.9) (44.5)

Other8 - 5.6 (100.0) - - 0.5 (100.0) -

Total Group 1,684.1 2,276.2 (26.0) (22.3) 190.5 402.8 (52.7) (50.5)

Airframe Systems provides Braking Systems, Fire Protection & Safety Systems, Power & Motion, Fuel Systems, Avionics & Sensors and Polymer Seals for around 51,000 in-service civil and 22,000 defence aircraft. As well as increasing our content on the new generation aircraft by as much as 250%, we also have a strong presence on all of the fastest growing and hardest worked defence platforms. As such, we have strong relationships with all of the major OEMs, whether commercial, defence or business jet; fixed wing or rotorcraft; US, European or Rest of World. The division represents 47% of Group revenue, generating 55% of its revenue from OE sales and 45% from the aftermarket derived mainly from Braking Systems, with the remaining aftermarket revenue from other product groups reported in Services and Support.

Operational and strategic highlights

Continued to support customers on new product development and testing across a number of platforms

Good progress on development of new technologies, including new 'green' fire suppression agent VERDAGENT[TM]

Transfer of products associated with further footprint consolidation, including moves out of Orange County, US to Airframe Systems sites in the US, UK and Europe

Secured $15m of funding under the CARES Act to support critical industrial base capability for military grade fuel bladders at our Rockmart, US facility

Deferral of capital expenditure relating to carbon capacity expansion in Braking Systems

Financial performance

Organic revenue was down 22% in the period. Civil OE revenue was down 34% with large jets and regional jets OE down 39% and 38% respectively, reflecting lower end market demand for new aircraft and OEMs reducing new build rates. Business jet OE was down 18% outperforming large and regional jets on a relative basis.

Civil aftermarket revenue was 42% lower on an organic basis reflecting the reduction in commercial air traffic and lower demand for spares. Organic aftermarket revenue in large, regional and business jets was down 38%, 52% and 32% respectively.

Defence revenue was flat, with OE 6% higher driven by growth in fighters, including the F-35 and Typhoon. In the aftermarket, revenue was 5% lower than the prior year, with growth on Typhoon, F/A-18 and light attack platforms more than offset by declining demand on rotary wing and special mission.

As a result of the lower volumes in civil OE and reduction in higher margin civil aftermarket revenues, underlying operating margin was 890 basis points lower than the comparative period at 15.2% (FY 2019: 24.1%).

In 2021, responsibility for all aftermarket activities in Braking Systems including spares and repairs, will transfer to the Services & Support division and be managed across the Group's three regional aftermarket hubs.

Engine Systems has market-leading positions in advanced engine composites, thermal and safety systems with a broad range of technologies including vibration monitoring and engine health management systems. This division also provides aerospace engine flow control and sensing solutions. Strong positions on high volume platforms mean we are well positioned for growth in Engine Systems. The division represents 14% of Group revenue, generating 89% of its revenue from OE and 11% from the aftermarket as a result of its principal route to the aftermarket being through the Services & Support division.

Operational and strategic highlights

Good progress developing new products in the engine core to displace heat, increase efficiency, and reduce fuel, particularly projects to support next generation engine demonstrators

Transfer of high volume engine composite parts to Saltillo, Mexico and direct shipments from Mexico to end customers

Transfer of Engine Sensing products from Basingstoke to Airframe Systems Fareham in the UK as part of ongoing footprint consolidation

In Defence, continued strong growth including to support the F-135 engine programme

Completed sale of our ducting business based in Dunstable (UK) in January 2021

Financial performance

Revenue decreased by 28% on an organic basis with good growth in defence more than offset by lower demand for OE parts across civil aerospace. Civil OE revenue was 49% lower on an organic basis, with the absolute reduction in revenue mainly driven by large jets. In defence, revenue grew by 9% on an organic basis with particularly strong growth on the F- 135 programme and the F-22 Raptor.

Despite the work done within the division to significantly reduce costs in response to the reduction in civil OE and AM volumes across all product groups, Engine Systems generated an underlying operating loss in the year of £13.2m (FY 2019: profit of £27.2m).

Within our Engine Composites business, we continued to make good progress with operational improvements including the transfer of additional high volume parts to our facility in Mexico. We remain firmly focused on our recovery plan in Engine Composites and returning this product group to mid-teens margins having delivered a number of operational improvements. However, as reported at the half year, due to the severe and sudden downturn in civil OE volumes, margin recovery will now take longer and extend beyond our previous timeline of the end of 2021.

Energy & Equipment consists of our energy product groups and businesses that provide products directly to defence customers. Energy Sensors & Controls provides a range of valves, actuators, sensor and condition monitoring systems for oil and gas applications. Heatric provides innovative printed circuit heat exchanger technology for offshore gas applications. Defense Systems provides a series of complex engineered products to defence agencies in electronic cooling, ammunition handling and scoring systems. Training Systems was sold on 30 June 2020 and revenue from this product group (FY 2020: revenue of £32.8m) is excluded from organic figures. Energy & Equipment represents 20% of Group revenue and generates 83% of its revenue from OE and 17% from the aftermarket.

Operational and strategic highlights

Strong Defence performance across ground vehicle cooling systems, countermeasures and ammunition handling

Sale of the Training Systems business in June 2020

Continued footprint consolidation with closure of the Orange County site and the transfer of products to other sites in the US and Europe

Continued transfer of production volumes to low cost countries

Financial performance

Revenue was up 7% organically (down 19% on a reported basis with the inclusion of Training Systems) with a strong performance from Defense Systems and strong OE growth on the Apache AH-64 and other rotary wing. In energy, despite the volatility in market conditions during the year, revenue was 12% lower on an organic basis, reflecting a strong order book as we entered the year. Underlying operating margins in Energy & Equipment at 12.7% were 20 basis points lower than the comparative period (FY 2019: 12.9%).

With the US defence budget agreed for 2021, a healthy order book and a number of promising commercial opportunities in both energy and defence, the outlook for 2021 is encouraging. As well as focusing on the conversion of these opportunities, our focus in Energy & Equipment will continue to be the delivery of further operational improvements across all sites.

Services & Support (S&S) provides a full service aftermarket offering including spares distribution and MRO to our commercial, business jet and defence customer base, throughout the lifecycle of our products. The division represents 19% of Group revenue and generates 100% of its revenue from the aftermarket.

Operational and strategic highlights

Continued delivery of strategic initiatives with consolidation of repair capabilities in our three regional centres of excellence: Ansty Park in the UK, Singapore and Miami in the US

Expansion of Singapore aftermarket capability and footprint

Enhanced maintenance forecasting capabilities leveraging best in class technologies to improve inventory management, reduce lead times and enhance customer service levels

Introduction of 'Smart Scoping' in our three regional hubs to leverage engineering capabilities to increase efficiency and reduce MRO costs

Financial performance

Within S&S, order intake in civil aftermarket was down 49% in the year as our aftermarket customers deferred orders for both spare parts and MRO. In APAC, orders were down 37% with the recovery in the Chinese domestic market underpinning the region; order intake was down 48% in the Americas with the 737MAX grounding negatively influencing demand for spare parts and, as a result of repeated lockdowns and associated border controls, within EMEA order intake was down 59% in the year.

Divisional revenue was 35% lower organically with civil aerospace revenue down 40%. Large jet revenue, which represented 82% of S&S civil revenue, was down 41% organically in the year, with regional and business jets down 39% and 32% respectively. In defence, revenue was 11% lower on an organic basis.

On a regional basis, organic revenue was down 32% in APAC and 34% and 36% in Americas and EMEA respectively. Underlying operating margin was 210 basis points lower at 12.7% (FY 2019: 14.8%).

In the coming year, our core priorities within S&S will be to ensure the smooth integration of brakes spares and repairs into the division, drive an increase in market share through signing additional SMARTSupport® contracts and investing further in our three regional aftermarket centres of excellence.

INVESTING FOR THE FUTURE

2020 2019 % Change

£'m £'m Organic Reported

Total research and development (R&D) 97.9 118.5 (14) (17)

Less: Charged to cost of sales / WIP (20.8) (23.8) (12) (13)

Less: Capitalised (41.4) (54.7) (20) (24)

Add: Amortisation / Impairment 32.6 28.7 24 14

Charge to underlying net operating costs 68.3 68.7 4 (1)

Capital expenditure 89.7 94.4

While we have scaled back expenditure on R&D in the year as part of our overall cash saving initiative, we have continued to invest in sustainable technologies to support new product development and future growth opportunities. Accordingly, total R&D expenditure in the full year of £97.9m was broadly in line with the prior year as a percentage of revenue at 5.8% (FY 2019: 5.2%). The charge to underlying net operating costs, including amortisation and impairment, decreased by 1% (increased by 4% on an organic basis) to £68.3m (2019: £68.7m).

Capital expenditure of £89.7m in 2020 was slightly lower than the prior year (FY 2019: £94.4m) and below our initial guidance of around £130m issued in February 2020. This reflects the actions we have taken to preserve cash and the associated deferral of capital expenditure relating to the transfer of production to Ansty Park and investment in carbon capacity, which will now be incurred in 2021 and beyond as these projects are completed.

For full year 2021, we expect to invest around £90m on R&D and £80m on capital expenditure, as we complete major projects deferred from 2020.

https://www.meggitt.com/wp-content/uploads/2021/03/2020-Prelims-statement_FINAL.pdf

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https://www.qinetiq.com/about-us

What we do

We are a company of over 6,000 dedicated people providing technological and scientific expertise that helps our customers protect, improve and advance their vital interests.

By listening to and anticipating your needs, we can provide unique solutions that combine our depth of knowledge and experience with a collaborative and enterprising approach. We work across every aspect of the life cycle of critical equipment and infrastructure, providing services and products that address our customers' most pressing challenges. Our breadth and depth of experience spans many markets and industries.

Air

Providing support across every aspect of air, built on 70 years of experience.

Land & Critical Infrastructure

Making significant scientific and technological innovations in order to evolve physical protection systems.

Maritime

Designing and testing innovative naval systems and components.

C4ISR

Resolving complex issues around communication and information infrastructures.

Cyber & Digital Resilience

Protecting and improving cyber resources to overcome challenges and threats.

Space

Building, launching and operating complex space infrastructure.

Weapons

Creating safe and effective military components and testing them before and during service.

Robotics & Autonomy

Over 40 years' experience in designing, developing and operating robotics to keep military personnel and first responders away from danger.

Training

Delivering realistic scenarios via simulation and virtual reality training so customers can prepare their people for every eventuality.

Advisory Services

Acting as an impartial, technical partner for customers looking to procure services and develop capabilities.

Innovation

Helping our customers increase their competitive and operational advantage through innovative business solutions

https://www.qinetiq.com/What-we-do

Third Quarter Trading Update

13 January 2021

QinetiQ Group plc today issues a trading update covering its third quarter of trading.

Good momentum, maintaining expectations

Building on a strong first half to the financial year, the Group has continued to deliver well with continued strong performance through the third quarter. While we remain cautious and alert to the changing COVID-19 environment, we are on-track for our fifth consecutive year of organic growth and we continue to maintain our expectations for the full year, as outlined at our interim results in November 2020.

Our company has remained resilient and performance has continued to be strong, against the backdrop of the evolving COVID-19 pandemic. We adopted a three phase approach to working through the pandemic and our "renewal phase", the last of the three phases, is progressing well with a renewed ambition and evolved strategy to accelerate sustainable growth. We continue to adapt to our "new normal" ways of working with distributed teams delivering effectively and efficiently for our customers.

EMEA Services

EMEA Services has continued to have good momentum in the third quarter with very limited impact from COVID-19, as the division benefits from long-term contracts and delivers work that is critical to sovereign defence capabilities. We expect good organic revenue growth in EMEA Services for the year.

Global Products

Global Products has continued to show top line growth in the third quarter, driven by the contribution of our advanced sensing solutions business (formerly known as MTEQ), following disruption due to COVID-19 in the first half. Our Targets business is showing positive signs of recovery in the second half with some key orders being won.

Strategy Update

At our interim results in November 2020 we set out a renewed ambition and evolved strategy to accelerate sustainable growth of the company by delivering mission-led innovation for our customers' advantage. This renewed strategy is already yielding significant benefits:

- Delivering on the LTPA: We are continuing to execute the modernisation programme, delivering successfully against all contractual KPIs and exceeding customer expectations; we remain on-track to deliver the final transition milestone on or ahead of schedule. In the quarter we hosted the UK and US Navy at our Hebrides ranges and we also completed the first training activities with the US Air Forces in Europe (USAFE) following our recent five year $27m contract win.

Delivery of RCV-L prototypes: In partnership with Pratt Miller Defense, we delivered the four prototype vehicles required to the US DoD ahead of schedule, under the Robotic Combat Vehicle Light programme, in advance of testing and experimentation in 2021.

- £127m Typhoon EDP contract: We have won a five year contract through the Engineering Delivery Partner (EDP) framework providing a range of engineering services for Typhoon, from planning and acceptance through to regulatory assurance, trials support and optimisation of in-service capability. The contract is a significant milestone bringing total orders through EDP since its inception to in excess of £500m, as reported at our interim results.

Disposal of OptaSense: In the third quarter we announced completion of the disposal of OptaSense to Luna Innovations Inc for £29m. This was the third disposal completed this financial year for a combined enterprise value of £69m. These disposals were strategy-led decisions to optimise our portfolio bringing greater focus on our core strategy to build an integrated global defence and security company.

Acquisition of remaining Inzpire shareholding: In December 2020 we acquired the final 15% share capital of Inzpire Group Limited, two years after our initial strategic investment. Inzpire is a leading provider of operational training and mission systems for military customers in the UK and internationally. The business has performed well in the last two years, and remains important to our growing training and mission rehearsal campaign.

https://www.qinetiq.com/en/news/third-quarter-trading-update

Rolls-Royce (LSE: RR)

About Rolls-Royce

Rolls-Royce Holdings plc is a British multinational public holding company that through its subsidiaries, designs, manufactures and distributes power systems. For more than a hundred years Rolls-Royce has provided power for aircraft, ships and land applications. Rolls-Royce is best known for its aero engines but it produces also low-emission power systems for ships, power systems for a wide array of land vehicles: ranging from trains to combine harvesters, and builds engines which can generate electricity. Approximately half of Rolls-Royce's revenues come from servicing power systems.

Rolls-Royce remains the second largest provider of defence aero-engine products and services globally with 16,000 engines in the service of 160 customers in 103 countries. Rolls-Royce engines power aircraft in every major sector including: transport; combat; patrol; trainers; helicopters; and unmanned aerial vehicles (UAVs).

Rolls-Royce has customers in over 150 countries and operates in more than 50 countries worldwide.

https://www.rolls-royce.com/

We are one of the world's leading industrial technology companies.

Throughout our history, we have set out to achieve extraordinary goals.

Along the way, we have developed ground-breaking technologies, established new standards and shaped the world we live in. This quest has taken us from our founding expertise in internal combustion engines to providing the world's most powerful and efficient aero-engines.

Civil Aerospace

Civil Aerospace is a major manufacturer of aero engines for the large commercial aircraft, regional jet and business aviation markets.

The business uses its engineering expertise, in-depth knowledge and capabilities to provide through-life support solutions for its customers.

35 Type of commercial aircraft powered by us

13,000 Engines in service around the world

47% Of total employees

Defence

Defence is the second largest provider of military aero-engine products and services globally, a major provider of maritime systems in the naval sector, as well as the technical authority for the nuclear steam raising plant powering the UK's nuclear submarine fleet.

150 Customers in over 100 countries

16,000 engines in service around the world

19% Of total employees

Power Systems

Power Systems is a leading provider of high-speed reciprocating engines, complete propulsion systems, distributed energy solutions, and safety-critical systems for nuclear plants around the world.

1,200 Development, service product, and dealership location

20,000 Reciprocating engines sold per year

19% Of total employees

https://www.rolls-royce.com/about.aspx

Rolls-Royce Holdings Plc 2020 Full Year Results

11 March 2021

Decisive and effective actions to address challenging market conditions

Severe impact of COVID-19 pandemic on Group performance and near-term outlook

More than £1bn saved in 2020 from in-year cash mitigations, compared to pre-COVID plans

Strengthened liquidity to £9bn and protected financial position with £7.3bn of new debt and equity and launched programme to raise at least £2.0bn from disposals

Strong progress on fundamental restructuring programme; around 7,000 roles removed in 2020

Targeting free cash flow (FCF) to turn positive during second half 2021 and at least £750m as early as 2022, dependent on the pace of the recovery in engine flying hours and underpinned by the restructuring programme

Warren East, Chief Executive said:

"2020 was an unprecedented year and I would like to thank everyone at Rolls-Royce for their hard work, dedication and sacrifice to help secure the Group's future. The impact of the COVID-19 pandemic on the Group was felt most acutely by our Civil Aerospace business. In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost reduction measures. We have taken decisive actions to enhance our financial resilience and permanently improve our operational efficiency, resulting in a regrettable, but unfortunately very necessary, reduction in the size of our workforce. With the support of our stakeholders we successfully secured additional liquidity with a rights issue, bond issuance and further credit facilities put in place during the year. We have made a good start on our programme of disposals and will continue with this in 2021. We continue to invest in developing market-leading technology and low carbon opportunities in all our end markets, to create value for our stakeholders and ensure we are well positioned to take advantage of the transition to a lower carbon economy and growing demand for more sustainable power solutions."

Group financial performance

£ million Reported

2020 Reported

2019 Underlying

2020 Underlying

2019

Revenue 11,824 16,587 11,763 15,450

Gross (loss)/profit (210) 942 (512) 2,387

Operating (loss)/profit (2,081) (852) (1,972) 808

(Loss)/gain on acquisition/disposal (14) 139 - -

Net losses on closing over-hedged position 1 - - (1,705) -

Other financing costs (815) (178) (281) (225)

(Loss)/profit before taxation (2,910) (891) (3,958) 583

Taxation (259) (420) (39) (277)

(Loss)/profit for the period (3,169) (1,311) (3,997) 306

(Loss)/earnings per share (pence) 2 (52.95) (23.70) (66.78) 5.44

£ million 2020 2019 Change

Group free cash flow (FCF) (4,185) 873 (5,058)

Reported movements in net funds (2,915) 701 (3,616)

Net (debt)/cash (ex. leases) (1,533) 1,361 (2,894)

1 Underlying financing charge of £1,705m reflects the cost of closing $11.8bn over-hedged £/US$ position across 2020-26 (£1,689m) and cost of closing over-hedged jet fuel position in 2020 (£16m). £202m of the cash cost was realised in 2020 with £1,503m cash cost across 2021-26.

2 2019 EPS restated to reflect the impact of the 2020 rights issue.

Summary of 2020 financial performance and financial impact of COVID-19

Our financial performance in 2020 was significantly affected by the COVID-19 pandemic. The global spread of the virus from March resulted in a sudden deterioration of some of our end markets. A positive albeit reduced contribution from Power Systems and growth in Defence were important to the Group's overall performance, partly offsetting the severe impact to our Civil Aerospace business.

Cash flow

FCF of £(4.2)bn, reflecting deterioration in underlying performance as a result of the impact of COVID-19 on Civil Aerospace in particular, and a deterioration in working capital which included a £(1.1)bn impact from the cessation of invoice discounting.

Actions to reduce non-critical spend and payroll delivered more than £1bn of savings in year compared to pre-COVID plans partly mitigating the impact of lower flying hour receipts.

Reported movement in net funds of £(2.9)bn was helped by £2.0bn inflow from the rights issue.

Underlying performance

Underlying revenue of £11.8bn reflected lower activity and included a £(1.1)bn revenue impact from Civil Aerospace LTSA contract accounting catch-ups.

Underlying operating loss of £(2.0)bn included £(1.3)bn of one-off charges largely due to COVID-19 comprising charges for LTSA catch-ups, contracts that have become loss-making in the year and customer provisions.

Underlying loss before tax of £(4.0)bn included a £(1.7)bn underlying finance charge related to the FX hedge book reduction, due to lower USD receipts in 2020 and forecast future years.

Reported performance

Reported operating loss of £(2.1)bn included £(1.3)bn net exceptional charges, largely as a result of COVID-19, including £(1.4)bn from impairments and write offs, £(489)m from restructuring, and a £620m exceptional provision release on the Trent 1000 programme.

A full reconciliation of reported results to underlying results is presented on page 6.

Financial and liquidity position at year end

Liquidity of £9.0bn at year end comprised £3.5bn cash and £5.5bn undrawn credit facilities.

A total of £7.3bn additional liquidity was secured during 2020, including £2.0bn rights issue and £5.3bn new credit through bonds, bank loan facilities and commercial paper.

Net debt of £(1.5)bn excluding leases (£(3.6)bn including leases).

Under the terms of recent loan agreements, we are restricted from making or declaring payments to our shareholders until after 31 December 2022. Regardless of these restrictions, the Board recognises that it would be inappropriate to make payments at this time due to the Group's financial position.

2020 Business unit performance summary

£ million Underlying

Revenue Organic

change 1 Underlying

operating (loss)/profit Organic

change 1

Civil Aerospace 5,089 (3,025) (2,574) (2,612)

Power Systems 2 2,745 (530) 178 (192)

Defence 3,366 125 448 34

ITP Aero 705 (240) 68 (43)

Corporate / eliminations (389) 192 (70) 46

Non-core business 247 (104) (22) (15)

Total Group 11,763 (3,582) (1,972) (2,782)

1 Organic change at constant translational currency (constant currency) applying 2019 average rates to 2020 and excluding M&A. All commentary is provided on an organic basis unless otherwise stated.

2 The underlying results for Power Systems for 2019 have been restated to reclassify Bergen Engines AS and the Civil Nuclear Instrumentation and Control business as non-core.

Responding to the impact of COVID-19

We reacted quickly to the outbreak and rapidly implemented a number of proactive safety measures, in line with local and national guidelines, which helped us to protect our people and ensure continuity of our operations. We also increased our focus on employee mental health and wellbeing through our Employee Assistance Programme and additional resources. Additionally, we have supported the countries and communities in which we operate, providing practical assistance including support with PPE supply, ventilator production and educational tools. Furthermore, we launched the Emergent Alliance, a global community that uses data analytics to assist the global recovery.

To help mitigate the financial impact of COVID-19, we promptly implemented a number of cash cost saving actions to reduce our cash outflow in 2020. These included tighter controls on all discretionary expenditure and a 10% salary reduction for senior managers and executives. Our early response, with many of these measures in place by April, enabled us to achieve more than £1.0bn in-year cash cost savings for 2020 compared to our pre-COVID-19 expectations.

The impact of COVID-19 on international travel significantly altered the near and medium-term outlook for civil aviation. In May 2020 we launched a major restructuring programme to fundamentally re-size the cost base and capital requirements of our Civil Aerospace business. In total we expect the restructuring to lead to the reduction of at least 9,000 roles by the end of 2022, most of which are in Civil Aerospace. By the end of the year, approximately 7,000 permanent and contractor roles had been removed with a significant proportion achieved through voluntary severance and natural attrition. Through these role reductions and a continued focus on costs, we expect to reduce our operating costs and capital spend by £1.3bn versus 2019 levels, with full run-rate savings realised by the end of 2022.

In 2020, $500m of bonds matured and we secured £7.3bn of additional debt and equity funding to strengthen our liquidity. Our strong liquidity position ensures that, even in a severe but plausible downside scenario (page 25) we have enough funding for our operations, business development and near-term debt maturities. In addition, in March 2021 we secured approvals for a £1.0bn increase, which we intend to leave undrawn, to the existing £2.0bn term-loan facility supported by an 80% guarantee from UK Export Finance. We are targeting at least £2.0bn from disposals by early 2022 and have already announced agreements to sell our Civil Nuclear Instrumentation and Control and Bergen Engines businesses. We expect the proceeds from the rights issue in 2020, together with business disposals and cash generated from operations over the next few years, to help us to return to a net cash position in the medium term.

Our recovery expectations

Our diversified portfolio helped to protect the Group's performance during the COVID-19 crisis, with support from governmental end-markets in Power Systems and Defence in particular. Looking ahead over the next couple of years, we are encouraged by the outlook for vaccinations and testing and we expect the rebound in global GDP and lifting of travel restrictions to drive our recovery.

Although the pace and timing of the air travel recovery remains outside our control, we have acted quickly to reset our cost base, particularly in Civil Aerospace, to deliver improved returns and greater operational efficiency. Our large engine LTSA flying hours (EFH) in 2021 are expected to increase to around 55% of 2019 levels (2020: 43%) with an acceleration in the second half as global vaccination programmes enable travel restrictions to be lifted. In 2022, our base case is for EFH to reach around 80% of 2019 levels (previously 90%). Large engine deliveries are expected to remain at the current lower levels for the next few years.

In Power Systems, the shorter-cycle nature of its business means that many of its end markets are expected to recover from the effects of the pandemic by the end of 2021 supporting our expectation that our revenues will be back to 2019 levels by 2022. In addition, our success in China is enabling us to continue to expand our business and win market share. Beyond 2021, we expect structural growth to be driven by global economic activity and the shift towards more sustainable, lower carbon power solutions, most notably hybrid-electric and hydrogen solutions as well as microgrids.

Our Defence business has a strong order book providing good visibility, with around 90% order cover for 2021, and steady growth into the medium term. With an installed base of more than 16,000 engines, we see potential to expand our aftermarket services with through-life upgrades for existing products. We expect broadly stable Defence revenues in the medium term, with strong cash conversion. Defence has substantial new programme opportunities, with good prospects in the US that could generate more than $7bn of lifetime revenue. We are also a key member of the Tempest programme in the UK.

Well positioned for the future

Despite the challenges we faced in 2020, we continued to invest organically and acquisitively in new opportunities, focused on technologies which enable our net zero carbon ambitions as the pace of adoption of low carbon solutions accelerates.

In 2020, approximately 7% of our research and development (R&D) spending was related to low carbon technologies (2019: 4%) and 38% towards next generation engine development with the remainder spent on delivering or enhancing our current product portfolio. The engine programmes we launched in recent years are now maturing and our investment priorities are pivoting towards lower carbon solutions as well as a more equitable balance across our business units. We intend to dedicate approximately 20% of our annual R&D expenditure to low carbon solutions including small modular reactors (SMRs), hybrid, hydrogen and electric power technologies, by 2023.

We publicly affirmed our ambition to enable the sectors we serve to achieve net zero carbon by 2050 when we joined the UN Race to Zero campaign in 2020.

Outlook and financial guidance

In this challenging environment, near-term financial forecasting is more difficult and the potential range of outcomes wider. Our expectations and targets are based on the pace of delivery of our fundamental restructuring programme and our current view of the shape and timing of the recovery.

We expect Group FCF in the region of £(2.0)bn in 2021, based on EFH at around 55% of 2019 levels, with the outflow weighted towards the first half before the Group turns cash flow positive at some point during the second half of the year.

Group FCF of at least £750m (excluding disposals) is achievable when EFH exceed 80%, on average, of 2019 levels for a 12-month period. We aim to reach this as early as 2022, underpinned by our cost reductions and management actions, however the exact timing is dependent on the pace of air travel recovery.

Medium-term, we aim to return to a net cash position and an investment grade credit position driven by free cash generation and our planned £2.0bn disposal programme.

The near-term outlook remains uncertain and highly sensitive to the developments of the COVID-19 virus and the related measures taken by governments around the world.

https://www.rolls-royce.com/media/press-releases/2021/11-03-2021-rr-holdings-plc-2020-full-year-results.aspx

SERCO (LSE: SRP)

About Serco

SERCO's customers are national and local governments and leading companies. SERCO has more than 50 years' experience operating in the areas of transport, employment, healthcare, protecting borders and supporting the armed forces.

Reimagining public services

Serco Group plc's roots go back to 1929, becoming Serco Limited in 1987 and in 1988 was listed on the London Stock Exchange. Now, Serco is a FTSE top 250 company managing over 500 contracts worldwide. Employing over 50,000 people, we operate internationally across four geographies: UK & Europe, North America, Asia Pacific and the Middle East and across five sectors: Defence, Justice & Immigration, Transport, Health and Citizen Services.

A world of experience

Our broad cross sector and international experience means we can transfer emerging best practice, share new service innovations and improve the performance of the public services we manage.

A strong public sector ethos runs through our organisation which is why you will always find our people are motivated to make a positive difference. We constantly evaluate our performance and the efficiency of our operations, as well as the outcomes we achieve for citizens.

https://www.serco.com/about

Acquisition of leading US defence business - 16/2/2021

Serco Group plc ('Serco' or 'the Group') has agreed to acquire Whitney, Bradley & Brown Inc (WBB), a leading provider of advisory, engineering and technical services to the US Military, for $295m from an affiliate of H.I.G. Capital. The acquisition will increase the scale, breadth and capability of Serco's North American defence business and will give Serco a strong platform from which to address all major segments of the US defence services market. The acquisition will be immediately accretive to earnings and will be funded through existing debt facilities; it is expected to complete in the second quarter of 2021, subject to regulatory approvals.

Financial details

In calendar year 2021 WBB is expected to generate revenue of around $230m (£168m), EBITDA of $29m (£21m) and UTP of $28m (£20m), before exceptional transaction and integration costs.

We expect WBB to be immediately accretive to earnings following completion and to enhance Underlying EPS by around 10% in 2022, the first full year of ownership. The return on invested capital is expected to exceed our weighted average cost of capital in the third full year of ownership.

Cost synergies of $4m per year, a large part of which are property-related, expected by 2023; significant opportunities for cross-selling services across both existing Serco and WBB customers.

Prospective 2021 acquisition multiples: 10.2x EBITDA and 10.5x UTP.

The consideration will be paid in cash funded through existing debt facilities.This acquisition will increase our Adjusted Net Debt to EBITDA multiple by around 0.9x. Including the effect of this transaction, as well as the acquisition of Facilities First Australia and the share purchases announced in December, we expect our leverage to be around 1.6x at H1 2021, and decrease thereafter. Leverage of 1.6x is comfortably within our target range of 1-2x.

Strategic logic for the acquisition

Highly complementary business: like Serco, WBB is a leading provider to the US Department of Defense of Systems Engineering and Technical Assistance (SETA) services focusing in the fields of Acquisition and Programme Management, Systems Design and Engineering, Through-Lifecycle Asset Management and Mission Performance.

Adds scale, breadth and capability to Serco's North American defence business creating a platform for future growth:

Scale: adds 20% to Serco's existing $0.9bn of North American defence revenues, and about 1,000 skilled people, reinforcing our position as a significant supplier in the US defence services market, with credible positions in all arms of the Department of Defense.

Breadth: to our strong position in the US Navy, the acquisition of WBB adds new market segments and reach within US defence. It will approximately double Serco's revenues across both the US Army and Air Force/Space Force, giving us ~$100m businesses in each. It will give us immediate access to markets that are difficult to enter organically including Air Force programme offices, the Missile Defense Agency, Space and Missile Defense Command, the Office of the Secretary of Defense, security agencies and others.

Capability: WBB brings significant new areas of capability to Serco's global defence business, including Advanced Data Analytics, Organisation Design, Cyber, AI & Machine Learning, Natural Language Processing, Wargaming, Modelling, and technologies related to geo-location. Among its 1,000 employees, 80% of whom have security clearances, it has around 200 "Subject Matter Experts" many of whom are former senior US military officers who are recognised experts in their fields. We believe we can offer these services to our existing customers in US defence and elsewhere.

Commenting on the acquisition, Rupert Soames, Serco Group Chief Executive, said: "Growing the scale, reach and capability of Serco in the largest defence market in the world is one of our strategic objectives, and the acquisition of WBB significantly advances that strategy. Following the acquisition of the Naval Systems Business Unit of Alion in 2019, which increased the size of our US Navy business by 70%, WBB takes our North American defence revenues to around $1.1bn and gives us credible positions in other parts of the market including Air Force, Space Force, Army, the Missile Defense Agency and the Office of the Secretary of Defense. It creates a powerful platform for future growth and brings us impressive new capabilities in areas such as Advanced Data Analytics, AI & Machine Learning and Precision Navigation and Timing, along with a team of renowned Subject Matter Experts covering a wide range of disciplines that can be deployed across our business. I greatly look forward to welcoming the WBB management team led by their CEO Robert Olsen along with 1,000 skilled WBB people to Serco and working with them and other colleagues as we build a strong global defence business.

The acquisition will be immediately accretive to our margins and to our earnings per share, and the recent strong cash performance allows us to execute this acquisition within our existing debt facilities whilst staying well within our target leverage ratio."

Notes

Historic financial data: In 2019, the last full year of audited accounts, revenue of WBB was $114m, EBITDA $9m, UTP $9m and gross assets were $170m. There were two acquisitions made in the final quarter of 2019, with the income statement including a contribution only for the period of ownership. In 2020, revenue was $212m, EBITDA $29m and UTP $28m.

https://www.serco.com/media-and-news/2021/acquisition-of-leading-us-defence-business

Serco Group plc full year results 2020

25 February 2021

Year ended 31 December 2020 2019 Change at reported currency Change at constant currency

Revenue(1) £3,884.8m £3,248.4m +20% +20%

Underlying Trading Profit (UTP)(2) £163.1m £120.2m +36% +37%

Reported Operating Profit (i.e. after exceptional items)(2) £179.2m £102.5m +75%

Underlying Earnings Per Share (EPS), diluted(3) 8.43p 6.16p +37%

Reported EPS (i.e. after exceptional items), diluted 10.67p 4.21p +153%

Dividend Per Share (recommended re-instated) [1.4p]

Free Cash Flow(4) £134.9m £62.0m +118%

Adjusted Net Debt(5) £57.8m £214.5m -73%

Reported Net Debt(6) £460.4m £584.4m -21%

Very strong year across global business in 2020; guidance increased for 2021.

Highlights

Revenue: grew by 20% to £3.9bn, with organic growth of 16%, a 5% uplift from our US acquisition in August 2019 of NSBU and -1% from currency.

Underlying Trading Profit: increased by 36% to £163m, with NSBU adding 8%; net impact of Covid-19 around £2m, or ~1% of UTP. Margin increased from 3.7% to 4.2%. Around three-quarters of our profit(7) is now from outside the UK.

Reported Operating Profit: increased by 75%, or £77m, to £179m, as a result of the 36% increase in underlying profit and an exceptional gain on disposal.

Earnings per Share: increased by 37% on an underlying basis and 153% on a reported basis.

Free Cash Flow: more than doubled, to £135m.

Adjusted Net Debt: reduced by £157m to £58m. Covenant leverage stands at 0.5x EBITDA.

Order Intake and Pipeline: some customer decisions slipped from Q4 2020 to Q1 2021, leading to order intake of £3.1bn (80% book-to-bill) and significant year-on-year increase in year-end qualified pipeline of new business to £6.4bn (2019: £4.9bn).

Government support & employee recognition: the Group has repaid all UK government employment and liquidity support, including £2m of furlough payments, and has made ex-gratia payments totalling £5m to around 50,000 front-line staff.

Dividends: the Board recommends restarting dividends, last paid to Serco shareholders in 2014, with a payment of 1.4p in respect of the 2020 financial year.

Acquisitions: in January 2021 we acquired Facilities First Australia (FFA), a leading Australian facilities management company for A$78m. In February 2021 we announced the acquisition, subject to regulatory approval, of Whitney, Bradley & Brown Inc (WBB), a leading provider of technical and engineering services to the US military for a consideration of $295m.

Outlook for 2021(8): having delivered compound annual growth in profits of 33% over the last three years, we expect revenues and trading profit to continue to grow in 2021, albeit at a slower rate than seen in recent years. Reflecting a strong start to the year, we have increased our profit guidance for 2021 by 6%, which equates to year-on-year growth at constant currency of 10%. This excludes the effect of the acquisition of WBB. Guidance will be updated for this following completion.

Rupert Soames, Serco Group Chief Executive, said: "In the coming months, every company's trading statement will pay glowing tributes to employees, and thank them for their resilience and courage. I have struggled to think of words that are not trite or clichés and will not be repeated by a thousand other CEOs, so I will use instead the words of a colleague, whose job is escorting prisoners, who wrote to me in January:

"Working as a Custody Officer is both challenging and rewarding, yes, the current situation with the virus has certainly changed the way in which we work and has made day to day life more challenging for everyone within Serco but also for the entire world. My husband has cancer and also a disease which has caused him to have no immune system. People have asked me why I would continue to work knowing that every day when I go home to him, I am putting his health at risk. The answer to this question is this: if everyone took that attitude then businesses would suffer more than they are already, people like myself and my colleagues are what keep the contract running, and without my work to focus on I am sure I would have gone crazy by now. Both my husband and I know that life throws us curve balls now and again and we have to get on and make the best of it and most importantly never give in! My husband and I acknowledge how precious life is, we are as careful as we possibly can be in protecting ourselves and others and acknowledge that life has to go on. Serco has looked after its employees very well throughout this terrible time. I am grateful to be able to work every day in a job that I love doing."

Around 90% of our 55,000 colleagues cannot work from home, because they work in places such as prisons, hospitals, ships, or trains. They have turned up each day to enable us to deliver our promise of supporting the delivery of public services; many have suffered loss, either of colleagues, friends or family, and still turned up for work. My respect and gratitude for them is unbound, and I want to extend our condolences to the families of those colleagues who have died from Covid-19 over the last year.

Turning to our financial performance in 2020, growing Revenues by 20% (2019: +15%) and Underlying Trading Profit by 36% (2019: +29%), is all the more impressive as it follows strong growth in 2019 and underlines the momentum behind Serco's return to robust financial health. This performance is particularly gratifying given the disruption caused to some parts of our business by Covid-19; despite approaching £400m of Covid-19 related revenues, the net impact of Covid-19 was around 1% of Underlying Trading Profit, and the balance of the 35% increase in profits came from the normal operations of the business.

Our free cash flow, now released from the drag of recent years of Onerous Contract Provisions, was very strong at £135m, which, combined with strong growth in EBITDA brings our covenant leverage ratio down to 0.5x, which puts us in a very strong financial position. This has enabled us to finance the recently announced acquisition of WBB from our existing debt facilities and still be around the middle of our target leverage range of 1-2 times Net Debt : EBITDA.

It is pleasing finally to be able to re-start paying dividends, last paid in 2014. The Board has thought carefully about this, particularly in the light of the current circumstances; in April 2020, we justified withdrawing the proposed Final Dividend in respect of 2019 saying: "At a time when the UK and other governments are helping Serco with its liquidity, it seems inappropriate to use that cash for anything other than its intended purpose of protecting the financial strength and resilience of our business". Subsequently, and for the same reason, we did not propose a dividend at the half year in August 2020. Four things have changed for us since the earlier decision-points in April and August. First, any concerns we had about liquidity have proved groundless; we have successfully re-entered the long term private placement debt market (and at lower cost); we have been strongly cash-positive in 2020; leverage is below our target range at year end, and even after the WBB acquisition would sit comfortably within our target range. Secondly, we have refunded all employment and liquidity support paid to Serco by governments, with the exception of £12m in the USA, for which there is no mechanism for early repayment, so will be repaid as scheduled in 2021 and 2022. Thirdly, whilst the profits arising from our work on Covid-19 are ephemeral, they do not represent a material proportion of our profits in the year (net, around 1% of Underlying Trading Profit). Finally, we have sought to recognise the intense pressure and extra work that Covid-19 has brought to our staff by making ex-gratia payments totalling £5m to 50,000 of our front line colleagues. In the light of these four considerations, the Board feels it appropriate to recommend the payment of a final dividend in respect of 2020 of 1.4p per share, representing a 25% payout ratio assuming a notional 1/3rd / 2/3rd split between interim and full year dividends.

Looking ahead to 2021, guidance set out below is improved from that which we gave in December. It does not reflect the acquisition of WBB, announced on 16 February, which is subject to regulatory approval; guidance will be updated immediately after completion, which is expected to be during the course of Q2. After the dramatic growth of the last three years - with 33% compound annual growth in Underlying Trading Profit - we see 2021 as being a year of more normal rates of growth in revenues and profits; we will have some "drags" on our profitability, notably only having six months of the AWE contract, and we expect revenues related to Covid-19 services to be much stronger in the first half than in the second. However, we have had a strong start to the year, and we are therefore increasing our profit guidance for 2021, with the revised guidance equating to 10% constant currency growth in the year.

2020 2021

Actual Initial guidance New guidance

Revenue £3.9bn ~£4.1bn ~£4.2bn

Organic sales growth 16% ~2% ~4%

Underlying Trading Profit £163m ~£165m ~£175m

Net finance costs £26m ~£27m ~£27m

Underlying effective tax rate 23% ~25% ~25%

Free Cash Flow £135m ~£75m ~£75m

Adjusted Net Debt £58m ~£100m ~£100m

Notes to guidance: The guidance uses an average GBP:USD exchange rate of 1.37 in 2021 and GBP:AUD of 1.79. If the WBB acquisition completes in Q2, we would expect our Net Debt : EBITDA to be around 1.6x at the half year and reduce thereafter.

https://www.serco.com/media-and-news/2021/serco-group-plc-full-year-results-2020

Ultra Electronics (LSE: ULE)

About Ultra Electronics

Ultra is a specialist international electrical and electronics engineering company. The Group operates predominantly in defence and other highly regulated markets with particular expertise in the maritime, and C3 (command, communication, and control including cyber) domains. Ultra is a sub-system and systems provider, focused on providing mission specific, bespoke solutions for its customers.

Defence & Aerospace

Ultra operates mainly, but not solely, in defence, with particular expertise in the maritime and C3 (Command, Communications & Control) domains, focusing on providing mission specific, bespoke solutions to navies and armies worldwide.

Elsewhere, our aerospace capabilities span across both military and civil platforms, where we provide high integrity mission-critical products and systems for the most challenging aircraft requirements.

Security & Cyber

Across the security and cyber domains, Ultra's specialist C2 (Command & Control), surveillance, forensic and data intercept capabilities support customers around the world in making informed and timely decisions. Ultra's capabilities also include contingency planning tools and incident management systems for first responders. We supply secure communication equipment and systems that enable accurate and timely exchange of voice, video and data to military, government, law enforcement agency, industry and commercial customers.

Energy and Safety-Regulated Commercial

We are an international provider and integrator of critical systems and software to operate, optimise and secure both today and tomorrow's energy and safety-regulated commercial systems. With integration capability and domain expertise at both technology and programme levels, we deliver control of the systems and data that drive operational efficiency and business value.

https://www.ultra-electronics.com/about-us

Interim Results for the six months ended 30 June 2020

Strong performance, continued progress

£m 6 months to 30 June 2020

6 months to 30 June 2019

Change %

Reported Organic(2)

Order book 1,173.2 1,014.1 +15.7 +14.0

Revenue 413.1 387.1 +6.7 +5.8

Underlying(1)

Operating profit 53.4 52.9 +1.0 -1.7

Profit before tax 47.9 46.5 +3.0

EPS (p) 54.7 52.5 +4.2

Statutory

Operating profit 45.3 41.0 +10.5

Profit before tax 29.8 37.9 -21.4

EPS (p) 34.2 43.3 -21.0

Interim dividend per share (p) 15.4 15.0 +2.7

Net debt to EBITDA(3) x1.20 x1.96

Cash Conversion 98% 25%

ROIC(7) 17.5% 16.7%

· Good strategic progress

o Positive technology and capability developments

o Important new contract wins

o Strong order book

o Transformation on track

· Robust underlying performance

o Limited COVID 19 impact

o Solid revenue growth

o Underlying profit progress and better than anticipated cash conversion

o Postponed FY 2019 and Interim 2020 dividends to be paid in September

· Positive momentum into H2

O Major markets solid

o Commercial aviation challenges

o Further orderbook progression and excellent visibility

o Accelerating cultural change

Simon Pryce, Chief Executive, commented:

"I am very proud of the performance of the Ultra team in the first half. Our primary objective as we manage through the pandemic is the safety of our people, our families and the communities in which we operate.

We've responded with great agility by rapidly adapting our processes and working practices whilst continuing to deliver for our stakeholders and particularly our customers. Any minor productivity issues were more than compensated for by lower than anticipated SG&A costs associated with the changes in ways of working. We also made good progress on our transformation initiatives. As a result, we have delivered a strong financial performance in H1, despite the impact of COVID.

We have very good visibility entering H2. Our major markets remain stable, but we do expect weak commercial aerospace demand to be more of a headwind during the second half. We expect SG&A costs to normalise and we are accelerating some of our transformation initiatives. Despite this, we remain confident that 2020 will, as anticipated, be a year of good progress for Ultra. We will therefore be paying both the final 2019 dividend as originally recommended and an interim 2020 dividend.

We are continuing to make good strategic progress. Our technology and capabilities are well positioned to address customers' existing and emerging needs. We continue to win good positions on long-term programmes and are pleased with the transformation momentum we have created. We are therefore confident in our ability to create exceptional value for all our stakeholders and in Ultra's exciting future."

STRATEGIC REVIEW

Financial summary

We made a good start to 2020 with strong order intake on existing programmes. These include a $101m Sonobuoy order under ERAPSCO's existing 5-year IDIQ and a $45m MK54 lightweight Torpedo array order. Despite the marketing challenges created by the global pandemic, we have also won number of key new strategic contracts. These include a new sole source contract to provide software for the MADIS (Marine Air Defense Integrated System) program for development of Counter Air and Counter Unmanned Aerial Systems and a new $31m IDIQ to continue supporting the secure, digital, jam-resistant advanced Link 16 network over the Alaskan air space.

Defence spend remains robust in all our key "five-eyes"(8) markets, despite the impact of COVID. Our order book is growing strongly with a 14% organic increase versus H1 2019 and we enter H2 with 93% order cover (H1 2019: 93%). This growth was delivered despite some COVID-19 delays, the usual H2 weighting of ORION radio sales & ADSI license fees, and, continued pressure on Nuclear sensor sales in our Energy business.

We achieved organic revenue growth in two out of three of our business units. Overall, organic revenue growth was up 5.8% with a particularly strong first half in Intelligence & Communications which grew 11%. This was driven by the anticipated increased ORION radio orders in H1 and strong command & control system sales.

Underlying operating profit was down 1.7% organically and underlying operating margins were 12.9%. Both were impacted by a change in phasing of bonus accruals to better weight them between the first and second half of the year, with a larger proportion now booked in H1. This resulted in an increased H1 bonus accrual of £4.5m. Excluding this increased H1 bonus accrual, underlying operating margin would have been 14.0% (H1 2019: 13.7%). Statutory profit before tax reduced by 21.4%, due to a mark to market loss on forward foreign exchange contracts as GBP weakened relative to our USD forward contract rate.

As expected, transformation related expenses, including IT, restructuring and process improvement costs increased in the period to £3.4m (H1 2019: £0.7m) as we increase the pace of our Focus; Fix; Grow transformation.

Underlying operating cash conversion was better than expected at 98% (H1 2019: 25%). This was mainly due to increased advanced payments from customers during the COVID pandemic, deferred sales tax, prompt payment of receivables (rather than any real structural improvement in average working capital turn) and reduced capital expenditure due to a change in ERP strategy. The new ERP strategy focuses on improving our business processes at all levels of the organisation, supported by some global best of breed systems to interface with our existing ERPs, rather than a higher risk large capital expenditure plan.

Strong cash generation has helped ROIC improve to 17.5% (H1 2019: 16.7%). This remains a key measure for management as we pursue our strategy and transformation initiatives.

Group Operational Summary

Operationally, the Group has performed very well during the pandemic, with no site closures and limited production inefficiency associated with changing working patterns. We also managed the supply chain effectively, where we saw limited disruption.

As previously announced, there was some limited impact due to changing shop floor working practices to enable social distancing and some isolated customer delays, however, this was mostly offset by reduced travel and marketing expenses and more modest growth in Internal Research & Development than expected due to COVID related delays and resource constraints (3.4% of revenue versus H1 2019: 3.3%). The overall level of R&D investment in the period was 17.9% of overall sales (H1 2019: 18.1%). Travel and marketing expenses are expected to return to more normal levels in H2 and the rate of investment in Internal Research & Development and Marketing is expected to increase in the second half of the year.

The Group continues to operate broadly as normal, despite the pandemic; no employees have been furloughed related to COVID and we do not intend to defer any VAT payments into 2021 due to our strong cash performance. We continue to monitor and adapt to the changing situation in all our markets.

ONE Ultra progress

In addition to maintaining our operations during the pandemic, we have also increased the pace of our transformation.

As a reminder, we are transforming to ONE Ultra through our Focus; Fix; Grow transformation plan:

- Focusing on our core strengths through executing a clear strategy

- Fixing the things that will allow us to deliver real parenting value

- Growing value for all our stakeholders

During the half we have increased the pace of our transformation programme with higher focus on standardisation of processes (for example bid process, project execution, purchase to pay, learning & development) and continuous improvement.

Our Focus; Fix; Grow transformation is a broad based and multi-year programme and will ultimately affect every part of the business. It supports delivering improved and exceptional outcomes for all our stakeholders through focussing on what we are good at, improving underlying delivery and performance and accelerating growth. We are making good progress and continue to identify additional potential for performance improvement that we will realise in the medium term.

Our transformation programme is split into six work streams, made up of several individual initiatives at various stages of development and execution, each owned by a team with central oversight. The pace of transformation increased in H1, and we have enhanced our transformation office capability as a result. All work streams made good progress in H1:

Workstream Goal Progress in H1

Operating Model Improved alignment to strategy, greater empowerment and collaboration, improved operational oversight, enhanced leadership and reduced management layers. Operating model agreed. Organisational re-design on plan. Role definition complete, good progress on filling roles, on track for implementation in January 2021. Stronger operational oversight.

Site Excellence Improved working environment & sustainability, optimised manufacturing and utilisation of space. Property review complete. Specific planning to improve utilisation of space commenced in line with organisational design. Reflects anticipated permanent changes in working practices post pandemic.

Operation and Functional Excellence Process standardisation, improvement and efficiency. Initially focussed on improved commercial acumen, internal R&D investment, knowledge sharing and strategy, global sales, HR, project execution and finance processes that can be continuously improved. Additional processes to be reviewed over time. Process definition to support operating model commenced.

Process standardisation commenced in HR, Finance and IT.

Data standardisation on track. Reviewed ERP strategy, existing installations to be reconfigured once process standardisation complete.

Procurement Better integration of supply chain into design and manufacture, improved aggregation of spend, better supplier collaboration and management. Head of Procurement appointed.

Internal high complexity, low volume, rapid prototyping PCB capability finalised to mitigate supply chain risk.

Direct procurement aggregation opportunities commenced.

Indirect procurement initiatives launched.

ONE Ultra Culture Leadership and talent to support ONE Ultra strategy. Common vision, mission, values agreed, launched and being embedded. Leadership capability assessment complete. Assessment tools, performance management and remuneration all aligned to ONE Ultra needs and values.

Leadership training developed to address capability gaps and development needs for Q4 launch. Broader leadership training aligned.

The Ultra Way system for continuous improvement being developed, resources being deployed.

Technology Enablement Improved collaboration and efficiency of IT infrastructure and application suite. Infrastructure and IT backbone investment back on track and accelerating.

During the period transformation costs (including redundancy and restructuring) of £3.4m were incurred, (H1 2019: £0.7m). We also invested £4.0m of capital expenditure on transformation initiatives, mostly comprising Technology, HR and payment process improvement initiatives. The early initiatives under our transformation workstreams have confirmed good opportunities for productivity and efficiency improvements. We see the opportunity to accelerate some of our transformation initiatives in H2.

OPERATIONAL REVIEW

Maritime (44% of Group revenue)

A partner in the maritime defence domain, focusing on mission-centric equipment and systems primarily across the "five-eyes"(8) nations. We specialise in maritime sonar, radar, acoustic expendables, signature management and power systems.

£m 2020 H1

(10)2019 H1

(10)2019 H1

for organic measure Growth

% Organic(2) growth %

Order book 1. 605.8 2. 451.1 456.3 +34.3 +32.8

Revenue 3. 184.3 4. 168.8 170.7 +9.2 +8.0

Underlying operating profit(1) 5. 27.3 6. 29.5 30.4 -7.5 -10.2

Underlying operating margin(1) 7. 14.8% 8. 17.5% 17.8%

Statutory operating profit 9. 26.8 10. 25.4 +5.5

Market

Ongoing geopolitical disputes and associated naval threats continue to drive growth in naval platforms and underwater systems. The pivot in national security doctrine, particularly in the US, to pursue technologies aimed at countering near peer adversaries is particularly favourable for Ultra given our strength and capability in underwater expendables, sonar sensors and systems, anti-submarine warfare and surface radar markets. Ultra is also a potential beneficiary of the growth in signature and power management to combat threat development while platform evolutions are increasingly driving demand for SWaP (Size, Weight and Power) and alternative propulsion technology, all of which are areas of existing Ultra expertise.

Beyond traditional capabilities, future navies will require a suite of new technologies that broaden full-spectrum capabilities and expand sonar detection, increasingly for deployment on unmanned vehicles to operate in anti-access, anti-denial environments. Ultra is also well placed to benefit from increased investment in innovations such as vector sensors, advanced materials to yield more system performance in the same space-weight-power envelope, unmanned surface/sub-surface air vehicles for remotely-operated ASW (Anti-Submarine Warfare), and deployable autonomous systems for distributed persistent undersea surveillance.

Performance

The Maritime business unit had a strong first half with order book increasing 34.3%. This was driven by: (i) a $101m order under the 5-year ERAPSCO IDIQ (received after period end in H1 2019); (ii) strong acoustic and torpedo countermeasure orders; (iii) a $45m order for MK54 torpedo arrays under an existing contract; and (iv) an increase in development funding for the Next Generation Surface Search Radar increase in development funding.

Organic revenue increased 8.0% to £184.3m during the first half, reflecting strong ASW receiver sales, increased NGSSR development revenue, and signature management awards. Key program milestones were also reached with the first S2150 Hull Mount Sonar installed on HMS Portland and an updated 3-year contract for electro-optical tracking systems for UK Type 45 destroyer.

Underlying operating profit however, decreased organically by 10.2% to £27.3m. This was predominantly due to: (i) the £3m H1 change to bonus accrual phasing (as explained above); (ii) increased Internal Research & Development (mainly in the Sonobuoy market); and (iii) increased transformation and restructuring investments.

As a result, operating margins reduced from 17.5% in H1 2019 to 14.8% in H1 2020. Excluding the one-time change to bonus accrual phasing, operating margins would have been 16.4%. Margins are expected to remain broadly flat vs 2019 for this division, with the non-repeat of the £8.8m of contract losses mostly balanced out by higher transformation and R&D costs and adverse sales mix.

Internal Research & Development during this half focused on Sonobuoy development, Radar and UAV technology. We also saw good progress in the Maritime Business Unit's transformation priorities, most notably, delivering better aligned organisational design, improving leadership capability, enhanced financial discipline and improved project oversight and execution.

Intelligence & Communications (28% of Group revenue)

A defence supplier engineering world-class, mission-critical, multi-domain intelligence, communications, command & control, cyber security and electronic warfare solutions.

£m

11. 2020 H1

(10)2019 H1

(10)2019 H1

for organic measure Growth

% Organic(2) growth %

Order book 12. 230.9 13. 236.6 241.1 -2.4 -4.2

Revenue 14. 114.1 15. 102.0 102.7 +11.9 +11.1

Underlying operating profit(1) 16. 12.3 17. 9.9 10.7 +24.2 +15.0

Underlying operating margin(1) 18. 10.8% 19. 9.7% 10.4%

Statutory operating profit 20. 7.1 21. 4.7 +51.1

Market

Ultra is well positioned to support the multi-domain, hyper-enabled battlespace of tomorrow, which will require decreased latency, autonomous decision making and advanced application support to get the right information to forces quickly and effectively. Support for the customer will become increasingly software-centric as operators are given broader connectivity capabilities through network modernisation programs. In an increasingly contested environment, secure solutions that provide near-instantaneous situational awareness and secure communications to the warfighter will require distributed decision making and cognitive support tools, along with multi-platform and multi-user interoperability.

As a network centric C3I(12) provider with capabilities currently extending across various radio frequencies, C2I(12), tactical communications and cyber security Ultra is well positioned to support this continuous evolution of the multi-domain battlespace and today is delivering information advantage to the warfighter. In addition to delivering existing technologies across C3I, incorporating future market technologies such as machine learning/artificial intelligence, analytics, intelligent networking, combat systems, 5G and reduced-size weight and power for micro-electronics, Ultra is working to support the customer requirements of today and tomorrow.

Performance

The Intelligence & Communications business unit won a number of new contracts in the half including: (i) $31m IDIQ to continue supporting the secure, digital, jam-resistant advanced Link 16 network over the Alaskan air space; (ii) a sole source contract to provide initial software for the US MADIS program (Marine Air Defense Integrated System) for development of Counter Air and Counter Unmanned Aerial Systems; and (iii) a new contract with the United States National Guard Bureau for three JET systems (Joint Interface Control Cell Extended Trainer solution) to meet the unique training, test and evaluation needs of their Air National Guard components.

Order book however declined due to increased ORION radio sales in H1 2020 versus H1 2019 for the US Army's Network Modernisation programme.

Organic revenue increased by 11.1% to £114.1m during the first half, reflecting increased US DoD radio equipment sales, and sales of tactical data link and command & control systems.

Underlying operating profit increased organically by 15.0% to £12.3m. Higher Internal Research & Development and transformation costs were more than offset by performance in ORION radio system sales, Specialist RF and ADSI ("Air Defence Systems Integrator"). We expect some growth in margins in this business unit in H2 to reflect the usual H2 ORION radio weighting and improved productivity.

Internal Research & Development during this half focused on advanced radio and networking including artificial intelligence and machine learning and virtual ADSI, leveraging hardware to deploy specialised real-time C2 functionality. The Intelligence & Communications business unit has made good progress with their Focus; Fix; Grow initiatives, appointing a dedicated transformation lead for this division, optimising their portfolio, improving governance and standardising KPIs. Strong progress has also been made in implementing technology and product roadmaps and processes to support innovation and internal investment.

Critical Detection & Control (28% of Group revenue)

In Precision Control Systems (PCS), we design and supply market-leading safety and mission-critical solutions, primarily to the military and commercial aerospace markets.

Forensic Technology is the world-leader in ballistic identification and forensic analysis solutions.

In Energy, we focus on the design and supply of safety critical sensors and systems and selected products for industrial applications, focusing on the UK, North American and Chinese markets.

£m 22. 2020 H1

(10)2019 H1

(10)2019 H1

for organic measure Growth

% Organic(2) growth %

Order book 23. 336.5 326.3 331.6 +3.1 +1.5

Revenue 24. 114.7 116.3 117.1 -1.4 -2.0

Underlying operating profit(1) 25. 13.8 13.5 13.2 +2.2 +4.5

Underlying operating margin(1) 26. 12.0% 11.6% 11.3%

Statutory operating profit 27. 12.0 11.4 +5.3

Markets

Aerospace - The increasing pace of the modernisation cycle is projected to continuously drive future defence aerospace growth in the "five-eyes" nations. These target markets retain growth prospects as customers are continuing to acquire new aircraft, upgrade ageing fleets or develop indigenous platforms. Ultra retains strong positions on major global platforms. There is a growing need for aircraft systems that require Ultra's innovative power and control technologies that are ideally suited to modern aircraft needs. The ever-increasing need for highly reliable, mission and safety critical sensing and control systems positions Ultra's capabilities in an increasingly competitive market. The industry is moving towards more environmental, cost-effective solutions for both traditional platforms and novel developments such as Urban Air Mobility and aircraft electrification. Ultra is well placed as an existing supplier of relevant technologies to early adopters.

COVID-19 has, however, significantly impacted the commercial aerospace industries outlook given the restrictions on domestic and international passenger air travel. While the realisation of the total long-term impact is not yet clear, and it had limited impact on Ultra in the first half, it is likely to have greater impact in the second half of this year.

Forensics - Effective solutions are needed to provide timely crime-gun intelligence and investigative leads spanning local, municipal, national and international networks. The latest innovations in 3D, quantum microscopy is unlocking the potential for objective methods to assist expert conclusions in Court on the potential match between firearms and bullets. As customers increasingly seek to construct preventative crime gun strategies which not only enable them to respond timelier to incidents but increases their lead generation abilities and the provision of intelligence, forensic technology remains at the forefront of building these strategies. In conjunction with these unique drivers artificial intelligence, machine learning and cloud base technologies are expected to gradually be introduced to the market.

Energy - Although COVID-19 has negatively impacted the energy sector in 2020, global demand is expected to recover and continue to increase in the long-term. Coupled with a growing need to decarbonise the power sector, this creates a need for increased investment in the civil nuclear power market. Ultra provides critical safety systems and detector capabilities to nuclear facilities around the world, safeguarding nuclear workers and the public. Ultra is positioned at the forefront of emerging technologies being developed for increased efficiency and decreased cost of nuclear power generation, such as advanced Small Modular Reactor technologies (SMRs).

Performance

As expected, the Critical Detection & Control order book only increased modestly year on year. This is predominantly due to the impact of COVID-19 on total commercial aerospace orders (2019 sales: c£65m). Forensic Technology also saw some COVID related delays, although orders for Safeguard services were robust and a $12m task order from the Bureau of Alcohol, Tobacco, Firearms and Explosives was received under a pre-existing 5-year contract. In Energy, a new contract was won to manufacture and supply a neutron monitoring system for SHINE Medical, an isotope production facility in Wisconsin.

Organic revenue decreased by 2.0%. Higher IBIS and Safeguard sales (Integrated Ballistic Identification System) in Forensic Technology and strong JSF orders on HiPPAG (High Pressure Air Generator), EIPS Controllers and harnesses in PCS were more than offset by shortfalls in Nuclear sensor sales due to recent COVID-19 order deferrals from nuclear plant operators in our Energy business. In PCS, we are experiencing significant reductions in commercial aerospace demand which we were able to mitigate with increased military sales in H1. This mitigation will not continue and therefore we anticipate there will be a much greater adverse financial impact in H2 from continued commercial aerospace weakness.

Underlying operating profit increased by 4.5% organically, mainly due to transactional FX tailwinds and cost reductions in this business unit, offset by the previously mentioned H1 bonus accrual phasing change of £1m. As a result, underlying operating margins were 12.0% vs 11.3% in H1 2019.

It is expected there will be significant pressure on PCS in the second half of the year due to reduced commercial aerospace orders and revenue which will impact the total 2020 performance and operating margins of this Business Unit.

FINANCIAL REVIEW

Orders

The order book increased organically by 14.0% to £1,173.2m (2019: £1,014.1m) compared to the prior period and showed 10.0% organic growth from the 31 December 2019 position of £1,022.9m, reflecting improving defence budgets, notably in the US, and some key wins on new and existing programmes. Order intake in the period grew organically by 13.5% to £515.3m (2019: £449.9m) and represents a book to bill ratio of 1.25 (2019: 1.16). The opening order cover for the second half is 93% (2019: 93%).

Total revenue

£m % impact

Six months to June 2019 387.1

Currency translation 6.2 +1.6

Disposals (2.8) -0.7

Six months to June 2019 (for organic measure) 390.5

Organic growth 22.6 +5.8

Six months to June 2020 413.1 +6.7

Total revenue grew by 6.7% to £413.1m compared to the prior period. This represents organic(2) growth of 5.8%, reflecting improved conditions in our US market. Specific programmes include revenue from the recently won Next Generation Surface Search Radar development contract, military aircraft platforms and tactical command and control systems. Sterling weakened during the period, increasing reported revenue by 1.6%. The average US dollar rate in the six months to 30 June 2020 was $1.26 compared to $1.29 in the prior period. The disposal of the Airport Systems and Paygate businesses in H1 2019 and the Ottawa based electronic intelligence business in January 2020 reduced revenue by 0.7% on a like-for-like basis.

Statutory operating profit

£m 2020 2019

Statutory operating profit 45.3 41.0

Amortisation of intangibles arising on acquisition 6.6 10.5

Significant legal charges and expenses 0.7 0.7

Acquisition and disposal related costs 0.8 0.7

Underlying operating profit 53.4 52.9

Statutory operating profit increased by 10.5% to £45.3m (2019: £41.0m). This reflects reducing amortisation costs as assets created by historical acquisitions become fully amortised.

Underlying operating profit and margins(1)

£m % impact

Six months to June 2019 52.9

Currency translation 0.8 +1.5

Disposals 0.6 +1.1

Six months to June 2019 (for organic measure) 54.3

Organic decline (0.9) -1.7

Six months to June 2020 53.4 +1.0

Underlying operating profit was £53.4m (2019: £52.9m), an increase of 1.0% on the prior year. The weakening of sterling increased profit by 1.5% and the impact of business disposals resulted in a 1.1% increase in like-for-like profit. The organic profit decline was 1.7%, consequently the underlying operating margin(1) was lower than H1 2019 and declined to 12.9% (H1 2019: 13.7%), due to:

· "Fix" related transformation investment, including redundancy and restructuring costs of £3.4m;

· H1 bonus accrual phasing change, resulting in additional H1 2020 charge of £4.5m compared to H1 2019; and

· Higher Internal Research & Development investment.

Research and development

Ultra continued its programme of R&D, with total spend in the period of £73.7m (2019: £70.0m). Internal Research & Development investment increased to £14.2m (2019: £13.0m) which represents 3.4% of revenue (2019: 3.3%), while customer funding increased to £59.5m (2019: £57.0m). The overall level of R&D investment in the year was 17.9% of revenue (2019: 18.1%). The increase in company funded spend was more modest than originally envisaged due to engineering resource constraints and COVID related customer funding delays at the beginning of the year.

Finance charges

Net financing charges(5) decreased by £1.0m to £5.5m (2019: £6.5m). This decrease was a result of lower average debt levels and reductions in US and UK interest rates. The interest payable on borrowings was covered 14 times (2019: 11 times) by underlying operating profit.

Profit before tax

Statutory profit before tax decreased to £29.8m (2019: £37.9m). Underlying profit before tax(1) increased to £47.9m (2019: £46.5m), as set out below:

£m 2020 2019

Statutory profit before tax 29.8 37.9

Amortisation of intangibles arising on acquisition 6.6 10.5

Acquisition and disposal related costs 0.8 0.7

Gain on disposal - (0.8)

Loss/(gain) on derivatives 10.0 (2.5)

Significant legal charges and expenses 0.7 0.7

Underlying profit before tax(1) 47.9 46.5

Amortisation costs arising from acquisitions declined by £4.0m as assets created by historical acquisitions become fully amortised. The loss on forward foreign exchange contracts was £10.0m (2019: £2.5m gain) as GBP weakened relative to our forward contract rate.

Tax and earnings per share

The Group's underlying tax rate(4) in the period decreased slightly to 19.0% (2019: 20.0%). The statutory tax rate on statutory profit before tax is 18.5% (2019: 19.2%).

Underlying earnings per share(1) increased 4.0% to 54.7p (2019: 52.5p), reflecting the increase in profit compared to the prior year. The weighted average number of shares in issue was 71.0m (2019: 70.9m). Basic earnings per share decreased to 34.2p (2019: 43.3p). At 30 June 2020, the number of shares in issue was 71,013,464.

Operating cash flow and working capital

Cash generated by operations was £65.8m (2019: £25.8m). Underlying operating cash flow(1) was £52.4m (2019: £13.4m) resulting in underlying operating cash conversion of 98% (2019: 25%). Working capital and provisions decreased by £7.1m. The working capital decrease was principally due increases in advances from customers. Our focus on improving working capital turn continues to be successful with the average working capital turn(9) for the Group improving to 8.5x (June 2019: 6.8x). Capital expenditure, including expenditure on transformation initiatives, increased to £10.0m (2019: £8.4m). Inventory increased during the year, reflecting revenue growth.

Net debt

Ultra's net debt at the end of the period was £107.4m (2019: £208.2m), this includes £43.7m of lease liability. Net debt/EBITDA(3) when including pension liabilities and lease liabilities was 1.20 times (2019: 1.96 times). On a covenant basis, which excludes pension liabilities and IFRS 16 lease liabilities, the figure is 0.46 times (2019: 1.32 times).

The Group's committed facilities comprise a £300m revolving credit facility (RCF), of which £250m has a maturity to November 2024 and £50m has a maturity to November 2023, and Pricoa loan notes: £50m with an expiry date of October 2025 and $70m with expiry dates of January 2026 and January 2029. At 30 June 2020 the drawings under the RCF were £41.0m leaving £259.0m of committed headroom, as well as liquid cash resources across the Group of £93.1m.

Conduct of business investigations update

As previously announced, investigations associated with conduct of business issues in Algeria and the Philippines continue with no material changes to report.

2020 FINANCIAL GUIDANCE

Ultra has had a strong start to H2 with a new $42m production contract awarded for our Next Generation Surface Ship Radar, a $28m Extended Range Directional Frequency Analysis and Recording Sonobuoy contract and an additional $33m Q-125 Sonobuoy order earlier this month.

We expect revenue growth in H2 to be broadly similar to H1, despite headwinds from commercial aerospace. Underlying operating margins will improve in H2, although we do expect increased spend in Internal R&D, transformation and travel & marketing costs. As previously flagged, we expect underlying operating margins to remain stable in the mid-teens range during our transformation.

Transformation expenses remain in the previously expected £8-12m range and are expected to accelerate in the second half. Capital expenditure will be within a range of £20-25m, factoring in the previously mentioned change in the ERP strategy (2019: £21.8m).

Our internal R&D spend will accelerate in the second half, although is expected to be around 4% of revenue in 2020 due to COVID related customer delays and resourcing constraints.

Due principally to increased advanced payments, good receivables performance, improved milestone payment terms and VAT deferrals, operating cash conversion is now expected to be above our previous 60-75% guidance, more in line with our medium-term cash conversion target of 80-90%.

DIVIDEND

As announced on 14 April 2020, as a precautionary measure due to the COVID-19 pandemic, the Board decided to postpone payment of its 2019 final dividend of 39.2 pence per share. Based on the Board's current knowledge, the robust liquidity position, the strong H1 performance and expected full year performance relative to the COVID-19 scenario modelling undertaken, an additional interim dividend equivalent to the postponed full year 2019 dividend of 39.2 pence per share will now be paid on 18 September 2020 to shareholders on the register at 28 August 2020.

The 2020 interim dividend of 15.4p (2019: 15.0p) will also be paid on the same date as the postponed 2019 dividend (18 September 2020 to shareholders on the register at 28 August 2020). Remaining cautious to the current pandemic the proposed amount is 2.7% increase versus the prior year, with the interim dividend being covered 3.6 times (2019: 3.5 times) by underlying earnings per share.

SUMMARY & OUTLOOK

The Group is trading in line with expectations with strong cash flow, increasing Return on Invested Capital, and we are increasingly confident of the benefits of our ONE Ultra transformation.

We remain well positioned in several areas of priority defence spend. Order book and demand remains strong in our key markets. The duration of the COVID-19 virus and its impact remains uncertain, but it is not significantly impacting current trading and we don't currently believe it will have any material long term impact. We are continuing to monitor the situation closely.

Ultra has an exciting strategy and is pursuing a transformation agenda to continue to drive growth in market share and to deliver exceptional value creation for all our stakeholders. We have increased the pace of this change in the past 6 months. It will take time before the benefits can be seen but there is a considerable opportunity with our transformation to become ONE Ultra and we remain excited about the prospects of the Group.

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Publication:United Kingdom Armaments
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Date:Apr 12, 2021
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