Annual Financial Report

RNS Number : 3538J

BAE SYSTEMS PLC

29 March 2010

Cautionary statement: All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of BAE Systems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements which reflect management's assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of BAE Systems or the markets and economies in which BAE Systems operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Nothing in this document shall be regarded as a profit forecast. BAE Systems plc and its directors accept no liability to third parties in respect of this report save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with section 90A of the Financial Services and Markets Act 2000. It should be noted that section 90A and section 463 Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that their liability is solely to BAE Systems plc.

BAE Systems plc - Annual Report 2009

BAE Systems plc has today published its annual report and accounts for the year ended 31 December 2009 ("Annual Report 2009"). The full document can be viewed on the Company's website at:

www.baesystems.com/reporting/

Copies of the annual report and accounts have been posted to those shareholders who have requested to receive communications from the Company in printed form. Copies of the document have also been lodged at the UK Listing Authority's document viewing facility at 25 The North Colonnade, Canary Wharf, London E14 5HS.

This announcement contains regulated information issued in accordance with section 6.3 of the Financial Services Authority's Disclosure and Transparency Rules and accordingly contains certain sections of the Annual Report 2009 in unedited full text. Page and chart references within the text of this announcement are references to pages and charts in the Annual Report that can be viewed as detailed above.

The Annual Report 2009 contains the following responsibility statement:

Responsibility statement of the directors in respect of the Annual Report and financial statements
Each of the directors listed below confirms that to the best of their knowledge:
- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
- the Directors' report includes a fair review of the development and performance of the business, and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Dick Olver	Chairman
Ian King	Chief Executive
Linda Hudson	Chief Operating Officer, President and Chief Executive Officer of BAE Systems, Inc.
George Rose	Group Finance Director
Paul Anderson	Non-executive director
Phil Carroll	Non-executive director
Michael Hartnall	Non-executive director
Andy Inglis	Non-executive director
Sir Peter Mason	Non-executive director
Roberto Quarta	Non-executive director
Nick Rose	Non-executive director
Carl Symon	Non-executive director
Ravi Uppal	Non-executive director

CHIEF EXECUTIVE'S REVIEW

"BAE Systems has evolved to become one of the world's leading defence companies and is well positioned to weather the pressures in its global markets."

- Continued good demand for high-technology capabilities

- Further significant multi-year support contracts awarded

- Delivering growth from combat aircraft programmes

- Transitioning from peak activity in land systems

The good operating performance of BAE Systems in 2009 reflects the good progress the Group has made in recent years, developing the business within a well-defined and consistently implemented strategic framework¹. That strategy underpins the Group's aim to deliver sustainable growth in shareholder value through a commitment to Total Performance for all its customers.

BAE Systems is a resilient business, well positioned to weather the pressures that result from the recent turbulence in global economies. The Group operates primarily in its seven home markets, and has a wide portfolio of products and capabilities serving defence customers across the air, land and sea domains. Many of the Group's programmes are subject to long-term contracts, and some include agreements designed to address and safeguard national capabilities.

Alongside its established defence-related activities, BAE Systems has a growing position in national security with a focus on information-based intelligence capabilities. The acquisition of Detica in September 2008 was a further step in the implementation of the Group's security strategy. BAE Systems is well placed to address opportunities in security markets, such as increasing focus on cyber threats.

The Group's geographic spread of business extends the diversity of its customer base. The strategy, to identify long-term sustainable markets around the globe and address those markets by building local industrial positions, is working to good effect. India has been identified as the Group's seventh home market and, in November, an agreement was signed with Mahindra & Mahindra to establish a joint venture in land systems.

Rapid changes in the nature and evolution of threats around the world have resulted in corresponding changes in priorities for many of the Group's customers. BAE Systems recognises that agility in addressing customers' requirements is becoming a key competitive discriminator.

Defence budgets in both the UK and the US are expected to come under further pressure, and with expectations of a more challenging business environment ahead, the focus on driving performance and efficiency in the business will be key. Cost reduction measures are being aggressively implemented across the Group.

US business

In the US, overall defence spending remains robust but the investment accounts, from which the Group derives significant business, are expected to be stressed by the continued cost of high tempo operations and rising manpower costs.

In April 2009, the US Secretary of Defense announced a reprioritisation of programmes that is expected to continue to shape US defence procurement. Many of BAE Systems' activities are well aligned to those announced priority changes. In February 2010, the US Quadrennial Defense Review was published along with the US defence budget for the Fiscal Year 2011 (FY11). The FY11 base budget identifies an increase of 3.4% and within this base budget the investment account allocations were at the upper end of the Group's planning assumptions.

The Group's high technology capabilities in the US are expected to continue to be in demand. The business has a strong record of innovation, rapidly generating advanced, but cost effective, solutions to address complex problems.

In June, BAE Systems completed the acquisition of Advanced Ceramics Research, Inc. for $14m (£9m). The acquisition supports BAE Systems' global Unmanned Aircraft Systems (UAS) strategy, adding small UAS platforms and ground segment capability to complement the Group's existing UAS capabilities.

A setback for the Group was the notification by the US Department of Defense in August 2009 and, following a re-evaluation of the bids, in February 2010 that a follow-on production contract for vehicles under the Family of Medium Tactical Vehicles (FMTV) programme had been lost.

UK and rest of world business

The outlook for UK defence spending remains difficult, but the Group has a large order book reflecting the firmly contracted long-term programmes that are a feature of BAE Systems' UK-based business.

The largest of those programmes, the Typhoon combat aircraft, is set for further growth with increasing deliveries to both the four European partner nations and to the Kingdom of Saudi Arabia.

BAE Systems is a leader in the provision of multi-year, capability-based, support solutions. Approximately 40% of BAE Systems' sales in 2009 are Readiness & Sustainment related activity. In addition to established relationships in the UK, the Kingdom of Saudi Arabia and Australia, BAE Systems seeks to migrate its Readiness & Sustainment capabilities to other markets.

New multi-year UK support contracts were awarded in the year totalling over £2bn. Such contracts included support and maintenance of Harrier and Typhoon aircraft in service with the Royal Air Force, the Type 45 anti-air warfare destroyer (the Group's first major UK ship support contract), and Spearfish and Sting Ray torpedoes in service with the Royal Air Force and Royal Navy, respectively.

The governments of the Kingdom of Saudi Arabia and the United Kingdom also agreed detailed arrangements to provide support for Typhoon operations for a three-year period. These arrangements will be operated through a full availability service contract with BAE Systems. Eight Typhoon aircraft were delivered in the year to the Saudi customer under the 2007 Salam production contract.

In July, contracts were agreed by the four European partner nations for 88 Tranche 3A Typhoon aircraft with a contract value to the Group of approximately £2bn. The contracts extend visibility of Typhoon production for the next five years.

BAE Systems is also a significant participant on the US F-35 (Joint Strike Fighter) programme with the combination of both airframe assembly manufacture in the UK and electronic systems supplied from the Group's US operations. The F-35 is expected to progress to high volume production over the coming years.

In October, BAE Systems completed the acquisition of VT Group's 45% shareholding in BVT, creating a wholly-owned subsidiary, BAE Systems Surface Ships Limited. The acquisition followed an agreement with the UK Ministry of Defence in July defining a Terms of Business Agreement setting out a 15-year partnering arrangement, including lead roles for the business on defined surface shipbuilding and support programmes. A significant element of the workload underpinned by this agreement is the manufacture of the Royal Navy's new class of two 65,000 tonne aircraft carriers. Following award of manufacturing contracts, steel cutting commenced in July, marking the start of build of the first of class. The Royal Navy also saw Astute, the first of a new class of nuclear powered attack submarines, commence sea trials in November.

BAE Systems identifies unmanned systems as an increasing priority amongst its customers, driven by rapidly evolving requirements often to meet urgent operational needs. BAE Systems is developing a range of unmanned system solutions to meet those requirements.

In the UK, the Group is developing three unmanned air platforms. A small high endurance air system, Herti, has been operationally deployed. A large twin-engined air platform, Mantis, commenced flight trials in October just 19 months after conception. A third development platform, Taranis, a stealthy unmanned combat air system, is in-build.

RESPONSIBLE TRADING PRINCIPLES

1. We understand and support our customers' national security and other requirements;

2. We assess carefully our products and services with the objective that neither BAE Systems nor our customers are exposed to significant reputational risk;

3. We work to BAE Systems' values in all that we do; and

4. We are as open as practicable about the nature of our business.

People and Total Performance

BAE Systems is dependent on the skills and capabilities of its people. The Group sets high standards for the training and development of employees, and is a major employer of apprentices and graduates.

The Group maintains robust processes for career development including succession planning for its senior executives.

Programme execution is an important and easily recognisable embodiment of performance but, in addition, we target an integrated approach to performance, embracing all aspects of our corporate existence. The Group wants to be recognised as a company committed to developing a culture of Total Performance. Successfully embedding this approach will be a key differentiator for the Group. Total Performance focuses not just on what we do but also how we do it. It is about every aspect of the way we do business; Customer Focus, Financial Performance, Programme Execution and Responsible Behaviour. Delivery of the Group's Corporate Responsibility agenda is an essential part of embedding a Total Performance culture across the Group.

Our focus on safety remains a top priority. The tragic loss of Nimrod XV230 over Afghanistan in 2006 and the subsequent Haddon-Cave report published in October have only strengthened our resolve to continuously seek improvements to safety across all aspects of our business. The Product Safety Review we recently announced, headed by Nigel Whitehead, Group Managing Director, Programmes & Support, further demonstrates the importance we place on safety. We will work with our customer, the UK Ministry of Defence, to ensure that any learning benefits our current and future workload.

We are also deeply saddened to report the death of one of our employees during deployment of communications equipment in Australia. We are reviewing the cause of this accident and co-operating fully with the regulatory investigation.

BAE Systems aims to achieve leadership standards of responsible business conduct through its programme to address the 23 recommendations of the Woolf Report. As a consequence, we reviewed all Group policies and governance processes during 2009, and have incorporated appropriate changes in the Operational Framework effective January 2010. A further key focus during 2009 was the rolling-out of a Group-wide Code of Conduct for employees as part of the drive to embed high standards of business conduct.

In addition, we have also launched Responsible Trading Principles (see page 5). All trading is to be undertaken in accordance with these principles and consistency of this approach is key in defining BAE Systems' reputation. Together with our global Code of Conduct, these underpin the way we do business.

BAE Systems is not complacent and recognises the difficulties in the wider economies in which it operates, but it is a broadly-based and robust business with a large order book. It has been agile in developing the business, adapting its capabilities in anticipation of changing requirements.

The result is a continuously evolving business with a good track record of identifying and exploiting growth opportunities whilst re-focusing the business towards the future priority needs of our customers.

Ian King Chief Executive

1 FOR THE GROUP STRATEGIC FRAMEWORK SEE PAGE 10

FINANCIAL REVIEW

"Another year of good underlying growth."

- The £46.9bn (2008 £46.5bn) order book¹ continues to provide excellent forward visibility

- £261m accounting gain on US pension restructuring and £278m of regulatory penalties excluded from underlying EBITA²

- Underlying EBITA² has increased by 17% to £2,220m (2008 £1,897m)

- £973m of impairment charges largely relating to the ex-Armor Holdings business

- Underlying earnings³ per share has increased by 10% to 40.7p per share (2008 37.1p)

- The total dividend has increased by 10% to 16.0p per share (2008 14.5p)

Summary income statement
	2009 £m	2008 £m
Sales¹	22,415	18,543

Underlying EBITA²	2,220	1,897
Return on sales	9.9%	10.2%
Profit on disposal of businesses	68	238
Pension accounting gain	261	-
Regulatory penalties	(278)	-
EBITA	2,271	2,135
Amortisation of intangible assets	(286)	(247)
Impairment of intangible assets	(973)	(177)
Net financial (expense)/income¹	(707)	697
Taxation expense¹	(350)	(640)
(Loss)/profit for the year	(45)	1,768
Exchange rates
£/$ - average	1.566	1.853
£/€ - average	1.123	1.258

ORDER BOOK

Order book¹ increased to £46.9bn (2008 £46.5bn) largely reflecting the acquisition of VT Group's 45% interest in the BVT Surface Fleet (BVT) joint venture (£2.1bn). Excluding the impact of exchange translation, the order book is broadly unchanged year-on-year.

INCOME STATEMENT

Sales¹ increased by 21% to £22.4bn (2008 £18.5bn). Like-for-like growth, after adjusting for the impact of exchange translation, and acquisitions and disposals, was 7%. Despite the planned lower level of land vehicle sales in the US, growth was delivered through increased deliveries of Typhoon Tranche 2 standard aircraft to the European partner nations, initial deliveries of Typhoon aircraft and support to the Kingdom of Saudi Arabia, and a 6% underlying growth in the Electronics, Intelligence & Support operating group. US-led businesses were responsible for 55% (2008 59%) of sales¹. 91% of sales¹ were generated from home markets (2008 88%). The Group's sales¹ performance is illustrated in the bridge chart below.

Underlying EBITA Management uses an underlying profit measure to monitor the year-on-year profitability of the Group, which is defined as earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items. This definition is referred to as Underlying EBITA. In order to ensure that it continues to provide a measure of profitability that is comparable over time, it has been amended to exclude all non-recurring items. Underlying EBITA continues to be the measure of profit on which segmental performance is monitored by management. As such, it is disclosed in note 3 to the Group accounts on a segmental basis.

Underlying EBITA² increased by 17% to £2,220m (2008 £1,897m). This includes favourable exchange translation of £187m. Return on sales reduced to 9.9% after expensing of the Mine Resistant Ambush Protected (MRAP) All-Terrain Vehicles (ATV) research and development, and bid costs (£56m) in the US businesses, and for trading initial deliveries of Typhoon to the Kingdom of Saudi Arabia at lower margins reflecting the early stage of that contract. US-led businesses delivered 53% (2008 57%) of the Group's underlying EBITA². The increase in underlying EBITA² is illustrated in the bridge chart below.

Non-recurring items are defined as items that are relevant to an understanding of the Group's performance with reference to their materiality, nature and function. The non-recurring items for the current and prior years are as follows:

Profit on disposal of businesses comprised the finalisation of the accounting gain recognised in 2008 on the disposal of the Group's interests in the businesses contributed to the BVT joint venture following acquisition of VT Group's 45% interest in 2009 (£58m) and additional proceeds received in respect of the disposal in 2008 of the Group's interest in Flagship Training (£10m). The prior year profit of £238m included the accounting gain on the disposal of the Group's interests in the businesses contributed to BVT (£121m), and profit on disposals of the Surveillance & Attack business (£61m) and the Group's interest in Flagship Training (£56m).

The pension accounting gain of £261m in 2009 has resulted from pension benefit restructuring in the US. It has been excluded from underlying EBITA² on the basis of its materiality and non-recurring nature.

The regulatory penalties of £278m in 2009 reflect the global settlement of the regulatory investigations by the US Department of Justice and the UK's Serious Fraud Office referred to in the Chairman's letter on page 3. These have been excluded from underlying EBITA² on the basis of their materiality and non-recurring nature.

Amortisation of intangible assets is £39m higher at £286m mainly for the impact of a full year of charges in respect of the businesses acquired in 2008.

Impairment of intangible assets of £973m primarily relates to the goodwill and intangible assets acquired with Armor Holdings in 2007. The impairment largely reflects the non-award of the follow-on Family of Medium Tactical Vehicles production contract (£592m) and the weaker outlook for the US-based Products Group business (£264m). In addition, £34m has been taken relating to the discontinued financial services element of the Detica business. The prior year charge of £177m included a reduction in the market value of the Group's interest in Saab of Sweden (£120m) and a charge against the Products Group (£40m). Further disclosure is provided in note 11 to the Group accounts.

Net financial expense¹ was £707m (2008 net financial income £697m). The underlying net interest charge increased to £195m (2008 £102m) primarily on the cash cost of business acquisitions made in 2008, lower interest received on cash held and the carrying cost of $1.5bn US bonds issued in June 2009. A net expense of £512m (2008 net credit £799m) arose from pension accounting, marked-to-market revaluation of financial instruments and foreign currency movements, reversing much of the net income recorded in 2008 from these items.

Taxation expense¹ reflects an effective tax rate of 28% (2008 26%), which is expected to increase to 29% in 2010. The effective tax rate is based on profit before taxation excluding goodwill impairment of £725m and regulatory penalties (£278m).

EARNINGS PER SHARE

Basic loss per share, in accordance with IAS 33, Earnings per Share, was 1.9p (2008 earnings 49.6p). The reduction on 2008 mainly reflects the impairments, regulatory penalties, and reversal of gains made in 2008 on marked-to-market revaluation of financial instruments and foreign currency movements.

Underlying earnings³ per share was 40.7p (2008 37.1p), an increase of 10%. The increase in underlying earnings³ per share is illustrated in the bridge chart below.

Reconciliation from underlying EBITA² to underlying earnings³
	2009 £m	2008 £m
Underlying EBITA²	2,220	1,897
Net financial expense excluding non-cash finance movements on pensions and financial derivatives (see note 6 to the Group accounts)	(195)	(102)
	2,025	1,795
Taxation	(567)	(467)
Minority interests	(22)	(23)
Underlying earnings³	1,436	1,305
Weighted average number of shares	3,532m	3,519m
Underlying earnings³ per share	40.7p	37.1p

DIVIDENDS

The Board is recommending a final dividend of 9.6p per share (2008 8.7p), bringing the total dividend for the year to 16.0p per share (2008 14.5p), an increase of 10%.

The proposed dividend is covered 2.5 times by underlying earnings³ (2008 2.6 times), which is consistent with the Group's policy of growing the dividend whilst maintaining a long-term sustainable earnings cover of approximately two times.

BALANCE SHEET

Summary balance sheet
	2009 £m	2008 £m
Intangible assets	11,253	12,306
Property, plant and equipment, and investment property	2,663	2,558
Equity accounted investments and other investments	852	1,040
Other financial assets and liabilities (net)	(45)	240
Tax assets and liabilities (net)	850	256
Pension deficit as defined by the Group	(4,410)	(3,325)
Working capital	(6,839)	(5,825)
Net cash as defined by the Group⁴	403	39
Net assets	4,727	7,289
Exchange rates
£/$ - year end	1.615	1.451
£/€ - year end	1.125	1.042

Exchange translation, principally in respect of the Group's US-dollar denominated businesses, reduced net assets by £302m.

The £1.0bn reduction in intangible assets to £11.3bn (2008 £12.3bn) mainly reflects amortisation and impairment (£1.3bn), and adverse exchange translation (£0.7bn), partly offset by the goodwill and intangible assets recognised on the acquisition of VT Group's 45% interest in BVT (£0.8bn).

The reduction in equity accounted investments and other investments from £1,040m to £852m is largely due to the acquisition of VT Group's 45% interest in BVT in October 2009. BVT, now re-named BAE Systems Surface Ships, is a wholly-owned subsidiary of the Group and its balance sheet, and associated purchased goodwill, are now consolidated on a line-by-line basis.

The movement in retirement benefit obligations during the year is shown below and further disclosure is provided in note 21 to the Group accounts.

	£m
Deficit in defined benefit pension plans at 1 January 2009	(4,155)
Increase in liabilities due to changes in assumptions	(3,342)
Actual return on assets above expected returns	1,258
Contributions over service cost	475
Non-recurring accounting gain	261
Exchange translation	96
Other movements	(166)
Deficit in defined benefit pension plans at 31 December 2009	(5,573)
US healthcare plans	(43)
Total IAS 19 deficit	(5,616)
Allocated to equity accounted investments and other participating employers	979
Group's share of IAS 19 deficit at 31 December 2009	(4,637)
Assets held in Trust	227
Pension deficit as defined by the Group	(4,410)

The better than expected investment returns and the restructuring of the US pension schemes has been outweighed by a reduction in real discount rates resulting in the Group's share of the pension deficit increasing to £4,637m from £3,325m at 31 December 2008. The real UK discount rate of 2.2% at the end of 2009 compares with an historic ten-year average of 2.9% (see table and chart below).

	2009	2008
Discount rate	5.7%	6.3%
Inflation	3.5%	2.9%
Real discount rate	2.2%	3.4%

During the year, the Group contributed £225m into Trust for the benefit of the Group's main pension scheme. This contribution is reported within other investments - current (£211m including a fair value gain of £2m), and cash and cash equivalents (£16m) in the consolidated balance sheet at 31 December 2009. The use of these assets is restricted under the terms of the Trust. The Group considers the contribution to be equivalent to the other one-off contributions it makes into the Group's pension schemes and, accordingly, presents a definition of the pension deficit above to include this contribution.

A net deferred tax asset of £1,430m (2008 £1,115m) relating to the Group's pension deficit is included within net tax assets and liabilities, and disclosed in note 8 to the Group accounts.

CASH FLOW

Reconciliation of cash inflow from operating activities to net cash
	2009 £m	2008 £m
Cash inflow from operating activities	2,232	2,009
Capital expenditure (net) and financial investment	(489)	(503)
Dividends received from equity accounted investments	77	89
Assets contributed to Trust	(225)	-
Operating business cash flow⁵	1,595	1,595
Interest	(186)	(98)
Taxation	(350)	(261)
Free cash flow	1,059	1,236
Acquisitions and disposals	(253)	(1,001)
Debt acquired on acquisition of subsidiary	(1)	(37)
Purchase of equity shares (net)	(20)	(27)
Equity dividends paid	(534)	(478)
Dividends paid to minority interests	(5)	(11)
Cash inflow/(outflow) from matured derivative financial instruments	36	(440)
Movement in cash collateral	(11)	106
Movement in cash received on customers' account⁶	(12)	26
Foreign exchange	262	(374)
Other non-cash movements	(157)	339
Movement in net cash as defined by the Group	364	(661)
Opening net cash as defined by the Group⁴	39	700
Closing net cash as defined by the Group⁴	403	39
Components of net cash as defined by the Group⁴
	2009 £m	2008 £m
Debt-related derivative financial assets	39	203
Other investments - current	211	-
Cash and cash equivalents	3,693	2,624
Loans - non-current	(2,840)	(2,608)
Loans and overdrafts - current	(453)	(173)
Cash received on customers' account⁶	(20)	(7)
Assets held in Trust	(227)	-
Closing net cash as defined by the Group⁴	403	39

Cash inflow from operating activities was £2,232m (2008 £2,009m), which includes contributions in excess of service costs for the UK and US pension schemes totalling £475m (2008 £321m).

There was an outflow from net capital expenditure and financial investment of £489m (2008 £503m), which included £94m (2008 £183m) in respect of new residential and office facilities in Saudi Arabia.

Dividends received from equity accounted investments, primarily MBDA, Saab and Eurofighter, totalled £77m (2008 £89m).

Assets contributed to Trust comprises the £225m of payments made into Trust during the year for the benefit of the Group's main pension scheme. As the use of these assets is restricted under the terms of the Trust, they are excluded from the Group's definition of net cash. Consistent with the presentation of other one-off contributions into the Group's pension schemes, the contribution is presented within operating business cash flow.

Interest increased to £186m (2008 £98m) largely reflecting the cash cost of business acquisitions in 2008, lower interest received on the Group's cash holdings and the carrying cost of the $1.5bn US bonds issued in June 2009.

Taxation payments increased to £350m (2008 £261m) mainly as a result of the higher taxable profits generated by the Group in 2008.

Net cash outflow in respect of acquisitions and disposals was £253m. This mainly comprises net payments made to acquire VT Group's 45% interest in BVT, including acquired cash (£315m), and Advanced Ceramics Research, Inc. (£9m), less the deferred consideration received relating to the 2008 disposal of a 50% interest in Flagship Training (£70m). In the prior year, the Group acquired MTC, Tenix Defence and Detica, and disposed of the Surveillance & Attack business and interest in Flagship Training for net cash consideration of £1bn.

The Group finances part of its investment in its US businesses through an intercompany loan. As at 31 December 2009, $2.1bn (2008 $2.1bn) of a total of $3.6bn (2008 $6.6bn) was hedged using a rolling programme of short-term foreign exchange hedges. As a consequence of the weakening of the US dollar, there has been a cash inflow from matured derivative financial instruments of £36m (2008 outflow £440m) from rolling these hedges into 2010.

Foreign exchange translation during the year, primarily in respect of the Group's US dollar-denominated borrowing, increased reported cash by £262m.

CAPITAL

The Group funds its operations through a mixture of equity funding and debt financing, including bank and capital market borrowings.

At 31 December 2009, the Group's capital was £4,614m (2008 £6,893m), which comprises total equity of £4,727m (2008 £7,289m) less amounts accumulated in equity relating to cash flow hedges of £113m (2008 £396m). Net cash as defined by the Group was £403m (2008 £39m).

The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. The Group's policy is to maintain an investment grade credit rating. The Group's dividend policy is to grow the dividend whilst maintaining a long-term sustainable earnings cover of approximately two times.

In 2010, the Group will initiate a programme to return up to £500m to shareholders by way of a market purchase of shares. This programme is set in the context of an appropriately balanced use of capital. In addition to this accelerated return to shareholders, the Group will continue to pursue its strategy of organic investment and investing in attractive sectors of the defence market through selective acquisitions.

1 Including share of equity accounted investments.

2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.

3 Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring items.

4 See note 27 to the Group accounts.

5 See note 26 to the Group accounts.

6 Cash received on customers' account is the unexpended cash received from customers in advance of delivery which is subject to advance payment guarantees unrelated to Group performance. It is included within trade and other payables in the Group's balance sheet.

OPERATING GROUP REVIEWS

ELECTRONICS, INTELLIGENCE & SUPPORT

The Electronics, Intelligence & Support operating group, with 32,000 employees¹ and headquartered in the US, designs, develops, produces and services systems and subsystems for a wide range of military and commercial applications.

The operating group comprises four lines of business: Electronic Solutions, Information Solutions, Platform Solutions and Support Solutions.

FINANCIAL HIGHLIGHTS

- Like-for-like organic sales¹ growth of 6% over 2008

- Underlying EBITA² excludes a non-recurring accounting gain of £202m from the restructuring of the US pension schemes

PERFORMANCE

	2009	2008	2007
Sales¹	£5,637m	£4,459m	£3,916m
Underlying EBITA²	£575m	£506m	£437m
Return on sales	10.2%	11.3%	11.2%
Cash inflow³	£380m	£380m	£302m
Order intake¹	£5,416m	£4,904m	£4,178m
Order book¹	£4.5bn	£5.2bn	£3.5bn

KEY POINTS

- Maintained leadership position in electronic warfare systems

- Introduced new infrared technology solutions to improve the effectiveness of US Army troops

- Secured seven-year managed IT services contract for the US Treasury

- Expanded leadership position in hybrid electric propulsion for urban mass transit buses

- Selected to provide US military counter-insurgency support services under a five-year urgent-needs contract

LOOKING FORWARD

BAE Systems remains focused on winning strategic contracts in information technology, cyber, mission support and services. The business continues to capitalise on its leadership positions in electronic warfare and infrared technologies, and expand its diverse mix of commercial and civil government businesses in areas such as ship repair, information technology and commercial aviation. It also continues to invest in the growing fields of energy management, Readiness & Sustainment services and cybersecurity.

In 2009, Electronics, Intelligence & Support (EI&S) achieved sales¹ of £5,637m (2008 £4,459m). On a like-for-like basis, sales¹ growth was 6% over 2008.

Underlying EBITA² of £575m (2008 £506m) excludes a non-recurring accounting gain of £202m from the restructuring of the US pension schemes. Return on sales reduced to 10.2% (2008 11.3%). In 2008, there was a credit of £23m from share scheme mark-to-market accounting.

Operating cash inflow³ was £380m (2008 £380m).

Electronic Solutions

Electronic Solutions continued to demonstrate its leadership position in the electronic warfare market through Low-Rate Initial Production (LRIP) awards for electronic warfare suites on the F-35 Lightning II. During 2009, orders totalled more than $220m (£136m). Deliveries on the first four LRIP contracts will conclude in 2012, and future contract awards are anticipated to support aircraft deliveries to the US government and international partner countries.

US Army demand for thermal weapon sights drove deliveries of some 36,000 systems valued at $340m (£217m) in 2009 under the five-year Indefinite-Delivery/Indefinite-Quantity (IDIQ) contract. Cumulative orders for these weapon sights exceed $500m (£310m) for 68,000 sights.

US Army orders for the Common Missile Warning Systems (CMWS) totalled more than $100m (£62m) in 2009. CMWS is a helicopter missile warning system that detects incoming missiles, rejects false alarms, and cues the onboard infrared jamming system to the missile's location. The system logged its millionth combat flight hour during the year.

Two IDIQ contracts were received from the US Army for the Laser Target Locator Module and the Driver's Vision Enhancer Family of Systems. The lightweight target locators enable soldiers to quickly, safely and accurately determine target coordinates in daylight or darkness, and the vision enhancement systems provide all-weather, day/night visibility to operators of combat and logistics vehicles. Initial orders for the two systems totalled $115m (£71m) in 2009.

The US Navy selected a BAE Systems-Alliant Techsystems team for the Joint and Allied Threat Awareness System (JATAS) technology demonstration. JATAS is the next-generation missile warning system to protect US Navy and Marine Corps helicopters and tilt-wing aircraft.

Information Solutions

Some two-thirds of the line of business's activity is in support of the US intelligence community.

The Information Solutions business also positioned itself among the largest providers of managed information technology services, receiving a seven-year contract to manage Information Technology (IT) operations for the US Treasury, valued at up to $325m (£201m).

The business received a contract for up to $148m (£92m) from the US Department of Homeland Security to support the agency's fingerprint image tracking programme.

In the government intelligence market, Information Solutions emerged as a leader in analysis of full-motion video and other advanced imagery, doubling the number of its own imagery analysts, and opening a facility to train analysts for the military and intelligence communities.

BAE Systems' prominent role in the information technology sector was recognised by Computerworld magazine which named the business one of the top 100 IT employers in the US.

Platform Solutions

Platform Solutions further expanded its leadership in hybrid propulsion for urban mass transit. The HybriDrive® propulsion system made its European debut, demonstrated on vehicles in partnership with UK-based manufacturer, Alexander Dennis Limited. As part of a Transport for London trial programme, BAE Systems has hybrid propulsion systems for 12 double-deck and five single-deck buses.

The business is well positioned for a hybrid bus production order for London's transit fleet in 2010. The efficient, emissions-reducing hybrid technology now powers more than 2,000 buses in North America and will enter the Seattle transit fleet in 2010 following the award of a contract from Daimler Buses North America which received a 500-unit order (with an option for 200 additional units) from the Seattle Transit Agency.

Following the US Army's development of the Common Modular Power System as its standard power management architecture for all legacy and modern vehicles, the business received its first production contract in support of the Paladin self-propelled howitzer.

Platform Solutions received the launch order for its holographic pilot display technology. The UK Ministry of Defence selected the Q-Sight™ helmet-mounted display for its Lynx helicopter programme, a development that positions the business for an expanded role in low-visibility operation of rotary wing aircraft. The technology provides superior optical performance with reduced weight and cost.

Support Solutions

The US military's Human Terrain Teams programme awarded the business a $350m (£217m), five-year contract to support urgent needs for recruitment, development and operational support of counter-insurgency efforts. Human Terrain Teams embed social scientists within combat brigades to help tacticians in field environments understand local cultures.

A $320m (£198m), five-year US Army contract was received to provide counter-Improvised Explosive Device (IED) operations and mission support covering comprehensive, all-source intelligence analysis to assist in the global counter-IED fight.

The US Navy awarded a $233m (£144m) contract for engineering and other services to support C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) systems at land-based facilities, and on platforms such as ships, submarines and ground vehicles.

In the Ship Repair business, the US Navy's first ever full ship modernisation was completed, a year-long, $31m (£19m) upgrade of the USS Bunker Hill. The maintenance, repair and modernisation programme was concluded on time and met all critical milestones.

LAND & ARMAMENTS

The Land & Armaments operating group, with 19,800 employees¹ and headquartered in the US designs, develops, produces, supports and upgrades armoured combat vehicles, tactical wheeled vehicles, naval guns, missile launchers, artillery systems, munitions and law enforcement products.

FINANCIAL HIGHLIGHTS

- Underlying EBITA² excludes a non-recurring accounting gain of £59m from the restructuring of the US pension schemes

- Underlying EBITA² includes £42m of costs associated with the unsuccessful Mine Resistant Ambush Protected (MRAP) All-Terrain Vehicle (ATV) bid that were expensed in the year

- Impairment charges of £927m mainly on the Family of Medium Tactical Vehicles (FMTV) programme and Products Group business

PERFORMANCE

	2009	2008	2007
Sales¹	£6,738m	£6,407m	£3,538m
Underlying EBITA²	£604m	£566m	£324m
Return on sales	9.0%	8.8%	9.2%
Cash inflow³	£480m	£467m	£10m
Order intake¹	£3,934m	£8,568m	£4,535m
Order book¹	£7.8bn	£11.5bn	£7.3bn

KEY POINTS

- Organisation realigned with global strategy

- High volume of vehicle reset and support activity

- Improving performance through rationalisation and efficiencies

- Loss of follow-on production contract for FMTV

LOOKING FORWARD

In the near term, Land & Armaments will be operating in an increasingly challenging market, brought about by shifting national priorities and pressure on defence budgets, particularly in our US and UK markets. The rest of world market is expected to provide export opportunities over the same period. The business is being shaped to perform in these market conditions through an ongoing drive for rationalisation and efficiency.

In 2009, Land & Armaments achieved sales¹ of £6,738m (2008 £6,407m). On a like-for-like basis, sales were 8% below 2008 reflecting the lower level of land vehicle sales, primarily on the Mine Resistant Ambush Protected (MRAP) programme, which totalled £0.2bn in 2009 (2008 £1.7bn).

Underlying EBITA² was £604m (2008 £566m), which excludes a non-recurring accounting gain of £59m from the restructuring of the US pension schemes. Excluding costs of £42m associated with the unsuccessful MRAP All-Terrain Vehicle (ATV) bid that were expensed in the year, return on sales increased to 9.6% (2008 8.8%).

Operating cash inflow³ was £480m (2008 £467m).

Order intake¹ was £3,934m (2008 £8,568m). Intake in 2008 included significant awards for the 15-year UK munitions capability contract and Family of Medium Tactical Vehicles (FMTV).

United States

BAE Systems continued in its role as a premier combat systems supplier to the US Army Heavy Brigade Combat Team (HBCT), providing remanufacturing, reset and support for key brigade components. BAE Systems was awarded $791m (£490m) of contracts for Bradley Fighting Vehicles and $277m (£172m) of contracts for Hercules M88 Recovery Vehicles during 2009 while delivering more than 1,500 completed vehicles to the customer.

The business was awarded an initial $64m (£40m) Paladin Integrated Management contract to modernise the M109A6 Paladin self-propelled howitzer system, including the design, fabrication and testing of five prototypes and two support vehicles.

BAE Systems continued to build the FMTV trucks with contracts for approximately $2bn (£1.2bn) per year to the end of 2010. Some 8,400 trucks were manufactured and delivered to the US Army in 2009.

A new Euro V-compliant Global Tactical Vehicle has been designed and produced to address European market requirements. The vehicle was unveiled at the biennial Defence Systems & Equipment international exhibition in the UK in September.

The personnel security business secured over $371m (£230m) of contracts for individual soldier protection, with contracts for Modular Lightweight Load Carrying Equipment from the Defense Logistics Agency as well as contracts for over 230,000 Outer Tactical Vests.

As part of the ongoing realignment of the Land & Armaments business in the US, the business has implemented rationalisation programmes reducing headcount by 12% and the closure of seven facilities.

United Kingdom

Under the 15-year munitions partnering agreement with the UK Ministry of Defence (MoD), delivery rates on small arms ammunition continued at an average of one million rounds per day in support of current operations. As committed under the agreement, £15m has been invested so far in new manufacturing operations out of the total programme for more than £120m.

Significant work is underway to support operations in Afghanistan, particularly in carrying out urgent operational upgrade work to vehicles such as the Warrior and the new Panther, to continue to protect against rapidly evolving threats.

The business submitted competitive bids into both the Future Rapid Effects System (FRES) Specialist Vehicle (SV) and Warrior upgrade programmes, the outcomes of which are currently expected to be known in 2010.

The BAE Systems turret design is optimised for the new cased-telescoped ammunition weapon system, the CT40, which was mandated by the UK MoD for both the Warrior and FRES SV programmes.

With a new schedule on the Terrier armoured tractor programme agreed at the end of 2008, the MoD confirmed the production of 60 vehicles with enhancements to improve protection beyond the original design. Production began in early 2010.

The business received new orders for the production and support of the M777 155mm lightweight howitzer, for both the US and Canadian armed forces. A total of 158 M777s were delivered in 2009. The M777 system has been deployed on operations in both Afghanistan and Iraq.

As part of its ongoing restructuring, the business announced over 500 job losses and the closure of three sites.

Sweden

Contracts for 24 BvS10 Viking amphibious all-terrain vehicles were awarded by the UK MoD for a value of £16m. All 24 will be of the new up-armoured MkII variant. In December, the BvS10 was selected following a competition to supply vehicles to the French armed forces and a contract for up to €220m (£196m) was awarded.

Export deliveries continued for CV90 vehicles and support to several customers around the world, including the Netherlands, Denmark and Sweden.

The 155mm Archer self-propelled artillery system has been selected and confirmed by both Sweden and Norway with contracts for a total of 48 systems expected to be signed in early 2010.

A successful legal appeal was made against the decision of the Swedish Defence Materiel Administration (FMV) in June 2009 to choose a competitor's vehicle for the Armoured Wheeled Vehicle programme. The Administrative Court of Stockholm ruled in October that the FMV must re-compete the procurement. The outcome of the competition is currently expected in 2010.

The Swedish businesses have announced job losses in 2009, totalling approximately 350, as a consequence of restructuring activity.

South Africa

The South African business continued to deliver RG vehicles to several customers around the world, including completing the delivery of RG32M vehicles to Sweden, RG31 vehicles to Spain and RG31 MRAP vehicles to the US.

Building on the success of the RG range of vehicles, a new vehicle, the RG35, has been designed and built. The RG35 is a 6x6 mine protected multi-purpose fighting vehicle and was launched to the market in September.

PROGRAMMES & SUPPORT

The Programmes & Support operating group, with 33,200 employees¹, primarily comprises the Group's UK-based air, naval and security activities.

FINANCIAL HIGHLIGHTS

- Sales¹ increased over 2008 on commencement of aircraft deliveries and support on the Saudi Typhoon programme, increased deliveries of the Typhoon Tranche 2 standard, and a full year of Detica sales

- Underlying EBITA² increased by 36%

- £8.8bn of orders¹ booked in the year, increasing order book¹ to £24.3bn

PERFORMANCE

	2009	2008	2007
Sales¹	£6,298m	£4,638m	£5,327m
Underlying EBITA²	£670m	£491m	£456m
Return on sales	10.6%	10.6%	8.6%
Cash inflow³	£285m	£651m	£807m
Order intake¹	£8,789m	£4,195m	£9,091m
Order book¹	£24.3bn	£19.8bn	£20.9bn

KEY POINTS

- Typhoon Tranche 3A secured

- Over £3bn of support orders received

- Astute submarine commenced sea trials

- Second Type 45 accepted off contract

- Acquisition of VT Group plc's 45% interest in the BVT joint venture, now 100% owned and re-named BAE Systems Surface Ships

- Detica security business performing strongly in the first full year since acquisition

- Continued rationalisation activity

LOOKING FORWARD

Programmes & Support is driven by its existing strong order book, and the level of future UK Ministry of Defence (MoD) funding to meet current UK armed forces operational requirements and delivery of the Defence Industrial Strategy. A Strategic Defence Review will begin after the general election in 2010.

In Military Air Solutions, growth is linked to increased combat aircraft production activity and in-service support performance.

Surface Ships is underpinned by the six-ship Type 45 destroyer programme, the manufacturing phase of the Queen Elizabeth Class carrier programme, export contracts and the 15-year Terms of Business Agreement with the UK MoD.

The Submarine Solutions business remains focused on the Astute programme, and on delivering the concept design work for the Successor Programme. Follow-on orders for Astute are key to retaining the skill base necessary to design and build a next-generation nuclear deterrent submarine.

Detica's reputation in the UK security market, repositioning to become a solution integrator and the publication of the UK government cybersecurity strategy, mean the business is positioned to benefit from continued government focus on intelligence, security and resilience.

Sales¹ in 2009 were £6,298m (2008 £4,638m). Sales¹ growth was 36% largely due to the commencement of aircraft deliveries and support on the Saudi Typhoon programme, increased deliveries of the Typhoon Tranche 2 standard, and a full year of Detica sales.

Underlying EBITA² was £670m (2008 £491m) with return on sales maintained at 10.6%.

Operating cash inflow³ was £285m (2008 £651m) reflecting the utilisation of programme advance funding.

Order intake¹ increased by £4.6bn to £8,789m (2008 £4,195m), giving a closing order book¹ of £24.3bn.

Military Air Solutions

In 2009, the business secured contracts totalling almost £3bn for availability support on the Typhoon and Harrier aircraft fleets, and the Typhoon Tranche 3A production contract for 88 aircraft.

Delivery of Typhoon aircraft to the four partner nations and Austria continues with 208 aircraft delivered, 50 being Tranche 2 standard aircraft. The first eight of 72 Typhoons were delivered to the Royal Saudi Air Force. Upgrade work on the Tranche 1 aircraft continues to provide the UK Royal Air Force (RAF) with increased operational capability.

In March, the UK government awarded the business a £430m five-year Typhoon Availability Service (TAS) contract to work with the RAF to ensure aircraft are available to meet operational commitments. In September, the Typhoon Support Centre and Maintenance Facility were officially opened at RAF Coningsby, marking the official start of our TAS undertaking.

A five-year contract worth in excess of £400m to provide a support service for the Radar and Defensive Aids Sub-System (DASS) for the Typhoon fleets of the air forces of the UK, Germany, Italy and Spain was awarded in October.

On the Tornado and Harrier programmes, operational requirements continued to be met through both the delivery of contractual milestones and Urgent Operational Requirements to support aircraft in theatre.

The UK Ministry of Defence (MoD) also awarded the Harrier Platform Availability Contract worth in excess of £550m to support the UK's Joint Force Harrier Fleet until their planned out of service date.

During the year, six Gripen aircraft were accepted by the South African customer. Hawk aircraft deliveries for South Africa are now complete and the programme is in the support phase.

Aircraft acceptances of the Hawk Mk128 Advanced Jet Trainer for the RAF are progressing, with 17 of 28 now accepted. Activity under the Hawk Integrated Operational Support programme continues, with aircraft availability consistently in excess of the 95% target.

Support continues to Hindustan Aeronautics Limited of India to conclude negotiations on the requirement for a further 57 Hawks in India.

The first production Nimrod MRA4 made a successful maiden flight from Woodford in September. Formal customer acceptance is anticipated in early 2010.

On F-35 Lightning II, major airframe units and systems for all three aircraft variants under development and initial production contracts have been delivered. The first F-35 airframes are in the UK for structural testing and the UK government has committed to order three of the Short Take Off and Vertical Landing (STOVL) aircraft for operational test and evaluation.

BAE Systems continues to leverage its expertise and capabilities in Unmanned Aircraft Systems and position itself in this growth market with Mantis making its first flight in October. Good progress is being made on Herti, with ongoing flight trials of the production standard variant. Final assembly of the Taranis advanced technology demonstrator is underway.

In September, consultations started on a programme of approximately 1,100 potential job losses across UK sites at Woodford, Samlesbury, Warton and Farnborough.

Following the publication of the independent report by Charles Haddon-Cave QC into the loss of Nimrod XV230 over Afghanistan in 2006, BAE Systems has appointed Dr Chris Elliott FREng, a leading systems engineer and barrister, to support and advise Nigel Whitehead FREng, Group Managing Director, Programmes & Support, who will undertake a review of the Group's approach to product safety across all its sectors in the UK.

BAE Systems Surface Ships

In October, the Group acquired VT Group plc's 45% shareholding in BVT Surface Fleet Limited. The wholly-owned subsidiary has been re-named BAE Systems Surface Ships Limited.

In July 2009, the business signed a 15-year Terms of Business Agreement with the UK MoD, providing a minimum of 15 years exclusivity for the design, build and integration on specified MoD shipbuilding programmes, including the Future Surface Combatant. It also gives a contractual guarantee to deliver a minimum of £350m of financial benefits to the MoD over the duration of the contract.

On the Type 45 programme, the second ship, Dauntless, was accepted off contract in Portsmouth in December. The third ship, Diamond, has completed her first sea trials and the fifth ship, Defender, was launched in October. In September, a multi-year contract for over £300m was signed for the in-service support of the six Type 45 destroyers.

Under the Queen Elizabeth Class aircraft carriers programme, a revised build strategy was announced in March under which BAE Systems, as part of the Aircraft Carrier Alliance, will deliver substantial sections from the Clyde and Portsmouth shipyards, as well as managing the integration of the ships at Rosyth. First steel was cut in July, engineering works to facilitate the delivery of the blocks from the Govan yard have been completed and substantial progress has been made in fabrication of units for the first ship, HMS Queen Elizabeth.

On export programmes, the first Oman vessel was launched in June, and the first and second ships for Trinidad & Tobago were launched in August and November, respectively.

Surface Ships continues to support the Royal Navy as its long-term partner in the management of Portsmouth Naval Base.

Submarine Solutions

The first of class Astute submarine successfully completed its nuclear power plant testing programme and has commenced sea trials. This is the first time since the Vanguard Class boats were successfully accepted in 1999 that a new to service submarine has undertaken sea trials in the UK. Ambush, the second Astute boat, is scheduled for launch at the end of 2010.

Involvement in the concept phase for the successor to the Vanguard Class submarine has been extended into 2010 in support of requirements definition.

Detica

Detica has continued to focus on helping its clients to collect, manage and exploit information to reveal actionable information intelligence. Detica is now developing a range of new, innovative technologies for analytical decision support, real-time situational awareness and control, and secure computing and communications. Detica is investing in combining these technologies with its in-depth security and industry knowledge to create differentiated solutions to tackle management of personnel security, defending against chemical, biological, radiological, and nuclear threats and protecting deployed forces.

In the UK market, Detica is repositioning as a solution integrator, combining its core consultancy, specialist products and applications development capabilities to deliver larger-scale systems integration and managed services programmes across both government and commercial markets. A system using Detica NetReveal^® has helped Her Majesty's Revenue and Customs to identify and target tax evasion using advanced data analytics. Detica was part of a consortium selected by the Highways Agency to provide consultancy services to the National Road Telecommunications System, as part of a ten-year, £20m programme.

Detica is helping to build international opportunities in the three global security mission areas of cybersecurity, border and transportation security, and counter terrorism and organised crime. The Detica NetReveal^® solution also continues to show strong global sales growth, with significant wins during the year. Also during the year, the Reveal suite of software-based solutions has been extended to include TxtReveal^TM, for analysing large volumes of unstructured data.

Integrated System Technologies (Insyte)

In July, the Seawolf Mid-Life Update system was declared 'In Service' on the Type 23 frigates whilst the update programme continues on the first of class Type 22 frigate.

In November, the FALCON mobile battlefield communication system for the UK Army and RAF passed its Equipment Acceptance Trial.

During the year, the 500th Sting Ray lightweight torpedo was delivered to the UK MoD. A £99m export contract for the Norwegian Navy was secured. In July, the UK MoD placed a ten-year, £370m Torpedo Capability Contract.

Both of the contracted Type 102 Commander air defence radars have now been accepted by the UK MoD and the first system deployed at its operational base.

A revised delivery schedule has been agreed with the UK MoD on the ARTISAN 3D Medium-Range Radar naval programme.

Milestones on the Maritime Composite Training System for use at HMS Collingwood are not being achieved on schedule. A review of the remaining programme is being undertaken to agree a revised delivery schedule.

Following a review of forward workload, the business announced a redundancy programme in November involving a loss of up to 642 jobs.

INTERNATIONAL

The International operating group, with 19,700 employees¹, comprises the Group's businesses in Saudi Arabia and Australia, together with a 37.5% interest in the pan-European MBDA joint venture, a 20.5% shareholding in Saab of Sweden and a 49% shareholding in Air Astana.

FINANCIAL HIGHLIGHTS

- Like-for-like sales¹ growth of 15% over 2008

- Good operating cash flow³ performance

PERFORMANCE

	2009	2008	2007
Sales¹	£4,253m	£3,333m	£3,359m
Underlying EBITA²	£442m	£435m	£435m
Return on sales	10.4%	13.1%	13.0%
Cash inflow³	£816m	£163m	£678m
Order intake¹	£4,825m	£4,065m	£3,876m
Order book¹	£11.6bn	£11.0bn	£7.9bn

KEY POINTS

- Entry into service of Typhoon aircraft under the Salam programme

- Order intake¹ secured for three-year support to Typhoon aircraft for the Kingdom of Saudi Arabia

- Order award for Australian Air Warfare Destroyer build programme

- Delivery of four inshore patrol vessels to New Zealand MoD

LOOKING FORWARD

The Group seeks to sustain its long-term presence in the Kingdom of Saudi Arabia through delivering on current programmes and industrialisation commitments, and developing new business, including in the land sector.

In Australia, the Defence White Paper and 2009-10 Budget included a commitment to increased defence funding for the next decade by approximately 3% per annum and a Strategic Reform Programme that will place cross-service pressure on support budgets. BAE Systems is well placed to benefit from both new defence procurement and increased Readiness & Sustainment activities.

During 2009, International achieved sales¹ of £4,253m (2008 £3,333m). The increase in sales¹ was predominantly a result of a full 12 months of trading from the acquired Tenix Defence business and entry into service of Typhoon aircraft in the Kingdom of Saudi Arabia.

Underlying EBITA² was £442m (2008 £435m) generating a return on sales of 10.4% (2008 13.1%). The reduction in return on sales is due to the low margin traded in the early stages of the Salam programme and the acquired Tenix Defence business being at lower margins than the average of this operating group.

Operating cash inflow³ was £816m (2008 £163m).

CS&S International

BAE Systems has a major presence in the Kingdom of Saudi Arabia (KSA). It acts as prime contractor for the UK/KSA government-to-government defence agreement. It also holds certain direct contracts with the Saudi government. Progress is ongoing to modernise the Saudi armed forces in line with the Understanding Document signed in December 2005 between the UK and KSA governments.

Around 4,900 people are employed by the Group in the Kingdom of Saudi Arabia, of whom approximately half are Saudi nationals. The business continues to develop its presence in Saudi Arabia and remains committed to developing a greater indigenous capability in the Kingdom. This is being enhanced by the entry into service of the Typhoon aircraft and the subsequent development of the Typhoon industrial base in Saudi Arabia.

Of the 72 Typhoon aircraft contracted in 2007 under the Salam programme, eight were delivered in the year to the customer in line with programme. The initial support solution contract was also agreed and flying operations commenced.

The business continues to support the operational capability of both the Royal Saudi Air Force and Royal Saudi Naval Forces. Significant incremental orders totalling £1.2bn were received in the period for the Tornado Sustainment Programme (TSP) weapons contract, Naval Minehunter Mid-Life Update and a multi-year Naval Training Programme.

The C4I⁴ programme remains challenging and discussions continue with the aim of agreeing the definition of a solution that meets the customer requirement.

The first Tactica land vehicles were delivered to the Saudi Arabia National Guard in June and deliveries have continued through the second half of the year. A contract for the support of Tactica land vehicles has been secured. Further opportunities are being pursued in support of the Royal Saudi Land Force's programme of capability enhancements and equipment upgrades.

Australia

The Australian Government's Strategic Reform Programme plans A$20bn (£10bn) in internal savings over the next decade through the delivery of significant efficiencies. The business is engaged with the Australian government and Australian Defence Force (ADF) in developing plans and creating opportunities to deliver these efficiencies.

Significant contract awards in 2009 included a A$94m (£52m) contract to enhance and support the ground segment of the ADF's satellite communications capability, contracts potentially worth up to A$570m (£318m) to provide maintenance and upgrades for the Royal Australian Navy's Seahawk and Australian Army's Black Hawk helicopter fleets and Royal Australian Air Force's F/A-18 Hornet fighter aircraft, and a A$309m (£172m) contract to build 36 hull modules for the Royal Australian Navy's three new Air Warfare Destroyers.

In the year, four inshore patrol vessels were delivered to the New Zealand MoD and two offshore patrol vessels are expected to be delivered in the first quarter of 2010. Warranty claims relating to the supply of the multi-role vessel in 2007 that were subject to mediation have been satisfactorily resolved.

The business is a subcontractor to Boeing on the Wedgetail Airborne Early Warning and Control programme. In the year, the business delivered the majority of the ground subsystem and the air subsystem entered the final acceptance testing phase. The business is working to deliver the Electronic Warfare systems in support of the aircraft integration programme.

The Australian government has issued a revised request for the supply of medium and heavy tactical trucks under its Land 121 programme. The Australian business is partnered with BAE Systems Land & Armaments and Scania, and participated in the vehicle trial and evaluation component of the programme. The results of this component, which will be known in the first half of 2010, will be used to down-select two preferred tenderers with contract award expected in 2011.

The programme to supply two Landing Helicopter Dock ships to the Royal Australian Navy is progressing with numerous milestones achieved, including the laying of the keel for the first ship, and the successful completion of the Whole of Ship Detailed Design Review.

The completion accounting process continues with the former owners of the Tenix Defence business in Australia and an expert has been appointed to determine certain matters in dispute.

MBDA (37.5% interest)

MBDA's performance in 2009 delivered an increasing return on sales on broadly unchanged sales volumes.

Order intake in 2009 was strong and included Scalp Naval production in France, a second year contract extension for the UK Complex Weapons programme, and in export markets, Marte anti-ship missiles to the United Arab Emirates, ground-based vertical launch Mica air defence weapons to a Middle Eastern country, Storm Shadow stand-off missiles, and Exocet anti-ship missiles.

Key domestic deliveries included Mica air-to-air missiles, Taurus stand-off missiles and Seawolf naval air defence missiles. Export deliveries included Aster and Mistral surface-to-air missiles, Storm Shadow stand-off missiles and Exocet anti-ship missiles.

Development programmes continue to progress well, with key milestones being passed on the MEADS air-defence programme, Meteor air-to-air missile programme, all Assessment Phases of UK Complex Weapon Programmes and Scalp Naval stand-off missile programme.

Significant evidence has been gathered out of Sea Viper firing campaigns during the year to support the overall system qualification, but an investigation is currently underway to identify the cause of issues arising during these campaigns as well as establishing a revised plan to support the Type 45 programme.

Saab (20.5% shareholding)

Saab's sales were SEK24.6bn (£2.1bn). Operating income was SEK1.4bn (£115m) producing an operating margin of 5.6%, compared with 0.7% in 2008.

Key orders won during 2009 include a SEK700m (£61m) order within the civil security area, Gripen orders from the Swedish Defence Materiel Administration (FMV) of approximately SEK1bn (£87m) to support operational capacity and future capability studies and a SEK1.5bn (£130m) order from the United Arab Emirates for an airborne surveillance system.

In response to market conditions, Saab announced 670 redundancies across its Dynamics and Commercial Aircraft areas of business during the year.

Defence Land Systems India Private Limited (26% shareholding)

As a further step in our strategy of developing India as a home market, the business entered into a joint venture arrangement with Mahindra & Mahindra Limited to create a new land systems-focused joint venture defence company based in India. The joint venture is expected to be established in the first half of 2010.

HQ & OTHER BUSINESSES

HQ & Other Businesses, with 2,200 employees¹, comprises the regional aircraft asset management and support activities, head office and UK shared services activity, including research centres and property management.

FINANCIAL HIGHLIGHTS

- Settlement with final insurer achieved, enabling closure of the Group's Financial Risk Insurance Programme

- Regional Aircraft profits of £46m following placement of 44 aircraft and settlement of outstanding commercial items

- Underlying EBITA² excludes regulatory penalties of £278m

PERFORMANCE

	2009	2008	2007
Sales¹	£254m	£235m	£243m
Underlying EBITA²	£(71)m	£(101)m	£(203)m
Cash (outflow)/inflow³	£(366)m	£(66)m	£181m
Order intake¹	£175m	£212m	£345m
Order book¹	£0.4bn	£0.4bn	£0.4bn

LOOKING FORWARD

Market conditions for the commercial aircraft market continue to provide a challenging trading environment due to the impact of the global economic downturn and tightened availability of funding to operators.

In 2009, HQ & Other Businesses reported a loss² of £71m (2008 loss² £101m) on sales¹ of £254m (2008 £235m).

In 2008, impairment charges of £32m were taken in respect of the spares and support business, and aircraft carrying values within Regional Aircraft.

In 2009, the Regional Aircraft business has recognised underlying EBITA² of £46m following favourable settlement of some outstanding commercial items, together with profits on sale of aircraft and lease extension activity.

A charge was taken in 2009 for a long-standing commercial dispute on an overseas defence equipment contract.

Operating cash outflow³ in 2009 was £366m (2008 £66m). This includes additional contributions in respect of UK pension schemes totalling £310m (2008 £104m).

The commercial aircraft market continues to prove challenging in the global economic downturn. Lease and sale discussions with operators are ongoing with regard to current and future fleet requirements, and marketing activity is focused on both uncontracted idle aircraft and those returning off lease.

Whilst support revenues have reduced due to lower demand for aircraft components, this has been partially offset by increased revenues from engineering and technical support services.

Whilst market conditions have impacted the general level of financing available to airlines globally, the portfolio customer base remains relatively robust and the business continues to closely monitor operator performance against default risk.

The balance sheet carrying value of aircraft in the Regional Aircraft business (£189m) is based on the net present value of forecast future net leasing or disposal income.

In the year, a settlement with the remaining insurer under the Group's Financial Risk Insurance Programme was completed.

1 Including share of equity accounted investments.

2 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items (see the Financial review on page 30).

3 Net cash inflow/(outflow) from operating activities after capital expenditure (net) and financial investment, dividends from equity accounted investments and assets contributed to Trust.

4 Command, Control, Communications, Computers and Intelligence.

PRINCIPAL RISKS

DEFENCE SPENDING

The Group is dependent on defence spending and reductions in such spending could adversely affect the Group.

Description: The Group's core businesses are primarily defence-related, selling products and services directly and indirectly primarily to the US, the UK, the Saudi Arabian and other national governments. In any single market, defence spending depends on a complex mix of political considerations, budgetary constraints and the ability of the armed forces to meet specific threats and perform certain missions. Because of these factors, defence spending may be subject to significant fluctuations from year to year.

Although the Group expects growth in US defence spending to slow, it believes it is well placed to support the US Department of Defense's likely emphasis on force sustainment, readiness and affordable transformation. The UK defence equipment budget is expected to continue to be constrained, having potential implications for the sustainability of long-term funding for future defence technologies and engineering capabilities in the UK. Saudi Arabia is expected to remain one of the heaviest defence spenders in the world.

Impact: A decrease in defence purchases by the Group's major customers could have a material adverse effect on the Group's future results of operations and financial condition.

Mitigation: The Group's business is geographically spread across seven home markets and its products are marketed across a range of sectors within the defence arena. In addition, the Group uses realistic assumptions to underpin its financial and operational planning.

LARGE CONTRACTS

Certain parts of the Group's business are dependent on a small number of large contracts.

Description: A significant proportion of the Group's revenue comes from a small number of large contracts. These contracts individually are typically worth or potentially worth £1bn or more including, but not limited to, those contracts in the Programmes & Support and International operating groups.

Impact: The loss, expiration, suspension, cancellation or termination of any one of these contracts, for any reason, could have a material adverse effect on the Group's future results of operations and financial condition.

Mitigation: The Group has a large forward order book and a well-balanced spread of programmes. An analysis of the Group's order book by major programme and operating group is presented on page 13. The Board regularly reviews the Group's performance on these contracts, and the Executive Committee continues to work closely with these customers to ensure the Group's strategy is aligned with theirs (refer to Strategy section on page 10).

GOVERNMENT CONTRACTS

The Group's largest customer contracts are government contracts.

Description: The governments of the United Kingdom, the United States and the Kingdom of Saudi Arabia are the Group's three largest end customers. Any significant disruption or deterioration in the relationship with these governments and a corresponding reduction in government contracts would significantly reduce the Group's revenues. Moreover, companies engaged in the supply of defence-related equipment and services to government agencies are subject to certain business risks particular to the defence industry. These governments could unilaterally cancel, suspend or amend their contractors' funding under existing contracts or eligibility for new contracts potentially at short notice. Terms and risk sharing agreements can also be amended. In addition, the Group, as a government contractor, is subject to financial audits and other reviews by some of its governmental customers with respect to the performance of, and the accounting and general practices relating to, government contracts. As a result of these audits and reviews, costs and prices under these contracts may be subject to adjustment.

Impact: The termination of one or more of the contracts for the Group's programmes by governments, or the failure of the relevant agencies to obtain expected funding appropriations for the Group's programmes, could have a material adverse effect on the Group's future results of operations and financial condition.

Mitigation: The Board regularly reviews the Group's performance in these home markets, and the Executive Committee continues to work closely with these customers to ensure the Group strategy is aligned with theirs (refer to Strategy section on page 10).

CONTRACT TIMING

The timing of contracts could materially affect the Group's future results of operations and financial condition.

Description: The Group's operating performance and cash flows are dependent, to a significant extent, on the award of defence contracts.

Impact: Because the amounts payable under these contracts can be substantial, the timing of award or failure to receive anticipated orders could materially affect the Group's operating results and cash flow for the periods affected.

Mitigation: The Board regularly reviews the Group's performance with regard to contract awards, and the Executive Committee actively manages the assets and resources of the Group in line with the timing of awards.

FIXED-PRICE CONTRACTS

The Group has fixed-price contracts.

Description: A significant portion of the Group's revenue is derived from fixed-price contracts, although the Group has reduced its exposure to fixed-priced design and development activity which is in general more risk intensive than fixed-price production activity. An inherent risk in these fixed-price contracts is that actual performance costs may exceed the projected costs on which the fixed prices for such contracts are agreed.

Impact: The Group's failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed-priced contract may reduce the profitability of such a contract or result in a loss.

Mitigation: To manage contract-related risks and uncertainties, contracts are managed through the application of the Lifecycle Management (LCM) business process mandated by the Group's Operational Framework at the operational level (refer to pages 15 and 84 for further information on LCM). The consistent application of metrics is used to support the review of individual contract performance (refer to page 28 for KPIs relating to programme execution).

COMPONENT AVAILABILITY, SUBCONTRACTOR PERFORMANCE AND KEY SUPPLIERS

The Group is dependent upon component availability, subcontractor performance and key suppliers.

Description: The Group is dependent upon the delivery of materials by suppliers and the assembly of components and subsystems by subcontractors used in its products in a timely and satisfactory manner and in full compliance with applicable terms and conditions.

Impact: Some of the Group's suppliers or subcontractors may be impacted by the current economic environment and constraints on available financing, which could impair their ability to meet their obligations to the Group. In addition, some products require relatively scarce raw materials. The Group is generally subject to specific procurement requirements, which may, in effect, limit the suppliers and subcontractors the Group may utilise. In some instances, the Group is dependent on sole-source suppliers. If any of these suppliers or subcontractors fails to meet the Group's needs, the Group may not, in the short term, have readily available alternatives. While the Group enters into long-term or volume purchase agreements with certain suppliers and takes other actions to ensure the availability of needed materials, components and subsystems, the Group cannot be sure that such items will be available in the quantities the Group requires, if at all. If the Group experiences a material supplier or subcontractor problem, its ability to satisfactorily and timely complete its customer obligations could be negatively impacted which could result in reduced sales, termination of contracts and damage to its reputation and relationships with its customers. The Group could also incur additional costs in addressing such a problem. Any of these events could have a negative impact on the Group's future results of operations and financial condition.

Mitigation: The Group's procurement function is responsible for establishing and managing end-to-end integrated supplier arrangements. It is led by a member of the Executive Committee. The Executive Committee continues to monitor this risk and the Group has experienced no material negative impact to date. In light of global economic conditions, the Group has reviewed strategically important suppliers globally to assess their financial health.

GLOBAL MARKET

The Group is exposed to risks inherent in operating in a global market.

Description: BAE Systems is a global company which conducts business in a number of regions, including the Middle East, and, as a result, assumes certain risks associated with businesses with a broad geographical reach. In some countries these risks include, and are not limited to, the following: government regulations and administrative policies could change quickly and restraints on the movement of capital could be imposed; governments could expropriate the Group's assets; burdensome taxes or tariffs could be introduced; political changes could lead to changes in the business environment in which the Group operates; and economic downturns, political instability and civil disturbances could disrupt the Group's business activities.

Impact: The occurrence of any such events could have a material adverse effect on the Group's future operational performance and financial condition.

Mitigation: The Group has a balanced portfolio with seven home markets.

EXPORT CONTROLS AND OTHER RESTRICTIONS

The Group is subject to export controls and other restrictions.

Description: A portion of the Group's sales is derived from the export of its products. Many of the products the Group designs and manufactures for military or dual use are considered to be of national strategic interest. The export of such products outside the jurisdictions in which they are produced is normally subject to licensing and export controls and other restrictions. No assurance can be given that the export controls to which the Group is subject will not become more restrictive, that new generations of the Group's products will not also be subject to similar or more stringent controls, or that political factors or changing international circumstances will not result in the Group being unable to obtain necessary export licences.

Impact: Reduced access to export markets could have a material adverse effect on the Group's future results of operations and financial condition. Failure to comply with export controls and wider regulations could expose the Group to fines and other penalties, including potential restrictions on trading.

Mitigation: The Group has formal systems and policies in place which are mandated under the Group's Operational Framework to ensure adherence to regulatory requirements and to identify any restrictions that could adversely impact the Group's future activities.

CONSORTIA AND JOINT VENTURES

The Group is involved in consortia, joint ventures and equity holdings where it does not have control.

Description: The Group participates in various consortia, joint ventures and equity holdings, exercising varying and evolving degrees of control. While the Group seeks to participate only in ventures in which its interests are aligned with those of its partners, the risk of disagreement is inherent in any jointly controlled entity, and particularly in those entities that require the unanimous consent of all members with regard to major decisions, and that specify restricted rights.

Impact: In the event of disagreement within a consortium, joint venture or equity holding and the business arrangement failing to meet its strategic objectives or expected benefits, the Group's business and results of operations may be adversely affected.

Mitigation: The Group has formal systems and procedures in place to monitor the performance of such business arrangements and identify and manage any adverse scenario arising.

COMPETITION

The Group's business is subject to significant competition.

Description: Most of the Group's businesses are focused on the defence industry and subject to competition from national and multi-national firms with substantial resources and capital, and many contracts are obtained through a competitive bidding process. The Group's ability to compete for contracts depends to a large extent on the effectiveness and innovation of its research and development programmes, its ability to offer better programme performance than its competitors at a lower cost to its customers, and the readiness of its facilities, equipment and personnel to undertake the programmes for which it competes.

Additionally, in some instances, governments direct to a single supplier all work for a particular programme, commonly known as a sole-source programme. Although governments have historically awarded certain programmes to the Group on a sole-source basis, they may in the future determine to open such programmes to a competitive bidding process. Government contracts for defence-related products can, in certain countries, be awarded on the basis of home country preference. Therefore, other defence companies may have an advantage over the Group for some defence-related contracts on the basis of the jurisdiction in which they are organised, where the majority of their assets are located or where their officers or directors are located.

Impact: In the event that the Group is unable adequately to compete in the markets in which it operates, the Group's business and results of operations may be adversely affected.

Mitigation: The Group's strong global market positioning, balanced portfolio, leading capabilities and performance continue to address this risk (refer to pages 16 to 19 for further information on the Group's positioning and portfolio).

PENSION FUNDING

The Group is exposed to funding risks in relation to the defined benefits under its pension schemes.

Description: The Group operates certain defined benefit pension schemes. At present, in aggregate, there is an actuarial deficit between the value of projected liabilities of these schemes and the value of the assets they hold. The Group has put in place and is implementing deficit recovery plans in line with agreements reached with the respective scheme trustees based on actuarial advice and valuation results.

Impact: The amount of the deficits may be adversely affected by a number of factors, including lower than assumed investment returns, changes in long-term interest rate and price inflation expectations, and greater than anticipated improvements in members' longevity. An increase in pension scheme deficit 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 obligations or business needs.

Mitigation: The performance of the Group's pension schemes and deficit recovery plans are regularly reviewed by both the Group and the Trustees of the schemes taking actuarial and investment advice as applicable. The results of these reviews are discussed with the Board and appropriate action taken (refer to page 150 for further details of the Group's retirement benefit plans).

ACQUISITIONS

The Group has experienced growth through acquisitions. Anticipated benefits of acquisitions may not be realised.

Description: The Group has experienced growth through acquisitions and continues to pursue acquisitions in order to meet its strategic objectives. Integrating the operations and personnel of acquired businesses is a complex process. The Group may not be able to integrate the operations of acquired businesses with existing operations rapidly or without encountering difficulties.

Impact: The diversion of management attention to integration efforts and any difficulties encountered in combining operations could adversely affect the Group's business. The failure to manage growth by acquisition while at the same time maintaining adequate focus on the existing assets of the Group could have a material adverse effect on the Group's business, future results of operations or financial condition. In addition, failure to integrate acquisitions appropriately creates the risk of impairments arising on goodwill and other intangible assets.

Mitigation: The Group has an established methodology in place to deliver the effective integration of acquisitions. The Group has an established policy for monitoring impairment risks. See note 1 to the Group accounts on page 125 for further information on the Group's approach to impairment testing.

LAWS AND REGULATIONS

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

Description: The Group's operations are subject to numerous domestic and international laws, regulations and restrictions. Non-compliance with these laws, regulations and restrictions could expose the Group to fines, penalties, suspension or debarment, which could have a material adverse effect on the Group. The Group has contracts and operations in many parts of the world and operates in a highly regulated environment. The Group is subject to the laws and regulations of many jurisdictions, including those of the UK and US. These include, without limitation, regulations relating to import-export controls, money-laundering, false accounting, anti-bribery and anti-boycott provisions. From time to time, the Group is subject to government investigations relating to its operations.

Impact: Failure by the Group or its sales representatives, marketing advisers or others acting on its behalf to comply with these laws and regulations could result in administrative, civil or criminal liabilities resulting in significant fines and penalties and/or result in the suspension or debarment of the Group from government contracts for some period of time or suspension of the Group's export privileges.

Mitigation: During the year, the Group has continued to add to its resources dedicated to its legal and regulatory compliance in order to further enhance its capability to identify and manage the risk of compliance failure. Internal and external market risk assessments form an important element of the ongoing corporate development process. Policies and procedures for the appointment of advisers engaged in business development have been further refined, and a uniform global policy and process has been established. In the settlement reached with the US Department of Justice in February 2010 in connection with its investigation commenced in 2007, the Company made commitments to the Department of Justice concerning the Group's ongoing regulatory compliance, including the appointment of an independent monitor for a period of up to three years to monitor the Company's compliance with such commitments.

EXCHANGE RATES

The Group is exposed to volatility in currency exchange rates.

Description: The global nature of the Group's business means it is exposed to volatility in currency exchange rates in respect of foreign currency denominated transactions, and the translation of net assets and income statements of foreign subsidiaries and equity accounted investments. The Group is exposed to a number of foreign currencies, the most significant being the US dollar.

Impact: Significant fluctuations in exchange rates to which the Group is exposed could have a material adverse effect on the Group's future results of operations and financial condition.

Mitigation: In order to protect itself against currency fluctuations, the Group's policy is to hedge all material firm transactional exposures, unless otherwise approved as an exception by the Treasury Review Management Committee, as well as to manage anticipated economic cash flow exposures over the medium term. The Group aims, where possible, to apply hedge accounting treatment for all derivatives that hedge material foreign currency exposures. The Group does not hedge the translation effect of exchange rate movements on the income statement or balance sheet of overseas subsidiaries and equity accounted investments it regards as long-term investments. Hedges are, however, undertaken in respect of investments that are not considered long-term or core to the Group.

Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an adverse effect on the financial condition or business of the Group.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December

	Notes	2009 £m	Total 2009 £m	2008 £m	Total 2008 £m
Continuing operations
Combined sales of Group and equity accounted investments	3		22,415		18,543
Less: share of sales of equity accounted investments	3		(2,041)		(1,872)
Revenue	3		20,374		16,671
Operating costs	4		(20,060)		(15,386)
Other income	5		465		415

Group operating profit excluding amortisation and impairment of intangible assets		2,038		2,003
Amortisation	11	(286)		(247)
Impairment	11	(973)		(56)
Group operating profit			779		1,700
Share of results of equity accounted investments excluding finance costs and taxation expense		233		132
Financial (expense)/income of equity accounted investments	6	(7)		44
Taxation expense of equity accounted investments		(23)		(37)
Share of results of equity accounted investments	14	203		139
Goodwill impairment in respect of equity accounted investments	14	-		(121)
Contribution from equity accounted investments			203		18

EBITA¹ excluding non-recurring items		2,220		1,897
Profit on disposal of businesses²	9	68		238
Pension curtailment gains²		261		-
Regulatory penalties³		(278)		-
EBITA¹		2,271		2,135
Amortisation		(286)		(247)
Impairments		(973)		(177)
Financial (expense)/income of equity accounted investments	6	(7)		44
Taxation expense of equity accounted investments		(23)		(37)
Operating profit	3		982		1,718
Finance costs	6
Financial income		1,573		3,380
Financial expense		(2,273)		(2,727)
			(700)		653
Profit before taxation			282		2,371
Taxation expense	8
UK taxation		(105)		(351)
Overseas taxation		(222)		(252)
			(327)		(603)
(Loss)/profit for the year			(45)		1,768

Attributable to:
BAE Systems shareholders			(67)		1,745
Minority interests			22		23
			(45)		1,768

(Loss)/earnings per share	10
Basic (loss)/earnings per share			(1.9)p		49.6p
Diluted (loss)/earnings per share			(1.9)p		49.5p

1 Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense.

2 Included in other income.

3 Included in operating costs.

Note references used above are references to notes to the Group accounts in the Annual Report 2009 that can be viewed on the Company's website.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December

	Notes	2009 £m	2008 £m
(Loss)/profit for the year		(45)	1,768
Other comprehensive income
Currency translation on foreign currency net investments:
Subsidiaries		(246)	807
Equity accounted investments	14	(56)	197
Amounts (charged)/credited to hedging reserve		(393)	469
Gain on revaluation of step acquisition		103	-
Net actuarial losses on defined benefit pension schemes:
Subsidiaries		(2,008)	(1,937)
Equity accounted investments		(54)	(60)
Fair value movements on available-for-sale investments		2	-
Recycling of cumulative currency translation on disposal		-	1
Current tax on items taken directly to equity	8	64	58
Deferred tax on items taken directly to equity:
Subsidiaries	8	562	425
Equity accounted investments		16	17
Total other comprehensive income for the year (net of tax)		(2,010)	(23)
Total comprehensive income for the year		(2,055)	1,745

Attributable to:
Equity shareholders		(2,077)	1,722
Minority interests		22	23
		(2,055)	1,745

Note references used above are references to notes to the Group accounts in the Annual Report 2009 that can be viewed on the Company's website.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December

	Attributable to equity holders of the parent
	Issued share capital £m	Share premium £m	Other reserves¹ £m	Retained earnings £m	Total £m	Minority interests £m	Total equity £m
At 1 January 2009	90	1,238	5,974	(68)	7,234	55	7,289
Total comprehensive income for the year	-	-	(511)	(1,566)	(2,077)	22	(2,055)
Share-based payments	-	-	-	52	52	-	52
Share options:
Proceeds from shares issued	-	5	-	-	5	-	5
Purchase of own shares	-	-	-	(25)	(25)	-	(25)
Ordinary share dividends	-	-	-	(534)	(534)	(5)	(539)
At 31 December 2009	90	1,243	5,463	(2,141)	4,655	72	4,727

At 1 January 2008	90	1,222	4,631	23	5,966	36	6,002
Total comprehensive income for the year	-	-	1,343	379	1,722	23	1,745
Share-based payments	-	-	-	51	51	-	51
Share options:
Proceeds from shares issued	-	16	-	-	16	-	16
Purchase of own shares	-	-	-	(43)	(43)	-	(43)
Other	-	-	-	-	-	7	7
Ordinary share dividends	-	-	-	(478)	(478)	(11)	(489)
At 31 December 2008	90	1,238	5,974	(68)	7,234	55	7,289

An analysis of other reserves is provided in note 24.

CONSOLIDATED BALANCE SHEET

as at 31 December

	Notes	2009 £m	2008 £m
Non-current assets
Intangible assets	11	11,253	12,306
Property, plant and equipment	12	2,552	2,446
Investment property	13	111	112
Equity accounted investments	14	846	1,034
Other investments	15	6	6
Other receivables	16	201	162
Other financial assets	17	133	514
Deferred tax assets	8	1,517	1,026
		16,619	17,606
Current assets
Inventories	18	887	926
Trade and other receivables including amounts due from customers for contract work	16	3,764	3,831
Current tax		17	14
Other investments	15	211	-
Other financial assets	17	216	674
Cash and cash equivalents		3,693	2,624
		8,788	8,069
Total assets	3	25,407	25,675
Non-current liabilities
Loans	19	(2,840)	(2,608)
Trade and other payables	20	(522)	(701)
Retirement benefit obligations	21	(4,679)	(3,365)
Other financial liabilities	17	(261)	(383)
Deferred tax liabilities	8	(8)	(80)
Provisions	22	(377)	(459)
		(8,687)	(7,596)
Current liabilities
Loans and overdrafts	19	(453)	(173)
Trade and other payables	20	(10,218)	(9,165)
Other financial liabilities	17	(94)	(362)
Current tax		(676)	(704)
Provisions	22	(552)	(386)
		(11,993)	(10,790)
Total liabilities	3	(20,680)	(18,386)
Net assets		4,727	7,289

Capital and reserves
Issued share capital	24	90	90
Share premium		1,243	1,238
Other reserves	24	5,463	5,974
Accumulated losses		(2,141)	(68)
Total equity attributable to equity holders of the parent		4,655	7,234
Minority interests		72	55
Total equity		4,727	7,289

Approved by the Board on 17 February 2010 and signed on its behalf by:

I G King G W Rose
Chief Executive Group Finance Director

Note references used above are references to notes to the Group accounts in the Annual Report 2009 that can be viewed on the Company's website.

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December

	Notes	2009 £m	2008 £m
(Loss)/profit for the year		(45)	1,768
Taxation expense		327	603
Share of results of equity accounted investments	14	(203)	(139)
Net finance costs		700	(653)
Depreciation, amortisation and impairment		1,600	755
Gain on disposal of property, plant and equipment	4, 5	(17)	(33)
Gain on disposal of investment property	5	-	(5)
Gain on disposal of businesses	5	(68)	(238)
Cost of equity-settled employee share schemes		52	51
Movements in provisions		52	(115)
Decrease in liabilities for retirement benefit obligations		(657)	(272)
Decrease/(increase) in working capital:
Inventories		6	46
Trade and other receivables		52	(5)
Trade and other payables		433	246
Cash inflow from operating activities		2,232	2,009
Interest paid		(250)	(249)
Interest element of finance lease rental payments		(2)	(5)
Taxation paid		(350)	(261)
Net cash inflow from operating activities		1,630	1,494
Dividends received from equity accounted investments	14	77	89
Interest received		66	156
Purchases of property, plant and equipment		(483)	(520)
Purchases of intangible assets		(42)	(32)
Proceeds from sale of property, plant and equipment		36	44
Proceeds from sale of investment property		-	5
Purchase of subsidiary undertakings	27, 29	(357)	(1,078)
Cash and cash equivalents acquired with subsidiary undertakings	27	33	2
Purchase of equity accounted investments	27	(1)	(12)
Proceeds from sale of subsidiary undertakings	9	2	131
Cash and cash equivalents disposed of with subsidiary undertakings		-	(60)
Proceeds from sale of equity accounted investments	9	70	16
Net proceeds from (purchase)/sale of other deposits/securities		(209)	164
Net cash outflow from investing activities		(808)	(1,095)
Capital element of finance lease rental payments		(13)	(18)
Proceeds from issue of share capital		5	16
Purchase of own shares		(25)	(43)
Equity dividends paid	28	(534)	(478)
Dividends paid to minority interests		(5)	(11)
Cash inflow/(outflow) from matured derivative financial instruments		36	(440)
Cash (outflow)/inflow from movement in cash collateral		(11)	106
Cash inflow from loans		920	-
Cash outflow from repayment of loans		(133)	(306)
Net cash inflow/(outflow) from financing activities		240	(1,174)
Net increase/(decrease) in cash and cash equivalents		1,062	(775)
Cash and cash equivalents at 1 January		2,605	3,046
Effect of foreign exchange rate changes on cash and cash equivalents		11	334
Cash and cash equivalents at 31 December		3,678	2,605
Comprising:
Cash and cash equivalents		3,693	2,624
Overdrafts		(15)	(19)
Cash and cash equivalents at 31 December		3,678	2,605

Note references used above are references to notes to the Group accounts in the Annual Report 2009 that can be viewed on the Company's website.

NOTE 31 TO THE GROUP ACCOUNTS

31. Related party transactions

The Group has a related party relationship with its directors and key management (as disclosed in the Remuneration report on pages 90 to 111 and in note 7), its equity accounted investments (note 14) and the pension plans (note 21).

Transactions occur with the equity accounted investments in the normal course of business and are priced on an arm's-length basis and settled on normal trade terms. The more significant transactions are disclosed below:

	Sales to related party		Purchases from related party		Amounts owed by related party		Amounts owed to related party		Lease income/ (expense) with related party		Management recharges
Related party	2009 £m	2008 £m	2009 £m	2008 £m	2009 £m	2008 £m	2009 £m	2008 £m	2009 £m	2008 £m	2009 £m	2008 £m
BVT Surface Fleet Limited¹	64	74	4	1	-	4	-	54	-	-	-	-
Eurofighter Jagdflugzeug GmbH	1,073	889	-	-	132	61	159	221	-	-	-	-
Gripen International KB	1	1	-	-	59	114	98	161	-	-	-	-
MBDA SAS	46	56	302	10	4	9	1,080	1,034	2	-	18	15
Panavia Aircraft GmbH	52	57	103	127	9	11	15	4	-	-	6	2
Saab AB	5	4	17	9	-	1	1	2	-	-	-	-
CTA International SAS	-	-	-	-	3	-	-	-	-	-	-	-
	1,241	1,081	426	147	207	200	1,353	1,476	2	-	24	17