PRESENTATION OF THE ARMSCOR ANNUAL REPORTTO THE PORTFOLIO COMMITTEE ON DEFENCE AND MILITARY

VETERANS

MR SIPHO MKWANAZI – ACTING CEO

DATE: 10th OCTOBER 2013

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

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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 Executive Authority of Armscor

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Introduction (Cont.)Within its mandate, Armscor’s objectives are to meet the following requirements of the DoD:

defence matériel needs technology development research & development analysis test & evaluation

effectively, efficiently and economically

Adhere to accepted principles of corporate governance and lawfulness

Highlights:

Clean Audit

Achieved level 3 BBBEE rating from level 7

Dockyard obtained ISO 9001: 2008 accreditation

Achieved a surplus of R84.6m (2012/13) against R70.2m in 2011/12

51% improvement on results of Corporate Social Investment (CSI) Flagship programme – Learner Enhancement Programme

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MARITIME SYSTEMS

Following the delivery and commissioning of three submarines, engineering changes were made to meet:

operational

safety

support related requirements

These were initially omitted due to financial constraints

Changes are almost completed, awaiting

Department of Public Works to complete escape training facility by end Sept 2013

Availability of submarine to carry out final on-board qualification by April 2013

Performance of Operational Functions - Acquisition

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AIRBORNE SYSTEMS

LUH - All 30 Helicopters have been delivered to SAAF & updated with latest production standards

Gripen - 9 x dual seat aircraft -17 x single seat aircraft delivered to SAAF

Aircrafts in full functionality, electronic warfare and datalink capability completed in Sept 2013

Integration of the A-Darter Missile was completed and delivered in November 2012

Hawk – Operational flight trainer has been upgraded to the same standard as the fleet

The fleet exceeded 10 000 flying training hours in October 2012

Rooivalk - Rooivalk fleet was upgraded to the MK1 deployment baseline

A depot level support was also established

Performance of Operational Functions - Acquisition (Cont.)

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39 Oryx Medium Transport Helicopter (MTH’s)

Development of avionics upgrade was completed

The modification on the first four helicopters is progressing well

A-Darter Missile development

Jointly funded with the Brazilian Air Force

Programme is progressing well despite some technical delays experienced

Seeker head has reached an acceptable level of technology maturity

Performance of Operational Functions - Acquisition (Cont.)

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LANDWARD SYSTEMS

Ground Based Air Defence System

New Local Warning Segment of the Ground Based Air Defence System has been completed

Phase two of the GBADS programme which entails upgrading of fire-control system of the 35 mm anti – aircraft guns has commenced

New Generation Infantry Combat Vehicle

Locally developed 30mm Camgun is undergoing final environmental test and evaluation

Advanced development was completed in December 2012 and testing commenced in February 2013

Development of an insensitive munition-compliant missile will be further explored in the next two years

Performance of Operational Functions - Acquisition (Cont.)

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Performance of Operational Functions - Research & Development (Cont.)

TEST & EVALUATION FACILITIES aims to maintain the capability

Gerotek

28% funded from DoD transfer payment

Relying on commercial business to fund shortfall

Alkantpan

33% funded from DoD transfer payment

67% operations funded from local and foreign business

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Performance of Operational Functions - Research & Development (Cont.)

DEFENCE SCIENCE AND TECHNOLOGY INSTITUTE

Armour Development

DoD transfer payment funds basic capability – 95%

Relying on commercial business to fund shortfall

Defence Decision Support Institute (DDSI)

100% funded from DoD transfer payment

Ergonomics Technologies (Ergotech)

95% funded from DoD transfer payment

5% funded from commercial contracts

Flamengro

75% funded from DoD transfer payment

Funded 25% of operations from local business contracts

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Performance of Operational Functions - Research & Development (Cont.)

DEFENCE SCIENCE AND TECHNOLOGY INSTITUTES

Hazmat

100% of income generated from local commercial contract

Institute of Maritime Technology (IMT)

88% funded from DoD transfer payment

12% from local commercial work

Protechnik

98% funded from DoD transfer payment

2% from commercial contracts

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Performance of Operational Functions - Dockyard

Obtained ISO 9001:2008 accreditation

Current financial year focus is on SHE matters

Funding based on a fixed transfer payment to deliver predetermined capabilities

Current capacity insufficient to deliver full requirements

Received R30.6m additional funding

Capacity rejuvenation

(skilled labour & equipment)

Insufficient & sustainable funding remains

Re-modernisation study completed in July 2013

Despite challenges, overall achievement 92%

versus 90% target

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Performance of Operational Functions - Dockyard(Cont.)

Planned and unplanned maintenance projects

Frigates:

SAS Spioenkop experience challenges, eventually completed in March 2013

Patrol Vessels:

SAS ISSAC Dyoba started maintenance in March 2013 for collision damage repairs which was successfully completed

SAS Umhloti, unscheduled maintenance and repairs completed on time

SAS Umzimkulu, successfully completed unplanned maintenance

Tugs:

Tug Indlovu

Tug Demist All work successfully completed on time

Tug Tshukudu

Tug Umalusi , unscheduled maintenance planned for completion in April 2013

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Performance of Operational Functions - Dockyard(Cont.)

Planned and unplanned maintenance projects (cont.)

Submarines:

SAS Manthatisi OEM executing refit at Dockyard, to be completed in July 2014

SAS Charlotte Maxeke completed within revised date due to unforeseen damage

SAS Queen Mojaji, activities completed within planned schedule

Independent Vessels:

SAS Protea completed in Feb 2013 vs. planned October 2012 due to unanticipated damage of valves to be removed, repaired and replaced

SAS Drankensberg completed within revised date

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Human Resources

Improvement in overall transformation, esp. from mid management to top management

Improvement in employee satisfaction survey – 66.5% (2012/13) from 62.9% (2011/12)

90 young engineers and scientist were identified for succession planning

Skills Development Programmes Armscor Senior Management Leadership Programme Functional training Dockyard training centre Adult Basic Education and Training (ABET) Talent Development Programme

CSI Flagship programme – “Learner Enhancement Programme” in support of Maths and

Science in schools resulted to an average of 51% improvement in these subjects

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Corporate Performance vs. Goals

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

Achieved goals except for System support: Acquisition and Procurement (operational funds)

Objective 4: Management of Defence Industrial Participation: •Execution of DIP obligationsObjective not achieved

OBJECTIVES MEASURING

FUNCTIONS IN TERMS OF SLA

Objective 5 : Management & Execution of Defence Technology, Test and Evaluation requirements for DOD:•Execution by Armscor Defence Institutes of contractual milestones/ deliveriesObjective achieved

Objective 6 : DOCKYARD•Management and performance against Dockyard Mandate Objective achieved

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Corporate Performance vs. Objectives (Cont.)

Strategic objective 1 – Funding & GrowthMeasure the expenditure compliance and effort to secure sufficient funding to sustain the organisationObjective not achieved

Strategic objective 2 – People & CapabilitiesMeasuring Armscor’s ability to attract and retain employees

through a positive organizational environmentx Objective partly achieved

ACHIEVEMENT OF STRATEGIC

OBJECTIVES

Strategic objective 3 – Organisational Effectiveness & EfficienciesMeasure the operational efficiency of Armscorx Objective partly achieved

Strategic objective 4 – Stakeholder RelationshipsMeasure the relationships with stakeholders & Armscor’s compliance to good governancex Objective partly achieved

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Financial Overview

Armscor received an unqualified Audit Report

Net asset value (Shareholder’s interest) increased by 187% to R1 792m million due to revaluation of land and buildings

Profit of R84.6m realised against R70.2m in 2012

Total revenue increased by 1% to R308.2 million

Personnel costs remains main contributor at 74.4% of total operating cost

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Financial Position as at 31 March 2013Assets

2012 2013 2013 2012

Rm Rm Rm Rm

ASSETS

NON-CURRENT ASSETS

48,8 938,3 Property, plant and equipment 1 322,6 236,9

- - Intangible assets 0,3 0,4

110,4 109,4 Post retirement medical benefit asset 134,0 137,7

159,2 1 047,7 1 456,9 375,0

CURRENT ASSETS

- 0,1 Non current assets held for disposal 0,2 -

2,5 2,4 Inventories 11,7 7,6

159,3 101,4 Trade and other receivables 127,9 184,1

442,6 689,8 Cash and short term deposits 685,7 440,6

180,0 40,9 Loans to subsidiaries - -

784,4 834,6 825,5 632,3

943,6 1 882,3 TOTAL ASSETS 2 282,4 1 007,3

CORPORATION GROUP

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Financial Position as at 31 March 2013Equity and Liabilities

2012 2013 2013 2012

Rm Rm Rm Rm

EQUITY AND LIABILITIES

CAPITAL AND RESERVES

75,0 75,0 Ordinary share capital 75,0 75,0

448,0 1 271,7 Non-distributable reserves 1 717,3 549,0

523,0 1 346,7 ORDINARY SHAREHOLDERS INTEREST 1 792,3 624,0

LIABILITIES

NON-CURRENT LIABILITIES

19,0 20,4 Post retirement medical benefit liability 20,4 19,0

9,5 86,0 Deferred income 86,0 9,5

28,5 106,4 106,4 28,5

CURRENT LIABILITIES

112,7 154,4 Loans from subsidiaries - -

151,9 169,0 Trade and other payables 233,3 203,1

67,9 69,0 Provisions 93,5 92,1

59,6 36,8 Deferred income 56,9 59,6

392,1 429,2 383,7 354,8

420,6 535,6 TOTAL LIABILITIES 490,1 383,3

943,6 1 882,3 TOTAL EQUITY AND LIABILITIES 2 282,4 1 007,3

CORPORATION GROUP

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Statements of Comprehensive Income for the year

ended 31 March 2013

2012 2013 NOTES 2013 2012

Rm Rm Rm Rm

24,2 19,9 Revenue 13 308,2 305,2

(10,4) (10,3) Cost of sales 14 (119,7) (111,9)

13,8 9,6 GROSS PROFIT 15 188,5 193,3

56,8 65,9 Other operating revenue 16 67,7 70,5

659,9 748,1Allocation for operating expenditure (Government grants)

17 748,1 659,9

(725,1) (843,6) Operating expenses 18 (949,8) (879,7)

5,4 (20,0) OPERATING PROFIT/ (LOSS) 19 54,5 44,0

31,5 30,1 Investment revenue 20 30,1 31,6

(10,1) (5,9) Finance costs 21 - (5,4)

26,8 4,2 PROFIT FOR THE YEAR 84,6 70,2

OTHER COMPREHENSIVE INCOME

- 819,5 Gains on property revaluation 2 1 083,7 -

26,8 823,7 TOTAL COMPREHENSIVE INCOME 22 1 168,3 70,2

CORPORATION GROUP

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Armscor Challenges

Challenge Plan to overcome Insufficient Funding New funding model developed, such as

capability maintenance fee, royalties from IP and investment income

Exploitation of IP for dual use technologies Pursue acquisition opportunities for other

government department and SADC / AU countries

Resourcing of the organisation Grow human capability in line with business growth opportunities and demand Training and Skills Development Skills retention Succession planning

Implementation of Employment Equity Plan Executing of employee satisfaction survey

results

Operational inefficiencies and effectiveness Implementation of IT strategy Re-modernisation study of Dockyard

Local Industry Support Provide additional marketing support through pursuing government to government collaboration Establish strategic partnerships with international

technology know-how partners Local and international exhibitions Implementation of BEE and DIP

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Questions & Answers

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