for more
information
—
BaeSyStemS.com
a
n
n
U
a
L
r
e
P
o
r
t
2
0
1
2
annUaL rePort
2012
BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
Telephone: +44 (0) 1252 373232
www.baesystems.com
Registered in England and Wales No. 1470151
© BAE Systems plc 2012. All rights reserved
BAE SYSTEMS is a registered trade mark of BAE Systems plc.
BAE Systems continues to build on its
position as one of the world’s largest
and most geographically diverse defence,
aerospace and security companies.
BAE Systems is focused on delivering
sustainable growth in shareholder
value through its commitment to
Total Performance.
Front cover: BAE Systems succeeds on the
talent, commitment and dedication of every
single employee.
For BAE Systems at a glance see overleaf
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. 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.
for more
information
—
BaeSyStemS.com
a
n
n
U
a
L
r
e
P
o
r
t
2
0
1
2
annUaL rePort
2012
BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
Telephone: +44 (0) 1252 373232
www.baesystems.com
Registered in England and Wales No. 1470151
© BAE Systems plc 2012. All rights reserved
BAE SYSTEMS is a registered trade mark of BAE Systems plc.
BAE Systems continues to build on its
position as one of the world’s largest
and most geographically diverse defence,
aerospace and security companies.
BAE Systems is focused on delivering
sustainable growth in shareholder
value through its commitment to
Total Performance.
Front cover: BAE Systems succeeds on the
talent, commitment and dedication of every
single employee.
For BAE Systems at a glance see overleaf
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. 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.
CONTENTS
BAE Systems is
focused on
delivering
sustainable
growth in
shareholder
value. This
section provides
an overview of
how we do it.
This section
provides a
commentary on
the Group’s
financial and
non-financial
performance, and
its approach to
the management
of corporate
responsibility
and risk.
This section
provides
summaries of
the operational,
financial and
non-financial
performance of
the Group’s five
principal
reporting
segments.
OVERVIEW
2012 summary and outlook
Chairman’s letter
STRATEGIC REVIEW
Chief Executive’s review
Key Performance Indicators (KPIs)
Our Strategy
Our business model
GROUP PERFORMANCE REVIEW
Financial Performance
Corporate responsibility review
Risk management
Principal risks
REPORTING SEGMENTS PERFORMANCE
REVIEW
Reporting segments overview
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
2
4
8
13
16
17
30
39
44
46
54
56
60
64
68
72
Throughout the Annual Report we have used the
Throughout the Annual Report we have used the
following icons to help navigate to further information:
following icons to help navigate to further information:
For further information visit: www.baesystems.com
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 by e-mail to: investors@baesystems.com
BAE Systems
places great
importance on
the way it
conducts its
business. This
section explains
the Group’s
approach to
governance.
GOVERNANCE
Board of directors
Chairman’s corporate governance letter
Corporate governance report
Remuneration report
78
80
83
93
Other statutory and regulatory information 114
Statement of directors’ responsibilities
117
The sections from Overview to Governance make
up the Directors’ Report for the purposes of the
Companies Act 2006.
This section
contains the
statutory
financial
information for
the Group and
the Company,
together with
important
information for
shareholders.
FINANCIAL STATEMENTS
Index to the accounts
Consolidated income statement
Consolidated statement of
comprehensive income
Notes to the Group accounts
– income statement
Consolidated cash flow statement
Notes to the Group accounts
– cash flow statement
Consolidated balance sheet
Consolidated statement of changes
in equity
Notes to the Group accounts
– balance sheet
Notes to the Group accounts
– other information
Company balance sheet
Notes to the Company accounts
Independent auditor’s report
Five-year summary
Shareholder information
Glossary
Links to pages within
this report
Links to pages within
our website
120
122
123
124
135
136
138
139
140
163
176
177
183
184
186
188
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BAE Systems Annual Report 2012
1
Bae SyStemS at a gLance
BAE Systems is a global defence, aerospace and security company with
approximately 88,200 employees1 worldwide. The Group delivers a wide range
of products and services for air, land and naval forces, as well as advanced
electronics, security, information technology solutions and support services.
Group
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Electronic Systems comprises the US and
UK-based electronics activities, including
electronic warfare systems and electro-
optical sensors, military and commercial
digital engine and flight controls, next-
generation military communications
systems and data links, persistent
surveillance capabilities, and hybrid
electric drive systems.
Cyber & Intelligence comprises the
US-based Intelligence & Security business
and UK-headquartered BAE Systems
Detica business, and covers the Group’s
cyber, secure government, and commercial
and financial security activities.
Platforms & Services (US) comprises the
US-headquartered Land & Armaments
business, with operations in the US, UK,
Sweden and South Africa, together with
US-based services and sustainment
activities, including ship repair and
munitions services.
Platforms & Services (UK) comprises
the Group’s UK-based air, maritime and
combat vehicle activities, and certain
shared services activities.
Bae SyStemS onLine
get the LateSt inveStor information onLine:
www.BaeSyStemS.com
For the latest information on:
– Innovation
– Performance
– Investor presentations
– Corporate responsibility
– News and events
– Company videos
Plus, features enabling you to:
– View on your laptop, tablet or phone
– Stay connected with Twitter, Flickr, YouTube and Facebook
– Sign up for RSS feeds
– Sign up for e-mail alerts
– Contact us
Platforms & Services
(International)
Platforms & Services (International)
comprises the Group’s businesses
in Saudi Arabia, Australia, India and
Oman, together with its 37.5% interest in
the pan-European MBDA joint venture.
Principal
operations
Sales1,2,3 by reporting
segment (%)
22
KPI
8
25
14
31
■ Electronic Systems
■ Cyber & Intelligence
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services (International)
Underlying EBITA1,3,4 by
reporting segment (%)
Operational
key points
21
KPI
6
20
18
35
■ Electronic Systems
■ Cyber & Intelligence
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services (International)
– Sustained a leadership position in the
airborne electronic warfare market
– Strengthened position in high growth
commercial aircraft electronics market
– Won key development contracts in the
classified area
– Continued focus on increasing
productivity and efficiency
– Business recovery complete following
disruption from flood damage at the
Johnson City facility
perform well on existing programmes and
secured strategic contract awards with
existing customers
– The US-based business continues to
invest in differentiating technologies,
such as activity-based intelligence and
cybersecurity, including a leading-edge
network operations and security centre
environment, to support a pipeline of
submitted bids of $2.9bn (£1.8bn) at the
end of 2012
– BAE Systems Detica continues to invest
in products and capability, including its
Security Operations Centre
– BAE Systems Detica awarded a contract
by Vodafone for next-generation
enterprise secure networks for mobile
devices
– The US-based business continues to
– Growth in US ship repair activities
– 46 Typhoon Tranche 2 aircraft delivered
– Salam price escalation negotiations
– Executing munitions infrastructure and
facility operations management
contracts
– £2.5bn Typhoon and Hawk contract for
Oman secured
to the partner nations
ongoing
– £5.0bn of orders received under the
Saudi British Defence Co-operation
Programme (SBDCP) for training aircraft
and support to the end of 2016
– First Landing Helicopter Dock hull arrived
in Australia for completion and second
hull launched in Spain
– MBDA export order for MICA air-to-air
missiles to India
– Strategic international win with Korean
– £446m contract awarded for European
F-16 upgrade down-select
support on Typhoon
– Continued to protect Bradley franchise
with $376m (£231m) in related awards
– First F-35 Lightning II aircraft accepted by
the UK Ministry of Defence (MoD)
– Awarded a $750m (£462m) contract for
CV90 armoured combat vehicles to
Norway
– Fifth Type 45 destroyer accepted off-
contract and support provided for all
Royal Navy Type 45 deployments
– Letter of Request received from Indian
government for 145 M777 howitzers
– Continued consolidation in the Land &
Armaments business
– Business disposals of Safety Products,
Safariland and Tensylon completed
– Settlement reached with the Government
of the Republic of Trinidad and Tobago in
respect of the cancelled Offshore Patrol
Vessels (OPV) programme
– Two OPVs delivered to the Brazilian Navy
– £0.8bn of customer funding received for
ongoing design and development of the
Successor submarine, and continuing
production of the fourth Astute Class
submarine
See page 54 for more information
on the Group’s reporting segments
Sales1,2
£2,507m
For more information visit
www.baesystems.com/businesses
Number of
employees1
13,000
£1,402m
8,200
£4,539m
21,300
£5,646m
27,900
£4,071m
15,500
Including share of equity accounted investments.
Before elimination of intra-group sales.
1
2
3 Excluding HQ.
4
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 31).
Printed by Park Communications on FSC® certified paper.
Park 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.
Designed and produced by Black Sun Plc.
Cover design by The Opcyon Design Company.
Bae SyStemS at a gLance
BAE Systems is a global defence, aerospace and security company with
approximately 88,200 employees1 worldwide. The Group delivers a wide range
of products and services for air, land and naval forces, as well as advanced
electronics, security, information technology solutions and support services.
Group
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Electronic Systems comprises the US and
UK-based electronics activities, including
electronic warfare systems and electro-
optical sensors, military and commercial
digital engine and flight controls, next-
generation military communications
systems and data links, persistent
surveillance capabilities, and hybrid
electric drive systems.
Cyber & Intelligence comprises the
US-based Intelligence & Security business
and UK-headquartered BAE Systems
Detica business, and covers the Group’s
cyber, secure government, and commercial
and financial security activities.
Platforms & Services (US) comprises the
US-headquartered Land & Armaments
business, with operations in the US, UK,
Sweden and South Africa, together with
US-based services and sustainment
activities, including ship repair and
munitions services.
Platforms & Services (UK) comprises
the Group’s UK-based air, maritime and
combat vehicle activities, and certain
shared services activities.
Bae SyStemS onLine
get the LateSt inveStor information onLine:
www.BaeSyStemS.com
For the latest information on:
– Innovation
– Performance
– Investor presentations
– Corporate responsibility
– News and events
– Company videos
Plus, features enabling you to:
– View on your laptop, tablet or phone
– Stay connected with Twitter, Flickr, YouTube and Facebook
– Sign up for RSS feeds
– Sign up for e-mail alerts
– Contact us
Platforms & Services
(International)
Platforms & Services (International)
comprises the Group’s businesses
in Saudi Arabia, Australia, India and
Oman, together with its 37.5% interest in
the pan-European MBDA joint venture.
Principal
operations
Sales1,2,3 by reporting
segment (%)
22
KPI
8
25
14
31
■ Electronic Systems
■ Cyber & Intelligence
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services (International)
Underlying EBITA1,3,4 by
reporting segment (%)
Operational
key points
21
KPI
6
20
18
35
■ Electronic Systems
■ Cyber & Intelligence
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services (International)
– Sustained a leadership position in the
airborne electronic warfare market
– Strengthened position in high growth
commercial aircraft electronics market
– Won key development contracts in the
classified area
– Continued focus on increasing
productivity and efficiency
– Business recovery complete following
disruption from flood damage at the
Johnson City facility
perform well on existing programmes and
secured strategic contract awards with
existing customers
– The US-based business continues to
invest in differentiating technologies,
such as activity-based intelligence and
cybersecurity, including a leading-edge
network operations and security centre
environment, to support a pipeline of
submitted bids of $2.9bn (£1.8bn) at the
end of 2012
– BAE Systems Detica continues to invest
in products and capability, including its
Security Operations Centre
– BAE Systems Detica awarded a contract
by Vodafone for next-generation
enterprise secure networks for mobile
devices
– The US-based business continues to
– Growth in US ship repair activities
– 46 Typhoon Tranche 2 aircraft delivered
– Salam price escalation negotiations
– Executing munitions infrastructure and
facility operations management
contracts
– £2.5bn Typhoon and Hawk contract for
Oman secured
to the partner nations
ongoing
– £5.0bn of orders received under the
Saudi British Defence Co-operation
Programme (SBDCP) for training aircraft
and support to the end of 2016
– First Landing Helicopter Dock hull arrived
in Australia for completion and second
hull launched in Spain
– MBDA export order for MICA air-to-air
missiles to India
– Strategic international win with Korean
– £446m contract awarded for European
F-16 upgrade down-select
support on Typhoon
– Continued to protect Bradley franchise
with $376m (£231m) in related awards
– First F-35 Lightning II aircraft accepted by
the UK Ministry of Defence (MoD)
– Awarded a $750m (£462m) contract for
CV90 armoured combat vehicles to
Norway
– Fifth Type 45 destroyer accepted off-
contract and support provided for all
Royal Navy Type 45 deployments
– Letter of Request received from Indian
government for 145 M777 howitzers
– Continued consolidation in the Land &
Armaments business
– Business disposals of Safety Products,
Safariland and Tensylon completed
– Settlement reached with the Government
of the Republic of Trinidad and Tobago in
respect of the cancelled Offshore Patrol
Vessels (OPV) programme
– Two OPVs delivered to the Brazilian Navy
– £0.8bn of customer funding received for
ongoing design and development of the
Successor submarine, and continuing
production of the fourth Astute Class
submarine
See page 54 for more information
on the Group’s reporting segments
Sales1,2
£2,507m
For more information visit
www.baesystems.com/businesses
Number of
employees1
13,000
£1,402m
8,200
£4,539m
21,300
£5,646m
27,900
£4,071m
15,500
Including share of equity accounted investments.
Before elimination of intra-group sales.
1
2
3 Excluding HQ.
4
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 31).
Printed by Park Communications on FSC® certified paper.
Park 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.
Designed and produced by Black Sun Plc.
Cover design by The Opcyon Design Company.
2012 SUMMARY AND OUTLOOK
Results in brief
Results from continuing operations
Sales1
Underlying EBITA2
Operating profit
Underlying earnings3 per share:
– including R&D tax benefit
– excluding R&D tax benefit
Basic earnings per share4
Order backlog1,5
Other results including discontinued operations
Dividend per share
2012
2011
£17,834m
£19,154m
£1,895m
£2,025m
£1,640m
£1,580m
KPI
KPI
KPI
n/a
38.9p
32.8p
45.6p
39.7p
37.0p
£42.4bn
£39.1bn
19.5p
18.8p
Operating business cash flow6
KPI
£2,692m
£634m
Net cash/(debt) (as defined by the Group)7
£387m £(1,439)m
Sales1 (£bn)
£17.8bn
2011: £19.2bn
KPI
25
20
15
10
5
0
21.8
22.3
18.0
19.2
17.8
08
09
10
11
12
KPI
References Key Performance Indicators (KPIs)
throughout the Annual Report
Financial key points
– Sales1 reduced by 7%
– Total dividend increased by 4% to 19.5p
– Underlying EBITA2 reduced by 6% to £1,895m. Deferred
– Operating business cash flow6 increased to £2.7bn
recognition of sales and profit relating to the formalisation
of price escalation on the Salam Typhoon programme
– Underlying earnings3 per share down by 2% (excluding the
benefit in 2011 of the UK tax settlement)
– Order backlog1,5 increased by 8% to £42.4bn
– Non-US and UK order intake1 increased to £11.2bn from
£4.8bn in 2011
– Net cash7 balance of £387m
– Three-year share repurchase programme of up to £1bn
initiated
– Longevity risk on £2.7bn of pension scheme liabilities
transferred to the insurance market
See page 30 for more information on the Group’s financial performance
Including share of equity accounted investments.
1
2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 31).
3 Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring items
(see note 8 to the Group accounts).
4 Basic earnings per share in accordance with International Accounting Standard 33, Earnings per Share.
5 Order backlog comprises funded and unfunded unexecuted customer orders, and is stated after the elimination of intra-group orders.
6 Net cash inflow from operating activities after capital expenditure (net) and financial investment, dividends from equity accounted investments, and assets
contributed to Trust.
7 See page 32 and note 10 to the Group accounts.
2
BAE Systems Annual Report 2012
13268 BAE069_AR2012_Summary&Outlook_vAW2 p1-3 Ev4.indd 2
13/03/2013 19:13
Results in brief
Financial key points
Underlying EBITA2 (£m)
£1,895m
2011: £2,025m
Underlying earnings3 per share (pence)
Operating business cash flow6 (£m)
KPI
38.9p
2011: 39.7p*
KPI
£2,692m
2011: £634m
39.1
39.8
37.1
45.6
39.7
38.9
2,500
2,000
1,896
2,151
2,179
2,025
1,895
1,500
1,000
500
0
50
40
30
20
10
0
3,000
2,500
2,000
1,500
1,000
500
0
1,595
1,595
1,187
634
KPI
2,692
– Total dividend increased by 4% to 19.5p
– Operating business cash flow6 increased to £2.7bn
– Net cash7 balance of £387m
– Three-year share repurchase programme of up to £1bn
initiated
– Longevity risk on £2.7bn of pension scheme liabilities
transferred to the insurance market
08
09
10
11
12
08
09
10
11
12
08
09
10
11
12
* Excluding R&D tax benefit
■ R&D tax benefit
■ Excluding R&D tax benefit
See page 13 for more information on the
Group’s KPIs
Outlook
This outlook statement assumes US
budgets are subject to Continuing
Resolution for the first quarter of
2013 only and does not reflect the
impact that might result from a US
sequestration.
Subject to near-term uncertainties
relating to US defence budgets,
modest growth in underlying
earnings3 per share is anticipated for
2013. This excludes any benefit from
the share repurchase programme in
2013. In addition, and assuming a
satisfactory conclusion to Salam
pricing negotiations this year, there
would be a further increase of around
3 pence in underlying earnings3 per
share.
– Electronic Systems sales1 are
expected to be at a similar level to
those in 2012 with margins
expected to be slightly lower within
a range of 12% to 14%.
– Cyber & Intelligence sales1 are
expected to be marginally lower
than those in 2012 with margins
expected to be within an 8% to 9%
range.
– In Platforms & Services (US), Land
& Armaments sales1 are expected
to be approximately 10% below the
2012 level with margins around
8%. Support Solutions sales1 are
expected to be marginally higher
than in 2012, with slightly reduced
margins.
– Platforms & Services (UK) sales1 in
2013 are expected to increase by
around 25%, assuming a price
escalation settlement and
resumption of aircraft deliveries on
the Salam Typhoon contract.
Margins are expected to be similar
to those in 2012.
– Platforms & Services
(International) sales1 are expected
to be marginally higher than in
2012. Margins are expected to
benefit from the anticipated
resolution of Salam Typhoon price
escalation, and are expected to be
at the top end of a 10% to 12%
range.
– HQ costs are expected to be more
than 10% lower than in 2012 and
Group earnings3 are expected to
reflect marginally lower underlying
finance costs. An effective tax rate
within a 23% to 25% range is
expected.
Notwithstanding cash inflows from
an anticipated Salam price
escalation settlement, significant
cash utilisation is expected in 2013.
This includes an expected high level
of utilisation against the advances,
received in 2012, on the Saudi
trainer aircraft and Omani Typhoon
and Hawk contracts and advances
consumed on the European Typhoon
production contracts.
BAE Systems Annual Report 2012
3
13268 BAE069_AR2012_Summary&Outlook_vAW2 p1-3 Ev4.indd 3
13/03/2013 19:13
CHAIRMAN’S LETTER
“ BAE Systems has delivered a
robust performance in a
challenging environment.”
Dick Olver
Chairman
COMMITTED TO
ENHANCING
SHAREHOLDER VALUE
BAE Systems has delivered a robust performance in a challenging
environment. The combination of rapid changes in defence priorities
around the world, together with the economic pressures that
constrain government customers, has hindered growth but I believe
2012 stands out as a year of validation of the direction and stature
of the Group.
It is this consistently robust performance which enabled the Group
to explore the possibility of a merger opportunity with EADS. The
merger held the prospect of creating a combined business that
would have been a global technology leader across both the
commercial aerospace and defence sectors and which, we believe,
would have delivered significantly enhanced value for shareholders.
Behind that consistent operational performance lies a soundly-
based strategy that has been forged over the past decade and which
has enabled the Group to develop as one of the global leaders in
defence, aerospace and security.
BAE Systems today operates with a broad base of business across
multiple international markets. The Group has a large order backlog
of platform programmes addressing all three defence domains of air,
sea and land. In addition, the Group has expanded to provide a range
of services-based capabilities, complementing and, to a large extent
derived from, its products-based positions. More recently,
BAE Systems has expanded its services offering into the provision of
capabilities for government intelligence communities as well as
commercial customers seeking cybersecurity solutions.
The Board reviews this strategy regularly and refreshes those
actions that are required to deliver the strategy. That review
considers many options, including the prospects for
transformational transactions. It was against this backdrop that the
option regarding a possible merger with EADS emerged.
The merger discussions were at no time seen as a replacement for
the Group’s established strategy. BAE Systems remains focused on
its strategy and prospects for the business remain good. In
particular, the outlook in international markets remains buoyant as
evidenced by a two-fold increase in international order intake outside
the US and UK markets in 2012. Further opportunities to mitigate or
offset likely pressures on sales growth in US and UK markets
remain.
BAE Systems is committed to enhancing shareholder value by
maximising earnings performance. Efficiency measures continue to
be implemented, aimed at delivering affordable solutions for
customers and attractive returns for shareholders.
The combination of the Group’s focus on cash generation and its
capital allocation policy provides opportunities for further enhanced
shareholder returns and, in February 2013, the Group announced a
three-year share repurchase programme of up to £1bn. In addition to
this accelerated return to shareholders, the Group’s capital
allocation policy will continue to reflect pension obligations,
business development needs for the longer term and dividends.
4
BAE Systems Annual Report 2012
13268 BAE069_AR2012_Chairman_vAW2 p4-5 Ev4.indd 1
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Dividend (pence per share)
Dividend (pence)
Governance
18.8
19.5
17.5
16.0
14.5
25
20
15
10
5
0
“ Transparency is a critical element of good
governance and in the Governance section
of this report on pages 76 to 117, I and
other directors report on how we have
discharged the important responsibilities
the Board has for the stewardship of the
Company.”
08
09
10
11
12
The Board has recommended a final dividend of 11.7p per share
making a total of 19.5p per share for the year, an increase of 4%
over 2011.
See page 80 for the Chairman’s corporate governance letter
extensive industrial experience. The Board is grateful to him for his
support and, more generally, his contribution to the development of
the Group.
As I near the start of my tenth year as Chairman, one of Nick Rose’s
tasks as the Board’s new Senior Independent Director is to manage
the succession for my own role. It is important that this process is
driven by the objective of finding the right person, not just by the
timetable. Notwithstanding the undoubted challenges the future
holds, I believe I will be handing over the tiller of a well-managed,
strong and successful company, that is operating to high standards
of governance.
Dividend
The Board has recommended a final dividend of 11.7p per share
making a total of 19.5p per share for the year, an increase of 4% over
2011. At this level, the annual dividend is covered 2.0 times by
underlying earnings (2011 2.1 times excluding the UK tax
agreement benefit). Subject to shareholder approval at the 2013
Annual General Meeting, the dividend will be paid on 3 June 2013 to
holders of ordinary shares registered on 19 April 2013.
Dick Olver
Chairman
BAE Systems places great importance on the way it conducts its
business. Alongside strategic and operational progress, the Group
has also made huge strides over recent years in establishing high
standards of governance.
The path to establishing high standards of governance has followed
a complex and at times arduous journey. Rather than addressing the
cosmetics of issues as they have arisen, we have sought to drive
fundamental culture change throughout the organisation. The
process can never be considered to be complete and best practice
in governance will always remain an objective, but I believe
BAE Systems is justified in now being regarded as a leader in this
area.
Consistent with the drive for continuous improvement, the Group’s
core governance procedures and policies were again reviewed and
updated during the year.
The Group continues to pursue an integrated approach to
performance in all aspects of its business life. This Total
Performance approach includes the setting of financial and
non-financial objectives for management. Further details of this Total
Performance approach, and the way it embraces all employees, can
be found on page 17 of this report.
BAE Systems recognises the benefits derived from drawing on the
talents of a diverse workforce. One important element of this is the
Group’s drive, through a structured programme of initiatives, to
attract more women into the workplace. Although there is still much
to do in this regard, across industry as a whole, the early stages of
progress are now apparent within BAE Systems and are expected to
provide the foundations for a better gender balance in future years.
In addition to this progress, and consistent with our commitment to
improve diversity, the Group again met its aspirational goal set
pursuant to the Davies Report, with women representing more than
25% of the composition of the Group’s Board.
Directors
In May, Michael Hartnall, a non-executive director, stood down from
the Board having served nearly nine years in that capacity.
As previously announced, Sir Peter Mason stepped down as the
Board’s Senior Independent Director in January 2013. Nick Rose, a
non-executive director, succeeds Sir Peter as the Board’s Senior
Independent Director. Sir Peter will step down from the Board at the
Annual General Meeting in May 2013. Sir Peter has been a great
asset to the Board, over many years, sharing his wise counsel and
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BAE Systems Annual Report 2012
5
STRATEGIC
REVIEW
In this section:
Chief Executive’s review
Key Performance Indicators (KPIs)
Our Strategy
Our business model
8
13
16
17
BAE Systems is focused on delivering sustainable growth in
shareholder value. This section provides an overview of how we do it.
6
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Creating cost-effective precision rockets
takes some of the sharpest minds around
The Advanced Precision Kill Weapon System is a laser-guided
rocket that provides a low-cost surgical strike capability. The
Group produces the mid-body guidance kit, which changes a
standard unguided rocket into a precision laser-guided missile.
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BAE Systems Annual Report 2012
7
CHIEF EXECUTIVE’S REVIEW
“ The Group’s geographic breadth of
business has provided, and is
expected to continue to provide,
resilience at a time when some of its
markets are constrained by
economic pressures.”
Ian King
Chief Executive
DELIVERING ON A
CLEAR STRATEGY
BAE Systems has continued to deliver on a clear strategy during
2012. The Group’s geographic breadth of business has provided,
and is expected to continue to provide, resilience at a time when
some of its markets are constrained by economic pressures.
Following a period of growth, defence budgets in the US have
flattened and are expected to remain constrained in response to
reducing overseas operations and measures to address federal
deficits. In the UK, the defence market has stabilised following
changes to programme priorities outlined in 2010 through the UK
government’s Strategic Defence and Security Review.
Growth opportunities in some segments of the US and UK markets
are identified, but the overall outlook in both countries is expected
to continue to be constrained.
In wider international markets, the Group is seeing good growth in
order intake leading to anticipated growth in international sales. In
2012, order intake outside of the US and UK was £11.2bn,
compared with £4.8bn in 2011.
BAE Systems has a clear strategy, focused on enhancing its
position as a premier global defence, aerospace and security
company. Consistent with that strategy, discussions between
BAE Systems and EADS were held between June and October of
2012. The discussions involved extensive engagement with many
of the Group’s government stakeholders, including in the UK, US
and Saudi Arabia, and we were grateful for the positive support
received. The merger would have been an exciting development, but
no agreement acceptable to all parties could be reached.
Focus on the underlying business performance was sustained as a
priority while the merger discussions were underway. The Group’s
continued strategic aim is to drive shareholder value through a
combination of meeting our customers’ requirements, further
improvements in financial performance and enhanced competitive
positions across the business. The focus of the Group’s Strategic
Actions in pursuit of these goals includes: growth in its cyber,
intelligence and security businesses; addressing growth
opportunities in electronic systems; driving further value from the
Group’s broad base of platforms and services positions; and
increased business in international markets outside of the UK and
US.
The evolution of BAE Systems has seen the Group’s business
develop from an equipment supply-centred model to one that now
embraces a services culture. In 2012, 50% of the Group’s sales
were generated in services across a wide range of activities and
geographies.
Services activities include in-service support in the UK for the Royal
Air Force’s trainer aircraft and fast jet fleets, and the Royal Navy’s
surface fleet. In Australia and Saudi Arabia, the Group provides a
broadly-based range of support services to the armed forces.
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BAE Systems provides extensive support to US armed forces
through provision of land vehicle reset and upgrade programmes,
rotary wing and other aircraft support, and naval ship repair
services. The Group also manages complex facilities including
ammunition production in the US and the UK.
BAE Systems’ services activities also include the provision of
extensive cyber and intelligence capabilities. The Group’s strategy
includes growing its positions in the cyber and intelligence services
markets for governments, and pursuing organic growth
opportunities in commercial cyber and security applications and
systems.
Affordability is a key consideration for all the Group’s customers
and BAE Systems has been successful in reducing costs over a
sustained period. Whilst necessary to address lower demand in
some business areas, cost reduction has also been targeted to
achieve competitive advantage. A regrettable but unavoidable
element of these cost reduction measures is the impact on
employment. Excluding M&A activity, net employee headcount
(including contractors) reduced by approximately 3,600 during the
year, bringing the total net reduction across the past four years to
approximately 26,000. In addition, site rationalisation has
continued. These efficiency improvements lead to benefits for
customers as well as underpinning the Group’s value proposition
for shareholders.
US
BAE Systems’ business in the US contributed approximately 40% of
Group sales in 2012. The US business has felt the dual pressure of
reduced activity in support of deployed operations in Iraq and
Afghanistan, and measures to reduce US federal budget deficits. In
particular, the US land vehicles business has, as forecast, seen
significant year-on-year reductions from the peak of activity in 2008.
The US elections have introduced some additional defence
procurement uncertainty with the administration entering a
six-month period of Continuing Resolution from the end of
September 2012.
Overhanging the US defence sector into 2013 is the potential
impact of a sequestration or other budget reductions that could
result in indiscriminate funding cuts. The Group bases its plans on
conservative assumptions and continues to address its cost base
accordingly.
UK
Defence budgets in the UK are expected to remain flat, but the
recent stabilising of equipment and services requirements and the
budget outlook has established a more predictable planning
environment.
The Group’s UK maritime business is experiencing a high level of
activity. Growth is anticipated in the submarines business on the
back of the multi-year Astute Class submarine programme and the
build-up in engineering workload for the Successor programme.
BAE Systems received further Successor funding during the year,
with approximately 1,000 people now working on the programme.
Also in the UK maritime business, the last ship of the six-ship
Type 45 destroyer programme completed sea trials. Good progress
continues to be made on the Queen Elizabeth Class Carrier
programme with delivery of major blocks underway for the assembly
of the first of these two ships. Work continues on the design of the
Type 26 ships to replace the UK’s Type 23 frigates from early in the
next decade. Type 26 production is expected to utilise a lower level
of UK ship build capacity following the currently high levels on the
Carrier programme. Discussions continue with the UK government
to determine how best to sustain the capability to deliver complex
warships in the UK in the future.
In the military air sector, European Tranche 2 Typhoon deliveries
have continued and international prospects for Typhoon remain
good with the potential to extend production into the next decade.
The Group continues to deliver assemblies for the US-led F-35
Lightning II programme under Low-Rate Initial Production contracts.
International
In addition to its US and UK operations, BAE Systems continues to
build on its positions in international markets. As well as
established operations in Saudi Arabia, Australia and more recently
India, the Group is pursuing multiple new business opportunities
worldwide.
Defence remains a high priority in the Kingdom of Saudi Arabia.
BAE Systems has a large involvement in the support of established
Our global defence market position ($bn)
Total Performance
70
60
50
40
30
20
10
0
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29.1
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30.7
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23.1 21.4
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3
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F
16.1 14.6
12.5 11.0
Top ten global defence companies (based on 2011 defence revenue)
Source: Defense News
In 2011, BAE Systems was the third largest global
defence supplier.
BAE Systems’ Mission is to deliver sustainable growth in
shareholder value through its commitment to Total Performance.
Total Performance encompasses:
– Customer Focus;
– Programme Execution;
– Financial Performance; and
– Responsible Behaviour.
Total Performance is explored in more detail throughout the
Directors’ Report.
See page 16 for the Group Strategic Framework for 2013
BAE Systems Annual Report 2012
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CHIEF EXECUTIVE’S REVIEW CONTINUED
Royal Saudi Air Force (RSAF) and Royal Saudi Navy programmes in
the Kingdom.
Deliveries of RSAF Typhoon aircraft are contracted to recommence
in 2013, following a contract amendment to enable UK final
assembly of the balance of 48 aircraft under the original contract
for 72.
Discussions to formalise Typhoon price escalation under the Salam
programme remain ongoing.
Discussions have commenced on the next phase of support,
following on from the three-year agreement that formed part of the
arrangements for initial entry into service of the Typhoon aircraft.
Under the Saudi British Defence Co-operation Programme, orders
totalling £3.4bn were awarded for support through to 2016, including
the provision of manpower, logistics and training to the RSAF. In
addition, a £1.6bn contract was awarded in May to support the
RSAF’s future aircrew training requirements involving the supply of,
and initial support for, Hawk Advanced Jet Trainer and Pilatus
training aircraft.
BAE Systems is the leading provider of equipment and support to
the Australian armed forces. The Group’s largest programme in
Australia is the Canberra Class programme to build two 27,000
tonne Landing Helicopter Dock vessels for the Royal Australian
Navy.
M&A activity
The Group’s business portfolio is reviewed regularly to determine
whether greater value can be created from the sale of a business
rather than its retention, and three small business disposals were
made during the year for a combined consideration of approximately
£111m.
In March, the Group completed the sale of BAE Systems Safety
Products Inc. and Schroth Safety Products GmbH (Safety Products).
In July, the Safariland, LLC (Safariland) business and the assets
comprising BAE Systems Tensylon High Performance Materials Inc.
(Tensylon) were sold.
BAE Systems continues to seek bolt-on acquisitions that enhance
routes to market or which provide rapid access to relevant
technologies and capabilities.
In November, the Group agreed the acquisition of Marine Hydraulics
International, Inc., a US marine repair, overhaul and conversion
company, for cash consideration of approximately $69m (£42m).
The acquisition is expected to complete in the first quarter of 2013.
Pension funding
Triennial funding valuations of the Group’s two largest UK pension
schemes, the BAE Systems Pension Scheme and the BAE Systems
2000 Pension Plan, were completed as at 31 March 2011. In 2012,
agreement on revised deficit funding plans was reached with the
BAE Systems continues to develop its business
in India. The Indian government has recently
confirmed its intention to buy the M777 artillery
system and negotiations for a third batch of 20
locally assembled Hawk aircraft are expected to
commence in 2013.
In Oman, a £2.5bn contract for 12 Typhoon and
eight Hawk aircraft and associated training and
support has been awarded, and we are
progressing opportunities for Typhoon in Malaysia
and the United Arab Emirates.
“ The Group continues
to build on the good
progress in recent
years to establish a
Total Performance
culture across its
business operations.”
trustees of those schemes and the next valuation
will commence in April 2014.
Total Performance
The Group continues to build on the good progress
in recent years to establish a Total Performance
culture across its business operations. For
BAE Systems, Total Performance is not just about
what the Group does, but how it is done. Total
Performance places emphasis on delivering
shareholder value, meeting the needs of
customers and, at all times, acting responsibly.
In June, the business was awarded a $750m (£462m) CV90
combat vehicle contract in Norway.
Balance sheet and capital allocation
The Group recognises the importance to investors of a clear capital
allocation policy, consistent with sustaining a strong investment
grade credit rating, as part of its value proposition.
In addition to meeting its pension funding obligations, the Group
expects to continue organic investment in its businesses to sustain
and grow, plans to continue to pay dividends in line with its policy of
a long-term sustainable cover of around two times underlying
earnings and to make accelerated returns of capital to
shareholders when the balance sheet allows. Consistent with this
approach, in February 2013, the Group initiated a three-year share
repurchase programme of up to £1bn. Full implementation of this
programme is subject to satisfactory resolution of Salam Typhoon
price escalation negotiations. Discussions with the Group’s UK
pension scheme trustees have commenced to address any
implications for deficit funding plans. Investment in value-
enhancing acquisitions will continue to be considered where
market conditions are right, where they deliver on the Group’s
strategy and where they offer greater value than repurchasing the
Group’s own shares.
In addition to delivering against its Financial Performance
objectives, the Group sets targets for the achievement of non-
financial performance measures, including Customer Focus,
Programme Execution and Responsible Behaviour.
BAE Systems is committed to achieving and sustaining high
standards of business conduct and continues to reinforce a culture
of responsible behaviour. Mandated policies and processes within
the Group’s Operational Framework are updated routinely to ensure
they reflect the Group’s Responsible Trading Principles. All
employees receive training to help them apply the Group’s global
Code of Conduct, with mandatory refresher programmes
undertaken during the year.
The Group’s people strategy of through-career capability
development and emphasis on promoting high levels of employee
engagement seeks to maximise the contribution that its workforce
makes to a culture of Total Performance. It enables every member of
the team to fulfil their personal potential. The success of this strategy
is measured ultimately in the success of the business as a whole.
BAE Systems has talented people who are committed to
excellence, doing work that is truly inspired.
The safety of our employees and those using our products is critical
to our business and a fundamental responsibility. I am deeply
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saddened to report the death of one of our employees whilst at work
in Saudi Arabia in a road traffic accident.
Safety continues to be a priority for the Group, with businesses
continuing to drive consistently high standards of safety.
Performance in safety was underpinned this year by the Group
achieving a 30% reduction in the Recordable Accident Rate.
Management
In June, Tom Arseneault was appointed Executive Vice President of
the Product Sector businesses headquartered in the US and Chief
Technology Officer for BAE Systems, Inc. Also in June, Lynn Minella
was appointed Group Human Resources Director following the
retirement of Alastair Imrie. On their appointment, both Tom and
Lynn joined the Group’s Executive Committee.
With effect from 30 March 2013, Larry Prior, Executive Vice
President of the Service Sector businesses headquartered in the
US and Chief Operating Officer for BAE Systems, Inc., and member
of the Group’s Executive Committee, will leave the Group to pursue
other opportunities.
In February 2013, David Herr was appointed Executive Vice
President of the Service Sector businesses and joined the Group’s
Executive Committee.
Summary
BAE Systems is a resilient business with talented people and the
resources to continue to develop within a clear strategic framework.
The strategy has seen the Group focus on defence, aerospace and
security markets across a broad geographic base. BAE Systems
aims to deliver attractive returns to its shareholders through its
positions on priority programmes and in services with high
relevance to its customers.
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Ian King
Chief Executive
Executive Committee key objectives – 2013
The Board reviews and updates the Group Strategic Framework annually. The Group Strategic Framework integrates the Group’s major
goals and actions into a cohesive document defining the direction and shape of the Group over the long term. There are agreed annual
objectives which focus on specific deliverables in support of both delivery of short-term results and the overall strategy. The Executive
Committee has set the following objectives for 2013 and a review of performance against these objectives will be contained in the
Annual Report 2013.
Target
Description
1. Financial Performance
Meet 2013 financial targets
2. Customer Focus and Programme Execution Continued focus on improving customer satisfaction and programme execution
3. Responsible Behaviour
4. Electronic Systems
Progress towards recognised leading positions
Be agile, sustain revenues and deliver strong bottom line performance
5. Cyber, Intelligence and Security
Enhance and grow our positions in cyber, intelligence and security
6. Platforms & Services (US)
7. Platforms & Services (UK)
Drive value from our land portfolio and deliver sustainable, profitable growth in the
services sector
Deliver sustainably profitable through-life businesses in the air, maritime and combat
vehicles sectors
8. Platforms & Services (International)
Grow our Platforms & Services (International) business
9. Engagement
Inspire and engage our people to deliver success
See page 16 for the Group Strategic Framework for 2013
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BAE Systems Annual Report 2012
11
CHIEF EXECUTIVE’S REVIEW CONTINUED
Executive Committee key objectives – 2012 performance
The Executive Committee set objectives for 2012 which focused 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
key objectives are discussed below.
Objective
Financial Performance
Meet 2012 financial targets
See page 30 for more information
Customer Focus and
Programme Execution
Continued focus on improving
customer satisfaction and
programme execution
See page 18 for more information
Responsible Behaviour
Progress towards recognised
leading positions
See page 39 for more information
Electronic Systems
Be agile, sustain revenues
and deliver strong bottom
line performance
See page 56 for more information
Cyber, Intelligence
and Security
Establish a leading position
in Cyber, Intelligence and Security
See page 60 for more information
Platforms & Services (US)
Drive value from our land portfolio
and deliver sustainable, profitable
growth in the services sector
See page 64 for more information
2012 performance
The target for underlying earnings1 per share was not achieved as formalisation of price
escalation on the Salam Typhoon programme remains outstanding. The targets for average and
year-end net cash/(debt)2 were exceeded.
The Group continued to deliver on its commitments to customers and delivered an overall
improvement in outturn margin across its major programmes.
The corporate responsibility agenda has been embedded further into the Group’s operations in
line with its commitment to Total Performance. Group targets in respect of business conduct,
safety, diversity and inclusion, and environment have been achieved.
Whilst sales3 have been impacted by the Continuing Resolution and lower operational tempo-
driven activity, order backlog3 has increased4 and return on sales was 14.2%. Programmes are
back on schedule after recovery efforts following severe flooding at Johnson City, New York, in
2011. The Commercial Aircraft electronics business has achieved good growth. The business
has continued to focus on cost reduction and the evolving priorities of its customers.
The Intelligence & Security business in the US remains stable despite delays in awards on a
significant bid pipeline of contract re-competes and new opportunities. Growth in BAE Systems
Detica has been impacted by routes-to-market issues in the Global Communications Solutions
business. BAE Systems Detica’s Security Operations Centre became fully operational, providing
services to detect and remediate advanced cyber attacks.
In Land & Armaments, the cost base was reduced further to reflect the lower level of activity and
business disposals were completed as portfolio streamlining continued. A $750m (£462m)
contract was awarded for CV90 armoured combat vehicles to Norway. In Support Solutions, order
backlog3 increased4 as the munitions facilities management, and aircraft sustainment and
modernisation businesses achieved key contract wins. The $69m (£42m) acquisition of Marine
Hydraulics International, Inc. is expected to complete in the first quarter of 2013, complementing
the ship repair business.
Platforms & Services (UK)
Deliver in the UK sustainably
profitable through-life businesses
in the air and maritime sectors
See page 68 for more information
Order intake3 in Platforms & Services (UK) was strong, including £2.5bn on Typhoon and Hawk
aircraft for Oman and £1.6bn on Hawk aircraft for Saudi Arabia. Progress was made on Typhoon
export campaigns to Malaysia and the United Arab Emirates, and rationalisation activity to
address programme changes was implemented. In maritime, major UK programmes progressed
in line with planned milestones and two of three Offshore Patrol Vessels were delivered to the
Brazilian Navy.
Platforms & Services
(International)
Increase our Platforms
& Services (International)
business
See page 72 for more information
In Saudi Arabia, orders were received under the Saudi British Defence Co-operation Programme
for support to the end of 2016. Salam Typhoon price escalation and future support negotiations
remain ongoing. In Australia, good progress was made on the Landing Helicopter Dock (LHD) and
Air Warfare Destroyer programmes, with the first LHD hull arriving in Australia for completion. In
India, the government confirmed its intention to buy 145 M777 howitzers.
1 Earnings excluding amortisation and impairment of intangible assets,
non-cash finance movements on pensions and financial derivatives, and
non-recurring items (see note 8 to the Group accounts).
2 See page 32 and note 10 to the Group accounts.
3
Including share of equity accounted investments.
4 Excluding the impact of exchange translation.
12
BAE Systems Annual Report 2012
See page 13 for the Group’s Key Performance Indicators for 2012
See page 16 for the Group Strategic Framework for 2013
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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 key objectives.
Executive directors’ remuneration is linked to certain of
these measures.
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Financial Performance
The Group sets itself challenging financial targets through
the Integrated Business Planning process to improve
financial performance and drive shareholder value.
p12 2012 Executive Committee key objectives
p46 Principal risks
p30 Financial Performance
p84 Integrated Business Planning process
Funded order intake1 (£bn)
£22.2bn
2011: £16.6bn
20.7
21.6
22.2
16.3
16.6
Definition
Funded order intake represents the value
of funded orders received from customers
in the year.
Funded order intake is a measure of in-year
performance and supports future years’
sales performance.
Comment
Funded order intake1 increased by 34% on
2011 driven by a high level of awards in
Saudi Arabia and a contract to supply
Typhoon and Hawk aircraft to Oman.
Non-US and UK funded order intake1
increased to £11.2bn from £4.8bn in
2011.
25
20
15
10
5
0
08
09
10
11
12
Sales1 (£bn)
£17.8bn
2011: £19.2bn
-7%
21.8
22.3
18.0
19.2
17.8
Definition
Sales represents the amounts derived
from the provision of goods and services,
and includes the Group’s share of sales of
its equity accounted investments.
25
20
15
10
5
0
08
09
10
11
12
1
Including share of equity accounted investments.
Comment
The 7% reduction in sales1 this year mainly
reflects the expected lower volume in the
Land & Armaments business and the
transition to UK final assembly
arrangements under the Salam Typhoon
programme. The next deliveries are in
2013.
Sales1 in 2012 have been impacted by the
deferral of trading relating to the
finalisation of price escalation on the
Salam Typhoon programme.
p31 Sales1 bridge chart
BAE Systems Annual Report 2012
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KEY PERFORMANCE INDICATORS CONTINUED
Financial Performance (continued)
Underlying EBITA2 (£m)
£1,895m
2011: £2,025m
-6%
2,500
2,000
1,896
2,151
2,179
2,025
1,895
1,500
1,000
500
0
08
09
10
11
12
Underlying earnings3 per share (pence)
38.9p
2011: 45.6p (39.7p*)
-2%*
-15%
39.1
39.8
37.1
45.6
39.7
38.9
50
40
30
20
10
0
08
09
10
11
12
* Excluding R&D tax benefit
■ R&D tax benefit
■ Excluding R&D tax benefit
Operating business cash flow4 (£m)
£2,692m
2011: £634m
Definition
Underlying EBITA excludes amortisation
and impairment of intangible assets,
finance costs and taxation expense, and
non-recurring items (for 2011 and 2012,
these are profit/loss on disposal of
businesses and regulatory penalties).
Underlying EBITA is used by the Group for
internal performance analysis as a
measure of operating profitability that is
comparable over time.
Comment
Underlying EBITA2 in 2012 has been
impacted by the deferral of trading relating
to the finalisation of price escalation on
the Salam Typhoon programme.
Return on sales was sustained at 10.6%.
p31 Non-recurring items
Target5 not achieved
Part of the executive directors’ 2012 annual incentive
Definition
Underlying earnings 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 8 to the Group accounts).
Underlying earnings per share provides a
measure of shareholder return that is
comparable over time.
Comment
Underlying earnings3 per share in 2012
has been impacted by the deferral of
trading relating to the finalisation of price
escalation on the Salam Typhoon
programme.
p32 Underlying earnings3 per share bridge
chart
p31 Non-recurring items
Target5 achieved
Part of the executive directors’ 2012 annual incentive
3,000
2,500
2,000
1,500
1,000
500
0
2,692
Definition
Operating business cash flow represents
net cash flow from operating activities
after capital expenditure (net) and financial
investment, dividends from equity
accounted investments, and assets
contributed to Trust.
Operating business cash flow is the
measure used to assess the operating
cash generation of the Group.
Comment
The £2.1bn increase in operating
business cash flow4 primarily reflects
down-payments received on new contracts
to Saudi Arabia and Oman.
A significant cash receipt expected on the
Salam Typhoon programme has been
deferred until ongoing negotiations
regarding price escalation have been
concluded.
1,595
1,595
1,187
634
08
09
10
11
12
p32 Reconciliation of cash inflow from
operating activities to operating business
cash flow4
2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 31).
3
Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring items
(see note 8 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.
4
5 The target is the Group’s budget for the year, which represents the first year of the five-year Integrated Business Plan (see page 84).
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Customer Focus6
The Group’s priority is to understand its customers’
evolving needs and expectations, and deliver on its
commitments throughout the life of the products and
services it delivers.
p12 2012 Executive Committee key objectives
p46 Principal risks
p84 Lifecycle Management (LCM)
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Customer satisfaction
Performance
The Group targets an aggregated year-on-
year improvement in customer satisfaction
across its major contracts.
Customer satisfaction metrics can only be
fully interpreted and understood on a
contract-by-contract basis and, therefore,
aggregated data is not presented.
Programme Execution
Definition
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.
Comment
The data for the customer satisfaction
metric included 92 contracts reported in
Contract Reviews prepared under LCM.
The year’s target was achieved.
Target achieved
Part of the executive directors’
2012 annual incentive
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.
p12 2012 Executive Committee key objectives
p46 Principal risks
Programme margin variation
Performance
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.
Definition
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.
Comment
The data for the programme margin
variation metric included 100 contracts
reported in Contract Reviews prepared
under LCM, representing over 60% of the
Group’s funded order backlog.
The year’s target was achieved.
Target achieved
Part of the executive directors’
2012 annual incentive
p12 2012 Executive Committee key objectives
p46 Principal risks
p39 Corporate responsibility review
p59 Performance by reporting segment
Target achieved
Part of the executive directors’
2012 annual incentive
Responsible Behaviour
High standards of business conduct are essential to the
Group’s Mission to deliver sustainable growth in
shareholder value.
Safety7
Performance
In 2012, the Recordable Accident Rate
reduced by 30% against 2011 performance.
Definition
The number of 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.
Comment
The Recordable Accident Rate is the
principal metric used by the Group’s
businesses to monitor performance in
safety. The Group also uses a five-level
Safety Maturity Matrix to help its
businesses around the world work towards
consistently high safety standards.
6
7
Prior to 2012, a schedule adherence metric, which measured the timing of achievement of key contract milestones, was a Customer Focus KPI. From 2012, this
metric is no longer reviewed by the Executive Committee.
Prior to 2012, the safety KPI was the Lost Work Day Case Rate, calculated as the number of injuries resulting in days lost per 100,000 employees. From 2012, the KPI
used to monitor safety performance is the Recordable Accident Rate, which focuses on the number of accidents rather than days lost, enabling inclusion of a wider
scope of accidents within the Group’s reviews, which is expected to lead to improvements in accident prevention.
BAE Systems Annual Report 2012
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OUR STRATEGY
Our Strategy defines the direction and shape
of the Group over the long term.
Our Vision
Our Vision provides a clear definition of the future that we wish to
attain.
While our Vision defines our destination, commitment to Total
Performance guides our actions for the benefit of all stakeholders.
This is embedded in our Mission.
Our Mission
Our Mission describes our overall goal and the philosophy that
underpins our activities. Meeting our Mission is key to achieving our
Vision.
Shareholder value is defined as share price appreciation and
dividend growth, driven by increased earnings per share and strong
cash generation.
Total Performance is demonstrated in every aspect of the way we do
business – Customer Focus, Programme Execution, Financial
Performance and Responsible Behaviour.
We believe that by embodying the four elements of Total Performance
wherever we operate, we will deliver growth in shareholder value and
become the premier global defence, aerospace and security company.
Our Strategy
Our Strategy defines the direction and shape of the Group over the
long term. This enables us to prioritise the deployment of our
resources in a challenging environment. We are committed to
implementing our Strategy in the most effective manner and will
remain agile and adapt to the changing environment.
We anticipate that defence budgets in certain of our major markets
will experience reductions. Our Strategy focuses on the growing
importance of winning international business, where growth markets
remain.
The key elements of our Strategy are to:
Support our customers in safeguarding their vital interests
We operate in the defence, aerospace and security markets, which
Our Vision is to be the premier global defence, aerospace 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
– Support our customers in safeguarding their vital interests
– Inspire and develop our people to drive our success
– Drive shareholder value by improving financial performance
and competitive positions across the business
Strategic Actions
Improve profit and
cash generation
Grow our Cyber,
Intelligence
and Security
business
Grow Electronic
Systems
Drive value
from our Platform
and Services
positions
Increase our
international
business
Integrated Business Plans
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in turn have their own unique market drivers. Our Strategy is to
understand and respond to the needs of our customers in each of
these markets, and anticipate that these needs may be subject to
rapid change. We need to be agile as an organisation, to enable us
to identify and prioritise capabilities which support our customers’
vital interests, creating demand for our products and services.
Inspire and develop our people to drive our success
We recognise that we can only deliver our Mission through the
performance of our people. We believe that if we engage with our
people we can inspire the will to succeed and develop skills to drive
improvements in performance, enabling us to compete more
effectively in an increasingly challenging environment.
See page 26 for more information on this new element of our Strategy
Drive shareholder value by improving financial performance and
competitive positions across the business
The current environment is increasingly competitive and, to deliver
growth in shareholder value, we need to focus on generating strong
cash flows and profits. Improving efficiency in our operations will
also make us more competitive to win future business. All our
operations in the defence, aerospace and security markets must
strive to increase value and eliminate non-value-added activity
whilst maintaining our commitment to Total Performance.
Strategic Actions
This Strategy translates into the five Strategic Actions. These directly
flow from our Vision, Mission and Strategy, and are designed to
shape our business portfolio and strengthen performance over the
long term. These actions translate the Group’s over-arching strategy
into operational plans that are delivered through our lines of
business.
Integrated Business Plans
The Integrated Business Planning process is an annual, two-stage
process that culminates in a five-year strategic and financial plan,
which is used to shape the Strategic Actions.
See page 84 for more information on the Integrated Business Planning
process
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OUR BUSINESS MODEL
1 2
43
BAE Systems delivers a wide range of products and services for air, land and naval forces,
as well as advanced electronics, security, information technology solutions and support services.
Delivering sustainable growth in shareholder value through Total Performance…
1. Customer Focus
The Group’s priority to all its
customers is to understand
their evolving needs and
expectations, and deliver on its
commitments throughout the
life of the products and services
it delivers. Customer
satisfaction is a key indicator of
Customer Focus.
2. Programme Execution
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. Key indicators of
performance include outturn
projections of, and movements
in, margin of key customer-
funded projects and customer
satisfaction.
3. Financial Performance
The Group sets itself
challenging financial targets
through its Integrated Business
Planning process. Financial
Performance is measured
through a range of key financial
salients derived from the
Group’s consolidated financial
statements, including funded
order intake1, sales1, underlying
EBITA2, underlying earnings3 per
share and operating business
cash flow4.
4. Responsible Behaviour
Responsible Behaviour is
embedded within the business.
The Group’s 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. Metrics
are used to measure safety,
diversity and inclusion, and
environmental impacts.
See page 18 for more
information
See page 20 for more
information
See Financial Performance on
page 30 for more information
See Corporate responsibility
review on page 39 for more
information
…across multiple markets and opportunities…
…by five reporting segments…
BAE Systems benefits from a broad and diverse market base,
focused on five home markets – the US, the UK, Saudi Arabia,
Australia and India. In addition, export markets provide a significant
ongoing opportunity for the Group.
The Group has five principal reporting segments which align with the
Group’s strategic direction – Electronic Systems, Cyber &
Intelligence, Platforms & Services (US), Platforms & Services (UK)
and Platforms & Services (International).
See page 22 for more information
See page 24 for more information
…underpinned by key resources…
…and a strong governance framework.
The Group’s key resources and arrangements include the people it
employs, its relationships with suppliers, research and
development, and intellectual property.
The Operational Framework sets out how the Group does business,
wherever it operates in the world, based on principles of good
governance. It provides a stable foundation from which to deliver
our Strategy, improve performance and develop our culture of Total
Performance.
See pages 18 to 21 for more information
See page 84 for more information
Including share of equity accounted investments.
1
2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 31).
3 Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring items
(see note 8 to the Group accounts).
4 Net cash inflow from operating activities after capital expenditure (net) and financial investment, dividends from equity accounted investments, and assets
contributed to Trust.
BAE Systems Annual Report 2012
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OUR BUSINESS MODEL CONTINUED
TOTAL PERFORMANCE
1
2
3
4
Our business model
See page 17
CUSTOMER FOCUS
DELIVERING ON COMMITMENTS TO OUR CUSTOMERS
Customer Focus means the
understanding of the customers’
evolving needs and expectations,
and delivering on our commitments
throughout the life of the products
and services we deliver.
The Group’s strong relationships with its customers include joint
development of major platforms, transitioning technology to
operational use, and providing improved training and logistics
support. The provision of support services to ensure mission
accomplishment underpins the Group’s focus. The Group often
responds to urgent operational requirements driven by a customer
need for an immediate solution that can be fielded rapidly.
OUR KEY RESOURCES
The Group’s key resources and
arrangements include the people it
employs, its relationships with suppliers,
research and development, and intellectual
property.
Delivering savings in Type 45 programme costs for
the UK Royal Navy customer
A new, more effective way of working between the UK Ministry of
Defence and BAE Systems has demonstrated significant cost and
schedule adherence benefits for the customer on the six-ship
Type 45 contract. The focus has been on the project plan,
budgets, quality and risk mitigation, working in tandem with the
customer. Issues are identified early, and solutions sought and
agreed, which both protect the programme and minimise cost. A
culture of co-operation is reflected in the collaborative enterprise
and joint acceptance teams, comprising major stakeholders who
meet on a regular basis to resolve issues. The project team has
consistently achieved its programme delivery dates and savings
of £86m have so far been attributed to this partnering approach,
which is also expected to enable savings on other major naval
ships programmes, most notably on the Type 26 Global Combat
Ship programme.
Significant investment in R&D…
The Group’s Research & Development (R&D) activities cover a wide
range of programmes, and include technological innovations and
techniques to improve the manufacturing and service of products.
Examples include: BAE Systems’ latest research on an advanced
positioning system that exploits existing transmissions, such as Wi-Fi,
TV, radio and mobile phone signals, to calculate the user’s location to
within a few metres; and BAE Systems’ Headborne Energy Analysis
and Diagnostic System (HEADS), a small sensor mounted inside a
combat helmet that records the severity of blasts or impacts during an
explosion, helping to identify potential combat-related head and brain
injuries. HEADS was named a US Army greatest invention of 2011.
In 2012, R&D expenditure was £1,138m (2011 £1,149m) of which
£150m (2011 £222m) was funded by the Group.
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DELIVERING ON COMMITMENTS TO OUR CUSTOMERS
Utilising systems experience on F-16 aircraft to offer
avionics upgrades for South Korea
Supporting Typhoon aircraft in service with the Royal
Saudi Air Force
BAE Systems is a leading provider of integration, avionics and
mission computers for F-16 aircraft, and has been down-selected
to be the sole source systems integration contractor for upgrading
more than 130 F-16s for the government of the Republic of Korea.
The Korean programme will build on BAE Systems’ experience
with the F-16, providing cost-effective upgrade solutions. The
Group supports 270 of the US Air National Guard’s upgraded
F-16s and 50 of the Turkish Air Force’s upgraded F-16s. For the
Korean fleet, BAE Systems will perform a range of services,
including systems engineering and integration, software and
electronics engineering, obsolescence management and logistics
support.
The Saudi Typhoon support contract is an availability contract
supporting the aircraft’s entry into service with the first of the
Royal Saudi Air Force’s (RSAF) Typhoon squadrons. Working as
‘One Team’ with the customer on-base, the Group has supported
the RSAF in establishing and successfully delivering all key
elements of their Typhoon operational readiness, including air
crew and ground crew training, maintenance facilities, technical
support, spares and repairs, aircraft availability, and aircraft
capability upgrades.
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OUR KEY RESOURCES
See page 15 for more information on the Group’s Customer Focus KPI
…generating substantial intellectual property.
Intellectual property is important to the Group’s success in obtaining
and maintaining a competitive advantage.
Like any industrial concern, BAE Systems does not just produce
products or provide services for its customers; in the process,
intellectual property may be created which often has a value to the
Group far greater than is reflected in the value of the particular
contract or programme of work under which it was created. It takes
many forms, including products, processes and knowhow.
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.
In 2012, the Group filed patent applications covering approximately
250 new inventions. One of the Group’s patented inventions has
assisted in BAE Systems obtaining a development contract, which in
turn will create valuable future opportunities for production contracts.
The Group’s Operational Framework mandates a policy to protect the
Group’s intellectual property (including patents, registered designs,
and registered trade and service marks) through appropriate use and
At 31 December 2012, BAE Systems had a total portfolio of patents
and patent applications covering more than 2,000 inventions
worldwide.
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BAE Systems Annual Report 2012
19
OUR BUSINESS MODEL CONTINUED
TOTAL PERFORMANCE
1
2
3
4
Our business model
See page 17
PROGRAMME EXECUTION
DELIVERING ON PROJECTS TO QUALITY, TIME AND COST
Programme Execution means
delivering on projects within tight
tolerances of quality, time and cost
performance in a reliable,
predictable and repeatable manner.
BAE Systems utilises Lifecycle Management (LCM) as part of its
project management processes to ensure effective delivery of its
programmes. LCM provides a benchmark approach which includes
early engagement of business leadership, applying the full set of
Group capabilities, and requiring experienced independent validation
of project status and results. Early identification of risk, and
implementing mitigation steps, are key features. Customer
interaction is essential. Opportunities for improved results are
identified and included in future project phases. Whether delivering a
complex system enhancing a current capability, improved operational
support or a customised solution, BAE Systems uses its world-class
management processes and tools.
Transformation of UK munitions plants under a
long-term partnering agreement
Munitions Acquisition Supply Solution is a 15-year partnering
agreement with the UK Ministry of Defence (MoD) to transform
three UK munitions manufacturing facilities into centres of
excellence. Following investment by BAE Systems, two new
facilities have been created at Radway Green and Washington,
with a major modernisation at Glascoed. The transformation
programme is reviewed jointly by the MoD and BAE Systems
against critical milestones. All major milestones have been met.
Key measures met to date include improved delivery of defined
munitions products, and a reduction in labour costs and
scrap/rework levels.
OUR KEY RESOURCES
The Group’s key resources and
arrangements include the people it
employs, its relationships with suppliers,
research and development, and intellectual
property.
A skilled workforce of 88,200 employees1…
BAE Systems’ investment in its current and future workforce is
designed to give it the capabilities to deliver its strategy, and ensure
that the Group is able to grow and develop talented people to meet its
challenges and opportunities. Through the Group’s ability to attract,
retain and engage its people, BAE Systems is able to deliver on its
Total Performance goals.
See page 26 for more information
1
Including share of equity accounted investments.
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PROGRAMME EXECUTION
DELIVERING ON PROJECTS TO QUALITY, TIME AND COST
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Providing maintenance and modification services to
the US Navy customer
Upgrading Saudi aircraft under the Tornado
Sustainment Programme
BAE Systems Ship Repair in Norfolk, Virginia, is home to
approximately 1,600 employees primarily working on US Navy
vessels. Located at the Group’s Norfolk site is the Titan drydock,
the largest floating drydock on the East Coast of the US. In
January 2012, the first ever tandem drydocking of two US Navy
Aegis guided missile destroyers, USS Mason and USS Bulkeley,
was undertaken. This unique and highly cost-effective use of the
facility enabled both destroyers to stay in drydock until the end of
April 2012 for routine maintenance and modifications.
In partnership with the Royal Saudi Air Force (RSAF), the Tornado
Sustainment Programme (TSP) has successfully upgraded all of
the RSAF Tornado fleet. Central to the upgrade is a new digital
weapons and avionics system. New RSAF facilities were
contractually placed in the custodianship of BAE Systems Saudi
Arabia until completion of the TSP embodiment programme. At
peak throughput, a Tornado was delivered back to the RSAF every
12 working days, all on schedule. Concurrently, 29 additional
aircraft underwent major maintenance under this complex and
technically challenging combined maintenance and upgrade
package.
OUR KEY RESOURCES
See page 15 for more information on the Group’s Programme Execution
KPI
…and thousands of suppliers who share our values.
The Group buys a wide range of major equipment, services, materials
and components that contribute to the products and services it
provides to customers, and it depends on its suppliers to help it
deliver these both on time and to a high quality, and to provide
innovative, cost-effective solutions. The Group expects these
suppliers to work to the same or equivalent standards as
BAE Systems on issues ranging from responsible trading and ethical
conduct to health and safety, and encourages them to adopt
sustainable environmental best practices.
In the UK, the Group is the largest manufacturer and provider of
complex military and security equipment and technology. It works
with approximately 7,500 UK suppliers, of which approximately
2,200 are small and medium-sized enterprises (SMEs).
BAE Systems has a strong interest in supporting the SME sector
and promoting innovation by investing in their businesses where
appropriate. Many play a key role in the Group’s business by
supplying unique goods and expertise. In turn, they benefit from
access to new markets and the financial security inherent in the
long-term nature of many of the Group’s projects.
BAE Systems is a founding member of the ADS Group’s (Aerospace,
Defence, Security and Space industries association) 21st Century
Supply Chains (SC21) programme designed to improve efficiency in
the UK aerospace, defence, security and space supply chains.
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BAE Systems Annual Report 2012
21
OUR BUSINESS MODEL CONTINUED
OUR MARKETS
1
2
3
4
Our business model
See page 17
TOP TEN CONTRACTOR TO THE US
DEPARTMENT OF DEFENSE
BAE Systems is a top ten US defence
contractor, offering a balanced
portfolio of products and services
in defence, aerospace and security
domains, including the operational
support of equipment used around
the world by US forces and their allies.
AN INTERNATIONAL
BUSINESS
US
34,500
EMPLOYEES1
POSITIONS IN FIVE HOME MARKETS WITH EXPORT OPPORTUNITIES
Today, our business is based
around five home markets – the
US, the UK, the Kingdom of Saudi
Arabia, Australia and India.
OUR MARKETS
BAE Systems has a broad geographic base with business operations
in five home markets around the world, in the US, the UK, the
Kingdom of Saudi Arabia, Australia and India. These home markets
are identified as having a significant and sustained commitment to
defence and security. They are countries that welcome foreign
investment to develop and sustain a domestic defence industrial
capability, building long-term and trusted customer relationships.
Importantly, they are also markets where BAE Systems can achieve
and demonstrate high standards of business conduct.
1
Including share of equity accounted investments.
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BAE Systems Annual Report 2012
Established positions in five home markets...
Top 10 defence markets accessible for business by the Group
($bn)
800
S
U
687.6
700
600
500
400
300
200
100
e
c
n
a
r
F
n
a
p
a
J
58.5
58.4
K
U
59.6
i
a
b
a
r
A
i
d
u
a
S
46.9
y
n
a
m
r
e
G
43.9
l
i
z
a
r
B
36.2
i
a
d
n
I
34.7
a
e
r
o
K
f
o
c
i
l
b
u
p
e
R
28.3
a
i
l
a
r
t
s
u
A
27.2
0
■ Home markets ■ Overseas Contingency Operations budget
Source: BAE Systems’ internal analysis (based on 2011 total defence expenditure)
BAE Systems is an established part of the defence industrial
capability in the US, the UK, the Kingdom of Saudi Arabia and
Australia where its principal operations are based, and continues to
develop its position in India, the Group’s newest home market.
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POSITIONS IN FIVE HOME MARKETS WITH EXPORT OPPORTUNITIES
LARGEST SUPPLIER TO THE UK MINISTRY OF DEFENCE
SUPPLIER TO THE INDIAN MINISTRY OF DEFENCE
BAE Systems plays a vital role in the UK’s
defence capabilities across air, maritime and
land platforms, including military and technical
service contracts. BAE Systems also plays a key
role in security and intelligence with customers
in both government and commercial markets.
India continues to develop as a home
market. BAE Systems is investing in its
presence through technology sharing and
inward investment in this growing defence
and security market.
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UK
32,800
EMPLOYEES1
INDIA
200
EMPLOYEES1
KINGDOM OF
SAUDI ARABIA
5,900
EMPLOYEES1
LARGEST IN-COUNTRY DEFENCE SUPPLIER
In Australia, BAE Systems supplies
leading capability across air defence,
land combat systems, naval systems
and security.
LEADING IN-COUNTRY DEFENCE SUPPLIER
BAE Systems is a leading in-country
defence supplier, supporting the
operational capability of the Royal Saudi
air and naval forces, and investing in the
development of Saudi indigenous
defence capabilities.
AUSTRALIA
5,500
EMPLOYEES1
OUR MARKETS
...delivering a broadly-based business portfolio...
...with export opportunities in growth markets.
Sales1 by home market
(%)
8
39
7
13
33
■ US
■ UK
■ Saudi Arabia
■ Australia
■ Other
Non-US and UK funded order intake1
(£bn)
12
11.2
10
8
6
4
2
0
4.8
4.3
10
11
12
With near-term budget pressures in some markets, the Group’s broad
geographic base provides a resilient business portfolio.
BAE Systems has a strong international market presence with
well-established relationships, supported by regional offices. The
Group’s strategy continues to focus on the importance of winning
international business, where growth markets remain. Success in
these international defence and security markets is evident in the
increasing order intake1 in markets outside the US and UK.
BAE Systems Annual Report 2012
23
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OUR BUSINESS MODEL CONTINUED
OUR BUSINESSES
The Group has five
principal reporting
segments which align
with the Group’s
strategic direction.
OUTSTANDING
CAPABILITIES
Electronic Systems
Cyber & Intelligence
Electronic Systems has advanced
technology, high integrity electronics
capabilities with a large portfolio of
annually-funded contracts, and significant
Group-funded research and development
invested in the business.
Electronic Combat combines the Electronic
Protection, Electronic Warfare and Electronic
Attack product lines, and provides a depth of
capability in integrated electromagnetic
systems for airborne applications.
Survivability & Targeting includes situational
awareness, targeting and survivability
systems, such as electro-optic sensor
products, guidance systems, handheld
targeting and infrared countermeasures
systems for soldiers and vehicles.
Communications & Control has a strong
footing in radio frequency communication
and datalinks, and provides military aircraft
controls and displays, together with platform
integration capabilities.
Intelligence, Surveillance & Reconnaissance
(ISR) addresses the market for airborne
persistent surveillance, identification
systems, signals intelligence and space
products.
Commercial Aircraft electronics addresses
the commercial aircraft electronics market,
including fly-by-wire flight controls, full
authority digital engine controls, cockpit
controls, head-up displays, cabin
management systems and power
management systems.
HybriDrive® propulsion delivers power and
energy management solutions, including
vehicle hybrid drive systems.
Cyber & Intelligence comprises government-
focused intelligence-based services, and
government and commercial cybersecurity
activities. Intelligence-based services
include IT-based services and the provision
of analysts and analysis-based services.
Cybersecurity activities include product
provision, service output and consulting
contracts.
Intelligence & Security delivers a broad
range of services, including IT, cybersecurity
and intelligence analysis to enable the US
military and government to recognise,
manage and defeat threats.
The business delivers:
– cost-effective IT solutions that solve
complex problems of collaboration and
security for the US national security
community;
– real-time threat assessments that rapidly
inform critical security actions; and
– automated, efficient and reliable
intelligence processing, data
management systems and imagery
mapping tools for the US intelligence and
defence communities.
BAE Systems Detica collects, manages
and exploits information to enable
government and commercial clients to
reveal intelligence, maintain security,
optimise performance and manage risk.
Alongside its secure government-focused
activities, the business is a supplier of
information assurance products and
services to the financial services and
telecommunications sectors. Primary
operations are in the UK, Denmark, Ireland
and the US.
A STRONG PORTFOLIO OF PRODUCTS AND SERVICES
Sales1, 2, 3 by reporting segment (%)
KPI
■ Electronic Systems
■ Cyber & Intelligence
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services
(International)
8
25
22
14
31
Including share of equity accounted investments.
1
2 Before elimination of intra-group sales.
3 Excluding HQ.
24
BAE Systems Annual Report 2012
See page 56 for more information
See page 60 for more information
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OUTSTANDING
CAPABILITIES
1
2
3
4
Our business model
See page 17
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (US) comprises the
Land & Armaments business which
includes a range of funded development
activity and fixed-price production and
services contracts, and US-based services,
sustainment and systems integration
activities which may be contracted over
multi-year arrangements.
Support Solutions is a major supplier of
ship repair services to the US Navy and
complex munitions facilities management
for the Holston and Radford facilities. Other
support activities in the US include fixed
and rotary wing aircraft support services.
Land & Armaments is engaged in the
design, development, production, support
and upgrade of armoured combat vehicles,
tactical wheeled vehicles, artillery systems,
naval guns, missile launchers and
munitions.
Vehicle Systems focuses on the tracked,
wheeled and amphibious vehicle markets,
servicing both US and international
customers.
Weapons Systems & Support focuses on
weapons, munitions and field support
markets, servicing US, UK and international
customers. Weapons include the
manufacture of artillery systems, such as the
M777 howitzer, as well as naval guns and
missile launchers. The business is the
principal supplier of munitions to the British
armed forces.
Platforms & Services (UK) is the focus for the
Group’s UK prime contracting platform and
systems integration contracts, with a large
order backlog of multi-year development,
production and services contracts.
Military Air & Information includes
programmes for the production of Typhoon
combat and Hawk trainer aircraft, F-35
Lightning II fuselage and empennage
manufacture, support for Typhoon, Tornado
and Hawk aircraft, and development of next-
generation Unmanned Air Systems and
defence information systems, such as the
Falcon secure deployable communication
system.
Maritime programmes include the
manufacture of two new Queen Elizabeth
class aircraft carriers for the Royal Navy, the
Type 45 anti-air warfare destroyers and the
Astute class submarines, the design of the
Successor submarine and Type 26 frigate,
and in-service support.
Combat Vehicles (UK) includes the
UK-based armoured vehicle and support
services business transferred from Land &
Armaments on 1 October 2012. The
principal programme is for the design and
manufacture of 60 Terrier combat engineer
vehicles for the British Army.
Platforms & Services
(International)
Platforms & Services (International)
comprises businesses in Saudi Arabia,
Australia, India and Oman, as well as a
37.5% shareholding in MBDA.
In Saudi Arabia, the business provides
operational capability support to the
country’s air and naval forces on
UK/Saudi government-to-government
contracts. Contracts, such as the Saudi
British Defence Co-operation Programme,
tend to be multi-year and fixed price.
In Australia, the business delivers
production, upgrade and support
programmes for the Australian government
across the air, maritime and land domains.
Services contracts include the provision of
support and upgrades. Platforms contracts
include naval ships, such as the Landing
Helicopter Dock programme for the Navy.
Contracts are often multi-year and fixed
price.
In India, the Group continues to develop its
software joint venture and build on its
long-standing relationship with Hindustan
Aeronautics Limited, which is
manufacturing Hawk aircraft under licence
in India.
The business is developing its position in
Oman, building on a long history of
relationships with the Omani armed forces,
with resulting orders placed with the
relevant reporting segments.
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A STRONG PORTFOLIO OF PRODUCTS AND SERVICES
See page 64 for more information
See page 68 for more information
See page 72 for more information
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BAE Systems Annual Report 2012
25
OUR BUSINESS MODEL CONTINUED
OUR PEOPLE
1
2
3
4
Our business model
See page 17
INSPIRE AND DEVELOP...
...OUR PEOPLE TO DRIVE OUR SUCCESS
The Group’s people strategy of
through-career capability
development and emphasis on high
levels of employee engagement
seeks to maximise the contribution
that its 88,200 strong workforce1
makes to the Total Performance of
the business.
The people strategy enables every member of the team to fulfil their
personal potential. The success of this strategy is measured
ultimately in the success of the business as a whole.
Leadership development
The Group continues to focus on the development of its current
and future leaders with structured global programmes linked to
Total Performance Leadership, an integrated performance
management and leadership development framework. In 2012,
leaders took part in development programmes designed to help
participants succeed as leaders and provide a strong talent
pipeline to meet the demands of changing markets. A common
Management Resource Review, which includes succession and
development planning, is conducted at Group and business level.
Continuous professional and personal development
The Group has continued to demonstrate its commitment to the
continuous professional and personal development of its
workforce. Development planning is supported by flexible training
and education programmes that encourage a culture of lifelong
learning and help employees to develop their skills to maximise
their potential.
In 2012, the Group continued to invest in learning programmes for
all employees that support its culture of responsible business
conduct. Extensive use is made of e-learning media, classroom
training and partnerships with academic institutions to provide
development and learning offerings.
Sustaining and developing capability relies on developing the
existing workforce and hiring talented people to meet current and
future skills requirements.
Developing current and future leaders...
...recruiting talented people...
Group development programmes complement business activities,
such as the Mustakbal Management Development Programme for
Saudi nationals, supporting the future sustainment of leadership
talent in the Kingdom of Saudi Arabia.
Veterans of the armed services are an important source of talent for
the business. In the US, for example, GI Jobs Magazine rated
BAE Systems in its top 100 list of military friendly employers.
1
Including share of equity accounted investments.
26
26
BAE Systems Annual Report 2012
BAE Systems Annual Report 2012
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...OUR PEOPLE TO DRIVE OUR SUCCESS
Employee engagement
Education and early careers programmes
S
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The Group recognises the importance of engaging its employees
to help them make their fullest contribution to the business.
Through a variety of media, the Group’s leadership seeks to listen
to employees’ views and opinions, and keep them informed about
developments and prospects for the business. In 2012, there
was more frequent use of leadership blogs and other e-enabled
communication channels.
A major focus for engagement has been the fostering of a more
diverse and inclusive working environment. Specific development
programmes have been produced to assist leaders in engaging
further with their teams and demonstrating the contribution that
each individual can make to the success of the Group.
When redundancies have been necessary to align with customer
requirements for products and services, management works with
employees, trade unions, and local and national bodies to
mitigate the impact on people and communities affected.
The Group works with the education sectors in each of its home
markets to help shape the workforce of the future with a particular
emphasis on encouraging young people to pursue careers in
science, technology, engineering and mathematics.
In the US, BAE Systems is partnering with the National Math and
Science Initiative to support the development of science,
technology, engineering and maths curricula to engage young
students, with the goal of inspiring them to become future
engineers.
In the UK, the Group has teamed with the Royal Air Force in staging
a Schools Road Show, taking a theatre-based class to over 250
schools, engaging 25,000 pupils in 2012 about careers in
engineering.
In Saudi Arabia, BAE Systems has established a University
Collaboration Agreement with King Saud University in Riyadh,
under which it will sponsor 30 engineering undergraduates.
In Australia, the business sponsors school pupils to participate in
the FIRST (For Inspiration and Recognition of Science and
Technology) LEGO League and FIRST Robotics Competition, both
aimed at encouraging more young people to engage in science,
technology, engineering and maths.
In India, BAE Systems has entered into a long-term partnership
agreement with Smile Foundation, a national level development
organisation with an outreach of over 200,000 underprivileged
children, women and youth across 25 states. The partnership
enables the Group to support development programmes in the
areas of primary education and healthcare.
...improving engagement...
...and investing in the future.
In 2012, the Group piloted the use of the ‘Great Place to Work’ Trust
Index with sample surveys in each of the home markets. The Great
Place to Work Institute is a globally recognised organisation that
identifies, creates and sustains great workplaces, and provides a
benchmark measure that supports the Group’s ambition to maximise
employee engagement and contribution.
During 2012, the Group recruited 650 people globally to join its
apprenticeship and graduate programmes to enrich its future
workforce, some of whom may potentially form part of its future
leadership population.
See Corporate responsibility review on page 39 for more information
See pages 59 to 75 for more information on how the Group’s reporting
segments are inspiring and developing our people
BAE Systems Annual Report 2012
BAE Systems Annual Report 2012
27
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Most people don’t see a cyber attack until
it’s too late. We are not most people
Understanding and counteracting illegal cyber activities is
crucial in preventing future cyber attacks and helping law
enforcement professionals locate cyber criminals. Digital
forensics is the process of collecting physical evidence from a
digital device. Digital forensic analysis requires systematic
processing, documentation and strict adherence to the
chain-of-custody process.
As technology continues to advance, so do the techniques
used by the digital forensic experts at BAE Systems. Digital
forensic professionals stay ahead of the proliferation of new
operating systems, software applications and mobile devices.
28
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GROUP
PERFORMANCE
REVIEW
In this section:
Financial Performance
Corporate responsibility review
Risk management
Principal risks
30
39
44
46
This section provides a commentary on the Group’s financial and
non-financial performance, and its approach to the management of
corporate responsibility and risk.
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BAE Systems Annual Report 2012
29
FINANCIAL PERFORMANCE
1
2
3
4
Our business model
See page 17
Peter Lynas
Group Finance Director
This section of the report covers Financial Performance from
a Group perspective.
See pages 54 to 75 for details on Financial Performance by reporting
segment
Financial highlights
Summary income statement
– Order backlog1,2 increased by 8% to £42.4bn
– Non-US and UK order intake1 increased to £11.2bn from
Summary income statement – continuing
operations
2012
£m
2011
£m
£4.8bn in 2011
– Sales1 reduced by 7%
– Underlying EBITA3 reduced by 6% to £1,895m. Deferred
recognition of sales and profit relating to the formalisation
of price escalation on the Salam Typhoon programme
– Underlying earnings4 per share down by 2% (excluding the
benefit in 2011 of the UK tax settlement)
– Total dividend increased by 4% to 19.5p
– Operating business cash flow7 increased to £2.7bn
– Net cash6 balance of £387m
– Three-year share repurchase programme of up to £1bn
initiated
– Longevity risk on £2.7bn of pension scheme liabilities
transferred to the insurance market
Sales1
Underlying EBITA3
Return on sales
Profit/(loss) on disposal
of businesses
Regulatory penalties
EBITA
Amortisation of intangible assets
Impairment of intangible assets
Finance costs1
Taxation expense1
Profit for the year
Exchange rates – average
£/$
£/€
£/A$
KPI
KPI
17,834
19,154
1,895
10.6%
2,025
10.6%
103
–
1,998
(226)
(86)
(275)
(337)
1,074
(29)
(49)
1,947
(239)
(109)
(106)
(233)
1,260
1.585
1.233
1.531
1.604
1.153
1.553
The results of the Regional Aircraft line of business are
shown within discontinued operations (see note 7 to the
Group accounts).
30
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Order backlog1,2
Order backlog1,2 has increased by 8% to £42.4bn driven by a high
level of awards in Saudi Arabia and a contract to supply Typhoon
and Hawk aircraft to Oman. Non-US and UK funded order intake1
increased to £11.2bn from £4.8bn in 2011.
Income statement
Finance costs1 were £275m (2011 £106m). The underlying
interest charge, which excludes pension accounting, marked-to-
market revaluation of financial instruments and foreign currency
movements, was £204m. In the prior year, the underlying interest
charge of £199m included £28m relating to the early redemption of
debt in connection with the disposal of the Regional Aircraft Asset
Management business. Costs in 2012 include interest on the
£400m debt refinancing completed in June and a higher level of net
present value charges on long-term liabilities.
Sales1 reduced by 7% reflecting lower volumes in the Land &
Armaments business, and there being no contracted Typhoon
aircraft deliveries in the year under the Salam Typhoon programme.
The Group’s sales1 performance is illustrated in the bridge chart
below.
Taxation expense1 reflects an effective tax rate of 25%. In 2011,
excluding the benefit of an agreement with the UK tax authorities
addressing a number of items, including research and development
tax credits, the effective tax rate was 26%. The calculation of the
effective tax rate is shown below:
19.2
-0.1
-0.8
-0.5
17.8
Sales1 bridge (£bn)
25
20
15
10
5
0
1
1
0
2
Calculation of the effective tax rate
Profit before taxation
(Deduct)/add back:
(Profit)/loss on disposal of businesses
Regulatory penalties
Goodwill impairment
Taxation expense1 (excluding 2011 UK tax
agreement)
UK tax agreement
Taxation expense1
Effective tax rate
Effective tax rate (excluding 2011 UK tax
agreement)
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2012
£m
2011
£m
1,411 1,493
(103)
–
57
29
49
94
1,365 1,665
337
–
337
25%
430
(197)
233
14%
25%
26%
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The underlying tax rate for 2013 is expected to be between 23%
and 25%, with the final number dependent on the geographical mix
of profits.
Underlying EBITA3 Management uses an underlying profit measure
to monitor the year-on-year profitability of the Group defined as
earnings before amortisation and impairment of intangible assets,
finance costs and taxation expense (EBITA) excluding non-recurring
items.
Underlying EBITA3 was £1,895m (2011 £2,025m) giving a return on
sales of 10.6% (2011 10.6%).
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. Profit on disposal of businesses of £103m
in 2012 includes the disposals of Safety Products and Safariland,
and assets comprising the Tensylon business, which were part of
the Land & Armaments business. The loss of £29m in 2011 arose
on the disposals of the Advanced Ceramics and Swiss-Photonics
businesses.
Amortisation of intangible assets is £13m lower at £226m mainly
reflecting the completion of deliveries under the Family of Medium
Tactical Vehicles (FMTV) contract in 2011.
Impairment of intangible assets, including goodwill, of £86m
mainly relates to the Safariland and Tensylon businesses sold
in July 2012, and the Commercial Armored Vehicles business
expected to be sold in the first quarter of 2013. In 2011, charges
included those taken against the Safety Products (£66m) and Naval
Ships (£34m) businesses.
1
2
3
Including share of equity accounted investments.
Order backlog comprises funded and unfunded unexecuted customer orders,
and is stated after the elimination of intra-group orders.
Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items.
4 Earnings excluding amortisation and impairment of intangible assets,
non-cash finance movements on pensions and financial derivatives, and
non-recurring items (see note 8 to the Group accounts).
6 See note 10 to the Group accounts.
7 See note 9 to the Group accounts.
BAE Systems Annual Report 2012
31
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FINANCIAL PERFORMANCE CONTINUED
Earnings per share
Cash flow
Reconciliation from underlying EBITA3
to underlying earnings4 – continuing operations
2012
£m
2011
£m
Underlying EBITA3
Underlying interest charge
(see note 5 to the Group accounts)
Taxation
UK tax agreement
Non-controlling interests
Underlying earnings4
Weighted average number of shares
Underlying earnings4 per share
Underlying earnings4 per share
(excluding 2011 UK tax agreement)
KPI
1,895 2,025
(199)
(204)
1,691 1,826
(417)
(472)
197
(16)
–
(11)
1,263 1,535
3,244m 3,365m
38.9p 45.6p
KPI
38.9p 39.7p
Underlying earnings4 per share was 38.9p, a decrease of 2% on
2011 (excluding the UK tax agreement benefit). The decrease is
illustrated in the bridge chart below.
Underlying earnings4 per share bridge (pence)
39.7
0.2
1.5
38.9
-2.5
50
40
30
20
10
0
1
1
0
2
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2
Basic earnings per share, in accordance with International
Accounting Standard (IAS) 33, Earnings per Share, was 32.8p
compared with 37.0p in 2011 (including the UK tax agreement
benefit).
Dividends and share repurchase
The Board is recommending a final dividend of 11.7p per share
(2011 11.3p), bringing the total dividend for the year to 19.5p per
share (2011 18.8p), an increase of 4%.
The total dividend for the year is covered 2.0 times by underlying
earnings4 from continuing operations (2011 2.1 times excluding
the UK tax agreement benefit).
In February 2013, the Group initiated a three-year share repurchase
programme of up to £1bn. Full implementation of this programme is
subject to satisfactory resolution of Salam Typhoon price escalation
negotiations. Discussions with the Group’s UK pension scheme
trustees have commenced to address any implications for deficit
funding plans.
1
2
Including share of equity accounted investments.
Order backlog comprises funded and unfunded unexecuted customer orders,
and is stated after the elimination of intra-group orders.
Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense (EBITA) excluding non-recurring items.
4 Earnings excluding amortisation and impairment of intangible assets,
3
KPI
Reconciliation of cash inflow from operating
activities5 to net cash/(debt) (as defined by the Group)6
Cash inflow from operating activities5
Capital expenditure (net) and financial
investment
Dividends received from equity
accounted investments
Assets contributed to Trust
Operating business cash flow7
Interest
Income from financial assets at fair
value through profit or loss
Taxation
Free cash flow
Acquisitions and disposals
Purchase of equity shares (net)
Equity dividends paid
Dividends paid to non-controlling interests
Cash outflow 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 inflow/(outflow)
Opening net debt (as defined by the Group)6
Closing net cash/(debt) (as defined by
the Group)6
2012
£m
2,916
2011
£m
951
(293)
(268)
94
(25)
2,692
(147)
–
(115)
2,430
96
(16)
(620)
(11)
88
(137)
634
(180)
4
(257)
201
(256)
(509)
(606)
(22)
(119)
(2)
(34)
–
1
92
(25)
13
(20)
36
1,826 (1,197)
(242)
(1,439)
387 (1,439)
The components of net cash/(debt) (as defined by the Group)6 are
as follows:
Components of net cash/(debt) (as defined by the Group)6
Debt-related derivative financial assets
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 cash/(debt) (as defined by the Group)6
2012
£m
22
2011
£m
56
3,355 2,141
(2,967) (2,682)
(518)
(3)
(403)
(21)
(2)
–
–
(30)
387 (1,439)
Cash inflow from operating activities5 was £2,916m (2011
£951m), which includes down-payments received on new contracts
to Saudi Arabia and Oman, and contributions in excess of service
costs for the UK and US pension schemes totalling £507m (2011
£375m).
The outflow from net capital expenditure and financial investment
of £293m (2011 £268m) was only marginally higher than 2011.
Dividends received from equity accounted investments, primarily
MBDA, Advanced Electronics Company, FNSS and Eurofighter,
totalled £94m (2011 £88m). This excludes a £424m
non-cash special dividend received from MBDA during the year
(see opposite).
5
non-recurring items (see note 8 to the Group accounts).
Excludes the £428m contribution from Trust to the UK pension schemes and
the £29.5m charitable contribution for the benefit of the people of Tanzania
in connection with the global settlement with the UK’s Serious Fraud Office
in 2010, both made in 2012, as the amounts had been deducted from the
Group’s net cash/(debt).
non-cash finance movements on pensions and financial derivatives, and
32
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Assets contributed to Trust comprise £25m of payments made
into Trust for the benefit of the BAE Systems 2000 Pension Plan. In
2011, £137m was paid into Trust for the benefit of the Group’s main
pension scheme.
Taxation payments were £142m lower at £115m primarily
reflecting tax refunds following the 2011 UK tax settlement and
timing differences on UK and US tax payments, and reflect the level
of pension deficit funding to the UK schemes.
Net cash inflow in respect of acquisitions and disposals of
£96m mainly comprises the disposals of Safety Products and
Safariland, and assets comprising the Tensylon business. The prior
year outflow of £256m mainly comprised the acquisition of L-1
Identity Solutions, Inc.’s Intelligence Services Group, Norkom Group
plc, ETI A/S, Fairchild Imaging, Inc. and stratsec.net Pty Limited
(£524m), less the net proceeds from the disposal of the Regional
Aircraft Asset Management business (£98m) and the Group’s
residual shareholding in Saab AB (£152m).
The net purchase of equity shares of £509m in the prior year
included 184 million shares purchased under the buyback
programme at a cost of £500m (excluding transaction costs of £3m).
As a consequence of movements in US dollar and Euro exchange
rates during the year, there has been a cash outflow from matured
derivative financial instruments of £119m (2011 £34m) 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.
Net cash (as defined by the Group)6 is £387m, a net inflow from
the net debt6 position of £1,439m at the start of the year. Cash and
cash equivalents of £3,355m (2011 £2,141m) are held primarily
for pension deficit funding, payment of the 2012 final dividend, the
share repurchase programme and management of working capital.
In June 2012, the Group issued a £400m, ten-year bond with an
annual coupon of 4.125% intended for general corporate purposes,
including the repayment of debt securities at maturity in 2014.
The maturity profile of the borrowings component of net cash is
illustrated in the chart below. Details of the Group’s objectives and
policies regarding net cash/(debt) are provided on page 36.
Maturity profile of the Group’s borrowings (£m)
3,000
2,500
2,000
1,500
1,000
500
0
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
0
2
0
2
1
2
0
2
2
2
0
2
6 See note 10 to the Group accounts.
7 See note 9 to the Group accounts.
8
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 consolidated balance sheet.
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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 cash/(debt) (as defined by the Group)6
Net liabilities of disposal group held for sale
Net assets
Exchange rates – year end
£/$
£/€
£/A$
2012
£m
10,928
2011
£m
11,465
2,407
2,626
270
(50)
951
(4,560)
(6,557)
387
(2)
3,774
788
(219)
975
(4,217)
(5,677)
(1,439)
(3)
4,299
1.624
1.232
1.564
1.554
1.197
1.516
The £537m reduction in intangible assets to £10.9bn (2011
£11.5bn) mainly reflects amortisation (£226m), impairments
(£86m) and exchange translation (£273m).
Property, plant and equipment, and investment property reduced
to £2.4bn (2011 £2.6bn) mainly reflecting the sale of certain
properties to the BAE Systems Pension Scheme and exchange
translation.
The reduction in equity accounted investments and other
investments reflects the receipt of a £424m non-cash special
dividend from MBDA.
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)
Total IAS 19 deficit at 1 January 2012
Actual return on assets above expected return
Increase in liabilities due to changes in assumptions
Additional contributions from assets held in Trust
Additional contributions from property disposals
Other additional contributions in excess of service cost
Recurring contributions in excess of service cost
Past service cost
Curtailment gains
Net financing charge
Foreign exchange translation
Movement in US healthcare schemes
Total IAS 19 deficit at 31 December 2012
Allocated to equity accounted investments and other
participating employers
Group’s share of IAS 19 deficit at 31 December 2012
Assets held in Trust
Pension deficit (as defined by the Group)
£m
(5,585)
689
(1,723)
428
75
195
237
(27)
26
(72)
38
11
(5,708)
1,148
(4,560)
–
(4,560)
The increase in the Group’s share of the pre-tax pension deficit
mainly reflects reductions in real discount rates in both the UK and
US. A net deferred tax asset of £1.1bn (2011 £1.2bn) relating to
the Group’s pension deficit is included within net tax assets and
liabilities, and disclosed in note 18 to the Group accounts.
The Group’s pension schemes are discussed in more detail overleaf.
There was a £0.9bn decrease in working capital mainly reflecting
a net increase in advance contract funding and utilisation of
provisions.
BAE Systems Annual Report 2012
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In the US, inflation assumptions are not significant as the Group’s
US schemes are not indexed with inflation.
The rate of increase in salaries for the UK schemes is assumed
to be 0.5% (2011 0.5%) above Retail Prices Index (RPI) inflation
of 2.9% (2011 2.9%). From 1 January 2013, employees in the US
schemes no longer accrue salary-related benefits.
The rate of increase in pensions in payment differs between UK
schemes. Different tranches of the schemes increase at rates
based on either RPI or Consumer Prices Index (CPI) inflation, and
some are subject to an inflation cap. With the exception of two
smaller schemes, the rate of increase in pensions in payment is
based on RPI inflation.
The rate of increase in deferred pensions for the UK schemes is
based on CPI inflation of 2.3% (2011 2.0%), with the exception of
the 2000 Plan, which is based on RPI inflation of 2.9% (2011 2.9%).
Life expectancy assumptions use, for the UK schemes, the
Self-Administered Pension Scheme S1 tables, with assumed
long-term future annual mortality improvements of 1%, and, for the
US schemes, the 2013 Internal Revenue Service Static Tables.
In February 2013, with the agreement of the Company, the trustees
of the 2000 Plan entered into an arrangement with Legal & General
to insure against longevity risk for the current pensioner population,
covering £2.7bn of pension scheme liabilities. This will reduce the
funding volatility relating to increasing life expectancy.
A revised version of IAS 19 has been issued, which is effective
from 1 January 2013. The revised standard, which is not expected
to have an impact on the net pension deficit, is discussed in more
detail on page 121.
Funding valuations
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 latest valuations of the Main Scheme and 2000 Plan were
performed as at 31 March 2011 and showed a funding deficit
of £3bn. Deficit recovery plans agreed with the trustees of both
schemes run until 2026. The expected level of pension deficit
funding across all Group schemes, in excess of service cost, is
expected to be approximately £0.4bn in 2013.
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.
Deficit allocation
Certain of the Group’s equity accounted investments participate
in the Group’s defined benefit pension schemes as well as Airbus
SAS, the Group’s share of which was sold in 2006. As these are
multi-employer schemes, the Group allocates an appropriate share
of the IAS 19 pension deficit to those equity accounted investments
and Airbus SAS.
FINANCIAL PERFORMANCE CONTINUED
Pension schemes
The Group’s principal pension schemes are funded defined benefit
schemes. The two largest schemes are the BAE Systems Pension
Scheme (Main Scheme) and the BAE Systems 2000 Pension
Plan (2000 Plan). In aggregate, these two schemes represent
73% (2011 73%) of the total IAS 19, Employee Benefits, deficit at
31 December 2012.
Investment strategy
Some 52% (2011 51%) of the Group’s pension scheme 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. 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 23 to the Group accounts.
Valuation
Pension plan valuations are performed by independent actuaries
for both IAS 19 accounting and funding purposes.
Accounting valuations
A summary of the Group’s pension scheme assets and liabilities is
shown below:
Pension scheme 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)
2012
£m
2011
£m
19,583 17,707
(25,291) (23,292)
(5,708) (5,585)
1,148
965
(4,560) (4,620)
403
(4,560) (4,217)
–
Assets held in Trust of £428m were paid into the Main Scheme and
2000 Plan in 2012 following £25m of additional payments into
Trust.
Pension scheme assets are included in the valuation at bid value.
The key assumptions used to calculate pension scheme liabilities
for the principal schemes are shown below:
Principal pension accounting
valuation assumptions
Discount rate (%)
Inflation (%)
Rate of increase in salaries (%)
Rate of increase in pensions
UK
US
2012
4.5
2.9
3.4
2011
4.8
2.9
3.4
2012
4.1
n/a
3.7
2011
5.0
n/a
4.5
in payment (%)
1.8–3.5 1.9–3.4
n/a
n/a
Rate of increase in deferred
pensions (%)
2.3/2.9 2.0/2.9
n/a
n/a
Life expectancy of a male
currently aged 65 (years)
Life expectancy of a female
currently aged 65 (years)
22–24 22–24
24–25 24–25
19
21
19
21
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 the discount
rate. A ten basis point movement in the rate changes the total
pre-tax liability by some £0.4bn.
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Capital
Objectives
Policies
Performance
Maintain the Group’s investment grade
credit rating and ensure operating
flexibility, whilst:
The Group funds its operations through a
mixture of equity funding and debt financing,
including bank and capital market borrowings.
The capital structure of the Group reflects the
judgement of the directors of an appropriate
balance of funding required.
At 31 December 2012, the Group’s capital
was £3,782m (2011 £4,291m), which
comprises total equity of £3,774m (2011
£4,299m), excluding amounts accumulated
in equity relating to cash flow hedges of
£8m debit (2011 £8m credit). Net cash (as
defined by the Group)6 was £387m (2011
net debt £1,439m).
During the year, the Group returned £620m
to shareholders in dividends.
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– meeting its pension obligations;
– continuing to pursue organic
investment opportunities;
– paying dividends in line with
the Group’s policy of long-term
sustainable cover of around two times
underlying earnings4;
– making accelerated returns of capital
to shareholders when the balance
sheet allows; and
– investing in value-enhancing
acquisitions, where market conditions
are right and where they deliver on the
Group’s strategy.
For more information see note 25 to the
Group accounts
Tax
Objectives
The Group’s tax strategy aims to:
– ensure compliance with all relevant
statutory obligations; and
– manage the Group’s tax burden in a
way that is consistent with its Values
and its legal obligations in all relevant
jurisdictions.
For more information see notes 6 and 18 to
the Group accounts
Policies
Performance
The Group’s tax affairs are broadly up to date
in the jurisdictions in which it operates.
During 2012, an Annual Compliance
Agreement (ACA) was signed with the
Australian Tax Office (ATO) covering income
tax and goods and services tax. The ATO’s
Tax Commissioner said the arrangements
offered an innovative way forward for business
to work closely with the ATO, and that an
ACA formalises the open and transparent
relationship they seek to have with large
business.
The Group seeks to build constructive, open
working relationships with tax authorities
through full disclosure, and actively considers
the implications of tax planning for the Group’s
wider corporate reputation.
Whilst the Group aims to maximise the tax
efficiency of its business transactions, it does
not use structures in its tax planning that are
against the spirit of the law, nor does it engage
in tax evasion.
Arm’s length principles are applied in the
pricing of all intra-group transactions of
goods and services in accordance with OECD
guidelines.
Where appropriate, the Group consults
with tax authorities to help shape proposed
legislation and tax policy.
BAE Systems operates internationally and is
subject to tax in many different jurisdictions.
The Group employs professional tax
managers and takes appropriate advice from
reputable professional firms. The Group is
routinely subject to tax audits and reviews
which can take a considerable period of time
to conclude. Provision is made for known
issues based on management’s interpretation
of country-specific legislation and the likely
outcome of negotiations or litigation.
4
Earnings excluding amortisation and impairment of intangible assets,
non-cash finance movements on pensions and financial derivatives, and
non-recurring items (see note 8 to the Group accounts).
6 See note 10 to the Group accounts.
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BAE Systems Annual Report 2012
35
FINANCIAL PERFORMANCE CONTINUED
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 treasury policies 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.
Compliance with treasury policies is monitored and any exceptions
found are reported to the TRMC. Treasury policies remain under
close review given continuing volatility in financial markets.
Objectives
Net cash/(debt)
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 interest
rates, reflecting the Group’s risk profile.
Interest rates
Manage the Group’s exposure to
interest rate fluctuations on borrowings
through varying the proportion of fixed
rate debt relative to floating rate debt
with derivative instruments, mainly
interest rate swaps.
Liquidity
Maintain adequate undrawn
committed borrowing facilities.
Policies
Performance
For more information see note 10 to the Group accounts
Material borrowings are arranged by the
central treasury department. Funds raised
are lent onward to operating subsidiaries as
required and any surplus funds are lent back
where appropriate.
In June 2012, the Group issued a £400m,
ten-year bond with an annual coupon of
4.125% intended for general corporate
purposes, including the repayment of debt
securities at maturity in 2014.
The Group intends to continue to fund the
business conservatively through proactive
use of bank and capital markets.
Excluding acquisition or disposal financing
and share buybacks, net cash/(debt) is driven
by the Group’s operational performance and
receipts on major contracts. The net cash/
(debt) position of the Group is generally best at
the end of the year.
For more information see note 27 to the Group accounts
A minimum of 50% and a maximum of 90%
of gross debt is maintained at fixed interest
rates. The Group’s interest rate policy has
been amended by the TRMC during the year
to allow the fixed interest rate component
of gross debt to increase from a maximum
of 75% to 90% reflecting the current
exceptionally low interest rate environment.
At 31 December 2012, the Group had 79%
(2011 63%) of fixed rate debt and 21%
(2011 37%) of floating rate debt based on a
gross debt of £3.0bn, including debt-related
derivative financial assets (2011 £3.1bn).
For more information see note 27 to the Group accounts
The RCF was undrawn throughout the year.
The Group had no Commercial Paper in issue
at 31 December 2012 (2011 £513m).
The Group’s committed Revolving Credit
Facility (RCF) is £2bn (2011 £2bn). The RCF,
which is contracted until 2015, is syndicated
amongst the Group’s core relationship banks
and is available to meet expected general
corporate funding requirements.
The RCF also acts as a back stop to
Commercial Paper issued by the Group.
Cash flow forecasting is performed by the
businesses on a monthly basis. The Group
monitors a rolling forecast of its liquidity
requirements to ensure that there is sufficient
cash to meet operational needs and maintain
adequate headroom.
Monitor and control counterparty credit
risk and credit limit utilisation.
The Group adopts a conservative approach
to the investment of its surplus cash. It is
deposited with financial institutions with the
strongest credit ratings for short periods.
The Group had cash and cash equivalents
at 31 December 2012 of £3,355m (2011
£2,141m), which was invested with 29
financial institutions (2011 24).
A credit limit is allocated to each institution
taking account of its market capitalisation,
credit rating and credit default swap price.
The maximum amount deposited with any
individual bank as at 31 December 2012
was less than £300m (2011 £200m).
The Group has no exposure to Greek,
Irish, Italian, Portuguese or Spanish banks.
Additionally, the Group monitors its exposure
to banks which have exposure to these
countries.
36
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Objectives
Currency
Reduce the Group’s exposure to
volatility in earnings and cash flows
from movements in foreign currency
exchange rates, mainly the US dollar,
Euro and Saudi Riyal.
Credit quality
Maintain an investment grade rating
in order to ensure access to the widest
possible sources of finance, minimise
the cost of debt funding and to support
the efficient operation of the Group’s
activities.
Insurance
Objectives
Maintain an understanding of the
current and future risk profile of the
Group, offer tailored risk mitigation
solutions, and ensure the Group
insurance protection reflects current
exposures.
Policies
Performance
For more information see note 27 to the Group accounts
The Group is exposed to movements in
foreign currency exchange rates in respect of
foreign currency denominated transactions.
All material firm transactional exposures
are hedged, unless otherwise approved as
exceptions by the TRMC, and the Group aims,
where possible, to apply hedge accounting to
these transactions.
The Group is exposed to movements in
foreign currency exchange rates in respect of
the translation of the 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 foreign subsidiaries and
equity accounted investments it regards as
long-term investments.
The Group aims to deliver its planned
operating cash flows and manage its
relationships with debt capital market
investors, banks and rating agencies.
There was a net charge of £5m in the
income statement for the year (2011 net
credit £85m) in respect of market value and
foreign exchange adjustments on financial
instruments and investments.
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Three credit rating agencies publish credit
ratings for the Group:
– Moody’s Investors Service – Baa2;
– Standard & Poor’s Ratings Services –
BBB+; and
– Fitch’s Investors Service – BBB+.
During the year, all three maintained their
categories and outlooks for the Group as
investment grade and stable, respectively.
Policies
Performance
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.
All of the Group’s insurers must have a
minimum credit rating of A-.
During 2012, 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.
Following the flood at the Electronic Systems
site in Johnson City, New York, in 2011,
the Group successfully recovered $186m
(£115m) under various insurance policies.
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BAE Systems Annual Report 2012
37
The Group has allocated a share of the pension deficit to its equity
accounted investments and other participating employers using a
consistent method of allocation, which represents the directors’
best estimate of the deficit anticipated to be funded by these
entities.
At 31 December 2012, the Group’s share of the IAS 19 pension
deficit was £4.6bn, excluding amounts allocated to equity
accounted investments and other participating employers.
For more information see note 23 to the Group accounts
Valuation of acquired intangible assets (IFRS 3, Business
Combinations) and ongoing impairment testing (IAS 36,
Impairment of Assets)
Acquired intangible assets, excluding goodwill, are valued in
line with internationally used models, which require the use of
estimates that may differ from actual outcomes. These 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.
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.
At 31 December 2012, total intangible assets were £10.9bn,
including £10.4bn of goodwill.
For more information see note 11 to the Group accounts
FINANCIAL PERFORMANCE CONTINUED
Critical accounting policies
Certain of the Group’s accounting policies are considered by the
directors to be critical because of the level of complexity, judgement
or estimation involved in their application and their impact on the
consolidated financial statements. The directors believe that the
consolidated financial statements reflect appropriate judgements
and estimates, and provide a true and fair view of the Group’s
financial performance and position. The critical accounting policies
are listed below and explained in more detail in note 32 to the
Group accounts. References to the relevant individual notes to the
Group accounts are also provided.
Recognition of profit on long-term contracts
(IAS 11, Construction Contracts)
Revenue on long-term contracts is recognised in the Group’s
income statement when performance milestones have been
completed.
The ultimate profitability of the contract is estimated based on
estimates of revenue and costs, including allowances for technical
and other risks, which are reliant on the knowledge and experience
of the Group’s project managers, engineers, and finance and
commercial professionals. Material changes in these estimates
could affect the profitability of individual contracts.
Revenue and cost estimates are reviewed and updated at least
quarterly, and more frequently as determined by events or
circumstances.
Profit is recognised progressively as risks have been mitigated or
retired.
A significant proportion of the Group’s £16.6bn of revenue in 2012
was accounted for under IAS 11.
For more information see note 1 to the Group accounts
Valuation of retirement benefit obligations for defined benefit
pension schemes (IAS 19, Employee Benefits)
The retirement benefit obligation recognised in the Group’s
balance sheet represents 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.
For each of the assumptions used to measure the Group’s pension
scheme liabilities (summarised on page 34), there is a range of
possible values and management exercises judgement in deciding
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. Pension scheme
accounting valuations are prepared by independent actuaries as at
30 June and 31 December each year.
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CORPORATE RESPONSIBILITY REVIEW
1
2
3
4
Our approach to Corporate Responsibility
Stakeholders and materiality
Our business model
See page 17
The Group’s approach to Corporate Responsibility (CR) is an
integral part of its strategy, with the Responsible Behaviour element
of Total Performance (see page 16). CR is focused on embedding
responsible business behaviours by placing emphasis not just on
what the Group does, but how it is done.
CR supports the long-term sustainability of the Group by managing
the current impacts of its operations and products, and anticipating
the future global business environment to ensure that it has in
place:
– responsible business practices to underpin business activities
and support employees in making the right decisions to drive
business performance;
– a safe work environment for employees;
– a diverse range of talented employees with a broad range of skills
and capabilities to deliver against global customer requirements;
and
– programmes to manage the environmental impacts of the
Group’s operations and products, reducing the Group’s carbon
footprint and that of the Group’s customers.
In September 2012, BAE Systems was confirmed as a member
of the Dow Jones Sustainability European Index.
Clear governance structures and visible leadership play a vital role
in embedding CR.
The Chief Executive has overall responsibility for the Group’s
ongoing commitment to CR. He is supported by the Board and
Corporate Responsibility Committee in ensuring that appropriate
policies, systems, reporting structures and metrics are in place to
achieve the Group’s ethical, social and environmental performance
objectives.
The Group’s CR team reports directly to the Chief Executive, and
supports the Executive Committee in embedding and driving CR
processes and performance. Performance is measured and risk
monitored throughout the year via the Group’s six-monthly
Operational Assurance Statement (OAS) (see page 86) and
Quarterly Business Review (QBR) (see page 84) processes.
The Group’s Internal Audit team also assesses the effectiveness of
policies and processes relating to key areas of ethical and
reputational risk.
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The Group’s principal stakeholders include investors, customers,
employees, business partners, suppliers, non-government
organisations and the communities in which it operates.
Stakeholder feedback informs the Group’s strategy and approach
to managing CR. BAE Systems aims to communicate openly with
stakeholders about its business. Two-way dialogue helps the Group
to understand their views and concerns, and explain the Group’s
approach.
CR covers the areas identified by internal and external stakeholders
as having the most potential to affect the long-term sustainability of
the Group, by directly impacting the Group’s reputation or ability to
operate (outlined below). The areas identified shape the Group’s CR
objectives and programmes, and are given priority.
The key CR areas and emphasis are:
– Ethics and governance
– Employee and product safety
– Diversity and inclusion
– Operational and product environmental impacts
Details of these areas are covered in this section of the report.
CR objectives
During 2012, the Group focused on four key areas:
– Ethics – continuing to strengthen the Group’s governance
processes and policies to ensure that employees have clear
guidance to enable them to make ethical decisions.
– Employee safety – embedding a safety first approach to the
Group’s operations so that all employees understand the
importance of a safe workplace.
– Diversity and inclusion – continuing to develop a diverse and
inclusive workplace which encourages innovation and enhances
productivity.
– Operational environmental impacts – minimising the Group’s
operational impacts.
Progress against the ethics objective is supported by Group-wide
programmes and is discussed overleaf.
Progress against objectives in employee safety, diversity and
inclusion, and operational environmental impacts is driven by
programmes at reporting segment level. These objectives are
bonus-related for senior executives globally (see page 99 of the
Remuneration report). An overview of progress against these
objectives is discussed on the following pages and within the
reporting segment reviews (see pages 59 to 75).
In 2012, the Group and individual reporting segments made good
progress across all CR objectives.
See page 114 for more information on the Group’s Community
Investment programme
13268 BAE069_AR2012_CR_vAW2 p39-43 Ev4.indd 1
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BAE Systems Annual Report 2012
39
CORPORATE RESPONSIBILITY REVIEW CONTINUED
Ethics and governance
2012 objective
– Continue to improve and evolve the Group’s business conduct
programme.
BAE Systems continues to embed its ethics programme globally. It
continues to focus on driving the right behaviours by supporting
employees in making good ethical decisions and embedding
responsible business practices.
Supporting employees in making ethical decisions is core to the
Group’s ethics programme and governance framework. The Group’s
Code of Conduct sets out the principles and standards of business
conduct expected of all employees wherever they operate and in
whatever role. It provides them with practical guidance on how to
deal with situations that may arise in their day-to-day activities. It
also includes guidance on where to go for advice, where to report
concerns and information on the Group’s Ethics Helpline.
The Code of Conduct and related policies are supported by regular
mandatory training for all employees. During 2012, the Group rolled
out its latest employee ethics training programme which focused on
making responsible decisions. The training was based around a
number of scenarios, each representing different working
environments and subject areas.
Detailed mandatory policies and procedures, including the Group’s
policies on Fraud, Facilitation Payments, Product Trading and Export
Control, are also available online for employees.
Additional compliance-based e-learning training is also targeted at
employees throughout the year. For example, senior executives and
business leaders undertake the Group’s Integrity in Business
Dealings training covering our policies on Gifts and Hospitality,
Facilitation Payments, Company Giving and Conflicts of Interest. All
employees using the Group’s IT system have been required to
complete a number of training modules in IT Security and Export
Control.
Employees have the opportunity to get independent advice and
support or report concerns via Ethics Officers, now in place across
the businesses, or via the Ethics Helpline, which is also available to
third parties. During 2012, 1,024 enquiries were reported to Ethics
Officers and via the Helpline. The Group has seen a steady increase
in reports and requests for guidance to Ethics Officers as they
become more established within their businesses.
If employees are found to be in breach of the Group’s Code of
Conduct or related policies, they will potentially be subject to
disciplinary action. In 2012, 292 employees were dismissed for
reasons relating to breaches of the Group’s standards and policies,
primarily for personnel and workplace issues.
The Group’s governance framework covers the products it makes
and exports. The Group’s Responsible Trading Principles, Product
Trading Policy and Pursuit of Export Opportunities Policy help
employees make informed decisions about the business
opportunities the Group pursues and to address any responsible
trading risks, including risks associated with the product and its
intended end use, the country of origin and delivery, and the
customer.
The Group is committed to respecting human rights in its
operations, within its sphere of influence, including supporting
conventions on child labour and minimum wages.
The Group continues to support and help improve ethical standards
across the defence industry. During 2012, the Group chaired the
International Forum on Business Ethical Conduct (IFBEC) for the
Aerospace and Defence Industry and remained a Task Force
member. IFBEC is committed to promoting high ethical standards
through the adoption of Global Principles of Business Ethics for the
Aerospace and Defence Industry.
Supplier management is important to the Group as it depends on
its suppliers to help to deliver the products and systems its
customers need, on time and to the quality they expect. Poor
performance or unethical conduct by a supplier could affect the
Group’s reputation or its ability to operate effectively.
The Group expects its suppliers to comply with local legislation and
to meet equivalent standards on issues such as ethical conduct,
health and safety, product safety, the environment, civil liberties
and human rights. The Group also expects them to apply these
standards in their own supply chains and assesses compliance
during the supplier selection process.
2013 objective
– Continue to improve and evolve the Group’s business conduct
programme.
Enquiries to Ethics Helpline^
2012 enquiries to Ethics Helpline^
1,011 1,024
870
734
507
1,200
1,000
800
600
400
200
0
351 350
400
300
200
100
0
86
65
46
42
28
Dismissals for reasons relating
to unethical behaviour*
500
400
485
355
300
297
298
292
200
100
19
14
10
7
4
2
0
08
09
10
11
12
All enquiries reported to Ethics Officers
and via the Ethics Helpline were reviewed
and reported either to the Ethics Review
Committee or, in BAE Systems, Inc., to the
Ethics Review Oversight Committee.
■ Employee relations and conduct
■ Guidance and advice
■ Labour/expenses practices
■ Management practices
■ Open enquiries1
■ Security and misuse of assets
■ Conflicts of interest
■ Company ethical practices
■ Environmental, Health and Safety
■ Procurement, trade and marketing
■ Quality or manufacturing issues
■ Contract compliance
■ International business issues
08
09
10
11
12
If an employee is found to be in breach of
the Group’s Code of Conduct or any other
relevant policies, appropriate disciplinary
action, which may include dismissal, is
taken.
^* See assurance statement on www.baesystems.com/deloitteassurancestatement
1 US category only.
40
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During 2012, the Recordable Accident Rate decreased by 30%. This
was ahead of improvement targets set. This progress represents a
fifth consecutive year of improvement. Individual reporting segment
performance against this metric can be found on pages 59 to 75.
Regrettably, there was one work-related employee fatality in 2012.
Each accident is thoroughly investigated and lessons learnt are
applied across the Group.
2013 objective
– Demonstrate improvements against key safety indicators,
including a 10% improvement in the Recordable Accident Rate.
Product safety
It is critical that the Group’s products do what they are designed for
without unacceptable harm to any third parties or the people using
them. No complex and innovative product, whether used in defence
or civilian markets or both, is without risk. It is essential that the
Group achieves an appropriate balance between the benefits they
provide to customers and the risks associated with their use.
The Group’s Product Safety Policy and practices are built on a set of
product safety principles that apply throughout a product’s life from
concept and manufacturing through to use and disposal. The safety
of the Group’s products relies on the application of its safety
policies and processes, and on the behaviours and attitudes of the
employees working on them.
Across the Group’s businesses, there are a number of working
groups that ensure a consistent approach to product safety by
sharing ideas and best practice.
During 2012, the Group continued to work with its customers to
agree the level of safety required that is both ethical and lawful, the
risks that are acceptable, and to deliver products that met that
level.
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Employee and product safety
2012 objectives
– Businesses to demonstrate improvement against 2011
performance on recordable accidents.
– Continue to progress against the Safety Maturity Matrix.
Employee safety
The safety of the Group’s employees, and anybody who works on its
sites, is a key priority. The Group wants everyone to return home
safely at the end of each day. The Group’s goal is to continue to
embed a safety first approach by providing training and tools that
help employees understand the importance of a safe workplace,
and encouraging employees to take responsibility for their own
safety and the safety of those around them.
During 2012, the Group’s global Safety, Health and Environment
(SHE) Steering Group focused on reviewing high risk manufacturing
activities which could lead to major accidents. A working group was
set up to establish minimum safety standards and processes,
which will be launched during 2013. The SHE Steering Group also
monitored safety performance, including progress against the
Safety Maturity Matrix (SMM) which was introduced in 2008. The
SMM has helped drive consistent standards of safety across the
Group.
Collaboration across the Group’s safety teams was recognised
during 2012 with a Gold award in the BAE Systems’ Chairman’s
Awards category of Transferring Best Practice. Safety teams worked
together to support the launch of an employee safety programme
that can be easily transferred across businesses (see page 71 for
more information).
The Group uses a number of global metrics throughout the year to
manage and monitor safety.
At the start of 2012, the Group changed the metric used to monitor
work place injuries from the Lost Work Day Case Rate to the
Recordable Accident Rate. The change in metric enables inclusion
of a wider scope of accidents within its reviews, which is expected
to lead to improvements in accident prevention. The Recordable
Accident Rate is the metric that has been linked to executive
bonuses.
Recordable Accident Rate
(per 100,000 employees)*
Major injuries recorded*
2012 causes of major injuries recorded*
2,000
1,669
1,500
1,162
1,000
500
0
77
69
59
53
44
1 1 1 1 1
22
3
3
4
7
80
60
40
20
0
■ Slips, trips or falls on the same level
■ Fall from height
■ Injured while handling, lifting or carrying
■ Strike against something fixed or
stationary
■ Exposure to, or contact with, a harmful
substance
■ Trapped by something collapsing/
overturning
■ Struck by moving, including flying/
falling, object
■ Contact with fire
■ Road traffic accident
■ Injured by animal
11
12
The Recordable Accident Rate decreased
by 30% during 2012, exceeding the 15%
stretch objective set by the Group (see
page 15).
08
09
10
11
12
Major injuries recorded decreased during
2012 in line with the Group’s overall
focus on accident reduction.
* See assurance statement on www.baesystems.com/deloitteassurancestatement
BAE Systems Annual Report 2012
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Increasing leadership diversity – to ensure diverse candidate lists
for leadership roles, where possible, executive search firms were
employed with a track record of open and inclusive recruitment
processes, and drawing from an appropriately diverse pool of
candidates, with the overall aim of appointing the best person for
the role.
Measuring performance – on a national basis, defined aspirational
objectives and actions have been put in place to increase gender
diversity. Gender diversity in leadership positions and succession
plans is monitored.
At the end of 2012, 27% and 25% of the Board and Executive
Committee members, respectively, were women. Globally, 20% of
the Group’s workforce are women.
2013 objective
– Increase diversity and inclusion within the organisation in
accordance with business goals.
See page 26 for more information on our people
CORPORATE RESPONSIBILITY REVIEW CONTINUED
Diversity and inclusion
2012 objective
– Demonstrate continued progress against the Diversity &
Inclusion Maturity Matrix and establish milestones/targets to
underpin delivery of the stated 2015 position.
The Group is committed to creating an inclusive work environment
in which a diverse range of talented people work together to
improve business performance and productivity by helping the
Group to remain competitive and innovative. A more diverse
workforce has a greater range of skills and capabilities which helps
to better understand customers and their requirements.
To support this commitment, the Group’s long-term goal is to build a
high-performing workforce that more closely reflects the diversity of
the local communities in which its businesses operate.
Across the Group, businesses have put in place plans to 2015 to
support and progress this aim. Highlights from these programmes
can be seen within the reporting segment reviews on pages 59 to
75. Activities include the development of frameworks and steering
groups, mentoring programmes, and training designed to support
the improvement in the diversity of its employees and create a more
inclusive work environment over the long term.
In 2012, the Executive Committee progressed actions to grow the
female talent pipeline at senior executive levels, with an aspiration
of continuing to achieve 25% female membership of the Executive
Committee by 2015:
Fostering a culture of inclusion – unconscious bias training for
executives globally has been scoped and will be rolled out during
2013. The objective of the training is to enhance talent
management decisions by raising awareness of unconscious and
conscious bias that influence those decisions.
Accelerating the development of high-potential women – an
Executive Committee mentoring programme was launched during
2012 to leverage the readiness of high-potential women across
the organisation and 24 high-potential women were mentored
during the year. This programme was supported by increased
participation by high-potential women in training and development
programmes.
2012 gender diversity (%)*
2012 age diversity (%)*
28
29
21
16
84
79
72
71
9
91
20
80
11
6
18
■ 25 years and younger
■ 26 – 35 years
■ 36 – 49 years
■ 50 – 59 years
■ 60 years and older
33
32
100
80
60
40
20
0
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Diversity data for both gender and age remained consistent with 2011. During 2012, the
Group continued to embed a diversity and inclusion strategy to support the recruitment,
engagement and retention of talented employees from all backgrounds.
■ Male
■ Female
* See assurance statement on www.baesystems.com/deloitteassurancestatement
42
BAE Systems Annual Report 2012
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Operational and product environmental impacts
2012 objective
– Continued progression against the Environmental
Sustainability Maturity Matrix – businesses to meet 2012
targets for energy, waste and water.
Operational environment
Businesses across the Group have environmental management
systems in place that monitor and manage impacts from
greenhouse gas emissions, material and solvent use, waste
products, and emissions to the atmosphere.
The Group’s goal is to reduce the environmental impact of its
operations and products by using energy, waste and water more
efficiently.
During 2012, businesses set targets to reduce the amount of
energy and water used, and the amount of waste generated. In total
during the year, energy use was reduced by 12%1, water
consumption was reduced by 7%1,2 and waste generated was
reduced by 25%1.
The Group monitors and reports greenhouse gas emissions,
primarily from energy use, on a Group-wide basis to understand its
global contribution to climate change. This helps the Group to meet
the requirements of legislation, such as the UK government’s
Carbon Reduction Commitment and the Australian National
Greenhouse Energy Reporting Act.
The Group’s 2012 carbon footprint decreased by 12% against 2011
to approximately one million tonnes3 of CO2 equivalent primarily due
to the energy reduction targets achieved across the businesses
during 2012.
The majority of the Group’s greenhouse gas emissions come from
the energy it uses in manufacturing and business travel.
Product environment
The Group ensures that environmental considerations are taken
into account throughout a product’s lifecycle from concept, design
and manufacture through to use and disposal via the Group’s
Lifecycle Management (LCM) process (see page 84). LCM supports
the Group in identifying and managing environmental risks,
including reducing the environmental impacts of the Group’s
products during research and development, minimising waste
materials during manufacturing, and helping to reduce product
impacts when being used, upgraded and disposed.
Deloitte LLP assurance statement
Engineers are given training and guidance via the Group-wide
Environmental Policy and Product Environmental Management
handbook to promote understanding of environmental product
design.
The Group’s Product Environmental Working Group develops
guidance documents and identifies good practices to share with
businesses to promote consistently high standards.
The Group works with customers to help them to understand the
environmental impacts of its products and supports them on their
environmental programmes. For example, the Group works with the
UK Ministry of Defence on their Sustainable Procurement Strategy.
The Group also works with suppliers to reduce the environmental
impact of the products and services they supply, reducing costs and
the Group’s environmental footprint. To support this, the Group
introduced a Sustainable Procurement handbook to help
purchasing teams understand and embed environmental standards
into the supplier management process.
Working in partnership with a variety of organisations, the Group
helps improve the environmental impacts of its business and the
wider defence industry. In the UK, the Group is a member of ADS
Group, the Aerospace, Defence, Security and Space industries
association, to help the industry prepare for, and respond to,
legislation on hazardous materials and environmental design. Also
in the UK, the Group works with the Institute of Environmental
Management and Assessments to develop environmental
competencies for environmentalists and non-environmentalists.
2013 objectives
– Set environmental improvement targets in line with the
Integrated Business Plan to include energy, water and waste.
– Establish a monitoring and recording system for air travel.
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1 Data is derived from internal recording systems and is not subject to external
verification or audit.
2 Data excludes Ordnance Solutions Inc. and Saudi Arabia.
3 The Group’s 2012 carbon footprint was externally compiled by the Coefficient
Company.
More information
This year, Deloitte LLP assured the following performance
indicators at Group level:
More information on the Group’s CR performance is available online
at: www.baesystems.com/corporateresponsibility
– Stakeholder engagement
– Support for local communities
– Internal governance controls
– Deloitte assurance statement
Ethics and governance – employee and third-party enquiries to
Ethics Helpline^ (total number and number by category) and
dismissals for reasons relating to unethical behaviour*;
Safety – Recordable Accident Rate*, the number of major injuries
recorded* and causes of major injuries recorded*;
Diversity and inclusion – employees split by gender* and age*;
and
Community – total Community Investment programme
donations* (see page 114).
Deloitte LLP has provided limited assurance on performance
indicators marked with a * and reasonable assurance on
performance indicators marked with a ^.
To see Deloitte LLP’s assurance statement go to:
www.baesystems.com/deloitteassurancestatement
BAE Systems Annual Report 2012
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RISK MANAGEMENT
Effective management of risks and
opportunities is essential to the delivery of the
Group’s strategic objectives, achievement of
sustainable shareholder value, protection of
its reputation and meeting the requirements
of good corporate governance.
How BAE Systems manages risk
Board
The Board has overall responsibility for determining the nature
and extent of the significant risks it is willing to take in achieving
its strategic objectives, and ensuring that risks are managed
effectively across the Group.
Risk is a regular agenda item at Board meetings and the Board
reviews risk as part of its regular strategy review process. 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.
The Board delegates certain risk management activities to the
Audit and Corporate Responsibility committees as follows.
Audit Committee
The Audit Committee monitors the Group’s key risks identified
by the risk assessment processes and reports its findings to the
Board on a regular basis. It is also responsible 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.
Corporate Responsibility Committee
The Corporate Responsibility Committee monitors the Group’s
performance in managing the Group’s significant non-financial
risks, including those arising in respect of business conduct, health
and safety, and the environment, and reports its findings to the
Board on a regular basis.
Approach
The Group’s approach to risk management is aimed at the early
identification of key risks, to remove or reduce the likelihood and
effect of those risks before they occur, and deal effectively with
them 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.
Reporting within the Group is structured so that key issues are
escalated through the management team and ultimately to the
Board where appropriate. The underlying principles of the Group’s
risk management policy are that risks are monitored continuously,
associated action plans reviewed, appropriate contingencies
provisioned and this information reported through established
management control procedures.
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.
Financial and non-financial risks
Financial risks expose the Group to potential costs which are
quantifiable on the basis that their probability and impact can be
adequately understood and related to the financial statements.
Non-financial risks cannot readily be assessed in financial
terms and, therefore, cannot be reflected reliably in the financial
statements.
Process
Businesses
The responsibility for risk identification, analysis, evaluation and
mitigation rests with the line management of the businesses.
They are also responsible for reporting and monitoring key risks
in accordance with established processes under the Group’s
Operational Framework.
The Group’s risk management process is set out in the Risk
Management Policy, a mandated policy under the Operational
Framework, and, in respect of projects, in the Lifecycle
Management Framework, a core business process under the
Operational Framework. Further guidance is provided by a Risk
Management Maturity self-assessment tool.
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.
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. These include programme margin
variation metrics, which are reviewed regularly by the Executive
Committee and Board (see KPI on page 15). Project margin is
recognised after making suitable allowances for technical and other
risks related to performance milestones yet to be achieved.
In addition, every six months, the businesses complete an
Operational Assurance Statement (OAS), which is a mandated
policy under the Operational Framework. The OAS is in two parts:
a self-assessment of compliance with the Operational Framework;
and a report showing the key financial and non-financial 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.
Executive Committee
The key financial and non-financial risks identified by the
businesses 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.
Management responsibility for the management of the Group’s
most significant non-financial risks is allocated at the Executive
Committee’s risk workshops. The OAS and Non-financial Risk
registers are reviewed regularly by the Executive Committee to
monitor the status and progression of mitigation plans, and these
key risks are reported to the Board on a regular basis.
Principal risks
Risks are identified as principal based on the likelihood of
occurrence and potential impact on the Group.
The principal risks identified by the Group using the policies and
processes explained above during the year are shown on pages 46
to 51.
See page 78 for more information on the
activities of the Board and its committees
See page 83 for more information on the Group’s
business processes and mandated policies
44
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BOARD
– Overall responsibility for risk management
Monitoring
AUDIT COMMITTEE
– Operational Assurance Statement Risk Register
– Non-financial Risk Register
CORPORATE RESPONSIBILITY COMMITTEE
– Non-financial Risk Register
Monitoring and reporting
Monitoring and reporting
Monitoring and reporting
EXECUTIVE COMMITTEE
– Operational Assurance Statement Risk Register
– Non-financial Risk Register
Monitoring and reporting
BUSINESSES
Integrated Business Plan – Core Business Process*
Annual long-term strategy and five-year plan for each business
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Operational Assurance Statement – Mandated Policy*
Six-monthly management self-assessment of compliance with the Operational Framework and summary of key risks
Chief Executive’s Business Review – Core Business Process*
Quarterly top-level review of the key operational, financial and non-financial performance issues within the business, and significant forthcoming bids and events
Quarterly Business Review – Core Business Process*
Quarterly management review of the performance of each of the Group’s businesses against their objectives, measures and milestones
Lifecycle Management Contract Review – Core Business Process*
Monthly management review of project performance and issues to ensure that appropriate decisions and actions are taken
Monitoring and reporting
BUSINESS RISK
Risk Management Policy – Mandated Policy*
1. IDENTIFICATION
– Financial and non-financial risks recorded
in controlled risk registers
I O N
T
A
IDENTIFI C
A
N
A
L
Y
S
I
S
2. ANALYSIS
– Risks analysed for impact and
probability to determine gross
exposure
4. MITIGATION
– Risk owners identified and action
plans implemented
– Robust mitigation strategy subject
to regular and rigorous review
M
I
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A
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O
N
U ATION
L
A
E V
3. EVALUATION
– Risk exposure reviewed and risks
prioritised
* As defined in the Group’s
Operational Framework
See page 84 for more information on
the Group’s Operational Framework
BAE Systems Annual Report 2012
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PRINCIPAL RISKS
Summary of principal risks
The Group’s principal risks are identified below,
together with a description of how the Group
mitigates those risks.
Link to
Total
Performance
Customer Focus
Programme Execution
Responsible Behaviour
Other
Financial Performance
High impact
Defence spending p46
Large contracts p48
Government
customers p47
Global market p47
Fixed-price contracts p48
Laws and
regulations p49
Medium impact
Contract award
timing p47
Component availability,
subcontractor
performance and key
suppliers p48
Competition p49
Pension funding p50
Export controls and other
restrictions p50
Acquisitions p50
Consortia and joint
ventures p51
Exchange rates p51
Cybersecurity p51
Defence spending
The Group is dependent on
defence spending.
Description
The Group’s core businesses are primarily
defence-related, selling products and
services directly and indirectly, mainly
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, and, as such, may be subject
to significant fluctuations from year to
year. With constraints on government
expenditure in a number of the Group’s
markets and countries in the Eurozone
area experiencing serious financial
difficulties, affordability continues to be a
key focus for customers.
Impact
A decrease in defence spending by the
Group’s major customers could have a
material adverse effect on the Group’s
future results and financial condition.
Mitigation
The Group’s business is geographically
spread across five home markets and its
products are marketed across a range of
defence markets. The Group has a highly
sustainable services business, which is an
area for growth as customers’ operations
and maintenance budgets come under
pressure. Significant cost reductions
continue to be made to address increased
budgetary pressures in the US and UK.
The Group continues to use conservative
assumptions to underpin its financial
and operational planning.
Overhanging the US defence sector
into 2013 is the potential impact of a
sequestration or other budget reductions
that could result in indiscriminate funding
cuts. The Group bases its plans on
conservative assumptions and continues to
address its cost base accordingly.
Defence budgets in the UK are expected
to remain flat, but the recent stabilising of
equipment and services requirements and
the budget outlook has established a more
predictable planning environment.
In Saudi Arabia, regional tensions continue
to dictate that defence remains a high
priority.
See page 22 for more information on the
Group’s five home markets
46
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Government customers
The Group’s largest customers
are governments.
Description
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.
Global market
The Group operates 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: political changes could lead to
changes in the business environment in
which the Group operates; economic
Contract award timing
The Group is dependent on the timing of
award of defence contracts.
Description
The Group’s profits and cash flows are
dependent, to a significant extent, on
the timing of award of defence 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, the failure of the relevant
agencies to obtain expected funding
appropriations for the Group’s programmes,
or a deterioration in the Group’s relationship
with any of its key government customers
and corresponding reduction in contract
awards, could have a material adverse
effect on the Group’s future results and
financial condition.
Mitigation
The Group regularly reviews performance in
its markets and the Executive Committee
continues to work closely with the
government customers in these markets
to ensure the Group’s 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.
See page 16 for more information on the
Group’s strategy
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downturns, political instability and civil
disturbances could disrupt the Group’s
business activities; 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;
and burdensome taxes or tariffs could be
introduced.
Impact
The occurrence of any such events
could have a material adverse effect on
the Group’s future results and financial
condition.
Mitigation
The Group has a balanced portfolio of
businesses across its markets.
See page 22 for more information on the
Group’s five home markets
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.
See page 55 for more information on the
Group’s major programmes
Impact
Amounts receivable under the Group’s
defence contracts can be substantial and,
therefore, the timing of awards, or failure to
receive anticipated awards, could materially
affect the Group’s profits and cash flows for
the periods affected.
In 2012, the Group’s financial performance
was impacted by a delay in the award of a
contract amendment from the Kingdom of
Saudi Arabia relating to price escalation
on the Salam Typhoon programme.
Negotiations on the contract continue in
2013.
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BAE Systems Annual Report 2012
47
PRINCIPAL RISKS CONTINUED
Large contracts
Certain of the Group’s businesses
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 Platforms &
Services (UK) and Platforms & Services
(International) reporting segments, is
typically worth or potentially worth over
£1bn.
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 loss, expiration, suspension,
cancellation or termination of any one
of these large contracts, for any reason,
could have a material adverse effect on
the Group’s future results and financial
condition.
Mitigation
To mitigate risk on UK Ministry of Defence
contracts, development programmes are
normally contracted with appropriate levels
of risk being initially held by the customer.
Subsequent production programmes are
priced when a platform’s development has
reached sufficient maturity. A variety of
contract structures are used to mitigate
risk on production programmes, such
as incentive arrangements, whereby the
customer and contractor share cost savings
and overruns against target prices.
The Group has a well-balanced spread
of programmes and significant order
backlog, which provides long-term visibility.
The Board regularly reviews the Group’s
performance on these large contracts and
the Executive Committee continues to work
closely with these customers to ensure the
Group’s strategy is aligned with theirs.
See page 55 for more information on the
Group’s order backlog by major programme
and reporting segment
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 under the Group’s
mandated Lifecycle Management (LCM)
process 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.
See page 84 for more information on LCM
which mandates project management
processes
Component availability, subcontractor performance and key 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 addition, some products
require relatively scarce raw materials.
The Group is generally subject to specific
procurement requirements which
may, in effect, limit the suppliers and
subcontractors it may utilise. 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, which
could have a negative impact on the Group’s
future results and financial condition.
Mitigation
The Group’s procurement function, which
is led by a member of the Executive
Committee, is responsible for establishing
and managing end-to-end integrated
supplier arrangements. 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.
See page 21 for more information on
suppliers
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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.
Competition
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 enhance
further 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 and training processes.
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 2010 settlement with the US
Department of Justice and the consequent
2011 settlement with the US Department of
State, the Group appointed, respectively, an
independent monitor in 2010 and a Special
Compliance Official in 2011, in each case
for a period of three years, to monitor the
Group’s compliance with its respective
commitments under those settlements and
its compliance obligations going forward.
See page 40 for more information on the
Group’s approach to business conduct
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The Group’s business is subject
to significant competition.
Description
The Group’s businesses are subject to
competition from national and multi-
national firms with substantial resources
and capital, and many contracts are
obtained through a competitive bidding
process, including contracts where the
Group is the current incumbent.
The Group’s ability to compete for
contracts depends in particular on: the
strength of its intellectual property rights
and technical knowhow; 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 sole-
source programmes. 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 and security-related products
and services can, in certain countries,
be awarded on the basis of home country
preference.
Impact
The Group’s business and future results
may be adversely impacted if it is unable to
compete adequately in the markets in which
it operates.
Mitigation
The Group’s global, multi-market presence,
balanced portfolio of businesses, leading
capabilities and performance continue to
address this risk. In particular, the Group
invests in research and development, and
innovation, and continues to reduce its cost
base and improve efficiencies.
See page 22 for more information on the
Group’s five home markets
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BAE Systems Annual Report 2012
49
PRINCIPAL RISKS CONTINUED
Pension funding
The Group has an aggregate funding
deficit in its defined benefit 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 assets
they hold.
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.
Mitigation
Following triennial funding valuations of the
Group’s two largest UK pension schemes
in 2011, revised deficit recovery plans were
agreed during the year. 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 appropriate. The results of these
reviews are discussed with the Board and
appropriate action taken.
In future, the growth of the defined benefit
liabilities is expected to be curtailed as
follows:
– With effect from April 2012, new
employees in the UK are offered
membership of a defined contribution
scheme rather than the previous defined
benefit/defined contribution hybrid
scheme. Existing members of the
Group’s legacy UK plans are unaffected
by this change;
– With effect from January 2013, all
employees in the US are offered
membership of a defined contribution
scheme (401(k)) and no longer accrue
salary-related benefits in defined benefit
schemes; and
– In February 2013, with the agreement
of the Company, the trustees of the
BAE Systems 2000 Pension Plan entered
into an arrangement with Legal & General
to insure against longevity risk for the
current pensioner population, covering
£2.7bn of pension scheme liabilities.
This will reduce the funding volatility
relating to increasing life expectancy.
See page 34 for more information on the
Group’s pension accounting and funding
valuations, and deficit recovery plans
political factors or changing international
circumstances will not result in the Group
being unable to obtain necessary export
licences.
Impact
Reduced access to export markets
could have a material adverse effect on
the Group’s future results 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 activities.
See page 23 for more information on
exports
Impact
The diversion of management attention to
integration efforts 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.
Mitigation
The Group has established policies in
place to manage the acquisition process,
monitor the integration and performance of
acquired businesses, and identify potential
impairments.
See page 10 for more information on the
Group’s recent M&A activity
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
Acquisitions
The anticipated benefits of acquisitions
may not be achieved.
Description
The Group considers investment in value-
enhancing acquisitions where market
conditions are right and where they deliver
on its strategy. Whether the Group realises
the anticipated benefits from these
transactions depends upon the successful
integration of the acquired businesses, as
well as their post-acquisition performance
in the markets in which they operate.
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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 degrees of
control. The risk of failure or the risk of
disagreement, particularly in those that
require the unanimous consent of all
members with regard to major decisions, is
inherent in any jointly controlled entity.
Exchange rates
Impact
In the event of failure or 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 future results may be adversely
affected.
Mitigation
The Group seeks to participate only
in ventures in which its interests are
complementary to those of its partners,
and has formal systems and procedures in
place to monitor the performance of such
business arrangements.
See page 145 for more information on the
Group’s principal joint ventures
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movements on the income statement or
balance sheet of foreign subsidiaries and
equity accounted investments it regards as
long-term investments.
See page 36 for more information on the
Group’s treasury policies
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, Euro and Saudi Riyal.
Impact
Significant fluctuations in exchange rates
to which the Group is exposed could have
a material adverse effect on the Group’s
future results 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 exceptions
by the Treasury Review Management
Committee. The Group does not hedge the
translation effect of exchange rate
Cybersecurity
The Group could be negatively impacted
by information technology security
threats.
Description
As a defence, aerospace and security
company, the security threats faced by the
Group include threats to its information
technology infrastructure, unlawful
attempts to gain access to its proprietary
or classified information and the potential
for business disruptions associated with
information technology failures.
Impact
Failure to combat these risks effectively
could negatively impact the Group’s
reputation among its customers and the
public, cause disruption to its business
operations, and could result in a negative
impact on the Group’s future results and
financial condition.
Mitigation
The Group has a broad range of measures
in place, including appropriate tools and
techniques, to monitor and mitigate this
risk.
See page 24 for an overview of the Cyber &
Intelligence reporting segment
Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an
adverse effect on the business or financial condition of the Group.
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BAE Systems Annual Report 2012
51
Supplying and supporting Hawk trainer
aircraft for the Royal Saudi Air Force
Following agreement between the governments of the
Kingdom of Saudi Arabia and the UK, under the Saudi
British Defence Co-operation Programme, BAE Systems
has a contract to support the future aircrew training
requirements of the Royal Saudi Air Force.
The contract, aimed at meeting the growing demands of a
world-class air force, covers the provision of equipment
and training devices, such as aircraft simulators, training
aids and aircraft on which to train aircrew. Included within
this requirement is the supply of 55 Pilatus PC-21 aircraft
to fulfil the basic training role and 22 BAE Systems Hawk
Advanced Jet Trainer aircraft, which will be used to fulfil the
fast jet training part of the syllabus.
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REPORTING
SEGMENTS
PERFORMANCE
REVIEW
In this section:
Reporting segments overview
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
54
56
60
64
68
72
This section provides summaries of the operational, financial and
non-financial performance of the Group’s five principal reporting
segments.
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BAE Systems Annual Report 2012
53
REPORTING SEGMENTS OVERVIEW
The Group has five principal reporting
segments which align with the Group’s
strategic direction.
Reporting segments financial performance summary
2012
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
p56
p60
p64
p68
Platforms & Services (International) p72
HQ
Discontinued operations
Less: Intra-group
Total
2011
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ
Discontinued operations
Less: Intra-group
Total
KPI
Funded
order
intake1
£m
2,540
1,454
5,010
8,077
5,266
268
–
22,615
(374)
22,241
KPI
Funded
order
intake1
£m
2,620
1,443
5,077
4,355
3,319
236
–
17,050
(403)
16,647
Order
backlog1,2
£bn
3.6
1.0
8.4
21.2
9.3
–
–
43.5
(1.1)
42.4
Order
backlog1,2
£bn
3.6
1.1
8.7
18.7
8.3
–
–
40.4
(1.3)
39.1
KPI
KPI
KPI
Sales1
£m
2,507
1,402
4,539
5,646
4,071
267
–
Underlying
EBITA3
£m
356
124
394
689
417
(85)
–
18,432
1,895
(598)
–
Return
on sales
%
14.2
8.8
8.7
12.2
10.2
Cash flow4
£m
256
113
314
1,719
506
(214)
(2)
2,692
–
17,834
1,895
10.6
2,692
KPI
KPI
KPI
Sales1
£m
2,645
1,399
5,305
6,258
3,794
233
–
Underlying
EBITA3
£m
Return
on sales
%
14.6
9.7
9.0
10.5
11.8
386
136
478
658
449
(82)
–
19,634
2,025
(480)
–
19,154
2,025
10.6
Cash flow4
£m
268
410
69
80
(308)
(8)
634
–
634
The Group’s US businesses are engaged in significant multi-year contracts. Performance on many contracts beyond the first year is
contingent upon the receipt of funding, which the US government typically authorises on an annual basis. The order book metric presented
in previous years excludes the unfunded element of these multi-year contracts. The order backlog1,2 metric presented above provides
visibility of the total value of contracts won, not just the funded value as recorded in the order book. In the US businesses, this metric gives a
more meaningful measure of the sustaining business levels. An example of order backlog1,2 is the ship repair business within Platforms &
Services (US). Multi-Ship, Multi-Option contracts for five years are secured, but then only funded by the customer incrementally. Order
backlog1,2 recognises the remaining period of the contracts awarded, but yet to be funded.
1
2
3
4
Including share of equity accounted investments.
Comprises funded and unfunded unexecuted customer orders.
Earnings before amortisation and impairment of intangible assets, finance costs and taxation
expense (EBITA) excluding non-recurring items (see page 31).
Net cash inflow/(outflow) from operating activities after capital expenditure (net) and financial
investment, dividends from equity accounted investments, and assets contributed to Trust.
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Order backlog2,5,6 by reporting segment (%)
Top 15 programmes in order backlog2,5,6 (%)
The Group has a £42.4bn
order backlog1,2.
■ Electronic Systems
■ Cyber & Intelligence
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services (International)
8
2
20
21
53% of the order backlog2,5,6 is
represented by the Group’s top 15
programmes, with the remaining
47% spread across the five
principal reporting segments.
49
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services (International)
■ Remaining order backlog
Top 15 programmes summary
Programme
Description
Astute Class Submarines
Design and manufacture of seven nuclear-powered attack
submarines
5
38
47
10
End user
Royal Navy
Queen Elizabeth Class Aircraft Carriers
Design and manufacture of two 65,000 tonne aircraft carriers
Royal Navy
Oman Typhoon and Hawk Aircraft
Supply of 12 Typhoon and eight Hawk aircraft and in-service
support
Typhoon Tranche 3A Aircraft
Manufacture of 88 Typhoon combat aircraft
Typhoon Tranche 2 Aircraft
Manufacture of 236 Typhoon combat aircraft
Royal Air Force of Oman
Air forces of the UK,
Germany, Italy and Spain
Air forces of the UK,
Germany, Italy and Spain
Availability Transformation Tornado Aircraft Contract
(ATTAC)
Availability service for Tornado aircraft, including maintenance,
support and training
Royal Air Force
India Hawk Aircraft
Successor Submarine
Supply of products and services to enable 57 Hawk aircraft to be
built under licence in India
Indian Air Force and Navy
Design of nuclear-powered submarine to carry the UK’s nuclear
deterrent
Royal Navy
Saudi British Defence Co-operation Programme,
including Saudi Aircraft Acquisition7
Provision of support to operational capability, including the
provision of training aircraft, manpower, logistics and training
Royal Saudi Air Force
Saudi Typhoon Aircraft7
Supply of 72 Typhoon combat aircraft
Royal Saudi Air Force
Landing Helicopter Dock
Design, production and supply of two 27,000 tonne amphibious
Landing Helicopter Dock ships
Royal Australian Navy
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Aster Phase 3
Full-scale production of Aster 15 and 30 missiles
French, Italian and Royal
navies, French Air Force
and Italian Army
Munitions Acquisition Supply Solution
Capability provision and manufacture of general munitions
British Army
Radford Army Ammunition Plant
Management, operation and maintenance of the Radford Army
Ammunition Plant
US Army
Norway CV90 Armoured Combat Vehicles
Supply of 144 new and 103 upgraded CV90 armoured combat
vehicles
Norwegian Army
5 Excluding HQ.
6
Including share of equity accounted investments’ order backlog and before the elimination of intra-
group order backlog.
The appropriate work share of the Saudi Typhoon Aircraft and Saudi Aircraft Acquisition contracts is
reported within Platforms & Services (UK).
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REPORTING SEGMENTS
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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 31).
Net cash inflow from operating activities
after capital expenditure (net) and financial
investment, dividends from equity
accounted investments, and assets
contributed to Trust.
Comprises funded and unfunded
unexecuted customer orders.
Includes both Group-funded and
customer-funded expenditure.
Electronic Systems, with 13,000 employees1, comprises
the US and UK-based electronics activities, including
electronic warfare systems and electro-optical sensors,
military and commercial digital engine and flight controls,
next-generation military communications systems and
data links, persistent surveillance capabilities, and hybrid
electric drive systems.
Operational key points
– Sustained a leadership position in the airborne electronic warfare market
– Strengthened position in high growth commercial aircraft electronics market
– Won key development contracts in the classified area
– Continued focus on increasing productivity and efficiency
– Business recovery complete following disruption from flood damage at the Johnson City facility
– £0.2bn of research and development expenditure5 in 2012
Financial key points
– Underlying order backlog1,4 increased in challenging business environment
– Sales1 reduction from operational tempo-driven activity on Thermal Weapon Sights
– Return on sales of 14.2%
– Cash flow3 conversion of underlying EBITA2 at 95%, before pension deficit funding
Sales analysis: activity (%)
Sales analysis: defence and commercial (%)
17
19
23
20
21
83
17
■ Electronic Combat
■ Survivability & Targeting
■ Communications & Control
■ Intelligence, Surveillance & Reconnaissance (ISR)
■ Commercial Aircraft electronics/HybriDrive® propulsion
■ Defence
■ Commercial
Funded order intake1
Order backlog1,4
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
KPI
KPI
KPI
KPI
2012
2011
2010
£2,540m
£2,620m
£2,894m
£3.6bn
£3.6bn
£3.5bn
£2,507m
£2,645m
£2,969m
£356m
£386m
14.2%
14.6%
£256m
£268m
£455m
15.3%
£367m
KEY CHARACTERISTICS
KEY CHARACTERISTICS
– Broad base of programmes, with more than
5,000 active contracts
– No programme greater than 5% of sales
– Over 67% of 2012 sales were fixed price-
– Cutting-edge technology and capabilities, with
significant levels of research and development
invested in the business
– 17% of total sales are to commercial
based
customers
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Financial performance
Order backlog1,4, excluding the impact of US dollar exchange
translation, increased despite the impact of contracting delays as the
US administration operated federal budgets under Continuing
Resolution limitations.
On a like-for-like basis, sales1 reduced by 7% on 2011 primarily
reflecting the completion of deliveries of Thermal Weapon Sights as
operational tempo-driven activity reduces. Sales in the Commercial
Aircraft electronics business increased by 11%.
Underlying EBITA2 was £356m (2011 £386m). Return on sales was
14.2% (2011 14.6%).
Cash flow3 conversion of underlying EBITA2 was 95%, before pension
deficit funding.
Operational performance
Following severe flooding in September 2011, operations formerly
conducted at the Electronic Systems facility in Johnson City, New
York, have been moved to Endicott, New York. After a year of recovery
efforts, operational capability has been restored and programmes
are back on schedule.
Electronic Combat The business maintains its leadership position in
the electronic warfare market, with continued focus on the F-35
Lightning II Systems Design and Development programme, planning
for the flight test programme starting in 2013. The business
progressed Low-Rate Initial Production (LRIP) Lot 5 and 6 deliveries
during the year, and has responded to the LRIP Lot 7 request for
proposal, which includes production aircraft for international
customers.
In support of the US Navy’s Next-Generation Jammer, which will
replace the ageing jammer currently on certain US Navy aircraft, a
$20m (£12m) modification was received to expand the scope of the
existing technology maturation contract. BAE Systems is one of three
bidders on the next phase technology development contract valued
at approximately $300m (£185m).
The Digital Electronic Warfare System (DEWS) continues to secure
new contract awards, including a six-year, $0.4bn (£0.2bn) contract
to upgrade 70 F-15 aircraft for the Royal Saudi Air Force. Initial flight
testing providing advanced radar warning and countermeasure
capabilities is scheduled to begin in March 2013. The business
continues to pursue other export opportunities for the DEWS suite.
Also in international markets, the business received three contracts
totalling $86m (£53m) to provide F-16 support equipment, test
systems and spares to the governments of Oman, Indonesia and Iraq
for delivery by early 2014.
Survivability & Targeting In early 2012, the US Army awarded the
business a two-year, $38m (£23m) contract to develop the Common
Infrared Countermeasures capability. Using its Boldstroke® system,
an integrated aircraft survivability system for protecting aircraft from
infrared-guided missiles and other threats, the business will provide
increased system capability in a smaller, more energy efficient
package. Following a competitor protest, the award was upheld by the
US Government Accountability Office and work restarted in June.
Initial test systems are in progress, with the first units scheduled for
government acceptance ahead of schedule.
The Advanced Precision Kill Weapon System programme passed
tests on several airborne platforms. With deployment in theatre and
positive performance feedback, the US Navy has authorised Full-Rate
Production of the system and awarded a base contract valued at
$28m (£17m) for 985 units and a Full-Rate Production option of
$41m (£25m) for 1,476 units.
Under a $37m (£23m) subcontract, BAE Systems continues to
support the engineering and manufacturing development of the Joint
and Allied Threat Awareness System, a next-generation warning
system to enhance aircraft survivability for the US Navy.
The Thermal High-Altitude Area Defence seeker programme provides
a transportable, rapidly deployable, ground-based capability to
intercept and destroy ballistic missiles inside or outside the
atmosphere during their final phase of flight. BAE Systems has
received an initial amount of $87m (£54m) in combined US
government and Foreign Military Sales to the United Arab Emirates
on the programme, including a base quantity of 146 seekers with an
option for up to a further 147.
Deliveries of Thermal Weapon Sights to the US Army in support of
military operations in Iraq and Afghanistan were completed.
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BAE Systems is responsible for a number of subsystems and
equipment on the F-35 Lightning II, including the electronic
warfare suite. The flight test programme for the electronic warfare
suite is planned to commence in 2013.
See page 69 for more information on the Group’s involvement on
F-35 Lightning II
Electronic Combat
Survivability & Targeting
The Advanced Precision Kill Weapon System is a laser-guided
rocket that provides a low-cost surgical strike capability. In 2012,
the programme passed tests on several airborne platforms and
achieved initial operational capability. The system has been
deployed in theatre and received positive performance feedback.
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REPORTING SEGMENTS CONTINUED
ELECTRONIC SYSTEMS
BAE Systems has responded to a US Army request for proposal for its
Joint Effects Targeting System programme, which has been designed
to enhance dismounted, forward-deployed soldiers’ ability to
accurately locate positions and target precision-guided munitions fire
support. An award decision is expected in the first half of 2013 for a
26-month Engineering and Manufacturing Development phase, which
will be followed by a Low-Rate Initial Production award competition.
Communications & Control The F-35 Lightning II programme
continues to be a key platform for the Group’s avionics products.
Deliveries continue on plan for the active inceptor system out of
Rochester, UK, and the vehicle management system out of Endicott,
New York. The business has continued to pursue additional
opportunities expanding its content on the platform.
Leveraging commercial technology to create a low size, weight and
power design, the business launched the PHOENIX™ family of
networking radios to integrate easily into US Army ground combat
vehicles. In October, the business responded to the US Army’s
next-generation Mid-tier Networking Vehicular Radio request for
proposal with its two-channel PHOENIX-SC radio, with an award
decision expected in 2013.
Intelligence, Surveillance & Reconnaissance (ISR) The business
continues to provide Wide Area Airborne Surveillance capability for
the US Air Force and US Army. These key programmes are based on
two wide-area, high-resolution imaging sensor systems, the Airborne
Wide Area Persistent Surveillance System, which has been
operational for over 12,000 hours in theatre, and the Autonomous
Real-time Ground Ubiquitous Surveillance – Imaging System. These
systems enable observation of very wide areas of interest with
sufficient imagery resolution to meet intelligence and surveillance
needs.
The business is providing state-of-the-art processing capabilities to
Boeing for the US Navy’s P8A Poseidon programme. The mission
computer suite has robust, flexible and rugged open architecture
providing high performance in the military environment. Over 30
initial systems have been delivered and a contract for Full-Rate
Production Lot 1 has been awarded.
As a leader in the Identification Friend or Foe market, the business
has a strong order backlog4 driven by the Mode 5 cryptographic
system upgrades, which have been incorporated into products
deployed on multiple US Department of Defense platforms.
Production has begun and is expected to continue to the end of the
decade.
Commercial Aircraft electronics The business continues to be well
positioned for growth in worldwide demand for commercial aviation
through its engine and flight controls activities.
FADEC Alliance, a new joint venture between FADEC International (a
joint venture between BAE Systems and Sagem) and GE Aviation,
began development of the Full-Authority Digital Engine Controls for
CFM International’s LEAP and GE Aviation’s Passport family of
engines.
Ongoing development of the primary flight control electronics and
active side sticks for Embraer’s KC-390 military transport aircraft is
raising the Group’s profile in the emerging Brazilian aerospace
industry. The first flight of the KC-390 is expected in 2014.
HybriDrive® propulsion BAE Systems has delivered 3,800 hybrid
diesel-electric propulsion systems since 2004, which are now in
service with over 60 operators.
In April 2012, European bus manufacturer, Iveco Irisbus, announced
that it had been awarded Europe’s largest single order for 132
diesel-electric hybrid buses for Dijon and Bordeaux in France. Prior
to this award, Iveco Irisbus had delivered approximately 20
diesel-electric hybrid buses equipped with BAE Systems’ propulsion
systems.
The business has progressed solutions for battery reliability issues
in the field from its first-generation lithium-ion battery packs. In
addition, ownership of the current battery supplier has changed and
the business is working with the new owner to minimise the impact
on the Group and its customers.
Looking forward
Efforts to reduce the US government’s budget deficit are likely to
impact all areas of government spend. A Continuing Resolution on
the 2013 fiscal budget has been passed through to March 2013 and
the risk of further reductions in US defence budgets remains,
including the impact of sequestration.
4
Comprises funded and unfunded unexecuted customer orders.
BAE Systems’ research and development investment and
innovations in technology have resulted in two significant
helmet-mounted display products: the Striker® and the Q-Sight®
helmets. The Striker® helmet variant for Typhoon integrates night
vision and full crew head protection. The Q-Sight® helmet uses
quantum wave guide technology to directly couple the output of an
LCD projector to a combining lens, eliminating the need for
intermediate lenses.
Communications & Control
Intelligence, Surveillance & Reconnaissance (ISR)
BAE Systems is a leading provider of Intelligence, Surveillance
and Reconnaissance capability, producing tactical identification,
sensing and intelligence exploitation systems for airborne,
maritime, land and space-based applications.
NASA’s Curiosity rover vehicle successfully landed on Mars and
began transmitting images back to Earth in August. Two
BAE Systems RAD750® computers controlled the flight from Earth
and the landing on Mars, and will continue to control the rover
during its two-year mission.
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Whilst likely funding reductions and the resultant slow down or
cancellation of ongoing and new programmes could impact the
business, Electronic Systems remains well positioned with a
balanced portfolio that will enable it to respond to changing US
Department of Defense priorities whilst maintaining its emphasis on
cost reduction. The business expects to benefit from its incumbent
positions on core platforms, and from positions in areas such as
commercial aircraft electronics and international defence
programmes.
Non-financial performance
Employee safety
Businesses to demonstrate improvement
against 2011 performance on
recordable accidents
Continue to progress against the
Safety Maturity Matrix
Diversity and inclusion
Demonstrate continued progress against the
Diversity & Inclusion Maturity Matrix
Establish milestones/targets to underpin
delivery of the stated 2015 position1
Environment
Continued progression against the
Environmental Sustainability Maturity Matrix
Reduction in energy2
Reduction in water2
Reduction in waste2
15% stretch
target achieved
Achieved
Achieved
Confirmed
Achieved
Target achieved
Target achieved
Target achieved
Employee safety During 2012, safety remained a priority for
Electronic Systems, achieving a 17% reduction in the Recordable
Accident Rate. This performance was supported during the year by
the introduction of a safety awareness campaign and training
programme for employees.
Diversity and inclusion Electronic Systems supported US-wide
diversity and inclusion activities, including inclusive leadership
Many of the world’s commercial aircraft employ BAE Systems’
engine and flight controls. Worldwide demand for commercial
aviation is expected to grow. In 2012, BAE Systems secured a
commercial aircraft electronics position in Brazil.
training, launching a multi-cultural network, and introducing diverse
candidate shortlists and panels for executive roles.
Locally, Electronic Systems focused on increasing the speed and
rigour of its diversity efforts. The business recruited a dedicated
diversity and inclusion manager, and introduced a diversity and
inclusion personal development objective for leaders.
Environment To support progress in environmental sustainability, the
business launched an Environment Policy to help progress
business-wide reduction targets in energy, water and waste, and
launched a recording system to drive consistency in data collection.
To help employees support reduction targets, an education
programme was launched to raise awareness of how each employee
could personally contribute to reducing energy used and waste
created.
People Electronic Systems operates a successful ‘One Team Award’
recognition programme. Each quarter, the programme recognises
teams that have been nominated for exemplifying one or more of five
imperatives demonstrated through end-user impact: community
focus; technology innovation; collaboration; best practices; and
overall value to the business.
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1 Businesses have put in place plans to 2015 to support and progress the
Group’s long-term goal to build a high-performing workforce that more closely
reflects the diversity of the local communities in which its businesses operate.
2 Data is derived from internal recording systems and is not subject to external
verification or audit.
Commercial Aircraft electronics
HybriDrive® propulsion
The Group’s efficient, low emission HybriDrive® propulsion
technology has been in service on buses since 2004. In 2012,
European bus manufacturer, Iveco Irisbus, was awarded an order
for 132 buses using BAE Systems’ HybriDrive® propulsion
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Cyber & Intelligence, with 8,200 employees1, comprises
the US-based Intelligence & Security business and
UK-headquartered BAE Systems Detica business, and
covers the Group’s cyber, secure government, and
commercial and financial security activities.
Operational key points
– The US-based business continues to perform well on existing programmes and secured strategic
contract awards with existing customers
– The US-based business continues to invest in differentiating technologies, such as activity-based
intelligence and cybersecurity, including a leading-edge network operations and security centre
environment, to support a pipeline of submitted bids of $2.9bn (£1.8bn) at the end of 2012
– BAE Systems Detica continues to invest in products and capability, including its Security Operations
Centre
– BAE Systems Detica awarded a contract by Vodafone for next-generation enterprise secure networks
for mobile devices
Financial key points
– Funded order intake1 and sales1 were broadly unchanged from 2011
– Return on sales impacted by investment in the BAE Systems Detica business for future growth
– Cash flow3 conversion of underlying EBITA2 at 91%
Sales analysis: activity (%)
Sales analysis: government
and commercial (%)
27
10
90
10
11
10
21
21
■ Information Technology
& Cybersecurity Solutions
■ GEOINT-ISR
■ Global Analysis
■ SpecTal
■ BAE Systems Detica
government
■ BAE Systems Detica
commercial
■ Government
■ Commercial
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 31).
Net cash inflow from operating activities
after capital expenditure (net) and financial
investment, dividends from equity
accounted investments, and assets
contributed to Trust.
Comprises funded and unfunded
unexecuted customer orders.
Funded order intake1
Order backlog1,4
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
KPI
KPI
KPI
KPI
2012
2011
2010
£1,454m
£1,443m
£1,300m
£1.0bn
£1.1bn
£0.9bn
£1,402m
£1,399m
£1,201m
£124m
£136m
£108m
8.8%
9.7%
£113m
£123m
9.0%
£89m
KEY CHARACTERISTICS
KEY CHARACTERISTICS
Intelligence & Security:
– Delivers cost-effective IT solutions that solve
complex problems of collaboration and
security for the US national security community
– Delivers real-time threat assessments that
rapidly inform critical security actions. The
business is a leading provider of specialised
security and intelligence operational support
and solutions in the US
– Delivers automated, efficient and reliable
intelligence processing, data management
systems and imagery mapping tools for the US
intelligence and defence communities
BAE Systems Detica:
– Expanding in the fast-growing cybersecurity
market
– Increasing focus on products and services for
the financial services and
telecommunications sectors
– Providing core intelligence technology and
managed services for government clients
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Financial performance
Funded order intake1 and sales1 were broadly unchanged from 2011.
Order backlog1,4 reduced to £1.0bn (2011 £1.1bn). There is a
significant number and value of competitive bids in the Intelligence &
Security business awaiting award decisions.
Underlying EBITA2 was £124m (2011 £136m). Return on sales
reduced to 8.8% (2011 9.7%) reflecting increased levels of
investment in the BAE Systems Detica business in support of
targeted future growth in commercial and international markets.
Operating cash inflow3 was £113m (2011 £123m), which represents
a conversion of underlying EBITA2 of 91%.
Operational performance
Intelligence & Security
The US-based Intelligence & Security business delivers a broad
range of services, including secure IT solutions, cybersecurity,
geospatial solutions and intelligence analysis to enable the US
military and government to recognise, manage and defeat threats.
The business is structured into four key business areas that provide
specific domain expertise, whilst working closely together to provide
enterprise-wide support to a range of customers, and key agencies in
the intelligence, defence, homeland security and civilian markets.
Information Technology & Cybersecurity Solutions develops, deploys
and maintains mission applications focused on information sharing,
knowledge management and enhanced enterprise mission IT
solutions for the US federal, civilian and defence intelligence
communities. The business also provides analytics, cyber analysis
and real-time network forensics.
Through 2012, work continued on the Solutions for the Information
Technology Enterprise Indefinite Delivery, Indefinite Quantity (IDIQ)
contract, with the business as the prime contractor, receiving task
orders now worth a total of $344m (£212m). Since the project
began, approximately 700 security-cleared IT experts, deployed
across 84 locations in 14 countries, have assisted the US Defense
Intelligence Agency in delivering IT services to 50,000 Department of
Defense personnel by standardising global IT operations and
reducing the time taken to deliver technician services.
Continuing work on the Next-Generation Desktop Environment
(NGDE) programme for the US Defense Intelligence Agency, the
BAE Systems provides critical cybersecurity and network defence
solutions in support of the US government.
Capabilities, such as digital forensics and cyber investigations,
play a role in the ongoing battle to protect computer networks from
cyber threats.
business has virtualised hundreds of applications and deployed data
centre infrastructure to 13 sites, now supporting over 12,000 global
analyst workstations. The NGDE is an enterprise networking
environment based on virtual desktop infrastructure.
The Security Operations Centre in the US protects the Group’s
networks by monitoring its global intranet, with more than 100,000
network interfaces serving employees across five home markets and
offices in over 100 countries. Services include security engineering,
risk analysis, support of IT hardware and software, IT engineering and
applications, and global enterprise monitoring and security incident
response.
GEOINT-ISR (Geospatial Intelligence – Intelligence, Surveillance and
Reconnaissance) develops and supports software systems and
mission applications for geospatial tasking, including data collection,
processing, exploitation and dissemination, as well as mission
planning, Intelligence, Surveillance and Reconnaissance (ISR),
precision targeting, and command and control for the US defence
and intelligence communities.
The business was awarded a five-year, $106m (£65m) contract by the
National Geospatial-Intelligence Agency (NGA), under which
engineers will design, develop and implement a transformational
solution enabling the US government to evolve from its current image
library to a standardised image storage, management and
dissemination process. This is an important strategic win that will
drive future GEOINT and imagery systems development.
In December 2012, BAE Systems was awarded a multi-year, $60m
(£37m) contract to provide activity-based intelligence systems, tools
and support for mission priorities for the NGA. This award is a task
order under the NGA’s Total Application Services for Enterprise
Requirements programme, a five-year IDIQ contract.
Global Analysis provides mission-enabling analytic solutions and
support to operations across the US homeland security, law
enforcement, defence, intelligence and counterintelligence
communities.
The business continues to provide approximately 450 security
cleared analysts working alongside forward deployed US defence
personnel as part of the Counter Improvised Explosive Device (C-IED)
programme, with a total value of funded orders of approximately
$450m (£277m) over the two years of the contract. The business is
now working with the customer to manage staffing levels in line with
reducing mission requirements.
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Information Technology & Cybersecurity Solutions
GEOINT-ISR
The Group develops Geospatial Intelligence (GEOINT) and
Intelligence, Surveillance and Reconnaissance (ISR) hardware
and software platforms, and mission applications for the defence
and intelligence communities.
The Group’s advanced tools and applications allow defence and
intelligence communities to quickly process high volumes of data
to help military and law enforcement officials confront or avoid
threats on the battlefield and give troops operating around the
world the accurate, real-time situational awareness they need to
make informed, tactical decisions.
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REPORTING SEGMENTS CONTINUED
CYBER & INTELLIGENCE
The business is executing well on the Full Motion Video and
Geospatial Imagery Analysis contract awarded in 2011, with a
contract value of $402m (£248m) and over 400 employees being
utilised.
Services The business, which provides consultancy, systems
integration and managed services, was impacted by challenging
market conditions in both the UK government and commercial
sectors.
SpecTal provides US government customers with specialised security
and intelligence mission support, including intelligence analysis,
targeting operations support, training and IT deployment.
With the 2011 acquisition of L-1 Identity Solutions’ Intelligence
Services Group, a key contract with an intelligence community
customer was gained. The contract has since been re-competed and
SpecTal was part of the winning bid team serving as a major
subcontractor on the five-year programme.
BAE Systems Detica
BAE Systems Detica continues to build a business that provides
security and intelligence products and services to both government
and commercial customers. In July, the stratsec business in
Australia, acquired in 2011, and a new security entity in India were
integrated into BAE Systems Detica. The business is also focused on
developing opportunities in the Americas’ commercial market.
Cyber Security Demand is growing across both government and
commercial sectors, with contracts secured with a global law firm and
a US financial institution in 2012. The Security Operations Centre
became fully operational in 2012, providing services to detect and
remediate advanced cyber attacks for clients.
The business was one of four companies selected by the UK’s
Government Communications Headquarters (GCHQ) to work in
partnership on a new Cyber Incident Response pilot programme, a
government quality-assured service that organisations can turn to
when they have suffered a cybersecurity incident.
Detica NetReveal® As a provider of risk, fraud and compliance
solutions to the global financial services industry, orders of £74m
were received during the year, including contracts in new business
areas of healthcare and insurance in the US.
Global Communications Solutions is a provider of specialist
communications equipment, including monitoring and lawful
intercept solutions, for use by government and commercial clients.
During 2012, a review of routes-to-market was carried out, resulting
in necessary changes which adversely impacted the 2012 financial
performance of the business.
Orders in the year included a contract under a business change
programme for a complex UK cross-government programme and a
managed services contract with Vodafone for the provision of
next-generation enterprise secure networks for mobile devices. The
business was unsuccessful in its bid to provide services under the
UK government’s Disclosure and Barring Service.
The business continues to develop opportunities internationally, in
both the Middle East and, with the addition of stratsec, the Asia
Pacific region.
Looking forward
Efforts to reduce the US government’s budget deficit are likely to
impact all areas of government spend. A Continuing Resolution on
the 2013 fiscal budget has been passed through to March 2013 and
the risk of further reductions in US defence budgets remains,
including the impact of sequestration.
Growth opportunities remain, particularly in critical, mission-focused
areas, such as next-generation ISR, Multi-INT fusion (the seamless
synthesis of the individual intelligence disciplines to enable more
complete situational awareness), counter intelligence and enterprise
solutions for big data problems.
The US market is experiencing delays in procurement awards and
descoping of existing contracts as US government agencies look to
reduce IT budgets. Sales in 2013 are expected to be impacted by the
completion of the C-IED contract as the US withdraws from
Afghanistan. However, the business expects an enduring need to
provide data management solutions, including the rapid collection,
processing and dissemination of data to intelligence community
customers and the US military. The business is well prepared to
compete in this price-sensitive market through its customer intimacy,
innovation and continued cost management.
BAE Systems Detica expects growth in cyber and intelligence, both in
the UK and overseas government markets, with increasing demand
for products and services in commercial markets to manage cyber
threats, counter financial fraud and improve compliance, including
next-generation security for mobile devices.
The US-based Intelligence & Security business provides
mission-enabling analytic solutions supporting a number of US
government departments.
BAE Systems’ tactical analysts work alongside warfighters around
the world to provide them with the insight they need to
successfully complete their missions through a number of
specialised analytic and support capabilities.
Global Analysis
SpecTal
The US business provides specialised security and intelligence
consulting services to the US government.
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At the start of 2012, BAE Systems Detica launched its diversity and
inclusion plan and steering group to drive progress throughout the
year. Activities within the plan included reviewing the business’s
recruitment and succession planning processes. During the year, a
dedicated communications campaign was aimed at engaging
employees.
Environment Intelligence & Security focused on reducing waste
during 2012, including the launch of an employee awareness
programme to reduce and recycle waste within the work environment.
During 2012, BAE Systems Detica broadened its environmental
impact analysis to cover two new site locations and the Australian
stratsec business. This analysis enables BAE Systems Detica to
understand and monitor the effect of its operations on various
environmental factors, including energy consumption, waste
disposal and recycling.
People The Intelligence & Security business employs over 5,700
people, many of whom are deployed alongside customers in the US
and overseas, with the latter including active service deployments.
Where people are deployed overseas, the Group makes available
support services to ensure families can stay in touch.
BAE Systems Detica instigated its first apprenticeships with a new
programme launched at its Leeds, UK, facility. Elsewhere, the
business continues to recruit to support its growing customer base.
1 Businesses have put in place plans to 2015 to support and progress the
Group’s long-term goal to build a high-performing workforce that more closely
reflects the diversity of the local communities in which its businesses operate.
2 Data is derived from internal recording systems and is not subject to external
verification or audit.
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Non-financial performance
Employee safety
Businesses to demonstrate improvement
against 2011 performance on
recordable accidents
Continue to progress against the
Safety Maturity Matrix
Diversity and inclusion
Demonstrate continued progress against the
Diversity & Inclusion Maturity Matrix
Establish milestones/targets to underpin
delivery of the stated 2015 position1
Environment
Continued progression against the
Environmental Sustainability Maturity Matrix
Reduction in energy2
Reduction in water2
Reduction in waste2
15% stretch
target achieved
Achieved
Achieved
Confirmed
Achieved
Target achieved
Target achieved
Target achieved
Employee safety During 2012, the business achieved a 46%
reduction in the Recordable Accident Rate.
The Intelligence & Security business has continued to mature its
safety culture by engaging its offsite employee population to identify
workplace hazards and increase overall accountability.
BAE Systems Detica continued to progress its performance in safety.
To help increase awareness and understanding of safety, a
leadership toolkit and safety tours were introduced for directors, and
an online safety training course was launched for employees.
Diversity and inclusion Intelligence & Security supported US-wide
diversity and inclusion activities, including inclusive leadership
training, launching a multi-cultural network, and introducing diverse
candidate shortlists and panels for executive roles. At a local level, a
communications programme targeted at employees was launched.
The UK-headquartered BAE Systems Detica business has been
working with energy company E.ON on its Smart Metering
Customer Programme, which will see the installation of smart
meters in homes across the UK. Smart metering will provide up to
35,000 gas and electricity consumption readings per household
per year. Drawing on its experience, knowledge and previous
central involvement in UK Smart Metering, BAE Systems Detica
conducted a programme-level data security review to help ensure
its security and the privacy of customers’ data.
BAE Systems Detica – smart metering
BAE Systems Detica – analytics platform
BAE Systems Detica has a bespoke analytics platform which
integrates a range of applications to identify behaviours, activities
and connections in data for fraud, cyber and communications
monitoring activities.
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REPORTING SEGMENTS
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Platforms & Services (US), with 21,300 employees1,
comprises the US-headquartered Land & Armaments
business, with operations in the US, UK, Sweden and South
Africa, together with US-based services and sustainment
activities, including ship repair and munitions services.
Operational key points
– Growth in US ship repair activities
– Executing munitions infrastructure and facility operations management contracts
– Strategic international win with Korean F-16 upgrade down-select
– Continued to protect Bradley franchise with $376m (£231m) in related awards
– Awarded a $750m (£462m) contract for CV90 armoured combat vehicles to Norway
– Letter of Request received from Indian government for 145 M777 howitzers
– Continued consolidation in the Land & Armaments business
– Business disposals of Safety Products, Safariland and Tensylon completed
Financial key points
– Sales1 reduced by 2% in Support Solutions business and by 23% in Land & Armaments business
– Return on sales increased to 8.8% in Support Solutions business and reduced to 8.6% in Land &
Armaments business
– Support business delivered an increase in order backlog1,4 and strong operating cash flow3
Sales analysis: activity (%)
Sales analysis: platforms and services (%)
19
15
18
21
3
24
75
25
■ Ship repair
■ Other support services
■ Protection Systems
■ Tracked vehicles
■ Wheeled vehicles
■ Artillery/munitions
■ Military & Technical Services
■ Platforms
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 31).
Net cash inflow from operating activities
after capital expenditure (net) and financial
investment, dividends from equity
accounted investments, and assets
contributed to Trust.
Comprises funded and unfunded
unexecuted customer orders.
Funded order intake1
Order backlog1,4
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
KEY CHARACTERISTICS
KEY CHARACTERISTICS
Support Solutions:
– US naval ship repair and modernisation
– Complex infrastructure services and
operations support
– Aircraft sustainment and modernisation
– Soldier survivability products
KPI
KPI
KPI
KPI
2012
2011
2010
£5,010m
£5,077m
£5,605m
£8.4bn
£8.7bn
£9.1bn
£4,539m
£5,305m
£7,671m
£394m
£478m
£728m
8.7%
9.0%
9.5%
£314m
£410m
£967m
Land & Armaments:
– Tracked combat vehicles
– Tactical wheeled vehicles
– Artillery, ammunition and naval armaments
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The US Naval Air Warfare Center Aircraft Division awarded a follow-on
five-year, $193m (£119m) contract to provide Command, Control,
Communications, Computers and Intelligence (C4I), lifecycle
support, integration and test engineering, and technical services,
supporting a broad range of air, land and sea platforms.
The business was awarded a $60m (£37m) task order under the US
Department of Defense’s Joint Improvised Explosive Device Defeat
Organization contract to develop and implement a five-year training
programme.
Support Solutions continues to pursue international aircraft upgrade
and modification opportunities. In August, the Republic of Korea
selected BAE Systems to upgrade avionics and electronic systems
on its fleet of more than 130 F-16 aircraft. The programme is
expected to be contracted in 2013 and is forecast to be worth over
$500m (£308m) over ten years.
In November, the business was awarded a contract by the US Navy for
depot level maintenance and logistics support for more than 360
T-34/T-44/T-6 training aircraft. If all options are exercised, the contract
would be valued at more than $400m (£246m) over five years.
BAE Systems is pursuing a potential bid as prime contractor for the
US Air Force’s T-X programme to replace the T-38 jet training system
with its Hawk trainer aircraft. The programme is valued at between
$11bn (£7bn) and $17bn (£10bn). The US Air Force is expected to
announce the timing of its request for proposals in 2013.
In the Protection Systems business, contracts have been secured
totalling over $200m (£123m) for the supply of Enhanced Small
Arms Protective Inserts, Tactical Vests and Modular Lightweight Load
Carrying Equipment.
In November, the Group announced a definitive agreement to acquire
Marine Hydraulics International, Inc., a marine repair, overhaul and
conversion company with shipyard, pier and waterfront facilities in
Norfolk, Virginia. The proposed acquisition, which is expected to
complete during the first quarter of 2013, complements the existing
ship repair business.
Land & Armaments
During 2012, Land & Armaments completed the disposals of its
Safety Products, Safariland and Tensylon businesses. The disposal of
the Commercial Armored Vehicles business is expected to complete
in the first quarter of 2013. In September, the business announced
that production of military equipment at its Fairfield, Ohio, facility
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Financial performance
Sales1 were £4.5bn (2011 £5.3bn), representing a like-for-like
reduction of 13%. Sales1 at Support Solutions were just 2% below
2011. Like-for-like sales1 at Land & Armaments reduced by 20%
primarily reflecting the completed Family of Medium Tactical Vehicles
programme, and lower volumes on Bradley, Caiman and Mine
Resistant Ambush Protected vehicles.
Underlying EBITA2 was £394m (2011 £478m). Return on sales
reduced to 8.7% (2011 9.0%). Return on sales at Support Solutions
increased from 7.5% to 8.8% benefiting from certain legal
settlements. Return on sales at Land & Armaments reduced from
9.9% to 8.6% reflecting accelerated rationalisation charges in
respect of the Newcastle vehicle manufacturing site in the UK and
certain legal claims.
Operating cash inflow3 reduced to £314m (2011 £410m) reflecting
continued investment in the UK munitions facilities in the Land &
Armaments business. Excluding pension deficit funding, cash flow3
conversion of underlying EBITA2 at Support Solutions and Land &
Armaments was 100% and 83%, respectively.
Operational performance
Support Solutions
The US-based ship repair business achieved 2012 commitments
under its Multi-Ship, Multi-Option contract vehicles with the US Navy,
receiving superior scores on award fee assessments. The business
was awarded new commercial maritime construction contracts
totalling $190m (£117m), including four platform supply vessels and
two barges.
In the complex infrastructure services market, the business secured
the Holston Army Ammunition Plant award of a follow-on five-year,
$145m (£89m) contract for facility operations. In addition, the
business completed the planned transition to begin operating the
Radford Army Ammunition Plant on 1 July 2012 under a contract
worth approximately $850m (£523m) over ten years. In October
2012, the business was notified that it had not been awarded the
Lake City Army Ammunition Plant management contract.
The business won a five-year, $44m (£27m) Navy Munitions
Command – Hawaii contract to handle and store munitions, which
continues more than 27 years of distinguished service recognised by
the US Navy.
BAE Systems is a leading provider of ship repair and
modernisation services to the US Navy. In addition, building on the
successful completion of the construction of the commercial
tanker, American Phoenix, the business has been awarded
multiple new commercial maritime construction contracts, which
continue to diversify the portfolio and position the business for
additional build-to-print opportunities.
Ship repair
Complex infrastructure services
In the complex infrastructure services market, the business
continues to expand its portfolio, with the award of a follow-on
contract for facility operations at the Holston Army Ammunition
Plant. BAE Systems began operating the Radford Army
Ammunition Plant in July 2012 under a ten-year contract.
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65
REPORTING SEGMENTS CONTINUED
PLATFORMS & SERVICES (US)
would be moved to Sealy, Texas, in early 2013. The Protection
Systems business, formerly reported in Land & Armaments, was
transferred to Support Solutions at the start of the year. Management
of the Combat Vehicles (UK) business was transferred to Platforms &
Services (UK) from 1 October 2012.
Vehicle Systems This division comprises the franchises in tracked
and wheeled vehicles.
The business received a $306m (£188m) contract modification in
August to upgrade 353 Bradley fighting vehicles, extending Bradley
activity into 2014. This production contract is in addition to $70m
(£43m) to purchase upgrade materials for the Bradley programme.
The business has received the Paladin Integrated Management (PIM)
Low-Rate Initial Production request for proposal scheduled for
submission in early 2013. Testing continues on the contracted
prototypes activity. An award decision is expected in 2013.
On the Ground Combat Vehicle (GCV) programme, the business
continues test work under the $450m (£277m) technology
development phase. Continuing development testing demonstrates
that the technology provides more power, efficiency and vehicle
performance than comparable conventional drive systems.
In January 2012, the business was awarded a £65m contract to
supply 48 BvS10 armoured all-terrain vehicles and associated
support to Sweden. The business was also awarded a £38m contract
to regenerate the British Royal Marines’ fleet of BvS10 vehicles. The
last of 53 BvS10s ordered by France was delivered by year end.
In June, the business was awarded a $750m (£462m) contract to
upgrade Norway’s existing 103-vehicle CV90 fleet and build new
vehicle chassis to deliver 144 CV90s in five different configurations,
including a variant equipped with a sensor suite for improved
surveillance capability.
All deliveries of the Caiman Multi-Terrain Vehicle were delivered to
contract schedule, with re-fit and integration of 592 vehicles
completed at the Mine Resistant Ambush Protected (MRAP)
sustainment facility in November.
In August, the business was selected as part of the industry team led
by Lockheed Martin for the engineering and manufacturing
development phase of the US government’s potentially large Joint
Light Tactical Vehicle programme.
The South African business continues to execute on a £39m contract
for 73 RG31 Mobile Mortar Platforms for the United Arab Emirates
and a £43m order for 110 RG32 patrol vehicles for the Swedish
Defence Force that were secured in December 2011.
The business secured places on all the amphibious trade studies,
demonstrators and hull survivability demonstrations, allowing the US
Marine Corps customer to evaluate design concepts based on a new
design or an upgrade to current vehicles.
In November, Denmark announced that eight bids had been received
in response to its requirement for up to 450 armoured vehicles.
BAE Systems bid a version of the CV90, which Denmark already
operates. The award decision is expected in late 2013.
In Canada, following a one-year delay, a new request for proposal was
released for up to 138 Close Combat Vehicles. BAE Systems
submitted a proposal based on its CV90 armoured combat vehicle.
The business was unsuccessful in its bid for the Tactical Armoured
Patrol Vehicle programme for the Canadian armed forces.
Weapons Systems & Support This division comprises munitions and
artillery activities.
In naval armaments, orders for six Mk110 57mm naval guns were
received for the US Coast Guard and to equip the US Navy’s Littoral
Combat Ships.
During the year, Australia announced its intention to buy 19 M777
howitzers to augment the 35 it already operates. In addition, the
Indian government has issued a Letter of Request to the US
government under the US Foreign Military Sales process for the
supply of 145 M777 howitzers for the Indian Army.
Under the 15-year Munitions Acquisition Supply Solution contract, the
UK Ministry of Defence placed an order to meet its 2015 munitions
requirement reflecting lower demand and quantities deferred from
previous years. This anticipated lower volume results from armed
force cuts and the draw-down of Afghanistan operations. Efficiencies
achieved through a £123m transformation of UK munitions
manufacturing facilities and support from the UK Ministry of Defence
position the business to offset this reduction with exports.
Joint ventures FNSS, BAE Systems’ Turkish joint venture, continues to
produce and upgrade tracked and wheeled military vehicles for
international customers. Design work and successful mine testing
were completed on a $559m (£344m) programme to produce 259
8x8 wheeled armoured vehicles in 12 different variants for the
Malaysian Army. Production has commenced and the first Infantry
Fighting Vehicles are scheduled to be delivered in 2013.
The CV90 family of vehicles, manufactured in Sweden, is in
service with six nations – Denmark, Finland, Norway, Sweden,
Switzerland and the Netherlands.
In 2012, the business won an order from Norway to upgrade its
existing CV90s and supply new vehicles in multiple
configurations. Incorporating lessons learned from Norwegian
operations in Afghanistan, the new vehicle fleet will have
enhanced protection, survivability, situational awareness,
intelligence and interoperability.
Tracked vehicles
Wheeled vehicles
The RG35, manufactured in South Africa, is one variant in
BAE Systems’ family of wheeled vehicles.
The RG35 family of vehicles can be deployed in many different
roles and offers a choice of variants and configurations while
maintaining 80% vehicle commonality. RG35 combines the high
levels of survivability of the RG31 Mine Protected Vehicle with the
tactical capability of an infantry fighting vehicle.
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Looking forward
Efforts to reduce the US government’s budget deficit are likely to
impact all areas of government spend. A Continuing Resolution on
the 2013 fiscal budget has been passed through to March 2013 and
the risk of further reductions in US defence budgets remains,
including the impact of sequestration.
In February 2013, the Group was notified that the US Navy was
considering the potential to cancel, defer or descope 13 ship
availability contracts, resulting in the decision to issue conditional
Worker Adjustment and Retraining Notification (WARN) Act notices to
nearly 3,600 employees in the ship repair business.
Whilst downward pressure will be seen across the services market as
a whole, potential cancellations and delays in new programmes may
present opportunities to sustain and modernise existing platforms.
In the near term, Land & Armaments continues to operate in a
challenging market environment. To offset these pressures and
remain viable in the future, the business is investing to protect
current programme positions like Bradley modernisation and UK
munitions, establish new US domestic programmes such as PIM and
GCV, and to win export programmes. The business continues to drive
rationalisation efforts, efficiencies and cost reduction in order to
remain competitive.
Non-financial performance
Employee safety During 2012, the business achieved a 16%
reduction in the Recordable Accident Rate. Support Solutions’ ship
repair business built on the success of its employee ‘Anchored in
Safety’ campaign by introducing an interactive ‘Safety Boot Camp’ to
keep employees focused on safety. During 2012, Land & Armaments
continued to increase employee awareness and understanding of
safety by maintaining its ‘Start Safe, Talk Safe, Home Safe’
campaign, focusing on potential safety issues and safe work habits.
Diversity and inclusion Platforms & Services (US) supported US-wide
diversity and inclusion activities, including inclusive leadership
training, launching a multi-cultural network, and introducing diverse
candidate shortlists and panels for executive roles. In Support
Solutions, a campaign was targeted at managers to improve their
awareness of diversity and inclusion. Land & Armaments introduced
a mentoring programme to support successor candidates for
leadership roles and introduced a Talent Committee to facilitate
senior leader commitment.
Protection Systems is a leading provider of soldier protective and
load carrying equipment in the US, producing a significant portion
of the nation’s body armour, tactical vests, combat helmets and
load carrying systems. The business is focused on the design,
development and production of leading-edge survivability
products.
Employee safety
Businesses to demonstrate improvement
against 2011 performance on
recordable accidents
Continue to progress against the
Safety Maturity Matrix
Diversity and inclusion
Demonstrate continued progress against the
Diversity & Inclusion Maturity Matrix
Establish milestones/targets to underpin
delivery of the stated 2015 position1
Environment
Continued progression against the
Environmental Sustainability Maturity Matrix
Reduction in energy2
Reduction in water2,3
Reduction in waste2
15% stretch
target achieved
Achieved
Achieved
Confirmed
Achieved
Target achieved
Target achieved
Target achieved
Environment A new environmentally-friendly facility was opened in
Sterling Heights, Michigan, during 2012. The new facility
consolidated existing buildings into one new purpose-built campus.
The building uses 15% less energy and 40% less water than a
conventionally designed building, and waste generated is managed
through a recycling programme.
People Support Solutions has a diverse and highly skilled workforce,
which is a key discriminator and plays an important role in the
performance of the business in an increasingly competitive market.
The business remains committed to building a culture that recognises
performance, creates new opportunities for employees, and focuses
on long-term goals that promote a healthy and viable business.
Through the Land & Armaments Talent Committee, high-potential
employees are being engaged to address key strategic opportunities.
By being part of the programme, which has also been designed to
support the Group’s commitment to diversity and inclusion, future
leaders are receiving fast track development.
1 Businesses have put in place plans to 2015 to support and progress the
Group’s long-term goal to build a high-performing workforce that more closely
reflects the diversity of the local communities in which its businesses operate.
2 Data is derived from internal recording systems and is not subject to external
verification or audit.
3 Data excludes Ordnance Solutions Inc.
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Artillery
The M777 howitzer is in service with US, Canadian and Australian
armed forces. Production continues and further orders are
anticipated, including to India following the issue of a Letter of
Request to the US government under the US Foreign Military
Sales process.
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REPORTING SEGMENTS
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Platforms & Services (UK), with 27,900 employees1,
comprises the Group’s UK-based air, maritime and combat
vehicle activities, and certain shared services activities.
Operational key points
– 46 Typhoon Tranche 2 aircraft delivered to the partner nations
– £2.5bn Typhoon and Hawk contract for Oman secured
– £446m contract awarded for European support on Typhoon
– First F-35 Lightning II aircraft accepted by the UK Ministry of Defence (MoD)
– Fifth Type 45 destroyer accepted off-contract and support provided for all Royal Navy Type 45
deployments
– Settlement reached with the Government of the Republic of Trinidad and Tobago in respect of the
cancelled Offshore Patrol Vessels (OPV) programme
– Two OPVs delivered to the Brazilian Navy
– £0.8bn of customer funding received for ongoing design and development of the Successor
submarine, and continuing production of the fourth Astute Class submarine
– £0.7bn of research and development expenditure4 in 2012
Financial key points
– Order backlog1 increased by £2.5bn on significant awards for Oman Typhoon and Hawk and Saudi
training aircraft
– 10% decrease in sales1 pending recommencement of Salam Typhoon deliveries in 2013
– Return on sales improved to 12.2%
– Strong cash flow3 performance on significant contract advances
Sales analysis: activity (%)
Sales analysis: platforms and services (%)
57
36
43
■ Military Air & Information
■ Maritime
64
■ Military & Technical Services
■ Platforms
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 31).
Net cash inflow from operating activities
after capital expenditure (net) and financial
investment, dividends from equity
accounted investments, and assets
contributed to Trust.
Includes both Group-funded and
customer-funded expenditure.
Funded order intake1
Order backlog1
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
KPI
KPI
KPI
KPI
2012
2011
2010
£8,077m
£4,355m
£3,968m
£21.2bn
£18.7bn
£21.0bn
£5,646m
£6,258m
£6,529m
£689m
£658m
£522m
12.2%
£1,719m
10.5%
£69m
8.0%
£191m
KEY CHARACTERISTICS
KEY CHARACTERISTICS
– Multi-year through-life programmes
Military Air & Information:
– Full spectrum of military aircraft capabilities,
including design, development, manufacture,
in-service support and training for combat and
trainer aircraft, and design and development
of Unmanned Air Systems
– Defence information systems, such as the
Falcon secure deployable communication
system
Maritime:
– Full spectrum of maritime systems
capabilities, including design, build,
integration and commissioning, in-service
support and training for naval ships,
submarines, radar and combat management
systems, and underwater systems
Combat Vehicles (UK):
– Design, build and through-life support of
armoured vehicles
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Financial performance
Funded order intake1 in the year increased to £8.1bn following the
award of significant contracts for the supply of 12 Typhoon and eight
Hawk aircraft to Oman (£2.5bn), and for training aircraft for the Royal
Saudi Air Force (£1.6bn).
Sales1 in 2012 were £5.6bn, 10% lower than 2011, reflecting no
contractual aircraft deliveries on the Salam Typhoon programme in
2012 and the completion of South African Gripen aircraft deliveries in
2011.
Underlying EBITA2 was £689m (2011 £658m). Return on sales
increased to 12.2% benefiting from strong programme execution,
particularly on the European Typhoon and Type 45 programmes.
There was an operating cash inflow3 of £1,719m (2011 £69m)
reflecting advances received on the Omani and Saudi contract
awards. These were partially offset by the utilisation of advances on
the European Typhoon programme and costs against the provision on
the Omani Offshore Patrol Vessel (OPV) programme.
Operational performance
Military Air & Information
Deliveries of Typhoon Tranche 2 aircraft to the four European partner
nations totalled 46 in the year. At the end of 2012, cumulative aircraft
deliveries to the four nations were 169 of the contracted 236. The first
ten Tranche 3 front fuselage sub-assemblies were manufactured
during the year. Manufacture of sub-assemblies continues in advance
of recommencement of deliveries of Typhoon aircraft to Saudi Arabia
in 2013.
In December 2012, a £2.5bn contract was awarded for the supply of
12 Typhoon and eight Hawk aircraft, associated training, and support
to the Royal Air Force of Oman.
The business continues to support its UK and European customers’
Typhoon and Tornado aircraft, and their operational commitments
through availability-based service contracts and support operations.
Orders of £668m were received in the year, including a contract worth
£446m for Typhoon support operations across Germany, Italy, Spain
and the UK. Support volumes on Tornado are expected to decline as
the number of aircraft and flying hours reduce in advance of the
out-of-service date of April 2019.
Delivery of the first F-35 Lightning II aircraft was accepted by the UK
MoD. The business has delivered a further 42 production aircraft
fuselage assemblies to Lockheed Martin. Interim funding of £234m
for the fifth and sixth Low-Rate Initial Production contracts was
secured in the year and negotiations continue in respect of final
funding.
Support continues to be provided to operators of Hawk trainer aircraft
around the world. In partnership with Hindustan Aeronautics Limited,
production of 66 Batch 1 Hawk aircraft has been completed in India.
Deliveries of materials and equipment in support of licence
production of the 57 Batch 2 aircraft continue and aircraft assembly
in India is ongoing. The business has provided an initial response to a
request for proposal for an additional 20 aircraft to India.
Following the 2011 government-to-government Memorandum of
Understanding, BAE Systems and Dassault Aviation have jointly
secured an order from the UK and French governments for a Future
Combat Air System demonstration programme preparation phase to
plan how to mature and demonstrate critical technology and
operational aspects for an Unmanned Combat Air System.
In the defence information domain, the Falcon secure deployable
communication system is now in service with the British Army and
RAF.
Under a continuing focus on cost reduction and efficiency, there has
been a net headcount1 reduction of approximately 1,400 in the year.
Maritime
Cumulative savings of £342m have been reported to the MoD
against commitments made under the 15-year Terms of Business
Agreement (ToBA), significantly ahead of target. In line with the ToBA,
the Group is progressing discussions with the MoD regarding future
shipbuilding strategy after completion of block build for the Royal
Navy’s new aircraft carriers, and as the business transitions to the
design and manufacture phase of the Type 26 Global Combat Ship.
The largest hull section of the first of the Royal Navy’s new aircraft
carriers, the Queen Elizabeth, has been delivered to Rosyth for
assembly with the other completed hull sections. Block manufacture
for the second ship, Prince of Wales, is well underway. BAE Systems
and its Aircraft Carrier Alliance partners are working to finalise the
detailed design changes required for operation of the short take-off
and vertical landing variant of F-35 Lightning II on the carriers.
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Typhoon is now in service with six air forces. In total, 571 Typhoon
aircraft have been ordered by the four European partner nations,
Saudi Arabia, Austria and Oman.
As well as Typhoon manufacture, BAE Systems also provides
availability and in-service support services. In 2012, the Group
was awarded a £446m contract for Typhoon support operations
across Germany, Italy, Spain and the UK.
Typhoon
F-35 Lightning II
BAE Systems is a major subcontractor on the F-35 Lightning II
combat aircraft. The Group has the lead in manufacture of the aft
fuselage, vertical and horizontal tails and wing tips, and is
responsible for a number of subsystems and equipment,
including the electronic warfare suite.
Almost 2,000 people in the US, UK and Australia are employed on
the F-35 Lightning II programme.
See page 57 for more information on the Group’s involvement on
F-35 Lightning II
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the customer and long lead procurement has commenced on the
sixth and seventh boats.
BAE Systems secured a further £383m of funding from the UK MoD
for the design and development phase of the Successor submarine
programme, to replace the Vanguard Class fleet, and now has
approximately 1,000 people engaged on the programme.
Combat Vehicles (UK)
The Terrier combat engineer vehicle contract concluded its reliability
growth confirmation trials, which identified a number of required
engineering changes. This has resulted in an increase in costs to
complete the contract. Final trials are complete and deliveries of the
60 vehicles will commence in 2013.
Following delivery of the Terrier vehicles, the Newcastle facility will
close, and support to Terrier and existing vehicles used by the British
Army customer will be provided from the remaining facility at Telford
and satellite offices.
Looking forward
Platforms & Services (UK) has a strong order backlog of long-term
committed programmes and an enduring support business.
In Military Air & Information, sales are underpinned by military aircraft
production on Typhoon, Hawk and F-35 Lightning II, and in-service
support for existing and legacy combat and trainer aircraft. There are
significant opportunities to secure future Typhoon export contracts to
Malaysia, the United Arab Emirates and Saudi Arabia.
In Maritime, sales are underpinned by the Queen Elizabeth Class
carrier and Astute Class submarine manufacturing programmes, the
15-year ToBA, the maritime support delivery framework, and the
design of the Successor submarine and Type 26. The through-life
support of these platforms and Type 45, together with their
associated command and combat systems, provides sustainable
business in technical services and mid-life upgrades.
In Combat Vehicles (UK), sales beyond the Terrier programme depend
upon through-life support of legacy platforms.
REPORTING SEGMENTS CONTINUED
PLATFORMS & SERVICES (UK)
Defender, the fifth Type 45 destroyer, was accepted by the Royal Navy
in July. The final ship, Duncan, has undertaken her sea trials and is on
schedule for delivery in 2013. The Type 45 support contract met all
ship deployment dates during the year.
Settlement with the Government of the Republic of Trinidad and
Tobago, in respect of the cancelled OPV programme, was reached in
November at an amount consistent with provisions held. In January
2013, £101m of the £131m cash settlement was paid, with the
remainder due in May 2013. Following the agreement in December
2011 for the sale of the OPVs to the Brazilian Navy, the first two
vessels were delivered in the year, with the third ship due for delivery
in 2013.
Following an incident at sea during gunnery trials on the first Khareef
Class corvette for Oman, detailed engineering, schedule and contract
reviews have resulted in revised delivery dates for the ships. This has
resulted in an increase in costs to complete the contract. The ships
are expected to be delivered in 2013 and 2014.
The Type 26 Global Combat Ship assessment phase contract
continues and is intended to be completed by the end of 2014. The
Type 26 is planned to replace the Royal Navy’s Type 23 frigates.
The warship support modernisation initiative contract, for delivery of
services at Portsmouth Naval Base, continues to exceed contract
performance. A new maritime support delivery framework will replace
the existing contract in 2013.
The Advanced Radar Target Indication Situational Awareness
Navigation (ARTISAN) 3-D radar successfully passed its factory
acceptance test and the first of class has been fitted to HMS Iron
Duke, a Type 23 frigate. The programme continues on track towards
full production.
The Maritime Composite Training System, a shore-based warfare
operator training solution, was declared ready for training by the Royal
Navy in August having completed a year of initial training. Over 3,000
Royal Navy personnel have now been trained through the facility.
The Sting Ray lightweight torpedo delivery contract for the Norwegian
government was completed in December.
Ambush, the second of class Astute submarine for the Royal Navy,
departed for sea trials in the second half of the year. The operational
handovers of both HMS Astute, the first of class, and Ambush are
planned for 2013. Pricing for the fourth boat has been agreed with
In 2012, Taranis, the UK’s Unmanned Combat Air System
technology demonstrator, successfully completed a series of
key tests on the way to commencing flight trials in 2013.
BAE Systems, as prime contractor, provides many elements of
Taranis, including systems integration, control infrastructure, full
autonomy elements, and the creation and integration of the low
observable technologies.
Unmanned Air Systems
Queen Elizabeth Class carriers
The largest hull section of the first of the Royal Navy’s Queen
Elizabeth Class aircraft carriers has been delivered to Rosyth for
assembly with the other completed hull sections. Block
manufacture for the second ship, Prince of Wales, is well
underway.
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Diversity and inclusion Platforms & Services (UK) launched its
diversity and inclusion framework during the year, the aim being to set
the goals and actions for diversity and inclusion over the next five
years.
To support the framework, a working group was established to help
progress the following actions: develop more gender-balanced supply
of appropriately qualified employees for leadership positions; hire
and select a diverse mix of top-performing people; build inclusive
leadership competence and capabilities; establish greater workplace
flexibility; foster a more inclusive culture; and engage with employees.
During the year, progress included female executives being mentored
through an Executive Committee mentoring programme and
unconscious bias training being scoped for senior managers.
Environment During 2012, Platforms & Services (UK)’s
environmental sustainability working group developed consistent
environmental standards across the businesses by aligning
approaches to programmes and target setting.
To further increase energy savings and actively promote awareness
amongst fellow employees across the businesses, the Energy
Matters campaign ‘Switch on to switching off’ continued to be
supported. The campaign involved training energy champions across
the business to actively promote the benefits of energy conservation
amongst fellow employees.
People In 2012, there were successes for young people engaged in
the Group’s early careers graduate and apprenticeship programmes,
including a team of apprentices winning the government-sponsored
‘Make it in Great Britain’ competition for the design and manufacture
of an innovative rehabilitation aid for amputees. In addition, an
apprentice won the inaugural Apprentice Champion of the Year Award
which recognises inspirational role models and outstanding
advocates for apprenticeships in the UK.
The Leading for Total Performance development programme aims to
ensure that the leadership engages fully with the Group’s strategy.
As part of a suite of measures designed to foster employee
engagement, a new Employee Assistance Programme was launched.
1 Businesses have put in place plans to 2015 to support and progress the
Group’s long-term goal to build a high-performing workforce that more closely
reflects the diversity of the local communities in which its businesses operate.
2 Data is derived from internal recording systems and is not subject to external
verification or audit.
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Non-financial performance
Employee safety
Businesses to demonstrate improvement
against 2011 performance on
recordable accidents
Continue to progress against the
Safety Maturity Matrix
Diversity and inclusion
Demonstrate continued progress against the
Diversity & Inclusion Maturity Matrix
Establish milestones/targets to underpin
delivery of the stated 2015 position1
Environment
Continued progression against the
Environmental Sustainability Maturity Matrix
Reduction in energy2
Reduction in water2
Reduction in waste2
15% stretch
target achieved
Achieved
Achieved
Confirmed
Achieved
Target achieved
Target achieved
Target achieved
Employee safety During 2012, the business achieved a 44%
reduction in the Recordable Accident Rate.
Businesses across Platforms & Services (UK) helped achieve safety
targets by putting in place employee engagement programmes
focused on the importance of workplace safety. Campaigns included
the ‘Good to Go’ process in the Submarines business looking at the
safety responsibilities of individuals (both office-based and
operational), supervisors and managers, with specific safety
information targeted at each group.
During 2012, the business’s ‘Safety First’ programme achieved a
Gold award in the Chairman’s Award category of Transferring Best
Practice. Safety teams worked together to develop an employee
programme that improves levels of safety and can be easily
transferred across sites. The programme also received external
recognition, including the British Safety Council International Safety
Awards, the Royal Society for the Prevention of Accidents, Gold
Awards for Occupational Health and Safety, and the Safety and
Health Practitioner Institution of Occupational Safety and Health
Awards. The programme has been endorsed by Lloyd’s Register
Quality Assurance and the UK Health and Safety Executive.
Production of the Royal Navy’s Astute Class nuclear-powered
submarines continues, with Ambush, the second of class,
undergoing sea trials in late 2012.
The 97 metre-long Astute Class submarines are powered by a
sophisticated nuclear propulsion system, which never needs
refuelling. The sonar system has the processing power of 2,000
laptops and can track ships 3,000 miles away. Armed with both
Tomahawk land attack missiles and Spearfish torpedoes, its
missiles have a target range of 1,200 miles with accuracy
measured in metres.
Astute Class submarines
UK Sport technology partnership
During 2012, BAE Systems’ £1.5m, five-year technology
partnership with UK Sport contributed to a significant number of
medals for Team GB at the London Olympics. The Group’s
technology partnership enabled its employees to share its unique
engineering capabilities with the sporting community and
thousands of young people through its education programmes.
BAE Systems is finalising a new four-year technology partnership
with UK Sport to provide £800,000 of engineering time,
equipment and materials to support British athletes. The
partnership will run from 2013 to 2016.
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REPORTING SEGMENTS
)
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Platforms & Services (International), with 15,500
employees1, comprises the Group’s businesses in Saudi
Arabia, Australia, India and Oman, together with its 37.5%
interest in the pan-European MBDA joint venture.
Operational key points
– Salam price escalation negotiations ongoing
– £5.0bn of orders received under the Saudi British Defence Co-operation Programme (SBDCP) for
training aircraft and support to the end of 2016
– First Landing Helicopter Dock hull arrived in Australia for completion and second hull launched in
Spain
– MBDA export order for MICA air-to-air missiles to India
Financial key points
– Order backlog1 increased reflecting multi-year support and training awards under the SBDCP
– Like-for-like increase in sales1 of 9% on increased support activity on the Salam Typhoon programme
and weapons deliveries under the Tornado Sustainment Programme (TSP)
– Strong operating cash flow3 reflecting acceleration of advances on TSP
Sales analysis (%)
Sales analysis: platforms and services (%)
54
16
54
30
46
■ Military & Technical Services
■ Platforms
■ Saudi Arabia
■ Australia
■ Other
1
2
3
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 31).
Net cash inflow from operating activities
after capital expenditure (net) and financial
investment, dividends from equity
accounted investments, and assets
contributed to Trust.
Funded order intake1
Order backlog1
Sales1
Underlying EBITA2
Return on sales
Cash inflow3
KEY CHARACTERISTICS
KEY CHARACTERISTICS
Saudi Arabia:
– Long-term contracts from the Royal Saudi Air
Force for equipment, training and support,
including Salam Typhoon aircraft
– Support to Royal Saudi Navy minehunter
programme
Australia:
– Strategic capability and sustainment provider
to the Australian Defence Force
– Delivering defence contracts across the air,
land, maritime and electronics domains
KPI
KPI
KPI
KPI
2012
2011
2010
£5,266m
£3,319m
£2,694m
£9.3bn
£8.3bn
£9.1bn
£4,071m
£3,794m
£4,325m
£417m
£449m
10.2%
£506m
11.8%
£80m
£449m
10.4%
£190m
India:
– Long-standing military aircraft relationships
MBDA:
– Pan-European guided weapons joint venture
Oman:
– In-service base across air, land and maritime
products
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was awarded in May to upgrade the RSAF’s aircrew training aircraft,
involving the supply of, and initial support for, Hawk Advanced Jet
Trainer and Pilatus PC-21 training aircraft. The business was also
awarded orders totalling £3.4bn for support to the end of 2016,
including the provision of manpower, logistics and training to the
RSAF.
Under the Tornado Sustainment Programme (TSP), the upgrade of the
RSAF Tornado fleet is complete, with all of the contracted aircraft
having been delivered back into the RSAF fleet. Delivery of Storm
Shadow missiles to the RSAF under the TSP is progressing in line
with the agreed programme schedule.
Work continues on the first ship re-fit on the minehunter mid-life
update programme. The ship is due to be handed back to the RSNF
customer during the second half of 2013.
On the C4I (Command, Control, Communications, Computers &
Intelligence) programme, the business continues to seek an
acceptable closure of the contract with the customer.
Australia
Integration of the first of two Landing Helicopter Docks commenced
at the Williamstown shipyard following the arrival of the hull from
subcontractor Navantia in Spain. The second hull was launched at
Navantia’s Ferrol shipyard.
A total of nine hull blocks have been constructed and delivered under
the A$209m (£134m) Air Warfare Destroyer contract, completing the
Group’s involvement in the first two ships of the three being built.
In 2012, the business completed the multi-year project to modernise
431 M113 armoured personnel carriers for the Australian Army.
The first of seven Royal Australian Navy ANZAC Class frigates is being
upgraded with anti-ship missile defence capability at the Henderson
shipyard under a A$267m (£171m) contract signed in January 2012.
The business has been selected as the preferred tenderer to provide
ongoing in-service support for the Royal Australian Air Force’s Hawk
Lead-In Fighter fleet and contract negotiations are ongoing.
The business was awarded an in-service electronic warfare support
contract for the Wedgetail airborne early warning and control aircraft
fleet to 2015 with a value up to A$68m (£43m).
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Financial performance
Order intake1 increased to £5.3bn (2011 £3.3bn) reflecting the
award of orders for continuing support of the operational capability
and training of the Saudi armed forces under the Saudi British
Defence Co-operation Programme (SBDCP) to the end of 2016.
Contracts were previously let on an annual basis.
Sales1 in 2012 were £4.1bn, 9% higher than 2011 on a like-for-like
basis, reflecting increased support activity on the Salam Typhoon
programme and weapons deliveries under the Tornado Sustainment
Programme (TSP).
Underlying EBITA2 was £417m (2011 £449m). Return on sales
reduced to 10.2% (2011 11.8%) as 2011 benefited from strong
performance and risk reduction on the Tornado upgrade and core
support programmes in Saudi Arabia.
Operating cash inflow3 of £506m (2011 £80m) reflected
acceleration of advances on TSP.
Operational performance
Saudi Arabia
Through the entry into service of Typhoon and the continued
development of the in-country industrial base, the Group remains
committed to developing a greater indigenous capability in Saudi
Arabia.
On the Salam programme, UK final assembly of the remaining 48 of
the 72 Typhoon aircraft has commenced and deliveries are expected
to resume in 2013. Work to expand the multi-role capabilities of the
Royal Saudi Air Force (RSAF) Typhoon is progressing to schedule.
The initial three-year Typhoon support contract finished at the end of
June and two subsequent six-month extensions have been secured.
Discussions continue with the customer on the next five years of
support.
Discussions on Typhoon price escalation with the Saudi Arabian
government remain ongoing. Negotiations are also ongoing for the
provision of maintenance and upgrade facilities in-Kingdom, and
further capability enhancement of the aircraft.
The business continues to support the operational capability of both
the RSAF and Royal Saudi Naval Forces (RSNF). A £1.6bn contract
Final assembly of the remaining 48 of the 72 Typhoon aircraft for
the Royal Saudi Air Force (RSAF) has commenced and deliveries
are expected to resume in 2013.
The Saudi Typhoon support contract is an availability contract
supporting the aircraft’s entry into service with the first of the
RSAF’s Typhoon squadrons.
See page 19 for more information
Saudi Arabia – Typhoon manufacture and support
Saudi Arabia – Tornado Sustainment Programme
As part of the Saudi British Defence Co-operation Programme,
BAE Systems has substantial training and support activities in
Saudi Arabia.
In partnership with the Royal Saudi Air Force (RSAF), the Tornado
Sustainment Programme has successfully upgraded all of the
RSAF Tornado fleet.
See page 21 for more information
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REPORTING SEGMENTS CONTINUED
PLATFORMS & SERVICES (INTERNATIONAL)
Whilst the business submitted a bid for the next-generation
Battlespace Communications System, the decision was taken to
withdraw from this competition after a breach of tender protocols had
occurred during its participation in the initial tender process.
MBDA
In the export market, a significant order was received from India in
early 2012 for MICA air-to-air missiles as part of the Indian Air Force’s
Mirage 2000 upgrade.
India
Following a strategic review of the Defence Land Systems India (DLSI)
joint venture, it has been jointly agreed that Mahindra & Mahindra will
acquire BAE Systems’ 26% shareholding in DLSI. This decision is a
reflection of the shareholders’ belief that they can best meet
customer requirements and address market opportunities on a
case-by-case basis, including continuing to explore opportunities for
co-operating on specific defence projects.
BAE Systems is participating as a subcontractor to Bharat
Electronics Limited (BEL) on the Tactical Communications Systems
programme for the Indian military, for which BEL has been selected
as one of two design authorities.
The Indian government has issued a Letter of Request to the US
government under the US Foreign Military Sales process for the
supply of 145 M777 howitzers for the Indian Army.
Together with its Eurofighter industry partners, the Group continues
to monitor the Medium Multi-Role Combat Aircraft competition and
stands ready to support the Indian government’s procurement
process.
The Group has received a request for proposal for a third batch of
Hawk Advanced Jet Trainer aircraft for the Indian Air Force.
Oman
The contract for the supply of Typhoon and Hawk aircraft awarded in
December 2012 builds on the close partnership with the Omani
armed forces and provides the platform to ensure this relationship is
further developed. The Group has a long history of working closely
with the Omani armed forces, and currently supports their existing air,
land and maritime platforms, such as air defence radars, Challenger
tanks, and Jaguar and Hawk aircraft.
In the domestic market, the business secured an important support
contract for the Principal Anti-Air Missile System and a development
contract for the Future Local Anti-Air Defence System. The business
continues to pursue the Anglo-French joint development and
production opportunity for the Future Anti-Ship Guided Weapon – Anti-
Navire Léger.
Development programmes continue to progress well. The Meteor
beyond visual range air-to-air missile successfully concluded its
guided firing programme.
Looking forward
In the Kingdom of Saudi Arabia, the Group seeks to build upon its
long-term presence through delivering current programmes and
industrialisation, and developing new business in support of the
Saudi military and security forces.
Following agreement of the training aircraft and support orders under
the SBDCP in 2012, the focus turns towards mobilising activities on
the next phases of these programmes.
In Australia, BAE Systems will continue to support the Department of
Defence by working with the customer to deliver cost and service
improvements. The business continues to explore and secure
opportunities in adjacent markets, including commercial maritime
repair and support, and commercial fabrication for the natural
resources industry.
In India, significant aircraft and artillery opportunities continue to be
pursued.
In MBDA, whilst domestic budgetary pressures continue, export
markets are anticipated to grow, potentially benefiting from
significant military aircraft procurements.
BAE Systems is the prime contractor for two 27,000 tonne
Landing Helicopter Docks, the largest ships ever to be built for the
Royal Australian Navy.
The completed hull of the first Landing Helicopter Dock arrived at
the Williamstown shipyard in October from the subcontractor
Navantia in Spain and integration activity has commenced.
Australia – Landing Helicopter Docks
Australia – air platforms
BAE Systems provides systems integration and sustainment
solutions to Australia’s current and future military air platforms.
The Group has an F-35 Lightning II manufacturing plant in South
Australia.
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In Australia, a Flexible Working handbook was launched to support a
flexible work culture and aspirations for female representation were
set for executives.
In India, a ‘Diversity & Inclusion Essentials’ course was rolled out to all
line managers, which aims to increase awareness and understanding
of how diversity and inclusion can create value for the business. A
women’s forum was introduced to provide personal development and
networking opportunities for women in the workplace.
Environment In Saudi Arabia, environmental sustainability has been
built into the procurement team’s processes and major
subcontractor reviews. This is also being done in Australia.
During the year, both Saudi Arabia and India launched environmental
conservation programmes. In Saudi Arabia, water conservation and
re-use is now a priority, and employee training was launched in India.
The Australian business implemented and sustained compliance
processes to meet environmental regulatory reporting requirements,
such as the National Greenhouse Energy Reporting Act.
People In Saudi Arabia, the Saudisation programme is crucial to the
long-term sustainability of the business. BAE Systems remains
committed to recruiting and training local nationals, with local
employees currently filling 60% of positions in-Kingdom. In 2012, the
Saudi business selected 24 high-potential people to participate in its
Mustakbal Management Development Programme, which leads to
Chartered Management Institute internationally recognised
qualifications.
In Australia, the ‘Bright Stars’ programme has been launched to
develop the next generation of leaders, actively engaging 13
high-performing people to provide opportunities, leadership and
mentoring to fast track their career prospects.
In India, the Group has entered into a long-term partnership
agreement with Smile Foundation, a national level development
organisation with an outreach of over 200,000 underprivileged
children, women and youth across 25 states.
1 Businesses have put in place plans to 2015 to support and progress the
Group’s long-term goal to build a high-performing workforce that more closely
reflects the diversity of the local communities in which its businesses operate.
2 Data is derived from internal recording systems and is not subject to external
verification or audit.
3 Data excludes Saudi Arabia.
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Non-financial performance
Employee safety
Businesses to demonstrate improvement
against 2011 performance on
recordable accidents
Continue to progress against the
Safety Maturity Matrix
Diversity and inclusion
Demonstrate continued progress against the
Diversity & Inclusion Maturity Matrix
Establish milestones/targets to underpin
delivery of the stated 2015 position1
Environment
Continued progression against the
Environmental Sustainability Maturity Matrix
Reduction in energy2
Reduction in water2,3
Reduction in waste2
15% stretch
target achieved
Achieved
Achieved
Confirmed
Achieved
Target achieved
Target achieved
Target achieved
Employee safety During 2012, the business achieved a 17%
reduction in the Recordable Accident Rate.
Regrettably, during 2012, an employee died in a road traffic accident
whilst at work in Saudi Arabia.
All businesses launched safety training and communications
campaigns targeted at employees to increase safety awareness and
to reinforce the message that safety is everyone’s responsibility.
Each business addressed specific safety priorities. In Saudi Arabia, a
working group was established to progress safety performance, with
key activities including safety on customer bases and road safety
awareness weeks. In Australia, safety objectives for senior leaders
were rolled out across the business. In India, the focus has been on
embedding safety processes across its offices and a Safety, Health &
Environment framework was launched.
Diversity and inclusion The businesses have launched a number of
initiatives to progress diversity and inclusion.
In Saudi Arabia, BAE Systems has developed a female employment
strategy and five-year plan to support the establishment last year of
its female office in Riyadh. In total, 117 women are now employed by
the business, including 43 in Saudi Arabia.
BAE Systems has received a request for proposal for a third batch
of Hawk Advanced Jet Trainer aircraft for the Indian Air Force.
The potential addition to the Indian fleet, one of the largest fleets
of Hawk in the world, would take the number of Hawk aircraft
ordered worldwide to over 1,000. Customers for Hawk include
Australia, Canada, South Africa, Bahrain, India, the Royal Saudi Air
Force and the Royal Air Force. The Royal Air Force aerobatics team,
the Red Arrows, has used the BAE Systems Hawk since 1979.
India – Hawk Advanced Jet Trainer
MBDA
BAE Systems is a 37.5% shareholder in MBDA, a leading global
guided weapons manufacturer.
MBDA is the prime contractor for a series of multi-national
programmes, including Storm Shadow, an Anglo-French
air-launched cruise missile that can be carried by Tornado aircraft.
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GOVERNANCE
In this section:
Board of directors
Chairman’s corporate governance letter
Corporate governance report
Remuneration report
Other statutory and regulatory information
Statement of directors’ responsibilities
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114
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BAE Systems places great importance on the way it conducts its
business. This section explains the Group’s approach to
governance.
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Photo credit:
US Army
Operating the Radford Army
Ammunition Plant
BAE Systems is the operating contractor of the Radford
Army Ammunition Plant in Virginia, managing, operating
and maintaining the plant under an initial ten-year contract
from the US Army. The Radford plant, established in 1941,
is a government-owned, contractor-operated facility that
manufactures propellants for military munitions.
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BOARD OF DIRECTORS
Chairman
Dick Olver 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: Member of the Prime Minister’s Business Advisory
Group, Business Ambassador for UK Trade & Investment, and member of the
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, Chairman of the Education for Engineering (E4E)
Policy Group, and adviser to HSBC and Clayton, Dubilier & Rice.
Other past appointments: Non-executive director of Thomson Reuters plc.
Committee membership: Chairman of the Nominations Committee and the
Non-Executive Directors’ Fees Committee
Executive directors
Ian King Chief Executive
Appointed to the Board: 2007
Nationality: British
Skills and experience: Appointed as Chief Executive in 2008 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 p.l.c.
Committee membership: Non-Executive Directors’ Fees Committee
Linda Hudson 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., Linda Hudson was previously
President of the Company’s US-based Land & Armaments business. 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 Bank of America Board of Directors, the
Smithsonian National Air and Space Museum Board of Directors, the
Executive Committee of the Aerospace Industries Association, and the
University of Florida Foundation Board. She also serves on advisory boards
for the University of Florida’s College of Engineering.
Committee membership: Non-Executive Directors’ Fees Committee
Peter Lynas Group Finance Director
Appointed to the Board: 2011
Nationality: British
Skills and experience: Peter Lynas, a qualified accountant, was appointed to
the Board as Group Finance Director in April 2011. He previously served for a
number of years as Director, Financial Control, Reporting & Treasury. He
joined GEC-Marconi in 1985 having previously worked for other companies in
the UK and Europe. After progressing through a number of positions he was
appointed Finance Director of GEC’s Marconi Electronic Systems business,
which was subsequently acquired by British Aerospace in 1999 to become
BAE Systems.
Non-executive directors
Paul Anderson 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
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BAE Systems Annual Report 2012
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 BP p.l.c.
Other past appointments: Non-executive director of BHP Billiton Plc, Qantas
Airways Limited and Spectra Energy Corporation.
Committee membership: Chairman of the Corporate Responsibility
Committee and member of the Nominations Committee
Harriet Green OBE Non-executive director
Appointed to the Board: 2010
Nationality: British
Skills and experience: Appointed Chief Executive Officer and executive
director of Thomas Cook Group plc in July 2012. She was previously 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 for Premier Farnell and volume distributor,
Arrow Electronics, Inc.
Other appointments: Non-executive director of Emerson Electric Co.
Committee membership: Corporate Responsibility Committee
Lee McIntire Non-executive director
Appointed to the Board: 2011
Nationality: US
Skills and experience: Lee McIntire is Chairman and Chief Executive of CH2M
HILL, a leader in consulting, design, design-build, operations, risk
management and programme management for public and private clients.
Prior to joining CH2M HILL, he was an executive at Bechtel Group Inc., where
he served on the board of directors and was Executive Vice President for the
parent company.
Committee membership: Remuneration Committee
Sir Peter Mason KBE Non-executive 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. Non-executive member of the board of
Spie S.A. 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.
Other 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. He served as the Company’s
Senior Independent Director for a number of years before stepping down
from that role in January 2013.
Paula Rosput Reynolds Non-executive director
Appointed to the Board: 2011
Nationality: US
Skills and experience: Paula Rosput Reynolds is Chief Executive Officer and
President of the business advisory group, PreferWest, LLC. She had
previously spent over 20 years in the energy sector in a variety of operational
roles, culminating in her appointment as President and Chief Executive
Officer of AGL Resources in 2002. She subsequently served as President
and Chief Executive Officer of Safeco Corporation, an insurance company
located in Seattle, Washington, until its acquisition by Liberty Mutual Group
in 2008. She was then appointed as Vice Chairman and Chief Restructuring
Officer of American International Group, Inc. (AIG) from October 2008 to
September 2009, overseeing AIG’s divestiture of assets and serving as chief
liaison with the Federal Reserve Bank of New York.
Other appointments: Non-executive director of Delta Air Lines, Inc., Anadarko
Petroleum Corporation and TransCanada Corporation.
Other past appointments: Non-executive director of Coca-Cola Enterprises,
Inc. and Air Products and Chemicals, Inc.
Committee membership: Audit Committee
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Nick Rose Non-executive director and Senior Independent Director
Carl Symon Non-executive director
Appointed to the Board: 2010
Nationality: British
Appointed to the Board: 2008
Nationality: British/US
Skills and experience: Nick Rose held the position of Chief Financial Officer of
Diageo plc for over ten years until October 2010 where, 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. He assumed the chairmanship of
the Company’s Audit Committee in August 2011 and was appointed the
Company’s Senior Independent Director on 21 January 2013.
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 past appointments: Non-executive director of BT Group plc, Rexam PLC
and Rolls-Royce Group plc, and Chairman of HMV Group plc.
Committee membership: Chairman of the Remuneration Committee
Other appointments: Chairman of Williams Grand Prix Holdings PLC and
Edwards Group Limited. Non-executive director of BT Group plc.
Company Secretary
Other past appointments: Non-executive director of Moët Hennessy SNC and
Scottish Power plc.
David Parkes
Committee membership: Chairman of the Audit Committee, and member of
the Nominations Committee and Remuneration Committee
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Back row from left to right: Sir Peter Mason KBE, Carl Symon, Harriet Green OBE,
Paul Anderson, Ian King, Lee McIntire, Linda Hudson, Nick Rose, Paula Rosput Reynolds
Seated from left to right: Peter Lynas, Dick Olver
BAE Systems Annual Report 2012
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CHAIRMAN’S CORPORATE GOVERNANCE LETTER
Dick Olver
Chairman
“ Chairmen are encouraged to report
personally in their annual
statements how the principles
relating to the role and
effectiveness of the board have
been applied.”...“Above all, the
personal reporting on governance
by chairmen as the leaders of
boards might be a turning point in
attacking the fungus of “boiler-
plate” which is so often the
preferred and easy option in
sensitive areas but which is dead
communication.”
Preface to The UK Corporate Governance Code (September 2012)
Dear Shareholders,
Those of you that have read this section of our report and accounts
in past years will know that I like to reflect on certain corporate
governance matters that are topical or of particular interest to you
as BAE Systems shareholders. This year, I want to highlight how we
use board visits to develop directors’ understanding of the
business and provide an update on board diversity. However, I will
start with a matter that generated much interest during 2012, the
Board’s decision that the Company should hold discussions with
EADS to look at a possible combination of the two businesses.
These discussions, and the subsequent decision to terminate
them, were the subject of much interest last year and I think it is
worthwhile looking at this matter from a governance perspective.
Strategy and decision making
The UK Corporate Governance Code states that a board’s role is to
provide entrepreneurial leadership for a company in setting its
strategic aims. BAE Systems has a well-developed strategy and
planning process that involves the Board throughout the year.
Consequently, the Company’s strategy is the subject of a good deal
of review that involves both the senior executive management team
and Board members in analysis and discussion. As a result of this,
prior to the discussions with EADS last year, we knew we had a
robust standalone strategy and business plan but if a board is to
provide strategic leadership it also needs to look at wider
opportunities to deliver shareholder value.
The UK’s Corporate Governance Code also aims to promote
effective board decision-making. The essential elements of good
governance in this area being a well-constituted board with a clear
division of responsibilities between chairman and chief executive,
that is able to make well-informed decisions on the basis of
collective debate and deliberation, and, once a decision has been
made, ongoing board oversight and supervision.
On the basis of the work that had been undertaken prior to 2012,
the Board was well informed on strategic matters and, therefore,
well placed to decide whether or not the Chief Executive should be
given authority to engage with EADS to explore that strategic
opportunity. The Board discussed this matter at length. The
discussions were well informed with effective engagement between
executive and non-executive members of the Board, following which
there was clear agreement on how to take this forward. Thereafter,
we took steps to ensure that directors were kept up-to-date with
developments and given the opportunity to raise any matters or
concerns they had. Regular conference calls and Board meetings
provided this engagement, and in the period from the initial Board
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discussions to the termination of the talks, a total of six Board
meetings and five informal telephone conference calls were held. In
addition, as Chairman, I remained in close contact with all Board
members (both executive and non-executive) to ensure that
everyone remained close to developments and all had the
opportunity to provide guidance or raise concerns.
Engagement with shareholders is a fundamental part of the UK’s
corporate governance model and BAE Systems has a well-
developed investor relations programme that has helped us to
develop important relationships with major shareholders. Once the
discussions with EADS became public, we recognised the need to
engage with various stakeholders, such as shareholders and
employees, without delay. This was a key priority for the Board and
had been the subject of much debate and planning. However, it
should be recognised that, as for all transactions governed by the
UK’s code on takeovers and mergers, the strict requirement to treat
all shareholders equally in terms of access to information and not
selectively disclose information meant that we were inevitably
restricted as to what we could disclose to shareholders and other
stakeholders in meetings. Accepting the limitations, many
stakeholder meetings were held and all directors received regular
feedback on them.
Major strategic actions test the true effectiveness of boards. As a
starting point, a good board needs to stay on top of market
conditions and understand a company’s strengths and the
challenges it faces so that it is able to make important strategic
decisions when opportunities present themselves. Decisions
should be made collectively and on a well-informed basis – where
necessary, with assistance from subject experts and professional
advisers. Prior to making major decisions, all directors should have
the time and the opportunity, both formally and informally, to
discuss matters and raise any concerns they may have. The
chairman, chief executive and senior independent director have
important roles to play in this process. Having made a decision, a
board needs to maintain oversight of matters as they develop and
be given every opportunity to get involved if there are issues that
need to be addressed.
When putting a board and an executive team together you look for
people with the knowledge, experience and basic sound judgement
that will enable them to guide a company through all eventualities
– knowing that there will be times when the quality of your
governance arrangements and people will be tested. As part of our
annual performance evaluation process, we have reviewed our
performance in 2012 and how we stood up to that test, and whilst
as a Board and as a Company we will always look at ways to improve
our performance, we believe our board governance was, and
remains, robust and effective.
Understanding the business
To be effective, directors need to develop an understanding of a
company’s business. For me, that means getting out of the
boardroom and meeting employees and experiencing business
operations at first-hand. Therefore, one of the highlights of 2012
from a board perspective was the visit we made to the Kingdom of
Saudi Arabia. Over the course of the three-day visit, directors met
with the customer, received direct feedback on the Company’s
performance and gained a valuable insight into our long-standing
relationship with the Kingdom. We also spent time with the local
management team reviewing the strategic and operational
priorities for the business.
Visiting different locations in Saudi Arabia, Board members met with
our employees and learnt how they work within the performance
framework and values agreed by the Board. Our Chief Executive,
Ian King, has consistently said that it is not just about what we do,
but how we do it, building a culture that delivers shareholder value by
meeting the needs of our customers and acting responsibly at all
times. Whilst in Saudi Arabia, we were encouraged by the progress
being made to build a sustainable long-term business shaped by our
values and performance expectations.
In addition to the visit to Saudi Arabia, the Board also undertook
similar visits to the US during the year, visiting the Company’s
operations at Greenlawn, New York, and holding meetings in
Washington, DC, with management and members of our US board.
The Board’s committees are also encouraged to engage with the
business at first-hand, and last year the Corporate Responsibility
Committee visited part of our UK ammunitions business at
Glascoed and the Audit Committee held one of its meetings at our
Naval Ships business in Glasgow.
Diversity
Last year, the Board agreed a policy statement on board diversity.
As part of that statement, we undertook to report in future annual
reports on progress against actions taken. In respect of the last 12
months I can report the following:
– There are currently three women on the BAE Systems Board
(2012 three), 27% of the total membership (2012 25%). Below
the Board, there are three women on the Executive Committee
(2012 two), 25% of its total membership (2012 17%), and 20% of
the Group’s global workforce are women (2012 19%).
– Four of the 11 members of the Board are non-UK citizens.
– The Board and the Nominations Committee reviewed the Group’s
management resources during 2012 and noted the actions being
taken to grow the female talent pipeline at senior executive
levels. These actions included the following:
– Initiating work aimed at developing a flexible work culture. In
particular, establishing the principles, behaviours and
education requirements to underpin this.
– Planning the roll-out of unconscious bias training in 2013.
– Establishing a senior executive mentoring programme
managed by the Executive Committee.
– Using executive search firms with a track record of open and
inclusive recruitment processes.
– Certain of the Company’s directors are involved in providing
mentoring services to potential, and recently appointed, listed
company directors. The Company is a founder member of the
FTSE 100 Cross-Company Mentoring programme and I am a
member of the 30% Club, a group committed to greater board
diversity. Also, we provide mentoring services through the
Chartered Management Institute.
Further details of our diversity and inclusion activities can be found
on page 42.
Board evaluation
In the following Corporate governance report, you will find details of
how the Board evaluates its own performance. We have undertaken
such evaluations every year since my appointment as Chairman,
and they have all been facilitated externally. You will also see over
the page details of achievement against the Board evaluation
objectives we set last year and the ones we have agreed for this
year. Every year since 2006, we have provided a similar summary of
the objectives agreed by the Board following its performance
evaluation. We introduced this innovation in governance reporting
to provide the readers of these reports with greater insight into the
working of the Board, and I believe it also shows our commitment to
transparency and the development of best practice in board
governance.
Dick Olver
Chairman
BAE Systems Annual Report 2012
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CHAIRMAN’S CORPORATE GOVERNANCE LETTER CONTINUED
Board performance – 2012 objectives and achievements
Strategy
Continue to keep strategy under review and
support moves to adjust the portfolio of
businesses where it is in the interests of
shareholders to do so.
Succession planning
Increase focus on matching succession and
development to the strategic challenges of
internationalisation, and the next decade of
change in the business environment.
Performance monitoring
Extract insight from the new segmentation of
business results.
Culture and behaviour
Implement improvements and observations
identified in the Ethical Leadership Group (ELG)
report and the US monitors’ reports, and
oversee progress against these at Board
meetings.
Risk and risk management
Continue to review the corporate risk register,
including major programme risks and crisis
management plans.
Board development
Use deep dives to improve understanding of
principal markets and other major business
issues.
Board performance – 2013 objectives
Strategy
Succession planning
Culture and behaviour
Risk and risk management
Board development
As detailed on page 80, the Company held discussions with EADS looking at a
possible combination of the two businesses. Minor adjustments to the portfolio of
businesses have been made, with three business disposals completed in 2012.
The Board and the Nominations Committee reviewed management resources during
the year, and noted the work being undertaken to understand the key attributes and
behaviours required for present and future senior management roles in the Company,
and the application of focused development work aimed at achieving this.
The revised reporting segments have improved visibility of the business, in particular,
in Cyber & Intelligence, and have enabled management to bring additional strategic
insight to the business and include this as part of the Board’s review of strategy.
The Board and the Corporate Responsibility Committee have maintained oversight of
the implementation of the actions in the ELG report and the reports produced by the
US monitors. The monitor appointed by the Department of Justice attended Audit
and Corporate Responsibility committee meetings during the year.
During the year, the Board reviewed the different elements of risk management and
how it discharged its responsibility – using the Financial Reporting Council’s Boards
and Risks report to inform and structure the discussion.
As reported above, the Board visited the Kingdom of Saudi Arabia and the US during
the year, and used these visits to develop directors’ understanding of these
businesses and the particular markets they serve.
Continue the strategic review of the business portfolio, with focus this year on the
services businesses. Work with the executive team in the development of a
comprehensive narrative of the Company’s strategy.
The Nominations Committee to complete the recruitment of two additional
non-executive directors and identify a world-class candidate to succeed Dick Olver as
Chairman.
Ensure that the Company remains at the forefront of developing and embedding best
practice in responsible business behaviour.
The Board to continue to review cybersecurity protection, the management of risk in
major programmes and crisis management.
Enhance the Board’s strategic understanding of geo-political and economic risks in
international markets. Use Board visits to promote understanding of markets and
the business development opportunities they offer.
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CORPORATE GOVERNANCE REPORT
1
2
3
4
Our business model
See page 17
“Corporate governance is the system by which companies are
directed and controlled. Boards of directors are responsible for the
governance of their companies. The shareholders’ role in governance
is to appoint the directors and the auditors and to satisfy themselves
that an appropriate governance structure is in place. The
responsibilities of the board include setting the company’s strategic
aims, providing the leadership to put them into effect, supervising
the management of the business and reporting to shareholders on
their stewardship. The board’s actions are subject to laws,
regulations and the shareholders in general meeting.”
Cadbury Committee Report – December 1992
Compliance with the provisions of the UK Corporate Governance
Code
The Company was compliant with the provisions of the UK
Corporate Governance Code (the Code) throughout 2012.
In September 2012, a number of changes were made to the UK
Corporate Governance Code. Whilst compliance with this revised
code is not required 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 and this is reflected
in additional information included within this report.
The Board
In 2012, 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 nine times during the year. The attendance by individual directors at meetings of the Board
and its committees in 2012 is shown in the table below.
Attendance by individual directors at meetings of the Board and its committees in 2012
Director
Mr P M Anderson
Ms H Green
Mr M J Hartnall
Ms L P Hudson
Mr I G King
Mr P J Lynas
Sir Peter Mason
Mr L A McIntire
Mr R L Olver
Ms P Rosput Reynolds
Mr N C Rose
Mr C G Symon
Audit
Committee
–
–
–
–
–
–
6 (6)
–
–
6 (6)
6 (6)
–
Corporate
Responsibility
Committee
4 (4)
4 (4)
–
–
–
–
3 (4)
–
–
–
–
–
Nominations
Committee
4 (4)
–
–
–
–
–
3 (4)
–
4 (4)
–
–
–
Remuneration
Committee
–
–
–
–
–
–
–
6 (7)
–
–
7 (7)
7 (7)
Non-Executive
Directors’ Fees
Committee
–
–
–
1 (1)
1 (1)
–
–
–
1 (1)
–
–
–
Board
9 (9)
9 (9)
1 (2)
8 (9)
9 (9)
9 (9)
9 (9)
8 (9)
9 (9)
9 (9)
8 (9)
9 (9)
Figures in brackets denote the maximum number of meetings that could have been attended.
The Board considers all of the non-executive directors, with the
exception of the Chairman, to be independent for the purposes of
the Code. Each of these directors has been identified on pages 78
and 79 of this report.
The Board appointed Nick Rose as its Senior Independent Director
with effect from 21 January 2013. Amongst the duties undertaken
by Mr Rose since that date was to meet with the non-executive
directors without the Chairman present to discuss the Chairman’s
performance.
In 2012, having served as a director for nine years, Sir Peter
Mason’s term of office was extended for a period of 12 months to
21 January 2013. The Board has asked Sir Peter to continue as a
director until the Company’s Annual General Meeting (AGM) on
8 May 2013. Consequently, the Board has considered whether in
respect of the period 22 January to 8 May 2013 he continues to be
independent notwithstanding his length of service. The Board used
its externally facilitated annual evaluation process to provide Board
members with the opportunity to consider individually whether they
believed that Sir Peter remained independent. The directors
concluded that he remains independent and, in reaching this
decision, the Board noted that his period of office had not coincided
to any significant degree with that of any of the current executive
directors.
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 its reasons for supporting those directors seeking
re-election at the forthcoming AGM.
Risk management and internal control
BAE Systems has developed a system of internal control that was in
place throughout 2012 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.
On pages 44 and 45 of this report, you will find details of the
processes the Company has put in place to manage risk. For the
Board, the key requirements are that the Company has robust
processes to identity, evaluate and manage risk, and that the
directors have visibility of the major risks.
Risks are identified on a ‘bottom-up’ basis as part of the Company’s
Operational Assurance Statement (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 preparation and
implementation of plans aimed at mitigating the risk.
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CORPORATE GOVERNANCE REPORT CONTINUED
The key financial and non-financial risks identified by the
businesses 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.
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.
Management responsibility for the management of the Group’s
most significant non-financial risks is allocated at the Executive
Committee’s risk workshops. The OAS and Non-financial Risk
registers are reviewed regularly by the Executive Committee to
monitor the status and progression of mitigation plans, and these
key risks are reported to the Board on a regular basis.
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 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.
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 a five-year business plan for each business, 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.
Whilst the quality of the control processes is fundamental to the
overall control environment, the consistent application of these
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 OAS
process. This has been subject to regular review over several years,
which has resulted in a number of refinements being made.
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.
The responsibility for internal control procedures with joint ventures
and other collaborations rests, on the whole, with the senior
management of those operations. BAE Systems’ employees on the
boards of such entities are required to exert such influence as the
Company may have to encourage the adoption of a governance
structure that is substantially equivalent to the Operational
Framework.
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 Reporting segment reviews on pages 56 to 75. The financial
position of the Group, including information on cash flow, treasury
policy and liquidity, can be found in the Financial Performance
section on pages 30 to 38. Principal risks are detailed on pages 46
to 51. In addition, the financial statements include, amongst other
things, notes on finance costs (page 129), loans and overdrafts
(page 153), and financial risk management (page 164).
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.
BOARD INSIGHTS
Performance evaluation
The Board undertakes an annual review of its own performance. In
the last few years it has employed the services of an external
facilitator, Sheena Crane. She is an independent consultant, with
experience of working at the most senior levels in major companies.
Within BAE Systems, her only work is with the Board and with the
Executive Committee, where she has undertaken similar
performance evaluation work. She was appointed to perform her
Board evaluation work in consultation with the Nominations
Committee.
Her evaluation process is based on one-to-one interviews with each
of the directors and recording their views on how the Board and its
committees work, and on the performance of individual directors.
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“The principles on which the Code is based are those of openness,
integrity and accountability. They go together. Openness on the part
of companies, within the limits set by their competitive position, is
the basis for the confidence which needs to exist between business
and all those who have a stake in its success. An open approach to
the disclosure of information contributes to the efficient working of
the market economy, prompts boards to take effective action and
allows shareholders and others to scrutinise companies more
thoroughly.”
Cadbury Committee Report – December 1992
Applying the principles of the UK’s Corporate Governance Code
The following report details how the Board has applied the main
principles in the Financial Reporting Council’s UK Corporate
Governance Code (the Code), as required by the UK Listing Rules.
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 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 principles
contained in the Code, and covers 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 details the separate and distinct roles of the
Chairman and the Chief Executive, and also those of the Senior
Independent Director and Company Secretary. It also states that
the following matters are reserved specifically for the Board:
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 derives from this.
Individual directors are also subject to annual performance
evaluation, with the Chairman providing feedback to all directors.
Committee chairmen also receive feedback on committee
performance.
The Chairman’s performance is discussed at a meeting of non-
executive directors. Following this meeting, the Senior Independent
Director meets with the Chairman to provide him with feedback on his
performance during the year. Subject to continued satisfactory
performance, directors seek re-election on an annual basis.
1. Approving the Company’s vision, values, principles of ethical
conduct, delegated authorities and overall governance
structure.
2. Approving all financial and commercial matters that it has
reserved for its decision.
3. Approval of the Company’s strategy and business plan.
4. Approval of the Company’s annual report and accounts, and
the preliminary and interim statements.
5. Approval of any distributions to shareholders including the
approval of any interim dividend payments and any
recommendations to shareholders concerning final
dividends.
6. Approval of any significant changes to accounting policies or
practices.
7. Appointment or removal of any director or the Company
Secretary.
8. Approval of all circulars, prospectuses and other documents
sent to shareholders (except for documents of a routine
nature).
9. Approving the issuing and allotment of shares, changes to the
capital structure of the Company, its legal status as a public
company, the listing of its shares and its name.
10. Recommending to shareholders the appointment,
re-appointment or removal of the Company’s auditors.
11. Forming committees of the Board and approving their terms
of reference.
12. Approval of the Board Charter (including this schedule of
reserved matters) and the Operational Framework (a
document detailing the Company’s vision, values, delegated
authorities and overall governance structure).
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.
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. 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 2012, the Board members were provided with opportunities to
engage in strategy development through informal meetings and
workshops as well as formal Board meetings.
Management resources review
The Nominations Committee undertakes an annual review of
management resources across the Group. Facilitated by the Group
Human Resources Director, the Committee focuses on the detailed
succession plans for all Board and Executive Committee positions,
and the strategic development of the Company’s management
resources. Through the use of the Talent Scorecard, the Committee
has access to metrics showing the Group’s performance over time in
populating succession plans appropriately, the level of appointments
sourced internally and externally, age profiles across levels within
succession plans, diversity at different management levels and
attrition rates.
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BOARD INSIGHTS
CORPORATE GOVERNANCE REPORT CONTINUED
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 we have the individuals with the right skills to meet the
needs of an increasingly complex and global business. The
procedures for the appointment of non-executive and executive
directors are detailed in the Nominations Committee report.
Following review by the Nominations and Corporate Responsibility
committees, the Board adopted the statement shown below to act
as a guide to future Board succession planning activity and to make
a clear public statement of its support for greater diversity in the
boardroom. Details of progress against the statement can be found
on page 81.
This included the following statement in respect of Board diversity:
– It shall have an aspirational target of at least 25% of the Board
being women by 2015.
– In seeking candidates for appointment to the Board, the
Nominations Committee shall only engage the services of search
consultants who have open and inclusive recruitment processes
that draw from an appropriately diverse pool of candidates.
– It shall report progress against targets and actions taken in the
Annual Report and Accounts.
There are currently three women on the Board (2012 three), 27%
(2012 25%) of the total membership. There are three women on the
Executive Committee (2012 two), 25% of its total membership
(2012 17%), and 20% of the Group’s employees are women (2012
19%).
BOARD INSIGHTS
On appointment, all non-executive directors are advised of the likely
time commitments and are asked to seek approval 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. 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. In addition, as part of the induction
process, new directors will typically visit the Group’s principal
operations in order to meet employees, and gain an understanding
of the Group’s products and services. Ongoing training is provided
for the Board and individual directors as required.
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.
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 83. 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 88.
Operational Assurance Statement
The Operational Assurance Statement (OAS) process is a key
element of the Company’s governance that is formed of two parts: a
self-assessment of compliance with mandated policies and
processes; and a report showing key risks for each business and
function.
Managed by the Group’s Internal Audit function, an OAS return must
be completed every six months by each operational and functional
business head, recording their formal review against such matters
as compliance with law and regulation, ethical business conduct,
financial controls, risk management, compliance with business
planning processes, health and safety, conflicts of interest,
delegated authorities, appointment of advisers, and product safety.
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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 93 to 113). 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 available to
meet with major shareholders and is in regular contact with them so
as 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. 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.
BOARD INSIGHTS
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Where simple yes/no answers are not appropriate, an assessment
of compliance is required to be made against structured qualitative
guidance.
The Audit Committee and the Corporate Responsibility Committee
review the output from the OAS process with the head of Internal
Audit. It is also shared in detail with the Company’s Auditors.
The provisions in the OAS concerning joint ventures were revised in
2012 aimed at increasing the level of assurance for such entities.
The completion of a separate OAS is mandated for joint ventures
and BAE Systems employees on the boards of these companies are
required to exert such influence as the Company may have to
encourage the adoption of a governance structure that is
substantially equivalent to that mandated for wholly owned or
controlled parts of the Group.
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CORPORATE GOVERNANCE REPORT CONTINUED
Audit Committee report
Members
Nick Rose (Chairman), Sir Peter Mason,
Paula Rosput Reynolds
Governance
The Audit Committee was in place throughout
2012 and held six meetings, plus one joint
meeting with the Corporate Responsibility
Committee. All its members are independent in
accordance with the provisions of the Code.
Summary of 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
– Monitoring the role and effectiveness of the
Internal Audit function
– Approving an annual programme of internal
audit work
– 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
– Assessing the effectiveness of the audit
process
– Developing and implementing policy on the
engagement of the Auditors to supply
non-audit services
Nick Rose, Chairman
Dear Shareholders,
An important part of the role of the Audit Committee is its responsibility for reviewing
the effectiveness of the Group’s financial reporting, internal control policies, and
procedures for the identification, assessment and reporting of risk. The latter two
areas are integral to the Group’s core management processes and the Committee
devotes significant time to their review. Further information on the risk management
and internal control systems is provided on page 83.
One of the key governance requirements of a group’s financial statements is for the
report and accounts to be fair, balanced and understandable. The co-ordination and
review of the Group-wide input into the Annual Report and Accounts is a sizeable
exercise performed within an exacting time-frame which runs alongside the formal
audit process undertaken by the external Auditors.
Arriving at a position where initially the Audit Committee, and then the Board, are
satisfied with the overall fairness, balance and clarity of the document is underpinned
by the following:
– comprehensive guidance issued to contributors at operational level;
– a verification process dealing with the factual content of the reports;
– comprehensive reviews undertaken at different levels in the Group that aim to
ensure consistency and overall balance; and
– comprehensive review by the senior management team.
The Audit Committee has also championed efforts to ‘declutter’ the document by
stripping out duplication and sequencing information in as logical a manner as
possible without compromising compliance with UK regulatory and accounting
requirements.
An essential part of the integrity of the financial statements are the key assumptions
and estimates or judgements that have to be made. The Committee reviews key
judgements on a twice-yearly basis prior to publication of the financial statements at
the full and half year, as well as considering significant issues throughout the year. In
particular, this includes reviewing any materially subjective assumptions within the
Group’s principal programmes to enable an appropriate determination of revenue
recognition or provisioning. The Committee has also reviewed an analysis of goodwill
held on the Group’s balance sheet in respect of a number of past major transactions
and assumptions made in respect of the relevant cash-generating units to which
goodwill has been attributed: the methodology for impairment testing used by the
Group is set out in note 11 to the Group accounts on page 140.
Audit – both internal and external – plays an important part in assessing the
effectiveness of financial reporting and internal controls and, in turn, the
effectiveness and quality of audit is of key importance.
Our Auditors, KPMG Audit Plc, and their legacy predecessors, have been in place
since 1981 and, in line with the audit profession’s own ethical guidance, the current
audit engagement partner will rotate off the Company’s account in 2013 having
served for a period of five years. The Committee reviews the Auditors’ independence
on an annual basis and also monitors on a quarterly basis the nature and level of
non-audit fees payable to them. The Committee believes that certain work of a
non-audit nature is best undertaken by the external Auditors, and 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. The Committee has implemented a policy on the engagement of the
Auditors to supply non-audit services which aims at safeguarding audit objectivity and
independence. The Committee has agreed the policy opposite regarding services
provided by the Auditors. Details of fees payable to the Auditors are set out on
page 127.
The Committee has reviewed the recent changes to the UK Corporate Governance
Code including the new provision for FTSE 350 companies to put the external audit
contract out to tender at least every ten years. Having considered the FRC’s guidance
on aligning the timing of such re-tenders with the audit engagement partner rotation
cycle, the Committee’s current intentions are that it will initiate a re-tendering process
in 2017. This policy will be kept under review and the Committee will use its regular
reviews of auditor effectiveness to assess whether an earlier date for such a re-tender
would be desirable. Such regular reviews are used to assess the effectiveness of the
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external audit process and the Auditors’ performance, with the Committee
undertaking an internal assessment of the audit effectiveness and performance
which is mapped against audit appointment criteria. On an annual basis, this is
undertaken through a Group-wide evaluation at management and functional level,
together with input from the Audit Committee itself. In addition, the Committee
undertakes a comprehensive review of the effectiveness and performance of the
external Auditors every three years. The last such review was undertaken in 2011 and
encompassed management performance evaluation, independent client service
review, future audit strategy and fee benchmarking.
Having considered the output of this review, the Committee has recommended to the
Board that it recommend that shareholders support the re-appointment of the
Auditors at the 2013 AGM.
As reported last year, the Committee appointed a new head of Internal Audit with
effect from April 2012. An external quality assessment of the Group’s Internal Audit
function has been initiated and any recommendations to strengthen the function’s
capabilities or enhance the service it delivers will be acted upon.
The annual internal audit programme itself is agreed jointly by the Audit and Corporate
Responsibility committees to ensure that the over-arching internal audit programme
includes the assessment of the effectiveness of policies and processes relating to
key areas of ethical and reputational risk.
The Committee derives considerable value from discussing issues with operational
management as well as seeing at first hand practical demonstrations of the Group’s
core control, risk identification and risk mitigation processes. To this end, in 2012, the
Committee met with senior management in the Group’s Support Solutions business
as part of its visit to the US in June, as well as meeting with senior management in the
UK Naval Ships business as part of a visit to the Scotstoun site in Glasgow in
December.
Nick Rose
Chairman – Audit Committee
Policy on non-audit services provided by the Auditors
Audit-Related Services
– Reporting required by law or regulation to
be provided by the Auditors;
– Reviews of interim financial information;
– 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;
– Accounting advice; and
– Validation and verification work in
connection with bids.
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;
– 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.
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CORPORATE GOVERNANCE REPORT CONTINUED
Corporate Responsibility Committee report
Paul Anderson, Chairman
Members
Paul Anderson (Chairman), Harriet Green,
Sir Peter Mason
Governance
The Corporate Responsibility Committee was in
place throughout 2012, and held four meetings
and participated in three site visits. All its
members are independent in accordance with
the provisions of the Code.
Summary of 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 internal control policies and
procedures for the identification,
assessment, management and reporting of
reputational and other non-financial risks
– Monitoring and reviewing the role and
effectiveness of the Company’s Internal Audit
function in relation to corporate responsibility
– Providing oversight of the Company’s
compliance with corporate responsibility-
related policies and procedures
– Reviewing audit and assurance reports
produced by the Corporate Responsibility
assurer
– Overseeing and supporting key stakeholder
engagement on social, environmental and
ethical issues
– Making proposals to the Remuneration
Committee regarding appropriate corporate
responsibility-related performance objectives
for executive directors
– Reviewing the Company’s arrangements for
employees to obtain further advice on ethical
issues in confidence
– Ensuring that the Code of Conduct is regularly
reviewed and reflects best practice for such
codes
– Ensuring the Company’s Annual Report and
Accounts includes an examination of ethical
business conduct within the Company
Dear Shareholders,
The Corporate Responsibility Committee has been in place since 2005 and over that
time a good deal of its work has been focused on ethics. Founded on a robust
approach, we have seen good progress in this area with good evidence of business
conduct being embedded in the way the Company does business. There is clear
leadership from the top and an ongoing education programme that provides guidance
on what is expected of employees. This assists them in applying our values and
behaviour expectations to workplace situations. It also includes guidance on how to
validate matters and seek assistance through mechanisms such as our Ethics
Helpline and network of Ethics Officers. As with all matters that shape the culture of
an organisation, the Committee is mindful that there will be an ongoing requirement
for clear leadership at all levels within the Company, and for training and education
that is engaging and relevant. Alongside this, there will always be a need for Board
oversight, supported by internal and external assurance providers, and the insight
provided by employee engagement processes.
Since its formation, the Committee has also focused on safety. Here again, we have
seen progress. In particular, we have seen improvements in safety leadership and the
integration of safety into the core management review and reward processes that are
used to drive performance throughout the Company. For 2012, the Committee agreed
that our basic measure of safety performance – and the one used as part of our
executive incentives – should change from the Lost Work Day Case Rate to the
Recordable Accident Rate. Whilst progress had been made using the lost day
measure, it was felt that we needed a metric that was more responsive to actions that
help embed safety into how we approach and manage our business, and also
facilitates external benchmarking against leading performers. Details of 2012
performance as measured by the Recordable Accident Rate can be found on page 41.
Compared with ethics and safety, diversity and inclusion is a comparatively recent
area of focus for the Committee. However, since 2009, it has been engaged in this
area, supporting the Chief Executive and his management team in developing an
approach to diversity and inclusion that is capable of delivering the desired result
across a large and diverse company. We have seen good engagement from the senior
management team, which recognises that evolving the culture of an organisation
requires leadership and commitment to change. To measure performance in this
area, the Company has adopted a maturity matrix approach that provides all
businesses with a model describing five levels of organisational maturity. The
Committee will continue to use this and other tools to monitor performance and
report on our progress to shareholders.
I’m pleased that we have been able to increase our focus on environmental matters in
2012. Against a goal of reducing the environmental impact of our operations and
products, targets have been set to reduce the amount of energy and water used, and
waste generated. As with all the corporate responsibility matters mentioned in this
report, environmental sustainability performance has been incorporated into the
Company’s core performance management processes and, therefore, has the same
visibility as financial measures of performance. The Committee receives
management information throughout the year that informs our ‘meeting room’
engagement with the Chief Executive and his senior operational executives. However,
there is always a need to spend time as a committee out of the meeting room,
meeting employees and seeing operations. Here the experience and knowledge of
Committee members can be used to assist in developing an understanding of
progress against our corporate responsibility goals. We did this three times in 2012,
with site visits in the UK, Saudi Arabia and the US providing valuable insights.
BAE Systems does not produce a separate corporate responsibility report. Instead
we choose to integrate these matters into this Annual Report and Accounts. If
corporate responsibility considerations are managed as an integral part of how you
do business that is how it should be. Within the business reporting segments (pages
56 to 75) you will find details of performance in the areas of safety, diversity and
inclusion, and environment for each of our reporting segments.
Paul Anderson
Chairman – Corporate Responsibility Committee
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Nominations Committee report
Members
Dick Olver (Chairman), Paul Anderson,
Sir Peter Mason, Nick Rose
Governance
The Nominations Committee was in place
throughout 2012 and held four meetings. It is
chaired by the Chairman of the Company. Whilst
he is not deemed to be independent, the other
three members of the Committee are
independent non-executive directors in
accordance with the provisions of the Code.
Summary of 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
Dick Olver, Chairman
Dear Shareholders,
Over the last few years, the Board has aimed to achieve a board membership of 12
directors, comprising a chairman, three executive directors and eight non-executive
directors. It is recognised that at times we will be slightly above or below, but having
such a target assists the Nominations Committee in its succession planning activity.
Following Michael Hartnall’s retirement at last year’s Annual General Meeting, Board
membership has been reduced to 11, plus the Committee knew we had to plan for
Sir Peter Mason’s retirement as he was in his tenth year on the Board. Consequently,
the Nominations Committee initiated a search in the first half of 2012 for suitable
candidates for appointment as non-executive directors of the Company. However, the
discussions that the Company held with EADS last year regarding a possible
combination of the two businesses could have led to the Board being re-constituted
and, consequently, the pace of the search activity had to be slowed. This activity is
now well underway with external search consultants, Zygos Partners, having been
appointed by the Committee to assist. I manage the relationship with Zygos and they
provide no other recruitment services to the Company. We expect to be in a position to
announce non-executive appointments shortly.
The following table summarises the membership of the Board at present:
Director
Chairman
Dick Olver
Nationality
Date of
appointment
Time on
Board
Committee
membership
UK
17 May 2004
8 years
9 months
Nominations
Executive directors
Linda Hudson
Ian King
Peter Lynas
US
UK
UK
1 January 2007
26 October 2009 3 years
4 months
6 years
2 months
1 year
11 months
3 years
10 months
1 April 2011
Average time on Board – Executive directors
Non-executive directors
Paul Anderson
US
8 October 2009
3 years
4 months
Harriet Green
Sir Peter Mason
UK
UK
1 November 2010 2 years
4 months
22 January 2003 10 years
Lee McIntire
US
1 June 2011
Paula Rosput Reynolds US
1 April 2011
Nick Rose
UK
8 February 2010
Carl Symon
UK/US
11 June 2008
Average time on Board – Non-executive directors
Average time on Board – All directors
1 month
1 year
9 months
1 year
11 months
3 years
4 years
8 months
3 years
10 months
4 years
4 months
–
–
–
Corporate
Responsibility,
Nominations
Corporate
Responsibility
Audit,
Corporate
Responsibility,
Nominations
Remuneration
Audit
Audit,
Nominations,
Remuneration
Remuneration
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BAE Systems Annual Report 2012
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CORPORATE GOVERNANCE REPORT CONTINUED
Succession planning activity has been constant throughout my time on the Board, and
rarely has there been a time when we have not been looking for candidates for
appointment as non-executive directors. As you can see from the above, we have
been successful in refreshing the Board, with the average time on the Board being
just over four years. In discharging its succession planning duties, the Committee
considers the profile of the non-executive members of the Board on a regular basis,
analysing its composition in terms of knowledge, experience and skills, diversity, and
length of service. Diversity is an important part of these considerations, and we look
at different aspects of this, including professional background and experience,
geographic/cultural diversity and gender diversity. We also consider the Company’s
strategy as part of our succession planning and, as a consequence, identify areas of
knowledge and experience that will assist the Board in strategic development and
delivery.
Executive director succession planning is also undertaken by the Committee, with the
annual tempo of the Committee’s work here focused on its oversight of the
Company’s executive development and succession planning processes. The
effectiveness of these processes, which cover the whole of the Group’s executive
population, is fundamental to the future success of the Company. Identifying talented
individuals with the ability to develop and grow as leaders is a core requirement for
successful businesses and, in BAE Systems, this is led by the Chief Executive. He and
the Executive Committee regularly review the experience and skills that our future
leaders will require, and use this to shape our development activities.
The Committee’s role in executive succession planning is to engage with the Chief
Executive and the Group Human Resources Director in discussing our management
development strategy and priorities, as well as the detailed succession plans for the
most senior executive positions. Through such engagement, the Company draws on
the knowledge and experience of the Committee’s members to help shape this
activity, and ensure that the analysis, objectives and processes are sound and robust.
Whilst our internal resources will always be considered for any appointment, we will
also look at external recruitment and use this in a balanced approach to meeting
future management needs.
Finally, Nick Rose joined the Committee recently having been appointed to succeed
Sir Peter Mason as Senior Independent Director. My term of office is due to expire
next year and, in line with the UK Corporate Governance Code, Nick Rose will chair the
Committee in its search to identify an individual to succeed me as Chairman. It is
therefore appropriate that Nick provides you with the following separate statement on
this matter on behalf of the Nominations Committee.
Dick Olver
Chairman – Nominations Committee
Chairman’s succession
One of the main principles in the UK Corporate
Governance Code states:
“The chairman is responsible for leadership of
the board and ensuring its effectiveness on all
aspects of its role.”
That is a very substantial role that is critical to
the performance of any board and, therefore,
ultimately the performance of the company. The
role of the Chairman of BAE Systems is
principally as defined by the Code, but it also
includes representing the Company at the
highest level, and building key relationships that
assist in developing our strategy and customer
relationships worldwide. Given the nature of our
business, the importance of this aspect of the
role should not be overlooked.
The Board and the Committee are fully aware of
the criticality of the chairman role and the need
to plan for the appointment of Dick Olver’s
successor in a thorough, well-structured and
timely manner. As the Senior Independent
Director, I am chairing the Nominations
Committee as it discharges this important role.
The Committee has structured the search
process in line with best practice for such
matters, including:
– I will engage with important stakeholders –
including our major shareholders – during the
search.
– The Committee will use an external search
consultancy to identify possible candidates
for appointment.
– The Committee will only nominate an
individual for appointment who is independent
at the time of appointment in accordance with
Code provision B.1.1.
We have started the search for a successor to
Dick Olver as Chairman of the Board and we
expect to be in a position to announce the
results of this later in the year.
Nick Rose
Senior Independent Director
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REMUNERATION REPORT
Remuneration Committee Report
Members
Carl Symon (Chairman), Lee McIntire,
Nick Rose
Governance
The Remuneration Committee was in place
throughout 2012 and held seven meetings.
Details of attendance at these meetings are
provided on page 83. All its members are
independent in accordance with the provisions
of the Code.
The Chief Executive and the Company’s
Chairman attend meetings by invitation only.
They do not attend where their individual
remuneration is discussed and no director is
involved in deciding his or her own remuneration.
Summary of 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
– Within the agreed policy, determining
individual remuneration 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
Carl Symon, Chairman
Dear Shareholders,
Over the last year, the Committee has focused on the simplification of our long-term
incentive arrangements. This has been largely achieved by replacing the Share
Matching Plan (SMP) with an increase in the Performance Share Plan (PSP) grant
which preserves the expected value at on-target performance and results in a better
balance between Earnings per Share (EPS) and Total Shareholder Return (TSR) as
drivers of long-term incentives, whilst balancing our major objectives of motivation,
retention, pay for performance and long-term shareholder alignment.
BAE Systems is one of the world’s largest and most geographically diverse defence,
aerospace and security companies. We have a clearly defined strategy to deliver
sustainable growth in value to shareholders, operating in a highly technologically
complex market, and with a presence in five principal markets. The Group continues to
face a more challenging trading environment as governments seek to reduce fiscal
deficits and defence budgets are significantly reduced in certain of our major markets.
Our strategy focuses on the growing importance of winning international business,
where growth markets remain. The key elements of our strategy are to support our
customers in safeguarding their vital interests, inspire and develop our people to drive
our success, and drive shareholder value by improving financial performance and
competitive positions across the business. The current environment is increasingly
competitive and, to deliver growth in shareholder value, we are focused on generating
strong cash flows and profits. Improving efficiency in our operations will also make us
more competitive to win future business. Each year, the Board agrees the Executive
Committee’s key objectives which are critical to delivering the Group’s strategy. For
2013, these are set out on page 11, and are used as the basis to set the individual
objectives for the executive directors and Executive Committee members which are
agreed by the Chairman, Dick Olver, and the Remuneration 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.
Our remuneration strategy is intended to recognise this business environment, whilst
fostering a Total Performance culture at all levels of the Group. Given the maturity of
the Group, certain areas of corporate responsibility, such as diversity and inclusion,
will not be specifically incentivised in 2013. In determining the levels of executive
reward, the Remuneration Committee believes it is of utmost importance to ensure a
strong link between actual remuneration received and the achievement of our
strategic and business objectives. The remuneration strategy incentivises executives
to deliver their contribution and rewards them for the achievement of the Group’s
strategy through a combination of short-term incentives targeted at Group
performance, business performance, personal performance and leadership
behaviours, and long-term incentives targeted at Group performance (and business
performance in the case of our US senior executives). To directly align short-term and
long-term reward, executive directors will be required to defer at least one-third of their
net 2013 annual incentive into shares when the annual incentive is paid in 2014.
The combination of the annual incentive plan, PSP and share options provides a
balance between short-term cash reward and longer-term share-based reward. The
proportion of the incentive package delivered through longer-term performance is
significantly higher at stretch pay-out than at on-target, demonstrating that the
package supports the achievement of superior long-term performance and strongly
aligns the interests of executives to those of shareholders by delivering long-term
reward in shares. Achieving strong performance on the in-year measures is important
but, to maximise the value of their incentive package, executives need to realise
growth in long-term EPS, TSR and share price.
In 2012, our performance against targets was as follows. Our EPS of 38.6p (underlying
EPS adjusted to exclude the effect of foreign exchange) was below threshold; the
stretch target for both year-end and average cash was achieved. Our TSR performance
reflects the sustained under-performance of our share price. The reported diluted
underlying EPS of 38.8p is below the level required for any vesting of PSP and SMP
long-term incentives awarded in 2010. This result of 38.8p will form the baseline EPS
figure against which performance of the 2013 PSP award will be measured.
Against this performance background, the main aspects of our remuneration policy
and practice for the year were as follows:
– For 2013, the salaries of the Chief Executive, Group Finance Director and the
President and Chief Executive Officer of BAE Systems, Inc. were frozen. There will
be no increase in base compensation and no increase in earnings opportunity
flowing through the rest of the package.
BAE Systems Annual Report 2012
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REMUNERATION REPORT CONTINUED
Advisers to the Remuneration Committee
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 is a founding member of the
Remuneration Consultants Group (RCG) and
complies with the RCG’s code of conduct for
remuneration consultants to the FTSE 350.
Kepler will not undertake any work for the
Company whilst they are retained as the
Committee’s independent adviser.
Representatives from Kepler are generally
invited to attend Committee meetings unless
specifically requested otherwise by the
Committee and attended all but one of the
Committee’s seven meetings during 2012.
During the year, the Committee also received
material assistance and advice on remuneration
policy from the Group’s Human Resources
Director (Alastair Imrie until 31 March and Lynn
Minella from 11 June) and the Human
Resources Director, Reward, Paul Farley.
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, 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. Mercer
provided data to the BAE Systems, Inc.
Compensation Committee, which was also used
to support the review of competitive positioning
of packages.
– Annual bonus pay-outs for the executive directors under the annual incentive plan
ranged from 55.1% to 68.2% of maximum.
– EPS performance over the three-year performance period for the 2010 awards
under the long-term incentive plans was below the minimum 5% per annum average
growth requirement. Consequently:
– the SMP award granted in 2010 earned a nil match; and
– of the 50% of the awards of shares granted in March 2010 under the EPS portion
of the PSP, none will vest.
– The Company’s TSR for the 50% of awards of shares granted in March 2010 under
the TSR portion of the PSP was below the median position when compared against
the comparator group of 17 other defence and aerospace companies, and the
related awards accordingly lapsed.
The Committee will continue to monitor the market and will consult with shareholders
on any further changes for 2014 to ensure that our plans continue to demonstrate a
clear line of sight for executives to the achievement of strategic goals and strong
alignment with the creation of shareholder value.
The Committee received important feedback from shareholders during last year’s
consultation largely around the perceived complexity of our long-term incentive
arrangements. Specific questions were raised about the need for the SMP and the
use of EPS performance in both this plan and the PSP. The Committee is proposing
the following changes to our executive remuneration framework for 2013:
– Elimination of the SMP, with redistribution of the associated value into the PSP.
Despite the increased face value award under the PSP, the expected value of the
overall package remains unchanged and grants remain within the current PSP plan
limits of 400%.
– The holding period under the PSP whereby vested shares are released in three
tranches over years three, four and five is unchanged. The redistribution of value
from the SMP into the PSP means that all of this element of reward value will be
subject to phased five-year vesting compared to the current three-year vesting for
the prior SMP.
– The PSP will continue to be based 50% on EPS and 50% on TSR against a
comparator group comprising companies with a significant defence focus in order
to ensure meaningful alignment between the Group’s strategy for delivering
shareholder value and executive performance. Elimination of the SMP (which has a
sole EPS performance condition) results in an increased emphasis on TSR as a
metric within the long-term incentive structure and a better balance with EPS.
– In the case of the President and Chief Executive Officer of BAE Systems, Inc., 50%
of the PSP is based on a measure relating to operating cash performance of the US
businesses (with the other 50% being subject to the same EPS performance
condition as applies to other executive directors). The President and Chief
Executive Officer of BAE Systems, Inc. also participates in the Restricted Share
Plan introduced following shareholder approval at the 2011 AGM, which applies to
US-based executives and has no performance conditions attached.
Hewitt New Bridge Street, who are appointed by
the Committee, provided advice on the TSR
figures for assessing the performance condition
under the PSP.
– Despite the challenging economic environment and reduction in defence budgets,
no adjustments are being made to the performance conditions – which remain a
challenging target of 5% to 11% growth per annum – or vesting structure within the
PSP.
– The Committee intends to implement a simple bonus deferral and claw back
mechanism, in line with UK shareholder and regulatory guidance and without
matching provisions. As currently, it is proposed that one third of the annual
incentive will be compulsorily deferred into shares without performance conditions
and will be held for a minimum of three years, with claw back provisions in the event
that performance is subsequently found to have been misstated.
– We are retaining our requirement for executive directors to build up a significant
personal shareholding and increasing the minimum shareholding requirements for
the Chief Executive from 200% to 300% of salary. Reflecting US market practice,
the shareholding requirement for the President and Chief Executive Officer of
BAE Systems, Inc. was increased substantially last year from 200% to 350% of
salary.
– We will add order intake as a third financial metric within the Annual Incentive Plan
to sit alongside EPS and cash, to ensure an appropriate alignment with the Board’s
strategic growth objectives.
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– As part of a wider effort to strengthen the US business’ competitive position across
current and future markets, and consistent with the treatment of all other
BAE Systems, Inc. employees, the formula for calculating pension benefits
applicable to the President and Chief Executive Officer of BAE Systems, Inc. earned
after 31 December 2012 will change from a 10% of plan compensation annual
accrual to a flat dollar amount of $1,000 plus, in the Non-Qualified Plan, an annual
accrual of $500.
In line with our ongoing commitment to keep our shareholders informed of
developments in executive remuneration arrangements, we shared with our largest
shareholders the Remuneration Committee’s views on potential changes to executive
remuneration for 2013 in late November 2012. This set out the conclusions of our
review at that early stage, with proposals finalised and shared more widely with our
major shareholders in January 2013 as part of our usual cycle of engagement. During
consultation regarding proposed changes for 2013, shareholders have expressed
support for the overall direction and, in particular, the structural improvement to the
long-term incentive design through elimination of the SMP.
The Committee intends to enact the proposed changes as soon as possible after the
formal shareholder approval of the Remuneration report at the AGM in May 2013.
Annual incentive invitations for 2013 would set out the compulsory deferral
requirement that would apply to annual incentive payments made in March 2014. The
increased face value of PSP awards would coincide with this, in March 2014.
On the following pages:
Policy report
This section includes:
– Remuneration strategy and policy
– How remuneration is reviewed
– Elements of package, and
purpose and link to strategy
– Base salary, annual incentive
plan and Long-Term Incentive
Plans (LTIPs)
– Executive directors’ service
contracts
– Policy on external board
appointments
– Chairman’s appointment, term
and fees
– Non-executive directors’
appointment, term and fees
Page
96–98
96
96
96
97
97
98
98
98
Carl Symon
Chairman – Remuneration Committee
Implementation report
This section includes:
– 2012 performance
– Personal shareholding policy
– Post-retirement and other
benefits
– Structure of individual executive
directors’ packages
– Summary of LTIPs
– Tabular information on directors’
shareholdings, share-based
incentives, emoluments and
pensions
99–113
99
99
100
101–103
104–106
107–113
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95
REMUNERATION REPORT CONTINUED
POLICY REPORT
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 Executive Committee members is to:
– helps to attract, retain and motivate;
– is aligned to shareholders’ interests;
– is competitive against the appropriate market;
– encourages and supports a Total Performance culture aligned to
the achievement of the Company’s strategic objectives;
– is fair and transparent;
– can be applied consistently throughout the Group; and
– balances overall commonality of design with appropriate tailoring
to ensure competitiveness in our different principal markets.
– set base salary with reference to median of the relevant market
competitive level;
– reward stretching superior performance with up to upper quartile
reward;
– provide an appropriate balance between:
– short-term and long-term reward; and
– fixed and variable reward
with the balance becoming more long term and more highly
geared with seniority; and
– provide a competitive package of benefits.
How remuneration is reviewed
In determining the levels of executive reward, the Remuneration Committee believes it is of utmost importance to ensure a strong link
between actual remuneration received and the achievement of our strategic and business objectives.
In 2012, information on the market for comparable positions was provided by PricewaterhouseCoopers so that the Committee could form a
view as to where to position the various elements of the package relative to comparable companies.
Appropriate comparator groups are constructed for the individual positions, taking account of company size, scale of operations and
breadth of role. The comparator group for the UK executive directors’ review in 2012 comprised 27 FTSE 100 companies where
BAE Systems was positioned towards the median in terms of market capitalisation and which the Committee believes is appropriate for
benchmarking UK executive directors’ packages. For the President and Chief Executive Officer of BAE Systems, Inc., the comparator group
for 2012 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) are 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 reviews market trends around the individual elements of remuneration to ensure that the structure of the package is
appropriately aligned 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. For 2012, the review indicated that the structure is broadly in line with
the relevant market.
In setting remuneration levels, the Committee is also sensitive to the pay and conditions of other employees within the Group. 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 2012, general salary increases
for our two largest employee populations in the UK and US typically averaged 3% and 3.5%, respectively.
The Committee intends to continue to flow down executive remuneration policy as detailed in this report to Executive Committee members
and to the most senior executives within the Group globally to maintain a consistent approach to global reward. The principles of the
remuneration strategy are applied consistently across the Group below this level, taking account of seniority and local market practice.
Elements of package
Purpose and link to strategy
Base salary
Annual incentive
Performance Share Plan
Share Option Plan
Restricted Share Plan
Pension provision
Other benefits
Recognise market value of role and individual’s skills, experience and performance to ensure the
business can attract and retain talent.
Drive and reward annual performance of individuals, teams and the Company on both financial and
non-financial metrics, including behaviours.
Drive and reward delivery of sustained long-term EPS and TSR performance aligned to the interests
of shareholders.
Drive and reward delivery of TSR performance and sustained improvement in the Company’s share
price.
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 through leveraging the Company’s size and scale.
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Base salary
The Committee reviewed base salaries, taking into account the
current economic climate, the challenges facing the business, their
respective positions against benchmark and the pay environment
for employees in general. No changes have been made to annual
base salary levels for executive directors in 2013, which remain as
follows:
Name
Ian King
Peter Lynas
Linda Hudson
2012 salary
£963,050
£546,000
$1,045,350
2013 salary
£963,050
£546,000
$1,045,350
Increase
0%
0%
0%
Annual incentive plan
The annual incentives for 2013 continue to focus on a combination
of in-year financial performance, and longer-term performance and
risk management (both business risk and reputation risk).
Four-fifths is driven off in-year financial performance, and one-fifth
based on driving performance and improvement in the area of
corporate responsibility and safety, combined with the other
non-financial objectives supporting the Group’s strategy.
The financial targets are derived from the IBP, and are based on
earnings, cash and order intake targets. These are seen as the key
indicators of both short-term and long-term financial performance
and value creation. 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 has been in place since 2009 and will continue for 2013. Due
to the stretching nature of the plan, the payout structure includes
threshold, target and stretch levels for both EPS and cash
measures. Order intake has target and stretch levels only. The
payout for on-target performance is 50% of maximum. The payout
for achieving a threshold performance is 20% of the maximum, with
no payout for achieving less than this. Payout for performance
between targets is calculated on a straight-line basis.
Performance measure
In-year financial
Corporate responsibility and safety
Other objectives
2012
80.0%
10.0%
10.0%
2013
80.0%
7.5%
12.5%
In setting targets for the annual incentive plan, the Committee
expects that these should represent positive progression relative
to the level of performance achieved in the prior year.
The Committee believes that the annual incentive targets for the
executive directors are stretching but achievable. The structure of
the 2013 annual incentive plan for executive directors is
summarised in their individual sections on pages 101 to 103.
Long-Term Incentive Plans (LTIPs)
The Company currently operates four LTIPs – the Performance Share
Plan (PSP), the Share Option Plan (ExSOP2012), the Share Matching
Plan (SMP) and, for US executives only, the Restricted Share Plan
(RSP) – the details of which are set out on pages 104 to 106.
The proposed simplification changes to our long-term incentive
structure for 2013 are set out in the Committee Chairman’s report
on pages 93 to 95.
The following graphs show at on-target and stretch performance the
proportion of the incentive package delivered by the various plans,
and which performance metrics are driving the value of the incentive.
1
Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense.
Proportion of Chief Executive’s incentive package delivered
by the various incentive plans (%)
Stretch
performance
On-target
performance
0
20
40
60
80
100
Proportion of incentive package (%)
■ Cash bonus ■ Deferred bonus ■ PSP ■ Share options
Performance drivers of Chief Executive’s incentive package (%)
Stretch
performance
On-target
performance
0
20
40
60
80
100
Proportion of incentive package (%)
■ In-year measures ■ Long-term EPS ■ Relative TSR ■ Share price
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.
Director
Linda Hudson 26 October 2009
Date of contract
Unexpired term
31 December
2013*
Notice period
90 days
either party
No fixed term
No fixed term
12 months
either party
12 months
either party
(amended
8 January 2010)
27 June 2008
16 February 2011
(effective
1 April 2011)
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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 Ian King and Peter Lynas 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).
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).
BAE Systems Annual Report 2012
97
The table below summarises the overall structure of the annual
incentives for executive directors.
Ian King
Proportion of annual incentive
Peter Lynas
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REMUNERATION REPORT CONTINUED
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 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 2012 were as follows: Ian King
£47,000 in respect of his non-executive directorship of Rotork p.l.c.;
and Linda Hudson $56,550 in respect of her non-executive
directorship of Bank of America since her appointment in 2012.
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 the Senior
Independent Director, it was extended again in 2009 for a third term
to 16 May 2013, and subsequently in 2011 to 16 May 2014 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. Recognising
that the Chairman’s fees had not changed since 2007, the
Remuneration Committee undertook a review of the level of his
fees in 2011 taking into account, amongst other things, the scope
of the duties performed by the Chairman of the Company. As a
result, his fee was set at £725,000 per annum with effect from
1 June 2011. This fee will not be reviewed again during his current
term of office, which ends on 16 May 2014.
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
Lee McIntire
Sir Peter Mason
Paula Rosput Reynolds
Nick Rose
Carl Symon
Date of appointment
08.10.2009
01.11.2010
01.06.2011
22.01.2003
01.04.2011
08.02.2010
11.06.2008
Expiry of current term*
07.10.2015
31.10.2013
31.05.2014
08.05.2013
31.03.2014
07.02.2016
10.06.2014
*
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.
98
BAE Systems Annual Report 2012
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 AGM following
their appointment and subsequently at intervals of no more than
three years.
Michael Hartnall retired from the Board on 2 May 2012 having
originally been appointed to the Board on 10 June 2003. Sir Peter
Mason will retire from the Board at the AGM on 8 May 2013.
In compliance with the UK Corporate Governance Code, all
members of the Board submit themselves for re-election on an
annual basis at the AGM.
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 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 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.
The Non-Executive Directors’ Fees Committee comprises
Dick Olver, Philip Bramwell, Linda Hudson and Ian King. Having
undertaken its review in January 2013, the Committee decided that
the non-executive directors’ fees should remain unchanged at the
current time 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)*
2012 and 2013 fee
£75,000
£25,000
£20,000
£20,000
£20,000
£4,500
*
The travel allowance of £4,500 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 2012 and 2013:
Non-executive director
Chairman Audit Committee
Chairman Corporate Responsibility Committee
Chairman Remuneration Committee
Other non-executive directors
Additional fee for Senior Independent Director
2012 and 2013 fee*
£100,000
£95,000
£95,000
£75,000
£20,000
* Excludes the travel allowance per meeting referred to above.
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IMPLEMENTATION REPORT
Financial performance 2012 was a challenging year with both
constraints in our principal markets due to wider economic
pressures, and the ongoing negotiations to formalise the price
escalation on the Salam Typhoon programme. The Group failed to
achieve its EPS target, as referred to on page 12, but stretch
performance for both cash targets was achieved. At the operating
group level, Programmes & Support missed its stretch profit target
but achieved stretch performance on both cash targets.
International achieved its threshold profit target, missed its
year-end cash target and missed its stretch average cash
performance. BAE Systems, Inc. achieved stretch performance for
both cash targets and achieved its EBITA1 target.
Non-financial performance Page 12 sets out the Executive
Committee’s key objectives for 2012 and the assessment of
performance against these, whilst pages 41 to 43 provide more
detailed information on performance against the specific objectives
relating to safety, diversity and inclusion, and environment.
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. All businesses
reported progress against the SMM. The Group achieved a 30%
reduction in the Recordable Accident Rate, exceeding the stretch
target of 15%.
Diversity and inclusion – The Group targeted progress against
diversity and inclusion maturity matrices, which delivered to plan
across all parts of the business.
Environment – The Group has continued to drive progress against
environmental maturity matrices, and to meet specific targets for
energy, water and waste for 2012. Businesses met the targets
they set for improvement and the cumulative impact at Group level
was a 12% reduction in energy, 7% reduction in water consumption
and 25% reduction in waste.
Key strategic objectives – Of the remaining key strategic objectives
for individual executive directors in 2012, the Committee agreed
assessments taking account of overall performance and
leadership behavioural performance of the individual executive.
This produced an average overall assessment of 71% of maximum.
Accordingly, the Committee determined the payout under the 2012
annual incentive plan as follows:
2012 annual incentive payout
% of target
% of base salary
Amount
In addition:
Ian King
111.3%
125.2%
Peter Lynas
110.2%
88.2%
£1,205,317 $1,604,310 £481,572
Linda Hudson
136.4%
153.5%
– the growth in EPS over the three years to 2012 was below the
performance range of 5% to 11% per annum. Consequently:
– the SMP award granted in 2010 earned a nil match; and
– none of the awards granted in March 2010 under the EPS
portion of the PSP vest.
– the Company’s TSR for the 50% of awards of shares granted in
March 2010 under the TSR portion of the PSP was below the
median position when compared against the comparator group of
17 other defence and aerospace companies, and the related
awards lapsed accordingly.
Value at 31 December 2012 of £100 investment at
31 December 2007 (£)
Value at 31 December 2012 of £100 investment (£)
£250
£200
£150
£100
£50
£0
£250
£200
£150
£100
£50
£0
2007
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
BAE Systems
FTSE 100
BAE Systems
FTSE 100
PSP comparator group
Pay 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 2012, on a total
shareholder return basis, of £100 invested in BAE Systems on 31 December
2007 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 2012 for the Performance Share
Plan (see page 105); and (iii) the companies forming the comparator pay group for
the 2012 UK executive pay review. The graph depicts the value for BAE Systems
and the comparators at the end of 2012 of a single £100 investment made at the
beginning of each of the last five years.
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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 a fixed percentage of base salary. These
limits are reviewed periodically. For 2013, the minimum
shareholding requirement for the Chief Executive has been
increased from 200% to 300% of base salary. The minimum
requirement for the Group Finance Director remains at 200% of
base salary, and at 350% in the case of the President and Chief
Executive Officer of BAE Systems, Inc. As a minimum, a holding
equal to 100% (175% for the President and Chief Executive Officer
of BAE Systems, Inc.) of base salary must be achieved as quickly as
possible using shares vesting or options exercised through the
1
Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense.
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 the
levels cited above is achieved and maintained. 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 107.
BAE Systems Annual Report 2012
99
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REMUNERATION REPORT CONTINUED
Post-retirement benefits
UK pension benefits
UK executive directors are members of the BAE Systems Executive
Pension Scheme (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 Prices 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’ 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
– 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.
The review carried out in 2010 concluded that the arrangements
should continue to 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 further reductions to the Lifetime
Allowance (introduced in 2006) and the impact of the reduced
Annual Allowance. This 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
100
BAE Systems Annual Report 2012
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 and Peter Lynas already have an unfunded promise from
the Company arising from the 2006 changes, which has been
extended to cover the reduced Annual Allowance at no additional
cost to the Company.
Ian King and Peter Lynas 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, some of which is
provided through the unfunded promise referred to above.
US pension benefits
Linda Hudson is a member of the 2006 Plan and a Non-Qualified
Plan which provided 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 was 14.1% of career average pay. From
1 January 2013, future accrual in the US pension arrangements
changed for all employees and Linda Hudson will now receive a
$1,000 annual accrual from the 2006 Plan and, from the Non-
Qualified Plan, a $500 annual accrual and an annual accrual of
4.1% of salary plus bonus (subject to a maximum bonus of 150% of
salary). 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 (for 2013, $255,000). From
1 January 2013, the company match is 100%.
Details of post-retirement benefits for each of the executive
directors who served during 2012 are shown in Table D on
page 113 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 are detailed under
Table C on page 112.
Further to his appointment as Group Finance Director, it was agreed
that Peter Lynas would 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
years one and two 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. No payments have yet been made under this
arrangement.
13268 BAE069_AR2012_RemReport_vAW2 p93-113 Ev4.indd 8
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Structure of individual executive directors’ packages
Ian King (Chief Executive)
Base salary
Annual incentive
On-target/maximum (% of salary)
Structure (% of salary)
Group EPS
Group cash
Order intake
Safety
Corporate responsibility
Personal objectives
Deferral
SMP
PSP
Share Option Plan
Pension accrual
Gross match
Performance condition
Grant (% of salary)
Performance condition
Grant (% of salary)
Performance condition
2013
2012
£963,050 pa
112.5%/225%
On-target
45%
28.125%
16.875%
5.625%
2.8125%
14.0625%
Compulsory 1/3 of net annual
incentive
Stretch
90%
56.25%
33.75%
11.25%
5.625%
28.125%
Not applicable
for 2013 annual incentive
Not applicable
for 2013 annual incentive
125%*
On-target
45%
45%
Stretch
90%
90%
Not applicable
5.625%
5.625%
11.25%
11.25%
11.25%
22.5%
1/3 compulsory plus voluntary up to
total of 50% of net annual
incentive
2:1
EPS growth of 5% – 11% pa
125%
1/2 on relative TSR against 12 other international defence
companies;
1/2 on EPS growth of 5% – 11% pa
300%
Relative TSR against 12 other international defence companies
1/30th of three-year final average salary from age 62 for 8%
member’s contributions
*
PSP award to increase to 250% in 2014 to coincide with elimination of SMP on 2013 annual incentive.
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)
Stretch
performance
On-target
performance
Proportion of package value delivered through fixed
and performance-related reward (%)
Stretch
performance
On-target
performance
0
2,000
4,000
6,000
8,000
10,000
12,000
0
20
40
60
80
100
■ Base salary ■ Pension ■ Cash bonus ■ Deferred bonus
■ PSP ■ Share options
■ Base salary ■ Pension ■ Cash bonus ■ Deferred bonus
■ PSP ■ Share options
Value of package (£’000)
Proportion of overall package (%)
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BAE Systems Annual Report 2012
101
REMUNERATION REPORT CONTINUED
Structure of individual executive directors’ packages (continued)
Peter Lynas (Group Finance Director)
Base salary
Annual incentive
On-target/maximum (% of salary)
Structure (% of salary)
Group EPS
Group cash
Order intake
Safety
Corporate responsibility
Personal objectives
Deferral
Gross match
Performance condition
Grant (% of salary)
Performance condition
Grant (% of salary)
Performance condition
SMP
PSP
Share Option Plan
Pension accrual
2013
2012
£546,000 pa
80%/160%
On-target
32%
20%
12%
4%
2%
10%
Stretch
64%
40%
24%
8%
4%
20%
Compulsory 1/3 of net annual
incentive
Not applicable
for 2013 annual incentive
Not applicable
for 2013 annual incentive
125%*
On-target
32%
32%
Stretch
64%
64%
Not applicable
4%
4%
8%
8%
8%
16%
1/3 compulsory plus voluntary up to
total of 50% of net annual
incentive
2:1
EPS growth of 5% – 11% pa
125%
1/2 on relative TSR against 12 other international defence
companies;
1/2 on EPS growth of 5% – 11% pa
300%
Relative TSR against 12 other international defence companies
1/30th of three-year final average salary from age 62 for 8%
member’s contributions
*
PSP award to increase to 215% in 2014 to coincide with elimination of SMP on 2013 annual incentive.
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)
Stretch
performance
On-target
performance
Proportion of package value delivered through fixed
and performance-related reward (%)
Stretch
performance
On-target
performance
0
1,000
2,000
3,000
4,000
5,000
0
20
40
60
80
100
■ Base salary ■ Pension ■ Cash bonus ■ Deferred bonus
■ PSP ■ Share options
■ Base salary ■ Pension ■ Cash bonus ■ Deferred bonus
■ PSP ■ Share options
Value of package (£’000)
Proportion of overall package (%)
102
BAE Systems Annual Report 2012
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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
On-target/maximum (% of salary)
Structure (% of salary)
Group EPS
Group cash
Order intake
Business EBITA1
Business cash
Business order intake
Safety
Corporate responsibility
Personal objectives
Deferral
Gross match
Performance condition
Grant (% of salary)
Performance condition
Grant (% of salary)
Performance condition
% of salary
SMP
PSP
Share Option Plan
RSP
Pension accrual
2013
2012
$1,045,350 pa
112.5%/225%
Stretch
30%
18.75%
11.25%
60%
37.5%
22.5%
11.25%
5.625%
28.125%
On-target
15%
9.375%
5.625%
30%
18.75%
11.25%
5.625%
2.8125%
14.0625%
Compulsory 1/3 of net annual
incentive
Not applicable
for 2013 annual incentive
Not applicable
for 2013 annual incentive
145%*
On-target
15%
15%
Stretch
30%
30%
Not applicable
30%
30%
60%
60%
Not applicable
5.625%
5.625%
11.25%
11.25%
11.25%
22.5%
Compulsory 1/3 of net annual
incentive. No voluntary element
2:1
EPS growth of 5% – 11% pa
145%
1/2 on long-term US operating cash;
1/2 on EPS growth of 5% – 11% pa
390%
Relative TSR against 12 other international defence companies
100%
Cash sum at retirement of
$1,500 and 4.1% of pay
plus bonus (subject to a
maximum of 150% of salary)
for each year of service,
plus a 100% company 401(k)
match on contributions to a
maximum of 6% of salary
Cash sum at retirement of
14.1% of career average pay
(salary plus bonus up to
maximum of 150% of salary)
for a contribution of 1.5% of pay,
plus an 85% company 401(k)
match on contributions to a
maximum of 6% of salary
*
PSP award to increase to 220% in 2014 to coincide with elimination of SMP on 2013 annual incentive.
The graphs below show the value of the package at on-target and stretch performance together with the proportion of the package delivered
through fixed and variable reward.
Value of package ($’000)
Stretch
performance
On-target
performance
Proportion of package value delivered through fixed
and performance-related reward (%)
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
■ Base salary ■ Pension ■ Cash bonus ■ Deferred bonus
■ PSP ■ Share options ■ RSP
■ Base salary ■ Pension ■ Cash bonus ■ Deferred bonus
■ PSP ■ Share options ■ RSP
Value of package ($’000)
Proportion of overall package (%)
G
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1
Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense.
BAE Systems Annual Report 2012
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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, the Share Option Plan and investment of the 2012
annual incentive deferral into the Share Matching Plan in 2013 are detailed below. Performance conditions for grants of awards made prior to
2013 are detailed on page 111.
Clawback arrangements have operated in respect of the Performance Share Plan and Share Matching Plan from the 2010 awards onwards,
and have operated for grants under the Share Option Plan since its inception. 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 2013:
– 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. For US participants, the first half of the award will be based on long-term operating cash
performance measured at the level of the US businesses, reflecting an increased emphasis from shareholders on cash flow generation;
– 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 at the end of year three. Awards that vest are exercisable in three
tranches between the third and seventh anniversary of vesting. For US participants, the awards are automatically delivered at the end of
years three, four and five, subject to the performance condition being achieved; and
– shares under award attract dividends prior to vesting.
How the PSP operates
PSP
award
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
(for US participants: 50% of award
based on long-term operating cash
performance measured at the level of
the US businesses)
50% of award based on average 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 participants, the awards are automatically delivered at the end of years three, four and five, subject to the performance condition being achieved.
Performance condition – PSPEPS
Performance condition – PSPEPS
The proportion of the award capable of exercise is determined by
the rate of average annual EPS growth over the three-year
performance period, with nil vesting at average annual 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 2012
2012 EPS was 38.8p compared with the 2009 EPS baseline figure
of 40.6p. This is below the performance range of 5% to 11% growth
per annum. Accordingly, none of the EPS portion of the March 2010
PSP awards vest.
104
BAE Systems Annual Report 2012
100
g
n
i
t
s
e
v
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a
w
a
l
a
t
o
t
f
o
%
75
50
25
0
0
1
2
3
4
5
6
7
8
9
10
11
12
Average annual EPS growth (%)
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Performance condition – PSPTSR
Performance condition – PSPTSR
The proportion of the award capable of exercise is determined by:
(i) the Company’s TSR (share price growth plus dividends) ranking
relative to a comparator group of 12 other international defence
companies as shown in the table opposite*. Reflecting the
Group’s strategy to transition from a more diversified portfolio,
the comparator group comprises those companies with a
significant focus on defence and security. None of the shares
vest if the Company’s TSR is outside the top 50% of TSRs
achieved by the sectoral comparator group, with 25% vesting at
median, and 100% vesting 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.
*
The previous comparator group for 2011 and prior years is also shown
opposite.
Summary of TSR performance to 31 December 2012
The chart opposite summarises the position on the TSR element for
all outstanding awards under the PSP as at 31 December 2012.
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 March 2010 PSP award
lapsed as the Company’s TSR was below that of the comparator
group.
100
g
n
i
t
s
e
v
d
r
a
w
a
l
a
t
o
t
f
o
%
75
50
25
0
0
10
20
30
40
50
60
70
80
90
100
Performance relative to comparator group (percentile)
PSPTSR – sectoral peer group for 2012 and 2013
Cobham
Finmeccanica
General Dynamics
ITT Exelis
L-3 Communications
Lockheed Martin
Meggitt
Northrop Grumman
Raytheon
SAIC
Thales
United Technologies
PSPTSR – sectoral peer group for 2011 and prior years
Boeing
Cobham
Dassault Aviation
EADS
Embraer PN
Finmeccanica
General Dynamics
GKN
Goodrich**
Honeywell International Smiths Group
Lockheed Martin
Northrop Grumman
Raytheon
Rockwell Collins
Rolls-Royce
Thales
United Technologies
** Goodrich is now part of United Technologies.
TSR performance under the Performance Share Plan
(to 31 December 2012)
0.0%
vesting
0.0%
vesting
42.7%
vesting
45.0%
vesting
100%
vesting
73.4%
vesting
125
100
)
%
(
n
r
u
t
e
R
r
e
d
o
h
e
r
a
h
S
l
l
a
t
o
T
75
50
25
0
23 March
2010
7 September
2010
18 May
2011
7 September
2011
29 March
2012
12 October
2012
Median to top 20% TSR
BAE Systems’ TSR
G
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1
Earnings before amortisation and impairment of intangible assets, finance
costs and taxation expense.
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REMUNERATION REPORT CONTINUED
Share Option Plan (ExSOP2012)
Key features for option grants in 2013:
– options granted under the Share Option Plan are normally
exercisable between the third and tenth anniversary of their
grant; and
– for share option awards made to the executive directors only,
exercise is subject to a TSR performance condition such that:
– 25% of each option grant is exercisable if the Company’s TSR
(share price growth and dividends) is at the median relative to
the comparator group (using the same 12 companies included
in the sectoral peer group for the 2013 PSPTSR performance
condition listed on page 105).
– 100% of each option grant is exercisable if the Company’s TSR
(share price growth and dividends) is in the upper quintile
relative to the comparator group. For performance between
median and upper quintile, the proportion of options
exercisable will be calculated on a straight-line basis.
Rationale for performance measure: major investors regard TSR as
an important indication of both earnings and capital growth relative
to other major companies in the same sector.
Share Matching Plan (SMP)
It has been proposed to eliminate the Share Matching Plan and as
such this plan will operate for the last time in 2013 in respect of the
deferral of 2012 annual incentive. Key features for grants of awards
in 2013:
– 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;
– matching shares attract dividends during the three-year deferral
period, released on vesting of any matching shares;
– executive directors are required to invest one-third of their 2012
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 average EPS growth of 5% per annum increasing
uniformly to a 1:1 match at 8% per annum and a maximum 2:1
match at 11% per annum growth (i.e. 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.
2010 SMP award
The 2010 SMP awards were based on nil match for average EPS
growth of 5% per annum increasing uniformly to a maximum 2:1
match at 11% per annum growth. 2012 EPS was 38.8p and is
below the 2009 EPS of 40.6p. Accordingly, none of the EPS portion
of the March 2010 PSP awards vest.
– 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.
Clawback arrangements operate in respect of this Plan.
Other share schemes and share usage
Share Incentive Plan (SIP)
During 2012, the UK executive directors were eligible to participate
in the all-employee free shares element of the SIP. As a result of the
Company’s performance in 2012, all eligible employees (including
the UK executive directors) will be entitled to receive shares worth
approximately £365. 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 SIP. 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, 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 SIP 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 below sets out the available dilution capacity for the
Company’s employee share schemes on this basis.
The Company currently intends to use new issue or treasury shares
to satisfy future share awards under the executive long-term incentive
plans and share option 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.
Total issued share capital as at 31 December 2012
All schemes:
10% in any consecutive ten years
Remaining headroom
Executive schemes:
5% in any consecutive ten years
Remaining headroom
Number
of shares
3,588m
358.8m
200.7m
179.4m
77.0m
Where it is appropriate to use shares purchased in the market to
satisfy employee share scheme commitments, a discretionary
ESOP Trust is used to acquire Company shares using funds loaned
by the Group. Further detail on the ESOP Trust is provided in note 25
to the Group accounts.
Restricted Share Plan (RSP)
Key features of awards in 2013:
On behalf of the Board
– 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
Dick Olver
Chairman
20 February 2013
106
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Tabular information on directors’ shareholdings, share-based incentives, emoluments and pensions
Table A: Directors’ interests
As at 1 January 2012
As at 31 December 2012
Ordinary
shares
60,000
–
329,289
Executive
Share Option
Plans
–
–
133,740
Share
Matching
Plan
–
–
415,901
Restricted
Performance
Share Plan
Share Plan
–
–
–
–
917,265 119,743
Ordinary
shares
60,000
–
405,020
Executive
Share Option
Plans
–
–
988,074
P M Anderson
H Green
L P Hudson
I G King
P J Lynas
Sir Peter Mason
L A McIntire
R L Olver
P Rosput Reynolds1
N C Rose
C G Symon
1,103,928 1,132,008 1,229,194 2,070,716
541,563
–
–
–
–
–
–
108,578
–
–
–
–
–
–
233,937
25,283
–
53,343
1,200
55,000
20,000
162,795
–
–
–
–
–
–
Share
Matching
Plan
–
–
Performance
Share Plan
–
–
Restricted
Share Plan
–
–
524,025 1,040,457 338,803
–
–
–
–
–
–
–
–
– 1,351,886 2,091,858 1,336,626 1,868,559
646,054
–
–
–
–
–
–
–
–
–
–
–
–
–
279,428
25,283
–
53,343
1,200
55,000
20,000
167,592
–
–
–
–
–
–
706,981
–
–
–
–
–
–
1 The ordinary shares held by Paula Rosput Reynolds are represented by 300 American Depositary Shares.
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 2012. There have been no changes in the interests of the current
directors listed in the table above between 31 December 2012 and 20 February 2013 with the exception of the interests in the ordinary
shares of Ian King who has acquired an additional 109 ordinary shares since 31 December 2012 under the partnership and matching
shares elements of the Share Incentive Plan so that his beneficial shareholding at the date of this report stood at 1,351,995.
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 108 to 113.
G
o
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BAE Systems Annual Report 2012
107
REMUNERATION REPORT CONTINUED
Table B: Share options and Long-Term Incentive Plan (LTIP) awards – Ian King
Share
options
PSPEPS
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
1 January
2012
76,925
65,219
328,227
328,228
Granted
during
the year
–
–
–
–
–
–
–
–
–
– 199,968
– 199,969
2,070,716 399,937
289,351
289,352
346,707
346,707
Lapsed
Exercised
31 December
during
during
2012
the year
the year
38,463
–
38,462
65,219
–
–
–
– 328,227
–
– 188,994
–
92,823
– 289,351
– 289,352
– 346,707
– 346,707
– 199,968
– 199,969
84,873 517,221 1,868,559
46,411
–
–
–
–
–
–
Exercise
price
£
Date of
exercise
Date of
or lapse
grant
nil 07.05.08 26.03.12
nil 08.09.08
–
nil 24.03.09 02.03.12
nil 24.03.09 02.03.12
nil 24.03.09 26.03.12
–
nil 23.03.10
–
nil 23.03.10
–
nil 18.05.11
–
nil 18.05.11
–
nil 29.03.12
–
nil 29.03.12
Market
price on
exercise
£
Date from
which
exercisable
Expiry date
3.06 26.03.121,2 26.03.15
– 08.09.121 08.09.15
– 24.03.123 24.03.16
– 24.03.123 24.03.16
3.06 24.03.121,4 24.03.16
– 23.03.135 23.03.17
– 23.03.135 23.03.17
– 18.05.146 18.05.18
– 18.05.146 18.05.18
– 29.03.156 29.03.19
– 29.03.156 29.03.19
ExSOP
ExSOP
ExSOP
ExSOP
ExSOP
ExSOP2012
318,314
272,388
221,903
145,443
173,960
–
–
–
–
–
– 959,850
1,132,008 959,850
–
–
–
–
–
–
–
– 318,314
– 272,388
– 221,903
– 145,443
– 173,960
– 959,850
– 2,091,858
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
3.01 29.03.12
–
–
–
–
–
–
– 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
– 29.03.156 29.03.22
LTIPs
SMP
SMP
SMP
SMP
Vested
during
the year
Granted
during
the year
1 January
2012
371,616
431,701
425,877
Lapsed
during
the year
– 157,658 213,958
–
–
–
–
–
– 479,048
31 December
2012
–
– 431,701
– 425,877
– 479,048
1,229,194 479,048 157,658 213,958 1,336,626
Market
price at
date of
award
£
Date of
award
Date of
lapse
Date of
vesting
3.43 24.03.09 28.02.12 26.03.123
– 23.03.135
3.80 23.03.10
– 18.05.146
3.37 18.05.11
– 29.03.156
3.01 29.03.12
Market
price on
vesting
£
3.05
–
–
–
Ian King’s SMP award that vested on 26 March 2012 attracted reinvested dividends which equated on vesting to an additional 24,525 shares. The market price on
vesting was £3.05.
His PSP awards exercised on 26 March 2012 also attracted reinvested dividends which equated on exercise to an additional 11,578 shares. The market price on
exercise was £3.06.
Note: Performance conditions for the options and awards set out above are detailed in the notes to Table B on page 111.
1 Subject to a performance condition that has been met.
2
‘Date from which exercisable’ refers to the date on which the portion of the option exercised during the year became exercisable. The option over shares remaining at
the year end is exercisable on the fifth anniversary of grant.
3 The award lapsed, or partially lapsed, during the financial year under review having not met the full performance condition.
4
‘Date from which exercisable’ refers to the date on which the portion of the option exercised during the year became exercisable. The option over shares remaining at
the year end is exercisable in two tranches on the fourth and fifth anniversary of grant.
5 The outstanding award lapsed, or partially lapsed, after the end of the financial year having not met the full performance condition.
6 Subject to a performance condition that is yet to be tested.
108
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Table B: Share options and Long-Term Incentive Plan (LTIP) awards – Peter Lynas
Share
options
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
Granted
during
the year
1 January
2012
25,318
63,822
63,822
Exercised
during
the year
– 12,658
–
–
–
–
–
–
–
– 113,372
– 113,372
541,563 226,744
Lapsed
during
the year
–
– 63,822
36,749
–
–
9,024
–
–
–
–
–
–
–
–
–
–
–
–
21,682 100,571
57,950
57,951
136,350
136,350
Exercise
price
£
Date of
exercise
Date of
or lapse
grant
nil 26.03.08 26.03.12
nil 24.03.09 02.03.12
nil 24.03.09 02.03.12
nil 24.03.09 26.03.12
–
nil 23.03.10
–
nil 23.03.10
–
nil 18.05.11
–
nil 18.05.11
–
nil 29.03.12
–
nil 29.03.12
31 December
2012
12,660
–
–
18,049
57,950
57,951
136,350
136,350
113,372
113,372
646,054
Market
price on
exercise
£
Date from
which
exercisable
Expiry date
3.06 26.03.121,2 26.03.15
– 24.03.123 24.03.16
– 24.03.123 24.03.16
3.06 24.03.121,4 24.03.16
– 23.03.135 23.03.17
– 23.03.135 23.03.17
– 18.05.146 18.05.18
– 18.05.146 18.05.18
– 29.03.156 29.03.19
– 29.03.156 29.03.19
ExSOP
ExSOP
ExSOP
ExSOP2012
13,386
75,887
73,522
–
–
–
– 544,186
162,795 544,186
–
–
–
–
–
13,386
–
75,887
–
73,522
–
–
544,186
– 706,981
3.56 22.12.05
4.28 12.04.06
4.57 30.03.07
3.01 29.03.12
–
–
–
–
– 22.12.081 22.12.15
– 12.04.091 12.04.16
– 30.03.101 30.03.17
– 29.03.156 29.03.22
LTIPs
SMP
SMP
SMP
SMP
1 January
2012
42,142
32,884
33,552
Granted
during
the year
–
–
–
– 101,156
108,578 101,156
Vested
during
the year
17,878
–
–
–
17,878
Lapsed
31 December
during
2012
the year
–
24,264
32,884
–
–
33,552
– 101,156
167,592
24,264
Market
price at
date of
award
£
Date of
award
Date of
lapse
Date of
vesting
3.43 24.03.09 28.02.12 26.03.123
– 23.03.135
3.80 23.03.10
– 18.05.146
3.37 18.05.11
– 29.03.156
3.01 29.03.12
Market
price on
vesting
£
3.05
–
–
–
Peter Lynas’ SMP award that vested on 26 March 2012 attracted reinvested dividends which equated on vesting to an additional 2,777 shares. The market price on
vesting was £3.05.
His PSP awards exercised on 26 March 2012 also attracted reinvested dividends which equated on exercise to an additional 3,055 shares. The market price on exercise
was £3.06.
Note: Performance conditions for the options and awards set out above are detailed in the notes to Table B on page 111.
1 Subject to a performance condition that has been met.
2
‘Date from which exercisable’ refers to the date on which the portion of the option exercised during the year became exercisable. The option over shares remaining at
the year end is exercisable on the fifth anniversary of grant.
3 The award lapsed, or partially lapsed, during the financial year under review having not met the full performance condition.
4
‘Date from which exercisable’ refers to the date on which the portion of the option exercised during the year became exercisable. The option over shares remaining at
the year end is exercisable in two tranches on the fourth and fifth anniversary of grant.
5 The outstanding award lapsed, or partially lapsed, after the end of the financial year having not met the full performance condition.
6 Subject to a performance condition that is yet to be tested.
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BAE Systems Annual Report 2012
109
REMUNERATION REPORT CONTINUED
Table B: Share options and Long-Term Incentive Plan (LTIP) awards – Linda Hudson
Share
options
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPTSR
PSPEPS
PSPOCF
PSPEPS
1 January
2012
28,921
104,813
104,813
Granted
during
the year
–
–
–
–
–
–
–
–
– 158,818
– 158,819
917,265 317,637
191,983
191,983
147,376
147,376
Released
during
the year
14,460
Lapsed
during
the year
–
– 104,813
60,352
–
–
14,820
–
–
–
–
–
–
–
–
–
–
–
–
31 December
2012
14,461
–
–
29,641
191,983
191,983
147,376
147,376
158,818
158,819
29,280 165,165 1,040,457
Exercise
price
£
Date of
exercise,
release
Date of
or lapse
grant
nil 26.03.08 26.03.12
nil 24.03.09 02.03.12
nil 24.03.09 02.03.12
nil 24.03.09 26.03.12
–
nil 23.03.10
–
nil 23.03.10
–
nil 18.05.11
–
nil 18.05.11
–
nil 29.03.12
–
nil 29.03.12
Market
price on
release
£
Date from
which
exercisable
Expiry date
3.05 26.03.121,2 26.03.15
– 24.03.123 24.03.16
– 24.03.123 24.03.16
3.05 24.03.121,4 24.03.16
– 23.03.135 23.03.17
– 23.03.135 23.03.17
– 18.05.146 18.05.18
– 18.05.146 18.05.18
– 29.03.156 29.03.19
– 29.03.156 29.03.19
ExSOP
ExSOP2012
133,740
–
– 854,334
133,740 854,334
–
–
–
133,740
–
854,334
–
– 988,074
4.57 30.03.07
3.01 29.03.12
–
–
– 30.03.101 30.03.17
– 29.03.156 29.03.22
1 January
2012
99,908
96,383
219,610
Granted
during
the year
–
–
–
– 208,032
415,901 208,032
Vested
during
the year
42,385
–
–
–
42,385
Lapsed
31 December
during
2012
the year
–
57,523
–
96,383
– 219,610
– 208,032
57,523 524,025
Market
price at
date of
award
£
Date of
award
Date of
lapse
Date of
vesting
3.43 26.03.09 28.02.12 26.03.123
– 23.03.135
3.80 23.03.10
– 18.05.146
3.37 18.05.11
– 29.03.156
3.01 29.03.12
Market
price on
vesting
£
3.05
–
–
–
119,743
–
– 219,060
119,743 219,060
–
–
–
– 119,743
– 219,060
338,803
–
3.37 18.05.11
3.01 29.03.12
– 18.05.14
– 29.03.15
–
–
LTIPs
SMP
SMP
SMP
SMP
RSP
RSP
Linda Hudson’s SMP award that vested on 26 March 2012 attracted reinvested dividends which equated on vesting to an additional 6,590 shares. The market price on
vesting was £3.05.
Her PSP awards which vested on 26 March 2012 also attracted reinvested dividends which equated on release to an additional 4,192 shares. The market price on
vesting was £3.05.
Note: Performance conditions for the options and awards set out above are detailed in the notes to Table B on page 111.
1 Subject to a performance condition that has been met.
2
‘Date from which exercisable’ refers to the date on which the portion of the award released during the year became available for release. The portion of the award of
shares outstanding at the year end will be delivered on the fifth anniversary of grant.
3 The award lapsed, or partially lapsed, during the financial year under review having not met the full performance condition.
4
‘Date from which exercisable’ refers to the date on which the portion of the award released during the year became available for release. The portion of the award of
shares remaining at the year end will be delivered in two tranches on the fourth and fifth anniversary of grant.
5 The outstanding award lapsed, or partially lapsed, after the end of the financial year having not met the full performance condition.
6 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. Gains on delivered PSP awards for Linda Hudson are included in the directors’ gains on LTIPs figure on
page 111 whilst PSP gains for the UK-based directors are included in the share option gain figure.
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Notes to Table B
Performance Share Plan (PSP)
A full description of the PSP is set out on pages 104 and 105. PSP awards granted since 2008 attract dividends prior to vesting.
PSPTSR – nil vesting if the Company’s Total Shareholder Return (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. A secondary financial measure is also used (see page 105). For US participants, this part of
the award is based on long-term operating cash flow performance measured at the level of the US businesses (PSPOCF), reflecting an increased
emphasis from shareholders on cash generation.
PSPEPS – proportion of the award exercisable is determined by the rate of average annual EPS growth over the three-year performance
period, with nil vesting at average annual EPS growth of 5% or less, 100% vesting at 11% growth, and vesting on a straight-line basis
between these two points.
Awards that vest are exercisable in three tranches at the end of years three, four and five (except for US executives where the awards are
automatically delivered at the end of years three, four and five, subject to the performance condition being achieved).
Executive Share Option Plan (ExSOP)
The Plan was established in 2001 and its ten-year life expired in 2011. No options have been granted under it since 2007. 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; and
(iii) 2003 grant – as in (i) but performance is retested at the end of years four and five against the full period from grant.
Share Option Plan (ExSOP2012)
A full description of the ExSOP2012 is set out on page 106. 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.
2012 grants – for share option awards made to executive directors only, exercise is subject to a TSR performance condition such that:
– 25% of each option grant is exercisable if the Company’s TSR is at the median relative to the comparator group; and
– 100% of each option grant is exercisable if the Company’s TSR is in the upper quintile relative to the comparator group. For performance
between median and upper quintile, the proportion of options exercisable will be calculated on a straight-line basis.
Share Matching Plan (SMP) – matching shares
A full description of the SMP is set out on page 106. SMP awards attract dividends prior to vesting.
2009-2012 awards – nil match for average EPS growth of less than 5% pa increasing uniformly to a 2:1 match at 11% pa growth.
Rationale for key performance measures for PSP, ExSOP, ExSOP2012 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.
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Restricted Share Plan (RSP)
The RSP is the time-vesting long-term incentive plan element applicable to senior executives in the US. Approved by shareholders at the 2011
AGM, it does not have performance elements attached to it other than time-vesting conditions as it seeks to mirror US remuneration practices
where performance-related LTIP awards only typically make up around one-third of the overall long-term incentive package for a US executive.
Share price information
The mid-market price for the Company’s ordinary shares at 31 December 2012 was 336.9p (2011 285.1p). The range during the year was
270.9p to 363.6p.
Aggregate amount of gains made by directors
The aggregate amount of gains made by directors from the exercise of share options in 2012, as calculated at the date of exercise, was
£370,811 (2011 £402,249). The net aggregate value of assets received by directors in 2012 from Long-Term Incentive Plans, as
calculated at the date of vesting, was £869,116 (2011 £654,645).
BAE Systems Annual Report 2012
111
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REMUNERATION REPORT CONTINUED
Table C: Directors’ remuneration
2012
2011
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
–
725
–
20
–
745
–
673
–
31
660
963
546
n/a
–
–
–
–
–
n/a
–
–
–
n/a
2,169
–
–
–
n/a
95
75
25
95
75
n/a
75
100
95
n/a
1,360
1,012
1,205
482
n/a
–
–
–
–
–
n/a
–
–
–
n/a
2,699
120
34
16
n/a
–
–
–
–
–
n/a
–
–
–
n/a
190
–
–
–
n/a
23
14
–
9
18
n/a
23
14
23
n/a
124
1,792
2,202
1,044
n/a
118
89
25
104
93
n/a
98
114
118
n/a
6,542
630
935
390
160
–
–
–
–
–
–
–
–
–
–
2,115
–
929
– 1,443
407
–
–
–
95
75
87
95
44
75
56
83
95
19
1,397
–
–
–
–
–
–
–
–
–
–
2,779
66
32
12
10
–
–
–
–
–
–
–
–
–
–
151
–
–
–
–
–
704
1,625
2,410
809
170
20
8
8
8
8
8
12
8
20
–
100
115
83
95
103
52
83
68
91
115
19
6,542
Chairman
R L Olver
Executive directors
L P Hudson
I G King
P J Lynas1
G W Rose2
Non-executive directors
P M Anderson
H Green
M J Hartnall3
Sir Peter Mason
L A McIntire1
R Quarta2
P Rosput Reynolds1
N C Rose
C G Symon
R K Uppal2
1 Appointed in 2011.
2 Retired in 2011.
3 Retired in 2012.
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 and parking, private use of a chauffeur-driven
car, medical examination, dental benefits, and insured life and disability benefits. In addition, her benefit figure includes £66,288 for private
use of a Company aircraft (2011 £29,535).
The other pay received by the non-executive directors represents the travel allowance of £4,500 per meeting as set out on page 98.
There were no payments to former directors during the year other than the Company pension payments to Sir Peter Gershon, Sir Richard
Lapthorne and George Rose referred to on page 113.
112
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Table D: Directors’ post-retirement benefits
Accrued
benefit at
1 January
20121
£ pa
722,752
677,983
282,937
Accrued
benefit at
31 December
20121
£ pa
892,405
740,270
342,552
Change in
accrued
pension after
allowing for
inflation
£ pa
133,515
Transfer
Transfer
value at
value at
31 December
1 January
20122
20122
£
£
786,233
589,333
28,388 11,645,676 13,117,517
45,468 4,631,241 5,584,676
Director’s
contributions
£
2,319
Increase in
transfer value
less director’s
contributions
£
194,581
84,524 1,387,317
905,595
47,840
L P Hudson3
I G King4
P J Lynas5
* Normal Retirement Age
Age
62
56
54
NRA*
65
62
62
1
2
3
4
5
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
change in transfer value arising from the change in assumptions is: Linda Hudson £13,880; Ian King £(193,884); and Peter Lynas £(171,173).
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 £89,675 from a contributory Qualified Plan and £802,730 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 2012, the Company paid contributions of £8,045 into this 401(k) arrangement during the year. Linda Hudson is paid in
US dollars. Of the change in the accrued benefit and the transfer value £(40,133) and £(35,358), 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.
Peter Lynas 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.
Sir Peter Gershon, Sir Richard Lapthorne and George Rose, all former directors, have unfunded pension arrangements. In 2012, the
Company paid Sir Peter Gershon a pension of £122,120 (2011 £117,113), Sir Richard Lapthorne a pension of £110,661 (2011
£105,522) and George Rose a pension of £137,274 (2011 £100,204) in respect of these arrangements.
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BAE Systems Annual Report 2012
113
OTHER STATUTORY AND REGULATORY INFORMATION
Principal activities
BAE Systems is a global defence, aerospace and security company.
The BAE Systems Group delivers, through its subsidiaries and equity
accounted investments, a wide 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.
Directors
The current directors who served during the 2012 financial year are
listed on pages 78 and 79. In addition, Michael Hartnall retired
from the Board on 2 May 2012.
Dividend
An interim dividend of 7.8p per share was paid on 30 November
2012. The directors propose a final dividend of 11.7p per ordinary
share. Subject to shareholder approval, the final dividend will be
paid on 3 June 2013 to shareholders on the share register on
19 April 2013.
Annual General Meeting (AGM)
The Company’s AGM will be held on 8 May 2013. 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.
Profit forecast
In its full year results announcement on 16 February 2012 and
Annual Report 2011, the Group made the following statement,
which is regarded as a profit forecast for the purposes of the
Financial Services Authority’s Listing Rule 9.2.18:
“Whilst little sales growth can be expected for the Group in 2012 in
the current market conditions, modest growth in underlying
earnings per share is anticipated, assuming a satisfactory
conclusion to Salam negotiations in 2012 and excluding the benefit
of the 2011 Research & Development tax settlement.”
On 19 December 2012, the Group announced that discussions
continued towards agreement of definitive pricing for the supply of
72 Typhoon aircraft to the Royal Saudi Air Force contracted in 2007
under the government-to-government Salam programme and that,
in the event of an acceptable agreement not being reached before
the Group’s full year results announcement on 21 February 2013,
the impact on 2012 trading guidance would be to reduce the
Group’s underlying earnings per share by approximately 3 pence per
share. At 20 February 2013, discussions continue and,
consequently, modest growth in underlying earnings per share in
2012 has not been achieved. Underlying earnings per share
(excluding the R&D tax benefit) was 39.7p in 2011. In 2012,
underlying earnings per share was 38.9p.
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.
114
BAE Systems Annual Report 2012
The average number of days’ credit provided in 2012 by suppliers
was 30 days (2011 35 days).
Employees
Regular internal communication, including newsletters,
management meetings and the intranet, keeps employees
informed, involved and motivated.
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.
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.
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 UK 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.
Charitable donations
During 2012, the amount donated for charitable purposes in the UK
was £1.8m (2011 £1.4m). In line with the Community Investment
programme, this included:
– £688,800 given to armed forces charities, including donations to
Combat Stress and Soldiers, Sailors, Airmen and Families
Association (SSAFA) Forces Help;
– £893,800 donated to education charities, with major donations
being made to Enthuse Charitable Trust, EngineeringUK, the
Queen Elizabeth Prize for Engineering Foundation and The
Prince’s Trust; and
– the remaining £249,100 donated for other charitable purposes,
including the advance of health and culture/heritage.
Globally, the Group and its employees through its Community
Investment programme contributed over £11m* to local, national
and international charities and not-for-profit organisations.
Political donations
No political donations were made in 2012.
Issued share capital
As at 31 December 2012, BAE Systems’ issued share capital of
£89,691,828 comprised 3,587,673,101 ordinary shares of 2.5p
each and one Special Share of £1.
Treasury shares
As at 1 January 2012, the number of shares held in treasury
totalled 351,756,854 (having a total nominal value of £8,793,921
and representing 9.8% of the Company’s called up share capital at
1 January 2012). During 2012, the Company used 14,942,858
treasury shares (having a total nominal value of £373,571 and
representing 0.4% of the Company’s called up share capital at
31 December 2012) to satisfy awards under the Free and Matching
* See assurance statement on www.baesystems.com/deloitteassurancestatement
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elements of the Share Incentive Plan (8,867,329 shares in
aggregate), awards vested under the Performance Share Plan
(2,728,737 shares), the Restricted Share Plan (47,568 shares)
and the Share Matching Plan (2,916,565 shares), and options
exercised under the Executive Share Option Plan (382,659 shares).
The treasury shares utilised in respect of the Share Incentive Plan,
the Performance Share Plan, the Restricted Share Plan and the
Share Matching Plan were disposed of by the Company for nil
consideration. The 382,659 shares disposed of by the Company in
respect of the Executive Share Option Plan were disposed of by the
Company for an aggregate consideration of £902,164. As at
31 December 2012, the number of shares held in treasury totalled
336,813,996 (having a total nominal value of £8,420,350 and
representing 9.4% of the Company’s called up share capital at
31 December 2012).
The rights to treasury 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.
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 holder of 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;
– 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
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 31 December 2012, 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
Invesco Limited
Franklin Resources Inc., and affiliates
Legal & General Group Plc
Silchester International Investors LLP
Percentage
notified
5.00%
3.98%
13.02%
4.92%
3.99%
3.01%
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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.
BAE Systems Annual Report 2012
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OTHER STATUTORY AND REGULATORY INFORMATION CONTINUED
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 2013 in compliance
with the UK Corporate Governance Code.
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.
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 2012 AGM, the directors were given the power to buy back a
maximum number of 323,805,150 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 2013 AGM or 30 June 2013. A
special resolution will be proposed at the 2013 AGM to renew the
Company’s authority to acquire its own shares.
At the 2012 AGM, the directors were given the power to issue new
shares up to a nominal amount of £26,981,064. This power will
expire on the earlier of the conclusion of the 2013 AGM or 30 June
2013. Accordingly, a resolution will be proposed at the 2013 AGM
to renew the Company’s authority to issue further new shares. At
the 2012 AGM, the directors were also given the power to issue new
issue shares up to a further nominal amount of £26,981,064 in
connection with an offer by way of a rights issue. This authority too
will expire on the earlier of the conclusion of the 2013 AGM or
30 June 2013, and a resolution will be proposed at the 2013 AGM
to renew this additional authority.
116
BAE Systems Annual Report 2012
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 2012 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 which provides 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
facility. The Revolving Credit Facility was undrawn as at
31 December 2012.
– 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.
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– 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 July 2009, BVT Surface Fleet Limited (now BAE Systems
Surface Ships Limited) and the UK MoD entered into a definitive
Terms of Business Agreement (ToBA) which sets out a 15-year
partnering arrangement, including lead roles for the BVT
business on defined surface shipbuilding and support
programmes. Where the MoD considers that a proposed Change
in Control of BAE Systems Surface Ships Limited would be
contrary to the defence, national security or national interest of
the UK, then the Change in Control shall not proceed until
agreement with the MoD is established. In the event that there is
a Change in Control of BAE Systems Surface Ships Limited
notwithstanding the objection of the MoD on such grounds, the
MoD shall be entitled to terminate the ToBA immediately without
compensation or termination charges.
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.
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.
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
20 February 2013
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.
In addition, each of the directors considers that the Annual Report,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the
Company’s performance, business model and strategy.
Dick Olver
Ian King
Linda Hudson
Peter Lynas
Paul Anderson
Harriet Green
Lee McIntire
Sir Peter Mason
Paula Rosput Reynolds
Nick Rose
Carl Symon
On behalf of the Board
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
G
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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.
Dick Olver
Chairman
20 February 2013
BAE Systems Annual Report 2012
117
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FINANCIAL
STATEMENTS
In this section:
Index to the accounts
Consolidated income statement
Consolidated statement of comprehensive income
Notes to the Group accounts – income statement
Consolidated cash flow statement
Notes to the Group accounts – cash flow statement
Consolidated balance sheet
Consolidated statement of changes in equity
Notes to the Group accounts – balance sheet
Notes to the Group accounts – other information
Company balance sheet
Notes to the Company accounts
Independent auditor’s report
Five-year summary
Shareholder information
Glossary
120
122
123
124
135
136
138
139
140
163
176
177
183
184
186
188
This section contains the statutory financial information for the
Group and the Company, together with important information for
shareholders.
118
BAE Systems Annual Report 2012
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Constructing two new aircraft
carriers for the Royal Navy
Two aircraft carriers, HMS Queen Elizabeth and HMS
Prince of Wales, are being delivered by the Aircraft
Carrier Alliance. BAE Systems has an overarching
role in managing the programme, as well as playing a
central role in the design and build of the ships.
Each 65,000 tonne aircraft carrier will provide the
armed forces with a four acre military operating base
which can be deployed worldwide. The vessels will be
versatile enough to be used for operations ranging
from supporting war efforts to providing humanitarian
aid and disaster relief.
Assembly of the completed hull sections of the first
carrier is being undertaken at Rosyth.
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BAE Systems Annual Report 2012
119
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COMPANY ACCOUNTS
COMPANY BALANCE SHEET
Notes to the Company accounts
INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF BAE SYSTEMS PLC
FIVE-YEAR SUMMARY
Page
176
177
183
184
INDEX TO THE ACCOUNTS
GROUP ACCOUNTS
Preparation and consolidation
CONSOLIDATED INCOME STATEMENT
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
Segmental analysis
Operating costs
Employees
Other income
Finance costs
Taxation expense
Discontinued operations
Earnings per share
CONSOLIDATED CASH FLOW STATEMENT
Cash flow analysis
Net cash/(debt) (as defined by the Group)
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
Intangible assets
Property, plant and equipment
Investment property
Equity accounted investments
Other investments
Trade and other receivables
Other financial assets and liabilities
Deferred tax
Inventories
Geographical analysis of assets
Loans and overdrafts
Trade and other payables
Retirement benefit obligations
Provisions
Share capital and other reserves
OTHER INFORMATION
Acquisition and disposal of subsidiaries
Financial risk management
Share-based payments
Related party transactions
Contingent liabilities and commitments
Group entities
Accounting policies
Note Page
121
122
123
124
127
128
128
129
130
133
134
135
136
137
138
139
140
142
144
145
146
147
148
149
152
152
153
154
155
160
161
163
164
166
169
169
170
171
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
120
BAE Systems Annual Report 2012
GROUP ACCOUNTS
Preparation and consolidation
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 84, and in accordance with EU-endorsed International Financial Reporting Standards (IFRS) 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 following potential key areas of judgement required to be made in applying the Group’s accounting policies:
– the determination of the revenue recognition approach to apply to individual contracts;
– the determination of assumptions underpinning the valuation of retirement benefit obligations for defined benefit pension
schemes; and
– the determination of assumptions underpinning goodwill impairment testing.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out in note 32. These
policies have been consistently applied to all the years presented, unless otherwise stated.
An explanation of the critical accounting estimates and judgements used in producing these consolidated financial statements is
made in the Directors’ Report on page 38.
Changes in accounting policies
With effect from 1 January 2012, the Group early adopted amendments to IAS 1, Presentation of Financial Statements, which
requires items within Other Comprehensive Income that may be reclassified to the income statement to be grouped together. This
amendment is concerned with disclosure only and has no impact on the reported results or financial position of the Group.
There were no other changes in accounting policies during the year.
A number of amendments to existing standards are effective for annual periods beginning after 1 January 2013 and have not been
applied in preparing these consolidated financial statements. None of these are expected to have a material impact on the
consolidated financial statements of the Group except IAS 19 (revised 2011), Employee Benefits, which replaces interest cost and
expected return on plan assets with a finance cost component comprising net interest on the net defined benefit pension deficit
calculated using the discount rate currently used to measure defined benefit pension liabilities. If this amendment had been applied
in 2012, pre-tax profit would have been £173m lower primarily because the discount rate is lower than the expected return on plan
assets. The net pension deficit would have been unchanged.
A number of new EU-endorsed standards, which are listed below, are effective for annual periods beginning after 1 January 2013 and
have not been applied in preparing these consolidated financial statements. None of these are expected to have a material impact
on the consolidated financial statements of the Group and as such they have not been early adopted.
– IFRS 10, Consolidated Financial Statements, defines the principle of control which is the basis for consolidation and sets out the
accounting requirements for the preparation of consolidated financial statements.
– IFRS 11, Joint Arrangements, focuses on the rights and obligations of the parties to a joint arrangement rather than its legal form
in determining whether it is a joint venture or a joint operation.
– IFRS 12, Disclosures of Interests in Other Entities, includes the disclosure requirements for all forms of interests in other entities,
including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.
– IFRS 13, Fair Value Measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value
and a single source of fair value measurement disclosure requirements for use across other standards within IFRSs. IFRS 13 does
not extend the use of fair value accounting.
There are no other IFRSs or IFRIC interpretations that are not yet effective that are expected to have a material impact on the Group.
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.
The results of subsidiaries are included in the income statement from the date of acquisition.
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated
in preparing the consolidated financial statements.
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 consolidated income statement includes its share of their profits and losses, and
the consolidated balance sheet includes its share of their net assets.
BAE Systems Annual Report 2012
121
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s
CONSOLIDATED INCOME STATEMENT
for the year ended 31 December
Continuing operations
Combined sales of Group and share of equity accounted investments
Less: share of sales of equity accounted investments
Revenue
Operating costs
Other income
Group operating profit
Share of results of equity accounted investments
Underlying EBITA1
Non-recurring items2
EBITA
Amortisation
Impairment
Financial (expense)/income of equity accounted investments
Taxation expense of equity accounted investments
Operating profit
Financial income
Financial expense
Finance costs
Profit before taxation
Taxation expense
Profit for the year – continuing operations
Profit/(loss) for the year – discontinued operations
Profit for the year
Attributable to:
Equity shareholders
Non-controlling interests
Earnings per share
Basic earnings per share
Diluted earnings per share
Earnings per share – continuing operations
Basic earnings per share
Diluted earnings per share
Notes
£m
1,895
103
1,998
(226)
(86)
(4)
(42)
1,326
(1,597)
1
1
1
2
4
1
5
1
5
6
7
8
2012
Total
£m
17,834
(1,214)
16,620
(15,353)
280
1,547
93
2011
£m
Total
£m
19,154
(1,384)
17,770
(16,478)
157
1,449
131
2,025
(78)
1,947
(239)
(109)
8
(27)
1,640
1,580
1,294
(1,408)
(271)
1,369
(295)
1,074
5
1,079
1,068
11
1,079
33.0p
32.8p
32.8p
32.6p
(114)
1,466
(206)
1,260
(4)
1,256
1,240
16
1,256
36.9p
36.7p
37.0p
36.8p
1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
2 Comprises profit on disposal of businesses £103m (2011 loss £29m) and regulatory penalties £nil (2011 £49m).
122
BAE Systems Annual Report 2012
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December
Other
reserves1
£m
–
2012
Retained
earnings
£m
1,079
Total
£m
1,079
Other
reserves1
£m
–
2011
Retained
earnings
£m
1,256
Total
£m
1,256
Notes
Profit for the year
Other comprehensive income
Items that will not be reclassified to the income
statement:
Net actuarial losses on defined benefit pension schemes:
Subsidiaries
Equity accounted investments
Tax on items that will not be reclassified to the income
statement
Items that may be reclassified to the income statement:
Currency translation on foreign currency net investments:
Subsidiaries
Equity accounted investments
Reclassification of cumulative currency translation reserve
on disposal
Amounts charged to hedging reserve
Fair value movements on available-for-sale investments
Reclassification of fair value movements on available-for-
sale investments
Tax on items that may be reclassified to the income
statement
Total other comprehensive income for the year (net of tax)
Total comprehensive income for the year
6
26
17
15
5
6
Attributable to:
Equity shareholders
Non-controlling interests
1 An analysis of other reserves is provided in note 25.
–
–
–
(796)
(84)
(796)
(84)
173
173
–
–
–
(1,522)
(45)
(1,522)
(45)
387
387
(164)
(25)
(97)
(21)
–
–
–
–
–
–
–
–
(164)
(25)
(97)
(21)
–
(19)
(17)
(14)
(56)
–
–
–
–
–
5
–
–
(21)
(19)
(17)
(14)
(56)
5
(21)
5
(302)
(302)
–
(707)
372
5
(1,009)
70
17
(89)
(89)
–
(1,196)
60
17
(1,285)
(29)
(302)
–
(302)
361
11
372
59
11
70
(89)
–
(89)
44
16
60
(45)
16
(29)
BAE Systems Annual Report 2012
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–
I
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c
o
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NOTES TO THE GROUP ACCOUNTS – INCOME STATEMENT
1. Segmental analysis
The Group has six reporting segments which align with the Group’s strategic direction:
– Electronic Systems comprises the US and UK-based electronics activities, including electronic warfare systems and electro-optical
sensors, military and commercial digital engine and flight controls, next-generation military communications systems and data
links, persistent surveillance capabilities, and hybrid electric drive systems;
– Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered BAE Systems Detica
business, and covers the Group’s cyber, secure government, and commercial and financial security activities;
– Platforms & Services (US) comprises the US-headquartered Land & Armaments business, with operations in the US, UK, Sweden
and South Africa, together with US-based services and sustainment activities, including ship repair and munitions services;
– Platforms & Services (UK) comprises the Group’s UK-based air, maritime and combat vehicle activities, and certain shared services
activities;
– Platforms & Services (International) comprises the Group’s businesses in Saudi Arabia, Australia, India and Oman, together with its
37.5% interest in the pan-European MBDA joint venture; and
– HQ comprises the Group’s head office activities, together with a 49% interest in Air Astana.
Management monitors the results of these reporting segments to assess performance and make decisions about the allocation of
resources. Segment performance is evaluated based on combined sales of Group and share of equity accounted investments, and
underlying EBITA1. Underlying EBITA1 is reconciled below to the reporting segment result and the operating profit in the consolidated
financial statements. Finance costs and taxation expense are managed on a Group basis.
Sales and revenue by reporting segment
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ
Intra-group sales/revenue
Combined sales of
Group and share of equity
accounted investments
2011
£m
2,645
1,399
5,305
6,258
3,794
233
19,634
(480)
19,154
2012
£m
2,507
1,402
4,539
5,646
4,071
267
18,432
(598)
17,834
Less:
sales by equity
accounted investments
2011
£m
(49)
–
(52)
(1,476)
(1,039)
(233)
(2,849)
3
(2,846)
2012
£m
(52)
–
(70)
(1,430)
(830)
(267)
(2,649)
2
(2,647)
Add:
sales to equity
accounted investments
Revenue
2012
£m
52
–
1
1,346
–
–
1,399
34
1,433
2011
£m
49
–
2
1,374
–
–
1,425
37
1,462
2012
£m
2,507
1,402
4,470
5,562
3,241
–
17,182
(562)
16,620
2011
£m
2,645
1,399
5,255
6,156
2,755
–
18,210
(440)
17,770
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
Intra-group revenue
Revenue from
external customers
2012
£m
102
22
54
375
9
562
2011
£m
118
22
79
214
7
440
2012
£m
2,405
1,380
4,416
5,187
3,232
16,620
2011
£m
2,527
1,377
5,176
5,942
2,748
17,770
1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
124
BAE Systems Annual Report 2012
1. Segmental analysis (continued)
Sales and revenue by customer location
United Kingdom
Rest of Europe1
Saudi Arabia
Rest of Middle East
United States
Canada
Australia
Rest of Asia and Pacific
Africa, Central and South America
Revenue by category
Long-term contracts
Sale of goods
Provision of services
Royalty income
Sales
Revenue
2012
£m
3,666
2,473
2,411
159
7,348
55
1,112
376
234
17,834
2011
£m
3,893
2,830
2,460
136
7,924
82
1,071
374
384
19,154
2012
£m
3,526
1,724
2,331
51
7,344
55
1,110
257
222
16,620
2012
£m
8,948
4,000
3,656
16
16,620
2011
£m
3,749
1,966
2,313
70
7,921
82
1,070
240
359
17,770
2011
£m
9,380
4,684
3,698
8
17,770
Revenue by major customer
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
2012
£m
4,475
4,986
2,302
2011
£m
4,802
5,675
2,276
Revenue from the UK Ministry of Defence and the US Department of Defense was generated by the five principal reporting segments.
Revenue from the Kingdom of Saudi Arabia Ministry of Defence and Aviation was generated by the Platforms & Services (UK) and
Platforms & Services (International) reporting segments.
1
Includes £1.3bn (2011 £1.3bn) generated under the Typhoon work share agreement with Eurofighter Jagdflugzeug GmbH.
BAE Systems Annual Report 2012
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a
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e
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t
s
–
I
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c
o
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e
s
t
a
t
e
m
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t
NOTES TO THE GROUP ACCOUNTS – INCOME STATEMENT CONTINUED
2012
£m
356
124
394
689
Non-recurring items2
2011
£m
–
–
(29)
–
2012
£m
–
–
103
–
2011
£m
386
136
478
658
Amortisation of
intangible assets
2012
£m
(22)
(76)
(92)
(28)
2011
£m
(15)
(64)
(118)
(32)
2011
Impairment of
intangible assets
2012
£m
(2)
–
(84)
–
£m
–
–
(75)
(34)
Reporting
segment result
2012
£m
332
48
321
661
2011
£m
371
72
256
592
417
(85)
1,895
449
(82)
2,025
–
–
103
–
(49)
(78)
(8)
–
(226)
(10)
–
(239)
–
–
(86)
–
–
409
(85)
(109) 1,686
439
(131)
1,599
1. Segmental analysis (continued)
Reporting segment result
Underlying EBITA1
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services
(International)
HQ
Financial (expense)/income
of equity accounted
investments
Taxation expense of equity
accounted investments
Operating profit
Finance costs
Profit before taxation
Taxation expense
Profit for the year –
continuing operations
Share of results of equity accounted investments within reporting segments
Share of results excluding finance costs and taxation expense:
Electronic Systems
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ
Financial (expense)/income
Taxation expense
1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
2 Comprises profit on disposal of businesses £103m (2011 loss £29m) and regulatory penalties £nil (2011 £49m).
126
BAE Systems Annual Report 2012
(4)
8
(42)
1,640
(271)
1,369
(295)
(27)
1,580
(114)
1,466
(206)
1,074
1,260
2012
£m
2011
£m
(2)
1
11
108
21
139
(4)
(42)
93
1
1
11
116
21
150
8
(27)
131
2. Operating costs
Raw materials, subcontracts and other bought-in items
Change in inventories of finished goods and work-in-progress
Cost of inventories expensed
Staff costs (note 3)
Depreciation, amortisation and impairment
Loss on disposal of property, plant and equipment, and investment property
Loss on disposal of businesses
Other operating charges
Operating costs
Included within the analysis of operating costs are the following expenses:
Minimum lease and sublease payments
Research and development expense including amounts funded under contract
Fees payable to the Company’s auditor and its associates included in operating costs
2012
Overseas
£’000
UK
£’000
Fees payable to the Company’s auditor for the audit of the
2012
£m
6,174
23
6,197
5,285
669
5
–
3,197
15,353
2011
£m
6,947
198
7,145
5,356
695
4
29
3,249
16,478
189
1,138
178
1,149
Total
£’000
UK
£’000
2011
Overseas
£’000
Total
£’000
Company’s annual accounts*
1,570
–
1,570
1,535
–
1,535
Fees payable to the Company’s auditor and its associates
for other services pursuant to legislation:
The audit of the Company’s subsidiaries*
Interim review
Other
Audit-related assurance services:
Advice on accounting matters
Tax compliance services
Tax advisory services
Corporate finance services:
M&A
Other assurance services:
Due diligence
IT advisory
Other non-audit services
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
Fees in respect of BAE Systems pension schemes:
Audit
Tax compliance
Tax advisory
1 Restated.
2,524
623
103
8
320
126
236
–
56
125
3,836
–
29
20
662
166
6,360
623
132
2,435
604
96
28
982
292
4
550
227
4,227
–
38
25
1,263
376
6,662
604
134
29
1,813
603
35
271
516
79
595
235
–
73
235
56
198
–
–
251
270
27
18
270
27
269
5,691
5,056
10,747
6,218
6,323
12,541
147
85
64
296
268
26
–
294
7,930
415
111
64
590
135
48
26
209
2291
8
–
237
8,197
364
56
26
446
Tax services in 2011 included compliance and advisory services in relation to the Group’s expatriate employees based around the
world. From 1 January 2012, PricewaterhouseCoopers have performed these services.
BAE Systems Annual Report 2012
127
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NOTES TO THE GROUP ACCOUNTS – INCOME STATEMENT CONTINUED
3. Employees
The weekly average and year-end numbers of employees, excluding those in equity accounted investments, were as follows:
At year end
2012
Number
‘000
13
8
21
27
11
1
81
2011
Number
‘000
13
9
24
28
12
1
87
2012
£m
4,546
367
26
129
212
5
5,285
2012
£m
21
19
14
10
103
18
26
16
53
280
2011
£m
4,603
385
24
119
225
–
5,356
2011
£m
22
21
21
12
–
17
–
2
62
157
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ
2011
Number
Weekly average
2012
Number
‘000
13
8
23
28
11
1
84
‘000
13
8
25
30
12
1
89
The aggregate staff costs of Group employees, excluding employees of equity accounted investments, were:
Wages and salaries
Social security costs
Share-based payments (note 28)
Pension costs – defined contribution plans (note 23)
Pension costs – defined benefit plans (note 23)
US healthcare costs (note 23)
4. Other income
Rental income from operating leases – investment property
Rental income from operating leases – other
Profit on disposal of investment property
Profit on disposal of property, plant and equipment
Profit on disposal of businesses (note 26)
Management recharges to equity accounted investments (note 29)
Pension curtailment gains (note 23)
US healthcare curtailment gains (note 23)
Other1
Other income
1 There are no individual amounts in excess of £10m.
128
BAE Systems Annual Report 2012
5. Finance costs
Interest income
Income from financial assets at fair value through profit or loss
Expected return on pension scheme assets (note 23)
Reclassification of fair value movements on available-for-sale investments
Gain on remeasurement of financial instruments at fair value through profit or loss
Foreign exchange gains
Financial income
Interest expense on bonds and other financial instruments1
Charges relating to early redemption of debt
Facility fees
Net present value adjustments
Interest charge on pension scheme liabilities (note 23)
Loss on remeasurement of financial instruments at fair value through profit or loss
Foreign exchange losses
Financial expense
Finance costs
Additional analysis
Finance costs:
Group
Share of equity accounted investments
Analysed as:
Underlying interest (expense)/income:
Group1
Share of equity accounted investments
Other:
Group:
Net financing (charge)/credit on pensions
Market value and foreign exchange adjustments on financial instruments and investments
Charges relating to early redemption of debt
Share of equity accounted investments
2012
£m
39
–
874
–
280
133
1,326
(187)
–
(7)
(56)
(929)
(250)
(168)
(1,597)
(271)
2012
£m
(271)
(4)
(275)
(211)
7
(204)
(55)
(5)
–
(11)
(275)
2011
£m
30
4
989
21
174
76
1,294
(204)
(13)
(7)
(33)
(965)
(163)
(23)
(1,408)
(114)
2011
£m
(114)
8
(106)
(210)
11
(199)
24
85
(13)
(3)
(106)
1 2011 restated to exclude £13m of pre-tax charges relating to early redemption of debt, with £28m that would have been incurred in future years remaining
within underlying interest.
BAE Systems Annual Report 2012
129
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NOTES TO THE GROUP ACCOUNTS – INCOME STATEMENT CONTINUED
6. Taxation expense
Current taxation
UK:
Current tax
Double tax relief
Adjustment in respect of prior years1
Overseas:
Current year
Adjustment in respect of prior years
Deferred taxation
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
UK1
Overseas
Taxation expense
2012
£m
2011
£m
(98)
1
5
(92)
(169)
12
(157)
(249)
(2)
2
(10)
(10)
(23)
(13)
(36)
(46)
(295)
(102)
(193)
(295)
(155)
2
187
34
(171)
5
(166)
(132)
(43)
7
(8)
(44)
(56)
26
(30)
(74)
(206)
(10)
(196)
(206)
1 2011 includes the benefit of a UK tax agreement of £197m.
2 The UK current tax rate will be reduced from 24% to 23% with effect from 1 April 2013. In line with this change, the rate applying to UK deferred tax assets
and liabilities has been reduced from 25% to 23%, creating a rate adjustment in 2012, which is partly reflected in the consolidated income statement and
partly in the consolidated statement of comprehensive income.
130
BAE Systems Annual Report 2012
6. Taxation expense (continued)
Reconciliation of taxation expense
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, including US state taxes
Expenses not tax effected
Income not subject to tax
Research and development tax credits
Goodwill impairment
Chargeable gains and non-taxable gains/non-deductible losses on disposal of businesses
Utilisation of previously unrecognised tax losses
Current year losses not tax effected
Recoverable deferred tax asset previously unrecognised
Prior year benefit of UK tax agreement1
Adjustments in respect of prior years
Adjustments in respect of equity accounted investments
Regulatory penalties
Tax rate adjustment2
Other
Taxation expense
2012
£m
1,369
2011
£m
1,466
24.5%
26.5%
(335)
(388)
(55)
(15)
12
24
(14)
17
9
(2)
20
–
6
23
–
(10)
25
(295)
(67)
(32)
24
40
(28)
(19)
27
(3)
30
197
28
35
(13)
(8)
(29)
(206)
1 2011 includes the benefit of an agreement with the UK tax authorities addressing a number of items, including the interpretation of complex tax rules relating
to research and development tax credits.
2 The UK current tax rate will be reduced from 24% to 23% with effect from 1 April 2013. In line with this change, the rate applying to UK deferred tax assets
and liabilities has been reduced from 25% to 23%, creating a rate adjustment in 2012, which is partly reflected in the consolidated income statement and
partly in the consolidated statement of comprehensive income.
BAE Systems Annual Report 2012
131
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NOTES TO THE GROUP ACCOUNTS – INCOME STATEMENT CONTINUED
6. Taxation expense (continued)
Tax recognised in other comprehensive income
Items that will not be reclassified to the income statement:
Net actuarial losses on defined benefit pension schemes:
Subsidiaries
Equity accounted investments
Share-based payments
Other
Tax rate adjustment1
Items that may be reclassified to the income statement:
Currency translation on foreign currency net investments:
Subsidiaries
Equity accounted investments
Reclassification of cumulative currency translation reserve
on disposal
Amounts charged to hedging reserve
Fair value movements on available-for-sale investments
Reclassification of fair value movements on available-for-
sale investments
Current tax
Financial instruments
Pensions
Other
Deferred tax
Subsidiaries
Tax rate adjustment1
Equity accounted investments – pensions
Tax on other comprehensive income
2012
Tax benefit/
(expense)
£m
Before
tax
£m
Net of tax
£m
2011
Tax benefit/
(expense)
£m
Before
tax
£m
Net of tax
£m
(796)
(84)
–
–
–
(164)
(25)
(97)
(21)
–
228
11
2
2
(70)
–
–
–
5
–
(568)
(73)
2
2
(70)
(164)
(25)
(97)
(16)
–
(1,522)
(45)
–
–
–
443
13
–
–
(69)
(1,079)
(32)
–
–
(69)
(19)
(17)
(14)
(56)
5
–
–
–
17
–
(19)
(17)
(14)
(39)
5
–
(1,187)
–
178
–
(1,009)
(21)
(1,689)
–
404
(21)
(1,285)
Other
reserves
£m
2012
Retained
earnings
£m
–
–
–
–
5
–
–
5
5
–
122
3
125
107
(70)
11
48
173
Other
reserves
£m
2011
Retained
earnings
£m
3
–
–
3
15
(1)
–
14
17
–
44
–
44
398
(68)
13
343
387
Total
£m
–
122
3
125
112
(70)
11
53
178
Total
£m
3
44
–
47
413
(69)
13
357
404
1 The UK current tax rate will be reduced from 24% to 23% with effect from 1 April 2013. In line with this change, the rate applying to UK deferred tax assets
and liabilities has been reduced from 25% to 23%, creating a rate adjustment in 2012, which is partly reflected in the consolidated income statement and
partly in the consolidated statement of comprehensive income.
132
BAE Systems Annual Report 2012
7. Discontinued operations
Regional Aircraft
The Asset Management and Support & Engineering businesses, which comprised the Group’s Regional Aircraft line of business
within the HQ reporting segment, are presented within discontinued operations.
In July 2011, the Group sold the Asset Management business.
The Support & Engineering business is classified as held for sale at 31 December 2012.
Results from discontinued operations
Revenue
Operating costs1
Other income2
Operating profit/(loss)
Finance costs
Profit/(loss) before taxation
Taxation expense
Profit/(loss) for the year
Profit on disposal of discontinued operations
Profit/(loss) for the year – discontinued operations
2012
£m
71
(67)
2
6
–
6
(1)
5
–
5
2011
£m
84
(104)
10
(10)
(3)
(13)
(5)
(18)
14
(4)
1 2011 includes depreciation and impairment of £56m, including £40m in respect of the carrying value of the Regional Aircraft Asset Management business.
2
Includes profit on disposal of property, plant and equipment of £nil (2011 £9m).
BAE Systems Annual Report 2012
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NOTES TO THE GROUP ACCOUNTS – INCOME STATEMENT CONTINUED
8. Earnings per share
Profit for the year attributable to equity shareholders
Represented by:
Continuing operations
Discontinued operations
(Deduct)/add back:
(Profit)/loss on disposal of businesses
Regulatory penalties
Net financing charge/(credit) on pensions, post tax
Market value and foreign exchange adjustments on financial
instruments and investments, post tax
Charges relating to early redemption of debt, post tax
Amortisation and impairment of intangible assets, post tax
Impairment of goodwill
Underlying earnings, post tax
Represented by:
Continuing operations
Discontinued operations
2012
Basic
pence
per share
33.0
Diluted
pence
per share
32.8
2011
Basic
pence
per share
36.9
Diluted
pence
per share
36.7
£m
1,240
32.8
0.2
32.6
0.2
1,244
(4)
37.0
(0.1)
36.8
(0.1)
29
49
(18)
(61)
10
188
94
1,531
1,535
(4)
1,531
45.5
45.3
45.6
(0.1)
45.5
45.4
(0.1)
45.3
39.1
39.0
38.9
0.2
39.1
38.8
0.2
39.0
£m
1,068
1,063
5
(103)
–
50
4
–
192
57
1,268
1,263
5
1,268
Underlying earnings excluding R&D tax benefit (2011 £197m)
1,334
39.6
39.4
Represented by:
Continuing operations
Discontinued operations
1,338
(4)
1,334
39.7
(0.1)
39.6
39.5
(0.1)
39.4
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
3,244
3,244
14
3,258
3,365
3,365
17
3,382
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.
134
BAE Systems Annual Report 2012
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December
Profit for the year
Taxation expense
Share of results of equity accounted investments
Net finance costs
Depreciation, amortisation and impairment
Profit on disposal of property, plant and equipment
Profit on disposal of investment property
(Profit)/loss on disposal of businesses
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
Taxation paid
Net cash inflow from operating activities
Dividends received from equity accounted investments
Interest received
Income from financial assets at fair value through profit or loss
Purchases of property, plant and equipment, and investment property
Purchases of intangible assets
Proceeds from sale of property, plant and equipment, and investment property
Purchase of subsidiary undertakings (net of cash acquired)
Equity accounted investment funding
Proceeds from sale of subsidiary undertakings (net of cash disposed)
Proceeds from sale of financial assets at fair value through profit or loss
Proceeds from sale of other investments
Net proceeds from sale of other deposits/securities
Net cash outflow from investing activities
Purchase of treasury shares
Purchase of own shares
Equity dividends paid
Dividends paid to non-controlling interests
Cash outflow from matured derivative financial instruments
Cash outflow from movement in cash collateral
Cash inflow from loans
Cash outflow from repayment of loans
Net cash outflow from financing activities
Net increase/(decrease) in cash and cash equivalents1
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 equivalents2
Overdrafts
Cash and cash equivalents at 31 December
Notes
6,7
1
5,7
2,7
2,4,7
2,4
2,4,7
14
9
14
9
15
25
2012
£m
1,079
296
(93)
271
669
(7)
(12)
(103)
57
(224)
(859)
6
447
931
2,458
(170)
(115)
2,173
94
23
–
(359)
(43)
115
(5)
(6)
101
–
–
–
(80)
–
(16)
(620)
(11)
(119)
(2)
1,863
(1,975)
(880)
1,213
2,136
(15)
3,334
2011
£m
1,256
211
(131)
117
751
(17)
(21)
15
68
(148)
(287)
(85)
191
(969)
951
(212)
(257)
482
88
32
4
(359)
(24)
115
(532)
(1)
124
152
1
265
(135)
(503)
(6)
(606)
(22)
(34)
–
2,693
(2,541)
(1,019)
(672)
2,802
6
2,136
3,355
(21)
3,334
2,141
(5)
2,136
1
2
Includes net cash inflow from discontinued operations of £2m (2011 £51m).
Includes £nil (2011 £403m) of cash held in Trust for the benefit of the Group’s main pension scheme (see note 23).
BAE Systems Annual Report 2012
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NOTES TO THE GROUP ACCOUNTS – CASH FLOW STATEMENT
9. Cash fl ow analysis
Operating business cash flow
Cash inflow from operating activities
Add back: Amounts already deducted from net cash/(debt) (as defined by the Group)1
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, and investment property
Proceeds from sale of other investments
Equity accounted investment funding
Dividends received from equity accounted investments
Operating business cash flow
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ
Discontinued operations
Operating business cash flow
2012
£m
2,458
458
2,916
(25)
(359)
(43)
115
–
(6)
94
2,692
2012
£m
256
113
314
1,719
506
(214)
(2)
2,692
2011
£m
951
–
951
(137)
(359)
(24)
115
1
(1)
88
634
2011
£m
268
123
410
69
80
(308)
(8)
634
1 Comprises the £428m contribution from Trust to the UK pension schemes and the £29.5m charitable contribution for the benefit of the people of Tanzania in
connection with the global settlement with the UK’s Serious Fraud Office in 2010, both made in 2012, as the amounts had been deducted from the Group’s
net cash/(debt).
Cash flows in 2012 from acquisitions and disposals
Proceeds from sale of subsidiary undertakings2
Cash and cash equivalents disposed of with subsidiary undertakings
Proceeds from sale of subsidiary undertakings (net of cash disposed)
Purchase of subsidiary undertakings (net of cash acquired)
Acquisitions and disposals
Safariland
£m
77
(10)
67
–
67
Other
£m
35
(1)
34
(5)
29
Total
£m
112
(11)
101
(5)
96
2 The Group received £108m in respect of the subsidiaries disposed of during 2012 (see note 26) and £4m in respect of sales price adjustments relating to
the sale of the Regional Aircraft Asset Management business in 2011.
136
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10. Net cash/(debt) (as defi ned by the Group)
Movement in net cash/(debt) (as defined by the Group)
Operating business cash flow (note 9)
Interest
Income from financial assets at fair value through profit or loss
Taxation
Free cash inflow
Acquisitions and disposals (note 9)
Equity dividends paid
Dividends paid to non-controlling interests
Purchase of own shares, including treasury shares
Cash outflow from matured derivative financial instruments
Cash outflow from movement in cash collateral
Movement in cash received on customers’ account1
Foreign exchange adjustment
Other non-cash movements
Movement in net cash/(debt) (as defined by the Group)
Opening net debt (as defined by the Group)
Closing net cash/(debt) (as defined by the Group)
Components of net cash/(debt) (as defined by the Group)
Debt-related derivative financial instrument assets – non-current (note 17)
Cash and cash equivalents
Loans – non-current (note 21)
Loans and overdrafts – current (note 21)
Less: Cash received on customers’ account1 (note 22)
Less: Assets held in Trust
Less: Cash held for charitable contribution to Tanzania
Net cash/(debt) (as defined by the Group)
2012
£m
2,692
(147)
–
(115)
2,430
96
(620)
(11)
(16)
(119)
(2)
1
92
(25)
1,826
(1,439)
387
2012
£m
22
3,355
3,377
(2,967)
(21)
(2)
–
–
(2,990)
387
2011
£m
634
(180)
4
(257)
201
(256)
(606)
(22)
(509)
(34)
–
13
(20)
36
(1,197)
(242)
(1,439)
2011
£m
56
2,141
2,197
(2,682)
(518)
(3)
(403)
(30)
(3,636)
(1,439)
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 in the consolidated balance sheet (see note 22).
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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 financial assets
Cash and cash equivalents
Assets held for sale
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
Liabilities held for sale
Total liabilities
Net assets
Capital and reserves
Issued share capital
Share premium
Other reserves
Retained earnings – deficit
Total equity attributable to equity holders of the parent
Non-controlling interests
Total equity
Approved by the Board on 20 February 2013 and signed on its behalf by:
I G King
Chief Executive
P J Lynas
Group Finance Director
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Notes
2012
£m
2011
£m
11
12
13
14
15
16
17
18
19
16
17
20
21
22
23
17
18
24
21
22
17
24
25
25
10,928
2,285
122
265
5
254
62
1,375
15,296
655
2,873
11
64
3,355
20
6,978
22,274
11,465
2,496
130
783
5
314
118
1,409
16,720
716
3,369
60
77
2,141
18
6,381
23,101
(2,967)
(1,481)
(4,607)
(66)
(13)
(449)
(9,583)
(2,682)
(571)
(4,673)
(74)
(26)
(501)
(8,527)
(21)
(8,067)
(88)
(422)
(297)
(22)
(8,917)
(18,500)
3,774
(518)
(8,531)
(284)
(468)
(453)
(21)
(10,275)
(18,802)
4,299
90
1,249
5,079
(2,698)
3,720
54
3,774
90
1,249
5,381
(2,480)
4,240
59
4,299
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December
At 1 January 2012
Profit for the year
Total other comprehensive income for the year
Share-based payments
Purchase of own shares
Ordinary share dividends
Other
At 31 December 2012
At 1 January 2011
Profit for the year
Total other comprehensive income for the year
Share-based payments
Purchase of own shares
Purchase of treasury shares
Ordinary share dividends
Other
At 31 December 2011
1 An analysis of other reserves is provided in note 25.
Attributable to equity holders of the parent
Issued
share
capital
£m
90
–
–
–
–
–
–
90
90
–
–
–
–
–
–
–
90
Share
premium
£m
1,249
–
–
–
–
–
–
1,249
1,249
–
–
–
–
–
–
–
1,249
Other
reserves1
£m
5,381
–
(302)
–
–
–
–
5,079
5,470
–
(89)
–
–
–
–
–
5,381
Retained
earnings
£m
(2,480)
1,068
(707)
57
(16)
(620)
–
(2,698)
(1,477)
1,240
(1,196)
68
(6)
(503)
(606)
–
(2,480)
Non-
controlling
interests
£m
59
11
–
–
–
(11)
(5)
54
71
16
–
–
–
–
(22)
(6)
59
Total
£m
4,240
1,068
(1,009)
57
(16)
(620)
–
3,720
5,332
1,240
(1,285)
68
(6)
(503)
(606)
–
4,240
Total
equity
£m
4,299
1,079
(1,009)
57
(16)
(631)
(5)
3,774
5,403
1,256
(1,285)
68
(6)
(503)
(628)
(6)
4,299
BAE Systems Annual Report 2012
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET
11. Intangible assets
Cost or valuation
At 1 January 2011
Additions:
Acquired separately
Internally developed
Acquisition of subsidiaries
Adjustment on finalisation of provisional goodwill
Business disposals
Transfer from property, plant and equipment
Foreign exchange adjustments
At 31 December 2011
Additions:
Acquired separately
Internally developed
Adjustment on finalisation of provisional goodwill (note 26)
Transfer from property, plant and equipment
Transfer to held for sale3
Business disposals
Foreign exchange adjustments
At 31 December 2012
Amortisation and impairment
At 1 January 2011
Amortisation charge
Impairment charge
Business disposals
Foreign exchange adjustments
At 31 December 2011
Amortisation charge
Impairment charge
Transfer from property, plant and equipment
Transfer to held for sale3
Business disposals
Foreign exchange adjustments
At 31 December 2012
Net book value
At 31 December 2012
At 31 December 2011
At 1 January 2011
Programme
and customer
related1
£m
Goodwill
£m
Other2
£m
Total
£m
13,588
1,944
465
15,997
–
–
291
5
(33)
–
49
13,900
–
–
2
–
(227)
(12)
(305)
13,358
3,123
–
94
–
7
3,224
–
57
–
(227)
(12)
(50)
2,992
10,366
10,676
10,465
–
–
179
–
(10)
–
11
2,124
–
–
–
–
(165)
(37)
(63)
1,859
1,373
158
13
(9)
10
1,545
160
11
–
(155)
(25)
(51)
1,485
374
579
571
17
7
91
–
(6)
3
–
577
39
8
–
40
(94)
(4)
(15)
551
285
81
2
(5)
4
367
66
18
6
(81)
(4)
(9)
363
188
210
180
17
7
561
5
(49)
3
60
16,601
39
8
2
40
(486)
(53)
(383)
15,768
4,781
239
109
(14)
21
5,136
226
86
6
(463)
(41)
(110)
4,840
10,928
11,465
11,216
1 Relates to intangible assets recognised on acquisition of subsidiary companies, mainly in respect of ongoing programme relationships and the acquired order book.
2
3 Represents Safariland (net book value £23m).
Includes patents, trademarks, software and internally funded development costs.
The Group has no indefinite life intangible assets other than goodwill.
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.
The value-in-use calculations use risk-adjusted future cash flow projections based on the Group’s five-year Integrated Business Plan (IBP)
and include a terminal value based on the projections for the final year of that plan, with growth rate assumptions applied. The IBP
process includes the use of historic experience, available government spending data and the Group’s order backlog. Pre-tax discount
rates, derived from the Group’s post-tax weighted average cost of capital of 6.72% (2011 7.37%) (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.
140
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11. Intangible assets (continued)
Significant CGUs
Goodwill allocated to CGUs which are largely dependent on US government spending on defence, aerospace and security represents
£8.5bn (2011 £8.9bn) of the Group’s total goodwill balance.
Significant CGUs
Electronic Systems
Key assumptions
Continued demand from the US government for
electronic warfare systems (where the
business has a leadership position), other
technology-based solutions and growth in the
commercial avionics market
Allocated goodwill
Pre-tax discount rate
2012
£bn
3.1
2011
£bn
3.2
2012
%
8.2
2011
%
9.2
Intelligence & Security
(within Cyber & Intelligence)
Support Solutions
(within Platforms & Services (US))
Continued demand in the US for the Group’s
1.3
1.4
8.2
9.2
services in the areas of homeland security, law
enforcement and counter-intelligence
Continued demand in the US for complex
infrastructure, maritime and aviation services,
and operations support
1.0
1.01
8.2
9.2
Land & Armaments
Continued demand in the Group’s principal
3.1
3.31
7.7
8.8
(within Platforms & Services (US))
markets for existing and successor military
wheeled and tracked vehicles, naval guns,
missile launchers, artillery systems, munitions,
upgrade programmes, and support
1 Re-presented for the transfer of the Protection Systems business from Land & Armaments to Support Solutions.
The final year growth rate assumption in the value-in-use calculations, after adjusting for assumed 3% inflation, is 0% (2011 0%).
The Group monitors changes in defence budgets on an ongoing basis. There is continuing uncertainty as to the potential impact of a
sequestration or other budget reductions that could result in indiscriminate cuts to US government spending. The future cash flow
projections used in the IBP do not include the potential full impact of a sequestration.
The headroom, calculated as the difference between net assets including allocated goodwill as at 31 December 2012 and the value-
in-use calculations, for the CGUs listed above is shown below. The table also shows the headroom assuming a 1% reduction in the
final year growth rate assumption used in the value-in-use calculations.
Electronic Systems
Intelligence & Security
Support Solutions
Land & Armaments
Headroom as at
31 December
2012
£bn
3.7
0.5
1.5
1.8
2011
£bn
2.6
0.2
1.0
1.4
Headroom assuming a 1%
reduction in final year
growth rate assumption
2011
£bn
1.5
(0.1)
0.6
0.4
2012
£bn
2.2
0.1
0.9
0.7
Other CGUs
The remaining goodwill balance of £1.9bn (2011 £1.8bn) is allocated across multiple CGUs, including £0.5bn in the BAE Systems
Detica CGU, with no other individual CGU exceeding 5% of the Group’s total goodwill balance. The majority of the projected cash
flows within these CGUs are underpinned by expected levels of primarily UK government spending on defence, aerospace and
security, and the Group’s ability to capture a broadly consistent market share. In the case of BAE Systems Detica, the future cash
flow projections are based on the expectation of growth in cyber and intelligence, both in the UK and overseas government markets,
with increasing demand for products and services in commercial markets.
Impairment – goodwill
In 2012, the impairment charge of £57m comprises the Safariland (£27m) and Tensylon (£12m) businesses disposed of during the
year (see note 26) and the Commercial Armored Vehicles business (£18m), all within the Land & Armaments CGU. The impairment in
respect of the Commercial Armored Vehicles business reflects the agreement to sell the business at a price below its carrying value.
In 2011, the impairment charge of £94m comprised the Safety Products business within the Land & Armaments CGU (£60m) and
Naval Ships (£34m).
Impairment – intangible assets
In 2012, the impairment charge of £29m primarily relates to the Land & Armaments business within the Platforms & Services (US)
reporting segment and includes £21m in respect of the Safariland business disposed of during the year.
In 2011, the impairment charge of £15m related to the Land & Armaments business within the Platforms & Services (US) reporting
segment.
BAE Systems Annual Report 2012
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
12. Property, plant and equipment
Cost
At 1 January 2011
Additions
Acquisition of subsidiaries
Adjustment on finalisation of provisional fair values on acquisitions
Transfer (to)/from inventories
Transfer to investment properties
Transfer to other intangible assets
Transfer to held for sale1
Reclassification between categories
Disposals
Business disposals
Foreign exchange adjustments
At 31 December 2011
Additions
Transfer to other intangible assets
Transfer to held for sale2
Reclassification between categories
Disposals
Business disposals
Foreign exchange adjustments
At 31 December 2012
Depreciation and impairment
At 1 January 2011
Depreciation charge for the year
Impairment charge for the year
Impairment write back
Transfer to inventories
Transfer to held for sale1
Reclassification between categories
Disposals
Business disposals
Foreign exchange adjustments
At 31 December 2011
Depreciation charge for the year
Impairment charge for the year
Transfer to other intangible assets
Transfer to held for sale2
Reclassification between categories
Disposals
Business disposals
Foreign exchange adjustments
At 31 December 2012
Net book value
At 31 December 2012
At 31 December 2011
At 1 January 2011
Land and
buildings
£m
Plant and
machinery
£m
Aircraft
£m
Total
£m
2,477
89
8
–
–
(7)
–
(4)
8
(84)
(2)
8
2,493
81
–
(15)
(17)
(88)
(3)
(66)
2,385
741
133
30
(16)
–
(4)
5
(55)
–
4
838
128
28
–
(3)
(5)
(13)
(1)
(21)
951
1,434
1,655
1,736
2,681
240
2
(2)
(5)
–
(3)
(72)
1
(142)
(17)
8
2,691
256
(40)
(11)
17
(122)
(14)
(53)
2,724
1,859
188
11
–
(5)
(72)
3
(130)
(9)
5
1,850
191
7
(6)
(8)
5
(118)
(12)
(36)
1,873
851
841
822
701
7
–
–
1
–
–
(643)
(9)
(42)
–
(15)
–
–
–
–
–
–
–
–
–
545
10
44
(1)
–
(543)
(8)
(34)
–
(13)
–
–
–
–
–
–
–
–
–
–
–
–
156
5,859
336
10
(2)
(4)
(7)
(3)
(719)
–
(268)
(19)
1
5,184
337
(40)
(26)
–
(210)
(17)
(119)
5,109
3,145
331
85
(17)
(5)
(619)
–
(219)
(9)
(4)
2,688
319
35
(6)
(11)
–
(131)
(13)
(57)
2,824
2,285
2,496
2,714
1 Comprises the Regional Aircraft Asset Management (net book value £95m) and Regional Aircraft Support & Engineering (net book value £5m) businesses.
2 Represents Safariland (net book value £15m).
142
BAE Systems Annual Report 2012
12. Property, plant and equipment (continued)
Net book value
Freehold property
Long leasehold property
Short leasehold property
Plant and machinery
Fixtures, fittings and equipment
At 31 December 2012
Net impairment
Electronic Systems
Platforms & Services (US)
Platforms & Services (International)
Discontinued operations
Land and
buildings
£m
1,230
93
111
–
–
1,434
Plant and
machinery
£m
–
–
–
772
79
851
2012
£m
–
15
20
–
35
Total
£m
1,230
93
111
772
79
2,285
2011
£m
2
7
12
47
68
2012
The impairment charge of £35m mainly comprises charges in respect of the carrying value of land and buildings in Saudi Arabia
(£20m), and assets of US businesses prior to their disposal (£7m).
2011
The net impairment charge of £68m comprised £21m from continuing operations and £47m in respect of the Regional Aircraft line of
business within discontinued operations (note 7).
Assets in the course of construction
At 31 December 2012
At 31 December 2011
Land and
buildings
£m
23
Plant and
machinery
£m
115
57
144
Total
£m
138
201
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
2012
£m
24
96
139
259
2011
£m
21
82
157
260
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.
BAE Systems Annual Report 2012
143
i
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a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
–
B
a
a
n
c
e
s
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e
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
13. Investment property
Cost
At 1 January 2011
Additions
Transfer from property, plant and equipment
Disposals
At 31 December 2011
Additions
Disposals
At 31 December 2012
Depreciation and impairment
At 1 January 2011
Depreciation charge for the year
Impairment
Disposals
At 31 December 2011
Depreciation charge for the year
At 31 December 2012
Net book value
At 31 December 2012
At 31 December 2011
At 1 January 2011
Fair value
At 31 December 2012
At 31 December 2011
£m
177
21
7
(29)
176
20
(25)
171
43
3
1
(1)
46
3
49
122
130
134
197
228
The fair values above are based on and reflect current market values as prepared by in-house professionals who have the
appropriate professional qualifications and recent experience of valuing properties in the location and of the type being valued.
144
BAE Systems Annual Report 2012
14. 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
European Typhoon programme
Group interest in
allotted capital
33% ordinary
Principally
operates in
Germany
Country of
incorporation
Germany
Development and manufacture
37.5% ordinary
Europe
France
of guided weapons
The Company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by providing information only
in relation to equity accounted investments whose results or financial position, in the opinion of the directors, principally affected the
financial statements. Accordingly, the equity accounted investments listed in the table above are those that represent more than 5%
of total Group sales or underlying EBITA1. A full list of subsidiary, equity accounted investments and other associated undertakings
as at 31 December 2012 will be annexed to the Company’s next annual return filed with the Registrar of Companies.
1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
Carrying value (including goodwill)
At 1 January 2011
Share of results after tax
Acquisitions
Equity accounted investment funding
Dividends received
Actuarial losses on defined benefit pension schemes, net of tax
Foreign exchange adjustment
At 31 December 2011
Share of results after tax
Equity accounted investment funding
Dividends received
Non-cash special dividend (note 29)
Actuarial losses on defined benefit pension schemes, net of tax
Adjustment on finalisation of provisional fair values on acquisitions
Foreign exchange adjustment
At 31 December 2012
Share of assets and liabilities
Assets:
Non-current assets
Current assets
Liabilities:
Non-current liabilities
Current liabilities
Carrying value
Contingent liabilities
The Group is not aware of any material contingent liabilities in respect of its equity accounted investments.
£m
787
131
1
1
(88)
(32)
(17)
783
93
6
(94)
(424)
(73)
(1)
(25)
265
2011
£m
745
3,108
3,853
(462)
(2,608)
(3,070)
783
2012
£m
781
2,278
3,059
(443)
(2,351)
(2,794)
265
BAE Systems Annual Report 2012
145
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a
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l
s
t
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e
m
e
n
t
s
–
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
15. Other investments
Non-current
Available-for-sale financial assets
Equity securities
Reconciliation of movements
Non-current
At 1 January
Disposals
Reclassification of fair value movements1
At 31 December
Current
At 1 January
Additions
Disposals
Fair value movements
At 31 December
1 Relates to the acquisition of the remaining 91.3% interest in Fairchild Imaging, Inc.
2012
£m
2011
£m
5
5
5
5
2012
£m
2011
£m
5
–
–
5
–
–
–
–
–
11
(1)
(5)
5
260
13
(278)
5
–
146
BAE Systems Annual Report 2012
16. Trade and other receivables
Non-current
Pension prepayments (note 23)
Prepayments and accrued income
US deferred compensation plan assets
Other receivables
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 29)
Prepayments and accrued income
Other receivables
2012
£m
47
9
187
11
254
6,521
(5,703)
472
1,290
882
163
270
268
2,873
2011
£m
53
16
180
65
314
6,459
(5,532)
552
1,479
1,141
234
268
247
3,369
1 There are no retentions against long-term contracts (2011 £nil) and no amounts that are past due within amounts due from customers for contract work (2011 £nil).
The aggregate amount of costs incurred and recognised profits (less recognised losses) to date in respect of contracts in progress at
31 December 2012 are estimated to be £31.4bn (2011 £30.3bn).
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
659
142
1
81
30
913
2012
Provision
£m
–
–
(1)
–
(30)
(31)
Net
£m
659
142
–
81
–
882
Gross
£m
942
121
–
78
39
1,180
2011
Provision
£m
–
–
–
–
(39)
(39)
Trade receivables are disclosed net of a provision for impairment losses. Movements on the provision are as follows:
At 1 January
Created
Released
Utilised
Foreign exchange adjustments
Other
At 31 December
2012
£m
39
20
(18)
(7)
(1)
(2)
31
Net
£m
942
121
–
78
–
1,141
2011
£m
41
18
(20)
(2)
(1)
3
39
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.
BAE Systems Annual Report 2012
147
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
17. Other fi nancial 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
1
Includes fair value hedges of £13m (2011 £15m).
2012
Assets
£m
2012
Liabilities
£m
2011
Assets
£m
2011
Liabilities
£m
25
15
22
62
32
32
64
(66)
–
–
(66)
(58)
(30)
(88)
38
24
56
118
42
35
77
(67)
(7)
–
(74)
(58)
(226)
(284)
The debt-related derivative financial liabilities are presented as a component of loans and overdrafts (see note 21).
The notional principal amounts of the outstanding contracts are detailed in note 27.
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 £21m (2011 £56m).
The amount debited from equity and included in contract-related non-financial assets and liabilities was £6m (2011 credit £11m).
Fair value hedges
The loss arising in the income statement on fair value hedging instruments was £2m (2011 £10m). The gain arising in the income
statement on the fair value of the underlying hedged items was £2m (2011 £11m). There was no ineffective portion recognised in
the income statement arising from fair value hedges (2011 gain £15m).
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).
All of the financial assets and liabilities above are classified as level 2 using the fair value hierarchy.
148
BAE Systems Annual Report 2012
18. Deferred tax
Deferred tax assets/(liabilities)
Property, plant and equipment
Intangible assets
Provisions and accruals
Goodwill
Pension/retirement schemes:
Deficits
Additional contributions and other1
Share-based payments
Financial instruments
Other items
Rolled over capital gains
Capital losses carried forward
Trading losses carried forward
Deferred tax assets/(liabilities)
Set off of tax
Net deferred tax assets/(liabilities)
1
Includes deferred tax assets on US deferred compensation plans.
Deferred tax assets
Deferred tax liabilities
2012
£m
7
–
317
–
1,144
137
16
19
62
–
15
36
1,753
(378)
1,375
2011
£m
–
–
367
–
1,239
101
11
27
40
–
16
47
1,848
(439)
1,409
2012
£m
(88)
(91)
–
(186)
–
–
–
(11)
–
(15)
–
–
(391)
378
(13)
2011
£m
(106)
(176)
–
(151)
–
–
–
(14)
(2)
(16)
–
–
(465)
439
(26)
Net balance at
31 December
2012
£m
(81)
(91)
317
(186)
2011
£m
(106)
(176)
367
(151)
1,144
137
16
8
62
(15)
15
36
1,362
–
1,362
1,239
101
11
13
38
(16)
16
47
1,383
–
1,383
BAE Systems Annual Report 2012
149
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i
a
l
s
t
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e
m
e
n
t
s
–
B
a
a
n
c
e
s
h
e
e
t
l
NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
18. Deferred tax (continued)
Movement in temporary differences during the year
Property, plant and equipment
Intangible assets
Provisions and accruals
Goodwill
Pension/retirement schemes:
Deficits
Additional contributions and other3
Share-based payments
Financial instruments
Other items
Rolled over capital gains
Capital losses carried forward
Trading losses carried forward
Property, plant and equipment
Intangible assets
Provisions and accruals
Goodwill
Pension/retirement schemes:
Deficits
Additional contributions and other3
Share-based payments
Financial instruments
Other items
Rolled over capital gains
Capital losses carried forward
Trading losses carried forward
At
1 January
2012
£m
(106)
(176)
367
(151)
1,239
101
11
13
38
(16)
16
47
1,383
At
1 January
2011
£m
(104)
(207)
394
(110)
1,060
18
11
8
56
(17)
17
28
1,154
Foreign
exchange
adjustments
£m
4
4
(13)
7
Acquisitions
and
disposals1
£m
1
9
(2)
(3)
Recognised
in income
£m
20
64
(35)
(39)
Recognised
in equity
£m
–
8
–
–
At
31 December
2012
£m
(81)
(91)
317
(186)
(12)
(5)
(1)
(2)
(1)
–
–
(2)
(21)
–
–
–
–
–
–
–
(1)
4
(76)
6
4
(7)
25
1
(1)
(8)
(46)
(7)
35
2
4
–
–
–
–
42
1,144
137
16
8
62
(15)
15
36
1,362
Foreign
exchange
adjustments
£m
–
1
1
(2)
Acquisitions
and
disposals2
£m
(13)
(53)
5
1
Recognised
in income
£m
11
75
(33)
(40)
Recognised
in equity
£m
–
8
–
–
At
31 December
2011
£m
(106)
(176)
367
(151)
5
1
–
–
–
–
–
1
7
–
–
–
–
11
–
–
1
(48)
(159)
93
–
(9)
(29)
1
(1)
17
(74)
333
(11)
–
14
–
–
–
–
344
1,239
101
11
13
38
(16)
16
47
1,383
1
2
3
Includes net deferred tax liabilities on disposal of subsidiaries (£6m) and the transfer of net deferred tax assets to held for sale (Safariland £2m).
Includes net deferred tax liabilities on acquisitions (Norkom £18m, ETI £14m and other £3m) and the transfer of net deferred tax assets to held for sale
(£13m).
Includes deferred tax assets on US deferred compensation plans.
150
BAE Systems Annual Report 2012
18. Deferred tax (continued)
Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following items:
Deductible temporary differences, including tax credits
Capital losses carried forward
Trading and other losses carried forward
2012
£m
3
59
68
130
2011
£m
11
43
86
140
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.
Future changes in tax rates
The UK current tax rate was reduced from 26% to 24% with effect from 1 April 2012. Under the Finance Act 2012, the UK current tax
rate will reduce to 23% with effect from 1 April 2013. The Chancellor has also proposed to reduce further the current tax rate to 21%
with effect from 1 April 2014. This will reduce future current tax charges accordingly.
The reduction from 24% to 23% was substantively enacted before 31 December 2012. In line with this change, the rate applying to
UK deferred tax assets and liabilities has been reduced from 25% to 23%, 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 2012 have been calculated at 23%.
The reduction in the rate from 23% to 21% has not yet been substantively enacted. If this reduction had been substantively enacted
by 31 December 2012, the effect would have been to reduce the net deferred tax asset at that date from £1,362m to £1,282m. Of
this reduction, it is estimated that £10m 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 2012 would
have been reduced from £130m to £123m.
BAE Systems Annual Report 2012
151
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l
s
t
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
19. Inventories
Short-term work-in-progress
Raw materials and consumables
Finished goods and goods for resale
The Group recognised £10m (2011 £6m) as a write down of inventories to net realisable value.
20. Geographical analysis of assets
Analysis of non-current assets by geographical location
Asset location
United Kingdom
Rest of Europe
Saudi Arabia
United States
Australia
Rest of Asia and Pacific
Africa, Central and South America
Non-current reporting segment assets
Financial instruments
Inventories
Trade and other receivables
Total reporting segment assets
Tax
Pension prepayments
Assets held for sale
Cash (as defined by the Group)
Consolidated total assets
2012
£m
385
203
67
655
2011
£m
251
276
189
716
Notes
17
19
16
23
10
2012
£m
2,402
707
615
9,464
599
4
21
13,812
104
655
2,873
17,444
1,386
47
20
3,377
22,274
2011
£m
2,515
1,274
703
10,000
617
7
24
15,140
139
716
3,369
19,364
1,469
53
18
2,197
23,101
152
BAE Systems Annual Report 2012
2012
£m
2011
£m
100
308
459
214
6
626
307
397
306
243
1
2,967
21
–
21
100
321
482
224
6
656
320
–
319
254
–
2,682
5
513
518
Total
£m
2,988
(22)
2,966
4,449
3,200
(56)
3,144
4,633
21. Loans and overdrafts
Non-current
Euro-Sterling £100m 10¾% bond, repayable 2014
US$500m 4.95% bond, repayable 2014
US$750m 5.2% bond, repayable 2015
US$350m 3.5% bond, repayable 2016
Albertville Hangar Bond, repayable 2018
US$1bn 6.375% bond, repayable 2019
US$500m 4.75% bond, repayable 2021
£400m 4.125% bond, repayable 2022
US$500m 7.5% bond, repayable 2027
US$400m 5.8% bond, repayable 2041
Debt-related derivative financial instruments – liabilities
Current
Loans and overdrafts
US$ Commercial Paper
The maturity of the Group’s borrowings is as follows:
At 31 December 2012
Carrying amount
Debt-related derivative financial instruments – assets (note 17)
Carrying amount including debt-related derivative financial instruments – assets
Contractual cash flows, including future interest payments
At 31 December 2011
Carrying amount
Debt-related derivative financial instruments – assets (note 17)
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
21
–
21
187
518
–
518
661
1,094
(13)
1,081
1,605
1,142
(15)
1,127
1,636
1,873
(9)
1,864
2,657
1,540
(41)
1,499
2,336
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.
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 2012 of 2.58%.
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 2012 of 5.52%. This portion is measured at fair value and
has been classified as level 2 in the fair value hierarchy (see note 17 for definitions).
The US$500m 7.5% bond, repayable 2027, was converted at issue to a sterling fixed rate bond by utilising cross-currency swaps
and has an effective interest rate of 7.73%.
The debt-related derivative financial instruments represent the fair value of certain interest rate and cross-currency derivatives
relating to 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.
BAE Systems Annual Report 2012
153
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
22. Trade and other payables
Non-current
Amounts due to long-term contract customers
Accruals and deferred income
US deferred compensation plan liabilities
Other payables
Current
Amounts due to long-term contract customers
Amounts due to other customers
Cash received on customers’ account1
Trade payables
Amounts owed to equity accounted investments (note 29)2
Other taxes and social security costs
Accruals and deferred income3
Other payables
2012
£m
988
46
222
225
1,481
4,457
242
2
710
708
63
1,291
594
8,067
2011
£m
93
47
220
211
571
4,354
254
3
966
1,161
63
1,236
494
8,531
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
5,445
4,449
5,132
4,164
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. This includes £nil (2011 £2m) in respect of long-term contract customers.
2 Reduction primarily relates to the £424m non-cash special dividend received in 2012.
3
Includes £131m (2011 £125m) in respect of the settlement reached on the terminated Trinidad and Tobago contract for Offshore Patrol Vessels, of which
£101m was paid in January 2013, with the remainder due in May 2013.
154
BAE Systems Annual Report 2012
23. Retirement benefi t obligations
Pension schemes
BAE Systems plc operates pension schemes for the Group’s qualifying employees in the UK, US and other countries. The principal
schemes in the UK and US are funded defined benefit schemes, and the assets are held in separate trustee administered funds.
The schemes in other countries are primarily defined contribution schemes. Pension scheme 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 schemes in the UK, US and other countries which are accounted for as
defined benefit schemes 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 schemes at 31 December each year.
Post-retirement benefits other than pensions
The Group also operates a number of non-pension post-retirement benefit schemes, 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 schemes, covering retiree medical and life insurance schemes in certain
US subsidiaries, were performed by independent actuaries as at 1 January 2012. These schemes were rolled forward to reflect the
information at 31 December 2012. The method of accounting for these is similar to that used for defined benefit pension schemes.
Principal financial assumptions used to calculate liabilities for the UK and US schemes
UK
Discount rate
Inflation
Rate of increase in salaries1
Rate of increase for pensions in payment
Rate of increase for deferred pensions2
Long-term healthcare cost increases
2010
2011
%
4.8
2.9
3.4
2012
%
4.5
2.9
3.4
%
5.5
3.4
4.4
1.8 – 3.5 1.9 – 3.4 2.3 – 3.6
2.8/3.4
2.0/2.9
2.3/2.9
n/a
n/a
n/a
2012
%
4.1
n/a
3.7
n/a
n/a
5.2
US
2011
%
5.0
n/a
4.5
n/a
n/a
5.3
2010
%
5.5
n/a
4.5
n/a
n/a
5.3
1 The rate of increase in salaries for the UK schemes is assumed to be 0.5% (2011 0.5%) above the Retail Prices Index (RPI) inflation of 2.9% (2011 2.9%),
plus a promotional scale. From 1 January 2013, employees in the US schemes no longer accrue salary-related benefits.
2 The assumption for the rate of increase for deferred pensions is 2.3% (2011 2.0%) in respect of those schemes which refer to the Consumer Prices Index as
the relevant measure and 2.9% (2011 2.9%) where RPI is 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 scheme 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 scheme liabilities, which are derived from
cash flow projections over long periods and therefore inherently uncertain, as at 31 December are shown in the following tables.
Discount rate assumptions are based on third-party AA corporate bond indices and yields that reflect the maturity profile of the
expected benefit payments. In the UK, the inflation 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 for 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 2012, used the
SAPS S1 mortality 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 scheme members. In addition,
to allow for future improvements in longevity, the CMI 2010 tables (published by the Institute of Actuaries) have been used, with
an assumed long-term rate of future annual mortality improvements of 1%, for both pensioner and non-pensioner members. The
mortality tables used for the US pension arrangements have been updated this year, from the 2012 IRS Static Tables, to the most
recently published tables, the 2013 IRS Static Tables. The mortality tables are projected to 2020 for pensioners and to 2028 for
non-pensioners. The current life expectancies underlying the value of the accrued liabilities for the main UK schemes range from
22 to 24 years for current male pensioners at age 65 and 24 to 25 years for current female pensioners at age 65 and, for the main
US schemes, 19 years for current male pensioners at age 65 and 21 years for current female pensioners at age 65.
In February 2013, with the agreement of the Company, the trustees of the BAE Systems 2000 Pension Plan (2000 Plan) entered
into an arrangement with Legal & General to insure against longevity risk for the current pensioner population, covering £2.7bn of
pension scheme liabilities. This will reduce the funding volatility relating to increasing life expectancy.
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 8.5% in 2013 reducing to 5% by 2020 for pre-retirement and 8.0% in 2013
reducing to 5% by 2019 for post-retirement.
A summary of the movements in the retirement benefit obligations is shown in the following table. The full disclosures, as required
by IAS 19, are provided in the subsequent information.
BAE Systems Annual Report 2012
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23. Retirement benefi t obligations (continued)
Summary of movements in retirement benefit obligations
Total IAS 19 deficit at 1 January 2012
Actual return on assets above expected return
Increase in liabilities due to changes in assumptions and experience
Additional contributions in excess of service cost
Recurring contributions in excess of service cost
Past service cost
Curtailment gains
Net financing (charge)/credit
Foreign exchange adjustment
Movement in US healthcare schemes
Total IAS 19 deficit at 31 December 2012
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
UK
£m
(4,676)
478
(1,307)
698
145
(26)
–
(107)
–
–
(4,795)
1,148
US and
other
£m
(909)
211
(416)
–
92
(1)
26
35
38
11
(913)
–
Total
£m
(5,585)
689
(1,723)
698
237
(27)
26
(72)
38
11
(5,708)
1,148
accounted investments and other participating employers at 31 December 2012
(3,647)
(913)
(4,560)
During the year, the Group contributed £25m into Trust for the benefit of the 2000 Plan. On 27 September, £387m was paid out of
the Trust into the BAE Systems Pension Scheme (Main Scheme) and £25m was paid out of the Trust into the 2000 Plan. In
December, the remaining £16m was paid into the Main Scheme. These payments are included within additional contributions in
excess of service cost in the table above. The Group considers the contributions made to the Trust 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
2012
£m
(4,560)
–
(4,560)
2011
£m
(4,620)
403
(4,217)
Present value of unfunded obligations
Present value of funded obligations
Fair value of scheme 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
2012
UK defined
benefit
pension
schemes
£m
(53)
(21,353)
16,611
(4,795)
US and
other
pension
schemes
£m
(142)
(3,609)
2,843
(908)
US
healthcare
schemes
£m
(5)
(129)
129
(5)
Total
£m
(200)
(25,091)
19,583
(5,708)
UK defined
benefit
pension
schemes
£m
(50)
(19,636)
15,010
(4,676)
2011
US and
other
pension
schemes
£m
(145)
(3,315)
2,567
(893)
US
healthcare
schemes
£m
(10)
(136)
130
(16)
Total
£m
(205)
(23,087)
17,707
(5,585)
1,148
(3,647)
–
(908)
–
(5)
1,148
(4,560)
965
(3,711)
–
(893)
–
(16)
965
(4,620)
–
(3,647)
(3,647)
38
(946)
(908)
9
(14)
(5)
47
(4,607)
(4,560)
–
(3,711)
(3,711)
34
(927)
(893)
19
(35)
(16)
53
(4,673)
(4,620)
Group’s share of IAS 19 deficit of
equity accounted investments
(137)
–
–
(137)
(129)
–
–
(129)
156
BAE Systems Annual Report 2012
23. Retirement benefi t obligations (continued)
Amounts for the current and previous four years are as follows:
Defined benefit pension schemes
Defined benefit obligations
Fair value of scheme assets
Total deficit before tax and allocation to equity accounted investments and
other participating employers
Actuarial (loss)/gain on scheme liabilities
Actuarial gain/(loss) on scheme assets at bid value
2012
£m
(25,157)
19,454
2011
£m
(23,146)
17,577
2010
£m
(21,158)
17,076
2009
£m
(20,488)
14,915
2008
£m
(17,133)
12,978
(5,703)
(1,723)
689
(5,569)
(4,082)
(5,573)
(4,155)
(1,405)
55
(3,342)
1,433
(422)
1,043
1,258
(3,724)
Total cumulative actuarial losses recognised in equity since the transition to IFRS are £5.0bn (2011 £4.1bn).
Certain of the Group’s equity accounted investments participate in the Group’s defined benefit schemes as well as Airbus SAS, the
Group’s share of which was disposed of in 2006. As these schemes are multi-employer schemes, the Group has allocated an
appropriate share of the IAS 19 pension deficit to the equity accounted investments and Airbus SAS based upon a 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.
Assets of defined benefit pension schemes
Equities
Bonds
Property1
Other
Total
Equities
Bonds
Property1
Other
Total
UK
%
51
40
7
2
100
UK
%
50
41
8
1
100
Expected
return
%
7.10
3.23
6.00
1.00
5.35
Expected
return
%
7.25
3.40
6.00
1.00
5.50
£m
8,412
6,639
1,240
320
16,611
£m
7,548
6,164
1,117
181
15,010
2012
US
Total
£m
1,678
982
183
–
2,843
Expected
return
%
8.10
4.10
7.40
–
6.67
£m
10,090
7,621
1,423
320
19,454
%
59
35
6
–
100
2011
US
Total
£m
1,452
912
203
–
2,567
Expected
return
%
8.70
4.50
7.30
–
7.10
£m
9,000
7,076
1,320
181
17,577
%
57
35
8
–
100
%
52
39
7
2
100
%
51
40
8
1
100
1
Includes £255m (2011 £185m) 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.
BAE Systems Annual Report 2012
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23. Retirement benefi t obligations (continued)
Changes in the fair value of scheme assets are as follows:
Value of scheme assets at 1 January 2011
Expected return on assets
Actuarial loss
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)
Foreign exchange gain
Benefits paid
Value of scheme assets at 31 December 2011
Expected return on assets
Actuarial gain/(loss)
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)
Foreign exchange loss
Benefits paid
Value of scheme assets at 31 December 2012
UK defined
benefit
pension
schemes
£m
14,580
967
(305)
662
474
103
577
36
–
(845)
15,010
825
478
1,303
1,021
99
1,120
23
–
(845)
16,611
US and
other
pension
schemes
£m
2,496
195
(117)
78
111
–
111
15
18
(151)
2,567
198
211
409
136
–
136
14
(119)
(164)
2,843
US
healthcare
schemes
£m
127
9
(6)
3
4
–
4
–
1
(5)
130
9
(1)
8
4
–
4
–
(6)
(7)
129
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 2011
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)/credit
Actuarial (loss)/gain on liabilities
Curtailment gains
Interest expense
Foreign exchange loss
Benefits paid
Defined benefit obligations at 31 December 2011
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
Foreign exchange gain
Benefits paid
Defined benefit obligations at 31 December 2012
158
BAE Systems Annual Report 2012
UK defined
benefit
pension
schemes
£m
(18,018)
(161)
(103)
(264)
(36)
(45)
(1,192)
–
(976)
–
845
(19,686)
(178)
(99)
(277)
(23)
(26)
(1,307)
–
(932)
–
845
(21,406)
US and
other
pension
schemes
£m
(3,140)
(49)
–
(49)
(15)
(2)
(213)
–
(164)
(28)
151
(3,460)
(44)
–
(44)
(14)
(1)
(416)
26
(163)
157
164
(3,751)
US
healthcare
schemes
£m
(148)
(2)
–
(2)
–
2
3
2
(7)
(1)
5
(146)
(2)
–
(2)
–
(3)
(6)
16
(6)
6
7
(134)
Total
£m
17,203
1,171
(428)
743
589
103
692
51
19
(1,001)
17,707
1,032
688
1,720
1,161
99
1,260
37
(125)
(1,016)
19,583
Total
£m
(21,306)
(212)
(103)
(315)
(51)
(45)
(1,402)
2
(1,147)
(29)
1,001
(23,292)
(224)
(99)
(323)
(37)
(30)
(1,729)
42
(1,101)
163
1,016
(25,291)
23. Retirement benefi t obligations (continued)
Contributions
During the year, a total of £428m was paid into the Main Scheme and 2000 Plan from the Trust. In addition, £75m was contributed
by the Group to the Main Scheme upon sale of certain properties. The total Group contributions made to the defined benefit
schemes in the year ended 31 December 2012 were £1,029m (2011 £515m) excluding those amounts allocated to equity
accounted investments and participating employers of £128m (2011 £70m).
In 2013, the Group expects to make regular contributions at a similar level to the recurring contributions made in 2012 and
additional contributions, such that total deficit funding, in excess of service cost, is expected to be approximately £0.4bn.
The Group incurred a charge in respect of the cash contributions of £129m (2011 £119m) paid to defined contribution schemes for
employees.
The amounts recognised in the income statement after allocation to equity accounted investments and other participating employers
are as follows:
2012
UK defined
benefit
pension
schemes
£m
US and
other
pension
schemes
£m
US
healthcare
schemes
£m
(141)
(26)
(167)
–
–
–
(44)
(1)
(45)
26
–
26
667
(760)
(93)
198
(163)
35
(7)
(4)
–
–
(2)
(3)
(5)
–
16
16
9
(6)
3
–
–
2011
UK defined
benefit
pension
schemes
£m
US and
other
pension
schemes
£m
US
healthcare
schemes
£m
(131)
(43)
(174)
–
–
–
(49)
(2)
(51)
–
–
–
785
(794)
(9)
195
(164)
31
(7)
(1)
–
–
(2)
2
–
–
2
2
9
(7)
2
–
–
Total
£m
(187)
(30)
(217)
26
16
42
874
(929)
(55)
(7)
(4)
Total
£m
(182)
(43)
(225)
–
2
2
989
(965)
24
(7)
(1)
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 scheme 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
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)
(3.0)
One percentage point
decrease
£m
0.1
2.3
A 0.5 percentage point change in discount rates used to value liabilities would have the following effect:
Decrease/(increase) in defined benefit obligations
0.5 percentage point
increase
£bn
1.9
0.5 percentage point
decrease
£bn
(2.2)
BAE Systems Annual Report 2012
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
24. Provisions
Non-current
Current
At 1 January 2012
Created
Released
Utilised
Adjustment on finalisation of provisional fair values on
acquisitions
Discounting
Reclassifications
Foreign exchange adjustments
At 31 December 2012
Represented by:
Non-current
Current
Warranties and
after-sales
service
£m
96
86
182
56
(43)
(61)
Reorganisations
– continuing
operations
£m
65
143
208
22
(56)
(101)
Legal,
contractual
and
environmental
£m
266
177
443
77
(29)
(73)
–
–
–
(4)
130
66
64
130
–
–
–
–
73
19
54
73
–
19
3
(9)
431
294
137
431
Other
£m
74
47
121
23
(16)
(14)
2
4
(3)
(5)
112
70
42
112
Total
£m
501
453
954
178
(144)
(249)
2
23
–
(18)
746
449
297
746
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.
Legal, contractual and environmental
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.
Other
There are no individually significant provisions included within other provisions.
160
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25. Share capital and other reserves
Share capital
Issued and fully paid
At 1 January 2011
Exercise of options
At 1 January 2012 and 31 December 2012
Equity
Ordinary shares of 2.5p each
Nominal
value
£m
Number of
shares
m
Non-equity
Special Share of £1
Number of
shares
Nominal
value
£
3,587
1
3,588
90
–
90
1
–
1
1
–
1
Total
Nominal
value
£m
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
In 2011, 184,393,049 ordinary shares of 2.5p were repurchased under the buyback programme.
As at 31 December 2012, 336,813,996 (2011 351,756,854) ordinary shares of 2.5p each with an aggregate nominal value of
£8,420,350 (2011 £8,793,921) were held in treasury. During 2012, 14,942,858 treasury shares were used to satisfy awards and
options under the Share Incentive Plan, Share Matching Plan, Performance Share Plan, Restricted Share Plan and Executive Share
Option Plan (2011 11,013,823 in respect of the Share Incentive Plan, Share Matching Plan, Performance Share Plan and Executive
Share Option Plan).
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 Employee Share Option Plan (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 2012.
At 31 December 2012, the ESOP held 2,633,198 (2011 2,402,305) ordinary shares of 2.5p each with a market value of £9m
(2011 £7m). 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 2012 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 2012 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 2012, the Group’s capital was £3,782m (2011 £4,291m), which comprises total equity of £3,774m (2011
£4,299m), excluding amounts accumulated in equity relating to cash flow hedges of £8m debit (2011 £8m credit). Net cash (as
defined by the Group) was £387m (2011 net debt £1,439m).
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 and ensure operating flexibility, whilst: meeting its pension obligations;
continuing to pursue organic investment opportunities; paying dividends in line with the Group’s policy of long-term sustainable cover
of around two times underlying earnings (see note 8); making accelerated returns of capital to shareholders when the balance sheet
allows; and investing in value-enhancing acquisitions, where market conditions are right and where they deliver on the Group’s
strategy.
BAE Systems Annual Report 2012
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NOTES TO THE GROUP ACCOUNTS – BALANCE SHEET CONTINUED
25. Share capital and other reserves (continued)
Equity dividends
Prior year final 11.3p dividend per ordinary share paid in the year (2011 10.5p)
Interim 7.8p dividend per ordinary share paid in the year (2011 7.5p)
2012
£m
367
253
620
2011
£m
359
247
606
After the balance sheet date, the directors proposed a final dividend of 11.7p. The dividend, which is subject to shareholder
approval, will be paid on 3 June 2013 to shareholders registered on 19 April 2013. The ex-dividend date is 17 April 2013.
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 2013.
Other reserves
At 1 January 2011
Currency translation on foreign currency net investments:
Subsidiaries
Equity accounted investments
Reclassification of cumulative currency translation reserve on
disposal
Amounts charged to hedging reserve
Tax on other comprehensive income
At 1 January 2012
Currency translation on foreign currency net investments:
Subsidiaries
Equity accounted investments
Reclassification of cumulative currency translation reserve on
disposal
Amounts charged to hedging reserve
Tax on other comprehensive income
At 31 December 2012
Merger
reserve
£m
4,589
Statutory
reserve
£m
202
Revaluation
reserve
£m
10
Translation
reserve
£m
622
Hedging
reserve
£m
47
–
–
–
–
–
4,589
–
–
–
–
–
4,589
–
–
–
–
–
202
–
–
–
–
–
202
–
–
–
–
–
10
–
–
–
–
–
10
(19)
(17)
(14)
–
–
572
(164)
(25)
(97)
–
–
286
Total
£m
5,470
(19)
(17)
(14)
(56)
17
5,381
–
–
–
(56)
17
8
–
–
(164)
(25)
–
(21)
5
(8)
(97)
(21)
5
5,079
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, 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.
Revaluation reserve
The revaluation reserve relates to the revaluation at fair value of the net assets of the BVT joint venture previously held as an equity
accounted investment 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.
162
BAE Systems Annual Report 2012
NOTES TO THE GROUP ACCOUNTS – OTHER INFORMATION
26. Acquisition and disposal of subsidiaries
Subsidiaries disposed of during 2012 – continuing operations
In March, the Group completed the sale of its BAE Systems Safety Products Inc. and Schroth Safety Products GmbH businesses
(Safety Products) in the US and Germany for cash consideration of approximately $32m (£21m).
In July, the US-based Safariland, LLC (Safariland) business was sold for cash consideration (after adjustment) of approximately
$124m (£78m).
Also in July, the Group sold the assets comprising its BAE Systems Tensylon High Performance Materials Inc. (Tensylon) business for
cash consideration of $18m (£12m).
Summary
Cash consideration
Transaction costs paid
Cash proceeds
Transaction costs accrued
Net proceeds
Net assets disposed:
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Deferred tax
Trade and other payables
Cash and cash equivalents
Cumulative currency translation gain
Profit on disposal of businesses – continuing operations
Safariland
£m
78
(1)
77
(1)
76
(23)
(15)
(16)
(22)
(2)
13
(10)
(75)
84
85
Other
£m
33
(2)
31
–
31
(12)
(4)
(14)
(3)
6
2
(1)
(26)
13
18
Total
£m
111
(3)
108
(1)
107
(35)
(19)
(30)
(25)
4
15
(11)
(101)
97
103
Safariland and Tensylon were written down to fair value less costs to sell prior to their disposal incurring impairment charges to
intangible assets of £48m and £12m, respectively.
Subsidiaries acquired during 2011
The Group acquired L-1 Identity Solutions, Inc.’s Intelligence Services Group (L-1 ISG), Norkom Group plc (Norkom), ETI A/S (ETI),
Fairchild Imaging, Inc. (Fairchild) and stratsec.net Pty Limited (stratsec). With the exception of Fairchild, the Group acquired 100% of
the shares of these entities. The Group acquired the remaining 91.3% interest in Fairchild which it did not already own.
If the acquisitions had occurred on 1 January 2011, combined sales of Group and share of equity accounted investments would have
been £19.2bn, revenue £17.8bn and profit £1,252m from continuing operations for the year ended 31 December 2011.
For all acquisitions made during 2011, fair values were finalised in 2012. In accordance with IFRS 3, Business Combinations, the
Group has adjusted the fair values attributable to the Norkom and ETI acquisitions during 2012. The net increase in goodwill of £2m
is not material to the consolidated accounts and, as such, the Group has not restated the balance sheet at 31 December 2011.
Material acquisitions
Acquisition
L-1 ISG
Norkom
ETI
Consolidated results for the period from
acquisition to
31 December 2011
Total
consideration
£m
180
177
135
Revenue
£m
112
42
39
EBITA1
£m
8
9
5
Loss after
tax2
£m
(2)
(3)
(9)
Acquisition date
15 February 2011
18 February 2011
21 March 2011
1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense excluding integration costs.
2
Includes amortisation charges on acquired intangible assets totalling £39m.
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163
NOTES TO THE GROUP ACCOUNTS – OTHER INFORMATION CONTINUED
27. 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.
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 values of forward foreign exchange contracts are calculated by discounting the contracted forward values and translating at
the appropriate balance sheet rates;
– the fair values 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 values of loans and overdrafts have 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.
Carrying values and fair values of certain financial assets and liabilities
Carrying values
Non-current
Available-for-sale financial assets1
Other receivables
Other financial assets
Loans
Other financial liabilities
Current
Other financial assets
Cash and cash equivalents
Loans and overdrafts
Other financial liabilities
2012
Assets
£m
2012
Liabilities
£m
2011
Assets
£m
2011
Liabilities
£m
Notes
15
16
17
21
17
17
21
17
5
207
62
–
–
64
3,355
–
–
–
–
–
(2,967)
(66)
5
261
118
–
–
–
–
(21)
(88)
77
2,141
–
–
–
–
–
(2,682)
(74)
–
–
(518)
(284)
1 Net carrying amount approximates to estimated fair value as there is no active market.
Fair values approximate to carrying values except for non-current loans which have an estimated fair value of £3,407m (2011
£3,554m).
Hedging instruments
The notional, or contracted, amounts of derivative financial instruments are shown below, analysed between foreign exchange and
interest rate contracts, classified by year of maturity.
31 December 2012
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 2011
Between
one year
and five
years
£m
More than
five years
£m
Net foreign exchange
(sales)/purchase contracts
US dollar
Euro
Other
(882)
1,155
519
792
187
1,018
(184)
1,021
54
95
–
149
(641)
2,268
335
1,962
(1,332)
1,531
560
759
66
470
(18)
518
Total
£m
(1,262)
2,044
542
1,324
643
4
43
–
47
–
616
–
616
–
643
–
308
308
772
–
322
1,094
Interest rate swaps – US dollar
Cross-currency swaps – US dollar
–
–
164
BAE Systems Annual Report 2012
27. Financial risk management (continued)
Interest rate risk
The Group’s objective is to manage its exposure to interest rate fluctuations on borrowings through varying the proportion of fixed
rate debt relative to floating rate debt with derivative instruments, mainly interest rate swaps.
The Group’s interest rate management policy is that a minimum of 50% and a maximum of 90% (2011 75%) of gross debt is
maintained at fixed interest rates. At 31 December 2012, the Group had 79% (2011 63%) of fixed rate debt and 21% (2011 37%) of
floating rate debt based on a gross debt of £3.0bn, including debt-related derivative financial assets (2011 £3.1bn).
Based on contracted maturities and/or repricing dates, the following amounts are exposed to interest rate risk over the future as
shown below:
Cash and cash equivalents
Loans and overdrafts
Less than
one year
£m
3,355
(647)
Between
one and
two years
£m
–
(626)
More than
two years
£m
–
(6)
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 2012, the Group had a total of $1.0bn (2011
$1.8bn) of this type of swap outstanding with a weighted average duration of 1.7 years (2011 2.8 years). In respect of the fixed rate
debt, the weighted average period in respect of which interest is fixed was 10.1 years (2011 10.4 years).
Given the level of short-term interest rates during the year, the average cost of the floating rate debt was 2.7% (2011 3.1%), 2.7% on
US dollars (2011 3.1% on US dollars and 2.5% on sterling). The cost of the fixed rate debt was 5.7% (2011 6.0%).
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 £6m (2011 £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 £7m (2011 £7m).
Liquidity risk
The Group’s objective is to maintain adequate undrawn committed borrowing facilities.
At 31 December 2012, the Group had a committed Revolving Credit Facility (RCF) of £2bn (2011 £2bn). The RCF is contracted until
2015 and was undrawn throughout the year. The RCF also acts as a back stop to Commercial Paper issued by the Group. At
31 December 2012, the Group had no Commercial Paper in issue (2011 £513m).
Cash flow forecasting is performed by the businesses on a monthly basis. The Group monitors a rolling forecast of its liquidity
requirements to ensure that there is sufficient cash to meet operational needs and maintain adequate headroom.
Surplus cash held by the businesses 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 cash forecasts.
Credit risk
The Group’s objective is to monitor and control counterparty credit risk and credit limit utilisation. The Group adopts a conservative
approach to the investment of its surplus cash. It is deposited with financial institutions with the strongest credit ratings for short
periods. The cash and cash equivalents balance at 31 December 2012 of £3,355m (2011 £2,141m) was invested with 29 (2011
24) financial institutions. A credit limit is allocated to each institution taking account of its market capitalisation, credit rating and
credit default swap price. The Group has no exposure to Greek, Irish, Italian, Portuguese or Spanish banks. Additionally, the Group
monitors its exposure to banks which have exposure to these countries.
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, US and Saudi Arabian governments where credit risk is not considered to be an
issue. For the remaining trade receivables, no one counterparty constitutes more than 8% of the balance (2011 6%).
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 from movements in foreign currency exchange
rates, mainly the US dollar, Euro and Saudi Riyal.
The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency denominated transactions. All
material firm transactional exposures are hedged, unless otherwise approved as exceptions by the Treasury Review Management
Committee, and the Group aims, where possible, to apply hedge accounting to these transactions.
The Group is 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 foreign subsidiaries and equity accounted investments it regards as long-term
investments.
BAE Systems Annual Report 2012
165
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28. Share-based payments
Details of the terms and conditions of each share-based payment plan are given in the Remuneration report on pages 93 to 113.
Expense/(credit) in year
Executive Share Option Plan (ExSOP)
Performance Share Plan (PSP)
Restricted Share Plan (RSP)
Share Matching Plan (SMP)
Equity-settled
£m
2
11
9
2
24
2012
Cash-settled
£m
2
–
–
–
2
Total
£m
4
11
9
2
26
Equity-settled
£m
–
18
1
7
26
2011
Cash-settled
£m
(2)
–
–
–
(2)
Total
£m
(2)
18
1
7
24
The Group also incurred a charge of £33m (2011 £42m) in respect of the equity-settled all-employee free shares and matching
Partnership Shares elements of the Share Incentive Plan.
2012
2011
Number of
shares
‘000
10,624
15,940
(807)
(2,743)
23,014
8,307
Weighted
average
exercise
price
£
3.61
3.02
2.29
3.70
3.24
3.62
Number of
shares
‘000
12,607
–
(390)
(1,593)
10,624
10,624
2012
2011
Number of
shares
‘000
5,243
(1,057)
(123)
4,063
4,063
Weighted
average
exercise
price
£
2.19
2.14
2.36
2.20
2.20
Number of
shares
‘000
5,857
(544)
(70)
5,243
5,243
2012
2011
Weighted
average
exercise
price
£
3.67
–
2.15
4.38
3.61
3.61
Weighted
average
exercise
price
£
2.20
2.29
2.43
2.19
2.19
Cash-settled Equity-settled
Cash-settled
Equity-settled
1.72 – 4.79 1.72 – 3.56 1.72 – 4.79 1.72 – 3.56
3
2
–
–
7
0.41
4
–
ExSOP
Equity-settled options
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
Range of exercise price of outstanding options (£)
Weighted average remaining contracted life (years)
Weighted average fair value of options granted (£)
166
BAE Systems Annual Report 2012
28. Share-based payments (continued)
PSP
Equity-settled awards
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
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 awards granted (£)
The exercise price for the PSP is £nil (2011 £nil).
RSP
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 awards granted (£)
The exercise price for the RSP is £nil (2011 £nil).
2012
Number of
shares
‘000
31,698
7,550
(2,056)
(10,358)
26,834
416
2012
Number of
shares
‘000
25
(25)
–
2012
–
2011
2011
Number of
shares
‘000
28,277
10,892
(2,112)
(5,359)
31,698
707
2011
Number of
shares
‘000
25
–
25
25
Equity-settled
5
2.62
Cash-settled Equity-settled
5
2.61
–
–
Cash-settled
–
–
2012
Number of
shares
‘000
1,383
7,310
(92)
(1,082)
7,519
8
2012
6
3.01
2011
Number of
shares
‘000
–
1,465
(3)
(79)
1,383
2
2011
6
2.92
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167
NOTES TO THE GROUP ACCOUNTS – OTHER INFORMATION CONTINUED
28. Share-based payments (continued)
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 awards granted (£)
The exercise price for the SMP is £nil (2011 £nil).
2012
Number of
shares
‘000
16,621
3,952
(2,521)
(4,718)
13,334
–
2012
1
3.01
2011
Number of
shares
‘000
13,025
5,979
(1,209)
(1,174)
16,621
–
2011
1
3.37
Details of options/awards granted in the year
The fair value of equity-settled options/awards granted in the year has been measured using the weighted average inputs below and
the following valuation models:
ExSOP – Binomial model
PSP – Monte Carlo
RSP and SMP – Dividend valuation model
Range of share price at date of grant (£)
Expected option/award life (years)
Volatility (%)
Risk free interest rate (%)
2012
2011
3.01 – 3.29 2.64 – 3.37
3 – 4
25 – 32
0.8 – 1.4
3 – 10
24
0.3 – 0.5
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 £3.10 (2011 £3.04).
168
BAE Systems Annual Report 2012
29. Related party transactions
The Group has a related party relationship with its directors and key management personnel (see below), equity accounted
investments (note 14) and pension schemes (note 23).
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
CTA International SAS
Eurofighter Jagdflugzeug GmbH
FADEC International LLC
Gripen International KB
MBDA SAS
Panavia Aircraft GmbH
Other
Sales to
related party
2012
£m
–
1
2011
£m
–
2
1,324 1,353
49
–
24
34
–
1,433 1,462
52
–
21
35
–
Purchases from
related party
2012
£m
19
–
–
–
–
166
65
–
250
2011
£m
153
–
–
–
–
65
98
1
317
Amounts owed by
related party
2012
£m
–
2
136
–
17
7
1
–
163
2011
£m
1
2
206
–
10
9
4
2
234
Amounts owed to
related party
Management
recharges
2011
2012
£m
–
–
£m
–
–
1611 1421
–
681
4871,2 9511
–
–
708 1,161
–
601
–
–
2012
£m
–
–
–
–
–
181
–
–
18
2011
£m
–
–
–
–
–
171
–
–
17
1 Also relates to disclosures under Financial Reporting Standard 8, Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December
2012, £705m (2011 £1,158m) was owed by BAE Systems plc and £3m (2011 £3m) by other Group subsidiaries.
2 Reduction primarily relates to the £424m non-cash special dividend received in 2012.
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 93 to 113. Total emoluments for directors and key management personnel were:
Short-term employee benefits
Post-employment benefits
Share-based payments
30. Contingent liabilities and commitments
2012
£’000
14,375
2,163
4,029
20,567
2011
£’000
14,807
1,310
5,534
21,651
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 and shipyards 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
2012
£m
169
518
621
1,308
2011
£m
184
551
772
1,507
Total of future minimum sublease income under non-cancellable subleases
188
234
Capital commitments
Capital expenditure contracted for but not provided for in the accounts is as follows:
Property, plant and equipment
Intangible assets
2012
£m
103
2
105
2011
£m
171
15
186
BAE Systems Annual Report 2012
169
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31. 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 Information Solutions Inc.
(Held via BAE Systems Technology Solutions &
Services Inc.)
BAE Systems Land & Armaments LP
1300 North 17th Street, Suite 1400, Arlington
VA 22209, USA
Group interest
in allotted
capital
100%
Ordinary
Principally
operates
in
Country of
incorporation
UK England and
Wales
Principal activities
Defence and commercial aerospace
activities
Designs, develops and manufactures
electronic systems and subsystems
Full-service information technology solution
provider
100%
Common
100%
Common
US
US
Manufactures and supports military
100%
US
vehicles
US
US
US
(Partners: BAE Systems Land & Armaments Inc. and
BAE Systems Land & Armaments Holdings Inc.)
BAE Systems Surface Ships Limited
(Held via BAE Systems Surface Ships (Holdings)
Limited)
Designs, develops and constructs surface
ships in the naval arena, and provides
fleet support services
100%
Ordinary
UK England and
Wales
The Company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by providing information only
in relation to subsidiary undertakings whose results or financial position, in the opinion of the directors, principally affected the
financial statements. Accordingly, the subsidiaries listed in the table above are those that represent more than 5% of total Group
sales or underlying EBITA1. A full list of subsidiary, equity accounted investments and other associated undertakings as at
31 December 2012 will be annexed to the Company’s next annual return filed with the Registrar of Companies.
No subsidiary undertakings are excluded from the Group accounts.
1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.
170
BAE Systems Annual Report 2012
32. Accounting policies
32. Accounting policies
The principal accounting policies applied in the preparation of
the consolidated financial statements are set out below. These
policies have been consistently applied to all the years
presented, unless otherwise stated.
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.
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.
Profit is recognised progressively as risks have been mitigated
or retired.
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.
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 determined on an
arm’s length basis.
Lease income
Rental income is recognised in other income 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.
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 1 to the Group accounts 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.
Finance costs
Financial income comprises interest income on funds invested,
changes in the fair value of financial instruments 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 instruments 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.
Tax
Income tax expense comprises current and deferred tax. Current
and deferred tax is recognised in profit or loss except to the
extent that it relates to a business combination, or items
recognised directly in equity or other comprehensive income.
Current tax is the expected tax payable or receivable on the
taxable profit or loss for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment
to tax payable in respect of previous years. Current tax payable
also includes any tax liability arising from the declaration of
dividends.
Deferred tax is recognised in respect of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation
purposes. Deferred tax is not recognised for temporary
differences:
– on the initial recognition of assets or liabilities in a transaction
that is not a business combination and that affects neither
accounting nor taxable profit or loss;
– related to investments in subsidiaries and equity accounted
investments to the extent that it is probable that they will not
reverse in the foreseeable future; and
– arising on the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to
be applied to temporary differences when they reverse, based
on the laws that have been enacted or substantively enacted by
the reporting date.
Deferred tax assets and liabilities are offset if there is a legally
enforceable right to offset current tax liabilities and assets, and
they relate to income taxes levied by the same tax authority on
the same taxable entity, or on different taxable entities, but they
intend to settle current tax liabilities and assets on a net basis
or their tax assets and liabilities will be realised simultaneously.
A deferred tax asset is recognised for unused tax losses, tax
credits and deductible temporary differences to the extent that it
is probable that future taxable profits will be available against
which they can be utilised. Deferred tax assets are reviewed at
each reporting date and reduced to the extent that it is no
longer probable that the related tax benefit will be realised.
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NOTES TO THE GROUP ACCOUNTS – OTHER INFORMATION CONTINUED
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 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.
Where the research and development activity is performed for
customers, the revenue arising is recognised in accordance with
the Group’s revenue recognition policy.
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 or
maintaining computer software programs 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
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
32. Accounting policies (continued)
32. Accounting policies (continued)
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 income
statement is re-presented as if the operation had been
discontinued from the start of the comparative period.
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.
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.
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
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 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.
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
income statement is recognised as a result of such
transactions.
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32. Accounting policies (continued)
32. Accounting policies (continued)
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
up to 50 years, or the lease
term if shorter
Plant and machinery:
Computing equipment, motor
3 to 5 years
vehicles and short-life
works equipment
Research equipment
Other equipment
8 years
10 to 15 years, or the project
life if shorter
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.
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 costs 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.
Leases
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.
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 instruments with
fixed or determinable payments and fixed maturities that the
Group’s management has the positive intention and ability
to hold to maturity; and
(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.
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173
NOTES TO THE GROUP ACCOUNTS – OTHER INFORMATION CONTINUED
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 in other
comprehensive income and presented in the hedging reserve in
equity. Amounts recognised in equity are reclassified 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.
Held for sale
Disposal groups held for sale comprise assets and liabilities
that are expected to be recovered primarily through sale rather
than continuing use.
The disposal group is measured at the lower of its carrying value
and fair value less costs to sell.
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.
32. Accounting policies (continued)
32. Accounting policies (continued)
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.
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.
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).
Inventories
Inventories are stated at the lower of cost, including all relevant
overhead expenditure, and net realisable value.
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. 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.
174
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Share-based payment compensation
The Group has granted equity-settled share options and Long-
Term Incentive Plan (LTIP) arrangements, and cash-settled share
appreciation rights to employees.
Equity-settled share options and LTIP arrangements 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. The Group recognises a liability at the
balance sheet date based on these fair values, and taking into
account the estimated number 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 income
statement.
For consolidation purposes, the assets and liabilities of
overseas subsidiary entities and equity accounted investments
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 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.
32. Accounting policies (continued)
32. Accounting policies (continued)
Pension obligations
Obligations for contributions to defined contribution pension
schemes are recognised as an expense in the income
statement as incurred.
For defined benefit retirement schemes, 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. 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 obligation recognised in the Group’s
balance sheet represents 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 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.
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.
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175
Notes
2012
£m
2011
£m
2
3
4
4
5
6
4
5
6
4
7
9
8,055
8,064
8,412
9
116
100
2,679
11,316
13
7,113
7,126
8,132
9
135
140
1,088
9,504
(21)
(13,846)
(113)
(13,980)
(2,664)
5,400
(5)
(11,480)
(311)
(11,796)
(2,292)
4,834
(1,262)
(30)
(95)
(1,387)
(52)
3,961
(898)
(40)
(101)
(1,039)
(49)
3,746
9
11
11
11
11
90
1,249
202
90
2,330
3,961
90
1,249
202
98
2,107
3,746
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
Net assets
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 20 February 2013 and signed on its behalf by:
I G King
Chief Executive
P J Lynas
Group Finance Director
176
BAE Systems Annual Report 2012
NOTES TO THE COMPANY ACCOUNTS
1. Accounting policies
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(3) 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 11 to these accounts. The Company
has no other recognised gains or losses in the current or
preceding year and, therefore, no statement of recognised gains
or losses is presented.
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.
Cash flow statement
The Company is exempt under the terms of FRS 1, Cash Flow
Statements, 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.
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 is
stated at cost less provision for impairment.
Financial instruments
The policies disclosed in the Group accounting policies on page
174 for recognition, measurement and presentation of financial
instruments are applied in the Company accounts.
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 schemes operated
in the UK. Details of the principal schemes and the financial
assumptions used are contained in the consolidated accounts
of the Group. As permitted by FRS 17, Retirement Benefits, the
schemes are accounted for as defined contribution schemes, as
the employer cannot identify its share of the underlying assets
and liabilities of the schemes. 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-based payment compensation
The Company has granted equity-settled share options and Long-
Term Incentive Plan (LTIP) arrangements to Group employees.
Equity-settled share options and LTIP arrangements are measured
at fair value at the date of grant. 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.
In accordance with Urgent Issues Task Force (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 and LTIP arrangements granted, except where the
employee has agreed to settle the employer’s national
insurance liability as a condition of grant.
Own shares held
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.
BAE Systems Annual Report 2012
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2. Investments in subsidiary undertakings
Cost
At 1 January 2012
Additions1
At 31 December 2012
Impairment provisions
At 1 January 2012 and 31 December 2012
Net carrying value
At 31 December 2012
At 31 December 2011
1 The additions to investments in subsidiary undertakings includes investments in BAE Systems (Holdings) Limited (£0.9bn).
3. Debtors
Due within one year
Corporation tax recoverable
Amounts owed by subsidiary undertakings
Amounts owed by Group joint ventures
Prepayments and accrued income
Other debtors
4. Other fi nancial 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
£m
7,174
942
8,116
61
8,055
7,113
2012
£m
2011
£m
32
8,340
7
25
8
8,412
16
8,077
6
14
19
8,132
2012
Assets
£m
2012
Liabilities
£m
2011
Assets
£m
2011
Liabilities
£m
1
115
116
–
91
9
100
(1)
(112)
(113)
(1)
(94)
–
(95)
4
131
135
3
96
41
140
–
(311)
(311)
–
(101)
–
(101)
1 The debt-related derivative financial instrument assets are presented as other financial assets. Debt-related derivative financial instrument liabilities are
presented as a component of loans and overdrafts (see note 5).
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 notes 17 and 27 to the Group accounts.
178
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2012
£m
2011
£m
21
21
100
214
307
397
243
1
1,262
5
5
100
224
320
–
254
–
898
Total
£m
5. Loans and overdrafts
Due within one year
Loans and overdrafts
Due after one year
Euro-Sterling £100m 10¾% bond, repayable 2014
US$350m 3.5% bond, repayable 2016
US$500m 4.75% bond, repayable 2021
£400m 4.125% bond, repayable 2022
US$400m 5.8% bond, repayable 2041
Debt-related derivative financial instruments – liabilities
Loans and overdrafts due within one year are at a floating rate of interest.
Loans and overdrafts are repayable as follows:
Less than
one year
£m
Between
one and
two years
£m
Between
two and
five years
£m
More than
five years
£m
At 31 December 2012
Carrying amount
At 31 December 2011
Carrying amount
6. Creditors
Due within one year
Amounts owed to subsidiary undertakings
Amounts owed to Group joint ventures1
Accruals and deferred income
Other creditors
Due after one year
Other creditors
1 Reduction primarily relates to the £424m non-cash special dividend received in 2012.
7. Provisions for liabilities and charges
At 1 January 2012
Created
Utilised
Released
Discounting
At 31 December 2012
21
5
100
214
948
1,283
–
324
574
903
2012
£m
2011
£m
12,802
705
42
297
13,846
9,996
1,158
36
290
11,480
30
30
40
40
Contracts
and other
£m
49
8
(9)
(1)
5
52
The Company holds provisions for expected contractual costs that it expects to incur over an extended period. These costs are
based on past experience of similar items and represent management’s best estimate of the likely outcome.
BAE Systems Annual Report 2012
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8. Contingent liabilities
Company guaranteed borrowings
Borrowings by subsidiary undertakings totalling £1,699m (2011 £2,289m) which are included in the Group’s borrowings have been
guaranteed by the Company.
9. Share capital
Issued and fully paid
At 1 January 2011
Exercise of options
At 1 January 2012 and 31 December 2012
Equity
Ordinary shares of 2.5p each
Number of
shares
m
Nominal
value
£m
Non-equity
Special Share of £1
Number of
shares
Nominal
value
£
Total
Nominal
value
£m
3,587
1
3,588
90
–
90
1
–
1
1
–
1
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
In 2011, 184,393,049 ordinary shares of 2.5p were repurchased under the buyback programme.
As at 31 December 2012, 336,813,996 (2011 351,756,854) ordinary shares of 2.5p each with an aggregate nominal value of
£8,420,350 (2011 £8,793,921) were held in treasury. During 2012, 14,942,858 treasury shares were used to satisfy awards and
options under the Share Incentive Plan, Share Matching Plan, Performance Share Plan, Restricted Share Plan and Executive Share
Option Plan (2011 11,013,823 in respect of the Share Incentive Plan, Share Matching Plan, Performance Share Plan and Executive
Share Option Plan).
180
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10. Employee share plans
Options over shares of the ultimate parent undertaking, BAE Systems plc, have been granted to employees of the Company under
various plans. Details of the terms and conditions of each share-based payment plan are given in the Remuneration report on pages
93 to 113 of this report.
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
Weighted average remaining contracted life (years)
Weighted average fair value of options granted (£)
Range of exercise price of outstanding options (£)
Expense recognised for the year (£m)
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
Executive Share Option Plan
2012
2011
Weighted
average
exercise
price
£
3.64
3.02
2.39
4.29
3.30
Number of
shares
‘000
6,175
–
(96)
(540)
5,539
Weighted
average
exercise
price
£
3.68
–
1.99
4.39
3.64
Number of
shares
‘000
5,539
4,975
(200)
(713)
9,601
6
0.38
1.72 – 4.79
1
4
–
1.72 – 4.79
–
Share Matching Plan
Performance Share Plan
Restricted Share Plan
2012
Number of
shares
‘000
5,732
2,055
(958)
(1,139)
5,690
2011
Number of
shares
‘000
4,998
1,922
(714)
(474)
5,732
2012
Number of
shares
‘000
11,910
2,426
(805)
(3,012)
10,519
2011
Number of
shares
‘000
11,057
3,969
(880)
(2,236)
11,910
2012
Number of
shares
‘000
9
83
–
9
101
2011
Number of
shares
‘000
–
9
–
–
9
Weighted average remaining contracted life (years)
Weighted average fair value of awards granted (£)
Expense recognised for the year (£m)
1
3.01
1
1
3.37
2
5
2.29
5
5
2.60
2
6
3.01
–
6
2.93
–
The exercise price for the Share Matching Plan, Performance Share Plan and Restricted Share Plan is £nil (2011 £nil).
Information on options/awards granted in the year can be found in note 28 to the Group accounts.
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NOTES TO THE COMPANY ACCOUNTS CONTINUED
11. Reserves
At 31 December 2011
Profit for the year
Dividends paid
Share-based payments
Purchase of own shares
Movements in hedging reserve
At 31 December 2012
Share
premium
account
£m
1,249
–
–
–
–
–
1,249
Statutory
reserve
£m
202
–
–
–
–
–
202
Other
reserves
£m
98
–
–
–
–
(8)
90
Profit
and loss
account
£m
2,107
797
(620)
48
(2)
–
2,330
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.
Other reserves
Other reserves for the Company comprise: capital reserve £24m (2011 £24m); hedging reserve £1m debit (2011 £7m credit); and
non-distributable reserve arising from property disposals to other Group undertakings £67m (2011 £67m). 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 are 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 £797m (2011 £1,222m). The non-distributable portion of the profit and loss account
is £196m (2011 £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 Employee Share Option Plan (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 2012.
At 31 December 2012, the ESOP held 2,633,198 (2011 2,402,305) ordinary shares of 2.5p each with a market value of £9m
(2011 £7m). 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 2012 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 2012 over shares in the Group All-Employee Free Shares Plan Trust other than those shares owned beneficially by
participants.
12. Other information
Employees
The total number of employees of the Company at 31 December 2012 was 801 (2011 820). Total staff costs, excluding charges for
share-based payments, were £129m (2011 £112m).
Total directors’ emoluments, excluding Company pension contributions, were £6,542,000 (2011 £6,542,000). 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 £1,570,000 (2011 £1,535,000).
Related party transactions
Details of related party transactions are detailed in note 29 to the Group accounts.
The Company also has a related party relationship with its directors and key management personnel, and pension schemes.
182
BAE Systems Annual Report 2012
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 2012 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 117, 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 Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate
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 2012 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 84, in relation to
going concern;
– the part of the Corporate Governance Statement on pages 83
to 89 in the Directors’ Report relating to the Company’s
compliance with the nine provisions of the UK Corporate
Governance 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
20 February 2013
BAE Systems Annual Report 2012
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FIVE-YEAR SUMMARY
Income statement for the year ended 31 December
Continuing operations1
Sales including Group’s share of equity accounted investments
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ
Intra-group sales
Underlying EBITA2
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ
Profit/(loss) on disposal of businesses
Pension curtailment gains
Regulatory penalties
EBITA
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 as at 31 December
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 cash/(debt) (as defined by the Group)
Disposal groups held for sale
Non-controlling interests
Total equity attributable to equity holders of the parent
184
BAE Systems Annual Report 2012
2012
£m
2011
£m
2010
£m
2009
£m
2008
£m
2,507
1,402
4,539
5,646
4,071
267
(598)
17,834
2,645
1,399
5,305
6,258
3,794
233
(480)
19,154
2,969
1,201
7,671
6,529
4,325
209
(629)
22,275
2,899
1,302
8,414
6,153
3,658
172
(756)
21,842
2,375
957
7,626
4,639
2,755
171
(532)
17,991
356
124
394
689
417
(85)
1,895
103
–
–
1,998
(312)
(275)
1,411
(337)
1,074
5
1,079
2012
£m
10,928
2,407
270
655
–
(6,419)
(50)
(4,607)
(746)
951
387
(2)
(54)
3,720
386
136
478
658
449
(82)
2,025
(29)
–
(49)
1,947
(348)
(106)
1,493
(233)
1,260
(4)
1,256
2011
£m
11,465
2,626
788
716
403
(5,386)
(219)
(4,673)
(954)
975
(1,439)
(3)
(59)
4,240
455
108
728
522
449
(83)
2,179
1
2
(18)
2,164
(517)
(194)
1,453
(462)
991
90
1,081
2010
£m
11,216
2,848
798
644
261
(6,159)
(10)
(3,456)
(1,077)
580
(242)
–
(71)
5,332
348
107
747
661
402
(114)
2,151
68
261
(278)
2,202
(1,259)
(694)
249
(344)
(95)
50
(45)
2009
£m
11,306
2,663
852
887
227
(6,918)
(45)
(4,679)
(929)
896
403
–
(72)
4,591
333
82
666
501
415
(101)
1,896
238
–
–
2,134
(303)
712
2,543
(649)
1,894
(126)
1,768
2008
£m
12,306
2,558
1,040
926
–
(5,866)
240
(3,365)
(845)
256
39
–
(55)
7,234
Movement in net cash/(debt) (as defined by the Group) for the year ended 31 December
Cash inflow from operating activities
Add back: Amounts already deducted from net cash/(debt) (as defined by
the Group)3
Net capital expenditure4
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 of equity shares
Foreign exchange adjustment
Other movements5
Net increase/(decrease) in net funds
Movement in cash on customers’ account
Movement in net cash/(debt) (as defined by the Group)
Opening net (debt)/cash (as defined by the Group)
Closing net cash/(debt) (as defined by the Group)
Other information
Continuing operations1
Basic earnings/(loss) per share – total (pence)
Basic earnings per share – underlying6 (pence)
Order backlog7 including the Group’s share of equity accounted investments
2012
£m
2,458
458
2,916
(293)
94
(25)
–
2,692
96
(147)
(746)
(16)
92
(146)
1,825
1
1,826
(1,439)
387
2011
£m
951
–
951
(268)
88
(137)
–
634
(256)
(176)
(885)
(509)
(20)
2
(1,210)
13
(1,197)
(242)
(1,439)
2010
£m
1,535
–
1,535
(364)
71
(25)
(30)
1,187
(88)
(173)
(958)
(520)
(20)
(80)
(652)
7
(645)
403
(242)
2009
£m
2,232
–
2,232
(489)
77
(225)
–
1,595
(254)
(186)
(889)
(20)
262
(132)
376
(12)
364
39
403
2008
£m
2,009
–
2,009
(503)
89
–
–
1,595
(1,038)
(98)
(750)
(27)
(374)
5
(687)
26
(661)
700
39
2012
2011
2010
2009
2008
32.8
38.9
37.0
45.6
27.9
39.8
(3.3)
39.1
53.2
37.1
(£bn)
42.4
39.1
n/a
n/a
n/a
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)
19.5
18.8
17.5
16.0
14.5
81,000
404
87,000
381
92,000
437
98,000
522
94,000
552
1 The Regional Aircraft line of business and Saab AB are presented as discontinued operations.
2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items. For 2008,
non-recurring items are profit on disposal of businesses and uplift on acquired inventories. For 2009 to 2011, non-recurring items are profit/loss on disposal
of businesses, pension curtailment gains and regulatory penalties. For 2012, non-recurring items comprises profit on disposal of businesses.
3 Comprises the £428m contribution from Trust to the UK pension schemes and the £29.5m charitable contribution for the benefit of the people of Tanzania in
4
connection with the global settlement with the UK’s Serious Fraud Office in 2010, both made in 2012, as the amounts had been deducted from the Group’s
net cash/(debt).
Includes net expenditure on property, plant and equipment, investment property, intangible assets, and other investments, and equity accounted investment
funding.
Includes cash flows from matured derivative financial instruments, cash collateral and other non-cash movements.
5
6 Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring
items. For 2008, non-recurring items are profit on disposal of businesses and uplift on acquired inventories. For 2009 to 2011, non-recurring items are
profit/loss on disposal of businesses, pension curtailment gains and regulatory penalties. For 2012, non-recurring items comprises profit on disposal of
businesses.
7 Order backlog comprises funded and unfunded unexecuted customer orders, and is stated after the elimination of intra-group orders.
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185
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
If you have any queries regarding your shareholding or need to
notify any changes to your personal details, please contact
Equiniti.
Equiniti’s website (https://help.shareview.co.uk) includes a
comprehensive set of answers to many frequently asked
questions relating to managing a shareholding. If you cannot
find the answer to your question, there is an online e-mail form,
which helps to ensure your question is directed to the most
appropriate team for a response. Alternatively, you can call the
BAE Systems Helpline on 0871 384 2044* or, from outside the
UK, +44 121 415 7058.
* Calls to this number cost 8p per minute plus network extras. Lines are
open from 8.30am to 5.30pm Monday to Friday.
Shareview – online access to your shareholding
Shareview is a free 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 and, once registered, arrange for
dividends to be mandated or update your address.
To take advantage of Shareview, register online at
www.shareview.co.uk
Click on ‘Register’ and follow the four easy steps.
Details of software and equipment requirements are given on
the website.
Dividend mandate
Over the past two years, Equiniti has processed over 17,000
dividend bank mandates. Shareholders with a dividend bank
mandate receive their dividend in their bank account on the
payment date and receive one consolidated tax voucher for
payments made within the tax year. This helps us save on
printing and postage costs.
If you have a UK bank or building society account and would like
to apply a bank mandate to your shareholding, a mandate form
can be obtained from our website or by contacting Equiniti.
Alternatively, bank details can be submitted in writing to Equiniti,
electronically via Shareview or, if the shareholding is held in a
sole name, Equiniti can take instructions over the telephone.
Do you have an overseas bank account? Instead of waiting for a
sterling cheque to arrive by post, why not take advantage of
Equiniti’s overseas payments service? Equiniti can arrange
payment for over 90 countries worldwide. It normally costs less
than paying in a sterling cheque and only takes a few days for
the money to arrive into the account after the dividend payment
date. For more information on the terms and conditions of this
service, and to obtain the appropriate mandate form, visit the
Shareview website (www.shareview.com/overseas) or contact
Equiniti.
186
BAE Systems Annual Report 2012
Electronic shareholder communications
An increasing number of shareholders receive communications
from the Company using e-mail and web-based communications.
The use of electronic communications, rather than printed paper
documents, helps us reduce the environmental impact of our
activities and assists 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, which contains a link to the
document.
– 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 to a consultation 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.
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
Alternatively:
– call the BAE Systems Helpline on 0871 384 2044* (+44 121
415 7058 from outside the UK); or
– a copy of the terms and conditions of the dividend
reinvestment plan, along with the mandate form, can be
downloaded from our website.
* Calls to this number cost 8p per minute plus network extras. Lines are
open from 8.30am to 5.30pm Monday to Friday.
ShareGift
ShareGift, the share donation charity (registered charity number
1052686), accepts donations of 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 2012 was 336.9p and the range during the year
was 270.9p to 363.6p.
American Depositary Receipts
BAE Systems plc American Depositary Receipts (ADRs) are traded
on the Over The Counter (OTC) market under the symbol BAESY.
One ADR represents four BAE Systems plc ordinary shares.
JPMorgan Chase Bank, N.A. is the depositary.
If you should have any queries, please contact:
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
Warning to shareholders – boiler room fraud and other
investment scams
The Company has been alerted to the fact that a number of
shareholders have received unsolicited telephone calls from
fraudsters purporting to either represent BAE Systems in an
alleged ‘secret takeover’ of another company, or represent
another company which is allegedly ‘taking control’ of
BAE Systems. These fraudsters are offering to buy shares in
BAE Systems at inflated prices, which generally entail a request
for the shareholder to sign non-disclosure agreements, provide
bank details, make payment or release share certificates.
Details of any share dealing facilities that the Company
endorses will be included in Company mailings.
We have also been made aware of shareholders who have
received telephone calls from bogus companies purporting to be
dealing with various matters on behalf of the Company. For
example the purchase of carbon credits, or seeking feedback on
specific activities.
The tactics employed by these criminals, who can be very
persistent and extremely persuasive, are constantly changing.
Shareholders are therefore advised to be very wary and remain
vigilant at all times about any unsolicited telephone calls.
Authorised firms are unlikely to contact you out of the blue with
investment opportunities and a legitimate company is unlikely to
use harassment, high-pressure sales tactics, or long and
persistent phone calls, to get you to invest.
The Financial Services Authority’s (FSA) website contains
information about many of the most common and latest scams:
www.fsa.gov.uk/consumerinformation/scamsandswindles
If you do receive any such unsolicited telephone calls or
investment advice:
– Make sure you get the correct name of the person and
organisation.
– Check that they are properly authorised by the FSA before
getting involved by visiting www.fsa.gov.uk/register/. Contact
the firm using the details on the register – many fraudsters
pretend to be from a legitimate firm, but are in fact from a
‘cloned firm’.
– Report the matter via the FSA’s Consumer Helpline on 0845
606 1234 or by visiting
www.fsa.gov.uk/consumerinformation/scamsandswindles
– 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.
Financial calendar
Financial year end
Annual General Meeting
2012 final ordinary dividend payable
2013 half-yearly results announcement
2013 interim ordinary dividend payable
2013 full year results – preliminary announcement
2013 final ordinary dividend payable
– report and accounts
Analysis of share register at 31 December 2012
By category of shareholder
Individuals
Nominee companies
Banks
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
31 December
8 May 2013
3 June 2013
1 August 2013
2 December 2013
February 2014
March 2014
June 2014
Ordinary shares of 2.5p
Accounts
Shares
Number
‘000
95.2
6.7
–
1.0
102.9
21.3
29.6
20.0
29.9
1.4
0.4
0.3
102.9
%
Number
million
92.5
94.9
6.5 3,025.7
0.1
467.0
100.0 3,587.7
–
1.0
1.0
20.7
7.9
28.8
14.2
19.4
72.3
29.1
33.6
1.3
0.4
164.8
0.3 3,293.9
100.0 3,587.7
%
2.7
84.3
–
13.0
100.0
–
0.2
0.4
2.0
1.0
4.6
91.8
100.0
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187
GLOSSARY
ADF
AGM
ATTAC
C4I
C-IED
CPI
CR
CV90
DEWS
EADS
EBITA
EC
EPS
EU
ExPS
ExSOP
FMTV
FPE
FPP
FRS
GAAP
GCV
GEOINT
IAS
IBP
IDIQ
IFRS
ISR
KPI
LCM
LHD
Australian Defence Force.
Annual General Meeting.
Availability Transformation Tornado Aircraft
Contract.
Command, Control, Communications, Computers
and Intelligence.
Counter Improvised Explosive Device.
Consumer Prices Index.
Corporate Responsibility.
Combat Vehicle 90.
Digital Electronic Warfare System.
European Aeronautic Defence and Space
Company.
Earnings before amortisation and impairment
of intangible assets, finance costs and
taxation expense.
Executive Committee.
Earnings per Share.
European Union.
Executive Pension Scheme.
Executive Share Option Plan.
Family of Medium Tactical Vehicles.
Final Pensionable Earnings.
Final Pensionable Pay.
Financial Reporting Standard.
Generally Accepted Accounting Practice.
Ground Combat Vehicle.
Geospatial Intelligence.
International Accounting Standard.
Integrated Business Plan.
Indefinite Delivery, Indefinite Quantity.
International Financial Reporting Standard.
Intelligence, Surveillance and Reconnaissance.
Key Performance Indicator.
Lifecycle Management.
Landing Helicopter Dock.
LRIP
LTA
LTIP
M777
M&A
MoD
MRAP
NGA
OAS
OECD
OPV
PIM
PSP
QBR
R&D
RAF
RCF
RPI
RSAF
RSNF
RSP
SBDCP
SHE
SIP
SMM
SMP
ToBA
TPL
TRMC
TSP
TSR
UAS
UITF
Low-Rate Initial Production.
Lifetime Allowance.
Long-Term Incentive Plan.
A lightweight 155mm field howitzer.
Mergers and Acquisitions.
Ministry of Defence.
Mine Resistant Ambush Protected.
National Geospatial-Intelligence Agency.
Operational Assurance Statement.
Organisation for Economic Co-operation and
Development.
Offshore Patrol Vessel.
Paladin Integrated Management.
Performance Share Plan.
Quarterly Business Review.
Research and Development.
Royal Air Force.
Revolving Credit Facility.
Retail Prices Index.
Royal Saudi Air Force.
Royal Saudi Naval Forces.
Restricted Share Plan.
Saudi British Defence Co-operation Programme.
Safety, Health and Environment.
Share Incentive Plan.
Safety Maturity Matrix.
Share Matching Plan.
Terms of Business Agreement.
Total Performance Leadership.
Treasury Review Management Committee.
Tornado Sustainment Programme.
Total Shareholder Return.
Unmanned Air System.
Urgent Issues Task Force.
188
BAE Systems Annual Report 2012
Bae SyStemS at a gLance
BAE Systems is a global defence, aerospace and security company with
approximately 88,200 employees1 worldwide. The Group delivers a wide range
of products and services for air, land and naval forces, as well as advanced
electronics, security, information technology solutions and support services.
Group
Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Electronic Systems comprises the US and
UK-based electronics activities, including
electronic warfare systems and electro-
optical sensors, military and commercial
digital engine and flight controls, next-
generation military communications
systems and data links, persistent
surveillance capabilities, and hybrid
electric drive systems.
Cyber & Intelligence comprises the
US-based Intelligence & Security business
and UK-headquartered BAE Systems
Detica business, and covers the Group’s
cyber, secure government, and commercial
and financial security activities.
Platforms & Services (US) comprises the
US-headquartered Land & Armaments
business, with operations in the US, UK,
Sweden and South Africa, together with
US-based services and sustainment
activities, including ship repair and
munitions services.
Platforms & Services (UK) comprises
the Group’s UK-based air, maritime and
combat vehicle activities, and certain
shared services activities.
Bae SyStemS onLine
get the LateSt inveStor information onLine:
www.BaeSyStemS.com
For the latest information on:
– Innovation
– Performance
– Investor presentations
– Corporate responsibility
– News and events
– Company videos
Plus, features enabling you to:
– View on your laptop, tablet or phone
– Stay connected with Twitter, Flickr, YouTube and Facebook
– Sign up for RSS feeds
– Sign up for e-mail alerts
– Contact us
Platforms & Services
(International)
Platforms & Services (International)
comprises the Group’s businesses
in Saudi Arabia, Australia, India and
Oman, together with its 37.5% interest in
the pan-European MBDA joint venture.
Principal
operations
Sales1,2,3 by reporting
segment (%)
22
KPI
8
25
14
31
■ Electronic Systems
■ Cyber & Intelligence
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services (International)
Underlying EBITA1,3,4 by
reporting segment (%)
Operational
key points
21
KPI
6
20
18
35
■ Electronic Systems
■ Cyber & Intelligence
■ Platforms & Services (US)
■ Platforms & Services (UK)
■ Platforms & Services (International)
– Sustained a leadership position in the
airborne electronic warfare market
– Strengthened position in high growth
commercial aircraft electronics market
– Won key development contracts in the
classified area
– Continued focus on increasing
productivity and efficiency
– Business recovery complete following
disruption from flood damage at the
Johnson City facility
perform well on existing programmes and
secured strategic contract awards with
existing customers
– The US-based business continues to
invest in differentiating technologies,
such as activity-based intelligence and
cybersecurity, including a leading-edge
network operations and security centre
environment, to support a pipeline of
submitted bids of $2.9bn (£1.8bn) at the
end of 2012
– BAE Systems Detica continues to invest
in products and capability, including its
Security Operations Centre
– BAE Systems Detica awarded a contract
by Vodafone for next-generation
enterprise secure networks for mobile
devices
– The US-based business continues to
– Growth in US ship repair activities
– 46 Typhoon Tranche 2 aircraft delivered
– Salam price escalation negotiations
– Executing munitions infrastructure and
facility operations management
contracts
– £2.5bn Typhoon and Hawk contract for
Oman secured
to the partner nations
ongoing
– £5.0bn of orders received under the
Saudi British Defence Co-operation
Programme (SBDCP) for training aircraft
and support to the end of 2016
– First Landing Helicopter Dock hull arrived
in Australia for completion and second
hull launched in Spain
– MBDA export order for MICA air-to-air
missiles to India
– Strategic international win with Korean
– £446m contract awarded for European
F-16 upgrade down-select
support on Typhoon
– Continued to protect Bradley franchise
with $376m (£231m) in related awards
– First F-35 Lightning II aircraft accepted by
the UK Ministry of Defence (MoD)
– Awarded a $750m (£462m) contract for
CV90 armoured combat vehicles to
Norway
– Fifth Type 45 destroyer accepted off-
contract and support provided for all
Royal Navy Type 45 deployments
– Letter of Request received from Indian
government for 145 M777 howitzers
– Continued consolidation in the Land &
Armaments business
– Business disposals of Safety Products,
Safariland and Tensylon completed
– Settlement reached with the Government
of the Republic of Trinidad and Tobago in
respect of the cancelled Offshore Patrol
Vessels (OPV) programme
– Two OPVs delivered to the Brazilian Navy
– £0.8bn of customer funding received for
ongoing design and development of the
Successor submarine, and continuing
production of the fourth Astute Class
submarine
See page 54 for more information
on the Group’s reporting segments
Sales1,2
£2,507m
For more information visit
www.baesystems.com/businesses
Number of
employees1
13,000
£1,402m
8,200
£4,539m
21,300
£5,646m
27,900
£4,071m
15,500
Including share of equity accounted investments.
Before elimination of intra-group sales.
1
2
3 Excluding HQ.
4
Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see page 31).
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Park 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.
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Cover design by The Opcyon Design Company.
for more
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BaeSyStemS.com
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annUaL rePort
2012
BAE Systems plc
6 Carlton Gardens
London SW1Y 5AD
United Kingdom
Telephone: +44 (0) 1252 373232
www.baesystems.com
Registered in England and Wales No. 1470151
© BAE Systems plc 2012. All rights reserved
BAE SYSTEMS is a registered trade mark of BAE Systems plc.
BAE Systems continues to build on its
position as one of the world’s largest
and most geographically diverse defence,
aerospace and security companies.
BAE Systems is focused on delivering
sustainable growth in shareholder
value through its commitment to
Total Performance.
Front cover: BAE Systems succeeds on the
talent, commitment and dedication of every
single employee.
For BAE Systems at a glance see overleaf
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. 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.