BAE Systems Annual Report 2017

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FY2017 Annual Report · BAE Systems

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Annual Report
2017

Welcome to the BAE Systems
Annual Report 2017

Strategic report

Governance

Financial statements

01-71

Who we are

Our business at a glance

Our key products and services

Group financial highlights

Operational and strategic highlights

Chairman’s letter

Chief Executive’s review

Group strategic framework

Our markets

How our business works

Our people

Our technology

Group financial review

Segmental review

Electronic Systems

Cyber & Intelligence

Platforms & Services (US)

Platforms & Services (UK)

Platforms & Services (International)

Re-presentation of 2017 results

Guidance for 2018

Segmental looking forward

Corporate responsibility

How we manage risk

Our principal risks

72-140

Directors’ report

Chairman’s governance letter

Governance highlights

Directors’ duties

Board governance

Board of directors

Board information

Governance disclosures

Audit Committee report

Corporate Responsibility Committee report 87

Nominations Committee report

Remuneration Committee report

Annual remuneration report at a glance

Annual remuneration report

Preface to the Directors’
remuneration policy

Directors’ remuneration policy

Statutory and other information

116

117

130

Independent Auditor’s report

136

141-207

Group accounts

Preparation

Consolidated income statement

Consolidated statement
of comprehensive income

Consolidated statement
of changes in equity

Consolidated balance sheet

Consolidated cash flow statement

Notes to the Group accounts

Company accounts

Company statement of
comprehensive income

Company statement
of changes in equity

Company balance sheet

Notes to the Company accounts

142

144

145

146

147

148

202

203

204

208
Shareholder information

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 of the 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.

Further information can
be found online by visiting
baesystems.com

Who we are

At BAE Systems, our advanced
defence technology protects
people and national security,
and keeps critical information
and infrastructure secure.

We search for new ways to
provide our customers with
a competitive edge across the
air, maritime, land and cyber
domains. We employ a skilled
workforce of 83,200 people1
in over 40 countries, and work
closely with local partners to
support economic development
by transferring knowledge,
skills and technology.

1. Including share of equity accounted investments.
2. Revenue plus the Group’s share of revenue of equity accounted investments.

Air

55%

Maritime

25%

2017 sales2
by domain

Land

15%

Cyber

BAE SystemsAnnual Report 2017Strategic reportGovernanceFinancial statements02

Our business
at a glance

Sales1 by domain
BAE Systems has strong, established positions in
the air, maritime and land domains, as well as a
growing position in cyber security.

Our key products
and services

Air

55%

Maritime

25%

Land

15%

Cyber

A Typhoon
B F-35 Lightning II
C Defence electronics
D Tornado
E Commercial avionics
F Weapon systems
G Hawk
H Other

26%
10%
20%
12%
11%
9%
6%
6%

– Manufacture, development,

– Design, manufacture and support

upgrade and in-service support
of Typhoon combat aircraft

of avionics equipment for
commercial aircraft

– Workshare partner for the

design and manufacture of major
sub-assemblies and systems, and
provision of support for F-35
Lightning II combat aircraft

– Design, manufacture and

support of electronics equipment
for military aircraft

– In-service support of Tornado

combat aircraft

– Design and manufacture of
missiles and missile systems
through a 37.5% interest
in MBDA

– Manufacture, development,

upgrade and in-service support
of Hawk trainer aircraft

– Development of next-generation

unmanned air systems and
defence information systems

– Design and manufacture

– Design and manufacture of

A Submarines

B Complex warships

C US ship repair

D UK naval support

E Weapon systems

F Other

30%

18%

17%

11%

15%

A Combat vehicles

B Munitions

C Commercial

D Weapon systems/

other

40%

24%

27%

of submarines

– Design and manufacture

of complex warships

– Provision of ship repair and
modernisation services in
the US

– Provision of in-service support
to surface ships and facilities
management in the UK

– Design, manufacture, upgrade
and support of tracked and
amphibious combat vehicles

– Manufacture of ammunition
and precision munitions for
US, UK and other armed forces

– Design and manufacture

of electric and hybrid electric
drive systems

naval gun systems, torpedoes,
radars, and naval command
and combat systems

– Design and manufacture of
artillery systems and missile
launchers for US, UK and
other armed forces

– Supply of cyber, intelligence
and security capabilities to
US government agencies

– Supply of defence-grade
cyber solutions for the
commercial market

– Supply of cyber, intelligence

and security capabilities to UK
and other government agencies

A US government

B UK and other
governments

C Commercial

50%

21%

29%

BAE SystemsAnnual Report 201703

Group financial
review

2017 sales1

£19,626m

2017 revenue

£18,322m

Sales1 by destination
BAE Systems has leading positions in
its principal markets – the US, UK, the
Kingdom of Saudi Arabia and Australia
– as well as established positions in a
number of other international markets.

Sales1 by activity
BAE Systems has a diverse portfolio,
broadly balanced between an
enduring services and support business,
long-term platform and product
programmes, electronic systems, and
activities in cyber and intelligence.

Sales1 by reporting segment
BAE Systems reports its performance
through five principal reporting
segments2.

Segmental
review

39%

21%

16%

A Military and technical services and support

B Platforms

C Electronic systems

D Cyber

21%

45%

32%

18%

A Electronic Systems

B Cyber & Intelligence

C Platforms & Services (US)

D Platforms & Services (UK)

E Platforms & Services (International)

18%

15%

38%

20%

Our
markets

A US

B UK

C Saudi Arabia

D Australia
E Other international markets3

Employees by location

Our
people

29,100

Other

10,600

Employees4

83,200

34,300

Australia

3,100

1. Revenue plus the Group’s share of revenue of equity accounted investments.
2. Effective 1 January 2018, BAE Systems revised its reporting segments to reflect the organisational changes described on page 17. See page 56 for more information.
3. Includes £0.9bn (4%) of sales generated under the Typhoon workshare agreement with Eurofighter Jagdflugzeug GmbH.
4. Including share of equity accounted investments.

Saudi Arabia

6,100

BAE SystemsAnnual Report 2017Strategic reportGovernanceFinancial statements04

BAE Systems
Annual Report 2017

Our key products
and services

BAE Systems has strong, established positions supplying
defence equipment, electronics and services, as well as
cyber, intelligence and security solutions for governments.
We also have a growing position in adjacent commercial
markets, including avionics and cyber security.

Typhoon manufacture and
capability development

F-35 Lightning II design
and manufacture

Unmanned and future air
system capabilities

Manufacture of major Typhoon assemblies
for European partner nations and other
export customers. Aircraft assembly for the
Royal Air Force, Royal Saudi Air Force and
Royal Air Force of Oman. Expansion of the
capabilities of the aircraft.

Design and manufacture of sub-assemblies
in the UK, including the aft fuselage and
empennage. Provision of equipment in the
US, including the electronic warfare suite.
BAE Systems has a significant workshare
on the world’s largest defence programme.

Development of future air system capabilities,
including a joint unmanned combat air system
programme with France.

Air support
and training

Defence
electronics

Commercial avionics
equipment

Provision of support to operational capability.
We provide maintenance, support and training
for Typhoon aircraft in service with the UK
and Saudi Arabian air forces. Under the Saudi
British Defence Co-operation Programme,
we have contracts to provide manpower,
logistics and training, training aircraft
(including Hawk), and upgrades to Tornado
aircraft in Saudi Arabia. We provide support
for Hawk aircraft in service in 14 countries
and will provide sustainment services for
the F-35 Lightning II aircraft in the Europe
and Pacific regions.

Design, manufacture and support of avionics
equipment across a range of US and other
western military aircraft programmes,
including a leadership position in the
electronic warfare market.

Design, manufacture and support of avionics
equipment across multiple commercial aircraft
platforms, including engine and flight controls,
and cabin and cockpit systems, together with
aftermarket support services. BAE Systems is a
leading supplier of engine controls for GE, and
is a major supplier of flight control electronics
for Boeing and other aircraft platforms.

BAE Systems
Annual Report 2017

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Complex
warships

Submarines

Ship repair and
naval support

Design and manufacture of two 65,000-tonne
aircraft carriers, five Offshore Patrol Vessels,
and Type 26 frigates for the Royal Navy.

Design and manufacture of seven Astute
Class nuclear-powered attack submarines
for the Royal Navy. The first three Astute
Class submarines are in operational service
with the Royal Navy, with the remaining
four boats in build. The final boat is expected
to enter service in the middle of the next
decade. Design and manufacture of four
Dreadnought Class nuclear-powered
submarines to carry the UK’s Trident
ballistic missiles. Manufacture of the first
Dreadnought Class boat, Dreadnought,
commenced in 2016.

Provision of naval and commercial ship repair
and modernisation services in the US and UK,
together with support to the navies of the US,
UK and Australia. In the US, BAE Systems has
facilities located on the east, west and Gulf
coasts, as well as Hawaii, and has invested
in new dry dock facilities at its San Diego
shipyard to support the US Navy’s increased
focus on Asia-Pacific operations.

Weapon systems
and munitions

Combat
vehicles

Cyber
security

Design and manufacture of naval gun
systems, munitions, torpedoes, radars, naval
command and combat systems, artillery
systems, missile launchers and, through a
37.5% interest in MBDA, missiles and missile
systems. BAE Systems also manages complex
ammunition plant operations for the US Army
to produce insensitive munitions and
propellant grains.

Products and services include: upgrade of
US Army tracked vehicles, including Bradley
Fighting Vehicles; design and manufacture of
the US Army’s M109 self-propelled howitzer
and Armored Multi-Purpose Vehicle, as well
as amphibious vehicles for the US Marine
Corps and international customers; design,
manufacture and support of the CV90
and BvS10 combat vehicles for international
customers; and vehicle upgrade and support
to the British Army.

Delivery of a broad range of services to
enable the US military and government
to recognise, manage and defeat threats.
Support to UK and other government
agencies in their intelligence missions.
Provision of defence-grade solutions
for commercial cyber applications.

BAE Systems
Annual Report 2017

Group financial
highlights

We monitor the underlying financial performance of the Group
using alternative performance measures. These measures are not
defined in IFRS1 and, therefore, are considered to be non-GAAP2
measures. Accordingly, the relevant IFRS1 measures are also
presented where appropriate.

– Sales increased by £0.6bn to £19.6bn largely

reflecting currency translation.

– Underlying EBITA increased to £2,034m, a 4%

increase on a constant currency basis3.

– Net debt reduced by £790m compared

with 31 December 2016.
– Order intake4 of £20.3bn.
– Order backlog4 of £41.2bn was unchanged

– Underlying earnings per share increased by 8%

on a constant currency basis3.

to 43.5p.

– Operating business cash flow increased by £748m

to £1,752m.

Financial performance measures as defined by the Group

Sales

£19,626m

(2016 £19,020m)

Underlying EBITA

£2,034m

(2016 £1,905m)

Definition Revenue plus the
Group’s share of revenue of
equity accounted investments.

Purpose Allows management to
monitor the sales performance
of subsidiaries and equity
accounted investments.

KPI

Net debt

£(752)m

(2016 £(1,542)m)

KPI

Order intake4

Definition Operating profit
excluding amortisation and
impairment of intangible assets,
finance costs and taxation expense
of equity accounted investments
(EBITA), and non-recurring items5.
Purpose Provides a measure of
operating profitability that is
comparable over time.

£20,257m

(2016 £22,443m)

Underlying earnings per share

BONUS KPI

Order backlog4

43.5p

(2016 40.3p)

£41.2bn

(2016 £42.0bn)

Definition Basic earnings per
share excluding amortisation and
impairment of intangible assets,
non-cash finance movements on
pensions and financial derivatives,
non-recurring items5 and, in 2017,
a credit in respect of US tax reform
enacted in December 2017.

Purpose Provides a measure
of underlying performance that
is comparable over time.

BONUS KPI

Definition Cash and cash
equivalents, less loans and
overdrafts (including debt-related
derivative financial instruments).

Purpose Allows management
to monitor the indebtedness of
the Group.

BONUS KPI

Definition Funded orders
received from customers including
the Group’s share of order intake
of equity accounted investments.

Purpose Allows management
to monitor the order intake of
subsidiaries and equity accounted
investments.

Definition Funded and unfunded
unexecuted customer orders
including the Group’s share of
order backlog of equity accounted
investments. Unfunded orders
include the elements of US
multi-year contracts for which
funding has not been authorised
by the customer.

Purpose Supports future years’
sales performance of subsidiaries
and equity accounted investments.

Operating business cash flow

KPI

£1,752m

(2016 £1,004m)

Definition Net cash flow from
operating activities excluding taxation
and including net capital expenditure,
financial investment and dividends
from equity accounted investments.

Purpose Allows management to
monitor the operational cash
generation of the Group.

KPI

References to Key Performance Indicators
(KPIs) throughout the Annual Report.

BONUS

80% of the UK executive directors’
bonuses are based on the achievement
of financial KPIs (see page 101).

Reconciliations from the financial performance
measures as defined by the Group to the financial
performance measures defined in IFRS1 are provided
in the Group financial review on pages 28 to 34.

BAE Systems
Annual Report 2017

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– Revenue increased by £0.5bn to £18.3bn largely

reflecting currency translation.

– Operating profit decreased to £1,480m, including

a £384m non-cash goodwill impairment in Applied
Intelligence reflecting lower growth assumptions.
– Basic earnings per share decreased by 7% to 26.8p.
– Net cash flow from operating activities increased

by £668m to £1,897m.

– Group’s share of the pre-tax accounting net
pension deficit reduced by £2.2bn compared
with 31 December 2016 to £3.9bn.

– Final dividend of 13p per share making a total
of 21.8p per share for the year, an increase of
2% over 2016.

Financial performance measures defined in IFRS1

Other financial highlights

Revenue

Group’s share of the net pension deficit

£18,322m

(2016 £17,790m)

Definition Income derived from
the provision of goods and services
by the Company and its subsidiary
undertakings.

£(3.9)bn

(2016 £(6.1)bn)

Definition Net International
Accounting Standard 19, Employee
Benefits, deficit excluding amounts
allocated to equity accounted
investments.

Operating profit

£1,480m

(2016 £1,742m)

Definition Profit for the year before
finance costs and taxation expense.
This measure includes finance costs
and taxation expense of equity
accounted investments.

Dividend per share

21.8p

(2016 21.3p)

Definition Interim dividend
paid and final dividend
proposed per share.

Basic earnings per share

26.8p

(2016 28.8p)

Definition Basic earnings per share
in accordance with International
Accounting Standard 33, Earnings
per Share.

Net cash flow from operating activities

£1,897m

(2016 £1,229m)

Definition Net cash flow from
operating activities in accordance
with International Accounting
Standard 7, Statement of
Cash Flows.

1. International Financial Reporting Standards.
2. Generally Accepted Accounting Principles.
3. Current year compared with prior year translated at current year exchange rates.
4. Including share of equity accounted investments.
5. Items that are not relevant to an understanding of the Group’s underlying performance

(see page 28).

BAE Systems
Annual Report 2017

Operational and
strategic highlights

In 2017, we made progress across the Group
in achieving our strategic objectives.

Chief Executive’s
review

We agreed contracts under the
Saudi British Defence Co-operation
Programme to provide ongoing support
services to the Royal Saudi Air Force
and Royal Saudi Naval Forces for a
further five years to 31 December 2021.

The full £3.7bn production contract
for the first batch of three Type 26
frigates was signed in June, with
£2.8bn of order intake in the year.
Production of the first ship, Glasgow,
commenced in July.

Growing demand for our
Advanced Precision Kill Weapon
System (APKWS™) laser-guided
rockets, with awards totalling
nearly $300m (£222m) during
the year and over 13,000 units
delivered at 31 December.

In November, the 2017 UK triennial
pension funding valuations and,
where necessary, deficit recovery
plans were agreed with the
trustees and certified by the
scheme actuaries after consultation
with the Pensions Regulator.

We received a $414m (£306m)
contract for the third and final
option for Low-Rate Initial Production
of 48 M109A7 self-propelled
howitzers and ammunition carriers
under the Paladin Integrated
Management programme. The
award contains options for a further
180 vehicle sets over three years of
Full-Rate Production.

BAE Systems
Annual Report 2017

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Group strategic
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Segmental
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During the year, our US-based
Intelligence & Security business
secured six task order contracts
valued at more than $180m
(£133m), increasing the
Full-Motion Video Intelligence,
Surveillance and Reconnaissance
analysis support we provide to
the US intelligence community.

Our US-based Electronic Systems
business received orders on the
F-35 Lightning II programme
worth over $450m (£333m) for
additional hardware production
and five years of support.

In December, BAE Systems and the
Government of Qatar entered into
a contract, valued at approximately
£5bn, for the supply of 24 Typhoon
aircraft. Alongside supplying the
aircraft, the agreement provides for
the supply of ground support to the
Qatar Armed Forces and delivery of
technical and pilot training in Qatar.
The contract is subject to financing
conditions and receipt by the Group
of first payment which are expected
to be fulfilled no later than mid-2018.

Under a contract signed in 2012,
the first eight Typhoon and all
eight Hawk aircraft for Oman
were delivered to the Sultanate of
Oman in the year. The remaining
four Typhoon aircraft are scheduled
to be delivered in 2018.

Under the seven-boat Astute
Class submarine programme,
we received the full £1.4bn
contract for the sixth
submarine from the Royal
Navy and the fourth boat,
Audacious, was launched.

BAE Systems
Annual Report 2017

Chairman’s
letter

The year in review
There is no doubt that 2017 was a successful
year and, most importantly, a year in which
the leadership baton was smoothly and
efficiently passed over to Charles Woodburn
as Chief Executive of the Group.

The Company’s long-term health and growth
were further underpinned by contracts
successfully secured during the year on major
programmes in our principal and international
markets. Notably, these included contracts to
supply frigates and submarines for the Royal
Navy, new and upgraded land vehicles for
the US, M777 howitzers for India, and strong
global demand for our world-class defence
and commercial electronic systems capabilities.
In December, we entered into a contract
to supply Typhoon aircraft to Qatar, subject
to financing conditions, and we remain
cautiously optimistic of securing further
aircraft sales to international customers.

Our cyber and intelligence capability
remains in high demand from government
and commercial customers around the world,
in a challenging market environment. It is
equally critical in ensuring best-in-class cyber
protection for our own defence platforms,
products and services. In recent years, we
have leveraged our capabilities into the
commercial sector, where on occasions
increased volume has been achieved at
the expense of value. This has now been
addressed through a change of management
and by refocusing the business into markets
where specialised skills provide competitive
edge and attractive returns.

During the second half of the year, our
organisation structure was simplified and aligned
with the demands of the business today.

“There is no doubt that 2017
was a successful year.”

Sir Roger Carr Chairman

Dividend (pence)

21.8p
+2%

2017

2016

2015

2014

2013

21.8
21.3
20.9
20.5
20.1

BAE Systems
Annual Report 2017

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Alternative performance
measure definitions

These changes acknowledge the increasing
requirement for in-country production by
our customers, the need to continuously hone
our competitive edge in all markets and the
emphasis that must be placed on efficient
execution of a strong order book.

For my part, as Chairman, I have been pleased
to witness the Company’s ability to manage
structural and leadership change in a
turbulent year.

It has been made clear to me by customers,
shareholders, employees and partners that
all have valued the preservation of seasoned
executive experience with the introduction
of fresh thinking and renewed energy in
the management team at a time of
geopolitical turbulence.

Relationships and reputation are, of course, key
to the success of any business. In this context,
it is pleasing that close liaison with governments
in the UK, US, the Gulf, Australia, India and
many other key international markets, continues
to ensure the strength of our relationships at the
highest levels and underline our commitment
to contributing to national priorities across
the globe. This will be particularly important
in 2018 in the pursuit of major business
opportunities in air, maritime, land and
cyber currently under negotiation.

The year ahead, therefore, remains
demanding, both in delivering the order
book we have and building an even
stronger backlog for the long-term future
of the business, but we approach it with
confidence and enthusiasm.

Our strategy
Whilst market conditions may fluctuate,
our strategy remains clear. We are an
international defence company operating in
the domains of air, maritime, land and cyber
with major business interests in the UK, US,
the Kingdom of Saudi Arabia and Australia.

We manage a balanced business of products
and services, employing world-class skills
in technology and engineering to meet our
customers’ current and future needs. We
use these capabilities primarily in the defence
sector but, where appropriate, extend our
reach into related and adjacent commercial
market areas.

We develop the skills necessary to supply
our customers by a commitment to
apprenticeships, graduate training and
life-long learning.

The cash we generate from the business
is used to pay our people, pay our taxes,
meet our pension obligations, invest in the
business through research and technology
and capital expenditure, reward shareholders
and make acquisitions, when appropriate.

To deliver this strategy, we have a well-defined
operational framework, underpinned by a
strong culture which seeks to be trusted,
innovative and bold.

Our culture
As a company, we focus not simply on how
much money we make but, more importantly,
how we make money. The tone is set at the
top and cascades throughout the organisation.

We are proud of what we do and committed
to serve and equip those that serve and
protect us. We aim to inspire and excel in the
work we do and the technology we develop.

The management ethos is to work with
customers in the spirit of partnership,
striving to go the extra mile in the products
we make and the service we offer,
recognising that we must earn everything
and are entitled to nothing.

As Chairman, I believe we should place
safety above profit, people above process,
and ethics above outcomes, in an environment
that promotes merit and values diversity.
Our Corporate Responsibility Committee
monitors performance in these areas.

Our Remuneration Committee focuses on
the importance of rewarding management
commensurate with performance and
creating a structure that is fair, transparent
and inclusive in recruiting, securing and
retaining the best talent.

We believe it is only by adopting these
principles that we can win the backing of
our stakeholders and the support of society
at large.

The Audit Committee continues to be the
check and balance that we have to ensure
we account conservatively, manage prudently
and manage risk effectively. In discharging
these responsibilities, the Committee works
closely with management, internal audit
and the external audit team to gather
their perspectives and ensure the integrity,
accuracy and veracity of our financial
reporting to a high standard.

BAE Systems
Annual Report 2017

Chairman’s letter
continued

At the heart of the business are the people
we employ and the talent we build from
apprentice to boardroom. As an international
leader in engineering and technology, we
believe we have a responsibility to develop
a deep pool of expertise through high-quality
training and apprenticeships, with some
2,000 apprentices and 500 graduates
currently in training in the UK.

Board and Executive Committee
With effect from 1 July, Charles Woodburn
succeeded Ian King as Chief Executive.
Ian retired after a career spanning more than
40 years at the Company, including leading
BAE Systems as Chief Executive since 2008.

Building a pipeline of talent and managing
succession at all levels in the business is, of
course, an essential part of strategic planning.
Our Nominations Committee consistently
reviews membership of the Board and
Executive Committee. In this respect, in 2017,
we were fortunate to recruit Revathi Advaithi
as a non-executive director bringing wide
international operational experience with
strong engineering and digital credentials,
and Karin Hoeing as Group Human Resources
Director and member of the Executive
Committee. As we look forward, beyond
the current year, we will continue to refresh
the Board and Executive Committee to ensure
our experience and skillset is fit for purpose
in a changing world.

To avoid complacency and in the pursuit
of excellence, we conduct rigorous annual
reviews of the Board with the employment
of an external advisor every other year. The
key findings of the 2018 Independent Board
Evaluation are outlined in the Chairman’s
Governance letter on page 72 of this report.
As a Board, we debate and review our
culture each year to ensure we continue to
treat everyone respectfully, trade responsibly,
act with integrity and govern scrupulously.

Summary
In summary, we have been pleased to deliver
another year of good performance with sales
of £19.6bn and underlying earnings per share
of 43.5p, underpinned by an order backlog
of £41.2bn.

Against the background of a strong Board,
and a refreshed and committed management
team, we are both content with the year’s
performance and positive about our future
prospects.

The Board therefore has recommended a final
dividend of 13p for a total of 21.8p per share
for the full year. Subject to shareholder
approval at the May 2018 Annual General
Meeting, the dividend will be paid on 1 June
2018 to holders of ordinary shares registered
on 20 April 2018.

Sir Roger Carr Chairman

Chief Executive’s
review

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“BAE Systems delivered a
good performance in 2017,
consistent with our
expectations for the year.”

Charles Woodburn Chief Executive

Group strategic
framework

Our
markets

Introduction
BAE Systems delivered a good performance
in 2017, consistent with our expectations for
the year. We are taking the actions necessary
to address costs and to meet our customers’
affordability challenges. Despite economic
and political uncertainties, governments in
our major markets continue to prioritise
defence and security, with strong demand
for our capabilities. We are investing in our
business, our people, and in the technology
and skills we need to drive the business
forward. With an improving outlook for
defence budgets in a number of our markets
and a solid foundation for medium-term
growth, we are well placed to generate
good returns for shareholders.

Since taking on the role of Chief Executive,
I have reiterated that we are a strong company,
with a number of key advantages, pursuing
the right strategy.

We have a broad geographic footprint and
diversified market positions. Importantly,
our track record of successful partnerships in
international markets to develop local industry,
employment and skills is now becoming a key
requirement to do business in those markets.

We have world-class technologies in the fields
of electronic warfare, autonomous systems,
advanced manufacturing, robotics and data
analytics, and we continue to invest in
research and development, often alongside
our customers, to identify and develop
emerging technologies. The speed of change
in technology means that we must continually
build on our technological advantage, and
attract and retain the right talent in order
to stay competitive.

It is important to recognise that in a tough,
competitive market, we need to become a
stronger, smarter and sharper organisation
to win new business and grow, which means
increasing our focus and efforts in three
priority areas:

Operational excellence
We have a number of major programmes
under way on which we are ramping up
production, so it is vital that we maintain
our focus on operational excellence by
delivering for our customers. There is simply
no better way to highlight our skills and
capabilities and, therefore, win new business.

BAE Systems
Annual Report 2017

Chief Executive’s review
continued

Competitiveness
Good progress has been made in making
the organisation more efficient over the
last few years, and there are further
opportunities with procurement and
enhanced collaboration at the forefront.

Technological innovation
We have a long heritage of developing
and integrating cutting-edge technologies
to create complex systems that give our
customers a capability advantage. The
accelerating pace of technological change
is a disruptive force and a key driver of
competitive advantage and, increasingly,
a determinant for our customers in
awarding new business.

Driving performance in these three areas
will be key for the development of the
business as we execute on our strategy
in 2018 and beyond.

2017 performance
US
After seven months under a Continuing
Resolution that maintained funding at the
prior year’s level, the fiscal year 2017 defence
budget ultimately rose by approximately
4%. Similarly, fiscal year 2018 has begun
under multiple Continuing Resolutions.
On 9 February 2018, Congress passed, and
the President signed, a budget agreement
that supports the medium-term planning
assumptions for our US businesses. This
budget agreement increases the budget
caps for two years, and extends the current
Continuing Resolution to 23 March 2018
to allow lawmakers to pass a fiscal year
2018 omnibus appropriations bill.

We see continued support for increased
defence spending in the President’s
recently-released fiscal year 2019 budget
request. This request maintains positive
momentum in funding for military readiness
and modernisation, and provides greater
near-term certainty. Our US-based portfolio
remains well aligned with customer
priorities and growth areas, such as the
ramp-up of production on a number of
our long-term programmes.

Our US electronics business delivered good
operational performance across our core
franchise positions in the high-technology
areas of electronic warfare, precision-guided
munitions, Intelligence, Surveillance and
Reconnaissance, and electro-optics.

BAE Systems has sustained its leadership
position in the US electronic warfare market
and production is ramping up to execute orders
across a number of programmes, some of
which are classified. As the electronic warfare
system supplier on the F-35 Lightning II
combat aircraft programme, we are increasing
production and are well positioned to meet
further increases in output rates over the
coming years to meet the requirements
of both US and international customers.
On F-15, upgrade programmes are contracted
and progressing for the US Air Force and
international customers.

The Group’s US-based combat vehicles
business is underpinned by programmes for
the manufacture of Armored Multi-Purpose
Vehicles and M109A7 self-propelled
howitzers, and Bradley upgrades which all
progressed in the year. In the amphibious
vehicle market, 16 prototypes have been
delivered to the US Marine Corps under the
Amphibious Combat Vehicle 1.1 programme.
We are one of two competitors for this
programme, with final down-selection
expected in 2018.

BAE Systems is a leading supplier of ship
repair services to the US Navy and continues
to adjust its workforce and facilities to meet
evolving demand. Additional dry dock capacity
at our San Diego shipyard became operational
in February 2017 and accepted its first ship
during the year.

Whilst market conditions remain highly
competitive and continue to evolve, our
US-based Intelligence & Security business
is focused on delivering on its contracts
and maintaining a high level of bid activity.

UK
Defence and security remains a priority for
the UK government. We expect this to be
reaffirmed in the National Security Capability
Review, and in the Modernising Defence
Programme, which was announced in
January 2018 by the Defence Secretary.

Transition arrangements after March 2019
will be important to enable companies to
prepare for potential changes in the regulatory
environment. As there is relatively limited
UK-EU trading and movement of EU nationals
into and out of BAE Systems’ UK businesses,
the resulting Brexit impact on the business is
likely to be limited, depending on the terms
of any transition and final agreements for
the UK’s future relationship with the
European Union.

We will support the government in achieving
its aim to ensure that the UK maintains its key
role in European security and defence
post-Brexit, and to strengthen bilateral
relationships with key partners in Europe. This
will be important for ongoing collaboration in
the development of defence capabilities.

In December, BAE Systems and the
Government of Qatar entered into a contract,
valued at approximately £5bn, for the supply
of 24 Typhoon aircraft. Alongside supplying
the aircraft, the agreement provides for the
supply of ground support to the Qatar
Armed Forces and delivery of technical and
pilot training in Qatar. The contract is subject
to financing conditions and receipt by the
Group of first payment which are expected
to be fulfilled no later than mid-2018.

Discussions with current and prospective
operators of the Typhoon aircraft continue
to support the Group’s expectations for
additional Typhoon contract awards. However,
there can be no certainty as to the timing of
these orders.

As a result of reducing production activity
on Typhoon and Hawk, and also taking into
account the changes to support requirements
as the Royal Air Force transitions from Tornado
to F-35 Lightning II, the business announced
in October a total proposed headcount
reduction of up to 1,400 roles over the
next three years.

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The Typhoon aircraft’s progression towards
the Royal Air Force Centurion standard will
enable transition of capability from Tornado
to Typhoon as the UK Tornado fleet is
scheduled to come out of service at the
end of the decade.

UK-based production of rear fuselage
assemblies for the F-35 Lightning II aircraft
increased to 82 in the year, with most of the
advanced manufacturing investment in place
to achieve the planned increase in production
volumes. In readiness for the arrival of the
UK’s first F-35 Lightning II aircraft in 2018,
good progress has been made on the support
facilities for the stand-up of the operational
service at RAF Marham in Norfolk.

In the maritime domain, there remains
pressure on the Navy’s near-term budgets.

On the aircraft carrier programme, HMS Queen
Elizabeth successfully concluded initial sea
trials and entered HM Naval Base, Portsmouth,
for the first time in August, with operational
handover to the Royal Navy in December.

Following contract award for the first batch
of three Type 26 frigates, worth £3.7bn,
production for the first ship, Glasgow,
commenced in July. The National Shipbuilding
Strategy announced in September committed
to all eight Type 26 frigates to be built in our
Scottish manufacturing facilities. In October,
we announced a teaming agreement with
Cammell Laird for their bid for the UK Ministry
of Defence’s proposed Type 31e general
purpose frigate programme.

Submarine activity is increasing with the
Astute and Dreadnought class submarines
now both in production and major
redevelopment of the Barrow site to deliver
the Dreadnought programme under way.

Our strategy in action

iMOTR™, a new
product designed
to improve radar
accuracy

In August, our Intelligence & Security
business launched a new product, iMOTR™.
This innovative, mobile, multiple-object
tracking radar uses commercial off-the-shelf
solutions to provide military test and
evaluation ranges with a higher degree of
accuracy in tracking the time, space and
position information for several objects in
flight compared with current radars.

The iMOTR™ solution, developed over
two years with Group-funded research
and development expenditure, features
enhanced capabilities that offer more precise
flight path tracking for objects travelling
close to the ground and allow tracking
information to be shared in real time with
other radars or data collection sensors.
These added capabilities will allow our
customers to assess larger, more complex
scenarios that are critical to developing the
next generation of solutions to address
national security threats.

Group strategic
framework

More online
baesystems.com

BAE Systems
Annual Report 2017

Chief Executive’s review
continued

International
The Saudi Arabian In-Kingdom Industrial
Participation programme continues to make
good progress and we have commenced
discussions with the new Saudi Arabian
Military Industries (SAMI) organisation to
explore how we can collaborate to deliver
further In-Kingdom Industrial Participation.
All of these activities are aligned with our
long-term industrialisation strategy, as well
as the Saudi Arabian government’s National
Transformation Plan and Vision 2030.

On the Salam Typhoon programme, all
contracted 72 aircraft have now been delivered
and the Typhoon support contracts are
operating well, exceeding the baseline flying
programme contracted with the customer.

Discussions with the Saudi Arabian customer
through 2017 resulted in contractual
agreements under the Saudi British Defence
Co-operation Programme being formalised.
These provide support services to the Royal
Saudi Air Force and Royal Saudi Naval Forces
for a further five years to 31 December 2021.

In Australia, the business is underpinned by
long-term support contracts, whilst activity
progresses on two major bid opportunities.

Firstly, as one of two tenderers for the
Land 400 Phase 2 Combat Reconnaissance
Vehicle programme, we have completed
the Risk Mitigation Activity contract and
submitted our final proposal, with final
preferred tender selection anticipated in
the first half of 2018.

Secondly, our initial tender response for
the Commonwealth’s nine-ship SEA 5000
Future Frigate programme was submitted
in August and we anticipate a preferred
tender selection in 2018.

The MBDA joint venture has continued
to win orders in both domestic and export
markets. The increase in business volumes
has resulted in the requirement to expand
production capacities in the UK and France.

Our strategy in action

Advanced
manufacturing
facilities for
F-35 Lightning II

In 2017, we demonstrated our military aircraft
manufacturing expertise as we achieved a
significant milestone on the F-35 Lightning II
programme. With the delivery of the 318th
rear section of the aircraft during the year,
10% of the projected global customer aircraft
requirement has now been produced. The
achievement of this milestone has only been
possible through investments made in our
advanced manufacturing facilities and our
close working relationship with the supply
chain. Our focus in these areas will enable
us to meet the ramp-up in production on
the programme in the coming years.

As a key partner on F-35 Lightning II,
a premier defence programme, we are
responsible for approximately 15% of the
work on each aircraft, excluding propulsion,
and we play a major role in the programme
across multiple markets, including the US,
UK and Australia.

Group strategic
framework

More online
baesystems.com

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Cyber security
Applied Intelligence achieved sales growth
from the continued delivery of national
security solutions for the UK and international
governments. In addition, we have deployed
anti-fraud, regulatory compliance, and cyber
security products and services across a large
range of commercial customers.

In 2017, Applied Intelligence reported an
underlying loss of £61m, including a £24m
restructuring charge. The first half loss of
£27m was followed by a reduced second
half loss, before the restructuring charge,
of £10m as cost reduction actions started
to deliver bottom-line benefit. A goodwill
impairment of £384m was taken in 2017
reflecting the future level and timing of
expected returns from the business.

Effective 1 January 2018, the business
changed its operating model to deliver a
more targeted portfolio of products and
services focused on customers within three
core business units: Government; Financial
Services; and Technology & Commercial.
The restructuring will enable a greater
focus on customer needs and higher levels
of operational efficiency, in the commercial
business, that will accelerate improvements
in competitiveness and profitability.

Balance sheet and capital allocation
The Group’s balance sheet is managed
conservatively, in line with its policy, to retain
its investment grade credit rating and to
ensure operating flexibility. Consistent with
this approach, the Group expects to continue
to meet its pension obligations, invest in
research and technology and other organic
investment opportunities, and plans to
pay dividends in line with its policy of
long-term sustainable cover of around
two times underlying earnings and to make
accelerated returns of capital to shareholders
when the balance sheet allows. Investment
in value-enhancing acquisitions will be
considered where market conditions are
right and where they deliver on the
Group’s strategy.

Pension schemes
The 2017 UK triennial pension funding
valuations concluded in November, with the
aggregate funding deficit as at 31 March 2017
across the UK schemes at £2.1bn. The deficit
recovery plan on the Group’s largest pension
scheme, the BAE Systems Pension Scheme,
continues to March 2026, with the other
schemes now with reduced repayment
periods or fully funded.

The UK funding deficit at 31 March 2017 is
some £3bn lower than the accounting deficit,
using like-for-like mortality assumptions and
asset values at 31 December 2017, largely due
to lower liabilities as a result of the discount
rate assumption based on the expected returns
on the investments held by the schemes.

Research and technology
BAE Systems has developed some of the
world’s most innovative technologies and
invests in research and development to
generate future products and capabilities.
We embrace disruptive technology, drive
innovation and invest appropriately both
on a self-funded basis and in conjunction
with our customers, universities, and small
and medium-sized enterprises. Company-
funded research and development contributes,
along with customer funding, in driving
focused investment in areas such as defence
and commercial electronics, military aircraft,
precision weapons and cyber security.

Responsible business
We continue to build a culture where our
people are empowered to make the right
decisions and know where to go to seek
help or guidance. During 2017, we rolled
out further ethics training across the Group
to support employees and, in January 2018,
launched our revised Code of Conduct.

The safety of our employees, and anybody
who works on, or visits, our sites, remains
a key priority. Our safety culture and our
employees demand high standards for all
aspects of health and safety. In 2017, there
was a 3% reduction in the Recordable Accident
Rate and a 28% reduction in the total number
of major injuries recorded as we continued to
focus on reducing risk and embedding safety
culture to drive improvement.

Recruiting and retaining talented people
is a key priority. We want every employee
to reach their full potential within a diverse
and inclusive work environment. We have
programmes in place across the business to
support strategic workforce planning, career
development and retention, as well as to
improve diversity and inclusion.

Organisational changes
In October, we announced a restructure of
our operations outside of the US-managed
business in support of our three priorities
of delivering operational excellence, honing
our competitive edge and accelerating our
technology innovation. The new operating
model, effective 1 January 2018, will simplify
our management structure to create
strengthened Air and Maritime reporting
segments, whilst changes to our UK-based
Applied Intelligence cyber security business
are focused on meeting customer needs and
accelerating improvements in competitiveness
and profitability.

Our 2017 results are re-presented on page
56 to reflect the organisational changes and
our segmental guidance for 2018 is presented
on page 57 on a consistent basis. On pages
58 and 59, we summarise the short- to
medium-term prospects for our five principal
reporting segments from 1 January 2018.

Summary
Our business benefits from a large order
backlog, strong franchises and established
positions on long-term programmes in the
US, UK, Saudi Arabia and Australia. Our
strategy is clear and well defined, with
governments in our major markets continuing
to prioritise defence and security, with strong
demand for our capabilities. Through
execution of a consistent strategy, we are well
placed to maximise opportunities, deal with
the challenges and continue to generate good
shareholder returns.

Charles Woodburn Chief Executive

BAE Systems
Annual Report 2017

Group strategic
framework

Our strategy is comprised of five key long-term areas of focus that will
help us to achieve our vision and mission. This strategy remains relevant
and consistent. We have updated our Group strategic framework to reflect
our renewed focus on becoming a stronger company, able to win and
grow in a tougher, competitive market.

The mission statement has evolved and aims
to set out more clearly our purpose – why
we exist – and the importance of our work.
It emphasises that we put our customers first,
giving them the critical capabilities and
technological edge they rely on to protect
security and prosperity around the world.

We have also redefined our strategic
objectives to become three strategic priorities
from 2018, providing greater alignment
between our strategy and the near-term
business objectives all our employees
work to.

Our vision
To be the premier international defence,
aerospace and security company

Our mission
To provide a vital advantage to help our customers
protect what really matters

Our strategy
Maintain and grow our defence businesses
Continue to grow our business in adjacent markets
Develop and expand our international business
Inspire and develop a diverse workforce to drive success
Enhance financial performance and deliver sustainable growth in shareholder value

Drive operational
excellence

Our strategic priorities
Continuously improve
competitiveness and efficiency

Advance and further
leverage our technology

Our values are Trusted, Innovative and Bold

Our strategy in action

15
iMOTR™, a new

product designed
to improve radar
accuracy

16
Advanced

manufacturing
facilities for
F-35 Lightning II

36
First flights of

our new Head-Up
Display

39
Unmanned air

systems adaptability
and mission
efficiency

40
Providing anti-money
laundering protection
to one of the UK’s
largest banks

42
Upgrading

and securing
communications
capabilities on
US Army vehicles

44
Nearing Full-Rate
Production on the
Paladin Integrated
Management
programme

47
A new concept

for full-spectrum
air defence

48
First Typhoon

and Hawk aircraft
delivered to the Royal
Air Force of Oman

51
Production of

Type 26 frigates
for the Royal Navy
commences

52
Supporting the

operational
capabilities of the
Royal Saudi Air Force

54
Upgrading

Australia’s radar
defence network

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Group strategic
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580

Principal markets

Our
markets

BAE Systems has leading positions in its principal
markets – in the US, UK, the Kingdom of Saudi Arabia
and Australia – as well as established positions in a
number of other international markets. We are one
of the largest global defence companies.

Supporting our customers
Our strategy is focused on providing a
vital advantage to our customers across US,
UK and international markets. In particular,
we have built strong positions aligned with
our core defence platforms to support our
customers in our four principal markets.
These principal markets – the US, UK, the
Kingdom of Saudi Arabia and Australia –
have been identified as having a significant
and sustained commitment to defence and
security. BAE Systems has established strong
and enduring relationships in these markets
and is recognised as playing a key role in the
industrial capability of each of these countries.

Our unique position and capabilities
Our strong position in the US through the
Special Security Agreement, together with
our standing as the leading defence contractor
in the UK, provides us with unique capabilities
that can be leveraged across the Group to
support our customers. In addition, our diverse
portfolio, including leading cyber capabilities,
provides us with a comprehensive offering for
our customers, with cyber now recognised as
a defence domain in its own right.

Responding to a changing character
of conflict
Our business continues to respond to
geopolitical and technology trends that will
influence the future character of conflict and
shape our customers’ requirements. Our
excellence in complex engineering, developing
cutting-edge technology and seeking
innovative solutions enables us to respond
to our customers’ requirements for greater
agility, global reach, and advanced technology
products and services.

International growth aspirations
Following a number of years of defence
spend contraction, global defence markets
are stabilising, with a number of nations
returning to growth in response to an
increasingly uncertain security environment.

We continue to recognise the importance and
requirements of our international customers.
We have a significant international presence,
one of the broadest amongst the defence
primes, supported by long-standing customer
relationships and diverse capabilities, leveraged
across the Group.

Accessible global defence markets1

Top ten global defence markets accessible
for business by the Group ($bn)

1. US

2. India

3. UK

4. Saudi Arabia

5. Japan

6. France

7. Germany

8. South Korea

9. Australia

10. Brazil

53
51
50
47
46
35
34
28
26

Source: 2016 US budget as shown in the Department of Defense Fiscal Year 2018 Budget
Request and, outside the US, IHS Jane’s Defence Budgets (based on 2016 total defence
budgets and constant 2017 US dollars).

BAE Systems’ global defence market position

Top ten global defence
contractors’ revenue ($bn)

20
20

1. Lockheed Martin

2. Boeing

3. BAE Systems

4. Raytheon

5. Northrop Grumman

6. General Dynamics

7. Airbus

8. L3 Technologies

9. Leonardo

10. Thales

9
9
8

Source: Defense News Top 100 for 2017 (based on 2016 numbers). Exchange rate applied
to BAE Systems is $1.35/£1.

1. Markets inaccessible for business by BAE Systems are excluded.

BAE Systems
Annual Report 2017

Our markets
continued

Sales1 by destination

A US

B UK

C Saudi Arabia

D Australia
E Other international markets2

39%

21%

16%

21%

1. Revenue plus the Group’s share of revenue

of equity accounted investments.

2. Includes £0.9bn (4%) of sales generated under the
Typhoon workshare agreement with Eurofighter
Jagdflugzeug GmbH.

The US continues to represent
the single largest defence
market in the world and
BAE Systems remains a top
ten defence supplier in the US.

BAE Systems remains the
largest defence company
in the UK, with strong and
long-standing relationships
with the Ministry of Defence.

After seven months under a Continuing
Resolution that maintained funding at the
prior year’s level, the fiscal year 2017 defence
budget ultimately rose by approximately 4%.
Whilst the fiscal year 2018 budget remains
under a Continuing Resolution, the bipartisan
budget agreement passed on 9 February 2018
would increase the US defence budget by
approximately 10% over current levels,
reflecting continued growth in defence
spending to $700bn (£518bn) for the fiscal
year ending 30 September 2018. This budget
agreement increases the budget caps for two
years and extends the Continuing Resolution
to 23 March 2018 to allow lawmakers to pass
a 2018 spending bill.

The US defence budget is expected to
experience continued growth.

The portfolio of the US-based business is
well aligned with customer priorities and
growth areas, which include combat vehicles,
precision-guided munitions, naval ship repair
and modernisation services, electronic
warfare, and space security. BAE Systems
has strong positions on a number of premier
defence programmes, including F-35
Lightning II, Paladin self-propelled howitzer
and Armored Multi-Purpose Vehicle, and we
are a leader in advanced electronic systems,
real-time intelligence and analysis, naval gun
systems and artillery systems.

In addition to our position on US defence
programmes, the US-based portfolio is also
focused on Foreign Military Sales and direct
international sales to allied nations.

We continue to deliver on existing commercial
programmes, including engine and flight
controls, and electric drive propulsion systems.

The UK is Europe’s largest defence market
and, after a period of budgetary decline,
defence spending has stabilised. The 2017
Spring Budget reinforced previous
commitments to increase defence spending,
as well as the continued pledge to maintain
spending at 2% of GDP. This provides the
context for the Modernising Defence
Programme announced in January 2018
by the Defence Secretary, the outcome
of which is aimed to be announced by
the summer of 2018.

In light of the UK’s referendum decision to
leave the EU, the government has signalled
its intent to continue to play a major role in
defence and security co-operation in Europe.

The UK government provides vital support
in the pursuit of international export
opportunities, recognising the value that
BAE Systems and the defence industry
contributes to the UK economy.

BAE Systems plays an important role in
providing capabilities to support the UK
government and armed forces across the
air, maritime, land and cyber domains.
Our involvement across the major UK
defence programmes, including Typhoon
aircraft, Queen Elizabeth Class aircraft
carriers, Type 26 frigates, and Astute and
Dreadnought Class submarines, maintains
our diverse skillsets, allowing us to provide
a vital advantage to our customers.

Our cyber business has a focused
investment strategy to ensure that we
support our commercial and government
customers as cyber security becomes an
increasingly important part of a sophisticated
and persistent threat environment.

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International

The Kingdom of Saudi
Arabia continues to be
a leading military power
and one of the largest
defence markets globally.

Saudi Arabia has a strong commitment
to defence and security spending driven
by regional security instability.

Saudi Arabia’s Vision 2030 strategy to
promote In-Kingdom industrialisation and
diversification away from reliance on oil
continues to shape our activities in support
of Saudi Arabia’s national objectives of
technology development, local skills, and the
development of indigenous defence industry
and capability. Through the restructuring
of the Group’s portfolio of interests in a
number of industrial companies, building
on our strong history in Saudi Arabia, we
are working in partnership to deliver these
priorities and we have commenced discussions
with the new Saudi Arabian Military Industries
(SAMI) organisation to explore how we can
collaborate to deliver further In-Kingdom
Industrial Participation.

We remain well placed as a leading
in-country contractor in support of air
defence platforms and training systems
for the Royal Saudi Air Force, as well as
support for mine countermeasure vessels
for the Royal Saudi Naval Forces.

BAE Systems is one of the
largest defence companies
in Australia, with strong
activities across all domains.

Regional instability and the pace of military
modernisation in the Asia-Pacific region
continue to drive the government’s
commitment to defence spending, with
major recapitalisation programmes expected
in the air, maritime and land domains.

In addition to a number of key priorities
highlighted in the Australian Defence White
Paper, the government indicated its intent
to grow defence spending by committing to
spend 2% of GDP by 2020/21. As part of
this commitment, the government has made
clear its objective to build a stronger and
more sustainable domestic defence industry,
ensuring that over time the nation has in place
a sovereign industrial base that has the skills,
knowledge and capability to manage and
support the platforms and systems it has
invested in.

We are well positioned to support Australia’s
initiative for growing domestic capabilities,
through an established business and a
workforce based at more than 25 sites across
the country, in addition to our ability to
leverage our international positions within
the Group.

We provide support to the Australian
Defence Force through engineering,
programme management and sustainment
solutions, including Jindalee Operational
Radar Network upgrade, Hawk Lead-In
Fighter support, F-35 Lightning II sustainment,
and Anzac frigate support and upgrade.

BAE Systems has many strong
and enduring relationships in
other international markets.

Regional security tensions, the growing
emphasis on indigenous capabilities and
varying economic conditions continue to
influence defence spending internationally.
With high growth in Asia-Pacific and the
Middle East, BAE Systems has developed
relationships with partners and customers
in a number of countries, working directly
with local industry.

In Malaysia, we are a supplier to the armed
forces, both directly and through joint
ventures. We have set up a Global Engineering
Centre in Kuala Lumpur focusing on local
delivery and global support of our cyber and
financial crime detection services.

We have signed a contract to provide Typhoon
aircraft to Qatar, subject to financing conditions
and receipt by the Group of first payment. We
provide support to Typhoon and Hawk aircraft
and naval vessels supplied to Oman.

In 2017, we signed a contract to collaborate
on the first development phase of an
indigenous fifth-generation fighter jet,
TF-X, for the Turkish Air Force. Our footprint
in Turkey is growing through our armoured
combat vehicles joint venture, FNSS.

We have a strong presence in Sweden
through our BAE Systems Hägglunds business
supplying and supporting tracked vehicles
for international customers.

Our US businesses export combat vehicles
to international customers, including Brazil
and Japan.

In India, we have long-established relationships
with local industry partners. We have a strong
partnership with Hindustan Aeronautics Limited
on Hawk aircraft and, more recently, with
Mahindra Defence Services on M777 howitzers.

Through our shareholding in MBDA, our
position in the missiles and missile systems
market continues to grow in European and
other international markets.

BAE Systems
Annual Report 2017

How our
business works

We provide advanced technology defence, aerospace
and security solutions that aim to give our customers
a competitive edge.

We aim to deliver…
…products and services that
provide a vital advantage to
help our customers protect
what really matters:
Our largest customers are governments,
but we also sell to large prime contractors
and commercial businesses. We take on and
solve some of our customers’ most complex
and challenging engineering and technology
projects to give them a competitive edge,
helping them protect what matters most.

Our key products
and services

We create value through…

– Established positions on long-term programmes

– Strong and collaborative relationships with

governments and large commercial customers

– Our position as a trusted supplier allows us

to identify emerging trends and opportunities
for growth

… identifying

customer needs

… services, sustainment

and upgrade

– Understanding our customers to provide

competitive services that add value

– Technical expertise acquired through product

design and development

– Flexibility and responsiveness to maximise
availability of our customers’ products

Our business model is underpinned by…
…our values
Our values of Trusted, Innovative and
Bold are at the heart of everything we
do and provide the right focus and
framework for the Company to aspire
to and live by, now and into the future.

…our people
We have a diverse range of talented
people. We invest in education and
training for our existing workforce,
including apprenticeship and graduate
programmes, and work with education
sectors to help shape the workforce
of the future.

Group strategic
framework

Our
people

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– Strategic focus on technological capabilities

which drive innovation

– Partnerships with small and medium-sized
enterprises and academia to develop new
solutions

– Early-stage research which is self-funded and
then further developed with customer funding

– Critical skills in identifying risk, whilst

focusing on value for customers

– Record of delivery on complex projects

– Partnerships with local companies
supporting economic development

… research and
development

… bidding and
contracting

… advanced manufacturing,

commissioning and integration

… designing and
developing

– Investment in advanced manufacturing facilities

and techniques

– Engineering expertise in developing
cutting-edge products and services

– Focus on operational excellence with safety as

a key priority

– Management of complex projects and

collaboration across global supply chains

– Product safety embedded in our designs
to maximise safety in the construction
and use of our products

– Products designed to be easily maintained

and upgraded as technology evolves

…our technology
We focus on technology innovation and
engineering excellence, prioritising and
investing in next-generation research
and development programmes to deliver
competitive solutions to meet our current
and future customers’ needs.

…our responsible behaviour
We take pride in managing our operations
responsibly and we require our employees
to conduct business in an ethical way under
our Code of Conduct to enable us to earn
and maintain the trust of our stakeholders.

…our governance framework
Our robust governance framework sets
out the way we do business. It details our
policies and processes which, together with
our culture, enable us to deliver operational
excellence in a clear, accountable and
consistent way.

Our
technology

Corporate
responsibility

Board
governance

BAE Systems
Annual Report 2017

How our business works

Our
people

Recruiting and retaining the best people from
the widest possible talent pool is a key priority
for BAE Systems.

Gender diversity

Board1

Senior managers2,3

Total employees4,5

Male
7
64%

300
86%

60,000
79%

Female
4
36%

50
14%

16,000
21%

Age diversity4,5

60 years
and older
8,000

50–59
years
23,000

24 years and
younger
5,000

25–34
years
15,000

35–49
years
25,000

We value our employees and the contribution
they make, and we are committed to creating
an inclusive culture where everyone can fulfil
their potential. This is essential if we are to
attract and retain talented people, and drive
creativity, innovation and our ability to solve
our customers’ complex challenges.

Our approach
Our human resources strategy prioritises
employee welfare and development,
empowerment and knowledge transfer.
Our Group Human Resources Director
reports directly to our Chief Executive and
chairs the HR Council to ensure that our
strategy supports the Integrated Business
Plan and People Policy. The Group’s strategy
is dependent on its ability to recruit and
retain people with appropriate talent and
skills, and we have identified this as a
principal risk (see page 71).

Our People Policy sets out our people
management expectations, including
with regard to diversity and inclusion,
training and development, reward and
employee engagement.

Diversity and inclusion
We are committed to creating an inclusive
environment with a diverse workforce, which
reflects the communities in which we work.

Our Chief Executive leads the Enterprise
Diversity and Inclusion Council which has
three key priorities:

– build a culture of inclusion and inclusive

leadership globally;

– drive a heightened awareness and
education of diversity and inclusion
across the organisation; and

– foster diversity and inclusion throughout

the organisation.

Our businesses are tasked with developing
strategies and programmes that support
these priorities and we are implementing
measures to track progress.

1. At 1 January 2018. At 31 December 2017, the Board
comprised seven male (70%) and three female (30%)
directors.

2. Senior managers are defined as employees (excluding

executive directors) who have responsibility for planning,
directing or controlling the activities of the Group or a
strategically significant part of the Group and/or who
are directors of subsidiary companies.

3. Excludes executive directors.
4. Excluding share of equity accounted investments and

rounded to the nearest thousand employees.

5. See summary of Deloitte LLP assurance on page 65.

We are determined to bridge the historical
gender gap in our industry by encouraging
more women to join the Company and
promoting development so that we ultimately
increase the number of women in senior
executive positions.

We have employee-led networks supporting
Lesbian, Gay, Bisexual, Transgender and Allies
called OutLink in the UK and US. In the UK,

this has resulted in a jointly developed
Transgender Policy being established in 2017.

Identifying and recruiting talent
We need to recruit a diverse range of
professionals to help solve our customers’
challenges, including engineers, designers,
software developers and project managers.
We look to draw people from a wide range
of backgrounds and cultures.

We have been focusing our recruitment
on the next generation to replace the skills
and experience we are losing as our
workforce retires, to mitigate Science,
Technology, Engineering and Mathematics
(STEM) skills shortages, and to accelerate
diversity within our leadership. For example,
we have partnered with Cranfield University
to provide the UK’s first-ever Masters-level
post-graduate engineering apprenticeship
scheme, with 76 BAE Systems engineers
starting the programme in January 2018.

Training and development
We want every employee to reach their full
potential and feel rewarded for what they do.
We support this through our comprehensive
career frameworks, development programmes
and the breadth of our operations. Continual
improvement of competence and skills transfer
helps us to continue to develop world-leading
technologies that give our customers a
critical advantage.

Our focus on professional development
throughout our employees’ careers supports
their personal and professional growth, and
ensures that we have the skills to meet our
customers’ current and future requirements.

Supporting STEM
workshops in Oman
In 2017, our UK and Omani engineering
graduates ran STEM workshops at schools in
Adam and Nizwa, close to the Adam air base,
home to Typhoon aircraft in Oman. The students
participated in hands-on exercises introducing
them to engineering, and listened to our
graduates’ experiences of their time abroad
and with BAE Systems in Oman.

Engineering and technological disciplines are
core to the future plans for Oman’s national
economy. The workshops undertaken by
BAE Systems in Oman continue to have the full
backing of the Omani Ministry of Education.

BAE Systems
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Recruiting the next generation
Our apprenticeship programme is one of the biggest and most progressive in the UK, and is rated
‘outstanding’ by the Office for Standards in Education (Ofsted). In 2017, we recruited 576 apprentices
and trainees, 190 graduates and 79 interns. By the end of 2017, we had approximately 2,000 apprentices
and 500 graduates in training across our UK business, approximately 6% of the workforce.

Our 2017 apprentice intake figures provided our best ever diversity and inclusion statistics, with 27% female
and 5% black, Asian and minority ethnic. From a social mobility perspective, in 2016, 18% of our apprentices
were recruited from the top 20 most deprived wards in England.

Social and community matters
It is important to us and our employees
that we give back to the communities
where we have a presence and can make
a positive difference.

Globally, during 2017, we contributed
more than £11m5 to local, national and
international charities and not-for-profit
organisations through our Community
Investment programme.

Community investment management
Our Community Investment Policy requires us
to develop and maintain a Global Community
Investment Strategy which outlines how we
support our primary focus areas, where a
measurable impact to the community can
be demonstrated.

Our primary focus areas are:

– Customer – supporting active service
personnel, veterans and their families;

– Education – inspiring young people to
consider STEM subjects and careers; and

– Local community – working to support
the communities in which we operate.

Community investment funding is not paid
to third-party fundraisers or directly to
individuals. As part of our due diligence
procedures, prior to a charitable sponsorship
or charitable donation being committed, the
charity is vetted through a recognised external
organisation to ensure that the funding will
be used for charitable purposes.

To avoid the risk of conflicts of interest, any
community investment activity is tested against
the principle that it does not place, or does
not appear to place, actual or potential
customers, suppliers or government officials
under any obligations.

The Global Community Investment Committee
reports to the Executive Committee on all
community investment activities, including
employee fundraising activities.

The impact of the work we do
We have strong ties with armed forces charities
and organisations that assist serving personnel,
veterans and their families. In the UK, we
are proud to be a founder donor (£5m over
five years) to the Defence and National
Rehabilitation Centre due to open in 2018.

Volunteering is important to us and our
employees, so we enable and encourage
it to be identified as a personal
development goal.

In the US, during the 2017 Military Appreciation
Month integrated campaign, ‘Remember.
Honor. Support.‘, employee donations to
selected organisations were double-matched
by the Company (up to $5,000 per employee)
for a total of nearly $180,000 (£133,000).

Reward
We provide our employees with competitive
reward packages which include a range of
benefits, and we recognise individual and
team successes.

The UK government has introduced gender
pay gap reporting regulations for companies
with more than 250 employees. For 2017, the
average gender pay gap for our UK workforce
was 11.2%, which is lower than the current
UK national average of 18.1%. We have a
gender pay gap because we employ around
four times more men than women and a
greater proportion of our senior leadership
team is male. This trend is not unusual for
companies like ours which employ large
numbers of people with qualifications in
STEM-related fields. With the number of
women who study and work in these fields
significantly less than the number of men,
we recruit from a much smaller pool of
female talent. We continue to work hard
to increase the number of females we
employ to improve our gender balance
and become a more diverse organisation.

Engagement
Effective engagement enables our
employees to contribute to improving
business performance and helps us to gauge
our success in creating an environment in
which everyone can fulfil their potential.

We encourage employees to become
shareholders in BAE Systems and, in some
markets, offer share schemes to support this.

We keep employees informed about what
is happening across the business, including
Company results, major business decisions
and other matters which affect them, using
a variety of media, including our intranet and
e-mail, through podcasts, newsletters and
leadership blogs, and also through team briefs
and team meetings where we seek to listen
to employees’ views and opinions. Employees
have the opportunity to share their views
through our employee surveys.

We seek to maintain constructive relationships
with our trade unions in the UK and Australia,
and our labour unions in the US. We have
structures in place to work with trade union
representatives in our local markets, where
it is appropriate and legally acceptable.

An outcome of our Community Investment
Policy is that each market develops its own
programme in support of the Global
Community Investment Strategy and which
is relevant to their lines of business, charitable
needs and culture.

BAE Systems
Annual Report 2017

How our business works

Our
technology

We leverage our technology and engineering
capabilities and invest in research and development
to deliver competitive solutions for our customers
now and in the future.

Research and development expenditure1

£1.7bn

(2016 £1.5bn)

Our approach
Technology and innovation are central to our
business; they underpin our strategy and the
development of our products and services.

We scan emerging technologies from
around the world to assess their potential for
application in defence and security. We develop
embryonic technology before selecting
technologies to mature for use in our products
and services. To do this, we work across our
business and we work with our customers,
academia and other industry partners. In some
cases, we will acquire other organisations to
secure exclusive access to technologies that
are critical for our future.

We also work with potential overseas partners
as part of our international campaigns and this
can be a major discriminator in some markets.
An example of this is our participation, for the
first time, in a technology symposium with
Singapore’s Defence Science and Technology
Agency (DSTA) in 2017. Our hope is that this
will be the first step in working with DSTA to
identify and prioritise areas of technology that
we can jointly explore for future collaboration.

Our people are encouraged to innovate
and embrace disruptive technologies focused
on those which will ensure our customers are
equipped to face present and future threats.
We look for ways that technology can give
our customers a competitive edge.

We assess the utility of our existing
technology to determine if we can create
value through licences and sales of rights
to other organisations.

Our investment
Our strategic thinking informs where we invest
our research and development (R&D) funding
and resource. This in turn helps us to secure
customer funding from organisations such
as the UK Ministry of Defence, the Defense
Advanced Research Projects Agency (DARPA)
and the US military service laboratories to take
the development of the technology to the
next level.

We target investment in customer priority
areas and in programmes that will give us a
competitive advantage. Our R&D programmes
are designed to improve the capability and
performance of our products and services,
reduce the cost of production, and provide
customers with efficiency savings and lower
through-life costs.

In 2017, we spent £1.6bn (2016 £1.4bn) on
R&D, of which £238m (2016 £206m) was
funded by the Group. In addition, the Group’s
share of the R&D expenditure of its equity
accounted investments in 2017 was £0.1bn
(2016 £0.1bn).

Protecting our investment in new technologies
is important and we have a portfolio of patents
and patent applications covering approximately
2,000 inventions internationally.

We look to make value-adding acquisitions in
emergent new technologies or in technologies
that will accelerate our R&D programmes
and, in 2017, we completed the acquisition
of IAP Research, Inc., a US engineering
company focused on the development and
production of electromagnetic launchers,
power electronics and advanced materials.

Laser Directed Energy Weapons – changing the nature
of warfare
Recognising the potential for Laser Directed Energy Weapons (LDEWs) to change the nature of
warfare, we are leveraging our engineering expertise across our UK and US businesses to accelerate
the development and introduction of laser capabilities.

Using focused light energy, LDEWs could be used in a range of operations across the air, maritime
and land domains, and our aim is to show our customers the potential capabilities of these weapons,
whilst prioritising safety and affordability.

We are collaborating with the university community to consider how to protect our platforms
from LDEWs and how we can shape our future platform designs to ensure protection is built in
to their development.

1. Including share of equity accounted investments.

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Cobotics – delivering
manufacturing advantage
Traditional manufacturing processes separate
the complex tasks performed by humans from
the simple, repeatable tasks performed by robots.
In contrast, cobotic systems are designed for
humans to work collaboratively with robots,
allowing us to merge the efficiency and
repeatability from the robot with the skill
and dexterity from the human operator.

Our ongoing development of cobotic technology
is focused on how we can provide more agility
in the manufacturing environment, increase
productivity, reduce costs and deliver improvements
in safety. Advances in sensor technology, robotics
design and machine learning will increasingly
enable humans to work safely alongside machines
without stopping the production line. Our aim is
to produce a system with the ability to adapt to
the user interfacing with it, thereby becoming the
ultimate manufacturing assistant.

Chief Technology Officer
Technology is a key priority for our business
and a new Chief Technology Officer (CTO)
was appointed at the start of 2018 to focus
on our investment in, and development
and exploitation of, technologies across
our products, services and operations.
Nigel Whitehead, a member of the Executive
Committee, assumed the role of CTO and,
working with the BAE Systems, Inc. business,
he will also oversee functional collaboration
across the Group on technology, IT and
digital strategy; manufacturing; engineering;
support; and project management.

– Autonomy – investing in the development
and integration of autonomous systems
technologies. They will play an increasingly
important role in future conflict by removing
armed forces personnel from dull, dirty
and dangerous tasks while ensuring humans
remain in control, continuing to make
critical military decisions.

– Laser Directed Energy Weapons –
commencement of a programme to
develop a laser weapon integration
capability and accelerate its introduction
into operational service.

– Advanced manufacturing – positioning

our manufacturing capability to meet future
product and platform demands through
the development and exploitation of novel
materials and advanced manufacturing
technologies.

Our areas of focus
Today, there are BAE Systems technologies
operating from the depths of the ocean to
the far reaches of space. However, the
technologies that have brought us to where
we are today will not see us through the next
decades. This is why we are investing in key
technologies that will be important for our
customers in the future and which will bring
value to our business over the coming years.

Areas of focus include:
– Big data – developing technologies and
capabilities that allow us to analyse and
deduce relevant information from vast
amounts of data. This is of growing
importance for both the defence and
commercial sectors.

– Stealth – continuing to invest in the
development of materials, design
approaches, manufacturing techniques
and support processes that minimise the
observability of our military products.
– Electronic warfare – developing this

advanced technology to help pilots identify,
monitor, analyse and respond to potential
threats. We are also investing to improve
our efficiency and capacity in defence
electronics production.

BAE Systems
Annual Report 2017

Group financial
review

We monitor the underlying financial performance of the Group
using the alternative performance measures defined on page 6.
These measures are not defined in IFRS1 and, therefore, are
considered to be non-GAAP2 measures. Accordingly, the
relevant IFRS1 measures are also presented where appropriate.

Peter Lynas Group Finance Director

Financial performance

Measures as defined by the Group

Measures defined in IFRS1

Sales

KPI

Revenue

£19,626m (2016 £19,020m)

£18,322m (2016 £17,790m)

Underlying EBITA

KPI

Operating profit

£2,034m (2016 £1,905m)
30 KPI
BONUS

Underlying earnings per share

43.5p (2016 40.3p)

£1,480m (2016 £1,742m)

Basic earnings per share

26.8p (2016 28.8p)

Operating business cash flow

KPI

Net cash flow from operating activities

£1,752m (2016 £1,004m)

£1,897m (2016 £1,229m)

Net debt

KPI

£(752)m (2016 £(1,542)m)

BONUS

Income statement
Sales increased by £0.6bn to £19.6bn
(2016 £19.0bn) largely reflecting currency
translation.

Underlying EBITA increased by £129m to
£2,034m (2016 £1,905m), giving a return on
sales of 10.4% (2016 10.0%). There was an
exchange translation benefit of £50m. Growth
on a constant currency basis4 was at 4%.

Revenue increased by £0.5bn to £18.3bn
(2016 £17.8bn) largely reflecting currency
translation.

Operating profit decreased by £262m to
£1,480m (2016 £1,742m). 2017 includes a
£384m impairment in respect of the Applied
Intelligence business, which is excluded from
underlying EBITA. There was an exchange
translation benefit of £39m.

Non-recurring items in 2017 of £13m
represents a loss on the disposal of the
BAE Systems San Francisco Ship Repair
business. Non-recurring items in 2016
of £12m represented an impairment taken
in respect of that business.

Amortisation of intangible assets is in
line with the prior year at £86m (2016 £87m).

Impairment of goodwill in 2017
represents the impairment of goodwill in
Applied Intelligence reflecting the future
level and timing of expected returns from
the business.

Order intake3

£20,257m (2016 £22,443m)

KPI
BONUS

Order backlog3

£41.2bn (2016 £42.0bn)

BONUS

80% of the UK executive directors’ bonuses are based
on the achievement of financial KPIs (see page 101).

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2017
£m

19,626

2,034

10.4%

2016
£m

19,020

1,905

10.0%

£m

18,322

17,790

1,480

8.1%

1,742

9.8%

£m

19,626

(2,575)

1,271

18,322

£m

2,034

(13)

(86)

(384)

(34)

(37)

19,020

(2,427)

1,197

17,790

£m

1,905

(12)

(87)

–

(28)

(36)

1,480

1,742

(346)

(250)

884

(245)

(173)

(591)

(213)

938

(257)

(177)

(185)

(619)

2016

1.354

1.223

1.823

Alternative performance
measure definitions

Net finance costs, including equity
accounted investments, were £380m
(2016 £619m). The underlying interest
charge, excluding pension accounting, and
fair value and foreign exchange adjustments
on financial instruments and investments
decreased marginally to £245m (2016 £257m).
Net interest expense on the Group’s pension
deficit was £173m (2016 £177m). There was
a credit in respect of fair value and foreign
exchange adjustments of £38m (2016 £185m
charge) on exchange translation of US
dollar-denominated bonds.

Taxation expense, including equity accounted
investments, of £287m (2016 £249m) reflects
the Group’s underlying effective tax rate for
the year of 21%, partially offset by a £40m
credit in respect of US tax reform enacted in
December 2017. The US federal tax rate has
been reduced from 35% to 21% with effect
from 1 January 2018, while the estimated
state tax rate has increased from 5% to 6%.
In line with this change, the rate applying
to US deferred tax assets and liabilities at
31 December 2017 has been reduced from
40% to 27%, creating a rate adjustment
in 2017, which is partly reflected in the
income statement.

The calculation of the underlying effective tax
rate is shown in note 6 to the Group accounts
on page 155.

The underlying effective tax rate for 2018
is expected to reduce from 21% to around
18% benefiting from US tax reform, with
the final rate dependent on the geographical
mix of profits.

Looking beyond 2018, the effective tax rate
will depend principally on whether there are
any changes in tax legislation in the Group’s
most significant countries of operation, the
geographical mix of profits and the resolution
of open issues.

Income statement

Financial performance measures as defined by the Group
Sales

Underlying EBITA

Return on sales

Financial performance measures defined in IFRS1
Revenue

Operating profit

Return on revenue

Reconciliation of sales to revenue
Sales

Deduct Share of sales by equity accounted investments

Add Sales to equity accounted investments

Revenue

Reconciliation of underlying EBITA to operating profit
Underlying EBITA

Non-recurring items

Amortisation of intangible assets

Impairment of goodwill

Financial expense of equity accounted investments

Taxation expense of equity accounted investments

Operating profit

Net finance costs

Taxation expense

Profit for the year

Underlying interest expense

Net interest expense on retirement benefit obligations

Fair value and foreign exchange adjustments on financial instruments and investments

Net finance costs (including equity accounted investments)

(380)

Exchange rates
Average

£/$

£/€

£/A$

Sensitivity analysis

Estimated impact on sales of a ten cent movement in the average exchange rate

€

1. International Financial Reporting Standards.
2. Generally Accepted Accounting Principles.
3. Including share of equity accounted investments.
4. Current year compared with prior year translated at current year exchange rates.

2017

1.289

1.141

1.681

£m

550

Orders
Order intake2 decreased by £2.2bn to
£20,257m (2016 £22,443m). The most
significant award was the production contract
for the first batch of three Type 26 frigates,
with £2.8bn of order intake in the year.

Order backlog2 decreased by £0.8bn
to £41.2bn (2016 £42.0bn) reflecting
currency translation.

Orders
Financial performance measures
as defined by the Group

Order intake2

KPI

£20,257m £22,443m

Order backlog2

£41.2bn

£42.0bn

2017

2016

BAE Systems
Annual Report 2017

Group financial review
continued

Earnings per share
Underlying earnings per share for the
year increased by 8% to 43.5p (2016 40.3p).
The in-year loss at Applied Intelligence was
offset by good performance across the rest
of the Group.

Basic earnings per share was 26.8p
(2016 28.8p). Basic earnings per share is
lower than underlying earnings per share
mainly reflecting the £384m goodwill
impairment charge taken in 2017 which
is excluded from underlying earnings
per share.

Earnings per share
Financial performance measures as defined by the Group
Underlying earnings

Underlying earnings per share

Financial performance measures defined in IFRS1
Profit for the year attributable to equity shareholders

Basic earnings per share

Reconciliation of underlying EBITA to underlying earnings
Underlying EBITA

Underlying interest expense (including equity accounted investments)

Taxation expense (at the underlying effective tax rate)

Non-controlling interests

Underlying earnings

Reconciliation of underlying earnings to profit for the year
attributable to equity shareholders
Underlying earnings

Impact of US tax reform enacted in December 2017

Non-recurring items, post tax

Amortisation and impairment of intangible assets, post tax

Impairment of goodwill

Net interest expense on retirement benefit obligations, post tax

Fair value and foreign exchange adjustments on financial instruments

and investments, post tax

Profit for the year attributable to equity shareholders

Non-controlling interests

Profit for the year

2017

2016

£1,383m £1,277m

KPI

43.5p

40.3p

£854m

26.8p

£913m

28.8p

£m

2,034

(245)

1,789

(376)

(30)

1,383

£m

1,383

(10)

(68)

(384)

(137)

854

884

£m

1,905

(257)

1,648

(346)

(25)

1,277

£m

1,277

–

(9)

(69)

–

(140)

(146)

913

938

1. International Financial Reporting Standards.
2. Including share of equity accounted investments.

BAE Systems
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Taxation payments increased to £227m
(2016 £187m) in line with the increase in
adjusted profit before taxation as calculated
in note 6 to the Group accounts on page 155.

Net capital expenditure and financial
investment was £444m (2016 £450m).
As planned, capital investment was made
in support of the production ramp-up
in our US Electronic Systems and Combat
Vehicles businesses.

Dividends received from equity
accounted investments of £72m (2016
£38m) is primarily receipts from MBDA,
FNSS and Advanced Electronics Company.
There was a higher dividend from MBDA
in 2017.

Interest received was £23m (2016 £10m).

The cash outflow in respect of acquisitions
and disposals in 2017 of £11m reflects
costs incurred in respect of the disposal of
BAE Systems San Francisco Ship Repair and
the acquisition of IAP Research, Inc. The cash
inflow in 2016 of £6m reflected the sale of
a 4.1% shareholding in a subsidiary company
in Saudi Arabia.

Interest paid was £204m (2016 £210m).

Equity dividends paid in 2017 represents
the 2016 final (£404m) and 2017 interim
(£280m) dividends.

Dividends paid to non-controlling
interests decreased to £8m (2016 £24m)
reflecting a lower payment by Saudi
Maintenance & Supply Chain Management
Company in which the Group has a
51% shareholding.

There was a cash outflow from matured
derivative financial instruments of £83m
(2016 £480m inflow) from rolling hedges
relating to balances with the Group’s
subsidiaries and equity accounted investments.
The cash flow partially offsets the foreign
exchange translation on the Group’s external
US dollar-denominated borrowing (see below).

Net cash flow from loans in 2016
represented repayment of a $350m (£286m)
3.5% bond at maturity.

Foreign exchange translation primarily
arises in respect of the Group’s US dollar-
denominated borrowing. In 2016, this was
materially offset by the cash flow from
matured derivative financial instruments
(see above).

Cash flow
Operating business cash flow was
£1,752m (2016 £1,004m), which includes
cash contributions in respect of pension
deficit funding, over and above service
costs, for the UK and US schemes totalling
£271m on a funding basis.

The remainder of the advances received
in 2012 on the Omani Typhoon and Hawk
order, as well as European Typhoon

Cash flow

production, are almost all now consumed.
On the Saudi support contracts renewal,
some £300m of cash was received in 2017
representing advance funding to be utilised
in 2018 and 2019. Costs have been incurred
against provisions created in previous years as
the US commercial shipbuilding programmes
are closed out. Approximately £100m of
VAT payments rolled from December 2017
into January 2018.

Financial performance measures as defined by the Group
Operating business cash flow

Financial performance measures defined in IFRS1
Net cash flow from operating activities

Reconciliation from operating business cash flow
to net cash flow from operating activities
Operating business cash flow

Add back Net capital expenditure and financial investment

Deduct Dividends received from equity accounted investments

Deduct Taxation

Net cash flow from operating activities

Net capital expenditure and financial investment

Dividends received from equity accounted investments

KPI

Interest received

Acquisitions and disposals

Net cash flow from investing activities

Interest paid

Net (purchase)/sale of own shares

Equity dividends paid

Dividends paid to non-controlling interests

Cash flow from matured derivative financial instruments

Movement in cash collateral

Net cash flow from loans

Net cash flow from financing activities

Net increase in cash and cash equivalents

Add back Net cash flow from loans

Add back/(deduct) Cash classified as held for sale

Foreign exchange translation

Other non-cash movements

Decrease/(increase) in net debt

Opening net debt

Net debt

187 and 188 Notes 24 and 26 to the Group accounts

1. International Financial Reporting Standards.
2. Re-presented to reclassify interest paid from investing to financing activities.

2017
£m

1,752

£m

1,897

£m

1,752

444

(72)

(227)

1,897

(444)

(11)

(360)

(204)

(1)

(684)

(8)

(83)

(15)

–

(995)

542

–

301

(55)

790

20162
£m

1,004

£m

1,229

£m

1,004

450

(38)

(187)

1,229

(450)

(396)

(210)

(670)

(24)

480

(286)

(675)

158

286

(2)

(621)

(120)

(1,542)

(752)

(1,422)

(1,542)

KPI

BAE Systems
Annual Report 2017

Group financial review
continued

Balance sheet
The £0.9bn decrease in intangible assets
to £10.4bn (2016 £11.3bn) mainly reflects
exchange translation (£0.5bn) and the Applied
Intelligence goodwill impairment (£0.4bn).

Property, plant and equipment, and
investment property is £2.0bn (2016 £2.0bn).

Equity accounted investments and
other investments increased to £390m
(2016 £305m) reflecting the Group’s share
of profit for the year (£116m) and reduced
pension allocation from the lower deficit
(£66m), less dividends received (£72m).

The Group’s share of the net IAS 19
pension deficit reduced to £3.9bn
(2016 £6.1bn) mainly reflecting asset returns,
updated mortality tables and allowances for
future mortality improvements. The major
movements in the net pension deficit
are shown in the bridge chart below.

The funding deficit across the UK schemes at
31 March 2017 was £2.1bn. The UK accounting
deficit, using like-for-like mortality assumptions
and asset values at 31 December 2017, is
approximately £3bn higher than the funding
deficit. The discount rate applied to liabilities
for accounting purposes reflects the yield on
high-quality corporate bonds. The discount

Balance sheet

Summarised balance sheet
Intangible assets

Property, plant and equipment, and investment property1

Equity accounted investments and other investments

Working capital1

Group’s share of the net IAS 19 pension deficit (see below)

Net tax assets and liabilities

Net other financial assets and liabilities

Net debt

Net assets held for sale

Net assets

2017
£m

10,378

1,977

390

(3,752)

(3,920)

435

2016
£m

11,264

1,999

305

(3,564)

(6,054)

935

121

KPI

(752)

(1,542)

–

4,784

3,464

1. Funding received from the UK government for property, plant and equipment at Barrow-in-Furness, UK, relating to the
Dreadnought submarine programme included in working capital in the Consolidated balance sheet is presented here in
property, plant and equipment, and investment property.

Components of net debt
Cash and cash equivalents

Debt-related derivative financial instrument assets

Loans – non-current

Loans and overdrafts – current

Net debt

Exchange rates
Year end

£/$

£/€

£/A$

KPI

£m

3,271

£m

2,769

114

(4,069)

(4,425)

(14)

(752)

–

(1,542)

2017

1.353

1.126

1.730

2016

1.236

1.172

1.707

Accounting net pension deficit – bridge (£bn)

Maturity of the Group’s borrowings (£bn)

6.1

0.5
(1.0)

(2.3)

2016

Add back 2016 allocation1

Change in mortality assumptions

Actual return on assets

Interest on liabilities

Real discount rate

Other

Deduct 2017 allocation1

2017

174 Note 21 to the Group accounts

0.9

0.5
(0.5)

(0.3)

3.9

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

4.1
4.1

3.3

3.0

2.6

2.2
2.2

1.6

1.1
1.1

2027

2028

2029

0.7
0.7
0.71
172 Note 19 to the Group accounts

1. Amounts allocated to equity accounted investments.

1. Repayable in 2041 (£292m) and 2044 (£395m).

BAE Systems
Annual Report 2017

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Policies
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. Three credit rating
agencies publish credit ratings for the Group:

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Category

Stable

Outlook

Rating
Moody’s Investors Service
Baa2
Standard & Poor’s Ratings Services
BBB
Fitch Ratings
BBB

Stable

Investment grade

185 Note 23 to the Group accounts

Dividends
As part of the Group’s capital allocation policy,
the Group plans to pay dividends in line with
its policy of long-term sustainable cover of
around two times underlying earnings.

The Board has recommended a final dividend
of 13p per share making a total of 21.8p per
share for the year, an increase of 2% over
2016. At this level, the annual dividend is
covered two times. Subject to shareholder
approval at the 2018 Annual General Meeting,
the dividend will be paid on 1 June 2018
to holders of ordinary shares registered
on 20 April 2018. The ex-dividend date
is 19 April 2018.

At 31 December 2017, the Company had
retained earnings of £2.6bn (2016 £2.1bn), the
non-distributable portion of which is £649m
(2016 £604m) (see page 202). Total external
dividends relating to 2017 are £694m (2016
£677m), including the interim dividend paid
during the year of £280m (2016 £273m) and
the final dividend proposed of approximately
£414m (2016 £404m). On an annual basis,
the Company receives dividends from its
subsidiaries to increase further its distributable
reserves and, accordingly, the Company expects
to have sufficient distributable reserves to
support its dividend policy.

The Group’s dividend policy is underpinned
by its viability and going concern statements
(see page 81).

rate for funding purposes reflects a prudent
assessment of expected returns on the
investments held by the schemes. Based
on the new funding valuations, the Group
will increase current annual deficit recovery
payments to the UK schemes to £220m
a year from 1 April 2018.

Details of the Group’s pension schemes are
provided in note 21 to the Group accounts
on page 174.

A net deferred tax asset of £0.7bn (2016
£1.2bn) relating to the Group’s pension
deficit is included within net tax assets
and liabilities.

Tax provisions
Tax provisions £351m (at 31 December 2017)
See note 16 to the Group accounts
Retirement benefit obligations
Group’s share of the net IAS 19 pension deficit
£3.9bn (at 31 December 2017)
See note 21 to the Group accounts

142 For more information

Changes in accounting policies
Effective 1 January 2018, BAE Systems
adopted IFRS 15, Revenue from Contracts with
Customers. The Group’s results announcement
for the half year ending 30 June 2018 will be
the first to be prepared under IFRS 15.

In aggregate, there was a £0.2bn decrease
in working capital largely reflecting advance
funding on support contracts in Saudi Arabia
and timing of VAT payments, partly offset by
previous advances now largely utilised.

The new Standard does not change the way
in which we manage our contracts under
Lifecycle Management, our mandated
project management process, or the lifetime
profitability and cash flow.

The Group’s net debt at 31 December
2017 is £752m, a net decrease of £790m
from the net debt position of £1,542m at
the start of the year. There are no material
debt maturities before 2019. The maturity
of the Group’s borrowings is shown in the
chart opposite.

Cash and cash equivalents of £3,271m
(2016 £2,769m) are held primarily for the
repayment of debt securities, pension deficit
funding, payment of the 2017 final dividend
and management of working capital.

Net assets held for sale represents the
Aircraft Accessories and Components
Company expected to be sold in 2018.

Accounting policies
Critical accounting policies
Certain of the Group’s significant 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:

Revenue and profit recognition
Revenue £18.3bn (year ended 31 December 2017)
See note 1 to the Group accounts
Carrying value of goodwill
Goodwill £10.0bn (at 31 December 2017)
See note 8 to the Group accounts
Deferred tax asset on retirement benefit
obligations
Deferred tax asset on pension/retirement scheme
deficits £0.7bn (at 31 December 2017)
See note 14 to the Group accounts

Revenue on the majority of contracts, currently
being recognised based on the completion of
milestones or deliveries, will cumulatively be
recognised earlier.

The provisional impact of restating our results
for the adoption of IFRS 15 is a reduction in
underlying earnings per share of 1.4p to 42.1p
for the year ended 31 December 2017 and an
increase in net assets of £57m at 31 December
2017. The restated results will be used as the
comparatives for the Group’s financial
statements for the year ending 31 December
2018. The earnings impact on 2018 and
beyond is not expected to be material.

Details of the impact of IFRS 15 are provided in
note 34 to the Group accounts on page 199.

Capital
Objectives
Maintain the Group’s investment grade credit
rating and ensure operating flexibility, whilst:
– meeting its pension obligations;
– pursuing organic investment opportunities;
– paying dividends in line with the Group’s
policy of long-term sustainable cover of
around two times underlying earnings;
– making accelerated returns of capital to

shareholders when the balance sheet allows
and when the return from doing so is in
excess of the Group’s Weighted Average
Cost of Capital; and

– investing in value-enhancing acquisitions,
where market conditions are right and
where they deliver on the Group’s strategy.

BAE Systems
Annual Report 2017

Group financial review
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.

Objectives/policies
Net 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.
– Material borrowings are arranged by the
central treasury department and funds
raised are lent onward to operating
subsidiaries as required.

Interest rates
Manage the exposure to interest rate
fluctuations on borrowings through varying
the proportion of fixed rate debt relative to
floating rate debt with derivative instruments,
including interest rate and cross-currency
swaps.
– A minimum of 50% and a maximum of
90% of gross debt is maintained at fixed
interest rates.

Liquidity
Maintain adequate undrawn committed
borrowing facilities.
– An undrawn committed Revolving Credit
Facility of £2bn contracted to December
2018 and £1.9bn contracted from December
2018 to December 2020 is available to meet
expected general corporate funding
requirements.

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
strong credit ratings for short periods.

Currency
Reduce the Group’s exposure to transactional
volatility in earnings and cash flows from
movements in foreign currency exchange rates.
– All material firm transactional exposures

are hedged.

– The Group does not hedge the translation
effect of exchange rate movements on the
income statements or balance sheets of
foreign subsidiaries and equity accounted
investments it regards as long-term
investments.

190 Note 28 to the Group accounts

Tax strategy
The Group’s tax strategy is to:
– ensure compliance with all applicable tax

laws and regulations; and

– manage the Group’s tax expense in a way

that is consistent with its values and its legal
obligations in all relevant jurisdictions.

The Group does not tolerate activities
designed to facilitate tax evasion offences.

The Group promotes collaborative professional
working with tax authorities in order to build
open, transparent and trusted relationships.
As part of this, the Group engages in open
and early dialogue to discuss tax planning,
strategy, risks and significant transactions,
and discloses any significant uncertainties
in relation to tax matters. Queries and
information requests by tax authorities are
responded to in a timely fashion and the
Group ensures that tax authorities are kept
informed about how issues are progressing.
The Group seeks to resolve issues in real time
and before returns are filed where possible.
Fair, accurate and timely disclosures are made
in tax returns, reports and documents that the
Group files with, or submits to, tax authorities.
Where disagreements over tax arise, the
Group works proactively to seek to resolve
all issues by agreement (where possible)
and reach reasonable solutions. In the UK,
the Group is subject to an annual risk
assessment by HM Revenue & Customs
and strives to achieve as low a risk rating as
can be achieved by a group of BAE Systems’
size and complexity.

Whilst the Group aims to maximise the tax
efficiency of its business transactions, it does
not use structures in its tax planning that are
contrary to the intentions of the relevant
legislature. The Group interprets relevant tax
laws in a reasonable way and ensures that
transactions are structured in a way that is
consistent with a relationship of co-operative
compliance with tax authorities. It also actively
considers the implications of any planning for
the Group’s wider corporate reputation.

The Group is open and transparent with
regard to decision-making, governance and
tax planning in its business, keeping tax
authorities informed of who has responsibility,
how decisions are reached, how the business
is structured and where different parts
of the business are located.

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. The
assessment and management of tax risks are
regularly reviewed by the Audit Committee,
as is the Group’s tax strategy.

Arm’s-length principles are applied in the
pricing of all intra-group transactions of
goods and services in accordance with
Organisation for Economic Co-operation and
Development guidelines. Where appropriate,
the Group engages with governments in
relation to proposed legislation and tax
policy. The Group endorses the statement of
tax principles issued by the Confederation of
British Industry in May 2013 (www.cbi.org.uk/
cbi-prod/assets/File/pdf/statement-of-tax-
principles.pdf).

154 Note 6 to the Group accounts

Segmental
review

We report our performance through
five principal reporting segments1.

Alternative performance
measure definitions

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Electronic
Systems

Cyber &
Intelligence

Platforms &
Services
(US)

Platforms &
Services
(UK)

Platforms &
Services
(International)

Employees2

14,400

Employees2

10,900

Employees2

11,400

Employees2

30,100

Employees2

13,800

Financial performance measures

As defined by the Group

Defined in IFRS3

KPI

Underlying
EBITA
£m

Return
on sales
%

562

242

794

472

(88)

15.5

2.9

8.3

10.3

11.4

Sales
£m

3,635

1,820

2,928

7,682

4,138

287

(864)

KPI
Operating
business
cash flow
£m

450

116

222

427

671

(134)

KPI

Order
intake2
£m

4,175

1,859

3,542

6,817

4,365

288

(789)

Order
backlog2
£bn

Revenue
£m

Operating
profit/(loss)
£m

Return
on revenue
%

5.4

2.1

4.6

16.8

13.3

–

(1.0)

3,635

1,820

2,825

7,624

3,136

–

(718)

542

(367)

218

774

427

(114)

14.9

(20.2)

7.7

10.2

13.6

19,626

2,034

10.4

1,752

20,257

41.2

18,322

1,480

8.1

Net cash
flow from
operating
activities
£m

569

127

286

607

669

(134)

(227)

1,897

Year ended 31 December 2017

Electronic Systems

Cyber & Intelligence

Platforms & Services (US)

Platforms & Services (UK)

Platforms & Services

(International)

HQ4

Deduct Intra-group

Deduct Taxation5

Total

We use financial performance measures as defined by the Group to monitor the underlying financial performance of the Group’s reporting
segments. Reconciliations from these measures to the financial performance measures defined in IFRS3 are provided in the Group financial
review on pages 28 to 34. Reconciliations by reporting segment for revenue and operating profit are included in note 1 to the Group accounts
(see page 148) and for net cash flow from operating activities in note 24 to the Group accounts (see page 187).

1. Effective 1 January 2018, BAE Systems revised its reporting segments to reflect the organisational changes described on page 17. See page 56 for more information.
2. Including share of equity accounted investments.
3. International Financial Reporting Standards.
4. HQ comprises the Group’s head office activities, together with a 49% interest in Air Astana.
5. Taxation is managed on a Group-wide basis.

BAE Systems
Annual Report 2017

Segmental review

Electronic
Systems

Electronic Systems comprises the US and UK-based electronics activities,
including electronic warfare systems, electro-optical sensors, military and
commercial digital engine and flight controls, precision guidance and seeker
solutions, next-generation military communications systems and data links,
persistent surveillance capabilities, and hybrid electric drive systems.

Electronic Combat includes the Integrated
Electronic Warfare, Low Observable Tactical
Aircraft Electronic Warfare and Tactical Aircraft
Electronic Warfare product lines. The business
provides a depth of capability in integrated
electronic warfare systems for airborne
applications, including electronic support,
electronic attack and electronic protection
technologies.

Survivability, Targeting & Sensing exploits
the electro-optical and infrared spectrum
to provide leading threat warning and
infrared countermeasures systems, precision
guidance and seeker solutions, advanced
targeting solutions, head-up displays and
state-of-the-art tactical imaging systems.

C4ISR Systems addresses the market for
actionable intelligence through innovative
technical solutions for airborne persistent
surveillance, identification systems, signals
intelligence, underwater and surface warfare
solutions, and space products.

Controls & Avionics addresses the
commercial and military aircraft electronics
markets, including fly-by-wire flight controls,
full authority digital engine controls, flight
deck systems, cabin management systems
and mission computers.

Power & Propulsion Solutions delivers
electric propulsion and power management
performance, with innovative products
and solutions that advance vehicle mobility,
efficiency and capability in the transit,
military, marine and rail markets.

Our strategy in action
First flights of our new
Head-Up Display
Our LiteHUD® Head-Up Display (HUD)
took to the skies for its first flights in 2017,
marking a significant milestone for both
the technology and the programme.

A HUD is a see-through display that
seamlessly presents flight-critical
information directly in a pilot’s line of sight
without obstructing views of the outside
world. We began funding the development
of LiteHUD® more than two years ago
and we are confident that customers will
benefit from its next-generation display
capability at an off-the-shelf price.

Designed using our patented optical
waveguide technology, LiteHUD® is
60% smaller and up to 50% lighter than
conventional head-up displays. The system
enhances situational awareness in day and
night conditions, significantly improving
flight safety and reducing pilot fatigue.

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Operational and
strategic highlights
– Orders worth over $450m (£333m)

received for F-35 Lightning II hardware
production and support

– Invested more than $100m (£74m)
in our ‘Ramp to Rate’ initiative to
prepare the business for future
Electronic Warfare growth

– Received a $311m (£230m) contract to
provide the Digital Electronic Warfare
System (DEWS) to support the sale of
new aircraft to an international customer

– Growing demand for APKWS™

laser-guided rockets, with awards
totalling approximately $300m
(£222m) during the year

– LiteHUD® Head-Up Display selected
by critical launch customers, with
first flights in 2017

– The FADEC Alliance joint venture

transitioned to Full-Rate Production of
the full authority digital engine control
for the LEAP commercial aircraft engine

– Major milestone achieved with the delivery

of our 8,000th hybrid-electric system

Financial performance

Financial performance measures
as defined by the Group

Financial performance
measures defined in IFRS2

Sales

Underlying EBITA

Return on sales

Operating business

cash flow

Order intake1

Order backlog1

KPI

2017

2016

£3,635m £3,282m

Revenue

£562m

15.5%

£494m

Operating profit

15.1%

Return on revenue

Cash flow from

2017

2016

£3,635m £3,282m

£542m

14.9%

£474m

14.4%

£450m

£469m

operating activities

£569m

£568m

£4,175m £3,322m

£5.4bn

£5.2bn

– Sales compared with 2016 were up
5% at $4.7bn (£3.6bn). The growth
came in the electronic warfare business
from the F-35 Lightning II and DEWS
programmes, as well as increasing
classified activity. Volumes of the
APKWS™ product almost doubled over
the year and now represent one of
the top five sales lines.

– The return on sales achieved of 15.5%
(2016 15.1%) reflects continued strong
programme execution and risk retirement.

– Cash conversion of underlying EBITA

for the full year was at 85% (2016 97%),
excluding pension deficit funding.

– Order backlog was at a record high of

$7.3bn (£5.4bn) following further awards
for F-35 Lightning II systems, classified
Electronic Warfare activity and APKWS™
product.

1. Including share of equity accounted investments.
2. International Financial Reporting Standards.

Sales by domain (%)

Sales by line of business (%)

Sales analysis: Defence and commercial (%)

Land

16%

Maritime

Air

81%

Controls & Avionics/
Power & Propulsion
Solutions

25%

Electronic
Combat

30%

Commercial

22%

Defence

78%

C4ISR
Systems

27%

Survivability,
Targeting & Sensing

18%

BAE Systems
Annual Report 2017

Segmental review
Electronic Systems

Operational performance
Electronic Combat
BAE Systems has sustained its leadership
position in the US electronic warfare market
and production is ramping up across a
number of programmes, some of which
are classified.

Low-Rate Initial Production (LRIP) hardware
deliveries for the F-35 Lightning II programme
continue with Lot 10 and 11 deliveries. We
have received initial Lot 12 funding, with an
anticipated final award value in excess of
$300m (£222m), and a Request for Proposal
for a potential block buy encompassing
multiple lots.

BAE Systems reached a price agreement
with Lockheed Martin on a $155m (£115m)
Electronic Warfare Performance Based
Logistics contract. The award provides
Electronic Warfare material availability
and support for the F-35 Lightning II
aircraft over a five-year period.

The business is under contracts from Boeing
and Warner Robins Air Logistics Complex,
totalling more than $1.0bn (£0.7bn), to install
the Digital Electronic Warfare System on
select new F-15 aircraft, upgrade existing
F-15 aircraft, and to provide spare units and
modules for an international customer. The
programme remains on schedule. BAE Systems
has also received a $311m (£230m) contract to
provide the Digital Electronic Warfare System
to support the sale of new F-15 aircraft to
another international customer.

Following our selection by Boeing in 2015 to
develop and manufacture the next-generation
digital electronic warfare system for the
US Air Force’s Eagle Passive Active Warning
Survivability System programme to upgrade
up to 400 F-15 aircraft, we are currently
executing the $161m (£119m) engineering
and manufacturing development contract.
The programme could be worth more than
$1.0bn (£0.7bn) over its life.

We have been awarded $87m (£64m) worth
of modifications to a competitively awarded
contract for an electronic warfare system for
the US Air Force Special Operations Command’s
fleet of C-130J aircraft. The total value of the
contract, including all options, could exceed
$300m (£222m). This award extends our
position to include our electronic warfare
capabilities on large, fixed-wing aircraft.

Production of our sensor technology for the
Long Range Anti-Ship Missile has commenced
following a $40m (£30m) order from prime
contractor Lockheed Martin. We provided the
sensor technology that supported a successful
launch of the missile, demonstrating its ability
to address the US Navy’s requirement for
versatile, multi-platform precision munitions
that enable distributed operations.

For over a decade, we have provided full
lifecycle support as the prime mission system
integrator for the US Air Force’s EC-130H
Compass Call stand-off electronic attack
platform. We are under contract to cross-deck
the mission electronics onto a new Gulfstream
G550 business jet for the US Air Force.
BAE Systems will continue to sustain the
existing EC-130H electronics as we develop,
manufacture, procure, integrate and sustain
the electronics. The programme could be
worth more than $2.0bn (£1.5bn) over the
next decade.

Due to the sensitive nature of electronic
combat systems and technology, many of
our programmes are classified. As a world
leader in electronic warfare, we continue
to experience growth in these increasingly
important areas.

Survivability, Targeting & Sensing
Our Advanced Precision Kill Weapon System
(APKWS™) laser-guided rocket is experiencing
growing demand, with over 13,000 units
delivered as at 31 December 2017. In addition
to expanding its use in the US military, the
system is generating strong international
attention, with 19 nations expressing interest.
The programme received awards totalling
approximately $300m (£222m) during the year.

We continue to execute on the Terminal
High-Altitude Area Defence programme.
We have received a $30m (£22m) production
contract for long-lead material on Lots 9 and
10, and anticipate that additional units will
be added in response to increasing demand.

On the $236m (£174m) Common Missile
Warning System programme, we continue
to deliver to schedule.

Under the five-year, $434m (£321m)
Enhanced Night Vision Goggle III and
Family of Weapon Sights – Individual
Indefinite Delivery, Indefinite Quantity
contract, we continued to progress the
production qualification testing.

The US Army’s Family of Weapon Sights
– Crew Served programme completed its
System Critical Design Review during the
year. This seven-year contract awarded
in 2016 has a potential value of up to
$384m (£284m).

The LiteHUD® Head-Up Display has been
selected by critical launch customers for
integration on multiple platforms. In 2017,
it had its first flights on a C-130J aircraft,
a Textron Scorpion jet and our advanced
Hawk demonstrator aircraft.

In December, the US Department of Defense
announced that we were awarded a contract
by the US Army for the Limited Interim Missile
Warning System programme.

C4ISR Systems
In September, the Communications &
Navigation Solutions product line joined the
Intelligence, Surveillance & Reconnaissance
business to form a new C4ISR Systems
business that spans the entire mission
lifecycle (sensing, processing, exploitation
and dissemination).

As a leading provider of space-qualified
subsystems and components, we continue to
experience growth in the areas of integrated
on-board processors, reconfigurable processing
payloads and secure communications.

We have been awarded an $81m (£60m)
contract for the Network Tactical Common
Data Link programme to provide the US Navy
with the ability to simultaneously transmit
and receive real-time intelligence, surveillance
and reconnaissance data over multiple data
links with a system to be fielded on various
surface ship types.

Since winning the Geospatial Data Services
Foundational GEOINT Content Management
programme in 2014, we have been awarded
orders valued at $214m (£158m). The business
is meeting all delivery requirements in assisting
US intelligence community customers with the
development of advanced geospatial intelligence
data collection and processing solutions.

As a provider of signals intelligence capabilities,
we are executing the $132m (£98m) Tactical
Signals Intelligence Payloads programme for
the US Army’s Gray Eagle unmanned aircraft.

BAE Systems
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Looking forward
Forward-looking information for the
Electronic Systems reporting segment
is provided later in this report.

Segmental
looking forward

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Our strategy in action

Unmanned air
systems adaptability
and mission
efficiency

We are developing technology for the
US Defense Advanced Research Projects
Agency (DARPA) that will enable unmanned
air systems to conduct multiple missions.
The CONverged Collaborative Elements for
RF Task Operations – or CONCERTO –
programme is creating single, multi-function
payloads that adapt to changing battlefield
situations and mission needs in real time.

These compact units will allow operators to
converge multiple radio frequency systems
on one payload that will efficiently switch
between intelligence, surveillance and
reconnaissance; command and control;
networking; and combat operations
support missions without having to make
physical changes.

Group strategic
framework

More online
baesystems.com

Power & Propulsion Solutions
With the transit bus market continuing
its shift towards more electric bus systems
to meet emission targets and to satisfy an
environmentally-conscious public, BAE Systems
achieved a major milestone with the delivery
of its 8,000th hybrid-electric system. Transit
operators around the world are looking
for reliable, low-emission technologies and
major cities, such as Seattle, Boston, Quebec,
London and Paris, are adopting our advanced
hybrid solutions, which are capable of
emission-free driving up to half of the time.

Re-presentation
of 2017 results

Work continues on the US Navy’s P-8A Poseidon
maritime surveillance aircraft programme to
provide state-of-the-art processing capabilities.
The programme is expected to be worth
$1.2bn (£0.9bn) over its life.

Controls & Avionics
BAE Systems is a major supplier of engine
controls, flight controls, and cabin and flight
deck systems. The development of the
integrated flight control electronics and remote
electronic units for Boeing’s next-generation
777X aircraft remains on schedule, with all
hardware in qualification and systems
integration testing progressing to plan.

On the Boeing 737 MAX aircraft, a
successful first flight was completed on
the MAX 9 with our spoiler controls, flight
deck systems and utilities electronics.

The development of our civil active inceptors
is progressing, with Gulfstream G500 and
Embraer KC390 aircraft continuing flight
tests with positive pilot feedback. A derivative
of the civil inceptors for the Boeing CH-47
Chinook helicopter, LinkEdge™ (Active Parallel
Actuation Subsystem), has successfully
completed its Preliminary Design Review.

FADEC Alliance, a joint venture between
FADEC International (our joint venture with
Safran Electronics & Defense) and GE Aviation,
has transitioned the full authority digital
engine control (FADEC) for the LEAP engine
to Full-Rate Production. The LEAP engine
powers the Airbus A320neo, the Boeing 737
MAX and the Comac C919. The development
of the FADEC for the GE9x engine for the
Boeing 777X is on schedule, with certification
planned for 2018.

On the F-35 Lightning II programme, LRIP
Lot 11 is ongoing for the current vehicle
management computer and active inceptor
system equipment. Orders for Lot 12 are
expected in 2018.

BAE Systems has been awarded a multi-
million dollar contract to provide flight control
computers, active inceptors, accelerometers
and integrated colour display systems for
new Taiwanese Air Force training aircraft.
The award establishes our footprint on a
new platform.

BAE Systems
Annual Report 2017

Segmental review

Cyber &
Intelligence

Cyber & Intelligence comprises the US-based
Intelligence & Security business and UK-headquartered
Applied Intelligence business, and covers the Group’s
cyber security, secure government, and commercial
and financial security activities.

Our strategy in action
Providing anti-money
laundering protection to one
of the UK’s largest banks
BAE Systems Applied Intelligence has
been selected by one of the UK’s largest
banks as its preferred strategic vendor
for anti-money laundering protection.

With laundered money now estimated to
represent between 2% and 5% of global
Gross Domestic Product – equivalent to
the fifth largest economy in the world –
money laundering schemes are becoming
ever more complex, with commercial,
retail and investment banks all becoming
targets for fraudsters.

The contract means this bank can use
our latest cutting-edge technology to
ensure criminals and money launderers
are accurately detected.

Intelligence & Security delivers a broad range
of services to the US military and government.

Global Analysis & Operations provides
innovative, mission-enabling analytic solutions
and support to the US government.

Integrated Electronics & Warfare Systems
provides systems engineering, integration
and through-life support services for US
defence and coalition partner customers.

IT Solutions delivers secure solutions and
services that enable US national security
customers to perform mission-sensitive
operations and protect their data and
networks.

Applied Intelligence provides data intelligence
solutions which enable governments and
commercial organisations to defend against
national-scale threats, protect their networks
and data against sophisticated attacks and
operate successfully in cyberspace. Its solutions
are delivered as licensed technologies,
software-as-a-service subscriptions, through
outsourced managed services, and via
consulting and systems integration projects.

UK Services delivers cyber security, data
analytics, and digital transformation consulting
and systems integration services to national
security, government and large enterprises in
the UK.

International Services & Solutions provides
cyber intelligence and defence solutions to
international government agencies and
communications service providers.

Commercial Solutions provides cyber defence,
counter-fraud and financial compliance
products to commercial organisations globally.

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Operational and
strategic highlights
Intelligence & Security
– Six task orders secured valued at more
than $180m (£133m) for Full-Motion
Video Intelligence, Surveillance and
Reconnaissance analysis support

– Won a position on a US Department
of Treasury programme to support
the Office of Terrorism and Financial
Intelligence, with a maximum lifecycle
value of $135m (£100m)

– Awarded three US Navy contracts
with an estimated lifecycle value
of approximately $180m (£133m) to
provide engineering and integration
support for critical mission systems

– Selected by the US Navy to pursue orders
to provide equipment and support services
for Space and Naval Warfare Systems
Center Atlantic

Applied Intelligence
– Contracts won with UK government

and commercial customers for secure
IT transformation and cyber defence

– Restructuring activities under way,
including headcount and facility
reductions and a move to a revised
operating model, effective 1 January
2018, to drive profitable growth

Financial performance

Financial performance measures
as defined by the Group

Financial performance
measures defined in IFRS2

Sales

Underlying EBITA

Return on sales

Operating business

cash flow

Order intake1

Order backlog1

KPI

2017

2016

£1,820m £1,778m

Revenue

£52m

2.9%

£90m

Operating (loss)/profit

5.1%

Return on revenue

Cash flow from

2017

2016

£1,820m £1,778m

£(367)m

(20.2)%

£59m

3.3%

£116m

£83m

operating activities

£127m

£106m

£1,859m £1,885m

£2.1bn

£2.4bn

– In aggregate, sales were marginally

lower at $2.3bn (£1.8bn). The Intelligence
& Security business saw a 4% decrease
largely in the highly competitive area of
IT support services to the intelligence
community. Growth in Applied Intelligence
was at 6%, benefiting from increases in
the UK Services and International Services
& Solutions divisions.

– Return on sales was 2.9% (2016 5.1%),
after a restructuring charge taken in the
Applied Intelligence business. Return on
sales in the Intelligence & Security business
was similar to last year at 8.8%. In Applied
Intelligence, the underlying loss for the
year was £61m, including £24m for the
restructuring charge. The first half loss

of £27m was followed by a reduced second
half loss, before the restructuring charge,
of £10m as the cost-reduction actions
under the ongoing restructuring started
to deliver bottom-line benefit.

– There was an operating loss of £367m
(2016 profit £59m), which includes a
£384m goodwill impairment in Applied
Intelligence reflecting the future level
and timing of expected returns from
the business.

– Cash conversion of underlying EBITA
for the year was in excess of 100%.

– Order backlog reduced marginally

to $2.9bn (£2.1bn).

1. Including share of equity accounted investments.
2. International Financial Reporting Standards.

Sales by business (%)

Sales analysis: Intelligence & Security (%)

Sales analysis: Applied Intelligence (%)

Applied
Intelligence

30%

Intelligence
& Security

70%

IT Solutions

20%

Global Analysis
& Operations

18%

International Services
& Solutions

21%

Commercial Solutions

30%

Government
(security)
99%

Commercial
1%

Integrated Electronics
& Warfare Systems

62%

Government
(security)
46%

Commercial
54%

UK Services

49%

BAE Systems
Annual Report 2017

Segmental review
Cyber & Intelligence

Operational performance
Intelligence & Security
Global Analysis & Operations
We are pursuing task orders under a new
Indefinite Delivery, Indefinite Quantity
contract with an estimated value of more
than $400m (£296m) to expand our work
in motion-imagery analysis, analytic training,
multi-media support and research for the
US intelligence community. During the year,
the business secured six task order contracts
valued at more than $180m (£133m).

We won a position on a US Department of
Treasury programme to support the Office
of Terrorism and Financial Intelligence. The
maximum lifecycle value of all task orders
to be awarded under the programme is
estimated at $135m (£100m).

Integrated Electronics & Warfare Systems
The business is executing on the second year
of a five-year, sole-source contract worth up to
$368m (£272m) to provide systems engineering
services to the US Navy’s Strategic Systems
Programs office. The programme provides
support for weapons systems on board
US Ohio and UK Vanguard Class submarines,
as well as future Ohio Class replacement and
UK Dreadnought Class submarines.

US Navy contract awards in the year include:
a new five-year, $42m (£31m) multiple-award
contract with the Naval Undersea Warfare
Center Division to install submarine multi-
mission trainer systems at bases in the US,
Guam and Australia; a 22-month, $76m
(£56m) contract to support the rapid design,
development, fabrication, customisation and
lifecycle maintenance of new and existing
communication and electronic platforms for
the Naval Warfare Center Aircraft Division; and
a five-year, $64m (£47m) contract to provide
lifecycle systems engineering and technical
support for a variety of deployed systems that
ensure operational readiness of the fleet.

In addition, the US Navy awarded BAE Systems
a position on a five-year Indefinite Delivery,
Indefinite Quantity contract to provide
research, development, test and evaluation
services support for the Naval Warfare Center
Aircraft Division’s Aircraft Prototype Systems
Division. The potential lifecycle value of all
task orders under this contract across the
eight awardees could reach $487m (£360m).

Our strategy in action

Upgrading
and securing
communications
capabilities on
US Army vehicles

In October, our engineers achieved a
significant milestone, successfully upgrading
the C4I1 capabilities of the 5,000th
mine-resistant tactical vehicle for US and
allied forces.

The upgrades, which are performed at
our state-of-the-art facility in Summerville,
South Carolina, US, enhance vehicle
communications systems, intercom systems,
mobile network systems and soldier
protective systems on a variety of
Mine-Resistant Ambush Protected (MRAP)
vehicles, including the MRAP All-Terrain
Vehicle (M-ATV), MaxxPro Dash and
RG-31 platforms.

This important milestone comes as the
US Army seeks to improve the mission
capabilities of its tactical vehicle fleet and
enhance situational awareness for soldiers.

Group strategic
framework

More online
baesystems.com

1. Command, Control, Communications, Computers and Intelligence.

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Looking forward
Forward-looking information for the Cyber
& Intelligence reporting segment is provided
later in this report.

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Re-presentation
of 2017 results

Segmental
looking forward

The US Navy has also selected BAE Systems
to provide equipment and support services
for Space and Naval Warfare Systems Center
Atlantic. As one of several companies involved,
we will pursue future orders as part of this
five-year, Indefinite Delivery, Indefinite
Quantity contract. The total value of all orders
to be awarded over the life of the contract is
estimated at $180m (£133m).

On the US Air Force Intercontinental Ballistic
Missile Integration Support Contractor
programme, we were awarded over $29m
(£21m) of additional engineering change
proposals in 2017, raising the total lifecycle
value of the contract to $922m (£682m).
Our work includes programme management,
systems sustainment, and cyber security
assessment and defence.

We continue to pursue task orders on
a nine-year Indefinite Delivery, Indefinite
Quantity contract to support the US Army
in developing next-generation technologies
for space, high-altitude and missile defence.

IT Solutions
Our contract to connect a number of US
agencies under one shared IT environment
passed significant security testing and was
authorised for adoption into the government
IT infrastructure. Although we executed on
our task orders and provided IT services to
foster greater systems integration and
information sharing for the intelligence
community, we have been advised that
future contract options will not be exercised
as the government reassesses its acquisition
strategy in favour of a more federated desktop
approach. We therefore do not anticipate
any future awards beyond the $164m (£121m)
of funding to date.

Our business was awarded a contract
increase of $160m (£118m) to extend the
period of performance of a major software
development and IT support contract for
a US intelligence community customer.

We received a five-year, $41m (£30m)
contract with the US Department of
Homeland Security, National Protection and
Programs Directorate to provide data analytics,
risk scoring and systems engineering support,
as well as cyber security assessment,
governance and training to ensure all federal
civilian agencies are in compliance with
government cyber security regulations.

Organisational changes
Effective 12 February 2018, the business moved
to a revised operating model to position for
growth through three customer-focused
business areas: Integrated Defence Solutions;
Intelligence Solutions; and Air Force Solutions.

We are continuing to renew existing long-term
customer contracts where we deploy a
comprehensive portfolio of products. Provision
of our anti-fraud and anti-money laundering
capabilities continues to see demand with
financial services customers.

Organisational changes
In the second half of the year, the business
commenced a restructuring that resulted
in a headcount reduction and, effective
1 January 2018, the business moved to a
revised operating model to deliver a more
targeted portfolio of products and services
focused on customers within three core
business units: Government; Financial
Services; and Technology & Commercial.
The restructuring will enable a greater focus
on customer needs and higher levels of
operational efficiency, in the commercial
business, that will accelerate improvements
in competitiveness and profitability.

Applied Intelligence
The business has delivered revenue growth
from the continued delivery of national
security solutions for the UK and international
governments, as well as deployment of
anti-fraud, regulatory compliance, and
cyber security products and services to
commercial customers.

UK Services
The business continues to invest in engineering
disciplines and specialist expertise in the
cyber, digital and data domains to support
our customers in national security intelligence,
national-scale cyber defence, commercial
cyber security and regulatory compliance.

We have won a number of contracts with
both UK government and commercial
enterprises, helping our customers to
maximise the benefits of secure IT
transformation and cyber defence.

International Services & Solutions
The business was underpinned by significant
demand for our national-scale cyber defence
capabilities. We continue to work with key
national security customers in Asia-Pacific
and the Middle East. Our technical capability
in multi-source intelligence analytics has
advanced significantly. In order to improve
the cost competitiveness of our engineering,
we are continuing to expand our off-shore
service operations and delivery centres.

Commercial Solutions
We have a focused set of cyber security,
anti-fraud and regulatory compliance solutions.

We continue to see demand for our
NetReveal™ anti-fraud and compliance suite,
with solutions being deployed to an increasing
number of prominent multi-national customers
in the financial services sector. Customers are
increasingly consuming these solutions as
multi-year managed services.

BAE Systems
Annual Report 2017

Segmental review

Platforms &
Services (US)

Platforms & Services (US), with operations in the US, UK and
Sweden, manufactures combat vehicles, weapons and munitions,
and delivers services and sustainment activities, including ship repair
and the management of government-owned munitions facilities.

US Combat Vehicles focuses on a portfolio
of tracked combat vehicles, amphibious
vehicles, accessories, protection systems and
tactical support services for the US military
and international customers.

Weapon Systems focuses on naval weapons,
artillery, advanced weapons, precision
munitions, high explosives and propellants
for US, UK and international customers.

Services include complex munition site
management for the US Army’s Holston
and Radford facilities.

US Ship Repair is a major provider of
non-nuclear ship repair, modernisation,
overhaul and conversions to the US Navy,
government and commercial maritime
customers. It has five operational sites
in the US on the Atlantic, Gulf of Mexico
and Pacific coasts, as well as in Hawaii.

BAE Systems Hägglunds focuses on the
tracked vehicle market for Swedish and
international customers.

FNSS, the Turkish land systems business in
which BAE Systems holds a 49% interest,
produces and upgrades tracked and
wheeled military vehicles for domestic
and international customers.

Our strategy in action
Nearing Full-Rate
Production on the Paladin
Integrated Management
programme
In December, the US Army awarded us
a $414m (£306m) contract for the third
and final Low-Rate Initial Production
option for the M109A7 self-propelled
howitzer. The award includes options
to initiate Full-Rate Production which,
if exercised, would bring the full value
to $1.7bn (£1.3bn).

The M109A7 consists of a new chassis
design for improved performance and
upgraded survivability, as well as state-
of-the-art digital backbone and power
generation capability. These enhancements
reduce overall programme cost and
logistical footprint, and provide improved
mobility and system survivability.

We will produce 48 vehicle sets, including
M992A3 ammunition carriers, with
options for 60 vehicle sets per year for
approximately three years thereafter
during Full-Rate Production.

BAE Systems
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Alternative performance
measure definitions

Operational and
strategic highlights
– Vehicle deliveries nearing completion

under the engineering and manufacturing
development phase of the Armored
Multi-Purpose Vehicle programme

– Awarded a $414m (£306m) contract for
the third and final option for Low-Rate
Initial Production under the Paladin
Integrated Management programme

– Completed deliveries of the 16 Amphibious

Combat Vehicle prototypes to the US
Marine Corps

– First two M777 lightweight howitzers
shipped to India for testing under the
$542m (£401m) contract awarded in
January 2017

– $140m (£104m) contract awarded for
the modernisation of USS Tortuga

– Construction of the final commercial

ship is nearing completion and the ship
is expected to be delivered in the first
half of 2018

– FNSS received a €155m (£138m) contract
to provide 27 amphibious assault vehicles
to the Turkish Ministry of National Defence

Financial performance

Financial performance measures
as defined by the Group

Financial performance
measures defined in IFRS2

Sales

Underlying EBITA

Return on sales

Operating business

cash flow

Order intake1

Order backlog1

KPI

2017

2016

£2,928m £2,874m

Revenue

£242m

£211m

Operating profit

8.3%

7.3%

Return on revenue

Cash flow from

2017

2016

£2,825m £2,783m

£218m

7.7%

£182m

6.5%

£222m

£58m

operating activities

£286m

£129m

£3,542m £3,308m

£4.6bn

– Order backlog was increased to $6.3bn
(£4.6bn), supportive of future growth
expectations. Key awards in the year
included the $0.5bn (£0.4bn) Indian order
for M777 howitzers, $0.4bn (£0.3bn) for
Paladin production and a total of $1.3bn
(£1.0bn) in the Ship Repair business.

– Sales reduced by 3% to $3.8bn (£2.9bn)
as deliveries of land vehicles to Brazil and
Japan slipped into the first half of 2018.

– The business delivered an improved return
on sales of 8.3% (2016 7.3%). Charges
taken in the year on the commercial
shipbuilding programmes amounted
to $16m (£12m), with just one contract
now remaining for completion.

– Cash conversion of underlying EBITA

was significantly improved despite the
impact from the use of provisions on the
commercial shipbuilding programmes.

1. Including share of equity accounted investments.
2. International Financial Reporting Standards.

Sales by domain (%)

Sales by line of business (%)

Sales analysis: Platforms and services (%)

Land

60%

Air

Maritime

39%

FNSS

BAE Systems
Hägglunds

Services

78%

Platforms

22%

US Combat
Vehicles

30%

US Ship
Repair

27%

Weapon
Systems

33%

BAE Systems
Annual Report 2017

Segmental review
Platforms & Services (US)

Operational performance
US Combat Vehicles
The business continues to perform on a
number of key franchise combat vehicle
programmes across both domestic and
international markets.

On the US Army’s Armored Multi-Purpose
Vehicle programme, we have nearly
concluded deliveries of the first 29 vehicles
under the engineering and manufacturing
development phase. The contract, which has
a potential value of $1.2bn (£0.9bn), including
options for 289 vehicles in Low-Rate Initial
Production, brings the US Army closer to
achieving its objective to replace its legacy
M113 armoured personnel carriers.

In December, we received a $414m (£306m)
contract for the third and final option for
Low-Rate Initial Production of 48 M109A7
self-propelled howitzers and M992A3
ammunition carriers under the Paladin
Integrated Management programme. With
options for Full-Rate Production of a further
180 vehicle sets over three years, the award
is worth approximately $1.7bn (£1.3bn).

The business is executing a $286m (£211m)
engineering and manufacturing development
contract to address the space, weight, power
and cooling limitations of the Bradley family
of vehicles and to prepare the vehicle for
communication network upgrades. The
US customer’s production decision regarding
the upgrade of approximately 500 vehicles
over a three-year period is expected in 2018.

In September, we received a contract from
the US Army worth up to $69m (£51m)
for the conversion of the next 20 M88A1
recovery vehicles to the more capable
Heavy Equipment Recovery Combat Utility
Lift Evacuation Systems (HERCULES)
configuration. In March, we received a
contract from the US Army worth up to
$112m (£83m) for technical support and
sustainment of M88 recovery vehicles.

Teamed with Iveco Defence, we completed
deliveries of the 16 Amphibious Combat
Vehicle (ACV) 1.1 prototypes to the US Marine
Corps for testing under the $158m (£117m)
engineering and manufacturing development
phase of the programme. We are one of two
competitors for this programme, with final
down-selection expected in 2018.

Whilst we have encountered some production
challenges, work continues on multiple
contracts totalling $165m (£122m) for Assault
Amphibious Vehicles (AAVs) for the Japanese
Ministry of Defence, including a contract for
30 new AAVs, and an $82m (£61m) contract
with Brazil to provide 23 upgraded AAVs.

Weapon Systems
BAE Systems remains a leading provider of
gun systems and precision strike capabilities.
In February 2017, we completed the acquisition
of IAP Research, Inc., a US engineering
company focused on the development and
production of electromagnetic launchers,
power electronics and advanced materials.

We continue to execute on a £183m contract
to provide the gun system known as the
Maritime Indirect Fire System for the Royal
Navy’s Type 26 frigate.

Following the contract modification received
in 2016 from the Swedish government
formalising its purchase of an additional
24 Archer systems, production work continues
with deliveries expected to begin in 2018.
In October, we received a contract to deliver
additional Bofors 155mm BONUS smart
anti-armour munitions to the Swedish Army
in 2019.

In January 2017, we received a $542m
(£401m) Foreign Military Sale contract from
the US government to provide 145 M777
lightweight howitzers to the Indian Army.
We will build the first 25 guns in our facilities,
with the remaining systems assembled in
India by Mahindra Defence Services, our
selected supplier to establish an assembly,
integration and test facility in India. The first
two guns were shipped during the year and
are progressing through in-country testing.

In July, we received a $47m (£35m) contract
for the continued development of the
precision-guided Hypervelocity Projectile, a
next-generation, low-drag projectile capable
of executing multiple missions from a number
of gun systems.

In the complex ordnance manufacturing
business, we continue to manage the
US Army’s Radford and Holston munitions
facilities, operating near capacity. In 2017,
we received additional funding of $177m
(£131m) to continue construction of a new
nitrocellulose facility in Radford. At Holston,
we are performing on modernisation contracts
totalling $135m (£100m) for waste water
management and a $146m (£108m) contract
for the construction of a nitric acid recovery
facility to produce larger quantities of
insensitive munitions.

US Ship Repair
As a leading provider of US Navy ship repair
and modernisation services, we secured
firm orders across our US shipyards totalling
approximately $1.3bn (£1.0bn) in 2017,
including a $140m (£104m) contract for
the modernisation of the USS Tortuga at
our Norfolk shipyard.

We continue to adjust our workforce
and facilities to meet evolving customer
demand, including the new dry dock in
our San Diego shipyard, which completed
operational certification in February and
welcomed the USS New Orleans as its first
vessel for servicing.

One of the final two commercial ships is
complete and awaiting acceptance sea trials
pending identification of a buyer following
the original customer’s decision not to take
delivery of the vessel. Construction of the
final ship is nearing completion and the ship
is expected to be delivered in the first half
of 2018.

BAE Systems
Annual Report 2017

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Looking forward
Forward-looking information for the
Platforms & Services (US) reporting
segment is provided later in this report.

Segmental
looking forward

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Our strategy in action

A new concept
for full-spectrum
air defence

We take pride in working closely with
our customers to understand and develop
the capabilities they require to complete
their missions. During the 2017 AUSA
(Association of the United States Army)
exhibition in October, BAE Systems unveiled
its Manoeuvre-Short Range Air Defence
(M-SHORAD) concept vehicle based on a
Bradley Infantry Fighting Vehicle designed
to address the US Army’s short-range air
defence requirements.

The integration of M-SHORAD on an
existing Bradley vehicle demonstrates
our ability to bring innovative solutions to
existing, adaptable platforms. M-SHORAD,
a multi-spectral solution consisting of
detection, identification, tracking and
engagement capabilities to defeat air
threats, such as unmanned air vehicles,
integrated on the Bradley would provide
a full-spectrum air defence solution to
the US Army.

Group strategic
framework

More online
baesystems.com

Re-presentation
of 2017 results

BAE Systems Hägglunds
Series production of CV90 Infantry Fighting
Vehicles for Norway was completed during
the year under the $865m (£640m) contract.

We have received contracts from the Estonian
government for a sustainment programme
for 44 CV90s. We are performing to schedule
on the refurbishment of Swedish CV90
vehicles, and the sustainment and upgrade
of Danish CV90s. We are integrating Mjölner
mortar systems on 40 Swedish CV90s, and
testing and verification of Active Protection
Systems on Dutch CV90s is under way,
together with significant vehicle upgrades.

We continue to perform on a contract to
produce 32 BvS10 military vehicles for Austria.

FNSS
FNSS, our land systems joint venture based
in Turkey, continues to perform under its
$524m (£387m) programme to produce
259 8x8 wheeled armoured vehicles for
the Royal Malaysian Army.

Production has completed on a contract to
upgrade M113 tracked armoured personnel
carriers for the Royal Saudi Land Forces.
The next phase of the contract is expected
in 2018.

In support of an export contract to Oman
awarded in 2015 for the PARS Wheeled
Armoured Vehicle, work continues to deliver
8x8 and 6x6 vehicles in a number of
configurations. Deliveries of the first 8x8
and 6x6 vehicles have been accepted, with
the first production batch of 8x8 vehicles
delivered in December.

Work has begun under two Turkish Land
Forces contracts, a €278m (£247m) contract
signed in June 2016 to supply 260 Anti-Tank
Vehicles and an €84m (£75m) contract signed
in December 2016 for air defence vehicles.

In March, FNSS received a €155m (£138m)
contract to provide 27 amphibious assault
vehicles to the Turkish Ministry of National
Defence.

BAE Systems
Annual Report 2017

Segmental review

Platforms &
Services (UK)

Platforms & Services (UK) comprises the Group’s UK-based
air, maritime, land and shared services activities.

Our strategy in action
First Typhoon and Hawk
aircraft delivered to the
Royal Air Force of Oman
The arrival of the first Typhoon and Hawk
aircraft, part of a batch of 12 combat and
eight trainer jets scheduled to be delivered
to the Sultanate of Oman, was marked
with a ceremony in June in the presence
of the Commander of the Royal Air Force
of Oman at Adam Air Base, Oman.

The Sultanate of Oman announced its
decision to purchase Typhoon and Hawk
aircraft in December 2012, and this first
delivery signifies important progress in
helping the Sultanate to upgrade the
capability of its air force.

Military Air & Information includes
programmes for the production of
Typhoon combat and Hawk trainer aircraft,
F-35 Lightning II manufacture and support,
support and upgrades for Typhoon, Tornado
and Hawk aircraft, and development of
next-generation Unmanned Air Systems
and defence information systems.

Maritime programmes include the
construction of two Queen Elizabeth Class
aircraft carriers, five River Class Offshore
Patrol Vessels and seven Astute Class
submarines for the Royal Navy, the design
and production of the Dreadnought Class
submarine and Type 26 frigate, and in-service
support, including the delivery of services at
HM Naval Base, Portsmouth.

Land UK provides combat vehicle
upgrades and support to the British Army
and international customers, and designs,
develops and manufactures a comprehensive
range of munitions products servicing its
main customer, the UK Ministry of Defence,
as well as international customers. The
business also develops and manufactures
cased-telescoped weapons through its
CTA International joint venture.

Organisational changes
Effective 1 January 2018, BAE Systems
revised its reporting segments to reflect
the organisational changes described on
page 17. The Platforms & Services (UK)
and Platforms & Services (International)
management structures have been removed
with the organisation streamlined, and
strengthened Air and Maritime reporting
segments created.

BAE Systems
Annual Report 2017

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Alternative performance
measure definitions

Operational and
strategic highlights
– Contract valued at approximately

£5bn signed in December to supply
24 Typhoon aircraft and support to
Qatar, subject to financing conditions
and receipt by the Group of first payment

– First eight Typhoon and all eight
Hawk aircraft for Oman delivered
to the Sultanate of Oman

– Signed the full £3.7bn production

contract for the initial batch of three
Type 26 frigates

– Received the full £1.4bn contract for

the sixth Astute Class submarine from
the Royal Navy in March, and the
fourth Astute boat, Audacious, was
launched in April

– Rationalisation activities announced,

including potential headcount reductions
in the Military Air & Information and
Maritime Services businesses

Financial performance

Financial performance measures
as defined by the Group

Financial performance
measures defined in IFRS2

Sales

Underlying EBITA

Return on sales

Operating business

cash flow

Order intake1

Order backlog1

KPI

2017

2016

£7,682m £7,806m

Revenue

£794m

10.3%

£810m

Operating profit

10.4%

Return on revenue

Cash flow from

2017

2016

£7,624m £7,699m

£774m

10.2%

£780m

10.1%

£427m

£199m

operating activities

£607m

£385m

£6,817m £8,024m

£16.8bn

£17.8bn

– Sales of £7.7bn (2016 £7.8bn) were
marginally lower than 2016. Activity
levels on the submarine programmes
were ahead of plan.

– Return on sales was at 10.3% (2016 10.4%).

– There was a cash inflow of £427m (2016

£199m), which includes a £106m temporary
benefit relating to VAT. Consumption of
customer advances on the Omani, Saudi
Arabian and European Typhoon contracts
has now largely completed.

– Order backlog reduced to £16.8bn

(2016 £17.8bn). The £5bn order received
from Qatar in December for 24 Typhoon
aircraft and support has not yet been taken
into order backlog, pending completion of
the financing package which we expect in
the coming months.

1. Including share of equity accounted investments.
2. International Financial Reporting Standards.

Sales by domain (%)

Sales by line of business (%)

Sales analysis: Platforms and services (%)

Land

Air

56%

Land UK

Military Air
& Information

59%

Services

37%

Platforms

63%

Maritime

39%

Maritime

37%

BAE Systems
Annual Report 2017

Segmental review
Platforms & Services (UK)

Operational performance
Military Air & Information
In December, BAE Systems and the
Government of Qatar entered into a contract,
valued at approximately £5bn, for the supply
of 24 Typhoon aircraft. Alongside supplying
the aircraft, the agreement provides for
the supply of ground support to the Qatar
Armed Forces and delivery of technical and
pilot training in Qatar. The contract is subject
to financing conditions and receipt by the
Group of first payment which are expected
to be fulfilled no later than mid-2018.

In the year, 20 Typhoon aircraft were
delivered from the UK final assembly facility,
of which four were delivered to Saudi Arabia,
completing the contract for 72 aircraft. All 236
Tranche 2 aircraft have been delivered to the
UK, Germany, Italy and Spain, together with
51 of the 88 contracted Tranche 3 aircraft.

There were eight Typhoon and eight Hawk
aircraft deliveries to the Oman customer in
the year, with the remaining four Typhoon
aircraft scheduled to be delivered in 2018.

Good progress continues to be made on
airframe manufacture for the contract to
supply 28 Typhoon aircraft to Kuwait secured
by Italian Eurofighter partner, Leonardo, in
2016, with fuselage deliveries due to
commence in 2018.

Development towards the Royal Air Force
Centurion standard continues, which will
enable transition of air capabilities from
Tornado to Typhoon. Flight testing for
Storm Shadow and Meteor weapons
capability enhancements was completed
during the year. Integration of the Captor
E-Scan radar continues.

We have continued to support our UK and
European customers’ Typhoon and Tornado
aircraft and their operational commitments.
The ten-year partnership arrangement with
the Ministry of Defence to support the UK
Typhoon fleet continues as planned, with
availability of aircraft being sustained at
contractual levels.

The initial support package has been
substantially delivered as part of the
contract to commence operations at a
new operating air base at Adam in Oman.

On the F-35 Lightning II programme, full
contract award was secured on Lot 10 and 82
rear fuselage assemblies were manufactured
for the Low-Rate Initial Production Lot 10
and 11 contracts. Negotiations continued
on Lot 11, with additional order intake received
in the year of £248m. Lot 11 negotiations are
expected to conclude during the first quarter
of 2018, with the balance of the order intake
also expected in this timeframe.

At RAF Marham in Norfolk, good progress
has been made on construction of the
engineering and training facilities and the
stand-up of the operational service in
readiness for the arrival of the UK’s first
F-35 Lightning II aircraft in 2018.

Following the announcement that the UK
had been chosen as a major European repair
hub for the maintenance, repair, overhaul
and upgrade of F-35 Lightning II avionics
and components, we have established a joint
venture with the UK Ministry of Defence and
Northrop Grumman, and progress on
establishing the repair facility and capability
continues to plan.

Support continues to be provided to users
of Hawk trainer aircraft around the world.
The long-term support contract for the
Royal Air Force’s UK fleet of Hawk fast jet
trainer aircraft continues to deliver against
all contractual milestones.

Discussions continue with the Government
of India and Hindustan Aeronautics Limited
(HAL) for the supply of additional kit sets
which will result in aircraft built under
licence by HAL for the Indian Air Force
and Indian Navy.

Following an extensive review with our partner,
Northrop Grumman, of the requirements and
conditions of the US Air Force future trainer
programme, both companies decided not to
proceed with the competitive bid.

An initial contract for the Anglo-French
unmanned combat air system feasibility and
definition phase of £16m was received during
the year. It is anticipated that an Anglo-French
follow-on programme will be agreed in 2018.

A £119m contract was secured for collaboration
on the first design and development phase of
an indigenous fifth-generation fighter jet for
the Turkish Air Force.

Maritime
On the aircraft carrier programme, HMS
Queen Elizabeth successfully concluded
initial sea trials and entered HM Naval Base,
Portsmouth, for the first time in August.
Operational handover and acceptance
by the Royal Navy took place in December.
HMS Prince of Wales floated out of the
dock at Rosyth in December. Large volume
installation activities continue to progress,
with commissioning of systems planned to
commence in 2018 and sea trials beginning
in 2019.

The full £3.7bn production contract was
signed in June for the first batch of three
Type 26 frigates, with £2.8bn of order intake
in the year, following funding in previous years
for long-lead items. Production of the first ship,
Glasgow, commenced in July. The programme
currently employs over 1,000 people and
production activities will progressively build
up during 2018 as more of the ship transitions
from completion of the detailed design through
to production readiness.

The first Offshore Patrol Vessel (OPV), HMS
Forth, completed sea trials in December and
was accepted by the Ministry of Defence in
January 2018. Construction of the remaining
four OPVs on the Clyde continues.

Under the Maritime Support Delivery
Framework contract, which the Ministry
of Defence has agreed in principle to extend
until 31 March 2020, we provide services
at HM Naval Base, Portsmouth, and support
to half of the Royal Navy’s surface fleet. We
remain on track to achieve target cost. The
business was unsuccessful on a competitive
bid to provide equipment procurement and
equipment management services for the
Queen Elizabeth Class aircraft carriers and
Type 45 destroyers.

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BAE Systems
Annual Report 2017

Looking forward
Forward-looking information reflecting
the organisational changes described on
page 48 is provided later in this report.

Segmental
looking forward

The first three Astute Class submarines are
in operational service with the Royal Navy.
Progress continues on the manufacture of
the remaining four boats, with launch of
the fourth boat, Audacious, achieved in
April. A full contract award for the sixth
boat, Agamemnon, was secured in March
for £1.4bn, with £0.6bn of order intake in
the year after order intake in previous years
for long-lead items. Further funding of
£80m was received for the seventh boat.

Functional and spatial design, and the
production of the first of class continues
to advance on the Dreadnought Class
submarine, the replacement for the
Royal Navy’s Vanguard Class submarine.
The next phase of the contract is
scheduled to commence in April 2018.

The major programme of building works
at the Barrow site continues, with contracts
in place totalling more than £500m, with
two further major buildings being completed
during the year.

The detailed arrangements for the
Dreadnought Alliance, including the
organisational, governance and commercial
arrangements between the three parties,
the Ministry of Defence, BAE Systems and
Rolls-Royce, continue to be developed.

Land UK
The business continues to provide UK and
international customers with a full range
of light and heavy munitions, with orders
totalling £133m received in the year.

During the year, 131 40mm cased-telescopic
cannons were delivered to the Ministry of
Defence by CTA International, a joint venture
between BAE Systems and Nexter, bringing
cumulative deliveries to 160 of 515. This is the
first entirely new medium calibre cannon and
ammunition system qualified by the British
Army since the late 1960s.

The business has continued to provide support
to previously supplied armoured vehicles and
bridging systems, with orders of £48m
received in the year. The business is one of
two contenders delivering the design stages
of the Challenger 2 Life Extension Programme
and the British Army’s bridging system.

Re-presentation
of 2017 results

Our strategy in action

Production of
Type 26 frigates
for the Royal
Navy commences

The UK programme to manufacture the
Type 26 frigate for the Royal Navy is under
way following the receipt of the full £3.7bn
production contract for the initial batch of
three frigates. Progress on the programme
was highlighted by the cutting of steel on
Glasgow, the first of the new ships, in July.

Highly-advanced and adaptable, the Type 26
frigate will be able to fulfil multiple missions
around the world, from submarine hunting
to humanitarian assistance. Designed for a
service life of at least 25 years, the Type 26
frigates will be a critical part of the future
Royal Navy surface fleet.

Group strategic
framework

More online
baesystems.com

BAE Systems provides significant support
and maintenance to the Royal Navy’s fleet
of Type 45 destroyers, and has responded
to a Ministry of Defence competitive proposal
on its power improvement project, with the
award decision expected in 2018.

Progress continues on the £270m Spearfish
torpedo upgrade demonstration and
manufacture phases, with the demonstration
phase forecast to complete in 2020.

Evolving customer requirements and a focus
on improved efficiency and removing cost
in the Maritime Services business have led to
the announcement in October of a proposed
headcount reduction of around 375 roles.
The proposed rationalisation will more closely
align capacity with workload and improve
competitiveness to retain and grow our
position on key programmes, while retaining
critical skills.

BAE Systems
Annual Report 2017

Segmental review

Platforms &
Services (International)

Platforms & Services (International) comprises the
Group’s businesses in Saudi Arabia, Australia and Oman,
together with its 37.5% interest in the pan-European
MBDA joint venture.

Our strategy in action
Supporting the operational
capabilities of the Royal
Saudi Air Force
Throughout 2017, we have continued
to provide support to the Royal Saudi
Air Force Typhoon and Tornado fleets.
We have delivered against our contractual
requirements ensuring that, as part of our
commitment to support the defence needs
of the Kingdom, an efficient and affordable
support service is always available.

Building on our success in reducing
through-life costs for the UK Royal Air
Force, we have met our commitments in
supporting Saudi Arabian aircraft across
maintenance, training, logistics and
servicing, as well as identifying cost savings
and process efficiencies. We have done this
without compromising the effectiveness of
the aircraft, enabling the Royal Saudi Air
Force to continue to conduct its vital role
in the defence of the Kingdom.

In Saudi Arabia, the business provides
operational capability support to the
country’s air and naval forces through
UK/Saudi government-to-government
programmes. The Saudi British Defence
Co-operation Programme and Salam
Typhoon project provide for multi-year
contracts between the governments.

In Australia, the business delivers production,
upgrade and support programmes for
customers in the defence and commercial
sectors across the air, maritime and land
domains. Services contracts include the
provision of sustainment, training solutions
and upgrades.

In Oman, the business is developing its position
building on a long history of relationships
with the Omani armed forces through the
provision, support and upgrade of defence
platforms and cyber security services. Business
generated in Oman is executed through our
relevant reporting segments.

MBDA is a leading global prime contractor
of missiles and missile systems across the air,
maritime and land domains.

BAE Systems
Annual Report 2017

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Alternative performance
measure definitions

Operational and
strategic highlights
– Final four of 72 Typhoon aircraft delivered
to Saudi Arabia on the Salam Typhoon
programme

– The Typhoon support contracts are
operating well and a contract for
support to additional flying hours
was agreed in April

– Contracts agreed to provide ongoing

support services to the Royal Saudi Air
Force and Royal Saudi Naval Forces for
a further five years

– The first major units of the second batch
of Hawk aircraft delivered on schedule
to Saudi Arabia allowing final assembly
to commence

– Assigned the role of F-35 Regional

Warehouse provider for the Asia-Pacific
region

– Selected as the preferred tenderer for

the Jindalee Operational Radar Network
upgrade programme

– MBDA signed a contract in December

to supply Brimstone and Meteor missiles
to Qatar, subject to financing conditions
and receipt of first payment

– MBDA contracts for naval fleet air defence
and coastal defence in Qatar became
effective in July

Financial performance

Financial performance measures
as defined by the Group

Financial performance
measures defined in IFRS2

Sales

Underlying EBITA

Return on sales

Operating business

cash flow

Order intake1

Order backlog1

KPI

2017

2016

£4,138m £3,943m

Revenue

£472m

11.4%

£400m

Operating profit

10.1%

Return on revenue

Cash flow from

2017

2016

£3,136m £3,037m

£427m

13.6%

£365m

12.0%

£671m

£435m

operating activities

£669m

£473m

£4,365m £6,175m

£13.3bn

£13.1bn

– Sales of £4.1bn (2016 £3.9bn) were 5%

up over 2016. With all 72 Salam Typhoon
aircraft now in service, we have seen higher
levels of support. In addition, we have seen
the expected ramp-up from MBDA’s strong
order backlog.

– Order backlog was marginally higher at
£13.3bn (2016 £13.1bn) as further order
intake was booked under the renewal of the
five-year support contract in Saudi Arabia
and Qatari naval orders became effective
within MBDA.

– Underlying EBITA of £472m (2016 £400m)
and the return on sales of 11.4% (2016
10.1%) benefited from improving
performance from our Saudi partner
companies and stronger performance
at MBDA.

– Operating cash inflow was £671m

(2016 £435m), although approximately
£300m of this was for an advance
payment on the Saudi support programme.

1. Including share of equity accounted investments.
2. International Financial Reporting Standards.

Sales by domain (%)

Sales by line of business (%)

Sales analysis: Platforms and services (%)

Land

Maritime

Air

84%

MBDA

21%

Saudi Arabia

65%

Services

71%

Platforms

29%

Australia

14%

BAE Systems
Annual Report 2017

Segmental review
Platforms & Services (International)

Operational performance
Saudi Arabia
On the Salam Typhoon programme, with four
deliveries in the year, all 72 contracted aircraft
have been delivered to the customer. Typhoon
capability development programmes continue
to progress.

The Typhoon support contracts are operating
well and a contract for support to additional
flying hours was agreed in April.

Discussions have continued with the Saudi
Arabian customer though 2017, resulting in
contractual agreements under the Saudi British
Defence Co-operation Programme to provide
ongoing support services to the Royal Saudi
Air Force and Royal Saudi Naval Forces for a
further five years to 31 December 2021.

Final aircraft deliveries for the first batch
of 22 Hawk aircraft were completed in the
second half of the year. The first major units
of the second batch of 22 aircraft, contracted
in 2015, have been delivered on schedule
to Saudi Arabia allowing final assembly
to commence.

Under the Royal Saudi Naval Forces’
Minehunter mid-life update programme,
acceptance of the third and final ship is
expected in the first half of 2018.

Under the planned reorganisation of our
portfolio of interests in a number of industrial
companies in Saudi Arabia, Riyadh Wings
Aviation Academy LLC acquired a 4.1%
shareholding in a Group subsidiary, Overhaul
and Maintenance Company, during 2016
and is expected to acquire a further interest
up to a maximum of 49%. The reorganisation
supports our strategy to expand the customer
base of our In-Kingdom Industrial Participation
programme, promoting training, development
and employment opportunities in line with
the Kingdom’s National Transformation Plan
and Vision 2030.

Our strategy in action

Upgrading
Australia’s radar
defence network

In June, we were advised that we have been
selected as the preferred tenderer to help
sustain Australia’s radar defence network
beyond 2042. The Jindalee Operational
Radar Network (JORN), a network of three
remote over-the-horizon radars, provides
wide-area surveillance and the upgrade
programme will see us carry out important
work to insert new technologies and extend
the operational life of the network.

The JORN programme offers further
opportunities for Australian suppliers as
our 100% Australian approach will see us
developing Australian small and medium-
sized enterprises in the supply chain. This
also ensures that Australia retains control
of its strategically important sovereign asset
which plays a vital role in supporting the
Australian Defence Force’s air and maritime
operations, border protection, disaster relief,
and search and rescue operations.

Group strategic
framework

More online
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BAE Systems
Annual Report 2017

Looking forward
Forward-looking information reflecting
the organisational changes described on
page 52 is provided later in this report.

Segmental
looking forward

MBDA
In March, MBDA secured a contract from the
UK and French governments for a three-year
concept phase of the Future Cruise/Anti-Ship
Weapon, which will prepare for the
replacement of the existing missiles deployed
by the UK and French armed forces. This
contract follows on from the joint UK-France
2016 programme for the mid-life refurbishment
of their current inventory of missiles.

In July, MBDA finalised the financing
package to secure effectivity of the Qatari
contracts signed in 2016, which will supply
air defence systems and anti-ship missiles
for the naval surface fleet along with coastal
defence systems.

The German Ministry of Defence and
MBDA have entered into a formal negotiation
process for the German ground-based air
defence system, TLVS, a key element of the
German defence strategy. Lockheed Martin
will be the joint venture partner with MBDA
on this programme.

Significant progress has been made in
securing positions on a number of fast jet
platforms. The Meteor Beyond Visual Range
Air-to-Air Missile is already in operational
service on Gripen with the Swedish Air Force
and has now achieved qualification for both
Typhoon and Rafale aircraft. A contract has
been received to procure further Brimstone
missiles to equip Typhoon. Integration of
MBDA missiles on F-35 Lightning II has
progressed well, with successful Advanced
Short Range Air-to-Air Missile qualification
firings achieved and contracts received from
the UK to integrate Meteor.

In December, MBDA entered into a contract
with Qatar for the supply of Brimstone and
Meteor missiles. The contract is subject to
financing conditions and receipt by MBDA
of first payment which are expected to be
fulfilled no later than mid-2018.

Success in both domestic and export markets
has significantly increased MBDA’s production
volumes resulting in the requirement to expand
production capacities. A new manufacturing
facility is fully operational in Bolton, UK, and
a capacity enhancement is under way in
Bourges, France.

Re-presentation
of 2017 results

The Saudi Arabian In-Kingdom Industrial
Participation programme continues to make
good progress. During 2017, there has been
further capability and knowledge transfer on
the Typhoon and Hawk platforms. The first
Hawk aircraft assembled in Saudi Arabia
will come off the production line in 2018
for delivery to the Royal Saudi Air Force.

We have commenced discussions with
the new Saudi Arabian Military Industries
(SAMI) organisation to explore how we can
collaborate to deliver further In-Kingdom
Industrial Participation. All of these activities
are aligned with our long-term industrialisation
strategy, as well as the Saudi Arabian
government’s National Transformation
Plan and Vision 2030.

Australia
We have continued to provide in-service
support to the Navy’s two Landing Helicopter
Docks under a four-year support contract
awarded in 2014. Final acceptance of these
vessels is expected in 2018.

HMAS Stuart, the final Anzac Class frigate
to be modernised under the Anti-Ship Missile
Defence programme, has been accepted into
service by the Commonwealth.

The scope of activities for the next five years
of sustainment and upgrade of the Anzac
fleet under the Warship Asset Management
Alliance has been agreed and contracts
totalling A$561m (£324m) have been
awarded to BAE Systems.

The next upgrade cycle for the Anzac frigate
fleet, the Mid-Life Capability Assurance
Programme, has commenced, with the first
ship, HMAS Arunta, being docked at our
Henderson shipyard during the second half
of the year. The upgrade programme is
planned to run through to 2023.

The delayed JP 2008 Phase 3F programme
to provide enhanced defence satellite
communications services was formally accepted
by the Commonwealth in November. We will
continue to provide in-service support to the
system under a five-year support contract.

Mobilisation activities for sustainment of the
Regional F-35 Lightning II fleet continues to
progress at our Williamtown facility, with an
increased scope following the announcement
in August that BAE Systems was assigned the
role of F-35 Regional Warehouse provider for
the Asia-Pacific region.

Our existing Hawk Mk127 Lead-in
Fighter sustainment contracts continue
to perform strongly.

The Capability Assurance Programme to
upgrade the Hawk fleet to meet the training
requirements of the fifth-generation F-35
Lightning II is progressing ahead of schedule,
with 20 of the 33 aircraft modified at the end
of 2017. During 2017, the Australian Air Force
customer declared achievement of initial
operating capability and has commenced
training with the aircraft.

In June, the Commonwealth announced
that we have been selected as the preferred
tenderer for the Jindalee Operational Radar
Network upgrade programme. If successful,
the expected value of the contract over the
initial award term of ten years is approximately
A$1.0bn (£0.6bn).

Following down-select in 2016 as one of
two tenderers for the Land 400 Phase 2
Combat Reconnaissance Vehicle programme,
we have completed the Risk Mitigation
Activity contract and submitted our final
proposal to the Commonwealth in August.
Customer evaluation is ongoing, with final
preferred tender selection anticipated in the
first half of 2018.

Our tender response for the Commonwealth’s
nine-ship SEA 5000 Future Frigate programme
was submitted in August. The Commonwealth
continues to fund Schedule Protection Activity
to support its evaluation timetable and we
anticipate a preferred tender selection in the
first half of 2018.

Oman
The Oman Typhoon and Hawk aircraft
programme, being undertaken by Platforms
& Services (UK), completed delivery of the
first eight Typhoon aircraft and all eight
Hawk trainer aircraft in 2017. The remaining
four Typhoon aircraft are scheduled to be
delivered in 2018.

Separately, we continue to fulfil our legacy
industrial participation obligations in Oman
through delivery of an agreed training and
knowledge transfer programme.

BAE Systems
Annual Report 2017

Re-presentation
of 2017 results

Effective 1 January 2018, BAE Systems revised its reporting
segments to reflect the organisational changes described
on page 17 and adopted International Financial Reporting
Standard (IFRS) 15, Revenue from Contracts with Customers.

Alternative performance
measure definitions

Financial performance measures for the year ended 31 December 2017 as re-presented to reflect the organisational changes are as follows:

As defined by the Group

Defined in IFRS1

KPI

Underlying
EBITA
£m

Return
on sales
%

562

242

1,000

258

(80)

15.5

2.9

8.3

12.4

8.2

Sales
£m

3,635

1,820

2,928

8,059

3,151

336

(303)

KPI
Operating
business
cash flow
£m

450

116

222

832

278

(146)

KPI

Order
intake2
£m

4,175

1,859

3,542

6,128

4,671

337

(455)

Order
backlog2
£bn

Revenue
£m

Operating
profit/(loss)
£m

Return
on revenue
%

5.4

2.1

4.6

20.4

9.1

–

(0.4)

3,635

1,820

2,825

7,120

3,119

(244)

542

(367)

218

952

247

(112)

14.9

(20.2)

7.7

13.4

7.9

19,626

2,034

10.4

1,752

20,257

41.2

18,322

1,480

8.1

Net cash
flow from
operating
activities
£m

569

127

286

888

396

(142)

(227)

1,897

Year ended 31 December 2017

Electronic Systems

Cyber & Intelligence

Platforms & Services (US)

Air

Maritime

HQ3

Deduct Intra-group

Deduct Taxation4

Total

Financial performance measures for the year ended 31 December 2017 as re-presented to reflect both the organisational changes and
the impact of the adoption of IFRS 15 are as follows:

As defined by the Group

Defined in IFRS1

KPI

Underlying
EBITA
£m

Return
on sales
%

541

237

967

251

(80)

15.0

3.2

8.0

13.4

8.7

Sales
£m

3,598

1,818

2,951

7,210

2,877

336

(303)

KPI
Operating
business
cash flow
£m

450

116

222

832

278

(146)

KPI

Order
intake2
£m

4,175

1,859

3,542

6,128

4,671

337

(455)

Order
backlog2
£bn

Revenue
£m

Operating
profit/(loss)
£m

Return
on revenue
%

4.8

2.1

4.2

19.5

8.5

–

(0.4)

3,598

1,818

2,848

6,312

2,845

(244)

521

(361)

213

921

240

(112)

14.5

(19.9)

7.5

14.6

8.4

18,487

1,974

10.7

1,752

20,257

38.7

17,224

1,422

8.3

Net cash
flow from
operating
activities
£m

569

127

286

888

396

(142)

(227)

1,897

Year ended 31 December 2017

Electronic Systems

Cyber & Intelligence

Platforms & Services (US)

Air

Maritime

HQ3

Deduct Intra-group

Deduct Taxation4

Total

The Group and segmental guidance for 2018 shown opposite is based on the Group’s actual financial performance for 2017 as re-presented
to reflect both the organisational changes and the impact of the adoption of IFRS 15.

1. International Financial Reporting Standards.
2. Including share of equity accounted investments.
3. HQ comprises the Group’s UK-based head office and shared services activities, together with a 49% interest in Air Astana.
4. Taxation is managed on a Group-wide basis.

BAE Systems
Annual Report 2017

Guidance
for 2018

For the year ending 31 December 2018, we expect the Group’s underlying earnings
per share to be in line with the full-year underlying earnings per share in 2017 of 42.1p.*
The guidance is based on the measures used to monitor the underlying financial performance of the Group. Reconciliations
from these measures to the financial performance measures defined in International Financial Reporting Standards for 2017
are provided in the Group financial review on pages 28 to 34.

* Compared with the Group’s actual financial performance for 2017 as re-presented to reflect the impact of the adoption of IFRS 15 from 43.5p to 42.1p

and assuming a US$1.40 to sterling exchange rate.

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Electronic Systems
– High single-digit sales growth is expected
in 2018 driven by a number of electronic
warfare contracts with some 70%
of projected sales in the 2017 closing
order backlog.

– Margins1 are expected to be in a range

of 14% to 16%.

Cyber & Intelligence
Comprising the US Intelligence & Security
sector (70% of Cyber & Intelligence sales
in 2017) and Applied Intelligence:
– In aggregate, sales in 2018 are expected
to be marginally higher than 2017. Sales
in Intelligence & Security are expected to
be largely unchanged, with some growth
coming from the UK Services and
International Services & Solutions divisions
of Applied Intelligence.

– Margins1 are expected to improve to

around 5%. The Intelligence & Security
business is expected to contribute around
8% margin, with Applied Intelligence
moving to an overall break-even position.

Platforms & Services (US)
– Sales growth of 10% to 15% is expected,
with increasing volumes from the US
Combat Vehicles and Weapon Systems
businesses, as well as higher ship repair
activity. Almost 75% of guidance is in
the closing order backlog.

– Another year of margin1 improvement to

a range of 9% to 10% is expected in 2018
absent further charges on the commercial
shipbuilding contracts.

Air
– Sales are expected to be some 5%

lower as activity on Typhoon for the
European, Saudi and Oman contracts
is largely complete. Around 85% of
guidance is in the closing order backlog.
– Margins1 are expected to be in the 11%

to 13% range.

Maritime
– Sales are expected to be stable as activity
levels on Carrier reduce and are largely
offset by increases on submarine
programmes. Around 90% of guidance
is in the closing order backlog.

– Margin1 levels are expected to be within

the 8% to 9% range.

HQ
– HQ costs are expected to be similar

to 2017.

– Underlying finance costs are expected

to be around 15% lower, benefiting from
the weaker US dollar, reduced charges
arising from our share of equity accounted
investments and lower net present value
adjustments.

– The underlying effective tax rate for 2018
is expected to reduce from 21% to around
18% benefiting from US tax reform, with
the final rate dependent on the geographical
mix of profits.

1. Underlying EBITA as a percentage of sales.

BAE Systems
Annual Report 2017

Segmental
looking forward

Effective 1 January 2018, BAE Systems has five principal
reporting segments, Electronic Systems, Cyber & Intelligence,
Platforms & Services (US), Air and Maritime, which align
with the strategic direction of the Group.

2017 sales1

Sales by reporting segment for the year
ended 31 December 2017 as re-presented
to reflect the organisational structure
effective from 1 January 2018 and the
impact of the transition to IFRS 15 are
as follows:

19%

10%

16%

39%

16%

A Electronic Systems

B Cyber & Intelligence

C Platforms & Services (US)

D Air

E Maritime

2017 underlying EBITA2

Underlying EBITA by reporting segment
for the year ended 31 December 2017 as
re-presented to reflect the organisational
structure effective from 1 January 2018
and the impact of the transition to
IFRS 15 is as follows:

A Electronic Systems

B Cyber & Intelligence

C Platforms & Services (US)

D Air

E Maritime

26%

12%

47%

12%

1. Revenue plus the Group’s share of revenue of equity

accounted investments.

2. Operating profit excluding amortisation and

impairment of intangible assets, finance costs and
taxation expense of equity accounted investments
(EBITA), and non-recurring items.

Electronic Systems

Cyber & Intelligence

Alternative performance
measure definitions

Our
markets

Electronic Systems comprises
the US and UK-based electronics
activities, including electronic
warfare systems, electro-optical
sensors, military and commercial
digital engine and flight controls,
precision guidance and seeker
solutions, next-generation military
communications systems and
data links, persistent surveillance
capabilities, and hybrid electric
drive systems.

Electronic Systems is well positioned to address
current and evolving priority programmes
from its strong franchise positions in
electronic warfare, precision guidance and
seeker solutions. Electronic Systems has a
long-standing programme of research and
development, and its focus remains on
maintaining a diverse portfolio of defence
and commercial products and capabilities
for US and international customers.

The business expects to benefit from its
ability to apply innovative technology solutions
that meet defence customers’ changing
requirements. That, along with strong
programme positions, particularly on F-35
Lightning II and F-15 upgrades, and specific
products such as APKWS™, position the
business well for the medium term.

In the commercial aviation market, Electronic
Systems’ technology innovations are enabling
the business to maintain its long-standing
customer positions and to compete for,
and win, new business.

Cyber & Intelligence comprises the
US-based Intelligence & Security
business and UK-headquartered
Applied Intelligence business, and
covers the Group’s cyber security,
secure government, and commercial
and financial security activities.

Intelligence & Security
The outlook for the US government services
sector is stable, although market conditions
remain highly competitive and continue
to evolve.

Whilst the government’s decision not to
exercise future options on our contract to
develop a shared IT environment for US
agencies could impact revenue in 2018, the
shift in the government’s IT strategy could
present new opportunities for the business.

With effect from 12 February 2018, the
business has restructured to better align with
its customer base and position the business
to more effectively compete and grow in
critical, mission-focused areas with three
business areas: Integrated Defence Solutions;
Intelligence Solutions; and Air Force Solutions.

Applied Intelligence
With effect from 1 January 2018, the Applied
Intelligence business has restructured to focus
on a more targeted portfolio of products and
services, delivering for customers within three
core business units: Government; Financial
Services; and Technology & Commercial.
The restructuring will enable a greater focus
on customer needs and higher levels of
operational efficiency, in the commercial
business, that will accelerate improvements
in competitiveness and profitability.

Sales growth is expected to continue as
cyber security is an increasingly important
part of government security and a core
element of stewardship for commercial
enterprises in a sophisticated and persistent
threat environment.

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BAE Systems
Annual Report 2017

US defence budget
Whilst we continue to operate under a Continuing Resolution, the bipartisan budget agreement passed on 9 February 2018
would increase the US defence budget by approximately 10% over current levels, reflecting continued growth in defence spending
to $700bn (£518bn) for the fiscal year ending 30 September 2018. This budget agreement increases the budget caps for two years
and extends the Continuing Resolution to 23 March 2018 to allow lawmakers to pass a 2018 spending bill.

Platforms & Services (US)

Air

Maritime

Platforms & Services (US), with
operations in the US, UK and
Sweden, manufactures combat
vehicles, weapons and munitions,
and delivers services and
sustainment activities, including
ship repair and the management
of government-owned
munitions facilities.

The land vehicles business is underpinned by
strong positions on key franchise programmes.
These include the US Army’s Armored
Multi-Purpose Vehicle, M109A7 self-propelled
howitzer and Bradley upgrade programmes,
and the CV90 and BvS10 export programmes
from our BAE Systems Hägglunds business.

The business continues to pursue a range
of domestic and international opportunities
in combat and amphibious vehicles as well
as weapon systems.

FNSS has grown its order book with both
domestic and international orders.

These long-term contracts and our franchise
position in tracked vehicles, which offer
opportunities in international markets, make
the land business well placed for growth in
the medium term.

In the maritime domain, the Group has a
strong position on naval gun programmes
and US Navy ship repair. Additional dry dock
ship repair capacity has been established in
San Diego to support the US Navy’s increased
requirements in the Asia-Pacific region.

The Group remains a leading provider of
gun systems and precision strike capabilities
and, in the complex ordnance manufacturing
business, we continue to manage the
US Army’s Radford and Holston munitions
facilities under long-term contracts.

Air comprises the Group’s UK-based
air activities for European and
International markets and US
Programmes and its businesses in
Saudi Arabia and Australia, together
with its 37.5% interest in the
pan-European MBDA joint venture.

In the UK, as current export contracts for
Typhoon and Hawk complete, and UK
Tornado support ends, sales are underpinned
by our workshare on Typhoon for Kuwait,
Typhoon and Hawk support, and F-35
Lightning II production and support. UK-based
production of rear fuselage assemblies for
F-35 Lightning II will increase over the next
three years to reach its expected peak rate
for the next decade. We play a significant
role in the F-35 Lightning II sustainment
programme in support of Lockheed Martin.

Discussions continue with current and
prospective operators on contract awards
for Typhoon and Hawk, and we continue
to develop long-standing international
partnerships in the air domain, maintaining
our skills and capabilities.

The UK and Saudi support operations are
underpinned by long-term contracts. In Saudi
Arabia, the In-Kingdom Industrial Participation
programme continues to make good progress
consistent with our long-term strategy, as well
as the Saudi Arabian government’s National
Transformation Plan and Vision 2030.

In Australia, the business is structured
around long-term sustainment and upgrade
activities, and we are progressing significant
opportunities with the Australian government
in the maritime and land domains.

MBDA has a strong order book which is
driving increasing production and sales.
Development programmes continue to
improve the long-term capabilities of
the business.

Maritime comprises the
Group’s UK-based maritime
and land activities.

Maritime
In Maritime, there remains pressure on
the Navy’s near-term budgets and a
highly-competitive environment in ship
support and upgrade.

Within submarines, the business is executing
on the Astute Class programme, with four
boats still in build. On the Dreadnought
programme, production on the first boat
of four commenced in 2016. Investment
continues in the Barrow facilities to provide
the capability on these long-term
programmes through the next decade.

In shipbuilding, sales are underpinned by the
contracts to manufacture the Queen Elizabeth
Class aircraft carriers, Type 26 frigates and
River Class Offshore Patrol Vessels.

The through-life support of surface ship
platforms provides a sustainable business
in technical services and mid-life upgrades.

Land UK
The Land UK business continues to deliver
support to armoured vehicle and bridging
systems in UK and international markets,
munitions under the 15-year Munitions
Acquisition Supply Solution partnering
agreement secured in 2008 and 40mm
cased-telescopic cannons for the UK and
French armies.

BAE Systems
Annual Report 2017

Corporate
responsibility

Corporate responsibility is a key enabler for our business,
supporting sustainable long-term performance by
managing non-financial risks that can impact reputation
and shareholder value.

How we
manage risk

Corporate responsibility in action
Launch of the revised
Code of Conduct
We regularly review and update our
Code of Conduct to ensure that it reflects
best practice, emerging issues and new
regulations. This was done in 2017 and
the revised Code of Conduct was launched
in January 2018. As part of the revision
process, the Code of Conduct was
externally benchmarked with two
organisations, the Institute of Business
Ethics and the Corporate Executive Board.
Further review was conducted by internal
consultation and collaboration across
the Group, including trade union
representatives. The final version was
approved by the Board in December.

The Board delegates the detailed oversight
of corporate responsibility matters to the
Corporate Responsibility Committee,
which is chaired by a non-executive
director (see page 87). The Corporate
Responsibility Committee meets as
part of the Board’s annual schedule of
meetings (see page 80), and agrees the
Group’s responsible business priorities
relating to our employees, trust and
integrity, health and safety, and
resource efficiency.

The Chief Executive is responsible for
ensuring we meet our own standards
and the expectations of our stakeholders.
He is supported by the Managing Director
Operational Governance with guidance
and oversight from the Board via the
Corporate Responsibility Committee.
The performance review process is used
to flow down corporate responsibility
objectives through the Company.

For information on how our business
model is underpinned by our commitment
to corporate responsibility, see page 23.

Our Operational Framework (see page 76)
sets out the way we do business. We set
Group-wide policies, which are enacted
at a local level by our businesses, and help
business leadership to make informed
decisions about the business opportunities
we pursue.

The Operational Framework is reviewed
and approved by the Board each year.
The twice-yearly Operational Assurance
Statement (OAS) process is used to
monitor compliance with the Operational
Framework. The Internal Audit Director
owns the OAS Policy, and is responsible
for the consolidation and reporting of the
OAS submissions from the businesses to
the Group Audit Review Board, the Audit
Committee and the Corporate Responsibility
Committee. The Internal Audit Director
reports functionally to the Audit Committee
and, for day-to-day operations, to the Chief
Executive. The Corporate Responsibility
and Audit Committees hold a joint meeting
each year to review the OAS and assurance
matters as both committees are concerned
with both financial and non-financial risk.

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Our principal
risks

Our corporate responsibility programmes
focus on:

– developing an inclusive, diverse workplace
to drive innovation and performance, and
engaging with the communities in which
we operate (see page 24);

– supporting our employees in making the

right decisions (see below);

During 2017, we rolled out face-to-face
ethics training that covered realistic, issue-
based scenarios. This training, delivered by
line managers to their teams across the Group,
was designed to stimulate conversations
around difficult issues faced by employees in
their workplace. Certain employees received
additional training according to their role,
such as anti-corruption training.

Total ethics enquiries1

2017

2016

2015

2014

2013
Anonymity rate

1,280

1,121
1,148

1,037
1,043

– continuously improving employee wellbeing
and standards of safety for employees and
those we work with (see page 63); and

– managing the environmental impacts of
our facilities and products (see page 64).

Trust and integrity
We aim to be a recognised leader in business
conduct. This helps us to earn and maintain
stakeholder trust and sustain business
success.

We consider it fundamental to maintain a
culture focused on embedding responsible
business behaviours. All employees are
expected to act in accordance with the
requirements of the Company’s policies,
including the Code of Conduct, at all times.
As well as being the right thing to do, this
reduces the risk of compliance failure and
supports us in attracting and retaining
high-calibre employees. Our principal risks
include risks relating to laws and regulations,
and our people (see pages 70 and 71,
respectively).

We work to build a culture where our people
are empowered to make the right decisions
and know where to go to seek help or
guidance. Our Code of Conduct sets out
clear expectations on ethical conduct and
we offer training and support to help people
understand the right thing to do.

Employees can speak up via our network
of over 160 Ethics Officers or by contacting
our 24-hour Ethics Helpline by phone, e-mail
or an external website to ask for support or
report concerns, anonymously if preferred.

We collect data on ethics enquiries and
dismissals for reasons relating to unethical
behaviour (see opposite). In 2017, there
were 1,2801 ethics enquiries, an increase
of 14% on 2016. This positive trend reflects
our efforts to encourage people to speak up
and we will continue to communicate to our
employees the methods of making contact.
Our 2017 anonymity rate of 24% compares
favourably with international benchmarks.

In 2017, 53% of the ethics enquiries received
were requests for guidance and advice,
which we believe reflects our employees
coming to us before a situation has worsened
and requires investigation. We encourage
employees to contact us as early as possible
when a potential incident can still be
prevented by timely advice.

All ethics enquiries reported which required
investigation were reviewed and reported
either to the Ethics Review Committee or,
in BAE Systems, Inc., to the Ethics Review
Oversight Committee.

24% (2016 21%)

2017 ethics enquiries by type1

680

217

146
122
115

1 Guidance and advice

2 Employee relations and conduct

3 Management practices

4 Accounting charges practices

5 Other

Dismissals for reasons relating
to unethical behaviour1

2017

2016

2013

2012

2011

219
227
265

292
298

For further information, see our
Corporate responsibility summary
baesystems.com/crsummary

1. See summary of Deloitte LLP assurance on page 65.

BAE Systems
Annual Report 2017

Corporate responsibility
continued

Our principal
risks

Operational
framework

Suppliers are regularly reviewed throughout
their contractual relationships against such
non-financial risks. In 2017, we published our
response to the UK Modern Slavery Act and
a statement in response to the California
Transparency in Supply Chain Act on our
website, baesystems.com.

Working with others
We continue to work with peers across
the defence industry to improve ethical
standards. During 2017, we continued to
participate in the International Forum on
Business Ethical Conduct’s Council and
worked with the Institute of Business Ethics
to set up a UK Defence Practitioners Group.
This group met several times in 2017 to share
experiences and best practice on ethical
issues of particular concern to the industry
and to receive expert briefings.

2018 priorities
We will roll out the revised Code of
Conduct to all employees. Managers will
distribute the Code of Conduct to their
direct reports alongside face-to-face,
scenario-based training. This forms part
of our continuing efforts to build a culture
of responsible behaviour and ethical
decision-making.

Anti-bribery and anti-corruption
We have well-established anti-bribery and
anti-corruption policies aimed at ensuring
adherence to the associated legal and
regulatory requirements. Our commitment
to comply with all applicable laws and
regulations, including those addressing
anti-bribery and anti-corruption, and our
commitment never to offer, give or receive
bribes or inducements is also clearly set out
in the Code of Conduct.

The policies referred to above include the
following:
– Advisers Policy – which governs the

appointment, management and payment
of third parties who are engaged to assist
with our sales and marketing activities;
– Gifts and Hospitality Policy – which

governs the reasonableness and
proportionality of offering or receipt
of gifts or hospitality;

– Conflict of Interest Policy – designed

to ensure that personal conflicts of interest
do not impair employees’ judgement and
damage the Company’s integrity and
interests; and

– Facilitation Payments Policy – designed

to ensure that the Company and its
employees seek to eliminate the practice
of facilitation payments.

Other policies, including our Export Control
Policy, Lobbying Policy and Offset Policy,
include measures to address bribery and
corruption risks.

An outcome of these policies is our extensive
due diligence procedures implemented to
address the issues mentioned above. In
particular, the Advisers Policy requires that
intermediaries who are engaged to assist with
our sales and marketing activities are approved
via procedures which include appropriate
internal and external due diligence and
authorisation. Sales and marketing advisers
with whom the Company has an ongoing
relationship go through this process every
two years.

For the principal risks relating to compliance
with anti-bribery and anti-corruption
regulations and how the risk is mitigated,
see the laws and regulations risk description
on page 70.

Suppliers
We work with suppliers and their supply
chains to provide fully compliant, cost-
effective equipment, goods, services and
solutions. Our supplier relationships are often
long term due to the length of our product
lifecycles, so we aim to work with suppliers
who share our values and who embrace
standards of ethical behaviour consistent
with our own.

Our policy is to identify and select suppliers
who meet our standards, and support them
by managing risks throughout the lifecycle
of any commercial arrangement. We manage
risk with our suppliers in accordance with our
Procurement Policy, our Lifecycle Management
Framework and our Supplier Principles. Our
business leaders and the Global Procurement
Council oversee compliance with the policies
and principles. Our procurement teams
assess suppliers against anti-bribery
and anti-corruption criteria.

After selection, we continue to engage with
our suppliers for ongoing assurance at all
stages of a project. Our key supplier and
procurement policies are compliant with
national and international laws. In 2017,
we reconfirmed our commitment to the
enhanced UK Government Prompt Payment
Code and were one of the inaugural
signatories to the Australian Small Business
Supplier Payment Code.

Human rights
We are committed to respecting human
rights. This applies equally to our employees,
our suppliers and business partners, all of
whom are expected to adopt the same or
similarly high standards of ethical behaviour.
We are committed to conducting business
responsibly and to maintaining and improving
systems and processes to reduce the risk of
slavery or human trafficking in our business
or supply chain.

Our Code of Conduct and other global
policies and processes mandated under the
Operational Framework, together with our
supporting principles and guidance on
responsible trading and suppliers, support
our commitment to human rights. This results,
for example, in due diligence being carried out
during the supplier evaluation stage against
non-financial risks, including human rights,
working hours, harassment and unlawful
discrimination, anti-whistleblowing, slavery,
human trafficking and child labour.

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Recordable Accident Rate
(per 100,000 employees)2

2017

2016

564
580

Major injuries recorded2,3

2017

2016

BONUS

KPI

BONUS

5% of the UK executive directors’ bonuses are based on the
achievement of safety KPIs (see page 101).

Health and safety
Our collective focus on employee wellbeing
and the health and safety of employees and
those who work on, or visit, our sites is a
contributory factor to the success of our
organisation. Our safety culture and our
employees demand high standards for all
aspects of health and safety. This is supported
both by our mandated Health and Safety
Policy and the principles contained within
our Code of Conduct for employees.

Employee wellbeing
We promote wellbeing through a wide variety
of programmes, ranging from exercise and
fitness promotion to occupational health
checks. We know that good mental and
physical health contributes to better decision-
making, greater productivity and higher levels
of employee satisfaction. We run campaigns
to encourage employees to take responsibility
for their health problems, such as heart
disease, diabetes and cancer. Our Employee
Assistance Programme is a confidential service
available to employees and includes support
and advice on personal matters.

Safety
Our business is highly complex and our
employees are exposed to many risks. These
range from slips, trips and falls in an office
environment, confined space working and
machinery hazards within manufacturing to
fire and explosion risks associated with the
manufacture and storage of munitions. Many
of our employees operate heavy equipment,
work at height or do physically demanding
work in high-risk environments.

In order to ensure consistency, all businesses
are required to comply with our Health and
Safety Policy, which outlines and prescribes
the responsibilities and arrangements in place
for ensuring safety. It is the responsibility of
individual business leaders to ensure that their
organisations comply with the policy. We aim
to mitigate or manage safety risks by finding
new ways to enhance safety standards,
increase awareness and continually drive
a strong safety culture.

Due to the varied risk profiles and work
environments within the Group, we operate
safety management systems within each
business, many of which are externally
accredited to the OHSAS1 18001 standard.
These systems identify and control risk,
and are used to assure that processes and
procedures are protecting our people and
others who may be affected by our
operations. Teams of safety specialists assist
management in ensuring safety management
systems are effective and that operational
control of risk is maintained. Health and
safety specialists provide expert advice and
tools to put our safety policies into practice.

Some employees may be exposed to
long-term health risks from hazardous
substances and other physical hazards.
We aim to reduce exposure levels to
hazardous substances and to seek alternatives,
where possible. We provide our employees
with health surveillance to understand and
reduce the impact of workplace health risks.

We use the Recordable Accident Rate as
a key performance indicator to measure
workplace injuries. This metric, along with
the number of major injuries, is used to
determine an element of executive bonus
(see page 101). In 2017, there was a 3%
reduction in the Recordable Accident Rate,
a 28% reduction in the total number of
major injuries recorded and no fatalities as
we continued to focus on reducing risk and
embedding safety culture to drive improvement.

2018 priorities
We will continue to drive towards a
world-class level of safety performance;
focus on the management and reduction
of safety risk; and drive a strong safety
culture through communication, awareness
and visible leadership. We will target a 10%
reduction in the Recordable Accident Rate.

1. Occupational Health and Safety Assessment Series.
2. See summary of Deloitte LLP assurance on page 65.
3. The definition of a major injury was updated in 2017
to more closely align with the Reporting of Injuries,
Diseases and Dangerous Occurrences Regulations 2014.

BAE Systems
Annual Report 2017

Corporate responsibility
continued

Corporate responsibility in action

Growth of our
hybrid-electric
transport systems

Resource efficiency
Resource efficiency is an important measure of
business effectiveness for us and is embedded
within our Environmental Policy. As a major
manufacturer, our operations have an impact
on the environment – from the energy and
resources we use to the products we
manufacture and the waste we generate.
We are committed to minimising the risk
of environmental impact of our operations
and products, reducing our environmental
footprint and, in turn, decreasing our
operational costs. In line with the
Environmental Policy, our businesses and
operational sites devise their own ways of
addressing their environmental priorities,
given the diverse geographic and sectoral
spread of our business.

Alongside the policy, the revised Code
of Conduct supports our commitment
to environmental management – every
employee is to contribute to the efficient
use of resources and compliance with
environmental practices and policies.

An outcome of our Environmental Policy is
that ongoing environmental performance
is reported to our senior management team
through Quarterly Business Reviews and
adherence to our Environmental Policy is
monitored by the environmental teams in
our businesses via the Operational Assurance
Statement process.

Our businesses set annual environmental and
resource efficiency targets. Whilst the priorities
and targets differ locally, our businesses are
tackling resource efficiency challenges that
are global in nature, chiefly materials resilience,
energy and climate change, and waste,
emissions and discharges.

Materials resilience
Where applicable, we adapt our materials
management and use according to regulations
as they are implemented. We have an
overall aim to reduce the hazardous materials
used at our sites during the manufacture of
our products.

To date, we have over 8,000 hybrid-
electric systems in service on buses from
London to California. Each year, these
buses transport over one billion passengers,
whilst saving 17 million gallons of fuel and
eliminating 170,000 tonnes of CO2 from
entering the atmosphere.

Using BAE Systems’ hybrid and electric
systems, transit bus agencies around the
world are taking initiatives to clean up
their cities and provide sustainable, quieter
options for public transportation. In
alignment with these initiatives, we have
introduced a next-generation hybrid, our
Series-ER, which extends the electric driving
range, and have brought to market a new
energy storage system and direct drive motor
to compete in our European markets. We are
prepared to respond to market demand for
zero-emissions with our Series-EV technology,
including a full-battery electric solution and
our hydrogen fuel cell technology solution.

We have taken our proven, green bus
technology to the water with the
introduction of three hybrid and electric
solutions: HybriGen® provides hybrid power
for boat accessories and cleaner, quieter
vessel propulsion; HybriGen® Zero addresses
the inland towboat market with hybrid
power, saving fuel, space and maintenance
costs; and Hybrid Assist uses a parallel hybrid
configuration to drive a vessel on electric
power at low speeds with a boost of power
for high speeds when required.

More online
baesystems.com

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Energy and climate change
We are improving energy efficiency and
de-carbonising our energy supply to reduce
greenhouse gas emissions. The nature of
our business, with large-scale projects and
fluctuations in orders, makes it challenging to
set a Group-wide emissions reduction target.
Energy targets are set at business level and
contribute to an overall energy reduction
target for the Group.

We collect data on greenhouse gas emissions.
The Group’s total greenhouse gas emissions
have decreased by 8% in the 12 months to
31 October 2017.

Our largest 20 sites accounted for 83% of
our greenhouse gas emissions on average

over 2014 to 2016. Of these sites, 18 are
certified to ISO 14001 and the other two
have an environmental management system
in place. In line with these environmental
management systems, the top 20 sites are
actively aiming to reduce the emissions
they produce.

Waste, emissions and discharges
Targets to reduce waste, emissions and
discharges are set by each business reflecting
the scale and maturity of their facilities and
the nature of their activities. The efficient
use of resources and a decrease in waste
produced reduces our environmental
footprint and provides cost-saving benefits
for the organisation.

We use our engineering expertise to improve
resource efficiency and make our products
more sustainable. We work to reduce
environmental impacts at every stage of
their lifecycle – from concept, design and
manufacture through to use and disposal.

2018 priorities
We will continue to drive improvements
in the management of materials and
resources across all businesses.

Deloitte LLP assurance
Deloitte LLP has provided limited
assurance on the following
performance indicators at
Group level:

Diversity – total employees split
by gender and age;

Ethics – employee and third-party
enquiries to Ethics Officers and
the Ethics Helpline, and dismissals
for reasons relating to unethical
behaviour;

Safety – Recordable Accident
Rate, the number of major
injuries recorded and the number
of fatalities;

Environment – greenhouse gas
emissions (total, and Scope 1, 2
and 3); and

Community – total value of
Community Investment
programme donations.

More online
To see Deloitte LLP’s
unqualified assurance
statement visit
baesystems.com/
deloitteassurancestatement

To see our Basis of
Reporting 2017 visit
baesystems.com/2017crdata

Greenhouse gas emissions data from 1 November 2016
to 31 October 2017 (tonnes CO2e)

Combustion of fuel within BAE Systems
facilities and vehicles (Scope 1)1

2017

2016

525,032
579,880

Electricity and steam purchased
for BAE Systems use (Scope 2 –
location-based)1

2017

2016

528,411
571,859

Business travel in non-BAE Systems
vehicles (Scope 3)1

2017

2016

147,125
146,511

Total greenhouse gas emissions1

2017

2016

1,200,568
1,298,250

Total greenhouse gas emissions
per employee2

2017

2016

16
17

1. See summary of Deloitte LLP assurance opposite.
2. Excluding share of equity accounted investments.

Methodology

The greenhouse gas emissions data is reported in line with the
Greenhouse Gas Protocol Corporate Accounting and Reporting
Standard ‘Operational Control’ approach, and emission factors
for fuels and electricity are published at www.gov.uk/government/
collections/conversion-factors-for-company-reporting.

The CO2e associated with carbon dioxide, methane and nitrous
oxide is reported. Greenhouse gas emissions associated with
hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride
are estimated to be immaterial to total emissions and are,
therefore, not reported.

The principal record of the Group’s worldwide facilities is its
legal department’s Global Property Database.

Greenhouse gas emissions are primarily calculated from
energy consumption records reported via the Group’s global
environmental database. Where actual usage data is not
available for facilities and residences within the Global Property
Database, an estimated consumption is used based on the type
of building.

Greenhouse gas emissions related to business travel include air
travel data for the majority of the global business and rail data
for business units operating in the UK and US. These data are
taken from travel suppliers’ procurement records.

Emissions from joint ventures and pension scheme properties
not occupied by the Group are not included. Where a business
or facility is acquired during a reporting year, it will be included
in our reporting in the next full reporting year after the change.

The Scope 2 greenhouse gas emissions associated with the
Greenhouse Gas Protocol ‘market-based’ method have been
calculated as 592,745 tonnes CO2e. Supplier-specific emission
factors have been sought for our most significant operating
regions, but were either deemed of insufficient quality to use
at present or were unavailable. Therefore, in line with the
Greenhouse Gas Protocol guidance, this figure has been
calculated using residual-mix emission factors where available
for our UK and US operations. In our other significant operating
regions, residual-mix emission factors are either unavailable or
the resulting absolute emissions at Group level are within the
margin of error and, therefore, the latter has been used.

BAE Systems
Annual Report 2017

How we
manage risk

Effective management of risks and opportunities is essential
to the delivery of the Group’s strategic objectives and the
creation of sustainable shareholder value.

Board
The Board has overall responsibility for
determining the nature and extent of the risk
it is willing to take, 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 annual
strategy review process. This provides the
Board with an appreciation of the key risks
within the business and oversight of how
they are being managed.

The Board delegates oversight of 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
twice a year. 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. The Committee reports its
findings to the Board on a regular basis.

Approach
The Group’s Risk Management Policy is
set out in the Operational Framework, the
Group’s detailed governance framework.

The Group’s approach to risk management
is aimed at the early identification of key risks,
mitigating the effect of those risks before
they occur and dealing with them effectively
if they crystallise.

The Group is committed to the protection
of its assets, which include human resources,
intellectual and physical 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
processes are that risks are monitored

continuously, associated action plans reviewed,
appropriate contingencies provisioned and
this information reported through established
management control procedures.

The Board has conducted a review of the
effectiveness of the Group’s systems of risk
management and internal control processes,
including financial, operational and compliance
controls and risk management systems, in
accordance with the UK Corporate Governance
Code. The Company has developed a system
of internal controls that was in place throughout
2017 and to the date of this report.

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
understood adequately and related to the
financial statements.

Non-financial risks cannot be assessed readily
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 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.

Our principal
risks

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 metrics,
which are reviewed regularly by the Executive
Committee and Board. 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
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 determined by the Executive Committee.
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
The Board has carried out a robust assessment
of the principal risks facing the Company,
including those that would threaten its
business model, future performance, solvency
and liquidity. Such risks have been identified
as principal based on the likelihood of
occurrence and the potential impact on the
Group, and have been identified through the
application of the policies and processes
outlined above. These risks, together with
details of how they are being mitigated and
managed, are detailed on pages 68 to 71.

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Risk management framework

Operational
Framework

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

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

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 risk registers

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

3. Evaluation
Risk exposure reviewed
and risks prioritised

*As defined in the Group’s Operational Framework.

BAE Systems
Annual Report 2017

Our principal
risks

Risks are identified based on the likelihood of occurrence
and the potential impact on the Group. The Group’s
principal risks are identified below, together with a
description of how we mitigate those risks.

Description

Impact

Mitigation

Lower defence spending by the
Group’s major customers could
have a material adverse effect
on the Group’s future results
and financial condition.

1. Defence spending
The Group is dependent on defence spending.

In 2017, 92% of the Group’s sales were
defence-related.

Defence spending by governments can fluctuate
depending on change of government policy,
other political considerations, budgetary
constraints, specific threats and movements
in the international oil price.

There have been constraints on government
expenditure in a number of the Group’s principal
markets, in particular in the US and UK. A National
Security Capability Review is being undertaken by
the Cabinet Office, and a Modernising Defence
Programme was announced in January 2018 by
the Defence Secretary. The outcome of both is
aimed to be announced by the summer of 2018.

The result of the EU referendum in the UK has
led to a period of uncertainty and, in the longer
term, there is a risk relating to the Group’s ability
to participate in further collaborative defence
programmes in Europe.

The business is geographically spread across US, UK and
international defence markets:
– In the US, after seven months under a Continuing Resolution
that maintained funding at the prior year’s level, the fiscal
year 2017 defence budget ultimately rose by approximately
4%. Whilst the fiscal year 2018 budget remains under a
Continuing Resolution, the bipartisan budget agreement
passed on 9 February 2018 would increase the US defence
budget by approximately 10% over current levels, reflecting
continued growth in defence spending to $700bn (£518bn)
for the fiscal year ending 30 September 2018. This budget
agreement increases the budget caps for two years and
extends the Continuing Resolution to 23 March 2018 to allow
lawmakers to pass a 2018 spending bill. The US business has
become adept at managing through Continuing Resolutions
and brief government shutdowns, mitigating any short-term
interruptions across our portfolio.

– The UK is Europe’s largest defence market and, after a

period of budgetary decline, defence spending has stabilised.
The 2017 Spring Budget reinforced previous commitments
to increase defence spending, as well as the continued
pledge to maintain spending at 2% of GDP.

– In Saudi Arabia, regional tensions continue to dictate that

defence remains a high priority.

The diverse product and services portfolio is marketed across
a range of defence markets. BAE Systems benefits from a large
order backlog, with established positions on long-term
programmes in the US, UK, Saudi Arabia and Australia.

BAE Systems has a growing portfolio of commercial businesses,
including commercial avionics and the commercial areas of the
Applied Intelligence business.

We will support the government in achieving its aim to ensure
that the UK maintains its key role in European security and
defence post-Brexit, and to strengthen bilateral relationships
with key partners in Europe. This will be important for ongoing
collaboration in the development of defence capabilities.

Deterioration in the Group’s principal
government relationships resulting
in the failure to obtain contracts or
expected funding appropriations,
adverse changes in the terms of its
arrangements with those customers
or their agencies, or the termination
of contracts could have a material
adverse effect on the Group’s future
results and financial condition.

Government customers have sophisticated procurement
and security organisations with which the Group can have
long-standing relationships with well-established and
understood terms of business.

In the event of a customer terminating a contract for
convenience, the Group would typically be paid for work
done and commitments made at the time of termination.

2. Government customers
The Group’s largest customers are governments.

The Group has long-standing relationships
and security arrangements with a number of
its government customers, including its three
largest customers, the governments of the
US, UK and Saudi Arabia, and their agencies.
It is important that these relationships and
arrangements are maintained.

In the defence and security industries,
governments can typically modify contracts
for their convenience or terminate them at
short notice. Long-term US government
contracts, for example, are funded annually
and are subject to cancellation if funding
appropriations for subsequent periods are
not made. Governments also from time to
time review their terms of trade and underlying
policies and seek to impose such new terms
and policies when entering into new contracts.

The Group’s performance on its contracts
with some government customers is subject
to financial audits and other reviews which
can result in adjustments to prices and costs.

BAE Systems
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Description

Impact

Mitigation

3. International markets
The Group operates in international markets.

BAE Systems is an international company
conducting business in a number of regions,
including the US and the Middle East.

The risks of operating in some countries include:
social and political changes impacting the
business environment; economic downturns,
political instability and civil disturbances; the
imposition of restraints on the movement of
capital; the introduction of burdensome taxes
or tariffs; change of government policy and
regulations in the UK, US and all other relevant
jurisdictions; and the inability to obtain or
maintain the necessary export licences.

The Group is exposed to volatility arising
from movements in currency exchange rates,
particularly in respect of the US dollar, euro,
Saudi riyal and Australian dollar. There has
been volatility in currency exchange rates in
the period since the EU referendum in the UK.

In July 2017, the High Court of England and Wales
ruled that the UK government has been acting
lawfully in granting defence export licences to
the Kingdom of Saudi Arabia. The Court of
Appeal is currently considering whether to
permit an appeal of the High Court’s decision.

The occurrence of any such events
could have a material adverse effect
on the Group’s future results and
financial condition.

The Group has a balanced portfolio of businesses across a
number of markets internationally. The Group benefits from
a large order backlog, with established positions on long-term
programmes in the US, UK, Saudi Arabia and Australia.

The Group’s policy is to hedge all material firm transactional
currency exchange rate exposures.

The Group’s contracts are often long-term in nature and,
consequently, it may be able to mitigate these risks over
the terms of those contracts.

Political risk insurance is held in respect of export contracts
not structured on a government-to-government basis.

BAE Systems has a well-established legal and regulatory
compliance structure aimed at ensuring adherence to
regulatory requirements and identifying restrictions that
could adversely impact the Group’s activities, including
export control requirements.

4. Competition in international markets
The Group’s business is subject to significant competition in international markets.

The Group’s business plan depends upon
its ability to win and contract for high-quality
new programmes, an increasing number of
which are expected to be in markets outside
the US and UK.

The Group is dependent upon US and UK
government support in relation to a number
of its business opportunities in export markets.

The Group’s business and future
results may be adversely impacted
if it is unable to compete adequately
and obtain new business in the
markets in which it operates.

The Group has an international, multi-market presence,
a balanced portfolio of businesses, leading capabilities
and a track record of delivery on its commitments to
its customers.

The Group continues to invest in research and development,
and to reduce its cost base and improve efficiencies, to
remain competitive.

In the UK, export contracts can be structured on a
government-to-government basis and government support
can also involve military training, ministerial support for
promotional activities and financial support through UK
Export Finance. In the US, most of the Group’s defence
export sales are delivered through the Foreign Military Sales
process, under which the importing government contracts
with the US government.

BAE Systems
Annual Report 2017

Our principal risks
continued

Description

Impact

Mitigation

5. Laws and regulations
The Group is subject to risk from a failure to comply with laws and regulations.

The Group operates in a highly-regulated
environment across many jurisdictions and
is subject, without limitation, to regulations
relating to import-export controls, money
laundering, false accounting, anti-bribery
and anti-boycott provisions. It is important that
the Group maintains a culture in which it focuses
on embedding responsible business behaviours
and that all employees act in accordance with
the requirements of the Group’s policies,
including the Code of Conduct, at all times.

Export restrictions could become more
stringent and political factors or changing
international circumstances could result in
the Group being unable to obtain or maintain
necessary export licences.

Failure by the Group, or its sales
representatives, marketing advisers
or others acting on its behalf, to
comply with these regulations could
result in fines and penalties and/or
the suspension or debarment of the
Group from government contracts
or the suspension of the Group’s
export privileges, which could
have a material adverse effect
on the Group.

Reduced access to export markets
could have a material adverse effect
on the Group’s future results and
financial condition.

BAE Systems has a well-established legal and regulatory
compliance structure aimed at ensuring adherence to regulatory
requirements and identifying restrictions that could adversely
impact the Group’s activities.

Internal and external market risk assessments form an
important element of ongoing corporate development
and training processes.

A uniform global policy and process for the appointment
of advisers engaged in business development is in effect.

BAE Systems continues to reinforce its ethics programme globally,
driving the right behaviours by supporting employees in making
ethical decisions and embedding responsible business practices.

The special compliance officer, appointed pursuant to
commitments concerning ongoing regulatory compliance made
in the course of the 2011 settlement with the US Department
of State, concluded his monitorship in May 2014 and, at the
invitation of BAE Systems, agreed to remain in a limited capacity
for a limited further period of time.

6. Contract risk and execution
The Group has many contracts, including a small number of large contracts and fixed-price contracts.

In 2017, 47% of the Group’s sales were generated
by its 15 largest programmes. At 31 December
2017, the Group had five programmes with order
backlog in excess of £1bn.

A significant portion of the Group’s revenue is
derived from fixed-price contracts. Actual costs
may exceed the projected costs on which the
fixed prices are agreed and, since these contracts
can extend over many years, it can be difficult
to predict the ultimate outturn costs.

It is important that the Group maintains a culture
in which it delivers on its projects within tight
tolerances of quality, time and cost performance
in a reliable, predictable and repeatable manner.

The inability of the Group
to deliver on its contractual
commitments, the loss, expiration,
suspension, cancellation or
termination of any one of its large
contracts or its failure to anticipate
technical problems or estimate
accurately and control costs on
fixed-price contracts could have
a material adverse effect on the
Group’s future results and
financial condition.

7. Contract awards and cash profiles
The Group is dependent on the award timing and cash profile of its contracts.

The Group’s profits and cash flows are
dependent, to a significant extent, on the
timing of, or failure to receive, award of
defence contracts and the profile of cash
receipts on its contracts.

Amounts receivable under the
Group’s defence contracts can
be substantial and, therefore, the
timing of, or failure to receive, awards
and associated cash advances and
milestone payments could materially
affect the Group’s profits and cash
flows for the periods affected,
thereby reducing cash available to
meet the Group’s cash allocation
priorities, potentially resulting in
the need to arrange external funding
and impacting its investment grade
credit rating.

Contract-related risks and uncertainties are managed under
the Group’s mandated Lifecycle Management process.

A leadership development programme for project directors
has been deployed across the Group, covering the leadership
competencies required to manage complex projects containing
significant levels of risk and uncertainty.

A significant proportion of the Group’s largest contracts are
with the UK Ministry of Defence. In the UK, development
programmes are normally contracted with appropriate levels of
risk being initially held by the customer and contract structures
are used to mitigate risk on production programmes, including
where 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 forward visibility.

The Group has limited exposure to fixed-price design and
development activity which is in general more risk intensive
than fixed-price production activity.

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 Group’s balance sheet continues to be managed
conservatively in line with its policy to retain an investment
grade credit rating and to ensure operating flexibility.

The Group monitors a rolling forecast of its liquidity
requirements to ensure that there is sufficient cash to meet
its operational needs and maintain adequate headroom.

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Description

Impact

Mitigation

8. Pension funding
The Group has an aggregate funding deficit in its defined benefit pension schemes.

In aggregate, there is an actuarial deficit
between the value of the projected liabilities
of the Group’s defined benefit pension
schemes and the assets they hold.

The funding deficits may be adversely affected
by changes in a number of factors, including
investment returns and anticipated members’
longevity.

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 cash allocation priorities.

9. Information technology security
The Group could be negatively impacted by information technology security threats.

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.

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.

In the UK, new employees have been offered membership
of defined contribution rather than defined benefit schemes
since April 2012 and, in the US, employees have not accrued
salary-related benefits in defined benefit schemes since
January 2013.

In November, the 2017 UK triennial funding valuations and,
where necessary, deficit recovery plans were agreed with the
trustees and certified by the scheme actuaries after consultation
with the Pensions Regulator. The funding deficit across the
UK schemes at 31 March 2017 was £2.1bn. Based on the
new funding valuations, the Group will increase current annual
deficit recovery payments to the UK schemes to £220m a
year from 1 April 2018. The deficits in each of the schemes
are expected to be cleared between 2021 and 2026. Under
the last agreement made in 2014, all scheme deficits were
only projected to be cleared in 2026.

The Group has a broad range of measures in place, including
appropriate tools and techniques, to monitor and mitigate
this risk.

10. People
The Group’s strategy is dependent on its ability to recruit and retain people with appropriate talent and skills.

Delivery of the Group’s strategy and business
plan is dependent on its ability to compete
to recruit and retain people with appropriate
talent and skills, including those with innovative
technological capabilities.

The Group’s business plan is targeting an
increasing level of business in international export
markets outside the US and UK. It is important
that the Group recruits and retains management
with the necessary international skills and
experience in the relevant jurisdictions.

The loss of key employees or
inability to attract the appropriate
people on a timely basis could
adversely impact its ability to deliver
its strategy, meet the business plan
and, accordingly, have a negative
impact on the Group’s future
results and financial condition.

The Group recognises that its employees are key to delivering
its strategy and business plan, and focuses on developing the
existing workforce and hiring talented people to meet current
and future requirements.

The Group has well-established graduate recruitment and
apprenticeship programmes and, in order to maximise the
contribution that its workforce can make to the performance
of the business, has an effective through-career capability
development programme.

In order to seek to maximise its talent pool, the Group is
committed to creating a diverse and inclusive environment
for its employees.

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.

Strategic report
The Strategic report was approved by the board of directors on 21 February 2018.

David Parkes
Company Secretary

BAE Systems
Annual Report 2017

Chairman’s
governance letter

Contents

Chairman’s governance letter

Governance highlights

Directors’ duties

Board governance

Board of directors

Board information

Governance disclosures

Audit Committee report

Corporate Responsibility
Committee report

Nominations Committee report

Remuneration Committee report

Dear Shareholders,
The importance of having a clearly defined
strategy for management to pursue and the
right culture to guide behaviour and drive
performance to implement the strategy
remains a priority focus for the Board, as
I highlight in the Chairman’s letter in this
report (see pages 10 to 12).

Effective engagement with our stakeholders is
equally an essential part of good governance,
with particular emphasis on shareholders
and customers.

Our shareholder contact is typically through
our investor relations team on a day-to-day
basis, which is supplemented by face-to-face
meetings with our major shareholders by our
Chief Executive and Group Finance Director
at the time of our annual and half-year results.
To ensure that our performance is viewed in
the context of our broader Board policy, as
Chairman, I try to meet with our major
shareholders at least once a year to discuss
governance, strategy, culture and succession.

Our Senior Independent Director is, of course,
available to speak to shareholders at all times
if an alternative or additional channel of
communication is required.

This year, we decided to widen the circle of
contact with Board members by inviting a
small group of shareholders to engage directly
with the Board in an informal gathering to
discuss the requirements of shareholders in
general, and to review BAE Systems in
particular. The meeting proved to be valuable
to both parties and we will continue this
practice in the years ahead.

Our second additional measure was to invite
shareholders to a more formal morning
meeting with our non-executive directors
and Chief Executive for a brief presentation
by each of the non-executive committee
chairs on our remuneration, audit and
corporate responsibility policies and
procedures. The presentations were followed
by an open question and answer session,
which enabled shareholders to probe more
deeply into the methods and mindsets of
the non-executive team. Feedback on this
session was particularly positive, and we will
continue to conduct this type of meeting on
a two-yearly basis or when there is material
change in Board membership.

BAE Systems
Annual Report 2017

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Our customer contact is undertaken at all
levels on a daily basis to ensure that the
relationships we have continue to be open,
transparent and productive. From a Board
perspective, however, we felt it was important
to provide the non-executive directors with
first-hand knowledge of the challenges and
opportunities with each of our major UK
customers. To achieve this objective, we
invited senior members of the Royal Navy and
Ministry of Defence to join the Board for an
open exchange on our strengths, weaknesses
and opportunities. The forum provided a
robust discussion which was both instructive
and encouraging. We intend to extend
invitations to other customers in the coming
year in order to deepen our understanding
of their needs and reinforce the relationships
we enjoy.

As a discipline, a number of Board meetings
are held on operational sites throughout
the year which provide an opportunity for
interaction with employees and a chance for
non-executive directors to develop deeper
insights into the quality of our current senior
management and the potential for succession
in the next generation.

During such visits, we meet individuals
for breakfast and dinner, tour the sites
and conduct town hall sessions with the
workforce. During 2018, the Board will
also accompany the executive management
team to meet colleagues and customers in
the US and the Kingdom of Saudi Arabia.

Additionally, the Corporate Responsibility
Committee makes independent visits to
operational sites across the world to evaluate
and encourage the adoption of the highest
standards of corporate behaviour.

To further our practice of Board involvement in
2018, we intend to nominate a non-executive
director to accompany Charles Woodburn to
participate in one of his regular meetings with
trade unions representatives in the UK.

As we look forward to the year ahead, we are
determined to continue this policy of deeper
engagement with all stakeholders to ensure
we understand and respect the needs of our
shareholders, our suppliers, our colleagues
and our customers.

Sir Roger Carr Chairman

Governance highlights
– Executive succession planning – the planned succession process whereby Charles Woodburn

succeeded Ian King as Chief Executive was completed in an orderly manner.

– Non-executive directors – Revathi Advaithi was appointed to the Board as an independent
non-executive, further strengthening it, particularly with regards to multinational business
leadership, and engineering and manufacturing experience and expertise.

– Audit re-tender – after a comprehensive and robust selection process led by the Audit

Committee, Deloitte was selected for appointment to succeed KPMG as the Company’s
auditors with effect from the Annual General Meeting in 2018.

– Shareholder engagement – the Board as a whole engaged directly with major shareholders,
including the hosting of an event at which governance arrangements for the Board and its
committees, and employee engagement activities were presented and discussed.

– Customer engagement – in order to help directors to develop their understanding of

the Company’s performance and relationship with key UK customers at first-hand, during
the year, the Board visited a customer site and also met with senior Royal Navy and
Ministry of Defence officials.

– Reporting – the Board’s reporting on governance matters in these reports has been

enhanced further, including greater focus on how the directors discharge their duties
and promote the success of the Company.

Board evaluation
Period of evaluation
January/February with feedback and review
taking place at a Board meeting held on
21 February 2018.

Evaluation process
Externally-facilitated self-assessment of the
Board conducted in accordance with best
practice described in the UK Corporate
Governance Code and other guidance.

Facilitator
Ffion Hague at Independent Board Evaluation
(IBE), which provides no other services to
BAE Systems.

Description of process
All directors interviewed by the facilitator for
1.5 hours based on a set agenda that had
been tailored for BAE Systems. Ten senior
executives were also interviewed.

Feedback
A comprehensive report was produced by
IBE, which was provided to directors ahead
of the Board meeting at which the principal
findings were presented by Ms Hague.
Among other things, the report covered
shareholder and stakeholder relations;
strategy; governance and compliance;
Board focus; risk management; succession
planning; Board composition; Board culture;
relationship with senior management;
decision-making; induction; papers; and
Board resources.

Feedback from the evaluation will be
provided to individual directors by the
Chairman. Feedback on the Chairman’s
own performance will be provided by the
Senior Independent Director after he has
met with all the non-executive directors
to consider the material provided by IBE.

Resulting actions
The Board discussed the report and agreed
actions concerning:
– executive and non-executive succession

planning;

– employee engagement, and diversity

and inclusion; and

– the provision of additional Board time

for wider and more open-ended discussion
of certain matters.

The Board will work on implementing
these in 2018.

Directors

BAE Systems
Annual Report 2017

Directors’
duties

Here we outline how the directors discharge their
duties to promote the success of the Company.

Section 172 of the UK’s Companies Act
In summary, as required by Section 172
of the UK’s Companies Act, a director
of a company must act in the way he
considers, in good faith, would most
likely promote the success of the company
for the benefit of its shareholders. In doing
this, the director must have regard,
amongst other matters, to the:

– likely consequences of any decisions

in the long term;

– interests of the company’s employees;

– need to foster the company’s business
relationships with suppliers, customers
and others;

– impact of the company’s operations on

the community and environment;

– company’s reputation for high standards

of business conduct; and

– need to act fairly as between members

of the company.

The directors of BAE Systems – and those
of all UK companies – must act in accordance
with a set of general duties. These duties
are detailed in the UK’s Companies Act
and include a duty to promote the success
of the Company, which is summarised here.

As part of their induction, the directors are
briefed on their duties and they can access
professional advice on these – either through
the Company or, if they judge it necessary,
from an independent provider.

It is important to recognise that in large and
complex companies, such as BAE Systems,
the directors fulfil their duties partly through
a governance framework that delegates
day-to-day decision-making to employees
of the Company.

The Board recognises that such delegation
needs to be much more than simple financial
authorities and, in this section of the report,
we have summarised our governance
structure, which covers: the values and
behaviours expected of our employees;
the standards they must adhere to; how
we engage with stakeholders; and how the
Board looks to ensure that we have a robust
system of control and assurance processes.

For more detail on our governance structure,
see pages 76 and 77.

Culture and values

The right corporate culture underpins how
a company creates and sustains value over
the longer term, and is a key element of
maintaining a reputation for high standards
of business conduct. Culture and values are
important in setting the behavioural standards
expected of employees.

During the year, the Board, which sets the Company’s
values, considered the Company’s culture and the
behaviours this is seen to be driving. The Board uses
employee engagement surveys to help understand
corporate culture across the Group. The Corporate
Responsibility Committee monitors the types of
issues reported through the Company’s Ethics
Helpline and Ethics Officers to assist in monitoring
corporate culture.

Corporate Responsibility
Committee report

Shareholders

A board needs to communicate effectively with
its shareholders and understand their views.

The Annual Report is the principal means by which
the Board reports to shareholders on its stewardship
of the Company. This report and other matters are
put to shareholders for their consideration and
approval at the Company’s Annual General
Meeting, where the Board engages directly with
shareholders. In addition, the Chairman meets
regularly with our largest shareholders and provides
feedback to the Board following these meetings.

Board
governance

Risk management

Risk management is the identification of
key risks that could threaten the success of
a company, and taking steps to reduce or
eliminate them. A board needs to ensure
that a company has effective risk
management processes.

The Company has well-developed risk management
processes, for which the Board has overall
responsibility. The Audit and Corporate Responsibility
committees jointly review the Operational Assurance
Statement Risk Register and Non-financial Risk
Register regularly. The Board considers risk as part
of its annual strategy review process and also when
considering major new business bids.

How we
manage risk

BAE Systems
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Directors

Standards

Robust governance

Strategy and planning

To promote the success of a company and
maintain a reputation for high standards
of business conduct, a board should set the
expectations and requirements with regards
to the behaviours and standards required by
its employees and others associated with it.

Through the Operational Framework, which
includes our Code of Conduct, the Board has
agreed policies that set the standards of behaviour
and business practice. Also, through these policies,
the Board sets standards and requirements with
regards to key governance matters, including:
our people; our commitment to the community
and the environment; standards of business
conduct; and our relationship with suppliers.

Operational
framework

In order to carry out their legal duties effectively,
the directors of large companies should ensure
they have a robust governance structure –
underpinned by the right culture and values
– which will ensure decisions are made at the
appropriate level and, where necessary, by
reference to required policies and procedures.

The Operational Framework documents the roles
of the directors and executive management,
detailing how and by whom key decisions are to
be made. The Board and Audit Committee regularly
review the effectiveness of the internal controls
detailed in the Operational Framework, supported
by our assurance processes. The Board uses its
annual evaluation process to help ensure that it is
effective in discharging its responsibilities.

Operational
framework

Promoting the long-term success of the
company by setting the strategy and strategic
objectives that will ensure its business model
remains relevant and effective.

The Board approves the Company’s strategy and
business plan. Each year, in November, it spends a
whole day reviewing and agreeing strategy, which
is detailed in the Company’s Integrated Business
Plan (IBP). Through the year, and in preparation for
the IBP, the Board undertakes a series of strategic
updates with each of the Group’s business sectors.

Group strategic
framework

Employees

Business relationships

Assurance

A company’s employees are central to the
long-term success of a company, as such a
board needs to consider their interests, and
have means of engaging with and
understanding their views.

The Company has a well-developed structure
through which senior management, including the
Chief Executive, engages regularly with senior trade
union officials to discuss and understand, in an
open and well-informed basis, matters concerning
UK employees. The Chief Executive briefs the Board
on matters raised at these meetings. Board members
engage with employees when visiting Company
sites around the world, and it has held ‘town hall’
meetings as part of such visits.

Our
people

Major decisions

Many of the decisions and actions of large
companies are made on the basis of authority
delegated by the board. However, to ensure
that major decisions – particularly those not in
the normal course of business, involving large
values or with a possible impact on the
reputation of the company – are considered
and taken by the directors. A board should
reserve certain matters for its own decision.

The Operational Framework clearly details the
matters that the Board has reserved for its own
decision. Where matters are delegated, financial and
other limits are set to ensure that major decisions are
referred to the Board. This includes major business
opportunities, capital expenditures and the nature
of the business that the Company should undertake.

Operational
framework

Fostering business relationships with key
stakeholders, such as customers and suppliers,
is key to a company’s success. As such, a board
should have oversight of these relationships.

The Board’s annual programme provides opportunities
for it to engage with our principal customers, and
gain at first-hand an understanding of their
requirements and the Company’s performance in
meeting these. The Chairman is engaged actively
in developing customer relationships at the most
senior level and reports regularly on this to the
Board. During the year, the Corporate Responsibility
Committee undertook a deep dive into how we
engage with suppliers.

A board needs assurance that a company’s
financial reporting, risk management,
governance and internal control processes
are operating effectively. This is essential to
the success of the company and its long-term
reputation.

The Board, principally through the Audit and
Corporate Responsibility committees, engages
throughout the year with the Company’s auditors
and internal audit function, and receives feedback
on their audit and review activities. In addition, it
has put in place certain key assurance processes,
such as the Operational Assurance Statement.

Group strategic
framework

Operational Assurance
Statement

Performance oversight

Remuneration and incentives

The board of a large company will normally
delegate day-to-day management to executive
management. However, it must maintain
oversight of the company’s performance and
ensure that management is acting in
accordance with its delegated authority, and
the values and standards that underpin this.

A board needs to ensure that executive
management and other employees are
remunerated and incentivised in a manner
that is consistent with the directors’ duty
to promote the success of the company
and the consequences of their decisions
in the long term.

At each Board meeting, the directors receive a
comprehensive report from the Chief Executive on
the performance of the Company. The effectiveness
of such reporting is supported by a system of risk
management and internal control processes – all of
which is underpinned by the values and standards
mandated in our Operational Framework.

In addition to setting the remuneration of the
executive directors, the Board’s Remuneration
Committee reviews and approves the remuneration
structure for all senior executives, including
incentive targets and their outcomes. It also
oversees the operation of the all-employee share
plans that reward and incentivise employees across
the Group.

Board
information

Remuneration Committee
report

BAE Systems
Annual Report 2017

Board
governance

This is the structure through which we manage
the Company. It has evolved over time, and
continues to evolve to meet the needs of the
business and our stakeholder responsibilities.

Shareholders
The Company has
approximately 100,000
individual, corporate and
employee shareholders.

Annual General Meeting
Shareholders vote on key
governance matters,
including the re-election of
directors, their remuneration,
the payment of dividends
and the appointment of
the auditors.

Shareholder relations
The Chief Executive and
Group Finance Director meet
the Company’s principal
shareholders on a regular
basis. Separately, the
Chairman maintains regular
contact with the Company’s
principal shareholders on
governance matters and
ensures that all directors are
aware of their views.

Board
The Board consists of executive and
independent non-executive directors,
plus a non-executive chairman who
was independent in accordance with
the UK Corporate Governance Code
on his appointment.

The non-executive directors constructively
challenge and help develop proposals
on strategy. They also scrutinise the
performance of management in meeting
agreed goals and objectives, and satisfy
themselves as to the integrity of financial
information, and that systems of risk
management are robust and defensible.
In addition, they set the remuneration of
the executive directors and oversee Board
succession planning.

Chairman
Responsible for leading the Board and
ensuring that it discharges its duties
efficiently.

Chief Executive
Responsible for the implementation and
delivery of the strategy agreed by the Board.

Senior Independent Director
Acts as a sounding board for the Chairman
and acts as an intermediary for the other
directors as necessary.

Company Secretary
Responsible to the Board for ensuring
that Board procedures are complied with.
Through the Chairman, he is responsible
for ensuring that directors are supplied
with information in a timely manner.

Operational governance
The Operational Framework sets
out how we do business across
BAE Systems, and encapsulates
our values, policies and processes,
together with clear levels of
delegated responsibility aimed
at ensuring that all of our
employees and businesses act
in a clear, accountable and
consistent manner. It is reviewed
and approved annually by
the Board.

Oversight of
performance
and compliance
with Operational
Governance

Board committees
The membership of the principal board committees
(see below) solely comprises non-executive directors.
They provide leadership, scrutiny and oversight over
key governance areas.

Audit
82 Committee

Corporate Responsibility

87 Committee

Nominations

90 Committee

Remuneration

91 Committee

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Group strategic
framework

How we work
The Operational Framework sets out the principles of
good governance which, together with our culture, guide
our work and behaviour in support of the strategy set in
our Group strategic framework (see page 18). Here we
set out the values that we ask all our employees to
demonstrate in their day-to-day work, wherever they
are in the world.

Organisation
From the Board downwards, we set out how we are
organised and the responsibilities of the Board, the
Chairman, the Chief Executive, the Executive Committee,
our Functional Councils (such as Engineering, Human
Resources and Procurement) and the senior executives
charged with running our businesses.

Governance
The UK Corporate Governance Code’s (the Code) principles are embedded in the Operational Framework, and
its policies and processes underpin all the disclosures made by the Board pursuant to the Code’s provisions.

How we conduct our business is fundamental to the success of BAE Systems. The Operational Framework sets
out our approach and the standards to which we adhere. It includes the following:

Responsible
Trading Principles
We do not
compromise on the
way we do business
and here we mandate
a principles-based
approach to our
business activity.

Code of Conduct
Lays out the
standards that are
expected of each
of us, to support
us in doing the right
thing. All employees
receive annual
training designed
to stimulate
conversations
about ethical
decision-making.

Risk framework
This is how we
identify, analyse,
evaluate and
mitigate risk
(see page 66).

Internal controls
Provide assurance
regarding:
– the reliability

and integrity of
information;

– compliance with

policies, processes,
laws, regulations
and contracts;
– the safeguarding
of assets and
protection against
fraud; and

– the economical

and efficient use
of resources.

Workplace and
operational
environment
This covers how we
expect our people
to be managed and
the obligations
placed on us all
concerning avoiding
conflicts of interest,
anti-bribery, and
managing the
security of our
people, information
and other assets.

Delegated
authorities
As part of a robust
system of internal
controls, the Board
has delegated
certain authorities
to executive
management.
Delegation is subject
to financial limits
and other
restrictions, above
which matters
must be referred
to the Board.

Operational Assurance Statement (OAS)
This key governance process requires that a return is completed every six months by each operational and functional business
head, reporting their formal view 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. There is a separate OAS process for our joint ventures.
Our Internal Audit function owns the OAS process. It is managed independently from management functions. The Internal
Audit Director reports functionally to the Audit Committee and, for day-to-day operations, to the Chief Executive.

Core business processes
These core business processes are mandated by the Operational Framework and designed to ensure consistent planning,
reporting and review of business performance across all businesses:

IBP
(Integrated Business Planning)

LCM
(Lifecycle Management Policy)

M&A
(Mergers & Acquisitions Policy)

TPL
(Total Performance Leadership)

Approved by the Board annually,
creates a consistent approach
to strategic planning, aligning
resources with the delivery of
forecast financial performance
and strategic objectives.

How we plan and manage the
execution of all projects above a
certain minimum level, providing
decision gate reviews at key
stages from initial opportunity
to final closure.

A structured approach to
mergers, acquisitions and
disposals.

A set of people-related
activities that help to identify,
select, manage and reward
leaders, and facilitates
succession planning.

BAE Systems
Annual Report 2017

Board of
directors

Sir Roger Carr
Chairman
Appointed to the Board: 2013 Nationality: UK

Charles Woodburn
Chief Executive
Appointed to the Board: 2016 Nationality: UK

Peter Lynas
Group Finance Director
Appointed to the Board: 2011 Nationality: UK

Skills, competence and experience
Charles joined BAE Systems in May 2016 as
Chief Operating Officer and succeeded Ian King as
Chief Executive on 1 July 2017. Prior to joining the
Company, he spent over 20 years in the oil and gas
industry, holding a number of senior management
positions in the Far East, Australia, Europe and the
US. He joined the Company from the oilfield services
business, Expro Group, where he served as Chief
Executive Officer. Prior to that, he spent 15 years
with Schlumberger Limited.

Non-executive appointments
None.

Committee membership
Non-Executive Directors’ Fees Committee.

Skills, competence and experience
Peter, a qualified accountant, was appointed to the
Board as Group Finance Director in 2011. This year,
Peter’s role was expanded to include responsibility
for UK Shared Services, Procurement and Group
Mergers & Acquisitions.
Peter 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 appointments
Non-executive director of SSE plc and chairman of
its audit committee.

Skills, competence and experience
Having joined the Board in 2013, Sir Roger was
appointed Chairman in 2014. He is an experienced
company chairman with a wealth of knowledge
gained across a number of business sectors. With
over two decades of boardroom experience, Sir Roger
has a deep understanding of corporate governance
and what is required to lead an effective board. Prior
to joining BAE Systems, Sir Roger was Chairman of
Centrica plc and Deputy Chairman of the Court of
the Bank of England. In the past, he has also served
as CEO of Williams plc and chairman of Thames Water
plc, Cadbury plc, Chubb and Mitchells & Butlers plc.
He was Vice Chairman of the BBC Trust until it was
dissolved in April last year.
He has been active in representing UK business
having previously served as President of the CBI and
as a member of the Prime Minister’s Business Advisory
Group. He was a member of the Higgs Committee
on Corporate Governance, which assisted in further
developing the UK Corporate Governance Code.
Sir Roger is also a senior adviser to Kohlberg Kravis
Roberts, a fellow of the Royal Society for the
encouragement of Arts, Manufactures and Commerce,
an honorary fellow of the Institute of Chartered
Secretaries and Administrators, and a visiting fellow
to the Saïd Business School, Oxford.

Other non-executive appointments
None.

Committee membership
Chairman of the Nominations Committee and the
Non-Executive Directors’ Fees Committee.

Jerry DeMuro
President and Chief Executive Officer
of BAE Systems, Inc.
Appointed to the Board: 2014 Nationality: US

Skills, competence and experience
Appointed to the Board on 1 February 2014 as President
and Chief Executive Officer of BAE Systems, Inc.,
Jerry is an experienced US executive who has worked
in the national security, technology and aerospace
industry for over 30 years. Prior to joining the Company,
he served as executive vice president and corporate
vice president of General Dynamics’ Information
Systems and Technology Group. Earlier in his career,
he spent almost a decade as an acquisition official at
the US Department of Defense.

Non-executive appointments
Non-executive director of Aero Communications, Inc.

Committee membership
Non-Executive Directors’ Fees Committee.

Revathi Advaithi
Non-executive director
Appointed to the Board: 2018 Nationality: US

Skills, competence and experience
Revathi brings extensive operational experience to
the Board, gained from her leadership of multinational
engineering and manufacturing businesses, where she
has gained a good understanding of digital technology
and international markets. Revathi is Chief Operating
Officer, Electrical Sector, for Eaton, a power
management company. She joined Eaton in 1995
and led the Electrical Sector in the Americas and
Asia-Pacific, with a three-year assignment in Shanghai.
Between 2002 and 2008, Revathi worked at Honeywell,
where she held several senior roles within the sourcing
and supply chain functions of the aerospace sector
before being named vice president and general manager
of Honeywell’s Field Solutions business in 2006.
Revathi returned to Eaton in 2008 as vice president and
general manager of the Electrical Components Division.
She serves on the board of governors of the National
Electrical Manufacturers Association in the US and on
the Advisory Council for the University of Pittsburgh’s
Center for Energy.

Other non-executive appointments
None.

Committee membership
Corporate Responsibility Committee and Nominations
Committee.

Chairman

Executive directors

Non-executive directors

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Elizabeth Corley CBE
Non-executive director
Appointed to the Board: 2016 Nationality: UK

Harriet Green OBE
Non-executive director
Appointed to the Board: 2010 Nationality: UK

Skills, competence and experience
Elizabeth brings investor, governance and boardroom
experience to the Board. She is currently non-executive
vice-chair of Allianz Global Investors. She has served
as Chief Executive Officer of Allianz Global Investors,
initially for Europe then globally, from 2005 to 2016.
Prior to that, she worked for Merrill Lynch Investment
Managers. Elizabeth is active in representing the
investment industry and developing standards within
it. She is a member of the FICC Market Standards
Board, the European Securities and Markets
Authority’s stakeholder group and of the advisory
council of TheCityUK. Elizabeth is currently chair of the
advisory group to the UK government on social impact
investing. In 2017, she stepped down from the board
of the UK Financial Reporting Council after completing
her second three-year term of appointment.
Elizabeth is also an acclaimed writer, a member
of the Royal Society of Arts and a trustee of the
British Museum.

Other non-executive appointments
Non-executive director of Pearson plc and
Morgan Stanley.

Committee membership
Nominations Committee and Remuneration Committee.

Skills, competence and experience
Harriet is a transformative business leader with
international operational and boardroom experience.
She is currently Chief Executive Officer and Chairman
of Asia-Pacific at IBM. Harriet has extensive global
business leadership experience. She previously served
as Chief Executive Officer and executive director of
Thomas Cook plc. Prior to that, she was Chief Executive
Officer and executive director of Premier Farnell plc.
Previously, she was also a non-executive director of
Emerson Electric Co. In 2017, Harriet was named as
one of the Fast Company’s 100 Most Creative People
in Business and The Financial Times ranked Harriet
sixth in their ‘HERoes ranking: Champions of Women
in Business’ list. In 2016, she won the Women in
Technology Institute (WITI) Award and, in 2014, she
received the Veuve Clicquot Business Woman Award.

Other non-executive appointments
None.

Committee membership
Corporate Responsibility Committee and Nominations
Committee.

Chris Grigg
Non-executive director
Appointed to the Board: 2013 Nationality: UK

Skills, competence and experience
As chief executive of a FTSE 100 company, Chris
brings management and boardroom experience
to the Board. He is currently Chief Executive of
The British Land Company PLC, a position he has
held since 2009.
Chris has more than 30 years’ experience in the
banking and real estate industries. Prior to joining
British Land, he was Chief Executive of Barclays
Commercial Bank. Before that, he was a partner
at Goldman Sachs. Chris is currently a member
of the executive board of the European Public
Real Estate Association and the board of the
British Property Federation.

Other non-executive appointments
None.

Committee membership
Corporate Responsibility Committee and Nominations
Committee.

Paula Rosput Reynolds
Non-executive director
Appointed to the Board: 2011 Nationality: US

Skills, competence and experience
An experienced company director in both the UK
and North America, Paula is currently Chief Executive
Officer and President of the business advisory group
PreferWest LLC.
Starting her career as an economist, she spent over
20 years in the energy sector, culminating in her
appointment as President and Chief Executive Officer
of AGL Resources in 2002. She served as President and
Chief Executive Officer of Safeco Corporation before
becoming Vice Chairman and Chief Restructuring
Officer of American International Group, overseeing
its divestiture of assets and serving as chief liaison with
the Federal Reserve Bank of New York. She received the
National Association of Corporate Directors National
Lifetime Achievement Award in 2014.
Past roles include non-executive directorships at
Coca-Cola Enterprises Inc., Anadarko Petroleum
Corporation, Delta Air Lines Inc., Air Products and
Chemicals Inc., and Siluria Technologies, Inc.

Other non-executive appointments
Non-executive director of BP p.l.c., CBRE Group, Inc.
and TransCanada Corporation.

Committee membership
Chairman of the Remuneration Committee, and member
of the Audit Committee and Nominations Committee.

Nick Rose
Non-executive director and
Senior Independent Director
Appointed to the Board: 2010 Nationality: UK

Skills, competence and experience
Nick brings to the Board considerable financial
expertise and boardroom experience. Nick was
Chief Financial Officer of Diageo plc for over ten years
until 2010. In this role, he was responsible for supply,
procurement, strategy and IT on a global basis. His
financial experience was developed during his time as
group treasurer and group controller at Diageo, and
also in his earlier career at Ford Finance. He is a former
Chairman of the engineering technology company
Edwards Group Limited and former non-executive
director of Moët Hennessy SNC and Scottish Power plc.
Nick is currently an adviser to CCMP Capital Advisors, LLC.

Other non-executive appointments
Chairman of Williams Grand Prix Holdings PLC;
non-executive director and senior independent
director of BT Group plc; and non-executive chairman
of Loch Lomond Group.

Committee membership
Chairman of the Audit Committee, and member of the
Nominations Committee and Remuneration Committee.

Ian Tyler
Non-executive director
Appointed to the Board: 2013 Nationality: UK

Skills, competence and experience
Ian brings considerable financial and long-term
international contracting experience to the Board.
Having qualified as a chartered accountant, Ian
subsequently held a number of senior finance and
operational positions within industrial companies
before being appointed Finance Director of Balfour
Beatty plc in 1996. He was subsequently appointed
as Chief Executive in 2005. He is currently Chairman
of Bovis Homes Group PLC and Cairn Energy plc.
Ian is a former non-executive director of Mediclinic
International plc, Cable & Wireless Communications
Plc and VT Group plc.

Other non-executive appointments
Chairman of Amey plc and AWE Management Limited.

Committee membership
Chairman of the Corporate Responsibility Committee,
and member of the Audit Committee and Nominations
Committee.

BAE Systems
Annual Report 2017

Board
information

Membership

Sir Roger Carr
Chairman

Revathi Advaithi
Non-executive director

Elizabeth Corley
Non-executive director

Harriet Green
Non-executive director

Chris Grigg
Non-executive director

Paula Rosput Reynolds
Non-executive director

Nick Rose
Non-executive director and Senior Independent Director

Ian Tyler
Non-executive director

Diversity – Board

7 male
4 female

Committee
membership

Nationality

Date of
appointment
to the Board

Date current
term ends

Current term
as director

C N

N R

C N

A N R

A C N

20131

2020

Second

2021

2019

2020

2019

First

Third

Second

Third

Second

2018

2016

2010

2013

2011

2010

2013

2016

2011

2014

The average length of appointment of non-executive members of the Board (as at 31 December 2017) was 5.3 years.

Charles Woodburn
Chief Executive

Peter Lynas
Group Finance Director

Jerry DeMuro
President and Chief Executive Officer of BAE Systems, Inc.

The average length of appointment of executive members of the Board (as at 31 December 2017) was 4.1 years.

Chairman

Non-executive director

Executive director

Committee chair
A Audit Committee
N Nominations Committee

C Corporate Responsibility Committee
R Remuneration Committee

Attendance
Individual directors’ attendance at meetings of the Board and its committees in 2017

Board

Audit
Committee

Corporate
Responsibility
Committee

Nominations
Committee

Remuneration
Committee

Tenure – independent
non-executive directors

Over
six years
3

Up to
three years
2

Sir Roger Carr

Elizabeth Corley

Jerry DeMuro

Harriet Green

Chris Grigg

Ian King

Peter Lynas

Paula Rosput Reynolds

Nick Rose

Ian Tyler

Charles Woodburn

8/8

7/8

8/8

4/4

8/8

–

6/6

–

4/4

–

4/4

–

4/4

–

3/4

4/4

–

4/4

–

6/6

–

6/6

–

Over three and
up to six years
2

1. Sir Roger Carr joined the Board in October 2013

and was appointed as Chairman in February 2014.

Governance
disclosures

UK Corporate Governance Code (the Code) compliance
The Company was compliant with the provisions of the
Code throughout 2017 and the Board has applied its principles
in its governance structure and operations. The following
statements are made in compliance with the Code.

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Risk management and internal
control statement
The Board is responsible for the Company’s
risk management and internal control systems.
It has delegated responsibility for reviewing in
detail the effectiveness of these systems to the
Audit Committee, which reports to the Board
on its findings so that all directors can take a
view on the matter.
An overview of the processes used to identify,
evaluate and manage the principal risks can be
found on pages 66 and 67. These processes
are an integral part of our governance
framework, the Operational Framework,
details of which can be found on page 76.
The Operational Framework mandates the
Operational Assurance Statement process,
which is owned by the Company’s Internal
Audit function and is one of the principal
processes used by the Board in monitoring
the effectiveness of control systems.
The risk management and internal control
systems detailed in the Operational Framework
were in place throughout the year and the
Board, having reviewed their effectiveness,
believes they accord with the Financial
Reporting Council’s Guidance on Risk
Management, Internal Control and Related
Financial and Business Reporting.

Viability statement
Assessment
As required by the provisions of the Code, the
Board has undertaken an assessment of the
future prospects of the Company taking into
account the Company’s current position and
principal risks. This assessment was informed
by the following business processes:
Risk management process – the Company
has developed a structured approach to the
management of risk (see above) and the
principal risks identified are considered as part
of the Board’s annual review of the Integrated
Business Plan.
Integrated Business Plan (IBP) – the IBP
represents a common process with standard
outputs and requirements that produces an
integrated strategic and business plan for the
Group and also for each of its businesses over
the following five years. The use of a five-year
period provides a robust planning tool against
which long-term decisions can be made
concerning, amongst other things, strategic
priorities, funding requirements (including
commitments to Group pension schemes),
returns made to shareholders, capital
expenditure and resource planning. Longer-
term strategic inputs also form part of the
IBP process and, where activity is required
to meet such long-term priorities, this is
provided for in the plan.

The detailed plan is reviewed each year
by the Board as part of its strategy review
process. Once approved by the Board, the
IBP provides the basis for setting all detailed
financial budgets and strategic actions across
the businesses, and is subsequently used
by the Board to monitor performance.
Liquidity analysis – the Board regularly
reviews an analysis based on the financial
output from the IBP, looking at the forecast
working capital requirements, cash flow,
and committed borrowing and other funding
facilities available to the Company over the
five-year period covered by the IBP. This
analysis includes ‘stress testing’ of the
Company’s liquidity under severe, but
plausible, scenarios as developed from the
IBP, including the following:
– the Company being unable to access debt

markets to renew term debt facilities;
– an unfavourable change to the terms of
trade the Company enjoys with certain
principal customers;

– the Company failing to win certain major

export contracts; and

– potential change of UK government policy.
The scenarios tested included the impact
of multiple adverse factors.
Conclusion
In undertaking its review of the IBP in 2017,
the Board considered the prospects of the
Company over the five-year period covered
by the process. On the basis of this and other
matters considered and reviewed by the
Board, the Board has reasonable expectations
that the Company will be able to continue in
operation and meet its liabilities as they fall
due over the following five years. It is
recognised that such future assessments are
subject to a level of uncertainty that increases
with time and, therefore, future outcomes
cannot be guaranteed or predicted with
certainty. Also, this assessment was made
recognising the principal risks that could have
an impact on the future performance of the
Company (see pages 68 to 71).

Going concern statement
Accounting standards require that directors
satisfy themselves that it is reasonable for
them to conclude whether it is appropriate
to prepare financial statements on a going
concern basis and the Code requires that, if
appropriate, this report includes a statement
to that effect. Following review, the directors
have concluded that it is appropriate to
adopt the going concern basis for these
financial statements and have not identified
any material uncertainties concerning the
Company’s ability to do so in the 12-month
period from the date of approving them.

For this reason, they continue to adopt the
going concern basis in preparing the accounts.

Directors
In compliance with the Code, all directors are
subject to annual election by shareholders.
The Chairman has confirmed that, based on
the formal performance evaluations undertaken
in 2017, all remain committed to the role and
the individual performance of all directors
continues to be effective. Also, in compliance
with the Code, the Company ensures that
non-executive directors have sufficient time
to fulfil their obligations. This is assessed when
a director is appointed and also in the event
of there being a material change to an
individual’s circumstances.
At the beginning of 2018, Elizabeth Corley,
a non-executive director of the Company,
was appointed as a non-executive director
of Morgan Stanley, a US listed company.
One of its UK subsidiary companies provides
corporate broking services to the Company
and, consequently, an assessment has been
undertaken to determine whether this
relationship has a bearing on her independence
for the purposes of provision B.1.1 of the
Code. After review, it was determined that this
was not a material business relationship given
the relatively low value of the contractual
arrangements and the nature of the
relationship, i.e. broking services are provided
by a UK subsidiary of Morgan Stanley and her
appointment is to the board of the US parent
company and non-executive in nature.
Should there be any change to either
Elizabeth Corley’s role with Morgan Stanley
or a material change in the services its UK
subsidiary provides to the Company, this
decision will be reconsidered.
In addition to being a non-executive director
of the Company, Ian Tyler is chairman of two
listed FTSE 250 companies, Bovis Homes Group
and Cairn Energy, and also two non-listed
companies, AWE Management, a private
company owned by three joint-venture partners,
and Amey, a subsidiary of a Spanish listed
company. The Chairman has reviewed Ian
Tyler’s other commitments and is satisfied that
they do not impinge on his ability to discharge
his responsibilities to BAE Systems effectively.
He will keep this matter under review.
All directors undertake a structured induction
programme when they first join the Board,
thereafter they regularly update and refresh
their knowledge of the Company.
The Company considers that all of the
non-executive directors identified on pages
78 and 79 of this report are independent in
accordance with Code provisions.

BAE Systems
Annual Report 2017

Audit Committee
report

Nick Rose
Chairman of the Audit Committee

Members
Nick Rose (Chairman)
Paula Rosput Reynolds
Ian Tyler

More detail on work undertaken by Deloitte
on the transition arrangements is set out on
page 83.

Audit re-tender and transition aside, the
Committee has continued its monitoring
of the financial reporting process and
its integrity, risk management systems
and assurance.

During the year, we have reviewed the initial
disclosures for IFRS 15, Revenue from Contracts
with Customers, and related briefings on the
impact on the financial statements. Further
information on IFRS 15 is provided in note 34
to the Group accounts on pages 199 to 201.

As reported on page 21, the Group has
been restructuring its portfolio of interests
in a number of industrial companies in
Saudi Arabia in order to support the
Kingdom’s Vision 2030 industrialisation
strategy. During the year, we have focused
on controls in our Saudi business, as well
as governance in relation to this portfolio
of collaborative partnerships.

We have continued in our efforts to leverage
optimal use of the Internal Audit function
within the risk environment. An external
assessment of the function originally
scheduled to be undertaken in 2017 has been
deferred until 2018 following organisational
changes taking effect from 1 January 2018.
The assessment has been commissioned and
will commence in the first quarter of 2018.

Dear Shareholders,
The section on the Audit Committee’s year
on page 86 provides an overview of the
work that we have undertaken in the last
12 months and I would like to focus here
on specific aspects of that activity.

We reported last year on progress to date on
our audit tender which has been conducted
in accordance with the audit tender and
transition timeframe set out in the graphic
below. I am pleased to report that the
tender exercise was completed to timescale,
enabling the Audit Committee to make a
recommendation to the Board in May 2017
which it subsequently endorsed. Subject to
shareholder approval at the 2018 Annual
General Meeting (AGM), Deloitte LLP will
succeed KPMG LLP as the Company’s auditor
at the end of that meeting. More detail on
the audit re-tender is set out on page 83.

My Audit Committee colleagues and I are
highly appreciative of the time and effort
that audit firms expend in preparing their
responses to tenders and would like to thank
the participating firms for their professionalism
and diligence in this regard.

Audit rotation regulations going forward
will require large companies to re-tender
their external audit service no less frequently
than every ten years.

Our focus since the recommendation was
endorsed by the Board has been two-fold:
ensuring that audit quality is maintained
for the 2017 half-year and full-year audits
from the outgoing auditor, whilst at the same
time ensuring that the proposed incoming
auditor is readying itself for the engagement in
terms of both audit engagement compliance
issues and familiarisation with the business.

External audit tender and transition timeline

Prior to May 2016
Pre-audit qualification and
independence enquiries

June 2016
Request for Proposal documents
for selected firms agreed

Summer 2016
Meetings with lead partners
of tendering firms

December 2016
Tender progress
assessment

September 2016 to March 2017
Fact-finding process for tendering firms

BAE Systems
Annual Report 2017

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Audit transition
Activity undertaken by Deloitte, as the incoming auditor1 for the
year ending 31 December 2018, has included the following:

– reviewed non-audit services provided to the Group and steps
taken to achieve audit independence from 1 January 2018;

– agreed interaction with KPMG, as outgoing auditor, during

the 2017 audit cycle, including attendance at key audit meetings,
observing the 2017 half-year process and shadowing the
year-end audit;

– finalised audit team and agreed key transition milestones
with the Committee and finance teams across the Group;

– held regular meetings with Group Finance Director,

Director, Financial Control and Reporting, and business
unit finance directors;

– worked closely with Internal Audit to understand their 2017

and 2018 work programmes, and used the outputs to inform
the 2018 Audit Plan and risk assessment process;

– attended Audit Committee meetings since June 2017 and
reported regularly on independence and audit transition
plan status; and

– undertaken familiarisation visits and other meetings and
interactions with sector and business unit management,
and other senior executives to facilitate knowledge building,
audit scoping and execution planning.

Audit re-tender
Key elements of the audit re-tender were as follows:

– overseen by the Audit Committee who agreed the scope

of the Request for Proposal (RFP);

– assessment of tender participants informed by complexity

of the Group and scale of its international business;

– tender competed by highly capable and experienced

international audit firms with strong track records and
technical expertise;

– no contractual obligations restricted the selection of firms

participating in the audit;

– current incumbent, KPMG LLP (and its predecessors), had

been in place as the Company’s auditors since 1981 without
re-tender and was thus not invited to tender;

– evaluation criteria in the RFP included:
– audit quality and independence;
– understanding of the Group’s business;
– capability of audit team in terms of skills, experience

and geographic reach;

– clear planning and audit approach; and
– robust challenge, insight and proactivity;

– business meetings and site visits scheduled to enable

the participating firms to gain an understanding of the
Group’s business;

– presentations made to the Audit Committee by participating

firms, with question and answer sessions;

– Audit Committee put forward formal recommendation to the

Board that, of two audit firms capable of undertaking the audit
appointment, Deloitte LLP was its preferred choice; and

– Board endorsed the Committee’s recommendation and
will recommend the appointment of Deloitte LLP at the
2018 AGM.

External audit tender and transition timeline

1. Subject to shareholder approval at the 2018 AGM.

May 2017
Selection of new auditors for
recommendation to the Board

August 2017
Announcement of
half-year results

February 2018
Announcement of
full-year results

May 2018
Board recommendation
at Annual General Meeting
to appoint new auditors

June 2017 to July 2017
Half-year results
shadow period

December 2017 to February 2018
Full-year results shadow period

BAE Systems
Annual Report 2017

Audit Committee report
continued

How the effectiveness of the external
audit process was assessed

Who we surveyed:
– Executive directors
– Operating group/sector and line

of business management

– Internal Audit Director
– Other senior executives, including

key finance roles

Areas we covered:
– Understanding of the Group’s risks
– Audit plan
– Robustness of audit processes
– Objectivity
– Quality of communications
– Ability to provide a seamless

service across differing jurisdictions

as well as interaction with the Committee
members.

This review related to KPMG’s final
audit prior to rotating off our account.
The feedback has been shared with them
and will also help inform our discussions
on audit scope and process with Deloitte,
our incoming auditor.

How we ensure that the Group’s
financial statements, taken as a
whole, are fair, balanced and
understandable

The process is:
– comprehensive guidance issued to all
the 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 directors

and the Executive Committee.

Audit Quality Review (AQR)
The Financial Reporting Council’s AQR team
monitors the quality of audit work of certain
UK audit firms through inspections of a sample
of audits and related procedures at individual
audit firms. During the year, the 2016 external
audit of the Group by KPMG was reviewed
by the AQR. The review covered certain items
of the Group-level audit (including retirement
benefit obligations, taxation, procedures in
relation to the risks of bribery and corruption,
and the quality of communications with the
Audit Committee) and the audit of recognition
of revenues and profits on long-term contracts
by two of the business unit audit teams. I met
with the AQR to gain an understanding of
its report and the Committee discussed the
review findings with KPMG. The AQR
reported a number of recommendations for
improvement and also areas of high standard.
The recommendations were incorporated
into the 2017 audit work and the Committee
is satisfied that they have been properly
addressed. The Committee does not consider
any of the findings to have a significant impact
on KPMG’s audit approach. We will make the
lessons learned from this report available to
our incoming auditor, Deloitte.

Audit independence
We have reviewed in detail the confirmation
and information received from KPMG on
the arrangements that they have in place
to safeguard auditor independence and
objectivity, including specific safeguards in
place where they are providing permissible
non-audit services to the Group.

As part of the auditor transition arrangements,
we have reviewed on a regular basis the steps
being taken by Deloitte, the proposed incoming
auditor, to achieve audit independence from
1 January 2018 onwards.

Non-audit services policy
The Committee has a formal policy
governing the engagement of the auditors
to provide non-audit services which we
review on an annual basis. The policy
prohibits certain activities from being
undertaken by the auditors and also places
restrictions on the employment of former
employees of the auditors.

Recognising that the auditors are best placed
to undertake certain work of a non-audit
nature, the policy permits the provision of
Audit-Related Services and Permitted
Non-Audit Services up to limits that are
pre-approved by the Committee, with specific

approvals required beyond such limits by the
Committee. A copy of the policy is available
on the Company’s website, baesystems.com.

As reported last year, we made revisions
to the policy in order to ensure compliance
with the Financial Reporting Council’s revised
regulations on ethical standards for auditors
and EU regulations adopted by the UK which
apply prohibitions to a range of engagements
that could result in an auditor facing a
conflict of interest. As a result, certain services
formerly provided by KPMG, primarily tax
services and investor information services,
were no longer provided by them with effect
from 1 January 2017.

Details of fees payable to the auditors are
set out on page 151. In 2017, non-audit fees
represented 15% of the audit fee. The principal
non-audit services provided by the auditors
related to the interim review and accounting
advice primarily in respect of IFRS 15.

Financial statements
The Committee reviews all significant issues
concerning the financial statements. The
principal matters we considered concerning
the 2017 financial statements were:

Recognition of revenue, profit
and provisioning
We reviewed key estimates and judgements
prior to publication of the financial statements.
Our review included the key estimates and
assumptions applied in determining the
financial status of the more significant
programmes, including Typhoon, UK aircraft
carrier programme, Astute Class submarine
programme and Saudi British Defence
Co-operation Programme.

Pensions
Recognising the scale of the Group’s pension
obligation, we reviewed the key assumptions
supporting the valuation of the retirement
benefit obligation. This included a comparison
of the discount and inflation rates used against
externally-derived data. We reviewed the
methodology used to allocate a proportion
of the retirement benefit obligation to equity
accounted investments and concluded that
this was appropriate with reference to
agreements between the Company and those
companies. We also considered the adequacy
of disclosures in respect of the sensitivity of
the deficit to changes in these key assumptions,
as well as the results of the UK triennial funding
valuations (see note 21 to the Group accounts
on pages 174 to 183).

BAE Systems
Annual Report 2017

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Goodwill
We considered the level of goodwill held
on the Group’s balance sheet in respect of
a number of past major transactions and
whether, given the future prospects of these
businesses, the value of goodwill held on
the balance sheet remains appropriate. The
methodology for impairment testing used by
the Group is set out in note 8 to the Group
accounts on page 158. As a result of this
review, there has been an impairment of
goodwill held in respect of Applied Intelligence
of £384m reflecting the future level and timing
of expected returns from the business.

Taxation
Whilst tax policy is ultimately a matter for
the Board’s determination, we reviewed the
Group’s tax strategy as set out on page 34.
Twice during the year, we reviewed the
Group’s tax charge, tax provisions and the
basis of recoverability of the deferred tax
asset relating to the Group’s pension deficit.

Going concern and viability statements
The Committee agreed the parameters
of, and reviewed the supporting report for,
the going concern statement (see page 81)
and the statement on the Board’s assessment
of the prospects of the Company (the viability
statement on page 81) over the five-year
period used in the Integrated Business Plan.

Internal control and risk
The Board has delegated to the Committee
responsibility for reviewing in detail the
effectiveness of the Company’s risk
management and internal control system.
The Committee’s review of the effectiveness
of internal controls has encompassed a review
of the reports relating to the six-monthly
Operational Assurance Statements (OAS), which
are submitted by each business or function
as a mandated policy under the Group-wide
Operational Framework, controls reports, and
reports from both internal and external auditors.

A key focus for the Committee is the controls
environment surrounding the Company’s
Lifecycle Management (LCM) process, the
bedrock of our programme execution and
management. LCM is integral to the successful
execution of the Group’s projects and
programmes, and of particular importance
in the early identification of programme risk
and the determination of profit recognition or
provisioning which, you will see from above,
tend to be areas where we are required to
exercise judgement. We have discussed the

outputs of general financial and LCM controls
testing, and any required improvement
actions, with management, and internal and
external audit, with a view to ensuring the
ongoing robustness of programme execution
and risk mitigation.

We have reviewed the ongoing effectiveness
of the Company’s risk management processes
as part of our wider review of internal controls.
The Group’s principal risks are set out on
pages 68 to 71.

Internal audit
Internal Audit plays an integral role in the
Company’s governance structure and provides
regular reports to the Committee, including
the outputs of the twice-yearly OAS process
and the tracking of remedial action in the case
of any control failures.

The annual Internal Audit programme is
agreed jointly by the Audit and Corporate
Responsibility committees to ensure that
the overarching programme covers not only
financial risk, but also the assessment of
the effectiveness of key areas of ethical and
reputational risk. The assurance programme
covers a broad range of audits covering areas
such as mandated governance, OAS outputs,
risk register findings, change programmes,
structural and business changes, and areas
relating to responsible behaviour and
non-financial risk. Internal Audit may also
from time-to-time undertake other work
within the context of the risk environment.
As part of this year’s process, we reviewed
the scope of annual audits and recalibrated
them against the current risk environment.

During the year under review, and separate
from the normal regular sessions we hold
with the Internal Audit Director without
management present, we held a separate
session with him, his heads of internal
audit and the external auditor, which
has helped inform our view on how
to optimise internal audit resource for
value-added assurance.

After discussion of the 2017 evaluation
output with the Internal Audit Director, the
Committee concluded that the Internal Audit
function remains effective. As reported earlier,
an external assessment of the function will
commence in the first quarter of 2018.

Nick Rose
Chairman of the Audit Committee

How the Committee assesses the
effectiveness of Internal Audit

Who we survey:
– Group-wide heads of Audit Review

Boards

– Other business leaders
– External auditors

Areas for requested feedback include:
– Role of Internal Audit and

independence

– Audit planning, processes and

execution

– People resources and skilling
– Communications and reporting

Committee composition and evaluation
The breadth of experience of the
Audit Committee members is set out
on page 79. The performance evaluation
of the Committee is undertaken as part
of the wider Board evaluation and the
Board believes the Committee to have
the appropriate composition, skills and
experience to discharge its responsibilities.

Competition and Markets
Authority Audit Order
The Committee has complied with
the provisions of the Competition and
Markets Authority Audit Order in respect
of committee responsibilities and audit
re-tendering disclosures.

BAE Systems
Annual Report 2017

Audit Committee report
continued

The Audit Committee’s year

February

Committee

June

Committee

London, UK
– Considered the accounting, financial

control and audit issues reported by the
auditors that flowed from the audit work.

– Reviewed the financial statements and
specific disclosures, including viability
and going concern, for recommendation
to the Board.

– Reviewed the effectiveness of the

external audit process.

– Received a report from the Group

Taxation Director.

– Considered output from the six-monthly

OAS review.

– Reviewed the procedures and outputs
for the identification, assessment and
reporting of risk.

– Reviewed the effectiveness of the
Company’s helpline procedures in
respect of the reporting of accounting
or financial improprieties.
– Regular quarterly items1.

Joint session with the Corporate
Responsibility Committee:
– Agreed final iteration of the annual

Internal Audit programme.

May

Committee

Farnborough, Hampshire, UK
– Conducted the audit tender selection and

made recommendation to the Board.
– Agreed the AGM Trading Statement.

Washington DC, US
– Agreed audit engagement and audit fee.
– Agreed audit strategy and scope.
– Reviewed external auditor independence

issues.

– Reviewed Deloitte’s Audit Transition Plan.
– Discussed with external auditors the
Financial Reporting Council’s latest
Quality Review on KPMG (which
did not include the BAE Systems audit).

– Considered output of the Internal

Audit Director’s report.

– Received a presentation from VP, Audit

for the US businesses.
– Regular quarterly items1.

July

Committee

London, UK
– Considered the accounting, financial

control and audit issues reported by the
auditors that flowed from the audit work.

– Reviewed the financial statements and

specific disclosures, including going concern,
for recommendation to the Board.

– Received a report from the Group Taxation

Director.

– Considered output from the six-monthly

OAS review.

– Reviewed the procedures and outputs
for the identification, assessment and
reporting of risk.

– Audit Transition: Reviewed independence

safeguards for incoming auditor.

– Regular quarterly items1.

1. The Committee reviews the nature and level of non-audit services (including independence safeguards from the
incumbent auditor where it provides such services), and holds a separate session with the Internal Audit Director
and external auditors without management present. The Audit Committee Chairman also meets separately with
internal and external audit on an ad hoc basis.

August

Meeting

London, UK
– Informal meeting with the Internal

Audit Director to discuss best practice
developments in internal audit and
its strategic development.

October

Committee

London, UK
– Agreed the Trading Update.

November

Briefing

– Reviewed briefing on IFRS 15.

December

Committee

London, UK
– Considered the external auditor’s

controls report.

– Considered output of the Internal Audit

Director’s report.

– Presentation on governance in the

Company’s Saudi Arabian Kingdom
Portfolio Companies.

– Received a report on export control

compliance.

– Received a report on the Group’s insurance

arrangements.

– Reviewed the Non-Audit Services Policy.
– Discussed the first iteration of the annual

Internal Audit programme.

– Set the parameters for work supporting

the viability and going concern statements.

– Undertook a review of the effectiveness

of the Internal Audit function.

– Regular quarterly items1.

Audit Committee timeline

February
Committee

May
Committee

June
Committee

July
Committee

August
Meeting

October
Committee

November
Briefing

December
Committee

Corporate Responsibility
Committee report

BAE Systems
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Ian Tyler
Chairman of the Corporate Responsibility Committee

Members
Ian Tyler (Chairman)
Revathi Advaithi
Harriet Green
Chris Grigg

Dear Shareholders,
It is my pleasure to once again be reporting
to you on the business of the Corporate
Responsibility Committee during 2017.
Through this report I aim to give you an
insight into the programme of work that
we have undertaken, our areas of focus
during 2017 and how we aim to develop
these into 2018.

The corporate responsibility landscape
continues to evolve and, as such, the
Committee monitors developments to
ensure that our agenda remains relevant,
whilst keeping a keen eye on the matters
that have been our principal focus for some
time. During 2017, we increased the intensity
of our review of diversity and inclusion across
the different areas of the business. We also
looked at responsible trading, the way in
which the Company interacts with our
suppliers and how the Company engages
with employees. I will provide detail on each
of these areas through this report and begin
with a discussion of our health and safety
agenda, which remains a key priority.

Safety
Safety continues to be a key priority for the
Committee and we remain focused on making
progress towards achieving world-class
performance wherever possible. During the
year, we carried out a deep-dive review of the
safety performance of the US business to
understand the factors driving these specific
safety performance metrics. In 2017, there
was a 3% reduction in the Recordable
Accident Rate and a 28% reduction in the total
number of major injuries recorded. To ensure
that we do not lose focus on this important
area, the Board continues to prioritise safety
in the business through the inclusion of a
specific safety objective that is designed to
be realistic, but stretching, and which forms
part of our executive annual incentive scheme
(see page 101).

Diversity and inclusion
In July, we welcomed Charles Woodburn to
the Board in the position of Chief Executive.
Charles has now taken on the role of
Chairman of the Company’s Diversity and
Inclusion Council, and he will be engaging
with the Committee on the Council’s priorities
and the progress that is being made to drive
business performance.

In my report last year I explained that,
during 2016, the Committee sought to gain
an understanding from management on the
Company’s objectives and plans with regard
to diversity and inclusion. At the conclusion
of our programme of work in 2016, it was
clear to me that, whilst taking a top-level view
had been helpful to set the scene, it did not
provide us with a rich enough view of what
the challenges were at business unit level.
Each business has its distinct challenges, and
the Committee was keen to understand what
these were and how the management boards
were addressing them. We therefore invited
each line of business to meet with the
Committee to discuss how they were building
the diversity and inclusion strategy into their
work. From the discussions we held with the
line leaders, we gained a more informed view
of the progress being made, but we also gained
an appreciation of why this is an evolving issue
and one that we as a Committee need to
continue to focus on in 2018.

The Committee held a very useful discussion
on the particular challenges that the Saudi
Arabian business faces in terms of local
recruitment and retention, and gender diversity
in particular. One of the issues that sits
alongside our consideration of diversity and
inclusion is the development of talent across
all backgrounds and it is promising to see that
developments in the educational opportunities
for women are being translated into changes
to the demographic of our employees.

At the end of 2017, the Committee had
reviewed the diversity and inclusion approach
for each line of business which has given the
Committee a better understanding of the
actions that are taking place at management
board level to embed a culture of diversity and
inclusion. During 2018, the Committee will
continue to keep this high on its agenda as we
consider the accountability measures that are
required to ensure that we have the necessary
commitment and engagement to deliver
further improvement.

Responsible trading
The Committee has continued to review
the issue of responsible trading. During
the year we reviewed the anti-bribery and
anti-corruption policies, which included the
Lobbying, Adviser, and Gifts and Hospitality
policies. These policies set out the expectations
that we have of our employees.

Focus on diversity and inclusion
The Corporate Responsibility Committee continued to focus on diversity and inclusion
throughout 2017 and this has remained a key agenda item at each of the quarterly
meetings. Our goal is to build a culture of inclusion and inclusive leadership globally,
and the Committee has played a key role in driving and supporting the development of
market plans and strategies to foster diversity and inclusion throughout the organisation.

The Corporate Responsibility Committee has reinforced accountability for diversity and
inclusion through the promotion of:

– demographic data analysis to identify targeted diversity and inclusion actions;

– numeric goals and milestones to increase the representation of minority groups and

accelerate diversity;

– recruitment processes that support increasing pipelines and mitigate unconscious bias;

– inclusive leadership training programmes;

– employee resource groups and local councils; and

– a focus on early careers and next-generation recruitment to address retirement risk and

Science, Technology, Engineering and Mathematics skills shortages.

BAE Systems
Annual Report 2017

Corporate Responsibility Committee report
continued

Focus on employee
engagement
It is important for the members of the
Board to be able to understand the views
and opinions of employees. The Company
engages with employees in a number of
different ways to gain feedback on what
is happening across the business and to
build a dialogue on key issues. This
includes meeting with employees and
the use of employee engagement surveys.
The opportunity to have face-to-face
engagement with employees is regularly
included in the agenda for site visits
undertaken by the Board. These
discussions are one of the ways in which
the Board can gauge the success of the
engagement and to listen directly to the
views of employees.

During 2017, the Corporate Responsibility
Committee reviewed the output of the
employee engagement surveys and, in
2018, we will look closely at the ways
in which the Board will develop the
frameworks for how it engages with
employees across the business.

Employee engagement
The Committee has considered how the
Company engages with employees to gain
an understanding of their views and opinions.
There are challenges to engaging effectively
with a large number of employees across a
number of countries. To meet this challenge
new engagement surveys have been developed,
and we reviewed the way in which the ‘Agile’
survey is being used to gain a quick response
from employees on specific topics. Each
business has the ability to tailor the questions
asked to suit their specific engagement needs
which gives a new agility to the process. The
Committee was also interested to understand
how management responds to these surveys.
It was encouraging to see that both the
quantitative results and the qualitative
comments were considered in detail by the
management teams as part of their
engagement process. The Committee will
continue to review the employee engagement
agenda during 2018.

Next year
As in previous years, the agenda for 2018
will be developed to ensure that we maintain
a focus on our rolling agenda of safety, ethics,
diversity and inclusion, and responsible
business conduct. In addition to this, we look
to include deep dives on other areas to
broaden our understanding of the challenges
and opportunities across the business in
relation to corporate responsibility.

Ian Tyler
Chairman of the Corporate
Responsibility Committee

The Committee also reviewed the different
ways in which the Company assesses and
makes judgements on the types of products
and services that are developed and sold
and the customers that we will do business
with. We considered some of the key export
markets where we operate and held in-depth
discussions with the management team on
our approach to existing and new business
opportunities, and how we engage with
governments and customers. In particular, the
Committee reviewed and carefully considered
the manner in which the Company operates
in these markets, looking at government
relationships and the controls we have in
place aimed at ensuring that we operate
legally and in accordance with our responsible
business policies.

For all of these areas we aimed to understand
how management assesses risk, from both
an operational and reputational perspective.
In support of this we also looked at the
Product Trading Policy which looks to ensure
that the required standards of integrity are met.
We are continuing to focus on responsible
trading as part of our 2018 agenda.

Responsible procurement
The Committee undertook a deep dive into
the way in which the Company engages with
suppliers. In 2016, the Company embarked
on a major programme of change within
its procurement function. The Committee
therefore met with the Chief Procurement
Officer to discuss the changes made to the
global Procurement Policy, the structure and
role of the Procurement Council and the
Supplier Principles, launched in January 2017.

The Committee was interested in understanding
two aspects of procurement in particular. The
first was how the Company can be confident
that its suppliers, and their supply chains in
turn, are meeting similar responsible business
standards to those that we set for ourselves.
The Supplier Principles detail what the Company
expects and these have been benchmarked
against global best practice. The second
aspect was how we as a customer engage
with our supply chain and the relationships we
build with this crucial element of our business.
The Committee will revisit this topic in 2018
to review the progress that has been made.

BAE Systems
Annual Report 2017

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The Corporate Responsibility Committee’s year

February

Committee

October

Committee

London, UK
– Carried out the annual review of the
Product Trading Policy. This policy
governs BAE Systems’ business behaviour
to ensure that the Company’s product
trading reflects the Company’s standards
of integrity.

– Consideration of the Company’s

approach to diversity and inclusion and
the way in which this is managed across
the business.

– Received a presentation from the Group
Human Resources Director on employee
engagement tools and discussed the
results of a recent internal survey.
– Review of performance against the

2016 safety performance objectives.
A recommendation on the performance
rating was made to the Remuneration
Committee.

June

Committee

Washington DC, US
– Received a presentation on diversity
and inclusion in BAE Systems, Inc.

– Discussion on the objectives of the business,
the strategy to achieve this and the way in
which performance was assessed.
– Review of the safety performance of
BAE Systems, Inc. to consider the key
areas of risk and the safety culture within
the business.

– Discussed the programme of work that
was being undertaken to update the
Code of Conduct.

London, UK
– Received a presentation on diversity and
inclusion in the International Operating
Group. Discussion of the progress that has
been made in BAE Systems Australia and
Saudi Arabia and the different challenges
for these areas of the business.

– Presentation from Group Procurement
on the policies and guidance relating to
responsible procurement. Consideration
of the structure of the function and the
way that it supports the global approach
to responsible business.

December

Committee

London, UK
– Undertook the annual review of the
Gifts and Hospitality, Facilitation
Payments and Advisers Policies.

– Received a presentation on diversity and
inclusion in Platforms & Services (UK).
Discussion of the approach taken by the
business to attract and retain diverse talent
and the way in which this supported the
leadership pipeline. Consideration of how
targets could be used to drive improvements.

– Consideration of the structure and focus
of the corporate responsibility objectives
for 2018.

– Review of the corporate responsibility
audit review programme for 2018.

Schedule for 2018

Committee

February
– Review of performance metrics

for 2017.

– Product trading.
– Diversity and inclusion deep dive.

June
– Anti-bribery and corruption –

overseas governance.

– Workplace safety deep dive.
– Environment update.
– Stakeholder and employee

engagement.

September
– Review of responsible procurement.
– Workplace safety.
– Diversity and inclusion deep dive.

December
– Anti-bribery and anti-corruption
and related policies – review
of Lobbying, Adviser, and Gifts
and Hospitality policies.

– Consideration of forward-looking

objectives.

– Diversity and inclusion deep dive.
– Stakeholder and employee

engagement update.

Corporate Responsibility Committee timeline

February
Committee

June
Committee

October
Committee

December
Committee

BAE Systems
Annual Report 2017

Nominations
Committee report

Sir Roger Carr
Chairman of the Nominations Committee

Members
Sir Roger Carr (Chairman)
Revathi Advaithi
Elizabeth Corley
Harriet Green
Chris Grigg
Paula Rosput Reynolds
Nick Rose
Ian Tyler

Dear Shareholders,
I’m pleased to report that 2017 saw a
successful conclusion to the Chief Executive
succession planning process – as managed
by the Nominations Committee – with
Charles Woodburn succeeding Ian King on
1 July. It was back in March 2015 that the
Committee first identified Charles as a
possible candidate for the role, and I would
like to thank him and Ian for the professional
and helpful manner in which they conducted
themselves during a rigorous and lengthy
selection and handover process.

Charles is well supported in his new role
by two very able and experienced fellow
executive directors; Jerry DeMuro, who
leads our US business, and Peter Lynas,
Group Finance Director. I’m pleased that
Peter has agreed to take a wider management
role, and since November last year he has
been responsible for UK Shared Services,
Procurement and Group Mergers &
Acquisitions.

Last year, I committed to further strengthen
the non-executive representation on the
Board. I’m delighted that we were able
to achieve this with the appointment of
Revathi Advaithi on 1 January this year.
With an international industrial sector
background and a good understanding of
the digital economy, Revathi’s knowledge
and experience will be an asset to the Board.
Heidrick & Struggles – JCA Group1 worked
with the Committee to assist in her
recruitment and Spencer Stuart1 performed
a similar role in the Chief Executive search.

Looking ahead, next year Nick Rose, who
chairs our Audit Committee and is also our
Senior Independent Director, will have served
on the Board for nine years and has indicated
that he will retire in 2019. Consequently, the
Committee has initiated a search process to
identify a suitable candidate to succeed Nick
in leading the Audit Committee.

BAE Systems recognises the value of being an
inclusive employer with a diverse workforce.
This also applies at Board level, and we
continue to make good progress in increasing
the diversity of the Board. In terms of gender,
36% of Board members are women, which
exceeds our previously stated policy target
of 33% or greater by 2020 – as targeted by
the Hampton-Alexander Review. This remains
our policy concerning gender. In terms of
other aspects of Board diversity, our policy
is to continue, over time, to create a Board
that not only brings together individuals with
the right skills, knowledge and experience,
but also has a diversity that reflects the
multi-national nature of our Company and
the increasingly global nature of the business
world in general. However, individual merit
will always be the prime consideration when
making appointments to the Board. We will
continue to engage with search consultants
to identify candidates in a manner that is
consistent with achieving an appropriately
diverse board.

1. Heidrick & Struggles – JCA Group and Spencer Stuart provide other recruitment services to BAE Systems.

One of the Committee’s objectives over the
last couple of years has been to develop a
better understanding of the depth of our
management resource. This has meant making
time for the non-executive directors to meet
with executives who either currently occupy
senior management positions just below our
Executive Committee, or show the potential
to reach that level. Using informal events
scheduled around our Board meetings, we
have been successful in significantly increasing
the Board’s engagement with executives.
This activity has helped the members of the
Nominations Committee to perform the
important role they undertake in overseeing
succession planning and executive
development across the Group.

This work will be a key priority for the
Committee in 2018. We know we employ
some highly talented people, and will
engage with the Chief Executive and our
new Group Human Resources Director in
ensuring that they are developed and given
the opportunities to lead this Company in
the years to come.

Sir Roger Carr
Chairman of the Nominations Committee

Nominations Committee timeline

February
Committee

March
Committee

May
Committee

July
Committee

BAE Systems
Annual Report 2017

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Key changes proposed and approved
at our 2017 AGM include:
– adoption of common metrics

(50% on Earnings per Share, 50%
on Total Shareholder Return) for all
performance-related share awards;
– introducing reasonable discretion

for the Committee to modify the final
outcome of awards vesting in light
of important factors in the business;

– amending the structure of our

Long-Term Incentive Plan applicable
to our UK executive directors to ensure
a minimum period from grant to final
release, based on a three-year performance
period with a further two-year holding
period for all awards to be granted from
2018 onwards; and

– a simplification of the Long-Term Incentive
construct applicable to the US executive
director.

2017 was a crossroads year for BAE Systems
and the application of our Policy reflected
these circumstances. Ian King retired from the
Company at the end of June having served for
over 40 years, including leading BAE Systems
as Chief Executive since 2008. His retirement
was handled precisely according to our Policy.
This transition had been anticipated and the
decision-making with respect to succession
and remuneration was undertaken with an eye
to ensuring a smooth transition of leadership
through a period of significant change in the
business environment. Thus, our then Chief
Operating Officer, Charles Woodburn, was
appointed Chief Executive with effect from
1 July 2017 and his remuneration was adjusted
in accordance with the Policy. Our Group
Finance Director, Peter Lynas, was subsequently
asked to undertake enhanced responsibility for
Procurement, Group Mergers & Acquisitions
and UK Shared Services. As previously
announced, the base salary of the Group
Finance Director was increased to reflect
these expanded responsibilities with effect
from 1 November 2017 and this adjustment
was also in accordance with the Policy.

Remuneration
Committee report

Paula Rosput Reynolds
Chairman of the Remuneration Committee

Members
Paula Rosput Reynolds (Chairman)
Elizabeth Corley
Nick Rose

Dear Shareholders,
The Remuneration Committee (the Committee)
is pleased to provide this update on our
progress in implementing the remuneration
policy approved at the May 2017 AGM (the
Policy). We appreciated the high level of
support we received (95.09% in favour) and
the continuing constructive dialogue we have
had with a number of you. The Committee
remains sensitive to the broad range of themes
regarding executive remuneration expressed
by investors, the UK government and the
wider public, particularly as regards to restraint
when setting quantum. We believe such
restraint is appropriate as long as remuneration
remains reflective of the business environment
and contains appropriate incentives to achieve
the Group’s business objectives. In keeping
with this theme, I believe you will find that
our changes for 2018 are quite modest but
are nevertheless responsive to the feedback
that the Committee received during the last
shareholder consultation cycle. To confirm,
for 2018, no revisions are proposed to our
executive remuneration framework which
would constitute a change to the Policy.

Business performance and incentive outcomes in 2017

2017
performance

2017
incentive outcome

Group EPS

Group cash

Group order intake

Average three-year EPS growth

Three-year TSR

Recordable Accident Rate (per 100,000 employees)

Major injuries recorded

Below threshold
Between threshold and target
Between target and stretch

AIP

LTI

AIP

42.3p

£(940)m

£19.3bn

4.7%

49.1%

564

AIP Annual Incentive Plan

LTI Long-Term Incentive

This resulted in the following incentive outcomes:
– 2017 annual bonus payouts for the executive directors ranged from 75.6% to 88.4%

of maximum; and

– Performance Shares (EPS) granted to executive directors in March 2015 will vest at 46.9%.
Performance Shares (TSR) and Share Option awards granted at the same time did not
meet their performance condition and will lapse.

BAE Systems
Annual Report 2017

Remuneration Committee report
continued

Summary of key decisions
for 2017
– Approval of early retirement for

outgoing Chief Executive (Ian King)
in June 2017.

– Approval of remuneration package

applicable to newly-appointed
Chief Executive (Charles Woodburn)
in July 2017.

– Salary of the Chief Executive is
being increased by 2.5% from
1 January 2018.

– As a result of his expanded role and

increased responsibilities, the salary of
the Group Finance Director increased
by 6.9% on 1 November 2017. His
salary is being increased by 2.5%
from 1 January 2018.

– Salary of the President and Chief

Executive Officer of BAE Systems, Inc.
is being increased by 3% from
1 January 2018.

– Approval of remuneration packages

for newly appointed Executive
Committee members.

– Awards granted in spring 2017 of

Performance Shares, Share Options
and (to US executive director only)
Restricted Shares.

– Performance Shares subject to

(i) 50% on Earnings per Share (EPS)
growth (3% to 7% average annual
growth requirement); and (ii) 50%
on the Total Shareholder Return (TSR)
percentile ranking against sector peer
comparator group and the companies
in the FTSE 100 index, with each
group having equal weight.

– Elimination of Share Options for

UK executive directors and maintaining
expected value in Performance Shares
for 2018 awards.

The Company remains subject to rapidly-
changing political, economic, defence and
security conditions around the world. Such
circumstances require that we be responsive
to the environment and innovate for the
long-run health of the business. Thus, in
October, we announced a restructure of
various of our operations, resulting in a
number of senior leadership changes. The
Committee adjusted remuneration for the
affected senior executives to reflect new
roles and enhanced responsibilities. In doing
so, the Committee adhered to the Policy.

Throughout this period of transition, the
Committee’s overarching goal has remained
constant – to ensure that we are providing
compelling incentives for sustainable high
performance by our executive team in a way
that is transparent to our stakeholders and is
supported by them. Further, our remuneration
programmes are designed to assure that
there is strong alignment between business
results and rewards conferred. In reading
this report, we hope you will agree that the
results of our deliberations are consistent
with these purposes.

Context to the Committee’s decisions
The Committee is responsible for the full
spectrum of executive employment matters:
recruiting, promoting and retaining the best
top-level leaders, setting the incentives under
which these leaders operate, and monitoring
the results they produce and the manner
in which they produce them. Our overall
remuneration framework has a number of
specific goals. It is designed to motivate
our key talent to achieve the Company’s
strategic objectives, to deliver on customer
commitments, to lead and inspire employees,
and to drive value for our shareholders. It is
also designed to be competitive in the various
markets in which we operate and compete
for talent.

There are multiple considerations in the
design of the overall framework. First, is
the balance of short-term and long-term
incentives. Second, is the interplay between
Group and business segment results and
individual accomplishments, as well as the
level of reward afforded to employees in
the wider Group. Third, is to distinguish
between the precise numerical results
and the character of the results themselves,
including the manner in which they are
achieved. Fourth, is the balance between
absolute shareholder value creation and
the Group’s performance relative to peers.

Our short-term programme metrics are tied
to Group performance, business segment
performance and individual goals, including
the leadership behaviours that underpin
BAE Systems’ Total Performance culture.
Our long-term incentive programme measures
absolute performance of the Group and
performance relative to peers. Our framework
is intended to foster accountability for
sustaining and growing the Group in a
responsible manner.

In addition to developing the overall
remuneration framework, the Committee
assesses the level of challenge within our
annual and long-term incentive plan targets.
Annually, in November, the full Board reviews
and adopts the Integrated Business Plan.
Thereafter, the Committee reviews the
specific business targets/metrics for the one
and three-year periods and examines the
underlying assumptions, including the degree
of ‘stretch’ contained within them. After
setting one and three-year targets, the
Committee periodically reviews progress
towards the attainment of the objectives.
After the close of each year, the Committee
undertakes a thorough review of annual
and three-year performance. Separately,
the Committee regularly considers the overall
construct of the remuneration package to
ensure that potential pay outcomes are
appropriate and reasonable against different
performance scenarios.

BAE Systems
Annual Report 2017

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2018 remuneration
As noted above, the changes for 2018 are
quite modest but are nevertheless responsive
to the feedback that the Committee received
during the last shareholder consultation cycle.
The following actions will apply to our
framework for 2018 and all are entirely in
accordance with the bounds of the approved
Policy. In line with our commitment to
continued transparency and engagement
with our shareholders, we have engaged
with our major shareholders on these
changes for 2018.

In order to increase focus on the
achievement of non-financial objectives
designed to support the Group’s strategy,
the weighting on non-financial performance
measures will increase from 20% to 25%,
with 75% remaining on financial metrics
relating to Group EPS, Group cash and
Group order intake.

The conversion from Share Options to
Performance Shares has been calculated
in line with the methodology explained
in our Policy on page 120 and is shown
in the table below.

This approach significantly simplifies our
LTI arrangements without changing the
underlying market-competitive expected
values of 185% for the Chief Executive
and 167.5% for the Group Finance Director.

Long-Term Incentive (LTI) design
simplification
As a further step towards simplification of
our LTI framework, having already taken the
decision to eliminate the use of Share Options
as part of the construct applicable to our
US executive director, the Committee will
also cease the award of Share Options to
the UK executive directors for 2018 onwards.

Long-Term Incentive award levels

Current
total expected
(% of salary)

185

167.5

Current aggregate
face value of awards
(Performance Shares
and Share Options)
(% of salary)

New face value
associated with
Performance Share
award only
(% of salary)

550

515

370

335

Chief Executive

Group Finance Director

Application of 2018 package for UK executive directors

Application of 2018 package for US executive director

Performance
Shares

Compulsory
bonus deferral

Annual
Incentive

Base
Salary

Vests subject to
three-year TSR and
EPS conditions, and
two-year holding
period, in year 5

One-third
compulsorily
deferred in shares
for three years

Two-thirds paid in
cash immediately

Performance
Shares

Restricted
Shares

Compulsory
bonus deferral

Annual
Incentive

Base
Salary

Vests subject to
three-year TSR and
EPS conditions;
vested shares
released in
one-thirds in
years 3, 4 and 5

Vests subject to
three-year service
condition with an
additional two-year
clawback period

One-third
compulsorily
deferred in shares
for three years

Two-thirds paid in
cash immediately

Year

Charts are illustrative and are not to scale. Details of executive director remuneration packages are on page 96. The full Policy approved at the 2017 AGM is set out on pages
117 to 129.

BAE Systems
Annual Report 2017

Remuneration Committee report
continued

Concluding comments
On behalf of my colleagues on the Committee,
and indeed the entire Board, we appreciate
the input we have received from shareholders
and representatives of institutional investors.
The Committee remains committed to our
policy of paying for performance. The
changes for 2018 simplify the LTI construct
considerably whilst ensuring that the
incentive arrangements for executives remain
meaningful and are aligned to the Company’s
strategic goals and the interests of our
shareholders. The Remuneration Committee
is actively engaged in monitoring performance
and continuing to ensure that the level of
challenge within our annual and long-term
incentive plans remains appropriate.

On behalf of the Board

Paula Rosput Reynolds
Chairman of the Remuneration Committee

Wider employee agenda
Recognising the public interest in pay
differentials, and the expected proposed
legislation in this area, we are continuing
to voluntarily disclose the pay ratio of our
Chief Executive to that of the average
employee of the Group.

The level of salary adjustment for the
executive directors is in line with the
average increase for employees generally
across the Group in 2018.

To support the Committee in taking a
greater responsibility for demonstrating
how pay and incentives are aligned across
the Company, the Committee undertook
a reward framework deep-dive session
covering information on the structure of
remuneration across the Group, including
pension benefits.

In February 2018, BAE Systems published
its gender pay report in accordance with
UK legislation. Our average gender pay gap
is 11.2%. This is lower than the UK national
average of 18.1%. We have a gender pay gap
because we employ around four times more
men than women in the UK and a greater
proportion of our senior leadership team
is male. We are determined to bridge the
gender gap in our industry by encouraging
more women to join BAE Systems and we
have put in place a number of programmes
and initiatives to support the development
and progression of women into senior
executive positions.

BAE Systems
Annual Report 2017

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The Remuneration Committee’s year

January

Committee

London, UK
– Agreed 2017 objectives for executive
directors and Executive Committee
members.

– Reviewed feedback from shareholder

consultation on 2017 Directors’
remuneration policy renewal.

– Reviewed Remuneration Committee

terms of reference.

February

Committee

London, UK
– Determined 2016 bonuses against

performance for executive directors
and Executive Committee members
for payment in March 2017.

May

Committee

Farnborough, Hampshire, UK
– Considered institutional investor

shareholder updates.

– Approved remuneration package for new
or existing Executive Committee members.

September

Committee

November

Committee

New Milton, Hampshire, UK
– Reviewed level of executive directors’
and Executive Committee members’
shareholdings relative to the Minimum
Shareholding Requirement.

– Reviewed dilution levels and share usage

under Employee Share Plans.

– Approved operation of Group All-Employee

Free Share Plans.

Farnborough, Hampshire, UK
– Agreed basis for 2017 annual remuneration
review including elimination of share options
for UK executive directors.

– Considered high level remuneration market

practice findings.

– Approved remuneration package for new
or existing Executive Committee members.

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– Received update on progress against
Annual Incentive Plan objectives for
executive directors and Executive
Committee members.

– Received update on performance conditions

– Approved 2016 Group All-Employee

for Long-Term Incentive awards.

– Approved remuneration package for new
or existing executive director or Executive
Committee members.

– Received details of recent pay review
exercise for key senior executives.

Free Share Plans payments.

– Determined vesting outcome for
2014 Long-Term Incentive awards.
– Approved 2017 Long-Term Incentive
awards and associated performance
targets for executive directors and
Executive Committee members.

– Approved modifying the mix of Long-Term

Incentives for US executive director.
– Reviewed feedback from shareholder
consultation on 2017 remuneration
review and policy renewal.

– Approved 2016 Annual remuneration

report.

– Reviewed outline of 2017 Annual

remuneration report.

December

Committee

London, UK
– Reviewed and set salaries and bonus

opportunity levels for executive directors
and Executive Committee members.

– Proposed and set 2018 Annual Incentive

targets.

Remuneration Committee timeline

January
Committee

February
Committee

May
Committee

September
Committee

November
Committee

December
Committee

BAE Systems
Annual Report 2017

Annual remuneration report
at a glance

Executive directors’ remuneration
The charts below show the 2017 actual remuneration achieved, as disclosed in the single total figure of remuneration on
page 99, compared with the 2017 on-target opportunity. On-target remuneration assumes target vesting of incentives
payable in respect of the performance period with year-end 2017. For Charles Woodburn, the first two bars below reflect
his remuneration for 2017 as Chief Operating Officer to 30 June and Chief Executive from 1 July. The third bar provides
on-target remuneration assuming he was Chief Executive for the full year, for comparison purposes only.

£m
4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

£m
4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

£m1
4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

On-target

Actual

On-target
CEO for
full year

On-target

Actual

On-target

Actual

Charles Woodburn2
Chief Executive

Peter Lynas
Group Finance Director

Jerry DeMuro3
President and Chief Executive
Ofﬁcer of BAE Systems, Inc.

Share Options
Performance Shares
Restricted Shares
Annual Incentive
Pension and beneﬁts
Base Salary

1. The figures for Jerry DeMuro have been converted from US dollars to sterling.
2. Charles Woodburn was appointed to the Board in 2016 and his first LTI is not due to vest until 2019 (subject to performance conditions being met).
3. Long-term incentive figures in the charts above are based on the 2015 Performance Shares, Share Options and Restricted Shares awards. For Jerry

DeMuro, the single total figure of remuneration on page 99 includes his 2017 Restricted Shares award as required by regulation.

Summary of remuneration framework

The overall remuneration framework applicable in 2018 to each of the three executive directors under the policy approved by shareholders at the
2017 Annual General Meeting1 is summarised in the following table.

Purpose and link to strategy

Base Salary
(with effect from
1 January 2018)

Recognise market value of role and individual’s
skills, experience and performance to ensure
the business can attract and retain talent.

Pension and benefits Provide competitive benefits.

Annual Incentive

Drive and reward annual performance of
individuals and teams on both financial and
non-financial metrics, including leadership
behaviours, in order to deliver sustainable
growth in shareholder value. Compulsory
deferral into shares increases alignment
with shareholder interests.

Performance Shares

Drive and reward delivery of sustained
long-term Earnings per Share (EPS) and
Total Shareholder Return (TSR) performance
aligned to the interests of shareholders.

Restricted Shares

Provide long-term reward through time-
vesting awards principally in the Company’s
US market.

Minimum
Shareholding
Requirement

Provide long-term alignment with
shareholder interests.

Charles
Woodburn2
CEO

Peter
Lynas
GFD

Jerry
DeMuro
CEO Inc.

£897,000

£641,650

$1,053,700

Defined
contribution

Defined
benefit

Section 401(k)
defined
contribution

On-target/maximum
opportunity (% salary)

112.5%/225%

80%/160%

112.5%/225%

Performance condition

75% financial/25% non-financial

Deferral into Deferred
Bonus Plan

One-third compulsory deferral

Grant (% salary)

370%

335%

298%

Performance condition

50% on relative TSR/50% on three-year EPS growth

Grant (% salary)

n/a

150%

(% salary)

300%

200%

425%

1. The full Directors’ remuneration policy approved by shareholders at the 2017 Annual General Meeting is set out on pages 117 to 129.
2. The appointment of Charles Woodburn as Chief Executive with effect from 1 July 2017 is detailed on page 100.

BAE Systems
Annual Report 2017

Annual remuneration report
for the year ended 31 December 2017

This section details the remuneration of the executive and non-executive directors
(including the Chairman) during the financial year ended 31 December 2017 and will
be proposed for an advisory vote by shareholders at the 2018 Annual General Meeting
(AGM). It has been prepared on the basis prescribed in the Large and Medium-sized
Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.

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Directors’ remuneration in the year ending 31 December 2018

For the purposes of the Companies Act 2006, the Directors’ remuneration policy
(the Policy) has been operating in practice since the date of its approval on 10 May
2017 at the 2017 AGM. The remuneration for 2018 will be implemented as follows:

– The salary of the Chief Executive is being increased by 2.5% to £897,000 with

effect from 1 January 2018.

– The salary of the Group Finance Director is being increased by 2.5% to £641,650

with effect from 1 January 2018.

– The salary of the President and Chief Executive Officer of BAE Systems, Inc.
is being increased by 3% to $1,053,700 with effect from 1 January 2018.

– Annual and Long-Term Incentive opportunity levels remain in line with 2017

approved Policy.

– Long-Term Incentive awards of Performance Shares only for UK executive

directors, and Performance Shares and Restricted Shares for US executive director.

– The performance measures and weightings for 2018 for the Annual Incentive

and Long-Term Incentives are set out on page 116.

– The Committee is of the view that bonus targets for the Annual Incentive

are commercially sensitive and that it would be detrimental to the Company
to disclose them in advance. The targets will be disclosed retrospectively after
the end of the relevant financial year.

– The fee for the Chairman is set at £700,000 per annum until February 2020.

As agreed by the Non-Executive Directors’ Fees Committee (whose composition is
detailed on page 114), the fee structure for non-executive directors, which will not
be reviewed until 1 April 2020, is as follows:

– Basic fee is £80,000 per annum.

– Senior Independent Director’s fee is £25,000 per annum.

– Remuneration Committee Chairman’s fee is £25,000 per annum.

– Corporate Responsibility Committee Chairman’s fee is £25,000 per annum.

– Audit Committee Chairman’s fee is £25,000 per annum.

– Travel allowance of £4,500 per meeting, payable on each occasion that

a scheduled Board meeting necessitates air travel of more than five hours
(one way), subject to a maximum of six travel allowances per year.

Contents

Directors’ remuneration in the
year ending 31 December 2018

Single total figure of remuneration:
– for the Chairman and

non-executive directors
– for the executive directors

Annual bonus

Key strategic objectives

Long-Term Incentive Plan (LTIP)
performance

Total Shareholder Return (TSR)
performance and Chief Executive pay

Pay ratio of Chief Executive to
average employee

Relative importance of spend on pay

Pension entitlements

Share interests:
– Scheme interests awarded during

the financial year

– Description of share plans and

summary of performance conditions
– Statement of directors’ shareholdings

and share interests

Statement of voting

98
99

101

102

104

105

106

107

109

110

111

114

Non-Executive Directors’ Fees Committee 114

Remuneration Committee composition
and advisers

115

Remuneration policy
The Company’s remuneration policy
approved at the 2017 AGM, which took
effect on 10 May 2017, is detailed on
pages 117 to 129.

The Company’s remuneration policy
approved at the 2014 AGM, which was
in effect until 10 May 2017, is available on
the Company’s website: baesystems.com

BAE Systems
Annual Report 2017

Annual remuneration report
continued

Single total figure of remuneration

Single total figure of remuneration for the Chairman and non-executive directors

Chairman
Sir Roger Carr

Non-executive directors
E P L Corley1
H Green

C M Grigg

P Rosput Reynolds

N C Rose

I P Tyler

Fees

2017
£’000

696

103

127

103

2016
£’000

650

120

Benefits

2017
£’000

2016
£’000

Other

2017
£’000

2016
£’000

Total

2017
£’000

–

696

137

133

109

2016
£’000

650

129

131

105

1. Appointed to the Board on 1 February 2016.

Chairman
Sir Roger Carr was appointed as Chairman on 1 February 2014 on a fixed annual fee of £650,000 throughout
his initial three-year term as Chairman. As reported last year, his fee was reviewed in 2016 and was increased
to £700,000 per annum with effect from 1 February 2017. This fee will not be reviewed again for the remainder
of his current three-year term.

Non-executive directors
As reported last year, the fee structure for the non-executive directors was reviewed and was increased for the first
time since 2012. With effect from 1 April 2017, the fee structure on a per annum basis is as follows: (i) Chairman, Audit
Committee: £105,000 (2016 £100,000); (ii) Chairman, Corporate Responsibility Committee: £105,000 (2016 £95,000);
(iii) Chairman, Remuneration Committee: £105,000 (2016 £95,000); (iv) other non-executive directors: £80,000 (2016
£75,000); and (v) additional fee for Senior Independent Director: £25,000 (2016 £20,000). These amounts are shown
in the ‘Fees’ column above. A travel allowance of £4,500 (2016 £4,500) per meeting is also paid on each occasion that
a non-executive director’s travel necessitates air travel of more than five hours (one way) to the meeting location, subject
to a maximum of six travel allowances per year. These amounts are shown in the ‘Other’ column. The amounts in the
‘Benefits’ column relate to travel expenses and subsistence.

The above table has been subject to audit.

BAE Systems
Annual Report 2017

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Single total figure of remuneration for the executive directors
Base salary

Taxable benefits1

Bonus2

LTIP3

Pension4

Other5

Total

I G King*6

C N Woodburn**7

P J Lynas

J DeMuro8

2017
£’000

2016
£’000

2017
£’000

2016
£’000

2017
£’000

2016
£’000

491

813

592

794

982

486

571

736

838

1,820

1,311

724

823

752

1,578

1,531

2017
£’000

504

–

332

441

2016
£’000

2017
£’000

2016
£’000

2017
£’000

2016
£’000

2017
£’000

2016
£’000

–

n/a

–

219

154

570

613

405

2,086

3,463

1,621

2,302

3,042

2,248

1,763

950

693

3,809

2,997

* Retired as Chief Executive and from the Board on 30 June 2017.
** Appointed to the Board on 9 May 2016 as Chief Operating Officer, and appointed as Chief Executive on 1 July 2017.

The above table has been subject to audit.

1. The benefits received by Ian King include the provision of a car allowance and the private use of a chauffeur-driven car

(2017 £28k; 2016 £47k). In addition, upon his retirement, Ian King received a leaving gift totalling £5k, with any tax due
on this payment being settled by the Company. The benefits received by Charles Woodburn include the provision of a car
allowance and the private use of a chauffeur-driven car (2017 £23k; 2016 £17k). The benefits received by Peter Lynas
include the provision of a car allowance and the private use of a chauffeur-driven car (2017 £21k; 2016 £19k). In addition,
Peter Lynas received a second residence allowance of £8k (2016 £15k) on the basis disclosed in previous years. Jerry
DeMuro’s benefits include private use of a chauffeur-driven car and parking (2017 £3k; 2016 £4k); medical and dental
benefits (2017 £14k; 2016 £12k); insured life and disability benefits (2017 £9k; 2016 £8k); and the private use of a
company aircraft (2017 £9k; 2016 £1k).

2. Further detail on bonus payments is provided on page 101. One-third of the net bonus paid to Charles Woodburn,

Peter Lynas and Jerry DeMuro will be deferred compulsorily into BAE Systems shares for a three-year period, without
additional performance conditions. The same deferral treatment applies to the net bonus paid to Ian King in respect
of the pro-rated bonus for his six months of service in 2017.

3. This column relates to the estimated or actual value of Long-Term Incentive Plans for which the performance period
ended in the relevant financial year. With respect to the 2015 LTIP PSEPS award, average annual EPS growth over the
three-year performance period was approximately 4.75% and, consequently, 46.9% of the shares under this award
will vest. The 2015 LTIP PSTSR and LTIP SO awards (for which the performance periods also ended on 31 December 2017)
did not meet their TSR performance condition and will lapse (see page 104 for further detail).

4. The figures for Ian King and Peter Lynas in this column reflect defined benefit arrangements and have been calculated
in line with the method set out in Section 229 of the Finance Act 2004 using a capitalisation factor of 20 to assess
the increase in the value of the pension promise over the year under review, net of inflation. The figures for Ian King
show the added pension value received in the defined benefit schemes from 1 January 2017 to the date of his
retirement on 30 June 2017 (see note 2 on page 107 for details on pension paid for the six months from retirement
to 31 December 2017). The figures for Peter Lynas allow for the impact of a pension sharing order effective in 2017.
These figures are also sensitive to salary increases and Consumer Prices Index (CPI) inflation as follows:
– Salary increase: Pensionable salary is averaged over three years. The figures for Peter Lynas reflect salary increases

since 31 December 2016.

– CPI inflation: In a year with high CPI inflation, the increase in the value of the pension promise would be lower than

in a year with lower CPI inflation. For the 2017 figures, the reference CPI inflation was 1%.

The figures for Charles Woodburn relate to a salary supplement in lieu of Company pension contributions.

The figures for Jerry DeMuro include company contributions paid into his Section 401(k) defined contribution arrangement.

5. This column includes (i) the value of Free Share awards under the UK all-employee Share Incentive Plan (SIP) of £505 for
Charles Woodburn and Peter Lynas, and Matching Shares under voluntary investment in the SIP for Ian King (for the
six months to 30 June 2017) and Charles Woodburn; and (ii) for Jerry DeMuro, the value of the 2017 grant of Restricted
Shares (£837k). This award formed part of Jerry DeMuro’s 2017 LTIP allocation but is required to be reported under
‘Other’ as it has no performance conditions attached; his prior year figure relates to a similar Restricted Shares award in
2016. The balance of the 2017 figure (£113k) relates to the value of notional reinvested dividends in respect of his 2014
Restricted Share Plan award which vested in March 2017, the third anniversary of grant. The value of the related award
was reported in the 2014 Remuneration report. The prior year figure for Charles Woodburn includes the cash payment
of £1,620,000 to recognise forfeited compensation from his previous employer, as set out in note 7 below.

100

BAE Systems
Annual Report 2017

Annual remuneration report
continued

Single total figure of remuneration continued

6. As previously reported, Ian King retired from the Company on 30 June 2017 having served for over 40 years,

including leading BAE Systems as Chief Executive since 2008. His leaving arrangements were as follows:
(a) His retirement constituted early retirement with Company consent for share plan and pension purposes and,

accordingly: (i) he was entitled to an immediate pension. Under the rules of the 2000 Pension Plan and Executive
Pension Scheme, a pension of 1/30th of three-year final average salary for each year of service subject to the
payment of members’ contributions (currently 8%) is payable at 62 years of age. Benefits paid prior to age 62
are subject to actuarial reduction, currently a reduction of 4% to annual benefits for each year that retirement
takes place prior to age 62, with proportionate reductions applied in respect of part years. He was 61 at the date
of his retirement and his pension payments were reduced accordingly; (ii) unvested share awards and options
under the Company’s Long-Term Incentive Plan will vest at the normal vesting date, subject to testing of the
relevant performance conditions at the end of the normal performance period. Share awards were reduced
pro-rata on the basis of complete months from the grant date to 30 June 2017. Any share options that vest will
remain exercisable for a period of six months from the vesting date; and (iii) unvested deferred bonus awards
were preserved and will vest at the normal vesting dates.

(b) He will continue to be covered by the Company’s Directors’ and Officers’ insurance policy and his director’s

indemnification arrangements will remain in force.

(c) He will continue to be bound by those provisions of his service agreement which continue to apply following
cessation of employment, including post-termination restrictive covenants and confidentiality provisions.

(d) He was eligible for an Annual Incentive payment for 2017, determined by the Committee, based on an assessment
of individual and Company performance. Any bonus was to be pro-rated for his six months of service during 2017
and will be paid at the normal date following the end of the 2017 financial year. One-third of the net bonus will be
compulsorily deferred into shares in the normal way (see page 101 for further detail).

(e) No award was granted under the Long-Term Incentive Plan in 2017.
(f) No termination payment was paid.
(g) Taxable benefits comprising the provision of a car allowance and the private use of a chauffeur-driven car ceased

from 30 June 2017.

7. As previously reported, Charles Woodburn was appointed as Chief Operating Officer on 9 May 2016 and joined the
Board as an executive director on the same date. His salary on appointment was £750,000, with a maximum bonus
opportunity of 200% of salary, of which one-third will be deferred in shares for a period of three years. He also
received LTIP awards at the following levels: Performance Share award of 230% of salary and Share Option award
of 300% of salary. In addition, he received the following awards to take into account the fair value of the awards
being forfeited which significantly extend the vesting/holding period of the incentives being given up:
(i) cash payment of £1,620,000 in respect of incentives earned and payable within six months, of which 50% of
this net amount was to be used to purchase BAE Systems shares within 120 days following payment. Due to
BAE Systems being in a closed period from 1 January 2017 until the announcement of the Company’s results
on 23 February 2017, the Remuneration Committee agreed to extend the period in which Charles was required
to buy the shares to the end of February 2017. These shares continue to be held in accordance with BAE Systems’
Minimum Shareholding Requirement; and

(ii) a one-off grant of Performance Shares equal to 266% of salary, subject to the same performance conditions
applicable to awards made under the LTIP with vesting in equal tranches of one-third in 2019, one-third in
2020 and the final third in 2021.

His pension arrangements are set out on pages 107 and 108.

On his appointment as Chief Executive on 1 July 2017, his salary increased to £875,000 per annum. All other
provisions of his remuneration package are as set out in the Company’s remuneration policy in respect of the
Chief Executive role.

8. Jerry DeMuro is paid in US dollars with the disclosed figures above being converted into sterling at the required
exchange rate. The 2017 salary reflects his 3.0% salary increase and the exchange rate fluctuations experienced
in 2017.

BAE Systems
Annual Report 2017

101

Annual bonus
Annual bonuses for the 2017 year are paid in March 2018. Annual bonus is made up of financial metrics, safety and
personal objectives, designed to support the achievement of certain strategic outcomes necessary for sustaining the Group’s
long-term vitality. The breakdown of bonus measures, achievement and pay-out for each executive director is shown below.
One-third of the net bonus payment is subject to compulsory deferral into BAE Systems shares for a three-year period, for
which there is no additional performance condition. As previously reported, one-third of the net bonus due to Ian King for
the six-month period he served in 2017 will be compulsorily deferred into shares in the normal way.

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Chief Operating Officer to 30 June 2017 and Chief Executive since 1 July 2017
Charles Woodburn

Measures

Financial Group EPS

Group cash

Group order intake

Personal

Safety

Key strategic objectives

Group Finance Director
Peter Lynas

Measures

Financial Group EPS

Group cash

Group order intake

Personal

Safety

Key strategic objectives

Weight (as a
percentage
of target)

Actual performance against targets set

Below

Threshold

Target

Stretch

40.0

25.0

15.0

5.0

15.0

Weight (as a
percentage
of target)

Actual performance against targets set

Below

Threshold

Target

Stretch

40.0

25.0

15.0

5.0

15.0

President and Chief Executive Officer of BAE Systems, Inc.
Jerry DeMuro

Measures

Financial Group EPS

Group cash

Group order intake

BAE Systems, Inc. profit

BAE Systems, Inc. cash

BAE Systems, Inc. order intake

Personal

Safety

Key strategic objectives

Chief Executive to 30 June 2017
Ian King

Measures

Financial Group EPS

Group cash

Group order intake

Personal

Safety

Key strategic objectives

Weight (as a
percentage
of target)

Actual performance against targets set

Below

Threshold

Target

Stretch

13.3

8.3

5.0

26.7

16.7

10.0

5.0

15.0

Weight (as a
percentage
of target)

Actual performance against targets set

Below

Threshold

Target

Stretch

40.0

25.0

15.0

5.0

15.0

Stretch
for 2017

Actual
performance1

Percentage
of maximum
opportunity

Threshold
for 2017

39.8p

Target
for 2017

40.6p

42.6p

£(1,947)m £(1,807)m £(1,508)m

n/a

£23.6bn

£24.5bn

See note 2 below

42.3p

£(940)m

£19.3bn

See Key strategic objectives section on page 102

Total bonus (as a percentage of maximum)

Stretch
for 2017

Actual
performance1

Percentage
of maximum
opportunity

Threshold
for 2017

39.8p

Target
for 2017

40.6p

42.6p

£(1,947)m £(1,807)m £(1,508)m

n/a

£23.6bn

£24.5bn

See note 2 below

42.3p

£(940)m

£19.3bn

See Key strategic objectives section on page 103

Total bonus (as a percentage of maximum)

Stretch
for 2017

Actual
performance1

Percentage
of maximum
opportunity

Threshold
for 2017

39.8p

Target
for 2017

40.6p

42.6p

£(1,947)m £(1,807)m £(1,508)m

n/a

£23.6bn

£24.5bn

42.3p

£(940)m

£19.3bn

$1,119m

$1,138m

$1,186m $1,189.6m

$1,991m $2,044m $2,148m

$2,355m

n/a

$10.6bn

$11.1bn

$11.3bn

See note 2 below

See Key strategic objectives section on page 103

Total bonus (as a percentage of maximum)

Stretch
for 2017

Actual
performance1

Percentage
of maximum
opportunity

Threshold
for 2017

39.8p

Target
for 2017

40.6p

42.6p

£(1,947)m £(1,807)m £(1,508)m

n/a

£23.6bn

£24.5bn

See note 2 below

42.3p

£(940)m

£19.3bn

See Key strategic objectives section on page 102

Total bonus (as a percentage of maximum)

92.5%

100.0%

40.0%

77.0%

75.6%

92.5%

100.0%

40.0%

83.0%

76.5%

92.5%

100.0%

40.0%

82.5%

88.4%

92.5%

100.0%

40.0%

79.0%

75.9%

The above table has been subject to audit.

1. Adjusted to be on a like-for-like basis with the targets.
2. Performance against the safety element of the bonus was determined by the Corporate Responsibility Committee (whose composition is stated on
page 87) taking account of the level of significant risk reduction and improvement in safety culture, as well as targeted improvements against key
safety indicators including a reduction in recordable accidents. While the Group achieved a 3% reduction in recordable accidents, it did not meet the
10% target level. A 30% reduction in the most severe accidents was delivered resulting in an overall performance award factor of 40% of maximum.

102

BAE Systems
Annual Report 2017

Annual remuneration report
continued

Key strategic objectives
Achievement against key strategic objectives represents 15% of the annual bonus
opportunity applicable to each of the executive directors. These objectives relate to the
delivery of the Group’s strategic objectives and demonstration of leadership behaviours.

Ian King
Chief Executive (until 30 June 2017)

Overview

Key achievements in the six-month period

For 2017, the focus of Ian’s personal objectives was on
sustaining the building blocks to meet long-term growth
as well as continuing to foster an inclusive environment
and developing a strong pipeline of talent for future
succession within the business.

– Assuring continuity in executive leadership

– Successful handover to Charles Woodburn

– Securing production contracts on key

maritime programmes

– Maintaining the Company’s UK workshare
across strategic manufacturing activity

– Driving positive customer relationships to secure
additional orders in key international markets

Payout (% of maximum): 79%

Charles Woodburn
Chief Operating Officer (until 30 June 2017) and Chief Executive (from 1 July 2017)

Overview

Key achievements in the year

Prior to his transition to the role of Chief Executive,
Charles’s objectives as Chief Operating Officer focused
on driving competitiveness and technology to position
the business for long-term growth.

Payout (% of maximum): 77%

– Establishing a global procurement strategy to drive

savings across the enterprise

– Achieving major milestones in respect of Air sector

capability upgrade programmes

– Establishing global cyber collaboration across

all key markets

– Taking a lead role in ensuring R&D funding is pulled

through into product plans

– Undertaking the transition from Ian King with

a clear sense of purpose communicated clearly
to internal and external audiences

– Implementation of new operating and

organisational models to deliver improved
efficiency and competitiveness

BAE Systems
Annual Report 2017

103

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Peter Lynas
Group Finance Director

Overview

Key achievements in the year

Peter’s objectives were focused on maintaining the
Group’s investor proposition and ensuring the delivery
of deficit recovery plans for the UK pension schemes.

– Sustaining the Group’s investment-grade credit rating
through budget discipline, cash management and a
strong well-monitored framework of controls

– Reaching agreement on pension deficit recovery
plans with Trustees and the Pensions Regulator

– Exceeding performance benchmarks on internally-

managed pension scheme asset portfolios

Payout (% of maximum): 83%

Jerry DeMuro
President and Chief Executive Officer of BAE Systems, Inc.

Overview

Key achievements in the year

Jerry’s objectives included defending and capturing
growth in our core franchises, with specific focus on
organic growth initiatives in Precision Munitions, Space,
and Land Vehicles as well as driving collaboration and
international market opportunities.

– Successful execution of key programme milestones

across Electronics, Land, and Services sectors

– Continued progress in securing additional

international business

– Growing domestic portfolio positions in each

of BAE Systems, Inc.’s businesses

– Driving efficiencies in Enterprise Shared Services

to reduce cost whilst maintaining agreed
service standards

– Identifying and delivering key global

collaboration opportunities

Payout (% of maximum): 82.5%

104

BAE Systems
Annual Report 2017

Annual remuneration report
continued

Long-Term Incentive Plan (LTIP) performance
Annual average EPS growth

Outperformance of performance conditions ending on 31 December 2017

Threshold

Maximum

2017 EPS requirement

Annual average EPS growth

Relative TSR against comparator group

41.3p

Percentage of
maximum achieved

Actual

43.3p

45.9p

4.75%

46.9%

Outperformance of performance conditions ending on 31 December 2017

Threshold

Maximum

TSR against comparator group

68.7%

128.0%

Actual

41.0%

Percentage of
maximum achieved

The following awards had performance periods that ended on 31 December 2017:

2015 Performance Shares (LTIP PS)
– Performance conditions: half on relative TSR against comparator group, half on EPS growth of 3% to 7% per annum.
The TSR three-year performance period ended on 31 December 2017 and the related performance condition was not
met, thus this portion of the award will lapse. With respect to the 2015 LTIP PSEPS award (for which the performance
period ended on 31 December 2017), the growth of EPS over the three-year performance period was approximately
4.75% and, consequently, 46.9% of the shares under this portion of the award will vest. The Committee is satisfied
that there has been a sustained improvement in the Company’s underlying financial performance and that it is
appropriate for vesting of 46.9% of the EPS portion.

2015 Share Options (LTIP SO)
– Performance condition: relative TSR against comparator group. The TSR three-year performance period ended

on 31 December 2017 and the related performance condition was not met, thus the award will lapse.

A summary of TSR performance to 31 December 2017 on outstanding TSR-related LTIP awards is illustrated
in the chart below.

The grey boxes show the range of TSR required for 25% vesting to full vesting in respect of the sectoral
international defence and FTSE 100 comparator groups, as appropriate, and the orange diamonds show
BAE Systems’ TSR. The proportion that would vest is shown in the boxes at the top of the chart.

TSR performance under the TSR-related awards as at 31 December 2017

0% vesting

26.2% vesting

0% vesting

140%

120%

100%

80%

60%

40%

20%

25 March 2015
award

23 March 2016
award

21 March 2017
award

Sectoral international
defence group
FTSE 100 group
BAE Systems’ TSR

BAE Systems
Annual Report 2017

105

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Total Shareholder Return (TSR) performance and Chief Executive pay
The graph below shows the value by 31 December 2017, on a TSR basis, of £100 invested in BAE Systems on 31 December
2008 compared with the value of £100 invested in the FTSE 100 index, including the effect of dividends. The FTSE 100
is considered to be an appropriate comparator for this purpose as it is a broad equity index of which BAE Systems is a
constituent member and reflects the investment interests of our UK shareholder base. In addition, it forms 50% of the
TSR performance measure for awards made from 2016 onwards. The equivalent data is shown for the sectoral TSR
comparator group of other international defence companies which is of relevance to our international shareholder base.

Value at 31 December 2017 of £100 investment at 31 December 2008

BAE Systems
FTSE 100
Sectoral TSR comparator group

£400

£350

£300

£250

£200

£150

£100

£50

£0

Change in Chief Executive’s
remuneration over nine years
Chief Executive’s single total
figure (£’000)2

Ian King

Charles Woodburn

Bonus paid as a percentage of maximum

Ian King

Charles Woodburn

LTI as a percentage of maximum vesting2

Ian King

Charles Woodburn

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

20171

4,030

4,810

4,613

2,574

2,499

3,519

2,929

3,463

2,086

–

1,279

4,030

4,810

4,613

2,574

2,499

3,519

2,929

3,463

3,365

83.0% 71.0% 68.6% 55.6% 53.4% 74.3% 72.4% 82.3% 75.9%

–

65.5% 57.6% 44.3%

–

nil

–

nil

–

16.8%

–

nil

–

75.8%

nil

–

11.3%

n/a

1. Ian King retired and stepped down as Chief Executive on 30 June 2017 and Charles Woodburn took over the position on 1 July 2017. Ian King’s

remuneration is shown from the start of the financial year until 30 June 2017. Charles Woodburn’s remuneration is shown from 1 July 2017 to the
end of the financial year.

2. Total remuneration includes the value of share plans vesting that were granted prior to appointment as Chief Executive.

The percentage change from 2016 to 2017 in remuneration of the Chief Executive and average UK employee is shown in
the table below. As required by statute, the table shows the details for the Chief Executive role and, therefore, includes a
combination of the remuneration of Ian King and Charles Woodburn for the 2017 financial year. The relevant remuneration
figures applying for 2017 in respect of the Chief Executive role are included in the table for reference. As Charles
Woodburn’s overall remuneration is lower than Ian King’s, the calculation for 2017 results in a downward movement in
the year-on-year percentage change. If the table below reflected Ian King’s remuneration for the full financial year, the
percentage movement on a like-for-like basis would be a 0% increase in salary and a decrease of 7.9% in bonus.

Base salary

Taxable benefits

Bonus

Chief Executive
remuneration to
31 December 2017
£’000

Change in
Chief Executive’s
remuneration
%

Change in
average UK employee1
remuneration
%

929

1,585

−5.5

−4.9

−12.9

+2.9

−2.7

1. The BAE Systems UK employee population has been chosen as this employee comparator group reflects the local employment conditions of the

Chief Executive for the purpose of this comparison.

106

BAE Systems
Annual Report 2017

Annual remuneration report
continued

Pay ratio of Chief Executive to average employee
The ratio of remuneration of the Chief Executive to the average employee of the entire Group over the last four years
was as follows:

Chief Executive’s remuneration (£’000)

Average employee remuneration (£’000)

Ratio

2014

3,519

60:1

2015

2,929

47:1

2016

3,463

52:1

2017

3,365

47:1

The Chief Executive’s remuneration is calculated on the same basis as the single total figure of remuneration table. The
Chief Executive’s remuneration in 2017 includes a combination of the remuneration of Ian King and Charles Woodburn.
As Charles Woodburn’s overall remuneration is lower than Ian King’s, the calculation for 2017 results in a downward
movement in the pay ratio.

Average employee remuneration is based on staff costs calculated on the same basis as note 3 to the Group accounts,
excluding social security costs and US healthcare costs.

The Committee is mindful of the relationship between Chief Executive remuneration and remuneration of the wider
BAE Systems employee population. Therefore, in line with our commitment to transparency, the table above provides
the ratio of remuneration of the Chief Executive to the average employee of the Group for the past four years. As can
be seen, the ratio has typically been around 50:1, with the ratio being higher in 2014 as a result of the partial vesting
of Long-Term Incentive awards in that year. The ratio could range from around 20:1 to 100:1 depending on the level of
performance against the measures which drive the Annual and Long-Term Incentive Plans.

Relative importance of spend on pay
The following charts set out underlying EBITA1, amounts paid in returns to shareholders, total employee costs and
average headcount for the years ended 31 December 2016 and 2017.

Underlying EBITA1 (£m)

Returns to shareholders (£m)

+7%

2017

2016

+2%

2017

2016

2,034

1,905

Total employee costs2 (£m)

Average headcount3 (’000)

+7%

2017

2016

2017

2016

5,830

5,440

684
670

76
76

1. Operating profit excluding amortisation and impairment of intangible assets, finance costs and taxation expense of equity accounted investments

(EBITA), and non-recurring items (see page 28).

2. After excluding the impact of exchange translation, total employee costs increased by 4% per employee on 2016.
3. Excluding share of equity accounted investments.

BAE Systems
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107

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n
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m
e
n
t
s

Pension entitlements
Total pension entitlements

Normal
retirement
age

Accrued
benefit at
1 January 20171,2,3,4
£ per annum

Accrued
benefit at

31 December 20171,2,3,4
£ per annum

857,652

7,270

251,954

99,884

875,235

17,486

285,564

136,043

Director

Ian King*

Charles Woodburn

Peter Lynas

Jerry DeMuro

Age

*Retired on 30 June 2017.

Figures included in the remuneration table on page 99

Added pension
value received in
the year from
defined
benefit
scheme2
£

Added pension
value received in
the year from
defined
contribution
scheme
£

218,946

n/a

569,871

n/a

–

n/a

10,816

Total
£

218,946

–

569,871

10,816

1. The defined benefit figure includes both funded and unfunded arrangements for Ian King and Peter Lynas. Accrued
benefit for Ian King and Peter Lynas is annual pension payable on retirement prior to any reduction for early payment
or exchanging pension for cash.

2. Ian King’s accrued benefit in this column is his accrued benefit at his retirement date of 30 June 2017, prior to any

reduction for early retirement. There was no further accrual of benefit between 30 June 2017 and 31 December 2017.
He retired at 30 June 2017 with a pension of £745,229 per annum (with his pension payments totalling £372,615
for the six months from retirement to 31 December 2017) and a cash lump sum of £1,132,032 (excluding Additional
Voluntary Contributions). These figures allow for a reduction in respect of Early Retirement Factors to allow for the
benefit being drawn before his Normal Retirement Age. The brought forward accrued benefit figure as at 1 January
2017 has been reduced by £3,516 from that disclosed in 2016 to properly reflect the longevity adjustment factor
that applies.

3. Peter Lynas has accrued defined benefit pension which is reduced if taken before normal retirement age. In addition,
a longevity adjustment factor is applied to pension accrued after 5 April 2006 to mitigate against life expectancy
changes. The figures allow for the current factors in force, whereas in practice the factors are updated annually and
those in force at retirement will be applied. Accrued benefit figures for Peter Lynas include the impact of a pension
sharing order effective in 2017.

4. Accrued benefit for Charles Woodburn is the total value of his defined contribution account, including employee
contributions and investment returns. Accrued benefit for Jerry DeMuro is the total value of his Section 401(k)
account, including both employee and company contributions as well as investment returns.

The above table has been subject to audit.

Peter Lynas is a member of the BAE Systems Executive Pension Scheme (ExPS) and the BAE Systems 2000 Pension Plan
(2000 Plan) which together provide a pension for executive directors payable at 62 of 1/30th of three-year average final
salary for each year of service subject to the payment of members’ contributions (currently 8%). Benefits paid prior to
age 62 for ExPS and age 65 for 2000 Plan will be subject to actuarial reduction.

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. Spouses’ pensions
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. Peter Lynas
joined the ExPS in 1999.

108

BAE Systems
Annual Report 2017

Annual remuneration report
continued

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.
Peter Lynas has 32 years and two months’ service in the 2000 Plan.

The review of pension policies carried out in 2010 by the Committee concluded that the pension benefits 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 and the impact of the reduced Annual Allowance. Peter Lynas was given the choice
to remain in the current arrangement and pay the increased tax or to take an unfunded promise; he elected for the latter.
The Committee has decided that in cases where the Company is to pay an unfunded promise, executives will be given
the choice to commute some or all of the benefit for a taxable lump sum, or take it as pension. Where an unfunded
pension is taken, ten years after retirement, the executive will be given a further opportunity to commute the residual
value of the unfunded pension for a lump sum.

Therefore, Peter Lynas’ total pension is the sum of his 2000 Plan benefits plus the top-up from the ExPS, most of which
is provided through the unfunded promise referred to above.

Ian King is a member of the ExPS (which he joined in 1999) and the 2000 Plan, with benefits in line with those set
out above and had opted to take an unfunded promise. At his retirement on 30 June 2017 he had 34 years’ service
in the 2000 Plan and became a pensioner member. As reported last year, when he retired as a director and ceased
employment on 30 June 2017, his retirement constituted early retirement with Company consent for pension purposes
and, accordingly, he was entitled to an immediate pension. Under the rules of the 2000 Plan and the ExPS, and as set
out above, a pension of 1/30th of three-year final average salary for each year of service subject to the payment of
members’ contributions (currently 8%) is payable at 62 years of age. Benefits paid prior to age 62 for ExPS and age 65
for 2000 Plan will be subject to actuarial reduction, currently a reduction of 4% to annual benefits for each year that
retirement takes place prior to 62 for ExPS and 65 for 2000 Plan, with proportionate reductions applied in respect
of part years. Ian King was 61 at the date of his retirement and his pension payments were reduced accordingly.

Charles Woodburn participates in the BAE Systems Executive Pension Scheme Defined Contribution Retirement Plan
(EPS DCRP), which is a defined contribution arrangement for senior executives. Charles Woodburn contributes the
maximum £10,000 per annum into the EPS DCRP arrangement as permitted by the Annual Allowance limit and a
19% salary supplement is paid in lieu of the Company contributions.

Jerry DeMuro participates in a Section 401(k) defined contribution arrangement set up for US employees in which
the company will match his contributions up to a maximum contribution of 6% of salary, up to US regulatory limits
(2018 $18,500; 2017 $18,000). In 2017, the company paid contributions of $14,628 into this arrangement.

External directorships
Fees retained in 2017 by executive directors, during the period in which they served in that capacity, in respect
of non-executive directorships were: Peter Lynas £85,000 in respect of his directorship of SSE plc; Jerry DeMuro
$50,000 in respect of his directorship of Aero Communications, Inc.; and Ian King £35,000 in respect of his
non-executive directorship of Schroders plc for the six months to 30 June 2017.

These amounts are not included in the remuneration table on page 99.

BAE Systems
Annual Report 2017

109

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Share interests
Scheme interests awarded during the financial year

Scheme

Type of interest

Date of grant

Number
of shares

Basis of award

Face value
of award1
£

Exercise
price
£

Date to which
performance
is measured

Performance
condition

Charles Woodburn

LTIP PSTSR

LTIP PSEPS

Performance
Shares/nil
cost option

21.03.17

132,897

115% of salary

862,502

21.03.17

132,897

115% of salary

862,502

nil

Three years
to 31.12.19

TSR/secondary
financial measure

Three years
to 31.12.19

EPS/secondary
financial measure

LTIP SO

Share option

21.03.17

346,687

300% of salary

2,249,999

6.49

Peter Lynas

LTIP PSTSR

LTIP PSEPS

Performance
Shares/nil
cost option

21.03.17

96,944

107.5% of salary

629,167

21.03.17

96,945

107.5% of salary

629,173

nil

LTIP SO

Share option

21.03.17

270,543

300% of salary

1,755,824

6.49

Jerry DeMuro

LTIP PSTSR

LTIP PSEPS

LTIP SO

LTIP RS

Performance
Shares

21.03.17

156,092

121% of salary

1,013,037

21.03.17

156,092

121% of salary

1,013,037

n/a

Share option

21.03.17

503,106

390% of salary

3,265,158

6.49

Three years
to 31.12.19

TSR/secondary
financial measure

Three years
to 31.12.19

TSR/secondary
financial measure

Three years
to 31.12.19

EPS/secondary
financial measure

Three years
to 31.12.19

TSR/secondary
financial measure

Three years
to 31.12.19

TSR/secondary
financial measure

EPS/secondary
financial measure

TSR/secondary
financial measure

Retention

21.03.17

129,002

100% of salary

837,223

n/a

1. The value of the award is calculated on the date of grant by reference to the middle market quotation at the close of the preceding day.

Key: LTIP – Long-Term Incentive Plan. PS – Performance Shares. SO – Share Options. RS – Restricted Shares.

Note: Performance Shares and Restricted Shares – Shares under award attract dividends prior to vesting. Performance Shares are intended to be free share
awards and are structured as a nil cost option to give the participant more flexibility as to the timing of the benefit. For the US executive director, awards
of Performance Shares are classified as conditional share awards (rather than share options) and are deliverable on the third, fourth and fifth anniversary of
grant, subject to attainment of the performance condition.

No grant of awards was made to Ian King in March 2017 in view of his previously announced retirement on 30 June 2017.

The table above has been subject to audit.

F
n
a
n
c
a

l
s
t
a
t
e
m
e
n
t
s

Percentage
of interests
receivable
if minimum
performance
achieved

25%

n/a

110

BAE Systems
Annual Report 2017

Annual remuneration report
continued

Description of share plans and summary of performance conditions
Performance Share Plan (PSP)/LTIP Performance Shares
Shares under award vest after satisfaction of the three-year performance condition. Awards that vest are capable of
exercise in three equal tranches on a phased basis from the third, fourth and fifth anniversary of grant. Any unexercised
awards will lapse on the seventh anniversary of grant*. For US participants, the awards are automatically delivered at the
end of years three, four and five, subject to the performance condition being achieved. Since 2015, shares have been
awarded under the LTIP (a single umbrella plan) that was approved at the 2014 AGM as detailed on page 119 and are
termed ‘Performance Shares’. Shares under award attract dividends prior to tranche vesting.

* From 2018, awards to non-US executive directors remain subject to the three-year performance period but will not vest until the fifth anniversary of grant

(see the UK executive director graphic on page 93). They will be exercisable until the seventh anniversary of grant.

Awards made to the UK executive directors since 2008, and to date to the US executive director, have been weighted
50% on the EPS performance condition and 50% on the TSR performance condition. The TSR comparator groups are
shown below.

Plan

Performance condition

LTIP PSEPS

PSPTSR/
LTIP PSTSR

For awards made from 2015, rate of average annual EPS growth over the three-year performance period, with 25% vesting
at 3% average growth per annum, 50% vesting at 5% average growth per annum and 100% vesting at 7% average
growth per annum, with vesting on a straight-line basis between these parameters. Awards will not vest unless the Board
is satisfied that there has been a sustained improvement in the Company’s underlying financial performance. In taking
such a view, the Committee may consider (but not exclusively) the following financial metrics: net cash/debt; order book;
risk; and project performance.

The proportion of the award capable of exercise is determined by:

(i) for awards made up to and including 2015, the Company’s TSR (share price growth plus dividends) ranking relative

to a comparator group of 12 other international defence companies over a three-year performance period. For awards
made from 2016, 50% of the TSR measure is on the current peer comparator group of 13 other international defence
companies and 50% is on a TSR percentile ranking against the companies in the FTSE 100 index. Under both the
sectoral and FTSE 100 comparator groups, no shares vest if the Company’s TSR is below the top 50% of TSRs achieved
by the comparator group, with 25% vesting at median, 100% vesting if it is in the top quintile and vesting on a
straight-line basis between these two parameters; and

(ii) whether there has been a sustained improvement in the Company’s underlying financial performance. 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 project performance.

1. Operating profit excluding amortisation and impairment of intangible assets, finance costs and taxation expense of equity accounted investments.

The TSR peer comparator group for awards from 2016 comprises:

Cobham

General Dynamics

Harris Corporation
L3 Technologies2
Leidos

Leonardo3
Lockheed Martin

Meggitt

Northrop Grumman

Raytheon

The TSR comparator group for awards from 2012 to 2015 comprises:

Cobham

General Dynamics
ITT Exelis4
L3 Technologies2

Leonardo3
Lockheed Martin

Meggitt

Northrop Grumman

2. Formerly named L-3 Communications.
3. Formerly named Finmeccanica.
4. ITT Exelis is now part of Harris Corporation.

SAIC

Thales

United Technologies

Raytheon

SAIC

Thales

United Technologies

BAE Systems
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111

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Executive Share Option Plan 2012 (ExSOP2012)/LTIP Share Options
Options are normally exercisable between the third and tenth anniversary of their grant, subject to the performance
condition set out below being achieved. Since 2015, shares have been awarded under the single umbrella plan (the
Long-Term Incentive Plan) that was approved at the 2014 AGM as detailed on page 119 and are termed ‘Share Options’.
Awards made from 2015 are subject to a further two-year clawback period after the initial three-year vesting period.
As set out elsewhere in this report, executive directors will no longer receive share option awards from 2018.

Plan

Performance condition

ExSOP2012/
LTIP SO

For awards made up to and including 2015, the proportion of the award capable of exercise is determined by the
Company’s TSR (share price growth plus dividends) ranking relative to a comparator group of 12 other international
defence companies over a three-year performance period. For awards made from 2016, 50% of the TSR measure is on
the current peer comparator group of 13 other international defence companies and 50% is on a TSR percentile ranking
against the companies in the FTSE 100 index. Under both the sectoral and FTSE 100 comparator groups, no shares vest
if the Company’s TSR is below the top 50% of TSRs achieved by the comparator group, with 25% vesting at median,
100% vesting if it is in the top quintile and vesting on a straight-line basis between these two parameters.

Restricted Share Plan (RSP)/LTIP Restricted Shares
The RSP is not subject to a performance condition as it is designed to address retention issues principally in the US.
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). Shares under award attract dividends prior to vesting. Since 2015,
shares have been awarded under the single umbrella plan that was approved at the 2014 AGM as detailed on
page 119 and are termed ‘Restricted Shares’. Awards made from 2015 are subject to a further two-year clawback
period after the initial three-year vesting period.

Statement of directors’ shareholdings and share interests
Minimum Shareholding Requirement (MSR)
Executive directors are compulsorily required to establish and maintain a minimum personal shareholding equal to a
set percentage of base salary. An Initial Value must be achieved as quickly as possible using shares vesting or options
exercised through the executive share option schemes and Long-Term Incentive schemes by retaining 50% of the net
value (i.e. the value after deduction of exercise costs and tax) of shares acquired under these schemes. Once the Initial
Value is achieved, a Subsequent Value must be achieved in the same way, except that a minimum of 25% of the net
value must be retained on each exercise or acquisition. Shares owned beneficially by the director (including the portion
of net annual bonus deferred compulsorily into BAE Systems shares) and his/her spouse count towards the MSR. The
MSR does not apply after the individual has ceased to be a director. Any case of non-compliance would be dealt with
by the Committee.

The following table sets out MSR Initial Value and Subsequent Value:

Ian King*

Charles Woodburn

Peter Lynas

Jerry DeMuro

*Retired on 30 June 2017.

Initial Value

Subsequent Value

150%

100%

300%

200%

175% (212.5% from 2018)

350% (425% from 2018)

Peter Lynas was in excess of his ‘Subsequent Value’ MSR at 31 December 2017, as was Ian King on 30 June 2017,
the date of his retirement. Jerry DeMuro joined the Board in 2014 and his personal holding of shares in the Company
at 31 December 2017 stood at 153%. The higher MSR values applicable to Jerry DeMuro recognise the higher LTI
opportunity and broader US market practice. Charles Woodburn joined the Board in May 2016 and his personal
shareholding in the Company at 31 December 2017 stood at 63%.

There are MSR requirements in place for all of the employee population who receive LTIPs.

There are no shareholding requirements for the Chairman or the non-executive directors.

112

BAE Systems
Annual Report 2017

Annual remuneration report
continued

Share interests as at 31 December 2017 (or on ceasing to be a director of the Company)
The interests of the directors, who served during the year ended 31 December 2017, in the shares of BAE Systems plc,
or scheme interests in relation to those shares, were as follows:

Scheme interests: Options and awards over shares

Share awards
with performance
conditions

Share awards
without performance
conditions

Share options
with performance
conditions

Share options
with performance
conditions, vested
but unexercised

Sir Roger Carr

E P L Corley

J DeMuro

H Green

C M Grigg

I G King1

P J Lynas

P Rosput Reynolds

N C Rose

I P Tyler

C N Woodburn

126,093

10,000

202,335

–

24,555

1,923,894

232,944

25,200

55,000

–

96,966

–

941,831

389,187

1,517,828

–

1,198,463

1,582,740

–

1,687,187

–

Total
scheme
interests

–

2,848,846

–

1,198,463

1,582,740

–

1,687,187

1. Retired from the Board on 30 June 2017. Ian King’s scheme interests stated as at 30 June 2017 are after pro-rating in accordance with his leaving

arrangements referred to on page 100.

The above table has been subject to audit.

The interests of directors include those of their connected persons. The shares held by Paula Rosput Reynolds are
represented by 6,300 American Depositary Shares. Details of the share interests in options and awards held by the
executive directors as at 31 December 2017 are given on page 113 and details of share options exercised in 2017
are given on page 114.

Performance Shares granted under the LTIP are classified as share awards with performance conditions for the
US executive director and as share options with performance conditions for the UK executive directors.

Since 31 December 2017, Charles Woodburn has acquired an additional 77 shares 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 97,043.

Revathi Advaithi, who was appointed to the Board on 1 January 2018, had a nil shareholding in BAE Systems plc at
the date of her appointment and at the date of this report.

There have been no changes in the interests of the remaining directors in the shares of BAE Systems plc between
31 December 2017 and the date of this report.

BAE Systems
Annual Report 2017

113

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Breakdown of scheme interests: Options and awards held as at 31 December 2017 (or on ceasing to be a director of the Company)

Ian King*

LTIP PSTSR

LTIP PSEPS

LTIP PSTSR

LTIP PSEPS

LTIP SO

31 December
2017*

167,8421

167,8432

104,5353

104,5363

544,7561

402,8221

250,8853

653,707

Date of
grant

25.03.15

23.03.16

nil

25.03.15

23.03.16

5.43

4.99

Peter Lynas

Exercise
price
£

Date from which
exercisable or part
exercisable

31 December
2017

Date of
grant

Exercise
price
£

Date from which
exercisable or part
exercisable

25.03.18

LTIP PSTSR

25.03.18

LTIP PSEPS

23.03.19

LTIP PSTSR

23.03.19

LTIP PSEPS

LTIP PSTSR

25.03.18

LTIP PSEPS

23.03.19

LTIP SO

110,3731

110,3732

123,0603

96,9443

96,9453

660,755

308,0181

343,4243

270,5433

921,985

25.03.15

23.03.16

21.03.17

25.03.15

23.03.16

21.03.17

nil

5.43

4.99

6.49

25.03.18

23.03.19

21.03.20

25.03.18

23.03.19

21.03.20

* The figures for Ian King are stated as at 30 June 2017, the date of his ceasing to be

a director. His share options and awards stated as at 30 June 2017 are after pro-rating
in accordance with his leaving arrangements referred to on page 100. There were no
subsequent changes to his scheme interests between 30 June 2017 and 31 December
2017 which remain subject to the relevant performance conditions.

F
n
a
n
c
a

l
s
t
a
t
e
m
e
n
t
s

Jerry DeMuro

Charles Woodburn

31 December
2017

Date of
grant

Exercise
price
£

Date from which
exercisable or part
exercisable

31 December
2017

Date of
grant

Exercise
price
£

Date from which
exercisable or part
exercisable

LTIP PSTSR

LTIP PSEPS

LTIP PSTSR

LTIP PSEPS

LTIP PSTSR

LTIP PSEPS

LTIP SO

LTIP RS

146,6201

146,6212

168,2033

156,0923

941,831

472,5791

542,1433

503,1063

1,517,828

121,174

139,011

129,002

389,187

25.03.15

23.03.16

21.03.17

25.03.15

23.03.16

21.03.17

25.03.15

23.03.16

21.03.17

n/a

5.43

4.99

6.49

n/a

25.03.18

23.03.19

21.03.20

25.03.18

23.03.19

21.03.20

25.03.18

23.03.19

21.03.20

LTIP PSTSR

LTIP PSEPS

LTIP PSTSR

LTIP PSEPS

LTIP SO

334,8333

132,8973

935,460

405,0403

346,6873

751,727

06.09.16

21.03.17

nil

06.09.16

21.03.17

5.56

6.49

06.09.19

21.03.20

06.09.19

21.03.20

1. The outstanding option or award will lapse after the end of the financial year having not met the full performance condition.
2. The outstanding option or award will partially lapse after the end of the financial year having not met the full performance condition.
3. Subject to a performance condition that is yet to be tested.

114

BAE Systems
Annual Report 2017

Annual remuneration report
continued

Options exercised during 2017

Ian King

ExSOP2012

PSPTSR

Exercised
during the
year

256,279

17,797

Exercise
price
£

Date of
grant

Date of
exercise

3.01

29.03.12

23.02.17

nil

29.03.12

11.05.17

Market price
on exercise
£

6.11

6.39

The PSP option exercised by Ian King attracted reinvested dividends which equated to an
additional 2,825 shares.

The tables on page 113 and above have been subject to audit.

Peter Lynas

Exercised
during the
year

10,090

Exercise
price
£

Date of
grant

Date of
exercise

Market price
on exercise
£

nil

29.03.12

24.05.17

6.52

PSPTSR

The PSP option exercised by Peter Lynas attracted reinvested dividends which equated to an
additional 1,601 shares.

Performance conditions
Performance conditions for the LTIP, PSP and ExSOP2012 are detailed on pages 110 and 111.

Statement of voting
Shareholder voting on the resolutions to approve the Directors’ remuneration policy and the Annual remuneration report
put to the 2017 AGM was as follows:

Directors’ remuneration policy

Votes for

2,286,232,998

95.09

Votes against

118,030,799

Annual remuneration report

Votes for

2,322,287,980

97.25

Votes against

65,571,040

4.91

2.75

Total votes cast

2,404,263,797

Total votes cast

2,387,859,020

Votes withheld
(abstentions)

6,035,623

Votes withheld
(abstentions)

22,440,400

Non-Executive Directors’ Fees Committee
The non-executive directors’ fees are set by the Non-Executive Directors’ Fees Committee which comprises Sir Roger Carr
(Chairman), Philip Bramwell (Group General Counsel), Jerry DeMuro and, since 1 July 2017, Charles Woodburn. Ian King
also served as a member of the committee until his retirement on 30 June 2017.

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Remuneration Committee composition and advisers
The Committee members comprise Paula Rosput Reynolds (Chairman), Elizabeth Corley and Nick Rose.
Advisers to the Remuneration Committee are shown below.

Adviser

Services provided

Appointment

Governance

PricewaterhouseCoopers
(PwC)

During 2017, provided information
on market practice in relation to
different aspects of remuneration,
market trends and benchmarking
of the remuneration packages for
the executive population.

By the Company
at the request of
the Committee.

Subsequently appointed in 2018 as
independent adviser to the Committee.

Committee
appointment.

In 2017 PwC did not directly engage with the
Committee but will do so in 2018 following
the appointment as independent adviser to
the Company.

The Committee is aware that PwC provides
a variety of other services to the Company,
including tax and pensions advice. PwC also
provides a range of consultancy services.

PwC is a member of the Remuneration
Consultants Group (RCG) and is a signatory
to the RCG’s code of conduct.

Fees (in respect
of services provided
to the Committee)

£54,000

Fee basis: Hourly

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Willis Towers Watson
(WTW)

During 2017, advised the Committee
members on remuneration matters,
including independent advice on the
information and proposals presented to
the Committee by Company executives.

Linklaters

Provided legal services, principally
regarding remuneration policy
regulations and revision of the
rules of the BAE Systems Long-Term
Incentive Plan 2014 to reflect
changes to reward structures.

Committee
appointment.

WTW engaged directly with the members
of the Committee.

£34,159

Fee basis: Hourly

The Committee is aware that WTW provides
a variety of other services to the Company,
including corporate risk management advice
and insurance brokerage services.

WTW also provides a range of HR consultancy
services related to human capital management
and employee benefits.

WTW is a member of the Remuneration
Consultants Group (RCG) and is a signatory
to the RCG’s code of conduct.

By the Company
with the approval
of the Committee.

Only provides legal compliance, legal
drafting and review services, and does
not advise the Committee.

£41,731

Fee basis: Hourly

New Bridge Street
(part of Aon Hewitt)

Advises on the TSR outcomes as
required for assessing the performance
condition under the BAE Systems
Long-Term Incentive Plan 2014.

By the Company.

The Committee is aware that Linklaters is
one of a number of legal firms that provides
legal advice and services to the Company
on a range of matters.

Linklaters is regulated by the Law Society.

The Committee is aware that New Bridge
Street provides a variety of other HR-related
services to the Company.

The nature of the advice provided to the
Committee is limited to factual information
concerning the performance of the
Company’s shares.

New Bridge Street is a member of the
Remuneration Consultants Group (RCG) and
is a signatory to the RCG’s code of conduct.

£14,900

Fee basis: Fixed fee

During the year, the Committee received material assistance and advice on remuneration policy from the then
Group Human Resources Director, Lynn Minella, and the Human Resources Director, Reward, Paul Farley. Ian King,
in his then role as Chief Executive, and Charles Woodburn in his role as Chief Executive, also provided advice that
was of material assistance to the Committee.

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Preface to the Directors’
remuneration policy

The Directors’ remuneration policy (the Policy) set out on pages 117 to 129 was agreed by
shareholders at the Annual General Meeting (AGM) on 10 May 2017 and took legal effect
on that date. The approved policy has been re-printed verbatim from the 2016 Annual Report,
updated only so that the page numbers, where appropriate, refer to the 2017 Annual Report
in order to aid readability, and to report subsequent Board membership changes.

Illustration of application of policy for 2018
The following charts show the value of the package each
of the executive directors would receive based on 2018 base
salaries, remuneration and 2018 LTI awards assuming the
following scenarios: minimum fixed pay (including salary,
benefits and pension as provided in the single total figure
table on page 99), and the Restricted Shares award for
the US executive director; pay receivable assuming on-target
performance is met; and maximum pay assuming variable
elements pay out in full. The scenarios below exclude any
share price appreciation and dividends.

UK legislation requires that these charts are given in relation
to the first year in which the remuneration policy takes legal
effect (see page 125). The charts below are reporting the
actual levels for 2018.

Chief Executive (£’000)

Maximum

17%

31%

52%

37%

On-target

33%

Minimum

100%

30%
1,092
2,000

3,345

4,000
Value of package (£’000)

6,000

Group Finance Director (£’000)

Maximum

28%

23%

49%

On-target

48%

Minimum

100%

32%

20%
1,241

2,561

6,429

8,000

4,417

1,000

2,000

3,000

4,000

5,000

Value of package (£’000)

President and Chief Executive Officer
of BAE Systems, Inc. ($’000)

Maximum

33%

On-target

53%

Minimum

100%

29%

24%
2,684

23%

38%
5,047

2,000

4,000
Value of package ($’000)

6,000

8,194

8,000

Fixed elements of remuneration
Annual bonus
Performance Shares

Directors’ remuneration for 2018
For 2018, it remains our intention to operate the Policy that was agreed
by shareholders at the 2017 AGM. This section sets out how the Policy
will apply in 2018.

As set out in our Remuneration Committee Chairman’s letter on pages
91 to 94, the Committee intends to make the following changes to our
executive remuneration arrangements for 2018 which do not constitute
a change to the Policy approved by shareholders in 2017.

Long-Term Incentive (LTI) construct for UK executive directors
As a further step towards simplification of our LTI framework, having
already taken the decision to eliminate the use of Share Options as
part of the LTI construct applicable to our US executive director,
the Committee also will cease the award of Share Options to the
UK executive directors for 2018 onwards.

Consistent with the flexibility contained within the Policy, LTI awards
will be delivered using Performance Shares only. This change will
result in a lower total face value of the award without, we believe,
diluting the incentive to the achievement of long-term sustainable
value. The conversion from Share Options to Performance Shares
has been calculated in line with the methodology explained in the
Policy on page 120 and is shown in the table below:

Current total
expected value

Current aggregate
face value of awards
(Performance Shares
and Share Options)

New face value
associated with
Performance Share
award only

Chief Executive

Group Finance Director

185%

167.5%

550%

515%

370%

335%

This approach significantly simplifies our LTI arrangements without
changing the underlying market-competitive expected values of 185%
for the Chief Executive and 167.5% for the Group Finance Director.

Metrics and weightings applicable in 2018
– The performance metrics and weightings applicable to the 2018
annual incentive are 75% on financial metrics relating to Group
EPS, Group cash and Group order intake, 5% on safety and 20%
on personal objectives designed to support the Group’s strategy.

– Performance Shares will continue to have 50% of the award

based on TSR performance as follows: 50% of the TSR measure
on the current peer comparator group of 13 other international
defence companies and 50% on a TSR percentile ranking against
the companies in the FTSE 100 index. For 2018, the remaining
50% of the award is subject to the EPS condition with a performance
range of 3% to 7% average annual EPS growth requirement. For US
participants, other than members of the Executive Committee, 50%
of the awards made in 2018 are subject to the long-term operating
cash performance of the US business in place of TSR growth.

– There is no change in 2018 to the criteria and weightings applying

to Restricted Shares. As set out previously, the US executive director
will receive an equal weight in expected value in Performance Shares
and Restricted Shares.

– As set out above, from 2018, UK executive directors will receive

Performance Shares only.

Directors’
remuneration policy

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This Directors’ remuneration policy (the Policy) will take legal effect from the conclusion of the 2017 Annual General
Meeting (AGM) subject to shareholder approval at the 2017 AGM1.

The Remuneration Committee (the Committee) considers remuneration policy annually to ensure that it remains aligned
with business needs and is appropriately positioned relative to the market. However, in the absence of exceptional or
unexpected circumstances which may necessitate a change to the Policy, there is currently no intention to revise the
Policy more frequently than every three years. We use target performance to estimate the total potential reward and
benchmark it against reward packages paid by BAE Systems’ competitors.

The Policy is to set base salary with reference to the relevant market-competitive level. Actual total direct reward reflects
the performance of the individual and the Company as a whole. The aim is to deliver an overall remuneration package for
executive directors which provides an appropriate balance between short-term and long-term reward and between fixed
and variable reward as described in the table below.

Whilst our Long-Term Incentive Plan provides the Committee with discretion in respect of vesting outcomes that affect the
actual level of reward payable to individuals, as explained on page 120, such discretion would only be used in exceptional
circumstances and, if exercised, disclosed at the latest in the report on implementation of the Policy (i.e. the Annual
remuneration report) for the year in question.

Changes compared to the policy approved at the 2014 AGM
The Policy contains no components which were not in the remuneration policy approved at the 2014 AGM. However,
the material changes from the policy approved in 2014 are summarised below with the supporting rationale provided
in the Remuneration Committee Chairman’s letter on pages 79 to 82 of the 2016 Annual Report.

Salary
– Clarity on cap on salary increases.

Annual incentive
– Introduction of separate maximum for Chief Operating Officer.
– Introduction of limits for new executive director role.
– Incorporation of malus and clawback mechanisms.

Long-Term Incentives (LTI)
– Introduction of reasonableness discretion.
– Introduction of separate maximum for Chief Operating Officer.
– Introduction of limits for new executive director role.
– Clarity on flexibility to vary weightings of different award types and the associated impact on opportunity

levels subject to the parameters set out.

– Incorporation of malus and clawback mechanisms.
– Introduction of two-year holding period for shares acquired on vesting of awards to non-US directors.
– Introduction of Earnings per Share (EPS) alongside Total Shareholder Return (TSR) on share options with

equal weighting.

– Removal of Share Options for US executive director and redistribution into Performance Shares and Restricted

Shares to maintain current Expected Value.

– Increase in Minimum Shareholding Requirement for US executive director.

Pension
– Participation in executive defined contribution retirement plan (or cash equivalent) introduced as default pension

vehicle for new directors.

– Inclusion of salary supplement as vehicle to offset impact of Lifetime Allowance and/or Annual Allowance.

Non-executive directors’ fees
– Introduction of maximum for Chairman’s fees and benefits.

1. Approved at the AGM on 10 May 2017.

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Directors’ remuneration policy
continued

Executive directors’ policy table

Base salary

Purpose and link to strategy
Recognise market value of role and individual’s skills, experience and performance to ensure the business can attract
and retain talent.

Operation
Salaries are reviewed annually. Business and individual performance, skills, the scope of the role and the individual’s time in the role are
taken into account when setting and assessing salaries, as is market data for similar roles in the relevant market comparator group.

The comparator group for UK executive directors is comprised of selected companies from the FTSE 100 and is constructed to position
BAE Systems around the median in terms of market capitalisation. For the President and Chief Executive Officer of BAE Systems, Inc.,
the comparator group is drawn from companies in the US aerospace and defence sectors, together with similar organisations in the
general industry sector where BAE Systems, Inc. is positioned at the median of the comparator group by reference to revenue size.

Maximum opportunity
When considering salary increases for the executive directors in their current roles, the Committee considers the general level of
salary increase across the Group and in the relevant external market.

Actual increases for the executive directors in their current roles will generally not exceed the average percentage increase for
employees as a whole, taking account of the level of movement within the relevant UK/US comparator group.

As a maximum, in exceptional circumstances (such as a material increase in job size or complexity while performing the same role,
or a recently appointed executive director where the salary is positioned low against the market), the increase will not exceed 10%
in any single year for executive directors performing the same role. If an individual’s role changes then a salary increase above 10%
may be awarded in any single year to position their salary appropriately in accordance with the base salary principles described under
‘Operation’ above. As a matter of policy, no new executive director role will have a salary greater than the Chief Executive at that time.

Performance metrics used, weighting and time period applicable
None.

Annual incentive

Purpose and link to strategy
Drive and reward annual performance of individuals and teams on both financial and non-financial metrics, including
leadership behaviours in order to deliver sustainable growth in shareholder value.

Compulsory deferral into shares increases alignment with shareholder interests.

Operation
The annual incentive is driven off in-year financial performance, corporate responsibility and other non-financial objectives
measured at the Group and individual level.

One-third of the total annual incentive amount is subject to compulsory deferral for three years in BAE Systems shares without
any matching.

A malus mechanism may be applied to any bonus, and a clawback mechanism may be applied to the deferred bonus shares until
up to the end of the three-year deferral period, in respect of 2015 or subsequent years where:
– the Company is entitled to terminate employment for cause or the participant has engaged in misconduct (including breach

of policy) which gives rise to other disciplinary sanction;

– the results of the Company and/or relevant business or businesses for any period have been restated or subsequently appear

materially inaccurate or misleading; and/or

– any Group company or business unit has made a material financial loss.
Cash dividends are payable to the participants on the shares during this three-year deferral period.

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Annual incentive continued

Maximum opportunity
Chief Executive and the President and Chief Executive Officer of BAE Systems, Inc.: 225% of salary

Chief Operating Officer: 200% of salary

Group Finance Director: 160% of salary

Where a new executive director role is established, the maximum opportunity will not exceed that of the Chief Operating Officer
role as set out above.

The pay-out for maximum performance is double the payout for on-target performance. The pay-out for target performance is half
of the respective maximum percentages above. The pay-out for achieving a threshold performance is 40% of the payout for on-target
performance (i.e. 20% of maximum), with no pay-out for achieving less than this. Pay-out for performance between targets is calculated
on a straight-line basis.

Performance metrics used, weighting and time period applicable
Performance is assessed on an annual basis, using a combination of the Group’s main performance indicators for the year and other
objectives designed to support the Group’s strategy. Metrics, which will include financial and non-financial metrics as well as the
achievement of personal objectives, will be determined and weighted each year according to business priorities. 75-80% will relate
to financial metrics.

Metrics and weightings to be determined annually. Proposed metrics and weightings applicable in 2017:
Group EPS – 40%
Group cash – 25%
Order intake – 15%
Safety – 5%
Personal objectives designed to support the Group’s strategy – 15%

See notes 4 and 5 on page 124 regarding the selection and weighting of performance metrics.

Notwithstanding performance against the applicable metrics, all bonus payments are at the discretion of the Committee, which will
be based on an assessment of the individual’s personal contribution to business performance over the relevant year and leadership
behaviours demonstrated in making that contribution, relative to others.

Long-Term Incentives (LTI)

Operation
Long-term incentives will operate under the BAE Systems Long-Term Incentive Plan approved by shareholders at the 2014 AGM.

The size of awards granted is based on a percentage of salary, which is divided by the share price to determine the number of
shares subject to the award.

Dividend equivalents in respect of vested shares may be paid at the time of vesting (or exercise, in the case of options) and are
not taken into account when determining individual limits.

A malus and clawback mechanism may be applied, until two years after vesting, or if sooner, the fifth anniversary of grant, or
the occurrence of certain corporate events, to all awards granted on or after 25 March 2015 where:
– the Company is entitled to terminate employment for cause or the participant has engaged in misconduct (including breach

of policy) which gives rise to other disciplinary sanction;

– the results of the Company and/or relevant business or businesses for any period have been restated or subsequently appear

materially inaccurate or misleading;

– any Group company or business unit has made a material financial loss; and/or
– the measurement of any performance condition does not reflect the actual performance of the Company over the

performance period.

The Committee will establish the targets for each measure at the start of each performance period based on Group projections and
market expectations for the business. The performance conditions for previous awards are described in the Annual remuneration report.

Awards and performance conditions can be adjusted to take account of variations of share capital and other transactions or events.

On a change of control or similar transaction, awards generally will vest to the extent performance conditions are then satisfied
(if applicable) and then be pro-rated to reflect the acceleration of vesting unless the Committee decides otherwise. Alternatively,
awards may be exchanged for equivalent awards over shares in the acquiring company.

The share plan rules may be amended from time-to-time by the Committee in certain circumstances including minor changes
for administrative, tax or other regulatory purposes.

Subject to this Policy, performance conditions of awards already granted may be amended in accordance with their terms or if
anything happens which causes the Committee reasonably to consider it appropriate to do so.

Performance metrics used, weighting and time period applicable
See notes 4 and 5 on page 124 regarding the selection and weighting of performance metrics.

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Directors’ remuneration policy
continued

Executive directors’ policy table continued

Long-Term Incentives (LTI) continued

Maximum opportunity
Over the lifetime of this Policy, the Committee will have discretion to vary the weighting of different types of awards within the
framework set out below, but the overall LTI Expected Value (EV) will remain the same (assuming the LTI EV is calculated as 50%
of face value for Performance Shares, 20% of face value for Share Options and 100% of face value for Restricted Shares):
– UK executive directors’ awards will consist of a mix of Performance Shares and Share Options (with Share Options comprising

no more than 50% of overall LTI EV).

– US executive directors’ awards will consist of a mix of Performance Shares and Restricted Shares (with Restricted Shares comprising

no more than 50% of overall LTI EV).

Performance metrics used, weighting and time period applicable
See below in relation to Performance Shares and Share Options.

In addition to the primary performance tests set out below, the Committee confirms and recognises its obligation to judge the
overall reasonableness of the rewards received relative to the overall business actions and results achieved. When determining the
final performance condition outcome under Performance Share and Share Option awards, the Committee will have discretion over
the number of awards vesting in light of other important factors in the business (reasonable discretion). The discretion may result in
vesting of awards going upwards (subject to maximum 100% vesting of awards) as well as downwards. Any factors will be properly
considered as they arise and any discretion to the calculated results will be applied in a highly disciplined manner and the rationale
and impact will be reported transparently. The use of reasonableness discretion would apply to LTI awards granted to executive
directors after the commencement of this Policy.

See notes 4 and 5 on page 124.

Long-Term Incentives – Performance Shares

Purpose and link to strategy
Drive and reward delivery of sustained long-term EPS and TSR performance aligned to the interests of shareholders.

Operation
For non-US executive directors, awards, typically in the form of nil-cost options, will vest subject to performance and service conditions
on the fifth anniversary of grant. These will be exercisable between the fifth and tenth anniversary of grant or such shorter period as
may be specified by the Committee.

For US executive directors, awards are delivered as conditional share awards (RSUs). To maintain the competitiveness of the LTI offering
in the US, awards will vest automatically on the third, fourth and fifth anniversary of grant, subject to performance conditions.

Policy maximum opportunity
Award levels applicable to UK executive directors for normal annual grants (assuming the current LTI EV weightings in Performance
Shares and Share Options) are as follows:

Chief Executive: 250% of salary

Chief Operating Officer: 230% of salary

Group Finance Director: 215% of salary

Award levels applicable to US executive directors for normal annual grants (assuming the current LTI EV weightings in Performance
Shares and Restricted Shares) are as follows:

President and Chief Executive Officer of BAE Systems, Inc.: 298% of salary

Note the percentages above could be exceeded if the LTI EV weightings were to be varied (see above).

Where a new executive director role is established, the maximum opportunity will not exceed that of the Chief Operating Officer
role as set out above.

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Long-Term Incentives – Performance Shares continued

Performance metrics used, weighting and time period applicable
Metrics and weightings will be as follows (subject to the Committee’s ability to adjust as set out below):
– 50% of award based on TSR relative to one or more appropriate comparator groups over the three-year performance period as

selected by the Committee at the time of grant:

– Vesting of each comparator group is determined as: nil vesting if TSR ranked below median in the peer group; 25% vesting if

TSR ranked at the median; 100% vesting if TSR ranked in the upper quintile; pro-rata vesting for performance between median
and upper quintile.

– If more than one comparator group is used, vesting of the TSR portion of the award will be determined by the average of the

vesting outcomes from each comparator group.

– Award subject to a secondary financial measure as set out on page 110.

– 50% of award based on average annual EPS growth over the three financial years starting with that in which the award is granted,
with 25% vesting for threshold performance, 50% vesting for target performance and 100% vesting for stretch performance.
Pro-rata vesting for intermediate performance.

The metrics and weightings applicable in 2017 are as follows:
– 50% of award based on TSR relative to the following two comparator groups over the three-year performance period:

– At least ten other international defence companies selected by the Committee at the time of grant.

– All companies in the FTSE 100 index.

– 50% of award based on average annual EPS growth over the three financial years starting with that in which the award is granted,
with threshold performance requirement as average annual EPS growth of 3%, target performance requirement as average annual
EPS growth of 5% and stretch performance requirement as average annual EPS growth of 7%.

Note that awards granted to executive directors from the date of the 2017 AGM would be subject to application of reasonableness
discretion in light of other important factors in the business as described earlier.

The Committee can adjust the weighting of the EPS and TSR conditions and, if considered appropriate, the Committee may introduce
an alternate performance condition aligned to the Company’s strategy.

See notes 4 and 5 on page 124.

Long-Term Incentives – Share Options

Purpose and link to strategy
Drive and reward delivery of sustained long-term EPS and TSR performance and sustained improvement in the Company’s
share price.

Operation
Share Options have an exercise price set at market value at grant.

For non-US executive directors, awards vest subject to performance and service conditions on the fifth anniversary of grant and will
be exercisable between the fifth and tenth anniversary of grant.

US executive directors are not eligible.

Policy maximum opportunity
Award levels applicable to UK executive directors for normal annual grants (assuming the current LTI EV weightings in Performance
Shares and Share Options) are as follows:

Chief Executive: 300% of salary

Chief Operating Officer: 300% of salary

Group Finance Director: 300% of salary

Note the percentages above could be exceeded if the LTI EV weightings were to be varied (see page 120).

Where a new executive director role is established, the maximum opportunity will not exceed that of the Chief Operating Officer
role as set out above.

Performance metrics used, weighting and time period applicable
For Share Option awards made to the executive directors, exercise is subject to the TSR and EPS performance conditions (subject to any
adjustment described above) and application of reasonableness discretion as set out above.

Note that for Share Option awards granted to the executive directors prior to the 2017 AGM, exercise is subject to the TSR performance
conditions as set out in our policy approved at the 2014 AGM.

See notes 4 and 5 on page 124.

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Directors’ remuneration policy
continued

Executive directors’ policy table continued

Long-Term Incentives – Restricted Shares

Purpose and link to strategy
Provide long-term reward through time-vesting awards principally in the Company’s US market.

Operation
The shares are subject only to the condition that the participant remains employed by the Group on the vesting date (three years
after the award date). These awards are not subject to a performance condition as it is designed to address competitive market
practice and retention issues principally in the US. Non-US executive directors are not eligible.

Policy maximum opportunity
Award levels applicable to US executive directors for normal annual grants (assuming the current LTI EV weightings in Performance
Shares and Restricted Shares) are as follows:

President and Chief Executive Officer of BAE Systems, Inc.: 150% of salary

Performance metrics used, weighting and time period applicable
None.

See notes 4 and 5 on page 124.

Benefits

Purpose and link to strategy
Provide employment benefits which ensure that the overall package is market competitive when these elements are
taken into account.

Operation
Benefits include provision of a company car (or cash equivalent), life assurance and ill-health benefit cover which are provided directly
or through membership of the Company’s pension schemes. The main benefits in the UK include a car allowance (currently £16,000
per annum), private use of a chauffeur-driven car and annual medical screening, plus life assurance and ill-health benefit cover provided
through membership of the Company’s pension schemes.

Opportunity for UK executive directors to participate in the Share Incentive Plan, a tax approved all-employee plan.

In the US, benefits include a cash allowance for car and parking (currently $20,900 per annum) and private use of a chauffeur-driven
car, medical and dental benefits, and insured life and disability benefits.

Additional benefits, such as relocation assistance, may also be provided in certain circumstances if considered reasonable and
appropriate by the Committee. Relocation assistance comprises reimbursement for direct items of expenditure, such as legal,
estate agency, removals and temporary accommodation.

Directors’ and Officers’ insurance cover is also provided for all executive directors.

Maximum opportunity
Benefits are set at a level which the Committee considers to be appropriate against comparable roles in companies of similar size
in the relevant market.

Benefits are as reported and itemised within the single total figure shown as part of the Annual remuneration report on page 99.
The maximum cost of such benefits will reflect the associated market-competitive cost of provision. Relocation assistance is based
on actual costs incurred which are linked to the size and value of the property, plus a maximum relocation allowance of £2,500.

Participation limits for the Share Incentive Plan are those set by the UK tax authorities from time-to-time.

Performance metrics used, weighting and time period applicable
None.

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Pension

Purpose and link to strategy
Provide competitive post-retirement benefits or cash allowance equivalent.

Operation
The current Chief Executive1 and Group Finance Director as at 22 February 20172 are members of the BAE Systems Executive Pension
Scheme and members of an underlying employee pension plan, which together provide a target benefit for executive directors
payable at normal retirement age (62) of 1/30th of final pensionable earnings (FPE) for each year of service up to a maximum of
two-thirds of FPE. Member contributions are currently 8% of salary. Further detail is provided on page 107 as part of the Annual
remuneration report.
The current Chief Operating Officer1 as at 22 February 20172 is a member of the defined contribution section of the BAE Systems
Executive Pension Scheme (EPS DCRP). In line with our policy, Company contributions are 19% of salary and member contributions
are 6% of salary. Where the Annual Allowance (AA) is breached, as is the case with the Chief Operating Officer, he will pay member
contributions up to the AA limit and the Company contributions will be paid as a salary supplement.

For any new externally-appointed UK executive directors, or internally appointed UK executive directors who are not members of
a BAE Systems defined benefit scheme, membership of the BAE Systems EPS DCRP is offered with contribution requirements set
as a percentage of base salary dependent on grading. Individuals may elect to receive some or all of their Company contributions as
a cash allowance. For any internally-appointed UK executive directors who are already members of a BAE Systems defined benefit
scheme, the Company may offer to maintain their membership in that pension arrangement (with the contribution rates appropriate
to that arrangement), or the choice of membership of the BAE Systems EPS DCRP as set out above.

Where UK executive directors’ pension entitlement or accrual is restricted to the Lifetime Allowance (LTA) and/or the AA, the
Company may offer an unfunded pension promise or salary supplement to offset the impact of these restrictions.
The current President and Chief Executive Officer of BAE Systems, Inc. as at 22 February 20172 participates in a Section 401(k)
defined contribution arrangement in which the company matches his contributions up to a maximum of 6% of salary, subject
to US regulatory limits.

Any new externally-appointed US executive directors, or internally-appointed US executive directors who are not members of a pension
plan, would be offered membership of the US Section 401(k) defined contribution plan. For any internally-appointed US executive
directors who are members of the 2006 Plan and Non-Qualified Plan, these plans provide a cash sum at retirement equal to the sum
of the annual accruals, currently set at $1,000 from the 2006 Plan and $500 from the Non-Qualified Plan. The Company may offer
to maintain membership of the 2006 Plan and Non-Qualified Plan, in addition to membership of the US Section 401(k) defined
contribution plan.

Maximum opportunity
The BAE Systems EPS DCRP provides a maximum Company contribution of 19% (in addition to employee contribution of 6%)
of base salary.

Under the existing executive defined benefit scheme, a maximum of two-thirds of FPE is accrued at 1/30th for each year of service.

Where UK executive directors’ pension entitlement or accrual is restricted to the LTA and/or the AA, the Company may offer an
unfunded pension promise or salary supplement to offset the impact of these restrictions.

The US Section 401(k) defined contribution plan provides 100% company matching contributions up to a maximum of 6% of base
salary, subject to US statutory limits.

For US executive directors who are members of the 2006 Plan and Non-Qualified Plan, these plans provide a cash sum at retirement
equal to the sum of the annual accruals, currently set at $1,000 from the 2006 Plan and $500 from the Non-Qualified Plan.

1. Ian King, Chief Executive as at 22 February 2017, retired on 30 June 2017. Charles Woodburn, Chief Operating Officer as at 22 February 2017, was

appointed as Chief Executive with effect from 1 July 2017.

2. Date of approval of the Company’s 2016 Annual Report in which this policy was originally published.

124

BAE Systems
Annual Report 2017

Directors’ remuneration policy
continued

Executive directors’ policy table continued

Notes to the executive directors’ policy table

Remuneration policy for other employees
1. The Company’s approach to annual salary reviews is consistent across the Group, with consideration given to the scope of the role,

level of experience, performance and market data for similar roles in other companies.

2. All leaders may participate in an annual bonus scheme with similar metrics to those used for the executive directors. Other employees
may participate in performance-based incentive plans which vary by organisational level and with relevant metrics for the particular
area of the business.

3. LTI grants may be made to the most senior managers in the business (approximately 400 individuals globally). The nature of the

awards depends on the individual’s location, roles and responsibilities, in particular:
– performance conditions and targets for performance share grants made to UK and Rest of World participants are made

in line with those applying to executive directors;

– for US participants below Executive Committee level, performance share grants are normally subject to BAE Systems, Inc.

operating cash flow and EPS performance conditions and targets;

– Performance Shares applicable to participants below executive director level vest on the third anniversary subject to performance
conditions and are exercisable (or released in the case of US participants) in equal tranches on the third, fourth and fifth anniversary
of grant;

– Share Options are granted to participants below executive director level; there are no performance conditions attached and they

vest and are exercisable after three years; and

– Restricted Share grants are currently made to the most senior managers in the US businesses reflecting competitive market practice

and vest after three years.

Performance measures and targets
4. The Committee selected the performance conditions because these are central to the Company’s overall strategy and are the

key metrics used by the executive directors to oversee the operation of the business. Any non-financial performance targets are
determined by the Committee in consultation with the Corporate Responsibility Committee.

5. The performance conditions and targets are determined annually by the Committee (within the parameters set out above), taking
account of the Group’s strategic objectives, the internal business plan and budgets, as well as external market expectations and
general economic conditions. The Committee is of the view that the performance targets for the annual bonus are commercially
sensitive and that it would be detrimental to the interests of the Company to disclose them before the start of the financial year.
The targets will be disclosed retrospectively after the end of the relevant financial year.

Minimum Shareholding Requirement (MSR)
6. The Committee has agreed a policy whereby the executive directors are required to establish and maintain a minimum personal

shareholding equal to a set percentage of base salary. An Initial Value must be achieved as quickly as possible using shares vesting or
options exercised through the executive share option schemes and other LTI schemes by retaining 50% of the net value (i.e. the value
after deduction of exercise costs and tax) of shares acquired under these schemes. Once the Initial Value is achieved, a Subsequent
Value must be achieved in the same way, except that a minimum of 25% of the net value must be retained on each exercise or
acquisition. The Committee has discretion to increase the Initial Value and/or Subsequent Value (see below). Shares owned beneficially
by the director and his/her spouse count towards the MSR. The MSR does not apply after the individual has ceased to be a director.
Any case of non-compliance would be dealt with by the Committee.

The following table sets out MSR Initial Value and Subsequent Value applicable from 2018:

Initial Value

Subsequent Value

Chief Executive

Chief Operating Officer

Group Finance Director

President and Chief Executive Officer of BAE Systems, Inc.

150%

100%

212.5%

300%

200%

425%

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Illustration of application of remuneration policy
The charts below show the value of the package each of the executive directors would receive in the first year of operation of the
Policy. The values are based on 2017 levels for base salaries, benefits and pension and assume that the office-holders at the date of this
Policy coming into effect are employed throughout the first year of operation of the Policy. Annual and long-term incentives are based
on awards applying in 2018. The charts assume the following scenarios: minimum fixed pay (including salary, benefits and pension
as provided in the single figure table on page 85 of the 2016 Annual Report); pay receivable assuming on-target performance is met;
and maximum pay assuming variable elements pay out in full. The scenarios below exclude any share price appreciation and dividends.

Chief Executive1 (£’000)

Chief Executive designate1 (£’000)

F
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Maximum

23%

32%

On-target

42%

Minimum

100%

28%
1,643
2,000

45%
3,945

30%

4,000
Value of package (£’000)

6,000

7,045

Maximum

18%

34%

On-target

34%

Minimum

100%

34%

32%
1,068

48%
3,119

5,881

8,000

2,000
4,000
Value of package (£’000)

6,000

Chief Operating Officer1 (£’000)

Maximum

19%

32%

On-target

36%

Minimum

100%

30%
919

34%

49%
2,527

4,707

2,000
4,000
Value of package (£’000)

6,000

Executive directorship changes
As announced on 22 February 2017, Ian King will retire as Chief
Executive on 30 June 2017 and Charles Woodburn, Chief Operating
Officer, will be appointed as Chief Executive on 1 July 20171. The
left-hand chart above illustrates Ian King’s remuneration if he were
Chief Executive throughout the year, and the right hand chart above
illustrates Charles Woodburn’s remuneration if he were Chief Executive
throughout the year. The chart to the left illustrates Charles Woodburn’s
remuneration if he were Chief Operating Officer throughout the year.

Group Finance Director (£’000)

Maximum

28%

26%

46%

On-target

48%

Minimum

100%

30%

22%
1,025

2,129

1,000

2,000
Value of package (£’000)

3,000

President and Chief Executive Officer
of BAE Systems, Inc. ($’000)

Maximum

33%

On-target

52%

Minimum

100%

29%

24%
2,605

24%

38%
4,907

2,000

4,000
Value of package ($’000)

6,000

3,658

4,000

7,976

8,000

Fixed elements of remuneration
Annual bonus
Performance Shares and Share Options

1. Ian King, Chief Executive as at 22 February 2017, retired on 30 June 2017.
Charles Woodburn, Chief Operating Officer as at 22 February 2017, was
appointed as Chief Executive with effect from 1 July 2017.

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Annual Report 2017

Directors’ remuneration policy
continued

Non-executive directors’ (NEDs) policy table

Fees

Purpose and link to strategy
To attract NEDs who have a broad range of experience and skills to provide independent judgement on issues of strategy,
performance, resources and standards of conduct.

Operation
NEDs’ fees are set by the Non-Executive Directors’ Fees Committee.

NEDs receive a basic fee with an additional fee for those who are chairmen of committees and/or undertake the role of Senior
Independent Director.

NEDs also receive a travel allowance per meeting on each occasion that a scheduled 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.

Fees are typically reviewed annually, taking into account time commitment requirements and responsibility of the individual roles,
and after reviewing practice in other comparable companies.

The Chairman’s fees are set by the Remuneration Committee on a three-year basis and not normally subject to review during
that period.

Maximum opportunity
Actual fee levels are disclosed in the Annual remuneration report for the relevant financial year.

The current Chairman’s fee has been set at £700,000 from 1 February 2017 and is fixed at this level for three years.

The aggregate cost of fees and benefits paid to NEDs (including the Chairman) will not exceed an annual limit of £2.5m and the cost
of fees and benefits paid to the Chairman will not exceed £1.25m annually.

Performance metrics used, weighting and time period applicable
None.

Benefits

Purpose and link to strategy
Reimbursement for reasonable and documented expenses incurred in the performance of duties.

Operation
NEDs are not eligible to participate in any pension benefits provided by the Company, nor do they participate in any performance-
related incentives.

The Chairman is provided with a chauffeur-driven car. This may be used for non-Company business, but the cost of the benefit
of such usage shall be paid by the Chairman.

Reimbursement of travel and subsistence costs (including payment of the associated tax cost) incurred by the director or his/her
spouse whilst undertaking duties on behalf of the Company that may be assessed as a benefit for tax purposes. Directors’ and
Officers’ insurance cover is also provided for all directors.

Maximum opportunity
See the aggregate limit under ‘Fees’ above.

Prior commitments
For the duration of this Policy, the Company will honour any commitments made in respect of executive director and non-executive
director remuneration and benefits before the date on which either: (i) the Directors’ remuneration policy becomes effective; or (ii) an
individual becomes a director, even where such commitments are not consistent with the policy set out in this report or prevailing at
the time any such commitment is fulfilled. This includes (without limitation) all existing share awards as detailed on page 102 of the
2013 Annual Report under the PSP, SMP, RSP, ExSOP and ExSOP2012 that remain outstanding, Peter Lynas’ second residence allowance
as detailed on page 93 of the 2013 Annual Report, and any commitments entered into (such as grants of share awards) consistent with
a previously approved Directors’ remuneration policy that was applicable at the relevant time.

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Approach to recruitment remuneration
The recruitment policy provides an appropriate framework within which to attract individuals of the required calibre to lead a company
of BAE Systems’ size, scale and complexity. The Remuneration Committee determines the remuneration package for any appointment
to an executive director position, either from within or outside BAE Systems.

Operation
The Remuneration Committee will take into consideration all relevant factors, including overall total remuneration, the type of
remuneration being offered and the jurisdiction from which the candidate was recruited, and will operate in order to ensure that
arrangements are in the best interests of the Company and its shareholders without paying more than is necessary to secure the
individual of the required calibre.

The fees and benefits applicable to the appointment of any new non-executive directors will be in accordance with the policy table
on page 126.

Opportunity
The Committee seeks to align the remuneration package offered with the policy set out in the executive directors’ policy table above
recognising that participation under the policy above varies by geography.
– For UK and other non-US executive director appointments, participation in annual incentive plans will not exceed 225% of annual

salary and long-term awards under this Policy will not exceed 550% of annual salary.

– For US executive director appointments, participation in annual incentive plans will not exceed 225% of annual salary and long-term

awards under this Policy will not exceed 500% of annual salary.

The Committee may make awards on hiring an external candidate to ‘buy-out’ existing equity or, in exceptional circumstances, other
elements of remuneration forfeited on leaving the previous employer. In doing so, the Committee will take account of relevant factors
including any performance conditions attached to these awards, the form in which they were granted (e.g. cash or shares) and the
time over which they would have vested. Buy-out awards would be capped to be no higher, on recruitment, than the fair value of
those forfeited. Full details will be disclosed in the next Annual remuneration report following recruitment which will include details
of the need to grant a buy-out award.

Fixed elements (base salary, retirement and other benefits)
The salary level will be set in accordance with the principles for setting base salary described in the executive directors’ policy
table above.

The executive director shall be eligible to participate in applicable BAE Systems’ employee benefit plans, including coverage under
applicable executive and employee pension and benefit programmes in accordance with the terms and conditions of such plans, as
may be amended by the Company in its sole discretion from time to time.

In the case of promotion of an existing Group employee to an executive directorship on the Board, commitments made before such
promotion will continue to be honoured whether or not they are consistent with the remainder of this Policy.

Annual Incentive Plan
The appointed executive director will be eligible to earn a discretionary annual bonus in accordance with the annual incentive
framework as described in the executive directors’ policy table above.

The level of opportunity will be consistent with the policy disclosed in the executive directors’ policy table in this report and subject
to the maximums referred to therein and under ‘Opportunity’ above.

Long-Term Incentive Plan
The executive director will be eligible for equity awards in such amounts as the Committee may determine in its sole discretion,
subject to this Policy and the rules of the Long-Term Incentive Plan.

The level of opportunity will be consistent with the policy set out in the executive directors’ policy table above and subject to the
maximums referred to therein and under ‘Opportunity’ above.

Other
For internal and external appointments, the Committee may agree that the Company will meet certain relocation expenses in
accordance with the provisions described under the Benefits section of the policy table on page 122.

128

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Annual Report 2017

Directors’ remuneration policy
continued

Service contracts and letters of appointment

Executive directors

Operation
In accordance with long-established policy, all executive directors have rolling service agreements which may be terminated in
accordance with the terms of these agreements.

Dates of appointment for executive directors
Name

Date of appointment

Ian King1

Charles Woodburn2

Peter Lynas

Jerry DeMuro

1 September 2008

1 July 2017

1 April 2011

1 February 2014

Notice period

12 months either party

90 days either party3

1. Retired on 30 June 2017.
2. Appointed to the Board as Chief Operating Officer on 9 May 2016; appointed as Chief Executive with effect from 1 July 2017.
3. Jerry DeMuro’s contract of employment automatically renews for one-year periods from 31 December each year, unless one party gives at least

90 days’ notice of non-renewal.

Notice period
The Committee’s policy is that the service contracts of executive directors will not exceed 12 months. In exceptional circumstances, in
relation to newly recruiting an executive director operating in a US environment, the notice period may be extended to a maximum of
24 months and structured such that it reduces to no more than 12 months by no later than the end of the first complete year of service.

Change of control
No executive director has provisions in his service contract that relate to a change of control of the Company.

Chairman
The Chairman’s appointment is documented in a letter of appointment and he is required to devote no fewer than two days a week
to his duties as Chairman. His appointment as Chairman (which commenced on 1 February 2014) will automatically terminate if he
ceases to be a director of the Company. The Chairman’s appointment was reviewed by the Nominations Committee prior to the end
of his initial three-year term and has been extended until February 2020, unless it is terminated earlier in accordance with the Company’s
Articles of Association or by the Company or the Chairman giving not less than six months’ notice.

Non-executive directors
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 are shown below:
Name

Date of appointment

Expiry of current term

Revathi Advaithi1

Elizabeth Corley

Harriet Green

Chris Grigg

Paula Rosput Reynolds

Nick Rose

Ian Tyler

01.01.2018

01.02.2016

01.11.2010

01.07.2013

01.04.2011

08.02.2010

08.05.2013

31.12.2020

31.01.2019

31.10.2019

30.06.2019

31.03.2020

07.02.2019

07.05.2019

1. Appointed to the Board on 1 January 2018.

The non-executive directors are normally appointed for an initial three-year term that, subject to review, may be extended subsequently
for further such terms. Any third term of three years is subject to rigorous review, taking into account the need progressively to refresh
the Board. Non-executive directors do not have periods of notice.

In accordance with the UK Corporate Governance Code, all directors are subject to annual election or re-election at the Company’s AGM.

Policy on payment for loss of office

Operation
The policy on payment for loss of office provides a clear set of principles that govern the payments that will be made for loss of office,
and take account of the need to ensure a smooth transition for leadership roles during times of change. The policy that will apply for
a specific executive director’s payments for loss of office will be the policy that was in place at the point when the payments for loss
of office were agreed for the executive director in question.

Any termination payment made in connection with the departure of an executive director will be subject to approval by the
Committee, having regard to the terms of the service contract or other legal obligations and the specific circumstances surrounding
the termination, including whether the scenario aligns to an example under the approved leaver criteria, performance, service and
health or other circumstances that may be relevant.

In addition to payments described below, the Committee may pay such amounts as are necessary to settle or compromise any claim
or by way of damages, where the Committee views it as in the best interests of the Company to do so. In the event of the termination
of an executive director’s contract, it is the Committee’s policy to seek to limit any payment to not more than one year’s base salary.

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Notice and pay in lieu of notice
Executive directors’ contracts allow for termination with contractual notice from either party or termination by way of payment of base
salary in lieu of notice, at the Company’s discretion. Neither notice nor a payment in lieu of notice will be given in the event of gross
misconduct. Any new executive director contracts since 2016 (including the Chief Operating Officer) concerning payment in lieu of
notice provisions allow for the Committee to exercise discretion to apply phased payments and mitigation on that executive director
securing alternative employment.

Jerry DeMuro’s contract of employment automatically renews for one-year periods from 31 December each year, unless one party
gives at least 90 days’ notice of non-renewal. If the employment is (a) terminated by the Company (other than for cause as defined
in the contract) or (b) he resigned for a ‘Good Reason’ (as defined in his contract), he is entitled to a termination payment equal to
(i) one year’s base salary and (ii) a bonus payable at target level pro-rated for service for the relevant financial year. He will also be
entitled to a continuation of medical benefits for 18 months (or a cash payment in lieu).

Other than notice payments, the Company has no obligation to make any termination payments when the Chairman’s appointment
terminates. Non-executive directors do not have periods of notice and the Company has no obligation to make any termination
payments when their appointment terminates, other than to pay fees in accordance with the appointment letters.

Retirement benefits
As governed by the rules of the relevant pension plan. No enhancement for leavers will be made.

Annual Incentive Plan
Where an executive director’s employment is terminated after the end of a performance year but before the payment is made, the
executive director will remain eligible for an annual incentive award for that performance year subject to an assessment based on
performance achieved over the period. No award will be made in the event of gross misconduct.

The Committee may, as set out below, exercise its discretion to allow an annual incentive payment for the year of cessation as part
of the termination package for executive directors. Where it does so, the exercise of the discretion and reason why the Committee
considered such action appropriate will be disclosed.

Where an executive director leaves during the relevant performance year by reason of death, ill-health, disability, retirement, a transfer
of business or redundancy, the Committee may use its discretion to determine that an executive director will remain entitled to receive
a bonus (subject to an assessment based on performance over the performance year and pro-rated for time) in respect of the financial
year in which the individual ceased employment. One third of the bonus will be subject to compulsory deferral as set out previously,
unless the Committee decides otherwise.

The Committee’s policy is not to award an annual incentive for any portion of the notice period not served.

The treatment set out above does not apply to the President and Chief Executive Officer of BAE Systems, Inc.

Long-Term Incentive Plans
The treatment of outstanding share awards in the event that an executive director leaves is governed by the relevant share plan rules.

Under the Long-Term Incentive Plan, where an executive director leaves the Group by reason of ill-health, injury, disability, retirement
with the agreement of the Company, sale of a business or employing company, redundancy or leaving in such circumstances as the
Committee determines (each an ‘approved leaver’), unvested awards and options generally continue and vest on the normal vesting
date (or, in the case of Performance Shares held by US executive directors, the first normal vesting date or, if later, cessation), unless
the Committee determines that the awards should vest on cessation. Any performance conditions will be applied at the time of vesting.

On vesting, the number of shares under award will, unless the Committee decides otherwise, be reduced pro-rata to reflect the
period in which the executive director was in employment as a proportion of the relevant vesting period (or in the case of Performance
Shares held by US executive directors or Performance Shares granted prior to the 2017 AGM, as a proportion of the initial three-year
vesting period).

In the event of death, awards generally vest at the time of death subject to the satisfaction of any performance conditions at that time.
Awards are then pro-rated as set out above.

Where an executive director’s employment is terminated for any other reason, his unvested awards and options will lapse. Options
normally remain exercisable for six months after cessation (or vesting, if later) and 12 months after death.

If the Committee exercises its discretion to treat a director as an approved leaver as permissible under the leaver provisions of the share
plan rules, the exercise of the discretion and reason why the Committee considered such action appropriate will be disclosed.

Where an executive director’s employment is terminated or an executive director is under notice of termination for any reason at the
date of award of any Long-Term Incentive awards, no Long-Term Incentive awards will be made.

Consideration of employment conditions elsewhere in the Company
The Committee does not consult directly with employees as part of the process for reviewing executive pay. When considering
salary increases for the executive directors, the Committee considers the general level of salary increase across the Group and
in the external market.

Stakeholder considerations
The Committee conducts an annual programme of consultation with major shareholders in order to seek their input to the
development of remuneration policy or plans.

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Annual Report 2017

Statutory and
other information

Company registration
BAE Systems plc is a public company limited
by shares registered in England and Wales
with the registered number 1470151.

Directors
The current directors who served during
the 2017 financial year are listed on pages
78 and 79. Ian King also served as a
director until his retirement on 30 June
2017. Revathi Advaithi was appointed
to the Board on 1 January 2018.

Dividend
An interim dividend of 8.8p per share was
paid on 30 November 2017. The directors
propose a final dividend of 13p per ordinary
share. Subject to shareholder approval, the
final dividend will be paid on 1 June 2018 to
shareholders on the share register on 20 April
2018. Information on dividend waivers is given
on page 185.

Annual General Meeting (AGM)
The Company’s AGM will be held on 10 May
2018. The Notice of Annual General Meeting
is enclosed with this Annual Report and details
the resolutions to be proposed at the meeting.

Certain information in the Strategic report
The following items are set out in the Strategic
report on pages 1 to 71:

– disclosures in relation to the use of financial

instruments;

– particulars of important events affecting
the Group which have occurred since
31 December 2017;

– an indication of likely future developments

in the business of the Group;

– an indication of the activities of the Group
in the field of research and development;

– actions taken to introduce, maintain or

develop arrangements aimed at employees;
and

– greenhouse gas emissions.

Office of Fair Trading undertakings
As a consequence of the merger between
British Aerospace and the former Marconi
Electronic 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,
Energy and Industrial Strategy). 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 half-year results announcement on
2 August 2017, the Group made the following
statement, which is regarded as a profit
forecast for the purposes of the Financial
Conduct Authority’s Listing Rule 9.2.18
(and which amended the US dollar planning
rate from the profit forecast made in the
Group’s full-year results announcement on
23 February and in the Annual Report 2016):

“In aggregate, we expect the Group’s
underlying earnings per share for 2017 to be
5% to 10% higher than full-year underlying
earnings per share in 2016 of 40.3p. This
outlook remains unchanged despite moving
the US dollar planning rate for the year from
$1.25 to $1.28.”

Underlying earnings per share was 43.5p
in 2017.

Employees
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.

Political donations
No political donations were made in 2017.

Issued share capital
As at 31 December 2017, BAE Systems’
issued share capital of £86,686,002 comprised
3,467,440,044 ordinary shares of 2.5p each
and one Special Share of £1.

Treasury shares
As at 1 January 2017, the number of shares
held in treasury totalled 291,449,361 (having
a total nominal value of £7,286,234 and
representing 8.4% of the Company’s called up
share capital at 1 January 2017). During 2017,
the Company used 10,216,622 treasury shares
(having a total nominal value of £255,416 and
representing 0.3% of the Company’s called up
share capital at 31 December 2017) to satisfy
awards under the Free and Matching elements
of the Share Incentive Plan (5,457,845 shares
in aggregate), awards under the Free and
Matching elements of the International Share
Incentive Plan (314,147 shares in aggregate),
awards vested under the Performance Share
Plan (486,223 shares), awards vested under
the Restricted Share Plan (861,480 shares), and
options exercised under the Executive Share
Option Plan (3,096,927 shares). The treasury
shares utilised in respect of the Share Incentive
Plan, the International Share Incentive Plan
and the Restricted Share Plan were disposed
of by the Company for nil consideration.
The 3,096,927 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 £12,047,653.
As at 31 December 2017, the number of
shares held in treasury totalled 281,232,739
(having a total nominal value of £7,030,818
and representing 8.1% of the Company’s
called up share capital at 31 December 2017).

The rights to treasury shares are restricted
in accordance with the Companies Act and,
in particular, the voting and dividend rights
attaching to these shares are automatically
suspended.

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– 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 Conduct
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
Long-Term Incentive Plan 2014, Deferred
Bonus Plan, Performance Share Plan,
Restricted Share Plan, Share Incentive
Plan, International Share Incentive Plan,
Group All-Employee Free Shares Plan and
International Profit Sharing Scheme are
subject to restrictions on the transfer of
shares prior to vesting and/or release.

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 2017 (and unchanged as
at 21 February 2018), the Company had been
advised of the following significant direct and
indirect interests in the issued ordinary share
capital of the Company:

Name of shareholder

AXA S.A. and its group of companies

Barclays PLC

BlackRock, Inc.

Percentage
notified

5.00%

3.98%

5.00%

The Capital Group Companies, Inc.

10.11%

Franklin Resources Inc., and affiliates

Invesco Limited

Silchester International Investors LLP

4.92%

4.97%

3.01%

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, Energy and
Industrial Strategy (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;

132

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Annual Report 2017

Statutory and other information
continued

Exercise of rights of shares in employee
share schemes
The trustees of the employee trusts do not
seek to exercise voting rights on shares held
in the employee trusts other than on the
direction of the underlying beneficiaries.
No voting rights are exercised in relation to
shares unallocated to individual beneficiaries.

Restrictions on voting deadlines
The notice of any general meeting shall specify
the deadline for exercising voting rights and
appointing a proxy or proxies to vote in
relation to resolutions to be proposed at the
general meeting. The number of proxy votes
for, against or withheld in respect of each
resolution are publicised on the Company’s
website after the meeting.

Appointment and replacement of directors
Subject to certain nationality requirements
mentioned below, the Company may by
ordinary resolution appoint any person to
be a director.

The directors also have the power to make
appointments to the Board at any time.
Any individual so appointed will hold office
until the next AGM and shall then be eligible
for re-election.

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 not less than 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 2018 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 2017 AGM, the directors were given
the power to buy back a maximum number
of 317,752,630 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 by
Regulatory Technical Standards adopted
by the European Commission pursuant to
article 5(6) of the Market Abuse Regulation.

This power will expire at the earlier of the
conclusion of the 2018 AGM or 30 June 2018.
A special resolution will be proposed at the
2018 AGM to renew the Company’s authority
to acquire its own shares.

At the 2017 AGM, the directors were given
the power to issue new shares up to a nominal
amount of £26,476,737. This power will expire
on the earlier of the conclusion of the 2018
AGM or 30 June 2018. Accordingly, a
resolution will be proposed at the 2018 AGM
to renew the Company’s authority to issue
further new shares. At the 2017 AGM, the
directors were also given the power to issue
new issue shares up to a further nominal
amount of £26,476,737 in connection with an
offer by way of a rights issue. This authority too
will expire on the earlier of the conclusion of
the 2018 AGM or 30 June 2018, however, no
resolution to renew this additional authority
will be proposed at the 2018 AGM.

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– In June 2017, BAE Systems Surface Ships
Limited entered into a contract with the
MoD for the manufacture of the first
batch of three Type 26 frigates. Where the
MoD considers that a proposed change of
control of BAE Systems Surface Ships Limited
would be contrary to the defence, national
security or national interest of the UK or
where the change of control would result
in increased costs to the MoD under the
contract, then the change of control shall
not proceed until agreement with the
MoD is established. If there is a change of
control without notice or notwithstanding
the objection of the MoD on such grounds,
then the MoD may terminate the contract
with immediate effect.

– The MSDF agreement between BAE Systems
Surface Ships Limited and the MoD became
effective on 1 October 2014 and establishes
a framework until March 2019 for the
provision of surface ship support work
and services relating to HM Naval Base
Portsmouth. Where the MoD considers
that a proposed change of control of
BAE Systems Surface Ships Limited would
be contrary to the defence, national security
or national interest of the UK, then the
change of control shall not proceed until
agreement with the MoD is established.
If there is a change of control without
notice or notwithstanding the objection
of the MoD, the MoD shall be entitled
to terminate the MSDF.

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.

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 2017 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 12 December
2013 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 2017.

– The Company has entered into a Restated
and Amended Shareholders Agreement
with European Aeronautic Defence and
Space Company EADS N.V. (EADS) and
Finmeccanica S.p.A. (Finmeccanica) relating
to MBDA S.A.S. dated 18 December 2001
(as amended). In the event that control of
the Company passes to certain specified
third-party acquirors, the agreement allows
EADS and Finmeccanica to exercise an
option to terminate certain executive
management level nomination and voting
rights, and certain shareholder information
rights of the Company in relation to the
MBDA joint venture. Following the exercise
of this option, the Company would have
the right to require the other shareholders
to purchase its interest in MBDA at fair
market value.

The Company and EADS have agreed
that if Finmeccanica acquires a controlling
interest in the Company, EADS will increase
its shareholding in MBDA to 50% by
purchasing the appropriate number of
shares in MBDA at fair market value.

– The Company, BAE Systems, Inc.,

BAE Systems (Holdings) Limited and
BAE Systems Holdings Inc. entered into
a Special Security Agreement dated
23 October 2015 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.

134

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Annual Report 2017

Statutory and other information
continued

– In December 2011, BAE Systems Marine
Limited entered into a contract with the
MoD for the design of the Dreadnought
submarines. Where the MoD considers that
a change of control of BAE Systems Marine
Limited would be contrary to the defence,
national interest or national security of the
UK, then the change of control shall not take
place until agreement is reached with the
MoD on how to proceed. In the event that
there is a change of control notwithstanding
the objection of the MoD on such grounds,
the MoD shall be entitled to terminate the
contract with immediate effect.

– In September 2016, BAE Systems Marine
Limited entered into a contract with the
MoD for the first phase of manufacture
of Boat 1 of the Dreadnought Class
programme. The MoD is entitled to
terminate the contract in the event of a
change of control of BAE Systems Marine
Limited, provided that the MoD must act
reasonably in exercising this right.

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
As detailed on page 82, following the
conclusion of a formal tender process
led by the Company’s Audit Committee,
the Board has approved the proposed
appointment of Deloitte LLP as the
Company’s auditors for the financial year
ending 31 December 2018, subject to
approval by Company’s shareholders at
the AGM on 10 May 2018.

– In August 2008, BAE Systems Land

Systems (Munitions & Ordnance) Limited
(now BAE Systems Global Combat Systems
Munitions Limited) and the MoD entered
into a 15-year partnering agreement for
the provision of ammunition to UK Forces
(the Munitions Acquisition Supply Solution
(MASS) partnering agreement). Where
the MoD considers that a proposed change
of control of BAE Systems Global Combat
Systems Munitions Limited would be
contrary to the defence, national security
or national interest of the UK, then the
change of control shall not proceed until
agreement with the MoD is established.
In the event that there is a change of control
of BAE Systems Global Combat Systems
Munitions Limited, notwithstanding the
objection of the MoD on such grounds,
the MoD may, having followed the dispute
resolution process, terminate the MASS
agreement for default.

– In November 2012, BAE Systems Marine
Limited entered into a contract with the
MoD for the design, construction, testing
and commissioning of Boat 4 of the Astute
Class programme. In November 2015,
BAE Systems Marine Limited entered into
a contract with the MoD for the design,
construction, testing and commissioning
of Boat 5 of the Astute Class programme.
In March 2016, BAE Systems Marine
Limited entered into a contract with the
MoD for the design, construction, testing
and commissioning of Boat 6 of the
Astute Class Programme. Where the MoD
considers that a proposed change of control
of BAE Systems Marine Limited would be
contrary to the defence, national security
or national interest of the UK, then the
change of control shall not proceed until
agreement is established with the MoD.
In the event that there is a change of
control of BAE Systems Marine Limited,
notwithstanding the objection of the MoD
on such grounds, the MoD shall be entitled
to terminate the agreements immediately.

Statement of directors’ responsibilities
in respect of the Annual Report and the
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 as adopted by the European Union
(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, including
Financial Reporting Standard (FRS) 101,
Reduced Disclosure Framework.

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, relevant, reliable 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;

– assess the Group and parent company’s
ability to continue as a going concern,
disclosing, as applicable, matters related
to going concern; and

– use the going concern basis of accounting
unless they either intend to liquidate the
Group or the parent company or to cease
operations, or have no realistic alternative
but to do so.

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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.

The directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the parent
company’s transactions and disclose with
reasonable accuracy at any time the financial
position of the parent company and enable
them to ensure that its financial statements
comply with the Companies Act 2006. They
are responsible for such internal control as
they determine is necessary to enable the
preparation of financial statements that are
free from material misstatement, whether
due to fraud or error, and 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 strategic report, directors’
report, directors’ remuneration report
and corporate governance statement that
complies 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.

Directors’ report
The Directors’ report was approved by the board of directors on 21 February 2018.

David Parkes
Company Secretary

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 Strategic report and Directors’

report, taken together, include 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
position and performance, business model
and strategy.

Sir Roger Carr

Chairman

Charles Woodburn

Chief Executive

Jerry DeMuro

President and Chief
Executive Officer of
BAE Systems, Inc.

Peter Lynas

Group Finance Director

Revathi Advaithi

Non-executive director

Elizabeth Corley

Non-executive director

Harriet Green

Non-executive director

Chris Grigg

Non-executive director

Paula Rosput Reynolds Non-executive director

Nick Rose

Ian Tyler

Non-executive director

On behalf of the Board

Sir Roger Carr
Chairman
21 February 2018

136

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Annual Report 2017

Independent Auditor’s report
to the members of BAE Systems plc only

Opinions and conclusions arising
from our audit
1. Our opinion is unmodified
We have audited the financial statements of
BAE Systems plc (the Company) for the year
ended 31 December 2017 which comprise the
Consolidated income statement, the Consolidated
statement of comprehensive income, the
Consolidated statement of changes in equity,
the Consolidated balance sheet, the Consolidated
cash flow statement, the Company Statement of
comprehensive income, the Company Statement
of changes in equity, the Company Balance sheet
and the related notes, including the accounting
policies, on pages 144 to 207.

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 2017 and
of the Group’s profit for the year then ended;

– the Group financial statements have been

properly prepared in accordance with International
Financial Reporting Standards as adopted by the
European Union;

– the parent company financial statements have
been properly prepared in accordance with
UK accounting standards, including FRS 101,
Reduced Disclosure Framework; 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.

Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK)
(ISAs (UK)) and applicable law. Our responsibilities
are described below. We believe that the audit
evidence we have obtained is a sufficient and
appropriate basis for our opinion. Our audit
opinion is consistent with our report to the
Audit Committee.

We were appointed as auditor by the directors
during the period of the Company’s incorporation
in 1981. The period of total uninterrupted
engagement is for the 37 financial years ended
31 December 2017. We have fulfilled our ethical
responsibilities under, and we remain independent
of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard
as applied to listed public interest entities. No
non-audit services prohibited by that Standard
were provided during 2017 by KPMG.

2. Key audit matters: our assessment
of risks of material misstatement
Key audit matters are those matters that, in our
professional judgement, were of most significance
in the audit of the Group financial statements
and include the most significant assessed risks
of material misstatement (whether or not due to
fraud) identified by us, including those which had
the greatest effect on: the overall audit strategy; the
allocation of resources in the audit; and directing
the efforts of the engagement team. We summarise
below the key audit matters, in decreasing order
of audit significance, in arriving at our audit opinion
above, together with our key audit procedures to
address those matters and, as required for public
interest entities, our results from those procedures.
These matters were addressed, and our results are
based on procedures undertaken, in the context
of, and solely for the purpose of, our audit of the
financial statements as a whole, and in forming
our opinion thereon, and consequently are
incidental to that opinion, and we do not provide
a separate opinion on these matters.

Group financial statements

2.1. Net retirement benefit obligations
Refer to page 84 (Audit Committee report) and pages
174 to 183 (accounting policy and financial disclosures)

Group’s share of the net IAS 19 deficit:
£3,920m (2016 £6,054m)

Risk versus 2016:

The risk: Subjective valuation
The valuation of the defined benefit pension deficit
depends on a number of judgemental assumptions
and estimates, including the discount rates used to
calculate the current value of the future payments
the Group expects to pay pensioners, the rate of
inflation that must be incorporated in the estimate
of the future pension payments and the life
expectancy of pension scheme members.

There is a considerable amount of judgement
required in setting the above assumptions and,
given the size of the schemes, a small change in the
assumptions and estimates may have a significant
impact on the retirement benefit obligations.

Further assumptions are made in the determination
of the Group’s share of assets and liabilities of the
multi-employer schemes in which it participates
and the corresponding amounts attributed to
other participating employers.

Our response
Our audit procedures included:

Our actuarial expertise: We used our own
actuarial specialists to challenge key assumptions
and estimates used in the calculation of the pension
deficit. The key assumptions and estimates we
tested included the discount rate, inflation and life
expectancy assumptions that were applied to the
valuation. We also compared the IAS 19 valuation
with the triennial funding valuations of the UK
schemes notwithstanding that they were prepared
on a different basis and as at different dates.

Benchmarking assumptions: We performed
a comparison of key assumptions against our
own benchmark ranges which are derived from
externally-available data as well as comparing
against those used by other companies reporting
on the same period.

Methodology assessment: We used our own
actuarial specialists to assess the appropriateness
and consistency of the methodology applied
by management in setting the key assumptions.
We challenged the reasons for any changes
in methodology and considered the presence
of indicators for bias.

Multi-employer allocation: We challenged
management in respect of their selection of the
basis upon which to allocate a portion of the
multi-employer retirement benefit obligations
to other participating employers and, in respect of
the largest participating employer (being MBDA),
agreed the amount allocated to their records.

Assessing transparency: We considered the
adequacy of the Group’s disclosure in respect of
retirement benefits, in particular the net retirement
benefit obligation and the assumptions used, which
are set out in note 21 to the financial statements.

Results
We found the valuation of the net retirement
benefit obligation to be acceptable (2016 result:
acceptable).

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2.2. Recognition of revenues and profits
on long-term contracts
Refer to page 84 (Audit Committee report) and pages
148 to 150 (accounting policy and financial disclosures)

Revenues: £11,910m (2016 £11,659m)

Risk versus 2016:

The risk: Subjective estimate
Long-term contracts include complex technical
and commercial requirements and often specify
performance milestones to be achieved throughout
the contract period, which can last many years.
At each balance sheet date, estimates and
assumptions involving a high degree of judgement
and estimation uncertainty are required in order to:
– assess the proportion of revenues to recognise
in line with milestones achieved and progress
made on contracts;

– forecast the outturn profit margin on each

contract, incorporating appropriate allowances
for technical and commercial risks related to
performance milestones yet to be achieved,
particularly in the case of fixed-price
contracts; and

– appropriately identify, value and provide for

loss-making contracts.

The directors have detailed procedures and
processes, called Lifecycle Management (LCM),
in place to manage the commercial, technical
and financial aspects of long-term contracts.
The LCM process includes the regular preparation
of a Contract Status Report (CSR), which includes
key accounting and forecast information for the
relevant contract.

The contracts requiring the highest degree of
judgement that occupied a significant proportion
of the audit effort included:
– Typhoon aircraft (European, Saudi and Omani);
– Astute Class submarines;
– Queen Elizabeth Class aircraft carrier;
– US commercial shipbuilding contracts; and
– Saudi British Defence Co-operation Programme.

2.3. Valuation of goodwill
Refer to page 85 (Audit Committee report) and pages
158 to 160 (accounting policy and financial disclosures)

Goodwill: £9,996m (2016 £10,902m)

Risk versus 2016:

The risk: Forecast-based valuation
The Group holds a significant amount of goodwill
relating to UK and overseas (principally US)
acquisitions during the past 20 years. The Group
estimates recoverable amounts based on value in
use which requires significant estimation and
judgement in forecasting future cash flows and
determining discount rates.

The US Department of Defense fiscal year 2018
budget and the current programme of work
support the planning assumptions for the Group’s
US businesses. However, future year budgets and
the allocation of the budget between the Group
and its competitors remains uncertain. This places
continued importance on the US business to secure
export contracts. Both of these factors contribute
to the risk that the goodwill allocated to the
Group’s US Cash-Generating Units (CGUs) may
not be recoverable, although we consider this
risk to have reduced from the prior year.

The Applied Intelligence CGU with an allocated
goodwill balance of £0.2bn at the reporting date
(2016 £0.6bn) operates in a highly competitive and
fragmented market where significant investment is
required for growth and where the future business
pipeline is much shorter than in most other
business units in the Group. As such, we consider
the uncertainty in forecasting cash flows higher
and the valuation of this CGU to have a higher risk
due to these sector-related factors. An impairment
charge of £384m was recognised in respect of this
CGU in 2017 (2016 £nil).

The remaining goodwill of £1.9bn is primarily
allocated to CGUs based in the UK. Whilst there
remains an inherent risk in the forecasting of
future cash flows for these businesses, many of
them hold sizeable order backlogs, much of which
is with government agencies, providing increased
support to the forecasts. We consider the
valuation risks around these CGUs to be lower
than Applied Intelligence.

Our response
Our audit procedures included:

Control design, observation and operation:
We tested the design and operating effectiveness
of key controls within the LCM process that support
contract-related balances, including:
– transactional controls that underpin the production
of long-term contract-related balances, including
cost information on contracts: We tested the
operation of purchase-to-pay cycle and payroll
controls;

– programme-level controls: We inspected

results from periodic peer reviews performed
by experienced employees independent to the
contract to challenge assumptions made and
judgements taken at pre-determined stages
of the contract lifecycle; and

– higher-level controls: We observed monthly
contract review meetings, quarterly business
unit review meetings and Group-level
review meetings.

For significant contracts (including those listed in
our audit risk description), determined on the basis
of the current and future technical or commercial
complexity, financial significance and any forecast
to be in significant loss-making positions:

Personnel interviews: We obtained an understanding
of the performance and status of the contract
through discussion with contract project teams,
Group and business unit directors, as well as through
attendance at project teams’ contract review
meetings. We applied our cumulative knowledge
of the status of the contracts and challenged the
appropriateness of the contract position at the
reporting date, including any central overlays to
positions reported by subsidiaries and whether
or not there were any indications of management
override of controls or management bias.

Benchmarking assumptions: We challenged the
Group’s positions through the examination of
externally-available evidence, such as customer
correspondence, and, in the case of one significant
programme, met the customer directly to further
corroborate the status of contracts and
recoverability of work-in-progress and receivables.

Our valuations expertise: In the case of one specific
project, we used our own valuation specialist to
assess the valuation performed on behalf of the
Group by an external valuation expert.

Results
The results of our testing were satisfactory and we
considered the amount of revenue and profit on
long-term contracts recognised to be acceptable
(2016 result: acceptable).

138

BAE Systems
Annual Report 2017

Independent Auditor’s report
continued

Our response
Our audit procedures included:

Historical comparison: Assessing the reasonableness
of the directors’ assumptions by reference to past
performance.

Benchmarking assumptions: Assessing the
reasonableness of the directors’ assumptions by
reference to publicly-available information, such
as future defence expenditure. We also compared
the directors’ assumptions to externally-derived
data (for example, bond yields and inflation
statistics) and internally-derived data to challenge
other key inputs, such as projected economic
growth and gearing leverage.

Comparing valuations: We compared the sum
of the discounted cash flows to the Group’s
market capitalisation to assess the reasonableness
of those cash flows and challenged management’s
explanation in reconciling the two.

Our sector experience: Our valuation specialists
assisted in evaluating the reasonableness of
assumptions and methodologies underlying the
discount rates adopted by the directors, including
the discount rate applied in the valuation of the
Applied Intelligence CGU.

Sensitivity analysis: We have run scenario-specific
models, including changes to the discount rate,
forecast cash flows and break-even analyses
to stress-test the valuations of CGUs’ recoverable
amounts.

Assessing transparency: We considered the
adequacy of the Group’s disclosure in respect
of the sensitivities to changes in key assumptions
and the risks inherent in the valuation of goodwill.

Results
We found the Group’s assessment of the
recoverable amount of goodwill to be acceptable
(2016 result: acceptable).

2.4. Tax accruals
Refer to page 85 (Audit Committee report) and page 171
(accounting policy and financial disclosures)

2.5. Deferred tax assets
Refer to page 85 (Audit Committee report) and pages
169 to 171 (accounting policy and financial disclosures)

Tax accruals: £351m (2016 £365m)

Deferred tax assets: £724m (2016 £1,251m)

Risk versus 2016:

The risk: Dispute outcomes
Accruals for tax contingencies require the directors
to make judgements and estimates in relation to
tax risks. This is one of the key judgement areas
that our audit is concentrated on due to the Group
operating in a number of tax jurisdictions, the
complexities of local and international tax legislation,
and the number of years which some matters can
take to resolve.

The tax matters are at various stages, from
the first identification of risks to discussions
with tax authorities and through to tax tribunal
or court proceedings.

Our response
Our audit procedures included:

Our taxation expertise: Our tax specialists assisted
in assessing the Group’s tax positions, its exposure
to future cash outflows and the assumptions
used by the directors to estimate the tax accruals.
This included an inspection of the Group’s
correspondence with the relevant tax authorities
and the Group’s external tax advisers.

Benchmarking assumptions: We used our
knowledge and experience of the application of
the international and local legislation by the relevant
authorities and courts in order to challenge the
positions taken by the directors. In support of
these positions, we separately met with certain
key external tax advisers of the Group. In respect
of certain matters, we compared the position taken
by the directors with outcomes of similar cases.

Assessing transparency: We have also considered
the adequacy of the Group’s tax disclosures.

Results
The results of our testing were satisfactory and
we found the resulting estimate of tax accruals
to be acceptable (2016 result: acceptable).

The risk: Subjective estimate
The directors are required to estimate the valuation
of deferred tax assets and to record those assets
to the extent their recovery is probable. This requires
a significant element of judgement.

The majority of the deferred tax asset balance
is in relation to the Group’s retirement benefit
obligations. As a result of the reduction in the
valuation of the Group’s net share of the retirement
benefit obligations, the Group’s related deferred
tax asset has also reduced: compared with last year,
the period required for the Group to recover the
amount of deferred tax is less. For this reason, we
have determined that the audit risk has reduced
from the prior year.

Our response
Our audit procedures included:

Assessing forecasts: We assessed and challenged
the directors’ judgement as to why it is deemed
probable that the deferred tax assets recognised
will be recovered, considering:
– the appropriateness and reliability of

forecasts used by management to estimate
the recovery period;

– the timeframe of the pension deficit recovery

plan; and

– the consistency of this judgement with other

assumptions and estimates made by the directors,
for example, those used to test impairment of
assets, including goodwill.

Benchmarking assumptions: We considered the
funding arrangements agreed with the Trustees
of the UK pension schemes. We compared the
views and estimates arrived at by the directors
(as described above) with advice received by the
Trustees in arriving at the funding arrangements
on the covenant provided by the Group over the
deficit recovery periods.

Tests of detail: We analysed the calculations used
to determine the estimated recovery period and
tested the accuracy of these calculations.

Results
As a result of our work, we found the level of
deferred tax assets recognised to be acceptable
(2016 result: acceptable).

BAE Systems
Annual Report 2017

139

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Parent company financial statements

2.6. Amounts relating to Group affiliates

These comprise:

Investments in subsidiary undertakings and
participating interests: £8,439m (2016 £8,399m)

Amounts owed by subsidiary undertakings and
Group joint ventures: £2,576m (2016 £2,954m)

Amounts owed to subsidiary undertakings and
Group joint ventures: £(8,183)m (2016 £(8,461)m)

The risk: Material amounts
The carrying amount of the Company’s
investments in subsidiaries held at cost less
impairment and intercompany receivables
represent 77% (2016 79%) of the Company’s
total assets. The Company’s intercompany
liabilities represent 80% (2016 79%) of the
Company’s total liabilities.

We do not consider the valuation of these
investments and recovery of intercompany
receivables or completeness of intercompany
liabilities to be at a high risk of significant
misstatement, or to be subject to a significant
level of judgement. However, due to their
materiality in the context of the Company
financial statements, this is considered to be
the area that had the greatest effect on our
overall parent company audit.

Our response
Tests of detail: We compared the investments
and receivables to the net assets of the relevant
entities to identify whether these net assets, being
an approximation of their minimum recoverable
amounts, were in excess of the investment carrying
amounts. We agreed that the intercompany
liabilities set-off against subsidiary counterparties
in the Group consolidation.

Our sector experience: We evaluated key
assumptions in the impairment models for certain
significant investments, in particular those for
profit contribution and growth, against our own
knowledge of the historic trading performance
of the relevant entities.

Control observation: We tested the automated
controls over the process for matching and
elimination of intercompany balances in the
Group consolidation.

Results
We found the assessment of the amounts recorded
to be acceptable.

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3. Our application of materiality and an overview of the scope of our audit
The materiality for the Group financial statements as
a whole was set at £55m (2016 £55m), determined
with reference to a benchmark of Group profit
before taxation from continuing operations, of
which it represents 4.9% (2016 4.8%).

exceeding £3m for income statement items, in
addition to other identified misstatements that
warranted reporting on qualitative grounds.

Materiality for the parent company financial
statements as a whole was set at £32m (2016 £30m),
as communicated by the Group audit team. This is
lower than the materiality we would otherwise
have determined with reference to a benchmark
of company net assets and represents 0.8%
(2016 0.8%) of the Company’s net assets.

We agreed to report to the Audit Committee any
corrected or uncorrected identified misstatements

2017

Audits for Group reporting purposes1

Specified risk-focused audit procedures2

Total

2016

Audits for Group reporting purposes1

Specified risk-focused audit procedures2

Total

Of the Group’s 41 (2016 41) reporting components,
we subjected 11 (2016 11) to full-scope audits for
Group purposes and 14 (2016 14) to specified
risk-focused procedures. The latter were in our
opinion not individually financially significant
enough to require an audit for Group reporting
purposes, but did present specific individual risks
that needed to be addressed.

The components within the scope of our work
accounted for the following percentages of the
Group’s results:

Number of
components

Group
revenue
%

Group
profit before
taxation
%

Group
total
assets
%

1. In the UK, US, Saudi Arabia and Australia. 2. In the UK, US and Saudi Arabia.

For the remaining components, we performed
analysis at an aggregated level to confirm our
preliminary assessment that there were no significant
risks of material misstatements within these.

The Group audit team instructed component
auditors as to the significant areas to be covered,
including the relevant risks detailed above and the
information to be reported back. The Group audit
team approved the component materiality levels,
which ranged from £2.7m to £32m (2016 £4m
to £37m), having regard to the mix of size and risk
profile across the components. The work on seven
of the 25 (2016 seven of the 25) in-scope
components was performed by component
auditors and the remainder, including the audit
of the parent company, by the Group audit team.

The Group audit team held a global audit conference
in 2014, where all significant component audit teams
came together in London to consider the audit risk
and strategy. Similar planning days took place in
2017 with the most significant component teams
from the UK, US and Saudi Arabia. In addition, the
Group audit team visited component teams in the
UK, US, Saudi Arabia and Australia to assess the
audit risk and strategy, discuss and moderate the
results of controls testing and discuss preliminary
findings of audit procedures. Video and telephone
conference meetings were also held with these
component auditors and any others in our audit
scope that were not physically visited. At these visits
and meetings, the findings reported to the Group
audit team were discussed in more detail, and any
further work required by the Group audit team
was then performed by the component auditor.

4. We have nothing to report on going concern
We are required to report to you if:
– we have anything material to add or draw

attention to in relation to the directors’ statement
in the financial statements on page 142 on the
use of the going concern basis of accounting with
no material uncertainties that may cast significant
doubt over the Group and Company’s use of that
basis for a period of at least 12 months from the
date of approval of the financial statements; or

– the related statement under the Listing Rules
set out on page 81 is materially inconsistent
with our audit knowledge.

We have nothing to report in these respects.

5. We have nothing to report on the other
information in the Annual Report
The directors are responsible for the other
information presented in the Annual Report
together with the financial statements. Our opinion
on the financial statements does not cover the other
information and, accordingly, we do not express an
audit opinion or, except as explicitly stated below,
any form of assurance conclusion thereon.

Our responsibility is to read the other information
and, in doing so, consider whether, based on our
financial statements audit work, the information
therein is materially misstated or inconsistent with
the financial statements or our audit knowledge.
Based solely on that work we have not identified
material misstatements in the other information.

140

BAE Systems
Annual Report 2017

Independent Auditor’s report
continued

Strategic report and Directors’ report
Based solely on our work on the other information:
– we have not identified material misstatements

in the Strategic report and the Directors’ report;

– in our opinion the information given in those
reports for the financial year is consistent with
the financial statements; and

– in our opinion those reports have been prepared
in accordance with the Companies Act 2006.

Directors’ remuneration report
In our opinion the part of the Directors’
remuneration report to be audited has been
properly prepared in accordance with the
Companies Act 2006.

Disclosures of principal risks and longer-term
viability
Based on the knowledge we acquired during our
financial statements audit, we have nothing material
to add or draw attention to in relation to:
– the directors’ confirmation within the viability

statement on page 81 that they have carried out
a robust assessment of the principal risks facing
the Group, including those that would threaten
its business model, future performance, solvency
and liquidity;

– the principal risks disclosures describing these

risks and explaining how they are being managed
and mitigated; and

– the directors’ explanation in the viability statement
of how they have assessed the prospects of the
Group, over what period they have done so and
why they considered that period to be
appropriate, and their statement as to whether
they have a reasonable expectation that the
Group will be able to continue in operation and
meet its liabilities as they fall due over the period
of their assessment, including any related
disclosures, drawing attention to any necessary
qualifications or assumptions.

Under the Listing Rules, we are required to review
the viability statement. We have nothing to report
in this respect.

Corporate governance disclosures
We are required to report to you if:
– we have identified material inconsistencies

between the knowledge we acquired during
our financial statements audit and the directors’
statement that they consider that the annual
report and financial statements taken as a whole
is fair, balanced and understandable, and provides
the information necessary for shareholders to
assess the Group’s position and performance,
business model and strategy; or

– the section of the Annual Report describing
the work of the Audit Committee does not
appropriately address matters communicated
by us to the Audit Committee.

We are required to report to you if the part of the
Director’s report section relating to the Company’s
compliance does not properly disclose a departure
from the 11 provisions of the UK Corporate
Governance Code specified by the Listing Rules
for our review.

We have nothing to report in these respects.

6. We have nothing to report on the other
matters on which we are required to report
by exception
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.

We have nothing to report in these respects.

7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out
on pages 134 and 135, the directors are responsible
for: the preparation of the financial statements,
including being satisfied that they give a true and
fair view; such internal control as they determine is
necessary to enable the preparation of financial
statements that are free from material misstatement,
whether due to fraud or error; assessing the Group
and parent company’s ability to continue as a going
concern, disclosing, as applicable, matters related to
going concern; and using the going concern basis of
accounting unless they either intend to liquidate the
Group or the parent company or to cease operations,
or have no realistic alternative but to do so.

Auditor’s responsibilities
Our objectives are to obtain reasonable assurance
about whether the financial statements as a whole
are free from material misstatement, whether due
to fraud or other irregularities (see below), or error,
and to issue our opinion in an auditor’s report.
Reasonable assurance is a high level of assurance,
but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements
can arise from fraud, other irregularities or error
and are considered material if, individually or in
aggregate, they could reasonably be expected
to influence the economic decisions of users taken
on the basis of the financial statements.

A fuller description of our responsibilities is
provided on the FRC’s website at www.frc.org.uk/
auditorsresponsibilities

Irregularities – ability to detect
Our audit aimed to detect non-compliance with
relevant laws and regulations (irregularities) that
could have a material effect on the financial
statements. In planning and performing our audit,
we considered the impact of laws and regulations
in the specific areas of export control, defence
contracting and anti-bribery and corruption
legislation. We identified these areas through
discussion with the directors and other management
(as required by auditing standards), from our sector
experience and from inspection of the Group’s legal
correspondence. In addition, we had regard to laws
and regulations in other areas, including financial
reporting, and company and taxation legislation.

We considered the extent of compliance with those
laws and regulations that directly affect the financial
statements, being anti-bribery and corruption and
as part of our procedures on the related financial
statement items. For the remaining laws and
regulations, we made enquiries of directors and
other management (as required by auditing
standards), and inspected legal correspondence.

We communicated identified laws and regulations
throughout our team and remained alert to any
indications of non-compliance throughout the
audit. This included communication from the
Group to component audit teams of relevant laws
and regulations identified at Group level, with a
request to report on any indications of potential
existence of irregularities in these areas, or other
areas directly identified by the component team.

As with any audit, there remained a higher
risk of non-detection of irregularities, as these
may involve collusion, forgery, intentional
omissions, misrepresentations or the override
of internal controls.

8. The purpose of our audit work and
to whom we owe our responsibilities
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.

Ian Starkey
Senior Statutory Auditor

For and on behalf of
KPMG LLP
Statutory Auditor

Chartered Accountants
15 Canada Square
London, E14 5GL
21 February 2018

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Financial
statements

BAE Systems
Annual Report 2017

141

Group accounts

Preparation

Consolidated income statement

Consolidated statement
of comprehensive income

Consolidated statement
of changes in equity

Consolidated balance sheet

Consolidated cash flow statement

1. Segmental analysis

2. Operating costs

3. Employees

4. Other income

5. Net finance costs

6. Taxation expense

7. Earnings per share

8. Intangible assets

9. Property, plant and equipment

10. Investment property

11. Equity accounted investments

12. Trade and other receivables

13. Other financial assets and liabilities

14. Deferred tax

15. Inventories

142

144

145

146

147

148

151

152

153

154

157

158

161

164

165

167

168

169

171

16. Current tax

17. Cash and cash equivalents

18. Geographical analysis of assets

19. Loans and overdrafts

20. Trade and other payables

21. Retirement benefits

22. Provisions

23. Share capital and other reserves

24. Operating business cash flow

25. Movement in assets and liabilities
arising from financing activities

26. Net debt

27. Fair value measurement

28. Financial risk management

29. Share-based payments

30. Related party transactions

31. Contingent liabilities

32. Commitments

33. Information about

related undertakings

34. Adoption of IFRS 15, Revenue

from Contracts with Customers

171

172

173

174

184

185

187

188

189

190

192

193

194

195

199

Company accounts

Company statement of
comprehensive income

Company statement
of changes in equity

Company balance sheet

Notes to the Company accounts

202

203

204

Group accounting policies
Accounting policies are included within
the relevant note to the Group accounts.

142

BAE Systems
Annual Report 2017

Group
accounts

Preparation

Basis of preparation
The consolidated financial statements of BAE Systems plc have been prepared on a going concern basis, as discussed in the Directors’ report
on page 81, 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).

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, with the resulting exchange differences
recognised in the income statement.

Significant accounting policies
The significant accounting policies applied in the preparation of these consolidated financial statements are set out in the relevant notes. These
policies have been applied consistently to all the years presented, unless otherwise stated. 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.

Critical accounting policies
Certain of the Group’s significant 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 critical accounting policies are listed
below and explained in more detail in the relevant notes to the Group accounts:

Critical accounting policy

Description

Revenue and profit recognition

Carrying value of goodwill

Deferred tax asset on retirement
benefit obligations

Tax provisions

Valuation of retirement benefit obligations

The majority of long-term contracts are accounted for under IAS 11, Construction Contracts.
Revenue on long-term contracts is recognised when performance milestones have been
completed. Profit is recognised progressively as risks have been mitigated or retired.
The ultimate profitability of long-term contracts is 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.

Goodwill is not amortised, but is tested annually for impairment and carried at cost less
accumulated impairment losses. For the purposes of impairment testing, goodwill is
allocated to Cash-Generating Units on a consistent basis.
The impairment review calculations require the use of estimates of the future profitability
and cash-generating ability of the acquired businesses based on the Group’s five-year
Integrated Business Plan and the pre-tax discount rate used in discounting these
projected cash flows.

The Group has recognised a deferred tax asset in respect of the deficits in its pension/
retirement schemes.
It is management’s judgement that the Group will generate sufficient taxable profits
to recover the net deferred tax asset recognised. This judgement requires the use of
estimates of future taxable profits based on the Group’s Integrated Business Plan.

Provision is made for known issues based on management’s interpretation of country-
specific legislation and the likely outcome of negotiations or litigation. The Group’s
approach is to consider each uncertain tax position separately. Where management
considers it is probable that there will be a future outflow of funds to a tax authority,
a provision is recognised. The position is reviewed on an ongoing basis.
Provisions are measured using management’s best estimate of the most likely amount,
being the single most likely amount in a range of possible outcomes. The Group
discloses any significant uncertainties in relation to tax matters to the relevant tax
authority. The resolution of tax positions taken by the Group can take a considerable
period of time to conclude and, in some cases, it is difficult to predict the outcome.

Defined benefit pension scheme accounting valuations are prepared by independent
actuaries. The liabilities of the pension schemes are valued based on a number of
actuarial assumptions.
For each of the actuarial assumptions used there is a range of possible values and
management estimates 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.

Notes

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143

Preparation continued

Judgements made in applying accounting policies
In the course of preparing the financial statements, no judgements have been made in the process of applying the Group’s accounting policies,
other than those involving estimates, that have had a significant effect on the amounts recognised in the financial statements.

Sources of estimation uncertainty
The application of the Group’s accounting policies requires the use of estimates. In the event that these estimates prove to be incorrect, there
may be an adjustment to the carrying amounts of assets and liabilities within the next financial year. The significant estimates in relation to the
Group’s critical accounting policies are set out above. The only significant risk of a material adjustment to the carrying amounts of assets and
liabilities during 2018 relates to the determination of the discount rate and inflation assumptions underpinning the valuation of the liabilities
of the Group’s defined benefit pension schemes. A description of the discount rate and inflation assumptions, together with sensitivity analysis,
is set out in note 21 to the Group accounts.

Changes in accounting policies
IFRS 9, Financial Instruments
IFRS 9 is effective from 1 January 2018. The standard, replacing the requirements of IAS 39, Financial Instruments: Recognition and Measurement,
introduces new requirements for recognition, classification and measurement, a new impairment model for financial assets based on expected
credit losses, and simplified hedge accounting.

Any changes to the classification and measurement of financial instruments are applied retrospectively by adjusting opening retained earnings
at 1 January 2018. There is no requirement to restate comparatives for prior periods. The Group has determined that there is no adjustment to
retained earnings on transition to IFRS 9.

IFRS 15, Revenue from Contracts with Customers
IFRS 15 is effective from 1 January 2018. The standard requires the identification of performance obligations in contracts with customers and
allocation of the total contractual value to each of the performance obligations identified. Revenue is recognised as each performance obligation
is satisfied either at a point in time or over time. The standard will replace IAS 11, Construction Contracts, IAS 18, Revenue, and all other existing
revenue accounting requirements within IFRS. The impact of the adoption of IFRS 15 on BAE Systems is set out in note 34.

IFRS 16, Leases
IFRS 16 is effective from 1 January 2019. The standard, which replaces IAS 17, Leases, was EU endorsed in October 2017. Whilst lessor accounting
is similar to IAS 17, lessee accounting is significantly different. Under IFRS 16, the Group will recognise within the balance sheet a right-of-use
asset and a lease liability for future lease payments in respect of all leases unless the underlying assets are of low value or the lease term is 12
months or less. Within the income statement, rental expense on the impacted leases will be replaced with depreciation on the right-of-use asset
and interest expense on the lease liability.

As set out in note 32, BAE Systems has operating lease commitments totalling £1.6bn at 31 December 2017 and, therefore, IFRS 16 will have a
material impact on the Group. The implications of the standard are currently under review and the Group has not yet determined which transition
option will be applied. As the impact of transition is dependent on the option chosen, the Group is unable to quantify the effect at this time.

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.

A subsidiary is an entity controlled by the Group. The Group controls a subsidiary when it is exposed, or has the rights, to variable returns from
its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.

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.

Joint ventures are accounted for under the equity method where the Consolidated income statement includes the Group’s share of their profits
and losses, and the Consolidated balance sheet includes its share of their net assets within equity accounted investments.

The assets and liabilities of overseas subsidiaries and equity accounted investments are translated at the exchange rates ruling at the balance sheet
date. The 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 in equity since 1 January 2004 are recognised in the income
statement as part of the profit or loss on sale.

144

BAE Systems
Annual Report 2017

Consolidated income statement
for the year ended 31 December

Continuing operations
Sales
Deduct Share of sales by equity accounted investments
Add Sales to equity accounted investments
Revenue
Operating costs
Other income
Group operating profit
Share of results of equity accounted investments

Underlying EBITA
Non-recurring items
EBITA
Amortisation of intangible assets
Impairment of intangible assets
Financial expense of equity accounted investments
Taxation expense of equity accounted investments

Operating profit

Financial income
Financial expense
Net finance costs
Profit before taxation
Taxation expense
Profit for the year

Attributable to:

Equity shareholders
Non-controlling interests

Earnings per share

Basic earnings per share
Diluted earnings per share

2017

Notes

£m

Total
£m

2016

£m

Total
£m

1
1
1
1
2
4

1
1

1
1
5
6
1

19,626
(2,575)
1,271

19,020
(2,427)
1,197

18,322
(17,089)
131
1,364
116

17,790
(16,274)
136
1,652
90

2,034
(13)
2,021
(86)
(384)
(34)
(37)

416
(762)

1,905
(12)
1,893
(87)
–
(28)
(36)

1,480

1,742

713
(1,304)

(346)
1,134
(250)
884

854
30
884

26.8p
26.7p

(591)
1,151
(213)
938

913
25
938

28.8p
28.7p

F
n
a
n
c
i
a

l
s
t
a
t
e
m
e
n
t
s

BAE Systems
Annual Report 2017

145

Consolidated statement of comprehensive income
for the year ended 31 December

Profit for the year
Other comprehensive income
Items that will not be reclassified to the income statement:

Subsidiaries:

Remeasurements on retirement benefit schemes
Tax on items that will not be reclassified to the income statement

Equity accounted investments (net of tax)

Items that may be reclassified to the income statement:

Subsidiaries:

Currency translation on foreign currency net investments
Amounts credited to hedging reserve
Tax on items that may be reclassified to the income statement

Equity accounted investments (net of tax)

Total other comprehensive income for the year (net of tax)
Total comprehensive income for the year

Attributable to:

Equity shareholders
Non-controlling interests

1. An analysis of other reserves is provided in note 23.

Other
reserves1
£m
–

2017

Retained
earnings
£m
884

Total
£m
884

Other
reserves1
£m
–

2016

Retained
earnings
£m
938

Total
£m
938

Notes

–
–
–

2,105
(490)
53

–
–
–

(1,468)
260
(53)

(625)
59
(11)
(15)
(592)
(592)

(587)
(5)
(592)

–
–
–
–
1,668
2,552

2,522
30
2,552

(625)
59
(11)
(15)
1,076
1,960

1,935
25
1,960

1,287
96
(17)
45
1,411
1,411

1,408
3
1,411

–
–
–
–
(1,261)
(323)

1,287
96
(17)
45
150
1,088

(348)
25
(323)

1,060
28
1,088

Consolidated statement of changes in equity
for the year ended 31 December

At 1 January 2017
Profit for the year
Total other comprehensive income for the year
Share-based payments (inclusive of tax)
Net purchase of own shares
Ordinary share dividends
At 31 December 2017

At 1 January 2016
Profit for the year
Total other comprehensive income for the year
Share-based payments (inclusive of tax)
Net sale of own shares
Ordinary share dividends
Partial disposal of shareholding in subsidiary undertaking
At 31 December 2016

1. An analysis of other reserves is provided in note 23.

Attributable to equity holders of BAE Systems plc

Issued
share
capital
£m
87
–
–
–
–
–
87

87
–
–
–
–
–
–
87

Share
premium
£m
1,249
–
–
–
–
–
1,249

1,249
–
–
–
–
–
–
1,249

Other
reserves1
£m
6,685
–
(587)
–
–
–
6,098

5,277
–
1,408
–
–
–
–
6,685

Retained
earnings
£m
(4,583)
854
1,668
53
(1)
(684)
(2,693)

(3,624)
913
(1,261)
59
3
(670)
(3)
(4,583)

Non-
controlling
interests
£m
26
30
(5)
–
–
(8)
43

13
25
3
–
–
(24)
9
26

Total
£m
3,438
854
1,081
53
(1)
(684)
4,741

2,989
913
147
59
3
(670)
(3)
3,438

Total
equity
£m
3,464
884
1,076
53
(1)
(692)
4,784

3,002
938
150
59
3
(694)
6
3,464

146

BAE Systems
Annual Report 2017

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
Retirement benefit surpluses
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
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 BAE Systems plc
Non-controlling interests
Total equity

Approved by the Board on 21 February 2018 and signed on its behalf by:

C N Woodburn
Chief Executive

P J Lynas
Group Finance Director

Notes

2017
£m

2016
£m

8
9
10
11

12
21
13
14

15
12
16
13
17

19
20
21
13
14
22

19
20
13
16
22

10,378
2,230
101
384
6
387
302
226
724
14,738

723
3,586
20
89
3,271
26
7,715
22,453

(4,069)
(1,722)
(4,222)
(133)
(4)
(413)
(10,563)

(14)
(6,322)
(104)
(305)
(345)
(16)
(7,106)
(17,669)
4,784

87
1,249
6,098
(2,693)
4,741
43
4,784

11,264
2,098
110
299
6
351
223
345
1,251
15,947

744
3,305
5
204
2,769
2
7,029
22,976

(4,425)
(1,027)
(6,277)
(102)
(10)
(372)
(12,213)

–
(6,540)
(212)
(311)
(234)
(2)
(7,299)
(19,512)
3,464

87
1,249
6,685
(4,583)
3,438
26
3,464

F
n
a
n
c
i
a

l
s
t
a
t
e
m
e
n
t
s

Consolidated cash flow statement
for the year ended 31 December

Profit for the year
Taxation expense
Research and development expenditure credits
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
Loss on disposal of businesses
Cost of equity-settled employee share schemes
Movements in provisions
Decrease in liabilities for retirement benefit obligations
(Increase)/decrease in working capital:

Inventories
Trade and other receivables
Trade and other payables

Taxation paid
Net cash flow from operating activities
Dividends received from equity accounted investments
Interest received1
Purchase of property, plant and equipment, and investment property
Purchase of intangible assets
Proceeds from sale of property, plant and equipment, and investment property
Proceeds from sale of intangible assets
Purchase of subsidiary undertakings
Equity accounted investment funding
Cash flow from sale of subsidiary undertakings
Cash and cash equivalents disposed of with subsidiary undertakings
Net cash flow from investing activities
Interest paid1
Net (purchase)/sale of own shares
Equity dividends paid
Dividends paid to non-controlling interests
Cash flow from matured derivative financial instruments
Cash flow from movement in cash collateral
Cash flow from repayment of loans
Net cash flow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Effect of foreign exchange rate changes on cash and cash equivalents
Cash and cash equivalents at 31 December
Comprising:

Cash and cash equivalents
Overdrafts
Cash classified as held for sale

Cash and cash equivalents at 31 December

1. Re-presented to reclassify interest paid from investing to financing activities.

BAE Systems
Annual Report 2017

147

Notes

6
4
1
5
2
2,4
2,4
2

17
19

2017
£m
884
250
(20)
(116)
346
728
(1)
(9)
13
61
150
(138)

(29)
(449)
454
(227)
1,897
72
23
(389)
(87)
34
1
(3)
(3)
(6)
(2)
(360)
(204)
(1)
(684)
(8)
(83)
(15)
–
(995)
542
2,771
(49)
3,264

3,271
(7)
–
3,264

20161
£m
938
213
(22)
(90)
591
345
(5)
(12)
–
55
(122)
(214)

95
(93)
(263)
(187)
1,229
38
10
(408)
(82)
45
–
–
(5)
6
–
(396)
(210)
3
(670)
(24)
480
32
(286)
(675)
158
2,537
76
2,771

2,769
–
2
2,771

148

BAE Systems
Annual Report 2017

Notes to the
Group accounts

1. Segmental analysis

Revenue and profit recognition
Revenue represents income derived from the provision of goods and services by the Company and its subsidiary undertakings.

Long-term contracts
The majority of the Group’s long-term contract arrangements are accounted for under IAS 11, Construction Contracts. Revenue is recognised
when the Group has obtained the right to consideration in exchange for its performance, which is when a separately identifiable phase
(milestone) of a contract or development has been completed.

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. No profit is recognised until the outcome of a contract can be reliably estimated.
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 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 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.

Revenue from the sale of software licences is recognised on delivery to the customer when the Group has no remaining obligations to perform
and collection of the consideration is considered probable. In circumstances where the Group has future obligations to perform as part of a
software licence and related services contract, revenue is recognised over the contract term.

Revenue and profits on intercompany trading are determined on an arm’s-length basis.

Research and development
The Group undertakes research and development activities either on its own behalf or on behalf of customers.

Where the research and development activity is performed on behalf of customers, the revenue arising is recognised in the income statement
in accordance with the Group’s revenue recognition policy on long-term contracts.

Reporting segments
During the year ended 31 December 2017, the Group had the following six reporting segments:

– Electronic Systems comprises the US and UK-based electronics activities, including electronic warfare systems, 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 Applied Intelligence business, and covers

the Group’s cyber security, secure government, and commercial and financial security activities;

– Platforms & Services (US), with operations in the US, UK and Sweden, manufactures combat vehicles, weapons and munitions, and delivers

services and sustainment activities, including ship repair and the management of government-owned munitions facilities;

– Platforms & Services (UK) comprises the Group’s UK-based air, maritime, land and shared services activities;

– Platforms & Services (International) comprises the Group’s businesses in Saudi Arabia, Australia 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.

Effective 1 January 2018, the Group revised its reporting segments to reflect the organisational changes described on page 17. The Group continues
to have six reporting segments and there were no changes to the Electronic Systems, Cyber & Intelligence and Platforms & Services (US) reporting
segments. The Platforms & Services (UK) and Platforms & Services (International) management structures have been removed with the organisation
streamlined, and Air and Maritime reporting segments created.

Air comprises the Group’s UK-based air activities for European and International markets and UK-based US Programmes, and its businesses in
Saudi Arabia and Australia, together with its 37.5% interest in the pan-European MBDA joint venture. Maritime comprises the Group’s UK-based
maritime and land activities. The HQ reporting segment includes the Group’s UK-based head office and shared services activities, as well as a
49% interest in Air Astana.

These reporting segments align with the Group’s strategic direction, determined with reference to the products and services they provide,
and the markets in which they operate.

The Board (the chief operating decision maker as defined by IFRS 8, Operating Segments) monitors the results of these reporting segments
to assess performance and make decisions about the allocation of resources. Segmental performance is evaluated based on Key Performance
Indicators – sales (see page 149) and underlying EBITA (see page 150). Finance costs and taxation expense are managed on a Group basis.

BAE Systems
Annual Report 2017

149

1. Segmental analysis continued

Key Performance Indicator – Sales
Definition Revenue plus the Group’s share of revenue of equity accounted investments.

Purpose Allows management to monitor the sales performance of subsidiaries and equity accounted investments.

Sales and revenue by reporting segment

Sales

Deduct
Share of sales by equity
accounted investments

Add
Sales to equity
accounted investments

Revenue

2017
£m
3,635
1,820
2,928
7,682
4,138
287
20,490
(864)
19,626

2016
£m
3,282
1,778
2,874
7,806
3,943
233
19,916
(896)
19,020

2017
£m
(95)
–
(103)
(1,088)
(1,002)
(287)
(2,575)
–
(2,575)

2016
£m
(79)
–
(91)
(1,118)
(906)
(233)
(2,427)
–
(2,427)

2017
£m
95
–
–
1,030
–
–
1,125
146
1,271

2016
£m
79
–
–
1,011
–
–
1,090
107
1,197

2017
£m
3,635
1,820
2,825
7,624
3,136
–
19,040
(718)
18,322

2016
£m
3,282
1,778
2,783
7,699
3,037
–
18,579
(789)
17,790

Intra-group revenue

Revenue from
external customers

F
n
a
n
c
i
a

l
s
t
a
t
e
m
e
n
t
s

Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ

Intra-group sales/revenue

Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)

Sales and revenue by customer location

UK
Rest of Europe1
US
Canada
Saudi Arabia
Rest of Middle East
Australia
Rest of Asia and Pacific
Africa, and Central and South America

2017
£m
73
88
23
529
5
718

2016
£m
92
58
43
592
4
789

2017
£m
3,562
1,732
2,802
7,095
3,131
18,322

Sales

Revenue

2017
£m
4,057
2,073
7,698
100
3,228
1,235
629
503
103
19,626

2016
£m
4,033
2,174
6,920
92
4,043
720
535
369
134
19,020

2016
£m
3,190
1,720
2,740
7,107
3,033
17,790

2016
£m
3,869
1,645
6,920
92
3,808
693
534
167
62
17,790

2016
£m
11,659
3,223
2,903
5
17,790

2017
£m
3,825
1,457
7,695
100
3,107
1,149
628
314
47
18,322

2017
£m
11,910
3,547
2,854
11
18,322

Includes £0.9bn (2016 £1.0bn) generated under the Typhoon workshare agreement with Eurofighter Jagdflugzeug GmbH.

Revenue by category

Long-term contracts
Sale of goods
Provision of services
Royalty income

150

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

1. Segmental analysis continued

Revenue by major customer
Revenue from the Group’s three principal customers, which individually represent over 10% of total revenue, is as follows:

US Department of Defense
UK Ministry of Defence1
Kingdom of Saudi Arabia Ministry of Defence and Aviation

2017
£m
4,558
4,348
2,967

2016
£m
4,319
4,402
3,726

Includes £0.9bn (2016 £1.0bn) generated under the Typhoon workshare agreement with Eurofighter Jagdflugzeug GmbH.

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.

Key Performance Indicator – Underlying EBITA
Definition Operating profit excluding amortisation and impairment of intangible assets, finance costs and taxation expense of equity accounted
investments (EBITA), and non-recurring items.

Purpose Provides a measure of operating profitability that is comparable over time.

Amortisation and impairment of intangible assets are excluded because they are not related to the in-year operational performance of the
business, being driven by the timing and amount of investment in acquired businesses and software.

Finance costs and taxation expense of equity accounted investments are excluded for consistency with pre-interest, pre-tax business performance.

Non-recurring items are not relevant to an understanding of the Group’s underlying performance and include:

2017
The loss of £13m represents the loss on disposal of the BAE Systems San Francisco Ship Repair business.

2016
The loss of £12m represented an impairment against the carrying value of the BAE Systems San Francisco Ship Repair business.

Operating profit/(loss) by reporting segment

Underlying EBITA

2017
£m
562
52
242
794
472
(88)
2,034

2016
£m
494
90
211
810
400
(100)
1,905

Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ

Net finance costs
Profit before taxation
Taxation expense
Profit for the year

Amortisation
and impairment
of intangible assets

Financial and
taxation expense
of equity accounted
investments

Non-recurring items

Operating
profit/(loss)

2017
£m
(20)
(419)
(9)
(16)
(6)
–
(470)

2016
£m
(20)
(31)
(15)
(15)
(6)
–
(87)

2017
£m
–
–
(2)
(4)
(39)
(26)
(71)

2016
£m
–
–
(2)
(15)
(29)
(18)
(64)

2017
£m
–
–
(13)
–
–
–
(13)

2016
£m
–
–
(12)
–
–
–
(12)

Share of results of equity accounted investments within reporting segments

Electronic Systems
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ

Underlying EBITA

Amortisation
of intangible assets

Financial
expense

Taxation
income/(expense)

2017
£m
6
13
14
133
25
191

2016
£m
5
12
15
107
19
158

2017
£m
–
–
–
(4)
–
(4)

2016
£m
–
–
–
(4)
–
(4)

2017
£m
–
(3)
(2)
(7)
(22)
(34)

2016
£m
–
(2)
(5)
(6)
(15)
(28)

2017
£m
–
1
(2)
(32)
(4)
(37)

2016
£m
–
–
(10)
(23)
(3)
(36)

2017
£m
542
(367)
218
774
427
(114)
1,480
(346)
1,134
(250)
884

2016
£m
474
59
182
780
365
(118)
1,742
(591)
1,151
(213)
938

Share of results
of equity accounted
investments

2017
£m
6
11
10
90
(1)
116

2016
£m
5
10
–
74
1
90

F
n
a
n
c
i
a

l
s
t
a
t
e
m
e
n
t
s

BAE Systems
Annual Report 2017

151

2. Operating costs

Leases
Lease payments made under operating leases, including any incentives granted, are recognised in the income statement on a straight-line basis
over the lease term.

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, and on development activities not meeting the conditions for capitalisation, is written off as incurred
and charged to the income statement.

Customer-funded expenditure on research and development activities is held in long-term contract balances as a contract cost within trade and
other receivables and recognised in the income statement in accordance with the Group’s revenue recognition policy on long-term contracts.

Raw materials, subcontracts and other bought-in items used
Change in inventories of finished goods and work-in-progress
Cost of inventories expensed
Staff costs (note 3)
Depreciation, amortisation and impairment
Lease expense
Loss on disposal of property, plant and equipment, and investment property
Loss on disposal of businesses
Other operating charges
Operating costs

2017
£m
6,414
656
7,070
5,830
728
295
1
13
3,152
17,089

2016
£m
5,742
1,415
7,157
5,440
345
284
2
–
3,046
16,274

Operating costs include research and development expenditure of £1,576m (2016 £1,416m), of which £238m (2016 £206m) was funded
by the Group. In addition, the Group’s share of the research and development expenditure of its equity accounted investments was £131m
(2016 £99m).

Fees payable to the Company’s auditor and its associates included in operating costs

Fees payable to the Company’s auditor for the audit of the

Company’s annual accounts*

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 matters1

Tax compliance services2
Tax advisory services2
Other assurance services:

Non-statutory financial statements audit

Other non-audit services:

Investor relations2
Other

Total fees payable to the Company’s auditor and its associates
*Total fees payable to the Company’s auditor and its associates for audit

services and interim review

Fees in respect of BAE Systems pension schemes:

Audit
Tax compliance
Tax advisory

2017
Overseas
£’000

UK
£’000

Total
£’000

UK
£’000

2016
Overseas
£’000

Total
£’000

2,034

–

2,034

1,776

–

1,776

2,809
506
65

4,471
–
18

7,280
506
83

2,663
497
112

4,143
–
3

6,806
497
115

515
–
–

–

90
107
35

–

–
38
5,967

–
53
4,774

–
–
–
–

292
5
–
297

605
107
35

–

–
91
10,741

9,820

292
5
–
297

–
17
9

–

–
576
122

200
83
5,357

–
31
4,882

–
–
23
23

278
2
–
280

–
593
131

200
114
10,239

9,079

278
2
23
303

1. 2017 includes advice in respect of IFRS 15.
2. With effect from 1 January 2017, certain tax services and investor information services are no longer provided by KPMG in order to ensure compliance with the Financial
Reporting Council’s revised regulations on ethical standards for auditors and EU regulations adopted by the UK which apply prohibitions to a range of engagements that
could result in an auditor facing a conflict of interest.

152

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

3. Employees

The weekly average and year-end numbers of employees, excluding those in equity accounted investments, were as follows:

Weekly average

At year end

Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ

2017
Number
’000
14
11
11
30
9
1
76

2016
Number
’000
14
12
11
29
9
1
76

The aggregate staff costs of Group employees, excluding employees of equity accounted investments, were as follows:

Wages and salaries1
Social security costs2
Share-based payments (note 29)
Pension costs – defined contribution plans (note 21)2
Pension costs – defined benefit plans (note 21)
US healthcare costs (note 21)

1. After excluding the impact of exchange translation, wages and salaries increased by 3% per employee on 2016.
2. 2016 reclassified.

4. Other income

Leases
Lease income under operating leases is recognised in the income statement on a straight-line basis over the lease term.

Research and development expenditure credits
Rental income from operating leases – investment property
Rental income from operating leases – other
Profit on disposal of property, plant and equipment
Profit on disposal of investment property
Management recharges to equity accounted investments (note 30)
Royalties
Other 1
Other income

2017
Number
’000
14
11
11
30
9
1
76

2017
£m
4,972
360
61
193
242
2
5,830

2016
Number
’000
14
12
11
29
9
1
76

2016
£m
4,672
339
55
189
183
2
5,440

2017
£m
20
23
16
2
9
16
9
36
131

2016
£m
22
24
18
7
12
16
8
29
136

Includes £11m (2016 £10m) in respect of management fees relating to the building works at the Barrow site for the Dreadnought submarine programme. There are no other
individual amounts in excess of £10m.

5. Net finance costs

Interest income and borrowing costs
Interest income and borrowing costs are recognised in the income statement in the period in which they are incurred.

Interest income
Gain on remeasurement of financial instruments at fair value through profit or loss1,2
Foreign exchange gains3
Financial income
Interest expense on bonds and other financial instruments
Facility fees
Net present value adjustments
Net interest expense on retirement benefit obligations (note 21)
Loss on remeasurement of financial instruments at fair value through profit or loss1,2
Foreign exchange losses3
Financial expense
Net finance costs

BAE Systems
Annual Report 2017

153

2017
£m
24
54
338
416
(202)
(4)
(44)
(165)
(317)
(30)
(762)
(346)

2016
£m
10
665
38
713
(208)
(4)
(43)
(169)
(55)
(825)
(1,304)
(591)

1. Comprises gains and losses on derivative financial instruments, including derivative instruments to manage the Group’s exposure to interest rate fluctuations on external

borrowings and exchange rate fluctuations on balances with the Group’s subsidiaries and equity accounted investments.

2. The decrease in the gain on remeasurement of financial instruments primarily reflects exchange rate movements on derivatives relating to US dollar-denominated

borrowings (2017 £19m; 2016 £446m). Loss on remeasurement of financial instruments includes £299m (2016 £23m) in respect of these exchange rate movements.
3. The foreign exchange gains primarily reflect exchange rate movements on US dollar-denominated borrowings (£319m). The foreign exchange losses in 2016 in respect

of these exchange rate movements were £592m.

Additional analysis

Net finance costs:

Group
Share of equity accounted investments

Analysed as:

Underlying net interest expense:

Group
Share of equity accounted investments

Other:

Group:

Net interest expense on retirement benefit obligations
Fair value and foreign exchange adjustments on financial instruments and investments1

Share of equity accounted investments:

Net interest expense on retirement benefit obligations
Fair value and foreign exchange adjustments on financial instruments and investments

1. The net gain/(loss) primarily reflects foreign exchange translational gains/(losses) on US dollar-denominated bonds held by BAE Systems plc.

2017
£m

(346)
(34)
(380)

(226)
(19)
(245)

(165)
45

(8)
(7)
(380)

2016
£m

(591)
(28)
(619)

(245)
(12)
(257)

(169)
(177)

(8)
(8)
(619)

F
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c
i
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t
a
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m
e
n
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s

154

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

6. Taxation expense

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
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.

Deferred tax
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.

Taxation expense

Current taxation
UK:

Current tax
Adjustments in respect of prior years

Overseas:

Current year
Adjustments in respect of prior years

Total current taxation
Deferred taxation
UK:

Origination and reversal of temporary differences
Adjustments in respect of prior years
Tax rate adjustment

Overseas:

Origination and reversal of temporary differences
Adjustments in respect of prior years
Tax rate adjustment1

Total deferred taxation
Taxation expense

UK
Overseas
Taxation expense

2017
£m

2016
£m

(132)
(21)
(153)

(160)
40
(120)
(273)

48
3
(1)
50

(54)
(13)
40
(27)
23
(250)

(103)
(147)
(250)

(74)
29
(45)

(164)
(5)
(169)
(214)

14
4
–
18

(28)
13
(2)
(17)
1
(213)

(27)
(186)
(213)

1. The US federal tax rate has been reduced from 35% to 21% with effect from 1 January 2018, while the estimated state tax rate has increased from 5% to 6%. In line with
this change, the rate applying to US deferred tax assets and liabilities at 31 December 2017 has been reduced from 40% to 27%, creating a rate adjustment in 2017, which
is partly reflected in the Consolidated income statement and partly in the Consolidated statement of comprehensive income.

BAE Systems
Annual Report 2017

155

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
Effect of intra-group financing
Expenses not tax effected
Income not subject to tax
Research and development tax credits and patent box benefits
Non-deductible goodwill impairment
Chargeable gains
Utilisation of previously unrecognised tax losses
Adjustments in respect of prior years
Adjustments in respect of equity accounted investments
Tax rate adjustment1
Other
Taxation expense

1. 2017 includes a £40m credit in respect of US tax reform enacted in December 2017.

Calculation of the underlying effective tax rate

Profit before taxation
Add back:

Taxation expense of equity accounted investments (note 1)
Goodwill impairment (note 8)
Adjusted profit before taxation

Taxation expense
Taxation expense of equity accounted investments (note 1)
Exclude: Impact of US tax reform enacted in December 2017
Adjusted taxation expense (including equity accounted investments)

Underlying effective tax rate

2017
£m
1,134

2016
£m
1,151

19.25% 20.0%
(230)
(81)
15
(15)
37
12
–
(3)
3
41
18
(2)
(8)
(213)

(218)
(101)
15
(8)
46
18
(74)
(2)
3
9
22
39
1
(250)

2017
£m
1,134

37
384
1,555

(250)
(37)
(40)
(327)

2016
£m
1,151

36
–
1,187

(213)
(36)
–
(249)

21%

F
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a
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c
i
a

l
s
t
a
t
e
m
e
n
t
s

156

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

6. Taxation expense continued

Tax recognised in other comprehensive income

Items that will not be reclassified to the income statement:

Subsidiaries:

Remeasurements on retirement benefit schemes
Tax rate adjustment1

Equity accounted investments

Items that may be reclassified to the income statement:

Subsidiaries:

Currency translation on foreign currency net investments
Amounts credited/(charged) to hedging reserve

Equity accounted investments

1. 2017 comprises £67m in relation to the US and £16m in relation to the UK.

Current tax
Subsidiaries:

Remeasurements on retirement benefit schemes

Deferred tax
Subsidiaries:

Remeasurements on retirement benefit schemes
Tax rate adjustment1
Amounts charged to hedging reserve

Equity accounted investments

Tax on other comprehensive income

1. 2017 comprises £67m in relation to the US and £16m in relation to the UK.

2017

Tax
(expense)/
benefit
£m

Before
tax
£m

Net of tax
£m

2016

Tax
benefit/
(expense)
£m

Before
tax
£m

Net of tax
£m

2,105
–
66

(625)
59
(14)
1,591

(407)
(83)
(13)

1,698
(83)
53

(1,468)
–
(66)

–
(11)
(1)
(515)

(625)
48
(15)
1,076

1,287
96
43
(108)

246
14
13

–
(17)
2
258

(1,222)
14
(53)

1,287
79
45
150

Other
reserves
£m

2017

Retained
earnings
£m

Total
£m

Other
reserves
£m

2016

Retained
earnings
£m

–
–

–
–
(11)
(1)
(12)
(12)

23
23

(430)
(83)
–
(13)
(526)
(503)

(430)
(83)
(11)
(14)
(538)
(515)

–
–

–
–
(17)
2
(15)
(15)

27
27

219
14
–
13
246
273

Total
£m

27
27

219
14
(17)
15
231
258

BAE Systems
Annual Report 2017

157

7. Earnings per share

Key Performance Indicator – Underlying earnings per share
Definition Basic earnings per share excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions
and financial derivatives, non-recurring items and, in 2017, the impact of US tax reform enacted in December 2017.

Purpose Provides a measure of underlying performance that is comparable over time.

Amortisation and impairment of intangible assets are excluded because they are not related to the in-year operational performance of the
business, being driven by the timing and quantum of investment in acquired businesses and software.

Non-cash finance movements on pensions are excluded because they are driven by external factors, such as corporate bond yields and inflation.

Non-cash finance movements on financial derivatives are excluded because they are driven by external factors, such as foreign exchange rates
and interest rates.

Non-recurring items are not relevant to an understanding of the Group’s underlying performance.

The impact of US tax reform enacted in December 2017 has been excluded because it does not reflect the Group’s in-year underlying tax rate.

Profit for the year attributable to equity shareholders
Add back/(deduct):

Amortisation and impairment of intangible assets, post tax1
Impairment of goodwill
Non-cash movements, being net interest expense on retirement

benefit obligations, post tax1

Non-cash movements, being fair value and foreign exchange

adjustments on financial instruments and investments, post tax1

Non-recurring items, post tax1
Impact of US tax reform enacted in December 2017

Underlying earnings, post tax

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

1. The tax impact is calculated using the underlying effective tax rate of 21% (2016 21%).

2017

Basic
pence
per share
26.8

Diluted
pence
per share
26.7

43.5

43.3

£m
854

68
384

137

(30)
10
(40)
1,383

2016

Basic
pence
per share
28.8

Diluted
pence
per share
28.7

40.3

40.1

£m
913

69
–

140

146
9
–
1,277

Millions

3,182

3,182
15

3,197

3,171

3,171
14

3,185

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158

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

8. Intangible assets

Intangible assets are carried at cost or valuation, less accumulated amortisation and impairment losses.

Cost or valuation
Goodwill
Under the acquisition method for business combinations, goodwill is the acquisition-date fair value of the consideration transferred, less the net
of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed. 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.
Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Software
Software includes:
– Computer software licences acquired 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; and

– Software development 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. Group-funded
expenditure associated with enhancing or maintaining computer software programs for sale is recognised as an expense as incurred.

Development costs
Development costs funded by the Group on activities applied to a plan or design for the production of new or substantially improved products
are capitalised as an internally generated intangible asset if certain conditions are met. The costs capitalised include materials, direct labour and
related overheads.

Programme and customer-related
Intangible assets recognised by the Group include those relating to ongoing programmes within businesses acquired, mainly in respect
of customer relationships and order backlog.

Other
Other intangible assets includes patents, trademarks and licences.

Amortisation
Goodwill is not amortised. Amortisation on intangible assets, excluding goodwill, is charged to the income statement on a straight-line basis
over their estimated useful lives.

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.

The estimated useful lives are as follows:

Software
Development costs
Programme and customer-related
Other

2 to 5 years
up to 10 years
up to 15 years
up to 20 years

The Group has no indefinite-life intangible assets other than goodwill.

Impairment of intangible assets, property, plant and equipment, investment property and equity accounted investments
The carrying amounts of the Group’s intangible assets (excluding goodwill), property, plant and equipment, investment property 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.

An impairment loss is recognised whenever the carrying amount of an asset or its Cash-Generating Unit exceeds its recoverable amount.

The recoverable amount is the greater of 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 flows,
the recoverable amount is determined for the Cash-Generating Unit to which the asset belongs.

Impairment losses are recognised in the income statement.

An impairment loss in respect of goodwill is not reversed. An impairment loss in respect of other intangible assets, property, plant and equipment,
investment property and equity accounted investments is reversed if the subsequent increase in recoverable amount can be related objectively to
an event occurring after the impairment loss was recognised or 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.

F
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a
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s
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a
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BAE Systems
Annual Report 2017

159

8. Intangible assets continued

Cost or valuation
At 1 January 2016
Additions:

Acquired separately2
Internally developed2

Disposals3
Reclassification from held for sale
Transfer from property, plant and equipment
Foreign exchange adjustments
At 31 December 2016
Additions:

Acquired separately
Internally developed
Business acquisitions
Disposals3
Reclassification as held for sale
Transfer from property, plant and equipment
Foreign exchange adjustments
At 31 December 2017
Amortisation and impairment
At 1 January 2016
Amortisation
Disposals3
Reclassification from held for sale
Foreign exchange adjustments
At 31 December 2016
Amortisation4
Impairment charge
Disposals3
Reclassification as held for sale
Transfer from property, plant and equipment
Foreign exchange adjustments
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
At 1 January 2016

Goodwill
£m

Software1
£m

Development
costs1
£m

Programme
and
customer-
related
£m

Other1
£m

Total
£m

14,041

–
–
–
–
–
1,362
15,403

–
–
3
–
–
–
(684)
14,722

4,201
–
–
–
300
4,501
–
384
–
–
–
(159)
4,726

9,996
10,902
9,840

382

43
34
(5)
–
57
47
558

42
45
–
(13)
–
33
(18)
647

232
37
(5)
–
34
298
43
–
(13)
–
7
(13)
322

325
260
150

102

–
1
(15)
–
–
13
101

–
–
–
–
–
–
(11)
90

56
10
(15)
–
8
59
8
–
–
–
–
(5)
62

28
42
46

604

–
–
(122)
–
–
62
544

–
–
–
(259)
–
–
(20)
265

534
32
(122)
–
52
496
20
–
(259)
–
–
(17)
240

25
48
70

4
–
(3)
3
–
12
99

–
–
–
(10)
(4)
8
(4)
89

72
4
(3)
3
11
87
14
–
(9)
(4)
–
(3)
85

4
12
11

15,212

47
35
(145)
3
57
1,496
16,705

42
45
3
(282)
(4)
41
(737)
15,813

5,095
83
(145)
3
405
5,441
85
384
(281)
(4)
7
(197)
5,435

10,378
11,264
10,117

1. Re-presented to separate software and development costs from other intangible assets.
2. Re-presented to separate internally developed software intangible asset additions from those acquired separately.
3. Includes intangible assets with nil net book value no longer used by the Group.
4. Amortisation of £85m includes £82m charged to the income statement as an amortisation expense and £3m recoverable on customer contracts.

Impairment testing
The recoverable amount of the Group’s goodwill is based on value in use estimated using risk-adjusted future cash flow projections from the
five-year Integrated Business Plan (IBP) and a terminal value based on the projections for the final year of that plan, with growth rate assumptions
in the range 0% to 2% applied. The IBP process includes the use of historical 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 6.60% (2016 7.01%) (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.

160

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

8. Intangible assets continued

Significant CGUs
Goodwill allocated to CGUs which are largely dependent on US government spending on defence, aerospace and security represents £7.9bn
(2016 £8.4bn) of the Group’s total goodwill balance. The Group monitors changes in defence budgets on an ongoing basis.

Cash-Generating Unit
Electronic Systems

Intelligence & Security

(within Cyber & Intelligence)

Platforms & Services (US)

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
Continued demand in the US for the Group’s services
in the areas of homeland security, law enforcement
and counter-intelligence
Continued demand in the Group’s principal markets for
existing and successor military tracked vehicles, naval guns,
missile launchers, artillery systems, munitions, upgrade
programmes and support, and in the US for complex
infrastructure, maritime and aviation services

Allocated goodwill

Pre-tax discount rate

2017
£bn
3.8

2016
£bn
4.0

2017
%
8

2016
%
9

0.7

3.4

3.7

The headroom, calculated as the difference between net assets including allocated goodwill as at 31 December 2017 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 terminal value
growth rate assumption and a 1% increase in the discount rate used in the value-in-use calculations.

Cash-Generating Unit
Electronic Systems
Intelligence & Security
Platforms & Services (US)

Headroom as at
31 December

2017
£bn
5.7
0.6
3.5

2016
£bn
3.5
0.3
1.6

Headroom assuming
a 1% reduction in the
terminal value growth
rate assumption

Headroom assuming
a 1% increase in the
discount rate

2017
£bn
4.0
0.4
2.2

2016
£bn
2.2
0.2
0.7

2017
£bn
3.7
0.4
2.0

2016
£bn
2.0
0.1
0.5

Other CGUs
The remaining goodwill balance of £2.1bn (2016 £2.5bn) is allocated across multiple CGUs, including £0.2bn (2016 £0.6bn) in the Applied
Intelligence CGU, with no individual CGU exceeding 10% 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 Applied Intelligence, the future cash flow projections are based on the expectation of
growth in cyber and intelligence, in the UK and overseas government markets, together with increasing demand for products and services in
commercial markets.

Impairment
In 2017, the impairment charge of £384m reflects lower growth assumptions in the Applied Intelligence CGU. The recoverable amount of the
Applied Intelligence CGU is based on value in use calculated using a pre-tax discount rate of 16% (2016 11%).

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9. Property, plant and equipment

Cost
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. The cost of demonstration assets
is written off as incurred. The reimbursement of the cost of an item of property, plant and equipment by a customer is presented as deferred
income and recognised in the income statement on a basis consistent with the depreciation of the asset over its estimated useful life.

Assets held for leasing out under operating leases are included in property, plant and equipment at cost less accumulated depreciation and
impairment losses.

Depreciation
Depreciation is provided, normally on a straight-line basis, to write off the cost of items of property, plant and equipment over their estimated
useful lives to any estimated residual value, using the following rates:

Buildings
Plant and machinery:

Computing equipment and motor vehicles
Other equipment

up to 50 years, or the lease term if shorter

4 to 5 years
10 to 20 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.

Impairment
The carrying amounts of the Group’s property, plant and equipment are reviewed at each balance sheet date to determine whether there
is any indication of impairment in accordance with the policy shown in note 8.

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Notes to the Group accounts
continued

9. Property, plant and equipment continued

Cost
At 1 January 2016
Additions1
Reclassification as held for sale
Transfer to investment properties
Transfer to other intangible assets
Reclassification between categories
Disposals
Foreign exchange adjustments
At 31 December 2016
Additions1
Reclassification as held for sale
Transfer to other intangible assets
Reclassification between categories
Disposals
Foreign exchange adjustments
At 31 December 2017
Depreciation and impairment
At 1 January 2016
Depreciation charge for the year
Impairment charge for the year
Reclassification as held for sale
Transfer to investment properties
Disposals
Foreign exchange adjustments
At 31 December 2016
Depreciation charge for the year
Impairment charge for the year
Impairment write back
Reclassification as held for sale
Transfer to other intangible assets
Reclassification between categories
Disposals
Foreign exchange adjustments
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
At 1 January 2016

Land and
buildings
£m

Plant and
machinery
£m

1,770
235
(20)
(9)
–
28
(22)
194
2,176
218
–
(2)
(42)
(41)
(97)
2,212

1,005
73
8
(20)
(9)
(13)
104
1,148
66
–
(4)
–
–
(33)
(39)
(55)
1,083

1,129
1,028
765

2,806
326
(2)
–
(57)
(28)
(72)
256
3,229
306
(16)
(39)
42
(144)
(146)
3,232

1,873
178
1
(2)
–
(70)
179
2,159
194
1
–
(11)
(7)
33
(139)
(99)
2,131

1,101
1,070
933

Total
£m

4,576
561
(22)
(9)
(57)
–
(94)
450
5,405
524
(16)
(41)
–
(185)
(243)
5,444

2,878
251
9
(22)
(9)
(83)
283
3,307
260
1
(4)
(11)
(7)
–
(178)
(154)
3,214

2,230
2,098
1,698

Includes £109m (2016 £143m) of land and buildings, and £42m (2016 £25m) of plant and machinery at Barrow-in-Furness, UK, relating to the Dreadnought submarine
programme funded by the UK government.

9. 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 2017

Net impairment

Electronic Systems
Platforms & Services (US)
Platforms & Services (International)

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163

Land and
buildings
£m
963
31
135
–
–
1,129

Plant and
machinery
£m
–
–
–
1,024
77
1,101

2017
£m
(4)
–
1
(3)

Total
£m
963
31
135
1,024
77
2,230

2016
£m
–
9
–
9

2017
The impairment write back in Electronic Systems relates to the carrying value of a property in New Jersey, US.

2016
The impairment charge in Platforms & Services (US) represented a charge against the carrying value of the BAE Systems San Francisco Ship
Repair business.

Assets in the course of construction

At 31 December 2017
At 31 December 2016

Land and
buildings1
£m
259
246

Plant and
machinery2
£m
296
352

Total
£m
555
598

Includes £178m (2016 £161m) at Barrow-in-Furness, UK, relating to the Dreadnought submarine programme funded by the UK government.

1.
2. 2016 included £78m in respect of a new dry dock in San Diego, US, which became operational in February 2017.

Operating leases
The future aggregate minimum lease income from the non-cancellable elements of operating leases for assets capitalised (including investment
property – see note 10) are as follows:

Receipts due:

Not later than one year
Later than one year and not later than five years
Later than five years

2017
£m

2016
£m

24
95
51
170

25
90
72
187

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.

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Notes to the Group accounts
continued

10. Investment property

Cost
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 impairment losses.

Depreciation
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.

Impairment
The carrying amounts of the Group’s investment property are reviewed at each balance sheet date to determine whether there is any indication
of impairment in accordance with the policy shown in note 8.

Cost
At 1 January 2016
Additions
Transfer from property, plant and equipment
Disposals
At 31 December 2016
Additions
Disposals
At 31 December 2017
Depreciation and impairment
At 1 January 2016
Depreciation charge for the year
Transfer from property, plant and equipment
Disposals
At 31 December 2016
Depreciation charge for the year
Impairment charge
Disposals
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
At 1 January 2016

Fair value
At 31 December 2017
At 31 December 2016

£m

176
9
9
(24)
170
15
(24)
161

56
2
9
(7)
60
3
2
(5)
60

101
110
120

173
167

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.

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Annual Report 2017

165

11. Equity accounted investments

A joint venture is a joint arrangement whereby the parties that have joint control have rights to the net assets of the arrangement.

Carrying value
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 carrying amounts of the Group’s equity accounted investments are reviewed at each balance sheet date to
determine whether there is any indication of impairment in accordance with the policy shown in note 8.

Principal equity accounted investments

Joint venture
Eurofighter Jagdflugzeug
MBDA

Principal activities
Management and control of the European Typhoon programme
Development and manufacture of guided weapons

Shareholding
33%
37.5%

Principally
operates in
Germany
Europe

The following tables summarise the financial information of the Group’s principal equity accounted investments included in their own financial
statements, as adjusted for fair value adjustments at acquisition and differences in accounting policies, and reconcile this to the Group’s interest
in those equity accounted investments.

Revenue (100%)
Underlying EBITA1 excluding depreciation
Depreciation and amortisation
Financial income
Financial expense
Taxation expense
Profit/(loss) for the year (100%)
Remeasurements on retirement benefit schemes, net of tax
Amounts charged to hedging reserve, net of tax
Foreign exchange adjustments
Total comprehensive income for the year (100%)

2017

Eurofighter
Jagdflugzeug
£m
3,011
10
(1)
2
–
(4)
7
–
–
–
7

2016

Eurofighter
Jagdflugzeug
£m
2,986
18
(2)
2
(9)
(26)
(17)
–
–
–
(17)

MBDA
£m
2,723
351
(46)
64
(82)
(84)
203
141
(6)
(8)
330

MBDA
£m
2,416
320
(74)
60
(77)
(56)
173
(139)
(30)
31
35

Group’s share of total comprehensive income for the year

124

(5)

Non-current assets

Cash and cash equivalents
Current assets excluding cash and cash equivalents

Current assets

Non-current financial liabilities excluding trade and other payables, and provisions
Other non-current liabilities

Non-current liabilities

Current financial liabilities excluding trade and other payables, and provisions
Other current liabilities

Current liabilities
Net assets (100%)

12
30
1,144
1,174
–
(29)
(29)
(3)
(1,130)
(1,133)
24

2,065
2,420
4,029
6,449
(4)
(789)
(793)
8
(7,206)
(7,198)
523

11
26
1,746
1,772
–
(26)
(26)
–
(1,740)
(1,740)
17

1,996
1,613
3,870
5,483
(101)
(937)
(1,038)
(32)
(6,100)
(6,132)
309

1. Operating profit excluding amortisation and impairment of intangible assets (EBITA), and non-recurring items.

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Notes to the Group accounts
continued

11. Equity accounted investments continued

Group’s share of net assets
Goodwill adjustment
Carrying value

Dividends received

2017

2016

Eurofighter
Jagdflugzeug
£m
8
–
8

MBDA
£m
196
6
202

2017

Eurofighter
Jagdflugzeug
£m
–

MBDA
£m
47

Total
£m
204
6
210

Total
£m
47

Eurofighter
Jagdflugzeug
£m
5
–
5

MBDA
£m
116
5
121

Eurofighter
Jagdflugzeug
£m
–

2016

MBDA
£m
13

Group summary
The Group also has a number of individually immaterial joint ventures, the carrying values of the most significant of which at 31 December
2017 are as follows: Advanced Electronics Company (£53m), FADEC International (£40m), Air Astana (£30m) and Panavia Aircraft (£19m).
The following table shows a reconciliation of opening to closing carrying value for both the Group’s principal and immaterial joint ventures
in aggregate.

At 1 January 2016

Group’s share of profit for the year
Group’s share of remeasurements on retirement benefit schemes
Tax on items that will not be reclassified to the income statement
Foreign exchange adjustments
Amounts (charged)/credited to hedging reserve
Tax on items that may be reclassified to the income statement

Group’s share of total comprehensive income for the year
Equity accounted investment funding
Dividends received from equity accounted investments
Foreign exchange adjustments
At 31 December 2016

Group’s share of total comprehensive income for the year
Equity accounted investment funding
Dividends received from equity accounted investments
Foreign exchange adjustments
At 31 December 2017

Principal equity
accounted
investments
£m
121
59
(66)
13
13
(14)
3
8
–
(13)
10
126
79
66
(13)
(4)
(2)
–
126
–
(47)
5
210

Other
£m
129
31
–
–
20
5
(1)
55
5
(25)
9
173
37
–
–
(5)
4
(1)
35
3
(25)
(12)
174

Contingent liabilities
The Group is not aware of any material contingent liabilities in respect of its equity accounted investments.

Total
£m
121
5
126

Total
£m
13

Total
£m
250
90
(66)
13
33
(9)
2
63
5
(38)
19
299
116
66
(13)
(9)
2
(1)
161
3
(72)
(7)
384

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167

12. Trade and other receivables

Trade receivables are stated at their cost less provision for bad debts. A provision for bad debt 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.

A loss on provision for bad debt 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 includes long-term contract balances and amounts due from contract customers, less attributable
progress payments.

Long-term contract balances are stated at cost less provision for any anticipated losses. 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 long-term
contract balances for that portion of the work which has already been completed, and the remainder is included as amounts due to long-term
contract customers within trade and other payables. Losses are determined on the basis of estimated results on completion of contracts and are
updated regularly.

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 Group performance, as cash received on customers’ account.

Amounts due from contract customers represent unbilled income and are stated at cost, plus attributable profit.

US deferred compensation plan assets are measured at fair value in accordance with IAS 19, Employee Benefits.

Non-current
Prepayments and accrued income
US deferred compensation plan assets
Other receivables1

Current
Long-term contract balances
Deduct Attributable progress payments
Amounts due from contract customers
Amounts due from customers for contract work
Trade receivables
Amounts owed by equity accounted investments (note 30)
Prepayments and accrued income
Other receivables1

2017
£m

2016
£m

5
302
80
387

2,506
(1,706)
422
1,222
1,688
86
284
306
3,586

35
296
20
351

3,128
(2,282)
435
1,281
1,437
69
256
262
3,305

Includes £89m which is reimbursable in respect of reorganisation costs incurred in 2017 (non-current £45m; current £44m).

The aggregate amount of costs incurred and recognised profits (less recognised losses) to date in respect of contracts in progress at 31 December
2017 is estimated to be £26.8bn (2016 £27.5bn).

Trade receivables are disclosed net of a provision for bad debts. Disclosures relating to the ageing of trade receivables and movements in the
provision for bad debts are provided in note 28.

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Notes to the Group accounts
continued

13. Other financial assets and liabilities

Derivative financial instruments and hedging activities
The international 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 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 uses foreign exchange derivative instruments to manage the Group’s exposure to currency fluctuations on its borrowings and deposits
with the Group’s subsidiaries and equity accounted investments.

In accordance with its treasury policy, the Group does not hold derivative financial instruments for trading purposes.

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.

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. The fair values are estimated by discounting expected future cash flows.

Fair value through profit or loss
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.

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
Debt-related derivative financial instruments – liabilities

Includes fair value hedges of £nil (2016 £4m).

2017

2016

Assets
£m

Liabilities
£m

Assets
£m

Liabilities
£m

147
–
79
226

77
12
–
89

(114)
(19)
–
(133)

(48)
(37)
(19)
(104)

138
93
114
345

151
53
–
204

(102)
–
–
(102)

(184)
(28)
–
(212)

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 credited to the hedging reserve in respect of cash flow hedges were £61m (2016 £87m), including £24m (2016 £74m)
on reclassification to profit and loss and £37m (2016 £13m credit) on contracts held at 31 December 2017.

Fair value hedges
The loss arising in the income statement on fair value hedging instruments was £4m (2016 £3m). The gain arising in the income statement
on the fair value of the underlying hedged items was £4m (2016 £1m).

Debt-related derivative financial instruments
The debt-related derivative financial instruments represent the fair value of cross-currency, interest rate and foreign exchange derivatives
relating to the US$500m 2.85% bond, repayable 2020, the US$800m 3.8% bond, repayable 2024, the US$750m 3.85% bond, repayable
2025, the US$500m 7.5% bond, repayable 2027, and the US$550m 4.75% bond, repayable 2044 (see note 19). These derivatives have
been entered into specifically to manage the Group’s exposure to foreign exchange or interest rate risk.

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169

14. Deferred tax

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.

The most significant recognised deferred tax assets relate to the deficits on the Group’s pension/retirement schemes (see below). This is because
retirement benefit costs are deducted in determining accounting profit as service is provided by employees, but deducted in determining taxable
profit either when contributions are paid to the pension/retirement schemes or when retirement benefits are paid. In reviewing the probability
that taxable profits will be available in the future against which such contributions/payments can be deducted, account has been taken of the
new deficit recovery plans agreed with the trustees of the relevant schemes in November 2017 under which the deficits are expected to be
cleared between 2021 and 2026 (see note 21).

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.

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)

Includes deferred tax assets on US deferred compensation plans.

Deferred tax assets

Deferred tax liabilities

Net balance at
31 December

2017
£m
16
13
224
–

710
100
14
–
27
–
10
12
1,126
(402)
724

2016
£m
20
18
343
–

1,212
149
23
–
39
–
11
17
1,832
(581)
1,251

2017
£m
(94)
(14)
–
(275)

–
(1)
–
(11)
(1)
(10)
–
–
(406)
402
(4)

2016
£m
(119)
(28)
–
(428)

–
–
–
(5)
–
(11)
–
–
(591)
581
(10)

2017
£m
(78)
(1)
224
(275)

710
99
14
(11)
26
(10)
10
12
720
–
720

2016
£m
(99)
(10)
343
(428)

1,212
149
23
(5)
39
(11)
11
17
1,241
–
1,241

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Notes to the Group accounts
continued

14. 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
2017
£m
(99)
(10)
343
(428)

1,212
149
23
(5)
39
(11)
11
17
1,241

At
1 January
2016
£m
(85)
(17)
299
(326)

908
112
15
10
35
(12)
12
21
972

Foreign
exchange
adjustments
£m
9
(1)
(22)
31

Recognised
in income1
£m
12
10
(97)
122

Recognised
in equity2
£m
–
–
–
–

At
31 December
2017
£m
(78)
(1)
224
(275)

(17)
(12)
–
–
–
–
–
–
(12)

28
(38)
(1)
5
(13)
1
(1)
(5)
23

(513)
–
(8)
(11)
–
–
–
–
(532)

710
99
14
(11)
26
(10)
10
12
720

Foreign
exchange
adjustments
£m
(16)
–
54
(67)

Recognised
in income
£m
2
7
(10)
(35)

Recognised
in equity
£m
–
–
–
–

At
31 December
2016
£m
(99)
(10)
343
(428)

45
24
–
1
6
–
–
1
48

26
13
4
1
(2)
1
(1)
(5)
1

233
–
4
(17)
–
–
–
–
220

1,212
149
23
(5)
39
(11)
11
17
1,241

Includes a credit of £39m recognised in income in respect of tax rate adjustments.

1.
2. Includes a debit of £83m recognised in equity in respect of tax rate adjustments.
3. Includes deferred tax assets on US deferred compensation plans.

Unrecognised deferred tax assets and liabilities
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

2017

2016

Gross
amount
£m
1
207
389
597

Unrecognised
deferred
tax asset
£m
1
36
38
75

Gross
amount
£m
2
165
415
582

Unrecognised
deferred
tax asset
£m
2
30
39
71

These assets have not been recognised as the incidence of future profits in the relevant countries and legal entities cannot be accurately predicted
at this time.

The Group has not recognised any deferred tax liability on temporary differences totalling £237m (2016 £274m) relating to potentially taxable
unremitted earnings of overseas subsidiaries and equity accounted investments because any withholding tax due on the remittance of those
earnings is expected to be insignificant.

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14. Deferred tax continued

Future changes in tax rates
The US federal tax rate has been reduced from 35% to 21% with effect from 1 January 2018, while the estimated state tax rate has increased
from 5% to 6%. This will reduce future US current tax charges accordingly. Recognised US deferred tax balances as at 31 December 2017 have
been calculated at a combined federal and state tax rate of 27% (2016 40%).

The UK current tax rate reduced from 20% to 19% with effect from 1 April 2017 and will reduce to 17% with effect from 1 April 2020. This will
reduce future UK current tax charges accordingly. Both recognised and unrecognised UK deferred tax balances as at 31 December 2017 have
been calculated at a blended rate of 17.5% (2016 18%).

15. Inventories

Inventories are stated at the lower of cost, including all relevant overhead expenditure, and net realisable value.

Short-term work-in-progress
Raw materials and consumables
Finished goods and goods for resale

2017
£m
377
260
86
723

2016
£m
416
256
72
744

The Group recognised £9m (2016 £10m) as a write down of inventories to net realisable value.

16. Current tax

Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet been settled, and as an asset to the extent
that the amounts already paid exceed the amount due or the benefit of a tax loss can be carried back to recover current tax of a prior period.
Current tax assets and liabilities are measured at the amount expected to be paid to or recovered from taxation authorities, using the rates that
have been enacted or substantively enacted by the balance sheet date.

Tax provisions
Research and development expenditure credits receivable
Other

Represented by:

Current tax assets
Current tax liabilities

2017
£m
(351)
131
(65)
(285)

20
(305)
(285)

2016
£m
(365)
105
(46)
(306)

5
(311)
(306)

Tax provisions of £351m (2016 £365m) are in respect of known tax issues, of which £292m (2016 £325m) relates to non-UK jurisdictions. Whilst
there is inherent uncertainty regarding the timing of any resolution of tax positions, the Group does not consider that there is a significant risk of
material change in 2018.

17. Cash and cash equivalents

Cash and cash equivalents includes cash in hand, call and term deposits, investments in money market funds 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.

Cash
Money market funds
Short-term deposits

Deduct Cash and cash equivalents (included within assets held for sale)

2017
£m
913
899
1,459
3,271
–
3,271

2016
£m
419
869
1,483
2,771
(2)
2,769

172

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

18. Geographical analysis of assets

Analysis of non-current assets by geographical location

Asset location
UK
Rest of Europe
US
Saudi Arabia
Australia
Rest of Asia and Pacific
Non-current segment assets
Retirement benefit surpluses
Other financial assets
Tax
Inventories
Current trade and other receivables
Cash and cash equivalents
Assets held for sale
Consolidated total assets

19. Loans and overdrafts

Notes

21
13
14,16
15
12
17

2017
£m
2,711
590
9,283
438
459
5
13,486
302
315
744
723
3,586
3,271
26
22,453

2016
£m
2,755
586
9,864
443
474
6
14,128
223
549
1,256
744
3,305
2,769
2
22,976

Loans and overdrafts are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, loans and overdrafts
are stated at either amortised cost or, where hedge accounting has been adopted, fair value in respect of the hedged risk. Any difference
between the amount initially recognised and the redemption value is recognised in the income statement over the period of the borrowings.

Non-current
Albertville Hangar bond, repayable 2018
US$1bn 6.375% bond, repayable 2019
US$500m 2.85% bond, repayable 2020
US$500m 4.75% bond, repayable 2021
£400m 4.125% bond, repayable 2022
US$800m 3.8% bond, repayable 2024
US$750m 3.85% bond, repayable 2025
US$500m 7.5% bond, repayable 2027
US$400m 5.8% bond, repayable 2041
US$550m 4.75% bond, repayable 2044

Current
Albertville Hangar bond, repayable 2018
Overdrafts

2017
£m

2016
£m

–
741
368
369
398
590
548
368
292
395
4,069

7
7
14

8
810
403
404
398
649
598
402
320
433
4,425

–
–
–

US$500m of the US$1bn 6.375% bond, repayable 2019, has been converted to a floating rate bond by utilising interest rate swaps that mature
in June 2019 and give an effective rate during 2017 of 6.2%.

The US$500m 2.85% bond, repayable 2020, has been converted to a sterling fixed rate bond by utilising foreign exchange swaps that mature in
February 2018 and give an effective rate during 2017 of 2.5%.

US$500m of the US$800m 3.8% bond, repayable 2024, has been converted to a floating rate bond by utilising interest rate swaps that mature
in October 2024 and give an effective rate during 2017 of 3.5%. US$500m of the US$800m bond is measured at amortised cost as adjusted for
the fair value of the interest rate risk.

US$734m of the US$750m 3.85% bond, repayable 2025, has been converted to a sterling fixed rate bond by utilising cross-currency swaps that
mature in June 2019 and give an effective rate during 2017 of 4.0%.

BAE Systems
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173

19. Loans and overdrafts continued

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 rate of 7.6%.

The US$400m 5.8% bond, repayable 2041, has been converted to a floating rate bond by utilising interest rate swaps that mature in October
2024 and give an effective rate during 2017 of 5.8%.

US$244m of the US$550m 4.75% bond, repayable 2044, has been converted to a sterling fixed rate bond by utilising cross-currency swaps
that mature in June 2019 and give an effective rate during 2017 of 4.2%.

20. Trade and other payables

Trade and other payables are stated at their cost.

US deferred compensation plan liabilities represent the present value of expected future payments required to settle the obligation to employees
in accordance with IAS 19, Employee Benefits.

Non-current
Amounts due to long-term contract customers
Amounts due to other customers
Amounts owed to equity accounted investments (note 30)
Accruals and deferred income1
US deferred compensation plan liabilities
Other payables

Current
Amounts due to long-term contract customers
Amounts due to other customers
Trade payables
Amounts owed to equity accounted investments (note 30)
Other taxes and social security costs
Accruals and deferred income
Other payables

Included above:

Amounts due to long-term contract customers, including contract losses
Advances from long-term contract customers
Advances from other customers

2017
£m

2016
£m

808
16
15
446
318
119
1,722

2,147
148
638
912
239
1,946
292
6,322

2,955
2,880
164

173
10
24
300
326
194
1,027

3,084
169
707
726
206
1,406
242
6,540

3,257
3,133
179

Includes £344m (2016 £209m) of funding received from the UK government for property, plant and equipment at Barrow-in-Furness, UK, relating to the Dreadnought
submarine programme.

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Notes to the Group accounts
continued

21. Retirement benefits

Pension schemes
Defined contribution
Obligations for contributions are recognised as an expense in the income statement as incurred.

Defined benefit
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. Remeasurements, including actuarial gains and losses, are recognised in the Consolidated statement
of comprehensive income in the period in which they occur. Past service costs resulting from a plan amendment or curtailment are recognised
immediately in the income statement.

The retirement benefit surpluses and obligations recognised in the Group’s balance sheet represent the fair value of scheme assets, less the
present value of the defined benefit obligations calculated using a number of actuarial assumptions as set out on page 178. The bid values of
scheme assets are not intended to be realised in the short term and may be subject to significant change before they are realised. The present
values of scheme liabilities are derived from cash flow projections over long periods and are, therefore, inherently uncertain.

IAS 19, Employee Benefits, limits the measurement of a defined benefit surplus to the lower of the surplus in the defined benefit scheme and the
asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the scheme or reductions in future
contributions to the scheme. IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, issued
in 2007, provides an interpretation of the requirements of IAS 19, clarifying that a refund is available if the entity has an unconditional right to a
refund in certain circumstances. The Group has applied IFRIC 14 and has determined that there is no limit on the recognition of the surpluses in
its defined benefit pension schemes as at 31 December 2017.

MBDA participates in the Group’s defined benefit schemes and, as these are multi-employer schemes, the Group has allocated a share of the
IAS 19 pension surpluses and deficits to MBDA based on the relative payroll contributions of active members, which is consistent with prior years.
Whilst this methodology is intended to reflect a reasonable estimate of the share of the deficit, it may not accurately reflect the obligations of the
participating employers.

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.

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.

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175

21. Retirement benefits continued

Background
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 two largest funded defined
benefit schemes are the Main Scheme and the BAE Systems 2000 Pension Plan (2000 Plan) which, in aggregate, represent 81% (2016 69%) of
the total IAS 19 defined benefit obligation at 31 December 2017. The schemes in other countries are primarily defined contribution schemes.

At 31 December 2017, the weighted average durations of the UK and US defined benefit pension obligations were 18 years (2016 19 years) and
12 years (2016 12 years), respectively.

The split of the defined benefit pension liability on a funding basis between active, deferred and pensioner members for the Main Scheme, 2000
Plan and US schemes in aggregate is set out below:

Main Scheme1
2000 Plan2
US schemes3

1. Source: Main Scheme actuarial valuation report as at 31 March 2017.
2. Source: 2000 Plan actuarial valuation report as at 31 March 2017.
3. Source: Annual updates of the US schemes as at 1 January 2017.

Active
%
35
16
31

Deferred
%
20
30
16

Pensioner
%
45
54
53

Regulatory framework
The funded UK schemes are registered and subject to the statutory scheme specific-funding requirements outlined in UK legislation, including
the payment of levies to the Pension Protection Fund as set out in the Pension Act 2004. These schemes were established under trust and the
responsibility for their governance lies jointly with the trustees and the Group.

The funded US schemes are tax-qualified pension schemes regulated by the Pension Protection Act 2006 and insured by the Pension Benefit
Guaranty Corporation (PBGC) up to certain limits. These schemes were established under and are governed by the US Employee Retirement
Income Security Act 1974 and the BAE Systems Administrative Committee is a named fiduciary with the authority to manage their operation.

Benefits
The UK defined benefit schemes provide benefits to members in the form of a set level of pension payable for life based on members’ final
salaries. The benefits attract inflation-related increases both in deferment and payment. All UK defined benefit schemes are closed to new
entrants, with benefits for new employees being provided through a defined contribution scheme. The Normal Retirement Age for active
members of the Main Scheme and 2000 Plan is 65. Specific benefits applicable to members differ between schemes. Further details on the
benefits provided by each scheme are provided on the BAE Systems Pensions website: baesystemspensions.com.

The US defined benefit schemes ceased to be final salary schemes in January 2013. The benefits accrued based on the final salaries of members
at that point will become payable on retirement. The Normal Retirement Age for the largest scheme in the US is 65.

Other retirement benefits
The Group operates a number of non-pension 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.

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Notes to the Group accounts
continued

21. Retirement benefits continued

Funding
Introduction
Disclosures in respect of pension funding are provided below. Disclosures in respect of pension accounting under IAS 19 are provided on pages
178 to 183.

The majority of the UK and US defined benefit pension schemes are funded by the Group’s subsidiaries and equity accounted investments.
The individual pension schemes’ funding requirements are based on actuarial measurement frameworks set out in their funding policies.

For funding valuation purposes, pension scheme assets are included at market value at the valuation date, whilst the liabilities are measured
on an actuarial funding basis using the projected unit credit method and discounted to their present value based on prudent assumptions set
by the trustees following consultation with scheme actuaries.

The funding valuations are performed by professionally qualified independent actuaries and include assumptions which differ from the actuarial
assumptions used for IAS 19 accounting purposes shown on page 178. The purpose of the funding valuations is to design funding plans which
ensure that the schemes have sufficient funds available to meet future benefit payments.

UK valuations
Funding valuations of the Group’s nine UK defined benefit pension schemes are performed every three years. The latest valuations were
performed as at 31 March 2017. The next funding valuation will have an effective date of no later than 31 March 2020.

In November, the 2017 triennial funding valuations and, where necessary, deficit recovery plans were agreed with the trustees and certified
by the scheme actuaries after consultation with the UK Pensions Regulator. The funding valuations have resulted in a significantly lower deficit
than under IAS 19.

The results of the most recent triennial valuations are shown below:

Market value of assets
Present value of liabilities
Funding deficit
Percentage of accrued benefits covered by the assets at the valuation date

The valuations were determined using the following mortality assumptions:

Life expectancy of a male currently aged 65 (years)
Life expectancy of a female currently aged 65 (years)
Life expectancy of a male currently aged 45 (years)
Life expectancy of a female currently aged 45 (years)

At 31 March 2017

Main
Scheme
£bn
12.8
(14.4)
(1.6)
89%

2000
Plan
£bn
4.3
(4.6)
(0.3)
93%

Other
£bn
4.5
(4.7)
(0.2)
96%

Total
£bn
21.6
(23.7)
(2.1)
91%

2017
86 – 89
88 – 90
88 – 92
91 – 93

The discount rate assumptions are based on prudent levels of expected returns for the assets held by each of the schemes. The discount rates
are curves which provide a different rate for each year into the future. The discount rates used in the 2014 valuation were based on a traditional
gilts yield plus a margin which varied by scheme and over time. The discount rates used in the 2017 valuation are directly based on prudent return
assumptions for the assets held by the schemes, reflecting the planned investment strategies and maturity profiles of each scheme.

The inflation assumptions are derived using data from the Bank of England which is based on the difference between the yields on index-linked
and fixed interest long-term government bonds. The inflation assumption is a curve which provides a different rate for each year into the future.

In aggregate, the net funding deficit across the UK schemes at 31 March 2017 was £2.1bn. The funding deficit is approximately £3bn lower
than the accounting deficit of the equivalent UK schemes prepared under IAS 19, using like-for-like mortality assumptions and asset values at
31 December 2017, largely due to lower liabilities reflecting the higher discount rate assumption. Under IAS 19, the discount rate for accounting
purposes is based on third-party AA corporate bond yields whereas, for funding valuation purposes, the discount rate is based on a prudent level
of expected returns from the broader and mixed types of investments held in the schemes, which are expected to yield higher returns than bonds.

The agreements reached are underpinned by contingency plans, which include a commitment by the Group to a further £50m of deficit funding
into the largest scheme prior to the next triennial valuation in the event that the scheme funding level was to fall below pre-determined parameters.
In addition, the Group would be required to pay £187m across its schemes with deficits at the valuation date if the funding levels for those
schemes were to fall significantly and were to remain at or below those levels for nine months.

There will be no change to the contributions or benefits, as set out in the rules of the schemes, for pension scheme members as a result of the
new funding valuations.

The results of future triennial valuations and associated funding requirements will be impacted by a number of factors, including the future
performance of investment markets and anticipated members’ longevity.

US valuations
The Group’s US pension schemes are valued annually, with the latest valuations performed as at 1 January 2017.

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177

21. Retirement benefits continued

Contributions
Under the terms of the trust deeds of the UK schemes, the Group is required to have a funding plan determined at the conclusion of the triennial
funding valuations.

Equity accounted investments make regular contributions to the schemes in which they participate in line with the schedule of contributions
and are allocated a share of deficit funding contributions.

In 2017, total contributions to the Group’s pension schemes were £433m (2016 £461m), including amounts funded by equity accounted
investments of £31m (2016 £50m), and included approximately £209m and £62m of deficit recovery payments in respect of the UK and
US schemes, respectively.

Based on the new funding valuations, current annual deficit recovery payments to the UK schemes, including amounts funded by equity
accounted investments, will increase to £220m a year from 1 April 2018. Deficit contributions will further increase in line with any percentage
growth in dividend payments made by the Group. Under the new deficit recovery plans, these annual payments would subsequently fall
by £50m in 2022 as the deficits on certain schemes are expected to be cleared. The annual payments are expected to end in 2026 when
all deficits are projected to be cleared. Under the last agreement made in 2014, all scheme deficits were projected to be cleared in 2026.

Based on the latest valuations of the Group’s US pension schemes, contributions are expected to remain at a level consistent with 2017
through to 2022.

In 2018, the Group expects to make total contributions to its pension schemes of £0.5bn.

Risk management
The defined benefit pension schemes expose the Group to actuarial risks, including market (investment) risk, interest rate risk, inflation risk
and longevity risk.

Risk

Mitigation

Market (investment) risk
Asset returns may not move
in line with the liabilities and
may be subject to volatility.

Interest rate risk
Liabilities are sensitive to
movements in interest rates,
with lower interest rates leading
to an increase in the valuation
of liabilities.

Inflation risk
Liabilities are sensitive to
movements in inflation, with
higher inflation leading to
an increase in the valuation
of liabilities.

The investment portfolios are highly diversified, investing in a wide range of assets, in order to provide
reasonable assurance that no single security or type of security could have a materially adverse impact
on the total portfolio. To reduce volatility, certain assets are held in a matching portfolio, which largely
consists of index-linked bonds, gilts and swaps, designed to mirror movements in corresponding liabilities.

Some 47% (2016 47%) of the Group’s pension scheme assets are held in equities and pooled investment
vehicles due to the higher expected level of return over the long term.

Some of the Group’s pension schemes use derivative financial instruments as part of their investment
strategy to manage the level of market risk. The Main Scheme has a long-dated equity option strategy
protecting £1.4bn of assets against a significant fall in equity markets.

In addition to investing in bonds as part of the matching portfolio, some of the UK schemes invest in
interest rate swaps to reduce the exposure to movements in interest rates. The swaps are held with several
banks to reduce counterparty risk.

The discount rate assumptions set as part of the 2017 UK funding valuations more directly reflect the
expected returns on assets held by the schemes and, therefore, the liabilities are less sensitive to interest
rate risk than they were in the 2014 funding valuation. Accordingly, the 2017 approach provides a more
natural hedge against interest rate risk. The planned investment strategy, which is reflected in the discount
rate and liability calculation, is for the schemes to increase their investments in bonds or other assets
which match the liabilities as the schemes mature. Under the 2017 UK funding valuation, the Group
expects the schemes to be fully hedged against interest rate movements following a five-year transition
period to the planned investment strategy.

In addition to investing in index-linked bonds as part of the matching portfolio, the principal UK schemes
invest in long-term inflation swaps to reduce the exposure to movements in inflation. The swaps are held
with several banks to reduce counterparty risk. The Group’s US schemes are not indexed with inflation.

The approach to the 2017 UK funding valuation provides a more natural hedge against inflation
movements and, therefore, the liabilities are less sensitive to inflation risk than they were in the 2014
funding valuation. Under the 2017 UK funding valuation approach, the Group is already fully hedged
against inflation movements and, under the planned investment strategy, the Group aims to maintain
a fully hedged position.

In 2014, the Main Scheme implemented a pension increase exchange to allow retired members to elect
for a higher current pension in exchange for foregoing certain rights to future pension increases.

Longevity risk
Liabilities are sensitive to
life expectancy, with increases
in life expectancies leading
to an increase in the valuation
of liabilities.

Longevity adjustment factors are used in the majority of the UK pension schemes in order to adjust
the pension benefits payable so as to share the cost of people living longer with employees.

In 2013, with the agreement of the Company, the trustees of the 2000 Plan, Royal Ordnance Pension
Scheme and Shipbuilding Industries Pension Scheme entered into arrangements with Legal & General
to insure against longevity risk for the current pensioner population, covering a total of £4.4bn of pension
scheme liabilities. These arrangements reduce the funding volatility relating to increasing life expectancy.

178

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

21. Retirement benefits continued

IAS 19 accounting
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.

Principal actuarial assumptions
The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the long-term nature of the obligation
covered, may not necessarily occur in practice.

Financial assumptions
Discount rate – past service (%)
Discount rate – future service (%)
Retail Prices Index (RPI) inflation (%)
Rate of increase in salaries (%)
Rate of increase in deferred pensions (%)
Rate of increase in pensions in payment (%)
Demographic assumptions
Life expectancy of a male currently aged 65 (years)
Life expectancy of a female currently aged 65 (years)
Life expectancy of a male currently aged 45 (years)
Life expectancy of a female currently aged 45 (years)

2017

2016

2015

2017

2016

2015

2.6
2.7
3.1
3.1
2.1/3.1

3.9
2.7
3.9
2.7
3.2
3.2
3.2
3.2
2.3/3.2
2.2/3.2
1.6 – 3.7 1.7 – 3.7 1.8 – 3.6

86 – 88
88 – 90
88 – 90
90 – 92

86 – 89
89 – 90
88 – 91
91 – 92

87 – 89
89 – 90
89 – 91
91 – 92

3.7
3.7
n/a
n/a
n/a
n/a

87
89
87
89

4.2
4.2
n/a
n/a
n/a
n/a

87
89
87
89

4.5
4.5
n/a
n/a
n/a
n/a

87
89
87
89

Discount rate
The discount rate assumptions are derived through discounting the projected benefit payments using a third-party AA corporate bond yield
curve to produce a single equivalent discount rate for the UK and US territories. This inherently captures the maturity profile of the expected
benefit payments. For the UK territory, the discount rate used for future service differs from that used for past service as it only uses the cash
flows relating to active members, which have a different duration. Further information on the duration of the schemes is detailed on page 175.

Retail Prices Index (RPI) inflation
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. In the US, inflation assumptions are not relevant
as the Group’s US pension schemes are not indexed with inflation.

Rate of increase in salaries
The rate of increase in salaries for the UK schemes is assumed to be RPI inflation of 3.1% (2016 RPI inflation of 3.2%), plus a promotional scale.
From 1 January 2013, employees in the US schemes no longer accrue salary-related benefits.

Rate of increase in deferred pensions
The rate of increase in deferred pensions for the UK schemes is based on Consumer Prices Index (CPI) inflation of 2.1% (2016 CPI inflation
of 2.2%), with the exception of the 2000 Plan, which is based on RPI inflation of 3.1% (2016 RPI inflation of 3.2%). For all UK schemes, the rate
of increase in deferred pensions is subject to inflation caps.

Rate of increase in pensions in payment
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 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.

Life expectancy
For its UK pension schemes, the Group has used the Self-Administered Pension Schemes S2 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 and information on the demographic profile of the scheme’s membership. In addition, to allow for
future improvements in longevity, the Continuous Mortality Investigation 2016 tables (published by the Institute of Actuaries) have been used
(in 2016, the Continuous Mortality Investigation 2015 tables were used), with an assumed long-term rate of future annual mortality improvements
of 1.25% (2016 1.25%), for both pensioner and non-pensioner members.

In October 2015, the Society of Actuaries in the US released updated mortality assumptions reflecting the results of its comprehensive mortality
study. For the majority of the US schemes, the mortality tables used at 31 December 2017 are a blend of the fully generational RP-2014 Aggregate
table and the RP-2014 White Collar table, both projected using Scale MP-2017. The IRS have approved the new mortality tables to be adopted for
funding valuation purposes from 2018.

US healthcare schemes
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 2017. These valuations were rolled forward to reflect the information at 31 December 2017. The method of
accounting for these is similar to that used for defined benefit pension schemes.

The assumption for long-term healthcare cost increases is 4.9% (2016 4.8%) based on the assumptions that the increases are 7.8% in 2017
reducing to 4.5% by 2026 and 4.5% each year thereafter for pre-retirement, and 8.5% in 2017 reducing to 4.5% by 2026 and 4.5% each year
thereafter for post-retirement.

21. Retirement benefits continued

Summary of movements in retirement benefit obligations

Total net IAS 19 deficit at 1 January 2017
Actual return on assets excluding amounts included in net interest expense
Increase in liabilities due to changes in financial assumptions
Decrease in liabilities due to changes in mortality assumptions
Decrease in liabilities due to changes in other demographic assumptions
Experience gains/(losses)
Contributions in excess of service cost
Past service cost – plan amendments
Net interest expense
Foreign exchange adjustments
Movement in US healthcare schemes
Total net IAS 19 deficit at 31 December 2017
Allocated to equity accounted investments
Group’s share of net IAS 19 deficit excluding Group’s share of amounts

allocated to equity accounted investments at 31 December 2017

BAE Systems
Annual Report 2017

179

UK
£m
(5,778)
1,082
(242)
971
202
136
98
(2)
(147)
–
–
(3,680)
326

US and
other
£m
(792)
444
(291)
24
–
(29)
53
–
(32)
55
2
(566)
–

Total
£m
(6,570)
1,526
(533)
995
202
107
151
(2)
(179)
55
2
(4,246)
326

(3,354)

(566)

(3,920)

The decrease in liabilities due to changes in mortality assumptions in the UK schemes reflects updated assumptions, both to base tables and
future improvements.

Contributions in excess of service cost on an IAS 19 accounting basis of £151m are lower than on a funding basis (£271m) because the service
cost is higher on an IAS 19 accounting basis.

Amounts recognised on the balance sheet
The table below shows a reconciliation between the gross assets and liabilities of the Group’s UK, US and other post-retirement benefit schemes
and the amounts recognised on the Group’s balance sheet after allocation to equity accounted investments.

Present value of unfunded obligations
Present value of funded obligations
Fair value of scheme assets
Total net IAS 19 (deficit)/surplus
Allocated to equity accounted investments
Group’s share of net IAS 19 (deficit)/surplus
Represented by:

Retirement benefit surpluses
Retirement benefit obligations

UK defined
benefit
pension
schemes
£m
(49)
(26,071)
22,440
(3,680)
326
(3,354)

2017

US and
other
pension
schemes
£m
(146)
(4,803)
4,352
(597)
–
(597)

US
healthcare
schemes
£m
–
(168)
199
31
–
31

UK defined
benefit
pension
schemes
£m
(74)
(27,099)
21,395
(5,778)
516
(5,262)

Total
£m
(195)
(31,042)
26,991
(4,246)
326
(3,920)

2016

US and
other
pension
schemes
£m
(153)
(4,981)
4,313
(821)
–
(821)

US
healthcare
schemes
£m
–
(169)
198
29
–
29

Total
£m
(227)
(32,249)
25,906
(6,570)
516
(6,054)

209
(3,563)
(3,354)

54
(651)
(597)

39
(8)
31

302
(4,222)
(3,920)

132
(5,394)
(5,262)

49
(870)
(821)

42
(13)
29

223
(6,277)
(6,054)

Group’s share of net IAS 19 deficit of equity

accounted investments

(126)

–

(126)

(193)

–

(193)

Total cumulative actuarial losses recognised in equity since the transition to IFRS are £4.6bn (2016 £6.7bn).

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BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

21. Retirement benefits continued

IAS 19 accounting continued

Changes in the fair value of scheme assets before allocation to equity accounted investments

Value of scheme assets at 1 January 2016
Impact of sectionalisation of the Main Scheme

Interest income
Actual return on assets excluding amounts included in interest income

Actual return on assets

Contributions by employer
Contributions by employer in respect of employee salary sacrifice arrangements

Total contributions by employer
Members’ contributions
Administrative expenses
Foreign exchange translation
Benefits paid
Value of scheme assets at 31 December 2016

Interest income
Actual return on assets excluding amounts included in interest income

Actual return on assets

Contributions by employer
Contributions by employer in respect of employee salary sacrifice arrangements

Total contributions by employer
Members’ contributions
Administrative expenses
Foreign exchange translation
Benefits paid
Value of scheme assets at 31 December 2017

UK defined
benefit
pension
schemes
£m
20,209
(1,779)
710
2,649
3,359
390
86
476
9
–
–
(879)
21,395
568
1,082
1,650
352
84
436
8
–
–
(1,049)
22,440

US and
other
pension
schemes
£m
3,452
–
166
180
346
71
–
71
–
(17)
679
(218)
4,313
169
444
613
81
–
81
–
(16)
(394)
(245)
4,352

US
healthcare
schemes
£m
166
–
8
2
10
1
–
1
–
–
33
(12)
198
8
19
27
2
–
2
–
–
(19)
(9)
199

Total
£m
23,827
(1,779)
884
2,831
3,715
462
86
548
9
(17)
712
(1,109)
25,906
745
1,545
2,290
435
84
519
8
(16)
(413)
(1,303)
26,991

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Annual Report 2017

181

21. Retirement benefits continued

Assets of defined benefit pension schemes

Equities:
UK1
Overseas

Pooled investment vehicles2
Fixed interest securities:

UK gilts
UK corporates
Overseas government
Overseas corporates
Index-linked securities:

UK gilts
UK corporates

Property 3
Derivatives4
Cash:

Sterling
Foreign currency

Other
Total

Equities:
UK1
Overseas

Pooled investment vehicles2
Fixed interest securities:

UK gilts
UK corporates
Overseas government
Overseas corporates
Index-linked securities:

UK gilts
UK corporates

Property3
Derivatives4
Cash:

Sterling
Foreign currency

Other
Total

2017

US and other

Total

Quoted
£m

Unquoted
£m

Total
£m

Quoted
£m

Unquoted
£m

Total
£m

Quoted
£m

Unquoted
£m

Total
£m

4,453
3,074
1,327

1,556
2,214
50
1,319

2,164
928
–
–

221
–
138
17,444

4,454
3,361
3,596

1,581
3,427
50
1,327

2,218
1,303
1,648
(1,011)

–
346
797

–
–
97
2,953

–
–
–
–

267
3
216
22,440

–
27
–
4,220

1
287
2,269

25
1,213
–
8

54
375
1,648
(1,011)

46
3
78
4,996

–
–
2

–
–
–
–

–
–
129
–

–
–
1
132

2016

US and other

Quoted
£m

Unquoted
£m

Total
£m

Quoted
£m

Unquoted
£m

4,030
2,774
1,503

1,947
2,389
79
1,069

2,039
1,046
–
–

345
32
–
17,253

–
–
2,428

–
145
–
230

–
546
1,460
(708)

–
26
15
4,142

4,030
2,774
3,931

1,947
2,534
79
1,299

2,039
1,592
1,460
(708)

–
430
988

–
–
151
2,509

–
–
–
–

345
58
15
21,395

–
79
–
4,157

–
–
–

–
–
–
–

–
–
147
–

–
–
9
156

–
346
799

–
–
97
2,953

–
–
129
–

–
27
1
4,352

Total
£m

–
430
988

–
–
151
2,509

–
–
147
–

–
79
9
4,313

4,453
3,420
2,124

1,556
2,214
147
4,272

2,164
928
–
–

221
27
138
21,664

4,454
3,707
4,395

1,581
3,427
147
4,280

2,218
1,303
1,777
(1,011)

267
30
217
26,792

1
287
2,271

25
1,213
–
8

54
375
1,777
(1,011)

46
3
79
5,128

Total

Quoted
£m

Unquoted
£m

Total
£m

4,030
3,204
2,491

1,947
2,389
230
3,578

2,039
1,046
–
–

–
–
2,428

–
145
–
230

–
546
1,607
(708)

4,030
3,204
4,919

1,947
2,534
230
3,808

2,039
1,592
1,607
(708)

345
111
–
21,410

–
26
24
4,298

345
137
24
25,708

Includes £33m (2016 £32m) of the Company’s own ordinary shares.

1.
2. Primarily invested in equities. The amounts classified as unquoted primarily comprise investments in private equity, valued in accordance with International Private Equity

and Venture Capital Valuation Guidelines.

3. Valued on the basis of open market value at the end of the year determined in accordance with the Royal Institution of Chartered Surveyors’ Appraisal and Valuation

Standards and the Practice Note contained therein. Includes £243m (2016 £229m) of property occupied by Group companies.

4. Includes interest rate, inflation and longevity swaps. The valuations are based on valuation techniques using underlying market data and discounted cash flows.

182

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

21. Retirement benefits continued

IAS 19 accounting continued

Changes in the present value of the defined benefit obligations before allocation to equity accounted investments

Defined benefit obligations at 1 January 2016
Impact of sectionalisation of the Main Scheme

Current service cost
Contributions by employer in respect of employee salary sacrifice arrangements

Total current service cost
Members’ contributions
Past service cost – plan amendments
Actuarial loss due to changes in financial assumptions
Actuarial gain due to changes in demographic assumptions
Experience gains
Interest expense
Foreign exchange translation
Benefits paid
Defined benefit obligations at 31 December 2016

Current service cost
Contributions by employer in respect of employee salary sacrifice arrangements

Total current service cost
Members’ contributions
Past service cost – plan amendments
Actuarial loss due to changes in financial assumptions
Actuarial gain due to changes in mortality assumptions
Actuarial gain due to changes in other demographic assumptions
Experience gains
Interest expense
Foreign exchange translation
Benefits paid
Defined benefit obligations at 31 December 2017

UK defined
benefit
pension
schemes
£m
(25,033)
2,446
(180)
(86)
(266)
(9)
(7)
(4,815)
250
242
(860)
–
879
(27,173)
(254)
(84)
(338)
(8)
(2)
(242)
971
202
136
(715)
–
1,049
(26,120)

US and
other
pension
schemes
£m
(4,203)
–
(11)
–
(11)
–
(4)
(170)
40
10
(200)
(814)
218
(5,134)
(12)
–
(12)
–
–
(291)
24
–
(29)
(201)
449
245
(4,949)

US
healthcare
schemes
£m
(145)
–
(1)
–
(1)
–
(1)
(5)
3
1
(7)
(26)
12
(169)
(1)
–
(1)
–
(1)
(13)
1
–
(1)
(7)
14
9
(168)

Total
£m
(29,381)
2,446
(192)
(86)
(278)
(9)
(12)
(4,990)
293
253
(1,067)
(840)
1,109
(32,476)
(267)
(84)
(351)
(8)
(3)
(546)
996
202
106
(923)
463
1,303
(31,237)

Amounts recognised in the income statement after allocation to equity accounted investments

2017

2016

UK defined
benefit
pension
schemes
£m

US and
other
pension
schemes
£m

US
healthcare
schemes
£m

Included in operating costs:

Current service cost
Past service cost – plan amendments

Administrative expenses

Included in net finance costs:

(228)
(2)
(230)
–
(230)

(12)
–
(12)
(16)
(28)

Net interest (expense)/income on retirement benefit

obligations

(134)

(32)

Group defined benefit schemes 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

(12)

(5)

–

(1)
(1)
(2)
–
(2)

–

UK defined
benefit
pension
schemes
£m

US and
other
pension
schemes
£m

US
healthcare
schemes
£m

Total
£m

(241)
(3)
(244)
(16)
(260)

(161)
(7)
(168)
–
(168)

(11)
(4)
(15)
(17)
(32)

(165)

(136)

(34)

(12)

(5)

(10)

(5)

–

Total
£m

(173)
(12)
(185)
(17)
(202)

(169)

(10)

(5)

(1)
(1)
(2)
–
(2)

–

The Group incurred a charge of £193m (2016 £189m restated) in relation to defined contribution schemes for employees.

BAE Systems
Annual Report 2017

183

21. Retirement benefits continued

Sensitivity analysis
The sensitivity information has been derived using scenario analysis from the actuarial assumptions as at 31 December 2017 and keeping all other
assumptions as set out on page 178.

Financial assumptions
The estimated impact of changes in the discount rate and inflation assumptions on the defined benefit pension obligation, together with the
estimated impact on scheme assets, is shown in the table below. The estimated impact on scheme assets takes into account the Group’s risk
management activities in respect of interest rate and inflation risk. The sensitivity analysis on the defined benefit obligation is measured on
an IAS 19 accounting basis and, therefore, does not reflect the natural hedging in the discount rate used for funding valuation purposes.

Discount rate:

0.1 percentage point increase
0.1 percentage point decrease

Inflation:

0.1 percentage point increase
0.1 percentage point decrease

1. Before allocation to equity accounted investments.

(Increase)/decrease
in pension obligation1
£bn

Increase/(decrease)
in scheme assets1
£bn

0.5
(0.5)

(0.5)
0.5

(0.2)
0.2

0.2
(0.2)

The sensitivity of the valuation of the liabilities to changes in the inflation assumption presented above assumes that a 0.1 percentage point
change to expectations of future inflation results in a 0.1 percentage point change to all inflation-related assumptions (rate of increase in salaries,
rate of increase in deferred pensions and rate of increase in pensions in payment) used to value the liabilities. However, upper and lower limits
exist on the majority of inflation-related benefits such that a change in expectations of future inflation may not have the same impact on the
inflation-related benefits, and hence will result in a smaller change to the valuation of the liabilities. Accordingly, extrapolation of the above results
beyond the specific sensitivity figures shown may not be appropriate. To illustrate this, the (increase)/decrease in the defined benefit pension
obligation resulting from larger changes in the inflation assumption would be as follows:

Inflation:

0.5 percentage point increase
0.5 percentage point decrease
1.0 percentage point increase
1.0 percentage point decrease

1. Before allocation to equity accounted investments.

(Increase)/decrease
in pension obligation1
£bn

(1.5)
1.5
(3.1)
2.8

Demographic assumptions
Changes in the life expectancy assumption, including the benefit of longevity swap arrangements (see longevity risk on page 177), would have
the following effect on the total net IAS 19 deficit:

Life expectancy:
One-year increase
One-year decrease

1. Before allocation to equity accounted investments.

(Increase)/decrease
in net deficit1
£bn

(1.1)
1.1

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184

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

22. 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.

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. 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 possible outcomes against their associated probabilities.

Reorganisations
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. The costs associated with the reorganisation programmes are supported by detailed plans and
based on previous experience as well as other known factors. Future operating costs are not provided for.

Legal, contractual and environmental
The Group holds provisions for expected legal, contractual and environmental costs that it expects to incur over an extended period. Management
exercises judgement to determine the amount of these provisions. Provision is made for known issues based on past experience of similar items
and other known factors. Each provision is considered separately and the amount provided reflects the best estimate of the most likely amount,
being the single most likely amount in a range of possible outcomes.

Non-current
Current
At 1 January 2017
Created
Utilised
Acquisitions
Reclassified between categories
Released1
Net present value adjustments
Foreign exchange adjustments
At 31 December 2017
Represented by:
Non-current
Current

Warranties
and
after-sales
service
£m
59
43
102
55
(37)
–
–
(13)
–
(5)
102

51
51
102

Legal,
contractual
and
environmental
£m
280
131
411
66
(36)
–
3
(51)
17
(16)
394

Reorganisations
£m
1
22
23
190
(16)
–
–
(6)
–
–
191

73
118
191

259
135
394

Other
£m
32
38
70
21
(10)
2
(3)
(8)
2
(3)
71

30
41
71

Total
£m
372
234
606
332
(99)
2
–
(78)
19
(24)
758

413
345
758

1. There are no individual provision releases in excess of £10m.

Warranties and after-sales service
Warranty and after-sales service 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
Reorganisation 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.

Other debtors includes £89m which is reimbursable in respect of reorganisation costs incurred in 2017 (see note 12).

Legal, contractual and environmental
Reflecting the inherent uncertainty within many legal proceedings, the amount of the outflows could differ significantly from the amount
provided and the timing of the outflows cannot be reliably estimated.

Other
There are no individually significant provisions included within other provisions.

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BAE Systems
Annual Report 2017

185

23. Share capital and other reserves

Share capital

Equity

Non-equity

Total

Ordinary shares of 2.5p each

Special Share of £1

Number of
shares
m

Nominal
value
£m

Number of
shares

Nominal
value
£

Nominal
value
£m

Issued and fully paid
At 1 January 2016, 31 December 2016 and 31 December 2017

3,467

Special Share
One Special Share of £1 in the Company is held on behalf of the Secretary of State for Business, Energy and Industrial Strategy (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
As at 31 December 2017, 281,232,739 (2016 291,449,361) ordinary shares of 2.5p each with an aggregate nominal value of £7,030,818
(2016 £7,286,234) were held in treasury. During 2017, 10,216,622 (2016 10,358,742) treasury shares were used to satisfy awards and options
under the Share Incentive Plan, International Share Incentive Plan, Performance Share Plan, Restricted Share Plan and Executive Share Option Plan.

Own shares held
Own shares held, including treasury shares and shares held by BAE Systems Employee Share Option Plan (ESOP) Trust, are recognised as a deduction
from retained earnings.

BAE Systems ESOP Trust
The Group has an ESOP discretionary trust to administer the share plans and to acquire Company shares, using funds loaned by the Group, to meet
commitments to Group employees. Dividend waivers were in operation for shares within the ESOP Trust, other than those owned beneficially by
the participants, for the dividends paid in June and November 2017.

At 31 December 2017, the ESOP held 1,680,035 (2016 1,327,731) ordinary shares of 2.5p each, with a market value of £10m (2016 £8m). 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 also in operation for the dividends paid in June and November 2017 over shares within the Company’s share incentive plan
trusts other than those shares owned beneficially by the participants.

Equity 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.

Prior year final 12.7p dividend per ordinary share paid in the year (2016 12.5p)
Interim 8.8p dividend per ordinary share paid in the year (2016 8.6p)

2017
£m
404
280
684

2016
£m
397
273
670

After the balance sheet date, the directors proposed a final dividend of 13p per ordinary share. The dividend, which is subject to shareholder
approval, will be paid on 1 June 2018 to shareholders registered on 20 April 2018. The ex-dividend date is 19 April 2018.

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 2018.

186

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

23. Share capital and other reserves continued

Other reserves

At 1 January 2016
Subsidiaries:

Currency translation on foreign currency net investments
Amounts credited to hedging reserve
Tax on other comprehensive income
Equity accounted investments (net of tax)
At 31 December 2016
Subsidiaries:

Currency translation on foreign currency net investments
Amounts credited to hedging reserve
Tax on other comprehensive income
Equity accounted investments (net of tax)
At 31 December 2017

Merger
reserve
£m
4,589

Statutory
reserve
£m
202

Revaluation
reserve
£m
10

Capital
redemption
reserve
£m
3

Hedging
reserve
£m
(62)

Translation
reserve
£m
535

–
–
–
–
4,589

–
–
–
–
202

–
–
–
–
10

–
–
–
–
3

–
96
(17)
(7)
10

–
59
(11)
1
59

1,284
–
–
52
1,871

(620)
–
–
(16)
1,235

Total
£m
5,277

1,284
96
(17)
45
6,685

(620)
59
(11)
(15)
6,098

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.

Capital redemption reserve
The capital redemption reserve represents the cumulative nominal value of the Company’s ordinary shares repurchased and subsequently cancelled.

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.

Translation reserve
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.

Capital
The Group funds its operations through a mixture of equity funding and debt financing, including bank and capital market borrowings.

At 31 December 2017, the Group’s capital was £4,725m (2016 £3,454m), which comprises total equity of £4,784m (2016 £3,464m), excluding
amounts accumulated in equity relating to cash flow hedges of £59m (2016 £10m). Net debt was £752m (2016 £1,542m).

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;

– pursuing 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 7);

– making accelerated returns of capital to shareholders when the balance sheet allows and when the return from doing so is in excess

of the Group’s Weighted Average Cost of Capital; and

– investing in value-enhancing acquisitions, where market conditions are right and where they deliver on the Group’s strategy.

BAE Systems
Annual Report 2017

187

24. Operating business cash flow

Key Performance Indicator – Operating business cash flow
Definition Net cash flow from operating activities excluding taxation and including net capital expenditure, financial investment and dividends
from equity accounted investments.

Purpose Allows management to monitor the operational cash generation of the Group.

Taxation is excluded because it is not relevant to the pre-tax operational cash generation of the Group.
Net capital expenditure and financial investment are included as a measure of the investment in the business to support the operational
performance of the Group.
Dividends received from equity accounted investments are included as a measure of the operating cash generation of the Group’s equity
accounted investments.

Reconciliation of net cash flow from operating activities to operating business cash flow

Net cash flow from operating activities
Add back Taxation paid

Purchase of property, plant and equipment, and investment property
Purchase of intangible assets
Proceeds from sale of property, plant and equipment, and investment property
Proceeds from sale of intangible assets
Equity accounted investment funding

Net capital expenditure and financial investment
Dividends received from equity accounted investments
Operating business cash flow

Reconciliation of operating business cash flow to net cash flow from operating activities by reporting segment

2017
£m
1,897
227
(389)
(87)
34
1
(3)
(444)
72
1,752

2016
£m
1,229
187
(408)
(82)
45
–
(5)
(450)
38
1,004

Operating business
cash flow

2017
£m
450
116
222
427
671
(134)
1,752

2016
£m
469
83
58
199
435
(240)
1,004

Deduct
Dividends received
from equity accounted
investments

Add back
Net capital
expenditure and
financial investment

Net cash flow from
operating activities

2017
£m
(3)
–
(8)
(9)
(52)
–
(72)

2016
£m
(2)
–
(9)
(3)
(19)
(5)
(38)

2017
£m
122
11
72
189
50
–
444

2016
£m
101
23
80
189
57
–
450

2017
£m
569
127
286
607
669
(134)
2,124
(227)
1,897

2016
£m
568
106
129
385
473
(245)
1,416
(187)
1,229

Electronic Systems
Cyber & Intelligence
Platforms & Services (US)
Platforms & Services (UK)
Platforms & Services (International)
HQ

Taxation paid1
Net cash flow from operating activities

1. Taxation is managed on a Group-wide basis.

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BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

25. Movement in assets and liabilities arising from financing activities

Non-current assets
Other financial assets

Current assets
Other financial assets

Non-current liabilities
Loans
Other financial liabilities
Cash collateral (reported in other payables)

Current liabilities
Loans
Other financial liabilities

Interest paid
Net purchase of own shares
Equity dividends paid
Dividends paid to non-controlling interests
Net cash flow from financing activities

26. Net debt

Non-cash movements

Cash
(inflow)/
outflow
£m

Foreign
exchange
movements
£m

Fair value
and other
movements
£m

2017
£m

–

350
–
–

–
–
350

(119)

226

6
(37)
–

(7)
(133)
(241)

(4,069)
(133)
(17)

(7)
(104)

2016
£m

345

–

204

(164)

(4,425)
(102)
(32)

–
(212)

–
6
15

–
241
98
204
1
684
8
995

Key Performance Indicator – Net debt
Definition Cash and cash equivalents, less loans and overdrafts (including debt-related derivative financial instruments).

Purpose Allows management to monitor the indebtedness of the Group.

Components of net debt

Cash and cash equivalents
Debt-related derivative financial instrument assets – non-current
Loans – non-current
Loans and overdrafts – current
Debt-related derivative financial instrument liabilities – current
Net debt

Notes
17
13
19
19
13

2017
£m
3,271
79
(4,069)
(14)
(19)
(752)

2016
£m
2,769
114
(4,425)
–
–
(1,542)

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189

27. Fair value measurement

Fair value of financial instruments
Certain of the Group’s financial instruments are held at fair value.

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the balance sheet date.

The fair values of financial instruments held at fair value 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; and

– 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.

Due to the variability of the valuation factors, the fair values presented at 31 December may not be indicative of the amounts the Group would
expect to realise in the current market environment.

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).

Carrying amounts and fair values of certain financial instruments

Financial instruments measured at fair value:

Non-current
Available-for-sale financial assets
Other financial assets
Other financial liabilities
Current
Other financial assets
Other financial liabilities

Financial instruments not measured at fair value:

Non-current
Loans1
Current
Cash and cash equivalents
Loans and overdrafts

2017

2016

Carrying
amount
£m

Fair
value
£m

Carrying
amount
£m

Fair
value
£m

Notes

6
226
(133)

89
(104)

6
226
(133)

89
(104)

13
13

6
345
(102)

204
(212)

6
345
(102)

204
(212)

(4,069)

(4,478)

(4,425)

(4,805)

17
19

3,271
(14)

2,769
–

1. US$500m of the US$800m 3.8% bond, repayable 2024, has been converted to a floating rate bond by utilising interest rate swaps. These derivatives have been designated
as fair value hedges. Changes in the fair value of the interest rate risk on the bond, and gains and losses on the derivatives are recognised in the income statement. The bond
has been included in financial instruments not measured at fair value because its carrying value has only been adjusted for the fair value of the interest rate risk on a portion
of the bond, which has been calculated by discounting the future cash flows and translating at the appropriate balance sheet rate.

All of the financial assets and liabilities measured at fair value are classified as level 2 using the fair value hierarchy. There were no transfers
between levels during the year.

Financial assets and liabilities in the Group’s Consolidated balance sheet are either held at fair value or their carrying value approximates to fair
value, with the exception of loans, most of which are held at amortised cost. The fair value of loans presented in the table above is derived from
market prices.

190

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

28. Financial risk management

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, including interest rate and cross-currency swaps.

The Group’s interest rate management policy is that a minimum of 50% (2016 50%) and a maximum of 90% (2016 90%) of gross debt is
maintained at fixed interest rates. At 31 December 2017, the Group had 82% (2016 81%) of fixed rate debt and 18% (2016 19%) of floating
rate debt based on a gross debt of £4.0bn, including debt-related derivative financial assets (2016 £4.3bn).

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
3,271
(746)

Between one
and two years
£m
–
(739)

More than
two years
£m
–
(661)

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 2017, the Group had a total of $1.0bn (2016 $1.0bn) of this type of swap
outstanding with a weighted average duration of 5.6 years (2016 2.6 years). In respect of the fixed rate debt, the weighted average period in
respect of which interest is fixed was 9.5 years (2016 11.6 years).

Given the level of short-term interest rates during the year, the average cost of the floating rate debt was 4.6% (2016 4.1%) on US dollars.
The cost of the fixed rate debt was 4.9% (2016 4.8%).

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 £7m (2016 £8m).

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 £14m (2016 £14m).

Liquidity risk
Contractual cash flows on financial liabilities
The contracted cash flows on loans and overdrafts, and derivative financial instruments at the reporting date are shown below, classified
by maturity. The cash flows are shown on a gross basis, are not discounted and include estimated interest payments where applicable.

31 December 2017

Contracted cash flow

Less
than
one
year
£m
(213)

Between
one and
five
years
£m
(2,474)

More
than
five
years
£m
(3,217)

Carrying
amount
£m
(4,083)

Total
£m
(5,904)

Carrying
amount
£m
(4,425)

31 December 2016

Contracted cash flow

Less
than
one
year
£m
(217)

Between
one and
five
years
£m
(2,354)

More
than
five
years
£m
(4,055)

401
397
(796)
(1)

358
90
(567)
118

33
(17)
(21)
6

792
470
(1,384)
123

(396)
466
(333)
255

23
225
(307)
58

30
18
(55)
7

821
771
(1,867)
275
9

(1)

–
–
11
(11)
25

50
74

–
–
–
–
(2)

(2)

92
91

(8)

(1)

821
771
(1,856)
264
32

150
183

1,809
620
(2,624)
195
7

10
9

–
–
–
–
106

106

29
134

118

114
235

–

–
–
–
–
–

–

147
147

Total
£m
(6,626)

(343)
709
(695)
320

(9)

1,809
620
(2,624)
195
113

113

186
290

Loans and overdrafts

Purchase/(sale) contracts:

US dollar
Euro
Sterling
Other

Cash flow hedges – foreign

exchange contracts
Purchase/(sale) contracts:

US dollar
Euro
Sterling
Other
Interest rate contracts

Other foreign exchange/interest

rate contracts

Debt-related derivative financial

instruments

Other financial assets and liabilities

(45)

60
78

8
18

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.

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BAE Systems
Annual Report 2017

191

28. Financial risk management continued

Borrowing facilities
The Group’s objective is to maintain adequate undrawn committed borrowing facilities.

At 31 December 2017, the Group had a committed Revolving Credit Facility (RCF) of £2bn (2016 £2bn). The RCF is contracted until 2018 at
£2bn and from 2018 to 2020 at £1.9bn. The RCF was undrawn throughout the year. The RCF also acts as a back stop to Commercial Paper
issued by the Group. At 31 December 2017, the Group had no Commercial Paper in issue (2016 £nil).

Cash management
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 instant-access current accounts, short-term deposits and money market funds, choosing
instruments with appropriate maturities or sufficient liquidity to provide adequate headroom as determined by cash forecasts.

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 which is deposited with financial institutions with strong credit ratings for short periods. The cash and
cash equivalents balance at 31 December 2017 of £3,271m (2016 £2,769m) was invested with 33 (2016 33) financial institutions. A credit limit
is allocated to each institution taking account of its market capitalisation, credit rating and credit default swap price.

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 counterparty credit risk through this process.

Currency risk
The Group’s objective is to reduce its exposure to transactional volatility in earnings and cash flows from movements in foreign currency
exchange rates, mainly the US dollar, euro, Saudi riyal and Australian dollar.

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 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 statements or balance sheets of foreign subsidiaries and equity accounted investments it regards as long-term investments.

The estimated impact on foreign exchange gains and losses in net finance costs of a ten cent movement in the closing US dollar exchange rate
on the retranslation of US dollar-denominated bonds held by BAE Systems plc is approximately £49m (2016 £59m).

Credit risk
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, a provision for bad debts has been calculated taking into account individual assessments based on past credit history
and prior knowledge of debtor insolvency or other credit risk, and no one counterparty constitutes more than 2% of the balance (2016 11%).

The ageing of trade receivables is detailed below:

Not past due and not impaired
Up to 180 days overdue and not impaired
Past 180 days overdue and not impaired
Past 180 days overdue and impaired

Movements on the provision for bad debts are as follows:

At 1 January
Created
Utilised
Released
Foreign exchange adjustments
At 31 December

2017

Provision
£m
–
–
–
(35)
(35)

Gross
£m
1,143
369
176
35
1,723

Net
£m
1,143
369
176
–
1,688

Gross
£m
850
466
76
85
1,477

2016

Provision
£m
–
–
–
(40)
(40)

2017
£m
40
16
(1)
(19)
(1)
35

Net
£m
850
466
76
45
1,437

2016
£m
34
15
(2)
(13)
6
40

192

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

29. Share-based payments

The Group has granted equity-settled share options and Long-Term Incentive Plan arrangements which 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.

Details of the terms and conditions of each share-based payment plan are given in the Annual remuneration report on pages 96 to 115.

Expense in year

Executive Share Option Plan
Performance Share Plan
Restricted Share Plan

2017
£m
6
12
6
24

2016
£m
6
11
5
22

The Group also incurred a charge of £37m (2016 £33m) in respect of the equity-settled all-employee Free Shares and Matching Partnership Shares
elements of the Share Incentive Plan.

Executive Share Option Plan

2017

2016

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

Range of exercise price of outstanding options (£)
Weighted average remaining contracted life (years)
Weighted average fair value of options granted (£)

Performance Share Plan, Share Matching Plan and Restricted Share Plan

Number of
shares
’000
34,315
9,816
(7,491)
(3,733)
32,907
5,835

Weighted
average
exercise
price
£
4.59
6.48
3.92
4.86
5.28
3.81

Number of
shares
’000
32,165
10,981
(6,255)
(2,576)
34,315
5,961

Weighted
average
exercise
price
£
4.26
5.02
3.81
4.28
4.59
3.56

2017
3.01 – 6.49
8
0.88

2016
3.01 – 5.56
8
0.65

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 (£)

Performance Share Plan

Share Matching Plan

Restricted Share Plan

2017
Number of
shares
’000
22,992
6,979
(456)
(8,757)
20,758
38

2017
5
5.36

2016
Number of
shares
’000
19,662
8,638
(361)
(4,947)
22,992
81

2016
5
4.09

2017
Number of
shares
’000
–
–
–
–
–
–

2017
–
–

2016
Number of
shares
’000
2,252
–
–
(2,252)
–
–

2016
–
–

2017
Number of
shares
’000
3,328
1,463
(766)
(256)
3,769
–

2017
5
6.49

2016
Number of
shares
’000
2,847
1,393
(699)
(213)
3,328
–

2016
5
5.01

The exercise price for the Performance Share Plan and Restricted Share Plan is £nil (2016 £nil).

BAE Systems
Annual Report 2017

193

29. Share-based payments continued

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:

Executive Share Option Plan – Binomial
Performance Share Plan – Monte Carlo
Restricted Share Plan – Dividend valuation

Range of share price at date of grant (£)
Expected option/award life (years)
Volatility (%)
Risk free interest rate (%)

2017
6.05 – 6.49
3 – 10
19
0.2

2016
4.99 – 5.56
3 – 10
20
0.1 – 0.4

Volatility was calculated with reference to the Group’s weekly share price volatility, after allowing for dividends, for the greater of 30 weeks or for
the period until vest date.

The average share price in the year was £6.11 (2016 £5.24).

30. Related party transactions

The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments (note 11)
and pension schemes (note 21).

Transactions occur with the equity accounted investments in the normal course of business, are priced on an arm’s-length basis and settled
on normal trade terms. The more significant transactions are disclosed below:

Related party
Advanced Electronics Company Limited
CTA International SAS
Eurofighter Jagdflugzeug GmbH
FADEC International LLC
FAST Training Services Limited
Gripen International KB
MBDA SAS2
Panavia Aircraft GmbH

Sales to
related party

Purchases from
related party

Amounts owed by
related party

Amounts owed to
related party1

Management
recharges1

2017
£m
86
8
1,004
95
2
–
28
48
1,271

2016
£m
27
6
997
79
–
–
24
64
1,197

2017
£m
158
–
–
–
–
–
199
51
408

2016
£m
95
–
3
–
–
–
199
79
376

2017
£m
24
3
47
–
–
–
9
3
86

2016
£m
–
4
41
–
–
18
2
4
69

2017
£m
5
–
49
–
–
–
873
–
927

2016
£m
–
–
126
–
–
16
608
–
750

2017
£m
–
–
–
–
–
–
16
–
16

2016
£m
–
–
–
–
–
–
16
–
16

1. Also relates to disclosures under IAS 24, Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2017, £884m (2016 £631m) was owed

by BAE Systems plc and £43m (2016 £119m) by other Group subsidiaries.

2. Amounts owed to related party in 2016 excludes £285m included within amounts due to long-term contract customers.

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 Annual remuneration
report on pages 96 to 115. Total emoluments for directors and key management personnel charged to the Consolidated income statement were:

Short-term employee benefits
Post-employment benefits
Share-based payments

2017
£’000

2016
£’000
16,878 19,389
1,931
5,744
23,662 27,064

1,661
5,123

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194

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

31. Contingent liabilities

Contingent liabilities are potential future cash outflows which are either not probable or cannot be measured reliably.

The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business and regards these
as insurance contracts. Various Group undertakings are parties to legal actions and claims which arise in the normal course of business. Provision
is made for any amounts that the directors consider may become payable (see note 22).

The Group has no individually significant contingent liabilities.

32. Commitments

Operating lease commitments
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

Total of future minimum sublease income under non-cancellable subleases

Capital commitments
Capital expenditure contracted for but not provided for in the accounts is as follows:

Property, plant and equipment1
Intangible assets

Includes £100m (2016 £158m) at Barrow-in-Furness, UK, relating to the Dreadnought submarine programme funded by the UK government.

2017
£m

2016
£m

251
769
626
1,646

255
699
802
1,756

101

115

2017
£m
310
18
328

2016
£m
429
19
448

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Annual Report 2017

195

33. Information about related undertakings

In accordance with Section 409 of the Companies Act 2006, a full list of subsidiaries and equity accounted investments as at 31 December 2017
is disclosed below. Unless otherwise stated, the Group’s shareholding represents ordinary shares held indirectly by BAE Systems plc, the year end
is 31 December and the address of the registered office is Warwick House, PO Box 87, Farnborough Aerospace Centre, Farnborough, Hampshire
GU14 6YU, United Kingdom. For companies incorporated outside of the United Kingdom, the country of incorporation is shown in the address.
No subsidiary undertakings have been excluded from the consolidation.

Subsidiaries – wholly-owned
4219 Lafayette, LLC22
4219-120 Lafayette Center Drive, Chantilly VA 20151,
United States

Aerosystems International Limited
Lupin Way, Alvington, Yeovil, Somerset BA22 8UZ,
United Kingdom

Alvis Pension Scheme Trustees Limited

Alvis Limited

Alvis Vickers Limited
Armor Holdings Inc.6
2000 North 15th Street, 11th Floor, Arlington
VA 22201, United States

Armstrong Whitworth Aircraft Limited1
Australian Marine Engineering Corporation
(Finance) Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

Avro International Aerospace Limited1
BAE Systems (Al Diriyah C4i) Limited1
BAE Systems (Aviation Services) Limited

BAE Systems (Canada) Inc.
220 Laurier Avenue West, Suite 1200, Ottawa ON K1P 5Z9,
Canada

BAE Systems (Combat and Radar Systems) Limited
PO Box 727, St. Paul’s Gate, New Street, St. Helier JE4 8ZB, Jersey

BAE Systems (Consultancy Services) Limited

BAE Systems (Corporate Air Travel) Limited
BAE Systems (CS&SI – Qatar) Limited1
BAE Systems (Defence Systems) Limited

BAE Systems (Dynamics) Limited

BAE Systems (Farnborough 1) Limited

BAE Systems (Farnborough 2) Limited

BAE Systems (Farnborough 3) Limited

BAE Systems (Finance) Limited

BAE Systems (Funding Three) Limited

BAE Systems (Funding Two) Limited

BAE Systems (Gripen Overseas) Limited

BAE Systems (Hawk Synthetic Training) Limited
BAE Systems (Holdings) Limited1
BAE Systems (Insurance) Limited
BAE Systems (International) Limited

BAE Systems (Kazakhstan) Limited
BAE Systems (Land and Sea Systems) Limited11
BAE Systems (Malaysia) Sdn Bhd
16th Floor, Wisma Sime Darby, Jalan Raja Laut, 50350
Kuala Lumpur, Malaysia

BAE Systems (MEH) Limited

BAE Systems (Military Air) Overseas Limited
BAE Systems (Moose Jaw) Inc.1,5
LeBlanc Nichols, The Chambers, 1000-300 Terry Fox Drive,
Ottawa ON K2K 0E3, Canada

BAE Systems (Nominees) Limited1
BAE Systems (Oman) Limited
BAE Systems (Operations) Limited10
BAE Systems (Operations) Singapore Pte Limited
One Marina Boulevard #28-00, Singapore 018989, Singapore

BAE Systems (Overseas Holdings) Limited

BAE Systems (Poland) Sp. z o.o.
ul. Abp. A. Baraniaka 88, 61-131 Poznan, Poland

BAE Systems (Projects) Limited

BAE Systems (Property Investments) Limited
BAE Systems (Sweden) AB17
c/o Advokatfirman DLA Nordic KB, Box 7315, SE-103 90
Stockholm, Sweden

BAE Systems (Vehicles and Equipment) Limited
BAE Systems 2000 Pension Plan Trustees Limited1
BAE Systems AB13
Box 5676, SE-114 86 Stockholm, Sweden

BAE Systems Al Diriyah Programme Limited1
BAE Systems Applied Intelligence (Asia Pacific)
Pte Limited
United Square, 101 Thomson Road, #25-03/04, 307591,
Singapore

BAE Systems Applied Intelligence (Australia) Pty Limited
Level 12, 16-20 Bridge Street, Sydney NSW 2000, Australia

BAE Systems Applied Intelligence (Belgium) NV
Geldenaaksebaan 329, B-3001, Heverlee, Leuven, Belgium

BAE Systems Applied Intelligence Canada Inc.
1959 Upper Water Street, Suite 900, Halifax NS B3J 2X2,
Canada

BAE Systems Applied Intelligence (Connect) A/S
Bouet Mollevej 3-5, 9400 Norresundby, Denmark

BAE Systems Applied Intelligence US Corp6
440 Wheelers Farms Road, Suite 202, Milford CT 06461,
United States

BAE Systems Australia Datagate Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Australia Defence Holdings Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Australia Defence Pty Limited14
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Australia (Electronic Systems) Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Australia (NSW) Holdings Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Australia (NSW) Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Australia (Singapore) Pte Limited20
60 Paya Lebar Road, #08-43 Paya Lebar Square, 409051,
Singapore

BAE Systems Applied Intelligence Inc.5
5th Floor, Suite 1920, 256 Franklin Street, Boston MA 02110,
United States

BAE Systems Australia Holdings Limited1
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Applied Intelligence GCS Inc.6
1676 International Drive, 10th Floor, Suite 1000,
McLean VA 22102, United States

BAE Systems Applied Intelligence (GCS) Limited
Surrey Research Park, Guildford, Surrey GU2 7YP,
United Kingdom

BAE Systems Australia Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Australia Logistics Pty Limited10
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Applied Intelligence (Germany) GmbH
Mainzer Landstrasse 50, 60325 Frankfurt am Main, Germany

BAE Systems Applied Intelligence (Integration) Limited
Surrey Research Park, Guildford, Surrey GU2 7YP,
United Kingdom

BAE Systems Australia Sea Sentinel Project Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Avionics Singapore Pte Limited
One Marina Boulevard, #28-00, Singapore 018989, Singapore

BAE Systems Applied Intelligence (International) Limited
Priestley Road, Surrey Research Park, Guildford,
Surrey GU2 7YP, United Kingdom

BAE Systems Applied Intelligence (Ireland) Limited
Level 5, Block 4, Dundrum Town Centre, Sandyford Road,
Dundrum, Dublin 16, D16 A4W6, Ireland

BAE Systems Applied Intelligence (Japan) KK
Ark Mori Building, Regus Serviced Office, 1-12-32, Akasaka,
Minato-ku, Tokyo, Japan, 107-6024

BAE Systems Applied Intelligence (Luxembourg) SARL
1 Boulevard de la Foire, L-1528 Luxembourg, Luxembourg

BAE Systems Applied Intelligence (Spain) S.A.
Paseo de la Castellana, 141, Cuzco IV, 28046 Madrid, Spain

BAE Systems Applied Intelligence (UK) Limited

BAE Systems Applied Intelligence A/S
Bouet Mollevej 3, 9400 Norresundby, Denmark

BAE Systems Applied Intelligence France SAS
19 Boulevard Malesherbes, 75008, Paris, France

BAE Systems Applied Intelligence Limited
Surrey Research Park, Guildford, Surrey GU2 7YP,
United Kingdom

BAE Systems Applied Intelligence LLC22
5th Floor, Suite 1920, 256 Franklin Street, Boston MA 02110,
United States

BAE Systems Applied Intelligence Malaysia Sdn Bhd
16th Floor, Wisma Sime Darby, Jalan Raja Laut, 50350
Kuala Lumpur, Malaysia

BAE Systems Applied Intelligence New Zealand Limited
c/o Russell McVeagh, Vero Centre, 48 Shortland Street,
Auckland Central, 1140, New Zealand

BAE Systems Applied Intelligence Pty Limited
Level 12, 16-20 Bridge Street, Sydney NSW 2000, Australia

BAE Systems Bofors AB
SE-691 80 Karlskoga, Sweden

BAE Systems Bofors Holdings Sdn Bhd
Level 21, Suite 21.01, The Gardens South Tower, Mid Valley City,
Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia

BAE Systems China (Exports) Limited

BAE Systems C-ITS AB
Box 5676, SE-114 86 Stockholm, Sweden

BAE Systems Communications Limited1
BAE Systems Communications Solutions, LLC22
Knowledge Oasis, Building 4, Second Floor, 0402-Z427,
Knowledge Oasis Muscat, PO Box 16, Postal Code 135,
Muscat, Oman

BAE Systems Controls Inc.5
1098 Clark Street, Endicott NY 13760, United States

BAE Systems Creole Inc.7
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems Datagate Limited

BAE Systems Datagate Holdings Limited
BAE Systems Defence Limited1
BAE Systems Deployed Systems Limited2
BAE Systems Display Technologies Limited

BAE Systems do Brasil Ltda
SCN Quadra 5 Bloco A, Ed. Brasilia Shopping, Torre Norte,
Sala 426, Brasilia, DF CEP:70715-900, Brazil

BAE Systems Electronic Systems (Overseas) Limited

BAE Systems Electronics Limited

196

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

33. Information about related undertakings continued

Subsidiaries – wholly-owned continued
BAE Systems Enterprises Limited
BAE Systems Executive Pension Scheme Trustees Limited1
BAE Systems Finance (Ireland) Unlimited Company23
Level 5, Block 4, Dundrum Town Centre, Sandyford Road,
Dundrum, Dublin 16, D16 A4W6, Ireland

BAE Systems Finance B.V.
c/o SGG Netherlands N.V., Hoogoorddreef 15,
1101 BA Amsterdam, Netherlands

BAE Systems Finance Inc.6
1101 Wilson Blvd, Ste 2000, Arlington VA 22209, United States

BAE Systems Flight Training (Australia) Pty Limited10
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

BAE Systems Funds Management1,23
BAE Systems Global Combat Systems Bridging Limited

BAE Systems Global Combat Systems Limited

BAE Systems Global Combat Systems Munitions Limited
BAE Systems Global Tactical Systems LLC22
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems Hägglunds AB
SE-691 80, Karlskoga, Sweden

BAE Systems Hawaii Shipyards Inc.6
3049 Ualena Street, Suite 915, Honolulu HI 96819, United States

BAE Systems Holdings (South Africa) (Pty) Limited
Central Office Park No. 5, 257 Jean Avenue, Centurion,
Gauteng, 0157, South Africa

BAE Systems Holdings B.V.
c/o SGG Netherlands N.V., Hoogoorddreef 15,
1101 BA Amsterdam, Netherlands

BAE Systems Holding GmbH17
Hauptstrasse 48, 82433 Bad Kohlgrub, Germany

BAE Systems Holdings Inc.5
1101 Wilson Blvd, Ste 2000, Arlington VA 22209, United States

BAE Systems Holdings International LLC22
1101 Wilson Blvd, Ste 2000, Arlington VA 22209, United States

BAE Systems IAP Research, Inc.6
CT Corporation System, 4400 Easton Commons Way, Ste 125,
Columbus OH 43219, United States

BAE Systems Imaging Solutions Inc.5
1841 Zanker Road, Suite 50, San Jose CA 95112, United States

BAE Systems, Inc.6
1101 Wilson Blvd, Ste 2000, Arlington VA 22209, United States

BAE Systems India (Services) Private Limited18
2nd Floor, Hotel Le-Meridien Commercial Tower, Raisina Road,
New Delhi 110001, India

BAE Systems India (Homeland Security) Private Limited18
2nd Floor, Hotel Le-Meridien Commercial Tower, Raisina Road,
New Delhi 110001, India

BAE Systems India (Technology) Private Limited18
2nd Floor, Hotel Le-Meridien Commercial Tower, Raisina Road,
New Delhi 110001, India

BAE Systems India (Ventures) Private Limited18
2nd Floor, Hotel Le-Meridien Commercial Tower, Raisina Road,
New Delhi 110001, India

BAE Systems Information and Electronic Systems
Integration Inc.6
65 Spit Brook Road, Nashua NH 03061, United States

BAE Systems Insurance (Isle of Man) Limited
Tower House, Loch Promenade, Douglas, IM1 2LZ,
Isle of Man, United Kingdom

BAE Systems Integrated System Technologies
(KSA) Limited

BAE Systems Integrated System Technologies
(Overseas) Limited

BAE Systems Integrated System Technologies GmbH
Hans-Stießberger-Str. 2b, 85540 Haar, Germany

BAE Systems Integrated System Technologies Limited

BAE Systems International Inc.5
1101 Wilson Blvd, Ste 2000, Arlington VA 22209, United States

BAE Systems Jacksonville Ship Repair LLC22
8500 Heckscher Drive, Jacksonville FL 32226, United States

BAE Systems Land & Armaments Holdings LLC6
2000 North 15th Street, 11th Floor, Arlington VA 22201,
United States

BAE Systems Land & Armaments Inc.6
2000 North 15th Street, 11th Floor, Arlington VA 22201,
United States

BAE Systems Land & Armaments L.P.22
2000 North 15th Street, 11th Floor, Arlington VA 22201,
United States

BAE Systems Land Systems ATF Limited

BAE Systems Land Systems (Finance) Limited
BAE Systems Land Systems FMTV International Inc.7
1101 Wilson Blvd, Ste 2000, Arlington VA 22209, United States

BAE Systems Land Systems (Investments South Africa)
Limited

BAE Systems Land Systems (Investments) Limited

BAE Systems Land Systems (Logistics) Limited

BAE Systems Land Systems Pinzgauer Limited

BAE Systems Land Systems Pinzgauer (Holdings) Limited

BAE Systems Land Systems (Ranges) Limited

BAE Systems Land Systems (Singapore Investments)
Limited

BAE Systems Logistica Ltda
SCN Quadra 5 Bloco A, Ed. Brasilia Shopping, Torre Norte,
Sala 426, Brasilia, DF CEP:70715-900, Brazil

BAE Systems MAI Turkey Hava Sistemleri A.S¸
Kizilimak Mahallesi, 1445. Sok No: 2, The Paragon B Blok K: 23,
iç Kapi No: 113 Çukurambar, Çankaya, Ankara, Turkey

BAE Systems Marine (Holdings) Limited

BAE Systems Marine (YSL) Limited

BAE Systems Marine Limited
BAE Systems Norfolk Ship Repair Inc.6
750 West Berkley Avenue, Norfolk VA 23523, United States

BAE Systems Oman LLC22
PO Box 74, Postal Code 111, Seeb, Oman

BAE Systems Ordnance Systems Inc.6
4509 West Stone Drive, Kingsport TN 37660-9982,
United States

BAE Systems Overseas Inc.6
1101 Wilson Blvd, Ste 2000, Arlington VA 22209, United States

BAE Systems PAMCO Services International Inc.7
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems Pension Funds CIF Trustees Limited1
BAE Systems Pension Funds Investment
Management Limited1,19
BAE Systems Pension Funds Trustees Limited1
BAE Systems Project Services Limited

BAE Systems Projects (Canada) Limited

BAE Systems Properties Limited
BAE Systems Quest Limited1
BAE Systems Regional Aircraft (Japan) KK6
Minami Azabu T&F Building 8th Floor,
4-11-22 Minami Azabu, Minato-ku, Tokyo, Japan

BAE Systems Regional Aircraft Colombia SAS
c/o Brigard & Urrutia, Calle 70 A No. 4-41, Bogota, Colombia

BAE Systems Resolution Inc.7
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems RO Defense Inc.6
1801 Electronics Drive, Anniston AL 36207, United States

BAE Systems Rokar International Limited
PO Box 45059, 11 Hartom Street, Mount Hotzvim,
91450 Jerusalem, Israel

BAE Systems S&S Holdings Inc.7
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems S&S Operations Inc.6
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems San Diego Ship Repair Inc.6
2205 East Belt Street, Foot of Sampson Street, San Diego
CA 92113, United States

BAE Systems Saudi Limited
PO Box 1732, Riyadh 11441, Saudi Arabia

BAE Systems Saudi America Limited
Business Gate Building 7, Floor 1, Riyadh 11482, Saudi Arabia

BAE Systems Saudi Arabia (Maintenance
and Equipment Services) Limited
PO Box 1732, Riyadh 11441, Saudi Arabia

BAE Systems Saudi Arabia (Vehicles and
Equipment Holdings) Limited1
BAE Systems Saudi Arabia (Vehicles and
Equipment Nominees) Limited1
BAE Systems Serviços de Aviônicos Ltda.
Rua Boa Vista, No. 254, 13th Floor, Suite 15, Centro, São Paulo,
São Paulo 01014-907, Brazil

BAE Systems Shared Services Inc.6
11215 Rushmore Drive, Charlotte NC 28277, United States

BAE Systems Shared Services (Overseas) Limited
BAE Systems Share Plans Trustee Limited1
BAE Systems Ship Repair Inc.6
750 West Berkley Ave., Norfolk VA 23523, United States

BAE Systems Southeast Shipyards Alabama LLC22
8500 Heckscher Drive, Jacksonville FL 32226, United States

BAE Systems Southeast Shipyards AMHC Inc.6,22
8500 Heckscher Drive, Jacksonville FL 32226, United States

BAE Systems Surface Ships (Holdings) Limited

BAE Systems Surface Ships Limited

BAE Systems Surface Ships (Projects) Limited

BAE Systems Surface Ships Intermediate Holdings
Limited

BAE Systems Surface Ships Integrated Support Limited
BAE Systems Surface Ships International Limited13
BAE Systems Surface Ships Maritime Limited
BAE Systems Surface Ships Portsmouth Limited13
BAE Systems Surface Ships Projects (Malaysia) Sdn Bhd
Level 14, West Block, Wisma Selangor Dredging, 142-C,
Jalan Ampang, 50450 Kuala Lumpur, Malaysia

BAE Systems Surface Ships Property Services Limited
BAE Systems Surface Ships Support Limited10
BAE Systems Surface Ships (Overseas) Limited

BAE Systems SWS Defence AB
SE-691 80 Karlskoga, Sweden

BAE Systems Tactical Vehicle Systems LP22
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems Technology Solutions & Services Inc.6
520 Gaither Road, Rockville, MD 20850, United States

BAE Systems Training Services Limited
BAE Systems TVS Holdings Inc.6
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems TVS Holdings LLC22
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

BAE Systems TVS Inc.7
3701 Outlet Ctr. Drive, Suite 15, Sealy TX 77474-4904,
United States

F
n
a
n
c
i
a

l
s
t
a
t
e
m
e
n
t
s

BAE Systems
Annual Report 2017

197

Stewart & Stevenson TVS UK Limited

Stratsec.net Sdn Bhd
Unit F-3-1, Blok F, Third Floor, CBD Perdana 3, Jalan Perdana,
Cyber 12, 63000 Cyberjaya, Selangor Darul Ehsan, Malaysia

Support Solutions General Services and Contracting
Company/Limited Liability company17,22
House No. 145, Street No. 1, Qtr. 611, Al Andulous Area,
Al Mansour, Baghdad, Iraq

TDS International Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

TDS International Holdings Pty Limited8
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

Tenix Philippines Inc.17,20
Unit 702, 7th Floor, Philippine AXA Life Centre, 1286 Sen,
Gil Puyat Avenue, Makati City, 1200, Philippines

The Blackburn Aeroplane & Motor Co Limited1
The Bristol Aviation Company Limited1
The British & Colonial Aeroplane Co. Limited1
The Leeds Partnership Limited10
The Supermarine Aviation Works Limited1,11
Thomas Sopwith Aviation Company Limited1
VSEL Birkenhead Limited

Warship Design Services Limited
Westover Controls Incorporated6
1098 Clark Street, Endicott NY 13760, United States

33. Information about related undertakings continued

Subsidiaries – wholly-owned continued
BAE Systems Zephyr Corporation5
c/o The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, City of Wilmington, County of New Castle
DE 19801, United States

BAE Systems Zephyr Fifth Corporation5
c/o The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, City of Wilmington, County of New Castle
DE 19801, United States

BAE Systems Zephyr Fourth Corporation5
c/o The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, City of Wilmington, County of New Castle
DE 19801, United States

BAE Systems Zephyr Second Corporation5
c/o The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, City of Wilmington, County of New Castle
DE 19801, United States

BAE Systems Zephyr Third Corporation5
c/o The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, City of Wilmington, County of New Castle
DE 19801, United States

Brabazon Limited
British Aerospace (Far East) Limited21
Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong

British Aerospace (Malaysia) Sdn Bhd21
Unit 30-01, Level 30, Tower A, Vertical Business Suite,
Avenue 3, Bangsar South, No.8, Jalan Kerinchi,
59200 Kuala Lumpur, Malaysia

British Aircraft Corporation (Pension Fund Trustees)
Limited1
British Aircraft Corporation Limited1
Buckfield Properties Limited
Cashhold Limited1,10
CPS International, Inc.7
c/o Benedetti & Benedetti, Comosa Building, 21st Floor,
Ave. Samuel Lewis, PO Box 850120, Panama 5, Panama

Creole (Nigeria) Limited10
Tapa House (2nd Floor), 45, Imman Dauda St (Abosede Kuboye
Crescent Entrance) Surulere, Lagos, Nigeria

Detica B.V.
Luna ArenA, Herikerbergweg 238, 1101 CM Amsterdam,
Netherlands

Detica Group Holdings (Ireland) Limited
Level 5, Block 4, Dundrum Town Centre, Sandyford Road,
Dundrum, Dublin 16, D16 A4W6, Ireland

Detica Group Limited
Detica Ireland Limited13
Level 5, Block 4, Dundrum Town Centre, Sandyford Road,
Dundrum, Dublin 16, D16 A4W6, Ireland

Detica Mexico S. de R.L. de C.V.
Torre Esmeralda II, Blvd Manuel Avila Camacho No. 36
Piso 18, Lomas de Chapultepec, 11000 D.F., Mexico

Detica Patent Limited
Level 5, Block 4, Dundrum Town Centre, Sandyford Road,
Dundrum, Dublin 16, D16 A4W6, Ireland

Detica Services, Inc.
5th Floor, Suite 1920, 256 Franklin Street, Boston MA 02110,
United States

ETI Engineering, Inc.6
1676 International Drive, 10th Floor, Suite 1000,
McLean VA 22102, United States

Gloster Aircraft Limited1
Granada Enterprises Limited
PO Box 1732, Riyadh 11441, Saudi Arabia

Hadrian Trustees Limited1,18
Hadrian Holdings, Inc.18
521 Fifth Avenue, New York NY 101075, United States

Hägglunds Vehicle GmbH
Ernst-Grote Strasse 13, 30916 Isernhagen, Germany

Hawker Siddeley Aviation Limited1
Hawker Siddeley Dynamics Limited1
H-B Utveckling, H-B Development AB
Nybrogatan 7, SE-114 34 Stockholm, Sweden

Hertfordshire Estates Limited10
HSA/HSD Pension Fund Trustees Limited1
Hunter Aerospace Corporation Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

International Military Sales Limited
Jetstream Aircraft Limited1
Prestwick International Airport, Prestwick, Ayrshire KA9 2RW,
United Kingdom

Kalamind Limited
Lemacrown Limited12
MES Holdco Limited
PO Box 727, St. Paul’s Gate, New Street, St. Helier JE4 8ZB, Jersey

MES Interco23
Meslink Limited

Muiden Chemie International B.V.
c/o SGG Netherlands N.V., Hoogoorddreef 15,
1101 BA Amsterdam, Netherlands

Newcombe Properties Limited

PAMCO Servicios Internationales de Mexico,
S. de R.L. de C.V.7
c/o Gonzalez Calvillo y Forastieri, S.C.,
Centro Empresarial Lomas, Monte Peloux No. 111, Piso 5,
Lomas de Chapultepec, 11000 D.F., Mexico

Piper Group plc

Pitch Technologies AB
Repslagaregatan 25, SE-582 22 Linköping, Sweden

Pitch Technologies Limited
Sweden House, 5 Upper Montagu Street, London W1H 2AG,
United Kingdom

Port Solent Limited

Port Solent Marina Limited
PT. BAE Systems Services6
Wisma 46, Kota BNI, 34th Floor, Suite 34.01.A,
Jl. Jenderal Sudirman Kavling 71, Jakarta 10220, Indonesia

Reflectone UK Limited16
15 Canada Square, London E14 5GL, United Kingdom

Representaciones SSTS, CA7
Ave Francisco de Miranda, Centro Lido El Rosal Oficina 71B,
Caracas, Venezuela

Royal Ordnance B.V.
c/o SGG Netherlands N.V., Hoogoorddreef 15,
1101 BA Amsterdam, Netherlands

Royal Ordnance (Crown Service) Pension Scheme
Trustees Limited

Royal Ordnance Senior Staff Pension Scheme
Trustees Limited
Royal Ordnance Speciality Metals Limited1
RWT Limited1
Salford Electrical Instruments Limited

Scentcivil Limited
Scottish Aviation Limited1
Prestwick International Airport, Prestwick, Ayrshire KA9 2RW,
United Kingdom

Sepia, LLC22
4219-120 Lafayette Center Drive, Chantilly VA 20151,
United States

Shipbuilding (MSF) Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

Shipbuilding (VIC) Pty Limited
Evans Building, Taranaki Road, Edinburgh Parks, Edinburgh
SA 5111, Australia

Stephen Howe Systems Limited
Alvington, Yeovil, Somerset BA22 8UZ, United Kingdom

Stewart & Stevenson Operations (Nigeria) Limited7
Tapa House (2nd Floor), 45, Imman Dauda St (Abosede Kuboye
Crescent Entrance), Surulere, Lagos, Nigeria

198

BAE Systems
Annual Report 2017

Notes to the Group accounts
continued

33. Information about related undertakings continued

Subsidiaries – not wholly-owned
Aircraft Accessories & Components Co Limited (82.2%)
PO Box 13532, Jeddah 21434, Saudi Arabia

Aircraft Research Association Limited (87.1%)1
Manton Lane, Bedford MK41 7PF, United Kingdom

ARA Pension Fund Trustees Limited (87.1%)
Manton Lane, Bedford MK41 7PF, United Kingdom

BAE Systems Saudi Development and Training
Company Limited (95%)3
PO Box 67775, Riyadh 11517, Saudi Arabia

BAE Systems SDT (UK) Limited (95%)
Flight Control System Management GmbH (66.6%)4
PO Box 801109, 81663 Munich, Germany

Hadrian Properties, Inc. (95%)18
521 Fifth Avenue, New York NY 101075, United States

International Systems Engineering Company Limited
(86.9%)
PO Box 54002, Riyadh 11514, Saudi Arabia

Overhaul and Maintenance Company Limited (95.9%)
PO Box 1732, Riyadh 11441, Saudi Arabia

Saudi Maintenance & Supply Chain Management
Company Limited (51%)
PO Box 1732, Riyadh 11441, Saudi Arabia

Saudi Technology & Logistics Services Limited (65%)1
PO Box 1732, Riyadh 11441, Saudi Arabia

SMSCMC (UK) Limited (51%)
U.S. Munitions, LLC (51%)22
1713 Burdette Crossing, Blue Springs MO 64015, United States

Notes
1. Directly owned by BAE Systems plc.
2. 40% owned by BAE Systems plc.
3. 1% owned by BAE Systems plc.
4. 33.3% owned by BAE Systems plc.
5. Ownership held in common stock.
6. Ownership held in common shares.
7. Ownership held in authorized shares.
8. Ownership held in class of A shares.
9. Ownership held in class of B shares.
10. Ownership held in class of A shares and B shares.
11. Ownership held in class of A shares, B shares

and preference shares.

12. Ownership held in ordinary shares and class

of A shares.

13. Ownership held in ordinary shares and

preference shares.

14. Ownership held in ordinary shares and

redeemable preference shares.

15. Ownership held in common shares and

B Preferred shares.

16. In members’ voluntary liquidation.
17. In liquidation.
18. Year end 31 March.
19. Year end 5 April.
20. Year end 30 June.
21. Year end 30 September.
22. Unincorporated entity for which the address

given is the principal place of business.

23. Unlimited company.

Equity accounted investments
Abercromby Property International (20.42%)

Advanced Electronics Company Limited (48%)
PO Box 90916, Riyadh 11623, Saudi Arabia

Air Astana (49%)5
Zakarpatskaya Str 4A, 050039 Almaty, Kazakhstan

AMSH B.V. (50%)9
Weena 210-212, 3012 NJ Rotterdam, Netherlands

BAeHAL Software Limited (40%)1,18
Airport Lane, HAL Estate, Bangalore 560010, India

BHIC Bofors Defense Asia Sdn Bhd (49%)
Level 21, Suite 21.01, The Gardens South Tower, Mid Valley
City, Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia

BAE (Consultancy Services) Malaysia Sdn Bhd (49%)
Tkt.11, Wisma Damansara, Damansara Heights, 50490
Kuala Lumpur, Malaysia

Canadian Naval Support Limited (50%)15
3099 Barrington Street, Halifax NS B3K 5M7, Canada

CTA International SAS (50%)
13 Route De La Miniere, 78000 Versailles, France

Data Link Solutions L.L.C. (50%)21,22
400 Collins Ave, Cedar Rapids IA 52498, United States

Eurofighter Aircraft Management GmbH (33%)1,17
Am Soldnermoos 17, 85399 Hallbergmoos, Germany

Eurofighter Jagdflugzeug GmbH (33%)1
Am Soldnermoos 17, 85399 Hallbergmoos, Germany

European Aerosystems Limited (50%)1,8
FADEC International LLC (50%)22
1098 Clark Street, Endicott NY 13760, United States

FAST Holdings Limited (50%)8,18
FAST Training Services Limited (50%)18
FBV Designs Limited (50%)8,18
33 Wigmore Street, London W1U 1QX, United Kingdom

FNSS Savunma Sistemleri A.S (49%)8
PK 37, Golbasi 06830, Ankara, Turkey

Gripen International KB (50%)22
SE-581 88 Linköping, Sweden

MBDA Holdings SAS (25%)
1 Avenue Réaumur, 92350 Le Plessis-Robinson, France

Nobeli Business Support AB (34%)
SE-691 80 Karlskoga, Sweden

Nurol BAE Systems Hava Sistemleri Anonim S¸ irketi (49%)9
Üniversiteler Mah, 1605.Cad, No:3/1-3, 06800, Ankara, Turkey

Panavia Aircraft GmbH (42.5%)1
Am Soldnermoos 17, 85399 Hallbergmoos, Germany

Patria Hägglunds Oy (50%)
Naulakatu 3, Fl -33100 Tampere, Finland

Reaction Engines Limited (20%)9
Hill House, 1 Little New Street, London EC4A 3TR,
United Kingdom

Saab-BAe Systems Gripen AB (50%)1
SE-581 88 Linköping, Sweden

Saab Bofors Test Center AB (30%)
SE-691 80 Karlskoga, Sweden

Sealand Support Services Limited (33.3%)14
MoD Sealand, Welsh Road, Sealand, Deeside, Flintshire
CH5 2LS, United Kingdom

Seele-Alvis Fenestration Limited (43.5%)8,20
Unit A33, Jack’s Place, 6 Corbett Place, London E1 6NN,
United Kingdom

SIKA International Limited (50%)8
Spectrum Technologies Limited (20%)1,18
Western Avenue, Bridgend Industrial Estate, Bridgend,
Mid Glamorgan CF31 3RT, United Kingdom

Tirs Mateen & Co LLC (50%)16,22
PO Box 3369, Postal Code 111, Seeb, Oman

Winner Developments Limited (33.3%)

BAE Systems
Annual Report 2017

199

34. Adoption of IFRS 15, Revenue from Contracts with Customers

Adoption of IFRS 15
From 1 January 2018, the Group will adopt IFRS 15, Revenue from
Contracts with Customers. The standard replaces IAS 11, Construction
Contracts, IAS 18, Revenue, and all other existing revenue accounting
requirements within IFRS. It applies to all revenue arising from contracts
with customers unless the contracts are within the scope of other
existing standards, such as IAS 17, Leases.

IFRS 15 outlines principles for the measurement and recognition of
revenue from contracts with customers, with the core principle being
that revenue should be recognised at an amount that reflects the
consideration to which an entity expects to be entitled in exchange for
the transfer of goods and services to the customer. In order to achieve
this objective, the standard sets out a five-step model:

1. Identify the contract(s) with a customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance

obligations in the contract.

5. Recognise revenue when (or as) the entity satisfies

a performance obligation.

The standard also covers the accounting for the incremental costs
of obtaining a contract and the costs to fulfil a contract, together
with presentation and disclosure requirements.

The Group will adopt IFRS 15 fully retrospectively in accordance with
paragraph C3 (a). Comparatives for the year ended 31 December 2017
will be restated.

Impact of adoption of IFRS 15

Revenue recognition
– Revenue on the majority of contracts, currently being recognised

based on the completion of milestones or deliveries, will cumulatively
be recognised earlier.

Under IAS 11, revenue under long-term contracts is recognised when
a separately identifiable phase (milestone) has been completed. Under
IAS 18, revenue from the sale of goods not under long-term contracts
is recognised when the significant risks and rewards of ownership have
been transferred to the customer, for example, upon delivery.

The Group has determined that the performance obligations identified
in the majority of its contracts will satisfy the criteria in IFRS 15 for
recognition over time rather than at a point in time. In order to qualify
for revenue recognition over time, the Group’s performance must not
create assets with alternative uses and it must have an enforceable right
to payment for performance completed to date. The majority of the
Group’s products are designed and/or manufactured under contract to
the customer’s individual specifications. The Group is, therefore, limited
in its ability to sell its products to alternative customers due to the
substantial rework costs involved.

Under IAS 11, the recognition of revenue over time based on
milestones gives rise to work-in-progress in respect of costs expended
in pursuit of milestones which have not been completed at the balance
sheet date. Under IFRS 15, it is not deemed appropriate to recognise
significant work-in-progress as an asset on the Group’s balance sheet
when revenue is recognised over time as the Standard considers the
control of the work-in-progress to have been transferred to the
customer. Consequently, under IFRS 15, the Group will recognise
revenue based on costs incurred reflecting the continuous transfer
of the benefit of the Group’s performance to the customer.

The adoption of IFRS 15 will not impact contracts for the provision of
services currently accounted for on the basis of the stage of completion
measured on the basis of either direct expenses incurred or labour
hours delivered as these have already been determined to meet the
criteria for over time revenue recognition.

If the over time criteria for revenue recognition are not met, revenue
is recognised at the point in time that control is transferred to the
customer, which is usually when legal title passes and the business
has the right to payment.

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Annual Report 2017

Notes to the Group accounts
continued

34. Adoption of IFRS 15, Revenue from Contracts with Customers continued

Profit recognition
– Profit on contracts will continue to be recognised progressively

Financing
– No financing (as defined by IFRS 15) in the Group’s contracts.

IFRS 15 states that the consideration in a contract must be adjusted
for the time value of money if the timing of payments either explicitly
or implicitly provides the customer or the entity with a significant
benefit of financing the transfer of goods or services to the customer.

In the ordinary course of business, certain of the Group’s businesses
can receive down-payments from customers in advance of the delivery
of the contracted products and services. Advances are not significant
in the Group’s US businesses. At 31 December 2017, advances from
long-term contract customers totalled £2.9bn.

The advances received are typically utilised within 12 months of
the balance sheet date. As such, the Group can apply the practical
expedient in IFRS 15 by which revenue does not have to be adjusted
for financing if the period between the down-payment and the
recognition of the related revenue is one year or less.

The Group also had £1.7bn and £0.3bn of progress payments
allocated to long-term and short-term work-in-progress, respectively,
at 31 December 2017. On transition to IFRS 15, most of this work-in-
progress, and associated progress payments, will be recognised
as revenue.

Balance sheet
– Most balance sheet contract work-in-progress replaced with
a contract receivable representing accrued revenue, based on
costs incurred, and including attributable profit.

Under IAS 11, fulfilment costs incurred on the Group’s contracts are
carried in the balance sheet until the associated revenue is recognised
upon achievement of performance milestones. Under IFRS 15, it is not
appropriate to recognise significant work-in-progress as an asset
on the Group’s balance sheet when revenue is recognised over time.
Accordingly, contract work-in-progress, both short-term and long-term,
is replaced with a contract receivable representing accrued revenue,
based on costs incurred, and including attributable profit. Inventories
will include fulfilment costs incurred in advance of delivery in respect
of contracts with customers which have been determined to fulfil the
criteria for point in time revenue recognition, together with products
manufactured to stock without contract cover.

Impact on reported results
The Group will adopt IFRS 15 fully retrospectively in accordance
with paragraph C3 (a). Provisional comparatives for the year ended
31 December 2017 are shown in the following tables.

as risks have been mitigated or retired.

– Profit will be recognised earlier on shorter-term contracts in the

Group’s US businesses.

– On contracts for both development and production in the Group’s
MBDA joint venture, there will be lower profit recognised during
the development phase.

On the majority of the Group’s contracts, profit is calculated by
reference to reliable estimates of contract revenue and costs after
making suitable allowances for technical and other risks related
to performance milestones yet to be achieved. No profit is recognised
until the outcome of a contract can be reliably estimated. Profit is
recognised progressively as risks have been mitigated or retired.
Forecast losses are recognised immediately in full.

On adoption of IFRS 15, profit on these contracts will continue to
be recognised progressively on this basis.

In the Group’s Platforms & Services (UK) and Platforms & Services
(International) businesses, contracts are typically longer-term in nature
than in the Group’s other businesses. Whilst the recognition of revenue
is accelerated under IFRS 15 as a result of the measure of progress
being based on costs incurred, there is less impact on the timing of
recognition of profit as, operationally, the next risk retirement point
will still not have been achieved on the contract. Conversely, in the
Group’s US businesses, contracts are typically shorter-term, with
cumulative profit to date traded at close to out-turn margin.
Accordingly, the acceleration of revenue recognised under IFRS 15
will accelerate profit recognition on the Group’s US contracts.

The Group’s MBDA joint venture is undertaking a number of significant
contracts which include both development and production elements.
Under IAS 11, MBDA has previously recognised profit on contracts
with both development and production elements at a single blended
out-turn profit margin. Under IFRS 15, the development and production
elements of the contract represent separate performance obligations,
with development satisfied over time and production, typically, satisfied
at a point in time. The development activity on these contracts has a
lower margin than the subsequent production activity and, therefore,
under IFRS 15, less profit is allocated to development, with more
allocated to production.

Licence revenue
– Some licence revenue in Applied Intelligence originally recognised
upfront under IAS 18 will be deferred and recognised over the
licence term under IFRS 15.

BAE Systems Applied Intelligence generates revenue from the sale of
licences of its intellectual property. The licences have varying terms and
conditions and can be provided for a fixed term or in perpetuity. Under
IAS 18, the Group recognises revenue in respect of software licences in
line with the substance of those transactions, either on delivery to the
customer or spread over the licence term (typically five years) or, in
relation to perpetual licences, over the related customer relationship.

The Group has determined that, under IFRS 15, certain licences that
qualified for upfront recognition under IAS 18 in its Applied Intelligence
business represent the right to access the Group’s intellectual property
on the basis that the customers have an expectation that the Group
will provide significant updates to the software during the licence term
to ensure its continuing value to the customer. Accordingly, revenue
relating to these licences is deferred and recognised over the licence
term under IFRS 15 rather than being recognised upfront under IAS 18.

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34. Adoption of IFRS 15, Revenue from Contracts with Customers continued

Consolidated income statement

Operating profit

Financial income
Financial expense
Net finance costs
Profit before taxation
Taxation expense
Profit for the year

Attributable to:

Equity shareholders
Non-controlling interests

Earnings per share

Basic earnings per share
Diluted earnings per share

Underlying earnings per share1

BAE Systems
Annual Report 2017

201

Year ended 31 December 2017

As
previously
reported
£m

IFRS 15
adjustments
£m

Restated on
adoption of
IFRS 15
£m

19,626
(2,575)
1,271
18,322
(17,089)
131
1,364
116

(1,139)
41
–
(1,098)
1,046
–
(52)
(9)

18,487
(2,534)
1,271
17,224
(16,043)
131
1,312
107

2,034
(13)
2,021
(86)
(384)
(34)
(37)
1,480

416
(762)
(346)
1,134
(250)
884

854
30
884

26.8p
26.7p

43.5p

(60)
–
(60)
–
–
–
(1)
(61)

–
–
–
(61)
34
(27)

(27)
–
(27)

(0.8)p
(0.8)p

(1.4)p

1,974
(13)
1,961
(86)
(384)
(34)
(38)
1,419

416
(762)
(346)
1,073
(216)
857

827
30
857

26.0p
25.9p

42.1p

1. Restated underlying earnings per share excludes an additional £18m benefit in respect of the impact of US tax reform enacted in December 2017 included in the restated

taxation expense above.

Consolidated net assets
The following table shows the effect of adopting IFRS 15 on net assets in the Consolidated balance sheet at 31 December 2016 and 2017:

Increase in net assets at 31 December 2016
Decrease in profit for the year ended 31 December 2017
Decrease in total other comprehensive income for the year ended 31 December 2017 (net of tax)
Increase in net assets at 31 December 2017

£m
92
(27)
(8)
57

202

BAE Systems
Annual Report 2017

Company statement of comprehensive income
for the year ended 31 December

Profit for the year
Other comprehensive income
Items that will not be reclassified to the income statement:

Remeasurements on retirement benefit schemes

Items that may be reclassified to the income statement:

Amounts charged to hedging reserve

Total other comprehensive income for the year (net of tax)
Total comprehensive income for the year

2017
£m
962

20161
£m
590

142

(56)

(2)
140
1,102

(13)
(69)
521

1. Restated to recognise an increase in investments in subsidiary undertakings representing the cost of the Free and Matching elements of the Share Incentive Plan awarded

to employees of subsidiary undertakings.

Company statement of changes in equity
for the year ended 31 December

At 1 January 20162
Profit for the year2
Total other comprehensive income for the year
Share-based payments
Net sale of own shares
Ordinary share dividends
At 31 December 20162
Profit for the year
Total other comprehensive income for the year
Share-based payments
Net purchase of own shares
Ordinary share dividends
At 31 December 2017

Issued share
capital
£m
87
–
–
–
–
–
87
–
–
–
–
–
87

Share
premium
£m
1,249
–
–
–
–
–
1,249
–
–
–
–
–
1,249

Other
reserves
£m
218
–
(13)
–
–
–
205
–
(2)
–
–
–
203

Retained
earnings1
£m
2,209
590
(56)
50
3
(670)
2,126
962
142
55
(1)
(684)
2,600

Total
equity
£m
3,763
590
(69)
50
3
(670)
3,667
962
140
55
(1)
(684)
4,139

1. The non-distributable portion of retained earnings is £649m (2016 £604m).
2. Retained earnings restated to recognise an increase in investments in subsidiary undertakings representing the cost of the Free and Matching elements of the Share

Incentive Plan awarded to employees of subsidiary undertakings.

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Company balance sheet
as at 31 December

Non-current assets
Intangible assets
Property, plant and equipment
Investments in subsidiary undertakings and participating interests
Other receivables
Retirement benefit surpluses
Other financial assets

Current assets
Trade and other receivables
Current tax
Other financial assets
Cash and cash equivalents

Total assets
Non-current liabilities
Loans
Other payables
Retirement benefit obligations
Other financial liabilities
Provisions

Current liabilities
Loans and overdrafts
Trade and other payables
Other financial liabilities
Provisions

Total liabilities
Net assets

Capital and reserves
Issued share capital
Share premium
Other reserves
Retained earnings2
Total equity

BAE Systems
Annual Report 2017

203

Notes

2017
£m

20161
£m

8
4

8
4
7

6
4
7

38
29
8,439
3
27
280
8,816

2,653
14
145
2,707
5,519
14,335

(1,059)
(19)
(186)
(216)
(101)
(1,581)

(7)
(8,416)
(172)
(20)
(8,615)
(10,196)
4,139

34
31
8,399
4
8
385
8,861

3,038
14
347
2,168
5,567
14,428

(1,122)
(33)
(308)
(182)
(97)
(1,742)

–
(8,664)
(332)
(23)
(9,019)
(10,761)
3,667

87
1,249
203
2,600
4,139

87
1,249
205
2,126
3,667

1. Restated to recognise an increase in investments in subsidiary undertakings representing the cost of the Free and Matching elements of the Share Incentive Plan awarded

to employees of subsidiary undertakings.

2. The Company’s profit for the year is £962m (2016 £590m1).

Approved by the Board on 21 February 2018 and signed on its behalf by:

C N Woodburn
Chief Executive

P J Lynas
Group Finance Director

Registered number: 1470151

204

BAE Systems
Annual Report 2017

Notes to the
Company accounts

1. Preparation

Basis of preparation
The financial statements of BAE Systems plc have been prepared on
a going concern basis, as discussed in the Directors’ report on page 81,
and in accordance with Financial Reporting Standard (FRS) 101, Reduced
Disclosure Framework, issued in September 2015. The amendments to
FRS 101 (2015/16 cycle), issued in July 2016, and FRS 101 (2016/17 cycle),
issued in July 2017, have no impact on the Company.

In preparing these financial statements, the Company applies the
recognition, measurement and disclosure requirements of International
Financial Reporting Standards (IFRS) as adopted by the EU (EU-adopted
IFRS), but makes amendments where necessary in order to comply with
the Companies Act 2006 and has set out below where advantage of
the FRS 101 disclosure exemptions has been taken:
– the requirements of paragraphs 45(b) and 46 to 52 of IFRS 2,

Share-based Payment;

The Company intends to continue to prepare its financial statements
in accordance with FRS 101.

In accordance with Section 408(3) of the Companies Act 2006, the
Company is exempt from the requirement to present its own income
statement. The amount of profit for the year of the Company is
disclosed in the Company statement of comprehensive income.

The financial statements have been prepared under the historical cost
convention, as modified by the revaluation of relevant financial assets
and financial liabilities (including derivative instruments).

Significant accounting policies
The significant accounting policies applied in the preparation of
these individual financial statements are set out below. These policies
have been applied consistently to all the years presented, unless
otherwise stated.

– the requirements of paragraphs 62, B64(d), B64(e), B64(g), B64(h),
B64(j), to B64(m), B64(n)(ii), B64(o)(ii), B64(p), B64(q)(ii), B66 and
B67 of IFRS 3, Business Combinations;

Investments in subsidiary undertakings and participating interests
Fixed asset investments in shares in subsidiary undertakings and
participating interests are stated at cost less provision for impairment.

– the requirements of paragraph 33(c) of IFRS 5, Non-current Assets

Held for Sale and Discontinued Operations;

– the requirements of IFRS 7, Financial Instruments: Disclosures;
– the requirements of paragraphs 91 to 99 of IFRS 13, Fair Value

Measurement;

– the requirement in paragraph 38 of IAS 1, Presentation of Financial

Statements, to present comparative information in respect of:
paragraph 79(a)(iv) of IAS 1; paragraph 73(e) of IAS 16, Property,
Plant and Equipment; paragraph 118(e) of IAS 38, Intangible Assets;
and paragraphs 76 and 79(d) of IAS 40, Investment Property;

– the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D,
40A, 40B, 40C, 40D, 111 and 134 to 136 of IAS 1, Presentation of
Financial Statements;

– the requirements of IAS 7, Statement of Cash Flows;
– the requirements of paragraphs 30 and 31 of IAS 8, Accounting

Policies, Changes in Accounting Estimates and Errors;

– the requirements of paragraphs 17 and 18A of IAS 24, Related Party

Disclosures;

– the requirements in IAS 24, Related Party Disclosures, to disclose
related party transactions entered into between two or more
members of a group, provided that any subsidiary which is a party
to the transaction is wholly owned by such a member; and

– the requirements of paragraphs 130(f)(ii), 130(f)(iii), 134(d) to 134(f)

and 135(c) to 135(e) of IAS 36, Impairment of Assets.

Other significant accounting policies
Other significant accounting policies are consistent with the Group
accounts and the table below references where they are disclosed.

Significant accounting policy

Loans and overdrafts
Retirement benefits
Provisions

Page

172
174
184

Prior year restatement
The Company has restated comparatives for the year ended
31 December 2016 to recognise a £250m increase in investments
in subsidiary undertakings and a corresponding increase in
non-distributable retained earnings, representing the cost of the
Free and Matching elements of the Share Incentive Plan awarded to
employees of subsidiary undertakings. The Company had previously
recognised the cost of these awards in the income statement, with
a corresponding credit in equity. Accordingly, investments and
non-distributable retained earnings at 1 January 2016 have increased
by £220m and profit for the year ended 31 December 2016 has
increased by £30m.

2. Investments in subsidiary undertakings and participating interests

Cost
At 1 January 20171
Additions
At 31 December 2017
Impairment provisions
At 1 January 2017
Impairment charge
At 31 December 2017
Net carrying value
At 31 December 2017
At 31 December 20161

£m

8,413
45
8,458

14
5
19

8,439
8,399

1. Restated to recognise an increase in investments in subsidiary undertakings representing the cost of the Free and Matching elements of the Share Incentive Plan awarded

to employees of subsidiary undertakings.

BAE Systems
Annual Report 2017

205

2017
£m

2016
£m

2,571
5
62
15
2,653

2,954
–
37
47
3,038

2017

2016

Assets
£m

Liabilities
£m

Assets
£m

Liabilities
£m

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m
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–
201
79
280

–
145
–
145

(1)
(215)
–
(216)

(1)
(152)
(19)
(172)

1
274
110
385

1
346
–
347

2017
£m
17
76
90
183

–
(182)
–
(182)

(2)
(330)
–
(332)

2016
£m
11
136
147
294

3. Trade and other receivables

Current
Amounts owed by subsidiary undertakings
Amounts owed by Group joint ventures
Prepayments and accrued income
Other receivables

4. Other financial assets and liabilities

Non-current
Cash flow hedges – foreign exchange contracts
Other foreign exchange/interest rate contracts
Debt-related derivative financial instruments – assets

Current
Cash flow hedges – foreign exchange contracts
Other foreign exchange/interest rate contracts
Debt-related derivative financial instruments – liabilities

The contractual cash flows on derivative financial instruments at the reporting date are shown below, classified by maturity.

Less than one year
Between one and five years
More than five years

Full disclosures relating to the Group’s other financial assets and liabilities, and financial risk management strategies are given in notes 13, 27 and
28 to the Group accounts.

5. Loans

Non-current
US$500m 4.75% bond, repayable 2021
£400m 4.125% bond, repayable 2022
US$400m 5.8% bond, repayable 2041

6. Trade and other payables

Current
Amounts owed to subsidiary undertakings
Amounts owed to Group joint ventures
Accruals and deferred income
Other payables

2017
£m

369
398
292
1,059

2016
£m

404
398
320
1,122

2017
£m

2016
£m

7,299
884
120
113
8,416

7,830
631
121
82
8,664

206

BAE Systems
Annual Report 2017

Notes to the Company accounts
continued

7. Provisions

Non-current
Current
At 1 January 2017
Created
Utilised
Released
Net present value adjustments
At 31 December 2017
Represented by:
Non-current
Current

Contracts
and other
£m
97
23
120
4
(8)
(1)
6
121

101
20
121

The Company holds provisions for 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.

8. Retirement benefits

The Company participates in all of the Group’s UK pension schemes. Regular contributions to the schemes are made in line with the schedule
of contributions and a share of deficit funding is allocated to participating employers. The deficit allocation methodology is based on the relative
payroll contributions of active members. Full disclosures relating to these schemes are given in note 21 to the Group accounts.

Amounts recognised on the balance sheet
The table below shows the Company’s share of the Group’s UK pension schemes after allocation to other participating employers.

Present value of unfunded obligations
Present value of funded obligations
Fair value of scheme assets
Company’s share of net IAS 19 deficit
Represented by:

Retirement benefit surpluses
Retirement benefit obligations

9. Share capital and other reserves

Share capital
Disclosures in respect of the Company’s share capital are provided in note 23 to the Group accounts.

Other reserves

At 1 January 2016
Amounts credited to hedging reserve
At 31 December 2016
Amounts charged to hedging reserve
At 31 December 2017

2017
£m
(33)
(1,326)
1,200
(159)

27
(186)
(159)

2016
£m
(39)
(1,429)
1,168
(300)

8
(308)
(300)

Statutory
reserve
£m
202
–
202
–
202

Capital
redemption
reserve
£m
3
–
3
–
3

Hedging
reserve
£m
13
(13)
–
(2)
(2)

Total
£m
218
(13)
205
(2)
203

Capital redemption reserve
The capital redemption reserve represents the cumulative nominal value of the Company’s ordinary shares repurchased and subsequently cancelled.

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10. Share-based payments

Options over shares of the Company 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 Annual remuneration report on pages 96 to 115.

2017

2016

Range of
exercise price
of outstanding
options
£
3.01 – 6.49
–

Weighted
average
remaining
contracted life
Years
8
5

Range of
exercise price
of outstanding
options
£
3.01 – 5.56
–

Weighted
average
remaining
contracted life
Years
8
5

Executive Share Option Plan
Performance Share Plan

The average share price in the year was £6.11 (2016 £5.24).

11. Employees

The total number of employees of the Company at 31 December 2017 was 1,134 (2016 1,101).

Total staff costs, excluding charges for share-based payments, were as follows:

Wages and salaries
Social security costs
Pension costs – defined contribution plans
Pension costs – defined benefit plans

12. Other information

2017
£m
86
9
2
11
108

2016
£m
98
9
2
6
115

Company audit fee
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts totalled £2,034,000 (2016 £1,776,000).

Related party transactions
Disclosures in respect of related party transactions are provided in note 30 to the Group accounts.

The Company also has amounts receivable from Aircraft Accessories and Co. Limited of £7m (2016 £nil) and Aircraft Research Association Limited
of £4m (2016 £1m) which are not wholly-owned subsidiaries.

The Company also has a related party relationship with its directors and key management personnel, and pension schemes.

Directors’ emoluments
Under Schedule 5 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (Schedule 5), total directors’
emoluments, excluding Company pension contributions, were £8,748,961 (2016 £10,806,172); these amounts are calculated on a different basis
to emoluments in the Annual remuneration report which are calculated under Schedule 8 of the Large and Medium-Sized Companies and
Groups (Accounts and Reports) (Amendment) Regulations 2013 (Schedule 8 (2013)). These emoluments were paid for their services on behalf
of the BAE Systems Group. No emoluments related specifically to their work for the Company. Under Schedule 5, the aggregate gains made
by the directors from the exercise of share options in 2017 as at the date of exercise was £1,002,325 (2016 £158,125) and the net aggregate
value of assets received by directors in 2017 from Long-Term Incentive Plans as calculated at the date of vesting was £1,016,511 (2016 £nil);
these amounts are calculated on a different basis from the valuation of share plan benefits under Schedule 8 (2013) in the Annual remuneration
report. Retirement benefits are accruing to one director in respect of defined benefit schemes and to two directors in respect of defined
contribution schemes.

Company guaranteed borrowings
Borrowings by subsidiary undertakings totalling £3,010m (2016 £3,295m), which are included in the Group’s borrowings, have been guaranteed
by the Company.

Information about related undertakings
In accordance with Section 409 of the Companies Act 2006, a full list of the Company’s subsidiaries and significant holdings is included in note 33
to the Group accounts.

208

BAE Systems
Annual Report 2017

Shareholder
information

Registered office
6 Carlton Gardens
London
SW1Y 5AD
United Kingdom
Telephone: +44 (0)1252 373232
Company website: 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 (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 will help to ensure your question is
directed to the most appropriate team for a response. Alternatively,
you can call the BAE Systems Helpline on 0371 384 2044 or, from
outside the UK, +44 121 415 7058. Lines are open from 8.30am
to 5.30pm Monday to Friday, excluding UK Bank holidays.

In addition, the following services are offered to shareholders:

– Shareview – online access to your shareholding, including
balance movements, indicative share prices and information
on recent payments

– Dividend mandates – have your dividends paid directly into
either your UK bank/building society account or an overseas
bank account

– Dividend reinvestment plan (DRIP) – have your dividend

reinvested in shares purchased on the stock market

More information on all these services can be found on Equiniti’s
website (shareview.co.uk).

BEWARE OF SHARE FRAUD

American Depositary Receipts
BAE Systems plc American Depositary Receipts (ADRs) are traded
on the Over The Counter market (OTC) under the symbol BAESY.
One ADR represents four BAE Systems plc ordinary shares.
JPMorgan Chase Bank, N.A. is the depositary. If you should have
any queries, please contact:
JPMorgan Chase & Co
PO Box 64504
St Paul
MN 55164-0854 USA
Email: jpmorgan.adr@wellsfargo.com
Telephone number for general queries: (800) 990 1135
Telephone number from outside the US: +1 651 453 2128

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 sharegift.org, by telephone on 020 7930 3737
or by e-mail: help@sharegift.org

Share price information
The middle market price of the Company’s ordinary shares on
31 December 2017 was 573.0p and the range during the year
was 535.5p to 677.0p.

For more information
Visit the Shareholder information section of our website:
investors.baesystems.com

FINANCIAL CALENDAR
Financial year end
Annual General Meeting
2017 final ordinary dividend payable
2018 half-yearly results announcement
2018 interim ordinary dividend payable
2018 full-year results:
– preliminary announcement
– Annual Report
2018 final ordinary dividend payable

31 December
10 May 2018
1 June 2018
1 August 2018
30 November 2018

February 2019
March 2019
June 2019

Fraudsters use persuasive and high-pressure tactics to lure investors into scams.
They may offer to sell shares that turn out to be worthless or non-existent, or to buy shares at an inflated price in return for an upfront payment.
While high profits are promised, if you buy or sell shares in this way you will probably lose your money.
Victims of share fraud lose an average of £20,000 to these scams, with as much as £200m being lost in the UK each year.
How to avoid share fraud
1. Keep in mind that firms authorised by the FCA are unlikely to
contact you out of the blue with an offer to buy or sell shares.
2. Do not get into a conversation, note the name of the person

6. Call the FCA on 0800 111 6768 if the firm does not have contact

details on the Register or you are told they are out of date.

7. Search the list of unauthorised firms to avoid at

and firm contacting you and then end the call.

scamsmart.fca.org.uk/warninglist

3. Check the Financial Services Register from fca.org.uk

to see if the person and firm contacting you is authorised
by the FCA.

8. Consider that if you buy or sell shares from an unauthorised firm
you will not have access to the Financial Ombudsman Service or
Financial Services Compensation Scheme.

4. Beware of fraudsters claiming to be from an authorised firm,

copying its website or giving you false contact details.

5. Use the firm’s contact details listed on the Register if you want

9. Think seriously about getting independent financial and
professional advice before you hand over any money.
10. Remember: if it sounds too good to be true, it probably is!

to call it back.

Report a scam
If you are approached by fraudsters please tell the FCA using the FCA Consumer Helpline on 0800 111 6768, or the share fraud reporting
form at fca.org.uk/scams, where you can also find out more about investment scams.
If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040 or online at actionfraud.police.uk

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baesystems.com

BAE Systems plc
6 Carlton Gardens
London
SW1Y 5AD
United Kingdom
Telephone: +44 (0)1252 373232
baesystems.com

Registered in England and Wales, No. 1470151

BAE SYSTEMS is a registered trade mark of BAE Systems plc.