Excellent that so many have come to the preliminary results presentation. I just want to say a few words on sort of the background to the company before we get into the meat of it, obviously, with Ian and Peter. I've now been the chairman here for just a little over 12 months. During the time, I've visited virtually everywhere in the business. I've been to, clearly, all the U.K. sites in the U.S.A., Kingdom of Saudi Arabia, and Australia. I've met a lot of our shareholders and spent time with customers in all the domains. In my career, I've had the sort of privilege to be involved with a lot of different companies. I have to say, 12 months in, none more engaging, or indeed, some ways more stimulating, than BAE Systems.
In the travels I've done, it's become very clear that whilst we do operate in very diverse markets with a very wide range of products and services, this company is absolutely unified by its commitment to excellence, the quality of its people, pride in its achievements, and a real belief in the role we have, which is obviously protecting and serving those that protect us. A year on, and it's exactly a year on since I stood here in my first early days of taking this job, I'm very pleased to say that I'm delighted to have taken the appointment, and I feel very positive about the future of the business. The board that I chair has proved to be what is really an excellent legacy. It is populated by individuals who have got a proven record of diverse experience.
There's a good mix of gender, although we're looking to further strengthen that mix. There's a good range of age and also of nationality. There's also, I think within the group of people, a real collective desire to contribute to the development of the business. Now, during the first year, we decided to look pretty systematically at a full review in some detail of the business to ensure that we all share within the boardroom a clear understanding of the business priorities, the management bench strengths, at a number of levels in the organization, the market requirements, and the strategic opportunities that we have.
We concluded as a board that we are indeed very fortunate to have the sort of strong geographic balance that you're all very familiar with, the very healthy mix of product and services, and the fact that we do serve our forces and our allies right across the globe. Now, our Applied Intelligence business capitalizes clearly on the deep intelligence roots that we have. It does benefit from the commercial reach that we've indeed expanded, and it continues to offer pretty attractive growth dynamics for the future. In the electronics business, we have, without doubt, leading-edge capabilities in military areas, and in the commercial avionics sector, we have an adjacent market with some real growth potential.
Looking back, the naming of the Queen Elizabeth aircraft carrier in Scotland in July, it absolutely showcased the remarkable engineering capabilities that exist within this company. We hope to deploy those capabilities in building a new range of frigates for the Royal Navy. In the air, the strengthening of the radar and weapons capability of the Typhoon combine to improve the export potential of the aircraft. The performance of that aircraft, I think a lot of you saw, indeed I did on a couple of occasions, at the Farnborough Airshow. Truly a terrific performance. I think looking in the broad, we ended 2014 in a much more uncertain and dangerous world than we've seen for some time. We did so in the company with a strong order book and a really good, sound, experienced management team. Looking forward, I think prospects for the business are promising.
We won a pivotal contract for the armored personnel vehicles at the end of last year in the U.S., with the potential for naval and aircraft orders from domestic and international markets in the future. None of us, however, can be certain that the good prospects that exist will always convert into firm orders, given the budget controls, the volatility of oil prices, and the changing leadership movements that we see both at home and abroad. It's against this background that whilst we are optimistic about our future growth, we're also realistic on risk. Our commitment as a board and a company to driving shareholder value, I think has been demonstrated very clearly through the performance we've done, the infill acquisitions that we've made, and the share buyback, and indeed, our progressive dividend policy.
We've already committed just under about GBP 500 million in buying back our stock. We announced three acquisitions during the year to add technologies and capabilities to the existing business. The largest, of course, was SilverSky, and that strengthened our Applied Intelligence business, and in particular, its future prospects in the fast-growing commercial cybersecurity market. When we look forward, our policy remains pretty much unchanged, and we will continue to use our cash resources in the best interest of shareholder value creation. In the meantime, we focused on driving down the costs, preserving the quality, which our reputation is firmly based, honing the competitive edge, which we continue to need to do, to ensure we are in the best position to compete in what are very challenging and demanding marketplace conditions. Looking back, I think so far so good.
Clearly, there's always more to do, and the people to do it are now going to tell you about the performance of the last 12 months. With that, I'll hand over to Ian. Thank you.
Morning, everyone. Thank you, Roger. I will spend a few minutes on our trading environment before handing over to Pete for the financial details. We'll take questions as we normally do. We delivered another solid performance in 2014. Through several years of budget constraints in our U.S. and U.K. markets, we have consistently performed and demonstrated agility to address volume and cost challenges. We have met customers' affordability challenges and delivered value to the bottom line. We now believe we are seeing signs of greater stability and improving clarity. Defense spending continues as a high priority in international markets, particularly in the Kingdom of Saudi Arabia, and we have continued to win significant new business. Order intake of GBP 4.3 billion was achieved from international markets outside the U.S. and U.K.
It should also be noted that for the third year running, we have achieved in excess of GBP 10 billion of order intake in the U.K. and U.S. This is protection of our core franchises that are key to supporting future services and international revenues. Our large order backlog of GBP 40.5 billion provides good multiyear visibility across many of our businesses. In addition to the improving outlook for our defense businesses, we have continued to deliver growth in our commercial adjacencies of cyber and avionics. This overall consistent performance has enabled us to generate good returns with a further GBP 925 million of capital returned to shareholders through dividends and share repurchases in 2014. Starting with the U.S., last January's bipartisan budget agreement provided a two-year window of defense funding visibility and some emerging stability. The continuing resolution operating across the last quarter had only minor trading disruption for us.
Some disruption may appear in 2015, we believe budgets are now relatively stable, with some early indicators of a modest improvement for 2016. There will always be a continuous need for competitiveness, efficiency, and agility, Jerry has streamlined the U.S. organization into three operating sectors with reduced administrative overhead. The stabilizing budget environment in the U.S. resulted in an improving level of procurement activity in the Electronic Systems and Platforms & Services businesses. Notably, we saw encouraging developments in our Land & Armaments business. The award of the Armored Multi-Purpose Vehicle contract was a key win, a new long-term franchise for the company. The group's intelligence and security business and some other government services activities continued to trade in a challenging environment. However, margin and cash performance in this business area remains good.
Commercial avionics continued to perform strongly, the selection to supply the integrated flight control system for Boeing's new 777X program was a notable win, generating significant new business in future years. The group also continued to perform well on delivery of ship repair capability to the U.S. Navy. Given the U.S. Navy's increased focus on Asia-Pacific operations, we committed $110 million investment to install a new floating dry dock facility in our San Diego shipyard. The U.S. commercial ship build contracts for which charges were announced last year are making operational progress. Jerry has strengthened the team in this business following a detailed review by our U.K. naval business. The U.S. team have also made good progress towards a much improved Radford Army Ammunition Plant contract.
It was disappointing that the Korean and U.S. governments wanted to terminate the KF-16 contract for their convenience. This was a market takeaway and not a core franchise. We have moved on and protected our existing relationships. Turning now to the U.K. We continue to benefit from long-term contracts in the maritime and military air domains. The U.K. defense and security environment has been stable, notwithstanding the continued pressure on public spending. We have also continued to deliver good program execution and cost control and a consistently strong operating performance. We do, however, recognize that the economic environment in the U.K. remains challenging, placing further pressure on many areas of public spend, including the U.K. defense budget. We are working to deliver continued improvement in affordability and to deliver both value and world-class capability through the large, long-term contracts that comprise much of our U.K. program workload.
In the air domain, Typhoon production and our extensive in-service support and upgrade business provides a strong core of high-performing business. 2014 has also seen an acceleration of capability expansion on Typhoon, with activity underway to clear additional weapons and sensor capabilities for the four partner nations and international customers. In November, the contract for the electronically scanned radar was a key milestone in the Typhoon platform's evolution. Alongside Typhoon, the F-35 program is commencing what is expected to be a significant growth in production, with the acceleration of volumes of both the U.K.-manufactured rear fuselage assemblies and the Electronic Systems content from our U.S.-based operations. We have also recently been selected as the regional hub in Australia on F-35 support. We also continue to develop a way forward in unmanned air systems.
Building on the successful Taranis flight demonstrations, we now have both a U.K. national funded activity and an agreement for a collaborative way forward with France. The outlook for our U.K. maritime businesses is robust. The build of two Queen Elizabeth Class aircraft carriers is progressing well. The first of class was named in a formal ceremony by Her Majesty The Queen, and was subsequently floated out of the dock in which she was assembled. This has enabled assembly of blocks for the second vessel to commence. The first vessel continues beside her with outfitting. We welcome the decision announced by the Prime Minister at the U.K. NATO Summit in October, committing to the operation of both vessels. In August, we were awarded a contract for the build of three Offshore Patrol Vessels for the Royal Navy.
This contract provides both additional naval capability and sustainment of key shipbuilding skills leading up to the start of manufacture for the anticipated Type 26 frigate program. We are working on the Type 26 assessment phase, and commercial discussions for the future phase of the program are well advanced. Type 26 will provide long-term clarity for complex warship manufacture at our facilities on the River Clyde in Glasgow. We are also providing significant support services to the Royal Navy. In October, we were awarded a support contract for the operation of the Royal Naval base at Portsmouth. We have also since signed the Type 45 support extension contract. In the submarines business, Artful, the third of the seven Astute-class submarines, was launched in May. Engineering work also continues to accelerate on the Successor submarine program. We now employ over 6,000 BAE Systems people in the submarines business.
At the end of the year, we were awarded a contract for the upgrade of the UK's Spearfish heavyweight torpedoes. This contract will ensure the sustainment of UK torpedo capability for the foreseeable future. 2014 has been a successful year for the UK business. We do, however, now enter a period of UK elections and a Strategic Defence and Security Review, but we do have the benefit of a large order backlog of long-term committed programs, with many of the decisions now addressed for several years to come. Our business is performing well, and we continue to take the actions necessary to address costs and to meet the customer's affordability challenge. In Saudi Arabia, you will recall that in February, we reached agreement on the Typhoon price escalation discussions under the current 72-aircraft contract.
We have continued to progress the provision of capabilities to the Royal Saudi Air Force, including delivery of a further 11 Typhoon aircraft. We made good progress in developing our position as a key part of the kingdom's defense industrial base. In June, we announced a reorganization of our portfolio of interests in a number of industrial companies in Saudi Arabia and an enhancement of our existing relationship with Riyadh Wings. The reorganization is expected to enhance the growth prospects of this portfolio of businesses and reinforce an ongoing commitment to support increasing local employment and capability. We also saw further significant order awards in the year, including additional equipment and capability for the RSAF's Typhoon and Tornado aircraft. Turning to some of our other markets and starting with Australia. The Australian government approved in May a commitment to grow defense spending within a decade to 2% of GDP.
The group's Australian operation is performing well. We delivered the first of two landing helicopter dock vessels for the Royal Australian Navy. The second ship is also progressing well. We are now moving off the high level of activity on this program, with currently no material follow-on workload contracted. We are in discussions with the government about options to sustain industrial capabilities as well as to meet the potentially substantial future naval requirements. The MBDA guided weapons joint venture is also seeing high demand, benefiting from a wide range of air and naval platforms across European and wider international markets. MBDA also received a GBP 234 million contract to supply the air-to-air missiles for India's Jaguar aircraft fleet. The business has also seen increased bidding interest on ground-based air defense systems in some regions.
Work progresses on the Omani Hawk and Typhoon contract, and we continue to pursue other international prospects for these platforms. The financial performance of Applied Intelligence was strong, all metrics advancing nicely, particularly order backlog growth. 2014 was a significant year in our strategy to develop and grow a position in the expanding commercial cyber market, building on our government credentials. We have seen both a commercial cyber strategy through both organic investment and acquisitions to fast-track growth. The SilverSky acquisition provides a well-established channel to the U.S. commercial cyber market, an existing large base of customers, a high-quality team, and a cloud-based delivery mechanism. A highly complementary fit with our existing portfolio and an accelerant for the strategy. This is a small part of BAE Systems today, but we have ambitious aspirations for growth and returns from our commercial cyber business in the medium term.
I will now ask Pete to take you through the financials. Thanks.
Thanks, Ian, and good morning. As usual, I'll step through the results for 2014. Then I'll move on to guidance for 2015. There has been considerable volatility in exchange rates through the year. For reference, the US dollar rate has averaged at 165 compared to 156 in 2013. The headline numbers and compare to 2013. Sales reduced by some GBP 1.5 billion to GBP 16.6 billion. Around GBP 0.6 billion of that reduction was due to exchange translation. The volume reductions in Land & Armaments of GBP 0.4 billion were as expected. Last year's sales included the retrospective benefit of around GBP 300 million from the price escalation settlement on the Salam program. Underlying EBITA decreased by GBP 223 million to GBP 1,702 million, giving a return on sales of 10.2%.
Of that reduction, GBP 49 million was due to exchange translation and GBP 183 million for that retrospective benefit traded in 2013 from the Salam price escalation. Underlying finance costs in the year increased by GBP 25 million to GBP 204 million. This arose primarily from a higher level of Net Present Value charges in line with a reduction in the group's Weighted Average Cost of Capital. On underlying earnings per share, last year's reported figure of GBP 0.42 benefited by little over GBP 0.04 from the Salam price escalation settlement. Excluding that, underlying earnings per share in 2014 of GBP 0.38 was marginally higher than in 2013. The tax rate for the year was at 19%. Recognizing the number of moving parts year-over-year within underlying EPS, there is a bridge chart showing the major movements appended to your packs.
There was an operating cash inflow of GBP 1.2 billion, benefiting from the sale and leaseback in the first half year of our two residential compounds in Saudi Arabia. Net debts at the end of the year was better than guidance at GBP 1,032 million. Order backlog, at GBP 40.5 billion, has reduced following the awards in 2013 for long-term support contracts in Saudi Arabia, which are now being traded out. The dividend for the year has increased to GBP 0.205, up 2% on the 2013 dividend. At this level, the dividend is covered 1.85 times by underlying earnings per share. In addition to the effect of exchange translation, there are a number of other items materially impacting the balance sheet in the year. Intangible fixed assets increased on the year's acquisitions.
There were two goodwill impairment charges, the first taken in relation to the South African Land & Armaments business disposal, and the second as a result of the U.S. commercial ship build performance. Tangible fixed assets reduced on the Saudi residential and office compound sale and leaseback transaction completed back in April. Within working capital, there were several significant movements. The major advances received in 2012 on the Omani Typhoon and Hawk order and the Saudi training aircraft contract are being consumed. Advances were also utilized in the year on the European Typhoon Tranche 2 and Indian Hawk programs. Provisions created in previous years were utilized on the Omani Offshore Patrol Vessel contract, rationalization costs, and settlement of a U.S. contract pricing dispute. The first of the two payments under the Salam price escalation settlement was received. In aggregate, working capital increased by some GBP 500 million.
The IAS 19 accounting pension deficit has increased over the year to GBP 5.4 billion, I'll come to that on the next slide. Finally, we close the year with net debt of GBP 1 billion. This slide shows the pension scheme assets, liabilities, and deficit as accounted for under IAS 19. The value of the scheme assets has increased over the year by GBP 2.3 billion to GBP 23.8 billion. In aggregate, across all of the group's pension schemes, equity investments remain close to half of scheme assets. Over the year, liabilities increased by GBP 4.6 billion to GBP 30.6 billion. Real discount rates reduced by 70 basis points in the U.K. and by 80 basis points in the U.S., driven by the further falls in bond yields. These discount rate movements have increased reported liabilities by around GBP 3.7 billion.
As regards mortality, we have early adopted recently issued U.S. mortality tables and taken a more prudent approach on U.K. main scheme pension longevity. These have led to an increase in reported liabilities of GBP 0.6 billion. The year's discount unwind and the service cost less pensions paid account for the rest of the increase in liabilities. In total, the impact of all these movements over the year is an increase to the group share of the pre-tax accounting pension deficit of GBP 1.9 billion. You know, the mark-to-market pension accounting does not determine the contributions we make to our schemes. It's the funding position that's relevant there. 2014 was a significant year for triennial funding valuations, with all nine of the group's U.K. schemes falling due.
The company and the trustees of each of those schemes have reached agreement on the funding valuations and revised deficit recovery plans, those agreements have also been cleared by the U.K. pensions regulator. This chart shows the assets and liabilities of the U.K. schemes under those newly agreed valuations compared to the position last time around. Total liabilities, shown here in red, have increased by GBP 2.1 billion to GBP 21.3 billion. Total assets, shown in blue, have increased by GBP 3.4 billion to GBP 18.6 billion. Overall, a reduction to the funding deficit from GBP 4 billion to GBP 2.7 billion. It is this funding deficit which determines the cash injections to be made by the group over the next three years, not the accounting deficit.
Based on these newly agreed deficit recovery plans, there will be little change in deficit funding to be made in 2015 compared to the circa GBP 400 million that were made in 2014. Moving on to cash. This slide sets out the movement from our net debt position of GBP 699 million at the beginning of the year. The operating business cash flow was GBP 1.191 billion. Interest in tax payments were GBP 237 million. Payment of 2013's final and 2014's interim dividend totaled GBP 642 million. Under the three-year share repurchase program of up to GBP 1 billion that we announced in February 2013, we have bought back 119 million shares at an average price, including costs, of GBP 4.16. The combination of dividend and share repurchases gave a total cash return to shareholders in the year of GBP 925 million.
Acquisition costs, primarily for SilverSky and transactions relating to the reorganization of our holdings in our partner companies in Saudi Arabia, amounted to GBP 230 million. Exchange translation and all other movements totaled GBP 132 million. We closed the year with gross debt of GBP 3.3 billion, cash of GBP 2.3 billion, and net debt of GBP 1 billion. This grossing up includes GBP 0.7 billion of pre-financing that we took in October against debt that matures in 2015 and 2016. The cash flow performance of the five sectors is shown here, but I'll return to that when I cover the results of each of the sectors. Just to note, the total cash outflow for pension deficit funding made in 2014 was GBP 391 million. The cash outflow at head office contains GBP 275 million of that. Moving on to the sectors.
I'll cover the in-year performance here and then return to the outlooks a little later. The first of the sectors, Electronic Systems, and the figures shown in U.S. dollars. Ahead of previous guidance, sales compared to 2013 increased by 3% to just under $4 billion. The commercial areas of the business now amount to 21%, having seen sales growth in the year of 7%. On the defense side, sales increased by 2% in the year, largely from the F-35 program in the electronic warfare area. The return on sales achieved of more than 15% was well ahead of guidance, largely for continued strong program execution and risk retirement. There was a 50 basis points non-recurring gain from a contract pricing settlement. Cash conversion of EBITDA for the year was at 66%, but excluding pension deficit funding, that conversion rate was at 80%.
Despite the U.S. budget pressures, order backlog was sustained at $6.1 billion. The contract award for the Enhanced Night Vision Goggle program has been protested again and is therefore not included within the reported backlog. The Cyber & Intelligence sector comprises the U.S. intelligence and security business, together with BAE Systems Applied Intelligence. The numbers here again in dollars. In aggregate, sales in the year reduced by 8%. The U.S. business saw a 17% decrease, driven largely by reduced budgets at the sector's two largest customers, along with further reductions in analysis support in theater. Organic growth in the BAE Systems Applied Intelligence business was at 10%, almost all of which was from commercial customers. Completion of the SilverSky transaction occurred in mid-December, and therefore, only $4 million of sales trading has been recognized from that transaction.
Despite the top-line performance, the margin achieved of 11.3% was ahead of our guidance range, with profitability in the Applied Intelligence business increasing ahead of plan. Cash conversion of EBITDA for the year was at 58% due to the capital cost of the replacement ERP system and stand-up of our Malaysian operating center in the Applied Intelligence business. In aggregate, order backlog increased to $1.4 billion, and despite the top-line pressures, backlog in the U.S. business grew by 7%, largely on the imagery analysis and cyber support awards. In the Applied Intelligence business, backlog increased by 37% over the year, 22% organically, and 15% from the SilverSky acquisition. That clearly builds on the 60% growth that we saw in 2013. For 2014 reporting, the U.S. Platforms & Services sector aggregates the Land & Armaments and the Support Solutions business. As we announced earlier this month, following the U.S.
rationalization made last July, when Support Solutions was disbanded and the various businesses reassigned, 2014 is the final year where we will report below the U.S. Platforms & Services sector level. The numbers, again, in U.S. dollars. So for the last time, I'm going to move straight on to the performance of Land & Armaments. Sales in the year declined to $2.3 billion, in line with previous guidance. Bradley reset activity has more than halved. The Medium Mine Protected Vehicles production contract is completed, and deliveries under the M777 lightweight howitzer contracts have largely traded out. Despite the expected top-line reductions, and in line with guidance, the business has delivered an improved margin of 10.3% through good program execution and cost reduction. Cash flow generation was again strong, with good conversion of working capital.
Order backlog reduced to $4.4 billion, largely from the trading out of deliveries on MMPV and M777. We haven't recognized within backlog the circa $800 million under the LRIP options on the December's AMPV program award. In the Support Solutions business, and again in line with guidance, sales were just 1% lower than in 2013. However, the year's margin has been materially impacted by cost overruns on the commercial ship build programs. Charges taken the first and second half-years totaled $122 million. The Radford Munitions contract has now been stabilized with no additional provisioning necessary. Order backlog decreased to $4.6 billion on the sales trading out under our five-year U.S. Navy ship repair contracts. The recompetes for the Hawaiian and San Diego contracts were both successfully secured in the year.
In the Platforms & Services UK sector, the year sales of £6.6 billion were 8% lower than in 2013, or 4% excluding last year's retrospective trading of price escalation on Salam Typhoon. This reduction is largely due to a lower level of intergroup trading in 2014, and therefore has no impact on the group's numbers. As expected, the return on sales was at 11.7%. Cash performance was better than expected, with a cash inflow of £173 million. Consumption of customer advances was at a lower level in the year than anticipated. Provisions were utilized against costs incurred on rationalization and on the Omani OPV program. Order backlog reduced to £20.1 billion, primarily from trading of Typhoon aircraft, Indian Hawks, and Carrier. This does mask the key order awards that were secured for long-term contracts on Spearfish torpedo upgrades and Portsmouth Naval Base support.
Sales in the international sector of GBP 3.6 billion were lower than guidance, mainly for timing of deliveries on Saudi support contracts. The reduction against 2013 includes GBP 143 million in respect to exchange translation arising on the Australian dollar and euro. The trading reductions were in the Australian business, as the landing helicopter dock program ramps down. Last year's sales trading arising from Salam price escalation and the higher level of Saudi equipment deliveries made in 2013. EBITA of GBP 366 million generated a return on sales of 10.2%, remaining within our guidance range. There was an operating cash inflow of GBP 881 million, which includes a net GBP 349 million from the sale and leaseback and initial rentals of the two Saudi residential compounds. Some GBP 200 million of receivables were collected in December, earlier than expected, and there were further down payments received on Saudi equipment awards.
For reference, there is a chart providing a summary of the trading performance of all five sectors, along with the numbers for headquarters appended to your presentation packs. This penultimate chart seeks to give guidance as to how we see the performance of each sector developing from 2014 into 2015. For reference, our exchange rate planning assumption for 2015 for the U.S. dollar is $1.55 to the pound. As we advised in our February the second RNS, we have restated here the 2014 numbers to recognize the reallocation of a line of business from the U.S. Platforms & Services sector across into Cyber & Intelligence. This guidance for 2015 is therefore provided on the new basis. Firstly, Electronic Systems.
Overall, we expect 2015 sales in dollar terms to be similar to those in 2014. More than 20% of the business is now in commercial markets, where we expect continued growth, and this should offset small reductions on the defense side of the business. In aggregate of 2015's projected sales, close to 80% are in the 2014 closing order backlog. This is a broadly consistent starting point with what we saw last year. On margins, we would expect to see performance again at the top end of our guidance range of 12%-14%. Next, Cyber & Intelligence. In aggregate, we expect mid-single digit sales growth in 2015. The U.S. business, which was 79% of the sector in 2014, is expected to be only marginally lower, having seen those sharp reductions in 2014.
Sales growth in the Applied Intelligence business is planned at around 30%, benefiting from both the SilverSky acquisition and organic growth from the continued expansion in commercial markets. Such growth is clearly supported by that 37% increase in backlog seen last year. Margins in 2015 are expected to be within an 8%-10% range, but at the lower end, after expensing both the integration costs of SilverSky and continued investment being made in the Applied Intelligence business in support of further growth. Moving to Platforms & Services U.S. Here, we expect sales to be some 10% lower or 8% on a like-for-like basis, recognizing the South African land business disposal. We expect to see the bottoming out of land-related reductions on completion of the Ground Combat Vehicle and Bradley reset activity. Initial engineering work on the new AMPV award has a relatively small impact to 2015 trading.
Almost 90% of the sales guidance is within order backlog. As to the margin level, we expect improvements given the $122 million of charges taken in 2014 on the commercial ship contracts. Due to the charges taken in the last two years on commercial shipbuilding and taken in 2013 on the Radford contract, there is a dilution from the sales trading through on those contracts in future years. We, therefore, anticipate a margin in the 6%-8% range for 2015. Turning next to Platforms & Services (UK), sales are expected to increase by around 5% on a higher level of Salam Typhoon deliveries. Against the 11 aircraft delivered in 2014, there are 13 planned for 2015. In the naval domain, we expect higher sales levels from activity on the Astute and Successor submarine programs, which will more than offset the reduced Carrier trading.
More than 90% of the sales guidance is within 2014's closing order backlog. Margins in this sector are again expected to be within our 10%-12% range. An impact from the lower pension discount rates is that service costs charged to P&L do increase. In 2015, this amounts to some £35 million compared to the 2014 level, therefore, whilst margins will remain within our guidance range, we expect them to be towards the lower end. To the last of the sectors, Platforms & Services International. Here, we expect sales in 2015 to be around some 10% higher than in 2014, with increased levels of support to the Salam Typhoon aircraft now in service and higher volumes of weapon systems. More than 90% of the guidance here is within backlog.
Margin levels are expected to be similar to 2014 at the lower end of our 10%-12% range. To complete your 2015 models, the headquarters charge is expected to be a little higher than in 2014. Underlying finance costs are expected to be similar. The cost of carry on the bond pre-financing is expected to be offset by a lower level of Net Present Value charges. The effective tax rate is expected to move back up to around 20%, the final number is, of course, dependent upon the geographic mix of profits. In aggregate, we expect the group's reported earnings per share to be marginally higher than in 2014, with some reliance on anticipated naval and aircraft orders. This final chart highlights our cash utilization. In the left-hand column are the numbers for 2014, to the right are those we expect in 2015.
In respect of operating cash flow, firstly, we are expecting capital expenditure to be slightly above depreciation levels, reflecting the investment being made on a new floating dry dock facility in our U.S. ship repair business. Within working capital, we expect to incur costs of around £200 million against provisions created in previous years that we hold in the balance sheet. As always, the most volatile area remains the level of customer advances. Against the advances we received in 2012 on the Saudi trainer aircraft contract and the Omani program, we will see a high level of utilization. You'll recall that under the terms of that Omani contract, no further cash will be received until deliveries commence in 2017. There will also be advances consumed on the European Typhoon production contract. The guidance here does anticipate the remaining cash inflow from the Salam price escalation settlement.
The early receipt from our Saudi customers seen in 2014 is expected to reverse in 2015. The final operating cash flow item is the year's pension deficit funding, which will again be close to GBP 400 million. The non-operating cash flow items are more predictable. Outflows for interest and tax are expected to total around GBP 0.3 billion. Dividend payments and the share buyback program should deliver a further GBP 1 billion of cash returns to shareholders. Under the transactions announced last year, we expect receipts from the disposal of the land business in South Africa and under the restructuring of our Saudi partner companies. In aggregate, 2015 is expected to see an increase in net debt post those shareholder returns.
In summary, in 2014, on the downside, we have encountered operational issues and further charges on the commercial shipbuilding contracts in the U.S., and the accounting pension deficit has increased significantly on lower bond yields. As positives, we've delivered on the group's earning guidance, exceeded cash expectations, and increased the dividend. Total returns to shareholders in the year were more than GBP 900 million, and in addition, we've closed out the pension funding valuations and deficit recovery plans, providing certainty as to those material deficit funding cash flows over the next three years. For 2015, we expect to see top line and earnings growth and further material returns to shareholders. With that, I'll pass it back to Ian.
Thanks, Pete. Before taking questions, I just want to touch on the group strategy. Each year, we review and refresh our strategy. Roger's appointment as chairman last year added focus and detail to the strategic review. We begin 2015 with a robust strategy, which has five areas of focus. Maintaining and growing our defense businesses remains the core. We continue to pursue growth in our existing adjacent markets, the cybersecurity and commercial avionics, and we will continue to explore others. We are a trusted partner to a number of countries around the world, and we look to further expand our international business. We will continue to support the development of our people, and we will continue to enhance competitiveness to drive success. Our strategic objectives set the near-term goal to help everybody align their personal objectives to the company strategy.
This year, we have added a sixth strategic objective: to find new ways to create greater value from our technology and engineering capabilities. This will be a key theme for the year ahead. I do not believe we get full recognition for the strength and depth of our technology and engineering. Our strategy has guided us through challenging market conditions in recent years. We have demonstrated our commitment to efficiency and improvement, rationalizing the business to more than keep pace with the challenge from the market. We have continued to derive value from our established platforms and services positions with good program execution and cost reduction. This should benefit both customers and shareholders as stability returns in key markets. We are generating good growth from commercial cyber and expect the SilverSky acquisition to accelerate that drive. We are already seeing margins rise as growth outpaces the initial organic investments.
International business continues to be a great strength of this company, representing circa 35% of sales. Our Electronic Systems business is a technology powerhouse with strong program positions such as the F-35 electronic warfare and increasing commercial avionics activity. We have delivered strong margin performance in this sector. We have not only sustained our position from the R&D generated by customer-funded programs, but we have also driven company-funded investment in those areas with the greatest potential and to address adjacent commercial growth markets. A good track record of delivery. These are competitive times, and we will continue to invest and develop the technology, skills, and market positions we need to drive the business forward. If we summarize, BAE Systems continues to benefit from a large order backlog across a wide base of high technology programs and capabilities.
We will manage the U.K. market, the recent 2016 budget request in the U.S. supports our view of stable U.S. budgets. The group continues to address customers' needs across a broad international market footprint. In Saudi Arabia, we have seen no reduction in defense as a priority for the kingdom. Similarly, in Oman, the Hawk and Typhoon programs are well-established, and we have already received a significant proportion of the program payment. The key is matching the national agendas of your core customers, sustaining positions for the long term. We have also established a 50/50 balance of business across both advanced products and capabilities and high technology support services. The group is well-positioned to continue delivering shareholder value by addressing customers' continuing defense and security needs as economies recover in domestic markets and as defense requirements continue to evolve. Thank you. We'll now take questions. First question.
Morning.
Morning.
Morning, gents. Jamie Robathan from Morgan Stanley. I've got three to kick off, please. Just to pick up on the earnings guidance for 2015, you've mentioned this reliance on potential ship and aircraft orders. Could you provide a bit more color there at all, please? Secondly, on cash generation, obviously much stronger than you'd guided. Peter, can we read positively into that at all, or is it really mainly just timing? Thirdly and finally, at the nine-month IMS, the inference was that outperformance in other divisions would offset the shipbuilding issues in the U.S., clearly that's what's happened, so that's good. Just to be clear, to what extent do you now feel you're on top of those issues in U.S. Support Solutions? Thanks.
Okay, we'll deal with this. I'll answer the first, Pete will answer the second, We'll give Jerry notice on answering the third. On the first one, the two areas you raise are covered in what I talked about in the script. In Australia, in Naval, we have had a high workload on the landing helicopter dock, which has been a very successful program in Australia. You need to characterize this program. This is the carrier program of Australia, their most complex capital ship, which we have now delivered into their service, which they're extremely happy with. What we're now in discussion with is, if you look at their future requirements that they have for naval expansion and replacement of vessels, how do we protect that capability going from where we are today to where we need to get to?
We're just in that point of discontinuity between the programs. What we want to flag is that we are in that discussion. We haven't got a solution at this stage, but we are in active discussion on that activity. Second is a similar position in Air. We've always said that there's an optimum program that we have going through our factories of circa 30 Typhoons a year. If you had to change the planning of that because of the timing of contract awards, then there would be some dislocation and cost impact of that. That's the position we're in.
Cash?
Yep.
I think, we've beaten our own guidance on cash, I have to confess to that, probably by around GBP 500 million-GBP 600 million. To your point, Jamie, does it stick or does it not? There's really three elements to it. We've got the early receipts that we had, as we mentioned, in Saudi Arabia. That was a couple of hundred million GBP that was actually dragged forward by a month. That is purely timing. On the advances, there's two issues. One is, with those extra order awards we're going to have in Saudi Arabia, they came with advances, so that's good news. There were extra orders, and that's extra advances. In terms of the burn on the existing advances, it was a lower run rate than we expected that we actually got in 2014. Again, most of that is timing.
Two elements are timing and one piece which is incremental.
Jerry?
Are we on? I believe the question was, to what extent do we think we have our arms around the issues that were presented in S2? There were a variety of those, I would give you a couple of reasons why we're reasonably confident. Number one. You'll note that we reorganized last year, part of that rationale for the reorganization was so that we could put those challenged programs into organizations that had additional managerial experience, technical expertise, particularly in building platforms and airframe avionics and those sorts of things, which were spread around S2. The result of that was we were able to not only bring the expertise within Inc. to bear, and organizations that had an infrastructure to support major programs, to bear on those programs, but we were also able to reach out across the enterprise.
Ian noted that we reached into Nigel's organization in naval ships, along with our platform expertise in the United States, brought them to bear. A couple of teams went down and looked at that and came up with some process improvements. We added a number of staff on shipbuilding. Over the last couple of months here, we think that we are finally in a position where we're comfortable that we're getting consistent performance. You have to recognize, in particular, shipbuilding, not only is it a complex systems engineering program, but it's also a very complex construction program. A number of these ships had already started and were well along towards completion. The ability to impact performance on those ships was limited. Since that time, over the course of the year, we've delivered one ship.
We have another ship, which we believe we will sell off here in the first quarter. We're now beginning to see very consistent performance out of those organizations that indicate that the process improvements that were recommended from some of our experts over here, as well as our platform guys in the United States, are having an impact. We're seeing stable performance, and actual improvement on the class 2 and class 3 in some of these shipbuilding programs. I think Ian and Pete mentioned also that Radford, we've had stable performance throughout the year. In fact, marginally ahead of the performance that we have projected. We've added some staff to that as well by putting that into Platforms & Services organization. We think that we have our arms reasonably around that.
We have about two years on both shipbuilding and on Radford to trade out at essentially zero margin. We're hopeful that as we move towards the end of that, we can actually improve on that. Subject to any further question, that's really the answer.
Thanks, Jerry.
Thanks.
There's a whole host of questions. We'll take something on the side. Who's first?
Thank you. Christian Laughlin from Bernstein. Gents, just a couple of questions about Typhoon sales campaigns, particularly relating to potential further order from your Middle East customers. Could you provide some color on how those campaigns are progressing and what you think about timing, especially how that relates to where you need to internally take decision points around what to do with the line in 2018 and beyond?
I think I've already answered the issue on timing in terms of the line. We're not specifically going to talk through every campaign that we've got. That would be prejudicial both to our customers' national interests and our own commercial interests. As said, we have a number of active campaigns. The important thing about Typhoon was what the core customers did last year in terms of enhancing the capability, both in terms of the weapons on it, the radar on it. Our supportability of it has been exceptional. When people have been flying this, they absolutely see the quality, the capability they get. That's the important thing we're doing at this moment, where everybody who has these assets are highly stressed in their usage. That's what we're focused on at this moment in time.
We've been very clear about the issue that we're dealing with in terms of those orders and the continuity of the line.
Okay. Well, I guess just one small follow-on then. Qualitatively, would you describe any change from your sentiment or positive outlook for these campaigns since we last talked about this around Farnborough?
We have the same confidence.
Okay, great. Thanks.
Right. Just one straight behind you, then go rest are back, then you can pass it forward.
Hi, good morning. Céline Fornaro, Bank of America Merrill Lynch. My first question would be first bit on the timing of the different customer advances. Just to be clear, we're still expecting some Oman Hawks advances in 2016 or what did you say about 2017 from the Omani side?
On the Omani contract, if you remember, when we got the contract back in 2012, we had a 40% down payment. There is no further cash until we deliver aircraft in 2017, which is why, the cash that we've got as we build those aircraft and utilize those advances, you're seeing the cash being burned.
That's for Hawks and Typhoons.
Both. Yep.
Thank you. My second question would be more, looking at what happened in the shipbuilding business, what actually are the lesson learned from that as you've been hitting some commercial areas, actually, that you were exploring, so more from a group level, what did you take out of that?
Yeah. It's a great question. When we bid into these commercial ship build contracts, they were described as being very mature designs, and it was build-to-print manufacture. As we entered into the contracts, it did not turn out that those were the relationships with the customers, and some of these designs were not fit for our manufacturing processes. In fact, the metrics at which the people said that they could build, and we could not meet. In terms of that sector as an adjacency, it is not something that we'll be pursuing new build going forward. That said, where we do repair and upgrades of commercial vessels, we make extremely good margins when we put them into our yards. We've got a growing business in Australia on that as we service the oil and gas fields around there and some of their demands.
That's repair and upgrade rather than design a new build.
My last question would be on the U.S. cyber business, where the performance remains relatively weak.
Our performance matches all of the peers in this sector. We study this in some great depth in terms of the volumes. We're not losing business. We make good margin from this business. In fact, the cash performance and margin performance in this business is extremely strong, but we're matching our peers in this activity. It's not as though we got services which are not in line, but it's a highly competitive marketplace.
Sorry. When you say the margin is strong, it's above the average that you reported in the division?
If I can just add, Céline, two things on there. One particular area that we had in that business was providing analysis support in theater. That obviously has ramped down considerably. That's one of the biggest drivers as to why we've seen that reduction in sales. On the margin, Dave and the team there have done a great job in, despite the top line coming down, the margin is at the top end. I think we'd be well compared against any of our peers.
Bear in mind, what we have is analysts. It's people we're providing. It's not like our Applied Intelligence Services with software tools, hardware tools, and some people. It's a very different style of business.
Sorry, which one is most profitable?
In terms of what will be the most profitable business, Applied Intelligence when we've burned through the organic investment, absolutely.
Yeah.
At the moment, it's the U.S. one.
Yes.
Must be similar at the moment.
It's slightly higher.
Just slightly higher at the moment.
Trust me on that one.
Ravi Mediratta from Investec. Three questions. It feels like order intake in 2014 was about 0.9 times.
Yeah.
What are your expectations for order intake? Appreciate there's some campaigns ongoing in 2015. The second question is on shareholder returns. On the guidance for cash, it's GBP 400 million, and you've done GBP 500 million. Does that suggest that at the end, the share buyback will be GBP 900 million rather than GBP 1 billion?
Oh.
On that dividends, we're at 1.85 times covered. The guidance or what you said in the past is around two times. Is the new normal 1.8 to 1.9 times, or how do you define around two times?
Around two times.
A small technical question. Assuming FX rates stay where we are at the moment, how will that impact EPS? Thanks.
On orders, what you've seen is over the last 3 years, we've have a consistent level of order intake through our U.K. and U.S. businesses, which is hugely important for protecting the franchises, the intellectual property, which develops the support services and then the international sales. We've done extremely well. In the international business, it's very lumpy. If you get a major procurement of assets in any year, you get extremely high order intake. You remember in the previous year, we had all of the extensions of our support arrangements in Saudi as well for 5 years. We were never going to get that level of order intake coming through in any given year. We don't focus so much on the book-to-bill ratio.
It's about the long-term visibility that we have. If you're sat with in excess of a GBP 40 billion order book, we have very good visibility in loading through our factories and facilities, and that's what we focus on.
On your other question, Ravi, on the buyback, what we said was a program up to GBP 1 billion over 3 years. We started it in February 2013, that runs through till February of year beyond 2015. On dividends, the policy is to have the dividend covered around 2 times by underlying earnings. If you look over a 10-year, we've been as high as 2.6, and we've been as low as a 1.5. It's what your definition is, around 2 times. We're at 1.85 times. We're comfortable with the cover. On the FX rate, the guidance we've used is 155. That's already built into the guidance you've just seen within the forecast that I've put up there for the USD rate.
38 includes the benefit from-
We said marginal growth against 38, and that marginal growth would include the FX benefit. Of course, you need to remember the impact from, as I said in the script, about the pension cost, which is effectively GBP 0.01 of earnings, which is a headwind.
There's two questions at the side and then one on that side. Why don't we take one up in the middle side there? Because they've had their arms up. They've got aching arms at this moment in time.
Yes, hello. It's Ben from Deutsche Bank here.
Hello, Ben.
I'll ask three if I could.
You always ask three.
I always ask three. I'm a man of tradition. Platforms and Services UK, your guidance is circa 150 type of basis point reduction in the margin. It looks to me like that pension, assuming all of that pension effect, the GBP 35 million comes in that division. That's about a 50-basis-point margin impact there. Just wondering what drives the rest of that down and whether that's a temporary effect, and whether it should be moving upwards. The second question was just around picking up on Jamie's question on some of the caveat risks for your 2015 guidance, and just trying to understand the potential scale of those if they go against you. Is it a big issue? Should we be concerned about it, or is that just put in there as a kind of, just be aware it's a small piece around the edge?
I know it's hard to be precise, but any color you could give on that. The third question was, I know this is looking some way ahead, but just the board's view, maybe if Roger Carr wanted to speak on this, I don't know, but capital allocation plans after February 2016 when the current buyback program ends, how you think about that, and particularly M&A in the context of a defense budget world that now looks maybe a bit more certain than it did when you launched the buyback. Thank you.
Shall I have the first one?
Yep.
First one. P&S UK, the margins. You're right, Ben, GBP 35 million is about 50 basis points. We've always given that range on P&S UK of 10%-12%, and that's clearly dependent upon the mix of programs you've got going through. You'll have noticed in the guidance I talked about an increasing level coming through on Astute and Successor. The margins on those programs are less than we've got on the mature Typhoon production. You are seeing a bit of a mix change as well. There's two things going on there. Did that give you what you need?
If you look at the two, you call them, your words, caveats, the sort of two issues we've raised in the guidance or put in the guidance. Are they issues that we believe that we can manage? Of course, they're issues that we believe we can manage because we've dealt with workload issues in the U.K. environment of what you've got to do to sustain capability. We're just at that point in time of that discussion with the Australian government. As you know, with government, sometimes you need a cliff edge to have a sort of sensible discussion on activity base. We just are at that point in time. Always were going to be at that point in time because we've met all of the targets on LHD.
In terms of the timing of export programs, it's something that we've had to deal with and optimize lines to cope with the timing of those things. Are they things that destroy the fabric of this company? No. We will manage our way through them, but we just need to sort of point out that in the guidance. Roger, do you want to comment on capital allocation?
Yeah, sure. Thank you. We sort of start with first principles about the way the business considers the use of its capital. As a balance sheet, we run and want to run an efficient balance sheet. Secondly, this is clearly a shareholder value model, and when you look at the allocation of capital, you can see that the way it is used. We have commitments to shareholders with the dividend policy. We have commitments, clearly, to our pension fund, which is an ongoing commitment. The value of capital that is left, we wish to allocate in the most effective way. We do see opportunities and have seen opportunities, as you've seen in the recent presentation, of areas of growth where we have the skill set and where we can employ that skill and capability, expanding our geographic footprint or increasing the range of service we offer.
We've applied that capital, I think, sensibly and wisely in doing that this year in the Applied Intelligence. We will continue to look for those opportunities as part of the way we run the business. Balance sheet efficiency, shareholder reward, and building on the strengths of this business are the ways in which we will continue to use the capital that we have. We want to deliver the highest return from the use of capital we generate. That, of course, includes investing in the business on a long-term basis.
Okay. We got three questions on the wire. Should we take the first question from Edward Stacy?
This is where it goes all difficult.
Hello. Yeah, Ed Stacy here at DESI.
Hi, Ed.
Just one question left for me. It's about retained earnings, distributable reserves on the balance sheet, because I can never remember which bit's distributable or not. I can see, compared to last year, the retained earnings deficit at the bottom of the balance sheet is a higher negative number.
Just wondering if in order to keep doing the buyback and to keep paying dividends, you need to do any kind of engineering with the balance sheet to be allowed to continue distributing. That was all. Thank you.
I think this is one for our group business development director, don't you?
It's a good question. One of the things that moves that number is the pension deficit movements. Those pension deficit movements don't fall into distributable reserves. When we do publish our accounts, you'll be able to see a better disclosure this year in terms of what we say about distributable reserves. We have no requirement to do any financial engineering, as you described it, in terms of being able to create distributable reserves. We've got plenty of cover for both dividend and buyback.
Thank you.
Okay. We'll take one in the middle there, one gentleman just down there, and then we'll take another one off the wire.
Yes, good morning. Thank you very much. Olivier Brochet with Credit Suisse.
Hi.
I will go for, first, with the AMPV to have a sense of what the export market could be for this platform going forward. Second, going to Céline's question about Applied Intelligence investment in the business, how long will it be continuing? Please, is this just an issue for 2015, or it is going to be going further than that? Final question on Type 26 timing, when do you think we should see something going forward?
Okay, well, there's three questions there, we'll get Jerry to do AMPV. On Applied Intelligence, the issue always was at the start, as we said, is that we would organically invest, there'll be a program at point in time when the growth overtakes the organic investment. We were not going to be reducing the level of investment, it's just that the growth will overtake that. We're just about at that point of cusp at the moment. The fact that the order grew by 60% in 2013, a further 37% in 2014. Sales were just under 10% growth. We're very pleased with the SilverSky acquisition as an accelerant of that growth. We are on that accelerated plan. We're not, as you might say, then cutting back all investment, we will continue to grow that business.
Type 26, we have an ongoing contract at this stage to continue the design of that. As I said, the commercial negotiations are well advanced. I'm not worried that we will not get continuity on that program. Jerry, AMPV, how many are you going to sell around the world globally? Why don't you scale the U.S. program? Because it troubles me, just looking at the small bookings so far.
Yeah. Just to review the AMPV program, we have just started on the development. That's roughly a $300 million-$400 million development program. There is another $1 billion in low-rate initial production, as Pete alluded to, which would take us through probably the 2020, 2021 timeframe. As to the overall value of that program in the U.S., the recent budget documents show anywhere between $6 billion-$12 billion as you go through production and sustainment and support over the next decade and a half. With respect to international opportunities, I would point to the M113, which this AMPV is the replacement for. That's been around for five decades. Except for Roger and I, probably longer than almost anybody in this room.
In addition, one of the other programs that you would point to is the Bradley, which has also been around for three or four decades and is spread around the world. I think that's an indicator of the value proposition that the international customers see once a product is developed here in the U.S. I would add that we also have a portfolio of offerings in this space, including the CV90 as an armored personnel carrier out of Sweden, which a number of customers want. We're very comfortable that at the higher end of the combat vehicle world, armored combat vehicle world, that we're very well-positioned, not only in the near term, but the longer term. I would add, we have a couple of pursuits coming up in the armored amphib world with the U.S.
Navy that also have similar characteristics in that what the U.S. Navy adopts, we have customers around the world, Japan and many others, that use those same products. We have a couple of programs running with the U.S. Marines to do that as well. That's it.
Thank you very much. Thanks, Jerry. David Perry over the wire.
Yes. Hello. Good morning, gents.
Hi, David.
Two sort of small questions for Peter, then a third on the Saudi, please. Peter, just for the models, first one, can you give us the self-funded R&D for 2014, please? The second one is just tax. You've just given us in your guidance a single number, 20%. Last year, you guided to 20%-22% initially. You came in at 19%. I just wondered if there was a range of sensitivity you could give on tax. Then thirdly on Saudi and the issue around your guidance. Sorry to come back to this. The price escalation discussions took three years. It seems to me a discussion on a new order is a vastly more complex thing, plus any decision to lower rates is not only a BAE or a U.K. decision, it's a Pan-European decision.
It seems a Complicated decision and an issue that might take several years to resolve. I accept your comment about not prejudicing negotiations, but can you give us any color about what the European governments are thinking right now about rates, please?
I don't agree that it's a more complex decision at all. I think the VOP discussion was the most complex contractual discussion that both countries have either entered into because of the timing that it covered. Actually, it didn't stop the delivery of aircraft. I don't agree with that analysis at all. In terms of the European, yeah, we'd have to have a discussion, but it's something that's been dealt with many times in the past if you have to do it. We're very good at doing it, by the way, as you've seen from the results that we made from that business.
David, on the R&D, total R&D, as you know, we have a mix between customer-funded and company-funded. Total R&D this year was just over GBP 1.3 billion. We saw a significant shift in terms of E-Scan radar funding, which we had been funding previously, clearly is now being funded by the customer. Our self-funded R&D in 2014 was around GBP 140 million. On the tax, the biggest swinger for us on tax is the geographic mix of profits. In the U.K., the corporation tax rate now is down at 20%. In the U.S., we're still up 35% plus. What you saw in 2014, where we took those $122 million of charges on the commercial ship build programs, of course, what you actually get is 38% tax relief on those. You see the tax rate sort of fell compared to our guidance.
We're not planning on any further losses in 2015, therefore you don't get that relief in 2015, the tax rate moves back up. We've guided to 20%, but it is subject to geographic mix of profits.
Okay. Just a quick follow-up on the R&D. That was GBP 31 million lower year-on-year. Any guidance on 2015?
No, I mean, 2015 will be about the same levels. What we've seen is, as I mentioned, the E-Scan radar program is now being funded by the customer. We've also got further weapons integration funding coming from the customer in terms of giving Typhoon additional capability as well. The way we look at it, as we've always discussed, you've got to look at the aggregate.
What's the percentage when you look at the aggregate?
The self-funded
8%
8% of group's revenues?
Yeah.
Yeah. Okay, on the side there. We'll take this one further on the wire and then in the middle there.
Thanks. This is Nick Cunningham from Agency Partners. I've got three rather nerdy financial questions, I'm afraid. Following up on tax rate, the 19% was really quite surprisingly low, even 20 for 2015 is still at the low end of, if you like, a weighted average group tax rate. It sort of goes a bit against the zeitgeist of governments trying to reduce deficit. When we look further forward, should we think about the tax rate moving up, and what's the sort of natural rate of tax for BAE on a forward basis? Shall I ask the others at the same time?
Yeah.
Yeah.
Thanks. Cost of debt should be falling as you retire your more expensive debt and get cheaper debt in. Again, how should we think going forward over the medium term about what your average interest rate costs will do? Finally, a bit of a hobby horse, but to what degree can you mitigate the impact of lower discount rates and pushing up your pension costs by recovery from customers? On what sort of timescale, if at all possible?
Right. Okay.
I think they're all for you, Peter.
I think they are, yeah. I was waiting for the one on pension, but oh well. Natural tax rate, interesting question. We clearly operate in a number of tax domains. The U.K. has now got the most competitive tax rate in the G20, that's come down again to 20%. More instinctively, you might think the tax rate will be going up, it's come down. U.S. is around the 35% mark. It's really where are we going to earn the profits? 20% is where we are today. Sorry, where we're guided to 2015. I wouldn't anticipate anything in 2016. If you're looking for a long-term rate, that's what you believe government policy is going to be on corporation tax. I'm not going to make a second call on that one.
In terms of cost of debt, you're right, we are and have been locking in lower rates on the financing we've been taking out in the last two or three issues that we've made. One of the things that does go through the interest rate line is the Net Present Value charges, which is driven by a WACC. We took a GBP 25 million charge in 2014 as a result of a lower WACC rate. That tends to be almost the biggest driver of in-year or year-over-year interest rates, or reported interest rather than underlying interest. The third issue on the lower discount rates, well, clearly, there's nothing we can do about where the bond yields might be. We're strong believers in equities in terms of where we're investing on pensions.
As I said, we've got nearly 50% of our assets still in equities, and 2014 saw a stonking return on the assets, more than double what was built into our planning valuations. We mitigate through where we invest. We've entered into longevity transactions to pass longevity risk into the markets. We're looking at more of that. We do whatever we can. We can't control the bond yields.
The reason why these guys are smiling is because Philip took a bet that Peter couldn't get stonking into his return and he'd give GBP 500 to charity for doing so.
I'll give you half.
Right. We've got one on the phone. Tristan.
Yes, good morning, gentlemen. Thank you for taking my question. It's Tristan from Exane. I have two question, one on Saudi Arabia, one on the F-16 contract in Korea. On Saudi Arabia, actually, I'm interested in the non-Typhoon OE business. We have normalization of volumes in 2014 after an exceptional 2013. How would you define today the quality of the relationship between U.K. and Saudi Arabia? How do you think that the changing geopolitics there are offering a good environment for volume growth for BAE going forward? Second, on the F-16 in Korea, can you tell us, is the story here totally over for BAE? If the two big retrofit programs in Taiwan and Korea are going to Lockheed Martin, is there any room left for BAE on the F-16 upgrade market? Thank you.
Two questions there. Well, I'll answer both of them. We operate in the Kingdom of Saudi Arabia under two relationships. One is the government-to-government relationship between the U.K. government and the Kingdom of Saudi Arabia, which is extremely strong, and we provide a whole host of services across a series of platforms, and a very good relationship. We're very confident that that will continue as a good relationship. We also, because as you know, we have 40% of our business in the U.S., produce Foreign Military Sales from the U.S. government through to the Kingdom of Saudi Arabia, and we also do a lot of land equipment there.
Through our Turkish joint venture, we also support that land equipment there, and there are a number of campaigns there where they need to replace and upgrade Bradleys, for instance, and other M109s, things like that, where it's quite an active country for us as well. We address it between those two governments. The relationships we foresee are very strong between the two of them. In terms of F-16 upgrades, where the program was terminated for the convenience of both the countries involved, it was a market takeaway for us. It's not a core franchise. We have lots of other equipments on F-16s, which we continue to supply. In fact, we just booked an order, which was announced this week, which is to continue to supply equipment and ground support equipment for Foreign Military Sales of F-16s.
In terms of the upgrade program, we had a go at it didn't work out, we've moved on. All the relationships that we had with Lockheed and all the other customers are protected, and we're still booking business.
Thank you. If I may just add a follow-up on Saudi Arabia. Is it fair to assume, according to your comment, that there might be a shift in your activity to Saudi from the U.K.-driven one to the U.S.-driven one as a consequence of the strengthening of the geopolitical relationship between the U.S. and Saudi Arabia? If I understood you correctly, is it fair to say that there shouldn't be any impact in the transition in the management of the kingdom and the recent change in king at Saudi Arabia and the evolution of fairly complex geopolitics in the area?
In terms of the succession to the new king, we do not believe it will change the two pivotal relationships that exist in the Kingdom of Saudi Arabia.
You don't believe either in a shift from the U.K. to the U.S. in terms of the.
You're making an assumption which is wrong. Saudi Arabia does not put all of its requirements in one country. It has a mix of equipment. If you look at the structure of its air force, it's a mix between the U.S. and the U.K. We benefit from both those programs. The F-15s that get supplied to Saudi, which have a brand-new electronic warfare kit on it, is our electronic warfare supplied through Boeing. Those are the two important relationships. They do not defer to just one relationship in their defense requirements.
Okay, thank you.
Okay. Conor.
Sorry, Andy Chambers from Cantos. In 2010, obviously, we had the last Strategic Defence Review, and your annual guidance changed quite significantly, despite the fact we knew the makeup of the incoming government pretty much was going to be conservative. We're clearly in a much less certain political environment here going into this election this year. You made the comment saying you felt relatively robust on your U.K. programs business. Do you see anything being at significant risk? Have you taken that into account in your guidance for the current year? Maybe you could just quantify what changes you might see between political parties.
I think that, as is said, there will be some pressure on defense spending, as there's going to be all elements of spending. I think the one fundamental difference is that when the last Strategic Defence Review was undertaken, there wasn't a balanced budget. The thing that Philip Hammond and Bernard Gray and the people was getting a balance between those programs that we committed and the available budget. They do now have a balanced budget against those programs. We both have clarity in terms of the programs and clarity that they've got the funding. Whereas I think you know is that at that time, they were just moving things backwards and forward, and we had all the noise about the Carrier program, about the rescheduling and the capability changes, which were just driving their budgets.
That's why we feel that there's more stability, because we know there is a balanced budget, and we know that they're not releasing new programs until they've defined that they have the availability within the budget. That's why the position is more stable. You then have to make the judgment as to, in this political environment, with all that's going on in the world, a new government coming in, and they're really going to decide to take some of the pivotal capability out when you've got all of the service chiefs saying, "We've been squeezed to the pips." That's the strength of the order book as well. Yeah. As Roger says, the strength of the order book, the GBP 40 billion that we have, as you know, they have to terminate for their convenience on that activity. I wonder what your advice would have been.
Well, when Scotland gets independence, whenever, you can have as many Typhoons as you want, Sandy. Oh. Okay. Any other questions? Okay. Thank you very much, everyone