Nick Cunningham

Nick Cunningham of Agency Partners asked if increased FTC scrutiny affects BAE's bolt-on M&A strategy. He also questioned if internal capital deployment options like R&D and inventory were exhausted, and if there was an opportunity to lock in recent pension gains through a third-party transfer.

Answer

Executive Tom Arseneault stated that the FTC's focus is on larger, vertical deals, so BAE's bolt-on strategy is not expected to be impacted. CFO Bradley Greve confirmed that internal investment is not exhausted, highlighting double-digit increases in R&D and strategic inventory builds. Regarding the pension, he explained a buyout is currently cost-prohibitive but remains an option they will monitor.

Nick Cunningham of Agency Partners sought comment on reports of a Typhoon production break in 2018 and asked for details on the financial calculus for the share buyback program and the criteria used for M&A decisions.

Answer

CEO Ian King confirmed that without new orders, Typhoon work would cease in Q1 2018, but noted this could be managed by reallocating resources to the ramping F-35 program. Group Finance Director Peter Lynas explained that the buyback's benchmark is an IRR exceeding WACC, while M&A targets are evaluated using a discount rate with a significant risk premium above WACC, typically looking at a year-three return.