PRESENTATION OF THE ARMSCOR ANNUAL REPORT TO

THE PORTFOLIO COMMITTEE ON DEFENCE AND MILITARY

VETERANS Presented by: Mr S Mkwanazi

Date : 16 October 2014

1

PRESENTATION SCOPE

1. Introduction

2. Performance of Operational Functions

Acquisition

Research and Development

Dockyard

3. Human Resources

4. Corporate Performance versus Goals / Objectives

5. Financial Performance

6. Challenges

7. Questions & Answers

2

INTRODUCTION

Armaments Corporation of South Africa SOC Limited (Armscor)

established in terms of the Armaments Corporation of South Africa,

Limited Act (Act 51 of 2003)

State – owned entity as contemplated in the Companies Act, 2008

Listed as a Schedule 2 Public Entity in terms of the PFMA

Further regulated by the Regulations issued in the terms of the PFMA

and the Companies Act

The Minister responsible for Armscor is the Minister of Defence &

Military Veterans (MOD&MV)

The Board of Directors is the Accounting Authority of Armscor

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INTRODUCTION Within its mandate, Armscor’s objectives are to meet the following requirements

of the DoD:

defence matériel needs

technology development

research & development

test & evaluation

effectively, efficiently and economically

Adhere to accepted principles of corporate governance and lawfulness

Highlights:

Clean audit

Retained level 3 BBBEE rating

Exceed all acquisition and R & D performance goals in terms of SLA

Best result in 5 years on financial performance of acquisition projects

Dockyard obtained ISO 9001 certificate

Contracted Denel for Phase 2 of the Infantry Combat Vehicle programme

4

PERFORMANCE OF OPERATIONAL FUNCTIONS

- ACQUISITION -

MARITIME SYSTEMS

Planned engineering changes on Class 209 Mod 1400

Submarines completed and the Escape Training Facility

successfully commissioned in July 2014

All deliverables on Meko A-200 SAN Frigates are completed

including the firing trials

AIRBORNE SYSTEMS

Light Utility Helicopter (LUH) and Gripen projects have been

completed and delivered to SAAF

Lead-In Fighter Trainer (LIFT), The delivery of the last

elements of local maintenance capability commenced and will

be completed in 2014

Oryx, communication & navigation systems on 10 aircrafts were

successfully upgraded and delivered to SAAF, 29 will be

delivered in February 2016

A-Darter Missile, flight test were successfully conducted. 3

further flights tests are to take place in 2014/15 to successfully

complete development phase, whereafter production will

commence

5

LANDWARD SYSTEMS

Ground Based Air Defence System

Phase two of the GBADS programme which entails upgrading

of fire-control system of the 35 mm anti – aircraft guns is

progressing well

Milestones achieved:

- Contracted Denel to develop Gun Fire Control Post &

- Rheinmetall Air Defence to supply & integrate fire control

systems

New Generation Infantry Combat Vehicle

Industrialisation & production contract of 238 vehicles was

placed on Denel Land Systems

Restructured the program to maximize local production: 21

vehicles sourced from Patria Land, 217 will be produced locally

Transfer of technology by Patria is underway to ensure

successful localisation & production

PERFORMANCE OF OPERATIONAL FUNCTIONS

- ACQUISITION - (Cont.)

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PERFORMANCE OF OPERATIONAL FUNCTIONS

- ACQUISITION - (Cont.)

COMMON WEAPON SYSTEMS

New Generation Digital Tactical Communication System

Development of all communication elements completed and

currently busy with industrialisation

System will be the first in the world to provide complete

tactical interoperability between all elements of the

battlefield

Industrialisation of major sub-systems will be completed

during 2014/15

Production will also commence during 2014/15

DEFENCE MATÈRIEL DISPOSAL

Disposal of redundant and obsolete defence materiel

stock on behalf of DoD

Disposed of R14.7m worth of military stock through the sale

of vehicles and related spare parts.

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PERFORMANCE OF OPERATIONAL FUNCTIONS

- Research & Development -

TECHNOLOGY MANAGEMENT Management of technology, IP & technology commercialisation

Technology budget allocation R573 million :Armscor R&D

institutes–14%, CSIR –26%, Universities–0.6% & SADI –59%

Major Technology Programmes:

Aerospace - Development of guided weapons technology. The

objective was to develop All Weather Air Defence Missile

Maritime (IMT) - successfully tested underwater glider vehicle for

mine detection & underwater security operations

- Ultrasonic Broken Rail Detector installation

projects progressing well

Support (Ergotech) - successfully modelled muscle contraction for

soldiers protection criteria purposes

- hearing protectors in a military noisy

environment were successfully tested &

available for use by SANDF

Electronics - Dual Band Radar (DBRXL) - demonstrator was

successfully utilised to detect and track a target drone at the

Umkhonto Missile Firing in October 2013.

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PERFORMANCE OF OPERATIONAL FUNCTIONS

- Research & Development – (Cont.)

TEST & EVALUATION FACILITIES

Gerotek - Established new test facilities & capabilities: > upgrade of National Antenna Test Range

> vehicle performance measurement equipment

> walk-in climate chambers

- 62% income generated through commercial

activities. The DoD transfer payment account for

30% of income. The SA military work account for

8%

Alkantpan - Purchased high precision GPS system to accurately measure impact points & location

- 51% income generated from foreign clients

31% from local commercial clients &

18% from DoD

9

PERFORMANCE OF OPERATIONAL FUNCTIONS

- Research & Development – (Cont.)

OPERATIONAL & SCIENTIFIC RESEARCH Defence Decision Support Institute (DDSI)

Assisted Defence Review Committee with cost estimator model

Supported SA Army & Joint Operations with doctrine

development

Armour Development

The programme to provide body armour to SANDF to improve

weight of armour packages is progressing well

Flamengro

Developed and upgraded integrated ballistic workbench for

simulation

Technology for extended range munition has reached maturity

and test validation has commenced

Hazmat

Derived 81% of income from commercial business

Protechnik

successfully completed planned investigations in protection,

synthesis, verification, decontamination, detection of chemical

warfare (CW) agents and toxic industrial chemicals, and

conducted biomedical and related public health research

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PERFORMANCE OF OPERATIONAL FUNCTIONS

- Dockyard -

Planned and unplanned maintenance projects

Frigates:

SAS MENDI The project started in May 2013 and was

supposed to be completed June 2013. The project had

to be re-prioritised due to funding challenges

Patrol Vessels:

SAS ISSAC DYOBA project started in March 14, was

completed in June 14.

SAS UMHLOTI, all tasks were completed on time

SAS UMZIMKULU, successfully completed

maintenance

Tugs:

TUG INDLOVU - planned maintenance completed on time

TUG UMALUSI, repairs completed on time ; June 14

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Planned and unplanned maintenance projects (cont.)

Submarines:

SAS MANTHATISI, additional scope of work identified,

completion date revised to Oct 2014 subject to

successful sea acceptance trial

SAS QUEEN MODJADJI, revised completion date from

June 14 is Nov 14, awaiting ordered parts

Independent Vessels:

SAS DRANKENSBERG refit commenced on 5 Aug 13,

planned completion date Sept 14, currently

experiencing fund challenges. Expected completion

date is Jan 15

PERFORMANCE OF OPERATIONAL FUNCTIONS

- Dockyard – (Cont.)

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Transformation goal set to achieve employment of black employees was exceeded; target 904

vs achieved 964

Improvement in employee satisfaction survey – from 62% (2010) to 64.5% (2014)

85 young engineers and scientists were identified for succession planning

Skills Development Programmes

Armscor Senior Management Leadership Programme

International Training Interventions

Dockyard Training Centre - MOU with Dept of Economic Dev & Tourism

- 54 Interns placed in electrical, mechanical & construction

- 36 SAN students received practical training

Adult Basic Education and Training (ABET)

Talent Development Programme

Bursaries - 31 undergraduate students assisted with bursaries

HUMAN RESOURCES

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CORPORATE PERFORMANCE VS. GOALS

OBJECTIVES

MEASURING

FUNCTIONS IN

TERMS OF SLA

Objectives 1 – 3 : Measure effectiveness of acquisition function in terms of:

• Contracts to be placed: commitment of funds

• Achieved cash flow against formally planned cash flow i.t.o. of

commitments

Objectives exceeded

Objective 4: Schedule placement:

• Measure the average time taken from receipt of requirement to

placement of contract

Objective exceeded (achieved 62.5 days vs. 90 days)

Objective 5: Management of Defence Industrial Participation:

• Execution of DIP obligations

Objective exceeded (achieved R196m vs. R190m)

Objective 6 : Management & Execution of Defence Technology, Test and

Evaluation requirements for DOD:

• Execution by Armscor Defence Institutes of contractual milestones/

deliveries

Objective exceeded (achieved 99.8% vs. 90%)

Objective 7 : Dockyard:

• Management and performance against Dockyard Mandate

Objectives achieved except for one partially achieved project

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STRATEGIC OBJECTIVES

ACHIEVEMENT OF

STRATEGIC

OBJECTIVES

Strategic objective 1 – Funding & Growth

Measure expenditure compliance & efforts to secure sufficient

funding to sustain the organisation

All objectives achieved - some later than planned

Strategic objective 2 – People & Capabilities

Measuring ability to attract and retain employees through a

positive organisational environment

Objectives achieved with one partially achieved & some later

than planned

Strategic objective 3 – Organisational effectiveness and

efficiencies

Measure effectiveness and efficiencies of Armscor

Objectives achieved except one & some later than planned

Strategic objective 4 – Stakeholder relationships

Measurement of stakeholder relationships & compliance to good

governance.

Objectives achieved with one partially achieved

15

FINANCIAL PERFORMANCE

FACTORS THAT INFLUENCED FINANCIAL RESULTS

Armscor Defence Institutes (Pty) Ltd was fully incorporated as the Research and

Development Department of Armscor SOC Ltd with effect from 1 April 2013.

Vacant land previously part of property, plant and machinery was reclassified to

investment property in line with the Group’s accounting policy.

The Medical Benefit Fund (separate entity) was fully consolidated compared to

previous periods where only the surplus and net plan assets were disclosed -

Armscor is still engaged in a process to minimize the risk and to reduce the

liability related to its post-retirement medical benefit obligation.

Increase in allocation to fund operating expenditure as a result of additional

services rendered.

Depreciation of property, plant and equipment increased in line with the higher

values of land and buildings that were revalued in the previous financial year.

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FINANCIAL PERFORMANCE (Cont.)

MAIN IMPACT OF FINANCIAL RESULTS

Shareholders equity increased with 5.7%

Total revenue increased with 16.4%

Expenditure increased with 18.5% due to:

increased depreciation

higher personnel costs

Net income before gain on property revaluation decreased with 6% to R103,3m

– if contribution from Medical Benefit Fund is excluded the net result is R76.9m

(2013 – R85.4m)

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Financial Position as at 31 March 2014

Assets

Restated Restated

2013 2014 2014 2013

Rm Rm Rm Rm

ASSETS

NON-CURRENT ASSETS

938.3 1,230.8 Property, plant and equipment 1,230.8 1,322.6

- 110.0 Investment property 110.0 -

- 0.1 Intangible assets 0.1 0.3

0.1 0.1 Investment in a joint venture - 0.9

607.5 712.5 Financial instruments 712.5 607.5

1,545.9 2,053.5 2,053.4 1,931.3

CURRENT ASSETS

0.1 0.2 Non current assets held for disposal 0.2 0.2

2.4 29.3 Inventories 29.3 11.7

85.4 120.7 Trade and other receivables 120.7 111.9

693.5 699.0 Cash and short term deposits 699.0 689.3

40.9 - Loans to subsidiaries - -

822.3 849.2 849.2 813.1

2,368.2 2,902.7 TOTAL ASSETS 2,902.6 2,744.4

GROUPCORPORATION

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Statement of Comprehensive Income for

the year ended 31 March 2014

Restated Restated2013 2014 2014 2013

Rm Rm Rm Rm

19.9 360.0 Revenue 360.0 308.2

(10.3) (144.0) Cost of sales (144.0) (119.7)

9.6 216.0 GROSS PROFIT 216.0 188.5

159.7 182.6 Other operating revenue 182.6 158.6

748.1 870.7Allocation for operating expenditure

(Government grants)870.7 748.1

(840.0) (1,193.2) Operating expenses (1,193.3) (1,007.3)

77.4 76.1 OPERATING PROFIT 76.0 87.9

41.1 48.8 Investment revenue 48.8 41.1

(5.9) - Finance costs - -

(61.1) 445.6 Loan written off gain/(loss) - -

- - Share of (loss)/profit in joint venture (0.9) 3.8

51.5 570.5 PROFIT BEFORE TAX 123.9 132.8

(22.9) (20.6) Taxation (20.6) (22.9)

28.6 549.9 PROFIT AFTER TAX 103.3 109.9

OTHER COMPREHENSIVE INCOME

819.5 - Gains on property revaluation - 1,083.7

848.1 549.9 TOTAL COMPREHENSIVE INCOME 103.3 1,193.6

GROUPCORPORATION

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Statement of Financial Position as at

31 March 2014

2014 2013

Rm Rm

STATEMENT OF FINANCIAL POSITION

NET ASSETS

Property, plant and equipment* 1,230.8 1,322.6

Investment property 110.0 -

Intangible assets 0.1 0.3

Other non current financial assets - 0.9

Other non current financial liabilities (166.6) (108.7)

Net current assets 534.3 442.4

Financial instruments 712.5 607.5

Post-retirement medical benefit liability (513.1) (460.3)

1,908.0 1,804.7

*Property, plant and equipment was revalued in 2013

EQUITY AND LIABILITIES

Ordinary shareholders' interest 1,908.0 1,804.7

GROUP

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CHALLENGES

Internal Challenges External Challenges

Insufficient Funding:

• Financing model

the Corporation (Acquisition & R&D)

Dockyard

Industry Capability Sustainability:

• Retention of capability & capacity

• Market expansion opportunities i.e. SADC,

AU & BRICS International strategic

partnerships

• Ensure compliance to Government

strategic initiatives i.e. BEE, job creation,

skills development

Outdated IT & Infrastructure:

• Renewal of application systems

Stakeholder Relationship: Support and guidance

• Strengthen relations with key stakeholders,

i.e. MoD, DoD, PCDMV, the Dti, SADI

Human Resources:

• Ageing organisation

Skills development

Skills retention

Defence Review:

• Role of Armscor & funding

• Capacitating and competencies

• Process and legal compliance alignment

Armscor brand positioning :

• Improve marketing efforts to reposition

Armscor brand

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THANK YOU

-

QUESTIONS

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