BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
Telephone +44 (0)1252 373232
Registered in England and Wales No. 1470151
Website details
www.baesystems.com
Annual Report 2010
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BAE Systems continues to build on its position as
one of the world’s largest and most geographically
diverse defence and security companies, focused
on delivering sustainable growth in shareholder
value through its commitment to Total Performance.
p20 For more information on the Group’s key home markets
Total Performance
across our markets
For more information visit our website: www.baesystems.com
How we report corporate responsibility (CR):
This report includes a summary of the Group’s corporate
responsibility activities during the 2010 calendar year.
It focuses on our strategy, and performance in the key
areas of business conduct, safety, diversity and inclusion,
environment and community. The report also includes
case studies from our businesses around the world that
demonstrate our approach in practice.
In this report:
– Summary of our 2010 corporate responsibility performance
– Update on our approach to business conduct
On our website:
– Our approach to CR
– Managing CR
– Reporting and assurance
– Safety stories from our businesses
– Education and early careers
– Training and development
– Support for local communities
www.baesystems.com/corporateresponsibility/
Cover image:
Cyber image sourced from istock.com
BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
Telephone +44 (0)1252 373232
Registered in England and Wales No. 1470151
Website details
www.baesystems.com
Annual Report 2010
B
A
E
S
y
s
t
e
m
s
p
l
c
A
n
n
u
a
l
R
e
p
o
r
t
2
0
1
0
BAE Systems continues to build on its position as
one of the world’s largest and most geographically
diverse defence and security companies, focused
on delivering sustainable growth in shareholder
value through its commitment to Total Performance.
p20 For more information on the Group’s key home markets
Total Performance
across our markets
For more information visit our website: www.baesystems.com
How we report corporate responsibility (CR):
This report includes a summary of the Group’s corporate
responsibility activities during the 2010 calendar year.
It focuses on our strategy, and performance in the key
areas of business conduct, safety, diversity and inclusion,
environment and community. The report also includes
case studies from our businesses around the world that
demonstrate our approach in practice.
In this report:
– Summary of our 2010 corporate responsibility performance
– Update on our approach to business conduct
On our website:
– Our approach to CR
– Managing CR
– Reporting and assurance
– Safety stories from our businesses
– Education and early careers
– Training and development
– Support for local communities
www.baesystems.com/corporateresponsibility/
Cover image:
Cyber image sourced from istock.com
Contents
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1. Overview
2010 performance summary and outlook
BAE Systems’ business model
Chairman’s letter
2. Strategy
Chief Executive’s review
Strategy
Key Performance Indicators (KPIs)
Key home markets
Resources
3. Group performance
Financial performance
Corporate responsibility
Risk management
Principal risks
4. Segmental performance
Operating group overview
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
5. Governance
Board of directors
Corporate governance
Remuneration report
Other statutory and regulatory information
Statement of directors’ responsibilities
6. Financial statements
Independent auditor’s report
Consolidated financial statements
Notes to the Group accounts
Company balance sheet
Notes to the Company accounts
Five-year summary
Shareholder information
Glossary
2
4
6
8
14
16
20
32
36
45
56
58
64
66
68
70
72
74
76
78
96
120
123
125
126
130
181
182
188
190
192
Sections 1 to 5 make up the Directors’ Report in accordance with the
Companies Act 2006.
Cautionary statement: All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results,
operations and businesses of BAE Systems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking
statements which reflect management’s assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors
which could cause the actual results, performance or achievements of BAE Systems or the markets and economies in which BAE Systems operates to be materially different from future
results, performance or achievements expressed or implied by such forward-looking statements. Nothing in this document shall be regarded as a profit forecast. BAE Systems plc and its
directors accept no liability to third parties in respect of this report save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue
or misleading statement or omission shall be determined in accordance with schedule 10A of the Financial Services and Markets Act 2000. It should be noted that schedule 10A and
section 463 Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that their liability is solely to BAE Systems plc.
BAE Systems Annual Report 2010
1
BAE Systems at a glance
BAE Systems is a global defence and security company with
approximately 98,200 employees1 worldwide. The Group delivers
a full range of products and services for air, land and naval forces,
as well as advanced electronics, security, information technology
solutions and support services.
BAE Systems, Inc.
Electronics, Intelligence
& Support (EI&S)
Land & Armaments
Programmes & Support
International
SALES1,2,3 BY OPERATING
GROUP (%)
KPI
UNDERLYING EBITA1,3,4
BY OPERATING GROUP (%)
KPI
International
International
Electronics,
Intelligence
& Support
Electronics,
Intelligence
& Support
20%
25%
21%
29%
29%
26%
23%
27%
Programmes
& Support
Land &
Armaments
Programmes
& Support
Land &
Armaments
ORDER BOOK3,5 BY OPERATING GROUP (%)
Top 15 orders
Remaining order book
Principal operations
EI&S provides a wide range of electronic
systems and subsystems for military and
commercial applications, technical and
professional services for US national
security and federal markets, and ship
repair and modernisation services.
Principal operations
Land & Armaments designs, develops,
produces, supports and upgrades
armoured combat vehicles, tactical
wheeled vehicles, naval guns, missile
launchers, artillery systems, munitions
and law enforcement products.
Principal operations
Principal operations
Programmes & Support primarily
International comprises the Group’s
comprises the Group’s UK-based air,
businesses in Australia, India and
maritime and Cyber & Intelligence
activities.
Saudi Arabia, together with interests in
the pan-European MBDA joint venture
Electronic Solutions
Intelligence & Security
Platform Solutions
Support Solutions
Main home markets
US
UK
Global Combat Systems
Global Tactical Systems
Security & Survivability
US Combat Systems
Products Group
Main home markets
US
UK
Military Air Solutions
BAE Systems Surface Ships
Submarine Solutions
Detica
Integrated System Technologies
Main home markets
UK
and Air Astana.
BAE Systems Saudi Arabia
BAE Systems Australia
BAeHAL Software (40% shareholding)
Defence Land Systems India
(26% shareholding)
MBDA (37.5% interest)
Air Astana (49% shareholding)
Main home markets
Australia
India
Saudi Arabia
BAE Systems online
Get the latest investor
information online:
www.baesystems.com
For the latest information on:
– Performance
– Investor presentations
– Corporate responsibility
Plus, interactive features enabling you to:
– Customise the homepage
– View the BAE Systems mobile site
– Sign up for RSS feeds
– Sign up for e-mail alerts
Land & Armaments
Munitions Acquisition
Supply Solution
S
41%
Programmes & Support
Queen Elizabeth Class
Aircraft Carriers
P
Typhoon Tranche 3A Aircraft P
Typhoon Tranche 2 Aircraft P
Astute Class Submarines P
S
Tornado ATTAC
P
Type 45 Destroyers
* S
Typhoon Support
* P
Hawk India Aircraft
Electronics, Intelligence & Support
3%
12%
Land & Armaments
11%
11%
Programmes
& Support
14%
8%
International
P
International
Saudi Typhoon Aircraft6
Saudi Tornado Role
Equipment
Landing Helicopter Dock
Saudi British Defence
Co-operation Programme S
Saudi Typhoon Support6
S
Saudi Tornado Upgrade * S
P
P
* New to top 15
S Services
P Platforms
1
2
3
4
5
6
Including share of equity accounted investments.
Before elimination of intra-group sales.
Excluding HQ & Other Businesses.
Earnings before amortisation and impairment of intangible assets, fi nance costs and taxation expense
(EBITA) excluding non-recurring items (see page 37).
Including share of equity accounted investments’ order books and before the elimination of intra-group
orders of £1.5bn.
The appropriate work share of the Saudi Typhoon Aircraft and Support contracts is reported within
Programmes & Support.
Key points
– Acquisitions of Atlantic Marine and
OASYS Technology completed
– Central operating group
headquarters closed as part of the
restructuring of BAE Systems, Inc.
Key points
– Restructured to create a leaner,
more responsive business to meet
customers’ needs
– Net headcount reduced by 5,500
(including contractors)
– Continued to perform on legacy
– Demand continues for land vehicle
programmes and secured several
strategic contract awards in new
markets
– US Army qualifi ed IMX-101 as a
safer and effective alternative for
the potential replacement of TNT
in artillery
– Strong ship repair performance
continued, with order intake totalling
$1bn (£0.6bn) in 2010
Readiness & Sustainment
– Continued progress in pursuit of
supply chain effi ciencies
– Continued Mine Resistant Ambush
Protected vehicle activity
Key points
Key points
– £537m Hawk India contract secured
– A further ten Typhoon aircraft
– Third Type 45 destroyer accepted off
contract and sixth launched
– HMS Astute acceptance completed
and second boat, Ambush, launched
– Nimrod MRA4 programme
terminated and Harrier to be taken
out of service in 2011 following
Strategic Defence and Security
Review (SDSR)
– Continued rationalisation and
effi ciency activity across the
operating group and alignment
of cost base post SDSR
delivered under the Salam
programme
– Typhoon operational capability being
provided under the support contract
– 157 Tactica vehicles accepted by the
Saudi Arabia National Guard
– BAE Systems Australia selected
as Lockheed Martin’s partner for
maintenance and upgrade support
on the Australian F-35 programme
– Defence Land Systems India
Private Limited joint venture
became operational
Sales1, 2
£5,653m
No. of employees1
30,800
Sales1, 2
£5,930m
No. of employees1
Sales1, 2
No. of employees1
Sales1, 2
No. of employees1
16,100
£6,680m
31,600
£4,534m
17,200
p66 For more information or visit
www.baesystems.com/businesses/
p68 For more information or visit
www.baesystems.com/businesses/
landarmaments/
p70 For more information or visit
www.baesystems.com/businesses/
programmessupport/
p72 For more information or visit
www.baesystems.com/businesses/
international/
2010 online corporate
reporting benefi ts:
– The Annual Report 2010 is
accessible in pdf or interactive
format
– Search the Annual Report for key
information and access links for
further information
– Corporate responsibility information
is integrated into the Annual Report
– Access the Notice of Annual General
Meeting and vote online
Visit: www.baesystems.com/reporting/
Shareholder feedback
Production of this report
If you would like to give us any feedback on this year’s
The printer is an EMAS certifi ed CarbonNeutral® company
Annual Report, please send your written comments to
and its Environmental Management System is certifi ed to
our investor relations team at:
BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
ISO 14001. 100% of the inks used are vegetable oil based,
95% of press chemicals are recycled for further use and on
average 99% of any waste associated with this production will
be recycled. The papers are a combination of 100% and 50%
recycled fi bre. The pulp for each is bleached using an Elemental
or by e-mail to investors@baesystems.com
Chlorine Free (ECF) process. All papers are FSC certifi ed.
BAE Systems at a glance
BAE Systems is a global defence and security company with
approximately 98,200 employees1 worldwide. The Group delivers
a full range of products and services for air, land and naval forces,
as well as advanced electronics, security, information technology
solutions and support services.
BAE Systems, Inc.
Electronics, Intelligence
& Support (EI&S)
Land & Armaments
Programmes & Support
International
SALES1,2,3 BY OPERATING
GROUP (%)
KPI
UNDERLYING EBITA1,3,4
BY OPERATING GROUP (%)
KPI
International
International
Electronics,
Intelligence
& Support
Electronics,
Intelligence
& Support
20%
25%
21%
29%
29%
26%
23%
27%
Programmes
& Support
Land &
Armaments
Programmes
& Support
Land &
Armaments
ORDER BOOK3,5 BY OPERATING GROUP (%)
Top 15 orders
Remaining order book
Principal operations
EI&S provides a wide range of electronic
systems and subsystems for military and
commercial applications, technical and
professional services for US national
security and federal markets, and ship
repair and modernisation services.
Principal operations
Land & Armaments designs, develops,
produces, supports and upgrades
armoured combat vehicles, tactical
wheeled vehicles, naval guns, missile
launchers, artillery systems, munitions
and law enforcement products.
Principal operations
Programmes & Support primarily
comprises the Group’s UK-based air,
maritime and Cyber & Intelligence
activities.
Electronic Solutions
Intelligence & Security
Platform Solutions
Support Solutions
Main home markets
US
UK
Global Combat Systems
Global Tactical Systems
Security & Survivability
US Combat Systems
Products Group
Main home markets
US
UK
Military Air Solutions
BAE Systems Surface Ships
Submarine Solutions
Detica
Integrated System Technologies
Main home markets
UK
Principal operations
International comprises the Group’s
businesses in Australia, India and
Saudi Arabia, together with interests in
the pan-European MBDA joint venture
and Air Astana.
BAE Systems Saudi Arabia
BAE Systems Australia
BAeHAL Software (40% shareholding)
Defence Land Systems India
(26% shareholding)
MBDA (37.5% interest)
Air Astana (49% shareholding)
Main home markets
Australia
India
Saudi Arabia
BAE Systems online
Get the latest investor
information online:
www.baesystems.com
For the latest information on:
– Performance
– Investor presentations
– Corporate responsibility
Plus, interactive features enabling you to:
– Customise the homepage
– View the BAE Systems mobile site
– Sign up for RSS feeds
– Sign up for e-mail alerts
Land & Armaments
Munitions Acquisition
Supply Solution
S
41%
Programmes & Support
Queen Elizabeth Class
Aircraft Carriers
P
Typhoon Tranche 3A Aircraft P
Typhoon Tranche 2 Aircraft P
Astute Class Submarines P
S
Tornado ATTAC
P
Type 45 Destroyers
* S
Typhoon Support
* P
Hawk India Aircraft
Electronics, Intelligence & Support
3%
12%
Land & Armaments
11%
11%
Programmes
& Support
14%
8%
International
P
International
Saudi Typhoon Aircraft6
Saudi Tornado Role
Equipment
Landing Helicopter Dock
Saudi British Defence
Co-operation Programme S
Saudi Typhoon Support6
S
Saudi Tornado Upgrade * S
P
P
* New to top 15
S Services
P Platforms
1
2
3
4
5
6
Including share of equity accounted investments.
Before elimination of intra-group sales.
Excluding HQ & Other Businesses.
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense
(EBITA) excluding non-recurring items (see page 37).
Including share of equity accounted investments’ order books and before the elimination of intra-group
orders of £1.5bn.
The appropriate work share of the Saudi Typhoon Aircraft and Support contracts is reported within
Programmes & Support.
Key points
– Acquisitions of Atlantic Marine and
OASYS Technology completed
– Central operating group
headquarters closed as part of the
restructuring of BAE Systems, Inc.
Key points
– Restructured to create a leaner,
more responsive business to meet
customers’ needs
– Net headcount reduced by 5,500
(including contractors)
– Continued to perform on legacy
– Demand continues for land vehicle
programmes and secured several
strategic contract awards in new
markets
– US Army qualified IMX-101 as a
safer and effective alternative for
the potential replacement of TNT
in artillery
– Strong ship repair performance
continued, with order intake totalling
$1bn (£0.6bn) in 2010
Readiness & Sustainment
– Continued progress in pursuit of
supply chain efficiencies
– Continued Mine Resistant Ambush
Protected vehicle activity
Key points
– £537m Hawk India contract secured
– Third Type 45 destroyer accepted off
contract and sixth launched
– HMS Astute acceptance completed
and second boat, Ambush, launched
– Nimrod MRA4 programme
terminated and Harrier to be taken
out of service in 2011 following
Strategic Defence and Security
Review (SDSR)
– Continued rationalisation and
efficiency activity across the
operating group and alignment
of cost base post SDSR
Key points
– A further ten Typhoon aircraft
delivered under the Salam
programme
– Typhoon operational capability being
provided under the support contract
– 157 Tactica vehicles accepted by the
Saudi Arabia National Guard
– BAE Systems Australia selected
as Lockheed Martin’s partner for
maintenance and upgrade support
on the Australian F-35 programme
– Defence Land Systems India
Private Limited joint venture
became operational
Sales1, 2
£5,653m
No. of employees1
30,800
Sales1, 2
£5,930m
No. of employees1
16,100
Sales1, 2
£6,680m
No. of employees1
31,600
Sales1, 2
£4,534m
No. of employees1
17,200
p66 For more information or visit
www.baesystems.com/businesses/
p68 For more information or visit
www.baesystems.com/businesses/
landarmaments/
p70 For more information or visit
www.baesystems.com/businesses/
programmessupport/
p72 For more information or visit
www.baesystems.com/businesses/
international/
2010 online corporate
reporting benefits:
– The Annual Report 2010 is
accessible in pdf or interactive
format
– Search the Annual Report for key
information and access links for
further information
– Corporate responsibility information
is integrated into the Annual Report
– Access the Notice of Annual General
Meeting and vote online
Visit: www.baesystems.com/reporting/
Shareholder feedback
If you would like to give us any feedback on this year’s
Annual Report, please send your written comments to
our investor relations team at:
BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
or by e-mail to investors@baesystems.com
Production of this report
The printer is an EMAS certified CarbonNeutral® company
and its Environmental Management System is certified to
ISO 14001. 100% of the inks used are vegetable oil based,
95% of press chemicals are recycled for further use and on
average 99% of any waste associated with this production will
be recycled. The papers are a combination of 100% and 50%
recycled fibre. The pulp for each is bleached using an Elemental
Chlorine Free (ECF) process. All papers are FSC certified.
Directors’ Report: Business Review
2010 performance summary and outlook
Results from continuing operations
Other results including discontinued operations
Results in BRief
Sales2
Underlying EBITA3
Operating profit
Underlying earnings4 per share
Basic earnings/(loss) per share5
Order book6
KPI
KPI
KPI
2010
Restated1
2009
£22,392m £21,990m
£2,214m £2,197m
£966m
£1,636m
40.1p
40.8p
28.9p
(2.3)p
£46.3bn
£39.7bn
Dividend per share
Cash inflow from operating activities
Net (debt)/cash (as defined by the Group)7 £(242)m
16.0p
£1,535m £2,232m
£403m
17.5p
Results from continuing operations
SALES1,2 (£BN)
UNDERLYING EBITA1,3 (£M)
KPI
KPI
22.0
22.4
18.1
15.4
13.4
25
20
15
10
5
0
2,500
2,000
1,500
1,000
500
0
2,197 2,214
1,879
1,417
1,169
06
07
08
09
10
06
07
08
09
10
UNDERLYING EARNINGS1,4
PER SHARE (PENCE)
KPI
OPERATING BUSINESS
CASH FLOW8 (£M)
KPI
50
40
30
20
10
0
1
2
3
4
5
6
7
8
40.1
40.8
36.8
29.4
22.9
2,500
2,000
1,500
1,000
500
782
0
1,978
1,595 1,595
1,187
06
07
08
09
10
06
07
08
09
10
Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as
a discontinued operation.
Including share of equity accounted investments.
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding
non-recurring items (see page 37).
Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and
financial derivatives, and non-recurring items (see note 10 to the Group accounts).
Basic earnings/(loss) per share in accordance with International Accounting Standard 33.
Including share of equity accounted investments’ order books and after the elimination of intra-group orders of £1.5bn
(2009 £1.7bn).
See page 39 and note 27 to the Group accounts.
Net cash inflow from operating activities after capital expenditure (net) and financial investment, dividends from
equity accounted investments, and assets contributed to Trust.
KPI References Key Performance Indicators (KPIs)
(see pages 16 to 19) throughout the Report.
2
www.baesystems.com
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p16
p36
for more information on the Group’s
financial Kpis
for more information on the Group’s
financial performance
Key points – finAnCiAl
– Headline sales2 increased by 1.8%
– Underlying EBITA3 up 0.8% to £2,214m (2009 £2,197m)
after a charge of £100m taken in respect of the terminated
Trinidad and Tobago ship contract
– Underlying earnings4 per share increased by 1.7% to 40.8p
(2009 40.1p)
– The total dividend has increased by 9.4% to 17.5p
(2009 16.0p)
– £500m market purchase of shares completed
p18
p45
for more information on the Group’s
non-financial Kpis
for more information on the Group’s
corporate responsibility performance
p64-74
for more information on the
performance and outlook of the
Group’s operating groups
Key points – non-finAnCiAl
– The Group is on schedule to meet its three-year
commitment to implement the 23 recommendations
of the Woolf Committee by May 2011
– Good performance against targets for Customer Focus
and Programme Execution
– The number of days lost to work-related injuries has
reduced by 31%
– The Group’s approach to diversity and inclusion was
strengthened in 2010 to better support the recruitment,
engagement and retention of talented people from
all backgrounds
outlooK
In 2011, a reduction in sales2 is anticipated as the volume
reduction in Land & Armaments is expected to complete and
as the changes arising from the Strategic Defence and Security
Review reduce activity in the UK businesses. The continuing
actions to reduce cost and improve efficiency are expected to
benefit return on sales and mitigate the impact of that lower
activity. In addition, the 2011 results will benefit from the
non-recurrence of the Trinidad and Tobago charge. The 2011
performance is expected to be weighted to the second half of
the year. With the re-basing of the Land business in 2011, and
the cost and efficiency actions, the Group will have established
a resilient platform for future growth.
BAE Systems Annual Report 2010
3
Directors’ Report: Business Review
BAE Systems’ business model
BAE Systems’ business model is driven by its strategy to deliver sustainable growth in
shareholder value. It is underpinned by the Group’s commitment to Total Performance.
A strong portfolio of
products, services
and capabilities…
BAE Systems has three market
segments designed to meet the
evolving needs of its customers in
both its home and export markets.
SALES1 BY MARKET SEGMENT (%)
Platforms
Readiness &
Sustainment
42%
39%
48%
Services
13%
6%
Electronic Systems
Cyber & Intelligence
SErvicES
ElEctronic SyStEmS
PlAtformS
In Readiness & Sustainment, the Group
provides total support for mission
success, ranging from preparation and
training programmes that are designed to
ensure military personnel and equipment
are ready for deployment (Readiness),
through to maintenance and
enhancement services (Sustainment).
In Cyber & Intelligence, the Group helps
government and commercial clients to
collect information to reveal intelligence,
maintain security, manage risk and
strengthen resilience, and also provides
mission-critical cyber security solutions,
information technology, intelligence and
analytical tools, and support solutions
to the intelligence, defence and civilian
communities.
Contracts can be multi-year, thereby
providing the Group with strong incumbent
positions and intimacy with customers.
BAE Systems has a track record of
delivering both enhanced capability and
cost savings, and this is an area of potential
growth for the Group as customers’ budgets
remain under pressure.
…and underpinned by
a culture of total
Performance.
4
www.baesystems.com
The Group designs, develops,
manufactures and integrates a diverse
portfolio of mission-critical electronic
systems.
The Group’s capabilities help meet its
customers’ requirements in the areas
of electronic warfare, signal processing
and battlespace management.
The Group’s wide range of products
include situational awareness and
survivability systems, intelligence,
surveillance and reconnaissance
systems, secure networked
communications and navigation
systems, precision targeting and
night vision systems.
This high technology business is
underpinned by the investment of a
significant proportion of the Group’s
research and development spend.
The Group designs, develops,
manufactures and integrates a broad
range of defence systems and equipment.
In air, the Group provides advanced
military air capability through delivering
combat aircraft and jet trainers, and is
addressing the emerging global market
for autonomous systems and related
technologies.
In land, the Group provides armoured
combat vehicles, tactical wheeled
vehicles, missile launchers, artillery
systems and munitions.
In maritime, the Group provides above
and under water battlespace capability
through the delivery of surface ships and
nuclear powered submarines.
BAE Systems is committed to
developing a culture of total
Performance, which encompasses
customer focus, Programme
Execution, financial Performance and
responsible Behaviour, and provides a
platform to deliver sustainable growth
in shareholder value and enhance
the Group’s reputation. the Group’s
success is measured by the Board with
a range of financial and non-financial
Key Performance indicators (KPis).
p16 For more information on the Group’s KPIs
Customer FoCus
The Group’s priority to all its customers
is to understand their needs and
expectations, and deliver on its
commitments throughout the life of the
products and services it has delivered.
Customer Focus is measured through
schedule adherence metrics relating
to milestone performance across the
Group’s major contracts, and customer
satisfaction.
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…across multiple
home markets…
BAE Systems’ business is based
around identified home markets where
the Group has established, or seeks
to establish, a good position in the
defence industrial base.
– United States
– United Kingdom
– Saudi Arabia
– Australia
– india
…delivered by four
principal operating
groups…
BAE Systems has four principal
operating groups each with different
characteristics resulting from the
nature and phase in the lifecycle of
programmes, products and services
provided, procurement philosophies
of their principal customers, and
geographical areas in which they
operate.
– Electronics, intelligence & Support
– land & Armaments
– Programmes & Support
– international
…supported by
essential resources…
the Group’s key resources and
arrangements, together with the
application of the mandated policies and
processes in the operational framework,
help the Group achieve its strategy.
– customers
– Subcontractors and other suppliers
– People
– research and development
– intellectual property
p20 For more information on the
Group’s key home markets
p64 For more information on the
operating groups
p32 For more information on the
Group’s resources
p84 For more information on the
Group’s operational Framework
ProGramme exeCutIon
FInanCIal PerFormanCe
resPonsIble behavIour
The Group’s performance is dependent
on the successful execution of its projects.
It is important that the Group wins and
contracts for high quality new programmes,
and delivers on those projects within tight
tolerances of quality, time and cost
performance in a reliable, predictable and
repeatable manner. Programme Execution
is measured by reference to outturn
projections of, and movements in, margin
of key customer-funded projects.
The Group sets itself challenging financial
targets through the Integrated Business
Planning process. Financial Performance
is measured through a range of key
financial salients derived from the Group’s
consolidated financial statements,
including order intake, sales, underlying
EBITA2, underlying Earnings per Share and
operating business cash flow.
Responsible Behaviour is measured with
metrics relating to safety, the roll-out and
training of the Code of Conduct, and the
biennial employee opinion survey.
BAE Systems’ global Code of Conduct is a
summary of the principles and standards
of business conduct expected of all
employees. Together with the Group’s
Responsible Trading Principles, the Code
of Conduct underpins its business
activities.
1
2
Including share of equity accounted investments.
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 37).
BAE Systems Annual Report 2010
5
Directors’ Report: Business Review
Chairman’s letter
“ BAE Systems
delivered a solid
performance in
2010, building on
the progress in
recent years.”
Dick Olver
Chairman
6
www.baesystems.com
Following six consecutive years of strong growth, 2010 was
a year of robust performance across the Group – in the midst
of market challenges. We continued to achieve progress by
developing the business within a clear strategic framework
(see page 14).
BAE Systems has a well-established strategic planning process
that generates clear objectives cascaded throughout the
business. The strategy is continually reviewed, and is evolved
as objectives are achieved allowing us to proactively address
changes in the business environment. We believe this structured
approach provides clarity of our strategic direction for both our
external stakeholders and for our employees.
There are three essential elements to the Group’s strategy which
have been incorporated into the Group Strategic Framework for
2011. Firstly, the Group plans to operate and target growth in the
defence and security market segments of Services, Electronic
Systems and Platforms. Secondly, to build upon the geographic
diversity which has fostered growth to date, the Group will target
growth in existing home markets and develop new home markets.
Finally, building on its existing Platforms activity, the Group will
target growth from export business.
The difficult global economic environment for many of our
customers is inevitably being felt in a business that works closely
with governments. BAE Systems has an excellent track record of
adapting to market pressures and, whilst there will be challenges,
such changes can present opportunities to generate new
business and help customers deliver capability in a more cost
effective way. Within the Group’s Services activities there are
numerous examples where we have enabled the armed forces to
achieve large cost savings and to provide better value capability.
We believe there is further scope for value to be derived from
the way defence capability is generated, in particular where
traditional boundaries between industry and the armed forces
can be changed. We look forward to continuing to help provide
value enhancing solutions for our customers in this more difficult
environment.
Recognising that security has become an increasing priority
for governments alongside their traditional commitments
to defence, our strategy has evolved to address these new
opportunities. In particular, the Group is building a strong
position in the Cyber & Intelligence domain.
In addition to pursuing financial goals, we remain committed
to becoming recognised as a leader in business conduct.
We attach great importance to the way we do business as well
as to the results we achieve. We are approaching this through
the development of a more integrated drive for performance
in all aspects of our business life. Good progress has been
A robust
governance
structure underpins
the delivery of the
Group’s strategy
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made in embedding these principles of Total Performance,
including the setting of financial and non-financial objectives
for management. This year’s inclusion of the Corporate
Responsibility report within the pages of this Annual Report
reflects this more integrated approach.
Achieving a culture of Total Performance depends on all our
employees living a common set of Values – Trusted, Innovative
and Bold – in their day-to-day work. Shared values and a global
Code of Conduct are particularly important in our increasingly
diverse global business.
The report published by the Woolf Committee in 2008 has been
an important framework for the programme of ethical awareness
which extends throughout the Group. We are on track to achieve
implementation of the Woolf Committee recommendations by
May 2011. The Company’s core governance procedures and
policies were reviewed during the year and updated to incorporate
our Responsible Trading Principles.
In February 2010, the Company announced a global settlement
of certain regulatory investigations with the US Department of
Justice (DoJ) and the UK Serious Fraud Office (SFO), including an
agreement with the SFO which provided for a payment of £30m
for the benefit of the people of Tanzania less any penalty imposed
by the Court in connection with the agreed basis of settlement.
A penalty of £500,000 (together with costs of £225,000) was
imposed by the Court in December 2010. The remaining balance
of £29.5m (together with interest) will be applied by the Company
for the benefit of the people of Tanzania in accordance with the
applicable Company policies, including those relating to business
conduct and the making of charitable contributions. The Company
is in the process of creating an advisory board comprising suitably
qualified and experienced individuals to guide the Company as to
the possible approaches to the realisation of this objective.
Following the settlement with the DoJ, dialogue continues with
other US regulatory agencies in order to address their concerns
regarding matters arising from the settlement.
The composition of the Group’s Board continues to evolve.
In February 2010, Nick Rose was appointed a non-executive
director of the Company. Phil Carroll and Andy Inglis, also
non-executive directors, retired from the Board in May and
July 2010, respectively. Harriet Green was appointed a
non-executive director of the Company in November 2010.
George Rose, Group Finance Director, will retire from the Board
on 31 March 2011 after 19 years with the Group. I would like to
thank George for his very significant contribution to BAE Systems.
Peter Lynas, currently Director, Financial Control, Reporting and
Treasury, has been appointed Group Finance Director with effect
from 1 April 2011, and will join the Board and Executive
Committee on that date.
The success of the business is built on the hard work, creativity
and commitment of our workforce. I am pleased to be able
to formally recognise many of their achievements through the
annual Chairman’s Awards. A new category was introduced
this year to recognise employees who have shown outstanding
success in implementing our Total Performance culture.
In addition to BAE Systems’ own programme to recognise the
achievements of our people, we were delighted to also see
external recognition. William McLachlan, a Safety, Health and
Environment Advisor for Surface Ships, was made a Member of
the Order of the British Empire (MBE) for services to charity, and
Howard Robinson, Senior Support Engineer Tornado Software
Support, was made MBE for services to the defence industry.
High quality, insightful narrative reporting is an important element
of good governance. Over the last few years we have looked to
develop the quality of our reporting so as to provide a fair and
balanced view of the Company that is informative and accessible
to readers. I am pleased that for the second year in a row this has
been recognised at the ICSA Hermes Transparency in Governance
Awards, with our 2009 report jointly winning the overall Best
Annual Report award in 2010.
BAE Systems is performing well and the Group’s strong position
on programmes that provide key capability for customers,
together with a large order book, provides good forward visibility.
The Board has recommended a final dividend of 10.5p per share
making a total of 17.5p per share for the year, an increase of 9.4%
over 2009. At this level, the annual dividend is covered 2.3 times
by underlying earnings from continuing operations (2009 2.5
times). Subject to shareholder approval at the 2011 Annual
General Meeting, the dividend will be paid on 1 June 2011 to
holders of ordinary shares registered on 26 April 2011.
Ravi Uppal has advised us that, in order to dedicate more time to
his business activities in India, he wishes to stand down from the
Board at the end of his three-year term on 1 April this year. I would
like to thank him for the contribution he has made to the Board,
especially the assistance he has provided in developing our
interests in India.
Dick Olver
Chairman
I and my fellow directors are aware of
the important responsibility we have for
the good governance of the Company.
We continue to review and evaluate the
structure and quality of our governance
arrangements with the aim of ensuring
that they remain robust and in line with
evolving best practice. Transparency is
a critical element of good governance,
and this Annual Report is the principal
means by which we express our
stewardship of the Company.
p78–95 For more information on our
governance structure
The Board has
recommended
a final dividend of
10.5p making a total
of 17.5p for the year,
an increase of 9.4%
on 2009
DIVIDEND
(PENCE PER SHARE)
20
16
12
8
4
0
17.5
16.0
14.5
12.8
11.3
06
07
08
09
10
BAE Systems Annual Report 2010
7
Directors’ Report: Business Review
Chief Executive’s review
“ BAE Systems is one
of the world’s leading
defence and security
companies.”
Ian King
Chief Executive
8
www.baesystems.com
BAE Systems has business operations providing key
national capabilities in many of the world’s larger defence
and security markets. Although the Group faces a more
challenging trading environment as governments look for
cost savings to address budgetary pressures, our broad
base of activity results in a resilient business that is well
positioned to withstand near-term market pressures.
Affordability and value for money are increasingly the priorities
for customers. Early recognition by the Group of customer
budgetary pressures resulted in significant cost reduction and
efficiency actions being taken in 2009 which have continued
throughout 2010. These actions have resulted in net headcount
reduction of approximately 15,100 (including contractors) in the
past two years. This cost reduction programme will enhance
competitiveness, deliver further improved value for customers,
and be of sustained benefit to the Group’s performance.
BAE Systems has a substantial presence in Services activities
in its defence and security markets. These activities, which
represented 48% of sales in 2010, include Readiness &
Sustainment business in the air, land and maritime defence
domains, and provision of Cyber & Intelligence services. The
Group is successfully growing its Services businesses, delivering
enhanced capabilities whilst reducing costs for its customers.
BAE Systems’ business is based around home markets where
the Group has established, or seeks to establish, a strong
position in the defence industrial base. The Group’s key home
markets are in Australia, India, Saudi Arabia, the UK and the US.
Sweden and South Africa remain an important part of the
Group’s Land & Armaments business.
US
Following a review of markets and customers’ needs in the US,
changes to the Group’s organisation were implemented in the
first half of the year to realign BAE Systems, Inc. to better deliver
on its strategy. Reductions in costs, benefiting both the Group’s
customers and shareholders, are flowing from the simplified
organisation. These changes enable BAE Systems to be more
competitive in a challenging environment and more agile in
BAE Systems
is committed
to progressing
towards a
recognised
leadership
position in
Responsible
Behaviour
Business conduct and safety
continued to be our two key
corporate responsibility
priorities in 2010. Achieving
high standards in ethics and
safety will build trust and
enhance our relationships
with stakeholders.
p45 For more information
on our approach to
Responsible Behaviour
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responding effectively to customers’ needs. In July, following
changes to the Group’s US organisation, Larry Prior was
appointed Executive Vice President, Service Sectors and
Bob Murphy was appointed Executive Vice President, Product
Sectors, both reporting to Linda Hudson, President and Chief
Executive Officer of BAE Systems, Inc.. Larry and Bob are also
members of the Group’s Executive Committee.
In early February 2010, the US Quadrennial Defense Review
(QDR) was released. The accompanying US defence budget
for Fiscal Year 2011 identified growth in the allocation to the
investment account element. The QDR restated the US’s
commitment to the large, next generation, F-35 combat aircraft
programme. BAE Systems, through both its US and UK
businesses, is a significant participant on this programme.
The US defence and security markets continue to generate
a number of business opportunities, despite budgetary
pressures. These pressures are leading to Department of
Defense programme reprioritisations and a drive for greater
efficiencies in procurement. These efficiencies are expected
to help fund continued modest growth on investment in
defence capability.
UK
Pressure to reduce government expenditure in the UK was
reflected in the Comprehensive Spending Review and the findings
of the UK Strategic Defence and Security Review (SDSR) were
published in October. The review identified a number of changes
to UK defence and security priorities over the coming years.
The Group continues to work with the UK Ministry of Defence
to address the detailed implications of the changes identified
by the SDSR. The Group believes that it can continue to help in
delivering efficiency improvements and value for money in the
way capability is generated and delivered. In aggregate, the
changes resulted in some modest impact on the performance
of the Group’s UK business in 2010 and, thereafter, are
expected to result in a reduction of approximately one pence
in earnings per share, per annum, when compared with the
Group’s prior financial planning assumptions.
Other home markets
The Group continues to seek growth in Australia and the
Kingdom of Saudi Arabia where it has strong, established
home market positions.
In Australia, the defence budget is expected to grow following
publication in 2009 of a Defence White Paper outlining the key
areas for defence spend over the coming years.
In the Kingdom of Saudi Arabia, defence spending is expected
to continue to be a high priority, representing some 10.9% of
GDP in 2009.
Defence spending in India is expected to grow substantially.
In the year, the Group has taken a number of steps to develop
India as one of its home markets. A second major contract for the
supply of Hawk aircraft to India was received, with local assembly
to be undertaken by Hindustan Aeronautics Limited. A land
systems joint venture with Mahindra & Mahindra Limited was
established, which is currently developing and marketing several
vehicles with the support of other BAE Systems’ businesses.
M&A activity
In addition to pursuing organic growth, the Group has continued
to make progress in developing its business through targeted
acquisitions. Notably, acquisitions have been made since January
2010 in Services and Electronic Systems, specifically high
technology electronic and electro-optic systems. BAE Systems
continues to target these areas, which are identified as priorities
for customers and offer prospects for growth.
In July 2010, the Group completed the acquisition of Atlantic
Marine Holding Company, a naval services business, for $372m
(£245m). The business employs approximately 1,500 people at
Mayport and Jacksonville, Florida; Moss Point, Mississippi; and
Mobile, Alabama. The acquisition complements BAE Systems’
existing ship repair and upgrade capabilities serving the US Navy.
The Group anticipates continued strong demand for naval support
capabilities in the US, and the acquisition is consistent with our
strategy to address anticipated growth in Services activities.
Our Services
activities
contributed
48% of Group
sales1 in 2010
SALES1 BY MARKET SEGMENT (%)
ORDER BOOK2,3 BY OPERATING GROUP (%)
Platforms
Readiness &
Sustainment
International
Electronics,
Intelligence & Support
42%
39%
48%
Services
12%
22%
Land &
Armaments
14%
13%
6%
52%
Electronic Systems
Cyber & Intelligence
Programmes & Support
1
2
3
Including share of equity accounted investments.
Including share of equity accounted investments’ order books and before the elimination of intra-group orders of £1.5bn.
Excluding HQ & Other Businesses.
BAE Systems Annual Report 2010
9
Directors’ Report: Business Review
Chief Executive’s review continued
In October, BAE Systems completed the acquisition of OASYS
Technology, LLC, a US manufacturer of electro-optical systems
and sub-assemblies, for an initial cash consideration of $24m
(£15m) and a potential earn out of up to $29m (£18m). The
acquisition complements BAE Systems’ existing electro-optical
capabilities, technologies and product offerings.
In January 2011, the Group completed the acquisition of
stratsec.net Pty Limited, an Australian information security
company supplying government and commercial customers.
The A$24m (£16m) acquisition supports the Group’s strategy
to add capabilities and footprint in the growing area of Cyber
& Intelligence.
In February 2011, BAE Systems completed the acquisition
of L-1 Identity Solutions, Inc.’s Intelligence Services Group,
a leading provider of security and counter threat capabilities to
the US government, for a cash consideration of approximately
$297m (£190m).
In December, the Group entered into a definitive agreement to
acquire ETI A/S, a leading Danish Cyber & Intelligence company
providing advanced technology products and services to
government and commercial clients worldwide, for a cash
consideration of DKK1.2bn (£138m).
In January 2011, the Group entered into an agreement to
acquire the 91.3% outstanding equity of Fairchild Imaging, Inc.
for a cash consideration of $86m (£55m). The California-based
business provides solid-state electronic imaging components,
cameras, and systems for aerospace, industrial, medical and
scientific imaging applications. The acquisition complements
the Group’s electro-optics and night vision capabilities.
The proposed acquisitions of ETI A/S and Fairchild are
conditional, among other things, upon receiving regulatory
approval.
In January 2011, the Group announced a recommended
€217m (£186m) cash offer for Norkom Group plc, a provider of
innovative counter-fraud and anti-money laundering solutions to
the global financial services industry.
In June, BAE Systems completed the sale of half of its
non-strategic 20.5% shareholding in Saab AB for a cash
consideration of SEK1,041m (£92m). The sale of the Group’s
remaining investment in Saab is expected in due course.
In September, BAE Systems announced that it was reviewing
strategic options with regard to its Platform Solutions business.
In January 2011, the Group announced that the sale of the
business was no longer being pursued.
Cash flow
Good cash generation has been achieved in the year, and is
expected to continue, notwithstanding any short-term volatility.
Use of this cash flow is expected to include a focus on pursuing
opportunities for enhanced equity returns through investment
in the business by way of organic development or precisely
targeted acquisitions. In addition, the Group will continue to
meet its pension funding obligations. Accelerated returns of
capital to shareholders remain an option to address extended
periods of balance sheet inefficiency.
Market environment
BAE SYSTEMS’ GLOBAL DEFENCE MARKET POSITION (US$BN)
d
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a
M
42.0
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N
33.4 31.9 30.7
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G
25.9
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D
A
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T
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U
15.0 13.3 13.0 11.1
50
40
30
20
10
0
Top ten global defence companies (based on 2009 defence revenues)
Source: Defense News
In 2009, BAE Systems was the second largest global defence supplier.
This represented a continuation of the Group’s position in its home and
export markets.
The global defence market is expected to become increasingly
competitive as government budgets remain under pressure.
The Group now has better clarity as to the priorities of its UK
and US customers following the publication of the UK Strategic
Defence and Security Review, and the US Quadrennial Defense
Review. Long-term spending commitments are being
established across the Group’s key home markets.
Against this backdrop, BAE Systems is positioned to weather
market pressures with a geographically diverse and targeted
portfolio of businesses.
Each of the Group’s market segments, Services, Electronic
Systems and Platforms, enjoy common attributes of long-term
demand, customers with whom the Group has strong
relationships and key intellectual property.
p20 For more information on the Group’s home and export markets
10
www.baesystems.com
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Total Performance
Total Performance is not just about what the Group does but
also about how we do it. Building a culture of Total Performance
means focusing on delivering shareholder value, on meeting the
needs of our customers and acting responsibly at all times.
BAE Systems performed well in 2010, delivering against both
its Financial Performance and non-financial objectives, including
Customer Focus, Programme Execution and Responsible
Behaviour. Embedding the importance of non-financial
performance measures in the culture of the Group, through the
drive for a more integrated, Total Performance, approach, has
contributed to this success.
BAE Systems is committed to achieving the highest standards
of business conduct to give its customers, suppliers, regulators,
employees and shareholders the confidence that it is a business
which they can trust. During the year, a major focus has been
on embedding a culture of Responsible Behaviour across
the business. Mandated policies and processes within our
Operational Framework have been comprehensively updated
to ensure they reflect our Responsible Trading Principles.
Employees in all markets are receiving refresher training to
help them to continue to apply our global Code of Conduct in
their work. This training is scheduled to be completed by
May 2011. We are pleased at the progress made and have
commissioned ethics consultancy, Ethical Leadership Group,
to review the work undertaken in response to the Woolf
Committee recommendations. Interviews with a number of
senior leaders in each home market and more than 60 employee
focus groups across our businesses have been undertaken.
We are deeply saddened to report the death of one of our
employees at our York facility in the US. We have reviewed
the cause of this accident and co-operated fully with the
regulatory investigation. The regulatory authority was
unable to determine a cause for the accident or identify any
non-compliances during the course of its investigation and,
as a result, has taken no further action. Any lessons learnt
from this incident will be applied across our global business.
Maintaining and developing the skills and capabilities of our
people is a key factor in the sustained success of the Group.
As well as Total Performance Leadership (see page 34),
programmes for high potential employees, leadership and
competency frameworks were provided, and appropriately
tailored, to each of the Group’s home markets. The Group’s
‘Developing You’ programme continued to deliver training
across a number of functional specialities and a Diversity
& Inclusion strategy was adopted to better support the
recruitment, retention and engagement of talented
employees from all backgrounds.
BAE Systems remains a broadly-based and resilient business,
with a focus on business opportunities in Services, Electronic
Systems and Platforms. In addition, cost efficiency will
continue to be a priority focus for management to the benefit
of customers and to extract greater performance from the
Group’s large order book.
Ian King
Chief Executive
ACCESSIBLE DEFENCE MARKETS (US$BN)
FORECAST DEFENCE BUDGETS FOR BAE SYSTEMS’
HOME MARKETS (US$BN)
S
U
666
750
600
450
300
150
0
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1,000
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600
400
200
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29
I
Home market
US supplemental
US investment account
US other
UK
Other home markets
Top 11 markets accessible for business by the Group (based on 2009 total defence expenditure)
In constant 2010 prices
Source: BAE Systems’ internal analysis
Source: BAE Systems’ internal analysis
2009
2010
2011
2012
The US continues to dominate global defence expenditure. It is estimated
to have accounted for approximately 44%1 of the world’s total defence
expenditure in 2009. As a major supplier in the US market, BAE Systems
remains well positioned to capture returns from that market.
Whilst persistent pressure on spending is expected across government
markets, defence and security expenditure is expected to remain an
investment priority in the Group’s key home and export markets. The Group is
well positioned in Australia and the Kingdom of Saudi Arabia, and developing
its position in India. These are markets in which defence spending is expected
to increase over the medium term.
1
Based on BAE Systems’ internal analysis.
BAE Systems Annual Report 2010
11
Directors’ Report: Business Review
Chief Executive’s review continued
EXECUTIVE COMMITTEE TOP TEN OBJECTIVES – 2010 PERFORMANCE
The Board reviews and updates the Group’s strategy annually. The Chief Executive and Executive Committee agree the Group’s
Strategy, Strategic Actions and Integrated Business Plans. In addition, there are ten annual objectives agreed by the Chief
Executive and Executive Committee with the Board which focus on specific deliverables in support of both delivery of short-term
results and the overall strategy. The specific in-year performance indicators used to measure performance against the Executive
Committee’s top ten objectives are discussed below.
Objective
2010 Performance
1. Meet 2010 financial targets,
and set challenging and
realistic longer-term plans
2. Further enhance
programme execution
through cost performance
The Group’s targets for underlying EBITA1 and net debt were exceeded.
Programme execution has been good with the Group delivering an aggregated
improvement in outturn margin across its major programmes.
3. Focus on our commitments
to our customers through
schedule performance
The Group has continued to deliver on its commitments to customers, delivering an
aggregated improvement in schedule adherence on milestones across major
projects.
4. Progress towards
recognised leadership
position in Responsible
Behaviour
5. Grow our Electronics,
Intelligence & Support
business both organically
and via acquisitions, and
improve efficiency
Management has continued to embed the Total Performance agenda across
the Group. Objectives in respect of business conduct, safety, and diversity and
inclusion have been achieved.
The agreed efficiency milestones were implemented and the business delivered a
1.6 percentage point improvement in return on sales. Order intake growth of 7.5%
was achieved. The Group acquired Atlantic Marine and OASYS Technology during the
year, and, in February 2011, completed the acquisition of L-1 Identity Solutions, Inc.’s
Intelligence Services Group, a leading provider of security and counter threat
capabilities to the US government.
6.
Implement our global land
systems strategy, and deliver
on our efficiency and
rationalisation plans
Planned rationalisation milestones were implemented and headcount reduction is
exceeding plan. The Group has continued to support the US Army’s Heavy Brigade
Combat Team – a $629m (£402m) contract to upgrade 1,700 Caiman Mine Resistant
Ambush Protected (MRAP) vehicles was received, and the South African business was
awarded contracts for the manufacture and upgrade of MRAP RG31 vehicles.
7. Establish in the UK
sustainably profitable
through-life business
in air, land and sea
8. Grow our home markets in
the Kingdom of Saudi
Arabia, Australia and India
9.
Implement our global
initiatives
The Strategic Defence and Security Review has set the agenda and defined
the areas for future UK spend in security and defence. Transformation and
rationalisation plans within Military Air Solutions, Surface Ships and Insyte are
continuing to plan. In Submarine Solutions, HMS Astute was accepted by the MoD
and the second boat, Ambush, was launched in January 2011. The Detica Cyber
& Intelligence business delivered sales growth of 12.7%.
Within the International business, like-for-like sales grew by 15.3%. In Saudi Arabia,
an additional 162 Saudi nationals were recruited. In India, the land systems joint
venture with Mahindra & Mahindra became operational and its first new product
unveiled. The Indian Defence Acquisition Council approved an accelerated process
for the procurement of the M777 howitzer.
A global Cyber & Intelligence strategy and implementation plan across the
US, UK and Australia has been issued. The Group acquired stratsec.net, an
Australian information security company, in January 2011, and announced
the proposed acquisitions of ETI A/S and Norkom Group plc, both Cyber &
Intelligence companies. A global Readiness & Sustainment plan has been
developed and Atlantic Marine, a US naval services and marine fabrication
business, was acquired in the year.
For more
information
p36-41
p19
p18
p45-55
p66-67
p68-69
p70-71
p72-73
p15
10. Continue to develop our
global markets
Following successes in 2010 on MOKYS2, Hawk and Archer, the Group continues
to pursue export opportunities, including on Typhoon, Hawk and land prospects.
p21
p16 For more information on the quantitative
Key Performance Indicators (KPIs) used to
measure performance against the Executive
Committee’s top ten objectives
p56 For more information on the Group’s approach
to risk management
p107 For more information on how the Executive
Committee’s top ten objectives relate to
the remuneration of executive directors
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 37).
1
2 Mobile military communications system.
12
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THE EXECUTIVE COMMITTEE
The Executive Committee is the forum chaired by the Chief
Executive in which the operating group and functional leaders
come together to communicate, review and agree on issues
and actions of Group-wide significance.
Ian King
Chief Executive
LInE LEADERShIP
FUnCTIOnAL LEADERShIP
Linda hudson
President and Chief Executive Officer
of BAE Systems, Inc.
Larry Prior
Executive Vice President, Service Sectors,
BAE Systems, Inc.
Bob Murphy
Executive Vice President, Product Sectors,
BAE Systems, Inc.
nigel Whitehead
Group Managing Director,
Programmes & Support
Guy Griffiths
Group Managing Director,
International
BAE Systems plc board member
George Rose
Group Finance Director
Philip Bramwell
Group General Counsel
Andrew Davies
Group Strategy Director
Alan Garwood
Group Business Development Director
Alastair Imrie
Group Human Resources Director
Charlotte Lambkin
Group Communications Director
Executive
Committee top ten
objectives – 2011
The Executive Committee has set the following objectives for 2011. A review of
performance against these objectives will be contained in the Annual Report
2011. The aim of these objectives is to provide focus for the leadership and
engagement of employees at all levels in the Group in support of both delivery
of short-term results and the overall strategy.
Objective
1. Financial Performance Meet 2011 financial targets and deliver sustainable growth in shareholder value
2. Programme Execution
Further enhance programme execution through cost performance
3. Customer Focus
Focus on our commitments to our customers through schedule performance
4. Responsible Behaviour
Progress towards recognised leadership position
5.
International
Grow our International presence through implementation of our home market strategy
6. US product businesses
Deliver actions to drive increased shareholder value
7. Programmes & Support Deliver in the UK sustainably profitable through-life business in the air and maritime sectors,
and grow our security business
8. US services businesses Build a foundation for sustained profitable growth
9. Global initiatives
Implement our global initiatives within the five-year plan
10. Business development
Continue to develop and deliver business within export markets
BAE Systems Annual Report 2010
13
Directors’ Report: Business Review
Strategy
Our strategy
The Group’s strategy integrates its major goals and actions
into a cohesive whole. It provides the framework which defines
the direction and shape of the Group over the long term. This
enables the Group to prioritise the deployment of its resources.
To address evolving challenges and maximise the Group’s
resilience in the current environment, it has reviewed and
refined the strategy, so as to ensure it remains robust, fit for
purpose and continues to deliver value. The Group is not
complacent and efficiencies continue to be driven hard within
the business.
Our business is focused on the defence and security markets,
and our home market investments in Australia, India, Saudi
Arabia, the UK and the US. Sweden and South Africa are no
longer viewed as home markets, but remain an important part
of the Group’s Land & Armaments business.
GROUP STRATEGIC FRAMEWORK – 2011
Our Vision is to be the premier global defence and security company
Our Mission is to deliver sustainable growth in shareholder
value through our commitment to Total Performance
Customer Focus
Programme Execution
Financial Performance
Responsible Behaviour
Our Values are Trusted, Innovative and Bold
Our Strategy
– Operate and grow in the defence and security markets in the segments
of Services, Electronic Systems and Platforms
– Grow in existing and develop new home markets
– Grow our export business
Strategic Actions
Invest and grow
in Services,
including
Readiness &
Sustainment
and Cyber &
Intelligence
Invest and grow
in Electronic
Systems
Sustain our
Platform
positions
Implement the
home market
strategy to grow
our business
Develop new
home markets
and grow our
export business
Implement
rationalisation
and efficiency
programmes
Integrated Business Plans
p20 For more information on the Group’s home and export markets
p64 For more information on the performance of the Group’s operating groups
14
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GROUP STRATEGIC FRAMEWORK – 2011
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The home markets in which the Group operates have been
refined on the basis of strategic alignment, market materiality,
financial and risk profile, and the presence of a sustainable
business. The Group will continue to look for additional home
markets, and its current focus is on markets in South America
and Asia.
At the core of the Group’s strategy is the creation of long-term
sustainable value for the Group’s shareholders, and leadership
in three market segments – Services, Electronic Systems and
Platforms. The global initiatives in Land, Security, Readiness
& Sustainment and Unmanned Aircraft Systems have now
moved successfully from initiatives to fully embedded
operational plans within the businesses.
The Group continues to evolve its strategy. The Group Strategic
Framework has been refreshed for 2011.
Vision
The Group’s consistent Vision provides a clear definition of
the future state it wishes to attain – it is “to be the premier global
defence and security company”.
Whilst the Group’s Vision defines the destination, a
commitment to Total Performance guides its actions.
This is embedded in the Group’s Mission.
Mission
The Group’s Mission describes its overall goal and the
philosophy that underpins its activities – it is “to deliver
sustainable growth in shareholder value through our
commitment to Total Performance” wherever we operate.
The Group believes that by embodying the four elements of
Total Performance – Customer Focus, Programme Execution,
Financial Performance and Responsible Behaviour – it will
deliver that growth in shareholder value.
Values
Achieving a culture of Total
Performance depends on all
employees living the Group’s
Values – Trusted, Innovative
and Bold. Having shared
values helps to bind the
Group together and underpins
delivery of its strategy.
Trusted
We deliver on our
commitments:
– We are honest and take
responsibility
– We can be relied upon
– Everyone matters
Innovative
We create leading edge
solutions:
– We value imagination
and experience
– We empower teams
– Working together we turn
our ideas and technologies
into solutions
Bold
We constructively challenge
and take the initiative:
– We operate with tenacity
and resolve
– We accept challenges and
manage risk
– We set stretching goals
Strategy
There are three essential elements to the Group’s Strategy
which have been incorporated into the Group Strategic
Framework for 2011.
Firstly, the Group plans to operate and target growth in the
defence and security market segments of Services, Electronic
Systems and Platforms. Secondly, to build upon the geographic
diversity which has fostered growth to date, the Group will target
growth in existing home markets and develop new home
markets. Finally, the Group will target growth from export
business.
Strategic Actions
For 2011, the Group has revised its six Strategic Actions to
reflect the market environment. They are designed to shape its
business portfolio and strengthen performance over the long
term. These actions translate the Group’s overarching strategy
into operational plans, delivered through its lines of business.
To this end, the Group plans to invest in Services, including
Readiness & Sustainment and Cyber & Intelligence, and in
Electronic Systems. It will seek to sustain the Group’s Platforms
positions across air, maritime and land. Whilst continuing to
implement the home market strategy, the Group will also seek
to develop both new home markets and its export business. The
execution of the Group’s strategy is underpinned by continuous
implementation of rationalisation and efficiency programmes.
Integrated Business Plans
The Integrated Business Planning process is an annual,
two-stage process that culminates in a BAE Systems Board and
Executive Committee approved five-year strategic and financial
plan, which is used to shape the Strategic Actions.
The plan is based on individual Integrated Business Plans from
each of our businesses, which are prepared in accordance with
our Operational Framework (see page 84).
BAE Systems Annual Report 2010
15
Directors’ Report: Business Review
Key Performance Indicators (KPIs)
The Board uses a range of quantitative
financial and non-financial performance
indicators, reported on a periodic basis,
to monitor the Group’s performance
against its Total Performance and
Executive Committee top ten
objectives. Executive directors’
remuneration is linked to certain of
these measures. The specific in-year
performance indicators used to
measure performance against the
Executive Committee’s top ten
objectives are discussed on page 12.
Financial Performance
The Group sets itself challenging financial targets through the Integrated Business Planning
process.
Link to 2010
Executive Committee
top ten objectives
p12
1. Meet 2010 financial targets; 5. Grow our Electronics, Intelligence
& Support business; 6. Implement our global land systems strategy;
7. Establish in the UK sustainably profitable through-life business
in air, land and sea; 8. Grow our home markets in the Kingdom of
Saudi Arabia, Australia and India; 9. Implement our global initiatives;
10. Continue to develop our global markets
Link to executive directors’
2010 annual incentive p107
Group Earnings per Share, Group cash
Link to principal risks
p58
All of the Group's principal risks could materially impact its
Financial Performance
Performance
Definition
Comment
ORDER INTAKE1,2 (£BN)
SALES1,2 (£BN)
20.9
20.8
21.7
15.5
16.4
25
20
15
10
5
0
22.0
22.4
18.1
15.4
13.4
25
20
15
10
5
0
06
07
08
09
10
06
07
08
09
10
£16.4bn
2009: £21.7bn1
£22.4bn +1.8%
2009: £22.0bn1
Order intake2 represents the value of funded
orders received from customers in the year.
It is a measure of in-year performance and
supports future years’ sales performance.
Sales2 represents the amounts derived from
the provision of goods and services, and
includes the Group’s share of sales of its
equity accounted investments.
The reduction in order intake2 reflects the
significant awards received in 2009 for long-term
production of Typhoon Tranche 3A aircraft, and
support for Typhoon, Harrier, Type 45, and
Spearfish and Sting Ray torpedoes.
A 1.9% like-for-like decrease in sales2 this year
has primarily been driven by the expected lower
level of US land vehicle sales in the Land &
Armaments business, which was largely offset
by increased Typhoon deliveries and support
activities in the Kingdom of Saudi Arabia.
2
3
4
5
6
16
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All Financial Performance KPIs, with the exception of operating business cash flow, reflect results from the Group’s continuing
operations.
1
Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a
discontinued operation.
Including share of equity accounted investments.
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding
non-recurring items (see page 37).
Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and
financial derivatives, and non-recurring items (see note 10 to the Group accounts).
Net cash inflow from operating activities after capital expenditure (net) and financial investment, dividends from equity
accounted investments, and assets contributed to Trust.
The target is the Group's budget for the year, which represents the first year of the five-year Integrated Business Plan
(see page 15).
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UNDERLYING EBITA1,3 (£M)
UNDERLYING EARNINGS1,4 PER SHARE
(EPS) (PENCE)
OPERATING BUSINESS CASH FLOW5 (£M)
2,500
2,000
1,500
1,000
500
0
2,197 2,214
1,879
1,417
1,169
50
40
30
20
10
0
40.1
40.8
36.8
29.4
22.9
2,500
2,000
1,500
1,000
500
782
0
1,978
1,595 1,595
1,187
06
07
08
09
10
06
07
08
09
10
06
07
08
09
10
£2,214m +0.8%
2009: £2,197m1
40.8p +1.7%
2009: 40.1p1
3 Target6 achieved
£1,187m
2009: £1,595m
3 Target6 achieved
➤ Part of the executive directors’
2010 annual incentive
➤ Part of the executive directors’
2010 annual incentive
Underlying EBITA3 is used to monitor the
year-on-year profitability of the Group. It excludes
amortisation and impairment of intangible
assets, finance costs and taxation expense, and
non-recurring items (these are profit/loss on
disposal of businesses, pension accounting
gains, and regulatory penalties levied by the
US Department of Justice and the UK’s Serious
Fraud Office).
Underlying earnings4 represent profit for the year
attributable to equity shareholders excluding
amortisation and impairment of intangible
assets, non-cash finance movements on pensions
and financial derivatives, and non-recurring items
(see note 10 to the Group accounts). Underlying
EPS provides a measure of shareholder return
that is comparable over time.
Operating business cash flow5 represents net
cash flow from operating activities after capital
expenditure (net) and financial investment,
dividends from equity accounted investments,
and assets contributed to Trust.
Excluding favourable exchange translation,
underlying EBITA3 was broadly unchanged.
Excluding a charge of £100m taken in respect
of the terminated Trinidad and Tobago ship
contract, return on sales improved to 10.3%.
The charge of £100m taken in respect of the
terminated Trinidad and Tobago ship contract
amounted to a 2.1p reduction in reported EPS.
Excluding this charge, underlying EPS growth
was 7.0%.
Relative to 2009, the reduction in operating
business cash flow5 reflects the utilisation of
customer advances in the Programmes &
Support and International operating groups,
incremental deficit funding primarily in respect
of the UK pension schemes, and a payment
made in respect of the regulatory penalty levied
by the US Department of Justice.
p36 For more information on the Group’s
financial performance
p64 For more information on the financial
performance of the operating groups
BAE Systems Annual Report 2010
17
Directors’ Report: Business Review
Key Performance Indicators (KPIs) continued
Customer Focus
The Group’s priority is to understand its customers’ needs and expectations, and deliver
on its commitments throughout the life of its products and services.
Link to 2010
Executive Committee
top ten objectives p12
3. Focus on our commitments to our customers through
schedule performance
Link to executive directors’
2010 annual incentive p107
Other objectives
Link to principal risks
p58
Defence spending, government customers, global market, contract
award timing
SCHEDULE ADHEREnCE
CUSTOMER SATISFACTIOn
The Group targets an aggregated improvement
in schedule adherence metrics relating to
milestones across its major contracts.
The Group targets an aggregated year-on-year
improvement in customer satisfaction across
its major contracts.
Schedule adherence metrics can only be fully
interpreted and understood on a contract-by-
contract basis and, therefore, aggregated data
is not presented.
Customer satisfaction metrics can only be fully
interpreted and understood on a contract-by-
contract basis and, therefore, aggregated data
is not presented.
3 Target achieved
3 Target achieved
➤ Part of the executive directors’
➤ Part of the executive directors’
2010 annual incentive
2010 annual incentive
Schedule adherence measures the timing of
achievement of key milestones. It shows how
well the Group is performing against key contract
commitments to its customers.
Customer satisfaction surveys are used to collect
customer opinions on key customer-funded
projects. This provides an opportunity for
customers to share information on perceived
performance levels, and identify areas of
strength and weakness.
The data for the schedule adherence metric
included 91 (2009 88) contracts reported in
Contract Reviews prepared under Lifecycle
Management (LCM). Performance was strong,
achieving the year’s target.
The data for the customer satisfaction metric
included 90 (2009 85) contracts reported in
Contract Reviews prepared under LCM. The
year’s target was achieved. Plans to improve
performance on those contracts reporting a
deterioration in customer satisfaction are
being implemented.
p32 For more information on LCM, which provides a structured approach to managing contractual
commitments and investments throughout project and product lifecycles
Performance
Definition
Comment
18
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Programme Execution
Responsible Behaviour1
The Group’s performance is dependent on the
successful execution of projects. It is important that
the Group wins and contracts for high quality new
programmes, and delivers on its projects within tight
tolerances of quality, time and cost performance.
Link to 2010
Executive Committee
top ten objectives p12
2. Further enhance
programme execution
through cost performance
Link to executive
directors’ 2010 annual
incentive p107
Link to principal risks
p58
Other objectives
Large contracts, fixed-price
contracts, component
availability, subcontractor
performance and key suppliers
PROGRAMME MARGIn vARIATIOn
The Group targets an aggregated year-on-year
improvement in programme margin across its
major contracts.
Programme margin variation metrics can only be
fully interpreted and understood on a contract-
by-contract basis and, therefore, aggregated data
is not presented.
High standards of business conduct are essential to the Group’s mission to deliver
sustainable growth.
Link to 2010
Executive Committee
top ten objectives p12
4. Progress towards recognised leadership position
in Responsible Behaviour
Link to executive directors’
2010 annual incentive p107
Business conduct, safety
Link to principal risks
p58
Laws and regulations
RESPOnSIBLE BUSInESS COnDUCT
AwAREnESS TRAInInG2
SAFETy
The Group’s target is to train all employees during
the period May 2010 to May 2011.
1,000
During the period to 31 December 2010, more than
50% of employees were trained.
800
600
400
200
0
789
557
554
562
389
06
07
08
09
10
Lost Work Day Case Rate (per 100,000 employees)
The Group targeted a 20% improvement in the
Lost work Day Case Rate compared with 2009.
3 Target achieved
Objective ongoing
3 Target achieved
➤ Part of the executive directors’
2010 annual incentive
Programme margin variation measures outturn
projections of and movements in margin of
key customer-funded projects. It provides an
indicator of the Group's ability to effectively
manage major programmes.
➤ Part of the executive directors’
2010 annual incentive
The number of incidents resulting in days lost to
injuries per 100,000 employees is monitored,
and actions taken to minimise the risk to the
Group’s employees and its operations, and drive
continual performance improvement.
The global Code of Conduct was launched in
January 2009. It defines the principles and
standards of responsible business conduct
the Group expects of employees wherever they
work globally. Following the completion of the
roll-out of the global Code of Conduct in early
2010, managers throughout the Group were
asked to lead face-to-face training on responsible
business conduct to raise further the ethical
awareness of its employees. Accordingly, this
year, the global Code of Conduct KPI has been
replaced by the Responsible Business Conduct
Awareness Training2 KPI.
The data for the programme margin variation
metric included 105 (2009 105) contracts
reported in Contract Reviews prepared under
LCM, representing over 70% of the Group’s order
book. The target was achieved despite the
impact of the termination of the Trinidad and
Tobago ship contract.
Training was completed by employees in the
Electronics, Intelligence & Support and Land &
Armaments businesses. All other businesses are
on track to complete training by the end of
May 2011.
An update on performance to 31 May 2011 will be
provided in next year's Annual Report.
In 2010, the overall Group improvement
was 31%.
p45 For more information on the Group’s corporate responsibility performance
p66–72 For more information on the safety
performance of the operating groups
1
2
In the Annual Report 2009, a KPI was presented relating to a 20% targeted improvement in the Group’s Operational
Assurance Statement (OAS) scores below the minimum standard. In 2010, the Executive Committee’s objective relating
to OAS was to agree action plans in respect of all scores below minimum standards. Whilst this objective has been achieved,
it is not presented as a Responsible Behaviour KPI this year. Further information on OAS is provided on page 87.
The Responsible Business Conduct Awareness Training objective is not a 2010 Executive Committee objective, but the
Executive Committee has committed to complete this for all employees by 31 May 2011.
BAE Systems Annual Report 2010
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Directors’ Report: Business Review
Key home markets
UniTed KinGdom
p24
Global positions in home
markets and export
opportunities
No.1
supplier to the Ministry of Defence
38,400
Employees2
$54bn (£35bn)
Defence expenditure3
2.5%
of GDP3
UniTed STaTeS
p22
6th
largest supplier to the Department
of Defense1
39,200
Employees2
$666bn (£426bn)
Defence expenditure3
4.7%
of GDP3
The Group’s
five key home
markets generated
92% of Group sales4
in 2010
Home markets
BAE Systems continues to benefit
from a broad and diverse market base,
operating indigenous businesses in
market segments where it sees good,
sustainable growth prospects. Today,
the Group is focused on five key home
markets, in Australia, India, the Kingdom
of Saudi Arabia, the UK and the US.
These markets are identified as having
a significant and sustained commitment
to defence and security budgets across
multiple domains. They are countries
that welcome foreign investment to
develop and sustain a domestic
industrial capability. They are also
markets where we have established,
or seek to establish, a good position
in their defence industrial base along
with strong customer relationships
and high standards of responsible
business conduct.
1
2
Based on 2009 Department of Defense expenditure.
Source: GovernmentExecutive.com
Excluding the Group’s share of equity
accounted investments.
Based on 2009 data.
Including share of equity accounted investments.
3
4
5 Mobile military communications system.
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SaUdi arabia
p26
No.1
india
p30
New
in-country defence supplier
home market in 2009
5,300
Employees2
$29bn (£19bn)
Defence expenditure3
$41bn (£26bn)
Defence expenditure3
2.4%
of GDP3
10.9%
of GDP3
aUSTralia
p28
No.1
in-country defence supplier
5,700
Employees2
$24bn (£15bn)
Defence expenditure3
2.4%
of GDP3
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SALES4 BY KEY HOME MARKET (%)
Saudi Arabia
14%
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44%
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Other
5%
8%
Export markets
Exports are an increasingly important part
of the Group’s business. BAE Systems
has opportunities to export its products
to many countries around the world. There
is renewed support from both the US and
UK governments for defence and security
export efforts.
Export successes in 2010 include
MOKYS5 to Slovakia, Hawk Advanced Jet
Trainer to India and Archer self-propelled
artillery system to Norway.
Many of the Group’s products have export
potential, but the focus in 2011 will be
on the Typhoon combat aircraft, M777
howitzer, Bradley and CV90 vehicles,
and Hawk trainer.
The Group will continue to evaluate
potential new home markets in countries
that match the Group’s established
criteria. The economic strength and
growing defence budgets of markets
in South America and Asia make them
particularly suitable.
BAE Systems Annual Report 2010
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Directors’ Report: Business Review
Key home markets in detail
United States
market context
The US remains the largest
single defence market with
2009 defence spending of
$666bn (£426bn). The 2010
Quadrennial defense review
(Qdr) identified growth in
investment allocations and
confirmed strategic priorities.
our position
bae Systems is a large and high-performing part
of the US defence industrial base, ranked the sixth
largest US defence contractor in 2009. The Group
is well positioned to support its US customers with
a balance of products, technologies and services.
The US business encompasses a diverse range
of customers and contracts with relatively low
exposure to any single programme.
atlantic marine acquisition
In July 2010, BAE Systems acquired Atlantic
Marine, a naval services business. The acquisition
has enhanced BAE Systems’ ability to support
current and future US Navy home-porting
strategies, broadened the customer base, and
increased capabilities in maritime maintenance
and modernisation activities.
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outlook
After exceptional growth in the last decade, the US Department
of Defense now forecasts a declining rate of growth and
eventual flattening of the defence budget, representing an
overall reduction of approximately $78bn (£50bn) to the Five
Year Defense Plan 2010 to 2015. However, the US government
remains committed to protecting the size, reach and fighting
strength of the military, and has committed to substantial
investments in high priority capabilities and programmes.
Increases in procurement funding are expected to be largely
funded through new cost efficiencies as operations and
maintenance funding is expected to occupy an increasing
proportion of the baseline budget. More than $100bn (£64bn)
in savings have already been identified to allocate to high priority
programmes, and a new initiative has been launched to ensure
value from contracting for defence goods and services.
In recognition of the growing importance of affordability and
efficiencies, BAE Systems streamlined the organisation of its
US business in 2010 to reduce costs and improve flexibility.
With the Land & Armaments market impacted by lower demand
for new vehicles, BAE Systems continues to rationalise its
facilities and other costs to sustain profitability, and compete
more effectively for development, production, upgrade and
Readiness & Sustainment contracts.
The Cyber & Intelligence market segment is a priority area for
further investment by the US government and represents one
of the opportunities for growth in the US.
opportunities
BAE Systems continues to benefit from its presence in capability
and product sectors that are expected to grow against the
general downturn and wider market pressures.
The Group continues to invest in distinctive capabilities that
provide competitive advantage. In Services, the acquisition
of Atlantic Marine in July enhances the ability of the Group’s
ship repair business to support maritime maintenance and
modernisation. The acquisition of OASYS Technology enhances
the Group’s product offerings in growing markets for Electronic
Systems, as would the proposed acquisition of Fairchild
Imaging. In February 2011, the Group completed the acquisition
of L-1 Identity Solutions, Inc.’s Intelligence Services Group,
which expands its existing presence in the US intelligence
community.
BAE Systems will continue to focus its investment on
strengthening its current positions in these growing sectors
of the market.
opportunities in action
In the US, the business is focused on expanding
capabilities and contracts in the Cyber &
Intelligence market segment – bringing
BAE Systems to new markets and customers.
In September, BAE Systems was selected to
provide critical information security safeguards,
including certification and accreditation, to ensure
the confidentiality and privacy of US Federal
Bureau of Investigation (FBI) computer networks
in the US and around the world.
Under this $40m (£26m) contract, BAE Systems
serves as the prime contractor offering information
security risk assessments, a form of quality control.
The information assurance process is continuously
monitored and improved as risks change so that
data, some of it classified, is transmitted, stored
and protected safely. Continuous monitoring is a
technique to address the security impacts on an
information system resulting from changes to the
hardware or software during the lifecycle.
Following this win, BAE Systems was also selected
as one of 45 IT contractors to participate in the
FBI’s largest ever Indefinite Delivery, Indefinite
Quantity (IDIQ) contract, potentially worth up to
$30bn (£19bn) amongst the competing
contractors over an eight-year period.
BAE Systems Annual Report 2010
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Key home markets in detail continued
United Kingdom
market context
The 2010 national Security
Strategy (nSS), and Strategic
defence and Security review
(SdSr) have defined the areas
for future UK spend in security
and defence.
our position
The Group has a key role in supporting the UK
armed forces, and the nation’s security and
intelligence capabilities. Together, the nSS and
SdSr have confirmed that the Group’s strategy for
the UK market is focused on the appropriate areas.
in defence, the business has a secure backlog of
contracted business across air, maritime and land
platforms, including significant readiness &
Sustainment contracts. in Cyber & intelligence,
the business continues to play a formative role
supporting customers in the growing intelligence,
civil government and commercial markets.
Type 45 programme
The Type 45 build programme is more than half
complete, with delivery of the third of class,
Diamond, sea trials for fourth of class, Dragon, and
the launch of the final ship, Duncan, during 2010.
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In the air domain, the SDSR committed the UK to modernise
and upgrade the capabilities of Typhoon, and to procure F-35
for operation from the Queen Elizabeth class aircraft carriers.
In addition, the UK and France are expected to develop ideas
for closer co-operation on Unmanned Aircraft Systems. These
factors will contribute to the future sustainment of the Group’s
combat air capability.
opportunities
Across all domains, the Group has been working with the
Ministry of Defence to reduce costs and deliver military
capability more effectively. Broad service offerings, including
Readiness & Sustainment solutions, will be a key contributor to
delivering additional savings and efficiencies. The Group is well
positioned to expand these service offerings in support of the
UK customer.
The Group’s investment in Cyber & Intelligence positions it
for growth in this expanding market segment. The Group is
committed to delivering world class technologies and services
to assist the government and commercial sectors to detect
and defend against cyber attacks, prevent fraud and money
laundering, and ensure secure delivery of services.
In the maritime domain, the Group’s surface warship design,
build and support capability is sustained by a 15-year Terms
of Business Agreement (ToBA). The SDSR’s commitment to
the construction of two Queen Elizabeth class aircraft carriers
underpins that capability in the near and medium term, as does
the Type 26 Global Combat Ship programme in the longer term.
The future of the Group’s submarine business is secured by the
government’s commitment to the procurement of seven Astute
class submarines, and the retention and planned renewal of a
submarine-launched continuous nuclear deterrent.
The NSS outlined and prioritised the “different and more complex
range of threats from a myriad of sources” that the UK faces, and
identified an additional £650m of investment to be made in the
next four years in the strengthening of national cyber security
as part of that response. BAE Systems is well placed to access
growth in the emerging security market through its investments
in Detica and elsewhere.
opportunities in action
During 2010, the Group launched the Detica
TreidanTM cyber threat detection service and is
working with a number of clients including major
private sector organisations to detect and stop
sophisticated intrusions into their IT systems.
Building on the Group’s capabilities in data capture
and large scale data analytics, the Detica TreidanTM
service hunts out patterns of unusual behaviour in
order to detect unauthorised intruders who have
gained access to protected systems using cyber
attacks, and to stop these incursions before the
attacker has had the opportunity to identify and
compromise sensitive systems and information.
Findings from these highly sensitive operations
confirm many of the messages in the SDSR about
the threat to the UK’s security and economic
prosperity. The Group continues to invest in a wide
range of new technologies and approaches in this
area for which it forecasts growing demand as both
public and private sector organisations become
increasingly aware of the nature and scale of the
threat to their operations.
BAE Systems Annual Report 2010
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Directors’ Report: Business Review
Key home markets in detail continued
Saudi arabia
market context
regional tensions continue
to ensure that defence and
security remain a high priority
for the Kingdom of Saudi arabia
(KSa). in 2009, defence
expenditure was 10.9% of GdP.
our position
bae Systems acts as the prime contractor for
the UK/KSa government-to-government defence
agreement and also holds certain direct contracts
with the Saudi government. Progress is ongoing
to modernise the Saudi armed forces in line with
the 2005 UK/KSa Understanding document, and
the Group continues to support the operational
capability of the royal Saudi air Force (rSaF) and
royal Saudi naval Forces (rSnF) through the Saudi
british defence Co-operation Programme (SbdCP).
investing in Saudi industry
BAE Systems continues to develop its presence
in Saudi Arabia and remains committed to
developing a greater indigenous capability
in-Kingdom. The business is pursuing a policy
of transferring technology and work to Saudi
Economic Offset companies in areas such as the
Tornado Programmed Depot Maintenance and
Upgrade facility.
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Regional tensions combined with enduring high oil prices result
in robust budgets and increasing opportunities. The linking of
defence and security procurement to indigenous industrial
development and in-Kingdom job creation for Saudi nationals
will continue as a strategic objective for the KSA government.
BAE Systems continues to invest in Saudi industry to help
deliver on this requirement.
opportunities
BAE Systems is seeking to extend its activities to support all
Saudi military and paramilitary forces.
In the air domain, availability contracting and additional support
on the Salam Typhoon contract represent opportunities for
the business.
In the land and maritime domains, there are a number of
near-term direct programme prospects for vehicle artillery
systems and maritime equipment.
The security market continues to mature and near-term
opportunities are expected in Intelligence, Surveillance
and Reconnaissance.
opportunities in action
The RSAF is now the sixth air force in the world
to be flying Typhoon aircraft.
In 2007, a contract to supply 72 Typhoon aircraft
to KSA was agreed and 18 were delivered by the
end of 2010 in line with the programme.
In 2009, to support continued aircraft availability,
the governments of the Kingdom of Saudi Arabia
and the UK reached agreement on detailed
arrangements under the Salam support solution
to provide support for operations by the RSAF
Typhoon fleet for a three-year period.
Building on BAE Systems’ knowledge and
experience gained working alongside the Royal
Air Force in supporting the UK’s Typhoon fleet,
the Salam support solution provides a full
availability service contract – the first of its kind
for Typhoon. The contract includes training in the
UK for RSAF Typhoon pilots and multi-skilled
aircraft technicians. In support of the contract,
BAE Systems continues to invest in local Saudi
companies, develop an industrial technology
transfer plan and train Saudi nationals to assist
in the provision of Readiness & Sustainment.
BAE Systems Annual Report 2010
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Key home markets in detail continued
australia
market context
australia’s 2009 defence budget
was $24bn (£15bn) and, as its largest
defence contractor, bae Systems is
well placed to provide the australian
defence Force (adF) and security
community with a full range of products
and services.
our position
bae Systems is the largest defence company
in australia. it supplies total capability across
mission systems, air defence, land combat
systems, maintenance, logistics support, and
intelligence, surveillance and reconnaissance.
in January 2011, the Group acquired stratsec.net,
an information security company, adding to the
Group’s capabilities and footprint in the growing
market segment of Cyber & intelligence.
readiness & Sustainment
BAE Systems and Australian Army personnel
inspect an upgraded M113AS4 Armoured
Personnel Carrier at Bandiana, Victoria.
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The Australian government has detailed an expansive
acquisition programme for platforms and systems over the
next decade, and has committed to average real growth in the
defence budget of 3% annually to 2017-18, with further growth
beyond in order to meet the defence and security objectives
outlined in its 2009 Defence White Paper. An important
contributor to this growth will be savings and efficiencies in
Australia’s military sustainment expenditure emerging from the
ten-year Strategic Reform Programme, which will be re-invested
in the acquisition programme. This is expected to generate new
opportunities for service offerings in Readiness & Sustainment.
opportunities
BAE Systems expects strong opportunities for Readiness
& Sustainment to the ADF in both the air and maritime domains.
Cyber & Intelligence also represents an important focus for the
Australian government.
BAE Systems is well placed to offer a range of solutions that are
sourced both from indigenous capability within Australia and
capability sourced from elsewhere in the Group. For example,
the business has recently experienced success in the Cyber
& Intelligence market segment through the transfer of Detica’s
UK capability into BAE Systems Australia.
opportunities in action
In January 2010, BAE Systems began modifying
the first of the Royal Australian Navy’s ANZAC Class
frigates to be upgraded under the Anti-Ship Missile
Defence project. The upgrade will significantly
improve the anti-ship self defence capabilities of
the ANZAC Class by integrating leading-edge CEA
Phased Array Radar, Vampir New Generation
Infrared Search & Track, Sharpeye Navigation
Radar Systems and an upgraded Combat
Management System which will include an
improved Operations Room layout. The platform
integration of these systems requires significant
structural modifications, and BAE Systems has
developed innovative design solutions to minimise
the impact on the ship’s weight and stability.
In October 2010, the first ship departed from the
BAE Systems production facility, and entered its
test and trials phase, with delivery back to the
customer anticipated in mid-2011.
This upgrade contract is a key example of
BAE Systems’ strong position in the Services
segment of the Australian maritime market,
a key focus for future growth.
BAE Systems Annual Report 2010
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Key home markets in detail continued
india
market context
india’s 2009 defence
expenditure was $29bn
(£19bn) and is in future
expected to grow in line
with the country’s economy.
our position
india is bae Systems’ newest home market, building on the
Group’s long-standing relationship with Hindustan aeronautics
limited (Hal) and rolls-royce, supplying 66 Hawk advanced
Jet Trainer (aJT) aircraft to the indian air Force. bae Systems
also has a 40% interest in baeHal Software limited, a joint
venture with Hal, specialising in aerospace software and
engineering services. in 2010, the Group secured a new order
with Hal for a further 57 Hawk aircraft, and established a land
systems joint venture with mahindra & mahindra limited,
defence land Systems india Private limited, which is
currently developing and marketing several vehicles with the
support of bae Systems’ businesses across the world.
land systems joint venture
This year, the Group established a land systems
joint venture with Mahindra & Mahindra Limited,
which is currently marketing several vehicles,
including the MPVi shown, with the support of
BAE Systems’ businesses across the world.
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outlook
The Indian government has embarked upon a modernisation
programme across the air, maritime and land domains, involving
the acquisition of new aircraft, missiles, artillery, combat
vehicles and naval vessels, and development of capabilities in
command, control, communications and intelligence gathering.
The Indian security market is less mature, but growing, as the
threat of terrorism and internal insurgency continues.
Currently, approximately 70% of India’s defence requirements
are sourced externally. The Indian government has a stated
desire to reverse this situation and is looking increasingly
to source its defence capabilities from indigenous Indian
companies, partnered with foreign suppliers where necessary.
opportunities
The Group is committed to a programme of investment
and technology transfer in support of its strategy to create
indigenous capability in the Indian defence and security market,
and significant order opportunities exist for BAE Systems.
In the air domain, BAE Systems continues to support EADS
in the promotion of Typhoon for the Indian Air Force Medium
Multi-Role Combat Aircraft competition, as well as working
with HAL on the supply of Hawk AJT aircraft.
In land, India is trialling the M777 howitzer in advance of a
potential purchase and further opportunities exist to sell
FH77-B05 artillery.
Opportunities also exist to import capability from other areas
of the Group to meet growing requirements in the security and
land domains.
opportunities in action
In 2010, BAE Systems secured a new order with
HAL, worth £537m, to supply products and
services to enable a further 57 Hawk AJT aircraft
to be built under licence in India for the Indian
Air Force and Indian Navy. The aircraft will be
manufactured under licence at HAL’s facilities
in Bangalore, and BAE Systems will provide
specialist engineering services, the raw materials
and equipment necessary for airframe production,
and the support package for the customer.
The new order extends the current partnership
with HAL for a further six years.
The Hawk AJT fast jet training solution enables
an air force or navy to prepare front-line pilots for
the most modern fighter aircraft.
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Resources
The Group’s key resources and arrangements include its relationships with customers,
subcontractors and other suppliers, people, research and development, and intellectual
property. These resources, together with the application of the mandated policies and
processes in the Operational Framework, help the Group to achieve its strategy.
Customers
The Group’s core businesses are primarily defence and
security-related, selling products and services in its home
and export markets both directly and indirectly, mainly to
government, but also to commercial, customers. Customer
relationships often extend over decades, and span the full
product and service lifecycle from initial concept definition,
through the system development phase, into production and
then on to support for the system in service.
– Improvements in schedule adherence and customer
satisfaction achieved
Principal customers
The Group’s most significant customers are the governments
of the US, UK, Kingdom of Saudi Arabia and Australia. In the US,
BAE Systems is subject to a Special Security Agreement that
safeguards US national security interests, as a result of which
BAE Systems is allowed to supply products and services of a highly
sensitive nature to the US government. Agreements between the
governments of the United Kingdom and Kingdom of Saudi Arabia
relating to defence co-operation programmes remain essential to
the development of the Group’s business in Saudi Arabia. In
Australia, BAE Systems is subject to an Overarching Deed with the
Commonwealth of Australia that protects their national security
and other interests, and allows the Group to own certain Australian
defence-related industrial assets.
Indian government policy on Foreign Direct Investment mandates
that foreign partners can hold a maximum of 26% equity in
defence ventures.
Lifecycle Management (LCM)
The application of LCM, which is a mandated project management
process, is fundamental to the Group’s capability to deliver
projects on time, within cost and according to agreed
requirements, thereby meeting customer commitments. It
provides a structured approach to managing the Group’s projects
throughout their lifecycles, promoting the application of best
practice management, facilitating continuous improvement and
providing a competitive advantage in the way that projects are
managed.
The lifecycle of a project comprises business winning and contract
execution phases. During business winning, management
focuses on the customer’s requirements and the ability of the
Group to deliver a product or service at acceptable risk and
profitability. In the contract execution phase, management
concentrates on developing and proving the product or service to
deliver to customers’ requirements and planned margins.
Schedule adherence and customer satisfaction metrics are
regularly reviewed by the Board to monitor contract milestone
achievement, and to ensure that the Group is delivering on its
commitments to its customers.
Customer Reviews
Throughout the project lifecycle, the Group engages extensively
with its customers and undertakes Customer Reviews to drive
change, and promote and sustain the growth and development of
customer relationships.
Under the Operational Framework, businesses are required to
undertake a Customer Review at least every two years with their
key customers, using specified processes. Customer Reviews
also include questions to determine customer perceptions of
BAE Systems’ ethics.
These reviews help the Group to understand how its customers
perceive its performance and behaviours, and help to understand
customer priorities, and to reshape services and behaviours when
necessary.
Responsible Behaviour – business conduct
BAE Systems does not compromise on the way it conducts
business, and consistency of this approach is key in defining its
reputation. The Group has four Responsible Trading Principles
(see page 33), which underpin all of its business activity.
The Group’s corporate responsibility agenda, including its
commitment to be recognised as a leader in business conduct,
contributes to successful long-term relationships with customers.
KPI The Group measures the success of its customer relationships through the
schedule adherence and customer satisfaction KPIs (see page 18)
Working closely with the customer at the
Group’s new design and prototyping centre
BAE Systems opened a new state-of-the-art design and prototyping centre in
Sterling Heights, Michigan, in close proximity to its customer to allow further
development of an ongoing, collaborative working relationship. The centre
houses facilities for vehicle and subsystem modifications, integration and
testing, electrical assembly fabrication, software development and system
integration of vehicle control and crew station electronics.
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Responsible Trading Principles
BAE Systems has four Responsible Trading Principles that underpin all of
the Group’s business activity. These are:
– we understand and support our customers’ national security and other
requirements;
– we work to BAE Systems’ Values in all that we do;
– we assess carefully our products and services with the objective that
neither BAE Systems nor our customers are exposed to significant
reputational risk; and
– we are as open as practicable about the nature of our business.
Responsible Behaviour – business conduct
The behaviour of suppliers could potentially impact the Group’s
reputation and performance, and the Group is taking steps to
encourage suppliers to adopt standards of Responsible
Behaviour consistent with the Group’s. In March 2010, the
Group’s Code of Conduct was sent to the top 1,000 suppliers
who are encouraged to work to equivalent standards. Tenders
from major suppliers are now also assessed against the Group’s
Responsible Trading Principles (see above).
Guidance has been introduced to help procurement teams apply
the Group’s Responsible Trading Principles, and criteria relating
to business conduct, safety and environmental management
have been integrated into supplier selection criteria and ongoing
supplier management.
Responsible Behaviour – environment
Reducing environmental impacts in the supply chain continues to
be a focus, with guidance published by the Group’s Sustainable
Procurement Working Group. BAE Systems remains committed
to the UK Ministry of Defence’s Sustainable Procurement Charter
that seeks to improve environmental standards in the defence
supply chain.
Subcontractors and other suppliers
Subcontractors and other suppliers provide the products
and services needed to manage the business from design
to manufacturing to Readiness & Sustainment. Managing
performance and expenditure with suppliers, which can
represent a significant portion of project cost, is an
important value driver for the Group.
– Top 1,000 suppliers are provided with the Group’s global
Code of Conduct and encouraged to work to equivalent
standards
– Standard terms and conditions introduced across the UK
and US
Business sustainability
BAE Systems is committed to developing and improving
relationships with suppliers to deliver better value and
innovation for customers. To minimise risk to the Group, the
financial health of key suppliers is assessed to ensure they can
continue to deliver essential products and services. The Group’s
global database of vulnerable suppliers identifies those which
may be at risk during the economic downturn, and which may
need support to ensure business continuity.
Terms and conditions
Standard terms and conditions have now been introduced
across the Group’s UK businesses to help to ensure that a
consistent approach to supplier management is adopted for
routine purchases. These include clauses on environmental
sustainability, business conduct and responsible trading. Other
home markets are following suit. Standard terms and conditions
had already been established by the Group’s businesses in the
US, and the majority have adopted the standards.
Capability development
Professional development of procurement staff is important.
A training programme has been developed in partnership with
the Chartered Institute of Purchasing and Supply in the UK, and
with the Institute of Supplier Management in the US. The UK
programme was launched in 2010, and the US version is
scheduled to pilot in 2011.
Supporting employment in the UK
In 2009, the Group’s UK businesses spent an estimated £5.9bn on
procurement of equipment, components, raw materials, rent, energy and
services from its suppliers. It is estimated that some £4.1bn of this was
spent in the UK.
Distributing BAE Systems’ UK procurement spending across industrial
sectors and examining the impact of that spending on total sales of
different industries, using input/output tables, suggests that a typical job in
BAE Systems in the UK supports a total of 1.2 jobs elsewhere in the economy.
Put another way, taking into account the first and second tiers of suppliers,
together the 42,360 Full-Time Equivalent (FTE) UK jobs at BAE Systems in
2009 supported a further 52,088 FTE jobs further down the supply chain.
Source: Oxford Economics
BAE Systems Annual Report 2010
33
Directors’ Report: Business Review
Resources continued
People
The Group’s investment in its current and potential future
workforce is designed to provide the capabilities and skills
needed to deliver on the Total Performance objective. The
Group takes a through-career approach to skills development,
from influencing the choices made by people in full time
education and early careers programmes to continuous
professional development. Through the global application of
its People Policy, the Group aims to provide an employment
proposition that attracts, retains and engages highly skilled,
motivated and valued people.
– 98,200 employees1 globally
– During 2010, the Group recruited 441 graduates and 338
apprentices globally
Responsible Behaviour – safety
The Group’s commitment to a strong safety performance is
a fundamental responsibility, and contributes to business
performance and employee engagement (see page 50).
Responsible Behaviour – diversity and inclusion
A focus on diversity and inclusion encourages innovation and
enhances productivity by helping the Group to recruit, motivate
and retain the best people (see page 51).
The People Policy within our Operational Framework obliges
each employee to contribute to the creation of an inclusive work
environment where individuals are respected and the value of
a diverse workforce is recognised. Diversity and inclusion are
included in the performance objectives of senior leaders.
The Group is committed to giving full and fair consideration to
applications for employment from disabled people who meet the
requirements for roles, and making available training opportunities
and appropriate accommodation to disabled people employed by the
Group. Unlawful discrimination against individuals with disabilities is
not tolerated. The principles set out in the People Policy are subject
to relevant legislative, regulatory and security requirements.
Capability development
Focused training and development programmes help to ensure
that employees have the skills and technical know-how to meet
our customers’ changing needs. A strategic approach to training
helps us to map employees’ skills against changing business
requirements and identify training priorities. Flexible training
and development programmes encourage a culture of lifelong
learning, helping employees to reach their full potential.
Developing leadership capability
The Total Performance Leadership framework provides an
integrated approach to performance management, resourcing
and leadership development. It aims to strengthen leadership
capabilities to optimise delivery of the Group’s strategy. The
framework provides a set of tools for matching individual’s skills
and potential with business goals, as well as feedback from
employee surveys and customer reviews. It includes training,
coaching and mentoring to support managers and aspiring
leaders in achieving their career goals.
Education and early careers
Education programmes in the Group’s home markets aim to
interest young people in science and engineering careers.
The schools road show in the UK, and the Group’s sponsorship
of FIRST (For Inspiration and Recognition of Science and
Technology) in Australia and the US target school age students.
The Group also partners with universities to develop courses
that meet the needs of industry and provide placement
opportunities for undergraduates.
In 2010, the Group launched its Skills 2020 strategy in the
UK, a programme for delivering the skills the engineering and
manufacturing sectors need over the next ten years. In the US,
the Group is a member of Change the Equation (CTEq), an
initiative to improve Science, Technology, Engineering and
Mathematics (STEM) education for children. The goals of CTEq
are to improve teaching in STEM subjects and inspire student
learning and career choices in STEM.
The Group’s education and early careers programmes support its
commitment to diversity and inclusion, by tackling perceptions that
engineering is a male career choice, and encouraging female and
minority students to consider a career in the industry (see page 51).
Employee engagement
Regular internal communication, including newsletters and the
intranet, keeps employees involved and motivated. Results from
the 2010 biennial Group-wide employee survey demonstrated
that the Group continues to engage proactively with its employees
despite ongoing restructuring activities. The Group will analyse
the results and develop action plans to address areas where
appropriate to enhance its engagement with employees.
The Group has constructive relationships with trade unions, and
regularly communicates and discusses business developments
which impact the Group and its employees.
The Group welcomes employees becoming shareholders in
BAE Systems, and offers a number of employee share plans to
support this.
KPI The Group measures its safety performance using the Lost Work Day Case
Rate KPI (see page 19)
BAE Systems’ commitment to future
capability development
BAE Systems’ graduate programmes are part of its wider commitment to
future capability development, and are designed to help meet its future
technology and leadership requirements. BAE Systems’ core graduate
programmes provide graduates with a development programme, which
includes a residential Graduate Developing You programme and an annual
conference. The Group’s new UK graduate recruitment website won the best
new corporate graduate recruitment website award at the 2010 Onrec
Awards, the leading industry online recruitment awards.
In the UK, the Group is one of the biggest recruiters of engineering
apprentices, employing 286 new apprentices in 2010.
1
Including share of equity accounted investments.
34
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Research and Development (R&D)
The Group is engaged in leading edge R&D programmes in
support of the Services, Electronic Systems and Platforms
that it provides to its customers.
– In 2010, R&D expenditure was £1,298m (2009 £1,211m)
of which £270m (2009 £278m) was funded by the Group
The Group’s R&D activities cover a wide range of programmes,
and include technological innovations and techniques to
improve the manufacturing and service of products.
The Group funds strategic R&D across the business, particularly
in the Electronic Systems, Cyber & Intelligence and military
Services market segments. Customers fund much of the
near-term product development work undertaken by the Group.
BAE Systems has an Investment in Innovation programme
aimed at small and medium-sized enterprises and academia
to identify and accelerate the development of new technologies
in support of customers’ requirements. As well as providing
financial support, BAE Systems offers expertise and resources,
including the use of test and evaluation facilities. Current
investments focus on the areas of cyber security, surveillance
and biometrics.
An example of the Group’s R&D activities within Cyber &
Intelligence is the development of a technology demonstrator
that integrates biometrics in the form of face and iris recognition
to a prototype system that can recognise subjects on the move.
In military Services, for example, the Group has developed
processes for the installation and testing of new capabilities on
Tornado aircraft, including for urgent operational requirements,
which have reduced timescales for delivery to the customer.
The Group continues to invest in autonomous systems in the air
domain to address emerging global demand. In conjunction with
its customer and industry partners, BAE Systems has designed,
developed and built the Taranis autonomous stealthy unmanned
combat air vehicle, which was unveiled during 2010.
Intellectual property
Intellectual property is vital to the Group’s success in
obtaining and maintaining a competitive advantage.
– In 2010, the Group filed patent applications covering over
250 new inventions
– At 31 December 2010, BAE Systems had a total portfolio
of patents and patent applications covering more than
2,000 inventions worldwide
The Group’s intellectual property is a key competitive
differentiator to the business in all market segments – Services,
Electronic Systems and Platforms. It takes many forms, in
products, processes and know how.
The Operational Framework mandates a policy to protect the
Group’s intellectual property (including patents, copyrights
and trade marks) through appropriate use and observance
of intellectual property law, so that returns made from
the investment in R&D and technological innovation are
protected, and commercial and business innovations are
adequately safeguarded.
BAE Systems is developing ‘liquid armour’
to protect frontline troops
BAE Systems has developed a counterintuitive liquid which hardens
when struck as part of a project to create future body armour, offering
soldiers greater ballistics protection and ease of movement in combat
situations. The technology, referred to as ‘liquid armour’, harnesses the
unique properties of shear thickening fluids which ‘lock’ together when
subjected to a force to enhance the existing energy absorbing properties
of material structures like Kevlar.
Ceramic-based armour plates used in current body armour systems to
cover large areas of the torso are heavy and bulky, restricting movement
and contributing to fatigue, particularly in harsh environments like
Afghanistan.
‘Liquid armour’ seeks to address a requirement for materials which can
offer troops increased protection with reduced mass, wider area cover,
greater manoeuvrability and easy integration with other systems. The
technology can be integrated into standard Kevlar body armour.
DEMON demonstrates ‘flapless flight
technology’
In September, the DEMON Unmanned Air Vehicle (UAV) successfully
demonstrated ‘flapless flight’ in the UK. Developed by Cranfield
University, BAE Systems and nine other UK universities, DEMON is
designed to be able to forgo the use of conventional mechanical
elevators and ailerons, which usually control the movement of an
aircraft, in favour of novel aerodynamic control devices using blown jets
of air. The aircraft is the outcome of a five-year programme jointly
funded by BAE Systems and the UK’s Engineering and Physical Sciences
Research Council.
BAE Systems Annual Report 2010
35
Directors’ Report: Business Review
Financial performance
“ A robust performance
evidencing the
quality and resilience
of the Group.”
George Rose
Group Finance Director
FinanciaL HigHLigHtS
– Headline sales2 increased by 1.8%
– Underlying EBITA3 up 0.8% to £2,214m
(2009 £2,197m) after a charge of £100m
taken in respect of the terminated Trinidad
and Tobago ship contract
– Underlying earnings4 per share increased
by 1.7% to 40.8p (2009 40.1p)
– The total dividend has increased by 9.4% to
17.5p (2009 16.0p)
– £500m market purchase of shares completed
Summary income Statement – continuing operationS
KPI
KPI
Sales2
Underlying EBITA3
Return on sales
Profit on disposal of businesses
Pension accounting gains
Regulatory penalties
EBITA
Amortisation of intangible assets
Impairment of intangible assets
Finance costs2
Taxation expense2
Profit/(loss) for the year
Exchange rates – average
£/$
£/€
£/A$
2010
£m
Restated1
2009
£m
22,392
21,990
2,214
9.9%
1
2
(18)
2,199
(392)
(125)
(194)
(461)
1,027
2,197
10.0%
68
261
(278)
2,248
(286)
(973)
(698)
(352)
(61)
1.545
1.166
1.682
1.566
1.123
1.990
Following the sale of half of the Group’s 20.5% shareholding
in Saab AB, its share of the results of Saab AB to the date of
disposal are now shown within discontinued operations for the
current and prior periods (see note 9 to the Group accounts).
36
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Amortisation of intangible assets is £106m higher at £392m
mainly reflecting the profile of vehicle deliveries under the Family
of Medium Tactical Vehicles (FMTV) contract.
Impairment of intangible assets of £125m includes £70m
relating to the Surface Ships business primarily arising from
the underperformance of the ex-VT Group export ship contracts.
The £973m charge in the prior year primarily reflected the
non-award of the follow-on FMTV production contract (£592m)
and the weaker outlook for the US-based Products Group
business (£264m).
Finance costs2 were £194m (2009 £698m). The underlying
interest charge was £191m (2009 £193m). A net expense
of £3m (2009 £505m) arose from pension accounting,
marked-to-market revaluation of financial instruments and
foreign currency movements. The net expense in the prior year
arose from movements in exchange rates on the unhedged
element of an intercompany loan from the UK to the US
business. That loan has subsequently been capitalised.
Taxation expense2 reflects an effective tax rate of 29% (2009
28%). The effective tax rate is based on profit before taxation
excluding goodwill impairment of £84m (2009 £725m) and
regulatory penalties of £18m (2009 £278m). The underlying
tax rate for 2011 is expected to be around 30%, with the final
number dependent on the mix of profits between the UK and US.
Income statement – continuing operations
Sales2 increased by 1.8% to £22.4bn (2009 £22.0bn).
Like-for-like sales2, after adjusting for the impact of exchange
translation, and acquisitions and disposals, reduced by 1.9%
as increased Typhoon deliveries and support activities in the
Kingdom of Saudi Arabia were more than offset by the planned
lower level of land vehicle sales in the US.
US-led businesses were responsible for 51% (2009 55%) of
sales2. Sales2 generated from home markets represented
92% (2009 92%) of sales2. The Group’s sales2 performance
is illustrated in the bridge chart below.
Underlying EBITA3 Management uses an underlying profit
measure to monitor the year-on-year profitability of the Group.
This is defined as earnings before amortisation of intangible
assets, finance costs and taxation expense (EBITA) excluding
non-recurring items.
Underlying EBITA3 increased by 0.8% to £2,214m (2009
£2,197m). This increase includes favourable exchange
translation of £25m. A charge of £100m was taken in the year
in respect of the terminated Trinidad and Tobago ship contract.
Excluding that charge, return on sales increased to 10.3%.
US-led businesses delivered 56% (2009 52%) of the Group’s
underlying EBITA3. The increase in underlying EBITA3 is
illustrated in the bridge chart below.
Non-recurring items are defined as items that are relevant to
an understanding of the Group’s performance with reference
to their materiality and nature. The non-recurring items, which
are unchanged from the prior year, are as follows:
In the prior year, profit on disposal of businesses of £68m
included £58m for the finalisation of the accounting gain
arising from the BVT joint venture transaction.
The pension accounting gain in the prior year of £261m
resulted from pension benefit restructuring in the US.
The regulatory penalties of £278m in the prior year reflect
the global settlement of the regulatory investigations by the
US Department of Justice (DoJ) and the UK’s Serious Fraud
Office. The £18m charge in the current year reflects the US
dollar exchange rate movement on payment of the penalty
in respect of the DoJ.
SALES2 BRIDGE (£BN)
UNDERLYING EBITA3 BRIDGE (£M)
25
20
15
10
5
0
2,500
2,000
1,500
1,000
500
0
20091
Currency
translation
Acquisitions
and
disposals
Organic
growth
2010
20091
Currency
translation
Acquisitions
and
disposals
Trinidad
and Tobago
charge
Performance
2010
1
2
3
Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and
subsequent classification as a discontinued operation.
Including share of equity accounted investments.
Earnings before amortisation and impairment of intangible assets, finance costs and
taxation expense (EBITA) excluding non-recurring items.
BAE Systems Annual Report 2010
37
Dividends
The Board is recommending a final dividend of 10.5p per share
(2009 9.6p), bringing the total dividend for the year to 17.5p per
share (2009 16.0p), an increase of 9.4%.
The proposed dividend is covered 2.3 times by underlying
earnings4 from continuing operations (2009 2.5 times), which
is consistent with the Group’s policy of growing the dividend
whilst maintaining a long-term sustainable earnings cover of
approximately two times.
Directors’ Report: Business Review
Financial performance continued
Earnings per share – continuing operations
reconciLiation From underLying eBita3 to underLying
earningS4 – continuing operationS
2010
£m
Restated1
2009
£m
Underlying EBITA3
KPI
2,214
2,197
Finance costs excluding non-cash
finance movements on pensions
and financial derivatives (see
note 6 to the Group accounts)
Taxation
Non-controlling interests
Underlying earnings4
(191)
2,023
(587)
(29)
1,407
(193)
2,004
(567)
(22)
1,415
Weighted average number of shares
3,451m
3,532m
Underlying earnings4 per share
KPI
40.8p
40.1p
Underlying earnings4 per share was 40.8p (2009 40.1p), an
increase of 1.7%. The effect of the Trinidad and Tobago £100m
charge taken in 2010, net of tax, amounts to an earnings per
share reduction of 2.1p. Excluding that charge, underlying
earnings4 per share increased by 7.0% compared with 2009.
The increase in underlying earnings4 per share is illustrated
in the bridge chart below.
Basic earnings per share, in accordance with IAS 33, Earnings
per Share, increased to 28.9p compared with a loss in 2009
of 2.3p.
UNDERLYING EARNINGS4 PER SHARE BRIDGE (PENCE)
DIVIDEND
(PENCE PER SHARE)
50
40
30
20
10
0
17.5
16.0
14.5
12.8
11.3
20
16
12
8
4
0
20091
Currency
translation
Share
buyback
Trinidad
and Tobago
charge
Tax rate
Performance
2010
06
07
08
09
10
1
2
3
Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and
subsequent classification as a discontinued operation.
Including share of equity accounted investments.
Earnings before amortisation and impairment of intangible assets, finance costs and
taxation expense (EBITA) excluding non-recurring items.
38
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4
5
Earnings excluding amortisation and impairment of intangible assets, non-cash finance
movements on pensions and financial derivatives, and non-recurring items.
Restated following finalisation of the fair values recognised on acquisition of the 45%
shareholding in BVT Surface Fleet Limited.
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Cash inflow from operating activities was £1,535m (2009
£2,232m), which includes contributions in excess of service
costs for the UK and US pension schemes totalling £554m
(2009 £475m), and the payment of the regulatory penalty to
the US Department of Justice (£266m).
There was an outflow from net capital expenditure and financial
investment of £364m (2009 £489m). The prior year included
£94m in respect of new residential and office facilities in
Saudi Arabia.
2010
£m
1,535
2009
£m
2,232
(364)
(489)
77
(225)
Dividends received from equity accounted investments,
primarily MBDA, FNSS, Air Astana, Advanced Electronics
Company and Eurofighter GmbH, totalled £71m (2009 £77m).
Assets contributed to Trust comprise a £25m payment made
during the year for the benefit of the Group’s main pension
scheme (2009 £225m).
Cash held for charitable contribution to Tanzania Whilst the
£29.5m charitable contribution for the benefit of the people
of Tanzania (referred to in the Chairman’s letter on page 7)
had not been made at the date of this Annual Report, the
amount has been deducted from the Group’s stated net debt
at 31 December 2010 and, with effect from 1 January 2011,
is being held by the Company in a notional deposit account
accruing interest for the benefit of the people of Tanzania at
the Sterling London Interbank Bid Rate.
Taxation payments were £352m (2009 £350m).
Net cash outflow in respect of acquisitions and disposals of
£88m mainly comprises the acquisition of Atlantic Marine and
OASYS Technology (£260m), less the disposal of half of the
Group’s 20.5% shareholding in Saab AB (£92m) and an initial
payment of A$112.5m (£65m, net of legal fees) received from
the former owners of the Tenix Defence business relating to the
resolution of outstanding issues from the 2008 acquisition.
The prior year outflow of £253m mainly reflects £315m paid
to acquire VT Group’s 45% interest in BVT, less £70m deferred
consideration received relating to the 2008 disposal of a 50%
interest in Flagship Training.
The net purchase of equity shares of £520m (2009 £20m)
includes 144 million shares purchased under the buyback
programme at a cost of £500m (excluding transaction costs
of £3m).
As a consequence of movements in the US dollar and Euro
exchange rates during the year, there has been a cash outflow
from matured derivative financial instruments of £123m
(2009 inflow £36m) from rolling hedges on balances with the
Group’s subsidiaries and equity accounted investments.
Foreign exchange translation primarily arises in respect of
the Group’s US dollar-denominated borrowing.
Cash flow
reconciLiation oF caSH inFLow From operating
activitieS to net (deBt)/caSH (aS deFined By tHe group)6
Operating business cash flow7
KPI
1,187
Cash inflow from operating activities
Capital expenditure (net) and financial
investment
Dividends received from equity
accounted investments
Assets contributed to Trust
Cash held for charitable contribution
to Tanzania
Interest
Taxation
Free cash flow
Acquisitions and disposals
Debt acquired on acquisition
of subsidiary
Purchase of equity shares (net)
Equity dividends paid
Dividends paid to non-controlling
interests
Cash (outflow)/inflow from matured
derivative financial instruments
Movement in cash collateral
Movement in cash received on
customers’ account8
Foreign exchange translation
Other non-cash movements
Total cash (outflow)/inflow
Opening net cash (as defined
by the Group)6
Closing net (debt)/cash (as defined
by the Group)6
71
(25)
(30)
(173)
(352)
662
(88)
–
(520)
(574)
(32)
(123)
11
7
(20)
32
(645)
–
1,595
(186)
(350)
1,059
(253)
(1)
(20)
(534)
(5)
36
(11)
(12)
262
(157)
364
403
39
(242)
403
componentS oF net (deBt)/caSH (aS deFined
By tHe group)6
Debt-related derivative financial assets
Other investments – current
Cash and cash equivalents
Loans – non-current
Loans and overdrafts – current
Less: Cash received on customers’
account8
Less: Assets held in Trust
Less: Cash held for charitable
contribution to Tanzania
Net (debt)/cash (as defined by
the Group)6
2010
£m
45
260
2,813
(2,133)
(920)
2009
£m
39
211
3,693
(2,840)
(453)
(16)
(261)
(20)
(227)
(30)
–
(242)
403
6
7
8
See note 27 to the Group accounts.
See note 26 to the Group accounts.
Cash received on customers’ account is the unexpended cash received from customers in
advance of delivery which is subject to advance payment guarantees unrelated to Group
performance. It is included within trade and other payables in the Group’s balance sheet.
BAE Systems Annual Report 2010
39
Directors’ Report: Business Review
Financial performance continued
Pensions
Pension schemes
The Group’s principal pension plans are funded defined benefit
plans. The two largest schemes are the BAE Systems Pensions
Scheme (Main Scheme) and the BAE Systems 2000 Pension
Plan (2000 Plan). In aggregate, these two plans represent 73%
(2009 77%) of the total IAS 19, Employee benefits, deficit at
31 December 2010.
Investment strategy
In aggregate, some 60% of the Group’s pension assets are held
in equities due to the higher expected level of return over the
long term. The investment portfolios are highly diversified in
order to provide reasonable assurance that no single security
or type of security could have a materially adverse impact on
the total portfolio. In addition, some of the Group’s pension
schemes use derivative financial instruments as part of their
investment strategy to manage the level of risk.
An analysis of pension scheme assets split between equities,
bonds, property and other investments, together with the
expected returns on those investments, is shown in note 21
to the Group accounts.
Valuation
Pension plan valuations are performed by independent
actuaries for both IAS 19 accounting (see critical accounting
policies on page 44) and funding purposes.
accounting valuations
A summary of the Group’s pension scheme assets and liabilities
is set out on the opposite page.
Pension scheme assets are included in the valuation at bid value.
The key assumptions used to calculate pension scheme
liabilities for the principal plans are shown below:
principaL penSion accounting vaLuation aSSumptionS
Real discount rate9 (%)
Rate of increase in
salaries (%)
Rate of increase in
UK
2010
2.1
US
2009
2.2
2010
2.5
2009
2.9
4.4
4.5
4.5
4.5
pensions in payment (%)
2.3–3.6 2.3–3.7
n/a
n/a
Rate of increase in
deferred pensions (%)
2.8–3.4
3.5
n/a
n/a
Certain of the Group’s equity accounted investments participate
in the Group’s defined benefit plans as well as Airbus SAS, the
Group’s share of which was sold in 2006. As these are multi-
employer plans, the Group allocates an appropriate share of
the IAS 19 pension deficit to those equity accounted
investments and to Airbus SAS.
Funding valuations
The triennial funding valuations of the Group’s two largest
pension schemes, the Main Scheme and 2000 Plan, were
performed as at 5 April 2008 and 2010, respectively.
Pension scheme assets are included in the valuation at market
value, whilst the liabilities are determined based on prudent
assumptions set by the trustees following consultation with
scheme actuaries.
The triennial funding valuations form the basis for the Group’s
cash funding obligations to its pension schemes.
The current deficit recovery plan agreed with the trustees of the
Main Scheme runs until April 2026 and includes annual lump
sum contributions of £40m until 2016. In addition, as part of
the agreed deficit recovery plan, the Group contributed a further
£25m into Trust in 2010. The cumulative contributions into Trust
of £250m are reported within other investments (£260m after
cumulative fair value gains of £11m), and cash and cash
equivalents (£1m) at 31 December 2010, and the use of these
assets is restricted under the terms of the Trust. A final £25m is
due to be paid into Trust in 2011. The Group considers these
contributions to be equivalent to other lump sum contributions
it makes into the Group’s pension schemes and, accordingly,
presents a definition of the pension deficit including them.
During the year, the Group made an incremental lump sum
contribution of £51m into the 2000 Plan. This payment was
made in advance of the finalisation of discussions between the
trustees and the Group to determine the funding implications of
the 2010 triennial valuation. The deficit recovery plan in respect
of the 2010 triennial valuation was subsequently agreed and
runs until April 2026. It includes lump sum contributions of
£15m in 2011 and £77m in 2012, and annual lump sum
contributions of £54m thereafter.
The Group also made contributions to the UK pension schemes
totalling £157m following the £500m share buyback
programme completed in July 2010.
The results of future triennial valuations and associated funding
requirements will be impacted by the future performance of
investment markets, and interest and inflation rates.
Life expectancy of
a male currently
aged 65 (years)
Life expectancy of
a female currently
aged 65 (years)
19–23
19–23
19
19
22–26
22–26
21
21
£bn
EFFECT OF CHANGES IN REAL DISCOUNT RATES9
ON THE UK PENSION DEFICIT (AS DEFINED BY THE GROUP)
The discount rate assumptions are based on third party AA
corporate bond indices using yields that reflect the maturity
profile of the expected benefit payments.
The valuation of the Group’s pension liabilities is highly sensitive
to movements in real discount rates. During the year, these
rates have continued to be volatile. A ten basis point movement
in the rate changes the pre-tax liability by some £0.3bn.
The relationship between the UK pension deficit (as defined
by the Group) and the real discount rate is illustrated in the
chart opposite.
5
4
3
2
1
0
9
Discount rate net of inflation.
40
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2006
2007
2008
2009
2010
UK pension deficit (as defined by the Group) (£bn)
Other movements (£bn)
Effect of change in real discount rate (£bn)
UK real discount rate (%)
%
5
4
3
2
1
0
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Balance sheet
Summary BaLance SHeet
Intangible assets
Property, plant and equipment,
and investment property
Equity accounted investments
and other investments
Other financial assets and liabilities (net)
Tax assets and liabilities (net)
Pension deficit (as defined by the Group)
Working capital
Net (debt)/cash (as defined by the Group)6
Net assets
Exchange rates – year end
£/$
£/€
£/A$
The movement in the pension deficit (as defined by the Group)
during the year was as follows:
movement in tHe penSion deFicit (aS deFined
By tHe group)
2010
£m
11,216
Restated5
2009
£m
11,306
2,848
2,663
798
(10)
580
(3,146)
(6,641)
(242)
5,403
852
(45)
896
(4,410)
(7,002)
403
4,663
Total IAS 19 deficit at 1 January 2010
Actual return on assets above expected return
Decrease in liabilities due to changes in assumptions
Contributions in excess of service cost
Past service cost
Curtailment gains
Net financing charge
Exchange translation
Movement in US healthcare plans
Total IAS 19 deficit at 31 December 2010
Allocated to equity accounted investments
1.565
1.166
1.526
1.615
1.125
1.795
and other participating employers
Group’s share of IAS 19 deficit
at 31 December 2010
Assets held in Trust
Pension deficit (as defined by the Group)
£m
(5,616)
1,043
55
554
(39)
2
(103)
(21)
22
(4,103)
696
(3,407)
261
(3,146)
Exchange translation, principally in respect of the Group’s
US dollar-denominated businesses, increased net assets
by £154m.
The £90m reduction in intangible assets to £11.2bn
(2009 £11.3bn) mainly reflects amortisation and impairments
(£517m), largely offset by the acquisition of Atlantic Marine
Holding Company (Atlantic Marine) (£170m) and exchange
translation (£277m). Intangible assets are accounted for in
accordance with IFRS 3, Business Combinations (see critical
accounting policies on page 44).
The reduction in equity accounted investments and other
investments from £852m to £798m includes a £155m impact
from the sale of half of the Group’s 20.5% shareholding
in Saab AB.
Better than expected investment returns, a £348m impact
arising from the change from the Retail Prices Index to the
Consumer Prices Index as the measure of price inflation for the
purposes of determining minimum statutory pension increases,
and deficit funding are the primary reasons for the Group’s share
of the pre-tax pension deficit reducing. With the exception of the
2000 Plan, the change to the measure for determining minimum
statutory pension increases has affected all of the Group’s UK
pension schemes for deferred pension increases, but has only
affected two of the Group’s smaller schemes for increases to
pensions in payment.
penSion aSSetS and LiaBiLitieS
Fair value of plan assets
Present value of obligations
Total IAS 19 deficit, net
Allocated to equity accounted investments
and other participating employers
Group’s share of IAS 19 deficit, net
Assets held in Trust
Pension deficit (as defined by the Group)
2009
2010
£m
£m
17,203
15,023
(21,306) (20,639)
(5,616)
(4,103)
696
(3,407)
261
(3,146)
979
(4,637)
227
(4,410)
A net deferred tax asset of £1.0bn (2009 £1.4bn) relating to
the Group’s pension deficit is included within net tax assets
and liabilities, and disclosed in note 8 to the Group accounts.
Further disclosure is provided opposite and in note 21 to the
Group accounts.
5
6
Restated following finalisation of the fair values recognised on acquisition of the 45%
shareholding in BVT Surface Fleet Limited.
See note 27 to the Group accounts.
BAE Systems Annual Report 2010
41
Directors’ Report: Business Review
Financial performance continued
Capital
The Group funds its operations through a mixture of equity
funding and debt financing, including bank and capital
market borrowings.
At 31 December 2010, the Group’s capital was £5,356m
(2009 £4,550m), which comprises total equity of £5,403m
(2009 £4,663m), less amounts accumulated in equity relating
to cash flow hedges of £47m (2009 £113m). Net debt (as
defined by the Group)6 was £242m (2009 net cash £403m).
The capital structure of the Group reflects the judgement of
the directors of an appropriate balance of funding required.
The Group’s policy is to maintain an investment grade credit
rating. The Group’s dividend policy is to grow the dividend
whilst maintaining a long-term sustainable earnings cover
of approximately two times.
Tax
The Group’s tax strategy is fully aligned with its business
strategy and, as part of that, the Group seeks to build
constructive, open working relationships with tax authorities
in all of the countries in which it operates.
Treasury
The Group’s treasury activities are overseen by the Treasury
Review Management Committee (TRMC). Two executive
directors are members of the TRMC, including the Group
Finance Director who chairs the Committee. The TRMC also
has representatives with legal and tax expertise.
The Group operates a centralised treasury department that
is accountable to the TRMC for managing treasury activities
in accordance with the framework of treasury policies and
guidelines approved by the Board. It is an overriding policy
that trading in financial instruments for the purpose of profit
generation is prohibited, with all financial instruments being
used solely for risk management purposes.
The Group monitors compliance against the principal policies
and guidelines (including the utilisation against credit limits),
and any exceptions found are reported to the TRMC.
The Group’s treasury policies in respect of the management
of debt, interest rates, liquidity, currency and credit quality are
discussed below. All treasury policies remain under close review
given the continuing volatility in the financial markets.
Further disclosure on financial instruments is set out in note 30
to the Group accounts.
Debt
The Group’s objective is to maintain a balance between the
continuity, flexibility and cost of debt funding through the use of
borrowings from a range of markets with a range of maturities,
currencies and rates of interest, reflecting the Group’s risk profile.
All the Group’s material borrowings are arranged by the central
treasury department and funds raised are lent onward to
operating subsidiaries as required. Surplus funds are lent
back to the central treasury department where appropriate.
The maturity profile of the Group’s borrowings is illustrated
graphically below and a more detailed analysis is provided in
note 19 to the Group accounts.
A $500m 4.75% bond was repaid in August 2010. This
repayment was pre-financed as part of $1.5bn raised in the
US bond market in 2009.
Generally, excluding the impact of acquisition or disposal
financing and share repurchases, net cash/debt (as defined
by the Group)6 is driven by the operational performance of the
Group’s subsidiaries and equity accounted investments, and the
level of receipts on major contracts. Historically, the net cash/
debt position of the Group has been at its best at the year end.
It remains the Group’s intention to ensure the business is
funded conservatively, and to be proactive in accessing bank
and capital markets in achieving this aim.
Interest rates
The Group’s objective is to mitigate its exposure to interest rate
fluctuations on borrowings and deposits through varying the
proportion of fixed rate debt relative to floating rate debt over the
forward time horizon by utilising derivative instruments, mainly
interest rate swaps.
MATURITY PROFILE OF THE GROUP’S BORROWINGS (£M)
2,500
2,000
1,500
1,000
500
0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
6
See note 27 to the Group accounts.
42
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The Group’s interest rate management policy is that a minimum
of 50% and a maximum of 75% of gross debt is maintained at
fixed interest rates. At 31 December 2010, the Group had 65%
(2009 62%) of fixed rate debt and 35% (2009 38%) of floating
rate debt based on a gross debt of £3.0bn, including debt-
related derivative financial assets (2009 £3.3bn).
Liquidity
The Group’s objectives are to:
– maintain adequate undrawn committed borrowing facilities;
and
– control and monitor bank credit risk and credit capacity
utilisation.
The Group’s committed Revolving Credit Facility (RCF) was
renegotiated in December and was increased to £2bn
(2009 £1.455bn). The RCF is syndicated amongst the
Group’s core relationship banks and is available to meet
expected general corporate funding requirements. The RCF is
contracted until 2015 and was undrawn throughout the year.
The RCF acts as a back stop to Commercial Paper issued by
the Group. The Group had £144m of Commercial Paper at
31 December 2010 (2009 £nil).
Cash flow forecasting is performed by each line of business as
part of the annual Integrated Business Planning process and
the monthly reporting cycle. The Group monitors a rolling
forecast of liquidity requirements to ensure it has sufficient
cash to meet operational needs while maintaining sufficient
headroom on its undrawn committed borrowing facilities.
The Group adopts a conservative approach to the investment of
its surplus cash. It is deposited with strong financial institutions
for short periods. Bank counterparty credit risk is monitored
closely on a systematic and ongoing basis. A credit limit is
allocated to each institution taking account of its market
capitalisation, credit rating and credit default swap price.
For internal credit risk assessment purposes, all transactions
are marked-to-market and any resultant exposure is allocated
against the credit limit. The Group had cash and short-term
investments at 31 December 2010 of £3,073m (2009
£3,904m), which was invested with 25 financial institutions.
The maximum amount deposited with any individual bank as
at 31 December 2010 was less than £225m (2009 £300m).
Currency
The Group’s objective is to reduce its exposure to volatility in
earnings and cash flows from movements in foreign currency
exchange rates. The Group is exposed to a number of foreign
currencies, the most significant being the US dollar.
transactional risk
The Group is exposed to movements in foreign currency
exchange rates in respect of foreign currency denominated
transactions. To mitigate this risk, the Group’s policy is to hedge
all material firm transactional exposures, unless otherwise
approved as an exception by the TRMC, as well as to manage
anticipated economic cash flows over the medium term.
The Group aims, where possible, to apply hedge accounting
treatment for all derivatives that hedge material transactional
foreign currency exposures.
translational risk
The Group is also exposed to movements in foreign currency
exchange rates in respect of the translation of net assets and
income statements of foreign subsidiaries and equity
accounted investments. The Group does not hedge the
translation effect of exchange rate movements on the income
statement or balance sheet of overseas subsidiaries and equity
accounted investments it regards as long-term investments.
Hedges are, however, undertaken in respect of investments
that are not considered long term or core to the Group.
Credit quality
The Group’s objective is to maintain an investment grade rating
in order to ensure access to the widest possible sources of
finance and minimise the cost of debt funding to support the
efficient operation of the Group’s activities. This is achieved
through the delivery of planned operating cash flows, and
management of its relationships with debt capital market
investors, banks and rating agencies.
Three credit rating agencies, Moody’s Investors Service,
Standard & Poor’s Ratings Services and Fitch’s Investors
Service, publish credit ratings for the Group. During the year,
all three maintained the outlook for their ratings as stable.
As at 31 December 2010, the Group’s long-term credit ratings
provided by these agencies were as follows:
Rating agency
Rating
Baa2
Moody’s
Standard & Poor’s BBB+
BBB+
Fitch’s
Outlook
Stable
Stable
Stable
Category
Investment grade
Investment grade
Investment grade
Insurance
The Group operates a policy of partial self-insurance, with the
majority of cover placed in the external market. The Group
continues to monitor its insurance arrangements to ensure
the quality and adequacy of cover.
The Group insures its export contracts and associated on-
demand bank guarantees against political and corporate risks.
The Group monitors and benchmarks this insurance to ensure
its adequacy and appropriateness.
During 2010, the Group again sought external validation of the
credit rating of those insurers who have a significant proportion of
the insurance portfolio. The views of a number of rating agencies
and insurance intermediaries were considered to assess the
long-term stability of the Group’s insurers. It is the Group’s policy
that all its insurers have a minimum credit rating of A-.
BAE Systems Annual Report 2010
43
Directors’ Report: Business Review
Financial performance continued
Critical accounting policies
The Group’s significant accounting policies are outlined in note
1 to the Group accounts. Not all of these significant accounting
policies require management to make difficult, subjective or
complex judgements or estimates.
The following is intended to provide an understanding of those
policies that management considers critical because of the
level of complexity, judgement or estimation involved in their
application and their impact on the consolidated financial
statements. These judgements involve assumptions or
estimates in respect of future events, which can vary from what is
anticipated. However, the directors believe that the consolidated
financial statements reflect appropriate judgements and
estimations, and provide a true and fair view of the Group’s
financial performance and position over the relevant period.
Revenue recognition
Long-term contracts (iaS 11, Construction Contracts)
Revenue on long-term contracts is recognised when
performance milestones have been completed and accepted
by the customer.
No profit is recognised on contracts until the outcome of the
contract can be reliably estimated. Profit is calculated by
reference to reliable estimates of contract revenue and forecast
costs after making suitable allowances for technical and other
risks related to performance milestones yet to be achieved.
Owing to the complexity of many of the contracts undertaken
by the Group, the cost estimation process requires significant
judgement. It is based upon the knowledge and experience
of the Group’s project managers, engineers, finance and
commercial professionals, and uses the Group’s contract
management processes. Factors that are considered in
estimating the cost of work to be completed and ultimate
profitability of the contract include the nature and complexity
of the work to be performed, availability and productivity of
labour, the effect of change orders, availability of materials,
performance of subcontractors, and availability of and access
to government-furnished equipment.
Cost and revenue estimates, and judgements are reviewed and
updated at least quarterly, and more frequently as determined
by events or circumstances. When it is probable that total
contract costs will exceed total contract revenue, the expected
loss is recognised immediately as an expense. Contract costs
comprise directly attributable costs, including an allocation
of direct overheads. Indirect overheads are only regarded as
contract costs when their recovery is explicitly allowed for under
the terms of the contract. Indirect costs are otherwise treated
as a period cost and expensed as incurred. Material changes in
one or more of these estimates, whilst not anticipated, would
affect the profitability of individual contracts.
other (iaS 18, Revenue)
Where goods are supplied, sales are recognised when
the significant risks and rewards of ownership have been
transferred to the buyer, recovery of consideration is probable,
there is no continuing management involvement, and revenue
and costs can be reliably measured.
Where services are rendered, sales are recognised in proportion
to the stage of completion when the stage of completion of
the services, and the related revenue and costs, can be
measured reliably.
Retirement benefit plans (IAS 19, Employee Benefits)
For defined benefit retirement plans, the cost of providing
benefits is determined periodically by independent actuaries
and charged to the income statement in the period in which
those benefits are earned by the employees. Actuarial gains
and losses are recognised in full in the period in which they
occur, and are recognised in the statement of comprehensive
income. Past service cost is recognised immediately to the
extent the benefits are already vested, or otherwise is
recognised on a straight-line basis over the average period
until the benefits become vested.
The retirement benefit obligations recognised in the balance
sheet represent the present value of the defined benefit
obligations as adjusted for unrecognised past service cost
and as reduced by the fair value of scheme assets.
The main assumptions made in accounting for the Group’s
post-retirement plans are summarised on page 40. For each
of these assumptions, there is a range of possible values and,
in consultation with actuaries, management decides the point
within that range that most appropriately reflects the Group’s
circumstances. Small changes in these assumptions can have
a significant impact on the size of the deficit.
The Group has allocated an appropriate share of the pension
deficit to its equity accounted investments and other
participating employers using a consistent and reasonable
method of allocation which represents, based on current
circumstances, the directors’ best estimate of the proportion
of the deficit anticipated to be funded by these entities.
The Group’s share of the pension deficit allocated to equity
accounted investments is included on the balance sheet
within equity accounted investments.
The valuing of assets and liabilities at a point in time rather
than matching expectations of assets and liabilities over time
has no impact on short-term cash contributions to the pension
plans, which are calculated based on separate independent
actuarial valuations.
Additional details are in notes 1 and 21 to the Group accounts.
Intangible assets (IFRS 3, Business Combinations)
From 1 January 2010, the Group adopted IFRS 3 on a
prospective basis. Acquisitions prior to 1 January 2010
are accounted for in accordance with IFRS 3 (2004).
Goodwill arising on the acquisition of subsidiaries is capitalised
and included in intangible assets. Goodwill on acquisition
of joint ventures and associates is included in equity
accounted investments.
Goodwill is not amortised, but is tested annually for impairment
and carried at cost less accumulated impairment losses. The
impairment review calculations require the use of estimates
related to the future profitability and cash-generating ability
of the acquired businesses.
Other acquired intangible assets are identified and valued in line
with internationally used models. These models require the use
of estimates which may differ from actual outcomes.
Other intangible assets are amortised over their estimated
useful lives. Future results are impacted by the amortisation
periods adopted and, potentially, any differences between
estimated and actual circumstances related to individual
intangible assets.
Additional details are in note 1 to the Group accounts.
Additional details are in notes 1 and 11 to the Group accounts.
44
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Directors’ Report: Business Review
Corporate responsibility
“ We are continuing to
embed a culture of
Total Performance.”
Deborah Allen
Managing Director,
Corporate Responsibility
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Responsible Behaviour means doing business in a way
that reflects our values – Trusted, Innovative and Bold. It is
a key element of Total Performance and works in harmony
with the other three elements: Customer Focus, Programme
Execution and Financial Performance. Responsible
Behaviour is embedded within our business through
delivery of our corporate responsibility (CR) strategy.
Our CR strategy covers the issues that have been identified
as having the most potential to affect the sustainability of the
Group, by directly impacting the Group’s reputation or ability to
operate. These priorities are outlined below.
We are committed to progressing our CR strategy by embedding
it into all areas of our business. It supports the delivery of our
Group strategy (see page 14), and helps build and maintain
strong relationships with our stakeholders, including customers,
regulators, investors, suppliers, employees and communities.
It enhances our reputation, contributes to greater operational
productivity and efficiency, and reduces risk to our business.
Our priorities
Business conduct and safety continued to be our two key CR
priorities in 2010. Executive bonuses (see page 107) and
management objectives (see page 12) linked to performance
on these issues support driving the Group towards our desired
leadership position.
We are increasing our focus on diversity and inclusion, and
environmental performance. Both issues have the potential to
impact the long-term sustainability of the Group: diversity and
inclusion affects our ability to recruit, engage and retain the
best people; and environmental management from increased
awareness of impacts, growing customer interest, increasing
regulation and cost.
During 2010, business conduct, safety, and diversity and
inclusion were part of the Executive Committee objective
on progressing towards a recognised leadership position
in Responsible Behaviour (see page 12). Environment has
been added to this objective in 2011. Our 2011 objectives
for business conduct, safety, and diversity and inclusion are
covered on page 46, and for environment, on page 52.
Governance
During 2010, CR key performance indicators, including business
conduct, safety, and diversity and inclusion, were reviewed by
the Executive Committee alongside financial and operational
performance. The CR Committee, chaired by non-executive
director Paul Anderson, provides independent oversight, advice
and strategic direction on CR issues, and reviews progress
against our CR objectives quarterly (see the Committee’s report
on page 92). Selected CR performance information, reported on
pages 46 to 53, is also subject to external assurance by Deloitte
LLP (see their assurance statement on page 54).
BAE Systems’ CR strategy is driven by the Chief Executive and the
Executive Committee. An element of senior executives’ (i.e. the top
250 employees in the Group) remuneration in 2010 was directly
linked to CR performance with up to 15% of potential annual
incentive payment dependent on meeting objectives in the priority
areas of business conduct and safety. All Group level targets
relating to these priority areas have been met. The performance of
the operating groups in respect of the Group’s safety KPI is included
in pages 66 to 72.
The Managing Director, Corporate Responsibility (MD CR)
reports directly to the Chief Executive and leads our global
CR team, which provides support in embedding aspects of CR
throughout the Group. A cross-functional CR Forum, led by the
MD CR, enables us to raise employee awareness, share best
practice and drive improvements across the Group.
BAE Systems Annual Report 2010
45
Directors’ Report: Business Review
Corporate responsibility continued
Performance in 2010 and objectives for 2011
Business conduct
2010 objectives
Progress
2011 objectives
Line Leaders and Functional Directors
confirmed progress following the
revisions made to the core policies
resulting from the Woolf implementation
programme, through their six-monthly
OAS.
Implementation of the Group’s
programme to address the Woolf
recommendations to be complete
by May 2011 and confirmed through
external assurance at the end of 2011.
All Line Leaders and Functional Directors
are required to submit to the Chief
Executive the level of implementation
of core policies in their areas of
responsibility through the twice yearly
Operational Assurance Statement
(OAS). In cases where a policy is judged
not to be fully implemented a plan is
required setting out the milestones to
full compliance. The objective agreed
for 2010 is that by December all of the
milestones have been met and any future
milestones are on track to be met.
Safety
2010 objectives
Progress
2011 objectives
Continue the progress towards a world
class level of safety performance:
– All businesses and BAE Systems’
controlled sites with more than 150
personnel to attain Level 4 of the
Safety Maturity Matrix (SMM), and
those at Level 4 to show progress
towards achieving Level 5 by the end
of 2011.
– Sites with more than 150 personnel
(other than those acquired during
2010) have now progressed to Level 4
on the SMM.
Continue to progress towards a world
class level of safety performance:
– Demonstrate continued progress
towards SMM Level 5. SMM
clarification:
a. Level 5 achievement: All sites at
Level 4 in 2009 to achieve Level 5 by
the end of 2011;
b. Level 5 progress: All sites at Level 4
at the end of 2010 to demonstrate
progress to achieve Level 5 by the end
of 2012;
c. Level 4 achievement: All remaining
sites to achieve Level 4 by the end
of 2012.
– Deliver at least a 20% improvement
– An overall 31% improvement in the Lost
in the Lost Work Day Case Rate
compared with 2009.
Work Day Case Rate was achieved,
exceeding our target of 20%.
– Continue to demonstrate year-on-year
improvement in the Lost Work Day
Case Rate.
Diversity and inclusion
2010 objectives
Progress
2011 objectives
Develop a global working climate which
embraces diversity and inclusion:
– Create a plan to deploy the Diversity &
Inclusion Maturity Matrix (D&IMM) by
the end of the first quarter and meet the
2010 milestones towards desired end
state to be achieved by the end of 2015.
– Each business deployed the matrix by
the end of the first quarter. Business
units have developed plans and
milestones against the D&IMM
reflecting their individual starting
points and cultural context.
Continue to utilise the global D&IMM
to achieve an improved level of
performance for 2011.
46
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Business conduct
Safety
EMPLOYEE ENQUIRIES
TO ETHICS HELPLINE^
2010 EMPLOYEE ENQUIRIES
TO ETHICS HELPLINE^
DISMISSALS FOR REASONS RELATING
TO UNETHICAL BEHAVIOUR*
1,000
800
600
400
200
0
870
734
507
410
327
300
285
240
242
180
120
60
0
85
34
25
20
12
11
7
6
4
3
0
485
355
297
260
216
500
400
300
200
100
0
06
07
08
09
10
06
07
08
09
10
Our Ethics Helpline enables employees to request
information and advice or raise any concerns about
business conduct confidentially wherever they work
and whatever their role1. In 2010, employees made a
total of 734 enquiries to the Helpline. All concerns
raised with the Ethics Helpline were reviewed and
reported either to the Ethics Review Committee or, in
BAE Systems, Inc., to the Ethics Executive Oversight
Committee.
■ Employee relations
and conduct
■ Guidance and advice
■ Accounting
charges practices
■ Security and
misuse of assets
■ Management practices
■ Conflicts of interest
■ Procurement, trade
and marketing
■ Environment, safety
and health
■ Group ethical practices
■ International
business issues
■ Contract compliance
■ Quality or
manufacturing issues
■ Scientific integrity
If an employee is found to be in breach of our Code
of Conduct or any other relevant policies, appropriate
disciplinary action is taken. In 2010, 355 employees
were dismissed for reasons relating to breaches of
our standards and policies.
LOST WORK DAY CASE RATE
(PER 100,000 EMPLOYEES)*
KPI
MAJOR INJURIES RECORDED*
2010 CAUSE OF MAJOR INJURIES
RECORDED (% OF TOTAL CAUSES)
1,000
800
600
400
200
0
789
557
554
562
389
100
80
60
40
20
0
4% 4%
4%
4%
77
69
53
40
44
9%
11%
13%
51%
06
07
08
09
10
06
07
08
09
10
The Lost Work Day Case Rate fell from 562 in 2009
to 389 in 2010, equivalent to a 31% decrease,
exceeding our target of 20%. In 2011, we will continue
to monitor the number of incidents resulting in days
lost to injury and take action to minimise the risk to
the Group’s employees and its operations, and drive
continual performance improvement.
The number of major injuries recorded in 2010
has fallen to 53, a decrease of 31% on 2009 data.
The normalised rate of major injuries per 100,000
employees has also decreased to 53 in 2010*.
This demonstrates an overall improvement in our
safety performance which reflects efforts to embed
a ‘safety first’ attitude across the Group.
■ Slips, trips or falls on the
■ Struck by moving,
same level
■ Fall from height
■ Injured while handling,
lifting or carrying
■ Contact with moving
machinery
including flying/falling,
object
■ Strike against something
fixed or stationary
■ Struck by moving vehicle
■ Road Traffic Accident
Slips, trips and falls on the same level were the main
causes of major injury in 2010, accounting for over 50%
of the total. Accidents that result in injury are
investigated and solutions identified to help prevent
future occurrence.
Diversity and inclusion
2010 GENDER DIVERSITY (%)*
2010 AGE DIVERSITY (%)*
2010 ethnic diversity*
100
80
60
40
20
0
16
84
18
100
18
19
82
82
81
16
84
27
20
80
73
29%
9%
8%
18%
■ 25 years and younger
■ 26-35 years
■ 36-49 years
■ 50-59 years
■ 60 years and older
Australia
India
KSA South
Africa
Sweden UK
US
Total
Male
Female
^ * See Assurance statement on pages 54 and 55.
1
In countries where there are no legal restrictions on the implementation of our helpline.
36%
Diversity data for both gender and age remained
consistent with 2009 figures. During 2010, the Group
adopted a diversity and inclusion strategy to support
the recruitment, engagement and retention of
talented employees from all backgrounds.
In Saudi Arabia, less than 40% of our employees
are expatriates, representing our commitment to
‘localising’ business talent. We continue to focus
on skills transfer and increase the number of local
nationals in our workforce. In South Africa, we are
working towards improving workplace diversity, in line
with the business’s transformation objectives and
the South African government’s Broad Based
Black Economic Empowerment (BBBEE) initiative.
Currently, 41% of our workforce in South Africa is
black. In the US, minority group representation is
25% and, in the UK, it remains low at 3%.
We do not collect ethnic diversity data for Australia,
India and Sweden.
BAE Systems Annual Report 2010
47
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Directors’ Report: Business Review
Corporate responsibility continued
Business conduct
Goal
BAE Systems is committed to becoming a recognised global
leader in business conduct by continuing to embed policies and
processes across the Group, and integrate them into day-to-day
business practice.
the recommendations have helped the Group review and
strengthen policies and processes as part of our governance
structure and integrate them into day-to-day business
practice. An update on progress will be available at
www.baesystems.com/corporateresponsibility/+
Strategy
We are placing business conduct at the heart of our business
through implementation of our global Code of Conduct, our
comprehensive response to the Woolf Committee Report,
and our commitment to Total Performance.
The Group’s Code of Conduct sets out the principles and
standards we require all our employees to adopt. Used in
conjunction with our Responsible Trading Principles (see
page 33), it supports our business activities.
2010 performance
Training to ensure employees understand and comply with the
Code of Conduct forms a core part of raising awareness and
developing a culture of Total Performance throughout the
business. This includes an induction for newly hired staff and
regular refresher courses for employees. We have also issued
the latest version of the Group’s Integrity in Business Dealing
training, an online course covering our Gifts and Hospitality,
Facilitation Payments, Company Giving and Conflicts of Interest
policies that is required to be taken by executives.
We are on schedule to meet our three-year commitment to
address the 23 recommendations of the Woolf Committee – an
external, independent committee appointed by the BAE Systems
Board which reported its findings in May 2008. As well as
guiding us towards a culture of responsible business conduct,
The Ethical Leadership Group, an ethics consultancy, has
been commissioned to carry out an independent assessment
of the Group’s Business Conduct programme and to review
the work undertaken in response to the Woolf Committee
recommendations. This is based on a document review,
interviews with the Chairman, the Chief Executive, the Chairman
of the CR Committee and senior managers in each home
market, and over 60 employee focus groups across our
businesses. This review covers the Group’s global operations
and is expected to be completed by April 2011.
Putting policies into practice
The Responsible Trading Principles introduced at the beginning
of 2010 are designed to ensure that the Group makes informed
decisions about the business opportunities we pursue.
Opportunities are assessed according to the level of risk
associated with the type of product, its intended use, the
end user and the country of sale. The Principles are also being
used in the procurement process to assess major suppliers.
Additional guidance is also being introduced on anti-bribery
and anti-corruption.
The appointment of advisers for business development,
security, offset and lobbying activities (with the exception of
certain domestic lobbyists in the US whose appointment is
subject to separate legislative controls) is reviewed and
Embedding Responsible Behaviour
in 2010, we have focused on integrating responsible behaviour into our core
business policies and procedures, and ensuring that these fully reflect all four
elements of total Performance.
Policies relating to responsible behaviour are now integrated into every
section of the operational Framework (oF), the set of mandated policies,
charters and processes that guide our work. this has included adding
a number of new policies and strengthening existing policies, including
those relating to gifts and hospitality, Facilitation Payments and conflicts
of interest.
Line leaders report compliance against each part of the oF twice a year through
the operational Assurance statement.
our Lifecycle Management Framework (see page 32), used across all our major
projects, has also been revised to reflect the four elements of total Performance.
this means, for example, that reviews carried out at the start of projects now
include consideration of responsible trading risks.
+ ^ See Assurance statement on pages 54 and 55.
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assessed by our Business Development Adviser Compliance
Panel, chaired by independent lawyers. All such advisers
appointed in 2010 were appointed in accordance with our
global adviser policy.
Following the settlement reached with the US Department of
Justice in February 2010, the Group has appointed Lord Gold,
former Senior Partner at Herbert Smith LLP , as an independent
corporate monitor for a period of up to three years. As part of his
role, Lord Gold will serve as an ex-officio non-voting member of
our Business Development Adviser Compliance Panel, review
and evaluate certain of the Group’s policies and procedures,
and submit periodic reports to the Group’s Board and the US
Department of Justice.
The Group is currently reviewing its policies and procedures in
preparation for the implementation of the new UK Bribery Act
2010. We believe our business conduct policies, including
those covering advisers, facilitation payments, gifts and
hospitality, conflicts of interest, offset and lobbying, will comply
with the requirements of the Act.+
Working to improve industry standards
As a member of the Aerospace Industries Association of America
and the Aerospace and Defence Industries Association of Europe,
we are working with other companies to continue to embed the
Global Principles of Business Ethics for the Aerospace and
Defence Industry, that were agreed in 2009, and to raise
standards of business conduct across the sector.
Code of Conduct
Following the introduction of the Code of Conduct and initial
training in 2009, the focus in 2010 has been to further embed
the Code throughout the Group. Employees are required to
attend refresher training during the 12-month period to May
2011 – more than 50%^ had already been trained by the end
of 2010 (see KPI on page 19). New employees receive a copy
of the Code and are required to complete training as part of
their induction.
Business conduct survey results
We conduct a comprehensive Group-wide employee opinion
survey every two years. The survey is designed and
administered by an external company, Towers Watson.
The survey includes questions on business conduct. In 2010,
the survey results showed an improvement for the comparable
questions on business conduct from 2008. The responses
demonstrated that our employees have a good awareness of
the business conduct standards we expect of them. We are
pleased to be making progress but recognise that there is still
much work to be done. We will continue to improve business
conduct training and employee engagement to maintain high
standards within our working culture, and support our people in
speaking up and challenging any inappropriate behaviour they
observe. Further analysis of the responses to the business
conduct employee opinion survey questions can be found on
www.baesystems.com/corporateresponsibility/+
Training on the Code of Conduct
training on the code of conduct in 2010 emphasised employee engagement,
leadership and embedding a culture of responsible behaviour throughout
the group. this built on training in 2009, designed to raise awareness and
understanding of the code.
the training is designed to prompt and promote discussion around ethical
dilemmas during face-to-face sessions led by managers. sessions include
a team discussion looking at a series of potential ethical dilemmas
employees could face in their work. An e-learning option is also available for
those working remotely to ensure that training reaches everyone in the group.
supporting articles in our internal newsletters have been used to reinforce
messages from the training as well as position it as an important global
activity for employees to participate in.
For more information about:
– code of conduct
– Progress against Woolf committee recommendations
– how our business works
visit: www.baesystems.com/corporateresponsibility/
BAE Systems Annual Report 2010
49
Directors’ Report: Business Review
Corporate responsibility continued
Safety
Goal
We aim to ensure consistently good safety management
across the Group and, over time, to drive performance to a level
comparable with the best performing global companies by
continuing to progress towards Level 5 on our Safety Maturity
Matrix (SMM).
During 2010, a benchmarking exercise was carried out which
compared our safety performance in 2009 with other large
global engineering and manufacturing companies with a proven
track-record of world class safety performance. This benchmark
has helped us to identify the gap in our performance against
these companies to help us drive improvements for 2011.
Strategy
Protecting the health and safety of employees is a fundamental
responsibility. Embedding a commitment to safety across the
business is a priority for the Group. Education and awareness
campaigns remind employees that they must put safety first in
all their activities and speak up on safety issues.
Our safety management systems cover a wide range of risks
associated with our manufacturing operations and diverse
global business. The Group’s Senior Safety Steering Group
brings together business leaders who are responsible for driving
BAE Systems towards a comparable level of safety performance
with the best performing global companies.
Progress at site level is measured using our five-level SMM to
help us drive safety performance. Businesses are required to
assess safety risks associated with projects as part of the
Lifecycle Management process (see page 32).
2010 performance
Improvements in safety performance during 2010 reflect
continued efforts to embed a ‘safety first’ attitude and improve
safety management in line with the Group’s SMM. Sites with
more than 150 personnel (other than those acquired during
2010) have now progressed to Level 4 on the matrix,
demonstrating a proactive approach to safety across our sites.
Businesses have also delivered a 31% improvement in the Lost
Work Day Case Rate (see KPI on page 19) and a 31% reduction
in major injuries.
Product safety
In October 2009, the Haddon-Cave report into the loss of
Nimrod XV230 was published. After carefully studying the
report, in December 2009, Ian King announced a review of the
Group’s approach to product safety in the UK businesses.
Nigel Whitehead, Group Managing Director, Programmes &
Support, led that review, which examined current policies,
processes, governance, actions and behaviours associated with
product safety. The review has developed a set of four principles
of product safety which are being tested with the Group’s
businesses in the UK and across the world.
Although originally UK-specific, the principles are intended to be
recognised by all business units as a sound basis for product
safety. The review has now handed over to the Product Safety
Implementation Project, which will ensure that the principles are
translated into policies and processes.
Fatality
We are deeply saddened to report the death of one of our
employees at our York facility in the US*. We have reviewed
the cause of this accident and co-operated fully with the
regulatory investigation. The regulatory authority was
unable to determine a cause for the accident or identify any
non-compliances during the course of its investigation and,
as a result, has taken no further action. Any lessons learnt
from this incident will be applied across our global business.
Safety First
safety First is helping bAe systems’ businesses develop a common safety
culture by encouraging employees to challenge unsafe practices and promote
safe behaviour. examples include:
– submarine solutions has established safety and environmental
management systems for all its operational sites in line with the
occupational health and safety standard ohsAs 18001 and environmental
management standard iso 14001. safety, health and environment advisers
have been appointed and additional training provided for employees.
safety systems have also been standardised to ensure a consistent
approach is taken across submarine solutions’ different UK sites.
– Military Air solutions launched ‘think safety First – everyone’s
responsibility’ to raise safety awareness across its operations.
the programme focuses on all aspects of safety and includes an
employee guide providing information and advice on what employees
should do if they have a safety concern.
For more information about:
– our approach to safety
– safety Maturity Matrix
visit: www.baesystems.com/corporateresponsibility/
*
See Assurance statement on pages 54 and 55.
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Diversity and inclusion
Goal
We are working to create an inclusive work environment
where all individuals are respected, and where diversity is
managed effectively via our Diversity & Inclusion Maturity
Matrix (D&IMM), to improve business performance and
enhance competitive advantage.
Strategy
A focus on diversity and inclusion encourages innovation and
enhances productivity by helping us to recruit, engage and
retain the best people. It is increasingly important to achieving
business success in the diverse locations and cultures in which
we operate.
The Group adopted a diversity and inclusion strategy in 2010
to support the recruitment, engagement and retention of
talented employees from all backgrounds. It will help us to
build a workforce that more closely reflects the diversity of the
local population in each of our markets and will underpin the
future sustainability of our business.
Our strategy also encompasses our education programmes
(see page 34), which focus on supporting the teaching of
science-based subjects and encouraging greater numbers
of young people to study science, technology, engineering and
mathematics. This is designed to ensure the Group has the
right skills to remain competitive and operate successfully over
the next decade, into 2020 and beyond.
A D&IMM is used to measure progress. It establishes
a consistent benchmark to help our businesses chart
progress from legal compliance (Level 1) to creating a
culture that embraces diversity as a source of competitive
advantage (Level 5).
The matrix provides sufficient flexibility within each home
market for our business units to adapt their approach to meet
operational characteristics and respect local cultures.
2010 performance
A communications plan was implemented to help employees
understand the importance of diversity and inclusion, and how
it contributes to Total Performance. This included a series of
features in our internal newsletters and intranet sites, and a
workshop at which senior leaders discussed and agreed the
business benefits of diversity and inclusion. BAE Systems’ Chief
Executive, Ian King, signed the UK Resource Centre for Women
in Science, Engineering and Technology’s (UKRC) CEO Charter
on Diversity, making public our commitment.
During 2010, in Australia and the UK, we reviewed our approach
to external recruitment, including briefings to recruitment and
advertising companies, to ensure that our recruitment
processes support our commitment to diversity and inclusion.
Gender diversity
Achieving greater gender diversity remains a challenge for the
defence and engineering sector. In the UK, for example, women
account for just 10% of engineering graduates. Our education
and early careers programmes are aimed at encouraging
women to consider science, engineering and technical careers
(see page 34).
We participate in and sponsor events organised by external
organisations, including the UK Confederation of British
Industry’s First Women Awards and, in Europe, the International
Women of Excellence. In the US, the Group is a member of the
Society of Women Engineers, which promotes engineering as a
desirable career option, whilst supporting females in advancing
their careers in the field of engineering.
The Group’s Women’s Global Virtual Forums provide
development and networking opportunities for female
employees, complementing efforts by our business units
to improve female representation at executive level through
career planning and creating more flexible work cultures.
Integrating diversity and inclusion
our businesses are taking steps to improve diversity and inclusion at all
stages of employment. examples include:
– Land & Armaments has integrated diversity and inclusion goals into
succession planning and recruitment processes for its south African,
swedish, UK and Us businesses, and developed diversity and inclusion
training for line managers. the businesses will use a metrics dashboard to
track progress and performance via quarterly business reviews.
– Military Air solutions has published a briefing pack, launched a website and
held a series of events to help employees understand the business case for
diversity and inclusion. it introduced a Maternity Leave Workshop, to
support mothers returning to work, and launched a Lesbian, gay, bisexual
and transgender Awareness network.
– bAe systems Australia’s diversity and inclusion strategy, launched in 2010,
is focused on increasing representation of women by promoting flexible
working, increasing the number of part-time roles, and introducing talent
management plans, women’s networks and mentoring.
For more information about:
– our approach to diversity and inclusion
– our diversity & inclusion Maturity Matrix
visit: www.baesystems.com/corporateresponsibility/
BAE Systems Annual Report 2010
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Directors’ Report: Business Review
Corporate responsibility continued
Environment
Goal
We aim to improve the environmental performance of our
products and operations by developing and launching an
environmental sustainability programme.
Strategy
Reducing our use of resources and the waste we produce
will improve operational efficiency, reduce costs and help
us to comply with changing regulatory requirements. The
environmental performance of our products is of increasing
importance to our customers.
Environmental impacts including greenhouse gas emissions,
material and solvent usage, waste products, and emissions to
the atmosphere are managed by individual business units.
Our commitment to reduce the environmental impacts of our
operations and products is outlined in our Environment Policy,
and other key documents including our Code of Conduct.
2010 performance
An Environmental Sustainability Steering Group was established
in 2010, comprising senior business and functional managers.
It is chaired by the Managing Director, Corporate Responsibility,
and sponsored by Executive Committee member, Nigel
Whitehead, Group Managing Director, Programmes & Support.
The Executive Committee has agreed goals and targets for the
business in 2011 as part of an overall objective to improve
environmental performance.
Our carbon footprint is calculated annually by the Coefficient
Company. We also monitor and manage other environmental
impacts.
The Group has made a number of improvements in the accuracy
and expansion of data collection systems to include energy use
from coal in the US and estimated data for a further 102 sites
representing small offices across the markets in which we work.
These data collection improvements and business acquisitions,
plus a slight increase in energy use, increased our reported
carbon footprint by 14% in 2009. 2010 data was not available
at the time of this report, but will be available on our website
in 2011.
Seal of Sustainability
bAe systems has been awarded the seal of sustainability by the
sustainable business institute for progress at its greenlawn site in
new york. this recognises the site’s achievements including:
– Participation in PowerPay! ny, a smart grid programme that manages
energy demand
– Adoption of a recycling programme
– Water conservation efforts
– Use of renewable energy systems including a solar water heating
system
the seal is awarded to companies that demonstrate a continuous
commitment to sustainable practices and helps the public to identify
businesses that promote sustainability. each company is evaluated
against criteria relating to the economy, society and environment.
Applications are reviewed by the Us national Pollution Prevention
roundtable, a non-profit membership organisation.
2011 objectives
Develop and launch an environmental sustainability
programme:
– Agree and implement an Environmental Sustainability Maturity
Matrix (ESMM).
– Businesses to confirm a 2010 baseline, and set 2011 targets
for energy, water and waste.
TOTAL CO2 EMISSIONS
(THOUSAND TONNES)
TOTAL CO2 EMISSIONS BY OPERATING
GROUP (THOUSAND TONNES)
TOTAL CO2 EMISSIONS BY SCOPE
(THOUSAND TONNES)
1,500
1,200
900
600
300
0
1,363
1,192
923
500
400
300
200
249
203
100
0
344
380
356
464
395
270
302
102
25
118
68
106 96
1,000
800
600
400
200
0
752
830
552
232
315
388
139
125
145
07
08
09
07
08
09
07
08
09
Source: Coefficient Company
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
Source: Coefficient Company
International
HQ & Other
Businesses
Scope 1 emissions include gas and other fuels brought onto site
Scope 2 emissions are those generated from using electricity
Scope 3 emissions are those relating to business travel
Source: Coefficient Company
Our 2010 global carbon footprint will be externally compiled by the
Coefficient Company.
For more information about:
– our environmental Management system
– 2011 goals and targets
visit: www.baesystems.com/corporateresponsibility/
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Community
Goal
Our goal is to support charities that make a positive contribution
to the communities in which we operate.
Strategy
The BAE Systems Company Giving programme, which is
underpinned by our Company Giving Policy, includes donations
and other support for local, national and international charities
and not-for-profit organisations. We focus on four areas that are
relevant to our business:
– the armed forces and their families;
– science, technology, engineering and maths education;
– local communities; and
– employee volunteering.
Our approach is implemented locally to reflect the different
needs of the communities in which we operate.
Charity Challenge is our Group-wide employee fundraising and
volunteering programme. Employees in Australia, the UK and
the US elect partner charities for a two-year period. Selected
charities must fit within one of our core themes to be eligible for
partner status. As well as fundraising and volunteering support
from employees, partner charities receive supplementary
funding from our Company Giving programme.
2010 performance
In 2010, our total community investment was more than
£3.3m*. This includes donations in cash as part of our
Company Giving and Charity Challenge programmes.
Our partner charities included: Make a Wish Foundation in
Australia; Operation Homefront in the US; and armed forces
charities, including Soldiers, Sailors, Airmen and Families
Association (SSAFA), The Royal British Legion and The Army
Benevolent Fund, in the UK.
COMMUNITY INVESTMENT SUBJECT
FOCUS (%)
11%
20%
11%
33%
■ Education and future
workforce
■ Health and human
services
■ Heritage
23%
1%
1%
■ Arts and culture
■ Armed forces and
customer affinity
■ Emergency relief
■ Other
*
See Assurance statement on pages 54 and 55.
Community involvement
in the UK, bAe systems is a founding supporter of the uk4u thanks!
2010 christmas box campaign, which supports 22,500 boxes full of
festive cheer being sent to servicemen and women across the world on
active duty who are working away from their families during the holiday
season. to support this activity closer to home, our UK employees
donated items for christmas parcels for veterans, and hospitals and care
homes where injured soldiers receive treatment for their injuries while
also spending christmas with their families.
bAe systems, inc. employees were so moved by the destruction and
suffering in haiti following the earthquake in january 2010, that they
donated $436,000 (£282,000) to the American red cross’s haiti
relief and development Fund and the international response Fund.
the group matched employee contributions dollar for dollar, to donate
a total of $872,000 (£564,000). in addition to the cash donations,
bAe systems employees at sites across the Us volunteered their time
helping pack over one million dehydrated meals for the Kids Against
hunger programme. the group also offered material support to the
American red cross in the form of technology and systems. For
example, Firstintercom®, a first responders’ radio system, was offered
for use in the relief efforts.
the devastating floods in Australia have had a shattering impact on
most people in Queensland and northern new south Wales, including
some of our employees, their families and many customers. in january
2011, the group donated A$200,000 (£119,000)1 to the Queensland
Premier’s disaster recovery relief Fund. our employees have also
supported fundraising efforts and some have volunteered supporting
emergency services.
1
This figure is not included within 2010 community investment totals or the chart below.
The Group uses the London Benchmarking Group methodology for calculating
community giving.
The focus of our community investment activities includes Company
donations and employee fundraising through Charity Challenge and payroll
giving programmes.
Our total community investment in 2010 is made up of more than £2.6m in
Company donations, and more than £715,000 in employee fundraising and
payroll giving.
For more information about:
– our approach to community relations
– our employee fundraising and volunteering activities
visit: www.baesystems.com/corporateresponsibility/
BAE Systems Annual Report 2010
53
Directors’ Report: Business Review
Corporate responsibility continued
Assurance statement
Independent assurance report by Deloitte LLP to BAE Systems
plc on the Corporate Responsibility section in the Directors’
Report: Business Review of BAE Systems’ Annual Report for
the year ended 31 December 2010
What we looked at: scope of our work
BAE Systems plc (‘BAE Systems’) has engaged us to provide
assurance on:
Limited assurance:
– The Group level business conduct, safety, diversity and
inclusion, and community performance indicators on
pages 47 and 53 indicated with a *
– Their statements on progress towards the Group level
corporate responsibility (CR) objectives on page 46
Reasonable assurance:
– Their statements on business conduct made under the
and performed our work to obtain reasonable assurance that
the business conduct indicators on page 47, indicated with a ^,
are fairly stated.
The qualitative and subjective nature of non-financial
information poses a number of inherent limitations for
assurance engagements. The basis of reporting for
each indicator marked with a * or a ^ is provided at
www.baesystems.com/reporting/ and should be read in
conjunction with statements made in this Annual Report.
What we did: key assurance procedures
Considering the risk of material error, we planned and
performed the work to obtain all the information and
explanations considered necessary to provide sufficient
evidence to support our assurance conclusion. The key
procedures we carried out were:
– Interviewing senior managers at BAE Systems in relation
heading ‘Business conduct’ on pages 48 and 49, excluding all
forward-looking sentences indicated with a +
to activities undertaken during 2010 regarding responsible
business conduct and CR performance reporting;
– Their statement on safety strategy made under the heading
‘Strategy’ on page 50
– The business conduct performance indicators on page 47
indicated with a ^
What standards we used: basis of our work and level of assurance
Our work was carried out by a multi-disciplinary team of CR and
business ethics assurance specialists in accordance with the
International Standard on Assurance Engagements 3000
(ISAE 3000).
For the business conduct, safety, diversity and inclusion, and
community performance indicators we planned and performed
the work to provide limited assurance as to whether the
BAE Systems’ data on pages 47 and 53, indicated with a *,
is not materially misstated. For the corporate responsibility
objectives, we planned and performed the work to provide
limited assurance as to whether the BAE Systems’ statements
on page 46 under the heading ‘Performance in 2010 and
objectives for 2011’ are not materially misstated. This provides
less assurance and is substantially less in scope than
reasonable assurance.
For the statements on business conduct and safety strategy
we planned and performed the work to obtain reasonable –
not absolute – assurance as to whether the statements on
business conduct on pages 48 and 49, excluding all forward-
looking sentences indicated with a +, and on safety strategy
on page 50 are a fair description of the activities undertaken.
For the business conduct performance indicators we planned
– Interviewing managers at BAE Systems’ head office, including
the CR and Safety, Health and Environment (SHE) team, and
those with responsibility for CR management and reporting
systems;
– Gaining an understanding of BAE Systems’ own process to
collect information from issue owners, and the process for
collation and validation of performance data at Group level
by the Group CR team;
– Analysing and reviewing on a sample basis the key structures,
systems, processes, procedures and controls relating to the
Group level collation, validation and reporting processes of
the Annual Report, including:
– the selection of issues to be reported on, related key
performance indicators and other matters to be reported on;
– the collection, collation, validation and reporting of selected
safety, diversity, community and business conduct
performance data at the year end; and
– undertaking questionnaires and interviews with a limited
purpose non-statistical sample of sites to gain an
understanding of key processes and controls for reporting
selected performance data to the Group CR team. Sites
were selected based on safety performance, materiality
to the Group and inherent risk of the location. We did not
perform any site visits during our work.
– Interviewing members of BAE Systems’ Legal department to
understand the process followed to monitor compliance with
Find out more
about corporate
responsibility in
BAE Systems...
On our website
– our approach to cr
– Managing cr
– reporting and assurance
– safety stories from our businesses
– education and early careers
– training and development
– support for local communities
visit: www.baesystems.com/
corporateresponsibility/
54
www.baesystems.com
excluding all forward-looking sentences indicated with a +,
are, in our opinion, in all material respects fairly stated as
at 18 February 2011.
– BAE Systems’ statement on safety strategy made under the
heading ‘Strategy’ on page 50 is, in our opinion, in all material
respects fairly stated as at 18 February 2011.
– The business conduct indicators on page 47, indicated with
a ^, are, in our opinion, in all material respects fairly stated.
Responsibilities of directors and independent assurance provider
BAE Systems’ responsibilities
– The directors are responsible for the preparation of the Annual
Report, and for the information and statements contained
in connection with it. They are responsible for determining
BAE Systems’ objectives in respect of CR performance, and
for establishing and maintaining appropriate performance
management and internal control systems from which the
reported information is derived.
Deloitte’s responsibilities
– Our responsibility is to independently express conclusions
on the reliability of management’s assertions on the selected
subject matters as defined within the scope of work above.
– This report is made solely to BAE Systems plc in accordance
with our letter of engagement for the purpose of the directors’
governance and stewardship. Our work has been undertaken
so that we might state to the Company those matters we
are required to state to them in this report and for no other
purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than
BAE Systems plc for our work, for this report, or for the
conclusions we have formed.
– Our multi-disciplinary team of CR and business ethics
assurance specialists performed the engagement in
accordance with Deloitte’s independence policies, which
cover all of the requirements of the International Federation
of Accountants (IFAC) Code of Ethics and in some areas are
more restrictive. We confirm to BAE Systems that we have
maintained our independence and objectivity throughout the
year, including the fact that there were no events or prohibited
services provided which could impair that independence and
objectivity in the provision of this engagement.
Deloitte LLP
London, United Kingdom
18 February 2011
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the Business Development Adviser Policy during 2010 and
to prepare for compliance with the Bribery Act 2010;
– Performing limited purpose non-statistical sample testing to
verify that a selection of advisers added to the BAE Systems’
Approved Adviser Register during 2010 were appointed in
compliance with the BAE Systems Adviser Policy;
– Interviewing members of BAE Systems’ management to
understand the scope and coverage of Code of Conduct
refresher and induction training activities during 2010;
– Performing limited purpose non-statistical sample testing to
verify the nature and extent of the roll out of Code of Conduct
training for new and existing employees;
– Interviewing members of BAE Systems’ management to
understand the process followed to capture, investigate
and report employee enquiries to the Ethics Helpline;
– Performing limited purpose non-statistical sample testing
to verify that a selection of employee enquiries to the
Ethics Helpline were appropriately captured, investigated,
categorised and reported to the Ethics Committee;
– Examining underlying documents to corroborate interview
outcomes and to inform our assessment of the subject matter
to be assured; and
– Reviewing the CR section of the Annual Report against the
findings of our work whilst assessing that the Annual Report
has been compiled as described on page 55 in the section
‘Scope and data’.
The scope of our work did not include the provision of assurance
over whether BAE Systems’ programme of work is adequately
designed to, or will, meet the requirements of the Woolf Report.
What we found: our assurance opinion
Limited assurance conclusion:
– Based on the assurance work performed nothing has come
to our attention to suggest that the business conduct,
safety, diversity and inclusion, and community performance
indicators on pages 47 and 53, indicated with a *, are
materially misstated.
– Based on the assurance work performed nothing has come to
our attention to suggest that the progress towards the Group
level corporate responsibility objectives on page 46 is
materially misstated.
Reasonable assurance opinion:
– BAE Systems’ statements on business conduct made under
the heading ‘Business conduct’ on pages 48 and 49,
Scope and data
The data and performance measures in this report cover
the period January to December 2010 with the exception
of environment data which covers the period January to
December 2009. Qualitative information and quantitative
data for the report are provided by individuals across our
business. Quantitative data is recorded on centralised
systems, and content and data are reviewed at head office.
Unless otherwise explained, the data in this report cover
the Group’s major operations globally, excluding those
acquired or divested during the year.
BAE Systems Annual Report 2010
BAE Systems Annual Report 2010
55
55
Directors’ Report: Business Review
Risk management
How BAE SYSTEMS MAnAgES riSk
Effective management of risks and opportunities is essential
to the delivery of the Group’s objectives, achievement of
sustainable shareholder value, protection of its reputation
and meeting the requirements of good corporate governance.
The Group’s approach to risk management is aimed at the early
identification of key risks, and then to remove or reduce the
likelihood and effect of those risks before they occur, and deal
effectively with actual problems if they crystallise.
The Group is committed to the protection of its assets, which
include human, property and financial resources, through
an effective risk management process, underpinned where
appropriate by insurance. The Group is also committed to the
effective management of material non-financial and reputational
risks, including those arising in connection with business
conduct, the environment, and health and safety.
The Board has overall responsibility for ensuring that risk is
effectively managed across the Group.
Reporting within the Group is structured so that key issues
are escalated through the management team, ultimately to
the Board if appropriate. The underlying principles of the
Group’s risk management policy are that risks are continuously
monitored, associated action plans reviewed, appropriate
contingencies provisioned and this information reported
through established management control procedures.
The Board has delegated:
– to the Audit Committee, the responsibility for reviewing in
detail the effectiveness of the Group’s system of internal
control policies and procedures for the identification,
assessment and reporting of risk; and
– to the Corporate Responsibility Committee, the responsibility
for monitoring and reviewing the Group’s performance in
managing business conduct, environmental, and health and
safety risks.
Both the Audit and Corporate Responsibility committees report
the findings of their reviews to the Board.
Business risk management
The responsibility for risk identification, analysis, evaluation,
mitigation, reporting and monitoring rests with line management.
Guidance for managers is given in the Group’s Risk Management
Policy in the Operational Framework and, in respect of projects,
in the Lifecycle Management (LCM) Framework and a Risk
Management Maturity self-assessment tool.
Project risks are reported and monitored in Group-mandated
format Contract Review Packs, which are reviewed by
management at monthly Contract Reviews. The financial
performance of projects is reported and monitored using
Contract Status Reports, which form part of the Contract
Review Pack. Project profit is recognised after making suitable
allowances for technical and other risks related to performance
milestones yet to be achieved.
Identified risks are documented in controlled risk registers
showing: the risks that have been identified; characteristics of
the risk; the basis for determining mitigation strategy; and what
reviews and monitoring are necessary. Each risk is allocated an
owner who has authority and responsibility for assessing and
managing it.
In addition, the Group has a six-monthly Operational Assurance
Statement (OAS) process, which is mandated by the Group’s
Operational Framework. The OAS is in two parts: a self-
assessment of compliance with the Operational Framework;
and a report showing the key risks for the relevant business.
Together with independent reviews undertaken by Internal Audit
and the work of the external auditors, the OAS forms the
Group’s process for reviewing the effectiveness of the system
of internal controls.
The output from the risk assessment processes are collated
and reviewed by the Executive Committee to identify those
issues where the cumulative risk, or possible reputational
impacts, could be significant. The Executive Committee’s
risk workshops allocate management responsibility for the
management of the Group’s most significant non-financial
risks. The non-financial risk register is reviewed regularly
by the Executive Committee to monitor the ongoing status
and progression of mitigation plans. In addition, it is
reviewed on a regular basis by the Board and Corporate
Responsibility Committee.
BUSinESS riSk iDEnTiFiCATion
Business risks are identified on a
continuous basis, through robust,
mandated processes, from monthly
Contract Reviews through to the annual
five-year Integrated Business Plan.
Board-approved long-term strategy and
five-year plan for each operating group
Management self-assessment of
compliance with the Operational Framework
and summary of key business risks
Management review of the performance of
each of the Group’s businesses against
their objectives, measures and milestones
Management review of project performance
and issues to ensure that appropriate
decisions and actions are taken
Integrated Business Plan
Core Business Process
Annually
Operational Assurance Statement
Mandated Policy
Six-monthly
Quarterly Business Review
Core Business Process
Quarterly
Lifecycle Management Contract Review
Core Business Process
Monthly
56
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As with any system of internal control,
the policies and processes that are
mandated in the Operational Framework
are designed to manage rather than
eliminate the risk of failure to achieve
business objectives, and can only provide
reasonable, and not absolute, assurance
against material misstatement or loss.
Principal risks
The principal risks identified by the Group,
which are consistent with the prior year,
are shown on pages 58 to 63.
BOARD REvIEw
REPORTInG/MOnITORInG
ExECuTIvE COMMITTEE REvIEw
BOARD COMMITTEE REvIEw
– Audit Committee
– Corporate Responsibility
Committee
REPORTInG/MOnITORInG
ASSuRAnCE/SELF-ASSESSMEnT
OPERATIOnAL FRAMEwORk
Total Performance
Organisation
Governance
Core Business
Processes
Delegated Authorities
Mandated Policies,
Processes and Charters
BAE Systems’ Businesses
BuSInESS RISk MAnAGEMEnT
IDEnTIFICATIOn
– Full risk review undertaken at least
six-monthly by each business
and function
– Both financial and non-financial risks
recorded in controlled registers
– Risk owners allocated to assess
and manage risk
O
R E P
ENTIFIC A
ID
I N G AND MONITO
T
R
T I O N
AnALYSIS
– Risks analysed for impact
and probability to determine
gross exposure
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RTING AND M O N I
MITIGATIOn
– Risk owners identified
– Action plans implemented to
manage, or respond to, risks
– Robust mitigation strategy subject
to regular and rigorous review
EvALuATIOn
– Risk exposure reviewed and
risks prioritised
– Risk evaluation documented
in controlled risk registers
REPORTInG AnD MOnITORInG
– Risks and mitigation
plans monitored,
and rigorously
reviewed regularly
– Significant risks notified
through the business
reporting systems
– key risks reported
through monthly
Contract Reviews and
Quarterly Business
Reviews, twice-yearly
through the Operational
Assurance Statement
self-assessment
and annually
through the Integrated
Business Plan
– Risk workshops
conducted by the
Executive Committee
to analyse and allocate
management
responsibility for
managing significant
non-financial risks
– Risks reviewed by
the Board, and its
Audit and Corporate
Responsibility
committees on
a regular basis
BAE Systems Annual Report 2010
57
p78–99 For more information on the activities
of the Board and its committees
p87–88 For more information on the
group’s business processes and
mandated policies
Directors’ Report: Business Review
Principal risks
SUMMArY oF PrinCiPAl riSkS
The Group’s principal risks are identified below, together with an
estimate of the size of their potential impact on the Group were
they to crystallise.
Link to
Total Performance
High impact
Customer Focus
Programme Execution
Responsible Behaviour
Other
Financial Performance
p58 Defence spending
p59 Government
p60 Large contracts
p60 Fixed-price contracts
customers
p59 Global market
p61 Laws and regulations p61 Competition
p62 Pension funding
p62 Export controls and
other restrictions
p62 Acquisitions
p63 Consortia and
joint ventures
p63 Exchange rates
Medium impact
p59 Contract award
timing
p60 Component
availability,
subcontractor
performance and
key suppliers
DEFEnCE SPEnDing
The group is
dependent on
defence spending
and reductions
in such spending
could adversely
affect the group.
Description
The Group’s core businesses are primarily defence
and security related, selling products and services
directly and indirectly, primarily to the uS, uk, Saudi
Arabian, and other national governments. Defence
spending depends on a complex mix of political
considerations, budgetary constraints, and the
ability of the armed forces to meet specific threats
and perform certain missions. Because of these
factors, defence spending may be subject to
significant fluctuations from year to year.
Despite budgetary pressures, the uS defence
market continues to generate a substantial number
of business opportunities. In the uk, pressure to
reduce government expenditure has been reflected
in the Strategic Defence and Security Review (SDSR),
which identified a number of changes in priorities,
with consequent implications for certain of the
Group’s programmes. Saudi Arabia is expected to
remain one of the largest defence spenders in the
world, with defence expenditure of 10.9% of GDP
in 2009.
impact
A decrease in defence purchases by the Group’s
major customers could have a material adverse
effect on the Group’s future results of operations
and financial condition.
Mitigation
The Group’s business is geographically spread
across five key home markets, and its products
are marketed across a range of sectors within the
defence and security arenas. The Group has a highly
sustainable Services business, which represented
48% of sales in 2010. This is an area for growth as
customers’ operations and maintenance budgets
come under pressure. The Group has already made
significant cost reductions in anticipation of the
increased budgetary pressure. The Group continues
to use realistic assumptions to underpin its
financial and operational planning.
p20 For more information on the group’s five key home markets
p24 For more information on the SDSr
58
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govErnMEnT CUSToMErS
The group’s largest
customer contracts
are government
contracts.
Description
The governments of the uS, uk and kingdom of
Saudi Arabia are the Group’s three largest end
customers. Any significant disruption or deterioration
in the relationship with these governments and a
corresponding reduction in government contracts
would significantly reduce the Group’s revenues.
Companies engaged in the supply of defence
and security related equipment and services to
government agencies are subject to certain business
risks particular to the defence and security
industries. These governments could modify
contracts or terminate them at short notice and
at their convenience. For example, long-term uS
government contracts are normally funded annually
and are subject to cancellation or delay if funding
appropriations for subsequent performance periods
are not made. Terms and risk sharing agreements
can also be amended. In addition, the Group, as a
government contractor, is subject to financial audits
and other reviews by some of its governmental
customers with respect to the performance of, and
the accounting and general practices relating to,
government contracts. As a result of these audits
and reviews, costs and prices under these contracts
may be subject to adjustment.
impact
The termination of one or more of the contracts for
the Group’s programmes by governments, or the
failure of the relevant agencies to obtain expected
funding appropriations for the Group’s programmes,
could have a material adverse effect on the Group’s
future results of operations and financial condition.
Mitigation
The Board regularly reviews the Group’s
performance in these home markets, and the
Executive Committee continues to work closely
with these customers to ensure the Group strategy
is aligned with theirs. In the event of a customer
termination for convenience, the Group would
typically be paid for work done and commitments
made at the time of termination. Having sovereign
governments as major customers offers the
benefits of dealing with mature procurement
organisations with which the Group can have
long-standing business relationships, and well
established and understood terms of trade.
p14 For more information on the group’s strategy
p32 For more information on the group’s customers
gloBAl MArkET
The group is
exposed to risks
inherent in
operating in a
global market.
Description
BAE Systems is a global company which conducts
business in a number of regions, including the
Middle East, and, as a result, assumes certain
risks associated with businesses with a broad
geographical reach. In some countries, these risks
include, and are not limited to, the following:
government regulations and administrative policies
could change quickly and restraints on the movement
of capital could be imposed; governments could
expropriate the Group’s assets; burdensome taxes
or tariffs could be introduced; political changes could
lead to changes in the business environment in
which the Group operates; and economic downturns,
political instability and civil disturbances could
disrupt the Group’s business activities.
impact
The occurrence of any such events could have
a material adverse effect on the Group’s future
operational performance and financial condition.
Mitigation
The Group has a balanced portfolio of businesses
with five key home markets.
p20 For more information on the group’s five key home markets
ConTrACT AwArD TiMing
The timing of
contract awards
could materially
affect the group’s
future results of
operations and
financial condition.
Description
The Group’s operating performance and cash flows
are dependent, to a significant extent, on the award
of defence contracts.
impact
Because the amounts payable under these contracts
can be substantial, the timing of award or failure to
receive anticipated orders could materially affect
the Group’s operating results and cash flow for the
periods affected.
Mitigation
The Board regularly reviews the Group’s performance
with regard to contract awards, and the Executive
Committee actively manages the assets and
resources of the Group in line with the timing
of awards.
p32 For more information on lifecycle Management (lCM) which
mandates project management processes from business
winning to contract execution
BAE Systems Annual Report 2010
59
Directors’ Report: Business Review
Principal risks continued
lArgE ConTrACTS
Certain parts of the
group’s business are
dependent on a
small number of
large contracts.
Description
A significant proportion of the Group’s revenue comes
from a small number of large contracts. Each of these
contracts, which are primarily in the Programmes &
Support and International operating groups, is
typically worth or potentially worth over £1bn.
impact
The loss, expiration, suspension, cancellation or
termination of any one of these contracts, for any
reason, could have a material adverse effect on
the Group’s future results of operations and
financial condition.
Mitigation
The Group has a large forward order book and a
well-balanced spread of programmes, which provides
long-term visibility. An analysis of the Group’s order
book by major programme and operating group is
presented on the inside front cover of this report.
The Board regularly reviews the Group’s performance
on these contracts, and the Executive Committee
continues to work closely with these customers to
ensure the Group’s strategy is aligned with theirs.
p14 For more information on the group’s strategy
FixED-PriCE ConTrACTS
The group has
fixed-price contracts.
Description
A significant portion of the Group’s revenue is derived
from fixed-price contracts. An inherent risk in these
fixed-price contracts is that actual performance costs
may exceed the projected costs on which the fixed
prices for such contracts are agreed. These
contracts can extend over many years and it can
be difficult to predict the ultimate outturn costs
associated with the terms on which they are based.
impact
The Group’s failure to anticipate technical problems,
estimate costs accurately or control costs during
performance of a fixed-price contract may reduce the
profitability of such a contract or result in a loss.
Mitigation
The Group has reduced its exposure to fixed-price
design and development activity which is in general
more risk intensive than fixed-price production
activity. To manage contract-related risks and
uncertainties, contracts are managed through the
application of the Lifecycle Management (LCM)
business process mandated by the Operational
Framework at the operational level. Robust bid
preparation and approvals processes are well
established throughout the Group, with decisions
required to be taken at the appropriate level in line
with clear delegations of authority. The consistent
application of metrics is used to support the review
of individual contract performance.
p32 For more information on lCM
CoMPonEnT AvAilABiliTY, SUBConTrACTor PErForMAnCE AnD kEY SUPPliErS
Mitigation
The Group’s procurement function is responsible
for establishing and managing end-to-end integrated
supplier arrangements. It is led by a member of the
Executive Committee. The Executive Committee
continues to monitor this risk and the Group has
experienced no material negative impact to date.
The Group reviews the financial health of strategically
important suppliers globally on an ongoing basis.
p33 For more information on the group’s subcontractors and
other suppliers
The group is
dependent upon
component
availability,
subcontractor
performance and
key suppliers.
Description
The Group is dependent upon the delivery of
materials by suppliers and the assembly of
components and subsystems by subcontractors
used in its products in a timely and satisfactory
manner, and in full compliance with applicable
terms and conditions.
impact
Some of the Group’s suppliers or subcontractors may be
impacted by the economic environment and constraints
on available financing, which could impair their ability to
meet their obligations to the Group. In some instances,
the Group is dependent on one or a limited number of
suppliers. If any of these suppliers or subcontractors
fails to meet the Group’s needs, the Group may not,
in the short term, have readily available alternatives,
thereby impacting its ability to complete its customer
obligations satisfactorily and in a timely manner. These
events could have a negative impact on the Group’s
future results of operations and financial condition.
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lAwS AnD rEgUlATionS
The group is subject
to risk from a failure
to comply with laws
and regulations.
Description
The Group has contracts and operations in many parts
of the world, operates in a highly regulated environment
and is subject to applicable laws and regulations of
many jurisdictions. These include, without limitation,
regulations relating to import-export controls,
money-laundering, false accounting, anti-bribery
and anti-boycott provisions. non-compliance could
expose the Group to fines, penalties, suspension or
debarment, which could have a material adverse effect
on the Group. From time to time, the Group is subject to
government investigations relating to its operations.
impact
Failure by the Group or its sales representatives,
marketing advisers or others acting on its behalf to
comply with these laws and regulations could result in
administrative, civil or criminal liabilities resulting in
significant fines and penalties and/or result in the
suspension or debarment of the Group from
government contracts for some period of time or
suspension of the Group’s export privileges.
Mitigation
During the year, the Group has continued to add
resources dedicated to legal and regulatory
compliance in order to further enhance its capability
to identify and manage the risk of compliance failure.
Internal and external market risk assessments form
an important element of the ongoing corporate
development process. A uniform global policy and
process for the appointment of advisers engaged
in business development is in effect. Pursuant to
its commitments concerning ongoing regulatory
compliance made in the course of the settlement
reached with the uS Department of Justice (DoJ)
in February 2010, the Group has appointed an
independent monitor for a period of up to three
years to monitor the Group’s compliance with
such commitments.
p48 For more information on the group’s approach to
business conduct
impact
In the event that the Group is unable adequately to
compete in the markets in which it operates, the
Group’s business and results of operations may be
adversely affected.
Mitigation
The Group’s global, multi-home market presence,
balanced portfolio of businesses, leading capabilities
and performance continue to address this risk.
p20 For more information on the group’s five key home markets
CoMPETiTion
The group’s
business is subject
to significant
competition.
Description
Most of the Group’s businesses are focused on
the defence and security sectors, and subject to
competition from national and multi-national firms with
substantial resources and capital, and many contracts
are obtained through a competitive bidding process.
The Group’s ability to compete for contracts depends
to a large extent on the strength of its intellectual
property rights and technical know-how, together with
the effectiveness and innovation of its research and
development programmes, its ability to offer better
programme performance than its competitors at a lower
cost to its customers, and the readiness of its facilities,
equipment and personnel to undertake the programmes
for which it competes.
In some instances, governments direct to a single
supplier all work for a particular programme, commonly
known as a sole-source programme. Although
governments have historically awarded certain
programmes to the Group on a sole-source basis, they
may in the future determine to open such programmes
to a competitive bidding process. Government contracts
for defence-related products can, in certain countries,
be awarded on the basis of home country preference.
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Principal risks continued
PEnSion FUnDing
The group is
exposed to funding
risks in relation to
the defined benefits
under its pension
schemes.
Description
The Group operates certain defined benefit pension
schemes. At present, in aggregate, there is an
actuarial deficit between the value of the projected
liabilities of these schemes and the value of the
assets they hold. The Group continues to implement
the deficit recovery plans agreed with the respective
scheme trustees based on actuarial advice and
funding valuation results.
impact
The amount of the deficits may be adversely affected
by changes in a number of factors, including
investment returns, long-term interest rate and price
inflation expectations, and anticipated members’
longevity. Further increases in pension scheme
deficits may require the Group to increase the amount
of cash contributions payable to these schemes,
thereby reducing cash available to meet the Group’s
other operating, investing and financing requirements.
ExPorT ConTrolS AnD oTHEr rESTriCTionS
The group is subject
to export controls
and other
restrictions.
Description
A portion of the Group’s sales is derived from the
export of its products. The export of defence and
security products outside the jurisdictions in which
they are produced is subject to licensing and export
controls, and other restrictions. no assurance can
be given that the export controls to which the Group
is subject will not become more restrictive, that new
generations of the Group’s products will not also
be subject to similar or more stringent controls,
or that political factors or changing international
circumstances will not result in the Group being
unable to obtain necessary export licences.
ACQUiSiTionS
The group has
experienced
growth through
acquisitions.
Anticipated benefits
of acquisitions may
not be realised.
Description
The Group has experienced growth through
acquisitions and continues to pursue acquisitions
in order to meet its strategic objectives. whether the
Group realises the anticipated benefits from these
transactions depends upon the integration of the
acquired businesses and their performance relative
to the Group’s acquisition expectations.
impact
The diversion of management attention to integration
efforts, difficulties in combining operations and the
performance of the acquired businesses below
expectations could adversely affect the Group’s
business, and create the risk of impairments arising
on goodwill and other intangible assets.
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Mitigation
The performance of the Group’s pension schemes and
deficit recovery plans are regularly reviewed by both the
Group and the trustees of the schemes taking actuarial
and investment advice as applicable. The results of
these reviews are discussed with the Board and
appropriate action taken.
p40
For more information on the group’s pension accounting
and funding valuations, and deficit recovery plans
impact
Reduced access to export markets could have a
material adverse effect on the Group’s future results
of operations and financial condition. Failure to comply
with export controls and wider regulations could
expose the Group to fines, penalties, suspension or
debarment, which could have a material adverse
effect on the Group.
Mitigation
The Group has formal systems and policies in place
which are mandated under the Operational Framework
to ensure adherence to regulatory requirements and
identify any restrictions that could adversely impact the
Group’s future activities.
p21
For more information on exports
Mitigation
The Group has established policies in place to
manage the acquisition process, integrate acquired
businesses, and monitor performance and potential
impairments.
p9
For more information on M&A activity during the year
p132 For more information on impairment testing
ConSorTiA AnD JoinT vEnTUrES
The group is
involved in
consortia, joint
ventures and equity
holdings where it
does not have
control.
Description
The Group participates in various consortia, joint
ventures and equity holdings, exercising varying and
evolving degrees of control. while the Group seeks
to participate only in ventures in which its interests
are aligned with those of its partners, the risk of
disagreement is inherent in any jointly controlled
entity, and particularly in those entities that require
the unanimous consent of all members with regard
to major decisions and that specify restricted rights.
impact
In the event of disagreement within a consortium,
joint venture or equity holding and the business
arrangement failing to meet its strategic objectives
or expected benefits, the Group’s business and
results of operations may be adversely affected.
Mitigation
The Group has formal systems and procedures in
place to monitor the performance of such business
arrangements, and identify and manage any
adverse scenario arising.
p155 For more information on the group’s principal joint
ventures
ExCHAngE rATES
The group is
exposed to volatility
in currency
exchange rates.
Description
The global nature of the Group’s business means it
is exposed to volatility in currency exchange rates in
respect of foreign currency denominated transactions,
and the translation of net assets and income
statements of foreign subsidiaries and equity
accounted investments. The Group is exposed to a
number of foreign currencies, the most significant
being the uS dollar.
impact
Significant fluctuations in exchange rates to which
the Group is exposed could have a material adverse
effect on the Group’s future results of operations and
financial condition.
Mitigation
In order to protect itself against currency
fluctuations, the Group’s policy is to hedge all
material firm transactional exposures, unless
otherwise approved as an exception by the Treasury
Review Management Committee, and to manage
anticipated economic cash flow exposures. The
Group does not hedge the translation effect of
exchange rate movements on the income statement
or balance sheet of overseas subsidiaries and
equity accounted investments it regards as
long-term investments. Hedges are, however,
undertaken in respect of investments that are
not considered long term or core to the Group.
p42
For more information on the group’s treasury policies
Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have
an adverse effect on the financial condition or business of the Group.
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Operating group overview
BAE Systems has four principal operating groups each with different
characteristics resulting from the nature and phase in the lifecycle of
programmes, products and services provided, procurement philosophies
of their principal customers, and geographical areas in which they operate.
operating group Financial perFormance summary –
continuing operations
2010
Electronics, Intelligence
& Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Discontinued operations
Less: intra-group
2009 (restated4)
Electronics, Intelligence
& Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Discontinued operations
Less: intra-group
KPI
Order
intake1
£m
5,823
3,707
4,139
2,908
207
–
16,784
(400)
16,384
5,416
3,934
8,789
4,564
175
–
22,878
(1,170)
21,708
KPI
KPI
Underlying
EBITA2
£m
Return
on sales
%
Sales1
£m
5,653
5,930
6,680
4,534
278
–
23,075
(683)
22,392
5,637
6,738
6,298
3,828
254
–
22,755
(765)
21,990
668
604
529
478
(65)
–
2,214
–
2,214
575
604
670
419
(71)
–
2,197
–
2,197
11.8
10.2
7.9
10.5
9.9
10.2
9.0
10.6
10.9
10.0
Order
book1
£bn
4.8
5.9
21.1
9.1
0.3
–
41.2
(1.5)
39.7
4.5
7.8
24.3
11.0
0.4
–
48.0
(1.7)
46.3
KPI
Cash
flow3
£m
568
858
227
195
(665)
4
1,187
–
1,187
380
480
285
813
(366)
3
1,595
–
1,595
p36 For more information on the
group’s financial performance
BAE Systems, Inc.
Electronics, Intelligence
& Support (EI&S)
Description of activities
Electronic Systems business
comprises many relatively small,
short-cycle contracts, applying high
technology solutions to complex
problems.
Services activities include Readiness
& Sustainment, such as the support
business, which includes US ship
repair and modernisation activities,
and Cyber & Intelligence, which
supports US and international
governments in their national
security missions.
Contracting structures include
Indefinite Delivery, Indefinite Quantity
(IDIQ) contracts, where orders are
made against an overall budget spend,
and Multi-Ship, Multi-Option (MSMO)
contracts, which enable work to be
undertaken during successive US Navy
ship dockings. The order book is
typically one year’s sales or less
reflecting the value of business drawn
against IDIQ or MSMO contracts, and
the annual budget appropriation
methodology for procurement in
the US.
Sales by market segment1
Electronic
Systems
40%
Services
60%
1
2
3
4
Including share of equity accounted investments.
Earnings before amortisation and impairment of intangible assets,
finance costs and taxation expense (EBITA) excluding non-recurring
items (see page 37).
Net cash inflow/(outflow) from operating activities after capital
expenditure (net) and financial investment, dividends from equity
accounted investments, and assets contributed to Trust.
Restated following the sale of half of the Group’s 20.5%
shareholding in Saab AB and subsequent classification as
a discontinued operation.
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BAE Systems, Inc.
Land & Armaments
Programmes & Support
International
Description of activities
The business typically comprises
medium to long-term contracts or IDIQ
contracts for design, development,
production, support and upgrade of
armoured combat vehicles, tactical
wheeled vehicles, missile launchers,
artillery systems and munitions.
Significant vehicle Platforms include
Mine Resistant Ambush Protected
(MRAP), the final deliveries on the
Family of Medium Tactical Vehicles
(FMTV) contract, and sales of CV90
vehicles. Other Platforms business
includes the manufacture of artillery
systems, such as the M777 howitzer,
and naval guns.
Services activities include the 15-year
munitions supply contract with the UK
Ministry of Defence, and contracts for
the reset and remanufacture of Bradley
Fighting Vehicles for the US Army.
The business is in the process of
restructuring to match the lower sales
volume and cost base as the FMTV
programme concludes and Bradley
reset activity reduces.
Description of activities
This operating group has a small
number of large Platforms contracts.
Most of the business is with the UK
government. Contracts are typically
awarded as multi-year programmes.
Development programmes are
contracted such that appropriate levels
of risk are initially held by the customer.
Subsequent production programmes
are priced when a system’s
development has reached sufficient
maturity for specifications to be
stabilised and costs known. Production
contracts may be awarded on a
fixed-price basis, often with indices to
adjust prices where they extend over
long periods. Contracts may also have
incentive arrangements whereby the
customer and contractor share cost
savings against agreed target prices.
The significant Services business for air
and maritime programmes is also
usually contracted over multi-year
periods, and includes business where
the Group provides an overall capability.
These contracts may also have
incentivised profitability, the customer
and contractor sharing cost savings.
The Detica business operates in the
Cyber & Intelligence domain.
Description of activities
International has businesses in
Saudi Arabia and Australia, as well as
shareholdings in MBDA, Air Astana,
and Indian land systems and software
businesses.
The business provides operational
capability support to Saudi Arabia’s
air and naval forces on UK/Saudi
government-to-government contracts.
Services contracts, such as the
Saudi British Defence Co-operation
Programme and Typhoon support,
tend to be multi-year, including fixed
price elements. Platforms business
includes multi-year, fixed price contracts,
often with price variation formula, such
as the Salam Typhoon contract.
In Australia, the business delivers
production and support/upgrade
programmes for the Australian
government across air, maritime, land
and security. Services contracts include
the provision of support and upgrades.
Contracts for Platforms include naval
ships and land vehicles. Contracts are
often multi-year and fixed price, but with
price variation formula.
The business is developing its position
in Oman and an order for Typhoon
aircraft is actively being pursued.
Sales by market segment1
Sales by market segment1
Sales by market segment1
Platforms
Platforms
53%
44%
Services
66%
Electronic
Systems
3%
33%
Services
1%
Electronic
Systems
Platforms
33%
Electronic
Systems
9%
Services
58%
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Operating group reviews
Electronics, Intelligence & Support
oVerVieW
Electronics, Intelligence & Support, with 30,800
employees1, provides a wide range of electronic systems
and subsystems for military and commercial applications,
technical and professional services for US national security
and federal markets, and ship repair and modernisation
services.
Key points – Financial
– Order intake1 growth of 7.5%
– Return on sales increased to 11.8%
– Cash flow3 conversion of underlying EBITA2 at 85%
perFormance
Financial
Order intake1
Order book1
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
Safety
Lost Work Day Case
Rate (per 100,000
employees)
2010
2009
2008
£4.8bn
KPI £5,823m £5,416m £4,904m
£5.2bn
KPI £5,653m £5,637m £4,459m
KPI
£4.5bn
£668m
11.8%
£568m
£575m
10.2%
£380m
£506m
11.3%
£380m
KPI
KPI
262
315
472
Key points – operational
– Acquisitions of Atlantic Marine and OASYS Technology
completed
– Central operating group headquarters closed as part of
the restructuring of BAE Systems, Inc.
– Continued to perform on legacy programmes and secured
several strategic contract awards in new markets
– US Army qualified IMX-101 as a safer and effective
alternative for the potential replacement of TNT
in artillery
– Strong ship repair performance continued, with order
intake totalling $1bn (£0.6bn) in 2010
In 2010, Electronics, Intelligence & Support sales1 were
£5,653m (2009 £5,637m). On a like-for-like basis, sales1
decreased by 2.4% over 2009 primarily reflecting the impact
of contracting delays caused by the extended Continuing
Resolution funding at the end of 2009.
Return on sales increased to 11.8% (2009 10.2%) reflecting
good programme execution on certain maturing programmes,
and ongoing cost reduction and efficiency programmes.
Operating cash inflow3 was £568m (2009 £380m) reflecting
good working capital management.
The business reduced its Lost Work Day Case Rate by 17% in
2010, driven by good performance in high risk areas. Although
the overall target of a 20% reduction was not achieved, the safety
performance of the businesses has continued to demonstrate a
year-on-year improvement. With the exception of Atlantic Marine
sites acquired in 2010, all sites with more than 150 personnel
progressed to Level 4 on the Group’s Safety Maturity Matrix.
Electronic Solutions
Electronic Solutions completed the $53m (£33m) acquisition
of OASYS Technology, an electro-optical systems manufacturer,
which strengthens BAE Systems’ Electronic Systems
capabilities, providing a wide range of night vision, soldier-borne
imaging systems.
The business maintained its leadership position in electronic
warfare, with strong performance on Low-Rate Initial Production
(LRIP) of electronic warfare suites for F-35. The initial
countermeasures system was delivered, with significant
improvements made to its mission systems flight testing software.
The F-22 electronic warfare programme completed its required
deliveries, retired all risk items as planned and exceeded its
cost reduction expectations.
The US Army continues to order the Common Missile Warning
System, a helicopter missile warning system, with contract
awards of $34m (£22m) in 2010. The business also unveiled
its directable, infrared countermeasures suite, Boldstroke™,
an integrated aircraft survivability system for protecting aircraft
from infrared-guided missiles and other threats.
A $46m (£29m) LRIP contract was signed with the US Navy for
the Advanced Precision Kill Weapon System. BAE Systems
designed the laser guidance and controls on this cost-effective
guidance kit that transforms standard unguided rockets into
highly precise laser-guided missiles.
2010 Executive Committee objective
Grow our EI&S
business both
organically and
via acquisitions,
and improve
efficiency
Support Solutions
Bae systems received a multi-ship, multi-option
(msmo) contract, with a potential value of $365m
(£233m), for executing planning, modernisation,
maintenance and repair work on 11 arleigh Burke
DDg-51 class destroyers at its norfolk, Virginia,
facility. this contract, and existing contracts for
cg-47 class cruisers and amphibious ships,
support work at the group’s norfolk, san Diego and
Hawaii shipyards, and positions Bae systems as a
major supplier of support services to the us navy.
1
2
Including share of equity accounted investments.
Earnings before amortisation and impairment of
intangible assets, finance costs and taxation expense
(EBITA) excluding non-recurring items (see page 37).
3
Net cash inflow from operating activities after capital
expenditure (net) and financial investment, dividends
from equity accounted investments, and assets
contributed to Trust.
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The business continues to invest in research and development. As
part of a three-year, $70m (£45m) investment in the development
of state-of-the-art manufacturing and systems engineering
facilities for integrated aircraft survivability equipment, the
Worrell/Weeks Aircrew Protection Center, a new testing and
equipment evaluation laboratory, was dedicated during the year.
Following strong performance by the business on legacy contracts,
US Army demand for thermal weapon sights continued in 2010
with the award of an additional $123m (£79m) contract under a
five-year, Indefinite-Delivery, Indefinite-Quantity contract. The order
increases the total thermal weapon sight contract value to more
than $1bn (£0.6bn) since 2004.
In 2010, the Driver’s Vision Enhancer Family of Systems
completed the hardware qualification phase and began
production deliveries, with orders totalling more than $92m
(£59m). The combat-proven Check-6® thermal camera system
received additional contracts worth more than $120m (£77m)
and deliveries exceeded 21,000 units.
In an emerging market related to unmanned aerial vehicle
opportunities, BAE Systems was awarded several wide-area
persistent surveillance contracts totalling over $100m (£64m).
In export markets, the business secured a $67m (£43m)
contract with the Slovak Ministry of Defence for a newly designed
mobile military communications system (MOKYS). The system
supports secure transfer of information in the form of voice, data
and images at both operational and tactical levels of command.
Intelligence & Security
In February 2011, BAE Systems completed the acquisition of
L-1 Identity Solutions, Inc.’s Intelligence Services Group, which
expands its existing presence in the US intelligence community,
for a cash consideration of approximately $297m (£190m).
Within the Services market segment, Intelligence & Security
continues to support US and international government and
commercial clients in the collection and management of
information to gather intelligence, maintain security, manage
risks and strengthen resilience in today’s complex operating
environments. Key focus areas are intelligence and
counterintelligence, homeland security, law enforcement,
and support of military operations.
With sustained intelligence and security operations around the
world, the business captured significant, indefinite-quantity
contract vehicles to provide knowledge management, cyber,
information technology, and analysis support to defence
and intelligence agencies, and the US Federal Bureau of
Investigation (FBI).
Other key contract awards included: Next Generation Desktop
for up to $300m (£192m) that will deploy over 12,000 analyst
workstations across the intelligence community; a $40m
(£26m) contract for the FBI supporting enterprise network
operations and information assurance; and a command and
control system contract for the US Navy with an estimated value
of $100m (£64m) that leverages BAE Systems’ market-leading
capabilities in full-motion video analysis, geospatial imagery
analysis and mission planning.
Platform Solutions
In the air domain, the business extended a long-term agreement
with Boeing, securing its exclusive position for Boeing original
equipment and aftermarket work through to 2019. The contract
covers commercial electronics for the Boeing 737, 747, 767
and 777 aircraft, with a potential value of $800m (£511m).
In the UK, the business delivered the first order of new helmet-
mounted optical sighting systems to the Royal Navy, addressing
a mission-critical need for increased air door gunner situational
awareness.
BAE Systems began production deliveries of its HybriDrive®
propulsion system to British bus builder Alexander Dennis under
the UK Green Bus Fund initiative, with over 100 systems in
service to date. The business began the development of a
hydrogen fuel cell system for SunLine Transit, delivered its first
production bus to the Seattle Transit System, and was selected
to power New Flyer hybrid buses in Atlanta, Georgia and Everett,
Washington. Transit buses powered by BAE Systems’
HybriDrive® green propulsion systems surpassed 200 million
miles of clean, reliable revenue service.
Support Solutions
Consistent with the Group’s strategy to grow its Readiness &
Sustainment activities, Atlantic Marine was acquired in July for
$372m (£245m). The acquisition enhances the Group’s ability
to meet ongoing demand for ship maintenance, repair, overhaul
and conversion services; marine fabrication; and construction.
Integration of the business is largely complete.
A five-year, $400m (£256m) MSMO contract was secured to
repair and modernise eight combatant ships for the US Navy.
The contract includes docking and non-docking work on four
CG-47 Ticonderoga class cruisers and four DDG-51 Arleigh
Burke class destroyers.
In another Services market, the US Army awarded the business
a contract worth up to $95m (£61m) to install and maintain
automated access control systems at US Army bases and other
installations. This award expands BAE Systems’ support of
physical security at US government sites.
BAE Systems has been approved to provide engineering and
technical services to the US Army and other federal customers
under the Rapid Response – 3rd Generation $16.4bn (£10.5bn)
government-wide contract, making it eligible to bid on a range of
task orders during the ten-year life of the contract.
outlooK
Pressures continue on the US defence budget. The US
Secretary of Defense recently announced a directive aimed
at reducing funding for multiple programmes and services.
Whilst these funding reductions and expected slowing or
ultimate cancellations of new programmes could impact the
business, BAE Systems remains well positioned to support
its US customers with a balance of products, technologies
and services. In recognition of the growing importance of
affordability and efficiencies, BAE Systems streamlined the
organisation of its US business in 2010 to reduce costs and
improve flexibility. BAE Systems expects to benefit from its
presence in markets that are forecast to grow despite general
market pressures, such as Cyber & Intelligence and ship repair
services. The business will continue to focus its investment in
market areas where growth is expected.
p12 For more information on the group’s
2010 executive committee objectives
BAE Systems Annual Report 2010
67
Directors’ Report: Business Review
Operating group reviews continued
Land & Armaments
oVerVieW
Land & Armaments, with 16,100 employees1, designs,
develops, produces, supports and upgrades armoured
combat vehicles, tactical wheeled vehicles, naval guns,
missile launchers, artillery systems, munitions and law
enforcement products.
Key points – Financial
– Return on sales increased to 10.2% (2009 9.0%)
– Cash flow3 conversion of underlying EBITA2 at 142.1%
In 2010, Land & Armaments sales1 were £5,930m (2009
£6,738m). On a like-for-like basis, and as expected, sales1
were 13.7% below 2009 reflecting the lower level of land
vehicle activity, primarily Bradley and Family of Medium
Tactical Vehicles (FMTV).
Underlying EBITA2 was £604m (2009 £604m). Return on sales
increased to 10.2% (2009 9.0%) benefiting from both
performance on the FMTV and Bradley programmes, and
continuing rationalisation and efficiency activities. Underlying
EBITA2 in the prior year included £42m of costs associated with
the unsuccessful Mine Resistant Ambush Protected (MRAP)
All-Terrain Vehicle (ATV) bid.
2010
2009
2008
Operating cash inflow3 was £858m (2009 £480m) reflecting
strong working capital management.
perFormance
Financial
Order intake1
Order book1
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
Safety
Lost Work Day Case
Rate (per 100,000
employees)
KPI £3,707m £3,934m £8,568m
£7.8bn £11.5bn
KPI £5,930m £6,738m £6,407m
£5.9bn
KPI
KPI
£604m
10.2%
£858m
£604m
9.0%
£480m
£566m
8.8%
£467m
KPI
277
500
737
Key points – operational
– Restructured to create a leaner, more responsive
business to meet customers’ needs
– Net headcount reduced by 5,500 (including contractors)
– Demand continues for land vehicle Readiness
& Sustainment
– Continued progress in pursuit of supply chain efficiencies
– Continued Mine Resistant Ambush Protected vehicle
activity
The business reduced its Lost Work Day Case Rate by 45%,
exceeding the 2010 objective of a 20% improvement on 2009.
All sites with more than 150 personnel progressed to Level 4
on the Group’s Safety Maturity Matrix.
In 2010, Land & Armaments restructured its operations to
reflect the expected lower demand for new vehicles. As a result
of the rationalisation programmes, total headcount (including
contractors) was reduced by 5,500.
United States
BAE Systems has reset and upgraded more than 3,390 Bradley
vehicles to support its customers since 2007. The business is
extending the lives of 552 Bradley Fighting Vehicles by replacing
old and damaged components under a $91m (£58m) contract
modification from the US Army Tank-automotive and Armaments
Command Life Cycle Management Command. This is in addition
to contracts totalling $440m (£281m) awarded on other Bradley
and HERCULES upgrades. The January statements by the US
Secretary of Defense included the need to continue to upgrade
the Bradley family of vehicles.
Early in 2010, following a rapid design and development
process, BAE Systems introduced the Caiman Multi-Terrain
Vehicle to provide an effective combination of interior
capacity, tactical mobility, operator comfort and survivability.
The business was awarded a $629m (£402m) contract from
the US MRAP Joint Program Office to upgrade 1,700 Caiman
MRAP vehicles.
2010 Executive Committee objective
Implement our
global land systems
strategy, and deliver
on our efficiency and
rationalisation plans
Caiman MRAP Upgrade
Programme
Bae systems has been awarded a $629m
(£402m) contract from the us mine resistant
ambush protected (mrap) Joint program office
to upgrade 1,700 caiman mrap vehicles. the
upgraded vehicle, called the caiman multi-terrain
Vehicle, includes a refurbished and improved
armoured capsule, a new high power automotive
power train, chassis and independent suspension.
this award demonstrates Bae systems’ support of
the customer’s current and future requirements by
rapidly improving product performance to protect
troops during combat missions.
1
2
Including share of equity accounted investments.
Earnings before amortisation and impairment of
intangible assets, finance costs and taxation expense
(EBITA) excluding non-recurring items (see page 37).
3
Net cash inflow from operating activities after capital
expenditure (net) and financial investment, dividends
from equity accounted investments, and assets
contributed to Trust.
68
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BAE Systems is on schedule to deliver seven Paladin Integrated
Management prototype vehicles to the US Army under the
existing research and development contract. The upgraded
vehicles use combat-proven technologies from the Bradley
vehicle family and feature the Group’s enhanced on-board
power management capability.
BAE Systems received orders from the US Marine Corps
Systems Command worth $170m (£109m) to produce 32 US
Special Operations Command (SOCOM) Armored Utility Vehicles
(AUV) and provide major upgrades to existing vehicles. The
US SOCOM AUV is one of several MRAP variants based on the
RG33 family of vehicles. To date, nearly 350 SOCOM MRAP
vehicles have been produced and, in total, the business has
delivered more than 6,400 MRAP vehicles to support urgent
needs in Iraq and Afghanistan, with nearly $5bn (£3.2bn) in
contract awards for the production and service of MRAPs.
Two new Services facilities were opened to provide the US Army
with work areas to maintain the RG33 SOCOM vehicles in
theatre. These facilities provide complete maintenance and
service capabilities in support of the Group’s products in the
field, training classrooms to assist soldiers, and living quarters
for workers. Expansion plans include support of all the Group’s
products in service with the US armed forces in the region.
During the year, the US business was awarded over $30m
(£19m) in orders to deliver armour protection kits for Armored
Security Vehicles (ASV), demonstrating BAE Systems’ position
as a leader in innovative armouring technologies. BAE Systems
has produced more than 2,500 armour kits for the highly
manoeuvrable, four-wheel drive ASV.
BAE Systems opened a new state-of-the-art design and
prototyping centre in Sterling Heights, Michigan, housing
facilities for vehicle and subsystem modifications, integration
and testing, electrical assembly fabrication, software
development, and system integration of vehicle control
and crew station electronics.
The business continues to deliver ahead of schedule and to
cost under its existing FMTV contract, producing over 7,000
vehicles at a record high quality level, with sales of some
$2bn (£1.3bn) in 2010. This contract is expected to complete
in the first quarter of 2011.
Following the submission of a bid for the development phase of
the US Army’s new Ground Combat Vehicle programme in May, the
business was notified of a change in the customer’s requirements
and re-submitted its bid. The technology demonstration phase of
the programme is expected to be awarded late in 2011.
United Kingdom
The munitions business has seen significant investment
and transformation activity during the year, with work on new
facilities at Radway Green and Washington. Throughout this
period, the business has continued to perform under its 15-year
partnership with the UK Ministry of Defence (MoD) to deliver
small arms ammunition, achieving cumulative schedule
adherence of 99% and sales of £302m in 2010.
The vehicles business received Readiness & Sustainment
contracts from the UK MoD, valued at £30m, for the design,
production and embodiment of upgrade kits for 78 British Army
Warrior infantry fighting vehicles. In March, the business
delivered the last of the latest tranche of BVs10 Viking Mk2
vehicles.
In March, the UK government announced that it had not selected
BAE Systems’ proposal for the Future Rapid Effect System
(FRES) Specialist Vehicles requirement.
The weapons business received an order for 93 additional
M777 howitzers, taking total cumulative orders since product
launch to 955 systems, worth in excess of £1bn.
Sweden
The weapons business was awarded a £135m contract for the
production of 48 Archer 155mm self-propelled artillery gun
systems for the Swedish and Norwegian armed forces.
The vehicles business was awarded a long-term contract from
the Dutch MoD to supply spares for their CV9035 infantry
fighting vehicles.
In June, BAE Systems launched the latest member of the CV90
family, the CV90 Armadillo, which has been modified to provide
a higher degree of payload and flexibility to address new threats,
and adapt to rapidly changing operational environments, thereby
introducing a new build standard.
Despite its upheld legal appeal against the decision of the
Swedish Defence Materiel Administration, the Group’s proposed
modular 8x8 vehicle, named Alligator, was not selected for the
Armoured Wheeled Vehicle programme.
South Africa
Through a partnership with General Dynamics Land Systems
Canada, the business received a $160m (£102m) follow-on
contract award to build 250 RG31 Mk5E vehicles in support
of the MRAP vehicle programme for use in Afghanistan.
In December, the business received a contract for $130m
(£83m) for the upgrade of approximately 700 MRAP RG31
vehicles. The upgrade includes new engines, and new
independent suspension and tyre inflation systems.
Joint ventures
FNSS, a 49% owned joint venture with Nurol Group of Turkey,
signed a letter of intent for approximately $500m (£320m) with
DEFTECH of Malaysia for the design and manufacture of 250
armoured wheeled vehicles for the Malaysian armed forces.
outlooK
Land & Armaments faces a challenging market environment.
It is expected that pressures on defence budgets, particularly
in the US and UK, will continue. Recent statements by the US
Secretary of Defense indicated that the 2011 US defence
budget is likely to include anticipated cost efficiencies,
programme reductions and potential cancellations. However,
the business is well positioned to compete for sustainment
and upgrade work on its existing platforms in the event of new
vehicle programme terminations.
Sales in 2011 will be impacted by approximately $1.6bn
(£1.0bn) on completion of the current FMTV contract and by
approximately $1.0bn (£0.6bn) for the lower level of Bradley
reset/remanufacture activity.
Going forward, the focus will be on securing key new
programmes, pursuing export opportunities, and sustaining
the margin improvement from the business’s ongoing
restructuring and efficiency initiatives.
p12 For more information on the group’s
2010 executive committee objectives
BAE Systems Annual Report 2010
69
Directors’ Report: Business Review
Operating group reviews continued
Programmes & Support
oVerVieW
Programmes & Support, with 31,600 employees1, primarily
comprises the Group’s UK-based air, maritime and Cyber &
Intelligence activities.
Key points – Financial
– Underlying EBITA2 includes a charge of £100m on the
terminated Trinidad and Tobago Offshore Patrol Vessel
(OPV) programme
perFormance
Financial
Order intake1
Order book 1
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
Safety
Lost Work Day Case
Rate (per 100,000
employees)
2010
2009
2008
KPI £4,139m £8,789m £4,195m
£19.8bn
KPI £6,680m £6,298m £4,638m
£21.1bn £24.3bn
KPI
KPI
£529m
7.9%
£227m
£670m
10.6%
£285m
£491m
10.6%
£651m
KPI
426
812
992
Key points – operational
– £537m Hawk India contract secured
– Third Type 45 destroyer accepted off contract and sixth
launched
– HMS Astute acceptance completed and second boat,
Ambush, launched
– Nimrod MRA4 programme terminated and Harrier to be
taken out of service in 2011 following Strategic Defence
and Security Review (SDSR)
– Continued rationalisation and efficiency activity across the
operating group and alignment of cost base post SDSR
Order intake1 in the year was £4.1bn (2009 £8.8bn).
The prior year intake included long-term orders for production
of Typhoon Tranche 3A aircraft, and support for Typhoon,
Harrier, Type 45, and Spearfish and Sting Ray torpedoes.
Sales1 in 2010 were £6.7bn, which, on a like-for-like basis,
were broadly unchanged from 2009.
Underlying EBITA2 was £529m (2009 £670m) with a return
on sales of 7.9% (2009 10.6%). Underlying EBITA2 in 2010
includes a £100m charge on the terminated Trinidad and
Tobago OPV programme. As expected, margins were impacted
by higher pension service costs arising from a fall in the
discount rates applied to pension liabilities.
The business reduced its Lost Work Day Case Rate by 48%,
exceeding the 2010 objective of a 20% improvement on 2009.
There were particular improvements in safety in the Surface Ships
business. All sites with more than 150 personnel progressed to
Level 4 on the Group’s Safety Maturity Matrix.
In addition to approximately 1,750 redundancies announced in
2009, a further 2,900 were announced across the operating
group in 2010 to continue to deliver efficiencies and align the
cost base following the SDSR.
Military Air Solutions
Delivery of Typhoon Tranche 2 aircraft to the four partner nations
continued with 41 aircraft delivered in the year. Deliveries to the
Royal Saudi Air Force (RSAF) were made in accordance with the
programme, with 18 of the 72 contracted aircraft delivered to date.
A £111m, four and a half-year Services contract was awarded on
the Hawk Advanced Jet Trainer (AJT) fleet at RAF Valley. Twenty-five
of the 28 Hawk AJT aircraft for the RAF have now been accepted.
BAE Systems has secured a £537m contract from Hindustan
Aeronautics Limited to supply products and services to enable an
additional 57 Hawk AJT aircraft to be built under licence in India.
On F-35, major unit deliveries to Lockheed Martin have been
completed for the development programme and the first two
production contract lots. Production continues to schedule on
Lot 3, which includes the first two UK operational test and
evaluation aircraft. The SDSR decision to acquire the F-35
Carrier variant instead of the F-35 Short Take Off and Vertical
Landing variant will not change BAE Systems’ role on the
programme. BAE Systems’ workshare arrangements are
2010 Executive Committee objective
Establish in the
UK sustainably
profitable
through-life business
in air, land and sea
BAE Systems wins
pan-European Readiness
& Sustainment contract
in may 2010, a five-year, £150m contract was
awarded for the delivery of typhoon avionics
equipment repair to the air Forces of germany,
spain and the uK. combined with the £400m
radar and Defensive aids sub-system (Dass)
contract awarded in 2009, the contracts offer a
range of repair services, halving the customer’s
avionic repair costs for typhoon and improving
availability.
1
2
Including share of equity accounted investments.
Earnings before amortisation and impairment of
intangible assets, finance costs and taxation expense
(EBITA) excluding non-recurring items (see page 37).
3
Net cash inflow from operating activities after capital
expenditure (net) and financial investment, dividends
from equity accounted investments, and assets
contributed to Trust.
70
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not matched against the UK government’s decisions on aircraft
type or quantities.
On the Tornado and Harrier programmes, operational
requirements continued to be met through the delivery of
contractual milestones and Urgent Operational Requirements.
BAE Systems continues to show good progress in its Unmanned
Aircraft Systems activities, with the roll out of the joint MoD
and industry Taranis Unmanned Combat Aircraft System
demonstrator in July.
In the UK, cyber security has been highlighted as a significant
threat in the National Security Strategy. Detica continues to be
well placed as a strategic partner to UK government. In 2010,
Detica launched a new cyber security service, Detica TreidanTM,
and is advising commercial and government customers on
preventing and responding to attacks on their networks.
The Detica NetReveal® solution continues to show global
sales growth with some key wins, particularly in the financial
services sector.
Surface Ships
Programmes for the Royal Navy have progressed to plan, with
construction well advanced on sections of the first Queen
Elizabeth Class aircraft carrier in Portsmouth and Glasgow.
The Type 45 build programme continues, with delivery of
third of class, Diamond, sea trials for fourth of class, Dragon,
and launch of the sixth and final ship, Duncan, during 2010.
The Type 45 support solution has been contracted for and
established in Portsmouth.
Considerable achievements have been made to transform the
business and drive cost savings under the Terms of Business
Agreement (ToBA) with the MoD, including efficiency savings
generated in the year to March 2010 for the MoD of £66m.
BAE Systems was awarded a four-year, £127m contract by the
MoD to develop a highly flexible, multi-role frigate for the Royal
Navy, the Type 26.
The export contracts for Oman, and Trinidad and Tobago have
encountered significant difficulties during construction that
have led to further delays and losses of £163m. The fair values
of these contracts have been updated accordingly (see note 29
to the Group accounts).
In September, BAE Systems received written notice from the
Government of the Republic of Trinidad and Tobago (GORTT) of
its intention to cancel the contract for three OPVs. The Group
has challenged GORTT’s entitlement to cancel and has itself
issued a termination for default notice on GORTT. The parties
are now proceeding in accordance with the contract’s dispute
resolution provisions and a charge of £100m has been taken.
Submarine Solutions
HMS Astute, the first of class attack submarine for the Royal
Navy, was accepted by the MoD in November. Ambush, the
second of class, was launched in January 2011 and will now
undertake commissioning activities prior to commencing sea
trials. Construction continues on the third and fourth boats.
A £360m order, which includes commencement of construction
of the fifth boat and long lead procurement for the sixth boat,
has been received.
The concept phase for the successor to the Vanguard class
submarine is scheduled to complete in March 2011, with the
assessment, design and development phases then to follow.
Detica
Detica’s Cyber & Intelligence activity, which focuses on cyber
security and information assurance, countering terrorism and
organised crime, and border security, has maintained sales growth
despite reduced UK government spending. Growth opportunities
in other BAE Systems home markets, and elsewhere in the Middle
East and Europe, have secured sales into the law enforcement,
telecommunications and financial services sectors.
In July 2010, the Home Office terminated the e-Borders
contract. Detica was a subcontractor to Raytheon on that
programme and has submitted a claim in connection with
the termination for convenience of its subcontract.
In December 2010 and January 2011, respectively, the Group
announced the proposed acquisitions of ETI A/S and Norkom
Group plc in the Cyber & Intelligence domain.
Integrated System Technologies (Insyte)
The FALCON secure deployable broadband communication
system for the British Army and RAF completed Technical
Field Evaluation in July. The contract provides for the initial
operational capability to be accepted in 2011. The business
is in discussions with the customer with regard to a revision
to the programme schedule.
A re-baselined programme on the Maritime Composite Training
System has been agreed with the customer. A revised ready for
training date is planned for September 2011.
The ARTISAN 3D radar successfully completed Customer
Critical Design Review in June, allowing the programme to
progress towards full production.
The Sting Ray lightweight torpedo main production order for the
Royal Navy completed production deliveries in May. The delivery
contract for the government of Norway is on schedule, with initial
deliveries achieved in December.
outlooK
Anticipating the impact of pressure on government spending
and the SDSR, the business has worked closely with the MoD
to align objectives and transformation plans. Programmes &
Support was re-organised with effect from 1 January 2011.
A new Maritime business has been created, encompassing
all UK maritime activities, and the new Military Air & Information
line of business integrates the military air and information
systems activities.
Maritime is underpinned by the Type 45, Queen Elizabeth carrier
and Astute class submarine manufacturing programmes,
the 15-year ToBA, and the concept design of the successor
submarine.
In Military Air & Information, growth is linked to increasing
combat aircraft production. The business is underpinned by
the Typhoon and F-35 programmes.
Detica’s position in the UK market, and its development as
a solutions integrator and provider of cyber security services,
means that it is well positioned to support the UK government’s
National Security Strategy, the increased focus on intelligence and
security in the UK and overseas, and growing commercial markets.
p12 For more information on the group’s
2010 executive committee objectives
BAE Systems Annual Report 2010
71
Directors’ Report: Business Review
Operating group reviews continued
International
oVerVieW
International, with 17,200 employees1, comprises the
Group’s businesses in Australia, India and Saudi Arabia,
together with interests in the pan-European MBDA joint
venture and Air Astana.
Key points – Financial
– Like-for-like sales1 growth of 15.3% over 2009
– Settlement achieved with the former owners of Tenix Defence
perFormance
Financial
Order intake1
Order book1
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
Safety
Lost Work Day Case
Rate (per 100,000
employees)
2010
Restated4
2009
Restated4
2008
KPI £2,908m £4,564m £3,559m
£10.2bn
KPI £4,534m £3,828m £2,926m
£11.0bn
£9.1bn
KPI
KPI
£478m
10.5%
£195m
£419m
10.9%
£813m
£417m
14.3%
£163m
KPI
896
746
1,393
Key points – operational
– A further ten Typhoon aircraft delivered under the
Salam programme
– Typhoon operational capability being provided under
the support contract
– 157 Tactica vehicles accepted by the Saudi Arabia
National Guard
– BAE Systems Australia selected as Lockheed Martin’s
partner for maintenance and upgrade support on the
Australian F-35 programme
– Defence Land Systems India Private Limited joint venture
became operational
During 2010, International sales1 were £4,534m (2009
£3,828m). The increase in sales was predominantly a result of
increased activity on the Saudi British Defence Co-operation
Programme (SBDCP) in the Kingdom of Saudi Arabia and
progress on the Landing Helicopter Dock programme in
Australia.
Underlying EBITA2 of £478m (2009 £419m) generated a return
on sales of 10.5% (2009 10.9%). The reduction in return on
sales is due to the low margin being traded on increased activity
on the early stages of the Salam and Landing Helicopter Dock
programmes.
Operating cash inflow3 was £195m (2009 £813m) reflecting the
expected utilisation of advance funding on the Salam programme.
The Lost Work Day Case Rate increased by 20% compared
with 2009. The overall trend in safety performance has been
improving since 2007, but this level of improvement was not
maintained in 2010. Senior management are reviewing safety
processes in order to put in place an improvement plan. All sites
with more than 150 personnel progressed to Level 4 on the
Group’s Safety Maturity Matrix.
Saudi Arabia
The business continues to develop its presence in Saudi Arabia
and remains committed to developing a greater indigenous
capability in the Kingdom. This strategy is being enhanced by
the entry into service of Typhoon aircraft and subsequent
development of the Typhoon in-country industrial base. Of the 72
Typhoon aircraft contracted under the Salam programme, 18 have
been delivered to the customer. Six of the ten aircraft delivered
this year are the twin-seat variant which will allow the Royal Saudi
Air Force (RSAF) to conduct their own training missions.
Whilst deliveries on the Salam programme remain on schedule,
the programme is likely to be adjusted to accommodate some
customer changes. These may include relocating final assembly
of the last 48 of the 72 aircraft, the creation of a maintenance and
upgrade facility in the Kingdom of Saudi Arabia and, in addition,
the last 24 of the 72 aircraft might be delivered with modifications
to allow future incorporation of Tranche 3 capability.
The business continues to provide support to the operational
capability of both the RSAF and Royal Saudi Naval Force through
the SBDCP. Customer discussions are ongoing for the next
phases of SBDCP and the Salam programme. The Group expects
the customer to place a greater emphasis on performance-based
contracting and use of the Saudi industrial base.
2010 Executive Committee objective
Grow our home
markets in the
Kingdom of Saudi
Arabia, Australia
and India
BAE Systems Australia – F-35
Bae systems australia has been selected as a key
australian partner for readiness & sustainment
support for the F-35 combat aircraft. Bae systems
is ideally placed to provide support for the F-35
through its established capabilities at Williamtown
where its 400-strong workforce already provides
maintenance and through-life support to the
F/a -18 Hornet and Hawk lead-in Fighter fleets.
1
2
Including share of equity accounted investments.
Earnings before amortisation and impairment of
intangible assets, finance costs and taxation expense
(EBITA) excluding non-recurring items (see page 37).
3
Net cash inflow from operating activities after capital
expenditure (net) and financial investment, dividends
from equity accounted investments, and assets
contributed to Trust.
4
5
Restated following the sale of half of the Group’s 20.5%
shareholding in Saab AB and subsequent classification
as a discontinued operation.
Command, Control, Communications, Computers and
Intelligence.
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All 200 Tactica land vehicles have been delivered to the Saudi
Arabia National Guard. In 2010, 157 vehicles were accepted
by the customer and entered into service. The remaining 43
vehicles are expected to be accepted in the first quarter of
2011. The business continues to support these vehicles in
accordance with a separate contract.
The C4I5 programme remains challenging, but good progress
continues towards design completion.
Australia
In 2010, BAE Systems consolidated its position as a strategic
support provider to the Australian Defence Force (ADF). The
Australian government’s parallel commitments to maintain
defence funding in real terms until 2018 and achieve A$20bn
(£13.1bn) of savings through its ten-year Strategic Reform
Programme represent both an opportunity and a challenge
to the business.
The business has formally presented a proposal to the
customer that is expected to deliver savings of at least 20% on
the support contract for the Royal Australian Air Force’s (RAAF)
Hawk Lead-In Fighter fleet without impacting aircraft availability.
A Memorandum of Understanding was signed with Lockheed
Martin to establish BAE Systems as the preferred Australian
partner for maintenance and upgrade support for the F-35 that
will form the mainstay of the RAAF’s air combat capability later
this decade.
The business is a sub-contractor to Boeing on the Wedgetail
Early Warning and Control aircraft programme. During the year,
the business completed delivery of the airborne components
of the Electronic Support Measures package under the
programme.
The maritime business achieved on-schedule performance
for the Landing Helicopter Dock project. On the Air Warfare
Destroyer programme, work continues to recover the schedule
for the construction of hull blocks following initial fabrication
difficulties.
The business was not down-selected as a preferred tenderer
for the Land 121 Phase 3 project to supply medium and heavy
tactical vehicles to the ADF.
Outstanding issues concerning the acquisition of the Tenix
Defence business in 2008 have been resolved. Payments
totalling A$127.5m (£74m, net of legal fees) are to be made
to us by the former owners of the business.
MBDA
MBDA has delivered increased sales and increased return on
sales compared to 2009.
Order intake in 2010 was below the level achieved in 2009 as
global budgetary constraints meant certain export contracts
were delayed. Order intake with domestic customers was good
with new production orders received for additional Mistral
surface-to-air missiles in France, the development and early
manufacture contract for Fire Shadow loitering munitions, and
the assessment phase, development and early manufacture for
SPEAR (Selectable Precision Effects At Range) weapons under
the Complex Weapons contract in the UK.
Key deliveries included Aster surface-to-air missiles, Mica
air-to-air missiles, Eryx anti-armour missiles, Taurus stand-off
missiles, Milan anti-armour missiles and Exocet anti-ship
missiles.
Development programmes continue to progress well, with
key milestones being passed on the MEADS air-defence
programme, SCALP Naval stand-off missile programme, Meteor
beyond visual range air-to-air missile, and all assessment and
development phases of the UK Complex Weapons Programmes.
The issues arising during last year’s Sea Viper firings have been
resolved, culminating in a number of successful trial test firings
of the Aster missile. A successful system firing involving an
Aster 30 missile was also made in October, to achieve Europe’s
first ever intercept of a tactical ballistic missile.
India
In 2010, Defence Land Systems India Private Limited, the
Group’s 26% joint venture with Mahindra & Mahindra Limited,
became operational, giving BAE Systems a domestic capability
in the land sector. The first new product, Mine Protected Vehicle
India, was unveiled in Delhi in February.
BAeHAL Software Limited, the Group’s 40% joint venture with
Hindustan Aeronautics Limited, has undertaken a series of
initiatives to expand its scope of operations and provide IT
solutions to a wider range of customers.
Air Astana
Air Astana achieved another year of strong performance. The
Group’s share of revenue increased by 18% to $321m (£208m),
with an improvement in profit driven by rising passenger demand
and strong cost base control across its portfolio of international
and domestic routes.
Oman
The business has strengthened its presence in Oman during
the year and significant activity is ongoing to agree an order for
the supply of Typhoon aircraft to the Royal Air Force of Oman.
A number of other longer-term prospects are being pursued,
and the business is also developing strategies to improve
its Services offerings across the significant installed and
anticipated future product base.
outlooK
The Group seeks to sustain its long-term presence in the
Kingdom of Saudi Arabia through delivering current programmes
and industrialisation, and developing new business in support
of all Saudi military and paramilitary forces.
The Salam programme changes referred to will necessitate
contract and pricing revisions that will need to be concluded in
2011. These will bias both sales and profits to the second half
of 2011.
In Australia, BAE Systems aims to capture its share of the
growth in defence spending through delivery of innovative, value
for money solutions across both new and existing programmes
in close co-operation with its major customer, the Australian
Defence Materiel Organisation.
In India, BAE Systems plans to develop its home market strategy
through existing and, if appropriate, additional joint ventures
and partnerships to address the future requirements of the
Indian armed forces, in new product and support activities.
p12 For more information on the group’s
2010 executive committee objectives
BAE Systems Annual Report 2010
73
Directors’ Report: Business Review
Operating group reviews continued
HQ & Other Businesses
oVerVieW
HQ & Other Businesses, with 2,500 employees1, comprises
the regional aircraft asset management and support
activities, head office and UK shared services activity,
including research centres and property management.
Key points – Financial
– Regional Aircraft underlying EBITA2 of £35m in the year
– Payment of the regulatory penalty to the US Department
of Justice
perFormance
Financial
Order intake1
Order book1
Sales1
Underlying EBITA2
2010
2009
2008
KPI
KPI
KPI
£207m
£0.3bn
£278m
£175m
£0.4bn
£254m
£212m
£0.4bn
£235m
£(65)m
£(71)m £(101)m
Cash outflow3
KPI £(665)m £(366)m
£(66)m
Key points – operational
– 52 aircraft placements contracted
– Long-term lease of six RJ100 aircraft with Swiss
International Airlines
In 2010, HQ & Other Businesses reported a loss2 of £65m
(2009 £71m) on sales1 of £278m (2009 £254m).
Operating cash outflow3 in 2010 was £665m (2009 £366m).
This includes the payment of the regulatory penalty to the US
Department of Justice (£266m) and additional contributions
in respect of UK pension schemes totalling £326m (2009
£310m).
Regional Aircraft
Conditions in the commercial aviation sector remain challenging.
Despite this, the business has secured 52 aircraft placements
to new and existing customers in the year, including a long-term
lease of six RJ100 aircraft with Swiss International Airlines.
Lease and sale discussions continue with operators with
regard to both current and future fleet requirements and
support needs. Marketing activity continues to focus on both
uncontracted idle aircraft and those returning off lease.
Whilst market conditions have continued to impact airline
profitability, the portfolio customer base remains relatively
robust and the business continues to closely monitor operator
performance against default risk.
Support revenues have remained under pressure reflecting the
current trading conditions. This has been partially offset by good
performance within the engineering business.
The balance sheet carrying value of aircraft in the Regional
Aircraft business (£166m) is based on the net present value
of forecast net leasing or disposal income.
outlooK
Trading conditions for the commercial aircraft market are
anticipated to remain challenging given the restricted availability
of credit to smaller operators and competition from surplus
used aircraft.
Advanced Technology Centre
Bae systems’ advanced technology centre
provides research and development, consultancy,
specialist manufacturing and technology brokering
services into defence, aerospace and commercial
markets. With 400 scientists and engineers,
the advanced technology centre works in
collaboration and partnership with academia
and innovative organisations throughout the
supply chain, identifying, pulling through, and
integrating technologies and capabilities to
deliver discriminating solutions to its customers.
1
2
Including share of equity accounted investments.
Earnings before amortisation and impairment of
intangible assets, finance costs and taxation expense
(EBITA) excluding non-recurring items (see page 37).
3
Net cash outflow from operating activities after capital
expenditure (net) and financial investment, dividends
from equity accounted investments, and assets
contributed to Trust.
74
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Directors’ Report
Governance
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5. Governance
Board of directors
Corporate governance
Audit Committee report
Corporate Responsibility Committee report
Nominations Committee report
Remuneration report:
Remuneration Committee report
Non-Executive Directors’ Fees
Committee report
Remuneration reporting
Other statutory and regulatory information
Statement of directors’ responsibilities
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Armadillo unveiled
in June 2010, Bae systems unveiled a new build
standard of the cV90 tracked armoured vehicle,
named armadillo. the Bae systems advanced
laboratory in Örnsköldsvik, sweden incorporates an
engine test cell in which both upgrade and platform
build projects can be carried out.
BAE Systems Annual Report 2010
75
Directors’ Report: Governance
Board of directors
1. Dick Olver
3. Linda Hudson
5. Paul Anderson
2. Ian King
4. George Rose
6. Harriet Green OBE
Key: Chairman Executive directors Non-executive directors
1. Dick Olver
3. Linda Hudson
5. Paul Anderson
President and Chief Executive Officer of
BAE Systems, Inc.
Appointed to the Board: 2009
Nationality: US
Skills and experience: Appointed to the Board
as President and Chief Executive Officer of
BAE Systems, Inc., she was previously President
of the Company’s US-based Land & Armaments
operating group. She joined the Company in
2006 from General Dynamics where she
had worked since 1992 in a variety of roles
culminating in her appointment as Corporate
Vice President and President, Armament and
Technical Products.
Other appointments: Member of the United
Service Organizations Worldwide Board of
Governors, the Association of the United States
Army Council of Trustees, and engineering
advisory boards for engineering programmes
at the universities of Maryland and Florida.
Committee membership: Non-Executive
Directors’ Fees Committee
Non-executive director
Appointed to the Board: 2009
Nationality: US
Skills and experience: Paul Anderson has
extensive global business experience in the
energy and mining sectors. He spent more
than 20 years in two spells at Duke Energy
Corporation and its predecessor companies,
culminating in his appointment as Chairman,
President and Chief Executive Officer. He was
subsequently Chairman of Spectra Energy
Corporation until 2009 and in the intervening
period he served as Managing Director
and Chief Executive Officer of BHP and,
subsequently, of the newly merged BHP Billiton.
Other appointments: Non-executive director of
Spectra Energy Corporation and BP p.l.c.
Past appointments: Non-executive director of
BHP Billiton plc and Qantas Airways Limited.
Committee membership: Chairman of the
Corporate Responsibility Committee and
member of the Nominations Committee
4. George Rose
6. Harriet Green OBE
Group Finance Director
Appointed to the Board: 1998
Nationality: British
Skills and experience: Appointed Group Finance
Director in 1998, he is a Fellow of the Chartered
Institute of Management Accountants. Prior to
joining the Company in 1992 he gained
substantial experience in the engineering and
manufacturing sectors, having held senior
finance positions in the Rover Group and
Leyland DAF.
Other appointments: Non-executive director of
Saab AB and National Grid plc, and a member of
the Industrial Development Advisory Board.
Non-executive director
Appointed to the Board: 2010
Nationality: British
Skills and experience: Currently Chief Executive
Officer and executive director of Premier Farnell
plc, a leading, high service, multi-channel
technology distribution group, Harriet Green
has significant global business experience
having run volume distribution businesses in
four continents including Asia Pacific for Arrow
Electronics as well as having functional
responsibility for worldwide marketing, suppliers
and strategy.
Other appointments: Non-executive director of
Emerson Electric Co.
Committee membership: Corporate
Responsibility Committee
Chairman
Appointed to the Board: 2004
Nationality: British
Skills and experience: A chartered civil engineer
with extensive experience of managing complex
international engineering projects, he held a
variety of senior management positions in the
oil industry culminating in his appointment to
the board of BP p.l.c. as CEO of Exploration and
Production in 1998. Subsequently appointed
Deputy Group Chief Executive of BP in 2003,
stepping down from that role when he assumed
the chairmanship of BAE Systems.
Other appointments: Business Ambassador for
UK Trade & Investment, and member of the
Prime Minister’s Business Advisory Group and
Prime Minister’s India/UK CEO Forum. Also a
member of the Multinational Chairman’s Group
and the Trilateral Commission, a Fellow of the
Royal Academy of Engineering and Chairman of
the Education for Engineering (E4E) Policy Group.
Past appointments: Non-executive director of
Thomson Reuters plc.
Committee membership: Chairman of the
Nominations Committee and the Non-Executive
Directors’ Fees Committee
2. Ian King
Chief Executive
Appointed to the Board: 2007
Nationality: British
Skills and experience: Appointed as Chief
Executive in 2007 having been originally
appointed to the Board as Chief Operating
Officer, UK and Rest of the World. He was
previously Group Managing Director of the
Company’s Customer Solutions & Support
business and, prior to that, Group Strategy and
Planning Director. Prior to the BAe/MES merger
he was Chief Executive of Alenia Marconi
Systems, having previously served as Finance
Director of Marconi Electronic Systems.
Other appointments: Non-executive director and
Senior Independent Director of Rotork plc.
Committee membership: Non-Executive
Directors’ Fees Committee
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7. Michael Hartnall
9. Roberto Quarta
11. Carl Symon
8. Sir Peter Mason KBE
10. Nick Rose
12. Ravi Uppal
7. Michael Hartnall
9. Roberto Quarta
11. Carl Symon
Non-executive director
Appointed to the Board: 2003
Nationality: British
Skills and experience: A Fellow of the Institute of
Chartered Accountants in England and Wales,
Michael Hartnall is a former Finance Director
of Rexam PLC where, in addition to his finance
responsibilities, he gained considerable
exposure to mergers and acquisitions activity.
Prior to that he held senior finance and
operational positions with a number of
manufacturing companies.
Other appointments: Non-executive director of
Lonmin plc.
Past appointments: Non-executive director of
Elementis plc.
Committee membership: Chairman of the
Audit Committee
Non-executive director
Appointed to the Board: 2005
Nationality: US/Italian
Skills and experience: Roberto Quarta’s
management experience spans a broad range
of manufacturing and service businesses with
global operations. A partner in the private equity
firm Clayton, Dubilier & Rice, he also serves as
Chairman of Rexel SA, one of the world’s largest
electrical products distributors, which is one of
the firm’s portfolio businesses.
Past appointments: Chairman of Italtel,
Chairman and Chief Executive of BBA Group
plc, executive director of BTR plc, and a
non-executive director of PowerGen plc and
Equant NV.
Committee membership: Audit Committee and
Remuneration Committee
8. Sir Peter Mason KBE
10. Nick Rose
Non-executive director and Senior Independent
Director
Appointed to the Board: 2003
Nationality: British
Skills and experience: Chairman of Thames
Water and Senior Independent Director of
Subsea 7 S.A., an international offshore
engineering, construction and services
contractor. Formerly Chairman and Chief
Executive of Balfour Beatty Limited, and Chief
Executive of AMEC plc, Sir Peter has extensive
experience in engineering, construction and
long-term contracting.
Past appointments: Executive director of
BICC plc and chief executive of Norwest Holst
Group PLC.
Committee membership: Audit Committee,
Corporate Responsibility Committee and
Nominations Committee
Non-executive director
Appointed to the Board: 2010
Nationality: British
Skills and experience: Nick Rose was until
recently Chief Financial Officer of Diageo plc.
He held the position for over ten years and, in
addition to his finance responsibilities, he was
also responsible for supply, procurement,
strategy and IT on a global basis. His financial
experience has encompassed a number of roles
since joining Diageo’s predecessor company,
Grand Metropolitan, in 1992, including group
treasurer and group controller, having spent his
earlier career with Ford Finance.
Other appointments: Non-executive director of
BT Group plc.
Past appointments: Non-executive director of
Möet Hennessy SNC and Scottish Power plc.
Committee membership: Audit Committee and
Remuneration Committee
Non-executive director
Appointed to the Board: 2008
Nationality: US/British
Skills and experience: Carl Symon has an
extensive background in global business
operations and management, retiring in 2001
after a long career at IBM during which he held
senior executive positions in the US, Canada,
Latin America, Asia and Europe, including that of
Chairman and Chief Executive Officer of IBM UK.
Other appointments: Non-executive director of
BT Group plc and Rexam PLC.
Past appointments: Non-executive director of
Rolls-Royce Group plc and former Chairman of
HMV Group plc.
Committee membership: Chairman of the
Remuneration Committee
12. Ravi Uppal
Non-executive director
Appointed to the Board: 2008
Nationality: Indian
Skills and experience: Ravi Uppal’s business
experience encompasses both operational
management and business development in
India and globally. Currently Managing Director
and Chief Executive of L&T Power Limited, a
member of the Larsen & Toubro group which
operates in the technical, engineering,
construction and manufacturing sector. He was
previously President, Global Markets, for the
power and automation technology group
ABB Limited where he was responsible for
ABB’s marketing and business development
on a worldwide basis.
Past appointments: Managing Director of
Volvo India.
Committee membership: Audit Committee
Each of the eight non-executive directors listed
above is considered to be independent for the
purposes of the Combined Code.
David Parkes
Company Secretary
BAE Systems Annual Report 2010
77
Directors’ Report: Governance
Corporate governance
“ A year in which we have
continued to evaluate
our governance
arrangements against
our own experiences
and changes in best
practice.”
Dick Olver
Chairman
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Dear Shareholders,
Change is inevitable and desirable, and this is as applicable to
companies as it is to most things in life. Managing change as
part of an ongoing process of improvement is a fundamental
part of good governance; driven as it is by the demands of the
business environment and wider social and political influences.
Boards need to look forward and put their companies in the best
position possible, not just reacting to change but managing it for
the benefit of our various stakeholders. Last year, I mentioned
the reports produced by Sir David Walker and the Financial
Reporting Council reviewing corporate governance in the UK,
and the changes that they recommended. In 2010, a number
of important changes were made to the UK’s Corporate
Governance Code. We welcome the new Code as a statement of
the evolving nature of good corporate governance practice – and
one that must continue to change if we are to learn lessons from
the past and go on to build the successful, robust commercial
enterprises that are fundamental to our economic and social
well being.
The Board has reviewed the new UK Corporate Governance
Code during the year, and has taken action to ensure that what
we do reflects fully its principles and that we comply with its
provisions. As I have said before in these reports, the Code
principles, embodying as they do the essence of good
governance practice, are the most important part of the Code.
In the next few pages, we seek to explain how they have been
applied by the BAE Systems Board. I will begin by highlighting a
number of important areas that have been the subject of further
development during the year.
Board membership
Too often we talk of boards in the abstract and overlook the
obvious point that a board is essentially a group of individuals.
The quality of those individuals largely determines the quality
of the board, so consequently, through the Nominations
Committee, we pay a good deal of attention to the composition
of the Board and succession planning. We look at composition
from a number of different angles, including:
– Knowledge and experience
– Diversity
– Key skills
– Executive/non-executive mix
– BAE Systems’ Board experience
We seek to achieve the right balance across these different
dimensions. However, I believe that to be effective a board
needs a core of business people who have deep knowledge and
experience in running companies. In particular, as BAE Systems’
business is characterised primarily by its complex long-term
contracting nature, we seek to retain core non-executive
knowledge and competence gained in similar industries.
In addition, we look for individuals with board level experience
with international and global companies.
Diversity
BAE Systems places particular emphasis on diversity and
inclusion, and this is reflected in the objectives that the Board
has set for management – and is one of the factors influencing
annual executive reward. This is an area in which the Board
needs to show leadership and gender diversity is a factor we
consider when appointing new directors. With the assistance of
our recruitment consultants, we have taken steps to ensure that
there are no obstacles to the Nominations Committee having
visibility of suitable candidates for possible appointment to the
Board, regardless of gender. Companies such as BAE Systems
have to accept that performance to date in achieving a more
equitable representation for women at the highest levels has
been poor and that this is something we have to address. When
women make up half of the population, those companies that
fail to have diverse leaders at the highest levels risk putting
themselves at a competitive disadvantage.
Developing the quality of the senior management ‘pipe-line’ –
which ultimately leads to the Board – is an area that chairmen
and boards do get involved in. As part of this activity, the Board
and our Nominations and Corporate Responsibility committees
have been monitoring how we manage diversity and inclusion
across the Group, and it is good to see progress being made,
particularly in developing the behaviours and culture that in the
long term will be the main determinants of success in this area.
Quotas and tokenism could superficially solve the diversity
issue – at least at board level. However, that would not be good
for companies and equally would not be good for women.
I believe that the best way forward is to set the right behavioural
expectations at the very top of the company and encourage
management to develop appropriate solutions to meet that
challenge. In terms of Board governance, the Corporate
Responsibility Committee undertakes a specific role in
monitoring progress against our diversity and inclusion
objectives (as it does with other non-financial performance
measures), and makes recommendations to the Remuneration
Committee for reward purposes based on actual achievement.
As chairman of both the Board and the Nominations Committee,
I recognise that I have particular responsibilities for leading the
work in developing the Board, and its composition is a very
important element of board effectiveness. Reflecting on the
gender diversity issue, progress has been made – both within
the executive and non-executive areas. Linda Hudson, one of
our three executive directors, is the President and Chief
Executive Officer of our US-managed businesses, which account
for more than half of our sales. Together with strong operational
management experience, she brings a deep understanding of
the US defence market. I am also pleased that in 2010 Harriet
Green joined the Board as a non-executive director. She is Chief
Executive Officer of a UK-listed international electronics
distribution company, and brings international and operational
experience to the Board. Progress, but more to do, particularly in
respect of long-term executive development work from which
many of our future executive directors will be found, and
importantly, will provide candidates for non-executive director
positions in other companies.
Succession planning and directors’ induction
Returning to the opening theme, change is inevitable but it is
also risky. Good succession planning recognises that you can
mitigate succession risk through well informed and timely
decisions being made by experienced and knowledgeable
people. The table below details the non-executive members of
the Board and their terms of office. The Nominations Committee
regularly reviews this information to help plan the membership
of the Board. This includes having people on the Board’s
committees with the right skills and experience. For example,
in 2009, the committee identified a need for an individual with
appropriate skills and financial experience to sit on our Audit
Committee, and provide expertise and long-term cover for
Michael Hartnall, who has done an excellent job in chairing the
committee since 2003. I am pleased that we were able to
appoint Nick Rose to the Board in February 2010, and he brings
the experience and skills gained in his role as Chief Financial
Officer of Diageo plc to our Audit Committee, and also to our
Remuneration Committee. Also, when we recruited Paul
Anderson in October 2009 we recognised he had the
background and qualities required for a future chairman of the
Corporate Responsibility Committee, and he was appointed to
that role in September last year.
With regards to the executive directors on the Board, the most
significant event during the year was the search for the right
candidate to succeed George Rose as Group Finance Director.
This was undertaken by the Nominations Committee and for this
purpose it co-opted an additional independent non-executive,
Nick Rose. The search process is detailed in the Nominations
Committee report on page 94.
Too much change around the board table can be a risk in itself.
No matter how experienced and knowledgeable an incoming
non-executive director is it will always take time for that
individual to develop a detailed understanding of the Company.
For this reason a properly tailored induction programme is very
important. Done well, it should reduce the time taken for a new
member of the Board to become fully effective. Over the last few
years, we have worked at improving the induction programme
we offer new directors, combining a mixture of subject specific
one-to-one meetings with senior management covering matters
such as core control processes and investor relations, through
to site visits to various Company locations around the world.
For information, an example of a typical induction programme
is shown on page 84. Maintaining the right level of experience
and company knowledge within a board, whilst at the same time
introducing new people who bring a new perspective and a ‘fresh
pair of eyes’, is a necessary but difficult balance to maintain.
We recognise it as such and remain diligent in trying to get the
balance right.
BOARD SUCCESSION – NON-EXECUTIVE DIRECTORS
Director
Date of appointment
2010
2011
2012
2013
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Sir Peter Mason
22.01.2003
Michael Hartnall
10.06.2003
Roberto Quarta
07.09.2005
Ravi Uppal
02.04.2008
Carl Symon
11.06.2008
Paul Anderson
08.10.2009
Nick Rose
08.02.2010
Harriet Green
01.11.2010
Third term
Second term
First term
BAE Systems Annual Report 2010
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Directors’ Report: Governance
Corporate governance continued
Roles and responsibilities
The revisions to the Combined Code made in 2010 provided
more definition to the roles of both the Chairman and the Senior
Independent Director. As a result, the Board has amended the
requirements of the roles as detailed in our Board Charter (see
page 83). The changes to the Senior Independent Director’s role
and responsibilities reflect the need for one of the non-executive
Board members to act as a sounding board for the Chairman
and, in the normal course of events, facilitate an annual review
of the Chairman’s performance. If events do not run such a
normal course, he will also act as an intermediary for the other
directors if they have specific concerns regarding the Chairman
and how the Board is being run. Having a robust senior director
on the Board who is both the natural person to turn to when I
need to discuss Board matters, and is open and frank in giving
feedback on my performance, is invaluable to me as Chairman,
and an important part of board governance.
The relationship between a chairman and the chief executive is
probably the key personal dynamic within a board. Again it is a
matter of balance, this time between being supportive of a chief
executive in delivering the agreed strategy and the need to have
the right level of challenge. Within BAE Systems, it is for others
to say whether I get this balance right, and here the Board’s
annual performance evaluation provides all directors with the
opportunity to speak to our external facilitator about my
performance – we specifically ask directors for their views on the
chairman/chief executive relationship – and for any issues to be
fed back to me via the Senior Independent Director. Likewise,
the Chief Executive is subject to the same evaluation process,
receiving formal feedback once a year from the Board but having
the opportunity to engage with members of the Board, both
formally and informally, throughout the year.
Managing risk
The management of risk in major companies is an issue to
which directors and those responsible for public policy have
given a good deal of thought in recent years. When reviewing the
changes to the Combined Code last year, the Board noted the
change to the Main Principle in the Risk Management and
Internal Control section of the Code, regarding a board being
responsible for determining the nature and extent of the
significant risks it is willing to take in achieving its strategic
objectives. The Board has agreed that this should be an integral
part of the process we use to develop and agree strategy, which
is based on strategy review sessions, separate from our formal
board meetings.
The Risk Management and Internal Control principle also
requires that boards maintain sound risk management and
internal control systems. There has been some debate
regarding the need for all listed company boards to have risk
committees. Whilst the detailed monitoring of the quality of
our risk management and internal control systems forms part
of the regular work undertaken by the Audit and Corporate
Responsibility committees, importantly the Board as a whole
is ultimately responsible for the management of risk. We ensure
that risk is a regular agenda item for the Board and this provides
all directors with the opportunity to evaluate the quality of our
risk management processes, to challenge the quality of the
judgements made on risk and the quality of risk mitigation
planning.
In addition to the specific inclusion of risk management within
the UK Corporate Governance Code’s principles, provisions
concerning remuneration have also been amended to require
that remuneration incentives are compatible with risk policies
and systems. In relation to this, it should be noted that within
BAE Systems, risk management is embedded into the
recognition of profit on long-term contracts.
In the accounting policy notes on page 134 you will find the
following words:
“ No profit is recognised on contracts until the outcome of the
contract can be reliably estimated. Profit is calculated by
reference to reliable estimates of contract revenue and forecast
costs after making suitable allowances for technical and other
risks related to performance milestones yet to be achieved.”
For us, the management of risk on our programmes is a core
management discipline and, therefore, management reward for
profit performance is inextricably linked to managing risk, with
reward and profit not recognised until outcomes can be reliably
estimated.
Board performance evaluation
One of the other key changes to the Combined Code in 2010
was the change to the evaluation section, with the addition of a
requirement that, at least every three years, the annual board
evaluation should be externally facilitated. During my time
as Chairman, we have undertaken an externally facilitated
performance evaluation exercise annually, covering the
performance of the Board, its committees and individual
directors (including myself). This is now a core process that we
have refined over the past six years and one that I believe adds
real value to the work of the Board. We have used the same
facilitator throughout this period, which has helped to build trust
in the process and an appreciation of its value in improving the
effectiveness of the Board.
For us, the use of an external facilitator has been a positive one.
I certainly don’t see the exercise as an audit or inspection that
is undertaken by an outsider with the aim of telling us what we
are doing wrong. Rather, it is more about providing a process
through which directors can speak candidly at length to our
facilitator and in doing so analyse our performance over the past
year. She then presents what she has heard, and collectively the
directors discuss this and agree any actions required to improve
our effectiveness. Feedback on the performance of the Board’s
committees is provided separately to committee chairmen so
that this can be discussed with committee members, and I
meet with the facilitator to discuss feedback on individual
performance before holding one-to-one meetings with directors.
Similarly, the Senior Independent Director, following discussions
with the facilitator and the other non-executive directors,
provides me with feedback on my performance.
For the last few years we have provided details of the annual
objectives the Board has set following the evaluation process
and information on how we think we did in addressing the prior
year’s objectives. We report on the evaluation we have just
completed opposite.
Shareholder engagement
As Chairman, I am responsible for ensuring that all directors are
aware of any issues and concerns that major shareholders may
have. The Company has a comprehensive investor relations
programme, through which the Chief Executive and Group
Finance Director engage regularly with our larger shareholders
on a one-to-one basis. The Board receives reports on these
meetings covering the general nature of matters communicated
and discussed. However, it is important that the Board has a
number of channels providing access to shareholder views.
These additional channels include an annual survey that our
investor relations consultants undertake of the views of our
largest shareholders, and which are reported directly to the
Board. Also, I write to major shareholders each year updating
them on matters concerning the Company and inviting them
to meet with me if they wish to discuss any particular matter.
The Chairman of our Remuneration Committee undertakes a
similar exercise on the subject of remuneration policy.
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Board Performance – 2010 oBjectives and achievements
2010 objectives
– Maintain focus on developing the
Company’s strategy and progress in
achieving the Strategic Actions agreed
by the Board in 2009.
2010 summary of achievements
– Through a number of different forums the Board undertook a wide-ranging review of
Group strategy in 2010. At the strategy review sessions in June and November, the
Board reviewed progress against the Strategic Actions agreed in 2009, and at the
end of 2010, updated the Group Strategic Framework (see page 14) to recognise
progress in achieving prior year actions.
– The Board and the Corporate
– During 2010, performance against the responsible business conduct objectives was
Responsibility Committee to continue
to monitor the development of a
Total Performance culture, including
implementation of the Woolf
Committee recommendations.
integrated into the Company’s regular management reporting requirements, and
consequently was reported at all scheduled Board meetings.
– At regular meetings held throughout the year, the Corporate Responsibility
Committee monitored performance against the CR-related objectives set for the
development of a Total Performance culture. In addition, the Committee agreed
the approach (including external assessments) that will be used to determine
progress in meeting the Company’s three-year commitment to addressing the
23 recommendations made by the Woolf Committee (see page 48).
– Focus on monitoring operational
performance, including cost and
efficiency metrics.
– Operational performance targets were integrated into the 2010 Integrated Business
Plan (IBP). Performance against this plan was monitored by the Board throughout
the year. In particular, as part of the development of the 2010 IBP, the Board
reviewed the efficient management of the Group’s cost base, and the contribution
that such activity is expected to make over the five-year planning period.
– Continue to monitor the development
of the competencies and culture
required to support the growth of our
home markets.
– The Board reviewed with senior operational managers progress in developing our
home markets. This has been reviewed both in terms of performance in individual
markets and also in terms of the long-term management resource required to
support our global business.
– The Chairman to facilitate continuing
development for the non-executive
directors, including their understanding
and familiarity with the Company’s
businesses and core processes
and markets.
– To assist in developing an understanding of the Company’s businesses, the Board
visited sites in the US and UK during the year. For example, it took the opportunity
whilst visiting part of our US ship repair business to gain a deeper understanding
of the development and dynamics of the US support services market.
– Facilitated by the Chairman, directors participated in a Responsible Business
Conduct Awareness Training session, utilising the materials used across the Group
to discuss responsible business behaviour and to focus on the importance of
ethical conduct to the Company.
Board Performance – 2011 oBjectives
Strategy
Succession planning and
implementation
Operational performance monitoring
Risk and risk management
Stewardship and UK Corporate
Governance codes
Brand
Develop further the process by which the Board engages in the development
of strategy.
Prioritise support for new Board members and long-term succession planning for
key executive roles.
Develop the programme of ‘Deep Dives’ to complement and validate KPIs and
deepen directors’ understanding of the Group’s operations and performance.
Monitor the development of crisis management planning and the role of the Board
in such plans. Establish future milestones after completion of the Woolf Report
three-year implementation review.
Engage with shareholders as they implement the Stewardship Code and find ways
to expose non-executive directors more directly to shareholders’ views.
Think about ‘Brand’ in the context of the evolving nature of the business.
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BAE Systems Annual Report 2010
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Directors’ Report: Governance
Corporate governance continued
I believe that regular dialogue with shareholders is important to
good governance. Establishing reliable lines of communication
– even when there are no particular issues of concern for
shareholders – is another of the valuable ‘safety valves’ that
we need to firmly establish as part of our governance processes.
Obviously, this requires engagement on the part of the investor
community and I welcome the Stewardship Code which was
launched last year in the UK with the aim of enhancing, “…the
quality of engagement between institutional investors and
companies to help improve long-term returns to shareholders
and the efficient exercise of governance responsibilities”.
During 2011, we will be looking to continue to improve the
quality of our engagement with shareholders and explore with
investors the practical means by which we can give effect to
the requirements of the Stewardship Code and UK Corporate
Governance Code.
Stewardship is a word that sits equally comfortably with the
directors of a company as it does with shareholders – maybe
even more so for directors as the duty is more immediate and all
embracing in its scope. Therefore, we naturally support the aims
of this new code and look forward to developing its application.
At the centre of a company’s engagement with its shareholders
is the Annual General Meeting (AGM), and we should not lose
sight of the importance of this meeting as it provides a forum for
engagement with all shareholders. BAE Systems has thousands
of shareholders, most of whom do not wish or are unable to
attend the actual meeting. However, all shareholders have the
opportunity to ensure that their shares are voted on. To help
facilitate this we provide the following:
– Electronic and postal voting – shareholders can vote on all the
resolutions either electronically via our website or by post.
– Questions & Answers – all shareholders have the opportunity
to submit questions by e-mail or post and we address the
issues that arise most frequently in these questions in
answers provided on our website.
– Polls – all the resolutions detailed in the Notice of Meeting
are voted on by way of a poll. This ensures that all votes are
counted on the basis of one vote for every share held, as
against voting on a show of hands, which results in only
attendees at the meeting deciding on the resolutions.
– Results – we publish the results of the voting on all resolutions
on our website.
Those who are able to attend our AGM have the opportunity to
ask questions and hear the views of other shareholders before
deciding how to cast their votes. One of the main changes to the
provisions in the Combined Code is the change to require that
all directors are subject to annual election by shareholders.
Consequently, all members of the BAE Systems Board shall be
standing for re-election this year and in future years.
This year’s AGM is on 4 May 2011. I look forward to meeting
those shareholders who are able to attend, and answering any
questions they may have on these governance reports and other
matters covered by the resolutions to be put to the meeting.
Dick Olver
Chairman
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Corporate governance report
Applying the principles of the UK’s Corporate Governance Code
The following report details how the Board has applied the
principles in the Financial Reporting Council’s Combined Code
(the “Code”), as required by the UK Listing Rules. In June 2010,
a revised code, the UK Corporate Governance Code, was
published. Whilst reporting against the additional and revised
principles contained within this revised code is not required for
regulatory purposes until next year, the Board accepts that it
represents an authoritative statement of best practice, and as
such it has reviewed its practices relative to it. Consequently,
the following report includes information on the application of
the additions and revisions to the Code.
Leadership
Principles – An effective board collectively responsible for
the long-term success of the company •A clear division of
responsibilities at the head of the company between the
running of the board and the executive •No one individual
should have unfettered powers of decision •The chairman is
responsible for the leadership of the board and ensuring its
effectiveness on all aspects of its role •Non-executive
directors should constructively challenge and help develop
proposals on strategy.
The Company’s governance structure is based on the leadership
principles in the new UK Corporate Governance Code. The core
activities of the Board and its committees are documented and
planned on an annual basis, and this forms the basic structure
within which the Board operates. The Board has adopted a
document, the Board Charter, in which there is a statement of
governance principles that reflect the principles contained in the
Code, and cover the following:
– Strategy – reviewing and agreeing strategy;
– Performance – monitoring the performance of the Group and
also evaluating its own performance;
– Standards and values – setting standards and values to guide
the affairs of the Group;
– Oversight – ensuring an effective system of internal controls is
in place, ensuring that the Board receives timely and accurate
information on the performance of the Group and the proper
delegation of authority; and
– People – ensuring the Group is managed by individuals with
the necessary skills and experience, and that appointments to
the Board are managed effectively.
The Board Charter also details the separate and distinct roles
of the Chairman and the Chief Executive, and also those of the
Senior Independent Director and Company Secretary. These are
detailed opposite, and have been reviewed and amended in light
of changes made to the Code in 2010.
Whilst the Board is ultimately responsible for the success of
the Company, given the size and complexity of its operations,
all but the most important matters are managed on a delegated
basis by the Chief Executive and the executives working for him.
The Board appoints the Chief Executive and monitors his
performance in leading the Company, and providing operational
and performance management in delivering the agreed strategy.
Specifically, he is responsible for developing, for the Board’s
approval, appropriate values and standards to guide all
activities undertaken by the Company and also making
recommendations on appropriate delegated responsibilities.
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roles and resPonsiBilities
The role of the Chairman
The Chairman is responsible for creating the conditions for the
effective working of the Board and is specifically responsible for
the following:
The role of the Chief Executive
The Chief Executive is responsible for the leadership, and the
operational and performance management of the Company
within the strategy and business plan agreed by the Board.
– Chairing Board meetings and setting the agenda for such
meetings, taking full account of the issues and concerns of
all directors and encouraging their active engagement in
Board discussion.
– Promoting the highest standards of corporate governance,
including compliance with the UK Corporate Governance
Code wherever possible.
– Promoting the requirement that all Board members are
exemplars of the Company’s values, principles and
standards.
– Through the Nominations Committee, ensuring that the
Board comprises individuals with an appropriate mixture of
skills, experience and knowledge.
– Ensuring that the Company maintains effective
communication with shareholders, and that their views and
any concerns are understood by the Board.
– Working with the Chief Executive to ensure that the Board
receives accurate and timely information on the performance
of the Company.
– Representing the Company at the highest level and, in
conjunction with the Chief Executive, developing strategic
relationships with major customers and political leaders
worldwide.
– Leading the evaluation of the performance of the Board, its
committees and individual directors.
– Establishing an effective working relationship with the Chief
Executive, providing support and advice whilst respecting
executive responsibility.
– Ensuring that a well constructed induction programme
is provided for new directors, that all directors have the
opportunity to develop their understanding of the
Company and that they are kept informed of matters
affecting the Company.
The Chief Executive is specifically responsible for the following
in respect of his/her relationship with the Board:
– Developing a business strategy for the Company to be
approved by the Board on an annual basis.
– Producing business plans for the Company to be approved
by the Board on an annual basis.
– Overseeing the management of the executive resource and
succession planning processes, and presenting annually the
output from these to the Board and Nominations Committee.
– Ensuring that effective business and financial controls,
and risk management processes are in place across the
Company, and that all relevant laws and regulations are
complied with.
– Making recommendations to the Board on the appropriate
delegation of authority within the Group.
– Keeping the Board informed regularly as to the performance
of the Company and bringing promptly to the Board’s
attention all matters that materially affect, or are capable
of materially affecting, the performance of the Company
and the achievement of its strategy.
– Developing for the Board’s approval appropriate values and
standards to guide all activities undertaken by the Company.
– Providing clear and visible leadership in business conduct.
– Promoting the requirement that all Senior Leaders are
exemplars of the Company’s values, principles and
standards.
– Owning the Company’s commitment to all aspects of
corporate responsibility.
The role of the Senior Independent Director
The Senior Independent Director is responsible for
the following:
The role of the Company Secretary
The Company Secretary is specifically responsible for
the following:
– Being available to shareholders if they have concerns which
contact through the normal channels of Chairman, Chief
Executive or other executive directors has failed to resolve
or for which such contact is inappropriate.
– Providing a sounding board for the Chairman and serving as
– Under the direction of the Chairman, ensuring good
information flows within the Board and its committees, and
between senior management and non-executive directors,
as well as facilitating induction activities for directors and
assisting with their development as required.
an intermediary for the other directors when necessary.
– Advising the Board through the Chairman on all
– Chairing the Nominations Committee when it is considering
the Chairman’s succession.
– Providing feedback on the Chairman’s performance as derived
from the evaluation exercise undertaken by the Board.
governance matters.
BAE Systems Annual Report 2010
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Directors’ Report: Governance
Corporate governance continued
The Operational Framework is the output from this process.
It is a document that has evolved over time, subject to a formal
six-monthly review process that culminates in the Board’s review
and approval. In approving it the Board has agreed the following:
– Performance requirements and values – i.e. Total Performance
and the Values underpinning it.
– Organisation structure – the roles and accountabilities of the
Board and certain senior individuals.
– Governance standards – the Group’s trading principles,
internal controls, operational assurance framework and risk
management framework.
– Core business processes – covering business planning,
project management, mergers and acquisitions, individual
executive performance, and management of performance
against business objectives, measures and milestones.
– Delegated responsibilities – dealing with the Board’s
delegation of authority concerning financial, commercial
and legal matters.
The Board and its committees monitor the application of values,
standards and processes. This includes a range of activities
such as the formal review of the effectiveness of internal
controls (see page 89).
To ensure that non-executive directors can constructively
challenge and help develop proposals on strategy, the Board
has adopted a process of reviewing the development of strategy
and formally approving the agreed strategy for the Company on
an annual basis. In 2010, the Board members were provided
with opportunities to engage in strategy development through
informal meetings and workshops as well as formal Board
meetings.
Effectiveness
Principles – Board and committees having an appropriate
balance of skills, experience, independence and knowledge
of the company to enable them to discharge their
respective duties and responsibilities effectively •A formal,
rigorous and transparent procedure for the appointment of
new directors •All directors to be able to allocate sufficient
time to the company to discharge their responsibilities
effectively •All directors to receive induction on joining and
should regularly update and refresh skills and knowledge
•The board should be supplied in a timely manner with
information in a form and of a quality appropriate to enable
it to discharge its duties •The board should undertake a
formal and rigorous annual evaluation of its performance,
and that of its committees and individual directors •All
directors should be submitted for re-election at regular
intervals, subject to continued satisfactory performance.
Succession planning is used by the Board to deliver two key
responsibilities, firstly to ensure that the Group is managed by
executives with the necessary skills, experience and knowledge,
and secondly to ensure that the Board itself has the right
balance of individuals to be able to effectively discharge its
responsibilities. The Nominations Committee has specific
responsibilities in this area but the Board as a whole is also
involved in overseeing the development of management
resources in the Group with the aim of ensuring the Company
has the individuals with the right skills to meet the needs of an
increasingly complex and global business. The process adopted
for the appointment of non-executive and executive directors is
detailed in the Nominations Committee report.
All non-executive directors are advised of the likely time
commitments at appointment and are asked to seek approval
Typical non-executive director induction programme
head office functions (aPProximately ten hours)
Matters covered
Duties of a director, Board procedures, corporate governance,
Facilitated by
Company Secretary
Code of Conduct
Business planning and control, and risk management
Director Financial Control, Reporting and Treasury
processes
Strategy and planning processes
Enterprise Metrics – the measures used by the Board and
management to measure and monitor performance
Investor Relations
Corporate Responsibility
Internal Audit
Business Development
Group Strategy Director
Managing Director, Performance Excellence
Investor Relations Director
Managing Director, Corporate Responsibility
Head of Internal Audit
Group Business Development Director
meetings with senior executives (aPProximately six hours)
Matters covered
uK and international (london-based)
Programmes & Support (UK defence and security businesses)
International (Saudi Arabia, Australia, India, Oman)
us (washington, dc)
BAE Systems, Inc.
Facilitated by
Group Managing Director, Programmes & Support
Group Managing Director, International
President and Chief Executive Officer of BAE Systems, Inc.
Executive Vice Presidents, BAE Systems, Inc.
oPerational site visits (aPProximately five days)
UK
Military Air Solutions – Warton and Samlesbury, Lancashire
Surface Ships – Portsmouth
US
Electronic Solutions – Nashua, NH
US Combat Systems – York, PA
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from the Nominations Committee if they wish to take on
additional external appointments. The ability of individual
directors to allocate sufficient time to the discharge of their
responsibilities is considered as part of the directors’ annual
evaluation process overseen by the Chairman. Any issues
concerning the Chairman’s time commitment are dealt with by
the Nominations Committee, chaired for this purpose by the
Senior Independent Director.
An induction programme is agreed for all new directors aimed at
ensuring that they are able to develop an understanding and
awareness of the Company’s core processes, its people and
businesses. A typical induction programme is shown opposite.
The Chairman, with the assistance of the Chief Executive and
Company Secretary, is responsible for ensuring that directors
are supplied with information in a timely manner that is in a form
and of a quality appropriate to enable them to discharge their
duties. In the normal course of business, such information is
provided by the Chief Executive in a regular report to the Board
that includes information on operational matters, strategic
developments, reports on the performance of Group operations,
financial performance relative to the business plan, business
development, corporate responsibility and investor relations.
In addition to the induction programme that all directors
undertake on joining the Board, an ongoing programme of
director development and Company awareness has been
developed. For example, as part of the annual programme of
Board meetings, directors will typically visit the Group’s principal
operations to meet employees and gain an understanding of the
Group’s products and services. In 2010, the Board visited the
Company’s Support Solutions and Information Solutions
businesses in San Diego, and the Surface Ships business in
Portsmouth. Also, the Board undertakes training sessions on
particular matters, and last year directors participated in
Responsible Business Awareness Training sessions facilitated
by the Chairman. As part of the recently completed evaluation
process, the Chairman is meeting with all directors individually,
and agreeing training and development.
For the last six years the Board’s annual effectiveness
evaluations have been undertaken by Sheena Crane, an
experienced consultant, whose only interest with BAE Systems
is with regards to her work with the Board and undertaking
similar performance evaluation work for the Executive
Committee. She was appointed to perform this work in
consultation with the Nominations Committee. The evaluation
process is based on the facilitator interviewing each of the
directors, and recording their views on the effectiveness of the
Board and its committees’ work, and on the performance of
individual directors. Feedback on Board performance is
presented to a meeting of the Board, which agrees actions and
objectives for the following year based on the information the
facilitator provides and the conclusions that the Board derived
from this.
Individual directors are also subject to annual performance
evaluation, and the Chairman meets with each director and
provides feedback on a one-to-one basis – committee chairmen
also get feedback on committee performance. Feedback on the
Chairman’s performance is provided by the facilitator directly to
the Board’s Senior Independent Director, who discusses this
with the other non-executive directors before discussing this
with the Chairman on a one-to-one basis. Subject to continued
satisfactory performance, directors seek re-election on an
annual basis.
Accountability
Principles – The board to present a balanced and
understandable assessment of the company’s position and
prospects •The board is responsible for determining the
nature and extent of the significant risks it is willing to
take in achieving its strategic objectives •The board should
maintain sound risk management and internal control
systems •The board should establish formal and
transparent arrangements for considering how they should
apply the corporate reporting and risk management and
internal control principles, and for maintaining an
appropriate relationship with the company’s auditor.
Through this report and, as required, through other periodic
financial statements, the Board is committed to providing
shareholders with a clear assessment of the Company’s
position and prospects.
The arrangements established by the Board for the application
of risk management and internal control principles are detailed
on page 87. The Board has delegated to the Audit Committee
oversight of the management of the relationship with the
Company’s auditors, further details of which can be found in the
Audit Committee report on page 89.
Remuneration
Principles – Levels of remuneration should be sufficient to
attract, retain and motivate directors of the quality required
to run the company successfully, but a company should
avoid paying more than is necessary for this purpose •A
significant proportion of executive directors’ remuneration
should be structured so as to link rewards to corporate and
individual performance •There should be a formal and
transparent procedure for developing policy on executive
remuneration, and for fixing the remuneration packages of
individual directors •No director should be involved in
deciding his or her own remuneration.
The Board has delegated to the Remuneration Committee
responsibility for agreeing remuneration policy and the
individual remuneration of the executive directors, the
Chairman, members of the Executive Committee and the
Company Secretary (see Remuneration report on pages 96 to
119). The Committee is formed exclusively of independent
non-executive directors.
Relations with shareholders
Principles – There should be a dialogue with shareholders
based on the mutual understanding of objectives •The
board as a whole has responsibility for ensuring that a
satisfactory dialogue with shareholders takes place •The
board should use the AGM to communicate with investors
and to encourage their participation.
The Company has a well-developed investor relations
programme managed by the Chief Executive, Group Finance
Director and Investor Relations Director. In addition, the
Chairman is in regular contact with major shareholders and
looks to keep them informed of progress on corporate
governance matters. In order to assist in developing an
understanding of the views of major shareholders, each year the
Company commissions a survey of investors undertaken by
external consultants. The results of the survey are presented to
the Board.
The Company maintains a comprehensive Investor Relations
website that provides, amongst other things, information on
investing in BAE Systems and copies of the presentation
materials used for key shareholder presentations. This can be
accessed via the Company’s website, www.baesystems.com
BAE Systems Annual Report 2010
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Directors’ Report: Governance
Corporate governance continued
The Company’s AGM provides all shareholders with the
opportunity to vote on the resolutions put to shareholders either
electronically via the Company’s website or by post. All resolutions
detailed in the Notice of Meeting are voted on by way of a poll so
as to ensure that all votes are counted on the basis of one vote for
every share held. The result of the voting on all resolutions is
published on the Company’s website.
Compliance with the provisions of the Combined Code
The Company was compliant with the provisions of the
Combined Code on Corporate Governance throughout 2010,
except that between 1 January 2010 and 8 February the
membership of the Remuneration Committee consisted of two
independent non-executive directors and the Chairman of the
Company (who had been independent on appointment to the
position of Chairman). The Committee met once during this
period and the only decision made concerning directors’
remuneration was to introduce clawback provisions into the
Company’s executive share plans.
The Board
The Board comprises a non-executive chairman, eight
non-executive directors and three executive directors.
The attendance by individual directors at meetings of the Board
and its committees in 2010 is shown in the table below.
The Board considers all of the non-executive directors, with the
exception of the Chairman, to be independent for the purposes
of the Combined Code. Each of these directors has been
identified on pages 76 and 77 of this report.
Mr Quarta is a partner in Clayton, Dubilier & Rice (CDR) and
Mr Olver is an adviser to that firm. The Board has considered
Mr Quarta’s independence in light of the provisions in paragraph
A.3.1 of the Combined Code (paragraph B.1.1 of the UK
Corporate Governance Code) concerning significant links with
other directors through involvement with other companies or
bodies. Following review, the Board considers that, for the
purposes of the Code, their relationship through CDR does
not constitute a significant link. In reaching this determination
the following matters were taken into consideration:
– as an adviser to CDR, Mr Olver has no management
responsibilities or oversight obligations in respect of CDR
or any of its investments; and
– Mr Olver has no involvement with the companies that
Mr Quarta is a director of, or has management responsibility
for, within CDR.
Mr Olver has undertaken to advise the Board should there
be any material change in his relationship with CDR whilst
Mr Quarta has an involvement with that firm.
Mr Symon and Mr Rose are both non-executive directors of
BT Group plc and the Board has determined that, as they both
serve in a non-executive capacity, both are independent for the
purposes of paragraph A.3.1 of the Combined Code (paragraph
B.1.1 of the UK Corporate Governance Code).
In 2010, the Board was scheduled to meet seven times and
in addition two days were spent reviewing strategy. Additional
Board meetings are called as required and in total the Board
met 11 times during the year.
The Board has appointed Sir Peter Mason as the Senior
Independent Director. Amongst the duties undertaken by
Sir Peter during the year was to meet with the non-executive
directors without the Chairman present to discuss the
Chairman’s performance.
The Company’s Articles of Association require that all new
directors seek re-election to the Board at the following AGM.
In addition, the Board has agreed that in compliance with the
UK Corporate Governance Code all directors shall seek
re-election on an annual basis. The Board has set out in the
Notice of Annual General Meeting their reasons for supporting
the re-election of those directors seeking re-election at the
forthcoming AGM.
attendance By individual directors at meetings of the Board and its committees in 2010
Director
Mr P M Anderson
Mr P J Carroll1
Ms H Green2
Mr M J Hartnall
Ms L P Hudson
Mr A G Inglis3
Mr I G King
Sir Peter Mason
Mr R L Olver
Mr R Quarta4
Mr G W Rose
Mr N C Rose5
Mr C G Symon
Mr R K Uppal
Audit
Committee
–
–
–
6 (6)
–
–
–
5 (6)
–
5 (6)
–
5 (6)
–
2 (5)
Corporate
Responsibility
Committee
3 (3)
–
0 (1)
–
–
1 (2)
–
4 (4)
–
–
–
–
–
1 (1)
Nominations
Committee
6 (6)
2 (2)
–
–
–
–
–
8 (8)
7 (8)
–
–
–
–
–
Remuneration
Committee
–
–
–
–
–
–
–
–
2 (2)
7 (7)
–
3 (5)
7 (7)
–
Non-Executive
Directors’ Fees
Committee
–
–
–
–
1 (1)
–
1 (1)
–
1 (1)
–
–
–
–
–
Board
10 (11)
5 (5)
1 (2)
10 (11)
10 (11)
3 (6)
11 (11)
11 (11)
10 (11)
6 (11)
11 (11)
7 (9)
10 (11)
8 (11)
Figures in brackets denote the maximum number of meetings that could have been attended.
1
2
3
4
5
Retired from the Board on 5 May 2010.
Appointed to the Board on 1 November 2010.
Retired from the Board on 9 July 2010.
Attended six of the seven scheduled Board meetings held during the year.
Appointed to the Board on 8 February 2010.
86
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Risk management and internal control
As reported in the Company’s 2009 Annual Report, the Board
has reviewed the historical control failures associated with the
global settlement agreement with the UK Serious Fraud Office
and the US Department of Justice announced in February 2010,
and believes that the Company has systematically enhanced
relevant compliance policies and processes since the behaviour
referred to in the settlements occurred.
The Board has conducted a review of the effectiveness of the
Group’s system of risk management and internal control
processes, including financial, operational and compliance
controls and risk management systems, in accordance with the
Code and the Turnbull guidance (as revised).
BAE Systems has developed a system of internal control that
was in place throughout 2010 and to the date of this report, that
encompasses, amongst other things, the policies, processes,
tasks and behaviours that, taken together, seek to:
– facilitate the effective and efficient operation of the Company;
– enable it to respond appropriately to significant operational,
financial, compliance and other risks that it faces in carrying
out its business;
– assist in ensuring that internal and external reporting is
accurate and timely, and based on the maintenance of proper
records supported by robust information-gathering processes;
and
– assist in ensuring that the Company complies with applicable
laws and regulations at all times, and also internal policies in
respect of the standards of behaviour and conduct mandated
by the Board.
Details of the processes the Company has put in place to
manage risk can be found on pages 56 and 57 of this report.
The Board has delegated to the Audit Committee responsibility
for reviewing in detail the effectiveness of the Company’s
system of internal controls. Having undertaken such reviews,
the Committee reports to the Board on its findings so that the
Board as a whole can take a view on this matter. In order to
assist the Audit Committee and the Board in this review, the
Company has developed the Operational Assurance Statement
(OAS) process (see below). This has been subject to regular
review over a number of years, which has resulted in a number
of refinements being made.
oPerational assurance statement (oas) – Key characteristics
A half-yearly review process to provide assurance that mandated policies and processes are being complied with, and a formal
assessment of business risk.
All senior executives with specific profit or loss accountability for a line of business (Line Leaders) and functional directors are
required to implement robust local processes to determine how their OAS should be completed. OAS returns are submitted to
the Chief Executive and reviewed by the Audit Director and Director Financial Control, Reporting and Treasury. Results from the
OAS are presented to the Audit and Corporate Responsibility committees, and form part of the Board’s regular review of risk.
All returns are made available to the Group’s auditors for use in their audit activities.
The OAS is formed of the following two parts:
1. Assessment of compliance with the Operational Framework
– Line Leaders of all businesses and relevant functional directors are required to complete and sign off an OAS recording their
formal review of compliance against the Company’s Operational Framework covering, amongst other things, the following:
– Health and safety
– Delegated authorities
– Environment
– Financial controls
– Product safety
– Risk management
– Sponsorship and
– People
charitable giving
– Gifts and hospitality
– Conflicts of interest
– Security
– Use of IT
– Advisers
– Engineering
– Business planning
– Lifecycle Management
(a core Group project
management process)
– Mergers, acquisitions and
Operational Framework
– Effectiveness of internal
controls in joint ventures
and associated
undertakings
– General compliance with the
– Product trading policy and
– Lobbying and political
pursuit of exports
disposals
support
– Ethical business conduct
– Compliance with law,
regulation and codes
of practice
– Where simple yes/no answers are not appropriate, an assessment of compliance is required to be made against structured
qualitative guidance.
– Minimum satisfactory levels of compliance are set by policy. If not compliant, a robust plan to achieve compliance is mandated
and monitored through the Group’s performance management processes and at the relevant audit review board.
2. Identification and management of key risks
– Line Leaders of all businesses and functional directors are required to identify their key risks (nominally 20), and analyse them
in terms of size of impact and probability. An owner is required to be assigned to each risk, and mitigation plans produced and
managed by the relevant business.
– The Executive Committee conducts risk workshops to analyse and allocate management responsibility for the management of
the Group’s most significant non-financial risks.
BAE Systems Annual Report 2010
87
Directors’ Report: Governance
Corporate governance continued
Risks are identified on a ‘bottom-up’ basis as part of the OAS
process. This process is mandated across the Group and
requires that the heads of all businesses and functions identify
their key risks. As part of this process, an assessment is made
of the probability of the risk arising and its potential impact on
the Group’s business plan. All risks have an owner who is
responsible for production and implementation of plans
aimed at mitigating the risk. The output from the Group’s risk
processes is reviewed on a regular basis by the Executive
Committee and it produces a register of non-financial risks.
As with risks identified through the OAS process, all risks on the
non-financial risks register have owners who are responsible for
mitigating them.
The Audit Committee is responsible for reviewing the ongoing
effectiveness of the Company’s risk management processes
as part of its review of the effectiveness of internal controls.
Also, twice a year, the Audit Committee receives reports on the
output from the OAS process, details of the changes in the risks
identified by it and the status of mitigation plans. The Corporate
Responsibility Committee undertakes a similar role in respect of
the non-financial risk register. The Board receives reports from
the chairmen of these two committees, providing details of the
work they have undertaken. Once a year, the Audit and Corporate
Responsibility committees hold a joint meeting to agree the
annual programme for the Group’s Internal Audit function.
Whilst the quality of the control processes is fundamental to the
overall control environment, the consistent application of these
processes is equally important. The consistent application of
world-class control processes is a key management objective.
The Company is committed to the protection of its assets, which
include human, property and financial resources, through an
effective risk management process, underpinned where
appropriate by insurance.
The Internal Audit team independently reviews the risk
identification procedures and control processes implemented
by management. It provides objective assurance as to the
operation and validity of the systems of internal control through
a programme of cyclical reviews making recommendations for
business and control improvements as required.
The overall responsibility for the system of internal control
within BAE Systems rests with the directors of the Company.
Responsibility for establishing and operating detailed control
procedures lies with the Line Leaders of each operating business.
In line with any system of internal control, the policies and
processes that are mandated in the Operational Framework are
designed to manage rather than eliminate the risk of failure to
achieve business objectives, and can only provide reasonable
and not absolute assurance against material misstatement
or loss.
Each year the Board specifically reviews the risks identified in
the risk management processes. This is aimed at providing the
Board with an appreciation of the key risks within the business
and oversight of how they are being managed.
Reporting within the Company is structured so that key issues
are escalated through the management team ultimately to the
Board if appropriate. The Operational Framework provides a
common framework across the Company for operational and
financial controls, and is reviewed on a regular basis by the
Board. The business policies and processes detailed within
the Operational Framework draw on global best practice and
their application is mandated across the organisation.
Lifecycle Management (LCM) is such a process, and promotes
the application of best practice programme execution and
facilitates continuous improvement across the Group. It
considers the whole life of projects from inception to delivery
into service and eventual disposal, and its application is critical
to our capability in delivering projects to schedule and cost.
Further key processes are Integrated Business Planning (IBP),
Quarterly Business Reviews (QBR) and Total Performance
Leadership (TPL). The IBP, approved annually by the Board,
results in an agreed long-term strategy for each operating group,
together with detailed near-term budgets. The QBRs evaluate
progress against the IBP, and business performance against
objectives, measures and milestones. TPL drives business
success by linking individual goals to those of the organisation,
enabling employees to understand how their own success
contributes to the success of the whole business.
The responsibility for internal control procedures with joint
ventures and other collaborations rests, on the whole, with
the senior management of those operations. The Company
monitors its investments and exerts influence through board
representation.
Going concern
The Group’s business activities, together with the factors likely
to affect its future development, performance and position, are
set out in the operating group reviews on pages 66 to 74. The
financial position of the Group, including information on order
intake, cash flow, treasury policy and liquidity, can be found in
the review of financial performance on pages 36 to 44. Principal
risks are detailed on pages 58 to 63. In addition, the financial
statements include, amongst other things, notes on finance
costs (page 142), loans and overdrafts (page 158), and financial
risk management (page 176).
After making due enquiries, the directors have a reasonable
expectation that the Group has adequate resources to continue
operational existence for the foreseeable future. For this
reason, they continue to adopt the going concern basis in
preparing the accounts.
On behalf of the Board
Dick Olver
Chairman
88
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Audit Committee report
Members
Michael Hartnall (Chairman)
Sir Peter Mason
Roberto Quarta
Nick Rose
Ravi Uppal
Responsibilities
– Reviewing the effectiveness of the Group’s financial
reporting, internal control policies and procedures for
the identification, assessment and reporting of risk.
– Monitoring the integrity of the Group’s financial statements.
– Reviewing significant financial reporting issues and
judgements.
– Monitoring the role and effectiveness of the Internal Audit
function including approving the appointment or removal of
the head of Internal Audit.
– Approving, in conjunction with the Corporate Responsibility
Committee, an annual programme of internal audit work.
– Considering and making recommendations to the Board on
the appointment of the Auditors.
– Agreeing the scope of the Auditors’ annual audit programme
and reviewing the output.
– Keeping the relationship with the Auditors under review,
including the terms of their engagement and fees, their
independence and expertise, resources and qualification,
and assessing the effectiveness of the audit process.
– Developing and implementing policy on the engagement of
the Auditors to supply non-audit services.
The full terms of reference of the Audit Committee can be
found on the Company’s website or can be obtained from the
Company Secretary. The terms of reference are reviewed on
an annual basis.
Michael Hartnall
Audit Committee Chairman
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Governance
The Audit Committee was in place throughout 2010. Nick Rose
and Ravi Uppal joined the Committee on 17 February 2010.
All its members are independent in accordance with provision
A.3.1 of the Combined Code.
Michael Hartnall has been chairman of the Committee since
2003. He was formerly the finance director of a FTSE 100
company and is a fellow of the Institute of Chartered
Accountants in England and Wales. As reported by the Chairman
on page 79, the appointment to the Committee of Nick Rose,
equipped with the experience and skills gained in his role as
Chief Financial Officer of Diageo plc, provides additional
expertise and longer-term succession planning. Further
biographical details on the individual members is provided
on pages 76 and 77.
The Committee has asked that the Chief Executive, Group
Finance Director, Director Financial Control, Reporting and
Treasury, and the head of Internal Audit normally attend its
meetings.
During the year, the Committee held individual meetings without
Group executives present, without the head of Internal Audit
present, solely with the head of Internal Audit present, and also
solely with the external auditors present.
The Auditors and head of Internal Audit have direct access to the
Chairman of the Committee.
The Committee may obtain at the Company’s expense
independent professional advice on any matters covered by
its terms of reference.
The Committee accepts that certain work of a non-audit nature
is best undertaken by the external auditors. The Committee
reviews regularly the amount and nature of non-audit work they
perform. It believes that it is not appropriate to limit the level of
such work by reference to a set percentage of the audit fee, as
this does not take into account important judgements that need
to be made concerning the nature of work undertaken to help
safeguard the Auditors’ independence.
During the year the Committee reviewed its policy in relation to
the undertaking of non-audit work by the external auditors and
implemented a revised policy as reported on page 90.
On an annual basis the Committee’s effectiveness is reviewed
as part of the Board’s externally facilitated evaluation process.
Meetings
The Committee met six times in 2010.
Activities
The principal activities undertaken by the Committee in the
period under review are set out below.
Internal controls and risk
– The Committee received and considered reports during the
year from the Group’s auditors, KPMG Audit Plc, and the
Group’s Internal Audit function on the work they had
undertaken in reviewing and auditing the control environment,
in order to assess the quality and effectiveness of the internal
control system.
– The Group’s internal controls framework, which is based on
a set of core processes that have been developed over a
number of years, is documented in the Operational Framework
(further information on which is provided on page 84). Twice
during the year, the Committee reviewed the results of the
Group’s Operational Assurance Statement (OAS) process,
through which senior managers across the Group report
on the quality of their businesses’ implementation and
BAE Systems Annual Report 2010
89
Directors’ Report: Governance
Corporate governance continued
compliance with the policies mandated in the Operational
Framework. Further information on the OAS is provided on
page 87.
– The Committee reviewed the output from the OAS process
that requires managers to evaluate, identify and report on
significant risks to the delivery of their business plans, and
to report on the status of plans to mitigate such risks.
– The Committee assessed the effectiveness of the Group’s
internal controls and reviewed the related disclosures in the
Annual Report.
– As part of the Committee’s programme to gain a greater
awareness of the Group’s operations and to understand in
more detail the implementation of core control processes,
it met with:
– senior executives from the Combat Systems business in
the US; and
– Detica senior management at Detica’s UK offices.
As well as giving the Committee the opportunity to meet and
discuss issues direct with operational management, these
sessions provide a practical demonstration of the Group’s risk
identification and risk mitigation processes within the context
of its wider internal control system.
The Committee also met with:
– the Chairman of the Information Technology & Management
Functional Council to receive a report on the governance,
management and security of IT;
– the Group Taxation Director to receive a report on taxation
matters; and
– the Pensions Director to receive an update on pension
scheme matters.
Financial reporting
The Committee:
– reviewed the financial statements and, as part of this
process, the significant financial reporting judgements
contained within them;
– reviewed liquidity risk and the basis for preparing the Group
accounts on a going concern basis, including the analysis
supporting the going concern judgement and disclosures in
the financial statements;
– reviewed the financial statements in the 2009 and 2010
Annual Reports, and the 2010 Half-yearly Report, and
received a report from the Auditors on the statements; and
– reviewed the two Interim Management Statements prior to
their publication in May and October 2010.
Internal Audit
The Committee:
– reviewed output from the internal audit programme twice
during the year and considered progress against the
programme;
– met with the Corporate Responsibility Committee to consider
a programme of internal audit work aimed at assessing the
effectiveness of policies and processes relating to key areas
of ethical and reputational risk;
– agreed the internal audit programme for 2010; and
– reviewed the effectiveness of the Group’s Internal Audit
function. In addition to the Committee’s own consideration,
this included discussion of the assessment and input from
key stakeholders within the Group.
The Committee also met with the new head of US Internal Audit
following her appointment.
The Auditors
The Committee:
– agreed the approach and scope of the audit work to be
undertaken by the Auditors;
– reviewed with the Auditors the findings of their work;
– reviewed the Group’s processes for disclosing information to
the Auditors and the statement concerning such disclosure in
the Annual Report;
– agreed the fees payable in respect of the 2010 audit work;
– undertook an annual review of the effectiveness and
performance of the Auditors which included, in addition to the
Committee’s own consideration, assessment and input from
key stakeholders within the Group, and was discussed by the
Committee. It also received assurances from the Auditors
regarding their independence. On the basis of this review the
Committee recommended to the Board that it recommend
that shareholders support the re-appointment of the Auditors
at the 2011 Annual General Meeting; and
– developed and implemented a revised policy in respect of
the provision of Non-Audit Services by the Auditors. Under
the policy:
– certain Non-Audit Services listed in the table on page 91
are prohibited from being provided by the Auditors.
– Audit-Related Services and Permitted Non-Audit Services
listed in the table on page 91 are pre-approved by the
Committee up to £250,000 (subject to senior finance
approval at business level up to £100,000 and subject
additionally to the approval of the Director Financial Control,
Reporting and Treasury up to £250,000). Work to be
undertaken beyond this threshold requires consent from the
Group Finance Director and the Audit Committee Chairman
(up to £500,000) or the full Committee (over £500,000).
– any other Non-Audit Services, which are neither prohibited
nor defined as Permitted Non-Audit Services as set out on
page 91, are subject to approval up to £100,000 by the
Group Finance Director and the Audit Committee Chairman,
and beyond that threshold by the full Committee.
On behalf of the Audit Committee
Michael Hartnall
Audit Committee Chairman
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Policy on non-audit services Provided by the auditors
Prohibited Non-Audit Services
– Book-keeping and work relating to the
preparation of accounting records and
financial statements that will ultimately
be subject to external audit;
Audit-Related Services
– Reporting required by law or regulation
to be provided by the Auditors;
– Reviews of interim financial
information;
– Financial information system design
and implementation;
– Appraisal or valuation services in
respect of material assets;
– Actuarial services;
– Internal auditing;
– Investment adviser or broking;
– Advocacy services;
– Secondments to management
positions that include decision-making;
and
– Any work where a mutuality of interest
is created that could compromise the
independence of the Auditors.
– Reporting on regulatory returns;
– Reporting to a regulator on client
assets;
– Reporting on government grants;
– Reporting on internal financial controls
when required by law or regulation; and
– Extended work undertaken at the
request of those charged with
governance on financial information
(this does not include accounting
services) and/or financial controls
performed where this work is integrated
with the audit work, and is performed
on the same principal terms and
conditions.
Permitted Non-Audit Services, subject
to approval under the policy
– Tax compliance services;
– Tax advisory services;
– Due diligence services relating to
acquisitions of new businesses or
significant investments in businesses,
joint ventures or strategic alliances;
– Public reporting on investment
circulars;
– Private reporting to sponsors or similar
parties in connection with investment
circulars (including comfort letters and
reporting on working capital
statements);
– Preparing information for third parties
relating to acquisitions and disposals,
including the conversion of financial
statements into other accounting
standards;
– Liquidation services in respect of
redundant subsidiaries or associate
companies;
– Participation in the evaluation of
Internal Audit; and
– Accounting advice.
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BAE Systems Annual Report 2010
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Directors’ Report: Governance
Corporate governance continued
Corporate Responsibility Committee report
Members
Paul Anderson (Chairman)
Harriet Green
Sir Peter Mason
Responsibilities
– Assisting the Board in overseeing the development of strategy,
and policy on social, environmental and ethical matters.
– Keeping under review the effectiveness of the Company’s
Governance
The Corporate Responsibility Committee was in place
throughout 2010.
Mr Anderson was appointed to the Committee on 17 February
2010 and succeeded Mr Inglis as Chairman of the Committee
on 9 July 2010. Mr Uppal ceased to be a member of the
Committee on 17 February 2010. Mr Inglis ceased to be a
member of the Committee on 9 July 2010 and Ms Green joined
the Committee on 1 November 2010 (Mr Olver attended
meetings between these dates).
internal control policies and procedures for the identification,
assessment, management and reporting of reputational
risks, including health and safety, workplace policies,
environmental impact and business ethics.
The Committee has asked that the Chief Executive, Group
General Counsel, Group HR Director, Managing Director,
Corporate Responsibility and the Head of Internal Audit normally
attend its meetings.
– Monitoring and reviewing the role and effectiveness of the
Company’s Internal Audit function in relation to Corporate
Responsibility (CR) and monitoring the development of the
capability and capacity of the function to perform its role with
regards to CR assurance and, in particular, ethical business
conduct.
– Reviewing audit and assurance reports produced by the
CR Assurer (an independent entity appointed to act as
an external assurer of the Company’s CR reporting)
and assessing management responsiveness to
recommendations in such reports.
– Overseeing and supporting key stakeholder engagement on
social, environmental and ethical issues.
– Making proposals to the Remuneration Committee regarding
appropriate CR-related performance objectives for executive
directors and, in due course, providing its assessment as to
performance against such objectives.
– Reviewing the Company’s arrangements for employees to
obtain further advice on ethical issues or raise and report
concerns, in confidence, where there may be possible
improprieties.
– Monitoring the implementation of the Woolf Report and
ensuring that the global Code of Conduct is regularly
reviewed and reflects best practice for such codes.
– Ensuring the Corporate Responsibility section of the Annual
Report includes an examination of ethical business conduct
within the Company.
The full terms of reference of the Corporate Responsibility
Committee can be found on the Company’s website or can
be obtained from the Company Secretary.
Paul Anderson
Corporate Responsibility
Committee Chairman
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The head of the Company’s Internal Audit function and managing
director of the CR function have direct access to the Chairman of
the Committee.
The Committee is responsible for appointing the CR Assurer
(presently Deloitte) and keeping under review its fees,
independence and objectivity, scope of work, and the expertise
and resources available to it.
The Chairman of the Committee reports on the proceedings of
all Committee meetings to the Board and all directors receive
copies of the Committee’s minutes.
The Committee may obtain at the Company’s expense
independent professional advice on any matters covered by its
terms of reference.
On an annual basis the Committee’s effectiveness is reviewed
as part of the Board’s externally facilitated evaluation process.
The Committee held a joint meeting with the Audit Committee
during the year to review work undertaken by the Internal Audit
function and agree the programme of audit work for the
following year.
Meetings
The Committee met four times in 2010.
Activities
The principal activities undertaken by the Committee during
2010 are detailed below.
CR objectives
The Committee agreed with the Chief Executive that the
Company should continue to focus on the following areas
of corporate responsibility:
– business conduct;
– safety; and
– diversity and inclusion.
At the end of 2009, the Committee agreed management
objectives in the areas of business conduct, safety, and diversity
and inclusion, and the Remuneration Committee incorporated
these into the non-financial objectives against which annual
incentive payments for executive directors and other senior
managers were to be based. At meetings held during the year,
the Committee reviewed progress against these objectives.
Actual performance against the measures agreed for the 2010
objectives was determined by the Committee at the end of the
year and a recommendation was made to the Remuneration
Committee to assist it in determining the total level of payout
under the annual incentive plan.
At the end of last year, the Committee agreed corporate
responsibility-related management objectives for 2011.
Risk management
The Committee reviewed the output from the Company’s
risk management processes as they relate to corporate
responsibility-related risks. These processes are as follows:
– Operational Assurance Statement (OAS) process – a half-
yearly self-assessment process by which businesses and
functional heads identify key risks.
– Non-financial risk register – a top-down analysis of key
non-financial and reputational risks reviewed regularly and
updated by the Executive Committee.
The Committee was provided with details of the risks reported
via the above processes and related mitigation plans. As part
of this activity, the Committee reviewed the Company’s crisis
management arrangements.
Assurance
Assurance as to adherence to corporate responsibility-related
policies is provided to the Committee by the Group’s Internal
Audit function. It also receives a report on the activities
undertaken by Deloitte LLP, who have been engaged by the
Committee to provide independent assurance on certain
corporate responsibility matters.
The Head of Internal Audit attends all of the Committee’s
meetings and, amongst other things, reports regularly on
corporate responsibility-related work undertaken by the Internal
Audit function and the key findings from this. The Committee has
reviewed with the Head of Internal Audit the development of the
skills and capabilities within the Internal Audit function required
to effectively undertake corporate responsibility-related audit
work. Deloitte provides the Committee with a letter detailing the
scope of the work undertaken and the key observations arising
from this. The Committee reviewed the letter issued by Deloitte
in 2010 following the review of the CR Report and agreed
matters to be addressed arising from the observations made.
Business conduct
During the year, the Committee monitored progress against the
milestones set for the implementation of the recommendations
in the Woolf Report. It also agreed how an assessment would
be undertaken in the first half of 2011 of the effectiveness of
the implementation of the 23 recommendations contained in
the report.
Environment
In 2010, the Committee reviewed progress towards developing
the Group’s approach to environmental sustainability.
Ethics Helpline
Recognising the importance of having a means by which
employees may raise issues or seek guidance on matters in
confidence, the Committee reviews the operation of the Ethics
Helpline. At two of the Committee’s meetings held in 2010 it
reviewed the working of the Ethics Helpline, and the nature and
number of contacts made.
Corporate Responsibility Report
The Committee reviewed and approved the Company’s
Corporate Responsibility Report.
Terms of reference
The Committee reviewed its terms of reference.
On behalf of the Corporate Responsibility Committee
Paul Anderson
Corporate Responsibility Committee Chairman
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BAE Systems Annual Report 2010
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Directors’ Report: Governance
Corporate governance continued
Nominations Committee report
Members
Dick Olver (Chairman)
Paul Anderson
Sir Peter Mason
Responsibilities
– Reviewing regularly the structure, size and composition of
the Board and making recommendations to the Board on any
appropriate changes.
– Identifying and nominating for the Board’s approval suitable
candidates to fill any vacancies for non-executive and, with
the assistance of the Chief Executive, executive directors.
– Planning for the orderly succession of directors to the Board.
– Recommending to the Board the membership and
chairmanship of the Audit, Corporate Responsibility and
Remuneration committees.
The full terms of reference of the Nominations Committee can
be found on the Company’s website or can be obtained from
the Company Secretary.
Governance
The Nominations Committee was in place throughout 2010.
It is chaired by the Chairman of the Company. Whilst he is not
deemed to be independent, the other two members of the
Committee are independent non-executive directors in
accordance with provision A.3.1 of the Combined Code.
When dealing with any matters concerning his membership of
the Board the Chairman will absent himself from the meeting
as required, and meetings will be chaired by the Board’s Senior
Independent Director, Sir Peter Mason.
The Committee normally asks the Chief Executive and the
Group HR Director to attend its meetings.
During the year, the Committee retained the services of the
search consultants Zygos Partners and Spencer Stuart to assist
in identifying potential candidates for nomination to the Board.
Nick Rose, an independent non-executive director, attended
Committee meetings in the period from June to November 2010.
Meetings
The Committee met eight times in 2010.
Activities
The principal activities undertaken by the Committee in the
period under review are set out below.
Executive succession planning
The Committee is responsible for reviewing the plans and
processes aimed at ensuring that the Company has a senior
executive resource with the necessary skills and experience
to meet the Group’s future needs, with a particular interest in
long-term succession planning for the executive membership
of the Board. As in past years, the Committee reviewed the
output from the Group’s executive development and succession
planning processes. This review looked at threats to achieving
the desired resource plans, and the overall health of the plans
in terms of depth of resource across readiness categories and
positions, average age profiles across readiness categories,
gender diversity, and attrition rates. In addition, the Committee
reviewed individual succession plans for the most senior
executive positions in the Company (including existing executive
director appointments).
During 2010, the Committee managed the search for a suitable
candidate to succeed George Rose as Group Finance Director
– Mr Rose having indicated that he was thinking about retiring
in 2011. To assist the Committee in this activity, Nick Rose, until
recently Chief Financial Officer of Diageo plc, attended meetings
and participated fully in the search activity. In addition, the
Committee engaged the services of the search consultants
Spencer Stuart. The search was undertaken against a detailed
job specification and included both internal and external
candidates. Having completed the process, the Committee
agreed to nominate Peter Lynas, a senior finance executive
within the Company, for the position and he was subsequently
appointed by the Board with such appointment to be effective
from 1 April 2011.
Dick Olver
Nominations Committee
Chairman
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Non-executive succession planning
As explained on page 79, the Committee also undertook a
review of the Board’s long-term succession requirements in
terms of non-executive directors. This review looked at both
the Board’s skill and experience requirements, and the needs
of the committees. This work was undertaken recognising that
two non-executive directors, Phil Carroll and Andy Inglis, were
looking to stand down from the Board, and also taking into
consideration the length of service and skill/experience profile
of current non-executive Board members.
Board committee membership
The Committee is responsible for nominating appropriate
individuals for membership of the Board’s committees.
A number of changes were made to committee membership
during the year to ensure that they comprised individuals with
the necessary skills, knowledge and experience, and that
they comply with the requirements of the Company’s Articles
of Association.
Conflicts of interest
As required by procedures adopted by the Board to deal with the
authorisation of potential conflicts of interest (in accordance
with UK company law), the Committee reviewed such
authorisations previously agreed by the Board and made
recommendations regarding their renewal.
On behalf of the Nominations Committee
Dick Olver
Nominations Committee Chairman
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BAE Systems Annual Report 2010
95
Directors’ Report: Governance
Remuneration report
The Remuneration report is structured as follows:
– Remuneration Committee report
– Non-Executive Directors’ Fees Committee
report
– Remuneration reporting:
– Remuneration strategy, policy and service
contracts for executive directors
– Chairman’s appointment, term and fees
– Non-executive directors’ appointment,
term and fees
Page 96
Page 99
Pages 100
to 112
Page 112
Page 113
Remuneration Committee report
Members
Carl Symon (Chairman)
Roberto Quarta
Nick Rose
Responsibilities
– Agreeing a policy for the remuneration of the Chairman,
executive directors, members of the Executive Committee
(EC), the Company Secretary and other senior executives.
– Tabular information on directors’
shareholdings, share-based incentives,
emoluments and pensions
– Within the agreed policy, determining individual remuneration
Pages 114
to 119
packages for the Chairman, executive directors and EC
members.
– Agreeing the policy on terms and conditions to be included
in service agreements for the Chairman, executive directors,
EC members, the Company Secretary and other senior
executives, including termination payments and
compensation commitments, where applicable.
– Approving any employee share-based incentive schemes and
any performance conditions to be used for such schemes.
– Determining any share scheme performance targets.
The full terms of reference of the Remuneration Committee
can be found on the Company’s website or can be obtained
from the Company Secretary.
Carl Symon
Remuneration
Committee Chairman
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Governance
The members of the Committee are independent non-executive
directors.
Dick Olver, the Company’s Chairman (who was deemed to be
independent on his appointment as Board Chairman on 1 July
2004), also served as a member of the Committee until
17 February 2010. Nick Rose was appointed to the Committee
with effect from 17 February 2010.
The Chief Executive and the Company’s Chairman, subsequent
to his resignation from the Committee, attend Committee
meetings by invitation only. They do not attend where their
individual remuneration is discussed and no director is involved
in deciding his own remuneration. The Company Secretary acts
as secretary to the Committee.
In 2010, the Committee met seven times and details of
attendance at these meetings are provided in the Corporate
Governance report on page 86.
The Committee appointed Kepler Associates as its Independent
Adviser in 2007 to provide advice to the Committee and its
individual members on all aspects of the Committee’s remit.
Kepler Associates will not undertake any work for the Company
whilst they are retained as the Committee’s Independent
Adviser. Representatives from Kepler Associates have attended
each of the Committee meetings during 2010 and will be in
attendance at all meetings unless specifically requested
otherwise by the Committee.
During the year, the Committee also received material
assistance and advice on remuneration policy from the Group’s
Human Resources Director, Alastair Imrie, and the Human
Resources Director, Remuneration and Benefits, Graham
Middleton. Dick Olver, Chairman, and Ian King, Chief Executive,
also provided advice that was of material assistance to the
Committee.
Legal advice to the Committee has been provided by Linklaters
who are appointed by the Company, and who also provided
services to the Company during the year. The Committee is
satisfied that the services provided to it by Linklaters are of a
technical nature and did not create any conflict of interest. If a
conflict of interest were to arise in the future, the Committee
would appoint separate legal advisers from those used by the
Company.
PricewaterhouseCoopers (PwC), who are appointed by the
Company and also provided services to the Company during the
year, provided detailed information on market trends and the
competitive positioning of packages. Hewitt New Bridge Street,
who are appointed by the Committee, provided advice on the
total shareholder return figures for assessing the performance
condition under the Performance Share Plan.
annual timetable of Committee aCtivities
Annual bonus
Share plans
Miscellaneous
Directors’ and EC
members’ remuneration
Quarter 1 Shareholder consultation
on remuneration review
Approve remuneration for
EC members
Quarter 2
Quarter 3 Review directors’ actual
pay and bonus for previous
year against comparator
group actuals
Set basis for annual
remuneration review
Quarter 4 Review market position
(including pensions)
Set bonus levels and share
plan grant levels
Set directors’ salaries
Approve Group
All-Employee Free Shares
Plan payments
Grant of Spring awards to
directors and executives
Review Remuneration
Committee Terms of
Reference and output of
the Remuneration
Committee performance
evaluation
Review prior year
performance against
financial and non-financial
performance. Where
applicable, agree bonus
amounts payable
Set directors’ and EC
members’ performance
targets and objectives for
current year
Review progress of
directors’ and EC members’
performance against targets
Grant of Autumn awards to
directors and executives
Review share-based reward
considering market trends,
and review status of
performance conditions,
dilution levels and usage
for following year
Agree grant policy for Spring
awards
Approve Group All-
Employee Free Shares Plan
for following year
Review Remuneration
Report for recommendation
to the Board
Review pay review for
senior executives below
the EC
Review market position of
package (including
pensions) for senior
executives below the EC
BAE Systems Annual Report 2010
97
Directors’ Report: Governance
Remuneration report continued
Activities and highlights
BAE Systems is one of the world’s largest and most
geographically diverse defence and security companies. We
operate with a clearly defined strategy to deliver sustainable
growth in value to shareholders, operating in a highly
technologically complex market, with a presence in five key
home markets. The Group faces a more challenging trading
environment as governments look for cost savings to address
budgetary pressures.
– the growth of EPS over the three-year performance period for
the 2008 awards under the long-term incentive plans was
approximately 10.6% pa. Consequently:
– the awards of matching shares granted under the Share
Matching Plan (SMP) in 2008 vest in full; and
– of the 50% of the awards of shares granted in Spring 2008
under the EPS portion of the Performance Share Plan (PSP),
94.55% vest.
Our remuneration strategy is intended to recognise this
business environment whilst fostering a Total Performance
culture at all levels of the Company, taking into account seniority
and local market practice. In addition, it reinforces our drive to
continue to embed high levels of business conduct and our
commitment to safety across the business.
The Committee is sensitive to the levels of the remuneration
packages of other employees within the Group. In some areas,
our workforce is heavily unionised. Many of our employees work
at the very leading edge of technology. We have a diverse
workforce operating in many countries. Employee remuneration
packages are therefore determined locally to meet local needs,
whilst respecting our culture and Values. In 2010, general salary
increases for our two largest employee populations in the UK
and US typically averaged 2.4% and 2.5%, respectively.
In determining the levels of executive reward, the Remuneration
Committee also continues to place considerable emphasis on
ensuring a strong link between actual remuneration received,
and achievement of our strategic and business objectives.
In 2010, our performance against targets was good. We slightly
exceeded our profit target, and exceeded our stretch cash
targets. However, our Total Shareholder Return (TSR)
performance reflects the sustained under-performance of our
share price. Our Earnings per Share (EPS) was 40.5p. We also
started to experience significant executive retention issues in
North America.
Against this performance background, the main aspects of our
remuneration policy and practice for the year were as follows:
– the Company’s TSR for the 50% of awards of shares granted
in March 2008 under the TSR portion of the PSP was below
the median position when compared against the comparator
group of 18 other defence and aerospace companies, and the
related awards accordingly lapsed;
– the structure of our annual incentive and long-term incentives
were left substantially unchanged (including the ‘clawback’
arrangements established last year) (see pages 101 and 108
for details);
– we retained the requirement for one-third of executive
directors’ annual incentives (25% for EC members and other
senior executives) to be compulsorily deferred into the SMP;
– our requirement for executive directors to build up a
shareholding of 200% of salary over time, remains unchanged.
Both the Chief Executive and Group Finance Director
comfortably exceed this level; at 31 December 2010, the
President and Chief Executive Officer of BAE Systems, Inc.
held shares representing approximately 144% of salary,
reflecting her more recent appointment; and
– we are seeking shareholder approval to introduce a Restricted
Share Plan (see page 102), principally to enable us to address
key executive retention issues for US-based executives. The
Plan would permit awards to executives in other countries, but
specific Remuneration Committee approval will be required on
each occasion. The President and Chief Executive Officer of
BAE Systems, Inc. will be included in the Plan, but other Board
members will not be included without further consultation with
shareholders.
– having been unchanged in 2009, the salaries of the Chief
Executive and Group Finance Director were increased by 3.9%
and 2.5%, respectively;
The Company’s remuneration strategy, policy and details of
executive remuneration are set out on pages 100 to 112 of this
report.
Following the announcement of the retirement of George Rose
as Group Finance Director, effective 31 March 2011, the
Committee also agreed the package for Peter Lynas on his
appointment as Group Finance Director and an executive
director of BAE Systems plc, effective 1 April 2011.
On behalf of the Remuneration Committee
Carl Symon
Remuneration Committee Chairman
– the salary of the President and Chief Executive Officer of
BAE Systems, Inc., Linda Hudson, has been increased by
12.2% to bring her nearer to market median. She was
appointed in October 2009 having been promoted to that
position from within the business. In setting her initial salary
the Remuneration Committee was aware that she would be
operating at a significantly higher level than was previously the
case, and, whilst this salary was a clear step-up from her
previous position, there was scope for future increases to
bring her closer to market median provided her performance
merited this. The increase awarded by the Remuneration
Committee recognises where her initial salary was set in 2009
and that she is performing on a level which justifies a more
market competitive package. This salary change was made
with effect from 1 January 2011;
– annual bonus payouts for the executive directors under
the annual incentive plan ranged from 69.1% to 89.1% of
maximum;
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Non-Executive Directors’ Fees
Committee report
Members
Dick Olver (Chairman)
Philip Bramwell
Linda Hudson
Ian King
Responsibilities
– Reviewing the fees payable to non-executive directors
(excluding the Chairman) and making changes to such
fees as deemed appropriate.
Dick Olver
Non-Executive Directors’
Fees Committee
Chairman
Governance
The Non-Executive Directors’ Fees Committee has delegated
authority from the Board to agree fees payable to non-executive
directors on its behalf.
Activities
The Board has approved the following guidelines to be used by
the Committee when discharging its responsibilities:
– fees shall be sufficient to attract and retain individuals with
the necessary skills, experience and knowledge required to
ensure that the Board is able to discharge its duties
effectively;
– in setting fees the Committee shall have regard to the amount
of time individual non-executive directors are required to
devote to their duties, and also the scale and complexity of the
business, and the responsibility involved;
– fees payable to non-executive directors shall be paid in cash
and shall not be performance-related; and
– non-executive directors shall not participate in the Company’s
share-based incentive schemes or pension scheme.
The Committee meets each year to consider the fees paid to the
non-executive directors. Having reviewed the increasing time
commitments expected of non-executive directors and the
market competitive positioning of existing fee levels, the
Committee agreed in January 2011 to increase the basic fee
from £66,000 to £75,000 per annum. All other fees remain
unchanged as detailed on page 113.
On behalf of the Non-Executive Directors’ Fees Committee
Dick Olver
Non-Executive Directors’ Fees Committee Chairman
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BAE Systems Annual Report 2010
99
Directors’ Report: Governance
Remuneration report continued
Remuneration strategy, policy and packages
Following the annual review in November 2010, the Committee concluded that the current remuneration strategy remains
generally appropriate, but the following changes have been introduced:
– to further emphasise the importance of business growth, order intake is being incorporated as one of the financial elements in
the annual incentive plan targets (see page 101). Other elements of the Plan remain unchanged; and
– to address retention issues principally in our North American business, shareholder approval is being sought at the AGM to
implement a Restricted Share Plan (see page 102).
Other than these changes, the Committee intends to continue with the executive remuneration policy as detailed in this report in
2011 and subsequent years for executive directors and EC members, and this policy will be flowed down to the most senior
executives within the Group globally (approximately 280) to create a consistent global approach to reward. The principles of the
remuneration strategy are applied consistently across the Group below this level, taking account of seniority and local market
practice.
The Committee will continue to consult on material changes with principal shareholders.
The Committee has considered the new UK Corporate Governance Code requirement regarding remuneration incentives being
compatible with risk policies and systems, and is satisfied that the Company is well placed to meet this requirement as profit
recognition on long-term programmes is intrinsically linked to risk reduction.
RemuneRation stRategy
RemuneRation PoliCy
The Company’s remuneration strategy is to provide a
remuneration package that:
To achieve the strategy, the remuneration policy for executive
directors and EC members is to:
– helps to attract, retain and motivate;
– set base salary at around median of the relevant market
– is aligned to shareholders’ interests;
– is competitive against the appropriate market;
competitive level;
– reward stretching superior performance with upper quartile
reward;
– encourages and supports a Total Performance culture
aligned to the achievement of the Company’s strategic
objectives;
– provide an appropriate balance between:
– short-term and long-term reward; and
– is fair and transparent; and
– fixed and variable reward
– can be applied consistently throughout the Group.
with the balance becoming more long term and more highly
geared with seniority;
– directly align short-term and long-term reward through
compulsory deferral of annual incentive into the Share
Matching Plan; and
– provide a competitive package of benefits.
elements of PaCkage
PuRPose
Base salary
Annual incentive
Share Matching Plan
Performance Share Plan
Restricted Share Plan
Pension provision
Other benefits
Global all-employee incentive plan
Recognise market value of role and individual’s skills, experience and performance.
Drive and reward annual performance of individuals, teams and the Company on both
financial and non-financial metrics, including behaviours.
Directly align short-term and long-term reward through compulsory deferral of annual
incentive into shares, and drive and reward delivery of sustained long-term EPS
performance through co-investment aligned to the interests of shareholders.
Drive and reward delivery of sustained long-term EPS and TSR performance aligned
to the interests of shareholders.
Provide long-term reward and address retention issues, through time-vesting awards
principally in the Company’s US market.
Provide competitive retirement benefits which reward long-term performance through
seniority, and loyalty through long service.
Provide competitive cost effective benefits package through leveraging the
Company’s size and scale.
Reward all employees globally for Group performance, encouraging employee share
ownership aligned to the interests of shareholders.
Appointment of new Group Finance Director
The Company announced on 10 December 2010 that George Rose would be retiring as Group Finance Director with effect from
31 March 2011 and that Peter Lynas would be appointed as Group Finance Director with effect from 1 April 2011. The salary
packages for both George Rose, the outgoing Group Finance Director, which had been agreed as part of the 2010 remuneration
review, and for Peter Lynas, the incoming Group Finance Director, which was agreed by the Committee subsequent to the 2010
remuneration review, are included in this report.
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2010 remuneration review
The 2010 review not only considered the Company’s executive remuneration packages against the market, but also the Company’s
performance to date and its corporate strategy for the next five years.
Information on the market for comparable management positions was provided by PwC so that the Committee could form a view as
to where to position the various elements of the package relative to comparable companies.
The methodology used was to construct appropriate comparator groups for the individual positions, taking account of company size,
scale of operations and breadth of role. The comparator group for the UK executive directors comprised the FTSE 50 companies
(excluding financial services and retail) with market capitalisation nearest to that of BAE Systems. The Committee believes that
using market capitalisation creates alignment between the value placed on the Company and the value placed on the executives who
manage it. The six largest companies were also excluded as were several others to arrive at a comparator group of 20 companies
(11 larger and 9 smaller) which the Committee believed appropriate for benchmarking UK executive directors’ packages.
For the President and Chief Executive Officer of BAE Systems, Inc., the comparator group was drawn from companies in the US
aerospace, defence and general industry sector, adjusted as appropriate, to produce market figures consistent with the size, scale
and relative independence of the US business, and adjusting where necessary to reflect the extra responsibility for her plc Board role.
The base salary, total cash reward (base salary plus annual incentive), total direct reward (total cash reward plus long-term
incentives) and total reward (total direct reward plus pension) were analysed at the lower quartile, median and upper quartile for the
relevant posts in the comparator group companies. This gives the Committee a view on the competitiveness of the individual
elements of the package as well as the package as a whole.
The Committee also reviewed market trends around the individual elements of remuneration to ensure that the structure of the
package stays in line with market practice. The remuneration structure overall also takes account of the performance of the
individual, the Company as a whole, and the pay and conditions of Group employees.
Overall, while the review indicated that the structure is broadly in line with the market, some minor adjustments were deemed
necessary to ensure that it remained so. In addition, the base salaries for both the Chief Executive and the President and Chief
Executive Officer of BAE Systems, Inc. were behind their respective benchmarks.
Base salary
The Committee reviewed base salaries, taking into account the current economic climate, the challenges facing the business, their
respective positions against benchmark, the pay environment for employees in general and that their salaries had been unchanged
since 2009. In particular, the salary of the President and Chief Executive Officer of BAE Systems, Inc. has been increased to
maintain the competitiveness of the package and bring her salary closer to market median. Further information on the rationale for
this increase is provided on page 98.
The annual base salary levels of executive directors with effect from 1 January 2011 are as follows:
Name
Ian King
George Rose
Linda Hudson
2010 salary
£900,000
£622,500
$900,000
2011 salary
£935,000
£638,000
$1,010,000
Increase
3.9%
2.5%
12.2%
Incentives
The Group’s strategy is set out on page 14 along with the Group Strategic Framework. This explains how the Group’s mission is
to deliver sustainable growth in shareholder value through its commitment to Total Performance – Customer Focus, Programme
Execution, Financial Performance and Responsible Behaviour. Underpinning the drive for Total Performance are the Group’s Values
– Trusted, Innovative and Bold. The Group’s strategy focuses on delivering growth in the three market segments of Services,
Electronic Systems and Platforms, in existing and new home markets, and in export markets. The six Strategic Actions, which
translate the strategy into operational plans, are underpinned by the Integrated Business Plan (IBP), which sets out a five-year
strategic and financial plan.
Each year, the Board agrees the Executive Committee’s top ten objectives which are those key to delivering the Group’s strategy.
For 2011, these are set out on page 13, and are used as the basis to set the individual objectives for the executive directors and
EC members which are agreed by the Chairman, Dick Olver, and the Committee. These then flow down to the senior leadership
team to ensure that all businesses within the Group are aligned with the overall Group strategy.
The remuneration strategy incentivises and rewards executives to deliver their contribution to the achievement of the Group’s
strategy through the combination of short-term incentives targeted at business performance, Group performance, personal
performance and leadership behaviours, and long-term incentives targeted at Group performance. To directly align short-term and
long-term reward, executive directors will be required to invest at least one-third of their net 2011 annual incentive into the SMP
when the annual incentive is paid in 2012. Further investment can be made on a voluntary basis up to a maximum investment of
half their net annual incentive, except in the case of the US executive director who will participate in the Restricted Share Plan
subject to its approval by shareholders at the 2011 AGM (further detail is provided on page 102).
Annual incentive plan
The annual incentives for 2011 continue to focus on a combination of in-year financial performance, and longer-term performance
and risk management (both business risk and reputation risk). Two-thirds is driven off in-year financial performance, and one-third
based on driving performance and improvement in business conduct and safety (reinforcing the importance of key aspects of the
Group’s corporate responsibility agenda) combined with the other non-financial objectives supporting the Group’s strategy. No
changes to this structure are proposed for 2011.
BAE Systems Annual Report 2010 101
Directors’ Report: Governance
Remuneration report continued
The financial targets are derived from the IBP, and are based on earnings and cash targets and, for 2011, also order intake. The
relative proportions of the financial targets for profit, cash and order intake are 40:40:20. These are seen as the key indicators of
both short-term and long-term financial performance and value creation, and are supported by the Company’s major shareholders.
At Group level, EPS is used whereas EBITA1 is used to measure earnings performance at a business level. To incentivise improved
phasing of cash generation throughout the year, a combination of year-end and average quarterly net cash/debt was introduced
for 2009 and 2010, and will continue for 2011. Due to the stretching nature of the plan, the Committee introduced for 2010 a
threshold paying 20% of maximum for the profit element. This will continue for 2011. The payout for on-target performance is 50%
of maximum. Payout for performance between targets is calculated on a straight-line basis.
The table below summarises the overall structure of the annual incentives for executive directors.
Performance measure
In-year financial
Business conduct and safety
Other objectives
Proportion of annual incentive
2010
66.6%
15.0%
18.4%
2011
66.7%
15.0%
18.3%
The Committee believes that the annual incentive targets for the executive directors are stretching but achievable. The structure of
the 2011 annual incentive plan for executive directors is summarised in their individual sections on pages 103 to 106.
Long-Term Incentive Plans (LTIPs)
The Company operates two LTIPs (having ceased awards of share options in 2008) – the Performance Share Plan (PSP) and the
Share Matching Plan (SMP). The structure of these plans remain unchanged. Full details of the PSP and SMP are contained on
pages 108 and 109.
The combination of the annual incentive plan, SMP and PSP provides a balance between short-term cash reward and longer-term
share-based reward as shown below. The proportion of the incentive package delivered through longer-term performance is
significantly higher at stretch payout than at on-target payout, demonstrating that the package supports the achievement of
superior long-term performance and strongly aligns the interests of executives to those of shareholders through long-term reward
being delivered in shares. The second graph shows which performance metrics are driving the value of the incentives. This shows
that, at on-target performance, the higher influence of the annual incentive means that in-year measures drive almost 40% of the
package value, with long-term EPS (which underpins the SMP and half the PSP awards) accounting for a similar proportion. But, at
stretch performance, the influence of the annual incentive is reduced, and the SMP and PSP account between them for nearly
three-quarters of the value of the incentive package, with the most important drivers of value becoming long-term EPS and share
price. This shows that achieving strong performance on the in-year measures is important but, to maximise the value of their
incentive package, executives need to drive growth in long-term EPS and share price.
PROPORTION OF CHIEF EXECUTIVE’S INCENTIVE PACKAGE
DELIVERED BY THE VARIOUS INCENTIVE PLANS (%)
PERFORMANCE DRIVERS OF CHIEF EXECUTIVE’S
INCENTIVE PACKAGE (%)
Stretch
performance
On-target
performance
Stretch
performance
On-target
performance
0
20
40
60
80
100
0
20
40
60
80
100
Proportion of incentive package (%)
Proportion of incentive package (%)
Cash bonus
Deferred bonus
SMP
PSP
In-year measures
Long-term EPS
Relative TSR
Share price
Restricted Share Plan (RSP)
Within the Company’s US peer group, our research indicates that performance-based LTIP awards only typically make up around a
third of the overall long-term incentive package for a US executive. In comparison, the BAE Systems LTIP plans are 100% based on
performance conditions, which provides much less retention value for senior US executives and can be ‘bought out’ by a competitor
for a small cost.
Our US business is a fundamentally important part of the Group, and it is essential we are able to attract and retain high calibre
staff. We do not wish to provide a completely different reward structure in the US compared to our global approach; nor will we
increase the overall value of the Inc. reward package. However, the retention issue is sufficiently serious and potentially damaging
to the business to require action.
Consequently, the Committee is proposing to introduce a time-vesting LTIP element within the overall US executive package. This
will be achieved by introducing a Restricted Share Plan (RSP) without performance conditions other than time vesting. The
Restricted Share Plan will provide 35% of the expected value of the total LTIP package, and will vest after three years. This Plan
will require the approval of shareholders at the AGM in May 2011.
The expected value of the total LTIP package for US executives including the RSP will be maintained at its current level. Subject to
shareholder approval of the RSP, this will be achieved by reducing existing LTIP award levels for participants as follows:
– removing the voluntary matching element of the SMP. This will apply to voluntary investment in the SMP in respect of the 2010
annual incentive plan payment, and onwards; and
– reducing overall PSP award levels.
Subject to shareholder approval, participants’ awards of restricted stock will be confirmed after the AGM.
1
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense.
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Whilst the Plan is primarily aimed at our US executives, the Plan would permit awards to executives in other countries, but specific
Remuneration Committee approval will be required on each occasion. The President and Chief Executive Officer of BAE Systems,
Inc. will be included in the Plan, but other Board members will not be included without further consultation with shareholders.
Personal shareholding policy
The Committee has agreed a policy whereby all executive directors are required to establish and maintain a minimum personal
shareholding equal to 200% of base salary. As a minimum, a holding equal to 100% of base salary must be achieved as quickly as
possible using shares vesting or options exercised through the executive share option schemes or long-term incentive schemes,
by using 50% of the shares that vest or 50% of the options which are exercised on each occasion. Thereafter, executive directors
are required to increase their personal shareholding gradually, on each occasion using 25% of the shares that vest or 25% of the
options exercised each year, until a personal shareholding equal to 200% of annual base salary is achieved and maintained. These
limits are reviewed periodically. A similar arrangement applies to senior executives eligible for share-based long-term incentives
with limits aligned to the levels of awards made under these plans.
Details of the directors’ personal shareholdings are shown in Table A on page 114.
Pension provision
No changes to the pension arrangements for executive directors were made in 2010. A review of UK executive pension
arrangements has been undertaken in the light of the changes announced to the taxation of members of UK registered pension
arrangements from 6 April 2011. The underlying principles for this review were that the aggregate level of benefits provided to
members under the new arrangements should be cost neutral to the Company compared to the existing arrangements. The
approach addresses tax inefficiencies arising for existing employees as a consequence of the pensions tax changes, and members
will be given the choice to remain in the current arrangements and pay the increased tax. Further detail is provided on page 111.
stRuCtuRe of individual exeCutive diReCtoRs’ PaCkages
Ian King (Chief Executive)
Base salary
Annual incentive
Maximum/on-target (% of salary)
Structure (% of salary)
Group EPS
Group cash
Order intake
Safety
Business conduct
Other objectives
Deferral into SMP
Gross match
Performance condition
Grant (% of salary)
Performance condition
SMP
PSP
Pension accrual
2011
£935,000 pa
2010
£900,000 pa
225%/112.5%
On-target
30%
30%
15%
Stretch
60%
60%
30%
Up to 16.875%
Up to 16.875%
Up to 41.25%
On-target
36%
24%
Stretch
90%
60%
Not applicable
Up to 16.875%
Up to 16.875%
Up to 41.25%
1/3 compulsory plus voluntary up to total of 50%
of net annual incentive
2:1
EPS growth of 5% – 11% pa
250%
1/2 on relative TSR against 18 other global
aerospace and defence companies, and
1/2 on EPS growth of 5% – 11% pa
1/30th of three-year final average salary from age 62
for 8% member’s contributions
The graphs below show the value of the package at on-target and stretch performance together with the proportion of the package
delivered through fixed and variable reward.
VALUE OF PACKAGE (£’000)
PROPORTION OF PACKAGE VALUE DELIVERED THROUGH
FIXED AND PERFORMANCE-RELATED REWARD (%)
Stretch
performance
On-target
performance
Stretch
performance
On-target
performance
£0
£2,000
£4,000
£6,000
£8,000 £10,000 £12,000 £14,000
0
20
40
60
80
100
Value of package (£’000)
Proportion of overall package (%)
Base salary
Pension
Cash bonus
Deferred bonus
SMP
PSP
Base salary
Pension
Cash bonus
Deferred bonus
SMP
PSP
BAE Systems Annual Report 2010 103
Directors’ Report: Governance
Remuneration report continued
stRuCtuRe of individual exeCutive diReCtoRs’ PaCkages continued
George Rose (Group Finance Director)
Base salary
Annual incentive
Maximum/on-target (% of salary)
Structure (% of salary)
Group EPS
Group cash
Order intake
Safety
Business conduct
Other objectives
Deferral into SMP
Gross match
Performance condition
Grant (% of salary)
Performance condition
SMP
PSP
Pension accrual
2011*
£638,000 pa
2010
£622,500 pa
150%/75%
On-target
20%
20%
10%
Stretch
40%
40%
20%
Up to 11.25%
Up to 11.25%
Up to 27.5%
On-target
24%
16%
Stretch
60%
40%
Not applicable
Up to 11.25%
Up to 11.25%
Up to 27.5%
1/3 compulsory plus voluntary up to total of 50%
of net annual incentive
2:1
EPS growth of 5% – 11% pa
250%
1/2 on relative TSR against 18 other global
aerospace and defence companies, and
1/2 on EPS growth of 5% – 11% pa
1/30th of three-year final average salary from age 60
for 9.29% member’s contributions
The graphs below show the value of the package at on-target and stretch performance together with the proportion of the package
delivered through fixed and variable reward.
VALUE OF PACKAGE (£’000)
PROPORTION OF PACKAGE VALUE DELIVERED THROUGH
FIXED AND PERFORMANCE-RELATED REWARD (%)
Stretch
performance
On-target
performance
Stretch
performance
On-target
performance
£0
£1,000
£2,000
£3,000
£4,000
£5,000
£6,000 £7,000
0
20
40
60
80
100
Value of package (£’000)
Proportion of overall package (%)
Base salary
Pension
Cash bonus
Deferred bonus
SMP
PSP
Base salary
Pension
Cash bonus
Deferred bonus
SMP
PSP
*
As announced by the Company on 10 December 2010, George Rose will retire with effect from 31 March 2011. The 2011 salary package details and graphs above set out the position had he
continued in his role throughout 2011. Details of his retirement arrangements are provided on page 112.
104 www.baesystems.com
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stRuCtuRe of individual exeCutive diReCtoRs’ PaCkages continued
Linda Hudson (President and Chief Executive Officer of BAE Systems, Inc.)
Base salary
Annual incentive
2011
$1,010,000 pa
2010
$900,000 pa
225%/112.5%
Maximum/on-target (% of salary)
Structure (% of salary)
Group EPS
Group cash
Order intake
Business EBITA1
Business cash
Business order intake
Safety
Business conduct
Other objectives
Deferral into SMP
SMP
PSP
Gross match
Performance condition
Grant (% of salary)
Performance condition
RSP
Pension accrual
% of salary
On-target
10%
10%
5%
20%
20%
10%
Stretch
20%
20%
10%
40%
40%
20%
Up to 16.875%
Up to 16.875%
Up to 41.25%
Compulsory 1/3 of net annual
incentive. No voluntary
element
On-target
12%
8%
Stretch
30%
20%
Not applicable
24%
16%
60%
40%
Not applicable
Up to 16.875%
Up to 16.875%
Up to 41.25%
1/3 compulsory plus voluntary
up to total of 50%
of net annual incentive*
2:1
EPS growth of 5% – 11% pa
160%
250%
1/2 on relative TSR against 18 other global
aerospace and defence companies, and
1/2 on EPS growth of 5% – 11% pa
65%
Not applicable
Cash sum at retirement of 14.1% of career pay
(salary plus bonus up to maximum of 150% of salary)
for a contribution of 1.5% of pay,
plus an 85% Company 401(k) match on contributions
to a maximum of 6% of salary
*
Linda Hudson will be granted an award under the RSP in 2011, subject to shareholder approval of the RSP at the 2011 AGM, and will thus not be permitted to make any voluntary investment in
the SMP in 2011 in relation to her 2010 net annual incentive payment.
The graphs below show the value of the package at on-target and stretch performance together with the proportion of the package
delivered through fixed and variable reward.
VALUE OF PACKAGE ($’000)
PROPORTION OF PACKAGE VALUE DELIVERED THROUGH
FIXED AND PERFORMANCE-RELATED REWARD (%)
Stretch
performance
On-target
performance
Stretch
performance
On-target
performance
$0
$2,000
$4,000
$6,000
$8,000
$10,000 $12,000
0
20
40
60
80
100
Value of package ($’000)
Proportion of overall package (%)
Base salary
Pension
Cash bonus
Deferred bonus
SMP
PSP
RSP
Base salary
Pension
Cash bonus
Deferred bonus
SMP
PSP
RSP
1
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense.
BAE Systems Annual Report 2010 105
Directors’ Report: Governance
Remuneration report continued
stRuCtuRe of individual exeCutive diReCtoRs’ PaCkages continued
Peter Lynas (Group Finance Director designate)
Base salary
Annual incentive
On-target/maximum (% of salary)
Structure (% of salary)
Group EPS
Group cash
Order intake
Safety
Business conduct
Other objectives
Deferral into SMP
Gross match
Performance condition
Grant (% of salary)
Performance condition
SMP
PSP
Pension accrual
Effective 1 April 2011
£520,000 pa
75%/150%
On-target
20%
20%
10%
Stretch
40%
40%
20%
Up to 11.25%
Up to 11.25%
Up to 27.5%
1/3 compulsory plus voluntary up to total of 50%
of net annual incentive
2:1
EPS growth of 5% – 11% pa
250%
1/2 on relative TSR against 18 other global
aerospace and defence companies, and
1/2 on EPS growth of 5% – 11% pa
1/30th of three-year final average salary from age 62
for 8% member’s contributions
The graphs below show the value of the package at on-target and stretch performance together with the proportion of the package
delivered through fixed and variable reward as if Peter Lynas had been in post as Group Finance Director with effect from
1 January 2011.
VALUE OF PACKAGE (£’000)
PROPORTION OF PACKAGE VALUE DELIVERED THROUGH
FIXED AND PERFORMANCE-RELATED REWARD (%)
Stretch
performance
On-target
performance
Stretch
performance
On-target
performance
£0
£1,000
£2,000
£3,000
£4,000
£5,000
£6,000
0
20
40
60
80
100
Value of package (£’000)
Proportion of overall package (%)
Base salary
Pension
Cash bonus
Deferred bonus
SMP
PSP
Base salary
Pension
Cash bonus
Deferred bonus
SMP
PSP
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Performance in 2010
The structure of the 2010 annual incentive plan was set out in last year’s Remuneration report and is summarised in the individual
sections for each of the executive directors on pages 103 to 106 of this report.
Financial performance: 2010 was a robust year in terms of financial performance following the Group’s strong performance of
recent years. At the Group level, EPS performance was above threshold, but well short of stretch performance. Stretch performance
was achieved on both cash targets. At the operating group level, Programmes & Support exceeded its profit target but did not hit its
stretch target, and achieved its stretch cash targets. International and BAE Systems, Inc. achieved stretch on all their financial
targets.
Non-financial performance: Page 12 sets out the Executive Committee’s top ten objectives for 2010 and the assessment of
performance against these, whilst page 46 provides more detailed information on the performance against the specific objectives
relating to business conduct and safety.
business conduct: The Group targeted the successful implementation of the suite of revised policies and processes which had
been updated as part of the Woolf implementation programme. All businesses are on target with their stated plans.
safety: The Group has continued to drive improvement of safety management, using its Safety Maturity Matrix (SMM) as the
mechanism to measure and drive performance. Sites with more than 150 personnel (other than those acquired during 2010) have
now progressed to Level 4 on the SMM. In addition, the Group achieved an overall 31% reduction in the Lost Work Day Case Rate,
exceeding a target 20% reduction, compared with performance during 2009. Some individual businesses did not achieve this target.
other objectives: Of the remaining top ten Group objectives most have been successfully achieved, giving a result of 90% of
maximum. This sets the starting point with further adjustment, up or down, depending on the assessment of overall performance
and leadership behavioural performance of the individual executive.
Accordingly, the Committee determined the payout under the 2010 annual incentive plan as follows:
2010 annual incentive payout
% of stretch
% of base salary
Amount
In addition:
Ian King
71.0%
159.7%
£1,437,075
Linda Hudson
89.1%
200.5%
$1,804,275
George Rose
69.1%
103.7%
£645,533
– the growth in EPS over the three years to 2010 was approximately 10.6% pa. Consequently:
– the awards of matching shares granted under the SMP in 2008 vest in full; and
– of the 50% of the awards of shares granted in Spring 2008 under the EPS portion of the PSP, 94.55% vest.
– the Company’s TSR for the 50% of awards of shares granted in March 2008 under the TSR portion of the PSP was below the
median position when compared against the comparator group of 18 other defence and aerospace companies, and the related
awards accordingly lapsed.
VALUE AT 31 DECEMBER 2010 OF £100 INVESTMENT
AT 31 DECEMBER 2005 (£)
VALUE AT 31 DECEMBER 2010 OF £100 INVESTMENT (£)
£200
£150
£100
£50
£0
£200
£150
£100
£50
£0
2005
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
BAE Systems
FTSE 100
BAE Systems
FTSE 100
Aerospace and defence comparator group
UK executive director pay review comparator group
This graph, which has been produced in accordance with the requirements of Schedule 8 of the
Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008,
shows the value by 31 December 2010, on a total shareholder return basis, of £100 invested in
BAE Systems on 31 December 2005 compared with the value of £100 invested in the FTSE 100
index. The FTSE 100 is considered to be an appropriate comparator for this purpose as it is a
broad equity index. As BAE Systems is a constituent member of the FTSE 100, it was deemed to
be the most appropriate general UK equity index.
The graph above shows the value shareholders have achieved by their investment in
BAE Systems over recent years as compared to (i) the FTSE 100 index; (ii) the companies
forming the sectoral peer group for the Performance Share Plan; and (iii) the companies forming
the comparator pay group for the 2010 executive pay review. The graph depicts the value for
BAE Systems and the comparators at the end of 2010 of a single £100 investment made at the
beginning of each of the last five years.
BAE Systems Annual Report 2010 107
Directors’ Report: Governance
Remuneration report continued
Summary of Long-Term Incentive Plans
Plan provisions
Performance conditions for grants of awards to be made under the Performance Share Plan and the Share Matching Plan in 2011
are detailed below. Performance conditions for grants of awards made prior to 2011 are detailed on pages 115 and 116.
Clawback arrangements operate in respect of these two plans from the 2010 awards onwards. The arrangements are intended to
cover situations, for example, where results are restated or otherwise turn out to be materially inaccurate or where the executive’s
employment can be terminated for cause.
PeRfoRmanCe shaRe Plan (PsP)
Key features for PSP awards in 2011:
– awards of shares are granted based on a percentage of salary and share price at the date of grant;
– the shares are subject to satisfaction of three-year performance conditions;
– half the PSP award will be based on a Total Shareholder Return (TSR) performance condition (PSPTSR) and the other half on an
Earnings per Share (PSPEPS) performance condition;
– in addition, there is a further test on the PSPTSR element to ensure that the TSR performance is supported by the underlying
performance of the Company;
– shares under award after satisfaction of the performance condition vest in three equal tranches at the end of years three, four
and five; and
– shares under award attract dividends prior to vesting.
how the PsP oPeRates
50% of award based on TSR
growth relative to a sectoral comparator
group of companies over the three-year
performance period, subject to a
secondary financial measure
PSP
award
50% of award based on actual
annual EPS growth over the
three-year performance period
PSP award
paid in shares
(amount varying
according to
performance
achieved)
One-third available immediately
at the end of year three
The second third available
at the end of year four
The final
third available
at the end of
year five
Year
0
Year
1
Year
2
Year
3
Year
3
Year
4
Year
5
Year
6
Year
7
For the US executives, the awards are automatically delivered at the end of years three, four and five, subject to the performance condition achieved.
PeRfoRmanCe Condition – PsPePs
The proportion of the award capable of exercise is determined
by the rate of annual actual EPS growth over the three-year
performance period, with nil vesting at annual actual EPS growth
of 5% and 100% vesting at 11% growth as set out opposite (15%
to 33% growth over three years).
The rationale for the EPS performance measure is that major
investors consider EPS to be a key indicator of long-term
financial performance and value creation.
Summary of EPS performance to 31 December 2010
2010 EPS was 40.5p, and is approximately 10.6% greater (per
annum) than the 2007 EPS of 30.7p. This is near the top of the
performance range of 5% to 11% growth per annum. Accordingly,
94.55% of the EPS portion of the Spring 2008 PSP awards vest.
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3
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5
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9
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11
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Annual actual EPS growth (%)
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PeRfoRmanCe Condition – PsPtsR
The proportion of the award capable of exercise determined by:
(i) the Company’s TSR (share price growth plus dividends)
ranking relative to a comparator group of 18 other
international defence and aerospace companies as shown in
the table opposite. There has been no change to the
comparator group. None of the shares vest if the Company’s
TSR is outside the top 50% of TSRs achieved by the sectoral
comparator group and 100% vest if it is in the top quintile
(i.e. top 20%) as set out opposite; and
(ii) whether there has been a sustained improvement in the
Company’s underlying financial performance and whether it is
appropriate to release some or all of the awards. In taking
such a view, the Committee may consider (but not exclusively)
the following financial metrics: net cash/debt; EBITA1; order
book; turnover; risk; and underlying project performance.
The rationale for TSR performance measures is that major
investors regard TSR as an important indication of both
earnings and capital growth relative to other major companies in
the same sector and to ensure that awards only vest if there has
been a clear improvement in the Company’s performance over
the relevant period.
General Dynamics
GKN
PSPTSR – sectoral peer group
Boeing
Cobham
Dassault Aviation Goodrich
EADS
Embraer PN
Finmeccanica
Honeywell International Smiths Group
Lockheed Martin
Northrop Grumman
Thales
United Technologies
Raytheon
Rockwell Collins
Rolls-Royce
PeRfoRmanCe Condition – PsPtsR
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%
100
75
50
25
0
0
10
20
30
40
50
60
70
80
90
100
Performance relative to comparator group (percentile)
summaRy of tsR PeRfoRmanCe to 31 deCembeR 2010
TSR PERFORMANCE UNDER THE PERFORMANCE SHARE PLAN
0.0%
vesting
0.0%
vesting
0.0%
vesting
0.0%
vesting
0.0%
vesting
0.0%
vesting
0.0%
vesting
0.0%
vesting
The chart opposite summarises the position on the TSR
element for all outstanding awards under the PSP as at
31 December 2010.
The coloured box shows the range of TSR required for 25%
vesting to full vesting, and the diamond shows BAE Systems’
TSR. The proportion that would vest is shown in the boxes at the
top of the chart.
This shows that the TSR portion of the 2008 PSP award lapsed
as the Company’s TSR return was below that of the comparator
group.
)
%
(
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75
50
25
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-25
-50
shaRe matChing Plan (smP)
PeRfoRmanCe Condition – smP 2011
26 March
2008
2 April
2008
8 September
2008
10 November
2008
24 March
2009
7 September
2009
23 March
2010
7 September
2010
Median to top 20% TSR
BAE Systems’ TSR
Key features for grants of awards in 2011:
– stand-alone share investment plan with the investment linked
to the award under the annual incentive plan;
– participants are granted a conditional award of matching shares
against the gross value of the annual incentive invested;
2:1
1:1
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– matching shares attract dividends during the three-year
deferral period, released on vesting of any matching shares;
0
– executive directors are required to invest one-third of their
2010 net annual incentive into the SMP; and
– maximum level of investment will be 50% of the net annual
incentive.
Match and performance condition
– Nil match for actual EPS growth of 5% per annum (with nil
vesting below that level) increasing uniformly to a 2:1 match at
11% per annum growth (15% to 33% growth over three years).
– Rationale for performance measure: major investors consider
EPS to be a key indicator of long-term financial performance
and value creation.
0
1
2
3
4
5
6
7
8
9
10
11
12
Annual EPS growth (%)
2008 SMP award
The 2008 SMP awards were based on nil match for actual EPS
growth of 5% per annum increasing uniformly to a 1:1 match at
8% per annum growth. 2010 EPS was 40.5p, and is
approximately 10.6% greater (per annum) than the 2007 EPS
of 30.7p. Accordingly, the 2008 SMP award vests in full.
1
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense.
BAE Systems Annual Report 2010 109
Directors’ Report: Governance
Remuneration report continued
Restricted Share Plan (RSP)*
Key features of awards in 2011:
– conditional awards of shares are granted based on a percentage of salary and share price at the date of grant;
– the shares are subject only to the condition that the participant remains employed by the Group at the end of the vesting date
(three years after the award date); and
– shares under award attract dividends prior to vesting.
The RSP is not subject to a performance condition as it is designed to address retention issues principally in the US, as detailed on
page 102. Clawback arrangements will operate in respect of this Plan.
*
Introduction of the RSP is subject to shareholder approval at the 2011 AGM.
Share Incentive Plan (SIP)
During 2010, the UK executive directors were eligible to participate in the all-employee free shares element of the Share Incentive
Plan. As a result of the Company’s performance in 2010, all eligible employees (including the UK executive directors) will be entitled
to receive shares worth £391.50. A similar arrangement operates for non-UK employees on a cash or shares basis depending on
local tax and security laws.
The Company operates a share purchase arrangement (Partnership Shares) under the Share Incentive Plan. Under this
arrangement, UK-based employees (including executive directors) may purchase ordinary shares in BAE Systems by either monthly
investments of between £10 and £125 a month, or lump sum investments of between £10 and £1,500 in a tax year, both limited to
10% of salary if less. The Partnership Shares attract matching shares. As the plan is an all-employee plan, the matching shares are
not subject to performance conditions in accordance with legislation. One free matching share is awarded for each Partnership
Share up to a maximum of £63 per month.
Dividends paid in respect of the shares in the Share Incentive Plan for UK-based employees are reinvested as Dividend Shares.
Share usage for employee share schemes
The Committee has agreed that, in respect of new issue or
treasury shares, shares representing no more than 1% (and no
more than 0.5% for the executive schemes) of the Company’s
issued share capital will be used in any one financial year for
the grant of incentives under all of the Company’s employee
share schemes. The table opposite sets out the available
dilution capacity for the Company’s employee share schemes
on this basis.
The Company currently intends to use new issue shares to
satisfy future share awards under the executive long-term
incentive plans up to the 0.5% annual dilution limit, and to use
treasury shares to satisfy awards of free shares and matching
shares under the all-employee Share Incentive Plan. For
outstanding options it is intended that new issue shares will
be utilised for the Executive Share Option Plan.
Total issued share capital as at 31 December 2010
All schemes:
10% in any consecutive years
Remaining headroom
Executive schemes:
5% in any consecutive ten years
Remaining headroom
Number
of shares
3,587m
358.7m
212.8m
179.4m
90.6m
Post-retirement benefits
uk pension benefits
UK executive directors are members of the BAE Systems Executive Pension Scheme (the ExPS) and members of the underlying
employee pension plans. As such, they are subject to the same contribution rates payable by employees of the underlying plans,
and the benefit changes introduced in 2006 for post-April 2006 service including the introduction of the Longevity Adjustment
Factor, a reduction in the maximum level of pension increases and a change in the definition of Pensionable Pay.
The ExPS tops up the underlying employee plan to provide a target benefit for executive directors payable from normal retirement
age of 1/30th of Final Pensionable Pay (FPP) for each year of ExPS pensionable service (subject to a maximum of two-thirds of FPP).
FPP is defined as annual base salary averaged over the last 12 months prior to leaving service in respect of service accrued to 5
April 2006 and 36 months prior to leaving in respect of service from 6 April 2006. The ExPS also provides a lump sum death-in-
service benefit equal to four times base salary at date of death, and a spouse’s death-in-service pension equal to two-thirds of the
prospective pension at normal retirement age. Children’s allowances are also payable, usually up to the age of 18. Spouses’
pensions and children’s allowances are also payable upon death in retirement and death after leaving the Company’s employment
with a deferred pension. Once in payment, pensions are increased annually by the rise in the Retail Price Index subject to a
maximum increase of 5% per year in respect of pre-6 April 2006 service and 2.5% per year in respect of service from 6 April 2006.
As a result of the 2006 age discrimination legislation, executive directors’ default retirement age is 65 but they retain any previous
rights they had to retire and draw their pensions without actuarial reduction for early payment at an earlier age.
Following the changes made to take account of the Pensions Simplification tax changes which came into effect from April 2006, UK
executives reaching the Lifetime Allowance (LTA) were given a number of choices as previously reported. These were:
– remain in the pension scheme and pay any additional tax charge; or
– opt out of the pension scheme (and so earn no further pension benefits in respect of future service) and instead receive a taxable
salary supplement. This supplement will be 30% of salary and 20% of salary for those senior executives with a two-thirds salary
target after at least 20 years’ and 30 years’ service, respectively; or
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– restrict scheme benefits to the value of the LTA with the remainder being provided directly from the Company as an unfunded
promise. At retirement, the unfunded Company benefits can be either taken as pension or commuted in full for a taxable lump sum.
The Committee reviews these arrangements each year in the light of developing market practice, and believes they remain
appropriate as they provide executives with competitive pension benefits and choices for dealing with the LTA which may better suit
their needs whilst being broadly cost neutral to the Company, are in line with market practice and do not compensate executives for
changes in taxation.
During the year, an additional review of UK executive pension arrangements has been undertaken in the light of the changes
announced to the taxation of members of UK registered pension arrangements from 6 April 2011. The underlying principles for this
review were that the aggregate level of benefits provided to members should continue to be cost neutral to the Company.
The review concluded that the new arrangements should be based on the Company’s registered pension schemes and that, in
appropriate circumstances, the Company will continue to have the option to offer an unfunded pension promise so as to mitigate
the impact of the Lifetime Allowance (introduced in 2006) and the impact of the reduced Annual Allowance with effect from 6 April
2011. This new arrangement addresses tax-inefficiencies arising for existing employees as a consequence of the pension tax
changes although members will be given the choice to remain in the current arrangement and pay the increased tax. The
Committee has decided that in cases where the Company is to pay an unfunded promise, executives will be given the choice to
commute some or all of the benefit for a taxable lump sum, or take it as pension.
Ian King, George Rose (who retires from the Company on 31 March 2011) and Peter Lynas already have an unfunded promise from
the Company arising from the 2006 changes; for Ian King and Peter Lynas, this will be extended to cover the reduced Annual
Allowance at no additional cost to the Company.
Ian King and Peter Lynas (Group Finance Director designate) are both members of the BAE Systems 2000 Pension Plan (the 2000
Plan), applicable to former employees of Marconi Electronic Systems (MES), and members of the ExPS with a normal retirement
age of 62. The 2000 Plan provides a pension of 1/50th of Final Pensionable Earnings (FPE) for each year of pensionable service,
payable from a normal retirement age of 65 and members pay contributions of 8% of Pensionable Earnings. FPE under the 2000
Plan is the best consecutive three-year average of base salary and bonus in the ten Plan Years prior to leaving, less an offset for
State pensions. The Company decided in 2006 to limit pensionable bonuses in the 2000 Plan in the 2006/07 Plan Year to 20% of
base salary and to 10% of base salary for the 2007/08 Plan Year and thereafter. However, there is a guarantee that the FPE figure
for benefits in respect of service prior to 6 April 2007 will not be less than the FPE figure at 5 April 2007 to ensure that employees
do not lose the benefit of contributions paid on past bonuses. Ian King and Peter Lynas joined the ExPS in 1999 following the BAe/
MES merger. Therefore their individual total pensions are the sum of their 2000 Plan benefits plus the top up from the ExPS.
George Rose is a member of the BAE Systems Pension Scheme paying contributions of 9.29% of base salary, and is a member of
the ExPS with a normal retirement age of 60. George Rose was affected by the previously applicable Inland Revenue earnings cap
on approved pensions and has an unapproved (i.e. non-tax qualified) pension arrangement to top up his benefits from the approved
schemes. This was designed so that the total pension from all sources would be broadly in line with the pension he would have
received from the Group pension schemes had he not been subject to the earnings cap. The Pension Simplification tax changes
allowed the flexibility to remove the earnings cap for George Rose in respect of service from April 2006, although some of his
benefits will remain to be provided by means of an unfunded promise from the Company. No further contributions will be paid into
his funded unapproved top up arrangement.
On leaving the Company, George Rose has been granted consent from the Company to early retirement and his pension benefits
will therefore become payable from 1 April 2011, one year early. His pension is subject to the normal actuarial reduction for early
payment that would be applied to any other member of the Executive Pension Scheme in these circumstances.
us pension benefits
Linda Hudson is a member of the 2006 Plan and a Non-Qualified Plan which provide a cash sum at retirement equal to a percentage
of career average pay (salary plus bonus subject to a maximum bonus of 150% of salary). The cash accrual rate of the combined
plans from 1 January 2010 is 14.1% of career average pay. Executive directors pay contributions at the same rates as other
employees in the plan, being 1.5% of earnings. Linda Hudson also receives a company match on her contributions to her 401(k)
plan up to a maximum contribution of 6% of salary, up to regulatory limits ($245,000 in 2010). From 1 January 2010, the company
match was 85%.
Details of post-retirement benefits for each of the executive directors who served during 2010 are shown in Table D on page 119
and are calculated in accordance with the requirements of Schedule 8 of the Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008.
Other benefits
Other benefits provided to executive directors include a car allowance, the private use of a chauffeur-driven car and a cash
allowance for medical examination.
On his appointment as Group Finance Director on 1 April 2011, Peter Lynas will be provided with Company support to establish a
second home in London as the Committee believed this to be a more cost-effective option for the Company than requiring full
relocation of his principal residence from outside London. This support is in accordance with Company policy, and consists of a
lump sum of £22,200, together with a monthly allowance totalling £33,300 in year one declining on a uniform basis to £6,660 in
year five (such monthly allowances over the five-year period totalling £99,900), and zero thereafter. Clawback provisions operate
during the first two years of this arrangement whereby he would be required to repay these monies on a pro-rata basis should he
leave the Company in certain circumstances, e.g. resignation or termination.
BAE Systems Annual Report 2010 111
Directors’ Report: Governance
Remuneration report continued
Executive directors’ service contracts
It is the Committee’s policy that executive directors should normally have service contracts that provide for the Company to give the
individual 12 months’ notice of termination. This policy has been chosen because it provides a reasonable balance between the
need to retain the services of key individuals and the need to limit the liabilities of the Company in the event of the termination of a
contract. The executive directors have service contracts with Group companies and details of these are shown below.
Linda Hudson
Ian King
George Rose
Peter Lynas
Date of contract
26 October 2009 (amended 8 January 2010)
27 June 2008
16 November 1998 (amended 3 December 1999,
15 January 2004 and 17 October 2005)
16 February 2011 (effective 1 April 2011)
Unexpired term
31 December 2011*
No fixed term
No fixed term – ends
31 March 2011
No fixed term
Notice period
90 days either party
12 months either party
12 months from the Company,
6 months from the individual
12 months either party
*
Subject to automatic renewal for one-year periods each year unless either party gives notice of non-renewal.
In the event of the termination of an executive director’s contract it is the Committee’s policy to seek to limit any payment made in
lieu of notice to a payment equal to the amount of one year’s base salary. The service contracts for two of the executive directors
(Ian King and George Rose), and that for Peter Lynas which comes into effect on 1 April 2011, contain specific provisions to the
effect that the Company has the right to pay a sum equivalent to 12-months’ salary in lieu of notice.
Linda Hudson’s contract of employment automatically renews for one-year periods from 31 December each year, unless one party
gives notice of non-renewal. Separately, there is a 90-day termination provision. If the employment is (a) terminated by the Company
(other than for cause as defined in the contract or in the event it is not extended following her 65th birthday) or (b) she resigns for a
‘Good Reason’ (as defined in her contract), she is entitled to a termination payment equal to (i) one year’s base salary, (ii) a
pro-rated bonus for the relevant financial year, and (iii) the continuation of 18-months’ medical benefits, plus a further 18-months’
subsidy of a portion of the premiums (or a cash payment in lieu of this benefit).
George Rose will retire from the Company, and as a director, with effect from 31 March 2011. No termination payments will be
made. All outstanding long-term incentive awards and share options will vest in accordance with the rules of the respective share
plans, i.e. subject to the attainment of the related performance conditions and pro-rating in accordance with the length of his
service against the relevant performance period. He will not be required to defer one-third of his 2010 annual incentive, payable in
2011, into the SMP. He will receive a normal early retirement pension as described on page 111.
No executive director has provisions in his or her service contract that relate to a change of control of the Company (and neither
does the Chairman nor the non-executive directors in their letters of appointment).
Policy on external board appointments
The long-standing policy of allowing executive directors to hold external non-BAE Systems-related non-executive directorships with
the prior approval of the Committee will continue. The Committee considers that external directorships provide the Company’s
senior executives with valuable experience that is of benefit to BAE Systems. It is also considered appropriate for BAE Systems to
contribute to the pool of non-executive expertise available for the benefit of the wider business community, thereby reciprocating
the benefit that it in turn has received from other organisations which have permitted members of their senior management teams
to serve on the BAE Systems Board. The Committee believes that it is reasonable for the individual executive director to retain any
fees received from such appointments given the additional personal responsibility that this entails. Such fees retained by
executive directors in 2010 were as follows: Ian King £43,333 in respect of his non-executive directorship of Rotork plc and
George Rose £78,500 in respect of his non-executive directorship of National Grid plc.
Chairman’s appointment, term and fees
Dick Olver was appointed Chairman on 1 July 2004. His appointment was for an initial fixed three-year term with effect from 17 May
2004 (the date that he was appointed to the Board as a non-executive director) and was subsequently extended in 2007 for a
second term of three years to 16 May 2010. Following the approval of the Board under the chairmanship of Sir Peter Mason, Senior
Independent Director, it was extended again in 2009 for a third term to 16 May 2013 unless terminated earlier in accordance with
the Articles of Association or with either party giving the other not less than six months’ prior written notice. The Chairman’s
appointment is documented in a letter of appointment which is not a contract of employment and he is required to devote no fewer
than two days a week to his duties as Chairman. His appointment as Chairman will automatically terminate if he ceases to be a
director of the Company. His fee, which was set by the Committee at £600,000 per annum for the duration of his second three-year
term, was reviewed in 2010 and the Committee decided that his fee should remain unchanged at that time. His current fee will be
subject to review in 2011.
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Non-executive directors’ appointment, term and fees
The non-executive directors do not have service contracts but do have letters of appointment detailing the basis of their
appointment. The dates of their original appointment were as follows:
Non-executive director
Paul Anderson
Harriet Green
Michael Hartnall
Sir Peter Mason
Roberto Quarta
Nick Rose
Carl Symon
Ravi Uppal
Date of appointment
08.10.2009
01.11.2010
10.06.2003
22.01.2003
07.09.2005
08.02.2010
11.06.2008
02.04.2008
Expiry of current term*
07.10.2012
31.10.2013
09.06.2012
21.01.2012
06.09.2011
07.02.2013
10.06.2011
01.04.2011
*
Subject to re-election at the AGM following their appointment and subsequently at intervals of no more than three years in accordance with the Company’s Articles of Association.
The non-executive directors are normally appointed for two consecutive three-year terms subject to review after the end of the
first three-year period and with any third term of three years being subject to rigorous review and taking into account the need
progressively to refresh the Board. They do not have periods of notice and the Company has no obligation to pay compensation
when their appointment terminates. Under the Company’s Articles of Association, they are subject to re-election at the Annual
General Meeting (AGM) following their appointment and subsequently at intervals of no more than three years. Having completed
a three-year term of appointment, Andy Inglis retired from the Board on 9 July 2010 having originally been appointed to the Board
on 13 June 2007. Phil Carroll, who had originally been appointed to the Board on 7 September 2005, also retired from the Board
on 5 May 2010 on the expiry of his term. Ravi Uppal will retire from the Board at the end of his current term on 1 April 2011.
In compliance with the new UK Corporate Governance Code, all members of the Board will submit themselves for re-election on
an annual basis from the 2011 AGM onwards.
Non-executive directors are proposed by the Nominations Committee and are appointed by the Board on the basis of their
experience to provide independent judgement on issues of strategy, performance, resources and standards of conduct.
Following publication of the new UK Corporate Governance Code in 2010, the time commitment expectations for non-executive
directors were reviewed and, with their agreement, their Letters of Appointment were amended to reflect that they need to commit
approximately two days for each of the Board meetings scheduled during the year, to cover attendance and preparation for the
meeting. Additional time commitments will include attending scheduled Board committee meetings, strategy review meetings and
ad hoc meetings of the Board (or sub-committees of the Board) that may be called from time to time. The non-executive directors
are aware that it is not possible to be specific as to exact time commitments as this will vary according to the nature of the matters
that the Board is required to deal with at any point in time. Newly appointed non-executive directors will also have to dedicate
additional time to induction activities. The level of their fees is set by the Non-Executive Directors’ Fees Committee to reflect this
time commitment and responsibility, and after reviewing practice in other comparable companies. Having undertaken its review in
January 2011, the Committee decided that the non-executive directors’ fees for 2011 will be as follows:
Base fee
Additional fee for chairing committees:
Audit Committee
Corporate Responsibility Committee
Remuneration Committee
Additional fee for Senior Independent Director
Travel allowance (per meeting)*
2010 fee
£66,000
£20,000
£20,000
£20,000
£20,000
£4,000
2011 fee
£75,000
£20,000
£20,000
£20,000
£20,000
£4,000
*
The travel allowance of £4,000 per meeting is paid on each occasion that a non-executive director’s attendance at a Board meeting necessitates air travel of more than five hours (one-way) to
the meeting location, subject to a maximum of six travel allowances per year.
The table below summarises the fee structure for 2010 and 2011:
Non-executive director
Chairman Audit Committee
Chairman Corporate Responsibility Committee
Chairman Remuneration Committee
Senior Independent Director
Other non-executive directors
*
Excludes the travel allowance of £4,000 per meeting referred to above.
On behalf of the Board
Dick Olver Chairman
16 February 2011
2010 fee*
£86,000
£86,000
£86,000
£86,000
£66,000
2011 fee*
£95,000
£95,000
£95,000
£95,000
£75,000
BAE Systems Annual Report 2010 113
Directors’ Report: Governance
Remuneration report continued
Tabular information on directors’ shareholdings, share-based incentives, emoluments
and pensions
table a: diReCtoRs’ inteRests
Share
Matching
Plan
–
–
–
99,908
As at 1 January 2010*
Executive
Share
Ordinary
Option Plan
shares
–
–
–
–
–
20,000
224,957
133,740
678,327 1,132,008
–
–
–
369,554
–
–
–
25,283
40,000
–
806,114
–
10,000
–
Performance
Share Plan
–
–
–
390,549
527,437 1,325,953
–
–
–
951,739
–
–
–
–
–
–
227,699
–
–
–
P M Anderson
H Green1
M J Hartnall
L P Hudson
I G King
Sir Peter Mason
R L Olver
R Quarta
G W Rose
N C Rose2
C G Symon
R K Uppal
As at 31 December 2010
Executive
Share
Ordinary
Option Plan
shares
–
10,000
–
–
–
20,000
253,390
133,740
873,422 1,132,008
–
–
–
369,554
–
–
–
25,283
40,000
–
859,694
55,000
10,000
–
Share
Performance
Matching
Share Plan
Plan
–
–
–
–
–
–
196,291
685,355
912,728 1,712,771
–
–
–
357,099 1,132,368
–
–
–
–
–
–
–
–
–
*
1
2
or upon appointment.
Appointed as a director on 1 November 2010.
Appointed as a director on 8 February 2010.
The table above gives details of the interests in ordinary shares in BAE Systems plc held by directors and their connected persons
for those individuals who were directors of the Company as at 31 December 2010. There have been no changes in the interests
of the current directors listed in the table above between 31 December 2010 and 16 February 2011 with the exception of the
interests in the ordinary shares of Ian King and George Rose who have acquired an additional 107 and 106 ordinary shares,
respectively, since 31 December 2010 under the partnership and matching shares elements of the Share Incentive Plan so that
their beneficial shareholdings at the date of this report stood at 873,529 and 859,800, respectively.
The Company’s register of directors’ interests (which is open to inspection) contains full details of directors’ share interests.
Information subject to audit
The Auditors are required to report on the information contained in Tables B, C and D on pages 115 to 119.
114 www.baesystems.com
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table b: shaRe oPtions and long-teRm inCentive Plan (ltiP) awaRds – ian king
Share
options
PSPTSR
PSPTSR
PSPTSR
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
ExSOP
ExSOP
ExSOP
ExSOP
ExSOP
LTIPs
SMP
SMP
SMP
SMP
Granted
during
the year
1 January
2010
49,313
53,200
115,973
122,039
122,039
103,467
103,467
328,227
328,228
Lapsed
during
the year
–
–
– 115,973
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Exercised
during
the year
– 49,313
– 26,599
–
–
–
–
–
–
–
– 289,351
– 289,352
31 December
2010
–
26,601
–
122,039
122,039
103,467
103,467
328,227
328,228
289,351
289,352
1,325,953 578,703 75,912 115,973 1,712,771
–
318,314
–
272,388
–
221,903
–
145,443
173,960
–
– 1,132,008
318,314
272,388
221,903
145,443
173,960
1,132,008
–
–
–
–
–
–
–
–
–
–
–
–
Exercise
price
£ Date of grant
nil 24.03.05
nil 12.04.06
nil 30.03.07
nil 26.03.08
nil 07.05.08
nil 08.09.08
nil 08.09.08
nil 24.03.09
nil 24.03.09
nil 23.03.10
nil 23.03.10
1.72 30.09.03
2.01 30.03.04
2.64 24.03.05
4.28 12.04.06
4.57 30.03.07
Date of
exercise
or lapse
24.03.10
13.04.10
30.03.10
–
–
–
–
–
–
–
–
Market
price on
exercise
£
Date from
which
exercisable
Expiry date
3.81 24.03.101,2 24.03.12
3.72 12.04.101,3 12.04.13
– 30.03.104 30.03.14
– 26.03.115 26.03.15
– 26.03.111 26.03.15
– 08.09.116 08.09.15
– 08.09.116 08.09.15
– 24.03.126 24.03.16
– 24.03.126 24.03.16
– 23.03.136 23.03.17
– 23.03.136 23.03.17
–
–
–
–
–
– 30.09.061 30.09.13
– 30.03.071 30.03.14
– 24.03.081 24.03.15
– 12.04.091 12.04.16
– 30.03.101 30.03.17
Granted
during
the year
1 January
2010
46,410
109,411
371,616
Vested
during
the year
– 46,410
–
–
–
–
–
– 431,701
527,437 431,701 46,410
Market
price at
date of
award
£
Date of
Date of
vesting
award
4.57 22.03.07 22.03.101
4.86 26.03.08 26.03.111
3.43 24.03.09 24.03.126
3.80 23.03.10 23.03.136
Market
price on
vesting
£
3.87
–
–
–
Lapsed
during
the year
–
–
–
–
–
31 December
2010
–
109,411
371,616
431,701
912,728
Ian King’s SMP award that vested on 22 March 2010 attracted reinvested dividends which equated on vesting to an additional
4,912 shares. The market price on vesting was £3.87.
Note: Performance conditions for the options and awards set out above are detailed in the notes to Table B on pages 115 and 116.
1
2
3
4
5
6
Subject to a performance condition that has been met.
‘Date exercisable’ refers to the date on which the portion of the option exercised during the year became exercisable.
As (2) above. The option over shares remaining at the year end is exercisable on the fifth anniversary of grant.
The award lapsed during the financial year under review having not met the performance condition.
The outstanding award lapsed after the end of the financial year having not met the performance condition.
Subject to a performance condition that is yet to be tested.
PeRfoRmanCe shaRe Plan (PsP)
A full description of the PSP is set out on pages 108 and 109. PSP awards granted since 2008 attract dividends prior to vesting.
PSPTSR – nil vesting if the Company’s TSR at the end of the three-year performance period is outside the top 50% of TSRs achieved
by a sectoral comparator group; 25% vesting if TSR is at median (50%); and 100% vesting if TSR is in the top 20%, with vesting on a
straight-line basis between these two points.
PSPEPS – proportion of the award exercisable is determined by the rate of annual actual EPS growth over the three-year performance
period, with nil vesting at annual actual EPS growth of 5% or less, 100% vesting at 11% growth, and vesting on a straight-line basis
between these two points.
Awards that satisfy the performance conditions at the end of year three are exercisable in three tranches at the end of years three,
four and five.
exeCutive shaRe oPtion Plan (exsoP)
No options have been granted under this Plan since 2007 and it is intended only to be used in future in exceptional circumstances.
Options granted under this Plan are normally exercisable between the third and tenth anniversary of grant. The maximum duration
of an option is ten years.
(i) 2005-2007 grants – 33.33% of each option grant is exercisable if the Company achieves on average real EPS growth pa of 3%
but less than 4% over the three-year performance period; 66.67% for real EPS growth pa of 4% but less than 5%; and 100% for
real EPS growth of 5% or more.
(ii) 2004 grant – as in (i) but performance is retested at the end of year five against the full period from grant.
(iii) 2003 grant – as in (i) but performance is retested at the end of years four and five against the full period from grant.
BAE Systems Annual Report 2010 115
Directors’ Report: Governance
Remuneration report continued
table b: shaRe oPtions and long-teRm inCentive Plan (ltiP) awaRds – geoRge Rose
Share
options
PSPTSR
PSPTSR
PSPTSR
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
ExSOP
ExSOP
Granted
during
the year
1 January
2010
63,133
67,942
122,538
122,039
122,039
227,024
227,024
Lapsed
during
the year
–
–
– 122,538
–
–
–
–
–
–
–
–
–
–
–
–
Exercised
during
the year
– 63,133
– 33,970
–
–
–
–
–
– 200,135
– 200,135
31 December
2010
–
33,972
–
122,039
122,039
227,024
227,024
200,135
200,135
951,739 400,270 97,103 122,538 1,132,368
185,747
185,747
183,807
183,807
369,554
369,554
–
–
–
–
–
–
–
–
–
Exercise
price
£ Date of grant
Date of
exercise
or lapse
nil 24.03.05 24.03.10
nil 12.04.06 20.04.10
nil 30.03.07 30.03.10
–
nil 26.03.08
–
nil 07.05.08
–
nil 24.03.09
–
nil 24.03.09
–
nil 23.03.10
–
nil 23.03.10
Market
price on
exercise
£
Date from
which
exercisable
Expiry date
3.81 24.03.101,2 24.03.12
3.77 12.04.101,3 12.04.13
– 30.03.104 30.03.14
– 26.03.115 26.03.15
– 26.03.111 26.03.15
– 24.03.126 24.03.16
– 24.03.126 24.03.16
– 23.03.136 23.03.17
– 23.03.136 23.03.17
4.28 12.04.06
4.57 30.03.07
–
–
– 12.04.091 12.04.16
– 30.03.101 30.03.17
LTIPs
SMP
SMP
SMP
1 January
2010
52,286
175,413
Granted
during
the year
–
–
– 129,400
227,699 129,400
Vested
during
the year
–
–
–
–
Lapsed
during
the year
–
–
–
–
31 December
2010
52,286
175,413
129,400
357,099
Market
price at
date of
award
£
Date of
Date of
award
vesting
4.86 26.03.08 26.03.111
3.43 24.03.09 24.03.126
3.80 23.03.10 23.03.136
Market
price on
vesting
£
–
–
–
Note: Performance conditions for the options and awards set out above are detailed in the notes to Table B on pages 115 and 116.
1
2
3
4
5
6
Subject to a performance condition that has been met.
‘Date exercisable’ refers to the date on which the portion of the option exercised during the year became exercisable.
As (2) above. The option over shares remaining at the year end is exercisable on the fifth anniversary of grant.
The award lapsed during the financial year under review having not met the performance condition.
The outstanding award lapsed after the end of the financial year having not met the performance condition.
Subject to a performance condition that is yet to be tested.
shaRe matChing Plan (smP) – matChing shaRes
A full description of the SMP, under which awards are subject to a three-year performance period, is set out on page 109. SMP
awards attract dividends prior to vesting.
2009 and 2010 awards – nil match for actual EPS growth of less than 5% pa increasing uniformly to a 2:1 match at 11% pa growth.
2008 award – nil match for actual EPS growth of 5% pa or less, increasing uniformly to a 1:1 match for 8% pa growth.
2007 award – nil vesting for real EPS growth pa of less than 3% over the three-year performance period, with one-third of the
matched award vesting on average real EPS growth pa of 3% but less than 4%, two-thirds vesting with a growth rate of 4% but less
than 5%, and full vesting at growth of 5% or over.
shaRe PRiCe infoRmation
The mid-market price for the Company’s ordinary shares at 31 December 2010 was 330.0p (2009 359.5p). The range during the
year was 294.7p to 388.8p.
aggRegate amount of gains made by diReCtoRs
The aggregate amount of gains made by directors from the exercise of share options in 2010, as calculated at the date of exercise,
was £655,392 (2009 £1,268,104). The net aggregate value of assets received by directors in 2010 from Long-Term Incentive
Plans, as calculated at the date of vesting, was £198,770 (2009 £247,044).
Rationale foR key PeRfoRmanCe measuRes foR PsP, exsoP and smP
EPS – importance to major investors as a key indicator of long-term financial performance and value creation.
TSR (and secondary financial measure) – importance to major investors as an indication of both earnings and capital growth
relative to major companies in the same sector, and to ensure that awards only vest if there has been a clear improvement in the
Company’s performance over the relevant period.
116 www.baesystems.com
table b: shaRe oPtions and long-teRm inCentive Plan (ltiP) awaRds – linda hudson
Share
options
PSPTSR
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
ExSOP
LTIPs
SMP
SMP
1 January
2010
89,160
45,881
45,882
104,813
104,813
Granted
during
the year
–
–
–
–
–
– 191,983
– 191,983
390,549 383,966
–
133,740
–
133,740
Exercised
or released
during
the year
–
–
–
–
–
–
–
–
–
–
Lapsed
during
the year
89,160
–
–
–
–
–
–
89,160
–
–
31 December
2010
–
45,881
45,882
104,813
104,813
191,983
191,983
685,355
133,740
133,740
Exercise
price
Date of
exercise,
release
or lapse
£ Date of grant
– 30.03.07 30.03.10
–
– 26.03.08
–
– 26.03.08
–
– 24.03.09
–
– 24.03.09
–
– 23.03.10
–
– 23.03.10
Date from
which
exercisable
Market
price on
release
Expiry date
£
– 30.03.101 30.03.14
– 26.03.112 26.03.15
– 26.03.113 26.03.15
– 24.03.124 24.03.16
– 24.03.124 24.03.16
– 23.03.134 23.03.17
– 23.03.134 23.03.17
4.57 30.03.07
–
– 30.03.103 30.03.17
1 January
2010
99,908
–
99,908
Granted
during
the year
–
96,383
96,383
Vested
during
the year
–
–
–
Lapsed
during
the year
–
–
–
31 December
2010
99,908
96,383
196,291
Market
price at
date of
award
£
Date of
Date of
vesting
award
3.43 24.03.09 24.03.124
3.80 23.03.10 23.03.134
Market
price on
vesting
£
–
–
Note: Performance conditions for the options and awards set out above are detailed in the notes to Table B on pages 115 and 116.
1
2
3
4
The award lapsed during the financial year under review having not met the performance condition.
The outstanding award lapsed after the end of the financial year having not met the performance condition.
Subject to a performance condition that has been met.
Subject to a performance condition that is yet to be tested.
Note: Awards granted to Linda Hudson (a US national) under the PSP are technically characterised as long-term incentives rather
than options as, subject to the attainment of the performance condition, they are delivered automatically on the third, fourth and
fifth anniversary of grant without the need to exercise an option. They are shown in the top portion of the table for ease of
comparison.
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BAE Systems Annual Report 2010 117
Directors’ Report: Governance
Remuneration report continued
table C: diReCtoRs’ RemuneRation
2010
2009
Base
salary
£’000
Fees
£’000
Bonus
£’000
Benefits
£’000
Other pay
£’000
Total
£’000
Base
salary
£’000
Fees
£’000
Bonus
£’000
Benefits
£’000
Other pay
£’000
Total
£’000
–
600
–
13
–
613
–
600
–
Chairman
R L Olver
Executive directors
W P Havenstein1
L P Hudson2
I G King
G W Rose
M J Turner3
Non-executive directors
P M Anderson2
P J Carroll4
H Green5
M J Hartnall
A G Inglis4
Sir Peter Mason
R Quarta
N C Rose5
Sir Nigel Rudd1
C G Symon
R K Uppal
n/a
583
900
623
n/a
n/a
n/a
– 1,168
– 1,437
645
–
n/a
n/a
–
–
–
–
–
–
–
–
n/a
–
–
–
–
–
–
–
–
–
–
n/a
–
–
2,106 1,204 3,250
76
23
11
86
45
86
66
59
n/a
86
66
n/a
22
26
28
n/a
–
–
–
–
–
–
–
–
n/a
–
–
89
n/a
n/a
– 1,773
– 2,363
– 1,296
n/a
n/a
96
20
31
8
11
–
94
8
45
–
94
8
70
4
63
4
n/a
n/a
106
20
20
86
92 6,741
294
105
900
623
–
–
–
–
189
– 1,680
755
–
–
–
–
–
n/a
–
–
–
–
n/a
–
–
–
–
–
n/a
–
–
–
–
n/a
–
–
–
1,922 1,223 2,624
15
66
n/a
86
86
86
66
n/a
81
71
66
63
11
9
70
74
–
–
–
n/a
–
–
–
–
n/a
–
–
–
227
–
663
305
–
–
303
– 2,650
– 1,452
591
591
4
24
n/a
4
4
4
4
n/a
4
24
24
19
90
n/a
90
90
90
70
n/a
85
95
90
687 6,683
1
2
3
4
5
Resigned or retired in 2009.
Appointed in 2009.
Retired in 2008.
Retired in 2010.
Appointed in 2010.
All emoluments and compensation paid to the directors during the year are shown above. Where the individual was appointed
during the year the amount is shown from appointment.
The benefits received by the UK-based executive directors include, where appropriate, the provision of a car allowance and the private
use of a chauffeur-driven car. The benefits received by the Chairman, Dick Olver, include the private use of a chauffeur-driven car.
The benefits received by the US-based executive director include a cash allowance for a car, medical examination, dental benefits,
and insured life and disability benefits. In addition, the benefits received by Linda Hudson also include $1,955 (£1,265) in respect
of private use of a company aeroplane (2009 $8,455).
The other pay received by the non-executive directors represents the travel allowance of £4,000 per meeting as set out on page 113.
Sir Richard Evans retired as a director and Chairman on 30 June 2004. He remained employed in a part-time customer relationship
role and ceased to be an employee on 29 February 2008. He subsequently became a member of the Company’s Home Market
Advisory Board for Saudi Arabia of which he ceased to be a member on 28 February 2010 upon the expiry of his contract. His
consultancy fees in 2010 for the period of time he spent in the role of a member of the Home Market Advisory Board were £47,000
(2009 £246,954).
A payment of £7,884 was made to Mike Turner in January 2010, due in relation to the tax payable in respect of his private use of a
chauffeur-driven car in the 2008/09 tax year, the amount of which was agreed with HM Revenue and Customs. There were no other
payments to former directors during the year other than the Company pension payments to Sir Richard Lapthorne and Sir Peter
Gershon referred to on page 119.
118 www.baesystems.com
table d: Post-RetiRement benefits
Accrued
benefit at
1 January
20101
£ pa
347,088
509,944
366,564
Accrued
benefit at
31 December
20101
£ pa
514,438
585,228
388,568
Change in
accrued
pension after
allowing for
inflation
£ pa
167,350
Transfer
Transfer
value at
value at
1 January
31 December
20102
2010
£
£
389,262
242,180
75,284 6,780,197 8,174,403
22,004 6,840,222 7,374,857
Director’s
contributions
£
2,379
Increase in
value less
director’s
contributions
£
144,703
79,200 1,315,006
476,972
57,663
L P Hudson3
I G King4
G W Rose5
Normal Retirement Age
Age
60
54
58
NRA*
65
62
60
Accrued benefits may be reduced if they are taken before the normal retirement age of the scheme. In addition, a longevity
adjustment factor applies to UK pension accrued after 5 April 2006.
Transfer values have been calculated in accordance with GN11 issued by the actuarial profession. For UK-based directors the
assumptions are the same as those used in the calculation of cash equivalents from the schemes. For US-based directors the
assumptions are the same as those used for accounting disclosures. The increase in transfer value arising from the change in
assumptions is: Linda Hudson: £5,113; Ian King: £166,128; George Rose: £(104,428).
Linda Hudson is a member of a US retirement plan which provides a cash sum at retirement equal to a percentage of career
average pay. The accrued benefit shown above is a cash lump sum amount payable at normal retirement age. This benefit
comprises £61,457 from a contributory Qualified Plan and £452,981 from Non-Qualified Plans. In addition, Linda Hudson
participates in a Section 401(k) defined contribution arrangement set up for US employees in which the Company will match
employee contributions up to a limit. In 2010, the Company paid contributions of £8,087 into this 401(k) arrangement. Linda
Hudson is paid in US dollars. Of the change in the accrued benefit and the transfer value £15,932 and £12,055, respectively,
is due to currency movements.
Ian King has an unfunded unapproved retirement arrangement for benefits in excess of the Lifetime Allowance. The pension
and transfer value figures shown are in respect of his total benefit.
George Rose has a funded unapproved retirement arrangement for pensionable service before 6 April 2006. No Company
contributions have been made to this arrangement during the year. In addition, George Rose has an unfunded unapproved
retirement arrangement for pensionable service before 6 April 2006 and for benefits in excess of the Lifetime Allowance.
The pension and transfer value figures shown are in respect of his total benefit.
*
1
2
3
4
5
Sir Peter Gershon and Sir Richard Lapthorne, both former directors, have unfunded pension arrangements. In 2010, the Company
paid Sir Peter Gershon a pension of £109,280 (2009 £109,230) and Sir Richard Lapthorne a pension of £102,382 (2009
£100,058) in respect of these arrangements.
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BAE Systems Annual Report 2010 119
Directors’ Report: Governance
Other statutory and regulatory information
Principal activities
BAE Systems is a global defence and security company.
The BAE Systems Group delivers, through its subsidiaries and
equity accounted investments, a full range of products and
services for air, land and naval forces, as well as advanced
electronics, security, information technology solutions and
support services.
Company registration
BAE Systems plc is registered in England and Wales with the
registered number 1470151.
Airmen and Families Association (SSAFA) Forces Help,
St Dunstan’s and uk4u Thanks!;
– £652,000 donated to education charities, including Arkwright
Scholarships Trust, Smallpeice Trust, Enthuse Charitable Trust
and The Prince’s Trust; with
– the remaining £28,000 donated for other charitable purposes,
including the advance of health and culture/heritage.
Further details of the Company’s charitable activities are set out
on page 53.
Directors
The current directors who served during the 2010 financial year
are listed on pages 76 and 77. Of those directors, Nick Rose
was appointed to the Board on 8 February 2010 and Harriet
Green on 1 November 2010. In addition, Phil Carroll and Andy
Inglis served as directors during the period up to their respective
retirements from the Board on 5 May 2010 and 9 July 2010.
It was announced on 10 December 2010 that George Rose
would be retiring from the Board on 31 March 2011 and that
Peter Lynas would be appointed in his stead with effect from
1 April 2011. Ravi Uppal will retire from the Board at the end
of his three-year term of office on 1 April 2011.
Dividend
An interim dividend of 7.0p per share was paid on 30 November
2010. The directors propose a final dividend of 10.5p per
ordinary share. Subject to shareholder approval, the final
dividend will be paid on 1 June 2011 to shareholders on the
share register on 26 April 2011.
Annual General Meeting (AGM)
The Company’s AGM will be held on 4 May 2011. The Notice of
Annual General Meeting is enclosed with this Annual Report
and details the resolutions to be proposed at the meeting.
Office of Fair Trading undertakings
As a consequence of the merger between British Aerospace and
the former Marconi Electronics Systems businesses in 1999,
the Company gave certain undertakings to the Secretary of
State for Trade and Industry (now the Secretary of State for
Business, Innovation and Skills). In February 2007, the
Company was released from the majority of these undertakings
and the remainder have been superseded and varied by a new
set of undertakings. Compliance with the undertakings is
monitored by a compliance officer. Further information regarding
the undertakings and the contact details of the compliance
officer may be obtained through the Company Secretary at the
Company’s registered office or through the Company’s website.
Supplier payment policy
It is Group policy that suppliers should be paid in accordance
with the payment terms and conditions stated in the
applicable purchase order. In the UK, the Group is a
signatory to the government’s Prompt Payment Code
(see www.promptpaymentcode.org.uk), under which it has
undertaken to pay suppliers on time, give clear guidance on
payment procedures and encourage the adoption of the code
throughout its supply chain.
The average number of days’ credit provided in 2010 by
suppliers was 34 days (2009 31 days).
Charitable donations
During 2010, the amount donated for charitable purposes in the
UK was £1.5m (2009 £1.6m). In line with the Company Giving
strategy, this included:
– £852,000 given to armed forces charities, including ABF
The Soldiers’ Charity, Combat Stress, RAF Benevolent Fund,
Royal Navy and Royal Marines Charity, Soldiers, Sailors,
Political donations
No political donations were made in 2010.
Issued share capital
As at 31 December 2010, BAE Systems’ issued share capital
of £89,684,547 comprised 3,587,381,835 ordinary shares
of 2.5p each and one Special Share of £1.
Treasury shares
During the year 143,951,447 ordinary shares of 2.5p each
were repurchased under the buyback programme announced
on 18 February 2010. The total consideration for the purchase
of the shares, including commission and stamp duty, was
£503,128,212.
As at 1 January 2010, the number of shares held in treasury
totalled 43,952,360 (having a total nominal value of
£1,098,809 and representing 1.23% of the Company’s called
up share capital at 1 January 2010). During 2010, the Company
used 9,526,179 treasury shares (having a total nominal value
of £238,154 and representing 0.27% of the Company’s called
up share capital at 31 December 2010) to satisfy awards under
the Free and Matching elements of the Share Incentive Plan
and awards vested under the Share Matching Plan. Of the
9,186,543 treasury shares utilised in respect of the Share
Incentive Plan, the 6,026,625 treasury shares used in respect
of the Free Shares element and the 3,159,918 treasury shares
used in respect of the Matching Shares element were disposed
of by the Company for nil consideration as were the 339,636
treasury shares utilised under the Share Matching Plan. As at
31 December 2010, the number of shares held in treasury
totalled 178,377,628 (having a total nominal value of
£4,459,441 and representing 4.97% of the Company’s called
up share capital at 31 December 2010).
The rights to such shares are restricted in accordance with the
Companies Act and, in particular, the voting rights attaching to
these shares are automatically suspended.
Rights and obligations of ordinary shares
On a show of hands at a general meeting every holder of ordinary
shares present in person and entitled to vote shall have one vote,
and every proxy entitled to vote shall have one vote (unless the
proxy is appointed by more than one member in which case the
proxy has one vote for and one vote against if the proxy has been
instructed by one or more members to vote for the resolution and
by one or more members to vote against the resolution; or if the
proxy has been instructed by one or more shareholders to vote
either for or against a resolution and by one or more of those
shareholders to use his discretion how to vote). On a poll, every
member present in person or by proxy and entitled to vote shall
have one vote for every ordinary share held. Subject to the
relevant statutory provisions and the Company’s Articles of
Association, holders of ordinary shares are entitled to a dividend
where declared or paid out of profits available for such purposes.
Subject to the relevant statutory provisions and the Company’s
Articles of Association, on a return of capital on a winding-up,
holders of ordinary shares are entitled, after repayment of the
£1 Special Share, to participate in such a return. There are no
redemption rights in relation to the ordinary shares.
120 www.baesystems.com
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Rights and obligations of the Special Share
The Special Share is held on behalf of the Secretary of State for
Business, Innovation and Skills (the ‘Special Shareholder’).
Certain provisions of the Company’s Articles of Association
cannot be amended without the consent of the Special
Shareholder. These provisions include the requirement that
no foreign person, or foreign persons acting in concert, can
have more than a 15% voting interest in the Company, the
requirement that the majority of the directors are British, and
the requirement that the Chief Executive and any executive
Chairman are British.
The holder of the Special Share is entitled to attend a general
meeting, but the Special Share carries no right to vote or any
other rights at any such meeting, other than to speak in relation
to any business in respect of the Special Share. Subject to the
relevant statutory provisions and the Company’s Articles of
Association, on a return of capital on a winding-up, the Special
Share shall be entitled to repayment of the £1 capital paid up on
the Special Share in priority to any repayment of capital to any
other members.
The holder of the Special Share has the right to require the
Company to redeem the Special Share at par or convert the
Special Share into one ordinary share at any time.
Restrictions on transfer of securities
The restrictions on the transfer of shares in the Company are
as follows:
– the Special Share may only be issued to, held by and transferred
to the Special Shareholder or his successor or nominee;
– the directors shall not register any allotment or transfer of any
shares to a foreign person, or foreign persons acting in concert,
who at the time have more than a 15% voting interest in the
Company, or who would, following such allotment or transfer,
have such an interest;
– the directors shall not register any person as a holder of any
shares unless they have received: (i) a declaration stating that
upon registration, the share(s) will not be held by foreign
persons or that upon registration the share(s) will be held by
a foreign person or persons; (ii) such evidence (if any) as the
directors may require of the authority of the signatory of the
declaration; and (iii) such evidence or information (if any) as
to the matters referred to in the declaration as the directors
consider appropriate;
– the directors may, in their absolute discretion, refuse to register
any transfer of shares which are not fully paid up (but not so as
to prevent dealings in listed shares from taking place);
– the directors may also refuse to register any instrument of
transfer of shares unless the instrument of transfer is in
respect of only one class of share and it is lodged at the place
where the register of members is kept, accompanied by a
relevant certificate or such other evidence as the directors may
reasonably require to show the right of the transferor to make
the transfer;
– the directors may refuse to register an allotment or transfer
of shares in favour of more than four persons jointly;
– where a shareholder has failed to provide the Company with
certain information relating to their interest in shares, the
directors can, in certain circumstances, refuse to register a
transfer of such shares;
employees require the Company’s approval to deal in shares;
and
– awards of shares made under the Company’s share incentive
plan are subject to restrictions on the transfer of shares prior
to vesting.
The Company is not aware of any arrangements between its
shareholders that may result in restrictions on the transfer of
shares and/or voting rights.
Significant direct and indirect holders of securities
As at 16 February 2011, the Company had been advised of the
following significant direct and indirect interests in the issued
ordinary share capital of the Company:
Name of shareholder
AXA S.A. and its group of companies
Barclays PLC
BlackRock, Inc
Invesco Ltd
Franklin Resources Inc, and affiliates
Legal & General Group Plc
Percentage notified
5.00%
3.98%
5.16%
5.08%
4.92%
3.99%
Exercise of rights of shares in employee share schemes
The Trustees of the employee trusts do not seek to exercise
voting rights on shares held in the employee trusts other than
on the direction of the underlying beneficiaries. No voting rights
are exercised in relation to shares unallocated to individual
beneficiaries.
Restrictions on voting deadlines
The notice of any general meeting shall specify the deadline for
exercising voting rights and appointing a proxy or proxies to vote
in relation to resolutions to be proposed at the general meeting.
The number of proxy votes for, against or withheld in respect of
each resolution are publicised on the Company’s website after
the meeting.
Appointment and replacement of directors
Subject to certain nationality requirements mentioned below,
the Company may by ordinary resolution appoint any person to
be a director.
The majority of directors holding office must be British.
Otherwise the directors who are not British shall vacate office in
such order that those who have been in office for the shortest
period since their appointment shall vacate their office first,
unless all of the directors otherwise agree among themselves.
Any director who holds the office of either Chairman (in an
executive capacity) or Chief Executive shall also be British.
The Company must have six directors holding office at all times.
If the number is reduced to below six, then such number of
persons shall be appointed as directors as soon as is
reasonably practicable to reinstate the number of directors to
six. The Company may by ordinary resolution from time to time
vary the minimum number of directors.
At each AGM of the Company, any director who was elected or
last re-elected at or before the AGM held in the third calendar
year before the then current calendar year must retire by rotation
and such further directors must retire by rotation so that in total
one-third of the directors retire by rotation each year. A retiring
director is eligible for re-election. It is the Board’s intention that
all directors will stand for election or re-election in 2011 in
compliance with the UK Corporate Governance Code.
– certain restrictions may from time to time be imposed by laws
and regulations (for example, insider trading laws);
– restrictions may be imposed pursuant to the Listing Rules of
the Financial Services Authority whereby certain of the Group’s
Amendment of the Company’s Articles of Association
The Company’s Articles of Association may only be amended
by a special resolution at a general meeting of shareholders.
Where class rights are varied, such amendments must be
approved by the members of each class of shares separately.
BAE Systems Annual Report 2010 121
Directors’ Report: Governance
Other statutory and regulatory information continued
In addition, certain provisions of the Articles of Association
cannot be amended without the consent of the Special
Shareholder. These provisions include the requirement that no
foreign person, or foreign persons acting in concert, can have
more than a 15% voting interest in the Company, the requirement
that the majority of the directors are British, and the requirement
that the Chief Executive and any executive Chairman are British.
Powers of the directors
The directors are responsible for the management of the
business of the Company and may exercise all powers of the
Company subject to applicable legislation and regulation, and
the Articles of Association.
At the 2010 AGM, the directors were given the power to buy back
a maximum number of 351,599,099 ordinary shares at a
minimum price of 2.5p each. The maximum price was the higher
of (i) an amount equal to 105% of the average of the middle
market quotations of the Company’s ordinary shares as derived
from the London Stock Exchange Daily Official List for the five
business days immediately preceding the day on which such
ordinary shares are contracted to be purchased, and (ii) the
higher of the price of the last independent trade and the highest
current independent bid on the London Stock Exchange as
stipulated in Article 5(1) of the Buy-back and Stabilisation
Regulation. This power will expire at the earlier of the conclusion
of the 2011 AGM or 30 June 2011. A special resolution will be
proposed at the 2011 AGM to renew the Company’s authority to
acquire its own shares.
At the 2010 AGM, the directors were given the power to
issue new shares up to a nominal amount of £29,296,994.
This power will expire on the earlier of the conclusion of the
2011 AGM or 30 June 2011. Accordingly, a resolution will be
proposed at the 2011 AGM to renew the Company’s authority to
issue further new shares. At the 2010 AGM, the directors were
also given the power to issue new issue shares up to a further
nominal amount of £29,296,994 in connection with an offer by
way of a rights issue. This authority too will expire on the earlier
of the conclusion of the 2011 AGM or 30 June 2011, and a
resolution will be proposed at the 2011 AGM to renew this
additional authority.
Conflicts of interest
As permitted under the Companies Act 2006, the Company’s
Articles of Association contain provisions which enable the
Board to authorise conflicts or potential conflicts that individual
directors may have.
To avoid potential conflicts of interest the Board requires the
Nominations Committee to check that any individuals it
nominates for appointment to the Board are free of potential
conflicts. In addition, the Board’s procedures and the induction
programme for new directors emphasise a director’s personal
responsibility for complying with the duties relating to conflicts
of interest. The procedure adopted by the Board for the
authorisation of conflicts reminds directors of the need to
consider their duties as directors and not grant an authorisation
unless they believe, in good faith, that this would be likely to
promote the success of the Company. As required by law, the
potentially conflicted director cannot vote on an authorisation
resolution or be counted in the quorum. Any authorisation granted
may be terminated at any time and the director is informed of the
obligation to inform the Company without delay should there be
any material change in the nature of the conflict or potential
conflict so authorised. The Nominations Committee has been
asked to review on an annual basis any authorisations granted
and to make recommendations to the Board as appropriate.
Directors’ indemnities
The Company has entered into deeds of indemnity with all its
current directors and those persons who were directors for any
part of 2010 which are qualifying indemnity provisions for the
purpose of the Companies Act 2006.
The directors of BAE Systems Pension Funds Trustees Limited,
BAE Systems 2000 Pension Plan Trustees Limited, BAE Systems
Executive Pension Scheme Trustees Limited and Alvis Pension
Scheme Trustees Limited benefit from indemnities in the
governing documentation of the BAE Systems Pension Scheme,
the BAE Systems 2000 Pension Plan, the BAE Systems
Executive Pension Scheme and the Alvis Pension Scheme,
respectively, which are qualifying indemnity provisions for the
purpose of the Companies Act 2006.
All such indemnity provisions are in force as at the date of this
Directors’ report.
Change of control – significant agreements
The following significant agreements contain provisions entitling
the counterparties to exercise termination, alteration or other
similar rights in the event of a change of control of the Company:
– The Group has entered into a £2bn Revolving Credit Facility
dated 8 December 2010 and a £500m Letter of Credit Facility
dated 27 March 2006 (as amended), which provide that, in the
event of a change of control of the Company, the lenders are
entitled to renegotiate terms, or if no agreement is reached
on negotiated terms within a certain period, to call for the
repayment or cancellation of the facilities. The Revolving
Credit Facility was undrawn as at 31 December 2010.
– The Company has entered into a Restated and Amended
Shareholders Agreement with European Aeronautic Defence
and Space Company EADS N.V. (EADS) and Finmeccanica
S.p.A (Finmeccanica) relating to MBDA S.A.S. dated
18 December 2001 (as amended). In the event that control of
the Company passes to certain specified third party acquirors,
the agreement allows EADS and Finmeccanica to exercise
an option to terminate certain executive management level
nomination and voting rights, and certain shareholder
information rights of the Company in relation to the MBDA joint
venture. Following the exercise of this option, the Company
would have the right to require the other shareholders to
purchase its interest in MBDA at fair market value.
The Company and EADS have agreed that if Finmeccanica
acquires a controlling interest in the Company, EADS will
increase its shareholding in MBDA to 50% by purchasing the
appropriate number of shares in MBDA at fair market value.
– The Company, BAE Systems, Inc., BAE Systems (Holdings)
Limited and BAE Systems Holdings Inc. entered into a Special
Security Agreement dated 8 November 2010 with the
US Department of Defense regarding the management of
BAE Systems, Inc. in order to comply with the US government’s
national security requirements. In the event of a change of
control of the Company, the Agreement may be terminated
or altered by the US Department of Defense.
In addition, the Company’s share plans contain provisions as
a result of which options and awards may vest and become
exercisable on a change of control of the Company in
accordance with the rules of the plans.
Auditors
KPMG Audit Plc, the auditors for the Company, have indicated
their willingness to continue in office and a resolution proposing
their re-appointment will be put to the AGM.
122 www.baesystems.com
Statement of directors’ responsibilities in respect of the
Annual Report and financial statements
The directors are responsible for preparing the Annual Report,
and the Group and parent company financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare Group and parent
company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements
in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the EU and applicable law, and have
elected to prepare the parent company financial statements in
accordance with UK accounting standards and applicable law
(UK Generally Accepted Accounting Practice).
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and
fair view of the state of affairs of the Group and parent company,
and of their profit or loss for that period. In preparing each of the
Group and parent company financial statements, the directors
are required to:
– select suitable accounting policies and then apply them
consistently;
– make judgements and estimates that are reasonable and
prudent;
– for the Group financial statements, state whether they have
been prepared in accordance with IFRSs as adopted by the EU;
– for the parent company financial statements, state whether
applicable UK accounting standards have been followed,
subject to any material departures disclosed and explained in
the parent company financial statements; and
– prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
parent company will continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
company’s transactions, and disclose with reasonable accuracy
at any time the financial position of the parent company and
enable them to ensure that its financial statements comply with
the Companies Act 2006. They have general responsibility for
taking such steps as are reasonably open to them to safeguard
the assets of the Group, and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a directors’ report, directors’
remuneration report and corporate governance statement that
comply with that law and those regulations.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Statement of disclosure of information to auditors
The directors who held office at the date of approval of this
Directors’ report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company’s
auditors are unaware; and each director has taken all the steps
that he/she ought to have taken to make himself/herself aware
of any relevant audit information and to establish that the
Company’s auditors are aware of that information.
On behalf of the Board
David Parkes Company Secretary
16 February 2011
Responsibility statement of the directors in respect of the
Annual Report and financial statements
Each of the directors listed below confirms that to the best of
their knowledge:
– the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company, and the undertakings included in the
consolidation taken as a whole; and
– the Directors’ report includes a fair review of the development
and performance of the business, and the position of the
Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties that they face.
Dick Olver
Ian King
Linda Hudson
George Rose
Paul Anderson
Harriet Green
Michael Hartnall
Sir Peter Mason
Roberto Quarta
Nick Rose
Carl Symon
Ravi Uppal
Chairman
Chief Executive
President and Chief Executive Officer of
BAE Systems, Inc.
Group Finance Director
Non-executive director
Non-executive director
Non-executive director
Non-executive director
Non-executive director
Non-executive director
Non-executive director
Non-executive director
On behalf of the Board
Dick Olver Chairman
16 February 2011
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BAE Systems Annual Report 2010 123
Note
Page
1
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3
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8
12
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2
182
181
185
185
184
186
183
184
184
187
185
187
185
187
183
Index to the accounts
Independent auditor’s report to the members
of BAE Systems plc
Note
Page
125
Index to the Group accounts
Index to the Company accounts
Accounting policies
Acquisition of subsidiaries
Changes in accounting policies
Consolidated balance sheet
Consolidated cash flow statement
Consolidated income statement
Consolidated statement of changes in equity
Consolidated statement of comprehensive income
Contingent liabilities and commitments
Disposals
Dividends
Earnings per share
Employees and directors
Equity accounted investments
Events after the balance sheet date
Finance costs
Financial risk management
Five-year summary
Group entities
Intangible assets
Inventories
Investment property
Loans and overdrafts
Net (debt)/cash (as defined by the Group)
Operating costs
Other financial assets and liabilities
Other income
Other investments
Property, plant and equipment
Provisions
Reconciliation of operating business cash flow
Related party transactions
Retirement benefit obligations
Segmental analysis
Share-based payments
Share capital and other reserves
Tax
Trade and other payables
Trade and other receivables
1
29
2
23
9
28
10
7
14
33
6
30
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19
27
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5
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12
22
26
31
21
3
25
24
8
20
16
Investments in subsidiary undertakings
130 Accounting policies
173 Company balance sheet
136 Contingent liabilities and commitments
128 Creditors
129 Debtors
126 Employee share schemes
127
127 Loans and overdrafts
166 Other financial assets and liabilities
147 Other information
173 Provisions for liabilities and charges
148 Reserves
143 Share capital
154 Statutory reserve
180 Tangible fixed assets
142
176
188
180
149
158
153
158
172
140
157
142
156
151
165
172
179
160
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169
167
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124 www.baesystems.com
Independent auditor’s report to the members of BAE Systems plc
We have audited the financial statements of BAE Systems plc
for the year ended 31 December 2010 which comprise the
Consolidated Income Statement, the Consolidated Statement
of Comprehensive Income, the Group and Parent Company
Balance Sheets, the Consolidated Cash Flow Statement, the
Consolidated Statement of Changes in Equity and related
notes. The financial reporting framework that has been applied
in the preparation of the Group financial statements is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the EU. The financial reporting
framework that has been applied in the preparation of the
parent company financial statements is applicable law and
UK Accounting Standards (UK Generally Accepted Accounting
Practice).
This report is made solely to the Company's members,
as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company's members those
matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members, as
a body, for our audit work, for this report, or for the opinions
we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities
Statement set out on page 123, the directors are
responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view.
Our responsibility is to audit, and express an opinion on,
the financial statements in accordance with applicable law
and International Standards on Auditing (UK and Ireland).
Those standards require us to comply with the Auditing
Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial
statements is provided on the APB’s website at
www.frc.org.uk/apb/scope/private.cfm
Opinion on financial statements
In our opinion:
– the financial statements give a true and fair view of the
state of the Group’s and of the parent company’s affairs as
at 31 December 2010 and of the Group’s profit for the year
then ended;
– the Group financial statements have been properly prepared
in accordance with IFRSs as adopted by the EU;
– the parent company financial statements have been properly
prepared in accordance with UK Generally Accepted
Accounting Practice; and
– the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006; and,
as regards the Group financial statements, Article 4 of the
IAS Regulation.
Opinion on other matters prescribed by the Companies Act
2006
In our opinion:
– the part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the
Companies Act 2006; and
– the information given in the Directors’ Report for the
financial year for which the financial statements are
prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to
you if, in our opinion:
– adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
– the parent company financial statements and the part of
the Directors’ Remuneration Report to be audited are not
in agreement with the accounting records and returns; or
– certain disclosures of directors’ remuneration specified
by law are not made; or
– we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
– the directors’ statement, set out on page 88, in relation
to going concern;
– the part of the Corporate Governance Statement on pages
86 to 88 in the Directors’ Report relating to the Company’s
compliance with the nine provisions of the June 2008
Combined Code specified for our review; and
– certain elements of the report to shareholders by the Board
on directors' remuneration.
A G Cates (Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
16 February 2011
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BAE Systems Annual Report 2010 125
Consolidated income statement
for the year ended 31 December
Continuing operations
Combined sales of Group and equity accounted investments
Less: share of sales of equity accounted investments
Revenue
Operating costs
Other income
Group operating profit excluding amortisation and impairment of
intangible assets
Amortisation
Impairment
Group operating profit
Share of results of equity accounted investments excluding finance
costs and taxation expense
Financial (expense)/income of equity accounted investments
Taxation expense of equity accounted investments
Share of results of equity accounted investments
EBITA2 excluding non-recurring items
Profit on disposal of businesses3
Pension curtailment gains3
Regulatory penalties4
EBITA2
Amortisation
Impairment
Financial (expense)/income of equity accounted investments
Taxation expense of equity accounted investments
Operating profit
Finance costs
Financial income
Financial expense
Profit before taxation
Taxation expense
UK taxation
Overseas taxation
Profit/(loss) for the year – continuing operations
Profit for the year – discontinued operations
Profit/(loss) for the year
Attributable to:
BAE Systems shareholders
Non-controlling interests
Earnings/(loss) per share
Basic earnings/(loss) per share
Diluted earnings/(loss) per share
Earnings/(loss) per share – continuing operations
Basic earnings/(loss) per share
Diluted earnings/(loss) per share
2010
Restated1
2009
Notes
£m
Total
£m
£m
Total
£m
3
3
3
4
5
11
11
6
14
9
11
11
6
3
6
8
9
10
22,392
(1,295)
21,097
(19,761)
169
21,990
(1,616)
20,374
(20,060)
465
2,038
(286)
(973)
1,505
779
210
2
(25)
131
187
2,197
68
261
(278)
2,248
(286)
(973)
2
(25)
2,022
(392)
(125)
177
(2)
(44)
2,214
1
2
(18)
2,199
(392)
(125)
(2)
(44)
1,636
966
1,358
(1,550)
1,573
(2,273)
(152)
(265)
(192)
1,444
(417)
1,027
54
1,081
1,052
29
1,081
30.5p
30.3p
28.9p
28.7p
(105)
(222)
(700)
266
(327)
(61)
16
(45)
(67)
22
(45)
(1.9)p
(1.9)p
(2.3)p
(2.3)p
1 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense.
3 Included in other income.
4 Included in operating costs.
126 www.baesystems.com
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Consolidated statement of comprehensive income
for the year ended 31 December
Profit/(loss) for the year
Other comprehensive income
Currency translation on foreign currency net investments:
Subsidiaries
Equity accounted investments
Amounts charged to hedging reserve
Gain on revaluation of step acquisition
Net actuarial gains/(losses) on defined benefit pension schemes3:
Subsidiaries
Equity accounted investments
Fair value movements on available-for-sale investments
Recycling of cumulative currency translation reserve on disposal
Recycling of cumulative net hedging reserve on disposal
Current tax on items taken directly to equity
Deferred tax on items taken directly to equity:
Subsidiaries
Tax rate adjustment4
Equity accounted investments
Total other comprehensive income for the year (net of tax)
Total comprehensive income for the year
Attributable to:
Equity shareholders
Non-controlling interests
Consolidated statement of changes in equity
for the year ended 31 December
Restated1
2009
Total
£m
(45)
(246)
(56)
(393)
14
(2,008)
(54)
2
–
–
78
573
–
16
(2,074)
(2,119)
Other
reserves2
£m
–
2010
Retained
earnings
£m
1,081
Total
£m
1,081
Notes
–
–
–
–
874
40
14
–
–
70
160
(6)
(84)
–
874
40
14
(17)
(4)
68
(309)
(23)
(12)
654
1,735
(285)
(23)
(12)
725
1,806
14
15
9
9
8
8
8
160
(6)
(84)
–
–
–
–
(17)
(4)
(2)
24
–
–
71
71
71
–
71
1,706
29
1,735
1,777
29
1,806
(2,141)
22
(2,119)
At 1 January 2010
Profit for the year
Total other comprehensive income for the year
Share-based payments
Share options:
Proceeds from shares issued
Purchase of own shares
Purchase of treasury shares5
Other
Ordinary share dividends
At 31 December 2010
At 1 January 2009
(Loss)/profit for the year
Total other comprehensive income for the year
Share-based payments
Share options:
Proceeds from shares issued
Purchase of own shares
Ordinary share dividends
At 31 December 2009 (restated1)
Attributable to equity holders of the parent
Issued
share
capital
£m
90
–
–
–
–
–
–
–
–
90
90
–
–
–
–
–
–
90
Share
premium
£m
1,243
–
–
–
6
–
–
–
–
1,249
1,238
–
–
–
5
–
–
1,243
Other
reserves2
£m
5,399
–
71
–
–
–
–
–
–
5,470
5,974
–
(575)
–
–
–
–
5,399
Retained
earnings
£m
(2,141)
1,052
654
58
–
(23)
(503)
–
(574)
(1,477)
(68)
(67)
(1,499)
52
–
(25)
(534)
(2,141)
Total
£m
4,591
1,052
725
58
6
(23)
(503)
–
(574)
5,332
7,234
(67)
(2,074)
52
5
(25)
(534)
4,591
Non-
controlling
interests
£m
72
29
–
–
–
–
–
2
(32)
71
55
22
–
–
–
–
(5)
72
Total
equity
£m
4,663
1,081
725
58
6
(23)
(503)
2
(606)
5,403
7,289
(45)
(2,074)
52
5
(25)
(539)
4,663
1 Other reserves reduced by £64m following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
2 An analysis of other reserves is provided in note 24.
3 Includes a £348m benefit arising from the change from the Retail Prices Index to the Consumer Prices Index as the measure for determining minimum statutory pension increases (see note 21).
4 The UK current tax rate will be reduced from 28% to 27% with effect from 1 April 2011, which creates a tax rate adjustment (see note 8).
5 Includes transaction costs of £3m.
BAE Systems Annual Report 2010 127
Consolidated balance sheet
as at 31 December
Non-current assets
Intangible assets
Property, plant and equipment
Investment property
Equity accounted investments
Other investments
Other receivables
Other financial assets
Deferred tax assets
Current assets
Inventories
Trade and other receivables including amounts due from customers for contract work
Current tax
Other investments
Other financial assets
Cash and cash equivalents
Total assets
Non-current liabilities
Loans
Trade and other payables
Retirement benefit obligations
Other financial liabilities
Deferred tax liabilities
Provisions
Current liabilities
Loans and overdrafts
Trade and other payables
Other financial liabilities
Current tax
Provisions
Total liabilities
Net assets
Capital and reserves
Issued share capital
Share premium
Other reserves
Accumulated losses
Total equity attributable to equity holders of the parent
Non-controlling interests
Total equity
1 Restated following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
Approved by the Board on 16 February 2011 and signed on its behalf by:
I G King
Chief Executive
G W Rose
Group Finance Director
128 www.baesystems.com
2010
£m
Restated1
2009
£m
Notes
11 11,216
2,714
12
134
13
787
14
11
15
282
16
110
17
1,160
8
16,414
644
3,559
51
260
289
2,813
7,616
24,030
(2,133)
(694)
(3,456)
(255)
(6)
(425)
(6,969)
11,306
2,552
111
846
6
201
133
1,531
16,686
887
3,764
32
211
216
3,693
8,803
25,489
(2,840)
(522)
(4,679)
(261)
(8)
(377)
(8,687)
(920)
(9,352)
(109)
(625)
(652)
(11,658)
(18,627)
5,403
(453)
(10,381)
(94)
(659)
(552)
(12,139)
(20,826)
4,663
90
1,249
5,470
(1,477)
5,332
71
5,403
90
1,243
5,399
(2,141)
4,591
72
4,663
18
16
15
17
3
19
20
21
17
8
22
19
20
17
22
24
24
Consolidated cash flow statement
for the year ended 31 December
Profit/(loss) for the year – continuing operations
Profit for the year – discontinued operations
Profit/(loss) for the year
Taxation expense
Share of results of equity accounted investments – continuing operations
Share of results of equity accounted investments – discontinued operations
Net finance costs
Depreciation, amortisation and impairment
Gain on disposal of property, plant and equipment
Gain on disposal of businesses – continuing operations
Gain on disposal of businesses – discontinued operations
Cost of equity-settled employee share schemes
Movements in provisions
Decrease in liabilities for retirement benefit obligations
Decrease/(increase) in working capital:
Inventories
Trade and other receivables
Trade and other payables
Cash inflow from operating activities
Interest paid
Interest element of finance lease rental payments
Taxation paid
Net cash inflow from operating activities
Dividends received from equity accounted investments – continuing operations
Dividends received from equity accounted investments – discontinued operations
Interest received
Purchases of property, plant and equipment
Purchases of investment property
Purchases of intangible assets
Proceeds from sale of property, plant and equipment
Proceeds from sale of investment property
Purchase of subsidiary undertakings
Cash and cash equivalents acquired with subsidiary undertakings
Purchase of equity accounted investments
Equity accounted investment funding
Proceeds from sale of subsidiary undertakings – continuing operations
Proceeds from sale of equity accounted investments – continuing operations
Proceeds from sale of equity accounted investments – discontinued operations
Purchase of other deposits/securities
Net cash outflow from investing activities
Capital element of finance lease rental payments
Proceeds from issue of share capital
Purchase of treasury shares
Purchase of own shares
Equity dividends paid
Dividends paid to non-controlling interests
Cash (outflow)/inflow from matured derivative financial instruments
Cash inflow/(outflow) from movement in cash collateral
Cash inflow from loans
Cash outflow from repayment of loans
Net cash (outflow)/inflow from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Effect of foreign exchange rate changes on cash and cash equivalents
Cash and cash equivalents at 31 December
Comprising:
Cash and cash equivalents
Overdrafts
Cash and cash equivalents at 31 December
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Notes
14
9
4, 5
5
9
14
14
27
27
27
14
9
9
9
15
28
2010
£m
1,027
54
1,081
417
(131)
(2)
192
899
(13)
(1)
(52)
58
101
(452)
318
183
(1,063)
1,535
(220)
(1)
(352)
962
67
4
48
(394)
(14)
(19)
68
2
(198)
19
(2)
(7)
–
1
92
(40)
(373)
(7)
6
(503)
(23)
(574)
(32)
(123)
11
1,317
(1,576)
(1,504)
(915)
3,678
39
2,802
2,813
(11)
2,802
Restated1
2009
£m
(61)
16
(45)
327
(187)
(16)
700
1,600
(17)
(68)
–
52
52
(657)
6
52
433
2,232
(250)
(2)
(350)
1,630
74
3
66
(483)
–
(42)
36
–
(357)
33
(1)
–
2
70
–
(209)
(808)
(13)
5
–
(25)
(534)
(5)
36
(11)
920
(133)
240
1,062
2,605
11
3,678
3,693
(15)
3,678
1 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
BAE Systems Annual Report 2010 129
Notes to the Group accounts
1. Accounting policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below.
These policies have been consistently applied to all the years
presented, unless otherwise stated.
Basis of preparation
The consolidated financial statements of BAE Systems plc
have been prepared on a going concern basis as discussed
in the Directors’ report on page 88 and in accordance with
EU-endorsed International Financial Reporting Standards
(IFRS), International Financial Reporting Interpretations
Committee interpretations (IFRICs) and the Companies Act
2006 applicable to companies reporting under IFRS.
The consolidated financial statements are presented in
pounds sterling and, unless stated otherwise, rounded to the
nearest million. They have been prepared under the historical
cost convention, as modified by the revaluation of available-for-
sale financial assets, and other relevant financial assets and
financial liabilities (including derivative instruments).
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates and
judgements.
The directors consider the potential key areas of judgements
required to be made in applying the Group’s accounting
policies. These relate to:
–
–
–
–
the determination of the revenue recognition approach to
apply to individual contracts;
the classification of financial assets or liabilities;
the classification of retirement benefit plans between
defined benefit and defined contribution arrangements;
and
the classification of investments as subsidiaries, equity
accounted investments or otherwise.
The directors do not consider that the practical application
of the judgements is significantly uncertain or subjective
in nature.
An analysis and explanation of the critical accounting
estimates and judgements used in producing this set of
financial statements is made in the Directors’ report on
page 44.
Basis of consolidation
The financial statements of the Group consolidate the results
of the Company and its subsidiary entities, and include its
share of its joint ventures’ results accounted for under the
equity method, all of which are prepared to 31 December.
Subsidiaries
A subsidiary is an entity controlled by the Group. Control is the
power to govern the operating and financial policies of an
entity so as to obtain benefits from its activities. Subsidiaries
include the special purpose entities that the Group transacted
through for the provision of guarantees in respect of residual
values, and head lease and finance payments on certain
regional aircraft sold. The results of subsidiaries are included
in the consolidated income statement from the date of
acquisition, up to the date of loss of control.
Business combinations on or after 1 January 2010 (IFRS 3,
Business Combinations)
Business combinations are accounted for using the acquisition
method as at the acquisition date, which is the date on which
control is transferred to the Group. The Group measures
goodwill as the acquisition-date fair value of the consideration
130 www.baesystems.com
transferred, including the amount of any non-controlling
interest in the acquiree, less the net of the acquisition-date
fair values of the identifiable assets acquired and liabilities
assumed, including contingent liabilities as required by IFRS 3.
Consideration transferred includes the fair values of assets
transferred, liabilities incurred by the Group to the previous
owners of the acquiree, equity interests issued by the Group,
contingent consideration, and share-based payment awards of
the acquiree that are replaced in the business combination.
Any contingent consideration payable is recognised at fair
value at the acquisition date. Subsequent changes to the fair
value of contingent consideration that is not classified as
equity are recognised in the consolidated income statement.
If a business combination results in the termination of pre-
existing relationships between the Group and the acquiree,
then the lower of the termination amount, as contained in
the agreement, and the value of the off-market element, is
deducted from the consideration transferred and recognised
in other expenses.
Transaction costs that the Group incurs in connection with a
business combination, such as finder’s fees, legal fees, due
diligence fees, and other professional and consulting fees,
are expensed as incurred.
Non-controlling interests are measured at either the non-
controlling interest’s proportion of the net fair value of the
identifiable assets, liabilities and contingent liabilities
recognised or at fair value. The method used is determined
on an acquisition-by-acquisition basis.
Business combinations between 1 January 2004 and 1 January
2010 (IFRS 3, Business Combinations (2004))
The purchase method of accounting is used to account for
the acquisition of subsidiaries by the Group. The cost of the
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed
at the date of exchange, plus costs directly attributable to the
acquisition. Identifiable assets acquired, and liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date.
The excess of the cost of acquisition over the fair value of
the Group’s share of the identifiable net assets acquired is
recorded as goodwill. Previously held identifiable assets,
liabilities and contingent liabilities of the acquired entity
are revalued to their fair value at the date of acquisition,
being the date at which the Group achieves control of the
acquiree. The movement in fair value is taken to the asset
revaluation reserve.
Upon initial acquisition of a non-controlling interest, the
interest of minority shareholders is measured at the minority’s
proportion of the net fair value of the identifiable assets,
liabilities and contingent liabilities recognised.
Business combinations prior to 1 January 2004 (date of
transition to IFRS)
On transition to IFRS, IFRS 3 (2004) was not retrospectively
applied and, therefore, the goodwill arising on acquisition
under UK Generally Accepted Accounting Practice (GAAP) is the
difference between the consideration paid for an acquisition
and the fair value of the net tangible assets acquired. Goodwill
arising on acquisitions before the date of transition to IFRS
has been retained at the previous UK GAAP amounts, as any
amounts related to intangible assets that would have been
recorded in the acquired entities if the Group had applied IAS
38, Intangible Assets, at the dates they were acquired were
considered immaterial, after being tested for impairment at
those dates. Goodwill written off to reserves under UK GAAP
1. Accounting policies continued
prior to 1998 has not been reinstated and is not included in
determining any subsequent profit or loss on disposal.
Accounting for acquisition of non-controlling interests that do
not result in a change in control
Acquisitions of non-controlling interests are accounted for as
transactions with equity holders in their capacity as equity
holders and, therefore, no goodwill or profit or loss in the
consolidated income statement is recognised as a result of
such transactions.
Prior to 1 January 2010, goodwill was recognised on the
acquisition of non-controlling interests in a subsidiary,
which represented the excess of the cost of the additional
investment over the carrying amount of the interest in the
net assets acquired at the date of the transaction.
Equity accounted investments
An entity is regarded as a joint venture if the Group has joint
control over its operating and financial policies. Joint ventures
are accounted for under the equity method where the Group’s
income statement includes its share of their profits and
losses, and the Group’s balance sheet includes its share
of their net assets.
Intangible assets
Goodwill
Goodwill on acquisitions of subsidiaries is included in
intangible assets. Goodwill on acquisitions of joint ventures
and associates is included in the carrying value of equity
accounted investments. Goodwill is tested annually for
impairment and carried at cost less accumulated impairment
losses. Gains and losses on the disposal of an entity include
the carrying amount of goodwill relating to the entity sold.
Research and development
The Group undertakes research and development activities
either on its own behalf or on behalf of customers.
Group-funded expenditure on research activities is written off
as incurred and charged to the income statement.
Group-funded expenditure on development activities applied
to a plan or design for the production of new or substantially
improved products and processes is capitalised as an
internally generated intangible asset if certain conditions
are met. The expenditure capitalised includes the cost of
materials, direct labour and related overheads. Capitalised
development expenditure is stated at cost less accumulated
amortisation and impairment losses.
Capitalised development expenditure is amortised over the
expected life of the product.
or maintaining computer software programmes for sale is
recognised as an expense as incurred.
Trademarks and licences have definite useful lives and
are carried at cost less accumulated amortisation and
impairment losses.
Intangible assets arising from a business combination are
recognised at fair value, amortised over their estimated
useful lives and subject to impairment testing. The most
significant intangible assets recognised by the Group on
businesses acquired to date are in relation to programmes.
For programme-related intangibles, amortisation is set on a
programme-by-programme basis over the life of the individual
programme. Amortisation for customer-related intangibles is
also set on an individual basis.
Amortisation is charged to the income statement on a
straight-line basis over the estimated useful lives of the
intangible assets.
The estimated useful lives are as follows:
Programme and customer related
Programme and customer related
Other
Acquired computer software licences
Capitalised software development
Capitalised research and development
expenditure
Trademarks and licences
Other intangibles
up to 15 years
2 to 5 years
2 to 5 years
up to 10 years
up to 20 years
up to 10 years
Property, plant and equipment
Items of property, plant and equipment are stated at cost less
accumulated depreciation and impairment losses. The cost of
self-constructed assets includes the cost of materials, direct
labour and an appropriate proportion of production overheads.
Depreciation is provided, normally on a straight-line basis, to
write off the cost of property, plant and equipment over their
estimated useful lives to any estimated residual value, using
the following rates:
Buildings
Buildings
up to 50 years, or the
lease term if shorter
Plant and machinery
Computing equipment, motor vehicles
and short-life works equipment
3 to 5 years
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Research equipment
Other equipment
8 years
10 to 15 years, or the
project life if shorter
up to 15 years, or the
lease term if shorter
Where the research and development activity is performed for
customers, the revenue arising is recognised in accordance
with the Group’s revenue recognition policy.
Aircraft
Aircraft
Other intangible assets
Acquired computer software licences for use within the
Group are capitalised as an intangible asset on the basis
of the costs incurred to acquire and bring to use the
specific software.
Costs that are directly associated with the production of
identifiable and unique software products controlled by the
Group, and that will probably generate economic benefits
exceeding costs beyond one year, are recognised as intangible
assets. Capitalised software development expenditure is
stated at cost less accumulated amortisation and impairment
losses. Group-funded expenditure associated with enhancing
For certain items of plant and equipment in the Group’s US
businesses, depreciation is normally provided on a basis
consistent with cost reimbursement profiles under US
government contracts. Typically this provides for a faster rate
of depreciation than would otherwise arise on a straight-line
basis.
No depreciation is provided on freehold land and assets in the
course of construction.
The assets’ residual values, useful lives and depreciation
methods are reviewed, and adjusted if appropriate, at each
balance sheet date. Where applicable, useful lives reflect the
component accounting principle.
BAE Systems Annual Report 2010 131
Notes to the Group accounts continued
1. Accounting policies continued
Assets obtained under finance leases are included in property,
plant and equipment and stated at an amount equal to the
lower of the fair value and the present value of the minimum
lease payments at inception of the lease, less accumulated
depreciation and impairment losses.
Impairment
The carrying amounts of the Group’s intangible assets,
property, plant and equipment, and equity accounted
investments are reviewed at each balance sheet date to
determine whether there is any indication of impairment as
required by IAS 36, Impairment of Assets. If any such indication
exists, the asset’s recoverable amount is estimated. For
goodwill and intangible assets that are not yet available for
use, impairment testing is performed annually. All other assets
are considered for impairment under the relevant standard.
An impairment loss is recognised whenever the carrying
amount of an asset or its cash-generating unit exceeds its
recoverable amount. Impairment losses are recognised in the
income statement.
The carrying value of an equity accounted investment
comprises the Group’s share of net assets and purchased
goodwill, and is assessed for impairment as a single asset.
The recoverable amount of assets carried at amortised cost
is calculated as the present value of estimated future cash
flows, discounted at appropriate pre-tax discount rates.
The recoverable amount of other assets is the greater of their
fair value less cost to sell and value in use. In assessing value
in use, the estimated future cash flows are discounted to their
present value using an appropriate pre-tax discount rate.
For an asset that does not generate largely independent cash
inflows, the recoverable amount is determined for the cash-
generating unit to which the asset belongs.
An impairment loss in respect of assets, other than goodwill,
carried at amortised cost is reversed if the subsequent
increase in recoverable amount can be related objectively to
an event occurring after the impairment loss was recognised.
An impairment loss in respect of goodwill is not reversed.
An impairment loss in respect of other assets is reversed if
there has been a change in the estimate used to determine
the recoverable amount.
An impairment loss is reversed only to the extent that the
asset’s carrying amount does not exceed the carrying amount
that would have been determined, net of depreciation or
amortisation, if no impairment loss had been recognised.
Investment property
Land and buildings that are leased to non-Group entities are
classified as investment property. The Group measures
investment property at its cost less accumulated depreciation
and accumulated impairment losses.
Depreciation is provided, on a straight-line basis, to write off
the cost of investment property over its estimated useful life
of up to 50 years.
The assets’ residual values and useful lives are reviewed,
and adjusted if appropriate, at each balance sheet date.
Other investments
The Group determines the classification of its other
investments at initial recognition taking account of, where
relevant, the purpose for which the investments were acquired.
The Group classifies its other investments as follows:
(a) loans and receivables: term deposits, principally
comprising funds held with banks and other financial
institutions, are carried at amortised cost using the
effective interest method;
(b) at fair value through profit or loss: financial instruments
held for trading or designated by management on initial
recognition. They are held at fair value and included in
non-current assets unless management intends to dispose
of the investment within 12 months of the balance sheet
date;
(c) held to maturity: non-derivative financial assets with fixed
or determinable payments and fixed maturities that the
Group’s management has the positive intention and ability
to hold to maturity;
(d) available-for-sale: investments other than interests in
joint ventures and associates and term deposits and not
classified as (b) or (c) above. They are held at fair value.
Purchases and sales of investments are recognised at the
date on which the Group commits to purchase or sell the
asset. Investments are initially recognised at fair value plus
transaction costs for all financial assets not carried at fair
value through profit or loss.
Investments are derecognised when the rights to receive
cash flows from the investments have expired or have been
transferred and the Group has transferred substantially all
risks and rewards of ownership.
Realised and unrealised gains and losses arising from
changes in the fair value of the investments classified as fair
value through profit or loss are included in finance costs in the
income statement in the period in which they arise. Unrealised
gains or losses arising from changes in the fair value of
investments classified as available-for-sale are recognised in
equity. When investments classified as available-for-sale are
sold or impaired, the accumulated fair value adjustments are
included in the income statement as gains and losses from
investment securities within finance costs.
The fair values of quoted investments are based on bid prices
at the balance sheet date.
Inventories
Inventories are stated at the lower of cost, including all
relevant overhead expenditure, and net realisable value.
Trade and other receivables
Trade and other receivables are stated at their amortised
cost less impairment losses. A provision for impairment is
established when there is objective evidence that the Group
will not be able to collect all amounts due according to
the original terms of the receivables. Significant financial
difficulties of the debtor, probability that the debtor will
enter bankruptcy or financial reorganisation, and default or
delinquency in payments are considered indicators that the
trade receivable is impaired. Receivables with a short-term
duration are not discounted.
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1. Accounting policies continued
An impairment loss is reversed if the subsequent increase in
recoverable amount can be related objectively to an event
occurring after the impairment loss was recognised.
Amounts due from customers for contract work include long-
term contract balances less attributable progress payments.
Long-term contract balances are stated at cost, plus
attributable profit, less provision for any anticipated losses.
Appropriate provisions for any losses are made in the year in
which they are first foreseen.
Progress payments are amounts received from customers
in accordance with the terms of contracts which specify
payments in advance of delivery and are credited, as progress
payments, against any expenditure incurred for the particular
contract. Any unexpended balance in respect of progress
payments is held in trade and other payables as customer
stage payments or, if the amounts are subject to advance
payment guarantees unrelated to company performance,
as cash received on customers’ account.
Cash received on customers’ account is excluded from net
cash/(debt) (as defined by the Group).
Derivative financial instruments and hedging activities
The global nature of the Group’s business means it is exposed
to volatility in currency exchange rates. In order to protect itself
against currency fluctuations, the Group’s policy is to hedge all
material firm transactional exposures as well as to manage
anticipated economic cash flow exposures over the medium
term. The Group also uses interest rate derivative instruments
to manage the Group’s exposure to interest rate fluctuations
on its borrowings and deposits by varying the proportion of
fixed rate debt relative to floating rate debt over the forward
time horizon. The Group aims to achieve hedge accounting
treatment for all derivatives that hedge material foreign
currency exposures and those interest rate exposures where
hedge accounting can be achieved.
In accordance with its treasury policy, the Group does not
hold derivative financial instruments for trading purposes.
However, derivatives that do not qualify for hedge accounting
are accounted for as trading instruments.
Derivative financial instruments are recognised initially at fair
value. Subsequent to initial recognition, such instruments are
stated at fair value at the balance sheet date. Gains and
losses on derivative financial instruments that do not qualify
for hedge accounting are recognised in the income statement
for the period.
Cash flow hedges
Where a derivative financial instrument is designated as a
hedge of cash flows relating to a highly probable forecast
transaction (income or expense), the effective portion of any
change in the fair value of the instrument is recognised directly
in reserves. Amounts recognised in reserves are recycled
from reserves into the cost of the underlying transaction and
recognised in the income statement when the underlying
transaction affects profit or loss. The ineffective portion of any
change in the fair value of the instrument is recognised in the
income statement immediately.
Fair value hedges
Where a derivative financial instrument is designated as a
fair value hedge, changes in the fair value of the underlying
asset or liability attributable to the hedged risk, and gains
and losses on the derivative instrument, are recognised in
the income statement for the period.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, call
deposits and other short-term liquid investments with original
maturities of three months or less and which are subject to an
insignificant risk of change in value. For the purpose of the
cash flow statement, cash and cash equivalents also includes
bank overdrafts that are repayable on demand.
Loans and overdrafts
Loans and overdrafts are recognised initially at fair value,
less attributable transaction costs. Subsequent to initial
recognition, loans and overdrafts are stated at amortised
cost or fair value in respect of the hedged risk where hedge
accounting has been adopted, with any difference between
cost and redemption value being recognised in the income
statement over the period of the borrowings on an effective
interest basis.
Trade and other payables
Trade and other payables are stated at their cost.
Provisions
A provision is recognised in the balance sheet when the Group
has a present legal or constructive obligation as a result of a
past event, it is probable that an outflow of economic benefits
will be required to settle the obligation and the amount has
been reliably estimated. If the effect is material, provisions are
determined by discounting the expected future cash flows at
an appropriate pre-tax discount rate.
A provision for warranties is recognised when the underlying
products and services are sold. The provision is based on
historical warranty data and a weighting of all possible
outcomes against their associated probabilities.
A provision for restructuring is recognised when the Group has
approved a detailed and formal restructuring plan, and the
restructuring has either commenced or has been publicly
announced. Future operating costs are not provided for.
A provision for onerous contracts is recognised when the
expected benefits to be derived by the Group from a contract
are lower than the unavoidable cost of meeting its obligations
under the contract.
Provisions for losses on contracts are recorded when it
becomes probable that total estimated contract costs will
exceed total contract revenues. Such provisions are recorded
as write downs of work-in-progress for that portion of the work
which has already been completed, and as liability provisions
for the remainder. Losses are determined on the basis of
estimated results on completion of contracts and are updated
regularly.
Pension obligations
Group companies operate various pension plans. The Group
has both defined benefit and defined contribution plans.
Obligations for contributions to defined contribution pension
plans are recognised as an expense in the income statement
as incurred.
For defined benefit retirement plans, the cost of providing
benefits is determined periodically by independent actuaries
and charged to the income statement in the period in which
those benefits are earned by the employees. Actuarial gains
and losses are recognised in full in the period in which they
occur, and are recognised in the statement of comprehensive
income. Past service cost is recognised immediately to the
extent the benefits are already vested, or otherwise is
recognised on a straight-line basis over the average period
BAE Systems Annual Report 2010 133
Notes to the Group accounts continued
1. Accounting policies continued
until the benefits become vested. Curtailments due to the
material reduction of the expected years of future services of
current employees or the elimination of the accrual of defined
benefits for some or all of the future services for a significant
number of employees are recognised immediately as a gain or
loss in the income statement.
The retirement benefit obligations recognised in the balance
sheet represent the present value of the defined benefit
obligations as adjusted for unrecognised past service cost
and as reduced by the fair value of scheme assets.
Tax
Income tax on the profit or loss for the year comprises current
and deferred tax. Income tax is recognised in the income
statement except to the extent that it relates to items
recognised directly in equity, in which case it is recognised
in equity.
Current tax is the expected tax payable on the taxable income
for the year, using rates enacted or substantively enacted at
the balance sheet date, and any adjustment to tax payable in
respect of previous years.
Deferred tax is provided in full, using the balance sheet liability
method, on temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. The
following temporary differences are not provided for: goodwill
not deductible for tax purposes; the initial recognition of
assets or liabilities that affect neither accounting nor taxable
profit; and differences relating to investments in subsidiaries
to the extent that they will probably not reverse in the
foreseeable future. The amount of deferred tax provided is
based on the expected manner of realisation or settlement of
the carrying amount of assets and liabilities, using tax rates
enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable profits will be available against
which the asset can be utilised. Deferred tax assets are
reduced to the extent that it is no longer probable that the
related tax benefit will be realised.
Additional income taxes that arise from the distribution of
dividends are recognised at the same time as the liability to
pay the related dividend.
Share-based payment compensation
The Group issues equity-settled and cash-settled share
options to employees. In accordance with the requirements of
IFRS 2, Share-based Payment, the Group has applied IFRS 2
to all equity-settled share options granted after 7 November
2002 that were unvested as of 1 January 2005 and all
cash-settled options outstanding at the balance sheet date.
As explained in note 25, equity-settled share options are
measured at fair value at the date of grant using an option
pricing model.
The fair value is expensed on a straight-line basis over the
vesting period, based on the Group’s estimate of the number
of shares that will actually vest.
Cash-settled share options are measured at fair value at the
balance sheet date using an option pricing model. The Group
recognises a liability at the balance sheet date based on these
fair values, and taking into account the estimated number of
the options that will actually vest and the relative completion
of the vesting period. Changes in the value of this liability are
recognised in the income statement for the year.
Foreign currencies
Transactions in foreign currencies are translated at the
exchange rates ruling at the dates of the transactions.
Monetary assets and liabilities denominated in foreign
currencies are retranslated at the exchange rates ruling at
the balance sheet date. These exchange differences are
recognised in the consolidated income statement unless they
qualify for net investment hedge accounting treatment, in
which case the effective portion is recognised directly in a
separate component of equity.
For consolidation purposes, the assets and liabilities of
overseas subsidiary entities, joint ventures and associates are
translated at the exchange rate ruling at the balance sheet
date. Income statements of such entities are translated at
average rates of exchange during the year. All resulting
exchange differences, including exchange differences arising
from the translation of borrowings and other financial
instruments designated as hedges of such investments,
are recognised directly in a separate component of equity.
Translation differences that arose before the transition date
to IFRS (1 January 2004) are presented in equity but not as
a separate component. When a foreign operation is sold, the
cumulative exchange differences recognised since 1 January
2004 are recognised in the income statement as part of the
profit or loss on sale.
Revenue and profit recognition
Sales include the Group’s net share of sales of equity
accounted investments. Revenue represents sales made by
the Company and its subsidiary undertakings, excluding the
Group’s share of sales of equity accounted investments.
Long-term contracts
The majority of the Group’s long-term contract arrangements
are accounted for under IAS 11, Construction Contracts.
Sales are recognised when the Group has obtained the right
to consideration in exchange for its performance. This is
usually when title passes or a separately identifiable phase
(milestone) of a contract or development has been completed
and accepted by the customer.
No profit is recognised on contracts until the outcome of the
contract can be reliably estimated. Profit is calculated by
reference to reliable estimates of contract revenue and
forecast costs after making suitable allowances for technical
and other risks related to performance milestones yet to be
achieved. When it is probable that total contract costs will
exceed total contract revenue, the expected loss is recognised
immediately as an expense.
Goods sold and services rendered
Revenue is measured at the fair value of the consideration
received or receivable, net of returns, rebates and other
similar allowances.
134 www.baesystems.com
1. Accounting policies continued
Revenue from the sale of goods not under a long-term contract
is recognised in the income statement when the significant
risks and rewards of ownership have been transferred to the
buyer, recovery of the consideration is probable, there is no
continuing management involvement with the goods, and the
amount of revenue and costs can be measured reliably. Profit
is recognised at the time of sale.
Revenue from the provision of services not under a long-term
contract is recognised in the income statement in proportion
to the stage of completion of the contract at the reporting
date. The stage of completion is measured on the basis of
direct expenses incurred as a percentage of total expenses to
be incurred for material contracts and labour hours delivered
as a percentage of total labour hours to be delivered for time
contracts.
Sales and profits on intercompany trading are generally
determined on an arm’s length basis.
Lease income
Rental income from aircraft operating leases is recognised in
revenue on a straight-line basis over the term of the relevant
lease. Lease incentives granted are charged to the income
statement over the term of the lease.
Leases
Assets obtained under finance leases are included in property,
plant and equipment at cost and are depreciated over their
useful lives, or the lease term, whichever is the shorter.
Future instalments under such leases, net of financing costs,
are included within loans. Rental payments are apportioned
between the finance element, which is included in finance
costs, and the capital element, which reduces the outstanding
obligation for future instalments, so as to give a constant
charge on the outstanding obligation.
Payments, including any incentives, made under operating
leases are recognised in the income statement on a
straight-line basis over the lease term.
Assets held for leasing out under operating leases are
included in property, plant and equipment at cost less
accumulated depreciation and accumulated impairment
losses. Rental income is recognised in revenue on a
straight-line basis.
Assets leased out under finance leases cease to be
recognised in the balance sheet after the inception of the
lease. Instead, a finance lease receivable, representing the
discounted future lease payments to be received from the
lessee plus any discounted unguaranteed residual value, is
recorded as a long-term financial asset. Interest income is
recognised in the income statement as it accrues, taking into
account the effective yield on the asset.
Underlying EBITA
Management uses an underlying profit measure to monitor
the year-on-year profitability of the Group, which is defined as
earnings before amortisation and impairment of intangible
assets, finance costs and taxation expense (EBITA) excluding
non-recurring items. This definition is referred to as Underlying
EBITA. Underlying EBITA is the measure of profit on which
segmental performance is monitored by management.
As such, it is disclosed in note 3 on a segmental basis.
Non-recurring items are defined as items that are relevant to
an understanding of the Group’s performance with reference
to their materiality and nature. The non-recurring items for
the current and prior years are presented on the face of the
Group’s consolidated income statement.
Finance costs
Financial income comprises interest income on funds
invested, gains on the disposal of available-for-sale financial
assets, changes in the fair value of financial assets at fair
value through profit or loss, and gains on hedging instruments
that are recognised in profit or loss.
Financial expense comprises interest expense on borrowings,
unwinding of the discounts on provisions, changes in the fair
value of financial assets at fair value through profit or loss,
and losses on hedging instruments that are recognised in
profit or loss.
Borrowing costs which are directly attributable to the
acquisition, construction or production of a qualifying asset
(one that takes a substantial period of time to get ready for
use or sale) are capitalised as part of the cost of that asset,
until such time as the assets are ready for their intended use
or sale.
All other borrowing costs are recognised in the income
statement in the period in which they are incurred.
Dividends
Equity dividends on ordinary share capital are recognised as a
liability in the period in which they are declared. The interim
dividend is recognised when it has been approved by the
Board and the final dividend is recognised when it has been
approved by the shareholders at the Annual General Meeting.
Discontinued operations
A discontinued operation is a component of the Group’s
business that represents a separate major line of business
or geographical area of operations that has been disposed
of or meets the criteria as held for sale. When an operation
is classified as a discontinued operation, the comparative
consolidated income statement is re-presented as if the
operation had been discontinued from the start of the
comparative period.
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BAE Systems Annual Report 2010 135
Notes to the Group accounts continued
2. Changes in accounting policies
Standards, amendments and interpretations effective in 2010
With effect from 1 January 2010, the Group early adopted
Improvements to IFRSs 2010 which makes minor amendments
to seven existing standards. These amendments impact
disclosures and, therefore, have had no impact on the
reported results or financial position of the Group. The
amendment to IAS 1, Presentation of Financial Statements,
allows the presentation either in the statement of changes in
equity, or within the notes, of an analysis of the components
of other comprehensive income by item.
With effect from 1 January 2010, the Group adopted the
following amendments to existing standards:
–
IFRS 3, Business Combinations, introduces changes
in the accounting treatment of acquisitions, such as
the accounting for acquisition-related costs, the initial
recognition and subsequent measurement of contingent
consideration, and business combinations achieved in
stages. The change in accounting policy has been applied
prospectively and has not had a material impact on
reported results. The impact on future years will depend
on the specific acquisitions undertaken; and
– Amendment to IAS 27, Consolidated and Separate Financial
Statements, requires that acquisitions of non-controlling
interests that do not result in a change of control are
accounted for as transactions with equity holders and,
therefore, no goodwill is recognised as a result. The
change in accounting policy has been applied prospectively
and has not had a material impact on reported results.
In addition, the Group has reviewed the effect of the following
amendments and interpretations effective from 1 January
2010, and has concluded that they have no impact on the
Group’s accounts:
– Amendment to IAS 39, Financial Instruments: Recognition
and Measurement: Eligible Hedged Items;
– Amendment to IFRS 2, Share-based Payment: Group
Cash-settled Share-based Payment Transactions;
–
–
–
Improvements to IFRSs 2009;
International Financial Reporting Interpretations Committee
(IFRIC) 17, Distributions of Non-cash Assets to Owners; and
IFRIC 18, Transfers of Assets from Customers.
Amendments to existing standards and interpretations that
are not yet effective and have not been early adopted by
the Group
The Group has reviewed the effect of the following
EU-endorsed amendments and interpretations, and does not
expect that they will have an impact on the Group's accounts:
– Amendment to IAS 32, Financial instruments: Presentation:
Classification of Rights Issues, effective on or after
1 February 2010;
–
–
IFRIC 19, Extinguishing Financial Liabilities with Equity
Instruments, effective on or after 1 July 2010;
IAS 24, Related Party Disclosures, effective on or after
1 January 2011; and
– Amendment to IFRIC 14, IAS 19, The Limit on a Defined
Benefit Asset, Minimum Funding Requirements and their
Interaction, effective on or after 1 January 2011.
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3. Segmental analysis
The Group reports on five operating groups which are organised around a combination of the different products and services
they provide, and the geographical areas in which they operate:
– BAE Systems, Inc.:
– Electronics, Intelligence & Support, based primarily in the US, provides a wide range of electronic systems and
subsystems for military and commercial applications, technical and professional services for US national security and
federal markets, and ship repair and modernisation services. It comprises four businesses: Electronic Solutions,
Intelligence & Security, Platform Solutions and Support Solutions;
– Land & Armaments, based primarily in the US, designs, develops, produces, supports and upgrades armoured combat
vehicles, tactical wheeled vehicles, naval guns, missile launchers, artillery systems, munitions and law enforcement
products;
– Programmes & Support primarily comprises the Group’s UK-based air, maritime and Cyber & Intelligence activities;
–
International comprises the Group’s businesses in Australia, India and Saudi Arabia, together with interests in the
pan-European MBDA joint venture and Air Astana; and
– HQ & Other Businesses comprises the regional aircraft asset management and support activities, head office and UK
shared services activity, including research centres and property management.
The Group has not aggregated any segments in arriving at the analysis.
Management monitors the results of these operating groups to assess performance and make decisions about the allocation
of resources. Segment performance is evaluated based on underlying EBITA1. This is reconciled below to the operating group
result and the operating profit in the consolidated financial statements. Finance costs and taxation expense are managed on
a Group basis.
Analysis by operating group – continuing operations
Combined sales
of Group and equity
accounted investments
Less:
sales by equity accounted
investments
Add:
sales to equity accounted
investments
Revenue
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Intra-operating group sales/revenue
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
2010
£m
5,653
5,930
6,680
4,534
278
Restated2
2009
£m
5,637
6,738
6,298
3,828
254
23,075 22,755
(765)
22,392 21,990
(683)
2010
£m
(49)
(42)
(1,445)
(1,221)
–
(2,757)
21
(2,736)
Restated2
2009
£m
–
(6)
(1,779)
(1,088)
–
(2,873)
16
(2,857)
2010
£m
49
–
1,339
–
–
1,388
53
1,441
2009
£m
–
–
1,166
–
–
2010
£m
5,653
5,888
6,574
3,313
278
1,166 21,706
(609)
1,241 21,097
75
2009
£m
5,637
6,732
5,685
2,740
254
21,048
(674)
20,374
Revenue from
external customers
Intra-operating
group revenue
2010
£m
130
106
274
7
92
609
2009
£m
138
45
431
12
48
2010
£m
5,523
5,782
6,300
3,306
186
674 21,097
2009
£m
5,499
6,687
5,254
2,728
206
20,374
Capital
expenditure3
2010
£m
116
99
119
61
42
437
2009
£m
123
84
109
142
64
522
Depreciation and
amortisation3
2010
£m
134
348
140
61
48
731
2009
£m
125
244
116
55
64
604
1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 37).
2 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
3 Includes intangible assets, property, plant and equipment, and investment property.
BAE Systems Annual Report 2010 137
Notes to the Group accounts continued
3. Segmental analysis continued
Electronics, Intelligence &
Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Financial (expense)/income
of equity accounted
investments
Taxation expense of equity
accounted investments
Operating profit
Finance costs
Profit before taxation
Taxation expense
Profit/(loss) for the year –
continuing operations
Analysis of non-current assets by geographical location
Asset location
United Kingdom
Rest of Europe
Saudi Arabia
United States
Asia and Pacific
Africa, Central and South America
Non-current operating group assets
Financial instruments
Inventories
Trade and other receivables
Total operating group assets
Tax
Retirement benefit obligations (note 21)
Cash (as defined by the Group) (note 27)
Consolidated total assets
Underlying EBITA1
Non-recurring items3
Amortisation of
intangible assets
Impairment of
intangible assets4
Operating group
result5
2010
£m
Restated2
2009
£m
668
604
529
478
(65)
575
604
670
419
(71)
2,214 2,197
2010
£m
2009
£m
2010
£m
2009
£m
2010
£m
2009
£m
2010
£m
2
–
1
–
(18)
(15)
202
59
68
–
(278)
51
(27)
(281)
(58)
(25)
(1)
(392)
(27)
(177)
(49)
(32)
(1)
(286)
(8)
(25)
(85)
(7)
–
(125)
(8)
(927)
(34)
(4)
–
635
298
387
446
(84)
(973) 1,682
Restated2
2009
£m
742
(441)
655
383
(350)
989
(2)
2
(44)
1,636
(192)
1,444
(417)
(25)
966
(700)
266
(327)
1,027
(61)
Carrying value of
non-current assets
2010
£m
2,582
1,105
734
10,022
621
31
Restated6
2009
£m
2,587
1,190
729
9,838
589
47
15,095 14,980
310
887
3,764
19,652 19,941
1,563
42
3,943
24,030 25,489
354
644
3,559
1,211
49
3,118
1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 37).
2 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
3 Non-recurring items comprise profit on disposal of businesses of £1m (2009 £68m), pension curtailment gains of £2m (2009 £261m) and regulatory penalties of £18m (2009 £278m).
4 See note 11.
5 The analysis by operating group of the share of results of equity accounted investments is provided in note 14.
6 Restated following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
138 www.baesystems.com
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3. Segmental analysis continued
Analysis of sales and revenue by geographical location – continuing operations
Sales
Revenue
Customer location
United Kingdom
Rest of Europe
Saudi Arabia
Rest of Middle East
United States
Canada
Australia
Rest of Asia and Pacific
Africa, Central and South America
Restated1
2009
£m
217
105
2010
£m
2010
£m
4,306 4,148 4,161
2,793 2,559 2,036
3,186 2,779 2,994
162
2009
£m
3,562
1,811
2,607
64
10,129 10,921 10,126 10,902
119
672
226
411
22,392 21,990 21,097 20,374
119
77
675 1,027
257
261
257
423
77
1,028
339
317
1 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
Analysis of revenue by category – continuing operations
Sale of goods
Construction contracts
Provision of services
Lease income
Royalty income
2010
£m
5,793
2009
£m
6,777
11,757 10,274
3,239
73
11
21,097 20,374
3,480
60
7
Analysis of revenue by major customer – continuing operations
Revenue from the Group’s three principal customers, which individually represent over 10% of total revenue, is as follows:
UK Ministry of Defence1
US Department of Defense
Kingdom of Saudi Arabia Ministry of Defence and Aviation
2010
£m
5,060
7,696
2,870
2009
£m
4,101
8,381
2,602
1 Revenue from the UK Ministry of Defence includes £1.3bn (2009 £1.1bn) generated under the Typhoon workshare agreement with Eurofighter GmbH. This revenue is included within Rest of
Europe in the analysis by geographical location above.
Revenue from the UK Ministry of Defence and the US Department of Defense was generated by all four principal operating
groups. Revenue from the Kingdom of Saudi Arabia Ministry of Defence and Aviation was generated by the International
operating group.
BAE Systems Annual Report 2010 139
Notes to the Group accounts continued
4. Operating costs
Raw materials and other bought-in items
Change in inventories of finished goods and work-in-progress
Cost of inventories expensed
Staff costs (note 7)
Depreciation, amortisation and impairment
Loss on disposal of property, plant and equipment
Regulatory penalties1
Trinidad and Tobago charge
Other operating charges
Included within the analysis of operating costs are the following expenses:
Lease and sublease payments:
Minimum lease payments
Research and development expense including amounts funded under contract
2010
£m
8,471
985
9,456
5,633
899
10
18
100
3,645
19,761
2009
£m
9,330
(538)
8,792
5,605
1,600
–
278
–
3,785
20,060
177
1,298
167
1,2112
1 The regulatory penalties of £278m in 2009 reflected the global settlement of the regulatory investigations by the US Department of Justice (DoJ) and the UK’s Serious Fraud Office. The £18m
charge in the current year reflects the US dollar exchange rate movement on payment of the penalty in respect of the DoJ.
2 Restated.
Costs of rationalisation programmes included in operating costs
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
2010
£m
14
26
90
13
12
155
2009
£m
24
32
80
9
6
151
140 www.baesystems.com
4. Operating costs continued
Fees payable to the Company’s auditor and its associates included in operating costs
Fees payable to the Company’s auditor for the audit of the
Company’s annual accounts*
1,484
–
1,484
1,486
–
1,486
UK
£’000
2010
Overseas
£’000
Total
£’000
UK
£’000
2009
Overseas
£’000
Total
£’000
Fees payable to the Company’s auditor and its associates
for other services
The audit of the Company’s subsidiaries pursuant
to legislation*
Other services pursuant to legislation:
Interim review
Other
Further assurance services
Advice on accounting matters
Internal controls
Due diligence
Tax services
Compliance
Advisory
Other services
M&A
Other
Total fees payable to the Company’s auditor and
its associates
* Total fees payable to the Company’s auditor and
its associates for audit services
2,499
4,536
7,035
2,497
4,217
6,714
579
92
51
–
365
637
290
58
148
–
139
17
–
337
579
231
68
–
702
2,026
379
2,663
669
638
240
696
388
581
57
–
–
437
481
272
99
76
–
–
22
2
45
581
57
22
2
482
768
542
1,249
814
–
2
99
78
6,203
8,312
14,515
5,986
5,598
11,584
8,519
8,200
In addition to the amounts above, the auditors’ fees for audit services in respect of the Group’s pension schemes were
£144,000 (2009 £143,000).
The increase in overseas fees for the audit of subsidiaries includes £317,000 relating to foreign exchange translation.
Tax services include tax compliance support and services in relation to the Group’s expatriate employees based around the world.
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BAE Systems Annual Report 2010 141
Notes to the Group accounts continued
5. Other income
Rental income from operating leases (including from investment property)
Profit on disposal of property, plant and equipment
Profit on disposal of businesses (note 9)
Management recharges to equity accounted investments (note 31)
Pension curtailment gains (note 21)
US healthcare curtailment gains (note 21)
Other
6. Finance costs
Interest income
Net present value adjustments
Expected return on pension scheme assets (note 21)
Gain on remeasurement of financial instruments at fair value through profit or loss1
Foreign exchange gains
Financial income
Interest expense:
On bank loans and overdrafts
On finance leases
On bonds and other financial instruments
Facility fees
Net present value adjustments
Interest charge on pension scheme liabilities (note 21)
Loss on remeasurement of financial instruments at fair value through profit or loss
Foreign exchange losses
Financial expense
Net finance costs
1 Includes a £26m (translated at average exchange rates) fair value movement in 2010 in respect of the remaining 10.25% shareholding in Saab AB.
Additional analysis of finance costs
Net finance costs:
Group
Share of equity accounted investments – continuing operations
Analysed as:
Net interest:
Interest income
Interest expense
Facility fees
Net present value adjustments
Share of equity accounted investments – continuing operations
Other finance costs:
Group:
Net financing charge on pensions
Market value and foreign exchange movements on financial instruments and investments3
Share of equity accounted investments – continuing operations
2 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
3 The loss in 2009 primarily reflected net foreign exchange movements on the unhedged portion of an intercompany loan from the UK to the US businesses.
Borrowing costs capitalised during the year were £nil (2009 £nil).
142 www.baesystems.com
2010
£m
48
23
1
14
2
5
76
169
2010
£m
40
–
916
176
226
1,358
–
(1)
(203)
(204)
(4)
(28)
(996)
(225)
(93)
(1,550)
(192)
2010
£m
(192)
(2)
(194)
40
(204)
(4)
(28)
5
(191)
(80)
84
(7)
(194)
2009
£m
50
17
68
24
261
–
45
465
2009
£m
66
5
777
408
317
1,573
(1)
(2)
(225)
(228)
(4)
(40)
(900)
(467)
(634)
(2,273)
(700)
Restated2
2009
£m
(700)
2
(698)
66
(228)
(4)
(35)
8
(193)
(123)
(376)
(6)
(698)
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7. Employees and directors
The weekly average and year-end numbers of employees, excluding those in equity accounted investments, were as follows:
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
2009
Number
Weekly average
2010
Number
‘000
31
18
33
11
2
95
‘000
33
21
27
11
2
94
The aggregate staff costs of Group employees, excluding employees of equity accounted investments, were:
Wages and salaries
Social security costs
Share options granted to directors and employees – equity-settled
Share options granted to directors and employees – cash-settled
Pension costs – defined contribution plans (note 21)
Pension costs – defined benefit plans (note 21)
US healthcare plans (note 21)
At year end
2010
Number
‘000
31
16
32
11
2
92
2009
Number
‘000
32
20
33
11
2
98
2010
£m
4,884
409
18
(2)
110
212
2
5,633
2009
£m
4,897
400
13
(2)
127
167
3
5,605
The Group considers key management personnel as defined under IAS 24, Related Party Disclosures, to be the members of the
Group’s Executive Committee and the Company’s non-executive directors. Fuller disclosures on directors’ remuneration are set
out in the Remuneration report on pages 96 to 119. Total emoluments for directors and other key management personnel were:
Short-term employee benefits
Post-employment benefits1
Share-based payments
1 2009 includes special incentive awards.
2010
£’000
15,131
1,300
4,033
20,464
2009
£’000
14,761
1,754
4,773
21,288
BAE Systems Annual Report 2010 143
Notes to the Group accounts continued
8. Tax
Taxation expense
Current taxation expense
UK corporation tax
Current tax
Double tax relief
Adjustment in respect of prior years
Overseas tax charges
Current year
Adjustment in respect of prior years
Deferred taxation expense
UK
Origination and reversal of temporary differences
Adjustment in respect of prior years
Tax rate adjustment2
Overseas
Origination and reversal of temporary differences
Adjustment in respect of prior years
Taxation expense
2010
£m
Restated1
2009
£m
(121)
3
(29)
(147)
(263)
26
(237)
(384)
(22)
23
(6)
(9)
(19)
(33)
(417)
(83)
8
(44)
(119)
(300)
46
(254)
(373)
(2)
16
–
55
(23)
46
(327)
Reconciliation of taxation expense – continuing operations
The following table reconciles the theoretical income tax expense, using the UK corporation tax rate, to the reported tax
expense. The reconciling items represent, besides the impact of tax rate differentials and changes, non-taxable benefits
or non-deductible expenses arising from differences between the local tax base and the reported financial statements.
Profit before taxation
UK corporation tax rate
Expected income tax expense
Effect of tax rates in foreign jurisdictions
Expenses not tax effected
Income not subject to tax
Research and development tax credits
Goodwill impairment
Chargeable gains
Utilisation of previously unrecognised tax losses
Current year losses not tax effected
Adjustments in respect of prior years
Adjustments in respect of equity accounted investments
Regulatory penalties
Tax rate adjustment2
Other
Taxation expense
2010
£m
1,444
Restated3
2009
£m
266
28.0%
28.0%
(404)
(74)
(43)
(24)
42
32
(24)
(2)
7
–
1
37
(5)
(6)
(28)
(417)
(37)
(43)
32
36
(203)
(1)
6
(7)
(5)
52
(78)
–
(5)
(327)
1 Restated following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
2 The UK current tax rate will be reduced from 28% to 27% with effect from 1 April 2011. In line with this change, the rate applying to UK deferred tax assets and liabilities has also been
reduced from 28% to 27%, creating a rate adjustment, which is partly reflected in the consolidated income statement and partly in the consolidated statement of comprehensive income.
3 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
144 www.baesystems.com
Net of tax
£m
(246)
(56)
(283)
10
(1,467)
(38)
2
–
–
(2)
–
6
(2,074)
Restated1
2009
£m
(3)
2
53
12
14
78
–
–
110
(4)
541
16
–
–
–
(2)
–
6
667
2010
£m
(2)
2
69
–
(1)
68
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8. Tax continued
Tax recognised in other comprehensive income
2010
Tax benefit/
(expense)
£m
Before tax
£m
Net of tax
£m
Before tax
£m
Restated1
2009
Tax benefit/
(expense)
£m
Currency translation on foreign currency net investments:
Subsidiaries
Equity accounted investments
Amounts (charged)/credited to hedging reserve
Gain on revaluation of step acquisition
Net actuarial gains/(losses) on defined benefit pension
schemes:
Subsidiaries
Equity accounted investments
Fair value movements on available-for-sale investments
Recycling of cumulative currency translation reserve on disposal
Recycling of cumulative net hedging reserve on disposal
Share-based payments
Tax rate adjustment2
Other
Current tax taken in equity
160
(6)
(84)
–
874
40
14
(17)
(4)
–
–
–
977
–
–
22
–
(234)
(12)
–
–
–
1
(23)
(6)
(252)
160
(6)
(62)
–
640
28
14
(17)
(4)
1
(23)
(6)
725
(246)
(56)
(393)
14
(2,008)
(54)
2
–
–
–
–
–
(2,741)
Relating to financial instruments
Relating to share-based payments
Relating to pensions
Relating to gain on revaluation of step acquisition
Other
Deferred tax assets/(liabilities)
Property, plant and equipment
Intangible assets
Provisions and accruals
Goodwill
Pension/retirement plans:
Deficits
Additional contributions
Share-based payments
Financial instruments
Other items
Rolled over capital gains
Capital losses carried forward
Trading losses carried forward
Unremitted overseas dividends
Deferred tax assets/(liabilities)
Set off of tax
Net deferred tax assets/(liabilities)
Deferred tax assets
Deferred tax liabilities
Net balance
at 31 December
2010
£m
14
–
394
–
1,060
18
11
20
58
–
17
28
–
1,620
(460)
1,160
Restated1
2009
£m
1
–
432
–
1,430
15
22
–
58
–
18
19
–
1,995
(464)
1,531
2010
£m
(118)
(207)
–
(110)
–
–
–
(12)
(2)
(17)
–
–
–
(466)
460
(6)
Restated1
2009
£m
(47)
(325)
–
(69)
–
–
–
(4)
(6)
(18)
–
–
(3)
(472)
464
(8)
2010
£m
(104)
(207)
394
(110)
1,060
18
11
8
56
(17)
17
28
–
1,154
–
1,154
Restated1
2009
£m
(46)
(325)
432
(69)
1,430
15
22
(4)
52
(18)
18
19
(3)
1,523
–
1,523
1 Restated following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
2 The UK current tax rate will be reduced from 28% to 27% with effect from 1 April 2011. In line with this change, the rate applying to UK deferred tax assets and liabilities has also been
reduced from 28% to 27%, creating a rate adjustment, which is partly reflected in the consolidated income statement and partly in the consolidated statement of comprehensive income.
BAE Systems Annual Report 2010 145
Notes to the Group accounts continued
8. Tax continued
Movement in temporary differences during the year
Property, plant and equipment
Intangible assets
Provisions and accruals
Goodwill
Pension/retirement plans:
Deficits3
Additional contributions
Share-based payments
Financial instruments
Other items
Rolled over capital gains
Capital losses carried forward
Trading losses carried forward
Unremitted overseas dividends
Property, plant and equipment1
Intangible assets
Provisions and accruals1
Goodwill
Pension/retirement plans:
Deficits3
Additional contributions
Share-based payments1
Financial instruments
Other items1
Rolled over capital gains
Capital losses carried forward
Trading losses carried forward1
Unremitted overseas dividends
At
1 January
20101
£m
(46)
(325)
432
(69)
Exchange
movements
£m
–
(10)
18
(2)
Acquisitions
and
disposals2
£m
(46)
(14)
8
–
Recognised
in income
£m
(12)
138
(64)
(39)
Recognised
in equity
£m
–
4
–
–
At
31 December
2010
£m
(104)
(207)
394
(110)
1,430
15
22
(4)
52
(18)
18
19
(3)
1,523
11
–
–
–
2
–
–
3
–
22
–
–
–
–
1
–
–
1
–
(50)
(47)
–
(11)
(11)
5
1
(1)
5
3
(33)
(334)
3
–
23
(4)
–
–
–
–
(308)
1,060
18
11
8
56
(17)
17
28
–
1,154
At
1 January
2009
£m
(69)
(509)
457
(34)
Exchange
movements
£m
6
33
(23)
5
Acquisitions
and
disposals4
£m
(2)
(34)
20
–
Recognised
in income
£m
16
214
(25)
(40)
Recognised
in equity
£m
3
(29)
3
–
At
31 December
2009
£m
(46)
(325)
432
(69)
1,115
66
30
(136)
25
(18)
18
1
–
946
(45)
–
(1)
–
–
–
–
1
–
(24)
–
(3)
(1)
–
(3)
–
–
5
–
(18)
(164)
(12)
(1)
19
33
–
–
9
(3)
46
524
(36)
(5)
113
(3)
–
–
3
–
573
1,430
15
22
(4)
52
(18)
18
19
(3)
1,523
1 Restated following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
2 Acquisitions and disposals includes net deferred tax liabilities on the acquisitions of Atlantic Marine (£40m) and Tenix Defence (£10m).
3 Includes deferred tax assets on workers’ deferred compensation plans in the US.
4 Acquisitions and disposals includes deferred tax assets on the acquisition of Tenix Defence (£7m) and Detica (£4m), less deferred tax liabilities arising on the acquisition of the remaining
shareholding in BVT (£27m).
Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following items:
Deductible temporary differences
Capital losses carried forward
Trading and other losses carried forward
2010
£m
3
56
194
253
2009
£m
10
58
158
226
These assets have not been recognised as the incidence of future profits in the relevant countries and legal entities cannot be
sufficiently accurately predicted at this time.
Due to changes in UK tax legislation during 2009, there are no unrecognised deferred tax liabilities arising on the aggregate
temporary differences associated with investments in subsidiaries, branches, associates and joint ventures (2009 £nil).
Any withholding tax due on the remittance of future earnings is expected to be insignificant.
146 www.baesystems.com
8. Tax continued
Future changes in tax rates
The Emergency Budget on 22 June 2010 announced that the UK current tax rate will reduce from 28% to 24% over a period of four
years from 2011. This will reduce future current tax charges accordingly. The first reduction from 28% to 27% was substantively
enacted before 31 December 2010 and will be effective from 1 April 2011. In line with this change, the rate applying to UK
deferred tax assets and liabilities has also been reduced from 28% to 27%, creating a rate adjustment, which is partly reflected
in the consolidated income statement and partly in the consolidated statement of comprehensive income. Accordingly, both
recognised and unrecognised UK deferred tax balances as at 31 December 2010 have been calculated at 27%.
The reduction in the rate from 27% to 24% has not yet been substantively enacted. If these reductions had been substantively
enacted by 31 December 2010, the effect would have been to reduce the net deferred tax asset as at 31 December 2010
from £1,154m to £1,065m. Of this reduction, it is estimated that £19m would have been charged to the consolidated income
statement and £70m charged to the consolidated statement of comprehensive income. In addition, unrecognised deferred tax
assets as at 31 December 2010 would have reduced from £253m to £235m.
9. Disposals
Discontinued operations for the year ended 31 December 2010
On 3 June 2010, the Group sold half of its 20.5% shareholding in Saab AB to Investor AB for a cash consideration of
SEK1,041m (£92m). Following the loss of significant influence over the company, the Group has discontinued the use of the
equity method and the remaining shareholding in Saab is shown within other financial assets as a financial asset at fair value
through profit or loss at 31 December 2010 (see note 17). The Group’s share of the results of Saab to the date of disposal is
shown within discontinued operations for the current and prior periods.
The results from discontinued operations which have been included in the consolidated income statement are as follows:
Share of results of equity accounted investments
Profit on disposal of discontinued operations
Profit for the year – discontinued operations
The profit on disposal of discontinued operations is calculated as follows:
Cash consideration
Fair value of retained 10.25% investment
Transaction costs
Carrying value of 20.5% shareholding (note 14)
Cumulative net hedging gain
Cumulative currency translation gain
Profit on disposal of discontinued operations
2010
£m
2
52
54
2009
£m
16
–
16
£m
92
97
(3)
(155)
4
17
52
Following the classification of Saab as a discontinued operation, combined sales of Group and equity accounted investments in
the comparatives for the year ended 31 December 2009 have been reduced by £425m.
Continuing operations for the year ended 31 December 2010
During 2010, the Group completed the disposal of its Sistemas y Desarrollos Funcionales Limitada (SISDEF) joint venture for
total cash consideration of £1m. Profit on disposal is £1m.
Continuing operations for the year ended 31 December 2009
Profit on disposal of businesses of £68m comprised the finalisation of the accounting gain recognised in 2008 on the disposal
of the Group’s interests in the businesses contributed to the BVT joint venture following acquisition of VT Group’s 45% interest
in 2009 (£58m) and additional proceeds received in respect of the disposal in 2008 of the Group’s interest in Flagship Training
(£10m).
The Group received deferred consideration of £72m in the year ended 31 December 2009 in respect of the disposals of
Flagship Training Limited in 2008 (£70m) and the Inertial Products business in 2007 (£2m).
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BAE Systems Annual Report 2010 147
Notes to the Group accounts continued
10. Earnings per share
Profit/(loss) for the year attributable to equity shareholders
Represented by:
Continuing operations
Discontinued operations
Add back/(deduct):
Profit on disposal of businesses, post tax
Pension curtailment gains, post tax
Regulatory penalties
Net financing charge on pensions, post tax
Market value movements on derivatives, post tax
Amortisation and impairment of intangible assets,
post tax
Impairment of goodwill
Underlying earnings, post tax
Represented by:
Continuing operations
Discontinued operations
2010
Basic
pence
per share
30.5
Diluted
pence
per share
30.3
28.9
1.6
28.7
1.6
42.4
42.1
40.8
1.6
42.4
40.5
1.6
42.1
£m
1,052
998
54
(1)
(1)
18
59
(57)
307
84
1,461
1,407
54
1,461
£m
(67)
(83)
16
(65)
(188)
278
91
278
384
725
1,436
1,415
21
1,436
Restated1
2009
Basic
pence
per share
(1.9)
Diluted
pence
per share
(1.9)
(2.3)
0.4
(2.3)
0.4
40.7
40.6
40.1
0.6
40.7
40.0
0.6
40.6
Weighted average number of shares used in calculating
basic earnings per share
Incremental shares in respect of employee share schemes
Weighted average number of shares used in calculating
diluted earnings per share
Millions
Millions
Millions
Millions
3,451
3,451
20
3,471
3,532
3,532
4
3,536
1 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
Underlying earnings per share is presented in addition to that required by IAS 33, Earnings per Share, to align the adjusted
earnings measure with the performance measure reviewed by the directors. The directors consider that this gives a more
appropriate indication of underlying performance.
In the 12 months to 31 December 2009, outstanding share options were anti-dilutive and so were excluded from the diluted
loss per share in accordance with IAS 33.
148 www.baesystems.com
11. Intangible assets
Cost or valuation
At 1 January 2009
Additions:
Acquired separately
Internally developed
Reclassification from equity accounted investments (note 14)3
Acquisition of subsidiaries (note 29) (restated4)
Adjustment on finalisation of provisional goodwill5
Disposals
Transfer from property, plant and equipment
Exchange adjustments
At 31 December 2009 (restated4)
Additions:
Acquired separately
Internally developed
Acquisition of subsidiaries (note 29)
Adjustment to fair value of consideration6
Disposals
Asset reclassifications
Transfer from property, plant and equipment
Transfer from inventories
Exchange adjustments
At 31 December 2010
Amortisation and impairment
At 1 January 2009
Disposals
Amortisation charge7
Impairment charge
Exchange adjustments
At 31 December 2009
Disposals
Amortisation charge7
Impairment charge
Asset reclassifications
Transfer from property, plant and equipment
Exchange adjustments
At 31 December 2010
Net book value
At 31 December 2010
At 31 December 2009 (restated4)
At 1 January 2009
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e
c
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a
m
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o
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a
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c
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a
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Programme
and
customer
related1
£m
Goodwill
£m
Other2
£m
Total
£m
13,201
1,728
417
15,346
–
–
253
420
5
–
–
(655)
13,224
–
–
161
(64)
(12)
–
–
–
279
13,588
2,333
–
–
725
(55)
3,003
–
–
84
–
–
36
3,123
10,465
10,221
10,868
–
–
–
225
11
–
–
(144)
1,820
–
–
37
–
–
27
–
–
60
1,944
556
–
219
240
(48)
967
–
327
30
15
–
34
1,373
571
853
1,172
28
14
–
–
–
(7)
4
(8)
448
17
2
4
–
(6)
(27)
3
3
21
465
151
(7)
67
8
(3)
216
(6)
65
11
(15)
1
13
285
180
232
266
28
14
253
645
16
(7)
4
(807)
15,492
17
2
202
(64)
(18)
–
3
3
360
15,997
3,040
(7)
286
973
(106)
4,186
(6)
392
125
–
1
83
4,781
11,216
11,306
12,306
1 Relates to intangible assets recognised on acquisition of subsidiary companies, mainly in respect of ongoing programme relationships and the acquired order book.
2 Other intangibles includes patents, trademarks, software and internally funded development costs.
3 Goodwill arising on the formation of the BVT joint venture in the year ended 31 December 2008 and goodwill associated with the Group’s initial 50% shareholding in Fleet Support Limited
was reclassified from equity accounted investments to intangible assets in accordance with IFRS 3 (2004) in 2009 upon acquisition of VT Group’s 45% shareholding in the BVT joint venture
(see note 14).
4 Restated following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
5 Adjustment on finalisation of provisional goodwill relating to the acquisition of MTC Technologies, Inc., Tenix Defence Holdings Pty Limited, Tenix Toll Defence Logistics Pty Limited, Detica
Group Plc and IST Dynamics in 2008. The amounts were not considered material for the restatement of comparative information in 2009.
6 See note 29.
7 Amortisation is included in operating costs in the income statement. The 2010 charge for programme and customer related intangibles includes an acceleration of amortisation (£137m)
reflecting the profile of vehicle deliveries under the Family of Medium Tactical Vehicles contract.
The Group has no indefinite life intangible assets other than goodwill. The Group’s approach to goodwill impairment testing is
set out in the accounting policies on page 132.
Impairment testing
In order to calculate the recoverable amount of the Group’s goodwill, all goodwill balances have been considered with regard
to value in use calculations. These calculations use risk-adjusted future cash flow projections based on the Group’s five-year
BAE Systems Annual Report 2010 149
Notes to the Group accounts continued
11. Intangible assets continued
Integrated Business Plan (IBP) and include a terminal value based on the projections for the final year of that plan, with an
inflationary growth rate assumption applied. The IBP process uses historic experience, available government spending data and
the Group’s order book. Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital of 7.28%
(2009 7.72%) (adjusted for risks specific to the market in which the cash-generating unit (CGU) operates), have been used in
discounting these projected risk-adjusted cash flows.
Significant CGUs
2010
The Group has two CGUs with allocated goodwill which is significant in comparison with the total carrying amount of goodwill,
the Electronic Solutions business (£2.0bn) within Electronics, Intelligence & Support (EI&S), and the Land & Armaments
business (£3.6bn).
The key assumptions underpinning the cash flow projections are, for Electronic Solutions, continuing demand from the US
government for electronic warfare systems (where the business has a leadership position) and other technology-based
solutions, and for Land & Armaments, the continued demand in the Group’s home markets and from exports for existing and
successor military land and tracked vehicles, upgrade programmes and support.
The pre-tax discount rates used to discount the risk-adjusted five-year cash flow projections were 9.1% and 9.0%, respectively.
The growth rate assumption applied to the final year of these projections was 3%.
2009
The Group had three CGUs with allocated goodwill which was significant in comparison with the total carrying amount of
goodwill. These were the US-based electronic warfare, network and mission solutions business in the EI&S operating group
(£2.6bn), and the US-based ex-United Defense Industries, Inc. (UDI) (£2.0bn) and ex-Armor Holdings, Inc. (Armor) (£1.7bn pre-
impairment below) businesses in the Land & Armaments operating group.
The key assumptions underpinning the cash flow projections were, for the EI&S CGU, the continuing demand from the US
government for electronic warfare systems, mission solutions and other technology-based solutions, and from non-military
agencies for network solutions, and for the Land & Armaments CGUs, the continued demand in the Group’s home markets
and from exports for existing and successor military land and tracked vehicles, upgrade programmes and support.
The pre-tax discount rates used to discount the risk-adjusted five-year cash flow projections were 9.9%, 9.8% and 10.3%,
respectively.
The growth rate assumption applied to the final year of these projections was 3% (2% for Armor).
Whilst there are no other CGUs with allocated goodwill balances exceeding 15% of the Group’s total goodwill balance, the
majority of the projected cash flows within the remaining CGUs are underpinned by expected levels of government spending
on defence and security, and the Group’s ability to capture a broadly consistent market share.
The directors have not identified any reasonably possible material changes relating either specifically to the global military
vehicle market, or to the levels of defence and security spending in the Group’s home markets, particularly in the US, that would
cause the carrying value of goodwill to exceed its recoverable amount. The Group continues to monitor changes in US defence
budgets on an annual basis.
Impairment – goodwill
2010
The total goodwill impairment charge of £84m mainly arose in Surface Ships (£70m) reflecting the underperformance of the
ex-VT Group export ship contracts. The pre-tax discount rate was 10.4%.
2009
The total goodwill impairment charge of £725m mainly arose in three CGUs, Armor (£526m), Products Group (£156m) and
Detica (£34m).
The Armor impairment charge reflected both the non-award of a follow-on contract for production of vehicles under the Family
of Medium Tactical Vehicles (FMTV) programme and the subsequent impact on the growth prospects of the business.
The Products Group impairment charge reflected a weaker outlook for the business as spending from customer discretionary
budgets had reduced in both domestic and export markets. The pre-tax discount rate used was 9.5%.
The Detica impairment charge related to the discontinued financial services element of the business. The pre-tax discount rate
used was 10.0%.
Impairment – intangible assets
2010
The total intangible assets impairment charge of £41m comprises £30m relating to programme and customer related
intangibles, and £11m relating to other intangibles. The charge impacted the EI&S (£8m), Land & Armaments (£25m) and
Programmes & Support (£8m) operating groups.
2009
The total intangible assets impairment charge of £248m comprised £240m relating to programme and customer related
intangibles, and £8m relating to other intangibles. The charge impacted the EI&S (£8m), Land & Armaments (£236m) and
International (£4m) operating groups.
150 www.baesystems.com
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11. Intangible assets continued
The charge relating to Land & Armaments included £108m in respect of the Products Group business, £66m relating to the
FMTV non-award and a number of individually small items each calculated on a programme-by-programme basis.
12. Property, plant and equipment
Land and
buildings
£m
Plant and
machinery
£m
Aircraft
£m
Total
£m
Cost
At 1 January 2009
Additions
Acquisition of subsidiaries (note 29)
Transfers from inventories
Transfer to investment properties
Transfer to other intangible assets
Reclassification between categories
Disposals
Exchange adjustments
At 31 December 2009
Additions
Acquisition of subsidiaries (note 29)
Transfers from inventories
Transfers to inventories
Transfer to investment properties
Transfer to other intangible assets
Reclassification between categories
Disposals
Exchange adjustments
At 31 December 2010
Depreciation and impairment
At 1 January 2009
Depreciation charge for the year
Impairment charge for the year
Reclassification between categories
Disposals
Exchange adjustments
At 31 December 2009
Depreciation charge for the year
Impairment charge for the year
Transfers to inventories
Transfer to investment properties
Transfer to other intangible assets
Reclassification between categories
Disposals
Exchange adjustments
At 31 December 2010
Net book value:
Freehold property
Long leasehold property
Short leasehold property
Plant and machinery
Fixtures, fittings and equipment
Aircraft
At 31 December 2010
At 31 December 2009
At 1 January 2009
1,972
245
85
–
(2)
–
28
(23)
(110)
2,195
159
98
–
–
(15)
–
17
(41)
64
2,477
605
80
11
(5)
(20)
(27)
644
101
29
–
(1)
–
(12)
(32)
12
741
1,511
173
52
–
–
–
1,736
1,551
1,367
2,529
187
53
2
–
(4)
(28)
(78)
(110)
2,551
225
15
1
(5)
–
(3)
(18)
(136)
51
2,681
1,690
184
2
5
(73)
(63)
1,745
201
–
(5)
–
(1)
13
(123)
29
1,859
–
–
–
734
88
–
822
806
839
826
48
–
–
–
–
–
(43)
(72)
759
20
–
–
(5)
–
–
1
(95)
21
701
586
51
10
–
(32)
(51)
564
34
14
(3)
–
–
(1)
(80)
17
545
–
–
–
–
–
156
156
195
240
5,327
480
138
2
(2)
(4)
–
(144)
(292)
5,505
404
113
1
(10)
(15)
(3)
–
(272)
136
5,859
2,881
315
23
–
(125)
(141)
2,953
336
43
(8)
(1)
(1)
–
(235)
58
3,145
1,511
173
52
734
88
156
2,714
2,552
2,446
BAE Systems Annual Report 2010 151
Notes to the Group accounts continued
12. Property, plant and equipment continued
Impairment
2010
The impairment charge of £43m in 2010 mainly comprises charges in respect of the carrying values of land and buildings in
Saudi Arabia (£16m) and the US (£10m), and aircraft within the Regional Aircraft business (£14m). The impairment impacts the
following segments: Electronics, Intelligence & Support (£10m); Land & Armaments (£3m); International (£16m); and HQ &
Other Businesses (£14m).
2009
The impairment charge of £23m mainly comprised charges in respect of aircraft carrying values within the Regional Aircraft
business (£8m) and a £13m charge following the reassessment of the carrying value of certain assets within the International
operating group. The impairment impacted the International (£13m), HQ & Other Businesses (£8m) and Land & Armaments
(£2m) segments.
Assets in the course of construction
Assets in the course of construction (including investment property (note 13))
At 31 December 2010
At 31 December 2009
Finance leases
Net book value of assets held as capitalised finance leases
At 31 December 2010
At 31 December 2009
Land and
buildings
£m
Plant and
machinery
£m
Aircraft
£m
67
133
77
76
–
–
Total
£m
144
209
Land and
buildings
£m
Plant and
machinery
£m
Aircraft
£m
Total
£m
–
–
–
–
–
5
–
5
At 31 December 2009, none of the assets held under finance leases were sublet under operating leases.
Operating leases
The future aggregate minimum lease income from the non-cancellable elements of operating leases for assets capitalised
(including investment property (note 13)) are as follows:
Receipts due:
Not later than one year
Later than one year and not later than five years
Later than five years
2010
£m
68
173
185
426
2009
£m
78
201
23
302
Under the terms of the lease agreements, no contingent rents are receivable. The leases have varying terms including
escalation clauses and renewal rights. None of these terms represent unusual arrangements or create material onerous or
beneficial rights or obligations. There is no lease income relating to assets held by the Group under capitalised finance leases
within the above.
152 www.baesystems.com
13. Investment property
Cost
At 1 January 2009
Transfer from property, plant and equipment
At 31 December 2009
Additions
Transfer from property, plant and equipment
Disposals
At 31 December 2010
Depreciation and impairment
At 1 January 2009
Depreciation charge for the year
At 31 December 2009
Depreciation charge for the year
Transfer from property, plant and equipment
Disposals
At 31 December 2010
Net book value of investment property
At 31 December 2010
At 31 December 2009
At 1 January 2009
Fair value of investment property
At 31 December 2010
At 31 December 2009
£m
153
2
155
14
15
(7)
177
41
3
44
3
1
(5)
43
134
111
112
233
166
The fair values above are based on and reflect current market values as prepared by in-house professionals. The valuations
were prepared by persons having the appropriate professional qualification, and with recent experience of valuing properties
in the location and of the type being valued.
Rental income from investment property
2010
£m
22
2009
£m
20
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BAE Systems Annual Report 2010 153
Notes to the Group accounts continued
14. Equity accounted investments
Carrying value of equity accounted investments
At 1 January 2009
Share of results after tax – continuing operations
Share of results after tax – discontinued operations (note 9)
Disposal
Reclassification to intangible assets (note 11)
Dividends – continuing operations
Dividends – discontinued operations
Market value adjustments in respect of derivative financial instruments, net of tax
Actuarial losses on defined benefit pension schemes, net of tax
Foreign exchange adjustment
At 31 December 2009
Share of results after tax – continuing operations
Share of results after tax – discontinued operations (note 9)
Acquisitions
Equity accounted investment funding
Disposal
Dividends – continuing operations
Dividends – discontinued operations
Market value adjustments in respect of derivative financial instruments, net of tax
Actuarial gains on defined benefit pension schemes, net of tax
Foreign exchange adjustment
At 31 December 2010
Share of
net assets
£m
374
187
16
28
–
(74)
(3)
5
(38)
(31)
464
131
2
2
7
(125)
(67)
(4)
3
28
4
445
Purchased
goodwill
£m
660
–
–
–
(253)
–
–
–
–
(25)
382
–
–
–
–
(30)
–
–
–
–
(10)
342
Carrying
value
£m
1,034
187
16
28
(253)
(74)
(3)
5
(38)
(56)
846
131
2
2
7
(155)
(67)
(4)
3
28
(6)
787
On 30 October 2009, the BVT Surface Fleet Limited (BVT) joint venture became a wholly-owned subsidiary of the Group after
VT Group plc (VT) exercised its option to sell its 45% shareholding in BVT to BAE Systems (see note 29). As part of the
transaction, the Group’s shareholding in Fleet Support Limited also increased from 55% to 100%. On the date of the
transaction, the Group gained full control of BVT, which was previously jointly controlled with VT.
Goodwill arising on the formation of the BVT joint venture in 2008 (£225m) and goodwill associated with the Group’s initial 50%
shareholding in Fleet Support Limited (£28m) was reclassified to intangible assets (see note 11) in 2009 in accordance with
IFRS 3 (2004).
On 3 June 2010, the Group sold half of its 20.5% shareholding in Saab AB to Investor AB for a cash consideration of
SEK1,041m (£92m) (see note 9). Following the loss of significant influence over the company, the Group has discontinued the
use of the equity method and the remaining shareholding in Saab is shown within other financial assets as a financial asset at
fair value through profit or loss at 31 December 2010 (see note 17). The Group’s share of the results of Saab to the date of
disposal is shown within discontinued operations for the current and prior periods.
Included within purchased goodwill is £59m (2009 £89m) relating to the goodwill arising on acquisitions made by the Group’s
equity accounted investments subsequent to their acquisition by the Group.
154 www.baesystems.com
14. Equity accounted investments continued
Share of results of equity accounted investments by operating group – continuing operations
Share of results excluding finance costs and taxation expense:
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Financial (expense)/income
Taxation expense
Share of the assets and liabilities of equity accounted investments
Assets:
Non-current assets
Current assets
Liabilities:
Non-current liabilities
Current liabilities
Carrying value
2010
£m
1
8
24
143
1
177
(2)
(44)
131
Restated1
2009
£m
1
(3)
77
135
–
210
2
(25)
187
2010
£m
2009
£m
803
3,014
3,817
990
3,313
4,303
(466)
(2,564)
(3,030)
787
(678)
(2,779)
(3,457)
846
1 Restated following the sale of half of the Group’s 20.5% shareholding in Saab AB and subsequent classification as a discontinued operation (see note 9).
Contingent liabilities
The Group is not aware of any material contingent liabilities in respect of equity accounted investments.
Principal equity accounted investments
Joint ventures
Eurofighter Jagdflugzeug GmbH
(Held by BAE Systems plc)
MBDA SAS
(Held via BAE Systems Electronics Limited
and BAE Systems (Overseas Holdings)
Limited)
Principal activities
Management and control of the
Typhoon programme
Group interest in
allotted capital
33% ordinary
Principally
operates in
Germany
Country of
incorporation
Germany
Development and manufacture of
37.5% ordinary
Europe
France
guided weapons
The Group comprises a large number of equity accounted investments and it is not practical to include all of them in the above
list. The list therefore only includes those equity accounted investments which principally affected the Group accounts.
A full list of subsidiary, equity accounted investments and other associated undertakings as at 31 December 2010 will be
annexed to the Company’s next annual return filed with the Registrar of Companies.
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BAE Systems Annual Report 2010 155
Notes to the Group accounts continued
15. Other investments
Non-current
Available-for-sale financial assets
Equity securities
Current
Available-for-sale financial assets
Government bonds1
Reconciliation of movements
Non-current
At 1 January
Fair value movements
At 31 December
Current
At 1 January
Additions
Fair value movements
At 31 December
1 The government bonds are held in a Trust in respect of the Group’s UK pension schemes (see page 40).
16. Trade and other receivables
Non-current
Other receivables
Pension prepayment (note 21)
Prepayments and accrued income
Current
Long-term contract balances
Less: attributable progress payments
Amounts due from contract customers
Amounts due from customers for contract work1
Trade receivables
Amounts owed by equity accounted investments (note 31)
Other receivables
Prepayments and accrued income
2010
£m
2009
£m
11
11
260
260
2010
£m
6
5
11
211
40
9
260
2010
£m
218
49
15
282
6
6
211
211
2009
£m
6
–
6
–
209
2
211
2009
£m
156
42
3
201
6,586
(5,680)
579
1,485
1,252
307
200
315
3,559
7,034
(5,941)
482
1,575
1,452
207
274
256
3,764
1 There are no retentions against long-term contracts (2009 £nil) and no amounts that are past due within amounts due from customers for contract work (2009 £nil).
The aggregate amount of costs incurred and recognised profits (less recognised losses) to date in respect of contracts in
progress at 31 December 2010 are estimated to be £31.9bn (2009 £36.9bn).
156 www.baesystems.com
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16. Trade and other receivables continued
The ageing of trade receivables is detailed below:
Not past due and not impaired
Up to 180 days overdue and not impaired
Up to 180 days overdue and impaired
Past 180 days overdue and not impaired
Past 180 days overdue and impaired
Gross
£m
1,065
117
1
70
40
1,293
2010
Provision
£m
–
–
(1)
–
(40)
(41)
Net
£m
1,065
117
–
70
–
1,252
Gross
£m
1,194
233
9
18
45
1,499
2009
Provision
£m
–
–
(2)
–
(45)
(47)
Trade receivables are disclosed net of a provision for impairment losses. Movement on the provision is as follows:
At 1 January
Created
Released
Exchange adjustments
Acquisitions
Utilised
At 31 December
2010
£m
47
23
(22)
1
–
(8)
41
Net
£m
1,194
233
7
18
–
1,452
2009
£m
50
36
(27)
(2)
2
(12)
47
Other receivables do not contain assets which are considered to be impaired.
The Group has material receivables due from the UK, US and Saudi Arabian governments where credit risk is not considered an
issue. For the remaining trade receivables, the provision has been calculated taking into account individual assessments based
on past credit history and prior knowledge of debtor insolvency or other credit risk.
17. Other financial assets and liabilities
Non-current
Cash flow hedges – foreign exchange contracts
Other foreign exchange/interest rate contracts
Debt-related derivative financial instruments – assets1
Current
Cash flow hedges – foreign exchange contracts
Other foreign exchange/interest rate contracts
Fair value of 10.25% shareholding in Saab AB
Debt-related derivative financial instruments – assets2
1 Includes fair value hedges of £9m (2009 £26m).
2 Includes fair value hedges of £17m (2009 £12m).
2010
Assets
£m
2010
Liabilities
£m
2009
Assets
£m
2009
Liabilities
£m
57
25
28
110
92
53
127
17
289
(77)
(178)
–
(255)
(68)
(41)
–
–
(109)
100
6
27
133
158
46
–
12
216
(95)
(166)
–
(261)
(54)
(40)
–
–
(94)
The debt-related derivative financial liabilities are presented as a component of loans and overdrafts (see note 19).
The notional principal amounts of the outstanding contracts are detailed in note 30.
Cash flow hedges
The hedged, highly probable forecast transactions denominated in foreign currency are predominantly expected to occur at
various stages during the next 12 months. The majority of those extending beyond 12 months are expected to have been
transacted within five years of the balance sheet date.
Amounts debited to the hedging reserve in respect of cash flow hedges were £84m (2009 £393m).
The amount reclassified from equity to the income statement was £3m (2009 £nil). The amount credited from equity and
included in contract-related non-financial assets and liabilities was £1m (2009 debit £39m). The ineffective portion recognised
in the income statement that arises from cash flow hedges amounts to £3m (2009 £nil).
Fair value hedges
The net loss arising in the income statement on fair value hedging instruments was £6m which comprises gains of £17m, less
losses of £23m (2009 loss £20m). The net gain arising in the income statement on the fair value of the underlying hedged
items was £6m which comprises gains of £23m, less losses of £17m (2009 gain £20m). The ineffective portion recognised
in the income statement that arises from fair value hedges amounts to a gain of £6m (2009 £4m).
BAE Systems Annual Report 2010 157
Notes to the Group accounts continued
18. Inventories
Short-term work-in-progress
Raw materials and consumables
Finished goods and goods for resale
The Group recognised £10m (2009 £35m) as a write down of inventories to net realisable value.
19. Loans and overdrafts
Non-current
US$1bn 6.4% bond, repayable 2011
Class B and Class G certificates, final instalments 2013
Euro-Sterling £100m 10¾% bond, repayable 2014
US$500m 4.95% bond, repayable 2014
US$750m 5.2% bond, repayable 2015
Albertville Hangar Bond, repayable 2018
US$1bn 6.375% bond, repayable 2019
US$500m 7.5% bond, repayable 2027
Debt-related derivative financial instruments – liabilities
Obligations under finance leases
Current
Bank loans and overdrafts
US$500m 4.75% bond, repayable 2010
US$1bn 6.4% bond, repayable 2011
Class B and Class G certificates, final instalments 2011/2013
Debt-related derivative financial instruments – liabilities
US$ Commercial Paper
Obligations under finance leases
The maturity of the Group’s borrowings is as follows:
At 31 December 2010
Carrying amount1
Debt-related derivative financial instruments – assets
Carrying amount including debt-related derivative financial instruments – assets
Contractual cash flows, including future interest payments
At 31 December 2009
Carrying amount1
Debt-related derivative financial instruments – assets
Carrying amount including debt-related derivative financial instruments – assets
Contractual cash flows, including future interest payments
Less than
one year
£m
Between one
and five
years
£m
More than
five years
£m
920
(17)
903
1,052
453
(12)
441
583
1,171
(9)
1,162
1,548
1,453
(26)
1,427
1,849
962
(19)
943
1,390
1,387
(1)
1,386
1,890
1 The carrying amount of loans and overdrafts at 31 December 2010 excludes debt-related derivative financial assets of £45m (2009 £39m) presented as other financial assets.
Contractual cash flows in respect of all other financial liabilities are equal to the balance sheet carrying amount. Current
contractual amounts relating to other financial liabilities, such as trade payables, are settled within the normal operating cycle
of the business.
158 www.baesystems.com
2010
£m
245
287
112
644
2009
£m
451
312
124
887
2010
£m
2009
£m
–
266
100
318
477
6
645
317
4
–
2,133
11
–
656
108
1
144
–
920
645
379
100
308
463
6
608
307
23
1
2,840
15
322
–
110
–
–
6
453
Total
£m
3,053
(45)
3,008
3,990
3,293
(39)
3,254
4,322
19. Loans and overdrafts continued
The US$1bn 6.4% bond, repayable 2011, has been partially converted to a floating rate bond by utilising a series of interest
rate swaps. US$500m has been swapped to a floating rate until maturity of the bond in 2011. This has been overlaid by
US$300m of floating to fixed interest rate swaps that fix the interest payments at a lower rate than the original coupon.
The effective interest rate during 2010 was 5.16% with an interest rate split on the bond at 31 December 2010 being
US$800m fixed and US$200m floating.
The Class B and Class G certificates are repayable in 2011 and 2013, respectively, with fixed US$ coupon rates of 7.16%
and 6.66%, giving a weighted average interest rate of 6.88%. At 31 December 2010, the gross outstanding principal due is
US$571m. Of this balance, US$197m has been converted to a sterling floating rate bond by utilising a series of cross-currency
swaps. Subsequently, £114m has been re-fixed utilising a sterling interest rate swap. The overall effective rate during 2010 is
2.86% on these elements.
The US$500m 4.95% bond, repayable 2014, was converted on issue to a floating rate bond utilising a series of interest rate
swaps giving an effective rate during 2010 of 2.45%.
The Albertville Hangar Bond is a floating rate bond with an effective interest rate of 3.24%. This bond has been converted to
a fixed rate using a floating to fixed rate swap, fixing the rate at 3.52%.
US$500m of the US$1bn 6.375% bond, repayable 2019, has been converted to a floating rate bond utilising a series of
interest rate swaps that mature in December 2014 and give an effective rate during 2010 of 5.0%.
The US$500m 7.5% bond, repayable 2027, was converted at issue to a sterling fixed rate bond by utilising a cross-currency
swap and has an effective interest rate of 7.73%.
The US$500m 4.75% bond, repayable 2010, was converted on issue to a floating rate bond by utilising interest rate swaps
giving an effective rate during 2010 of 3.67%. The bond was repaid in August 2010.
The debt-related derivative financial instruments represent the fair value of certain interest rate and cross-currency derivatives
relating to the US$1bn 6.4% bond, repayable 2011, Class B and Class G certificates, final instalments 2011/2013, the
US$1bn 6.375% bond, repayable 2019, and the US$500m 7.5% bond, repayable 2027. These derivatives have been entered
into specifically to manage the Group’s exposure to foreign exchange or interest rate risk.
Finance lease obligations
Finance lease liabilities – minimum lease payments due:
Not later than one year
Later than one year and not later than five years
Future finance charges on finance leases
Present value of finance lease liabilities
Present value of finance lease liabilities – payments due:
Not later than one year
Later than one year and not later than five years
The average interest rate on finance lease payables at 31 December 2009 was 5%.
2010
£m
2009
£m
–
–
–
–
–
–
–
–
7
1
8
(1)
7
6
1
7
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BAE Systems Annual Report 2010 159
Notes to the Group accounts continued
20. Trade and other payables
Non-current
Amounts due to long-term contract customers
Cash received on customers’ account2 for long-term contracts
Other payables
Accruals and deferred income3
Current
Amounts due to long-term contract customers
Amounts due to other customers
Cash received on customers’ account2:
Long-term contracts
Others
Trade payables
Amounts owed to equity accounted investments (note 31)
Other taxes and social security costs
Other payables4
Accruals and deferred income
Included above:
Amounts due to long-term contract customers
Advances from long-term contract customers, including progress payments in respect of work not yet
performed
2010
£m
181
–
339
174
694
5,036
193
7
9
1,114
1,232
57
636
1,068
9,352
Restated1
2009
£m
142
5
332
43
522
5,696
216
14
1
1,063
1,353
51
851
1,136
10,381
2010
£m
5,224
Restated1
2009
£m
5,857
5,026
5,416
1 Restated following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
2 Cash received on customers’ account is the unexpended cash received from customers in advance of delivery which is subject to advance payment guarantees unrelated to Group
performance.
3 Includes £125m at 31 December 2010 in respect of the three Offshore Patrol Vessels under the terminated Trinidad and Tobago contract.
4 Other payables at 31 December 2009 includes the regulatory penalties of £278m reflecting the global settlement of the regulatory investigations by the US Department of Justice (DoJ) and
the UK’s Serious Fraud Office (SFO). Other payables at 31 December 2010 includes £30m in respect of the global settlement with the UK’s SFO following payment of the DoJ penalty during
the year.
21. Retirement benefit obligations
Pension plans
BAE Systems plc operates pension plans for the Group’s qualifying employees in the UK, US and other countries. The principal
plans in the UK and US are funded defined benefit plans, and the assets are held in separate trustee administered funds.
The plans in other countries are defined contribution plans. Pension plan valuations are regularly carried out by independent
actuaries to determine pension costs for pension funding and to calculate the IAS 19, Employee Benefits, deficit.
The disclosures below relate to post-retirement benefit plans in the UK, US and other countries which are accounted for as
defined benefit plans in accordance with IAS 19. The valuations used for the IAS 19 disclosures are based on the most recent
actuarial valuation undertaken by independent qualified actuaries as updated to take account of the requirements of IAS 19 to
assess the deficits of the plans at 31 December each year. Plan assets are shown at the bid value.
Post-retirement benefits other than pensions
The Group also operates a number of non-pension post-retirement benefit plans, under which certain employees are eligible to
receive benefits after retirement, the majority of which relate to the provision of medical benefits to retired employees of the
Group’s subsidiaries in the US. The latest valuations of the principal plans, covering retiree medical and life insurance plans in
certain US subsidiaries, were performed by independent actuaries as at 1 January 2010. These plans were rolled forward to
reflect the information at 31 December 2010. The method of accounting for these is similar to that used for defined benefit
pension plans.
160 www.baesystems.com
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21. Retirement benefit obligations continued
The financial assumptions used to calculate liabilities for the principal plans are:
UK
Discount rate
Inflation rate
Rate of increase in salaries
Rate of increase for pensions in payment
Rate of increase for deferred pensions1
Long-term healthcare cost increases
2010
%
5.5
3.4
4.4
2009
%
5.7
3.5
4.5
2008
%
6.3
2.9
3.9
2.3 – 3.6 2.3 – 3.7 2.2 – 3.4
2.9
2.8 – 3.4
–
–
3.5
–
2010
%
5.5
3.0
4.5
–
–
5.3
US
2009
%
5.9
3.0
4.5
–
–
5.3
2008
%
6.5
3.0
5.5
–
–
5.3
1 The assumption for the rate of deferred pension increases of 2.8% is in respect of those schemes which refer to the Consumer Prices Index as the relevant measure.
The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the timescale
covered, may not necessarily occur in practice. The bid values of plan assets, which are not intended to be realised in the short
term and may be subject to significant change before they are realised, and the present values of plan liabilities, which are
derived from cash flow projections over long periods and therefore inherently uncertain, as at 31 December are shown in the
tables below.
Discount rate assumptions are based on third-party AA corporate bond indices and yields that reflect the maturity profile of
the expected benefit payments. The inflation rate assumptions are derived by reference to the difference between the yields
on index-linked and fixed-interest long-term government bonds, or advice from the local actuary depending on the available
information. The inflation assumptions are used to derive the rate of increase for pensions in payment and the rate of increase
in deferred pensions where there is such an increase.
For its UK pension arrangements the Group has, for the purpose of calculating its liabilities as at 31 December 2010, continued
to use PA 00 medium cohort tables based on year of birth (as published by the Institute of Actuaries) for both pensioner and
non-pensioner members in conjunction with the results of an investigation into the actual mortality experience of plan members.
In addition, this mortality has been subject to a minimum assumed rate of future annual mortality improvements of 1%. For its
US pension arrangements, the mortality tables used are RP 2000 projected to 2018 for pensioners and projected to 2025 for
non-pensioners. The current life expectancies underlying the value of the accrued liabilities for the main UK and US plans range
from 19 to 23 years for current male pensioners at age 65 and 21 to 26 years for current female pensioners at age 65.
The Group has a number of healthcare arrangements in the US. The long-term healthcare cost increases shown in the table
above are based on the assumptions that the increases are 8.0% in 2011 reducing to 5% by 2017 for pre-retirement and 8.5%
in 2011 reducing to 5% by 2018 for post-retirement.
A summary of the movements in the retirement benefit obligations is shown below. The full disclosures, as required by IAS 19,
are provided in the subsequent information.
Summary of movements in retirement benefit obligations
Total IAS 19 deficit at 1 January 2010
Actual return on assets above expected return
Decrease/(increase) in liabilities due to changes in assumptions
Additional contributions
Recurring contributions in excess of service cost
Past service cost
Curtailment gains
Net financing (charge)/credit
Exchange translation
Movement in US healthcare plans
Total IAS 19 deficit at 31 December 2010
Allocated to equity accounted investments and other participating employers
Group’s share of IAS 19 deficit excluding Group’s share of amounts allocated to equity
accounted investments and other participating employers at 31 December 2010
UK
£m
(5,006)
917
314
301
193
(39)
–
(118)
–
–
(3,438)
696
US and
other
£m
(610)
126
(259)
–
60
–
2
15
(21)
22
(665)
–
Total
£m
(5,616)
1,043
55
301
253
(39)
2
(103)
(21)
22
(4,103)
696
(2,742)
(665)
(3,407)
The decrease in UK liabilities due to changes in assumptions includes a benefit of £348m arising from the change from the
Retail Prices Index to the Consumer Prices Index as the measure of price inflation for the purposes of determining minimum
statutory pension increases. With the exception of the BAE Systems 2000 Pension Plan (2000 Plan), this change has affected
all of the Group’s UK pension schemes for deferred pension increases, but has only affected two of the Group’s smaller
schemes for increases to pensions in payment.
BAE Systems Annual Report 2010 161
Notes to the Group accounts continued
21. Retirement benefit obligations continued
During the year, the Group contributed an additional £25m into Trust for the benefit of the Group’s main pension scheme
(2009 £225m). The cumulative contributions totalling £250m are reported within other investments (£260m after cumulative
fair value gains of £11m) and cash and cash equivalents (£1m) at 31 December 2010, and the use of these assets is
restricted under the terms of the Trust. The Group considers these contributions to be equivalent to the other lump sum
contributions it makes into the Group’s pension schemes and, accordingly, presents below a definition of the pension deficit
including them.
Group’s share of IAS 19 deficit, net
Assets held in Trust
Pension deficit (as defined by the Group)
Amounts recognised on the balance sheet
2010
£m
(3,407)
261
(3,146)
2009
£m
(4,637)
227
(4,410)
Present value of unfunded obligations
Present value of funded obligations
Fair value of plan assets
Total IAS 19 deficit, net
Allocated to equity accounted
investments and other participating
employers
Group’s share of IAS 19 deficit, net
Represented by:
Pension prepayments (within trade
and other receivables)
Retirement benefit obligations
2010
UK defined
benefit
pension
plans
£m
(28)
(17,990)
14,580
(3,438)
US and
other
pension
plans
£m
(138)
(3,002)
2,496
(644)
US
healthcare
plans
£m
(11)
Total
£m
(177)
(137) (21,129)
17,203
127
(4,103)
(21)
UK defined
benefit
pension
plans
£m
(10)
(17,776)
12,780
(5,006)
2009
US and
other
pension
plans
£m
(115)
(2,587)
2,135
(567)
US
healthcare
plans
£m
(11)
(140)
108
(43)
Total
£m
(136)
(20,503)
15,023
(5,616)
696
(2,742)
–
(644)
–
(21)
696
(3,407)
979
(4,027)
–
(567)
–
(43)
979
(4,637)
–
(2,742)
(2,742)
49
(693)
(644)
–
(21)
(21)
49
(3,456)
(3,407)
–
(4,027)
(4,027)
42
(609)
(567)
–
(43)
(43)
42
(4,679)
(4,637)
Group’s share of IAS 19 deficit of
equity accounted investments
(88)
–
–
(88)
(128)
–
–
(128)
Amounts for the current and previous four years are as follows:
Defined benefit pension plans
Defined benefit obligations
Plan assets at bid value
Total deficit before tax and allocation to equity accounted investments
and other participating employers
Actuarial gain/(loss) on plan liabilities
Actuarial gain/(loss) on plan assets at bid value
2010
£m
(21,158)
17,076
2009
£m
(20,488)
14,915
2008
£m
(17,133)
12,978
2007
£m
(17,109)
15,110
2006
£m
(17,456)
14,289
(4,082)
55
1,043
(5,573)
(3,342)
1,258
(4,155)
1,433
(3,724)
(1,999)
952
(156)
(3,167)
473
521
Total cumulative actuarial losses recognised in equity since the transition to IFRS are £2.5bn (2009 £3.4bn).
Certain of the Group’s equity accounted investments participate in the Group’s defined benefit plans as well as Airbus SAS,
the Group’s share of which was disposed of during 2006. As these plans are multi-employer plans the Group has allocated
an appropriate share of the IAS 19 pension deficit to the equity accounted investments and to Airbus SAS based upon a
reasonable and consistent allocation method intended to reflect a reasonable approximation of their share of the deficit. The
Group’s share of the IAS 19 pension deficit allocated to the equity accounted investments is included in the balance sheet
within equity accounted investments. In the event that an employer who participates in the Group’s pension schemes fails or
cannot be compelled to fulfil its obligations as a participating employer, the remaining participating employers are obliged to
collectively take on its obligations. The Group considers the likelihood of this event arising as remote.
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21. Retirement benefit obligations continued
Assets of defined benefit pension plans
Equities
Bonds
Property1
Other
Total
Equities
Bonds
Property1
Other
Total
UK
%
59
33
7
1
100
UK
%
64
27
7
2
100
Expected
return
%
8.25
4.7
6.0
1.0
6.8
Expected
return
%
8.25
4.8
6.0
1.0
7.0
£m
8,544
4,765
1,084
187
14,580
£m
8,195
3,411
960
214
12,780
2010
US
Total
£m
1,690
613
108
85
2,496
Expected
return
%
£m
9.0 10,234
5,378
6.0
1,192
7.0
4.0
272
8.0 17,076
%
68
25
4
3
100
2009
US
Total
£m
1,384
551
101
99
2,135
Expected
return
£m
%
9,579
9.25
3,962
6.0
1,061
7.0
313
4.0
8.1 14,915
%
65
26
5
4
100
%
60
31
7
2
100
%
64
27
7
2
100
1 Includes £181m (2009 £168m) of properties occupied by Group companies.
When setting the overall expected rate of return on plan assets, historical markets are studied, and long-term historical
relationships between equities and bonds are preserved. This is consistent with the widely accepted capital market principle
that assets with higher volatility generate a greater return over time. Current market factors such as inflation and interest
rates are evaluated before expected return assumptions are determined for each asset class. The overall expected return is
established with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check
for reasonableness and appropriateness.
Changes in the fair value of plan assets are as follows:
Value of plan assets at 1 January 2009
Expected return on assets
Actuarial gain
Actual return on assets
Contributions by employer
Contributions by employer in respect of employee salary sacrifice arrangements
Total contributions by employer
Members’ contributions (including Department for Work and Pensions rebates)
Currency loss
Benefits paid
Value of plan assets at 31 December 2009
Expected return on assets
Actuarial gain
Actual return on assets
Contributions by employer
Contributions by employer in respect of employee salary sacrifice arrangements
Total contributions by employer
Members’ contributions (including Department for Work and Pensions rebates)
Currency gain
Benefits paid
Value of plan assets at 31 December 2010
UK defined
benefit
pension
plans
£m
11,159
765
994
1,759
421
107
528
36
–
(702)
12,780
883
917
1,800
653
108
761
37
–
(798)
14,580
US and
other
pension
plans
£m
1,819
141
264
405
216
–
216
18
(198)
(125)
2,135
180
126
306
113
–
113
16
65
(139)
2,496
US
healthcare
plans
£m
92
6
13
19
13
–
13
–
(10)
(6)
108
8
8
16
8
–
8
–
3
(8)
127
Total
£m
13,070
912
1,271
2,183
650
107
757
54
(208)
(833)
15,023
1,071
1,051
2,122
774
108
882
53
68
(945)
17,203
BAE Systems Annual Report 2010 163
Notes to the Group accounts continued
21. Retirement benefit obligations continued
Changes in the present value of the defined benefit obligations before allocation to equity accounted investments and other
participating employers are as follows:
Defined benefit obligations at 1 January 2009
Current service cost
Contributions by employer in respect of employee salary sacrifice arrangements
Total current service cost
Members’ contributions (including Department for Work and Pensions rebates)
Past service cost
Actuarial loss on liabilities
Curtailment gains
Interest expense
Currency gain
Benefits paid
Defined benefit obligations at 31 December 2009
Current service cost
Contributions by employer in respect of employee salary sacrifice arrangements
Total current service cost
Members’ contributions (including Department for Work and Pensions rebates)
Past service cost
Actuarial gain/(loss) on liabilities
Curtailment gains
Interest expense
Currency loss
Benefits paid
Defined benefit obligations at 31 December 2010
UK defined
benefit
pension
plans
£m
(14,231)
(92)
(107)
(199)
(36)
(18)
(3,120)
–
(884)
–
702
(17,786)
(159)
(108)
(267)
(37)
(39)
314
–
(1,001)
–
798
(18,018)
US and
other
pension
plans
£m
(2,902)
(70)
–
(70)
(18)
(3)
(222)
261
(167)
294
125
(2,702)
(53)
–
(53)
(16)
–
(259)
2
(165)
(86)
139
(3,140)
US
healthcare
plans
£m
(153)
(3)
–
(3)
–
–
(8)
–
(9)
16
6
(151)
(2)
–
(2)
–
–
6
5
(8)
(6)
8
Total
£m
(17,286)
(165)
(107)
(272)
(54)
(21)
(3,350)
261
(1,060)
310
833
(20,639)
(214)
(108)
(322)
(53)
(39)
61
7
(1,174)
(92)
945
(148) (21,306)
Contributions
The Group contributions made to the defined benefit plans in the year ended 31 December 2010 were £695m (2009 £546m)
excluding those amounts allocated to equity accounted investments and participating employers (£71m). This includes
contributions of £157m into the UK schemes relating to the £500m share buyback programme completed in July 2010 and
£51m into the 2000 Plan following the triennial actuarial valuation of that scheme. In 2011, the Group expects to make regular
contributions at a similar level to those made in 2010.
The Group incurred a charge in respect of the cash contributions of £110m (2009 £127m) paid to defined contribution plans for
employees. It expects to make contributions of £108m to these plans in 2011.
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21. Retirement benefit obligations continued
The amounts recognised in the income statement after allocation to equity accounted investments and other participating
employers are as follows:
UK defined
benefit
pension
plans
£m
2010
US and
other
pension
plans
£m
US
healthcare
plans
£m
Included in operating costs:
Current service cost
Past service cost
Included in other income:
Pension curtailment gains
US healthcare curtailment gains
Included in finance costs:
Expected return on plan assets
Interest on obligations
Included in share of results of equity
accounted investments:
Group’s share of equity accounted
investments’ operating costs
Group’s share of equity accounted
investments’ finance costs
(130)
(29)
(159)
–
–
–
(53)
–
(53)
2
–
2
728
(823)
(95)
180
(165)
15
(8)
(3)
–
–
(2)
–
(2)
–
5
5
8
(8)
–
–
–
UK defined
benefit
pension
plans
£m
2009
US and
other
pension
plans
£m
US
healthcare
plans
£m
Total
£m
(185)
(29)
(214)
2
5
7
(80)
(14)
(94)
–
–
–
(70)
(3)
(73)
261
–
261
141
(167)
(26)
916
(996)
(80)
630
(724)
(94)
(8)
(3)
(9)
(3)
–
–
Total
£m
(153)
(17)
(170)
261
–
261
777
(900)
(123)
(9)
(3)
(3)
–
(3)
–
–
–
6
(9)
(3)
–
–
A one percentage point change in assumed healthcare cost trend rates would have the following effects:
(Increase)/decrease in the aggregate of service cost and interest cost
(Increase)/decrease in defined benefit obligations
One percentage
point increase
£m
(0.2)
(2.4)
A 0.5 percentage point change in net discount rates used to value liabilities would have the following effect:
Decrease/(increase) in defined benefit obligations
22. Provisions
0.5 percentage
point increase
£bn
1.7
One percentage
point decrease
£m
0.1
1.7
0.5 percentage
point decrease
£bn
(1.7)
Non-current
Current
At 1 January 2010
Created
Released
Utilised
Provisions and fair values arising on
acquisitions (note 29)
Discounting
Exchange adjustments
At 31 December 2010
Represented by:
Non-current
Current
Aircraft
financing
£m
20
18
38
5
(5)
(20)
Warranties and
after-sales
service
£m
99
64
163
69
(24)
(34)
Reorganisations
– continuing
operations
£m
21
126
147
204
(16)
(104)
Legal,
contractual
and
environmental
£m
169
263
432
164
(55)
(47)
–
2
–
20
–
20
20
–
–
7
181
107
74
181
–
–
–
231
7
224
231
4
16
7
521
242
279
521
Other
£m
68
81
149
21
(33)
(31)
12
3
3
124
69
55
124
Total
£m
377
552
929
463
(133)
(236)
16
21
17
1,077
425
652
1,077
BAE Systems Annual Report 2010 165
Notes to the Group accounts continued
22. Provisions continued
Aircraft financing
The provision includes probable exposures under residual value guarantees issued by the Group on previous sales transactions.
The Group has provided residual value guarantees in respect of certain commercial aircraft sold. At 31 December 2010, the
Group’s gross exposure to make future payments in respect of these arrangements was £33m (2009 £48m). The Group’s net
exposure to these guarantees is covered by the provisions held of £18m (2009 £32m) and the residual values of the related
aircraft of £18m (2009 £12m).
Warranties and after-sales service
Warranties and after-sales service are provided in the normal course of business with provisions for associated costs being
made based on an assessment of future claims with reference to past experience. Such costs are generally incurred within
three years post-delivery. Whilst actual events could result in potentially significant differences to the quantum but not the
timing of the outflows in relation to the provisions, management has reflected current knowledge in assessing the provision
levels.
Reorganisations – continuing operations
The costs associated with the reorganisation programmes are supported by detailed plans and based on previous experience
as well as other known factors. Such costs are generally incurred within one to three years. There is limited volatility around the
timing and amount of the ultimate outflows related to these provisions.
The reorganisation provisions totalling £204m created in 2010 include £60m for which the Group is contractually entitled
to reimbursement from the customer. This amount is included in prepayments and accrued income at 31 December 2010
(see note 16).
Legal, contractual and environmental provisions
The Group holds provisions for expected legal, contractual and environmental costs that it expects to incur over an extended
period.
These costs are based on past experience of similar items and other known factors and represent management’s best
estimate of the likely outcome.
Reflecting the inherent uncertainty within many legal proceedings, the timing and amount of the outflows could differ
significantly from the amount provided.
There are no individually significant amounts included in the legal, contractual and environmental provisions created in 2010
totalling £164m.
Other provisions
There are no individually significant provisions included within other provisions.
23. Contingent liabilities and commitments
Guarantees and performance bonds
The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business.
Provision is made for any amounts that the directors consider may become payable under such arrangements.
Operating lease commitments – where the Group is the lessee
The Group leases various offices, factories, shipyards and aircraft under non-cancellable operating lease agreements. The
leases have varying terms including escalation clauses, renewal rights and purchase options. None of these terms represent
unusual arrangements or create material onerous or beneficial rights or obligations.
The future aggregate minimum lease payments under non-cancellable operating leases and associated future minimum
sublease income are as follows:
Payments due:
Not later than one year
Later than one year and not later than five years
Later than five years
Total of future minimum sublease income under non-cancellable subleases
Capital commitments
Capital expenditure contracted for but not provided for in the accounts is as follows:
Property, plant and equipment
Intangible assets
166 www.baesystems.com
2010
£m
2009
£m
222
608
670
1,500
180
571
704
1,455
254
286
2010
£m
103
4
107
2009
£m
126
7
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24. Share capital and other reserves
Share capital
Issued and fully paid
At 1 January 2009
Exercise of options
At 1 January 2010
Exercise of options
At 31 December 2010
Equity
Ordinary shares
of 2.5p each
Non-equity
Special Share
of £1
Total
Number of
shares
m
Nominal
value
£m
Number of
shares
Nominal
value
£
Nominal
value
£m
3,582
3
3,585
2
3,587
90
–
90
–
90
1
–
1
–
1
1
–
1
–
1
90
–
90
–
90
Special Share
One Special Share of £1 in the Company is held on behalf of the Secretary of State for Business, Innovation and Skills (the
Special Shareholder). Certain provisions of the Company’s Articles of Association cannot be amended without the consent of
the Special Shareholder. These provisions include the requirement that no foreign person, or foreign persons acting in concert,
can have more than a 15% voting interest in the Company, the requirement that the majority of the directors are British, and the
requirement that the Chief Executive and any executive Chairman are British citizens. The effect of these requirements can also
be amended by regulations made by the directors and approved by the Special Shareholder.
The Special Shareholder may require the Company at any time to redeem the Special Share at par or to convert the Special
Share into one ordinary voting share. The Special Shareholder is entitled to receive notice of and to attend general meetings
and class meetings of the Company’s shareholders but has no voting right, nor other rights, other than to speak in relation to
any business in respect of the Special Share.
Treasury shares
During the year, 143,951,447 ordinary shares of 2.5p each were repurchased under the buyback programme completed in
July 2010.
As at 31 December 2010, 178,377,628 (2009 43,952,360) ordinary shares of 2.5p each with an aggregate nominal value of
£4,459,441 (2009 £1,098,809) were held in treasury. During 2010, 9,526,179 treasury shares were used to satisfy awards
and options under the Share Incentive Plan and the Share Matching Plan (2009 11,086,593 to satisfy awards and options
under the Share Incentive Plan and the Save-As-You-Earn Share Option Scheme).
Own shares held
Own shares held, including treasury shares and shares held by BAE Systems ESOP Trust, are recognised as a deduction from
retained earnings.
BAE Systems ESOP Trust
The Group has an ESOP discretionary trust to administer the share plans and to acquire Company shares, using funds loaned
by the Group, to meet commitments to Group employees. A dividend waiver was in operation for shares within the ESOP Trust,
other than those owned beneficially by the participants, for the dividends paid in June and November 2010.
At 31 December 2010, the ESOP held 2,202,800 (2009 3,644,598) ordinary shares of 2.5p each with a market value of £7m
(2009 £13m). The shares held by the ESOP are recorded at cost and deducted from retained earnings until such time as the
shares vest unconditionally to employees.
A dividend waiver was in operation during 2010 and remains over shares within the Company’s Share Incentive Plan Trust other
than those shares owned beneficially by the participants. A dividend waiver was also in operation for the dividends paid in June
and November 2010 over shares in the Group All-Employee Free Shares Plan Trust other than those shares owned beneficially
by participants.
Capital
The Group funds its operations through a mixture of equity funding and debt financing, including bank and capital market
borrowings.
At 31 December 2010, the Group’s capital was £5,356m (2009 £4,550m), which comprises total equity of £5,403m (2009
£4,663m), less amounts accumulated in equity relating to cash flow hedges of £47m (2009 £113m). Net debt (as defined by
the Group) was £242m (2009 net cash £403m).
The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. The
Group’s policy is to maintain an investment grade credit rating. The Group’s dividend policy is to grow the dividend whilst
maintaining a long-term sustainable earnings cover of approximately two times.
BAE Systems Annual Report 2010 167
Notes to the Group accounts continued
24. Share capital and other reserves continued
Other reserves
At 1 January 2010 (restated1)
Currency translation on foreign currency net investments:
Merger
reserve
£m
4,589
Statutory
reserve
£m
202
Revaluation
reserve
£m
10
Translation
reserve
£m
485
Hedging
reserve
£m
113
Subsidiaries
Equity accounted investments
Amounts charged to hedging reserve
Recycling of cumulative currency translation reserve on disposal
Recycling of cumulative net hedging reserve on disposal
Current tax on items taken directly to equity
Deferred tax on items taken directly to equity
At 31 December 2010
–
–
–
–
–
–
–
4,589
–
–
–
–
–
–
–
202
–
–
–
–
–
–
–
10
160
(6)
–
(17)
–
–
–
622
–
–
(84)
–
(4)
(2)
24
47
1 Revaluation reserve reduced by £64m following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
Total
£m
5,399
160
(6)
(84)
(17)
(4)
(2)
24
5,470
Merger reserve
The merger reserve arose on the acquisition of the Marconi Electronic Systems (MES) business by British Aerospace in 1999
to form BAE Systems, and represents the amount by which the fair value of the shares issued by British Aerospace as
consideration exceeded their nominal value.
Statutory reserve
Under Section 4 of the British Aerospace Act 1980 the statutory reserve may only be applied in paying up unissued shares of
the Group to be allotted to members of the Group as fully paid bonus shares.
Revaluation reserve
The revaluation reserve relates to the revaluation at fair value of the net assets previously held as an equity accounted
investment relating to the BVT joint venture on the acquisition of the remaining 45% interest in 2009.
Translation reserve
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of
foreign operations.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging
instruments related to hedged transactions that have not yet occurred.
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25. Share-based payments
Details of the terms and conditions of each share option scheme are given in the Remuneration report on pages 96 to 119.
Executive Share Option Scheme (ExSOS)
Equity-settled options
2010
2009
Outstanding at the beginning of the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
Cash-settled share appreciation rights
Outstanding at the beginning of the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
Weighted
average
exercise
price
£
Number of
shares
‘000
3.48 23,731
(1,931)
2.26
(3,570)
4.13
3.67 18,230
3.67 13,506
Number of
shares
‘000
18,230
(3,242)
(2,381)
12,607
12,607
2010
2009
Weighted
average
exercise
price
£
Number of
shares
‘000
2.62 12,667
(1,420)
2.25
3.74
(1,159)
2.20 10,088
2.20 10,088
Number of
shares
‘000
10,088
(1,531)
(2,700)
5,857
5,857
Weighted
average
exercise
price
£
3.49
2.40
4.14
3.48
3.09
Weighted
average
exercise
price
£
2.65
2.15
3.54
2.62
2.62
2010
2009
Range of exercise price of outstanding options (£)
Weighted average remaining contracted life (years)
Expense/(credit) recognised for the year (£m)
Performance Share Plan (PSP)
Equity-settled options
Equity-settled
1.72 – 4.79
5
2
Equity-settled
Cash-settled
Cash-settled
1.72 –3.56 1.72 – 4.79 1.72 – 3.98
3
(2)
3
(2)
6
2
Outstanding at the beginning of the year
Granted during the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
Cash-settled share appreciation rights
Outstanding at the beginning of the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
2009
Number of
shares
‘000
20,880
12,701
(4,445)
(2,941)
26,195
2,212
2009
Number of
shares
‘000
3,143
(2,291)
(35)
817
–
2010
Number of
shares
‘000
26,195
11,167
(3,123)
(5,962)
28,277
1,029
2010
Number of
shares
‘000
817
(780)
(12)
25
25
2009
2010
Weighted average remaining contracted life (years)
Weighted average fair value of options granted (£)
Expense recognised for the year (£m)
The exercise price for the PSP is £nil (2009 £nil).
Equity-settled
5
3.00
14
Cash-settled
1
–
–
Equity-settled
5
2.81
8
Cash-settled
2
–
1
BAE Systems Annual Report 2010 169
Notes to the Group accounts continued
25. Share-based payments continued
Restricted Share Plan (RSP)
All awards are equity-settled.
Outstanding at the beginning of the year
Exercised during the year
Outstanding at the end of the year
Expense recognised for the year (£m)
The exercise price for the RSP is £nil (2009 £nil).
Share Matching Plan (SMP)
All awards are equity-settled.
Outstanding at the beginning of the year
Granted during the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
Weighted average remaining contracted life (years)
Weighted average fair value of options granted (£)
Expense recognised for the year (£m)
The exercise price for the SMP is £nil (2009 £nil).
Save-As-You-Earn (SAYE)
Equity-settled options
Outstanding at the beginning of the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
170 www.baesystems.com
2010
Number of
shares
‘000
–
–
–
2009
Number of
shares
‘000
216
(216)
–
2010
–
2009
–
2010
Number of
shares
‘000
8,680
5,881
(307)
(1,229)
13,025
–
2009
Number of
shares
‘000
1,811
7,661
(94)
(698)
8,680
–
2010
2
3.80
2
2009
2
3.43
3
2010
2009
Weighted
average
exercise
price
£
1.56
1.56
–
–
–
Number of
shares
‘000
4,636
(4,550)
(82)
4
4
Weighted
average
exercise
price
£
1.56
1.56
1.54
1.56
1.56
Number of
shares
‘000
4
(4)
–
–
–
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25. Share-based payments continued
Cash-settled share appreciation rights
Outstanding at the beginning of the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
2010
2009
Weighted
average
exercise
price
£
–
–
–
–
Number of
shares
‘000
–
–
–
–
2010
Weighted
average
exercise
price
£
3.56
3.56
3.56
–
Number of
shares
‘000
2,895
(349)
(2,546)
–
2009
Range of exercise price of outstanding options (£)
Credit recognised for the year (£m)
Equity-settled
–
–
Cash-settled
–
–
Equity-settled
1.56
–
Cash-settled
–
(1)
Details of options granted in the year
The fair value of both equity-settled awards granted in the year has been measured using the weighted average inputs below
and the following valuation models:
PSP – Monte Carlo
SMP – Dividend valuation model
Range of share price at date of grant (£)
Exercise price (£)
Expected option life (years)
Volatility
Spot dividend yield
Risk free interest rate
2010
2009
3.23 – 3.80 3.23 – 3.43
–
3 – 4
34%
4.2 – 4.6%
1.7 – 1.8%
–
3 – 4
33 – 34%
–
1.0 – 1.8%
Volatility was calculated with reference to the Group’s weekly share price volatility, after allowing for dividends and stock splits,
for the greater of 30 weeks or for the period until vest date.
The average share price in the year was £3.42 (2009 £3.44).
The liability in respect of the cash-settled elements of the schemes shown above and reported within liability provisions at
31 December 2010 is £5m (2009 £12m).
The intrinsic value of cash-settled options that have vested at 31 December 2010 is £6m (2009 £10m).
Share Incentive Plan
The Group also incurred a charge of £29m (2009 £31m) in respect of the all-employee free shares element of the Share
Incentive Plan.
BAE Systems Annual Report 2010 171
Notes to the Group accounts continued
26. Reconciliation of operating business cash flow
Cash inflow from operating activities
Assets contributed to Trust
Purchases of property, plant and equipment, and investment property
Purchases of intangible assets
Proceeds from sale of property, plant and equipment
Proceeds from sale of investment property
Equity accounted investment funding
Dividends received from equity accounted investments
Cash held for charitable contribution to Tanzania
Operating business cash flow
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Discontinued operations
Operating business cash flow
27. Net (debt)/cash (as defined by the Group)
Debt-related derivative financial instrument assets – current
Debt-related derivative financial instrument assets – non-current
Other investments – current
Cash and cash equivalents
Loans – non-current
Loans – current
Overdrafts – current
Loans and overdrafts – current
Less: Cash received on customers’ account1
Less: Assets held in Trust
Less: Cash held for charitable contribution to Tanzania
Net (debt)/cash (as defined by the Group)
Movement in net (debt)/cash (as defined by the Group)
Operating business cash flow
Interest
Taxation
Free cash inflow
Acquisitions and disposals
Debt acquired on acquisition of subsidiary undertakings
Proceeds from issue of share capital
Equity dividends paid
Dividends paid to non-controlling interests
Purchase of own shares, including treasury shares
Cash (outflow)/inflow from matured derivative financial instruments
Cash inflow/(outflow) from movement in cash collateral
Movement in cash received on customers’ account1
Foreign exchange translation
Other non-cash movements
Movement in net (debt)/cash (as defined by the Group)
Opening net cash (as defined by the Group)
Closing net (debt)/cash (as defined by the Group)
2010
£m
1,535
(25)
(408)
(19)
68
2
(7)
71
(30)
1,187
568
858
227
195
(665)
4
1,187
2010
£m
17
28
260
2,813
3,118
(2,133)
(909)
(11)
(920)
(16)
(261)
(30)
(3,360)
(242)
2010
£m
1,187
(173)
(352)
662
(88)
–
6
(574)
(32)
(526)
(123)
11
7
(20)
32
(645)
403
(242)
2009
£m
2,232
(225)
(483)
(42)
36
–
–
77
–
1,595
380
480
285
813
(366)
3
1,595
2009
£m
12
27
211
3,693
3,943
(2,840)
(438)
(15)
(453)
(20)
(227)
–
(3,540)
403
2009
£m
1,595
(186)
(350)
1,059
(253)
(1)
5
(534)
(5)
(25)
36
(11)
(12)
262
(157)
364
39
403
1 Cash received on customers’ account is the unexpended cash received from customers in advance of delivery which is subject to advance payment guarantees unrelated to Group
performance. It is included within trade and other payables.
172 www.baesystems.com
27. Net (debt)/cash (as defined by the Group) continued
Cash flows in relation to acquisitions and disposals
Subsidiaries
Atlantic Marine
Tenix Defence
OASYS
Other
Purchase of subsidiary undertakings
Equity accounted investments
Other
Purchase of equity accounted investments
Other
Proceeds from sale of equity accounted investments – continuing operations
Saab
Proceeds from sale of equity accounted investments – discontinued operations
Cash
(consideration)/
proceeds
£m
Cash and cash
equivalents
acquired
£m
(245)
65
(15)
(3)
(198)
(2)
(2)
1
1
92
92
18
–
1
–
19
–
–
–
–
–
–
Total
£m
(227)
65
(14)
(3)
(179)
(2)
(2)
1
1
92
92
Total cash flows in relation to acquisitions and disposals
(107)
19
(88)
28. Dividends
Equity dividends
Prior year final 9.6p dividend per ordinary share paid in the year (2009 8.7p)
Interim 7.0p dividend per ordinary share paid in the year (2009 6.4p)
2010
£m
335
239
574
2009
£m
307
227
534
After the balance sheet date, the directors proposed a final dividend of 10.5p (2009 9.6p). The dividend, which is subject
to shareholder approval, will be paid on 1 June 2011 to shareholders registered on 26 April 2011. The ex-dividend date is
20 April 2011.
Shareholders who do not at present participate in the Company’s Dividend Reinvestment Plan and wish to receive the final
dividend in shares rather than cash should complete a mandate form for the Dividend Reinvestment Plan and return it to the
registrars no later than 10 May 2011.
29. Acquisition of subsidiaries
Acquisition of subsidiaries for the year ended 31 December 2010
In 2010, the Group acquired Atlantic Marine Holding Company (Atlantic Marine) and OASYS Technology, LLC (OASYS). If the
acquisitions had occurred on 1 January 2010, combined sales of Group and equity accounted investments would have been
£22.5bn, revenue £21.2bn and profit £1,022m from continuing operations for the year ended 31 December 2010.
For all acquisitions made in the year, fair values remain provisional, but will be finalised within 12 months of acquisition.
Acquisition
Atlantic Marine
OASYS
Consolidated results for the
period from acquisition to
31 December 2010
Acquisition
date
13 July 2010
19 October 2010
Percentage
share
100%
100%
Total
consideration
£m
245
33
278
Goodwill
£m
133
28
161
Revenue
£m
74
7
81
Profit
after tax
£m
3
1
4
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BAE Systems Annual Report 2010 173
Notes to the Group accounts continued
29. Acquisition of subsidiaries continued
Atlantic Marine
On 13 July 2010, the Group completed the acquisition of Atlantic Marine, a naval services and marine fabrication business, for
$372m (headline price of $352m, plus purchase price adjustments of $20m) (£245m). The business employs approximately
1,500 people at Mayport and Jacksonville, Florida, Moss Point, Mississippi, and Mobile, Alabama.
The acquisition complements BAE Systems’ existing ship repair and upgrade capabilities serving the US Navy. The Group
anticipates continued strong demand for naval support capabilities in the US and the acquisition is consistent with
BAE Systems’ strategy to address anticipated growth in Services activity in its home markets. Atlantic Marine operates two
facilities in Jacksonville and Mobile, both of which are situated in deep water ports along some of the busiest trade routes in
the US. Additionally, Atlantic Marine operates a facility located on the Mayport Naval Station near Jacksonville, the second
largest homeport of US Navy surface combatants on the East and Gulf Coasts, and proposed as the new homeport for an
aircraft carrier in the 2010 Quadrennial Defense Review. These opportunities do not translate into separately identifiable
intangible assets, but represent much of the assessed value within Atlantic Marine supporting the recognised goodwill.
The goodwill is not expected to be deductible for tax purposes.
The Atlantic Marine acquisition had the following effect on the Group’s assets and liabilities:
Intangible assets
Property, plant and equipment
Inventories
Receivables
Deferred tax assets
Payables
Deferred tax liabilities
Provisions
Cash and cash equivalents
Net assets/(liabilities) acquired
Goodwill
Consideration – cash
Accounting
policy
alignments
£m
–
(1)
1
(1)
–
(1)
–
–
–
(2)
Fair value
adjustments
£m
36
20
–
–
–
(1)
(18)
(2)
–
35
Book value
£m
1
94
–
15
1
(13)
(23)
(14)
18
79
Fair value
£m
37
113
1
14
1
(15)
(41)
(16)
18
112
133
245
The Group incurred acquisition-related costs of £5m related to external legal fees and due diligence costs. These costs have
been included in operating costs.
The intangible assets acquired as part of the acquisition of Atlantic Marine of £37m primarily relate to customer relationships.
Receivables include trade receivables with a fair value and gross contractual value of £13m, which are expected to be fully
recoverable.
OASYS
On 19 October 2010, the Group completed the acquisition of OASYS, a US manufacturer of electro-optical systems and
sub-assemblies based in Manchester, New Hampshire, for cash consideration of $24m (£15m) and a potential earn-out of
up to $29m (£18m). The fair value of the contingent consideration at the acquisition date is $29m (£18m). Payment of the
contingent consideration is dependent on the business achieving certain revenue targets for 2010 and 2011.
The net assets and goodwill included in the consolidated balance sheet as a result of this acquisition are £5m and £28m,
respectively.
The acquisition of OASYS complements the existing Electronic Solutions business in the US and enhances the Group’s product
offerings in growing electro-optical markets. These opportunities do not translate to separately identifiable intangible assets,
but represent much of the assessed value within OASYS supporting the recognised goodwill.
Adjustments to goodwill in respect of prior year acquisitions
Tenix Defence Holdings Pty Limited (Tenix Defence)
Outstanding issues concerning the acquisition of the Tenix Defence business in 2008, including the completion accounting
process, have been resolved successfully with agreement of contingent payments totalling A$127.5m (£74m, net of legal fees)
from the former owners of the business. In September 2010, the Group received a payment of A$112.5m (£65m, net of legal
fees) with the remainder due in 2011. These payments reduce purchase consideration and, therefore, the amount of goodwill
arising on consolidation is reduced by £64m (£74m, less £10m deferred tax) from £323m to £259m.
174 www.baesystems.com
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29. Acquisition of subsidiaries continued
Acquisition of subsidiaries for the year ended 31 December 2009
The most significant acquisition made by the Group during the year ended 31 December 2009 was of the 45% shareholding in
BVT Surface Fleet Limited (BVT) held by VT Group plc (VT). If the acquisition had occurred on 1 January 2009, combined sales of
Group and equity accounted investments, revenue and loss for the year ended 31 December 2009 from continuing operations
would have been £22.4bn, £21.3bn and £74m, respectively.
BVT (now BAE Systems Surface Ships)
On 30 October 2009, the BVT joint venture became a wholly-owned subsidiary of the Group after VT Group plc exercised its
option to sell its 45% shareholding in BVT to BAE Systems. Consideration paid including transaction costs for the remaining
45% interest was £348m. The now wholly-owned company has been renamed BAE Systems Surface Ships Limited (Surface
Ships). The Group previously held a 55% interest in BVT, and accounted for its share of the results and net assets of BVT in
accordance with IAS 31, Interests in Joint Ventures.
Total goodwill arising amounted to £584m, which comprised £225m on the initial formation of the BVT joint venture in the year
ended 31 December 2008 and £359m arising on the acquisition of the 45% interest.
A final update of the fair values arising on acquisition has been undertaken, with the main adjustment being for additional
losses identified on the export ship contracts amounting to £163m. The losses have arisen due to circumstances in existence
prior to 1 July 2008, but those losses have only been identified in the current year. Goodwill has increased by £53m to £637m
primarily reflecting 45% of the post-tax losses. In accordance with IFRS 3 (2004), the portion of these losses relating to the
Group's original 55% interest in the joint venture has been reflected in the revaluation reserve (£64m), leaving a cumulative
credit on that reserve of £10m. Comparatives for the year ended 31 December 2009 have been restated accordingly.
In the period from acquisition to 31 December 2009, Surface Ships contributed revenue and profit after tax of £338m and
£34m, respectively, to the Group’s consolidated results as a wholly-owned subsidiary.
The acquisition of BVT has had the following effect on the Group’s assets and liabilities. The figures in the table below
represent a 100% interest in BVT.
Restated
Intangible assets
Property, plant and equipment
Inventories
Receivables
Deferred tax assets
Payables
Current tax (liabilities)/assets
Deferred tax liabilities
Provisions
Cash and cash equivalents
Net liabilities acquired
Goodwill
Fair value of net liabilities acquired and goodwill arising
Components of cost of acquisitions:
Fair value of consideration for initial 55% shareholding in 2008
Fair value of consideration for remaining 45% shareholding in 2009
Total cost of acquisition
Losses under equity method of initial 55% shareholding
Gain on revaluation of step acquisition
Fair value of net liabilities acquired and goodwill arising
Consideration satisfied by:
Cash paid on acquisition of remaining 45% shareholding in 2009
Directly attributable costs:
Paid
Cash consideration
Fair value of net assets contributed to BVT joint venture for initial 55%
shareholding in 2008
Directly attributable costs:
Paid
Total cost of acquisition
Book value
(30 October
2009)
£m
–
136
61
225
2
(433)
(16)
(6)
(12)
33
(10)
Accounting
policy
alignments
£m
–
–
–
–
–
–
–
–
–
–
–
Fair value
adjustments
£m
225
–
–
–
22
(327)
27
(63)
–
–
(116)
Fair value
£m
225
136
61
225
24
(760)
11
(69)
(12)
33
(126)
637
511
189
348
537
(36)
10
511
346
2
348
178
11
537
BAE Systems Annual Report 2010 175
Notes to the Group accounts continued
29. Acquisition of subsidiaries continued
The intangible assets acquired as part of the acquisition of BVT of £225m represented order backlog.
Advanced Ceramics Research
The Group acquired Advanced Ceramics Research, Inc. in the US on 8 June 2009 for a consideration of $14m (£9m). The net
assets and goodwill included in the Group’s consolidated balance sheet as a result of this acquisition were £1m and £8m,
respectively.
30. Financial risk management
A discussion of the Group’s treasury objectives and policies, and the use of financial instruments can be found in the Directors’
report. Financial instruments comprise net (debt)/cash (note 27) together with other financial assets and other financial
liabilities (note 17), and other instruments deemed to be financial instruments under IAS 32, Financial Instruments:
Presentation, including non-current receivables, non-current payables and non-current provisions.
Hedging instruments
The notional, or contracted, amounts of derivative financial instruments are shown below, analysed between foreign exchange
contracts and interest rate contracts, classified by year of maturity.
Foreign exchange contracts
Net forward (sales)/purchase contracts
US dollar
Euro
Other
31 December 2010
Between
one year
and five
years
£m
More than
five years
£m
5
495
65
565
15
8
–
23
Not
exceeding
one year
£m
(887)
1,851
249
1,213
Not
exceeding
one year
£m
(614)
1,882
44
1,312
Total
£m
(867)
2,354
314
1,801
31 December 2009
Between
one year
and five
years
£m
More than
five years
£m
202
392
71
665
53
17
–
70
Interest rate contracts
Interest rate swap contracts
US dollar
Sterling
Cross-currency swap contracts
Net forward purchase contracts
US dollar
31 December 2010
Between
one year
and five
years
£m
More than
five years
£m
Not
exceeding
one year
£m
512
31
543
639
84
723
–
–
–
Total
£m
1,151
115
1,266
31 December 2009
Between
one year
and five
years
£m
More than
five years
£m
Not
exceeding
one year
£m
310
31
341
1,115
115
1,230
–
–
–
1,425
146
1,571
31 December 2010
Between
one year
and five
years
£m
More than
five years
£m
Not
exceeding
one year
£m
Not
exceeding
one year
£m
Total
£m
31 December 2009
Between
one year
and five
years
£m
More than
five years
£m
Total
£m
51
51
945
945
320
320
1,316
1,316
51
51
965
965
310
310
1,326
1,326
Fair value of financial instruments
The fair value of a financial instrument is the price at which one party would assume the rights and/or duties of another party.
The fair values of financial instruments have been determined based on available market information at the balance sheet date,
and the valuation methodologies listed below:
–
–
–
the fair value of forward foreign exchange contracts are calculated by discounting the contracted forward values and
translating at the appropriate balance sheet rates;
the fair value of both interest rate and cross-currency swaps are calculated by discounting expected future principal and
interest cash flows and translating at the appropriate balance sheet rates; and
the fair value of loans and overdrafts has been estimated by discounting the future cash flows to net present values using
appropriate market-based interest rates prevailing at 31 December.
Due to the variability of the valuation factors, the fair values presented at the balance sheet date may not be indicative of the
amounts the Group would expect to realise in a current market environment.
176 www.baesystems.com
Total
£m
(359)
2,291
115
2,047
Total
£m
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30. Financial risk management continued
The following table compares the estimated fair values of certain financial assets and liabilities to their carrying values at the
balance sheet date1.
Assets
Non-current
Other receivables2
Other financial assets
Current
Available-for-sale investments
Other financial assets
Cash and cash equivalents
Liabilities
Non-current
Loans
Other financial liabilities
Current
Loans and overdrafts
Other financial liabilities
Net carrying
amount
2010
£m
Estimated
fair value
2010
£m
Net carrying
amount
2009
£m
Estimated
fair value
2009
£m
233
110
260
289
2,813
233
110
159
133
260
289
2,813
211
216
3,693
159
133
211
216
3,693
(2,133)
(255)
(2,598)
(255)
(2,840)
(261)
(3,266)
(261)
(920)
(109)
(940)
(109)
(453)
(94)
(454)
(94)
1 The estimated fair values of the remaining financial assets and liabilities are consistent with their carrying values at the balance sheet date.
2 Net carrying amount approximates to estimated fair value as there is no active market.
Fair value hierarchy
The fair value measurement hierarchy is as follows:
– Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;
– Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and
– Level 3 – Inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).
The following table presents the Group’s assets and liabilities that are measured at fair value.
2010
Level 1
£m
Level 2
£m
Level 3
£m
Assets
Available-for-sale investments
Derivatives used for hedging
Financial assets at fair value through
profit or loss
Debt-related derivative financial
instruments
Total assets
Liabilities
Loans
Derivatives used for hedging
Financial liabilities at fair value through
profit or loss
Debt-related derivative financial
instruments
Total liabilities
260
126
183
–
569
–
23
22
45
90
–
(112)
(801)
(33)
(42)
(177)
–
(154)
(5)
(1,016)
–
–
–
–
–
–
–
–
–
–
2009
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
260
149
205
45
659
211
197
46
–
454
–
61
6
39
106
(801)
(145)
–
(68)
(1,118)
(81)
(219)
(43)
(163)
(5)
(1,170)
–
(111)
(23)
(1,385)
Total
£m
211
258
52
39
560
(1,118)
(149)
(206)
(23)
(1,496)
–
–
–
–
–
–
–
–
–
–
Level 1 includes foreign exchange hedges valued at unadjusted quoted prices at less than two years’ maturity. Level 2 includes
all other fair value items and foreign exchange hedges greater than two years’ maturity.
Net financial liabilities of £8m measured at their 2010 balance sheet carrying value were transferred from Level 2 to Level 1 as
a result of changes in maturity profile.
BAE Systems Annual Report 2010 177
Notes to the Group accounts continued
30. Financial risk management continued
Interest rate risk
Based on contracted maturities and/or repricing dates, the following amounts are exposed to interest rate risk over the future
as shown below:
2011
£m
2012
£m
2013
£m
2014
£m
Beyond
2014
£m
Assets
Current
Cash and cash equivalents
2,813
–
–
–
Liabilities
Non-current
Loans
Current
(737)
(737)
(711)
(639)
Loans and overdrafts
(311)
–
–
–
–
–
–
Collateral
As shown above, the Group has entered into a number of financial derivative contracts to hedge certain long-term foreign
currency and interest rate exposures. Cash collateral payments can be required to be made periodically to the counterparty
dependent on the market value of these financial derivatives. Cash deposited in this way is treated as a non-current receivable
and at 31 December 2010 totalled £nil (2009 £11m).
Interest rate risk
The Group’s objective is to mitigate its exposure to interest rate fluctuations on borrowings and deposits through varying the
proportion of fixed rate debt relative to floating rate debt over the forward time horizon by utilising derivative instruments, mainly
interest rate swaps.
The Group’s current interest rate management policy is that a minimum of 50% (2009 50%) and a maximum of 75% (2009
75%) of gross debt is maintained at fixed interest rates. At 31 December 2010, the Group had 65% (2009 62%) of fixed rate
debt and 35% (2009 38%) of floating rate debt based on a gross debt of £3.0bn, including debt-related derivative financial
assets (2009 £3.3bn).
The floating rate debt has been predominantly achieved by entering into interest rate swaps which swap the fixed rate US dollar
interest payable on debt into either floating rate sterling or US dollars. At the end of 2010, the Group had a total of $1.5bn
(2009 $1.9bn) of this type of swap outstanding with a weighted average duration of 4.6 years (2009 4.2 years). In respect of
the fixed rate debt, the weighted average period in respect of which interest is fixed was 5.7 years (2009 6.4 years).
Given the level of short-term interest rates during the year, the average cost of the floating rate debt was 3.3% (2009 3.4%),
2.7% on US dollars and 1.8% on sterling (2009 3.0% on US dollars and 2.3% on sterling). The cost of the fixed rate debt was
6.5% (2009 6.3%).
A change of 100 basis points in short-term rates applied to the average fixed/floating mix and level of borrowings would vary the
interest cost to the Group by £12m (2009 £12m).
In respect of cash deposits, given the fluctuation in the Group’s working capital requirements, cash is generally invested for
short-term periods based at floating interest rates. A change of 100 basis points in the average interest rates during the year
applied to the average cash deposits would vary the interest receivable by £16m (2009 £17m).
Liquidity risk
Cash flow forecasting is performed by each line of business as part of the annual Integrated Business Planning process and as
part of the monthly reporting cycle. The Group monitors a rolling forecast of liquidity requirements to ensure it has sufficient
cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities.
Surplus cash held by the operating groups over and above balances required for working capital management is loaned to the
Group’s centralised treasury department. Surplus cash is invested in interest bearing current accounts, term deposits, money
market deposits and marketable securities, choosing instruments with appropriate maturities or sufficient liquidity to provide
sufficient headroom as determined by the line of business cash forecasts.
At 31 December 2010, the Group had a committed Revolving Credit Facility (RCF) of £2bn (2009 £1.455bn). The RCF is
contracted until 2015, and was undrawn throughout the year.
178 www.baesystems.com
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30. Financial risk management continued
Credit risk
The Group is exposed to credit risk on its cash and cash equivalents to the extent of non-performance by its counterparties
in respect of financial instruments. However, the Group has policies in place to ensure credit risk is limited by placing
concentration limits. The Group has a credit limit system to manage actively its exposure to treasury counterparties. The cash
and cash equivalents balance at 31 December 2010 of £2,813m (2009 £3,693m) was invested with 24 (2009 26) financial
institutions. The system assigns a maximum exposure based on the counterparty’s size, a composite credit rating and credit
default swap price. These limits are regularly monitored and updated.
The cash and cash equivalents of the Group are invested in non-speculative financial instruments which are usually highly liquid
such as short-term deposits. The Group, therefore, believes it has reduced its exposure to credit risk through this process.
The Group has material receivables due from the UK and US governments where credit risk is not considered to be an issue.
For the remaining trade receivables no one counterparty constitutes more than 5% of the balance (2009 5%).
Currency risk
In order to protect itself against currency fluctuations, the Group’s policy is to hedge all material firm transactional exposures.
The Group’s objective is to reduce its exposure to volatility in earnings and cash flows as a result of movements in foreign
currency exchange rates. The Group is exposed to a number of foreign currencies, the most significant being the US dollar.
The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency denominated
transactions. To mitigate this risk, the Group’s policy is to hedge all material firm transactional exposures, unless otherwise
approved as an exception by the Treasury Review Management Committee, as well as to manage anticipated economic cash
flows over the medium term. The Group aims, where possible, to apply hedge accounting treatment for all derivatives that hedge
material transactional foreign currency exposures.
The Group is also exposed to movements in foreign currency exchange rates in respect of the translation of net assets and
income statements of foreign subsidiaries and equity accounted investments. The Group does not hedge the translation effect
of exchange rate movements on the income statement or balance sheet of overseas subsidiaries and equity accounted
investments it regards as long-term investments. Hedges are, however, undertaken in respect of investments that are not
considered long term or core to the Group.
31. Related party transactions
The Group has a related party relationship with its directors and key management (as disclosed in the Remuneration report on
pages 96 to 119 and in note 7), its equity accounted investments (note 14) and the pension plans (note 21).
Transactions occur with the equity accounted investments in the normal course of business, are priced on an arm’s-length basis
and settled on normal trade terms. The more significant transactions are disclosed below:
Related party
Advanced Electronics Company
Limited
BVT Surface Fleet Limited1
Eurofighter Jagdflugzeug GmbH
FADEC International LLC
Gripen International KB
MBDA SAS
Panavia Aircraft GmbH
Saab AB2
CTA International SAS
Other
Sales to
related party
2010
£m
2009
£m
Purchases from
related party
2010
£m
2009
£m
Amounts owed
by related party
2009
2010
£m
£m
Amounts owed
to related party
2009
2010
£m
£m
Lease income/
(expense) with
related party
2010
£m
2009
£m
Management
recharges
2010
£m
2009
£m
–
–
64
–
1,313 1,073
–
49
1
1
46
36
52
40
5
3
–
–
–
2
1,444 1,241
149
–
–
–
1
162
92
20
–
–
424
–
4
–
–
–
302
103
17
–
–
426
1
–
283
–
11
10
1
–
–
1
307
–
–
–
–
132
–
59
–
–
1433 159
–
–
673
98
4 1,0103 1,080
15
12
9
1
–
–
–
–
3
–
–
–
207 1,232 1,353
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
2
–
–
–
–
–
143
–
–
–
–
14
–
6
–
–
–
18
–
–
–
–
24
1 To date of acquisition (30 October 2009).
2 To date of sale of half of the Group’s 20.5% shareholding (3 June 2010).
3 Also relates to disclosures under Financial Reporting Standard 8, Related Party Disclosures, for the parent company, BAE Systems plc.
BAE Systems Annual Report 2010 179
Notes to the Group accounts continued
32. Group entities
Principal subsidiary undertakings
BAE Systems (Operations) Limited
(Held via BAE Systems Enterprises Limited and
BAE Systems (Overseas Holdings) Limited)
BAE Systems Information and Electronic Systems
Integration Inc.
(Held via BAE Systems, Inc.)
BAE Systems Land & Armaments LP
1300 North 17th Street, Suite 1400, Arlington VA
22209, USA
(Partners: BAE Systems Land & Armaments Inc. and
BAE Systems Land & Armaments Holdings Inc.)
BAE Systems Tactical Vehicle Systems LP
5000 Interstate 10 West, Sealy, TX 77474, USA
(Partners: BAE Systems TVS Holdings LLC and
BAE Systems TVS Inc.)
Principal activities
Defence and commercial aerospace
activities
Group
interest in
allotted
capital
100%
Ordinary
Principally
operates in
UK
Designs, develops and manufactures
electronic systems and subsystems
100%
Common
US
Country of
incorporation
England
and
Wales
US
Manufactures and supports military
100%
US
US
vehicles
Mobility and protection systems
100%
US
US
The Group comprises a large number of subsidiary undertakings and it is not practical to include all of them in the above list.
The list therefore only includes those subsidiary undertakings which principally affected the Group accounts.
A full list of subsidiary, equity accounted investments and other associated undertakings as at 31 December 2010 will be
annexed to the Company’s next annual return filed with the Registrar of Companies.
No subsidiary undertakings are excluded from the Group consolidation.
33. Events after the balance sheet date
In January 2011, the Group entered into an agreement to acquire the 91.3% outstanding equity of Fairchild Imaging, Inc. for
a cash consideration of $86m (£55m). The California-based business provides solid-state electronic imaging components,
cameras, and systems for aerospace, industrial, medical and scientific imaging applications. The acquisition complements
the Group’s electro-optics and night vision capabilities. The acquisition is conditional, among other things, upon receiving
regulatory approval.
In January 2011, the Group announced a recommended €217m (£186m) cash offer for Norkom Group plc, a provider of
innovative counter-fraud and anti-money laundering solutions to the global financial services industry.
On 15 February 2011, the Group acquired 100% of L-1 Identity Solutions, Inc.’s Intelligence Services Group, a leading provider
of security and counter threat capabilities to the US government, for a cash consideration of approximately $297m (£190m).
The acquisition accounting exercise is yet to be undertaken.
180 www.baesystems.com
Company balance sheet
as at 31 December
Fixed assets
Tangible assets
Investments in subsidiary undertakings
Current assets
Debtors due within one year
Debtors due after one year
Other financial assets due within one year
Other financial assets due after one year
Cash at bank and in hand
Liabilities falling due within one year
Loans and overdrafts
Creditors
Other financial liabilities
Net current liabilities
Total assets less current liabilities
Liabilities falling due after one year
Loans
Creditors
Other financial liabilities
Provisions for liabilities and charges
Capital and reserves
Issued share capital
Share premium account
Statutory reserve
Other reserves
Profit and loss account
Equity shareholders’ funds
Approved by the Board on 16 February 2011 and signed on its behalf by:
I G King
Chief Executive
G W Rose
Group Finance Director
Notes
2010
£m
2009
£m
2
3
4
4
5
5
6
7
5
6
7
5
8
10
12
13
12
12
15
6,793
6,808
7,348
10
178
157
1,700
9,393
4
7,070
7,074
7,466
14
262
179
2,804
10,725
(39)
(11,854)
(157)
(12,050)
(2,657)
4,151
(37)
(14,490)
(255)
(14,782)
(4,057)
3,017
(200)
(6)
(310)
(516)
(52)
3,583
90
1,249
202
116
1,926
3,583
(233)
(3)
(327)
(563)
(61)
2,393
90
1,243
202
119
739
2,393
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BAE Systems Annual Report 2010 181
Notes to the Company accounts
1. Accounting policies
Basis of preparation
The financial statements have been prepared under the
historical cost convention, as modified by the revaluation of
available-for-sale financial assets, and financial assets and
financial liabilities (including derivative instruments) at fair
value through profit or loss, and in accordance with applicable
accounting standards in the United Kingdom (UK GAAP).
The going concern basis has been applied in these accounts.
In the Company’s accounts, all fixed asset investments
(including subsidiary undertakings and joint ventures) are
stated at cost (or valuation in respect of certain listed
investments) less provisions for impairments. Dividends
received and receivable are credited to the Company’s profit
and loss account. In accordance with Section 408(4) of
the Companies Act 2006, the Company is exempt from
the requirement to present its own profit and loss account.
The amount of profit for the financial year of the Company
is disclosed in note 12 to these accounts.
Relief under Sections 612 and 616 of the Companies Act
2006 is taken wherever possible. Accordingly, where such
relief is available, the difference between the fair value and
aggregate nominal value of shares is not recognised in either
shareholders’ funds or cost of investment.
Changes in accounting policies
The following amendments to existing standards have been
adopted by the Company for the year ended 31 December
2010 and have not had a material impact on the Company’s
accounts:
–
Improvements to Financial Reporting Standards 2009 is
a collection of amendments to five Financial Reporting
Standards in order to maintain existing levels of
convergence between UK GAAP and IFRS. In addition,
the disclosure requirements in FRS 11, Impairment of
Fixed Assets and Goodwill, have been strengthened;
– Amendment to FRS 25, Financial Instruments: Presentation,
changes the classification from liabilities to equity of
certain financial instruments;
– Amendment to FRS 20, Share-based Payment: Group Cash-
settled Share-based Payment Transactions, which clarifies
both the scope of the standard and the accounting for
group cash-settled share-based payment transactions in
the separate financial statements of the entity receiving
the goods or services when that entity has no obligation
to settle the share-based payment transaction; and
– Amendment to FRS 26, Financial Instruments: Recognition
and Measurement: Eligible Hedged Items, clarifies how
existing principles underlying hedge accounting should be
applied to the designation of a one-sided risk in a hedged
item and inflation in a financial hedged item.
The following amendments to existing standards are effective
for the year ending 31 December 2011. They are not expected
to have an impact on the Company’s accounts.
– Amendment to FRS 25, Financial Instruments: Presentation:
Classification of Rights Issues;
– Urgent Issues Task Force (UITF) Abstract 47, Extinguishing
Financial Liabilities with Equity Instruments; and
–
Improvements to Financial Reporting Standards 2010.
Cash flow statement
The Company is exempt under the terms of FRS 1 from the
requirement to publish its own cash flow statement, as its
cash flows are included within the consolidated cash flow
statement of the Group.
Foreign currencies
Transactions in foreign currencies are translated at the
exchange rates ruling at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies are
retranslated at the exchange rates ruling at the balance sheet
date. These exchange differences are recognised in the profit
and loss account unless they qualify for hedge accounting
treatment, in which case the effective portion is recognised
directly in a separate component of equity.
Tangible fixed assets
Depreciation is provided, normally on a straight-line basis,
to write off the cost or valuation of tangible fixed assets
over their estimated useful economic lives to any estimated
residual value using the following rates:
Buildings
Computing equipment and
short-life works equipment
up to 50 years, or the lease
term if shorter
3 to 5 years
No depreciation is provided on freehold land and assets in the
course of construction.
Impairment reviews are undertaken if there are indications that
the carrying values may not be recoverable.
Leases
Rental payments under operating leases are charged to the
profit and loss account on a straight-line basis in arriving at
operating profit.
Investments
The Company’s investment in shares in Group companies are
stated at cost less provision for impairment.
Tax
The charge for taxation is based on the profit for the year
and takes account of taxation deferred because of timing
differences between the treatment of certain items for taxation
and accounting purposes. Deferred tax is recognised on an
undiscounted basis in respect of all timing differences
between the treatment of certain items for taxation and
accounting purposes which have arisen but not reversed by
the balance sheet date where there is an obligation to pay
more tax, or a right to pay less tax, in the future.
Pensions and other post-retirement benefits
The Company contributes to Group pension plans operated
in the UK. Details of the principal plans and the financial
assumptions used are contained in the consolidated accounts
of BAE Systems plc. As permitted by FRS 17, Retirement
Benefits, the plans are accounted for as defined contribution
plans, as the employer cannot identify its share of the
underlying assets and liabilities of the plans. The employer’s
contributions are set in relation to the current service period
and also to fund a series of agreed measures to address the
pension scheme deficits.
Share options and own shares held
The Company issues equity-settled share options to Group
employees. Equity-settled share options are measured at
fair value at the date of grant using an option pricing model.
The fair value is expensed on a straight-line basis over the
vesting period, based on the Company’s estimate of the
number of shares that will actually vest.
182 www.baesystems.com
Notes to the Company accounts
1. Accounting policies
Basis of preparation
The financial statements have been prepared under the
historical cost convention, as modified by the revaluation of
available-for-sale financial assets, and financial assets and
financial liabilities (including derivative instruments) at fair
value through profit or loss, and in accordance with applicable
accounting standards in the United Kingdom (UK GAAP).
The going concern basis has been applied in these accounts.
In the Company’s accounts, all fixed asset investments
(including subsidiary undertakings and joint ventures) are
stated at cost (or valuation in respect of certain listed
investments) less provisions for impairments. Dividends
received and receivable are credited to the Company’s profit
and loss account. In accordance with Section 408(4) of
the Companies Act 2006, the Company is exempt from
the requirement to present its own profit and loss account.
The amount of profit for the financial year of the Company
is disclosed in note 12 to these accounts.
Relief under Sections 612 and 616 of the Companies Act
2006 is taken wherever possible. Accordingly, where such
relief is available, the difference between the fair value and
aggregate nominal value of shares is not recognised in either
shareholders’ funds or cost of investment.
Changes in accounting policies
The following amendments to existing standards have been
adopted by the Company for the year ended 31 December
2010 and have not had a material impact on the Company’s
accounts:
–
Improvements to Financial Reporting Standards 2009 is
a collection of amendments to five Financial Reporting
Standards in order to maintain existing levels of
convergence between UK GAAP and IFRS. In addition,
the disclosure requirements in FRS 11, Impairment of
Fixed Assets and Goodwill, have been strengthened;
– Amendment to FRS 25, Financial Instruments: Presentation,
Tax
changes the classification from liabilities to equity of
certain financial instruments;
– Amendment to FRS 20, Share-based Payment: Group Cash-
settled Share-based Payment Transactions, which clarifies
both the scope of the standard and the accounting for
group cash-settled share-based payment transactions in
the separate financial statements of the entity receiving
the goods or services when that entity has no obligation
to settle the share-based payment transaction; and
– Amendment to FRS 26, Financial Instruments: Recognition
and Measurement: Eligible Hedged Items, clarifies how
existing principles underlying hedge accounting should be
applied to the designation of a one-sided risk in a hedged
item and inflation in a financial hedged item.
The following amendments to existing standards are effective
for the year ending 31 December 2011. They are not expected
to have an impact on the Company’s accounts.
Cash flow statement
The Company is exempt under the terms of FRS 1 from the
requirement to publish its own cash flow statement, as its
cash flows are included within the consolidated cash flow
statement of the Group.
Foreign currencies
Transactions in foreign currencies are translated at the
exchange rates ruling at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies are
retranslated at the exchange rates ruling at the balance sheet
date. These exchange differences are recognised in the profit
and loss account unless they qualify for hedge accounting
treatment, in which case the effective portion is recognised
directly in a separate component of equity.
Tangible fixed assets
Depreciation is provided, normally on a straight-line basis,
to write off the cost or valuation of tangible fixed assets
over their estimated useful economic lives to any estimated
residual value using the following rates:
Buildings
up to 50 years, or the lease
Computing equipment and
short-life works equipment
term if shorter
3 to 5 years
No depreciation is provided on freehold land and assets in the
course of construction.
Impairment reviews are undertaken if there are indications that
the carrying values may not be recoverable.
Rental payments under operating leases are charged to the
profit and loss account on a straight-line basis in arriving at
Leases
operating profit.
Investments
The Company’s investment in shares in Group companies are
stated at cost less provision for impairment.
The charge for taxation is based on the profit for the year
and takes account of taxation deferred because of timing
differences between the treatment of certain items for taxation
and accounting purposes. Deferred tax is recognised on an
undiscounted basis in respect of all timing differences
between the treatment of certain items for taxation and
accounting purposes which have arisen but not reversed by
the balance sheet date where there is an obligation to pay
more tax, or a right to pay less tax, in the future.
Pensions and other post-retirement benefits
The Company contributes to Group pension plans operated
in the UK. Details of the principal plans and the financial
assumptions used are contained in the consolidated accounts
of BAE Systems plc. As permitted by FRS 17, Retirement
Benefits, the plans are accounted for as defined contribution
plans, as the employer cannot identify its share of the
underlying assets and liabilities of the plans. The employer’s
contributions are set in relation to the current service period
and also to fund a series of agreed measures to address the
Share options and own shares held
The Company issues equity-settled share options to Group
employees. Equity-settled share options are measured at
fair value at the date of grant using an option pricing model.
The fair value is expensed on a straight-line basis over the
vesting period, based on the Company’s estimate of the
number of shares that will actually vest.
– Amendment to FRS 25, Financial Instruments: Presentation:
Classification of Rights Issues;
pension scheme deficits.
– Urgent Issues Task Force (UITF) Abstract 47, Extinguishing
Financial Liabilities with Equity Instruments; and
–
Improvements to Financial Reporting Standards 2010.
1. Accounting policies continued
In accordance with UITF Abstract 25, National Insurance
Contributions on Share Option Gains, the Company provides
in full for the employer’s national insurance liability estimated
to arise on the future exercise of share options granted,
except where the employee has agreed to settle the
employer’s national insurance liability as a condition of
the grant of the options.
As required under UITF Abstract 38, Accounting for ESOP
Trusts, the cost to the Company of own shares held is shown
as a deduction from shareholders’ funds within the profit and
loss account. Consideration paid or received for the purchase
or sale of the Company’s own shares in the ESOP trust is
shown separately in the reconciliation of movements in
shareholders’ funds.
Dividends
Equity dividends on ordinary share capital are recognised as a
liability in the period in which they are declared. The interim
dividend is recognised when it has been approved by the
Board and the final dividend is recognised when it has been
approved by the shareholders at the Annual General Meeting.
2. Tangible fixed assets
Cost
At 1 January 2010
Additions
Disposals
Transfers from other Group companies
At 31 December 2010
Depreciation and impairment
At 1 January 2010
Depreciation
Disposals
At 31 December 2010
Net book value
At 31 December 2010
At 31 December 2009
Net book value of:
Long leasehold property
Fixtures, fittings and equipment
3. Investments in subsidiary undertakings
Cost
At 1 January 2010
Additions
Transfers to other Group companies1
At 31 December 2010
Impairment provisions
At 1 January 2010 and 31 December 2010
Net carrying value
At 31 December 2010
At 31 December 2009
Land and
buildings
£m
Plant and
equipment
£m
9
–
–
–
9
6
1
–
7
2
3
27
4
(24)
11
18
26
3
(24)
5
13
1
Land and
buildings
£m
Plant and
equipment
£m
2
–
2
–
13
13
Total
£m
36
4
(24)
11
27
32
4
(24)
12
15
4
Total
£m
2
13
15
£m
7,131
14
(291)
6,854
61
6,793
7,070
1 Primarily comprises the transfer at book value of the Company’s investment in BAE Systems Surface Ships Limited to BAE Systems Surface Fleet Solutions (Holdings) Limited.
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BAE Systems Annual Report 2010 183
Notes to the Company accounts continued
4. Debtors
Due within one year
Corporation tax recoverable
Amounts owed by subsidiary undertakings
Amounts owed by Group joint ventures
Other debtors
Prepayments and accrued income
Due after one year
Other debtors
Other debtors includes cash collateral of £nil (2009 £11m).
5. Other financial assets and liabilities
Due within one year
Cash flow hedges – foreign exchange contracts
Other foreign exchange/interest rate contracts
Due after one year
Cash flow hedges – foreign exchange contracts
Other foreign exchange/interest rate contracts
Debt-related derivative financial instruments – assets1
2010
£m
2009
£m
260
7,040
5
20
23
7,348
10
10
243
7,188
3
6
26
7,466
14
14
2010
Assets
£m
2010
Liabilities
£m
2009
Assets
£m
2009
Liabilities
£m
5
173
178
1
137
19
157
–
(157)
(157)
–
(310)
–
(310)
4
258
262
5
174
–
179
–
(255)
(255)
–
(327)
–
(327)
1 The debt-related derivative financial instrument assets are presented as other financial assets. The debt-related derivative financial liabilities are presented as a component of loans and
overdrafts (note 6).
Full disclosures relating to the Group’s other financial assets and liabilities and financial risk management strategies are given
in the Financial performance section of the Directors’ report and note 30 to the Group accounts.
6. Loans and overdrafts
Due within one year
Bank loans and overdrafts
SYSTEMS 2001 Asset Trust Option Aircraft bond
Debt-related derivative financial instruments – liabilities
Due after one year
Euro-Sterling £100m 10¾% bond, repayable 2014
SYSTEMS 2001 Asset Trust Option Aircraft bond, final instalment 2013
Debt-related derivative financial instruments – liabilities
2010
£m
2009
£m
11
27
1
39
100
96
4
200
15
22
–
37
100
119
14
233
Bank loans and overdrafts are at a floating rate of interest.
The SYSTEMS 2001 Asset Trust bonds are at a floating rate of interest, having been converted to a sterling floating rate bond
by utilising a cross-currency swap which resulted in an effective interest rate during 2010 of 2.86% (2009 2.84%).
Loans and overdrafts are repayable as follows:
At 31 December 2010
Carrying amount
At 31 December 2009
Carrying amount
Less than
one year
£m
Between
one and
two years
£m
Between
two and
five years
£m
More than
five years
£m
39
37
29
29
171
204
–
–
Total
£m
239
270
The total amount of loans repayable by instalments, where any instalment is due after five years, is £nil (2009 £nil).
184 www.baesystems.com
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7. Creditors
Due within one year
Amounts owed to subsidiary undertakings
Amounts owed to Group joint ventures
Other creditors1
Accruals and deferred income
Due after one year
Other creditors2
2010
£m
2009
£m
10,330
1,220
263
41
11,854
12,615
1,325
511
39
14,490
6
6
3
3
1 Other creditors at 31 December 2009 includes the regulatory penalties of £278m reflecting the global settlement of the regulatory investigations by the US Department of Justice (DoJ) and
the UK’s Serious Fraud Office (SFO). Other creditors at 31 December 2010 includes £30m in respect of the global settlement with the UK’s SFO following payment of the DoJ penalty during
the year.
2 Other creditors includes unfunded pension liabilities transferred from other Group companies.
8. Provisions for liabilities and charges
At 1 January 2010
Created
Transfers from other Group companies
Reclassified to other creditors
Utilised
Released
Discounting
At 31 December 2010
Contracts
and other
£m
61
1
1
(6)
(9)
(1)
5
52
9. Contingent liabilities and commitments
Company guaranteed borrowings
Borrowings by subsidiary undertakings totalling £2,548m (2009 £2,646m) which are included in the Group’s borrowings have
been guaranteed by the Company.
10. Share capital
Issued and fully paid
At 1 January 2009
Exercise of options
At 1 January 2010
Exercise of options
At 31 December 2010
Equity
Ordinary shares
of 2.5p each
Non-equity
Special Share
of £1
Total
Number of
shares
m
Nominal
value
£m
Number of
shares
Nominal
value
£
Nominal
value
£m
3,582
3
3,585
2
3,587
90
–
90
–
90
1
–
1
–
1
1
–
1
–
1
90
–
90
–
90
Special Share
One Special Share of £1 in the Company is held on behalf of the Secretary of State for Business, Innovation and Skills (the
Special Shareholder). Certain provisions of the Company’s Articles of Association cannot be amended without the consent of
the Special Shareholder. These provisions include the requirement that no foreign person, or foreign persons acting in concert,
can have more than a 15% voting interest in the Company, the requirement that the majority of the directors are British, and the
requirement that the Chief Executive and any executive Chairman are British citizens. The effect of these requirements can also
be amended by regulations made by the directors and approved by the Special Shareholder.
The Special Shareholder may require the Company at any time to redeem the Special Share at par or to convert the Special
Share into one ordinary voting share. The Special Shareholder is entitled to receive notice of and to attend general meetings
and class meetings of the Company’s shareholders but has no voting right, nor other rights, other than to speak in relation to
any business in respect of the Special Share.
BAE Systems Annual Report 2010 185
Notes to the Company accounts continued
10. Share capital continued
Treasury shares
During the year, 143,951,447 ordinary shares of 2.5p each were repurchased under the buyback programme completed in
July 2010.
As at 31 December 2010, 178,377,628 (2009 43,952,360) ordinary shares of 2.5p each with an aggregate nominal value of
£4,459,441 (2009 £1,098,809) were held in treasury. During 2010, 9,526,179 treasury shares were used to satisfy awards
and options under the Share Incentive Plan and the Share Matching Plan (2009 11,086,593 to satisfy awards and options
under the Share Incentive Plan and the Save-As-You-Earn Share Option Scheme).
11. Employee share schemes
Options over shares of the ultimate parent undertaking, BAE Systems plc, have been granted to employees of the Company
under various schemes. Details of the terms and conditions of each share option scheme are given in the Remuneration report
on pages 96 to 119 of this report.
Executive Share Option Scheme
Save-As-You-Earn
2010
2009
2010
2009
Outstanding at the beginning of the
year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Weighted average remaining life
(years)
Range of exercise price of
outstanding options (£)
(Credit)/expense recognised for the
year (£m)
Number of
shares
‘000
8,745
(1,778)
(792)
6,175
Weighted
average
exercise
price
£
3.41
2.22
3.99
3.68
5
Number of
shares
‘000
11,262
(663)
(1,854)
8,745
Weighted
average
exercise
price
£
Number of
shares
‘000
–
–
–
–
3.48
2.37
4.19
3.41
6
1.72 – 4.79
1.72 – 4.79
(1)
1
Weighted
average
exercise
price
£
–
–
–
–
–
–
–
Outstanding at the beginning of the year
Granted during the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Share Matching Plan
2010
Number of
shares
‘000
3,308
1,972
(192)
(90)
4,998
2009
Number of
shares
‘000
987
2,490
(94)
(75)
3,308
2010
Number of
shares
‘000
10,687
3,831
(1,338)
(2,123)
11,057
Performance Share Plan
2009
Number of
shares
‘000
8,508
4,765
(2,083)
(503)
10,687
Weighted
average
exercise
price
£
1.56
1.56
–
–
Number of
shares
‘000
142
(142)
–
–
–
–
–
Restricted Share Plan
2010
Number of
shares
‘000
–
–
–
–
–
2009
Number of
shares
‘000
80
–
(80)
–
–
Weighted average remaining life (years)
Weighted average fair value of options granted (£)
Expense recognised for the year (£m)
1
3.80
1
2
3.43
2
5
2.93
4
5
2.81
4
–
–
–
–
–
–
The exercise price for the Share Matching Plan, Performance Share Plan and Restricted Share Plan is £nil (2009 £nil).
Information on options granted in the year can be found on page 171 (note 25 to the Group accounts).
186 www.baesystems.com
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12. Reserves
At 31 December 2009
Profit for the year
Dividends paid
Share-based payments
Exercise of options
Purchase of own shares
Purchase of treasury shares
Movements in hedging reserve
At 31 December 2010
Share
premium
account
£m
1,243
–
–
–
6
–
–
–
1,249
Other
reserves
£m
119
–
–
–
–
–
–
(3)
116
Profit
and loss
account
£m
739
2,223
(574)
54
–
(13)
(503)
–
1,926
Other reserves
Other reserves for the Company comprise: capital reserve £24m (2009 £24m); hedging reserve £6m (2009 £9m); and non-
distributable reserve arising from property disposals to other Group undertakings £86m (2009 £86m). The non-distributable
reserve arising from property disposals to other Group undertakings relates to the revaluation surplus realised by the Company
on properties which were sold to other Group companies as part of operational reorganisations in prior years. Amounts within
this reserve will be transferred to the profit and loss account as distributable when the related properties are disposed of
outside the Group, or written down following impairment.
Profit and loss account
The Company’s profit for the financial year was £2,223m (2009 loss £777m). The non-distributable portion of the profit and
loss account is £736m (2009 £736m).
Own shares held
Own shares held, including treasury shares and shares held by BAE Systems ESOP Trust, are recognised as a deduction from
retained earnings.
BAE Systems ESOP Trust
The Group has an ESOP discretionary trust to administer the share plans and to acquire Company shares, using funds loaned
by the Group, to meet commitments to Group employees. A dividend waiver was in operation for shares within the ESOP Trust,
other than those owned beneficially by the participants, for the dividends paid in June and November 2010.
At 31 December 2010, the ESOP held 2,202,800 (2009 3,644,598) ordinary shares of 2.5p each with a market value of £7m
(2009 £13m). The shares held by the ESOP are recorded at cost and deducted from retained earnings until such time as the
shares vest unconditionally to employees.
A dividend waiver was in operation during 2010 and remains over shares within the Company’s Share Incentive Plan Trust other
than those shares owned beneficially by the participants. A dividend waiver was also in operation for the dividends paid in June
and November 2010 over shares in the Group All-Employee Free Shares Plan Trust other than those shares owned beneficially
by participants.
13. Statutory reserve
Under Section 4 of the British Aerospace Act 1980, this reserve may only be applied in paying up unissued shares of the
Company to be allotted to members of the Company as fully paid bonus shares.
14. Other information
Employees
The total number of employees of the Company at 31 December 2010 was 846 (2009 721). Total staff costs, excluding
charges for share options, were £116m (2009 £93m).
Total directors’ emoluments, excluding Company pension contributions, were £6,741,000 (2009 £6,683,000). These
emoluments were paid for their services on behalf of the BAE Systems Group. No emoluments related specifically to their
work for the Company.
Company audit fee
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts totalled £1,484,000 (2009 £1,486,000).
BAE Systems Annual Report 2010 187
Five-year summary
Income statement1,2,3
Continuing operations
Sales including Group’s share of equity accounted investments
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Intra-operating group sales
Underlying EBITA4
Electronics, Intelligence & Support
Land & Armaments
Programmes & Support
International
HQ & Other Businesses
Profit on disposal of businesses
Pension curtailment gains
Regulatory penalties
Uplift on acquired inventories
EBITA5
Amortisation and impairment of intangible assets
Finance costs including share of equity accounted investments
Profit before taxation
Taxation expense including share of equity accounted investments
Profit/(loss) for the year – continuing operations
Profit/(loss) for the year – discontinued operations
Profit/(loss) for the year
Balance sheet
Intangible assets
Property, plant and equipment, and investment property
Non-current investments
Inventories
Assets held in Trust
Payables (excluding cash on customers’ account) less receivables
Other financial assets and liabilities
Retirement benefit obligations
Provisions
Net tax
Net (debt)/cash (as defined by the Group)
Disposal groups held for sale
Non-controlling interests
Total equity attributable to equity holders of the parent
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
5,653
5,930
6,680
4,534
278
(683)
22,392
5,637
6,738
6,298
3,828
254
(765)
21,990
4,459
6,407
4,638
2,926
235
(529)
18,136
3,916
3,538
5,327
3,009
243
(673)
15,360
4,007
2,115
4,615
3,102
295
(695)
13,439
668
604
529
478
(65)
2,214
1
2
(18)
–
2,199
(517)
(194)
1,488
(461)
1,027
54
1,081
2010
£m
11,216
2,848
798
644
261
(6,159)
(10)
(3,456)
(1,077)
580
(242)
–
(71)
5,332
575
604
670
419
(71)
2,197
68
261
(278)
–
2,248
(1,259)
(698)
291
(352)
(61)
16
(45)
20096
£m
11,306
2,663
852
887
227
(6,918)
(45)
(4,679)
(929)
896
403
–
(72)
4,591
506
566
491
417
(101)
1,879
238
–
–
–
2,117
(303)
701
2,515
(636)
1,879
(111)
1,768
2008
£m
12,306
2,558
1,040
926
–
(5,866)
240
(3,365)
(845)
256
39
–
(55)
7,234
437
324
456
403
(203)
1,417
40
–
–
(12)
1,445
(297)
93
1,241
(366)
875
47
922
2007
£m
9,559
1,887
787
701
–
(5,373)
52
(1,629)
(809)
63
700
64
(36)
5,966
429
168
331
387
(146)
1,169
13
–
–
–
1,182
(139)
(174)
869
(243)
626
1,013
1,639
2006
£m
7,595
1,869
678
395
–
(4,298)
6
(2,499)
(695)
648
435
–
(17)
4,117
188 www.baesystems.com
Movement in net (debt)/cash (as defined by the Group)
Cash inflow from operating activities
Net capital expenditure7
Dividends received from equity accounted investments
Assets contributed to Trust
Cash held for charitable contribution to Tanzania
Operating business cash flow
Acquisitions and disposals
Interest
Tax and dividends
(Purchase)/issue of equity shares
Preference share conversion
Exchange movements
Other movements8
Net (decrease)/increase in net funds
Movement in cash on customers’ account
Movement in net (debt)/cash (as defined by the Group)
Opening net cash/(debt) (as defined by the Group)
Closing net (debt)/cash (as defined by the Group)
Other information
Continuing operations
Basic earnings/(loss) per share – total (pence)
Basic earnings per share – underlying9 (pence)
Order book including the Group’s share of equity accounted
investments (£bn)
Including discontinued operations
Dividend per ordinary share (pence)
Number of employees, excluding share of employees of equity
accounted investments, at year end
Capital expenditure including leased assets (£m)
2010
£m
1,535
(364)
71
(25)
(30)
1,187
(88)
(173)
(958)
(520)
–
(20)
(80)
(652)
7
(645)
403
(242)
2009
£m
2,232
(489)
77
(225)
–
1,595
(254)
(186)
(889)
(20)
–
262
(132)
376
(12)
364
39
403
2008
£m
2,009
(503)
89
–
–
1,595
(1,038)
(98)
(750)
(27)
–
(374)
5
(687)
26
(661)
700
39
2007
£m
2,162
(262)
78
–
–
1,978
(2,112)
(65)
(509)
603
245
36
57
233
32
265
435
700
2006
£m
778
(141)
145
–
–
782
1,330
(207)
(431)
(71)
6
323
(11)
1,721
(9)
1,712
(1,277)
435
2010
2009
2008
2007
2006
28.9
40.8
(2.3)
40.1
52.7
36.8
25.2
29.4
19.3
22.9
39.7
46.3
45.7
37.9
30.9
17.5
16.0
14.5
12.8
11.3
92,000
437
98,000
522
94,000
552
88,000
341
79,000
538
1 For the year ended 31 December 2006, Airbus SAS is presented as a discontinued operation.
2 For the year ended 31 December 2006, the operating group information has been restated to reflect changes made to the Group’s organisational structure.
3 For the years ended 31 December 2006 to 2010, Saab AB is presented as a discontinued operation.
4 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items. From 2006 to 2008, non-recurring items are profit
on disposal of businesses and uplift on acquired inventories. In 2009 and 2010, non-recurring items are profit on disposal of businesses, pension curtailment gains and regulatory penalties.
5 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense.
6 Restated following finalisation of the fair values recognised on acquisition of the 45% shareholding in BVT Surface Fleet Limited (see note 29).
7 Includes expenditure on property, plant and equipment, investment property, intangible assets and other investments, and equity accounted investment funding.
8 Other movements include cash flows from matured derivative financial instruments, cash collateral and other non-cash movements (see page 172).
9 Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring items. From 2006 to 2008,
non-recurring items are profit on disposal of businesses and uplift on acquired inventories. In 2009 and 2010, non-recurring items are profit on disposal of businesses, pension curtailment
gains and regulatory penalties.
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BAE Systems Annual Report 2010 189
Shareholder information
Registered office
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
Telephone: +44 (0)1252 373232
Company website: www.baesystems.com
Registered in England and Wales, No. 1470151
Registrars
Equiniti Limited (0140)
Aspect House, Spencer Road, Lancing
West Sussex BN99 6DA
United Kingdom
Email: BAESystems@equiniti.com
Telephone: 0871 384 2044
Calls to the above number are charged at 8p per minute from
a BT landline. Other telephony providers’ costs may vary.
Lines are open from 8.30am to 5.30pm Monday to Friday.
Telephone number from outside the UK: +44 121 415 7058
If you have any queries regarding your shareholding, please
contact the registrars.
Dividend mandate
Shareholders can arrange to have their dividends paid directly
into their bank or building society account, by completing a
bank mandate form. The benefits of this are:
– Cleared funds are received into their bank account on the
payment date – avoiding a trip to the bank, or a cheque
lost in the post;
– One consolidated tax voucher, covering both dividend
payments made in the financial year; and
– BAE Systems saves money and less paper is used –
which is good for shareholders and the environment.
With the 2010 interim dividend, paid in November 2010,
to encourage the mandating of dividends and to support the
Company’s work with UK armed forces charities, for each new
bank mandate instruction we received we undertook to donate
£1 to St Dunstan’s, a charity that supports and cares for
blind ex-service men and women. The response to date has
been extremely good, with a £2,000 donation being made to
St Dunstan’s in December 2010. A further donation will be
made during 2011.
To take advantage of the benefits of having dividends paid
directly into a bank account, as well as supporting the work
of St Dunstan’s, a mandate form can be obtained from our
website, by contacting Equiniti, or by using the one that would
have been attached to the tax voucher for the last dividend
payment. Alternatively, mandate instructions can be submitted
via Shareview or, if the shareholding is held in a sole name,
Equiniti can take instructions over the telephone.
Overseas shareholders can also arrange for dividends to be
paid in their local currency and more information can be
obtained from www.shareview.com/overseas
Electronic shareholder communications
An increasing number of shareholders receive communications
from the Company using e-mail and web-based communications.
190 www.baesystems.com
The use of electronic communications, rather than printed paper
documents, helps us reduce the environmental impact of our
activities and assist us in managing our costs.
We regularly consult with shareholders to check how they wish
to receive information from us. Shareholders may receive
electronic communications in one of two ways:
– via e-mail – This option is available through Shareview.
Shareholders receive an e-mail notification when a new
document is made available.
– via our website – Shareholders receive a notification by
post when a new document is made available.
A shareholder is taken to have agreed to website
communications if a response has not been received. Any
document or information required to be sent to shareholders
is made available on the Company’s website and a notification
of availability is sent. Shareholders who receive such a
notification are entitled to request a hard copy of the
document at any time and may also change the way they
receive communications at any time by contacting Equiniti.
Notwithstanding any election, the Company may, at its sole
and absolute discretion, send any notification or information
to shareholders in hard copy form.
Shareview services
Shareview is a portfolio service offered by Equiniti to investors
which gives shareholders online access to more information
on their investments, including balance movements, indicative
share prices and information on recent payments. It can also
be used to sign up to receive all shareholder communications
electronically, or arrange for dividends to be mandated.
To take advantage of Shareview, register online at
www.shareview.co.uk. Click on ‘Register’ and follow the four
easy steps. Once registered, Shareview is:
– Easy to use. To log on, all that is needed is the user ID,
password and the user’s date of birth. Information
regarding shareholdings is regularly updated.
– Secure. Data transferred to a shareholder’s browser is
encrypted and not accessible to other internet users
without the log on information.
– Free. Equiniti make no charge to shareholders for providing
this service.
Please visit www.shareview.co.uk for more details. Details of
software and equipment requirements are given on the website.
Dividend reinvestment plan
The Company offers holders of its ordinary shares the option
to elect to have their dividend reinvested in shares purchased
in the market instead of cash. To make this election, please
request a dividend reinvestment plan mandate from our
registrars:
Equiniti Financial Services Limited
Aspect House, Spencer Road, Lancing
West Sussex BN99 6DA
United Kingdom
Telephone: 0871 384 2268
Calls to the above number are charged at 8p per minute from
a BT landline. Other telephony providers' costs may vary.
Lines are open 8.30am to 5.30pm Monday to Friday.
Telephone number from outside the UK: +44 121 415 7058
Alternatively, a copy of the Terms and Conditions of the
dividend reinvestment plan, along with the mandate form,
can be downloaded from our website.
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ShareGift
The Orr Mackintosh Foundation operates a charity donation
scheme for shareholders with small parcels of shares which
may be uneconomic to sell. Details of the scheme are
available from ShareGift at www.sharegift.org or by telephone
on 020 7930 3737.
Share price information
The middle market price of the Company's ordinary shares
on 31 December 2010 was 330.0p and the range during the
year was 294.7p to 388.8p.
American Depositary Receipts
BAE Systems plc American Depositary Receipts (ADRs) are
traded on the Over The Counter market (OTC) under the
symbol BAESY. One ADR represents four BAE Systems plc
ordinary shares.
JPMorgan Chase Bank, N.A. is the depositary.
Warning to shareholders – boiler room scams
Many companies have become aware that their shareholders
have received unsolicited phone calls or correspondence
concerning investment matters. These are typically from
overseas-based ‘brokers’ who target UK shareholders, offering
to sell them what often turn out to be worthless or high-risk
shares in US or UK investments. These operations are
commonly known as ‘boiler rooms’. These ‘brokers’ can be
very persistent and extremely persuasive, and a 2006 survey
by the Financial Services Authority (FSA) has reported that the
average amount lost by investors is around £20,000.
It is not just the novice investor that has been duped in this
way; many of the victims had been successfully investing for
several years. Shareholders are advised to be very wary of
any unsolicited advice, offers to buy shares at a discount or
offers of free company reports. If you receive any unsolicited
investment advice:
If you should have any queries, please contact:
– make sure you get the correct name of the person and
JPMorgan Chase & Co
PO Box 64504
St Paul
MN 55164-0504
USA
Email: jpmorgan.adr@wellsfargo.com
Telephone number for general queries: (800) 990 1135
Telephone number from outside the US: +1 651 453 2128
organisation;
– check that they are properly authorised by the FSA before
getting involved by visiting www.fsa.gov.uk/register/ and
contacting the firm using the details on the register;
–
report the matter to the FSA either by calling
0845 606 1234 or visiting
www.moneymadeclear.fsa.gov.uk; and
–
if the calls persist, hang up.
If you deal with an unauthorised firm, you will not be eligible to
receive payment under the Financial Services Compensation
Scheme. The FSA can be contacted by completing an online
form at
www.fsa.gov.uk/pages/doing/regulated/law/alerts/overseas.shtml
Details of any share dealing facilities that the Company
endorses will be included in Company mailings.
More detailed information on this or similar activity can
be found on the Consumer Financial Education Body website
www.moneymadeclear.fsa.gov.uk
Financial calendar
Financial year end
Annual General Meeting
2010 final ordinary dividend payable
2011 half-yearly results announcement
2011 interim ordinary dividend payable
2011 full year results – preliminary announcement
2011 final ordinary dividend payable
– report and accounts
31 December
4 May 2011
1 June 2011
28 July 2011
30 November 2011
February 2012
April 2012
June 2012
BAE Systems Annual Report 2010 191
Shareholder information continued
Analysis of share register at 31 December 2010
By category of shareholder
Individuals
Nominee companies
Banks
Insurance and pension funds
Other
By size of holding
1 – 99
100 – 499
500 – 999
1,000 – 9,999
10,000 – 99,999
100,000 – 999,999
1,000,000 and over
Glossary
Australian Defence Force.
Annual General Meeting.
All-Terrain Vehicle.
ADF
AGM
ATV
BvS10 Viking Amphibious armoured ATV.
C4ISR
Command, Control, Communications,
Computers, Intelligence, Surveillance and
Reconnaissance.
Corporate Responsibility.
Combat Vehicle 90.
Defensive Aids Sub-System.
Earnings before amortisation and impairment
of intangible assets, finance costs and
taxation expense.
Executive Committee.
Earnings per Share.
European Union.
Family of Medium Tactical Vehicles.
Final Pensionable Earnings.
Final Pensionable Pay.
Future Rapid Effect System.
Financial Reporting Standard.
Generally Accepted Accounting Practice.
Gross Domestic Product.
International Accounting Standard.
Integrated Business Plan.
Indefinite Delivery, Indefinite Quantity.
International Financial Reporting
Interpretations Committee.
International Financial Reporting Standard.
CR
CV90
DASS
EBITA
EC
EPS
EU
FMTV
FPE
FPP
FRES
FRS
GAAP
GDP
IAS
IBP
IDIQ
IFRIC
IFRS
192 www.baesystems.com
Ordinary shares of 2.5p
Accounts
Shares
Number
‘000
102.3
7.6
0.0
0.0
1.0
110.9
23.2
31.5
22.4
31.5
1.4
0.6
0.3
110.9
%
Number
million
92.2
98.8
6.9 3,262.3
0.3
0.0
0.1
0.0
225.9
0.9
100.0 3,587.4
1.1
20.9
8.4
28.4
16.0
20.2
74.8
28.4
35.3
1.3
0.5
193.9
0.3 3,257.9
100.0 3,587.4
%
2.8
90.9
0.0
0.0
6.3
100.0
0.0
0.2
0.4
2.1
1.0
5.4
90.9
100.0
KPI
KSA
LCM
LRIP
LTA
LTIP
M777
MEADS
MoD
MRAP
MSMO
OAS
OF
OPV
QBR
QDR
RAF
RCF
RG31
RSAF
RSNF
SBDCP
SDSR
SMM
STOVL
TSR
UAV
Key Performance Indicator.
Kingdom of Saudi Arabia.
Lifecycle Management.
Low-Rate Initial Production.
Lifetime Allowance.
Long-Term Incentive Plan.
A lightweight 155mm field howitzer.
Medium Extended Air Defence System.
Ministry of Defence.
Mine Resistant Ambush Protected.
Multi-Ship, Multi-Option.
Operational Assurance Statement.
Operational Framework.
Offshore Patrol Vessel.
Quarterly Business Review.
Quadrennial Defense Review.
Royal Air Force.
Revolving Credit Facility.
Mine protected armoured personnel carrier.
Royal Saudi Air Force.
Royal Saudi Naval Forces.
Saudi British Defence Co-operation Programme.
Strategic Defence and Security Review.
Safety Maturity Matrix.
Short Take-Off and Vertical Landing.
Total Shareholder Return.
Unmanned Air Vehicle.
BAE Systems at a glance
BAE Systems is a global defence and security company with
approximately 98,200 employees1 worldwide. The Group delivers
a full range of products and services for air, land and naval forces,
as well as advanced electronics, security, information technology
solutions and support services.
BAE Systems, Inc.
Electronics, Intelligence
& Support (EI&S)
Land & Armaments
Programmes & Support
International
SALES1,2,3 BY OPERATING
GROUP (%)
KPI
UNDERLYING EBITA1,3,4
BY OPERATING GROUP (%)
KPI
International
International
Electronics,
Intelligence
& Support
Electronics,
Intelligence
& Support
20%
25%
21%
29%
29%
26%
23%
27%
Programmes
& Support
Land &
Armaments
Programmes
& Support
Land &
Armaments
ORDER BOOK3,5 BY OPERATING GROUP (%)
Top 15 orders
Remaining order book
Principal operations
EI&S provides a wide range of electronic
systems and subsystems for military and
commercial applications, technical and
professional services for US national
security and federal markets, and ship
repair and modernisation services.
Principal operations
Land & Armaments designs, develops,
produces, supports and upgrades
armoured combat vehicles, tactical
wheeled vehicles, naval guns, missile
launchers, artillery systems, munitions
and law enforcement products.
Principal operations
Programmes & Support primarily
comprises the Group’s UK-based air,
maritime and Cyber & Intelligence
activities.
Electronic Solutions
Intelligence & Security
Platform Solutions
Support Solutions
Main home markets
US
UK
Global Combat Systems
Global Tactical Systems
Security & Survivability
US Combat Systems
Products Group
Main home markets
US
UK
Military Air Solutions
BAE Systems Surface Ships
Submarine Solutions
Detica
Integrated System Technologies
Main home markets
UK
Principal operations
International comprises the Group’s
businesses in Australia, India and
Saudi Arabia, together with interests in
the pan-European MBDA joint venture
and Air Astana.
BAE Systems Saudi Arabia
BAE Systems Australia
BAeHAL Software (40% shareholding)
Defence Land Systems India
(26% shareholding)
MBDA (37.5% interest)
Air Astana (49% shareholding)
Main home markets
Australia
India
Saudi Arabia
BAE Systems online
Get the latest investor
information online:
www.baesystems.com
For the latest information on:
– Performance
– Investor presentations
– Corporate responsibility
Plus, interactive features enabling you to:
– Customise the homepage
– View the BAE Systems mobile site
– Sign up for RSS feeds
– Sign up for e-mail alerts
Land & Armaments
Munitions Acquisition
Supply Solution
S
41%
Programmes & Support
Queen Elizabeth Class
Aircraft Carriers
P
Typhoon Tranche 3A Aircraft P
Typhoon Tranche 2 Aircraft P
Astute Class Submarines P
S
Tornado ATTAC
P
Type 45 Destroyers
* S
Typhoon Support
* P
Hawk India Aircraft
Electronics, Intelligence & Support
3%
12%
Land & Armaments
11%
11%
Programmes
& Support
14%
8%
International
P
International
Saudi Typhoon Aircraft6
Saudi Tornado Role
Equipment
Landing Helicopter Dock
Saudi British Defence
Co-operation Programme S
Saudi Typhoon Support6
S
Saudi Tornado Upgrade * S
P
P
* New to top 15
S Services
P Platforms
1
2
3
4
5
6
Including share of equity accounted investments.
Before elimination of intra-group sales.
Excluding HQ & Other Businesses.
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense
(EBITA) excluding non-recurring items (see page 37).
Including share of equity accounted investments’ order books and before the elimination of intra-group
orders of £1.5bn.
The appropriate work share of the Saudi Typhoon Aircraft and Support contracts is reported within
Programmes & Support.
Key points
– Acquisitions of Atlantic Marine and
OASYS Technology completed
– Central operating group
headquarters closed as part of the
restructuring of BAE Systems, Inc.
Key points
– Restructured to create a leaner,
more responsive business to meet
customers’ needs
– Net headcount reduced by 5,500
(including contractors)
– Continued to perform on legacy
– Demand continues for land vehicle
programmes and secured several
strategic contract awards in new
markets
– US Army qualified IMX-101 as a
safer and effective alternative for
the potential replacement of TNT
in artillery
– Strong ship repair performance
continued, with order intake totalling
$1bn (£0.6bn) in 2010
Readiness & Sustainment
– Continued progress in pursuit of
supply chain efficiencies
– Continued Mine Resistant Ambush
Protected vehicle activity
Key points
– £537m Hawk India contract secured
– Third Type 45 destroyer accepted off
contract and sixth launched
– HMS Astute acceptance completed
and second boat, Ambush, launched
– Nimrod MRA4 programme
terminated and Harrier to be taken
out of service in 2011 following
Strategic Defence and Security
Review (SDSR)
– Continued rationalisation and
efficiency activity across the
operating group and alignment
of cost base post SDSR
Key points
– A further ten Typhoon aircraft
delivered under the Salam
programme
– Typhoon operational capability being
provided under the support contract
– 157 Tactica vehicles accepted by the
Saudi Arabia National Guard
– BAE Systems Australia selected
as Lockheed Martin’s partner for
maintenance and upgrade support
on the Australian F-35 programme
– Defence Land Systems India
Private Limited joint venture
became operational
Sales1, 2
£5,653m
No. of employees1
30,800
Sales1, 2
£5,930m
No. of employees1
16,100
Sales1, 2
£6,680m
No. of employees1
31,600
Sales1, 2
£4,534m
No. of employees1
17,200
p66 For more information or visit
www.baesystems.com/businesses/
p68 For more information or visit
www.baesystems.com/businesses/
landarmaments/
p70 For more information or visit
www.baesystems.com/businesses/
programmessupport/
p72 For more information or visit
www.baesystems.com/businesses/
international/
2010 online corporate
reporting benefits:
– The Annual Report 2010 is
accessible in pdf or interactive
format
– Search the Annual Report for key
information and access links for
further information
– Corporate responsibility information
is integrated into the Annual Report
– Access the Notice of Annual General
Meeting and vote online
Visit: www.baesystems.com/reporting/
Shareholder feedback
If you would like to give us any feedback on this year’s
Annual Report, please send your written comments to
our investor relations team at:
BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
or by e-mail to investors@baesystems.com
Production of this report
The printer is an EMAS certified CarbonNeutral® company
and its Environmental Management System is certified to
ISO 14001. 100% of the inks used are vegetable oil based,
95% of press chemicals are recycled for further use and on
average 99% of any waste associated with this production will
be recycled. The papers are a combination of 100% and 50%
recycled fibre. The pulp for each is bleached using an Elemental
Chlorine Free (ECF) process. All papers are FSC certified.
BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
Telephone +44 (0)1252 373232
Registered in England and Wales No. 1470151
Website details
www.baesystems.com
Annual Report 2010
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BAE Systems continues to build on its position as
one of the world’s largest and most geographically
diverse defence and security companies, focused
on delivering sustainable growth in shareholder
value through its commitment to Total Performance.
p20 For more information on the Group’s key home markets
Total Performance
across our markets
For more information visit our website: www.baesystems.com
How we report corporate responsibility (CR):
This report includes a summary of the Group’s corporate
responsibility activities during the 2010 calendar year.
It focuses on our strategy, and performance in the key
areas of business conduct, safety, diversity and inclusion,
environment and community. The report also includes
case studies from our businesses around the world that
demonstrate our approach in practice.
In this report:
– Summary of our 2010 corporate responsibility performance
– Update on our approach to business conduct
On our website:
– Our approach to CR
– Managing CR
– Reporting and assurance
– Safety stories from our businesses
– Education and early careers
– Training and development
– Support for local communities
www.baesystems.com/corporateresponsibility/
Cover image:
Cyber image sourced from istock.com